7 CHAPTER II LITERATURE REVIEW 2.1 Operations Management Operations Management is defined as the design, operation, and improvement of the systems that create and deliver the firm’s primary products and services. Like marketing and finance, operation management is a functional field of business with clear line management responsibilities. This point is important because operations management is frequently confused with operation research and management science and industrial engineering (Chase, 2001, pp.6-7). Operations management decisions at the strategic level impact the company’s long-range effectiveness in terms of how it can address its customer’s needs. Thus, for the firm to succeed, these decisions must be in alignment with the corporate strategy. Decisions made at the strategic level become the fixed conditions or operating constrains under which the term must operate in both the intermediate and short term. At the next level in the decision-making process, tactical planning primarily addresses how to efficiently schedule material and labor within the constraints of previously made strategic decisions. Issues on which Operation Management concentrates on this level include: How many workers do we need? When do we need them? Should we work overtime or put on a second shift? When should we have material delivered? Should we have a finished goods inventory? These tactical 8 decisions, in turn, become the operating constraints under which operational planning and control decisions are made (Chase, 2001, p8). 2.2 Achieving Competitive Advantage through Operations Competitive advantage implies the creation of a system that has a unique advantage over its competitors. The idea is to create customer value in an efficient and sustainable way. 2.2.1 Competing On Response Response is often referred as flexible, reliable and quick responses. Indeed, we define response as including the entire range of values related to timely product and service development and delivery, as well as reliable scheduling and flexible performance. Flexible response may be thought of as the ability to match changes in a marketplace in which design innovations and volumes fluctuate substantially. The second aspect of response is the reliability of scheduling. In the airline business, reliable schedule is the main selling point for an airline. Delay on schedules can bring down customer to their lowest preferences to fly with one airline. Consequently, the competitive advantage generated through reliable response has value to the end customer. The third aspect of response is quickness. John Electric, discussed in the Operation Management in action box, competes on speed – speed in design, 9 production, and delivery. Most passenger put quick and easy services to their top of the mind. From ordering tickets to passenger-handling process, and baggage handling process the operations manager who develop processes that respond quickly can have a competitive advantage(Heizer, 2001, pp35-36). 10 2.3 Strategic Analysis Table 2.1 External versus Internal Analysis External Analysis Internal Analysis a. Customer analysis a. Performance analysis b. Segments, motivations and unmet b. Profitability, sales, shareholder value needs. analysis, customer satisfaction, c. Competitor analysis product quality, brand associations, d. Identity, strategic groups, relative cost, new products, employee performance, images, objectives, capability and performance, product strategies, cultures, cost structure, portfolio and analysis. strength and weaknesses c. Determination of strategic options e. Market analysis d. Past and current strategies, strategic f. Size, projected growth, profitability, problems, organizational capabilities entry barriers, cost structure, and constraints, financial resources, distribution systems, trends, key financial strength, constraints and success factors. weaknesses g. Environmental analysis h. Technological, cultural, economical, governmental, demographic, scenarios, information-need areas. Strategic strengths, weaknesses, Opportunities, threats, trends, and problems, constraints and uncertainties. uncertainties. Strategy identification and selection 1. Identify strategic alternatives a. Product-Market Strategies b. Functional Area Strategies c. Assets, Competencies and Synergies 2. Select Strategy 3. Implement the operating plan 4. Review strategies 11 2.4 Quantitative and Qualitative Research Moreover, most research methods can be used in either qualitative or quantitative studies. This is shown in table 2.2 the table underlines that methods are techniques which they are used. All this means that we need to resist treating research methods as mere techniques. Table 2.2 Different Uses for Four Methods (David Silverman, 2001, p89) Methodology Method Quantitative research Qualitative research Observation Preliminary Work, e.g. prior to Fundamental to understanding framing questionnaire another culture Textual analysis Content analysis, i.e. counting Understanding participants’ in terms of researchers’ categories categories Interviews Survey research: mainly fixed Open-ended questions to small choice questions to random samples samples Audio and video Used frequently to check the Used to understand how recording accuracy of interview records participants organize their talk and body movements 12 Table 2.3 Methods of Qualitative Research (David Silverman, 2001, p90) Method Features Claim Observation Extended periods of contract Understanding of ‘subcultures’ Textual analysis Attention to organization and Understanding of language and use of such material other sign systems Interviews Relatively unstructured and Understanding ‘experience’ ‘open-ended’ Audio and video Precise transcripts of naturally Understanding how interaction recording occurring interactions is organized 2.5 Airline Business An airline is an organization providing aviation services to passengers and/or cargo. It owns or leases airliners with which to supply these services and may form partnerships or alliances with other airlines for reasons of mutual benefit. In view of the congestion apparent at many international airports, the ownership of slots at certain airports (the right to take-off or land an aircraft at a particular time of day or night) has become a significant tradeable asset in the portfolios of many airlines. Clearly take-off slots at popular times of the day can be critical in attracting the more profitable business traveller to a given airline's flight and in establishing a competitive advantage against a competing airline. If a particular 13 city has two or more airports, market forces will tend to attract the less profitable routes, or those on which competition is weaker, to the less congested airport, where slots are likely to be more available and therefore cheaper. Other factors, such as surface transport facilities and onward connections, will also affect the relative appeal of different airports and some long distance flights may need to operate from the one with the longest runway. Where an airline has established an engineering base at an airport then there may be considerable economic advantages in using that same airport as a preferred focus (or "hub") for its scheduled flights. Each operator of a scheduled or charter flight uses a distinct airline call-sign when communicating with airports or air traffic control centres. Most of these call- signs are derived from the airline's trade name, but for reasons of history, marketing, or the need to reduce ambiguity in spoken English (so that pilots do not mistakenly make navigational decisions based on instructions issued to a different aircraft), some airlines and air forces use call-signs less obviously connected with their trading name. 2.6 Five-Forces Model of Competition One important component of airline business and competitive analysis involves delving into the business’ competitive process to discover what the main sources of competitive pressure are and how strong each competitive is. This analytical step is essential because managers cannot devise a successful strategy without in-depth understanding of the business’ competitive character. Porter’s five- 14 forces model, depicted in Figure 2.1, is a powerful tool for systematically diagnosing the principal competitive pressures in a market and assessing how strong and important each one is. (Thompson, Jr, 2004, pp79-81). FIRMS IN OTHER INDUSTRIES OFFERING SUBSTITUTE PRODUCTS Competitive Pressures coming from the market attempts of outsiders to win buyers over to their products RIVALRY AMONG SUPPLIERS Competitiv COMPETING Competitiv OF RAW e pressures SELLERS e pressures MATERIALS, stemming stemming PARTS, from from seller- BUYERS COMPONE supplier- buyer NTS OR seller Competitive collaborati OTHER collaborati prssures created on and RESOURCES on and by jockeying for bargaining ii better market iti d Competitive pressures coming from the threat of the entry of new rivals POTENTIAL NEW ENTRANTS Figure 2.1 Five-Forces Model of Competition In the airline business, especially in Indonesia, forces from rivalry among competing airline centered on price competition, competing to offer passengers, the best (lowest) price. As the airlines compete for market share, these forces tend to be 15 high. Potential entry of new competitor force is at moderate level, this is because airline business in Indonesia is in the transition period. In the past time, the barrier of new entrants is low, and it is not difficult to get an airline operating license, but nowadays,