Strategic group model of the European airline industry

Content

1 Introduction

2 External analysis with the strategic group model
2.1 Application
2.2 Advantages

3 The European Airline Industry

4 Appliance of the Model to the European Airline Industry
4.1 Vertical integration in interrelation with geographical scope
4.2 Product range in interrelation with geographical scope
4.3 Service quality in interrelation with organization size measured in fleet size

5 Critical appraisal
5.1 Direct critique drawn from the application of the model to the industry
5.2 Additional critique drawn from literature review

6 Conclusion

References

Appendix

Abbreviation

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List of Figures

Figure 1: Brian Pearce (2007): Additional passenger 2006-2011. Available from: www.iata.org/economics [cited 16th of December 2007]

Figure 2: IATA (2007): Global Air Traffic Contribution 2003-2025. Available from: http://www.iata.org/NR/rdonlyres/D95225BD-62A0-40F9-AF99-525B43804C52/0/industry_times_december2007.pdf

[cited 16th of December 2007]

Table 1: Own work (2007): European Airline Industry: 22 investigated airlines. Available from: various websites which can be seen in the reference list [cited 16th to 18th of December 2007]

Graph 1: Own work (2007): Vertical integration in interrelation with geographical scope. Individually developed using the collected data as can be seen in table 1. 18th of December

Graph 2: Own work (2007): Product range in interrelation with geographical scope. Individually developed using the collected data as can be seen in table 1. 18th of December

Graph 3: Own work (2007): Service quality in interrelation with organization size. Individually developed using the collected data as can be seen in table 1. 18th of December

1 Introduction

This paper aims to investigate in the limitations and benefits of the strategic group model in relation to the appliance of the model to the European airline industry. Therefore, the first part will shortly summarize the model including issues concerning the appliance as well as advantages. The second part will than have a short look at current trends and factors driving the industry. This will be followed by the appliance of the model to the chosen industry while plotting the 22 investigated enterprises within strategic group maps each showing the interrelation of two chosen criteria. Finally, the model will be critical evaluated concluding in giving evidences about the overall value of the model.

2 External analysis with the strategic group model

The overall purpose of conducting an external analysis of an industry is to gain an overview for an enterprise showing strategic opportunities and threats within the environment it is operating in. The strategic group model was initially introduced by Hunt (1972), but did not gain much attention until the work of Porter, who defined a strategic group as “a set of firms within an industry that are similar to one another and different on one or more key dimensions of their strategy” (Dranove et al, 1998). The word group, however, is merely an analytical convenience. Groups as such do not exist and are solitary used to segment industries into sets of companies, whose competitors, activities and outcomes are comparable to each other (Hatten & Hatten, 1987). However, Strategic groups are not equivalent to market segments, but are defined on the ground of a wider concept of strategic position (Porter, pg. 130). In this regard, it is assumed that equal strategies are followed by companies in one group which can be related to Porter’s generic strategies of cost leadership, differentiation and focus. These are used to provide a company with a competitive advantage and outperform other companies in their industry (Miller & Dess, 1993).

In addition, shifts from one strategic group to another are limited through mobility barriers, which equal entry barriers of Porter’s five forces but on strategic group level and consist of brand image, cost production, location advantages, customer loyalty etc. (Doyle & Stern, pg. 122). Mobility barriers also include exit barriers e.g. long-term contracts with supplier. Furthermore, different strategic groups can have a different standing regarding Porter’s five forces which leads to the assumption that some are more desirable than others and therefore, manager need to evaluate if a company could compete better in a different strategic group and moving into that group could be considered an opportunity (Hill & Johnson, pg 81-86).

2.1 Application

The strategic group model provides a useful intermediary approach between showing the whole industry and considering each firm single (Dess & Davis, 1984) and accommodates “intra-industry heterogeneity with internal homogeneity of group member firms (Gonzales & Ventura, 2002). Therefore characteristics that distinguish between strategic groups form two major categories (Johnson & Scholes):

- Scope of organizations activity: product range, geographical coverage, range of distribution channels used etc.
- Resource commitment: vertical integration, product or service quality, technological leadership, size of organization etc.

However, the relevance of those criteria depend upon the industry and literature gives just little guidance on how to choose the most appropriate criteria and on how to classify firms into strategic groups (Gonzales & Ventura, 2002). Once determined frequently through a “rule of thumb” method companies will be grouped within a map or a cluster along the selected criteria. The mapping technique though is frequently seen as invaluable for the rich and diverse data available of companies now-a-days (Leask, 2004).

2.2 Advantages

Disregarding the limitation of appliance the model is seen by many strategists as powerful tool within strategic management for the following benefits:

- Allows to investigate multiple firms concurrently and their strategic actions (Hatten & Hatten, 1987)
- Useful not just for external analysis, but also for strategy formulation (Tang & Thomas, 1992)
- Identifies potential opportunities and threats to an organization e.g. accounting of strategic gaps (Johnson & Scholes, pg.90)
- Gives overview of immediate competitors (Hill & Johnes, pg. 83)
- Useful to spot future valuable market positions or to explore future competitor steps towards them (Leask, 2004)

Dranove et al consider strategic groups even in dynamic and highly competitive environments worthwhile, because in such stages companies may find it less desirable to act alone and rather engage in collective strategies. However, this assumption is contrary to the elucidations of Hill and Jones and will further referred to in a later part of this paper.

3 The European Airline Industry

Air transport is one of the world’s largest industries and facilitates as network growth in output and employment, international trade and investment, tourism and, living standards. Air travel is a vital factor to reinforce the process of globalisation, allowing it to transform the way in which many other industries carry out their business.

Within the European Union, air services were fully deregulated and liberalised by the early 1990s. This was followed by years of rapid growth, and the advent of several new airlines, especially no frills carriers, to challenge the primacy of the major national flag carrier. However, there are a number of other trends affecting the European industry summarized by Zinnov LCC and the International Air Transport Association (IATA) including:

- Increased competition mainly through LCC carrier
- Competition from High Speed Trains
- Trend towards usage of 70 to 110-seat Jets
- Replacement and rightsizing of aircraft fleet
- Increased demand for self-service (53% in Europe)
- Pilot shortage

However the biggest challenge at the top of the political agenda is the environment. Currently aviation contributes 2% of global manmade carbon emissions. In addition, by 2011 as can be seen in figure 1. passenger numbers will exceed 2.75 billion and the world’s airlines will move 36 million tonnes of air cargo. This would increase the emission by another 1% reaching 2050.

Airlines, therefore invest billions in new fuel-efficient aircraft with advanced avionic systems, but the industry and governments mutually will need to face the future with a globally harmonised approach to both infrastructure and environment.

To cope with all the mentioned threats most of the European carriers are part of alliances (e.g. One world, Star Alliance) or have significant strategic partnership. In addition, the industry has an important support network consisting of a variety of associations and lobbies acting in place of the interest of members e.g. IATA, ATAG, ICAO and EASA. Nevertheless, it is expected that the European airline industry will fall in its global share from about 24% to 21% in 2025 as can be seen in figure 2.

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4 Appliance of the Model to the European Airline Industry

The strategic group model has already found its appliance within the airline industry. Kling and Smith mapped US passenger airlines by competitive strategies, using Porter’s theory of generic strategy, while Boyd structured airlines of the world industry in national flag carrier, international carrier as well as regional carrier. The reason for using the model within the industry can be seen desirable from both qualitative and quantitative perspective, because it is seen as much easier psychological to understand competitive dynamics within the airline industry if similar groups can be identified instead of analyzing each competitor equally (Kling & Smith, 1995).

For the analysis of the European airline industry which compares 22 airlines (see Appendix), three different maps could be compiled each looking at a different linkage of variables. The data supporting each variable were gathered through researching each individual company website profile as well as the websites of the main alliances. The listing concerning each variable are shown summarized within the Appendix as can the maps regarding the following interrelations which have been investigated:

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