Business Strategy Evaluation
Its fight to survive in the early 1990s saw the airline restyle itself to become Europe’s first low fares, no frills carrier…The new formula effected a turnaround in the fortunes of the company, and by 1997, the company was floated in an IPO on the Dublin Stock Exchange and on Nasdaq…In 2002, the company was admitted to the Nasdaq-100” (Johnson et al. , 2005, p. 834). 1. 0 Introduction When you hear the name Ryan Air two things come to mind: the no-frills airline and its flamboyant CEO, Michael O’Leary. The story of rise and glory of Ryan Air is also the story of rise and glory of its CEO.
How did Michael O’Leary transform Ryan Air, a loss-making airline to a profitable and Europe’s largest low fare airline? This report will try to answer this question. More importantly it will also analyse in detail what strategy Michael O’Leary applied to achieve this great feat. Critical evaluation of the strategy Ryan Air applied will highlight the strategy paradigm it followed based on the strategic models of Porter’s five forces. It also aims to investigate the internal environment (strengths and weaknesses) and external environment (opportunities and threats) of Ryanair in the 21st century.
Business Strategy Evaluation Essay Example
This report will also take us through the challenges aviation as a whole faces in the 21st century and Ryan Air in particular as it learns from the challenges it faced and success it had through it’s competitive advantages. This report concludes with some observations on strategies Ryan Air developed and applied, and the future course of action it will probably follow to maintain its winning ways. Ryan Air will hereafter be referred to in one word ‘Ryanair’ as it is the more common usage in the public domain. 1. 1 Airline Industry: Two Major Trends
A ‘full-service’ airline like British Airways (BA) or Aer Lingus is designed to serve passengers from almost any place, that is, point A to any destination, that is, point B. They employ a ‘hub-and-spoke’ system centred on major strategically positioned airports and/or countries to reach many as well as distant destinations and serve passengers with connecting flights. They attract passengers who desire more comfort by serving them with first-class or business-class service. They treat such passengers with a wide variety of facilities at air-ports and on onboard to ensure their comfort and interests.
At air-ports they accommodate them in luxury lounges and onboard they treat them with in-flight entertainments. They also assist their passengers with flight connections and baggage transfer facilities. Full-service airlines serve in-flight meals to their passengers as most of these flights involve long distance travel covering many hours. Passengers who travel in First-class and Business-class pay high amount for their tickets in comparison to those travelling in other classes. These passengers are often called as Economy-class passengers.
They, however, get services mentioned above but of a lesser degree/choice and comfort. Full-service airlines have routes and destinations that are long as well as short and sometimes with multiple points in a single journey known as stop-over. British Airways, for example may fly to Beijing with a stop-over in Mumbai or Hong Kong. No-frills airlines, in contrast, tailor all its activities to deliver low-cost, convenient service on its particular type of route. Their fast turnarounds enable them to keep aircrafts flying for longer hours than full-service airlines and enhance frequent departure plans with fewer aircrafts.
They do not offer meals, assigned seats, interline baggage checking, or premium classes of service. They more often than not engage in e-ticketing which helps them bypass travel agents and hence save commissions to them and other administrative costs of staff and documenting, etc. No-frills airlines purchase fleets of aircrafts that are standard size and custom made for their short-haul journeys with little extras other than the basics required for safety and security enabling them to benefit a huge cut in price unit of aircraft procured.
No-frills airlines’ strategy is to attract customers/passengers by providing them alternative travel facilities to what is provided by full-service airlines at a low cost and make profit for them by removing carefully extra expenses and by maximum use of aircrafts and services at their disposal. Ryanair is a no-frills low fare airline in its most accomplished form. 2. 0 Ryanair-The “Southwest” of European Airlines 2. 1 History Ryanair was founded in 1985(www. ryanair. com) as an alternative to the existing carrier Aer Lingus especially to serve Irish migrants who are in the British Isles.
It was launched as a full-service conventional airline (Johnson et al. , 2005, p. 834). When it struggled to make profit transformation and new strategic approach became a necessity to survive. Change and new strategic positioning were introduced. It followed the example of the Southwest airline of Texas, USA. “Southwest Airlines Company, for example, offers short-haul, low-cost, point-to-point service between midsize cities and secondary airports in large cities. Southwest avoids large airports and does not fly great distances.
Its customers include business travellers, families and students. . Southwest’s frequent departures and low fares attract price-sensitive customers who otherwise would travel by bus or car, and convenience-oriented travellers who would choose a full-service airline on other routes” (Susan 2002, p. 77). 3. 1 Strategic Positioning Strategy, according to Chandler is (Chandler, 1962 cited in Segal-Horn Susan 2002, p. 11) 2the determination of the basic long-term goals and objectives of an enterprise and the adoption of courses of action and the allocation of resources necessary for those goals. Ryanair, in the face of failure, took a new course of action. It survived and grew in its sector in spite of problems. 3. 2 Ryanair’s Objective 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 in order to make profit, for true strategy “is the direction and scope of an rganization over the long term, which achieves advantage in a changing environment through its configuration of resources and competences with the aim of fulfilling stakeholder expectations” (Johnson et al. , 2005, p. 9). Ryanair, with its new beginning in the 1990s as Europe’s first low fare airline initiated a multidimensional marketing strategy to face off stiff competition it had from other airlines. In 1997, Ryanair gained competitive position in the airline market as it overtook Aer Lingus as the number one carrier on flights between the Republic of Ireland and the UK (Johnson et al. , 2005, p. 35). Time factor was used as a strategy as it maintained its position as the most punctual airline between Dublin and London. Because of innovations and new strategies Ryanair, (according to www. ryanair. com) has become the third largest airline in Europe in terms of passenger numbers and by 2005 it had 600 scheduled short-haul flights per day serving 107 locations throughout Europe, including 24 in the U. K. served by a fleet of 90 aircrafts most of them Boeing 737-200 and 800 (http://sec. edgar-online. com-Ryanair) Ryanair Passenger Growth in Millions (www. ryanair. com) 3. 3 Critical Success Factors
In order to position itself in the market and continue to grow Ryanair drew up a passenger charter in 2003(Johnson et al. , 2005, pp. 838-839) among the key factors highlighted lowest fare was a priority. Michael O’Leary took it up as a challenge. At the same time they concentrated on making profits. They aimed at having point-to-point short-haul flights (The goal of Ryan air is to meet the needs of travelling at the lowest price. The Critical success factors (CSF) Ryanair followed are: the lowest prices, reliability, comfort and service, and frequency. 4. 0 Porter’s Principles and Ryanair 4. Cost Reduction Strategy Ryanair’s low fares are designed to stimulate demand. Like all low-fare airlines Ryanair kept its price low targeting fare-conscious leisure and business travellers who might otherwise have used alternative forms of transportation or would not have travelled at all. According to Michael O’Leary (Johnson et al. , 2005, pp. 843) “Any fool can sell low airfares and lose money. The difficult bit is to sell the lowest airfares and make profits”. To achieve its goal of having competitive positioning the airline market, Ryanair uses a cost reduction strategy.
Cost reduction strategy relies on five main aspects like fleet commonality, contracting out services, airport charges and route policies (judiciously chose secondary & regional airports, made special deals), managed staff costs and productivity (modest salary but performance related pay structure/incentives) and managed marketing costs (Johnson et al. , 2005). Ryanair used its website to its fullness for advertisement, even the aircrafts it flew were used for promotional purposes. Television, print media are some other mediums used for promoting Ryanair. 4. 2.
Five different generic Strategies (Porter Five Forces) Ryanair practised the generic competitive strategies proposed by Porter (1980). The best applied among them are cost leadership and differentiation. “The three generic strategies differ in dimensions other than the functional differences…. also imply differing organizational arrangements, control procedures, and inventive systems…. , sustained commitment to one of the strategies as the primary target is usually necessary to achieve success” (Porter, 1980, p. 40). Ryanair applied Porter’s Generic Strategy to position itself in the market place.
According to Porters, a company positions itself by leveraging its strengths. Organization use generic strategies to competitively and effectively adapt to the situation in the marketplace to enhance their competitiveness. Cost leadership, differentiation, focused cost leadership, integrated cost leadership/differentiation help the company to establish and obtain competitive advantage within a particular competitive scope. By applying these strategies three generic strategies resulted: cost leadership, differentiation, and focus (Johnson et al, 2008).
The strategies used by the company include cost leadership, differentiation strategy and focused differentiation 4. 2. i Cost leadership According to Porter (1980, pp. 35-36), “Having a low cost position yields the firm above-average returns in its industry despite the presence of strong competitive forces. Its cost position gives the firm a defence against rivalry from competitors…A low cost position defends the firm against powerful buyers because buyers can exert power only to drive down prices to the level of the next most efficient competitor”.
Ryanair always targeted to apply the lowest fare and even match competitor’s special offers (Johnson et al. , 2008, p. 839). This low price strategy kept its main rivals like easyJet at arms length. 4. 2. ii Differentiation Differentiation is based upon persuading customers that a product is superior to that offered by competitors. Differentiation guards against other competitors because of brand loyalty (Porter, 1980). Most of the low-fare airlines take great initiative to pay attention to the price factor and forget the other two. Ryanair showed their differentiation by equally emphasizing all three elements.
Ryanair eliminated extras such as in-flight meals, advanced seat assignment, free drinks and other services. It still prioritises features which remain important to its target market such features include frequent departures, advance reservations, baggage handling and on-time services. 4. 2. iii Focus-differentiation Through focus-differentiation strategy Ryanair aimed at a segment of the market and targeted it with consistency. Again the risk included is imitation by competitors and changes in the target segments, i. e. area or people in the case of Ryanair. Ryanair utilized all three generic strategies.
First they offered the lowest fare than their competitors; it also became focused by targeting a narrow segment which included Irish and UK business people or travellers who could not afford to fly major airlines frequently. The main goal was to stimulate demand by offering no-frills service with low fare. As passenger got attracted it took big market share and became leader by offering lowest fare in the market. This strategy was more prominent when Ryanair expanded to Continental Europe. Low fare and no-frills strategy helped it survive in the industry and repositioned itself as a low cost airline.
Ryanair did not, as per Porter’s definitions, define its strategies distinctively in the first place. That was because it was the only player in the market. But when the niche market got saturated and competitors invaded the market it fought hard clearly establishing its strategic position by identifying itself. Initially it was trying to mix both focus and cost but soon it was forced to concentrate on one generic strategy as Porter himself recommends, “The three generic strategies differ in dimensions other than the functional differences…. lso imply differing organizational arrangements, control procedures, and inventive systems…. , sustained commitment to one of the strategies as the primary target is usually necessary to achieve success” (Porter, 1980, p. 40). Ryanair finally concentrated ruthlessly on cost leadership. This was a success and by 1997, Ryanair was floated on the Dublin Stock Exchange and on NASDAQ (Johnson et al. , 2008, p. 834). 4. 3 Expansion Strategy: Another factor that was paid attention was expansion of its routes to position itself in the market place.
Under this strategy it acquired Buzz in February 26, 2003. Took advantage of its 11 routes and service of pilots, and made it the largest airline based in Stansted airport. In 2003 alone it opened up 73 new routes and carried over 2 million passengers in one month (July) a record at that time. The company’s website enabled it to position itself in the global market. 5. Strategic Options & Strategic Positions 5. 1 Strategic Options-TQM The case study on Ryanair (Johnson et al. , 2008, pp. 832-852) highlights problems and issues faced by the airline despite strategies.
One of the problems was handling customers, that is, target market. Another problem was assuring quality services. To solve this company had to adopt Total quality management (TQM). Competition in aviation industry is challenging and brisk and companies seek for strategic options that can be used to satisfy internal and external customers. TQM through its extensive strategic management procedures would keep them in the competitive business world. Customers will be satisfied and the company will maintain and expand its market share. The Total Quality Management system is customer-oriented.
Hence the airline operations must be developed in order to steadily deal with the improvement of their operation through the ongoing participation of all employees in problem solving across the functional and hierarchical boundaries. To apply TQM in its fullness and bring out the desired result Ryan air management of the airline must fully accept the whole concept of the improvement, which means that all the people of the airline company must agree that there is a need for a total transformation especially for the quality of operations and services that are offered.
Customer satisfaction should be the driving force and criteria for TQM and Managers who apply it. 5. 2 Strategic Positions Most of the time there is misleading perceptions regarding Strategic positions (Susan, 2002). The root of the problem emanates from the failure to distinguish between Operational Effectiveness and Strategy. According to Porter (Susan, 2002, p. 74) “Operational effectiveness(OE) means performing similar activities better than rivals perform them…strategic positioning means performing different activities from rivals’ or performing similar activities in different ways”.
Operational effectiveness, and therefore, customer satisfaction can be achieved by programmes such as TQM. Ryanair had operational effectiveness in fine tuning their performances in many ways including TQM. However these measures alone would not bring superiority over competitors. The most common reason is imitation by competitors. “Competitors can quickly imitate management techniques, new technologies, input improvements, and superior ways of meeting customers’ needs. The most generic solutions- those that can be used in multiple settings- diffuse the fastest” (Susan, 2002, p. 6). Moreover, operational effectiveness if done without due diligence can make rivals look alike. “The more benchmarking companies do, the more they look alike. The more that rivals outsource activities to efficient third parties (often the same ones), the more generic those activities become. As rivals imitate one another’s improvements in quality, cycle times, or supplier partnerships, strategies converge and competition becomes a series of races down identical paths that no one can win” (Susan, 2002, p. 7). Ryanair positioned itself differently from other airlines by being no-frill and low-fare airline and it strategically positioned itself from other no-frills airlines by its unique ways of operating. Lowest price, than anybody else than what others could pay, for example was one of such activity. 5. 3 Competitive Strategy “Competitive strategy is about being different. It means deliberately choosing a different set of activities to deliver a unique mix of value”, says Porter (Susan, 2002, p. 77).
Ryanair, for example, offers short-haul, point-to-point service, from secondary and regional airports connecting second class cities, which helps it reduce operational costs and save time as these airports are less congested, turnaround becomes quick and it enhances higher rates of on-time departures (Johnson et al. , 2005, p. 844). One interesting aspect of business models is how difficult it is for others to imitate them. Many airlines have tried to emulate Ryanair’s low cost approach. Most of their attempts have not fared well.
Copying the Ryanair model apparently creates too many conflicts with the airlines’ established business model. Cost leadership and Cost differentiation gave Ryanair very high advantage over others. Being the leader in the market also kept them always ahead of others. 5. 4 Competitive Advantage One of the major investment costs for airlines is aircraft procurement and their maintenance. Ryanair effectively managed it by restricting itself to one main make of aircraft, Boeing and model 737-200 and 737-800, two variants of it.
Their resources were used in a focused way as they could save expenses by reducing the number of engineers and other skilled workers, including pilots. By contracting out services of aircrafts to third parties they concentrated on their main service area: serving passengers. At the same time they retained quality of services and maintenance of aircrafts by keeping trained engineers at sensitive stages of this process. Ryanair was the first European low-fare airline. Being first in had the advantage of leading the way and opportunity to be first in all strategies that go with it.
According to Jay Barney (De Wit and Meyer, 2004, p. 286), “A firm is said to have competitive advantage when it is implementing a value creating strategy not simultaneously being implemented by any current or potential competitors”. Being the oldest low-cost carrier in Europe, Ryanair had some advantages over its competitors. For one thing, it had the advantage of experience, and secondly, its brand enjoyed good recognition. However, after the deregulation of air travel in Europe in the late 1990s, a number of start-up airlines came up in the low-cost market.
Notable among the competitors was easyJet, the discount airline set up in 1995 by Greek shipping magnate, Stelios Haji-Iaonnou. easyJet was based in London’s Luton airport and competed on some of the same routes as Ryanair (Gerry Johnson et al. , 2005, pp. 849). In 2002, with the takeover of Go, easyJet beat Ryanair to the top position as the biggest low-cost airline in Europe. O’Leary declared that Ryanair would soon bounce back to reclaim its number one position. Although Ryanair and easyJet both operated in the low-cost segment and had similar operational models, there were some inherent differences between the two airlines.
Besides, Ryanair made a major portion of its profits by flying to secondary airports which were a long distance away from the main cities while easyJets operated from major cities and prime airports which made operational costs very high for them. 5. 5 Strategic Capability In order to increase its market share and profit Ryan air in 2003 acquired Buzz, the loss-making subsidiary of KLM. The acquisition helped in many ways; increased its service routes, it got a high volume of passengers, more significantly Ryanair had more pilots as a result of this acquisition.
It took away a potential competitor from the market enabling it to consolidate more in its service and make more profit. At the time of the purchase deal Buzz was going through a rough patch in its operations and as a result Ryanair got it almost for nothing (Johnson et al. , 2005, pp. 840). Ryanair had a robust aircraft procurement policy. First of all it had taken the bold decision to stick to one type of aircraft, Boeing 737. As Ryanair ordered high volume of aircrafts it was in an advantageous position to bargain with manufacturers and bring down the cost per unit of aircraft.
It bought most of its planes in the years that followed the 9/11 disaster when airline industry was in total decline and manufacturers were struggling to sell planes. Ryanair took full advantage of the windfall. As a result of this massive acquisition Ryanair was left with a large fleet of modern and new aircrafts. Most of them were always operationally ready. Maintenance cost was at its minimum and it will continue to be like that for many more years. Operational cost per passenger came down dramatically enabling it to make huge profits. Other competitors who on the other hand had a fleet of mixed aircrafts had lot of costs.
EasyJet, for example, had to spend a lot more to train its pilots for its aircrafts various types and making. Ryanair controlled its promotional and advertising costs to very minimum. It used its website, newspapers and televisions for advertising. Even the externals of aircrafts were used for advertising purposes. In January 2000, Ryanair launched its www. ryanair. com website. Money which was spent on office staff and agents’ commission were saved. Ryanair did 95 percent of its bookings through its website saving millions of pounds for the company (Johnson et al. 2005, pp. 845). 6. 0 Conclusion Ryanair has made a big turnaround after its re-launch as no-frills airline. Since then it has made profit upon profit and gave good customer service to passengers. (www. ryaniair. com) It is known for its on-time departure records as well as maximum use of flying hours per aircraft. All these factors brought in good dividend to the company and its stakeholders. In spite of all these, Ryanair had faced challenges in the last ten years. Especially in 2004 it had lost it stock market value (Johnson et al. , 2005, pp. 832-834).
It lost too many court cases and a huge amount was paid as fine and compensation after losing court battles and paying up grieving customers. Ryanair came often into conflict with European Union (Johnson et al 2005, pp. 834). Its efforts to buy archrival Aer Lingus was rebuked; Ryanair’s most successful and high profile CEO, who is praised in most quarters of airline industry for his extraordinary achievement, is the talking point in the corridors of power for not so praiseworthy reasons. He is made a public debate, becoming at the same “arrogant pig” and “messiah” (Johnson et al. 2005, pp. 852). A commendable job done is marred by the way The CEO comes across in the public. Observations Ryanair is strategically positioned to continue to grow and make profits. However, macroenvirornmental situations may slow down this upward growth. Strategies which will bring in more synergies such as reducing number of flights from locations where seat filling is less by better coordination and consolidation of external and extra activities will help in this sluggish time. An important concern for the whole airline industry at the moment is the rising price of fuel.
A price hike which does not show any end in sight has been set off by issues that are beyond the sphere of the industry. Ryanair has to become more customer friendly and environmentally responsible airline. It needs to draw up yet another strategic plan for the future where sustainable management and sustainable strategy can be put into operation. Ryanair needs a “sustainable strategic management (SSM)…strategic management process that are economically competitive, socially responsible, and in balance with the cycles of nature” (Stead and Stead, 2006, p. 36). Given the complexity of today’s business environment, it is imperative for strategic managers to develop environmental scanning cultures within their organizations. Determining environmental opportunities and threats should result from the collective wisdom of the firm’s stakeholders. Successful sustainable strategic management requires that opportunities and threats be identified, and it requires that they be analyzed in terms of the underlying assumptions on which they are based”.