The Competitive Strategy Of British Airways Economics Essay

Any business has challenges from different elements like globalisation, information and technology, socio and cultural factors, political factors and so on. To meet these challenges a clear strategy is very crucial for any organization. A strategy is a clear vision of what the organisation will be based on a sustainable competitive advantage. Actually, strategy is a road map for future directions and scope. It is a long range plan for five years and more. It develops mission, objective and goals for an organisation. To develop an effective strategy any organisation must set an account with different factors. Environmental analysis, present analysis, strength, weakness, opportunities and so on are the factor through which a strategy can be developed.

Are looking to buy products or services, they are looking for a wide range of products and services. They also want easy accessibility and hope to buy good quality products and services at a competitive price. They are really important as they provide money for the business in order to be successful.

Suppliers stock the business with the supplies the business needs, if they are late then it will cause a conflict between business and suppliers. Therefor it is vital that all the business suppliers are on time. Suppliers are probably the third important part in a business, they provide the products/services and if they are not in time it poses to be a threat to the financial state of the business. On the other hand, suppliers aren’t that important in decision making because they are scared of losing their contract with British Airways.

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An economic system is loosely defined as a countries plan for its services, goods, and the exact way in which its economic plan is carried out. Basically there are three major/different types of economic systems prevailing around the world and they are:

Market Economy: In a market economy, national and state governments play a minor role. Instead consumers and their buying decisions drive the economy. In this type of economic system, the assumptions of the market play a major role in deciding the right path for a country’s economic development.

Market economies aim to reduce or eliminate entirely subsidies for a particular industry, the pre-determination of prices for different commodities, and the amount of regulation controlling different industrial sectors.

The absence of central planning is one of the major features of this economic system. Market decisions are mainly dominated by supply and demand, the role of the government in a market economy is to simply make sure that the market is stable enough to carry out its economic activities properly.

Planned Economy: A planned economy is also known as a command economy. The most important aspect of this type of economy is that all major decisions related to the production, distribution, commodity and service prices, are all made by the government.

The planned economy is government directed, and market forces have very little say in such an economy. This type of economy lacks the kind of flexibility that is present a market economy, and because of this, the planned economy reacts slower to changes in consumer needs and fluctuating patterns of supply and demand.

On the other hand, a planned economy aims at using all available resources for developing production instead of allocating the resources either for advertising or marketing.

Mixed Economy: A mixed economy combines elements of both the planned and the market economies in one cohesive system. This means that certain features from both market and planned economic systems are taken to form this type of economy. This system prevails in many countries where neither the government nor the business entities control the economic activities of that country – both sectors play an important role in the economic decision – making of the country. In a mixed economy there is flexibility in some areas and government control in others. Mixed economies include both capitalist and social economic policies and often arise in societies that seek to balance a wide range of political and economic views.

http://www.economywatch.com/world_economic-indicators/type

British Airways operates in the Mixed economic system as British Airways was privatised on February 1987 and the government has less intervention as it’s a private company the only intervention that the government would have is only setting the prices of the air tickets.

What is Social Welfare: Social welfare is about how people, communicate and institutions in a society take action to provide certain minimum standards and certain opportunities. It is generally about helping people facing contingencies.

Social welfare which British Airways does for its employees.

Social Welfare Policy: Is basically to improve and protect the standard of living of the people or citizens as a whole. In the United Kingdom the Name “Social Policy” is used to apply to the policies that the government uses for welfare and social protection and the ways in which welfare is basically developed in a society. There are various social welfare policies that the United Kingdom’s adopts and they are:

Social welfare policy that British Airways has adopted/follows:

Health and social protection

Employment Law

Work place regulation

Social fund

Social security

The impact that social welfare initiates on British Airways as well as the wider community is firstly that British Airways adopting the work place regulation is that it benefits the employees of British Airways and that the employees can work without any head aces as British Airways has provided all it employees with training in safety measures, plus rest time is given to the employees and to the crew members of British Airways accommodation is given because the crew is normally flying for endless hours/long journeys. The workers are also made alert about the basic terms and conditions of the organisation which are basically ethics, code of conduct, and the responsibility of the organisation.

The other social welfare policy which British Airways provides its employees is social security for its employees similar to contribution benefits (Retirement pension, maternity allowances) and also non contributor benefits (social fund, working tax benefits) to its employees, which gives the employees the freedom to do whatever in their personal life. The Employment Law in British Airways states and illustrates the normal working hours, conditions, and the acts of the organisation.

What is Industrial Policy:

Industrial policy comprises all government interventions which consist of:

Directed towards the supply side of the economy that consists of enterprises, industries, sectors).

Aims to influence the industrial structure of the economy and its industrial changes.

Industrial policy purposefully affects incentives to produce specific goods or incentives to enter or exit a specific goods market.

It is not limited to manufacturing and includes all types of commercial economic activities.

Industrial policy interventions have to be justified because if competitive markets worked adequately, any such intervention would:

Distort optimal allocation,

Distort dynamic competition and its benefits (innovation, flexibility, consumer’s sovereignty etc.).

Privilege specific enterprises or industries or sectors at the expenses of others,

Would disadvantage taxpayers and consumers. (An European industrial policy: concepts and consequences, Oliver Budzinski).

Industrial policy is concerned; it is the government sponsored economic program in which the public and private sector coordinate their efforts to develop new technologies and industries. Government provides the financial support and capital to the private sector by direct subsidies, tax credits or government- run developmental banks. Industries policy emphasise cooperation between government, banks, private enterprise, and employees to strengthen the national economy. http://encyclopedia2.thefreedictionary.com

Impact of Industrial policy on British Airways:

In the United Kingdoms the Industrial policy has affected a lot of industries but the Industry that suffered the most was the aviation industry including all the airlines even British Airways. Therefore British Airways has changed its strategy of working and has been successful as British Airways adopted new policies. One of the policy that states to reduce Co2 emissions by 15% by all airlines and British Airways has decided to reduce by 50% as they are working on creating a new kind of fuel which is known as bio diesel which is pollution free and environment friendly.

Fiscal Policy: Government spending policies that influences macroeconomic conditions. These policies affect tax rates, interest rates and government spending in an effort to control the economy.

Monetary Policy: The action of a central, bank currency or other regulatory committee that determine the size and rate of growth of the money supply, which in turn affects interest rates. Monetary policy is maintained through actions such as increasing the interest rate, or changing the amount of money banks need to keep in the vault or bank reserves.

Impact of fiscal and monetary policy on airline industry as well as British Airways:

The principles of economics tell us that governments can sometimes improve market outcomes. Methods of influencing market outcomes can come in the form of monetary and fiscal policies. Monetary policies influence shifts

in aggregate demand for goods and services by increasing the money supply, reducing the equilibrium interest rates and stimulating investment spending or decreasing the money supply, raising equilibrium interest rates, lowering investment spending (Mankiw, 2004). Fiscal policies shift the aggregate demand curve by increasing or decreasing government spending or through the increase or decrease in taxes (Mankiw). Because these policies influence aggregate demand, the government uses such policies to try and bring stabilization to the economy.

Such polices affect different industries on many different levels. Some industries have positive effects and some negative. In analysing how monetary and fiscal policies affect the airline industry, we can look at how these policies affect employment, growth of the industry, and product prices.

Many fiscal policies directed toward the airline industry have had profound effects. One such policy is represented by the excise taxes and fees levied on air carriers. Such taxes and fees are allocated by the

Government to fund improvements of airports, provide security for the airlines and airports, allocate funding for the FAA, provide for services for international customers, and support operations at airpark facilities. These fees represent roughly 26% or $52 of a standard 200-dollar round-trip airline ticket (Air Transport Association, 2005). Current economic conditions of the airline industry are dismal, especially due to the tragic events of September 11th. The Air Transport Association (ATA) argues that such fiscal policy in these trying times hinder the air carriers’ ability to right themselves through a self-help policy. The ATA further explains that in an effort to stabilize the industry, such taxes and fees can account for the elimination of over 129,000 jobs, forced many carriers into bankruptcy, and, because consumers react heavily to price increases in this industry, hinder their ability to allocate funds by raising ticket prices. With this current fiscal policy, air carriers have little manoeuvrability of funds to meet the demands of an operating budget.

Mike Smith (personal communication, June 10, 2008), former owner of Pacific Crest Aviation in Big Bear Lake, CA, adds that governing agencies institute other fees to generate operating revenues for airports. On example of this is landing fees. Landing fees vary from airport to airport, but play a key role in the determination of where air carriers decide to base their operations. In attempts to accumulate more funding through fiscal policy, Mr. Smith explains that the FAA continues to suggest the implementation of user fees. Still to be determined how such a fee would impact the airline industry; present fiscal policies have air carriers screaming for reform.

Deregulation is another fiscal policy that has considerably impacted areas of the airline industry. Since deregulation in 1979, the airline industry experienced substantial growth. With the emergence of new competition in the industry this created numerous amounts of jobs, drove ticket prices down, and expanded the available market for various air carriers. Through an industrial wide growth of over 200%, new carriers were able to open positions to thousands of new employees in various parts of the nation. Average ticket prices in 1979 remain relatively unchanged today. As an extremely competitive market emerged, the rally for passengers on each carriers flights kept ticket prices down as carrier created connecting flights through this new open sky policy; reaching more consumers, minimizing opportunity cost, and offering competitive pricing.

The Airline industry continues to be affected by the overall condition of the nation’s economy. When healthy spending exists and pleasure travel is frequent, air carriers are able to fill flights, raise prices, and maintain a stable economic environment. However, when condition of the nation’s economy falls, so do the buying habits of the consumer. This is where the airline industry finds itself today. Struggling to fill flights in a slow economy and fighting heavy fiscal policy.

Recent monetary policies made by the federal government to improve market conditions are sure to have an effect, but how it will impact employment, growth, and prices in the airline industry are still unknown. The most

Recent monetary policy made by the government came in the form of economic stimulus checks. This in-flow of money into the economy in an attempt to stimulate the purchase of goods and services throughout the United States may help diminish the effects of our current sluggish economy. Little to no data exists to show how this has impacted any growth in the airline industry. So far, there seems to be little change in the spending habits of the consumer to travel via air. Because the economic position of the airline industry has been struggling for so long, improvements due to any single event may be impossible to track. Whether changes in fiscal policies, monetary policies, or internal carrier structure help to improve conditions in the airline industry, changes will happen slow and will reflect economic condition in the nation’s marketplace.

By successfully managing opportunity cost, and adapting to an ever changing economic environment, airline industries can have economic success. However, the well-being of the nation’s economy will have a direct impact on the level of success experienced in the airline industry. During economic shortfalls in the nation’s economy, travellers will have fewer resources available to travel for pleasure. Contributing to the negative economic influences in the airline industry, future and existing policies targeting the airline industry will continue to hinder the industry’s ability to recover losses in periods of economic hardships. http://www.taxreformpanel.gov

Makiw, N.G. (2004) Principles of economics (3rd edition). Chicago, 2: Thomson South-Western.

PESTLE Analyses on British Airways:

PESTLE Factors

Key Points

Implications for British Airways

Political

Heavy regulation (AEA, 2009).

Increased security due to past terrorist threats (DFT, 2008)

Compliance is essential if British Airways wants to continue.

Sufficient security measures should be in place to ensure consumer confidence and competitive advantage in maintenance.

Economic

Global economic crisis: world growth is projected to just over 2 per cent in 2009 (IMF, 2008). Pound weakness especially against the Euro.

Oil prices declined by 50% since their peak retreating to 2007 levels. Decline in fuel prises the dollar strengthens (IMF, 2008).

UK Consumer spending saw its sharpest decline for 13 years between July and September 2008 (Channel 4, 2008)

Possible reduction in the amount of business travel as companies are cutting costs and using alternative means of communication such as telecom fencing. British Airways is vulnerable as a United Kingdom operating airline to a poor exchange rate.

Fluctuation in oil prices and exchange rates will directly affect British Airways cost base.

More intense competition.

Social

The United Kingdom has an aging population.

Increasing Unemployment

Potential opportunities for growth as older generations have more time to spend on leisure activities such as international travel.

Increased bargaining power as an employee.

Technological

A recent survey revealed that 34% of online consumers plan to use price- comparison sites more in 2009 (NMA, 2009)

Online booking services and check-in is becoming increasingly used by the airline industry.

Increased consumer awareness and therefore bargaining power.

British Airways must ensure that they remain up to date with these technological advances whilst avoiding becoming overly reliant, as this may isolate certain consumer markets (i.e. the elderly) who don’t feel comfortable using such technology.

Environmental/Ethical

Noise pollution controls and energy consumption controls.

Cancellations of flights and loss of baggage.

New legislation (e.g. climate change bill) enforcing tighter environmental regulation may increase operational costs each year.

Such ethical issues could have a detrimental effect on reputation if left unresolved.

Legal

Collusion and price fixing.

Recognition of trade union and industrial action e.g. cabin crew strikes.

Open skies agreement.

Restriction on mergers will have an impact on British Airways proposed alliance with American Airlines.

Good employee relations are essential if British Airways wants to avoid industrial action and interrupted operations.

Opportunity for British Airways and its competitors to freely transport aircrafts between the European Union and the United States.

Part 3

Investigate the behaviour of organizations and the market environment.

What is Oligopoly:

Oligopoly is a market which is normally dominated by a few numbers of large suppliers. The degree of market concentration is very high. Firms within an oligopoly produce branded products and also sometimes there is a barrier to new entries.

Advantages as general:

Firms or companies are able to reap economies of scale, due to large scale competition.

Products cannot produce by individual firms on a small scale.

There is an incentive to engage in research and development. They have the ability to earn super normal profits and capture large market share.

Firms enjoy lower costs due to technological improvement. This results in higher profits which will improve the firms or companies capacity to withstand price war.

http://www.blurtit.com/q2774865.html

Disadvantages as general:

Firms and companies are concerned with the activities of their competitors.

If one firm or company reduces its prices the other companies would have to.

How oligopoly has impacted the airline market and British Airways:

In the late 1990s the European airline market was liberalised, lowering the barriers to entry.

Traditional firms then faced competition as firms could enter the market more easily.

New entrants used leased aircrafts to keep costs low.

Firms have merged (such as Liberia Airways and British Airways did in 2000) to improve the firms horizontal integration.

What is monopoly:

A situation in which a single company owns all or nearly all of the market for a given type of product or service. This would happen in the case that there is a barrier to entry into the industry that allows the single company to operate without competition. In such an industry structure, the producer will often produce a volume that is less than the amount which would maximize social welfare. www.investwords.com/3112/monopoly.html

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Advantages of monopoly as general:

There is no risk of excess production.

There is sufficient capital for research.

Price of goods are reduced.

The market can be controlled.

Disadvantages of monopoly as general:

The consumers are exploited.

There is hardly and consumer choice.

The price is high on products.

As there is no competition it leads to inefficiency.

The labour is exploited as the price charged is higher than the marginal cost.

How monopoly has impacted the airline market and British Airways:

There is no competition which would make the airlines inefficient.

As there is no choice the consumer would have to take that one airline only.

As the ticket prices could be high the consumers would prefer to take a train to their destination if the consumer’s destination is in Europe and this would cause a loss for the company.

What is perfect competition:

An ideal market structure characterized by a large number of small firms, identical products sold by all firms, freedom of entry into and exit out of the industry, and perfect knowledge of prices and technology. This is one of four basic, market structures. The other three are monopoly, oligopoly, and monopolistic competition. Perfect competition is an idealized market structure that is not observed in the real world. While unrealistic, it does provide an excellent benchmark that can be used to analyse real world market structure. In particular, perfect competition efficiently allocates resources. http://www.amosweb.com.

Advantages of perfect competition as general:

Optimal allocation of resources.

Competition encourages efficiency.

Consumers charged a lower price.

Responsive to consumer wishes, change in demand, leads extra supply.

Disadvantages of perfect competition as general:

Insufficient profits for investment.

Lack of product variety.

Lack of competition over product design and specification.

Unequal distribution of goods and income.

Externalities .e.g. pollution.

How perfect competition impacts airlines market and British Airways:

As in the Airlines Industry there are many airlines and there is competition there can be either positive effects as well as negatives effects the positive effects of perfect competition is that the resources of the airlines is allocated to the point as there is competition the other airlines as well as British Airways is encouraged to work harder to beat the competition and there for the airlines charge its customers with a lower cost to gather more of the customers. The negative effects of perfect competition is that sometimes the return on the investment can be poor there is noise pollution being created by the noise of the plane engines and can affect the society with air pollution as it can harm the society.

Part 4

Explain the significance of international trade and the European dimension for UK businesses.

What is trade:

Trade is the transfer of ownership of goods or services from one person to another person. Trade is also known as commerce or financial transaction or barter like in the old days. Trade can only take place in a market. A market is a place where buying and selling takes place it could be either in a shop, house or even the internet.

Advantages of trade:

Can increase international ties.

Leads to specialisation and therefore increases efficiency.

Increases standards of living.

Disadvantages of trade:

As there is excess production it leads to pollution.

Can lead to a possible economical imperialism.

Can cause a balance of payment problem which can lead to international debt.

Why is trade important:

To trade is important for a country because through trade a country gets its resources which it can’t provide for itself, or its cheaper for a country to import than to produce locally. A country trades its resources to other countries that cannot produce them this means that it’s a big cycle where everyone trades until all the countries have what they exactly need while making some money by selling what they don’t need. The country basically does it for the development of the country so that its people can get their daily bread and butter, clothes and necessities which they need that their country does not have access to, and to even do business with other countries through trade.

What is international trade:

International trade is exchange of capital, goods, and services across overseas boarders or territories. It basically refers to exports of goods and services by firms to a overseas buyer also known as a importer. In most countries it represents a significant share of gross domestic product also known a (GDP).

Advantages of international trade:

Improve domestic competitiveness.

Helps to gain global market share.

Reduces the dependency on existing market.

Increases chances to expand.

Disadvantages of international trade:

Can take a very long time to gain.

Additional cost can be incurred.

Payments come after long.

Licenses are need and deal has to be done in regulations.

Why is international trade important:

International trade is important because it allows other countries to take advantage of something known as comparative advantage. Comparative advantage means that a country is able to produce something by giving less for something else they want. Therefore even if a country in not able to produce the best quality product of anything, comparatively the countries can produce without giving up something. When countries take advantage of comparative advantage, the total output in the world increases and therefore everyone benefits from extra output and therefore international trade helps establish a higher standard of living.

What is economic integration:

Economic integration is the elimination of tariff and nontariff barriers to the flow of goods and services and the factors of production between a group of nations or various different parts of the same nation.