What’s Happening?!
The Apple Macintosh is 20 years old!
Apple’s audacious machine is still taking chances at 20.
Steve Jobs’ personality, values inseparable from the
Apple saga.
In an era where bean counters and marketeers call the
shots. Steve Jobs is the last Big Kahuna still standing.
Chapter 2 Summary
Business Competitive
Environment
Chapter Objectives
Defining competitiveness
 Competitive Model

– Competitiveness: A Link to National Goals

Competitive Advantage of Nations
– Diamond of National Advantage Model

Role of Government
Definition
“Competitiveness:
The degree to which a nation can, under free and fair market
conditions, produce good and services that will meet the test
of international markets while simultaneously maintaining or
expanding the real income of its citizens.”
Competitiveness: A Link to National Goals
Human
Resources
Capital
Technology
Trade
Policy
Improved
Domestic
Performance
New
Competition
Decreased
Budget
Deficit
Increased
World Market
Competitiveness
Reduced
Trade
Deficit
Stronger
National
Security
More and
Better Jobs
Increased
Standard of
Living
How to Gain a Competitive Advantage?
Provide value to the customer
 Right strategies - achievable and sustainable
over time
 Know products and services
 Know customers
 Know competitors

The Diamond of National Advantage
Chance
Firm Strategy,
Structure and
Rivalry
Factor
Demand
Conditions
Conditions
Related and
Supporting
Industries
Government
Role of Government
Serve as a catalyst and challenger
 Encourage companies to raise level of
expectations - higher level of competitive
performance
 Do anything that would promote
unrestrained competition

Questions
1. In order for companies to achieve and sustain a
competitive advantage, what would a possible
action plan include?
2. For a government to perform effectively in its role
as a catalyst and challenger, what objectives
should governments aim to accomplish?
Chapter 3 Summary
The Porter Competitive Model for
Industry Structure Analysis
Competitive Model
Understand and Evaluate:
– Business environment structure of an
industry.
– Threats of competition to a specific
company.
Porter Competitive Model
Potential
New Entrants
Bargaining
Power
of Suppliers
Intra-Industry
Rivalry
Strategic Business Unit
Bargaining
Power
of Buyers
Substitute
Products
and Services
Source: Michael E. Porter
“Forces Governing Competition in Industry
Harvard Business Review, Mar.-Apr. 1979
Figure 3-1
Porter Competitive Model
Components
Intraindustry Rivalry
 Bargaining Power of Buyers
 Bargaining Power of Suppliers
 Threat of New Entrants
 Threat of Substitutes

Primary and Supporting Strategies
Differentiation Strategy (Primary)
 Low Cost Strategy (Primary)
 Innovation (Supporting)
 Growth (Supporting)
 Alliance (Supporting)

Porter Value Chain
Basic Concept:
1. Deals with core business processes.
2. Enables tracking a new idea to create a new
product and/or service from origination all the
way to customer satisfaction.
SUPPORT ACTIVITIES
Generic Porter Value Chain
FIRM INFRASTRUCTURE
HUMAN RESOURCE MANAGEMENT
TECHNOLOGY DEVELOPMENT
PROCUREMENT
INBOUND
LOGISTICS
OPERATIONS OUTBOUND
LOGISTICS
MARKETING
AND SALES
SERVICE
PRIMARY ACTIVITIES
Adapted with the permission of the Free Press, an imprint of Simon & Schuster Inc.. from
COMPETITIVE ADVANTAGE: Creating and Sustaining Superior Performance by Michael Porter. Copyright
© 1985 by Michael E. Porter.
Figure 3-6
Possible Exam Questions
1.
What is the objective in using the Porter
Competitive Model?
2.
How does the Value Chain differ from the
Porter Competitive Model?
Chapter 4 Introduction
Airline Industry Analysis
Key Points
Lessons Learned from Profitable Airlines s
 Analysis of the Airline Industry using the
Porter Competitive Model
 Airline Industry Business Strategy Model
 Importance of IT in the Industry
 American Airlines as a Profile Airline

Still Consistently Profitable Airlines

Southwest Airlines
Aircraft Utilization, focus on city pairs, corporate culture, cost savings
in reservations

Singapore Airlines
Geographic Locations, National Strategies, Shrewd Management and
Leadership in IT, Competitive Strategies
British Airways has run into problems in recent years!
Porter Competitive Model
Airline Industry Analysis - North American Market
•Aircraft Manufacturers
•Aircraft Leasing Companies
•Labor Unions
•Food Service Companies
•Fuel Companies
•Airports
•Local Transportation Service
•FAA
•Hotels
Bargaining
Power
of Suppliers
•Alternate Travel Services
•Fast Trains
•Boats
•Private Transportation
•Videoconferencing
•Groupware
Potential
New Entrants
•Foreign Carriers
•Regional Carrier Start ups
•Cargo Carrier Business Strategy Change
Intra-Industry Rivalry
SBU: American Airlines
Rivals: United, Delta, US Air,
Northwest, Southwest
Substitute
Products
and Services
Bargaining
Power of Buyers
•Travel Agents
•Business Travelers
•Federal Government
•Pleasure Travelers
•Charter Service
•U.S. Military
•Cargo and Mail
Figure 4-2
Airline Business Strategy Model
Make note of the fact that the example
in the textbook is not well done.
Airline Industry Strategies
Products/Services
Scheduled Flights
Chartered Flights
Air Freight
Mail
Customers
Business Travelers Personal Travelers Seniors Families Government
Europe
Markets
N. America
Pacific Rim
Latin America
Routes and Route Structure
Short Haul
Long Haul
Hub and Spoke
Point to Point
Fare Strategy
Low Fares
Premium Fares
Company Structure
Alliances
Independent
Information Systems
Customer Systems Operational Systems Logistical Systems Business Systems
American Airlines
Has historically been the largest airline in
the world in terms of revenue and number
one in the U.S.
 A premium service carrier.
 Hub and Spoke System
 SABRE System
 Financial losses same as most other carriers

IS in American Airlines
Industry Leader in IS
 Convenience to Customers
 Knowledge of Customers
 Providing a Foundation of Other Systems
 Building a Base for other Business

Conclusions
Still a clearly defined industry.
 Information Systems play a vital role in the
industry.
 The industry is greatly affected by many
factors.
 Strategies dictated by the market are
important.

Chapter 4
Porter Competitive Model
and
the Airline Industry
2003 - A Hundred Years of Flight
Aviation is celebrating its centennial year. From its first brave
beginnings the civil aviation industry remains dynamic and
although some of the priorities have changed, the spirit and
passion remain.
Some priorities are not new: safety, the need for efficient
operations, adequate capacity to meet growth and, of course,
customer satisfaction. Other priorities have gained prominence
in recent years – security, war risk insurance and
environmental concerns – and will remain important in the
coming years.
This industry is always in the
grip of its dumbest competitors.
Robert Crandall
Former CEO
American Airlines
We must look at the world as it
is versus how airlines would
like it to be.
Robert L. Crandall
And as government officials, politicians
and consumers would like it to be.
Airline Industry Goals

Public Service. (Service to Customers)

Return to Investors.

Country Strategic Resource.
Are these consistent or in frequent
conflict?
Airline Profitability
Profitability = [yield X load factor] - cost
In order to survive and profit in this tough environment,
airlines attempt to manipulate three main variables:
Cost, calculated as total operating expenses divided by
available seat miles (ASM)
Yield, calculated as total operating revenues divided by
the number of revenue passenger miles (RPM)
Load Factor, calculated as the ratio between RPMs and
ASMs, which measures capacity utilization.
United Flight 815
Chicago to LAX, October 31, 2001
204 tickets were sold and 186 people showed up.
68 passengers originated in Chicago and 118 were from
connecting flights.
97 passengers terminated at LAX, 89 continued on another
flight.
Of the 33 passengers that were only Chicago-LAX there were 27
different fares:
• A frequent flyer passenger paid nothing.
• A 1st class passenger paid $1,248.51 on the day of the flight.
• A coach passenger paid $102.26 on the day of the flight.
• A cash fare passenger paid $87.21 twenty-nine days in advance .
The National Commission to Ensure a
Strong Competitive Airline Industry
Change, Challenge and
Competition
A Report to the President and Congress
August 1993
Airline Industry Report
The air transportation system has
become essential to the economic
progress for the citizens and
businesses of this nation.
The commission questioned some of the
most basic assumptions that have formed
the foundation of policy toward this
industry--and behavior within it--for the
past half century.
It also questioned whether the
airline industry has basic structural
problems or if it is just a collection
of poorly managed companies.
Commission Findings
• The Airline Industry is more competitive than before
deregulation in 1978.
• Travelers and shippers are charged less than in 1978.
• The Airline Industry has never made a sustained,
substantial return on investment.
• It lost huge amounts of money from 1990 to 1993.
• It canceled many aircraft orders shortly after an
unprecedented buying binge.
• Its freedom to compete in international markets is
uncertain because of government restrictions.
Commission Conclusions
For the U.S. to prosper in a global marketplace
the airline industry must:
• Be efficient and technologically superior.
• Have the financial strength to respond to rapid
change and opportunity.
• Efficiently move people, products and services
to markets, wherever they exist.
Recommendations
Efficiency: Reinvent the FAA.
Financial Health: Deal with factors that impact
the financial health of the industry.
Access to Foreign Markets: Replace the current
bilateral system with a multi-national regime.
To return their balance sheets to
respectability, most airlines would
have to achieve profit margins that
are almost unprecedented in their
history, and sustain those margins
for years.
September 11 Impact
An absolute disaster for the industry.
1990-1993 Was a Disaster!








The Gulf War.
The general decline in the world economy.
Aircraft fuel price increases.
Wages, work rules and work patterns.
Chapter 11 bankruptcy airlines.
Excess capacity.
A very capital intensive business.
Too many years as regulated airlines.
Airline Industry
The shock of September 11th has forced airlines to
face an awkward fact: in some respects, aviation is a
declining industry.
Nov. 22, 2001
The Economist
Decline in Air Travel
At Thanksgiving in 2000 a record 2.2 million
Americans took a flight to spend the holiday with
family and friends.
Air traffic in October and November 2001 was down
by about 25% compared to the previous year in the
world's biggest aviation market, thanks to a
combination of economic recession and the attacks
on September 11th.
International Travel
International travel from America has been hit even
harder: the number of Americans flying across the
Atlantic was down by over 30%.
Never mind that more people are killed on America's
roads every three months than have died in the entire
history of commercial aviation.
Fatalities by Transportation Mode
Airline
12
Railroad
530
Passenger Car
20,818
0
5000 10000 15000 20000 25000
Load Factors
Despite cutting capacity, the big American airlines are still
flying with planes barely 60% full—a figure that would be
much lower were it not for hefty discounts.
Boeing and Airbus, the two manufacturers of large jetliners,
are offering airlines special financing deals to pay for their
purchases in order to stave off outright cancellations.
The last time the airlines were in such straits, during the
Gulf war and recession in 1990-92, it took them four years
to return to profit, even though traffic recovered within a
year.
European Airlines
The situation in Europe is no better.
Two flag carriers, Swissair and Sabena, have
collapsed since the terrorist attacks.
Other big carriers, such as British Airways (BA) and
KLM, are in major financial trouble.
Traffic within Europe fell by over 10% in September
and October 2001, while traffic from Europe to
America and Asia fell by 35% and 17% respectively.
Looking for Options
In most industries, such a situation would quickly lead to
mergers. But this is not so easy for airlines, hemmed in as they
are by national ownership rules and rigid international
regulation of routes.
America's airlines are retreating to their strongholds in the hub
airports they dominate, such as Dallas-Fort Worth (American)
and Atlanta (Delta).
Most airlines have cut at least one “wave” of coordinated
flights in and out of their hubs.
Dropping Point-to-Point Flights
The biggest effect has been for airlines to drop non-stop
“point-to-point” flights rather than those that go through
hubs.
The network economics of hubs becomes more attractive
for big carriers when times are tough.
A study of America's changed airline-route map shows that
large carriers are cutting non-stop flights to cities where
they do not operate hubs by more than they are trimming
hub flights.
Unions and Vendors
The industry's woes have forced airlines to get
tough with unions and suppliers over restrictive
practices that raise their costs.
US Airline Industry Must
Restructure or Die
Aviation Week & Space Technology
November 2002
Low-Cost Airlines, Not September 11, Have
Transformed Industry Fundamentals
"When people say the traditional industry model is broken,
they are moving their jaw without putting their brain in gear,"
responds former American Airlines CEO Robert Crandall. He
added that he is skeptical that the industry will ever be
competitive as long as there are so many carriers selling what
has evolved into a commodity product.
Aviation Week Contentions
A collapse in pricing power and a fundamental shift in the
buying behavior of business travelers, coupled with fierce
competition from low-cost airlines, is forcing U.S. major huband-spoke carriers to restructure their operations or face the
prospect of eventually going out of business.
The crux of the problem is a combination of excessive costs in
relation to carriers' current and projected revenues, an
imbalance between the supply and demand for available
airline seats, and an inability to boost air fares.
Corrective Actions
It will take much more than concessions by labor for
major U.S. airlines to solve their financial problems.
Airline Industry US Market
Share
Based on current trends, the domestic market share held by
the six major US airlines (American, Continental, Delta,
Northwest, United and US Airways) plus Alaska Airlines
will drop from 75% in 2002 to 62% in 2010—and 45% by
2020, according to an industry projection.
Southwest could pass American to become the largest U.S.
airline by 2013, and JetBlue could pass Delta to become the
third largest by 2020.
Industry Structure Problems
The fact that low-cost carriers have been able to mature this
far says as much about what's wrong with the majors as it
does about what's right with their low-cost counterparts, and
begs the question: does the underlying strategy or business
model employed by the large hub-and-spoke airlines still
work?
Analysts and other industry observers believe it does, but to
function properly carriers must reduce their costs and
restore the balance between supply and demand.
A Sobering Fact
Before September 11, 2001, the global industry was
showing a net loss on international services of
around $3 billion.
Corrective Actions
• Reduced capacity.
• Older aircraft may never return to service.
• Reduced wage pressures.
• Continued joint agreements.
• Discounted tickets and more travel packages.
Code Sharing Agreements
The US Transportation and Justice Departments approved a pact
that will let Delta Air Lines, Continental Airlines and Northwest
Airlines share access to each other's routes.
The code-share agreement allows each carrier to market the
others' routes as its own. One Northwest flight, for instance,
might also have a Continental flight number and a Delta flight
number.
The agreement is the biggest in the industry. US Airways and
United Airlines have a similar agreement.
Code Sharing Agreements
It's an especially appealing arrangement to frequent fliers who
prefer to build up miles on one airline while flying all three.
The government placed several conditions on the deal.
Specifically, the DOT said 60 percent of any new code-sharing
routes must serve those areas of the country that are considered
under-served.
It also bans anti-competitive practices like coordinated pricing or
shared decisions about route planning and capacity.
Continuing Concerns
1. Fuel costs
2. Decisions regarding passenger services like
whether to charge for food, the need for more
electronic capabilities.
3. Upgrading aircraft.
4. Route strategies.
5. Union relations.
6. Relations with travel agents.
Porter Competitive Model
Airline Industry Analysis - North American Market
•Aircraft Manufacturers
•Aircraft Leasing Companies
•Labor Unions
•Food Service Companies
•Fuel Companies
•Airports
•Local Transportation Service
•FAA
•Hotels
Bargaining
Power
of Suppliers
•Alternate Travel Services
•Fast Trains
•Boats
•Private Transportation
•Videoconferencing
•Groupware
Potential
New Entrants
•Foreign Carriers
•Regional Carrier Start ups
•Cargo Carrier Business Strategy Change
Intra-Industry Rivalry
SBU: Southwest
Rivals: American, United,
Delta, US Air, Northwest
Substitute
Products
and Services
Bargaining
Power of Buyers
•Travel Agents
•Business Travelers
•Federal Government
•Pleasure Travelers
•Charter Service
•U.S. Military
•Cargo and Mail
Figure 4-2
Benefits of Information
Systems
to American Airlines
1. Convenience to Customers.
2. Knowledge of Customers.
3. Providing a foundation for other
systems.
4. Building a base for other businesses.
Four Three Consistently Profitable
Airlines
1. Singapore Airlines
2. Cathay Pacific
3. British Airways
4. Southwest Airlines
Singapore Airlines






Consistently profitable but experiencing profit pressures.
Winner of multiple awards for “airline excellence.”
An extension of the country strategy to be the business and
travel gateway to Southeast Asia.
An impressive travel infrastructure.
Leader of the Orient Airlines Association (OAA)
– Abacus reservation system.
– Price collusion on major routes.
Nervous regarding U.S. carrier price competition.
Why SIA is So Good!
• Clarity and Commitment (to customer service).
• Continuous Training.
• Internal Communications.
• Consistent External Communications.
• Connection with Customers.
• Benchmarking.
• Rewards and Recognition.
• Professionalism, Pride and Profits.
Southwest Airlines






A U.S. carrier success story.
Commuter airline that concentrates on city pairs.
(Average flight is 400 miles or less and takes less
than one hour)
CEO Herb Kelleher, a Connecticut attorney turned
Texan, had the best labor relations in the industry
and an excellent company culture.
Lowest cost structure in the industry.
Company vision was to provide low cost airline
service to an increasingly larger number of people.
Objective to minimize reservation costs.
A Strength of Southwest
Airlines
1. Focus.
2. Focus.
3. Focus
Best Airlines for Business Travelers
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
Singapore Airlines
Swiss Air
Cathay Pacific
Midwest Express **
Japan Airlines
Quantas
ANA
Virgin Atlantic
Lufthansa
KLM-Royal Dutch
11. Finnair
12. British Airways
13. Alaska
14. Air France
15. Varig
16. Aer Lingus
17. Kiwi
18. Air Canada
19. American **
20. Delta**
Source: Zagat Survey of Frequent Flyers
Deregulated But Very Regulated

Safety factors.

Air traffic controllers.

Impact on constituents.

International routes.
Airline Alliances
The Star Alliance is the largest of the major groupings.
Consisting of 15 airlines led by United Air Lines and
Lufthansa. Star serves about 815 destinations in more than
130 countries.
Oneworld, which is eclipsed by only Star among the major
airline alliances, is led by British and American Airlines.
Eight airlines offer service to 550 destinations in more than
130 countries.
SkyTeam is quickly becoming a major alliance player by
serving more than 450 destinations in nearly 100 countries.
Led by Air France and Delta, SkyTeam has also consolidated
cargo services.
Barriers to Entry
Access to airports continues to be impeded by:
(1) Federal limits on takeoff and landing slots
at the major airports in Chicago, New York, and
Washington
(2) Long-term, exclusive-use gate leases
(3) “Perimeter Rules” prohibiting flights at New York’s
LaGuardia and Washington’s National airports that
exceed a certain distance.
Airline Industry Conclusions



It is a vivid example of the dynamics of the
markets that it serves.
Establishing strategies dictated by the market is
critical.
Once the right strategies have been identified,
information systems can play an important
supporting role.
Possible Exam Questions
1. Identify an industry where information systems act as a
significant barrier to entry and explain the significance of this
barrier.
2. Identify and explain the two basic strategies and three
supporting strategies used by intra-industry rivals.
3. What is the primary benefit to be derived through the use of
the Porter Value Chain?
4. Explain the logic and growth as a competitive strategy and
provide two company examples where this was a key
strategy.