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Airline Industry

The absorbtion of a company is often a difficult task.Critical issues to consider, include organizational culture, technology, socio-culture, brand equity, and profitability of the firm.Organizational culture is the most important issue to consider when acquiring another company.

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While some cultures differ from others, that doesn’t necessarily make them weak cultures. Key questions to ask are; how well will the companies cultures mix with each other? If changes to either culture occur, what implications does this have on productivity and efficiency?

Technology is and has been a key part of business and will continue to be. Technology increases productivity, efficiency, and in many times lowers the cost of making products. When looking to acquire another company one must compare the technology of that company to its industry. How much will a company have to invest in a company to get the technology updated and personnel trained on those machines? How much would the company gain by implementing this new technology? Socio-cultural factors are a mindset of customers and they play a major role in whether or not a customer purchases a product and how much of it they will purchase.

Grapefruit, for example, was a very popular item during the craze of the Hollywood Diet. Carbohydrates were in low demand when the Adkins Diet was trendy, and now it’s no transaturated fats that are becoming the next style of diet. Fast food companies had to change their menus to fit some of these trends due to their popularity! The lesson to take away from this is that a company needs to look into current as well as future trends that occur before making the decision to make an investment into an absorption.

Brand equity is an essential part of acquiring a company. For example, a customer enters a pharmacy and sees both Tylenol and the generic brand of acetaminophen at the same price; the customer will most likely pick the Tylenol because it has proven itself to be a strong brand. The same can be said with companies in other industries. A company must research the customer’s perception of the products and service that the potentially acquired company offers in order to insure that they are making a good investment.

Since the nature of business is to make profit, a shrewd to examination into the current profitability of the company being acquired as well as speculate future profitability is required. It’s also essential for a company to forecast the impacts that this merger will cause for their own company and determine if the results are desirable before the merger takes place. Part II. Barriers to entry—moderate: Sometimes a company will be able to enter the market but only for a short time; however this still causes competition and causes a reduction in fares.

Part of what keeps barriers high are that airlines that are already in business there have planes already purchased as well as partnerships with other companies established. This leads to a potential entrant having diseconomies of scale. The two major things that deter customers from choosing a competitor are cost and past experience. These don’t contribute much to switching costs so when a new competitor enters the industry margins decrease even more. Since startup costs are so huge in the commercial airline industry, the threat of potential entrants is rather low.

Rivalry among existing firms—high: Since JetBlue has entered the global market there are several more airlines worldwide that JetBlue has to compete with, as well as domestic and startup airlines to compete with. They must keep their prices/margins low not only to deter customers from other competitors but also to compete with close substitutes. There isn’t a firm that controls a large portion of the market so in turn companies receive low return due to competitive pricing structures. Finally there is very little differentiation in the airline industry.

Services that JetBlue offers like free WiFi and XM radio are small things that help them differentiate their service for customers to buy. Threat of close substitutes—high: There are several substitutes to air travel, these being things like a car or a train. When going overseas there really isn’t a good substitute unless you are going on a cruise which in my opinion is an entirely different plan for travel. Sometimes if a group of people want to travel to the same place they will carpool for a cheaper rate, but this is getting less popular than it once was.

In summary the shorter the distance, the more likely an airline is going to lose to close substitutes like a car or train. Bargaining power of suppliers—high: This is due to the fact that the suppliers are in an oligopoly. There isn’t much competition in the supplier market so those companies can keep their margins rather high. If a company decides to purchase a different brand of airliner then they would need to face training and maintenance costs associated with buying that new brand. Now there are things like beer and peanuts, uniforms and the like.

The airline industry has potentially high bargaining power against these suppliers but those items don’t affect the profit margin like equipment does. Bargaining power of buyers—low/moderate: The price of an airline ticket is set and doesn’t really change except over time through competition. Buyers get to use technology like the internet to compare prices of different competitors which lowers prices; however that only affects prices over time. Since there are many airlines to choose from as well as low switching costs buyers enjoy a moderate amount of bargaining power.

However, with few exceptions like companies that use economies of scale to negotiate rates for you there is very little a buyer can do to bargain with an airline immediately. Overall competition in airline industry is very intense. There are several competitors in the airline industry, and since the industry is low growth competitors try to differentiate their service to get people to switch to them. In poor economic times people look for lower cost alternatives and airfare is no different—people will look for lower cost means of transportation. Airliners also face an overall moderate bargaining power which limits their profit margins.

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