Business Strategy Evaluation
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.
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
Business Strategy Evaluation Essay Example
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.
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.
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.
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”.