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Strategic Management > Lecture 1: Ryanair > Flashcards

Lecture 1: Ryanair Flashcards

1
Q

What is the content of strategy?

A

A firm’s strategy is the set of choices it makes about where and how to compete.

Choices fall into three main areas:
1. Objective

2. Fulfillment
Activities/policies covering:
– production, operations,
– development,
– marketing communications, – organisational design
– management processes
– etc
Essentially ‘internally focused’
  1. Market positioning
    Who? (which customers)
     What? (what products/services; what features, what pricing)
     Where? (what geographic scope) Many think of this as ‘SCOPE’
    Essentially ‘external-facing’
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2
Q

Strategy Choices fall into three main areas:

A
  1. Objective
  2. Fulfillment
    (Internally focused: Operations, production etc)
  3. Market positioning
    (External-facing: Who? What? Where? SCOPE)
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3
Q

Explain what is the difference between Business strategy and Corporate Strategy

A

Corporate Strategy: What businesses should the overall corporation be in? How should those businesses be managed?

Business strategy: Where and how to compete in a distinct business.

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4
Q

What should strategy align?

A

At a broad level, strategy should align the firm’s strengths/ weaknesses with the opportunities/threats in its business environment

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5
Q

Explain the SWOT framework

Diagram

A

Slide 20

At a broad level, strategy should align the firm’s strengths/ weaknesses with the opportunities/threats in its business environment

Three underlying principles:
1. Business success is about spotting and capitalizing on opportunities for new/
improved products, processes, business models etc.
A) Tough to make good profits from merely copying established firms
B) Customer needs/preferences, technology, competition are always evolving

  1. Business success is about developing some distinctive strengths – something you do (or possess) which is better than competitors
  2. Business success is about aligning strengths and opportunities o While being resilient to threats
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6
Q

What are the three underlying principles of SWOT?

A
  1. Business success is about spotting and capitalizing on opportunities for new/
    improved products, processes, business models etc.
    A) Tough to make good profits from merely copying established firms
    B) Customer needs/preferences, technology, competition are always evolving
  2. Business success is about developing some distinctive strengths – something you do (or possess) which is better than competitors
  3. Business success is about aligning strengths and opportunities while being resilient to threats
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7
Q

Explain how SWOT can be analysed throughout the strategy process

A
  1. Phase 1: Generating ideas and options
    SWOT can be used to systematic identify opportunities
    a) E.g. use environmental scanning tools such as PESTEL
    b) E.g. how can we further exploit our strengths?
  2. Phase 2: Assessing/selecting ideas
    The SWOT framework implies a test for good strategy:
    a) Is our strategy based on opportunities where our company-specific strengths are relevant?
    b) How well does our strategy deal with the threats we see?
  3. Phase 3:
    SWOT can be used to
    highlight the strengths
    (resources, capabilities) that you need to successfully implement a strategy
  4. Phase 4: Monitoring/Evaluating
    SWOT can sometimes be used to highlight relevant metrics for monitoring
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8
Q

How can SWOT be used in the generation of ideas?

A

Phase 1: Generating ideas and options
SWOT can be used to systematic identify opportunities
a) E.g. use environmental scanning tools such as PESTEL
b) E.g. how can we further exploit our strengths?

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9
Q

How can SWOT be used in the assessment/selection of strategy ideas?

A

Phase 2: Assessing/selecting ideas
The SWOT framework implies a test for good strategy:
a) Is our strategy based on opportunities where our company-specific strengths are relevant?
b) How well does our strategy deal with the threats we see?

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10
Q

How can SWOT be used in the implementation of strategy ideas?

A
  1. Phase 3:
    SWOT can be used to
    highlight the strengths
    (resources, capabilities) that you need to successfully implement a strategy
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11
Q

How can SWOT be used in the monitoring/evaluation of strategy ideas?

A

SWOT can sometimes be used to highlight relevant metrics for monitoring

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12
Q

What are the limitation of SWOT analysis

A

A. Often ends up a laundry list of items

  1. Hard to tell what’s really important / significant
  2. Hard to make an overall judgment on whether strategy will be successful or not

B. In particular, companies typically list many ‘strengths’ without assessing if each strength is really important and competitively differentiating

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13
Q

What is the overall goal of ‘strategy’ (in competitive business context)?

A

Many possible (generic) goals:

  1. Growth
  2. Survival
  3. Above-normal profitability (e.g. ROCE which produces positive economic profit)
  4. Absolute size of profits
  5. Environmentally sustainable operations
  6. Make positive impact on society
  7. High value created for customers
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14
Q

Most strategists now believe that the prime objective of ‘strategy’ is…

A

…ABOVE-NORMAL PROFITABILITY

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15
Q

Above-normal profitability is pre-requisite to achieving other goals:

A
  1. funds for growth,
  2. defending against competition,
  3. making contributions to society
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16
Q

Why do we focus on ‘superior profitability’?

A
  1. Investors base their decisions largely on ROE
  2. ROE = Profit = Profit x Sales x CE
  3. Strategists tend to ignore differences in leverage and focus on ROCE
    – We are concerned with ‘profitability’ (ROCE), not absolute profits
  4. The forces of competition tend to drive profitability down to ‘normal’ levels i.e. profit = cost of capital
    – Zero economic profit
  5. Hence real value creation for investors requires superior (above-normal) profitability
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17
Q

Ryanair can in fact have a unit cost advantage over BA/AL due to

A

─ Better staff efficiency (i.e. fewer staff for same output)

─ Higher load factor

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18
Q

What are the ways to estimate relative customer value?

A
  1. Compare the attributes of each offering and make a judgment as to which one is likely to generate higher value. Recognising of course that there my be different segments (that value attributes differently)
  2. Use actual, realised prices as indicating underlying Customer Value

Comparing attributes is probably safer method

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19
Q

How do customers make their purchase decisions?

A

Remember that customers make their purchase decisions based on the relative gap between CV and Price
– Don’t try to factor ‘price’ into CV

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20
Q

What is a value profile?

A

A Value Profile is a Value Proposition (attributes that drive customer value plus price) in visual form

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21
Q

Draw a value profile for ryanair and BA

A

slide 31

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22
Q

How do customers decide what to buy?

A

The greater the gap between CV and RP, the greater the net value for the customer and the more likely is that the customer buys it

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23
Q

What is Ryanair’s value proposition?

A

It is likely to rest on significantly lower price

24
Q

How can BA react to Ryanair’s entry?

A

2 Options:

  1. Accommodation: Do nothing
  2. Retaliation: Probably price cuts
25
Q

How can we predict response?

A 
Quantitative analysis (game theory)
o What will the economic impact be on BA/AL of two alternative responses?

Qualitative analysis
o Other factors influencing likely behaviour of BA/AL

26
Q

What’s a good framework for analysing competitors?

A

Slide 38

  1. STRATEGY
  2. GOALS
  3. ASSUMPTIONS
  4. CAPABILITIES
27
Q

How profitable is the airline industry? Why?

A
  1. Overall poor profitability
  2. Main reason is ‘high degree of competitive rivalry’ (i.e. price-based
    competition) encouraged by:
    A) Undifferentiated products with relatively low customer switching costs
    B) High fixed costs / low marginal costs
  3. But also presence of subsidized National flag carriers
    − profit doesn’t matter
    − can’t leave the industry
28
Q

What is strategy mapping?

A

Strategy mapping = identifying what a company’s strategy really is.

29
Q

Explain the value framework

A

Slide 7, L2

Strategy is about creating value but it is also about capturing value.

30
Q

What is the definition of customer value per unit?

A

The maximum amount a customer is willing to pay for the product or service in question.

Depends on:

  1. Customer’s financial position and preferences
  2. Substitute products/services
31
Q

What does customer value per unit depend on?

A
  1. Customer’s financial position and preferences

2. Substitute products/services

32
Q

What is the definition of supplier cost per unit?

A

The minimum amount that a supplier is willing to charge for their particular input

Depends on Substitute uses for that input

33
Q

What does supplier cost per unit depend on?

A

Substitute uses for that input

34
Q

Three Key Questions for Strategists

A
  1. How can we create more value than competitors?
  2. How can we ensure that we capture a good part of this value?
  3. How can we ensure that our advantage can be sustained for a reasonably long period of time?
35
Q

What is a value creation advantage?

A

achieve a wider gap between CV and SC (than key competitors)

36
Q

What is the definition of net advantage?

A 
Value Creation Advantage
\+/-
Bargaining Advantage
= 
Net Advantage or disadvantage
37
Q

What is Value Creation Advantage?

A

(gap between CV and SC relative to competitors)

38
Q

What is Bargaining Advantage?

A

(do we capture more or less from buyers or suppliers

relative to competitors)

39
Q

Net competitive advantage or disadvantage

A

(gap between RP and AUC relative to competitors)

40
Q

State and draw the Value Chain Framework

A

SUPPORT ACTIVITIES

  1. Firm Infrastructure
    (e. g. Financing, Planning, Investor Relations)
  2. Human Resource Management
    (e. g. Recruiting, Training, Compensation System)
  3. Technology Development
    (e. g. Product Design, Testing, Process Design, Material Research, Market Research)
  4. Procurement
    (e. g. Components, Machinery, Advertising, Services)

PRIMARY ACTIVITIES

  1. Inbound logistics
    (e. g. Incoming Material Storage, Data Collection, Service, Customer Access)
  2. Operations
    (e. g. Assembly, Component Fabrication, Branch Operations)
  3. Outbound Logistics
    (e.g. Order
    Processing, Warehousing, Report Preparation)
  4. Marketing & Sales
    (e.g. Sales Force, Promotion,
    Advertising, Trade Shows, Proposal Writing)
  5. After sales service
    (e.g. Installation, Customer
    Support, Complaint Resolution, Repair)

ALL THESE CONTRIBUTE TO MARGIN

41
Q

Explain the Strategy-Outcome model

A 
A. Strategy
CHOICES
1. Scope 
2. Activities/policies 
3. Objective(s)
|
B. OUTCOMES
Intermediate outcomes
1. Volume
2. Market-related 
3. Operating-related 
4. Organization-related
|
Final outcomes
1. Profitability (ROCE ideally)
CV, SC, RP, AUC
|
CONTEXT: Market, technology, regulation, micro-economics, competitors
42
Q

What are the Intermediate outcomes?

A

Intermediate outcomes are outcomes that are significant in driving profitability.

– Important to identify/recognize them!

  1. Volume
  2. Market related
  3. Operating related
  4. Organisation related
43
Q

Why does Ryanair have superior profitability?

A

Boils down to three factors:

  1. Low Actual Unit Costs
  2. Customer value
  3. Other factors that drive revenue
44
Q

What are the sources of Ryanair’s low actual unit costs?

A
  1. Eliminate service features (e.g. bundled food/drink)
  2. Make ‘low cost’ choices (e.g. secondary airports)
  3. Make choices that lead to high efficiency
    (e. g. staff incentives, standardized aircraft, focused strategy, encourage cost conscious culture)
  4. Make choices which lead to high utilization
    (e. g. high load factor via aggressive pricing, high aircraft utilization via low turnaround time)
  5. Lower need for cost (e.g. advertising) as consequence of ‘lowest cost’ positioning
  6. Use bargaining power versus travel agents (reduced fees)
45
Q

How has Ryanair’s strategy impacted CV?

A

Ryanair CV lower than BA/AL but…!

Ryanair more profitable because of very low supplier cost (SC). The achieve a greater gap between CV and SC than the competition, which means that they have a value creation advantage.

46
Q

What’s Ryanair’s value proposition in a phrase?

A

‘Low value but really low price’

Success requires a substantial market segment that is attracted by this proposition

47
Q

What other ways has Ryanair found to drive revenue per passenger?

A
  1. Exploit ancillary revenue opportunities
    a) Add-on services: Food/Drink, Speedy boarding, additional luggage, etc
    b) Duty free sales
    c) Ads on seat backs, on planes
  2. Use power over partners to get revenue
    a) get revenue from secondary airports
  3. Minimise ‘rivalry’
    a) early entry to novel routes, get dominant share, raise barriers to competition due to offering low fares
    b) target lucrative duopoly routes
48
Q

Ryanair’s activity system

A 
A. Very limited service
(Nothing free, many restrictions)
B. Frequent, reliable departures
C. Lean ground and gate crews
D. High aircraft utilisation
E. Lowest Ticket prices
F. Short haul flights, secondary cheap airports
49
Q

What happens to competitive advantage over time?

A

Tends to erode: very important to ask ourselves how sustainable our strategy is and for how long.

50
Q

Why didn’t BA add low cost options to their existing business?

A
  1. Hard for BA/AL to copy Ryanair’s choices
    – Most of Ryanair’s choices involve ‘trade-offs’ (choice C allows me to do X very well but is bad for achieving Y) Very different from current BA/AL practice (e.g. secondary airports, no food/drink included)
    – Many different choices – hard to match them all
  2. Hard to run a very different kind of service alongside conventional service
    a) brand clash (customers)
    b) cultural clash (staff impact)
51
Q

How easy/hard is to for ‘imitators’ to match Ryanair?

A

First line of defence:

Strategy: Scope, Activities and policies

52
Q

How easy/hard for imitators to match Ryanair’s competitive position (brand strength, operational efficiency etc.)

A

Second line of defense against imitators:
Ryanair’s Outcomes
Intermediate outcomes Volume
Brand
Knowhow
Etc.
Final outcomes Customer value Realised price Actual unit cost Supplier cost (unit)

53
Q

What happened at Ryanair between 1986-1990? Why was it failing?

A
  1. Essentially me-too scope
  2. Unclear value proposition (great service and low price)  3. Nothing really distinctive in their activities/policies
  3. Unfocused execution
54
Q

What happened at Ryanair in the 90s? Why did it become successful?

A

1. Clear ‘scope’:
– Routes where we compete
– Customer segments we aim to target
– Product (stripped down!)

2. Clear value proposition
– Be THE lowest cost airline
 Developed a series of self-reinforcing activities (system) – Which facilitated extraordinary low costs

3. Built strong ‘route’ market shares
– Move early and purposefully

  1. Highly disciplined execution
    – Simplicity, Leadership, Culture
55
Q

Ryanair in 1990s: Strategic Outcomes

A
  1. Clear competitive advantage at value creation level (wider CV – SC gap)
  2. Good value capture
    a) Use of bargaining power vs Travel Agents and Secondary Airports
    b) Minimise rivalry via novel but limited size routes (niches)
  3. Good sustainability of advantage
    a) Incumbents find it hard to copy Ryanair’s 1990s choices because of organisational and brand conflicts
    b) Imitators probably find it hard to fully copy Ryanair’s 1990s choices or to match their competitive position

• Those that succeed (Easyjet) appear to understand the risk that route profitability can be killed by head-to-head rivalry

56
Q

What are the different mechanisms to achieve lowest unit cost?

A
  1. Design business system to be fundamentally low cost
  2. Eliminate product/service features where cost outweighs the reduction in customer value
  3. Achieve superior scale (where scale is important)
  4. Achieve superior operational efficiency, using know-how especially
  5. Achieve systematically higher utilisation (especially if based on proprietary knowhow)
  6. Secure low cost inputs
  7. Direct benefits of being lowest cost (less marketing spend, etc)
57
Q

Explain the dynamics of low cost over time and what is required at each stage

A

Slide 43, L2

  1. Start —> Reduce unit costs
    Initial opportunity to reduce costs
  2. Reduce Prices
    Willingness to forego profit
  3. Gain higher volume
    Elastic demand needed

Again to reduce unit costs further
(Economies of scale)

Strategic Management (9 decks)

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