Pestel analysis of british airways

In analyzing the macro-environment, it is important to identify the factors that might in turn affect a
number of vital variables that are likely to influence the organization’s supply and demand levels and its
costs (Kotter and Schlesinger, 1991; Johnson and Scholes, 1993). The “radical and ongoing changes
occurring in society create an uncertain environment and have an impact on the function of the whole
organization” (Tsiakkiros, 2002). A number of checklists have been developed as ways of cataloguing the
vast number of possible issues that might affect an industry. A PEST analysis is one of them that is
merely a framework that categorizes environmental influences as political, economic, social and
technological forces. Sometimes two additional factors, environmental and legal, will be added to make a
PESTEL analysis, but these themes can easily be subsumed in the others. The analysis examines the
impact of each of these factors (and their interplay with each other) on the business. The results can then
be used to take advantage of opportunities and to make contingency plans for threats when preparing
business and strategic plans (Byars, 1991; Cooper, 2000).

Kotler (1998) claims that PEST analysis is a useful strategic tool for understanding market growth or
decline, business position, potential and direction for operations. The headings of PEST are a framework
for reviewing a situation, and can in addition to SWOT and Porter’s Five Forces models, be applied by
companies to review a strategic directions, including marketing proposition. The use of PEST analysis
can be seen effective for business and strategic planning, marketing planning, business and product
development and research reports. PEST also ensures that company’s performance is aligned positively
with the powerful forces of change that are affecting business environment (Porter, 1985). PEST is useful
when a company decides to enter its business operations into new markets and new countries. The use
of PEST, in this case, helps to break free of unconscious assumptions, and help to effectively adapt to the
realities of the new environment.

Main Aspects of PEST Analysis

Economic conditions affect how easy or how difficult it is to be successful and profitable at any time
because they affect both capital availability and cost, and demand (Thompson, 2002). If demand is
buyout, for example, and the cost of capital is low, it will be attractive for firms to invest and grow with
expectations of being profitable. In opposite circumstances firms might find that profitability throughout the
industry is low. The timing and relative success of particular strategies can be influences by economic
conditions. When the economy, as a whole or certain sectors of the economy, are growing, demand may
exist for a product or service which would not be in demand in more depressed circumstances. Similarity,
the opportunity to exploit a particular strategy successfully may depend on demand which exists in growth
conditions and does not in recession. Although a depressed economy will generally be a treat which
results in a number of organizations going out of business, it can provide opportunities for some
(Robinson and et al., 1978; Thompson, 2002).

Economic conditions are influenced by political and government policy, being a major influence affecting
government decisions. The issue of whether European countries join, or remain outside, the single
European currency is a case in point. At any one time either exported or imported goods can seem
expensive or inexpensive, dependent upon currency exchange rates. There are many other ways,
however, in which government decisions will affect organizations both directly and indirectly, as they
provide both opportunities and threats.

While economic conditions and government policy are closely related, they both influence a number of
other environmental forces that can affect organizations. Capital markets determine the conditions for
alternative types of funding for organizations. They tend to be a subject to government controls, and they
will be guided by the prevailing economic conditions. The rate of interest charged for loans will be affected
by inflation and by international economics and, although the determining rate may be fixed by a central
bank, as it is the case with the Bank of England, that will also be influenced by stated government
priorities. According to Thompson (2002), government spending can increase the money supply and
make capital markets more buoyant . The expectations of shareholders with regard to company
performance, their willingness to provide more equity funding or their willingness to sell their shares will
also be affected.

The labour market reflects the availability of particular skills at national and regional levels; this is affected
by training, which is influenced by government and other regional agencies. Labour costs will be
influenced by inflation and by general trends in other industries, and by the role ad power of trade unions.

The sociocultural environment encapsulates demand and tastes, which vary with fashion and disposable
income, and general changes can again provide both opportunities and threats for particular companies
(Thompson, 2002; Pearce and Robinson, 2005). Over-time most products change from being a novelty to
a situation of market saturation, and as this happens pricing and promotion strategies have to change.
Similarly, some products and services will sell around the world with little variation, but these are relatively
unusual. Organizations should be aware of demographics changes as the structure of the population by
ages, affluence, regions, numbers working and so on can have an important bearing on demand as a
whole and on demand for particular products and services. Threats to existing products might be
increasing: opportunities for differentiation and market segmentation might be emerging.

Technology is widely recognised by various literature on strategic management (Capron and Glazer,
1987; Johnson and Scholes, 1993; Jan, 2002), as part of the organization and the industry part of the
model as it is used for the creation of competitive advantage. However, technology external to the
industry can also be captures and used, and this again can be influenced by government support and
encouragement. Technological breakthroughs can create new industries which might prove a threat to
existing organizations whose products or services might be rendered redundant, and those firms which
might be affected in this way should be alert to the possibility. Equally, new technology could provide a
useful input, in both manufacturing and service industries, but in turn its purchase will require funding and
possibly employee training before it can be used.

There are three key drivers behind the recent trends and events in the airline industry. These
are:

A/ Deregulation
B/ Internet
C/ Low Cost Airlines (LCAs)

A/ Deregulation
Drawing on the political factors in the PEST analysis performed on this industry, there are two
significant factors that have brought change to airline industry.
i/ The US Airline Deregulation Act 1978
ii/ Air Transportation Deregulation in Europe between 1987 - 1997

The main PEST factors that have influenced alliances are:-

Political.
Politically, there are operating restrictions, which airlines have to work within. The benefits in
joining an alliance, is that it makes otherwise unreachable routes, a reality. This also ties in with
slots, as each national carrier in their home cities, has the monopoly. Another political benefit is
the bilateral route agreements, which all members of an alliance can utilise.

Economic.
Capacity in Europe outstrips demand, which leads to rate wars, equalling lower yields for
companies. Economically, alliances lead to a greater control on capacity, therefore reducing
competition and increasing yields. Alliances also reduce the near term possibilities of airport
expansion. By code sharing airlines are able to not only split costs but to offer services and
enter markets, they might ill afford to do on their own. This leads to less aircraft at airports,
therefore less space being required, and is another way in gaining access to prime airports,
which can expand no further.

Social.
These are strong from an employer staffing perspective. Airlines in alliances / code-share can
reduce costs by utilising only one airline's staff.

Technological.
Technology in this industry is fast moving and very expensive. Alliances, give the opportunity for
joint investment ventures, such as shared check-in systems

://www.harrcross.com/harrcross/business083.htm

How far is my company away from failure? The question itself sounds like an admission of
inadequacy. The confident manager surely doesn't walk around waiting for nemesis to strike.
Rather, confident people strut the stage like a colossus, with all the certainty, say, of Bill Gates.
The question, though, was inspired by Gates, who observed that 'Microsoft is always just two
years away from failure.' This wasn't self-deprecation, but sober analysis.

One of management's trustiest tools is the SWOT analysis. You take a calm, cool look at the
organisation's Strengths, Weaknesses, Opportunities and Threats. Then you seek to capitalise on
the Strengths, Eliminate the Weaknesses, seize the best Opportunities and counter the Threats.
Could the magnificent success of Microsoft, with its 90% gross margin and $9 billion of cash,
really be threatened? In a brilliant study in Worldlink magazine, Howard Anderson has shown
that the answer is Yes - a dozen times over. Although the threats are specific to the software
industry, they are also generic. Try them on your own firm:

1. Could newcomers (including breakaways from your own company) create damaging
competition?
2. Is there an equally powerful force in the market which could muscle into your territory?
3. Is there a rival technology or other differentiator which could come out on top?
4. Are you weak compared to the competition in a key market segment?
5. Is the market developing in ways that favour competitors more than you?
6. Could your customers takes major sources of revenue away?
7. Is there a major area in the market where you lag rather than lead?
8. Does a competitor have a stronger hold on your biggest customers?
9. Is there a growing market where you are being left behind?
10. Are there environmental/regulatory threats?
11. Could unsuspected challenge arrive from outside the existing industry?
12. Is your market too broad for all threats to be safely covered?

AN INTIMIDATING LIST
The thirteenth question, of course, is whether, if any of the dozen apply to your business, you are
doing anything effective to counter the Threat or, better still, to convert Threat into true
Opportunity. It's an intimidating list, even for mighty Microsoft, especially when you see the
names of its leading enemies: Sun Microsystems, the big banks, Cisco, Compaq, Netscape,
Oracle, SAP and IBM. The latter giant provides Anderson with his starting point. Could what
happened to IBM afflict Microsoft? His company, The Yankee Group, had been deeply
impressed by the Strengths deployed by IBM in 1982 - and not surprisingly.

IBM led in every important market of the time: mainframes, communications, mainframe
storage, mincomputers, and personal computers. It earned more profit than the next nine
computer firms generated in total sales, spending more on R&D than they made in earnings. The
Yankee Group concluded that IBM was therefore invulnerable - yet the giant was about to
embark on a prolonged slide that, amazingly, leaves its market value lagging behind both
Microsoft and Intel, and by no small margin, either. IBM's $86 billion of mid-1997 market
capitalisation compares to $149 billion for Microsoft and $124 billion for Intel: IBM should
plainly have held on to its old strategic investment in the latter. How could the Yankee Group's
assessment be so spectacularly wrong?

In the first place, never concentrate just on your own or anybody else's Strengths. That's highly
dangerous, partly because they can so easily turn into Weaknesses. Thus IBM's domination of
mainframes, and dependence on them for the bulk of its profits, became an incubus as the market
moved away to the PCs from which Intel and Microsoft drew their super-growth. The latter's
similar domination and dependence in PC operating systems almost moved from Strength to
Weakness as the Internet took off - and Gates was much nearer than his 'two years away from
failure' when, with a mighty effort, he reversed engines and poured billions into Net, software
probably just in time.

Second, market share and leadership by size are not strongpoints in themselves. In PCs, Compaq
was able to exploit a world share of around 3% far more effectively than IBM, which had three
times the market. The issue is how the market share, whether leading or not, has been achieved
and sustained. Is the product or service perceived as superior? Is it cheaper? Is the distribution
more effective? Is the cost level lower? Is speed-to-market faster? Are customer requirements
met more accurately?

REACTION IN CRISIS
In the case of Compaq v IBM, curiously enough, the answers were all negative. Compaq had no
significant advantage in product, distribution, costs, price, speed-to-market or customer
satisfaction. But in the money-losing crisis into which Compaq suddenly plunged, it reacted
radically on every point to create a stronger platform than its rival. The cost ratio, for instance,
came down from 31% to 12.5% - an astonishing performance - as new products were launched at
high speed, and the premium price policy was abandoned in favour of leading price levels
downwards.

The key Strengths at Compaq were therefore intangibles, as were the Weaknesses at IBM. The
smaller company was able to react and reform at speed; the larger could only react slowly and
reluctantly. So the Yankee Group's second error was to concentrate on static Strengths, which are
the results of past performance, rather than analysing the factors which will govern performance
in the future. Even IBM's massively higher R&D spending was irrelevant in this context - the
quantum of expenditure was less important than the uses to which its results were being put. The
Yankee research consequently missed the low rate of conversion of R&D into saleable products -
clearly shown, for example, by the strange RISC saga.

IBM's discovery of Reduced Instruction Set Computing, primarily the work of a technologist
named John Cooke, was potentially a big winner, since it much enhances the performance of
smaller computers. IBM, though, didn't use its own discovery in a work-station until 1990 - three
years after Sun Microsystems and twice as long after RISC's availability. How could such
absurdity be allowed? The explanation is that RISC was resisted by people who were dedicated
to extending the 360-370 mainframe architecture. That's a perfect (or imperfect) example of how
Strength turns into Weakness. Exactly the same mindset also allowed Compaq to seize the
advantage, and a market share of nearly one third. in client-servers, powerful PCs which serve
networks.

The resilience which IBM's rivals have shown, compared to their opponent's fateful
conservatism, rests on people. In any industry today, the brighest and best employees are aware
that their own SWOT analysis could lead to breakaway. They could stay with the company and
develop their ideas within its embrace. But fragmented markets and booming stock prices,
coupled with increasingly plentiful venture capital, offer a constant temptation.

Keeping people one by one, buying them off, so to speak, is no solution. The company has to
create a culture that's so attractive, so hard to leave, that the retention rate will remain very high.
In other words, Putting People First has to be the base strategy. An unhappy workforce is both a
Weakness and a Threat - as British Airways has recently found. Its resurgence was founded on a
programme actually called Putting People First - but, after a pilots' strike threat last year, in late
June cabin crew and ground staff were equally alienated.

Look at what Fortune magazine calls the 'four-pronged approach' adopted by chief executive Bob
Ayling, and the missing element is immediately obvious:

1. Develop a marketing plan with universal appeal

2. Help employees understand the company's global vision
3. Benchmark off mistakes that others have made in the past
4. Select the right partners for joint ventures overseas.

MISSION STATEMENT
The wording of the only reference to people is curious. So long as they 'understand' that BA
wants to be seen as a global airline, not a national carrier, that's fine. But consider this quotation:
'At a recent employee gathering in New York, none of the 75 people in the audience could
remember the company's... mission statement' - which was only a single sentence. To put it
mildly, there's not much point in a mission that everybody has forgotten.

The massive facelift on which BA is engaged went down well with the same audience ('there
were audible oohs and ahs when images of the new planes and tocket jackets flashed up on a big
screen.') The author's conclusion was that; 'If you give somebody a product they can be proud of
and tell them why it's changing, you stand a good chance of helping them sell it better.' That is
far from the truth. There are some key questions that need to be answered:

1. Have the people helped to create the new product?

2. Did they contribute to the thought processes that led to change?
3. Are they constructively involved in deciding how to sell the product better?

The answers at BA appear to be negative. One report accuses Ayling of being someone who
'may not have grasped the finer points of dealing with real people, as opposed to numbers on a
page.' The curious issue here, though, is that BA has confronted similar problems before. Some
of its managers have learned the powerful lesson that change accomplished through people is far
more effective than change forced upon them. In the last 1980s, the troubles with its engineering
division became so acute that management was forced to take a strike, keeping the airline going
with white-collar labour, until the unions capitulated.

Alastair Cumming, the manager in charge, concluded that 'very determined management' could
only go so far. Unless the employees could be positively involved and their willing support
obtained, further progress would be impossible. The results of changing the management culture
- from order and obey to cooperation - were spectacular. Cumming sold off its engineering
overhaul business to GE, cut staff numbers by 500, and took £38 million out of costs
in the first year - without any dispute. Once improvement had become the shared objective, and
the necessary tools had been provided, examples soon abounded of employees taking the
initiative in raising quality and reducing cost.

The BA engineering exercise rubs in the point that the SWOT exercise needs to be in two parts:
internal and external. The first category includes matters like R&D strengths, engineering know-
how, the cash in the bank, and so on. But these are passive. The second category is what actively
turns the physical assets into achievements in the external world. This was brought home to me
forcefully by reading Ryuzaburo Kaku's account of how he devised the two plans - in 1972 and
1982 - which converted Canon into, first, a premier Japanese company and, second, the world
technology leader that it is today.

INTERNAL DEFECTS
The process, according to Kaku's article in the July-August Harvard Business Review, began
with a meeting at which the young Kaku argued that Canon's obvious weakness of the time (a
cash shortage so severe that it couldn't pay dividends) resulted from internal defects: 'poor
decision-making and bureaucratic organisation'. Given his chance, Kaku 'radically decentralised
decision-making, redesigned the organisation' and 'poured resources into R&D'. As the fruits
poured forth, Kaku developed his ideas on 'kyosei' or 'a spirit of cooperation'.

He describes kyosei as a five-stage journey, starting with economic survival. That's where the
vast majority of companies stop - making reliable profits from strong market positions: just like
IBM or BA, in other words. But Kaku argues that this stage is not enough - the company must
move on to cooperation between management and labour. Salaries, bonuses and training are all
involved in this process: 'The two sides are in the same boat...sharing the same fate'. Plainly, this
is the stage where BA has fallen short. Instead of emulating his own engineering side's later
enlightenment, Ayling is adopting the strong-arm methods of its former, unhappier days.

Even cooperation is still not enough - 'this stage of kyosei can become so inwardly focused that it
does little to solve problems outside the company'. Kaku goes on to call for cooperation with
both suppliers and customers and with communities. Suppliers, for instance, are 'provided with
technical support and in turn deliver high-quality materials on time'. But even that's not enough.
In this third stage, 'companies often focus so much on local and national problems that they
neglect global problems' - which leads on to Kaku's next two stages, globalism and partnership
with governments.

Now, for most businesses these two stages seem infinitely remote - though globalism, thanks
partly to the Internet, is a rising force in many markets today, and may well become decisive. But
Kaku's five stages raise a crucial point: nothing is ever enough. No matter how great your
Strengths, how limited your Weaknesses, how minimal the Threats and well-taken the
Opportunities, there is always a next stage. The organisation must continually challenge itself
and move onwards and upwards. An encouraging internal and external SWOT analysis is simply
a foundation - an encouragement to do better still, and then more.

Nevertheless, the foundations laid by Kaku, together with the principles of employee cooperation
which he used, make an instructive guide and form a penetrating two-part questionnaire:

1. Have you formed a large overall ambition? (Canon's was to join the top ranks of global
companies and move from cameras to all-round high-technology manufacturer).
2. Have you set aggressive, long-term performance targets for every part of the organisation?
3. Have you got the right set-up? (Canon formed a matrix with three main product lines as
vertical pillars, linked by three horizontal activities - manufacturing, marketing and R&D).
4. Are you investing heavily in all the horizontal activities?

Turn from Canon to BA, and the four questions would reveal similar foundation strengths,
starting with the fact that it carries more passengers than any other airline. Its planned alliance
with American Airlines should create a dominant force in an industry where BA already boasts
the highest profitability. Its plans to cut costs and employment by radical reorganisation,
including the outsourcing or disposal of services, will add to the Strengths and ward off any
Threats. But the whole edifice (including those plans) rests on the next four questions based on
the Canon experience:

5. Have you eliminated all distinctions between different types of employee?

6. Have you based excellent employee relations on investing in high salaries, extensive training
programmes, generous vacations., etc?
7. Do you dislike and seek to avoid lay-offs, early retirements,etc.?
8. Do you make it a prime objective never to engage in confrontation with your employees?

Here BA's answers are far less satisfactory. Yet the two parts, the strategic exploitation of
commercial assets and the creation of a one-company, cooperative culture go hand-in-hand. You
can see the fruits of Canon's two-part octet in a decade of growth in net profits by 20% annually,
with sales rising at 9%, and the return on both sales and equity more than doubling. In copiers
and desktop printers, its main products, too, Canon is world leader. To take today's abundant
Opportunities in like style, against multiplying Threats, never forget that Strengths can become
Weaknesses - but, equally important, Weakness can be turned into Strength.

1. Introduction
The present assignment should formulate a proposal concerning a major strategy change of
British Airways, which will be in our case the acquisition of the low-cost carrier Easy Jet. After
the formulation of the major strategy change proposal, this work provides an implementation
plan as well as a strategic management plan.

2. Major Strategy Change Proposal

2.1. Nature and Content

2.1.1. Reaffirmation of practical nature of proposal

In recent years, the number of low-cost carriers in Europe has increased noticeable. Especially
the market for short haul flights within Europe has enlarged so that there are today
approximately 57 providers competing for customers (www.discountairfares.com). Predictions
of experts suggest that in the near future there will be a collapse in the low-cost airline business
and only the biggest and strongest will be able to survive. The proposal of the author is that
British Airways (BA) takes over the London based low-cost airline Easy Jet (EJ) in order to
participate in this fast growing market. In this way, BA will be able to reparate its mistake from
August 2002 as Go Air was sold to Easy Jet. Even after the collapse of the low-cost line of
business, BA’s low-priced subsidiary will be capable to increase its market share and to remain
competitive.

2.1.2. Generic Basis of Competition

Michael Porter developed the ‘Generic Strategies’, which provide three main options of selecting
a strategy fitting for each company. Figure 1 illustrates the different strategy alternatives, which
are cost leadership, differentiation, cost focus and differentiation focus which can be recognized
as one strategy. Regarding our case, the author decided to select the ‘Cost Focus’ strategy. For
the case of BA and EJ, we have to say that the ‘Cost Leadership’ strategy would not be suitable.
It is obvious that low-cost airlines offer low fares. Consequently, the costs have to be reduced in
order to achieve profit. However, the reputation of BA can be described as excellent. This is the
reason why the new BA low-cost airline will have to have higher standards than its competitors.
Furthermore, Easy Jet will remain an own brand in order not to influence BA’s image negatively.
Nevertheless, the new airline will be a low-cost airline with focus on costs even if it does not
hold the cost leadership. The ‘Differentiation’ as well as the ‘Differentiation Focus’ strategy will
not be taken into consideration due to the fact that low-cost airlines do not have a large
possibility to differentiate itself from others by better in-flight service.

2.1.3. Strategic Direction and Risk/Reward

The strategic direction and risk/reward can be identified and explained with the aid of the well-
known Product-Market-Matrix by Ansoff, which is from 1965 but still state-of-the-art. The aim
of this matrix is to systemise and to organize different product and market strategies. These four
strategies are identified as market penetration, product development, market development and
diversification (Figure 2). For our case, we can state that BA enters the low-cost airline market,
which is a new line of business. Furthermore, the product BA is operating with is still aircraft.
Consequently, we can classify the strategic direction of BA in the Ansoff Matrix to the position
bottom left, which is identified as market development.
As a result of the new market the airline enters and the associated problems that can occur the
risk can be seen as medium to high. The expected rewards of these strategies are on the one hand
the development of new markets, the attraction of new target groups and the opening of new
channels of distribution. On the other hand, the possibility exists of exploiting synergy potential
(Welge 1999 p. 436).

2.1.4. Implementation Method

For the implementation of the new strategy the author chose the Merger&Acquisition (M&A)
method (Figure 3). For our case the author is proposing an acquisition of Easy Jet by British
Airways in order to obtain full control of the company. Obviously, an acquisition which is not
well executed might fail and cause damages at both companies concerned. Acquisition is a tried
and tested method to get immediate access to new products or markets. Furthermore, acquisitions
can be seen as a ‘low-cost’ alternative to organic growth if the share price of the target company
is lower than the estimated company value. As a third advantage, we can state that the acquiring
company takes over the target firm as well as its ‘human capital’- the company’s employees
(Picot 2002 p. 309). Regarding our case, this clarifies that British Airways is capable of
obtaining the market specific know how of Easy Jet’s staff which will be valuable in order to
stay competitive in the low-cost carrier market. On the other side risks exist like the possible
problem of integrating the new company. Nevertheless, the brand Easy Jet will be sustained and
departments for purchasing, accounting and perhaps services will be combined to realize
synergetic effects. Besides, a further disadvantage for acquisitions can be the long period after
the acquisition until the shareholder value increases
http://www.thinkingmanagers.com/companies/british-airways.php