College of Social Sciences Birmingham Business School International Business Strategy MSc International Business ID: 1136816

Table of Content 1. List of Strategic Issues1 1.1. Market Based View..1 1.2. Resource Based View.1 1.3. Organisational Based View.2 1.4. Key Strategic Issues.3 2.0 GENERATING STARTEGIC OPTIONS.4 3.0 STRATEGIC EVALUATION AND SELECTION...5 3.1. Disinvestment in Air Asia X.5 3.2. Separation of Air Asia from Air Asia X..5 3.3. Suitability Criteria- Air Asia.6 3.4. ACCEPTABILITY Criteria- Air Asia...7 3.5. FEASIBILITY Criteria- Air Asia...8 3.6. STRATEGIC EVALUATION.8 4.0. FUTURE STRATEGIC RECORMENDATION.9 5.0. APPENDIX AND REFFRENCES.11 Appendix 1. KSF Analysis of Long-haul model and LCC model.11 Appendix 2. An Analysis of the Porters Five Forces.11 Appendix 3. VRIO Framework13 Appendix 4. Government as important a Stakeholder....13

Appendix 5.Strategic Option 1.....14 Appendix 6. Strategic Option 2....15 References.. ..16

EXECUTIVE SUMMARY This is a strategic report aimed at analysing, the key strategic issues that Air Asia is facing in 2009 and also generating future strategic choices for the for the company based on a Suitability Feasibility and Acceptability (SFA)analysis of the strategic Options that have been selected . Considering the result of the SFA analysis recommendations will be made addressing the issues that have been identified.

Air Asia Strategic Report 1. LIST OF STRATEGIC ISSUES 1.1. Market Based View a. Integrating Air Asia and Air Asia X. The key success factor in the long haul and the low cost carrier model are different. The analysis of Key Success Factor (KSF) tells us that the two companies should not be integrated as the companies will lose focus, based on the differences of the KSF. (see appendix 1)

b. Potential growth in the South East Asian Region This South East Asian Region is experiencing a very high growth which will translate in the growth of the market for the low cost flight with in the region. The low cost airline industry has been very profitable as compared to long haul airline industry in 2009 (flightglobal, 2011). This region has seen the increase in the number of lowcost airline operators to over 20 since Air Asia started in 2001(flightglobal, 2011). This region is experiencing high economic growth which creates a growing market for Low cost carrier airlines.

1.2. Resource Based View c. The use of joint venture to spread the risk of its expansion strategy in to other markets.

The use of joint venture in Air Asias expansion strategy in South East Asia has been successful in the market as it benefits from Shared risk involved in the investment Local support of the state and the people

d. The transfer of the resource and capabilities Will this contribute to its Air Asia Xs competitive advantage? (Consider appendix 3) The VRIO Framework analysis shows that competitors in the long haul airline industry have high capabilities. This will reduce the value of the capabilities when transferred.

e. Air Asias focus on improving its capability in maintaining a very low operation cost with high quality in costumer services. In an industry where low price is very important, the capability of being able to maintain a low operation cost is a very important strategic issue. Its success has been greatly due to the ability to maintain a very low operating cost while ensuring high quality services to customers. 1.3. Organisational Based View f. The relationship with the Malaysian Government must be well maintained to avoid conflict with the Malaysian government. (see Appendix 4)

1.4.

Key Strategic Issues

After consolidating the strategic issues, these are the key strategic issues that will be considered 1. Issues number 1 and 2 stated above can be merged to the form the Strategic Market Growth issue. This is because they all focus on Growth of the company. 2. Issues 3 ,4 and 5 will be merged to form Contentiously Improve on R&C. this is they are all related to the capabilities of the company and they will all be used in the implementation of a growth strategy. 3. Maintain good relationship with the Malaysian government

Short term

longterm

High Urgency Conteniously Improve on R&C Strategic Market Growth

Low urgency

maintain good relationship with the Malyasian government

2.0 GENERATING STARTEGIC OPTIONS

Level of Strategy Broad Level

Strategic option 1 Separate Companies

Strategic option2 Disinvestment

Avoid loss of Focus by separating Disinvestment in Air Asia X. Air Asia and Air Asia X and focus on growing the south east Asian market Market development in south east Asia ( high economic Growth) Market Penetration Alliance with Malaysian Airways to generate trunk routs from its long haul routes (increase in traffic)

Specific level 1

Specific level 2

forming joint venture in different countries

Acquire struggling low cost airlines in other countries,

Functional and supporting

Transfer Resources and capabilities to the joint venture. Increase marketing strategy aimed at reducing the treat of substitute (train or rad transport). Increasing spending on Marketing Campaigns to

Influence Malaysian Government to ease visa regulation and promote tourism. Improve and transfer capabilities to acquired Airlines.

Note: See appendix 5 for details on Strategic option 1 See appendix 6 for details on Strategic option 2

3.0 STRATEGIC EVALUATION AND SELECTION

3.1 Disinvestment in Air Asia X Advantages This will enhance the relationship with the Government. A very important OBV perspective Disadvantages Control over trunk routs will be lost.

Create finance for required expansion

Disinvestment will be seen in the media as bad image for the company

Create a clear focus for the company (LCC model)

Might make some stakeholders unhappy (employees, due to loss of job)

3.2 Separation of Air Asia from Air Asia X Advantages Have high influence over trunk routs, can influence the movement of traffic to its advantage. Disadvantages Will damage the relationship with the Malaysian Government. (very critical OBV issue in the long run)

Both companies will focus on their particular market without having to loss focus in their different target markets

The relationship between the two companies might limit the freedom each company has to make decisions.

Share of operational activates will help keep cost low for both companies. ( Online booking)

3.3.
Concepts (MBV) 5 forces Market and customer segment

Suitability Criteria- Air Asia

Separation Reduces industry rivalry. (+) Disinvestment reduce the threat of substitute (+)

Focused on more than one Focused on one type of segment (Low cost and long haul) segment (people looking and still maintains clear focus by for low cost travel). ( - ) separation. (+) Lead to Malaysia Airlines entering the LCC in retaliation. (-) Will reduce competitor power and escape retaliation by Malaysia Airlines. (+) Clear focus on KSF. Less probability for a strategic drift (+)

Competitor Retaliation

KSF

Clear focus on KSF with fair possibility of a strategic drift due to interest in Air Asia X (+)

Concepts (RBV) R&C Development Transfer of capabilities will be of high value in Air Asia X and the joint ventures. (+) Transfer or capabilities will be of very high value in the Companies acquired. (Same Market). (+) The distinctive competencies will be source of Competitive advantage in the success of the acquisition. (+)

Distinctive competency as basis of CA

The distinctive competencies will not be source of Competitive advantage a in Air Asia X. (-)

Concept (OBV) Stockholders perspective Support of Malaysian Government will be lost (competition with Malaysia airlines). (-) Support with of the Malaysian Government will be of high Value in the long term. (+)

Note: (+): Favourable strategy. (-): Unfavourable Strategy. Ranking; Separation ( 4+/3-) Disinvestment (6+/1-) Disinvestment is the suitable option

3.4. CONCEPT RISK

ACCEPTABILITY Criteria- Air Asia SEPATATION Disinvestment

Air Asia X might not be profitable in Problems with unsatisfied the short run. (High Competition in laid off workers (cost of industry). (-) compensating workers). (-)

RETURNE

Low profit expected in Air Asia X due to the nature of the industry and Competition. (-)

Re investing the funds in the South east Asian region will provide high returns due to the high level of growth that is expected in the region. (+) regarded as big player in the region (+)

REACRTION OF Stockholders

Positive for; customers, suppliers, employees, negative for; Government, shareholders ( fall in value of shares of Air Asia X due to low profit) (-)

Positive for; customers, Government, suppliers, shareholders. Negative for; employees. (+)

Note: (+): Favourable strategy. (-): Unfavourable Strategy. Ranking; Separation ( 0+/3-) Divest (3+/1-) Divest is the Acceptable option

3.5. CONCEPT Financial Feasibility

FEASIBILITY Criteria- Air Asia SEPATATION Finance needed for joint venture can be easily raised, (reputation of Air Asia in LCC industry). (+) Disinvestment The large number of airlines in the industry supports the strategy of acquisition as some will be poorly managed and cheap to acquire. (+) The Divest in Air Asia X will create enough cash for the acquisition needed. (+) The skills needed for this strategy is available as the company will need to manage the transfer of the capabilities. (employees from the divested company). (+) Air Asia is not experienced in acquisition and the skills required are different from Joint ventures (-) The transfer of employees will make the process easier to integrate. (+)

People and Skills

Air Asia is highly experienced in setting up joint ventures. Considering the success in Joint ventures ( Indonesia and Thailand) (+)

Integrating Resources

Transferring capabilities will be easy to do and integrating the back office operation will see both companies benefit from it (+)

Note: (+): Favourable strategy. (-): Unfavourable Strategy. Ranking; Separation ( 3+/0-) Divest (4+/1-) Both strategic options are equally Feasible option

3.6. STRATEGIC EVALUATION Strategic Choice Separation Disinvestment Suitability NO Yes Acceptability No Yes Feasibility Yes Yes

4.0. FUTURE STRATEGIC RECORMENDATION

Recommended strategy Time frame 1 to 2 years STRATEGIC ISSUES IT AIMS TO SOLVE Conteniously Improve on R&CDisinvesting in Air Asia X and focusing on LCC in South east Asia. DETAILED ACTION PLAN HowBecause of the Poor performance of Air Asia X, its share price will be low. Disinvesting in the company in the short run will mean selling at a loss. This loss in the short run needs to be taken to allow for the growth in the South east Region in the long run.

Broad level- Disinvestment strategy. The disinvestment in Air Asia X is highly recommended, WhyThis will free up cash for Air Asia to use in its expansion strategy in the South East Asian region. The long haul airline industry is a mature industry and it has been less profitable than the LCC industry (flightglobal, 2011). The Competitors in the Industry Emirates and British Airways have strong financial resources and might retaliate aggressively with very low prices.

Specific level 1- Market 3to 5 development Strategy in south years east Asia. WhyThis region is expected to experience high economic growth, this will translate to a growth in the travel and tourism industry. This city has been experiencing the highest growth rate in China for over 10 years (China Daily, 2010). This location of this city will be a strategic advantage considering the Cities with in the 3 hours flying range.

Conteniously Improve on R&C

How- this can be done by targeting the struggling airlines in the special economic zones in China, Shenzhen This will reduce the cost of entering the market.

Specific level 2Using a joint venture to enter the market Considering the current credit crisis, which is a short term problem (International Monetary Fund, 2009), some airline will be struggling to live through it, making cost of entering other countries low. Threat from competitors and suppliers will be low

1-2 years

Use of joint venture for Expantion in South East Asia

How- the struggling airlines in Shenzhen will be the ones with very low share prices. By using the local companies resources and transferring the capabilities of Air Asia in the operations of the joint venture. Air Asia will benefit from local support (government and People) as it will be saving a struggling airline. Air Asias Capabilities and brand reputation and the local companies resources will be invested in the joint venture HowCollaborating with the Malaysia airline will provide trunk touts for Air Asia as well as prevent air Malaysia Airlines from entering the Low cost Industry. This alliance will put Air Asia in a strong position to be able to influence the government.

Functional and supportingMaintain a good relationship with the Malaysian government. Why- being able to influence the governments regulation can be very important when it comes to a market development strategy. The regulations on visa restriction and promotion of tourism will have a big impact in the industry. In 2009 the government Vetoed Air Asias plan to build its own airport (The Economic Times, 2011). This would have been different if the relationship with the government was good.

3to 5 years

Relationship With the government.

5.0. APPENDIX AND REFFRENCES Appendix 1. Key Success Factor Analysis of Long-haul model and LCC model KSF Costumers Strategic issue analysed In the long haul model the profitable customers are the first class customers who then subsidise the economy class customers. In the LCC model there is only one class of customers economy class. The long haul market is one flooded with highly experienced competitors with strong financial resources and capabilities. In the LCC model market in South East Asia, Air Asia is a market Leader in the LCC model market Strategic issue identified Different customers Different strategy needed

Competitors

Different Competitors

Different Position in the different Markets

Corporation

The resources and capabilities that lead to the competitive advantage in Different strategy needed the LCC model are different from those that are needed in the long haul model.

Appendix 2. An Analysis of the Porters Five Forces Porters 5 Forces Strategic issue analysed

Strategic issue identified Fuel suppliers are very powerful cannot be changed

Supplier Power

A mixture of powerful suppliers as in the aircraft and fuel suppliers and less powerful suppliers the suppliers that provide the food and other running cost

Aircraft supplier power cannot be reduced

Threat of substitute

This threat is high as the low cost airlines serves short routes which can be also be served by other means of transportation Low entry barriers, easy to setup as no need to buy aircraft. Large number of low air craft operators, wide variety of substitutes means of transport. Customers bargaining power high Very intense competition, more than 35 new low cost airline operators in 2009. Loss of focus will see other airlines taking Air Asias customers

Reason to focus on low cost and quality service

Entry Barriers

Need for strong brand positioning

Bargaining power of customer

Continuously improve on services

Industry Competition

Focus on another market will lead to loss of focus for Air Asia

VRIO FRAMEWORK VRIO The R&C of Air Asia when Competitors have high transferred in the long haul R&C model will not serve as a competitive advantage for Air Asia X,

Appendix 3. VRIO Framework This will use Air Asias Capability in a VRIO analysis to determine its effect in being competitive in the long haul airline industry. R&C Valuable Rare? Costly to imitate no Fairly Exploited by Strength or organization weakness Yes yes Non Strength

Financial Low cost capability HR strength and culture

yes yes

No Fairly

Yes

Yes

Yes

Yes

Strength

Technology Yes capability Reputation no of Low cost

No

No

Yes

Non

--

--

no

Weakness

Appendix4. Government as important a Stakeholder Considering the industry in which Air Asia is in the effect of government regulation can be very can be disastrous for the business, being able to influence the Malaysian government regulations on tourism and travel might provide big opportunity for market development.

Appendix 5.

Strategic Option Broad Level- Air Asia and Air Asia X should not be merged, the KSF are different. Merging the two companies will lead to the company losing focus as it will be operating as hybrid, without a clear business strategy for the different airline industries (Long haul and Low-Cost). Air Aisa should focus only on LCC model in the South East Asia market. This market is experiencing very high economic growth in the whole region and Air Asia currently has recorded annual passengers of only 11.8 million out of a region with over 500 million people. Considering the number of new airline operators in the region a loss in focus might see the market leadership position of Air Asia change.

Specific Level 1 - Air Asia should focus on market development in the South East Asian Market, considering the growth potential of the region and the low entry barrier in the industry. Air Asia X should operate as a separate company focusing on purely long haul. Specific Level 2- Air Asia can focus its expansion strategy by forming joint venture with low cost airline operators in different countries. This can be possible as the increase in the number of airlines will mean that some airlines will be struggling to make profit. Functional and Supportive- Air Asia should transfer increase its marketing effort aimed at expanding the market for low-cost flight, as the region is experiencing high economic growing this will be very important considering the High threat of substitute (means of transportation).

Appendix 6.

Strategic Option 2 Broad Level- Air Asia X should be sold and the funds used by Air Asia to fund the expansion in to the South East Asian Market. The funds can be used to acquire struggling airlines in countries with strategic location advantage in the region. This will improve the companys relationship with the Malaysian government, putting it in a good position to influence the governments regulations affecting the low cost airline industry Specific Level- An alliance with the Malaysia Airlines will help in increasing traffic by providing trunk touts for Air Asia. This will boost its penetration strategy. Specific level 2- Acquiring struggling airlines in the region should be a good strategy when penetrating the market as in this case the market is growing (economic growth in the region). Functional and Supportive- Air Asias good relationship with the government is very important considering the growth in the region, regulations on travel and tourism will have a big impact in its business. Transfer of Capabilities to the acquired airlines will be the key to the success acquisition strategy

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