ASSIGNMENT 3: CORPORATE STRATEGY
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DUE DATE: 04 OCTOBER 2012
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Read the following case study and then answer all the questions that follow.
KULULA.COM: SOUTH AFRICA’S LOW COST AIRLINE
Airline Kulula belongs to an elite group of corporate upstarts that have hit the tarmac and immediately caused larger rivals to scurry for cover. Owned by Comair, Kulula has caused South African Airways (SAA) much consternation – evident in the remarkable behavioural shift it has forced upon the country’s national carrier.
The now familiar luminous green brand kicked off in August 2001 with the intention of punting a “no-frills”, low-cost flight carrier to South Africa’s leisure travel market, hoping to turn a profit if it could find passengers for about 80% of the seats on all its flights. Two years later (2003), Kulula was on the verge of hitting the one million passenger mark. Importantly, it has snaffled 13% of the lucrative Johannesburg-Cape Town flight market, the key route for South African air carriers.
As at March 2010, in the South African domestic market, Kulula.com ranked second after the dominant national carrier South African Airways. While fellow low cost carrier 1time is a close follower, South Africa’s third low cost carrier Mango is substantially smaller, just over half the size of Kulula.
South African Domestic Airlines By Weekly Seat Capacity
(as at March 2010)
|
Number of Weekly Seats Filled
|
SAA |
152,891 |
Kulula.com |
49,400 |
1time |
44,745 |
BA (Comair) |
27,634 |
Mango |
26,219 |
Interlink Airlines |
1,425 |
Kulula’s CEO is reluctant to crow about the carrier’s success. “We saw that price was becoming a major factor in why and how people travel and we thought there was a strong business case for providing the most affordable flights possible,” he says. A strong case indeed.
Aiming to break even within a year Kulula started making profit within its first month – boosted by a champagne-tinted debut in which it poured over R3million into wooing publicity for its business.
Exactly how profitable Kulula is currently remains a closely guarded secret known only by a handful at Comair’s Kempton Park headquarters. Comair is 18% owned by global heavyweight British Airways and in February 2003 Comair reported a 15% increase in turnover to R708 million for the six months to the end of February. Although Comair refused to provide a breakdown of its profits, this increase was believed to have emanated from the success enjoyed by Kulula – into which Comair poured R70 million in development funds.
Comair’s MD says the breakdown “has not been disclosed”, but confirms that Kulula “is making a profit.” Comair’s MD also brushed off fears that Kulula has eaten dangerously into Comair’s own market share in the South African market. “Kulula has undeniably cannibalised some of British Airways-Comair’s business. Some customers clearly find it more palatable than the Comair flights. But in the end, both Kulula and Comair are very different businesses, and are serving different markets,” he said.
Kulula’s profitability stems from the fact that its belt is tightened to the maximum. The company cut costs by providing a basic flight service and by slashing its technology costs through an online booking system. It has no business class, no free food or drink, no airport lounges, no refund for cancellations and most ticket sales are electronic. But hitting the millionth passenger mark in 2003, within two years of its launch, made it clear that Kulula had adopted an approach that worked.
Remarkably, Kulula has also become South Africa’s largest online retailer. The carrier takes in millions through the internet, as over 65% of its tickets are booked through www.kulula.com, a website which has earned kudos for exemplifying the Zulu meaning of its name – ‘easy’. The company was able to edge out Kalahari.net and bidorbuy.co.za in the online sales stakes primarily due to the hefty average value per transaction of about R1000. The website cost R1million to develop, a far cry from the millions that SAA was estimated to have ploughed into its flysaa.com website.
“The cost savings ensure,” says Kulula’s CEO, “the cheapest flights possible in South Africa.” A return flight on the popular (and money-spinning) Johannesburg – Cape Town route costs upwards of R1050, the new Johannesburg-Port Elizabeth route costs about R800, while the Durban-Johannesburg route costs upwards of R630. By contrast, an SAA Johannesburg-Cape Town flight starts at about R1500.
Although both parties will deny this, a low-intensity price war was waged between SAA and Kulula, evoking memories of the 1998 tussle in which SAA tackled Comair, Nationwide and Sunair. Countering the threat posed by the newcomer, SAA launched a “red-eye” late night flight for R627 return in 2003 – but only for flights on Tuesdays and Saturdays. Notably, SAA’s advertising campaign for their “red-eye” flights took a blatant swipe at Kulula by mentioning the fact that food and drinks are handed out free-of-charge on their flights (inviting the comparison with Kulula’s onboard meal service, for which passengers must pay). Kulula wasn’t slow to take up the gauntlet.
It immediately launched its own “red-eye” flights for R500 one way – more expensive than SAA, but flying on Fridays and Sundays, which are far more enticing and easier to book. Either way, this competition can only be good for consumers.
Over the last few years, overseas carriers like Ryanair and EasyJet in the United Kingdom and Virgin Blue in Australia have made air travel affordable for the masses. For South Africans bred on a regular diet of expensive flight options, Kulula’s arrival provided a welcome new alternative. “I think we really have changed the South African market,” says Kulula’s CEO. “By isolating price as a key factor in how often people fly and targeting this we’ve brought a new market to air travel and also encouraged the existing market to fly more often,” he says.
The growth in the market is borne out by figures released by the Airports Company of South Africa, which showed that air travel is growing by 12% on average. But is this really as cheap as air tickets can get? After all, the UK market is elbow-to-elbow with advertisements to fly all over Europe and back for less than £50.
Kulula says flight prices are at their absolute minimum right now. “It’s really as cheap as it can go. You can’t compromise on the class of the service and the safety factors. And for us, about 55% of our costs are from abroad and paid in dollars,” comments Kulula’s CEO. He adds that South Africa has a far smaller market than the UK, so ticket prices must accommodate the possibility of emptier flights. Either way, Kulula claims it is 40% cheaper on average than other carriers – this is illustrated by the market space it has grabbed from the usual suspects.
Kulula’s CEO says that the carrier attained its 13% market share on the Johannesburg-Cape Town route through a rapid network expansion. When it launched amidst much fanfare in 2001, Kulula took to the runway only three times a week between Johannesburg and Cape Town – and then with only one Boeing 727. As at February 2010, Kulula’s fleet of aircraft had increased to nine, with eight new aircraft on order. Its route network has also expanded – for example, in May 2003 Kulula launched two new routes: Johannesburg-Port Elizabeth and Durban-Cape Town.
In 2002 Kulula embarked on a different tack entirely by offering a car hire service for people using its flights. In collaboration with Imperial Car Rental, Kulula offered its return flight passengers the opportunity to rent a Toyota Tazz for R165 a day, including unlimited mileage. More recently, Kulula has introduced a budget hotel accommodation booking service.
Kulula then is clearly well established. So what of future plans? “Well we think the business market is a huge potential market for us, especially the smaller business person and small companies,” says Kulula’s CEO. This line of thinking is commendable, considering that over 80% of South Africa’s air travel market consists of business travel.
Kulula’s CEO says that the medium sized companies are becoming acutely aware of maintaining costs, while for the small entrepreneurs, cheaper flights might actually convince them to take the aerial route instead of driving between cities. The burgeoning small and medium sized enterprise market in the Eastern Cape, for example, was one of the major reasons driving the launch of the Johannesburg-Port Elizabeth route.
To lure the business traveller, Kulula introduced an innovation uncommon in the low-cost flight arena. For a very small fee, booked flights can be changed as many times as a passenger wants – a bonus for the business people who have either run late in meetings or want to get home quicker. “We saw that the average flight reservation is changed 2 ½ times on average. So we became the first low-cost airline in the world to allow passengers to change their flights online up to two hours before they are due to fly,” says Kulula’s CEO.
The company has also placed a strong emphasis on punctuality with over 70% of its flights leaving at the time advertised. “This is much better than most our our competitors and actually, when one looks at the figures over 90% of our flights leave within 15 minutes of the scheduled time,” comments Kulula’s CEO.
Prices aside, there is another reason why Kulula has become the equivalent of the generic medication for cheap air travel in South Africa. Through its luminous green brand, Kulula has pitched itself as a fresh, dynamic company without the stuffy pretensions of the jacket-and-tie SAA corporate set. Through this, the carrier aligned itself with younger companies such as Outsurance. “We wanted to create a sense of fun, wackiness and informality about the brand. Those who don’t expect much from us service-wise are then pleasantly surprised,” comments Kulula’s CEO.
To continue to eat into SAA’s market share, Kulula will need all the help it can get. The stakes are high and for its low-cost service to work, it has to keep its flights more than 80% full, a considerable challenge when one considers that other low-cost carriers like Intensive Air have crumbled under the cost pressure. But at the moment, Kulula is meeting this 80% target and beating the SA industry average of 65% in the process.
Source: Adapted from www.kulula.com , www.anna.aero.com and Times Live, 2010
Question 1 (25)
“Porter's five-forces model of industry competition is by far the most widely-used approach in industry and competitive analysis”.
Using
Porter’s five-forces model
, critically analyze Kulula’s operation within the air travel industry.
Question 2 (20)
2.1 Which of Michael Porter’s
generic competitive strategies
has Kulula chosen? Critically analyze this choice of strategy that has led to its success. (10)
2.2 Outline the branding strategy employed by Kulula. (10)
Question 3 (15)
The air travel industry is currently in its lifecycle stage of maturity.
3.1 Critically discuss whether Kulula’s strategies are appropriate to the
stage of maturity
in the air travel life cycle. (10)
3.2 If Kulula is still operating when the air travel industry reaches the
stage of stagnation and decline
, explain how Kulula should adjust its strategy. (5)
Question 4 (20)“Strategic management essentially involves strategic alignment; a dynamic process whereby an organization’s strategy is calibrated with its culture, leadership, organizational structure, and governance”
4.1 Critically discuss the concept of
strategic alignment
, and analyze the extent to which Kulula has achieved strategic alignment. (10)
4.2 Critically discuss the
factors
which could bring about
strategic misalignment
within Kulula, detailing the negative impact which such misalignment would have for the airline. (10)
Question 5 (20)
In order to effectively monitor and evaluate progress made against strategic goals, it is important that Kulula conduct enterprise performance management.
Prepare a report for the Kulula’s
CEO
in which you provide guidelines on how to measure performance against the company’s strategic goals.
Assignment Guidelines
- Word Limit: Your assignment (excluding index, cover page, list of references and appendices)
must not exceed 6000 words. Your assignment should include a Table of Contents page.
- Text: Font: Arial or Times New Roman (12), Spacing: 1½ lines.
- All text must be justified at each margin.
- Your answers must include any theories, charts, tables, appendices or exhibits necessary to support your analysis and recommendations.
- References -
At least 10 sources of reference
(textbooks, journals, press reports, internet, etc.) must be included in your list of references.
The Harvard system of referencing
must be used.
- You MUST use theory/literature to support your discussion/observation and opinions.
- Ensure that readings are not merely reproduced in the assignment without original critical comments and views.
- In answering each question you should give attention to the structure of their answers. Each answer should
begin with an introduction
and
end with a conclusion. Learners should also give attention to the logical structuring of their arguments so as to ensure the coherent flow of discussion.