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Asian Journal of Canadian Studies Vol. 21 No. 1 June 2015 한국캐나다학회 The Korean Association for Canadian Studies L’Association Coreenne d’Etudes Canadiennes

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Asian Journal of Canadian Studies

Vol. 21 No. 1

June 2015

한국캐나다학회The Korean Association for Canadian StudiesL’Association Coreenne d’Etudes Canadiennes

Asian Journal of Canadian StudiesVol. 21 No. 1 June 2015

Table of Contents

Anton L. Allahar · James E. Côté ................................................. 1Class and the Crisis of Higher Education in North America

Kyoung Bae Kim · Shin Young Kang .......................................... 51External and Internal Forces Impacting upon the Future Strategic Direction of the Scandinavian Airlines System Group : Lessons from Air Canada.

Kwinam Mun · Mu-seong Lee ...................................................... 77Festival Service Quality for Foreigners Including Canadians : A Case Study of the Jinju Yudeung Festival

Book Review ................................................................................. 105Marco Katz Montiel. Music and Identity in Twentieth-Century Literature from Our America. Palgrave Macmillian, 2014. 244 pp,

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External and Internal Forces Impacting upon the Future Strategic Direction of the Scandinavian

Airlines System Group : Lessons from Air Canada.

Kyoung Bae, KimKwangwon University, Korea

Shin Young, KangKyunghee Cyber University, Korea

Abstract

Nowadays, all organisations are faced with the challenges of strategic development. The strategy literature has argued that organisations must continuously reconfigure their resources in rapidly-changing environments, because turbulent environments destroy the value of existing competencies. An important differentiating means is thus strategic flexibility. However, it is not easy to forecast the outlook for the international airline industry in an increasingly volatile world. Especially, airline industry supports 58 million jobs and contributes $2.4 trillion to the economy. In Europe, aviation supports nearly 12 million jobs and some $860 billion of GDP. Also, Europe’s airlines are the weakest amongst the world’s major regions and a post-tax

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net profit of $2.8 billion this year, for an average net profit margin of just 1.3%. Therefore the purpose of this research is to use the suitable strategy model, concepts and theories, critically analyse those external and internal forces impacting upon the future strategic direction of the SAS Group lesson from Air Canada.

Key words: Strategic development, Marketing tool, SAS (Scandinavian Airlines System) group, Air Canada, Low Cost Carrier, Full Service Carrier

Introduction The tourism industry has experienced a new paradigm. During the last several decades, the tourism industry has had remarkable growth and the twentieth century's rapid economic growth has improved people's lifestyle. Moreover, the increased competition of today has forced companies to develop new strategic activities in order to differentiate from competition. According to IATA Environmental review (2015), airline industry supports 58 million jobs and contributes $2.4 trillion to the economy. Especially, in Europe, aviation supports nearly 12 million jobs and some $860 billion of GDP. Also, Europe’s airlines are the weakest amongst the world’s major regions and a post-tax net profit of $2.8 billion this year, for an average net profit margin of just 1.3% (IATA Environmental review, 2015). According to Kotler (2003), today’s development of

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competition in the business environment has forced the companies to analyse and revise their current marketing strategies. The importance of dynamic capabilities has been recently proposed (Eisenhardt and Martin 2000), which are defined as ‘the ability to integrate, build, and reconfigure existing resources to renew functional competencies that adapt to turbulent environments’ (Teece et al. 1997). Reasons behind this increasing turbulence are associated to many factors. Firstly, technological convergence and the consequential fall in the barriers to entry of industries related with communications and information (Chackravarthy, 1997). Secondly, the increasing access and availability of information and the need to manage that information in a more effective way (D’Aveni, 1994). Thirdly, the increasingly global profile of competitors (D’Aveni, 1994) and finally the existence of new global public sector trends, characterized by the downsizing of government in many countries, after its massive retreat in its roles of shareholder in different sectors of the economy and by the significant increase in social and environmental activism, resulting in major new legislation aimed at improving life quality of citizens, but often at a significant cost to industry (Bailey, 1997). The dynamic nature of the business environment provides implications in predicting the future perfectly and determining the long-term good of the organisation, requiring strategic decisions to be changed due to incidental change (Mintzberg 1994). According to those definitions above it is clear how

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critical is choosing the right strategy when the business environment is so dynamic. Therefore after analysing the strategic position and knowing what strategic choices the SAS group has got it is so important to know how the right strategy is going to be determined and implemented. For that reason, the purpose of this research is to use the suitable strategy model, concepts and theories, critically analyse those external and internal forces impacting upon the future strategic direction of the SAS Group. In addition, there will be critically review the strategic options for the SAS Group and identify those options most appropriate for the medium and long term. Consequently, critically appraise the use of prescriptive strategy models in determining strategy in potentially dynamic and turbulent environments.

Internal and External Analysis

For a strategy to be successful, it must be consistent with the firm’s goals and values, with its external environment, with its resources and capabilities, and with its organisation and system (Grant, 2002). According to SAS annual report (2015), the SAS Group’s main mission is to make life easier for Scandinavia´s frequent travelers. With SAS you become part of a community experiencing easy, joyful and reliable services, delivered the Scandinavian way (Annual report, 2015). For analysing external and internal forces to impact SAS group’s future strategy, this research will use the analysis

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models as follows:

1. External analysis

To analyse the external force, Porter’s five forces model, and opportunities & Threats framework will be used. In 2003, SAS group ranked 4th largest airline group, but the ranking has been gradually dropped to the 10th in Europe in 10 years (IATA, 2014).

Figure 1. Most Popular Airlines in Europe 2014 (unit : million)

0 20 40 60 80 100

Lufthansa Group

Air France-KLM

easyJet

TUI Airlines

Aeroflot Group

Source: IATA annual report, 2014

Environmental scanExternal analysis Internal analysis

5 Forces (Micro-environment) Opportunities & Threats

Core competenceStrengths & Weaknesses

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1.1 Porter’s five forces model

According to Grant (2002), the external environment of the firm comprises the whole range of economic, social, political, and technological factors that influence a firm’s decisions and its performance. However, for most strategy decisions, the core of the firm’s external environment is its industry, which is defined by its relationships with customers, competitors, and suppliers. The task of business strategy, then, is to determine how the firm will deploy its resources within its environment to satisfy its long-term goals, and how to organise itself to implement that strategy. The Porter’s framework identifies the suppliers of substitute goods and services as one of the forces of competition that reduces the profit available to the firms within an industry. It is consisted to substitutes, potential entrants, competitors, suppliers and buyers.

Substitutes : Express Railway and Cruise are the main threat as substitution. Railway is more convenient and safer than airline. Also, the railway station has got better accessibility than an airport. Otherwise, for leisure purpose travellers, the Cruise offers not only transport, but also various entertainments and leisure attractions.

Potential entrants : The threat of entrants is low because they need high fixed cost (oil price) and the market is already saturated. Moreover, the route is limited and the competition is

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very strong. Therefore, restructuring, co-operation and consolidation are the most visible signs of the changes the airlines have undertaken.

Competitors : Nowadays, the strongest competitor is low cost airline. They have got price and cost advantages. The airport for low price airline is easy to access and convenient to reserve. As a full service airline company, Lufthansa group which is the 1st largest company could be visible competitor.

Suppliers : The power of suppliers is strong. There are no many manufacturing company which are producing the fleet; Boing and Airbus. According to Airline is service industry, human resource who is supplying service is very important. Airline companies are controlled by airport and oil supplier. Also, lack of competitive pressure on airports and other suppliers of aeronautical services are causing an inefficient use of scarce national resources and high prices for airline and their users.

Buyers : Consuming power of customers is high. Nowadays, with growing of low cost airline market, the price becomes the most important factor in the airline industry. Therefore, many traditional service airlines are constructing various price strategies. Also, to cut the cost, they are offering cheaper deals through on-line and consolidating low cost airlines.

1.2 Opportunities and Threats

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Distinguishing between the external and the internal environment of the firm is common to most approaches to the design and evaluation of business strategies. One well-known approach is the SWOT framework. This framework distinguishes between two features of the internal environment, strengths and weaknesses, and two features of the external environment, opportunities and threats. However, the SWOT framework is handicapped by difficulties in distinguishing strength from weaknesses and opportunities from threats (Grant, 2002).

Opportunities- De-regulation environment (Prices, frequencies, destinations etc.)

- The growth of the low cost carriers (The low-fare concept snowflake was launched.)

- Flag carriers are losing market share- EU enlargement (EU case study)

The growth of the low cost carriers can be both opportunities and threats. Though SAS airline is traditional service airline, they have low cost system which is snowflake. It can be the opportunity relatively to other traditional service airlines.

Threats- Traffic - Limited route

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- The aggravation of world economy (decrease of the leisure travel market)

- Congestion, resulting in environmental nuisance and a higher risk of accidents, is getting worse day by day

- Increase of low cost carriers’ market

Even though the world economy is recovering, somesthesia economy is still low. Therefore, the revenue of the company may not be recovered for a while.

2. Internal analysis

2.1 Core competence

Core competences are activities or processes that critically underpin an organisation’s competitive advantage (Johnson and Scholes, 2002). SAS group has several core competences. Globalisation SAS group is cross national cooperation company. The group is managed by Norway, Sweden and Denmark. It can reduce the management risk in the international activity because three countries manage the company. Positive environmental management SAS group is unique company of the environmental management. They invest many funds in the environmental technology and research. It gives good image and reputation to company. They are managing various business areas such as Scandinavian airlines, Subsidiary

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& Affiliated airlines, Air support Business, Airline related business and Hotels, and all of them are concerned with airline business. It is helpful to reduce of supplier’s power and each area can function as complement. Also, they have 4 levels price system like snowflake, economy, economy flex and business. Also, they have been introduced various flexible price system. Each level is supplied different options in one fleet at the same time.

2.2 Strengths and Weaknesses

Strengths- One of the lowest price airlines in Europe- Four different price categories according to market segmentation (snowflake, economy, economy flex and business)

- Introducing organisation and management model for centralisation (Contour system; new reservation system-> dramatically increased efficiency)

- Managing hotel; Convenient One-stop service between carrier and accommodation (Fly & Stay service)

- Carmen rave system (problem solving system)- New price monitoring system (Safari systems: quick catch of competitor’s fare changes, reducing cost)

- Scandinavian airlines’ loyalty programme EuroBonus (increased revenue and royalty)

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- Positive environmental management- Alliance and partnership with other airlines

Weaknesses- Increase of the Oil price- Potential problem among three partners such as a cultural gap and difference of the regulation

- A previous offence (In Oct. 2001, the SAS airplane was crashed on take-off)

- Customer satisfaction and market share has been continuously decreasing

However, strategy analysis is not just about identifying and understanding the various characteristics of the firm’s internal and external environment. Developing strategies and appraising strategy are all about seeing ‘the big picture’ looking at the firm as a whole within the context of its industry environment.

Reviewing the Strategic Options for the SAS Group

1. Review the strategic options

The SWOT analysis summarised the key issues from the company environment and the strategic capability of an organisation that are most likely to effect on strategy development. This can also be useful as a basis against which

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to judge future action. The aim of analysis is to explore the extent to which the current strengths and weaknesses are relevant to, and capable of dealing with the changes taking place in the business environment. It can also be used to assess if there are opportunities to exploit further the unique resources or core competences of the company. From the internal analysis, the SAS group need to set strategy for maximising strengths and minimising weaknesses. For example of strategy to emphasis their strengths and downtown their weakness from existing company’s strategy is that the SAS group has very strong positive environmental management. They have developed environmental index since 1995 and set up sustainability policy in 2001 in order to consider their employees, customers, and environment. Sustainable development is to meet demands that in step with the increasing globalisation of the economy, more and more citizens and organisations are demanding that companies take added social responsibility. At the same time, there are growing demands on a company’s subcontractors with regard to environmental performance, ethics and social responsibility. The employees of the SAS Group are to consider in their day-to-day work the company’s environmental and social impacts as well as its economic performance. Sustainable development means a simultaneous pursuit of economic growth, environmental improvements and social responsibility. The task before the Group is to create long-term growth in shareholder value on the basis of its ethical judgments. In this way, environmental and

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social responsibility is an integral part of the Group’s business activities. The company’s main activities for protecting environment is to run foundation with Coca-Cola to prevent in the Nordic and Baltic Sea regions as well as Partners with Save the Children in Denmark, Norway and Sweden, sponsor of the Norwegian Sofie Award and is a corporate friend of the international environmental institute Worldwatch and Worldwildlife Fund. The SAS group collaborates on sustainable development with universities, engine manufacturers and the authorities on cleaner technology, environmental education and reducing environmental impacts as well as with social service authorities on alcoholism prevention and rehabilitation of alcoholics (annual report, 2014). This fact drives the company to gain excellent reputation in terms of protection environment and at the same time company can reduce fuel consumption as follow new noise standard. The company also has strong strengths regarding price. They offer four different price categories for one flight which is to meet customers demand in terms of price and service. These strengths mentioned above can appeal in new strategy and would be beneficial toward competitors. However, in 2001, flight SK 686 from Milan to Copenhagen crashed and 118 people died (annual report, 2001). This will remain with customers for a long time. The SAS introduced new system for reporting flight safety incidents which report can be made by pilots, cabin crew, station staffs and technicians. The system makes it possible to

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ascertain the overall flight safety situation at Scandinavian Airlines and to constantly improve safety with better precision. As well as all employees has defined responsibilities for flight safety and enhance security on the ground in order to recover from the image of accidents. External environment analysis (Opportunities, Threats and PESTEL framework) showed that the company’s strategy was affected by these environmental influences. The company set operational strategies which is to focus on reduce costs and increase productivity which is enhancing measures to broaden its customer base. For increasing competitiveness, the company concentration on all market segment the SAS group previously focused on business traveller under The Businessman’s Airline concept and now they moved to four customer concepts comprise the basis of Scandinavian Airlines’ customer services. It was Short-haul flights (Efficient transportation in the home market), Medium-haul flights (Efficient travel to and from European destinations), Long-haul flights (an intercontinental travel experience), Scandinavian Light (Value-for-money travel concept offering simple solutions). The company also introduced loyalty concept called ‘EuroBonus’ system which is enable for company to build long-term profitable relationship with customers. Threats from global competition and the ongoing deregulation of the airline industry, war, the weak economy and the effects of September 11, 2001 led most major international airlines to

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consolidate their activities. Airlines have been seeking opportunities for new growth by forming strategic alliances or finding other forms of integration with other carriers. The SAS group was not exception to avoid this situation. The company had global partner strategy with Star Alliance, consolidate with Spanair, Cooperation with Lufthansa as well as cooperate with a number of regional airlines in Scandinavia and neighbouring countries. These Alliance and Partnership strategies gave competitive advantages to the company. Companies’ strategies for competing in an industry can differ in a many ways. However, there is similar strategy capture the possible differences among a company’s strategic options in a given industry (Porter, 1980). They are specialisation, brand identification, channel selection, product quality, technological leadership, cost position, service, price policy, relationship with parent company and so on. Porter (1980) also indicated three generic strategies for creating defendable position in the long run and outperforming competitors in an industry. They are overall cost leadership, differentiation, and focus. Cost leadership requires aggressive construction of efficient scale facilities, cost reduction from experience, overhead control, how cost relative to competitors becomes the theme running through the entire strategy. Service differentiation in the form of design, brand, and technology or customer service provides company to cope with or survive against competitive environment. Also achieving differentiation may gain a high market share. Focus strategy is

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focusing on particular market.

2. The medium and long term options and benchmarking of Air Canada

To be summarised existing strategy for the company is that the SAS group set out its own strategy every year in order to improve activities which will ensure survival and provide opportunities for future competitiveness and development. As examples, company released 4 main strategic in 2001 to focus on long-term development. These main strategies were growth (aims to cooperate in an effective traffic system together with partners and alliances), competitiveness, value creation, and participation. In 2001, however, it was a disastrous year for the airline business result from terrorist attacks. The crisis in 2001 laid a sharp economic downturn and effected to consolidation within the airline industry as well as reduced confidence in air transport as a safe means of travel. The SAS group was forced to quickly adapt to these lower levels of demand in two ways. Firstly, close a number of destinations. Secondly, reduce frequencies and take a total of 21 aircraft out of production (President of SAS, 2001). Year of 2001 was negative for the SAS group, not just for the group, but for airline industry. However, all of strategy was not negative. The introduce of a single SAS share was a highly positive occurrence which means, this is an important step towards better comparability with other

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airlines, greater liquidity in the shares as well as inspire both employee and investor. Also, SAS purchased Braathen which enable to carry the company’s valuable qualities, and create an effective infrastructure which meets the demands of travels to, from and within Norway. Air Canada is Canada’s largest domestic, U.S. transborder and international airline and the largest provider of scheduled passenger services in the Canadian market, the Canada-U.S. transborder market and in the international market to and from Canada (Air Canada annual report 2014). According to annual review of Air Canada, Air Canada has lots of strengths point. Basically, Air Canada has established a solid financial footing and It holds a powerful position in Canada’s domestic and international markets, with a commanding lead in long-haul fights. Moreover, Air Canada rouge offers a growth path with a much lower cost base and merits of alliance membership (Star Alliance) are one of the strength. In terms of weakness point, Air Canada has striking a delicate balance between falling costs and decreasing yields, fostering customer understanding of different product segments. To sum up, Air Canada, In 2013, together with Jazz and other regional airlines operating flights on behalf of Air Canada under capacity purchase agreements, operated, on average, 1,498 daily scheduled flights to 181 direct destinations on five continents, comprised of 60 Canadian cities, 54 destinations in the United States and a total of 67 cities in Europe, the Middle

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East, Asia, Australia, the Caribbean, Mexico and South America. Domestic, U.S. transborder and international departures accounted for approximately 67%, 25% and 8%, respectively, of the 1,498 average daily departures. In 2013, Air Canada carried 35.8 million passengers Canada (Air Canada annual Information Form 2014). The consideration of future strategies must be realities which can take into action and can be certain constraints on strategic choice. Johnson and Scholes (1999) indicated three strategic choices which are corporate, competitive, and directions and methods of development strategy. Corporate strategy is referred to as the corporate parent that the levels of management of the business units and therefore without direct interaction with buyers and competitors (Johnson and Scholes, 1999). The SAS group restructured their organisation for better governance of the group while supporting a high degree of independence and professionalism as well as create brand loyalty, increase shareholders, cut cost, and so on into four areas. This enable to the company developing the company’s current activities or specialisation on more related activities. Long term strategy in relation to corporate strategy for the Hospitality is to expand market share in Europe as well as worldwide. As a medium strategy, company set out strategy in Airline related business due to offer competitive price, create the necessary condition for the group’s airline and providing extra service for the customers. Consumers are choosing to purchase from variety of market as

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follow their preference (the price of product and service or extra value for goods). Therefore, it is very important to achieve competitive advantage by providing differentiated product than competitors. The SAS group offered full service concentrating business segment. However, as a medium term, the company moved into ‘No frill’ strategy focusing on price sensitive leisure segment due to compete with growing low fare airlines as well as hybrid two strategies for gaining differentiation, market share, and a price lower than competitors. And also the company released new production which connect with the new winter traffic programme, improve aircraft utilisation, reducing turnaround time as well as combine the best of the low-fare carriers with the best of a full-service airline. However, the company’s strong customer focus is going on which enable company to expand market share, attracting shareholder, and focused differentiation as a long term strategy.

Appraising the Use of Prescriptive Strategy Models in Determining Strategy

The SAS group found itself in need of applying significant changes to its strategy and consequently its structure. The problem that was facing the SAS group was the necessity to deal with the fall in demand and the strong pressure on the yield and at the same time attain long term competitiveness and

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profitability by cutting costs. The solution for the group as was told by the president was turnaround 2005 which was implemented with full force simultaneously with the new group structure. Turnaround 2005 was not only an attempt to decrease costs throw capacity increases as in the case of Lufthansa or Air France but also it was a fundamental restructuring of the cost base and the business model of the SAS group. It mainly aimed to carry out restructuring measures with total cost savings of SEK 14 billion. The key elements of the overall plan where as follow:

- Scandinavian airlines: Increasing the utilization rate of the aircrafts. Simplifying call centres’ structure and reducing their number. Salaries reductions, and increasing tickets’ selling via the internet.

- Airline support businesses: SAS technical services (STS) established a new organisational structure on 2003, and is achieving total cost savings of SEK 1.6 billion.

- Subsidiary airlines and hotels: Subsidiary airlines will carry a growing percentage of the traffic because of their low cost base. Savings of over SEK 2.8 billion have been identified in Subsidiary Airlines and the Hotels business area which will have their full effect in 2005.

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The key issue for Scandinavian Airlines was that it was more involved in the short-haul travel than any other European network airlines. This left it very exposed to low-cost airlines and current short-haul overcapacity. SAS's major competitive disadvantage was that long haul was less than 13% of passenger revenue and within this, as was typical for airlines of its size, no real market share position and competitive advantage existed. Furthermore there were many issues that were not under the company’s control such as airports, which might increase their costs. On short haul, competition increased with a considerable number of Scandinavian competitors, like Norwegian Air Shuttle and Nordic Airlink. Longer-term competitive threats came from Ryanair and easyJet which were likely to further expand significantly in Scandinavia and the Baltic States beyond 2005. SAS was basically restructuring its cost base and business model to adjust to a lower yield environment. It was possible that the group will fulfill its cost-reduction programme. Though the group's restructuring programme was fundamental and the yield environment may improve, the weak strategic position of the group continues. Valuation remained excessive for what was a lower-quality, high-risk investment played even in the context of the European network airline peer group. Therefore what the company should really do was to focus on its competitive advantage and tried to gain as much market share as it could from the short-haul segment of the market. Finally came the restructuring and correcting the strategy in

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order to sustain the same vision of the company without any barriers affecting the flow of the business. Another strategy model was that the SAS Group tried to intensify the ticketless travel. Recently of course the Internet had helped to increase direct booking and to reduce costs. Ticketless travel was possible because of automation and the widespread use of credit cards. Some major carriers were considering doing something similar, because distribution costs had been increasing as a proportion of total operating costs. In conclusion prescriptive strategy provides direction for achieving both competitive advantage and organisational objectives. The usefulness of prescriptive strategy is constantly challenged by the dynamic nature of the business environment that possesses varying degrees of stability and malleability. Evidence shows that circumstances exist where prescriptive strategies are completely, partially useless, but equally there is evidence where prescriptive strategy is successful and is even created by the dynamics of the business environment. Strategists favouring prescriptive strategy recognise the need for accurate forecasting and scenario planning to dampen the effect of the business environment. They also appreciate the need for strategic review to realign strategy with the business environment. Fundamentally the usefulness of prescriptive strategy is not determined by the business environment but by the ability to achieve organisational objectives and competitive advantage following prescriptive strategy.

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Conclusion

Nowadays, all organisations are faced with the challenges of strategic development. The strategy literature has argued that organisations must continuously reconfigure their resources in rapidly-changing environments (Eisenhardt and Brown 1999), because turbulent environments destroy the value of existing competencies (Leonard-Barton 1992). An important differentiating means is thus strategic flexibility (Sambamurthy et al. 2003). However, it is not easy to forecast the outlook for the international airline industry in an increasingly volatile world. This environment demands business models to be robust and flexible enough to respond to both the underlying cycles and the shocks that lie ahead. Clearly, efforts to fully liberalise the industry and to simplify business models are essential to achieve this flexibility of business response (IATA annual report, 2004). Thus, organisational strategy is a summary account of the principal characteristics and relationships of the organisation and its environment, an account developed for the purpose of informing decisions affecting the organisation’s success and survival (Winter, 1987, Kim at el., 2014).

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Reports

Air Canada annual report, 2014.Air Canada Annual Information Form, 2014.Air Canada management’s discussion and analysis of results of operations and financial condition, 2014.Case study: SAS Fly & Stay, Fourth dimension software, 2003.IATA Environmental Annual Information reviewSAS group’s Investor meeting report 2004.SAS Annual Review 2013-2014, 2015

Received in April, 2015Reviewed in May, 2015Reviewed version received in June, 2015