DESIGNING AND EXECUTING STRATEGY

IN AVIATION MANAGEMENT
 Dedicated to our beloved parents,
Georgios and Vasiliki Flouris and Edward and Helen Oswald
Designing and Executing Strategy
in Aviation Management

TRIANT G. FLOURIS
San Jose State University, USA

and

SHARON L. OSWALD
Auburn University, USA
First published 2006 by Ashgate Publishing

Published 2016 by Routledge

2 Park Square, Milton Park, Abingdon, Oxon OX14 4RN
711 Third Avenue, New York, NY 10017, USA

Routledge is an imprint of the Taylor & Francis Group, an informa business

Copyright © Triant G. Flouris and Sharon L. Oswald 2006

Triant G. Flouris and Sharon L. Oswald have asserted their moral right under the Copyright,
Designs and Patents Act, 1988, to be identified as the authors of this work.

All rights reserved. No part of this book may be reprinted or reproduced or utilised in any form
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Product or corporate names may be trademarks or registered trademarks, and are used only for
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British Library Cataloguing in Publication Data

Flouris, Triant G.
Designing and executing strategy in aviation management
1.Airlines - Management 2.Strategic planning
I.Title II.Oswald, Sharon L.
387.7'068

Library of Congress Cataloging-in-Publication Data

Flouris, Triant G.
Designing and executing strategy in aviation management / by Triant G. Flouris and
Sharon L. Oswald.-- 1st ed.
p. cm.
Includes bibliographical references and index.
ISBN 9780754636182 (hbk)
1. Airlines--Management. 2. Strategic planning. I. Oswald, Sharon L. II. Title.

HE9776.F57 2006
387.7068’4--dc22
2005028246
ISBN 9780754636182 (hbk)
ISBN 9781315576718 (ebk)
 Contents

List of Figures x
List of Tables xi
List of Boxes xii
Foreword xiv
Preface xvi
Acknowledgements xx
List of Abbreviations xxi

1 The Essence of Strategy 1

What is Strategic Management? 1

What is the Strategy of an Organization? 2
The Meaning of Competitive Strategies 3
The Difference between Operational Effectiveness and Strategy 4
The Strategic Management Process 5
Corporate Values and Social Responsibility 6
Designing a Corporate Vision 8
Is a Strategic Vision Really Important? 10
Sample Vision Statements 10
Designing a Mission Statement 11
The Reason Mission Statements are Important 12
Mission Statements and the Environment 12
Setting Organizational Objectives 13
Long-Range and Short-Range Objectives 14
Objectives Should be Pervasive Throughout the Organization 14
Strategic Versus Financial Objectives 14
Carving Out a Strategy 15
Strategy is an On-going Process 16
Sample Mission Statements 16

2 Strategic Positioning and Sustaining a Market Presence 19

The Generic Strategies 19

Low-Cost Leadership Position 21
When Should a Low-cost Leadership Strategy be Used? 24
What do Managers Have to Do to Achieve Low-Cost Leadership? 24
vi Designing and Executing Strategy in Aviation Management
Differentiation Strategies 25
Niche Strategy 29
Geographical Niche 29
Customer-Type Niche 29
Product-line Niche 30
Cost or Differentiated Niche Strategy 31
Best-Cost Producer Strategy 34
The Miles and Snow Typology 34
Defender 35
Prospector 35
Analyzer 35
Reactor 35
A Fresh Perspective on Competitive Strategies 36
A Summary of Competitive Strategy 37

3 The Essence of Competitive Strategies 39

Flexibility and Competitive Advantage 40

Core Competency 42
How Does One Recognize a Core Competency? 42
Are Our Skills Truly Superior? 42
How Sustainable is the Superiority? 43
How Much Value Can the Competency Generate in Comparison to
Other Economic Levers? 44
Is the Competence Integral to Our Value Proposition? 44
Turning Core Competencies into Sustainable Competitive Advantages 44
Sustainable Competitive Strategies 44
Fit and Focus 45
Can any Strategic Position be Copied? 45
When are Tradeoffs Important? 46
Tradeoffs are Essential to Sustainability 46
Case Illustration: Institutionalizing Competitive Advantage: Southwest
Airlines’ Unique Advantage 47

4 The External Environment 51

The Macro External Environment 52

The Micro External Environment 55
Michael Porter’s Five Competitive Forces 56
Barriers to Entry 57
The Power of the Supplier Market 58
The Power of the Buyer Market 59
 Contents vii
The Power of Substitute Products 60
Rivalry among Industry Firms 61
Industry Characteristics 62
Understanding Opportunities and Threats in the Industry 63
Driving Forces 65
What is a Driving Force? 65
Understanding the Competition 66
Key Success Factors 69
The Process of Environmental Analysis 70
Environmental Scanning 70
Monitoring 71
Forecasting Environmental Change 71
Assessing Environmental Change 71
Using Experts to Help in Environmental Assessment 72
The Delphi Technique 73
Organizational Brainstorming 74
Tools to Address Environmental Uncertainty 74
Scenario Planning 74
The Limitations of Environmental Analysis 75
Case Illustration: The Denver International Airport: An Environmental
Debacle 76

5 The Internal Environment 79

Value Chain Analysis 80

How Does One use the Value Chain? 81
What are the Problems with Value Chain? 88
Strategic Cost Analysis 88
Resource-Based View 89
Strategy in the Twenty-first Century 90
Benchmarking:Learning from Others 90
Focusing on the Customer 91
Outsourcing 91
Strategy and the Internet 93
Knowledge Management 94
Case Illustration: JetBlue:Value Added 95

6 Setting Corporate Direction 99

What Will it be – Single or Multi-Business? 99

Corporate Strategies 100
viii Designing and Executing Strategy in Aviation Management
Growth Strategies 101
Intensive Growth Strategies 101
Integrative Growth Strategies 103
Concentration Growth Strategies 105
Diversification Growth Strategies 105
No Growth Strategies 111
Retrenchment and Turnaround 111
What are the Common Themes to Turnaround? 113
Liquidation 113
Divestiture 114
International Strategies 115
Strategies Tailored to Specific Situations 116
Strategies for Fragmented Industries 116
Strategies for Declining Markets 117
Strategies for Emerging Industries 118
First-Mover Advantages 118
Case Illustration: AA’s Acquisition of TWA: Timeline of Events 119

7 Establishing a Strategy 125

SWOT Analysis 125

Strengths 126
Weaknesses 126
Opportunities 127
Threats 128
What else Can be Gained from SWOT? 132
Formulating Strategy under Uncertainty 132
Choices of Responses to Uncertainty 135
Case Illustration: Background to Air Transport Regulation and Attempts for
Liberalization 137

8 Aviation Strategy Implementation 143

Strategic Leadership: A Key to Successful Implementation 145

Preparation 145
Leadership 146
Change 146
Partnership 146
Knowing When to Hold it and When to Outsource 146
Putting Together the Right Staff 148
Matching the Right Organizational Structure to a Strategy 150
The Simple Structure 151
 Contents ix
The Functional Structure 151
Multidivisional Structure 152
Strategic Business Units 156
The Matrix Organizational Structure 157
Instituting Total Quality 161

9 Managing Strategy Execution through Tracking, Support Systems

and Controls 165

Tracking through Information Systems 165

Internal Systems 166
E-Commerce as a Support System 167
Other Essential Support Systems 170
Employee-level Controls 171
Corporate Governance Controls 173
Strategic Controls and Strategic Change 175
Implementation Controls 176

Bibliography 177
Index 181
 List of Figures

4.1 The Macro External Environment 52

4.2 The Micro Environment 55
4.3 Porter’s Five Forces of Competition 56
4.4 Examples of Several U.S. Carriers in Terms of Geographic Scope and
Price 67
4.5 Examples of Several Non-U.S. Carriers in Terms of Geographic Scope
and Price 68
4.6 Assessing Environmental Change through Plotting Trends 72
5.1 Value Chain 81
5.2 Core Processes in a Passenger Airline Business Model 84
6.1 Related Diversification 106
7.1 SWOT Analysis 125
8.1 Simple Organizational Structure 151
8.2 Functional Organizational Structure 152
8.3 Southwest Airlines’ Modified Functional Organizational Structure 153
8.4 Multidivisional Geographic Organizational Structure 154
8.5 Product-line Multidivisional Structure for an Airline 154
8.6 Multidivisional Business Organized in SBUs 159
8.7 Matrix Organizational Structure 159
8.8 Lines of Authority in Matrix Organizational Structure 160
 List of Tables

1.1 Cost Per Available Seat Mile in 2002 4

2.1 Comparative Schedules and Prices between Ryanair, SAS and
British Airways 23
2.2 Chalk’s Timetable 31
3.1 Historical Operational and Service Offerings 40
3.2 New Operational and Service Offerings 41
4.1 Opportunities for the Aviation Industry Post-September 11 63
4.2 Threats to the Aviation Industry Post-September 11 64
4.3 Competitive Matrix for the Airline Industry 70
5.1 Value Chain through an Integrated Software Architecture 86
5.2 Examples in an Airline where Business Process Outsourcing is
Applicable 92
6.1 American Airlines Corporate Information Pre- and Post-TWA-Takeover 123
7.1 Jet Airways’ SWOT Analysis 130
8.1 The Divisions that Make up Lufthansa’s SBU Organizational
Structures 158
8.2 2004 Airline Quality Rating 163
 List of Boxes

Ch. 1 Values, Vision, Mission 7

Vision Statements 10
What Questions Should be Answered by the Mission Statement? 12
Financial vs. Strategic Objectives for the Aviation Industry 15
Ch. 2 Low-Cost Leadership 20
What are the Competitive Strengths of a Low-Cost Leadership
Strategy? 22
When a Low-Cost Strategy Works Best 24
What are the Problems with a Low-Cost Leadership Position? 26
JetBlue Airways’ Differentiation Strategy Approach 27
What are the Competitive Strengths of a Differentiation Strategy? 27
When a Differentiation Strategy Works Best 28
What are the Problems with a Differentiation Position? 28
British Airways Concorde Service 29
What are the Competitive Strengths of a Niche Strategy? 32
When a Focus Strategy Works Best 32
What are the Problems with a Niche Position? 33
Adapting the Miles and Snow Typology to the Regional Airlines 37
Ch. 3 Questions to Ask to Determine Core Competencies: 43
Ch. 4 Eclipse Jet and Friction Stir Welding7 54
When to Use Scenario Planning: 75
Ch. 5 Defining the Value Chain 82
Support Activities5 82
Ch. 6 United Parcel Service: Related Diversification 107
US Airways’ Woes 112
Dobbs International Sold to SwissAir Parent 115
Characteristics of Fragmented Industries 116
Ch. 7 Sources of Strengths 126
Sources of Weakness 127
Sources of Opportunities 128
Sources of Threats 128
Ch. 8 Denver Airport Revisited 145
Outsourcing Aircraft Maintenance 147
The Case of United Airlines 149
JetBlue’s Organizational Behavior 150
Delta and Song 155
 List of Boxes xiii
Lufthansa’s SBUs 156
Boeing: The Matrix Organization 158
Ch. 9 E-Commerce and the Airlines 169
United Airlines’ Statement on Corporate Governance 175
 Foreword

When we started SkyEurope in September 2001 we aimed at creating the first “low-
fare, low-cost, no-frills” airline based in the heart of Europe in order to provide
expanded travel options to both leisure and business customers. The cornerstone of
our business model is the stimulation of “point-to-point” service from cities within our
network. We believe in serving our customers through the provision of safe, affordable,
and friendly service, and we have based our operations on this philosophy. We have
also sought to create a friendly and motivating work environment that supports our
employees in performing their jobs. Currently, SkyEurope is one of Europe’s fastest
growing low-cost passenger airlines using our four Central European bases, Bratislava,
Budapest, Warsaw, and Krakow, as pivots in providing direct airline travel options to
underserved markets throughout Europe.
The successful implementation of our business model has allowed us to become
the largest low-cost, low-fare carrier based in Central Europe based on our current
fleet size, which has a total capacity of 1,676 seats as of 1 December 2005. We
believe that our business will continue to grow as we have “placed” our business in
a significant population hub. The three countries in which our bases are located, the
Slovak Republic, Hungary, and Poland, collectively comprise more than two-thirds
of the total population of the countries that acceded to the European Union in May
2004, which we believe provides significant growth opportunities for us. In addition,
our largest base, Bratislava, where we also maintain our operational headquarters, is
located approximately 50 kilometres from Vienna, thereby providing us with access
to Austria, one of the most mature air travel markets in Central Europe.
Today, SkyEurope operates a leased fleet of 12 Boeing 737 (Classics) aircraft.
We have also recently ordered 16 brand new Boeing 737-700 (Next Generation) and
have acquired purchase rights for an additional 16 Boeing 737-700 (Next Generation)
aircraft. Our aim is to create a single-aircraft-type fleet so as to maximize operational
efficiency and minimize aircraft utilization costs. We want to continue to be a leading
low-cost operator and to pass on these low costs to our customers.
However, we still have a lot of work to do in solidifying our position in the very
competitive intra-European airline markets, and through clear focus on our business
model and continuous innovation I believe we will continue to be successful in
bringing safe and affordable airline travel options to our customers. Running a
low-cost airline, or any airline, especially in a very competitive market is a perilous
task for those business leaders who want to achieve top safety, excellent customer
service, and affordable travel for their customers and, at the same time, conduct this
 Foreword xv
in a business-sensible way. Managing a successful airline entails applying strategic
management thinking in a challenging industry setting on a daily basis.
A great lesson any newcomer to the airline industry can learn is that in order for an
airline to maintain the highest standards of operational safety and quality of service,
and ultimately be successful in their strategy, is to invest heavily in the people who
will carry out this strategy. Investments in sophisticated equipment and technology
alone are not enough to sustain a successful strategy; they have to be coupled with
investments in effective human capital development.
Innovative efforts by academics in shedding empirical light on the strategic
management of airlines are useful for practitioners. This book by Drs. Flouris and
Oswald presents a well-balanced and realistic look at the application of strategic
management theory on the airline industry, highlighting the complex character of the
industry. The authors’ assertion that a poor or misdirected strategy can be disastrous
for organizations in a challenging industry such as aviation is something that I find
extremely applicable to my role as an industry executive on a daily basis.
Christian Mandl
Chief Executive Officer
SkyEurope Airlines
 Preface

This book is an application of strategic management in the aviation industry and the
academic field of aviation management. The objective is to cover, effectively and
engagingly, what every student of aviation management or of the aviation industry
needs to know about crafting and executing business strategies both theoretically and
in terms of their practical applications to aviation.
The hallmark of this book is its coverage of strategy related changes in the aviation
industry, which is being driven by globalization and the technological revolution. We
have taken great care and effort to try and meet the market’s need for a comprehensive
and multifaceted teaching/learning package that squarely targets what the student of
aviation needs to know about crafting and executing business strategies. Consequently,
we are also including applied case studies on several airlines and aviation businesses
in order to demonstrate how these organizations have addressed strategy formulation
and implementation in several different areas, which include corporate strategy, generic
strategy, competitive strategy, internal and external environment assessment, mergers,
alliances, and safety and security.
Chapter 1 establishes the groundwork for the study of strategic management
in the aviation industry. It examines the importance of corporate values and how
these values should be reflected in a mission for the organization. The mission is
presented as the focal point of the strategic management process, and components of
a mission statement are presented as well as sample mission statements. This chapter
discusses how, in turbulent, highly competitive environments, the mission might
evolve from an analysis of the environmental influences. While this is counter to the
traditional strategic management model, a discussion of why this may be a proactive
strategic move is presented. Michael Porter’s Generic Strategies are introduced with
examples from the airline industry, and a short discussion follows as to how Generic
Strategies provide a business direction. The chapter concludes with the introduction
of objectives, specifically how they are derived from the mission and purpose of
objectives in corporate strategy. This discussion introduces competitive strategies
as the vehicle for attaining corporate objectives, which will be examined in detail in
other chapters.
Chapter 2 further develops the discussion of Porter’s Generic Strategies: low-
cost leadership, differentiation, and focus or niche strategy. It also studies how
combinations of these strategies are often more effective. In addition, this chapter
introduces the idea of strategies based on competencies, suggesting that perhaps
Porter’s model is not as effective in today’s competitive environment. The term core
 Preface xvii
competency is introduced, and a discussion follows on how these competencies are a
means of focusing on the future and next-generation products and services.
Chapter 3 explains the need for competitive strategies as a means of obtaining
corporate objectives and describes how a successful company may not always
have a competitive advantage. The idea of competitive capabilities, which allow
companies to build a unique position in the marketplace, is introduced. Core
competencies build a capability that is not easy for the competition to imitate,
leading to a discussion of strategy sustainability and the difference between gaining
a competitive advantage and sustaining the advantage. The chapter concludes with
a case illustration entitled Institutionalizing Competitive Advantage: Southwest
Airlines’ Unique Advantage.
Chapter 4 examines how the external environment is a key factor in strategy
selection. The emphasis is on monitoring these strategic factors and utilizing all
possible sources of information in determining a strategic direction. First, a discussion
of the macro external environment is provided. The macro environment includes a
detailed discussion of economic, political, environmental, and societal issues. Then
a discussion of the micro environment is presented, which centers on an industry
assessment and includes information on industry regulations, the competition, the
market, the supplier market, and the customer market. The discussion also emphasizes
the importance of technology in competitive markets. Michael Porter’s Five Forces
of Competition model is studied in detail. The idea of identifying niche areas in the
market is discussed as a means of competitive advantage and an example is provided
from the airline industry. The SWOT (Strengths, Weaknesses, Opportunities, Threats)
analysis method is introduced, which will be discussed in the following chapter. This
chapter concludes with a case illustration entitled The Denver International Airport:
An Environmental Debacle
Chapter 5 completes the second half of the SWOT analysis, the internal
environment of the company. The internal environment is further divided into a
discussion of the company environment and the individual departments and how
strategic decisions must be based on the capabilities of the organization. The analysis
emphasizes that a corporation’s resources are not only measurable assets, such as
bricks and mortar or financial position, but also the skills and competencies of the
people within the functional area. A corporation’s structure, capabilities, culture, and
corporate resources are further highlighted through a study of process management.
Michael Porter’s Value Chain analysis as a means of assessing the overall process of
providing airline services is explained in detail. Further, the idea of benchmarking both
within the industry and outside is developed. Emphasis is placed on the importance
of financial analysis through ratio comparisons with industry norms as well as closest
competitors. Finally, strategic performance is discussed, examining such questions
as the following: how well has the company fulfilled its objectives and lived up to
the mission, and have they gained a competitive advantage? The chapter concludes
with a case illustration entitled JetBlue: Value Added.
xviii Designing and Executing Strategy in Aviation Management
Chapter 6 introduces the idea that corporate strategy is based on a combination of
a company’s orientation toward growth, the assessment of the external environment,
and the capabilities of the company. Three general categories of strategy are identified:
growth, no growth, and international. The discussion of growth strategies is further
divided into types of growth strategies: aggressive, integrated, stabilization, single
business, and diversified strategies (related and unrelated). Portfolio analysis is
examined as a means of managing various product lines and business units. Examples
are provided of each as well as an explanation as to when is the most appropriate time
to use each type of strategy. No growth strategies are further divided into liquidation,
divestiture, and retrenchment, with explanations and examples. Turnaround is
discussed in relation to retrenchment as a means of going from a no-growth position
to one of stabilization or growth. The chapter concludes with a discussion on
international strategies, including the reasons in favor of expansion and some of the
constraints companies face and a case illustration entitled AA’s Acquisition of TWA:
Timeline of Events.
Chapter 7 examines how the strategic decision-making process, introduced
in Chapter 1 and followed throughout the previous chapters, leads to strategy
establishment. It suggests that once the internal and external environments are
assessed, it is important to review and, if necessary, revise the corporate mission before
proceeding to identify strategic alternatives. The importance of SWOT in strategy
establishment is examined, as well as the identification of critical issues. The use of
contingency plans and scenario analysis is also briefly discussed as a tool of strategy
formulation in turbulent environments. The discussion of strategy feasibility once
again emphasizes the importance of core competencies to competitive advantage
and future sustainability. The chapter concludes with a case illustration entitled
Background to Air Transport Regulation and Attempts for Liberalization.
Chapter 8 emphasizes the point that successful strategy does not always equal
successful implementation. Strategic buy-in is emphasized as well as the importance
of senior management support. Constraints to implementation revolve around the
idea of managing the change process. The idea of fitting structure to strategy is
discussed and a brief study of organizational structure follows. Further, the idea that
implementation follows the basic principles of management, including planning,
directing, motivating, and staffing, is explored. The concept of management re-
engineering is briefly discussed. The chapter concludes with a discussion of specific
implementation problems in the international arena, including commitment of
management both at the corporate office and the local office and how local customs
and traditions could provide additional implementation constraints.
Chapter 9 describes the final step in the strategic management process: evaluation.
The idea of assessing strategic success with regard to both the objectives met as well
as the corporate mission is emphasized, which once again returns to the idea of the risk
position of the company and the importance of continuous monitoring and the need
for scheduled feedback. The link between monitoring and modification is discussed
 Preface xix
and how modification is often the result of environmental changes both internal
and external, which then leads to a discussion of getting back on track and how bad
decisions, if not caught soon, could lead to serious problems. The chapter concludes
by noting that the strategic management process is a continual process.
 Acknowledgements

This manuscript emerged out of our teaching experiences at Auburn University both
in aviation and in management. We are indebted to this generous university for its
academic vigor and rigor and for the fact that it offers undergraduate and graduate
study in aviation management in the College of Business.
Several graduate and undergraduate students, both in aviation and in management
and at Auburn University and at Concordia University in Montreal, Canada, have
been very helpful in the realization of this book due to their research efforts. From
Auburn University we would like to thank Ryan Simpson, Ashley Simpson, Craig
Davis, and Tiffany Dunlap, and from Concordia University we would like to thank
Kevin Carillo, Herve Riboulet and Serihy Petrenko.
In addition, we would like to offer a special acknowledgement to Gilbert George,
a former student in the Global Executive MBA Program in Aviation at Concordia
University and management executive for Jet Airways, who allowed us to use his
insightful information on Jet Airways as part of this book. Further, we would like
to give credit to our colleague, Steve Swidler, who was my co-author in our jointly
authored paper on the financial status of the AA-TWA merger.
My friends Adrianus (Dick) and Margaret Groenewege have been of tremendous
help for their encouragement and for allowing me to use part of their excellent work,
The Compendium of International Civil Aviation, on the discussion of aviation
liberalization.
Many thanks to Christian Mendl of SkyEurope, who wrote the Foreword to this
book despite his very busy schedule.
Special thanks to the editorial team and staff at Ashgate, both in the United
Kingdom and in the United States, for their professionalism, encouragement, and
support throughout the authoring of this book, especially John Hindley, who believed
in the idea of this book, and Guy Loft for seeing it through to its completion.
Lastly, I would like to express my gratitude and appreciation to Joy Leighton.
Without her editorial help this book would not have been possible.

Triant Flouris
 List of Abbreviations

AA American Airlines
ACI Airports Council International
AF Air France
ALPA Air Line Pilots Association
AMA American Management Association
AMR AMR Corporation (holding company owner of American
Airlines)
AOC Air Operator Certificate (Air Operating Certificate)
AQR Airline Quality Rating
ATA American Trans Air
ATC/5 Fifth ICAO Air Transport Conference
ATR72 Avions de Transport Régional, build by Aerospatiale
ATS Air Traffic Services
A320 Airbus 320
BA British Airways
BAC1-11 British Aircraft Corporation 1-11 (a.k.a. One-Eleven)
Bn Billion
B2b Business to Business
B2c Business to Customer
B2e Business to Employee
B727 Boeing 727
B737 Boeing 737
B747 Boeing 747
B757 Boeing 757
B767 Boeing 767
CAD Canadian Dollars
CASM Cost Per Available Seat Mile
CDG Charles de Gaulle airport (France)
CEO Chief Executive Officer
CRM Customer Relationship Management
CRS Computerized Reservation System
DC9 Mc Donnell Douglas DC9
DHL Dalsey, Hillblom and Lynn, Global Logistics Company
DOT Department of Transportation (U.S.)
DSS Decision Support Systems
EDI Electronic Data Interface (Interchange)
xxii Designing and Executing Strategy in Aviation Management
EDIFACT Electronic Data Interchange For Administration, Commerce and
Transport
EC European Commission
ERP Enterprise Resource Planning
EU European Union
EUR Euro
FAA Federal Aviation Administration (U.S.)
FASB Financial Accounting Standards Board
FedEx Federal Express
FRA Frankfurt Airport (Germany)
FSC Full-Service Carrier
GATS General Agreement on Trade in Services
GDP Gross Domestic Product
GDS Global Distribution System
GF-X Global Freight Exchange
GmbH Gesellschaft mit beschränkter Haftung (the German equivalent of
a limited liability corporation)
GPS Global Positioning System
GSA General Service Agent
IATA International Air Transport Association
IATA AGM IATA Annual General Meeting
IBM International Business Machines Corporation
ICAO International Civil Aviation Organization
IPO Initial Public Offering
IT Information Technology
J31 Jetstream J31
J41 Jetstream J41
KLM Royal Dutch Airlines (Koninklijke Luchtvaart Maatschappij)
LCA Low-Cost Airline
LCAG Lufthansa Cargo Charter Agency GmbH
LCC Low-Cost Carrier
LF Load Factor
LH Lufthansa German Airlines
LHR Heathrow Airport (England)
LSG LSG Sky Chefs (Lufhtansa Service Holding GmbH)
LUV Southwest Airlines’ symbol at NYSE
L1011 Lockheed 1011
MBA Master’s of Business Administration
MD80 McDonnell Douglas MD80
MIS Management Information System
MRO Maintenance Repair Overhaul
NASA National Aviation and Space Administration (U.S.)
 Abbreviations xxiii
NIST National Institute of Standards and Technology
NYSE New York Stock Exchange
OSL Gardermoen airport (Norway)
Q&A Question and Answer
PSA Pacific Southwest Airlines
Rt Round trip
R&D Research and Development
ROI Return On Investment
RPK Revenue Passenger Kilometres
RPM Revenue Passenger Miles
Sabre Semi-Automatic Business Research Environment
SARS Severe Acute Respiratory Syndrome
SAS Scandinavian Airline Systems
SBU Strategic Business Unit
SSG Shared Services Group (Boeing)
STN Stanstead airport (England)
SWA Southwest Airlines
SWOT Strengths Weaknesses Opportunities Threats
TCAA Transatlantic Common Aviation Area
TRF Torp airport (Norway)
TWA Trans World Airlines
U.K. United Kingdom
ULD Unit Load Demand
UNCTAD United Nations Conference on Trade And Development
UPS United Parcel Service
U.S. United States of America
USD United States Dollars
WATS World Air Transport Summit
WTO World Trade Organization
XML Extensible Markup Language
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 Chapter 1

The Essence of Strategy

A major problem [with strategy] is partial ignorance; at decision time we do not have
the assurance that all the forthcoming attractive activities have been identified and
described.
Igor Ansoff1

In 1965 when Igor Ansoff said strategy was based on partial ignorance, the field of
strategic management was in its infancy. Four decades later, in an era of technological
advancements and knowledge management one would expect strategy to be more
scientific, more certain. Not so! Yet despite the lack of total information, the art of
designing, implementing, and executing corporate strategy is an essential component
of strong and effective business management. It is the heart and lungs of corporate
competitiveness.

What is Strategic Management?

Strategic management is a planning process used to help an organization determine

its mission and general direction or strategic intent. It is a process that helps an
organization establish a plan in which to achieve and implement its objectives and
which is necessary in order to take a company into the future.
Strategic management provides the path or direction that the organization will
follow as it seeks out new markets, attracts or maintains customers, competes with
market rivals and conducts the operations of the business. In a sense, strategy is the
behavior of an organization. Like any other behavior, strategy is influenced by outside
forces as well as internal values, the company’s culture and its capabilities. These
internal values and capabilities should be the part of the equation that is well known
to the organization. These capabilities include such things as financial performance,
market performance, safety records and operational performance. However, in an
ever-changing industry, like the aviation industry, the outside forces often form the
basis for the “partial ignorance,” to which Ansoff referred. While some outside forces
can possibly be anticipated, such as industry mergers, acquisitions and bankruptcies,
oil and gas prices and the economy, nothing could have anticipated the catastrophic

1 Igor H. Ansoff, Corporate Strategy: An Analytic Approach to Business Policy for Growth
and Expansion, New York: McGraw-Hill, 1965, 152.
2 Designing and Executing Strategy in Aviation Management
incident of September 11, 2001 (also referred to as 9-11) and the subsequent havoc it
wreaked on the airline industry specifically as well as throughout the entire worldwide
aviation industry and system. This single event created a ripple effect spreading
throughout the entire aviation industry. Airlines, airports, air navigation service
providers, and general aviation would never be the same after 9-11. New rules and
regulations were imposed reaching, for instance, as deep as heightened insurance
premiums for flight schools and fixed base operators. System security became a core
issue and was addressed in various ways and by various countries and regions, all
the way from the local to the international level through world organizations such as
ICAO (International Civil Aviation Organization), IATA (International Air Transport
Association) and ACI (Airports Council International).

What is the Strategy of an Organization?

The strategy of an organization is based on a series of managerial decisions supported

by quantifiable information yet hedged on good judgment. Strategic management
attempts to identify the issues that will be important in the future, and based on the
capabilities of an organization it provides a roadmap for future behaviors. Today, more
than any time in the past, strategy is essential to corporate survival. Why? Because
strategy forces managers to think ahead, to be proactive in sculpting the business
of the company. Without a strategy, a company is like a piece of driftwood floating
through the marketplace with no apparent direction. Companies without strategies
generally end up reacting to competitive moves and follow a path of mediocrity,
and in a competitive marketplace there is no room for mediocrity. Strategy is also
essential to organizational performance; it is the glue that holds all the pieces of the
organization together. If all the parts of the organization are not supportive of one
another – operations supportive of marketing, finance working with operations, R&D
coordinating with operations and information systems coordinating all organizational
efforts – the outcome can be disastrous in the marketplace. A well-designed strategy
provides the framework for operational rationale.
Yet while strategy is a necessity to good business management, it does not guarantee
a problem-free existence. An individual can design the most brilliant strategy ever
conceived, but, without the proper implementation, the strategy can be a complete
failure. Proper implementation relates back to the organization’s internal capabilities.
The proper resources – people, money, materials, facilities – must be in place to support
and implement the strategy. Corporate success is not always realized immediately, and
quick fixes are rare. Often, it takes several years for a good strategy to take hold and
for a company to find its optimal position in the marketplace. Sometimes poor market
conditions or economic downturns might temporarily delay the expected results of a
well-executed strategy, but these should be just this, temporary. These delays should
never be excuses for continual mediocre performance. If mediocrity is constant, this
 The Essence of Strategy 3
may be the sign of poor managerial decisions or hasty decision-making that is not
supportive of the strategy. A well-designed strategy should withstand the ups and
downs of business cycles without being completely altered. Consider, for instance,
Southwest Airlines in the months following 9-11, when the major (legacy) airlines in
the U.S. were in cut-back mode, losing money and worried about their very survival.
Southwest was operating in a manner that was not much different than any other time
in their existence. Their strategy was solid and their implementation well-executed;
this is the foundation for marketplace success. Southwest was insulated from the
rapid swings of an international network and had a low-cost base of operation coupled
with a very unique and effective human resource system.

The Meaning of Competitive Strategies

Having a competitive strategy (as distinct from just any strategy) means that a company
is doing something different, deliberately choosing a different set of activities than its
competitors.2 Once again, Southwest Airlines is a good example of a company that
has done just this. It originally chose a competitive strategy that was different from
its rival firms. Southwest mostly avoided (and still avoids) large, congested airports
and offers short-haul, point-to-point service between mid-size cities and secondary
airports in large cities. It does this while keeping costs low, which, in turn, helps keep
ticket prices lower for consumers. In many cases, because their fares are low and
the frequency of the flights are high, Southwest is able to attract people who might
otherwise travel by car. Thus, having a competitive strategy means doing something
different, offering different activities than competitors. If a company does not have a
competitive strategy, then what is the purpose of having any strategy at all? Without
a competitive strategy, one company is no different from another.
Southwest’s competitive strategy is that it has chosen to be different from
full-service airlines. Full-service airlines serve a large number of cities. A large
percentage of the customers have connecting flights, and, therefore, full-service
airlines have to coordinate schedules and check baggage through to a connecting
location. Most of the full-service airlines use a hub-and-spoke method. Under the
hub and spoke method, the airline clusters around peak flying hours at hub airports.
Southwest, on the other hand, caters primarily to short-haul routes and uses a rolling
hub (scheduling) system, where flights leave spaced out throughout the day rather
than at a small number of peak times. They also have a standardized fleet of Boeing
737s (B737), which makes maintenance easier and reduces the cost of crew training
as pilots, flight attendants and mechanics work on only one type of aircraft. Through
its policy of standardization, Southwest has achieved a comparative advantage in

2 Michael E. Porter, “What Is Strategy?,” Harvard Business Review, 74, no. 6, 1996:
61–78.
4 Designing and Executing Strategy in Aviation Management
the use of the B737, a strategy that is difficult to match. Table 1.1 shows cost per
available seat mile for several carriers in the U.S. Fleet standardization is one of the
factors that contributes to lower costs for carriers such as Southwest and JetBlue, the
latter, which at the time of the publication of the table, had standardized fleets as well.
Interestingly, in 2003, JetBlue decided to forgo the benefits of a standardized fleet and
ordered a second aircraft type, operating under the assumption that the new aircraft
(E-190) would be more efficiently deployed in several markets and the benefits from
this more efficient deployment would outweigh the costs of adding a second type in
the airline aircraft mix.

Table 1.1 Cost Per Available Seat Mile in 20023

The Difference between Operational Effectiveness and Strategy

It is a given that if a company wants to survive in its business environment, it has to

be operationally effective. To be operationally effective one must perform similar
activities better than one’s competitors. This may mean that a company is more

3 Shawn Tully, “The Airlines’ New Deal: It’s Not Enough,” Fortune Magazine, 28 April
2003, 79–81.
 The Essence of Strategy 5
efficient or has the ability to keep costs of operation lower than a rival firm’s. In
fact, operational effectiveness may be the reason that there are differences in the
profitability among firms. However, if the activities are similar, but only better,
these activities can be easily copied. If they are copied, where does this leave the
company? Possibly no better than its rivals. Strategy or competitive strategies, as we
have coined it, means that a firm is performing different activities from its competitors
or it is performing the same activities in different ways. This is what Southwest and
JetBlue did in the United States and Ryanair and EasyJet did in Europe. For a firm
to continue to outperform its rivals, it must establish a difference and it must hang
on to this difference, preserving it by always thinking ahead. How does a company
do this? It must engage in the process of strategic management.4

The Strategic Management Process

A corporate executive once said, “Three years ago, when our speaker didn’t show
up at our quarterly sales meeting, we decided to fill the time by doing some strategic
planning. That was the best four hours we ever spent.” It would be great if planning
was this easy and a company only had to plan once. While it seems like common sense
that this would not work, there are managers who never really seem to understand
that strategic planning is an on-going process. Strategic management is based on the
concept that companies must continually monitor and re-monitor both internal and
external influences so that changes can be made to the strategic direction as needed.
What happened to the corporate executive’s company? It closed two years after he
made this statement.5
There are six major tasks in the strategic management process: establishing a
corporate vision and mission; setting corporate objectives; determining strategic
alternatives; selecting a strategy that supports the corporate values, vision and mission;
implementing and executing the strategy; and evaluating, monitoring and initiating
corrective actions where necessary. While the stages seem clear cut, there is a great
deal of interdependence and overlap of the steps. The corporate values, vision, mission
and objectives are generally crafted such that each one is reflected in the other. In
other words, the values of a company help shape its vision and mission. Yet even
these tasks cannot be accomplished without a clear picture of the company’s internal
capabilities and the environmental forces affecting the company and the industry
in which it exists. Without an honest assessment of the company’s capabilities,
implementation will be compromised. While the strategy process does not require
a doctorate, it is dependent on accurate information, well thought-out assumptions,
honest evaluations, and sound judgment.

4 Ibid.
5 Michael Plumb, interview by Sharon Oswald, 15 July 1991.
6 Designing and Executing Strategy in Aviation Management
• Establish Corporate Values through a Vision and a Mission: Corporate values
are the cornerstone on which the company resides; they are what the company
believes in. A strategic vision is an articulation of the company’s desired future by
organizational leaders. The corporate mission provides a more detailed account
of that vision, answering the questions, “Where are we going?”, “Who are we?”
and “What are we doing?”
• Set Corporate Objectives: A company must set specific performance targets
within the realm of the corporate vision and mission. In order to be worthwhile,
corporate objectives must be measurable and attainable, and they should answer
the question, “Where do we want to be in year X?”
• Determine Strategic Alternatives: Strategic alternatives come from an analysis
of the external and internal environments. Strategic alternatives are the vehicles
used to achieve corporate objectives, and they answer the question, “How are we
going to get there?”
• Select Strategy to Support Corporate Mission and Objectives: The selected
strategy should reflect the corporate values as well as achieve the corporate
objectives. The selected strategy should be the vehicle that improves the
competitive position of the company.
• Implement and Execute Strategy: Implementing and executing the strategy means
getting all the resources in order and then putting the strategy in place.
• Evaluate, Monitor and Adjust: A company must evaluate their performance
through constant monitoring and make adjustments when new developments
warrant corrective actions. Sometimes adjustments require alterations in the
mission, objectives, strategic alternatives, and selected strategies. The importance
of environmental scanning cannot be emphasized enough.

This strategic management process establishes the framework for the upcoming
chapters.
The next section will focus on corporate values, vision, and mission and their
importance to the strategy process. While all three appear to overlap, individually
they each help to form the strategic purpose of the organization and the foundation
on which it operates.

Corporate Values and Social Responsibility

The topic of corporate values, particularly with regard to ethical behavior and social
responsibility, has received a great deal of attention in the aftermath of the Enron and
WorldCom debacles. Corporate values are considered by some to be the core element
in the drive to become competitively dominant. These values are the uncompromising
guiding principles of a company and are used to motivate employees and to give
employees something in which to believe. In effect, these values shape organizational
 The Essence of Strategy 7

Values:
The Principles of the Organization

Vision:
The Future of the Organization

Mission:
The Distinctive Characteristics of the Organization

attitudes and employee behaviors. Yet sometimes corporate values are little more
than a few words, often clichés. For example, annual reports throughout the world
use such statements as “integrity,” “customer service” and “excellence.” These are
represented as the values of the company, the essence of their existence.
Corporate values are a set of principles that guide and define how a company
should treat its employees, shareholders and customers. By definition, corporate
values should do the following:

1. Remain intact, regardless of changing business cycles or economic swings.

2. Be relevant and applicable to every person in the organization.
3. Be applied consistently, regardless of issues.
4. Remain constant, regardless of staff or management changes.6

For corporate values to play a meaningful role in organizational effectiveness and for
these values to form the foundation for creating and maintaining the organization,
corporate values must be first-order. In other words, corporate values should be
derived from a fundamental philosophy about what actually constitutes the good of
the organization. The values are management’s attempt to define the organizational
good both in the context of organizational life and in all of the actions and endeavors
in which the organization engages. First-order values should be the very reason the
organization exists; in essence, they are a constitutional framework for corporate
governance.7
Many corporations take these first-order values one step further by situating the
good of the organization in a societal context. This is known as social responsibility.
Social responsibility has become an important value for many companies trying to
focus on moral and societal issues and events. Social responsibility revolves around
the idea of giving something back to society, whether it is in terms of monetary

6 Sandy French, “CEO Values Replace Corporate Values,” Canadian HR Reporter, 8 April
2002, 4.
7 Edward J. Giblin and Linda E. Amuso, “Putting Meaning into Corporate Values,” Business
Forum, 22, no. 1, 1997: 14–19.
8 Designing and Executing Strategy in Aviation Management
donations, sponsorship of events, or ethical words by which to live. Much of the
current interest in social responsibility supports the belief that an ethical overtone is
in the best interest of the company. It is a type of Hippocratic oath for a business,
which tells the customer exactly what to expect from the company.
Even more important today is the issue of ethical behavior as part of the company’s
core value system. Company stakeholders want to see a written commitment to ethics
in business dealings. A 2002 study by the American Management Association (AMA)
indicated that 76 percent of the 175 executive respondents listed ethics and integrity
among their core corporate values. In addition, 86 percent reported that they had
written corporate values that were disseminated to employees through handbooks,
brochures, wall posters, or website. However, despite the emphasis on corporate
values, the same study revealed that 32 percent of these companies did not necessarily
follow their corporate values and that their written word was often quite different
from their actions.8 Many people might find this last statement very disturbing. What
is the purpose of having corporate values if they are not followed? The corporate
values, vision, and mission should provide the foundation on which an organization
is built and moves into the future.

Designing a Corporate Vision

A strategic vision is an articulation of the company’s desired future by organizational

leaders; it is truly an integral part of the strategic management process. One of the
first important steps in the strategy process is establishing a corporate vision. Top
managers are responsible for crafting the corporate vision. It should answer such
questions as the following:

• Where should the company be in the future?

• What is the direction in which the company is headed?
• What place should the company occupy in the marketplace?

Establishing a vision requires management to take a close look at the company, its
capabilities, its product, and its competitiveness. It forces managers to focus outside
of the organization on the market and the industry and make some tough decisions
as to where the company can best succeed. The vision reflects the aspirations and
ambitions of the top managers with respect to the company, and a strong vision means
that it becomes the guiding perspective and driving force of the organization. Put
succinctly, a strategic vision should provide a sense of commitment and cohesiveness
for the organization.

8 American Management Association (AMA), AMA 2002 Corporate Values Survey, New
York: AMA, 2002, see <http://www. amanet. org/research/pdfs/2002_corp_value.
pdf>.
 The Essence of Strategy 9
Westley and Mintzberg suggested that to establish a true vision within a company
three very distinct steps must be followed:9

• Step one: Envision an image of where the company should be in the future.
• Step two: Articulate this vision to everyone who is affected by the vision,
employees, customers and any followers such as stockholders.
• Step three: Empower these individuals, employees, customers and followers to
enact, or “live,” the vision.

One of the biggest problems found in business is that all too often the vision is
nothing more than a statement that top management is aware of but to which the
employees, customers and even the stockholders may never have been exposed. As
a result, no one knows the one statement that is supposed to “rule” the future events
of the company!
A study by the National Institute of Standards and Technology confirmed just
this. Prepared by Harris and Associates, the study of 300 executives from large U.S.
industrial and service companies revealed that while 82 percent of the individuals
interviewed said that they had a definite vision of what they felt their organization
should be in the future, and 79 percent of them thought that a long-term vision was
necessary for the survival of their companies, only 38 percent felt that their visions were
broadly shared within the organization.10 If a vision is never articulated, it cannot be
very clear to anyone outside of top management offices. If it is not very clear to anyone
outside of top management, how are the employees supposed to believe in what the
organization is all about? Logically, if the vision is not shared and, therefore, people
are not aware of it, then how can a company say that a vision exists? Westley and
Mintzberg said that if vision is to exist it must be the result of an interaction between
the leaders and followers and the vision should empower everyone involved.11
The vision forces managers to think into the future. If a manager does not know
where he or she wants to be in the future and does not know the direction to steer the
business, how can he or she run the business? The vision provides the future path
for the business. Therefore, the strategic planning efforts should support the vision
and also inform the organization’s vision. What does this mean? Through planning
efforts, managers become aware of the environment around them. As the environment
changes (which will be discussed in Chapter 4), managers will begin to realize the
effectiveness of their vision.

9 F. Westley and H. Mintzberg, “Visionary Leadership and Strategic Management,” Strategic

Management Journal, 10, 1989: 17–32.
10 National Institute of Standards and Technology (NIST), 818407 (2003), see <http://www.
ddworld.com/pdf/LADFSO2R.PDF+Harris+and+Associates+study+on+corporate+
vision&hl=en>.
11 F. Westley and H. Mintzberg, 17–32.
10 Designing and Executing Strategy in Aviation Management
It is evident that a corporate vision cannot be designed in a vacuum. Unless
managers thoroughly study the marketplace, they may not be able to see the future
clearly. A thorough examination of the market tells a manager what the competition
is doing, what the customers want, what new innovations are on the horizon and
what the technological requirements are now and will be in the future. Setting a
future direction must be based on an honest assessment of the market. Without the
knowledge of the marketplace, managers do not know whether the company can
sustain itself in the future or if the business needs to change in order to better meet
future demands and needs.

Is a Strategic Vision Really Important?

Imagine as a pilot getting into an airplane without a flight plan; the pilot knows what
is needed to fly to a specific destination, but he or she does not know the specific route
to take to arrive at the goal. A strategic vision is like a flight plan. While corporate
values provide the moral and ethical fiber for a company and provide the incentive
which serves to motivate its employees, a firm’s strategic vision has much more
direction-setting value. Consequently, a firm’s vision has more of a direct link to its
status in the marketplace.
Managers are required to keep their finger on the pulse of the future. Every day
new technologies are developed and these new innovations may have an effect on the
way a company conducts business in the future. How might the company be affected?
It might see changes in the needs or expectations of its customers or realize that the
changing marketplace could make current business practices obsolete. It might see a
path toward competitive dominance or discover that the future holds new and better
ways to provide services, such as reducing overhead or labor costs.
To be successful in business today, managers must be forward thinking. A vision
statement forces managers to think about the future. When top management fails to look
to the future, they are committing their company to a dated strategy, which could lead to
the demise of the company or, at the very least, place it in a reactive market position.

Sample Vision Statements12

AirNet Express (Overnight Freight)

“AirNet is committed to focusing its resources on providing value-added time-
critical air shipment and aviation services to a diverse set of customers in the most
service-intensive and cost effective manner possible.”

12 See <http://www.raytheon.com/about/gva.htm>; http://www.amrcorp.com/corpinfo.htm;

http://www.heliwing.com/; and <http://www.airnet.com/Company/companyFrame.htm>.
 The Essence of Strategy 11

AMR (American Airlines)

“To be the world’s leading airline by focusing on industry leadership in the areas
of safety, service, network, product, technology, and culture.”

Heliwing Helicopters Ltd.

“To continue to develop strategies and incorporate new technology to ensure our
company remains progressive while maintaining our record of safety and reliability.
Our operations shall continue to be conducted with integrity and dedication to
service.”

Raytheon (Owners of Beechcraft)

“Be the most admired defense and aerospace systems supplier through world-class
people and technology.”

Designing a Mission Statement

The mission is a broadly defined statement of purpose. Mission statements are called
many different things such as creeds, purposes, or statements of corporate philosophy.
No matter what term is used, a mission statement defines the business in terms of
scope and purpose. While the mission is broad, it is, in some ways, also specific in
nature. A mission must be broad enough to allow for innovation and expansion, to
allow for natural organizational growth, yet narrow enough to establish some direction
for the company. For example, the corporate mission generally answers the questions,
“Who are we?”, “What do we do?” and “How do we differ from the competition?”
A mission statement is the means by which an organization distinguishes itself from
all others. The mission is like a mirror: it reflects how the company sees itself, yet
it also sets the parameters for future business decisions, and this is why it needs to
be somewhat broad. (Several sample general, functional area and project specific
mission statements are provided at the end of Chapter 1.)
The mission of a company should not change unless there is a dramatic change
in business operations. Again, it should be limited enough to set the parameters but
broad enough not to require constant change. What are the most common elements
of a mission statement? The results of a 1994 Business Week study of corporations
showed that companies with mission statements included concern for public image
(73 percent); concern of quality (73 percent); commitment to survival, growth and
profitability (70 percent); identity of customer and markets (60 percent); identity of
products and services (60 percent); statement of company philosophy (43 percent);
and differentiation from the competition (33 percent).13

13 Charles Rarick and John Vitton, “Mission Statements Make Cents,” Journal of Business
Strategy, 16, 1995: 11–13.
12 Designing and Executing Strategy in Aviation Management

What Questions Should be Answered by the Mission Statement?

• Who is the customer?

• What is the product?
• What market is being served?
• What makes this company different from the competition?
• What are the beliefs, philosophies, and values of the company?
• What is the level of commitment to survival, growth and profitability?

Additional items to include:

• Statements of technological advancement.

• Concern for the corporate image.
• Inspiring qualities of the company.
• Statements of social responsibility.
• Concern for quality.

The Reason Mission Statements are Important

Mission statements have been found to increase shareholder value. A Business Week
study of 1,000 corporations indicated that having a corporate mission statement had a
favorable impact on corporate profitability, boosting shareholder equity. Corporations
with mission statements had an average return on stockholder value of 16.1 percent,
while those without mission statements reported only a 7.9 percent average return.14
Why would a mission statement have this kind of effect? If the mission statement
provides the framework for corporate decisions and sets the parameters for corporate
moves, it gives focus to the company, something which is essential if it is to be
successful competitively.
Mission statements can also be developed to assure projects meet the expectations
of the constituents, as was the case with the Oakland International Airport expansion
(see end of chapter). It is also not unusual for functional areas to have mission
statements. The mission statements of functional areas should reflect the overall
company mission. Continental Airlines’ “Fly to Win” mission provides the overarching
structure for its functional area mission statements (see end of chapter).

Mission Statements and the Environment

In a highly turbulent, ever-changing environment, a company might find it more

14 Ibid.
 The Essence of Strategy 13
advantageous to establish its mission after a detailed environmental analysis. In a
situation like this, the company might be one that has not been competitive and is
looking for an entirely new direction for the organization. Alternatively, it may be a
new entrant into the market looking for the one area where it might establish a new
way of doing something, a next-generation approach to the industry. In a situation
like this, the mission becomes the result of the environmental and industry analysis
(discussed in Chapter 4).

Setting Organizational Objectives

The next step in the strategy-making process is to set organizational objectives.

The objectives translate the values, vision, and mission statement into specific
performance targets. In effect, they solidify the plans of the organization to achieve
specific targets. They are a kind of action plan for the company. If it is not attached
to specific targets, the mission statement cannot begin to increase shareholder value.
These performance targets are then used as milestones of management achievement.
They give direction to management in striving to be competitive and in sustaining a
competitive posture.
For these objectives to be worthwhile, they must be direct, quantitative or
measurable and attainable. Further, they must have a timeline attached to them for
achievement. In other words, the objectives spell out how much of something will
occur in a specified period of time. Measurement is essential. A company cannot
realize its objectives unless they are measurable. For example, if the objectives are
stated to “maximize profits” or “increase sales” what does this really mean? Nothing.
Instead, the company should use specific, measurable objectives like “increase
profitability by 5 percent” or “increase sales by 10 percent.”
How aggressive should a business be in setting its objectives? Objectives should be
a means of stretching the organization to achieve its full potential. Aggressive, forward
moving objectives should not be feared and should push managers to the point of being
challenged. Some believe that it is important to set objectives almost to the point of
impossibility, but one must be realistic. If one is too aggressive in defining the company
objectives, then management will continually face failure, and failure leads to a less
motivated management team. On the other hand, one does not want to be too lenient
in defining objectives. At the least, minimum incremental improvement is needed, but,
depending on the industry and the competitive environment, incremental improvement
may not be enough to sustain an organization in the competitive arena.
The appropriate targets for strategic objective are dependent upon a company’s
internal capabilities as well as the environment in which it exists. It is also
dependent on what level of performance will satisfy the customers and shareholders.
Most importantly, though, the objectives must be an extension of the mission
statement.
14 Designing and Executing Strategy in Aviation Management
Long-Range and Short-Range Objectives

When objectives are being established, one should think both in terms of long-
range objectives and short-range objectives. In the dynamic environment in which
organizations presently exist, long-range generally means five years. Long-range
objectives force one to think in terms of the position and future performance of
the organization. Whether or not a person is setting long or short-term objectives,
he or she must always be aware of what is going on in the world around them. If
one does not have long-term objectives, focusing only on the short-term, the goal
of competitive sustainability is neglected. Competitive sustainability can only be
achieved by always looking to next-generation products or services. By establishing
long-term objectives, one is essentially setting long-range performance targets for
their managers.
The short-term objectives serve as a means of forcing management to take
immediate action toward achieving long-term objectives. They can be the milestones
or stepping stones toward achieving the desired state.

Objectives Should be Pervasive Throughout the Organization

It is essential to establish organizational objectives in order to provide direction

for an organization. However, objective setting should not stop at the top. In fact,
objectives should be set at all levels throughout the organization. The concept of
top-down objective setting means that the direction is established at the top, but the
divisions, separate businesses, departments and functional areas establish their own set
of objectives. The objectives that are set at other levels in the organization are there
to support the corporate objectives. For example, if a company says that they want to
increase profitability by 5 percent, then each of these areas should have an objective
that will help the company achieve this level. Like the organizational objectives, the
objectives set at other levels of the organization must be measurable and attainable.
These objectives must stretch the organizational units to achieve the highest levels
of performance. By setting the organizational objectives at the top and then allowing
organizational units to establish complementary objectives, it determines both the
strategic and financial direction of the organization.

Strategic Versus Financial Objectives

When one thinks of objectives, generally the first thing that comes to mind is financial
objectives, for instance “we will increase profitability by 5 percent in two years.”
Financial objectives are essential to any organization: one cannot look to the future
without financial objectives like earnings, revenues, dividends and stock prices. If
one does not have acceptable financial performance, then there is little chance that
any kind of strategic objective will be achieved.
 The Essence of Strategy 15
Strategic objectives are those objectives that are directed toward issues like market
position, product quality, customer service, geographic coverage and cost reductions.
They are essential to attaining and sustaining the company’s competitive position in the
industry. The strategic objectives help define the strategic intent of the organization,
which differs from company to company. If the intent is to be a global competitor,
then the strategic objectives should reflect this; if the intent is to gain market share
in the domestic market, again, the strategic objectives must state this. Like financial
objectives, strategic objectives are essential to the strategic management process.
They set the specific performance targets both financially and strategically.

Financial vs. Strategic Objectives for the Aviation Industry

Financial Objectives Strategic Objectives

• US Airways (2003): Successfully • US Airways (2003): Reduce average

emerge from Chapter 11 bankruptcy operating costs to restore competitive
protection. situation.

• Air Canada (2004): Bring operational • Air Canada (2004): Establish trust in
costs under control. the relationship of management and
employee unions.

Carving Out a Strategy

Now that corporate values, vision, mission statement and the objectives or target for
achieving the mission have been established, the next step is strategy development.
Strategies are the vehicles for achieving the objectives. They describe how
organizational goals will be achieved – how financial and performance targets will
be met, how the competition will be outsmarted and how to become a prominent
force within the industry.
Professor Michael Porter suggested that a company’s competitive strategy consists
of the business approaches and initiatives it engages in to attract new customers,
withstand the competitive environment and strengthen its competitive market position.
While there are countless competitive strategies that companies can embark upon, Porter
noted that company strategies can be boiled down to fit into three classifications, or a
combination of the three. Known as his Generic Strategies, these strategies are low-cost
leadership, niche, or differentiation. Chapter 2 examines Porter’s Generic Strategies
and why, in the changing environment today, they may no longer be enough.15

15 Michael E. Porter, Competitive Strategy Techniques for Analyzing Industries and

Competitors, New York: Free Press, 1980, 34–46.
16 Designing and Executing Strategy in Aviation Management
Strategy is an On-going Process

Once corporate values, vision, mission, objectives and strategies have been established,
the job is still not complete. In fact, the strategic management process is never final;
it is an on-going process. If the environment remained stagnant and nothing ever
changed, then the same objectives and strategies would suffice forever. But people
do not live in a fish bowl! The world is fluid and the aviation world in particular is
a very competitive, ever-changing environment, characterized by a history of strict
regulation and great sensitivity to the business cycle. A normal part of the strategic
management process is to review environmental changes, evaluate the performance
of the strategies that have been put into place, and make adjustments as needed. It
is up to the managers responsible for implementing these strategies to monitor the
situation, keep abreast of the problems as well as the opportunities and be aware of
environmental threats. Their duty is to initiate the appropriate corrective actions,
whether it is a simple change or a totally different strategic approach. In the following
chapters, the steps involved in the strategic management process will be further
examined, beginning by looking at how to craft a company’s strategies.

Sample Mission Statements16

General Mission Statements

Virgin Atlantic: To grow a profitable airline, that people love to fly and where people
love to work.

Heliwing Helicopters Ltd.: To provide a professional helicopter service of the

highest quality.

TourJet: As an aircraft charter broker, TourJet will access a Worldwide network of

aircraft types and operators; ensuring that the best possible aircraft is matched to the
mission requirement of Tour Jet’s clients.

Functional Area Mission Statements

Continental Airlines:
Fly to Win (Market Plan)
Achieve above-average profits in a changed industry environment. Grow the airline
where it can make money and keep improving the business/leisure mix. Maximize

16 See <http://www.virgin-atlantic/our_story_student_packview.do>; <http://www. heliwing.

com/; <http://www.tourjet.net/mission.html>; <http://www.flyoakland. com/tex/terminal_
expansion_mission.shtml>; and <http://www.continental.com/com/company/investor/
docs/continental_ar_2002.pdf>.
 The Essence of Strategy 17
distribution channels while reducing distribution costs and eliminating non-value-
added costs.
Fund the Future (Financial Plan)
Manage our assets to maximize stockholder value and build for the future. Reduce
costs with technology. Generate strong cash flow and improve financial flexibility
by increasing our cash balance.
Make Reliability a Reality (Product Plan)
Deliver an industry-leading product we are proud to sell. Rank among the top of the
industry in the key DOT measurements: on-time arrivals, baggage handling, complaints
and involuntary denied boardings. Keep improving our product.
Working Together (People Plan)
Help well-trained employees build careers they enjoy every day. Treat each other
with dignity and respect. Focus on safety, make employee programs easy to use and
keep improving communication. Pay compensation that is fair to employees and
fair to the company.”

Project Specific Mission Statement

Oakland International Airport, Terminal Expansion: The Port intends to reconstruct

the passenger terminal facilities at Oakland International Airport to serve as a major
gateway to Oakland and the East Bay and North Bay Regions, with a cost conscious
approach, to provide convenient, cost effective facilities with the realization that the
theme of the terminal complex should reflect the diversity of the communities served.
The complex will be designed to be aesthetically attractive and should present the user
with a series of interesting and unique experiences. The use of art in the construction of
the complex will be a priority. This terminal complex shall be functional, constructable
[sic] and maintainable for all users and shall be appropriate to handle the increasing
passenger traffic through the initial years of the twenty-first century. The Airport
acknowledges itself as a “best value” airport and as such, these facilities must be built
in compliance with the established budget using an open process where information
is shared by all. During construction, existing Airport operations must be maintained
with only the most necessary service disruptions. To the greatest extent economically
possible, commercial opportunities for local businesses will be maximized, consistent
with Port Policies throughout all aspects of the Program. Adherence to the above will
create a safe, cost effective and secure terminal complex that provides the maximum
in customer service to the users of the Airport.
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