Current Value Chain of Ryanair - Essay Example

To create competitive advantage firms need resources, capabilities and competencies. Resources can be physical, financial, tangible and intangible financial assets available in the market while the capabilities comprise of the skills possessed by the individuals. Understanding these creates the core competencies for a firm (Hales & Barker, 2003). Core competencies imply access to a wide variety of markets, contribution to the perceived customer benefits and it should be difficult for competitors to imitate. They are built through a continuous process of improvement and enhancement. These core competencies help in the creation of value chain. Porter’s traditional value chain focuses on the enterprise and its internal mechanisms and is recognized as an effective management tool for value analysis. This paper will examine how this traditional value chain differs from the revised value chain created by Deise et al., and create a value chain for Ryanair based on its core competencies. According to Porter, ‘every firm is a collection of activities that are performed to design, produce, market, deliver and support its product. All these activities can be represented using a value chain’. The porter’s model of value chain (Table I) describes generic activities undertaken by the firm to procure, transform and add value to the products and services delivered to the customer. These activities can be primary or support activities where the primary activities are concerned with the transformation of the input into output as services or after sales service. Support activities include procurement, HRM, technology and infrastructure. Table I Source: Hales & Barker, 2003 A firm’s value chain reflects its history, strategy, the approach to implementing the strategy and the economics of the activities themselves. In this traditional value chain each activity is an independent process and each activity sequentially adds value to the final outcome. Creating a value chain is with the objective to create a process or product that will lead to profits. Thus value chain analysis studies each link of the chain to ensure that economic value is added to it. According to Porter, adding value is a strategic means to achieve profit and competitive advantage. Traditionally different business functions perceived and created value differently but with Porter’s model each activity can be analyzed individually or collectively to asses their contribution to the enterprise. An analysis helps to eliminate the inefficient processes and add value. Mascarenhas, Kesavan and Bemacchi (2004) contend that any person or product or process can also add value. Shareholders, suppliers, customers, employees, consultants are the people that add value while the process could include technological innovation, regulations, insourcing and outsourcing, or other market forces including government policies. Graham and Ahmed (2000) cite that Porter’s model of value chain provides a better strategic insight than traditional cost accounting. Strategic decisions become clearer and it helps to exploit linkages with suppliers. Porter’s value chain has been criticized for not incorporating human talent and reputation of the firm. No reference has also been made to the social values. Normann and Rameirez suggest that the value chain should be integrative and the whole value chain should be seen as constituting a ‘value-added’ partnership (Graham & Ahmed). This denotes that firms are interested not only in their own welfare but also that of the suppliers and customers. Cooperation can help achieve greater cost advantages through functional specialization. The suppliers may also be able to contribute to technological development. The integrated value chain approach would be more decentralized and concentrate more narrowly on quality assurance. The revised value chain proposed by Deise et al., (Table II) incorporates the Pull marketing model. This model determines the customer demand and need for new product development. Once the customer needs have been identified, the material and process are resourced and then service provided to the customers. Deise et al., also determine that the companies have only focused on automating internal processes whereas advanced web-technology can be used to enhance business communications and transactions (Fink, 2006). This would give rise to values such as complimentary services. Table II Source: Hales & Barker, 2003 Background of Ryanair Ryanair entered the market as pioneers in the budget airline industry and adopted a classical airline business model focusing on customer service. They were distinctive as they offered air route for the Irish immigrants working in England whose status was elevated from ferrying across to air travel (Bhagavan Ertekin, Geijerman & Kuznetsov, 2003). Hence they created a market segment for themselves. Their strategy was not just to divert other airlines’ passengers to them but to convert passengers of other modes of service to air travel. This required low prices to sustain competition, which in turn meant offering no frills, introduced direct sales, increased the number of seats and reduced staff. Analysis of Ryanair value-chain Having understood the difference of the traditional value chain as proposed by Porter and the subsequent changes suggested by Deise et al., and others, it would be easier to examine the Ryanair value chain and suggest changes if any. The Ryanair value chain as it exists is shown in Table III. Table III Source: This value chain demonstrates that Ryanair uses online booking and ticketing system to lower brokerage fees and ticketing costs, thereby redefining its relationship to its customer markets. To create sustained difference relationships have to be close. A close relationship with the customer, supplier or even a competitor can represent a strategic asset (cited by O’Toole, 2003). E-relationship adds an extra value in a relationship that is difficult to imitate. This relationship can meet the sustainable relationship advantage. E-relationships help to automate the service functions. This automation helps in cost reduction and increasing reliability of services but these can be imitated. If the business processes are integrated and the knowledge is pooled for joint advantage, the service can create extra symbolic in brands. E-relationships require a culture of trust. In Porter’s value chain model information is merely treated as a supportive element whereas Deise et al suggest utilizing this information as a source of competitive advantage and making it a primary activity. The Pull model suggests that services should be made to customer satisfaction. Despite this automation, as Deise et al., suggest, Ryanair has not used technology to enhance business communication and transactions. They follow differential pricing depending upon availability and demand, they operate on short-haul routes or airports which have competitive cost terms, but these cost-saving techniques do not really add value to the service to the customer. It may increase competitive edge due to flexible and lower prices but the customer service is not enhanced. They have been on the other hand reducing services like not allotting seats and provide no frills to the services. Table IV demonstrates that the key success driver of the management at Ryanair was to focus on setting low fares, sustaining low cost position and finding extra revenues from other services. Table IV Source: Bhagavan, Ertekin, Geijerman & Kuznetsov (2003). They are in fact following the traditional value chain as they concentrate on outbound logistics, attempting to reduce the turnaround times by opting for secondary airports. This also results in fewer terminal delays and more competitive airport access and handling costs. Faster turnaround results in maximizing aircraft utilization but ultimately these are merely cost reduction techniques. Ryanair identified its core competencies and accordingly outsourced the non-core areas like partial maintenance and ground handling activities. All their efforts are directed to keep costs down. Ryanair has been concentrating on process and service but not on its people and maximizing utility of technology. Ryanair has not been concentrating on enhancing business communications which is evident from their poor employee and volatile customer relations. People and stakeholders are an equally important part of the value chain and effective communications with each of them add to the value. A close relationship with the competitor can also represent a strategic asset (O’Toole) but Ryanair has antagonistic relationship with their competitors. Ryanair has the competitive power and the bargaining resources but has been unable to maximize the utility. Ryanair has already identified the market segment. It can now focus on the key attributes and define the value chain. On its website it could attract advertisers to generate revenue and in exchange provider certain number of seats on certain flights complimentary. They have eliminated the seatback pockets, which can be reintroduced by using it as an advertising media thereby generating extra revenue. This would enhance customer service. Suggestions to add value To add value to the services they offer, Ryanair has to change its business model. In order to cut costs, they even compromised on compensation to employees. Even their customer focused approach does not demonstrate a positive growth attitude. They used yield management to gain customers through price drop instead of finding opportunities to raise fares without losing existing customers (Bhagavan Ertekin, Geijerman & Kuznetsov). Deregulation has lowered the barriers to entry and hence they face the threat from competition. Its supplier’s power has also decreased as the airports increase the fees when they renew their contracts because of the airline’s exponential growth and profitability. To some extent it has been able to capture the cost conscious leisure travelers but then all this demonstrates their cost focused approach. Ryanair has been able to manage growth so far because they follow a high degree of standardization. They do not have direct competition in most routes and use secondary airports. They keep costs down and all these may appear to be competitive advantages for some time because the competition has not yet replicated their business. For sustained growth in the industry, they need to develop new product or services as per the value chain model of Deise et al. They are unable to compete on long-haul sectors because passengers are not willing to compromise on comfort and food. Secondly, on long distance flights their direct costs increase, which leaves them with very little profits on hand. Since it is not very difficult for the traditional airlines to duplicate their services, Ryanair needs to come up with innovation to add value to their customers. Ryanair should use technology to enhance visitor relationship management to enhance customer relations. Customer’s online experience influences consumer perception of a product’s brand (Fink). If Ryanair adopts this, they would be able to focus on the needs of the customers rather than just providing low cost airline facility. Customer relationship Management (CRM) helps to understand customers from a multifaceted perspective. Ryanair needs to recognize that their focus should shift from providing low fares to managing customer profitability. They should be able to provide the right product to the customer, offering price, convenience and service. Employing enterprise resource planning (ERP) such as data mining can provide increased integration with internal as well as external systems. This would lead to increased flexibility in meeting customer demands. Baggage handling is an important part of customer service equation. Ryanair encourages passengers to carry their own baggage and is even thinking of disallowing checked baggage facility altogether with a view to further cut costs. It has increased the weight limit ion carry-on bags and has hiked rates for overweight checked baggage (Wyld, Jones, Totten, 2005). This might be detrimental to the airline’s interest in the long run. Instead, traditional airlines are moving towards applying the RFID technology which can improve customer service through better operational efficiency in baggage handling. Improved accuracy of baggage handling can enable the carriers to close the service-delivery gap in the competitive business environment. RFID based luggage tracking will soon become the norm in the industry and Ryanair would lag behind in service. Conclusion The current value chain of Ryanair represents the traditional value chain proposed by Porter to the extent that they have been focusing on keeping the costs down. They have enhanced the process to some extent but in every aspect their approach is only to keep costs low to attract customers. This business model is not sustainable and they need to add value to their chain. They need to enhance the customer relations through different strategies; they need to improve relations with the employees. Ryanair also would benefit if they enhanced relations with competition instead of considering them as threats. For instance, if airlines jointly pool in for the RFID technology, it would lead to lower investments for all concerned and benefits too are reaped by all the carriers. Instead of lowering costs for the customers, they can enhance services, add frills and attract more customers. They should even enhance their experience and relations with the suppliers as they have outsourced their non-core activities to others. They could find other areas of revenue generation like advertising revenue through their website on in-flight. As per the model proposed by Deise et al., Ryanair should constantly endeavor to add services to provide delight to the customers. With the current market situation, duplicating services in the secondary airports and short haul sectors would not be a difficult proposition for the traditional airlines as their fixed costs would not be affected. They need to consider an e-business model instead of just enabling online booking. The management at Ryanair must assess opportunities more strategically and be less activity-driven. Since customer service is the sore competency, they must continue to invest in it. Even with a customer value focus, they must target the customers’ needs and wants. Providing best value to the customer is a core competency. Hence, Ryanair has to think beyond costs, look at the opportunities, incorporate technology, and have a more positive approach. 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RFID and airline customer service, Marketing Intelligence & Planning Vol. 23 No. 4, 2005 pp. 382-394 Read More