978-1259278211 Case 5 Solution Manual Part 2

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What does all this say about the industry, and JetBlue?

Regarding the airline industry, a 2007 article at The Motley Fool

http://www.fool.com/investing/general/2007/06/15/remove-that-clothespin-from-your-

nose.aspx said “Even Warren Buffett is skeptical about making money in airlines (he

should know from his experience with USAir). In a 2002 interview he was famously

quoted as saying:

If a capitalist had been present at Kitty Hawk back in the early 1900s, he

should have shot Orville Wright. He would have saved his progeny

You’ve got huge fixed costs, you’ve got strong labor unions, and you’ve got

commodity pricing. That is not a great recipe for success. I have an 800

Given the above, and the fact that it’s fairly easy to start up an airline, but hard to

consistently make money at it, what might be a good competitive strategy for

JetBlue to adopt going forward?

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

competitive advantage?

Referencing Chapter 3: Analyzing the Internal Environment of the Firm

When one firm outperforms others by a wide margin over a long period of time, it’s

important to figure out how this could be. The answer may lie in how that firm arranges

Remember, value-chain analysis is a strategic analysis of an organization that uses value-

creating activities. Value is the amount that buyers are willing to pay for what a firm

provides them and is measured by total revenue, a reflection of the price a firm’s product

Every activity should add value. Take a look at Exhibit 3.1 to see the value chain

activities. Based on the relationships between these elements, JetBlue can make a choice

of how to proceed to craft a competitive advantage. See the following suggestions:

Value chain activity How does JetBlue create value for the customer?

Primary:

Inbound logistics (distribution

systems, warehouse layouts)

Web-based booking gives greater control on managing

Operations (efficient workflow

Paperless cockpit, no meals served, no paper tickets–all

Outbound logistics

processing)

New A320s are larger and more fuel-efficient. Less

Marketing and Sales (motivated

sales people, innovative

customer segments &

distribution channels)

Web-based ticketing as a distribution channel. Market

segment properly identified i.e., business travelers

Service (ability to solicit

customer feedback & respond)

Customers need to be informed of changes or

inconveniences. The Customer Bill of Rights providing

Secondary (or support):

Procurement (win-win

supplier)

Aircraft procurement plan to support growth. Increased

Technology development (state

personnel)

Investments in technology from the beginning of the

Human resource management

(effective recruitment, incentive

Non-unionized workforce (so far), reward systems such

as stock-option plans, profit sharing, innovative

General Administration

(effective planning systems to

establish goals & strategies,

Change of the CEO from David Neeleman to Dave

Barger in May 2007, then to Robin Hayes in 2014

signaled shifts here. Top management with expertise in

Primary Activities

In terms of primary activities, the key to JetBlue’s ability to successfully compete in the

market appeared to reside primarily in its operations. Having copied many of its

operational systems from Southwest, JetBlue was able to effectively control costs.

Support Activities

With regards to support activities, a competitive advantage can be achieved by

developing a strong general administration that is built around visionary leadership and a

supportive human resource, technological or external network of willing partners.

In addition, see the concept of the resource-based view of the firm, and the three key

types of resources: tangible resources, intangible resources, and organizational

capabilities. A firm’s strengths and capabilities – no matter how unique or impressive –

do NOT necessarily lead to a competitive advantage. The resource-based view of the firm

An important issue to focus on here is the importance of intangible resources like

innovation and reputation. Especially in mature brands, sustaining reputation is essential.

Look at resources that are controlled by JetBlue that might enable it to develop and

implement value-creating strategies. Based on their reading of the case, students might

identify those resources to include:

Tangible Resources:

Financial: Hard to reliably assess. Cost fluctuations in fuel and fees are hard to

Physical: New terminal at JFK, new planes, but questions remain about financing and

Technological: Doesn’t appear that these resources are any more developed than any

Organizational: Too early to assess Hayes’ affect on the organization.

Intangible Resources:

Human: Originally, this might have been a strength. Now union troubles, financial and

Innovation and creativity: Neeleman’s original vision for the airline – to “bring humanity

Reputation: Originally, JetBlue had a very good reputation – consistent travel awards –

but after the Valentine’s Day incident the reputation became tarnished. Now extra fees for

things like pillows may confuse customers. What does JetBlue stand for?

Determining whether the internal resources are valuable, rare, difficult to imitate, or

difficult to substitute (VRIN) can help a firm sustain a competitive advantage. See Exhibit

3.6. Applying the VRIN concept, in case of JetBlue, it is too early to say whether its

resources are inimitable. This is because there is not much of path dependency or causal

Referencing Chapter 4: Recognizing a Firm’s Intellectual Assets

See the concepts of intellectual capital, human capital, and social capital, all of which

are intangible assets that a company such as JetBlue needs to have in order to compete

successfully. Intellectual capital is a measure of the value of a firm’s intangible assets, its

Human capital involves the individual capabilities, knowledge, skills, and experience of

the company’s employees and managers. This knowledge is relevant to the task at hand,

as is the capacity to add to this reservoir of knowledge, skills, and experience through

Success in retaining human capital could also be attributed to the nurturing of the “social

ties” or social capital. Social capital is a function of the network of relationships that

individuals have throughout the organization and beyond. Relationships are critical in

Dynamic capabilities involve a firm’s capacity to build and protect a competitive

advantage, which rests on knowledge, assets, competencies, complementary assets, and

technologies. Dynamic capabilities include the ability to sense and seize new

opportunities, generate new knowledge, and reconfigure existing assets and capabilities.

Intellectual assets or intangible resources are critical to organizational success. The

growing importance of knowledge, coupled with the move by labor markets to reward

Human capital: does the organization effectively attract, develop, and retain talent?

Does the organization value diversity?

Social capital: does the organization have positive personal and professional

relationships among employees and alliance partners?

Technology: does the organization effectively use technology to transfer best practices

across the organization, codify knowledge, and develop dynamic capabilities for

competitive advantage?

Organizational Capabilities: Hard to say what JetBlue’s current capabilities are now.

Specific Competencies or Skills: Originally, JetBlue’s operations were its most valuable

competency. Barger seemed interested in operational controls and extending relationships

Capacity to combine resources: Analysts are frustrated – JetBlue should be able to use

2. Is JetBlue’s competitive advantage sustainable?

Referencing Chapter 6: Formulating Corporate-Level Strategy

Corporate strategy focuses discussion on the questions of what businesses a corporation

should compete in, and how the businesses should be managed so they can create

Diversification is the process of firms expanding their operations by entering new

businesses. In related diversification, a firm enters a different business in which it can

benefit from leveraging core competencies, sharing activities, or building market power.

Some possibilities include:

●Mergers and acquisitions

●Strategic alliances

Whatever the choice, it should create value for all stakeholders – employees, suppliers,

Companies can achieve synergy through diversification in two ways:

Through related businesses (horizontal relationships)

●Sharing tangible resources

Or through unrelated businesses (hierarchical relationships)

●Value creation derives from corporate office

Core competencies reflect the collective learning in organizations—how to coordinate

diverse production skills, integrate multiple streams of technologies, and market diverse

Sharing activities means that value chain elements are shared across business units, so

that two or more activities are done by one of the businesses. This allows for cost

Acquisition is the incorporation of one firm into another through purchase. It can be a

means of obtaining valuable resources that can help an organization expand its product

JetBlue was in an interesting position. It had carved out a niche for itself, competing

using a combined strategy, but was this enough for long-term growth? JetBlue at the end

JetBlue had so far relied on a hub-and-spoke model, using New York as the hub, but as it

expanded routes to provide a point-to-point service via code share arrangements, it was

NOT IN THE CASE: CEO Barger had said he was not interested in doing any

acquisitions, and he did not see JetBlue as a target for a buy-out offer, even though the

Luftanza deal had caused some speculation about this. Yet the airline had expanded into

Alaska and on the West Coast of the U.S., and there were multiple code share agreements

in place as of 2015. See http://www.jetblue.com/airline-partners/ Was JetBlue

diversifying or not?

Starting in 2014 JetBlue “will begin vying for big-spending business travelers” by

offering “lie-flat seats and private suites on transcontinental flights on the highly

competitive routes between Los Angeles and New York and San Francisco and New

York… the new seats added to Airbus A321 planes will have adjustable firmness, a

And as another example of how JetBlue was trying to add special “perks” to its service,

here’s a story from August 2013: “as the airline industry continues to put the squeeze on

luggage fees, US-based carrier JetBlue has launched a baggage delivery service that will

allow flyers to bypass the carrousel and proceed directly home or to their resort holiday.

Finally, the instructor can discuss a recap of the 2007 Bill of Rights incident, pointing out

customers, some of whom said they appreciated this. As congress has said, all airlines

Based on passenger’s traditional issues, such as leg room, baggage handling, and

effective communications, does JetBlue appear to have addressed the general concerns

Further regarding JetBlue’s activity system, and the importance of all mutually

reinforcing components’ affect on strategy, see the following graphic adapted from one

produced for Southwest Airlines:

JetBlue’s activity system – modeled after Southwest’s activity system

As in M. E. Porter. 1996. What is Strategy? Harvard Business Review, November-December, pp.60-79.

Also according to this article, the darker circles indicate the higher-order strategic themes. These are

Limited but

Lean,

Reliable

High

Short and

Brand

assigned

seating,

etc.,

No baggage

Limited

connections with

Quick gate

turnaround

Effective

Non-

implemented through the clusters of tightly linked activities which are in the lighter circles.

NOTE – this activity figure is not reproduced in the powerpoint slides. If the instructor

NOTE – ADDITIONAL READING, VIDEO INTERVIEWS WITH NEELEMAN &

BARGER:

JetBlue continues to rank highest in the J.D. Power Airline Satisfaction Survey

http://www.jdpower.com/press-releases/2015-north-america-airline-satisfaction-study

JetBlue has embraced social media. See JetBlue’s Twitter page at

http://twitter.com/JetBlue

The use of technology and marketing through social networking is an attempt to broaden

JetBlue’s appeal. However, most airlines, including JetBlue have begun charging for all

kinds of things like pillows, blankets, checked baggage, and new CEO Hayes announced

Regarding areas where JetBlue has stumbled with its competitive (dis)advantage, the

February 2007 ice storm in the Northeast created many problems for JetBlue’s passengers

Further investigation showed that these JetBlue customers could not use JetBlue to get

home to Sacramento. They had to pay to get an ATA flight to Chicago’s Midway, and then

a Southwest flight to Sacramento, California. JetBlue also lost their luggage… This kind

Do you think the existence of a bill of rights might have appeased these travelers?

Here is Neeleman’s video apology for the February fiasco:

https://www.youtube.com/watch?v=-r_PIg7EAUw&list=PL8F3BBDA63E013068

Do you think the learning and strategies outlined will be sufficient to prevent future

problems?

Business Week’s first ever ranking of the 25 companies who provide the best customer

service had Southwest in 13th place (the only airline on the list), and dropped JetBlue

from contention altogether based on their February 2007 customer service failure. Here’s

In May of 2007, when Neeleman was replaced as CEO, the thought was “he’s a great

entrepreneur, but perhaps one of those types who is much better at innovating than

CEO Dave Barger, in his first year on the job in October 2007, explained JetBlue’s

competitive advantages:

According to one analyst in 2012, “JetBlue isn’t immune to the industry’s bane: soaring

fuel costs. Ten years ago jet fuel cost an average of 71¢ a gallon; JetBlue now pays an

average of $3.15. Higher fuel costs represented 71 percent of its yearly increase in

operating expenses,” and JetBlue is planning on adding more routes attractive to business

Regarding the questions about whether JetBlue is positioned for being a buy-out target, as

of 2012, Barger doesn’t see acquisitions or mergers as an option. He believes he can grow

What do you think new CEO Robin Hayes needs to focus on the most?

Just as an ironic note, in 2008, after leaving the JetBlue CEO job, Dave Neeleman started

an airline in Brazil, Azul (“Blue”), using the Brazilian Embraer airliner, with the same

As of 2015, Azul was Brazil’s third biggest airline, and poised to raise additional capital

for expansion by selling shares in an IPO. Perhaps Neeleman was successful in Brazil

References

Porter, M.E. 1996. “What is strategy?”, Harvard Business Review, 74(6): 61-78.