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The Insider ( Singapore International’s Success Secret)

In cost leadership strategy, an organization sets out to become the low cost producer in its industry. The sources of cost advantage are varied and depend on the structure of the industry. They may include the pursuit of economies of scale, proprietary technology, preferential access to raw materials and other factors. First with Singapore International Airlines(SIA). There’s something unique about Singapore Airlines. Over the past four decades, it has earned a stellar reputation in the fiercely competitive commercial aviation business by providing customers with high-quality service and dominating the business-travel segments.

What’s not so well known is that despite the quality of its services, SIA is also one of the industry’s most cost-effective operators. From 2001 to 2009, its costs per available seat kilometer (ASK) were just 4.58 cents. According to a 2007 International Air Transport Association study, costs for full-service European airlines were 8 to 16 cents, for U.S. airlines 7 to 8 cents, and for Asian airlines 5 to 7 cents. In fact, SIA had lower costs than most European and American budget carriers, which ranged from 4 to 8 cents and 5 to 6 cents respectively.

It’s intriguing that SIA has combined the supposedly incompatible strategies of differentiation—which it pursues through service excellence and continuous innovation—and cost leadership. Few enterprises have executed a dual strategy profitably; indeed, management experts such as Michael Porter argue that it’s impossible to do so for a sustained period since dual strategies entail contradictory investments and organizational processes. Yet pursuing dual strategy SIA has exceled beyond ordinary.

As it were, one of the underlying forces of threat of entry can be high and if there seems to be a drastic move from the new entrants, the incumbents can fight back by cutting prices or further differentiating products and services, but it’s often a losing battle. Price wars typically hurt leaders more than they do challengers, and relentless differentiation is tough to sustain. Adopting a dual strategy is often the only choice. No company executes a dual strategy better than SIA. The airline has delivered healthy financial returns since its founding, in 1972, never posting an annual loss. It has almost no debt, and except for its initial capitalization, it has funded growth through retained earnings while executes a dual strategy by managing four paradoxes: providing service excellence cost-effectively; innovating in both a centralized and a decentralized manner; being a technology leader and a follower; and achieving standardization and personalization in its processes. SIA’s self-reinforcing system is difficult to imitate, yielding sustainable competitive advantage. As we shall see in the following lines, the dual strategy has become part of the airline’s organizational DNA over the years.

SIA has two main assets—planes and people—and it manages them so that its service is better than rivals’ and its costs are lower. Unlike other airlines, SIA ensures that its fleet is always young. For instance, in 2009, its aircraft were 74 months old, on average—less than half the industry average of 160 months. This triggers a virtuous cycle: Because mechanical failures are rare, fewer takeoffs are delayed, more arrivals are on time, and fewer flights are canceled. New planes are more fuel efficient and need less repair and maintenance: In 2008, repairs accounted for 4% of SIA’s total costs compared with 5.9% for United Air Lines and 4.8% for American Airlines. SIA’s aircraft spend less time in hangars—which means more time in the air: 13 hours, on average, per day versus the industry average of 11.3 hours. And, of course, customers like newer planes better.Service is mostly about people, so SIA invests heavily in training employees. It schools its fresh recruits for four months—twice as long as the industry average of eight weeks—and spends around $70 million a year to put each of its 14,500 employees through 110 hours of retraining annually. The training includes courses on deportment, etiquette, wine appreciation, and cultural sensitivity. SIA’s cabin crews are trained to interact with Japanese, Chinese, and American passengers in different ways. Trainees learn to appreciate subtle issues, such as communicating at eye level rather than “talking down” to passengers – think about that!. The superior service that results not only delights customers but also reduces costs by minimizing customer turnover.Recently Mr Pillay shared the success secrets that had made SIA one of the most admired airlines in the world. It also boasts the biggest market capitalisation for any airline company in the world. The guiding premise or organising principle of the company (during its formation in 1972) was self reliance, or accountability, and full discretion (to management)and it is important to note as opposed to many outsiders that from the outset, the government stipulated no financial aid to SIA. Period! Investment for expansion, yes. But no subsidy, direct or indirect. SIA had to attain cruising speed on its own, or stall.’

Mr Pillay, who is also the chairman of the Singapore Exchange, cautioned that SIA’s success, despite government equity control, was unique. That the government being a huge shareholder but still that has no bearing on how SIA is being startegically managed.

‘The odds are stacked, heavily, against companies tinged with government ownership. SIA is one of the few exceptions. The decisive factor is accountability, and associated authority – conditions not customarily found in government companies, with the exception of Singapore.’He added that while good companies exist in jurisdictions with ‘dodgy governance practices’, the odds were stacked against those exceptions.

Mr Pillay summed up his speech by underlining five key factors for corporate success, be it an airline or any other entity.

‘First, every board is bound to recognise its total accountability to shareholders for the fortunes of the corporation. Second, the board and management should enjoy unfettered authority to guide the destiny of the company. ‘Third, lines of command and control within a company must be unambiguous, to reinforce accountability at all levels. Fourth, everything else being equal, the governance and fortunes in a company from the private sector tend to be superior than they are in a government company. ‘Fifth, the standard of governance in society is a crucial determinant of governance and performance.

Since its official formation dating back to 1947, Singapore Airlines have founded its business on world-class service quality in the airline industry. Such a reputation is built on core aspects of the airlines service delivery which includes features like the friendly service, prompt flights and in-flight entertainment system. As consumers, we only see these final outcomes and therefore, often forget that these qualities are a product of much planning, trial and of course – teamwork. The efficient, continuous use of teams throughout the business is a fundamental tool in which Singapore airlines is able to deliver `quality’ to its customers. More specifically it is the way that the team operates and the values instilled within those teams that make them so effective.