Cathay Pacific Airways’ Strategic Renewal
Executive Summary
This paper discusses the circumstances in a which a company consider implementing strategic renewal strategy. Cathay Pacific Airways is used a case study. Cathay Pacific is one of the leading airlines in Asia. It has a comprehensive network of flights to over 90 destinations around the world. Cathay Pacific is considered as an industry leader. It operates in a mature industry. Firms in mature industry finds themselves in a challenging situation. As more and more firms enter the industry and more and more products and services are introduced, the threat of industrial decline is serious. Cathay Pacific like many airlines around the world employs different strategies to maintain its position and continue growths and expansion. Cathay Pacific’s strategies to remain competitive and maintain its position as a top airline company will be discussed in this paper.
Strategic Renewal
Strategic renewal is defined by Guth and Ginsberg (1990) as the transformation of organizations through renewal of the key ideas on which they are built. According to Sharma and Chrisman (1999) strategic renewal involves considerable changes to an organization’s business or corporate level strategy or structure. The purpose of renewal is to change or renew existing products, markets, structural relationships and resource configurations in order to improve the company’s performance. Strategic renewal is often implemented as am answer to different environmental issues and demands that may threaten the company’s success.
Cathay Pacific Airways
Cathay Pacific is Hong Kong‘s premier airline company. It has a wide network, operating in over 90 destinations around the world. Cathay Pacific is one of the biggest and most admired airlines. In 1946, Cathay Pacific was founded in Hong Kong. The company since then has continued to develop Hong Kong’s airline industry and supported Hong Kong’s position as a major transportation center in the region. Cathay Pacific was founded by an American named Roy Farrel and an Australian named Sydney de Kantzow. Cathay Pacific was founded in Hong Kong on the 24th of September, 1946.
Cathay pacific is one of the most well known airline company in the world. It competes with different airline companies for prestige and notoriety in the airline industry. Recently the company underwent a change in image and strategies to counter the problems its industry has. It shifted the focus of its strategy into making sure that there will be an increase of clients who demanded their services, it also made sure that the services and technologies they use can be competitive to other airlines company.
Factors that Lead to Strategic Renewal
Industry Life Cycle Stage
The airline industry is considered a mature industry. Mature industries continue to change and develop and firms in mature industries continue to innovate. However, firms in mature industries are slowing down their competitive positioning efforts. Competitive strategies have already been played out. Total industry demand grows very slowly. Cathay Pacific operates in a mature industry where product differentiation strategies becoming less effective. Product innovation in mature industries are minimal. Competitive advantage through superior technology is difficult to obtain. The customers in mature industries are also changing. They tend to have a strong knowledge base. In mature industries, consumers are sophisticated in the sense that they are well informed. As customers get used to the product they become more critical in their appraisal of what firms have to offer and also become more brand conscious. Customers’ attention moves from deciding whether to purchase the product to making choices among brands (Proctor 2000). Cathay Pacific operates in a maturing industry where different factors affect its operation and success. Cathay Pacific needs to constantly reassess its strategy. Slower growth, more knowledgeable customers and greater technological maturity means that competition is based more upon level of service and cost control. Cathay Pacific needs to closely monitor the developments in the industry. As the organization continues to grow, capacity additions to the industry will be continual and regular. The organization needs to forecast the rate of industry growth. According to Proctor (2000), the ability to find new products and applications diminishes as maturity is attained and where they can be found they tend to be more risky and costly.
We can say that the life-cycle stage where Cathay Pacific Airways operates pose different challenges for the firm. The challenges and threats in the mature industry is one of the factors that influence an organization to consider strategic renewal.
Changes in Demand
The changes in customer demands affect a firm’s processes and operation. When new firms enter the industry and new products and services are introduced, the market will eventually become saturated. As more and more firms enter the industry and more and more products and services get introduced, the industry will enter a new market phase. Sales will start to fall and the firms that will fail to keep up with the changes in demands will eventually forced to cease its operation.
Creation and Diffusion of New Knowledge
Firms continue to create new knowledge. This leads to continuous product innovation. A firm may create a new knowledge. This knowledge can leak into the industry causing a more intense competition. Product innovation is closely followed by process innovation. The sequence is to establish the product standard and then establish the process. After establishing the standard, firms often try to introduce innovation to the process for cost savings and quality improvements.
Strategies for Strategic Renewal
Strategic Innovation in Service
One of the strategies that Cathay Pacific implemented in order to remain competitive is strategic innovation in service. The company develops a strategy that will keep them informed about the changes in customer needs. Cathay Pacific seeks to build strong relationship with its customers that’s why it implemented a strategy called ‘Service Straight from the Heart’. Cathay Pacific’s Service Straight from the Heart is the firms way of introducing innovation in the airline industry. Cathay Pacific moved away from the set standard and developed a more effective way of rendering service. By doing this, Cathay Pacific is able to differentiate its service from its competitors. Cathay Pacific’s Service straight from the Heart is considered as a source of competitive advantage.
As a customer-focused organization, Cathay Pacific keeps the needs and wants of the customers a top priority in the decision-making process. Cathay Pacific displays a genuine commitment to satisfy the demands of the passengers. Cathay Pacific focuses on service because it differentiates them from other airlines. Because of their Service from the Heart strategy, Cathay Pacific is able to build relationship with customers. Passengers become loyal to the company because they feel comfortable, valued and safe. Modern corporations are increasingly offering fuller market packages of consumer focused combinations of goods, services, support, self-service, and knowledge. The goal of Cathay Pacific is to become the world’s most admired airline through its superior delivery of service and customer value. Cathay Pacific believes that superior service differentiates them from the competition. The organization is committed to meeting on-time performance goals, maintaining and growing international route network, and increasing flight frequencies to meet market demand. Cathay Pacific strives to deliver Service Straight from the Heart and takes pride in making its customers feel safe, welcome, comfortable and above all, reassured. Cathay Pacific aims to meet and even surpass customer expectations. That Service Straight from the Heart strategy of Cathay Pacific enables the company to strengthen customer loyalty and enhance the profitability (Cathay Pacific Annual Report 2006).
Leadership Strategy: Corporate Venturing
Corporate venturing is defined as the process of creating new businesses in an organization. An organization can create a new business venture by creating new business divisions within the firm or by using external competences to form a joint venture with a different company (Verbeke et al 2007). Corporate ventures can contribute to the success of an organization in different ways. A corporate venture can enable firms to appropriate greater value from their core competencies by leveraging those competencies within product-market arenas operationally or strategically related to the firm’s business (Burgelman and Doz 2001 cited in Covin and Miles 2007). An organization can also use a corporate venture to develop new competencies that will explore new opportunities for that were previously out of the parent company’s reach. Corporate ventures are also used by many companies with declining businesses as a new core business that will help them develop new core businesses. Corporate ventures can also be useful in exploring new business domains that the parent organization is planning to enter. Cathay Pacific Catering Service is a wholly owned subsidiary of Cathay Pacific Airways. It is the principal flight kitchen in Hong Kong. Cathay Pacific’s venture produced 19.8 million meals in 2005 and accounts for 71 per cent of the airline catering market in Hong Kong.
Flanking Defence: Mergers and Acquisitions
Two of the most important corporate-level strategies of companies today is are mergers and acquisitions. Mergers and acquisitions are holding strategies that aim to support growth and at the same time protect the company from the threats of new entrants. Mergers and acquisitions are flank strategies as it aims to heighten barriers to entry while leveraging growth. Merger and acquisition strategies are now seen as essential in order for a firm to grow and succeed. Cathay Pacific’s move to integrate Dragonair and build stronger partnership with Air China enabled it to strengthen its position as Hong Kong’s top carrier. Through mergers and acquisitions Cathay Pacific is able to acquire excellent businesses and talented people. Cathay Pacific holds a 60 per cent interest in AHK Air Hong Kong Limited, an all-cargo carrier with a major focus on express cargo services for DHL Express. AHK is continuing to grow with more destinations in Asia. Cathay Pacific also holds a 70 per cent interest in Hong Kong Airport Services Limited, the largest franchised ramp handling company at Hong Kong International Airport. Hong Kong Airport Services recorded a healthy growth in revenue as it handled a record number of flights. Hong Kong Aircraft Engineering Company Limited is another company that Cathay Pacific partly owns. Cathay Pacific holds a 27 per cent interest in the company that provides aircraft maintenance, modification and overhaul services at Hong Kong International Airport. Cathay Pacific holds an 18 per cent interest in Hong Kong Dragon Airlines Limited, an airline company operating passenger services to 30 destinations in Asia (Cathay Pacific Annual Report 2006). Dragonair helps Cathay Pacific maintains its top position in the airline industry in Asia as well as intensifying the barriers for new entrants
Dual Strategy: Product and Service Differentiation
Dual strategies aim to maximize the effectiveness of a firm’s present resources and maximize the future wealth of the company by creating new value.
Cathay Pacific uses a differentiation strategy in order for it to acquire a dominant position in the market. According to Proctor (2000), a differentiation strategy is one where wide product ranges and higher quality products are offered for the convenience of customers as well as added services. Customers values different product and service offerings. Cathay Pacific uses its expertise, experience and resources in order to maintain its top position. Cathay Pacific values its people above all. Its people are its major resource. Amidst the emergence of cheap long-haul airlines, Cathay Pacific remains strong. The company caters to a different market that values service and product features more than price. Through Cathay Pacific’s quality service and luxurious features and amenities, passengers repeat their purchase of the product and service. Interior layout and configuration of the aircraft is one of the considerations of Cathay Pacific’s passengers. Space is considered as the key comfort variable. Cathay Pacific’s excellent in-flight service and high catering standards are another source of competitive advantage. In flight service and catering standards according to Doganis (2002), cover the nature and quality of food and beverages provided, the number of cabin staff for each class of cabin, the availability and range of newspapers and magazines, in-flight entertainment and communications, give-aways for passengers as well as for children and so on. The company is committed to meeting catering standards. The company meticulously plan its airline meals. Still another factor that adds to the present effectiveness of the company and at the same time create new value for the future is the creation of the company’s super hub at the Hong Kong International Airport. Cathay Pacific’s super hub at Hong Kong International Airport offers a wide range of services and benefits aimed at making the passengers’ arrival, departure and connections as smooth, convenient and pleasurable as possible. Other intangible aspects of comfort and source of differentiation that Cathay Pacific is offering are efficiency, helpfulness and friendliness of staff, both the cabin crew in the air and the ground staff at check-in, in the airline lounges and at the boarding gates.
Dual Strategy: Ensuring Customer Satisfaction through Service
Cathay Pacific’s business is selling experience to the passengers. The company tries to develop an emotional bonding with its passengers in order to encourage repeat purchase and loyalty. The people that work in Cathay Pacific are the airlines top resource. They are the ones who make the differentiation of Cathay Pacific’s offerings different from those of the competitors. The employees at Cathay Pacific are the ones who bridge the gap between product development and customer expectation. The employees make the passengers feel welcomed, appreciated and reassured. Service Straight from the Heart is a programme that aims to develop cultural change within the airline focused on improving customer service. Service is the principal means of differentiating between airlines and is highly influential in customer choice. Cathay Pacific has expressed within its programme its understanding of the importance of the people within the organization and its recognition of the contribution of those people to its success.
Dual Strategy: Strategic Human Resource Management
Human resources or human capital is the intangible resources of abilities, effort, and time that workers bring to invest in their work (Davenport 1999). The people at Cathay Pacific are the major contributors of strategic capability to the company. One of the advantages of Cathay Pacific over its competitors is the quality of service that the staff provide to its customers. Service has a big impact on the customers’ perceptions about the company’s product. Because of the importance of its people, Cathay pacific formulated an employee development strategy through proper and effective training. This strategy is expected to strengthen Cathay Pacific’s position in the marketplace. Employee development can be an essential ingredient of an organization’s competitive advantage. Employee development includes all of the education and training that organizations might invest in their employees such as training employees to perform effectively in their current jobs, orienting employees to the workplace, developing them for advanced positions or programs, and building organizational capability for future success (www.cathaypacific.com). Cathay Pacific promotes a working environment wherein the employees are free to act in both the company’s and passengers’ best interests.
One of the key to maintaining a competitive advantage in the airline industry, now and in the future, is the strategic management of human resources. Human resources as an internal resource of a firm are one of the sources of strategic capability. Human resources are among the top contributors to Cathay Pacific’s strategic capability. Effective management of an organization’s human resources according to Sims (2002) is a major source of competitive advantage and may even be the single most important determinant of an organization’s performance over the long term.
Conclusion
Moving from an emerging industry to a mature industry has different challenges and threats. In mature industries, new opportunities are declining. Innovation is also hard to introduce and the sales are starting to fall. These problems make it hard for firms to maintain their positions and to further their growth. Cathay Pacific is considered an Airline Industry leader with operations in more than 90 destinations around the world. Like many firms, Cathay Pacific finds itself in a challenging situation now that the Airline industry has reached its maturity. In order to continue growth and expansion, Cathay Pacific employ different strategies. One of this is the introduction of innovative service. Cathay Pacific was able to develop an innovative way of serving its passengers. The Service straight from the Heart programme of Cathay Pacific helps it retain its customers and encourage repeat purchase. Quality service sets Cathay Pacific from its competitors. Another strategy is corporate venturing. Corporate venturing is the process of creating new business in the organization. Cathay Pacific’s corporate ventures help the firm to explore other opportunities aside from its present core business. Mergers and acquisitions are being used by Cathay Pacific as flanking defence. Mergers and acquisition help the company acquire excellent businesses and talented people. Mergers and acquisitions contribute in organizational growth. Mergers and acquisitions also protect the firm from new entrants. Product and service differentiation give competitive advantage to the company at present and in the future. As a service organization, Cathay Pacific takes pride in its quality service and effective human resources.
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