Classic Airlines (Classic) operates in an intensely competitive industry with extremely low profit margins as exemplified by the fact that Classic earned only $10 million profit on $8.7 billion sales. The company’s CEO Amanda Miller and CFO Catherine Simpson believe the key to winning the competition is to achieve operating efficiency, hence, their focus on number while other members of the management team such as CMO Kevin Boyle, SVP of Customer Service Renee Epson, SVP of Human Resources John Hartman prefer customer-oriented approach to winning the competition. Amanda has given Kevin, Renee, and John a goal of achieving 15 percent reduction in costs to meet board expectations. At the same time, other management team members have other demands such as Catherine wanting to focus more on fuel hedging and SVP and General Counsel Ben Sutcliffe wanting to maintain good relationship with the union.
Kevin, Renee, and John are in favor of pursuing an industry alliance after attending Kevin’s friend Josef Wymann’s presentation who is marketing executive of Skyway Airlines. But the trio also know that Amanda has historically shunned such industry alliances because of her belief that the company can serve its customers better by itself. Kevin, Renee, and John also agree that investment in CRM system which Amanda advocated was the right thing to do but they also think that the system has been implemented without proper planning and is not being utilized so as to exploit its true potential.
Classic is faced with several challenges including destructive price war with the competition, declining employee morale, lower customer satisfaction, and loss of customers to the competition. Membership in Classic Rewards program declined by 19 percent while the flights per remaining member also declined by 21 percent, thus, one of Amanda’s priorities is to reverse the trend and preserve client base as well as increase customer satisfaction. In addition, the working relationship between leadership and management team is relatively weak and Kevin, Renee, and John have different vision than Amanda and Catherine of how the company should be managed.
As well as the airline industry is concerned, it still has considerable room to grow, also due to globalization. The industry’s impact on GDP grew by 3 percent in 2011 and is expected to average 4.1 percent yearly from 2012 to 2022. Even though Classic has avoided alliance, the other players in the industry such as Skyway have forged alliance to achieve greater operating efficiency and customer satisfaction.
The main problem facing Classic is to figure out as to how customer satisfaction can be increased because it will not only strengthen customer loyalty but also help the company gain new customers. In addition, successfully solving the issue of declining customer satisfaction will also help Classic improve its finances. Moreover, company’s investors will also benefit from rising stock price. Similarly, the company also faces the issue of declining employee morale.
There are several factors that have contributed to problems regarding lower customer satisfaction as well as declining employees’ morale. First of all, the organization has been taking operation-oriented approach to business instead of customer-oriented approach as evident by Amanda and Catherine’s focus on operating efficiency. The company’s Class Rewards Program is also poorly designed, with little feedback from the customers and the current format of the program greatly reduces its appeal to customers due to several restrictions and fewer options as compared to competitors’ reward programs. The company has also done a poor job of understanding its customers’ preferences and lifestyles as evident by customer feedback. The company has primarily focused on lower prices to attract customers but customers’ feedback shows that not all customers, particularly, business travelers consider price the primary factor in their travel decisions. It is also clear from customer service transcripts that customer service reps have little flexibility in resolving customers’ issues to their satisfaction and often focus on keeping calls short due to management’s emphasis on operating efficiency.
Things are not much different when it comes to employees many of whom complain of poor relationship between the management and their subordinates and believe that management should seek more feedback from subordinates. They even mention the fact that they are not very likely to recommend Classic to others as a career choice. Even employees have mentioned the fact that the company does a poor job of serving its customers and the management needs to give more attention to what the customers have to say.
Classic’s management has several goals over the next year. One of the goals is to achieve a customer satisfaction rate of 90 percent. The company’s management also hopes to increase the membership of Classic Rewards Program by 10 percent as well as the business from existing members by at least 20 percent. The management also hopes that the improvement in customer satisfaction and revenues will help the company’s stock price increase by at least 5 percent. The management team members primarily responsible for improving customer satisfaction and Classic Rewards Program’s membership will be Kevin, Renee, and John. Kevin, Renee, and John will also carefully study the company’s CRM system to ensure that all of the company’s marketing and customer service activities are integrated with each other and the data produced by the system has real value for strategic decision making. In addition, the management’s goals also include reducing employee turnover over rate by at least 10 percent over the next one year.
The above-mentioned goals have been established because the management realizes that the company’s survival and long-term future depends upon improving loyalty among existing customers as well as gaining new customers. The management realizes that it is not going to be easy due to intensely competitive market but one thing is clear that the company’s leadership and management will have to improve working relationship and communication. In addition, success will depend upon commitment not only from the upper management but from employees at all levels of the organization because these are employees who mostly interact with the customers.
The management will take several steps to measure the progress towards achieving the goals. First of all, the data related to Classic Rewards Program will be analyzed on a bi-weekly basis and the customer feedback will be reviewed to identify the things the company is doing right as well as the changes that could make the Classic Rewards Program more appealing to the customers. The management hopes to achieve about 1 percent growth in Classic Rewards Program membership on a monthly basis as well as about 2 percent growth in business from existing Classic Rewards Program members. Similarly, the management will also monitor employee turnover rates on a monthly basis and take steps when progress may be below expectations.
There are several alternatives available to Classic to achieve higher customer satisfactions, higher market share, higher employee satisfaction, and lower employee turnover.
Option 1: Redesign Classic Rewards Program by both listening to the customers as well as studying competitors’ reward programs. In addition, shift focus from differentiation on the basis of lower prices to better product and customer service. This option can also be complemented by joining an industry alliance. One good industry example is Southwest Airlines which is one of the most profitable airlines in the industry and has become a case study for the competition when it comes to customer service (Schlanger, 2012).
Option 2: Narrow down targeted customer segments and focus more on business travelers that are less sensitive to prices. Such a strategy will require Classic to scale down the size of its operations and focus only on the most profitable routes and customers. The company may also have to revise its rewards program to make it more appealing to business travelers and encourage them to fly more frequently. Under this option, Classic will not be the only one to revise its rewards program to attract customers. In fact, Southwest and JetBlue have increased more flexibility in their reward programs to enhance customer loyalty (McCartney, 2012).
Option 3: Continue to pursue the current strategy of focusing on operating efficiency and competing on lower prices. This strategy may require Classic to focus more on leisure travelers who give more importance to price factors as compared to business travelers.
As far as option 1 is concerned, it will require a complete change in corporate competitive strategy. The leadership such as Amanda and Catherine will also have to shift their focus from operating efficiency to customer-oriented marketing. The whole organization from upper management to lower-level employees will dedicate themselves to studying customers which means customer service rep will not have to worry about call times anymore and their only goal will be to offer a satisfactory solution to each customer. This strategy may result in high operating costs and even short-term financial losses as the organization tries to reinvent itself. This strategy will also require more open communication between management and subordinates. Classic may also benefit from joining an industry alliance like Skyway since it will help the organization eliminate some routes and also provide more options to customers. This option assumes that business travelers will react in the same manner as they indicated in surveys.
Classic is currently the fifth largest airline which means the company tries to keep costs down through economies of scale so that it can offer lower prices to customers. Pursuing option 2 will require the company to scale back its operations and focus only on the most profitable and less-price sensitive customers which means greater focus on business travelers as opposed to leisure travelers. This strategy may also require company to eliminate some routes and dedicate more resources to routes often frequented by business travelers. The company may also have to offer more direct routes to meet the needs of business travelers. It is clear this strategy will increase average cost of serving a customer but at the same time, this strategy will also increase average profit margin. This strategy will require more targeted marketing approach as opposed to serving the entire market.Option 3 means the company continues to follow the same strategy of being a discount airline and focus on cost minimization to increase revenues.
One of the major risks in pursuing option 1 is that the increase in revenues will not be as much as costs. In addition, it will be difficult to gain new customers if the competitors match or exceed Classic’s customer service levels. The risk in pursuing option 2 is that the business travelers may turn out to be more price sensitive than what they indicated in surveys. Another risk will be that Classic’s revenue will become more cyclical in nature due to reliance on fewer customers. One of the risks in option 3 is that Classic may be forced to declare bankruptcy if its efforts to lower costs fail. Moreover, the customers may continue to move to the competition, resulting in further decline in revenue.
The first two options are more reasonable because the current competitive strategy is not sustainable in the long run, particularly due to the fact that Classic cannot afford any more price reductions. Option 1 is reasonable because it will enable Classic to address the primary factors behind its recent troubles which is declining customer satisfaction as well as loss of customers to the competition. The major benefit of this option is that Classic will be able to prevent loss of customers and may even regain some who have flocked to the competition. The major con of this option is that Classic’s operating costs will rise and there is no guarantee that the strategy will succeed if the competition also offer similar or better customer service and that too at lower prices. The second reasonable alternative is option 2 which will enable Classic to pursue a more focused approach and make it easier to understand and meet the needs of the targeted customer segments which is business travelers in this case. Classic will also obtain greater pricing power by differentiating itself from the competition.
Classic should pursue option 2 which is to focus more on less price-sensitive business travelers. The business travel will continue to grow due to globalization and moreover, competition will also continue to grow in the airline industry. Thus, Classic should find a way to immune itself to some extent from price-based competition and one way to do so is to meet the needs of few customer segments better than the competition. Business travelers represent huge opportunities and even one of the industry leaders, Delta Airlines has been given special attention to business travelers (Boehmer, 2012).
To pursue the strategy of successfully meeting business travelers’ needs, Classic will first have to improve communication with business travelers and better understand them through a variety of marketing research activities such as research, surveys, and interaction through social media. Amanda will also have to provide more resources to Kevin, Renee, and John so that they can update CRM system to better capture customer data and transform it into a useable form. The management will also have to empower lower-level employees so that better customer service become a company-wide mission. Fortunately, Classic already has a great management team, a state-of-the-art CRM system, and human capital to successfully implement the strategy. The only changes needed are a change in the leadership style of upper management such as Amanda and Catherine, greater and more open communication throughout the organization, and a better balance between quality of customer service and operating efficiency.
Classic’s management will monitor several metrics to determine the progress in successfully implementing the new strategy. One metric will be the growth in Classic Rewards Program’s membership of business travelers. Another metric closely monitored by the management will be profit margin which will reveal the real price-sensitiveness of business travelers and provide clues regarding appropriate pricing strategies.
It is not possible to develop an effective solution without properly understanding the factors both within and outside the organization that affect an organization’s competitiveness. The 9-step model is a systematic way to look at the problem and develop an effective solution. The model achieves its purpose by carefully studying the circumstances surrounding the organization, factors that may be causing the problems, the solutions available to the organization, the pros and cons as well as the risks involved, and the best options given the circumstances and goals of the organization. By taking a systematic approach, the 9-step model ensures that the management has carefully studied the problem before devising a solution. In this case, Classic has a great management team as well as a CRM system but the management team has poor cohesion and the focus on operating efficiency has caused the company’s leadership to get out of touch with the customers. Thus, the company should shift its focus back to customers to improve its competitiveness.
Boehmer, J. (2012, November 27). BTN’s 2012 Airline Survey: An Unprecedented Sweep. Retrieved December 29, 2012, from http://www.businesstravelnews.com/Strategic-Sourcing/BTN-s-2012-Airline-Survey–An-Unprecedented-Sweep/?ida=Airlines&a=btn
McCartney, S. (2012, May 16). Best Airlines for Redeeming Miles. Retrieved December 29, 2012, from http://online.wsj.com/article/SB10001424052702303879604577408271116224192.html
Schlanger, D. (2012, June 13). How Southwest Keeps Making Money In A Brutal Airline Industry. Retrieved December 29, 2012, from http://www.businessinsider.com/case-study-how-southwest-stays-profitable-2012-6