Business Strategy Case Analysis Ryanair Management Essay
Ryanair is a 24 year old international air carrier providing scheduled airline services. It is Europe's first and most profitable no frills airline. Founded by the Ryan Family based in Dublin, Ireland. It started its operations in 1985 flying between Waterford in southeast of Ireland and London's Gatwick airport.
Ryanair with rapid growth occupied a most sought position in its own field being Britan's Favourite airline. The CEO, Michael O'Leary was appointed in 1991 as a new management who turned the company to float it on Dublin stock Exchange in 1997 and was admitted to NASDAQ in 2002. He has achieved a dramatic growth and profitability in a very competitive airline industry. It was declared by Air Transport Magazine in August 2006 as the world's largest profitable airline. It remains as biggest low cost carrier of European nations with enormous growth of passengers attaining 34 million passengers in 2006.
The main strategy of Ryanair is low cost airline. Booking are done via internet which reduces cost of intermediaries, it uses secondary airport for landing which is cheaper than primary airport. Travels to 26 countries in 148 destinations serving 74 routes daily with more than 1050 flights a day and has 169 aircrafts.
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It consists of macro environment (analysed with PESTEL), industry (analysed with porter 5 forces) and identification of opportunities and threats (from SWOT). This together provides a better understanding of the industry to be gained and as a result better strategic decision will be made.
The pestle analysis provides a comprehensive list of influences on possible success or failure of particular strategies. This categorises environmental influences into six main types: political, economic, social, technological, environmental and legal. It is vital to analyse how these factors can change and how likely are they going to change in the future, illustrating the implications. Many of these factors are linked together. It is a strategic tool for understanding market growth or decline, business positions and the potential direction for operations.
Political: The political environment is created by governments and powerful decision makers who are able to create laws, regulations and codes and also imposing taxes on the organisation. This highlights the role of governments.
Changes in government policy and regulation which affects aviation industry.
Increase of trade union pressure.
Increase in route charges by the government. It increased by 21% because increase in the number of sectors flown.
The UK authorities imposed severe security measures at all airports due to terrorism attack on airlines.
Climate protection charge. Airline had to pay environmental taxes
Economic: countries have different economic systems ranging from highly controlled and planned ones to other where free market is given more importance.
Increase in growth rate. The growing level of population in the economy increases the need for travelling.
High price of petroleum products. Due to the terrorism attacks, the price of fuel keeps on fluctuating.
Unemployment rate slash to 8.7% in 2006
The currency fluctuations lead to depreciation of US Dollars
EU commission Rulings - Compensation for flight cancellations, reimbursement of delayed passengers.
Social: this exerts pressure on society on how individuals and organisation behave. Values and attitudes are important therefore affect the society as a whole.
Increase in grey market. Means that it's a low cost fare than set by the agency which increase the buying power of passengers to travel a lot and It also attracted wide range of demographic prospects by the low cost strategy.
Increase in business travel. Due to increase in globalisation and advancement in technology, people travel a lot for business preference so Ryan air was successfully targeting at business people.
Change in mode of travelling due to terrorism attack - e.g. banned from carrying liquids and gels on carry on luggage, this made it difficult for passengers to carry their shampoos, hair gels and perfumes which was a necessity to them so passengers chose to travel by train or cars.
Tourism is growing due to migration the desire for people to travel has increased. This is because of their lifestyle changes.
Technological: This Includes advancement of knowledge and equipments in the society and the rate of development and application of such knowledge
The growth of internet usage is a key to low cost airline because it allows passengers to but a ticket online and also get checked in online. By 2003, 95% of the booking was done online eliminating the cost of travel agents.
With the growth of internet, Ryan air also generates income through online gambling and web sales.
By deploying more efficient aircrafts, the consumption of fuel was low.
New aircrafts were bought at a low price decreasing the amount of carbon emission.
Environmental: These are factors that include weather, climate and climate change that affect an organisation.
The increased number of direct flights reduced the pollution.
There was a strict check on green house gas - carbon emission
Noise level control
Climate change. During summer time, there are a lot of passengers travelling with their children simply because there is no school so they go for holidays.
Legal: it means changes in legislation which impacts in employment, access to materials, resources and taxes.
Allegations of misleading advertisements. By exaggerating the prices of its competitor in making comparisons online.
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Abolishment of duty free sales.
Safety measures of staff and pilots
Cancellation and delayed flights compensation. The European Union devised new rules to cover overbooking, cancellations and delayed flights where passengers automatically would get compensation.
MICHAEL PORTER 5 COMPETITIVE FORCES
Michael Porter based this on the insight that a corporate strategy should meet the opportunities and threats in organisation external environment and specially the competitive strategy should base on and understanding of industry structure and the way of change.
Porter main focus was where this fives forces are high; industries are not attractive to compete in, alot of competition pressure to allow reasonable profits.
The five forces are:
Threat to new entrants: The easier for companies to enter an industry, the higher the competition is in that industry. Threat of entrants depends on the extent and height of barriers to entry. These are factors that are needed to be overcome by new entrants to compete successfully. Overall threat is Medium for Ryanair.
Ryanair typical barriers of entry are that it needs a flight authorisation i.e. a license to get into the airline industry which takes a long process. In European countries there was a regulation that was passed which removed barriers and different competitors entering into the airline industry. There were a lot of low cost airline in the industry which are MyTravelLite, FlyBE, easyjet which limited others to enter. As there was a requirement of huge capital investment and disbursement of capital, it made it difficult for the entry. As the landing slots are already reserved by European Countries and are also used by nation carrier's, made it complex for entrants due to scarcity of landing slots.
Threats of substitutes: Substitutes are products or services which offers a similar benefit to a product or service but in a diverse process. People can substitute airplanes for a train to travel. Substitute can reduce demand for a particular set of products as customer switch to alternatives. Overall threat is Medium for Ryanair as industry is susceptible to changes in the economy.
Consumers are choosing eco friendly modes of transport such as Trains, cars and ferries to travel within home country which is a threat to Ryanair. There is also a threat that if the country enters in a recession period, there would be a generic substitution meaning that people would spend their income on their basic needs rather than on luxury of travel. The management relationship with customers on Ryanair was lenient leveraging which made passengers to substitute.
Bargaining power of Buyers: Customers are essential for the survival of any business. Sometimes buyers can have a high bargaining power that their suppliers face a difficulty to make any profits at all. Overall consumer power is Medium/High.
The creation of website comparisons made passengers to easily compare flight prices between different airlines and pick the lowest fare. Ryanair target market is for customers looking for low prices. There was no control over price as customers were not concentrated instead customers were price sensitive because they had a huge inclination towards low cost airline. The power of travel agent was dropping as prospects used to book tickets online or through direct booking posing a threat to travel agent.
Bargaining power of suppliers: Suppliers are people who are raw materials, equipment, fuels, labour and sources of finance. Overall supplier power is Low/Medium with changes in external environment.
The supplier's power was high since there were only two imperative suppliers of planes, Boeing and Airbus which led to high context of supplier and were playing a dominate role in the industry. The switching cost from one supplier to another was high which led to retrain mechanics, staff and pilots for the usage of the other supplier's aircraft. Due to the frequent fluctuations in the price of fuel which was related to the cost of oil so the cost of production was varying due to the fluctuations. Regional airport have little bargaining power if they are heavily dependent on one airline. But bargaining power increases due to competition of low fare airlines. Bigger airport where Ryanair operates have greater bargaining power.
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Competitive rivalry: These are organisations with similar products and services aimed at similar customer group. High competitive pressures results in pressure on prices, margins and thus on profitability for each company in the industry. Overall rivalry was high.
There wasn't much differentiation in the airline industry; the only differentiation factor was price. Ryanair was based on low cost- no frills strategy, this meant that if any airline company decides to compete with Ryanair than there would be heavy pressure on prices, margins and profitability as well. There are various mergers and strategic alliance E.g. KLM and Air France which makes it difficult for other airlines to operate alone. The airline industry faced a threat of substitute meaning that if it charges high price or isn't operating well to satisfy customer needs than people would prefer to travel in cars, trains pr by sea. Since a huge amount of capital was involved, airline firms faced high barriers to exit.
OPPORTUNITIES AND THREATS (SWOT ANALYSIS)
It provides information which is helpful in matching firm's resources and capabilities to competitive environment it operates. It summarises the key issues from the business environment and the strategic capability of an organisation that are most likely to impact on strategy development. The aim is to identify the extent to which strengths and weakness are relevant to, or capable of dealing with the changes taking place in the firm. A SWOT includes internal (strengths and weakness) and external elements (opportunities and threats).
Below are the external elements of Ryanair
Opportunities: these are external environmental analysis that may reveal certain new opportunities for profit and growth. It is a favourable situation in an organisation environment
With the management system and the strengths that it has, Ryanair has bigger opportunities to dominate and catch up with competition in the European airline industry in terms of providing quality service standard and at the same time preserving its low cost frills strategy.
It has expanded with European Union.
It has started long distance flights.
Advanced cost reduction. With An increasing number of business travellers, Ryan air took advantage by creating low cost business service
Threats: These are changes in external environment which also may present threats to the firm. They are gained from an external audit which analyses the business and economic environment, market conditions and strength of the competitors. A threat might be a barrier, anything external that cause difficulty for the company.
Loss of skilled pilots. There is a pressure from the British airline pilots' Association to recruit Ryanair pilots based in UK.
Substitute Transportation due to terrorism attacks and expense of checking in luggage as well extra time spent in airport security checking. People would prefer to travel using Trains or Cars.
Increase of low fare cost competition. There are many airline firms following a low cost strategy, charging low prices to passengers which are a threat to Ryan air.
Fluctuating fuel prices - the price of fuel rose in 2005 and kept increasing. It would neither be predicted nor controlled. It was based on hedging. This meant that if fuel prices kept on increasing, passengers would be charged high through increased fares.
Terrorism and security threat. Passengers were body checked and were banned from carrying liquids and gels due to security.
It focuses on key internal strengths and weakness (from SWOT) and can be achieved by examining the resources and competences (RBV) of Ryanair by applying the VRIO model.
Strengths: These can be looked upon as real advantages. Firm's strengths are its resources and capabilities that can be used as a basis for developing a competitive advantage.
It has a strong marketing strategy which includes a strong brand name and reputation in the airline industry. It is one of the most recognised brands on Goggle.
It has an aggressive and innovative leadership managed by Michael O'Leary which made a lot of publicity
90 % of the booking is done online which made Ryanair the largest travel website in Europe and offering it a huge potential to convert it into e-commerce. However it eliminated intermediaries and distribution costs.
It received an award in August 2006 by Air Transport Magazine for the most profitable airline in the world and was one of the most successful airlines in the industry with high number of passengers and flights.
High service performance: In-flight services are extremely good, seats are comfortable to sit, provides in-flight mobile services and on board sales, and high rate of flight completion giving the company a good image.
Weakness: These are seen as negative factors. The absences of certain strengths are viewed as weakness of the firm. It is the limitations or faults that exist in the organisation that will keep it away from achieving its objectives.
The staffs of Ryanair are unskilled. They have poor working conditions such as staff banned from charging their own phones at work simply to reduce electricity bill.
Poor leg rooms: there is no proper space for passengers to stretch out and sit nicely.
Some secondary airports were significantly further from the city which consumes more time and costs.
No control over fuel prices. Based on hedging meaning educated guessing.
There has been significantly bad publicity of the company thus creating a negative impression to the airline industry.
Ryanair has been known as European first low cost, no frills airline brand. It started with the strongest selling point which resulted to rapid increase of customers and expansion of the business operation. Despite the increase of passengers, the company wasn't doing well at managing the cost which resulted difficulty to handle customer or the target market. It accumulated hidden taxes, fuel cost, restricted customer service and deceiving advertisement which posed a threat to Ryanair. With the new management system led by Michael O'Leary and the strengths, it served better opportunity to dominate and catch up the airline industry by providing quality service and preserving low cost - no frills strategy. It faced an inevitable threat of low cost competition from its rival.
Resource Based View
Is the competitive advantage and superior performance of an organisation that is explained by its distinctiveness and of its capabilities. It is very useful framework for gaining insights on why some competitors are more profitable than others.
It includes Tangible resources, intangible resources and organisational capabilities.
Tangible resources are assets that are observable and easily quantified. They include the physical and financial assets that an organisation uses to create value for the customers. Tangible resources include:
Physical resources: this consists of resources (machines, production capacity, and location) that are needed to operate within firm. Ryanair includes 196 Boeing aircrafts, maintenance, headquarter office and secondary airports. It lands to 27 countries in 127 destinations.
Financial resources: These are firm's cash account, borrowing capacity, capital, debt, equity and investment. Ryanair is the lowest cost airline with highest profit and its capital came from the Ryan Family and shareholders, debtors, creditors, discount from governments and airports.
Technological Resources: this includes innovative production process, patents, copyrights and trademarks. Ryanair introduced online booking for passengers, compensation to passengers for flight cancellations, delays and denied boarding.
Intangible resources are non physical resources such as information, reputation and knowledge. It is much more difficult for competitors to imitate them and is typically embedded in unique routines and practices that have evolved and accumulated over time. Intangible resources include Human Resources (experience and capability of employees, trust, effectiveness of team work and managerial skills), reputation resources (brand name, reputation with suppliers, customers reliability)
Ryanair has an average of 6000 staff working and are passionate about the work they do. It had knowledge of board and Michael O'Leary was disciplined and focused. It had a labour policy, E.g. cabin crew to clean the aircraft in between the flights. It had small number of core staff and outsourced all non core activities.
Ryanair had the strongest brand awareness and made a reputation in the airline industry by offering low cost - no frills to passengers. Despite of competition in the airline industry, Ryan air's customers were loyal to the aircraft because of low fare and punctuality and had alot of publicity due to CEO of Ryan air Michael O'Leary who had a lot of confidence despite failure.
Organisational Capability: these are competencies that firm employs have to transform inputs into outputs. It refers to an organisation's capacity to deploy tangible and intangible resources generally in combination and to control those capabilities for a desired outcome. Competences are the skills and abilities by which resources are organized effectively through activities and processes of the organisation.
Ryanair received an award for the world's most profitable airline by Air Transport World Magazine in August 2006 on basis of operating profits and net profit margins. In 2006 Ryanair published a passenger charter which embraces a number of doctrines, dealing with low fares, redress and punctuality; this was one of the service innovations. Ryan air scored very well on best fares and had 22.1 million passengers by the end of November 2006. Ryanair with the new management team held by Michael O'Leary successfully restyled the airline to become Europe's first low fares and No-frills carrier - this mean it combines a low price, low perceived service benefits and a focus on sensitive market segment. It uses innovative strategies on cost cutting; it travels point to point reducing airport charges, using secondary and regional airport destinations which are low at cost and has quick turnaround time.
By applying the VRIO model to Ryanair resources (Appendix 1) determines whether it is using the resources and capabilities to maintain competitive advantage in the industry.
Concluding from the above analysis, Ryanair should develop its market globally. According to my point of view, the company should increase its cost because fuel/oil prices may rise and the company might lose its market share. Rather than targeting the niche market, Ryanair can increase its revenue by identifying new routes, increasing the frequency of exiting routes and expanding the market to other areas of Europe and other continents.
Its resources and capabilities combined them to make core competences in low cost strategy to enjoy profit margin.
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