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Internationalized Sustainable Industrial System

Question:

Discuss about the Internationalized Sustainable Industrial System.

Answer:

Introduction

This report will be dealing with the airline industry that is present in the United States and the struggles that it is undertaking to keep itself afloat in the market. There have been a large number of low cost flights that have entered the industry and are competing with the major carriers that are present in the industry. The increase in the prices of aviation fuel has also taken a toll on the revenues that are being earned by the industry. The high cost of labors that are being demanded by the union has resulted in the lack of proper maintenance of the aircrafts and it has affected the overall growth of the companies as well. Internet sites like Orbitz, Expedia and Travelocity are providing many options to the consumers so that they can compare the prices and book their flights accordingly.

The US airline industry has around 2000 airlines in operation and provides its services to more than 3700 airports on a global basis. They contribute in covering almost one-thirds of the air traffic that I present in the world. The network of the US airline industry connects at least one of the major trade hubs along with the services that are provided to the smaller cities as well (Zou et al. 2014). The industry is heavily unionized and the high premiums in wages and the contracts for a longer term have created a stagnant labor force in the industry that may be one of the major causes for being bankrupt (Williams 2017). The rise in the prices of fuel has also been a matter of concern for the industry, as it has increased the cost of the airfares to a major extent. Most of the aircrafts that are present under the US airlines are on leases, which have also caused a rise in the cost of operations as well (Brueckner, Lee and Singer 2013).

The power of the suppliers in the industry is high because of labor, fuel and aircraft that the industry needs. These factors are affected by the external environment and the rise in the prices of fuel on a global manner will lead to a rise in the price of the aviation fuel as well. The rising price of aviation fuel is due to the geopolitical and the other factors that are present on a global manner (Grant 2016). Additionally, the labor unions have the power to bargain for the labor that is being used in the airline industry. This has led to the rise in the prices of labor that are being supplied to the airlines along with the other concessions that they are enjoying. Moreover, the aircrafts that are being bought either by purchasing or on lease also depend on two big companies that are Boeing and Airbus. These companies fulfill the needs of the airline industry by supplying the aircrafts. The rise in their prices is also affecting the airline industry in the United States (Holloway 2017).

The increase in the system of distribution and the online system of booking the tickets has resulted most of the passengers to book their tickets on their own and not rely on the intermediaries or the agents for their needs. On the other hand, the low cost carriers that are gaining entry within the industry have also provided the fliers with an option to book cheaper flights to travel to the same destination (Arjomandi and Seufert 2014). There has been a tight regulation on the demand of the airlines within the industry, which has resulted in protecting the passengers by means of rules and regulations so the power has shifted mostly towards the buyers. These factors suggest that the consumers have a moderate to high power over the airline industry, as they are being able to choose their own flights and book their own tickets as well (Holloway 2017).

There will a requirement of a high investment of capital within the airline industry for entering and they have face losses while exiting the industry as well. The entry in to the airline industry needs a higher investment of capital and a greater amount of knowledge regarding the competitors that are present in the industry as well. The exit from the industry on the other hand is les as the United States does not let the companies to exit unless there is a genuine cause of leaving the business. This is due to the fact that the synergies of the companies help in increasing the economies of scale. Thus it can be stated that the entry and exit in this industry is very high within the US (Kotler 2015).

Threat of substitutes

The airline industry that is present in the United States does not face any threat unlike the countries that are developing, as it is a developed economy. Most of the customers present in the country take flights rather than buses or trains to commute to different places. However within the same industry, the rise of the low cost carriers has been giving stiff competition to the other airlines. The complimentaries that are provided within the industry include meals and other amenities for the passengers so that they can provide all the benefits to the passengers. Therefore it can be stated that the threat for substitutes within the airline industry in the United States is low (Berrone et al. 2013).

The airline industry within the country is highly competitive due to the entry of the low cost carriers along with the safety regulations that has been imposed by the government on the industry. This has lead to an increase in the expenses for operations and the business model that they have been using within the industry has become outdated (Arjomandi and Seufert 2014). The regulations within the industry is being done by the supply side and less on the demand side, which means that the fliers have the option of choosing the airline so that they can be pampered by the operators. This is the reason why most of the low cost carriers have stopped their airlines that are for full-time services, as the intense competition will decrease their ability to make profits (Vogel 2014).

Causes for low profitability

The five forces analysis has helped in identifying that the airline industry in the United States is facing many problems with its operations. The increase in the cost of operations and the prices of aviation fuel has hastened the situation, which needs to be changed immediately. It can be seen that most of the customers are shifting to low cost carriers, as it is within their budgets and can travel to the same destination at a lower rate (Dobbs 2014). Most of the suppliers that are present in the industry have been increasing the prices of their services, which has resulted in increasing the cost for the customers as well. This has led to a shift in the base of the customers to other airlines that are available at a cheaper price. Since the entry in to this industry is high, this has prevented to the other airlines to help in increasing the base of customers for the industry (Aithal 2016). The customers are being provided with the complimentaries with regards to the price that they are paying for tickets but most of the customers prefer to use the low cost carriers, as the prices of the tickets are low. The other factor for a low profit in the industry is because the customers have a proper knowledge in booking their own tickets and are not relying on the agents to act on their behalf. This has also resulted in the decrease of their profit ratio as well (Zhang and London 2013).

The advantage of using this model in that it helps the industry in understanding the power of the suppliers and the buyers that they have and the influential role they play for the industry as well. This is important in the market, as it will allow the industry in understanding and gain a better knowledge regarding the competitive factors that will allow them to survive in the market (Srivastava, Franklin and Martinette 2013). The analysis will also provide a better understanding of the competitiveness that is present in the industry so that it the industries can be equipped in a better manner with the technological advancements so that it can help in being competitive in the market. The industries are also able to analyze the threat that is present from the substitutes so that it can help them in eliminating those threats and market their products in a better manner to the consumers (Lee, Seo and Sharma 2013).

There are two main disadvantages in this model. Firstly, the competition that is domestic in nature face the same level of challenges such as issues with labor and other regulations present within the country. The competitors that are present on a global manner may use the technological advancements and better logistics so that it can help them in gaining a better competitive advantage in the market. The various competitive environments need to be analyzed so that it can help in understanding the situations that are present in other places irrespective of the comparison that is being done within the same industry (Zhang and London 2013).

The other disadvantage of this model is that it is very difficult in defining the industry that is being chosen in the analysis. Many companies join each other so that they can support the businesses together but are dealing in different businesses. These different lines of businesses cannot be grouped together under a particular industry. The analysis needs to be done based on a particular line of business and not on its amalgamation. The strategy of saddling up the businesses may not be efficient in a developing country, as there are many regulations that need to be followed to gain access to the resources (Belobaba, Odoni and Bamhart 2015).

Economic performance

There has been a decrease in the cost of the airlines, as it was seen that in the second quarter of 2016 the cost decreased to around 4.1 percent and the system cost of network carrier had reduced to 3.4 percent. The decrease in the cost of airlines was due to the fact that the prices of fuel were dropping in the country. Most of the dominant carriers in the industry is using the predatory pricing system so that it can help in reducing the competition that is present within the industry (Appelbaum 2014).

It can be seen that the reduction in the prices by the airlines have affected their seating capacity as well, as it had to be changed accordingly. An example of this would be Spirit Airlines who wanted to enter the Detroit market and reduce its fare to $49 that was a change of around 71 percent, which helped them in gaining an extra capacity of customers. This was followed by other airlines a swell such as Frontier Airlines but they failed in utilizing the strategy (Aithal 2016).

Another major factor that led to the downfall of the economy is collusion, as it is difficult to maintain due to the difference in the structure of cost that is p[resent among the companies. The economy decreased due to the fact that production of the companies were different, which had lead to a change in the agreement of the prices and violate the rules and regulations as well. The oligopolistic type of market that is present in the United States has led to influencing the strategies undertaken by the carriers, as the increase in the polices will not affect a particular carrier only but will get distributed among all the carriers that are operating within the market (Singh and Sushil 2013).

The prices of the airfares have decreased to a significant level due to the deregulation that has helped in stimulating competition within the market. This is due to the entry of the low cost carriers in the market that are attracting the customers towards them. this has led to the equilibrium in marketing to be placed at a perfect competition and the manipulation of the prices have been decreased to a great extent (Belobaba, Odoni and Banhart 2015).

Strategies to increase profitability

The airline industry needs to adopt a new business model so that it can help in increasing their rate of profits. This will help the industry to establish them in the market in a better manner.  The first strategy that needs to be taken up by the industry is that they need to deliver proper messages to the customers so that it can help in making the customers understand the services that are being provided to them (Kim and Mauborgne 2014). The identification of the correct segment of population and using the advanced techniques and tools will help the companies in delivering the correct messages to the correct section of the people. This will lead to an increase in the purchasing capacity of the customers towards the respective services that are being provided by the companies (Lawton 2017).

Secondly, the industry needs to maintain a balance between the path of booking the flight and the conversion of the flights. This will help in selling the products by the airlines in a smarter manner along with the ancillary items as well. The industry needs to provide the customers to book their fares through their handsets and keep a track of their booking orders as well. The third strategy is to provide the right customers with the correct type of products at the best price. This will help the industry in gaining a competitive advantage and improve its services on a constant manner so that they can earn a better rate of return from these services (Flouris and Oswald 2016).   

The five forces analysis of Porter has helped in identifying the major areas where the industry needs to be developed in the external environment so that it can benefit the industry in adopting the right strategies that will be suitable for them. The increase in the cost and labor within the industry will lead to decrease in the rate of profit, as these are the two major parameters that have been affecting the industry to a great extent. The economic performance of the industry is very low that needs to be increased by adopting the right business model. This will allow the industry to increase its level of profit as well. The strategies will allow the airline industry to compete with the low cost carriers so that they can stand a chance to increase their revenues as well.

Conclusion

Therefore it can be concluded that the airline industry that is present in the United States is facing numerous problems that can be addressed by adopting the right strategies that will help in increasing the rate of profit. The use of the correct strategies and business model will help in gaining a competitive advantage in the market over the low cost carriers that are operating within the US market as well.

Reference List

Aithal, P.S., 2016. Study on ABCD analysis technique for business models, business strategies, operating concepts & business systems. Browser Download This Paper.

Appelbaum, E., 2014. High-performance work practices and sustainable economic growth. Members-only Library.

Arjomandi, A. and Seufert, J.H., 2014. An evaluation of the world's major airlines' technical and environmental performance. Economic Modelling, 41, pp.133-144.

Belobaba, P., Odoni, A. and Barnhart, C. eds., 2015. The global airline industry. John Wiley & Sons.

Berrone, P., Fosfuri, A., Gelabert, L. and Gomez‐Mejia, L.R., 2013. Necessity as the mother of ‘green’inventions: Institutional pressures and environmental innovations. Strategic Management Journal, 34(8), pp.891-909.

Brueckner, J.K., Lee, D. and Singer, E.S., 2013. Airline competition and domestic US airfares: A comprehensive reappraisal. Economics of Transportation, 2(1), pp.1-17.

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Flouris, T.G. and Oswald, S.L., 2016. Designing and executing strategy in aviation management. Routledge.

Grant, R.M., 2016. Contemporary strategy analysis: Text and cases edition. John Wiley & Sons.

Holloway, S., 2017. Straight and Level: Practical Airline Economics: Practical Airline Economics. Routledge.

Kim, W.C. and Mauborgne, R.A., 2014. Blue ocean strategy, expanded edition: How to create uncontested market space and make the competition irrelevant. Harvard business review Press.

Kotler, P., 2015. Framework for marketing management. Pearson Education India.

Lawton, T.C., 2017. Cleared for take-off: structure and strategy in the low fare airline business. Routledge.

Lee, S., Seo, K. and Sharma, A., 2013. Corporate social responsibility and firm performance in the airline industry: The moderating role of oil prices. Tourism management, 38, pp.20-30.

Singh, A.K. and Sushil, 2013. Modeling enablers of TQM to improve airline performance. International Journal of Productivity and Performance Management, 62(3), pp.250-275.

Srivastava, M., Franklin, A. and Martinette, L., 2013. Building a sustainable competitive advantage. Journal of technology management & innovation, 8(2), pp.47-60.

Vogel, H.L., 2014. Entertainment industry economics: A guide for financial analysis. Cambridge University Press.

Williams, G., 2017. The airline industry and the impact of deregulation. Routledge.

Zhang, P. and London, K., 2013. Towards an internationalized sustainable industrial competitiveness model. Competitiveness Review: An International Business Journal, 23(2), pp.95-113.

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