Business Management and Decision Making of Ryanair - Case Study Example

Strategy is what a company does or does not do to fulfill its vision in a market place. If a company does everything then there is no strategy involved. It is how and what one does that gives it the distinctive edge. Just as Dell computers sell build-to-order personal computers directly to consumers, low-cost airlines provide world-class customer satisfaction to flyers that value high frequency low-cost flights (Finkelstein, 2005). Strategies are usually based on internal competence that customers value enough to pay for and strategies cannot be easily replicated by customers. Strategies can be complicated and the decision-making process has to consider many factors. Ryanair is one such low-cost carrier that entered the market as pioneers in the budget airline industry and adopted a classical airline business model focusing on customer service. Their strategies in different areas like market segmentation, e-relationship with customers, marketing communication, their distinction in offering or abstaining from on-board and ground services have reached them this position. Ryanair, the Dublin based carrier, started its operations in 1991 on the very successful, Southwest Airlines Low Cost Leadership Model. Like most European flights, this airline offers a point-to-point rather than hub service. It offers no frills like seat allocation, meals or frequent flyer programs (SD, 2006). It aims to turnaround flights in 25 minutes and they have the shortest routes. Ryanair’s CEO is an accountant by training but an entrepreneur by inclination and he has amply demonstrated this ability in the success of this airline (Box & Byus, 2007). He has gone against the trade unions, the government officials and the competitors but he has achieved dramatic growth and profitability in this industry. Ryanair flies only Boeing 737s and is currently facing challenges escalating fuel costs, intense competition and regulatory framework in the UK. Despite these challenges, Ryanair has been able to create its own market due to its strategic decision making process. Success in marketing can be achieved by matching the organizational capabilities with the requirements of the marketplace. This matching is based on market segmentation. Expectation based segmentation is a powerful marketing tool in the services sector because it provides knowledge for customer identification, which aids better customer service (Diaz-Martin, 2000). They can tailor their actions to suit the individual requirements. Ryanair followed the expectation based segmentation and became distinctive as they offered air route for the Irish immigrants working in England whose status was elevated from ferrying across to air travel (Bhagavan Ertekin, Geijerman & Kuznetsov, 2003). Hence they created a market segment for themselves. Their strategy was not just to divert other airlines’ passengers to them but to convert passengers of other modes of service to air travel. This required low prices to sustain competition, which in turn meant offering no frills, introducing direct sales, increasing the number of seats and reducing staff. Deise et al., revised the traditional Porter’s value chain which describes generic activities undertaken by the firm to procure, transform and add value to the products and services delivered to the customer. They incorporated the Pull marketing model (cited by Hales & Barker, 2003). This model determines the customer demand and need for new product development. Once the customer needs have been identified, the material and process are resourced and then service provided to the customers. This is strategic innovation and this creates economic growth even in flat, slow or shrinking markets. Any radical change in the value chain can lead to disruptive strategy or a breakthrough strategy. Ryanair has completely reshaped its value chain and achieved a breakthrough strategy which has helped them to reduce the costs to the minimum (Moingeon & Lehmann-Ortega, 2006). They have also reinterpreted the criteria used by customers to value the offering. With the standardization of fleet, they have been able to reduce the costs of maintenance. The cabin crew cleans the planes between flights and on most if its flights they use low-tax airports. While Moingeon & Lehmann-Ortega (2006) contend it is breakthrough innovation, Leavy (2004) describes Ryanair’s strategy as disruptive innovation. Leavy emphasizes that the primary aim of most disruptive innovation is to create a whole new segment at a price much below the current market prices and then dominate this segment as it grows. Despite being a late entrant into the low-cost airline industry, they could succeed in building a substantial market position through such a strategy. They outsource many of their functions like aircraft handling and heavy maintenance as a part of their strategy to avoid complexity, keep costs down and maintain productivity at levels well above industry norms. Ryanair uses online booking and ticketing system to lower brokerage fees and ticketing costs, thereby redefining its relationship to its customer markets. To create sustained difference relationships have to be close. A close relationship with the customer, supplier or even a competitor can represent a strategic asset (cited by O’Toole, 2003). E-relationship adds an extra value in a relationship that is difficult to imitate. E-relationships help to automate the service functions. This automation helps in cost reduction and increasing reliability of services but these can be imitated. If the business processes are integrated and the knowledge is pooled for joint advantage, the service can create extra symbolic in brands. E-relationships require a culture of trust, which Ryanair has been able to establish with its customers. Ryanair has not been concentrating on enhancing business communications which is evident from their poor employee and volatile customer relations. They pay their employees based on productivity and they do not pay the pilots based on their tenure which is an industry practice (Bhagavan Ertekin, Geijerman & Kuznetsov, 2003). People and stakeholders are an equally important part of the value chain and effective communications with each of them add to the value. While they update their employees on the challenges that the company is facing, they have antagonistic relationship with their competitors. A close relationship with the competitor can also represent a strategic asset (O’Toole). Ryanair has the competitive power and the bargaining resources but has been unable to maximize the utility. In order to cut costs, Ryanair compromised on compensation to employees. Even their customer focused approach does not demonstrate a positive growth attitude. They used yield management to gain customers through price drop instead of finding opportunities to raise fares without losing existing customers (Bhagavan Ertekin, Geijerman & Kuznetsov, 2003). Deregulation has lowered the barriers to entry and hence they face the threat from competition. Its supplier’s power has also decreased as the airports increase the fees when they renew their contracts because of the airline’s exponential growth and profitability. To some extent it has been able to capture the cost conscious leisure travelers but then all this demonstrates their cost focused approach. In addition to the low cost structure, Ryanair’s additional sources of revenue are on-board sales and advertising both inside the aircrafts and on the exterior. According to Porter, ‘fit is a far more central component of competitive advantage than most realize” and the CEO of Ryanair agrees that one has to move away from the discipline of the model (Leavy, 2003). This means decisions have to be taken depending upon the market conditions and the situation that confronts at every stage. However this can work as along as the current strategy is effective but when traditional market collapses, Ryanair would face further challenges. Ryanair has been able to manage growth so far because they follow a high degree of standardization. They do not have direct competition in most routes and use secondary airports. They keep costs down and all these may appear to be competitive advantages for some time because the competition has not yet replicated their business. For sustained growth in the industry, they need to develop new product or services as per the value chain model of Deise et al (Hales & Barker). They are unable to compete on long-haul sectors because passengers are not willing to compromise on comfort and food. Secondly, on long distance flights their direct costs increase, which leaves them with very little profits on hand. Since it is not very difficult for the traditional airlines to duplicate their services, Ryanair needs to come up with innovation to add value to their customers. Baggage handling is an important part of customer service equation. Ryanair encourages passengers to carry their own baggage and is even thinking of disallowing checked baggage facility altogether with a view to further cut costs. It has increased the weight limit on carry-on bags and has hiked rates for overweight checked baggage (Wyld, Jones, & Totten, 2005). This might be detrimental to the airline’s interest in the long run. Instead, traditional airlines are moving towards applying the RFID technology which can improve customer service through better operational efficiency in baggage handling. Improved accuracy of baggage handling can enable the carriers to close the service-delivery gap in the competitive business environment. RFID based luggage tracking will soon become the norm in the industry and Ryanair would lag behind in service. The downside of its strategy has started to show as the CEO has warned that their profits could be cut by half due to a "perfect storm" of rising oil prices, weakening consumer demand, and higher airport charges (Capell, 2008). The shares plunged more than 15% in one day. Despite this, the CEO is firm that the recession in the aviation industry is welcome as it would lead to significantly lower fares which will be good for Ryanair’s business model and that will leave them fewer competitors. Over the years, despite competition, rivals like Vueling Airlines, Clickair in Spain, Germanys Air Berlin and Hungarys Wizz Air had entered the market. All these short-haul carriers have added capacity with Ryanair alone adding 6 new bases and 194 routes in the past year. If the consumer spending is curbed the industry shakeout is likely as smaller and newer operators with higher profit margins will be driven out of business. Ryanair’s strategy has always been to slash fares, stimulate demand, and open new routes. Despite the expected curb in profits, they plan to double the fleet, passengers and profit by 2012. According to an official of the Citigroup, they have the strongest business model of any European airline. Despite their penny-pinching strategy, Ryanair is registering growth. They charge for everything including checked baggage or a bottle of water on board. Flight crew has to buy their own uniforms and even bring their own pens to work. Despite a 42% hike in fuel prices, they registered a profit of $422 million, on sales of $1.6 billion in 2006 (Capell, 2006). Its net margins at 18% are the highest of any European airline. As flag carriers like British Airways (BA) and Lufthansa are cutting back on short-haul flights to focus on transatlantic and business flights, Ryanair expects to derive mileage out of the situation. Because of its low overhead it can make money on these routes. As BA has withdrawn from regional airports like Belfast City or Birmingham, Ryanair is being approached to operate from these airports. According to Capell the only area which can slow down Ryanair is the oil prices which account for one-third of the operating costs. To this end, they find hedging as the solution and recession will also bring down the fuel prices. Thus, despite different views from authors and researchers, Ryanair is determined to remain in the market with decent profit margins. While come call it breakthrough innovation and others think it is disruptive innovation, they are focusing on cost reduction alone. They are ignoring the relationship with their customers and their employees and are not adopting technology to enhance the customer experience. They have neither adopted technology for baggage handling and nor for customer relationship. They come up with some new strategy and as mentioned by the CEO, they truly do not believe in any discipline of model. The penny-pinching tactics of the airline may not be to everyone’s liking but none can deny their success in the aviation industry as pioneers in low-cost travel and for making air travel popular and within common a man’s reach. References: Bhagavan, M., Ertekin, O., Geijerman, P., & Kuznetsov, V., (2003), Budget Airlines – Ryanair, 25 February 2008 Box, T. M. & Byus, K. (2007). RYANAIR (2005): SUCCESSFUL LOW COST LEADERSHIP, Journal of the International Academy for Case Studies; 2007; 13, 4; ABI/INFORM Global pg 71 Capell, C. (2006), "Wal-Mart With Wings", 25 February 2008 Capell, C. (2008), Ryanairs Changing Altitude, 25 February 2008 Diaz-Martin, A M (2000), The use of quality expectations to segment a service market, Journal of Services Marketing, Vol. 14 No. 2 2000, pp. 132-146 Finkelstein, S. (2005), When bad things happen to good companies: strategy failure and flawed executives, The Journal of Business Strategy; 2005; 26, 2; ABI/INFORM Global pg 19 Hales, K., & Barker, J., (2003), Value Creation and the Virtual Enterprise, 25 February 2008 HBS (2000), Dogfight over Europe: Ryanair, 25 February 2008 Leavy, B., (2003), Assessing your strategic alternatives from both a market position and core competence perspective, Strategy & Leadership, Vol. 31. No. 6 pp. 29-35 Leavy, B., (2004), Outsourcing strategies: oppurtunities and risks, Strategy & Leadership, Vol. 32. No. 6 pp. 20-25 Moingeon, B. & Lehmann-Ortega, L. (2006). Strategic innovation: how to grow in mature markets, EBF, Issue 24 Spring 2006 OToole, T., (2003), E-relationships - emergence and the small firm, Marketing Intelligence & Planning, 21/2 [2003] pp 115-122 SD (2006), Easyjet and Ryanair flying high on the Southwest model, STRATEGIC DIRECTION, VOL. 22 NO. 6 2006, pp. 18-21 Wyld, D. C., Jones, M. A., & Totten, J. W., (2005), Where is my suitcase? RFID and airline customer service, Marketing Intelligence & Planning Vol. 23 No. 4, 2005 pp. 382-394 Read More