Master's Thesis, 2010
9 Pages, Grade: Merit
Following the financial losses in 1990, Ryanair still had the courage to be the first European carrier to restyle itself into a low-cost airline model, which was base on the successful Southwest Airlines in America. Since then, Ryanair turned out to be the Europe's most profitable airline, ironically once outperforming Southwest in profit margin percentages. (money.cnn.com, 2006) Clearly, Ryanair’s adopted business model played the key role in its achievements and there is more to than just copying another airline’s tactics. In this essay, we shall discuss Ryanair’s strategic approach from a perspective of the core competencies, together with the related competitive strategy that they have implemented by it.
Competencies for flying cheap
What does it take to be in the low-fare airline business in Europe? Throughout the industry and business developments in this sector, many air lines have learned to transform certain operations to favor their service role as low-cost flyers. To mention a few of them would be having a route plan of a point-to- point network (in contrast to the hub and spoke form of traditional carriers), focus on cost cutting and reduced operational expenses by trading between service quality, avoiding major airports as landing points, uniformed aircraft types, online ticketing, maintaining trips with higher load factors and reducing ground turnaround time. (Lawton, 2002) More or less, these techniques may appear as threshold capabilities that any low-cost airline may need to survive in the business. (Johnson, Scholes, & Whittington, 2008)
Interestingly, while being profitable, Ryanair retains lower average fares compared to its rivals such as Easyjet and Aer Lingus, who also inherits most of the above minimal functional requirements. (www.Ryanair.com, 2010) (www.corporate.easyjet.com, 2010) Never the less, Ryanair CEO has the vision of offering tickets for a zero cost (but with a criticized payment fee of below £5). (www.bbc.co.uk - watchdog, 2008) Therefore it is worthwhile assessing what lies behind the success of Ryanair apart from the list of survival skills of a low cost carrier. Is their strategy underpinned by rather inimitable capabilities or perhaps, core competencies which other European air lines fail to emulate? (Johnson, Scholes, & Whittington, 2008)
The core competency concept
The origins of core competencies were solely based on how advanced end product technology manufactures exploited their unique core skills and resources among the organization, and across their market. The main vision was on the “collective learning of an organization, especially how to coordinate diverse production skills and integrate multiple skills of technologies”, and a model for transforming competencies into end product through the development of core products was presented. (Prahalad & Hamel, 1990) The tests that are put to identify core competencies are firstly, they need to provide potential access to large markets, secondly, must significantly contribute to the customers perceived value of the end product and finally must be difficult to imitate by competitors. (Prahalad & Hamel, 1990)
Due to the nature of the specific (manufacturing) industry segment from which this concept was pointed out from, there seems to be many inconsistencies regarding the separation of what real core competencies are and what appear to be generic skills that companies are quite good at. Hence core competencies were redefined in a much broader view as the embedded complementary skills or knowledge within a group that results in ‘executing critical processes’ to a ‘world class standard’ in the form of either “Insight/foresight” or “Frontline execution competences”. (Coyne, Hall, & Clifford, 1997) This writing also provides a check-list to evaluate core competencies with regards to the superiority and sustainability of the competence, the value generated relative to competitors by it and the ability to commercialize the competence (if it is an insight or foresight). (Coyne, Hall, & Clifford, 1997)
For the analysis of Ryanair’s core competencies, the later definition tends to attracts more preference based on the categorization under ‘Insight/foresight’ - “competencies enabling a company to discover or learn facts or patterns that create first-mover advantages” and the wider range of service industries considered, in contrast to the specificity of technological manufacturing. (Coyne, Hall, & Clifford, 1997)
How ever the former discussion of core competencies may not directly apply to the Ryanair situation, since it does not focus on competencies at a SBU level. The competency evaluation criteria of the two definitions for determining core competencies are mostly overlapping in there contexts, since they pose the questions of do the competencies help in the value delivery to the customers? Does the competency give an advantage of superiority to competitors? And are the competencies sustainable along time and difficult to learn and practice by competitors?
Strategy development of Ryanair
Adopting the Southwest Airline model was a careful step that the Ryanair CEO, Michael O'Leary had to perform in 1991. (O'Leary, 1994) Although the Southwest operational efficiencies were the key to its success, this cannot be viewed as a strategy, but operational efficiencies that the airline needed to meet. Rather they are the complementary factors that supported the airline to function as a short-haul point-to-point operator, which was their actual strategic choice of operation. (Gillen & Lall, 2004) Similarly, when Ryanair remodeled into the Southwest airline of Europe, they had to ‘strategically fit’ into the local market, imitating only what is required to be competitive. (Porter, 1996) Ryanair took a few steps further than Southwest, by deciding to provide completely no-frills services to its customers, to outsourcing all possible operational services, expanding routes in Europe and most importantly they gained the first mover advantage in the sector when signing long term contracts with secondary air ports. (Gillen & Lall, 2004) This advancement of analyzing and dynamically applying a new transformational strategy may be considered as Ryanair’s core competence, which is highly dependable on CEO Michael O'Leary’s views and guidance. (Hitt, Ireland, & Hoskisson, 2004)
The Core competency in effective remodeling
One of the significant facts in the transformation into a new European low-cost airline would be the unique no-frills specialization that Ryanair extended from Southwest. Ryanair no-frills meant no sweets, newspapers, free food or beverage service, no seat allocation, no business class service. The focus was to operate on an average number of passengers per flight, with more seats per aircraft archiving a higher load factor.
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