Discuss about the Strategic Management for Ryanair.
This report is focussed at critically assessing the key issues that strategic analysis plays in a business. For this purpose, Ryanair has been selected in the current report. The report commences by offering background information of the organisation. Moreover, to perform external environmental analysis, PESTEL and Porter’s Five Forces have been used. Findings of the external analysis shows the considerable issues for the company like charges by UK government and bargaining power of buyers. In addition to this, internal analysis has been conducted with the help of Porter’s Value Chain, Porter’s generic strategy and VRIO framework. The internal analysis makes it clear that the company has strong potential, but it needs to focus on its customer service and human resource management more. It has been found that Ryanair’s current strategy is cost leadership and the company also uses corporate clout for securing economies of scale. This aids Ryanair to get a strong place in aviation industry. However, there are certain issues on which the company needs to focus for maintaining its competitive advantage, and thus, necessary recommendations have been made to the company.
The organisation selected for the paper is Ryanair, which is the primary lost cost airline of Europe and provides customers low fare flights for all places. Ryanair was set up in the year 1985 by Ryan family with a workforce of just 25 people and share capital of £1. Since its establishment the company has developed from a mere one-stop airline to be one of the largest carriers of Europe. Ryanair operates above 1600 flights in a day to approximately 1600 low fare routes, from 69 bases. This way, the airline company links 186 destinations in 30 nations (Ryanair, 2016). Also, in the year 2000, Ryanair.com was launched officially, and the website currently accounts for more 98% of bookings for Ryanair airlines.
The vision of the company is to be the leading low-fares scheduled passenger airline of Europe by making constant improvements and increasing offerings of its low-fares service. The company has created a revolt in the air travel industry by adopting no-frills, low-cost strategy. Ryanair is the only airlines of Europe that has made the air travel accessible to masses and also played a substantial role in increasing Europe tourism unlocking it in a manner, which it had never been before (Ryanair, 2016).
In order to perform macro-environment analysis of Ryanair, PESTEL model has been used so that key factors related to the macro environment can be determined that affect the company:
Political Factors: The trade union of Europe is compelling Ryanair as EU directives impose direct subsidies by the governments to their airlines because they mainly work to frame a level playing field among the region’s airlines. This kind of approach was highly driven by the political developments as many companies were interested to have a level playing field across the EU. This was not only wished in the airline sector as it was demanded in various other factors as well in many countries. On the other hand, government taxes affects low fare airlines in the negatively manner when it comes to air journey (Thomas, 2014).
Economical Factors: It is evident that the global airline sector is facing decline in passenger travel as the economic downturn has affected the spending of individuals and families. Apart from this, increased price of fuels has decreased the profit ratio of Ryanair as well as labour cost also plays a significant role in the cost of airlines. It has been viewed that if the fuel prices have risen $115 per barrel then it is sure that losses will be up to $5bn (Jacobs, 2012).
Social Factors: When it comes to travelling, customer attitudes has changed a lot in the current era due to the high travel cost of airlines as compared to other means of transport. Also, the fact cannot be neglected that the enhancing desire for mobility is inviting huge development in the airline industry like Ryanair (Enz, 2009). Though, the costs are higher in airlines but still, customers like to take a flight than to travel in ships or trains and this significant improvement in the market would take customers to go back to utilize airline travel again in the near future (Grubb & Neuhoff, 2006).
Technological Factors: There have always been the greatest technological advancements in the airline sector especially when it comes to the improved fuel efficiencies of airlines. Some of the greatest technological advancements have made Ryanair a great low cost airline company such as booking of tickets through online platform and checking the status of flights on internet in order to avoid any kind of ambiguity.
Environmental Factors: It is so true that the carbon footprint has been the most major issue in the airline sector and in this regard, Ryanair has been one of the most targeted airlines due to high amount of carbon emission in the environment and hence, it is advisable to Ryanair to lessen the impact of the carbon footprint in the environment (European Environmental Agency, 2012).
Legal Factors: There is a major trade union pressure on the airline industry as the government has two choices which are either to reduce or promote costs. For instance, government has started strict security levels at airports which might cost airlines to increase their costs. EU expansion is one of the major causes to promote or enhance costs and this need to be done with proper carefulness in order to avoid political turbulence in future (Deloitte, 2014).
From the above discussion, it can be concluded that Ryanair has a greater opportunity to think on the favour of environment in order to win the hearts of various people or passengers by reducing carbon footprint. On the other hand, the constantly increasing fuel prices can be a major threat for the company as it would lead to increase costs and people might feel reluctant to this aspect. The UK government charges and government taxes are also a major expense but it is necessary to pay them on time in order to maintain goodwill of company.
Competitive Rivalry: Competitive rivalry can be contemplated as nominal as airlines companies always try to avoid direct clash by laying emphasis on poaching travellers. Here, the price competition is of greater value as traffic will be moved to a company who serves nominal prices and this is what Ryanair do attract large number of customers.
Bargaining Power of Suppliers: Bargaining power of suppliers is quite higher as two aircraft companies are majorly present in the market namely Boeing and Airbus. In this regard, Ryanair does not have many options to choose the suppliers as there is lack of suppliers in the region (Thomas, 2011).
Bargaining Power of Customers: The bargaining power is very high as the market contains huge amount of price receptive travellers and they can easily switch to those companies which are offering the same services at cheaper prices. Also, the bargaining power of customers seems high as the customers are not at all loyal towards a single company and switch to other companies when they are likely to get better services at nominal prices. In context to this, price sensitivity of Ryanair customers is another significant factor that highly contributes to their bargaining power.
Threat of Substitute Products: This is undoubtedly true that the threat of substitute products is very high as travellers do not hesitate to shift to other substitute of transportation such as trains, buses, ships or personal vehicles. On the contrary to this, the threat of substitute is low as customers are not likely to get the same luxurious services in any other mode of transport. Hence, it is very noteworthy to state that the threat of substitute products and services for Ryanair is insignificant when it is highly compared to various other industries in the market place.
Threat of New Entrants: The threat of new entrants is not too high but is present as many companies are ready to copy the success of low fare flights but also, they face huge challenge to get landing slots for the same. Besides this, liberalization has really allowed maximum numbers of competitors in the industry but, companies are not willing to set up due to heavy investment in this area. In nutshell, it can be said that the threat of new entrants is quite low because of essential entry barriers which are highly associated while entering in the airline sector and they may involve capital requirements, access of distribution channels, economies of scale and many other factors (Belobaba, Odoni and Barnhart, 2009).
From the above discussion, it can be concluded that the Ryanair is doing well in its area and it does not have any major competitor as well as the threat of new entrants is not so high which makes the company very strong in various aspects. Apart from this, the major key issue here is that difficulties which are associated to proper distribution channel can be considered as another major hurdle for new companies to enter into airlines sector. Hence, Ryanair is doing well and does not need to worry about the new entrants and suppliers.
With reference to Porter’s three generic strategies, it is considerable that Ryanair has adopted the lost cost strategy. Low Cost Model has been implemented by the leader of the company Michael O’Leary who used it from Southwest airlines. The company has taken some strategic moves that allow it to offer low cost services to its customers (Clark, 2014). For example, Ryanair flies to secondary airports only, so that it can avoid the huge landing and gate charges and consequently offer low price to its customers. In addition to this, point-to-point flying is also used by the company, which helps in getting rid of many extra operations (Casadesus-Masanell and Ricart, 2011). Further, the company has also adopted the cost culture and has communicated it to all the employees to make it an important part of its cultural web. The biggest competitive advantage, the company has on its competitors is first mover advantage as it is the primary airline to instigate low fares by discussing low rates with secondary airports (Mitchell and Coles, 2004).
The below present VRIO analysis demonstrates the capabilities and resources of the firm:
|
Capability/Resource |
Valuable |
Rare |
Costly to Imitate |
Non Substitutable |
Competitive Advantage |
|
Brand Name |
Yes |
Yes |
Yes |
Yes |
High |
|
Management by Michael O’Leary |
Yes |
Yes |
Yes |
Yes |
High |
|
No Frills Low Cost Strategy |
Yes |
No |
No |
Yes |
Medium |
|
New Fleet |
Yes |
No |
No |
Yes |
Low |
|
Low Cost Culture |
Yes |
No |
Yes |
Yes |
High |
|
Physical Resources |
Yes |
No |
No |
No |
Medium |
Core competencies of Ryanair have played a critical role in forming the basis of competitive advantage for the company (Mennen, 2010). For the company, generating core competency as a low cost airline came from bringing together a bunch of complementary resources, comprising of a fleet of easy maintaining aircraft, and flying towards regional airports, selling mainly via an online channel and looking after customer service. The enviable profits of Ryanair are the outcome of making sure that all the capabilities and resources bring down expenses and enhance capacity (Kahawatte, 2010).
Porter’s value chain is helpful to determine the activities which connect and generate value for the company. The below discussed are the value chain activities of Ryanair.
Support Activities: This includes the infrastructure of the firm and Ryanair’s infrastructure expenses comes from gate leasing at airports, maintaining technology systems, like website or online booking.
Human Resource Management: Ryanair uses low cost agency training for its employees and aircrafts mostly includes minimal crew. Ryanair employs pilots of young age and offer them low wages for maintaining low cost operations (Rankin, 2014).
Technology: Ryanair.com is the major source of sale of tickets for the airlines. The website is managed internally and thus cost saving is done by not relying on any third party (Whois.com, 2014).
Procurement: Ryanair utilises procurement for acquiring resources at the best possible low cost. This is done by utilising the corporate clout of Ryanair (Kew & Stredwick, 2006).
Primary Activities: The cost of inbound logistics is low due to the corporate clout of the company and skilled procurement team. The operations of the company are extremely lean and outbound logistics of the company are concentrated on accuracy and punctuality. In 2013, 90% of the flights of Ryanair landed on time, defeating other European airlines (BBC, 2013). The focus of marketing and sales is on low cost promotions. Moreover, in terms of service, it is considerable that customer service is often regarded as the biggest weaknesses of the company. However, implementing turnaround strategy shows an attempt to transform brand perception (Topham, 2013).
The main aim of Ryanair is to become a big giant in the low cost market but is facing few major issues which are not allowing company to see its position in low cost such as regulation by domestic and EU is a major issue. This is because European airline is always compelled to check regulation from both domestic as well as European Union. On the other hand, Ryanair’s objectives and long term vision is another major setback as it is next to impossible for a company to operate the largest amount of routes with minimum or the lowest fare can lead to declining profits of company.
It has been analyzed that Ryanair has 4 dominant objectives and they are passenger traffic, passenger growth, smooth European routes and perfect customer service delivery and they together can serve as a myth as it is not possible to achieve all of them and hence, the company should try to achieve one by one so that its goals may not get neglected and can be fulfilled on time. Although, Ryanair does not have to face major competition from its competitors but still, this can be a major issue as companies are setting up their businesses in this sector after the allocation of liberalization as mentioned properly in the above section. In nutshell, it can be said that the company is doing well in its field and can enhance with flying colours if it may resolve the above mentioned issues in a better manner.
Considering the growing need of transportation, it is necessary that Ryanair should commence new routes in EU. The company should attempt to set up its presence in the EU and generate customer loyalty. The company can do this by starting Ryanair service to a location that is not low-cost service (Morris, Schindehutte and Allen, 2005).
Ryanair should keep into consideration strategic alliances with other small companies at international and national level for enhancing its efficiency, service and to deal with the rising competition (Johnson, et al., 2014). Strategic alliances will provide the company the chance to get capabilities for targeting more markets and sharing financial risks (Porter, 2001).
Another recommendation to the company is to focus on improving its customer service. Ryanair should work on its customer service by employing new talent, launching new customer service schemes and offer customers innovative services for their long term satisfaction (Hitt, Hoskisson & Ireland, 2011).
Conclusion
It can be concluded on the basis of the aforementioned discussion that Ryanair has surpassed airline industry by originating the low cost airline in Europe. The leadership in lost has enabled the company to get significant competitive advantages, uphold profits, and quick growth. However, with the changing airline sector and difficult external environment, it is complicated for the company to sustain competitive advantage. Thus, it is necessary for Ryanair to now consider new strategic moves and utilise its capabilities for offering better service to customers and maintain their loyalty for an enduring period of time.
References
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Belobaba, P., Odoni, A., & Barnhart, C. (2009). The Global Airline Industry. John Wiley & Sons.
Casadesus-Masanell, R., & Ricart, J.E. (2011). ‘How to Design a Winning Business Model.’ [Online]. Available at: https://hbr.org/2011/01/how-to-design-a-winning-business-model (Accessed: 16 February 2015).
Clark, R. (2014). Ryanair Feels the Squeeze as Rivals Lower Fares. Retrieved from: https://www.nytimes.com/2014/05/20/business/international/ryanair-feels-the-squeeze-as-rivals-scramble-to-lower-fares.html?_r=0
Enz, C.A. (2009). Hospitality Strategic Management: Concepts and Cases. John Wiley and Sons.
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Johnson, G., Whittington, R., Angwin, D., Scholes, K., & Regnér, P. (2014). Exploring Strategy. Pearson.
Kahawatte, U. (2010). Ryanair’s Strategy from a Perspective of Core Competencies. GRIN Verlag.
Kew, J., & Stredwick, J. (2006). Business Environment: Managing in a Strategic Context. CIPD Publishing.
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Porter, M.E. (2001). Strategy and the Internet. Harvard Business Review, 79(3), pp. 62-78
Rankin, J. (2014). Ryanair flies high after customer service overhaul. Retrieved from: https://www.theguardian.com/business/2014/sep/03/ryanair-customer-service-profits-passengers
Ryanair. (2016). Retrieved from: https://www.ryanair.com/en/about/
Thomas, A.R. (2011). Soft Landing: Airline Industry Strategy, Service, and Safety. Apress.
Thomas, N. (2014). ‘Budget 2014: Air Passenger Duty reformed to boost trade’, The Telegraph, Retrieved from: https://www.telegraph.co.uk/finance/budget/10709694/Budget-2014-Air-Passenger-Duty-reformed-to-boost-trade.html
Topham, G. (2013). Ryanair’s new touchy-feely O’Leary hits turbulence but sees clearer air ahead. Retrieved from: https://www.theguardian.com/business/2013/nov/05/ryanair-michael-oleary-investors-future
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