Industry Attractiveness: Iberia case example

Transcription

1 Industry Attractiveness: Iberia case example In the previus sectin we develped a segmentatin: 1. Dmestic 2. Eurpean 3. Intercntinental Latin America Nrth America Asia (fr simplicity, we will ignre ur higher level segmentatin f airlines versus rail) Attractiveness has three dimensins Size, Grwth and Average prfitability. S, ur task is t assess the attractiveness f these three segments and, if pssible, the sub segments f the intercntinental business. Size. Iberia is split rughly equally acrss all three f the majr segments. As it represents a majr share f the Spanish market fr all these segments, they must be f rughly similar size. Grwth. The grwth rates likely vary being highest in the develping markets and lwer in the dmestic market althugh there is nt much data t supprt this hypthesis. S, this is an extra bit f data we might want t have as a strategist (knwing what yu dn t knw, but wuld like t knw is an imprtant skill!). Prfitability. Hw d we estimate differences in prfitability? Using the cncepts in the bk, we culd lk at the fllwing: Iberia s prfitability. This is nt available in the case but might reasnably be discvered if we were the Iberia management team. Hwever, this will be affected by Iberia s cmpetitive psitin, which varies by segment s it is nt an accurate prxy fr segment AVERAGE prfitability Cmpetitr s prfitability. Unfrtunately few cmpetitrs will reprt prfitability at the segment level. It might be pssible t get sme infrmatin but it is likely t be anecdtal Overall industry structure. We knw that the dmestic market is highly cncentrated, and that there are relatively few cmpetitrs n mst intercntinental rutes and that there are increasing numbers f cmpetitrs in Eurpe s that suggests a ranking in terms f industry prfitability. Dmestic is a quasi mnply r dminant cmpetitr type f segment, intercntinental is ligplistic but Eurpe is quite cmpetitive. T dig further, we need t d a five frces analysis. The fllwing checklist cmes frm the bk t which I have added cmments abut the varius segments, starting with the dmestic market:

2 Dmestic market five frces. The threat f substitute prducts r services is high when: Substitutes have cmpetitive price and quality. At present there are few substitutes. Hwever, there is a serius threat frm high speed rail and imprved rad cnnectins Buyers face few switching csts. Switching csts are lw OVERALL: Threat is mderate but likely t increase significantly The threat f new entrants is high when there are: Few ecnmies f scale. There are sme significant ecnmies f scale althugh it might be pssible t set up an airline n sme f the busier rutes e.g., Madrid t Barcelna, particularly if Iberia is charging high prices due t its dminant psitin Limited experience r learning curve effects. Limited effects Limited prduct differentiatin. Sme differentiatin fr business travellers perhaps nt fr ecnmy. But, nt highly differentiated particularly given the shrt times fr the flights. Lw capital requirements. Mdest capital requirements due t ability t lease planes Lw switching csts. Yes, lw switching csts Ready access t distributin channels. Web is a gd distributin channel Limited advantages fr incumbents frm ther surces, e.g. Prprietary prduct technlgy Lw Favurable access t raw materials Lw Favurable lcatins Iberia may be able t cntrl slts at sme airprts? If s, this wuld be a significant barrier t entry Gvernment subsidies Lw OVERALL: Threat f new entrants is mderate but culd be quite lw if Iberia can cntrl slts at mst prfitable airprts. Supplier Pwer. There are several suppliers: Fuel, Labur, Aircraft and engine manufacturers and Airprts fr example. Each has t be analysed separately. The bargaining pwer f suppliers is high when: There are few suppliers and they are mre cncentrated than the industry they sell t, They are nt bliged t cmpete with ther substitute prducts fr sales t the industry The industry is nt an imprtant custmer f the supplier grup

3 The supplier's prduct is an imprtant input t the buyer's business The supplier grup's prducts are differentiated r have built up switching csts The supplier grup pses a credible threat f frward integratin Fuel. There are likely t be several fuel suppliers at each airprt and thus there is unlikely t be a lt f pwer. Prices will tend t be set by the price f il and whlesale price fr il prducts. In additin, Iberia is a majr custmer in Spain. S lw pwer. Nte, sme peple think the pwer must be high, because fuel price increases are knwn t be a big issue fr airlines and a cause f lwer prfitability. But, the issue is nt the pwer f the suppliers but that such price increases are hard t pass n t buyers due t the ther factrs e.g., rivalry. OVERALL: Weak. Labur. This is shwn in a bit mre detail as an example: There are few suppliers and they are mre cncentrated than the industry they sell t. The wrkfrce will be uninised and therefre cncentrated althugh nt mre than the Spanish airlines business They are nt bliged t cmpete with ther substitute prducts fr sales t the industry. There is n substitute fr their labur except ver the lng term (e.g., by utsurcing) The industry is nt an imprtant custmer f the supplier grup. It is an imprtant custmer The supplier's prduct is an imprtant input t the buyer's business. Labur is a vital input The supplier grup's prducts are differentiated r have built up switching csts. There are high switching csts as yu cannt easily fire them and hire a new wrkfrce The supplier grup pses a credible threat f frward integratin. Nt credible OVERALL: Labur has a lt f pwer in a uninised envirnment such as is likely the case in Spain but s d Iberia. S, it will be a tussle f nerves if they get int a cnfrntatin (as is typical f the industry where there are ften strikes but they are nt always successful). Aircraft and engine manufacturers. Their pwer culd be very high. But, in reality, they are ften highly cmpetitive with each ther because they have very high stakes t play fr (market share and a full rder bk is wrth a lt). S, their pwer is prbably high at bm times when their rder bk is really strng, but weak mst f the rest f the time. OVERALL: Ptentially strng but rarely use their pwer except when demand is very high Airprts. Their pwer culd be very high if they cntrl the gateway t imprtant destinatins e.g,. Madrid r Barcelna. There can, hwever, be cmpetitin between airprts. Mre imprtantly, airprts ften have their pwer limited by regulatin (as in the UK) r because they are publicly wned and perated t bst the lcal ecnmy rather than t maximise prfit. Further, Iberia as the largest dmestic airline has particularly high bargaining pwer.

4 OVERALL: Ptentially high but in practice prbably nt wrth checking up n thugh. Nte a useful way t think thrugh the pwer is t imagine the tw parties the airline and the supplier sitting dwn t negtiate. Wh has the pwer in the negtiatin? I find that imagining this situatin is smething peple can d intuitively whereas they can get a bit stuck if they think abut pwer in the abstract. Buyer pwer. We can distinguish between leisure and business but in fact neither have bargaining pwer as very few parties literally negtiate with the airline. This is because the bargaining pwer f buyers is high when: Buyers are cncentrated r purchase large vlumes relative t seller sales. Buyers are fragmented this is the main pint that leads t lw buyer pwer The prducts buyers purchase represent a significant fractin f their csts r purchases. Typically it is an imprtant but nt very imprtant fractin f csts. The prducts buyers purchase are standard r undifferentiated. The prducts are relatively undifferentiated Buyers face few switching csts. There are lw switching csts Buyers earn lw prfits. Varies. Families will feel the pinch mre than bankers n client expenses. Buyers pse a credible threat f backward integratin. N they dn t The industry's prduct is unimprtant t the quality f the buyers' prducts r services. Varies The buyer has full infrmatin. These days they d via the internet. OVERALL: The fragmentatin relative t the cncentratin f the airline limits buyer pwer. We d nt yet have airlines being frced t auctin ff r negtiate prices except with very large crprate buyers. Rivalry amng existing cmpetitrs is high when there are: Numerus r equally balanced cmpetitrs. Nt the case in the Spanish dmestic market Slw industry grwth. Grwth is mderate High fixed r strage csts. High fixed csts variable csts f carrying a passenger are very lw nce the flight has been scheduled Limited differentiatin r switching csts. Lw particularly fr leisure travellers

5 Diverse cmpetitrs. Smaller new entrants are diverse in that they have different cst structures High strategic stakes. This wuld depend n the situatin. It might be the case fr a smaller airline having t fight fr survival High exit barriers. Mderate. Planes can be sld r used fr ther rutes. Capacity is augmented in large increments. Nt the case. OVERALL: Rivalry is likely t be lw due t the high market share f Iberia but it culd rise if there are many new entrants. OVERALL CONCLUSIONS: Dmestic. Currently, mst f the frces are favurable meaning that we wuld expect the dmestic market t have high average returns. Hwever, the tw ptential prblems are new rads and railways (high pwer frm substitutes) and high rivalry (if new entrants cme int the market). Key issues are the plan fr new rad and rail, Iberia s ability t maintain high barriers t entry and thus the ptential fr new entrants. Eurpean markets. These are nt cvered here in detail. The threat f substitutes is much lwer (gd) but the rivalry is already high and there are threats f further new entrants. Key issues include the access t airprt slts fr new entrants as this culd act as a barrier t entry at sme airprts. Intercntinental. These als are nt cvered here in detail. Regulatin limits the number f cmpetitrs n any ne rute, and barriers t entry are als high because f the higher csts assciated with setting up a lng distance airline. S, this culd be quite attractive. Hwever, it will vary by rute. Fr example, there are many US airlines wh are reasnably cmpetitive s that culd be a mre cmpetitive market than, fr example, Latin America. Als, it is mre feasible fr Spanish passengers t fly via Paris, Amsterdam, Frankfrt r Lndn t the US than t Latin America s there are mre feasible ways t fly t the US and thus mre cmpetitin. Asia als seems t have sme strng cmpetitrs e.g., Emirates, Singapre, Cathay, Quantas s may be mre cmpetitive than Latin American rutes. OVERALL: Dmestic is currently very attractive but with medium term threats. Eurpe is less attractive due t the level f cmpetitin that lks likely t increase. Intercntinental is attractive in sub segments where regulatin r just a lack f strng cmpetitrs reduces the rivalry.