Strategic Management for Norwegian Air Shuttle Asa

Executive summary

The purpose of this report is to compose a new strategy for a client, Norwegian Air Shuttle (referred to as NAS from now on). In order to obtain this new strategy, a short overview of the external environment containing the most important aspects is presented followed by an internal analysis. Afterwards, strengths and weaknesses are summarized in a dynamic SWOT analysis with the purpose of developing three strategic options for NAS. These strategic options are evaluated and lastly there is given a conclusive recommendation. The internal analysis consists of an analysis of resources followed by an analysis of NAS’s value chain. NAS’s aircraft fleet (tangible resource), brand and reputation (intangible resource), and financing (capability). NAS’s brand and reputation is labeled as a sustainable competetive advantage, while the other resources give competetive parity. The most important factors in NAS’s value chain are operations (levels of service) and firm infrastructure (technology development). The internal and external analysis are summarized in the dynamic SWOT analysis, which presents three strategi options. A M&A where NAS buys Air NZ does not comply with all criteria, as it is too risky and requires further analysis. Organic growth does not fit either as it takes too much time. It is concluded that a joint venture where NAS creates a new LCC together with Air NZ is the most realistic strategy for growth, and is therefore the recommended option.

Introduction

NAS is a low cost carrier (LCC) from Norway, which throughout the last decade has grown to be one of the largest airlines in Europe. In recent years, NAS has expanded its scope of product from being a low-cost airline in Europe, to becoming a low-cost long-haul airline with new ventures in the USA (Annual Report, 2017, p. 4). NAS is still looking to expand their organization, and their new hubs in the USA as well as a growing fleet presents opportunities for entering new markets, like New Zealand.

External environment

First of all, the industry is defined by the scope of products and the geographic scope (Porter, 2008). In this report, the scope of products is defined as international commercial flights, whereas the geographic scope is defined as New Zealand, meaning all flights to and from airports stationed in New Zealand. The external environment surrounding the New Zealand airline industry is characterized by being under constant change and pressure mainly due to industry forces and changes in the macro-environment. There exists a relatively low intensity of competition as market shares are concentrated (see Graph 1 and 2), in addition to a medium-low threat of substitute products. There exists a worldwide growth in LCC that has not yet fully reached New Zealand, which in addition to less political restrictions for international entrance enhances the attractiveness of entrance for new players (Passport, 2017). In total, this creates prosperous ground for new competitors and a high threat of new entrants. An analysis of the macro-environment displays how macroeconomic and technological changes presents both threats and opportunities in form of fuel prices, economic growth, decrease in unemployment rate, alternative methods of transport and alternative sources of energy. Lastly, environmental consciousness leads to increased criticism for the airlines environmental impact, leading to environmentally friendly companies being favorized.

Internal analysis

After analyzing threats and opportunities in the external environment, it becomes relevant to match NAS’s internal resources and capabilities to the identified opportunities. First, NAS’s tangible and intangible resources and capabilities are identified before being cherry-picked and analyzed with the help of Barneys (1991) VRIN(+) model. After the VRIN+ analysis, Porters (1985) Value Chain analysis will examine how NAS creates value by investigating contributions of different internal activities to that value.

VRIN+ model

The VRIN(+) model looks at a firms internal resources in order to tell if they create competitive advantage, and potentially a sustainable competetive advantage. Such a resource has to fulfill four criteria; it has to be valuable, rare, inimitable and non-substitutable (Barney, 1991, p. 106-109). In addition, the resource has to be exploitable for the firm (+).

Tangible Resources – Aircraft Fleet

NAS’s tangible resources consist mainly of aircraft, parts and installations on leased aircraft (Annual Report, 2017, p. 43). NAS is known for having a large fleet of new aircraft, and has from 2016 to 2017 purchased 27 new aircraft in addition to acquiring 21 Boeing 737-800 on sale and leaseback. As of 31 December 2017 the NAS group operated a total of 144 aircraft, which is an increase of 28 aircraft compared to 2016. It is concluded that NAS’s modern aircraft fleet differentiates them from other LCC competitors. NAS’s fleet consist mainly of aircraft of the same model, which reduces maintenance costs as well as not having to train the staff to handle different aircraft. The new fleet also means that NAS is more environmentally friendly with less pollution. In total, the aircraft fleet is considered as valuable. Other LCCs like Ryanair and easyJet follow the same strategy utilizing a uniform fleet of aircraft, meaning that this resource is not considered either rare or inimitable. Lastly, the resource is substitutable in the form of using other types and generations of aircraft as well as the resource is well exploited to date.

Intangible resources – brand and reputation NAS’s intangible resources consist of software, goodwill, and other intangible resources like brand name, which are all quantifiable in terms of dollar value (Annual Report, 2017, p. 41). The focus for this examination is going to be on the value of NAS’s brand as well as their reputation. Utilizing the strong brand awareness that NAS has built over the years is one of their key strategies for the time to come. NAS states as the value of their brand increases, the ability of the company to effectively attract new consumers and increase repurchase also grows (Annual Report, 2017, p. 9-10). Ryanair for instance, has previously received negative publicity as a result of being accused for poor working conditions for their employees. This led to Norwegian ministers boycotting Ryanair (DN, 2013). The NAS brand has enjoyed a good reputation throughout the most part of its life, and works hard to maintain this. In total this could make customers choose NAS as their preferred choice of airline. Based on the above, it is concluded that NAS has a valuable reputational resource, that also could be considered rare to some degree. Developing a brand like NAS’s is both difficult and expensive to imitate, while the resource is rather unique and not considered substitutable as well as being properly exploited.

Capabilities – Financing

As previously mentioned, NAS has acquired a relatively vast amount of new aircraft during several years, which demonstrates their capability of paying their obligations to both lenders and lessors. Getting loans from the bank as well as support from other financial services is fundamental for an airlines survival in this competetive industry. Being able to acquire financing for buying as many aircraft as NAS has bought in the last couple of years, is definitely considered a resource of great value. On the other hand this resource is cannot be considered as rare nor hard to imitate. NAS does however take advantage of it in times of increasing competitiveness, meaning it is exploitable. NAS’s capability of getting financing is therefore the only one getting labeled with being a sustainable competetive advantage. Table 1 contains a summary of the discussions above.

Value Chain Analysis

Porter’s (1985) Value Chain analysis consists of five primary activities: inbound logistics, operations, outbound logistics, marketing and sales, and service. The support activities consist of firm infrastructure, human resource management, technology and procurement (illustrated in Figure 3). For the sake of keeping the analysis compact and relevant to the case, some of these elements are excluded. The most important ones that will be discussed are operations and firm infrastructure. Both the excluded and included parts of the analysis are accounted for in Appendix 1.

Operations – Level of Service

NAS’s business model revolves around offering a cheap core product, where most of their services are sold as extras (e. g. check-in luggage, food and drinks, etc. ). However, they do offer free Wi-Fi on all flights as an extra service. NAS has a recorded punctuality of around 76% on their take-offs. Compared to other airlines in the segment like Ryanair with their 88% punctuality, there is room for improvement (Ryanair, 2017).

Firm infrastructure – Technology development NAS has proven themselves as being one of Europe’s most innovative airlines, using entrepreneurial approaches in order to combine low-cost and long-haul. Innovation can be considered as advantageous as it creates a first-mover advantage. This can give customers an incentive for choosing them as their preferred airline, even when they expand to new parts of the world.

Dynamic SWOT Analysis

The dynamic SWOT (Table 2) analysis will now summarize opportunities and threats from the external environment and the strengths and weaknesses from the internal environment, while integrating the different parts of the framework. With the help of the dynamic SWOT analysis, it becomes apparent that there are several strategic options that NAS can take advantage of in order to enter the New Zealand airline industry.

Evaluation

Johnson, Whittington and Scholes (2011) presents three methods to pursue strategic growth options: mergers and acquisitions (M&As), strategic alliances, and organic growth. M&As and strategic alliances are presented as external strategies, whereas organic growth is an internal approach that is very time consuming compared to the others (Johnson et al. , 2011, p. 328). M&As and strategic alliances carry similarities as they can be pursued quickly. A M&A is a possibility where NAS used its financing strength to buy Air NZ – its biggest competitor in the New Zealand airline industry. This would require further analysis of financials for both companies, and would be an extremely big and risky leap for NAS. There are problems with these types of strategies as they require organizational and strategic fit, in addition to having a 50% rate of failure (Johnson et al. , 2011, p. 346).

Therefore, the fulfillment of criteria 2, acceptability, is debatable as a cost-benefit analysis etc. would be necessary. Organic growth could be an option where NAS expands its business to New Zealand under its own brand, creating new hubs and routes. This way NAS would be in total ownership control and does not need to worry about organizational and strategic fit, etc. Organic growth passes the criteria regarding suitability and acceptability, however the option is not in compliance with Criteria 3, feasibility. As NAS needs to take advantage of the different opportunities presented in the dynamic SWOT analysis before it is too late, organic growth is excluded from further consideration. Within the category of strategic alliances, creating a joint venture is an option. This growth strategy includes two companies coming together, creating a new company between them – a joint venture.

This means that both companies can continue to exist, and the risk is diversified between them as well as both have a high degree of ownership and control over their new venture. As Air NZ possesses most of the market shares in the New Zealand airline industry, it could be a good option for NAS to create a joint venture with this powerful, local company. Bringing together NAS’s competencies regarding cost-cutting and Air NZ’s competencies regarding the markets on the southern hemisphere, a new and powerful LCC could have great success in this emerging market. In order to comply with criteria 1, suitability, it is necessary to create a joint venture in the shape of a LCC. This is where NAS’s strength lies, and a way they can present the worldwide growth of LCC’s to New Zealand. In order for acceptability to be fulfilled, extensive financial and risk analysis need to be done. Lastly, criteria 3, feasibility, is also likely to be fulfilled. There could be an issue with getting Air NZ on board with creating the joint venture, however they must realize the threats towards them including the growth in LCCs and less (political) restrictions.

Recommendations

The dynamic SWOT analysis shows that both threats and opportunities in the external environment can be integrated with NAS’s strengths and weaknesses by expanding to New Zealand. Three strategic options have been discussed (M&A, organic growth, and joint venture), resulting in M&A and organic growth being excluded from further analysis due to not complying with the three criteria. The recommendation is that NAS creates a joint venture with Air NZ by introducing a LCC to the New Zealand market. This way NAS takes advantage of the growth within the segment, in addition to Air NZ complementing NAS’s weaknesses and vice versa. Lastly, NAS could also enjoy a first-mover advantage giving them a lead on their competitors.