GARUDA INDONESIA To Becoming a Distinguished Airline Teaching Note

Case Summary PT. Garuda Indonesia (Persero) (Garuda) is a State-owned Corporation (BUMN) celebrating its 61st anniversary in 2010 (when the case was being written and published). This State-owned Corporation that is known for being insolvent with heartbreaking service has successfully managed to restructure its debts, boost its operating revenue, and book profits. The most priding situation is that Garuda has also

successfully received four-star rating from an independent institution for world airline and airport star ratings, SKYTRAX. Through its quantum leap strategy, Garuda expects to receive five-star rating in 2014, making it (its service) comparable to worldclass airlines like Singapore Airlines, Cathay Pacific, and Qatar Airways. In addition, in 2014 Garuda aims at increasing its revenue by 320%, net profit by 562%, ASK (available seat kilometres) by 320%, number of aircrafts by 223%, number of passengers by 268%, cargo by 258%, and OTP (on time performance) by 88% (of the current 84% average). In the present capital-intensive, highly competitive industry, it is not easy for Garuda to achieve such strategic targets. Even worse, Garuda is still indebted to a number of international institutions and wants to perform IPO to collect money for its business improvement.

The case consists of five sections. The opening section provides brief information on Garuda, focusing on its airline as "holding company", not on its three strategic business
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Pepey Riawati Kurnia for PPM School of Management

units and four subsidiaries. The second section is the brief history of Garuda Indonesia. The third section describes the development of scheduled flight industry in Indonesia. The third section describes various strategic issues in flight industry worldwide. The fourth section describes the Garuda's efforts to become a competitive company. The last section contains challenges faced by Garuda in achieving its strategic targets.

Alternative Queries for Discussion What external strategic issues does Garuda face? What internal strategic issues does Garuda face? Are the strategic targets that already set (quantum leap objectives) achievable? What must Garuda do to ensure the achievement of its strategic targets?

Potential Case Readers Participants of Master of Management Study Program Participants of Workshops (Strategic Planning)

Potential Subjects or Topics Strategic Management Management control system (application of Balance Score Card)

Learning Target Upon reading and analyzing this case, readers are expected to be able to:

2 Teaching Note by Aries Heru Prasetyo, MM., Dr. Ningky Sasanti Munir, and Dr.

Pepey Riawati Kurnia for PPM School of Management

1. identify external strategic issues in the form of opportunities and threats being faced by Garuda; 2. identify internal strategic issues in the form of strengths and weaknesses being faced by Garuda; 3. develop alternative strategy and establish the best business strategy; 4. provide implementation design encompassing the priority activities within three to five years to come.

In-Class Learning Arrangement (Master of Management Study Program) 1. Suggested timescale of 150 minutes or 1.5 session (example for Master of Management Study Program) Session 1 i. Garuda products and strategic group where Garuda plays ii. Internal strategic issues being faced by Garuda iii. External strategic issues being faced by Garuda iv. Development of alternative strategies and establishment of business strategy v. Establishment of priority activities for the next three to five years 20 30 30 40 30

2. Strategic planning workshop for a total of 270 minutes or an equivalent of 3 sessions

Session 1 i. Garuda products and strategic group where Garuda plays ii. Internal strategic issues being faced by Garuda iii. External strategic issues being faced by Garuda Pepey Riawati Kurnia for PPM School of Management 30 30 30

3 Teaching Note by Aries Heru Prasetyo, MM., Dr. Ningky Sasanti Munir, and Dr.

Session 2 i. Development of alternative strategies and establishment of business strategy ii. Establishment of priority activities for the next three to five years 45 45

Session 3 i. Presentation ii. Summary 80 10

3. Suggested learning board division

What PT. (persero) Garuda sells are: (use the product component concept already taught in Marketing Management)

Strategic group: X axis variable: no frills full service Y axis variable: price (low - high)

Internal strategic issues in the form of strengths and weaknesses: Operational Aspect, Marketing Aspect Human Resource Aspect, and Financial Aspect

External strategic issues in the form of opportunities/threats of macro environment Politics, Economy, Social Technology, Environment Customer, Competition, Supplier, Substitute, Novice

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Pepey Riawati Kurnia for PPM School of Management

Development of Business Strategy for the next three to five years

Priority activities (interpretation of the strategy) for three to five years to come: Human capital, information capital, organizational capital, operation management process, innovation process, regulatory and social process

4. Likely discussion Useful references are strategic management books. Such as: i. Barney, Jay B, and Hesterly, William S. (2008). Strategic Management and Competitive Advantage 2nd edition. New Jersey: Pearson Education International. ii. Coulter, Mary. (2008). Strategic Management in Action 4th edition. New Jersey: Pearson Education International. iii. David, Fred R. (2010). Strategic Management: Concepts 13th edition. Prentice-Hall iv. Heracleous, Loizos, Wirtz, Jochen, and Pangarkar, Nitin.(2009). Flying High in a Competitive Industry: Secrets of the Worlds Leading Airlines. Singapore: McGraw Hill. v. Porter, M.E. (1980) Competitive Strategy, New York: Free Press, vi. Pearce, J.A. and Robinson, R. B. (2009). Strategic Management 10th edition. Boston: McGraw-Hill Irwin.

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Pepey Riawati Kurnia for PPM School of Management

Especially for marketing, the following book is useful for reference: Kotler, P. & Keller, K.L. (2006). Marketing Management, 12th edition, Pearson Education International.

a. Identification of external strategic issues Opportunities: i. Increasing number of domestic and international flight passengers; ii. The availability of internet enables airlines to improve efficiency, service quality, and to develop new products; iii. Aircraft manufacturing technology delivers more efficient products (aircrafts with ability to travel longer distance while minimizing fuel consumption); iv. The trend of alliance among airlines to improve efficiency and service quality; v. Indonesian stock market tends to be lucrative (source from internet); vi. Indonesian Visit Program will still continue, where the Government requires reliable partners (source from internet). vii. Promising Indonesian economic growth has boosted the domestic flight demand (source from internet); Threats: i. ASEAN Open Sky policy will allow foreign airlines to enter Indonesian market;
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Pepey Riawati Kurnia for PPM School of Management

ii. Local novice; iii. Fuel price tends to increase, making the operational cost higher; iv. To find skilled employees (pilot, co-pilot, technician) is difficult; v. Growing LCC phenomenon; vi. Internet vii. The growth of premium-class passengers is likely stagnant (source from internet); viii. High competition intensity; b. Identification of internal strategic issues of internal environment (may use the functional concept analysis; 7SMcKinsey, VRIO, value chain, competitive profile matrix, and others in accordance with the reference chosen by the facilitator) Strengths: i. The image as premium airline; ii. Corporate culture has started to materialize iii. Broad route network; iv. Corporate customer; v. Having clear strategy; vi. Marketing program; vii. Financial support from shareholders; Weaknesses: i. Price is perceived to be expensive;
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Pepey Riawati Kurnia for PPM School of Management

ii. (Soekarno Hatta) Airport is less supportive, causing frequent delays due to airport technical problems (this information shall not be conveyed in the case, but we are aware that world-class airlines have world-class airports too; Fly High book also explains the relationship between Singapore Airline and Changi International Airport, Cathay Pacific and Hong Kong Airport, MAS and KLIC, Emirates and Dubai Airport, Thai and Svarnabhumi). During interview, Garuda affirmed its effort to get a special terminal from Angkasa Pura II, through Government lobbying, certainly; iii. High turnover of pilot, co-pilot technician. Garuda does not want to have this information written in the case. However, diligent participants may download Management Report 2009 from its website and see that in the last three years Garuda failed to achieve its budget/target recruiting skilful employees; iv. High dependency on leader figure; v. There are still unrests among skilled employees (pilots and co-pilots) with regard to salary and among labour union members due to frequent "re-statement" of the financial statement; c. Evaluation of critical points in the current strategy Use the perspective of Balance Score Card (BSC) in determining the critical points of the current policy and strategy
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Pepey Riawati Kurnia for PPM School of Management

Evaluate the management achievement in terms of human capital, information capital, and organizational capital. You may use the following criteria to evaluate each variable: o Human capital; Transparent recruitment system Applicable reward system

o Information capital; Innovation program to improve customer service quality o Organizational capital; The company's capability to "perform" as a cultured Indonesian airline. Employees aircrew) Evaluate a number of variables in internal business process, including operation management process, innovation process, and regulatory and social process. A number of indicators can be used to perform evaluation in this perspective, such as: o Fuel handling for operation o Flight fleet readiness for service provision o Human Resource preparedness in providing flight services both on the ground (from ticketing to baggage complaint service) and in the air teamwork performance (including

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Pepey Riawati Kurnia for PPM School of Management

Redefinition of availability, quality, selection and price aspects, being done by the management at present

Redefinition of the main (measurable) objectives to be attained by the management within 3 to 5 years to come.

d. Alternative strategy development May use the concept of The Ansoff Product-Market Growth Matrix (Ansoff, I., Strategies for Diversification, Harvard Business Review, Vol. 35 Issue 5, Sep-Oct 1957, pp.113-124); Market penetration: i. maintaining the existing quality, ii. conducting integrated-service solution by introducing

internet media and internet banking iii. maximizing the utilization of GFF member card to provide more customized services iv. not follow suit in lower-price trend and maintain the perceived value pricing already done to secure the exclusive image - pricing strategy (market-based price) Market development: i. continue to develop flight route network towards new destinations; ii. continue to develop customer network, mainly the individual, internet-literate customers, iii. enter the middle-lower market segment (under different brand) 10 Teaching Note by Aries Heru Prasetyo, MM., Dr. Ningky Sasanti Munir, and Dr. Pepey Riawati Kurnia for PPM School of Management

Product development: i. Develop holiday package products; ii. Cooperate with the local government in respect of attractive activities (e.g. Sail Banda 2010, etc.) iii. Cooperate with leading hotel network for business and vacation packages; iv. Cooperate with local SME to uplift products of local cultural value to the international level; v. In line with the increasing demand for private airline, in the future the company will have private airline service for specific segment

Diversification: i. Take benefit of products of SBU and subsidiaries; ii. Explore the possibility to open education institution which specially creates skills in the field of flight iii. Capture the opportunity of medical airline services

e. Business Strategy establishment May use the Porter's generic strategy [Porter, M.E. (1980) Competitive Strategy, New York: Free Press] Differentiation i. conducting integrated-service solution by introducing

internet media and internet banking ii. maximizing the utilization of GFF member card to provide more customized services CRM utilization
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Pepey Riawati Kurnia for PPM School of Management

iii. not involved in "price war" for shuttle product and maintain the perceived value pricing already done to secure the exclusive image - pricing strategy (market-based price) Leadership in cost i. Use the perspective of Balance Score Card in identifying anything to be done by the management to achieve the longterm shareholder value. ii. Option to become a leader in terms of cost can be done by improving the cost structure, including the operational, marketing, human resource management, information system management and corporate financial costs. iii. To be able to improve efficiency in the future, the management needs to fix up financial matters. First, reduce the cost of capital component as a result of alternative fund source usage (short-term loan, bond, convertible bond and stock). Second, accurate investment. The case shows that the management made inaccurate investment during the period of 90s to early 2000. Inaccurate investment decision will result in failure to select the right alternative funding in the future. Focus strategy i. Make clear the targeted market segment. In the case, there is information that the management seems to focus on serving

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Pepey Riawati Kurnia for PPM School of Management

selected segment. Therefore, the company needs to focus on serving premium market segment. ii. Improve the quality dimension of services to be provided for selected segment. Therefore, the management needs to redefine the quality level of services offered. Strategy establishment based on Miles and Snow [Miles, Raymond E., and Charles C. Snow. (1978). Organizational Strategy, Structure, and Process. New York: McGraw-Hill. in Coulter, 2008] 1. Garuda may use the defender strategy, i.e. performing horizontal integration (opening routes), while maintaining efficiency of networking, product portfolio, and joint facility and activity and by considering vertical integration forwards or backwards, e.g. ensuring the availability of products generated from synergy with SBU and subsidiary products, , etc.; Notes: Defender organizations face the entrepreneurial problem of
how to maintain a stable share of the market, and hence they function best in stable environments. A common solution to this problem is cost leadership, and so these organizations achieve success by specializing in particular areas and using established and standardized technical processes to maintain low costs. In addition, defender organizations tend to be vertically integrated in order to achieve cost efficiency. Defender organizations face the administrative problem of having to ensure efficiency, and thus they require centralization, formal procedures, and discrete functions (Miles and Snow, 1978).

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Pepey Riawati Kurnia for PPM School of Management

2. In addition, Garuda may use the analyzer strategy, i.e. maintaining efficiency of networking, product portfolio, and joint facility and activity while developing new service products which are relevant with the core business. Notes: Analyzer organizations share characteristics with prospector
and defender organizations; thus, they face the entrepreneurial problem of how to maintain their shares in existing markets and how to find and exploit new markets and product opportunities. These organizations have the operational problem of maintaining the efficiency of established products or services, while remaining flexible enough to pursue new business activities. Consequently, they seek technical efficiency to maintain low costs, but they also emphasize new product and service development to remain competitive when the market changes. The administrative problem is how to manage both of these aspects. Like prospector organizations, analyzer organizations cultivate collaboration among different departments and units. The analyzers organizations are characterized by balancea balance between defender and prospector organizations (Miles and Snow, 1978).

14 Teaching Note by Aries Heru Prasetyo, MM., Dr. Ningky Sasanti Munir, and Dr.

Pepey Riawati Kurnia for PPM School of Management