Polynesia National Airlines: Strategic Planning Report

Comparing and contrasting “contemporary” and “traditional” approaches to strategic planning

For a company like Polynesia National Airlines (PNA) to survive in the cut-throat competitive environment, there is little doubt that it needs to use strategic planning as one way of attaining competitive advantage. Notably however, such a company needs to be aware of the differences between tradition and contemporary strategic concepts in order to make maximum use of benefits provided by either one of the concepts. Scouring through literature, it is easy to tell that a good number of authors (Leavy, 1998; Mintzberg, 1994; and Porter, 1987) among others are convinced that traditional strategic planning is outdated and is not fit for application in modern day organisations.

Porter (1987) is for example on record for criticising traditional strategic planning as a process that did not contribute to the much-essential strategic thinking that organisations needed in order to make good strategic decisions. He hence proposed that contemporary strategic planning should be transformed into management disciplines. As if taking a cue from Porter’s advice, the management industry has given way to such disciplines such as Total Quality Management (TQM), Business Process Reengineering (BPR), and Continuous Process Improvement (CPI). The common denominator amongst the management disciplines is that strategic planning is not treated as a static, one time undertaking, but as a continuous learning process (Kwak et al. 2001, p. 1; Smith and Day, 2000, p.1).

Among the notable differences between the two approaches to strategic planning is that the traditional approach proposes the use of analytical tools such as Strengths, Weaknesses, Opportunities and Threats (SWOT) and PESTEL analysis. The use of the analytical tools is based on the argument that organisations, which need to plan well for the future, must understand their strengths and internal capabilities.

Further, the traditional approach proponents argue that understanding the internal and external situations facing the organisation gives planners a better idea of what the future is likely to be (Smith and Day, 2000, p.3). The contemporary divide on the other hand holds different views. One such person is Porter (1987), who argues that strategic planning should be based on an understanding of the factors that drive the markets. With such an understanding, Porter (1987) posits that planners would be able to choose the right market positions for their companies in order to ensure sustainability.

Another difference between traditional and contemporary strategic planning is that while the latter seeks an understanding or a firm’s strengths, weaknesses, opportunities and threat, the former seeks to understand the dynamics contribution to market situations (Mintzberg, 1994). Consequently, while the traditional strategic planners spend extensive periods putting together the strategic plans, their counterparts who follow the contemporary approach watch market performances with a view of learning how they can incorporate relevant flexibility in order to enhance their firms’ performances (Mintzberg, 1994).

Contemporary strategic planning further seeks to change the minds of relevant stakeholders in the organisation. Such an undertaking is contrary to the traditional strategic planning approach, which is preoccupied with making plans (De Geus, 1988). Notably, plans that are a product of the traditional approach are lengthy, and as De Geus (1988) notes, they are often stored at the “bottom desk drawer” without much a thought given to their implementation. Strategic plans that result from the contemporary approach, on the other hand seek to facilitate learning.

Hence, the planners design them in a manner that encourages an organisation to explore and exploit situations in an ongoing dynamic version. The concept of the ‘learning organisation’ is a result of such line of reasoning, where it is stated that strategic plans should boost an organisation’s ability to learn faster that the competition as a way of attaining competitive advantage. The traditional approach to strategic planning presents plans that do not have many differentials for competing firms except those presented by the SWOT analysis. Such firms are likely to obtain the same results in their PESTEL analysis thus meaning that no form of competitive advantage can be derived from such knowledge.

Among the admirable traits of the contemporary thought in regard to strategic planning is that it is based on real time issues. As such, not much time is spent predicting things that may never happen. Instead, the planner who follows the contemporary strategic planning approach relies on real time events to make short-term plans for an organisation. In PNA for example, strategic planners following the contemporary though would base their plans on real time events and situations such as the urgent need to remain competitive amidst the influx of low cost carrier airlines.

Considering the differences between traditional, the desirable end result for PNA would be to attain competitiveness in the short-term since the organisation’s long-term survival depends on how it manages competition in the short-term. Following the traditional approach however, would require the organisation to conduct an in-depth analysis based on past happenings, and what the organisation expects to happen in the future. A PESTEL analysis would also allow the company to understand its operational environment thus making the plans based on the traditionally approach more detailed. While the contemporary approach to strategic planning seems to have its main advantage pegged on its flexibility, the traditional approach’s apparent advantage is pegged on its detailed nature thus making it vital for long-term planning.

Both approaches to strategic planning have a role to play in the modern-day organisation. PNA for example could use contemporary strategic planning for pressing organisational needs that need the organisation to act with speed and accuracy. The organisation can also use the traditional approach when launching a new business line in order to gauge the viability of the same.

Among the similarities that the two approaches share especially in relation to qualifying as strategic plans include: i) they are used in developing plans, which if implemented properly would address key issues affecting the organisation); ii) the two approaches address the direction that the organisation is taking; iii) the two approaches consider how all stakeholders (i.e. shareholders, employees, directors, clients and the community) will be affected by the strategic plans developed from them; and iv) the approaches are meant to produce realistic plans that can be implemented (De Geus, 1988).

Unfortunately, traditional approaches do not always score well on the fourth aspect noted above. As Porter (1987), most strategic plans based on the traditional approach are just wish list that companies make but never implement. Since the short-term strategic plans are based on real-time events, they are more realistic and likely to address the ‘real’ issues facing the organisation in a prompt and effective manner.

The reality in PNA’s case for example is that it is facing increased competition from LCC airlines. Hence, the desirable situation for the airline is that it should attain competitive advantage in a manner that allows it to retain its market share and probably acquire more by expanding its operations in other countries and regions. The airlines decision to use either the traditional or contemporary approach to strategic plans depends on how soon the changes are needed, and how detailed the plan should be especially for purposes of convincing stakeholders about the need for change.

Case Study

While SWOT has been criticised by La Piana (2008, p. 181) as an outdated attempt of obtaining objectivity in organisations, this report will still use it for purposes of identifying the strengths and weakness in PNA. Additionally, the analysis will be used to identify the opportunities that the organisation can utilise, as well as the threats that it should be wary about.

Strengths

• A fairly modern fleet with no history of accidents
• PNA is the airline of choice for most Polynesians and hence enjoys loyalty from customers
• Government backing
• A loyal, skilful and dedicated workforce
• Excellent onboard services, which could attract and retain customers.

Weaknesses

• PNA airfare is high when compared to what is offered by the LCCs
• Most sales are through travel agents who earn commissions on the same

Opportunities

• PNA could utilise online sales in order to cut back on commissions paid to travel agents. This would however require it to introduce on-line check-in for passengers.
• Its position in the airline industry in Polynesia places it in a better and stronger position when compared to the LCCs.

Threats

• The LCCs pose a competitive threat to PNA
• The rigid position held by the airline’s CEO

Based on the above analytical findings, this report develops four likely scenarios for PNA. According to Schwartz (1996), scenario building is an essential step in strategic planning since it provides the foundation for decision making. Wilkinson (1995) further observes that scenario building enables people in an organisation to understand the situation that lie before them. Hence, strategic planners are able to rehearse their response to possible futures. Additionally, the scenarios make it easier for an organisation to identify the real situation when it begins to unfold (Wilkinson, 1995, p. 79).

The scenarios are based on the fact that faced with an imminent threat posed by the ‘no frills’ LCCs, PNA needs to choose the market tactics that are most suited to cope with the challenge.

Scenario 1: Ostrich

By resisting change and abiding by its old business model, PNA could act like the ostrich that stuck its head in the sand. In that case, everything would remain the same for the airline, and it would pursue its ‘normal’ way of doing things. Specifically, PNA can choose to subscribe to the notion that LCCs are just a fad, which cannot survive the high cost of doing business as suggested by Jarach (2004, p.31).

If PNA chooses to resist the pressure to engage in the price war that LCCs carriers have initiated, it will continue to conduct its business as usual. However, it may have to contend with a reduction in its market share especially considering that some customers would prefer the cheaper LCCs for their low-cost advantage.

Theoretically, such line of reasoning from PNA would be justified by the value-proposition theory, which suggests that consumers will purchase a product or service based on the perceived value of the same (De Boer and Browning, 2010, p. 7). Hence, even though the no-frills LCCs may be lower in airfare prices, some consumers may not prefer them based on the benefits earned vs. Sacrifices made. Customers who perceive value based on the quality of services offered during a flight are most likely to prefer travelling aboard an airline with frills (De Boer and Browning, 2010, p. 4).

Just like the proverbial ostrich that hid its head in sand when the bushes around it were burning, PNA would have to bear the risk of loosing a significant amount of its price-sensitive customers to the LCCs. This would especially be the case if LCCs sustain their business model in the long-run (Casadesus-Masanell and Ricart, 2007). If that was to happen, PNA and other like-minded airlines, which expect that the low airfare charges will go up once the LCCs fail to make profits, will have to re-strategise.

Among the disheartening sentiments from industry players to those who think the low airfare prices are not sustainable is the global forecast by Hansson et al (2001, p. 5), which estimates that the no-frills LCCs will continue to grow regardless of how unsustainable some people think it is. Hansson et al. (2001, p. 5) further observe that LCCs are a growing phenomenon in Europe, and their growth is supported by a simple and flexible business model which targets transporting as many people as possible, and spending as little as possible on their onboard services.

To shield its bottom-line from being eroded completely, one can envisage a situation where PNA looks for alternative measures of attaining competitive advantage. For example, seeing that its lack of an online check-in system is one of its weaknesses, PNA would develop and install a system that addresses the same. Consequently, most of the monies used to settle commissions to travel agents would be reverted to the company thus enhancing the airline’s income earning capacity. Specifically, eliminating the commissions given to travel agents will enable PNA to have a better yield per passenger.

Strategic response to Scenario 1

It would be an easy but not a very smart option for PNA to bury its head in the sand and ignore the competitive pressures brought about by LCCs. While it is easy, and perhaps convenient for PNA and other legacy carriers to sit back and wait for the gloomy predictions of forecasters such as Tretheway (2004) to come true, it would not be a wise decision to passively observe as their market share and profits dwindle as a result of LCCs operations. Tretheway (2004, p. 5) predicted that LCCs will inevitably go away, especially if legacy carriers chose to readjust their pricing strategies to conform to the LCC business model.

Following Tretheway’s (2004, p. 5) line of argument, it easy to see that if PNA and other legacy carriers are to retain their market share, they have to accept the fact that their price discrimination ability has already been undermined by the prices offered by the LCCs (Hazledine, 2011, p. 133). Hence, they must choose either to gain a competitive advantage based on cost or service quality differentials. If they choose the cost advantage, then they must be ready to adjust their prices downwards. If they choose the quality advantage, they must be willing to offer services that will enhance their value proposition.

PNA could also choose to rely on De Boer and Browning’s (2010, p. 4) observation, which states that not all travellers are willing to switch the comfort and luxury of travelling aboard a legacy carrier with the ‘no-frills’ experience aboard LCCs. PNA however needs to conduct a market analysis to determine just how significant the market share that holds such sentiments is. If it is big enough to sustain the business in both the short- and long-term, then PNA can continue persist with the ostrich scenario since it will have proven that the LCCs will not affect its operations and profitability in Polynesia and other markets significantly.

Scenario 2: Mother hen

Like the mother hen protecting its hatchlings, PNA could put up a war to protect its market share. Among the most likely manner that PNA can fight the LCCs is to go head-to-head with their price propositions. Going by its market position in Polynesia, lowering its airfare to match what is offered by the competition would probably make PNA retain most of its market share, which would otherwise be lost to the low cost carriers.

However, such an approach would not be without risks. For starters, there is likelihood that PNA could loose its long-standing corporate identity as a loyalty carrier. Secondly, the sentiments by its CEO could come true especially if no clear cost advantage is assured. Hence, PNA should only engage in a price war on assurance that the low airfare prices will not affect its profitability. Alternatively, the airline can choose to lower its overhead costs in order to balance its reduced income due to the low air charges, with its expenditure.

Fighting the LCCs would need PNA to submerge itself fully in the business of attaining high returns through assets and customers turnover, while reducing the operation costs to the lowest possible levels (De Boer & Browning, 2010, p. 4). One possible situation under this scenario is that PNA would want to reduce its employee numbers, or reduce its compensation levels. As Franke (2003) observes, Network Carriers such as PNA needs to reduce their expenditure in order to compete favourably with LCCs. If not, they can choose to operate as LCCs, in which case they would need to change their business models.

Franke specifically observes that “LCCs are able to deliver 80% of the service quality [offered by network carriers] at less than 50 % of network carriers” (2003, p. 15). The requirement to reduce expenditure would make PNA reconsider its compensation arrangements, or perhaps the number of people it has employed. In an effort to conform to the lean business model, PNA is likely to engage in confrontations with the labour unions. Cutting back on its employee numbers or salaries would also reflect negatively on the airline and this would probably impact negatively on its brand image. Such negative reflections would on the other hand erode existing customer loyalty thus compromising the airline’s competitiveness even further.

Reconsidering PNA’s employment policy would probably erode one of the airline’s core strength, which is contained in its loyal, skilled and committed workforce. As Trent (2008, p. 186) however notes, a lean workforce means that the retained employees have to do a better job at offering services in order to fill the gap left by their retrenched counterparts. In an attempt to embrace a lean business model, PNA will probably have to eliminate the hub and spoke system, which is termed as expensive (Trent, 2008, p. 186), and probably standardise its fleet in preference for the Boeing 737, which is a more spacious model. The spacious aircraft models would be a source of competitive advantage for PNA since it would mean that passengers are not crammed into tiny jets as is the norm in most LCCs.

Strategic response to scenario 2

Converting PNA from a legacy carrier to an LCC has too many potential weaknesses to serve any strategic purposes. True to the airlines CEO, such drastic measures to turn the airline into a low cost carrier could lead to its death. Hence, as much as PNA needs to fight to retain its market share, converting into an LCC should be the last option to consider.

The chances of the airline to succeed as an LCC are minimal especially considering that the CEO is already opposed to it. As Baloch and Inam (2008, p. 5) and Liedtka (1998, p. 31) observe, the essence of strategic planning is to initiate strategic thinking, which should then lead to strategic management. In PNA, the CEO has already dismissed the idea of converting the airline to an LCC. This means that the LCC can only succeed if a change of leadership in the company is initiated. Otherwise, the same CEO cannot be expected to oversee the implementation of a strategy that he opposes.

Scenario 3: Falcon

Just like a falcon that is able to change direction rapidly to avert danger, a scenario where PNA adopts a mixed business model is likely. In such a case, the airline would be able to maximise its profitability both as a network carrier and a low cost carrier. Amongst the best viable ways that the airline can succeed in capturing both markets is through the introduction of a low-cost subsidiary while still maintaining its traditional airline approach. Such a parallel approach would enable the airline to penetrate markets in both the high-spending and lower-spending categories. Airlines that can serve as successful examples of such an approach include Qantas in Australia, which introduced its Jetstar subsidiary to fight LCCs that were eroding its market share (Centre for Asia Pacific Aviation, 2007).

To effectively manage a mixed business model however, PNA would:

1. Remove the scheduling constraints that inhibit the pace of doing business. Comparing LCCs performance to PNA’s, one notices that only a partly 4% sales is done through travel agents. LCCs do not pay as much sales commission as PNA does on regional (50%) and International (35%) sales. By establishing an online booking and check-in system, there is a likelihood that the scheduling system would improve both in speed and efficiency. Additionally, commission sales given to travel agents would reduce significantly thus meaning that the airline would have better returns for every passenger who travels aboard its aircrafts.
2. Create distinct business systems to cater for the different customer segments: As suggested by Hansson et al (2001, p. 9), there needs to be a great deal of product and service differentiation where an airline wants to introduce a LCC subsidiary. Such an approach makes it possible for the two business divisions to develop strategies and competitive models based on the unique objectives for each segment. For example, PNA would target the low-spending market segment with its LCC subsidiary, while still maintaining the traditional business model to cater for the market segment that does not welcome the cost-advantage offered by the LCCs.
3. Tailor its business streams to fit the needs and wants of the two different market segment: Considering that leisure travellers do not make last minute changes to their travel arrangement when compared to business travellers, PNA will need to tailor the processes to cater for such distinct needs. As Hansson et al. (2001) observe the check-in for leisure travellers should be simplified to avoid too much direction seeking from the customers. The travel processes for the business travellers on the other hand, should consider their ever-changing schedules (Hansson et al., 2001). Additionally, the system should be fast and reliable. To aid in differentiating the two market segments, one can envisage a situation where PNA introduces in-flight entertainment, lounge facilities and sophisticated traveller programs for its high-value customers. To attain competitive advantage in its LCC subsidiary, PNA could operate above the ‘no-frills’ concept by offering its customers basic services such as onboard refreshments.

Strategic response to Scenario 3

Among the four scenarios developed in this report, scenario three is the most probable approach that PNA will adopt. For starters, the establishment of an LLC subsidiary will allow PNA to continue serving its traditional market and thus serving its loyal customers. Additionally, the subsidiary will serve the low-spend customer segment especially on leisure destinations and will stay away from the major routes where PNA operates. The latter is a necessary strategy to avoid loyal customers from jumping from PNA to its cheaper subsidiary.

It is however worth noting that the while “airline within an airline” model can effectively compete with independent LCCs, there is a probability that they can take up some of the parent company’s market share (Gillen and Gados, 2008; Graham and Vowles, 2006). To avoid such a situation however, PNA strategic planners must work at differentiating the services offered by the national carrier and its subsidiary.

Scenario 4: Flamingos

Just like the flamingos that can fly, wade through murky waters, or even swim depending on the situation they are in, PNA can forge alliances through mergers or joint ventures with other airlines in order to enhance it capacity and hence improve its chances of survival amid the stiff competition. Seeing that PNA is a national carrier, government approval and support would first be needed to facilitate such a move. In this case, PNA would retain its highly skilled human resource capacity, and would still retain a significant amount of its loyal customers.

To enhance its fleet, PNA would seek to attract investments from foreign direct investors. Like most national airlines, such capital injection serves to enhance the operating capacity. In order to uphold the Polynesian connection, PNA will have to limit how much of the airline’s shares can be sold to the foreign investors. Ideally, and for control purposes, Polynesian nationals should retain majority shareholding in the airline. This will fortify loyalty among citizens who perceive the airline as their own.

Following the multimarket contact theory as proposed by Edwards (1995), one can envisage a situation where PNA is able to increase its operating capacity through flying routes where partner airlines already operate. The multimarket contact theory posits that large enterprises competing in the same market are likely to run into each other often during their operations.

Hence, such organisations learn to respect each other by adopting a live-and-let-live approach (Edwards, 1995). Consequently, the competitive environment where such two firms operate is stable and without the price wars and other market upheavals evident among competitors that want to outdo each other. When the business environment is hostile to the two entities, they are more likely to forge alliances in order to devise a common strategy for overcoming the challenges (Edwards, 1995).

In PNA’s case, the airline would seek to merge or engage in a joint venture with another airline with the same capacity, and which faces the same challenges as PNA does in its traditional Polynesia market. Through mergers or joint ventures, the airline would have enhanced capacity, which would improve its profitability thus enhancing its market position compared to LCCs operating in its traditional market.

Should PNA choose to merge with an international airline, the merged entity would have a significant market share that would incorporate PNA’s traditional market share and the partner airline’s market share. However, this would probably erode some of the strengths associated with the airlines acting as independent entities. A likely scenario is that a merger would lead to rebranding, and some of the loyal customers would change allegiances to different airlines. It is also probable that merging with another airline would cause discomfort among employees especially if any changes are to occur in to the existing PNA’s employment policy.

Should PNA choose to form an alliance with existing airlines especially on major international routes, it will succeed in attaining increased market share. However, PNA would need to find a solution to the revenue sharing schemes as suggested by Wright, Groenevelt and Shumsky (2010, p. 16). Other challenges highlighted by the three set of authors (and which PNA would need to find solutions to) include how best to maximise revenue for the partners, and how well to balance operations for each partner.

Strategic response to scenario 4

Basing my response on empirical literature, there is little doubt that mergers or joint ventures would make entry to new markets easier (Goolsbee and Syverson, 2008, p. 1612). After studying airline mergers in the 1980s, Kim and Singal (1993) concluded that competition will be less vigorous in markets because airlines that have worked together in any one market try to avoid price wars in other markets. Their findings concur with the multimarket contact hypothesis, which holds that collusion between competing firms, which operate in the same market where they contact each other often, is possible (Bernheim and Whinston, 1990, p. 5).

In PNA’s case, the airline could try the merger or joint venture approach with LCCs whose capacities are (considering some have a single aircraft). PNA could even try buying such LCCs out in order to lessen competition. However, to cater for the income sensitive customers who prefer the LCCs based on their price advantage, PNA cannot buy out the LCCs and then go back to cater for the traditional customers; this then means that PNA would have to establish an LCCs subsidiary as portrayed in scenario three. Failure to establish the subsidiary would essentially mean that PNA will leave a market gap that other LCCs will try to occupy in future.

Reflective Statement

There is no doubt that successful companies put a lot of effort in planning and formulating effective strategies. After completing the above two tasks, it is now even clearer to me that running an organisation is not a one man task. The greatest lesson however came from understanding the role that strategy plays in an organisation. As Baloch and Inam (2008, p.23) clearly state “strategy spells out the program of action for achieving the results and together with objectives, clarified the future plan”.

True to this statement, it is apparent from the above scenario building exercise that without clear objectives, one is highly unlikely to attain a desirable future. Overall, PNA had two main objectives: i.e. to remain competitive and to attain enhanced market share in both regional and international routes. Having these two objectives in mind, it was easier to create scenarios that would help the airline attain the two objectives albeit through different approaches.

Having concluded that it would be a bad strategic decision for PNA to convert into an LCC considering the risks that such a strategy could expose the airline to, I now understand that leaders have an essential role to play in the strategic thinking, planning and management of the organisations they represent. By expressing reservations regarding PNA becoming a LLC, the CEO at PNA acted like a War General, who according to Tzu and Cleary (2005, p. xx), “must see what others do not see and know what others do not know”. Clearly, the CEO knew that the LCC route was not a perfect strategy for meeting PNA’s objectives.

It is also clear that in effective strategies do not just happen; rather they are the product of well-carried out investigations, which provide the planners with essential insight into the market that an organisation wants to operate in. Based on such insight, are able to formulate strategic plans. Among the major sources of market related information are the competitive forces as identified by Porter (2008).

They include supplier power, competitive rivalry, substitute effect, buyer power and new market entrants. Planners can also use traditional approaches to strategic planning which involves carrying out SWOT and PESTEL analysis. While the traditional approaches to strategic planning have been criticised as being outdated, they provide invaluable approaches to understanding the operational environment in any given industry and cannot therefore be easily disqualified.

While conducting research for this exercise, it dawned on me that all fast-growing industries are not necessarily profitable. Additionally, it was apparent that mergers and joint ventures do not always create an avenue for profit making specifically since the merged or partnering firms have to overcome logistical challenges. Overall, I learnt that any given firm can create structures that enhances it competitive advantage through strategic planning. However, for the plans to work, they must be implemented. Hence, strategic plans that end up in desk drawers never to be implemented do not count for anything.

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