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Opening case Singapore Airlines

CHAPTER 4
Over the past four decades Singapore Airlines (SIA) has developed an enviable
reputation for providing its passengers with a high-quality air travel experience.

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The company prides itself on being the ‘most awarded airline’, a title it has gained
through winning many prizes for its customer service standards. SIA has, for
example, been acknowledged as the ‘World’s Best Airline’ by Condé Nast Traveler
21 times out of the total of 22 times the title has been awarded and was ranked
27th in Fortune magazine’s ‘World’s Most Admired Companies’ in 2010. What is
perhaps less well known is that SIA is also one of the most cost-effective operators
in the airline business. The data listed in Table 4.1 illustrates this fact.
The company can trace its roots back to 1947 but really took off as an
independent entity in the early 1970s when it severed its ties to Malaysian Airlines.
During the 1970s the company grew rapidly, extending its scheduled routes from
its Singapore hub to many destinations in India and Asia. In the 1980s it added
routes to the US, Canada and Europe and continues to expand its network. Since
its incorporation in 1972 SIA has been partly owned by the Singapore government
that has a ‘golden share’ but operationally it is free from government intervention.
SIA has based its strategy on two main pillars – its planes and its people. In
terms of its aircraft, the company tries to keep its fleet ‘young’. In 2009, for example,
the average age of the SIA fleet was 74 months as opposed to the industry average
of around 160 months.1 SIA was the first airline to launch the Airbus A380 high-
capacity jet and although there was an initial delay in receiving the aircraft from
Airbus, due to development problems, these additions to the fleet have proved

Table 4.1 Costs of available seat kilometres (ASK) between 2001

and 2009 in US cents
Airline Costs per ASK (US cents)

Singapore Airlines 4.58

Full service European airlines 8–16

US airlines 7–8

Asian airlines 5–7

Source: Heracleous, L. and Wirtz, J. (2010). Singapore Airlines’ balancing act. Harvard Business Review,
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July–August, 145–9. Reproduced by permission of Harvard Business Publishing.

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F O U N DAT I O N S O F S T R AT E G Y

Reproduced by permission of Singapore Airlines

successful. The policy of operating a young fleet also means that SIA’s aircraft are
more fuel efficient and require less repair and maintenance than those of its rivals.
Heracleous and Wirtz2 report that ‘in 2008 repairs accounted for 4% of SIA’s total
costs compared with 5.9% for United Airlines and 4.8% for American Airlines’. SIA’s
aircraft also spend less time in hangars and more time in the air – 13 hours, on
average per day versus the industry average of 11.3%.
In terms of its people, the Singapore International Airlines group as a whole
(including cargo, repair and maintenance service, etc.) employed just under 22,000
people in 2010/11, of which 13,600 were employed by the passenger airline
business. While the company pays only average Singapore wages, it manages
to attract first-class university graduates because it has a reputation for offering
excellent training and experience. The company spends around $70 million a
year putting each of its employees through 110 hours of retraining annually.
Much of this training is focused on embedding the culture of customer service
into everything employees do. Staff are, for example, trained to appreciate subtle
cultural differences and to look for clever ways of personalising passengers’ flying
experience – for example noticing that a laptop is out of power or a mother needs
assistance with her child. As a consequence crew members who leave the company
usually find it easy to find employment with other operators.
Whilst emphasis is given to customer service, any opportunity to cut costs,
however small, is taken. The headquarters of the airline is housed in modest
premises near the airport and the central ‘head count’ is kept to a minimum.
Training takes place within the airline’s offices and is delivered by senior members

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of the airline’s own crew rather than by outside trainers. Staff are encouraged

CHAPTER 4
to find ways of reducing waste and bonus schemes are in place that incentivise
cost-cutting behaviour. For example, even though two brands of high-quality
champagne are available to business class travellers, cabin crew are encouraged
to pour drinks from whichever bottle is open unless the passenger requests a

T H E N AT U R E A N D S O U R C E S O F CO M P E T I T I V E A D VA N TAG E
specific brand. Similarly, pots of jam, which cabin crew noticed were frequently
wasted, are now provided only on request. To make sure that cabin crew can give
passengers personal attention SIA flights usually carry more flight attendants
than other airlines, but this is reported to add only about 5% to labour costs and
as an expense that contributes strongly to the airline’s reputation for excellent
customer service allows SIA to compete on factors other than price.
SIA tries to achieve both differentiation and cost saving through its approach
to innovation. The company is willing to experiment and is fast to adopt any
incremental innovations that improve customer service. It was, for example, one
of the first airlines to introduce fully reclining seats (slumberettes), in-flight mobile
telephone and fax services and biometric technology to simplify and speed up
check-in times following a series of global health scares. However, unlike some of its
rivals, it has not developed highly customised and sophisticated yield management
and other back-office software, preferring instead to buy ‘off the shelf’ tried-
and-tested applications. It has also outsourced responsibility for maintaining non-
strategic hardware and software to low-cost service providers in India.
Whilst the company seems to have very successfully reconciled the seemingly
contradictory strategies of cost minimisation and differentiation, it does face
problems. The company dominates the business class market segment on many
of its routes and it is this segment that is particularly sensitive to the level of
economic activity. For the first time in 2009 SIA posted a full-year loss and its load
factors were below the industry average.3 The company has responded by cutting
staff, reducing working hours and reviewing its routes and schedules. It remains
to be seen whether the distinctive culture of the company that supports its dual
strategy remains intact when the company attempts to simultaneously operate
budget and full service airlines.

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Case Insight 4.2
F O U N DAT I O N S O F S T R AT E G Y

Is Singapore Airlines’ competitive advantage sustainable?

In the opening case to this chapter we have argued that SIA has outperformed
its rivals by referring to the number of awards it has achieved and the fact that it
has consistently achieved returns that are well in excess of the industry average.
Its success has been based on its systematic design and development of a cost-
effective approach to service excellence, supported by investments in its fleet,
customer-focused innovation and staff training and development. But how
sustainable is SIA’s advantage? Can its approach be identified and replicated
easily by competitors?
It would appear relatively straightforward for other airlines to unpick SIA’s
strategy – indeed we have attempted to do that in our analysis – and they too
can invest in new aircraft, staff training, new ticketing and check-in technologies
and so on. What is much more difficult to identify and copy is the culture of cost-
effective service excellence ingrained in the company and its people and the
complex sets of linkages between SIA’s different activities that create a virtuous
circle of improvement. SIA’s unique activity system is embedded in a way in that its
‘profit conscious’ approach is made explicit in its vision statement (to be the most
profitable rather than the largest airline), is evident in the way staff are rewarded,
is highlighted in staff training and is reinforced by its emphasis on feedback and
benchmarking. Cabin crew members work together for significant periods of
time and form closely-knit teams, experienced staff deliver in-house staff training
and the giving and receiving of feedback is encouraged – all of which creates a
climate where there is peer pressure to perform. When these linked activities are
combined with investment in a modern fleet and the infrastructure of its hub
airport, Changi, in Singapore and put together with a successful track record of
implementing customer-focused innovation, the whole becomes greater than
the sum of the parts and much more difficult for competitors to imitate.

Businesses that require the integration of a number of complex, team-based routines

may take years to reach the standards set by industry leaders. General Motors’ attempt
to transfer team-based, lean production from its NUMMI joint venture with Toyota at
Fremont, California, to the GM Van Nuys plant 400 miles to the south involved complex
management problems that remained unsolved two years later.27

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required 30 different interrelated adjustments.
6

CHAPTER 4
Identify opportunities for reducing costs. By identifying areas of comparative
inefficiency and the cost drivers for each, opportunities for cost reduction become
evident. For example:
– If scale economies are a key cost driver, can volume be increased? One feature

T H E N AT U R E A N D S O U R C E S O F CO M P E T I T I V E A D VA N TAG E
of Caterpillar’s cost-reduction strategy was to broaden its model range and
begin selling diesel engines to other vehicle manufacturers in order to expand
its sales base.
– Where wage costs are the issue, can wages be reduced either directly or by
relocating production?
– If a certain activity cannot be performed efficiently within the firm, can it be
outsourced?

Case Insight 4.3

Using the value chain to explore Singapore Airlines’ cost-saving
initiatives and opportunities
Illustrative examples
of airline activity
fitting Porter’s Illustrative cost-saving opportunities
Porter’s category categories and initiatives

Inbound logistics Aircraft Young fleet – in 2009 the average age of

Fuel SIA’s aircraft was 74 months compared to
Food and drink an industry average of 160 months
New aircraft significantly more fuel efficient
Staff trained to spot ways of eliminating
waste in food and drink

Operations Airport and gate In 2008 repairs accounted for 4% of SIA’s

operations total costs, close to 1% point lower than
Ticketing its main rivals
Flight scheduling
Baggage handling
Repair and maintenance
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Outbound Flight connections Routes are constantly being added
F O U N DAT I O N S O F S T R AT E G Y

logistics Partnerships and alliances and subtracted from the company’s

with other operators route map

Marketing & sales Promotion The company’s success in achieving

advertising awards promotes the company in
promoting its brand

Service Pre and post flight service Online booking of meals and seats
allows for better forward planning.
Social media are used as a low-cost
way of reinforcing the relationship with
customers

Firm infrastructure Management systems – Small headquarters located in low-cost

yield management, site
IT services, budgeting, etc.

HRM Recruitment and reward Training undertaken by senior cabin

Training crew members rather than third
parties and takes place on SIA’s own
premises. Training emphasises ‘waste
control’ – no cost saving considered
too small.
The staff reward scheme with bonuses
based on company profitability
encourages staff to engage in cost
savings
Labour costs are lower than many
of its rivals because it pays average
Singaporean wages but attracts a high
calibre of applicant

Technology IT systems Non-strategic IT services e.g. end-user

development support for desktops etc. outsourced
to low-cost service providers
Buys tried-and-tested software
systems ‘off the shelf’ rather than
customised or leading-edge
applications

Procurement Acquisition of aircraft A culture of hard bargaining for anything

from aircraft to the negotiation of hotel
rates for crew member stays when
overseas

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Case Insight 4.4
F O U N DAT I O N S O F S T R AT E G Y

Using the value chain to explore Singapore Airlines’ differentiation

opportunities and initiatives
Illustrative examples of
Porter’s generic airline activity fitting Illustrative examples of differentiation
categories Porter’s categories opportunities and initiatives

Inbound logistics Aircraft Young fleet means a greater % of arrivals

Fuel and departures are on time
Food and drink Food and drink customised to individuals’
preferences through use of online
booking system

Operations Airport and gate Employs more cabin crew than other
operations airlines so that more personal attention
Ticketing can be given to customers in-flight
Flight scheduling
Baggage handling

Outbound logistics Flight connections Introduction of a non-stop business class

Partnerships and alliances only service between Singapore and New
with other operators York in 2007

Marketing & sales Promotion Use of customer relationship management

Advertising (CRM) system in conjunction with training
of cabin crew to personalise passengers’
in-flight experience

Service Pre and post flight service Loyalty marketing

Firm infrastructure Management systems – The constant reinforcement of a culture

yield management, IT of customer service
services, budgeting, etc. Use of the CRM system to personalise the
customer experience

HRM Recruitment and reward The company attracts first-class university

Training students who like the idea of working
for a leading local company. The
company invests heavily in training and
enhancement of staff skills

Technology IT systems SIA has invested in those technologies

development that improve the customer experience.
For example, after the scares over the

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SARS epidemic, SIA invested in biometric

CHAPTER 4
technology to speed up check-in

Procurement Acquisition of aircraft Has pioneered the introduction of brand

new aircraft, like the Airbus A380, to
its fleet and has used this to generate

T H E N AT U R E A N D S O U R C E S O F CO M P E T I T I V E A D VA N TAG E
publicity and to enhance its reputation as
a leading airline. For example the launch
of the A380 service was accompanied by
a charity auction of the first seats

The aim of the analysis is not merely to identify and classify different elements
of SIA’s overall differentiation strategy but to spot where opportunities exist for
further differentiation and to reinforce linkages between different parts of the
value chain. For example allowing passengers to state their preferences through
online booking of meals when combined with judicious use of the CRM system
and careful training of staff allows the airline to both ‘personalise’ and ‘standardise’
customer service.

By combining the two types of competitive advantage with the firm’s choice of
scope – broad market versus narrow segment – Michael Porter has defined three generic
strategies: cost leadership, differentiation and focus (see Figure 4.6). Porter views cost
leadership and differentiation as mutually exclusive strategies. A firm that attempts to
pursue both is ‘stuck in the middle’:

The firm stuck in the middle is almost guaranteed low profitability. It either loses the
high-volume customers who demand low prices or must bid away its profits to get this
business from the low-cost firms. Yet it also loses high-margin business – the cream –
to the firms who are focused on high-margin targets or have achieved differentiation
overall. The firm that is stuck in the middle also probably suffers from a blurred corporate
culture and a conflicting set of organisational arrangements and motivation system.35

In practice, few firms are faced with such stark alternatives. Differentiation is not
simply an issue of ‘to differentiate or not to differentiate’. All firms must make decisions
as to which customer requirements to focus on, and where to position their product or
service in the market. A cost leadership strategy typically implies a narrow-line, limited-
feature, standardised offering. However, such a positioning does not necessarily imply
that the product or service is an undifferentiated commodity. In the case of IKEA furniture
and Southwest Airlines, a low-price, no-frills offering is also associated with clear market
positioning and a unique brand image. The VW Beetle shows that a low-cost, utilitarian,
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Figure 4.6 Porter’s generic strategies
SOURCE OF COMPETITIVE ADVANTAGE
Low cost Differentiation
F O U N DAT I O N S O F S T R AT E G Y

COST
Industry-wide DIFFERENTIATION
LEADERSHIP
COMPETITIVE
SCOPE
Single Segment FOCUS

mass-market product can achieve cult status. At the same time, firms that pursue
differentiation strategies cannot be oblivious to cost.
In most industries, market leadership is held by firms that maximise customer appeal
by reconciling effective differentiation with low cost – Toyota in cars, McDonald’s in fast
food, Nike in athletic shoes. Cost leaders are frequently not market leaders but smaller
competitors with minimal overheads, non-union labour and cheaply acquired assets.
In oil refining, the cost leaders tend to be independent refining companies rather than
integrated giants such as Exxon Mobil or Shell. In car rental, the
In most industries, cost leader is more likely to be Rent-A-Wreck (a division of Bundy
market leadership American Corporation) rather than Hertz or Avis. Simultaneously
is held by firms pursuing differentiation, cost efficiency and innovation was a
that maximise key element in the global success of Japanese companies in cars,
customer appeal motorcycles, consumer electronics and musical instruments.
by reconciling Reconciling different performance dimensions has been facilitated
effective by new management techniques. For example, total quality
differentiation with management has refuted the perceived trade-off between quality
low cost. and cost.

Case Insight 4.5

Singapore Airlines: reconciling differentiation with low costs
Porter argues that it is impossible for a firm to sustain cost leadership and differ-
entiation over a sustained period of time without becoming ‘stuck in the middle’.
He bases this claim on the fact that such strategies usually entail contradictory
investments, different organisational processes and different organisational
mindsets. The SIA case illustrates that many companies do not face such stark

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alternatives and that by developing appropriate cultures, thinking creatively and
strategically about investment decisions and paying attention to the details the

CHAPTER 4
best performing companies often manage to reconcile what at first sight appear
to be contradictory strategies. For example by allowing customers to state
their food preferences in advance the airline offers them a personalised service
whilst at the same time eliminating waste. By speeding up the check-in process,

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the airline enhances the travel experience of its passengers but also improves
punctuality and reduces the costs incurred by delays.

Summary
Making money in business requires establishing and sustaining competitive advantage.
Both these conditions for profitability demand profound insight into the nature and
process of competition within a market. Competitive advantage depends critically on the
presence of some faults in the competitive process – under perfect competition, profits are
transitory. Our analysis of the imperfections of the competitive process has drawn us back
to the resources and capabilities that are required to compete in different markets and to
pursue different strategies. Sustaining competitive advantage depends on the existence of
isolating mechanisms: barriers to rivals’ imitation of successful strategies. The greater the
difficulty that rivals face in accessing the resources and capabilities needed to imitate or
substitute the competitive advantage of the incumbent firm, the greater the sustainability
of that firm’s competitive advantage. Hence, one outcome of our analysis is to reinforce
the argument made in Chapter 3: the characteristics of a firm’s resources and capability are
fundamental to its strategy and its performance in decision making and long-term success.

Summary table
Learning Objectives Summary

Understand the term ‘competitive advantage’ and
identify the circumstances in which a firm can
create a competitive advantage over a rival
When two or more firms compete within the
same market one firm possesses a competitive
advantage over its rivals when it earns (or has
the potential to earn) a persistently higher rate of
profit. Firms can create a competitive advantage
when some kind of imperfection exists in the
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competitive process

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