An Analysis of Ryanair’s Corporate Strategy
Ryanair was founded in 1985 as a family business that originally provided full service conventional scheduled airline services between Ireland and the UK. The airline started to compete within the confines of the existing industry by trying to steal customers from their rivals, especially the state monopoly carrier Air Lingus, outlined by Chan Kim and Renée Mauborgne (2004) as “Bloody or Red Ocean Strategy”. Ryanair seemed to follow a “me-too strategy”; according to Osborne, K. (2005), they “tried to be all things to all people”. Even they started restructuring; their strategy was not enough differentiated and their cost advantage was too low to be profitable. In 1986, they got “stuck in the middle”, outlined by Porter (1985) as they had a limited cost advantage and no service advantage.
Ryanair then created a competitive advantage through the alignment of the three components of business systems;
1) Creating superior value for their customers (outside perspective)
2) Supplying their superior value-adding activities in an effective and efficient manner (which jointly form the “Value Chain”)
3) Possessing over the resource base required to perform the value-adding activities, (inside perspective)
According to Porter (1987), “corporate strategy is what makes the corporate whole add up to more than the sum of its business unit parts.” It is seen to be concerned with the overall purpose and scope of the organisation and to meet the expectations of major stakeholders. All aspects of Ryanair’s value chain are important to the company and their shareholders as Ryanair’s decisions add value to both.
The following report outlines the three perspectives of shaping Ryanair’s business system. The value creation dimension of Ryanair’s business model will be outlined, considering the theories of Porter and the more recent authors Kim and Mauborgne (2004). Further, the linkages in the airline’s value chain and their resource base will be analysed, considering Hamel and Prahalad’s (1990) core competency model (inside-out approach).
In section 2, the future challenges of the airline are considered. Ryanair’s strengths and weaknesses will be analysed, internal value creating factors such as assets, skills or resources, to consider how the airline can create alignment to its opportunities and threats, external factors. An stronger “outside – in” approach for Ryanair’s future corporate strategy will be considered, applying Porter’s five forces model, placing the market, the competition, and the customer at the starting point of the strategy process.
I An evaluation of Ryanair’s key strategic perspectives
1) Creating superior value for their customers
The low cost market segment
Ryanair has found a source of leveraging a competitive advantage; the knowledge about the opportunities associated with implementing the low cost strategy, which was created by Southwest Airlines. The Texas airline found a unique approach to the market through re-conceptualisation of market segments. In 1990, Ryanair successfully applied their model in the European market, becoming a “no frills” airline, focussing on short haul destinations and keeping its planes in the air as frequently as possible in a 24 hour period. The new low price market segment, which did not exist before in Europe, could be described as the development of a ‘blue ocean’, uncontested market space through the expansion of boundaries of the existing industry, outlined by Kim and Mauborgne (2004). Ryanair’s low fares created demand, particularly from fare-conscious leisure and business travellers who might otherwise have used alternative forms of transportation or would not have travelled at all (Case Study, p. 3). The competition became less relevant and allowed Ryanair to develop and sustain high performance in an overcrowded industry. Up to now the airline benefits from the early profitable and rapid growth within the blue ocean and successfully executes the low cost business model, which became obvious when the airline announced that it has beaten its own downbeat forecasts to record a 29 % increase in pre-tax profits and 19 % passenger growth, having carried more than 27.6 million passengers in the past financial year (Jameson, A., 2005).
Ryanair’s position within the industry
However, ‘blue oceans’ are not easily protected and Ryanair has been facing competitors that try to copy their low cost approach. Further, Ryanair has always been competing within the ‘red ocean’, by targeting a broad range of customers, e.g. the business segment and “stealing customer from rivals”. This outlines that Kim and Mauborgne’s strategy approach cannot be seen as exclusive. Competing with new entrants of competitors (and differentiators), Ryanair was able to launch an “all out war”, lowering prices and remaining profitable whilst increasing the frequency of flights and establishing new routes (Case Study).
According to Porter (1980, 1985), the relative competitive position within an industry lies at the core of success or failure of firms. He defined two basics types of competitive advantage; cost leadership and differentiation (and focus). Ryanair set out to be best in the budget market segment, becoming the lowest cost airline in its industry (cost focus), e.g. no paper tickets, no passenger meals, no pre-arranged seating, enabling to cope and remain profitable, even on low yields. The airline constantly strives to reduce or control four of the primary expenses involved in running a major scheduled airline; their aircraft equipment costs, personnel productivity, customer service costs, airport access and handling costs. The airline deals successfully with competitive forces and is Europe’s leader in low fares by generating a superior return on investment (Osborne, 2005). This supports Mintzberg’s argument of price leadership being more relevant to competitive advantage than cost leadership. Planning to turn into a “no-fares-airline” by offering flights for free (Case Study), Ryanair can be argued to follow price leadership as one of the six ways to differentiation outlined by Minzberg. According to Mr O’ Leary (2005), new planes will enable him to drive down average fares by 5% a year causing a “bloodbath”. We are going to show up in your market and trash your yields.” (“Ryanair rolls out plans for European domination”, 2005).
Differentiation through price outlines the superseding of Porter’s generic strategies by the resource/competence-based strategy frameworks. In addition to low prices, Ryanair’s branding emphasises on punctuality and efficiency, which is mainly achieved through operating from secondary airports. According to Ryanair, their success is not just due to their low fares “but also a winning combination of our No.1 on-time record, our friendly and efficient people and our new Boeing 737-800 series aircraft” (Ryanair, 2005). It can therefore be argued that in a globalized competitive environment, even cost leaders need to differentiate their message (‘hybrid strategy’), contradicting Porter’s original idea of fundamentally different routes to competitive advantage.
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- Porter Corporate Strategy Ryanair Strength and Weaknesses value creation low cost market segment SWOT Analysis