ZADÁNÍ BAKALÁŘSKÉ PRÁCE

TECHNICKÁ UNIVERZITA V LIBERCI

Hospodářská fakulta Katedra podnikové ekonomiky

ZADÁNÍ BAKALÁŘSKÉ PRÁCE

pro Adélu Votrubovou

program č. B6208 Ekonomika a Menagement

obor č. 6210R015 Podniková ekonomika

Vedoucí katedry Vám ve smyslu zákona č.1i1/ 1998 Sb. o vysokých školách a navazujících předpisů určuje tuto bakalářskou práci:

Název tématu:

Survival of National Airlines Using a Differentaition strategy and Customers`

Attitudes Towards it

Pokyny pro vypracování:

1. Teoretický rozbor charakteristik učící se organizace 2. Charakteristika kultury podporující učení v organizaci

3. Metody, kterými se ověří, zda organizace má charakteristické rysy učící se organizace

4. Aplikace na vybranou organizaci

5. Zhodnocení, návrhy a doporučení ke zlepšení

Rozsah grafických prací:

Rozsah průvodní zprávy: 50 - 70 stran textu + nutné přílohy Forma zpracování: tištěná

Chan, L.K., Hui, Y.V., Lo, H.P., Tse, S.K., Tso, G.K.F., Wu, M.L., (2001), Consumer satisfaction index: new practice and findings, European Journal of Marketing, 37, (5/6), pp. 872-909

Domanico, F. (2007), The European airline industry: law and economics of low cost carriers, Eur J Law Econ, 23, pp.199-221

Grant, R.M. (2005), Contemporary strategy analysis, 5^th edition, Oxford: Blackwell Publishing Ltd

McGee J., Thomas H. and Wilson D. (2005), Strategy: Analysis & Practice. London:

McGraw Hill Education

Passemard D. and Kleiner H. (2000), Competitive Advantage in Global Industry, Management Research News, 23, (7/8), pp. 111-117

Porter, M. (1985), Competitive advantage, New York: The Free Press

Sharp, B. (1991), Competitive marketing strategy: Porter revisited, Marketing intelligence & Planning, 9, (1), pp. 4-10

Shaw, S (2007), Airline Marketing and Management, 6^th edition, Aldershot: Ashgate Publishing Limited

Vedoucí bakalářské práce: Ing. Iveta Honzáková

Konzultant: Dr. Dina Williams

Termín zadání bakalářské práce: 31.10.2007 Termín odevzdání bakalářské práce: 29.04.2008

Doc. Dr. Ing. Olga Hasprová Doc. Ing. Ivan Jáč, CSc.

děkanka vedoucí katedry

Prohlášení

Byla jsem seznámena s tím, že na mou bakalářskou práci se plně vztahuje zákon č.

121/2000 Sb. O právu autorském zejména §60 – školní dílo.

Beru na vědomí, že Technická Univerzita v Liberci (TUL) nezasahuje do mých autorských práv užitím mé bakalářské práce pro vnitřní potřebu TUL.

Užiji-li bakalářskou práci nebo poskytnou-li licenci k jejímu využití, jsem si vědoma povinností informovat o této skutečnosti TUL; v tomto případě má TUL právo ode mne požadovat úhradu nákladů , které vynaložila na vytvoření díla, až do jejich skutečné výše.

Bakalářskou práci jsem vypracovala samostatně s použitím uvedené literatury a na základě konzultací s vedoucám bakalářské práce a konzultantem.

Datum: 29.04.2008

Podpis:...

Adéla Votrubová

Technická Univerzita v Liberci

Hospodářská fakulta

Stidijní program: 6208- Ekonomika a Management

Studijní obor: Podniková ekonomika

Survival of National Airlines Using a Differentaition Strategy and Customers`

Attitudes Towards it.

1. Přežití národních leteckých společností používajících strategii rozlišování a zákazníkův postoj vůči tomu.

BP-PE-KPE-200704

Adéla Votrubová

Vedoucí bakalářské práce: Ing. Iveta Honzáková, katedra marketingu

Konzultant: Dr. Dina Williams, ve spolupráci s University of Huddersfield, VB

Počet stran: 72

Datum odevzdání: 29.04.2008

University of Huddersfield Business School

BA (Hons) European Business

Survival of National Airlines Using a Differentiation Strategy and Customers’

Attitudes Towards It Business Dissertation

Author: Adela Votrubova

Acknowledgements

Firstly I would like to thank my personal tutor Dr Dina Williams who lead me through the whole year and gave me advices for my dissertation.

I would also like to thank my parents who were encouraging me and as well supporting my steps to study in Huddersfield. Finally, I would like to thank to Fernando Jose Da Penha Rebelo who was always there when I needed him for my support, help and without him some moments would be very hard to carry out alone.

Abstract

The main area of this dissertation is differentiation strategy with focus on airline industry. The centre of attention is on the Manchester Airport where the research will take place.

The differentiation strategy is not the only issue to be discussed in this dissertation;

furthermore the view of the customers will be point out. How the customers feel about uniqueness, quality, service and price of the companies which are lead by differentiation strategies.

The threat of cost leadership strategy which is applied by low-cost airlines will be point out in the theory and as well in the research. The postures of the costumers facing the differentiation strategy are based on survey which questioned the reasons of choosing company with differentiation strategy or cost leadership and the attitude of the customers. This will show the main reasons so the fruitfulness of this strategy can be analysed.

The explanation of the differentiation strategy is ground on the literature review. The literature review covered customers’ decision process and identify the influences of external environment.

The research was focused on customers’ attitudes towards national and low-cost carriers. The results from this research will be analysed by SPSS software. The respondents were asked to fill in the questionnaire on which the research was based.

The research analysed if the carriers chosen by customer depends on social classes. The results revealed that there is not strict dependence between social class and chosen carriers. Moreover, this issue is analysed in results from questionnaires.

The suggestions for national carriers to gain competitive advantage are given in conclusion. The dissertation leads the reader to get inside of the issue of airline industry.

Content

Chapter 1 – Introduction ... 1

Chapter 2 – Literature review... 3

2.1. The nature of the differentiation strategy ... 3

2.1.1. Porter’s differentiation strategy ... 4

Table 1.1 Three Generic Strategies... 4

2.1.1.1 Value and uniqueness... 5

2.1.2. The threat for the differentiation strategy ... 7

2.1.3. Risks for differentiation strategy... 8

2.1.4. Alliances to attack leaders... 9

2.1.4.1. Strategic alliances... 10

2.1.5. Summary of differentiation strategy... 12

2.2. The consumer ... 13

2.2.1. Consumer behaviour... 14

2.2.2.1. Consumer decision process ... 14

2.2.2.2. External environment ... 16

2.2.2.3. Quality, service and price... 19

2.2.2.4. Consumer satisfaction ... 20

Chapter 3 – Analysis of airline industry ... 21

3.1. Porter’s strategies applied on airline industry ... 21

3.1.1. Political factors of deregulations ... 21

3.1.2. National airlines-using differentiation strategy ... 22

3.1.2.1. Alliances... 22

3.1.3. Low-cost airlines-using cost leadership strategy ... 24

3.2. The Consumer ... 27

3.2.1. Advantages and disadvantages for the consumer ... 27

Chapter 4 – Methodology ... 30

4.1. Research philosophy ... 31

4.2 Research approach ... 31

4.3. Research strategy... 32

4.3.1. Survey... 32

4.5. Data collection methods ... 34

4.5.1 Questionnaire... 34

4.5.1.1 Questions design ... 35

4.6. Questionnaire used in this research ... 36

4.6.1. Sample ... 36

4.6.2. Questionnaire design ... 36

4.6.3. Validity, reliability and practicality ... 37

4.6.4 Ethics ... 38

4.6.5 Limitations of the research ... 38

4.6.6 Analysis of the data ... 39

4.6.7 Summary... 39

Chapter 5- Results... 40

5.1 Information about respondents... 41

5.2

Means of transport... 45

5.3 Reasons using the plane ... 47

5.4

Type of flight... 48

5.5

Type of class and type of flight ... 49

5.6

Booking flight ... 50

5.7

The priority while booking the flight ... 51

5.8 The customer satisfaction... 53

5.9 The customers’ choice of airlines depends on their social class 55 Chapter 6-Conclusion ... 58

References ... 61

List of Appendices ... 665

Appendix 1: Value Chain ... 66

Appendix 2: Alternative Value Chains in Airlines ... 67

Appendix 3: Social-class profile (Schiffman and Kanuk, 2004, p.384) ... 68

Appendix 4: The framework of decision making... 69

Appendix 5: Questionnaire... 70

List of tables

Table Page

Table 1.1 Three Generic Strategies

………... 4

Table 1.2 Uniqueness drivers

………... 5

Table 1.3 Risks for differentiation strategy

……….. 8

Table 1.4 Advantages and disadvantages of alliances

………... 10

Table 2.1 Social classes

……….. 18

Table 3.1 Basics and drivers of airlines alliances

……….. 23

Table 3.2 Comparison of the alliances

……….. 23

Table 3.3 Advantages and disadvantages for the consumer of national airlines

……….. 29

Table 4.1 Theory related to the questionnaire

……….. 37

Table 5.1.1 The gender

……….. 41

Table 5.1.2 The age of the respondents

……….. 42

Table 5.1.3 Nationality of the respondents

……….. 43

Table 5.1.4 Frequency of flying

……….. 44

Table 5.2 The most preferred means of transport

……….. 46

Table 5.3 Reasons for using the plane

……….. 47

Table 5.4 Type of flight

……….. 48

Table 5.5 Type of class

……….. 49

Table 5.6 Booking online

……….. 51

Table Page

Table 5.7 The priority while booking the flight

……….. 52

Table 5.8.1 Satisfaction with service

……….. 53

Table 5.8.2 Satisfaction with the service the respondents paid for

……….. 54

Table 5.9 Social classes

……….. 55

Table 5.9.1 The national or low-cost airlines

……….. 56

Table 5.9.2 The customers’ choice of airlines depends on their social class

……….. 57

List of Figures

Figure Page

Figure 1.1 The framework of decision process

………... 16

Figure 4.1 The research process “onion”

………... 30

List of Graphs

Graph Page

Graph 5.1.1 The gender of the respondents

………... 41

Graph 5.1.2 The age of the respondents

………... 42

Graph 5.1.3 The nationality of the respondents

………... 43

Graph 5.1.4 Frequency of flying

………... 44

Graph 5.2 Preferences in means of transport

………... 46

Graph 5.2.1 Preferences in means of transport

………... 46

Graph 5.3 Reasons for using the plane

………... 47

Graph 5.4 Type of flight

………... 48

Graph 5.5 Type of class

………... 49

Graph 5.7 The priority while booking the flight

………... 52

Graph 5.8.1 satisfaction with service

………... 53

Graph 5.8.2 Satisfaction with the service the respondents paid for

………... 54

Graph 5.9 Social classes

………... 55

Graph 5.9.1 The national or low-cost airlines

………... 56

Graph 5.9.2 The customers’ choice of airlines depends on their social class

………... 57

Chapter 1 – Introduction

Nowadays, the strategies are one of the most important focuses of the companies. Due to them they can gain competitive advantages against others companies and so gain the preferences of the customers’. Every industry has its own nature and companies search for strategic position inside of it (Passemard D. and Kleiner H., 2000). This strategic position can be gained through competitive strategy which is based on competitive advantage (Passemard D. and Kleiner H., 2000). The goal of the companies is to obtain competitive advantage in comparison with the other competitors (McGee, J. 2005).

Refer to Porter (1985) the competitive advantage can be gain by profiling of the activities in which the company is embossed. For this purpose Porter (1985) came up with value chain (see appendix 1). The way how the company deals up with its activities inside of the value chain it gains or loos the competitive advantage and it is essential piece in gaining the position inside of the industry (Passemard D. and Kleiner H., 2000).

Moreover, speaking about positioning inside of the industry we can separate competitive advantage in two parts: advantage gain by low cost or by differentiation (Passemard D. and Kleiner H., 2000).

The author chose to analyse the advantage gained by differentiation strategy and threats of low cost. Furthermore, the dissertation is focused on customers’ attitudes towards the national carriers (using differentiation strategy) and low-cost carriers (using cost leader ship focused on low-cost advantage).

The objectives of the dissertation are:

1) To analyse differentiation strategy used by national-flag carriers 2) To classify opportunities and threats for airlines using differentiation

strategy

3) To analyse the customers’ needs and decision process 4) To determine future aspects of airline industry

The chapters are divided in several chapters. Second chapter leads the reader through the theoretical background where the differentiation strategy and customer behaviour is analysed.

The following chapter if focused on airline industry. The issue of deregulation is discussed to show how the political factor influenced the airline industry. Furthermore, the chapter includes the benefits and disadvantages resulting for the customer.

The chapter four called methodology is determining the methods used for the research.

Additionally, it discusses the issue of validity, reliability and practicality. The chapter which follows is focused on results resulting from the research. Last chapter covers the discussion and conclusion of the dissertation.

Chapter 2 – Literature review

The literature review focuses on supply side of the company and on the demand side of the consumer. The centre of attention on the supply side is differentiation strategy used by the national airlines. To analyse this strategy the Porter’s three generic strategies is discussed in the first part of the literature review with focus on the nature of the differentiation strategy. Furthermore, the threats and risks for differentiation strategy are pointed out. The final part defining the supply side is focused on alliances.

The demand side is presented by consumer. The issues which are discussed in this section are consumer decision process, external environment and its impact on decision process. Moreover, the quality, service and price will be determinate and finally the consumer satisfaction will terminate the demand side.

2.1.

The nature of the differentiation strategy

In order to analyse the differentiation strategy of airlines companies the chapters in literature review will point out the essential frameworks. The theory of differentiation strategy will be described as well as its risks and threats.

Johnson et al. (2006, p. 246) describe differentiation strategy as broad strategy which

“seeks to provide products or services that offer benefits different from those of competitors and that are widely valued to buyers.”

The aim of the company using the differentiation strategy is to gain competitive advantage towards its competitors by proposition of better products or services with same or a bit higher prices (Johnson, G. et al., 2006). In contexts with differentiation strategy many authors refers to Porter.

2.1.1. Porter’s differentiation strategy

In 1980, Porter, published a book “Competitive strategy” in which he described differentiation strategy. He found out generic competitive strategy which determines three generic strategies as can be seen in table 1.1.

Table 1.1 Three Generic Strategies

COMPETITIVE ADVANTAGE

COMPE TITIVE SCOPE

Source: Porter (1985, p. 12)

Three main strategic families can be observed: cost leadership, differentiation and focus (cost focus or differentiation focus). Companies achieve success differently, some by cost leadership position and the others by strategy focused on differentiation (Shaw, 2007).

The differentiation is the generic strategy used by companies which have broad target of costumers. Sharp (1991) mentioned the fact that the company wants to achieve proximity of the segments, on which it operates; it should be focused on large market share or else broad target of the customers.

This strategy obtains the goal of the company to be unique for its customers and permits firm to charge customer for a premium price (Porter 1985; Sharp 1991; Akan et al.

2006). According to Porter (1985) and Akan et al. (2006) the differentiation has its fundament in product and service quality, delivery system, distribution channels and

Lower Coast Differentiation

Broad Target

1. Cost Leadership 2. Differentiation

Narrow Target

3A. Cost Focus 3B. Differentiation Focus

(Akan, et al. 2006). The ways how to achieve successful differentiation are dissimilar and it depends on every company which way it will choose.

According to Porter (1985) the differentiation strategy differs from the others, especially form the cost leadership, by its uniqueness to which the customers give higher value.

2.1.1.1 Value and uniqueness

As Akan et al. (2006) mentioned the passengers put bigger value to differentiated products than to low-cost products or services. The value can have different meanings, but Porter defines it with this words: “In competitive terms, value is the amount buyers are willing to pay for what a firm provides them” (Porter, 1985, p.38). Overall, the value which has been created is dimensioned by price that customers are able to pay to get the product or the service (Passemard and Kleiner, 2000).

To know what the uniqueness is, the question “why an activity is unique?” has to be asked (Porter, 1985, p. 124). The reason why the company should focus on this question is that due to it answer it can develop novel forms of differentiation (Porter, 1985).

According to Porter (1985) the uniqueness can be identified by several drivers which are listed in table 1.2.

Table 1.2 Uniqueness drivers

• product features and performance offered

• service provided

• intensity of an activity adopted

• technology employed in performing an activity

• quality of inputs procured for an activity

• procedures governing the actions of personnel in an activity

• skill and experience level of personnel employed in an activity, and training provided

Additionally, Grant (2005) reviewed those drivers and added one more which according to him is location. To sum up, the uniqueness is mainly question of the service given to the customers, technology, employees who are delivering the uniqueness to the customer, quality and furthermore location.

Grant (2005) point out that differentiation is more about customer needs and reaching of their appreciation by the company. Furthermore, Johnson et al. (2006, p. 96) suggest several factors leading to successful differentiation and they can be identified by two basic questions:

• Who is the strategic customer?

Refer to Johnson et al. (2006,p. 96) the strategic customer is: “the person to whom the strategy is primarily addressed because they have the most influence over which goods or services are purchased...there has to be understanding of what is valued by that strategic customer as a starting point for strategy.” Additionally, Sharp (1991) mentioned that customers should benefit from marketing provided by company. This benefit, provided by company, should be very difficult for the other companies to gain it and if it is so the company achieve competitive advantage and should focus on its sustainability (Sharp, 1991).

• Who are the competitors?

This question should be obvious in each firm (Johnson et al., 2006).

Different industries have different kinds of competitions and different businesses have different competitors.

Nevertheless, speaking about differentiation Porter (1985) said that according to generic strategy the competitors are companies using differentiation strategy and on the other side those using cost leadership.

However, Getz and Sturdivant (1989, p. 5) argued that “...low cost is not at opposing strategy, but rather a necessary tool for sustaining a differentiated position.

2.1.2. The threat for the differentiation strategy

Cost leadership strategy is as well as differentiation strategy focused on broad target as can be seen in table 1.1. Porter (1985) suggests that this strategy differs from differentiation strategy, which focused on uniqueness and premium price, by externalization on low cost. However, Getz and Sturdivant (1989) proposed that cost leadership is instrument to sustain differentiation strategy. Nevertheless, the strategy based on Porter (1980) says that companies using different strategies are competitors.

According to these statements the issue of cost leadership strategy influence on differentiation strategy should be discussed.

The aim of this strategy is to get cost advantage against the other competitors and achieve the lowest cost on the field of production and distribution so therefore the customer will be faced to choose between lowest costs on the market and uniqueness with premium prices (Thompson and Strictland, 1987; Kotler, P. et al., 1989; Brown, 1990).

As can be seen in table 1.3 one of the risks for companies using differentiation strategy is losing of cost proximity and therefore the customers can find more interesting the company with focus on costs using strategy of cost leadership.

Cost leadership is gain by the company that is able to provide customers with lowest- cost within the industry. As McGee et al. (2005) mentioned the cost cut should be sustainable and for its reduction should be utilized every stage of Value Chain to gain cost and competitive advantage. Moreover, the company that achieve the Cost Leadership within the industry can command the prices and so the company utilizing the differentiation strategy can get in disadvantage (Porter, 1985; Grant, 2006).

To sum up, the influence between those two strategies should not be deny and it should be emphasize that the customer is one of the main factors who is leading the strategies of the companies.

2.1.3. Risks for differentiation strategy

In table 1.3 are identified risks for differentiation strategy. The companies, applying the differentiation strategy, can be faced to the issue of decreasing uniqueness for buyers. In other words it means that they (the buyers) can overlap to companies applying cost leadership with lower prices and the cost proximity (uniqueness) of the company using differentiation strategy is lost.

On the other hand the risk or threats for cost leadership can be technological changes.

Table 1.3 Risks for differentiation strategy

Cost Leadership Differentiation Focus

• Competitors imitate

• Technology changes

• Other bases for cost leadership

• Proximity in differentiation is lost

• Cost focusers achieve even lower cost in segments

• Competitors imitate

• Bases for differentiation become less

important to buyers

• Cost proximity is lost

• Differentiation focusers achieve even greater differentiation in segments

• Imitated

• The target becomes structurally unattractive:

Structure erodes, Demand

disappears

• Broadly targeted competitors overwhelm the segment

• New focusers sub segment the industry Source: Polyakov, (2008)

One of the risks which can be observed in table 1.2 and was analysed by Miller (1992) is threat of imitations by competitors. According to Miller (1992), in this case the firms should develop the complex strategy which would be hard to imitate.

Another risk for company using differentiation strategy can be the hypothesis of Chan and Wright (1990) who argues that low-cost position can achieve greater market share than differentiation. If this would be true, after the huge boom of low-cost firms, the companies using differentiation strategy could find themselves in debts and near to bankrupt because their market share would decrease.

2.1.4. Alliances to attack leaders

In 1985 Porter demonstrate in his work the reason of alliances by those words: “A challenger may need to form an alliance to obtain the necessary resources, technology, market access, or other strengths to attack an industry leader” (Porter, 1985, p. 529).

Additionally, he said that alliances do not assure success (Porter, 1985) but on the other hand he mentioned that in several cases they had main position while a company was attacking success of the leader.

Overall, the companies try to link together to achieve better resources for gaining the market share and pull down or at least shake with the position of the leader.

In contexts with differentiation strategy and cost leadership strategy should be point out that the alliances are usually used by those companies which want to reduce their costs (Taneja, 2003).

2.1.4.1. Strategic alliances

Lynch (2000, p.583) define alliances as type of contract between close relative companies. Furthermore he defines advantages and disadvantages of Alliances which can be observed in table 1.4.

Table 1.4 Advantages and disadvantages of alliances

Advantages Disadvantages

• Can built close contact with partner

• Uses joint expertise and commitment

• Allows potential partners to learn about each other

• Locks out other competitors

• Slow and plodding approach

• Needs constant work to keep relationship sound

• Partners may only have a limited joint commitment to make alliance a success

• Unlikely to build economies of scale

Source: Lynch, (2000), p. 584

Johnson et al. (2006, p. 353) described strategic alliances like “....two or more organisations share resources and activities to pursue a strategy”. According to Johnson et al. (2006) the reason why the companies create alliances is that they are not able to compete on field of resources and competences by themselves. The reasons are accompanied with motivations which lead to strategic alliances. Those motivations were defined and divided in three main parts by Johnson et al. (2005, p. 353). The first motivation speaks about “need for critical mass” through which can be reached cost cut and furthermore the purchaser supply can be enhanced. The other motivation can be

“co-specialisation” where the partner of the alliances can focus on its activities in which it has the best capabilities. The final motivation is “learning” where one partner learns from the other one.

Johnson et al. (2006, p. 354) define four types of alliances that are listed below:

• Joint ventures

• Networks

• Franchising

• Co-production

Furthermore, this paper will focus on networks which are typical form of alliances in analysed airline industry.

As was said the networks alliances are the most usual and the most successful in analysed airline industry. The network in this industry is shared by alliances so they can cooperate better and compete more effective towards low cost airlines. Due to implementing network alliance they reduce costs of their service and furthermore they improve their service for the customer who does not need to buy several tickets while travelling on long-haul destinations as he should do while travelling with low-cost carriers which are offering only point-to-point flights without possibility of refunding a ticket.

The core of network alliance strategy is in an equal aim that has its members and raise of performance of the company network (Polyakov, 2008b).

Refer to Johnson et al. (2005, p. 356) the description of the network alliance is defined as: “...arrangements whereby two or more organisations work in collaboration without formal relationship where there is mutual advantage of doing so.” In another words the strategic networks alliances are trying to gain same goal (Klint and Sjöberg, 2003).

2.1.5. Summary of differentiation strategy

The differentiation strategy was defined by Porter (1980) and afterwards this strategy was revisited by different authors several times most of them adapted his theory but on the other hand some of them criticised him.

To sum up the differentiation strategy it should be said that it is a strategy where the company obtain competitive advantage against other competitors by its uniqueness and value which is estimated by price that customers want to pay for it.

The uniqueness should be point out as a most important factor of differentiation strategy. The product or service is different from the others by its uniqueness. The main task for the company using differentiation strategy should be to answer the question

“Why the activity is unique?” and while analysing the answer the managers should think how to gain the uniqueness of the product/service.

Of course the threats for the company, which is using differentiation strategy, exist and one of them is threat of the company using cost leadership strategy. On the other hand as was mentioned this statement is not straightforward as it was suggested by Porter (1985). Nevertheless, as Porter (1985) proposed the leader can be attacked by alliances and in Chapter 3, where is analysed the airline industry, the reader can observe the issue that after deregulation of this industry in 1990s the alliances started to appear. The reader should ask: “Why after the deregulation the alliances started to be necessary for national flag carriers?” Was it due to threats of the low-cost airlines and their influence on the analysed industry? Was it because the flag-carriers got in troubles? Was it because the customer changed their preferences so the flag-carriers lost their cost proximity?

Furthermore, this dissertation will analyse the view of the customer, his needs and his behaviour while purchasing a product/service. Is his goal only the price? Does he prefer the service? What is his need nowadays?

2.2. The consumer

As was mentioned above the customer is one of the element that influence the strategy of the company and as was point out by Johnson et al. (2005, p. 96) the company implementing differentiation strategy should ask themselves “Who is strategic customer?”

First of all the difference between customer and consumer should be given. Loudon and Bitta (1993, p.5) defined the difference between customer and consumer. According to them the costumer is: “...someone who regularly purchases from a particular store or company” (Loudon and Bitta, 1993, p.5). On the other hand consumer is more general statement for customer and moreover the consumer is not connected with specified company (Loudon and Bitta, 1993, p.5). Furthermore, the customer was defined by Smith (2003, p. 6) who is explaining the customer as “...an individual or group to whom you supply one or more products or services.”

The main objective of this part is to analyse the consumer behaviour. The author should not forget to mention that even you are a consumer with your own needs which different companies are trying to reach.

The most important element in this part of dissertation will be consumer and his behaviour and relationship towards the company, his satisfaction, motivations and nature of decisions making while purchasing the product or service of the company.

In different industries dissimilar consumers exist but the fundamental behaviour of the consumer was analysed by many authors (for example Loudon and Bitta, 1993; Engel et al., 1995; Schiffman and Kanuk, 2004).

Additionally, from strategic point of view the customer can be observed as one of the stakeholders of the company (Polyakov, 2008).

2.2.1. Consumer behaviour

The areas which will be covered in this part are: customer decision process, influence of the culture (socio-cultural factor), quality of the service versus price and finally customer satisfaction.

First of all the description of consumer behaviour should be specified. According to Loudon and Bitta (1993, p.5) the consumer behaviour can be identified as: “...the decision process and physical activity individuals engage in when evaluating, acquiring, using, or disposing of goods and services.” Refer to Schiffman and Kanuk (2004, p. 8) the consumer behaviour could be described as: “....the behaviour that consumers display in searching for, purchasing, using, evaluating and disposing of products and services that they expect will satisfy their needs. ” Additionally, the consumer behaviour could be summed up by those questions “What to buy? Why to buy? When to buy? Where to buy? How often to buy? How often to use? How evaluate it after the purchase? How dispose it?” (Schiffman and Kanuk, 2004, p. 8).

As can be seen the consumer behaviour is related to consumer decision process which will be described in following part.

2.2.2.1. Consumer decision process

Consumer decision process is complex of several factors. Those factors influence the decision of consumer. This process of consumer decision was simplified in framework, which can be observed in figure 1.1, by Loudon and Bitta (1993) and moreover Schiffman and Kanuk (2004) define another framework described in appendix 5. As can be seen the framework of Loudon and Bitta (1993) is clearer but it does not show clearly the influences of external environment and individual determinants as the framework of Schiffman and Kanuk (2004).

The frameworks include all the issues which can influence decision of the customer

The issue which should be determined is the whole process before the customer buy the product or service. This process starts when consumer recognises that he has a need accompanied by action which occur when the customer realize disharmony within his current and perfect state (Loudon and Bitta, 1993, p.25).

Another stage of customer decision process is gathering of information. Refer to Loudon and Bitta (1993, p. 25) this gathering of information begin with “internal search” when the consumer sees through his memory the information what he already has and is followed by “external search”. Furthermore this stage is connected to the external environment by the socio-cultural influences which have an effect on consumer decision (Schiffman and Kanuk, 2004, p. 553). The issue of socio-cultural impact on the customer will be discussed additionally.

The other stage of this process is alternative-evaluation process which focuses on comparison of the information (Loudon and Bitta, 1993, p. 25). After the evaluation the consumer finally identify the most favourite or the most suitable product or service for him.

After what consumer buy the product or service the issue of satisfaction or dissatisfaction is examined (Loudon and Bitta, 1993, p. 25). If the consumer will be satisfied with the purchase he will probably become the customer of the company on the other hand if not he will search for another product or service before purchasing. As Henry (2002) point out different consumers have different criteria for the purchase.

Figure 1.1 The framework of decision process

Source: Loudon and Bitta (1993, p. 22)

What was described till now identified the core of consumer decision process but while looking on the figure 1.1 two surroundings can be observed: external environment and individual determinants.

2.2.2.2. External environment

The external environment was determined by Loudon and Bitta (1993) as mix of factors like cultural influence, sub cultural influence, social class influence, social group influence, family influence, personal influence and other influences. Schiffman and Kanuk (2004) suggested that the most powerful factor is culture and social class.

Many authors (for example Loudon and Bitta, 1993; Engel et al., 1995; Schiffman and Kanuk, 2004) tried to explain what the culture exactly is. According to the author the most sententious description was given by Schiffman and Kanuk (2004, p.408) who

explained culture as: “...sum total of learned beliefs, values, and customs that serve to direct the consumer behaviour of members of a particular society.”

While describing culture the factors as language, knowledge, religion, music, food customs, art, technology etc. should not be left behind because they as well influence the individuals in particular culture (Schiffman and Kanuk, 2004, p. 408).

The culture influence the consumer so far that in particular situations the respond on the situation can be predicted by cultural background of the consumer (Schiffman and Kanuk, 2004). According to the Mowen et al. (1998) the cultural background can be identified by nation.

The culture is not the only factor which can influence the consumer behaviour.

Everybody is part of a culture with its social classes. The objective of explanation of the social classes is to define differences and point out the influence on consumer decision making. Different social classes request different products or services and that are why the companies should observe this factor while defining their strategy.

Engel et al. (1995) described social class as: “...grouping of people who are similar in their behaviour based on their economic position in the market-place.”

Those social classes were described by several authors (for example Gilbert and Kahl, 2002; Thompson and Hickey, 2005). Overall, four main groups of classes were defined and they can be observed in figure 2.1 and in appendix 2.

The wages introduced in figure 2.1 should be taken with limitations because different countries have different wages for classes.

For evaluation and measures of social-classes can be used single-item indexes as occupation, education and income (Schiffman and Kanuk, 2004, p.380). The occupation index focuses on customer employment according to which can be analysed his lifestyle

income can be determined. Author should mention that normally higher education is connected with higher source of income. Final single-index is income by itself.

Additionally, due to those classes the companies can identify needs of the consumer who is member of particular class and furthermore they can predict the price which he will be able to pay for the value which the company can offer him.

Table 2.1 Social classes

Upper class Disproportionate amount of influence (income commonly $ 150,000+)

Upper middle class White collar salaried management and professional employees advanced college degree.

Household income commonly above $ 100,00, but may be considerably less for 1 income earner households or some lesser paid professionals, active in politics and social issues Lower middle class Bachelor’s degree. White collar employees with considerably

less autonomy than upper middle class professionals. Incomes commonly between $30,000 and $ 75,000 depending on the number income earners, emulate consumption patterns of the more affluent, overworked, little leisure

Working class Blue collar and clerical workers, work often in uncomfortable environments, little job security, prone to out-sourcing, closely supervised. Household income commonly between $16,000 and

$30,000, pride themselves in doing “Real work.”

Lower class Prone to job-loss, often work multiple jobs. Household income often less than $16,000

Source: Thompson and Heckey, (2005), p. 215-217

Moreover, different social classes have different requirements on the products or services they would like to buy. Those requirements differ by quality they expect from it.

2.2.2.3. Quality, service and price

The quality, service and price is related to consumer descriptions that could be identified as the idea, image or symbol which came in consumer mind while speaking about some brand or company. Those consumer descriptions or imageries can influence consumer behaviour through individual feelings about particular firm.

Those imageries are linked together by consumer needs. The consumer is expecting to get the service and quality for which he paid. The issue to discuss is if the low-price means low-service and quality. To examine this particular issue the explanation of those consumer imageries should be given.

Firstly the price will be discussed. According to the Schiffman and Kanuk (2004, p.

186) the price can be distinguished by consumer as high, low or fair. The consumer satisfaction is as well related to the price because the consumer is expecting service and quality for which he is paying. In relation to the airline industry and particularly to the low-cost carriers the issue which was could be find out as unfair to the consumer is the fact that the consumer sitting on the next seat may paid less because of the sales, promotion or he booked the ticket in advance. This price unfairness may have an effect on consumer imagery about the service provided by the company. The high price is connected with high service and quality on the other hand low-price is associated with low-quality but the competition lead by cost leadership strategy is trying to provide the consumer with high quality for low-price which consumer pays. On the other hand the consumer can sometimes find the pricing unfair as in case of low-cost carriers.

The other consumer imagery to discuss is service. The service can be one of the key factors in differentiating from competitors (Schiffman and Kanuk, 2004, p.185). The service is delivered by employees working for the company. The consumer decision process could be impacted by feelings about the service provided as well as behaviour of the employee delivering this service. The employee should be trained to deliver as good customer service as they can.

The final imagery to discuss is quality which can be connected to service or product that is perceived. For the purpose of this dissertation the focus will be given on quality connected to service. As was point out by Schiffman and Kanuk (2005, p. 189) the service provided depends on employee who is providing this service as well as on customer receiving this service. The companies try to harmonize their service in order to provide the quality persistently.

Nowadays the companies are competing to provide good quality of service for low- price. Additionally, it depends on consumer what he is expecting from the price what he paid and afterwards he can find the price too high or unfair to the quality of service what he gain and be dissatisfied or on the other hand he can find the price high but he can be satisfied with the quality of service. According to Schiffmann and Kanuk (2005, p. 194) “...the consumer takes price as an indicator of the product quality.” This would mean that low-price is related by consumer to low-quality which they can expect from the service. On this stage the companies should focus on promotion and performance of the service in case to reject the negative quality associated with low-price (the example of McDonald’s could be used- low price, cleanness and quick service).

The quality of service for which the consumer paid is evaluated by him and he can be satisfied or dissatisfied with it.

2.2.2.4. Consumer satisfaction

The aim of the company is to gain by its strategy the consumer satisfaction so the consumer will become its customer and will repeat the purchase of the product or service. To satisfy the consumer is very difficult aspect for the company. The consumers differ from each other by their motivations, needs, decision process and buying behaviour (Engel et al., 1995). The company can gain from consumer satisfaction consumer loyalty, excellent firm reputation; reduce prices, lower costs of future transaction, and higher employee efficiency (Chan et al., 2001). As can be seen satisfaction is very important factor for demand (consumer) and supply side (company).

Chapter 3 – Analysis of airline industry

3.1. Porter’s strategies applied on airline industry

What was said in literature review is applied on European airline industry which had to deal up with several changes during last 20 years. The issue of deregulation open doors to higher competition and dynamic development of low-cost airlines. Due to this act the national airlines had to defend themselves and as well preserve their customers who could choose from larger scale of airlines.

3.1.1. Political factors of deregulations

The European airline industry was strictly regulated till 1987 when the process of Single Aviation Market within the European Union started to be processed (Shaw, S. 2007).

This act is connected with deregulation and liberalization.

Until the deregulation the airline industry was not very competitive and the entrance barriers were quite high for non-flag carriers (companies). The cooperation of the companies was based on various agreements focused on routes, airports, types of aircraft used and tariffs (Domanico, F. 2007).

In 1987, with introduction of Single European Market and its changes that had to be achieved till 1992 for its set up, the airline industry had to be improved and changed as well. The aim of whole process was liberalisation and encouragement of competition.

Due to this process the European Union forces “packages” with objective of European liberalisation process (Domanico, F. 2007). First package was focused on tariffs as well as second (1990) package which, furthermore, opened the doors for new companies.

With third package (1997) came in force the free supply of services within the European Union. This last package meant that: “....the right of every air transport company of one Member State to carry out transportations between two locations of another single.

Member State” (Domanico, F., 2007, p. 201). After the introduction of third package the

In 2004 with enlargement of the EU the Aviation Market became broader and the competition has grown.

Another matter which misleads the competition in this industry and is connected with political factor is state aid (financial support from national government) which put in disadvantage those companies which are not national carriers. The state aid was argued in 1993 by European Union and as a result the European Commission decided to strengthen the control over the state aid and so-called one time/last time principle came in force (Shaw, S., 2007; Domanico, F., 2007). This principle means that the government could give the last injection of the money to the national airline company.

By this act the competition has been intensified.

Another issue that make competition inactive are bilateral agreements which are usually between flag carriers (hub and spoke system) and so in 2002 the European Court of Justice stated the other carriers (mostly low-cost carriers) as discriminated (Domanico, F. 2007).

3.1.2. National airlines-using differentiation strategy

As Domanico (2007) point out the new strategy of flag-carriers, after the deregulation, was to put new entrants in disadvantage. They wanted to reach it by mergers, acquisitions and alliances. According to, Cassani (2005), who was working for British Airlines and established GO, the mergers do not work very efficiently and as a tool how to gain in front of the leaders could be alliances.

3.1.2.1. Alliances

However, the most successful tool, in airline industry competition, to attack cost leader seems to be alliance and as Porter (1985, p. 529) said: “Alliances of various types have played important roles in many successful attacks against leaders”.

According to Taneja (2003) the main aim of the alliances is to reduce costs and in case

came with lower prices. Kleymann and Seristö (2004) described several basics and drivers for alliances that lead for their set up (see table 3.1). One of the basics is attacking competitor which in case of national airlines can be appropriate as well as lower operating costs that can be observed in column of drivers.

Table 3.1 Basics and drivers of airlines alliances

Basics Drivers

• risk sharing • market power

• scale economics • lower operating costs

• access to

markets/technology

• deregulation of the industry

• attacking competitor • changes in customer preferences

• changes in technology and infrastructure

Source: Kleymann and Seristö (2004)

The boom of alliances came at the end of 1990s and nowadays, the world is mainly operated by three international alliances: SkyTeam, One World and Star Alliance that are summarized in table 3.2.

Table 3.2 Comparison of the alliances

Star Alliance SkyTeam Oneworld

Set up 1997 1999 2000

Destinations 965 841 675

Passengers per year 455,5 million 428 million 319,7 million

Members 24 11 10

Market share 25,1% 20,8% 14,9%

Source: Oneworld (no date), SkyTeam (no date), Star Alliance (no date)

As can be seen these alliances were established after the deregulation. One should ask

cost airline. Nevertheless, by being a part of an alliance the flag-carriers gain competitive advantage of cost reduction, expansion of routes amount, improvement of service for customers and get round restrictions related to mergers, acquisitions and extension in international market (Taneja, N. K., 2003).

While speaking about alliances it should be mention that low-cost carriers get in disadvantage because its routes are only point-to-point that means that if consumer has to change somewhere his plane he has to check-out and check-in again.

3.1.3. Low-cost airlines-using cost leadership strategy

In contexts with airline industry in Europe we can see the major growth of low-cost airlines using the Cost Leadership in late 1990s (Shaw, S. 2007). In Europe this fact was due to deregulation and so called “Open skies”.

With deregulation the entry berries to this industry decrease so the doors were open for new entrants as were Ryanair, Easyjet, Jet2, Wizzard etc.

The question is: How the low-cost airlines gain the competitive advantage by using the strategy of Cost Leadership? There are several areas in value chain where the companies can gain competitive advantage and save money that result in falling price for customer service and particularly for flying tickets. According to Shaw, S. (2007, p.

93-100) those areas can be divided in eight parts.

1. Low Fleet Costs

Low-cost airlines usually use one type of aircraft to maintain easily and cheaply the pilot, stuff training. As an example we can use Ryanair which operate only Boeing 737s and Easyjet that in 2002 changed from Boeing 737 to Airbus A319s. Additionally, to achieve cost cut the low-cost airlines started with “second-hand” aircrafts.

2. Low Landing Fees

This fee is one of the most costly parts of the flying ticket (approximately 18

%) and its reduction can be achieve by little-used or even underutilised

the region because the customers will spend money by shopping, renting a car, oversleeping in hotel etc. Ryanair has built whole strategy to achieve this advantage.

3. Short Turnarounds/High Aircraft Utilisation

Traditionally the turnarounds take 50-60 minutes but the low-cost airlines try to achieve it in 20-25 minute. This is gain by no-allocation of seats for passengers and no-airbridges use. From personal experience this can cause the delay because if the aircrew is not able to make it in short time the airplane can lost its start from runway.

4. Limited On-board Services

The food service is provided but customer is charged for it. The flights in Europe are usually short-hull (2/3 hours) so there is no need as in long destination flights to serve passengers with full hospitality. Furthermore, there is no need of full cabin cleaning but only quick cleaning that is arranged by cabin crew during short turnaround.

5. Point-to-Point only

In this part airlines cut cost in investment which would be request if they would not operate point-to-point. On the other hand this can be seen as disadvantage for customers who had to check-out and check-in again.

6. Simple Fares

When the customer wants to flight with the low-cost airline he is faced to option “take it or leave it” that means that for his destination is offer only one or two flights which they can take.

7. Low Distribution Cost

With development of technology the low-cost airlines started to use the internet through which they removed commissions for travel agents and booking fees for Global Distribution System. The Easyjet established in 1995 got competitive advantage when it started booking through the internet and furthermore it was followed by Ryanair.

8. Non-refundable Tickets

The low-cost airlines do not provide any free changes on pre-booked tickets.

Low-cost strategy in airline industry

To analyse the industry the view of the customer should not be forgotten. Furthermore, the benefits and disadvantages both strategies related to the customer will be described.

3.2. The Consumer

Nowadays, the European consumer is influenced by European culture that is impacted by globalisation and deregulated labour market within European Union.

The deregulated labour market has several impacts on airline industry. Firstly the business travellers are playing battle with time and they are looking for rapid and comfortable transfer, secondly people seeking for a job have new opportunity to get job abroad and thirdly the leisure travellers has grown due to fashion of holidays which can people offer tanks to better financial situation (Shaw, S. 2007). Another factor is change in family structure. The companies should transform their supply towards consumer satisfaction. According to those factors described above the consumers could be divided in two sections according to the purpose of flying: business traveller and leisure traveller. Additionally the advantages and disadvantages of the consumer will be described.

Another issue which should be mentioned is that due to higher competition in airline industry the new and sometimes even better deals are offered to new customer and as Littlewood (no date) discussed the old existing customers are left behind. With those better deals the company is trying to lure on the consumers to become their new customer but on the other hand their old customers can overlap to another company because they can offer them better deal as they would become new customers.

3.2.1. Advantages and disadvantages for the consumer

The consumer decision process is impacted by issues which were discussed in literature review. To summarize the impacts which can influence the consumer decision process the table of advantages and disadvantages can be observed below in table 3.3.

As can be observed in this table the national airlines have fewer disadvantages than low- cost airlines. Due to this the travellers should be using the national-airlines more.

Nevertheless, the consumers decision process is influenced by one of the factor

the company. According to this, the consumers are taking the disadvantages of the low- cost airlines with limitations because they have possibility to save some money. On the other hand this statement can be argued due to small airports where the low-cost airlines are flying because the consumer has to take another public transport to transfer himself to the end-point of his destination. As an example could be used Ryan air and its destination Barcelona-Girona, where the consumer has to take a bus to get in Barcelona and it takes around 1,5 hour more than if you fly to Barcelona main airport from where the bus takes only 30 minutes.

Table 3.3 Advantages and disadvantages for the consumer of national airlines

Advantages Disadvantages

National Airlines

• Higher service

• Long destinations - good connections while changing the plane

• In plane service-food included in ticket price

• The luggage included in the ticket price

• Flights to big airports (no far from city centre)

• Refundable tickets

• Higher prices for tickets

• Delays due to big traffic in the big airports

Low-cost Airlines

• Lower prices for tickets

• Flights to smaller airports-it helps to develop region around the airports

• No delays due to small traffic in the small airports

• Lower service

• Point-to-point destinations

• In plane service – no food included in the ticket price

• The luggage has to be paid separately

• Flights to smaller airports

• Non-refundable tickets

Form the table can be observed that the consumers’ can gain larger advantages from using national carriers. Nevertheless, as will be shown in the results of the research the price is strong issue which can influence the decision process of the consumers.

Chapter 4 – Methodology

Apart from the literature review, describing theoretical background and analysis of the industry the explanation of methods used for the research will be described in this chapter.

The overall objective of this work is to determine how consumer receives differentiation strategy, if he is satisfied with it and if he prefers uniqueness or lower prices. Another objective is to analyse how frequently and for which purpose is plane used by consumers in relation to their social classes define by occupation, qualification and age.

To define the method which will be used for a research the research process should be analysed. This research process is summed up in figure 4.1. The figure describes whole process which precedes specification of data collection methods which is the core of so called onion ().

Figure 4.1 The research process “onion”

4.1. Research philosophy

Research philosophy is external part of the “onion”. Saunders et al. (2000, p. 85) define it as a way how a researcher will do a research.

It can be divided in two parts positivism and phenomenology. Positivism is more focused on analyses that have been already done and a researcher assumes those analyses (Saunders et al., 2000). On the other hand phenomenology criticise the positivism and its generalisation and assumptions which people have towards the way how the world works (Saunders et al., 2000).

In this particular research which has been done for purpose of this dissertation the author support phenomenology. In relation to airline industry the assumption is that customers travelling with national airlines are usually business travellers and customers travelling with low-cost airlines are usually leisure travellers. According to the author this assumption should be discussed.

Nevertheless, the travellers have a lot of possibilities. Nowadays, it depends on consumers preferences and influences on their decision process.

4.2 Research approach

Firstly, the question: “How to do the research?” should be asked (Dawson, 2002).

Several authors described the research approaches. According to them the research approach can be divided in two sections which are inductive and deductive approaches.

Furthermore, the methods of research can be defined as quantitative or qualitative.

Firstly the research methods will be described. Qualitative method of research is appropriate to use when deep research needs to be done and the questions focus on details and the researcher does not need quantum of respondents (Dawson, 2002).

Another method of research is Quantitative method where the research is based on

The research approaches are related to the research methods. Inductive approach is related to qualitative research method and with this combination researcher can identify new theories. On the other hand deductive approach is related to quantitative research and researcher can test already existing theories (Saunders et al., 2000).

The author used deductive approach in this research. With quantitative method was used to analyse the customer opinion and his choice within airlines companies.

4.3. Research strategy

Another step in achieving the appropriate data collection method the research strategy has to be chosen. Saunders et al. (2000) defined eight research strategies which can be used: experiment, survey, case study, grounded theory, ethnography, action research, cross-sectional and longitudinal studies and descriptive and explanatory studies.

4.3.1. Survey

In this dissertation the survey research strategy was used for this purpose. The theoretical background of the survey should be given. The survey method is associated to deductive approach (Saunders et al., 2000, p. 93). This strategy of research is very popular because it allows a researcher to gather large number of samples for low financial resources.

Every strategy has its advantages and disadvantages. The advantage for survey strategy is the economical way of collecting samples, comprehensibility for respondents. On the other side disadvantages can be seen in designing of the questionnaires (questionnaires are appropriate to use while utilising a survey), piloting the questionnaires, analysing the data and finally one of the biggest disadvantage is the time consuming (Saunders et al., 2000).

Referring to Denscombe (1998) the survey can effectively map the studied area which is

The researcher are faced to the reality that they cannot gather data from everyone. This means that data collected are applied for rest of the population (Denscombe, 1998). This issue has to be carefully studied and investigated while doing a research. Size of the sample is reasonable question. For the purpose of the dissertation was used small-scale research which involves 30-250 samples (Denscombe, 1998). According to Denscombe (1998, p. 24) the samples should include more than 30 samples otherwise the statistical analysis cannot be used. In this work the author wanted to use the statistical program of SPSS to analyse the data and therefore the need of 30+ samples was adequate.

The author decided to use survey because of the low financial resources and large number of samplings that can be collected and analysed.

4.4. Time horizons

Fourth layer of the research process is focused on time horizons. The time horizons can be longitudinal and cross sectional. As can be predicted from the names the longitudinal time horizons focus on changes and development within long time period whereas the cross-sectional time horizons is appropriate for research of particular phenomenon in particular time horizons (Saunders et al., 2000). In particular case of this dissertation the cross sectional time horizon was used due to time limitations for the research.