Environmental
- Companies now have to comply with strict environment protection regulations and laws. Should they breach them, they may be liable to enormous fines or court hearings. This can have a greater impact on low-cost carriers as they have more take-offs and landings due to higher frequency of flights, and therefore need to pay more environment related taxes.
- The Strategic Growth Model
Ryanair was set up by the Ryan family in 1985. The company went public in 1997 and the Ryans subsequently sold the bulk of their share to other shareholders. Ryanair traditionally developed organically, i.e. by growing its assets by itself. Every year, it opened new hubs in Europe, started flights from new airports, and added to its aircraft fleet. This model proved to be rather successful. By 2003, Ryanair was the most profitable and valuable airline in Europe ahead of Lufthansa and doubling its value over British Airways. However, as the market started to saturate and as the competition got tougher, the company decided to buy Buzz, another low-cost airline. It did so in 2003. Many said that Buzz was a financial disaster but acquiring it was strategically important for Ryanair that wanted to increase its market share and get Buzz’s airport slots and other facilities.
- The Leadership Style of the CEO
The CEO Michael O’Leary can be characterized as an eccentric, charismatic leader. He has never been conventional and has always been ready for controversy. Thus, he dressed as the Pope, St Patrick and an aviator to promote his company. He also repeatedly challenged his rivals in very outspoken and extraordinary ways (e.g., challenged EasyJet sitting on top of a tank etc). His leadership style can be seen as transformational rather than transactional because under his management people tried to work harder and achieve challenging goals and felt commitment to what they were doing. FT called O’Leary one of the 25 greatest European business stars (‘A head for numbers, a shrewd marketing brain, and a ruthless competitive streak’).
- The Competitive Environment
In order to understand the competitive environment, it is useful to carry out the Porter’s Five Forces Analysis:
Barriers to Entry
- High because as the case suggests only early entrants such as Ryanair can succeed. There has been much industry shake-out and many airlines have gone bust.
- High entry costs due to the necessity to buy expensive aircraft and equipment, pay to airports, and advertise massively. In the market where one competes on cost and not on differentiation, it is hard to attract customers from incumbent airlines.
Threat of substitutes
- Medium to high. Although low-cost carriers have taken over some share of car ferries and buses, high-speed trains in Europe, especially on short-haul routes are posing an increasingly serious threat. The speeds of the train are ever increasing and new routes are constantly being added, which compounds the situation.
Bargaining power of buyers
- Medium. On the one hand, if prices are increased, customers may vote by feet. On the other hand, the sheer volume of the passenger traffic is so great that airlines can afford not satisfying all customers all the times. Moreover, even if increased, low-cost carriers’ prices will still be lower than those of large flag carriers, which will inevitably attract price-sensitive passengers. Evidence: many passengers are not pleased with the customer care level of Ryanair (please see the comparative tables), however, the company’s profits have been surging.
Bargaining power of suppliers
- Ryanair outsources most of its operations (luggage handling, passenger loading etc) because this is cheaper than retaining the operations in-house. The bargaining power of suppliers is rather low because there are plenty of them and Ryanair can switch suppliers should it desire at no cost. Moreover, suppliers are interested in co-operation with Ryanair because of stability of orders and high volume of outsourced services. Ryanair also proved its high bargaining power with aircraft suppliers (Boeing) by getting favourable contracts.
Existing rivalry
- Very high, intense. Ryanair competes with:
- other low-cost carriers such as EasyJet, BMIbaby, MyTravelLite;
- national carriers who are slashing costs and offering low fares: BA, KLM, Lufthansa. They, moreover, provide greater value for money;
- high-speed trains like TGV in France.
The airline industry, therefore, is highly competitive and barely attractive. At the same time, the low-budget sector is in a more favourable situation due to greater traffic and customer affection. This sector is more attractive as entry costs as well as bargaining power of both passengers and suppliers are lower. However, the competition is, probably, is even more intense here.
- Strategic capabilities: resources and competencies
Resources
- Early entrant thus brand recognition and customer loyalty;
- Large fleet;
- Very healthy cash flow thus opportunity to re-invest and market aggressively;
- Highly skilled workforce;
- The CEO – Michael O’Leary;
- Investor confidence;
- Expertise and accumulated knowledge/experience;
Competencies
- Learning curve (early entrant), accumulated much knowledge/experience;
- Outstanding marketing and PR skills (O’Leary!);
- Ability to bargain and get beneficial deals with suppliers;
- Efficiency (high turn-around rate; fast luggage handling; high punctuality);
- Ability to think strategically and assertively and to act on it: acquisition of Buzz; expansion of new hubs; new routes added;
- Ability to control and cut costs – crucial to survive and succeed in the industry!
- Ability to build and sustain brand (loyalty).
Section B.
- Define the value chain model
The value chain model was suggested by Michael Porter. He maintained that an organization can provide value to its customers in two major ways: by lowering costs in a particular operation or by enhancing perceived value-added through differentiation. A company can add value using both methods in its different operations. The value chain consists of primary activities and supporting activities.
Primary activities include:
- Inbound logistics, i.e. suppliers, purchases, inventories, lead times;
- Operations, i.e. manufacturing or processing; waste and distribution management; inventory control; efficiency; location management; customer service; information systems;
- Outbound logistics: selling, delivering, transportation, distribution;
- Marketing and sales;
- Service: customer satisfaction and retention, customer loyalty.
Supporting activities entail:
- Infrastructure: structure of the organization (centralized or decentralized etc); culture; managers’ involvement and support; vision; frequency of communication between managers and employees;
- Human resources: motivation; respect of employees, which leads to happier staff and lower turn-around;
- Technology development: Internet bookings, satellite communications, ERP information systems all lead to greater efficiency and lower costs;
- Procurement: relationships with suppliers; storage. When bargaining power towards suppliers is high, then costs are low.
A successful company strives to add value at EVERY level and activity. It can do so by lowering costs in any given activity, and thus passing on the savings to customers in the form of lower prices. E.g., it can save on transport (outbound logistics) and will thus reduce its overall bill and set lower prices. It can also improve any given activity or effectively differentiate it, without lowering costs. By doing so, the company will increase the perceived value-added to the customer at this level of activity. By introducing advanced technology, the organization will not lower costs in the short run but will improve its efficiency in servicing clients, and will thus enhance the perceived value-added to customers.
The stronger the linkages between the company activities, the greater value will be delivered to the customer.
References
The paper is based on RyanAir Case Study Scholes (2005) Exploring Corporate Strategy, 7th Edition, p882
