This report examines the application of the services marketing theories to the airline industry. Part 1 defines the elements of the marketing mix and the historical development of the same and provides criticisms and limitations to the marketing mix. Part 2 highlights the factor of inseparability or simultaneous production and consumption of the services in the airline industry and explores how the airline industry in general differentiates themselves from one another. The homogenisation of services in the airline industry is covered in part 3 of this report. It also covers the exploration of the Five - Classification Scheme and provides discussion on the homogenisation of services. Finally part 5 describes how specifically Singapore Airlines creates entry to barrier and differentiation using Porter's Five Forces and Shostack's Molecular Model.
1. HISTORICAL DEVELOPMENT MARKETING MIX
The term ‘marketing mix' was first used in 1953 when Neil Borden, an American Marketing Association President, addressed his views on the topic, making this term ‘marketing mix' a trade mark. E. Jerome McCarthy a prominent marketer, proposed the 4 P's classification in 1960, which has been widely used and is now part of businesses and academia.
The concept of the Extended Marketing Mix (Extended MM) is one of the foundations underpinning marketing theory and strategy development (Bennett 1997; Constantinides 2006; Rafiq & Ahmed 1995). McCarthy (1964) formally defined the concept of a marketing mix as the strategic “combination of all of the factors at a marketing manager's command to satisfy the [needs of the] target market” (1964: 35). In his original formulation, McCarthy's conceptual framework comprised Four Ps—
Product, Price, Place and Promotion—that provided a basis upon which an organisation could follow an internally consistent and integrated strategy for the provision of goods that would be perceived by the market as valuable.
After much debate about the fit of McCarthy's Four Ps to the delivery of services, Lovelock (1979) Mindack & Fine (1981), Nickels & Jolson (1976), Shostack (1977), an additional three Ps—Process, People, and Physical Evidence—were added by Booms and Bitner (1981).
1.1 Marketing Mix
The service marketing mix comprises off the 7'p's.
The extended marketing mix mainly focuses on the presentation of a good/service that satisfies a target audience's wants in a manner that enables them to purchase it (Crane 2001). Whilst this may seem straightforward, identifying the core need to be addressed, and the extent to which a single product is capable of fully satisfying it, presents a challenge to an organisation. The strategic marketing literature recognises this challenge, and holds that there are three basic levels of product that must be understood by an organization: the core product, the actual product, and the augmented product (Kotler et al. 2006).
Another element of the marketing mix that an organisation needs to focus on, is the amount it charges its customers for the good/services it provides. This constitutes the product offering (Nagel & Cressman 2002, Potter 2000). At its most basic level, the practice of price setting must enable an organisation to recover its costs as well as generate some predetermined level of profit. At a more advanced level, the strategic setting of price requires an organisation to consider product positioning and price planning. To enable an organisation to manage price, it must do more than just set fees that are better than its direct competitors, but must include important strategic considerations such as the need to build strong and ongoing customer relationships and the need to assist customers in constructing their perceptions of value (Nagel & Cressman 2002).
Research has shown that inadequate understanding of the place element in the extended marketing mix can serve to undermine the product in three main ways.
- The reputation of an intermediary may be incongruent with the quality or reputation of an organisation, and that this incongruence adversely impacts the customers' perception of the organisation's product (Guibert 2006).
- Intermediaries charged with selling an organisation's product may be in competition with each other, and this competition can undermine an organisation's ability to carry out its business strategy for the product (Choong 2008).
- An intermediary may prove incapable or lacking in the required expertise for properly representing and selling the product to the customer (Dube & Renaghan 2000).
This part of the marketing mix focuses on the product offered by an organisation (Lovelock & Wirtz 2004). It refers to the human resources deployed conducted for the various aspects of the product delivery processes. Implementing the process element effectively means that the organisation must ensure that its people are knowledgeable about its product, and what it has to offer and its performance levels which contribute to the roles of a commercial transaction (Lovelock & Wirtz 2004). People and staff are an essential element to any service provision that is appropriate to the company. Making sure the right staff has been recruited and trained is important, as the delivery of services is crucial in obtaining an organisational competitive advantage. Customers come with expectations and perceptions of an organisation therefore, to avoid judgements, employees need to deliver services to meet customer needs and keep them satisfied. The staff is trained to act appropriately concerning customer query, and should have interpersonal skills, the right attitude, and service knowledge to provide the service that consumers are paying for.
The process refers to the way the systems are utilised to assist the organisation within its delivering and its services. An example is the banking system, which sends out credit cards automatically when their customers' old one has expired, this requires an efficient process to identify expiry dates and renewal. An efficient service that replaces old credit cards will foster consumer loyalty and confidence in the company.
This element of the service mix is about where the service is being delivered. Physical Evidence is the elements of the service mix which allows the consumer again to make judgments on the organisation. If you walk into a restaurant your expectations are of a clean, friendly environment. On an aircraft if you travel first class you expect enough room to be able to lie down. Physical evidence is an essential ingredient of the service mix; consumers will make perceptions based on their views of the service provision, which will have an impact on the organisations perceptual plan of the service.
1.2 Limitations and Criticisms
Although McCarthy's four Ps mix has increasingly been scrutinised with the result that different marketing mixes apply to different marketing contexts, he believes that conceptualisations undermine the concept of the marketing mix. Furthermore, McCarthy bases his ideas on a survey of a seven Ps framework that can be applied to consumer goods. This survey also reports the results, which suggest that there is a high degree of dissatisfaction with four Ps hence why he proposes that Booms and Bitner's (1981) seven Ps mix for services should be extended to other areas of marketing. This information suggests that the 7Ps framework has had wide reviews and achieved a high degree of acceptance as a generic marketing mix.
The marketing mix approach to marketing is one model of crafting and implementing marketing strategies. It stresses the "mixing" of various decision factors in such a way that both organizational and consumer objectives are attained.
Against McCarthy's four Ps, some claim that they are too strongly oriented towards consumer markets and are not an appropriate model for industrial product marketing. Others claim it has too strong of a product market perspective and is not appropriate for the marketing of services.
Re-engineering theorists claim that the mix process generally leads to inefficiencies. According to Michael Hammer and James Champy (Hammer & Champy 1993), rather than organising a firm into functional specialties (like marketing, sales, advertising, marketing research, new product development, public relations, etc.) and looking at the tasks that each function performs, we should be looking at complete processes from materials acquisition, to production, to marketing and distribution and customer satisfaction.
Furthermore Peter Doyle (Doyle 2000) believes that the marketing mix approach leads to unprofitable decisions because it is not grounded in financial objectives such as increasing shareholder value. Doyle goes on to add that it has never been clear what criteria to use in determining an optimum marketing mix. Objectives such as providing solutions for customers' needs at low cost have not generated adequate profit margins. Doyle claims that developing marketing based objectives while ignoring profitability has resulted in the dot-com crash and the Japanese economic collapse.
He also claims that pursuing a ROI approach while ignoring marketing objectives is just as problematic. He argues that a net present value approach that maximizes shareholder value "provides a rational framework" for managing the marketing mix.
Inseparability of production and consumption refers to the concepts of interaction and service encounter. The process of simultaneous production and consumption involves the presence of customers, the customer's role as a co-producer, customer-employee and customer-customer interactions that makes it unique from a product (Shostack 1977). Researchers often refer to the customers as ‘partial employees' in a service setting and with technological advancements, during co-production; the customer involves himself in self-service using technology and machines offered by the service provider. For example the self check-in service in the airline industry.
2.1 Service encounters
During simultaneous production and consumption, it is the ‘service encounter', that is the critical moment of truth in which the customer often develops a perception/ attitude about the business (Bitner et al. 2000) and creates a differentiation from other competitors. In the airline industry, these service encounters are on which the organisation, either thrives or dies based on customer's evaluation of their service. And the successful organisations take it a step further to enhance their core or essential features with extended or enhanced features.
Service encounters can take place across a range from the traditional face-to-face (check-in, cabin crew), telephone (telephonic check in, booking tickets), and lastly through the internet (web check-in, booking tickets) and at every point the airline industry thrives to make it easier and comfortable (less time consuming) for the customer. A successful organisation is which that exceeds the customer's expectations (enhancing features) and not just meeting their expectations (core features). But Harris et al. (2003) suggests that if the core features are not met by the airline industry, it is that leads to customer dissatisfaction. He also suggests that only 5% of the unhappy customers complain to the service providers, thus making it difficult for the service providers to address the issue. What intrigues even more is that the 95% of the customers, who do not complain, talk negatively about the service to their acquaintances. However, when dissatisfied customers do complain and the problem is resolved to their satisfaction, they are likely to return. The reasons for dissatisfaction may vary across long queues at check-in or booking counter, incompetent personnel, unsafe website and so on and so forth.
Bitner et al. (2000) suggests that in the airline industry core factors vary from friendliness of the staff, knowledge about the service, efficiency, and service quality, sanitary and safe environment. But to create differentiation from their competitors these organisations, provide added or enhancing factors and those include concierge service, reservations, seating by host, lounge/ hotel facilities for delayed flights and so on and so forth. Air India flight provides cheaper flights just barely meeting the core features, but Emirates for the same route provides expensive flights with a varied extended factors.
2.2 Shostack's Models
Shostack (1977) suggested that there is no element known as a pure service and that there is always a continuum between the tangible dominant goods and intangible dominant services. The airline industry, the tangible elements include the interiors of the flight, food, seat and also the overall graphic continuity from buying tickets to the attendant's uniforms (Shostack 1977). Even though the airline industry is intangible dominant, different market segments require different elements to make it an experience for them.
Say for example in the case of Virgin airlines they have three tailored travelling experience for three different markets.
- In the case of students/ backpackers or during bad economic conditions, it is elements such that ‘reaching from one destination to the other' or a ‘no frills' flight would be of emphasis on the nuclear core (cheap flights+hostels, bed and breakfast)
- In the case of business travellers, it would be schedule frequency along with comfort would be most important (a comfortable travel+ hotel with internet, office facilities).
- Lastly for tourists (with families), it would be unison of in-flight and post-flight services (hotels) that would be of paramount importance (comfortable flight-but not too expensive+hotel near a tourist destination)
But in the case of tangible elements the various markets demand differently. For example, for flights like Air Asia, which offers low cost air travel, the travellers are not provided certain tangible elements such as food and drink in-flight.
So the challenge for other firms is to create an experience for each market, so that it would form an experience for each of them as each of their needs differ from another. The challenge is to understand how consumers perceive a certain service and what as a firm they should do to manage and meet the expectations (Lovelock and Gummesson 2004).
But these airlines just cater to travellers who wish to travel on a limited budget.
Shostack (1977) defined a model that was termed as ‘total market entity' where she argues that a change in one element may change the entity on a whole or partial basis.
This model however does not show how a service functions and this is explained using another model by Shostack-
Service Blueprinting. It has been developed to deal with processed, acts and flows and in (fig 4), a blueprint for airline travel has been presented under how airlines try to reduce variability
Every time a customer is interacting or having a service encounter, a service experience is taking place and because simultaneous production and consumption takes place, the customer mostly experiences the service in the firm's physical surroundings (Groove and Risk, 2001). Service experience is defined by the quality of service provided by the airlines. What the airlines aim is make profit while creating a satisfactory or unique service experience.
To create a differentiation from their competitors, airline firms use the Porter's Generic Strategy Model (1980):
Using Figure 1 and figure 2, Porter's Generic strategy can be explained as:
1. Cost Leadership
Cost leadership refers to gaining competitive advantage and giving your company an edge over the others. This can be attained in two ways: Firstly increasing profits by reducing costs and secondly increasing market share by charging low prices.
Airlines such as Air Asia and Rynair have chosen to cut costs to a minimum, thus enabling to charge customers low prices. But where they did compromise in on the in-flight and other services such as Air Asia does not even provide water in flight; one is expected to buy them, free seating etc helps them price their tickets low. Smaller airlines even provide just few routes at cheaper prices than their international rivals.
But the risk if when competitors follow suit and hence firms should look for other means to continuously differentiate themselves.
2. Differentiation Strategy
This involves making ones service different and more unique. This could be achieved by airlines in terms of their airplane types, costs, brand image etc. Singapore Airlines, Emirates have portrayed an image of making travel an experience with their superior quality. But as Porter (1980) argues that for a company using differentiation strategy, they would incur additional costs for research, development, innovation as well as advertising, which are normally recovered from the customers.
3. Focus Strategy
Airlines using focus strategy emphasise on a niche market and this could be a unique low cost airline for a target group or high-end price for another target group. For example, the A380 airplanes used by Singapore Airlines and Emirates charge a premium price of £3600 for Business Class travel on Emirates from Heathrow to Dubai. So this is for the target group who like to travel with a lap of luxury with pool tables, spas, Internet, lounge area etc during their flight of less than 7 hours.
There is very much less competition in markets where focus strategies are used. But the risk is when the niche will disappear and when the business and customer preferences change over time.
2.4 Variability of Services
One other feature of services marketing is its heterogynous nature and organisations strive to reduce the variability that would lead to building a strong brand. The aim is to communicate a persistent image and message to its customers at different places and different times. Service Variability can take place in different ways.
- Variations in external Conditions -weather, crowding and differences in service locations
- Variations in service delivery- customer interactions with employees
- Variations in customer perception-customers' perception of a service may differ from place to place and with time too The figure below shows the causes and consequences of service variability in any organisation.
Figure 3: Causes and Consequences of Service Variability
The issue of variability leads to difficulty in attaining a uniform output especially in services that require a lot of human interaction. Say for example, we still have not developed technology to eliminate the need of humans completely. Airlines do not use robots to replace the human cabin crews as one human interaction is essential and secondly some technologies are too expensive to adopt suggest that behaviour varies not only amongst different employees but also amongst the same employee on different days and with different customers (Lovelock 1983).
To provide a good service as well as creating an experience for the customer and to ensure reduced service variability, the airlines use the following techniques:
1. Employee Training
As employees are part of any service provided, most airline firms have a rigorous selection and training process. Firms who invest a lot in selection and training process mostly offer higher quality service than others. For example, Singapore Airlines hires staff that fit in with the ‘Singapore Girl' image and portrays the same values as that of the firm.
Most airlines have pre-determined scripts for each type of service encounter, which consists of either verbal responses or series of actions. The usage of verbal scripts is common while booking a ticket or enquiring about a service. Like for example, when a customer calls a call centre for a query, they normally have a script, which goes by:
“Good morning, Thank you for calling Malaysian Airlines. My name is Ben and how may I help you?”
Similarly a scripted message is used after a call or as an apology. In the case of scripted actions, it would like all cabin crews, follow the same actions once passengers are in the flight. But this has its limitations in terms of how at times personnel feel restricted from offering superior service based on their judgement.
Shostack (1982) suggested that blueprinting allows quantitative description of critical service elements, such as logical sequences of actions and processes, and time that occur at a place of service delivery. It also defines actions for the place of interaction (front-line) as well for events taking place beyond the line of visibility. Zeithaml, Bitner et al. 2006 define service blueprinting as a tool for simultaneously depicting the service process, the points of customer contact, and the evidence of the service from the customer's point of view. The figure 4 below shows a service blueprinting for an air travel.
32 |Page Group Assignment
Case Study on the Airline Industry-Application of Theories
32 |Page Group Assignment
Case Study on the Airline Industry-Application of Theories
4. Quality Audits
This is done to monitor the consistent quality provided by the airlines. Ground service analysis covers ticketing, check-in, security, lounges, boarding, departures, transfer, arrivals, and corporate branding. Onboard service analysis is a detailed and complex qualitative evaluation of all product and service delivery elements - core product standards, service efficiency and critical factors of staff service delivery. IATA carries out frequent safety audits.
5. Quality Awards
Airlines often advertise the awards they have received for their superior quality. These awards are recognized worldwide and ensure that these airlines provide world-class travel experience for their travellers. For example, in 2009, Singapore Airlines was awarded the Airline of the Year award for its superior quality and safety.
6. Service Recovery
However thorough an airline is on its quality and service provided, there would still be occasional glitches. And a feature of any service is its heterogeneous nature, where each service encounter is different from another one. Berry (1995) argues that companies do not empower front line employees to solve problems immediately.
7. Customer Retention
Parasuraman et al. (1985) suggests that even though there is a positive relationship between service quality and customer loyalty, above a certain level, additional improvements in quality do not have further impact on customer retention as there is no point in increasing quality costs if it cannot be passed down to the customers.
The variability of services poses a high threat when it comes to brand building, but since humans are an integral part and cannot be eliminated completely, steps are taken to provide better training, motivate and encourage employees as they all form part of the service encounter. As Lovelock and Gummesson (2004) suggests that performance is less variable when machine-intensive technologies are used.
So as to reduce the consequences of service variability, airline industries have adopted the use of technology so as to reduce if not eliminate the factor of human error. These include:
- Use of computerised system instead of telephone operators.
- Use of self-check in Kiosks at airports, mobile check-in (SSTs-Self Service Terminals)
- Using website to book or amend tickets.
The other dimension of variability is the extent to which a service can be altered to meet the demand of individual customers. Services that are manufactured for a large number of customers are difficult to be customised like in the case of air travel, but can be customised in particular areas. For Example scheduled airline service is highly standardized in design but presents areas for customising specific elements, such as alternative schedules; service to or from different airports in the same metropolitan area; different classes and prices; seat location; and a selection of drinks, food, and other amenities.
But with the evolution of technology, industries, especially the airlines are adopting technology as far as possible as with rising competition there is no room for error. But not using humans at all is impossible. So as Jim Collins said: “People are your most important asset is wrong. The right people are your most important asset.”
3. HOMOGENISATION OF SERVICES
Vargo and Lusch (2004) described heterogeneity as the relative inability to standardize the output of services in comparison to goods. It is a characteristic difference between goods and services discussed in the past by Zeithaml, Parasuraman, and Berry (1985). The list of unique characteristics is completed with intangibility, inseparability and perishability (IHIP). Homogeneity can be seen as the opposite of heterogeneity. It is similar to standardisation of services.
Standardisation or homogenisation is viewed more from the manufacture's perspective and thus has become the standard of quality. On the other hand non-standardisation or heterogeneity is the normative goal from the marketing perspective (Vargo and Lusch 2004).
Service management often represents an ongoing struggle between the desires of marketing managers to add value and the goals of operations managers to reduce costs through standardisation (Lovelock 1983).
3.1 Exploration - Five-Classification Scheme
In this part of the report we will explore the issues associated with the homogenisation of services by implementing the five-classification scheme and the conceptual model.
The five-classification scheme of Lovelock (1983) offers a new way to group services other than by current industry classifications. In each instance examples are given of how various services fall into similar or different categories:
Nature of the service act
During the exploration of the nature of the service act, two fundamental issues are discussed; at whom is the act directed and is this act tangible or intangible in nature?
Lovelock (1983) described the actual passenger transportation in the airline service as services directed at people's bodies. Getting the customer speedily and safely between two points is here the tangible aspect of the service act. This tangible aspect of transporting people is also seen as the core factor.
Tangible actions at people's bodies may sometimes seem to spill over into two or more categories. In the airline service, intangible actions come up that are directed at people's mind (Lovelock 1983). These actions are called the enhancing factors, as they give added value to the core factors.·
Nature of relationship
In the airline service, no formal relationship is being built with the customer. In consequence, the service provider does not know the identity and the usage of their current customers. This allows transactions to be discrete and each usage to involve a payment to the service supplier by an essentially anonymous customer. These transactions do not happen on a continuous basis, consumers experience the service for a particular while. The normative goal is to seek ways to develop a formal relationship in order to ensure repeat business (Lovelock 1983).
Ensuring repeat business can be achieved by rewarding customers for their repetitive purchases or by giving added value to the core factors. In airline industries they introduced, for instance, the VIP lounges and additional, enhancing, services to stimulate repeat business.
Customisation and Judgement
The transportation business, such as the airline industry, is highly standardised in design but offers customizing specific elements. These elements give extra value to the customers by offering alternative schedules, service to or from different airports, different classes and prices, seat location, selection of drinks, etc. As customers have unique demands and experience the service in a unique way, customization is needed to meet specific needs (Lovelock and Gummesson 2004).
Nevertheless customization is not always the key factor to success. Standardising a service to take advantage of the economies of mass production may actually increase consumer satisfaction. Speed, consistency and price savings may be more important to any customers than customized service (Lovelock 1983).
Nature of service demand
Another unique characteristic of services is ‘perishability' or the fact that a service cannot be stored. In the airline service, there are large demand fluctuations of time. Causes of these fluctuations are customer habits, third party actions and non-foreseeable events. During periods of low demand, the potential income from an empty seat on an airline flight is lost forever once that flight takes off. If people cannot get a seat on an airline during a high demand period, another carrier gets the business or the trip is cancelled or postponed. Strategies to come up with fluctuations are special offerings; discount prices, added value during periods of low demand or hiring part time employees during peak times. Another method is to ration demand through a reservation or queuing system. (Lovelock 1983)
During periods of low demand, the airline company must give added value to their customers by offering extra enhancing factors to the actual flight. Factors as for instance, seat location and VIP lounges, give the customer the feeling that they really care about them and that they always look for the best solution.
Nature of service delivery
Interaction between the customer and an airline company can be done at arm's length, mail or electronic communications. At this way, it may be possible to separate certain components of the service from the core product and to handle them separately.
Making reservations and asking information about the airline flight can be done directly through the airline as well as through a travel agent. The travel agency provides a one-stop-shop by arranging the flight and the accommodation. In this way, convenience is very high and a strong relationship is being built. (Lovelock 1983)
People who make use of a travel agent also means a threat for the airline company as the agents also look at the competitors. Here it is very important to provide user-friendly solutions to customers so they can book their tickets directly through the airline company.
3.2 Service Quality
The conceptual model of Service quality by Service Parasuraman et.al 1988 defines the gap between what the customers expect from the service and what is provided. From this model, it can suggest that to create a better service encounter for the customers.
This represents the void of the perceptions and expectations between the marketer and the consumer. The key is to understand what the customer expects rather than forming a perception of what they might want. Parasuraman et al. (1988) suggests that this void can be filled if sufficient market research is done prior to offering the service. For example, if an airline firm is to find out what a particular target market is looking for, before offering enhanced factors.
This refers to the void between what the company perceives and the service quality specifications.For example, low-budget flights like Air Asia advertise that they provide in-flight entertainment, but the quality is limited (all passengers view the same program on a single television set).
This is the void between quality specification and service delivery.For example in the case of few Asian airline companies, the quality of service provided would be accepted by the home nation. But outside the home nation, the quality specification may not be on par with what the customers expect. For example, in India, Kingfisher airlines claims to provide world class travel experience to its customers. Even though the service provided is perceived to be on par with top airlines in India, the quality of service offered is nowhere close to airlines such as Singapore Airlines, Thai Airways etc.
This relates to the void between the standard of quality promised and the service delivered.Thai airways have positioned itself as an airline that brings together quality as well as hospitability (‘Travel with the Thai touch, Smooth as Silk'). But what raised issues and led to negative publicity was when their personnel were found to be rude to passengers. This led to a completely contradicting image of what they claim to be to what is delivered.
Parasuraman et al (1985) argue that it is important for good service quality to meet or exceed customer's expectations from the service. Judgments of high and low service quality depend on how consumers perceive the actual service performance in the context of what they expected. Service quality is low when company's actions are perceived as unwilling, rather than unable.
Figure 5: Homogenisation of Services (Zeithaml, Parasuraman, Berry 1985)
Our previous findings are summarised into the model above and are adapted from Zeithaml, Parasuraman and Berry (1985). With ‘homogenisation of services' we understand the movement from heterogeneous to homogeneous, or as we refer to as enhancing factor and core factor respectively. This movement is influenced by factors impacting on customer expectations. The challenge for companies is to identify and situate these factors. Because what a company defines as an enhancing factor, can be perceived as a core factor by customers. Enhancing factors should consist of differentiated offerings, providing distinctive competence to companies.
In this case, homogenisation of services can occur in two ways. On the one hand by moving services from enhancing factor to core factor. Or on the other hand by cancelling these ‘enhancing services'.
Zeithaml et al (1985) already introduced factors having an impact on customer expectations. With this adapted model, we want to look at it from a different angle. We can witness a change in customers perception of services. We believe customers are getting used to (some) enhancing factors and give it less importance. As a result, companies will make core factors of these services in an attempt of cost cutting, timesaving etc. When making these movements, companies must handle unambiguously. It would, for example, be dangerous to communicate about an enhancing factor, when customers experience the service as a core factor. There is a zone of tolerance to allow some deviation in perception from both companies and customers.
An airplane company can claim that punctual planes are an enhancing factor, while customers experience it as a core factor. They expect planes to be on time.
Homogenisation of services can also be achieved by cancelling enhancing factors. This will be the case when it is not possible to deliver the service at a lower cost price or in a shorter period of time. Although companies must be aware of any change these changes can include, as it could affect competitive advantage. It is important to find the right balance between the enhancing factors and the core factors, and to communicate about them in the right way.
With this report we expect to provide a solution in setting boundaries between the core factors and enhancing factors.
4. BARRIERS TO ENTRY/DIFFERENTIATION
It is important for any company to create barriers that inhibit competitors to enter the market. By creating competitive advantages the company can set barriers against there competitors.
To explain how barriers and differentiation can be created within a company we will apply Porter's five forces model and Porter's two generic competitive strategies.
To implement the theory, the case company, Singapore Airlines (SIA) will be used.
4.1 Porter's Five Forces
According to Porter (1980) there are five forces that determine the competitive intensity of an industry: supplier power, threat of substitutes, threat of new entrants, buyer power and degree of rivalry. The model displays a series of five boxes in a cross formation. The central box of the model is competitive rivalry and is a function of the other four forces. (Grundy 2006)
To explain Porter's Five Forces model more broadly, Singapore Airlines will be used as an example.
Figure 6: Implementation of Porter's Five Forces on SIA
The first force, the threat of new market entrants, shows that it is quit expensive for a company to enter the air traffic industry and that it requires a lot of experience. When companies are in the business for some time, they could have obtained some cost benefits and/or economies of scale. Throughout the years of experience, companies also obtain a brand image that is very important for an airline company, to create customer loyalty. As a conclusion, there are high barriers to enter the air traffic market.
The second force, the bargaining power of suppliers, illustrates that SIA has a large number of suppliers, these are all medium to large companies. The supplier power within SIA is neutral, which makes that the company has the ability to substitute. SIA has achieved a positive brand reputation, where the company takes advantage.
The bargaining power of buyers is the third force of the model. The company has a large number of buyers. In the air traffic industry it is difficult to keep existing customers because they are all very price sensitive and they have the ability to substitute all the time. For that reason, it is important for SIA to add value to the service they offer. They have to differentiate and outperform the competitors; due to this they create a competitive advantage. SIA has consistently outperformed its competitors by implementing differentiation through service excellence and innovation, together with cost leadership. (See Porter's two generic strategies)
The forth force is the threat of substitutes in the air traffic industry. As already mentioned with the third force, buyers can easily choose other airlines as substitutes. Therefore it is important that companies add value to create differentiation. If they succeed in adding value through differentiation, customers will be satisfied and will become more loyal to the company. They need to position themselves as the number one airline for their customers.
The final force, in the middle of the model, is the competitive rivalry. There are many competitors in the air traffic industry. Beside low switching costs, for moving from one company to another, customer loyalty is also hard to maintain. To be stronger than the competitors the company should add value to the service it offers, differentiate and create competitive advantage.
We can conclude that SIA is performing well at most of the forces of the model. The company creates a competitive advantage by adding value to the service they offer. This will lead to more attractiveness for the customers and long-term profitability.
4.2 Porter's two generic strategies
In Porter's Competitive Advantage: Creating and sustaining superior performance (1985), he discribes two types of generic strategies: cost leadership and differentiation. It is important for a company to create a competitive advantage and to make sure that no competitor can duplicate the benefits of the strategy (Barney 1991).
This competitive strategy consists of lowering the costs in such a way that other competitors are not able to compete. These costs are not always visible to customers, also the internal costs of a company need to be as low as possible.
Cost leadership can be obtained by using: economies of scale, the learning curve, differential low-cost access to factors of production, technological advantage independent of scale and policy choices (Jaquier 2003).
Table 4: Economies of Scale
Cost leadership is a very useful way to obtain a competitive advantage over other companies. However the product or service that the company produces needs to lend itself to this particular strategy. Not all strategies to create cost leadership are equally applicable to any good or service.
Companies can obtain differentiation by creating characteristics that are perceived in the market as being unique benefits.
According to Porter (1980), differentiation provides a company with an advantage against competitive rivalry because it creates brand loyalty with customers. This customer loyalty also provides a barrier to entry and protect the company against substitutes(see Porter's five forces).
Marketing is about offering customers a package of benefits. The package consists of a core product (good or service), which is accompanied by supplementary services. These services add value to the core. The supplementary services help to differentiate core products and create competitive advantage by facilitating the use of the core service and enhancing the value and appeal of the core (see figure 8).
4.3 Singapore Airlines' dual strategy
According to Porter (1985) it is practically impossible for a company to be succesfull as a cost leader and differentiator at the same time. They would be ‘stuck in the middle' if they tried to be both. And never be the best at anything.
However SIA is successful at being a cost leader and differentiating itself at the same time. The table below shows elements of how SIA creates its dual strategy (Heracleous & Wirtz 2009).
Table 5: Elements of differentiation and cost leadership strategies at SIA.
According to Ulaga and Eggert (2006), service support and personal interaction are core differentiators. If we take a look at Singapore Airlines, the positioning of their service excellence indicates that service support is a priority for the company. Personal interaction can be found in the the way they profile the Singapore girl but also in the way that they constantly innovate and learn.
Not only is Singapore Airlines succesfull in differentiation but also cost leadership. By using technological advantages throughout their company. Thes advantages are found in the companies cultural values. It is enough for them to innovate on a constant base, a little at a time, and still be the best at what they do. By doing this they keep the costs of innovation quit low and provide the best service for a low cost.
We can conclude that Singapore Airlines succeeded very well in creating and sustaining this dual strategy. They outperform their competitors by differentiation through service excellence and innovation, together with cost leadership (Heracleous & Wirtz 2009).
4.4 Shostack's Molecular Model
Shostack (1977) designed a Molecular Model to visualise and manage a market entity. She utilises a scientific analogy to justify that, as in chemical formulations, a change in a single element may completely change the whole market entity. The model can be applied for either products or services.A ccording to Shostack (1982) a market entity has always a core benefit, which is a good or a service, connected with some supplementary services. These services add value to the core entity and help to differentiate the core product. Besides they create competitive advantage by facilitating the use of the core service and by enhancing the value and appeal of the core entity.
Figure 7: Shostack's Molecular Model (1982)
Figure 7 outlines that the core benefit can be tangible or intangible dominant, in other words can mainly consist of product or service elements. Physical objects that cannot be seen as true product elements can conduct Service elements. They are pieces of evidence that justify the existence or the completion of a service. Shostack distinguishes two kinds of service evidence: peripheral evidence and essential evidence. Peripheral evidence is possessed as part of the purchase and has little or no independent value, for example an airline ticket. Consumers cannot possess essential evidence. It has a significant impact on the service purchase and the use of the service. For example, during the 1970s there were a few crashes of DC-10 aircrafts that scared a lot of US passengers. Because of that there was a lack of enthusiasm of US passenger for DC-10 aircrafts, so US airlines stopped using them. The service elements and service evidence were linked by bonds, which are used by marketers to identify important elements, correlations or relationships.
To complete the model, the remaining marketing elements should be added. First of all, the total entity is surrounded by the distribution strategy. Then the marketer should consider about the price strategy of the entity, which involves the price setting and the cost of the entity. Finally, the entire entity is ringed by its positioning to the market. This final step includes the promotion and advertising strategy of the company. The positioning of the entity into the market allows the company to create an image, which is the outward representation of the entity. Besides, it is a method of differentiating the entity to its target market.
One of the main discussion points of Shostack's Molecular Model is that it only presents some guidelines about how to offer a service, but does not describe the development of the service.
Figure 8: Implementation of Shostack's Molecular Model on SIA
Singapore Airlines is an example of airline transportation. The core benefit of this entity is intangible-dominant this means that there exist no physical ownership of a tangible good. In other words an airline travel can only be experienced, not physically possessed.
By breaking down the core entity into more elements, we can conclude that nearly all of the other important elements are intangible as well. Examples of intangible elements according to Singapore Airlines are the onboard entertainment system and the punctual pre- and post flight service. But for the market positioning Singapore Airlines marketers are also trying to reinforce the intangible core by developing some tangible items, like for instance the onboard gourmet cuisine, the uniform of the Singapore Girl designed by Pierre Balmain etc. Both tangible and intangible enhancing factors have an influence on the ‘reality' of the service in the mind of the customer and add value to the customer. They help to differentiate the core product and create a competitive advantage.
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The Role of a Quality of the Product in the Marketing Strategy
If the product is of a low quality, all marketing efforts will fail. A nice packaging, attractive promotion or even a lower price of competitors cannot replace a quality. The successful marketing strategy is the one that has all elements balanced. This is the only way to attract customers and hold them in a long-run.
Marketing strategy includes all activities aimed at the increase in sales and a sustainable competitive advantage based on the selected marketing mix that consists of 4 Ps or product, price, place and promotion (McCarthy). All elements of the marketing mix are equally important and must be harmonized in order to achieve the marketing goals. The product is what sells to customers and the base of the business operations. It must have an adequate price which is determined by costs and must be brought to the consumer through selected distribution channels. Customers also must be informed about the product that is offering. In services marketing is added three more elements – process, people and physical environment, which makes the 7 Ps (Booms et. al.).
Although all elements of the marketing strategy are important, the quality of the product is crucial because creates a customer satisfaction (Singh 5). Even when all other elements of the marketing strategy are in line with the market, if the quality of the product is low, the customers will not be satisfied and will stop buying the product. The quality of the product also creates value (Singh 5). Furthermore, product quality has a direct and positive influence on ROI, market share and price (Jacobson and David 32). Customers are willing to pay higher prices for higher quality. Also, a quality product will easier enter the market and increase market share. In return, higher prices and market share have a positive feedback effect on increasing the quality and all together increase ROI (Jacobson and David 42). It is enough to look the well-known brands, such as iPhone, Mercedes, Nike or Armani to see that with high quality always goes high price, a huge market and enormous business success. However, customers will buy only what they want, so the company must find the right mix of all elements.
Therefore, though all four elements of the marketing strategy are important, without a quality product a company cannot survive in the market, even if has the greatest competitive advantages in other aspects of marketing. Very often a quality of the products is the crucial factor in the decision to purchase a product because it determines customer satisfaction.
Booms, Bernard H. and Bitner, Mary Jo. “Marketing Strategies and Organization Structures for Service Firms.” Marketing of Services. American Marketing Association,1981, pp. 47–51.
Jacobson, Robert, and David A. Aaker. “The Strategic Role of Product Quality.” Journal of Marketing, vol. 51, no. 4, 1987, pp. 31–44., doi:10.2307/1251246. Accessed 16 Feb. 2017.
McCarthy, E. Jerome. Basic Marketing, IL: Richard D. Irwin, 1964.
Singh, Meera. “Marketing Mix of 4P’S for Competitive Advantage.” IOSR Journal of Business and Management, vol. 3, no. 6, 2012, pp. 40–45., doi:10.9790/487x-0364045. http://www.ijbmi.org/papers/Vol(2)6/Version-2/B02620508.pdf. Accessed 17 Feb. 2017.
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