Ryanair’s strategic management practices through the theory of core competencies
Introduction
The aim of this assignment is to explore Ryanair’s strategic management practices through the theory of core competencies developed by Prahalad and Hamel (1990). Ryanair operates in the low cost carriers (LCC) industry and experienced success since the launch of its operations. Ryanair’s successful strategic management position is reflected in the optimisation of its internal processes offering value to customers whilst eliminating waste. By developing a set of core competencies, Ryanair has been able to develop a strong market position while transporting millions of customers every year.
The first part of the essay provides a brief overview of the company and the industry in which it operates. This section outlines the key competing forces and argues for the company’s cost leadership approach towards its strategy. The second section outlines the core competence theory developed by Prahalad and Hamel (1990). This section briefly summarises the theory and its assumptions. The third section discusses the application of the strategic theory to Ryanair. This section argues that Ryanair’s core competencies concern not only the efficient utilisation of its tangible resources (e.g. aircraft, contract on destinations with airports), but also intangible resources (e.g. market share, reputation, customer loyalty).
Brief overview of Ryanair
Ryanair gained its reputation as a low cost carrier (LCC) throughout Europe by following the SouthWest business model (Strategic Direction, 2006) (see Appendix 1 for a comparison between the two models). This model included the delivery of a no- frill service whilst offering a point-to-point service and short haul routes to secondary and regional airports. By competing on cost, Ryanair was able to offer cheap tickets to a range of European destinations with the result of changing how customers perceived their travelling experience. Ryanair was able to offer competitive prices by reducing operational costs through the utilisation of its aircrafts. In particular, by avoiding a hub-and-spoke service, creating short haul journeys, scrapping the traditional system of ticket production and seat reservation and in-flight meals, the company was able to increase the number of journeys whilst reducing costs. Moreover, the use of secondary and regional airports offer less handling costs, fewer terminal delays, and greater airport access. According to Datamonitor (2010) “as of June, 2009, the company offers over 1,200 scheduled short-haul flights per day serving 145 locations throughout Europe and Morocco, with an operating fleet of 196 aircrafts. The company operates through approximately 845 routes” (p.6). The scale of the company’s operations indicates its positive reception by consumers seeking to reduce travelling costs whilst increasing the frequency of trips to European destinations.
Current trends in the Low Cost Carrier (LCC) Market
3.1 A different approach to airplane transportation
Malighetti, et al (2010) argue that the growth behind the LCC market is underpinned by the consumers’ increasing interest in using airplanes not as a luxurious mode of transportation but as an opportunity for travelling to new destinations at a minimum cost. According to Huttinger (2006) “many countries perceived the airlines as a state institution and their reason for existence as a fulfilment of public needs (p.229). The same idea is also expressed by Pitt and Brown (2001) who argue that the development of a differentiated strategy allowed the LCC firms to create a new niche. Dobruszkes (2009) argues that efforts towards deregulating the industry by the EU allowed airline firms to introduce changes in their way of operation. Lack of regulation meant fewer restrictions as to how the airlines needed to design and perform their operations (e.g. ticketing system, destinations, etc) (Dobruszkes, 2009)
According to Strategic Direction (2007a, 2007b, 2007c) the emerging opportunities developing from deregulation were followed by the SouthWest business model in the USA. This model was not only copied but also extended by companies like Ryanair and Easy Jet in Europe (Barrett, 2004). As Figure 1 illustrates, a steady increase in the number of passengers carried between LCC firms can be noted. For example, whereas Virgin Atlantic achieved 28.9% growth, in contrast, Ryanair achieved 171.9% for the number of passengers carried. The difference in volume is evidence of the consumers’ growth and changing travel needs.
Figure 1 Scheduled passengers carried, 2002-06
2002
2003
2004
2005
2006
% change
m
m
m
m
m
2002-06
easyJet
11.4
20.3
24.3
29.6
33.7
+195.6
Ryanair
14.9
21.3
26.6
33.7
40.5
+171.8
Flybe
2.6
3.2
–
–
5.5
+111.5
bmibaby
0.7
2.8
3.3
3.6
4.1
+583.3
Monarch
na
na
2
2.6
3.2
na
Virgin Atlantic
3.8
3.8
4.3
4.5
4.9
+28.9
BMI
7.5
9.4
10.5
10.5
10.5
+40
BA (est)
40
38
36.1
35.7
35.6
-11
Source: Company data/CAA UK airline statistics/Mintel
A key trend in the LCC market has not only been the consumers’ attention on cost but also opportunity for travelling to new destinations within Europe (Malighetti, et. al. 2010). As Pitfield (2008) argues, following the recent economic credit crunch the new business model favoured the LCC. Cost became a differentiating factor in the way consumers made their purchasing choices on travel (Pitfield, 2008). Moreover, from Figure 2 it can be noted that the competition between the LCC remains fierce. Ryanair and Easy Jet are the largest competitors in Europe sharing the greatest volume of passengers travelling. According to Gillen and Lall (2004) such growth is attributed to a) the number of destinations already served by the airliners, b) the reputation on cost and c) the development of a strategy that allows them to utilise resources whilst minimising waste. Efficiency remains a key attribute to the development of competitive advantage in this market. This is because excessive costs contribute to the firm’s cost structure. This means that for a LCC firm to remain competitive such company needs to sustain its levels of efficiency whilst improving the value chain with which the service is delivered.
Figure 2: Passengers carried in 2006
Source: Mintel/Company data (2007)
3.2 Ryanair’s cost leadership strategy
According to Porter (1980, 1985) there are three types of strategies companies can adopt in an industry. These are a) cost leadership, b) differentiation strategy, and c) focus strategy. A cost leadership remains effective depending on the volume of customers served. Such strategy focuses on achieving economies of scale by maximising its profit margins through the maximised over volume of sales. In contrast, a differentiation strategy is based on the specific attributes of a service and/or product that competitors are not able to offer (Porter, 1987). The distinctive features that are unique to such service/product differentiate the company’s competitive power (Porter, 1996). A focus strategy concerns a firm’s concentration on a particular segment in the market (e.g. consumers, product, health-related products) with the result of creating new barriers of entry for other competitors to enter (Porter, 1987). Such barriers are created because of the tacit knowledge (e.g. methods of production) that is needed in order to develop the product and/or service.
Ryanair is adopting a cost leadership approach to strategy. As Figure 4 shows, when comparing the company’s prices against competitors and for the same destinations the cost difference remains considerable. Mintel (2007) notes that the company aims to turn flights around within 25 minutes and routes are consistently the shortest of all the Low Cost Carriers (LCCs).
Wood (2004) and Boru (2006) argue that even though this cost leadership strategy has proven effective, nevertheless, it has been difficult for Ryanair to maintain it without influencing the quality of service offered to customers. In particular, Boru (2006) argues that Ryanair’s hard approach on cost has resulted in a hostile behaviour towards customers. “Ryanair’s couldn’t-care-less approach to customer care also applies to refunds and baggage. Not only are refunds never paid out, even if a passenger’s travel plans are disrupted by the death of a grandparent, but the bereaved customer is told to … for having the temerity to ask” (Boru, 2006, p.50). Datamonitor also reports “various lawsuits, claims, and legal proceedings, arising in the ordinary course of its business. Some of these legal proceedings and claims seek damages, fines, or penalties in substantial amounts or remediation of environmental contamination” (p.7). The implication of this argument is that even though consumers continue to fly with Ryanair, they nevertheless remain weary of its behaviour to their changing travelling needs.
Figure 4: Comparative fare levels (same booking date and approximate departure times
Source: O’Higgins in Johnson G, Scholes, K, Whittington, R. (2008, p.839)
Mintel (2007) argues that in order for Ryanair to increase its revenues, it tends to engage in making incremental increases on costs that remain hidden to consumers. For example, consumers are being charged to pay for advance boarding to seat reservations, sports equipment to extra baggage and others. O’Higgins (2008) mentions for example that “a disabled man won a landmark case against Ryanair after it charged him £18 for a wheelchair he needed at Stansted Airport to get from the check-in desk to the aircraft. The passenger was awarded £1,336 in compensation from Ryanair, as the UK based Disability Commission said it may launch a class action against the airline on behalf of 35 other passengers” (p.834).
Such hidden costs generated a negative image for the company’s low cost reputation. Donne (2004) and Groom (2004) argue that customers dislike extra charges and seek to withdraw their loyalty for carriers that are not committed to their quality of service on the grounds of reducing costs.
Figure 5: Customer complaints
Source: in Johnson G, Scholes, K, Whittington, R. (2008, p.842)
The implication of this argument is that Ryanair’s successful strategy remains contingent to the changing trends in the environment. As Figure 3 illustrates, the process of strategy formulation and evolution goes through a cycle where application needs to conform to the changing conditions of the environment. This means that Ryanair needs to develop a different approach to its cost leadership strategy by introducing modifications to its model. This can be done by placing greater importance on the customers’ perceptions of satisfaction rather than just promoting the selling of low cost tickets.
Figure 3 Aspects of Strategy formulation and evolution
Source: Chaharbaghi and Willis (1998:1022)
Core Competencies Theory
According to Johnson et al (2008) Chaharbaghi and Willis (1998) the study of strategic management is concerned with understanding how an organisation can realise its corporate goals through the manipulation of its tangible and intangible resources. According to Ansof (1984) strategic management can be defined as “a systematic approach to a major and increasingly important responsibility of general management: to position and relate the firm to its environment in a way which will assure its continued success and make it secure from surprises.” (p. xv) According to Raduan, et al. (2009) “strategic management can be seen as a combination of strategy formulation, implementation and evaluation” (p.406)
According to Mintzberg et al (1998) there are two principle schools of thought that influenced the discourse on strategic management over time. These are characterised as the a) design school and the b) emergent school. The design school argues for the importance of careful planning. Lidtka (2000) for example argues that the orchestration of processes can lead to the achievement over the intended strategic corporate outcomes. The emergent school was influenced by the work of Mintzberg (1979, 1983) and argues for the management’s inability to manage uncertainty in the course of realising its corporate goals. Mintzberg (1983) argues that the role of strategic management is to adjust a firm’s intentions according to the shifting conditions of the environment. Such conditions cannot be known a priori but only realised at the time of their development (Mintzberg, et al (1998). Cunah and Cunah (2006) also support this idea by arguing that “firms developed their strategic positions by an emergent process resulting from managers’ and employees’ improvisations in response to the realities of the market” (p.839).
In the discourse between the two schools, Prahalad and Hamel (1990) developed the theory of core competencies. This theory argues for a firm’s ability to develop specific competencies which are intertwined with the employee’s tacit knowledge and expertise. Core competencies remain context-specific and are not easily transferable because of the specificity of the employees’ knowledge and skills that help maintain it.
According to Größler (2007) core competencies represent “a firm’s capabilities created by the complex interaction of its resources combined with implicit or explicit knowledge about the effective combination of these resources” (p.252). According to Prahalad and Hamel (1994) the implication of this argument is that the innovative capability of a firm remains closely located in its awareness of the employees’ skills and their continuing development. Hence, the process of fostering core competencies comprises the development of qualities which concern the advancement of products/services which are intertwined with a set of skills which are people-specific (Hamel, 1996). As Figure 4 illustrates, performance remains an outcome of the interaction between capabilities and resources. Such a process is dynamic and not static, which means that the firm is in a continuing process of identifying and strengthening its core competencies over time (Goold, 1996).
Figure 4 Relationship between resources, capabilities and performance
Performance
Capabilities
Resources
Source: Adapted from Größler (2007, p.253)
Having outlined the theory of core competencies the following section will discuss its application on Ryanair.
Assessing Ryanair’s strategy through its core competencies
5.1 Waste minimisation and improvement making
According to Lawton (1999) and Done (2004) Ryanair’s core competencies are identified in its ability to discover and remove operations that do not add value to customers. Prices can be reduced when unnecessary processes are eradicated and/or improved. Pietfeld (2008) argues how the increase in efficiency is an activity that needs to move beyond the process of careful planning. Gillen and Lall (2004) argue that Ryanair has instilled an improvement-making strategy that resides in its corporate culture. This means, that employees can take real-time initiatives which are then evaluated and implemented by the management on the organisation as a whole (Leavy, 2003).
Lawton (1999) argues that the management of the organisation remains unable to detect deficiencies as employees are the ones who have immediate contact with customers. Hence, the process of introducing quality improvements requires the necessary organisational structure to allow initiative-taking by employees whilst these are also supported by the management layer.
According to O’Sullivan and Gunningle (2009) the literature on initiative-taking by employees remains subject to criticism. This is because employees can indicate areas of improvement but such suggestions may not be readily applicable. However, a core competency developed by Ryanair is the development of an organisational structure where the corporate culture allows them to take initiatives which are then institutionalised. The management is responsible for the development of the necessary regulations, policies and procedures that can accommodate initiatives (Barrett, 2004). The implication of this activity is that the firm is able to swiftly respond to the customers’ changing needs with little delay. This core competency remains difficult to copy by competitors because it resides within their existing work ethic and cultural values of employees that has matured over time.
A criticism that is expressed against Ryanair, and in contrast to its effort to increase levels of efficiency, concerns the absence of unions that may exercise resistance to the management’s growing demands. By increasing the array of responsibilities, employees are required to achieve performance targets, O’Sullivan and Gunningale (2009) argue that Ryanair has created excessive demands on employees that are not accounted for in their salary.
5.2 Utilisation of Resources
A second core competence concerns Ryanair’s ability to maximise the volume of customers travelling whilst increasing the number of routes offered. Barrett (2004) argues that “the shorter turnaround times permit more journeys per day per plane which, coupled with the higher seat density of Ryanair planes, generate lower seat mile costs (p.92). Delays result to high maintenance costs in servicing aircrafts (Barrett, 2004). Such costs, in turn, can result in reducing the number of destinations offered in the first place. Gillen and Lall (2004) argue that “a faster turn improves utilization of all factors of production such as aircraft, gates, ground equipment and labour” (p.44). Ryanair’s core competency concerns its capacity to maximise the utilisation of its aircrafts whilst also maximising the number of routes offered. However, such utilisation requires the management of the employees’ contribution for knowing how resources need to be managed. The exercise of knowledge and training remain task-specific. Employees understand how their contribution, at one segment in the business, can have a wider contribution on the company’s performance as a whole. Ryanair demonstrates synergy in managing array of operations that include a) the management of its network routes, b) the punctuality with which aircrafts turnaround, and c) the employees’ capability to manage an increase in volume of passengers. Such understanding is embedded onto the employees. As Prahalad and Hamel (1990) argue, a competency remains difficult to replicate by competitors because it is context-specific, and subject to the tacit knowledge and skills produced in the first place. Ryanair’s ability to utilise its resources whilst maintaining a cost leadership strategy results from the combination between the employees’ knowledge and the utilisation of its resources. Figure 5 illustrates the company’s efforts to increase levels of efficiency between 2002 and 2003.
A complementary dimension to the utilisation of resources is the creation of new destinations. Datamonitor (2010) argues that “in January 2010, the company introduced 25 new routes to/from Alicante, Barcelona Reus, Barcelona Girona, Bratislava, Bristol, Cork, East Midlands, London Stansted, Milan Bergamo, and Pescara. In the following month, the company announced opening three new routes from Edinburgh to Faro, Marrakech, and Paris. It also launched six new routes to the Greek holiday destinations of Kos, Rhodes and Volos” (p.6). The creation of new routes is subject to the company’s core competencies for sustaining its cost-leadership strategy whilst expanding the destinations offered. This means that by attracting a larger volume of passengers travelling, Ryanair achieves economies of scales that help maximise its profit margins. By achieving a high seat-filling-capacity Ryanair can sustain its standard maintenance costs whilst improving on revenues. Moreover, such strategy can create barriers of entry to competitors (Dobruszkes, 2009). By gaining entry to the new network routes, other airline companies (e.g. Easy Jet, Air Lingus, etc) have greater difficulty in competing for the same destinations.
Figure 5: Ryanair operating statistics between 2002 and 2003
Source: O’Higgins in Johnson, et al. (2008, p.846).
Conclusion
The aim of this essay has been to explore Ryannair’s strategic management practices. By making use of the theory of core competencies as developed by Prahalad and Hamel (1990) this essay argued for the company’s cost-leadership strategy that is sustained through its efforts to minimise waste and improve efficiency. Even though Ryanair’s business model has proved successful, at the same time, there is growing criticism regarding the evidence indicating the company undermining the quality of its customer service. Even though consumers continue to use Ryanair for its efficient service and low cost prices the company is struggling to avoid the mounting criticism concerning the introduction of hidden costs and lack of adequate customer service (Wood, 2004, Boru, 2006). This essay argued that the company’s core competencies concentrate on improving levels of efficiency at the operational level. There are two areas in which this occurs. The first is by developing an organisational culture where employees are encouraged to take initiatives in order to reduce operations that do not add value to customers (O’Higgins, 2009). The second area concerns Ryanair’s ability to maximise the utilisation of resources whilst expanding on the number of destinations offered (Dobruszkes, 2009). According to Prahalad and Hamel (1990) it can be argued that Ryanair’s business model remains difficult to copy by competitors because the synergies created are subject to the employees’ knowledge and experience. Such knowledge remains contextual and task specific.Such core competence is difficult to transfer by merely migrating the methods and tools used. However, this essay also argued that perceptions of value need to be reconsidered by Ryanair. This is because value is not only subject to the low cost prices offered but also to the quality of customer service which includes the company’s attitude towards responding to complaints and avoiding the misrepresentation of information as well as hidden costs.
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