Figure 1: Sector-Wide GDP contribution
(Source: CIA, 2011)
Oil rates also have a huge influence on the market outlook of the airline firms. Energy prices have experienced widespread volatility in recent years and continue to grow at extremely high levels. The table below indicates both historical and estimated oil prices.
Figure 2: Oil Price Movements
(Source: Ringbeck, Gautam & Pietsch, 2009, p.40)
The Indian aviation industry also reflects strong market development in terms of potential demand, as the Asia-Pacific region provides a broad variety of choices for aviation companies.
Figure 3: Demand Projections
(Source: CII & PriceWaterHouse Coopers, 2010, p.13)
Sociological
Sociological aspects include demographical aspects and consumer behavior of the target market. India is the second largest populated nation of the world that helps generate considerable demand (US Department of State, 2011). The total population of the nation is 1189172906 individuals as of 2011 making it the second highest populated nation of the world. The Indian customers are very price sensitive and normally prefer a value pricing approach. The distribution of family income as per Gini index is pegged at 36.8 percent as of 2004. About 25 percent of the population is below the poverty line (CIA, 2011).
Technological
Technological aspects in the Indian aviation industry include aspects like use of technologically superior aircrafts; facilities like web check-ins and online bookings etc. In addition to this in flight entertainment and other aspects largely define the technological aspects that governs the airline industry in the nation (Kamath & Tornquist, 2004, p.4). There are about 4.536 million active users of the internet in the nation with about 35.77 million telephone lines and 670 million mobile connections as of the year 2010.
Environmental
Environmental aspects include the aspect of emission control and adherence to environmental protection laws. The nation has laws that aim towards reducing the carbon footprint and reduction of gases emitted for reducing the greenhouse effect.
Legal
Legal aspects are very important for a foreign firm while entering into a new market. Legislative aspects like competitive laws as well as laws for inter firm disputes largely affect international expansion strategies of business organizations. India has accepted the jurisdictions of the International Court of Justice that is important for foreign firms (CIA, 2011).
Porter’s Five Forces
The analysis of the competitive forces in an industry can be analyzed by using the framework of the five forces model proposed by Michael Porter. The five forces include bargaining power of buyers, bargaining power of suppliers, threat of new entrants, threat of substitutes and the competition among the existing players (Hill & Jones, 2009, p.42-43).
Bargaining Power of Buyers
Bargaining power of the Indian customers is quite significant considering the large number of options available to them after the deregulation of the airline industry. The price war triggered in the Indian airlines industry has further increased the instances of customers switching between players.
Figure 4: Bargaining Power of Buyers
(Source: Moser, Gracht & Gnatzy, 2010, p.12)
Bargaining Power of Suppliers
Suppliers include aircraft manufacturing companies as well as the companies that supply fuel to the aircrafts. Both these have considerably high bargaining power owning to high switching cost and dependency factors (Krishnan, 2008, p.18). Hence the bargaining power of suppliers is quite high in this industry.
Figure 5: Bargaining Power of Suppliers
(Source: Moser, Gracht & Gnatzy, 2010, p.12)
Threat of New Entrants
The airline industry has very high entry barriers as it is a capital intensive industry. Moreover with high competition and increased competition in the markets the new entrants face hurdles while entering the market. Hence the bargaining power of new entrants is very low.
Figure 6: Threat of New Entrants
(Source: Moser, Gracht & Gnatzy, 2010, p.13)
Threat of Substitutes
Substitutes for RyanAir’s services include railways and roadways. The airline industry faces stiff competition from the railways that provides services at very low rates (Ideas1st, 2010, p.6). Considering the price sensitive nature of Indian customers the bargaining power of this force is very high.
Figure 7: Threat of Substitutes
(Source: Moser, Gracht & Gnatzy, 2010, p.13)
Competition among Existing Players
The Indian aviation industry is characterized by cut throat competition with a large number of low cost carriers in the market that are increasingly playing price wars. This has enhanced the intensity of competition among the market players. Hence the bargaining power is very high for this competitive force.
Culture
The Indian customers have a low affinity towards air travel. This is illustrated from the fact that the air traffic density is very low as compared to its mammoth population. The main reason for this is cost that is very high for air travel in India. However with the advent of low cost carriers in the nation, the customers have slowly shifted towards air travel. In addition the poor infrastructure and service delivery of road and rail travel is increasingly favoring air travel as a viable choice for passengers both in business as well as non business segments (Ideas1st, 2010, p.2-6).
Capabilities and Competencies
RyanAir has considerable expertise in the no frills airline industry segment. The company has been one of the pioneers in the European low cost aviation industry and continues to maintain its dominance even in the wake of economic turbulence and high competition. The company’s successful no frills strategy can be very well imitated in India. The company can use its brand image and operational expertise acquired over the years to generate a good market image. In addition to this a well framed human resource policy can help in providing better levels of customer satisfaction and better connectivity at low prices that would help the firm to grab a significant market share in the Indian market.
Market Entry Strategies
RyanAir would enter the Indian market in a joint venture partnership with a local partner. This would help the firm to gain a better understanding of the market considering the familiarity of the partner in the Indian market. The strategic partner would have a minority shareholding that would allow the company to have management control over the organization’s operations in the Indian market. The company would initially target the 12 major cities of the nation and would use code sharing agreements with other airlines to provide better connectivity. The medium term strategies would include expansion into the smaller cities which would also include a hub and spoke model that would help augment its connectivity.
Mode of Entry
The international expansion strategy of RyanAir in India would largely follow an aggregation strategy of the AAA triangle framework that would involve by creation of regional operational excellence and standardizing the product and service offering (Barber, 2010, p.31). This strategy would help the firm to use its expertise and resources to generate competitive advantage in the Indian market. In addition to this the company would also formulate a good marketing communication strategy that would help promote the services of the organization. A ‘glocalisation’ strategy of thinking globally and acting locally would be used in its marketing campaigns (Phatak, Bhagat & Kashlak, 2006, p.209-210). Under this strategy the company would select a local film star as a brand ambassador that would help generate confidence and a good positioning among the members of the target market audience.
Conclusion and Recommendations
The Indian market presents huge opportunities for a company like RyanAir considering the untapped market and the good potential. In addition to this the strategy also assumes significance considering the fact that the airline’s present market in Europe is very saturated and there is very little scope for growth considering the mature nature of the market. India on the other hand is an emerging market with lots of strategic potential. The company can use its expertise and resource base to replicate its highly successful no frills strategy in India. This would help the firm gain leverage following the advent of globalization. RyanAir must formulate an effective service mix that would provide best possible services to the customers. The service mix must be backed by an efficient marketing communication program that would help in spreading the message about the services of the organization. Finally every strategy must take into account t the local culture and sentiments of the target market population. Using a ‘glocalisation’ strategy of thinking globally and acting locally can largely help the organization to become a formidable player in the Indian skies.
Task 2: Critical Analysis
Introduction
The present age of business environment is characterised by large scale turbulence and intense competition among the market players. The advent of globalisation has accentuated the aspect of competition among the market players as firms are essentially trying to reach out to new markets breaching geographical and political boundaries. International expansion is one of the most prominent business strategies undertaken by firms to expand their reach beyond the traditional markets. The rise of India and China as economic super-powers has also encouraged several heavily saturated foreign companies to grow into their conventional US and Western European markets. In this respect, it is very critical to consider the feasibility and value of their corporate plans in terms of foreign growth in order to provide businesses with a competitive advantage. The article below will aim to include a critical analysis of Ghemawat’s proposed AAA system. It will also provide an examination of both the constructive and certain negative elements of the analytical structure of the model.
Summary
The article largely tries to analyse the international expansion strategies of business organizations. In the research paper the author has framed an approach for analysing the international strategies of business organization. The framework has been named as AAA that stands for adaptation, aggregation and arbitrage. Adaptation strategy involves a strategy where firms focus upon increasing revenues by increasing the local presence in a nation. This includes setting up units that helps firm run the entire supply chain and production process. Aggregation strategies involve generation of economies of scale by aggregating and integrating the production and other facilities. Arbitrage strategy involves exploiting the difference in supply chains by locating different aspects of the supply chain in different areas where each aspect has a specific advantage (Ghemavat, 2007, p.60). According to the article firms must compulsorily adopt any one of these strategies while undertaking an international expansion. It is also stated that firms normally adopt all the here strategies at different points of time depending on the business capabilities and interests. The AAA triangle framework proposed by the author also states that using these framework organizations can benefit their overall business prospects. In this context both marketing and financial strategies play a very important role in deciding upon the strategy to be employed by the organization. Firms often try to employ all of these three A’s as a part of their international expansion strategies. The article also notes that firms that are successful in managing a combination of the three strategies are successful by the virtue of their abilities to manage the issues of integrating these strategies better than the competitors of the organization. Use of an integrated strategy also involves an organization’s culture and long term vision as well as the resources of an organization including financial and human resources that play a significant role in the nature of the strategy or a combination of strategies to be adopted by the organization wile expanding internationally.
Positive Aspects
The positive aspects in the AAA framework proposed by Ghemawat arise from the fact that the framework analyses the aspect of international marketing strategies from many perspectives that includes an analysis of the internal as well as external factors. The framework largely takes into account different aspects of an organization that also includes human resources. Crucial aspects like research and development as well as the influence of macro economic factors have also been taken into consideration. In addition to this the AAA triangle framework also includes the methods and the intricacies associated with the employment of each of the strategy separately and also the issue associated with the employment of a combination of strategies. This helps firms to analyse an effective strategic formulation while undertaking an international expansion. In addition to his the framework can also be integrated with the other theoretical concepts like PESTEL and CAGE. In summary the essence of this framework proposed by Ghemawat can largely help firms to prepare and analyse the international strategies from a holistic and comprehensive perspective that can help firms leverage on the benefits of globalisation and generate sustainable competitive advantage in the long term future.
Negative Aspects
As like every other theoretical model the AAA triangle framework also has a set of certain issues that cannot be ignored. The negative aspects can be traced to the fact that the model does not takes into account the political factors that have a major role in the international expansion strategies of business organizations. The model largely shows the implementation of the three strategies in a very favourable political scenario. An example in this regard can be stated that firms practicing arbitrage strategy largely resort to outsourcing. However this may be banned in some nations. Similarly the adaptation strategy also proposes that an organization can set up captive centres for each of the aspects of supply chain. However some nations may have policies that do not allow 100 percent foreign equity in certain business areas. In addition to this the model also fails to include the cost of integration of supply chain and the general tendency among the suppliers to resort to a new integrated system. The suppliers essentially might not have the ability to incur the expenses required for Business process reengineering that is essential in for adaptation strategy.
Moreover firms, pursuing aggregation and arbitrage strategies may also face hurdles in the form of export import policies of different nations. Nations might not allow a certain kind of product to be imported or exported. Hence firms having units of supply chain scattered around different regions around the globe may face hurdles regarding the aspect of imports and exports. Moreover the aspect of economic cycles has also not been taken into consideration. The model is largely applicable in instances of perfect economy. However the model would fail to explain strategies for firms during financial crisis.
Impact
The impact of this model is very significant as it would largely help firms to analyse the strategies to be adopted for their international expansion strategies. This aspect also assumes significance in the wake of the business organizations resorting to international expansion owning to the saturation of their traditional markets and the growing opportunities from the other markets. The model can help firms to make strategic international expansion strategy. The use of this framework would also provide firms with opportunities to generate sustainable advantage. It would also enable organizations to evaluate their strategies for international expansion that would include a single strategy or a combination of international strategies. The correlation with other theoretical models as well as inclusion of aspects like economies of scale and scope would help organizations generate sustainable advantages in international territories and help the fully leverage upon the benefits and opportunities of globalisation.
Coherence
Ghemawat’s AAA triangle model explaining the international business strategies of business organizations is also related to a CAGE framework. The CAGE framework is another model that is used by organizations to assess the distance factor in case of international expansion. CAGE stands for Cultural distance, administrative distance, geographical distance and economic distance (Ghemawat-a, 2001, p.140). While undertaking an international expansion firms largely analyse these four aspects that helps them in taking vital decision like segmentation, targeting and positioning. It also helps firms to formulate the elements of the marketing mix as well as the promotional strategies. Using this model firms can also take up decision with regards to the employment of adaptation, aggregation or arbitration. Firms trying to adopt a combination of these strategies can also use the CAGE framework as a supplement to analyse the issues of integration of these strategies as well as management of the tension between the strategies (Sanne, 2007, p.6). A similar theory that can be used in this regard is that of the PESTEL framework. The PESTEL tool analyses the political, economic, sociological, technical, environmental and legal forces that regulate the sector in particular of the industry. The PESTEL as a tool can help a firm to analyse the external aspects. The results of this analysis can largely be used by firms to analyse the adaptation, aggregation and arbitration strategy (Johnson, Scholes & Whittington, 2009, p.65-68).
Conclusion
The AAA triangle framework proposed by Ghemawat is a very useful tool for business organizations that are trying to expand beyond their traditional markets. The concept assumes importance considering the fact that business organizations are trying to leverage the benefits and opportunities of globalization. The framework proposes three strategies that can be either used singly or in a combination to generate benefits for the organization. The use of this framework can help organizations evaluate and decide the most suitable strategy that can be applied in a new business market. The article also shows the possible issues that may emerge before organizations while implementing these strategies. It also provides answers to organizations with regards to the capabilities that they require for being successful in implementing the stated strategies stated in the article. The article also provides considerable real-life examples from the industry that can help prospective firms to analyse the strategies and select an appropriate mix of the strategies that can help them to establish a strategic foothold in the new market and help generate sustainable competitive advantage in the long run.
