External Environmental Factors that impacted the Growth of Air Asia
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External Environmental Factors that impacted the Growth of Air Asia
Various external environmental factors such as political, economic, socio-cultural and technological factors impact the growth and development of Air Asia. In relation to political factors, Air Asia receives support from the Malaysian government as well as Prime Minister Mohammad. However, unsupportive regulations and policies that are imposed by foreign countries where Air Asia operates its business would negatively affect its growth. Reduction in regulation of the airline industry in South-East Asia also positively contributes to the growth of Air Asia by providing new opportunities for expansion and niche markets.
Economic factors such as conducive investment environment that attracts investors, existence of business partners such as Thai Air Asia and Indonesia Air Asia and high economic growth and development also leads to the success of Air Asia. Air Asia is also able to growth because it can effectively imitate business operations and strategies form other industry players and developer redesign the strategies to more profitable ventures. The economy is also favorable for growth and development of a business. For example, Air Asia is able to obtain capital through various means such as through initial public offering (IPO) (Grant 2010). The presence of a market segment with unmet or underserved needs also provides an ample opportunity for the growth of Air Asia. In addition, Air Asia is capable of growing due to the expansion of the low-cost air transport industry which provides new investment opportunities to the company. However, it is also important to note that the presence of competing firms such as Ryanair and Jet Blue in the low-cost carrier industry provides stiff competition to Air Asia. As a result, the ability of Air Asia to grow is negatively affected.
Socio-cultural factors such as the existence of low-income earners who want cheap air transport services also facilitates the growth of Air Asia by providing a ready market for its business. The huge population of approximately 500 million also provides a ready market. Similarly, Air Asia is able to employ workers with diverse social and cultural backgrounds. This enables the company to comprehensively understand the social and cultural needs of the target market, and consequently be able to provide services that meet the needs of customers. This leads to continued growth and success of Air Asia.
Lastly, technological factors such as availability of appropriate technology like computer reservation systems (CRSs) and yield management systems (YMSs) also facilitates the growth of Air Asia by enhancing its ability to provide high quality services at low costs. Similarly, the availability of interactive media such as Facebook and the internet helps Air Asia to place advertisements about its products more easily, hence facilitating its growth.
Moreover, technological developments such as the CRSs positively impacts operations of the company by enhancing cost reduction strategies, hence facilitating growth. The availability of highly transferable technologies such as YMSs also enables Air Asia to acquire new technologies that are used during provision of services, hence positively contributing to its growth. A PEST analysis for these factors is shown in Appendix A.
Value Chain Analysis of Air Asia
Air Asia carries a number of value chain activities, both primary and support that have aids in the provision of high quality and unique services to customers. These activities are discussed below.
Value chain primary activities are those activities carried out by an organization that are directly related to the production, sales and marketing and distribution of goods and services to the customers. In relation to primary activities, Air Asia focuses on value creation to its services by providing safe and reliable air travels, giving the guests an opportunity to choose from a variety of highly customized services and providing services that offer enjoyable flying experience for the customers (Grant 2010).
The company also deploys various marketing strategies and brand development activities such advertising through the internet and increased media coverage to market the low-cost carrier services for the customers. Air Asia uses various media such as television, print and the internet to market its services. The company also ensures maximum press coverage to inform customers about the services on offer (Grant 2010). Moreover, direct sales are also made through the company’s website and call centre. The use of the internet, website and call centre to market services also significantly helps Air Asia in reducing operational costs, for instance, by eliminating commissions that would be paid to agents.
Primary activities relating to outbound logistics at Air Asia include use of a single type of aircraft, the Airbus 350, which helps in the provision of cheap transport services for the customers. Similarly, the company provides minimal customers services, hence reduces costs. However, non-assignment of seats by Air Asia may be inconveniencing to some customers; hence, this strategy may work against its goals. The company also offers uncomplicated services thus allowing quick turnaround of planes. The main activity for inbound logistics is acquisition of airbuses that are capable of delivering high quality transport services for the customers.
In relation to organizational operations, Air Asia contracts and enters into joint ventures with foreign companies such as Thailand Air Asia and Indonesia Air Asia to facilitate the provision of services in foreign countries. Entering into joint ventures helps Air Asia in ensuring that needs of customers in foreign markets are also met effectively. Air Asia also ensures maximum utilization of aircrafts in order to guarantee low cost services and high productivity. Air Asia also streamlines its operations and applies point-to-point networks in order keep operations simple, hence enhancing the quality of services it offers to the customers.
Support activities are those activities which provide assistance required for the primary activities to occur. Support activities concern the infrastructure of a company, management of human resources, technological advancements and acquisition of inputs needed for production of goods and services.
Firm infrastructure usually deals with how the company plans and organizes its primary activities. In relation to the firm infrastructure, Air Asia usually outsources services that it cannot provide effectively to the third parties, for example, maintenance of aircrafts. The company also uses information generated by the yield management system (YMS) to plan and schedule needed facilities more effectively. This results into enhanced provision of services.
With regard to management of human resources, Air Asia rewards workers based on their contributions to the organization. The company deploys non-discriminatory recruitment and selection of employees as well as continuous training and development to enhance the capability of workers to provide services that adequately meet needs of the customers. The company also assists employees in understanding the core business strategizes, values and goals. Employees are also guided on how to provide low-cost services to customers without compromising quality. The use of rewards by Air Asia to motive employees positively contributes to its growth by ensuring that employees are retained within the organization. The rewarding system also helps in ensuring the employees are highly committed and focused to their work. Moreover, rewarding helps Air Asia in ensuring that employees remained satisfied at the workplace. For example, the new employee share ownership scheme (ESOP) scheme helps in motivating workers. According to Pizzi (2009), highly motivated employees usually commit themselves to work, thus leading to the provision of better services. Air Asia also ensures effective utilization of technology to improve the quality of services it provides. For example, the company uses computer reservation system (CRS) and yield management system (YMS) to assist in the provision of low cost services. Similarly, Air Asia uses a wireless technology to enable effective promotion of services provided by the company through mobiles. The adoption of wireless technology highly boosts the sales and marketing efforts of Air Asia.
In relation to procurement, Air Asia acquires core business assets (aircrafts) from identified contractors only. The company procures aircrafts at cheap prices. The aircrafts are highly capable of providing low-cost services. This facilitates service delivery for the customers.
Value Chain Linkages
At Air Asia, various linkages exist between primary activities and support activities. For instance, acquisition of technologically advanced systems such as wireless technology helps in promotion of services of the company through mobile phones. This results into increased awareness amongst the customers. Technology also assisted in the creation of a website that is currently used by the company to advertise products and services. Similarly, procurement of aircrafts that have high capability of providing cheap transport services at lower prices also helps in ensuring that the company offers services at cheap or affordable prices.
Core competencies are business activities or processes that enable an organization to deliver high quality goods and services to the customers (Mills 2007). Core competences usually result into competitive advantage over other the competitors. The core competences of Air Asia include the ability of providing high quality services at lower costs, ability to hire, train and develop employees, unique organizational culture and strong brand image.
Air Asia is able to provide high quality services at lower prices than those of the competitors. This gives the company a competitive advantage over competitors. Similarly, the company hires, trains and retains highly qualified and professional employees. The company also benefits from the expertise and experience of some of the investors. This gives the company an upper-hand in the low-cost carrier industry.
In addition, Air Asia has a unique organization culture. At Air Asia, there is no bureaucracy, and employees are able to communicate freely and openly with the top management (Grant 2010). This facilitates exchange of information, ideas and views within the organization, thus enhancing the ability of the company to provide better and more innovative services than the competitors.
Lastly, the company has built a strong brand image amongst the customers. In contrast, the main competitors of Air Asia lack this strong brand image. The strong brand image gives Air Asia an added advantage. Generally, these core competences of Air Asia meet the VRIN criteria because they are capable of giving the company a competitive advantage over competitors as shown in the discussion. For additional information on the value chain analysis, see appendix B below.
Generic Strategies being pursued by Air Asia
A generic strategy is an approach or tactic used by an organization to gain competitive advantage over the competitors. Generic strategies include cost leadership, customer focus and differentiation (Pitelis 2009). Cost leadership involves providing goods and services that can attract price-sensitive customers. Cost leadership is achieved by charging the lowest prices in the target market. Differentiation involves the provision of products that are unique and do not have close substitutes. Provision of highly differentiated products usually allows firms to charge premium prices and earn more profits than the competitors. Differentiation involves customizing goods and services with unique features or attributes that would deliver higher benefits to the customers (Ireland 2011; Beath & Katsoulacos 2009).
Based on the core competences listed above, it is worth noting that Air Asia is pursuing cost leadership and differentiation strategies, for example, by targeting the low-income earners and through the provision of high quality and exclusive services for the customers. It is prudential for Air Asia to pursue both cost leadership and differentiation strategies at the same using an integrated strategy approach. This is because integrated strategy approach would enable Air Asia to achieve or realize more than one organizational goal at the same time. For example, combining cost leadership and differentiation strategies would enable Air Asia to provide low cost services that are unique and distinguished. Upon integration of the two strategies, more customers are attracted and enticed to consume more of Air Asia’s services. However, considerable caution that should be taken before such an approach is made in order to avoid chances of being stuck-in-the-middle.
Treacy and Wiersema (2010) also assert that companies that intend to achieve integrated strategies for cost leadership and differentiation should plan how to minimize the conflict between reducing and minimizing costs and increased costs incurred for providing highly differentiated products. In case a conflict arises, then the company will become stuck-in-the-middle. Thus, it will not be able to achieve any of the generic strategies.
The use of an integrated approach is possible because Air Asia has effectively achieved cost leadership and a strong brand image in the low-cost carrier industry. However, for the new Air Asia X, the company may not succeed in integrating generic strategies because it has not positioned itself in the target market, unlike Air Asia which has an excellent position in the market.
Air Asia and Air Asia X
Some of the major advantages that Air Asia can bring to support the competitive strategy of Air Asia X include strong organizational culture, success strategies such as maximum use or utilization of aircrafts, ensuring safety of passengers and adequate compliance with world airlines rules and regulations, well established and streamlined operations as well as lean distribution systems that can help Air Asia X in ensuring that the services it provides are highly innovative. Air Asia can also bring a large market share for Air Asia X. This is because Air Asia has good market coverage with lots of customers which can be easily transferred to Air Asia X. Air Asia can also help in the provision of essential services such as direct sales and marketing that would help in popularizing the new Air Asia X amongst the target customers.
Air Asia X can also benefit from the good asset base from Air Asia, for example, good technology like the computer reservations system (CRS) and yield management system (YMS) that can facilitate operations of the new Air Asia X. Another advantage that Air Asia X can obtain from Air Asia is human capital. The new airline can benefit from the expertise and experience of employees of Air Asia. Employees of Air Asia are more experienced and well conversant with the airline industry. This knowledge can be transferred to Air Asia X.
Similarly, Air Asia X can gain from reduced business risks. According to the case study, risks of the new venture can be spread amongst several investors such as the Virgin Group (Grant 2010). Air Asia X can also benefit from adequate airline management techniques, cost reduction strategies, good leadership, management, strong brand image and reputation of Air Asia. This can help the new company in attracting and retaining customers.
The major disadvantage that Air Asia X can face in comparison to its main rivals is stiff competition from major international airlines such as Malaysian Airline, Emirates and British Airways that are well established. Strong competition can negatively affect business operations of Air Asia X if not properly managed. Air Asia X is also faced with the challenge of streamlining its operations and services with those of the competitors, for example, by providing service frills such as baggage transfer and aerobridge. In my opinion, long haul business is good for Air Asia X because it will enable the company to expand and grow further.