Strategic innovation of CPH Airport's business model Strategisk innovation af CPH Lufthavns business model How to improve CPH Airport’s Business Model Master Thesis Name: Philip Nygård Petersen Education: Cand.merc (Økonomisk Markedsføring) Master Thesis Contract nr: 6989 Name: Rasmus Røpke Bjørnlund Education: Cand.soc (Organizational Innovation and Entrepreneurship) Master Thesis Contract nr: 7679 Date: 15 May 2017 Supervisor: Henrik Johannsen Duus Number of pages: 118,2 · Characters: 268.809 Dispensation for writing together This page confirms that we have been allowed to write our thesis together. This dispensation was necessary, as we study two different master programs (Cand.soc. and Cand.merc.). Our two contracts numbers have also been linked (6989 and 7679) 2 Table of Contents 1. ABSTRACT 5 2. INTRODUCTION 6 2.1 BACKGROUND AND CHOSEN CASE 6 2.2 PROBLEM IDENTIFICATION 7 2.3 PROBLEM STATEMENT 9 2.4 THE FOCUS AREA 9 2.5 METHODOLOGY INTRODUCTION 10 2.6 THEORY INTRODUCTION 11 2.7 THESIS LAYOUT 12 3. METHODOLOGY 12 3.1 RESEARCH PHILOSOPHY 13 3.1.1 CRITICAL REALISM 14 3.2 RESEARCH APPROACH 14 3.3 RESEARCH STRATEGY 16 3.4 RESEARCH CHOICES 16 3.5 TIME HORIZON 18 3.6 THE DATA COLLECTION 18 3.6.1 SECONDARY DATA 18 3.6.2 PRIMARY DATA 18 3.6.3 PRESENTATION OF INTERVIEWEES 18 3.6.4 FOCUS GROUPS 19 3.6.5 INTERVIEWS 21 3.6.6 QUESTIONNAIRE 22 3.6.7 LIMITATIONS FOR THE QUESTIONNAIRE 23 3.7 LIMITATIONS FOR THE THESIS 23 4. THEORY 24 4.1 THEORY HISTORY 24 4.2 ALEXANDER OSTERWALDER 27 4.2.1 CUSTOMER SEGMENTS 28 4.2.2 VALUE PROPOSITION 29 4.2.3 THE FIT 30 4.2.4 CUSTOMER RELATIONSHIPS 31 4.2.5 CHANNELS 31 4.3 DAN ROAM 32 4.3.1 THE GOOD-LUCK COIN 32 4.4 DAVID A. AAKER & DAMIEN MCLOUGHLIN 34 4.4.1 EXTERNAL ANALYSIS 34 4.4.2 INTERNAL ANALYSIS 39 5. THE SITUATION 40 5.1 THE HISTORY OF COPENHAGEN AIRPORT 41 5.2 CPH AIRPORT’S BOARD AND MANAGEMENT 42 5.3 CPH AIRPORT’S MAIN ACTIVITY 43 3 5.4 ANNUAL REPORTS ANALYSIS 47 5.4.1 KEY FIGURES AND DEVELOPMENT 47 5.4.2 KEY RATIOS 49 5.5 CPH AIRPORT’S GENERAL COMPETITION 50 5.6 CONCLUSION OF THE SITUATION 50 6. ANALYSIS 51 6.1 PEST ANALYSIS 51 6.2 PORTER’S FIVE FORCES 56 6.3 CUSTOMER ANALYSIS 62 6.3.1 CUSTOMER SEGMENTATION 62 6.3.2 CUSTOMER MOTIVATIONS, GAINS, AND JOBS. 69 6.3.3 UNMET NEEDS AND CUSTOMER PAINS 75 6.3.4 PARTIAL CONCLUSION 77 6.4 VALUE PROPOSITION 77 6.5 THE FIT 81 6.6 INTERNAL ANALYSIS 84 6.6.1 NON-FINANCIAL MEASUREMENTS 85 6.6.2 COMPETITIVE ADVANTAGE – USE OF DIGITAL SOLUTIONS 86 6.7 CONCLUSION OF THE ANALYSIS. 88 7. STRATEGIC INITIATIVES AND DISCUSSION 90 7.1 INNOVATING OF THE OFFERINGS 91 7.2 DISRUPTION VERSUS ADAPTATION 92 7.3 DIGITALIZATION 93 7.3.1 THE CONTENT 94 7.3.2 THE USE OF DATA AND PRIVACY 95 7.3.3 THE INNOVATION DEPENDS ON THE PARTNERSHIPS 96 7.4 AUTOMATION 96 7.4.1 A NEW WAY OF SELLING 97 7.4.2 WHAT PRODUCTS TO OFFER 98 7.5 CPH ADVANTAGE 99 7.6 BRANDS IN CPH AIRPORT 101 7.6.1 ADJUSTING QUALITY INSTEAD OF PRICE 103 7.6.2 BARGAINING POWER 104 7.7 THE LINKAGE BETWEEN THE AERONAUTICAL AND NON-AERONAUTICAL BUSINESS 105 7.8 DAN ROAM’S GOOD-LUCK COIN 106 8. FURTHER RESEARCH 109 9. CONCLUSION 110 10. BIBLIOGRAPHY 113 APPENDIX 119 4 1. Abstract This thesis uses business modelling to examine how CPH Airport can optimize its non-aeronautical business area. The main focus is to apply Alexander Osterwalder’s value proposition canvas, with the aim to optimize the Fit between the offered value proposition and an identified customer segment. This has led to the following problem statement for the thesis “How can CPH Airport optimize its business model for its non- aeronautical business?”. To answer the question, a combination of theory within organizational innovation and strategic marketing has been included. The chosen theories included are Alexander Osterwalder’s theory regarding value proposition canvas, Dan Roam’s concept of the good-luck coin and lastly, David A. Aaker and Damien McLoughlin’s framework of strategic market management. Through the findings of the customer analysis, the segment efficiency traveller is identified to be the most relevant customer segment, for optimizing the non-aeronautical business. This is because their behaviour and needs are challenging for CPH Airport’s non-aeronautical business to match. The segment wants to go through Copenhagen Airport independently as well as efficiently, and does not believe that their is a proper coherence between price and quality of the offerings in the airport. However, there is at the same time a possibility to improve these existing problems, by meeting the segments’ needs through strategic innovation. This has led to three specific initiatives to improve CPH Airport’s non-aeronautical business by creating a stronger Fit: digitalization, automation and branding. Digitalization through beacons can create a more efficient shopping experience, by giving the travellers offers on the go. Automated retail solutions allow the segment to shop more independently, as they can do the shopping on their own. A focus on having well-known brands in the airport can meet the chosen segment’s concerned gap between price and quality, as they know what to expect from the brand. An important finding to be aware of is how stress among the travellers seem to ruin all desire to shop in CPH Airport. This means that the current constructions at CPH Airport can create stress for the travellers, which can limit the effect of the suggested initiatives. 5 2. Introduction 2.1 Background and chosen case H.C. Andersen once stated “To travel is to live” (Den Store Danske, H. C. Andersen på vej mod europæisk berømmelse, 2012). This seems even more true in the 21st century, as the world bank has announced that there were 3.441 billion air transport passengers carried in 2016 (The World Bank, Air Transport, 2017). The number of air transport passengers carried has especially increased rapidly in the recent years, as it has increased with more than a billion since 2009 (see Appendix 1). This means that airports all around the globe plays an important role, as they are the hubs connecting billions of people, and create a global network bringing you almost anywhere on the planet. The increasing number of passengers, also means that airports are becoming a lucrative business, as Airports Council International (ACI) have stated that airports are making more money than ever before (International business times, How do airports generate money?, 2013). In the council's most recent report from 2015, they state that in 2014 the global airport industry revenue was 142.5 billion US dollars. The industry as a whole had grown by 8.2 percent from 2013 to 2014 (ACI, 2015 ACI airport economics report, 2015). An airport generalizes its sources of profit by dividing them into two entities, aeronautical and non- aeronautical business. The first leg of the business is the aeronautical business, which relates to airlines and air traffic. It concerns the charges airlines have to pay for using the airport’s equipment, such as landing charges, parking charges, security charges and aviation fees (Athens international airport, Aeronautical charges, 2015). Aeronautical business is the the bulk of an airport’s income, accounting for about 55 percent of the airport industry’s revenue in 2014 (ACI, 2015 ACI airport economics report, 2015). Aeronautical business is probably what most people imagine when they are thinking about the business of an airport. However, there are many other stakeholders to consider, which leads to the other business leg of an airport. The other business leg of an airport is the non-aeronautical business. In 2014, it was an estimated 58 billion US dollars industry (Concessionaire Analyzer+, Non-aeronautical revenues, 2016). Areas within the non- aeronautical business are products and services such as shops, kiosks, car parking, car rental, etc. (ACI, AirportInfo, 2013). It typically accounts for about 44 percent of an airport’s total operating revenue (International business times, How do airports generate money?, 2013). The business is a source that tends to 6 generate higher profit margins, in comparison with aeronautical activities (ACI, AirportInfo, 2013). The growing number of travellers creates a basis for the airport to sell more products and services. In 2014, the highest revenue streams for global airport’s non-aeronautical business were retail (28 percent), car parking (22 percent) and property (15 percent) (Concessionaire Analyzer+, Non-aeronautical revenues, 2016). An airport that has experienced a positive financial development based on its non-aeronautical business is Copenhagen Airports A/S (CPH Airport). CPH Airport emphasizes in its annual report from 2015 the importance of the non-aeronautical business and a growing number of passengers, as key drivers for its current success (CPH Airport Annual Report 2015, 2016, p. 21). The income statement from 2015 supports the importance of the non-aeronautical business as it accounted for DKK 1,697.4 million of the total DKK 4,061.9 million revenue, which is approximately 41 percent. The total non-aeronautical revenue increased by 4.9 percent from 2014 to 2015, which shows the current growth in the business area (CPH Airport Annual Report 2015, 2016, p. 12). The importance of the non-aeronautical business for CPH Airport, means that the travellers as customers play an important role for the future business of the company.