Exploring Corporate Strategy Model Commerce Essay
To analyse the case the author will use the Exploring Corporate Strategy model. The model will compose of three segments.
The first is analysing the strategic position of the company. To analyse the position, it is important to identify where the organization is currently in terms of performance, the impact of strategy to the external environment (In analysing the external environment of an organisation, it is important to identify the factors that might affect it and in turn affect a number of variables that are likely to influence the organisation’s supply and demand levels and its cost. The ongoing changes occurring in the market create an uncertain environment and have an impact on the function of the whole organization), strategic capabilities and the expectations and influence of stakeholders (Johnson, et al., 2008) by using the PESTEL model, Michael Porters 5 forces, and ratios.
The second part is making strategic choices; strategic choices involve the options for strategy in terms of both the directions in which the strategy might move and the methods by which it is pursued (et al G. Johnson 2008). To analyse this segment the author will discuss how Ryanair competes in the market, in which market it will be competing in and its competitive advantage by using the strategic clock.
The last part which is strategic action is involved in organising and implementing future plans, the author will suggest ways to improve existing services and initial new one.
Table of Contents
Table of Contents 4
1.0 INTRODUCTION: 5
2.0 STRATEGIC POSITION: 5
2.1 PESTEL Analysis: 5
2.2 Michael Porters 5 Forces Analysis: (see appendix 7.8) 7
2.3 Ratios Analysis: 8
Ryanair’s financial performance is positive, although there is still room for improvement (see appendix 7.9). The net profit margin in 2006 was lower than 2005 but Ryanair managed to increase it in the second half of 2006. The return on capital employee has been constant from 2005 to 2006. 8
3.0 STRATEGY CHOICES: 8
3.1 Strategy: 8
3.2 Competitive Advantage Analysis: 9
4.0 STRATEGY IN ACTION: 12
5.0 CONCLUSION: 13
As seen in section 3.2 Ryanair is using the no frill strategy, the company has positioned itself well in the market and has manage under the leadership of the Chief Executive Officer and shareholder Michael O’ Leary to become a household name. Although Ryanair is targeting a niche in the market where its customers are willing to forgo extra benefits for the low fare, the company should try to add value for its customers where ever it can and when ever it can to increase brand loyalty and ultimately sales. 13
6.0 REFERENCE: 14
7.0 APPENDIX: 15
7.1 Demographics: 15
7.2 Market Trend: 15
7.3 Product Life Cycle: 15
7.4 Strategic clock: 16
7.5 PESTEL Analysis: 17
7.6 SWOT Analysis: 18
7.7 Competitive Advantage: 19
7.8 Michael Porters 5 forces: 20
7.9 Ratios 21
7.10 European Short Haul Market Share: 21
7.13 Financial Performance of Ryanair VS competitors for the year 2008-2009 25
Source: centre for Asia Pacific Aviation 25
7.14 Ryanair’s Profit after Tax for 2009: 26
7.15 Ryanair’s Operating Profit Margins for 2009 26
7.16 Frequency of Flights: 27
Ryanair was founded in 1985 by the Ryan family, headed by Tony Ryan, to provide scheduled passenger airline service between Ireland and the United Kingdom, as an alternative to then state monopoly carrier, Aer Lingus. Its fight to survive in the early 1990s saw the airline successfully restyle itself to become Europe’s first low-fares, no frills carrier, built on the model of Southwest Airlines, the highly successful Taxes based operator. Ryanair, first floated on the Dublin Stock Exchange in 1997, is quoted on the Dublin and London Stock Exchanges and on NASDAQ, where it was admitted to the NASDAQ 100 in 2002 3.
2.0 STRATEGIC POSITION:
Ryanair is a leading no frill airline in Europe and across the globe, it has managed to outperform all other airlines and in 2006, it carried over 34.8 million passengers. Ryanair is targeting low income earners and cost conscience customers 1.
2.1 PESTEL Analysis:
(See appendix 7.5) PESTEL analysis is a useful strategic tool for understanding market growth or decline, business position, potential and direction for operations. It is a framework for reviewing a situation and can be applied by Ryanair to review strategic direction as well as marketing intention 4. When one aspect in the PESTEL analysis is affected, the rest will also be affected for example if the political situation of Ireland changes then the economical, technological, social, legal, economical and even environmental aspects will change 4.
Ryanair is not in good terms with some governments in the European Union as well as airline industry authorities and airport regulatory bodies due to the rules and regulations they set. The EU wanted to charge tax on aviation fuel due to carbon emissions generated by the airline industries before 2010, Ryanair argued that any environmental taxations scheme should be to the benefit of more efficient carriers, so airlines with low load factors that generate high fuel consumption and emission per passenger and airline that offer connecting rather than point to point flights should be penalised thus excluding itself 5. Secondly, Ryanair protested against charges and conditions on some airports such as Stansted and Dublin.
Economical conditions also affect both capital availability and cost, as well as demand 4. If demand is high and the capital is low, it will be attractive for Ryanair to invest and grow with expectations of being profitable. To influence demand Ryanair must continue to use its current strategy and improve its services and upgrade its customer care policies.
The currency exchange rates affect Ryanair as they may determine whether customers will book a flight or not. If the exchange rate is high, customers will opt to use other means of transport such as the EURO express. To avoid this situation, customers can use the Euro to book flights 1.
Moreover, jet fuel prices are dominated in US dollars and therefore Ryanair will have to risk paying more or less for fuel as it will include the exchange rate.
The opportunity to exploit a particular strategy successfully may depend on demand which exists in growth conditions and does not in recession. Although a depressed economy will generally be a treat which results in a number of organizations going out of business, it can provide opportunities for some4. The recession decreased the number of competitors in the industry as well as weakening the remaining competition. In and after recession, customers are more willing to fly with a no frill or low cost carriers rather than a differentiated or hybrid carrier. Therefore, to certain extent the recession has had a positive impact Ryanair.
The socio or cultural environment involves demand and tastes, which vary with fashion and disposable income, and general changes, can provide both opportunities and threats for Ryanair 4. Ryanair should be aware of demographics changes as the structure of the population by ages, affluence, regions, number working and so on so as to be able to take advantage when an opportunity occurs.
Technological breakthroughs affect the airline industry the most. If the organization can adapt to the technological change then it will be able to overcome competition and increase its market share. The global focus in the 21st century is environmental protection. Ryanair has been able to meet the demand and standards of the world market by offering eco friendly airlines. The aircrafts produce 50% less emissions, 45% lower noise emissions per seat. A winglet modification programme on the fleet is providing better aircraft performance and a 2% reduction in fleet fuel consumption, a saving which Ryanair hopes to improve in the coming years 1.
Ryanair has been using one type of airline, Boeing 737 to save cost on training staff. As Ryanair cannot dump expenses on its customers it should look for ways to reduce costs and the author believes that this is one of it 1.
Legal factors affecting Ryanair is that of labour unions. Ryanair does not have a good relationship with its employees as it has refused to acknowledge unions. Secondly it is providing poor working conditions and low salaries. Although Ryanair has argued that its pilots are the best paid short haul pilots in Europe. In the autumn 2006 pilots in Ryanair lodge a complaint with the Irish Labour Relations Commission on the basis that there were significant in net salary between Ryanair and Aer Lingus pilots.
2.2 Michael Porters 5 Forces Analysis: (see appendix 7.8)
The threat of substitutes in the airline industry is high as there are other means of transport to and from Europe as well as within Europe. Customers are opting to use the Euro Express (train) rather than using an airplane as it is cheaper and offers extra benefits. The Euro Express enables its customers to enjoy the scenario while offering more or less the same services as the airplane.
Rivalry amongst existing firms; there are a number of competitors within the market and when the European Union commenced even more competitors entered the market. The industry is competitive and is becoming saturated. Each competitor is using a strategy to get a foot hold in the industry. Although some of the airlines are using the no frill strategy, Ryanair has been able to best them by creating a strong brand offering the lowest price fare.
Bargaining power of suppliers, the bargaining power of suppliers is low as there are many suppliers in the industry. The suppliers of the airline industry are those who supply the airline with parts such as the blades and engines, food, uniforms for the air hostess and so on. They are easily replaceable as Ryanair can get these services from any country within and outside of Europe. Ryanair as a supplier has a high bargaining power as it offers services that are unique in the market (it is the only no frill airline in the United Kingdom).
Bargaining power of buyers, the bargaining power of buyers is very high as there are a lot of substitutes and competitors in the market. The customer can easily use his/her car to go Dublin rather than take an airplane. Secondly, as there are a number of competitors in the market, the airlines will offer discounts and promotions to attract customers and therefore customers can easily switch from one airline to another.
Threats of new entrants; the biggest barrier to entering the airline industry is capital but nowadays entrepreneurs can take a loan with the bank or form an alliance such as a joint venture to overcome this barrier. The industry regulations can help decrease the number of new entrants and reduce competition within the market. There is no union among the existing firm to keep new entrants out, in other industries the existing firm come together to keep new entrants out of the industry as they would saturate the market even more.
2.3 Ratios Analysis:
Ryanair’s financial performance is positive, although there is still room for improvement (see appendix 7.9). The net profit margin in 2006 was lower than 2005 but Ryanair managed to increase it in the second half of 2006. The return on capital employee has been constant from 2005 to 2006.
3.0 STRATEGY CHOICES:
Ryanair’s objective is to firmly establish itself as Europe’s leading low-fares scheduled passenger airline through continued improvements and expanded offerings of its low-fares service. Ryanair aims to offer low fares that generate increased passenger traffic while maintaining a continuous focus on cost-containment and operating efficiencies 1.
Ryanair was initially a hybrid (see appendix 7.4) as it was a full service conventional airline, in the early 1990’s it become a no frill carrier under the management of Michael O’ Leary 1. The author believe that this move by the Chief Executive Officer has enable Ryanair to create a market peak for itself and gain market share and therefore I would not suggest a change in strategy. The industry is very competitive and is becoming saturated thus if Ryanair decides to change its strategy it will have to design and implement a new strategy that is not being used by its competitor or that has never been used in the industry. This is next to impossible as all of the strategies i.e. differentiation, cost leadership are already being used. Secondly, Ryanair would lose the foothold it has in the industry and its market share and it would have to start from scratch, which will mean more capital will have to be invested into the new strategy.
Although Ryanair is using the no frill strategy1 they must be careful to not devalue the company. Currently, it has a large customer base but most of which have a very low opinion of the airline 6. Moreover, Ryanair should increase more benefits to its customers for example they should remove the 50 cent wheelchair levy that was impose on every passenger ticket 6. These small charges are making customers opt to fly with a different airline.
The airline offers point to point flight 1. Ryanair uses secondary terminals to avoid crowding in the terminals as well as to decrease its turnaround time. The turnaround time is also kept to a minimum by the flight attendants cleaning the airplane instead of outsourcing professionals.
Building on its success in the Ireland-U.K. market and its expansion of service to continental Europe, Ryanair intends to follow a manageable growth plan targeting specific markets to gain an advantage over its competitors. Ryanair believes it will have opportunities for continued growth by 1:
Initiating additional routes from the U.K. or Ireland to other locations in continental Europe that are currently served by higher-cost, higher-fare carriers
Increasing the frequency of service on its existing routes
Starting new domestic routes within EU countries
Considering possible acquisitions that may become available in the future
Connecting airports within its existing route network (“triangulation”)
3.2 Competitive Advantage Analysis:
Ryanair has many competitive advantages (See appendix 7.7). According to Ryanair’s official website the following are some of its competitive advantage;
3.2.1 Low Fares: Ryanair sets fares on the basis of demand for particular flights and by reference to the period remaining to the date of departure of the flight, with higher fares charged on flights with higher levels of demand for bookings made nearer to the date of departure. The airline sells seats on a one-way basis, thus eliminating minimum stay requirements from all travel on Ryanair scheduled services, regardless of fare. Ryanair’s competitors generally do not operate a one-way pricing policy, so direct comparison is not possible, but current round-trip fares on Aer Lingus, Ryanair’s largest competitor on the London- Dublin route, for travel in September 2004 were 82.27 Euro for economy restricted return tickets, 218.27 Euro for economy flexible return and 353.75 pounds for business class tickets.
3.2.2 Customer Service: Ryanair delivers the best customer service performance in its peer group. According to reports by the Association of European Airlines and the airlines’ own published statistics, Ryanair has achieved better punctuality, fewer lost bags and fewer cancellations than all of the rest of its peer grouping in Europe. Ryanair achieves this by focusing strongly on the execution of these services and by operating from uncongested airports.
3.2.3 Frequent Point-to-Point Flights on Short-Haul Routes: Ryanair provides frequent point-to-point service on short-haul routes to secondary and regional airports in and around major population centres and travel destinations. Short-haul routes allow Ryanair to offer frequent service, while eliminating the necessity to provide “frill” services otherwise expected by customers on longer flights. Point-to-point flying allows Ryanair to offer direct, non-stop routes and avoid the costs of providing through service for connecting passengers, including baggage transfer and transit passenger assistance costs. In choosing its routes, Ryanair favours secondary airports with convenient transportation to major population centres and regional airports. Secondary and regional airports are generally less congested than major airports and, as a result, can be expected to provide higher rates of onetime departures, faster turnaround times, fewer terminal delays and more “competitive” airport access and handling costs. Faster turnaround times are a key element in Ryanair’s efforts to maximize aircraft utilization. Ryanair’s average scheduled turnaround time for the fiscal year ended March 31, 2004 was approximately 25 minutes. Secondary and regional airports also generally do not maintain slot requirements or other operating restrictions that can increase operating expenses and limit the number of allowed take-offs and landings.
3.2.4 Low Operating Costs: Management believes that Ryanair’s operating costs are among the lowest of any European scheduled passenger airline thus being advantageous to the airline. Ryanair strives to reduce or control four of the primary expenses involved in running a major scheduled airline:
Aircraft equipment costs
Customer service costs
Airport access and handling costs
3.2.5 Aircraft Equipment Costs: Ryanair’s initial strategy for controlling aircraft acquisition costs was to purchase used aircraft of a single type Boeing 737, there was a significant reduction in the number of such used aircraft available for purchase in the market. The 737-800s represent the latest generation of Boeing’s 737 aircraft and share certain basic attributes in common with Ryanair’s current fleet. Although Ryanair’s acquisition of the 737-800s has already, and will continue to significantly increase the size of its fleet from that in 1998 and thus significantly increase its aircraft equipment and related costs, the purchase of aircraft from a single manufacturer enables it to limit the costs associated with personnel training, maintenance and the purchase and storage of spare parts, as well as affording greater flexibility in the scheduling of crews and equipment.
3.2.6 Personnel Productivity: Ryanair endeavours to control its labour costs by continually improving the productivity of its already highly-productive work force. Compensation for employees emphasizes productivity-based pay incentives, including commissions for on-board sales of products for flight attendants and payments based on the number of hours or sectors flown by pilots and cabin crew personnel within limits set by industry standards or regulations fixing maximum working hours, as well as participation in Ryanair’s stock option programs.
3.2.7 Customer Service: Ryanair has entered into agreements on competitive terms with third party contractors at certain airports for passenger and aircraft handling, ticketing and other services that management believes can be more cost efficiently provided by third parties. Management attempts to obtain competitive rates for such services by negotiating multi-year contracts at prices that are fixed or subject only to periodic increases linked to inflation. The development of its own internet booking facility and reservations centre has advantaged Ryanair to eliminate travel agent commissions.
3.2.8 Airport Access Fees: Ryanair attempts to control airport access and service charges by focusing on airports that offer competitive cost terms. Management believes that Ryanair’s record of delivering a consistently high volume of passenger traffic growth at many of these airports has allowed it to negotiate favourable contracts with such airports for access to their facilities. Ryanair further endeavours to reduce its airport charges by opting, when practicable, for less expensive gate locations as well as outdoor boarding stairs rather than more expensive jet ways.
3.2.9 Ecommerce: During January 2000, Ryanair converted its host reservation system from the BABS (British Airways Booking System) to a new system called Flight speed, which it operates under a 10 year hosting agreement with Accenture Open Skies (“Open Skies”). As part of the implementation of the new reservation system, Open Skies developed an internet booking facility called Skylights. The Skylights system allows internet users to access Ryanair’s host reservation system and to make and pay for confirmed reservations in real time through Ryanair’s website which accounts for a 96% reservation of all flights.
3.2.10 Safety: Ryanair’s commitment to safety is a primary priority of the Company and its management. This commitment begins with the hiring and training of Ryanair’s pilots, cabin crews and maintenance personnel and includes a policy of maintaining its aircraft in accordance with the highest European airline industry standards. Ryanair has not had a single incident involving major injury to passengers or flight crew in its 20 year operating history. Although Ryanair seeks to maintain its fleet in a cost-effective manner, management does not seek to extend Ryanair’s low cost operating strategy to the areas of safety, maintenance, training or quality assurance. Routine aircraft maintenance and repair services are performed at Dublin, London (Stansted), Glasgow (Prestwick), Shannon and Milan (Bergamo) by Ryanair and, at other airports maintenance contractors.
4.0 STRATEGY IN ACTION:
According to Ryanair’s website the company plans to initiate new services and improve existing ones and therefore the author will suggest ways the company can do so.
The first is initiating additional routes from the U.K. or Ireland to other locations in continental Europe that are currently served by higher-cost and higher-fare carriers. As economies have just emerge from a recession, customers are more cost conscience and therefore if Ryanair continues to use its no frill strategy it will be able to quickly gain market share and dominance.
Increasing the frequency of service on its existing routes, as seen in appendix 13 the most used route is from Dublin to London, therefore Ryanair should increase flights from Dublin to London and vice versa.
Starting new domestic routes within EU countries, as the EU Union continues to grow, more markets will open up. Ryanair should try to enter these markets the first so as to gain the first mover advantage such as being the first to exploit the market thus gaining more knowledge about the market.
Considering possible acquisitions that may become available in the future. Ryanair acquired a small Dutch budget, short haul, carrier buzz and wanted to acquire Aer Lingus its Irish rival and long haul airline. Although the acquisition failed at the time, Ryanair can still try again but using a different strategy. In the future the airline should appoint a stockbroker to purchase Aer Lingus as it did when its stockbroker Davy purchased the Aer Lingus shares. Secondly, Ryanair should negotiate behind closed doors, the first attempt failed because of media interference. Ryanair should state that it will bring in an expert to handle the organizational structure so that the 2 organizations can be able to work together and allow trade unions so as to win over the trust of the government and the Aer Lingus board.
Connecting airports within its existing route network, currently Ryanair is using secondary terminals to avoid traffic and increase its turnaround time. But most customers prefer to use the main terminals and therefore if Ryanair uses both the main and secondary terminals it will be able to increase its customer base.
As seen in section 3.2 Ryanair is using the no frill strategy, the company has positioned itself well in the market and has manage under the leadership of the Chief Executive Officer and shareholder Michael O’ Leary to become a household name. Although Ryanair is targeting a niche in the market where its customers are willing to forgo extra benefits for the low fare, the company should try to add value for its customers where ever it can and when ever it can to increase brand loyalty and ultimately sales.
Ryanair’s official website, http://www.ryanair.com obtained on 21st November 2009 at 12:11 P.M
G. Johnson, k. Scholes, R. Whittington 2008, Exploring Corporate Culture, 8th Edition, Prentice Hall
Ryanair’s history 2009 obtained from http://en.Wikipedia.org/Ryanair on 19th November 2009 at 11:23 A.M
PESTEL Analysis, obtained from http://university-essays.tripod.com on 19th November 2009 at 12:00 P.M
S. Cairns and C. Newson, predict and decide: Aviation, climate change and UK policy, ECI Research Report 33, Environmental Change Institute, University of Oxford 2006
D. Milmo, Ryanair the world least favorite airline, Guardian 26 October 2006
Center for Asia Pacific Aviation 2009, obtained from http://www.cntreforpacificaviation.com on 15th November 2009 at 2:12 P.M
BBC WORL NEWS, fast track, interview with Michael O’Leary time 11:55 28th December 2009
Ryanair’s marketing mix 2009 obtained from http://www.marketingteacher.com on the 27th of November 2009 at 12:06 P.M.
Ryanair’s competitive advantage obtained from http://www.slideshare.net/puya455/newanalysis-of-ryanairs on the 27th November 2009 at 1:00 P.M
Ryanair’s value chain analysis obtained from http://www.peerpapers.com/essays/Ryanair-Value-Chain-Analysis/171123.html?topic
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