45 Pages Posted: 13 Aug 2010
Date Written: August 13, 2010
A Strategic Variance Analysis (SVA) is a management tool used to establish reasons for differences in a firm’s operating income between two time periods – reasons that may not always be apparent from the financial statements. SVA allows management to determine, in the form of performance variances, changes in operating income resulting from changes in sales volume, sales prices, unit costs per unit of activity, productivity and capacity utilization. An SVA of American Airlines’ 2009 results, as compared to its 2008 results, reveals improvements in operating income of $891 million. Specifically, the results reveal that American Airlines reduced its sales volume, reduced its ticket prices, reduced its unit costs per unit of activity, improved its productivity and reduced its level of capacity underutilization. While this is important information for American Airlines’ management to evaluate the impact of its strategic initiatives and gauge progress in meeting performance goals, it lacks a competitive perspective.
Relative Strategy Variance Analysis (RSVA) provides such a competitive perspective. It allows firms to examine how the specific performance variances determined in an SVA compare with those of its industry by allowing firms to identify whether these performance variances are driven by industry effects or firm-specific effects. RSVA is most useful in situations where firms are altering their competitive strategy positions (launching new products or services, changing pricing, reducing input costs, altering production to improve efficiency) in an environment where competitors are making similar strategic changes. Individual competitors can use RSVA to understand how their performance improvements compare with those of the general industry.
An RSVA of American Airlines reveals that the 2009 improvement of $891 million actually represents a favorable industry effect of $1.2 billion, i.e., American Airlines’ 2009 improvement would have been $1.2 billion if it had matched industry performance. Its firm-specific effect was an unfavorable $296 million, i.e., American Airlines 2009 operating income, after considering industry effects, actually declined by $296 million. More specifically, the RSVA reveals that, American Airlines, as compared to its industry, reduced its sales volume more, reduced its ticket prices less, reduced its unit costs per unit of activity less, increased its productivity less and reduced its level of capacity underutilization less. Hence, American Airlines’ RSVA provides an almost diametrically opposite picture from the one provided by its SVA, one that is important in managing its strategy for the future.
Keywords: Performance Benchmarking, Strategic Variance Analysis, Strategy, Airline Industry
JEL Classification: A20
Suggested Citation: Suggested Citation
Mudde, Paul A. and Sopariwala, Parvez R., Relative Strategic Variance Analysis: The Case of American Airlines (August 13, 2010). AAA 2011 Management Accounting Section (MAS) Meeting Paper. Available at SSRN: https://ssrn.com/abstract=1658508 or http://dx.doi.org/10.2139/ssrn.1658508