Question

3. Below are some activities that Lan Airlines conducts.

• Invest in passenger and cargo
• Price discrimination (10 different fare rates)
• Full service (i.e., meals)
• Sell ticket through travel agents (67%)
• A member of Oneworld alliance¹
• LanPass²
• Long haul routes
• International routes
• Non-standardized fleet
• Hub-and-spoke model
• Performance-related pay structure

Notes:

1. Oneworld is an airline alliance, and its member airlines include American Airlines, British Airlines, Japan Airlines, Malaysia Airlines, etc.
2. Frequent flyer program

Based on these activities, 1) briefly describe Lan’s business-level strategy and how they achieve profitability; 2) What are the tradeoffs in Lan’s strategy and how do such tradeoffs make its strategy hard to imitate?

Answer 1

Answer 1:

LAN’s business-level strategy and the process of achieving profitability:

LAN invests in passengers and cargo. By investing in passenger, LAN is ensuring that it provides better services to its customers so that whenever they would think of flying through the airlines, they would only think of LAN. Making an investment in cargo ensures that the company has enough assets so as to serve the maximum possible customers without the need of denying their demands.

The price description strategy of the LAN provides it with the benefit of occupying all types of customers and achieving economies of scale. This helps the company in maximizing its profit. Price discrimination is as per the services being provided to the customers. For the lowest cost tickets, the services would be less as compared to that being provided for the high-cost tickets.

Provisioning of meals during the travel for all prices of tickets helps the airliner in attracting the customers to avail its services. Selling ticket through the travel agents helps the company in reaching the customers at their convenient point and thus, maximizing its profits by increasing the sales of the ticket through the travel agents.

Answer 2:

The tradeoffs in LAN’s strategy are that they have hired travel agents for selling 67% of its tickets and has included a performance-related pay structure. It provides full services to the passengers for all the prices of tickets. Selling of the tickets through the travel agents ensures that the company reaches all the possible customers such that they would be able to book the tickets from their comfortable points. This maximizes the sales of the tickets of the airliner. The inclusion of price discrimination helps the customers in selecting the tickets that match their budget. This helps all types of passengers to select the service provider and enjoy its services. Other airliners could not imitate the business strategy of LAN as they operate with a limited number of aircraft and provisioning of economically priced tickets to the customers is not possible for them as they are not able to apply the economies of scale because of the limited availability of the aircraft whereas LAN is the airliner that sufficiently invests in the passengers and the cargo. Furthermore, LAN has implemented the strategy that the pay structure to the employees would be on the basis of their performance. In order to gain more earnings, employees of LAN work hard for achieving their targets. This further benefits the service provider.