PACE - Professional & Continuing
Education
ON-LINE DISTANCE LEARNING
MASTER IN BUSINESS ADMINISTRATION

NUR EFIZA AB. RAZAK
SUBJECT: Strategic Management
SUBJECT CODE: MGT6303

Coursework Assignment 2
Due Date: 31st March 2015

Executive Summary
In this second assignment, I have choose AirAsia and AirAsia X Group to further illustrate their strategic direction and development which is crucial for their survival.
With a new travellers on the scene, it is inevitable that AirAsia will keep on growing.
With hubs in KL, Bangkok, Jakarta, Sabah and Sarawak, AirAsia operates in a region with the world’s largest population, Asia. AirAsia’s strategy for growth is based on the potential demand from this region, which is huge indeed.
Section (a) described the Ansoff Matrix and how it can be used by organisation. In another words, at the corporate level, the decision makers ought to address questions and issues related to the overall direction and scope of the business and where it should be going, as well as to look at the organisation’s competitiveness and where in the future it can continue to be stronger (MacMillan and Tampoe, 2000).
Section (b) described the tactical level strategies that can further allow the grand strategies discussed in section (a) to be acted upon. Also the merits and limitations in each strategy.

Answer for (a)
The Ansoff Product – Market Growth Matrix is designed by a mathematician, H. Igor
Ansoff in 1957. The matrix provides ways for organisation to grow their business. An organisation can pursue such alternatives as market penetration, market development, product development and diversification. This model is also helpful for assessing the level of risks associated in each strategy in the current market situation.
The Ansoff Matrix Model

Markets

Diversification

Existing

New

Market
Diversification
Development

Product
Development

Market
Penetration
Existing

New

Products & Services
Market Penetration or Concentrated Growth
Market penetration strategy or sometimes called concentrated growth strategy emphasize on increasing market share in the existing market by offering existing product or services. There are few approaches which are commonly used such as increasing present customers’ rate of use, attracting competitors’ customers and attracting non-users to buy the products or services. Examples of organization that have benefit in high returns are McDonald’s, Apple Computer and Goodyear.

In a stable market, any organization undertaken this strategy will benefit a lower risk as compared to other strategy. However, in an unstable market situation, the same organization will suffer higher risks. IBM for example had developed OS/2 for its computer line. In doing so its existing clone has become absolete. While penetrating a specific industry market, an organization might be susceptible to changes. Mack
Truck has lost $20 million due to slumping in the truck industry.

An organization pursuing market penetration is more aware of new trends as compared to its competitors. But lack of awareness will caused them extreme losses.
Many ordinary watch manufacturers faced bankruptcy as they failed to adhere to competition from the fashion industry such as Guess and Swatch. The organization also faced a higher opportunity cost by ignoring other opportunities that bring more profit to the business.

The Chief Executive Officer of AirAsia, Ms. Aireen Omar mentioned in The Star newspaper not long ago, that AirAsia currently have 60 percent domestic and 40 percent international market share and they intended to maintain and grow the market share. AirAsia’s Free Seats promotion, which was recently launched, has successfully attracted overwhelming response from existing and new customers. The promotion started from Tuesday, 24th March till Sunday 28th March. With RM0 customers are able to travel to more than 20 countries. The free seats are almost fully booked especially during school holidays and festive seasons.

They eliminated the fuel surcharged and introduced new routes across the group.
Siegtraund Teh, AirAsia Group Chief Commercial Officer also said by doing so,
AirAsia are able to fly more people with an affordable cheaper fares to such locations as Langkawi, Penang, Kota Kinabalu, Bangkok, Bali, Hong Kong, Kalibo,
Melbourne, Seoul, Sapporo and Taiwan.

AirAsiaGo customers enjoy up to 75% saving if bookings are done together with accommodation and up to 50% for accommodation if only in the same booking and travel period. During this promotion, AirAsia BIG Loyalty Programme and BIG
Prepaid Master Card Holders will be able to gain points and to redeem their flight at lower fares

Extremely cheaper seats advertisement will definitely attract bigger market. Who will not be attracted to fly when the tickets are cheaper than bus fare? When these people frequently visit the website and later found that no more free are seats available, they might consider buying the normal priced tickets at it is still cheaper as compared to

other airlines. AirAsia is taking advertising seriously and this always help them to be one step ahead further of their competitors.

Market Development
When trying to broaden its operation, an organization may consider offering its existing product or services to a new market. It might consider opening additional geographic market or attracting other market segments. Du Pont identified new application for Kevlar in maintenance of wooden-hulled boats. Initially Kevlar was widely used in bulletproofing.

Apple and Google are examples of companies that are successful in implementing market development strategy. As reported in Bloomberg BusinessWeek, Indians preferred low-cost Android smartphones or basic handsets. Therefore Apple offers newly discounted iPhone4 with interest-free payment plan, trade in offers and discounted service agreement, which resulted in higher sales in the Indian market.

Google has developed plans to open showrooms to promote its devices that runs in
Android and Chrome operating system. This showrooms help Google in introducing
Google Glass to potential customers and promoting customer service to small and medium businesses to advertise products like Ad words.

AirAsia looks set to strengthen its market share on the domestic front and to continue growing its regional business through its affiliates and regional hubs. Thai AirAsia and Indonesia AirAsia were launched in 2004 and till today, these two affiliates are going strong. In 2012 and 2013, it launched AirAsia Philippines and AirAsia India consecutively. AirAsia ventured into the long-haul market by launching AirAsia X in 2007. Through common shareholding, shared services and resources and along term brand license agreement, AirAsia X’s operation shared AirAsia’s global brand, excellent short haul network and scale benefits. AirAsia X operation begins with only 4 destinations in
2007. Now they operates to 17 destinations in the Asia Pacific region.

Azran Osman Rani, its Chief Executive Officer, had commented in a January 2012 press release that they intended to focus volume in Australia, China, Taiwan, Japan and Korea where they have developed stable markets and routes. They planned to offer new destinations with more frequency within these countries.

In January 2014, AirAsia X placed a world-record order of 25 Airbus A330-300 aircraft valued at USD$6 billion which provides AirAsia X with the ability to offer non-stop service to destinations in England or one-stop service to America. AirAsia founder, Tan Sri Dr. Tony Fernandes revealed at the signing ceremony of the Airbus contract in Paris that AirAsia X intended to enter England again by 2016. They also intended to enter America with their new planes, the A330-300s.

Enquiring coming in for an agency ticket-booking system has encouraged AirAsia to focus on the travel agency market. In January 2006, the airline signed an agreement with a global distribution system (GDS) provider, Galileo.

Product Development
An organization can grow by developing new products or services for the existing markets. The strategy can be achieved by developing new product features, developing quality variations and developing additional models and sizes (product proliferation). This approach involves modification of existing products or services or developing new product that can be catered to the existing market. Mc Donald’s and
Pizza Hut are good examples of companies establishing the product development strategy in their organizations. Mc Donald’s frequently offers new selection in the menu such as chicken, salad and etc. Pizza Hut added mini pizza to its current menu.
New menu usually attracted new customers.

AirAsia is a subsidiary of Tune Group Sdn Bhd and operates under the company Tune
Air that is part of the Tune Group of Companies. Tune Group is founded by Tan Sri
Dr. Tony Fernandes and Dato’ Kamaruddin Meranum which is a parent company of many subsidiaries in various industries in Malaysia.

All of these subsidiaries have a single mission to serve the underserved. In essence, their vision is to deliver services at prices that everyone can afford. Tune Group does

this through its various companies namely Tune Air, Tune Hotels, Tune Talk, Tune
Money, Tune Sports and Tunes Tones. All of which seek to innovate and revolutionize services and employ efficient web-based technologies to reach and engage their customers.

Seeking further ways to offer its customers a wholesome experience and to increase revenue, AirAsia formed its first Adjacency Business in March 2011 by partnering with Expedia Inc, the world’s largest online travel company. The new company seeks to offer AirAsia’s customers a complete range of great value flights, accommodations and holiday packages. AirAsia later partner with CAE Inc, a company well known in civil aviation training to set up a world-class aviation training

center. Then in

November 2011, AirAsia continue pursuing its Adjacency Business venture by partnering with Tune Money Sdn Bhd to launch its very own global loyalty programme under the brand “BIG”

Diversification
This means to add something new let it be a product, variety or service. There are four decisions that could come under this strategy. The first is known as concentric diversification, which suggested company would want to increase the variety of its manufactured products that are related to its present operation or would prefer to associate the activities as within its current sector. Such an example is seen when a furniture manufacturer goes into increasing the variety by producing wooden frames for the house windows and doors, door and wall panels, parquet flooring and even wood related toys and garden furniture.

The next is called conglomerate diversification strategy where a company adds variety in a different or unrelated sector. A furniture manufacturer goes into the hotel business, a food manufacturer build a few chalets for the tourists, a car dealer sets up a fruit cordial bottling plant and a bread manufacturer starts selling automobiles are some examples of firms pursuing the strategy.

Then we have a strategy known as horizontal diversification that is rarely used. It is due to requests by its regular clients. In order for it to continue doing business with the regular clients, it is somewhat obliged to meet the request. A simple request by a

regular customer for a car shampoo from a newspaper delivery service could be easily being met. But if the delivery service could get a unique special price for the shampoo, then with time most of the office staff will be made aware of the special price being offered and the delivery company might add car shampoo as its permanent item to be delivered.

The fourth is called geographical diversification strategy, which is also rarely used but still has its own domain. This is where a company goes into a new country for the first time to carry out its current business activities. Although no new variety is added, the
“new variety” here covers the new country as market development strategy rarely talks about going into a new country.

AirAsia is not at the stage of diversification as its products and services at this current stage is still in the growing life cycle. Low-cost fares are still in demand either for short haul or long haul. At the current economic stages, which are at the slowdown stage and recession, AirAsia’s customers still want to enjoy the benefit from low cost fare. Some other higher end customers may change their mind and choose Air Asia as their option to travel as to keep within their budget.

Answer for (b)

All the above strategies are not implementable in the sense that there need to be an enabler or a vehicle for strategies to be implemented. These enablers are termed as the tactical strategies as they are the ones that will allow the various grand and secondary strategies to be acted upon. These tactical strategies are organically (internal development), joint venture, merger, and acquisition, reverse takeover, strategic alliances and licensing/franchising.

It is normal for many organization to pursue each of the alternative strategic options in different situations. It might for example, chose to grow internally in certain market, acquire other company in certain market or to form a collaboration with other company in certain market by taking consideration of the market characteristics.

This term, organically growth or internal development has been introduced recently to describe a strategy where a company would do it through its own strengths and capabilities without the involvement of any other company with similar interest.
Growing by expansion organically means to grow by using its available resources like setting a branch and allocating required personnel from existing establishments while recruiting and training some more. Or the company might want to grow by backward integration organically thereby setting up its own raw material supply company by identifying relevant personnel within the company and forming a team to start the new supply entity. Turning around too can be done organically where a divestiture strategy can be done organically where its own staff are used to identify lines and products to be liquidated thus cutting costs to be followed by having its staff determine which new area to do a conglomerate diversification.

Technically a merger will result in the formation of a new company by all parties involved. The two or more names of those involved in the merger will not exist anymore. Bank Bumiputra and Commercial Bank became Bumiputra Commerce, after another merger with the Southern Bank became CIMB Bank Berhad. A merger attempts to make full use of the assets of all the companies involved targeting some synergistic effects as well as riding on the highs of those involved. Consolidation could also be another objective but with the current global trend, a merger is also looking at the possibility of going global or preparing the arrival of some global giants now that the market is being liberalized as the borderless world phenomenon takes effect. Look at international hypermarkets such as Wal-Mart Stores, Carrefour,
TESCO and IKEA. Local will not have a chance if they do not merge so that they are equal in the battle for market.

An acquisition and a takeover are almost similar as it involves the buying of the majority equity of the company. Acquisition involves a lot of discussion and peaceful negotiation with regard to the price that need to be paid by the acquirer on the costs of the shares before the final agreement is signed. Kwong Yik and Chung Kiaw Banks were the result of acquisitions by bigger banks. In acquisition, the name of the buyer will usually prevail and the acquired’s name will be removed from the registry.

A joint venture involves a setting up of a new company with equity participation of all the parties involved. The equity participation is agreed upon and the personnel involved in the new set up can come from any party or even from outside. One party usually will have a majority share for effective decision making. Thus, a stable growth strategy can be achieved by doing geographical diversification through a joint venture with partners from the country that the company is venturing into. BASF
Petronas Chemical is a joint venture between German Chemical Company BASF and
Petronas Malaysia.

Strategic alliances are just alliances or partnership between companies to work together to achieve their mutual goal without any changes in their organization structure. These alliances involved smart partnerships in a win-win situation. The participating parties felt that by working together they have much more to gain and it is usually they compliment one another in various aspects of the businesses. An example would be the used of utilized production capacity to a second party at a special price where the second party do not have to own one but instead use the underutilized facilities. Underutilized assembly line could also do it for a competitor, sharing a warehouse, using services provided by the competitor. But in all cases both sides must benefit from the alliance. At one time two different brands of the video player (competitors) were assembled by one company but because it is underutilized, its production line was able to accommodate the needs of its competitors.

The Asian sky is a highly regulated airspace. In order to overcome all the challenges is by setting up a joint venture with potential partners in the region. In 2003, it entered a joint venture with Shin Corporation to form Thai AirAsia. The year 2014 celebrates
TAA’s first decade in Thailand. TAA has served 50 million passengers for the past 10 years. Although it is smaller in size compared to the Indonesia market player Lion Air, PT
Indonesia AirAsia (IAA) boasts exiting growth in the region’s most prospective air travel market. In 2013, it flew 7.8 million passengers. Within Indonesia alone, its geography is such that 17,000 islands are separated from one another. Taking advantage of this, that made flying necessary, IAA has gained huge profits from
Indonesia.

Despite fierce competition from Cebu Pacific Air, Philippines’ first LCC, AirAsia went on to launch it affiliates carrier named Philippines’ AirAsia in December 2010.
An opportunity to establish a presence at the Manila International Airport came along in March 2013, in the form of a share-swap with local LCC Zest Air, PAA immediately agreed to the alliance.

AirAsia India was established in March 2013. It is a joint venture of 49:30:21 between AirAsia Investment Ltd, Tata Sons Ltd and Telestra Tradeplace Private Ltd.
AirAsia India is a terrific market for AirAsia Group once it stabilizes and conquers the aviation industry of the world’s most populous nation.
AirAsia Japan is a joint venture with Japan’s All Nippon Airways (ANA) formed in
2012. It ceased operation in October 2013. AirAsia has made a comeback when it signed the Shareholders Agreement with Octave Japan Infrastructure Fund I GK
(Octave), Rakuten Inc. (Rakuten), Noevir Holdings Co. Ltd. (Noevir), and Alpen Co.
Ltd. (Alpen).

AirAsia X has proven that it is possible to build a highly successful low-cost longhaul business. Thai AirAsia X is the first long-haul venture. Then followed by the second venture with Indonesian business partner that formed Indonesia AirAsia X.
Through these joint ventures, AirAsia X Group is expected to reduce risk and keep start-up costs to a minimum by leveraging its existing network.
AirAsia strategic alliances and joint ventures provide excellent opportunities for them to grow and expand further. They are able to coordinate their key areas and resources to fully utilized its available capacity. AirAsia can benefits in their partners’ home market sales strength with combine fares and joint marketing of flights.
Despite AirAsia winning strategies in most of its attempts, AirAsia failed in its joint venture in Japan in 2011. Its ventures with All Nippon Airways (ANA) failed due clashed over management and operational differences which were followed by total losses of RM113 million.

References :
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Strategic Management, Oxford, 2014
Strategic Management, Mc Graw, 2015
The Asia Story, Kanyin Publication, 2008
The Asia Story 2, Kanyin Publication, 2014