Examining views on RyanAirs Strategy and Success
Ryanair was founded in 1985 as a family business that originally provided full service conventional scheduled airline services between Ireland and the UK. The airline started to compete within the confines of the existing industry by trying to steal customers from their rivals, especially the state monopoly carrier Air Lingus, outlined by Chan Kim and Renée Mauborgne (2004) as “Bloody or Red Ocean Strategy”. Ryanair seemed to follow a “me-too strategy”; according to Osborne, K. (2005), they “tried to be all things to all people”. Even they started restructuring; their strategy was not enough differentiated and their cost advantage was too low to be profitable. Ryanair then created a competitive advantage through the alignment of the three components of business systems; 1)Creating superior value for their customers (outside perspective) 2)Supplying their superior value-adding activities in an effective and efficient manner (which jointly form the “Value Chain”) 3)Possessing over the resource base required to perform the value-adding activities, (inside perspective) According to Porter (1987), “corporate strategy is what makes the corporate whole add up to more than the sum of its business unit parts.” It is seen to be concerned with the overall purpose and scope of the organisation and to meet the expectations of major stakeholders. All aspects of Ryanair’s value chain are important to the company and their shareholders as Ryanair’s decisions add value to both. The following report outlines the three perspectives of shaping Ryanair’s business system. The value creation dimension of Ryanair’s business model will be outlined, considering the theories of Porter and the more recent authors Kim and Mauborgne (2004). Further, the linkages in the airline’s value chain and their resource base will be analysed, considering Hamel and Prahalad’s (1990) core competency model (inside-out approach). In section 2, the future challenges of the airline are considered. Ryanair’s strengths and weaknesses will be analysed, internal value creating factors such as assets, skills or resources, to consider how the airline can create alignment to its opportunities and threats, external factors. An stronger “outside – in” approach for Ryanair’s future corporate strategy will be considered, applying Porter’s five forces model, placing the market, the competition, and the customer at the starting point of the strategy process.
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Global Corporate Strategy A Case Study on Ryan Air
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An Analysis of Ryanair’s Corporate Strategy
Executive Summary
Ryanair was founded in 1985 as a family business that originally provided full service
conventional scheduled airline services between Ireland and the UK. The airline started to
compete within the confines of the existing industry by trying to steal customers from their
rivals, especially the state monopoly carrier Air Lingus, outlined by Chan Kim and Renée
Mauborgne (2004) as “Bloody or Red Ocean Strategy”. Ryanair seemed to follow a “me-too
strategy”; according to Osborne, K. (2005), they “tried to be all things to all people”. Even
they started restructuring; their strategy was not enough differentiated and their cost
advantage was too low to be profitable. In 1986, they got “stuck in the middle”, outlined by
Porter (1985) as they had a limited cost advantage and no service advantage.
Ryanair then created a competitive advantage through the alignment of the three components
of business systems;
1) Creating superior value for their customers (outside perspective)
2) Supplying their superior value-adding activities in an effective and efficient manner
(which jointly form the “Value Chain”)
3) Possessing over the resource base required to perform the value-adding activities,
(inside perspective)
According to Porter (1987), “corporate strategy is what makes the corporate whole add up to
more than the sum of its business unit parts.” It is seen to be concerned with the overall
purpose and scope of the organisation and to meet the expectations of major stakeholders. All
aspects of Ryanair’s value chain are important to the company and their shareholders as
Ryanair’s decisions add value to both.
The following report outlines the three perspectives of shaping Ryanair’s business system.
The value creation dimension of Ryanair’s business model will be outlined, considering the
theories of Porter and the more recent authors Kim and Mauborgne (2004). Further, the
linkages in the airline’s value chain and their resource base will be analysed, considering
Hamel and Prahalad’s (1990) core competency model (inside-out approach).
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Global Corporate Strategy A Case Study on Ryan Air
2
In section 2, the future challenges of the airline are considered. Ryanair’s strengths and
weaknesses will be analysed, internal value creating factors such as assets, skills or resources,
to consider how the airline can create alignment to its opportunities and threats, external
factors. An stronger “outside in” approach for Ryanair’s future corporate strategy will be
considered, applying Porter’s five forces model, placing the market, the competition, and the
customer at the starting point of the strategy process.
I An evaluation of Ryanair’s key strategic perspectives
1) Creating superior value for their customers
The low cost market segment
Ryanair has found a source of leveraging a competitive advantage; the knowledge about the
opportunities associated with implementing the low cost strategy, which was created by
Southwest Airlines. The Texas airline found a unique approach to the market through re-
conceptualisation of market segments. In 1990, Ryanair successfully applied their model in
the European market, becoming a “no frills” airline, focussing on short haul destinations and
keeping its planes in the air as frequently as possible in a 24 hour period. The new low price
market segment, which did not exist before in Europe, could be described as the development
of a `blue ocean’, uncontested market space through the expansion of boundaries of the
existing industry, outlined by Kim and Mauborgne (2004). Ryanair’s low fares created
demand, particularly from fare-conscious leisure and business travellers who might otherwise
have used alternative forms of transportation or would not have travelled at all (Case Study, p.
3). The competition became less relevant and allowed Ryanair to develop and sustain high
performance in an overcrowded industry. Up to now the airline benefits from the early
profitable and rapid growth within the blue ocean and successfully executes the low cost
business model, which became obvious when the airline announced that it has beaten its own
downbeat forecasts to record a 29 % increase in pre-tax profits and 19 % passenger growth,
having carried more than 27.6 million passengers in the past financial year (Jameson, A.,
2005).
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Global Corporate Strategy A Case Study on Ryan Air
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Ryanair’s position within the industry
However, `blue oceans’ are not easily protected and Ryanair has been facing competitors that
try to copy their low cost approach. Further, Ryanair has always been competing within the
`red ocean’, by targeting a broad range of customers, e.g. the business segment and “stealing
customer from rivals”. This outlines that Kim and Mauborgne’s strategy approach cannot be
seen as exclusive. Competing with new entrants of competitors (and differentiators), Ryanair
was able to launch an “all out war”, lowering prices and remaining profitable whilst
increasing the frequency of flights and establishing new routes (Case Study).
According to Porter (1980, 1985), the relative competitive position within an industry lies at
the core of success or failure of firms. He defined two basics types of competitive advantage;
cost leadership and differentiation (and focus). Ryanair set out to be best in the budget market
segment, becoming the lowest cost airline in its industry (cost focus), e.g. no paper tickets, no
passenger meals, no pre-arranged seating, enabling to cope and remain profitable, even on
low yields. The airline constantly strives to reduce or control four of the primary expenses
involved in running a major scheduled airline; their aircraft equipment costs, personnel
productivity, customer service costs, airport access and handling costs. The airline deals
successfully with competitive forces and is Europe’s leader in low fares by generating a
superior return on investment (Osborne, 2005). This supports Mintzberg’s argument of price
leadership being more relevant to competitive advantage than cost leadership. Planning to turn
into a “no-fares-airline” by offering flights for free (Case Study), Ryanair can be argued to
follow price leadership as one of the six ways to differentiation outlined by Minzberg.
According to Mr O’ Leary (2005), new planes will enable him to drive down average fares by
5% a year causing a “bloodbath”. We are going to show up in your market and trash your
yields.” (“Ryanair rolls out plans for European domination”, 2005).
Differentiation through price outlines the superseding of Porter’s generic strategies by the
resource/competence-based strategy frameworks. In addition to low prices, Ryanair’s
branding emphasises on punctuality and efficiency, which is mainly achieved through
operating from secondary airports. According to Ryanair, their success is not just due to their
low fares “but also a winning combination of our No.1 on-time record, our friendly and
efficient people and our new Boeing 737-800 series aircraft” (Ryanair, 2005). It can therefore
be argued that in a globalized competitive environment, even cost leaders need to differentiate
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Global Corporate Strategy A Case Study on Ryan Air
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their message (`hybrid strategy’), contradicting Porter’s original idea of fundamentally
different routes to competitive advantage.
International expansion
Ryanair further constantly created value for customers by following generic growth and
internationalisation strategies; they moved their operations into more and more countries,
expanding the route system from its primarily Irish-UK emphasis to serve 86 destinations on
133 routes across 16 countries. According to Mr. O’ Leary (2005), they “will deliver 34m
passengers from 12 European bases and have identified a further 48 potential bases.” The
airline expanded recently by placing an order for 70 more Boeing 737-800 aircraft to keep
growing at 20% a year (“Ryanair rolls out plans for European domination”, 2005).
Ryanair can compete on price, as the airline has besides its low cost product offering an
activity system and resource base that match the price positioning, opposite to traditional
airlines that seem to get “stuck in the middle”, as outlined by Porter, when undergoing severe
cost cutting which affects their areas of differentiation, e.g. Aer Lingus.
2) Supplying superior value-adding activities in an effective and efficient manner
The “Value Chain”
As Ryanair’s low cost/price approach leads to overlapping value chains, the company is a
perfect example of linking its opportunities, as outlined by Campbell and Goold (1998, in
Meyer and de Witt, 2004). From a Value Based Management point of view, Porter’s Value
Chain framework can be seen as one of two dimensions in maximizing corporate value
creation, outlining how well a company performs relatively towards its competitors (`Relative
Competitive Position’). Even Ryanair subscribes to a similar basic model compared to e.g.
Easyjet, the airline has an entirely different value chain.
Ryanair’s low cost/price approach adds value to most of Ryanair’s processes, e.g. clear
corporate identity and brand image in addition to limited organisational complexity,
increasing the differentiation towards their competitors. Ryanair maintains their efficient, high
quality and low cost services through operating from secondary airports and by exploiting the
advantages of outsourcing, a strategic management model, transferring the business processes
of services to outside firms, e.g. passenger and aircraft handling, ticketing. This allows the
Ryanair boss aims to axe ‘unnecessary’ co-pilots
Ryanair chief Michael O’Leary will seek permission from aviation authorities to have just one pilot on shorter flights
Press association
guardian.co.uk, Wednesday 8 September 2010 10.48 BST Article history
ryanair boss Michael O’Leary wants to use just one pilot per flight as part of his ongoing drive to save costs at the budget airline.
O’Leary said he intends to write to aviation authorities for permission to use only one pilot per flight because he believes co-pilots are unnecessary in modern jets, the Financial Times reported today.
The airline boss, who has previously considered standing tickets on flights, as well as charging for the use of toilets, conceded that two pilots would be needed on long-haul flights, but said on shorter trips that flight attendants could do the job.
In an interview he said the second pilot was only there to “make sure the first fella doesn’t fall asleep and knock over one of the computer controls”.
He backed up his comments by adding that trains were allowed to have one driver even though this could conceivably cause a crash in the event of a heart attack. He said: “It could save the entire industry a fortune. In 25 years with over about 10 million flights we’ve had one pilot who suffered a heart attack in flight and he landed the plane.”
But industry experts have labelled the proposal “unwise”. A spokesman for the British Airline Pilots Association said: “This is just a bid for publicity. His suggestion is unsafe and his passengers would be horrified.”
O’Leary frequently courts controversy with his attempts to cut costs at Ryanair. This year he raised the baggage charge for the summer holiday season and, following the volcano ash cloud crisis, initially capped the level of compensation to passengers. He later bowed to EU pressure and agreed to pay out costs to customers affected by the eruption.
(Source: http://www.guardian.co.uk/money/2010/sep/08/ryanair-axe-unnecessary-co-pilots )
Broker snap: Ryanair maintains guidance
Thu 30 September 2010 12:53
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Attention-seeking no-frills airline Ryanair held an investor day on Wednesday which mainly focused on the company’s business model and medium-term strategy, Commerzbank revealed.
“Management reiterated its intention to slow down growth until 2013,” Commerzbank analyst Johannes Braun said. “Full-year guidance for 2010/11 is maintained. However, with current trading developing well, guidance risks are clearly skewed to the upside,” Braun suggested.
That’s a view that is mirrored by Panmure Gordon. It thinks the company may have been playing its cards close to its chest by maintaining the full year profit guidance for the current year at EUR350 – 375m. “If it had chosen to change its guidance at this point in time, we believe the profit range would have moved up rather than down,” the broker speculated.
Ryanair’s management said it would place another aircraft order if the price is right but if an acceptable price can not be found it is prepared to accept two to three years of zero growth from 2013, if necessary, Braun reported.
As growth slows down, the company should be in a position to accumulate cash, but that will not lead to a regular dividend payment if the management’s current thinking is maintained; on the other hand, irregular payments like this year’s EUR500m distribution remain a possibility.
The company intends to stick pretty much to its current low-cost business model, despite its intention to increase its presence at bigger airports and, in the words of Braun, “focus on its service proposition.”
“While we believe slowing growth and the resulting yield optimisation as well as dividend payout potential are positive, it remains to be seen how unit costs performance will develop in a slower growth environment and the shift of focus to its service proposition will play out. While the share’s valuation is relatively demanding, due to ongoing positive traffic and profit momentum we stay with our Add rating,” the broker said.
Panmure Gordon is more positive and is sticking with its “buy” recommendation and EUR5 target price.
“Our stance remains positive as the outlook remains very attractive in terms of average fare increases, cost control and strong cash generation,” the broker said.
Sources : http://www.h-l.co.uk/shares/share-tips-and-research/stockbroker-tips/archive/broker-snap-ryanair-maintains-guidance
RYANAIR.COM THE LOW FARES AIRLINE THE COST CRAZY AIRLINE!:
RYANAIR.COM THE LOW FARES AIRLINE THE COST CRAZY AIRLINE! PRESENTATION BY: Philip Avumegah Conall Deazley Paola Lanciani Rory McCaughan
EXECUTIVE SUMMARY:
EXECUTIVE SUMMARY THE INDUSTRY THE MARKET THE STRATEGY THE SUCCESS STORY
INDUSTRY TRENDS:
INDUSTRY TRENDS Growth rates in excess of economic activity despite: 1. Market maturity 2. Congested Airports 3. Air traffic control systems Global economic expansion Disaggregation of international trade barriers
INDUSTRY TRENDS:
INDUSTRY TRENDS DEREGULATION – increasing liberalisation of the world airline industry – ‘open skies’ policy within EU since 1997 – competition rules curtailed state subsidies, forcing cost-cutting programmes – development of low-cost, no-frills air services
INDUSTRY TRENDS:
INDUSTRY TRENDS EUROPEAN MARKET most expansive market in the world during 1990s high levels of competition passenger transport remains main market
INDUSTRY TRENDS:
INDUSTRY TRENDS UK MARKET – Two main market sectors: 1. Scheduled 2. Non-scheduled – Scheduled passenger services; the most important sector accounting for over 70% of generated revenue – Scheduled airline demand a result of economic activity, consumer confidence and trends in expenditure
INDUSTRY TRENDS :
INDUSTRY TRENDS Despite high levels of competition, UK was main target of low-cost airlines Market share of the low-cost airlines RYANAIR – 1.1 EASYJET – 0.9 VIRGIN – 0.4 GO – 0.40 BUZZ – 0.1
INDUSTRY TRENDS:
INDUSTRY TRENDS Leisure improved standards of living trend towards choice and variety in leisure short vacations – the fastest growing sector of outbound holiday market Business growth in international trade value for money now extends to business travellers too even in recession, demand for domestic and international travel grows
DEFINING THE BUSINESS:
DEFINING THE BUSINESS THE PRODUCT Point-to-point short haul commuter and leisure flying ‘Ryanair is the best imitation of Southwest Airlines that I have seen’ Herb Kelleher, Southwest founder.
DEFINING THE BUSINESS:
DEFINING THE BUSINESS CUSTOMERS Initially targeting those who would fly if the price was right Incresingly targeting the expanding business community
DEFINING THE BUSINESS:
DEFINING THE BUSINESS THE COMPANY An unconventional airline Distinctive personality Charismatic and energetic leadership incorporated throughout company structure Inclusion of employees in company vision through their ownership
DEFINING THE BUSINESS:
DEFINING THE BUSINESS THE MARKET Creating new markets and growing existing ones Very competitive domestic market Potential for mainland Europe
DEFINING THE BUSINESS:
DEFINING THE BUSINESS Well placed to take advantage of deregulation and liberalisation Prepared to take on majors head-to-head (Lufthansa in Germany) Aggressive response to market threats and opportunities (Sept 11th) Michael O’Leary ‘The Robin Hood of the skies’
DEFINING THE BUSINESS:
DEFINING THE BUSINESS THE TECHNOLOGIES Incorporation of leading cost-reducing technological capabilities establishing the youngest fleet in Europe expansion of online booking new technologies to delight customers and enhance product
STRATEGY:
STRATEGY Ryanair’s operating costs vs. European airlines
STRATEGY:
STRATEGY An experience curve Entry deterring barrier to newcomers
STRATEGY:
STRATEGY ‘What’s your secret?’ – ‘It’s very simple. We’re like Wal-Mart in the US — we pile it high and sell it cheap.’ One simple formula:
STRATEGY:
STRATEGY Simplicity – the pervading philosophy of low-cost airlines Ryanair’s twin strategic approach: 1. Maintain industry leading low costs 2. Dramatic growth How are these objectives achieved so successfully?
STRATEGY:
STRATEGY 1. The low-cost position There exist a number of cost reducing policies all aimed at lowering total unit cost — 1. Ticket-less check-in 2. Single-class cabins – Removal of business class allowing for a higher capacity onboard
STRATEGY:
STRATEGY 3. Direct online bookings – eliminating travel agents commission 4. Fleet commonality – reducing training and maintenance costs 5. Contracting out of services, obtaining competitive fixed rate prices 6. Airport selection and route policy – less congested; quicker turnaround
STRATEGY:
STRATEGY 2. Dramatic Growth Continued success for low-cost airlines relies on continued cost advantages Growth = increased overheads: beware the dangers of over-expansion Annual cap on growth of 25%
STRATEGY:
STRATEGY Sustainable product-cost advantage: traditional airlines have established standards difficult to abandon Poor supplier power allowed highly competitive order of aircraft
STRATEGY:
STRATEGY Very little individual consumer buying power Threat of substitutes – unable to depress profits given Ryanair’s low-cost base Intense rivalry among key players Likely to increase as expansion into Europe continues (region-to-region competition rather than simply point-to-point)
SUCCESS:
SUCCESS 1990 – losses of £20 million 2001 – net profit of £65 million 11 consecutive years of remarkable growth Europe’s largest low-fares airline 63 Routes, 12 Countries Passenger numbers up 35%; Average fares down 3%
SUCCESS:
SUCCESS Continues to demonstrate that low costs are the key to success in the airline industry Not only the lowest cost , but the most profitable Greatest stock market value of any airline in Europe
SUCCESS:
SUCCESS Awards: Best managed airline (2001,2000,1999) Irish Company of the year (2000) Market Development Award (2000) Golden Spider Award (2000) Best Value for Money Airline (1999,1998,1997,1996,1995) … to name just a few
SUCCESS:
SUCCESS THE FUTURE: Over 10 million passengers carried last year with the aim of 40 million by 2010 New partnership with Boeing – will revolutionise short-haul air travel all over Europe, as in the US with Southwest A winning formula: Low costs, strong balance sheet, and disciplined management
CONCLUSION:
CONCLUSION THE COST CRAZY STRATEGY WORKS
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