Sadiq Gillani Pembroke College

MPhil Management Studies

“Sustaining Competitive

Advantage In Spite of Imitation”

11th June 2001 Supervisor: Dr. J. Prabhu

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ABSTRACT:

It has been argued that if an action or innovation can be imitated then it can provide no

competitive advantage for the first mover to take that action. This is because the respondent can

copy that action (for example a product innovation) and thus both firms end up worse off than

before. This argument was refuted. The link between radicality of an action, response time and

competitive advantage was also investigated. In addition, it was analysed whether imitation can be

good – whether there can be win-win situations. All of this work was combined into an overall

model, linking radicality and the degree of win-win. Finally, moves that firms can make to increase

their competitive advantage, in spite of imitation, were examined. These hypotheses were tested by

analysing how British Airways and Virgin Atlantic have competed in the UK airline industry over

the last 17 years. Very interesting conclusions were drawn - that imitation can in fact be healthy. It

was found that the more radical an innovation, the more time it takes for imitation to occur and

the greater the win-win for both firms, in the long-run.

ACKNOWLEDGMENT:

The author would like to sincerely thank Dr. Jaideep Prabhu for his invaluable guidance and

support in writing this thesis and in focussing the area of research.

“This thesis is substantially my own work and confirms to the Judge Institute guidelines on plagiarism. Where

reference has been made to other research this is acknowledged in the text and bibliography.”

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CONTENTS

1.0 INTRODUCTION……………………………………………………… 3

1.1 Foundations…………………………………………………………..... 4

1.2 Importance Of Imitation……………………………………. ………... 5

1.3 Aim Of The Paper…………………………………………………….. 5

2.0 REVIEW OF EXISTING WORK……………………………………… 6

2.1 Differentiation………………………………………………………… 6

2.2 Imitation……………………………………………………………… 6

2.3 Action And Responses………………………………………………… 7

2.4 Does Imitation Negate Competitive Advantage?……………………… 8

2.41 First-Mover Advantages…………………………………………….. 10

2.42 Imitation Of Tactical Actions – Price Cuts…………………………….. 12

2.5 Uniqueness…………………………………………………..……….... 13

2.6 Win-win Situations……………………………………………………. 15

2.7 Overall Model……………………………………………………….… 17

2.8 Increasing A Competitive Advantage………………………………….. 18

2.81 Supporting Innovations With Complementary Assets…………………… 18

2.82 Using Isolating Mechanisms………………………………………… 19

3.0 THE DATA AND METHOD………………………………………… 23

3.1 What Data Was Used……..……………………………………… 23

3.2 How Data Was Collected….……………………………………... 24

4.0 HISTORY OF THE AIRLINES……………………………………… 25

4.1 British Airways…………….……………………………………… 25

4.2 Virgin Atlantic……………………………………………………. 27

4.3 Competition Between The Two Airlines………………………….. 29

5.0 TESTING THE HYPOTHESES……………………………………... 32

5.1 Effect Of Imitation On Competitive Advantage………………….. 32

5.2 Uniqueness And Imitation………………………………………... 36

5.3 Win-win Situations…………………………….…………………. 38

5.4 Overall Model…………………………………………………….. 41

5.5 Increasing Competitive Advantage………………………………... 43

5.51 Using Complementary Assets………………………………. .. 43

5.52 Using Isolating Mechanisms………………….…………….. . 44

6.0 CONCLUSIONS ………………………………………………………. 48

7.0 LIMITATIONS AND FUTURE RESEARCH……………………… 49

BIBLIOGRAPHY…………………………………………………………. 50

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1.0 INTRODUCTION

“No two species can coexist that make their living in the identical way” –

(Gause’s Principle of Competitive Exclusion, 1934)

Gause put two very small animals of the same genus into a bottle with an adequate supply of food.

If the animals were of different species, they could survive and live together. If they were of the

same species, they could not (Henderson, 1989). When one firm imitates another in some area, it

becomes more similar to that firm and thus threatens the survival of one of them. If one firm

introduces a cunning new product or launches a new advertising campaign, the competitive

advantage of such moves is directly dependent on whether competitors imitate these actions. This

is basic game theory. It has therefore been argued (Kay 1993, Moore and Urbany 1994) that

imitation negates competitive advantage. It is the purpose of this paper to examine and challenge

this argument and clarify when and why imitation affects the sustainability of competitive

advantage. It will be argued that the more radical an innovation is, the greater the competitive

advantage for the innovator will be, due to a longer response time from competitors. In addition,

it will be examined whether imitation can lead to a win-win situation for both the innovator and

imitator.

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1.1 FOUNDATIONS

Competitive advantage can be defined as: “when two or more firms compete within the same

market, one firm possesses a competitive advantage over its rivals when it earns a persistently

higher rate of profit” (Grant, 1998). It is important to note that each firm can have a competitive

advantage in different areas. Examples of competitive advantages are British Airways in resources,

size and landing slots and Virgin in brand, creative capabilities, and management skills.

This paper will focus on duopolies and oligopolies, since this reflects the structure of many

industries. Duopoly represents a simple case that makes it easier to provide analysis. The UK

(transatlantic) airline industry has been chosen for this reason as a primary source of data. Over

the last 17 years since British Airways (BA) and Virgin Atlantic have been competing, the success

of one on transatlantic routes (for example, London to New York) depends on the actions of the

other. In fact, the competition between these two firms has been direct and severe over this time

period. This provides useful data on which to assess the impact of imitation and competitive

advantage. In fact, almost every action by one leads to a response by the other and their

interaction is quite remarkable – a reflection of the strength of the competition between the two.

In this paper, the action of one firm will be compared to the response of the other and the

resulting impact on performance of both of them investigated. The actions that will be looked at

include price changes, new product launches/improvements (e.g. new sleeper seats) and loyalty

card schemes. All of these actions can be seen as innovations and the terms ‘actions’ and

‘innovations’ will be used interchangeably. Thus an innovation is more than simply developing a

new product – it can be any action that changes the marketing mix or marketing strategy of a firm

in order to secure a competitive advantage. Any response has to involve a counteraction, in which

it seeks to copy or counteract the original move.

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1.2 IMPORTANCE OF IMITATION

“The speed with which competitive advantage is undermined depends on the ability of competitors to

challenge either by imitation or innovation” (Grant, 1998)

Competitive advantage is of great importance to businesses – they live and die by it. Porter (1990)

shows how this even applies to nations. A firm without a competitive advantage is like being

surrounded by a pack of lions without any means of defence – soon competitors will ensure the

death of the firm. However, even if a firm has a competitive advantage, it must sustain it. This can

be done by innovating (in the broadest sense described above) in the marketing strategy. There are

many sources of competitive advantage. Kay (1993) outlines four sources: product innovation,

reputation, architecture (relationships) and strategic assets. This paper will focus on product

innovations and other strategic actions. The effect of imitation of these actions by competitors will

be very important. Smith, Grimm, and Gannon (1992) state that, “firms are not interdependent in

the marketplace, but are affected by the actions of one another and prone to react. Given this

interdependence, the effectiveness of a firm’s strategy cannot be assessed without an evaluation of

the reactions of rivals”

1.3 AIM OF THE PAPER

As the quote above shows, the success of any action will depend on whether competitors copy

that action. Thus, the imitation of competitors is a very important area of study, which has been

under-researched. This is especially true of less tangible areas of the marketing mix. While a lot of

research (using game theory) has been done on the effect of matching a price change, there is little

work on the effect of less objective dimensions, say BA introducing a sleeper seat after Virgin

introduces them. This paper aims to fill this gap by focusing on the degree of radicality of an

action and the impact of imitation of that action on the performance of both firms.

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2.0 REVIEW OF EXISTING WORK

2.1 Differentiation:

“Competition existed long before strategy. It began with life itself”(Henderson, 1989)

Henderson (1989) provides a useful discussion of how firms compete. He draws on Gause’s

Principle (mentioned above) that competitors which make their living in the same way cannot

coexist. Each must be different enough to have a unique advantage. The continued existence of a

number of competitors is proof that their advantages over each other are mutually exclusive. They

may look alike, but they are different species. Every airline must differentiate itself in important

ways, to gain a different segment of the market. “They must sell to different customers or offer

different values, services or products” (Henderson, 1989). In fact, image alone can be a source of

differentiation. Since there are many sources of differentiation, there are many possibilities for

each competitor to distinguish itself and allow it to develop a competitive advantage. Virgin seeks

to differentiate itself through its product and image, thus utilising or developing a competitive

advantage in these areas.

2.2 Imitation:

“Imitation is the sincerest form of flattery, but in business it is often thought to be a killer

compliment” – Brandenburger and Nalebuff (1995)

Imitation can be seen as an opposite move to differentiation – an attempt to replicate a successful

action of another firm. Textbooks on strategy warn that if others can imitate something you do,

you cannot make money at it (Brandenburger and Nalebuff, 1995). It can be seen to make

competitors more similar and thus threaten the survival of each. Imitation can be a means of

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stimulating all out war between the two companies. For example a price reduction, if copied, can

lead to further and further reductions until one firm withdraws from the market or concedes

market share, a resource needed for survival, to the other. Thus, imitation can reduce the

profitability of one or both of the firms. Kay (1993) argues that a fundamental weakness of

innovation as a source of competitive advantage is that it mostly can easily be replicated. The

result is that the innovator is exposed to the costs of innovation and the risks of development,

only to see competitors share or dominate the fruits of success. Kay sees this as a big public policy

problem, since it reduces the incentive to innovate and he argues that patent protection should be

extended to cover business innovations. Aside from the law, secrecy is another tool, but again this

does not help an airline which must make any new product available to all of the public. It will be

shown that, in spite of imitation, innovation can still lead to a competitive advantage in certain

situations.

2.3 Action and Responses:

“Know the enemy and know yourself; in a hundred battles you will never be in peril. When you are

ignorant of the enemy but know yourself, your chances of winning or losing are equal. If ignorant of

your enemy and yourself, you are certain in every battle to be in peril”

– Sun Tzu, 4th Century BC (1963, p.84)

Moore and Urbany (1994) argue that, “as in war, business and marketing strategists should assess

the expected behaviour and subsequent reaction of competitors to new strategy initiatives before

undertaking them.” This is especially true, they argue, in oligopolistic markets where gains in

market share come at the direct expense of rivals.

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Investigating actions and responses goes back to Schumpeter (1934). He saw a market as allowing

firms to experiment by taking actions. Some try to lead, while others follow and imitate. Leaders

can reap profits through being a monopolist until their action is copied. However, long-term

equilibrium is never reached, since the excess profits cause competitors to imitate the action

(Smith, Grimm, Gannon and Chen, 1991). Schumpeter (1934) believed the profits earnt by the

first-mover causes the response, because the competitor wants to participate in the profits. As the

expected profits increases, so will the speed and number of responders seeking to imitate the

action. Smith, Grimm, Gannon and Chen (1991) thus argue firms should take action against

competitors who are slow to respond or are less likely to respond.

Porter (1980) developed profiles of competitors within a market. He labelled firms which

consistently imitate a competitor’s actions as imitators. Other firms, which he labelled responders,

will always respond in some way to any action. Some firms respond selectively, but slowly. A few

firms are consistently first or last to respond. These distinctions will be discussed in the UK airline

industry.

2.4 Does Imitation Negate Competitive Advantage?

However, not all of the existing literature can be supported. Moore and Urbany (1991) argue that

if a competitor imitates your action, then there is no advantage to you. They refer to the example

of American Airlines introduction of a Loyalty card system, which was soon replicated by a major

competitor and thus they argue the initiator lost their advantage. This implies that the American

Airlines should not have launched their innovation. Kay (1993) also argues that in the airline

industry there are not substantial advantages in innovating, since “product innovations are quickly

replicated if successful”. This paper seeks to directly challenge these statements and distinguish

when competitive advantage can be sustained or not under the threat of imitation.

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The statements above imply that if a firm knows that it’s action (say an improvement in the

product offering) can be imitated, then there will be no competitive advantage to be gained from

doing it. This will be only true in certain cases and it is useful to make a distinction. If the original

action can be immediately copied (for example a price decrease), then it is agreed that no

competitive advantage can be gained if the respondent copies the move. This is because there is

no time in which to enjoy an advantage. It must be possible for the action to be copied both

immediately and exactly for the competitive advantage to be negated through imitation. If there is

some delay in imitation, profits can be earnt in the meantime. If the action is slightly different,

then the first-mover can exploit these differences.

Smith, Grimm, Gannon and Chen (1991) make a useful distinction between strategic and tactical

competitive actions. “Strategic actions involve significant commitments of specific, distinctive

resources and are difficult to implement and reverse. A major change in the definition of a

business is an example. Tactical actions, on the other hand, are often designed to fine-tune

strategy; they involve fewer and more general resources than strategic actions, are easier to

implement, and are often more reversible. Examples include prices cuts and new advertising

promotions”. Therefore, they argue, competitors will be less likely to respond to strategic actions

than to tactical actions because the information contained in strategic actions may be unfamiliar

and uncertain. When a firm launches a new product (strategic), competitors may wait and see how

successful the product is. Responses will be fewer and slower than to a tactical decision. Also,

since imitating strategic actions requires significant commitment of distinctive resources,

competitors will find it harder to imitate it. In contrast, tactical actions are more familiar and past

experience can be used to help make a competitor’s decision. Tactical actions involve general

resources and thus competitor can imitate them more easily. This relates to the analysis above, that

actions which are immediately and perfectly imitable will not provide a means for sustainable

competitive advantage. Tactical actions will be immediately and perfectly imitable, whereas

strategic actions will not, and thus provide a means for competitive advantage.

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Hypothesis 1: If an action cannot be imitated immediately, then there will be some competitive advantage to

be had from undertaking that action, in spite of imitation. Competitive advantage can be sustained through

strategic actions and not through tactical actions.

However, with the vast majority of actions, it is not possible to imitate immediately and thus a

competitive advantage can be sustained. It is only the obvious case of a price decrease that can

confer no advantage after imitation – for all other actions it will be argued that some advantage

can be gained. Thus the original statements above (which stated that for loyalty cards and product

innovation, imitation renders the competitive advantage void) will be refuted, since they are not

immediately imitable.

It is important to discuss briefly, how it may be possible for there to be a competitive advantage,

in spite of a competitor imitating an innovation. This will be done through three sub-hypotheses:

2.41 First-Mover Advantages:

“Achieving a superior competitive position is beneficial to the firm as long as it can be preserved”

- Fisher, (1991)

The time in which it takes the competitor to respond provides a great source of competitive

advantage. Whilst your action or innovation is unique, it is possible to reap the full profit from the

action. This profit will be greater the longer it takes competitors to respond. Brandenburger and

Nalebuff (1995) give the example of Minnetonka, who had the idea of Softsoap, a liquid soap

dispensed by a pump. They knew competitors such as Procter and Gamble would be quick to

copy their new product. They realised that the little plastic pump was the hardest part of

producing the soap since there were only two suppliers. They locked up both suppliers total

annual production by ordering 100 million of the pumps. Capturing the supply of this crucial part

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gave them a head start of 12-18 months from their competitors, in which time they reaped large

profits.

Sub-Hypothesis 1.1: The time period in which the first mover’s actions are unique will provide the chance

to gain a competitive advantage and thus earn higher profits.

In addition to these profits, Minnetonka was able to build brand loyalty, which continues to

provide added value to this day. Kay (1993) also gives the example of Sony, who pioneered the

Walkman. Competitors imitated their innovation quickly, but Sony is still the market leader in this

market. Being the first-mover can provide a competitive advantage, since consumers associate that

innovation with them. Also, by being the first mover allows them to conduct that action in a more

efficient manner, by improving and modifying their system (economies of learning).

Sub-hypothesis 1.2: Being a first-mover (of a competitive action) will provide a competitive advantage,

which will continue after imitation.

In addition, having a continuous flow of temporary competitive advantages from being the first to

take certain actions becomes a sustainable and continuous advantage. At the very least, each action

provides a short-term advantage (until imitation) and if new actions are continually taken, then this

will amount to a continuous advantage. Brandenburger and Nalebuff (1996) argue that if your

advantage is negated by imitation, then you should create a long-lasting series of temporary gains:

“The trick is to run faster and faster. You make a better product. Others copy it. But by then

you’re a step ahead. You’ve already improved your product.” It does not matter how good your

product is, but how good you are at improving it, relative to competitors. “It isn’t where you are;

it’s how fast you’re moving. It isn’t position; it’s speed. You never stand still; you’re a moving

target”.

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t

This will be explored in the airline industry – whether continually innovating and gaining short-

term competitive advantages does in fact provide a sustainable long-term competitive advantage

Sub- hypothesis 1.3: A continuous flow of innovations provides a sustainable competitive advantage.

2.42 Imita ion of Tactical Actions – Price Cuts.

Until now, only the effect of imitation on strategic actions has been discussed. It is worth briefly

discussing the effect of imitating tactical actions (which are immediately and perfectly copied). The

most important of these is price. Game theory can provide a useful insight into the best course of

action. Karnani and Wernerfelt (1985) do just this, with reference to the US airline industry. They

point out that in the airline industry there is multiple point competition – many battlefields which

can be fought on. This is due to airlines competing head to head on several routes. If Airline A

reduces prices on one route, the responder will have four options. Airline B can (1) do nothing, (2)

match the price reduction on that specific route, (3) cut prices on a different route, (4) cut prices

on all routes on which they both compete. Option (1) will be seen as a sign of weakness and

option (4) would spark total war, which would be costly to both parties. Thus, they argue that

option 2 will be the best response, since Airline B can contain the conflict and fight only a limited

war. Thus the likely outcome of a price cut will be the imitation of it – a ‘limited war equilibrium’.

Sub-Hypothesis 1.4: Price cuts will be matched by competitors. As a result market share will remain

unchanged and thus competitive advantage will not improve.

Karnani and Wernerfelt (1985) believe a firm should only attack with a price cut if its position will

be improved regardless of how the competitor responds. They state that “the ideal situation is one

in which attacking is fairly inexpensive, defending will be costly for the responder, the responder

does not have any attractive opportunities for counterattack and the responder does not want to

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risk getting into a total war.” If the attacker has to cut prices on only a small volume, whereas the

responder will have to cut prices on a much larger volume, then they argue it would be more

advantageous. Another reason they give for launching an attack is to pre-empt the other firm from

striking first.

Thus, a price cut must be carefully considered. It must be anticipated that competitors will match

it. However, Karnani and Wernerfelt view price cuts and competition as war. Advocating cutting

prices where you will only make a small loss but the competitor loses much more greatly is

unhelpful to managers who are concerned with profits. In business, it is quite inappropriate to take

such war-like actions. In fact, a price cut could be a win-win situation if both firms can fill

otherwise empty seats and thus increase demand. In reality it is this reason that prices are cut in

the first place (although they are matched for the reasons which they give). Thus, it is not to be

used as a tool to increase market share at another airline’s expense, but to increase overall demand.

This is unless a destroyer pricing strategy is being pursued, in which case large price cuts could be

an effective way of making competitors leave the market.

2.5 Uniqueness

“The essence of strategy is in the activities – choosing to perform activities differently or to

perform different activities than rivals. Otherwise, a strategy is nothing more than a marketing

slogan that will not withstand competition” – Michael E. Porter (1996)

Smith, Grimm and Gannon (1992) assess actions of firms using four main dimensions. Firstly, the

magnitude of an action is defined as the extent to which resources are required to effectively

implement an action. The scope of an action is the number of competitors directly affected by the

action. The threat of an action is the potential of the action to steal competitors. Fourthly, the

implementation required of an action is the length of time between announcing an action and

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implementing it. They later introduce radicality as another dimension which affects the strength or

significance of an action. Whilst the four main dimensions have been studied extensively, little

work has been done on the radicality or uniqueness of actions. Note that the terms radicality and

uniqueness will be used interchangeably and are intended to reflect the same type of action.

Macmillan, McCaffrey, Van Wijk, (1985) define radicality as, “an action that is new and entirely

different from previous competitive moves in an industry”. Radical actions are strategic (as

opposed to a tactical action) since they involve a significant contribution of specific resources.

Smith, Grimm and Gannon (1992) found that more radical actions are associated with longer

response times. This supports Porter’s (1980) belief that moves which cannot be matched, because

they violate competitor’s assumptions, are ideal moves for firms to make. This is because firms

will be unfamiliar with the information available on radical moves, thus delaying their response

until they can assess whether the action is successful or not (Smith, Grimm and Gannon, 1992).

Macmillan, McCaffrey, Van Wijk, (1985) also found that the more an action differed from industry

norms, the longer the response times.

Hypothesis 2: The uniqueness of an action will affect the time of the imitator’s response and thus the

innovator’s competitive advantage. The more unique the action is, the greater the benefit, in spite of imitation of

that action.

For example, it will be tested whether a radical innovation causes a large time lag between the

innovation and imitation and thus increasing the competitive advantage of the innovator. There

will be other benefits from being a radical innovator (for example, first mover advantages from

being the only provider of the innovation) and these have been discussed above.

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2.6 Win-win Situations:

“When you do come up with a way to change the game, accept that your actions might well be

imitated…. Imitation can be healthy.” (Brandenburger and Nalebuff, 1995)

Arguing that imitation can be healthy seems to fly in the face of all of the other writings on

imitation. However, the authors argue their case effectively. One example they use is the General

Motors (GM) card – a new credit card that allowed customers to apply 5% of their charges

towards buying or leasing a new GM car. Ford and Volkswagen (VW) soon copied their idea. The

authors argue that this actually helped GM. This is because Ford and VW offset the cost of their

credit card rebates by scaling back other incentive programs. “ The result was an effective price

increase for GM customers, the vast majority of whom do not participate in the Ford and VW

credit card programs. This gives GM the option to firm up its demand or raise its prices further.”

In addition, all three companies got a more loyal customer base, reducing the incentive to compete

on price.

Brandenburger and Nalebuff (1995) argue that this shows there are times when you want to create

a win-win situation – the best way to succeed can be to let your competitors do well too. Win-win

strategies can be better for several reasons. Firstly, there are more options available to the firm.

Secondly, since competitors can also benefit, they may offer less resistance, making it easier to

implement. Thirdly, win-win moves do not force competitors to retaliate, so the new game is more

sustainable. Finally, imitation of a win-win move is beneficial, not harmful.

Game theory provides a useful analysis of the effects of imitation by competitors. A price cut, if it

is not imitated, can be a win-lose outcome for the first-mover. However, if it is imitated, the

outcome may be lose-lose, since the competitive advantage of the price reduction is lost and thus

both firms sell their goods at a lower price. An action which has a time lag will provide a win-lose

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outcome until the action is imitated. After imitation, the outcome could be win-win or lose-lose. It

was traditionally seen to be a lose-lose situation (for example loyalty cards), but as the analysis

above showed, it can in fact be seen as a win-win outcome.

Another example of a win-win outcome, given by Brandenburger and Nalebuff (1995), is in the

airline industry. In 1993, TWA increased the legroom in economy class by removing some of the

seats. The company moved into first place for customer satisfaction on long-haul routes as a

result. This was a win for TWA, but a loss for the other airlines. However, elements of a win-win

situation were present, since TWA would be less likely to start a price war, with fuller planes. If

other airlines copied the strategy, it would still be a win-win situation, since excess capacity would

be removed from the industry, passengers would get more legroom and less empty seats would be

carried. Thus everyone would win.

Whilst their analysis provides a very useful analysis of imitation, there is one drawback. They fail to

take into account the size of the benefits for each firm. With TWA, they win whether competitors

imitate or not, but they win by a different margin in each case. One can say that if competitors do

not imitate, TWA’s competitive advantage will be greater. If they do imitate that advantage is

eroded, in favour or less intense competition in the industry. In spite of this failure to quantify the

size of the payoffs, their analysis is of great use to us.

Hypothesis 3: There are situations where imitation may not be harmful, win-win situations, since other

benefits accrue to compensate for the lost competitive advantage.

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2.7 Overall Model – Combining Hypotheses 1 – 3.

The data on competition between British Airways and Virgin Atlantic will be analysed to find out

when their actions and reactions lead to a win-win, win-lose or lose-lose outcome. It will be found

out which types of actions lead to the different outcomes. The analysis on uniqueness can be

combined with this work. In addition, the distinction between strategic and tactical decisions can

be included. It will be investigated whether radical strategic actions, when perfectly imitated, lead

to win-win situations, and in contrast whether non-radical, tactical actions lead to a lose-lose

outcome.

Main Hypothesis: When radical, strategic actions are imitated there will be a win-win outcome. When

non-radical, tactical actions are imitated the result will be a lose-lose situation.

Of course, the degree of win-win will be determined by the response of the imitator. If no

response is taken, then it could be argued that it will be a win-lose outcome. If an action is taken

many years later then it would be a win-lose situation until the radical innovation is imitated. If the

imitation is perfect then perhaps the game becomes win-win. It is important to note that the win-

lose situation may be better or worse than the resulting win-win situation after imitation and this

will be investigated.

It is also possible to argue that the greater the radicality the innovation, the more time the game

stays at win-lose (until it is imitated) and thus the greater the benefit to the innovator. In addition

to this benefit, it may be that the win-win situation after imitation will also be greater since the

benefits to both parties could be greater the more radical the innovation is. This can be

summarised below: (Note that this diagram only deals with actions that are imitated at some point

in time.)

ACTION: REACTION: OUTCOME:

IMIT(DEL

RADICAL STRATEGIC

ACTION Win-lose until imitated

Win-win

Lose-lose (Most likely)

IMITA

(IMME

NON-RADICAL TACTICAL

ACTION

2.8 Increasing a Competitive Advantage, in

t2.81 Suppor ing Innovations With Complem

Finally, it would be worth exploring the moves

advantage, in spite of imitation. Kay (1993) ar

with other distinctive capabilities (for example

be gained. He argues that, “a reputation for in

the latest products without having to shop ar

capabilities or protected by complementary as

He gives the example of Oxford Instruments

strongly innovative record in magnets, becau

companies such as GE and Siemens which hav

Hypothesis 4.1: An innovation supported by t

provides a greater competitive advantage.

TION DIATE)

Spite of Imit

entary Asset

which firms c

gues that, if y

reputation), t

novation attra

ound”. If the i

sets, then imita

who “have der

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he firm’s capabil

ATION AYED)

Time

Figure 1.1 Model of Imitation

ation.

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s.

an make to increase their competitive

our action is deployed in conjunction

hen a competitive advantage can still

cts customers, who can gain access to

nnovation is supported by distinctive

tion of the innovation is not enough.

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e capabilities are rapidly matched by

ful complementary assets”.

ities or protected by complementary assets

2.82 Using Isolating Mechanisms:

“Wherever competitive success is observed, it will be imitated by competitors pursuing profits”

– Alchain (1958)

The example of Minnetonka was given above, which showed that competitors tried to copy their

product as soon as it was seen to be successful. However, by capturing a key resource, they

managed to delay the imitation of their product, which is an isolating mechanism (defined below).

There are many other strategies that can also be adopted to delay imitation. These strategies will

extend the competitive advantage that can be gained, in spite of imitation.

Fisher (1991) develops the concept of an isolating mechanism as a framework to identify strategies

that resist competitive imitation. He recognises the threat posed by imitation to maintaining a

differentiated position. “The more quickly and efficiently competing firms are able to duplicate

aspects of a firm’s offering, the shorter the duration of returns to the differentiating firm.”

Isolating mechanisms should be built, he argues, to withstand or delay competitive imitation.

These are “imbalances in the knowledge, skills, or other capabilities of industry firms. These

information or resource asymmetries limit the capacity of firms to imitate each other and increase

the costs associated with competitive imitation.” He identifies eight isolating mechanisms (five

competitive and three consumer-based isolating mechanisms). This can be seen below:

19

Competitive Isolating Mechanisms Information Impactedness Response Lags Economies Of Scale Producer Learning Channel Crowding

DURABLE

DIFFERENTIATION

Figure 1.2 Isolating Mechanisms – Fisher (1991), pg 21.

Customer-based Isolating Mechanisms Buyer Switching Costs Buyer Evaluation Costs Advertising Crowding

20

Competitive Isolating Mechanisms: (Fisher 1991)

The emphasis in these is on beating the competition, by exploiting the superior skills or resources

of the firm and the deficiencies of the competitors.

1) Information Impactedness: This is where competitors do not have the knowledge needed

to imitate. They advise minimising staff turnover in areas with access to important infor-

mation to lessen the potential for knowledge leaks. Also developing close relationships

with clients to make the service more personalised, making it harder to imitate.

2) Response Lags: These result from an inability to react immediately to a firm’s action. It can

be caused by the need to buy specialised equipment or requiring key skills (the Minnetonka

example above). Thus an action which requires an investment in physical or human

resources is likely to be more durable. Needing to hire employees with specialised skills will

therefore be beneficial. They also advice using guerrilla tactics to keep competitors off

balance. For example, marketing initiatives conducted in a ‘hit and run’ fashion, with

unpredictable timing and expenditure, will create a greater response lag.

3) Economies of Scale: The ability of larger firms to purchase raw materials, capital and other

assets at a lower cost can provide a cost advantage which will be difficult to replicate.

There will also be learning curve effects, which can be achieved by specialising in a

narrower service mix.

4) Producer Learning: Competitive knowledge is difficult to capture without direct industry

experience. Insights into personnel, production, marketing and other business functions

can be invaluable.

5) Channel Crowding: This is where a firm gains access to a distribution channel and thereby

prevents competitors from using the channel. Late entrants may be forced into less

advantageous locations, making imitation imperfect. In addition, he recommends searching

for innovative distribution systems to overcome the disadvantages of poor physical

locations (e.g. in renting a car use a cheaper location, but provide a free pick up and return)

21

Customer-Based Isolating Mechanisms.

These are economic and psychological barriers related to consumers’ brand selection decisions.

They involve taking advantage of barriers that restrict brand switching.

1) Buyer Switching Costs: These occur when purchasers face barriers to changing from one

brand to another. They recommend developing long-term contracts that penalise switching

or reward loyalty. Also providing and cross-selling services that expand and deepen the

client-seller relationship.

2) Buyer Evaluation Costs: These may be monetary or psychological. Most services are

experience goods, which can be exploited. Firms can lower buyers’ evaluation costs by

providing clues about the product (e.g. through the brand and advertising). Providing

warranties to reduce buyers’ need to evaluate the service. Also associating the service with

tangible products that already have good reputations can do this.

3) Advertising Crowding: The first mover faces less rivalry for consumer attention and

interest. As a result they have a better opportunity to position their offering in consumer’s

minds. Once a ‘psychological position’ has been attained, Fisher argues, it is difficult for

competing firms to imitate. Therefore he advocates supporting new actions with a clear

and consistent advertising program.

Fisher also advocates making expectations about how long it will take competitors to respond.

“Even if competitors are expected to imitate a differentiated position quickly, it may still be

profitable to undertake the strategy by charging a premium price during the time before

competitors are able to react.” In addition, firms should try and make it uncertain where success is

coming from. By developing a greater number of differentiated sources, it may become more

difficult for competitors to identify what is the main determinant of high profitability. Overall

Fisher’s work provides valuable advice to managers on how to resist imitation. These isolating

mechanisms will be tested in the UK airline industry to see whether they are useful.

22

Hypothesis 4.2: Using isolating mechanisms can make it harder for competitors to imitate a product,

thus increasing the competitive advantage.

Reed and DeFillippi (1990) provide similar advice, all be it with a different emphasis, when they

advocate raising barriers to imitation. They argue that advantage is achieved through the unique

position a company attains and using causal ambiguity to make it difficult to emulate strategies.

They say there are three ways of generating causal ambiguity:

1) Tacitness refers to the implicit accumulation of skills that results from learning by doing.

2) Complexity results from having a large number of interdependent skills and assets.

3) Specificity refers to the transaction-specific skills and assets that are utilised in the

production processes and provision of services for particular customers.

They argue that “any or all of these competency characteristics can produce ambiguity between the

firm’s business actions and outcomes that create its advantage. This in turn creates barriers to

imitation.” Their work complements the work on isolating mechanisms by Fisher.

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3.0 THE DATA & METHOD

3.1 What Data Was Used

The hypotheses were tested using case study data. It was analysed extensively how British Airways

and Virgin have competed over the last 17 years since Virgin Atlantic first started flying. The aim

was to uncover every action in their marketing strategy that each firm has taken over that period

and to investigate how the other firm responded (this will be discussed in section 3.3 in more

depth). The resulting impact upon performance was looked at for each hypothesis. Performance

was measured in terms of market share or profits, depending on which provided the best

indication of performance for each action. Market share was the most useful indicator of

performance because profits are sensitive to a much large number of factors (such as the

economic environment). In contrast market share is shielded from outside shocks, as it is a relative

measure. US Department of Transport statistics were used on London to New York routes

(between Heathrow and Gatwick and Newark and JFK) as providing a representative indicator of

market share and performance. All scheduled flights were included, for airlines carrying more than

500 passengers per month. There were five airlines which met this criteria – BA, Virgin, American

Airlines, United Airlines and Continental. Two airlines which flew via London to New York (Air

India and Kuwait Air) were dropped from the data set, since the majority of passengers on these

flights do not only travel between London and New York, and they are thus competing in a

different market. Profits were found using published accounting data. However, BA’s profits have

been very variable and it is hard to analyse which competitive actions accounted for what

percentage change in profits.

The timing of events was crucial in comparing an action with a response. A time-chart of

competitive actions which each firm has taken was drawn up. The actions of each firm that

evoked a response was analysed in depth. If the action was not imitated then it was not included

24

3.2 How Data Was Collected

Data was gathered on the two companies from a variety of sources. Reuters Business Briefing was

invaluable, since it provided searchable access to everything written about the two companies in

newspapers and magazines. As well as national newspapers, it included trade publications such as

Aviation Week, Travel Trade Gazette, Flight International and Airline Business. In addition, a lot

of information was gathered from the Internet and the company’s own websites. Detailed histories

of the two companies were obtained from them directly, which included many useful key dates.

Kay (1993) provided a useful history of BA and an insight into the culture of the company. A

controversial biography by Tom Bower on Richard Branson (2000) and an autobiography by

Branson himself (1998), also provided useful information on the development of the airline and

how the two have competed.

3.3 Measuring Action and Response

Firstly, it was decided whether an action was strategic or tactical. It was decided to use radicality as

a measure of the strength of an action rather than the four dimensions which Smith, Grimm and

Gannon (1992) propose. It can be argued that radicality encompasses all four dimensions (the

magnitude, scope, threat and implementation required of an action). For example, a radical action,

such as a new business class cabin, will require a lot of resources to implement it (magnitude), will

affect a number of competitors directly (scope), will steal away many customers (threat) and there

will be a lag before the action is implemented (implementation required). In fact, radicality can be

assessed using these dimensions and also the extent to which the action departs from industry

norms or previous ways of doing business. Radicality was assessed across all of these dimensions

and a score out of 100 was given to each action. Imitation was also measured. The most important

factor was the time it took for the imitation to occur. The more immediate the response is, the

more the competitive advantage of the original action is reduced. Time was measured in months

4.0 A BRIEF HISTORY OF THE AIRLINES AND AN ANALYSIS OF THEIR

COMPETITIVE ADVANTAGE

4.1 British Airways PLC.

“BA is for short, thin people” – Virgin Atlantic advertisement, 1990

British Airways is the world’s largest international airline, carrying over 30 million passengers in

1999 (Source: BA website) and as a result claims to be “the world’s favourite airline”. BA was

formed in 1972 by the merger of two state-owned airlines. It was privatised in 1987 and it is from

this point in time that their actions and reactions have been analysed. From privatisation until

now, the airline has had to undergo major changes in it’s approach and service. They have

drastically cut back on unprofitable routes and costs. They have scaled down the number of

employees and contracted out many non-core activities such as catering. This move from

inefficiency to a more efficient operation can be contrasted to Virgin’s position, which moves in

the opposite direction of starting out small and efficiently run, to growing larger whilst trying to

remain efficient.

Kay (1993) argues BA’s competitive strength is largely based on their strategic assets, the most

importance of which is their dominance of Heathrow Airport (the largest international airport in

the world), of which they have 37% of the landing slots (Source: BA website). Heathrow is the

closest and best connected London airport and is substantially more attractive than other airports.

Virgin Atlantic estimated that flying from Heathrow is worth a 15% premium to customers and

thus their landing slots are more valuable. Kay estimates that these landing rights could be worth

as much as the airline itself.

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26

As this advantage has been slowly eroded through other airlines gaining greater access to

Heathrow and Virgin growing in strength, BA has had to become more competitive. In 1991,

many more airlines (including Virgin Atlantic) were allowed to fly from Heathrow, having been

granted landing slots at BA’s expense. It can be seen that the healthy position BA is now in, owes

a lot to the disciplining effect of Virgin’s competition. From being an inefficient, over staffed

airline with a poor product, they are now in a good position and are admired in the industry. Most

of their innovations have been undertaken by Virgin many years previously, but the two airlines

are now consistently rated as significantly better than their American competitors.

The ‘dirty tricks’ campaign in 1993 saw BA get significant adverse publicity for allegedly trying to

steal Virgin’s customers. In 1997 they removed the Union flag from their tailfins and replaced it

with controversial ethnic art. Two years later they reversed their decision after substantial criticism

and reinstated it on many of their aircraft. Also in 1997 they began an alliance with American

Airlines, but their planned merger was dropped after it was ordered that they give up over 300

landing slots at Heathrow in order to allow the merger to go ahead. They view a system of

alliances as crucial to their survival. They are a leading member of the OneWorld alliance, which

was created in 1998. BA and their partners aim to provide co-ordinated world-wide services,

increased frequencies, shared marketing and reciprocity in their reward schemes.

Their latest focus under their new chief executive, Rod Eddington, is aiming to focus on the

business traveller and higher paying customers. They have introduced a new class called World

Traveller Plus (an improved economy class) and substantially improved their business class service

(Club World) to achieve this, rather than looking to discount to budget travellers. In fact, economy

class (World Traveller) now takes up less than 30% of some BA international flights. Their focus

has been on ordering smaller, more efficient planes for more frequent trips, rather than larger

planes which require heavy discounting in order to fill. They have trimmed capacity, in terms of

routes and the number of economy passengers, in favour of higher margins.

According to Kay (1993) their distinctive capability is based on their name and reputation – their

brand. “This rests partly on customers’ perceptions of the safety and reliability of its flights and

the consistency of the service standards it offers.” He believes their three capabilities are the access

to Heathrow, the possession of route licences and the BA brand. In 2000, they operated 340

aircraft to 535 destinations (Source: BA website). For the year-ending March 2001, BA lost £21

million, the first annual loss since privatisation, on revenues of over £10 billion after a bad year

partly caused by a ground and service staff strike.

4.2 Virgin Atlantic Airways Ltd.

“Imitation is the sincerest form of flattery. Where Virgin Atlantic lead, BA belatedly follow. Rather than waiting

for BA to try to catch us up, you can book with Virgin today”- Richard Branson

Virgin Atlantic is unique. It is unique in being a privately owned airline, with a popular and daring

chief executive, Richard Branson. It is the second largest long-haul airline in the UK with 32

aircraft flying to 20 destinations. Virgin Atlantic, drawing on the Virgin brand, is associated with

fun, innovation and quality. They have led the way in airline innovation, being the first airline to

offer individual TVs to all passengers, a Premium Economy class, free Limousines to Upper Class

passengers (business class), masseurs and a dedicated sleeping cabin for business class passengers.

They market their Upper Class as a first class service for a business class fare (they have merged

first and business class and target business people with it). Below is a summary of the different

classes offered by the two airlines:

27

Class of Travel British Airways Virgin Atlantic___

First Class First n/a

Business Class Club World Upper Class

Improved Economy World Traveller Plus Premium Economy

Economy World Traveller Economy

Figure 1.3 Classes of Travel

Virgin were initially based at Gatwick, but since 1991 have also operated from Heathrow. They

have largely expanded at British Airway’s expense, frequently being awarded new slots either

instead of BA, or having BA’s slots transferred to them at Heathrow. It is worth noting that whilst

BA has been trimming back their routes and capacity, Virgin continues to grow. They were the

first to sign a contract for the new giant 555-seater Airbus A3XX aircraft, which they are due to

receive in 2006 and which signals their growth intentions. They have won a huge number of airline

industry awards. In 2000, they earned a net profit of £41m on turnover of £1.2 billion (Source:

Virgin Atlantic Fact Sheet)

Both airlines earn the majority of their profits on Atlantic routes. They make most of their money

on business-class passengers, which are a highly lucrative market. It is worth noting that frequent

price wars are targeted at the economy market and that both airlines choose to compete on their

product and service, rather than price, in the business class market. Virgin’s competitive advantage

lies in offering an excellent innovative product, with good branding with a fun image.

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4.3 Competition Between the Two Airlines.

Date Virgin Atlantic British Airways____________

May 89 Individual TVs in Upper Class

Jun 91 Individual TVs in all classes

Apr 92 Launch of Premium Economy

Oct 92 Individual TVs in Club World

Jun 93 Launch of snoozezone

(dedicated sleeping cabin)

Feb 94 1st Class Sleeper service

Mar 94 Code-sharing with USAir

July 94 Code-sharing with Delta

June 96 Codesharing with American Airlines

Feb 98 Code-sharing with Continental

Nov 98 Individual TVs in all classes

Nov 99 Seat/beds in Upper Class

July 00 Seat/beds in business class

July 00 Launch of World Traveller Plus

Figure 1.4 Time Chart of Innovation and Imitation

The time chart above shows that over the last 16 years, Virgin have generally innovated in their

product offering and this innovation is copied by BA some time later. There are three areas in

which this happens - 1) Seating (in blue above) 2) Entertainment (seat-back TVs) (in green), 3)

Improved Economy Class (in red). In contrast, Virgin can be seen to be imitating BA’s use of

code-sharing and alliances with US airlines (in orange).

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30

In addition, there have been annual short-term price wars, usually in March and October, where

BA reduces many of their economy fares and Virgin matches or slightly undercuts these

reductions. It would appear that Virgin is therefore a price-taker. This can be seen by the fact that

their reduced fares are so similar, have the same conditions, are on the same routes and the offers

last the same length of time. It is always BA starting the fare war, to sell off excess seats.

There are many other actions by one firm, which invoke a reaction from the other. This highlights

the nature of the direct and intense competition between the two airlines. In 1991, Virgin was

awarded BA’s Tokyo landing slots. This led to BA to stop its donations to the Tory party (it has

been alleged), which was followed by Virgin’s PR machine criticising BA’s corruption. In 1993, the

famous ‘dirty tricks’ campaign started. Virgin alleged that BA was hacking into their computer

system and stealing their passengers by asking them to switch seats to BA. Virgin’s reaction to this

was a massive PR drive and a libel court case, which Virgin won. In 1996, BA tried to merge with

American Airlines, to which Virgin launched a £10 million advertising campaign to prevent, with

the slogan “the world’s least favourite monopoly”. In 1997, BA put an advertisement saying that

they would give a free ticket to passengers who did not believe their business class service was the

best. This prompted Virgin to launch an advertising campaign helping passengers to claim this free

flight, with a standard letter that they could cut out and send to BA. In 1997, BA removed the

union flag from their tailfins, which prompted Virgin to put union flags on their planes. In 1999

BA reinstated the flag, to which Virgin launched a new livery with several union flags! There is a

distinct pattern of BA taking an action to which Virgin retaliates with a marketing response,

advertising campaign or PR drive in order to benefit at BA’s expense. However, since these

marketing responses are not imitating BA’s actions, they cannot be used for data in this analysis.

However, future work could develop this area further (see future research, section 7.0).

31

Market Share London-New York 1996-2000

0.0%

5.0%

10.0%

Figure 1.5 Market Share over time, London – New York (All airlines).

(Source: US Department of Transport)

This is a very interesting graph. It shows how the market share of airlines operating between

London and New York has changed over time. A careful comparison of BA (the blue line) and

Virgin (the red line) shows that the two lines are nearly symmetrical. This means that, generally

speaking, there is a trade off in market share between the two airlines. When BA’s market share

increases, then Virgin’s falls and vice versa. This is useful because it highlights the fact that the two

airlines are substitutes and consumers generally switch between these two airlines. Overall, Virgin’s

market share has increased steadily over the last five years, whilst BA’s has been eroded.

(Note: AA = American Airlines, CO = Continental, UA = United Airlines, VS = Virgin Atlantic)

15.0%

20.0%

25.0%

.0%

35.0%

40.0%

.0%

50.0%

Jan-96

Apr-96

Jul-96

Oct-96

Jan-97

Apr-97

Jul-97

Oct-97

Jan-98

Apr-98

Jul-98

Oct-98

Jan-99

Apr-99

Jul-99

Oct-99

Jan-00

Apr-00

Date

Mar

ket

Shar

e

45

AABA

COUAVS

30

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5.0 TESTING THE HYPOTHESES

5.1 The Effect of Imitation on Competitive Advantage

Hypothesis 1: If an action cannot be imitated immediately, then there will be some competitive advantage to

be had from undertaking that action, in spite of imitation. Competitive advantage can be sustained through

strategic actions and not through tactical actions.

In the airline industry there are major time lags between deciding to undertake an action, planning

its introduction and then finally launching it. For example, it took over three years for BA to

introduce individual seat-back TVs in business class after Virgin introduced them. There is an

additional time in which the reactor waits to assess whether the innovation is successful and worth

introducing or not. Thus, it is difficult to imitate an innovation (a strategic move) immediately and

there are especially long delays in the airline industry. There will be a competitive advantage in this

time for the innovator and to explain how this will occur, one can look at the sub-hypotheses.

Sub-Hypothesis 1.1: The time period in which the first mover’s actions are unique will provide the chance

to gain a competitive advantage and thus earn higher profits.

Sub-hypothesis 1.2: Being a first-mover (of a competitive action) will provide a competitive advantage,

which will continue after imitation.

Sub- hypothesis 1.3: A continuous flow of innovations provides a sustainable competitive advantage.

Whilst Virgin was the only firm offering improved entertainment facilities in Upper Class it had a

good competitive advantage and could earn higher profits from it. Virgin is still famous today for

offering individual TVs in economy class, even though BA have also started offering it since 1998.

It takes time for consumers to become aware that an innovation is also offered by another airline

but that innovation is still remembered and associated with the innovator. Thus, Virgin’s

competitive advantage from seat-back TVs has continued after it has been imitated. This will be

even more dramatic if it is supported by the firm’s capabilities or complementary assets. Virgin’s

reputation of offering a fun service helped to increase the association with an advanced

entertainment system. This will be further explored later.

Virgin have launched a continuous flow of innovations in order to stay ahead of their competitors.

An analysis of the time chart in figure 1.4 will testify to this. Virgin have launched many

innovations since their launch which, taken together, have provided a large competitive advantage.

This is because the sum of each of the small competitive advantages from each innovation quickly

adds up. This can be shown by looking at their market share below:

Virgin's Market Share 1996-2000, London - New York

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

1996 1997 1998 1999 2000

Date

Mar

ket

Shar

e

Figure 1.6 Virgin’s Market Share over time, London – New York

(Source: US Department of Transport)

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34

Virgin are an excellent example of a firm that has undertaken a continuous flow of innovations.

This graph shows the success of this strategy. They have a reputation of being innovative and fun

because of doing this and it has given them a major competitive advantage.

The second half of hypothesis 1 states that “competitive advantage can be sustained through strategic actions

and not through tactical actions.” The analysis above showed that strategic actions do lead to a

competitive advantage, so now tactical actions can be examined. Price cuts are the best example of

a tactical action. This hypothesis will be explored using the sub-hypothesis below:

Sub-Hypothesis 1.4: Price cuts will be matched by competitors. As a result market share will remain

unchanged and thus competitive advantage will not improve.

There have been many fare wars by BA and Virgin. In fact, they occur up to two times a year, in

March and October, when demand is at its lowest. It is always BA who launches the price war and

Virgin quickly match them on the same routes. Virgin usually choose to undercut by £1 and match

the conditions (for example, the date until which the offer lasts, the minimum length of stay). This

can be seen in the article from The Mirror below (12th October 1998):

“Tycoon Richard Branson halved fares on Virgin Atlantic yesterday as he launched a price

war with British Airways. Return flights to New York were slashed from £310 to £140 and

to Hong Kong from £569 to £279. The reductions are in reply to British Airways’ own

discount offers made in association with a national newspaper. They undercut the BA price

by a few pounds. Mr Branson said yesterday: ‘This is another war between Virgin and BA

proving that competition works. We will never be beaten by BA on price’. BA said: ‘we’ve

always said, whether it’s Richard Branson or anyone else, that competition is healthy and it

is the consumer who wins in the end.’ The BA flights can be bought from October 28. The

Virgin offer expires on the same date.”

35

Therefore it has been shown that price cuts (tactical actions) will be matched and thus no

competitive advantage of one firm over the other will occur. However, it can be seen to be a win-

win situation for both airlines. An article in Marketing on 22nd October 1998 explains why :

“BA and Virgin are drawn into a vicious fares war on their lucrative routes almost every

year. If the fares war is not allowed to spiral downwards too deeply or to go on too long,

then BA and Virgin will probably both benefit. Both airlines will win passengers from

other airlines that put fewer seats on sale and less muscle into advertising. They will sell

seats, albeit at bargain fares, that otherwise would have flown empty…. it is generally

agreed that once an airline has filled its first and business class cabins with full-fare paying

passengers it has more than covered the cost of the flight and tickets sold in economy are

straight profits. A fares war is simply a way of maximising return at the margin”.

Special low fares are a good way of getting publicity for an airline. They never state how many of

the low fares are on sale and thus it may not be very damaging to have such an offer. In addition,

both airlines benefit from increased demand and filling empty seats and thus they maximise

profits. The fare wars are only on economy tickets, rather than business class tickets where they

earn the majority of their profits. Thus, if a tactical action, such as a price war, is imitated it can be

a win-win situation.

However, this is a special situation and should be viewed as seasonal discounting rather than a

tactical price reduction. If, in contrast, one airline permanently cut fares (all year round) and the

other firm imitated this, then both firms would be worse off – a lose-lose outcome. Thus, neither

airline has decided to do this and there was no evidence of a tactical action being imitated, since

both airlines acknowledge their interdependency and do not want to embark upon lose-lose

actions.

In fact, the opposite has occurred. In September 2000, BA increased their fares by 3% (it said that

this was because of rising fuel prices) and Virgin immediately also raised their fares by 3% (Source:

Reuters News, 15th September 2000). Both firms aim to maximise profits and if both airlines

increase their fares, both can benefit. If they both reduce their fares then it will be a lose-lose

outcome. Therefore tactical competitive actions will be imitated and there will be no competitive

advantage of one firm over its rival from doing it. However, both firms can benefit from non-

competitive tactical actions if they know the other firm will imitate (thus making it a joint move)

and they can anticipate a win-win outcome. The example of a price rise shows that imitation can

be beneficial if it is anticipated. Thus, imitation should be anticipated in tactical moves and used so

that both firms can benefit, rather than gaining a competitive advantage over each other.

5.2 Uniqueness and Imitation

Hypothesis 2: The radicality of an action will affect the time of the imitator’s response and thus the

innovator’s competitive advantage. The more radical the action is, the greater the benefit, in spite of imitation of

that action.

The actions which Virgin or BA have taken, and the response time of the other, were analysed.

Only actions which were perfectly imitated were included in this. A comparison of the radicality of

the action and the time it takes to respond is shown below:

Action Radicality Response Time

New ‘Premium Economy’ Class 100% 102 months

Individual TVs in all classes 50% 89 months

Individual TVs in Upper Class 40% 41 months

Price Change (cut or increase) 10% 0.25 months

Table 1.7 Radicality and Response Time.

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It was described in section 3.3 how radicality was measured. The introduction of a Premium

Economy class was seen as a very radical action because it had never been done before and

involved a significant commitment of resources and taking a big risk. In contrast a price cut would

involve a much smaller risk (especially as it is an annual event). Introducing individual TVs in all

classes was seen as more radical than introducing it in only business class because it involved a

greater commitment of resources and it was unclear whether the extra cost could be justified on

economy class passengers. The response time is the time between the launch of the innovator’s

action and the time of the imitator to launch their response. These results are summarised below:

Figure 1.8 Radicality and Response Times

Radicality And Response Time

0

20

40

60

80

100

120

10% 40% 50% 100%

Radicality

Res

pon

se T

ime

(Mon

ths)

This diagram supports the hypothesis that the more unique an action, the longer the response

time. It was shown above that there are benefits from being a first-mover. The longer that it takes

for a competitor to imitate, the longer the first-mover can enjoy greater profits (as in Virgin’s case)

from being the sole provider of an innovation. They can gain a reputation or improved image

from that (Virgin have experienced this). They can increase customer satisfaction, which will

continue even after imitation has occurred. Therefore, undertaking more radical or unique actions

causes a longer response time from competitors which provides the innovator with greater profits.

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5.3 Win-win Situations

Hypothesis 3: There are situations where imitation may not be harmful, win-win situations, since other

benefits accrue to compensate for the lost competitive advantage.

There are many examples of win-win situations in the airline industry. It has been discussed how

the fare wars were a win-win situation for both airlines. In addition, the imitation of innovations

can be win-win. When Virgin introduced Premium Economy in 1992, it was a win-lose situation

(BA lost out). This innovation, combined with other product enhancements, helped Virgin to

double its market share to 31% in 2000 from 16% in 1992 between London and New York

(Source: US Department of Transport statistics and Virgin fact pack). However, once this

innovation was imitated by BA, the game became a win-win situation. This is because seats were

removed and thus capacity decreased, thus the need to offer heavily discounted fares was reduced.

In fact an article in Barron’s (9th April 2001) highlights the fact that these two British airlines will

both benefit at the expense of the US airlines:

“So far, Virgin Atlantic is the only other airline [apart from BA] to offer such a premium

economy service. It’s one that may help insulate the two British carriers against the worst

effects of a collapsing business-travel market in the event of a full-blown recession.”

It is also beneficial for Virgin to have BA in a healthy state during a recession, so that they do not

start any price wars or step up the competition. Thus, the imitation makes the game sustainable.

Another example of this is the new flat seat-beds, which both airlines now operate. In February

2001 an article in The Daily Mail stated that:

“Aided by good timing and strategic business moves, British airlines are stealing the

thunder of US rivals in the crowded translatlantic skies between America and Britain. BA

and Virgin have introduced new products to lure business clients on some of the busiest

routes in the world at the moment that their American rivals are suffering a consumer

backlash for shoddy service and the threat of strikes”

By both UK airlines offering a superior product, they can both benefit at the expense of the US

airlines – a win-win outcome. Virgin’s offering of a dedicated sleeping cabin back in 1993 and a

sleeper seat-bed in 1999 helps to account for their success. BA has been benefiting from it’s own

seat-beds and a spokesperson from BA has claimed that they have picked up 9% more seats

between London and New York since it’s introduction in 2000 (Source: The Daily Mail). An

article in The Observer (15th April 2001) states that, “it was important to note that BA and Virgin

between them were winning business of the North Atlantic from big US rivals such as American

Airlines, Continental and Delta, which do not offer beds. The two UK airlines have raised the

benchmark on product, and the others have fallen behind”. It can be seen below that the UK

airlines are benefiting at the expense of the US airlines:

39

Market Share London- New York Over Time. US -v- UK airlines

34.0%

38.0%

42.0%

46.0%

50.0%

66.0%

Jan-96

Apr-96

Jul-96

Oct-96

Jan-97

Apr-97

Jul-97

Oct-97

Jan-98

Apr-98

Jul-98

Oct-98

Jan-99

Apr-99

Jul-99

Oct-99

Jan-00

Apr-00

Date

Mar

ket

Shar

e

62.0%

58.0%

54.0%UK

US

Figure 1.9 Market Share over time, London – New York (US and UK airlines)

(Source: US Department of Transport)

40

Figure 1.9 above shows that over the last five years, UK airlines have been increasing their market

share at the expense of US airlines. In 1996 the 2 UK airlines held 58% of the market, compared

to 42% by the 3 US airlines. However, in 2000 the UK airlines increased this to 64% compared to

36% by the US airlines. The two lines are symmetrical and it shows that there has been a direct

trade-off between the two countries’ airline’s market shares. BA has even capitalised on this in

their US marketing campaign by stating that, “The British Simply Know How To Travel”. If BA

and Virgin work together to improve their services, they can gain a huge advantage over the US

airlines and provide an even greater win-win outcome. If British airlines get a good reputation for

offering a better product, then both BA and Virgin will benefit and this will be more than if only

one of them offered a better product.

In addition, healthy competition between the two airlines will spur the two to new heights, way

above other airlines. The managing director of Virgin, Steve Ridgway states that, “there’s no doubt

that we stirred BA to make some radical decisions on Club World….it is part of the industry game

of competing and outdoing each other and overtaking each other” (Source: Asian Wall Street

Journal, 17th April 2001). If BA did not imitate Virgin and try to keep up with them, then Virgin

would not need to keep innovating even further. Thus imitation is a win-win situation for both

airlines by making them strive even harder to improve their products. As a result of this the two

airlines together are managing to outshine their rivals. Imitation can make it even easier to sustain

a competitive advantage.

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5.4 Overall Model

Main Hypothesis: When unique, strategic actions are imitated there will be a win-win outcome. When

non-unique, tactical actions are imitated the result will be a lose-lose situation.

Now that an analysis of radicality and win-win situation has been carried out, one can combine the

results. It has been shown the more radical an action, the greater the time it takes to respond. In

the time it takes to respond, it is a win-lose situation and the innovator earns larger profits the

longer the response time. It can be shown that the more radical an action, the greater the win-win

will be after imitation. For example, when Virgin and BA both introduced seat-beds, it created a

large win-win situation (see above). In contrast, both introducing seat-back TVs was less radical

and thus did not lead to as great a competitive advantage of UK airlines over US airlines. The

more radical an action, the greater the potential competitive advantage and if both UK airlines do

it, they gain a greater win-win over their US rivals. This is because the nature of the competition

will change and intensify, the more radical an action is taken. Consumers will benefit even more

and thus demand will increase. A greater price can be charged from a more radical innovation,

since the added value which the airline provides will be greater. The seat-beds in business class

make travel more comfortable, thus increasing consumer satisfaction and willingness to pay. In

contrast, a less radical action like seat-back TVs, whilst providing benefits, does not provide as

much added value as the seat-beds. Thus the firm with a radical action benefits twice – from a

longer time with the game at win-lose and then a greater combined win-win outcome after

imitation.

In contrast, it is traditionally thought that a non-unique tactical action, such as a permanent price

cut, cannot bring anything other than a lose-lose or zero sum game if imitated. There is no

evidence of lose-lose games from the competition between BA and Virgin since both firms know

that they will be worse off if they undertake such a move and thus they refrain from doing so. Any

tactical action which involves a small commitment of resources can be imitated both perfectly and

immediately, thus negating any competitive advantage which can be had from such a move. Thus

there can only be limited or no benefit from undertaking such a move.

These results can be summarised below (note green boxes are strategic actions, blue boxes are

tactical):

ACTION: REACTION: OUTCOME:

IMITATION (LONG DELAY)

VERY RADICAL STRATEGIC

ACTION Large Win-win

Win-lose until imitated (longer)

IMIT(DEL

RADICAL STRATEGIC

ACTION

Win-win

IMITA(IMME

NON-RADICAL TACTICAL

ACTION

Lose-lose Or Zero Sum

This is a modification of Figure 1.1 to take into

the time it takes to respond and thus the resu

be shown to give a good summary of the comp

TION DIATE)

the accou

lting win-w

etition be

ATION AYED)

Win-lose until

imitated

Radicality

42

Time

Figure 2.0 Model of Imitation

nt the degree of radicality of an action on

in. It is a useful overall model which can

tween BA and Virgin.

43

t

5.5 Increasing A Competitive Advantage, In Spite of Imitation

5.51 Suppor ing Innovations with Complementary Assets.

Hypothesis 4.1: An innovation supported by the firm’s capabilities or protected by complementary assets

provides a greater competitive advantage.

When someone flies Virgin Atlantic, they are buying into a lifestyle. That lifestyle is a trendy, fun-

loving person who wants to be seen as fashionable. The Virgin brand is a powerful and extensive

one, which people want to be associated with. This is more appealing to younger individuals.

Virgin’s core capability is in marketing. In fact, Richard Branson dedicates a large part of his time

to personally promoting the Virgin brand. The biggest asset to the Virgin Group is the brand

(according to branding consultants Interbrand) and any innovation in the airline is supported by

this asset. This can be seen by the fact that even though Virgin is one tenth of the size of BA (in

terms of the value of the company) they generate the same amount of articles and free publicity as

BA.

Any action Virgin take is supported by this significant brand and proficient marketing machine

and thus a greater competitive advantage is sustained compared to an airline which does not have

this. British Midland is a larger airline than Virgin (in terms of the value of the company, number

of aircraft and the number of routes), yet they receive nowhere nearly as much as free press

coverage. Virgin have also developed a reputation for innovating, so consumers know that

whenever they choose to fly with Virgin, they will get the most up to date product. Overall,

Virgin’s innovations are supported by their core marketing capabilities and thus they gain an even

greater competitive advantage.

5.52 Using Isolating Mechanisms.

Hypothesis 4.2: Using isolating mechanisms can make it harder for competitors to imitate a product, thus

increasing the competitive advantage.

Fisher (1991) outlines eight isolating mechanisms (see below). Each one will be discussed with

regard to Virgin and BA to see whether they can in fact increase competitive advantage.

Competitive Isolating Mechanisms Information Impactedness Response Lags Economies Of Scale Producer Learning Channel Crowding

DURABLE

DIFFERENTIATION Customer-based Isolating Mechanisms Buyer Switching Costs Buyer Evaluation Costs Advertising Crowding

Figure 2.1 Isolating Mechanisms – Fisher (1991), pg 21.

Competitive Isolating Mechanisms: (Fisher 1991)

1) Information Impactedness: This is where competitors do not have the knowledge needed

to imitate. In the airline industry it is very difficult to keep new products secret, since once

they are launched everyone can see them. However, the long time lags between planning

and implementation could be crucial. If plans are kept secret during the planning stage

then it will take the imitator a long time to imitate. Minimising the defection of high level

managers is important. For example, in 1989 Mike Batt left BA to join Virgin, but only

stayed two days before returning to BA. This could have been very costly to Virgin.

44

45

2) Response Lags: These result from an inability to react immediately to a firm’s action.

Response lags are significant in the airline industry. It takes years to plan and implement

the refitting of a plane. This means Virgin can benefit greatly from the fact that imitation

takes a long time and by the time BA have imitated, Virgin can be launching a further

innovation. Virgin’s use of masseurs is hard for BA to imitate because it would take them a

long time to recruit and train enough people to fly on all of their key flights, since they

require people with specialised skills.

3) Economies of Scale: BA have experienced severe diseconomies of scale. This has enabled

them to successfully cut £1 billion worth of costs. There are many disadvantages from BA

being so large and operating over the minimum efficient scale. In contrast, Virgin operates

near or slightly over the minimum efficient scale, thus ensuring their costs remain low. Mr.

Branson even thought about splitting the airline into Virgin Atlantic and Virgin Pacific to

ensure that the airline did not experience the problems of BA. Kay (1993) estimated that in

1993 BA gained a competitive advantage over other European airlines of 15% from

operating at Heathrow, having a good brand and owning their route licences. He estimated

that around half of this was absorbed in higher costs. Therefore remaining small and

focussed can control costs and thus provide a cost advantage. Virgin benefits from a cost

advantage over BA and this helps to account for the fact that they can earned a profit of

£40 million in 2000, compared to BA’s loss of £21 million.

4) Producer Learning: This will help both BA and Virgin compete against new entrants into

the UK airline industry. They have both gained insights into personnel, production,

marketing and other business functions, which will give them a competitive advantage.

5) Channel Crowding: This is where a firm gains access to a distribution channel and thereby

prevents competitors from using the channel. BA fought long and hard to prevent Virgin

gaining access to Heathrow Airport. Had they succeeded Virgin would have been severely

handicapped. However, now they both have access, they can both gain at the expense of

competitors. This is because the Bermuda Treaty 1972 states that only two UK and two

46

US airlines can fly from Heathrow to the US. Both airlines have prevented the lifting of

this treaty (the campaign for ‘open skies’) and thus they stop competitors (such as British

Midland and Continental) from being able to compete fairly. This is a significant isolating

mechanism which has given both BA and Virgin a significant competitive advantage.

Until 1991 Virgin was forced into a less advantageous location (Gatwick). Kay

recommends searching for innovative distribution systems to overcome the disadvantages

of poor physical locations. This is exactly what Virgin did to overcome their poor location.

They offered free chauffeured transport to and from Gatwick to Upper Class passengers,

which was a good way of overcoming some of the disadvantages of their inferior location.

Customer-Based Isolating Mechanisms.

1) Buyer Switching Costs: Both airlines attempt to create buyer switching costs with their

loyalty schemes. These seek to develop long-term contracts which reward loyalty and

prevent switching. This acts as a barrier to new entrants. It is possible to argue that

consumers will simply belong to both loyalty schemes. However, both BA and Virgin have

conditions attached to the accumulation of points which means that you lose them after a

certain time. Thus, to take full advantage of the scheme, flyers should undertake all of their

transport with one airline.

2) Buyer Evaluation Costs: A flight is an experience good. Firms can lower buyers’ evaluation

costs by providing warranties to reduce buyers’ need to evaluate the service. Both Virgin

and BA have at some point provided a money-back guarantee to customers in Business

Class. This usually asserts that their service is the best and if you do not agree they will

refund your ticket. This reduces evaluation costs and thus provides a competitive

advantage. Virgin also benefit from customers being able to associate the airline with other

tangible products that already have a good reputation. If a customer has faith in the brand

through their experience, they will be more willing to try the airline. This gives them a

greater competitive advantage.

47

3) Advertising Crowding: Fisher advocates supporting new actions with a clear and consistent

advertising program. This is exactly what Virgin does – they highlight the fact that their

product is continually being updated and that they take the lead in innovating.

In addition, Fisher advises firms to make it unclear where success is coming from. Virgin have

succeeded in doing this. Even though many of their innovations have been imitated, there are

many others which have not. For example, Virgin offer masseurs, free limousine transport to and

from the airport, an onboard lounge and drive-thru check-in, for Upper Class passengers. Not

only will it take BA a long time to imitate all of these innovations, they will not be able to

determine which ones are the most beneficial (in terms of increasing customer satisfaction and

thus profits) to Virgin. Thus, there is a lot of evidence to show that isolating mechanisms are very

useful in increasing competitive advantage and making it harder for competitors to imitate

innovations.

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6.0 CONCLUSIONS

• Analysing how Virgin and BA competed revealed that imitation does not negate the competitive

advantage from strategic actions. The time-lag in the airline industry means that first-mover

advantages will be significant before imitation and even after imitation, since the benefits from the

innovation continue. A continuous flow of innovations provided a sustainable competitive advantage

to Virgin. However, tactical actions can be imitated immediately so there will be no advantage.

• The hypothesis that the more unique an action, the greater the competitive advantage, was also

supported. It was shown that longer response times occurred, the more radical the innovation.

• The work on win-win situations provided interesting results. It showed that Virgin could in fact

benefit from BA imitating them and that together they could, and in fact are, ‘stealing a transatlantic

march on their rivals’.

• The main hypothesis brought together all of the analysis. It was argued that the more radical an action,

the greater the win-win. The win-win will be greater because the time lag until the innovation is

imitated increases as does the benefits for both after imitation.

• Finally, it was argued that supporting an innovation with complementary assets and using isolating

mechanisms provides a greater competitive advantage

Overall, BA can be seen as the price leader and Virgin as a price taker in the UK airline industry. In

contrast Virgin is the innovation leader, setting the standards for the product, and BA is the

innovation taker. Virgin always respond quickly to BA and in some way to every action BA take, but

BA tend to respond slowly and selectively to Virgin’s actions. Both benefit from having each other,

since competition between the two disciplines them and raises the benchmark of their services.

Virgin’s competitive advantage has been sustained through launching radical innovations and imitation

has not eroded this. Both airlines are now benefiting because of imitation– a win-win outcome. Thus,

imitation is in fact healthy.

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7.0 LIMITATIONS AND FUTURE RESEARCH

The work of this thesis has been limited by the data available. Only major strategic actions are

usually reported in the press. For example, it was hard to find information about smaller actions

like spending more on advertising or improving the quality of the food. The data on performance

was also limited, since market share data only covered the period January 1996 to June 2000. Data

on profits is of limited use, because there are too many variables affecting. It was also difficult to

determine what causes fluctuations in performance (market share) and how long the benefits of

strategic actions will last. Indeed, quantification of the benefit of actions (for example, the seat-

back TVs) is very difficult. Finally, the measure of radicality used was quite subjective and hence

not very rigorous.

It would be useful if future research looked at other industries and investigated whether the same

conclusions can be drawn. In particular, the main model linking radicality and win-win needs to be

applied to other industries and companies and developed further. In addition, work could be done

on different industry structures – where more than two firms compete directly. The work on

radicality and the time of response would be enhanced if there were more data points and future

research could look at this in depth. A more rigorous measure of radicality could be adopted in

further research, such as the method used by Smith, Grimm, and Gannon, (1992). They asked

managers to respond to three questions about the extent to which an action was radical and the

extent to which the action resulted in an opportunity for the competitor. They summed the

standardised scores to each question. Finally, the discussion of BA’s actions which invoked a

marketing response from Virgin could be further developed (section 4.3). It could be analysed

how successfully Virgin negate BA’s action through creative marketing responses.

50

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