ARSHAD AYUB GRADUATE BUSINESS SCHOOL (AAGBS)

STRATEGIC MARKETING MANAGEMENT

MICHAEL PORTER’S FIVE FORCES ON FIREFLY CASE STUDY

PREPARED BY:

AHMAD AZID TAHAR BIN AHMAD LATIFFI (2013379075)

NUR HIDAYAH BINTI ZAFFRIE (2013532009)

PREPRED FOR:

PROFESSOR DR. ROSMIMAH MOHD ROSLIN

1.0 Introduction

Firefly was launched on April 3, 2007 where Firefly is a fully-owned subsidiary of Malaysia

Airline System Sdn. Bhd (MAS). Firefly operating hub located at Penang and Subang, Firefly

also provides connections to various points within Malaysia, Southern-Thailand, Singapore

and Sumatera of Indonesia, aligning itself with the Indonesia-Malaysia-Thailand Growth

Triangle (IMT-GT) agenda.

The total fleet that Firefly have is around 17 fleet and flies around 19 routes in total which it

serving Singapore, Indonesia, and Thailand region.

The commercial air passenger market is focused into Full Service Carriers and Low Cost

Carriers, with Firefly targeting in the end. Even with the overall drop in air travellers, low

cost air travel is still growing in this region. Firefly has placed down themselves as a

Community Airline which offering reasonable low fares and at the same time ensuring

passenger are at ease and convenience.

At the moment, Firefly will keep endure to face stiff competition from AirAsia, the Low Cost

Carrier market leader in this region. AirAsia has many strong point including a powerful

brand presence, high efficiency and strong online services. Moreover, Firefly’s hub in

Subang Airport has poor public transport services thus, this matter are causing trouble to their

customer.

2.0 Issue

Firefly has difficulty to reach customers. It does not have any uniqueness that differentiates

itself from other low cost companies. AirAsia and Malindo give Firefly a great impact in

promotion element which AirAsia and Malindo are competing aggressively head-to-head in

giving the best advertisement through every channel and medium while Firefly still left a few

steps behind.

3.0 Michael Porter’s Five Forces on Firefly

This model identifies and analyses 5 competitive forces that shape every industry, and helps

determine an industry's weaknesses and strengths. Frequently used to identify an industry's

structure in order to determine corporate strategy, Porter's model can be applied to any

segment of the economy to search for profitability and attractiveness. This model will

identify the competitiveness of Firefly in the industry through the five forces.

3.1 Rivalry among existing competitors

Firefly main competitors are basically AirAsia and Malindo since both of these airline is Low

Cost Carrier (LCC) airlines. AirAsia has the world’s lowest unit cost but this matter does not

become a biggest issue for Firefly since Firefly is a subsidiary of MAS, thus they are

basically targeting in slightly different target market. This is because AirAsia’s hub is in

KLIA 2 along with Malindo while Firefly’s hub is at Subang and Penang. The most establish

carriers including Tiger Airways (Singapore), Nokair (Thailand), and Jetstar (Singapore)

these LCC airlines are operating in Malaysia which provide the same route as local airline.

Since AirAsia has the world’s lowest cost this enables AirAsia to offer competitive prices

combined with its strong brand presence. AirAsia is a direct competition for two routes from

Penang and six routes from Kuala Lumpur. Although AirAsia flies to the LCC terminal in

KLIA whilst Firefly flies to Subang, the airports can be considered to be closed and a

competition for point-to-point.

As all know Firefly growth has been rapid since Firefly is on of MAS subsidiary but because

of a strong competition among LCC like AirAsia and Malindo Firefly become volatile.

Firefly may growth because of MAS influence but to be by its own it’s hard for Firefly to

achieve it since Firefly has a lot of deficit compared to AirAsia and Malindo.

As mentioned earlier, there are several airlines operating on the same destination including

the international airline.

The competition becomes stronger also because of the limited product differentiation. The

product differentiation includes the technology, regional market, price leadership, and

operational efficiency. As all know, nowadays every single transportation especially airplanes

are provide with facilities like Wi-Fi. Technology also describes how they use advertisement

approach to advertise their services and product. At the same time, their regional market is

about the same with other airlines which all airline are about targeting the same target market,

it may have slight different target market but most them are travellers, business dealers, and

for those fast traveller but save their cost. The price between LCC does not have a big

different between one and another. However, if one of the airline are offering the best and

low price toward their customer then it will be a big issue to other airline and also they need

to figure out how to overcome and make some improvement towards service and quality

instead of lower the price. AirAsia are always offering the best and low price.

The other airlines are aggressively competing for the best advertisement. Just like AirAsia

and Malindo they are having a lot of attractive advertisement in terms of video, radio, online,

and hands-out also big screen advertisement. Thus, the advertisement makes their airline

images become one of the best advertisement that airline ever had. Firefly have slow

approach towards advertisement and their advertisement always the same compared to rapid

change of advertisement design and approach of other airlines like AirAsia and Malindo.

Firefly also has lack in promoting new services and the fares is always higher than other

LCC. At the same time, Firefly also got plenty of complaints regarding their flight delay and

this lead dissatisfaction among passenger and this will lead to a bad quality of Firefly and at

the same time it could influence the MAS image.

The exit barrier of Firefly is high. This is because, for an airplane is a fixed asset it cannot be

used other than flying so it is hard to replace it with other usage. Besides that, they have little

scrap which they have little unusable function. Furthermore, the airplanes become worse if

leave it inside the hangar so that the company will keep them flying rather than become a

mothball. Besides, in politic matter the countries tempted to subsidize rather than let their

national carrier exit the barriers.

These conclude that Firefly have a high rivalry among existing competitors and based on

competitive advantages Firefly have competing with AirAsia, Malindo, Nokair, Jetstar, and

Tiger Airways as airlines that operate domestically in Malaysia.

3.2 Bargaining of power of buyers

The bargaining power of buyers is about assessing whether or not the buyers have a

strong pressure on decisions taken by the companies in an industry. This evaluation is

particularly influenced by two elements which are the degree of bargaining power buyers

have, and their sensitivity to prices. In order to asses if the bargaining of power of the buyers

is strong or weak, it is important to enumerate the points that corresponds to each of the

situation.

On the first hand, there are four elements that shows that there may be a high threat of buyers.

Indeed, buyers have a low-switching costs to competing products. They have access to many

information about products and services. Also, they care about the price of the product or

services and they the products they want to purchase are all standardized.

Buyers ‘switching costs are low because they can easily change from an airline company to

another one. The clients have the possibility to choose the company they want to fly with

according to their needs. Booking their flights in relation with the prices, the comfort, the

food and quality of food offered. For example, if the price is too high for one company,

customers will not hesitate to book they flights tickets somewhere else.

Nowadays, the internet facilitate the availability on information, and make easy the access to

them. Customers have a constant access to flight details: prices of products, and quality of

services and products. Also, they are aware of the costs imputed on the prices and can use

these information in order to find better deals.

In this industry, buyers are sensitive to price. They pay attention on their expenses. As they

purchase their flight tickets on low-costs airline companies, we can say that they earn low

profits or income, or they want to save money. From that point of view, purchases represent

then a significant fraction of their earnings and the product performance is not really

significant. Thus, high prices can be a boundary to buyers, and companies will have to lower

the prices in order to sell more.

All low-costs airline companies have the same objective which is to try to cut down the costs

of services, of transport in order to offer lower prices to the population. The products

proposed are then similar to each other since customers focuse particularly on the price of the

products. As the products are standardized clients can easily asses the product that fits their

needs looking at the information of each companies.

On a second hand, two elements shows that buyers may have a weak bargaining power:

Buyers are small and numerous, and buyers cannot easily postponed purchases.

The population who chose to travel by plane does not cease to increase. There are more and

more people booking tickets and who also want to pay less for them. So that the airlines

company are quite few in comparison with travelers. Consequently, the lower the business of

the buyers is, the lower they have the ability to bargain prices with the sellers.

In addition, it is not easy for the client to change their flight ticket. Even if they have the

option to modify their flights they must pay extra fees. With sometimes prevent the

customers to postpone their flights, except if they really do not have the choice.

We deduce from these previous points, that the bargaining power of buyers is strong. Buyers

have them the ability to negotiate the price or exert a certain influence on companies’

decisions.

3.3 Potential Entrants

Potential entrants refer to the threat of new competitors pose to existing competitors in an

industry. Potential entrants is one of the forces that shape the competitive structure of an

industry and its influence the ability of existing firms to achieve profitability. There are two

situations under potential entrants; there are high threat of entry and low threat of entry. High

threat of entry can be seen increase in new competitors entering the marketplace which

threaten or decrease in the market share and profitability of existing competitors while low

threat of entry is vice versa. Besides that, entrants of new competitors can result in changes to

existing product quality, quantity and price. Both situations may have it pro and cons. For

example, besides decrease in profit potential, high threat of entrants can make an industry

more competitive thus improve the quality of product and service to attract more new

customers. On the other hand, low threat of entry make an industry less competitive and

increase profit potential but it won’t create competitive spirit with others.

There are several factors that determine the degree of threat of new entrants in an industry.

These factors are divided into two. There are barriers to entry and entry barriers. Barriers to

entry refer to the factors or conditions in the competitive environment of an industry that

make it difficult for new business to begin operating in that market. Examples of barriers to

entry are the trends, competitors and switching cost. Entry barriers refer to the difficulties in

gaining access in the industry. Example of entry barriers are government policies, technology

and cost needed.

3.3.1 Firefly’s Potential Entrants: Open Air Policy

ASEAN’s had proposed a new policy in aerospace industry by allowing airlines from

ASEANS countries to fly between one points and another without getting any dictate from

the home government. ASEAN’s ultimately goal is to achieve a single aviation market.

Basically, this policy may now prevent an airline from holding a majority share in a carrier in

another Asean country where there will be free merge across borders between countries. But

still this ambitious goal is come with its own challenge, the implementation itself. This is

because according to Tan (2014) from aviation law academic of National University of

Singapore, it will be hard for Indonesia to agree on this due to the stiff competitiveness of the

local airlines with other stronger carriers from fellow Asean countries. Even though

Indonesia constitutes half of Asean’s population, due to its economy Indonesia have to face

many cons than pros in its implementation. This will be a little bit like the European Union

doing without France, Germany and Britain in aligning their currency.

The ‘Open Skies’ agreement’s freedom is mostly involves an airline flying to one airport of

one’s country to another country without the need for prior intergovernmental approval.

Besides that, an airline have the rights to fly over foreign airspace without landing the right to

stop in another country for refuelling or maintenance addition on having the rights to park its

planes and operate domestic flights in another country.

The Open Air Policy may have its pros and cons in the industry where it contributed profit

and vast market share to the airlines and its customer. If we look at the positive side, airlines

may have a healthy competition between each other’s besides generating more profit and

customer may have variety choices and choose which airlines that offer and fulfil their wants

and needs. Contradict; airlines may lost in the stiff competitions. This might happen to Firefly

if they did not start and change it 4P’s. Firefly has its own target market and ways of

approach. But due to stiff competition from various low cost airlines, Firefly might not

survive in the industry. According to Euromonitor in Firefly’s revenue in the year of 2009 till

2013, its decreasing compared to Air Asia where its revenue are triple as Firefly. Air Asia

may or not be Firefly competition since both of them have different target market and way of

approach towards potential and current customers, but if we look at the bigger picture and

rationally, how will Firefly survive in the open skies environment when they’re having a hard

time stabilize their business in close skies environment?

Yes, Firefly has its strong competitive advantages where they focus more on safety,

punctuality and value in comfort ability. But this may not enough compared to service that

had been provided by Air Asia and Malindo Airline. Therefore, Firefly need to strategies and

do a research in facing a new and competitive environment.

3.4 Potential Substitute

Potential Substitute is define as a product that the consumer can purchase which offer the

same benefits to the consumer as the product produced by the firms within the industry. The

availability of a substitution threat can affect one’s business profit and lead to stiff

competition with each other. Furthermore, the availability of substitution products benefits to

the consumers since the have a variety of products or brands to purchase instead of industry’s

product. Due to that, firms have to create competitive advantages in order to compete with

other competitors and attract more new and potential customers. On the other hand, lack of

substitute products makes an industry less competitive and increases profit potential for the

firms in the industry.

There are several factors that may determine whether are there threat of substitute or not in an

industry. There switching cost, price, quality and lastly product’s function, attributes and

performance of the product and firm.

Switching cost – switching cost refer to when customer have the ability to switch in using one

product with another product. For example, customer may change it shampoo from L’Oreal

brand to other brands such as Sunsilk, Pantene and Herbal Essence.

Price – Price refer to the amount of value for that particular product. In the industry, firm that

charge a lower price may have the competitive advantages. For example, Malaysians prefer

to shop their groceries in Tesco than Cold Storage due to the price.

Quality – Quality refer to the products durability and longevity For example, women don’t

mind to spend more for handbag because of its quality and women need a good handbag

since it had become a necessity for women.

Product’s function attributes and performance – Product’s function, attributes and

performance refer to the product itself. If most of substitute product are equal with other

product it would lead to less profit and stiff competition in the industry.

Therefore, it is necessary for the firm to do an analysis for the product and particular industry

to evaluate the competitive environment and structure for profit potential of a market.

3.4.1Firefly Potential Substitute: Train

Kereta Api Tanah Melayu Berhad.

Keretapi Tanah Melayu is the main rail operator in Peninsular Malaysia. The organisation

was corporatized in 1992 but remains wholly owned by Malaysian government. KTMB is

divided ito two main lines and several branch lines. The total length of the network was 1,699

km but due to some partial dismantling work that occurred between Tanjong Pagar and

Kranji in Singapore, the new total length of the network is 1,677 km.

KTM Komuter is an electrified commuter train service introduced in 1995 which cater from

Kuala Lumpur to certain suburban areas. KTM Komuter provides 248 commuter service

daily serving 45 stations along 175 route-kilometres.

Basically, KTM Komuter is the potential substitute of Firefly since their main function is the

same which bring one person from one place to their destination. But the difference is the

service that their offer. KTM Komuter serves on railway but Firefly on air. Besides that, both

transportation have their own promotion but in term of price, KTM Komuter is much cheaper

that Firefly.

3.4.2 Firefly Potential Substitute: Bus

There are lot of bus that are available in Malaysia that can be used to deliver ones to his or

her destination. In Malaysia there are about 20 buses that Malaysian and tourist can choose to

travel. There are Mayang Sari, Transnational and MARA Liner. These are among the bus

companies that had dominated Malaysia bus industry.

Basically, bus can be a substitute product for Firefly. This is because they share the same

function and services. But most of the passengers are a little bit reluctant in taking bus to

travel due to safety. In Malaysia, there are a lot of cases of road accident happened which

mostly due to condition of the road, negligence of drivers and condition of the bus itself.

In term of price, surprisingly, Firefly domestic plane offer much lower price than bus. That’s

why starting 2010, the statistic of people travel using airplane increasing to 78%

(Euromonitor, 2013). For example, Firefly offer RM 55.99 from Subang Airport to Penang

while Transnational offer RM 65.00 from Pudu Raya to Penang.

Firefly Potential Substitute: Taxi

Taxi is one of the public transports that usually use by Malaysians and tourist to go

someplace near. People don’t usually travel by using taxi due to its price. For example, to

travel from Kuala Lumpur to Malacca the taxi would charge you till RM 60.00. This is why

most people choose to travel by using bus or airline. But still, there are a lot of Taxis

Company in Malaysia such as Sunshine Taxi Co., Blue Taxi Berhad and Hello Kuala Lumpur

Taxi Sdn Bhd.

3.4.3 Firefly Potential Substitute: Car Rental

Car Rental in Malaysia is remained highly fragmented with the offering coming from both

small independent players, domestic and internationally. Car rentals players are incorporating

more convenience factors into their service packages such as pick up of rental cars from one

location and preferred time. Examples of car rental that dominate the industry are Mayflower

and Avis. Avis have its competitive advantage where it have its own online booking through

its website and application where customer may download it from their smartphone.

Basically, Firefly offer same service as Avis where deliver one’s from one place to another.

With Avis online service, more people may prefer to use car rental as their choice of

transportation for service. But still according to Prasarana’s Malaysians Affordability Public

Transport, only 1% of Malaysians prefer to use car rental as their transportation to travel.

3.6 Conclusion

Through this evaluation, we figured out that the competition among rivals is high, the threat

of new entrance is high and the threat of substitute is high, the bargaining power of buyers is

high and so is the bargaining power of suppliers. As a conclusion we can deduce that the

industry is competitively unattractive since all five forces are strong. It may explain the

reason why Firefly faces some difficulties to compete with its rivals, but also to gain more

market share and attract the customers.

Our objective here is then to enumerate some alternatives that the company should use in

order to improve its situation according to the market segment it targets.