50 years since Franklin Roosevelt gifted a DC-3 Dakota airplane to King Abdul-Aziz, allowing the country a leap into modernity, countrywide carrier Saudi Airlines' fleet has grown to 139, rendering it the region's leading Aviation Company.
But as the Gulf's spending ability grew via habitual essential oil booms, so did the transport-expansion capacity of neighbouring countries. Competition in your community is becoming brutal, with vast amounts of investment pouring into modernization and fleet development by countries such as Qatar and the Emirates. Increase that the entrance of low-cost service providers such as National Air Services and SAMA Airlines which checks a complete new field.
Saudi Airlines made a decision to take on the challenge on multiple levels. Firstly, a global advertising campaign drew attention to Saudi hospitality and power as something provider. By buying an upgrade of its business class services and inserting an order for 22 Airbus A320 wide-body jumbo jets, the air travel aims to keep up its leading position of the last years (formal website, 2010).
In addition, a privatization process is expected to further stretch its competitive advantage, with its catering and technological services items already spoken for and other sections to follow in '09 2009. "Saudi Arabian Airlines is respected in providing world-class services with a distinctive Saudi persona and warm Arabian hospitality, " points out Yousef Atiah, Vice Leader for CUSTOMER SUPPORT. "All our improvements, enhancements, and enhancements are based on this principle" (Foreign Affairs, 2008).
"Saudi Arabian Airlines agreed upon five landmark contracts Sunday to privatize its main aviation unit, set up a new company for surface services whatsoever Saudi airports, funding its new fleet of plane and deal with the IPO of its catering company" (arab media, 2010). Such news is filling the air nowadays whilst Saudi Airlines carryon forward their ambitious goals of completely privatisation by the end of 2015.
Saudi Airlines started out the procedure of privatisation in 2006, where it dividing itself into Strategic Business Units (SBU); the catering unit was the first ever to be privatized. In August 2007, Saudi Arabia's Council of Ministers approved the change of strategic products into companies. It is planned that ground services, specialized services, air cargo and the Prince Sultan Aviation Academy, as well as the wedding caterers unit, can be subsidiaries of a positioning company.
Apart from the privatisation goals mentioned formerly, some aiding divisions were maintained in the shade and not pointed out in the line-up. Departments such as Information Technology, medical centre, and training team were not obviously dealt with in the strategy plan mentioned before. Never the less, decisions have been made actually to outsource some of them, mainly the medical and the training centres, as indie earnings institutes. Regarding Information Technology, it had not been clear whether to keep it in-house as a main competence or outsource it to the marketplace [].
To sophisticated more on this issue, the Information Technology Dept. will be studied as a case-study where it'll be measured and examined using two tactical perspectives, mainly transfer cost (TCE) and learning resource centered view (RBV).
Information Technology team, having a wide array of employees (around 500), is in charge of providing a verity of e-solutions and e-support to various segments of the business; and their main duties are:
1. Host and maintain the company's booking system: that handles reservations, ticketing, and arranging transactions where the system is hosted in-house over a mainframe system administrated 24/7 with a dedicated well trained team. In addition to a support team who are responsible of make required amendment to the system.
2. Hosting other team systems: such as financial, marketing, real human resource, and payroll systems with dedicated teams to each of them for support and development. They were recently replaced by SAP Organization Tool Planning (ERP) solution.
3. e-Business centre: which give a verity of -services to employees such as medical session reservation, airline personnel booking, payroll information, statistical and market information for professionals and training materials.
4. Network administration: where sites between different areas of the company in addition to sales office buildings across the world are supervised and looked after via the network dept.
5. Communication services: including corporate and business e-mail and other messaging systems are given for staff and crew users.
6. Hardware and Software maintenance: for those PCs, printers, terminals, and other related parts.
Transaction cost overall economy (TCE), pursuing Williamson (1975), can be involved with all the costs of search, metering and monitoring from the transfer of resources and products across markets and within organizations.
TCE is actually built on the idea that efficient businesses will be the ones who decrease the total of creation costs and exchange cost (Lockett, Thompson 2001: 728). The creation costs are all inputs to the development process that includes physical inputs such as recycleables, machineries, and workforce, workers & supervision. The exchange cost, on the other hands, presents the indirect costs needed to carryout that process. It is the cost scheduled to using the market in issues such as looking for buyers and sellers, negotiating deals with them, preparing agreements, monitoring deliveries, and the payment mechanism.
Another application of TCE is in the 'make or buy' decision making, which involve deciding whether to produce the required aspect in-house or source it from market. TCE propose that "in the lack of production cost difference the answer depends on the relative cost of using the market or internalizing the business deal. Where the costs of using the marketplace are high, the make - or vertical integration - option will generally be preferred. Where in fact the costs of using the marketplace are low it will usually be cheaper to make use of the buy option" (Lockett, Thompson 2001: 728).
The purchase cost was first released by Ronald Coase in 1937 to try to explain life of company. Coase viewed firms as a way of eliminating purchase cost since organizations are though to be beneficial unites (vertically integrated) ready to produce and sell goods in order to avoid the location market related costs such as searching, negotiation, and monitoring delivery in each re-contracting. Inside the lack of the firm model, these costs happen on daily basis where personnel are hired. Because of this, daily hiring cost, uncertainty of both hiring or option of enough labour are some of the dangers; in addition in loosing the opportunity of learning and training scheduled to daily basis recruitment.
Although the Coasian organization tried to explain the business deal cost idea by responding to the physical costs included, it actually lacked the behavioral point of view of the subject. Oliver Williamson (1975; 1985) further developed that theory by including these behavioral factors to the model.
Williamson clarifies the difference of his view by saying that "there is some discomfit with the obvious disjunction between neoclassical and business deal cost modes of economic research where the ex - emphasizes creation costs and views the company as a development function, while the last mentioned focuses on business deal costs and regards the company as a governance composition" (Williamson, 1985).
His two major efforts were posing interior organization and markets as alternative ways of coordinating transaction; and checking out the determinants of the business deal cost.
Consequently, many habit determinants have been identified as well as the Coasian physical ones; and these are:
1. Bounded Rationality
3. Information asymmetry
5. Small amounts bargaining
6. Consistency of transaction
According to Williamson, it is the mixture of several of these that actually improve the transactional cost. So in the absence of symmetric information, for example, as in the case of selling an automobile, a supplier how knows better could react opportunistically with the customer who lacks information about the car and because of this the business deal cost could be significantly high.
Another main factor (according to Klein and Teece) is the advantage specificity. A secured asset specified to a particular task generally generates higher returns in that use than other general goal one. An example could be Petrol pipelines, used specifically to copy oil from Essential oil wells/domains to refineries or seaports. With all the existence of advantage specificity, there's always a risk of arguments and disagreement between contracting functions, which in turn might bring about a complete hold-up. Such situation, if took place, would certainly increases the transaction cost included.
Therefore, vertical integration - make - is recommended to advertise sourcing - buy - when Business deal cost is high and regularity is high and visa versa. Some exception to this role happens in conditions involving advancement, culture variations, or country/industry specific factors.
TCE proved to be widely applicable to most monetary and contractual connections; including vertical and horizontal integration, corporate and business finance, marketing, RECRUITING, organisation of work, commercial contracting, copy charges, franchise, and even legislation (Selanski H. A. and Klein, P. G. 1995).
In addition, if an excellent transactional system can not be imitated, it might be a critical way to obtain sustainable competitive edge, as the situation of Toyota with their sub-contractors.
It is not surprising, then, that Rumlet, Schendel and Teece (1994: 27) mentioned that "of all the new subfields of economics, the deal cost branch of organizational economics has the best affinity with tactical management" and continuo on watching that TCE "is the bottom where monetary thinking, strategy, and organizational theory meet" (Rumlet et al. 1994: 27).
By making use of TCE methodology, maybe it's made a decision whether to outsource the IT dept. or keep it in-house (vertically integrated). By looking at the business deal cost associated with outsourcing the center, it isn't recommended to look for market for most reasons:
1. Outsourcing the complete department can't be done for multiple suppliers because of the uniqueness of the systems which can't be duplicated. On the other hand, sourcing to only one supplier holds, also, the risk of stability and quality of services provided. Supplier's environment robustness is a mandatory, since any malfunction could paralyze the entire business.
2. Another concern is regarding opportunism behavior. Since the distributor knows how crucial these systems are to the work-flow of the business, he would have a strong bargaining power when renewing the agreement.
3. The indirect cost associated within such as searching cost and time, negotiating deals, metering payments, monitoring deliverables are extremely high and time consuming. And in the event opportunism behavior occurs, it might be very costly to improve to another one.
4. But not regarded as a central of the business enterprise, It's important for the deliverable of virtually all services available and relying such important element on just one single source might lead to a hold up by the company. So, a back-up should be accessible (which is not the case here!).
5. When the contract involves preparing a location (advantage specificity) for the company to work it could lead to more exchange cost, especially regarding cancelling the deal (sunk costs).
Although TCE comes with an advantage of being built on a simple and straightforward guideline -cost minimisation, and courses decision making by posing inner corporation and market as mentioned recently, nevertheless there a wide range of issues that contain been raised contrary to the benefits of using TCE.
TCE is commonly technologically deterministic, where development might cause the prediction to be invalid (Lockett and Thomson: 110). It really is, also, subjective in costs estimates, as professionals might define business deal costs in another way. TCE is hard to measure, and testing have a tendency to be in an indirect form for the reason that they just explore marriage between contractual benefits and assumed determinants of exchange costs and not the costs themselves. In addition, it does not provide a value for trust in contracting and always presume opportunism.
Other critics concern the genuine philosophy of TCE theory and whether it's good enough to be utilized running a business strategies whatsoever. One such concern is the fact TCE tends to put too much emphasis on opportunism and inadequate on trust (Ghoshal and Moran 1996). It, also, centers only on cost aspect of a transaction and ignores the benefits associated with a exchange, which frequently focus on the social part of humans (Zajac and Olsen 1993). Furthermore, it might not make clear the organization heterogeneity (Conner 1991).
Initiated in the mid-1980s by Wernerfelt (1984), Rumlet (1984) and Barney (1986), Reference Based View (RBV) point of view tries to clarify the link between your internal features of firm and its overall performance (Barney, 1991). On this proper theory, the company can be regarded as a assortment of tangible and intangible resources that enable that company to compete with other businesses. It focuses on the connections between a firm's resources and their competitive advantage. Resources can be categorised into:
Physical resources (equipment, building)
Human resources (knowledge, experience, individuals' insight)
Organizational resources (culture, composition, informal process)
Finance reference (debt, equity)
The RBV is based on two main hypotheses: tool diversity and source of information immobility (Barney, 1991; Mata et al. , 1995). Matching to Mata et al. (1995), these assumptions are thought as:
1. Resource variety: (also called resource heterogeneity) relates to whether a firm owns a learning resource or capability that is also owned or operated by many other competing businesses, then that tool cannot provide a competitive advantage. An example might be considered a firm is wanting to choose whether to apply a new development technology. This new technology may provide a competitive gain to the organization if no other rivals have the same functionality. If they do have similar features, then this new technology doesn't complete the 'resource diversity' ensure that you hence doesn't provide a competitive benefit.
2. Reference immobility: this identifies a tool that is difficult to get by competitors anticipated to the cost of expanding, acquiring or using that source which is too much. Consider, as an example, a firm hoping to decide whether they can purchase an 'off-the-shelf' supply-chain monitoring system or have one built specifically for them. If indeed they buy an already built solution, they have no competitive gain over others on the market because their competition can use the same system. If they purchase a customized the one that provides specific talents that only they can put into action, then they may have a competitive benefits over their rivals.
Sustainability in a ecological competitive advantages is independent based on the time. A competitive gain is considered sustainable when all work by competitors to help make the competitive advantage redundant have failed. Once the imitation tries ends without distracting the firm's competitive edge, then your firm's strategy can be called ecological. This is divergent to other views such as Porter's which stated that competitive edge is sustained when it offers above average returns over time.
Industrial Organisation Economics (IO), marketed by Porter (1980), views the company's competitive edge as produced from the company knowing where you can position itself on the market. Leading determinant in IO view is that performance is dependant on exterior environment and industry structure. Therefore, revenue source is market positions and that the positions are safeguarded by barriers to entry in to the market.
Resource established view is different. It looks inside the business which it considers as a bundle of resources and looks at which resources that allows a firm to obtain a sustainable competitive benefits. Therefore, a company's competitive advantage is not predicated on market or industry set ups but rather, what it derives from its own inside resources.
It could be obviously seen that RBV doesn't challenge IO; in fact they both go in-hand. IO, on one hand, looks at the opportunities and risks of a SWOT examination, while RBV talks about the Strengths and Weaknesses of this SWOT.
Barney (1991) identifies the criteria on which a tool could be looked at as a source of competitive advantage and highlights the importance of intangible elements that can be within organisations. RBV will not suggest that every source can be a way to obtain competitive advantage. Rather it must possess a number of characteristics to be looked at consequently.
Consider Barney's (1991) survey about the RBV. He (1991:102; emphasis in original) explains that
"A company is thought to have a competitive advantage when it's implementing a value creating strategy not together being applied by any current or potential competitors. A company is thought to have a sustained competitive advantage when it's applying a value creating strategy not simultaneously being executed by any current or potential opponents and when these other businesses are unable to duplicate the advantages of this strategy".
Thus, a learning resource is recognized as a way to obtain sustainable competitive gain if it's:
1. Valuable: which identifies the power of a company attribute to exploit specific opportunities and counter risks in the environment.
2. Rare: the learning resource must be unusual among the list of firm's present as well as potential opponents. As long as the number of firms having this tool is significantly less than the amount of firms needed to generate perfect competition, the reference is adequately uncommon to probably create competitive benefits.
3. Imperfectly imitable: the resource may be imperfectly imitable due to any one of these three factors. If it is reliant on unique historical environment or its relation to competitive edge is causally ambiguous or the source of information is socially complex.
4. Imperfectly substitutable: suggests that there are no strategically comparable substitutes that are valuable but are either imitable or not rare.
Resources with these characteristics are called VRIN resources. A VRIN learning resource can be a source of lasting competitive edge. Knowing which the competitive advantage sources are is very important for the company as it allows decision manufacturers to decide how uncommon it is and also to protect it from imitation.
Isolating mechanisms are the main ways of guarding the company's resources from imitation and conserve profit flow. One of these mechanisms is known as the causal ambiguity. Causal ambiguity limits imitation and mobility because opponents do not really know what the causes of a rival firm's efficiency are. This can become a way to obtain competitive advantage especially if firms themselves disregard the hyperlink between their resources and their edge which causes others to do the same.
In order to compete with others, organizations need to effectively control their resources and do so it must protect their current resources, consistently improve them and build new ones. Resources need to be durable, difficult to identify and understand, imperfectly transferable, hard to reproduce and clearly owned or operated and handled by the business.
From RBV point-of-view, strategic choices are tied to the organizations' resources. Therefore if strategies aren't based on its VRIN, then only short-term comes back are expected at best, which is also not sustainable. The simplest way for maintaining permanent benefits is designed for companies to envisage strategies that are designed on their resources.
Advocates of RBV claim that diversifications have prominent implications for commercial strategies if based on companies' specific resources. Diversification is recommended to utilize resources that can have uses in markets that aren't presently exploited by the company.
Seen as a way of corresponding a firm's resources with market opportunities, RBV advises that companies should take up strategies that their resources can support.
Unlike TCE which works pessimistically, RBV searches for the foundation of electric power inside the firm & tries to get the core competences within. By search the competences relating to the IT Dept. , it is recommended going for market sourcing for most reasons:
1. IT is not a core competence of the business enterprise. Though it has a great deal of importance, still it can not be regarded as competences since such solution are already available in off-the-shelf editions. So, they are not rare nor they are imitable.
2. Outsourcing would, also, be good since these services will be dealt with by professional companies, whose central competence is to cope with such work.
3. Eradicating such issues, helps the company give attention to and develop their real competences, and even seek out new ones.
4. Unlike TCE, RBV does not over estimate hold-up, if trust prevails between both get-togethers it might be save to outsource to them.
Despite the countless benefits that RBV offers to proper decision making, still there are some major drawbacks because of this perspective.
The over-focus on current source is one main problem, because it tends to narrow down the view to existing resources, which may become obsolete after some time, and discarding any dynamic capability which might eventually lead to losing the chance of exploring new potential competences (i. e. primary rigidity).
RBV tends to exclude market electricity, because firms have no bargaining electric power in product market segments. Thus, competitive advantage can not be based on market electric power in the sense of elevating price above cost via restricting source.
It is weakened in the sense of competitive activities because they're limited to safeguarding costly-to-imitate resources. As a result, price discrimination, product differentiation and scientific competition are hard to imbed within RBV (Makowski and Ostroy 2001).
Transaction costs are dismissed in RBV point of view. So, it isn't possible to install corporate and business strategy issues including the choice of circulation channels and relations to suppliers in terms of comparative contracting (Chi 1994).
In addition, the process of creating, acquiring, and safeguarding value is barely observed in RBV. Thus, value creation credited to product development or differentiation (Machove 1995), enhancing contractual agreement and internal firm (Williamson 1994; Foss and Foss 2002) and others can not be encapsulated within.
In conclusion, taking either TCE or RBV as a proper strategy for decision making is a mistake alone. Both view have there pros and cons. In addition, TCE tends to go through the external factors that might influence business strategy, while RBV search in the inner aspects that could build a competitive gain. Both are actually complementing one another; where TCE focuses on Opportunities and Threats, RBV handles Talents and Weaknesses. Because of this, they jointly complete the SWOT paradigm.
For Saudi Airlines' IT to consider a better decision, it will consider both methods. And rather than going for a lump-sum decision on totally outsourcing or completely keeping in-house, it is best to divide the complete structure into small chunks some of which are critical and must be retained at house plus some tend to be trivial and could be outsourced safely.
By doing this, Saudis' IT Dept could better optimise their resources and give attention to core business at hand and be ready for the new period (privatization age).