Strategic Management Trends in the Low Cost Airline Industry the of Ryanair - Case Study Example

Strategic management trends in the low cost Airline industry – the case of Ryanair Executive summary The development of corporate activities around the world has been differentiated the last decade especially under the influence of severe financial and political turbulences in many countries worldwide. In this context, the firms that want to survive in the modern market should update their strategies trying to respond to the needs of customers and the demands of the market (in terms of technology development, skills of employees and so on). Towards this direction it is supported by Santos et al. (2000, 2) that ‘according to its characteristics, objectives and the resources available (human, physical, financial etc.), each company prioritizes some competitive criteria, according to market tendencies and concentrates its efforts to get a competitive position relating to concurrence’. Ryanair is a firm that operates for many years in the airline industry. The main characteristic of the firm’s strategic choices is that they are all directed towards the provision of low cost services to the customers. This strategy has helped the firm to survive in its market and expand its activities in many countries (apart from Britain). The potential differentiation of the firm’s strategic choices is examined in this paper trying to identify the reasons that led the firm to remain stable in its strategies since its establishment. 1. Introduction The strategic direction of a firm that operates within the modern market is an issue that can be criticized and evaluated primarily by the firm’s owners/ stakeholders. At a first level the firm’s managers have a series of strategic options available (like Porter’s five forces model and SWOT analysis that will be analyzed in the following sections) that can help them to decide on the appropriateness of their strategic choices. However, the use of the above mentioned strategic tools requires the competency of the managers to understand all the aspects and the role of these tools – in order for the firm to be actually benefited. The accurate and the extensive industry analysis is also mentioned by many researchers as an appropriate tool offering to the firms’ managers the appropriate support towards the development of the corporate initiatives and the increase of effectiveness of the corporate plans. In this context, it is noticed by Pritsker (1997, 32) that ‘industry analysis typically focuses on a companys external dimensions such as its markets, customers, and competitors’. In the case of Ryanair the strategic tools chosen by the firm’s managers should be appropriately customized in order to respond to the firm’s needs targeting to the increase of the firm’s profitability and the stabilization of its position within the global airline industry. The survival of the firm through the difficult years (referring to the airline industry) that followed the event of the September the 11th proves that the firm’s strategic decisions are appropriate in accordance with the firm’s current strengths and weaknesses. However, an update of existed strategies would be necessary in order to support the improvement of the firm’s position in the airline industry (both in the British and the international market). 2. Ryanair – general overview Ryanair was set up in 1985. At that time the number of passengers (for the whole year) was estimated to be approximately 5000 (see corporate website) and the staff included 51 employees. Through the years the firm managed to expand its activities reaching the 50 millions passengers in 2007. The firm has added bases to its existed ones: Alicante, Belfast, Bristol, Dusseldorf and Valencia are included in the firm’s destinations since last year. International organizations, like IATA has stated that the firm should be considered as one of the most powerful ones within the international airline industry (see the corporate website). In accordance with a report published by the Scottish Enterprise (2003) in Ryanair ‘a) Passengers exhibited a high socio-economic profile, with 78% of passengers in the top ABC1 grouping, b) around 90% of passengers described the cost of the flight as an "important" or "very important" reason for taking the trip’; the average spend per person per trip for visitors to Scotland was £215’. The development of the firm’s performance through the years (on a continuous basis as it can be noticed in Figure 3, Appendix section) is a result of the corporate strategic options through the years. The strengths and the weaknesses (if any) of these strategies are going to be identified and analyzed trying to explain the continuous growth of the firm since its establishment in 1985. 2.1 Main strategic choices of Ryanair – analysis of the industry The strategic choices of Ryanair have been analyzed by researchers worldwide. The success of the firm in the international market has caused the interest of commercial analysts around the world. In this context, Pitfield (2007, 75) supported that ‘Ryanair tends to operate to destinations from its UK bases that are not the main airports in the country being served and in this it differs from many other European low-cost carriers; although direct competition is not provided in the way that rival services operate between identical pairs of airports, indirect competition is provided; Ryanair appears to gain more market share than its initial stimulus to the market’. In accordance with the above, the success of Ryanair’s strategy could be located at a specific point: the choice of airports that are not of high traffic means that the cost for the firm (regarding all stages of the flight) is low. In this context, the firm can offer to its passengers low prices in all the destinations. Apart from the choice of the airport for the development of the business activities, a series of other policies (appropriately customized) could be regarded as participating in the success of the firm around the world. We should refer to the study of Schuler et al. (1998, p.159) who made clear that the firms that need to develop their strategies should concentrate on the following issues/ sectors: ‘a) the business structure, b) the legislative and employment relationship context, c) the patterns of HRM competence and decision-making and d) the national culture’. From a different point of view Gomez et al. (2002) supported that firms that need to develop their performance should focus on the update of the following organizational sectors: ‘inputs (materials, energy, information, management, technology, facilities and labor), transformation (or conversion process) and disposition (marketing and sales)’ (Gomez et al., 2002, Ch. 15). Even if the above issues are thoroughly considered by the firms’ strategic managers, it is necessary that any update of the corporate strategy is appropriately prepared making sure that there will be no case of failure (or at least that such a failure would be limited). In this context, it is noticed by Akkermans et al. (1992, 7) that the most common problems faced by firms within the international market belong to the following categories: ‘(1) problems regarding the organizational structure within which the persons involved work; (2) problems regarding the cognitive skills of the persons involved; and (3) problems regarding the attitudes of the persons involved’. The evaluation of the firm’s strategic choices cannot be completed without the presentation of the forces that the firm has to confront on a constant basis. These forces can be identified using the relevant model of Porter (Figure 1, Appendix). The strategic option generator of Wiseman (Figure 2, Appendix) would be also an alternative solution for the firm’s managers (in case that the restructuring of the firm’s policies is decided). In the case of Ryanair, these forces could be analyzed as following: 1) the industry (high turbulences due to the international financial crisis), 2) suppliers (the products/ services of the firm’s suppliers can be located easily in the market, no significant pressure by the firm’s suppliers could be identified at this period of time), 3) customers (the prices offered by the firm to the customers and the high level of customer support have secured the position of the firm in the market – the firm remains the favourite one for passengers internationally), 4) threat of new entrants (no threat for the firm can be identified, the prices offered by the firm and its customer base – which is extended – have secured the position of the firm in its industry, even in case of new entrants the position of the firm cannot be considered as being under threat), 5) substitute services (due to the reasons provided above, there is no threat for the firm from substitute services). 3. Support of business plans 3.1 Human resources The employees of Ryanair around the world have been estimated to approximately 2700 in 2007 (from 51 in 1985, see corporate website). It is clear – if observing the performance of the firm until today – that the firm’s employees are highly skilled and the customer support service is of high level. The firm’s HR managers use practices that are appropriate in accordance with the firm’s target and the needs of the customers. In accordance with Harris et al. (2004, 156) ‘the particular set of HR practices that an organization adopts must fit with other organizational factors in order for it to be effective’. On the other hand, Boselie et al. (2005, 11) supported that ‘culture management, strategic decision-making, fast change, and market driven connectivity – together comprise the HR competency domain of Strategic Contribution’. It is clear that when referring to the firm’s performance the competencies of employees have to be mentioned and analyzed. As Korman et al. (1999, 221) stated: ‘of critical importance is the nature of fit; organizations need more versatile managers and are finding fewer candidates available with the skills they need’. The strategy followed by Ryanair regarding its employees can be identified in the following statement: ‘we reward you well for effort; where possible, we incentivise your work so the more you do the more you get paid; we aim to offer competitive salaries with excellent benefits that are simple and easy to understand; we offer an excellent share option scheme, which ultimately allows you to own a piece of the airline and share in its success’ (statement of the firm’s managers, corporate website, careers section, 2008). In other words, the firm’s employees should be considered as being a catalytic factor in the development of the firm through the years. The support offered by the firm towards its employees is probably the reason for the employees’ high performance since the firm’s establishment. 3.2 Supply chain Other factors, like the supply chain management should be regarded as being important towards the success of corporate strategies. In this context, it is supported by Krishnan et al. (2001, 259 that ‘supply chain management has become an important part of strategic planning in both large and small businesses since the 1990s as firms increasingly choose outsourcing as an externally-driven strategic growth path’. On the other hand, Agrawal et al. (2001, 22) ‘products reach customers through a chain of retailers, distributors, wholesalers, manufacturers, and component suppliers; supply chain management is intended to accelerate the flow of goods, information, and capital in both directions, along the chains entire length, and to help companies monitor that flow’. In the case of Ryanair, the supply chain management is involved directly in many business activities (need for machinery for the service of the firm’s airplanes, catering services, online services and so on). The success of the corporate strategy therefore would be also connected with the success of the policies applied in the relationship between the firm and its suppliers. 4. Conclusion All business activities are evaluated in accordance with specific criteria. In this context, Steyn (2004, 615) supported that ‘successful organisations are knowledge-creating organisations, which produce, disseminate and embody new knowledge in new products and services; to this end, knowledge management enables organisations to improve efficiency and effectiveness mainly by decoding tacit knowledge into explicit information’. On the other hand, Kesler (2000) supported that modern organizations should apply innovation in the design and the application of all their plans. More specifically innovation should be used in the following parts of the business: ‘1. Finance, 2. Process, 3. Offering and 4. Delivery’ (Kesler, 2000, 26). At a next level, Rand (1999, 97) noticed that ‘businesses fail because management does not have effective control of the business as management is too far removed from revenue-producing processes’. Regarding this issue, it is noticed by Bunker et al. (2005, 12) that ‘much of that failure stems from not understanding how to manage the structural side of change and the human dynamic of transition’. In other words, business managers need to proceed to the appropriate initiatives if they notice that the firm’s performance is being decreased for a specific period of time. Appropriate changes are then required. In this context, Katzenbach (1996, 149) supported that ‘change efforts are often conceived as waves of initiatives that sweep through an organization from the top down, or the bottom up, or both, and flow across functions’. In the case of Ryanair it seems that there is no particular reason for the firm’s managers to proceed to changes on the firm’s current strategic options. In accordance with an article published by BBC News (2007) ‘Ryanair has shrugged off the impact of rising fuel and labour costs to report a healthy rise in half-year profits; pre-tax profits at the Irish budget airline rose 23% to 459.5m euros (£319.7m; $665m) in the six months to the end of September; passenger numbers rose 20% to 26.6 million while Ryanair absorbed a 5% rise in unit costs stemming from higher fuel and airport landing costs’ (BBC News, 2007). In accordance with the above, the strategic choices of the firm’s managers should be characterized as absolutely justified – only partial changes would be possibly required in the future following the trends of the market and the changes in customer preferences. References Akkermans, H., Aken, J. (1992) Process-Related Problems in Operations Strategy. International Studies of Management & Organization, 22(4), p. 6-12 Agrawal, M., Pak, M., (2001). Getting Smart about Supply Chain Management. The McKinsey Quarterly, 22-24 BBC News (2007) ‘Rising costs fail to hurt Ryanair’, [online], available at http://news.bbc.co.uk/1/hi/business/7078654.stm Bunker, K., Wakefield, M. (2005). Changing Workforce: Leading Effectively When Change Is the Norm Canadian Government Managers Discover How to Weather Draconian Layoffs and Budget Cuts by Turning Inward to Become More Authentic. The Public Manager, 34(4): 9-17 Gomez-Mejia, L., Balkin, D. (2002). Management, 1e. The McGraw-Hill Companies Harris, H., Sparrow, P. (2004) Globalizing Human Resource Management. New York: Routledge Huy, O. (2002). Emotional Balancing of Organizational Continuity and Radical Change: The Contribution of Middle Managers. Administrative Science Quarterly, 47(1), p. 31-66 Katzenbach, J. (1996). Real Change. The McKinsey Quarterly, 1: 148-153 Kesler, G. (2000). Four Steps to Building an HR Agenda for Growth: HR Strategy Revisited. Human Resource Planning, 23(3): 24-38 Korman, A., Kraut, A., London, M. (1999). Evolving Practices in Human Resource Management: Responses to a Changing World of Work. San Francisco: Jossey-Bass Krishnan, H., Park, D. (2001). Supplier Selection Practices among Small Firms in the United States: Testing Three Models. Journal of Small Business Management, 39(3): 259-269 Porter, M. (1998) On Competition. Harvard Business School Press Pritsker, K.D. (1997). Strategic Reengineering: An Internal Industry Analysis Framework. SAM Advanced Management Journal, 62(4): 32-43 Rand, T. (1999). Why Businesses Fail: an Organizational Perspective. Emergence, 1(4): 97 Ryanair, corporate website, www.ryanair.com Schuller, R., Rogovsky, N. (1998) Understanding compensation practices across firms: the impact of national culture’, Journal of International Business Studies, 29(1): 159-172 Scottish Enterprise (2003) Ryanair flights prove just the ticket for Scottish economy, 6 November 2003, [online], available at http://www.scottish-enterprise.com/sedotcom_home/news-verity/news-fullarticle-verity.htm?articleid=34108 Steyn, G. (2004). Harnessing the Power of Knowledge in Higher Education. Education, 124(4): 615-623 Appendix Figure 1 – Porter - Five Forces (source: Porter, 1998, 22) What is the strategic target? Supplier Customer Competitor What is the strategic thrust? Differentiation Cost Innovation Growth Alliance What is the mode? Offensive Defensive What is the direction? Use Provide Figure 2 - Strategic Option Generator (Wiseman, C., 1985, ‘Strategy and Computers’, Dow Jones – Ivwin) Figure 3 - Ryanair passenger growth in millions (source: corporate website) Read More