Assignment One Task (One) 1) Cost Leadership Strategy Definition

Companies that choose a cost leadership strategy offer relatively standardized products with features or characteristics that are acceptable to customers. In other words, with a minimum level of differentiation and also at the lowest competitive price. This means that companies offer standardized to an industrys typical customer. Customers receive value when a company successfully implements a cost leadership strategy. Companies that wish to be successful by following a cost leadership strategy must maintain constant efforts aimed at lowering their costs which relative to competitors cost and creating value for customers. Cost reduction strategies include: Building an efficient scale facilities Establishing tight control of production and overhead costs Minimizing the costs of sales. Product research and development, and service. Investing in state of the art manufacturing technologies.

In simply, cost leadership strategy is a type of competitive strategy with which the organization aggressively seeks efficient facilities, cuts costs, and employs tight cost controls to be more efficient than competitors. Undercut competitors prices and still offer comparable quality and earn a reasonable profit. Successful strategy to defend against the five competitive forces. Such protected from powerful customers and suppliers, because customers cannot find lower prices elsewhere, and other buyer or potential new entrants occur, surely get more market share. Also acts as a barrier against new entrants and products.

2) Porters Competitive Forces and Strategies

Porter M. E. proposed that business-level strategies are the result of five competitive forces in the companys environment. Five Competitive Forces:
a)

Potential new entrants

Companies successfully following cost leadership strategies generally must produce and sell in large volumes to earn above- average returns. And, with a continuous focus on efficiency and reduce the costs, low cost leadership companies creates barriers to entry. New entrant must either enter the industry at large scale or to be satisfied with average profits until they move sufficiently far down the experience curve to match the efficiencies of the low cost leader. For example, capital requirements and economies of scale are main two potential barriers. Internet technology reduces barriers to entry. However, they also have its disadvantages side. If an incumbent firm is a cost leader, the new entrants may have to invest heavily to reduce their costs prior to entry. Often, new entrants will enter using another business strategy rather than attempting to compete on costs. Bargaining power of buyer

b)

Achieving the low cost position provides some protection against powerful customers who attempt to drive down prices. If customers attempt to drive prices below the cost of the nest most efficient company, that company might choose to exit the market rather than remain and earn below average profits, leaving the low cost with a monopoly position. If that happens, customers would lose any bargaining power, as Monopoly Company would be in a position to raise prices. For example, the internet provides a wide array of information about product, which makes customers become empowered customers with increasing bargaining power. Internet shifts greater power to end consumers. Cost leadership can also reduce the threat of buyers. Powerful buyers are a threat to firms when they insist on low prices or higher quality and service from their suppliers. As opposed to, lower prices threaten firm revenues. Higher quality can increase a firm's costs. Cost leaders can have their revenues reduced by buyer threats and still earn normal or above-normal profits. These firms can also absorb the greater costs of increased quality or service and may still have a cost advantage over their competition.
c)

Bargain power of supplier

Because they have achieved the lowest cost position in the industry, the cost leadership strategy enables a company to absorb a greater amount of cost increases from powerful suppliers before it must raise prices charged to customers. This may enable the company to be alone among its competitors in earning above average returns. In addition, a low cost leader that also has a dominant

market share may be in position to force suppliers to lower prices or to hold down the level of price increases, and thus reduce the power of suppliers.

For example, procurement over the web tends to give a company greater power over supplier, but the web also gives suppliers access to a greater number of customers, as well as the ability to reach end users. Overall, the Internet trends to raise the bargaining power of suppliers.

Suppliers can become a threat to a firm by charging higher prices and reducing the quality of the goods and services they supply. However, when a supplier sells to a cost leader, that firm has greater flexibility in absorbing higher-cost suppliers than does a high-cost firm. Higher supply costs may destroy any above-normal profits for high-cost firms but still allow a cost-leader firm to earn an above-normal profit.

d)

Threat of substitute products

The low cost leader is in a more attractive position relative to substitute products than are other companies in the industry. To retain customers, the low cost leader can more easily reduce prices to maintain the price value relationship and retain customers. For example, internet creates new substitution threats. For example, traditional travel agencies have been hurt by the offering of lowcost airline tickets over the Internet.

e)

Rivalry among competitors

Achieving the lowest cost position means that a companys competitors will hesitate to compete on the basis of price because, in the event of a price war, the low cost company will continue to earn profits after its competitors compete away their profits. Thus, for example, by cost and product differentiation, whilst also with the levelling force of the Internet and information technology, it has become more difficult for many companies to find ways to distinguish themselves from their competitors, so rivalry has intensified. In relate with their disadvantages, this threat also can be reduced through two choices of pricing strategies. First, the cost-leader can set its price equal to the price of higher-cost competitors. However, by doing this, it will reduces the chance that competitors that imitate the low-cost firm. Because of, keeping prices equal to a competitor's prices does sacrifice market share and sales volume. Thus in result, the cost-leader firm earns an above-normal profit at this competitive price.

Second, the low-cost firm can price its goods or services below the prices of its high-cost rivals. The lower price of the low-cost firm will attract numerous customers and increase its market share and sales volume but the cost is a lower profit earned. This strategy sends a signal to competitors that lower costs are possible. Such a signal may motivate competitors to try to reduce theirs costs.

3) The Foundation of Air Asia Company

Asia believes in the no-frills, hassle-free, low fare business concept and feels that keeping costs low requires high efficiency in every part of the business. Through the corporate philosophy of Now Everyone Can Fly, Air Asia sparked a revolution in air travel with more and more people around the region choose Air Asia. In the competitive airline industry, Air Asia keeps improving their supportive and constructive management by being supportive and responsive in listening to its employee for any ideas for reducing cost. And as their philosophy Everyone Can Fly Air Asia its weapon to corner its other competitor is effect in reducing cost boosted Air Asia to be one of the top in low cost air carrier competition. Air Asia is leading the way for developing low cost airlines and its promises to revolutionize the international market place. And for now, many low cost airline companies in some country have adopted the strategies innovated by Air Asia successfully

Regarding on that, Air Asia Company believe by through on their excellent regional passenger base, high levels of service quality and committed customer relationships would leaves them well positioned to continue to deliver cost savings and growth significantly to the Air Asia whilst increased profitability. However, attaining low costs requires high efficiency in every part of the business and maintaining simplicity. Therefore Air Asia had incorporated best industry practices in every process system, which through the implementation of the following key strategies: Safety First Safety is the single most important criterion in an area that Air Asia will never compromise on. Air Asia had complied with the conditions set by regulators in all the countries where the airline operates. Others than that, Air Asia had also partners with the worlds most renowned maintenance providers to ensure that theirs fleet is always in the best condition.

The power of supplier is high due to the airplane manufacturers only Boeing and Airbus. In addition, the switching cost for the Boeing and Airbus is pretty low because it can sell same standards to another airline. However, to make up an airplane needs high technique and specialist so it is rarely possible for Air Asia to extend and integrate their operation into supplier part.

High Aircraft Utilization In relates with this term, Air Asias high frequency flights have made it more convenient for guests to travel. Air Asia as the fastest in the region, had implements as a quick turnaround of 25 minutes. This has resulted for Air Asia in high aircraft utilisation, lower costs and greater airline and staff productivity, whilst enable them to gain more profits through removed frills service and removed chair booking and extensive crew drilling on performing quick turnaround.

Air Asia had replaced their aging Boeing B737 aircraft with the Airbus A320 aircraft in Thailand and Indonesia. This was led to an all Airbus fleet provides them with an opportunity to stamp their dominance as the ASEAN airline throughout the Air Asia Group by the end of 2010. In addition, with also their unmatched network connectivity, frequency and full-fledged Airbus operation along with their low cost operations and low-fare model, so Air Asia will enjoy a substantial edge over competitors around them.

Low Fare, No Frills Air Asia targets guests who are prepared to do away with frills such as meals, frequent flyer miles or airport lounges in exchange for fares lower than those currently offered without comprising on quality and service. For example, the guests of Air Asia have the choice of buying exclusively prepared meals, snacks and drinks from their in-flight service at an affordable price. Air Asia put emphasis on lowering all avoidable costs to sustain low fares and remain profitable, even on low yields. What Air Asia do is cut the cost of operating the flights on their chosen routes by flying to and from airports that offer cheaper take-off and landing fees. Besides, Air Asia end free meals and drinks during flights as travellers do not expect excellent service. Also, Air Asia does not allocate specific seats to passengers and there is only one class. Streamlined Operations

One of the key for Air Asias success was made by the process as simple as possible. Air Asia was worked towards a single aircraft fleet, this actually greatly reduced duplicating manpower requirements as well as stocking of maintenance parts.

The area is vast, the cultures diverse, the economies vibrant and the travel links well, thats where Air Asia spotted the opportunity. Some are innovative ideas inspired by the talented people of Air Asia and some are simple but functional moves that came from other sources.

Lean Distribution System Air Asia offers a wide and innovative range of distribution channels to make booking and travelling easier for its guests. Air Asias ticket-less service provides a low cost alternative to their overall guest in issued printed tickets.

Point to Point Network The LCC model adopts the simple point-to-point network. In Air Asia, their flights are short haul (four-hour flight radius or less), whilst their sister airline Air Asia X focuses more on the medium to long haul flights (more than four-hour flight radius). The underlying business is to fly a person from point A to B.

4) Air Asias Value

Air Asias Vision To be the largest low cost airline in Asia and serving the 3 billion people who are currently underserved with poor connectivity and high fares. Air Asias Mission To be the best company to work for whereby employees are treated as part of a big family. Create a globally recognized ASEAN brand. To attain the lowest cost so that everyone can fly with Air Asia. Maintain the highest quality product, embracing technology to reduce cost and enhance service levels. Air Asia builds and sustains its competitive advantage by providing services at a

price that is simply lower than competitors price. Operation effectiveness and outstanding efficiency are two main characteristics of low cost businesses including Air Asia.

5)

Air Asia Financial Analysis

Counting the profit from operation, Air Asia gained 281,432,000 RM, an increase of 217.63% from 2008 data. After deducted with depreciation and all taxes, the company experienced 25.96% increased of profit after tax in 2009 compared to 2008 data. Based on its impressive growth of financial performance, we can see that Air Asia has implemented the correct business model to win the competition within the industry.

6) Value Chain Analysis

The central objective is to achieve bigger cost advantages than the rivals by continuously searching areas for cost reduction along its value chain. By further analysed Air Asias value chain, one can actually determine how Air Asia creates low cost advantages along its value chain. These cost advantages constitute Air Asias order winner in competing with its rivals as they enable Air Asia to provide the lowest possible price to the price sensitive customers.

In LCC industry, cost is the competitive priority and it determines market position. The goal of these activities (Inbound logistics, Operations, Outbound logistics, Marketing and Sales, and Service) is to create value that exceeds the cost of providing the product or services, thus generating a profit margin.

Margin

Support

Human Resource Management Technology Development Procurement Infrasructure

Activities

Outbound Logistics

Marketing & Sales

Informal Logistic

Operators

Service Margin

Primary Activities The value chain analysis describes the activities the organization performs and links them to the organizations competitive position. It evaluates the value in each particular activity added to the organizations products or services. The performance of Air Asia could be evaluated by valued chain model. a) Inbound Logistics It involves all the activities required to receive, store, and inputs for producing outputs. Air Asia, by having a single, their standard aircraft model throughout the whole fleet to helps them reduced their overall inventory costs, delivers greater productivity, and increases fuel efficiency. In additional, all the aircraft can share to use the same tool, spare parts and same skilled manpower for maintenance and repair purpose. This will help to reduce the stock of part maintenance, less training for employee and servicing cost. Ultimately through replaced with Airbus A320, Air Asia was overcome the increase of oil price by structurally reduce cost and enhance customer services with better quality aircraft. These Airbus A320 are ultra modern, more fuel efficient and environmentally friendly aircraft with unparalleled levels of passenger comfort, serviceability and reliability. Air Asia has received positive

feedback that their passengers love this aircraft. These aircraft have reduced operational cost significantly and helped to deliver strong profits. b) Operations It processes inputs to create valuable products and services. Air Asia was stringent about standards and procedures, but maintains a generous degree of humour. Air Asia realizes that keeping the passenger safe is of paramount importance. Air Asia has once again emerged as market leader in the airline industry. The low fares airline came up tops on the Boeing's list for having the best utilization and dispatch reliability amongst players in the airline industry. What this means is that Air Asia successful in operating more flights out of its aircraft schedule and on time for all theirs departures. Besides, Air Asia conducts line checks at transits, night-stops, and "A" checks, low level maintenance checks that are conducted once a month. Department of Civil Aviation Malaysia also appreciate the high maintenance standards of Air Asia. Superior quality comes with the aesthetics and every cabin crew demonstrates skill and talent in carried out their tasks efficiently. Air Asia pilots practice standard applications, technical and behavioral tests, ground school training, safety and emergency procedural training. c) Outbound Logistics It involves delivering the product and service into the distribution channel and then to the final consumer. Air Asia currently operates 13 aircraft on a 12 aircraft schedule. Air Asia's aircraft interior was outfitted with signature red carpeting and plush leather seats to enable its guests to travelled comfortably. Penang and Singapore to our previous international routes to Kuala Lumpur, Kota Kinabalu and Bangkok.2009 was a very challenging year for Indonesia Air Asia. Great efforts were successfully made to refocus the business from mostly domestic to mostly international routes. d) Marketing and Sales The excellent utilization of IT have directly contributed to their promotional activities, brand building exercise as well keep the cost low by enabling direct purchase of tickets by consumer thus saving on airline agent fees. The power of buyer is moderately high due to almost no switching cost for customers. Customers can compare each airline by the Internet so the information about the price and service is quite clearly.

Furthermore, the other system that Air Asia implemented is customer reservation system (CRS). It is an integrated web-based reservation and inventory system. It includes Internet, call center, airport departure control and more. It is a direct sales engine that effectively eliminates the travel agents and the sales commissions that need to be paid to them.

By using this system, Air Asia can reduce the cost and eliminates the travel agents and the sales commission to pay them. After that, this system are very customer friendly because the entire customer if want to buy or make a reservation a ticket directly via online, and no need to come to the ticket counter. In conclusion, by using this system effectively, efficiency, customer satisfaction, fast and secure in buying a ticket already met. It means the lowest cost can possibly achieve. Their main ancillary driver is Baggage Supersize, excess baggage and cargo. Air Asia also launched Air Asia-CIMB Savers Account and Air Asia Courier to add to their already big ancillary drivers such as Air AsiaGo.com, Air Asia Insure, Air Asia Caf, Pick a Seat, Air Asia Megastore, in-flight merchandise and much more. In additional, Air Asia K-Bank Credit Card by Thailand Air Asia and Karsikornbank provide overall guests in offered more privileged when flying with Air Asia Thailand e) Service Air Asias one of the few airlines that has the shortest turnaround time. It operates with a 25 minutes turnaround time, hence allowing them benefit from more flights a day. Air Asia also provided shuttle bus service for customer between main airport and secondary airport. Air Asia learnt a lot from their passengers feedback. Air Asia believe that being transparent can encourage itself to maintain a high quality service for all passengers. They provided the fastest in-flight services in the region. Within 25 minutes, new carts loaded with food, beverages and high-quality merchandise are efficiently stowed on their aircraft, ready for sale after takeoff. .In addition, with the Citibank Air Asia Credit Card, Air Asia provided points which are redeemable for Air Asia flights. Card members will also enjoy priority booking during promotional campaigns. Frequent services are needed in order to justify the smaller capacity. Such high frequency of service can also attract business travellers since they can catch the connecting flights on time without waste their time.

7) SWOT Analysis( Strengths and Opportunities)

SWOT analysis that Air Asia have is on of the major component to make Air Asia more strength in their business and can make they are able to compete with the same low cost carrier airline industry.

a) Strengths
Air Asia has a very strong management team with strong links with governments and airline industry leaders. This is partly contributed by the diverse background of the executive management teams that consists of industry experts and ex-top government officials..T he strong links with the government and airline industry leaders is one of the strength of Air Asia Company. For example, Shin holds a 50% stake in Thai Air Asia. This has helped Air Asia to open up and capture a sizeable market in Thailand. And also, with their strong working relationship with Airbus, they managed to get big discount for aircraft purchase which is also more fuel efficient compared to Boeing 737 planes which is being used by many other airlines The management team is also very good in strategy formulation and execution. The strategy that they have formulated at the beginnings was a clever blend of proven strategies by other low cost airlines is US and Europe. They are operational strategy, such as no frills, landing in secondary airport), people strategy and branding strategy which was linked with other service providers like hotels, car rental). Air Asias brand name is well established in Asia Pacific. Besides the normal print media advertising and promotions, Air Asias top management also capitalized on promotions through news by being very media friendly and freely sharing the latest information on Air Asia as well as the airline industry. Their partnership with other service providers such as hotels and hostels, car rental firms, Citibank (Air Asia Citibank card) has created a very unique image among travellers. Air Asias local presence in few countries such as Indonesia and Thailand has successfully elevated the brand to become a regional brand beyond just Malaysia. The links with Manchester United and AT&T Williams Formula One team have further boosted their image to a greater extend beyond just the this region Air Asia is the low cost leader in Asia With the help of Air Asia Academy, Air Asia has successfully created a low-cost airline mentality among their workforce. The workforce is very flexible and high committed and very critical in making Air Asia the lowest cost airline in Asia.

The excellent utilization of IT The excellent utilization of IT have directly contributed to their promotional activities, brand building exercise as well keep the cost low by enabling direct purchase of tickets by consumer thus saving on airline agent fees

b) Opportunities
There are 2 major events that are taking place now or going to take place in less than 6 months from now. Oil Price First, is the ever-increasing oil price. The increasing oil price at the first glance may appear like a threat for Air Asia. But being a low cost leader, Air Asia an upper hand because its cost will be still the lowest among all the regional airlines. Thus, Air Asia has a great opportunity to capture some of the existing customers of full service and other low cost airlines customers. However, there will be also some reduction in overall travel especially by casual or budget travelers. ASEAN Second, is the ASEAN Open Skies allows unlimited flights among ASEANs regional air carriers beginning December 2008. This will definitely increase the competition among the regional airlines. However, with the first mover advantage as well as its strengths in management, strategy formulation, strategy execution, strong brand and low-cost culture among its workforce, this agreement can be seen as more of an opportunity.

8) Significant Resources
Highly skilled employees They were the source of all capabilities that Air Asia possessed. The experience and knowledge which they had were hard to imitate by other competitor. Capabilities on Reduce Cost These were the competitive weapon that would be used by AA to corner other competitor. Their effect in reducing cost boosted AA to be one of the top in low cost air carrier competition.

9)
Cost Effectiveness Efficiency Reliability

 Cost Effectiveness

Higher frequency of service

Air Asia put emphasis on lowering all avoidable costs to sustain low fares and remain profitable, even on low yields. What Air Asia do is cut the cost of operating the flights on their chosen routes by flying to and from airports that offer cheaper take-off and landing fees. Besides, Air Asia end free meals and drinks during flights as travelers do not expect excellent service. Also, Air Asia does not allocate specific seats to passengers and there is only one class. Efficiency Using a ticket-less online booking system and telephone booking systems, Air Asia can save the travel agents commissions. Selected airports are generally close to large or international airports. Besides, the Air Asia strives to offer a very simple product, for example by just offering one-way tickets, without any frequent flyer points or rebates. Reliability Air Asia chooses secondary and regional airport destinations instead of a congested main airport. Generally, less busy airports can be expected to provide higher rates of on- time departures, shorter turnaround times. Besides, without the need to load and unload cargo, the turnaround time of an aircraft was reduced from 30 to 25 minutes hence allowing the airline to benefit from more flights a day. Higher frequency of service In general, Air Asia offers point-to-point flights on short-haul routes. Higher plane utilization is resulted from short turnaround time and point-to-point routes. Air Asia normally flies more often than other full service carrier Air Asia has once again emerged as market leader in the airline industry and possesses all the critical success factors that we have identified. The low fares airline came up tops on the Boeing's list for having the best utilization and dispatch reliability amongst players in the airline industry. What this means is that Air Asia is successful in operating more flights out of its aircraft schedule and is on time for all its departures.

Conclusion

Air Asia (AA) has exposed us an insightful example in showing how a keen and critical strategic movement may drive a company that was almost bankrupt back into shape. While Air Asia management was provided a suitable business environment, its employees demonstrated a highly productive and efficient performance in running the business and reducing cost. Air Asia decision on using uniform aircraft also put into account. It emphasized the principle of economies of scale and also it will eventually reduce learning curve. Undoubtedly, the Airbus replacement programme is the biggest contributor to Air Asia Company's strong performance. The superior operating economics and reliability of the Airbus A320 aircraft has elevated their customer service delivery to a higher level and the aircraft is proven popular among their guests in Air Asia. As the number of Airbus A320 aircraft in fleet increases, Air Asia had gained that opportunity in continue to achieve greater reduction for their operational costs and further extend their competitive edge. However, Air Asia actual main strength was based in its innovative ways to keep the cost low which was hard to imitate. With those entire factors combined together, we can seen Air Asia develop competitive advantage that brought Air Asia to be the contender as market leader in the competition.

10)

Is strategy of Air Asia sustainable

These were the product of AA employees creativity. All the capability that Air Asia possessed required high skill from its conductor. Without sufficient knowledge, it will only give small benefit to Air Asia on low cost industry. Once the strategic positioning and direction have been defined, then we are going to view this sustainability of Air Asia in providing a company providing a platform for future growth and to execute current strategy. A position will be more sustainable the more it forces potential imitators to be inconsistent with their own current image or reputation, activities or coordination and control mechanism

These inconsistencies will deter the potential imitator from matching particular levels of quality and cost

Analyze processes and infrastructure Air Asia build up their competitive advantage form providing customer lowest price and omit the unnecessary service. For example, Air Asia install kiosks to speed up check-in. With those innovations, it truly making aviation become more convenient. The customers and the operations are around Asia. Air Asia use IT to connect and integrate those end-to-end support processes. Evaluate people and partners As a member of the AirAsia Team have highly competitive and attractive compensation packages. In order to provide customer excellent service, AirAsia arrange a series of training course to their in-house flight attendant. The training courses include awareness on safety standards, aviation terminology, in flight service procedures, product knowledge and so on. AirAsia chose many kinds of field partners as their complementors. Their partnership can divide into two main kinds: direct partners and indirect partners. Direct partners have strong relationship with the airline, for example, hotels, travel agencies and so on. And indirect partner included Facebook, Twitter,

REFERENCES
Strategic Management, Raphael Amit, Professor at Wharton University of Pennsylvania,US Strategy formulation and implementation:
Thompson, Jr & A.J. Strickland III, 1992 Tasks of the General Manager, by Arthur A.

Air Asia (2005). Corporate Web Site. Retrieved on April 10, 2005, from
http://www.airasia.com/