CHAPTER II THEORITICAL FOUNDATION

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1 CHAPTER II THEORITICAL FOUNDATION 2.1 Retrenchment and Turnaround Strategy The term turnaround is used to represent both the retrenchment and the turnaround strategy, synonymous with recovery strategy. John L. Thompson in his book Understanding Corporate Strategy (2001, p. 500) explained retrenchment and turnaround strategy. Remedial action is required when a company experiences declining profits as a result of economic recession, production inefficiency or competitor innovation. In such circumstances effort should be concentrated on those activities and areas in which the company has distinctive competence or a superior competitive position. In order to improve efficiency three aspects are involved: cost reduction, asset reduction, and revenue generation. The aim is to reduce the scale of operations to a position where the company has solid, consolidated and competitive base. The key issue concerns how much the reduction is needed, whether it is minor or drastic, and how quickly the company must act. It is important to ensure there is the necessary flexibility to allow for renewal and growth. Retrenchment, cutting back, is accomplished relatively easily as long as necessary steps are taken: cutting in the right areas and not destroying important

2 competencies, cutting back to a carefully determined core and then creating new competitive advantages to build upon this core and generate new growth. Turn around strategies involve the adoption of a new strategic portion for a product or service, and typically lead on from retrenchment. Resources that are freed up are re-allocated from one strategic thrust to another. Revenue generating strategies, such as product modifications, advertising or lower prices designed to generate sales, are often involved; and in addition products and services may well be refocused into the niches that are thought to be most lucrative or defensible. According to Orit Gadiesh, et.al, in their article published in Strategy & Leadership (2003, p. 41), successful corporate turnarounds require a response that addresses three dimension of an organization s problems. They require an overhaul of finances, of strategy, and of corporate pride. Moreover, true turnaround artist attack these dimensions simultaneously and with a high-speed process. Key managerial changes were made at the outset. To transform finances and strategy, these turnarounds focused on results, not elaborate change practices. To reinvigorate company pride, CEO reached out through speeches, events and targeted incentives to re-energize employee and executives.

3 Financial Side Strategic Side Pride Side stabilize cashflow shore up balance sheet develop clear and cogent strategy communicate its principle restore trust, dignity, and drive to company culture celebrate achievements, share success story Figure 2.1. Three Dimension of Corporate Turnaround 2.2 SWOT Analysis Phillip Kotler in his book Marketing Management (2009, p. 89), explain SWOT Analysis as the overall evaluation of a company s strength, weaknesses, opportunities, and threats. The SWOT analysis help explore strategic choices by signifying the strengths, addressing the weakness, capitalizing the opportunity and anticipating the threats. A next step of analysis helps to think about the options that can be pursued. In order to do so, external opportunities and threats should be match with internal strengths and weaknesses. This helps identify strategic alternatives that address the following additional questions:

4 Strengths and Opportunities (SO) - How to use strengths to take advantage of the opportunities? Strengths and Threats (ST) - How to take advantage of strengths to avoid real and potential threats? Weaknesses and Opportunities (WO) - How to use the opportunities to overcome the weaknesses? Weaknesses and Threats (WT) - How to minimize weaknesses and avoid threats? 2.3 Marketing and Management According to Stephen Shaw in his book, Airline Marketing and Management (2007, p.1), there is popular misconception when the term marketing is mentioned, that it is about tricking customer to buy things that they do not really need through deceitful advertising. Kotler & Keller in their book, Marketing Management (2009, p.45) describe marketing is about identifying and meeting human and social needs. Kotler stated the definition of marketing by American Marketing Association (2004) as an organizational function and a set of processes for creating, communicating, and delivering value to customers and for managing customer relationships in ways that benefit the organization and its stakeholders. Furthermore, Shaw distinguished between Consumer and Industrial Marketing. Consumer marketing activity targeted at the individual or the family. Industrial Marketing is the term used to describe business-to-business or firm-to-firm

5 marketing. While Consumer Marketing is quite straightforward in identifying the customer for a particular product, Industrial Marketing gives no such straightforward opportunities as firms usually require complex decision-making process to make purchasing decisions for particular products. Airline marketing is a combination of consumer and industrial marketing, as marketing to business air traveler and air freight services definitely suggest the industrial marketing and leisure air travel marketing exhibit the principle of consumer marketing. Robbins and Coulter in their book, Management (2007, p.37) explained that management involves coordinating and overseeing the work activities of others so that their activities are completed efficiently and effectively. As for Marketing Management, Kotler saw it as the art and science of choosing target market and getting, keeping, and growing customers through creating, delivering, and communicating superior customer value, in efficient and effective manners, adding Robbins and Coulter explanation Market Segmentation, Targeting & Positioning According to Shaw s Airline Marketing and Management (2007, p.23), the process of trading off customer requirements against production economics is called Market Segmentation which leads to definition of Market Segment as a group of customers who have sufficient in common that they form a viable basis for a product/price/promotion combination.

6 There are two possible mistakes which can be made when segmenting a market those of under-segmentation and over-segmentation. Under-segmentation occurs when customers are grouped into segments which are too large, and where there is actually a high degree of difference in the requirements of those included in the segment. Over-segmentation is the situation where too many segments are isolated, with the result that they give insufficient indicators with regard to policy development. The correct segmentation does, of course, depend on the question of the use that will be made of it. With product planning, almost all airlines are handicapped by the fact that only two or three classes of service currently exist on-board the aircraft. A broad segmentation must be used for product planning purpose, in contrast with provision for Database Marketing campaign which much finer segmentation should be employed. Segmentation of the air passenger market has traditionally been based on the use of three variables: the purpose of the passenger s journey, the length of their journey and the country or culture of origin. Journey purpose usually divided into business and leisure travel, although nowadays specific purpose such as pilgrimage or medical reason should be viewed as a separate market. Length of journey divided into short-haul and long-haul route, although there s an interesting debate over the cut-off point between short-haul and long-haul route. The culture or country of origin of the person who is travelling must be seen as a highly significant segmentation in aviation

7 marketing, different races vary in term of height and weight, food and drink preference, and even class features requirements. 2.5 Marketing Mix Shaw in Airline Marketing and Management (2007, p.2) explained Marketing Mix as activities which must be undertaken in order to apply marketing principle to business. It is useful to describe marketing activity as encompassing the following 4Ps : Product, Price, Promotion, and Place. Product is a tangible object or an intangible service that is mass produced or manufactured on a large scale with a specific volume of units. The price is the amount a customer pays for the product. It is determined by a number of factors including market share, competition, material costs, product identity and the customer's perceived value of the product. Place represents the location where a product can be purchased. It is often referred to as the distribution channel. It can include any physical store as well as virtual stores on the Internet. Promotion represents all of the communications that a marketer may use in the marketplace.