Case Analysis To Determine a New Business Proposition for XYZ Corporation
Introduction
Good evening Chairman Griggs and fellow CEO Management. Thank you for
your time tonight while we decide the future of XYZ Corporation. I would like to
introduce the CEO management of XYZ beginning with Mr. Marcus Penner, Ms. Allie
Palmer, Mr. Jaron Jedicka, and myself, Joshua Gee. We will discuss the two new
industry proposals the Board of Directors asked us to analyze for corporate
expansion. Each opportunity will be discussed individually and exclusively, and
then we will provide a recommendation based on our team analysis and consensus.
We will begin conversing about the U.S. airline proposal followed by the carbonated
beverage proposal. After both analyses have been discussed, we will commence
with a strategic recommendation for our future endeavor.
Analysis of the US Airline Industry in 1995
We will begin this meeting by discussing the current situation within the airline
industry. Then, we will discuss the business concepts of two different segments
and how one caused the other to develop. The marketing schemes along with the
potential for XYZ to solidifying a position in the U.S airline industry will conclude the
analysis.
Current Situation
The airline industry is comprised of two business concepts with different attributes
associated accordingly. Large trunk carriers follow the model of large expansion
encompassing many markets through bankruptcies or mergers. The second concept
is newly founded by Southwest Airlines entailing cross-regional coverage efficiently
and effectively for their firm and their customers. The problem large trunk carriers
face is the ability to adapt and maneuver within an environment consisting of many
uncontrollable variables. SWA countered the large carriers design by developing an
innovative hub and spoke concept consisting of the utilization of small hub airports
allowing for lower prices and more efficient management of their company.
The Business Concept Revealed
Large carriers are experiencing deep troughs with diminutive profit potential.
Their business model is centered on growth and acquisitions of depleting firms to
enlarge their own firm. Their dilemma is the ability to adapt and innovate within a
transforming world. Their inability is derived by the size of the firm (route
structure), fixed costs (including excess capacity), aged aircraft, and unionized
employees. Government regulation, the substitution of competing routes, price fares
from new entrants, supplier production constraints, and the intuition of buyers, are
restricting large trunk carriers from sustaining profits. Pricing from new and
existing entrants and buyer power are the major forces driving large carrier losses.
These Porter forces and the inability to innovate have led the large carriers into a
business cycle decline beginning twenty plus years ago. Even effective marketing
techniques like Computer Reservations Systems, frequent flyer mile programs, and
creative pricing techniques, cannot overcome the inefficiencies of a large carrier.
These attempts to moderate competitive pressures are short-lived due to
inadequate infrastructures of the large carriers’ routing systems. In the end, the
problem for large carriers is sustaining profits.
Southwest Airlines concentrates on regional secondary airport hubs enabling SWA
to capture less expensive prices for gates and runway space. Their decision to
remain small, yet competitive, is enabling SW to become efficient in their market
segment. Exhibit 1 illustrates the compact routing system prompted by SWA.
Instead of focusing outward, SWA focuses inward to improve internal resources
because of the rapid changing environment. Leasing aircraft assists SWA’s limited
fixed costs and enables them to provide state of the art aircraft. Their relatively
small firm allows them to adapt and become more customer focused while setting a
benchmark of 7.1 cents per ASM. The SWA business practice focuses on providing
affordable prices through efficient, innovative, streamline procedures. Unlike their
competitors, SWA has remained true to their strategy by remaining consistent,
understanding the competitive environment, and utilizing their resource
capabilities to effectively develop new and innovative products. These intangible
attributes have given SWA a reputation for proficiency. Some would say SWA has
truly embraced the entrepreneur spirit.
The Overall Competitive Market
Market practices are drifting toward smaller firms naturally. Large carriers are
shrinking at a fast rate and small firms such as SWA are continuingly choosing to
remain small with slow growth. Large carriers losing profits are reorganizing or
remaining stagnate with no change in processes. Large carriers attempted to follow
SWA business practices, but failed due to overall fixed costs associated with the
firm. Small carriers are surfacing with copycat route structures comparable to SWA.
The aircraft flying industry is transforming to smaller, more efficient, more
adaptable business practices.
Marketing Issues
SWA attempts to gain loyalty through new ventures. Large carriers’ marketing
strategies toward consumers are confusing. Numerous avenues deliver different
prices pending the day and time. This frustrates the consumer and might be
detrimental to a firm because of the power of the buyer. SWA advertises a “no
kidding” price alleviating consumer concern during product selection. This
technique could lead consumers to automatically choose SWA for consistent low
prices, thus producing brand loyalty.
Capturing a Market Segment
The ever-changing world is changing the industry from conglomerate LBOs to
moderate-sized, efficient firms that are able to adapt within the market
environment while producing a product at a reasonable price for the customer. XYZ
Corporation has the potential to enter the market and perform at great levels due to
the changing airline market. Today, airlines practice sale-leasebacks enabling them
to free up capital. The practice of moving routes around to capture un-tapped
market share is easily allowed due to lack of fixed assets and the ability to conduct
business out of many airport hubs. Great customer service, consistency in our
business strategy, along with efficient industry practices, gives us an opportunity to
move quickly into the airline industry. This will aid XYZ in capturing a market
share, surpassing our break-even point, and creating positive operating margins.
Our product differentiation could eliminate the inelastic attitude consumers portray
toward the airline industry.
Cola Wars Continued: Coke and Pepsi in 2006
In this section, we will discuss the current situation of Coke and Pepsi derived by the
natural environment and Porter’s Five Forces. There will be special attention
toward the bottling segment of the supply chain. The end of the analysis will
surround the major Porter Force in the industry and how it is changing the overall
industry.
Current Situation
Coke and Pepsi has evolved from concentrated soft drinks to an explosion of
numerous products ranging from soft drinks, energy drinks, sport drinks, and
bottled water. These respective companies did not evolve naturally. With changing
consumer demand and culture shifts, these contenders were forced to modify their
company from a soft drink concentrate company to a beverage producing company
with many supply chain layers. Overall, the complete industry consists of
concentrators, bottling suppliers, and shipping suppliers, in conjunction with huge
integrated marketing campaigns.
Explaining Porters Five Forces
Porter’s Five Forces are easily illustrated within these two major companies. The
beverage industry has a relatively low threat of new entrants due to buyouts of low
end concentrators and bottlers, and the lack of buying power derived from inelastic
prices (derived from product recognition and loyalty), these forces had relatively
low intensity in regards to the Coke and Pepsi debate. As competitors became
contenders, acquisitions by Coke or Pepsi soon followed. Examples of this practice
include Pepsi buying Quaker Oats for Gatorade and Coke acquiring Full Throttle.
Buying out the competition diminishes the Threat of New Entrants as a viable issue.
Coke and Pepsi compete against each other in this industry rivalry to buy the most
attractive, contending companies and then create franchises. This major force was
derived initially by new entrants, but ends up affecting the industry rivalry of Pepsi
and Coke.
The bargaining power of buyers is not a huge factor either. Brand recognition and
loyalty dissolves the moderate increases in price. The absolute reason this occurs is
because Coke and Pepsi market their products around major events in United States
history. Coke’s niche was within the U.S. military during WWII and Pepsi’s niche
was the Great Depression. These two historic events were great avenues to
advertise their products, and allowed the companies to secure strong brand loyalty.
This makes Coke and Pepsi product prices mutually inelastic (this assumption is
based off moderate increases).
The bargaining power of suppliers, the threat of substitutes, and the industry
competitiveness of Coke vs. Pepsi, are the main forces driving Coke and Pepsi in
their respective direction. Vertical integration of suppliers is a major force in the
companies’ business plans. Coke and Pepsi had major trouble coordinating all
business avenues with their bottlers due to bottlers entering and exiting the
industry. The situation was inadequate, thus promoting labor unions and
congressional laws allowing bottlers the right to bottle many different products
from different concentrators (substitutes). An attempt to alleviate the problem
drove Coke and Pepsi to create the CCE and PBG respectively, creating
accommodating vertically integrated substitutes. This was accomplished by
purchasing low rate bottlers. Recently there has been better communication
between the concentrators and their suppliers .
Industry rivalry among the existing firms (basically Coke and Pepsi) is the major
force driving the competitive market. Both firms utilize massive promotional
campaigns along with deep advertising budgets to capture and retain the majority of
available market share. Each firm spends relatively 43% of sales on advertising and
marketing. (Exhibit 4) These budgets limit the growth of other competitors, but
limit profit potential for Coke and Pepsi. Overall, the existing level of rivalry is
expected. It appears there are only two levels of companies. There is Coke, Pepsi,
and the ‘other’ small companies. Coke and Pepsi have obtained a dynamic loyalty
and have obtained enormous market share in their industry. It appears the small
companies’ agendas are to obtain a product large enough to cause Coke or Pepsi to
pay attention to their product. Then the smaller entrant will sell out to one of the
big two, thus creating the level of rivalry that exists today.
Porter’s Major Force
The substitutes are not necessarily different products from different companies;
rather they are different products evolving naturally from consumer demand. Coke
and Pepsi are engaging this issue by creating their own new products. Also, the
force drives Coke and Pepsi to buy-out small competitors attempting to enter the
industry, and absorb their products. Coke and Pepsi are successful in this venture
because of the economies of scale already developed through years of production.
This gives them the absolute cost advantage. New companies with new products
eventually sell out due to the threat of aggressive price-cutting and increased
advertising.
The threat of substitutes is the force changing the most in the industry. Many
products are in demand by consumers forcing Coke and Pepsi to innovate and
capture the revised market share. Through their vertically integrated, welldesigned supply chain, this expansion of the company will be a flawless intervention
within their company. The introduction of sport drinks, energy drinks, bottled
water, and specialty coffee drinks, elevates the Porter Force to new heights. This
threat is developing through a consumer demand for variety. Exhibit 7 and 8
illustrates the continuing trend toward beverages other than carbonated drinks.
Carbonated drinks are showing a gradual decline, while bottled water and sport
drinks are increasing in popularity. Moderate health concerns, increased prices, and
more variety, have caused a decline in carbonated beverages. In order for Coke,
Pepsi, and other beverage producers to maintain healthy profits, they will have to
adapt to consumer demand and continue to produce non-carbonated drinks. Both
major companies appear proficient in this manner and will continue to maintain
profits.
Chairman XYZ Corp. Questions/Recommendations
Chairman Griggs, after careful analysis of both industries, the CEO management
team has come to an agreement about the direction of XYZ Corporation. Both
industries have profit potential to be gained. We will discuss both the benefits and
drawbacks of each industry and follow up with our recommendation.
Benefits and Drawbacks
The U.S. Airline industry has great benefits for XYZ Corporation. SWA has built a
new structure in the airplane industry XYZ can benefit from. XYZ has the ability to
start small with the option of moderate expansion. It appears low fixed costs are
now available due to sale–leasebacks from manufactures. This alleviates pressure
from volume sales, gives XYZ more credibility with banks, and allows us to compete
with the large trunk carriers. This will create low costs and prices. Also, if the
market share begins to dwindle, XYZ can move its aircraft to different hubs
capturing untapped market shares. The industry looks promising, but there are
drawbacks. High upfront entry costs will force XYZ to buy aircraft, rent hub space,
and hire staff. XYZ will have to gain quick credibility to acquire space at the hubs at
airports. Furthermore, there is a backlog of efficient planes manufactured by
Boeing. There are many uncontrollable variables within the industry. Also, new
entrants could give us competitive issues.
Switching gears to the beverage industry, XYZ can have low overhead cost due to
market pressures. The market will force XYZ to start locally. XYZ can take on the
entrepreneur spirit and develop a new beverage for the market. Successfully
performing this new drink will definitely give us credibility within the market. XYZ
also has the potential to tap into other markets via the beverage industry. The
drawbacks in this industry are great. XYZ agenda is to break into an industry. As
beverage companies grow, Coke or Pepsi will buy them out. If XYZ fights the buyout,
Coke and Pepsi will price cut and push for massive advertising and promotion
expenditures to force our product out of the market. Growth in a beverage company
will involve very hectic supply chain management issues. Lastly, there is the major
risk of establishing no market share, ending in a faulty business venture. This could
happen due to Coke and Pepsi’s historical business practices.
XYZ CEO Management Recommendation
The major concern with the beverage industry is the high risk for buyout. Therefore,
the XYZ CEO management team recommends going forth with the airline industry
business venture based on the analysis, benefits, and drawbacks of both industries.
Our team will create a cross-regional airline with a compact route structure
spending much energy on internal processes to eliminate non-value added
procedures. Our strategy will be consistent, competitive, and objective. XYZ will
concentrate on reducing the bargaining power of buyers by marketing our efforts
toward a major event comparable to Coke and Pepsi with low prices. This
marketing perspective will draw brand recognition and loyalty, lessening the elastic
attitude toward the airline industry.
Exhibit 1