Indian Aviation Industry: Red or Redux for Strategic Competitive Analysis?

Jet Airways, India’s favorite private airliner, posted its largest quarterly loss (of USD 360 million) recently casting doubts on its ability to turnaround despite the sale of a sizeable equity stake to Etihad. Jet’s difficulties compound the loss making operations of India’s full fare national carrier, Air India on one hand, and the low cost private airliner SpiceJet on the other. Air India (together with Indian Airlines) has been operational from 1932 with 4000 daily flights to over 90 national and international destinations while Jet has been operational from 1993 with 3000 daily flights to nearly 80 destinations and SpiceJet has been operational from 1993 with 350 daily flights to 58 destinations. While there are other marginal players like GoAir and Air Costa, their position is not considered any better. The sad story of Kingfisher Airlines which once had a 20 percent market share and has since ceased operations last year , and is in serious debt repayment woes, continues to trouble investors and bankers. The net loss of the major loss making airliners of India has exceeded USD 1.2 billion in fiscal 2013. Cumulatively, the Indian aviation industry is reported to have lost over USD 8 billion over the last seven years and the industry debt has exceeded USD 13 billion. The only successful airliner in India seems to be IndiGo, a privately held operation (from 2006 with nearly 500 daily flights to 36 destinations). 

Green is red?

In this scenario of airliner industry being in scorching red, AirAsia India, with its striking red livery, has made its entry into the Indian aviation as a low cost airliner (as an Indian subsidiary of the highly successful Malaysian AirAsia). It has made a splash with the announcement of its inaugural flight from Bengaluru to Goa on June 12, 2014 at a tantalizing fare of Rs 999. It is believed that AirAsia would launch its additional flights also with such nano fares. In the Indian aviation industry, approximately, Air India has a market share of 20 percent, Jet at 22 percent, IndiGo at  29 percent and SpiceJet at 19 percent. Together these four airliners garner 90 percent of the Indian aviation market. Given the more or less equal division with three unprofitable and one profitable airliner, new entry is a risky proposition on the face of it. The existing airline players together are up in the arms against the green light to AirAsia; clearly they are apprehensive of the adverse competitive impact of a disruptive entry into the Indian skies.

Mittu Chandilya, the young and aggressive CEO of AirAsia India has said that theirs would be the only true low cost airliner in India while all others may try to gain shares on low fares. He implied in several forums that the existing airliners have their faulty or inefficient operational models rather than low fares to blame. He has also committed himself to enter the market with disruptive pricing but expressed confidence that the airline would breakeven in a few months due to intrinsically superior operating model. In a characteristic response Indigo offered the classic Indian formula of Re 1 fare even as SpiceJet has been on low promotional fares for quite some time. It is unclear, at this rate, as to where the operational and business models of the Indian airliners would lead to, and if the Indian aviation industry would be in a perpetual red zone. There are doubtless some differences, with established airliners like Air India,  Jet, SpiceJet and Indigo being both national and international  (in varying mixes of course) and AirAsia being a pure domestic play. The Indian aviation industry makes an excellent case for analyzing structure, strategy and competitive advantage of firms, in particular the relevance or otherwise of Porter’s theory of competitive strategy in multiple facets and the need for an alternative theory.

Industry analysis

Transportation industry is a consumer facing but highly infrastructure controlled, technology driven and investment intensive industry. The industry has to perforce operate through public (government owned) assets, be it roads, rail tracks, sea ports or airports. The Indian aviation industry reflects these characteristics in a distinctive manner; it is an oligopoly with a mix of public, private and overseas ownership. Airports are tending to get privatized, but not entirely and the skies are regulated. Aircraft makers are just two or three, and investment costs are huge. Aircraft turbine fuel bears huge import costs and duty elements and taxes dominate the fare structure. Air transportation is a highly technology intensive operation with compelling needs of rapid turnaround and uncompromising safety. It requires highly skilled workforce, be it pilots, maintenance engineers, flight crew or ground handlers. In most cases, the service an airliner can offer tends to be accentuated or attenuated by the quality of airports while even the lowest of fare is ballooned by tax components.

In terms of strategic framework, at one level the competitive forces seem stable. With only two aircraft builders with long delivery lead times but fiercely competitive between themselves, the bargaining power of suppliers is high but not prone to escalation. With capacity ahead of seats and occupancy factor being elastic with fare competitiveness the bargaining power of buyers is low but not compelling. With air transport being a favored requirement for business travelers and time-sensitive travels, the threat of substitutes is low but distance distorts the competitive force; the shorter the distance the greater the threat of alternate transport modes such as rail and road. Given the loss-making nature of the industry and the exits and consolidations that happened in the industry from time to time (East West, Sahara, ModiLuft, and Air Deccan) the threat of new entrants ought to be low but entry now and then (example, Kingfisher, GoAir, Air Costa and AirAsia) with disruptive operating models reflects that the threat of new entrants is real and the Indian aviation industry defies the Porter’s norm of industry attractiveness.

Industry rivalry, the fifth competitive force, is judged by the scale and scope of competitive responses of the players. In general fast moving consumer goods, electronic goods and white goods industries are known for high competitive intensity. Road transport in spite of the fragmented competition and rail transport by virtue of being a State monopoly do not engage themselves in intense competition. Air transport in India continuously fluctuates between cartelized high fares and disruptive promotional fares. Apart from boosting occupancy factor and market share, individual airliners do not have any other apparent reason for competitive behavior. Given that market share is gained at the expense of profitability in the Indian aviation industry, industry rivalry is intense. That being the case, the air traveler ought to have been the winner but apparently it is not so; poor connectivity, minimal options, high dynamic fares, long waits and bland service are the common refrains of domestic frequent fliers. International flights may offer better service but options tend to be few and expensive. Considering the five competitive forces, the Indian aviation industry refuses to be described adequately by the theory of competitive strategy.       

Need for a new model

The state of the Indian aviation industry, as discussed above, is reflective of an industry that has few degrees of freedom to control its destinies even though individual firms aspire to succeed. The industry’s logjam which cannot be removed by the entry of one or two overseas airliners as wholly owned subsidiaries or joint venture partners. The industry needs to work on a multilateral collaboration model to bring itself out of the logjam. The industry needs a model of collaborative advantage. The author in his blog post titled, “A New Theory of Generic Collaborative Strategy: Adding Value to Porter’s Generic Competitive Strategies, Strategy Musings, March 24, 2013 propounded an alternative but supplemental approach to industry analysis (http://cbrao2008.blogspot.in/search?q=A+new+Theory+of+generic+collaborative+strategy).

The blog post proposed in the generic collaborative strategy five collaborative value drivers. These are the values of co-integration, co-development, co-fulfillment, co-expansion, co-diversification and co-saturation. These value drivers are achieved collaboratively with suppliers, innovators, customers, new entrants and also all the players within the industry. By leveraging the collaborative value drivers, a firm can ensure competitive operations, optimized investments, innovative products and processes, enhanced consumer choice and larger market. As opposed to competitive strategy which seeks to increase the value of the firm on a relative basis at the cost of related as well as competing stakeholders, collaborative strategy drives up the value of the firm and its stakeholders simultaneously.  

The collaborative model is essential for the Indian aviation industry to come out of the woods. Co-integration would require development of a total air transportation value chain involving ground handlers, caterers, airport authorities, maintenance hangars, air travel booking agencies much as automobile industry works with its component suppliers and logistics providers. Co-development requires that current plans leverage current enablers and future enablers are developed to meet future plans.  Currently, the infrastructure at the Indian airports dictates the airliners’ fleet mix and route planning (apart from regulatory licenses); for example, the small runway length of certain airports rules out bigger aircraft such as Airbus A 320 while air traffic instrumentation dictates the landing hours. While airliners must advocate with government agencies to upgrade airports in all their facets, the airliners must also perforce work with a fleet mix that harmonizes with the available infrastructure.

Co-fulfillment requires that air transport must transform itself from the most economical alternative to the most preferred experience. That cannot come from mere hot food or cumulative mileage points. It comes from a belief that if one makes a booking with an airliner he or she would be provided with a total travel experience. In multi-sector travels, notably international or multi-city national, the originating airliner, for example, can offer the best option without insisting on total routing with only its aircraft or code-shared aircraft. The customer experience and loyalty that develop with sacrificing airline’s short term profits would be significant in the long term. Co-diversification would require acquiring potential technologies that could add competitive advantage to the operations. It could mean co-branding of debit and credit cards at one level or diversification into pre- and post-air travel logistics and travel portals on the other. Co-saturation would mean the ultimate collaborative strategy of networking with all agencies, public and private and central and state governments to completely saturate the Indian skies with network that covers all the cities and towns.  

Beyond the firm

It is understandable that every firm in the Indian aviation industry, be it the hallowed but loss making national carrier Air India, the favored Jet Airways, the avowed low cost airliner SpiceJet,  the profitable IndiGo or the disruptive startup AirAsia, is focused on advancing the respective airliner level occupancy factors and revenue parameters. However, the industry scenario offers few real degrees of freedom to any individual airliner. AirAsia would probably do well to play for the long term consolidation rather than short term disruptive entry while others would do well to look at collaborative revival than competitive blockage of AirAsia.  A massive collaborative transformation of the entire aviation value map is called for. The industry needs to be reinforced and pulled out of the collective dire straits through multilateral development before the individual firms can be on a sustainable growth path. The Governments and the private firms need to work together to find a lasting solution through the collaborative format discussed herein.

Posted by Dr CB Rao on June 1, 2014

A New Theory of Generic Collaborative Strategy: Adding Value to Porter’s Generic Competitive Strategies

Michael Porter has been the Darwinian advocate of strategy. He proposed in the 1980s with great insight, and to considerable success, that companies (much like human beings) compete to succeed and in the big aggressive world of business competition it is the game of the survival of the fittest. As a strategy guru, he prescribed three competitive strategies of cost leadership, differentiation and niche for companies to compete and derive competitive advantage in an industry. While Porter’s rather easy-to-follow strategic prescription is universally available, companies are not universally successful even if they follow Porter’s competitive strategies. Execution is often cited as the reason for this; two firms following the same broad generic strategy could have vastly different execution profiles.

This blog post hypothesizes that the relative performance success or superior competitive advantage is not merely related to execution but is even more importantly to collaboration. If generic competitive strategy drives cost or differentiation advantage or a mix thereof, generic collaborative strategy drives value up for firms, and even the industry as a whole. Generic competitive strategy is an extremely firm-centric approach which exhorts a firm to maximize its performance by maximizing its competitive power vis-à-vis all the power of its industry stakeholders (suppliers, customers, new entrants, substitute products and industry players). Generic collaborative strategy, on the other hand, is a refreshingly industry-oriented approach which advises a firm to maximize its performance by optimizing its collaborative network not only within its industry but also across a broad range of industries. While the need for a firm to be competitive will never go away, the need to be competitive by optimizing its network is now greater than ever before. 

Lifecycle drives collaboration

The generic competitive strategy was set in an industry environment of three decades ago which had three theoretical premises, which are by now outdated. Firstly, it encouraged monopoly power and scale economics as the drivers of competitive efficiency. This is the reason for the competitive strategy theory viewing the original equipment manufacturer (OEM) and vendor relations in terms of conflicting power play rather than one of mutual dependence. Secondly, it considered new product and new entrants as being industry antagonist, rather than as consumer protagonist. This is the reason for Porter’s competitive strategy viewing substitute products and new entrants as threats to industrial stability rather than as enablers for market expansion. Thirdly, it considers industry evolution from monopoly state to fragmented state as a phenomenon to be controlled by powerful incumbent firms rather than as one of new firms adding to consumer choice as much as to industry competition. In sum, Porter’s generic competitive strategy tends to defend status quo.

The generic collaborative strategy derives its relevance in a contemporary industry environment that has three theoretical premises, which are positively futuristic. Firstly, it recognizes that monopolies are a thing of the past even though scale continues to offer economies. This is the reason for the collaborative strategy theory viewing the OEM and vendor relations in terms of mutual dependence rather than one of conflicting power play. Secondly, it considers new products and new entrants as market expansive for the industry, even if share erosive for firms. This is the reason for the collaborative strategy theory accepting timed and coordinated launch of new products as a structural reality of market expansion rather than as an industry destabilizing factor. Thirdly, the generic collaborative strategy views technology as a more widely available input leading to early formation of oligopoly. This is the reason for the collaborative strategy theory to continuously seek re-segmentation and re-structuring of industry to counter fragmentation.

The generic collaborative strategy postulates five collaborative value drivers. These five collaborative value drivers are the values of co-integration, co-development, co-fulfillment, co-expansion and co-saturation. These value drivers are achieved collaboratively with suppliers, innovators, customers, new entrants and also all the players within the industry. By leveraging the collaborative value drivers, a firm can ensure competitive operations, optimized investments, innovative products and processes, enhanced consumer choice and larger market. As opposed to competitive strategy which seeks to increase the value of the firm on a relative basis at the cost of related as well as competing stakeholders, collaborative strategy drives up the value of the firm and its stakeholders simultaneously.

Co-integration

In an ideal scenario, a firm can achieve maximum competitive efficiency with respect to its products if all of its components and systems are manufactured in-house. A fully integrated development and manufacturing value chain operating at the highest scale possible is the dream of any monopoly player. The automobile industry in the mechanical age and the electronics industry in the digital age have demonstrated how outsourcing can help optimize investments. In the former case, an unconnected OEM and component industrial structure demonstrated how maximization of respective competitive positions, caused essentially by non-sharing of respective positions on volumes and costs, could dilute mutual efficiencies.  In the latter case, a complete farming out of all critical components and systems demonstrated how maximization of dependence on external manufacture, caused essentially by the belief that integration of software and hardware is more important than integration of components, could diffuse a firm’s core competency. The golden mean between a firm being troublingly reclusive and dangerously open is provided by the concept of co-integration. Co-integration is based on the concept that limited co-exclusive relationships between OEMs and suppliers provide for scale and scope so that they are dovetailed to collaborate rather than compete.

Co-development

The concept of co-development is that technologies of components and systems will develop at an exponential pace, making specialization the forte of outsourcing while a well-integrated OEM product provides the scale economics for all value chain players. The current paradigm of technological development is one of fits and starts of technological flourishes, many of them uncoordinated. Probably, the initiative for ultra notebook is one of the few coordinated strategic technological developments, strangely driven by the chip manufacturer to withstand the competition from tablet computers. Co-development, however, needs to be a more widespread initiative.  If computer makers were to take the challenge of making tablets thinner than smart phones it would require coordinated development amongst all the component makers of a notebook maker, to develop a breakthrough generation of new components,  from unbreakable and unbendable screens and ultrathin imaging components to custom built super chips and wafer-thin battery packs. Similarly, operating system developments, instead of going through continuous improvements every six months, must aim at breakthrough changes to achieve leading edge connectivity and computing power.  

Co-fulfillment

The traditional concept is that companies develop products based on market research and customers accept or reject them depending on how they are perceived and utilized. Steve Jobs overturned the established practice and demonstrated that brilliantly designed and manufactured Apple products create new needs or fulfill existing needs better. In both cases, it is the singular mind of the lone firm that imagines new technologies and new products. The concept of co-fulfillment is that a cluster of all the firms in the industry not only work together but also individually and collectively work with the consumers to identify the current and future needs. This collaborative process generates a far more intensive and far more effective understanding, and hence far more effective fulfillment of consumer needs. This requires an enlightened and non-egoistic approach by all the stakeholders to analyze and question themselves at the hands of consumers. Even the greatest innovator Apple has held on too long to its pet technological positions and refused to recognize the need for co-fulfillment with consumers as a result of which the company lost some of its momentum.

Co-diversification

Porter’s theory advocates that the force of substitute products is a key competitive force rendering existing products obsolete and even modifying industry structure. Co-development as outlined above enables firms and component makers to proactively identify unfulfilled as well as emerging needs. New products that emerge out of a different way of fulfilling the need is a collaborative and proactive way of handling product transition that is superior to the practice fighting an inevitable change. The dated prescriptions like BCG grid institutionalize past technologies. The rate of technological change is so rapid and the changing consumer preferences are so decisive that preserving the past oftentimes distracts from shaping a future. The watch industry, the imaging industry, the printing industry and scores of several other industries are examples. Just to detail one example, the change from mechanical to quartz to analogue to digital has been an inexorable movement in watch movement technologies. The watchmakers who partnered the change in a timely manner progressed while those who refused to see the writing on the wall (or, on the dial?) had serious setbacks.

Co-saturation

Sunrise industries evoke interest but rarely attract big ticket investments by incumbent firms who are in fact best positioned to take those little risks. Paradoxically, smaller startups take larger risks to develop sunrise technologies but when these risks are rewarded larger firms rush into the space with acquisitions of such startups. Growth industries and growth markets evoke even greater rush for firms, big and small alike. Porter’s theory advocates that such excessive competition increases competitive intensity in an industry and drives down industry profits. Firms must, in Porter’s strategic framework,   adopt competitive strategies that edge out smaller firms and dominate the available market. The generic collaborative strategy, on the other hand, welcomes newer and additional competition as it only expands markets, often creating new segments. Samsung’s strategy of introducing “phablets” is as revolutionary contributor to market expansion as Apple’s first smart phones. Co-saturation is the concept that incumbent firms must view entry of new players as an opportunity to co-saturate the market and expand as well as diversify product range. Market share in such co-saturated markets is less important than expanding volumes for every player. 

Collaborate to compete

As product lifecycles become shorter and investments to retool become larger, a generic strategy of only competing to vanquish others is a less relevant option than collaborating and competing.  Treating all the stakeholders in the industry, be it suppliers, customers, innovators or new entrants, as helpful elements in expanding and diversifying product-market scope works to the benefit of the firm. Porter’s generic competitive strategy considers industry competition as a win-lose game where the fittest only survive whereas this blog post’s generic collaborative strategy considers industry collaboration as a win-win game where everyone elevates the game and serves the consumers even better with more products and services that are more fulfilling than ever.

Posted by Dr CB Rao on March 23, 2013