Critical analysis of the application of the value creation concepts within Cathay Pacific Hong Kong

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Table of Contents

Introduction
Loyalty and Value
Physical Evidence
Conclusion
References

Introduction

Value creation is the need to add value beyond what can be measured by the stock market. Value creation is what can be added to the company’s value beyond what is reflected in the balance sheet (Backer, 2008). It goes beyond the book value of its assets minus its liabilities.

It is the customer’s perceived value and the analysis tools used focuses goes further than the determination of future performance of the company (Farrell & Hartline, 2008). In other words value creation is something that enhances the intangible value of the organisation so that the customers continue to patronise the products and services of a particular firm.

There are many who argue that corporate leaders must focus on the creation of value that are driven not by financial measures of performance but those that are created by intangible drivers like innovation, people, ideas, and brand(Bateson & Hoffman, 1999).

By using strict financial measures of performance, this strategy forces corporate leaders to achieve cost-efficiency within the firm (Thierauf, 2001). Cost-efficiency simply means that a company is considered profitable if it can sell a product at a price that is higher than the cost of production (Bowie & Buttle, 2008).

But the negative side of this mentality is that business leaders are willing to cut costs at the expense of providing quality service (Bruhn & Georgi, 2006).

Thus, the impact of such measures is only good for the short term (Gummesson, 2002). On the other hand if corporate leaders decide to invest on innovation, people, ideas and the brand, this can enhance the long-term competitiveness and growth of the company (Pride, Hughes, & Kapoor, 2010).

In the case of Cathay Pacific, the airline company took the idea of value creation to heart (Craven, 2002). The company’s belief in the importance of value creation is made evident by an overview of the core values of the organisation.

Consider the first statement of the airline company: “We put safety first” (Cathay Pacific Airways, 2011 p.1). By doing so, the company created a connection with the customers both intellectually and emotionally.

A customer will not choose an airline company because it is the most cost-efficient. A customer will choose an airline company because of the assurance of a safe flight.

In another major example of value creation in the eyes of customers, Cathay Pacific declared that the airline company supports Hong Kong.

Cathay Pacific clarified this by saying, “We continue to make substantial investments to develop Hong Kong’s aviation industry and enhance Hong Kong’s position as a regional transportation hub” (Cathay Pacific Airways, 2011, p.1). For customers who value Hong Kong, the decision to choose Cathay Pacific becomes easy.

In addition, the company promises to provide outstanding products and services. In the long run, customers will come to understand the value of Cathay Pacific beyond the cost-benefit of buying tickets (Dibb, Simkin, Pride, & Ferrell, 2005).

They would associate the intangible aspects of service as a value-enhancer and come to believe that they received more than their money’s worth if they continue to fly with Cathay Pacific.

Cathay Pacific Airways Ltd. is a Hong-Kong-based airline that is roughly 40% owned by Swire Pacific (Plunkett, 2009, p.24). Cathay Pacific flies to 118 destinations in 37 countries and territories using a fleet of 116 aircraft (Plunkett, 2009, p.24).

Some of the busier routes include flights from Hong Kong to Australia, France, Germany, Indonesia, Spain, South Africa, Russia, the U.K. and the United States as well as key cities in Asia (Plunkett, 2009, p.24).

This particular airline company was able to add value to the organisation by utilising two major strategies. The first one deals with customer relationship management or CRM.

The second strategy is to incorporate physical evidence to provide tangible proof that Cathay Pacific is intent on enhancing the value of the organisation through CRM. When applied to the airline industry, corporate leaders must not only focus on selling a particular service but also to establish a relationship that will hopefully last for a very long time (Knox, Maklan, Payne, Peppard, & Ryals, 2003).

It is not enough to add value to the organisation by offering customized services, the company must make sure that products and services offered are reliable and delivers on the promises made (Payne & Ballatyne, 2002).

When this is achieved then trust becomes a part of the marketing relationship between seller and buyer (Kotler, Bowen, & Makens, 2010). When trust is developed then the brand becomes a part of the lives of the customers (Buttle, 2004). There is no need to look for another brand because they have found the brand that can satisfy a particular need.

Nevertheless, it is important that an organisation is able to maintain this high-level of trust (Hougaard & Bjerre, 2004). In the event that a customer is seriously disappointed by the inability of the organisation to provide what was promised then it can lead to the dissolution of the relationship (Lovelock & Wirz, 2007).

It is therefore imperative to prevent the loss of trust (McColl-Kennedy, 2003). When trust is evident then loyalty is the expected result.

Loyalty and Value

It is imperative that an organisation continue to attract loyal customers. The presence of loyal customers assures the profitability of the company (Kasper, Helsdingen, & Gabbott, 2006).

For an airline company there is no need to spend additional funds to attract new customers if it can sustain a high number of repeat customers. If a customer is loyal to a particular brand then he or she is willing to pay higher prices in order to continually use the company’s product or service.

Customer loyalty also enables the organisation to achieve long-term growth and more importantly ensures a steady stream of income.

A nominal state of loyalty is the most common type of customer loyalty. Most companies only have a few customers that are emotionally loyal because most of them are in the bottom part which is labelled as occasional customers.

The occasional customers are not loyal in the sense that they simply seek to fulfil a need by whatever means available. Therefore, if Cathay Pacific is an airline company that enables them to fly to Hong Kong then they would avail the services of Cathay Pacific but the second time around that they fly, they will use another airline.

Behaviourally loyal customers are only loyal based on several factors such as barriers, price, location, and benefits.

However, “Attitudinally Loyal” customers will continually use a product or service based on perceived value. If a customer believes that the company offers a type of service quality that is unparalleled in the industry then the customer remains loyal as long as the organisation can sustain the quality of service.

At the top of the pyramid are the “Emotionally Loyal” customers. These are customers that already have an emotional connection to the brand. Customers will remain loyal for a long time because they have proven that they can trust the company.

On many occasions they experienced high levels of satisfaction. In the case of Cathay Pacific, the airline company developed a strategy to bring occasional customers from the bottom of the loyalty pyramid to the top tier.

The best example is the creation of the Marco Polo Club. This is an exclusive programme for frequent flyers. This programme transforms occasional customers to become behaviourally loyal customers because they can avail of certain privileges that are not available if they remain occasional customers of Cathay Pacific.

By increasing the number of loyal customers, Cathay Pacific can be assured of long-term profitability. Loyalty programs and measures implemented to increase the level of satisfaction among users of Cathay Pacific can easily create value for the customers. Value is created because the customers feel that they receive more than what they paid for.

The Marco Polo Club is the first step in the creation of more loyal customers. Afterwards the use of CRM enables Cathay Pacific to enhance their services so that “behaviourally loyal customers” become “attitudinally loyal customers” because of the perceived value of the airline company.

The assurance of safety and the delivery of high quality service can easily change the way customers view the Cathay Pacific brand. After a period of finding satisfaction in using Cathay Pacific, the customer develops emotional loyalty to the airline company. This is made possible in the use of physical evidence that enables a customer to see that the customers are highly valued in this airline.

Physical Evidence

Although Cathay Pacific already communicated its brand promise and succeeded and creating an emotional connection with the customers every time the brand is mentioned, all these things are unimportant if the company is not able to deliver on the promises given.

There must also be a clear indication of brand attributes. In other words, brand attributes are the tangible features that can exemplify the Cathay Pacific brand of service. Thus, the company made it a point that every time customers use their service they are only left with the impression of excellent service.

The space that the customer’s occupy during the duration of the flight as well as their pleasant experience with the cabin crew are all part of the tangible evidence that the airline company is able to deliver on its promise.

Cathay Pacific works hard to develop a standardized service for all customers. This covers the major components of every flight such as reservations and check-in.

But apart from standardized services, the company has to customise some of its services as a way to deal with segmentation in the market. This is the time to utilise the principles embedded in the concept called Physical Evidence and Servicescape.

Cathay Pacific has to have a physical built environment in which service encounters take place (Baron, Harris, & Hilton, 2009, p.9). In other words there must be a tangible way to express service. This refers to the interior and exterior environment and becomes the strong medium for communicating the levels of service to customers (Baron, Harris, & Hilton, 2009, p.9).

Cathay Pacific was able to accomplish all of the above by creating the business class. The business class is a way of creating segmentation in the market. Not everyone can afford the business class travel amenities. Therefore, this is marketed to a smaller number of potential targets.

But those who can afford to pay for business class expects to get their money’s worth. Cathay Pacific ensures that the passengers in the business class section will only have fond memories of their experience. It all begins with the seat. The seats are taller than regular seats and can be adjusted in accordance to the need for privacy or the mood of the passenger.

The next important amenity is the fully flat bed which is said to be over two metres in length. The fully-extended bed means that even tall passengers can be assured of a restful flight.

In addition, the bed can be extended in terms of width and therefore customers that are heavyset are not going to fall-off from their beds. The airline even went as far as being mindful of the sleeping position of the passengers. For those who would like to sleep on their side then there is a compartment that can be manipulated to provide ample support for their knees.

The bed is enclosed therefore passengers can have privacy while they sleep. But it is not only the bed and the seats that are provided by the airline.

Cathay Pacific’s business class section also provides personal storage space. It is a side cabinet that contains a headset and vanity mirrors as well as ample space for small items that the customers may need to have quick access to.

Passengers are also able to access a 15.4 inch TV with hundreds of movies and music CD’s at their disposal. The entertainment control panel has amenities for those who carry iPod and iPhone products. There are also amenities for charging mobile devices.

Cathay Pacific did not only intend to make it an entertaining and restful flight. The flight and crew are also intent on making business class passengers feel the hospitality of the company through a well designed meal.

For long-haul flights, passengers in the business class section have a choice of four entrees and three for regional flights (Plunkett, 2009). The airline company designed the trolleys so that passengers can see what is on offer as the food passes by the aisle.

The focus on details is one of the best examples of how Cathay Pacific demonstrated its desire to develop long-lasting relationships with their customers.

Physical evidence creates value for customers because they are given a tangible proof that Cathay Pacific is going to go the extra mile in order to satisfy the needs of customers when it comes to their needs during the flight. In this case physical evidence created value for the customer because Cathay Pacific demonstrated how they anticipate the needs of the customers.

Conclusion

The theories provide a framework that enables business organisations to increase the number of loyal customers. But without a case study to compare these ideas with then the theory remains an abstract concept in the minds of corporate leaders. Thus, it was really helpful to focus on the Cathay Pacific.

This airline company is indeed a gold standard when it comes to the airline industry. Other airline companies simply focus on safety and on-time flights but Cathay Pacific made it clear that they want to go the extra mile when it comes to the happiness and satisfaction of their customers.

This drive to excel was made evident in the Marco Polo Club a loyalty programme as well as the creation of the Business Class section of every long-haul flight and regional flight of Cathay Pacific. It was the attention to detail that was very impressive.

For instance, the company considered the sleeping position of the passengers and in that position the knees are sometimes exposed without support. Thus, they figured out a way to deal with that problem. In other airline companies the trolley that they use to carry the food are is eye level with the passengers.

But Cathay Pacific believed that it would be better if the customers can see what is being offered rather than simply relying on the description of the flight attendant. By going the extra mile, Cathay Pacific demonstrated acute awareness of the importance of branding, brand loyalty, customer-relationship marketing and other principles that would enable them to secure the loyalty of their customers.

All of these were made possible by the use of CRM and physical evidence strategies. CRM enables Cathay Pacific to focus on increasing the number of loyal customers.

This goal can never be achieved without the utilisation of principles taken from CRM and one of that is to secure the loyalty of customers so that they continually use the product and services provided by Cathay Pacific.

Although it is imperative to develop loyalty programs and other steps needed to increase the number of loyal customers, nothing would happen if Cathay Pacific was not mindful about the importance of physical evidence.

This was made evident in the Business Class section of every Cathay Pacific flight. In this section customers have tangible evidence of the meaning of high-quality service that Cathy Pacific can provide its loyal customers.

The two strategies employed add value to Cathay Pacific. Nevertheless, there are still areas that require improvement. Cathay Pacific must go beyond the Business Class section and Marco Polo Club.

The airline company must strive to increase the number of loyal customers even for those who do not fly Business Class. This goal can be achieved if Cathay Pacific also focuses on passengers that cannot afford to fly Business Class. The airline company must improve regular and standard services in order to increase the number of repeat customers.

References

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