MB609F Stand Alone Project Strategic Audit

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STAND-ALONE PROJECT

MB609 Capstone: Strategic Management

Stand-Alone Project: Strategic Audit

PART A

Performance in terms of revenues, profitability and market share.

In considering the company performance over past few years from 2009 to 2013, the company experienced increasing annual revenue income from year 2011 to 2013. The graph of the company has been steady with real increase in profitability as shown by gross income. The information is clearly seen in the table provided (Charnes, Gallegos & 2013).

Financial yr 2009 2010 2011 2012 2013
Sales revenue 19.92B 22.17B 23.98B 24.86B 26.74B
Cost of goods sold 17.1B 18.16B 20.68B 20.42B 20.14B
COGS 16B 17.06B 19.59B 19.4B 19.12B
Depreciation & amortization 1.1B 1.09B 1.09B 1.02B 1.02B
Depreciation Expense 979M 967M 954M 915M 1B
Amortization of intangible assets 125M 126M 132M 100M 20M
Gross income 2.82B 4.01B 3.30B 4.44B 6.60B

In terms of market share the company performance was good with banks like banks like Morgan Stanley, Bank of America-Merrill Lynch, JPMorgan, Barclays, and USB giving it a buyer rating in 2009.

Strategic postures in relation to mission, objectives and strategies

Mission

The mission of statement of the company is commitment to providing every citizen of the world with the highest quality air travel to the widest selection of destination possible. The airline was expected to modernize its fleet while maintaining its position as the largest air carrier in the world with the goal of becoming the most profitable airline (Charnes, Gallegos & Li, 2013).

Objectives

The objectives of this company oscillate around improving services to its stakeholders and majorly the customers being the greatest stakeholder. To following incorporates the company objectives:

Strategies

  • Continue to strengthen their global network to serve customers travel and connectivity needs
  • Improve the customer experience as demonstrated by key metrics resulting in greater financial rewards for employees.
  • Focusing investments in maintenance, airport resources, and technology to improve on time arrival and baggage handling
  • Continue to develop and deploy customer travels innovations
  • To act as good environmental stewards and implement innovative ideas and wise investment to minimize environmental foot print.
  • To support the communities, it serves and deeply commit to supporting important causes and economic development.
  • Making American airline Company a good place for good people to work and build a carrier by creating and maintaining safe, collaborative, inclusive and respectful environment.
  • The objectives are conforming to the expectations of the company mission which calls for the highest quality air travel services to customers.

Strategies involve the game plan employed towards attainment of objectives and goals. Under this company the strategies applied incorporated managing costs and retaining its customer base through alliances and rewards programs. The first one was frequent flier program which allowed customers to earn points and redeem miles at both American Airlines and other subsidiaries of ARM. Secondly, there was one world Alliance that links the networks of the member carrier to enhance customer service and smooth connections to the destinations. The third was information Technology Systems whose main aim is to bring technological changes for the benefit of the customers. Their improvement ought to be done to streamline air travel for consumers.

There was also philanthropic focus that dealt majorly with projects and programs that serve variety of community groups. The strategies provided are consistent with one another and they are within the mission statement of the Company which calls for providing every citizen of the world with the highest quality air travels to the widest selection of destination possible. The therefore encompass the expectations of the mission.

Corporate Governance in terms of Directors and Top Management

The company experienced significant change in management at the wake of company’s bankruptcy filing. The ranks of senior management were cut from 14 to 10 people with the company giving effort to streamline business unit as a reason. Notably, two senior executive positions were shuffled in at the end of 2011 being flight operations and employee relations, areas that had been sources of trouble for American in those recent years. The senior positions available included Chairman and Chief Executive officer, President and CEO, Senior Vice President and general Counsel, Senior President and Chief Finance Officer, and Board of Directors. The Board of Directors was chaired by CEO. As stipulated in the Company’s Board of Directors Governance policies, the responsibility of each director is to provide effective governance over the affairs of the company for the benefit of the company and its shareholders.

Part B

Porters 5 forces are a framework used in determination of methods of accessing attractiveness in various organizations. The frame work includes the power of the buyer, power of suppliers, the threat of substitutes, the threat of entry and finally the competitive rivalry. The frame work has contributed greatly in competitive power determination and profit maximization by America airlines in the US airline Industry (Porter, 2008).

Threat of entry

Starting an airline requires both strong financial support and huge investment which might be a threat to a new entrant entering a price war with the already established airline companies. Flight tickets are expensive besides customers prefer Airline Company they are familiar with. Furthermore, standard set by the government in terms of infrastructure and regulatory requirements are too high for new entrant. The great financial support from shareholders as well as brand awareness gives the airline an impetus for entering the industry and forging forward.

Threat of substitutes

In looking at the airline industry and American Airlines in particular, they are not highly threatened by lots of choices available for travelling like use of cars, bus, ship or use of train as a means of travelling since the use of airlines in travelling is something the Americans citizens are used to. Business travelers always work with time and therefore using airplane is faster and convenient. This airline company being business friendly, targeting business travelers came up with sets of packages including comfortable real leather seat, high quality service, and in-flight Wi-Fi. The factors have greatly impacted on the threat of substitutes (Charnes, Gallegos & Li, 2006).

The power of buyers

Passengers have the power to make comparison prices and amenities provided by different airlines online (Porter, 2008). Online ticketing and distribution system have given passengers more freedom on choosing tickets unlike solely relying on ticket agency. Through filter selection, customers can choose airlines offering tickets at lower prices, good amenities, and transparent in customer dealings. American Airlines provide these qualities hence ending up winning some domestic airline awards.

Power of suppliers

Currently in the commercial airlines companies there are only two suppliers satisfying requirements namely Airbus and Boeing. Consequently, little competition is evident. The dominating suppliers can draft contract with companies knowing how important they are. By facing financial problem, the company cannot easily create corporate relationship with these suppliers, hence pressure from the power of supplier though that is still very high in this industry. High cost of aviation fuel has posed a lot of threat but for this company to lower high supplier power.

Competitive rivalry

Since in this industry there is provision of similar product and services in the same market, competitive rivalry thrives. The company faces the same situation with its rivalry coming from Virgin American airline, Southwest airline, and JetBlue Airline. The company offers the following services to be able to overcome the existing competition. Commitment to quality service was its major tool and therefore it embarked on evaluation data of flying in time, denied boarding, baggage mishandled, and the complaints launched by customers to ensure achievement of this factor.

Three other factors affecting industry and their importance

Fluctuation in the fuel prices has been a greater problem in this industry. Since aviation fuel is the driver of this industry its increase greatly impacts negatively on the revenue of the companies in this industry (Hill & Westbrook, 2007). The issue of finance has posed a great problem since this industry requires greater funding to initiate as well as keep the operations moving. Fuel for aviation, maintaining technology and standards of operations and the general functioning of the airline companies utilize greater funds. Stringent regulations and standard put by the government through are aimed at achieving quality and creation of favorable environment for operation, has proved a challenge since their achievement require a lot of resources deployment and a dedicated management.

Opportunities

The flight plan of 2020 created by authorities has open opportunities as it emphasizes on serious investment in strengthening global networks, earning loyalty, and building work place community. Strategies have also been put in place to address the issues related to labor cost including placement of negotiation with flight attendants’ unions and maintaining outsourcing. Improvements have been done especially on international offerings through potential growth within the Asian markets and as well upgrading of business class on a long trip. Through expansion to Asian markets the airline has been able to open doors to generate more revenue for the airline and seize more opportunities for market expansion. Through partnering with four leading green communities, American Airlines has been able to create a good image and bring about reduction in pollution. These further create more opportunities.

Threats

The sky rocketing fuel prices has proved a challenge since it threatens revenue yearly since this cost takes a greater percentage of operating cost. The nature of requirements and regulations on the operations has put the airline on terms and conditions that it must abide by to successfully operate. They are strict and tough to fulfill. The competition from other airline operators is also another concern. The company receives competition from other airline operators like Virgin America and others.

There is development and innovation have created substitutes for travelling substitutes and therefore cases video conferencing that keep people communicating without having to make travel have come up posing risk on the company. ICC as a model is also threatening legacy carriers. The model has posed a lot of pressure on removal of available legacy carriers.

An External Factors Analysis Summary (EFAS Table) for American Airlines listing the five opportunities and five threats described above.

External factors O/T Weight Rating Weighted average comments
Flight plan 2020 O 0.10 5.0 0.50 The major driving factor
Remedies to Wrangles O 0.05 2.6 0.13 Revamp reputation incase successful
International offerings O 0.15 3.0 0.45 Opportunity for expansion
Expansion to Asian markets O 0.10 2.2 0.22 Growth opportunity
Partnering O 0.10 1.4 0.14 Green companies
Fuel prices fluctuation T 0.10 2.5 0.25 Serious constrain
Competition T 0.10 2.5 0.25 Better strategies necessity
Regulation requirements T 0.10 3.4 0.34 Too stringent
ICC model threats T 0.15 2.0 0.30 A threat to carriers
Video conferencing T 0.05 1.8 0.09 Alternative to travelling
Totals   1.00   2.67  
           

Importance of threats and opportunities

The opportunities and threats are factors that come from the external environment of a company and their analysis play a major role in the industry. They are a pointer to possible risks that the company might find itself in for instance a pointer on future fuel increase would prepare company to stage itself in a better way to cope with the situation. They can as well point an available chance that an airline can exploit to generate more revenues. Their analysis can also help companies cope with the problem associated with the external environment like the competitor’s strategies, suspected stiff competition due to new entry or pricing strategies.

Part C

Core Competencies incorporates the essential capabilities that create a firm’s sustainable competitive advantage. American airline has a core competency of providing quality travelling services to its customers.

Competitive position

The completion in domestic airline is very competitive on both international and domestic scale. The major competitors of this company consist of similarly situated legacy airlines and emergency low cost carriers (Chen, 2006). On most of its domestic non-stop routes, the company faces competing services from at least one, and more than one domestic airline include: Delta Airlines, Alaska Airlines, Frontier Airlines, Hawaii Airlines, Virgin America, and US Airways and affiliated regional carriers.

Strengths

A good reputation worldwide as well as very high brand awareness, the Americans already know the brand since it was among the first careers. The airline still enjoys some investors’ confidence since it produces strong operating cash flows. It is also highly famous and has high rating among investors. Strategic location of the airport gives it a greater advantage since it is situated in a strong key business hub. The location is in Dallas, Miami, and Chicago. The company has incorporated advanced technology in terms of providing facilities to customers for instance in-flight facilities that are business friendly. Experience in the industry is acting as a greater strength for management.

Weaknesses

The company is incapable of competing in international flights. The company has failed in initiating mechanisms to aid it in edging its competitors in the industry with provide better quality. The financial position of the company is threatened to the extent that it can’t enter into hedging contracts. Analysis by financial officers still forecasts future financial problems. The success of the company is still threatened by wrangles from Union and labor.

The issues therefore still impede developments within the company. The resurgence in the demand of company services still poses threat to its revenue since demand drives revenue and in case it is low the company is significantly affected. Since the company provides fewer destinations than other airlines, it always makes a small portion of market share. This has been hastened by lower demand hence failure to ply many routes and destinations.

An Internal Factors Analysis Summary (IFAS Table) for American Airlines listing the five (5) strengths and five (5) weaknesses described above.

Internal factors W/S weight Rating Weighted score comments
Good Reputation S 0.15 2.2 0.33 Since among first careers
Investors confidence S 0.05 1.7 0.085 Influence shares prices
Strategic location S 0.10 5.0 0.50 Dallas
technology S 0.10 2.8 0.28 Advanced in seats
Experience in industry S 0.10 4.1 0.41 Handling issues
Poor financial position W 0.15 3.0 0.45 A major factor
Incapacity for int. flights W 0.10 5.0 0.50 Gives competitors advantage
Wrangles in union, labor W 0.10 1.8 0.18 Tilts company image
Decrease in demand of products W 0.05 3.0 0.15 Threatening the company
Fewer destination W 0.10 1.6 0.16 Closure of some routes
Total   1.00   3.045  

Importance these internal factors

The internal factors of environment play very important role in the life of companies. They determine the company’s capability to withstand the pressures associated with competition as well as threats posed by new market entrance (Gretzky, 2010). Market share and strategies the company has in place are also investigated and in case they show limitations on the company’s side necessary adjustments are done to keep the company at per or above other competitors in the industry.

Part D

Analysis of Strategic Factors

Situational analysis of strategic factors and their relevance to strategic planning process. Situational analysis involves looking at the internal and external factors of the organization with a long-term approach (Houben, Lenie & Vanhoof, 2009). We will therefore look at three of each of these factors from strengths to threats being the final part.

Strengths

Weaknesses

  • Good reputation enjoyed due to earlier appearance in the industry
  • Good investors’ confidence and strong operation cash flow
  • Strategic location of the airport in the strong business hub

Opportunities

  • Union and labor wrangles which prevent progress and development
  • Incapacity to enter into better supply contracts and compete in international flights
  • Poor financial ground that inhibits entering into hedging contracts

Threats

  • The flight plan of 2020 created by authorities
  • Creation of remedies to subvert issues related to labour and union wrangles
  • Improved international offering through potential growth in Asian market

The analysis of this nature plays great roles in the strategic planning process since it gives a good all-round view of current and forward situations of the company (Helms & Nixon, 2010). The strengths of the company always allow the company to consider its competitive advantage in the market place and they are a focal point of the company’s operation and strategic planning. It is important in the strategic planning process or a company to understand its weaknesses to be able to easily deal with them (Dyson, 2004). It can either seek to improve if these weaknesses prevent it from implementing its objectives to achieve objectives or try to down play them in marketing of brand. Opportunities helps the company identify ways to improve and grow through taking advantages of changes in the market place (Houben, Lenie & Vanhoof, 2009).

  • Incessant fluctuation in prices of fuel for aviation
  • Developments in other methods of communication that reduces chances of travelling for instance video conferencing
  • Lack of proper mechanisms to counter stiff competition in the industry

Analysis of company threats on the other hand helps the company insulate itself from external threats including the environment, regulations, technology and trends being major factors here.

Develop a Strategic Factor Analysis Summary (SFAS) Matrix for American Airlines using the strategic factors described above.

The SFAS (Strategic Factors Analysis Summary) Matrix summarizes an organization’s strategic factors by bringing together the external factors from the EFAS Table with the internal factors from the IFAS Table. The SFAS Matrix requires the strategic decision maker to condense these strengths, weaknesses, opportunities, and threats into fewer than ten strategic factors. This is done by reviewing and revising the weight given to each factor. The revised weights reflect the priority of each factor as a determinant of the company’s future success. The highest weighted EFAS and IFAS factors should appear in the SFAS Matrix.

Table

STRATEGIC FACTOR ANALYSIS SUMMARY (SFAS) MATRIX FOR AMERICAN AIRLINES

Strategic Factors Weight Rating Weighted Score Comments
S1 Strategic location 0.10 2.8 0.28 Dallas port
S4 Investors’ confidence 0.05 1.6 0.08 Drives company shares
S3 Good reputation 0.10 2.3 0.23 Name recognition
W4 Incapacity for international flights 0.10 2.2 0.22 Comparative advantage for competitor
W6 Labor wrangles 0.05 1.4 0.07 Spoilt image of company
W1 Poor financial ground 0.10 5.0 0.50 Finance is key to growth
O1 Strategic plan 2020 0.10 4.9 0.49 The major driving factor
O5 Remedies to wrangles 0.05 1.6 0.08 Reputation revamp in success
O6 International offering 0.10 2.4 0.24 Opportunity for expansion
T2 Fuel price fluctuations 0.10 3.7 0.37 Serious constrain
T4 Video conferencing 0.05 1.7 0.085 An alternative to travelling
T2 Competition 0.10 4.1 0.41 Better strategies required
Total scores 1.00   3.055  

Are the company’s mission and objectives relevant considering the above external and internal strategic factors? Explain

The mission and objectives of the company are still very vital at strategic planning process. The leaders should therefore emphasize current mission statement to employees which clarifies the purpose and primary measurable objectives of the organization. Strategic plan may involve changing the mission statement to reflect a new direction of the organization. Giving the highlights of the benefits of change and minimizing the deficits will help the employees and the public buy into the change due to strategic planning process (Gretzky, 2010).

TOWS Matrix and Strategies

The TOWS Matrix helps in thinking of the options that can be pursued. To do this, matching of eternal opportunities and threats with the internal strengths and weaknesses are importance (Weihrich, 2002). Illustration is provided in the box below

  External Opportunities (O) 1. Strategic plan 20202. Remedies for wrangles 3. Improved international offering External Threats (T) 1. Fluctuation in fuel prices2. Video conferencing3. Mechanisms for competition
Internal Strengths(S) 1. Strategic location of port2. Investors’ confidence3. Good reputation SO”Maxi-Maxi” StrategyStrategies that use strengths to maximize opportunities. ST”Maxi-Mini” StrategyStrategies that use strengths to minimize threats.
Internal Weaknesses (W) 1. Union, labor wrangles2. Incapacity for inter. flights3. Poor financial ground WO”Mini-Maxi” StrategyStrategies that minimize weaknesses by taking advantage of opportunities. WT”Mini-Mini” StrategyStrategies that minimize weaknesses and avoid threats.

The above illustration assists us in identification of alternatives that address the following additional question (Weihrich, 2002):

Strengths and opportunities (SO) – how do we use our strengths to exploit the opportunities?

Strengths and Threats (ST) – how can we take advantage of our strengths to avoid real/ potential threats?

Weaknesses and opportunities (WO) – how can we use our opportunities to subvert the weaknesses we are experiencing?

Weaknesses and threats (WT) – how can we minimize our weaknesses and avoid threats?

Part E Strategic Alternatives and Recommended Strategies

4 strategic alternatives available for the company

There are some recommendations which have been developed based on the evaluation of American Airlines.

Sales and marketing Strategy

While maintaining good performance of current flights, looking for opportunities to expand more routes in the US domestic market to be able to compete with competitors who own many routes is important. Increased market spending to reignite consumers confident in the airline service would also vital.

Low-cost Strategy

As the price of jet fuel will remain in the foreseeable future in years, instead of purchasing fuel in advance, America Airlines can look for a cheaper and greener bio fuel to reduce the footprint and save on costs. Delivering the concept of “low-cost, high quality service” to their target market should be given consideration

Merger strategy

The airline can as well look for alternative of partnering with a company that is already established to be able to pool resources together to attain greater achievements in terms of customer delivery (Peters, 2003).

Environmental Friendly Project Strategy

The organization can come up with more environmentally-sustainable green projects to make up for the poor fuel efficiency performance can impact positively on the airlines’ performance and image. The strategy would popularize the company and reignite its presence with the customers and public.

Those that best suit the Company

Among the stated recommendations the ones that can best suit the company include both low-cost strategy and merger strategy. The two would give the company the required motivation to start again in unity as well as reduce the challenges associated with costs like cost of fuel that has been a stumbling block for performance (Dyson, 2004).

Justification of recommendation based on the impact it has on the profitability and long-term position of the firm using relevance and sustainability.

While looking at the recommended strategies, there are lots of impacts that they will have on profitability of the company as well as the long-term position of the company and this might take different forms. Application of the cost benefit strategies like looking for alternative fuel which are cheaper would mean that the cost of production is reduced hence higher profit margin, and this would also give them a competitive advantage since they would be using cheaper fuel alternative. Cost reduction would result to higher profit margin and hence sustainability.

Through seeking a merger, the company would have greater opportunities of entering into contract with suppliers and will also accrue benefits associated with large scale service due to merger.

Strategic decision based on commentary on whether it was good or bad.

I think looking at the decision made by the company it was recommendable to take such action since the company was by then in a crisis and needed a methodology for survival and this was the best option. Mergers have many benefits to including the involving companies having a major competitive force; the investors are also likely to benefit in terms of increased share and the share prices. The companies will also have a greater competitive advantage since they will have the capacity to operate in large scale (Arnold, 2013). The deal gave American and creditors everything they could ask for and even promised raises and equity shares for employees. But along the way there were challenges to Horton’s severance (Arnold, 2013).

Then in August the Department of Justice sued to block the merger, claiming then that the industry was too consolidated and that customers would suffer (Arnold, 2013). Days before the lawsuit was set to go to trial, the two sides struck a deal to give up key slots in New York and Washington, D.C., and the deal could go forward (Arnold, 2013). Now 100,000 workers at the company are looking forward to a happier coming year, yet it’s one still full of uncertainty (Arnold, 2013). Parker and American’s other new leaders must decide how Tulsa and American’s primary maintenance and overhaul base fits into the future for the world’s new largest airline (Arnold, 2013).

References

Arnold, K. (2013, Dec 22). No. 1 business story of 2013: American airlines merger. McClatchy –

Tribune Business News Retrieved from http://search.proquest.com/docview/1470294132?accountid=45844

Charnes, A., Gallegos, A., & Li, H. (2006). Robustly efficient parametric frontiers via multiplicative DEA for domestic and international operations of the Latin American airline industry. European Journal of Operational Research, 88(3), 525-536.

Chen, M. J. (2006). Competitor analysis and interfirm rivalry: Toward a theoretical integration. Academy of management review, 21(1), 100-134.

Conaway, D., Esq. (2012). American airlines: Who’s flying the plane? Business

Credit, 114(5), 34-37. Retrieved from http://search.proquest.com/docview/1016478509?accountid=45844

Dyson, R. G. (2004). Strategic development and SWOT analysis at the University of Warwick. European journal of operational research, 152(3), 631-640.

Gretzky, W. (2010). Strategic Planning and SWOT Analysis.

Helms, M. M., & Nixon, J. (2010). Exploring SWOT analysis-where are we now? A review of academic research from the last decade. Journal of strategy and management, 3(3), 215-251.

Hill, T., & Westbrook, R. (2007). SWOT analysis: it’s time for a product recall. Long range planning, 30(1), 46-52.

Houben, G., Lenie, K., & Vanhoof, K. (2009). A knowledge-based SWOT-analysis system as an instrument for strategic planning in small and medium sized enterprises. Decision support systems, 26(2), 125-135.




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