By Grant Hall. Founder of League Cultural Diplomacy
This post is part of the Going Global segment of where words fail.
It’s been said that one person’s problem is another’s opportunity. In this post I look at the roles of leadership and imagination when applying international business strategy.
In an earlier Going Global post I wrote about Michael Porter’s Five Forces analysis tool and how the tool can help you to decide if a particular market is right for you to enter.
When assessing a potential new market, Porter’s ‘Five Forces’ analysis framework asks it’s users to consider the existing intensity of industry rivalry in that market, the bargaining power of both suppliers and buyers in that market, and the threats of new entrants or substitutes coming into that market.
But what about entering a crowded market such as the airline industry, where you are a new entrant providing what your competitors might call a ‘substitute’ product?
Let’s apply some of Porter’s theory to the airline industry, and consider why Richard Branson has been successful in it.
When assessing the potential positioning of your business within an industry, Porter suggests you ask:
Is the industry analysis consistent with actual long-run profitability?
The stats tell the story of the airline industry; ‘over the last 30 years, more than 150 airlines have sought bankruptcy protection or disappeared’ and ‘the industry incurred losses of more than $30 billion from 2001 to 2006 and has gleaned only scarce profits since then’; profit margins typically run at less than one percent. So it appears that the industry analysis is not consistent with actual long-run profitability.
Porter also suggests you ask,
Are more-profitable players better positioned in relation to the five forces?
Profit levels in the economy airline industry per seat are fairly similar across the industry averaging less than four dollars a seat. This means that airlines must sell more seats to gain a greater market share – and in this industry there are few costs left to cut.
Since deregulation in 1992, many once profitable airlines have disappeared while others less well capitalised have thrived. Although higher capitalisation might increase bargaining power over suppliers, the threats of new entrants and substitutes is the same to all players in the industry, unless an airline has enough capital to ‘see off’ competitors over time. There are many likely future changes within each of Porter’s forces that will affect the airline industry; changing markets and demographics, war, epidemics and natural disasters are some examples, many of which are of an unpredictable nature.
It’s clear that the airline industry is a tough industry in which to thrive.
But why have people like Richard Branson been able to achieve success against the odds in industries that were already crowded when they arrived?
Branson writes extensively about the birth of his Virgin airline and is famously quoted as saying;
If you want to be a millionaire, start with a billion dollars and launch a new airline
From his writings we can learn that even in the 1990’s the rivalry among competitors and the bargaining power of buyers were high. Fuel suppliers in particular have always had strong bargaining powers.
There are always exceptions to any “rule” and Branson is often the exception. Most analysts would say that the duopoly that Airbus and Boeing hold over the industry would mean that the bargaining power is too strongly on their side for the industry to be considered ‘attractive’.
But Porter himself warns us of using his Five Forces framework ‘to declare an industry attractive or unattractive rather than using it to guide strategic choices’.
Difficulty accessing capital or the Airbus / Boeing duopoly didn’t seem to faze Branson too much – he writes about his innovative approach in acquiring finance and getting a good deal on planes:
However tight things are, you still need to have the big picture at the forefront of your mind. The most vivid proof of this came during the depths of the recession in 1992. At the time, I was trying to raise money to install individual seat-back videos in all our aircraft – I have always believed that Virgin should offer the best in-flight entertainment. We needed $10 million to install the equipment. Nobody at Virgin Atlantic could raise the necessary funding, and we were all sitting down at Crawley one day in despair, on the point of giving up, when I thought I would try one last gamble.
Nervously, I picked up the telephone, called Boeing and asked to speak to the CEO, Phil Conduit. I asked him whether, if we bought ten new Boeing 747-400s, he would throw in the individual seat-back videos in economy class. Phil was amazed that anyone was thinking about buying planes during that recession, and he readily agreed. I then called Jean Pierson at Airbus, and asked him the same question about the new Airbus. He, in similar financial straits also agreed. After a few further enquiries, we discovered that it was easier to get $4 billion credit to buy eighteen new aircraft than it was to get $10 million credit for the seat-back video seats. As a result, Virgin Atlantic suddenly had a brand new fleet of planes, the youngest and most modern fleet in the industry, at the cheapest price we’ve ever been able to acquire planes before or since.
These days, analysts might point to the need for capital to buy planes as a high entry barrier into the market, but imaginative operators have maneuvered around this by renting planes in order to reduce the capital outlays and in turn reduce entry barriers.
Paul Hawken, in his book ‘Growing a Business’ notes that:
The major problem affecting businesses, large or small, is a lack of imagination, not capital
I couldn’t agree more.
As Branson and the savvy operators of today have shown, a company’s bargaining power is as strong as a company’s strongest negotiator, entry barriers can be reduced by creative business strategy, and opportunities to innovate should be taken where needed.
I’d like to leave you with a Ted Talk by artist Janet Echelman. I’ve chosen this video because it’s about creativity, imagination, problem solving and the need to look at things from a different perspective. Many of the thought processes that Echelman discusses are the same processes that Branson would have applied solve his financing problem highlighted above. Branson himself had spent a lot of time working with creative artists (mostly musicians) and it’s clear some of their creativity and problem solving skills rubbed off on him.
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Endnotes and sources are listed on the next page.