Embed Size (px)
Citation preview
AN APPLICATION OF DAVID’S
STRATEGY FORMULATION
FRAMEWORK TO THE TURKISH
AIRLINES ON DOMESTIC AIR
TRANSPORTATION OPERATIONS
Thesis submitted to the
Institute of Social Sciences
in partial fulfillment of the requirements
for the degree of
Master of Arts
in
Management
by
Mehmet ŞANAL
Fatih University
June 2007
ii
© Mehmet ŞANAL
All Rights Reserved, 2007
iii
To my wife, Nesibe…
APPROVAL PAGE
iv
I certify that this thesis satisfies all the requirements as a thesis for thedegree of Master of Arts.
Assist. Prof. Dr. N. Gökhan Torlak Department Chair
This is to certify that I have read this thesis and that in my opinion it isfully adequate, in scope and quality, as a thesis for the degree of Master ofArts.
Assist. Prof. Dr. N. Gökhan TorlakSupervisor
Examining Committee Members
Assist. Prof. Dr. N. Gökhan TORLAK ……………………….
Prof. Dr. Vildan SERİN ……………………….
Assoc. Prof. Dr. Selim ZAİM ……………………….
It is approved that this thesis has been written in compliance with theformatting rules laid down by the Graduate Institute of Social Sciences.
Assoc. Prof. Dr. Mehmet ORHANDirector
DateJune 2007
AUTHOR DECLARATIONS
v
1. The material included in this thesis has not been submitted wholly or
in part for any academic award or qualification other than that for which it is
now submitted.
2. The program of advanced study of which this thesis is part has
consisted of:
i) Research Methods course during the undergraduate study
ii) Examination of several thesis guides of particular universities both in
Turkey and abroad as well as a professional book on this subject.
Mehmet ŞANAL
June, 2007
vi
ABSTRACT
Mehmet ŞANAL June 2007
AN APPLICATION OF DAVID’S STRATEGY
FORMULATION FRAMEWORK TO THE TURKISH AIRLINES
ON DOMESTIC AIR TRANSPORTATION OPERATIONS
This thesis focuses on a modern strategy formulation framework formedby Fred David in the strategic management process. This framework guidesstrategists to evaluate firms’ internal strengths/weaknesses and externalopportunities/threats, to reach alternative strategies for the firms by usingmany different tools and models and to choose the best strategy for thefirms. The tools presented in this framework are applicable to all sizes andtypes of organisations and can help strategists identfy, evaluate, and selectstrategies. In this study the author has designed the case study of theTurkish Airlines on Domestic Air Transportation, applied the David’s strategyformulation framework to the Turkish Airlines on Domestic Air TransportationOperations, and suggested the most applicipable strategy(ies) to the firm.
Key words:
decision stage strategy formulation mission strategic management
strategy analysis vision
vii
KISA ÖZET
Mehmet ŞANAL Haziran 2007
DAVİD’İN STRATEJİ FORMÜLASYON MODELİNİN TÜRK
HAVA YOLLARININ İÇ HAT HAVA YOLU TAŞIMACILIĞI
FAALİYETLERİ ÜZERİNE BİR UYGULAMASI
Bu tez, Fred David tarafından geliştirilen stratejik yönetim süreci içindekimodern strateji modelini ele almıştır. Bu model firmaların içsel güçlüyanlarını, zayıflıklarını, fırsatlarını ve tehditlerini değerlendirmek, birçok farklıaraç ve modeli kullanarak firmalar için alternatif stratejilere ulaşmak vefirmalara en iyi stratejiyi seçmek için stratejistlere rehberlik eder. Bu modeldeortaya konan araçlar, her çeşit ve büyüklükteki firmalar için uygulanabilir. Bumodel aynı zamanda stratejileri tanımlamak, değerlemek ve seçmek içinstratejistlere yardım eder. Bu çalışmada yazar, Türk Hava Yollarının iç hathava yolu taşımacılığı faaliyetlerinin vaka çalışmasını oluşturmuş, Türk HavaYolları iç hat hava yolu taşımacılığı faaliyetlerine David’in strateji modeliniuygulamış ve firmaya en uygun strateji(leri) tavsiye etmiştir.
Anahtar Kelimeler
karar safhası Strateji formülasyonumisyon Stratejik YönetimStrateji analizi vizyon
viii
ACKNOWLEDGEMENTS
I gratefully acknowledge all those who have contributed to the
presentation of this thesis.
I owe my special thanks to my thesis advisor Gökhan Torlak for his
valuable supervision, interest, suggestion, and patience throughout this
study. This thesis may not have been completed without his help,
contributions, and constructive criticism.
I am indebted to my wife cause without her encouragements maybe I
would not find any motivations to begin with writing this thesis.
ix
LIST OF CONTENTS
Dedication Page……………………………………………………………………….…........…iii
Approval Page…………………………………………………………...…………….….....…..iv
Author Declarations………………………………………………………………………….......v
Abstract……………………………………..……………………………………………….......…vi
Kısa Özet……………………………………..………………………………………..……........vii
Acknowledgements……………………………………………………......……………..…..viii
List of Contents…………………………………………………………………….......….…….ix
List of Tables……………………………………………………………………....……..………xiii
List of Figures……………………………………………………………………………......….xiv
INTRODUCTION……………………………………………………………………......………...1
PART I: THEORETICIAL DESCRIPTION………..………………………….…….......….5
CHAPTER 1………………………………………………………………………….…….........5
WHAT IS STARTEGIC MANAGEMENT?...................................................5
1.1. The Historical Foundation of Strategic
Management.......................5
1.2. Defining Strategic
Management.......................................................6
1.3. The Stages of Strategic
Management..............................................7
x
1.4. The Strategic-Management
Model...................................................8
CHAPTER 2……………………………………………….......................................11
STRATEGIC MANAGEMENT
PROCESS................................................11 2.1. Strategy
Formulation.......................................................................11
2.1.1.The Business Mission and Mission Statement........................11
2.1.2. The Business Vision and Vision Statement...........................14
2.1.3. The External Assesment.....................................................15
2.1.4. The Internal Assesment.....................................................21
2.1.5. Strategies In Action: Types of Strategies.............................22
2.1.6. Strategy Analysis and Choice..............................................30
2.2. Strategy Implemetation............................................................30
2.3. Strategy Evaluation..................................................................31
CHAPTER 3........................................................................................33
STRATEGY ANALYSIS AND CHOICE.....................................................33
3.1. Comprehensive Strategy-Formulation Framework........................33
3.1.1. The Input Stage................................................................34
3.1.2. The Matching Stage...........................................................39
3.1.3. The Decision Stage............................................................54
PART II: PRACTICE……………………………………………………………….…........…..58
CHAPTER 4........................................................................................58
xi
THE DESCRIPTION OF THE TURKISH AIRLINES ON DOMESTIC AIR
TRANSPORTATION OPERATIONS.......................................................58
4.1. The History of Turkish Airlines…………………………….……….............58
4.2. Chief Characteristics of Turkish Airlines on
Domestic Air Transportation Operations..……….….............….….…59
4.2.1. The Turkish Airlines Passenger Function……………….…….......59
4.2.2. The Turkish Cargo Function………………………….……...............60
4.2.3. Mission Statement……………………………………….……...............61
4.2.4. Organisational Structure……………………………….……..............61
4.2.5. Fleet…………………………………………………………......................62
4.2.6. Destinations of Turkish Airlines on Domestic Flights……........64
4.2.7. Maintenance Centre…………………………………………….............65
4.2.8. E-commerce……………………………………………………….............65
4.2.9. Accidents……………………………………………………………............65
4.2.10. Financial Condition…………………………………………….............66
4.3. The Turkish Aviation Industry....................................................70
4.3.1. The Nature of The Turkish Aviation Industry........................70
4.3.2. The Fuel Prices in the Aviation Industry...............................72
4.3.3. The Competition in the Turkish
Domestic Air Transportation…………………….......…………......72
CHAPTER 5........................................................................................71
THE APPLICATION OF THE STRATEGY FORMULATION
FRAMEWORK TO THE TURKISH AIRLINES ON DOMESTIC AIR
TRANSPORTATION.............................................................................75
xii
5.1. The Input Stage......................................................................76
5.2. The Matching Stage.................................................................79
5.3. The Decision
Stage......................................................................87
CONCLUSION........................................................................................89
BIBLIOGRAPHY.....................................................................................94
xiii
LIST OF TABLES
Table 3.1. External Factor Evaluation Matrix.............................................36
Table 3.2. Internal Factor Evaluation Matrix..............................................37
Table 3.3. Competitive Profile Matrix........................................................38
Table 3.4. The Quantitative Strategic Planning Matrix................................57
Table 4.1. Table 4.1. Turkish Airlines Balance Sheets as at 31 December 2006 and 2005...............................................67
Table 4.2. Turkish Airlines Balance Sheets as at 31 December 2006 and 2005..............................................68
Table 4.3. Turkish Airlines Statements of Income for the Years Ended 31 December 2006 and 2005....................69
Table 4.4. Number of Domestic Passenger Carried in 2006........................73
Table 5.1. EFE Matrix for the Turkish Airlines on Domestic Air Transportation..................................................................76
Table 5.2. IFE Matrix for the Turkish Airlines on Domestic Air Transportation..................................................................77
Table 5.3. Competitive Profile Matrix for the Turkish Airlines on Domestic Air Transportation...............................................78
Table 5.4. SWOT Matrix for the Turkish Airlines on Domestic Air Transportation........................................................................81
Table 5.5. Factors That Make Up the SPACE Matrix Axes for the Turkish Airlines on Domestic Air Transportation....................................81
Table 5.6. SBUs in Terms of Sales and Profits in Turkish Airlines on Domestic Air Transportation……………………………………….......83
Table 5.7. SBUs in Terms of Sales and Profits in Turkish Airlines on Domestic Air Transportation………………………………………....…84
Table 5.8. QSPM for Turkish Airlines on Domestic Air Transportation….…....88
xiv
LIST OF FIGURES
Figure 1.1. Comprehensive Strategic Management Model.........................10
Figure 2.1.The Five-Forces Model of Competition......................................17
Figure 2.2. Porter’s Generic Strategies......................................................28
Figure 3.1. Strategy-Formulation Framework............................................33
Figure 3.2. The SWOT Matrix...................................................................41
Figure 3.3. Strategic Position and Action Evaluation Matrix.........................45
Figure 3.4. Boston Consulting Group Matrix..............................................47
Figure 3.5. The Internal-External Matrix...................................................51
Figure 3.6. Grand Strategy Matrix............................................................53
Figure 4.1. Turkish Airlines Organisation Chart..........................................62
Figure 4.2. Turkish Airlines Fleet..............................................................63
Figure 4.3. Destinations of TA on Domestic Flights………….….…….……......…64
Figure 5.1. SPACE Matrix for the Turkish Airlines on Domestic Air Transportation........................................................................82
Figure 5.2. BCG Matrix for Turkish Airlines on Domestic Air Transportation..................................................................83
Figure 5.3. IE Matrix for the Turkish Airlines on Domestic Air Transportation.......................................................................85
Figure 5.4. The Grand Strategy Matrix for Turkish Airlines on Domestic Air Transportation..............................................86
1
INTRODUCTION
Strategic management is that set of managerial decisions and actions that
determines the long-run performance of a corperation. Strategic management is
the science of formulating, implementing, and evaluating cross-functional
decisions that enable an organisation to achieve its objectives. An organisation’s
ability to strengthen its strategic position is dependent on one important factor,
its ability to create the strategies that produce the desired results. An effective
strategy formulation process should enable an organisation to create strategies
and solutions that will strengthen its strategic position. An ineffective strategy
formulation process negatively impacts an organisation’s rate of growth and
overall competitive position. An effective strategy formulation process may in
itself become a competitive advantage. Staretgy formulation includes developing
a vision and mission, identifying an organisation’s external opportunities and
threats, determining internal strengths and weaknesses, establishing long-term
objectives, generating alternative strategies, and choosing particular strategies
to pursue.
The aim of this study is to examine an applicability of a comprehensive
strategy formulation framework developed by Fred David at the Turkish Airlines
on Domestic Air Transportation Operations.
2
Chapter one, called ”What is Strategic Management”, handles the historical
foundation of the strategic management, the definition and the stages of the
strategic management, and finally a comprehensive strategic management
model.
Chapter two, called “ Strategic Management Process”, deals with the strategy
formulation, strategy implementation and strategy evaluation activities. Strategy
formulation activities include, firstly, forming mission and vision statements,
assessment of internal and external environment, identfying alternative
strategies, and choosing the best strategy for the organisation. Strategy
implementation is the sum total of the activities and choices required for the
execuation of a strategic plan. It is the process by which strategies and policies
are put into action through the development of programme and procedures.
Strategy evaluation is the systematic documentation of the consequences of
using the strategic planning process and the determination of its worth in order
to make decisions.
Chapter three, called “Strategy Analysis and Choice”, examines a
comprehensive strategy-formulation framework that helps strategists generate
feasible alternatives, evaluate those alternatives, and choose a specific course of
action. This framework consists of three stages: (1) input stage, (2) matching
stage, and (3) decision stage. Stage 1 of the formulation framework includes
3
the External Factor Evaluation (EFE) Matrix, the Internal Factor Evaluation (IFE)
Matrix, and the Competitive Profile Matrix (CPM). Input Stage summarise the
basic input information needed to formulate strategies. Stage 2, called the
Matching Stage, focuses upon generating feasible alternative strategies by
aligning key external and internal factors. Stage 2 techniques include the
Strengths-Weaknesses-Opportunities-Threats (SWOT) Matrix, the Strategic
Position and Action Evaluation (SPACE) Matrix, the Boston Consulting Group
(BCG) Matrix, the Internal-External (IE) Matrix, and the Grand Strategy Matrix.
Stage 3, called the Decision Stage, involves a single technique, the Quantitative
Strategic Planning Matrix (QSPM). A QSPM reveals the relative attractiveness of
alternative strategies and thus provides objective basis for selecting specific
strategies.
Chapter four, called “ The Description of the Turkish Airlines on Domestic Air
Transportation Operations”, explains the company in terms of its history, main
features, and aviation industry.
Chapter five, called “ The Application of the Strategy Formulation Analytical
Framework to the Turkish Airlines on Domestic Air Transportation Operations”,
uses the formulation framework in the Turkish Airlines on Domestic Air
Transportation and proposes the best strategy from amongst alternative
strategies to the company.
4
In the conclusion part, the thesis will be summarized, the positive and
negative aspects of the strategy formulation framework will be discussed, and
then future research areas will be pointed up.
PART I: THEORETICIAL DESCRIPTION
CHAPTER 1
WHAT IS STRATEGIC MANAGEMENT?
5
This chapter focuses, firstly, the historical foundation of strategic
management, definition and stages of the strategic management, and, lastly,
presents a strategic management model.
1.1. The Historical Foundation of Strategic Management
The concept of strategic management is of political and military origin. The
origin of the English “strategy” comes from the Greek “strategos” or a “general”,
with the Greek verb “stratego” implying to “ plan the destruction of one’s
enemies through effective use of resources” (Jeffery, 1980). This is why many
of the business terms traditionally used in strategic management were
developed by the military, such as mission, objectives, strategies,strengths, and
weaknesses.
Over the past decades, strategic management has primarly been developed
in the business sector, promoted by the modern writers such as Von Neumann
and Morgenstern in the late 1940s (Hopkins, 1987). One formulation of strategic
management was being developed in the late 1940s and early 1950s with
planning as the center for these early strategic management approaches
(Hopkins, 1987).
In the 1980s strategic management acknowledges the importance of
strategic formulation, implementation, and control as the model to managing
complex organisations within competitive environments.
6
Today, Strategic Management is a new perspective of thinking not only in
terms of internal operations but also in terms of external environmental
assessment. It focuses on creating a fit between the organisation’s external
environment (political, economic, technological, social, and competitive forces)
and its internal situation (vision, values, culture, finance, organisation, human
resources, marketing, information systems).
1.2. Defining Strategic Management
One definition of strategic management is “the set of decisions and actions
resulting in formulation and implementation of strategies designed to achieve
the objectives of an organisation” (Pearce and Robinson, 1988). From another
viewpoint , Thompson and Strickland (2003) define strategic management as
“the managerial process of forming a strategic vision, setting objectives, crafting
a strategy, implementing and executing the strategy, and then over time
initiating whatever corrective adjustments in the vision, objectives, strategy, and
execution are deemed appropriate”.
Walker (2004) summarizes strategic planning as the formulation of the
overall strategy or direction of the organisation to achieve a mission or vision,
translating the results into operational terms. This includes establishing
clarifying assumptions of the external and internal environment, developing
guidelines to drive decision processes “especially at the level of the single
7
business unit”, and converting strategic thinking into action agendas with
assigned responsibilities and allocation of resources.
According to David (2007), strategic management is the art and science of
formulating, implementing, and evaluating cross-functional decisions that enable
an organisation to achieve its objectives. As this definition implies, strategic
management focuses on integrating management, marketing,
finance/accounting, production/operations, research and development, and
development, and computer information systems to achieve organisational
success.
1.3. The Stages of Strategic Management
The strategic-management process consists of three stages: strategy
formulation, strategy implementation, and strategy evaluation:
Staretgy formulation includes developing a vision and mission, identifying an
organisation’s external opportunities and threats, determining internal strengths
and weaknesses, establishing long-term objectives, generating alternative
strategies, and choosing particular strategies to pursue.
Strategy implementation often is called the “action stage” of strategic
management (David, 2007). Strategy implementation requires a firm to
establish annual objectives, devise policies, motivate employees, and allocate
resources so that formulated strategies can be execuated. Strategy
8
implementation includes developing a strategy-supportive culture, creating an
effective organisational structure, redirecting marketing efforts, preparing
budgets,developing and utilizing information systems, and linking employee
compensation to organisational performance.
Strategy evaluation is the final stage in strategic management. Managers
need to know when particular strategies are not working well; strategy
evaluation is the primary means for obtaining this information. The fundamental
strategy-evaluation activities are (1) reviewing external and internal factors that
are bases for current strategies, (2) measuring performance, and (3) taking
corrective actions.
1.4. The Strategic Management Model
Methods and processes for strategy development and implementation vary
widely among business organisations. There does not appear to be any
generally used format for determining and applying strategy. Organisations
differ in processes they use to formulate and direct their strategic management
activities. Strategic management models vary in formality and the level of detail.
However, the basic components of the strategic management model are similar
in all models.
The strategic management process can best be studied and applied using a
model. A useful integrated model of strategic management has been developed
9
by Fred R. David who has published many of the writings in strategic
management. The framework illustrated in Figure 1.1. is a widely accepted,
comprehensive model of the strategic management process.
This model is a dynamic and continuous. A change in any one of the major
components in the model can necessiate a change in any or all of the other
components.
Figure 1.1. Comprehensive Strategic Management Model (David, 1988)
PerformExternal
Audit
Establish Evaluateand
ImplementStrategies
ImplementStrategies
Measureand
DevelopVision and
Long-term Select Management marketing
finance Evaluate
MissionStatements Objectives Strategies Issues accounting,R&D
Issues Performance
PerformInternalAudit
StrategyFormulation
Strategyimplementation
Strategyevaluation
10
CHAPTER 2
STRATEGIC MANAGEMENT PROCESS
The strategic management process can be broken down into three main
activities: strategy formulation, strategy implementation, and strategy
evaluation. This chapter examines these three activities.
2.1. Strategy Formulation
Strategy formulation activities include, firstly, forming mission and vision
statements, assessment of internal and external environment, identfying
alternative strategies, and, lastly, choosing the best strategy for the
organisation. This section describes these activities.
2.1.1.The Business Mission and Mission Statement
11
Mission can be viewed as the cornerstone of organisational culture and a
critical tool for motivating employees to pursue institutional goals by providing
meaning to their work. Mission is the “why” of an organisation. The mission of a
business reflects the essence of that business.
According to Drucker (1973), a business is not defined by its name, statutes,
or articles of incorporation. It is defined by the business mission. Only a clear
definition of the mission and purpose of the organisation makes possible clear
and realistic business objectives.
In the field of strategic management, mission statement is generally known
that the first step in the strategic planning in determining the mission of the
organisation (Thompson and Strickland, 1996). There are various versions of
mission statement definition in management literature.
A mission statement attempts to articulate the business mission. It tries to
convey the identity, purpose and direction of a business in a concise and simple
manner ( Leuthesser and Kohli, 1997).
A mission statement broadly charts the future direction of an organisation. A
good mission statement describes an organisation’s purpose, products and
services, markets, and basic technology.
A mission statement establishes the values, beliefs, and guidelines for the
way the organisation conducts its business and determines its relationships with
12
its stakeholders—employees, customers, shareholders, suppliers, government,
and the community (Ackoff, 1987).
A mission statement reveals the long-term vision of an organisation in terms
of what it wants to be and who it wants to serve (David, 1989). Mission
statements are often regarded as ‘enduring statements of purpose that
distinguish one business firm from others’. A well-designed mission statement is
essential for formulating, implementing, and evaluating business strategy
(David, 2001).
As Kemp and Dwyer (2003) stated that a clear mission statement is important
to sound strategic management of an organisation for several reasons:
First, a clear mission statement is needed before alternative strategies can
be formulated, implemented, and evaluated. Only a clear definition of the
mission and purpose of an organisation makes it possible to formulate realistic
business objectives, providing useful criteria for choosing between strategies.
Second, a clear mission statement can provide a basis or standard for
allocating organisational resources, providing managers with a common
direction that should transcend individual, departmental and transitory needs.
Third, a clear mission statement describes the values and priorities of an
organisation. A clear mission statement can help to establish a general tone or
organisational climate which can serve as a focal point for individuals to identify
13
with the organisation’s purpose and direction and to indicate standards of
behaviour expected from them (Klemme and Sanderson &Luffman (1991).
Fourth, the mission statement can be an effective vehicle for communicating
with important internal and external stakeholders. Stakeholders are groups,
both inside and outside the organisation, with an interest in its fortunes. They
are those individuals or groups who depend on the organisation to fulfil their
own goals and on whom,in turn, the organisation depends. They include such
external groups as customers, sup pliers, shareholders, invest ors, government
agencies,and the general public (David, 2001).
Generally the content is essential to a meaningful mission statement, and the
statement has to be clearly and concisely articulated. The clear presentation of
concepts then become essential to the mission’s overall effectiveness (David,
2001).
2.1.2. The Business Vision and Vision Statement
A Vision should be expressed that describes what the organisation looks like,
how it functions, and how it behaves. Generally, the vision expresses the
desired future state of the business from the participant’s viewpoint.
Hammer and Champy (1993) claim that a powerful vision should be both
qualitative and quantitative, and contain three elements: it should focus on
14
operations, it should include measurable objectives and metrics, and finally it
should change the basis for competition in the industry.
David (2007) indicates that many organisations today develop a vision
statement that answers the question “what do we want to become?”.
Developing a vision statement is often considered the first step in strategic
planning, preceding even development of a mission statement. Many vision
statements are a single sentence.
A vision statement describes where the organisation wants to be at a specific
future point. It does not restate the mission, but incorporates the mission as a
statement of the present. It serves to inspire and focus the efforts of the
organisation.
2.1.3. The External Assessment
An organisation’s external forces can be classified into two groups; the
industrial environment and the macro-environment. The industrial environment
includes competitors, customers, and suppliers, which directly affect the
organisation. The macro-environment comprises 1) economic forces, 2) social,
cultural, demographic, and environmental forces, 3) political, governmental, and
legal forces, 4) technological forces and, 5) competitive forces (David, 2007).
Hill and Jones (1989) indicate that many of these environmental factors are “
15
constantly changing, and the change process itself gives rise to new
opportunities and threats”.
Hill and Jones (1989) also note the fit between organisational environments
and the strategic choices: “For an organisation to succeed, its strategy must be
consistent with the external environment. Superior performance is the product
of a good fit between strategy and environment. To achieve a good fit,
managers must first understand the forces that shape competition in the
external environment.
In order to analyze external environment and competitors Michael Porter
(1979) presented a clear and intuitive model to be used by industry as a tool to
help decide if a particular industry should be entered or expand their established
operations. He called his model the “five-forces” model.
· Competitive Analysis: Porter’s Five- Forces Model
A widely used technique for the analysis of market competition is the Michael
Porter's “five forces” model. It provides a framework for structural analysis of
industries. The advantage of using Porter's model as a framework for strategic
analysis is to consider different factors within the five forces so as to provide a
more complete map about their level of strategic competitiveness. (Yeo and
Huang, 2003).
16
Figure 2.1. The Five-Forces Model of Competition (Porter, 1979)
Porter suggests that market competition is a function of five major forces.
These are:
· Rivalry among existing firms
· Bargaining power of buyers
· Bargaining power of suppliers
· Threat of potential entrants
· Threat of substitutes
Four forces -bargaining power of customers, the bargaining power of
suppliers, the threat of new entrants, and the threat of substitute products -
17
combined with other variables to influence a fifth force, the level of competition
in an industry. Each of these forces has several determinants:
Rivalry among Existing Firms:
The intensity of rivalry between competitors in an industry will depend on:
- The structure of competition. Rivalry is more intense where there are many
small or equally sized competitors; rivalry is less when an industry has a clear
market leader.
- The structure of industry costs. Industries with high fixed costs encourage
competitors to fill unused capacity by price cutting.
- Degree of differentiation. Industries where products are commodities (e.g.
steel, coal) have greater rivalry; industries where competitors can differentiate
their products have less rivalry.
- Switching costs are the one-time costs customers incur when buying from a
different supplier. When a customer can freely switch from one product to
another there is a greater struggle to compute customers.
- Strategic objectives. When competitors are pursuing aggressive growth
strategies, rivalry is more intensive.
- Exit barriers are economic, strategic, and emotional factors causing companies
to remain in an industry even though the profitability of doing so may be in
question. When barriers to leaving an industry are high (e.g. the cost of closing
down factories), the competitors tend to exhibit greater rivalry.
Bargaining Power of Buyers
18
Buyers are the people / organisations who create demand in an industry. The
bargaining power of buyers is greater when there are few dominant buyers and
many sellers in the industry, products are standardised, buyers threaten to
integrate backward into the industry, suppliers do not threaten to integrate
forward into the buyer's industry, and the industry is not a key supplying group
for buyers
Bargaining Power of Suppliers
Suppliers are the businesses that supply materials & other products into the
industry. The cost of items bought from suppliers (e.g. raw materials,
components) can have a significant impact on a company's profitability. If
suppliers have high bargaining power over a company, then in theory the
company's industry is less attractive. The bargaining power of suppliers will be
high when there are many buyers and few dominant suppliers, there are
undifferentiated, highly valued products, buyers do not threaten to integrate
backwards into supply and, the industry is not a key customer group to the
suppliers
Threat of Potential Entrants
Potential entrants to an industry can raise the level of competition, thereby
reducing its attractiveness. The threat of potential entrants largely depends on
the barriers to entry. High entry barriers exist in some industries (e.g.
19
shipbuilding) whereas other industries are very easy to enter (e.g. restaurants).
Key barriers to entry include:
- Economies of scale is referred to as the quantity of a product produced during
a given time period increases, the costs of manufacturing each unit declines.
- Capital requirements. Competing in a new industry requires resources to
invest. Capital is needed for every critical business functions and inventories.
- Access to industry distribution channels
- The likelihood of retaliation from existing industry players.
Threat of Substitutes
The presence of substitute products can lower industry attractiveness and
profitability because they limit price levels. The threat of substitute products
depends on buyers' willingness to substitute, the relative price and performance
of substitutes and, the costs of switching to substitutes.
2.1.4. The Internal Assessment
The internal analysis is composed of five major areas of evaluation that relate
to the overall capability of the firm. Those areas are: Management
finance/accounting, marketing, production/operations, and Research and
Development.
20
· The function of management consist of five basic activities: planning,
organizing, motivating, staffing, and controlling.
· The functions of finance/accounting comprise three decisions. First,
the investment decision is the allocation and reallocation of capital and
resources to projects, products, and divisions of an organisation.
Second, dividend decisions concern issues such as the percentage of
earnings paid to stockholders, the stability of dividends paid over time,
and the purchase of stock. Third, the financing decisions determines th
best capital structure for the firm and includes examinig various
methods by which the firm can raise capital (Horne, 1974).
· The function of marketing can be described as the process of definig,
anticipating, creating, and fulfilling customers’ needs and wants for
products and services (David, 2007). There are seven basic functions
of marketing: (1) customer analysis, (2) selling products/services, (3)
product and service planning, (4) pricing, (5) distribution, (6)
marketing research, and (7) opportunity analysis (Evans and Bergman,
1982).
· The production/operations function of a business consists of all those
actvities that transform inputs into goods and services.
21
Production/operations management comprises five decision areas:
process, capacity, inventory, workforce, and quality.
· Research and Development (R&D) is discovering new knowledge about
products, processes, and services, and then applying that knowledge
to create new and improved products, processes, and services that fill
market needs.
2.1.5. Strategies In Action: Types of Strategies
Alternative strategies that an enterprise could pursue can be categorized into
six actions; (1) integration strategies (forward integration, backward integration,
horizontal integration), (2) intensive strategies (market penetration, market
development, product development), (3) diversification strategies (related
diversification, unrelated diversification), (4) defensive strategies
(retrenchment, divestiture, liquidation), (5) Michael Porter’s generic strategies,
and (6) joint venture.
1. Integration Strategies
There are two kinds of integration strategies. These are: vertical integration
and horizontal integration.
· Vertical Integration
22
Vertical integration can be viewed as the extent to which a firm controls the
production of its inputs or suppliers and the distribution of its output or finished
products (Mpoyi, 2003). Vertical integration can occur in two directions:
- Forward integration; where the firm takes ownership and control of
its own customers (Sadler, 1993). Through forward integration, a manufacturer
has guaranteed access to distribution channels for its new products. An
example of this is a movie studio that also owns a chain of theaters.
- Backward integration; where the firm takes ownership and control
of producing its own inputs (Sadler, 1993). For example, an automobile
company may own a tire company, a glass company, and a metal company.
· Horizontal Integration
When a company expands its business into different products that are similar
to current lines. For example, a book publisher might acquire another publishing
house to increase its stable of editors and authors or to otherwise enhance its
competitiveness.
2. Intensive Strategies:
Market penetration, market development, and product development are
referred to as intensive strategies because they require intensive efforts if a
firm’s competitive position with existing products is to improve.
23
· Market Penetration
Market penetration is an effort to increase company’s sales without departing
from an original product-market strategy. The company seeks to improve
business performance either by increasing the volume of sales to its present
customers or by finding new customers for present products (Ansoff, 1957).
This strategy includes increasing the number of salespersons, increasing
advertising expenditures, offering extensive sales promotion items, or increasing
publicity efforts (David, 2007). For example, firms use the web to sell existing
products in new markets.
· Market Development
Market development is a strategy in which the company attempts to adopt its
present product line (generally with some modification in the product
characteristics) to new missions (Ansoff, 1957). An airline company, which
adapts and sells its passenger transport for the mission of cargo transportation
is an example of this strategy
· Product Development
Product development is a strategy that seeks increased sales by improving or
modifying present products or services. Product development usually entails
large research and development expenditures (David, 2007). The idea is to
24
attract satisfied customers to try new products as a result of their positive
experience with the company’s initial product offering (Pearce, 1982).
3. Diversification Strategies
Diversification is a product-market strategy based on a new product or
service offers in a new market (or markets) (Morden, 1999). This is a shift into
either new products, new markets, new channels to market, new technologies,
new geographic domains or into new competencies (or into a combination of
some of these) (Grundy, 2003). There are two general types of diversification
strategies: related and unrelated diversification strategies.
· Related Diversification
Related diversification refers to diversification into a new activity that is linked
to a company’s existing activity by commanality between one or more
components of each activity’s vale chain. Normally, these linkages are based on
manufacturing, marketing, materials management, and technological
commanolities (Charles and Jones, 1989). A publishing company, for instance,
might diversify into the making of programmes for television and radio for which
it can produce stories and scripts.
· Unrelated Diversification
25
Unrelated diversification refers to diversification into a new activity that has
no obvious commonalities with any of the company’s existing activities (Charles
and Jones, 1989). Firms that employ unrelated diversification continually search
across different industries for companies that can be acquired for a deal and yet
have potential to provide a high return on investment (David, 2007). For
example a food processing firm may manufacture leather footwear as well.
4. Defensive Strategies
There are three kinds of defensive strategies. They are: retrenchment,
divestiture and liquidation.
· Retrenchment
Retrenchment occurs when an organisation regroups through cost and asset
reduction to reverse declining sales and profits. Retrenchment is designed to
fortify an organisation’s basic distinctive competence (David, 2007).
Retrenchment can entail selling off land and buildings to raise needed cash,
pruning product lines, closing marginal businesses, closing obsolote factories,
automating processes, reducing the number of employees, and instituting
expense control systems.
· Divestiture
26
A divestiture strategy is the marketing for sale of a business or a major
component of a business. When a retrenchment strategy fails, strategic
managers often decides to sell the business (Pearce, 1982). Divestiture can take
either of two forms. The parent can spin off a business as a financially and
managerially independent company in which the parent company may or may
not retain partial ownership. Or the parent may sell the unit outright, in which
case a buyer needs to be found (Thompson and Strickland, 1996).
· Liquidation
Selling all of a company’s assets, in parts, for their tangible worth is called
liquidition. Liquidition is a recognition of defeat and consequently can be
emotionally difficult strategy. The benefit of liquidation is that the board of
directors, as representatives of the shareholders, together with top
management make the decisions instead of turning them over to the court,
which may choose to ignore shareholders completely (Thompson and Strickland,
1996).
5. Michael Porter’s Generic Strategies
Michael Porter presented his generic strategies for businesses to consider
relating to winning and sustaining competitive advantage. The main theme of
Porter’s strategies was to create sustainable competitive advantages. A firm's
relative position within its industry determines whether a firm's profitability is
27
above or below the industry average. The fundamental basis of above average
profitability in the long run is sustainable competitive advantage. There are two
basic types of competitive advantage a firm can possess: lower cost or
differentiation. The two basic types of competitive advantage combined with the
scope of activities for which a firm seeks to achieve them, lead to three generic
strategies for achieving above average performance in an industry: cost
leadership, differentiation, and focus as shown in Figure 2.2.:
COMPETITIVE ADVANTAGE
Differentiation Lower CostIndustrywide
COMPETITIVE SCOPE
Particular Segment
Only
Figure 2.2. Porter’s Generic Strategies
Cost leadership strategy is mostly about minimizing costs by achieving
economies of scale and scope. Hence, one must pay special attention to costs
associated with parts, labor, and overhead, besides making sure that a high
level of capacity is being utilized (Thompson and Strickland, 1995).
Differentiation strategy is about offering a unique product that customers desire
DIFFERENTIATION COST LEADERSHIP
FOCUS
28
and value. The organisation’s effort must be geared towards offering a product
that is distinct from its competitors’ product (Thompson and Strickland, 1995).
However, this strategy is also associated with costly activities such as higher
R&D expendtures, higher inventory levels, and greater marketing and
distribution costs. Focus strategy is directed toward serving the needs of a
limited customer group or segment. In other words, a focused company
concentrates on serving a particular market niche, which may be defined
geographically or by the type of customer or by segment of the product line.
6. Joint Venture
A joint venture is founded through the creation of a separate legal entity to
complete a one-time project that is owned, operated and controlled by
simultaneous contractual agreements between the founding organisations
(Kukalis and Jungemann, 1995).
Joint ventures are also widely used by companies to gain entrance into
foreign markets. Foreign companies form joint ventures with domestic
companies already present in markets the foreign companies would like to
enter. The foreign companies generally bring new technologies and business
practices into the joint venture, while the domestic companies already have the
relationships and requisite governmental documents within the country along
with being entrenched in the domestic industry
29
2.1.6. Strategy Analysis and Choice
Strategy analysis and choice is the evaluation of alternative strategies and
selection of the best alternative. These activities seek to determine alternative
courses of action that could best enable the firm to achieve its mission and
objectives. The firm’s present strategies, objectives, and mission, coupled with
the external and internal audit information, provide a basis for generating and
evaluating feasible alternative strategies (David, 2007).
2.2. Strategy Implemetation
Strategy implementation is the sum total of the activities and choices
required for the execuation of a strategic plan. It is the process by which
strategies and policies are put into action through the development of programs
and procedures (Wheelen and Hunger, 2004). According to Price and Newson
(2003), strategy implementation ‘‘is concerned with the translation of strategy
into organisational action through organisational structure and design, resource
planning and the management of strategic change.’’.
Formulating the right strategies is not enough for the success of the
strategies, because managers and employees must be motivated to implement
those strategies. Management issues considered central to strategy
implementation include matching organisational structure with strategy, creating
an organisational climate conductive to change, managing political relationship,
30
adapting production/operations processes, and managing human resources.
Establishing annual objectives, devising policies, and allocating resources are
central strategy implementation activities common to all organisations.
Successful strategy implementation also depends on cooperation among all
functional and divisional managers in an organisation. Marketing departments
are commonly charged with implementing strategies that require significant
increases in sales revenues in new areas and with new improved products.
Finance and accounting managers must devise effective strategy
implementation approaches at low cost and minimum risk to that firm. R&D
managers have to transfer complex technologies or develop new technologies to
successfully implement strategies.
2.3. Strategy Evaluation
The final phase of strategic management process is evaluation. Evaluation is
the systematic documentation of the consequences of using the strategic
planning process and the determination of its worth in order to make decisions.
Evaluation provides input to future planning efforts for the organisation.
Strategy evaluation includes three basic activities: (1) examining the
underlying bases of a firm’s strategy, (2) comparing expected results with actual
results, and (3) taking corrective actions to ensure that performance conforms
to plans (David, 2007).
31
According to David (2007), strategy evaluation must meet several basic
requirements to be effective. First, strategy evaluation activities must be
economical; too much information can be just as bad as too little information.
Strategy evaluation activities also shoud be meaningful; they should specifically
relate to a firm’s objectives. Strategy evaluation activities should provide timely
information; on occasion an in some areas, managers may daily need
information. Strategy evaluation should be designed to provide a true picture of
what is happening.
There is no one ideal strategy evaluation system. The unique characteristics
of an organisation, including its size, management style, purpose, problems, and
strengths, can determine a strategy evaluation and control system’s final design.
32
CHAPTER 3
STRATEGY ANALYSIS AND CHOICE
This chapter examines a comprehensive strategy-formulation framework that
helps strategists generate feasible alternatives, evaluate those alternatives, and
choose a specific course of action. This framework consists of three stages: (1)
input stage, (2) matching stage, and (3) decision stage.
3.1. Comprehensive Strategy-Formulation Framework
Techniques of strategy-formulation can be integrated into a decision
making framework. This framework is composed of three stages as shown in
Figure 3.1. Strategists can apply tools of the framework to all sizes and types of
STAGE 1: THE INPUT STAGE
External Factor Competitive Internal FactorEvaluation (EFE) Profile Evaluation (IFE)
Matrix Matrix MatrixSTAGE 2: THE MATCHING STAGE
Threats- Strategic Boston Internal-External Gran StrategyOpportunities- Position and Consulting (IE) Matrix Matrix Weaknesses- Action Evaluation Group (BCG)(SWOT) Matrix (SPACE) Matrix Matrix
STAGE 3: THE DECISION STAGE
Quantitative Strategic Planning Matrix (QSPM)
33
organisations. Strategies can be identified, evaluated and selected by this
framework.
Figure 3.1. Strategy-Formulation Framework (David, 2007)
Fred David stated the stages of the framework as below (David, 2007):
Stage 1 of the formulation framework consists of the External Factor Evaluation
(EFE) Matrix, the Internal Factor Evaluation (IFE) Matrix, and the Competitive
Profile Matrix (CPM). Called the Input Stage, Stage 1 summirazes the basic input
information needed to formulate strategies.
Stage 2, called the Matching Stage, focuses upon generating feasible
alternative strategies by aligning key external and internal factors. Stage 2
techniques include the Strengths-Weaknesses-Opportunities-Threats (SWOT)
Matrix, the Strategic Position and Action Evaluation (SPACE) Matrix, the Boston
Consulting Group (BCG) Matrix, the Internal-External (IE) Matrix, and the Grand
Strategy Matrix.
Stage 3, called the Decision Stage, involves a single technique, the Quantitative
Strategic Planning Matrix (QSPM). A QSPM uses input information from Stage 1
to objectively evaluate feasible alternative strategies identified in Stage 2. A
QSPM reveals the relative attractiveness of alternative strategies and thus
provides objective basis for selecting specific strategies.
34
3.1.1. The Input Stage
1. External Factor Evaluation (EFE) Matrix
External Factor Evaluation (EFE) Matrix allows strategists to summarize and
evaluate economic, social, cultural, demographic, environmental, political,
governmental, legal, technological, and competitive information. Illustrated in
Table 3.1., the EFE Matrix can be developed in five steps:
1. List key external factors as identified in the external-audit process.Include a total of from ten to twenty factors, including bothopportunities and threats affecting the firm and its industry. List theopportunities first and then the threats. Be as specific as possible,using percentages, ratios, and comparative numbers wheneverpossible.
2. Assign to each factor a weight that ranges from 0.0 (not important) to1.0 (very important). The weight indicates the relative importance ofthat factor to being successful in the firm's industry. Opportunitiesoften receive higher weights than threats, but threats too can receivehigh weights if they are especially severe or threatening. The sum ofall weights assigned to the factors must be equal to 1.0.
3. Assign a 1-to-4 rating to each key external factor to indicate howeffectively the firm's current strategies respond to the factor, where 4= the response is superior, 3 = the response is above average, 2 =the response is average, and 1 = the response is poor. Ratings arethus company-based, whereas the weights in Step 2 areindustry-based.
4. Multiply each factor's weight by its rating to determine a weightedscore.
5. Sum the weighted scores for each variable to determine the totalweighted score for the organisation.
In the EFE Matrix, the highest possible total weighted score for an
organisation is 4.0 and the lowest possible total weighted score is 1.0. The
average total weighted score is 2.5. A total weighted score of 4.0 indicates that
35
an
organisation is responding in an outstanding way to existing opportunities and
threats in its industry. A total score of 1.0 indicates that the firm’s
strategies are not capitalizing on opportunities or avoiding external threats.
Table 3.1. External Factor Evaluation Matrix
KEY EXTERNALFACTORS WEIGHT RATING WEIGHTED
SCORE
Opportunities
1-2-3-4-5-Threats
1-2-3-4-5-Total
36
2. Internal Factor Evaluation (IFE) Matrix
Internal Factor Evaluation Matrix (IFE) summarizes and evaluates the major
strengths and weaknesses in the functional areas of a business, and it also
provides a basis for identifying and evaluating relationships among those areas.
(Table 3.2.)
David
(2007) stated IFE Matrix in five steps as below:
1. List key internal factors as identified in the internal-audit process. Usea total of from ten to twenty internal factors, including both strengthsand weaknesses. List strengths first and then weaknesses.
2. Assign a weight that ranges from 0.0 (not important) to 1.0(all-important) to each factor. The weight assigned to a given factorindicates the relative importance of the factor to being successful inthe firm's industry. The sum of all weights must equal 1.0.
3. Assign a 1-to-4 rating to each factor to indicate whether that factorrepresents a major weakness (rating = 1), a minor weakness (rating= 2), a minor strength (rating = 3), or a major strength (rating = 4). Note that strengths must receive a 4 or 3 rating and weaknessesmust receive a 1 or 2 rating. Ratings are thus company-based,whereas the weights in Step 2 are industry-based.
4. Multiply each factor's weight by its rating to determine a weightedscore for each variable.
5. Sum the weighted scores for each variable to determine the totalweighted score for the organisation.
KEY INTERNALFACTORS WEIGHT RATING WEIGHTED
SCORE
Internal Strengths
1-2-3-4-5-Internal Weaknesses
1-2-
37
Table 3.2. Internal Factor Evaluation Matrix
In the IFE Matrix, the total weighted score can range from a low of 1.0 to a
high of 4.0, with the average score being 2.5. Total weighted score well below
2.5 charactarize organisations that are weak internally, whereas scores above
2.5 indicate a strong internal position. Like the EFE Matrix, an IFE Matrix should
include from 10 to 20 key factors. The number of factors has no effect upon the
range of total weighted scores because the weights always sum to 1.0.
3. Competitive Profile Matrix (CPM)
The Competitive Profile Matrix (CPM) identifies a firm's major competitors and
their particular strengths and weaknesses in relation to a sample firm's strategic
position. A CPM include both internal and external issues; therefore, the ratings
3-4-5-Total
38
refer to strengths and weaknesses, where 4 = major strength, 3 = minor
strength, 2 = minor weakness, and 1 = major weakness. A sample CPM is
provided in Table 3.3. In this example critical success factors listed that include
advertising, product quality, price competitiveness, management, financial
position, customer loyalty, global expansion and market share.
Table 3.3. Competitive Profile Matrix
Different from EFE, critical success factors in a CPM are broader; they do not
include specific or factual data and even may focus on internal issues. The
critical success factors in a CPM also are not grouped into opportunities and
threats as they are in an EFE. Ratings and total weighted scores can be
compared with the sample firm in CPM. This provides internal strategic
information which is important for the firm.
Company A Company B Company C
CRITICAL SUCCESSFACTORS WEIGHT RATING SCORE RATING SCORE RATING SCORE
Advertising
Product Quality
Price Competitiveness
Management
Financial Position
Customer Loyalty
Global Expansion
Market Share
TOTAL
39
3.1.2. The Matching Stage
1. Strengths-Weaknesses-Opportunities-Threats
(SWOT) Matrix
The acronym SWOT stands for Strength, Weaknesses, Opportunities, and
Threats. It is an approach to the analysis of the internal and external
environments. This analytical technique assists an organisation to fulfill its needs
for consistent knowledge of the current situation (David, 2007).
SWOT analysis originated from efforts at Harvard Business School (HBS) to
analyse case studies. In the early 1960s, classroom discussions in business
schools were focusing on organisational strengths and weaknesses in relation to
the opportunities and threats in their business environments (Panagiotou,
2003). SWOT analysis was first introduced in the 1980’s for assesing General
Electric’s position in each of its various business.
SWOT Matrix helps managers develop four types of strategies: SO (strengths-
opportunities) Strategies, WO (weaknesses-opportunities) Strategies, ST
(stregths-threats) Strategies, and WT (weaknesses-threats) Strategies. In a
SWOT Matrix (David, 2007). SO strategies use a firm’s internal strengths to take
advantage of external opportunities. WO strategies aim at improving internal
weaknesses by taking advantage of external external opportunities. ST
strategies use a firm’s strengths to avoid or reduce the impect of external
40
threats. WT strategies are defensive tactics directed at reducing internal
weaknesses and avoiding environmental threats.
As shown in Figure 3.2. SWOT Matrix is composed of nine cells. There are
four key factor cells, four strategy cells, and one cell that is always left blank (
the upper-left cell). The four strategy cells, labeled SO, WO, ST,and WT, are
developed after completing four key factor cells, S, W ,O, and T. There are eight
steps involved in constructing a SWOT Matrix:
1. List the firm's key external opportunities.2. List the firm's key external threats.3. List the firm's key internal strengths.4. List the firm's key internal weaknesses.5. Match internal strengths with external opportunities and record the
resultant SO Strategies in the appropriate cell.6. Match internal weaknesses with external opportunities and record the
resultant WO Strategies.7. Match internal strengths with external threats and record the resultant
ST Strategies.8. Match internal weaknesses with external threats and record the
resultant WT Strategies.
Always Leave
Blank
STRENGTHS – S1.2.3. List strengths4.5.
WEAKNESSES – W1.2.3. List weaknesses4.5.
41
Figure 3.2. The SWOT Matrix
2. Strategic Position and Action Evaluation (SPACE) Matrix
Strategic Position and Action Evaluation (SPACE) Matrix analysis is an
analytical tool originally devised by Rowe and Mason (1994) and updated in
subsequent editions. It uses the data and aggregates conclusions that would be
produced by applying the classical strategic auditing models found in the
strategy literature, such as the profit impact of marketing strategy, Porter’s
(1979) competitive forces that determine industry profitability and the value
OPPORTUNITIES – O1.2.3. List opportunities4.5.
SO STRATEGIES1.2. Use strengths to3. take advantage4. of opportunities5.
WO STRATEGIES1.2. Overcome weaknesses3. by taking advantage4. of opportunities5.
THREATS – T1.2.3. List threats4.5.
ST STRATEGIES1.2. Use strengths3. to avoid4. threats5.
WT STRATEGIES1.2.3. Minimize weaknesses4. and avoid threats5.
42
chain (Porter 1985), the Boston Consulting Group Matrix, and SWOT (Cross and
Henderson, 2003).
SPACE method is based on two internal dimensions and two external
dimensions. The internal dimensions; financial strength [FS] and competitive
advantage[CA], are the major determinants of the organisation’s strategic
position, whereas the external dimensions of environmental stability[ES] and
industry strength [IS] characterize the strategic position of the entire industry.
(Radder and Louw, 1998).
The key dimensions which determine environmental stability (ES) include
technological change, rate of inflation, demand variability, price range of
competing products, barriers to entry into the market, competitive pressure and
price elasticity of demand. Factors determining industry strength (IS) include
growth and profit potential, financial stability, technological know-how, resource
utilization, capital intensity, ease of entry into the market and productivity or
capacity utilization. Competitive advantage (CA) is of specific importance to
marketers. Critical factors in this dimension are market share, product quality,
product life cycles and product replacement cycles. Other variables include,
customer loyalty, competition’s capacity utilization, technological knowhow and
vertical integration. Factors influencing financial strength (FS) include return on
investment, leverage, liquidity, required/available capital, ease of exit from the
market and the risk involved in business (Radder and Louw, 1998).
43
The steps required to develop a SPACE Matrix are as follows:
1. Select a set of variables to define financial strength (FS), competitiveadvantage (CA), environmental stability (ES), and industry strength(IS).
2. Assign a numerical value ranging from +1 (worst) to +6 (best) toeach of the variables that make up the FS and IS dimensions. Assigna numerical value ranging from - 1 (best) to -6 (worst) to each of thevariables that make up the ES and CA dimensions.
3. Compute an average score for FS, CA, IS, and ES by summing thevalues given to the variables of each dimension and dividing by thenumber of variables included in the respective dimension.
4. Plot the average scores for FS, IS, ES, and CA on the appropriate axisin the SPACE Matrix.
5. Add the two scores on the x-axis and plot the resultant point on X.Add the two scores on the y-axis and plot the resultant point on Y.Plot the intersection of the new xy point.
6. Draw a directional vector from the origin of the SPACE Matrix throughthe new intersection point. This vector reveals the type of strategiesrecommended for the organisation: aggressive, competitive,defensive, or conservative as shown in Figure 3.3.:
The aggressive strategy is typical in an attractive industry with stable
economic conditions. Financial strength usually enables an organisation with this
strategy to protect its competitive advantage. Such an organisation may also
take full advantage of opportunities in its own or related industries, look for
acquisition candidates, increase market share and/or allocate resources to
products that have a definite competitive edge. Entry of new competitors is,
however, a crucial factor.
A competitive posture is characteristic of an attractive industry in a relatively
unstable environment. The organisation with such a strategy is at a competitive
44
advantage and could acquire financial resources to increase marketing thrust,
add to the sales force, and improve or extend the product line. Such an
organisation could also invest in productivity, cut costs, or merge with a cash-
rich organisation. Financial strength is, however, of critical importance.
The conservative posture is distinctive of a low growth but stable market. The
focus is on financial stability, while product competitiveness is the critical factor.
In this situation organisations could prune their product lines, cut costs, make
cash flow improvements, protect competitive products, focus on new product
developments, and try to enter into more attractive markets.
A defining characteristic of the defensive posture is an unattractive industry
where competitiveness is the critical factor. The organisation finding itself in this
dimension often lacks a competitive product and financial strength. It could
prepare for retreat from the market, discontinue marginally profitable products,
reduce costs and capacity, and defer or minimize investments (Radder and
Louw, 1998).
45
Figure 3.3. Strategic Position and Action Evaluation Matrix
3. Boston Consulting Group (BCG) Matrix
Boston Consulting Group (BCG) Matrix or the growth-share matrix is a chart
that was created by Bruce Henderson for the Boston Consulting Group in 1970
to help corporations with analyzing their business units or product lines. This
helps the company allocate resources and is used as an analytical tool in
strategic management and portfolio-analysis.
In this model, the first step is to identify the various Strategic Business Units
("SBU's") in a company portfolio. An SBU is a unit of the company that has a
46
separate mission and objectives and that can be planned independently from
the other businesses. An SBU can be a company division, a product line or even
individual brands - it all depends on how the company is organised. Using the
BCG Box a company classifies all its SBU's according to two dimensions: relative
market share and industry growth rate. Relative market share position is defined
as the ratio of a division's own market share in a particular industry to the
market share held by the largest rival firm in that industry. Relative market
share position is given on the x-axis of the BCG Matrix. The midpoint on the
x-axis usually is set at .50, corresponding to a division that has half the market
share of the leading firm in the industry. The y-axis represents the industry
growth rate in sales, measured in percentage terms. The growth rate
percentages on the y-axis could range from -20 to +20 percent, with 0.0 being
the midpoint. These numerical ranges on the x- and y- axes are often used, but
other numerical values could be established as deemed appropriate for
particular organisations (David, 2007).
As shown in Figure 3.4., each circle represents a separate division. The size
of the circle corresponds to the proportion of corporate revenue generated by
that business unit, and the pie slice indicates the proportion of corporate profits
generated by that division. Divisions located in Quadrant I of the BCG Matrix are
called Question Marks, those located in Quadrant II are called Stars, those
47
located in Quadrant III are called Cash Cows, and those divisions located in
Quadrant IV are called Dogs.
RELATIVE MARKET SHARE POSITION
High Medium Low1.0 0.50 0.0
HighI G +20N RD OU WS TT HRY R
AT
S EA (%) MediımL 0E
S
Low-20
Figure 3.4. Boston Consulting Group Matrix
The four Quadrants indicate different types of businesses:
1. Question Marks: Businesses operating in high-growth markets but
having low relative market shares are put in question marks cell. Most
of the SBUs start off as question marks as the company tries to enter
a high-growth market in which there is a market leader already. In
this cell, a company has to put in a lot of cash in plants, equipment,
STARS
II
QUESTION MARKS
I
CASH COWS
IIIDOGS
IV
48
and personnel to keep with the fast growing market to overtake the
leader. The company has to think hard about whether to keep pouring
money into this business since the risk involved is quite high.
2. Stars: A successful question mark SBU becomes a star, a market
leader in a high-growth market. Here, again, a company needs to put
in a lot of cash to keep up with the high market growth rate and fight
with competitors. Thus, a star may produce a negative cash flow at
present but in future it has to produce a positive cash flow. The risk
involved in investment in this cell is medium to low.
3. Cash Cows: A star with the largest relative market share becomes a
cash cow, when the market’s annual growth rate falls below 10%.
This produces the maximum positive cash for the company. Capacity
expansion is not financed in this cell as the market’s growth rate has
slowed down. An SBU in this cell, being the market leader, provides
positive cash flows with economies of scale and higher profit margins.
Cash cows are used to pay the bills and support the SBUs in other
quadrants. In case the cash cow starts losing relative market share, it
will need money in order to maintain market leadership or it will go to
dogs.
4. Dogs: SBUs with weak market shares in low growth markets are
called dogs. These may generate some cash but generally give low
49
profits or losses. The company may hold a dog expecting a
turnaround in the market or in the SBU (to become a market leader
again) or for sentimental reasons but normally dog SBUs are closed
(Singh, 2004).
Stars and cash cows are favorable quadrants, while there shall not be too
many question marks or dogs. A balance among these has to be obtained.
Successful SBUs have a life cycle. Starting as question marks, they become
stars, then cash cows, and dogs at the end.
4. Internal-External (IE) Matrix
The Internal-External (IE) Matrix positions an organisation's various divisions
in a nine cell display illustrated in Figure 3.5. The IE Matrix involve plotting
organisation divisions in a schematic diagram. Also, the size of each circle
represents the percentage sales contribution of each division, and pie slices
reveal the percentage profit contribution of each division in IE Matrix.
The IE Matrix is based on two key dimensions: the IFE total weighted scores
on the x-axis and the EFE total weighted scores on the y-axis. On the x-axis of
the IE Matrix, an IFE total weighted score of 1.0 to 1.99 represents a weak
internal position; a score of 2.0 to 2.99 is considered average; and a score of
3.0 to 4.0 is strong. Similarly, on the y-axis, an EFE total weighted score of 1.0
to 1.99 is considered low; a score of 2.0 to 2.99 is medium; and a score of 3.0
to 4.0 is high.
50
The IE Matrix can be divided into three major regions that have different
strategy implications.
First, the prescription for divisions that fall into cells- I, II, or IV can be
described as grow and build. Intensive (market penetration, market
development, and product development) or integrative (backward integration,
forward integration, and horizontal integration) strategies can be most
appropriate for these divisions.
Second, divisions that fall into cells III, V, or VII can be managed best with
hold and maintain strategies; market penetration and product development are
two commonly employed strategies for these types of divisions.
Third, a common prescription for divisions that fall into cells VI, VIII, or IX is
harvest or divert. Successful organisations are able to achieve a portfolio of
businesses positioned in or around cell I in the IE Matrix (David, 2007).
51
5. Grand Strategy Matrix
The Grand Strategy Matrix is based on two evaluative dimensions:
competitive position and market growth. Appropriate strategies for an
organisation to consider are listed in sequential order of attractiveness in each
quadrant of the matrix.(Figure 3.6).
Firms located in Quadrant I of the Grand Strategy Matrix are in an excellent
strategic position. For these firms, continued concentration on current markets
(market penetration and market development) and products (product
development) are appropriate strategies. It is unwise for a Quadrant I firm to
shift notably from its established competitive advantages. When a Quadrant I
organisation has excessive resources, then backward, forward, or horizontal
integration may be effective strategies. When a Quadrant I firm is too heavily
committed to a single product, then concentric diversification may reduce the
risks associated with a narrow Product line.
52
Firms positioned in Quadrant II need to evaluate their present approach to
the marketplace seriously. Although their industry is growing, they are unable
to compete effectively, and they need to determine why the firm's current
approach is ineffectual and how the company can best change to improve its
competitiveness. Because Quadrant II firms are in a rapid-market-growth
industry, an intensive strategy is usually the first option that should be
considered. However, if the firm is lacking a distinctive competence or
competitive advantage, then horizontal integration is often a desirable
alternative. As a last resort, divestiture or liquidation should be considered.
Quadrant III organisations compete in slow-growth industries and have weak
competitive positions. These firms must make some drastic changes quickly to
avoid further demise and possible liquidation. Extensive cost and retrenchment
should be pursued first. An alternative strategy is to shift resources away from
the current business into different areas. If all else fails, the final options for
Quadrant III businesses are divestiture or liquidation.
Finally, Quadrant IV businesses have a strong competitive position but are in
a slow growth industry. These firms have the strength to launch diversified
programs into more promising growth areas. Quadrant IV firms have
characteristically high cash flow levels and limited internal growth needs and
often can pursue concentric, horizontal, or conglomerate diversification
successfully. Quadrant IV firms also may pursue joint ventures (David, 2007).
53
Figure 3.6. Grand Strategy Matrix
3.1.3. The Decision Stage
1. The Quantitative Strategic Planning Matrix (QSPM)
RAPID MARKET GROWTH
Quadrant II Quadrant I
1. Market development 1. Market development
2. Market penetration 2. Market penetration
3. Product development 3. Product development
4. Horizontal integration 4. Forward integration
5. Divestiture 5. Backward integration
6. Liquidation 6. Horizontal integration
7. Concentric diversification
WEAK STRONG
COMPETITIVE COMPETITIVE
POSITION Quadrant III Quadrant IV POSITION
1. Retrenchment 1. Concentric diversification
2. Concentric diversification 2. Horizontal diversification
3. Horizontal diversification 3. Conglomerate diversification
4. Conglomerate diversification 4. Joint Venture
5. Divestiture
6. Liquidation
SLOW MARKET GROWTH
54
According to David (1986) The Quantitative Strategic Planning Matrix is a
technique that allows top managers to aveluate alternative strategies objectively
based on a firm’s internal strengths/weaknesses and external
opportunities/threats.
Other than ranking strategies to achieve the prioritized list, there is only one
analytical technique in the literature designed to determine the relative
attractiveness of feasible alternative actions. This technique is the Quantitative
Strategic Planning Matrix (QSPM), which comprises Stage 3 of the
strategy-formulation analytical framework. This technique objectively indicates
which alternative strategies are best. The QSPM uses input from Stage' I
"analyses and matching results from Stage 2 analyses to decide objectively
among alternative strategies. That is, the EFE Matrix, IFE Matrix, and
Competitive Profile Matrix that make up Stage 1, coupled with the SWOT Matrix,
SPACE Analysis, BCG Matrix, IE Matrix, and Grand Strategy Matrix that make up
Stage 2, provide the needed information for setting up the QSPM (Stage 3). The
QSPM is a tool that allows strategists to evaluate alternative strategies
objectively, based on previously identified external and internal critical success
factors.
The basic format of the QSPM is illustrated in Table 3.4. Note that the left
column of a QSPM consists of key external and internal factors (from Stage 1),
and the top row consists of feasible alternative strategies, (from Stage 2).
55
Specifically, the left column of a QSPM includes information obtained directly
from the EFE Matrix and IFE Matrix. In a column adjacent to the critical success
factors, the respective weights received by each factor in the EFE Matrix and the
IFE Matrix are recorded.
The top row of a QSPM consists of alternative strategies derived from the
SWOT Matrix, SPACE Matrix, BCG Matrix, IE Matrix, and Grand Strategy Matrix.
These matching tools usually generate similar feasible alternatives.
Conceptually, the QSPM determines the relative attractiveness of various
strategies based on the extent to which key external and internal critical success
factors are capitalized upon or improved. As shown in Table 3.4., the relative
attractiveness of each strategy within a set of alternatives is computed by
determining the cumulative impact of each external and internal critical success
factor. Any number of sets of alternative strategies can be included in the
QSPM, and any number of strategies can make up a given set, but only
strategies within a given set are evaluated relative to each other.
There are six steps required to develop a QSPM (David, 2007):
Step 1: Make a list of the firm's key external opportunities/threats and internalstrengths/weaknesses in the left column of the QSPM. This informationshould be taken directly from the EFE Matrix and IFE Matrix. Aminimum of 10 external critical success factors and 10 internal criticalsuccess factors should be included in the QSPM.
Step 2: Assign weights to each key external and internal factor. These weightsare identical to those in the EFE Matrix and the IFE Matrix. Theweights are presented in a straight column just to the right of theexternal and internal critical success factors.
56
Step 3: Examine the Stage 2 (matching) matrices and identify alternativestrategies that the organisation should consider implementing. Recordthese strategies in the top row of the QSPM. Group the strategies intomutually exclusive sets if possible.
Step 4: Determine the Attractiveness Scores (AS), defined as numerical valuesthat indicate the relative attractiveness of each strategy in a given setof alternatives. Attractiveness Scores are determined by examiningeach key external or internal factor, one at a time, and asking thequestion, "Does this factor affect the choice of strategies beingmade?" If the answer to this question is yes, then the strategiesshould be compared relative to that key factor. Specifically,Attractiveness Scores should be assigned to each strategy to indicatethe relative attractiveness of one strategy over others, considering theparticular factor. The range for Attractiveness Scores is 1 = notattractive, 2 = somewhat attractive, 3 = reasonably attractive, and 4= highly attractive. If the answer to the above question is no,indicating that the respective key factor has no effect upon the specificchoice being made, then do not assign Attractiveness Scores to thestrategies in that set. Use a dash to indicate that the key factordoes not affect the choice being made. if one strategy receives a dash,then all others must receive a dash in a given row.
Step 5: Compute the Total Attractiveness Scores. Total Attractiveness Scoresare defined as the product of multiplying the weights (Step 2) by theAttractiveness Scores (Step 4) in each row. The Total AttractivenessScores indicate the relative attractiveness of each alternative strategy,considering only the impact of the adjacent external or internal criticalsuccess factor. The higher the Total Attractiveness Score, the moreattractive the strategic alternative (considering only the adjacentcritical success factor).
Step 6: Compute the Sum Total Attractiveness Score. Add Total AttractivenessScores in each strategy column of the QSPM. The Sum TotalAttractiveness Scores reveal which strategy is most attractive in eachset of alternatives. Higher scores indicate more attractive strategies,considering all the relevant external and internal factors that couldaffect the strategic decisions. The magnitude of the differencebetween the Sum Total Attractiveness Scores in a given set ofstrategic alternatives indicates the relative desirability of one strategyover another.
57
Table 3.4. The Quantitative Strategic Planning Matrix
PART II: PRACTICE
CHAPTER 4
STRATEGIC ALTERNATIVESStrategy 1 Strategy 2 Strategy 3
Key Factors Weight AS TAS AS TAS AS TASKey External FactorsEconomyPolitical/Legal/GovernmentalSocial/Cultural/Demographic/EnvironmentalTechnologicalCompetitiveKey Internal FactorsManagementMarketingFinance/AccountingProduction/OperationsResearch and DevelopmentComputer Information SystemsSum Total Attractiveness Score
58
THE DESCRIPTION OF THE TURKISH AIRLINES ON
DOMESTIC AIR TRANSPORTATION OPERATIONS
This chapter deals with the history of Turkish Airlines, chief characteristics of
Turkish Airlines, and the Turkish Aviation Industry.
4.1. The History of Turkish Airlines
The Turkish Airlines (TA) was established in May, 1933, as the State Airlines
Administration - Hava Yolları Devlet Işletmesi Idaresi. It began its operations
with an Istanbul, Eskişehir, Ankara service in August, 1933. The name was
changed to Devlet Hava Yolları Umum Müdürlüğü (DHY) in 1938. The first long-
awaited inaugural international flight was launched in 1947 to Athens but it was
another 40 years before the introduction of long-haul flights to the Far East and
across the Atlantic.
In a major reorganisation the state company DHY was replaced with a mixed
corporation, Turkish Airlines Company in 1956. The airline's shares were passed
to the Prime Ministry Public Participation Administration in 1990, which took the
company public first in December 1990 selling 5 percent of the shares. The
government later sold about 23.0 percent of the shares to the public in
December 2004 and a further 28.75 percent in May 2006. The airline is owned
by the Turkish Republic Privatisation Administration (49 percent) and private
shareholders. The Turkish Airlines quit Qualiflyer group in 1999, due to
59
incompatibilites with Swissair and Delta. The request of joining the Star Alliance
has been accepted in December 2006.
4.2. Chief Characteristics of Turkish Airlines on Domestic Air
Transportation Operations
This section describes, Turkish Airlines passenger function, Turkish Cargo
function, its mission statement, its organisational structure, its fleet, its
destinations on domestic flights, its maintenance centre, its e-commerce
operations, its domestic accidents, and its financial condition in 2005-2006.
4.2.1. The Turkish Airlines Passenger Function
Turkish Airlines (TA) is the flag carrier of Turkey based in Istanbul. It
operates a network of scheduled services to 103 international and 29 domestic
cities, serving a total of 132 airports, in Europe, Asia, Africa, and the United
States. The airline's main base is Atatürk International Airport (IST), Istanbul,
with secondary hubs at Esenboga International Airport (ESB), Ankara, and
Sabiha Gokcen International Airport (SAW), Istanbul. In 2006, it carried 17
million passengers with total revenues of US$3 billion. The airline has around
12,000 employees.
4.2.2. The Turkish Cargo Function
The Turkish Airlines offers a variety of services designed to meet customer’s
shipping needs and to fulfill their individual transport requirements. The Turkish
60
Airlines transports every type of cargo ranging from small packages to livestock,
perishable foods, textile products, flowers, leather and spare parts. Currently on
domestic flights the Turkish Cargo service is provided with passenger planes to
28 destinations, 5 of which have Turkish Cargo organisations locally. The
Turkish Airlines got 8 percent of the total income from cargo and mail
transportation in 2006. In the period of 2006, TA has transported 159,873 tones
of cargo, which is 10 percent higher than 2005 figure, additionally, the revenue
gathered from cargo has increased 14 percent.
Destination points of the Turkish Cargo on domestic flights are Adana,
Ankara, Antalya, Istanbul, Izmir (airports with Customs) Agri, Adiyaman,
Batman, Bodrum, Dalaman, Denizli, Diyarbakir, Elazig, Erzincan, Erzurum,
Gaziantep, Kahramanmaras, Kars, Kayseri, Konya, Malatya, Mardin, Mus,
Samsun, Sanliurfa, Sivas, Trabzon and Van.
4.2.3. Mission Statement
As Turkey’s flag-carrier, the mission of the Turkish Airlines is to provide air
transportation services within the context of the following objectives:
· Strengthening the Company’s position as a global airline carrier by expanding its long-distance flight network.
61
· Positioning the Company as a technical service provider by transforming its maintenance unit into a leading maintenance base in the region.
· Promoting the Company’s identity as a service provider in all areas of strategic civil aviation, including handling and flight training.
· Maintaining the Company’s leading position in domestic air transportation.
· Providing non-stop, high-quality air transportation services by collaborating with a global airline alliance that complements its network to further improve the Company’s image abroad and increase marketing opportunities.
· Making Istanbul an important hub.
4.2.4. Organisational Structure
Turkish Airlines is organized by major business function as shown in Figure
4.1.
62
Figure 4.1. Turkish Airlines Organisation Chart
4.2.5. Fleet
The fleet in 2006 comprises 102 passenger and one cargo planes, a total
number of 103 planes. Seat capacity reached 17.931. Figure 4.2. shows the
categorisation of the planes in Turkish Airlines.
63
A340-300Number of planes: 7Passenger capacity: 271
A330-203Number of planes: 5Passenger capacity: 250
A310-300Number of planes: 6Passenger capacity: 210
A321Number of planes: 9Passenger capacity: 195
A320Number of planes: 15Passenger capacity: 150
A319Number of planes: 2Passenger capacity: 124
B737-800Number of planes: 41Passenger capacity: 165
B737-400Number of planes: 17Passenger capacity: 150
A310-304 Number of planes: 1 Cargo Capacity: 36.00km/200m3
Figure 4.2.Turkish Airlines Fleet
64
4.2.6. Destinations of Turkish Airlines on Domestic Flights
The Turkish Airlines operates the following services in domestic scheduled
destinations as shown in Figure xxx: Adana (Şakirpaşa Airport), Adıyaman
(Adıyaman Airport), Ağrı (Ağrı Airport), Ankara (Esenboğa International Airport),
Antalya (Antalya International Airport), Bodrum (Milas-Bodrum Airport), Bursa
(Yenişehir Airport), Dalaman (Dalaman Airport), Denizli (Çardak Airport),
Diyarbakır (Diyarbakır Airport), Elazığ (Elazığ Airport), Erzincan (Erzincan
Airport), Erzurum (Erzurum Airport), Eskisehir (Anadolu Airport), Gaziantep
(Oğuzeli Airport), Istanbul (Atatürk International Airport-Sabiha Gökçen
International Airport), İzmir (Adnan Menderes International Airport), Kars (Kars
Airport), Kayseri (Erkilet Airport), Konya (Konya Airport), Malatya (Erhaç
Airport), Mardin (Mardin Airport), Muş (Muş Airport), Nevsehir (Kapadokya
Airport), Samsun (Çarşamba Airport), Şanlıurfa (Şanlıurfa Airport), Sivas (Sivas
Airport), Trabzon (Trabzon Airport), Van (Ferit Melen Airport).
Figure 4.3. Destinations of TA on Domestic Flights
65
4.2.7. Maintenance Centre
Turkish Airlines has a maintenance centre at its hub Atatürk International
Airport, (IST) in Istanbul. The Turkish Airlines Maintenance Centre (TA Technic)
is responsible for the maintenance, repair and overhaul of TA's all aircrafts,
engines, and components. This centre also serves to Onur, Pegasus, and
Atlasjet planes.
4.2.8. E-commerce
On the Turkish Airlines web site, static pages, where provision of information
is crucial, are updated continuously. All information on departures-arrivals,
baggage tracking, cargo tracking, Miles&Smiles transactions and scheduled
queries are within the scope of the on-line services available.
4.2.9. Accidents
During its 74 year history, the Turkish Airlines had three accidents on its
international flights, and eighteen on domestic flights. The most disastrous was
Turkish Airlines Flight 981, which crashed near Paris in France on 3 March 1974
due to explosive decompression, killing all 346 people on board. The main cause
of this event was a design fault on the cargo doors of DC-10 aircraft.
66
4.2.10. Financial Condition
The Turkish Airlines gain income from the following three ways; (1) income
of passenger transportation, (2) income of cargo and mail and (3) other
incomes like technical care service, charter, and hiring. In 2006, the Turkish
Airlines got 80 percent of its total income from passenger transportation, 8
percent of the total income from cargo and mail transportation. The total
income of the Turkish Airlines in 2006 was 3.8 billion dollars. Table 4.1., 4.2.,
and 4.3. give the balance sheet and income statement of Turkish Airlines in
2005 and 2006.
67
Table 4.1. Turkish Airlines Balance Sheets as at 31 December 2006and 2005 (All amounts expressed in New Turkish Lira (YTL) unless otherwise stated.)
ASSETS Audited31 December 2006
Audited31 December 2005
Current Assets 857.257.447 825.922.684Cash and Cash Equivalents 365.057.959 482.910.555Marketable Securities (net) - -Accounts Receivable (net) 273.400.852 191.596.806Financial Lease Receivables (net) - -Due from Related Parties (net) 21.318.613 970.701Other Receivables (net) 8.571.133 6.567.690Biological Assets (net) - -Inventories (net) 135.643.567 84.255.279Receivables from Construction Contractsin Progress (net)
- -
Deferred Tax Assets - -Other Current Assets 53.265.323 59.621.653Non-Current Assets 3.741.767.286 2.987.438.785Accounts Receivable (net) - -Financial Lease Receivables (net) - -Due from Related Parties (net) 14.812.000 -Other Receivables (net) 1.971.731 1.901.488Financial Assets (net) 29.327.501 37.406.378Positive/Negative Goodwill (net) - -Investment Property - -Tangible Fixed Assets (net) 3.503.076.666 2.631.113.979Intangible Fixed Assets (net) 7.508.620 6.154.133Deferred Tax Assets 158.971.576 298.568.802Other Non-Current Assets 26.099.192 12.294.005Total Assets 4.599.024.733 3.813.361.469
68
Table 4.2. Turkish Airlines Balance Sheets as at 31 December 2006and 2005 (All amounts expressed in New Turkish Lira (YTL) unless otherwise stated.)
LIABILITIES Audited31 December
2006
Audited31 December
2005Short-Term Liabilities 1.073.727.696 1.198.903.059Bank Borrowings (net) - 362.903.225Short-Term Portion of Long-Term Bank Borrowings (net) 4.481.158 -Financial Lease Obligations (net) 218.720.799 179.092.821Other Financial Liabilities (net) 373.497 332.636Accounts Payable (net) 318.114.700 255.994.916Due to Related Parties (net) 14.869.046 8.022.859Advances Received 45.665.631 52.397.414Billings on Construction Contracts in Progress (net) - -Provisions for Liabilities 27.369.058 27.543.644Deferred Tax Liabilities - -Other Liabilities (net) 444.133.807 312.615.544Long-Term Liabilities 1.915.578.585 1.366.116.817Bank Borrowings (net) 36.401.442 -Financial Lease Obligations (net) 1.443.932.862 856.730.859Other Financial Liabilities (net) - -Accounts Payable (net) 8.988.621 7.124.267Due to Related Parties (net) - -Advances Received - -Provisions for Liabilities 117.304.910 113.641.242Deferred Tax Liabilities 308.950.750 388.620.449Other Liabilities (net) - -MINORITY INTERESTS - -SHAREHOLDERS' EQUITY 1.609.718.452 1.248.341.593Share Capital 175.000.000 175.000.000Capital Reserves 1.922.017.534 1.872.838.374- Share Premium 181.185 181.185- Share Premium of Cancelled Shares - -- Revaluation Surplus on Tangible Fixed Assets 49.179.160 -- Revaluation Increments on Financial Assets - -- Restatement Effect on Shareholders' Equity 1.872.657.189 1.872.657.189Profit Reserves 8.223.909 8.223.909- Legal Reserves 417.011 417.011- Statutory Reserves - -- Extraordinary Reserves 7.806.889 7.806.889- Special Funds 9 9- Associate Shares and Gain on Sale of InvestmentProperty to be added to Capital
- -
- Foreign Currency Translation Differences - -Net Profit for the Year 185.749.426 138.227.837Accumulated Profits/(Losses) (681.272.417) (945.948.527)Total Liabilities and Shareholders' Equity 4.599.024.733 3.813.361.469
69
Table 4.3. Turkish Airlines Statements of Income for the Years Ended31 December 2006 and 2005 (All amounts expressed in New Turkish Lira (YTL)
unless otherwise stated.)
MAIN OPERATING REVENUESAudited
1 January –31 December 2006
Audited 1 January –
31 December 2005Sales Revenues (net) 3.813.810.220 2.956.104.996Cost of Sales (-) (3.247.648.431) (2.435.869.117)Service Revenues (net) - -Other Revenues from MainOperations/Interest+Dividend+Rent (net)
235.572.545 150.966.612
GROSS OPERATING PROFIT 801.734.334 671.202.491Operating Expenses (-) (712.312.403) (577.630.482)NET OPERATING PROFIT 89.421.931 93.572.009Income from Other Operations 875.813.548 425.430.333Losses from Other Operations (-) (671.072.706) (277.165.588)Financial Expenses (-) (98.102.328) (60.042.012)OPERATING PROFIT 196.060.445 181.794.742Net Monetary Gain/(Loss) (net) - -MINORITY INTEREST - -PROFIT BEFORE TAXATION 196.060.445 181.794.742Taxes (10.311.019) (43.566.905)NET PROFIT FOR THE YEAR 185.749.426 138.227.837EARNINGS PER SHARE (YKr) 0,106 0,079
70
4.3. The Turkish Aviation Industry
This section examines the nature of the Turkish Aviation Industry, the fuel
prices in the aviation industry, and the competition in the Turkish Domestic Air
Transportation
4.3.1. The Nature of The Turkish Aviation Industry
Although the Turkish aviation sector is effected negatively by the political and
financial crisis, it continues its growth in the long term with the growth of
economy, liberalisation, globalisation, international trade developing, lowering
prices, and expanding service net. This sector’s climactic was the terrorist attack
in 11 September 2001 in USA. The aviation sector was harmed due to this
attack, that gave rise to the bankruptcy of some prominent airline companies.
While the aviation sector was trying to recover itself, it was damaged again.
This time the reasons were Gulf War and SARS illness in the Far East Asia in
2003. But, Iraq war was shorter than expected and SARS was taken under
control, so aviation sector got into growing trend in 2004.
The high performance of the Turkish economy in recent years, the rising
numbers of tourists coming to Turkey, the lower prices of the private airways
firms after the tax cut on flight prices in 2004 speeded up the Turkish airways
transportation to sector. Though the domestic passenger number was 8,7
71
million in 2002, it rose up to nearly 20 million domestic passengers in 2005. This
number is 38 percent more than the number in 2004.
By 2006, March, the Turkish aviation sector had 204 passenger planes, 24
cargo planes and capacity of 38 thousand passengers. Although Turkish Airlines
had domestic flights from two airports to 25 scheduled domestic points in 2003,
the flights today are from seven airports by five airway firms to 38 points. If we
bear in mind the Turkey’s advantageous geographical condition, interregional
trade development, and the improvement efforts in tourism, the Turkish aviation
sector which has a growing trend now is expected to continue this growing
process.
Furthermore, cargo transportation has a great deal of improvements. There
were 74 percent increase in domestic cargo flights in 2002-2005. Totally 27.182
tons of cargo capacity was reached by September 2006.
Turkey acts like a point of passing between Europe, Middle East and Asia
because of its geographical condition. The improvements in recent years,
Turkey’s liberal policies and bilateral agreements have turned this geographical
area to a special centre for passenger and cargo transportation.
There are 70 airports can be opened to air traffic in Turkey. East part of
Turkey has many airports but some of them are not in use because of the
topographic structure of those regions. In a short time, the demand increasing
72
of air transportation will affect these unused airports to provide important
advantages for Turkey.
4.3.2. The Fuel Prices in the Aviation Industry
The most important reason of preferring air transportation to others is ticket
prices. Fuel cost acts really an important role to determine ticket prices. Rising
of fuel prices affects air transportation negatively. The fuel price in Turkey is
higher than fuel price in other countries because of tax change, so this hinders
lowering the flight price and results in minimizing the competitive power of the
Turkish air transportation firms.
4.3.3. The Competition in the Turkish Domestic Air Transportation
Regional Aviation may be Turkey’s the most important decision on in 21th
century by the word “Every Turk will try plane at least once.” In relation with
the incentive policy to make the domestic flights attractive and to bring activity
to regional airports there has been a reduction in DHMI (Government Airport
Service) tariffs, the private communication tax and the education contribution
pay have been abolished by the Ministry of Transport in October, 2003. Private
air transporter companies gain the right to have flights in domestic flights
according to the decision taken by Ministry of Transport. With this practice
many new private air transporter company have enter to the market, therefore
a sudden shift up and a real competition have developed in the sector. This
73
increased the number of domestic passengers.(Table xxx). Private firms
increased domestic flights by taking their licenses. Onur Air, Atlas Jet and
Pegasus Airlines are initial firms that took the licenses.
Table 4.4. Number of Domestic Passenger Carried in 2006
Onur Air is a low-cost airline based in İstanbul, Turkey. As well as operating
package flights between Turkey and a number of Westrn European Countries, it
also operates a no-frills scheduled service between İstanbul and 12 other
Turkish cities, using a flat fare structure. Its main base is Atatürk International
Airport, İstanbul. The airliner was established in 1992 and started its operations
in May 1992. It began with two leased Airbus A320 aircrafts. In 2003, it
launched its low-fare domestic services. It carries 1.4 million passengers a year
by average. It is owned by Cankut Bagona (33.3%), the Chairman and the Chief
Executive, Hayri Içli (33.3%) and Unsal Tulbentci (33.3%). Onur Air average
fleet age is 11.8 years old in July 2006.
Pegasus Airlines is an airline based in Istanbul, Turkey. It operates holiday
charter flights to the Turkish resorts from North and West Europe, and leases
Rank Companies Passenger1 Turkish Airlines 8.857.0002 Onur Air 4.400.2673 Atlas Jet 2.982.7124 Pegasus 1.818.989
74
aircraft and crew to other operators on demand. Its main base is Sabiha Gökçen
International Airport (SAW), Istanbul, with a second hub at Antalya
International Airport (AYT). The airline was established in December, 1989 and
started operations in April, 1990. It was owned by Aer Lingus, but was sold in
1994 to Yapi Kredi Bank. It is now owned by Esas Holdings (85 percent) and
Silkar (15 percent). Pegasus Airlines is one of the biggest charter companies in
Turkey with a passenger capacity of more than 4 million passengers per year.
Atlasjet is an airline based in Istanbul, Turkey. It operates domestic
scheduled passenger services and regular charter flights to Europe, Kazakhstan
and the United Arab Emirates. It serves to Germany on behalf of Öger Tours. Its
main base is Atatürk International Airport, Istanbul, with hubs at Adnan
Menderes Airport, İzmir and Antalya Airport. The airline was established on 14
March 2001 and started operations in June, 2001. Formerly known as Atlasjet
International Airlines, it was set up as a subsidiary of Öger Holdings. In 2004,
ETS Group acquired a 45 percent stake, increased in February 2006 to 90
percent when it acquired Öger's 45 percent holding. It is now owned by ETS
Group (90 percent) and Tuncay Doganer (Vice-President and Chief
Executive)(10 percent) and has 730 employees.
CHAPTER 5
75
THE APPLICATION OF THE STRATEGY FORMULATION
FRAMEWORK TO THE TURKISH AIRLINES ON DOMESTIC
AIR TRANSPORTATION
This chapter aims to apply strategy formulation analytical framework to the
Turkish Airlines on Domestic Air Transportation. This framework has three
stages: (1) input stage, (2) matching stage, (3) decision stage. Stage 1 of the
formulation framework consists of the External Factor Evaluation (EFE) Matrix,
the Internal Factor Evaluation (IFE) Matrix, and the Competitive Profile Matrix
(CPM). Stage 2, called the Matching Stage, include the Strengths-Weaknesses-
Opportunities-Threats (SWOT) Matrix, the Strategic Position and Action
Evaluation (SPACE) Matrix, the Boston Consulting Group (BCG) Matrix, the
Internal-External (IE) Matrix, and the Grand Strategy Matrix. Stage 3, comprises
a single technique, the Quantitative Strategic Planning Matrix (QSPM).
5.1. The Input Stage
76
· External Factor Evaluation (EFE) Matrix
Table 5.1. EFE Matrix for the Turkish Airlines on Domestic Air
Transportation
The overall EFE rating for TA is 2.47. This signifies that TA is managing these
threats and opportunities just below the 2.5 average. Since there are some
serious threats, TA could try to address these issues in a more efficient and
effective manner. A company that finds itself in such a situation should attempt
KEY EXTERNAL FACTORS
Opportunities WEIGHT RATING WEIGHTEDSCORE
1. The portion of air transpoortation in total transportation is very low with respect to land or maritimetransportation. The Turkish domestic air transportation market is 20 percent less than that of Europeancounterparts.
0.12 3 0.36
2. The low passanger loadings and low marketing and distribution expenses are some of the importantopportunities that TA holds. It is anticipated that TA will increase its present 69 percent passanger loadingpercentage to 71 percent in 2007, and to 73 percent in 2010.
0.06 3 0.18
3. Due to the direct relation and interaction among the industries of tourism and transportation, theopportunity of integrating touristic activities and domestic air network which is developed in recent yearshas arised.
0.10 4 0.40
4. In addition to the tax reductions in ticket fees, the grant providing the freedom of self pricing for airwaycompanies resulted in the opportunity of offering lower prices for the corresponding firms.
0.07 2 0.14
5. Though not all of them are operating, the existence of many airports in the Eastern part of the countrywhich has inconvenient topographic structure provides the advantages of responding the rapid demand forair transportation, and widening the network in national scales.
0.08 2 0.16
6.Through the EU integration process the adoption of EU standards concerning aviation security and safetyin Turkish Aviation will be provided. Hence, the security will be increased and the robust development ofTurkish Aviation will be provided.
0.04 3 0.12
7. The domestic passanger density in January 2006 has grown 385 percent compared to January, 2005. 0.12 2 0.24Threats1. There are five firms except TA operating in the industry. It is expected that the new firms will enter tothe industry and that will increase competition, which is highly competitive presently in the industry. 0.12 2 0.24
2.The rapid and unplanned growth in the industry increased the vacant positions for licensed staff needed,and training institutions could not respond vacancies resulting from this rapid growth.
0.06 4 0.24
3.The rise of fuel prices in the world and the the excess taxes on the fuel prices in Turkey: the fuel costsare very essential in pricing process of the tickets. The recent increases in fuel prices all over the world hasnegative effects on air transportation.
0.09 2 0.18
4. Turkey have borders to Middle East countries, the bottle and political turmoil in this region and theuncertainty in geopolitics will negatively affect the Turkish aviation which is operating so close to thecorresponding region, consequently can be a barrier to the development of tourism and air transportation.
0.07 1 0.07
5. In order to survive, the low scale aviation companies added small sized aircrafts to their fleets.Additionally, for the sake of lower prices, different flight alternatives for different levels of economicconditions that passangers have, have been presented. A lot of new flight routes from different cities toIstanbul including Antalya, Izmir, Ankara, and Erzurum has been started.
0.07 2 0.14
Total 1 2.47
77
to more effectively counteract threats with opportunities. This will reduce the
impact of external threats on the company.
· Internal Factor Evaluation (IFE) Matrix
Table 5.2. IFE Matrix for the Turkish Airlines on Domestic AirTransportation
The Turkish Airlines’ total weighted score of 2.57 indicates that they are
slightly above average in formulating strategies that capitalise on their strengths
and minimise their weaknesses.
KEY INTERNAL FACTORS
Strengths WEIGHT RATING WEIGHTEDSCORE
1.In 2006, TA has won second standing in one of the AEA service quality evaluation criteria concerningproportion of “on time departures” in total departures, via achieving a proportion of 83,9 percent. 0.10 2 0.20
2. TA is qualified to take the world’s # 1 certificate called as IOSA, concerning airport securitymanagement and given by IATA. 0.08 3 0.24
3. In December 2006, TA has decided to join to the biggest global airline alliance named as Star Alliance. 0.09 3 0.274. All of TA domestic offices and agents passed to the e-ticket system. 0.07 4 0.285. TA transported 8.9 million passangers in domestic filights, in 2006, which is 23.8 percent higher thanprevious year.
0.06 3 0.18
6. Through the period between January and December 2006, parallel to the growth in fleet; TA increasedits staff by 37.3 percent. 0.06 3 0.18
7. In the period of 2006, TA has transported 159,873 tones of cargo, which is 10 percent higher than2005 figure, additionally, the revenue gathered from cargo has increased 14 percent. 0.05 2 0.10
8. In June 2006, TA qualified for ISO 9001:2000 Quality Certificate. 0.06 3 0.189. With the inclusion of 25 new generation planes, the average age of planes in the fleet decreased to7,3 years, and the number of planes rose by 24.4 percent and reached to 103 in number. 0.12 3 0.36
10. TA can provide education and training to its own pilots. 0.07 2 0.14
Weaknesses1. The irrational prices determined by rivals and rapid increase in passanger capacity caused less incomemargins in 2006.
0.08 2 0.16
2. Depending upon the increase in number of planes financed by leasing, the lease expenditureincreased 65 percent and reached to 34 million USD. 0.04 2 0.08
3. Income from operations, which was 89 million USD in 2005, has reduced to 22 million by the effect of9 percent increase in operational expenses.
0.04 1 0.04
4. Despite 17 percent increase in consumption of fuel, 49 percent increase of fuel expenses with respectto dollars has affected EBITDA margin negatively. 0.06 2 0.12
5. There is not an ERP software the company uses. 0.02 2 0.04
Total 1 2.57
78
· Competitive Profile Matrix
Table 5.3. Competitive Profile Matrix for the Turkish Airlines onDomestic Air Transportation
In the Competitive Profile (CPM) Matrix above there are ten key success
factors for the Turkish Airlines. They are advertising, product quality, price
competitiveness, management, customer loyalty, market share, customer
service, e-commerce, management experience, and branding. TA's three major
competitors in the aviation industry are Onur Air, Pegasus, and Atlasjet. TA is
often seen as the highest quality company providing excellent service. Onur Air
is viewed as the cost leader in the industry. Based on the data contained in the
CPM, Atlasjet and Pegasus are the most competitive followed by Onur Air and
then by TA.
Turkish Airlines Onur Air Pegasus Atlasjet
CRITICAL SUCCESS FACTORS WEIGHT RATING SCORE RATING SCORE RATING SCORE RATING SCORE
Advertising 0.08 2 0.16 2 0.16 3 0.24 3 0.24
Product Quality 0.14 4 0.56 2 0.28 3 0.42 3 0.42
Price Competitiveness 0.09 3 0.27 4 0.36 3 0.27 3 0.27
Management 0.05 3 0.15 4 0.20 4 0.20 3 0.15
Customer Loyalty 0.12 4 0.48 3 0.36 2 0.24 3 0.36
Market Share 0.20 4 0.80 3 0.60 2 0.40 3 0.60
Customer Service 0.02 4 0.08 1 0.02 2 0.04 3 0.06
E-commerce 0.10 2 0.20 3 0.30 4 0.40 3 0.30
Management Experience 0.05 4 0.20 3 0.15 2 0.10 2 0.10
Branding 0.15 3 0.45 1 0.15 4 0.60 2 0.30
TOTAL 1 3.35 2.58 2.91 2.80
79
In terms of price competitiveness Onur Air is the best company, in customer
service all companies in the sector are not doing well.
5.2. Matching Stage
· Strengths-Weakness-Opportunities-Threats (SWOT) Matrix
STRENGTHS – S1.In 2006, TA has won second standing inone of the AEA service quality evaluationcriteria concerning proportion of “on timedepartures” in total departures, via achievinga proportion of 83,9 percent.2. TA is qualified to take the world’s # 1certificate called as IOSA, concerning airportsecurity management and given by IATA.3. In December 2006, TA has decided to jointo the biggest global airline alliance namedas Star Alliance.4. All of TA domestic offices and agentspassed to the e-ticket system.5. TA transported 8.9 million passangers indomestic filights, in 2006, which is 23.8percent higher than previous year.6. Through the period between January andDecember 2006, parallel to the growth infleet; TA increased its staff by 37.3 percent.7. In the period of 2006, TA has transported159,873 tones of cargo, which is 10 percenthigher than 2005 figure, additionally, therevenue gathered from cargo has increased14 percent.8. In June 2006, TA qualified for ISO9001:2000 Quality Certificate.9. With the inclusion of 25 new generationplanes, the average age of planes in the fleetdecreased to 7,3 years, and the number ofplanes rose by 24.4 percent and reached to103 in number.10. TA can provide education and training toits own pilots
WEAKNESSES – W1. The irrational prices determined byrivals and rapid increase in passangercapacity caused less income margins in2006.2. Depending upon the increase in numberof planes financed by leasing, the leaseexpenditure increased 65 percent andreached to 34 million USD.3. Income from operations, which was 89million USD in 2005, has reduced to 22million by the effect of 9 percent increasein operational expenses.4. Despite 17 percent increase inconsumption of fuel, 49 percent increaseof fuel expenses with respect to dollarshas affected EBITDA margin negatively.5. There is not an ERP software thecompany uses.
OPPORTUNITIES – O1. The portion of air transpoortation in totaltransportation is very low with respect toland or maritime transportation. TheTurkish domestic air transportation marketis 20 percent less than that of Europeancounterparts.2. The low passanger loadings and lowmarketing and distribution expenses aresome of the important opportunities that TAholds. It is anticipated that TA will increaseits present 69 percent passanger loadingpercentage to 71 percent in 2007, and to
SO STRATEGIES1.Segment the market in different customergroups that look for shortor long- haul, highfrequency, low fare Airlines and developfocussedmarketing strategies.(S5-S9,O1-O2-O4)2. Enhance the amount of short haul flightsto new cities and airports(S7-S3, O3-O7)
WO STRATEGIES1.An effective ERP program should beadopted to the firm.(W5,O2-O4)
80
73 percent in 2010.3. Due to the direct relation and interactionamong the industries of tourism andtransportation, the opportunity ofintegrating touristic activities and domesticair network which is developed in recentyears has arised.4. In addition to the tax reductions in ticketfees, the grant providing the freedom ofself pricing for airway companies resulted inthe opportunity of offering lower prices forthe corresponding firms.5. Though not all of them are operating, theexistence of many airports in the Easternpart of the country which has inconvenienttopographic structure provides theadvantages of responding the rapid demandfor air transportation, and widening thenetwork in national scales.6.Through the EU integration process theadoption of EU standards concerningaviation security and safety in TurkishAviation will be provided. Hence, thesecurity will be increased and the robustdevelopment of Turkish Aviation will beprovided.7. The domestic passanger density inJanuary 2006 has grown 385 percentcompared to January, 2005.THREATS – T1. There are five firms except TA operatingin the industry. It is expected that the newfirms will enter to the industry and that willincrease competition, which is highlycompetitive presently in the industry.2.The rapid and unplanned growth in theindustry increased the vacant positions forlicensed staff needed, and traininginstitutions could not respond vacanciesresulting from this rapid growth.3.The rise of fuel prices in the world andthe the excess taxes on the fuel prices inTurkey: the fuel costs are very essential inpricing process of the tickets. The recentincreases in fuel prices all over the worldhas negative effects on air transportation.4. Turkey have borders to Middle Eastcountries, the bottle and political turmoil inthis region and the uncertainty ingeopolitics will negatively affect the Turkishaviation which is operating so close to thecorresponding region, consequently can bea barrier to the development of tourism andair transportation.5. In order to survive, the low scale aviationcompanies added small sized aircrafts totheir fleets. Additionally, for the sake oflower prices, different flight alternatives fordifferent levels of economic conditions thatpassangers have, have been presented. Alot of new flight routes from different citiesto Istanbul including Antalya, Izmir, Ankara,
ST STRATEGIES1.Integrate or take-over with tour operatorsto provide all in one low price weekend andshort holiday packages to coastal areas ornational.(S1-S6-S9,T1-T5)2. TA should diversify its flight points toEastern Anatolia and South East Anatoliaregions(S9,S6-T1-T5).3. The frequency of the flights should beincreased to the Eastern Anatolia and SouthEast Anatolia regions.( S5-S9, T1)4. TA should educate effectively both its andother private firms’ personel by developingits education center.(S6-S10, T2)
WT STRATEGIES1. Increasing the number of small sizedaircrafts decrease the negative effects ofthe fuel prices.
81
Table 5.4. SWOT Matrix for the Turkish Airlines on Domestic AirTransportation
· Strategic Position and Action Evaluation (SPACE) Matrix
Table 5.5. Factors That Make Up the SPACE Matrix Axes for theTurkish Airlines on Domestic Air Transportation
The average score for FS is: 14 / 5 = 2.8The average score for CA is: (-12)/ 5 = (-2.4)The average score for ES is: (-18) / 5 = (-3.6)The average score for IS is: 19 / 5 = 3.8
and Erzurum has been started.
INTERNAL STRATEGİC POSITION EXTERNAL STRATEGIC POSITIONFinancial Strength (FS) Rating Environmental Stability (ES) RatingFrom 2005 to 2006, EBITDA Margin decreased from17.22 percent to 16.25 percent. 2 Inflation falled down 10 percent in 2006 in Turkey -2
In 2006, total assets increased to 3.272 USD andrecorded an increase of 15 percent compared to2005.
4The increase in the effective use of aerialtransportation in domestic tourism. -3
Firm is strong financially in comparison tocompetitors. 3
The level of competition has increased by theinclusion of low seat capacity small planes byprivate firms in the industry, and low prices.
-4
In 2006, Shareholder’s equity increased to 1.145million USD with a 12 percent increase with respectto 2005.
3
Except TA there are five more companiesoperating in the domestic market and in theforeseeble future it is anticipated that newentrants to the market will occur.
-5
From 2005 to 2006, Current Ratio increased from0.69 percent to 0.80 percent. 2 The pressure from competitors is very high -4
Total 14 Total -18Competitive Advantage (CA) Rating Industry Strength (IS) RatingThe company holds 60 percent share of market indomestic scale. -3 In 2006, 80 percent of total revenues are held by
earnings from passangers. 6
From 2005 to December 2006, seat capacityincreased by 24 percent. -2
By 2006 March, Turkish aviation sector has 204passenger planes, 24 cargo planes and capasity of38 thousand passengers.
3
With the inclusion of 25 new generation planes, theaverage age of planes in the fleet decreased to 7,3years, and number of planes rose by 24.4 percentand reached to 103 in amount.
-2
In cargo transportation, through the years 2002and 2005, 74 percent increase in domestic cargoindustry has been enjoyed, and by September2005, a total capacity of 1.041.623 tones of cargohas been reached.
4
The number of staff has been reduced by 25percent from 2002 to present. -4
There are 70 airports that are available fordomestic industry, this is an advantage forresponding to the rapidly increasing demand andto expending countrywide aerial transportation.
4
In the whole offices and agents of the firm the “e-ticket” sales occur. -1 The aviation sector is affected negatively because
of terrorist attacks. 2
Total -12 Total 19
82
The two scores on the x-axis are added (IS + CA =3.8 – 2.4 = 1.4) and the resultantpoint is plotted on X.The two scores on the y-axis are added (FS + ES = 2.8 – 3.6 = -0.8) and the resultantpoint is plotted on Y. The intersection of the new xy point is drawn and a directionalvector is drawn.
Conservative FS Aggressive
CA IS
Defensive ES Competitive
Figure 5.1. SPACE Matrix for the Turkish Airlines on DomesticAir Transportation
The Turkish Airlines located in the Competitive Quadrant because of the
directional vector appear in the lower-right of the diagram. Based on the SPACE
Matrix, TA should use a Competitive Profile which has competitive advantages in
a high-growth industry. Thus, TA should first look at some form of integration,
followed by market penetration, market development, product development,
and finally, joint ventures.
· Boston Consulting Group (BCG) Matrix
83
# Functions Revenues(USD) %Revenue Profits(USD) %Profits %MarketShare
% GrowthRate
1 Passenger 2.445.000 92 122250 89 0.6 +10
2 Cargo 222.000 8 15540 11 0.55 +7Table 5.6. SBUs in Terms of Sales and Profits in Turkish Airlines on
Domestic Air Transportation
RELATIVE MARKET SHARE POSITION
High Medium Low1.0 0.50 0.0
High +20
I G
N RD OU WS TT H
MediımR 0Y R
AT
S EA (%)LE
S Low-20Figure 5.2. BCG Matrix for Turkish Airlines on Domestic
Air Transportation
The BCG Matrix is used to compare the different divisions or departments
within a single organisation. The primary reason to use this matrix is to visually
analyse which divisions or departments are making the most profit and which
ones are not. It also shows which ones have the largest relative market share as
well as overall sales within the organisation. For this matrix we have chosen to
evaluate the Passenger and Cargo function of the TA. Both Passenger and
1
Stars
2
QuestionMarks
Cash Cows Dogs
84
Cargo functions are positioned on Division II (Stars) according to their market
share and industry growth rate percentages. Passenger function has a greater
circle and pie slice compared to the cargo function because of bigger revenue
and market share. Forward, backward, and horizontal integration; market
penetration; market development; and product development are appropriate
strategies for these functions to consider.
· Internal- External (IE) Matrix
In the matrix below,both passenger and cargo functions are in cell I. This
means that the company should grow and build. The company should pursue an
intensive or integrative strategies. This includes market penetration, market
development, and product development for the intensive strategies. For the
integrative strategies backward integration, forward integration, and horizontal
integration strategies should be considered.
Table 5.7. SBUs in Terms of Sales and Profits in Turkish Airlines onDomestic Air Transportation
The IFE Total Weighted Score
# Functions Revenues(USD) %Revenue Profits(USD) %Profits EFE IFE
1 Passenger 2.445.000 92 122250 89 3.6 3.52 Cargo 222.000 8 15540 11 3.2 3.5
85
The
EFE
Total
Weighte
d
Score
Figure5.3. IE Matrix for the Turkish Airlines on Domestic Air
Transportation
· Grand Strategy Matrix
The Turkish Airlines (TA) is placed in Quadrant I. TA has a strong competitive
position because of their ability to increase sales above their competition. In
addition, TA is a financially strong company that has experienced a steady rate
of growth. TA should continue to implement strategies that strengthen their
market position. TA should also consider using excess resources for backward,
forward and horizontal integration, and market penetration and market
development to increase their competitive advantage.
Strong
3.0 to 4.0
Average
2.0 to 2.99
Weak
1.0 to 1.99
High
3.0 t.
3.991 I
2
II III
Medium
2.0 to
2.99IV V VI
Low
1.0 to
1.99VII VIII XI
86
Figure 5.4. The Grand Strategy Matrix for Turkish Airlines onDomestic Air Transportation
RAPID MARKET GROWTH
Quadrant II Quadrant I 1. Market development
2. Market penetration
3. Product development
4. Forward integration
5. Backward integration
6. Horizontal integration
7. Concentric diversification
WEAK STRONG
COMPETITIVE COMPETITIVE
POSITION Quadrant III Quadrant IV POSITION
SLOW MARKET GROWTH
87
5.3. Decision Stage
· Quantitative Strategic Planning Matrix (QSPM)
STRATEGIC ALTERNATIVESMarket
PenetrationMarket
DevelopmentProduct
DevelopmentKey Factors Weight AS TAS AS TAS AS TASKey External FactorsOpportunities1. The portion of air transpoortation in total transportation is very low withrespect to land or maritime transportation. The Turkish domestic airtransportation market is 20 percent less than that of Europeancounterparts.
0.12 4 0.48 4 0.48 2 0.24
2. The low passanger loadings and low marketing and distributionexpenses are some of the important opportunities that TA holds. It isanticipated that TA will increase its present 69 percent passanger loadingpercentage to 71 percent in 2007, and to 73 percent in 2010.
0.06 3 0.18 2 0.12 2 0.12
3. Due to the direct relation and interaction among the industries oftourism and transportation, the opportunity of integrating touristicactivities and domestic air network which is developed in recent years hasarised.
0.10 4 0.40 4 0.40 3 0.30
4. In addition to the tax reductions in ticket fees, the grant providing thefreedom of self pricing for airway companies resulted in the opportunity ofoffering lower prices for the corresponding firms.
0.07 4 0.28 3 0.21 3 0.21
5. Though not all of them are operating, the existence of many airports inthe Eastern part of the country which has inconvenient topographicstructure provides the advantages of responding the rapid demand for airtransportation, and widening the network in national scales.
0.08 - - -
6.Through the EU integration process the adoption of EU standardsconcerning aviation security and safety in Turkish Aviation will beprovided. Hence, the security will be increased and the robustdevelopment of Turkish Aviation will be provided.
0.04 2 0.08 2 0.08 2 0.08
7. The domestic passanger density in January 2006 has grown 385percent compared to January, 2005.
0.12 3 0.36 3 0.36 2 0.24
Threats8. There are five firms except TA operating in the industry. It is expectedthat the new firms will enter to the industry and that will increasecompetition, which is highly competitive presently in the industry.
0.12 3 0.36 3 0.36 1 0.12
9. The rapid and unplanned growth in the industry increased the vacantpositions for licensed staff needed, and training institutions could notrespond vacancies resulting from this rapid growth.
0.06 2 0.12 2 0.12 3 0.18
10.The rise of fuel prices in the world and the the excess taxes on the fuelprices in Turkey: the fuel costs are very essential in pricing process of thetickets. The recent increases in fuel prices all over the world has negativeeffects on air transportation.
0.09 3 0.27 2 0.18 2 0.18
11. Turkey have borders to Middle East countries, the bottle and politicalturmoil in this region and the uncertainty in geopolitics will negativelyaffect the Turkish aviation which is operating so close to thecorresponding region, consequently can be a barrier to the developmentof tourism and air transportation.
0.07 - - -
12. In order to survive, the low scale aviation companies added smallsized aircrafts to their fleets. Additionally, for the sake of lower prices,different flight alternatives for different levels of economic conditions thatpassangers have, have been presented. A lot of new flight routes fromdifferent cities to Istanbul including Antalya, Izmir, Ankara, and Erzurum
0.07 2 0.14 3 0.21 3 0.21
88
Table 5.8. QSPM for Turkish Airlines on Domestic Air Transportation
Comparing the attractiveness of both strategies, and looking to the extent to
which key external and internal critical success factors are capitalised upon or
improved, it seems that the market penetration strategy is the most attractive
strategy for the Turkish Airlines on domestic air transportation.
has been started.Key Internal FactorsStrengths1.In 2006, TA has won second standing in one of the AEA service qualityevaluation criteria concerning proportion of “on time departures” in totaldepartures, via achieving a proportion of 83,9 percent.
0.10 4 0.40 4 0.40 4 0.40
2. TA is qualified to take the world’s # 1 certificate called as IOSA,concerning airport security management and given by IATA.
0.08 3 0.24 3 0.24 3 0.24
3. In December 2006, TA has decided to join to the biggest global airlinealliance named as Star Alliance.
0.09 - - -
4. All of TA domestic offices and agents passed to the e-ticket system. 0.07 3 0.21 3 0.21 2 0.14
5. TA transported 8.9 million passangers in domestic filights, in 2006,which is 23.8 percent higher than previous year.
0.06 4 0.24 2 0.12 1 0.06
6. Through the period between January and December 2006, parallel tothe growth in fleet; TA increased its staff by 37.3 percent.
0.06 2 0.12 1 0.06 1 0.06
7. In the period of 2006, TA has transported 159,873 tones of cargo,which is 10 percent higher than 2005 figure, additionally, the revenuegathered from cargo has increased 14 percent.
0.05 3 0.15 2 0.10 2 0.10
8. In June 2006, TA qualified for ISO 9001:2000 Quality Certificate. 0.06 3 0.18 3 0.18 3 0.18
9. With the inclusion of 25 new generation planes, the average age ofplanes in the fleet decreased to 7,3 years, and the number of planes roseby 24.4 percent and reached to 103 in number.
0.12 4 0.48 3 0.36 3 0.36
10. TA can provide education and training to its own pilots. 0.07 1 0.07 1 0.07 2 0.14
Weaknesses
11. The irrational prices determined by rivals and rapid increase inpassanger capacity caused less income margins in 2006.
0.08 2 0.16 1 0.08 1 0.08
12. Depending upon the increase in number of planes financed by leasing,the lease expenditure increased 65 percent and reached to 34 millionUSD.
0.04 2 0.08 2 0.08 2 0.08
13. Income from operations, which was 89 million USD in 2005, hasreduced to 22 million by the effect of 9 percent increase in operationalexpenses.
0.04 3 0.12 2 0.08 2 0.08
14. Despite 17 percent increase in consumption of fuel, 49 percentincrease of fuel expenses with respect to dollars has affected EBITDAmargin negatively.
0.06 3 0.18 2 0.12 2 0.12
15. There is not an ERP software the company uses. 0.02 1 0.02 1 0.02 1 0.02
Sum Total Attractiveness Score 5.32 4.64 3.94
89
CONCLUSIONS
This thesis has examined the main topics of strategic management including
its historical development, its definitions in literature, and its processes. There
are many different strategic management process models in the literature. The
thesis has used Fred David’s Strategic management model. The model, which
consists of three stages: strategy formulation, strategy implementation and
strategy evaluation, has been described theoretically. Then a case study of the
Turkish Airlines on Domestic Air Transportation has been designed. The data
concerning the case has been gathered from the department of Strategic
Planning and Investment Management of the Turkish Airlines. In the application
of David’s strategic management model, strategy formulation framework has
been applied to the Turkish Airlines on Domestic Air Transportation and strategy
suggestions have been made to the firm.
The thesis is divided into two parts. The first part, called, the theoretical
description, consists of three chapters. In the first chapter, the historical
foundation of the strategic management, the definition of the strategic
management and the stages of the strategic management have been described,
and a comprehensive strategic management model has been introduced. In the
second chapter, strategy formulation, strategy implementation, and strategy
evaluation activities has been examined. Strategy formulation activities include,
90
firstly, forming mission and vision statements, assessment of internal and
external environment, identfying alternative strategies, and choosing the best
strategy for the organisation. Strategy implementation is the sum of the
activities and choices required for the execuation of a strategic plan. Strategy
evaluation is the systematic documentation of the consequences of using the
strategic management process and the determination of its worth in order to
make decisions. In the third chapter, a comprehensive strategy-formulation
framework has been analyzed. This framework consists of three stages: input
stage, matching stage, and decision stage. Input Stage includes the External
Factor Evaluation (EFE) Matrix, the Internal Factor Evaluation (IFE) Matrix, and
the Competitive Profile Matrix (CPM). Input Stage summarises the basic input
information needed to formulate strategies. Matching Stage focuses upon
generating feasible alternative strategies by aligning key external and internal
factors. Its techniques include the Strengths-Weaknesses-Opportunities-Threats
(SWOT) Matrix, the Strategic Position and Action Evaluation (SPACE) Matrix, the
Boston Consulting Group (BCG) Matrix, the Internal-External (IE) Matrix, and
the Grand Strategy Matrix. Decision Stage involves a single technique, the
Quantitative Strategic Planning Matrix (QSPM). A QSPM reveals the relative
attractiveness of alternative strategies and thus provides objective basis for
selecting specific strategies.
91
The second part, called, practice, includes two chapters. In the first chapter,
the case study of the Turkish Airlines on Domestic Air Transportation has been
designed. The case study comprises the history of Turkish Airlines, chief
characteristics of Turkish Airlines, and the Turkish Aviation Industry.
In the second chapter, which is involved in the application part of the thesis,
firstly, IFE, EFE and CPM Matrices have been constructed for the TA to obtain
internal and external position of the firm. Then, SWOT, SPACE, BCG, IE, and
Grand Strategy Matrices have been generated to find appropriate alternative
strategies for the firm. Among many alternative strategies, market penetration,
market development and product development strategies have been the most
adaptable strategies for the TA. Finally, QSPM has been constructed for the TA.
These three strategies derived from matching stage, has been compared in
QSPM diagram and the best strategy for the TA is appeared to be “market
penetration”.
In the application of the strategy formulation framework to the Turkish
Airlines on domestic air transportation, I have come accross some advantages
and disadvantages. These can be stated as positive features and limitations of
the framework.
92
· Positive Features
One of the positive features of the QSPM in the framework is that sets of
strategies can be examined similtaneously in QSPM. There is no limit to the
number of strategies that can be evaluated in QSPM. Another positive feature of
QSPM is that every strategist can effectively apply, develop, expand, and update
QSPM with a personal computer. There is a software programme called
checkmate comprising the whole process of David’s strategy formulation
framework. This programme makes easier for the user to reveal pertinent
strategies. QSPM can be adapted for use by small and large for-profit and
nonprofit organisations. The sum total attractiveness scores can reveal the
relative attractiveness of many different types of strategies for many different
types of organisations.
· Limitations
David has used matrices in the framework eclectically. Each tool in the
framework has different theoretical, philosophical and sociological
assumptions. This shows that each tool may bring about contrasting
outcomes. It is inappropriate to compare the outcomes of BCG and IE Matrices
with those of other matrices in a single framework. Because, IE and BCG
matrices suggest alternative strategies for the divisions/departments of the
93
firm. However the SPACE Matrix, Grand Strategy Matrix, and SWOT Matrix
analyze the overall firm and suggest alternative strategies.
This model always requires intuitive judgments and educated assumptions.
The numerical values that are assigned as rating and attractiveness scores are
judgmental decisions although they should be based on objective information.
QSPM is that it can only be as good as the prerequiste information and
matching analyses upon which it is based. Sometimes personal preferences
get unduly embedded in the strategy formulation process (David, 1986).
Another point is that the practitioner as an hired consultant may be serving
to the interests of top managers or owners of the firm and may disregard the
interests of disadvantaged (silenced and marginalised) groups, this may bring
about deleterious consequences for the firm.
The final criticism is related to the issue of cultural feasibility. At the end of
the application of David’s strategy formulation framework, the analyst would
come up with a set of strategies that do not commensurate with values,
norms, goals, and objectives of the firm. Under such circumstances, the
suggestions of the practitioner would be impractical.
94
BIBLIOGRAPHY
Ackoff, R., (1987), “Mission Statements”, Pla nning Review, 15(4).
Ansoff, H., I., (1957), “Strategies for Diversification”, Harvard Business Review,September-October.
Cross, J. and Henderson, S., (2003) “Strategic challenges in the football business: aSPACE analysis” Strategic Change, 12.
David, F.R., (1986) “The Strategic Planning matrix-A Quantitative Approach”, LongRange Plannig, V.19,no.5.
David, F.R., “How Companies Define Their Mission”, Long Range Plannig, 22,no.3(June 1988):40.
David, F.R., (1989), “How Companies Define Their Mission”, Long Range Planning,22(1).
David, F.R., (2001), Strategic Management Concepts, (8th ed.), Upper SaddleRiver,NJ: Macmillan.
David, F.R., (2007), Strategic Management Concepts and Cases, (11th ed.), PrenticeHall.
Drucker, P. F., (1973), Management: Tasks, Responsibilities, and Practices, Harper &Row, New York.
Evans J. and B. Bergman, (1982), Marketing, New York: Macmillan:17.
Grundy, T., (2003), Gurus on Business Strategy, London, GBR: Thorogood.
Hammer, Michael and Champy, James (1993), Reengineering the corporation, NewYork: Harper Business.
Hill, C.W.L. and Jones, G.R., (1989), Strategic Management: An IntegratedApproach,Houghton Mifflin Company.
Hopkins, H.D., (1987), “Long-Term Acquisition Strategies in the U.S. Economy” ,Journal of Management,13.
95
Horne, J.V., (1974), Financial Management and Policy, Upper Saddle River, N.J.:Prentice- Hall,:10.
Jeffery, B., (1980), “The Historical Development of The Strategic ManagementConcept” Academy of Management Review 5(2).
Klemme, M., Sanderson, S., & Luffman, G., (1991), “Mission Statements: SellingCorporate Values to Employees”, Long Range Planning, 24(3).
Kukalis, S., (1995), “Jungemann, M., Strategic Planning for a Joint Venture”, LongRange Planning, Vol.28, No.3
Leuthesser L., and Kohli C., (1997), “Corporate identity: The role of missionstatements”, Business Horizons, May/June, Vol. 40, Issue 3.
Morden, T., (1999), Introduction to Business Strategy, (2nd ed.), Mc Graw Hill.
Mpoyi, R.T., (2003), “Vertical Integration: Strategic Characteristics and CompetitiveImplications”. CR, Vol.13, No.1.
Panagiotou, G., (2003), “Bringing SWOT into Focus”, Business Strategy Review,Volume 14 Issue 2.
Pearce, J., A., II, (1982:Spring), “Selecting among Alternative Grand Strategies”,California Management Review, 24:3.
Pearce, J.H. II and Robinson, R.B.Jr., (1988), Strategic Management: StrategyFormulation and Implementation, Homewood, Illinois: Irwin.
Porter, M. E., (1979), “How Competitive Forces Shape Strategy”, Harvard BusinessReview, 57(2).
Porter, M.,E., (1980), Competitive Strategy: Techniques for Analyzing Industries andCompetitors, The Free Press, New York.
Price, A.D.F., Newson, E., (2003-October), “Strategic Management: Consideration ofParadoxes, Processes, and Associated Concepts as Applied to Construction”, Journal ofManagement in Engineering, 19:4.
96
Radder L., Louw, L., (1998), ”The SPACE Matrix: A Tool for Calibrating Competition”,Long Range Planning, Vol. 31, No. 4.
Rowe A, Mason R, Dickel K, Mann R., (1994), Strategic Management: AMethodological Approach.Addison Wesley: Reading, Mass.
Sadler, Philip, (1993), Strategic Management, Milford, CT, USA: Kogan Page,Limited.
Singh, J.P., (2004:October), “Development Trends in the Sensor Technology: A NewBCG Matrix Analysis as a Potential Tool of Technology Selection for a Sensor Suite”IEEE Sensor Journal, Vol. 4, No. 5.
Kemp, S., Dwyer, L., (2003), “Mission Statements of International Airlines: A ContentAnalysis”, Tourism Management, 24.
Thompson, A.A. and Strickland, A.J., (2003), Strategic management concepts andcases, (13th ed.), New York, NY: McGraw-Hill/Irwin.
Thompson, A.A. and Strickland A. J., (1996), Strategic Management: concepts andcases, (9th ed.), Chicago, IL:Irwin.
Thompson, A.A. and Strickland, A.J., (1995), Crafting and Implementing Strategy,(6th ed.), Boston, MA: Irwin.
Yeo, J. and Huang, W., (2003), “ Mobile E- Commerce Outlook”, InternationalJournal of Information Technology& Decision Making, Vol.2, No.2.
Walker, G., (2004), Modern Competitive Strategy, New York, NY: McGrraw-Hill/Irwin.
Wheelen, T.L. and Hunger D.J., (2004), Strategic Management and Business Policy,(9th ed.), Prentice Hall, Upper Saddle River.
http://www.answers.com/topic/growth-share-matrix (18 April 2007)
http://www.law.cornell.edu/wex/index.php/Joint_venture (23 May 2007)
http://www.thy.com.tr (10 June 2007)
97
http://www.tutor2u.net/business/strategy/bcg_box.htm (20 May 2007)
http://www.tutor2u.net/business/strategy/porter_five_forces.htm (11 May 2007)
http://www.wikipedia.com (10 May 2007)
