Star Alliance and the environment

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Frame of reference

The theoretical framework presents previous research made in this field. It also aims at presenting relevant theories and models used. It also includes a presentation of the statistical measurements used throughout the paper.

Previous research

There are several reports written on the chosen topic even though the concept of strategic alliance is fairly new to the market. Many approaches and fields of research have been applied to this concept, such as management, finance, strategy and marketing. There is also a vast quantity of descriptive studies covering the concept. A study that was conducted by Park and Cho (1997) focused on the performance of strategic alliances in the international airline industry. They chose to investigate if the market share of code-sharing alliances was increased after joining a strategic alliance or not. This involved analyzing time-series data of 56 different airlines between the years 1986 to 1993. In the study there are three different hypotheses which the writers tried to answer, which are the following:
– Strategic alliances in a particular market have had a positive effect on the performance of allied firms.
– Strategic alliances between current competitors (among large market sharers) will have greater impact on the allied firms’ performance than the impact of strategic alliances between new entrants (among small market sharers).
– The performance of strategic alliances will be negatively associated with the number of participating firms in the markets.
In using various statistical calculation methods, such as: descriptive statistics, correlation matrix, frequency analysis and multivariate regression, the researchers managed to answer these hypotheses with a minimal level of uncertainty. For the first hypothesis, it was concluded, just as presumed, that strategic alliances had a positive effect on the performance of allied members. They continue to explain that they also found evidence that implied that the performance of strategic alliances between greater market sharers was larger than the performance between smaller market shares. However, they also found that the market share for alliances with new entrants, in a specific market, tended to increase more in comparison to the alliances with already existing airlines. As for the last hypothesis, the researchers discovered that the impact alliances had on performance was correlated with the amount of members in the alliance. They also realized that in markets with fewer competitors and new entrants, the impact of an alliance was likely to be greater than in markets with a larger amount of competitors and entrants. These findings further led to the assumption that strategic alliances would likely be more successful in markets in which they are more dynamic and experiencing higher growth (Park & Cho, 1997).

Strategy Development

Motives behind a strategy

When looking at the survival of an organization or the success of an organizational strategy there is a direct connection to the firm’s ability respond to three different types of pressures, namely: the competing pressures from the business environment, the firm’s strategic capability and the cultural and political issues. Furthermore, these pressures work as the fundamental aspects when creating the organizational motives of a firm. It is extremely important that the organizational motives are “correct” since the motives, in turn, are used to help the organization in deciding which strategy they should implement. Motives are generally categorized in three different groups, which separate their intention and focus. The first type is environmental-based motives, which simply stated means that the organization is trying to fit their new strategy to a changing business environment. The second group is capability-based motives these focus on stretching and exploiting the resources and competences of the organization. Finally, the expectations-based motives which focus on meeting the expectations created by issues related to culture and politics (Johnson, Scholes & Whittington, 2005).

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The Strategies

There are different schools proposing methods on how to pursue the development of a specific strategy. An organization which is able to decide if they wish to continue on its own, also called internal development, or to collaborate with other organizations in form of a strategic alliance or through either an acquisition or a merger. This report focuses on allied airline companies, only two of the three methods are further discussed in the following sections (Johnson et al., 2005). Internal development is an organization making use of its own capabilities to develop strategies organically. There are several reasons why firms ultimately decide to go with internal development instead of a collaborative approach. Organizations which use complex technology in design or in manufacturing often choose to base their strategies on their own capabilities. Through the process of development, companies can acquire important capabilities and also gain valuable knowledge about the market. These capabilities and newly attained knowledge could also be helpful when the organization is creating market opportunities and competitive advantage as well as developing new products or services for their customers. Another important factor is the actual cost of internal development. Great initial investments are not needed here since the costs are spread over a long period of time in comparison to the more collaborative approach, which often requires huge initial investments. It also offers the ability to grow in network with investment in infrastructure (Johnson et al., 2005). A strategic alliance is a type of collaboration between two or more organizations, which share specific resources and activities in order to achieve a mutual goal.  As mentioned earlier, this type of partnership has increased in popularity over the years and has often been said to be a direct consequence of complex business environments. In the same way as there are different motives behind the decision of entering an alliance; there are also different types of alliances available to organizations (Johnson et al., 2005).

Strategic Alliances

There are several differences between a regular alliance and a strategic alliance. Wakeam (2003) writes in the article The Five Factors of a Strategic Alliance, about various differences and what constitutes a strategic alliance. He claims that in order for an alliance to be regarded as strategic, it has to incorporate at least one of these alternatives, the alliances block a competitive threat, are critical to the core business success or crucial to maintain competitive advantage and core competence. It should also create or maintain strategic choices for the firms or mitigate a significant risk. Note that it is not necessary to match all of these criteria, one is sufficient to be able to call an alliance strategic. To continue, it is also very important to understand the partner/s and their view on the criteria, otherwise the alliance is likely to fail. It is further suggested to look in-depth of each of these criteria, since it might bring insight on how to manage and control the strategic values of the alliance. Stout and Beaucaire (2005) talk about strategic alliances as a wide concept that includes other concepts such as joint ventures, merger, out-sourcing, etc. They define strategic alliance as “more than one person/company collaborating to achieve a result – ultimately to increase profitability” (Stout & Beaucaire, 2005, p. 1). They also define a strategic alliance as an exchange and sharing of information, expertise and capital investments. Another concept brought up by the researchers is the difference between vertical and horizontal alliances. The horizontal alliance is an alliance between companies in the same industry while the vertical is between companies in different industries. Star Alliance is a horizontal alliance as all the members are active in the airline business. “An overview of strategic alliances” (Elmuti & Kathawal, 2001) is another article that defines the concept of strategic alliances. They define the concept as “an agreement between firms to do business together in ways that go beyond normal company-to-company dealings, but fall short of a merger or a full partnership”. There are drawbacks and risks with strategic alliances, as almost 70% of all alliances fail, and the decision to join an alliance must be carefully considered. One must take care to understand their firm hopes to gain from an alliance and what position is needed in order to fulfill those needs.

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Network structures

In the article “The Price Effects of International Airline Alliances”, by Brueckner and Whalen (2000), the evolution of an alliance is described.  Figure 2-1 represents a model of the earliest airline alliances and this would be an identical view for a passenger traveling from “B” to “E” on non-allied carriers, with the difference being however that the latter would require a traveler to buy two tickets.

Point-to-Point Model

Brueckner and Whalen went on to further describe the two prevailing models of organization in the airline industry.  The first model, point-to-point, connects all origins to all destinations.  Traditional full-service airlines have shunned this model so as to capitalize on the density benefits of the hub-and-spoke model.  The reason for this should be simple to see, each carrier serving the world represented in example 2-4 would be required to fly over six routes as opposed to the hub-and-spoke model, Figure 2-5, which requires half that many. Because of the additional routes the company must fly more planes with fewer passengers.  This organization does have advantages over the hub-and-spoke model in that is more direct which can allow a passenger to fly, without stops, from one point on the globe to another (Brueckner & Whalen, 2000).  This model has, since 1985, come back into vogue with the most famous modern-day implementations of these models appearing in the lowcost airline industry including Ryanair in Europe (Ryanair, 2008) and Southwest Airlines in the US (Southwest Airlines, 2008), neither of which has a true hub.

Hub-and-Spoke model

With the hub-and-spoke network, there is a larger hub that sends out routes to smaller airports so that a traveler can reach more remote airports via larger hub airports. The model was developed in 1984 by Caves, Christensen and Tretheway in their article “Economies of Density versus Economies of Scale: Why Trunk and Local Service Airline Costs Differ”. This model differs from the point-to-point system by centralizing its operations at a hub.  This mandates that most or all routes to and from spokes shall be connected at a central hub.

1. Introduction
1.1 Background
1.2 Problem statement
1.3 Purpose
1.4 Hypothesis Tests
1.5 Perspective
1.6 Delimitations
2. Frame of reference
2.1 Previous research
2.2 Strategy Development
2.3 Strategic Alliances
2.4 Network structures
2.5 Denied boarding compensation
2.6 Load Factor Distribution
2.7 Quantitative Theories
3. Method
3.1 Research approach
3.2 Deduction vs. Induction
3.3 Quantitative vs. Qualitative
3.4 Selection and perspective
3.5 Collection of Data
3.6 Analyzing Data
3.7 Credibility of the Research
4. Empirical findings
4.1 The Big Three
4.2 Load Factors
4.3 Denied Boarding Compensation
5. Analysis
5.1 Load Factors
5.2 Distribution Shifts
5.3 Star Alliance and the environment
5.4 Analysis summary
6. Conclusion
7. Final Discussion
7.1 Limitation
7.2 Further Research
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