Ryanair (2005): successful low cost leadership.

Box, Thomas M. ; Byus, Kent

CASE DESCRIPTION

The primary subject matter of this case concerns strategic management in the airline industry in Europe. Secondary issues examined include international marketing, operations management and business ethics. The case has a difficulty level of four or five, and the case is designed to be taught in one 90-minute class session. It is expected that students will need to devote three to four hours of outside preparation for the class discussion.

CASE SYNOPSIS

Ryanair is a 20-year-old international air carrier based in Dublin, Ireland. It is now the largest low cost airline in Great Britain and Europe and has modeled its operations (since 1991) on the very successful Southwest Airlines Low Cost Leadership model. Ryanair's CEO, Michael O'Leary, is an accountant by training but a combative entrepreneur by inclination. He has angered trade unions, government officials and competitors with his "bare knuckle" tactics but has achieved dramatic growth and profitability in the very competitive airline industry.

As of the end of the year 2004, Ryanair was flying 25 million passengers annually with a staff of less than 2,500 personnel. Ryanair flies only Boeing 737s and is rapidly transitioning to the newest 737 models--the 737-800. Challenges to the airline at the end of 2004 included escalating fuel costs, intensity of competition and the sometimes less than favorable attitude of the regulatory bodies in Great Britain, Ireland and the EU.

INSTRUCTORS' NOTES

Learning Objectives

This case is intended to reinforce strategic management concepts at the senior-level or first year MBA level. The following common tools can be employed in a discussion of the case.

1. Porter's Generic Strategies

2. SWOT analysis

3. Porter's Five Force Analysis of Industry Competition

4. Pricing strategies

5. Market expansion

It is assumed that most of the above topics will have been discussed in class prior to the case analysis. If not, then this case provides a real opportunity for the "blackboard panel approach" recommended by Harvard Business School.

Teaching the Case

We suggest that a common starting point for this should be a classroom discussion of SWOT analysis and generic strategies. This case is an interesting example of the differences between firms well-known for employing a particular generic strategy, in this case Low Cost Leadership. Despite the fact that Ryanair emulated Southwest Airlines' approach to business, there are substantive differences between the two firms. Ryanair's O'Leary and Southwest's Kelleher are vastly different in their approach to customers and employees. It should be explained (particularly to undergraduate students) that a Low Cost Leadership strategy doesn't necessarily mean a low selling price for products and services.

When assigning this case for an in-depth classroom discussion, we have found it helpful to require students to jot down answers to the discussion questions prior to class. This facilitates the discussion and also helps to eliminate the "free rider" attitude of some students who don't prepare by reading the case.

In addition to the following discussion questions, one could easily include other topics and, perhaps, stretch this to a two-day discussion. Other topics might include:

1. The differences and importance of remote industry environmental factors like fuel cost, regulation and the potential impact of terrorism.

2. A discussion of Kelleher (Southwest Airlines) and O'Leary (Ryanair) and their substantial differences regarding what the Quality Management people call "The Voice of the Customer."

DISCUSSION QUESTIONS

1. Do a SWOT analysis for Ryanair at the end of 2004.

Strengths for Ryanair include continuing profitability and revenue growth despite intense competition. Additionally, their business model--very similar to Southwest Airlines--is also an apparent strength.

Weaknesses would include the reputation they have for less than competitive customer relations and employee relations.

Opportunities for Ryanair include expansion of their routes to Eastern Europe.

Threats continue to be the escalating cost of fuel (a major component of operating expenses) and competition. It might also be argued that relations and interactions with the Irish and EU governments constitute at least an implicit threat.

2. As specified in the case, Ryanair and particularly Michael O'Leary have been criticized regarding business practices. Using the following terms, discuss Ryanair's ethical decision making.

a. Applied ethical standards:

b. Above the law:

c. Aspirational:

d. Beyond the bottom line:

a. Business ethics is more and more becoming an applied discipline. Most all professional fields have engaged in rule making and standard setting that are derived from moral philosophy or religious tradition. Ryanair, as part of the international airline industry, must consider the application of specific ethical criteria if it is to continue to grow and prosper in an expanding global marketplace.

b. Ethical decision criteria are typically those that are above the legal minimum. Unfortunately, many companies, Ryanair perhaps, view ethics as synonymous with legal requirements. Business should (normative) view the law as the floor and not as the ceiling.

c. Ryanair, like Southwest Airlines, should consider ethical standards to be inspirational as well as aspirational. Junior and senior executives should (normatively) approach business decision making within a virtuous framework. In addition to formalizing a vision and mission, Ryanair might consider formalizing an "Aspiration Statement".

d. Ryanair should (normative) view growth within the conditions that are beyond financial impact. Environmental, safety, and societal implications of decision making and policy setting provide greater long-term benefit than merely providing low-cost operations that benefit shareholders. Ethical decisions must be systematic and transparent for customers, stockholders, employees, and other vested stakeholders.

3. Achieving financial critical mass, that is, the minimum size of the firm thought necessary to compete effectively is critical to Ryanair's continuing success. What issues associated with Ryanair's financial performance and strategic growth plans present concern to the analyst when considering the critical mass issue?

A major reason why companies seek to achieve critical mass is because the market will very often place a higher multiple on the earnings of a larger company compared to those of a smaller company. In the case of Ryanair, if the acquisition of new aircraft or new routes and destinations dilutes the earnings of a business, then it could reduce value, even if the business has doubled in sales and carries a higher multiple. In addition, it is a dangerous proposition for any public company to make business decisions that are tailored to the investment community where opinions can be fickle. Specifically, the analysis of Ryanair's financial performance should be considered in terms of the critical ratios that will be impacted by any large scale addition of equipment, employees, or additional costs, especially when competing with airlines that receive subsidies from national treasuries.

This assumption that bigger is better needs to be examined critically. Exactly why is bigger better? There are scores of strong, profitable, well-managed companies that have lower than average sales in the airline industry. There is also a history of acquisitions of these types of businesses by larger companies that squash the very culture that makes the business so strong in the first place. Once again, a strategy to achieve critical mass in the operational sense also needs to be challenged and understood before acquisitions, equipment or routes are pursued.

4. Difficulties in implementing international coordination and growth may be traced to the inherent problems of developing a compatible organizational culture within the cultures of otherwise disparate national cultures. Ryanair's growth plan requires significant understanding and integration of such cultural differences. Discuss the following internal/organizational issues that must be more specifically addressed to insure Ryanair's long-term success.

a. International Career Paths:

b. Management Training:

c. Reward Systems:

d. Management Recruitment:

e. Information Systems and Technology:

a. Management promotion within an international organization typically includes a plan to systematically assign managers to international posts. In Europe, such path assignments produce requirements to ensure that managers can learn new languages, adapt to succession, and develop specialized decision making skills.

b. Training at all employee levels must include exposure to similar techniques and methods that are designed to help promote standardization and the development of a uniform company identity. Personal relationships, communications, formal and informal training schedules, and unionization are a few of the critical items to be considered by Ryanair.

c. Compensation, bonus payments, time-off and benefits are generally bounded by a national mentality. Ryanair must consider all such implications.

d. Nationality and other characteristics of Ryanair's pool of managers will have an important bearing on the firm's internal environment and ultimate strategic success. Significant resentment and counterproductive behavior develops within organizations when executive management of a limited national source allows operational activities to be undertaken by locals with another national identity.

e. The ability for employees and managers to identify with the aims and goals of Ryanair will depend on the nature and scope of information available. In cases where information flow is one-way (provided to an international headquarters with little or no corresponding return flow), management will find it difficult to aid in the organizational culture creation.

5. Are there any strategic management lessons that Michael O'Leary could learn from Herb Kelleher (Founder and CEO of Southwest Airlines) as Ryanair pursues its growth plan?

"The Leader to Leader Institute" (formerly the Drucker Foundation, 320 Park Ave., 3rd Floor, New York, NY, 10022) profiled Herb Kelleher and discovered some specific and important characteristics and attributes that could be of benefit to Michael O'Leary as he ponders his "yellow legal pad issues." They include:

a. When building a culture of commitment and performance spend less time benchmarking best practices and more time building an organization in which personality counts as much as reliability.

b. Don't just lead by the numbers. Business must be fun. Hire people who have humor during the bad times because when they come to work, they will help make the firm different and better.

c. Don't be afraid of losing control of the organization. Create an organization where people truly want to participate and you will not need control.

d. Rather than trying to define what the customer will do, define what the firm is and what is important.

e, Make a commitment to job security and customer satisfaction that cannot be matched by the competition.

f. The most important training is not how to manage or administer but how to lead.

REFERENCES

Achido, B. (February 25, 2005). Ryanair places order for up to 140 Boeing jets. USA Today, 3B.

Business Ticker (2005), "Mickey Mouse" Ryanair trumpets its success after 20 years. Retrieved May 28, 2005, from http://www.theclobeandmail.com/servlet/ArticleNews/TPStory/LAC/200500527/

Business Week Online (May 14, 2001), Why Michael O'Leary Is No Local Hero. Retrieved May 24, 2005 from http://www.businessweek.com/

Calder, S. (2003), No Frills. London: Virgin Books.

Creaton, S. (2005), Ryanair. London: Atrium Press.

Guardian Unlimited (June 16, 2002), The Life of Ryan. Retrieved May 15, 2005, from http://www.guardian.co.uk/

Holding Pattern. (2004, July1). The Wall Street Journal. A1.

Flugreview (October, 2004), Michael O'Leary. Retrieved May 17, 2005, from http://www.flug-revue.rotor.com/

Porter, M.E. (1980), Competitive Strategy. New York, NY: The Free Press.

Rivkin, J.W. (2000a), Dogfight over Europe: Ryanair (A). Boston, MA: Harvard Business School Publishing.

Rivkin, J.W. (2000b), Dogfight over Europe: Ryanair (B). Boston, MA: Harvard Business School Publishing.

Rivkin, J.W. (2000c), Dogfight over Europe: Ryanair (C). Boston, MA: Harvard Business School Publishing.

Ryanair (2004), Annual Report.

The Economist (2004a), Grounded: Trouble for the market leader. Retrieved May 24, 2005 from http://www.economist.com/displaystory.cfm?story_id=2388861.

The Economist (2004b), Turbulent skies. Retrieved May 24, 2005 from http://www.economist.com/displaystory.cfm?story_id=2897524.

Welch, J. (2005) Winning. New York: Harper-Collins

Wikepedia (nd), Ryanair. Retrieved May 18, 2005 from http://www.algebra.com/algebra/about/history/Ryanair.wikepedia.

Thomas M. Box, Pittsburg State University

Kent Byus, Texas A&M University--Corpus Christi