Introduction
The understanding of the specific forces and factors in the industry and sector where the company operates is essential to the development of effective strategies. In particular, a manager should be aware of the organization’s position relative to the consumers, competitors, and stakeholders, the available strategic choices in a situation, and their predicted outcomes once they are implemented. Economic theorists have developed a variety of frameworks and approaches to industry analysis and strategy formulation. This report describes Porter’s five forces model, differentiates four industry types, identifies strategic groups, and elaborates on the Blue Ocean approach as well as their applications to Abu Dhabi Aviation.
Porter’s Five Forces Model
Michael Porter introduced the notion that the key to strategic success is the positioning of the company in a manner that protects it from competitive forces or allows it to use them to its advantage. For the approach to succeed, the manager should be aware of the primary influences in the industry and their sources. Notably, according to Todorov and Akbar, Porter concentrated on economic forces within the industry, as he noted that outside powers tended to affect every player in the sector equally, and the difference was in a firm’s ability to respond to them (183). The theorist distinguishes five essential factors that allow one to determine an industry’s structure.
Porter defines the market for a particular product as the combination of the companies that are active in it, potential entrants, and the consumers. As such, according to Todorov and Akbar, the five forces are the threat of new entrants, the bargaining powers of suppliers and buyers, the substitute products, and the intensity of the rivalry between competitors (188). The airline industry is characterized by high entry barriers due to the costs associated with maintaining the necessary technical resources. As such, the bargaining power of suppliers is high, while that of the consumers is relatively low. Substitutes are a concern for short-range flights, but not for international and intercontinental routes. Lastly, the intensity of rivalry is low, as the carriers prefer to avoid direct competition.
Industry Types
The type of industry where the company operates can significantly influence its strategy and preferred approaches. According to Chauhan, there are four primary industry types: monopolies, oligopolies, and perfect as well as imperfect competition (372-373). A monopoly is a situation where the industry is dominated by a single seller, which is able to forgo technology development and adjust prices freely due to the lack of competition.
An oligopoly is a similar situation to a monopoly, but the industry consists of multiple large companies that do not compete and collude to control prices. A perfect market is a situation where numerous companies compete using uniform prices and mostly homogeneous products, forcing companies to accept the established rate. However, as such an environment is usually not possible in practice, an imperfect, or real, market, where constant aggressive competition leads to a state of disequilibrium, is more common.
The airline industry may be described as an oligopoly, as relatively few carriers are prevalent in the field, and they generally offer similar prices and rarely offer overlapping flights unless the route is popular enough to ensure simultaneous popularity for all of the offerings. The features of the model as described by Chauhan include unattractive entry, the likely emergence of price leadership cartels, and high interdependence (373). As such, competitive approaches to business would likely be frowned upon by other participants in the industry and potentially lead to attempts to remove the offending company from the industry.
Strategic Groups
Industries tend to be characterized by a division into factions of companies that follow similar strategies. Grant uses airline industries as an example, as “legacy carriers” offer expensive, high-quality service, loyalty programs, and first-class seats while “low-cost carriers” forgo the model to offer significantly lower prices (108). Grant also notes that economic theory suggests that strategic groups are differentiated in profitability, although empirical evidence for the claim is currently not sufficient to reach a conclusion (108). Nevertheless, the tendency of low-cost carriers to offer significantly lower prices is reflected in their popularity with customers and, consequently, potentially higher profits.
Abu Dhabi Aviation is different from the above in that it belongs to its own strategic group, which is known as “charter airlines.” Its model consists of lending whole aircraft to customers and conducting non-scheduled flights. As such, the company operates locally in Abu Dhabi and limits its advertising to wealthy clients who are able to afford its services. The company’s air force is relatively small when compared to commercial carriers, and it seeks to establish long-term contracts with clients such as the oil companies present in the region. As such, there is little competition due to high customer loyalty, but there are also not many strategic opportunities due to the small size of the target market.
Blue Ocean Thinking
The Blue Ocean approach to competition is an innovative method that was introduced in the early 2000s. According to Mebert and Lowe, the strategy involves using creativity and so-called “value innovation” to avoid markets with intense rivalry, which the framework calls “red oceans,” and find a field where the company will be a pioneer and avoid competition. The use of the strategy requires an understanding of the factors present in the current state of the industry and the ability to apply unconventional thinking to avoid their influence altogether, as opposed to Porter’s model. As a result, the company will achieve success and prosperity while potentially discouraging others from entering and competing if it manages to capture a small market quickly.
Abu Dhabi Aviation can be considered an example of a successful Blue Ocean strategic approach. Charter airway services are a relatively small niche that can be highly profitable due to the target market, which consists of wealthy individuals and companies that require fast and comfortable travel over land as well as water. The company capitalized on the needs of the consumer base by offering helicopters and later planes to local oil companies, which often have installations offshore and require a fast way of traveling to and from them yet do not wish to maintain a fleet of helicopters. The venture was well received by the target market, and the company can be considered successful.
Conclusion
Abu Dhabi Aviation is a successful airline company due to its business strategy, which is inspired by the Blue Ocean model of thinking. The firm decided to enter the airways industry, but the creation of a commercial carrier was inadvisable due to the high entry barrier. Furthermore, the industry was organized as on oligopoly and would likely not welcome new competitors. As such, the company decided to align itself with another strategic group, charter airlines. Appealing to the local oil companies that required transportation to offshore installations, it was able to secure a position of success and avoid competition.
Works Cited
Chauhan, S. P. S. Microeconomics: An Advanced Treatise. Phi Learning Private Limited, 2016.
Grant, Robert M. Contemporary Strategy Analysis: Text and Cases Edition. John Wiley & Sons, 2016.
Mebert, Andreas, and Stephanie Lowe. Blue Ocean Strategy. CRC Press, 2017.
Todorov, Krassimir, and Yusaf H. Akbar. Strategic Management in Emerging Markets: Aligning Business and Corporate Strategy. Emerald Group Publishing, 2018.