Companies’ behavior towards changes in the external environment
Ash from Iceland’s eyjafjallajokull volcano triggered an unprecedented shutdown of European airspace for six days until the 21st of April 2010, paralyzing many airports and trapping hundreds of thousands of tourists and business travellers. The flight ban was compulsory because ash can turn to molten glass in the high temperatures of an aircraft’s turbine and cripple the engine. The safety and security of travellers was the first priority of the airlines’ companies and accordingly they had to stop all their flights within Europe, which in turn affected the whole tourism’s industry including hotels. BBC, 2010)
However, each company had their own point of view on the best actions that can be taken in these types of situations and unique circumstances, depending on some of the business and economical theories and concepts. Nevertheless, to demonstrate and understand these actions Mrs. Judith Piggott’s experience with British airways and a local hotel is used. In this report, these theories will be presented and analyzed; in addition the way that the companies implemented them in this case will be exposed.
Supply and demand and how do they effect the price and the Market Equilibrium
To understand the local hotel’s attempt, which is lowering their price, the terms supply, demand and Market Equilibrium must be known. Firstly, the term demand means “the want or desire to possess a good or service with the necessary goods, services, or financial instruments necessary to make a legal transaction for those goods or services” (see appendix 1), and the relationship between price and quantity demanded is an inverse or negative relationship. This means that when price goes up quantity demanded goes down, and when price goes down quantity demanded goes up true for individuals, modules (e.g. Groups of consumers), whole markets. Secondly, the word supply in economics means “the amount of a product that the firm is able and willing to put on the market over a specified period” (see appendix 1). The market supply is the sum of the supply of all firms at any given price, there is a positive relationship between price and quantity, when price goes up quantity supplied goes up (Tucker, 2008). Finally and the most important term for our case is the Market Equilibrium, where the supply and demand intersect or in another words when the quantity of product supplied equals the quantity of product demanded at any given price (see appendix 2). (Wessels, 2006)
Therefore, the Market Equilibrium is the goal for any firm to avoid any surpluses (see appendix 3) or shortages (see appendix 4). By understanding these concepts we can recognise that the local hote were concerned that because of the ash clouds, the coming customers’ numbers will be less than usual adding to that the other competitors in the market which will even lower the numbers more, consequently minimising the hotel’s chare from the whole market. Therefore, the hotel had to lower their prices firstly to avoid surpluses of empty rooms, and secondly to compete with the other hotels in the market.
Gaining the customer loyalty
The regular company in the UK wastes from 20-40% of its customers each year. By acknowledging this issue and its negative influence on the company competitiveness and profitability, a firm must swap from the long accepted market share strategy to a completely different long-term approach to business, which is building the customer loyalty (Bell and Patterson, 2004). Boosted loyalty can bring cost savings to a firm in at least six areas:
- Reduced marketing costs (customer gaining or attracting costs require more pounds).
- Lower switching costs such as contract negotiation and order processing.
- Reduced customer turnover costs (fewer lost customers to replace).
- Increased cross-selling success leading to larger share of market.
- More positive word of mouth and better company image.
- Reduced collapse costs.
Five advantages for making a first time customer a lifetime purchaser (Loyal customer)
- Sales go up, because the customer is purchasing more from the firm.
- The firm is strengthening their situation in the marketplace, when clients are buying from them instead of their competitors.
- Marketing costs decrease when the firm doesn’t have to spend a huge amount of money to attract repeat customers, since they already have them. In addition, as satisfied customers they tell their friends (Word of mouth marketing) thereby decreasing your need to advertise. Therefore, decreasing marketing costs.
- Avoiding price competition with competitors, because a loyal customer is less expected to be attracted away to another competitors by a discount of a few pounds.
- Finally, a satisfied customer is expected to sample the firm’s other product lines thus helping to achieve a larger share of customers.
When a firm is spending less to attract new customers, it can afford to pay their staff’s better wages. Better salaries prompt a chain reaction, with huge benefits. If a company is able to maintain good workers, the company’s loyalty both internally and externally improves. Just as customer retaining has a positive influence on profitability, customer defection can have a negative influence. Defection by a long-term customer (Loyal customer) can cause an intense loss and affect the bottom line faster than defection by a new customer. Both of customer loyalty and satisfaction are two words that go into the Sales Strategic Plan. (Lawfer, 2004).
Both of British airways and Thomson’s holidays tried to gain the customer’s loyalty and expand their customers’ base by their actions. For example, British airways paid off their customers the extra nights hotel’s fees, and they did that in a short period of time. Whereas companies such as Ryan air refused to do so. In addition, Thomson holidays were so generous and caring with their customers they paid for the extra nights, food and they even send their cruises to pick their clients and return them home. While, other companies where so mean and untruthful to their clients, they promised to pay for the meals and then retreat and demanded money for them. Which had a negative impact on their customer base. Thus lowered the number of returning customers and that can be seen clearly from Ryan air customer’s feedback. Even though British airways and Thomson holidays lost a huge amount of money on the short run, but they gained their customer’s loyalty and trust. Consequently, expanded their customers’ base, which will recover their losses in the long run (Reichheld, 1996).
To sum up, the Iceland’s volcanic ash had a strong impact on the airlines industry and forced the companies to stop all their flight within Europe, which in turn affected the tourism industry as a whole. Companies’ actions towards this incident varied from one to another, depending on some of the commercial and economical theories and principles. Some of the companies such as British airways and Thomson holidays were looking more on the future and tried to maintain their customer base and gain their trust, by being helpful and truthful with their clients. On the other hand companies such Rayan air and some of the other holiday’s firms, were dishonest and looked more on the present and how to avoid losses. Even though British airways and Thomson lost a huge amount of money on the short run, but maintaining their customer base will allow them to cover these losses in the long run.In terms of pricing strategies the local hotel depended on the great understanding of the economical terms supply, demand and Market Equilibrium. They pushed the price down so they can raise the demand up and achieve the Market Equilibrium, and in turn avoid surpluses or shortages in rooms. Moreover, pushing the prices down will able them to compete with other competitors in the market and expand their market share. In my opinion British airways and Thomson holidays made the right strategic decision and approached the right actions, because of the advantages of increasing the loyalty and maintaining loyal customers that I mentioned previously. In addition, I think the local hotel were also successful in their pricing strategies, because if they did not push the prices down there would had been a huge numbers of unequipped rooms, and their losses would had been even grater.
- BBC (2010) Icelandic volcanic ash alert grounds UK flights. April 15, 2010 [online]. Available from: http://news.bbc.co.uk/2/hi/uk_news/8621407.stm [Accessed on April 22, 2011]
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- Remarkable Customer. Massachusetts: Adams Media
- Lawfer, M. (2004) Why Customers Come Back: How to Create Lasting Customer Loyalty. New Jersey:
- The Career Press
- Reichheld, F. (1996) The loyalty effect: the hidden force behind growth, profits, and
- lasting value. Massachusetts: Harvard Business School Press
- Tucker, I. (2008) Macroeconomics for Today. Ohio: Cengage Learning
- Wessels, W. (2006) Economics. New York: BARRON’S