(BPP Business Organisations, Competition and Environment Chapter 4 Page 108)
This is when only a few firms dominate a market. There are a few producers and many buyers, the action of one producer will affect the influences of other producers and vice versa. They can't dictate price and availability like a monopoly can, they often turn into friendly competitors, since it is in all the members' interest to maintain a stable market and profitable prices so often they get together and behave as if they were a single Monopoly, perhaps by forming a Cartel, (An agreement among two or more firms in the same industry to co-operate in fixing prices and/or carving up the market and restricting the amount of output they produce.) Or they may get together informally, by preferring gentle non price competition (trying to win business from rivals other than by charging a lower price. Methods include advertising, slightly differentiating the product, improving its quality or offering free gifts or discounts on subsequent purchases.) When they do compete on price, they may produce as much and charge as little as if they were in a market with perfect competition.
There is a duopoly, and this is when two major companies dominate the market place.
Easy Jets Market Structure
All organisations are in a market structure and Easy Jet is no different. Easy Jet is a low cost airline and is in the oligopoly market, but saying that you could argue that they are a duopoly with Ryan air, as these two are the major airlines that offer low cost flights.
It wasn’t very hard for Easy Jet to enter into the market due to the EU ruling on the ‘Open Skies’ agreement allowed competitors to serve flight paths that were traditionally considered the property of certain airlines and Easy Jet adopted an interesting strategy to overcome the entry barriers to the airline market. For the first five years of their existence, passenger-handling, baggage-handling and various other operations were contracted out so that they could focus on cutting costs. As soon as the company was of a sufficient size and profitability, they assumed control of all aspects of business and product operations. This allowed the company to avoid the barriers of expensive infrastructures.
Another item of importance relates to the success of Easy Jet and this was that the airline industry had suffered heavily due to September 11th attack, and so therefore Easy Jet and their main rival Ryan Air started taking away much of the business from the big airlines in Europe.
The bigger airlines sell a full service that charges premium prices for the high levels of service they provide; by comparison Easy Jet positions itself at the other end of the scale and sells no frills flights which set their prices at a reasonable low.
Eventually Easy Jets ambitions are to have 25% of the market share co that they can enter into the monopoly market.
Market Forces and impacts on Easy Jet
A definition of market forces is - pressures from buyers and sellers in a market, rather than those coming from a government planner or from regulation.
The market price of a product or service is determined by both the supply and demand for it. The supply and demand model as shown in fig. 1 is one of the original thoughts of economics and the price level of a product or service determines the point at which quantity supplied equals quantity demanded.
If the price is above the equilibrium price (the point where quantity supplied and quantity demanded are in balance, it is where the supply and demand curves cross) then there will be excess supply therefore causing the price to fall.
On the other hand if the price is below the equilibrium price then there will be excess demand and in this situation causing the price to increase.
Fig.1
Demand is defined as ‘the quantity of a good or service consumers are willing and able to buy at a given price in a given time period.’
Fig.1
Supply and demand diagram
The demand curve may change due to factors that influence customer demand for a product or service and it can either shift to the left (if for example positive news report about the product)or the right (for example negative news about the product).
The factors that may influence the demand curve to shift are:
- Customer preference
- Prices of related goods
- Income
- Number of buyers
- Expectations of a price change
Fig2. Shifts in the demand curve
‘Supply is the quantity of a good or service that a producer is willing and able to supply onto the market at a given price in a given time period.’
Fig3.shifts in Supply curve
The supply curve can also shift due to influences and again shift to the left or the right. Such a shift results in a change in quantity supplied for a given price level and if the change causes an increase the supply curve would shift to the right and if the change causes a decrease then it would shift to the left.
Some supply shifting factors may include:
- Prices of other goods
- Number of sellers
- Prices of inputs like resources
- Technology
- Expectations of customer prices
Price elasticity of demand is how much the quantity demanded changes when the price changes and it is calculated by
% change in the quantity demanded
% change in price
It plays an important role because it is used when working out a price for the product.
The price elasticity will usually be negative when the price goes up because the quantity demanded falls and vice versa.
Fig.4. Shows infinite elasticity which is if the quantity demanded would be very sensitive to changes in prices.
Fig 4.Perfectly elastic demand curve
Fig.5 shows that even if there was a large price increase there would be no impact on quantity demand.
Fig.5 Perfectly inelastic demand curve
There are factors that influence price elasticity of demand:
- Degree of necessity or luxury
- Proportion of income required for product
- Time period
- Permanent or temporary price change
Income elasticity of demand is the reaction of demand to changes in the household income. The way it is worked out is:
% change in the amount demanded
% change in income
When worked out if the value is >1 demand is income elastic, but if the value is <1 the demand is income inelastic.
Price elasticity of supply measures the reaction of supply to a change in price.
% changed in the quantity supplied
% change in the price
If the % change in supply is greater than the % change in price then supply is elastic.
If the % change in supply is less than the % change in price then supply is inelastic.
No company can fight market forces and they have impacts on all companies sometime good, but sometimes bad. In the table below I have gave 3 examples of how market forces have impacted on Easy Jet and Easy Jets response to these.
Section 2
Competitive Advantage
‘Competitive advantage is anything that gives an organisation an edge over its competitors in the products it sells or the services it provides’
(BPP Business Organisations, Competition and Environment Chapter 7 Page 177)
The type of competitive strategy an organisation takes depends on the competition.
An organisation can develop its competitive advantage over its rivals and there are 3 strategies which can be adopted and these are:
- cost leadership strategy – producing at a lower cost
- differentiation strategy – these may be colour or size differences or alternatives for different market segments
- focus strategy – concentrate on different market segments
Michael Porter suggest the above 3 strategies in his book 'Competitive Advantage', published in 1980.
He stated that there were three main ways in which a company could achieve a competitive advantage that was lasting. These were as follows.
Cost Leadership - the company would attempt to become the producer with the lowest costs in its industry. Cost cutting and increased efficiency are the main routes for achieving this position. Such companies usually sell a basic product which is similar to other products in the market.
Product Differentiation - the company aims to differentiate its products from those of competitors by developing product features which the others do not have. These novel features must be valued by customers, which then enable the company to charge a premium price.
Focus - The company attempts to focus all of its efforts on one market segment and become the 'expert' supplier for their chosen sector. E.g. The Sock Shop and The Body Shop. By specialising, such companies can offer a wider range of core products and a closer relationship with their customers.
Porter suggested that by following one of these strategies companies should be able to achieve a competitive advantage over rival companies that was sustainable in the long term.
He also introduced the five forces model for analysing an industry. It is as follows:
(M. E. Porter, 1979)
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Easy Jets Competitive Advantage
Easy Jet used Porters model when developing a competitive advantage over its rivals.
Threat of new entrants
- High capital investment reverses threat to some extent
- Lack of take-off and landing slots makes it difficult for new carriers to find suitable airports
- Over crowed market and very strong competition deters potential new entrants
Bargaining Power of Customers
- Although the customer does not affect ticket prices much, they are still fickle and vote with their feet in order to find value for money.
- In times of economic depression (slump) then customers have a tendency to opt for cheaper ticket flights
- Customers have the Civil Aviation Authority (CAA) on their side.
Bargaining Power of Suppliers
- The price of aviation fuel is directly related to the cost of oil, as an individual company easy Jet does not have the power to alter this.
- The more Easy Jet expands the more power it will possess over its suppliers
The threat of Substitute Products or Services
- Other modes of transport e.g. Euro Star.
The industry jockeying for position among current competitors
- Easy Jet operates cost leadership and differentiation strategies. The other strategy that it does not or is not able to implement is that of ‘Focus’ It does not maintain close links to its market, after all 50% of its customers are business customers who are not even in Easy Jet’s target market.
- Easy Jet sustains a cost leadership advantage over all other operators, as it doesn’t use travel agents. Easy Jet bookings are taken directly either through the Internet site or through their call centre, so therefore incurs none of the typical administration costs. Another cost advantage is that it only flies out of ‘uncontested, inexpensive airports’, which have by comparison much lower airport charges. At some airports such as Heathrow these charges can double the price of a ticket.
Evaluation
I personally think Easy Jet’s responses to the impacts are reasonable. The first response I gave concerning competition shows to some extent ‘price fixing’ due to both companies wanting to achieve joint profit maximisation. On the other hand though this in itself may anger other airlines and cause a price war.
The second response was Easy Jet now using the scarce resource of its Gatwick slots for another service due to increase of landing charges and I feel Easy Jet thought either to increase prices and keep Gatwick as one of there airport sites or move to another site and keep their flights still low cost. It is a loss either way because if Easy Jet stayed and increased prices the demand for the flight may decrease, but if Easy Jet cancelled the flights from Gatwick the demand for the low cost flight would still be in demand. So either way it is a conflict between customers and the airline.
Lastly there was the increase in Air Passenger Duty. Easy Jet themselves cannot fight the battle alone but if all the airlines got together and gave there opinions and other alternatives then maybe things may be different. As it stands it is not only Easy Jet who has to increase prices but all of its competitors also.
Competitive advantage – nearly all companies want to be the ‘one on top.’ Easy Jet’s aim is to be in the monopoly market and to have an edge over its rivals. To do this they have to concentrate on new entrants, customers, suppliers and substitute products or services.
I think Easy Jet has one problem and that is ‘focus.’ Easy Jet feels as though they don’t require it, but I disagree due to the fact that they are increasing popularity with business people, so if they acquire target marketing they may increase profit.
Future strategies could include;
- Reach different target groups
- Reach agreements with travel agents and airlines to promote their services
- Regular competitions to guarantee browser loyalty and also designed to create a desire to visit the website on a regular basis thus maintaining a high daily ‘hit’ rate.
- Employee competence
- Use a systematic approach.
Conclusion
As seen there are many factors that influence organisations when it comes to market forces and competitive advantage.
Market Forces – any little thing can change the supply and demand of a product or service. Just by looking at Easy Jet, you can see that competition has an affect and for them to keep their customer base they have to cut costs so demand for the service will still be there. If they don’t cut flight costs then they may lose the demand to rival budget airlines. The increase in Air Passenger Duty Tax and landing charge increases also affect the company and so therefore affect customers.
Competitive advantage – to get an edge over your rivals you must adopt cost leadership strategy (producing at a lower cost), differentiation strategy (these may be colour or size differences or alternatives for different market segments) and focus strategy (concentrate on different market segments).
References
(BPP Business Organisations, Competition and Environment Chapter 4 Page 105)
(BPP Business Organisations, Competition and Environment Chapter 4 Page 106)
(BPP Business Organisations, Competition and Environment Chapter 4 Page 108)
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Bibliography
Organisation, Competition and Environment Class Notes
BPP Business Core Unit 4 Organisation, Competition and Environment
External Influences, Nancy Wall
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