Risk Management and Corporate Strategy

Table of contents

This research paper will be looking at the risk management and corporate strategy approaches taken by low budget airlines and, in particular, by EasyJet. As part of the background analysis, literature in this area will be drawn upon to identify background information that will shape the research aims and questions, as well as identifying the research methodology and timescales that are going to be applicable.

Introduction

In order to gain a background understanding, this section will look at the general strategy and corporate issues experienced by the low budget airlines, before then going on to examine the risk management and corporate strategy that is used, especially by the likes of EasyJet. Consideration will be given as to how this strategy can then be evaluated as, although delineating the actual way in which the strategy operates. Once this has been achieved there is the need to verify whether or not this strategy has bee successful and how exactly success should be defined in this context. During this research proposal one issue that needs to be delineated is why EasyJet is being looked at as a case study and why this is being done after the theoretical background has been looked at. It is contended here that choices of business strategy are theoretical and need to be understood generically before then looking at how this choice plays out in the ‘real world’ through the use of EasyJet. Understanding the choice of strategy is just one stage of the proposal, with the main value being added by the ability to evaluate the strategy in the context of the industry and to look at ways in which the strategy could be improved or altered, in order to achieve sustainable success, in the future. For this reason, the background literature review and current understanding has been looked at here before setting out the structure for the research paper in more detail.

The Concept of Budget Airline Strategies as Background Understanding

The UK airline industry has, as an industry, gathered considerable pace in recent years, with the number of passengers flying in the last decade increasing to a point whereby it is becoming part of day to day life, rather than an activity that is reserved for the wealthy, perhaps once a year for their annual holiday. According to the CAA Statistics there are approximately 126 million air journeys made a year from the UK This general change in the demographic of those relying on these airlines is such that it has fundamentally changed the budget airline industry. In particular, one of changes is the appearance of budget airlines, such as Ryanair and EasyJet, as well as the growth within the regional airports across the country, again supporting greater access for all. Prior to the growth of the low cost airline industry, commercial flying was something that was reserved for those in a much more financially stable situation, yet the marketing and branding of the budget industry has encouraged a much broader range of appeal. There is a question as to which way round this has occurred and as such this will need to be explored during the wider paper. The industry as a whole hit a particular difficulty in 2001, where the trade centre attacks meant that a variety of airlines no longer had the same appeal and a number of airlines went into liquidation (IAA, 2011)Despite this, there has been an increasing pressure on the airline industry from the low cost arena, with more and more people viewing airlines such as EasyJet and Ryanair as a viable travel option, thus attracting a broad range of individuals who will now consider, particularly local and short haul travel, as a means of enjoying cheap holidays, on a regular basis (Gross and Schroeder, 2007) .

The budget airlines operate with a different strategy from the more traditional commercial airlines in the industry, and are thus able to make cost savings that can then be passed on to the customer base. A considerable amount of literature such as that by Doganis in 2001 has been established to look at the ways in which the low cost airlines have set themselves apart and have changed the airline industry. One of the leading arguments that is presented as part of this background research is that of Porter’s Five Forces model, in 1981, provides a conceptal tool which suggests that a company will look at the five forces on the industry as a means of creating and establishing their own strategy. These five forces are : the bargaining power of suppliers, the bargaining power of buyers, the threat of potential new entrants, the threat of substitute products and the rivalry within the industry. This strategic argument has also been presented by Brandenburger and Nalebuff 1995 that indicates game theory is used to support the success of the airline industry. ,This will be explored in considerably more detail in the research itself; however, it provides an important starting point for the discussion here and will form a key part of the ongoing analysis.

Corporate Strategy employed by EasyJet

EasyJet is being used as a case study in this scenario. Therefore, consideration will be given as to how the specific corporate strategy as indicated by Porter’s model, has worked within the company itself and how this can then be evaluated and the risks associated with the strategy managed, appropriately. As noted by Porter in 1996 (p.62), it was stated that: “A company can outperform rivals only if it can establish a difference that can preserve. It must deliver greater value to customers or create comparable value at lower cost or do both”. It is this approach that is used as the fundamental strategy which has been established by EasyJet (Wright 1987). Porter, as a result of his analysis, created three generic strategies, one of which is relevant here, namely that of cost leadership. In this case, the aim is to be the lowest cost supplier and to achieve profitability based on having a strong price cost margin (Dobson, Starkey and Richards, 2004). This is an extension of the understanding established initially by Porter in 1985, where he stated at p.13 “Low-cost producers often sell a standard, or no-frills, products and place considerable emphasis on reaping scale or absolute cost advantages from all sources”. Although the discussions here were aimed at those that generically follow these strategies, they are clearly very relevant to the way in which EasyJet has formulated itself. Moreover, for this type of cost leadership strategy, it is suggested that there is a need to be offering roughly the same product as the competitors, but to do so in a way that is cheaper, thus identifying the key element of the product or service that simply must be provided and to remove the frills that are perceived to be unnecessary, in order to attract the appropriate market share. Within the airline industry, it could be argued that an actual airline seat which goes from A to B is a standard commodity and that a seat will be booked in order to allow an individual to travel from one place to another and that aside from this, no substantial differentiation is necessary for the majority of the public. Of course, there are those who might desire more leg room, better food, faster check in, etc., but on the whole, this is a standard commodity which lends itself to an idea that cost leadership can be achieved and is a approach potentially taken by budget airlines such as EasyJet.

EasyJet, for example, has looked at the various ways in which it can save costs, such as the cost of landing at central airports, the cost of providing meals to everyone, the cost of check in staff at the airport, all of which has been eliminated as part of its strategy. For instance, by encouraging online check in and allowing all customers to book online and to manage their booking entirely online, this reduces the number of staff required within the airport. Furthermore, the airline typically utilises regional airports, as they charge less than central airports and this then allows the company to provide cheaper flights to the region. This will, of course, reduce the number of people who are willing to travel to that region, as some will place a premium on a direct flight to the centre of the city but, in many cases, an alternative airport within a few miles will be acceptable and is a great way of achieving a cheaper flight. This will also be the approach when providing the flight element of cheap package holidays.

Concept of Risk Management within the Budget Airlines

Based on this strategy, there are clear needs to look at risk management as a means of maintaining the strategy. When following a cost leadership approach, there is the need to consider that competitors may simply innovate to copy and to be able to do the same, so that companies such as EasyJet need to ensure that they stay ahead of the game and are constantly looking towards improving their position and cost savings and therefore gathering greater market shares.

Other risks are generic to the industry, as a whole, such as terrorism or global economic decline; however, the focus of this paper is on the way in which EasyJet deals with the risks that set it apart from the others and the way that this company uses its own strategy to manage the risks that may be present. For example, if there is operational pressure, or there are fewer people looking to travel, EasyJet can look towards the notion of providing greater technological efficiencies or offering its customers to groups of the market share that may improve its position. Risk management is therefore, in this case, about creating a level of dynamism that allows the company to remain ahead of the competition and to further its own competitive strategy, in this case, cost leadership.

Industry Background

In order to understand the role of EasyJet it is necessary to briefly understand the generic industry situation. The actual notion of a low cost airline can be seen to have emanated in the 1970s, when Southwest Airlines established itself as a cut price airline providing a very basic but nevertheless acceptable service to American internal travellers. It aimed to appeal to those who were interested in price, rather than convenience, comfort or timeframe; it was often aimed at the student market and was referred to by many as the ‘Hippie’ Airline. From this point, several longer haul efforts emerged, but never fully gathered speed in comparison to the short haul equivalents, arguably due to their inability to differentiate themselves across the markets (Porter, 1980). That said, from the late 1990s through to the current day, several short haul no frills airlines have gained considerable success. Others have failed such as Zoom, in 2008, which suffered from problems associated with higher costs, most notably in the area of fuel. (Zoom, 2014)

Despite certain differences pursued by the various carriers, on the whole, they pursued the approach of having uniform airplanes that reduced purchase and maintenance costs, as well as sticking to those airplanes that have minimal operations requirements and can therefore retain a low level of costs. Other operational benefits are gained through the use of requiring personnel to undertake multiple roles and to ensure that there are less people required to service customer needs, both on the ground and in the air. Whilst this may somewhat reduce the efficiency and the quality of service provided, on balance, it provides a basic service at a cheap price. Certain principles are seemingly consistent across the low cost airline industry, such as the use of secondary airports which are cheaper, the removal of non essential features, the imposition of charges for any added extras, e.g. additional baggage handling, so that individuals can simply pay more for what they actually require or want as added extras. The primary example of this is the removal of inflight meals as standard, thus allowing flyers to purchase what they wish, if indeed they wish to purchase food at all. Again, this reduces automatic costs and also offers opportunities for added revenue to be generated through the sale of snacks.

These basic principles are common across the entire industry, although certain aspects have been more readily pursued by EasyJet and will form the focus of the main discussions.

Research Aim and Research Question

The overall research aim is to evaluate risk management and corporate strategy in low budget airlines using Easyjet as a case study.The research will analyse the working methods of the budget airline industry and to consider its overall and generic corporate strategy and positioning as an industry, as well as to look at individual examples within the industry, such as Easyjet.

The research objectives are as follows:

  1. To gain an understanding of the ethos of the no frills airline industry, as a whole, considering strategies and approaches that are being accepted as the norm within the budget airline industry. A specific consideration of the risks facing low budget airlines
  2. To evaluate risk management and growth strategies across the industry and identify how these can then be mitigated in the long run.
  3. To evaluate the processes and strategies operating within EasyJet.

By following this approach, the aim is to look at the industry, as a whole, but then to use the knowledge gained as a means of evaluating the current approach and looking to the future for both EasyJet and others within the same industry. Recognising this will enable a rounded and directed discussion for the management team of both EasyJet and other similar airlines.

Research Methodology

The research methodology for the paper is considered to be important for the purposes of identifying how the overall aim of evaluating the strategies and risk management available to low budget airlines and, in particular, EasyJet can be acheived. Firstly, it is considered to be necessary to undertake a deductive approach to the literature review, whereby the basic theory of the no frills airline is taken and then explored and observed. For example, there are accepted principles which are part of the no frills airline as a generic cost leadership strategy. Therefore, by taking the essence of the cost leadership strategy and then observing the industry in light of this, it is then possible to create a further theory as to the success of the industry and, more specifically, EasyJet. At this point, it is then necessary to take an inductive reasoning approach and to use observations as a means of developing a further theory of how these approaches can be evaluated and how these can then be better dealt with, in the future, for both EasyJet and the industry, as a whole. With this in mind, there is a shift in reasoning that needs to be clearly delineated in the structure of the research paper and will be looked at in these sections, below.

This research methodology, which relies entirely on secondary research, may be seen to be limited, due to the lack of primary research; however, it is felt to be appropriate in this case, due to the need to gather such a broad range of opinions, if primary research were to be relied upon. With this in mind and the specific thought that consumers are likely to have in relation to the industry, it was determined unhelpful to collate a large amount of primary research.

Although there is a large amount of information available in the general domain, this is not in itself going to provide sufficient depth of understanding and therefore additional databases are going to be required, in order to add the necessary value to the discussion.

Economic and financial journals may also prove useful in this regard, as they are readily available in the University library and will provide the background theoretical understanding.

The starting points for the references and resources to be used are contained below; however, it is anticipated that this will be increased dramatically, over the course of the first two stages of the research and, in particular, during the literature review.. Key words will include, budget, strategy, airlines and EasyJet

Timescale

The overall duration of this research is to take place over one academic year, consisting of ten months. This is also a large deciding factor in the determination not to rely on primary research, at all. There would need to be a large amount of primary research gathered and this simply would not be possible with the time frame allocated if a suitable level of reliabilty were to be obtained.

The following time frame is to be followed, with a degree of flexibility allowed in order to ensure that all aspects of the research are completed diligently.

  1. Month 1 – set out the research question, consider the available literature as well as the access to case study information and delineate any possible limitations that may arise in terms of information available.
  2. Months 1 – 2 – establish the introduction and industry background, looking solely at literature relating to the generic theories of business development, as well as the theory of the no frills airline.
  3. Months 3 – 4 – undertake case study analysis of EasyJet, which will require detailed information to be gathered from the company, from the commentary relating to the company and from any other source that could offer guidance as to how the company has been successful or, indeed, where the company has failed.
  4. Months 5 – 6 – analyse case study, in light of the literature review and evaluation structure set, going forward. A key component of this research is to evaluate the strategy being employed and to evaluate the way that the company may manage its risk. With this in mind, the evaluation process should be considered over a long period of time and with sufficient depth, revisiting issues, if required.
  5. Months 7 – 8 – pull together all the research and revisit any areas that seem lacking or where additional questions have been raised; most notably, ensuring that the aims and objectives are fully established and any gaps have been dealt with or, at the very least identified, so as to form part of the limitations and future research statements in the end report.
  6. Months 9 – 10 – review and present findings, undertake any other final areas of research that may be required and ensure that the findings of the research paper are presented fully. Any further areas of research will be identified at this stage and laid out for future use by others. Any limitations of the research will also be established.

Resources Required

The primary research is not being undertaken due to the required timeframe. For the analysis itself, there is a need to have access to a variety of literature data bases, including the standard academic databases and industry information relevant to the airline industry. It has been identified that sources such as Euromonitor may provide a particularly useful insight into the industry itself, but are paid for databases. However, there are certain databases that may present industry information and are provided to the University which need to be looked at, in more detail. Specific databases that are appropriate include:

  • Datastream
  • EconLit
  • JSTOR
  • Datamonitor

In summary, therefore, the aim is to evaluate the strategies used by the no frills industry, with particular reference to EasyJet. In this context, the next step is to undertake a reasonable amount of background reading, to ascertain the areas that are then going to be pursued as part of the literature review. The main initial stage will be to look at the various aspects of the corporate strategy and to split the areas of reading and literature into sub headings. This will then be pursued when looking at the EasyJet case study; therefore, it is necessary to establish these strands of the argument and the support for this argument, from the outset.

Establishing the main aims, strands of analysis and the way in which the findings will be presented will all be part of this initial fact finding and preparatory stage.

References

  1. Brandenburger A.M. & Nalebuff B.J. (1995), “The Right Game: Use Game
  2. Theory to Shape Strategy”, Harvard Business Review, July-August pp 57 – 71
  3. Calder, S. (2003), No Frills: The Truth Behind the Low-Cost Revolution in the Skies, UK: Virgin Books
  4. CAA Statistics (2006)
  5. http://www.caa.co.uk/docs/80/airline_data/2006Annual/Table_0_1_6_All_Services_2006.pdf
  6. Doganis, R. (2001), The airlines business in the 21st century, London: Routledge
  7. Galbraith, C. & Schendel, D. (1983), “An Empirical Analysis or Strategy Types”,
  8. Strategic Management Journal, 4:2 153 – 173
  9. Gross, S and Schroeder, A. (Eds.) (2007) Handbook of Low Cost Airlines – Strategies, Business Processes and Market Environment, Berlin.
  10. Hill, C.W.L. (1988), “Differentiation Versus Low Cost or Differentiation and Low
  11. Cost: A Contingency Framework”, Academy of Management Review 13:3 pp 401 – 412
  12. IATA (2011) The Impact of September 11th http://www.iata.org/pressroom/documents/impact-9-11-aviation.pdf
  13. Miller, D. (1988), “Relating Porter’s Business Strategies to Environment and
  14. Structure: Analysis and Performance Implications”, Academy of Management Journal 31:2 pp 280 – 308
  15. Mintzberg, H. (1978), “Patterns in Strategy Formation”, Management Studies 24:9 pp 934 – 948
  16. Mintzberg, H., Quinn, J.B. & Ghoshal, S. (1995), The Strategy Process, UK: Prentice Hall
  17. Murray, A.I. (1988), “A Contingency View of Porter’s “Generic Strategies””, Academy of Management Review 13:3 pp 390 – 400
  18. Porter, M.E. (1985), Competitive Advantage: Creating and Sustaining Superior Performance, New York: The Free Press
  19. Porter, M.E. (1980), Competitive Strategy: Techniques for Analysing Industries and Competitors, New York: The Free Press
  20. Stabell, C.B. & Fjeldstad, O.D. (1998), “Configuring Value for Competitive Advantage: On Chains, Shops, and Networks”, Strategic Management Journal 19:5 pp 413 – 437
  21. Treacy, M. & Wirsema, F. (1993) “Customer Intimacy & Other Value Disciplines’, Harvard Business Review, Jan-Feb pp 84 – 93
  22. White, R.E. (1986), “Generic Business Strategies, Organizational Context and Performance: An Empirical Investigation”, Strategic Management Journal 7:3 pp 217 – 231
  23. Wright, P. (1987), “A Refinement of Porter’s Strategies, Strategic Management Journal 8:1 pp 93 – 101
  24. Zoom (2014) Zoom – Bankruptcy Filed in 2008 Retrieved from http://www.flyzoom.com/

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