Performance measures to support competitive advantage

http://www.accaglobal.com/en/student/acca-qual-student-journey/qual-resource/accaqualification/p3/technical-articles/performance-measures.html by Graham Morgan 01 Aug 00! "he emergence in the 1##0s of low-cost airlines and the e$pansion of the %uropean tra&el mar'et has shown how competition can significantly affect the structure of an industry. (yanair and easy)et are now well-established and their on-going success will depend upon a continuing ability to attract customers and maintain operational efficiency. "his must be done in the conte$t of increased competition from schedule and charter airlines that now recognise the effecti&eness of the business model adopted by the low-cost carriers. "his article e$amines how the balanced scorecard might be used to maintain the low-cost carriers* competiti&e edge. "he business model adopted by low-cost carriers can be &iewed as ha&ing three broad elements on which success is based: route networ' de&elopment brand de&elopment and mar'eting effecti&eness low-cost operations. "hese aspects can be seen to be structural as they reflect major decisions and de&elopments which set the conte$t for operational performance and day-to-day management. "he route networ' is the product dimension of first importance to customers. +efore %uropean air tra&el was deregulated in the mid-1##0s, the mar'et was neatly di&ided. -chedule carriers focused primarily on business tra&ellers with .!/ of the mar'et, the other !/ being pro&ided by charter airlines as part of the pac'age holiday industry. 0ow-cost carriers use aircraft which for %uropean routes are generally larger than those used by schedule airlines and routes the balanced scorecard must be selected to pro&ide high load factors, ie percentage of a&ailable seats sold. (outes chosen should be new routes or those ser&ed by high-cost carriers, and ha&e appeal to leisure and pri&ate tra&ellers. "his approach allows low-cost carriers to use secondary airports at major %uropean cities or regional airports which pro&ide o&erseas homeowners greater access to properties with minimum tra&el in the destination country. Another major aspect of the route networ' decision is the departure airport. 0ow-cost carriers* use of secondary airports in the 12 pro&ides con&enience to tra&ellers, and important cost sa&ings for the company. Another important factor in the de&elopment of the route networ' is to a&oid direct competition from other low-cost carriers. 3n 00 , of 1 4 low-cost routes, only 1. in&ol&ed the same departure and destination airports - and (yanair and easy)et adopted distinct positions in the mar'et. 5hile (yanair has become the *least-cost pro&ider*, easy)et has positioned itself to ha&e a significant appeal to the

Performance measures to support competitive advantage

business tra&eller by flying three times a day to major cities such as Amsterdam, 6adrid, 7aris, and 8urich from 0ondon*s 0uton and 9atwic' airports, which are generally &iewed as more accessible from 0ondon than -tansted :(yanair*s base airport;. "he success of the route networ' strategy is supported by the fact that easy)et carried 11 million passengers in 00<, operating 1!3 routes to << %uropean airports. +rand de&elopment and mar'eting effecti&eness is essential for a product which has a high le&el of mar'et acceptance which is e&idently the case with the low-cost carriers* route networ' strategy outlined already. "here are two major factors which ha&e allowed both (yanair and easy)et to capitalise on product strengths to become leading 12 brand names. =irst, the accepted practice in the industry of discounting prices just before departure dates was re&ersed so that fares are initially low and rise as departure dates approach. "his practice, especially when supported by aggressi&e promotional campaigns such as * 00,000 seats at ##p - must be boo'ed before -eptember 00>* promotes the company*s central mar'et message in an e$tremely effecti&e manner. "his strategy is particularly effecti&e since the a&erage price paid per seat is greatly in e$cess of the *loss leader* promotional price and is comparable to that obtained by traditional charter airlines. -econdly, the brand is promoted by the adoption of direct selling to the customer either &ia the telephone or the 3nternet. "he customer deals with (yanair or easy)et and not the tra&el agent, with a consequent increase in brand identification. "he remo&al of the latter from the purchase transaction also pro&ides a significant cost sa&ing since no commission is paid. 0ow-cost operations are in part based on the cost ad&antages of operating from secondary airports, and the direct selling strategies outlined abo&e. "hese cost ad&antages in relation to schedule airlines are enhanced by aircraft fleet utilisation decisions. =irstly, increased number of seats per aircraft pro&ides a considerable reduction in passenger unit costs. -econdly, the daily flying time per aircraft is increased significantly. "hirdly, the elimination of free in-flight passenger ser&ices, particularly catering, remo&es a cost which is not necessarily &alue-adding to the customer and allows faster turnaround times between flights. "he final factor pro&iding significant cost sa&ings are crew compensation and utilisation factors based on the higher usage time of aircraft. 0ower costs and high load factors permit the low-cost carriers to offer fares !0 to .0/ below those offered by schedule airlines. +inggeli and 7ompeo1 ha&e estimated that the cumulati&e cost sa&ings for a lower cost carrier such as (yanair are reflected in the cost per a&ailable seat 'ilometre :A-2; statistic. "hey estimate that in 001, this cost to the top three major schedule airlines was 1 cents :1-; compared with <.! cents :1-; for (yanair. ?n this basis, (yanair*s brea'e&en load factor is !!/.

The scorecard approach

3n maintaining the competiti&e position arising from the business model of the low-cost carriers, it is necessary for management to de&elop a set of performance measures which focus on 'ey aspects of performance. "he balanced scorecard pro&ides a framewor' which can be utilised to de&elop a multidimensional set of performance measures for strategic control of the business. "he +alanced -corecard as shown in =igure 1 has been de&eloped to reflect important aspects of the low-cost carrier*s business

Performance measures to support competitive advantage

model outlined abo&e.

=igure 1: "he balanced scorecard "he business process element of the scorecard is the logical starting point since it must reflect the *do wells* of the business. 3n this conte$t, no airline can be successful unless it has an e$cellent safety record and a reputation for punctuality of ser&ice. "he high utilisation of aircraft of the low-cost carrier ma'es it &ulnerable to delays, since there is ine&itably a *'noc'-on* effect within a flight timetable. "he principal measure here, must therefore be *adherence to schedule*, which will depend on the effecti&eness of managing three interconnected areas of acti&ity. %ngineering management in&ol&es maintenance and safety wor' on aircraft between flights and the longer-term maintenance, requiring the aircraft to be withdrawn from ser&ice. -election of an appropriate set of measures in this area must not lead to any compromise to safety standards or the inappropriate funding of short-term cost sa&ings against long-term lifetime costs of operations. @rew management, both of pilot and cabin staff, has to balance the need to ha&e bac'-up staff to co&er for unplanned absences and problems arising from flight delays. Again, this is a potential pressure point for the low-cost carrier, since staff utilisation is more intense than on schedule airlines. 9round and passenger handling acti&ities, loading and unloading of passengers, luggage, fuel etc in&ol&es the coordination of different parties wor'ing to an agreed timetable. "he lower le&el of passenger ser&ice and open seat :as opposed to allocated seat; policy of the low-cost carrier simplifies these relationships and as such wor' to their ad&antage. "he three abo&e acti&ities will in combination affect punctuality and the relationship with Air "raffic @ontrol, whose goodwill can often be important in reco&ering *lost* landing and ta'e-off slots. "he fundamental measure in this area must be percentage of flights on schedule with an analysis of delayed flights by reason - distinguishing una&oidable and a&oidable delays. "he latter will indicate the areas where management action needs to be directed to impro&e performance. 6easures must also be de&eloped for customer-company interaction with regard to both the boo'ing and administrati&e aspects of tra&el, since the direct selling strategy is critical to on-going success. "he enquiry-to-boo'ing con&ersion rate would be the principal measure with an analysis of potential problem areas, again attempting to classify a&oidable and una&oidable problems. ?ther con&entional measures in an e-commerce world would need to be employed to assess the quality of customer ser&ice, eg response times to information requests &ia the 3nternet/telephone etc. "he inno&ation and growth elements must reflect the ability of the business to maintain competiti&e ad&antage. "wo principal areas of inno&ation can be identified - route networ' de&elopment and the management of operational-based relationships. "he first of these reflects the ongoing understanding of customer demand in terms of new route de&elopment. "wo measures could be employed: time period required to build traffic to brea'e&en load factor le&el

Performance measures to support competitive advantage

number of routes withdrawn, eg within 14 months. 3n e&ol&ing a new route structure, important relationships will ha&e to be de&eloped with handling agents, suppliers in destination airports, and time periods to establish effecti&e relationships could be monitored against a standard time period. A major strategic de&elopment for low-cost carriers is their ability to establish *hub-based* businesses abroad :eg in 9ermany; and to monitor this acti&ity and assess similar initiati&es. ?ther measures would focus on the de&elopment of indi&iduals within the company, either by measures of e$penditure on training or success in jobs as measured by internal promotion rates. "hese businesses require fle$ibility in the indi&iduals they employ and this needs to be measured and managed. "he last two elements - customer and financial perspecti&es - are dependent on the performance achie&ed in the business processes, and inno&ation and growth elements should reflect achie&ements in the mar'et and the effecti&eness of management processes. "he customer perspecti&e measures included customer satisfaction, rating of ser&ice/&alue-for-money, le&els of customer complaints/compensation payments and measure of loyalty in terms of *repeat business* and *switching beha&iour* between other low cost/schedule carriers. ?ther measures might assess the con&enience of tra&el as measured by the a&erage miles tra&elled to 12 airport/from o&erseas airports to destination, a composite measure of total journey time, a 'ey factor in customer satisfaction ratings. "he financial perspecti&e will embrace the high-le&el performance measures such as return on capital employed :(?@%; and gearing which reflect the financial strength of the company - a 'ey factor in entering long-term contracts for new aeroplanes and for e&aluating the terms within leasing agreements. 2ey operational statistics influencing financial performance should be considered, such as load factors, route flying times, and other re&enue/cost measures analysed in terms of A-2 statistics, eg cabin crew costs per A-2. ?ther measures might focus on specific initiati&es which might ha&e profit potential, eg the sale of targeted in-flight ser&ices beyond those con&entionally pro&ided such as catering and duty-free sales. %$ceptional items such as fuel charge e$cesses might need to be monitored, gi&en its potential impact on the profit outcome. "he abo&e re&iew of strategic de&elopments within the %uropean airline mar'et and how the balanced scorecard might be used to monitor performance is essentially *a rear-&iew mirror* approach and is limited in this respect. "he 'ey to success is future-oriented and while certain elements of the scorecard are fundamental to the industry, the 'ey dri&er of success is the strategy adopted and the ability to 'eep ahead of competitors. ?n this basis, it might be argued that the inno&ation and growth element needs special thought and analysis since the modern world is characterised by persistent change, and successful business models ha&e to be re-formulated in line with these changes. Aonetheless, the importance of performance measurement systems has long been recognised, since indi&iduals 'now that *what counts is counted*. "he performance measurement system adopted by an organisation is a &ery powerful means of not only e&aluating an e$isting strategy, but is also useful for de&eloping the mindsets within an organisation which will allow new strategies to be de&eloped on the basis of a coherent analysis of the e$isting

Performance measures to support competitive advantage

strategy and company performance. Reference +inggeli, 1 and 7ompeo, 0: Byped Bopes for %urope*s 0ow-@ost Airlines, "he 6c2insey Cuarterly, 00 , number <. Graham J Morgan is a senior lecturer in strategy and management at The University of Central England