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This case is about Ryanair which is the first budget airline in the Europe headed by Michael O'Leary who was the CEO of Ryanair. The case further explains how Ryanair the most profitable airline faced various challenges during the time period of 2004 to 2007 including the backdrop of the European airline industry.
Main objectives of this assignment are to provide recommendations to senior management team of Ryanair with strategic choices and recommend new strategic initiatives and areas for improving strategy implementation. In order to accomplish those objectives a strategic analysis of environment, industry as well as the internal performances of Ryanair will be conducted.
3.1 About Ryanair
Ryanair was founded by Ryan family in 1985. It has changed from a fully service conventional airline to the budget airline segment with the great turbulence they had faced in 1990. Now it has become the world's most profitable airline.
Ryanair's mission statement - "Ryanair will become Europeâ€²s most profitable lowest cost airline by rolling out our proven `low-fare-no-frillsâ€² service in all markets in which we operate, to the benefit of our passengers, people, and shareholders" (Mayer, 2007)
It is possible to identify Ryanair's current business scope from that statement. (Thompson & Strickland, 2003) They are the Europe's most profitable low cost airline who provides low cost no frill services to their customers who are according to (Mayer, 2007) within Europe and price-sensitive with a lower income level or other preferences and less willing to pay for the add-on services onboard.
According to (Strategy, n.d) Ryanair's main 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". Their other objectives includes providing best customer service, providing point to point short haul routes to secondary airports around major population destinations and travel destinations at the lowest possible cost by lowering the operating costs. According to the case they have some future growth plans also.
It is possible to identify many critical issues when analysing the case. Among them main issues would be high customer dissatisfaction and poor labour relations. Other issues may include failure to acquire their Irish rival Aer Lingus, announcement of its CEO Michael O'Leary to leave the organisation.
Models and Theories Used
To analyse the macro-environment of European aviation industry, PESTEL analysis, Porter's Diamond model and strategy drivers of globalisation will be used. European aviation industry and especially the low cost airline industry will be analysed using Porter's Five Forces model and Strategic Grouping method. After analysing external environment, internal analysis of Ryanair will be conducted using VRIO model and Porter's Value Chain analysis. Finally a SWOT analysis will be done to review the findings.
External Environment Analysis
Organizations do not operate in a vacuum. It is been affected and affects the environments in which it operates and so the strategy of an organization. In a highly competitive market it is necessary to analyse the environment an organization operates and assess the impact to its strategy. Finally this analysis would lead to identify opportunities and threats that are facing by the organisation.
When analysing the external environment it can be divided into 2 parts, macro-environment and industry environment.
According to (Thompson & Strickland, 2003) macro-environment consists of all relevant forces outside an organisation and those factors are far beyond the control of the organisation. Since they have a big impact on an organisation's strategy, analysis is very important.
Macro-environment can be analysed using the PESTEL analysis. It helps to identify each factor of macro-environment and its effects on the industry in which an organisation operates. This includes the following components (PESTEL analysis of the macro-environment, 2007);
P - Political - This analyses how political decisions, government policies, etc affects businesses.
E - Economic - This considers economic factors like interest rates, taxation, and economic growth.
S - Social - This analyses how changes in social life styles affects demands and businesses
T - Technological - Technology is changing and improving faster. It affects businesses in many ways. New technology can be used to improve product quality and reduce costs. Also new technology creates new products and markets.
E - Environmental - This considers the environmental factors like climate changes, and impact of industrial outputs on the environment
L - Legal - This relates to the legal environment in an organisation operates.
Detailed analysis of the PESTEL analysis for Ryanair's external macro-environment and key drivers for changes including environment created opportunities and threats is included under Appendix 1
6.1.2 Globalisation Drivers of Strategy
A detailed analysis of how globalisation created opportunities and forced aviation industry to go international especially in Europe's context is conducted under Appendix 2.
(Jatuliaviciene & Kuanskiene, 2006)
6.1.3 Porter's Diamond
This model has been developed by Michael Porter to understand the competitive position or advantages that certain nations or geographic regions posses in global competition.
According to this model certain nations possess competitive advantages over other nations as an outcome of the combination of interlinked advanced activities or factors between related companies in a geographic location. As this model explains governments play an important role in possessing competitive advantage through proactive actions. (Diamond model - Michael Porter, 2010)
(Diamond model - Michael Porter, 2010)
According to (Diamond model - Michael Porter, 2010) Porter has identified factors for competitive advantages for regions or countries as follows.
1. Firm Strategy, Structure and Rivalry
2. Demand Conditions
3. Related Support Industries
4. Factor Conditions
A detailed analysis of how Europe possessed competitive advantage for aviation industry as a region and how it created opportunities for Ryanair is analysed under Appendix 3.
Traditionally after conducting a macro-environmental analysis industry analysis is conducted to analyse the level of competition a business likely to face. (The Industry Environment Analysis, n.d)
According to (Pearce & Robinson, 2005) the level of competition within an industry is depends upon 5 factors. Profitability of an industry is determined by the collective strength of those forces. Those can be analysed using the Porter's Five Forces model.
Porter's Five Forces
(The Industry Environment Analysis, n.d)
According to Porter competitive forces are as follows;
The threat of entry of new competitors.
The seriousness of the threat of entrance of new competitors depends on the barriers presents in a particular industry. If barriers of entry are high and the new comer expects high reactions from existing firms, new firm will think twice before entering. Some barriers to entry are as follows; economies of scale, product differentiation, capital requirement. (Pearce & Robinson, 2005)
The bargaining power of buyers.
When buyers have more power than sellers they can force down the price and thereby affecting the profitability of an industry. (Aaker, 2005)
The bargaining power of suppliers.
In situations like when suppliers sell for too many customers and when the supplier switching cost is high from the buyer's perspective the bargaining power of suppliers can be high.(Aaker, 2005)
The threat of substitutes.
Firms from different industries can have close competition if their products substitute each other. According to (Thompson & Strickland, 2003) competitive pressure from substitute products depends on factors like price of substitutes are attractive, whether substitutes provide satisfactory performance, etc.
The Rivalry among competitors in the industry.
According to (Aaker, 2005) intense of competition from existing competitors depends on factors like, the number of competitors, their size, similarity of their product offerings and strategies, high fixed costs of businesses and existence of high exit barriers.
A detailed analysis of Porter's Five Forces model and how each force impact the profitability of the Ryanair's industry which is low cost airline industry is conducted under appendix 4.
6.2.2 Industry Life Cycle Analysis
Life cycle stage strongly affects the industry growth rate (Thompson & Strickland, 2003). Organisations will have to change their strategy when they move from different stages of life cycle. Analysis of Europe's aviation industry is included in Appendix 5.
6.2.3 Strategic Grouping
According to (Thompson & Strickland, 2003) a strategic group consists of those rival firms with similar competitive techniques and positions in the market. Using strategic group concept can help analysis of competitors in an industry. Reducing the number of competitors into manageable groups certainly make it easier the analysis than analysing large number of competitors (Aaker, 2005). Appendix 6 contains a strategic groping map for the aviation industry in Europe.
6.2.4 Key Success Factors Analysis
According to (Thompson & Strickland, 2003) KSF are prerequisites to success in a particular industry. They can include particular strategy element, product attribute, resources, competencies, competitive capabilities. KSF can be identified from the industry analysis. A detailed analysis of KSFs of budget air line industry in Europe is provided under Appendix 7.
6.3 EFAS (External Factors Analysis Summery)
According to (Fletcher, 2003) after finding main external factors that can affect a business by conducting external environmental analysis EFAS table will be used to organize those factors into opportunities and threats and measure the perceived importance of particular factors. Ryanair's EFAS is attached in Appendix 8.
Internal Environment Analysis
An internal analysis is a must to identify organisational strengths and weaknesses which are essential in strategy formulation. (Pearce & Robinson, 2005) Understanding business in depth is the goal of an internal analysis. This analysis would have more emphasis on the analysis of performances. (Aaker, 2005) Internal analysis can begins with analysis of financial performances.
According to (Pearce & Robinson, 2005) there are four basic groups of financial ratios. Those include liquidity ratio, leverage ratio, activity ratio and profitability ratio.
Liquidity Ratios - these ratios are used to measure whether organization is in a good position to meet its short term obligations.
Leverage Ratios - this ratio is used to identify the firm's source of capital either owners or outside creditors. According to (Pearce & Robinson, 2005) the most used leverage ratio is total debt divided by total assets. Total debt includes current liabilities and long term liabilities.
Activity Ratios - these are to be used to analyse whether an organisation utilizes its resources effectively or not. According to (Pearce & Robinson, 2005) it is possible to establish an organisation's efficiency of its operations by comparing revenues with the resources used to generate them.
Profitability Ratios - According to (Pearce & Robinson, 2005) profitability is the final result of larger number of strategies and decisions made by an organisation's management. The profit margin is calculated by the widely used ratio of return on sales (ROS). And other useful ratio is ROI (return on investment).
Financial analysis of Ryanair is attached under Appendix 9.
Resources and Capabilities analysis
The difference between resources and capabilities is defined by (Gallagher, 2004) as resources, what companies have, versus capabilities, things companies can do.
Resources and capabilities can take many forms they range from tangibles to intangibles, examples may include plant and equipments, financial resources, technology a company posses, brand and reputation and even expertise an organization posses. (Gallagher, 2004)
According to (Fletcher, 2003) tangible resources can be listed in the balance sheet and they become rarely competitive advantages because of their nature and intangible resources can often play big role in competitive advantage creation. In there the organisational capabilities are defined as complex combinations of both tangible and intangible resources. According to (Thompson & Strickland, 2003) a company's competencies become a meaningful competitive capability customers value them as valuable and beneficial.
Core competencies are resources and capabilities that serve as a source of competitive advantage over rivals. (Internal Analysis Competencies, 2009)
Ryanair's resources and capabilities analysis is included in Appendix 10.
VRIO analysis and Competitive Advantages
This model says that in order core competencies and resources to become sustainable competitive advantages for an organisation, they should have characteristics as follows (Gallagher, 2004);
Valuable - A resource will become valuable if it can help the organisation to face threat or capitalize on an opportunity. Most importantly those should be valued by customers.
Rare - If resources are scarce or they are not available to an organisation's competitors they become rare resources.
Inimitable - This means that resources cannot be easily imitated or substituted. Usually intangible resources or capabilities like a good brand image cannot easily be imitated.
Organized - There is no use from a valuable resource if it is not well utilized by the organisation. Therefore it should be very well organized to be utilized.
A complete analysis of Ryanair's resources and competencies using the VRIO model to identify Ryanair's competitive advantages is included under Appendix 11.
Value Chain Analysis
Value chain proposed by Michael Porter analyses systematically the series of activities an organisation performs to provide products or services to customers (Pearce & Robinson, 2005). A firm can achieve competitive advantage over their competitors by performing these strategically important activities better than competitors.
According to (Gallagher, 2004) many processes that are identified in value chain analysis can be a potential source of VRIO resources.
Major categories of activities are grouped in to primary activities and support activities. Primary activities help directly the physical creation of products where support activities provide inputs or infrastructure to help primary activities to take on ongoing basis. Primary activities that are identified by this model are as follows (Pearce & Robinson, 2005);
Inbound logistics - activities that are associated with receiving, storing inputs to production
Operations - activities related to transforming inputs into products
Outbound Logistics - activities that are related to distributing products towards customers
Marketing/Sales - activities associated with informing customers to encourage the purchasing
Service - Activities that undertake once products are sold to customers to enhance or maintain the value of products.
Support activities that are identified by this model are as follows (Pearce & Robinson, 2005);
Procurement - activities that are done within the firm to provide inputs across entire value chain
Technology development - activities that are done to improve the product as well as the way each activity is performed
Human resource management - activities conducted in order to ensure the availability of human resources to each primary activity.
Infrastructure - activities like accounting, management that are essential to perform all activities in the value chain.
Value chain analysis of Ryanair is included in Appendix 12.
IFAS (Internal Factor Analysis Summary)
According to (Fletcher, 2003) after finding main internal factors that can affect the current and future competitiveness by conducting internal analysis of an organisation, IFAS table will be used to organize those factors into strengths and weaknesses and measure the perceived importance of particular factors. IFAS of Ryanair is included in Appendix 13.
According to the findings of external and internal environment analysis SWOT analysis would be as follows.
Strong brand image (as the first budget operator and number one in the budget industry)
Web site (enabled them to on line bookings, promotions)
Low cost strategy
Advantages of economies of scale and experience curve
Innovative promotional techniques used at a lower cost
Same fleet of airplanes
New more efficient airplanes
Poor quality of services
Poor employee relations
Decrease in employee morale
Some secondary airports are too far from city centres
Budget airline market is growing
Revenue generation from ancillary services
Web site can be turn into a revenue generator
Can apply low cost no frill into long haul
Spread their business to more countries
Increase customer base
Acquisition of Aer Lingus is a growth opportunity
Security issues like terrorism
Rapid increase in oil price and unpredictable fluctuations
Intense rivalry among competitors
Changes in customer demographics
Pressure from environmental protection groups
Costly new EU regulations
Ryanair as the most profitable airline in the world and the number one budget sector airline in the Europe is not without facing any challenges as it is the nature of the highly competitive modern business world. It was possible to identify many critical issues that were facing by Ryanair like high customer dissatisfaction and poor labour relations and many other threats which are externally created when analysing the case.
Macro-environment, industry and internal analyses were conducted to analyse the current situation of Ryanair. From the external environment analysis it was possible to identify many opportunities that were created by the environment like growth in the budget airline industry in Europe and opportunities created by internet, etc. Also they were facing many threats like new EU regulation, environmental concerns, fluctuating oil prices and terrorism threats.
Further from the internal environment analysis it was possible to identify number of strengths that are possessed by Ryanair like strong brand image, their financial strengths, efficient operations, etc and their weaknesses like customer dissatisfaction, poor employee relations, etc.
In the analysis it was found that there is a huge growth potential in Europe and they could successfully win over the competition if they utilize their strengths like brand image and financial strength to beat competition and if they can minimize weaknesses like customer dissatisfaction there will be no chance to competitors like easyJet to outperform Ryanair.
Therefore it can be said that the management of Ryanair needs to consider adjusting their existing strategies or if required formulate new strategies to capitalize on the opportunities using their strengths and more importantly to minimize the weaknesses and face externally created threats using their available strengths and opportunities.