2019

654269

JOHN
GATHURI
MBUGUA

[BUS 4090:STRATEGIC
MANAGEMENT]
Contents
INTRODUCTION .................................................................................................................... 3
HISTORY OF AMERICAN AIRLINES ................................................................................. 3
OVERVIEW MICHAEL PORTERS FIVE FORCES ............................................................. 4
THE 5 FORCES.................................................................................................................... 4
Competition in the Industry .............................................................................................. 4
Potential of New Entrants Into an Industry ...................................................................... 5
Power of Suppliers ............................................................................................................ 5
Power of Customers .......................................................................................................... 5
Threat of Substitutes ......................................................................................................... 5
MICHAEL PORTERS FIVE FORCES IMPACT ON AMERICAN AIRLINES ENTRY
IN TO THE KENYAN MARKET ....................................................................................... 6
Competition in the Industry .............................................................................................. 6
Potential of New Entrants into an Industry....................................................................... 6
Power of Suppliers ............................................................................................................ 7
Power of Customers .......................................................................................................... 7
Threat of Substitutes ......................................................................................................... 8
COMPETITIVE ADVANTAGES OF AMERICAN AIRLINES ............................................ 8
What is competitive advantage? ........................................................................................... 8
AMERICAN AIRLINES COMPETITIVE ADVANTAGES .............................................. 9
Cost competitive advantage .............................................................................................. 9
Product/Service Differentiation ........................................................................................ 9
RECOMMENDATION ............................................................................................................ 9
CONCLUSION ......................................................................................................................... 9
REFERENCES ....................................................................................................................... 11
AMERICAN AIRLINES ENTRY TO KENYA
INTRODUCTION
In this paper I will be looking at American Airlines Inc. and its planned entry into the Kenya
market in 2019. I will start off by looking at the history of American Airlines and then look
at how Michael Porters five forces namely:

1. Competition in the industry

2. Potential of new entrants into the industry
3. Power of suppliers
4. Power of customers
5. Threat of substitute products

will impact American Airlines as they enter the Kenyan market. I will also discuss the potential
competitive advantages they may have when they enter the Kenyan market.

HISTORY OF AMERICAN AIRLINES

American Airlines was started in 1930 via a union of more than eighty small airlines. The two
organizations from which American Airlines was originated were Robertson Aircraft
Corporation and Colonial Air Transport. The former was first created in Missouri in 1921, with
both being merged in 1929 into holding company The Aviation Corporation. This in turn, was
made in 1930 into an operating company and rebranded as American Airways. In 1934, when
new laws and attrition of mail contracts forced many airlines to reorganize, the corporation redid
its routes into a connected system, and was renamed American Airlines. Between 1970 and
2000, the company grew into being an international carrier, purchasing Trans World Airlines in
2001.

In 2011, due to a downturn in the airline industry, American Airlines' parent company AMR
Corporation filed for bankruptcy protection. In 2013, American Airlines merged with US
Airways but kept the American Airlines name, as it was the better recognized brand
internationally; the combination of the two airlines resulted in the creation of the largest airline
in the United States, and ultimately the world.

OVERVIEW MICHAEL PORTERS FIVE FORCES

The model of the Five Competitive Forces was developed by Michael E. Porter in his book
„Competitive Strategy: Techniques for Analyzing Industries and Competitors“in 1980. Since
that time it has become an important tool for analyzing an organizations industry structure in
strategic processes. Porter’s model is based on the insight that a corporate strategy should
meet the opportunities and threats in the organizations external environment. Especially,
competitive strategy should base on and understanding of industry structures and the way
they change. Porter has identified five competitive forces that shape every industry and every
market. These forces determine the intensity of competition and hence the profitability and
attractiveness of an industry. The objective of corporate strategy should be to modify these
competitive forces in a way that improves the position of the organization. Porters model
supports analysis of the driving forces in an industry. Based on the information derived from
the Five Forces Analysis, management can decide how to influence or to exploit particular
characteristics of their industry.

THE 5 FORCES

Competition in the Industry

This force refers to the number of competitors and their ability to undercut a company. The
larger the number of competitors, along with the number of equivalent products and services
they offer, the lesser the power of a company. Suppliers and buyers seek out a company's
competition if they are able to offer a better deal or lower prices. Conversely, when competitive
rivalry is low, a company has greater power to charge higher prices and set the terms of deals to
achieve higher sales and profits.
Potential of New Entrants Into an Industry

A company's power is also affected by the force of new entrants into its market. The less time
and money it costs for a competitor to enter a company's market and be an effective competitor,
the more a company's position may be significantly weakened. An industry with strong barriers
to entry is an attractive feature for companies that allow them to charge higher prices and
negotiate better terms.

Power of Suppliers

This force addresses how easily suppliers can drive up the cost of inputs. It is affected by the
number of suppliers of key inputs of a good or service, how unique these inputs are, and how
much it would cost a company to switch from one supplier to another. The fewer the number of
suppliers, and the more a company depends upon a supplier, the more power a supplier holds to
drive up input costs and push for advantage in trade. On the other hand, when there are many
suppliers or low switching costs between rival suppliers a company can keep input costs lower
increasing profits.

Power of Customers
This specifically deals with the ability that customers have to drive prices down. It is affected
by how many buyers or customers a company has, how significant each customer is, and
how much it would cost a company to find new customers or markets for its output. A
smaller and more powerful client base, means that each customer has more power to
negotiate for lower prices and better deals. A company that has many, smaller, independent
customers will have an easier time charging higher prices to increase profitability.

Threat of Substitutes
Substitute goods or services that can be used in place of a company's products or services
pose a threat. Companies that produce goods or services for which there are no close
substitutes will have more power to increase prices and lock in favorable terms. When close
substitutes are available, customers will have the option to forgo buying a company's
product, and a company's power can be weakened.
MICHAEL PORTERS FIVE FORCES IMPACT ON AMERICAN AIRLINES
ENTRY IN TO THE KENYAN MARKET

Competition in the Industry

As seen earlier, competition in industry refers to the number of companies that offer similar
services. In this case we will look at the airline industry in the Kenyan market. In Kenya the
level of competitive rivalry in the airlines industry is high, with Kenya having more than 44
airlines in operation in the country. The competition ranges from big international airlines
such as Qatar airways and Emirates which have been in operation in Kenya for a substantial
amount of time, to regional airlines such as Ethiopian airlines and local airlines such as
Kenya Airways.

The increase number of airlines brands especially low cost carriers such as Jambo Jet and
Safari link has intensified the competition. Regulations are also a reason that competition has
kept growing intense. Most airlines have reduced prices and upped the level of customer
service to remain competitive. Investment in marketing has also grown higher for attracting
customers and retaining market share. The low cost carriers have grown in popularity and the
high cost carriers have been forces to provide better customer service at their existing prices.
The level of competitive rivalry overall is high.

In order to successfully infiltrate the market they will have to either take on of two paths,
one, offer budget friendly flights in order to target the price conscious customers or two,
provide impeccable customer service in order to be able to charge an amount higher than low
budget airlines and still attract customers. All in all the competition will clearly have an
impact on American Airlines and will affect how they price and the type of services they will
offer in order to have a competitive advantage

Potential of New Entrants into an Industry

The threat of new entrants in the Airline industry in Kenya is low which is mainly because of
the high entry and exit barriers. These barriers deter new entrants from entering the industry.
Apart from economic factors there are regulatory factors that make both entry and exit
difficult. Entry requires large capital investment apart from skilled human resources and
technical knowhow. All these factors act as big barriers deterring to new players into the
industry. So, only the determined players enter the market, which know they would be forced
to bear major losses if they ever decided to exit. Moreover, aviation companies gain from
economies of scale, and so operating on a large level is generally considered more profitable.
Overall, the barriers are too high which keeps the threat from new Airlines minimized. There
is a big investment in marketing and building customer loyalty too. This means for American
Airlines to enter in the Kenyan they will need a lot of investment as well as resilience and
patience, however once in given the numerous regulations and barriers the threat of other
airlines setting up shop in the Aviation industry in Kenya is low therefore competition for
them will be low.

Power of Suppliers
The power of suppliers in the airline industry is immense because of the fact that the three
inputs that airlines have in terms of fuel, aircraft, and labor are all affected by the external
environment. For instance, the price of aviation fuel is subject to the fluctuations in the
global market for oil, which can fluctuate wildly because of geopolitical and other factors.
The craft and technology suppliers are limited in number and aviation brands depend upon
them to supply fuel efficient, fast and well-designed aircrafts. Two leading names of aircraft
manufacturers are Boeing and Airbus. Similarly, the labor force in the aviation industry
mainly consists of well-paid high level professionals. Airlines focus on hiring as well as
retaining the best talent. This is the reason the power of the suppliers in terms of the three
inputs needed for them is categorized as high according to the Porter’s Five Forces
framework.

Power of Customers
Buyers have immense bargaining power over airlines because the cost and effort required to
switch from one carrier to another is minimal. Apart from technological innovation,
economic factors have also allowed huge power in the hands of customers. Each individual
passenger is important. Apart from, the entry of low cost carriers and the resultant price wars
has greatly benefited the fliers. Moreover, the tight regulation on the demand side of the
airline industry meaning that passengers and fliers have been protected by the regulators
means that the balance of power is tipped in their favor. All these factors make the airline
industry cede power to the consumers and hence, the power of buyers is moderate to high as
per Porter’s Five Forces methodology. Most travelers do not contact an airline directly to
book a flight. They access sites or apps that compare rates across all carriers enter their trip
itineraries and then choose the least expensive deal that accommodates their schedules.

American Airlines can respond to this market force by conducting market research and
offering more direct flights at low prices to the destinations fliers search for most frequently
on third-party platforms.

Threat of Substitutes
A substitute, as defined by the Five Forces model, is not a product or service that competes
directly with the company's offerings but acts as a substitute for it. Examples of substitutes in
the case of Airline Industry are trains, cars or buses. Meaning the threat of Substitutes is a
mix of high and low. High when it comes to relatively short distances like trips within the
country or the region of East Africa. A lot of Kenyans opting to drive or take buses to these
places or in the case in the recent year opt to use the new speed trains. However for longer
distances and trips there really is no substitute. Until a new technology comes along that
supplants air travel as the fastest and most convenient way to travel long distances

COMPETITIVE ADVANTAGES OF AMERICAN AIRLINES

What is competitive advantage?

Competitive advantages are conditions that allow a company or country to produce a good or
service of equal value at a lower price or in a more desirable fashion. These conditions allow
the productive entity to generate more sales or superior margins compared to its market
rivals. Competitive advantages are attributed to a variety of factors including cost structure,
branding, the quality of product offerings, the distribution network, intellectual property, and
customer service.
AMERICAN AIRLINES COMPETITIVE ADVANTAGES

Cost competitive advantage

This is when a company is able to utilize its skilled workforce, inexpensive raw materials,
controlled costs, and efficient operations to create maximum value to consumers. American
being in the industry has acquired the necessary experienced work force and suppliers to
effectively maximize on value to customers. This can also be attributed to the American
airlines being a conglomerate of different airlines.

Product/Service Differentiation
If a company's product or service has a valuable, unique offering for its consumers, then
loyalty and product/service differentiation can occur. Cost competitive advantages can easily
disappear with the introduction of a new competitor or new technology. If a company offers
a unique product or service, it is harder to maintain an edge in the market based on price
alone. The company must offer something to the consumer besides just a low price.
American has a proven track record of high quality and better delivery and can be seen in its
innovations. For example American will become the first airline to install automatic
identification technology (Tegtmeir, 2011). This is a security threat detection tool. It will
assist the company to reduce labor costs associated with security inspections

RECOMMENDATION
As a management strategist I would recommend as American Airlines enter the Kenyan
market they should consider the airline industry in Kenya and the broad number of other
airlines that they will be in competition with. I would recommend that they target low end
customers with cheap flights until they establish themselves in the market by proving they
are a quality airline.

CONCLUSION
In conclusion we can see that American airlines the following factors to consider as they plan
to enter into the Kenyan airline market:

1. Competition in the Industry

 2. Potential of New Entrants Into an Industry
3. Power of Customers
4. Threat of Substitutes
5. Power of suppliers

This is based on Porters Five forces. We have seen that the competition is tight with a more
than a number of airlines in operation already in Kenya. The potential for new entrants is low
given the tough regulations regarding to airlines. The power of customers is high as well as
that of suppliers and the threat of substitutes is relative to distance with other modes of
transport being preferred for shorter distances while planes being preferred for longer
distances.

We can also see that American Airlines has a competitive advantage in terms of Cost and
Product differentiation.
REFERENCES
Porter's Five Forces - Airline Industry Analysis. (n.d.). Retrieved from
https://sites.google.com/site/admn703ai/the-team

Mindtools,com(2018). Porters Five forces; Understanding competitive forces to maximize

profitability. [online]. Available from:
https://www.mindtools.com/pages/article/newTMC_08.htm .

Porter, M.E. (1979). 'How Competitive Forces Shape Strategy,' Harvard Business Review
[online].

MSG Management Study Guide. (n.d.). Retrieved from

https://www.managementstudyguide.com/porters-five-forces-analysis-of-airlines-industry-in-
united-states.htm

Porter, M.E. (1998). Competitive Strategy. New York: Free Press.

Stark, K., & Stewart, B. (2013, April 09). 5-Step Primer to Entering New Markets. Retrieved
from https://www.inc.com/karl-and-bill/5-step-primer-to-entering-new-markets.html

Evans, K. (2019, February 11). Barriers to Entry in the Airline Industry. Retrieved from
https://bizfluent.com/list-7576197-barriers-entry-airline-industry.html