ANALYSIS TO BUILD A COMPETITIVE STRATEGY FOR KOREAN AIR CARGO IN HO CHI MINH CITY UNTIL 2016

1 TR NG I H C M TP.HCM HO CHI MINH CITY OPEN UNIVERSITY UNIVERSITÉ LIBRE DE BRUXELLES SOLVAY BRUSSELS SCHOOL MBAVB4 TR NG V N LIÊN ANALYSIS TO BUILD A COMPETITIVE STRATEGY FOR KOREAN AIR CARGO IN HO CHI MINH CITY UNTIL 2016 MASTER PROJECT MASTER IN BUSINESS ADMINISTRATION (PART-TIME) Ho Chi Minh City (2011) DECLARATION I hereby declare that this project is written by myself as requested by the Part-time MBA Program from Ho Chi Minh City Open University and Solvay Brussels School In the project, I use theories from books published by well-known authors such as Michael Porter and other authors whose studies and researches related to my study Besides, I also collect data and information from newspapers, magazines, and government authority websites such as Vietnam Customs website, Vietnam GSO website, Ho Chi Minh city website, … In addition, I also pick up some information from previous projects studying the same issue All extracted information and data are attached with links to the author or original sources to ensure author rights I also use the guidelines and instructions from the Tutor, Associate Professor Doctor Ha Nam Khanh Giao from the University of Economics in Ho Chi Minh city (UEH) to accomplish this project Ho Chi Minh city, February 2012 TRUONG VAN LIEN ACKNOWLEDGEMENTS I would like to thank all Professors of the program who bring me valuable knowledge to accomplish this thesis I would like to show my unforgettable thanks to Associate Professor Doctor Ha Nam Khanh Giao who guided me with interesting learning experience throughout the thesis Special thanks to Mr Nguyen Khanh Diep, Cargo Sales Manager of Korean Air Cargo in Ho Chi Minh city who inspired me with this subject and who dedicated strong support to me during the thesis accomplishment I would also like to thank my classmates for their exciting support during the two-year MBA program and in my thesis as well Last but not least, I would like to dedicate this paper to my wife who has given full support and understanding to me during the writing time of this study Ho Chi Minh city, February 2012 TRUONG VAN LIEN COMMENTS FROM THE TUTOR As tutor working with Mr Tr ng V n Liên in his Final Report, namely Analysis to Build a Competitive Strategy for Korean Air Cargo in Ho Chi Minh city until 2016, I found out that Liên proved to be hard working, and disciplined His Final Report analyzed the environment and suggested some possible ideas about the strategy of Korean Air The strong point of this report is based on Mr.Liên’s knowledge of the air cargo business as he has been working in the area for years I strongly recommend Mr Tr ng V n Liên to present his work to the jury panel as part of his Master of Business Administration And I believe that he will be successful in the future Ho Chi Minh city, the 1st of March, 2012 Assoc.Prof Dr Ha Nam Khanh Giao TABLE OF CONTENTS DECLARATION ACKNOWLEDGEMENTS COMMENTS FROM TUTOR EXECUTIVE SUMMARY 10 ABBREVIATIONS 11 LIST OFTABLES 13 LIST OF FIGURES 14 REFERENCES 95 APPENDIX 1: LIST OF AIRLINES IN HCMC 2011 96 APPENDIX 2: LIST OF CARGO AIRLINES IN HCMC 2011 97 APPENDIX 3: DESTINATIONS SERVED BY KOREAN AIR 98 APPENDIX 4: CUSTOMER SURVEY FORM 99 APPENDIX 5: CUSTOMER SURVEY RESULT 102 CHAPTER 1: INTRODUCTION 15 Rationale of the study 15 Objectives, limitation of the project 17 Methodology of the project 17 CHAPTER 2: LITERATURE REVIEW 19 Previous studies on competitive strategy & related issues 19 General concept 20 Porter’s five forces and three generic competitive strategies 21 3.1 Porter’s five forces 21 3.2 Three generic competitive strategies 23 The generic value chain 25 4.1 Primary activities 25 4.2 Support activities 26 CHAPTER 3: HO CHI MINH CITY AIRFREIGHT MARKET 27 Overview of air freight market 27 1.1 History of world air freight 27 1.2 Some figures about airfreight market 28 1.3 Role of air transport in the economy 29 1.4 Air cargo industry key drivers and trends 29 HCMC air freight market analysis 31 2.1 General information about HCMC airfreight market 31 2.2 Customer behaviors 36 2.3 How the process works 40 2.3.1 The players involved in the process 41 2.3.2 Process flow 42 2.4 Porter’s five forces driving industry competition in HCMC market 44 2.4.1 Intensity of rivalry 44 2.4.2 Potential entry of competition 47 2.4.3 Threat of substitute product 50 2.4.4 Bargaining power of Buyer 52 2.4.5 Bargaining power of Supplier 55 2.4.6 Summary of Porter’s five forces analysis 56 2.5 Trends of airfreight industry in Ho Chi Minh city 58 CHAPTER 4: ANALYSIS TO BUILD A COMPETITVE STRATEGY FOR KOREAN AIR CARGO UNTIL 2016 60 I Competition in HCMC market 60 Competition intensity in HCMC market 60 Strengths, weaknesses and strategies of key competitors in HCMC 61 II Analysis of Korean Air Cargo HCMC business 62 Porter’s generic value chain analysis 63 1.1 Primary activities 63 1.1.1 Inbound logistics 64 1.1.2 Operations activities 65 1.1.3 Outbound logistics 66 1.1.4 Marketing and sales 67 1.1.5 Service activities 67 1.2 Support activities 68 1.2.1 Corporate support activities 68 1.2.2 Quality control activities 68 1.2.3 Human Resource Management 68 1.2.4 Security activities 68 Korean Air Cargo SWOT analysis 68 2.1 Strengths 69 2.2 Weaknesses 71 2.3 Opportunities 72 2.4 Threats 74 Korean Air vision and mission 76 III Suggested Competitive Strategy for Korean Air Cargo HCMC 77 Three levels of strategy 77 1.1 Corporate-level strategy 78 1.1.1 Growth strategy 78 1.1.2 Portfolio strategy 82 1.1.3 Parenting strategy 82 1.2 Business-level strategy 82 1.2.1 Cost Leadership strategy 82 1.2.2 Differentiation strategy 83 1.2.3 Focus strategy 87 1.2.4 Competitive Tactics 87 1.3 Functional strategy 88 1.3.1 Marketing strategy 89 1.3.2 Financial strategy 89 1.3.3 Production strategy 89 1.3.4 Human Resources strategy 89 1.3.5 Information System strategy 90 1.3.6 Research and Development strategy 90 Strategy Implementation 90 2.1 People 90 2.2 Resource Allocation 90 2.3 Structure 91 2.4 System 91 2.5 Culture 91 CHAPTER 5: CONCLUSION AND FURTHER RESEARCH 93 Conclusion 93 Further research 94 10 EXECUTIVE SUMMARY Since Ho Chi Minh city is growing fast and continues to be the biggest city of Vietnam, the airfreight market here is also an attractive business for all airlines The growing market generates big opportunities as well as tough challenges to existing airlines in Ho Chi Minh city As a leading cargo airline in the world, Korean Air Cargo extended their business network to Ho Chi Minh city since 1989 with passenger aircraft and since 1997 with all-cargo flight Since then, the competition in the market is getting harder with the presence of several other carriers The market demand is growing but the capacity from airlines is also very much expanding, making the competition between airlines harder than ever This paper is trying to analyze internal as well as external factors of the market, of Korean Air Cargo, and of the competitors in Ho Chi Minh city market Based on Korean Air Cargo SWOT analysis, Ho Chi Minh city airfreight market analysis, Customer Survey results, and other elements that affect the air transport business, this paper recommends some ideas about competitive strategy to Korean Air in Ho Chi Minh city market In Corporate-level Strategy, the company should achieve growth by implementing Horizontal growth Strategy In the Business-level Strategy, this paper recommends the company to implement the Differentiation Strategy and Focus (Differentiation) Strategy which best fit Korean Air business in HCMC 11 ABBREVIATIONS AFAS: ASEAN Framework Agreement on Services ASEAN: Association of Southeast Asian Nations AWB: Air Way Bill BR: Eva Air CAAV: Civil Aviation Administration of Vietnam CI: China Airlines EU: Europe FDI: Foreign Direct Investment FOB: Free On Board FTK: Freight-Tonne-Kilometers GDP: Gross Domestic Product GSO: General Statistics Organization of Vietnam HCMC: Ho Chi Minh city IATA: International Air Transport Association IEA: International Energy Agency KE: Korean Air KPI: Key Performance Indicator M&A: Merger & Acquisition NAFTA: North American Free Trade Agreement OPEC: Organization of the Petroleum Exporting Countries RTK: Revenue Ton Kilometers SAGS: Saigon Airport Ground Service SCSC: Saigon Cargo Service Corporation SGN: Ho Chi Minh city SWOT: Strength, Weakness, Opportunity, Threat TCS: Tan Son Nhat Cargo Service TIAGS: Tan Son Nhat International Airport Ground Service ULD: Unit Load Device USA: United States of America 90 the target customers It should try to increase this percentage to at least 95-98% which really satisfy its customers 1.3.5 Information System strategy: Korean Air Cargo HCMC should build a communication channel with customers in this strategic field to better update the customers about tracking information and their cargo status The number of 70% of customer in the survey being satisfactory with the service change or delay update means that there is still a big portion of customers not happy with this And this is extremely vital to hi-tech and perishable customers who would decide to make growth to Korean Air in the near future 1.3.6 Research and Development strategy: There is not much to with this function except the market survey about related products in order to offer the required services to customers For instance, there is a new kind of fresh fruit which will be approved to export to the USA in coming time The company should make some research about this fruit and recommend the service in the near future Strategy Implementation: Implementation is the process of turning strategies into actions in order to accomplish strategic objectives and goals To successfully implement the suggested strategy, the company should coordinate and integrate the strategies with suitable structures and appropriate control measures This study considers five key organizational components – People, Resource, Structure, System and Culture which influence the implementation of the company strategies 2.1 People: A strategy is generally based on organizational competency that, in turn, is based on people Korean Air Cargo needs to review its people to ensure that it has right people with required competencies and skills to support the plan In addition, the company should provide enough training to improve the skills which are needed to offer the best service to customers Especially, the company should motivate and empower people who have experience in handling hi-tech cargos and perishable cargos 2.2 Resource Allocation: 91 Successful implementation requires that the resources needed are fully committed to support implementation of the strategic plan Sufficient resources should be allocated with respect to personnel and funding 2.2.1 Personnel: The company should make sure each individual assigned to the plan must perform their tasks effectively by delegating responsibility to them For each step of work, there must be someone to be responsible for performance This is also useful once the company needs to correct any problem at any point of work 2.2.2 Funding: To implement new services, Korean Air needs certain new investments in man power, work facilities, and extra costs for ground handling tasks Thus, Korean Air Cargo HCMC management needs to get approval from its Headquarter for these investments in order to offer the service Definitely, the extra investments could be covered by the extra revenues paid by customers for differentiated and unique services 2.3 Structure: Organizational structure defines lines of authority and communication and specifies the mechanism by which organizational tasks and programs are accomplished Structure can vary in the degree of centralization and formality of communication channels Since the new service can utilize the synergies of current Korean Air structure, this study suggests that the company should maintain the centralized organizational structure This will maximize the scale and synergies across the company 2.4 System: Management system can all influence the strategy implementation This study considers four elements of management system that has strong affect on the result of strategy implementation: Communication system, Information system, Operating system, and Measurement & Rewarding system 2.4.1 Communication system: although the top management can understand well about the company goals and objectives, other employees in the company may not Thus, it is necessary to deliver the strong message about the company goals and objectives to all of the employees, especially the ones who involve closely to the strategic plan It is important that all of the strategic team should be clearly circulated with the same mission, vision that they will cooperate mutually to achieve the same goals 92 2.4.2 Information system: one of the key elements that the customers of hi-tech and perishable cargos want to know is information about status of their cargos This study recommends that all of the strategic team of Korean Air Cargo have an effective system to communicate with customers about their cargos The company needs to set up an automatic information system to provide customers with active massages about every movement of their cargos This will make customers happy and reduce any extra communication costs that may arise 2.4.3 Operating system: this is policies, procedures, information and controls needed to implement the strategy Korean Air Cargo should make this as simple and effective as possible to make sure that all the possible mistakes could be minimized and Korean Air Cargo is so easy to business with An effective and efficient operating system will enable the company to offer the best service at reasonable costs and bring more benefits to customers 2.4.4 Measurement and Rewarding system: in the field of hi-tech and perishable cargos, the service performance is vital to the business Any failure or mistake during the handling process may lead to serious complaints as well as big claims from customer As the result, the company needs to set up a strong appraisal system which effectively measures the employee performance and satisfaction It should be closely monitored and discussed with employee continuously for continuous improvement In addition, due to higher profit margin from the industry as well as the higher responsibility required by the field of business, the company should offer a higher package of rewards to the strategic team This will strongly motivate them for loyalty and encourage them to have better performance 2.5 Culture: It is important for the company management to create a supportive working environment to connect all of the employees to accomplish the same goals Korean Air Cargo has been widely known as a leading carrier in cargo world for a long period of time, and now it is proud for employee to offer another special service to customers This is the symbol of innovation, excellence and growth 93 CHAPTER 5: CONCLUSION AND FURTHER RESEARCH Conclusion: Vietnam is growing fast and is becoming one of the most attractive place for investment in the Southeast Asia region All kinds of business are growing and business oppotunities are open to every enterprise Airfreight industry in Ho Chi Minh city is also achieving fast growth year after year Korean Air Cargo, one of the biggest cargo airlines in the world, is trying to make more business from this market The attractiveness of the market creates big oppotunities as well as poses certain challenges for Korean Air Cargo to maintain the leading position in the market In order to survive and to grow, Korean Air Cargo needs to strongly compete against other competitors in the market and must set themselves differentiated to be profitable By understanding well the airfreight market in HCMC and SWOT analysis of Korean Air Cargo HCMC, this study recommends some strategies that Korean Air Cargo in Ho Chi Minh city can implement to better compete against competitors and to gain more market share in HCMC market In the Corporate-level Strategy, the study recommends the company should achieve growth by Horizontal Growth Strategy In the Business-level Strategy, it is recommended that that company should select differentiation strategy and focus strategy to expand their market to hi-tech and perishable market segments For Differentiation Strategy, the project suggests the company to focus on three important areas: Inbound Logistics (or Operation Support), Operations activities, and Service activities The Inbound Logistics activities will help the company to build up its brand name by strengthening the fleet sourcing, or in other words strengthening the capacity to ensure the best performance to customers Besides, the Operations activities should focus on the handling capacity and warehouse facility to better serve the two promising products in HCMC market being Perishable products and Hi-tech products Lastly, the Service activities should enhance the communication channel between Korean Air Cargo and the customers to make sure that any of the issues from customers can be received and well handled by Korean Air Cargo This is very important when Korean Air Cargo is trying to attack one of the sensitive segment of the market in which there is no opportunity for any 94 problem to occur with global shippers such as: Intel, Canon, Samsung, Nidec … However, differentiation usually requires costs and may lead to market share shrink, therefore the company needs to avoid this trap by selecting the appropriate areas to be differentiated with less investment costs and opportunities to gain more market share For Focus Strategy, the study recommends that Korean Air Cargo HCM should focus on the Differentiation-Focused segment This can be done thanks to the efforts and capability to differentiate itself in the operations and services activities If the company can implement this strategy successfully, this market may become niche market However, likewise the reverse side of the Differentiation Strategy in the preceded paragragh, if the company assumes the wrong forecasts in the industry, the Focus strategy will not work with the company, and it may bring loss or market share shrink accordingly Further research: The recommended differentiation strategy can help Korean Air Cargo to fortify their position in Ho Chi Minh city market and to extend their business in here However, these strategies can also be imitated by competitors which could restrict the company’s competitiveness In order to maintain the sustainability of differentiation, Korean Air Cargo needs to: lower costs to generate differentiation, increase the barriers to target segments, and raise up the switching costs to keep the customers with Korean Air, or what can be the next growth objective of Korean Air Cargo in HCMC These areas could be the subjects for further study or research for later students and for the company as well 95 REFERENCES (English) Boeing, (2010-2011), World Air cargo Forecast CargoNewsAsia Magazine, Vol 35 No 17 October 24, 2011 Franziska Kupfer, Hilde Meersman, Evy Onghena and Eddy Van de Voorde, (2010), The aggregated and disaggregated relationship between air freight and merchandise trade Gal Luft, (2006), The oil crisis and its impact on the air cargo Heinrich Bofinger, (2009), Freight Transport for development toolkit: Airfreight James K.D.Morrison, Brian Yutko, and R.John Hansman, (2010), Transitioning the U.S Air Transportation System to higher fuel costs Juan Carlos Serna Velez, (2006), Analysis of Strategic alliances as a source of competitive advantage in the airline cargo business Michael E Porter, (1980), Competitive Strategy: Techniques for analyzing industries and competitors, New York, The Free Press Michael E Porter, (1985), Competitive Advantage: Creating and Sustaining superior performance, New York, The Free Press 10 Michael Peter Kant, (2006), Economic feasibility study into viability of air cargo in the Pacific Northwest 11 Niclas Anderson, (2001), The Swedish air freight industry 12 Oh Kyoung Kwon and Yonghwa Park, (2003), Airport development and air cargo logistics: Korea’s initiatives in Northeast Asia 13 Peterson J., (2007), Air freight industry – White paper 14 Rex C Mitchell, Ph.D (2010), Strategy Formulation 15 Website www.iata.org 16 Willem-Jan Zondag, (2006), Competing for air cargo 17 Wouter Dewulf, Eddy Van de Voorde and Theirry Vanelslander, (2011), Key factors contributing to management strategy development at air cargo carrier REFERENCES (Vietnamese) 18 Nguy n Th Hoàng Mai, (2011), Báo cáo c p nh t ngành D t may Vi t Nam 10T 2011, Habubank Securities Analysis 2011 19 TS Hà Nam Khánh Giao, (2004), Qu n tr Chi n l 20 Website www.baohaiquan.vn c Công ty 1&2, NXB Th ng kê 96 APPENDIX 1: LIST OF AIRLINES IN HCMC (2011) No 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 Carrier name Aeroflot Airlines Air Asia Air China Air France Air Mekong All Nippon Airways Asiana Airlines Bangkok Airways Cambodia Angkor Air Cargo Lux Cathay Pacific Cebu Pacific Air China Airlines China Eastern Airlines China Southern Airlines Delta Airlines Eva Air Fedex Garuda Airlines Hongkong Airlines Japan Airlines Jet Star K-Mile Korean Air Laos Airlines Lion Air Lufthansa Airlines Malaysia Airlines Mandarin Airlines Novair Philippines Airlines Qantas Airways Qatar Airways Royal Brunei Airlines Shanghai Airlines Shenzen Airlines Singapore Airlines Thai Airways Tiger Airways Transaero airlines Turkish Airlines No 42 43 44 Carrier name Uniair United Airlines Vasco 97 APPENDIX 2: LIST OF CARGO AIRLINES IN HCMC (2011) No Carrier name Cargo Lux China Airlines Eva Air Fedex K-mile Korean Air Qantas Airways Shanghai Airlines 98 APPENDIX 3: DESTINATIONS SERVED BY KOREAN AIR No 10 11 Destination North America Toronto Anchorage Atlanta Chicago Dallas Los Angeles Miami New York San Francisco Seattle Sao Paulo Country Canada USA USA USA USA USA USA USA USA USA Brasil 12 13 14 15 Central Asia Navoi Dehli Mumbai Istanbul Uzerbekistan India India Turkey 16 17 18 19 20 21 22 23 24 East Asia Beijing Guangzhou Qingdao Shanghai Tianjin Hongkong Nagoya Osaka Tokyo China China China China China China Japan Japan Japan 25 26 27 28 29 30 31 32 South Asia Jakarta Kuala Lumpur Penang Manila Singapore Bangkok Hanoi Ho Chi Minh city Indonesia Malaysia Malaysia Philippines Singapore Thailand Vietnam Vietnam No 33 34 Destination Middle East Tel Aviv Dubai Country Israel UAE 35 36 37 38 39 40 41 42 43 44 45 Europe Vienna Brussels Copenhagen Paris Frankfurt Milan Amsterdam Moscow Leningrad Zaragoza London Austria Belgium Denmark France Germany Italy Netherlands Russia Russia Spain UK 46 Oceania Sydney Australia 99 APPENDIX 4: CUSTOMER SURVEY FORM CUSTOMER SURVEY FORM CUSTOMER NAME: …………………………… REPRESENTATIVE IN CHARGE: …………… DATE COMPLETED: …………………………… Dear Customer, We would appreciate your fill-in the below survey which is served as a data collection method for an MBA program from Solvay Brussels School and HCMC Open University Thank you The survey is made to measure the service quality offered by Korean Air Cargo in HCMC It contains questions that need your answer Question 1: Operational Performance Criteria On-time performance Claims processing Customer Service Responsiveness (after hours availability, # of rings, personnel dedicated to customer, email reply) Advice of Service change or delay Value Added services (door service, last-minute acceptance, quick connection, free storage charge) Excellent Good Satisfactory Fair Poor 100 Question 2: Pricing Criteria Very high High Acceptable Low Very low Good Satisfactory Fair Poor Good Satisfactory Fair Poor Korean Air price level compared to competitors Question 3: Technology Criteria On-line booking system Excellent Data link to Korean Air system Question 4: Airline Accounting Criteria Error-free invoicing and billing Corrective actions for wrong invoicing and billing Excellent Question 5: Sales and Management Support Criteria Always Almost always Sometimes Almost never Never 20% Accessibility Effective, planned agenda on sales calls Effectiveness (meeting customer needs) Meeting with Sales and local Management at least once a month Question 6: Market share Criteria Percentage of cargo given to Korean Air 101 Question 7: Preferred carriers (how often you use each carrier): Carriers Very often Often Sometimes Rarely Never Cargolux China Airlines Eva Air Fedex K-mile Korean Air Qantas Airways Shanghai Airlines Question 8: Recommendations (what you need Korean Air to improve): Criteria On time performance Online booking system Operational handling procedures Cooling warehouse Pricing Customer Services Fine Should improve Actions in details 102 APPENDIX 5: CUSTOMER SURVEY RESULT CUSTOMER SURVEY RESULT Survey requests sent : 50 Reply received : 50 Question 1: Operational Performance Criteria Excellent Good Satisfactory Fair Poor Total On-time performance 10 12 20 50 Claims processing 10 30 50 36 50 35 50 0 48 50 Customer Service Responsiveness (after hours availability, # of rings, personnel dedicated to customer, email reply) Advice of Service change or delay Value Added services (door service, lastminute acceptance, quick connection, free storage charge) Question 2: Pricing Criteria Very high High Acceptable Low Very low Total Korean Air price level compared to competitors 11 39 0 50 Excellent Good Satisfactory Fair Poor Total 14 20 16 0 50 24 21 0 50 Question 3: Technology Criteria On-line booking system Data link to Korean Air system 103 Question 4: Airline Accounting Criteria Excellent Good Error-free invoicing and billing Corrective actions for wrong invoicing and 43 billing Question 5: Sales and Management Support Criteria Always Satisfactory Fair Poor Total 33 50 0 50 Never Total 50 Accessibility Almost always 44 Sometimes Almost never Effective, planned agenda on sales calls Effectiveness (meeting customer needs) Meeting with Sales and local Management at least once a month 38 0 50 12 29 0 50 45 0 50 Question 6: Market share Criteria Percentage of cargo given to Korean Air 20% 15 Total 50 Total Question 7: Preferred carriers (how often you use each carrier): Carriers Very often Often Sometimes Rarely Never 11 14 19 50 China Airlines 16 14 50 Eva Air 13 20 50 Fedex 20 11 15 50 K-mile 0 16 26 50 Korean Air 15 27 50 Qantas Airways 0 28 13 50 Shanghai Airlines 0 24 11 15 50 Cargolux 104 Question 8: Recommendations (what you need Korean Air to improve): Criteria Fine On time performance Should improve 46 Total Actions in details 50 Improve EU + US bound Online booking system 49 50 Operational handling procedures Cooling warehouse 45 50 50 50 Pricing 47 50 Customer Services 14 36 50 More cut-off time Should match with other competitors After hours contact