Introduction
VivaColombia Airlines is a Colombia low-cost carrier that operates in South, Central, and North America. A team of top executives from the leading global airline companies was interested in developing a unique business model. They included William Show, a former chief executive officer of British Airways and Juan Emilio Pasads who was also a former chief executive officer of Avianca (Rivera 2019). Fred Jacobsen from Tampa Cargo and Gabriel Migowski from Brazilian Airways joined them. The four brought together their experience in the aviation sector to start a company that would dominate the domestic and regional market.
The management of the company realized that the low-cost market had a huge potential, as many people were willing to use air transport but could not afford. They believed that by eliminating unnecessary luxuries, maximizing on the space, and taking advantage of economies of scale, they could lower the overall cost of operation and lower their prices. When it started its operations in 2012, the firm was able to experience rapid market expansion, introducing new routes to Peru, Ecuador, Panama, and the United States. The management is currently facing a dilemma of whether to consolidate the local market or to expand to new markets as a way of increasing the firm’s revenues and profitability. This report seeks to provide a guideline for the company in 5-year strategic plan.
Objectives
The objective of this study is to compare options available for this company in its strategic plan, identify pros and cons of each option, and select the most appropriate strategy between consolidation in the domestic market and expansion into the Brazilian market. The study will provide justifications why one of the strategies is superior to the other.
Addressing the Key Points
When developing a strategic plan, it is important to understand forces that a firm has to overcome to achieve the desired level of success. VivaColombia has a tough decision of either consolidating the local the market or going global. The decision that it makes would define its ability to achieve sustained development in this highly competitive industry.
Strategic Analysis
The strategic analysis of this firm internal environment would help to understand core competencies and issues that the firm needs to address to achieve a competitive edge over its rivals. Using SWOT (strength, weaknesses, opportunities, and threats) model may help in this internal analysis of the firm (Truxal 2017). The main strength of this company is in the knowledge and experience of its top executives. The founders of this company have been top executives at global airline companies such as British Airways, Tampa Cargo, and Brazilian Airways. They understand what it takes to achieve success in this market and have the right connections that can help them facilitate rapid growth of the company.
Given that VivaColombia is a small company, it is flexible enough to deal with different market forces both locally and in the international market. However, the case study shows that one of the main weaknesses of this firm is its limited financial capacity.
The study shows that the firm’s profit in the last financial year was only US$971,000. With less than one million dollars in profits, it means that the company cannot afford to sponsor financially demanding market research that would enable it to understand the changing market trends. The table in Appendix 1 shows that the rate of complaints from customers has been on the rise, which means that the quality of service delivery has been compromised.
The domestic and regional markets present numerous opportunities that this company can target to achieve the desired growth. The number of people traveling from Colombia and various other South and Central American countries to the United States has been on the rise. The number of people using air travel services domestically within Colombia has also been increasing (Wiesman & Guinan 2015). The increasing purchasing power of the locals is another major opportunity as it increases the number of people who can afford to use the services offered by companies in this industry. Improved security in the region will boost operations of this firm in the market. Stiff competition is one of the biggest threats that the firm has to face.
The number of firms operating in this industry within the same market has been on the rise. The volatility in international oil prices is another major concern because it affects the cost of operation. Table 1 below summarizes strengths, weaknesses, opportunities, and threats that VivaColombia faces in the market.
Table 1: SWOT summary.
The internal analysis of this firm has identified specific strengths that this firm can use to achieve success in this competitive market. It is important to leverage VivaColombia’s critical success factors to give it an edge over the rivals. The team of highly knowledgeable and experienced top managers has the best capacity to develop strategic plans that can work for the firm. They can monitor market trends and understand forces that are disruptive and those that can enhance success. The flexibility of the firm also makes it easy for the firm to streamline its operations based on the market forces. The firm that the team of employees and managers understands the local and regional market forces also gives the firm an edge. Figure 1 below identifies the critical success factors that givers VivaColombia and edge over its market rivals.
Strategic Choices and Reflections
The management of VivaColombia Airline has to make a critical decision about the path that this firm would take in the next five years. The firm can opt to consolidate its operations in the local market or decide to expand regionally. It is important to discuss each of these strategic choices to understand the pros and cons they present before choosing the most appropriate plan that the firm should select.
Strategic option 1: consolidation in the domestic market
The first strategic option that the management of this company can embrace within the next five years is consolidation in the domestic market. Instead of going global, this firm would focus on the Colombian market. It will come up with unique products that meet the local market needs in the best manner possible (Balch 2014). One of the benefits of this strategy is that the company will not spend a lot on market research because it already understands the local needs. The focus will enable the firm to identify effective strategies that can enable it to compete effectively against local and international airlines operating in the country.
It can also collaborate with some of the international airline companies to offer travel services to their customers in the local Colombian routes that they do not serve. The main weakness of this strategic move is that the firm will lose the opportunity to capitalize on the growing regional and international market (Mills 2017). The management has to understand that focusing on the domestic market does not overcome the risk of other firms exploring this market. While it will forgo the opportunity to acquire new markets, this firm will have to deal with new market entrants within the Colombian market.
Strategic option 2: expanding internationally into Brazil and other nations
The second strategic option that VivaColombia can consider is to expand to the international market by having new routes to Brazil. According to Bitzan, Peoples, and Wilson (2016), going global has become one of the strategies that firms use to increase their market growth despite the growing competition. One of the benefits of this move is that this company will expand its market share in the regional market.
The firm will take advantage of the growing number of people traveling from one country to another in North, Central, and South America. The move will enable the company to recover lost market share in Colombia as new firms continue to penetrate the market. The biggest challenge of this strategy is that the firm will need to invest more resources to sustain the expansion. It may be forced to purchase additional large airplanes relevant for such long routes.
When it comes to market research, this firm will spend more as it tries to understand different needs of its customers in different countries. What Americans may desire differs from what Brazilians or Colombians want (Page 2015). The company’s limited profits may not sustain such expensive studies. One of the risks that this firm may face when choosing this strategy is that it may have to upgrade its standards. The company compromised comfort for low price. However, such long routes mean that travelers will need to be comfortable. Such comfort comes at a cost to the company (Fleisher & Bensoussan 2015). There is the risk of changing the current business model to meet these new needs.
Preferred option
The analysis above presents the management with pros, cons, and risks of choosing any of the two strategic choices. It would be desirable for the firm to embrace both strategies at the same time, trying to consolidate the local market while at the same time embracing globalization strategies. However, given the fact that this is a small company with a strained budget, it is necessary to select one of the two options. According to Eriksson and Steenhuis (2016), many airline companies often prefer focusing on the international market where they do not have to face stiff competition from substitute products such as road and rail transport. The management of VivaColombia can focus on expanding its operations internationally to Brazil.
The airline has already made a successful entry into Panama, Ecuador, Peru, and the United States. Instead of withdrawing from these markets to focus its operations domestically, this firm should identify new markets where its products would meet the needs of customers. Brazil is a good option because of its large middle class population, which is keen on spending within a specific budget. They will find the pricing of this firm attractive. The option will enable the company to expand its market share despite the stiff competition in the local market.
Plan of Action
VvivaColombia needs an effective plan running from 2016 to 2020 that would enable it to achieve success in the market. As discussed above, the firm will focus on expanding its growth in the regional market by introducing new routes. The strategy will mean that the company will have an inflated budget. The new routes will require additional planes at the company. It will also require this firm to hire new pilots, cabin crewmembers, engineers, and other relevant staff members. The cost of fuel will also increase. The fixed cost during the expansion strategy will include the purchase of new planes at the necessary equipment.
Based on the current cost of Airbus a320, this firm will need about £650 million to add an additional 3 planes to service the new routes. Depending on the rate of growth in the international market, the cost of operation (variable costs) at the company at the company may increase by about 25%. The management should ensure that these costs are met using the available resources at the firm.
Mission
The company intends to offer quality air-travel services to its customers in the American continent at the lowest price possible.
Vision
To become the preferred low-cost carrier in North, Central, and South America
Targets
VivaColombia’s five-year strategic plan targets the middle class in North, Central, and South American markets. These individuals often consider cost as one of the most important factors when purchasing their products. The target is to increase the firm’s market share by at least 35% in every financial year. The firm also seeks to increase its revenues and profitability by about 25% every financial year.
Objectives
The company needs clear objectives that would define the manner in which it offers its services to customers. The following are the objectives that the management would need to focus on to ensure that this company achieves the intended goals:
- To understand the emerging market needs in the industry and develop effective plans of meeting them;
- To lower the cost of operations by eliminating wastage of resources and duplication of work;
- To offer good quality services to customers at a competitive price in the targeted market.
Deadlines
In this five-year strategic plan, it is necessary for the management to set short term goals, preferably on a yearly basis, that would be realized as a way of determining that the firm is moving towards the right direction. The annual deadlines set in every financial year would be met using the resources made available. Whenever there are weaknesses in the systems or company structure, it should be addressed within the set annual deadline to ensure that the plan of achieving specific objectives within the year is not compromised.
Focus-areas, priorities, and initiatives
The ability of this firm to achieve a 35% market growth depends on its priorities, focus areas, and initiatives that the management embraces. The focus area of this company would be the middle class in North, Central, and South America. VivaColombia’s business model targets these customers because of their growing number and their willingness to use air-travel services. The priority of this company is to ensure that its services are within acceptable levels in terms of quality. Although the primary goal is to lower the cost as much as possible, it should not be at the expense of quality. The firm needs to develop initiatives such as having its own jet fuel storage facilities to help it manage the cost of operations even when the international oil price increases.
Key performance indicators (KPIs)
Key performance indicators refer to a measurable value, which demonstrates how effectively a firm is moving towards the realization of its objectives. In this plan, specific objectives, missions, and targets have been defined, which VivaColombia can realize within the next five years. One of the main key performance indicators is customer satisfaction. The increasing cases of customer complaints at VivaColombia indicate that this company is not performing well in this indicator. The management would need to improve the quality of its services to eliminate such complaints. Another indicator is the profitability of the firm.
The financial report of this company shows that the company’s revenues and profits have been on the rise. It shows that the company’s performance is good. The cost of operation is another major performance indicator (Truxal 2017). The overall cost of operation at VivaColombia has been going down, which is an indication that the firm is making progress towards achieving its strategic goals. Another major performance indicator that the management of this company has focused on is customer satisfaction. The company has been focused on meeting the needs of its employees in terms of their remuneration and workplace environment. Satisfied workers tend to be motivated and capable of delivering excellent performance.
Conclusions
VivaColombia Airline is an emerging company in Colombia’s aviation industry. The firm selected a unique niche that many other airlines often avoid, the low-cost segment. The management realized that many people in South, Central, and parts of North America often desire to use such services but they cannot afford the average market price. As such, it introduced a unique model that compromised on comfort, especially for the short distances, and lowered the price significantly. The company has made an effort to lower its overall cost of operation as a way of increasing its profitability.
The study shows that the firm has to make a choice between consolidating its operations in the local market and exploring foreign market. The paper has identified pros, cons, and risks associated with each of the two options. The researcher recommends that within the next five years, the firm should focus on expanding its market coverage beyond the current routes. It should consider making an entry into the Brazilian market to help it achieve a sustained growth.
Reference List
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Appendix
Complaints
The increasing complaints at this firm show that it is unable to address customers’ needs in a way that meets their expectations. While complaints at other firms are increasing, complaints at VivaColombia are on the rise. It 2015, it had the worst record of all the seven airlines reviewed.
