Today, air travellers seem to be looking for carriers that are able to offer high service quality, on-time arrival, and low fares all at once. Airline companies, therefore, do not have a choice but to defy the traditional business strategy theory according to which trying to achieve low cost and differentiation simultaneously is a recipe for strategic disaster. Wishing to establish stronger conceptual and empirical links between strategy theory and aviation management practice, the authors have developed a framework that can be used by aviation researchers to (1) measure the extent to which airline companies successfully pursue the integrated cost

leadership/differentiation strategy and (2) understand how they manage to resolve the trade-off between low cost and differentiation. Generic Competitive Strategies

Attempting to explain and categorize

specific competitive strategies that

firms use, Porter (1980) has argued

that there exists two types of

competitive advantages which

can be combined with either a

broad or limited competitive

scope to create four well-

known business strategies: cost

leadership, differentiation,

focused low-cost and focused

differentiation (figure 1).

Cost leadership is the typical

business strategy pursued by

companies in the consumer

electronics or compact car

industry. Each one of the cost

leader’s value chain activities

has to be conducted in the most

efficient way in order to

generate a profit margin despite

the low prices of the product or

service offered. In contrast,

differentiation is the business strategy

of companies who offer a product of a

service that customers perceive as

being different and for which they are

willing to pay a higher price. Selecting

the bases of differentiation, or the

features of the product and service

offered or the ways in which it is

offered, and developing the

organizational capabilities needed to

achieve the bases of differentiation is a

key challenge for companies.

Interestingly, in order to make sure that

they offer acceptable value to

customers, cost leaders must not ignore

the bases of differentiation that

customers value and for which they are

willing to pay a premium. However,

cost leaders must not try to offer

features that differentiated products or

services possess, for fear of being stuck

in the middle. According to Porter

(1980), this is what happened to Laker

Airways in the 1970s. The British

airline offered a successful no frill/low

fare service but eventually started to

add more destinations and fancier in-

flight services. To maintain its

profitability, Laker had to raise their

fares to the point where travellers felt

that they had more value for money

when flying with traditional carriers.

According to Porter, being stuck in the

middle is a recipe for strategic

mediocrity and below-average

performance because pursuing all the

strategies simultaneously means that a

firm is not able to achieve any of them

because of their inherent

contradictions.

Business Strategy and

Competition for the Future

in the Airline Industry

The business strategy theory is very useful to help aviation

researchers and practitioners to make sense of the current

competitive pressure under which airlines all around the world

seem to be. As one of the key fields of administrative sciences,

strategy can be envisioned as a hierarchy reflecting the

organizational structure of multidivisional corporations in which

corporate strategy states the general direction – in terms of scope

and choice of business sectors – that the firm will follow, while

business strategy is a formulation of how the business unit intends

to compete in its given business sector. For example, Virgin is

pursuing a corporate strategy of growth by unrelated diversification

and has chosen to be active in business sectors such as air and rail

transportation, holiday packages, music and entertainment, mobile

phone communication, financial sevices, and “lifestyle” services. In

each of these business sectors, Virgin competes by using the

strength of its brand to differentiate its offerings from that of its

competitors. The lower level of the hierarchy of plans reveals the

instrumental character of functional strategies that are designed to

support the implementation of the business and corporate

strategies. Marketing strategy, human resource strategy, research

and development strategy and operations strategy are examples of

functional strategies.

By Isabelle Dostaler and Triant Flouris

Competitive Advantage

Lower Cost Differentiation

Competi

tive Broad

Target

Cost

Leadership

Differentiation

Scope Narrow

Target

Cost Focus

Focused

Differentiation

Figure 1

Four Competitive Strategies“Stuck in the Middle” Revisited The “stuck in the middle” prescription has generated much debate. Indeed, many authors do not consider cost leadership and differentiation as mutually exclusive and argue that companies in mature industries can rejuvenate themselves by shifting to product differentiation and innovation, whilst preserving strengths in cost reduction and process efficiency. Some researchers have observed that in many industrial sectors bases of competition in one era have become the essential prerequisites for new organizational capabilities in the next. This contributed to challenge the notion of a single competitive edge and stressed the danger for companies to pin all their hopes and resources on one main ability. This strong argument echoed the “value for money” paradigm supported by authors who advocate for the need for companies to try to achieve both cost leadership and differentiation.

Cronshaw, Davis and Kay (1994) have suggested that firms who do not establish lower costs or better or differentiated products rarely succeed overall. Interestingly, this interpretation suggested that “stuck in the middle” may be less a prescription than a way to analyse strategic outcomes and evaluate performance. The global ship building industry can be used to illustrate this. In his 1990 book The Competitive Advantage of Nations, Porter explained how Japanese, Korean, Scandinavian and Chinese ship builders have each successfully pursued one of the four competitive strategies while the Spanish and British ship building industries have declined because they were stuck in the middle. However, Cronshaw et al. argued that the weaknesses of the British yards were not due to their strategic choice but rather the implementation of the chosen competitive strategy, adding that British ship builders failed simply because they were not very good at building ships.

The “stuck in the middle” prescription should, therefore, not be taken literally. As mentioned before, Porter has insisted on the danger for a low-cost producer of not offering acceptable quality and service as well as the danger for a differentiator of having costs higher than its price premium when he introduced

his typology of business

strategy in 1980. Moreover,

Porter’s discussion about the

sustainability of the competitive

advantage in his 1990 book

seemed to implicitly revisit the

“stuck in the middle”

prescription. The author

claimed that whether a firm will

be able to sustain its advantage

depends on the source of the

advantage, the number of

distinct sources and constant

improvement and upgrading.

Porter made a distinction

between lower-order

advantages, such as low labor

costs or cheap raw material, and

higher-order advantages, such as

proprietary process technology or

product differentiation based on

unique products or services; he

argued that pure cost advantages are

often less sustainable than

differentiation. In a sense, the author

appeared to treat cost leadership like

the poor cousin in the competitive

strategy family. The underlying

message seemed to be that

differentiation is the best strategy. In

keeping with Cronshaw et al. (1994),

it could be argued that being able to

combine differentiation and cost

leadership successfully would be

even better. Consequently, it is not

surprising that most strategy

textbooks now offer a fifth choice

(figure 2), namely the “integrated

cost leadership/differentiation

strategy,” a strategy in which an

organization develops a competitive

advantage by simultaneously

achieving low costs and high levels

of differentiation. Interestingly, while

Southwest is widely recognized for

having invented the low-cost carrier

business model, strategy textbooks

state that Southwest succeeds in spite

of poor economic conditions because

of its integrated cost

leadership/differentiation strategy,

adding that Southwest offers low

fares, like many other carriers, but

also has fewer customer complaints

than major carriers, is able to attract

employees that treat customers well

and has an excellent on-time

performance. Southwest, therefore,

appears to achieve low cost and

differentiation simultaneously.

Proposed Aviation Research

Framework

Given this backgroud, we propose a

framework that aviation researchers

can use to (1) measure the extent to

which airline companies successfully

pursue the integrated cost

leadership/differentiation strategy

and (2) understand how they manage

to resolve the trade-off between low

cost and differentiation.

Our proposed research design would

first entail the identification of the

business strategy that carriers

actually pursue. As mentioned

earlier, the typology of competitive

strategies introduced by Porter can be

used to compare how rivals in a

given industrial sector positioned

themselves. It would therefore be

relevant to apply this tool to

understand the positioning of a

sample of airline carriers competing

on the same routes (some could be

traditional carriers and others could

be so-called low-cost carriers).

Selecting airlines competing on the

same routes controls for travel

distance. In fact, it can be argued that

what customers value considerably

depends on the length of the flight.

After the sample of airlines is

established, objective measurement

of costs and levels of differentiation

should be taken. While airline fares

can be used as an indicator of the

extent to which airlines are using low

cost as a competitive advantage, the

level of differentiation can be

measured using indicators such as

safety, in-flight services and on-time

arrivals. Researchers can choose to

concentrate on a single indicator of

differentiation or to create an index

using various bases of differentiation.

Published information on a carrier’s performance could be used to evaluate the level of differentiation. Alternatively, direct measurement of a customer’s evaluation of airline safety and in-flight services could be taken by conducting a survey of passengers travelling with the selected airlines. In keeping with Porter’s typology of business strategies, this approach allows for the identification of whether or not carriers offer air travel services that passengers value and for which they would be willing to pay a premium. Moreover, measuring the fares offered by the airlines will indicate whether passengers feel that they are being offered value without having to pay a premium. Again, according to business strategy theory, this means travelling with an airline pursuing an integrated cost

leadership/differentiation strategy. The expected results of the above measurement can be plotted on a scattergram (figure 3), composed of the following quadrants: a group of airlines pursuing a cost leadership strategy, a group of airlines pursuing a differentiation strategy, a group of airlines pursuing an integrated cost leadership/differentiation strategy and the last group unable to achieve either low cost or differentiation. The next step of our analysis entails

concentrating on airlines located in

the integrated cost

leadership/differentiation quadrant of

the scattergram. Depending on

whether or not all airlines in the

research sample are public

companies, indicators such as profit

margins, stock price and return on

investment can be used to evaluate

financial performance. Strategic

performance can be measured with

indicators such as market share and

capacity utilization. Measuring

financial and strategic performance

will allow for the distinction between

airlines successfully pursuing the

integrated cost

leadership/differentiation strategy

and airlines that are stuck in the

middle and do not succeed better

than those located in the bottom left

quadrant of the Airlines Realized

Business Strategies Scattergram.

In order to determine how airlines

can manage to pursue the integrated

cost leadership/differentiation

strategy successfully, secondary data

can be collected to compare airlines

having successfully implemented the

best-cost provider strategy and with

airlines appearing to be stuck in the

middle. It should be noted that the

proposed aviation research

framework does not include a priori

assumptions about the

factors explaining

successful achievement of

the integrated cost

leadership/differentiation

strategy. We suggest that

aviation researchers

compare, in an open-ended

manner, the cases of airlines

pursuing different business

strategies and achieving

different levels of financial

and business performance.

This could lead to the

demonstration that a

number of aviation strategic

options exist between the

traditional and low-cost

airline model. Given that

the airline industry is

currently searching for new

strategic avenues, the

results of the objective comparison of

airline performance and activities

could be most valuable.

References

Cronshaw, M., Davis, E., & Kay, J.

(1994). On Being Stuck in the Middle

or Good Food Costs Less at

Sainsbury’s. British Journal of

Management, 5 (1), 19-32.

Porter, M.E. (1980), Competitive

Strategy: Techniques for Analyzing

Industries and Competitors, New

York, NY: Free Press.

Porter, M.E. (1990). The Competitive

Advantage of Nations. New York,

NY: Free Press.

This article is based on ”Stuck in the

middle revisited: The case of the

airline industry,” (ATRS 2004),

Isabelle Dostaler and Triant Flouris.

Authors

Isabelle Dostaler*

Assistant Professor, Department of

Management

John Molson School of Business

Concordia University

1455 de Maisonneuve Blvd. W., GM

503-55

Montreal, Quebec, H3G 1M8

Tel.: (514) 848-2424 ext. 2798

Email: idostaler@jmsb.concordia.ca

Triant Flouris

Associate Professor and Director

International Aviation MBA Program

John Molson School of Business

Concordia University

1455 de Maisonneuve Blvd. W., GM

409

Montreal, Quebec, H3G 1M8

Tel.: (514) 848-2424 ext. 2820

Email: tflouris@jmsb.concordia.ca

*Send all correspondence to Isabelle

Dostaler at the above address.

Low

Fares Airlines pursuing a

cost leadership

strategy Airlines pursuing an integrated strategy (Some potentially stuck in the middle)

High Fares

Airlines unable to

achieve either a cost

leadership or a

differentiation

strategy

Airlines pursuing a

differentiation

strategy

Low Service Level High Service Level

Figure 3

Airlines Realized Business Strategies下载本文