Ryanair: Business Model; Competitive Strategy

And Competitive Advantage

1. Introduction

The objective of this paper is to conduct a critical evaluation of the competitive position of Ryanair, as well as the competitive advantaged of the company. The paper also conducts a critical discussion of how Ansof’s product/market growth matrix can be applied to the current and future Ryanair business model. Section 2 below presents a critical evaluation of Ryanair’s competitive position and competitive advantage; section 3 provides a critical discussion of the application of Ansof’s product/market growth matrix to Ryanair’s current and future business model.

2. Competitive position and Competitive Advantage of Ryanair

2.1 Competitive Position

The competitive position of a company is defined as the market share, costs, prices, quality, accumulated experience of a company in comparison to its competitors.

The strategic position of a company deals with how the external environment, the orgnisation’s strategic capability (resources and competencies) and the competition and influence of stakeholders affect the strategy of the organisation. To better understand Ryanair’s competitive position, this paper employs Porter’s model of competitive industry structure to determine how the external environment affects Ryanair’s strategy. This model which is a modification of porter’s five forces is depicts an organisation’s external environment and consisting of five components. These include potential entrants, suppliers, substitutes, buyers and industry competitors.

Figure 1: Porter’s Model of Competitive Industry Structure

Source: Wang (Undated)

A company operating in the industry faces a number of competing forces from each of the players in its external environment. From suppliers it faces difficulty making a good deal with suppliers if their bargaining power is higher. To maintain a competitive position, the company must be able to reduce the bargaining power of suppliers. Likewise, it must reduce the bargaining power of customers to be able to make a favourable deal with customers. The company also faces threats of new entrants from potential entrants. It faces the threat of the introduction of substitute products and services from other competitors. From competitors already in the industry, the company faces rivalry from other firms already in the industry. Thus the company faces five different forces from five different actors in its external environment. From suppliers in faces the risk that the bargaining power of suppliers may be higher. From customers it faces the risk that the bargaining power of customers may be higher. From potential entrants it faces the risk that new firms may enter the industry and from substitutes, it faces the risk that substitute products and services may be introduced. Having introduced the model of competitive industry structure this paper now moves on to describe how the model can be used to analyse Ryanair’s competitive position.

To do this, this paper concentrates on the industry rivalry section, the treat of substitutes and the threat of new entrants to the industry. The main variables employed to conduct the analysis include market share, sales volume, price level, quality level, pricing policy, level of equipment, and technology, level of product innovation and the extent of the product line. Ivashchen and Papenkoval (2007) employed these variables to study the determination of the factors of the competitive position of a company that manufactures chemical fibres.

Market Share

Ryanair and Aer Lingus account for 80 percent of the all flights between Ireland and other European countries (O’Higgins, 2007). Ryanair has the largest international passenger volume in the world (http://seekingalpha.com/article/147535-ryanair-proposes-standing-on-planes-innovation-or-insanity?source=reuters). Ryanair has the highest number of passengers in the European low cost industry. (O’Higgins, 2007). It accounts for 34.9 million passengers representing 29.9 percent of total passengers. It is closely followed by easyjet with 30.3million passengers, which constitutes 25.9% of the total passenger base. Next comes Air Berlin/Niki with 11.80 percent; FlyBE – 4.7 percent; Germanwings – 4.7 percent; Sterling Maersh – 3.3 percent, bmibaby – 3.0 percent, dba – 2.6 percent; etc. (O’Higgins, 2007).

Ryanair is one of Europe’s most important low cost airlines. The air carrier has witnessed tremendous growth since its inception and continues to maintain sustainable growth. The airline served approximately 4.9million passengers on average per month during the year 2007. Total traffic witnessed an increase of 21.1% from the 2006 figure. In like manner, sales revenue jumped by 23% over the same period (Malighetti et al., 2009).

Costs and Prices

Ryanair competes on cost and prices. It provides customers with the lowest prices and ensures that its costs are kept very low. For example, the airline does not use any agents to help in booking its flights. It makes only very short journeys and employs the latest technology which enables it to save on fuel. These costs savings are transferred to customers through low fares.

Innovation and Technology

Ryanair is very innovative in getting passengers from point to point for very little money. In 2008, for example, Ryanair provided one million passenger seats for £0.01 each. This promotion led to an increase in the number of hits on its website thus offering it the opportunity of serving as an advertisement forum for other companies – and thus the opportunity of making extra revenues. Ryanair recently announced plans to reduce costs by making fliers perch on tools with seatbelts around their waists. According to the Chief Executive Officer (CEO),  the company is currently discussing plans with Boeing to design an aircraft with standing room. This move is expected to increase the number of passengers by 30% and reduce costs by 20 percent (http://seekingalpha.com/article/147535-ryanair-proposes-standing-on-planes-innovation-or-insanity?source=reuters).

2.2 Competitive Advantage

Ryanair differentiate on cost and price. Ryanair adopted Southwest airlines low-cost model which comprises of: low costs; high frequency flights, point-to-point service; no free meals or drinks on board the airline; no seat assignment; short flights and flights to secondary airports. (Strategic Direction,  2007). According to Strategic Direction (2007), the above model is consistent with Porter’s theory which states that there are three major strategies that companies can use to gain competitive advantage. This include: (i) cost leadership whereby an organisation thrives to be the lowest cost producer by selling standard products and services in large quantities; (ii) differentiation, whereby a firm introduces a unique dimension that is considered to be important to the market. Ryanair has adopted this strategy through its introduction of unique dimensions such as self-check-in, baggage costs, on-board adverts e-commerce, etc- an approach that has enabled Ryanair to benefit from cost savings, increased ancillary revenues and low cost fares to passengers. This is a win-win situation for both Ryanair and its customers. The last strategy proposed by Porter is Focus, which involves targeting a particular customer segment. Ryanair is yet to have a focus because it rarely targets any particular customer segment. Ryanair ensures that its costs are kept very low and that low fares are offered to customers. The airline runs a simply type of aircraft, cuts outs travel agents and their percentages, and treats former costs as revenue generating opportunities. By so doing fares are offered to passengers at very low costs. Ryanair generates a significant portion of its income from anciliary revenue generated from non-flight scheduled services such as hotels, travels, insurance, excess baggage charges, flight change fees, car rental services, in-flight sales, rail and bus ground transport services, commission from its Credit card with MBNA and personal loans. In addition, its website is considered one of the largest travel websites in Europe, as well as the fifth most recognised brand on Google. The website offers the company huge potential for being converted into e-commerce and advertising revenues. (O’Higgins, 2007). Ryanair also offers its employees higher pay rates compared to other competitors in the industry.

3. Ansof’s Product/Market Growth Product Matrix

Figure 2: Ansof’s Product Growth matrix

Source: http://tutor2u.net/business/strategy/ansoff_matrix.htm

The Ansof’s product growth matrix is a strategic management tool that enables organisations to decide their product and market growth strategy. As can be seen in figure 2 above, the matrix is made up of market penetration (existing products in existing markets), market development (existing products in new markets), diversification (new products in new markets) and product development (new products in existing markets).

The matrix suggests that an organisation’s growth prospects depend on ability to market new or existing products in new or existing markets. To apply Ansof’s matrix, an organisation has to adopt a series of strategies. These include market penetration, a growth strategy adopted by an organisation with the objective of selling existing products in existing markets. The main objectives of a market penetration strategy include: maintaining or increasing the market share of current products, which can be achieved by combining competitive pricing strategies, advertising, sales promotion and dedicating more resources to personal selling; securing dominance of growth markets; restructuring a mature market by driving out competitors achieved through more aggressive promotional campaign, which is supported by a pricing strategy that is capable of reducing the attractiveness of the market to competitors. By so doing the company can reduce the number of potential entrants, reduce the competitive power of existing firms and reduce the threat of substitute products. Another objective is to increase the usage by existing customers through the introduction of loyalty schemes for instance. This strategy is likely not to require more investment in marketing research given that the firm will be focusing on markets and products that it is well versed with, as well as having enough information about customer needs and the level of competition.

From the foregoing Ryanair can employ the market penetration strategy to market its existing brand in its existing European market. At present, Ryanair only flies to certain airports in Europe because it aims at paying less airport taxes. Ryanair can increase its market penetration by looking for ways to reduce the taxes paid in major airports; for example, by lobbying for the government to reduce taxes. It can do this by making the government  understand that it can generate more revenue which will, in effect, lead to the collection of more taxes from other sources such as corporation tax and value added tax (VAT). Ryanair can also reduce completion by buying out major competitors or better still merging with them. Ryanair tried this with Aer Lingus although the merger was turned down by Aer Lingus. (O’Higgins, 2007).

Market Development

Another strategy proposed under the Ansof’s growth matrix is market development. This is a strategy designed by a company with the objective of selling existing products in new markets (Whittington, 2008). These include new geographical locations, new product dimensions, new distribution channels, differentiating policies. Ryanair can adopt a market development strategy by making exending its brand beyond the confines of the European market to other parts of the world such as the United States of America, Australia, Africa and Asia. This implies that the company has to engage in long-haul flights.

Diversification

The third strategy proposed by Ansof’s growth matrix is diversification. Diversification helps to reduce risk. Diversification is analogous to the saying that one should not put all of his/her eggs in one basket. In the context of the Ansof’s growth matrix, diversification is a strategy whereby the company makes new products in new markets. The strategy is considered more risky because the organisation is trying to operate in a market where it knows very little about and where it has no experience. The organisation must have a clear idea of what it intends to achieve from the diversification strategy prior to engaging in it.

In the case of Ryanair, it needs to study the new markets carefully, study the different customer segments in each new market, understand the specific needs of each customer segment and devise strategies to meet those costs. Ryanair also needs to conduct a cost-benefit analysis to determine whether the benefits outweigh the costs prior to engaging in the strategy. In addition, the level of competition in each market needs to be carefully studied and understood in order to devise strategies to provide customers with products that meet their needs more than what competitors are offering. By so doing, Ryanair can improve on its competitive position and gain sustainable competitive advantage.

Product Development

Product development is a growth strategy that is aimed at marketing new products in existing markets. Under this strategy the company is required to develop new competencies and modified products which can be more appealing to existing customers (Whittington, 2008).

Ryanair can develop new or innovative products that are more appealing to existing customers. For example, the company’s website has one of the highest number of hits. This is a potential source of advertising revenue to Ryanair. The company can thus benefit from this opportunity by launching an e-commerce website where businesses can advertise their products and thus enable Ryanair to benefit from an increase in advertising revenues.

4. Conclusions and recommendations

Based on the foregoing discussion, one can conclude that Ryanair remains one of the most profitable low cost airlines. Main competitors include Easyjet and Aer Lingus. Despite its competitive position and advantage, the company remains open to threats from a number of sources such as from substitutes or from potential entrants. The company can improve and stay competitive by employing Ansof’s growth matrix that will enable it develop new products in existing markets, market new products in new markets, market existing products in new markets and develop new products in new markets. By so doing, it cope with and contain competition, maintain sustainable competitive advantage, achieve sales growth and provide increased value to shareholders.

References

Ansof’s Product Growth Matrix available online at: http://tutor2u.net/business/strategy/ansoff_matrix.htm

BNET Business Dictionary (2009) Business Definition for: Competitive Position. Available online at: http://dictionary.bnet.com/definition/competitive+position.html

Wang D. (Undated), “Positioning and Competitive Advantage”, Lecture Notes, MSc Strategic Management, Lecture 5

Strategic Direction (2007). “Fight or flight?” Ryanair, Southwest Airlines and post-merger US Airways and America West, Strategic Direction, VOL. 23 NO. 1 2007

Malighetti, P., Paleari, S., Redondi, R. (2009), “Pricing strategies of low-cost airlines: The Ryanair case study”, Journal of Air Transport Management 15  195–203

Strategic Direction (2006). Easyjet and Ryanair flying high on the Southwest model Charting the ups and downs of low-cost carriers, VOL. 22 NO. 6, pp. 18-2

Ivashchenko, N. S. Papenkova, K. E. (2007), “Determination of factors of the competitive position of a company manufacturing chemical fibres. Fibre Chemistry, vol. 39, No. 4.

Ryanair Proposes Standing on Planes: Innovation or Insanity? Available online at: http://seekingalpha.com/article/147535-ryanair-proposes-standing-on-planes-innovation-or-insanity?source=reuters

O’ Higgins E (2008), “Ryanair – the low-fares airline” in Johnson, G., Scholes, K., and Whittington, R. (2008) Exploring Corporate Strategy, Texts and Cases, 8 Edition, FT Prentice Hall, pp. 694-707.