Professor Edward Desmarais
Business Policy and Strategy
Fall 2004
Continental Airlines
Case Analysis
by: The Brain Busters
TABLE OF CONTENTS
I. Executive Summary
A. Mission
B. Vision
C. Objectives
D. SWOT Summary
E. Recommendations
3
3
3
3
7
8
II. Current Situation
A. Current Performance
B. Strategic Posture
9
9
10
IV. External Factors
34
V. Internal Factors
156
VI. Action Plan
231
Appendix A. Stakeholder Worksheet
245
I. Executive Summary
A. Mission
Continental is a major commercial airline that transports passengers traveling on business or leisure to
destinations around the world while providing convenient, dependable, high quality service.
B. Vision
To continue looking for ways to improve performance, reduce costs, and increase revenues by listening to
customers, responding to their needs, and continuing to improve the organization’s culture.
C. Objectives
Short-term strategic objectives

To become the fourth largest commercial airline in 2 years.

To expand Continental Express by 10% in the Southeast in 3 years in order to gain market share
in that area without having to commit large planes with high break-even margins.

To reduce the number of aircraft types to 4 in 3 years in order to continue to bring down
maintenance expenses.
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Increase the amount spent on researching customer preferences by 5% in the next 3 years.
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Reduce operating cost per available seat mile by 2% in the next 3 years.

Reduce on the job injuries by 5% in 2 years by providing better safety training.

Increase hedging of fuel costs by 5% annually for the next three years.

Decrease voluntary turnover rate to 4% in 3 years.

Reduce absenteeism rate by 5% in 2 years.

To add three new domestic destinations to Continental’s regular service each year for the next
three years.

To add 10 new cities to Continental Express within 3 years.

To increase the percentage of total sales from e-ticketing by 10% in 2 years.

To increase the number of independent websites that are allowed to book Continental flights by
5% in 3 years.
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On-time arrivals to 84% within 2 years.

Remain in the top 3 companies in terms of on-time arrivals for 18 consecutive months.
3
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To be named the “Most Admired Airline” by Fortune magazine within 3 years.

Reduce the number of passengers involuntarily denied boarding by 10% in 3 years.
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To reduce the percentage of mishandled baggage by 5% in 3 years.
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Increase the benefits of the frequent flyer program by 5% in 2 years.

Continue international expansion. Add flights to fifteen new foreign cities within 2 years.

To continue having more international flights than any other rival for the next three years.

Spend 5% more on researching new information systems within 3 years.

Send out 5% more surveys within the next 3 years.

Increase the number of employees focused solely on innovation by 5% in 2 years.

Increase the number of Continental and Continental Express flights by 10% within the next three
years.

Rank within the top three major commercial airlines in terms of the percentage of customer
complaints as measured by the Department of Transportation within 2 years.

Rank within the top three in terms of customer satisfaction within 2 years.

Increase the monetary incentives for flight attendants to book passengers on Continental flights
by 5% in 2 years.
Long-term strategic objectives

To become the 1st or 2nd largest airline in 10 years.

To dispose of all older aircraft within 10 years so that the maximum age of any aircraft in the
fleet is 8 years old.

Increase research expenditures by 10% in the next 10 years.

To reduce interest costs by 15% in 10 years by paying down debt and financing new growth by
issuing stock.

To increase the number of first class seats by 10% in 10 years.

Increase e-ticketing to 99% of their destinations in 8 years.

On-time arrivals to 87% in 10 years.
4

To receive the Air Transport World “Airline of the Year Award” for 7 out of the next 10 years.

To increase customer service incentives for employees by 15% within 5 to 10 years.

Rank number one in major commercial airlines for having the fewest number of baggage
complaints within 5 to 10 years.

Add three new hubs in International markets within 10 years.

Reduce the amount of time it takes to produce financial results by 15% in 10 years.

Increase the number of services offered to customers by 10% in 10 years.

Increase the number of planes the company has to fly those flights by 7% within 10 years.

Reduce the number of bumped passengers to 2% in the next 5 to 10 years.
Short-term financial objectives

To increase the percentage of growth by 6% in 3 years.

Increase earnings by 20% in 2 years.

Raise the diluted earnings per share by 5% in 3 years.

Raise profit margin to 5% within 3 years.

Increase percentage of sales from code-sharing agreements by 5% within 2 years.

Increase EVA by 5% within 3 years.

Increase MVA by 5% within 3 years.

Lower debt to equity ratio by 8% in 2 years.

Receive the most-admired U.S. airline award from Fortune magazine within 3 years.

Continue to have a 30% growth rate with Continental Express for the next 3 years.

Reduce costs during times of recession by 5% within 1 year.

Increase ROA to 4% within 2 years.

Maintain an ROE of 30% for 2 years.

To increase the amount of cash on hand by 10% in 3 years.
5

Increase current ratio by 10% in 3 years.

Improve net working capital ratio by 4% in 3 years.
Long-term financial objectives

Achieve an average of 18% revenue growth over the next 10 years.

Increase earnings by 50% in 8 years.

Raise the diluted earnings per share by 15% in 10 years.

Pay a 1% dividend within 5 to 10 years.

Raise profit margin to 7% within 8 years.

Increase load factors by 15% in 8 years.

Reduce the number of flights with a profit margin less than 1% by 20% within 10 years.

Increase EVA by 10% in 10 years.

Increase MVA by 12% in 7 years.

Have a 2-1 debt to equity ratio within 10 years.

Receive the award for Tops in Customer Satisfaction by J.D. Power and Associates for 9 out of
the next 10 years.

Expand the number of Continental Express destinations by 25% in 10 years.

Increase market share by 10% within 8 years.

Increase the number of routes with a profit margin above 8% by 20% within 10 years.

Increase ROA to 9% within 15 years.

Improve ROE by 10% within 5 to 10 years.

To increase current ratio by 20% within 10 years.

Improve net working capital ratio by 8% in 10 years.
6
D. SWOT Summary
Strengths
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Information systems
Advertising and promotion
Product and service innovation
Ability to continually improve quality
Technological know-how
Culture
Brand name
Alliances and cooperative ventures
Attractive customer base
Wide geographic coverage
Image
Location of operation facilities
Regional service
Recognized industry leader
Reputation for customer service
Intellectual capital
Fixed asset utilization
Age of aircraft
Opportunities
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Weaknesses
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High overall operating cost
Limited access to financial capital
Cost disadvantages
High debt to equity ratio
Financial position – cash flow
Large quantity of buyers
Extent of rivals vertical integration
Population demographics (opportunities for
growth)
Changing societal values
Feeder routes
International routes
Bargaining power with some suppliers
Extent of rival’s horizontal integration
Threats
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Economic recession
Legislative, regulatory, and political
environments
Technology
Mature market
Exit barriers
Volatile fuel costs
Rivals using competitive weapons
Extent to which rivals use economies of scale
Large number of rivals similar in size
Low buyer switching costs
Increasing buyer knowledge level
Degree of alliances
Long term industry growth rate
Industry profitability
7
E. Recommendations

Develop a cost conscious culture.

Hedge jet-fuel purchases.

Share ground operations with other airlines.

Renegotiate leases.

Advertise service features on websites where plane tickets are sold (ex. Orbitz, Expedia).

Have flight attendants hand out surveys encouraging passengers to identify what they would like
the airline to offer in the future.

Have top management work directly with flight attendants in finding innovative ways to improve
services.

Redesign the OnePass frequent flyer program to make it more attractive to leisure passengers.

Increase advertising and double bonus miles when rivals use price cuts.

Increase fares on routes with high passenger traffic when the planes are flying at or near capacity.

Increase the number of profitable flights Continental and Continental Express are flying and
remove flights with low profit margins from the schedule.

Defer delivery of new aircraft on order.

Enter into additional code-sharing agreements.

Add additional international routes and destinations with high profit potential.

Open a new hub in Europe.
8
II. Current Situation
A. Current performance
Continental’s performance has improved since Gordon Bethune became CEO in late 1994. The
company’s revenues grew at a rate higher than industry average between 1995 and 2000. In 2000,
Continental was the fifth largest commercial airline, in terms of market share, with 9.632% of the market.
In the same year, Continental had more international flights than any of its rivals. By September 2001,
Continental had 2,500 daily flights (Continental and Continental Express) and showed profits for 25
quarters in a row.
There is intense rivalry in the airline industry. Continental has a strong position relative to most
competitors. They have improved the quality of their service and listened to customer’s needs to increase
their revenues and reduce their costs.
9
B. Strategic Posture
Chapter 2 Worksheet
Mission
Criteria
What is our business?
Facts
Continental is a commercial airline that
operates in both foreign and domestic
markets. Continental transports first class
and coach passengers to cities around the
world.
In 1994, it was the fifth largest
commercial airline with revenues of
nearly $6 billion.
What does this mean?
Continental provides a means of travel in
an Industry with a great deal of
competition. Because of this
competition, Continental must find ways
to meet the needs of customers in ways
superior to that of rivals. The company
did not have a clear idea of how to do
this until Bethune entered the
organization.
Continental was in Chapter 11
bankruptcy in 1983 and a second time in
1990. It emerged from the second
bankruptcy in 1993.
Continental had ten CEOs in ten years
time.
By September 2001, Continental had
2500 daily flights (Continental and
Continental Express) and showed profits
for 25 quarters in a row.
Who are our customers
“See stakeholder analysis worksheet”
(stakeholders)? What do
we do for each of them?
How (technology used or
functions performed) do
we meet their needs and
expectations?
How do we
communicate the
mission to our
organization and our
customers
(stakeholders)?
Before 1994, Continental’s top
management was cut off from
employees. It was a top down
organization with low morale, high
turnover, high absenteeism, and low
wages. The culture at Continental was
very poor and employees resisted any
changes passed down by management.
Employees were used to fighting with
each other over resources, worrying
about layoffs, and pointing the finger of
blame. Employees were not kept well
“See stakeholder analysis worksheet”
The mission is communicated in a
variety of ways in order to reach all
stakeholders. The goal is to get all
stakeholders on the same page. Everyone
must have a clear idea of what the
company is doing.
By communicating the mission to
everyone, it helps to create a team
atmosphere that encourages synergy.
The missions of individual divisions can
Thompson, Arthur and Strickland, A.J. Strategic Management: Concepts and Readings. McGrawHill Irwin. NY. 12th Edition
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informed by management.
When Bethune came aboard, he realized
he needed to focus on the culture of the
organization in order for employees to
buy into the new mission. He apologized
to stakeholders and ensured them that
Continental was going to improve.
Bethune communicated the new mission
by:
Propping the door open to his office (it
used to be shut and guarded by security
cameras)
Meeting directly with employees at all
major locations and levels of the
organization.
then be formed based on the company’s
overall mission.
With a clearly defined mission
stakeholders can make recommendations
and give feedback.
The mission communicates to the
stakeholders what the company is doing
daily to differentiate their product from
that of competitors.
Bethune went too great lengths to make
sure stakeholders were kept well
informed. This is very different from
prior management. When stakeholders
know what is going on they are more
likely to want to participate and buy into
changes.
Sitting at the middle of the boardroom
table during meetings and discussing
each topic in the same order outlined in
the “Go Forward Plan.”
Installing 600 bulletin boards and LED
displays to keep employees posted.
Inviting top business customers to his
home, apologizing for past mistakes and
giving them a leather ticket case as a
show of thanks.
Painting all planes to match as a
symbolic way of showing Continental
was under new leadership and changes
were being made.
Burning manuals in the parking lot and
empowering employees to use their own
judgment when handling problems.
Encouraging employees to make
decisions and involve headquarters as a
resource when they need to.
Having executives personally call old
business customers to apologize and let
them know about the new Continental.
Allowing employees to make
suggestions to top management. Improve
Thompson, Arthur and Strickland, A.J. Strategic Management: Concepts and Readings. McGrawHill Irwin. NY. 12th Edition
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communication at all levels.
Providing a voice mail number to the
CEO so that employees can contact him
directly.
Created incentives for employees to
work together and achieve the
organizations objectives (ex. On-time
bonuses, Absenteeism bonuses).
Gatherings sponsored by the company
for employees to spend time with each
other and network.
Monthly employee newsletter,
Continental Times. This newsletter
included information about how well the
company was doing and reporting on any
new changes.
Mailing quarterly newsletter, Continental
Quarterly, to employee’s homes.
Bethune contacted travel agents and
provided them with incentives for
business passengers to try Continental.
Bethune reinstated programs that helped
travel agents to promote Continental.
Creating the slogan “Dignity and
Respect” in 1996.
Vision
Criteria
What will our business
be in 5, 10 years?
Facts
Continental plans to still be a
commercial airline that operates in both
foreign and domestic markets. It will
continue to transport first class and coach
passengers to cities around the world.
Continental plans to enter into more
international markets and add features to
its existing services if they add value to
its product.
What does this mean?
Continental is planning to continue
looking for ways to improve its
performance, reduce costs, and increase
revenues.
They plan to do this by listening to
customers and responding to their needs
and continuing to improve the
organizations culture.
Thompson, Arthur and Strickland, A.J. Strategic Management: Concepts and Readings. McGrawHill Irwin. NY. 12th Edition
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Continental will continue to look for
ways to improve the quality and
accuracy of the information they are able
to receive from their internal financial
systems.
Continental has reward systems in place
that will help motivate employees to help
the organization achieve its future
objectives.
The company plans to keep increasing its
percentage of on-time arrivals and
looking for ways to differentiate its
product to attract customers with un-met
needs.
Who are our future
“See stakeholder analysis worksheet”
customers? What will
we do for each of them?
How (technology used or
functions performed)
will we meet their needs
and expectations?
“See stakeholder analysis worksheet”
How will we
communicate the vision
to the organization and
our customers?
Continental makes sure that stakeholders
are aware of what the company is
planning to achieve in the future.
The vision is communicated in many of
the same ways the mission is
communicated. Monthly newsletters,
meetings, bulletin boards, reports, and
word of mouth all help to keep
stakeholders informed.
Continental wants stakeholders to be
informed so that they will be motivated
by past success and have a desire to
contribute to the future of the company.
Top management is able to gain from
sharing this information because
employees can provide suggestions and
knowledge that will help the company to
reach its objectives.
ESTABLISHING OBJECTIVES
Strategic objectives
Criteria
Market share
Facts
In 1994, Continental was the fifth largest
commercial airline.
Small market share in low-fare point-topoint routes.
Small market share in Southeast.
What does it mean?
(How much of what kind of performance
by when?)
Short-term: To become the fourth largest
commercial airline in 2 years.
Short-term: To expand Continental
Express by 10% in the Southeast in 3
years in order to gain market share in
that area without having to commit large
planes with high break-even margins.
Thompson, Arthur and Strickland, A.J. Strategic Management: Concepts and Readings. McGrawHill Irwin. NY. 12th Edition
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Long-term: To become the 1st or 2nd
largest airline in 10 years.
Quicker design-tomarket times
In 1994, Continental was using 10
different types of aircraft. The
maintenance department was trained on
how to repair and service each type of
plane.
Continental disposed of older aircraft,
such as the Airbus 300, because they
were costly to operate and required
specialized training, parts inventories,
and special procedures. Older planes like
this also required repairs more
frequently.
Short-term: To reduce the number of
aircraft types to 4 in 3 years in order to
continue to bring down maintenance
expenses.
Long-term: To dispose of all older
aircraft within 10 years so that the
maximum age of any aircraft in the fleet
is 8 years old.
By replacing older aircraft, Continental
reduced the size of its maintenance
department and was able to close its Los
Angeles facility.
Continental reduced aircraft downtime
by flying a smaller variety of newer
planes.
Higher product quality
In an effort to increase customer
satisfaction and improve the quality of
the product, superior on-time arrivals
were focused on.
Continental also:
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Short-term: Increase the amount spent on
researching customer preferences by 5%
in the next 3 years.
Long-term: Increase research
expenditures by 10% in the next 10
years.
Purchased newer planes
Improved baggage handling
Provided more room for
passenger carry-on luggage
Focused on improving its
employee relationships in order
to make employees feel better
about where they work.
Employees pass this positive
attitude on to customers through
courteous service.
Uniform fleet (all planes painted
identical)
Thompson, Arthur and Strickland, A.J. Strategic Management: Concepts and Readings. McGrawHill Irwin. NY. 12th Edition
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Lower costs relative to
rivals
Convenient online ticketing
Reduced wait times (more
customers booking online)
More international flights
Better meals
Flights to where people need or
want to go (reducing the number
of connecting flights needed)
Operating cost per available seat mile:
Year
2000
1999
1998
1997
1996
1995
1994
1993
Cost
9.76¢
8.99¢
8.89¢
9.04¢
8.75¢
8.36¢
8.76¢
7.90¢
Percent change
8.565%
1.125%
-1.659%
3.314%
4.665%
-4.566%
10.886%
In the early years, operating cost
increased as a result of management’s
actions to increase the value of its
product to attract and retain consumers.
Prior management had decreased costs to
the point were the product was no longer
attractive to potential customers.
The case does not include the operating
cost per available seat mile of
competitors, but does break it down by
expense.
Short-term: Reduce operating cost per
available seat mile by 2% in the next 3
years.
Short-term: Reduce on the job injuries by
5% in 2 years by providing better safety
training.
Short-term: Increase hedging of fuel
costs by 5% annually for the next three
years.
Short-term: Decrease voluntary turnover
rate to 4% in 3 years.
Short-term: Reduce absenteeism rate by
5% in 2 years.
Long-term: To reduce interest costs by
15% in 10 years by paying down debt
and financing new growth by issuing
stock.
In 1994, Continental’s maintenance
department had the lowest dispatch
reliability and highest costs in the
industry. In 2000, Continental was
second highest in “Other Operating and
Maintenance Expenses” compared to 10
major airlines.
Continentals move to dispose of some of
the oldest and largest planes in its fleet
and renegotiate maintenance contracts
brought down maintenance costs.
In 1994, on the job injuries were also
above the average for the industry. This
Thompson, Arthur and Strickland, A.J. Strategic Management: Concepts and Readings. McGrawHill Irwin. NY. 12th Edition
15
meant higher workmen’s compensation
costs.
The increases in the usage of e-ticketing
brought down costs. Prior to e-commerce
flight attendants handled 80% of all
reservations. With more reservations
being booked online, Continental
lowered staffing costs.
Renegotiated leases on aircraft stretched
out lease payments and lowered annual
costs. Refinancing saved $25 million in
annual interest payments.
Interest costs were reduced from $202
million in 1994 to $117 million in 1996.
Increases in the percentage of on-time
arrivals lowered costs from $5 million a
month down to roughly $2.5 million (the
amount given to employees for on-time
arrival bonuses).
Costs were reduced in 1996 as a result of
the perfect attendance program.
Employees with perfect attendance from
Jan-June or July-Dec received a $50
bonus and a chance to win a Ford
Explorer. Even though 83 cars were
given out and the program cost the
company $3.3 million it was estimated
that reductions in the absenteeism rate
saved the company $20 million. 14,980
eligible employees received bonuses.
Voluntary turnover rates decreased from
6.7% in 1998 to 6.1% in 1999 to 5.3% in
2000. Lower employee turnover reduces
costs on recruiting, selecting, and
training new employees.
Broader or more
attractive product line
than rivals
In the early 1990s Continental was not
known for having an attractive product
line.
Short-term: To add three new domestic
destinations to Continental’s regular
service each year for the next three years.
The company focused on lowering costs
to try to show a profit. Lowering costs
Short-term: To add 10 new cities to
Continental Express within 3 years.
Thompson, Arthur and Strickland, A.J. Strategic Management: Concepts and Readings. McGrawHill Irwin. NY. 12th Edition
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often brought down the quality of service
and product customers received.
Long-term: To increase the number of
first class seats by 10% in 10 years.
Continental Lite did not meet the needs
of customers. The program was losing
money because of relatively high costs
and low revenues. People were willing to
pay more for “frills.” Removing first
class seats caused the company to lose a
potentially profitable market segment.
Bethune made the company’s product
line more attractive by flying to the
places customers wanted to go. Surveys
were conducted to determine customer
preferences and changes were made
accordingly. Large overhead bins
attracted business customers. Frequent
flyer programs and incentives were
reinstated to attract Fortune 500
businesses.
Continental Express was created to
broaden the services Continental offered.
Customers that flew to large hubs
through Continental Express were more
likely to fly Continentals regular service.
Customers were able to fly Continental
to more international locations than any
other U.S. commercial airline.
Better e-commerce and
internet capabilities than
rivals
Continental has recognized the
importance of e-commerce in reducing
travel agent fees and staffing costs.
Short-term: To increase the percentage
of total sales from e-ticketing by 10% in
2 years.
They increased e ticketing to 95% of
their destinations in 2000.
Short-term: To increase the number of
independent websites that are allowed to
book Continental flights by 5% in 3
years.
54% of their total sales in 2000 came
from e-ticket sales, a total of $5.8 billion.
They also introduced www.orbitz.com in
conjunction with American, United,
Delta, and Northwest. The website offers
consumers travel tips and helps them to
book flights, rental cars, lodging etc.
Long-term: Increase e ticketing to 99%
of their destinations in 8 years.
Thompson, Arthur and Strickland, A.J. Strategic Management: Concepts and Readings. McGrawHill Irwin. NY. 12th Edition
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Superior on-time
delivery
Continental was ranked last in 1993 and
1994 in on-time arrivals out of the 10
largest U.S. commercial airlines. The ontime arrival figure is the percentage of
flights that arrive within the time they
are scheduled.
Short term: On-time arrivals to 84%
within 2 years.
Bethune recognized how important ontime arrival was to customer service and
created a bonus program for all
employees. The goal was to improve ontime performance and rank in the top
three.
Long-term: On-time arrivals to 87% in
10 years.
Short term: Remain in the top 3
companies in terms of on-time arrivals
for 18 consecutive months.
Instead of incurring the $5 million
dollars in costs associated with
customers missing their connecting
flights, Bethune decided to give
approximately half that amount to
employees in the form of a one-time
bonus. ($2.5m / 40,000 employees 
$65.00)
The results:
Ranking
10th
4th
1st
1st
2nd
2nd
3rd
4th
1st
Month/year
Jan 1995
Jan 1995
Feb 1995
Mar 1995
Apr 1995
Aug 1995
Sep 1995
Oct 1995
Nov 1995
Dec 1995
% on-time
61%
71%
80%
83%
In January of 1996 the bonus amount
was raised to $100 and Bethune paid
employees the new amount for
December 1995 because of high results
for that month.
In 2000, bonus checks were paid for 11
out of the 12 months totaling $39
million. Between 1995-2000 a total of
$157 million was given to employees in
on-time bonuses.
Thompson, Arthur and Strickland, A.J. Strategic Management: Concepts and Readings. McGrawHill Irwin. NY. 12th Edition
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For the first 8 months of 2000, the
average was 77.7% for on-time arrivals.
For the first 8 months of 2001, the
average was 80.9% for on-time arrivals.
Routes were revised in order to prevent
delays on connecting flights. At airports
like Newark where 15-30 min delays
were common, planes flew to that airport
and back rather than through to another
destination. This way if one plane was
delayed it did not affect other flights.
Stronger brand name
than rivals
Continental had a poor brand name
before Bethune.
Employees were ashamed of their place
of employment and took off clothing
with company logos on it before leaving
work.
Short-term: To be named the “Most
Admired Airline” by Fortune magazine
within 3 years.
Long-term: To receive the Air Transport
World, “Airline of the Year Award” for 7
years out of the next 10.
Continental had a bad record of poor
performance, poor customer service, and
high complaints. Rivals were much
stronger in these areas.
When Bethune took over, the steps he
took improved Continental’s image. He
changed the climate of the organization
and improved performance and service
levels.
One of the earliest moves he made
(repainting the planes by July 1995) was
very symbolic. The uniform fleet of
planes showed all stakeholders that
Continental was on the path of change.
The awards and recognition that the
company has received improve the
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Continental name.
Superior customer
service
In 1994, Continental’s percentage of
passengers involuntarily denied boarding
because of problems, including
overbooking, was one of the worst in the
industry.
Short-term: Reduce the number of
passengers involuntarily denied boarding
by 10% in 3 years.
Short-term: To reduce the percentage of
mishandled baggage by 5% in 3 years.
Continental had the highest number of
mishandled baggage reports per 1,000
passengers.
Short-term: Increase the benefits of the
frequent flyer program by 5% in 2 years.
Continental’s percentage of on-time
arrivals gave it a last place ranking out of
the 10 largest commercial airlines.
Long-term: To increase customer service
incentives for employees by 15% within
5 to 10 years.
Employees were so ashamed of working
at Continental that they took their
patches off when not at work for fear
irate customers might approach them.
Long-term: Rank number one in major
commercial airlines for having the
fewest number of baggage complaints
within 5 to 10 years.
Bethune introduced employee incentives
for on-time arrivals, noting that on-time
arrivals were crucial to improving
customer service. He also monitored
baggage handling to ensure that all parts
of the system were working.
Bethune said that good service meant
flying customers to where they want to
go. He focused on removing destinations
with low traffic and adding additional
destinations and/or flight to high traffic
destinations.
He redesigned routes to improve on-time
performance.
He had surveys conducted of consumer
preferences, catering to passenger’s
specific needs.
Overhead bins were redesigned to
accommodate business passenger’s
carry-on luggage.
He put the OnePass frequent flyer
program back into effect because
customers enjoyed its features.
Around the year 1999, Continental
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received recognition for ranking in the
top 3 airlines in fewest number of
baggage complaints for 30 out of 31
months.
Stronger global
distribution than rivals
In 1994, Continental was operating on a
global scale. However, many of its
flights were unprofitable.
Short-term: Continue international
expansion. Add flights to fifteen new
foreign cities within 2 years.
When Bethune took over, he began
expanding into the international markets
that looked promising and cutting flights
to those that were causing losses.
Short-term: To continue having more
international flights than any other rival
for the next three years.
Between 1995-2000, Continental added
more destinations from hub locations and
additional flights to destinations already
served.
Long-term: Add three new hubs in
International markets within 10 years.
The expansion was done quickly.
Flights were added to South America,
Mexico, Rome, Milan, Honk Kong, Tel
Aviv, Tokyo, Guam, Caribbean, Central
America, and many other European
cities.
Continental served most of these
countries through hubs located in the
U.S.
In 2000, Continental was operating 2000
flights to 90 international destinations
and 130 domestic.
In 2000, Continental had more
international flights than any of its rivals.
Continental was planning to take
advantage of TWA's decision to
discontinue flights from New York to the
Middle East and Europe.
Because of TWA’s decision, Continental
planned to expand to 30 more cities in
Europe within 3-5 years, and look into
expanding in the Middle East.
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Industry leader in
technology
Before Bethune, there was no mention of
technology.
Bethune looked for ways to use
technology to make information more
readily available in order to facilitate
effective decision-making. He wanted
information that was reliable and
trustworthy.
Short-term: Spend 5% more on
researching new information systems
within 3 years.
Long-term: Reduce the amount of time it
takes to produce financial results by 15%
in 10 years.
Larry Kellner created a financial system
that generated a daily report with
updated profit figures for various flights,
fuel costs, maintenance costs, etc. This
report was circulated to all top
executives.
The report was improved over time as
technology increased. It helped
Continental with its decision to expand
more in Europe. The report showed that
Continental’s flights to Europe were
generating higher than normal profits.
Continental purchased new planes in an
effort to bring down the average age of
its fleet. The new planes with their
updated systems required less
maintenance and had less mechanical
problems.
In 1997, LED boards were placed in high
employee traffic locations and break
rooms to provide employees with up to
the minute information about the
company’s stock, it’s competitors,
weather reports and other news.
Continental also expanded its ecommerce operations and received $5.8
billion in sales through e ticketing.
Toll-free voice mail numbers were put in
place so employees were able to
communicate directly with the CEO, get
answers to their technical problems or
concerns and make changes to their
benefit packages.
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Industry leader in
product or service
innovation
Bethune stressed the importance of
adding costs only when the costs added
greater perceived value to the product in
the eyes of customers.
Short-term: Send out 5% more surveys
within the next 3 years.
Short-term: Increase the number of
employees focused solely on innovation
In trying to meet the needs of its business by 5% in 2 years.
customers, Continental installed larger
overhead bins in 2000 to accommodate a Long-term: Increase the number of
greater amount of carry-on luggage. It
services offered to customers by 10% in
cost the company $12 million dollars to
10 years.
install these new bins.
Continental’s rivals were using templates
to restrict the size of carry-on luggage.
Continental also listened to customer’s
requests for new services or changes to
existing services. Surveys of customer
preferences led to:






Coke being served instead of
Pepsi
More beer variety
First-class priority with baggage
handling
Improved meals (tested by
Bethune)
Music while customers boarded
In flight phones
When travel agents told Bethune that
business customers needed additional
flights to certain locations, Bethune
listened to their advice and added the
flights.
Wider geographic
coverage than rivals
In 2000, Continental had over 2000
flights with over 130 domestic locations
and 90 international.
Continental served more international
destinations than its rivals.
Continental has plans to take advantage
of high profitability on flights to Europe
Short-term: Increase the number of
Continental and Continental Express
flights by 10% within the next three
years.
Long-term: Increase the number of
planes the company has to fly those
flights by 7% within 10 years.
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by increasing the number of international
destinations.
In 2000, Continental Express had over
1000 flights to 70 U.S cities, 10 Mexican
cities, and 5 Canadian cities.
Continental Express is a subsidiary of
Continental offering regional service. It
provides frequent and economical
service to small cities and transports
passengers to Continental’s hubs where
they can use Continental’s regular
service to get to their destinations.
Continental Express led to improved
load factors on Continental’s normal
flights.
Higher levels of
customer satisfaction
than rivals
In 1994, in operating performance and
customer satisfaction, Continental ranked
last compared to 10 major U.S.
commercial airlines.
Customer complaints to the Department
of Transportation regarding Continental
were 30% greater than the 9th ranking
airline and 3 times the industry average.
Highest number of complaints per
100,000 passengers.
Flight attendants avoided booking
travelers on Continental because they did
not want to lose their customers.
Bethune tackled these problems by
apologizing to customers for past
mistakes and promising to improve
service.
Short-term: Rank within the top three
major commercial airlines in terms of the
percentage of customer complaints as
measured by the Department of
Transportation.
Short-term: Rank within the top three in
terms of customer satisfaction within 2
years.
Short-term: Increase the monetary
incentives for flight attendants to book
passengers on Continental flights by 5%
in 2 years.
Long-term: Reduce the number of
bumped passengers to 2% in the next 5
to 10 years.
He focused on fixing problems with
employees first in order to get them to
treat customers better.
In 2001, J.D. Power and Associates
recognized the airline as being the “Top
in Customer Satisfaction” for four out of
five years.
In a study done by the Aviation Institute
at the University of Nebraska at Omaha
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and Wichita State University titled “Air
Quality Rating 2001,” Continental
dropped from 2nd place the prior year to
7th place out of the top 10 ten U.S.
airlines because of poor ratings on
mishandling bags and bumping
passengers.
Continental bumped an average of 18
passengers out of 100,000 (it was 3.4 the
year before) and mishandled and average
of 535 bags per 100,000 passengers (the
number was 442 the prior year).
Financial objectives
Criteria
Revenue growth
Facts
Operating revenues have steadily
increased in every year except for 1994.
Year Revenues
2000 $9,899
1999 $8,639
1998 $7,927
1997 $7,194
1996 $6,347
1995 $5,825
1994 $5,670
1993 $5,767
(in billions)
Change % Growth
$1260.00 14.585%
$712.00 8.982%
$733.00 10.189%
$847.00 13.345%
$522.00 8.961%
$155.00 2.734%
$-97.00 -1.682%
What does it mean?
(How much of what kind of performance
by when?)
Short-term: To increase the percentage
of growth by 6% in 3 years.
Long-term: Achieve an average of 18%
revenue growth over the next 10 years.
The greatest jump in revenues occurred
between 1999 and 2000.
From 1993-2000, revenues increased by
71%.
Earnings growth
Year Earnings
2000 $342
Change % Growth
$-113
-24.835%
Short-term: Increase earnings by 20% in
2 years.
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1999 $455
1998 $383
1997 $385
1996 $319
1995 $224
1994 $-613
1993 $-39
(in millions)
$72
$-2
$66
$95
$837
$-574
18.799%
-.519%
20.690%
42.411%
136.542%
-1471.795%
Long-term: Increase earnings by 50% in
8 years.
From 1985 to 1994, there were no
earnings.
In 1995, the earnings became positive.
They have stayed positive since then and
have fluctuated yearly. The biggest
positive increase occurred between 1994
and 1995.
Bethune’s leadership helped the
company to increase each year. The
biggest increases occurred after his
initiatives were introduced.
In the first quarter of 2001, earnings
were $9 million in the second quarter
they were $42 million. In the prior year,
these two quarters generated $149
million in earnings.
The fluctuations in earnings are due in
part to downturns in the national and
global economies.
Higher dividends
Between the years of 1993 and 2000 no
dividends were paid.
Short-term: Raise the diluted earnings
per share by 5% in 3 years.
The diluted earnings per share were as
follows:
Long-term: Raise the diluted earnings
per share by 15% in 10 years.
2000
1999
1998
1997
1996
1995
1994
1993
Long-term: Pay a 1% dividend within 5
to 10 years.
$5.45
$6.20
$5.02
$4.99
$4.17
$3.37
$(11.88)
$(1.17)
Some rivals in the industry pay
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dividends.
Wider profit margin
Year Revenue Costs Net Inc. Margin
2000 $9,899 $9,215 $342 3.455%
1999 $8,639 $8,039 $455 5.267%
1998 $7,927 $7,226 $383 4.832%
1997 $7,194 $6,478 $385 5.352%
1996 $6,347 $5,822 $319 5.026%
1995 $5,825 $5,440 $224 3.845%
1994 $5,670 $5,681 $-613 -10.811%
1993 $5,767 $5,786 $-39
-.676%
(in billions)
Net Earnings/Revenue = Profit Margin
Between the years of 1985 and 1994,
Continental reported net losses. Despite
years of costs cutting attempts by prior
management the company did not
operate profitably until 1995. Between
1994 and 1997 the profit margin rose
every year. In September of 2001,
Continental and Continental Express had
25 consecutive quarters of profitability.
Short-term: Raise profit margin to 5%
within 3 years.
Short-term: Increase percentage of sales
from code-sharing agreements by 5%
within 2 years.
Long-term: Raise profit margin to 7%
within 8 years.
Long-term: Increase load factors by 15%
in 8 years.
Long-term: Reduce the number of flights
with a profit margin less than 1% by
20% within 10 years.
Many of the other airlines were operating
profitably between 1985-1994.
In 1994:
At least 18% of Continental’s routes
were not profitable.
Continental Lite- A “low fare/no frills”
program had very high costs and low
revenues. One third of Continental Lite’s
routes were generating 70% of
Continental’s loses.
The maintenance department had the
highest costs in the industry with the
lowest dispatch reliability.
Continental was spending $5 million a
month because of it’s problems related to
on-time arrivals. When passengers
missed their connecting planes because
of delays the company had to provide
housing, food etc. Passengers were also
occasionally booked on the flights of
Continental’s rivals.
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1994-2001:
When Bethune became CEO in late
1994, he applied the “Row 5 test.” Costs
were only increased if they added value
to customers.
He focused on making sure only
profitable routes were served.
Older less efficient aircraft that required
special training to service were replaced
with new aircraft. This, combined with
the reduction in the number of types of
planes, helped to lower maintenance
costs. Large planes flying at 50-60%
capacity were no longer used. The
smaller planes that replaced them meant
less excess set capacity. Revenues were
retained, costs were decreased, and profit
margins swelled.
Larry Kellner created a program to hedge
jet-fuel purchases that saved the
company $3 million when the price of
jet-fuel increased.
Code-sharing increased profit margins.
Two companies listed the flight and one
airline provided the plane and crew. This
increased revenues, reduced costs led to
higher load factors. The companies also
worked together at certain destinations
by providing the ground crew for each
other’s flights when it did not make
sense financially to have ground crews
for both companies at every airport.
Continental had code-sharing agreements
with Northwest, Air Canada, America
West, American Eagle, Horizon Airlines,
Alitalia, Air France Virgin Airways, Air
China, and KLM Royal Dutch Airlines.
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EVA performance
EVA = Operating Profit – Income taxes
– Cost of Debt – Equity Cost.
Short-term: Increase EVA by 5% within
3 years.
The cost of equity is not known from the
case.
Long-term: Increase EVA by 10% in 10
years.
EVA is the amount by which
shareholders wealth increased over what
they would have received if they put
their money into another investment at
the same risk level.
MVA performance
MVA = Current Stock Price * Number
of shares outstanding – Shareholders
equity investment
The current stock price is not known
from the case.
Short-term: Increase MVA by 5% within
3 years.
Long-term: Increase MVA by 12% in 7
years.
MVA is how much shareholder value has
increased as a result of the company’s
actions.
Strong bond and credit
ratings
Continental emerged from Chapter 11
bankruptcy protection in 1993 and in
1994 it still had 2 billion in debt to pay
off.
Short-term: Lower debt to equity ratio by
8% in 2 years.
Long-term: Have a 2-1 debt to equity
ratio within 10 years.
Continental was highly leveraged and
did not have many unencumbered assets
to use as collateral on future loans.
On September 30, 2001, it was
determined that Continental had a little
over $1 billion in unencumbered assets
to use as collateral.
Because of liquidity problem in 2001 and
its financial record, they are not the most
attractive company to loan funds to.
Debt to equity ratios:
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2001
2000
8564 = 6.840
1252
8041 = 6.932
1160
The higher the ratio the more a company
has been financing its future with debt.
This can be a sign of trouble because
Continental will have large interest
payments in the future.
In 2001, they were able to take delivery
of 14 new aircraft from Boeing.
Continental had roughly $1.3 billion in
financing from Boeing for future aircraft
on June 30, 2001.
Recognition as a bluechip company
Continental has won numerous awards
but no mention is made of blue-chip
recognition.
Short-term: Receive the most-admired
U.S. airline award from Fortune
magazine within 3 years.
Awards include:
Long-term: Receive the award for Tops
in Customer Satisfaction by J.D. Power
and Associates for 9 out of the next 10
years.
1996 and Jan 2001- Airline of the year,
Air Transport World. First airline to
receive award twice in five-year period.
2001- Best Trans-Atlantic Airline, Best
Airline Based in North America, Best
frequent Flyer Program, OAG Pocket
Flight Guides
Tops in Customer Satisfaction four out
of five years, by J.D. Power and
Associates.
2000 and 2001- Second most-admired
U.S. airline, Fortune.
June 2001- “Highest rating for
outstanding management,” Aviation
Week & Space Technology.
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More diversified revenue
base
Continental has diversified its revenue
base both domestically and
internationally.
Short-term: Continue to have a 30%
growth rate with Continental Express for
the next 3 years.
New flights were added to existing
destinations when it was profitable to do
so and new destinations were added to
Continental flights based on customer
needs.
Long-term: Expand the number of
Continental Express destinations by 25%
in 10 years.
Continental Express was created as
regional service. It grew by 30%
annually and has led to increased
revenue for Continental’s regular service
by feeding Continental’s hubs with
passengers.
Not all competitors operate
internationally or offer service for short
distances.
Stable earnings during
recessions
Bethune was able to maintain profit
margins even though the economy was
entering a recession in the late 1990s.
Earnings dipped between 1999 and 2000
but the company still showed a net
income of 342 million. This is due in
part to increases in the number of
profitable routes that Continental was
flying.
Short-term: Reduce costs during times of
recession by 5% within 1 year.
Long-term: Increase market share by
10% within 8 years.
Long-term: Increase the number of
routes with a profit margin above 8% by
20% within 10 years.
Continental focused on gaining market
share by catering to the needs of its
customers better than competitors.
In 2001, Continental and Southwest were
the only two major commercial airlines
to show a profit for the first two quarters
of the year.
Higher ROA
Net Income/Total Assets
In 2000:
342 / 9,201 = 3.71%
Short-term: Increase ROA to 4% within
2 years.
Long-term: Increase ROA to 9% within
15 years.
In 2000, Continental was able to
generate 342 million in earnings from its
investment (assets).
We do not have balance sheets for rivals.
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Higher ROE
Net Income/Shareholders Equity
In 2000:
342 / 1,160 = 29.48%
Short-term: Maintain an ROE of 30% for
2 years.
Long-term: Improve ROE by 10% within
5 to 10 years.
We do not have balance sheets or income
statements for rivals to compare the
profitability of firms in the industry.
Higher cash flow
Continental has had a history of cash
flow problems. It emerged from its
second bankruptcy in 1993 with $2
billion in debt and comparatively low
revenues.
Short-term: To increase the amount of
cash on hand by 10% in 3 years.
The company’s liquidity has come into
question many times over the years.
When revenues drop as demand
periodically slackens, the company has
had trouble paying its interest payments
and accepting new aircraft orders. For
example, in 2001, Continental was
considering a third bankruptcy because
of a drop in revenues and debt payments
coming due. The government provided
relief for the airlines, which helped
Continental make it’s payments.
Long-term: To increase current ratio by
20% within 10 years.
Short-term: Increase current ratio by
10% in 3 years.
Although the industry has many firms
with cash flow problems as a result of
high debt, some firms have managed to
keep large cash reserves.
Continental had $1,201 million in cash
and cash equivalents on hand on
September 30, 2001.
Continental had $1,371 million in cash
and cash equivalents on hand on
September 30, 2000.
Current Ratio:
Current Assets / Current Liabilities =
2001:
2,252 / 3,084 = .73022
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2000:
2,459 / 2,980 = .82516
Financial ratios superior
to rivals
Net working capital ratio:
Net working capital / total assets = net
working capital ratio
Short-term: Improve net working capital
ratio by 4% in 3 years.
Long-term: Improve net working capital
ratio by 8% in 10 years.
2001:
2,252 – 3,084 / 9,816 = -.08476
2000:
2,459 – 2,980 / 9,201 = -.05662
Without balance sheets for competitors
these numbers cannot be compared to
other companies in the industry.
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IV. External factors
Chapter 3 Worksheet
Macro-environment forces
Criteria
The economy at large
Facts
What does this mean?
The economy is changing
throughout the time frame of the
case. When the case began, the
economy at large was picking up.
However, it was still partly
recovering from a recession that
occurred in the early 90’s.
The economy at large was an
opportunity for the industry between
1995 and 1998. During this time period,
the airline industry had the potential to
increase revenues.
Between 1995 and 1998, the
economy was in a period of rapid
growth. New businesses were
opening at an incredible rate and
there was heavy investment in
the stock market. Investors were
profiting from high returns on
most stocks.
In 1999, the economy was entering a
recession. A recession is a threat to the
airline industry. In a recession, there is
less demand for air travel. Competition
increases and profits are decreased.
In 1999, the economy was
beginning to enter into a
recession. The unemployment
rate began to rise. Some investors
were losing confidence in the
stock market because of the burst
of the dot-com bubble. People
were spending less of their
income on leisure.
Legislative, regulatory and
political environments
The airline industry began
deregulation in 1978. The goal
was to increase competition in
the industry to the point where
passengers are able to benefit
from lower fares and greater
service.
Deregulation is a threat to the industry.
After deregulation, competition was
fierce. The battle for market share drove
profits down.
Anti-trust legislation is a threat to the
industry. Airlines that are not able to
earn enough revenues on their own
cannot join with other companies when
it reduces competition in the industry.
Code-sharing agreements are allowed,
but only to a certain extent.
Airlines frequently try to lower
their own costs and raise their
revenues by joining with other
airlines in code-sharing
agreements. These alliances
occasionally involve the purchase New security measures are a threat to
of stock of one airline by a
the industry. They add to the costs of the
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34
competing airline, thus giving
voting control to the competing
airline. When the U.S.
Department of Justice believes
that these actions reduce
competition in the industry, it
uses the Clayton Act and the
Sherman Act to put an end to
these alliances.
After September 11, 2001, many
new security measures became
mandatory. The FAA increased
regulations concerning baggage
handling, the screening of
employees directly involved with
the flight, passenger screening,
cockpit security etc. The
regulations not only increased
costs but also increased the
amount of time it takes for
airlines to move passengers
through the system.
The attacks of September 11 also
had political ramifications.
The United States had to
maintain relationships with the
rest of the world while trying to
find a way to prevent terrorist
attacks.
airlines and increase the time it takes for
passengers to move through the system.
The longer process is a hassle for
customers and reduces the number of
passengers willing to fly. While this was
a strong factor immediately after
September 11, it has become less of an
issue as time passes.
The political environment is a threat to
the industry. The attacks of September
11 caused many political disturbances
throughout the world. U.S. citizens are
now treated differently in many
countries as a result of the attacks and
the countries response to them.
Relationships with oil producing
countries have been affected. This is a
threat to the industry. The cost of jetfuel increases when these relationships
are damaged. The profit margins are so
low in the industry already that a
significant rise in the cost of jet-fuel
sometimes causes airlines to file for
bankruptcy.
Falling barriers are an opportunity for
this industry. Markets that were once
limited to domestic companies are now
open to international firms.
Many countries have reduced
some of the barriers to entry for
firms operating outside of the
country. Companies can now
enter these countries more easily
and compete with domestic
companies for market share.
Population demographics
The United States population has
been changing in many ways
over the last 15 to 20 years.
Although there continues to be a
difference between the mean
annual income of men and
women, there is an increasing
amount of women involved in all
levels of organizations.
An increased number of women
working at higher paying positions is an
opportunity for the airline industry. This
group will be more likely to use air
transportation.
The rising education level of the
population in general leads to increased
income and a greater probability that
flying will be used as a means of travel.
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35
This is an opportunity, as well.
The education level has steadily
increased. The percentages of
people graduating from high
schools, colleges, and graduate
programs have all risen.
People have always been
attracted to cities, but because of
the high cost of living many have
chosen to live further from cities
and either commute or work from
home.
The average life expectancy has
risen.
Many baby-boomers are nearing
retirement and some have already
retired. This group is a relatively
large portion of the U.S.
population.
Household size is decreasing.
The number of single-parent
homes is going up. The number
of families with both parents
working is increasing.
Grandparents and other relatives
raise more children than ever
before.
Most people work in the service
industry. The number of
professionals has risen. The
number of low paying
manufacturing jobs has
decreased.
Education also increases people’s
curiosity. They will more likely to want
to venture into the world and explore
other countries and cultures.
People living far outside cities or
videoconferencing still usually need to
commute to work periodically. Low
priced regional air service is one of their
options. This is an opportunity.
The greater number of retired
individuals is an opportunity. They
often have the time and the money to
travel.
The rise in single parent households is a
threat to the airline industry. These
families typically have less
discretionary income and are less likely
to use air transportation.
The rise in the number of professionals
is an opportunity. This group is more
willing to pay for greater comfort and
service.
High unemployment rates are a threat.
Not only do the unemployed have less
income to spend on leisure, but they will
also be less likely to travel on business.
The number of people working longer is
an opportunity. This group tends to have
a higher amount of discretionary
income.
More people are working longer
before having children.
The U.S. population is much
more diverse than it was 20 years
ago. The number of African
Americans, Hispanics, and
Asians is increasing.
The airline industry is a global
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industry. The demographics in
each country are very diverse and
companies need to understand
their differences in order to
compete with other global and
domestic companies.
Most professionals work in and
around cities. They prefer greater
comfort, convenience, and
quality. Professionals also buy
more products that convey a
certain status position.
Most individuals and families in
the average income range and up
will pay for products that are
safer and have fewer health
consequences.
Societal values and lifestyles
Ethnographics and
psychographics provide the
following categories: personality,
values, and lifestyle.
As a result of the education level
rising and increases in
technology, people have learned
more about other cultures. Their
curiosity has led to increases in
global air transportation.
An increasing number of
Americans are traveling overseas
because the organizations they
work for have international
operations.
Exotic vacations and safaris are
much more common.
After the attacks of September
11, many consumers were afraid
to fly. As time passed, gradually
the numbers of airline passengers
began to rise.
The lifestyle of many U.S.
citizens is very fast paced. People
want to get where they are going
Technology and education has increased
the amount of information people have
about other societies. Globalization is
helping to merge world culture. This is
an opportunity for the airline industry.
People want to observe other parts of
the world first hand and learn about
differences.
With an increasing number of
companies with overseas operations, the
lifestyles of many people have changed.
Employees spend a greater percentage
of time working overseas and require
transportation from their home country
to their host country. This is an
opportunity for the airline industry.
A fast paced lifestyle is an opportunity
as well. People value their time and are
willing to spend money to decrease the
amount of time it takes to get to their
destinations.
In general, people are now more likely
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quickly and with a limited
amount of hassle. People often
pay the additional cost of an
airline ticket rather than waste
valuable time on a long bus or
train ride.
to consider traveling by air for short and
long distances and that is an opportunity
for the industry.
Immigrants now frequently travel
back to their home country in
order to maintain relationships
with their relatives and stay
reminded of where they are from.
Technology
Technology is changing the way
passengers’ book flights. It is
now much easier to book an
entire trip from the comfort of
your own home. The entire
process takes a matter of
minutes. E-ticketing and online
travel agencies allow customers
to completely customize much of
their travel experience.
Technology has also improved
scheduling systems allowing
people to find out whether or not
a flight is on time by phone or
computer.
New technology installed at
airports and on planes has
improved security.
Technology improvements have
been made in aircraft systems
and maintenance equipment and
procedures.
Computer systems have
improved information processing
and communication within
organizations. For example,
intranets have made it possible
for all employees to receive up to
the minute information.
Technology is a double-edged sword. It
has drastically improved the ticketing
process. Now it is quick and easy to
purchase tickets online without leaving
your home. This has reduced costs for
both consumers and airlines. This is an
opportunity for the industry.
Technology that leads to reduction in
other costs is also an opportunity for the
industry.
On the other hand, e-commerce
technology has also made it possible for
consumers to instantly compare
different flights and make an educated
decision. This is a threat to the industry.
Customers can base their decision on up
to the minute information.
Much of the new technology that
improves communication over long
distances is also a threat to the industry.
People no longer need to meet in person
to exchange thoughts and ideas. It used
to be that phones were impersonal
because you were not able to see the
person. Now technology has made it
possible for a board meeting to be held
in one country while a board member
from around the globe can interact and
view each others facial expressions.
Having all the board members travel to
one location is no longer always
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Technology has also led to an
explosion of portable devices
designed to store and transmit
information. It is no longer
necessary to meet face to face for
many business transactions.
Telecommuting is very popular
in some organizations.
necessary.
Video conferencing has enabled
people in countries around the
world to see each other while
they are speaking. This has
reduced the need for travel.
People can attend meetings in the
comfort of their own home. They
can instantly send documents via
email or by fax almost as easily
as passing it to the person next to
them at a board meeting.
1. What are the Industry's dominant economic features?
Criteria
Market size
Facts
The total commercial airline revenue in
2000 was $98.1 billion.
The scheduled revenue passenger miles
were $651.8 billion.
The industry had a total operating profit
of $5.50 billion.
What does this mean?
The market in 2000 was very large. A
large market is an opportunity for
existing firms but it also increases the
threat of new entry.
Large markets cause attention from
companies that might want to enter the
industry.
The market size was increased as a result
of competitors reducing ticket prices to
compete with each other. The lower
ticket prices brought in a lower amount
of revenue per ticket, but a much greater
number of passengers that were willing
and able to purchase tickets. This larger
number of customers led to an increased
market size.
After September 11, the market size was
reduced. Many people chose other
Thompson, Arthur and Strickland, A.J. Strategic Management: Concepts and Readings. McGrawHill Irwin. NY. 12th Edition
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methods of transportation that were
believed to be safer or simply did not
travel. The market size has slowly
rebounded.
Scope of the competitive
rivalry
(The competitive scope
criteria addresses
geographic scope (Global,
National, Regional, Local),
product scope, market
scope and so on.)
Most of the large airlines in the industry
operate globally while smaller airlines
provide regional or national service.
However, a few large competitors have
yet to expand internationally.
The product scope is in the middle of
narrow and broad. Rivals are constantly
looking for small changes to the product
that customers will view as valuable.
Rivalry is very high in U.S. markets.
There are fewer competitors in many
international markets and U.S.
companies are trying to gain market
share in these countries to gain firstmover advantages.
The market for travel is international and
the wealthiest nations have the largest
markets. Because air travel is relatively
expensive, in some countries only a
small portion of the population can
afford to fly.
Market growth rate and
position in the business
cycle (development,
Commercial Airline Revenue Growth
1995-2000. (Revenue in billions)
growth, maturity, decline)
Year
2000
1999
1998
1997
1996
1995
Revenue
$98.1
$89.6
$84.6
$83.5
$78.5
$73.5
Growth Rate
9.487%
5.910%
1.317%
6.369%
6.803%
The scope of the competitive rivalry is a
threat to the industry. Rivals are
operating in many of the same markets
around the world. Intense rivalry limits
the ability for companies to find
profitable markets.
Rivals have made many attempts at
differentiating their product but
competitors can easily imitate these
changes because many large airlines
have similar capabilities.
Rivals will resort to price cuts and other
competitive actions to keep competitors
out of the markets they are serving.
The threat to competitors is building in
international markets as well. Rivals
monitor the moves of their competitors
and quickly enter markets that other
rivals have had a success operating in.
The market growth rate is a threat to the
industry. With a slow rate of growth and
a maturity position in the business cycle
the airline industry is not attractive.
Competition among rivals is very intense
in this industry.
The market is in the maturity position in
the business cycle.
Airlines attempt to improve profits by
cutting costs and maintaining or
increasing market share.
Thompson, Arthur and Strickland, A.J. Strategic Management: Concepts and Readings. McGrawHill Irwin. NY. 12th Edition
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Most companies try to differentiate the
product as much as possible and some
companies are focusing on improving
processes.
The market is growing at an average rate
of approximately 6% each year. In the
months following September 11, this
growth rate fell, but it has slowly
recovered.
After September 11, demand fell and
rivals competed for sales from a smaller
number of buyers.
Number of rivals and
their relative size
(Relative size refers to each
rival’s market share based
on total sales for the overall
market or, when applicable,
individual market
segments.)
Ten major rivals and their relative sizes
based on operating revenues in 2000.
Airline
Revenue % of market
United
$19,331.3
American
$18,117.1
Delta
$15,320.9
Northwest $10,956.6
Continental $9,449.2
US airways $9,181.2
Southwest
$5,649.6
TWA
$3,584.6
America West $2,309.3
Alaska
$1,762.6
19.705%
18.468%
15.618%
11.169%
9.632%
9.359%
5.759%
3.654%
2.354%
1.7968%
A large number of major rivals is a threat
to competitors. Many competitors have
similar capabilities and have to battle for
market share. This market is close to
pure competition. Market share is not
held by a single rival or a select few.
With a large number of major rivals the
threat of new entry is decreased. In order
to compete with the major companies
already in the industry, a significant
investment is needed.
There are many other large competitors
in the airline industry. Some operating in
only their home countries and others
internationally.
Number of buyers and
their relative size
(Address the number of
buyers in each market and
market segment. Buyer
size refers to the buyer’s
volume of sales for the
industry.)
There are over 554,000,000 buyers in the
industry. Buyers are very small in size,
usually individuals. Each buyer
contributes an extremely small amount to
total industry sales.
An industry with a large number of small
buyers is an opportunity. Small buyers
lack the power that large buyers have.
The fact that there are many individual
buyers makes losing a single buyer less
of a concern.
Businesses also buy tickets, but not in
quantities large enough for them to have
power in the industry.
There are a large number of both
business travelers and flip-flop
customers.
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Extent of rivals’ vertical
integration (How far
forward or backwards have
the rivals extended their
value chain?)
Rivals have done a small amount of
vertical integration.
Some airlines have extended their value
chain forward by partnering with other
airlines in developing online services
that offer customers discounted prices on
airline tickets as well as car rentals,
hotels, and tourist attractions. This
reduces the need for travel agencies that
erode profits.
Vertical integration is an opportunity for
companies in this industry. While some
areas are expensive to integrate into,
such as airplane manufacturing or oil
refinery, airlines can gain a cost savings
by integrating backward into activities
such as food preparation. Companies that
are successful at vertical integration will
develop a cost advantage over other
rivals and increase the capital
requirements needed to enter the market.
Offering other services to customers, in
addition to air travel via the internet, is
also an opportunity for this industry.
The extent of rivals’ vertical integration
is not a threat in this industry.
Extent of rivals’
horizontal integration
(Horizontal integration
applies to using the
synergies in your value
chain to produce different
products or provide
services for a different
industry or market
segment.)
Rivals have integrated horizontally by
offering different services for different
market segments.
Some major companies offering
international and national service have
regional services catering to passengers
that need a quick flight from city to city.
These flights are often scheduled
frequently and have a short duration.
Regional services often use smaller
planes, keeping profits up. Not only are
these regional divisions usually
profitable, but they also feed passengers
to hub locations where they can book
flights on the companies regular service.
Horizontal integration is an opportunity
for airlines to use the synergies in their
value chains to cater to different market
segments.
The extent of rivals’ horizontal
integration is not a threat in this industry.
Some competitors agree to carry postal
mail packages on their passenger jets to
gain added revenue.
Types of distribution
channels rivals use to
access customers. (Do
the channel types vary by
customer segment?)
The airline industry receives its
passengers through the gate system. All
customers wait at the gate and are called
to board when the plane is ready.
All major airlines use a gate system for
boarding. This is neither an opportunity
nor a threat for the airline industry.
Rivals pay for the gates and have control
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over the amenities that are offered at
them.
Pace of technological
innovation in
production process
innovation
Technological innovation is occurring at
a fast pace.
The airline industry uses a large number
of computers in its operations.
Computers are used in the maintenance
of aircraft, scheduling, information
systems, automated phone systems,
flight navigation, air traffic control, etc.
As the power of the computer increases
and new programs are written and
improved, the time and cost of many
company operations can be decreased.
New ways of accomplishing traditional
tasks are frequently introduced.
Improvements can lead to a higher
quality product as perceived by
consumers.
Pace of technological
innovation in product
introduction
Technological innovation in product
introduction is not a factor.
The pace of technological innovation in
the production process is a threat to the
industry. Technological changes increase
the capital requirements for airlines to
remain competitive.
There is a greater amount of risk for new
entrants. Not only do they have to
purchase the technology initially, but
they will also need to make upgrades to
keep up with the industry.
The pace of technological innovation in
product introduction is neither a threat
nor an opportunity in this industry.
Manufactures of aircraft are responsible
for the improvements made to the
aircraft.
Boeing and Airbus produce new types of
planes with additional service features,
increased safety, and greater comfort.
Extent to which the
rivals differentiate their
products and/or services
Rivals have attempted to differentiate
their services in a number of ways. Many
companies are constantly adapting
services to cater to the specific needs of
the customers they are targeting.
Rivals have an opportunity to
differentiate their products to increase
market share. Companies that have
succeeded in this area are a threat to the
rest of the industry.
Some of the ways competitors have tried
to differentiae their product is by:
Airlines are continuously making
changes to their services to gain an
advantage over rivals. Surveys are
frequently conducted to identify what
specific un-met needs customers have.
When an airline meets the needs of
customers in a way superior to the
airlines rivals, they will likely increase
their profit.


Flying customers to exactly where
they want to go (Providing a
sufficient number of flights to the
right destinations at the right times)
Offering customers greater
convenience when scheduling
flights by providing online booking
Thompson, Arthur and Strickland, A.J. Strategic Management: Concepts and Readings. McGrawHill Irwin. NY. 12th Edition
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












Extent to which rivals
use economies of scale
in:
 Purchasing
 Manufacturing
 Services
 Transportation
(logistics)
 Marketing
 Advertising
 General and
Administration
 Other steps in the
value chain
services
Priority baggage handling
First-class seating
No frills flights at a reduced cost
Higher quality service (Higher ontime arrival percentage, lower
number of mishandled bags,
courteous flight attendants and
pilots, etc.)
Increased carry-on luggage
capacity
One stop shopping services for all
your travel needs
A wide variety of incentives for
business customers including
frequent flyer miles and discounted
flights
Higher quality food and on-board
entertainment
More comfortable seating
Gate amenities
Price
Improved information services for
customers including automated
flight information
Improved parking facilities at a
lower cost to customers
Rivals use economies of scale in
purchasing by ordering large quantities
of spare parts, food, maintenance
equipment, fuel, and aircraft. Large
companies can often negotiate lower
costs on these items.
Rivals gain economies of scale by using
hub locations to service their aircraft
rather than having a large staff at all
airports.
A differentiated product reduces a
buyer’s power. A buyer will not always
be able to fill the same number of needs
with a competitor’s product.
Economies of scale are a threat to this
industry. While rivals are able to gain
economies of scale in some activities,
they are not a significant force in all
industry operations.
Rivals with economies of scale have an
advantage over other rivals. They can
lower ticket prices to levels lower than
competitors and still remain profitable.
These rivals require a lower number of
passengers to break even.
Large competitors can achieve
economies of scale in advertising
because any mention of the company’s
name helps to advertise all of the
company’s products. A simple
advertisement for one destination helps
to put the name of the company into the
mind of consumers.
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Economies of scale exist in a human
resource department when the entire
department operates as a cohesive unit
and services a large company.
Procedures can be standardized with
forms drawn up in advance. Automated
systems can speed up the process of
benefit selection and inquiries.
The fixed costs of new technology,
research and design, and general
administration can be spread out over a
wider number of ticket sales in larger
companies.
Extent to which the key
industry participants are
clustered in one
geographic location
Key industry participants have
operations across the U.S. and in many
major foreign cities.
Rivals often use a hub system where they
can base their maintenance and
administrative operations to serve a
particular region or country. These hubs
are often clustered in major urban
centers.
The fact that industry participants are not
located in one geographic location is a
threat to the industry. With most major
markets already being served there is
limited room for expansion.
Customers have alternatives to chose
from across the U.S. Rivalry is strong in
almost all locations not just one region.
The largest companies compete in every
major city or travel destination.
Extent to which certain
industry activities result
from learning and
experience curve effects
The airline industry benefits from
learning and experience curve effects in
maintenance, flight scheduling,
advertising, and daily operations.
Repairing aircraft and related equipment
is a complicated process. When a new
aircraft is introduced, it takes a while for
the maintenance department to learn
about the aircraft and diagnose problems.
After a while the staff will become more
familiar with common problems and the
time it takes to fix these problems will be
reduced.
The learning and experience curve
effects are a threat. The knowledge that
is gained from past operations gives
large competitors advantages when they
redesign flight schedules and operations
procedures.
Greater knowledge leads to lower costs
and increased revenues. Experienced
companies will have a better
understanding of what flights to add to
their schedule, how to efficiently handle
maintenance problems, and how to
effectively conduct daily operations.
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Rivals that use a limited number of types
of aircraft can benefit from learning
effects. Mechanics working on the same
types of aircraft frequently will become
more familiar with each type of aircraft.
Companies schedule flights according to
market data, past experience and
competitors actions. In time, flight
scheduling is improved as a company
learns from its successes and failures.
Airlines also learn by trying different
service modifications to see what works
and what does not. This helps them to
determine customer needs.
Capacity surplus or
shortage in the industry
(Capacity refers to the total
manufacturing output
capability for the industry.
Capacity surplus would
indicate that the industry
has the capability to
produce more products
than the market demands.)
There is a capacity surplus in the airline
industry as a whole. The industry is
capable of carrying many more
passengers than it is currently
transporting.
The capacity varies from route to route.
Some routes have very little capacity
surplus while others have a shortage.
Airlines adjust their flight schedules in
response to changes in demand.
Major airlines usually have a capacity
surplus because they have a limited
number of planes with a set number of
seats in each plane. These companies
sometimes reduce their surplus by
having smaller regional services feed
their regular service. Smaller planes
reduce capacity so that it matches the
reduced demand.
Capital requirements and
the ease of entry into or
exit from the industry
Capital requirements make it very costly
for a potential new entrant to enter into
the airline industry.
The capacity surplus is a threat to the
industry. In order to earn profits,
companies need to cover the high costs
of capital needed to operate in the
industry. It is crucial for companies to
fill as many empty seats as possible in
order to earn enough revenues to show a
profit on their flights.
Pressure on rivals to compete for
passengers is very high. A capacity
surplus reduces prices and profit
margins.
Capital requirements are a threat to the
industry. In most companies a large
percentage of revenue goes to covering
the lease payments on aircraft.
Thompson, Arthur and Strickland, A.J. Strategic Management: Concepts and Readings. McGrawHill Irwin. NY. 12th Edition
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The cost of purchasing the necessary
equipment will run into the high
millions. Leasing aircraft will still put a
significant strain on the financial
situation of the company.
Entering on even a regional level
requires substantial cash outlays for
planes, maintenance equipment, and
advertising.
Capital requirements are also a threat
because once a company purchases the
necessary equipment it is not easy to
liquidate it. An airplane is not a
commodity; there are a limited number
of potential buyers. Because companies
tend to purchase new aircraft and the
market is in the maturity stage, aircraft
are often sold for far less than what was
paid for them.
Exiting the industry is also very
expensive. Liquidating the company’s
assets is not easy. Aircraft become
outdated as new technology is
introduced. Finding buyers for old
aircraft in this industry cannot be done
quickly. Companies often continue to
operate at a loss because of the high
exiting costs.
Industry profitability
(The annual net profit
margin for the industry.)
The annual net profit margin for the
industry is low. Competitors are always
looking for ways to reduce costs or
attract customers away from other
airlines by offering travel incentives,
improved service, more destinations or
convenient flight times, greater comfort,
etc.
The most profitable airlines are not
making very large profits.
Competitors enter into code-sharing
agreements to increase each other’s
profitability.
Low profit margins are a threat to this
industry. When companies do not stay
ahead of their rivals, their profit margin
quickly begins to disappear.
In the airline industry, it is somewhat
common for rivals to have liquidity
problems from time to time and file for
bankruptcy.
Companies in financial distress are often
forced to reduce costs, which lowers the
quality of service the airline provides.
This helps to increase financial problems
even more by reducing revenues.
The added cost of security measures after Because of low industry profitability,
September 11, combined with the drop in rivalry is increased.
revenues from fewer passengers has
reduced profitability even further.
However, the number of passengers has
slowly increased since that time.
Degree of alliances
Alliances are becoming very common in
the airline industry.
To increase profitability, airlines enter
into code-sharing agreements. The
agreements are usually designed so that
The degree of alliances is a threat to this
industry. The alliances are an
opportunity for airlines to reduce their
costs and increase revenues, but at the
same time they increase rivalry.
Thompson, Arthur and Strickland, A.J. Strategic Management: Concepts and Readings. McGrawHill Irwin. NY. 12th Edition
47
one company provides the plane and
staff, yet the flight is listed on both of the
company’s flight listings. They also
might share employee lounges and
ground crew.
Groups of competitors are formed by the
alliances. These groups compete with
each other for additional alliances.
Airlines not involved in code-sharing
agreements or other alliances are often
less competitive.
When one carrier does not provide a
destination, it will negotiate an
agreement with another carrier to
transport its passengers the rest of the
way.
When one airline does not have a ground
crew in certain locations, it will team up
with another airline and use their ground
facilities.
Alliances are also made with online
travel services that provide customers
with easy ticketing and travel
information.
Car rental companies, hotels, tourist
attractions, and time-share properties
form alliances with airlines to offer
customers deals on packages.
2. What is competition like and how strong are each of the competitive forces?
Criteria
RIVALRY
How many competitors
are there in this
industry?
Facts
What does this mean?
(Does this make the force strong or weak
for the industry?)
The case mentions 10 major competitors,
American, Alaska, Continental, Delta,
America West, Northwest, TWA,
United, US Airways, and Southwest.
The large number of competitors in this
industry is a very strong force, in terms
of rivalry. Competition in this industry
erodes profit margins and causes
competitors to look for ways to steal
market share away from rivals. The
increased rivalry is a threat to the
industry.
The case also mentions Air Canada,
American Eagle, Horizon Airlines,
Alitalia, Air France Virgin Airways, Air
China, and KLM Royal Dutch Airlines.
There are a numerous number of other
competitors in the industry, both
domestically and internationally.
Thompson, Arthur and Strickland, A.J. Strategic Management: Concepts and Readings. McGrawHill Irwin. NY. 12th Edition
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What is the relative size
(market share based on
their percentage of industry
sales) of each
Ten major rivals and their relative sizes
based on operating revenues in 2000.
Airline
Revenue % of market
competitor?
United
$19,331.3
American
$18,117.1
Delta
$15,320.9
Northwest $10,956.6
Continental $9,449.2
US airways $9,181.2
Southwest
$5,649.6
TWA
$3,584.6
America West $2,309.3
Alaska
$1,762.6
19.705%
18.468%
15.618%
11.169%
9.632%
9.359%
5.759%
3.654%
2.354%
1.7968%
The relative size of each competitor is a
strong force in increasing rivalry within
the industry. A large number of
competitors with similar capabilities and
sizes mean that most companies are
equally able to fight for greater market
share.
Rivals are constantly monitoring other
competitors and adjusting their
strategies.
Most of the major competitors are
similar in size.
What is the industry
concentration ratio (C4)?
Industry concentration ratio:
 Top 4 company’s sales
Industry sales
Airline
Revenue % of market
United
American
Delta
Northwest
$19,331.3
$18,117.1
$15,320.9
$10,956.6
19.705%
18.468%
15.618%
11.169%
The top four companies had roughly
65% of the market share. This industry
concentration ratio is a threat to the
airline industry. The industry is much
closer to pure competition than it is to a
monopoly. One company does not have
the majority of market share. The top
four companies each have a similar share
of the market, causing rivalry to increase.
63725.9 / 98.1 = 64.960%
What is the product or
service demand growth
rate?
Industry Growth Rate:
1999-2000
1998-1999
1997-1998
1996-1997
1995-1996
9.487%
5.910%
1.317%
6.369%
6.803%
Individual Growth Rate:
United
1999-2000
1998-1999
1997-1998
1996-1997
1995-1996
American
7.595%
2.564%
1.052%
6.242%
9.546%
A slow demand growth rate increases
rivalry. This force is strong in the airline
industry. Airlines have a lot of unused
capacity but not enough demand for their
flights. The rate is growing, though, and
at times the growth rate increases by a
significant percentage. Rivals have taken
advantage of this opportunity and many
have increased their own individual rates
of growth.
The rise and fall of the growth rate
increases the risk of fierce rivalry during
time periods when the industry growth
rate slows down.
After September 11, the demand fell for
air travel, which made this force even
Thompson, Arthur and Strickland, A.J. Strategic Management: Concepts and Readings. McGrawHill Irwin. NY. 12th Edition
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1999-2000
1998-1999
1997-1998
1996-1997
1995-1996
12.630%
-1.309%
2.794%
4.827%
-3.104%
Delta
1999-2000
1998-1999
1997-1998
1996-1997
1995-1996
2.815%
1.856%
2.998%
6.654%
6.055%
Northwest
1999-2000
1998-1999
1997-1998
1996-1997
1995-1996
11.030%
13.339%
-12.791%
2.382%
9.457%
Continental
1999-2000
1998-1999
1997-1998
1996-1997
1995-1996
12.739%
5.992%
11.535%
13.178%
9.813%
US Airways
1999-2000
1998-1999
1997-1998
1996-1997
1995-1996
8.520%
-1.114%
0.635%
10.353%
10.296%
Southwest
1999-2000
1998-1999
1997-1998
1996-1997
1995-1996
19.301%
13.727%
9.091%
12.021%
18.580%
TWA
1999-2000
1998-1999
1997-1998
1996-1997
1995-1996
8.339%
1.522%
-2.138%
-6.305%
8.336%
America West
1999-2000
6.714%
stronger.
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Are rivals using price
cuts or other competitive
weapons to boost unit
volume?
1998-1999
1997-1998
1996-1997
1995-1996
9.128%
5.082%
7.723%
12.165%
Alaska
1999-2000
1998-1999
1997-1998
1996-1997
1995-1996
3.951%
7.228%
8.501%
11.541%
12.357%
Rivals use price cuts and other
competitive weapons to boost unit
volume. Unused capacity is costly in this
industry.
Rivals often reduce prices on certain
routes to increase the profit of those
flights. Ticket prices are cut when it is
evident that there will be a shortage of
passengers on some flights.
Rivals compete with each other by
offering travel agencies better incentives
to book passengers on their flights.
The use of price cuts and other
competitive weapons is a somewhat
strong force in this industry. It is in the
airlines interest to do whatever is
possible to book as many seats per flight
as it can. Empty seats mean lost revenue
and a fewer number of full seats to cover
the costs of the flight.
These actions reduce industry profits and
increase rivalry and they are a threat to
the industry.
Special discounts are given to business
travelers.
Are the customer's
switching costs low?
The customer’s switching costs are very
low.
Unless the customer is switching airlines
last minute and has already booked a
flight, there typically is no financial cost.
Some rivals offer flights with drastically
reduced rates, in that case switching to
another airline is likely to be expensive.
Low switching costs are a threat to the
industry. Customers have very little
reason to remain loyal to one competitor
when another rival reduces their price or
offers better service.
Competition is very strong in the airline
industry because of this. Rivals are
constantly looking for better ways to lure
passengers from other carriers.
Depending on the airline they are
switching from, customers will find
better service and features at another
airline.
Because most airlines are operating at
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less than full capacity, there is usually
space for a last minute customer on most
flights.
Customers accustomed to flying with a
certain airline occasionally become so
used to that airline that the unfamiliarity
of other companies increases switching
costs. However, this is not very common.
Usually, airports are located relatively
close to other means of transportation
such as taxicabs, train stations, bus
depots, car rental facilities, etc. All of
these will act as substitutes depending on
how quick the passenger needs to arrive
at their destination.
Are rivals launching
moves to change their
market share or industry
position at the expense
of other industry
participants?
Competitors are continuously launching
moves to change their market share at
the expense of other industry
participants.
Competitors monitor each other’s actions
and try to imitate successful ideas.
When one rival finds a particular route to
be profitable, competitors will move into
the market and try to gain as much
market share away from the rival as
possible.
The moves rivals make to change their
market share at the expense of industry
participants are a threat to the industry.
They are a strong force in increasing
rivalry. Companies launch moves and
their competitors retaliate to maintain
their market share.
Financial problems are common in the
airline industry, which helps to increase
the number of aggressive moves.
Some of the alliances that are put in
place are set up to reduce the market
share of other competitors.
When a company is in financial distress
it will often launch aggressive moves to
attempt to rapidly gain market share.
What are the payoffs for
strategic moves?
The payoffs from strategic moves are
increased market share, greater profits,
increased revenues, and reduced costs.
Strategic moves can also improve
customer service and make the product
more attractive to customers.
Even small changes to the product
sometimes make a large difference to
customers. For example, curbside
The payoffs of strategic moves are
sometimes substantial. This is a strong
force that increases rivalry in the airline
industry.
Rivals know they can increase their
financial figures by investing time and
money into making the right strategic
moves.
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baggage checking. Customers carrying
large bags on board will likely look for
this service.
Moving into international markets ahead
of competitors can give rivals firstmover advantages. In some countries
only a certain number of foreign firms
are allowed.
Competitors that set up operations in
foreign countries first will gain
acceptance and experience ahead of
other rivals. First mover advantages
increase rivalry.
Does it cost more to exit
the industry than to
continue participation?
It costs far more to exit the industry than
to continue participation in most cases.
An airline loses a lot when it liquidates
its assets.
The high cost of exiting the industry is a
strong force that increases rivalry.
Companies stay in the industry when
they are not profitable to avoid a bigger
financial loss. Competition with these
companies is fierce.
How consistent are rivals
strategic visions,
strategic intents,
objectives, strategies,
resources, and origins?
Rival’s strategic visions, strategic
intents, objectives, strategies, resources,
and origins are inconsistent.
Inconsistency when it comes to strategic
visions, strategic intents, objectives,
strategies, resources, and origins is a
threat to airlines in the industry.
Competitors are unpredictable and
rivalry is strongly increased as a result of
this.
The greater the
consistency, the more
likely there is increased
rivalry.
Rivals have different approaches to
gaining market share. They have varied
ideas about the best way to service
customers, reduce costs, and plan their
flight schedules.
Rivals change their strategies often to
aggressively pursue different
opportunities.
Rivals look for innovative ways to gain
market share that are different from other
competitors.
Rivals also vary by country of origin in
international markets.
Are strong new entrants
acquiring weaker rivals
and launching wellfunded, aggressive
moves?
We are not aware of any strong new
entrants acquiring weak rivals. There
have been mergers with weak rivals, but
they were within the industry.
The lack of strong new entrants
acquiring weaker rivals and launching
well-funded, aggressive moves is an
opportunity in this industry. This is not a
force increasing rivalry in this industry.
Economies of scale in purchasing are
high. The large size of most major rivals
enables them to gain significant
economies of scale in purchasing by
The high economies of scale in the
airline industry help to prevent new
entry. They create a significant entry
barrier. Potential entrants need to enter
THREAT OF ENTRY
What economies of scale
exist in each of the
following areas:
 Production
Thompson, Arthur and Strickland, A.J. Strategic Management: Concepts and Readings. McGrawHill Irwin. NY. 12th Edition
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







Purchasing
Inbound and
outbound logistics
Advertising
Financing
Customer service
Raw materials
R&D
Other steps in the
value chain?
(Please note that synergies
across the value chains of
related diversified
corporations also constitute
economies of scale.)
ordering large quantities of spare parts,
food, maintenance equipment, fuel, and
aircraft. They have the ability to
negotiate better prices on these goods.
on a large scale, thus increasing the
capital requirements and risk. Companies
that do not enter on a large-scale face
higher costs.
Economies of scale in maintenance are
moderate. Rivals gain economies of scale
by using hub locations to service their
aircraft rather than having a large staff at
all airports.
Large-scale entry means that new
entrants will quickly need to increase
revenue to fill the large capacity of the
planes they purchase or they will remain
unprofitable.
High economies of scale exist in
distribution. Airports have a limited
amount of gates. They want large airlines
to use those gates because the increased
traffic increases the airports revenues.
Economies of scale are an opportunity
for airlines already in the industry.
Economies of scale in advertising are
high. Large competitors often receive
lower advertising rates because of the
quantity of their advertising. Any
advertisement helps to increase brand
recognition.
Economies of scale in other activities are
moderate. Economies of scale exist in a
human resource department when the
entire department operates as a cohesive
unit and services a large company.
Procedures can be standardized with
forms drawn up in advance. Automated
systems can speed up the process of
benefit selection and inquiries.
Economies of scale in financing are
moderate. Large competitors often have
more unencumbered assets to use as
collateral. Major companies can often
secure a greater line of credit.
Economies of scale in customer service
are low. In many cases, it is harder for a
large company to increase customer
service than for a small company.
Economies of scale are moderate in
researching and designing new services.
Large competitors often have greater
resources at their disposal.
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Cost and resource
disadvantages
independent of size
Costs independent of size include high
landing fees. Airlines need to be able to
pay these fees to land at airports. These
fees vary depending on how busy the
airport is.
Current industry participants also have
relationships with high-quality suppliers
and have set up operations at optimal
locations.
What are the learning
curve and experience
effects to enter the
industry?
Inability to match the
technology and
specialized know-how of
firms already in the
industry. How
accessible is the
industry's technology?
The cost and resource disadvantages
independent of size decrease the threat of
new entry and are an opportunity for
existing firms in the industry.
New entrants need to have the necessary
cash on hand to pay the high landing fees
and invest time in the industry to develop
relationships.
The airline industry benefits from
learning and experience curve effects in
maintenance, flight scheduling,
advertising, and daily operations.
The learning curve and experience
effects to enter this industry are a threat
to new entrants and an opportunity for
existing firms.
Over time, firms learn from their past
mistakes and the past mistakes of their
rivals. They learn the best ways of
performing the many different activities
in the airline industry. The learning
curve and experience effects lead to
reduced costs.
New entrants do not have the knowledge
that comes from experience in this
industry.
The technology and training in this
industry is highly specialized. In order to
participate in this industry, you need to
have people with the necessary skills to
use the technology.
The inability to match the technology
and specialized know-how of firms
already in the industry is a threat to new
entrants. This is an opportunity for
existing firms.
The technology is available, but is
expensive. People with the necessary
training and education are not always
readily available and the necessary skills
are not easy to learn.
New entrants need to find people with
the specialized skills or invest a great
deal of time and money training existing
employees.
Existing firms already have the
technology and the right people in place
to operate it.
Brand preferences and
customer loyalty
Customers have a low preference for
certain brands and do not remain loyal
when a competitor offers something
more attractive.
Brand preferences and customer loyalty
are not much of a barrier to new entry, at
least in United States markets. This is a
threat to existing firms and an
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opportunity for new entrants.
Through advertising campaigns and
improved customer service and
satisfaction, firms have tried to increase
brand preference and have been
successful but only to a limited extent.
New entrants can easily steal customers
away from existing firms by offering
lower rates or more convenient flight
times.
Companies with bad reputations will
cause customers to stay clear, but when
the company has a decent reputation
price becomes a greater factor.
In international markets there is often
more brand preference and customer
loyalty to companies that are from the
same country as the customers.
What are the capital
requirements to enter?
The capital requirements to enter the
market are very high. To enter this
industry a firm must have a large amount
of cash to use for purchasing planes,
maintenance equipment, gate and
landing fees, advertising, cash reserves
and staffing (specialized employees are
paid higher salaries).
The high capital requirements of entry
into the industry are an opportunity for
existing firms. High capital requirements
threaten new entrants.
The high capital requirements limit the
number of potential entrants and help to
protect existing firms from new
competition.
Firms that do not have the required cash
need to be able to find a source of funds
such as private investors, banks, supplier
credit accounts, etc. Finding such a large
amount of capital is not easy.
What other resource
requirements are
necessary to enter?
Existing firms usually have a strong legal
team to help protect the company from
unfair competition. This is very
important for an airline just entering the
industry. Other major airlines will use
their strength and resources to try and
force the new entrant out of business, in
some cases even before it starts flying
passengers.
The need for a strong legal team is a
threat to new entrants and an opportunity
for existing firms. A legal team with
experience in the industry is not easily
attained without a sufficient amount of
investment.
What is the access to
distribution channels?
Existing firms use the gate system to get
their passengers on to the company’s
flights. Access to this system is not
easily attained. Airports demand high
fees and do not rent space to every
airline. An airport will be reluctant to
The limited access to distribution
channels is a threat to new entrants and
an opportunity for existing firms.
Existing firms have a protected
distribution system. New entrants cannot
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What regulatory policies
apply?
rent gate space to an airline that has just
started operations. It is wiser for the
airport to rent the limited amount of gate
space it has to established airlines that
bring in a high amount of revenue.
easily move in and use the system. New
entrants usually have to offer the airport
a greater amount of money for the gate,
which will reduce the new entrants
profits.
The Airline Deregulation Act passed in
1978 has changed the industry
dramatically by allowing increased
competition.
The Airline Deregulation Act created an
opportunity for new entrants. New
entrants can now move into a market and
add flights much more easily. This is a
threat to existing firms that are trying to
hold on to and/or increase their market
share.
The Federal Aviation Administration has
several regulations to improve the safety
of air travel. These regulations increase
the costs of operating in the airline
industry.
What tariffs and trade
restrictions apply?
FAA regulations affect all competitors.
They are a cost of operating in the
industry.
Companies operating internationally face
restrictions by host governments that
limit the investment they can make in
some countries. Government restrictions
vary by country. Some governments only
allow a certain amount of foreign firms.
In some countries there is a significant
government barrier to new entry, which
is an opportunity for existing firms
operating in the country. They essentially
have a protected market to operate in.
Substitutes are readily available. They
include trains, automobiles, buses, and
boats. The price of these substitutes
varies depending on the distance that is
to be traveled and the quality of service
the consumer wants to receive during the
trip.
The availability of attractively priced
substitutes is a threat to existing firms.
Just how much of a threat depends on
factors including the distance of the trip.
SUBSTITUTES
What is the availability
of attractively priced
substitutes?
Trips of a short distance make the
substitutes more reasonably priced and
attractive.
With some substitutes it is necessary for
travelers traveling long distances to stay
overnight in hotels and pay for gas, food,
and other expenses. There is also a cost
to customers in terms of time, missed
sleep and aggravation.
Substitutes challenge the industry and
reduce the size of the market for air
travel. The smaller this market gets, the
more rivalry among existing firms.
Substitutes also reduce the price that
existing firms in the industry can charge.
The higher the price of airline tickets the
more attractive other means of
transportation become.
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Is the substitute of better, A list of some of the advantages and
worse, or equal quality?
disadvantages of major substitutes.
Automobile transportation:
Advantages:



Traveler can control when to stop
unless it is a taxicab. Stopping at
attractions along the way is a nice
option.
Sometimes less expensive than
flying for short distances.
Traveler can go almost anywhere on
land.
Substitutes are likely to challenge the
airline industry. Depending on the length
of the trip and consumer preferences, all
of these substitutes can be considered
higher quality. This is a threat to existing
firms in the industry. For some trips, air
travel is by far the best means of
transportation, but for others, airlines
need to compete with substitutes for
passengers.
Disadvantages:




Usually takes much longer to reach
destination unless distance is very
short.
Costs of gasoline, food, etc. are all
extra.
Driving is not as safe as flying.
Overnight hotel stays are common
for long distances.
Train:
Advantages:




Usually less expensive than flying.
Passenger can see the country as
they travel.
High-quality accommodations on
some trains.
Service to most major cities.
Disadvantages:


Frequent stops
Slower than air transportation for
most distances.
Buses have most of the same advantages
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and disadvantages as travel by train.
They are usually less comfortable than
trains and require overnight hotel stays
on long trips. Buses typically provide
service to more destinations than trains.
Boat:
Advantages:



Cruise ships usually have highquality accommodations,
entertainment, beautiful views, etc.
Service is offered to many islands
and countries.
Sometimes less expensive than air
travel. Travelers do not have to pay
for hotel accommodations.
Disadvantages:


Slow when you are trying to get to a
destination.
Can be more expensive than air
travel.
Is the substitute of better, For almost all trips automobiles, trains,
worse or equal
buses, and boats perform worse than
performance?
airlines in terms of the time it takes to
reach the destination. Air travel allows
passengers to move from city-to-city or
country-to-country in a fraction of the
time it takes a passenger traveling by any
other means of transportation.
Substitutes are an unlikely challenge to
the industry, in terms of performance.
Airlines have the ability to move
passengers from place to place much
quicker than substitutes can offer. This is
an opportunity for existing firms.
Business travelers especially rely on the
performance of the airline industry when
making up their own schedules.
Can buyers easily switch
to the substitutes?
Buyers can easily switch to substitutes.
In most cases, it is not hard for a buyer to
find other another means of
transportation.
Locating another means of transportation
as fast as flying is very unlikely.
Substitutes are a likely threat to the
industry, in terms of how easily buyers
can switch to the use of their services.
Substitutes are readily available and can
be attractively priced. This is a threat to
existing firms.
However, customers that need to arrive
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59
at a destination quickly cannot easily
switch to the substitutes without
jeopardizing or losing their chance of
arriving on time. This is an opportunity
for existing firms.
SUPPLIERS
Please note, that this section applies to
the companies that supply the industry
under analysis.
Is the item or service a
commodity available on
the open market from
many suppliers who are
capable of filling the
order?
Major supplies to the airline industry:
Aircraft- This item is not a commodity.
There are only two suppliers of large
commercial aircraft, Boeing and Airbus.
Maintenance tools- This item is not a
commodity. A small number of
companies provide specialized
equipment.
Most items airlines need to operate are
not commodities. This is a threat to the
airline industry. Suppliers are likely to
have bargaining power in this industry.
A small number of suppliers can fill
orders for aircraft, equipment, and fuel.
Airlines need to buy these items when
the price is right. When the prices of
these items increase it puts significant
pressure on the airline industry.
Airports- Airports are not a commodity.
A limited number of airports are
available and the space at each airport is
limited.
Food/beverages- Food and beverages are
commodities. They can be purchased
from a large number of suppliers. A
combination of low price and high
quality determines which supplier the
airline uses.
Fuel- Jet fuel is more of a commodity
than aircraft but it is still only offered by
a small number of companies.
Are there good
substitutes for the
product or service to
which the buyers can
easily switch?
There are no good substitutes for almost
all of the major supplies an airline needs.
Aircraft, and jet-fuel cannot be
substituted.
The lack of good substitutes for the
major supplies the airline industry needs
to operate is a threat to the industry. It
increases the bargaining power of
suppliers.
In some cases, an airline can chose a
The ability for the airline industry to
smaller airport away from a major airport switch to smaller less crowded airports
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60
to save on landing fees and gain access
to a crowded market.
and offer different foods and beverages
is an opportunity for the airline industry.
Airlines can normally find substitutes for
the particular food and beverages it is
currently offering.
Is the company a major
buyer?
Large airlines are major buyers of
Boeing or Airbus aircraft. Each airline
places orders that run into the billions.
These orders are often a strong
percentage of the supplier’s sales.
Neither supplier can afford to lose a
major airline as a customer.
The fact that each large airline is a major
customer of the aircraft supplier they
chose is an opportunity for the airline
industry. This reduces the power of
suppliers to raise prices or lower quality.
The success of the supplier is tied in with
the success of the airline.
Boeing and Airbus want their customers
to succeed because when the airlines that
buy their products are profitable, they
place additional orders and expand the
size of their fleet.
Even though each major airline is a
major buyer of jet fuel, the airlines do
have very little control over reducing
rising fuel costs. This is a threat to the
airline industry. High fuel costs will raise
costs and reduce the airlines profitability.
An aircraft supplier must maintain a
strong relationship with its customers or
risk losing the customers to the other
competitor.
Large airlines are also major buyers of
jet fuel, but they do not have much
power in terms of negotiating for better
prices. In order to save on jet fuel costs,
airlines must take advantage of hedging
fuel purchases.
Airlines purchase large quantities of food
and beverages and, depending on the
specific products and manufacturers they
use, they can negotiate better prices and
higher quality on some of these items.
Because airlines are major buyers of
food and beverage suppliers they can
negotiate with suppliers for better prices,
more favorable terms of sale and higher
quality. This is especially true when the
company they are purchasing from is
small in size or just starting out. This is
an opportunity for the airline industry.
The amount of power an airport has is
dependent on the location of the airport,
the number of other major airlines that
utilize the airport or wish to utilize the
airport, and the number of flights the
airline provides to or from that
destination. This can be an opportunity
or a threat to the airline industry.
Airlines are major customers of airports.
Each major airline pays a large amount
of airport landing fees. When airlines
discontinue service to a particular
airport, the airport loses those landing
fees.
Does the supplier
In the commercial aircraft manufacturing
Airlines can only purchase aircraft from
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61
dominate the industry?
(The supplier provides the
industry with an item that
accounts for a sizable
fraction of the costs of an
industry's product (or
service), is crucial to the
industry, or significantly
affects product quality.)
industry, one supplier alone does not
dominate the industry. Both Airbus and
Boeing are very large in size and
together they dominate the industry.
Aircraft manufactures provide the airline
industry with a product that makes up a
large portion of the airlines costs and is
needed in order for the airline to operate.
Changes in the quality of aircraft can
raise airlines costs and make an airline
less attractive to its customers.
Jet fuel is crucial to the industry, makes
up a large percentage of airlines variable
costs, and needs to be of a certain quality
for airlines to use it. A single jet fuel
supplier does not dominate the industry.
Airlines can purchase jet fuel from a few
different companies.
Major food and beverage suppliers do
not dominate the industry. Airlines can
still chose alternatives to most items.
Does an outside supplier
provide a cost advantage
over vertical integration?
The outside suppliers provide a cost
advantage over vertical integration. This
is true for the suppliers of jet fuel,
aircraft, and landing space (airports).
Suppliers have gained economies of
scale in many areas.
Food preparation is sometimes less
expensive when an airline performs this
activity rather than a supplier.
two suppliers. The cost of an airplane is
a large portion of an airline’s total cost.
Airplanes are not only necessary
equipment for an airline, but they also
affect the quality of the service an airline
can offer to its customers. Airbus and
Boeing compete with each other for
sales. Their success is tied to the success
of the airlines they supply. It is in their
interest to invest in technology and
improve their product so that they can
retain their buyers. Therefore, airplane
suppliers are not a threat to the airline
industry.
The supply of jet fuel is a threat to the
industry. Airlines can improve some of
the terms of sale by switching to other jet
fuel providers but the item is required
and its cost has a large influence on the
overall costs of the airline.
There is an opportunity for the airline
industry when it comes to food and
beverage purchases. Airlines can reduce
prices and improve quality by shopping
around for the best supplier.
Outside suppliers of aircraft and jet fuel
provide them at a fraction of the cost
airlines are able to. The suppliers lower
their costs by producing in large
quantities. These items require
specialized equipment and personnel and
a vast knowledge of the particular
industries. The capital requirement of
these industries is substantial. This is a
threat to the airline industry. Suppliers
can raise prices on these items to a
certain extent without having to worry
that airlines will start supplying
themselves.
Food preparation is an opportunity for
the airline industry. When suppliers raise
prices, airlines have the potential to
lower their costs by preparing their own
meals.
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Does an outside supplier
provide other advantages
over vertical integration?
Higher quality is another advantage that
suppliers provide over vertical
integration.
Suppliers have experience producing
their products and have learned the best
ways to improve product quality without
dramatically increasing cost. Because of
the quantity they produce suppliers can
afford to purchase the best technology to
increase product quality. Suppliers
spread the cost of this technology out
over a larger quantity of product.
What types of working
relationships exist? Are
these relationships of
strategic value for the
competitors in the
industry? If so, why and
how do the relationships
impact the competitive
structure and
environment of the
industry?
Types of working relationships:
What is the relative
quality of the supplier
and his services or
products?
The relative quality of the aircraft
suppliers is high. One of the ways
Boeing and Airbus compete is by
offering airlines new technology and
Airplane suppliers
Maintenance tool suppliers
Food and Beverage Suppliers
Advertising Suppliers
Financial Suppliers
Airports
Fuel Suppliers
The quality advantage outside suppliers
have over vertical integration is a threat
to the airline industry. Suppliers can
provide higher quality products than an
airline is able to produce. This gives
suppliers more bargaining power.
Developing working relationships with
suppliers is an opportunity for existing
firms in the airline industry. These
working relationships lead to lower costs
and increased profitability for some
airlines. The airlines with the best
relationships gain competitive advantage.
This increases rivalry in the industry.
These relationships are of strategic value
for the company. Without some of these
relationships airlines will not be able to
operate. Airlines with superior
relationships are able to negotiate lower
prices and better terms of sale. For
example, Continental received a partial
refund of $29 million from Boeing when
the airline canceled a $70 million dollar
order because Bethune had a strong
personal relationship with Ron
Woodward of Boeing. Rivalry is
increased as a result of these
relationships.
High quality suppliers are available to
firms in the airline industry. This is an
opportunity for these firms. Airlines can
utilize high quality supplies to provide a
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higher quality planes.
The relative quality of food and beverage
suppliers, advertising suppliers and fuel
suppliers is high because they compete
for the purchases of the major airlines by
offering a high quality product.
better product to their customers. Rivalry
in this industry is intense because all
competitors have access to most of these
suppliers.
Large airports maintain the quality of
their services to help prevent major
airlines from flying to smaller airports.
BUYERS
Please note, that this section applies to
the companies that purchase goods or
services from the industry under
analysis. Buyers include any purchaser
downstream from the industry.
What is the cost to the
buyer of switching to a
competitor or a
substitute?
The cost to the buyer of switching to a
competitor or a substitute is very low.
Buyers are not locked in. They can
choose a different airline or even a
different method of transportation
depending on their preferences.
The low switching costs buyers face are
a threat to the airline industry.
Competition in this industry is increased
as a result of this. Airlines need to focus
on satisfying customers needs better than
their competitors and firms offering
substitutes.
How many buyers are
there in this industry?
There are millions of buyers in the
airline industry.
The large number of buyers is an
opportunity for the airline industry.
Competitors can easily find other
customers to replace those that are lost.
Existing firms also have the opportunity
to gain a large number of buyers by
changing their product or service in a
way that satisfies a greater number
customer needs.
What is the relative size
(based on the amount
they purchase) of each
buyer?
Buyers are very small in this industry.
The total commercial airline revenue in
2000 was $98.1 billion. The majority of
ticket sales are less than $1000 each.
Each individual sale is a very small
percentage of the total revenue.
The relative size of buyers is an
opportunity for the airline industry. An
individual buyer has very little
bargaining power in this industry due to
the fact that they only contribute a very
small fraction of total industry revenue.
What is the buyer's
knowledge level?
The buyer’s knowledge level has
increased dramatically in the airline
industry. The internet has made it
possible for buyers to research the pros
and cons of each airlines service. Buyers
can quickly compare flight times, prices,
Knowledgeable buyers are a threat to the
airline industry. Buyers have more
barging power as a result of their
increased knowledge. This knowledge
also increases competition in the
industry.
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in-flight services, airline safety records,
etc. Because airline tickets are
considered to be major purchases by
many buyers, most will make the effort
to shop around for the airline that is the
most attractive to them. Before the
internet this information took much
longer to compile and review.
Can the buyers threaten
the industry with
backward integration?
Are the industry's
products discretionary
purchases?
The buyers cannot integrate backward
into the industry.
Backward integration is neither a threat
nor an opportunity in the airline industry.
The airline industry’s products are
discretionary purchases. When a buyer is
not satisfied with the current price of air
travel or services offered by airlines the
buyer can delay purchasing a plane
ticket, use another means of
transportation, cancel the trip, etc.
The fact that plane tickets are
discretionary purchases is a threat to the
airline industry. The buyer can chose to
fly or not to fly. This increases the power
buyers have in this industry.
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3. What is (and how are they) causing the industry's competitive structure and business environment to change?
Factors
Industry competitive structure
This factor is supposed to capture how the
drivers of change are altering the
industry's competitive structure.
Industry business environment
This factor is supposed to capture how the
drivers of change are altering the industry's
business environment.
Strategic implications
The competitive structure of an industry entails the number of suppliers, competitors and
buyers and the number of and complexity of the competitive relationships. For example,
an industry entering maturity causes fewer, larger competitors. This affects the industry's
structural arrangement between rivals, buyers, and suppliers. When the industry
approaches maturity or when it is in decline, the industry's business environment will
create intense rivalry for a diminishing market.
Internet and new ecommerce
opportunities
The internet and new e-commerce
opportunities are changing this industry’s
competitive structure.
Buyers in the past used travel agents to
book their flights and hotel stays. Now
buyers can easily log on to the internet to
find the latest flights, prices, and other
information, without the assistance of a
travel agent. It is very easy to compare
airlines and make an informed decision.
As a result, the number of travel agents
has decreased and the number of online
travel services like Expedia, has increased.
Many rivals have already entered into
agreements with online travel websites to
provide buyers with a variety of services
in hopes they will book a flight with their
airline. The relationship airlines have with
travel agents is weakening and new
relationships are being established with
The internet and new e-commerce
opportunities are helping airlines to lower
their costs. Setting up a website and
maintaining it is much less costly than
paying travel agent fees and providing
travel agents with incentives.
This driver of change has also increased
innovation. Airlines are continually looking
for new ways to market their product on the
internet. Some rivals have started websites
that offer a variety of services to consumers
in hopes that the consumer will chose to
book their flight on the site.
Airlines have made changes to their product
knowing that consumers will learn of these
changes on the Internet. For example, many
websites now exist that allow consumers to
compare airlines based on comfort,
convenience, performance, in flight
entertainment, etc.
The internet and new ecommerce technologies are
an opportunity for airlines
to increase revenue and
lower costs by encouraging
consumers to book flights
on-line instead of using a
travel agent.
Airlines have the
opportunity to increase
revenue by making changes
to their product and
developing a direct
relationship with consumers
by communicating with
them through the internet.
Airlines need to develop
relationships with online
travel services to attract and
retain customers.
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online travel service providers.
New internet technology and video
conferencing has made it possible for a
person in one location to communicate in
real time with another person on the other
side of the world. Not only can they
exchange dialogue, but they can also view
each other’s facial expressions and
reactions. This cuts down on the need for
air travel, especially business travel. The
higher the price of air travel, the more it
makes sense to set up online video
systems at company locations.
The internet is increasing buyer
knowledge and decreasing the number of
buyers in the industry. Pressure is
increasing for individual rivals to retain
and attract buyers by taking advantage of
e-commerce opportunities and offering
attractive prices and services. Rivalry
between individual airlines is increased
and some airlines will not be able to
operate profitably. The relationships with
suppliers change as the number of
individual rivals decreases and the
competition between remaining rivals
continues to increase. Some suppliers are
forced into bankruptcy when a large
airline they supply too begins having
financial problems and must reduce its
orders.
The internet and e-commerce also helps
airlines to increase their sales to existing
customers. Consumers that purchase their
tickets online via an airlines website
provide contact information that can be used
by the airline to notify the consumer of
future specials, discounts, new services, etc.
The internet and new e-commerce
opportunities have increased buyer
knowledge resulting in increased
competition in the business environment.
The increased buyer
knowledge and decrease in
demand because of new
video-conferencing
technology are threats to the
airline industry. They
negatively affect the
competitive structure. As
rivalry intensifies, the
airlines industry’s
profitability suffers and
some companies are forced
to file for bankruptcy.
New video-conferencing technology has
reduced the demand for air travel and this
too has increased rivalry in the business
environment.
Increased competition has caused some
rivals to have financial problems.
Many rivals have focused on international
markets as a way of increasing their
profitability.
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Increasing
globalization of the
industry
The globalization of this industry is
increasing. Many airlines have earned
profits by increasing the number of
international routes.
Air travel offers the quickest way for a
person in one country to meet face to face
with someone located overseas. As
education levels rise, people become more
curious about other parts of the world and
international air travel increases.
The increasing globalization of the airline
industry is altering the industry’s business
environment.
Airlines have to make changes depending
on where they are operating. Airlines need
to research the local regulations and
government actions. They need to look into
ways of reducing costs while serving
additional international markets.
The increasing
globalization of the industry
has created an opportunity
for firms to enter
international markets to
increase profits. Many
developing countries are
demanding more air
transportation.
As globalization increases,
new entrants threaten the
Competition is very intense within the
market share of firms
United States borders. As a result, many
already operating in
airlines are looking for opportunities to
international markets. As
serve foreign cities in order to increase
more firms enter these
revenues. The market for air travel is
Firms need to make decisions concerning
markets, rivalry will
mature in the United States, but that is not where to run their operation from and
increase and profits will
true in many developing countries. For
conduct maintenance procedures and how to fall.
example, China is an emerging market that attract and retain employees with the
will demand more air travel as business in necessary knowledge in these locations.
The political environment
China increases. Chinese citizens will
in many countries was
travel more as their discretionary income
As globalization increases, rivalry in many
affected by the events of
levels rise and more business men and
markets will increase. New firms will enter
September 11. This has
women will travel to and from China.
markets that rivals have found to be
reduced the number of
profitable. Firms already serving these
potential profitable markets.
Deregulation and other barriers to outside markets will have to fight to retain and
entry have been reduced or eliminated in
increase their market share.
many areas throughout the world. This
increases the number of markets airlines
can serve.
Airlines must look at the service they are
offering and see whether or not they can
make changes to attract customers in certain
markets.
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Globalization will increase the number of
buyers in the industry. The relationship
between an individual rival and buyer is
transactional.
Rivalry will increase in certain locations
where airlines have been able to make
profits. As new rivals enter markets
already served by existing firms, there will
be a battle for market share. The existing
firms will have first mover advantages.
Relationships with suppliers will also
change. Airlines will use the suppliers
with the highest quality and lowest cost.
New relationships will be established with
suppliers in different markets. Airlines
will look for opportunities to build strong
relationships with the suppliers that offer
them the most.
Long term industry
growth rate
The long-term growth rate in this industry
is low, as demand for air travel has
decreased. The industry has reached
maturity and the number of buyers has
decreased.
Existing firms are competing for market
share and intense competition has reduced
The long term industry growth rate has
altered the business environment by
increasing the pressure on rivals to lower
their costs, increase their sales and make
changes to the product that add value in the
eyes of consumers.
The long-term industry
growth rate threatens
existing firms. Firms must
look for opportunities to
attract new customers and
retain the their existing
ones.
Increased rivalry results in fewer firms
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the number of individual rivals. Major
airlines have acquired or merged with
weaker airlines. Quite a few airlines have
filed bankruptcy over the years and are no
longer operating.
competing for market share.
With fewer individual rivals there is less
of a need for supplies and the number of
suppliers has decreased. When major
airlines go out of business, some of their
suppliers are also forced into bankruptcy
because a large airline is often a major
customer to a supplier. Remaining
suppliers have less bargaining power
because they have fewer customers.
Airlines in strong positions
need to look for
opportunities to acquire
weaker airlines to gain
market share.
Almost all airlines can
benefit from entering into
code-sharing agreements
and other strategic
alliances.
Individual rivals are serving fewer buyers
and placing smaller orders with suppliers.
There is a transactional relationship
between both individual rivals and buyers
and between suppliers and individual
rivals.
Firms have the opportunity
to gain market share by
making changes to their
product and/or increasing
sales to customers they are
already serving.
Buyers have power because of increased
knowledge. Airlines must compete by
reducing their price or offering superior
customer service to attract or retain
buyers.
Who buys the product
and how do they use it
Air travel was much more expensive in the
past than it is today. Competitive pressure
has forced prices down and more people
are now able to afford to fly. More people
are now using air travel for short distances
and vacations.
Airlines must develop
aggressive strategies to
attract customers from
airlines that have gone out
of business.
The changes in who is buying the product
and how they are using it changes the way
competitors try to gain market share.
Some competitors have focused on
differentiating their product by offering
larger overhead bins, first class priority
Changes in who buys the
product and how they use it
are decreasing the
profitability of many
airlines in the industry.
Airlines that do not
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Companies like Southwest that offer no
frills flights do not require as many
suppliers. They do not serve meals on
their flights. Many airlines have reduced
costs in order to lower prices and attract
more customers.
Other airlines have taken the opposite
approach by offering greater luxury on
their flights. These airlines look for high
quality suppliers to satisfy the needs of
customers that do not mind spending more
money for greater frills.
With some competitors offering lower
prices, competition between individual
rivals has increased and some rivals have
not been able to survive. Rivals are
targeting different demographics now in
order to try and increase market share.
baggage check in, luxurious seating,
superior frequent flyer programs, etc. These
competitors are targeting business
passengers. Rivalry among firms targeting
business passengers has increased because
the demand for business travel is
decreasing.
successfully lower their
costs or differentiate their
product will eventually lose
market share.
Other competitors have focused on reducing
all costs to enable them to charge the lowest
prices in the industry. These competitors are
targeting customers that cannot afford the
added luxurious or do not think they add
value. Some business passengers are flying
on these low frills flights to reduce their
company’s costs.
Because of this change driver, firms often
have to alter their services while at the same
time lowering their costs to remain
competitive.
The number of suppliers overall has
decreased as a result of this but some of
the supplier relationships have grown
stronger because airlines can gain an
advantage by forming alliances with low
cost or high quality suppliers.
Product innovation
Product innovation has altered the
industries competitive structure. Existing
rivals have searched for ways to gain
market share by making changes to their
product.
Low fare/no frills flights have caused
increased rivalry and so have minor
Product innovation has made it possible for
a larger number of buyers to fly. New
innovations will attract buyers from one
airline to another.
The intense rivalry that
product innovation is
creating is a threat to the
airline industry.
As a buyer’s needs change, product
innovation becomes more common. There
is now more pressure on rivals to retain
Product innovation will
cause some rivals to lose
market share and most
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changes like increased carry-on luggage
capacity.
The increased rivalry as a result of product
innovation has caused a reduction in the
number of rivals and the number of
suppliers. Some relationships with
suppliers have been weakened and some
have been strengthened depending on
what is needed to put the new innovation
into place.
existing customers and provide superior
customer service.
Product innovation has helped some
companies lower costs, increase
profitability, and gain market share. Rivalry
has been intensified as a result of this.
rivals will retaliate.
Rivals need to focus on
strategies based on
differentiation and lowering
costs.
Rivals must make sure that
consumers know about new
innovations to their
products.
Some competitors have been able to
increase their number of buyers by
satisfying customer’s needs in a way
superior to that of rivals.
Technological change
Technological change is altering the
industry’s competitive structure. New
technology reduces the number of buyers
in the airline industry. Increases in video
conferencing technology and other
communication systems will make air
travel less necessary.
New technology also increases buyer
knowledge. Buyers can now use the
internet to find the lowest prices for air
travel and can compare flight times, safety
records, the amount of time it takes to
reach the destination, etc. Increases in
buyer knowledge will increase rivalry
between competitors. Rivals must now
monitor their competitors even more
closely to determine what they are
offering. Rivals cannot charge higher fares
Technological changes will alter the
business environment by changing the way
airlines operate.
Increased buyer knowledge will change the
way competitors market their service.
New technology will enable airlines to
differentiate their product in innovative
ways and decrease costs.
Rivalry will increase as firms purchase the
new technology directly or purchase firms
with the new technology.
Technological change is a
threat to the airline industry
because new technology is
often very expensive and is
usually only supplied by a
limited number of suppliers.
Increases in video
conferencing technology
and other similar
communication systems
result in fewer buyers in the
industry. This is a threat to
the industry.
New technology that results
in increased buyer
knowledge is a threat to the
airline industry. With more
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than the rest of their competitors without a
large number of buyers finding out.
Increased buyer knowledge results in more
bargaining power for buyers.
New technology has enabled airlines to
improve their internal information
systems, scheduling, quality, maintenance
procedures, safety records, etc. New
technology is often highly specialized.
Rivalry is increased as technology changes
because competitors must try to take
advantage of new technology before their
rivals and compete for a smaller number
of buyers.
It can be very expensive for firms to
purchase the new technology, but firms
that do not will be at a disadvantage.
Alliances with the suppliers of new
technology are often important.
knowledge, buyers have
more bargaining power.
Potential relationships
between suppliers of the
new technology and the
individual airlines will
increase rivalry and threaten
the industry as well.
Backward vertical
integration usually does not
provide an opportunity for
firms to lower their costs
because of the complexity
of the new technology. This
increases the power
suppliers have and is a
threat to the industry.
Some technology can reduce the need for
certain suppliers and increase the need for
others.
In general, new technology will reduce the
number of buyers and decrease the
number of individual rivals that are able to
survive. The number of suppliers will
decrease as the quality of supplies
demanded by individual rivals decreases.
The relationship between individual rivals
and buyers is transactional.
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Marketing innovation
Marketing innovation in this industry will
increase the rivalry between airlines.
Marketing innovation has helped airlines
to differentiate their product and increase
the number of buyers purchasing their
tickets. This has also helped many airlines
to lower their total costs. Some of the
airlines with lower costs have been able to
use this position to lower prices and attract
buyers. Because of their low cost floors,
these airlines have been able to still make
a profit.
Rivals have the opportunity to use the
internet to reduce travel agency fees and
lower costs. There is intense competition
with rivals to form alliances with online
travel services.
Marketing innovation has forced airlines to
make changes to their strategies to remain
competitive.
Rivals have had to respond to competitors
by lowering prices and/or differentiating
their products.
Marketing innovation in
this industry puts additional
pressure on firms to lower
their prices and/or
differentiate their products
or risk lower profitability.
As more companies start taking advantage
of a marketing innovation, rivalry also
increases.
Marketing innovation is a
threat to the airlines. Firms
need to focus on looking for
ways to lead the industry in
marketing innovation and
aggressively responding to
other competitors marketing
initiatives.
The entry of major firms with innovative
ideas about how to attract customers and
The small number of new
entrants is an opportunity
A marketing innovation that causes one
rival to increase market share, increases the
rivalry in the industry.
In this industry, marketing innovation will
increase the competitive pressure for rivals
to gain buyers but the total number of
buyers will not increase significantly.
The relationship between buyers and
individual rivals is transactional.
Individual rivals will go out of business
and this will reduce the quantity of
supplies needed. Suppliers will eventually
shut down due to lost sales. The
relationship between individual rivals and
suppliers is transactional.
Entry of major firms
The entry of major firms into the airline
industry is not common. However, when it
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Exit of major firms
Diffusion of technical
know-how
does occur it causes competition between
individual rivals to increase. New firms
can change the industry by introducing
new ways of operating. With new entry
the number of buyers will remain the
same, but now more rivals will be trying
to compete for their business. The quantity
of supplies demanded will stay the same
as well. The quantity individual rivals
purchase will change as buyers switch
airlines. The strength of the relationships
between suppliers, individual rivals and
buyers will all weaken.
run a successful airline will alter the
business environment. A new firm will
often change the way existing firms
compete and what strategies they use.
for the airline industry.
The exit of major firms in this industry
causes the remaining firms to compete for
the business of the exiting firms
customers. The exit of major firms
changes the industry’s structure by
reducing the number of firms and possibly
changing who the industry leaders are.
The number of buyers in the industry
remains the same and the number of
supplier’s decreases. The exiting firms
buyers and suppliers will develop
transactional relationships with the
remaining individual rivals.
The exit of major firms alters the business
environment. Competition will increase as
the remaining firms focus on strategies to
attract the exiting firm’s customers. Firms
will offer promotions and reduced prices to
increase their market share.
The exit of major firms is
an opportunity for
remaining rivals to increase
their share of the market.
The diffusion of technological know-how
changes the industry’s structure over time.
It takes a while for new firms to learn the
most efficient ways of operating and the
techniques to use for gaining market share.
Over time, rivalry increases as technical
know-how spreads and the number of
The diffusion of technical know-how will
change the business environment over time
as the technical know-how spreads.
The diffusion of technical
know-how is a threat to the
industry. Firms need to
constantly look for more
effective ways of operating
and when they discover one
they must protect the new
Technical know-how will allow firms to
have lower costs floors and/or come up with
new innovations. Technical know-how can
However, when a major
new firm does chose to
enter the industry, it will
cause competition in the
industry to increase and
existing firms will have to
focus on maintaining their
market share.
The exit of major firms is
also a threat to the industry
because of the increased
competition. Rivals will use
whatever methods they can
to battle for the exiting
firms customers.
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rivals that is able to survive decreases. A
firm that is able to gain a competitive
advantage because of technical know-how
will not be able to hold onto it forever. As
employees leave and news spreads, all of
the existing firms will be able to begin
copying the successful firms operations.
The diffusion of technical know-how does
not affect the number of buyers in the
industry but does reduce the quantity of
suppliers in the industry as increased
competition reduces the number of rivals
that are able to survive. The relationships
between individual rivals and suppliers are
weakened.
Cost and efficiency
Cost and efficiency are altering this
industries competitive structure. In the
airline industry, there is a lot of emphasis
on improving this factor. There is a
widening difference between competitors
in this industry. A few airlines have much
lower costs and higher efficiency than
other airlines.
The result of this widening difference is
increased competition. The airlines with
the lower costs are reducing prices,
gaining market share, and making an
attractive profit.
This affects the competitive structure of
the industry by reducing the number of
individual rivals. Rivals with high costs
will not be as competitive. Some
gives some firms an advantage that will
help them expand internationally.
Firms without the knowledge will put
strategies in place to obtain it.
The firms with the knowledge will have
strategies designed to prevent the technical
know-how from spreading.
knowledge. Protecting their
technical know-how can be
costly.
Employees leaving the
company and the moves
rivals make constantly
threaten competitive
advantage from technical
know-how.
As the technical know-how is diffused,
more firms will begin altering their
strategies to use the knowledge to their
advantage.
Reductions in costs and increases in
efficiency have caused competition in this
industry to increase. More rivals are now
focusing on reducing costs so that they are
able to lower prices to compete with no
frills airlines and still make some profit.
Most airlines are careful when they
differentiate their product to make sure that
the changes add value to the product in the
eyes of consumers.
Changes in costs and
efficiency are a threat to
this industry. This is a very
important force in this
industry. Low cost airlines
are gaining market share
from competitors and the
competition that results is
threatening many rivals
profitability.
Rivals need to lower their
costs in order to remain
profitable when they lower
their prices.
Rivals that are unable to
lower their costs or
differentiate their products
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76
companies will enter into agreements with
suppliers to lower their costs as much as
possible to avoid financial problems.
Rivals will also focus on improving
customer service and adding value to their
product to attract and retain as many
buyers as possible.
Growing buyer
preferences for
differentiated products
instead of a commodity
product
Growing preference for differentiated
products instead of a commodity product
is a factor in this industry. Rivals that have
made changes to their product such as
larger carry-on luggage bins, higher
quality food, and priority baggage
handling have been able to increase their
sales.
This has caused relationships between
individual rivals and suppliers to change.
It can lead to an increase or decrease in the
quantity of suppliers depending on what
changes customers value the most.
Innovations can attract new buyers to the
industry.
in a way that adds value in
the eyes of customers will
not be competitive.
There is an opportunity for
rivals with the lowest cost
floors to increase market
share by reducing their
prices and still remain
profitable.
Growing buyer preference for differentiated
products instead of a commodity product
causes competition to increase as individual
rivals try to meet the needs of the customer
in a way superior to that of their
competitors. The ability for some
companies to increase market share by
offering no frills service or making changes
to aircraft and services puts pressure on
other competitors to focus on differentiation
and/or lowering costs.
Growing buyer preferences
for differentiated products
instead of a commodity
product is an opportunity
for firms that have the
capability to respond to
customer needs.
Changing consumer needs
are a threat to the industry
because firms must monitor
these needs and constantly
be looking for ways to
improve their product. The
costs associated with
identifying these needs and
responding to them can be
very high. Rivals must also
be aware of the way other
competitors are trying to
meet customer’s needs.
The growing need for low
priced no frills air travel has
caused many firms to focus
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77
on reducing costs so that
they are able to show a
profit when they lower their
ticket prices.
Regulatory and
government policy
changes
In 1978, deregulation dramatically
changed the competitive structure of the
airline industry. Competition increased
and this helped to drive down prices.
Many rivals ended up filing for
bankruptcy and eventually exited the
industry. This led to a reduction in the
number of suppliers and the relationship
between remaining airlines and their
suppliers became transactional in nature.
Deregulation has altered the business
environment in the airline industry by
increasing competition. Increased
competition has put tremendous pressure on
airlines to lower costs and focus on
increasing sales by differentiating their
product and offering incentives to existing
customers. Airlines have also focused on
international expansion into markets with
less competition.
The number of buyers increased since
more people were now able to afford to fly
with the lower ticket prices.
New mandatory safety and security
regulations have caused airlines to focus on
reducing other costs to avoid having to
increase their ticket prices to pay for the
changes.
Deregulation and other government
actions to increase foreign participation in
markets have increased.
After September 11, new mandatory
safety and security regulations increased
the costs airlines had to pay. Some
suppliers were eliminated because airlines
decided to cut nonessential supplies and
use the costs savings to pay for the new
changes.
Societal concerns,
attitudes and lifestyle
changes
Societal concerns about the safety of air
travel immediately following the attacks
of September 11 had an effect on the
Societal concerns, attitudes, and lifestyle
changes have increased rivalry in this
industry. Competitors are under pressure to
Regulatory and government
policy changes are a threat
to the industry.
Deregulation resulted in
increased competition and
lower profitability for many
airlines.
New safety and security
regulations have increased
costs and are a threat to
airlines financially.
Some regulatory and
government policy changes
in foreign countries are an
opportunity for the industry.
These changes have made it
possible for an airline to
serve new international
markets.
Societal concerns, attitudes,
and lifestyle changes are a
threat to this industry.
Thompson, Arthur and Strickland, A.J. Strategic Management: Concepts and Readings. McGraw-Hill Irwin. NY. 12th Edition
78
competitive structure of the industry. This
concern has decreased since that time.
People have changed their attitudes about
the amount of time they are willing to wait
to board a plane.
Societal concerns reduced the number of
buyers in the industry and increased
rivalry between individual airlines. Some
airlines reduced the quantity of supplies
they were demanding. There are
transactional relationships between both
buyers and individual rivals and suppliers
and individual rivals.
Reductions in
uncertainty and risk
Reductions in uncertainty and risk have
occurred in the airline industry. This
industry has reached maturity. The airline
industry has many large firms of similar
size competing for market share. Firms
have a clear idea about the size of the
market, the time and money needed to fix
problems and the distribution channels.
not only increase or maintain their own
market share but also to ensure all
customers that it is safe to fly.
Safety concerns have caused airlines to
focus on innovative ways to increase the
safety of their aircraft. Airlines have had to
look for new ways to reduce costs while
still ensuring customers safety.
This driver of change has also affected
firm’s decisions to expand internationally.
After the attacks, more people were afraid
to travel internationally.
Reductions in uncertainty and risk have
increased the number of large firms
operating in this industry and rivalry is
intense. Airlines have merged with other
rivals or acquired them. Firms are using
similar strategies to increase market share.
Airlines need to focus on
making sure that consumers
view air travel, as a safe
means of transportation or
the entire industry will
suffer.
Airlines must constantly
pay attention to any new
changes and adapt
accordingly.
Reductions in uncertainty
and risk have caused new
firms to enter the market
resulting in increased
competition. This is a threat
to the industry. Firms need
to focus on strategies that
will help them retain
customers and build a
competitive advantage.
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79
4. Which companies are in the strongest/weakest positions?
Strategic Group Map: Quality of Service Rankings
Southwest
High
Continental
Northwest
American
US Airways
Medium
A. West
Delta
Alaska
TWA
Low
United
Narrow
Broad
Market Scope
Thompson, Arthur and Strickland, A.J. Strategic Management: Concepts and Readings. McGraw-Hill Irwin. NY. 12th Edition
80
Quality of service is based on each company’s average ranking in terms of the “percentage of scheduled flights arriving within 15 minutes of the
scheduled time, mishandled baggage reports per 1,100 passengers, involuntary denied boardings per 10,000 passengers due to oversold flights, and
complaints per 100,000 passengers boarded.”
The quality of service strategic group map makes it easy to identify which competitors are focusing on a broad or narrow market and have poor or
high quality of service. Because Southwest has the highest average quality of service rating, it falls in a section of this map away from other
competitors. Southwest uses this position to improve its profit potential. Southwest provides a high quality of service in a national market.
American, U.S. Airways, United, and Delta are all very close rivals offering customers roughly the same quality of service and serving a broad
market. These rivals are all a threat to each other and all have limited profit potential. United has the poorest service, but the largest market share.
Continental has tried to distance themselves from this group by improving their service levels. They have improved the quality of their service in
order to increase their profit potential.
America West and Alaska are also relatively close on this strategic map. They offer about the same quality of service to a narrow market and they
are a direct threat to each other. Northwest has improved their service and moved away from this group. Northwest also focuses on a broader
market.
The rivalry is the strongest on the right side of the map where there are several large competitors serving a broad market. The industry’s
competitive forces and driving forces are a threat to the companies with the lowest quality of service rankings. These companies are in the weakest
positions. With new technology buyers now have more information than ever before. They can compare airlines much easier and chose the airlines
with the highest service levels. There are also fewer buyers because of new communication technology. Airlines need to focus on customer service
to attract and retain these buyers. Customer service is an opportunity for firms to distinguish themselves from other close competitors.
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81
Strategic Group Map: Average Sale
High
TWA
United
American
Medium
Continental
Northwest
Alaska
US Airways
A. West
Delta
Low
Southwest
Narrow
Broad
Market Scope
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82
The average sale strategic group map makes it evident that there is a large group of companies with a large percentage of the market all clustered
together. TWA, American, Continental, US Airways, Delta, and United are all close rivals and they are a threat to each other. These rivals have
limited profit potential and they are in the weakest positions because of this intense rivalry.
Southwest is separated from this group because of the low prices they charge for their flights. Southwest only offers domestic service, which also
brings down their average sale. Because they only operate in a national market they can gain costs savings from only using a single type of
aircraft. They have made costs savings a part of their culture and they are a threat to all industry participants operating in the United States.
Southwest has passed their costs savings on to customers and dramatically increased the number of passenger they serve. This increase in
passengers helped Southwest improve its profit potential. Southwest is in the strongest position.
Alaska and American West are also clustered together. They are not much of a threat to the rest of the industry. Their average sale figures are in
the middle and they serve a limited number of destinations. Northwest is a threat to this group given its close proximity. Northwest has a much
larger market share than Alaska and American West.
Most driving forces and competitive pressures in this industry favor the strategic groups with the lowest costs. Companies that are already
operating in many international markets (like most located in the large group on the right of the map) have the potential to gain first mover
advantages and gain a significant share of the individual markets before competitors move in.
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83
United is well
entrenched. United
is number one in
operating revenues
out of the top U.S.
commercial airlines.
Their individual
growth rate is
slightly less than the
industry average.
They have the third
highest number of
passengers carried.
United’s
strategic
posture is a
combination of
offense and
defense.
What does this mean in terms of
their most likely moves?
United’s
market share
objective is to
hold on to it’s
present share
while looking
for
opportunities
to expand via
international
mergers and
acquisitions.
What is their competitive strategy
(low cost, differentiation, broad
or narrow, best value)?
United’s
strategic
intent is to
maintain it’s
position.
What is their strategic posture
(offensive, defensive, both)?
What is their market share
objective (aggressive expansion,
expansion via internal growth,
expand by acquisition, hold
present share, give up share)?
Multicountry
What is their competitive position
(getting stronger, well
entrenched, stuck in the middle,
going after different market
position, losing ground,
retrenching)?
What is their strategic intent
(dominant leader, overtake the
leader, top 5, move up a position,
maintain position, survive)?
United
What is the competitive scope of
each (local, regional, national,
multi-country, or global)?
List the competitors
5. What strategic moves are rivals likely to make next?
United’s
competitive
strategy is to
serve a broad
market and
focus on
differentiation.
United will most likely make
changes internally to increase
their profitability. They
already have the highest
operating revenues in the
industry and carry the third
highest number of passengers.
In order to maintain their
position and increase
profitability, they will likely
enter into new markets both
domestically and
internationally. This is a threat
to existing firms already
serving these markets.
Their size also makes them a
threat to the rest of the
industry.
United’s percentage of on-time
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84
arrivals has decreased, their
number of involuntary denied
boardings has increased and
their number of passenger
complaints has increased.
They will likely try to improve
these figures or risk losing
customers. Until these figures
are improved, there is an
opportunity for other firms to
lure passengers away from
United.
American
Multicountry
American’s
strategic
intent is to
become the
dominant
leader.
American’s
market share
objective is to
expand
aggressively
via internal
growth and
domestic and
international
mergers and
acquisitions.
American’s
competitive position
is getting stronger.
Between 1999 and
2000 they grew at a
rate greater than the
industry growth rate.
American had the
second highest
number of
passengers carried in
2000. They were
number two in
operating revenues
out of the top U.S.
commercial airlines.
American’s
strategic
posture is
mostly
offensive.
American’s
competitive
strategy is to
serve a broad
market and
focus on
differentiation.
American will likely enter into
new markets, both
domestically and
internationally, in an attempt
to increase their market share
at the expense of rivals.
American has acquired Trans
World Airlines and will look
for other opportunities to
expand via mergers and
acquisitions.
They are a large airline with a
strong market share trying to
increase the number of
passengers they carry and their
operating revenue. They are a
threat to the rest of the
industry.
They will likely try to lower
their costs to increase their
Thompson, Arthur and Strickland, A.J. Strategic Management: Concepts and Readings. McGraw-Hill Irwin. NY. 12th Edition
85
profitability.
Delta
Multicountry
Delta’s
strategic
intent is to
maintain
position.
Delta’s market
share
objective is to
hold on to its
present share
while looking
for
opportunities
to expand via
international
mergers and
acquisitions.
Delta is well
entrenched. Delta is
number three in
operating revenues
out of the top U.S.
commercial airlines.
Their individual
growth rate is less
than the industry
average. They have
the highest number
of passengers
carried.
Delta’s
strategic
posture is a
combination of
offense and
defense.
Delta’s
competitive
strategy is to
serve a broad
market and
focus on low
costs.
Delta has a large share of the
market and will likely look for
ways to improve customer
service and retain their
passengers. They are a threat
to the rest of the industry.
Delta is also likely to review
the routes they are flying and
remove unprofitable flights
from their schedule. They are
flying the most passengers but
they do not have the highest
revenues or the profits that
some of the other airlines have
been able to earn.
They are likely to enter into
code-sharing agreements and
other alliances to reduce their
costs.
Northwest
Multicountry
Northwest’s
strategic
intent is to
move up a
position.
Northwest’s
market share
objective is to
expand via
internal
growth and
international
mergers and
acquisitions.
Northwest’s
competitive position
is getting stronger.
Between 1998 and
2000, Northwest
grew at a rate
greater than the
industry growth rate.
They are number
four in terms of
Northwest’s
strategic
posture is a
combinatio
n of
offense and
defense.
Northwest’s
competitive
strategy is to
serve a broad
market and
focus on low
costs.
Northwest is a threat to the
industry. They are growing at
a rate higher than the industry
average and they have the
fourth largest share of the
market.
They are likely to focus on
improving customer service
and expanding into new
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86
operating revenue
out of the top ten
U.S. commercial
airlines.
They carry the 6th
highest number of
passengers and have
the highest debt to
total capital
percentage.
Continental
Multicountry
Continental’s
strategic
intent is to
move up a
position or
two.
Continental’s
market share
objective is to
expand via
internal
growth.
Continental’s
competitive position
is getting stronger.
They are making
moves to gain
market share. Their
individual growth
rate exceeded the
industry growth rate
in each year between
1995 and 2000.
They ranked five out
of the top U.S.
commercial airlines
in terms of operating
revenues.
Continental has the
third highest debt to
total capital
percentage.
markets.
They will likely look for ways
to reduce their debt.
Recessions will cause
Northwest to have financial
problems. During times of
recession, Northwest is likely
to make aggressive moves to
increase revenues. This is a
threat to the industry.
Continental
’s strategic
posture is
mostly
offensive.
Continental’s
competitive
strategy is to
serve a broad
market.
Continental
has focused
on increasing
the number
of profitable
routes both
domestically
and
internationally. They are
also targeting
business
customers
because they
are more
likely to pay
for added
frills.
Continental is a threat to the
industry. They are growing at
a rate well above the industry
average. They are likely to
continue improving customer
service and gaining
passengers.
They are likely to enter into
more code-sharing agreements
and alliances and expand their
regional service to more
destinations.
They will become more of a
threat to existing firms
operating internationally as
they enter into more European
cities.
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87
They have a
best-cost
provider
strategy.
US
Airways
Southwest
Multicountry
NationalThey
serve the
US Airway’s
strategic
intent is to
move into a
position in
the top five.
Southwest’s
strategic
intent is to
US Airway’s
market share
objective is to
expand via
internal
growth.
Southwest’s
market share
objective is to
US Airways is stuck
in the middle, but
they are trying to get
stronger. They are
number six in terms
of operating revenue
out of the top ten
U.S. commercial
airlines. They are
number five in terms
of the number of
passengers carried.
They have the
second highest debt
to total capital
percentage and they
have grown at a rate
below the industry
average. However,
their growth rate
between 1999 and
2000 was the fourth
highest individual
growth rate. US
Airways has also
improved their
customer service.
US
Airway’s
strategic
posture is a
combination of
offense and
defense.
Southwest’s
competitive position
is getting stronger.
Southwest’
s strategic
posture is
US Airway’s
competitive
strategy is to
serve a broad
market and
focus on
differentiation.
US Airways is a threat to the
industry. They are likely to
challenge companies for a
position in the top five.
They are likely to continue to
grow at a rate greater than the
industry and increase the
number of passengers they
carry.
Their debt to total capital
percentage is very high and
they are likely to focus on
lowering their debt.
US Airways is likely to focus
on finding ways to improve
their profitability.
In a recession, US Airways is
likely to have financial
problems and make aggressive
moves to gain revenue.
Southwest’s
competitive
strategy is to
Southwest is a large threat to
the industry. Southwest is
likely to continue growing at
Thompson, Arthur and Strickland, A.J. Strategic Management: Concepts and Readings. McGraw-Hill Irwin. NY. 12th Edition
88
United
States
only.
maintain
their position
as dominant
leader.
continue to
expand via
internal
growth.
Southwest has a
record of having
over twenty-five
consecutive
profitable quarters.
Their individual
growth rate has far
exceeded the
industry growth rate
in each year between
1995 and 2000.
They ranked 7th in
operating revenues
out of the top U.S.
commercial airlines.
Their debt to total
capital percentage is
the lowest out of the
top nine major
airlines.
mostly
offensive
with some
defensive
moves.
focus on low
costs and
serve only a
national
market.
rates that far exceed the
industry growth rates. They
will continue to look for ways
to increase passenger traffic
and their profit margin.
They are number one in terms
of quality of service and they
are likely to try and maintain
this position.
They are not a threat in
international markets because
they only operate within the
United States.
They have very little debt and
are likely to survive during
recessions.
Their low pricing strategy is
likely to continue in the future
and pressure other rivals to
lower their prices to compete.
They are likely to continue
entering more domestic
markets.
TWAAmerican
Multicountry
TWA’s
strategic
TWA’s
market share
TWA was losing
ground for a while.
TWA’s
strategic
TWA’s
competitive
American Airlines acquired
TWA. American Airlines is
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89
Airlines
acquired
them.
America
West
North
AmericaThey
serve
United
States,
Canada,
and
Mexico.
intent was to
try to
survive.
objective was
to expand via
internal
growth. They
were likely to
make
aggressive
moves to
minimize
loses.
Their average
growth rate was
much lower than the
industry average.
They were number
eight out of the top
ten U.S. commercial
airlines in terms of
operating revenues.
Their customer
service ratings were
going down year
after year.
posture
was mostly
defensive
although
they were
likely to
take some
risks to try
and
survive.
strategy was
to serve a
broad market.
They had a
best-cost
strategy.
likely to become more of a
threat as a result of this
transaction. American Airlines
is now larger in size and
carries more passengers.
America
West’s
strategic
intent is to
try to
survive.
America
West’s market
share
objective is to
expand via
internal
growth.
America West is
trying to get
stronger. They have
grown at a rate
above the industry
average. They are
number nine out of
the top ten U.S.
commercial airlines
with the second
lowest number of
passengers carried.
They have a very
high number of
passenger
complaints and
involuntarily denied
boardings.
America
West’s
strategic
posture is
mostly
defensive.
America
West’s
competitive
strategy is to
serve a
narrow
market and
focus on low
costs.
America West is a threat in
some markets, but not a major
threat in the industry. They
have lower costs than some
rivals but they also have a very
poor service record in some
areas. They serve a relatively
small number of passengers
compared to other major
airlines.
They are likely to continue to
expand and grow at an average
rate higher than the industry
average.
They are likely to adapt their
strategies as rivals announce
their plans.
They are likely to try and pass
their low costs on to customers
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90
in the form of lower ticket
prices. For this to happen, they
need to increase revenue.
Alaska
North
AmericaThey
serve the
United
States,
Canada,
and
Mexico.
Alaska’s
strategic
intent is to
try to
survive.
Alaska’s
market share
objective is to
expand via
internal
growth.
Alaska is struggling.
They are losing
ground to other
competitors. They
have the lowest
number of
passengers carried,
the lowest operating
revenues out of the
top ten U.S.
commercial airlines
and their growth rate
fell below the
industry rate
between 1999 and
2000.
Alaska’s
strategic
posture is
mostly
defensive.
Alaska’s
competitive
strategy is to
serve a
narrow
market and
focus on
differentiation.
Alaska is a threat in some
markets in the United States,
Canada, and Mexico, but not a
large threat to the entire
industry.
Alaska is likely to try and
improve their service ratings
and attract more passengers.
They do not have the resources
that some of the other airlines
posses to accomplish this.
They are likely to respond to
the moves rivals make in
whatever way they can.
They are likely to look for
opportunities to enter into
agreements with other airlines
to lower expenses and increase
revenue.
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Delta
What does
this mean?
What is their capability for
this factor?
American
What does
this mean?
What is their capability for
this factor?
United
What does
this mean?
What is their capability for
this factor?
You can provide your justification for
selecting the KSFs underneath the
KSK.
What is their capability for
this factor?
6. What are the key factors for competitive success (in this industry)?
How does each competitor fare on each success factor?
Northwest
What does
this mean?
Technology related KSFs
Scientific research and expertise
Technical capability to make
innovative improvements in production
processes
Product innovation quality
Expertise in a given technology
Internet expertise
Manufacturing (production of the
product or service) related KSFs
Low-cost production efficiency
Manufacturing quality
Thompson, Arthur and Strickland, A.J. Strategic Management: Concepts and Readings. McGraw-Hill Irwin. NY. 12th Edition
92
High fixed asset utilization
In the airline industry, high fixed asset
utilization is critical. An airplane costs
a company millions of dollars. The
costs of flying that airplane from one
destination to another are also
substantial.
Airlines need to generate enough
revenue per flight to cover the costs of
that flight. Airplanes that are flying
with many empty seats are not being
used wisely.
Airlines can increase their profitability
by utilizing their aircraft in the most
effective way possible. This includes
reducing turnaround time at airports,
flying only profitable routes, using
smaller planes when passenger traffic
is low, etc.
United’s
capability for
this
factor is
average.
This
determination is
based on
the
number
of
airplanes
they had
in 2000
and the
number
of
passengers
carried.
Balance
sheets
and
operating
statistics
are
needed
for a
more
accurate
conclusion.
United is
not using
their fixed
assets to
the best of
their
ability.
This is an
opportunity
for other
firms.
United can
improve
it’s fixed
asset
utilization
by
reducing
the size of
the planes
in it’s fleet.
Purchasing
a different
type of
aircraft can
reduce
excess
capacity on
flights.
American’s
capability for
this
factor is
below
average.
This
determination is
based on
the
number
of
airplanes
they had
in 2000
and the
number
of
passengers
carried.
Balance
sheets
and
operating
statistics
are
needed
for a
more
accurate
American
needs to
focus on
improving
its fixed
asset
utilization.
American
will
increase its
profitability
by reducing
the size of
its fleet.
Delta’s
capability
for this
factor is
very
good.
This
determination is
based on
the
number of
airplanes
they had
in 2000
and the
number of
passengers
carried.
Balance
sheets and
operating
statistics
are
needed for
a more
accurate
conclusion.
Delta is a
threat to
other firms
in the
industry.
They are
able to
keep their
costs down
and carry
more
passengers
with a
smaller
investment.
Northwest’s
capability
for this
factor is
good.
This
determination is
based on
the
number of
airplanes
they had
in 2000
and the
number of
passengers
carried.
Northwest
is a threat
to other
firms.
They are
utilizing
their assets
more
efficiently
than other
competitors in the
markets
they are
operating
in.
Balance
sheets and
operating
statistics
are needed
for a more
accurate
conclusion.
Thompson, Arthur and Strickland, A.J. Strategic Management: Concepts and Readings. McGraw-Hill Irwin. NY. 12th Edition
93
conclusion.
Low cost plant locations
Access to adequate supplies of skilled
labor
High labor productivity
Low cost product (service) design and
engineering
Manufacturing flexibility
Distribution related KSFs
(Note: This applies to inbound and
outbound logistics.)
Network strength
Electronic (Internet) tracking
Ample space on retailer's shelves
Company owned retail outlets
Low distribution costs
Speed of distribution
Marketing related KSFs
Fast, accurate technical service
Thompson, Arthur and Strickland, A.J. Strategic Management: Concepts and Readings. McGraw-Hill Irwin. NY. 12th Edition
94
Customer service
Customer service is key in this
industry. Customer service can be
measured by looking at a combination
of factors including the percentage of
flights arriving on time, the number of
passenger complaints, the number of
involuntary denied boardings due to
overbooked flights, and the number of
mishandled baggage reports.
Airlines that provide superior customer
service are able to attract and retain a
greater number of passengers in the
markets they serve. A greater number
of passengers decreases the capacity
surplus on their flights and improves
the passenger load factor. This leads to
increases in profitability.
Efforts to improve customer service
also result in decreased costs. This
leads to increased profitability as well.
Customer service is important because
there is less demand for air travel,
buyers have greater knowledge, and
they have lower switching costs. It is
more expensive to find a new customer
than to retain existing customers.
United’s
capability for
this
factor is
poor.
United
ranked
last in the
percentage of
on-time
arrivals,
last in
terms of
the
number
of
mishandled
baggage
reports
and 2nd
to last in
the
number
of
passenger
complaints.
United
provides
poor
customer
service.
This can be
seen from
its low
rankings.
United will
find it
difficult to
compete
for
customers
with such a
poor
service
record.
They are
likely to
have lower
profitability on each
flight.
American’s
capability for
this
factor is
average.
American
ranked
7th in
terms of
passenger
complaints and
6th in
terms of
mishandled
baggage
reports.
They are
getting
worse in
these
areas.
It ranked
3rd in
both ontime
arrival
and
involun-
America
has room
for
improvement.
Delta’s
capability
for this
factor is
average.
They have
the
potential to
increase
profits by
focusing on
reducing
the number
of
passenger
complaints
and
mishandled
baggage
reports.
Delta
ranked 3rd
in terms
of
passenger
complaints and 4th
in terms
of
mishandled
baggage
reports.
These areas
need to be
focused on
quickly
because
they are
becoming
more of a
problem.
They
ranked 6th
in
involuntary
denied
boardings
and 8th in
on-time
arrival.
They have
improved
in some
areas and
gotten
Delta has
scheduling
problems.
Delta’s
poor
rankings in
on-time
arrivals and
involuntarily
denied
boardings
are likely
related.
Delta has
the
potential to
increase
profitability on its
flights by
improving
the
problem
that is
causing
poor
rankings in
these two
areas.
Northwest
’s
capability
for this
factor is
very good.
Northwest
ranked 1st
in
involuntary
denied
boardings
and 2nd in
on-time
arrival.
They
ranked 7th
in mishandled
baggage
reports
and 6th in
passenger
complaints.
When
their ontime
arrival
percentage
improves,
their
Thompson, Arthur and Strickland, A.J. Strategic Management: Concepts and Readings. McGraw-Hill Irwin. NY. 12th Edition
Northwest
has
superior
performance in
some areas
but subpar performance in
others.
They have
the
opportunity to
increase
profitability by
listening
to
customer
complaints
and
making
necessary
changes to
lower the
number of
future
complaints.
They need
to focus
on on-time
arrival and
95
tary
denied
boardings.
worse in
others.
number of
mishandled
baggage
reports
increases.
mishandled
baggage
reports
simultaneously.
Accurate buyer order filling
Breadth of product line and selection
Merchandising skills
Attractive styling/packaging
Guarantees and warranties
Advertising
Skills related KSFs
Workforce talent
Quality control know-how
Design expertise
Expertise in a particular technology
Ability to develop innovative products
and product improvements
Speed of getting new products to
market
Organizational capability KSFs
Thompson, Arthur and Strickland, A.J. Strategic Management: Concepts and Readings. McGraw-Hill Irwin. NY. 12th Edition
96
Superior information systems
Superior information systems are very
important in this industry. Information
that is up to date and readily available
helps managers to make well-informed
decisions on how to increase
profitability on a day-by-day basis.
The most helpful information systems
present the information in an orderly
fashion and allow management to
make comparisons between flights.
Airlines have used superior
information systems to gain a
competitive advantage.
United’s
capability for
this
factor is
average.
United is a
threat to
other
competitors
in this
industry.
United
has used
many of
the
information
systems
other
airlines
have
developed.
United has
the
resources
available to
invest in
improving
their
information
systems.
This
includes
the Sabre
system
developed by
American
Airlines.
United
has a
large
amount
of cash
on hand
American’s
capability for
this
factor is
good.
American
created
the Sabre
reservation
system.
This
United
system is
usually
used for
waits until
identifyother
ing
competitors flights
pay the
that meet
costs to
custodevelop the mer’s
system and criteria.
then
benefits by Ameriresearching can has a
their
large
experienamount
ces.
of cash
on hand.
American
is a threat
to other
firms in
this
industry.
American
has a
record of
introducing
new
information
systems
that allow it
to achieve a
competitive
advantage.
The
competitive
advantage
is not
sustainable
over a long
period of
time but
does allow
the
company to
increase its
profitability.
Delta’s
capability
for this
factor is
good.
Delta has
invested
millions
of dollars
in
improving
its
informatio
n systems.
Delta had
a record
of poor
information
systems
until it put
the Delta
Nervous
System in
place.
This
system
allows
easier
access to
information stored
in many
Delta has
recognized
the need
for a
superior
information
system and
this system
will likely
improve
the
company’s
profitability.
Delta’s
new system
is a threat
to the
industry.
Delta can
use the
system to
identify its
strengths
and
weaknesses
and
develop
more
effective
strategies.
Northwest’s
capability
for this
factor is
average.
To our
knowledge,
Northwest
does not
have
information
systems in
place that
are
superior
or inferior
to rivals
information
systems.
Northwest
is not
focused on
improving
its
information
systems in
order to
increase
profitabilit
y.
Northwest
has the
potential
to increase
its
profitability by
improving
in this
area.
They do
have
significant
resources
to use to
improve
their
systems.
Thompson, Arthur and Strickland, A.J. Strategic Management: Concepts and Readings. McGraw-Hill Irwin. NY. 12th Edition
97
and has
the
largest
market
share.
different
databases.
Ability to respond quickly to shifting
market conditions
Use of the Internet and Enterprise
Information systems
Overall experience
Managerial know-how
Other KSFs
Image and reputation
Thompson, Arthur and Strickland, A.J. Strategic Management: Concepts and Readings. McGraw-Hill Irwin. NY. 12th Edition
98
Overall low cost
The airline industry has many large
competitors and intense rivalry. Profit
margins in this industry are small.
Demand in this industry is falling. As it
does, the airlines with the highest cost
floors suffer the most.
In order to maintain or increase
profitability, airlines need to
continually look for ways to reduce
any unnecessary costs.
United’s
capability for
this
factor is
below
average.
United’s
total
operating
expenses
per
average
seat mile
was
$10.60 in
2000.
This is
well
above the
average
of
$10.12.
United will
have
financial
problems
when
demand in
this
industry is
reduced.
Their high
operating
costs
threaten
their future
profitability.
American’s
capability for
this
factor is
below
average.
American’s
total
operating
expenses
per
average
seat mile
was
$10.49 in
2000.
This is
well
above the
average
of
$10.12.
American
will have a
hard time
increasing
profitability
with
operating
costs this
high.
They are in
a better
position
than US
Airways
and United
but they
still need to
improve.
Delta’s
capability
for this
factor is
very
good.
Delta’s
total
operating
expenses
per
average
seat mile
was $9.43
in 2000.
This is
well
below the
average of
$10.12.
Delta
made only
small
increases
to its costs
from 1995
to 2000.
Delta is a
threat to
other firms
in the
industry.
Northwest’s
capability
for this
factor is
good.
Delta is in
a stronger
position
because of
its low
operating
costs.
Northwest’s
total
operating
expenses
per
average
They will
seat mile
be able to
was $9.96
lower their in 2000.
prices
This is
much
below the
lower than average of
competitors $10.12.
and still
remain
Northwest
profitable.
made
larger
increases
to its costs
from 1995
to 2000
than Delta
did.
Northwest’s low
operating
costs are a
threat to
most of
the other
firms in
the
industry.
The low
operating
costs are
an
opportuneity for
Northwest.
Northwest
has the
ability to
drop its
prices
lower than
many
competitors to
attract
passengers, and
still
remain
profitable.
Convenient retail locations
Pleasant employees in all customer
Thompson, Arthur and Strickland, A.J. Strategic Management: Concepts and Readings. McGraw-Hill Irwin. NY. 12th Edition
99
contact positions
Thompson, Arthur and Strickland, A.J. Strategic Management: Concepts and Readings. McGraw-Hill Irwin. NY. 12th Edition
100
Access to financial capital
In this industry, access to a large
amount of financial capital is crucial.
Firms without access to financial
capital will not be able to expand or
pay their creditors when revenues fall.
The capital requirements to enter this
industry are very high.
Firms must also focus on reducing
debt. Airlines with a lot of debt have
lower profits as a result of high interest
payments.
United’s
capability for
this
factor is
average.
United
has $1.28
billion in
cash on
hand.
They
have a
debt to
total
capital
percentage of
68.5%.
Their
interest
payments
in 2000
were
close to
the
average
for that
year.
United has
financial
resources
available to
purchase
new
aircraft and
expand.
The
interest
payments
that United
is paying
are
comparable
to most
other firms.
United can
increase
it’s
profitability by
lowering
it’s debt
and
reducing
interest
payments.
American’s
capability for
this
factor is
excellent.
American has
the third
highest
amount
of cash
on hand.
They
have the
second
lowest
debt to
total
capital
percentage.
In 2000,
American paid
the
lowest
amount
in
interest
in the
industry.
American
is in a
strong
position in
terms of
access to
financial
capital.
Delta’s
capability
for this
factor is
very
good.
American
is a threat
to other
airlines.
Delta has
the
highest
amount of
cash on
hand.
American
has
financial
resources
available to
purchase
new
equipment.
They have
the third
lowest
debt to
total
capital
percentage.
Delta is
able to
make
future
purchases
without
piling on
debt.
Delta’s low
debt to
total capital
percentage
helps the
company to
prevent
large losses
when
demand
slackens.
Delta has a
strong
AmeriDelta’s
position in
can ‘s low
interest
this
interest
payments industry in
payments
doubled in terms of
helps to
2000.
access to
improve the Before
financial
company’s this time,
capital.
profitabilthey were
ity.
average.
They need
to look at
why their
interest
payments
Northwest’s
capability
for this
factor is
very poor.
Northwest
has an
average
amount of
cash on
hand for
an airline
of its size.
They have
the
highest
debt to
total
capital
percentage.
Northwest
paid the
second
highest
amount in
interest in
2000 out
of the
major
airlines.
Thompson, Arthur and Strickland, A.J. Strategic Management: Concepts and Readings. McGraw-Hill Irwin. NY. 12th Edition
Northwest
is not a
threat to
other
competitors in
terms of
access to
financial
capital.
Northwest
purchases
new
equipment
and
expands
by adding
on debt.
Their high
interest
payments
are putting
a strain on
their
financial
situation.
When this
firms
revenues
fall they
are forced
to pay
their bills
101
spiked in
2000 and
focus on
reducing
their future
interest
payments.
Northwest
had a loss
between
1997 and
1998.
In 1998,
the
amount
spent on
interest
went from
21¢ to 32¢
(in cents
per
average
seat mile.)
by adding
on more
debt.
They need
to focus
attention
on
lowering
their debt.
Patent protection
Others?
Additional Competitors:
Continental
US Airways
Southwest
Thompson, Arthur and Strickland, A.J. Strategic Management: Concepts and Readings. McGraw-Hill Irwin. NY. 12th Edition
TWA
102
What does
this mean?
What is their capability for
this factor?
What does
this mean?
What is their capability for
this factor?
What does
this mean?
What is their capability for
this factor?
What is their capability for
this factor?
You can provide your justification for
selecting the KSFs underneath the
KSK.
What does
this mean?
Technology related KSFs
Scientific research and expertise
Technical capability to make
innovative improvements in production
processes
Product innovation quality
Expertise in a given technology
Internet expertise
Manufacturing (production of the
product or service) related KSFs
Low-cost production efficiency
Manufacturing quality
Thompson, Arthur and Strickland, A.J. Strategic Management: Concepts and Readings. McGraw-Hill Irwin. NY. 12th Edition
103
High fixed asset utilization
In the airline industry, high fixed asset
utilization is critical. An airplane costs
a company millions of dollars. The
costs of flying that airplane from one
destination to another are also
substantial.
Airlines need to generate enough
revenue per flight to cover the costs of
that flight. Airplanes that are flying
with many empty seats are not being
used wisely.
Airlines can increase their profitability
by utilizing their aircraft in the most
effective way possible. This includes
reducing turnaround time at airports,
flying only profitable routes, using
smaller planes when passenger traffic
is low, etc.
Continental’s
capability
for this
factor is
very good.
Continental’s
passenger
load factor
was
74.4% in
2000.
Continental has
focused
on
reducing
the size of
the
aircraft in
its fleet
and
removing
unprofitable
routes
from its
schedule.
Continental also
improved
its asset
The
moves
Continental has
made have
resulted in
lower
costs for
the airline.
Continental is now
able to
earn
higher
profits on
each flight
because of
the
reduction
in aircraft
size.
Continental’s cost
savings is
a threat to
other
firms.
US
Airway’s
capability for
this
factor is
average.
This
determination is
based on
the
number
of
airplanes
they had
in 2000
and the
number
of
passengers they
carried.
Balance
sheets
and
operating
statistics
are
needed
for a
more
accurate
conclu-
US
Airways
has the
opportunity
to improve
it’s
profitability
and become
a greater
threat to
existing
firms by
focusing on
removing
routes with
low
passenger
loads and
decreasing
the size of
the planes
it uses for
domestic
flights.
Southwest’s
capability
for this
factor is
excellent.
Southwest
improved
it’s load
factor
every year
from 1995
to 2000.
Southwest
uses one
type of
aircraft
and only
serves the
United
States.
Southwest
uses a
point-topoint
system
and turns
planes
around
much
faster than
competitors.
Southwest
is the
industry
leader in
high fixed
asset
utilization.
Southwest
has focused
a lot of
attention
on looking
for ways to
maximize
fixed asset
utilization.
Southwest
is a threat
to other
firms. They
have lower
costs and
higher
profitability than
their rivals.
TWA’s
capability
for this
factor
cannot be
determined
from the
information in the
Southwest
or
Continental cases.
We do not
know how
well TWA
managed
its assets.
Balance
sheets and
operating
statistics
are needed
for a more
accurate
conclusion
.
Thompson, Arthur and Strickland, A.J. Strategic Management: Concepts and Readings. McGraw-Hill Irwin. NY. 12th Edition
104
utilization
on its
regular
service by
introducing
Continental
Express.
Continental
Express
feeds
Continental’s hubs.
sion.
Southwest
keeps its
planes in
the air as
much as
possible.
Low cost plant locations
Access to adequate supplies of skilled
labor
High labor productivity
Low cost product (service) design and
engineering
Manufacturing flexibility
Distribution related KSFs
(Note: This applies to inbound and
outbound logistics.)
Network strength
Electronic (Internet) tracking
Ample space on retailer's shelves
Company owned retail outlets
Low distribution costs
Speed of distribution
Marketing related KSFs
Thompson, Arthur and Strickland, A.J. Strategic Management: Concepts and Readings. McGraw-Hill Irwin. NY. 12th Edition
105
Fast, accurate technical service
Thompson, Arthur and Strickland, A.J. Strategic Management: Concepts and Readings. McGraw-Hill Irwin. NY. 12th Edition
106
Customer service
Customer service is key in this
industry. Customer service can be
measured by looking at a combination
of factors including the percentage of
flights arriving on time, the number of
passenger complaints, the number of
involuntary denied boardings due to
overbooked flights, and the number of
mishandled baggage reports.
Airlines that provide superior customer
service are able to attract and retain a
greater number of passengers in the
markets they serve. A greater number
of passengers decreases the capacity
surplus on their flights and improves
the passenger load factor. This leads to
increases in profitability.
Efforts to improve customer service
also result in decreased costs. This
leads to increased profitability as well.
Customer service is important because
there is less demand for air travel,
buyers have greater knowledge, and
they have lower switching costs. It is
more expensive to find a new customer
than to retain existing customers.
Continental’s
capability
for this
factor is
very good.
Continent
al tied
Southwest
for the 1st
place
ranking in
mishandled
baggage
reports.
Continental ranked
2nd in
involuntary
denied
boardings,
4th in
passenger
complaints, and
5th in ontime
arrival.
Continental has
made
Continental has the
opportunity to be
number
one in
customer
service
based on
these four
areas by
improving
its on-time
arrival
percentage
and
reducing
the
number of
passenger
complaints.
Continental has
recognize
d the
importance of
customer
service.
Continental is a
threat to
other
US
Airway’s
capability for
this
factor is
average.
They
ranked
4th in
involuntary
denied
boardings, 5th
in
passenger
complaints, 5th
in
mishandled
baggage
reports
and 6th in
on-time
arrival.
US
Airways
has not
focused
enough
attention on
customer
service.
Companies
with high
customer
service
rankings
are a threat
to US
Airways
profitability.
US
Airways
needs to
focus on
making
customer
service a
priority
within the
organizaTheir
tion. All
perforfour
mance
measures of
goes up
customer
and down service
year after need to be
Southwest’s
capability
for this
factor is
excellent.
Southwest
ranked 1st
in on-time
arrival,
mishandled
baggage
reports
(tie with
Continental), and
passenger
complaints.
Southwest
ranked 9th
in
involuntary
denied
boardings.
They have
made
attempts
to
improve
this
figure.
Southwest
is a threat
to the rest
of the
industry.
TWA’s
capability
for this
factor was
poor.
Their high
rankings
attract and
retain
passengers
and
improve
their load
factor.
TWA did
not focus
on
customer
service.
They have
much
higher
profitability than
other
airlines.
They need
to focus on
reducing
the number
of
involuntary
denied
boardings
to increase
their
customer
service
They
ranked 7th
in on-time
arrival, 8th
in mishandled
baggage
reports, 7th
in
involuntary
denied
boardings,
and 8th in
passenger
complaints.
Thompson, Arthur and Strickland, A.J. Strategic Management: Concepts and Readings. McGraw-Hill Irwin. NY. 12th Edition
TWA had
the
opportunity to
increase
profitability by
focusing
on a
strategy to
improve
customer
service in
all areas.
TWA was
not a
threat to
other
competitors in
terms of
customer
service.
107
improving
customer
service
one of its
objectives.
firms
because of
its
attention
on
customer
service.
Continental is
likely to
have
higher
profitability than
many
other
rivals.
year.
improved.
Southwest
made
customer
service a
necessity
within the
organization.
even more
and help
maintain
their
position.
Accurate buyer order filling
Breadth of product line and selection
Merchandising skills
Attractive styling/packaging
Guarantees and warranties
Advertising
Skills related KSFs
Workforce talent
Quality control know-how
Design expertise
Expertise in a particular technology
Ability to develop innovative products
and product improvements
Speed of getting new products to
market
Organizational capability KSFs
Thompson, Arthur and Strickland, A.J. Strategic Management: Concepts and Readings. McGraw-Hill Irwin. NY. 12th Edition
108
Superior information systems
Superior information systems are very
important in this industry. Information
that is up to date and readily available
helps managers to make well-informed
decisions on how to increase
profitability on a day-by-day basis.
The most helpful information systems
present the information in an orderly
fashion and allow management to
make comparisons between flights.
Airlines have used superior
information systems to gain a
competitive advantage.
Continental’s
capability
for this
factor is
very good.
Bethune
hired
Larry
Kellner to
improve
Continental’s
information
systems.
This move
led to new
finance
systems
that
helped
Bethune
to identify
which
routes
were
profitable
and which
were not.
New
informa-
Continental’s new
information
systems
are a
threat to
the rest of
the
industry.
Continental has the
opportunity to use
those
systems to
make
quick and
accurate
decisions
that will
affect the
company’s
profitability.
Competitors that
do not
have
similar
systems
will not be
able to
US
Airway’s
capability for
this
factor is
average.
US
Airways
has the
financial
resources
to
improve
its
information
systems.
US
Airways
has the
potential to
develop
superior
information
systems.
They are a
threat to the
rest of the
industry.
Southwest’s
capability
for this
factor is
excellent.
Southwest
has
invested a
lot of time
and
money
onto
developing state
of the art
information
systems.
Southwest
uses its
systems to
help the
company
find
profitable
routes,
develop
schedules,
turn
planes
around
quickly,
and keep
Southwest
is a leader
in this
industry
when it
comes to
information
systems.
They are a
threat to
other firms
because
they are
continually
looking to
improve
and will
make the
necessary
investments.
TWA’s
capability
for this
factor was
below
average.
The
company
did not
have
superior
information
systems in
place.
TWA had
an
opportunity to
increase
profitability by
improving
its
information
systems.
Southwest
acts on the
information
they
receive in a
way that is
superior to
rivals.
Thompson, Arthur and Strickland, A.J. Strategic Management: Concepts and Readings. McGraw-Hill Irwin. NY. 12th Edition
109
tion
systems
also
helped to
keep
employees
up to date.
adapt as
quickly as
Continental.
employees
well
informed.
Ability to respond quickly to shifting
market conditions
Use of the Internet and Enterprise
Information systems
Overall experience
Managerial know-how
Other KSFs
Image and reputation
Thompson, Arthur and Strickland, A.J. Strategic Management: Concepts and Readings. McGraw-Hill Irwin. NY. 12th Edition
110
Overall low cost
The airline industry has many large
competitors and intense rivalry. Profit
margins in this industry are small.
Demand in this industry is falling. As it
does, the airlines with the highest cost
floors suffer the most.
In order to maintain or increase
profitability, airlines need to
continually look for ways to reduce
any unnecessary costs.
Continental’s
capability
for this
factor is
average.
Continental’s total
operating
expenses
per
average
seat mile
was
$10.20 in
2000. This
is slightly
above the
average of
$10.12.
Continental has
reduced
some
costs by
improving
customer
service.
Continental’s total
costs have
increased
by 17%
Continental used to
focus
solely on
lowering
costs to
improve
its
profitability now it
has
focused
on a bestcost
provider
strategy.
As
demand
decreases,
firms with
lower
costs
floors are
a threat to
Continental.
Continental needs
to monitor
its costs to
make sure
they are
adding
value to
US
Airway’s
capability for
this
factor is
very
poor.
US
Airway’s
total
operating
expenses
per
average
seat mile
was
$13.88 in
2000.
This is
way
above the
average
of
$10.12.
US
Airway’s
operating
expenses
have
increased
by 19%
from
1995 to
The other
rivals in
this
industry are
a threat to
US
Airways.
US
Airways
will likely
have
financial
problems
very
quickly
when
demand for
air travel
falls.
US
Airways
needs to
look at its
costs and
determine
which costs
it can
reduce.
Southwest’s
capability
for this
factor is
excellent.
Southwest
has the
lowest
operating
cost per
average
seat mile
in the
industry.
Southwest’s
operating
costs are
well
below the
industry
average.
They have
made cost
savings a
part of
their
culture.
Southwest
is a threat
to all firms
in the
industry.
TWA’s
capability
for this
factor was
average.
They are
able to
charge
much
lower
ticket
prices than
competitors
and attract
a large
number of
passengers.
TWA’s
total
operating
expenses
per
average
seat mile
was
$10.14 in
2000. This
is right
around the
average of
$10.12.
TWA was
competitive in
terms of
operating
costs.
It was a
threat to
roughly
half of the
top ten
major
airlines.
TWA
increased
its costs
by almost
20% from
1995 to
2000.
Southwest
has
remained
Thompson, Arthur and Strickland, A.J. Strategic Management: Concepts and Readings. McGraw-Hill Irwin. NY. 12th Edition
111
from 1995
to 2000.
the
2000.
product in
the eyes of
buyers.
profitable
for a long
period of
time.
Convenient retail locations
Pleasant employees in all customer
contact positions
Thompson, Arthur and Strickland, A.J. Strategic Management: Concepts and Readings. McGraw-Hill Irwin. NY. 12th Edition
112
Access to financial capital
In this industry, access to a large
amount of financial capital is crucial.
Firms without access to financial
capital will not be able to expand or
pay their creditors when revenues fall.
The capital requirements to enter this
industry are very high.
Firms must also focus on reducing
debt. Airlines with a lot of debt have
lower profits as a result of high interest
payments.
Continental’s
capability
for this
factor is
poor.
Continental has the
lowest
amount of
capital on
hand out
of the
seven
largest
commerci
al airlines.
Continental has the
third
highest
debt to
total
capital
percentage.
Continental’s
interest
payment
was
slightly
above
Continental is not a
threat to
other
firms in
terms of
access to
financial
capital.
This is
one of
Continentals
weaknesses.
Continental makes
its
purchases
on credit
and is
forced to
use the
limited
cash it has
on hand to
make
payments
on debt
when
revenue
falls.
Continen-
US
Airway’s
capability for
this
factor is
very
poor.
US
Airways
has $1.25
billion in
cash on
hand.
They
have the
second
highest
debt to
total
capital
percentage.
They
paid the
highest
amount
of
interest
in 2000.
They
have a
US
Airways
needs to
improve in
this area.
They are
not a threat
to the
industry in
terms of
this factor.
US
Airways
has
accumulated a lot of
debt and
the interest
payments
on this debt
are
negatively
affecting
their
financial
situation.
They are
likely to
have
problems
during
recessions.
Southwest’s
capability
for this
factor is
excellent.
Southwest
is a threat
to all other
firms in
terms of
this factor.
They have
the second
highest
amount of
cash on
hand and
they are
much
smaller
than some
of the
other
major
airlines.
Southwest
has the
resources
to expand
and enter
into new
markets as
needed
without
having to
dramatically
increase
debt.
They have
the lowest
debt to
total
capital
percentage by
far.
Southwest
pays a very
low
amount in
interest and
this has
helped the
company’s
profitability.
The
average of
their
interest
payments
TWA’s
capability
for this
factor was
average.
TWA had
the second
highest
interest
payments
in 1995
and paid
an average
amount of
interest in
2000.
TWA was
trying to
improve
its
financial
situation
and
renegotiate
payments
on debt.
American
Airlines
acquired
TWA in
2000.
In a
recession,
this
Thompson, Arthur and Strickland, A.J. Strategic Management: Concepts and Readings. McGraw-Hill Irwin. NY. 12th Edition
113
average in
2000.
Bethune
renegotiated
payments
on debt in
1994. This
brought
the
interest
payments
down
considerably.
tal is
trying to
improve,
but it is
still in a
weak
position in
terms of
this factor.
record of
paying
the
highest
amount
of
interest
in the
industry.
from 1995
to 2000 is
the lowest
in the
industry.
company is
able to
survive
much
longer than
competitors
without
having to
make
drastic
cutbacks or
changes.
Patent protection
Others?
Additional Competitors:
America West
Alaska
Thompson, Arthur and Strickland, A.J. Strategic Management: Concepts and Readings. McGraw-Hill Irwin. NY. 12th Edition
114
What does
this mean?
What is their capability for
this factor?
What is their capability for
this factor?
You can provide your justification for
selecting the KSFs underneath the
KSK.
What does
this mean?
Technology related KSFs
Scientific research and expertise
Technical capability to make
innovative improvements in production
processes
Product innovation quality
Expertise in a given technology
Internet expertise
Manufacturing (production of the
product or service) related KSFs
Low-cost production efficiency
Manufacturing quality
Thompson, Arthur and Strickland, A.J. Strategic Management: Concepts and Readings. McGraw-Hill Irwin. NY. 12th Edition
115
High fixed asset utilization
In the airline industry, high fixed asset
utilization is critical. An airplane costs
a company millions of dollars. The
costs of flying that airplane from one
destination to another are also
substantial.
Airlines need to generate enough
revenue per flight to cover the costs of
that flight. Airplanes that are flying
with many empty seats are not being
used wisely.
Airlines can increase their profitability
by utilizing their aircraft in the most
effective way possible. This includes
reducing turnaround time at airports,
flying only profitable routes, using
smaller planes when passenger traffic
is low, etc.
America
West’s
capability
for this
factor is
good.
This
determination is
based on
the number
of airplanes
they had in
2000 and
the number
of
passengers
carried.
Balance
sheets and
operating
statistics
are needed
for a more
accurate
conclusion.
America
West is a
threat to
Alaska and
other
competitors
in the
markets it
operates in.
America
West’s is
utilizing its
assets
effectively
to keep
costs down
and
improve
profitability.
Alaska’s
capability
for this
factor is
below
average.
This
determination is
based on
the
number of
airplanes
they had
in 2000
and the
number of
passengers
carried.
Alaska is
not a threat
in terms of
fixed asset
utilization.
Improving
Alaska’s
fixed asset
utilization is
likely to
reduce costs
and help the
company to
reduce
costs.
Balance
sheets and
operating
statistics
are needed
for a more
accurate
conclusion.
Low cost plant locations
Access to adequate supplies of skilled
labor
High labor productivity
Thompson, Arthur and Strickland, A.J. Strategic Management: Concepts and Readings. McGraw-Hill Irwin. NY. 12th Edition
116
Low cost product (service) design and
engineering
Manufacturing flexibility
Distribution related KSFs
(Note: This applies to inbound and
outbound logistics.)
Network strength
Electronic (Internet) tracking
Ample space on retailer's shelves
Company owned retail outlets
Low distribution costs
Speed of distribution
Marketing related KSFs
Fast, accurate technical service
Thompson, Arthur and Strickland, A.J. Strategic Management: Concepts and Readings. McGraw-Hill Irwin. NY. 12th Edition
117
Customer service
Customer service is key in this
industry. Customer service can be
measured by looking at a combination
of factors including the percentage of
flights arriving on time, the number of
passenger complaints, the number of
involuntary denied boardings due to
overbooked flights, and the number of
mishandled baggage reports.
Airlines that provide superior customer
service are able to attract and retain a
greater number of passengers in the
markets they serve. A greater number
of passengers decreases the capacity
surplus on their flights and improves
the passenger load factor. This leads to
increases in profitability.
Efforts to improve customer service
also result in decreased costs. This
leads to increased profitability as well.
Customer service is important because
there is less demand for air travel,
buyers have greater knowledge, and
they have lower switching costs. It is
more expensive to find a new customer
than to retain existing customers.
America
West’s
capability
for this
factor is
average.
America
West
ranked 4th
in on-time
arrival and
3rd in
mishandled
baggage
reports.
America
West has
the
opportunity
to increase
profitability by
focusing on
two key
areas,
passenger
complaints,
and
involuntary
denied
boardings.
It ranked
last in
involuntary
denied
boardings
and
passenger
complaints.
America
West needs
to listen to
it’s
customers
and
improve its
scheduling.
The
number of
passenger
complaints
is much
higher than
all other
rivals.
Alaska’s
capability
for this
factor is
below
average.
Alaska
ranked 9th
in on-time
arrivals,
9th in
mishandled
baggage
reports
and 8th in
involuntary
denied
boardings.
They
ranked 2nd
in
customer
complaints.
Alaska
needs to
focus more
attention on
scheduling
and turning
planes
around
faster to
improve its
rankings and
profitability.
Alaska
serves a
smaller
market than
rivals.
Alaska has
the
opportunity
to
differentiate
its product
through
superior
customer
service to
attract
passengers
in that
market.
Accurate buyer order filling
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118
Breadth of product line and selection
Merchandising skills
Attractive styling/packaging
Guarantees and warranties
Advertising
Skills related KSFs
Workforce talent
Quality control know-how
Design expertise
Expertise in a particular technology
Ability to develop innovative products
and product improvements
Speed of getting new products to
market
Organizational capability KSFs
Thompson, Arthur and Strickland, A.J. Strategic Management: Concepts and Readings. McGraw-Hill Irwin. NY. 12th Edition
119
Superior information systems
Superior information systems are very
important in this industry. Information
that is up to date and readily available
helps managers to make well-informed
decisions on how to increase
profitability on a day-by-day basis.
The most helpful information systems
present the information in an orderly
fashion and allow management to
make comparisons between flights.
Airlines have used superior
information systems to gain a
competitive advantage.
America
West’s
capability
for this
factor is
average.
America
West has
142
airplanes
and
roughly
14,000
employees.
America
West has
the lowest
amount of
cash on
hand.
America
West is
much
smaller
than most
of the other
major
competitors. It is
typically
easier to
improve
information
flow in
smaller
organizations.
America
West has
the
opportunity
to gain an
advantage
and
increase
profitability by
focusing on
ways to
improve
information
systems.
Alaska’s
capability
for this
factor is
good.
Alaska is a
threat to
other firms
in the
industry.
Alaska is
the
smallest
out of the
top ten
airlines
with 100
airplanes.
Alaska has
made
attempts to
improve its
information
systems and
increase
profitability.
Alaska
has more
cash on
hand than
America
West and
fewer
employees.
Alaska
has made
attempts
to
improve
its
information.
Cash flow
can be a
Thompson, Arthur and Strickland, A.J. Strategic Management: Concepts and Readings. McGraw-Hill Irwin. NY. 12th Edition
120
problem in
developing
a new
system.
Ability to respond quickly to shifting
market conditions
Use of the Internet and Enterprise
Information systems
Overall experience
Managerial know-how
Other KSFs
Image and reputation
Thompson, Arthur and Strickland, A.J. Strategic Management: Concepts and Readings. McGraw-Hill Irwin. NY. 12th Edition
121
Overall low cost
The airline industry has many large
competitors and intense rivalry. Profit
margins in this industry are small.
Demand in this industry is falling. As it
does, the airlines with the highest cost
floors suffer the most.
In order to maintain or increase
profitability, airlines need to
continually look for ways to reduce
any unnecessary costs.
America
West’s
capability
for this
factor is
very good.
America
West’s
total
operating
expenses
per average
seat mile
was $8.57
in 2000.
This is well
below the
average of
$10.12.
Southwest
is the only
company
with a
lower
operating
cost.
America
West is a
threat to
most other
competitors
in this
industry.
They are
focusing on
costs to
improve
their
profitability.
Alaska’s
capability
for this
factor is
below
average.
Alaska’s
total
operating
expenses
per
average
seat mile
was
$10.25 in
2000. This
is slightly
above the
average of
$10.12.
Alaska’s
operating
costs grew
by nearly
30% from
1995 to
2000.
Alaska has
increased
costs
dramatically
and has
much higher
costs than
Southwest
or America
West.
Alaska is
not much of
a threat to
these two
competitors.
Southwest
and America
West have
the ability to
lower their
prices much
lower than
Alaska’s
and still
remain
profitable.
Convenient retail locations
Pleasant employees in all customer
contact positions
Thompson, Arthur and Strickland, A.J. Strategic Management: Concepts and Readings. McGraw-Hill Irwin. NY. 12th Edition
122
Access to financial capital
In this industry, access to a large
amount of financial capital is crucial.
Firms without access to financial
capital will not be able to expand or
pay their creditors when revenues fall.
The capital requirements to enter this
industry are very high.
Firms must also focus on reducing
debt. Airlines with a lot of debt have
lower profits as a result of high interest
payments.
America
West’s
capability
for this
factor is
below
average.
America
West is
becoming
more of a
threat to
other
airlines.
America
West has
the lowest
amount of
cash on
hand out of
the largest
nine major
airlines.
They have
improved
their
financial
situation by
lowering
their
interest
payments.
They have
the fourth
highest
debt to
total capital
percentage.
They have
limited
access to
cash and
this is a
weakness
of America
West’s.
America
West has
lowered the
amount it
pays in
interest
from 32¢ in
1995 to
08¢ (third
lowest) in
2000.
They are
likely to
fund future
growth by
accruing
debt.
Alaska’s
capability
for this
factor is
good.
Compared
to
America
West (an
airline that
is similar
in size)
they have
much
more cash
on hand.
They pay
an average
amount in
interest
each year.
Alaska
has the
fourth
lowest
debt to
total
capital
percentage.
Alaska is in
a strong
position in
this industry
in terms of
access to
total capital.
They do not
have the
access that
many large
airlines have
but
compared to
other
airlines that
are similar
to their size,
they are
doing well.
They have
resources
available to
expand and
try to gain
market
share.
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123
Patent protection
Others?
7. Is this industry attractive and what are its prospects for above-average profitability?
Criteria
Industry growth potential
Facts
The airline industry has very little growth
potential. The industry is in the maturity
position in the cycle. Demand for air travel
is much less than supply.
What does it mean?
The industry’s growth potential is a threat
to the industry. Rivalry is intensified as a
result of this. Low growth potential also
makes the industry less attractive to new
entrants.
Does competition permit adequate profit
potential?
Competition seriously reduces the profit
potential in this industry. The industry has
many rivals that are similar in size. The
major companies in the industry are battling
for market share in a market with a low
growth rate. Competition is increasing and
rivals are continually looking for ways to
differentiate their product or lower their
prices to attract customers. Competitors
react by matching or beating low prices
and/or differentiating their products.
The fact that competition does not permit
adequate profit potential is a threat to the
industry. Intense competition resulting in
reduced profits makes the airline industry
unattractive.
Many airlines have had financial problems
as a result of low profitability.
Does competition lead to stronger or weaker
forces?
Competition leads to stronger forces. Rivals
are constantly battling for market share.
Stronger forces are a threat to the
industry. The stronger the forces become,
the more pressure it puts on profits. Rivals
will do whatever they can to remain
profitable. This makes the industry more
Thompson, Arthur and Strickland, A.J. Strategic Management: Concepts and Readings. McGraw-Hill Irwin. NY. 12th Edition
124
unattractive.
Will the prevailing driving forces positively
or negatively impact profit potential?
What is the company's relative competitive
potential in this industry?
Most of the prevailing driving forces will
negatively impact profit potential. For
example:

Competitors are using the Internet
now to compete. Greater buyer
knowledge has reduced profit
potential.

New technology reducing the need for
air travel has decreased profit
potential.

Deregulation and other government
actions and regulations have reduced
profit potential.

The long-term industry growth rate
has reduced profit potential.

Globalization leads to increased
profits for a short time until other
competitors move in. Increased
international competition decreases
profit potential.
Continental’s relative competitive potential
is strong in this industry. Continental is
gaining market share and improving its
quality of service. They have strong
leadership in the upper levels of the
The prevailing driving forces are a threat
to the industry. Decreased profit potential
will increase competition for market
share. Competitors will make aggressive
moves in order to earn enough revenue to
cover costs. Prevailing driving forces that
negatively impact profit potential make
the industry less attractive.
Continental’s relative competitive
potential in this industry is a threat to
other rivals. Continental has the
opportunity to gain market share by
continuing to improve its quality of
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organization. They are making moves to
reduce debt and improve the culture of the
company.
Continental has made changes to it’s flight
schedule, marketing programs, and onboard services that have attracted the
interest of many business passengers.
They have many profitable routes both
domestically and internationally.
service and add more profitable flights.
They are a significant threat to other
airlines with a large number of business
passengers because they have found ways
of meeting the needs of these individuals.
Continental must continue to improve on
the areas it has focused on or risk lower
profitability. They must continue to look
for ways to meet their customer’s needs.
What is the company's ability to capitalize on
its competitor's weaknesses?
Continental can capitalize on it’s
competitors weaknesses by continuing to
improve customer service, utilize its
information systems, reduce the number of
aircraft in its fleet, add more profitable
international routes and add service features
that add value.
Continental has a strong ability to
capitalize on its competitor’s weaknesses.
Continental has a talented and
knowledgeable management team that has
developed strategies that will help
Continental to increase market share.
Can the company defend against or is it
insulated from the factors that make this
industry unattractive?
Continental can defend against the factors
that make this industry unattractive. These
factors include a low growth rate and
intense competition.
Continental will be able to maintain or
increase market share in this industry by
continuing it’s present strategies. Even
though this industry is unattractive,
Continental can still be profitable.
Continental can continue to differentiate
their product and offer superior customer
service in order to increase their profits.
How well do the company's capabilities
match the industry's KSFs?
Continental’s capabilities do not perfectly
match the industry’s key success factors.
Continental has strong capabilities in fixed
asset utilization, customer service and
information systems. They have an average
capability in overall low costs and a poor
capability in access to financial capital.
The company’s capabilities need to be
improved to match up better with all key
success factors. This is a threat to
Continental.
Continental has used its strengths to
increase profitability and compete for
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market share. Two key success factors,
overall low cost and access to financial
capital are weaknesses for Continental.
The company must focus on improving in
these areas to remain profitable in the
future.
What are the future uncertainties and risks
for this industry?
Future uncertainties and risks:
Changing economic environment (ex. a
deeper recession)
Changing political environment (ex. future
terrorist attacks)
Increasing demand for substitutes
Lower growth rate than predicted
Increased competition
New technology reducing demand for air
travel
Unstable fuel prices
What is the severity of the issue(s) or
problem(s) facing this industry?
The low growth rate and terrorism are the
most severe problems facing this industry.
The existing firms in the airline industry are
capable of providing much more air travel
than is currently needed. The low growth
rate in the airline industry has increased
competition for market share. Intense
competition has put downward pressure on
profits.
The future uncertainties and risks for this
industry are threats to the industry.
Anyone of these can reduce a company’s
profitability. Firms must keep their costs
low and take advantage of as many
opportunities as possible to increase
volume and remain profitable in the
future.
The severity of the issues and problems
facing this industry is a threat to this
industry. The issues are faced by all
competitors and have the potential to
dramatically reduce profitability by
raising costs, increasing competition, and
lowering revenues. Firms must develop
strategies to increase volume and drive
costs down as much as possible.
Terrorism has affected the political
environment. The threat of more attacks
reduces the demand for air travel and forces
airlines to compete for a smaller number of
passengers.
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Terrorist attacks also increase airlines costs.
New security regulations and procedures
require changes to be made that affect
airlines profits.
Increases in fuel costs can have a large
affect on the profitability of an airline. Fuel
prices have become increasingly unstable.
If a corporation, will continued participation
in this industry positively or negatively
impact its ability to compete in other
industries?
Continued participation in the airline
industry will negatively impact an airlines
ability to compete in other industries.
Due to the lack of consistent profits and
greater investment needed to remain
competitive in the airline industry, available
cash to invest in other industries will not
always be available.
The negative impact continued
participation in this industry has on a
company’s ability to compete in other
industries is a threat to the industry.
Existing firms have limited opportunities
to compete in other industries because this
industry ties up cash reserves.
8. Summary matrix
External analysis section
Opportunity
Threat
Macro-environment
The economy at large
The economy at large was an opportunity for the
industry between 1995 and 1998. During this time
period, the airline industry had the potential to
increase revenues.
In 1999, the economy was entering a recession. A
recession is a threat to the airline industry. In a
recession, there is less demand for air travel.
Competition increases and profits are decreased.
Legislative, regulatory and
political environments
Falling barriers are an opportunity for this industry.
Markets that were once limited to domestic
companies are now open to international firms.
Deregulation is a threat to the industry. After
deregulation, competition was fierce. The battle for
market share drove profits down.
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Anti-trust legislation is a threat to the industry.
Airlines that are not able to earn enough revenues on
their own have to be careful about joining up with
other companies. Code-sharing agreements are
allowed, but only to a certain extent.
New security measures are a threat to the industry.
They add to the costs of the airlines and increase the
time it takes for passengers to move through the
system. The longer process is a hassle for customers
and reduces the number of passengers willing to fly.
While this was a strong factor immediately after
September 11, it has become less of an issue as time
passes.
The political environment is a threat to the industry.
The attacks of September 11 caused many political
disturbances throughout the world. U.S. citizens are
now treated differently in many countries as a result
of the attacks and the countries response to them.
Relationships with oil producing countries have been
affected. This is a threat to the industry. The cost of
jet-fuel increases when these relationships are
damaged. The profit margins are so low in the
industry already that a significant rise in the cost of
jet-fuel sometimes causes airlines to file for
bankruptcy.
Population demographics
An increased number of women working at higher
paying positions is an opportunity for the airline
industry. This group will use air transportation more
frequently.
High unemployment rates are a threat. Not only do
the unemployed have less income to spend on
leisure, but they will also not be traveling on
business.
The rising education level of the population in
general leads to increased income and a greater
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probability that flying will be used as a means of
travel. This is an opportunity, as well.
Education also increases people’s curiosity. They
will want to venture into the world and explore other
countries and cultures.
People living far outside cities or videoconferencing
still usually need to commute to work periodically.
Low priced regional air service is one of their
options. This is an opportunity.
The greater number of retired individuals is an
opportunity. They often have the time and the money
to travel.
The rise in the number of professionals is an
opportunity. This group is more willing to pay for
greater comfort and service.
The number of people working longer is an
opportunity. This group tends to have a higher
amount of discretionary income.
Societal values and lifestyles
Ethnographics and psychographics
provide the following categories:
personality, values, and lifestyle.
Technology and education has increased the amount
of information people have about other societies.
Globalization is helping to merge world culture. This
is an opportunity for the airline industry. People
want to observe other parts of the world first hand
and learn about differences.
With an increasing number of companies with
overseas operations, the lifestyles of many people
have changed. Employees spend a greater percentage
of time working overseas and require transportation
from their home country to their host country. This is
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an opportunity for the airline industry.
A fast paced lifestyle is an opportunity as well.
People value their time and are willing to spend
money to decrease the amount of time it takes to get
to their destinations.
In general, people are now more likely to consider
traveling by air for short and long distances and that
is an opportunity for the industry.
Technology
Now it is quick and easy to purchase tickets online
without leaving your home. This has reduced costs
for both consumers and airlines. This is an
opportunity for the industry.
Technology that leads to reduction in other costs is
also an opportunity for the industry.
Opportunity
On the other hand, e-commerce technology has also
made it possible for consumers to instantly compare
different flights and make an educated decision. This
is a threat to the industry. Customers can base their
decision on up to the minute information.
Much of the new technology that improves
communication over long distances is also a threat to
the industry. People no longer need to meet in person
to exchange thoughts and ideas. It used to be that
phones were impersonal because you were not able
to see the person. Now technology has made it
possible for a board meeting to be held in one
country while a board member from around the
globe can interact and view each others facial
expressions. Having all the board members travel to
one location is no longer always necessary.
Threat
Industry’s dominant
economic traits
Market size
The market in 2000 was very large. A large market is The market in 2000 was very large. A large market
an opportunity for existing firms.
increases the threat of new entry. Large markets
cause attention from companies that might want to
enter the industry.
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Scope of the competitive rivalry
The scope of the competitive rivalry is a threat to the
industry. Rivals are operating in many of the same
markets around the world. Intense rivalry limits the
ability for companies to find profitable markets.
Rivals have made many attempts at differentiating
their product but competitors can easily imitate these
changes because many large airlines have similar
capabilities.
Rivals will resort to price cuts and other competitive
actions to keep competitors out of the markets they
are serving.
The threat to competitors is building in international
markets as well. Rivals monitor the moves of their
competitors and quickly enter markets that other
rivals have had a success operating in.
Market growth rate and position in
the business cycle
The market growth rate is a threat to the industry.
With a slow rate of growth and a maturity position in
the business cycle the airline industry is not
attractive.
Competition among rivals is very intense in this
industry.
Number of rivals and their relative
size
With a large number of major rivals the threat of
new entry is decreased. In order to compete with the
major companies already in the industry, a
significant investment is needed.
A large number of major rivals is a threat to
competitors. Many competitors have similar
capabilities and have to battle for market share. This
market is close to pure competition. Market share is
not held by a single rival or a select few.
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Number of buyers and their
relative size
An industry with a large number of small buyers is
an opportunity. Small buyers lack the power that
large buyers have. The fact that there are many
individual buyers makes losing a single buyer less of
a concern.
Extent of rivals’ vertical
integration
Vertical integration is an opportunity for companies
in this industry. While some areas are expensive to
integrate into, such as airplane manufacturing or oil
refinery, airlines can gain a cost savings by
integrating backward into activities such as food
preparation. Companies that are successful at vertical
integration will develop a cost advantage over other
rivals and increase the capital requirements needed
to enter the market.
Offering other services to customers, in addition to
air travel via the internet, is also an opportunity for
this industry.
The extent of rivals’ vertical integration is not a
threat in this industry.
Extent of rivals’ horizontal
integration
Horizontal integration is an opportunity for airlines
to use the synergies in their value chains to cater to
different market segments.
The extent of rivals’ horizontal integration is not a
threat in this industry.
Types of distribution channels
rivals use to access customers.
All major airlines use a gate system for boarding.
This is neither an opportunity nor a threat for the
airline industry.
All major airlines use a gate system for boarding.
This is neither an opportunity nor a threat for the
airline industry.
Pace of technological innovation in
production process innovation
There is a greater amount of risk for new entrants.
Not only do they have to purchase the technology
The pace of technological innovation in the
production process is a threat to the industry.
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initially, but they will also need to make upgrades to
keep up with the industry.
Technological changes increase the capital
requirements for airlines to remain competitive.
Pace of technological innovation in
product introduction
The pace of technological innovation in product
introduction is neither a threat nor an opportunity in
this industry.
The pace of technological innovation in product
introduction is neither a threat nor an opportunity in
this industry.
Extent to which the rivals
differentiate their products and/or
services
Extent to which rivals use
economies of scale
Rivals have an opportunity to differentiate their
products to increase market share.
Companies that have succeeded in this area are a
threat to the rest of the industry.
Economies of scale are a threat to this industry.
While rivals are able to gain economies of scale in
some activities, they are not a significant force in all
industry operations.
Rivals with economies of scale have an advantage
over other rivals. They can lower ticket prices to
levels lower than competitors and still remain
profitable. These rivals require a lower number of
passengers to break even.
Extent to which the key industry
participants are clustered in one
geographic location
The fact that industry participants are not located in
one geographic location is a threat to the industry.
With most major markets already being served there
is limited room for expansion.
Customers have alternatives to choose from across
the U.S. Rivalry is strong in almost all locations not
just one region.
Extent to which certain industry
activities result from learning and
experience curve effects
The learning and experience curve effects are a
threat. The knowledge that is gained from past
operations gives large competitors advantages when
they redesign flight schedules and operations
procedures.
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Greater knowledge leads to lower costs and
increased revenues. Experienced companies will
have a better understanding of what flights to add to
their schedule, how to efficiently handle
maintenance problems, and how to effectively
conduct daily operations.
Capacity surplus or shortage in the
industry
The capacity surplus is a threat to the industry. In
order to earn profits, companies need to cover the
high costs of capital needed to operate in the
industry. It is crucial for companies to fill as many
empty seats as possible in order to earn enough
revenues to show a profit on their flights.
Pressure on rivals to compete for passengers is very
high. A capacity surplus reduces prices and profit
margins.
Capital requirements and the ease
of entry into or exit from the
industry
Capital requirements are a threat to the industry. In
most companies a large percentage of revenue goes
to covering the lease payments on aircraft.
Capital requirements are also a threat because once a
company purchases the necessary equipment it is not
easy to liquidate it. An airplane is not a commodity;
there are a limited number of potential buyers.
Because companies tend to purchase new aircraft
and the market is in the maturity stage, aircraft are
often sold for far less than what was paid for them.
Industry profitability
Low profit margins are a threat to this industry.
When companies do not stay ahead of their rivals,
their profit margin quickly begins to disappear.
In the airline industry, it is somewhat common for
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rivals to have liquidity problems from time to time
and file for bankruptcy.
Companies in financial distress are often forced to
reduce costs, which lowers the quality of service the
airline provides. This helps to increase financial
problems even more by reducing revenues.
Because of low industry profitability, rivalry is
increased.
Degree of alliances
The degree of alliances is a threat to this industry.
The alliances are an opportunity for airlines to
reduce their costs and increase revenues, but at the
same time they increase rivalry.
Groups of competitors are formed by the alliances.
These groups compete with each other for additional
alliances. Airlines not involved in code-sharing
agreements or other alliances are often less
competitive.
Opportunity
Threat
Five forces
RIVALRY
How many competitors are there in
this industry?
The large number of competitors in this industry is a
very strong force, in terms of rivalry. Competition in
this industry erodes profit margins and causes
competitors to look for ways to steal market share
away from rivals. The increased rivalry is a threat to
the industry.
What is the relative size?
The relative size of each competitor is a strong force
in increasing rivalry within the industry. A large
number of competitors with similar capabilities and
sizes mean that most companies are equally able to
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fight for greater market share.
Rivals are constantly monitoring other competitors
and adjusting their strategies.
What is the industry concentration
ratio (C4)?
What is the product or service
demand growth rate?
The top four companies had roughly 65% of the
market share. This industry concentration ratio is a
threat to the airline industry. The industry is much
closer to pure competition than it is to a monopoly.
One company does not have the majority of market
share. The top four companies each have a similar
share of the market, causing rivalry to increase.
In some years the growth rate does increase by a
significant percentage. Rivals have taken advantage
of this opportunity and many have increased their
own individual rates of growth.
A slow demand growth rate increases rivalry. This
force is strong in the airline industry. Airlines have a
lot of unused capacity but not enough demand for
their flights.
The rise and fall of the growth rate increases the risk
of fierce rivalry during time periods when the
industry growth rate slows down.
After September 11, the demand fell for air travel,
which made this force even stronger.
Are rivals using price cuts or other
competitive weapons to boost unit
volume?
The use of price cuts and other competitive weapons
is a somewhat strong force in this industry. It is in
the airlines interest to do whatever is possible to
book as many seats per flight as it can. Empty seats
mean lost revenue and a fewer number of full seats
to cover the costs of the flight.
These actions reduce industry profits and increase
rivalry and they are a threat to the industry.
Are the customer's switching costs
Low switching costs are a threat to the industry.
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low?
Customers have very little reason to remain loyal to
one competitor when another rival reduces their
price or offers better service.
Competition is very strong in the airline industry
because of this. Rivals are constantly looking for
better ways to lure passengers from other carriers.
Are rivals launching moves to
change their market share or
industry position at the expense of
other industry participants?
The moves rivals make to change their market share
at the expense of industry participants are a threat to
the industry. They are a strong force in increasing
rivalry. Companies launch moves and their
competitors retaliate to maintain their market share.
Financial problems are common in the airline
industry, which helps to increase the number of
aggressive moves.
What are the payoffs for strategic
moves?
The payoffs of strategic moves are sometimes
substantial. This is a strong force that increases
rivalry in the airline industry.
Rivals know they can increase their financial figures
by investing time and money into making the right
strategic moves.
Competitors that set up operations in foreign
countries first will gain acceptance and experience
ahead of other rivals. First mover advantages
increase rivalry.
Does it cost more to exit the
industry than to continue
participation?
The high cost of exiting the industry is a strong force
that increases rivalry. Companies stay in the industry
when they are not profitable to avoid a bigger
financial loss. Competition with these companies is
fierce.
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How consistent are rivals strategic
visions, strategic intents,
objectives, strategies, resources,
and origins?
Inconsistency when it comes to strategic visions,
strategic intents, objectives, strategies, resources, and
origins is a threat to airlines in the industry.
Competitors are unpredictable and rivalry is strongly
increased as a result of this.
Rivals look for innovative ways to gain market share
that are different from other competitors.
Are strong new entrants acquiring
weaker rivals and launching wellfunded, aggressive moves?
The lack of strong new entrants acquiring weaker
rivals and launching well-funded, aggressive moves
is an opportunity in this industry. This is not a force
increasing rivalry in this industry.
Opportunity
Threat
THREAT OF ENTRY
What economies of scale exist?
The high economies of scale in the airline industry
help to prevent new entry. They create a significant
entry barrier. Potential entrants need to enter on a
large scale, thus increasing the capital requirements
and risk. Companies that do not enter on a largescale face higher costs.
Large-scale entry means that new entrants will
quickly need to increase revenue to fill the large
capacity of the planes they purchase or they will
remain unprofitable.
Economies of scale are an opportunity for airlines
already in the industry.
Cost and resource disadvantages
independent of size
The cost and resource disadvantages independent of
size decrease the threat of new entry and are an
opportunity for existing firms in the industry.
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New entrants need to have the necessary cash on
hand to pay the high landing fees and invest time in
the industry to develop relationships.
What are the learning curve and
experience effects to enter the
industry?
The learning curve and experience effects to enter
this industry are a threat to new entrants and an
opportunity for existing firms.
New entrants do not have the knowledge that comes
from experience in this industry.
Inability to match the technology
and specialized know-how of firms
already in the industry. How
accessible is the industry's
technology?
The inability to match the technology and
specialized know-how of firms already in the
industry is a threat to new entrants. This is an
opportunity for existing firms.
New entrants need to find people with the
specialized skills or invest a great deal of time and
money training existing employees.
Existing firms already have the technology and the
right people in place to operate it.
Brand preferences and customer
loyalty
Brand preferences and customer loyalty are not
much of a barrier to new entry, at least in United
States markets. This is a threat to existing firms and
an opportunity for new entrants.
New entrants can easily steal customers away from
existing firms by offering lower rates or more
convenient flight times.
What are the capital requirements
to enter?
The high capital requirements of entry into the
industry are an opportunity for existing firms. High
capital requirements threaten new entrants.
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The high capital requirements limit the number of
potential entrants and help to protect existing firms
from new competition.
What other resource requirements
are necessary to enter?
The need for a strong legal team is a threat to new
entrants and an opportunity for existing firms. A
legal team with experience in the industry is not
easily attained without a sufficient amount of
investment.
What is the access to distribution
channels?
The limited access to distribution channels is a threat
to new entrants and an opportunity for existing
firms.
Existing firms have a protected distribution system.
New entrants cannot easily move in and use the
system. New entrants usually have to offer the
airport a greater amount of money for the gate,
which will reduce the new entrants profits.
What regulatory policies apply?
The Airline Deregulation Act created an opportunity
for new entrants. New entrants can now move into a
market and add flights much more easily. This is a
threat to existing firms that are trying to hold on to
and/or increase their market share.
FAA regulations affect all competitors. They are a
cost of operating in the industry.
What tariffs and trade restrictions
apply?
In some countries there is a significant government
barrier to new entry, which is an opportunity for
existing firms operating in the country. They
essentially have a protected market to operate in.
Opportunity
Threat
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SUBSTITUTES
What is the availability of
attractively priced substitutes?
The availability of attractively priced substitutes is a
threat to existing firms.
Just how much of a threat depends on factors
including the distance of the trip.
Is the substitute of better, worse, or
equal quality?
Substitutes are likely to challenge the airline
industry. Depending on the length of the trip and
consumer preferences, all of these substitutes can be
considered higher quality. This is a threat to existing
firms in the industry. For some trips, air travel is by
far the best means of transportation, but for others,
airlines need to compete with substitutes for
passengers.
Is the substitute of better, worse or
equal performance?
Substitutes are an unlikely challenge to the industry,
in terms of performance. Airlines have the ability to
move passengers from place to place much quicker
than substitutes can offer. This is an opportunity for
existing firms.
Can buyers easily switch to the
substitutes?
Customers that need to arrive at a destination quickly
cannot easily switch to the substitutes without
jeopardizing or losing their chance of arriving on
time. This is an opportunity for existing firms.
Opportunity
Substitutes are a threat to the industry, in terms of
how easily buyers can switch to the use of their
services.
Substitutes are readily available and can be
attractively priced. This is a threat to existing firms.
Threat
SUPPLIERS
Is the item or service a commodity
available on the open market from
many suppliers who are capable of
filling the order?
Most items airlines need to operate are not
commodities. This is a threat to the airline industry.
Suppliers are likely to have bargaining power in this
industry.
A small number of suppliers can fill orders for
aircraft, equipment, and fuel. Airlines need to buy
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these items when the price is right. When the prices
of these items increase it puts significant pressure on
the airline industry.
Are there good substitutes for the
product or service to which the
buyers can easily switch?
The ability for the airline industry to switch to
smaller less crowded airports and offer different
foods and beverages is an opportunity for the airline
industry.
The lack of good substitutes for the major supplies
the airline industry needs to operate is a threat to the
industry. It increases the bargaining power of
suppliers.
Is the company a major buyer?
The fact that each large airline is a major customer
of the aircraft supplier they chose is an opportunity
for the airline industry. This reduces the power of
suppliers to raise prices or lower quality. The
success of the supplier is tied in with the success of
the airline.
Even though each major airline is a major buyer of
jet fuel, the airlines do have very little control over
reducing rising fuel costs. This is a threat to the
airline industry. High fuel costs will raise costs and
reduce the airlines profitability.
Because airlines are major buyers of food and
beverage suppliers they can negotiate with suppliers
for better prices, more favorable terms of sale and
higher quality. This is especially true when the
company they are purchasing from is small in size or
just starting out. This is an opportunity for the airline
industry.
The amount of power an airport has is dependent on
the location of the airport, the number of other major
airlines that utilize the airport or wish to utilize the
airport, and the number of flights the airline provides
to or from that destination. This can be an
opportunity or a threat to the airline industry.
The amount of power an airport has is dependent on
the location of the airport, the number of other major
airlines that utilize the airport or wish to utilize the
airport, and the number of flights the airline provides
to or from that destination. This can be an
opportunity or a threat to the airline industry.
Does the supplier dominate the
industry?
There is an opportunity for the airline industry when
it comes to food and beverage purchases. Airlines
can reduce prices and improve quality by shopping
The supply of jet fuel is a threat to the industry.
Airlines can improve some of the terms of sale by
switching to other jet fuel providers but the item is
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around for the best supplier.
required and its cost has a large influence on the
overall costs of the airline.
Airlines can only purchase aircraft from two
suppliers. The cost of an airplane is a large portion of
an airlines total cost. Airplanes are not only
necessary equipment for an airline, but they also
affect the quality of the service an airline can offer to
its customers. Airbus and Boeing compete with each
other for sales. Their success is tied to the success of
the airlines they supply. It is in their interest to invest
in technology and improve their product so that they
can retain their buyers. Therefore, airplane suppliers
are not a threat to the airline industry.
Does an outside supplier provide a
cost advantage over vertical
integration?
Food preparation is an opportunity for the airline
industry. When suppliers raise prices, airlines have
the potential to lower their costs by preparing their
own meals.
Does an outside supplier provide
other advantages over vertical
integration?
What types of working
relationships exist? Start by listing
the types of working relationships
Outside suppliers of aircraft and jet fuel provide
them at a fraction of the cost airlines are able to. The
suppliers lower their costs by producing in large
quantities. These items require specialized
equipment and personnel and a vast knowledge of
the particular industries. The capital requirement of
these industries is substantial. This is a threat to the
airline industry. Suppliers can raise prices on these
items to a certain extent without having to worry that
airlines will start supplying themselves.
The quality advantage outside suppliers have over
vertical integration is a threat to the airline industry.
Suppliers can provide higher quality products than
an airline is able to produce. This gives suppliers
more bargaining power.
Developing working relationships with suppliers is
an opportunity for existing firms in the airline
industry. These working relationships lead to lower
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that exist. Then, focus on the
strategic importance of
relationships with suppliers in this
industry. Are these relationships
of strategic value for the
competitors in the industry? If so,
why and how do the relationships
impact the competitive structure
and environment of the industry?
What is the relative quality of the
supplier and his services or
products?
costs and increased profitability for some airlines.
The airlines with the best relationships gain
competitive advantage. This increases rivalry in the
industry.
High quality suppliers are available to firms in the
airline industry. This is an opportunity for these
firms. Airlines can utilize high quality supplies to
provide a better product to their customers. Rivalry
in this industry is intense because all competitors
have access to most of these suppliers.
Opportunity
Threat
BUYERS
What is the cost to the buyer of
switching to a competitor or a
substitute?
The low switching costs buyers face are a threat to
the airline industry. Competition in this industry is
increased as a result of this. Airlines need to focus
on satisfying customers needs better than their
competitors and firms offering substitutes.
How many buyers are there in this
industry?
The large number of buyers is an opportunity for the
airline industry. Competitors can easily find other
customers to replace those that are lost. Existing
firms also have the opportunity to gain a large
number of buyers by changing their product or
service in a way that satisfies a greater number
customer needs.
What is the relative size (based on
the amount they purchase) of each
buyer?
The relative size of buyers is an opportunity for the
airline industry. An individual buyer has very little
bargaining power in this industry due to the fact that
they only contribute a very small fraction of total
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industry revenue.
What is the buyer's knowledge
level?
Can the buyers threaten the
industry with backward
integration?
Are the industry's products
discretionary purchases?
Knowledgeable buyers are a threat to the airline
industry. Buyers have more barging power as a
result of their increased knowledge. This knowledge
also increases competition in the industry.
Backward integration is neither a threat nor an
opportunity in the airline industry.
Backward integration is neither a threat nor an
opportunity in the airline industry.
The fact that plane tickets are discretionary
purchases is a threat to the airline industry. The
buyer can chose to fly or not to fly. This increases
the power buyers have in this industry.
Opportunity
Threat
Drivers of change in the
industry
Internet and new e-commerce
opportunities
The internet and new e-commerce technologies are
an opportunity for airlines to increase revenue and
lower costs by encouraging consumers to book
flights on-line instead of using a travel agent.
Airlines have the opportunity to increase revenue by
making changes to their product and developing a
direct relationship with consumers by
communicating with them through the internet.
The increased buyer knowledge and decrease in
demand because of new video-conferencing
technology are threats to the airline industry. They
negatively affect the competitive structure. As
rivalry is intensifies, the airlines industry’s
profitability suffers and some companies are forced
to file for bankruptcy.
Airlines need to develop relationships with online
travel services to attract and retain customers.
Increasing globalization of the
industry
The increasing globalization of the industry has
created an opportunity for firms to enter international
markets to increase profits. Many developing
countries are demanding more air transportation.
As globalization increases, new entrants threaten the
market share of firms already operating in
international markets. As more firms enter these
markets, rivalry will increase and profits will fall.
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The political environment in many countries was
affected by the events of September 11. This has
reduced the number of potential profitable markets.
Long term industry growth rate
Airlines in strong positions need to look for
opportunities to acquire weaker airlines to gain
market share.
The long-term industry growth rate threatens
existing firms. Firms must look for opportunities to
attract new customers and retain the their existing
ones.
Almost all airlines can benefit from entering into
code-sharing agreements and other strategic
alliances.
Firms have the opportunity to gain market share by
making changes to their product and/or increasing
sales to customers they are already serving.
Airlines must develop aggressive strategies to attract
customers from airlines that have gone out of
business.
Who buys the product and how do
they use it
Changes in who buys the product and how they use
it are decreasing the profitability of many airlines in
the industry.
Airlines that do not successfully lower their costs or
differentiate their product will eventually lose
market share.
Product innovation
The intense rivalry that product innovation is
creating is a threat to the airline industry.
Product innovation will cause some rivals to lose
market share and most rivals will retaliate.
Rivals need to focus on strategies based on
differentiation and lowering costs.
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Rivals must make sure that consumers know about
new innovations to their products.
Technological change
Technological change is a threat to the airline
industry because new technology is often very
expensive and is usually only supplied by a limited
number of suppliers.
Potential relationships between suppliers of the new
technology and the individual airlines will increase
rivalry and threaten the industry as well.
Backward vertical integration usually does not
provide an opportunity for firms to lower their costs
because of the complexity of the new technology.
This increases the power suppliers have and is a
threat to the industry.
Marketing innovation
Marketing innovation in this industry puts additional
pressure on firms to lower their prices and/or
differentiate their products or risk lower profitability.
Marketing innovation is a threat to the airlines.
Firms need to focus on looking for ways to lead the
industry in marketing innovation and aggressively
responding to other competitors marketing
initiatives.
Entry of major firms
The small number of new entrants is an opportunity
for the airline industry.
However, when a major new firm does chose to
enter the industry, it will cause competition in the
industry to increase and existing firms will have to
focus on maintaining their market share.
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Exit of major firms
The exit of major firms is an opportunity for
The exit of major firms is also a threat to the
remaining rivals to increase their share of the market. industry because of the increased competition.
Rivals will use whatever methods they can to battle
for the exiting firms customers.
Diffusion of technical know-how
The diffusion of technical know-how is a threat to
the industry. Firms need to constantly look for more
effective ways of operating and when they discover
one they must protect the new knowledge. Protecting
their technical know-how can be costly.
Employees leaving the company and the moves
rivals make constantly threaten competitive
advantage from technical know-how.
Cost and efficiency
There is an opportunity for rivals with the lowest
cost floors to increase market share by reducing their
prices and still remain profitable.
Changes in costs and efficiency are a threat to this
industry. This is a very important force in this
industry. Low cost airlines are gaining market share
from competitors and the competition that results is
threatening many rivals profitability.
Rivals need to lower their costs in order to remain
profitable when they lower their prices.
Rivals that are unable to lower their costs or
differentiate their products in a way that adds value
in the eyes of customers will not be competitive.
Growing buyer preferences for
differentiated products instead of a
commodity product
Growing buyer preferences for differentiated
products instead of a commodity product is an
opportunity for firms that have the capability to
respond to customer needs.
Changing consumer needs are a threat to the industry
because firms must monitor these needs and
constantly be looking for ways to improve their
product. The costs associated with identifying these
needs and responding to them can be very high.
Rivals must also be aware of the way other
competitors are trying to meet customer’s needs.
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The growing need for low priced no frills air travel
has caused many firms to focus on reducing costs so
that they are able to show a profit when they lower
their ticket prices.
Regulatory and government policy
changes
Regulatory and government policy changes are a
threat to the industry.
Deregulation resulted in increased competition and
lower profitability for many airlines.
New safety and security regulations have increased
costs and are a threat to airlines financially.
Some regulatory and government policy changes in
foreign countries are an opportunity for the industry.
These changes have made it possible for an airline to
serve new international markets.
Societal concerns, attitudes and
lifestyle changes
Societal concerns, attitudes, and lifestyle changes are
a threat to this industry.
Airlines need to focus on making sure that
consumers view air travel, as a safe means of
transportation or the entire industry will suffer.
Airlines must constantly pay attention to any new
changes and adapt accordingly.
Reductions in uncertainty and risk
Reductions in uncertainty and risk have caused new
firms to enter the market resulting in increased
competition. This is a threat to the industry. Firms
need to focus on strategies that will help them retain
customers and build a competitive advantage.
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Opportunity
Threat
There is an opportunity for Continental to move
away from the rest of the group by continuing to
improve its quality of service. By moving away from
the group, Continental will be able to increase
market share.
American, US Airways, Delta, and United are
Continental’s closest competitors and biggest threats
according to this map. Southwest and Northwest are
threats to Continental, but only in the markets they
both serve. Southwest and Northwest do not operate
in some of the markets that Continental does.
Strategic group map
Quality of Service Rankings
American West and Alaska are not threats to
Continental. They have a much lower quality of
service and they serve a narrow market.
Average Sale
Alaska, American West, Northwest, and Southwest
are not close competitors of Continental’s according
to this map.
Continental has the opportunity to break free from
the grouping it is in by catering to business
passengers by providing additional frills and raising
ticket prices to pay for the frills.
American, US Airways, Delta, and United are
Continental’s closest rivals. They all are direct
threats to Continental. Continental must monitor
their moves at all times and look for ways to separate
from this grouping.
Continental also has the opportunity to lower costs to
the point where it can lower prices on all flights and
become an international no frills, low cost airline.
Continental does not have the strengths required to
do this.
Opportunity
Threat
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Competitor’s next moves
The firms with the highest market share in the
industry can use their size to put pressure on smaller
firms that are trying to survive.
Most major competitors in this industry have
offensive strategies and are trying to gain market
share. Many airlines are serving the same markets
and have similar resources. Mergers and acquisitions
are a threat to competitors.
Opportunity
Threat
Key success factors
High fixed asset utilization
There is an opportunity for airlines to increase their
fixed asset utilization in this industry to increase
profitability. Some rivals are not strong in this area.
Access to financial capital
Access to financial capital is threat in this industry.
Without financial capital future growth is hard to
achieve and companies can have cash flow
problems.
Customer service
Customer service provides an opportunity for firms
to increase revenues. Not all competitors have
focused on this area.
Superior information systems
Having a superior information system will increase
the quality of the information available for decisionmaking. The number of rivals with poor or less than
average information systems is an opportunity for
firms to exploit.
Overall low cost
Firms with low costs floors are a threat to
competitors. High cost floors cause companies to
have financial problems when demand slackens.
Opportunity
Threat
Industry profitability
Industry growth potential
The industry’s growth potential is a threat to the
industry. Rivalry is intensified as a result of this.
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Low growth potential also makes the industry less
attractive to new entrants.
Does competition permit adequate
profit potential?
The fact that competition does not permit adequate
profit potential is a threat to the industry. Intense
competition resulting in reduced profits makes the
airline industry unattractive.
Does competition lead to stronger
or weaker forces?
Stronger forces are a threat to the industry. The
stronger the forces become, the more pressure it puts
on profits. Rivals will do whatever they can to
remain profitable. This makes the industry more
unattractive.
Will the prevailing driving forces
positively or negatively impact
profit potential?
The prevailing driving forces are a threat to the
industry. Decreased profit potential will increase
competition for market share. Competitors will make
aggressive moves in order to earn enough revenue to
cover costs. Prevailing driving forces that negatively
impact profit potential make the industry less
attractive.
What is the company's relative
competitive potential in this
industry?
Continental’s relative competitive potential in this
industry is a threat to other rivals. Continental has
the opportunity to gain market share by continuing to
improve its quality of service and add more
profitable flights.
They are a significant threat to other airlines with a
large number of business passengers because they
have found ways of meeting the needs of these
individuals.
Continental must continue to improve on the areas it
has focused on or risk lower profitability. They must
continue to look for ways to meet their customer’s
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What is the company's ability to
capitalize on its competitor's
weaknesses?
Can the company defend against or
is it insulated from the factors that
make this industry unattractive?
How well do the company's
capabilities match the industry's
KSFs?
needs.
Continental has a strong ability to capitalize on its
competitor’s weaknesses. Continental has a talented
and knowledgeable management team that has
developed strategies that will help Continental to
increase market share.
Continental will be able to maintain or increase
market share in this industry by continuing it’s
present strategies. Even though this industry is
unattractive, Continental can still be profitable.
The company’s capabilities need to be improved to
match up better with all key success factors. This is a
threat to Continental.
Continental has used its strengths to increase
profitability and compete for market share. Two key
success factors, overall low cost and access to
financial capital are weaknesses for Continental. The
company must focus on improving in these areas to
remain profitable in the future.
What are the future uncertainties
and risks for this industry?
The future uncertainties and risks for this industry
are threats to the industry. Anyone of these can
reduce a company’s profitability. Firms must keep
their costs low and take advantage of as many
opportunities as possible to increase volume and
remain profitable in the future.
What is the severity of the issue(s)
or problem(s) facing this industry?
The severity of the issues and problems facing this
industry is a threat to this industry. The issues are
faced by all competitors and have the potential to
dramatically reduce profitability by raising costs,
increasing competition, and lowering revenues.
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Firms must develop strategies to increase volume
and drive costs down as much as possible.
If a corporation, will continued
participation in this industry
positively or negatively impact its
ability to compete in other
industries?
The negative impact continued participation in this
industry has on a company’s ability to compete in
other industries is a threat to the industry.
Existing firms have limited opportunities to compete
in other industries because this industry ties up cash
reserves.
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V. Internal factors
Chapter 4 Worksheet
1. How well is the current strategy working?
Criteria
What are the present
strategies? (Note: This
question applies to the
corporate, business, and
functional levels of the
organization.)
Facts
Continental’s overall strategy
is to be the best-cost provider.
They are focusing on
providing customers with
“more value for the money.”
Continental wants to have the
lowest costs out of any airline
offering similar product
features and customer service
levels.
Costs are only increased when
necessary to add value to the
product. Bethune’s “row 5
test” is used to help determine
this. The “row 5 test” involves
determining whether a
passenger in row 5 will pay
more for the added feature.
Continental focuses on high
quality and better services.
Efforts to reduce costs in each
step in the value chain have
helped Continental to improve
quality. For example,
Bethune’s efforts to lower the
$5 million spent because of
poor on-time arrival not only
reduced this figure drastically,
but also helped the company
to rate among the top three
major airlines in on-time
arrival for many months.
What does this mean?
Continental caters to business
travelers, but also wishes to attract
passengers traveling on leisure.
Continental must be successful not
only in adding value to the product but
also in developing low cost ways to
accomplish this.
Continental must determine exactly
what customers value and remove
features that do not add value to the
product.
Continental needs to continue to
improve their customer service levels
to help justify the higher price they are
charging.
Continental has been successful at
implementing their present strategy
because of the moves that were made
to improve the organization’s culture.
Continental’s present strategy has
helped the company to develop
strengths in a number of areas. These
strengths have helped Continental
pursue opportunities for growth and
defend against intense competition.
Continental’s long-term solvency still
needs to be improved. Continental
must also continue to search for ways
to lower its cost floor without
decreasing the value of the product.
Continental focuses on quality
at all levels of the
organization.
Continental provides service
for business passengers and
the flip-flop crowd, but the
marketing strategy focuses
more on the needs of business
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passengers because the
company believes they will
pay more for comfort and
convenience.
Continental uses its financial
systems to determine the
routes with the most profit
potential and eliminate routes
with low passenger traffic.
When Bethune came on board,
he put the “Go Forward Plan”
in place. This plan consists of
four parts: “Working
Together,” “Fund The Future,”
“Make Reliability A Reality,”
and “Fly To Win.” Together,
these parts are designed to
help Continental improve its
financial situation, the culture
of the organization, customer
service, and the reputation the
company has.
Continental Express also has a
best-cost provider strategy.
Continental Express is
constantly looking for new
opportunities to increase the
number of destinations they
fly to and routes they serve.
They are lowering costs and
adding value to the service by
disposing of old aircraft and
purchasing newer planes.
Continental uses code-sharing
and other alliances to increase
revenues and lower costs.
Continental’s new
management team developed
these strategies and focused on
improving the culture of the
organization so that they were
able to be implemented.
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Assess the company’s relative
performance using the three
tests for a winning strategy.
- Goodness of fit
- Competitive advantage
(You must answer question 2
below before analyzing the
company’s competitive
advantages.)
- Performance
(You must address the
objectives question and
financial analysis question
below before you analyze the
company’s performance.)
To address GOF, you must
analyze the SWOT. If the
majority of the intersections
are in the S-O quadrant, the
company has a good fit. For
the CA test, you must first
complete question 2 in
Chapter 4. Your responses to
the four tests of competitive
value determine whether or
not the company passes the
CA test. For the performance
test, you must examine the
company’s actual
performance. Look at their
financial ratios and their
relative performance. When
you have the facts, it is much
easier to conduct your
analysis.
Goodness of fit:
Goodness of fit:
Continental’s strategy of
offering better customer
service and meeting customer
needs in a way superior to
rivals has helped Continental
increase revenues, lower costs,
and increase profits.
Continental has successfully tailored
its resource strengths and weaknesses
to match the industry and competitive
conditions, as well as the market
opportunities and threats.
Continental has made
innovative changes to their
product and service. These
changes have helped the
company pursue growth
opportunities and meet the
needs of their customers.
Bethune helped to turn the
company’s weaknesses into
strengths and used those
strengths to pursue
opportunities and defend
against threats.
Major external threats include
the economic recession,
maturity of the market, intense
rivalry, and industry
profitability.
The company’s major
weaknesses include its high
cost floor, high debt to equity
ratio and financial position.
The company’s major
strengths include its
intellectual capital, culture,
degree of alliances, reputation
for customer service, and
product/service innovation.
Continental’s major
opportunities include the large
number of buyers in the
industry, population
demographic changes, and
international routes.
Continental’s strategy relies on the
strengths Bethune helped create to
pursue opportunities and defend
against threats.
Continental’s marketing focus on
business passengers fits well with the
capabilities the company has
developed.
The company’s reputation for
customer service, ability to devise
innovative ways of meeting customer
needs, intellectual capital, culture and
degree of alliances are a tight fit with
the opportunities in the industry.
These strengths also help the company
to defend against intense competition
and low industry profitability.
Continental’s present strategy passes
the goodness of fit test. The present
strategy and its implementation is a
strength.
Competitive advantage:
Continental’s strategy has helped the
company develop a number of
strengths. However, Continental does
not have any sustainable competitive
advantages. Their strengths, in some
cases, are superior to other rivals, but
they can all be trumped by rivals
resources and capabilities and/or be
easily copied.
Performance:
Continental’s profitability has
increased because of the present
strategy. Continental’s strategy passes
the performance test. This is a
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Competitive advantage:
strength.
Continental has a number of
strengths. The company’s use
of technology in developing
its financial information
system has helped improve the
accuracy, reliability, and
timeliness of information for
decision-making.
Continental’s promotional
efforts attracted passengers
that stopped using the
company’s service because of
poor service in the past.
Continental has been
successful in making
innovative changes to it’s
product and service. They
have been able to use their
capabilities to improve the ontime arrival percentage and
baggage handling. The
company has used its
technological knowledge to set
up and expand its website and
improve the efficiency of
maintenance procedures.
Continental has improved its
load factor and reduced excess
capacity by disposing of older
and much larger aircraft and
purchasing smaller planes.
They have strengths because
of their hub and spoke system
and choices of location for
maintenance facilities and
hubs. They also have strengths
as a result of their wide
geographic coverage, superior
intellectual capital, product
quality, culture, recognition as
an industry leader, attractive
customer base, and alliances
with other airlines.
Continental’s competitive strength has
increased and there have been gains in
the company’s long-term market
position. Therefore, Continental
passes this part of the test as well. This
is also a strength.
The present strategy has improved the
financial performance of the company
in the short run, but Continental’s
long-term solvency remains to be a
problem. This is a weakness.
Performance:
Continental’s profitability,
competitive strength, and
long-term market position
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Continental began to show
profits when the new strategy
was implemented.
Continental’s sales growth
stayed above the industry
average in every year between
1995 and 2000. By September
of 2001, Continental and
Continental Express had 25
consecutive quarters of
profitability. In 2001,
Continental and Southwest
were the only two major
commercial airlines to show a
profit for the first two quarters
of the year.
Continental lowered many of
its costs by improving the
culture of the organization and
focusing on increasing the
percentage of flights arriving
on time. Continental’s cost
floor remains higher than most
rivals. Continental’s debt to
equity ratio is the third highest
and Continental has less cash
on hand than other rivals
similar in size. Continental’s
competitive strength has
improved and the company
has been successful in meeting
the needs of customers,
business travelers especially.
What is the company’s
competitive scope
 Stages of the industry's
production-distribution
chain it operates,
 Geographic market
coverage, and
 Size and composition of
the customer base?
 Please add other facets of
competitive scope as
necessary.
Stages of the industry's
production-distribution
chain it operates:
Continental’s tickets for air
travel are sold by travel
agents, at the airport, online at
the company’s website, or
online at ticketing services
such as Expedia.
Continental increased eticketing to 95% of their
Stages of the industry's productiondistribution chain it operates:
Continental has made efforts to
increase sales from sources other than
travel agencies and ticket counters. By
doing this, Continental has reduced
costs and added value to the product.
With e-ticketing, there are no
commission fees to pay to travel
agents and employees are not required
to conduct the transaction. A smaller
staff is often used to monitor the
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You are supposed to examine
the company’s competitive
scope from the perspective of
how the competitive scope is a
competitive capability within
the overall framework of how
well is the current strategy
working. From your analysis,
identify the particular
strengths or weaknesses
associated with the
competitive scope strategy.
destinations in 2000.
54% of their total sales in
2000 came from e-ticket sales,
a total of $5.8 billion.
They also introduced
www.orbitz.com in
conjunction with American,
United, Delta, and Northwest.
The website offers consumers
travel tips and helps them to
book flights, rental cars,
lodging etc.
Continental rents gate space at
airports to get their passengers
on to the plane. Gates are
available to all airlines, but
there are a limited number of
gates and fees vary depending
on the airport.
Geographic market
coverage:
In 2000, Continental had over
2000 flights with over 130
domestic locations and 90
international.
Continental served more
international destinations than
its rivals.
Between 1995 and 2000,
flights were added to South
America, Mexico, Rome,
Milan, Honk Kong, Tel Aviv,
Tokyo, Guam, Caribbean,
Central America, and many
other European cities.
system and handle any problems.
Customers also often find the service
much more convenient and it allows
them greater control over their trip
planning. This adds values to the
product in the eyes of consumers.
Continental has the competitive
capability to lower costs and increase
value in the production-distribution
chain it operates. This is a strength for
Continental.
Continental’s gate access is not a
competitive capability.
Geographic market coverage:
Continental’s market coverage is more
widespread than many other rivals.
Continental’s experience serving
European cities has helped them to
identify new opportunities
internationally. The company’s
regional service, Continental Express,
has helped to boost the load factors on
Continental’s regular service. The hub
and spoke system that Continental
uses has enabled the company to
expand its market coverage and earn
higher profits on its regular service by
using Continental Express to feed the
hubs. This competitive capability has
helped Continental to lower costs and
add value to the product. Customers
can fly on a Continental plane from a
small city to a large airport and
connect with one of Continental’s
larger planes to their final destination,
possibly outside of the United States.
Before this, it was often necessary to
change carriers or drive the distance to
a major airport. Continental’s
geographic coverage is a strength.
Continental served most of
these countries through hubs
located in the U.S.
Size and composition of the
customer base:
In 2000, Continental Express
had over 1000 flights to 70
U.S cities, 10 Mexican cities,
and 5 Canadian cities.
Continental’s best-cost provider
strategy will attract both business
travelers and the flip-flop crowd.
Continental provides the frills
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Size and composition of the
customer base:
Continental carried
46,896,000 passengers in
2000. The customer base is
made up of flip-flop
passengers (passengers usually
traveling on leisure) and
business travelers.
customers enjoy and remains
competitive in terms of price with
other airlines offering similar frills.
The product features along with high
levels of customer service will help
Continental to retain customers. These
are both strengths that fit well with the
composition of the customer base.
Business travelers will
generally pay more for added
comfort and need convenient
flight times.
The flip-flop crowd usually
looks for lower prices and are
more open to flying at odd
times.
What are the functional
strategies
 Production,
 Marketing.
 Finance,
 Human resources,
 R&D,
 Etc.?
Start by listing the functional
areas; then provide the facts
associated with each of the
areas. Finally, conduct your
analysis and determine how
well the functional areas are
working and the associated
strengths and weaknesses.
You are supposed to examine
the company’s functional
strategies from the perspective
of how the strategies provide a
competitive capability within
the overall framework of how
well the current strategy is
working. You are supposed to
determine the strengths or
Production:
Continental uses a hub and
spoke system instead of a
point-to-point system.
Continental uses e-ticketing to
reduce its costs. E-ticketing is
more convenient for
passengers and bypasses travel
agents.
Continental has put a lot of
attention on identifying
profitable routes and removing
unprofitable routes from the
schedule.
Overhead bins were
redesigned to allow greater
carry-on luggage capacity.
Continental has launched
programs to improve its
percentage of flights arriving
on-time and its baggage
handling.
Continental’s production strategy is
working well. This strategy helps
Continental achieve the strategic
objectives in the “Go Forward Plan.”
Continental has a competitive
capability because of the way it uses
its hub and spoke system. This is not a
competitive advantage because other
rivals can put a similar system into
place. Continental’s use of e ticketing
is a strength. Continental has been
able to lower their costs and increase
revenues because of the internet.
Continental’s overhead storage bins
are also a strength, but not a
competitive advantage because other
competitors can copy the move.
Continental’s improvements in ontime arrival and baggage handling are
also both strengths.
Continental’s marketing strategy is
working very well. It has helped the
company to attract the passengers that
stopped flying Continental and it
strengthens the company’s market
position. Continental has showed
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162
weaknesses associated with
the strategies. Determining
the strategy is working is the
first step. Your analysis of
why is the strategy working or
not working will identify the
strengths or weaknesses.
Marketing:
“Fly to Win”: This was the
market plan. The plan
involved looking at the routes
the planes flew and the
number of flights on each
route. Routes and flights that
were not profitable were
eliminated and new attractive
routes were added. The
number of destinations was
increased. Because
Continental Lite, a no frills
service, did not catch on with
the company’s customers,
Bethune decided on full
service flights.
customers that it has changed and is
now a very different airline. The
strategy has increased the number of
profitable flights and reduced costs
that do not add value to the product.
Continental has competitive
capabilities in choosing routes and
improving its on-time performance.
These are not competitive advantages
because they can be copied.
Continental’s financial strategy helped
the company to turn around and show
a profit in 1995. The strategy is
working well to increase the
company’s revenues and lower costs
that do not add value to the product.
Continental has grown at a rate higher
than the industry average. This is a
strength.
The plan also involved
utilizing a hub and spoke
system and eliminating hubs
with low traffic levels. Fares
were increased on routes with
high traffic. A300 planes were
disposed of to reduce the age
of the aircraft fleet and the
number of types of planes
Continental uses. This was
done to reduce maintenance
costs and parts inventories.
Smaller planes were used to
reduce capacity surplus on
many flights.
Management’s ability to renegotiate
lease payments and refinance debt
helped to improve the company’s
solvency. Postponing some debt
repayments was crucial during some
periods to enable the company to show
a profit, but did not help to improve
the company’s long-term solvency.
This is a weakness. The financial
strategy does not provide a clear plan
for reducing the company’s debt in the
long-term. This is crucial to the
financial success of the company in
the future.
“Fly to Win” also involved
attracting passengers
Continental had lost. A new
marketing campaign was
launched targeting past
customers, with the emphasis
on business travelers.
Continental reinstated the One
Pass frequent flyer program
and put the added benefits
Continental offered in the past,
back into effect. The
marketing plan involved
personally apologizing to
business travelers and travel
Continental’s human resource strategy
is working extremely well.
Improvements in the culture of the
organization have resulted in less
absenteeism, fewer on the job injuries,
and lower employee turnover.
Customer service levels have risen and
employees are participating in groups
to find better ways of achieving
objectives. Improved performance in
on-time arrivals and baggage handling
are signs that employees are buying
into the new strategy. These are all
strengths of the new strategy and
many of them add value to the
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163
agents and offering travel
agents incentives to attract
Fortune 500 clients. Higher
commissions for travel agents
were reinstated as well.
Bethune promised improved
customer satisfaction and ontime performance.
To promote Continental,
Bethune held a party at his
private home where he invited
100 business travelers and
their guests, leather ticket
holders were given out at the
party. Top executives,
including Bethune, also made
private calls to customers and
travel agents, etc.
product. The human resource strategy
has helped the company to achieve its
financial objectives and its strategic
objectives. Increases in worker
productivity have lowered costs and
happier employees have helped the
company to attract and retain
customers. Continental’s culture is one
of its biggest strengths.
The maintenance strategy is working
well. Continental has achieved its
objectives in terms of lowering
maintenance costs and improving
efficiency. The maintenance facilities
are now more reliable and fewer
maintenance locations are required to
repair planes. Maintenance is now one
of Continental’s strengths.
“Make reliability a reality”:
This was the product plan. It
involved improving
Continental’s “on-time
performance, baggage
handling, and overall flying
experience- doing the very
things that would please
customers and make them
inclined to fly Continental
again.” Employees were
rewarded for on-time
performance. Customer
service was improved,
Continental provided
information on their website,
surveys were conducted of
customer preferences, etc.
Finance:
“Fund the Future”: This was
the financial plan. Continental
emerged from bankruptcy in
1993 with $2 billion in debt.
The company also had high
lease and interest payments.
The goal of the financial plan
was for Continental to show a
profit in 1995 after almost ten
years of losses. This goal was
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164
achieved. The plan involved
“the renegotiation of aircraft
lease payments, refinancing
some of Continental’s debt at
lower interest rates,
postponing some debt
repayments, and raising fares
on certain routes.” Continental
also hedged it’s jet-fuel
purchases, used code-sharing
to increase profit on some
flights, canceled planes, sold
excess parts, and disposed of
older aircraft that were more
expensive to operate and
maintain.
Human resources:
“Working Together”: This was
the people plan. It was
considered the most important
part of the “Go Forward Plan.”
It involved “creating a positive
work environment,” and
getting people to work
together. The heart of the plan
was changing the corporate
culture. The emphasis was put
on teamwork.
Bethune took care of the
hygiene factors and later went
to work on providing a
rewarding environment where
employees wanted to come to
work. Red tape in the
organization was removed so
that people were able to
perform their jobs. Employees
were empowered to make
decisions. Management
listened to ideas and two-way
communication was
established. Wages and
benefits were brought up to
industry standards. Toll-free
numbers were put in place so
that employees were able to
communicate with Bethune
and receive information on
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165
their benefits. Feedback was
encouraged. Employees were
rewarded with bonuses, profit
sharing, cars, and verbal
recognition.
R&D:
R&D does not apply to the
Continental case.
Maintenance:
Improvements were made in
maintenance. Newer planes
required less specialized
training and fewer part
inventories. Excess parts were
sold and maintenance
contracts were renegotiated. A
toll free number was set up so
that employees working on
aircraft were able to get
answers to any problems they
were having. Books of rules
and procedures were replaced
with more user-friendly
guidelines.
Has the company achieved its
financial objectives?
Determine if they achieved
their short and long-term
objectives and provide the
supporting analysis why they
did or did not achieve the
objective. Then you are in a
position to determine the
associated strengths or
weaknesses.
Bethune wanted the company
to show a profit in 1995. They
achieved this objective by
lowering costs, refinancing
debt, stretching out debt
payments, and adding
profitable routes.
Continental has achieved the financial
objectives that were outlined in the
“Go Forward Plan.” This is a strength.
Bethune wanted to lower
interest payments by late
1995. This objective was
achieved and the company’s
annual interest payments were
lowered by $25 million. This
was done by refinancing the
debt at lower rates.
Continental’s interest
expenses went from $202
million in 1994 to $117
million in 1996.
Bethune wanted to stretch the
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166
debt payments out by the end
of 1995 to help the company
in the short term. This
objective was achieved and
the company’s debt
repayments were spread out
from 3 years to 7 or 8 years.
From 1993 to 2000,
Continental’s revenues
increased by 71%.
In 1995, the company’s
earnings became positive.
They have stayed positive
since then and have fluctuated
yearly. The biggest positive
increase occurred between
1994 and 1995.
Bethune’s leadership helped
the company to increase each
year. The biggest increases
occurred after his initiatives
were introduced.
Has the company achieved its
strategic objectives?
Determine if they achieved
their short and long-term
objectives and provide the
supporting analysis why they
did or did not achieve the
objective. Then you are in a
position to determine the
associated strengths or
weaknesses.
Bethune wanted to reduce the
number of types of aircraft
from 9 types to 5 types by
1999. This objective was not
achieved because Continental
was unable to afford the new
planes to make it possible.
Continental achieved almost all of the
strategic objectives outlined in the
“Go Forward Plan. ” This is a
strength.
Continental was not able to reduce the
number of types of planes down to
five. This is a weakness.
Bethune wanted to rank
among the top three major
U.S. airlines in terms of ontime performance. This
objective was achieved.
Bethune gave out $65 bonuses
and revised schedules to help
accomplish this objective.
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167
Bethune wanted to improve
passenger satisfaction levels
and baggage handling.
Continental went from having
very poor rankings in these
areas to consistently ranking
among the top five major U.S.
airlines.
Bethune wanted all of the
planes repainted by July of
1995. This objective was
achieved. Bethune made it
clear what was expected and
demanded results.
What is the company's
position relative to EACH of
its competitors?
 Market share
 Profit margin
 Net profits
 ROI
 EVA
 MVA
 Financial strength
 Sales growth
 Image
 Reputation
 Industry position
 Please add other facets
of relative position as
necessary.
Market share:
In 1994, Continental was the
fifth largest commercial
airline.
Small market share in low-fare
point-to-point routes.
Small market share in
Southeast.
Profit Margin:
Between the years of 1985 and
1994, Continental reported net
losses. Despite years of cost
cutting attempts by prior
management the company did
not operate profitably until
1995. Between 1994 and
1997, the profit margin rose
every year. In September of
2001, Continental and
Continental Express had 25
consecutive quarters of
profitability.
Continental’s market share and profit
margin are strengths. Under the
present strategy, Continental’s profit
margins have been increasing.
The company’s financial position is a
weakness. They will have a hard time
to find loans and prevent cash flow
problems when demand falls.
Continental’s sales growth is a
strength. It has been well above the
industry average and increasing.
The company’s image and reputation
are strengths. They both help to attract
and retain customers.
Continental’s industry position is a
strength.
Continental’s strategy has helped it
improve its position in almost all areas
relative to its competitors. However,
Continental is still not financially
strong compared to competitors.
Southwest Airlines had much
higher profitability in every
year between 1985 and 2001.
In 2000, Southwest’s profit
margin was roughly 18%. In
the same year, Continental had
a profit margin of 3.455%.
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168
Continental and Southwest
reported a profit for the first
half of 2001. They were the
only two major U.S. airlines to
do so.
Net profit, ROI, EVA, MVA:
Not enough information was
available in the case to
compare rivals.
Financial strength:
When compared to other
major airlines of roughly the
same size, Continental had the
lowest amount of cash on hand
($1.01 billion) by far.
Continental’s debt to total
capital ratio in 2000 was the
third highest out of the top
nine major U.S. airlines
(87.6%). Southwest’s was
only 33.3% in the same year.
Sales Growth:
Continental’s sales growth has
been above the industry
average since 1995. The
greatest increase in sales
occurred between 1999 and
2000. During this period,
Southwest Airlines was the
only company to have higher
sales growth.
Image and Reputation:
Bethune took steps to improve
Continental’s image and
reputation. He changed the
climate of the organization
and improved performance
and service levels.
One of the earliest moves he
made (repainting the planes by
July 1995) was very symbolic.
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169
The uniform fleet of planes
showed all stakeholders that
Continental was on the path of
change.
Continental has received
awards and recognition for
customer service, on-time
arrival, baggage handling,
frequent flyer programs,
outstanding management, and
customer satisfaction.
In both 2000 and 2001,
Fortune magazine named
Continental, the second most
admired U.S. airline.
Southwest Airlines was the
most admired.
The awards they received and
the reputation they are gaining
has helped to put Continental
ahead of many competitors.
Industry position:
Continental is a major
commercial airline with the
fifth highest sales in the
industry as reported in 2000.
They desire to move up in
industry position. Out of the
top nine major airlines, they
carried the third lowest
number of passengers in 2000.
If the strategy is not working,
is it due to:
 Weak strategy and/or
Continental’s strategy is
working to help the company
achieve most of its objectives.
However, Continental still has
There is a weakness in Continental’s
strategy. The company has a hard time
defending itself against drops in
demand.
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170

Poor implementation
a high debt to equity ratio, few
unencumbered assets, and a
low amount of cash on hand.
This is partly because
Continental’s costs are above
the industry average and their
costs are increasing. Economic
recessions are especially hard
on Continental because of the
company’s high cost floor.
2. What are the company's resource strengths and weaknesses?
The purpose of this tool is to assess the competitive values of the company's resources. The four tests of
competitive value are:

Is the resource hard to copy?

How long does the resource last?

Is the resource really competitively superior?

Can the resource be trumped by a rival's resources/capabilities?
As a minimum, for each of the resource types listed below, assess the competitive value of each resource.
Please identify all of competitive advantages. Identify all of the company’s strengths and weaknesses.
Criteria
Facts
What does this mean?
Skills and expertise
 Proprietary technology
 Advertising and
promotion
 Product innovation
 Ability to improve
production processes
 Technological know-how

Proprietary technology
Larry Kellner created a
financial system that generated
a daily report with updated
profit figures for various
flights, fuel costs, maintenance
costs, etc. This report was
circulated to all top
executives.
The report was improved over
time as technology increased.
It helped Continental with its
decision to expand more in
Europe. The report showed
that Continental’s flights to
Europe were generating higher
than normal profits.
Continental purchased new
planes in an effort to bring
down the average age of its

Continental’s financial
information system, voice mail
system, and LED boards are not
hard to copy. It is expensive to put
these systems into place but most
airlines have the financial
resources to do so. Rivals can
benefit from new technology on
planes by purchasing new planes
themselves. Continental’s
proprietary technology is not a
lasting resource because
technology becomes outdated
quickly. The resource is not
competitively superior because
many other rivals have similar
systems in place. The resource can
be trumped. Rivals can use
superior ways of obtaining
information and making that
information available to
employees. Continental’s
proprietary technology is a
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171
fleet. The new planes with
their updated systems required
less maintenance and had less
mechanical problems.
In 1997, LED boards were
placed in high employee
traffic locations and break
rooms to provide employees
with up to the minute
information about the
company’s stock, it’s
competitors, weather reports
and other news.
strength for Continental because it
enables the company to make
more effective decisions and keep
all employees well informed. This
resource does not give the
company a competitive advantage.

Continental’s advertising and
promotion efforts are not hard to
copy. Once rivals hear of the
actions Continental has taken they
can send their own letters out,
hold their own parties, put new
incentives in place, and join up
with other online travel services.
This resource will not last long.
Rivalry in this industry is intense
and competitors will quickly make
moves to reduce the effectiveness
of Continental’s efforts. The
resource is competitively superior
because directly speaking with
customers helps to establish a
relationship between the
customers and the company that
cannot be created with other
methods of promotion. Rival’s
resources and capabilities can
trump this resource. A rival with a
lower cost floor can reduce its
price to the point where a
customer will value the lower
price over this relationship. This
resource is a strength for
Continental because of how
effective it has been at raising
revenues. However, the resource
is not a competitive advantage.

Continental’s current skills and
expertise in product innovation are
not hard to copy. A company can
hire employees for coming up
with innovative ways of changing
the product or it can wait until
Continental changes the product
and quickly follow suit. This
resource has the potential to last a
long time. Once a culture of
innovation is developed,
employees begin to collectively
Toll-free voice mail numbers
were put in place so
employees were able to
communicate directly with the
CEO, get answers to their
technical problems or
concerns and make changes to
their benefit packages.

Advertising and
promotion
Continental entered into codesharing agreements with other
airlines. These agreements
made it possible for some of
the company’s flights to be
listed on both carriers’
schedules. This way more
passengers will see that the
flight is offered.
All planes were repainted by
July of 1995 to send the
message that Continental was
changing. This helped to
create a uniform product.
Continental provided travel
agents with a variety of
incentives to attract Fortune
500 customers.
Continental made sure travel
agents were paid attractive
commissions and provided
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172
them with incentives for
reaching a certain volume of
ticket sales.
look for better ways of operating
in all areas. The resource is
competitively superior to some
companies but not all. For
example, Southwest’s skills and
expertise in innovation are
superior to Continental’s. A rival’s
resources or capabilities can trump
the resource. Again, a rival with a
lower cost floor can charge a
lower price while still making a
profit on the flight and attract
passengers away from
Continental. This resource is a
strength for Continental but not a
competitive advantage.
Continental’s skills and expertise
in product innovation have
enabled the company to attract
passengers from other airlines and
increase revenues.
The OnePass frequent flyer
program was put back into
effect because customers
enjoyed its features.
Bethune had a get together at
his private home where he
announced that Continental
was making new changes and
improving its services. One
hundred invitations were sent
out to high mileage frequent
flyers for the event. He gave
all guests at the function a
leather ticket case.
Letters were mailed out to
executives at other companies.
These letters apologized for
past mistakes and explained
how Continental was
improving.

Continental’s ability to improve
its on-time arrival percentage to
reduce costs and increase revenues
is not easy to copy. Continental
has a strong management team
that knew how to turn the
company’s on-time arrival
percentage around. This resource
will last a long time. Once
employees begin buying into
changes that will improve the
company’s performance, the
culture of the company will
improve. This resource is
competitively superior. Rivals
have had a hard time competing
with Continental’s on-time arrival
performance. This resource is a
strength of Continental’s but not a
competitive advantage because it
can be trumped by competitors
offering customers better
incentives for flying their airline, a
higher quality of service, etc.

The technological know how that
has been accumulated by
Continental’s employees is hard to
copy. There are a limited number
Executives at Continental
made personal phone calls to
business customers thanking
them for their patronage.
Continental used its website
(www.continenetal.com) to
sell tickets and provide
information.
Continental partnered with
other companies offering
travel services to create Orbitz
(www.orbitz.com). The
website provided information
for planning a trip and
scheduling flights and hotel
rooms.

Product innovation
In trying to meet the needs of
its business customers,
Continental installed larger
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173
overhead bins in 2000 to
accommodate a greater
amount of carry-on luggage. It
cost the company $12 million
to install these new bins.
Continental’s rivals were
using templates to restrict the
size of carry-on luggage.
Continental also listened to
customer’s requests for new
services or changes to existing
services. Surveys of customer
preferences led to:






Coke being served
instead of Pepsi
More beer variety
First-class priority
with baggage handling
Improved meals
(tested by Bethune)
Music while
customers boarded
In flight phones
of people with the skills and
expertise necessary to fill many
airline positions. This resource
will last as long as Continental
continues to provide training for
employees on new technology.
This resource is competitively
superior because they have used
new technology to their
advantage. This resource is a
strength, but not a competitive
advantage. Rivals resources and
capabilities can trump it. For
example, rivals that have the
financial resources to purchase the
newest planes can gain a bigger
advantage from the new
technology on these updated
aircraft.
When travel agents told
Bethune that business
customers needed additional
flights to certain locations,
Bethune listened to their
advice and added the flights.

Ability to improve
production processes
Continental focused on
increasing its performance in a
number of areas to reduce
costs and increase the
attractiveness of its product.
For example, Continental was
able to improve it’s on-time
arrival percentage by
providing an incentive for
employees and creating more
of a team environment at the
company. A higher on-time
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arrival percentage not only
reduced the costs associated
with having to provide lodging
and services for stranded
passengers but also made the
company more likely to attract
new passengers.

Technological know-how
Continental has reduced the
number of types of planes in
its fleet. The maintenance
department now has fewer
repair procedures to master.
By working on only a few
different types of planes,
maintenance crews will
develop a proficiency in
repairing those planes faster.
Continental has an
experienced management team
in place that is developing new
information systems and
innovative ways of handling
scheduling and maintenance
problems.
The company has many highly
skilled employees with
experience in the industry.
Physical assets
 Plant capacity
 Plant and equipment age
and technological
capabilities
 Plant and retail location
 Access to distribution
channels
 Wide geographic coverage
 Global distribution
capability

Plant capacity
In 1994, Continental had 10
types of aircraft. The Airbus
300 was one type that was
very large in size. The large
plane was expensive to repair,
required specialized training to
service, cost Continental
$200,000 a month in lease
payments, and was costly to
operate.
Continental disposed of all of
its A300s to reduce costs and
improve capacity utilization.

It is not hard to copy Continental’s
capacity utilization. However, not
all airlines are in the position to
dispose of their larger planes and
purchase smaller aircraft. It is also
not easy to increase passenger
traffic on flights. This resource
will not last long. Changes in
demand will affect capacity. This
resource is not competitively
superior. Other airlines have
comparable load factors. Other
rivals that have lower overall costs
or are more capable of attracting
customers can trump the resource.
This resource is a strength of
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The large planes were
operating at 50 to 60 percent
full. Using smaller aircraft and
reducing the number of large
planes Continental had in its
fleet, increased Continental’s
overall load factor.
Continental’s but not a
competitive advantage.

New equipment is expensive, but
this resource can be copied. The
benefits from new equipment will
not last long as it becomes
outdated. Continental’s fleet is
younger than many competitors,
making this resource
competitively superior. Rivals can
trump it. For example, rivals in a
better financial position can
replace all their old aircraft and
reduce the average age of their
fleet even more. This resource is a
strength but does not give the
company a competitive advantage.

The location of Continental’s hubs
and maintenance facilities and the
airports it flies to can be copied.
Some locations will be easier to
obtain than others will. The
locations will last a long time.
This resource is not competitively
superior because other rivals have
had more success using other
locations. Rivals that use more
effective locations and are able to
generate more traffic at certain
airports can trump it. This
resource is a strength for
Continental but not a competitive
advantage.

Continental’s gate access can be
copied, but not easily. A company
must have the financial resources
to do so. Continental’s gate access
will last as long as the company is
able to pay the fees. This resource
is not competitively superior.
Other airlines have gate access at
many of the airports Continental
does. The resource can be
trumped. For example, Southwest
uses smaller airports to reduce
gate fees and has been very
successful at these smaller
Continental also made changes
to its schedules to improve
capacity utilization. The
company removed
unprofitable flights from the
schedule and introduced new
routes with higher passenger
traffic.
Continental also entered into
code-sharing agreements to
increase the number of
passengers on its flights and
reduce excess capacity.
Continental Express led to
improved load factors on
Continental’s normal flights.

Plant and equipment age
and technological
capabilities
Continental disposed of older
planes because they required
special training, specialized
parts inventories and were
expensive to operate.
The company purchased new
planes in an effort to bring
down the average age of its
fleet. The new planes with
their updated systems required
less maintenance and had less
mechanical problems.
By replacing older aircraft,
Continental reduced the size
of its maintenance department
and was able to close its Los
Angeles facility.
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airports. Continental’s access to
distribution channels is neither a
strength nor a weakness.
Continental reduced aircraft
downtime by flying a smaller
variety of newer planes.

Plant and retail location

Continental’s wide geographic
coverage is not hard to copy.
Other airlines can enter many of
the international and domestic
markets Continental is operating
in. This resource does not last
long. When Continental is
profitable in serving a market
other competitors quickly move
in. The resource is not
competitively superior because
other rivals have had more success
serving a more limited geographic
area. The resource can be trumped
because rivals can move into the
same markets and offer better
services and higher quality. This
resource is a strength for
Continental but not a competitive
advantage.

Continental has access to many
global distribution channels. This
resource is not hard to copy. Other
international carriers with the
necessary capital can purchase
gate space at airports. This
resource will not last long as rivals
continue to expand internationally.
The resource is not competitively
superior and it can be trumped.
Other rivals can also gain access
to airports abroad and compete in
terms of price and service
features. Continental’s global
distribution is a strength but not a
competitive advantage.
Continental uses a hub and
spoke system.
Between 1995 and 2000,
Continental added more
destinations from hub
locations and additional flights
to destinations already served.
Continental served most
international destinations
through hubs located in the
United States.
Continental Express provides
frequent and economical
service to small cities and
transports passengers to
Continental’s hubs where they
can use Continental’s regular
service to get to their
destinations.

Access to distribution
channels
Continental has gate access at
many major airports in the
United States and abroad.

Wide geographic
coverage
In 2000, Continental had over
2000 flights with over 130
domestic locations and 90
international.
Continental served more
international destinations than
its rivals.
Continental has plans to take
advantage of high profitability
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on flights to Europe by
increasing the number of
international destinations.
In 2000, Continental Express
had over 1000 flights to 70
U.S cities, 10 Mexican cities,
and 5 Canadian cities.
Continental Express is a
subsidiary of Continental
offering regional service. It
provides frequent and
economical service to small
cities.

Global distribution
capability
In 1994, Continental was
operating on a global scale.
However, many of its flights
were unprofitable.
When Bethune took over, he
began expanding into the
international markets that
looked promising and cutting
flights to those that were
causing losses.
Between 1995 and 2000,
Continental added more
destinations from hub
locations and additional flights
to destinations already served.
The expansion was done
quickly.
Flights were added to South
America, Mexico, Rome,
Milan, Honk Kong, Tel Aviv,
Tokyo, Guam, Caribbean,
Central America, and many
other European cities.
Continental served most of
these countries through hubs
located in the U.S.
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In 2000, Continental was
operating 2000 flights to 90
international destinations and
130 domestic.
In 2000, Continental had more
international flights than any
of its rivals.
Continental was planning to
take advantage of TWA's
decision to discontinue flights
from New York to the Middle
East and Europe.
Because of TWA’s decision,
Continental planned to expand
to 30 more cities in Europe
within 3 and 5 years, and look
into expanding in the Middle
East.
Human assets
 Superior intellectual
capital

Superior intellectual
capital
Gordon Bethune started
working for Continental in
February of 1994. He had
experience working in the
airline industry and working
for the aircraft manufacturer,
Boeing. When he became
CEO of Continental, he
quickly began putting the plan,
“Fly to Win,” into place. He
constructed this plan with the
help of Greg Brenneman.
Together their efforts helped
the company to show profits
for the first time in roughly ten
years.

The new management team and
top executives that were brought
in are hard to copy. This resource
has the potential to last a long time
as these managers gain knowledge
and are promoted. Their skills will
also spread to other employees in
the organization. The resource is
competitively superior. This is
shown by the company’s higher
rankings in various areas when
compared to other major airlines.
Companies that have resources
and capabilities that allow them to
charge a lower price for air travel
while still making a profit can
trump the resource. Intellectual
capital is a strength of
Continental’s but not a
competitive advantage.
They began the slow process
of changing the organization’s
culture and creating a trusting
relationship with employees.
“Dignity and Respect” became
the company’s new motto.
Bethune hired many talented
individuals for top executive
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positions and roughly half of
the prior vice presidents left
Continental.
Top executives that rated
poorly on a scale of 1 to 4,
were asked to leave the
company.
Between 1995 and 2000,
Continental’s culture
improved and intellectual
capital became more of
strength to the organization.
Organizational asset
 Financial position
 Patents
 Better product quality
 Culture
 Product line breadth and
depth
 Product quality

Financial position

Between 1994 and 1997 the
profit margin rose every year.
In September of 2001,
Continental and Continental
Express had 25 consecutive
quarters of profitability.
Continental’s financial position is
improving, but it is not hard to
copy. This resource will not last
long and it is not competitively
superior. Other rivals have greater
profit margins and lower debt to
equity ratios. Competitors have
been able to trump it because of
the strength of their own financial
position. Continental’s financial
position is one of their
weaknesses.

We are not aware of any patents in
the airline industry.
Continental has a high debt to
equity ratio.

Continental’s product quality is
not hard to copy. Rivals can focus
on a variety of areas to improve
their own product quality. This
resource will not last long as rivals
respond by improving their own
quality to compete with
Continental. Continental’s product
quality is competitively superior
to some rivals, but not all. Rivals
resources and capabilities can
trump this resource. For example,
a rival with more attractive flight
times will be able to attract more
customers even though it has
lower quality flights. Better
product quality is a strength of
Continental’s, but not a
Continental’s revenue has
been growing at a rate higher
than the industry average.
From 1993 to 2000, their
revenues increased by 71%.
Continental has had a history
of cash flow problems. It
emerged from its second
bankruptcy in 1993 with $2
billion in debt and
comparatively low revenues.
The company’s liquidity has
come into question many
times over the years. When
revenues drop as demand
periodically slackens, the
company has had trouble
paying its interest payments
and accepting new aircraft
orders. For example, in 2001,
Continental was considering a
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180
third bankruptcy because of a
drop in revenues and debt
payments coming due. The
government provided relief for
the airlines, which helped
Continental make it’s
payments.
competitive advantage.

Continental’s culture is not hard to
copy. Bethune has improved the
culture, but it is not unique. This
resource will not last long unless
Bethune continues to improve the
culture. Continental’s culture is
not competitively superior and
rival’s resources and capabilities
can trump it. For example,
Southwest has a much more
unique culture that has enabled the
company to achieve financial
success beyond other airlines in
the industry. Continental’s culture
is a strength, but not a competitive
advantage.

The breadth and depth of
Continental’s product line can be
copied. Many rivals offer regional
service, international flights and
serve business passengers and
leisure passengers. This resource
has a short life span. Continental’s
successful moves will be quickly
copied. This resource is
competitively superior because of
the profits Continental has earned,
but it can be trumped. Rivals with
lower cost floors can enter the
same markets and compete with
Continental by offering lower
prices. This resource is a strength
for Continental but not a
competitive advantage.

Continental’s product quality can
be easily copied. Rivals can offer
the same product features and
improve their performance. The
resource will not last long. In this
competitive environment, rivals
will quickly find something better
to attract customers. The resource
is competitively superior to some
rivals, but it can be trumped.
Rivals can charge lower prices to
attract customers. This resource is
In 2000, Continental was
second highest in “Other
Operating and Maintenance
Expenses” compared to 10
major airlines. The company’s
total operating costs are higher
than many other major
airlines.

Patents
Continental does not have any
patents that we are aware of.

Better product quality
Continental provided more
room for passenger carry-on
luggage.
The company focused on
increasing its on-time arrival
percentage and ranked among
the top three airlines in ontime arrivals 6 times in 1995.
In 2001, J.D. Power and
Associates recognized the
airline as being the “Top in
Customer Satisfaction” for
four out of five years.

Culture
When Bethune came aboard,
he realized he needed to focus
on the culture of the
organization.
Bethune made efforts to
improve the culture by:
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Propping the door open to his
office (it used to be shut and
guarded by security cameras)
a strength of Continental’s, but not
a competitive advantage.
Meeting directly with
employees at all major
locations and levels of the
organization.
Sitting at the middle of the
boardroom table during
meetings and discussing each
topic in the same order
outlined in the “Go Forward
Plan.”
Installing 600 bulletin boards
and LED displays to keep
employees posted.
Burning manuals in the
parking lot and empowering
employees to use their own
judgment when handling
problems. Encouraging
employees to make decisions
and involve headquarters as a
resource when they need to.
Allowing employees to make
suggestions to top
management. Improve
communication at all levels.
Providing a voice mail number
to the CEO so that employees
can contact him directly.
Created incentives for
employees to work together
and achieve the organizations
objectives (ex. On-time
bonuses, Absenteeism
bonuses).
Gatherings sponsored by the
company for employees to
spend time with each other
and network.
Monthly employee newsletter,
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Continental Times. This
newsletter included
information about how well
the company was doing and
reporting on any new changes.
Mailing quarterly newsletter,
Continental Quarterly, to
employee’s homes.
Creating the slogan “Dignity
and Respect” in 1996.
Higher performance in a
number of target areas resulted
from these efforts to improve
the culture of the organization.

Product line breadth and
depth
Continental serves more
international destinations than
any other carrier does.
Continental Express was
created as a regional service.
Continental has both coach
and first-class seating
available on most of its flights.

Product quality
In an effort to increase
customer satisfaction and
improve the quality of the
product, superior on-time
arrivals were focused on.
Continental also:




Purchased newer
planes
Improved baggage
handling
Provided more room
for passenger carry-on
luggage
Focused on improving
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





Intangible asset
 Image
 Brand name
 Reputation for customer
service

its employee
relationships in order
to make employees
feel better about
where they work.
Employees pass this
positive attitude on to
customers through
courteous service.
Uniform fleet (all
planes painted
identical)
Convenient online
ticketing
Reduced wait times
(more customers
booking online)
More international
flights
Better meals
Flights to where
people need or want to
go (reducing the
number of connecting
flights needed)
Image

Continental has made efforts to
improve their image. Their image
is not hard to copy. Rivals can
take many of the same actions to
improve their own image. The
resource will not last long.
Continental’s image is fragile
because of past mistakes the
company has made. It is not
competitively superior to other
rivals and competitor’s resources
and capabilities can trump it. For
example, Southwest has a much
stronger image and can trump
Continental’s image through
advertising. Continental’s image is
one of its strengths but is not a
competitive advantage.

Awards have improved
Continental’s brand name. This
resource will take time to copy,
When Bethune took over, the
steps he took improved
Continental’s image. He
changed the climate of the
organization and improved
performance and service
levels.
One of the earliest moves he
made (repainting the planes by
July 1995) was very symbolic.
The uniform fleet of planes
showed all stakeholders that
Continental was on the path of
change.

Brand name
The awards and recognition
that the company has received
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184
but it can be done. Continental’s
brand name will be a valuable
resource as long as the company
continues to increase service and
performance. This resource is not
competitively superior. Other
major airlines have similar levels
of brand name recognition. Rivals
can trump the resource. For
example, rivals can increase their
advertising or offer new
incentives. Continental’s brand
name is one of its strengths, but is
not a competitive advantage.
improve the Continental brand
name.

Reputation for customer
service
The actions Bethune took to
improve customer service
helped the airline to receive a
number of awards.
Around the year 1999,
Continental received
recognition for ranking in the
top 3 airlines in fewest number
of baggage complaints for 30
out of 31 months.

Continental’s reputation for
customer service is not hard to
copy. Rivals can also take actions
to improve their own service
levels. The resource will last as
long as management continues to
improve the culture of the
organization and emphasize the
importance of customer service.
This resource is competitively
superior to some airlines, but not
all. Rivals offering more
convenient flight times and
incentives can trump it.
Continental’s reputation for
customer service is one of their
strengths, but not a competitive
advantage.

Continental’s competitive
capabilities in terms of cost
advantages are not hard to copy.
This resource will not last long
and is not competitively superior.
Many rivals have lower overall
costs and lower costs in a number
of their functional areas. This
resource can be trumped. This is
one of Continental’s weaknesses.
1996 and Jan 2001- Airline of
the year, Air Transport World.
It was the first airline to
receive award twice in a fiveyear period.
2001- Best Trans-Atlantic
Airline, Best Airline Based in
North America, Best frequent
Flyer Program, OAG Pocket
Flight Guides
Tops in Customer Satisfaction
four out of five years, by J.D.
Power and Associates.
2000 and 2001- Second mostadmired U.S. airline, Fortune.
Competitive capabilities
 Cost advantages
 Sophisticated use of ecommerce

Cost advantages
Continental has taken a
number of actions to reduce
the company’s costs while
increasing the value of the
product in the eyes of
consumers.
Bethune improved
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185
performance in on-time
arrivals, reduced the rate of
absenteeism, lowered
employee turnover, and
reduced the number of
workmen’s compensation
claims. All of these actions
reduced costs. However,
Continental does not appear to
have any specific cost
advantages when compared to
rivals.


Continental’s sophisticated use of
e-commerce can be easily copied.
Rivals can set up their own web
pages and join up with one of the
many new travel services or start a
new travel service as Continental
did in conjunction with other
airlines. This resource will not last
long because other airlines are
quickly improving their own use
of e-commerce. The resource is
not competitively superior. Many
rivals already have similar ecommerce capabilities. Rivals
with more user- friendly web sites,
etc. can trump it. Continental’s use
of e-commerce is one of its
strengths, but is not a competitive
advantage.

Continental’s market position as a
recognized industry leader is not
easy to copy. Gaining such
recognition is possible, but it takes
time. This resource will last as
long as Continental’s performance
continues to improve. This
resource is not competitively
superior because there are a
number of other major airlines that
are recognized by various
Sophisticated use of ecommerce
Continental has recognized the
importance of e-commerce in
reducing travel agent fees and
staffing costs.
They increased e ticketing to
95% of their destinations in
2000.
54% of their total sales in
2000 came from e-ticket sales,
a total of $5.8 billion.
They also introduced
www.orbitz.com in
conjunction with American,
United, Delta, and Northwest.
The website offers consumers’
travel tips and helps them to
book flights, rental cars,
lodging, etc.
Market position
 Recognized industry
leader
 Attractive customer base

Recognized industry
leader
Continental has received
numerous rewards recognizing
them as an industry leader.

Attractive customer base
Continental has a customer
base composed on flip-flop
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passengers and business
passengers. Most buyers are
not loyal. They will choose
another carrier when they can
find a lower price or more
attractive flight time.
Alliances or cooperative
ventures
Continental has alliances with
a number of other airlines
through code-sharing
agreements.
Code-sharing increases profit
margins. Two companies list
the flight and one airline
provides the plane and crew.
This increases revenues,
reduces costs, and leads to
higher load factors. The
companies also work together
at certain destinations by
providing the ground crew for
each other’s flights when it
does not make sense
financially to have ground
crews for both companies at
every airport. Continental has
code-sharing agreements with
Northwest, Air Canada,
organizations as being an industry
leader. This resource can be
trumped. An airline with a more
attractive product can quickly
attract the attention of buyers in
this industry. This resource is one
of Continental’s strengths but is
not a competitive advantage.

Continental’s customer base is not
hard to copy. Other rivals can
compete with Continental for the
same customers by offering
similar flight schedules, prices and
service. The resource will last as
long as Continental continues to
meet the needs of its customers.
Continental’s customer base is not
competitively superior. Buyers are
not loyal and other competitors
can move in to attract passengers.
Competitors offering better
service, lower fares, etc. can
trump the resource. This resource
is one of Continental’ strengths,
but does not give the company a
competitive advantage.

Continental’s alliances and
cooperative ventures are not easy
to copy. This is because a contract
is usually involved and it takes
time to negotiate agreements. The
resource will last as long as the
alliance benefits both parties or
until the contract runs out. The
resource is not competitively
superior because many airlines are
entering code-sharing agreements.
Rivals with other resources and
capabilities can trump the
resource. For example, rivals with
a strong capability in maintaining
a high load factor are able to earn
higher profits without alliances.
This resource is one of
Continental’s strengths, but is not
a competitive advantage.
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America West, American
Eagle, Horizon Airlines,
Alitalia, Air France Virgin
Airways, Air China, and KLM
Royal Dutch Airlines.
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188
3A. Are the company's prices and costs competitive?
This question applies to all companies independent of the strategy (cost or differentiation) they use to compete in their industry. Using the
following criteria, assess each step in the value chain (inbound logistics and supplies, operations, outbound logistics, sales and marketing, service,
R&D, human resources, general and administrative) and compare each step with the competitor's prices and costs. After completing this analysis,
examine the value chain as a whole. How does the integration of each successive step in the value chain lower costs? Finally, assess the value
chain of the company in the context of the industry.
Address each cost driver for each step in the value chain. Concentrate on how the company uses the cost drivers to reduce costs. Make sure you
list the associated strengths and weaknesses in their cost savings activities through executional drivers.
Structural cost drivers
 Scale economies
 Learning curve
 Technology
requirements
 Capital intensity
 Product line
complexity
 Etc.
Inbound
Logistics
Operations
Outbound
Logistics
Sales and
Marketing
Service
Profit
Margin
R&D
HRM
A&G
Continental
worked
diligently to
achieve
economies of
scale. They
teamed up
with airlines
in codesharing
agreements,
where they
helped each
other at
certain
airports. This
helped to
reduce costs
for each
airline and it
is a strength.
Continental
also reduced
Continental
reduced
operation
costs by
setting up a
hub and
spoke system.
With fewer
locations, this
reduced
training at
airports and
resulted in
lower costs.
This is a
strength. By
setting up
Orbitz,
Continental
also reduced
costs. This is
strength.
Eliminating
Continental
used code
sharing. This
led to lower
costs in
outbound
logistics.
This is
strength. By
improving
morale,
Continental
increased the
number of
repeat
passengers.
This helped
to fill the
planes. This
is a strength.
By reducing
the number
of types of
Orbitz was
set up to
encourage
consumers to
plan their
vacations online, instead
of going
through
travel agents.
This helped
Continental
reduce costs
and increase
sales. Orbitz
helped
Continental
in marketing.
This is a
strength.
Bethune set
up a party at
his house to
The “Go
Forward
Plan” was
designed to
increase
sales.
Employees
needed to
buy into the
plan to help
improve
service.
Bethune
implemented
bonuses to
employees as
well as
management.
This created
a culture that
helped
Continental
achieve many
Continental’s
use of
economies of
scale,
practice of
filling planes
to capacity,
learning
curve
benefits, and
introduction
of Orbitz
helped lower
costs. This
resulted in
lower costs
and a higher
profit
margin. This
is a strength.
Bethune
looked for
opportunities
to lower
costs and
increase the
profit
margin. He
looked at the
flights that
were costing
the company
the most to
fly. He
developed a
hub and
spoke
system to
reduce costs.
This is a
strength.
Bethune also
taste tested
Continental’s
human
resource
management
lowered
costs. An
open door
policy was
put in place.
A toll-free
number was
created for
employees to
call for
information
on how the
company
was
performing.
Employees
were kept
well
informed.
Bethune
came aboard
and decided
a change was
in order. He
had
employees
burn their
manuals
containing
rules and
procedures
and
empowered
his
employees.
This is a
strength
because
employee
productivity
increased.
He created
Thompson, Arthur and Strickland, A.J. Strategic Management: Concepts and Readings. McGraw-Hill Irwin. NY. 12th Edition
189
the average
number of
aircraft in its
fleet. This
resulted in
less training
needed for
employees.
This is a
strength.
Continental
set up a
website,
which helped
the company
to cut down
on the need
for travel
agents and
resulted in
reduced
costs. This is
a strength.
Continental
Express is
another
example of
Continental’s
attempt to
increase
economies of
scale.
Continental
reduced the
learning
curve by
the bigger
planes helped
Continental
fill their
empty seats.
This helped
Continental
given the fact
that this is a
capitalintensive
industry. This
is a strength.
By increasing
morale,
Continental
reduced the
learning
curve. This
boosted
Continental’s
on time
arrival. It also
helped reduce
the number of
lost baggage
complaints.
This is a
strength.
Continental
set up a
frequent flier
plan to help
fill their
empty seats.
Code sharing
aircraft,
Continental
was able to
reduce the
amount of
training
required.
This led to
lower costs
and
increased
profits. This
is a strength.
Setting up a
hub and
spoke system
helped to
increase the
number of
arrivals that
were on
time. This is
a strength.
Continental’s
efforts to
lower costs
in outbound
logistics
have been
successful.
This is a
strength.
encourage
business
travelers to
fly
Continental.
This showed
the
commitment
he had
towards
customers
and his hope
of increasing
sales was
achieved.
This is a
strength.
Continental
has lowered
costs in sales
and
marketing.
This is a
strength.
of its
objectives.
On time
arrival and
baggage
handling
were both
improved.
This helped
to lower
costs and is a
strength.
With
employees
working
together and
happy with
their jobs,
consumers
were more
likely to
choose to fly
Continental
again. Larger
overhead
bins where
put in the
planes so that
people did
not have to
check their
baggage.
This feature
allowed
quicker turn
around at
food to find
the best
meals to
serve
passengers.
Surveys of
consumer
preferences
were
conducted
and changes
were made
accordingly.
These moves
helped to
make
customers
happier and
increased
repeat
business.
They helped
to reduce
costs
because
Continental
did not have
to replace
lost
passengers.
Continental
has been
successful in
this area at
lowering
costs. This is
Thompson, Arthur and Strickland, A.J. Strategic Management: Concepts and Readings. McGraw-Hill Irwin. NY. 12th Edition
Open houses
were held
that
employees
were invited
to attend. All
these steps
helped to
reduce
employee
turnover.
This is a
strength.
When
employees
are happy
and well
informed, it
deters them
from looking
for a job
somewhere
else.
Reducing
employee
turnover
helped to
reduce costs
associated
with
selecting,
recruiting,
and training
new
employees.
Continental
an open door
policy.
Bethune did
not take a
paycheck
during the
second half
of 2001 to
help reduce
costs. He
was involved
in the
creation of
Orbitz. He
created
economies of
scale in the
company.
Continental’s
on time
arrival and
number of
baggage
complaints
were
improved.
These are all
strengths and
they helped
to lower the
company’s
costs.
190
reducing the
number of
aircraft. The
reduction in
the number
of hub
locations
helped in
lowering
costs. This is
a strength.
Overall,
Continental
has been
successful in
lowering
costs in
inbound
logistics.
This is a
strength.
also helped in
reducing
operation
costs. This is
a strength.
Continental
has been
successful in
lowering
costs in
operations
this is a
strength.
However,
Continental’s
operating
costs are
higher than
competitors.
This is a
weakness.
airports. In
addition, it
decreased
customers
waiting time
because they
did not have
to check their
bags. This
helped
Continental
to decrease
costs. This is
a strength.
Continental
has been able
to lower
costs in this
area. This is a
strength.
a strength.
Thompson, Arthur and Strickland, A.J. Strategic Management: Concepts and Readings. McGraw-Hill Irwin. NY. 12th Edition
was able to
significantly
lower costs
in this area.
This is a
strength.
191
Executional cost drivers
 Commitment to
continuous
improvement
 Product quality
 Process quality
 Capacity
utilization
 Internal business
processes
 Working with
buyers and
suppliers on
costs
 Etc.
Continental’s
dedication to
on time
arrival made
them one of
the leaders in
the industry.
Employees
also reduced
the number
of baggage
claims.
These
actions
reduced
costs. This is
a strength.
Bethune
increased
salaries to
meet
industry
standards.
This helped
to increase
quality
throughout
the
Continental
culture.
Employees
began
treating
customers
better.
Fewer
Continental
set up a hub
and spoke
system and
cut down on
the number of
flights to
small airports.
This helped
improve the
quality of
service and
reduced costs
because of the
commitment
of the
employees at
each location.
This is a
strength.
Bethune
reduced the
average age
of the aircraft.
This also
helped to
improve
quality. This
is a strength.
Bethune
ordered all
the planes
painted. This
raised costs
and is a
weakness. He
Orbitz
improved
ticketing and
lowered
costs.
Consumers
purchasing
an e-ticket
often found
the
experience
more
convenient.
This also
helped in
filling the
planes. This
is a strength.
Bethune
raised fares
on selected
flights
thinking that
the
passengers
were willing
to pay for
better
service. This
is a strength.
Continental
had a
frequent flier
plan that
resulted in
repeat
business.
Continental
had joint
marketing
through
Orbitz. The
website
enabled
customers to
book a flight
and a place
to stay.
Improving
sales and
marketing
helped to
lower the
costs
associated
with having
to find new
customers to
replace
customers
that stopped
using
Continental.
Continental’s
efforts in
sales and
Continental
played music
as passengers
boarded.
Larger
overhead
bins were
installed to
accommodate
passenger’s
luggage. The
selection of
beers was
improved.
Continental
determined
through
research that
passengers
preferred
Coke to
Pepsi. In
discovering
that, they
made the
switch to
Coke.
Continental
became one
of the top in
the industry
in on time
arrival
providing
better service
for the
Bethune did
a widespread
sweep of the
company. He
reduced
costs
wherever
possible, and
worked hard
to change the
culture of the
organization.
He painted
all planes to
match. He
did
everything
including
tasting the
meals for the
flights.
Continental
did see a
profit margin
after
Bethune
implemented
his “Go
Forward
Plan.”
Bethune,
along with
his
management
team,
researched
ways to
lower costs.
From
finance right
down to
tasting
meals. This
is a
commitment
to
continuous
improvement
and it helped
to lower the
company’s
costs. This is
a strength.
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N/A
Bethune is
very
dedicated to
what he
does.
Continental
ordered
planes, but
he decided
that it was
not the right
time to buy
and
attempted to
cancel the
order and
receive a
partial
refund on the
deposit.
Although
Woodard
only agreed
to a partial
refund, it
showed
Bethune’s
leadership
qualities. He
always
thought of
the company
first.
Continental
has been
successful in
192
customer
complaints
helped to
lower costs.
This is a
strength.
Consumers
began to
recognize
Continental
as an airline
that had
quality
service. This
reduced
costs and
strengthened
the profit
margin.
Continental’s
excess
capacity
began being
filled.
Continental’s
efforts
helped to
lower costs.
This is a
strength.
worked with
suppliers and
was able to
reduce costs
on some
supplies. This
is a strength.
He
renegotiated
lease
payments,
refinanced
debt at a
lower interest
rate hedged
gasoline
prices, and
stretched out
repayments
for seven or
eight years.
All of this
helped in
operations
because of the
improvements
it made to the
company’s
cash flow.
These actions
helped to
increase
profits by
reducing
costs. This is
a strength.
marketing
reduced
costs. This is
a strength.
consumer.
These
qualities
made
Continental
very
competitive
with rivals in
the industry.
They all
helped to
lower costs
by satisfying
customer’s
needs. This
helps
Continental
to have
repeat
business.
Continental’s
performance
in this area is
a strength.
Thompson, Arthur and Strickland, A.J. Strategic Management: Concepts and Readings. McGraw-Hill Irwin. NY. 12th Edition
this area.
This is a
strength.
193
Continental’s
efforts in this
area have
reduced costs
in operations.
This is a
strength.
Thompson, Arthur and Strickland, A.J. Strategic Management: Concepts and Readings. McGraw-Hill Irwin. NY. 12th Edition
194
3B. If the company uses either a differentiation or best-value strategy, also assess how each step in the value chain creates or adds value (e.g.
incorporates product attributes and user features, raises performance, increases buyer satisfaction) and how the integration of each successive step
in the value chain increases value. Provide the supporting analysis to determine how the company adds value and develops specific strengths and
weaknesses. Please list the strengths and weaknesses.
Criteria



Incorporate product
attributes and user
features that lower the
buyer's overall costs of
using the company's
product
Incorporate features
that raise the
performance a buyer
gets out of the
product,
Increase features that
enhance buyer
satisfaction in non-
Inbound
Logistics
Operations
Outbound
Logistics
Sales and
Marketing
Service
Profit
Margin
Carry-on
baggage
improvements
On-time
arrivals
were
improved
On-time
flights
www.conti
nental.com
Continental
employees
have higher
morale
with
Bethune
and this
trickles
down to
customer
Bethune’s
“Row 5
Test”
Installed
bigger
overhead bins
Continental
increased it’s
call capacity
by adding
more agents
and upgrading
it reservation
system
software
Positive
attitudes in
reservations
Orbitz &
E-ticketing
Team efforts
on
operations
resulted in
high
reliability
and quality
Company
Culture
Improveme
nt in onflight
meals
R&D
HRM
A&G
Codesharing
flight
crews in an
effort to
labor costs
Using less
than nine
different
types of
aircraft
Coca-Cola
instead of
Pepsi
Regional
jets as
opposed to
turbo props
for better
customer
comfort.
Meal
surveys
Thompson, Arthur and Strickland, A.J. Strategic Management: Concepts and Readings. McGraw-Hill Irwin. NY. 12th Edition
Eliminated
managers
with a
rating of
“4”
Positive
195
economic or intangible Music played
ways
as customers
boarded

No
smoking
policy.
Company
Culture
Deliver value to
customers via
competitive
capabilities that rivals
do not have or cannot
afford to match
Labor
Relations
Bring
salaries up
to industry
standard
Code-sharing
with alliances
Continental adds value to the product in inbound logistics by providing large overhead carry-on baggage compartments. This meets the needs of
business travelers who wish to carry their luggage on the plane instead of waiting in line to check the baggage. This is a strength. Continental has
added more flights to its schedule. These flights are offered at convenient times to destinations customers wish to fly to. This adds value to their
service and is a strength. Friendly employees who are pleasant to interact with add value to the service. This is a strength. Music while customers
board the plane provides a calming effect and makes customers feel more comfortable. This adds value and is a strength. Code-sharing results in
more flight times and destinations for customers to choose from. This adds value and is a strength. Continental’s performance in this area is a
strength.
Continental improved its operations by focusing on the percentage of flights arriving on-time and baggage handling. Both of these actions add
value to the product and this is a strength. Team efforts to improve quality and Continental’s culture have helped add value to the product. Higher
quality and stronger employee/employer relationships have translated into better service for the customer. This is a strength.
Improvements in the quality of meals, great comfort, and satisfying customer preferences have all increased the perceived value of the product.
This is a strength.
In sales and marketing, Continental has used Orbitz and e-ticketing to reduce costs and add to the value of their product. These services allow
customers to purchase tickets in the privacy of their own home without having to wait in lines. Orbitz allows customers to plan their entire trip on
a single website. The convenience they provide adds value to the product. Continental’s performance in this area is a strength.
Higher morale leads to better customer service. This adds value to the product and is a strength.
Bethune’s “Row 5 Test” forces attention on product features and attributes that add value to the product. This is a strength.
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196
The company’s consumer preference survey’s result in product features and attributes that customers value, for example, in flight phones. This is a
strength.
Continental’s human resource actions have added value by helping to improve the company’s culture. Happier employees will treat customer
better. This adds value to the product and is a strength.
Overall, Continental’s strategy has resulted in a product of higher value. This is a strength.
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197
4. How strong is the company's competitive position?
Key success factors
(Refer to Q 6 in the
external analysis.)
High fixed asset
utilization
Customer service
Superior information
systems
Overall low cost
Access to financial
capital
Sum of weights
Weighted overall
strength rating
Weight
.25
Continental
Rating Weighted
score
8
2.00
United
Rating Weighted
score
5
1.25
American
Rating Weighted
score
4
1.00
Delta
Rating Weighted
score
8
2.00
Northwest
Rating Weighted
score
7
1.75
.15
.10
8
8
1.20
.80
3
5
.45
.50
5
7
.75
.70
5
7
.75
.70
8
5
1.20
.50
.25
.25
5
3
1.25
.75
5
5
1.25
1.25
5
9
1.25
2.25
8
8
2.00
2.00
7
2
1.75
.50
1.0
6.00
4.70
5.95
7.45
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5.70
198
Key success factors
(Refer to Q 6 in the
external analysis.)
High fixed asset
utilization
Customer service
Superior information
systems
Overall low cost
Access to financial
capital
Sum of weights
Weighted overall
strength rating
Weight
.25
US Airways
Rating Weighted
score
5
1.25
Southwest
Rating Weighted
score
10
2.50
TWA
Rating Weighted
score
4
1.00
America West
Rating Weighted
score
7
1.75
Alaska
Rating Weighted
score
4
1.00
.15
.10
5
5
.75
.50
10
10
1.50
1.00
3
4
.45
.40
5
5
.75
.50
4
7
.60
.70
.25
.25
2
2
.50
.50
10
10
2.50
2.50
5
5
1.25
1.25
8
4
2.00
1.00
4
7
1.00
1.75
1.0
3.50
10.00
4.35
6.00
5.05
In terms of the key success factors, Continental is strong relative to most competitors. This is a strength. Only two airlines have a higher overall
strength rating. Continental is tied with America West while American Airlines has a slightly lower overall rating. Continental needs to lower its
costs and gain access to financial capital in order to improve its overall strength rating.
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199
5.
What strategic issues does the company face?
Issue areas
Is the present strategy adequate in light of
driving forces present in the industry?
To address this question, look at the
SWOT analysis. If most of the
intersections are in the S-O quadrant, you
can conclude that the company’s strategy
is adequate. If the intersections are in the
other quadrants, your conclusions should
be different.
Facts
The airline industry has a slow
growth rate and intense rivalry
between competitors. New
technology is threatening the
demand for air travel. Competitors
are constantly looking for new
ways to increase their share of the
market and defend against attacks
on their own market share.
Companies are focusing on
innovation and global expansion to
increase the number of passengers
they carry. Rivals are forming
alliances with each other to lower
their costs and increase revenue.
Airlines offering low frills and low
prices have had success gaining
market share and increasing the
numbers of passengers they carry.
What does this mean?
Continental’s present strategy is adequate in
light of most of the driving forces in the
industry.
Continental’s present strategy of being the
best-cost provider has helped the company to
increase revenue, reduce costs that do not add
value to the product, increase their profit
margin, and increase market share.
Continental’s strategy has helped turn the
company around and attract the attention of
customers that stopped flying Continental
because of the company’s reputation in the
past.
Continental’s alliances with other airlines have
improved Continental’s load factor and
allowed the company to participate in a greater
number of markets. This is a strength for
Continental. Continental has also had success
expanding into new markets.
Continental’s high debt, high cost floor, and
history of cash flow problems makes them
vulnerable to price cuts and other aggressive
attempts by rivals to gain market share.
Is the company’s present strategy geared
to the industry's future key success
High fixed asset utilization
Continental has high performance in fixed
asset utilization, customer service and
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200
factors?
Please start with the industry KSFs you
identified in the question 6 of the Chapter
3 worksheet. Use the KSFs as the starting
point for your analysis. Then determine
how well the company performs each of
the KSFs. If the company has high
performance on each KSF, their current
strategy is geared to the industry’s future
key success factors.
Continental’s passenger load factor
was 74.5% in 2000. It has
increased by over 11% since 1993.
information systems. These are all strengths of
Continental’s. The current strategy is geared to
these key success factors.
Continental has focused on
reducing the size of the aircraft in
its fleet and removing unprofitable
routes from its schedule.
The strategic issue involves how to add value
to the product in each step in the value chain
while at the same time reducing costs. The goal
is to reduce overall cost while increasing
revenue and profits so that Continental is able
to lower it’s debt, fund future growth, and
protect against future uncertainties.
Continental also improved its asset
utilization on its regular service by
introducing Continental Express as
a subsidiary. Continental Express
feeds passengers to Continental’s
hubs. Continental’s regular service
uses a hub and spoke system to
improve the load factor.
Customer service
Continental tied Southwest for the
1st place ranking for the number of
mishandled baggage reports per
1,000 passengers.
Continental ranked 2nd for the
number of involuntary denied
boardings per 10,000 passengers
due to oversold flights, 4th for the
number of complaints per 100,000
passengers boarded, and 5th for the
percentage of scheduled flights
arriving within 15 minutes of the
scheduled time.
Continental has made improving
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201
customer service one of its primary
objectives.
Superior information systems
Bethune hired Larry Kellner as the
new chief financial officer for
Continental to improve the
company’s information systems.
The new system that was designed
with the help of Bethune made it
possible for management to have
dependable, trustworthy, and
accurate information for managers.
This information was readily
updated and clearly displayed in a
daily report. Estimates of profits,
revenues, costs, credit card
receipts, and cash flows, were
displayed on the report. It even
broke these estimates down by
route, hub, and passenger seat.
New information systems also
helped to keep employees
informed. Employees were able to
obtain information concerning
their benefit packages and receive
answers to maintenance problems
by calling a toll-free number.
Overall low cost
Continental’s total operating
expense per average seat mile was
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202
$10.20 in 2000. This is above the
average of $10.12.
Bethune reduced some of the
company’s costs by improving
customer service and focusing on
creating a pleasant work
environment where employees
wanted to come to work.
Continental’s total costs have
increased by 17% from 1995 to
2000.
Access to financial capital
Continental has the lowest amount
of cash on hand out of the seven
largest commercial airlines.
Continental has the third highest
debt to total capital percentage.
They have very few unencumbered
assets to use as collateral on future
loans.
Bethune renegotiated payments on
debt in 1994. This brought the
interest payments down
considerably, but in 2000, the
interest payment was still above
average.
How good a defense does the present
strategy offer to the 5 forces?
Rivalry among airlines:
Continental’s present strategy overall offers a
good defense against the five forces. The
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203
Rivalry is a very strong force in
this industry. The industry is close
to pure competition. There are a
large number of rivals similar in
size. In this industry, rivals are
using competitive weapons such as
price cuts, to increase their market
share on certain routes and move
into new markets. Rivals are
continually looking for ways to
gain market share.
Continental has differentiated its
product by responding to customer
needs and introducing features that
add value to the product. For
example, Continental redesigned
the carry on luggage bins to hold a
greater volume of baggage. This
was perceived as valuable by
business passengers that did not
wish to check their luggage.
company’s current strategy has helped it to
increase market share despite the moves rivals
have made. Continental has also been able to
defend against rising fuel costs and substitute
products. After the new strategy was
implemented, Continental’s revenues and
profit margins increased.
In the event of a price cut by a competitor,
Continental will be at a disadvantage because
of the company’s high cost floor. Continental
will not be able to bring its price down and still
earn a profit when the competitor prices the
ticket below Continental’s costs. Continental
needs to make sure that consumers value the
product features they are adding and will pay a
higher price for them even when competitors
are offering much lower prices. Continental
also needs to focus on increasing volume and
lowering the cost floor.
Continental has also focused on
lowering costs so that it is able to
offer attractive prices and still earn
a profit. Continental wants to offer
the frills customers will pay for at
a price lower than other
competitors.
Continental’s strategy has helped
the company to distinguish itself
form competitors. Continental uses
its product features, brand name,
image, and reputation for customer
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service to help the company
defend against price cuts.
Buyers:
There are a large number of small
buyers in this industry. Buyer
knowledge is increasing. Buyers
have low switching costs.
Continental has focused on
customer service and adding
attractive benefits for passengers
in order to increase buyer’s
loyalty. These benefits include
incentives like the One Pass
frequent flyer program, priority
check-in for passengers flying
first-class, and better tasting meals
and beverages.
Substitute Products:
Substitutes in this industry are
available and can be attractively
priced depending on factors
including the length of the trip.
Substitutes do not provide the
speed of travel that airlines do.
Continental has focused on
increasing the comfort and
convenience of traveling by air.
The company has introduced
Continental Express a regional
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service that offers a faster
alternative to traveling by car,
train, or bus. Continental Express
gives customers more value for
their money by offering comfort at
an attractive price.
Potential new entrants:
New entry is not a strong threat in
this industry given the industry’s
position in the life cycle, the
industry profitability, high capital
requirements, etc. Although, new
entry of low frills airlines is a
threat.
Continental has improved their
customer service and catered to the
preferences and needs of
passengers to defend against new
entry.
Suppliers:
There are only two suppliers of
commercial aircraft, Airbus and
Boeing. These suppliers have some
bargaining power, but it is limited
because a major airline is such a
large customer that their success is
often tied to the airline’s success.
Airlines have bargain power with
most other suppliers. The price of
fuel is set by the market and the
airline industry is susceptible to
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volatile fuel prices.
Bethune was able to convince Ron
Woodward of Boeing to grant a
partial refund of $29 million on
new planes that it turned out
Continental was not able to afford.
Bethune renegotiated payments on
aircraft Continental had ordered in
the past to lower interest expenses.
Continental also hedged its jet-fuel
purchases. This move saved the
company $3 million in 1995 when
the price of jet-fuel rose.
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Does the present strategy protect the
company against external threats and
internal weaknesses?
This criterion is asking you to analyze the
intersection of the external threats and the
company’s strengths and weaknesses in
the SWOT matrix. You have to list the
threats and, strengths and weaknesses as
the starting point for conducting the
analysis.
If the majority of the intersections are in
the strengths-threats portion of the matrix,
then the company’s current strategy
protects them. If the majority of the
intersections are in the weaknesses-threats
portion of the matrix, then the strategy
will not protect them.
The major external threats include
the economic recession, maturity
of the market, intense rivalry, and
industry profitability.
The company’s major weaknesses
include its high cost floor, high
debt to equity ratio and financial
position.
The company’s major strengths
include its intellectual capital,
culture, degree of alliances,
reputation for customer service,
and product/service innovation.
Continental’s present strategy has helped them
defend against intense rivalry and increase
revenues despite the economic condition and
the low profitability in the industry. The
changes they have made internally have
improved their defense against the major
external threats. New product features and
improved customer service have helped them
to increase their market share.
However, Continental’s weaknesses are very
important and they require attention. Their
high cost floor, high debt to equity ratio and
financial position, makes Continental
especially susceptible to changes in the
economy and aggressive moves made by
rivals. Continental will have a hard time
earning profits when competing in terms of
price with airlines with much lower cost floors.
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Is the company vulnerable to competitive
attack by one or more rivals?
Continental has lowered many of
it’s costs by improving service in a
number of areas, but the company
still has a higher cost floor than
most rivals do.
Continental has a history of cash
flow problems and had a debt to
total capital ratio of 87.6 in 2000.
Continental is vulnerable to a competitive
attack, especially by airlines with low cost
floors. The company needs to continue to
lower costs by cutting down on costs that do
not add value to the product or by increasing
volume. Continental has to continue to
improve its financial position by widening its
profit margin, paying down its debt, and setting
cash reserves aside for the future.
Low frills airlines like Southwest,
have lower cost floors, and, in the
case of Southwest, they are in a
stronger position financially.
Continental has improved it’s ontime arrival percentage, number of
mishandled baggage reports,
number of involuntary denied
boardings and number of
passenger complaints, but major
competitors have also improved in
these areas.
Continental has tried to defend
against an attack by adding
features to its product that add
value and continually improving it
its customer service. Continental
has added incentives to attract and
retain passengers.
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Does the company have competitive
advantages (Refer to the responses to
question 2 above.) or must it offset the
competition's competitive advantages?
Continental does not have any
competitive advantages.
Some of Continental’s competitors
have competitive advantages in
areas such as culture, advertising
and promotion, brand name and
cost advantages.
Continental is gaining strength in
theses areas, but they are not
competitive advantages for the
company.
Continental has focused on gaining strength in
areas other airlines have competitive
advantages and this has helped Continental
offset these advantages to some degree.
Continental has been able to increase their
competitiveness by focusing on business
travelers and offering them added features and
incentives for flying Continental. Continental
needs to decide whether they will continue to
focus on changing product features to cater to
the needs of business customers or whether
they will put more attention on lowering costs
in key areas.
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What are the strong and weak parts of the
current strategy?
One of the strongest parts of the
strategy is the fact that they are
focusing on adding value to the
product. They are conducting
surveys of customer needs and
they are striving to meet those
needs in ways superior to their
competitors. They are adding
features that buyers are willing to
pay for and removing unnecessary
costs. They are improving
customer service and attracting
buyer’s attention. They are using
their information systems to
determine exactly what routes
have the highest profit potential
and they are removing unprofitable
routes from their schedule. They
have added additional international
flights to their schedule that have
increased the company’s profits.
The decision to create Continental
Express not only resulted in a
profitable subsidiary but also
increased passenger loads on
Continental’s normal flights.
Continental’s strategy has quite a few strong
parts. Their strategy will help them to increase
their profits by adding international routes and
expanding Continental Express. They will be
able to earn higher revenues by focusing on
adding features that increase the perceived
value of the product, allowing Continental to
charge a higher price. However, in the event of
lower demand for air travel they will have
problems remaining profitable or even
avoiding bankruptcy. With lower demand, their
revenues will drop while their costs remain
higher than many other competitors in the
industry. They need to develop strategies now
to prepare for future problems.
One of the weakest points of the
strategy is that it offers little
defense against an economic
recession. Continental is still
highly leveraged and demand for
air travel has slowed down.
Continental has very little reserves
set aside to pay its debts as they
come due.
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What additional moves are necessary to:
 Improve costs
 Capitalize on emerging opportunities
 Boost the company's competitive
position
Continental has focused on
lowering costs by improving
service, improving the culture of
the organization, and avoiding
unnecessary expenditures.
However, Continental’s operating
cost per available seat mile rose by
almost 24% since 1993. This was
mostly a result of management’s
actions to increase the value of its
product to attract and retain
consumers.
Continental needs to lower their total operating
cost per available seat mile by continuing to
remove costs that do not add to the value of the
product. Additional customer preference
surveys will help the company to determine
exactly what customer’s value. Continental
needs to develop innovative ways to reduce
costs in operations so that there is less of a cost
difference between Southwest and Continental.
Lowering costs will help the company in the
event of an economic downturn.
The emerging opportunities are in
international service and regional
service. Continental uses a hub in
the United States to serve
international markets.
Continental needs to consider expanding
Continental Express and the company’s
international service. The company needs to
look into whether additional hubs in foreign
countries will help lower the costs of serving
those markets.
Continental has an opportunity to
boost its competitive position by
increasing its alliances with other
airlines.
Continental needs to focus on advertising and
promoting the changes the company has made
that add value to the product in order to boost
the company’s competitive position.
Continental needs to increase the number of
alliances it has with other airlines and the
benefits it receives from each alliance it
presently has. This will help familiarize
additional customers with Continental’s service
and fill empty seats on both domestic and
international flights.
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6. Financial ratio analysis for the company and industry. Specifically state the strengths and
weaknesses that you find through your analysis of the financial ratios.
(in millions of dollars unless otherwise noted)
September 30,
2001
December 31,
2000
Liquidity ratios:
Current Ratio
Current assets
Current liabilities
2,252 = .73
3,084
2,459 = .83
2,980
Cash Ratio
Cash
Current liabilities
1,201 = .39
3,084
1,371 = .46
2,980
Net Working Capital
Net working capital
Total assets
-832 = -.08
9,816
-521 = -.06
9,201
The decrease in the current ratio shows a weakening in Continental’s ability to meet its short-term debt
requirements. With current liabilities rising in a greater proportion to current assets, this is a cause for
concern especially considering most this industry’s assets are not liquid. This ratio shows a weakness in
financial trends for Continental and is not a positive sign for creditors.
The cash ratio shows Continental’s ability to meet its short-term financial obligations without having to
depend on accounts receivable. This is a more conservative measure than the current ratio above. The
decrease in the ratio is a cause for concern. With their current liabilities increasing faster than their cash
reserves, Continental’s ability to pay its current liabilities is questionable.
The decrease in the net working capital ratio for Continental is not a positive sign. A decrease in the
amount of the company’s working capital can greatly affect Continental’s ability to meet its short-term
debt obligations and decrease it’s ability to stay solvent through tough financial periods in the future. A
negative number is a sign of problems in Continental’s ability to meet short-term obligations. This ratio is
used as an indicator in determining what companies will possibly file for bankruptcy in the future.
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September 30,
2001
December 31,
2000
8,564 = .87
9,816
8,041 = .87
9,201
Long-term solvency measures:
Debt Ratio or
Debt to Assets Ratio
Total liabilities
Total assets
Staying relatively the same, this ratio indicates that during this time period, Continental’s assets grew at
the same rate as its debt. Continental’s debt ratio is high for a number of reasons. Continental emerged
from Chapter 11-bankruptcy protection in 1993 and, in 1994, it still had $2 billion in debt left to pay. The
company has also purchased quite a few new airplanes from Boeing. This can be a sign of trouble because
Continental will have large interest payments in the future. A high amount of debt is a weakness in
Continental’s financial situation.
Debt to Equity Ratio
Total debt
Stockholders’ equity
8,564 = 6.84
1,252
8,041 = 6.93
1,160
The higher the ratio the more a company has been financing its future with debt. The debt to equity ratio
decreased during this period of time. This is a positive sign, however, this debt to equity ratio shows a
corporation whose future is highly leveraged and is at risk of not being able to pay off its long-term debt.
When demand decreases and revenues begin to fall, Continental will still have to find a way to make the
interest payments on its debt. This puts a significant strain on the company. Continental’s debt to equity
ratio is above the average for the industry.
Equity Multiplier Ratio
Total assets
Total equity
9,816 = 7.84
1,252
9,201 = 7.93
1,160
The equity multiplier ratio is decreasing. This is a positive sign in terms of Continental’s financial
position. For every dollar in equity, Continental had $7.84 in assets on September 30, 2001. The higher
the number, the more Continental is using debt to finance assets.
Long Term Debt Ratio
Long term debt
4,092 = .76
Equity + long term debt 1,252+4,092
3,374 = .74
1,160+3,374
Continental’s long-term debt is a concern. This corporation is highly leveraged. This can hinder its
growth and ability to acquire more loans in the future. This ratio shows a negative trend in the long-term
financial situation of this airline. Continental is leveraging its future to try to survive the present threats in
the industry.
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Asset management, turnover measures, or activity ratios:
Year 2000
Receivables Turnover
Sales
Accounts receivable
9,899 = 20.00
495
The receivables turnover ratio measures Continental’s efficiency in allowing customers to purchase on
credit and collecting on the accounts. Generally, a higher figure is preferable. Continental has a relatively
low amount of receivables compared to it’s total sales. In this industry, customers pay for their tickets
before they fly. Receivables in this industry are lower than in industries where products are more
commonly purchased on credit.
Days Sales In Receivables
365 days
Receivables turnover
365 = 18.25
20.00
This ratio shows Continental’s ability to receive payment for services in a timely fashion.
Continental appears efficient in receiving their payments from customers. By maintaining a low dollar
amount tied up in receivables, Continental has a greater ability to meet its short-term debt obligations.
However, we do not have enough information to compare this ratio to rivals to determine Continental’s
relative position.
Net working Capital Turnover
Sales
Net working capital
9,899 = -19.00
-521
Continental is weak in it’s ability to increase net working capital. The airline’s inability to put profits
aside to use for future growth is a problem. Continental is decreasing their cash reserves to make
payments on debt, thus putting the airline in a poor financial situation in the near future.
Fixed Asset Turnover
Sales
Net fixed assets
Total Asset Turnover
Sales
Total assets
Fixed assets are not given in the
case
9,899 = 1.08
9,201
This ratio measures a company’s efficiency to use their assets to produce sales. This is important in this
mature industry. For every dollar in assets Continental is able to generate $1.08 in sales. In the same year,
Southwest’s total asset turnover was .85. This is understandable because companies with wider profit
margins usually have lower total asset turnover. Southwest has a record of maintaining the highest profit
margins in the industry. Continental appears to be efficiently using their assets.
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Profitability measures:
Gross Profit Margin
Sales-Cost of goods sold
Sales
Cost of goods sold is not given
in the case
Operating Profit Margin
Profits before interest and taxes
Sales
See chart below
Operating profit margin
1997
1996
1995
2000
1999
1998
1994
684/9,899
= .069
600/8,639
= .069
701/7,927 716/7,194 525/6,347 385/5,825 -11/5,670
= .088
= .100
= .088
= .066
= -.002
1993
-19/5,767
= -.003
Continental’s operating profit margin increased between 1993 and 1997. The operating margin peaked in
1997. The economic recession that began in the late 90’s is a likely cause for the slight decrease in 1999.
Bethune’s strategy to lower total costs while increasing total revenue has been the catalyst in returning
Continental to profitability after almost ten years of losses. Continental’s ability to maintain profits after
1995 indicates that management’s actions have been effective in improving the financial position of the
company.
Net Profit Margin
Net income
Sales
See chart below
2000
1999
Net profit margin or Return on sales
1998
1997
1996
1995
342/9,899
= .035
455/8,639
= .053
383/7,927 385/7,194 319/6,347 224/5,825 -613/5,670
= .048
= .054
= .050
= .038
= -.108
1994
1993
-39/5,767
= -.007
The net profit margin also shows Continental’s ability to consistently remain profitable. By lowering
costs, and improving the organization internally, Continental was able to increase its net profit margin
between 1993 and 1997. Although their net profit margin is less than the net profit margin of Southwest,
it is superior to the profit margins of many of its other competitors. Continental needs to continue to lower
costs and look for opportunities to increase revenues and help maintain a healthy profit margin during the
economic recession that began in the late 90’s. Continental needs to focus on the profit margin to help
strengthen its financial position. Paying down debt and looking for opportunities to refinance at lower
interest rates will help increase the profit margin.
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Year 2000
Return On Assets
Net income
Total assets
342 = 3.71%
9,201
In 2000, Continental was able to generate $342 million in earnings from its investment (assets). The
return on assets ratio measures Continental’s efficiency to generate income from their assets. Compared
to Southwest’s percentage of 9.37% in 2000, Continental is not using their assets as efficiently to
maximize a return. Continental needs to increase their return on assets to compete with the more
profitable carriers in the future. This ratio is important in this mature industry.
Return On Equity
Net income
Total equity
342 = 29.48%
1,160
The return on equity ratio measures the return a stockholder receives from their investment. Southwest’s
return on equity was 18.12% in 2000. Therefore, Continental was stronger in this area in that year.
However, an investor also has to take into account the degree of risk involved in their investment.
Continental’s short-term and long-term liquidity ratios indicate an investment in Continental is risky.
Southwest is much stronger in these areas.
Continental’s higher return on equity is likely due in part to the fact that Continental is highly leveraged.
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Market value measures:
Earnings Per Share
Net income
Shares outstanding
Number of shares outstanding is
not given in the case
Price To Earnings Ratio
Price per share
Earnings per share
Price per share is not given in
case
Market To Book Ratio
Market value per share
Book value per share
Neither figure is given in the
case
Dividend Payout Ratio
Annual dividends per share
After tax earnings per share
N/A
Dividend Yield On
Common Stock
Annual dividend per share
Current market share per share
N/A
Cash Flow Per Share
After tax profits + depreciation
Common shares outstanding
Not enough information
is provided in the case
Internal Growth Rate
Not enough information is provided in the case
Sustainable Growth Rate
Not enough information is provided in the case
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Financial ratios summarized and compared to Southwest Airlines
Southwest was used as a benchmark because of their records of high profitability in the industry.
Southwest was profitable for 28 consecutive years and, in 2000, had the lowest debt to total capital ratio
in the industry.
Ratio
Continental
September 30,
2001
Continental
December 31,
2000
Liquidity ratios
Current Ratio
.73
.83
Cash Ratio
.39
.46
Net Working Capital
-.08
-.06
Long-term solvency measures
Debt to Assets Ratio
.87
.87
Debt to Equity Ratio
6.840
6.932
Equity Multiplier Ratio
7.84
7.93
Long-term Debt Ratio
.76
.74
Asset management, turnover measures, activity ratios
Receivables Turnover
20.00
Days Sales in
Receivables
18.25
Net working capital
turnover
-19.00
Fixed asset turnover
Total asset turnover
1.08
Profitability measures
Gross profit margin
Operating profit margin
6.9%
Net profit margin
3.5%
Return on assets
3.71%
Return on equity
29.48%
Market value measures
Southwest
2000
Compared to Southwest
Airlines and past
performance
Weakening
Weakening
Weakening
.48
.93
1.93
.18
Poor- staying the same
Poor- slightly improving
Poor- slightly improving
Poor- getting worse
Not able to compare
Not able to compare
Not able to compare
Unable to calculate
.85 Very good
18%
11.1%
9.37%
18.12%
Unable to calculate
Low
Low
Low
Good
Unable to calculate
Growth rate
Growth rate
Avg. sales growth
rate 1995-2000
Continental
Southwest
Industry
Comment
10.651%
14.544%
5.9772%
Excellent- Much higher than industry
Southwest is definitely a threat
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Market share
Total Airline Industry
United
American
Delta
Northwest
Continental
US Airways
Southwest
TWA
America West
Alaska
Revenue in Millions
$19,331.3
$18,117.1
$15,320.9
$10,956.6
$9,449.2
$9,181.2
$5,649.6
$3,584.6
$2,309.3
$1,762.6
% of market (98.1 billion)
19.705%
18.468%
15.618%
11.169%
9.632%
9.359%
5.759%
3.654%
2.354%
1.7968%
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Profitability graphs
Continental Operating Profit Margin
12
10
%
8
6
4
2
0
-2
1993 1994 1995 1996 1997 1998 1999 2000
%
Continental Net Profit Margin
8
6
4
2
0
-2
-4
-6
-8
-10
-12
1993 1994 1995 1996 1997 1998 1999 2000
Despite years of costs cutting attempts by prior management, the company did not operate profitably until
1995. Between 1994 and 1997 the profit margin rose every year.
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7. Top Management’s values and perspectives
How are the personal ambitions, business philosophies, and ethical beliefs of managers stamped on the company's strategy and
competitive capabilities? Specifically state the strengths and weaknesses that you find through your analysis of Top Management’s values
and perspectives.
Continental’s board of directors chose Gordon Bethune to turn the company around and improve its performance. Together with Greg
Brenneman, they began implementing their “Go Forward Plan.” The plan initially involved making changes in a number of areas including
marketing and finance. Bethune took an active role in communicating the new plan to all levels of the organization. He set up monthly open
houses, employee outings, and meetings at almost all employee sites. In many cases, employees were able to learn of top management’s values
and perspectives first hand.
Bethune believed in people. He empowered employees to make decisions on their own, even telling employees to burn manuals containing
rules, procedures, and regulations at the Houston headquarters. He wanted people to use their own judgment when handling problems and coming
up with solutions. Bethune trusted employees to make the right decisions or seek help when they needed it. The goal was to remove the red tape in
the organization so that people were able to perform their jobs without unneeded interference. He had high expectations and was quick to reward
performance. At a meeting in the middle of 1996, Bethune decided to tape half of the yearly bonus to the bottom of executive’s chairs rather than
waiting until the end of the year to distribute it. He announced, “This is because you have done such an outstanding job- because Continental is
going to make its plan this year. Here’s the money the company owes you for that success.” Bethune believed that people were self-motivated and
competent and needed to be treated fairly and recognized for their accomplishments. He rewarded employees in many ways including profit
sharing plans, on-time arrival bonuses, and a chance to win an Eddie Bauer Ford Explorer for perfect attendance. He respected his employees and
worked hard to earn their respect in return. Bethune shared as much information as possible with people at all levels in the organization and kept
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them updated with meetings, Continental Times, Continental Quarterly, LED boards, daily intranet updates, weekly voicemail messages, a daily
newsletter, etc. Bethune made sure two-way communication was possible. He propped the door open to his office, set up a toll-free voicemail
number so that employees were able to get in contact with him directly, and answered questions from all employees at meetings. He valued
feedback and strived to create a team atmosphere where departments cooperate with each other to achieve their goals. He was fond of saying that
“running an airline was the biggest team sport in the world.”
Bethune had a strong commitment to the success of individuals and the company as a whole. He recognized that he had a responsibility to
all stakeholders. His integrity and honesty helped him to gain respect and trust. Bethune had a clear focus and made sure that he was easily
understood. At executive meetings and in company newsletters, the four basic parts of the “Go Forward Plan” were always addressed in the same
order, constantly reminding employees of the new plan. He set realistic goals that were attainable but forced the company to reach. Bethune
invested time and effort into the organization was focused on continually improving its performance. He opened his own home for a party where
he invited one hundred of Continental’s frequently flying business passengers. He used the opportunity to apologize for past mistakes Continental
had made and described what changes were in store. Bethune was focused on meeting customer’s needs and providing quality service. He
conducted customer preference surveys and looked for opportunities for innovation. Bethune maintained the appropriate humility and recognized
that accomplishments were not a result of just one individual, but of an entire team. His strong ambition and work ethic became contagious. He
was quoted as saying, “Work Hard. Fly Right…exemplifies who we are and what we do.”
Bethune brought outsiders with similar ambitions, philosophies, and ethical beliefs into Continental. These individuals each had unique
strengths and experience in their area of expertise. Larry Kellner and Greg Brenneman are two examples. They were both committed to the
organization’s success and each of them made invaluable contributions.
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The strengths in top management’s values and perspectives can be seen in the company’s strategy. The “Go Forward Plan” was an
ambitious plan that required the support and hard work of everyone involved. The strategy was geared toward taking care of customers and
constantly improving performance. It involved improving the way people treated each other and empowered people to get the job done.
Top management’s values and perspectives drove the organization’s culture. As the culture at Continental improved, it became more
conducive to the strategy Bethune and Brenneman had created. The organization’s culture is reflected in the strategy itself, its implementation, and
the company’s competitive capabilities. Continental now has a “can do” attitude that helps the company to implement new and ambitious
strategies and improve the company’s competitive capabilities.
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8. Organization’s culture
How do the company's values, policies, and culture impact the strategy, strategy implementation, and company's competitive capabilities?
Specifically state the strengths and weaknesses that you find through your analysis of the organization’s culture.
When Gordon Bethune became CEO of Continental in 1994, the culture made it almost impossible for him to implement any strategy.
Continental had ten CEOs over the course of ten years. The company had poor performance in a number of areas including customer service,
baggage handling, on-time arrival, etc. Many of the prior CEOs had tried to turn the company around, but had limited success. There was little
communication both horizontally and vertically. Departments fought over the limited supply of resources. Employees looked out for
themselves and no one else. The company’s poor culture was costing the company money. Continental had a high rate of absenteeism, work
injuries, and employee turnover. People did not like coming to work and were so ashamed of their place of employment that they removed the
company’s insignia from their uniforms when they left at the end of the day. “The culture at Continental, after years of layoffs and wage
freezes and wage cuts and broken promises, was one of backbiting, mistrust, fear, and loathing.”
Bethune recognized that improving Continental’s culture was crucial to turning the company around. He began focusing on the people
in the organization first, knowing that once they were happy they would begin treating customers better and employee productivity would also
increase. Bethune focused on getting people to work together and removing barriers that prevented people from performing to the best of their
ability. This was the basis of his people plan, “Working Together.” He made several moves that are worth noting. Prior CEOs kept the door to
their office shut and had it guarded by security cameras. Bethune propped the door open and encouraged employees to stop by. Bethune put
toll free numbers in place so that employees were able to communicate with him directly or find answers to maintenance problems or
questions on benefits. He had employees burn regulation and procedure manuals at the Houston headquarters. This symbolic move showed
Thompson, Arthur and Strickland, A.J. Strategic Management: Concepts and Readings. McGraw-Hill Irwin. NY. 12th Edition
225
employees that Continental was changing and communicated what Bethune expected of employees in the future. Bethune empowered
employees to make decisions and trusted that they would help the company succeed. He searched for “ways to measure and reward
cooperation rather than infighting, to encourage and reward trust and confidence.” Bethune sat at the middle of the boardroom table at
meetings rather than at the head and he introduced casual dress Friday’s for employees not working directly with the public so that executives
were more approachable. Bethune focused on creating a team atmosphere where all departments worked together for a common goal. He made
sure that employees had the resources necessary to do their jobs so that there would be less fighting. In 1996, “Dignity and Respect” became
the company’s slogan with the goal of making the work environment more pleasant. Bethune had departments work directly with each other to
improve scheduling, maintenance, and operations. He rewarded employees in a number of ways for their efforts in order to build trust and put
attention on teamwork. The company held celebrations along with fried chicken dinners, ice cream parties, picnics, and barbecues. Bethune’s
actions caught the attention of employees and started the company on a path of change.
Not all employees bought into the changes. Top management ranked executives on a scale from one to four and eventually removed
the executives with the lowest rankings. Bethune asked employees that refused to change to leave the organization and hired new management
that held the same values he was trying to communicate.
Top management changed the company’s values and policies and these changes were “ingrained into the corporate culture.” The new
culture became one of Continental’s strengths whereas the old culture was definitely one of its weaknesses. The new culture was a good fit
with the strategy that Bethune developed and was trying to implement. Employees were more committed to customer service, quality,
innovation, and treating each other with respect. Honesty, integrity, and trust were all important in improving Continental’s competitive
capabilities. Without these values, Continental was a collection of individuals with no desire to work together. Bethune linked rewards to
Thompson, Arthur and Strickland, A.J. Strategic Management: Concepts and Readings. McGraw-Hill Irwin. NY. 12th Edition
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strategic performance and took the resources from projects implemented in the old strategy and put them towards new strategic moves. For
example, the new strategy involved shutting down the no-frills low priced service, Continental Lite. This made resources available to help put
Continental Express in place. The new policies resulted in less red tape and allowed employees to do their jobs in the most effective and
efficient way possible. The culture Bethune molded helped employees to “buy into” the new strategy of being the best-cost provider and
helped the company to lower costs in numerous areas while adding value to the product in the eyes of consumers.
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227
9. Summary matrix
Internal analysis section
Strengths
Skills and expertise
-Proprietary technology
-Advertising and promotion
-Product innovation
-Ability to improve production processes
-Technological know-how
Physical assets
-Plant capacity
-Plant and equipment age and technological
capabilities
-Plant and retail location
-Access to distribution channels
-Wide geographic coverage
-Global distribution capability
Human assets
- Superior intellectual capital
Organizational asset
-Better product quality
-Culture
-Product line breadth and depth
-Product quality
Intangible asset
-Image
-Brand name
-Reputation for customer service
Weaknesses
-Financial position
Thompson, Arthur and Strickland, A.J. Strategic Management: Concepts and Readings. McGraw-Hill Irwin. NY. 12th Edition
228
Competitive capabilities
-Sophisticated use of e-commerce
Market position
-Recognized industry leader
-Attractive customer base
Alliances or cooperative ventures
-Alliances or cooperative ventures
-Cost advantages
Thompson, Arthur and Strickland, A.J. Strategic Management: Concepts and Readings. McGraw-Hill Irwin. NY. 12th Edition
229
10. SWOT Matrix
Weaknesses
Strengths
Information systems
Advertising and promotion
Product and service innovation
Ability to continually improve quality
Technological know-how
Culture
Brand name
Alliances and cooperative ventures
Attractive customer base
Wide geographic coverage
Image
Location of operation facilities
Regional Service
Recognized as an industry leader
Reputation for customer service
Intellectual capital
Fixed asset utilization
Age of aircraft
High cost floor
Limited access to financial capital
Cost disadvantages
High debt to equity ratio
Financial position- cash flow
X
X
X
X
X X
X X
Volatile fuel costs
Rivals using competitive
weapons
Extent to which rivals use
economies of scale
Large number of rivals
similar in size
Low buyer switching costs
Increasing buyer
knowledge level
Degree of alliances
Long term industry
growth rate
Industry profitability
Exit barriers
Mature market
Economic recession
Legislative, regulatory and
political environments
Technology
Extent of rival’s
horizontal integration
Threats
Bargaining power with
some suppliers
International routes
Feeder routes
Matrix
Changing societal values
SWOT
Large quantity of buyers
Extent of rival’s vertical
integration
Population demographics
(Opportunities for growth)
Opportunities
X
X
X
X
X
X
X
X X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X X
X
X
X
X
X
X
X
X
X
X
X
X X
X
X
X
X
X
X
X
X
X
X
X
X
X X
Thompson, Arthur and Strickland, A.J. Strategic Management: Concepts and Readings. McGraw-Hill Irwin. NY. 12th Edition
X
X
X
X
X
230
VI. Action plan
Intersection
Recommended
actions
Priority
Implementation
steps
Required
resources
Schedule and
sequence
Opportunity:
 Large quantity
of buyers
Continental
must take steps
to lower their
cost floor. With
a lower cost
floor, they will
be able to lower
their price and
still earn a
profit. A lower
price will help
them be
competitive
with low frills
airlines. A
lower price will
enable
Continental to
meet the needs
of a larger
number of
buyers.
Renegotiating
leases is the top
priority because
it has the
potential to
lower the cost
floor
significantly
and in a short
period of time.
Renegotiate
leases by
determining what
the present
interest rates and
terms are on the
company’s leases
and look for
opportunities in
the market to
refinance with
more favorable
terms or lower
rates.
Continental
must rely on its
strong
intellectual
capital.
Continental’s
financial
department
will be a key
resource in
renegotiating
leases and
making plans
to hedge jetfuel purchases.
Continental’s
efforts to
renegotiate
leases needs to
begin
immediately.
Weakness:
 High cost floor
Continental
needs to use it’s
employees to
find innovative
ways to reduce
Hedging jet-fuel
purchases is the
next priority.
This action will
not take a long
time to
implement and
can
substantially
lower
Continental’s
costs.
Developing a
cost conscious
culture will take
time, but will
Hedge jet-fuel
purchases by first
determining what
the company’s
jet-fuel
requirements will
be in the future
and then
purchasing the
appropriate
quantity of fuel to
cover the
company’s needs.
Top
management
needs to realize
the importance
of these
actions.
The culture of
the company
will also be a
strong
resource.
Continental
needs to
continue to look
for
opportunities to
hedge jet-fuel
purchases.
Continental’s
top
management
needs to start
communicating
to employees
the importance
of lowering
costs.
Management
also needs to
put a reward
system in place.
Internal and
external
success
standards
(e.g.
benchmarks)
Internal:
Compare
Continental’s
operating cost
per available
seat mile to
past records.
Compare
costs on
flights in
particular
areas.
External:
Measurement
metrics
Operating
cost per
available seat
mile in
dollars or
cents per
share
Costs per
flight and per
area are in
dollars
Southwest’s
financial
reports show
cost in dollars
Compare
Continental’s
costs in each
step of the
value chain to
the low cost
leader
Southwest.
231
costs in every
step of the
value chain,
while
maintaining the
value the
product has in
the eyes of
customers.
Continental
needs to
develop a cost
conscious
culture.
Continental
also needs to
continue to
hedge jet-fuel
purchases. This
practice saved
the company $3
million in 1995
when the price
of fuel
increased.
Continental
needs to look
for
opportunities to
share ground
crews with
other airlines.
This will help
Continental
pay high
dividends in
terms of cost
savings in the
future. This is
third in terms of
priority.
Cost conscious
culture:
Once
employees
come forward
First step:
with ideas that
Continental’s top result in a
management must lower cost
begin to make
floor for the
Sharing ground cost saving a part company, they
operations is
of the culture of
need to be
last in terms of
the organization.
rewarded.
priority.
This topic needs
Continental
to be discussed
can use a
Any efforts that with employees at percentage of
result in a lower every opportunity. the money it
cost floor
saves to
without
Second step:
provide an
reducing
appropriate
revenue will
Employees who
reward.
help widen
come up with
Continental’s
ideas to reduce
profit margin.
the company’s
This will help
cost without
the company
making the
earn a higher net product less
income and pay attractive need to
its debt
be rewarded. At
payments on
meetings, their
time.
accomplishments
need to be
discussed so that
the rest of the
employees will
have examples to
follow.
This way an
employee will
be reward
quickly when
they come up
with an idea
that results in a
lower cost floor.
Continental
needs to
continually look
for
opportunities to
share ground
resources with
other airlines.
232
reduce costs on
certain flights.
Continental
needs to
renegotiate
leases at lower
interest rates.
This will help
the company to
lower their
interest
payments.
Third step:
Management
needs to provide
feedback to the
employees on
how well the
company is doing
in terms of
lowering costs in
comparison with
rivals and
Continental’s past
performance. This
can be done in the
company
newsletter or on
the LED boards.
Feedback needs to
be internal and
external.
Ground
operations
sharing:
First step:
Contact other
airlines to
negotiate deals to
share ground
crews, equipment,
etc. at certain
airports.
233
Second step:
Evaluate the cost
savings. At
particular airports
it can definitely
make sense for
Continental to
have its own
ground crew
when the
passenger traffic
and flight
schedule is heavy.
Continental needs
to evaluate to
make sure the
arrangement is
resulting in a
lower cost floor.
Intersection
Recommended
actions
Priority
Implementation
steps
Required
resources
Schedule and
sequence
Threat:
 Rivals using
competitive
weapons
Continental
must use its
strength in
product and
service
innovation to
defend against
The first priority
is advertising.
Customers need
to be aware of
what
Continental is
doing
Advertising:
Continental
can use their
existing
marketing team
to create the
advertisements
and design the
Continental
needs to start
the advertising
as soon as
possible.
Strength:
 Product and
First Step:
Identify the
websites where
advertising is
available and
The initial
Internal and
external
success
standards
(e.g.
benchmarks)
Internal:
Measurement
metrics
Numbers of
passengers
Compare the
number of
Percentage
product and
market share
service
innovations to Operating
234
service
innovation
the threat of
rivals using
competitive
weapons such
as price cuts.
When
Southwest
Airlines enters
a market, they
usually use
price cuts to
draw attention
and attract
passengers.
Continental
needs to
differentiate its
product so they
can retain their
market share
when new
airlines move
in aggressively.
Continental
needs to:
Put
advertisements
on websites
where plane
tickets are sold
(ex. Orbitz,
Expedia).
These
differently than
their
competitors or
they will
immediately
choose the
airline with the
lowest price.
Advertisements
help Continental
maximize their
return on the
product and
service
innovations.
contact the
companies for
quotes.
Second step:
Choose websites
that have high
usage and
attractive rates for
advertisement.
Surveys and
meetings with
travel agents:
First step:
The second
priority is
conducting
surveys and
working with
travel attendants
to increase
innovation. This
way
management
will have a
better
understanding
of consumer
needs and will
help with future
innovations.
Third, in terms
of priority, is
Design a survey
that provides an
opportunity for
passengers to
identify their
needs.
Second step:
Hold meetings at
hubs where
management can
speak directly
with travel agents.
Management can
use this
opportunity to
communicate the
plan and discuss
innovation with
surveys.
It is crucial that
management
buys into these
actions and
follows
through. They
need to be
willing to share
their
experience and
knowledge and
work with the
flight
attendants.
Continental
will need to
create a crossfunctional team
to work on
redesigning the
OnePass
frequent flyer
program
drawing on the
strengths of
employees in
various areas in
the
organization.
Continental
will need to
budget
meetings with
flight attendants
need to be held
within 3 months
and follow up
meetings to be
held within 9
months.
The surveys
need to be
distributed
within 6
months.
The improved
OnePass
program needs
to be put in
place within a
year.
past years.
Look at
reductions in
revenue when
rivals begin
using
competitive
weapons such
as price cuts.
revenue in
dollars
Number of
product or
service
innovation
Number of
frequent flyer
members
Compare the
number of
business
travelers and
passengers
traveling on
leisure before
and after the
rivals begin
using the
weapons.
External:
Market share
in the
particular
markets
where
competitive
weapons are
being used.
Compare
Continental’s
235
advertisements
need to point
out the benefits
of flying
Continental as
opposed to
another carrier.
Have flight
attendants hand
out surveys on
random flights
for passengers
to fill out.
These surveys
need to be
designed to
encourage
passengers to
identify what
they would like
the airline to
offer in the
future.
As it stands
now, top
management is
doing most of
the innovation.
Management’s
skills need to
be spread
throughout the
organization.
Management
redesigning the
frequent flyer
programs so that
they are more
attractive to
leisure travelers.
Passengers
traveling on
leisure will be
more likely to
switch to
competitors
now because
most of them do
not have
attractive
incentives to fly
on a single
airline.
And on an as
needed basis,
Continental
must monitor
the competitive
moves rivals
make and
increase
advertising and
incentives
accordingly.
employees.
Third step:
Set up follow-up
meetings where
flight attendants
are encouraged to
voice their ideas
and are given
feedback.
approximately
$50K for
advertising on
websites. This
will vary
depending on
the websites
and the method
they use to
charge for
advertisement.
innovations to
other
competitors.
Compare
Continental’s
frequent flyer
programs to
other
competitors.
Frequent flyer
program:
First step:
Conduct a survey
of the OnePass
frequent flyer
members asking
whether or not
they travel on
leisure and what
they think will
make the program
better.
Second step:
Redesign the
program
accordingly.
Maintain the
benefits for
business travelers
236
needs to speak
directly with
flight
attendants and
work in
conjunction
with them in
finding
innovative
ways to service
customers.
Flight
attendants are
in the perfect
position to
offer valuable
information
about
customer’s
needs.
while adding
features that
attract passengers
who do not fly as
frequently or who
fly at off peak
times.
Redesign the
company’s
OnePass
frequent flyer
program so that
it is more
attractive to
passengers
traveling on
leisure without
making it less
attractive to
business
travelers. This
will help
237
increase the
loyalty of these
passengers.
When rivals
begin to use
price cuts and
other
competitive
weapons in a
particular
market,
Continental
needs to
increase
advertising and
double bonus
miles.
Intersection
Recommended
actions
Priority
Implementation
steps
Required
resources
Schedule and
sequence
Internal and
external
success
standards
Measurement
metrics
238
Threat:
 Economic
recession
Weakness:
 High debt to
equity ratio
Continental is
susceptible to
the threat of
economic
recession
because of their
high debt to
equity ratio.
During an
economic
recession,
demand for air
travel decreases
and
Continental’s
revenues fall.
Because
Continental is
highly
leveraged they
have high
interest
payments.
When revenues
fall, they have a
hard time
meeting their
debt
obligations.
Continental
needs to:
Deferring
delivery of new
aircraft is the
first priority.
Accepting a
delivery of new
aircraft will add
to the
company’s debt
and the
payments the
company has to
make.
Raising fares on
selected routes
is the second
priority. This
will result in a
wider profit
margin.
Management
needs to keep a
close eye on
revenues to
make sure that
they do not fall.
The third
priority is
increasing the
number of
profitable
routes.
Identifying
profitable routes
and increase fares
on select routes:
First step:
Use the financial
information
system Larry
Kellner designed
to rank the
international and
domestic routes in
terms of
profitability and
passenger load.
Second step:
Use the
information the
system provides
to determine
exactly what
routes to add or
drop from the
schedule and what
routes are
attractive
candidates for
fare increases.
Dropping
domestic routes
Implementing
these actions
will require the
use of the
company’s
financial
information
systems and
intellectual
capital.
Continental
needs to begin
implementing
these actions
immediately.
The current
economic
recession is
putting pressure
on revenues.
Continental’s
management
team will have
to carry out
these steps.
Continental
needs to
continuously
monitor the
profitability of
the routes the
company
chooses to fly
and act quickly
when routes
have above or
below average
profitability.
(e.g.
benchmarks)
Internal:
Compare
Continental’s
debt to equity
ratio to what
it was in the
past.
The debt to
equity ratio is
usually given
as a
percentage. It
is calculated
by dividing
total debt by
total equity.
Management
needs to set a
target debt to
equity ratio
and then
evaluate their
progress.
External:
Compare to
other airlines
in the
industry.
Southwest
debt to equity
ratio was
33.3% in
2000. In that
year the
average debt
to equity ratio
of the top
nine major
U.S. airlines
239
Increase fares
on routes with
high passenger
traffic when the
planes are
flying at or near
capacity.
Increase the
number of
profitable
flights
Continental and
Continental
Express are
flying and
remove flights
with low profit
margins from
the schedule.
Defer delivery
of new aircraft
on order.
Instead, work
to reduce
turnaround
times at
airports to
increase the
utilization of
existing fixed
assets.
Continental
needs to use its
fixed assets to
fly only the
most profitable
routes.
with low profit
margins will help
to free up
resources for
international
routes where the
company has been
profitable.
Lastly,
additional codesharing
Third step:
agreements need
to be established Look for codeinternationally.
sharing
opportunities.
Continental can
increase
passenger traffic
on routes by
entering into
code-sharing
agreements.
was 70.19%.
Continental’s
debt to equity
ratio was
87.6%.
This is far
above the
average and
needs to be
improved.
Fourth step:
Use increases in
net income to pay
down the
company’s longterm debt.
Enter into
additional
240
code-sharing
agreements.
This way
Continental
does not
necessarily
have to provide
a plane to serve
a market. They
can gain
revenue from
just listing the
partner’s flight
on their
schedule.
These actions
will help
Continental
widen the profit
margin so that
it will have the
funds available
to pay down the
company’s
debt.
241
Intersection
Recommended
actions
Priority
Implementation
steps
Required
resources
Schedule and
sequence
Opportunity:
 International
routes
Continental
needs to use its
information
systems to
determine the
international
routes with the
greatest profit
potential and
add these
routes to its
schedule.
The first priority
is adding
additional
international
flights with
strong profit
potential.
First step:
Implementing
these actions
will require the
use of the
company’s
information
systems and
intellectual
capital.
Continental
needs to begin
making the
necessary
changes to the
information
systems within
6 months.
Strength:
 Information
systems
Continental
also needs to
use the
information
systems to
determine a
location for a
new hub in
Europe. With a
new hub,
Continental can
add a greater
number of
international
flights to its
schedule in
future years
The second
priority is
determining the
optimal location
for a new hub in
Europe. The
hub will involve
a large capital
expenditure and
it will take time
before the
company has
the funds
available.
Make any
necessary minor
changes to the
current
information
systems so that
they will be able
to generate the
required reports to A team needs
help in making
to be formed to
these decisions.
analyze the
information
Second step:
and make the
decisions.
Create reports
showing the
The company’s
profitability of
financial and
each route and
marketing
destination
departments
Continental flies
will play a key
to outside the
role.
United States.
These reports
Creating a new
need to show
hub will
information
involve a large
including the
capital outlay.
operating cost, the This will be
revenue gained,
funded by the
The reports
need to be
generated
within 9
months.
New flights
need to be
added to the
schedule within
9 to 12 months.
A hub in
Europe needs to
be in operation
as soon as the
funds are
available.
Continental
needs to
Internal and
external
success
standards
(e.g.
benchmarks)
Internal:
Compare the
number of
profitable
international
routes to past
years.
Look at
profitability
in markets in
Europe and
compare to
past
performance.
External:
Compare
Continental’s
international
expansion to
the expansion
of their
rival’s.
Measurement
metrics
Profit margins
are calculated
by dividing
net earnings
by revenue
and are
shown as a
percentage.
Continental
can compare
itself to rivals
by looking at
the number of
international
flights and
destinations
served and by
comparing
costs and
revenue
information in
dollars. This
information is
also available
per seat mile.
Compare
Continental’s
profitability
242
and can also
look into the
possibility of
offering
regional service
in Europe.
and the load
factor for each
international
flight.
Third step:
Use the
information
systems and
reports to forecast
demand for air
travel in new
cities.
profits earned
on the
international
routes that
were added to
the schedule.
evaluate these
decisions within
6 months after
they are
implemented
and changes
need to be made
accordingly.
in
international
markets to
competitors
operating in
those
markets.
Fourth step:
Rely on the
information to
make decisions
about which
international
routes and
destinations have
the most profit
potential and
which ones
Continental is
able to add to it’s
schedule given
it’s current
capabilities.
Fourth step:
Add the new
243
international
routes and
destinations.
Opening the hub:
First step:
Research possible
hub locations in
Europe by
looking into the
political,
economic, and
social
environments in
various countries.
Gather
information
concerning local
government
policies, the cost
of labor, etc.
Second step:
Evaluate the
information
obtained in the
previous step in
conjunction with
the information
from the internal
information
systems and make
decisions
244
concerning where
in Europe to
locate the hub.
Third step:
Use the profits
from the
international
flights that were
added to the
schedule to
finance the new
hub location.
245
Appendix A. Stakeholder Worksheet
Stakeholders
Specific companies,
Groups, and individuals
Customers


“Backpack and flipflop crowd”
“Coat-and-tie crowd”
Type/nature of the
relationship/ what we do
for each of them
Continental transports
paying passengers by air to
destinations around the
world.
Needs
How we satisfy those
needs




Continental tied Southwest
for the 1st place ranking
out of the top 10 major
U.S. airlines in mishandled
baggage reports for the
period between 1996 and
2000.
Before Gordon Bethune:
Continental had a very
poor relationship or no
relationship with its
customers. The company
had the highest number of
passenger complaints and
mishandled baggage
reports out of the major
airlines in the United
States. Continental also
had close to the highest
percentage of passengers
involuntarily denied
boarding. The culture of
the organization was very
poor. Employees did not
like the company they
worked for and as a result,
treated customers poorly.












After Bethune:
Along with Bethune’s
actions to change the work

Safe means of travel
Dependable service
On-time arrival
Adequate workspace
and carry-on luggage
space
Legroom
Quality food and
beverages
Available seating
Comfort
Convenience
Reliable baggage
handling
Respect and courteous
treatment
Hassle-free service
Flight times that fit
with customer’s
schedules
Systems to provide
information
concerning flight
delays, etc.
Amenities at airports
Flights to the
destinations
customer’s need to fly
to
In flight entertainment
During that same period,
Continental ranked 2nd in
involuntary denied
boardings, 4th in passenger
complaints, and 5th in ontime arrival.
Continental has used the
results of the surveys it
conducted to make
changes to improve the
company’s service. These
changes include:





Coke being served
instead of Pepsi
More beer variety
First-class priority
baggage handling
Improved meals
(tested by
Bethune)
Music while
246
environment and culture of
the organization, he also
focused on improving the
relationship the company
had with its customers. He
invited business
passengers to his house for
a party and made personal
phone calls to past
customers apologizing for
the company’s mistakes
and explaining what the
company was doing to
earn their business.
Now Continental provides
comfort and high quality
customer service.
Continental conducts
surveys of consumer
preferences and listens to
their ideas. The company
then acts on that
information to improve the
quality of service.

Incentives

customer board the
planes
In flight phones
In trying to meet the needs
of its business customers,
Continental installed larger
overhead bins in 2000 to
accommodate a greater
amount of carry-on
luggage.
Continental has won
numerous awards for
meeting customer’s needs
including:
1996 and Jan 2001- Airline
of the year, Air Transport
World. First airline to
receive award twice in
five-year period.
2001- Best Trans-Atlantic
Airline, Best Airline Based
in North America, Best
frequent Flyer Program,
OAG Pocket Flight Guides
Tops in Customer
Satisfaction four out of
five years, by J.D. Power
and Associates.
2000 and 2001- Second
most-admired U.S. airline,
247
Fortune.
Competitors
Employees
Continental’s main
competitors in order of
market share:









United
American
Delta
Northwest
US Airways
Southwest
TWA
America West
Alaska









Top management
Middle management
Flight attendants
Pilots
Maintenance staff
Gate staff
Security
Administrative staff
Baggage handlers
There is intense rivalry
between competitors in the
airline industry.
Competitors are constantly
looking for opportunities
to gain market share at the
expense of their rivals.
Bethune encouraged
employees to “thrash the
competition.” He said,
“If United Airlines needed
help in crossing the street,
I’d say sure, “Sure go
ahead,” and watch them
get hit by a truck. I’d say
“Sorry, I thought the light
was red not green.” And
then I wouldn’t even call
911.”
Continental needs to gain
as much market share as
possible and retain their
position as the fifth-largest
commercial airline, while
looking for opportunities
to become the fourth
largest.
Continental satisfies those
needs by adding value to
its product in the eyes of
consumers and attempting
to lower costs so that it is
able to charge a price
lower than competitors
with products of similar
value.
Before Bethune,
employees were treated
very poorly and not highly
regarded by management.
There was little vertical or
horizontal communication.
Employees were not
encouraged to bring issues
to the attention of
Employees need
recognition, a sense of
accomplishment, guidance,
motivation, training,
security, comfort, safety,
job satisfaction, affiliation,
and lastly, competitive
wages/benefits.
Before Bethune, none of
theses needs were being
met properly. Employees
had poor morale and little
desire to come to work.
The rate of absenteeism,
turnover rate, and number
of on-the-job injuries were
all very high.
248


Ticketing agents
Ground crews
management. Employees
were use to cuts in wages
and broken promises and
were not happy to come to
work. The relationship
between employees and
management was
consistent with the Theory
“X” style of management.
Bethune focused on the
culture of the organization.
He propped open the door
to the executive suite and
put a toll free number in
place so he was able to be
reached. He worked to
improve communication
and met with employees at
all levels of the
organization. He
empowered employees to
use their own judgment
and he rewarded them for
their accomplishments.
Casual Friday’s were
created to help build
relationships. Wages and
benefits were brought up to
industry standards. He
celebrated success with his
employees and made sure
they were kept informed
on the company’s progress.
He focused on making
changes as a team.
Bethune respected
employees and treated
them as equals. This was
key to improving the
relationship between the
company and its
employees.
Bethune wanted to
improve this relationship
and the culture of the
company. He knew that
happier employees were
likely to translate into
better customer service and
productivity.
Bethune’s approach was
more consistent with the
Theory “Y” style of
management.
Shareholders

Investors
Shareholders put their
Shareholders need to earn
Continental satisfies the
249



General public
Employees
Northwest Airlines
from late 1997 until
July 22, 2001.
money into Continental’s
stock in hopes to earn a
high return. Shareholders
own a piece of the
company. Shareholders
expect Continental will act
responsibly and maximize
shareholder wealth.
attractive returns on their
investment or they will
invest in another company.
They also need accurate
financial statements and
publications to make
investment decisions.
Continental needs a source
of capital.
shareholders needs by
acting in their interest to
increase profits and
maximize their return on
investment. Continental
provides quarterly and
annual financial statements
and reports.
Citizens in the local
communities need a place
of employment where they
can use their skills and
receive compensation. The
community needs tax
revenue to fix the cities
infrastructure, fund
projects, provide
education, etc. Local
businesses need increased
foot traffic to help increase
sales. The community
needs companies that will
donate to special causes.
Continental satisfies these
needs by providing jobs,
paying taxes, remaining
profitable, carrying a large
number of passengers, and
paying all airport fees.
Northwest purchased
shares to gain voting
control of Continental.
Both airlines worked
together by listing their
flight codes on both
carriers schedules, sharing
executive lounges, and
combining frequent flyer
benefits.
Community




Cities of operation
Airports
Local businesses
Local citizens
Continental helps the
community by paying
taxes and providing a
means of transportation for
people to come to the area
surrounding the airports.
This helps the tourism
industry in the local
communities. The
community provides
Continental with a source
of staff and a place for its
operations.
250
Airports need revenue
from gate and landing fees
and customers that will use
the services the airport
provides.
Continental needs
employees with the
necessary skills, land for
their operations, and a safe
environment to conduct
business in.
Financial
Institutions
Strategic



Banks
Private investors
Northwest Airlines
Continental’s relationships
with the financial
institutions it conducts
business with are
transactional in nature. The
financial institutions
provide a source of capital
in return for payments of
interest. Usually
Continental’s assets are
used as collateral.
The financial institutions
need to lend their money
out to companies and
individuals that will honor
the loan agreements and
make interest payments on
time. Continental needs to
locate these sources of
capital and convince them
that they are able to handle
the loan and will keep up
with their end of the
agreement.
Before Bethune,
Continental did not meet
the needs of its financial
institutions. The company
had a record of problems
with debt and an inability
to make interest payments
that were due.
The relationships between
Boeing has a strategic
Continental satisfies
Bethune took steps to
refinance loans at lower
interest rates and stretch
out payments on debt to 7
or 8 years. This helped
Continental to meet the
needs of the financial
institutions by paying its
interest payments on time.
251
Alliances











Air Canada
American Eagle
Horizon Airlines
Alitalia
Air France
Virgin Airways
Air China
KLM Royal Dutch
Airlines
Boeing
Hotels
Car rental chains
Continental and the
companies it has strategic
alliances with provide
mutual benefits to both
parties. Continental works
together with these
companies to further both
organizations’ goals. These
relationships often involve
a collaboration of
resources.
stake in the success of
Continental. Continental is
a major buyer of their
aircraft. Boeing cannot
afford to loose Continental
as a customer. The more
profitable Continental is,
the more new airplanes
they will typically demand.
Continental needs to
purchase planes with state
of the art technology, high
quality, and attractive
prices.
Continental needs the
resources of the airlines it
has alliances with and they
need Continental’s
resources as well.
Continental and the hotels
and car rental companies it
has alliances with all need
to provide customers with
a convenient way to shop
for their products.
Boeing’s needs by
purchasing new aircraft
from them. Boeing
satisfies Continental’s
needs by providing a high
quality product and
working with Continental
so the cost stays
reasonable.
Both Continental and the
airlines it has alliances
with satisfy their needs by
entering into code sharing
agreements. In these
agreements, airlines list
flights on both of the
partner’s flight schedules
and one carrier provides
the plane and crew. This
helps both airlines to
improve their load factors,
increase revenues, and
lower costs. Continental
also works together with
these airlines to fill each
other’s needs for ground
crew support, gate staff,
lounge areas, etc. at certain
airports.
Continental and the hotel
and rental car companies
satisfied each other’s needs
by collaborating to form
www.orbitz.com. With
252
Orbitz, a customer can
shop for air travel, hotel
accommodation, and a
rental car all at one website
in the comfort of their own
home.
Govt. and
Environmental
Groups




Federal Aviation
Administration
Department of
Transportation
Environmental
Protection Agency
Local Governments
The government and
environmental groups
provide licensing and
establish rules and
regulations for airlines to
follow.
The government and
environmental groups need
to put these rules and
regulations in place and
make sure that airlines
comply. They help to
ensure that air travel is a
safe means of
transportation that does not
harm the environment or
society.
Continental complies with
the rules and regulations
that are put in place.
253