The report here discusses about analyzing the competitive structure of Ryanair Airlines using Porter’s Five Forces model. Michael Porter introduced the five forces model in 1980 to describe techniques to analyze competitors and industries. Thus, from then on the Porters model has become a vital instrument for strategic analysis of the industry structure of an organization. According to the Porter’s model, any business strategy must meet the threats and opportunities in the external environment of the organization. The report also discusses that the model considers five forces as a measuring tool for evaluation of the profitability of the industries. These forces include customer bargaining power, supplier’s bargaining power, substitute products, competition among the firms existing and barrier to entrance. Therefore, the intensity of competition and profitability of an industry is dependent on these forces. In order to improve the position of an organization it is very important to revise these forces from time to time. Through Porter model, one can analyze the driving forces of an industry. The report further discusses that information derived from the five forces model can help management decide on how particular characteristics of the industry can be influential or advantageous (Rothaermel 2015).
The buying power of customers determines the level of pressure the customers can impose on the levels of sales that decides the market share of a firm. In this respect, the buying power of customers is relatively high when there is there is large number of substitutes for a particular product, varied fixed cost and there are a large number of buyers and sellers. Further, the buying power determined by the price sensitivity of the customer and how much information he has regarding the production cost. In this respect, Ryanair being a low cost airline enjoys high buying power because buyers would have to incur additional expenses by switching to Southwest airlines or British airways. Ryanair customers also face a higher level of sensitivity in price that also contributes their buying power. Moreover, Ryanair is susceptible to any measures related to price reduction by its competitors because it lacks brand loyalty in the airline industry. However, substitute services for Ryanair include transport via railways, sea or by car. Commutation through these services is more expensive than taking Ryanair flights. The cheap price strategy of Ryanair gives it an edge over other airlines as well. (Hannigan, Hamilton and Mudambi 2015)
The main supplier of Ryanair has been Boeing considered one of the top in aircraft manufacturing companies existing. However, Ryanair has expressed interest in buying aircrafts manufactured by a Chinese company named Comac. Comac is offering planes with greater amount of seats and lesser energy consumption thereby increasing efficiency. Therefore, by incorporating aircrafts from the Chinese company Ryanair can not only enlarge its destination list but also at the same time provide the passengers with low cost tickets (Graham 2013). Therefore, it will ensure Ryanair a second largest position worldwide that is ahead of Southwest airline. .The present scenario is an indication of Ryanair increasing buying power towards its supplier Boeing. In this respect, though Ryanair will have to incur higher switching cost as the above act will involve retraining pilots. The lack of supply of trained and experienced pilots has led to their strong bargaining power thereby administering a hold. On the other hand, Ryanair is inclined to a rapidly increasing power towards the category of suppliers. However, the competition amongst airports has also contributed to the bargaining power of the airline companies with respect to maintaining business relationships with airports of the locality. (Daft and Albers 2013)
There is an intense rivalry in the airline industry due to several reasons. However, long run has a constant number of competitors that does not indicate over or under capacity. In this regard, the fixed cost is quite high and therefore quitting the industry seems difficult as most companies have loan agreements of a longer term. The strongest forces in the industry are between the suppliers and the existing companies. Therefore, to enter the industry the present firm needs to have enough capital. The company will incur severe loss if there is a potential change in credit. In this context, entering a market that lowers entry risk is not only time consuming but also at the same time expensive (Terpstra and Sarathy 2012). Thus, switching cost and substitutes are too costly, which make the buyers weak. The long-term profit for this industry is also dependent on the number of people willing to fly. There has been an usual trend that airline firms that are in a higher scale of profit have more aircrafts with a variety of flights that enables better facilities to the users. In this regard, Ryanair has an advantage over Southwest Airlines and British Airways as they have a low fare and no frill policy. Compared to Southwest and British airways Ryanair reduces the cost outlay through point-to-point strategy, shortening flight turnarounds and expanding the routes for short haul flights. In this regard, there is an increase in competition among other airlines for customers who are sensitive to price and higher benefits. Competitive rivalry refers to threat that leads to decline in sales and in this respect Ryanair do not face any competition. (Nhuta 2012)
Ryanair is one of the famous low cost airlines of Europe in business since 1985. The airline has presently set up reservation system and online booking called “Skylights” whose promotion was grandly done on television, newspaper and radio (Llach et al. 2013). Compared to Southwest Airlines and British Airways, Ryanair provides aircrafts that are low cost. This is possible as Ryanair adheres to the policy of cost reduction in all possible ways. Moreover, Ryanair’s prefers low cost and smaller airports with the target of finding market in the remotest location that previously had no convenient connection. Again, Ryanair also enables active route management that takes only 25 min turnaround time that makes it the most profitable. The airline also drives in 20% of ancillary revenues that ranges from various products to services. These include car hire facility, hotel facility, travel insurance, in-flight sales and surface transport. (Jimenez, Claro, and de Sousa 2014)
The analysis of the external environment conducted for understanding the environmental nature in which a firm operates. Through this analysis, one can understand the degree of impact of the environmental forces on the firm (Walder 2012). Moreover, the analysis also helps to identify various challenges, threats and opportunities that the company is facing. In this context, the external analysis for Ryanair includes an analysis of the external factors and industry and a macro level environmental analysis. Through the macro level analysis, one can not only identify but also scan the general environmental factors that have impacts Ryanair. The Macro environment is defined by uncontrollable and external factors that affect performance, strategies and decision making of a company. This analysis is termed PESTEL (political, economical, social, technological, environmental and legal) analysis of a company. However, these factors do not undergo frequent changes but when they do it affects the organization majorly. However, the industry analysis stresses on the competitive scenario of the company. The aim of this analysis is to identify the factors that are affecting industry profitability. In this context, Porter’s Five Force model used to provide an aid to the industrial analysis. The model helps to identify effective competition in the market and at the same time locate the dynamic factors responsible for influencing growth of the industry.
Ryanair has earned a position of most profitable airline through its services and thus has advantage over Southwest Airlines and British Airways. The skills, knowledge, resources, strategies and competencies as to how they are affecting the business and differentiating it from its competitors define the competitive advantage of Ryanair. The competitive advantage of Ryanair can be analysed based on Bowman’s Strategy Clock and Porter’s Generic Strategy (Castillo-Manzano, López-Valpuesta and Pedregal 2012).
The Bowman’s Strategy Clock enables us to understand the competition amongst the companies in the marketplace. The model enables companies to judge various combinations of perceived value and price and thereby help a company in choosing a position as per the competencies. The strategy clock is a powerful means for the company to understand, sustain and establish its competitive position in an economy that is market driven (Shakhshir 2014). The model asserts eight strategic positions for the company to analyze and evaluate its present strategy and decide on if any adjustments are required for improving its competitive position. According to this model, Ryanair competitive advantage can be classified under the low added value system and the hybrid system. The Bowman strategy clock analyses the competitive position of Ryanair in respect to its competitors. Additionally, the strategy clock also considers differentiation advantage or cost advantage to analyze the market position. However, the strategy of Ryanair is hybrid because they claim to offer unique services at low prices. However, a survey carried out on 4000 passengers showed the airline as least preferred due to fight delay, poor service, safety standards and hospitability of the staffs. Throughout Ryanair has believed in low cost strategy so the strategy gets a position on the left side of the Bowman clock (Tassabehji and Isherwood 2014).
Ryanair is a cost effective airline that focuses on cost reduction in all possible means. Compared to Southwest Airlines and British Airways, Ryanair follows a strategy of low budget. Here the Porter’s generic strategies are applied to analyze the competitive advantage of the company. The model has three generic strategies cost leadership, differentiation and focus in the light of which the market position of Ryanair is studied (Baroto et al. 2012).
The cost leadership strategy implies to strategy that business organizations follow in managing their value addition activities so as to become the lowest cost producer of a product within an industry. Ryanair follows this strategy in effectively managing its value added activities to become the low cost compared to Southwest Airlines and British Airways. Through cost leadership, Ryanair has become the most cost effective and preferred airline by most Europeans. Ryanair had to survive the hardships of survival in a scenario with high cost airlines. Therefore, Ryanair became an effective cost leader in the sector and the best too (Kevin 2013).
The differentiation however makes use of a strategy where a company can recover its excess cost through premium pricing over customers. Successful differentiation strategy can lead to potential competitors in the market. Ryanair has incurred huge losses due to the hardships faced. This led to the change in company strategy by one of its stakeholder for its long-term survival. However, in trying to do this Ryanair strategy lay somewhere between a cost leader and a focuser. This means that Ryanair previous strategy was that of a focuser but when there was a boom in competitors, they changed their strategy to cost leadership thereby becoming a low cost airline. In this regard, when Ryanair competitors made use of primary airports it made use of secondary airports to reduce cost. Therefore, compared to its competitors Ryanair tried to focus on low cost services rather than differentiation. ( Kinyua 2012)
Thus according to cost leadership Ryanair focuses on being the airline with low fare thereby enabling benefits to the customers who chooses Ryanair over others. Therefore, Ryanair focused more on strategy of low cost and less differentiation. Through these aspects by using the porter’s generic forces, Ryan Air maintains a low cost airfare and lack differentiation that makes it unique among its competitors. Thus, they based their strategies entirely on being the cost Leader in its segment.
The strategy of focus in Porter’s model is a mediator of two strategies. Companies follow such to focus on market areas with least competition. Ryanair focuses on attracting customers through a low cost structure. The focus of Ryan is to enable passengers to choose a low budget airline over Southwest Airline and British Airways. Thus, Ryanair has no frills and at the same time ensure quality service to passengers who have to travel to cities with secondary airports. Therefore, Ryanair targets business clients since they hardly have issues with comfort compared to passengers who goes for holidaying.( Rothaermel 2015)
Ryanair inception dates back to July 1985 in the hands of three brothers Shane, Caltan and Declan Ryan under their father’s financial assistance. The first operation was as a commercial carrier with only 25 staff members. Ryanair first aircraft was a turbo prop 15-seat commuter plane that flew between Waterford in the southwest of Ireland and Gatwick Airport. Later, Ryanair got the permission to take at least four flights on the Dublin-London route. Presently, Ryanair has a rapid growth and now occupies the most coveted position and considered as Britain’s favorite airline. The airline is also the oldest low cost airline existing in Europe (Walder 2012.).
The internal capabilities focus on the uniqueness of the internal resources of a company that enables it to survive competition. In other words, known as the resource based firm review. While explaining by theory it can be stated that a firm have a advantageous possession depending upon the rare resources it possess and its ability to use the resources to drive potential customers. Therefore, it is a competitive advantage for a firm with superior resources. In other words, resources are tangible and intangible assets that a firm have and can choose accordingly to implement strategies. In order to make the resources bearable a firm incorporates capabilities. In other words, capabilities and resources determine the strategies of a firm. The resource-based view represents competitor’s perspective to possess a resource or capability originating from the interplay of the forces of the market. In this respect, the tangible resources of the Ryanair include 737 Boeing airplanes. Among the other tangible resources are the company headquarters and other buildings located in Dublin. These resources also include drinks, food and all other duty-paid products including fuel that remains in the company’s inventory. However, intangible resources include skills, abilities, talents, expertise, accumulated knowledge and intellectual capital. These also include Ryanair brand recornition, reputation, loyalty of the customers and investors and confidence (Marzo and Zambon 2012).
However, in this context the capabilities of Ryanair include:
Ryanair incorporates innovative strategies on reducing cost, ensures turnaround in lesser time, involves simple processes and ensures large brand awareness. Further,being an early entrant in the field Ryanair has not only gained expertise but has excellent marketing strategies. The airline ensures high punctuality, quick luggage handling, and efficiency in turn around rate and has the ability to strike profitable deals with the supplier. The capabilities further allow Ryanair to strategically think and instantly act on it. The airlines have also added new routes and hubs in no time. Thus Ryanair has survived in an industry with high priced airlines based on its strategy of cost control (Diaconu 2012.). Ryanair also enables sustaining and building its brand loyalty.
Thus to critically assess the current and future challenges of Ryanair, PESTEL analysis is incorporated that involves various factors like political, economical, social, technological, environmental and legal. The impact of these factors on Ryanair however depends upon the strategies that the company follows. Ryanair is a short haul low cost Irish airline that flies to the destinations at the cheapest rate and considered the most suitable airline from customer point of view. Economic recession in Europe has led to the decline in profitability of the airline and is thereby attempting to recover the loss. In this regard, the PESTEL analysis will help us to understand the profit, growth rate and possibilities of the market as per the current economic situation (Gudmundsson 2015).
The airline industry is highly influenced by the political system of the country and the relationships they maintain with other countries. Compared to Southwest Airlines and British Airways Ryanair is a low cost airline with operations restricted to particular destinations that has an impact on its business (Bertels, Koen and Elsum 2015). There are some airlines considered flagship airlines and the political policies are important for these airlines to follow as many countries think that the competition between airlines can be a threat to the state. The European Union has furnished this trend for the airline industry thereby allowing them with product differentiation and innovative pricing policy. Further, there are directives issued by the European Union that disallows government subsidies to airlines to ensure level playing fields thereby leading to political developments in European countries (Rövenstrunck 2013).
The country’s economic status directly affects the airline industry. There is a direct relation with the trade and economic cycles. In this context, Ryanair being a low cost airline is least affected compared to Southwest Airlines and British Airways. Economic factors include inflation rates, GDP, exchange rates, unemployment rate, fiscal and monetary policy (Myre 2015). Change in any one of these factors can lead to financial impacts with reduced business activities. This have a direct impact on the airline business as the number of passengers reduced for a specific destination thereby leading to the company’s loss. Therefore, whenever there is economic crisis there is always a downfall in the number of passengers who travel through airlines. Thus, the crisis has a direct impact on revenue collection. Ryanair gets a preference over other airlines due to its low cost structure. In this scenario, the passengers always resort to last minute booking mostly will choose Ryanair over other airlines (Lawton 2017).
The social factors include the value, lifestyle and beliefs of a society. Most of the passengers look for safety in an airline and if they find that all safety measures have been undertaken then the airline gets a preference over others (Mack 2013). Passenger preference is one of the factors determining the choice of airlines. Therefore, if there is any mishap or any kind of fear about terrorist attack then people might cancel boarding thereby decreasing the revenue of the airline. The outbreak of an epidemic like swine flu and avian flu also effect customer trust. In this context, the initiation of the European Union has changed the lifestyles of the citizens thereby forcing them to undertake more business and holiday travel (Dobruszkes 2013). Compared to its competitors, Ryanair is preferred not only because of its low cost structure but also due to the hospitability and politeness of its staff. Additionally they also have an excellent air and ground service.
There has been new change in the airline industry with the emergence of various technological innovations and the internet. Video conferencing is a facility that allows businesspersons to deal with people without the necessity to travel. The emerging internet has enabled people to get the necessary information and book tickets online. Technology is so farfetched that people can even see movies and listen to audio songs while flying. Ryanair although a low cost airline has introduced online ticket booking facilities to the customers thereby enabling more passengers to book tickets. Thus, Ryanair is trying to cope with the immediate necessities of the clients so that in can increase its revenue compared with Southwest Airlines and British airways. When people can book a flight ticket sitting at home then why should they personally try to get one. Preference will be towards the airline that has online ticket facility with low cost tickets. In this respect, Ryanair dominates (Budd and Vorley 2013).
The increase in environmental awareness among people has influenced the airline industry. Various environmental protection agencies guide the airline industry. In this context, the European Union has introduced the Emission trading schemes to control carbon dioxide emissions from the industries. The rule made mandatory for the airlines to control carbon dioxide emission with the use of latest equipments and technologies (Molloy et al. 2012). Therefore, strict supervision made to follow the environment guidelines in carbon dioxide reduction. In this respect, Ryanair still needs to incorporate measures to reduce its carbon dioxide emissions compared to the Southwest Airlines and British Airways. There have also been measures to control noise levels and global warming. Operating airlines in order to put up with its service must consider these measures.
The international air traffic agency (IATA) has made certain rules for the operation of flights across the world. The airlines must strictly adhere to these regulations in order to ensure passenger benefits. Then there is the issue of airport ownership that airlines have to face since some of the airports government owned whereas others owned privately. The government owned airports not only allows monopoly to the management for flight operation but the operating airlines also have competitive advantage. On the other hand, privately owned ones incur certain operating cost on the airlines. Therefore, European Union has issued a legislation providing sufficient rights to the passengers travelling from the European Union countries. Ryanair aim being a low cost airline must adhere to the IATA rules and take into account the various aspects before choosing an airport before conducting its operations (Prassl 2014).
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