Bargaining Power of Suppliers Research Paper Example

1) Bargaining Power of Suppliers

Suppliers provide the critical raw materials needed to run the day to day operations of an organization or company. They are therefore an important component as far as the efficiency and effectiveness of service delivery is concerned. Some of the underlying issues here would be how many potential suppliers exist? How unique is their product or service? The profitability of the US Airline industry was pegged on the ability of suppliers to meet the needs of the industry. Bearing in mind that the needs of the Airline industry can be quite unpredictable and demanding, it is necessary to ensure that an airline clearly defines what it requires in order to ensure smooth business operations. The US airline industry, therefore, needed a robust and reliable pool of suppliers that was going to ensure timely delivery of goods or services to the end user.

The fuel crisis of 1979, air traffic controllers' strike of 1981 and the severe recession that hit the US in the early 1980s contributed immensely to the industry's difficulties. These three groups of people form the bulk of suppliers that the industry relied on to get things moving. The fuel crisis meant that there was a limited supply of this precious commodity. The strike, on the other hand, crippled service delivery since there was an insufficient supply of labor which was and still is a critical component of production. With suppliers having the upper hand in determining how they will do business, due to their limited supply, it was still going to be rough for the Airline industry to manage to operate smoothly even in the face of these emerging issues. The bargaining power of the suppliers was high at that time and predictions for the future still indicated a higher bargaining power.

THREAT OF NEW ENTRANTS

In the business world one can never tell exactly when a new entrant, a competitor is likely to enter the market. This, therefore, leaves such a reality lingering in the minds of existing businesses knowing that at one time they are likely to face such a reality. Good businesses, companies and or organizations must, therefore, prepare themselves to counter such new entrants because their intention is to shift business to their favor. Business should analyze, among them, cost of entry, specialist knowledge, economies of scale and ability to protect key technologies. If it is easy to gain access to the factors mentioned, then that means it would also be easy to enter such an industry. Companies should, therefore, proof themselves by ensuring that they have hard to crack business policies at entry level. Governments can at times introduce legislation meant to either cushion or suppress the existing business enterprises from new entrants. Most of such legislation can, however, be retrogressive and bad for business. Under such circumstances, the government is forced to revise its decision and either abolish the entire legislation or make it more business-friendly. This can best be exemplified by the US Airline Deregulation Act of October 1978 which permanently altered the commercial airline industry in the US. As a result of deregulation, very many new airlines entered the market. Even then, during the first decade of this act, more than 150 carriers, mostly start-ups, collapsed into bankruptcy. This saw about three major Airlines survive the turmoil albeit for a while. This is because, after the recession, competition and lower fares led to greatly expanded airline travel. This forced most of the new airlines to compete with limited route structures and lower fares than the major airlines. The threat of new entrants was therefore high especially with the introduction of the Deregulation Act. This trend was likely to keep going up as everyone jostled for the share of the market.

BARGAINING POWER OF CUSTOMERS

Customers are the key drivers of the airline industry and as such knowing what they want, when and how they want it is critical. Customers have different tastes and preferences and knowing how to capitalize on this was going to be very important especially for market entrants. Knowing the number of customers served or targeted, their sensitivity to price, ability to substitute and cost of changing would among others, form a solid basis for the participants in the US Airline industry to know to what extent the customers have the power to bargain. From the US Airline industry, customers would mostly be dissatisfied with service delivery by the Airlines hence a call to look into the regulation of competitive airline practices. This meant that the customers have quite a say in how they prefer to be served. The bargaining power of customers would initially be moderate but expected to rise as customers become aware of the services offered and what is in for them.

THREAT OF SUBSTITUTE PRODUCTS

This refers to the likelihood of customers finding a different way of doing what you do. If they get a substitution that is easy and affordable then this I likely to weaken the market position of a company and affect its profitability in the long run. The only way of countering such threat would be by ensuring that the performance of the company is optimal, delivering quality service and in good time. In a case where the existing businesses fail to exploit opportunity then new entrants that are vibrant enough will completely exploit available opportunities and by a large extent offer that which customers need just like it happened in the US Airline industry. With the major airlines taking up the lion's share of the industry profits they were faced with a new threat of new airlines creating a second tier of providing services in markets abandoned or ignored by major carriers. These substitute products were bound to pile pressure on the incumbents as far as service delivery was concerned ensuring that the threat of substitute products was consistently high.

COMPETITIVE RIVALRY WITHIN THE INDUSTRY

This force greatly determines how the four other forces above will relate to one another. In simple terms, the threat of new entry, bargaining power of suppliers, bargaining power of customers and threat of substitution determine the levels of competitive rivalry in an industry. This rivalry is what completes the cycle and assists one to determine whether an industry is most attractive, moderately attractive or least attractive for business. The signing of the Airline Deregulation Act in October 1978 set the stage for increased rivalry in the US Airline industry. Before this, the Civil Aeronautics Board used to manage various regulatory activities, most of which made price competition non-existent. However, with the introduction of the Deregulation Act, airline fares came tumbling down, setting the stage for new market entrants. A factor which almost certainly increased competitive rivalry within the US Airline industry. This rivalry could only get worse with time, given that the airlines in existence operated as if there were only two market segments, those who could afford to fly and those who could not yet there was so much opportunity to exploit.

Summary Findings

The threat of new entry is quite high. The Deregulation Act has made it easy to for new entrants to access the industry thereby reducing profit share.

Competitive rivalry is extremely high. An Airline that does not offer competitive pricing will be quickly undercut. Intense competition puts strong downward pressure on prices.

Buyer Power is strong, again implying a strong downward pressure on prices.

There is some threat of substitution in the US Airline industry, though not at very elevated levels

All this brought together means that the US Airline industry is less attractive due to the factors explained above.

Internal Analysis of Southwest Airlines’ Capabilities and Evaluation of Its Core Competencies

VALUE CHAIN ANALYSIS

PRIMARY ACTIVITIES

Inbound logistics

Southwest Airlines had a relatively short turnaround time but tied with a lot of inconsistencies. It would not be a good sight when a pilot has to be the one loading or offloading luggage. Other aspects of record keeping and inventory control are not quite brought out clearly. Southwest Airline needs to have an elaborate inventory control mechanism to take care of its stock, from the aircraft purchased to the stationeries used.

Operations

The decision by the Airline to maintain short haul, point to point flights as its initial focus was a good decision. This meant that they specialized in short-haul flights and as many such customers familiarized themselves with the system. They internalized Southwest as the go-to airline for short haul flights.

Outbound logistics

These activities include but are not limited to getting the final product to the customer. Southwest Airlines had an elaborate plan and schedule for its flights which made sure that their services were available when needed.

Sales and marketing

These are activities associated with getting the buyers to purchase tickets, goods and or services. The goods and services include advertising, promotion, pricing, retail management and many others. The launch of the Rapid Rewards frequent flyer program was undoubtedly a good strategy in boosting sales for the Southwest Airlines. This gave the customers a feeling of loyalty and ownership of the airline.

Service

Southwest original flights were staffed by attendants in hot pants, a dress code that later evolved to khakis and polo shirts by 1996. This introductory dress code was a sure way of developing an interest in the airline and most people who would have wanted to see flight attendants in hot pants had to travel with this airline. Relative to other major airlines, Southwest Airlines did not have reserve ticketing nor did they offer meals. Seats were offered on a first come first served basis. With the ever-changing trends, it is totally inappropriate, in this day and age, not to reserve seats for customers or even offer them simple meals.

SUPPORT ACTIVITIES

Procurement

The airline procures 3 aircraft, to begin with. This is a reasonable quantity bearing in mind that the Airline is new. Having too many aircraft would have been expensive to maintain and having just one aircraft would most probably make little economic sense especially in instances where the demand for a particular destination rises.STechnology development

After discovering that there exist two different types of travelers, Southwest went ahead to develop a two-tiered pricing structure. One to suit convenience, time-oriented business travelers and the other to suit price-sensitive leisure travelers. This pricing differentiation was a very big strength for them as it drew more customers to their diverse and well-timed offers. Customers felt that their need for choice and preference was being respected and taken into account. Southwest Airlines became the first national carrier to sell seats from an internet site again they were the first to create a homepage on the internet. This is quite commendable bearing in mind that it enhanced speed and ease of booking seats.

Human Resource Management

Human capital is critical to the well-being of any organization. This part of business makes it possible for organizations to know where gaps exist as far as skills, knowledge and attitude are concerned. This, therefore, means that the companies can leverage on the human capital to get the most out of their capabilities. Southwest Airline took a keen interest in developing its employees. Their training focused mainly on leadership, team building and cultural diversity. Employee initiative was also supported and encouraged by management. In an effort to maintain cooperative labor relations, 82% of employees at Southwest were unionized and represented by 11 unions. By allowing employe...