Business Strategy Air AsiaCompany BackgroundAir Asia is one of the companies that very successful in adopting the cost leadership strategy as one of their competitive advantages. Air Asia had been established on 12 december 2001 with Dato? Sri TonyFernandez as the CEO. As what the slogan says ? now everyone can fly? which actually attract thecustomers to buy the ticket and also they offer a lot of promotions to many destinations around asia andcustomers are chasing around in getting their promotions even though the customers are not reallymeant to go somewhere.

This is also part of their marketing strategies in creating the customerawareness about their brand. 2. 1 Company Background AirAsia is one of the businesses that have successfully adopted cost leadershipthrough operational effectiveness and efficiency. The cost advantages haveenabled AirAsia to become the Asia¶s leading low fare airline. Established on 12December 2001, AirAsia has been such a big phenomenon in airline industryespecially in Asia. By using a simple but strong slogan ? Now Everyone Can Fly? , AirAsia has successfully positioned itself in customers¶ mind.

Its net profit for thesecond quarter ending 31 December 2004 was reported RM 44. 4 million, a 323%increase over the previous quarter (AirAsia, 2005). 2. 2 Mission Statement and Value of AirAsia AirAsia¶s mission statement is to be the ? Asia’s leading low fare no frills airlineand first to introduce “ticketless” traveling, AirAsia will be unveiling moreincentives in the future to encourage more air travel among Malaysians.? (AirAsia, N. D).? Now Everyone Can Fly? clearly describes AirAsia¶s value. Cost advantagescreated by AirAsia through operational effectiveness and efficiency go directly tothe customers.

The customers now enjoy much more surplus than before as thefare falls dramatically and AirAsia captures some of the µdead weight losses¶ bycapturing segments of customers that previously cannot afford the airlines¶ fare. 306-669 Strategic Enterprise Systems Group Project 6 2. 3 Business Strategy Aligned with its mission statement, AirAsia¶s business strategy is centred on costleadership. However, its business strategy targets specific markets; pricesensitive customers (including first-time fliers) needing short-haul flights.

InPorter¶s generic strategies, AirAsia¶s business strategy can be categorised intofocused cost leadership; quadrant 3A in figure 1 COMPETITIVE ADVANTAGECOMPETITIVESCOPE Lower Cost Diff erentiation BroadTarget Narrow Target 1. Cost Leadership 2. Diff erentiation 3A. Cost Focus 3B. Diff erentiation Focus Figure 1 – Porter’s Generic Strategies Source: Porter, 1985, p. 12 AirAsia builds and sustains its competitive advantage by providing services at aprice that is simply lower than competitors¶ price. Operation effectiveness andoutstanding efficiency are two main characteristics of low cost businessesincluding AirAsia.

The central objective is to achieve bigger cost advantages thanthe rivals by continuously searching areas for cost reduction along its valuechain. By further analysing AirAsia¶s value chain, one can actually determine how AirAsia creates cost advantages along its value chain. Appendix 2 summarisesthe sources of cost advantages contributable to the low cost business model for each activity in AirAsia¶s value chain. These cost advantages constitute AirAsia¶sorder winner in competing with its rivals as they enable AirAsia to provide the 306-669 Strategic Enterprise Systems Group Project 7 owest possible price to the price sensitive customers. In LCC industry, cost isthe competitive priority and it determines market position. 2. 4 Environmental Scanning Environmental scanning is performed to assess the attractiveness of LCCindustry specifically in Asia. Macro-environmental scanning will be conducted byanalysing significant macro factors affecting the LCC industry while Porter¶s fiveforces will be utilised to assess the micro-environment surrounding LCC industry. M acro-Environment The major macro-environmental factors suggest a very conductive environmentfor the growth of LCCs in Asia.

According to Sachs (1997), ? demographicfundamentals of large populations, rising middle classes with increasing leisuretime and disposable incomes, combined with the lack of competitive forms of transportation, paint an extremely encouraging demand picture in the long run?. Furthermore, air travel market is bound to continue to grow due to a rapidlyincreasing urbanisation trends (Centre for Asia Pacific Aviation, 2002). Archipelago geographical structure of Asia continent is also contributable to theimportance of air transportation.

For example, there is no other viable andefficient mode of transportation between East and West Malaysia other than byair (Lawton and Solomko, 2003). While the impact of terrorism and SARS can benegative for the growth of LCCs, the long run forecast continues to be verypositive. M icro-Environment Porter¶s five forces is utilised to perform the micro-environmental analysis   specific to LCC industry in Asia. The overall power of supplier is high due tolimited number of suppliers (only Boeing and Airbus). The power of buyer is 306-669 Strategic Enterprise Systems Group Project 8 oderately high due to almost no switching cost for customers to switch fromone LCC to another. In addition, the access to the internet allows customers tohave close to full information on prices charged by the LCCs. Threat of substitutes is moderately low; there are several substitutes such as cruises, rail,bus, and car. However, the archipelago geographical structure of Asia has madeair travel the viable, efficient, and convenient mode of transportation. Threat of new entry is moderate; high capital requirement and government barrier such asair service agreement can act as barriers to entry.

However, the deregulation of aviation industry in Asia Pacific region has resulted in more competitors enteringthe market. Furthermore, many full service airlines enter the LCC industry bylaunching their LCC version. For example, Nok Air set up by Thai Airways is apart of LCC industry in Thailand. Finally, industry rivalry is moderately high dueto price as the basis of competition and high exit cost. However, marketparticipants tend to realize that price war is destructive for them thus they avoiddirect price competition and they turn into µfriendly¶ competitors. Appendix 3summarises Porter¶s five forces specific to LCC industry.

Based on the environmental scanning performed, the demand for LCC isexpanding thus LCC industry will keep growing rapidly. The LCC industryattractiveness and profitability will attract many full service airlines to launch itsLCC version adding the degree of rivalry in this industry. As the implication, AirAsia, current market leader of LCC in Malaysia, Thailand, and Indonesia, willface competition from both existing and new players. In order to sustain itscompetitive advantage, AirAsia needs to leverage its competency in creating costadvantages across multiple value chains.