978-1259278211 Case 5 Solution Manual Part 1

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Teaching Note: Case 5 – JetBlue Airlines: Getting Over the “Blues”?

Case Objectives

1. To investigate the challenges of choosing an appropriate competitive strategy.

2. To examine how external and internal forces affect competitive strategy.

See the table below to determine where to use this case:

NOTE: There are both PRIMARY and Secondary chapters that can be used for this case. The

Chapter Use Key Concepts Additional Reading and/or

Exercises

PRIMARY

Strategy

Competitive strategy;

NOTE embedded video, Neeleman,

SECONDARY

Environment

Industry competition five

NOTE web links, stock price, video

3: Internal

Value-chain analysis;

4: Intellectual

Intellectual and human

6: Corporate-

Diversification; synergy;

Case Synopsis

JetBlue was a domestic airline in the United States with a geographically diversified flight

schedule that included both short-haul and long-haul routes. The mission of the company,

according to founder David Neeleman, was “to bring humanity back to air travel,” and become

America’s favorite airline. To stimulate demand, the airline focused on underserved markets and

As JetBlue grew, it made some changes. In February 2007, JetBlue joined an alliance with Aer

Lingus to facilitate easy transfers to both airlines’ customers, and signed a code-share agreement

with Cape Air for service to Cape Cod. In 2008, Germany’s Lufthansa acquired a minority equity

This turnaround was welcome. A disastrous storm on Valentine’s Day 2007 had exposed many

weaknesses in JetBlue’s operations and had a negative impact on the airlines’ reputation as well

as its financial performance. Founder and CEO David Neeleman had made a public apology and

Then, in 2014, the JetBlue board asked Dave Barger to step down to allow JetBlue’s current

president, Robin Hayes, to replace him. During Barger’s tenure, JetBlue was known for its

customer service, but operating margins had continued to be among the lowest of the U.S.

The answer appeared to be “yes”, as JetBlue was becoming a “hybrid carrier” model, in a niche

positioned between the ultra-low-cost and full-service network air carriers. By concentrating on

markets where it could become the top carrier, JetBlue was acting more and more like the big

Teaching Plan

The JetBlue case is a good example of how a firm can struggle to formulate and sustain a

competitive strategy. It also provides an opportunity to discuss how the external environment and

internal resources either support or challenge a firm’s choice of strategy – that strategic

The instructor can also position this case discussion with a sole PRIMARY focus on Chapter 5:

Business-Level Strategy, contrasting JetBlue to the Southest and Emirates cases – in discussing

choice of competitive strategy, students are encouraged to choose between low-cost leadership

and differentiation, but in the airline industry there is really no choice but competition based on

The instructor can also position this case discussion as a direct contrast to the Southwest case –

the Southwest story points out how careful attention to operational components is critical to the

effective implementation of a competitive strategy. The customer service differentiation

advantage touted by JetBlue may be misleading. In comparison to Southwest, for instance, many

For advanced students, the instructor may wish to assign Michael Porter’s 1996 article “What is

Strategy?” (Harvard Business Review, November-December, pp. 60-79) as companion reading to

Summary of Discussion Questions

Here is a list of the suggested discussion questions. You can decide which questions to assign,

and also which additional readings or exercises to include to augment each discussion. Refer

back to the Case Objectives Table to identify any additional readings and/or exercises so they can

be assigned in advance.

1. PRIMARY QUESTION: What are the components of JetBlue’s competitive advantage,

and what are the merits and demerits of these components?

2. SECONDARY QUESTIONS: What are key forces in the general and industry

environments that affect JetBlue’s choice of strategy?

3. What internal resources and assets does JetBlue have that may give it a competitive

advantage?

4. Is JetBlue’s competitive advantage sustainable?

Discussion Questions and Responses

1. What are the components of JetBlue’s competitive advantage, and what are the merits

and demerits of these components?

Referencing Chapter 5: Business-Level Strategy

How firms compete with each other and how they attain and sustain competitive advantages go

to the heart of strategic management. In short, the key issue becomes: why do some firms

outperform others and enjoy such advantages over time? The viability of a firm’s success is

A business-level strategy is a strategy designed for a firm or a division of the firm that competes

within a single business. Within the firm’s industry environment generic strategies include basic

●Overall cost leadership

oLow-cost-position relative to a firm’s peers

●Differentiation

oCreate products and/or services that are unique and valued

●Focus strategy

oNarrow product lines, buyer segments, or targeted geographic markets

Generic strategies are plotted on two dimensions: competitive advantage and strategic target. The

overall cost leadership and differentiation strategies strive to attain advantages industry wide,

In order to achieve a sustainable competitive advantage, JetBlue had to assess its ability to

contend with other airlines. The two bases of JetBlue’s competitive advantage were cost

JetBlue achieved cost leadership by attaining efficient operations. New planes minimized

maintenance and fuel costs, larger planes ensured more revenue per flight, longer hauls on an

However, JetBlue needed to be careful. Firms pursuing low-cost strategy generally get trapped in

focusing on too few of value chain activities, or lack parity on differentiation with competitors.

The other component of JetBlue’s strategy is differentiation. This is based on creating differences

in the firm’s product or service offering by creating something that is perceived industry wide as

unique and valued by customers. Firms may differentiate themselves in both primary and support

The problem with differentiation strategy is that differentiating features could be easily imitated.

Firms employing combination strategies should have a much stronger strategy to outperform

JetBlue employed a combination of these two strategies that, if successfully implemented, could

give it a distinctive competitive advantage. It combined low-cost services with a differentiated

offering. The company invested in technology for efficient operations right from its inception

Currently, the key activity appears to be JetBlue’s degree of differentiated service. The only

current differentiators JetBlue have are the LiveTV and inflight social networking, the extra

legroom, and the new planes with leather seats. These are all easy for other airlines to imitate. It

As explained in the chapter, competitive parity means a firm’s achievement of similarity or being

“on par” with competitors with respect to low-cost, differentiation, or other strategic product

characteristics. Competitive parity on the basis of differentiation permits the cost leader to

translate cost advantages directly into higher profits than competitors. Thus, the cost leader earns

Instructors can ask students if it’s possible to compete on differentiation in the airline industry. In

discussing choice of competitive strategy, students are encouraged to choose between low-cost

leadership and differentiation, but in the airline industry there is really no choice but competition

Although it might seem reasonable to pick one of the generic strategies and proceed, a firm’s

competitive strategy is also dependent on both the external forces it faces and the internal

resources available to it. JetBlue needs to do an analysis of both the general and industry

2. What are key forces in the general and industry environments that affect JetBlue’s

choice of strategy?

Referencing Chapter 2: Analyzing the External Environment of the Firm

Organizational leaders must become aware of factors in the overall environment that might affect

their ability to create a competitive advantage. So how do managers become environmentally

Environmental scanning involves surveillance of a firm’s external environment to predict

environmental changes and detect changes already under way. It is a BIG PICTURE viewpoint

Environmental monitoring is a firm’s analysis of the external environment that tracks the

evolution of environmental trends, sequences of events, or streams of activities. Leaders need to

What factors or trends might be most important to JetBlue? To assess how the external

environment might affect JetBlue’s strategy, it’s necessary to take a look at the factors in the

Political-Legal: Under the legal factors, the deregulation of the airline industry in 1978 provided

an opportunity to several players to enter the market. It allowed new market segments such as

that of the low cost, point-to-point services to emerge. It thus changed the industry landscape.

Economic: The airline industry is susceptible to upturns and downturns with the trends in the

economy. A growing economy and booming business mean greater demand for air travel, and a

slow-down in the economy means reduced demand, consequent unutilized capacity and

intensified competition. The availability of venture capital, and other capital sources have an

Sociocultural: The airline industry is highly susceptible to the extreme events such as the

September 11, 2001 attacks on the World Trade Center, and publicity surrounding any air

accidents. These create fears in the minds of customers toward air travel and have a severe

Technological: The emergence of Internet technology and other breakthroughs have had an

impact on the way the airlines conduct their businesses. For example, the Internet reduced the

It’s also necessary to assess the segments of the external competitive environment that include

Suggested:

the threat

of substitutes such as

car, limo, bus, train, is

short.

Porter’s Five Forces of Competition to the airline industry by drawing a diagram on the board

similar to the following, and having students fill in the details:

Based on the external environmental factor analysis, the airline industry has many competitors

trying to carve out a piece of the “profit” pie. Here are some details:

Threat of new entrants: The extent of threat due to new entrants is determined by how high or

Economies of scale. This did not work out well for the players in the airline industry. The hub-

and-spoke model developed by the major players, led to more of diseconomies of scale than

Product differentiation. Airlines try to create strong brand identification and customer loyalty by

using the frequent flyer programs. When there is strong brand identification, it forces the new

entrants to spend heavily on weaning away customers from the existing players, thus

discouraging their entry. However, in the airline industry the brand identification has not proved

Suggested: there

competitors; low

switching costs

for consumers.

Substitutes

Suppliers’

Power

High

Rivalry

Very High

Buyers’

Power

Suggested: there are only two

Suggested: there are low barriers

to entry, especially for the low-cost

Threat of

New

to be so strong as to prevent people from switching to other airlines. Some low-cost players are

trying to achieve some product differentiation (e.g., JetBlue providing more legroom, LiveTV at

each seat, etc., Southwest emphasizing commitment to customer service). However, these are not

Switching costs. There are virtually no switching costs for customers. The frequent flier

programs attempt to create switching costs. However, when the customers are presented with

Thus, the airline industry faces a high threat of new entrants particularly in the low-cost segment.

Bargaining power of suppliers is high when there are few suppliers in the industry, there are no

easy substitutes to supplier’s products, when the buyer industry is not an important customer of

the supplier group, the supplier’s product is an important input to the buyer’s business, the

Bargaining power of buyers is low as the buyers are not concentrated. While the buyer does not

have any switching costs, and there are several choices available, they still lack concentration.

Threat from substitutes is high when the distances traveled are shorter. In such cases, the

customer can choose to travel by land, by car/limo/bus/rail as they might prove to be cheaper

The intensity of rivalry among existing competitors in the airline industry is very high. There are

numerous competitors, and in times of low or moderate industry growth, the competition gets

fiercer as each one tries to nab customers from the other in order to keep their capacity

In addition, as described in the case, there were traditionally three segments to the U.S. airline

industry: major airlines such as the legacy carriers American, United and Delta, regional airlines

such as Sky West (based in Utah) and Cape Air (out of Barnstable, MA), and low-fare carriers

such as Southwest, Virgin America and Allegiant Air. Although JetBlue is identified as a low-fare

(See http://www.investopedia.com/features/industryhandbook/airline.asp for one source of

information on the industry.)

NOTE – ADDITIONAL WEB LINKS TO FINANCIAL DATA AND COMMENTARY,

INCLUDING VIDEO:

Use the tools available at this link to identify JetBlue’s stock price fluctuations over the last 5

years, compared to competitor Southwest Airlines: http://finance.yahoo.com/q/bc?

t=5y&s=JBLU&l=on&z=l&q=l&c=luv

More comparison between JetBlue and Southwest in early 2009 shows both airlines struggling:

http://www.centreforaviation.com/news/2009/06/08/jetblues-unit-revenue-icestorm-southwests-

prasm-tailspin/page1

And although JetBlue did post a rare first quarter profit in 2009, JetBlue said it is being helped

Some analysts liken the airline industry in 2009 to the automobile industry, calling both a

“meltdown”:

http://www.thestreet.com/story/10514020/1/meltdown-101-will-airlines-go-bankrupt.html

From the customer’s perspective, the carriers’ cost concerns and consolidation in the industry

have eroded expectations of customer service. From an analysis in 2015, the airlines with the

highest profit margins also have the lowest customer service scores, implying that “the more an

airline earns, the less it cares about service… The highest rated airline, JetBlue, with a customer