Business Strategy and the Economic Environment of Business - Assignment Example

Business Strategy and the Economic Environment of Business Abstract The current business environment has become quite competitive and this has forced many firms to change tact in order to survive. The airline industry is one that is marred by this heightened competition as more and more market players join. Choice of destinations, strict schedules, type of aircrafts (big or small), safety record, cargo handling and fares all play a key role in determining an airline’s success. These factors are the ones that individual airlines look into as they are directly linked to customer relations strategies and are also important in gaining competitive advantage. The European skies are leading in having one of the most competitive arenas. Airlines like Ryanair have in a huge way mastered this market and have as a result become quite successful over the years. Statement of purpose This paper to a huge extent will look into Ryanair and how it has evolved and the internal and external factors which have shaped it. It will also focus on the ways in which the management has moved the airline forward and the directions taken to expand it. The other focus is on its operations in relation to core competences, strategic directions, competitive advantages and other relevant strategic decisions taken. All these will be merged in various sections where they will be highlighted as they fall under the airline’s strategic practices. Airline’s history Ryanair’s history as well as its present position in the airline business is quite impressive. According to Miriam (2010) since 1985 it has reined the European skies overcoming competition from big airlines like British Airways. It is now one of the biggest airlines in the continent with passenger traffic of more than 66 million annually as per the 2009 end year results. The airline expects to have passenger traffic of not less than 73 million in 2010. It spans its services to over 25 countries and operates at least 1400 daily flights to over 160 destinations (Stefanie 2007). It also boasts of a huge fleet of aircrafts of not less than 250. It is amazing to know that this airline started with only one aircraft with a capacity to carry 15 passengers in 1985. At this time its route was Waterford to London and by 1987 it had expanded to more destinations in Europe (Ryanair 2010). This was however made possible by the fact that the company had purchased a jet aircraft that was not only fast but efficient. There was immense growth during its first 6 years of operations which was curtailed in 1990. This year remains in the history books and in the minds of many that worked for the company more so in the management positions. It made a huge loss of 20 million Sterling Pounds which was hugely publicised (Sascha 2008). The attributing factor was mainly due to heightened competition particularly from British Airways and Aer Lingus. Change strategy Things from this moment changed a great deal with the whole operations structure first experiencing changes. It is important to note here that the airline’s specialty is offering of low fares, in fact lower than almost all airlines and going to more destinations in Europe than many. It became a completely low cost airline with scrapping of free drinks and meals. These changes saw the airline change to become a passengers’ choice as the case was with the long queues witnessed in Dawson Street for tickets. Passenger traffic was at 45% higher in 1992 than it was 2 years before and so were the profits (Ryanair 2010). Customer service was another item in the change list which saw the airline being branded as the least likely to lose passenger’s luggage. With increased profits and more passengers the airline management found the need to travel wider in Europe and in the process bought many aircrafts to fit the increased demand. To clearly give the picture of its growth 1992 had seen passenger traffic of 945,000 and by 2008 the number was 58 million according to Ryanair (2010). This is in the eyes of analysts next to impossible feat. By 2008 the airline had hugely invested in customer service and modern and bigger aircrafts as the policy of low fares had for a decade ploughed many customers to the airline. With only a staff of 25 at its inception, the airline now has well over 8000 and increasing as its business increases (Sascha 2008). Management practices Marketing Mix Ryanair in many ways has fought to rise as the best low cost airline in Europe. This could not be the case if the management has not been addressing important issues as explained below. The management has taken advantage of its core competence being the low fares policy as the key strength. Carol and Julian (2000) say that this is a resounding branding strategy and the time the name Ryanair is said then low fares come in mind. This has developed the airline’s marketing mix standards that others like BA and Virgin Atlantic among others among others are not able to match. Stefanie (2007) states that Michael O’Leary the CEO for 20 years has been in the forefront in ensuring that the company’s selling point remains guarded and innovative. O’Leary and his management team will form a huge part of this paper in trying to explain the directions they have taken and are to take. The airline’s website shows in the opened tab the extension, Cheap Flights to Europe with Ryanair (Ryanair 2010). This is just but one aspect of trying to sell their brand as a cheap one for customers and has evidently worked to the airline’s advantage. Big airlines have on this note tried to take back the market share taken from them by Ryanair. They have done so by establishing subsidiaries which are of low cost and which offer low fares. Sascha (2008) says that this move by airlines like British Airways got Ryanair unaware and in 2008/2009 financial year it made a loss. This acted as a wake up call that the competitive arena is becoming intense. It is important to note that the major competitors are huge international airlines rather than continental ones. Those offering huge competition are British Airways and Virgin Atlantic as earlier mentioned. Others are Lufthansa, Aer Lingus and EasyJet as stated by Miriam (2010). To face this competition the airline has adopted the following strategies that have been working wonders to the amazement of its competitors. Products and services The airline’s low cost strategy has been at the centre of its success. It has been able to do this by operating as a low cost airline whereby it offers all that can be termed as necessary in an aircraft. Its aircrafts offer no frills; have seats that cannot be tilted for one to lie backwards. The life jackets are placed overhead far from the normal under-the-seat position. The reason for having this is to facilitate cleaning, ensure quick checks and above all to buy the aircrafts cheaply. The other notable point is that the airline rarely offers refunds in cases of delay in boarding the plane or other forms of compensation that may result from the customer’s faults. The customer as per the airline’s regulations is supposed to be responsible enough to board on time and in case they are left they need to purchase new tickets. The airline also offers nothing for free even food and drinks on board since the choice is either to carry own food or purchase some on board. Customers to the surprise of the industry have welcomed this as they carry what they like and buy that which they can afford. The airline also has ancillary services that are important in bringing in the needed revenue to support key operational activities. These services range from hotel services as well as car rentals. They also sell bus tickets together with phone cards; all of these facilitate transport and communication for their customers thereby adding value in their operations. This is a key area of value chain as far as Ryanair is concerned. To attest to this these ancillary services’ profit contribution has hit the 16% mark according to Miriam (2010). These measures aim at offering the customers all the options for one to spend on what they can afford thereby leaving an option of spending or not thereby adding value in different ways to individual customers. The other area is luggage fees which are paid for separately from ticket prices. For those having no luggage they expect to pay nothing in respect to luggage fees and vice versa. These strategies have ensured that the airline is operating at a relatively lower cost than competitors. Pricing The airline’s low fares strategy is the other one that has worked towards the airline’s success in a huge way (Whittington 2001). Its low fares are unmatched by any other airline. Due to the many customers and destinations served coupled with low cost of operations, Ryanair is able to offer these kinds of fares. On November 09 2010 the airline was advertising a 6 Pound one way flight which was an offer to run for 2 months (Ryanair 2010). This and other pricing strategies have been quite a nag to other airlines competing in the European skies. The most impressive fact as far as pricing and competition are concerned is that many of its competitors are not currently and even in the near future able to go that low. Considering that Europe is full of middle class citizens its prices are developed in such a way that they are near to being perfect for the market (Palmer and Ponsonby 2002). Another point to consider is the availability of the ancillary services that it offers. As mentioned earlier this avenue is lucrative enough as to cause the airline to subsidise its ticket prices. These strategies have not however been taken lightly by competitors. They claim that the airline is going against fair market competition to use undercut means to sabotage their operations. MyTravelLite is one such airline that saw it pull off from Birmingham - Dublin route as a result of lower-than-normal fares being charged by Ryanair. Go is the other that withdrew from Dublin - Glasgow due to the same predicaments. Competitors have also raised numerous concerns that the fares being advertised by Ryanair are lower than actual (Gregory & Marilyn 2004). Advertising Standards Authority in this respect has in many occasions investigated these allegations of which some have come to be true. An unlikely quarter; the railway fraternity has also claimed bleach of advertising standards. Ryanair once advertised claiming that its flights are much faster than the trains. Ryanair has however made sure of late to reflect the true picture in its adverts. Place In regards to place the airline has put in place various strategies that have seen it conquer the market in an unusual way as explained by Carol and Julian (2000). The primary concern was to remove agents from the system of offering tickets. This is also another area of value addition to customers and the airline. The airline website has been the innovation that has been saving it more than 15% of total expenses on agent fees through online booking. The airports that it operates in and its base i.e. Stansted in Essex are cheaper to operate and have lower congestion for both aircrafts and customers. They charge relatively lower fees as compared to Heathrow or others of similar class. Turnaround time in these remote airports is also low thereby reducing hugely on the related charges. In cases where the plane goes to the airport earlier it always takes a few circles round the airport before landing to try and reduce on this fee. The European Union has however taken these strategies as anti-competition. Promotion The promotional campaigns of this airline have been quite peculiar. While considering that its rivals have been investing fortunes to lure customers, its advertising strategies have been consuming little from its coffers. The adverts of this airline are quite simple and are more on fares being charged. Michael O’Leary is personally in charge of these adverts and this creates a sense of confidence in the market. The management has for a long time now opted for the in-house advertisement channel which has proved to be cheaper than the use of agents. Much of Ryanair’s adverts are sought of indirect. In this regard the airline tries to use controversy to create awareness and publicity. One such instance is when the use of toilets on board a flight was to be charged in 2009 according to Miriam (2010). This created quite a stir in the industry whereby the CEO later said that it was not to happen. The other notable publicity stance was the claim that large passengers were to pay more as a result of the space they were to occupy. The claim was being made basing it on the fact that there was increasing concerns from passengers that large passengers were becoming a bother. It has also in numerous instances compared its competitors in unpleasant manner. A statue urinating was used as a symbol of demeaning Sabena in Belgium. The advert said, “Pissed off with Sabena’s high fares? Low fares have come to Belgium.” This was taken very seriously and in the court case Ryanair lost and was instructed to apologise. The management was creative enough to take this avenue as another publicity stance. Another instance was when this airline used the terms ‘expensive bastards’ to refer to British Airways. The court decision in this case was rather funny as it ruled that this term was just an exaggeration of what was true. The airline at a back-to-school advert placed an explicitly dressed model in uniform. This attracted huge attention from authorities and public. These are just but a few notable cases that the airline has gone overboard to achieve cheap publicity (Richard & Colin 2005). In the process Ryanair has been in and out of courts being sued for undue advertising and influence. This in another angle is a losing end to the company as these cases are an expense. Furthermore, the profit from these moves is not directly traceable. SWOT analysis Each company has its strengths, weaknesses, opportunities and threats in the market place. Strengths One of Ryanair’s most important strengths lies in the many customers and huge revenue base coupled with a strong brand name. These could not however be possible without the brand name itself. Huge revenue has made the airline to have the latest aircrafts in terms of safety and functionality. Due to a wide customer base there has been the need to expand its destinations and increase flights. The other strength lies in the airline’s use of secondary airports instead of the congested and costly ones like Heathrow according to Philip and James (2003). Low fares and low cost operations have been key players towards the huge passenger traffic and in turn high returns. The airline for years now stands to be the most reliable in respect to luggage handling. The other is being the first mover in many airports thereby hindering interference from other airlines. Weaknesses This company has been experiencing weaknesses that have for time to time dragged its progress. One is the bad name created once a court case goes out of Ryanair’s favour. The same cases have been a huge financial burden as heavy fines have been applied. The airline has been criticised for poor service in airports. The destinations for the airline are usually inconveniencing to passengers are they are at times far from city centres. Threats Due to the increased competition the company has not been able to capture the European market as it should thereby finding that some market share is going to competitors. These competitors like BA and JetBlue at some point established low cost fleets that were to compete in this arena. Considering that some of these competitors are global airlines, their muscle can go a long way in taking Ryanair’s market. Charles and Gareth (2009) state that fare reduction wars have heightened with such developments and Ryanair is now being forced to come up with better strategies that are to make it maintain market leadership even in future. The oil market is a big factor to consider as small changes result in huge shift in profits and expenditure. Opportunities With the establishment of the European Union, there has been increased expansion of destinations. There are huge chances of increasing its market share by expanding concentration to the elderly or those going on holidays. Europe is having more and more aged people and they are a good niche market (Charles and Gareth 2007). Due to the global recession and related outcomes passengers are becoming more cost efficient thereby running to low fares airlines. It has less geopolitical risks as it concentrates its operations in Europe. PEST Analysis Political There is increasing pressure from trade unions whereby higher remunerations are being sought (David 2003). EU expansion is in one way beneficial but in another quite detrimental. It benefits Ryanair by offering more destinations but hampers this growth through numerous laws and regulations. Misleading adverts have been the other problem that EU has eyes on. Climate related charges have also affected Ryanair’s income a great deal. Economic Fluctuations in fuel prices have been affecting budgeting and revenue generation for quite some time and the trend seems not to be easing soon. US dollar has been on a depreciating trend and being the world trading currency its exchange rates are affecting Ryanair’s business (Sascha 2008). EU commission rules have also been a major setback for example the compensation requirements in case of overbooking, cancelled flights, subsidies of airports and refund to passengers as a result of delays. Socio-cultural issues The older generation is increasing in numbers all over Europe due to an extensive period of low birth rate in many countries. This grey market is becoming a market to look forward to. There has been an increasing tendency for people to travel for holidays and adventure which opens up market opportunities (Nigel, David & George 2003). Business travel has also been on the increase as globalisation becomes well entrenched. Technological High speed trains have come to take away some markets especially for short distance travellers. Internet booking to a huge extent has increased on cost and time saving for both the airline and its customers. Internet wars have also increased with many airlines posting their low fares adverts in their websites. Porter’s Five Forces Suppliers bargaining power Ryanair purchases its aircrafts from Boeing which diminishes its bargaining power a great deal. Furthermore, the other alternative it may have is Airbus meaning that suppliers are better placed to negotiate. It is not easy to switch these suppliers though since the expenses will be too high especially in regards to training of pilots and mechanics. Although Ryanair controls its fuel prices by hedging fuel prices, still oil prices have an impact on it stated by Miriam (2010). Ryanair tries as much as possible to operate in Regional Airports other than main ones due to their little bargaining power. This scenario makes the supply chain in this respect to be quite rigid making it difficult for the airline to offer highly specialised services to customers. Consumers’ bargaining power The airline industry in general is sensitive and volatile to changes in economic conditions. This volatility comes as a result of consumers being directly affected by changes in the economy e.g. the Global Economic Crisis. Consumers can easily switch airlines depending on various conditions e.g. air fare changes. There is hardly any loyalty as far as air travel is concerned thereby customers move from airline to airline quite frequently. Customers also are aware of the cost of airline operations thereby are able to know when overcharged. New entrants The airline industry is capital intensive and Ryanair invests a great deal in expansion strategies e.g. aircraft purchases. Stefanie (2007) says that since 2003 the airline was faced by huge competition from big airlines’ subsidiaries and others. This threat has however been extinguished as time passes through intense advertisement campaigns and continuous innovation to further reduce on cost and fares. A recent example is the July announcement by O’Leary that the airline is to bring forth standing-room only areas (Haq 2010). These spaces are to be relatively cheaper for short flights and will save on space thereby being able to accommodate more passengers and thereby more profits. Threat of substitutes There is little if any loyalty from customers therefore they can switch to other means like train easily. This factor is also attributed to the low customer relationship that airlines have. This is also made worse by the fact that customers switch at no cost. High speed trains e.g. Eurostar and Eurolines are nowadays relatively fast and cheaper than air travel to many destinations. Faster cars and ferries are also in the market. Competitive rivalry There is little chance of product differentiation and in case an airline does so, others easily copy the trend. The low cost airlines at present have reduced direct rivalry by opting to ply separate routes. However, in case this scenario reverts to direct rivalry then the completion will hurt Ryanair’s profitability due to further reductions in fare prices. Price being the only aspect of differentiation, Ryanair is forced to remain lower than all thereby mounting pressure on profitability. Objectives and vision Ryanair wishes to ply the most routes in Europe while offering lowest fares possible and those which other carriers are not able to offer (Fred 2010). The other arena the management wishes to excel in is quality of service and to outdo the rest. This should be done with no compromise on the current business model. In doing this what is expected is steady growth both in short and long term. Conclusion This review of Ryanair has revealed that good strategies have been put in place in order to become a market leader in the low cost segment. Europe as a continent is not easy to operate in due to the extensive competition but the management has overcome all odds to remain the low cost airline of choice. Since 1985 the airline seems to have mastered this market as it grew. The strategies have been focusing on low fares, short-haul flights, good choice of profitable routes, low cost of operation, use of internet for bookings, endeavouring to improve on quality of service, establishment of lucrative ancillary services and overall criteria for growth that is working well so far. Ryanair’s vision to be the largest carrier and particularly in low cost category in Europe will definitely breed positive results if only the management of the day appreciates the airline’s past record and sticks to set standards. References Carol, HA & Julian, WV 2000, Strategic marketing management: Meeting the global marketing challenge, Houghton Mifflin. pp. 232 – 261. Charles, H and Gareth, J 2009, Strategic management theory: An integrated approach, Cengage Learning. Charles, HWL and Gareth, JR 2007, Strategic management: An integrated approach, Cengage Learning. David, F 2003, Strategic management, Prentice Hall. Fred, D 2010, Strategic management: Concepts, Prentice Hall. Gregory, GD & Marilyn, LT 2004, Strategic management: Creating competitive advantages, McGraw Hill Book Co. Haq, R 2010, Ryanair eyes 'standing-room only' areas on flights, viewed 09 Nov 2010 . Miriam, M 2010, An analysis of Ryanair’s corporate strategy, GRIN Verlag. Nigel, E, David, C & George, S 2003, Strategic management for travel and tourism, Butterworth-Heinemann. Palmer, A and Ponsonby, S 2002, Journal of Marketing Management. pp. 260 – 401. Philip, S & James, CC 2003, Strategic management, Kogan Page Publishers. Richard MS, Wilson & Colin G 2005, Strategic marketing management: Planning, implementation and control, Butterworth-Heinemann. Ryanair 2010, History of Ryanair, viewed 08 Nov 2010 . Sascha, M 2008, Ryanair and its low cost flights in Europe: Marketing plan, GRIN Verlag. Stefanie, H 2007, The low-cost airline Ryanair: A critical evaluation of the Ryanair phenomenon and its future prospects with taking the European airline industry into consideration, GRIN Verlag. Whittington, R 2001, What is strategy and does it matter? Thomson Learning Read More