The Companys Approaches to Managing Strategic Change - Term Paper Example

Strategic Management: The case of Ryanair BY YOU YOUR ACADEMIC ORGANISATION HERE 12 January 2008 EXECUTIVE SUMMARY Ryanair maintains a strong long-term focus on improving the stability and longevity of the company by creating strategic policies which strengthen the company’s balance sheet and total year-by-year profit margin. The company continuously outperforms even the majority of its large-scale competitors by maintaining a low cost pricing structure and by outsourcing internal staff responsibilities. The company experiences tremendous growth with each passing year, making it a powerful competitive entity in the European market. This project describes the activities of Ryanair which contribute to its success in this market. TABLE OF CONTENTS EXECUTIVE SUMMARY INTRODUCTION…………………………………………………………………… 4 THRIVING IN A DIFFICULT COMPETITIVE ENVIRONMENT……………….. 4 CONCLUSION……………………………………………………………………… 13 BIBLIOGRAPHY…………………………………………………………………… 14 Strategic Management: The Case of Ryanair Introduction Ryanair, an Irish-owned low-cost carrier serving a diverse market for air travellers in Europe, has witnessed explosive growth in terms of profitability and in customer volumes since its inception in 1985. Utilising a wide variety of strategic initiatives, policies, and procedures, the company is now the largest international low-cost carrier in its category, outperforming even British Airways. Ryanair is a no-frills airline company, as it offers no onboard meals or luxury amenities, which allows the company to keep its fares low and delight the majority of its European passengers. This paper describes the company’s approaches to managing strategic change, strategic human resources policies and its diversification strategies in order to understand how Ryanair manages to outperform its larger-scale competitors. Thriving in a Difficult Competitive Environment Ryanair appears to be a rather progressive and flexible company as the firm’s leadership is working to create new strategic initiatives in order to outperform its growing levels of competitive entities. The primary success factor in maintaining a strong business is in its offer of the no-frills flight, including no onboard meals and offering no peanuts or other added luxuries as a method to keep fares low-cost and inviting for the European consumer (Ryanair.co.uk, 2007). In addition, Ryanair has developed the interior of its passenger airliners to include no back-seat storage pocket for passengers, allowing the amount of consumer-generated trash to be limited, which allows for less clean-up by its onboard crew so as to reduce the turn-around times from flight to flight (Brand Strategy, 2007). However, following this model of no-frills offerings requires the ability to manage strategic change, which Ryanair has historically been able to accomplish with minimal resistance and has experienced significant success in these initiatives. In the 1990’s, as a means to reduce costs even further to maintain low fares, the company began outsourcing many of its internal job functions to other companies, which required the firm to restructure its internal organisational structure. The company used to maintain its own fleet of maintenance and accounting staff (as two relevant examples) but began the process of outsourcing which fueled significant debate from its internal employees and the trade unions which represented them (Goldsmith, 1996). The outsourcing strategy involved flattening the organisational hierarchy and removing multiple layers of management, taking the firm from one which was relatively mechanistic to one in which divisions are largely autonomous. The mechanistic hierarchy is one in which the majority of decision-making is generated at the highest levels of management and are passed down to subordinates, who are expected to conform to these strategic policies without being consulted or allowed to participate in the decision-making process (Landy & Conte, 2006). Whenever a firm manages an internal change in its management structure, the firm must consider the impact of these changes on its internal business climate in relation to how such initiatives will affect employee motivation and the profitability of the firm. However, the evidence suggests that managing such change was monumentally successful, as between 1996 and 1997 the company experienced a 21% growth rate in total customer volume and continued growth in profitability (Ryanair.co.uk). In addition, as a long-term orientation toward serving larger areas of Europe in the future, the company was able to replace all of its original turbo-prop planes with Boeing 737s and other large-scale jetliners in this period, making them highly competitive against other large-scale airline companies (Ryanair.co.uk, 2007). Managing these changes requires a strategic leadership team who remain focused on growth and profitability, and utilise their current capabilities to work towards these objectives. Ryanair recognised additional opportunities in the future for the company to expand into an emerging European Union, thus it decided to replace several directors on its board to include French and German officials to create relationships with the broader EU market (Done & Sullivan, 2002). This pan-European approach to establishing a stronger board of directors illustrates that the company is focused on long-term business opportunities and is able to adapt its internal organisational structure and high-level leadership to attain these goals. Further in relation to managing strategic change was Ryanair’s decision to bring the company into the forefront of the broader consumer market. In 2000, Ryanair was the first airline company to sponsor the Skynews Weather reports which were aired into millions of European homes and literally thousands of hotels all across Europe (Ryanair.co.uk). As the company’s long-term orientation was to build a larger fleet of jetliners and serve larger areas of Europe, the company created a strong emphasis on promotion and marketing efforts to make the company a popular consumer phenomenon by engraining the existence of Ryanair into every corner of European lifestyle. These strategic initiatives appeared to have paid off, as in 2005, the company maintained approximately 31 million passengers, a growth rate of 1400 percent since its inception (Ryanair.co.uk). In further relation to managing such changes for increased growth and profitability, Ryanair outsourced its internal staff functions to Prestwick Airport, just outside of Glasgow, to handle all aspects previously managed by Ryanair staff including ticketing, check-in and baggage handling (Goldsmith). At the same time, to promote the utilisation of Prestwick airport instead of other airports Ryanair was currently associated with, the company partnered with Scotland railroad companies to allow Scottish residents to travel for free from anywhere in Scotland when using Prestwick as their port of choice (Goldsmith, 1996: A1). The intention of this strategic initiative was to ensure that Ryanair was able to keep its payroll costs down by allowing passengers to be serviced by Prestwick staff rather than by other airports where Ryanair staff was still responsible for these service-oriented functions. It is a likely assumption that when companies are unable to manage internal and external strategic changes, the inability to manage these tactics can be witnessed either in the form of diminished profitability or ineffective leadership. However, Ryanair has consistently experienced continued growth in customer volume, international expansion, a larger fleet of jetliners and total year-to-year profitability. This would tend to suggest that Ryanair is a leader not only in establishing long-term policies which serve the objectives of growth, but are able to manage them successfully without causing any significant disruption to its business practices. From a different perspective, Ryanair maintains a somewhat unbalanced approach to managing strategic human resources. In the company’s 2006 annual report, the company indicates that the motivation and commitment of its internal staff members are the primary element to the firm’s success (Ryanair Annual Report, 2006). The company’s long-term orientation at building a more diverse executive leadership team (as mentioned previously) appears to suggest that the company considers the long-term impact of current staffing policies to reflect its commitment toward diversity and boosting staff motivation. From a strategic HR perspective, it would appear that the company is well-versed in using staffing as a means to boost future profitability and growth, hence success in its industry. However, considerable media backlash regarding the company’s view on trade unions and the methods by which it actually treats its employees has arisen in recent years, suggesting that the company is not as progressive as they claim themselves to be. Michael O’Leary, the company’s chief executive, is cited as being well-known across much of Europe for his anti-union mentality (Personnel Today, 2005). This would suggest that the company considers that its progressive policies, high levels of staff pay (which are some of the highest in the industry) and motivational tactics should be enough to drive employee commitment and loyalty to securing the company’s long-term goals. Despite this, the International Transport Workers’ Federation (ITF) established a website designed to allow Ryanair staff to discuss their grievances with the company in a rather informal online environment. The website recorded over 500,000 hits from visitors which revealed a “shocking catalogue of misery, low pay and oppression” (Personnel Today, 2005: 4). This would tend to suggest that in relation to strategic HR policy, the company is not delivering on its promises for building staff cohesion. What is particularly interesting in this scenario is that Michael O’Leary publicly stated about the ITF website: “You get noise from empty vessels like the ITF with a website that generally is just fiction” (Done, 2005: 5). While the general public and the company’s trade union representatives were being exposed to the publicised grievances of its employees, O’Leary essentially suggested that the website was nothing but rubbish and did not choose to address the matter further by changing its policies toward HR. From a practical perspective, this would seem to suggest a conflict when it comes to the firm’s long-term orientation related to strategic initiatives. For instance, it is a likely assessment that many in Europe support the efforts of unions like the ITF and would consider O’Leary’s statements to suggest that Ryanair is not concerned with the well-being of its crew and internal staff members. The aforementioned ITF website was set-up as a free forum to discuss problems with Ryanair, however the rather non-chalant attitude of O’Leary labeled the company “hostile to unions” (Done, 2003: 4). Such perceived hostility would likely suggest that many of its employees and the general public alike would have considered this to be somewhat callous and not a positive aspect toward long-term strategy in relation to human relations initiatives. Creating negative publicity for the firm is not a solid approach to building a quality reputation in terms of its staffing and employee treatment programmes, thus the company should have developed a more careful approach to discussing and managing this difficult HR (and PR) situation. However, outside of this particular situation, the company currently pays its staff members considerably higher than that of other airlines in the European market. Despite problems with rising fuel costs and other uncontrollable aspects which could serve to undermine both short- and long-term profitability, the company maintains its policy of high pay as a means to motivate workers toward serving the long-term objectives and interests of Ryanair. This would suggest a long-term orientation, whilst sacrificing short-term profit margins, so as to build a more cohesive and focused team of professionals willing to get the job done to make a more profitable company. This would further seem to suggest that Ryanair maintains a focus on satisfying strategic human resources initiatives as a means to secure its position as an industry leader in the years to come. Outside of all of the aforementioned situations regarding managing strategic change and the company’s approach toward managing strategic HR lies the company’s long-term orientation in regards to diversifying the company. Though Ryanair appears to be continuously working on methods to best streamline internal functions and ensure external expansion, the company does not appear to have a strong mentality toward diversifying the company’s business portfolio. In many businesses, diversifying generally consists of new investments in opportunities which are outside of the regular business function, such as investing in real estate or other strategic intentions (Longenecker, Moore, Petty & Palich, 2006). However, diversification in this particular industry is represented by seizing new market opportunities and experiencing growth through marketing efforts. With this definition in mind, Ryanair is a low-cost carrier leader for diversification strategies. For instance, the company went from being a domestic carrier to an international carrier by expanding into the European Union and seizing opportunities to develop new routes and international hubs as part of its expansion strategy. In 2007, Ryanair added new operational bases in Bristol, Alicante, Belfast, Dusseldorf, and Valencia (Ryanair.co.uk) which gave the company more passengers than even its largest competitor: British Airways. In addition, the company established operations in Pisa, Nottingham East Midlands and Liverpool John Lennon Airport (Ryanair.co.uk) which suggests that the firm works toward diversification as part of its ongoing strategy for international expansion. Accomplishing these objectives requires a strong balance sheet and credit rating, which further suggests that the company’s continued growth in passenger revenues creates a series of short-term capabilities which further support the company’s objectives for long-term expansion. The company accomplishes these goals of expansion by providing customers with a “no fuel surcharge guarantee”, which is a competitive strategy that has allowed European customers to flock to Ryanair as a method of personal cost savings (Ryanair.co.uk). Further, by partnering with different companies and international alliances for boosting the firm’s image and internal staff capabilities, the company has managed to widely diversify its business and still maintain a quality image for timeliness of arrival and departure and satisfy the needs of a market which turns toward domestic and international travel as a routine element of lifestyle. Locating research information regarding the specific marketing objectives elicited by Ryanair which have made such expansion possible was significantly difficult to locate. However, the fact that such expansion has occurred in such a short period of time would tend to suggest that Ryanair’s diversification strategies are not only paying off by establishing multiple international ports but that their marketing objectives are both aggressive and worthwhile to the long-term stability of the company. Another interesting element of Ryanair is the fact that the company continuously maintains the ability to outperform all of its competition, even those such as British Airways, Southwest Airlines and other large-scale competitive entities. A 2007 report announced that British Airways’ operating profits fell 27 percent in the third quarter of 2006 whilst Ryanair experienced a 16 percent increase during the same time period (Financial Times, 2007). This appears to be a consistent trend year to year in outperforming rivals. Though the larger airlines continuously elicit different strategies designed to undermine the interests of its low-cost competitors, most are not meeting with success. Alitalia airlines recently utilised pricing as a means to accomplish the aforementioned goal of beating Ryanair by offering a £65 anywhere-in-Italy promotion (Goldsmith). This was a tactic designed to seize market share from Ryanair and other low cost carriers. Though these fares likely delighted the consumer and business traveller, it raised concerns with antitrust officials who deemed such practices to be predatory pricing, which is a regulatory mandate for airlines to maintain fair competition (Goldsmith). When situations such as this occur with antitrust officials, it tends to raise negative publicity for the airline, which could suggest that Alitalia’s attempts to secure its own interests (it has not outperformed Ryanair through these efforts) could be a poor long-term strategy for securing their growth and profitability. Whilst Alitalia worked toward predatory pricing strategies, Ryanair maintained its strict focus on offering no frills and no fuel surcharge guarantees to retain its position as a leader in the industry. Ryanair appears to have attempted to offset the prices of higher fuel by charging passengers Pounds 2 for their use of check-in services at airports in relation to baggage handling, items which used to be included in the ticket price (Wiggins, 2008). However, companies such as British Airways had incorporated additional fees related to fuel and check-in long before Ryanair which likely turned any initial animosity for these charges to the large-scale airliners who adopted them, generating initial negative PR for Ryanair’s competitors instead of themselves. By the time Ryanair raised service-related prices, it is a likely assumption that the negative public relations damage had already been done and had given consumers time to become accustomed to such charges. This can be reflected by noting that British Airways experienced a one percent decrease in passenger traffic and revenues in early 2008 even though total European traffic had been up by over six percent in the same time period (Yuk, 2008: 14). The ancillary revenues, such as those earned by commissions paid by car rental and check-in service fees, were attributed as the cause for this early drop in passenger volume for British Airways. This would suggest that large-scale competitors are not finding success in outperforming Ryanair by using service-related consumer fees to boost revenues rather they are pushing competition further into Ryanair’s waiting arms. Most of the large scale competition for Ryanair appear to maintain high operational costs in the form of payroll and various overhead, which seems to undermine their strategic efforts at providing better services or using competitive strategy to outperform the low cost carrier. At the same time Ryanair is developing their own strategies such as providing Internet access on its planes, the launch of online bingo and gambling (Callaghan, 2007), and its no fuel surcharge guarantees despite the rising costs of fuel. The evidence would tend to suggest that for each strategy developed by large-scale carriers, Ryanair is equipped with a counter maneuvre designed to offset the threat to their stability. Southwest airlines began offering complimentary soft drinks on its flights and established a frequent flyer programme for transcontinental and domestic passengers as a means to outperform low cost carriers (Strategic Direction, 2006). These are activities which do not exist at Ryanair. However, despite these efforts, Southwest had been unable to achieve a profit margin over that of Ryanair from 2001 until 2006, suggesting that Ryanair’s basic strategy of no frills and continuous low cost cannot be strategically undermined by any large-scale competitor efforts. Conclusion The company aggressively diversifies as part of its marketing and expansion initiatives and has grown from a relatively small-scale company to a force to be reckoned with in the airline industry. Ryanair’s somewhat unbalanced approach to managing strategic human resources appears to be its only notable limitation. In addition, all of the strategic policies developed by Ryanair are well-managed which can be witnessed in its annual reports which highlight continued growth year after year. The most logical conclusion is that Ryanair’s long-term focus toward growth and profitability, and the steps utilised to accomplish these goals, will continue to provide the firm with a strong portfolio well into the next decade. Bibliography Brand Strategy. (2007). ‘PROFILE – Michael O’Leary: Ryanair Facts’. London, 10 Dec 2007: 19. Callaghan, Jim. (2007). ‘Annual Information Update (AIU) for Ryanair Holdings’. Retrieved 7 January 2008 from http://www.ryanair.com/site/about/invest/docs/2006/AIU_050928.pdf Done, K. & Sullivan, R. (2002). ‘Ryanair boosts its board people’. Financial Times. London: 14. Done, Kevin. (2003). ‘Ryanair faces new challenge over union rights’. Financial Times. London: 4. Done, Kevin. (2005). ‘Ryanair staff flood complaint website’. Financial Times. London: 5. Financial Times. (2008). ‘Ryanair’ London, 6 Feb 2007: 16. Goldsmith, Charles. (1996). ‘Continental Thrift: No-Frills Flying Gains Altitude Inside Europe as Barriers Fall Away- Low Fares Expand Market; High-Cost Flag Carriers Launch Rival Operations’. Wall Street Journal, New York, NY: A1 Landy, F. & Conte, J.M. (2006). Work in the 21st Century: An Introduction to Industrial and Organisational Psychology. 2nd ed. Blackwell Publishing. Longenecker, J., Moore, C.W., Petty, J.W. & Palich, L. E. (2006). Small Business Management: An Entrepreneurial Emphasis. 13th ed. United Kingdom, Thomson South-Western. Personnel Today. (2005). ‘Ryanair’s HR director dismisses staff forum’. Sutton: 4. Ryanair Annual Report. (2006). ‘Annual Report and Financial Statements 2006’. Retrieved 7 January 2008 from http://www.ryanair.com/site/about/invest/docs/2006/060901annualreport.pdf Ryanair.co.uk. (2007). ‘History of Ryanair’. Retrieved 7 January 2008 from www.ryanair.com/site/EN/about.php?page=About&culture=GB&pos=HEAD Strategic Direction. (2006). ‘Easyjet and Ryanair flying high on the Southwest model’. Bradford 22(6): 18-22. Wiggins, Jenny. (2008). ‘Which? attacks Ryanair charge’. Financial Times. London: 2. Yuk, Pan Kwan. (2008). ‘Ryanair fails to take off on traffic rise’. Financial Times. London: 14. Read More