ryanair (a) & (b) key take-aways haas school of business university of california, berkeley
Post on 22-Dec-2015
215 views
TRANSCRIPT
How can we anticipate competitor’s moves?
Ryanair vs Aer Lingus / BA Will these players retaliate against Ryanair? If so, how? Given the assumption of retaliation, should Ryanair enter? If
so, how?
How can we anticipate competitor’s moves?
Game Theory Identify structure of the game that is being played In static setting, predicts limited competitive response of AL /
BA to Ryanair’s entry---but it’s a close call With targeted response, retaliation starts to look attractive With non-pecuniary incentives, retaliation starts to look attractive
Competitor analysis Develop model of pecuniary and non-pecuniary incentives,
views of the “game”, etc. based on “Competitor response profile”
Competitor analysis
Competitor analysis can be helpful in anticipating competitor moves A competitor profile includes an assessment of a competitor’s
strengths and weaknesses, its strategic intent, and its behavioral predispositions
Competitor analysis is inherently qualitative Complements quantitative analyses
Competitor analysis (II)
Questions to ask: What are the goals of my competitor?
May be different from pure greed (profit maximization) What is the strategy of my competitor?
Do the prior strategic actions (or statements) of the competitor suggest a direction that the competitor now might take?
What are the resources and capabilities of my competitor? Does the competitor have a particular set of strengths or weaknesses
that might make some of its reactions more or less likely to succeed? What assumptions is the competitor making about the
business? Competitors may hold a set of assumptions about the industry that lead it
to make systematically different choices from the ones that you would make, were you in their shoes
A Framework for Competitor Analysis
Source: Michael E. Porter, Competitive Strategy, p. 49
What the Competitor Is Doing and Can Do
What Drives the Competitor
Future Goals
At all levels of managementand in multiple dimensions
Current StrategyHow the business iscurrently competing
CapabilitiesBoth strengthsand weaknesses
AssumptionsHeld about itselfand the industry
Competitor’s Response Profile
Is the competitor satisfied with its current position?
What likely moves or strategy shifts will the competitor make?
Where is the competitor vulnerable?
What will provoke the greatest and most effective retaliation by the competitor?
Competitor profile of British Airways (1986)
Goals Successful flotation /
privatization Key step for Thatcher’s program
Focus on near term profitability
Resources and Capabilities Government interest Heathrow Extensive network Reputation for safe, reliable
service; improving reputation for customer service
(neg) still operationally inefficient (neg) needs capex to upgrade
int’l fleet
Strategy Differentiation in service: “The
world’s favorite airline” Focus on business class
customers
Assumptions Competition is coming to Europe BA will benefit from airline de-
regulation in Europe given extensive international experience
What does this tell us about how BA is likely to respond?What does this tell us about how BA is likely to respond?
Competitor profile of Aer Lingus (1986)
Goals “Safety, efficiency, reliability, and
profitability” Promote national interests
Resources and Capabilities Government backing Reputation & reliability among
Irish Established operations in EU,
Boston, NY Shannon airfield Technical skills that other airlines
need (neg) inefficient (neg) needs capex
Strategy Break even on air services and
profit from diversification Provide service levels
comparable to flag carriers
Assumptions Airline service is a public good
government will pay One true way to run an airline Airlines cooperate ‘Gentlemanly’ competition
What does this tell us about how AL is likely to respond?What does this tell us about how AL is likely to respond?
Ryanair’s 1986 entry strategy
Initial success 100% load factor on Dublin-London Route AL & BA dropped restricted fares to I₤95 vs. Ryanair’s I₤95
unrestricted fare: a rather mild reaction Positive press – managers believed they had a winning strategy
Expansion 27 routes; 5 jets by 1991 rapidly increasing customer volumes strategy: “driven by customer service”
Aer Lingus responds matches prices, increases capacity on routes served by Ryanair
Problems with Ryanair’s 1986 entry strategy
Limited cost advantage in high fixed cost, low marginal cost industries competition is
intense for incremental customers even though Ryanair may have had a cost advantage, AL was willing to
produce below average costs (but above marginal costs) to pay off fixed costs
AL had deeper pockets and other sources of profit
No service advantage “first rate customer service” – no difference from BA or AL potential disadvantages
flying into Luton rather than Gatwick or Heathrow flying turboprops rather than jets
A me-too strategy
In the words of Porter, Ryanair attempted to compete on operational effectiveness without making any explicit tradeoffs “we tried to be all things to all people” – Kevin Osborne, CFO,
Ryanair (B) case
Not differentiated and not enough of a cost advantage to profit from the restructuring of the industry that they began
Comparison to Dell’s Entry
“Compaq was very strong in retail. A new marketing an distribution strategy was something new, however.” --- Michael Dell
Dell’s entry: Not head-to-head with established players Achieved significant variable cost advantage (7 versus 65
days inventory) “Stealth” strategy --- direct channel undervalued by
established players
Ryanair rising from the ashes
O’Leary, 29, appointed Deputy CEO “No one else was left to take the position”
Focus on cost reduction & cash generation Drop loss-making routes No in-flight amenities Renegotiated labor contracts to pay based on productivity Emphasized duty-free sales
Become 1/3 of flight attendant compensation Sell advertisements on seat-backs Goal: “become a low-cost, low-fare airline”
Senior managers visit Herb Kelleher at Southwest
Even more frugal than Southwest
No free snacks or drinks Not even peanuts!
No “air bridges” linking plans with airport terminals All boarding via metal stairs
No frequent flier program
Average fare falls to I£42 / passenger Average cost ~ I£25 In 1999, O’Leary claimed marginal cost was - I£2
Relative Efficiency of Major Airlines
Employees (approx)
Revenue per employee (est)
Market Value of Equity
Ryanair 2,302 Euro 450,000 $6.7 Billion
Southwest 31,011 $210,570 $11.3 Billion
Continental 38,255 $254,607 $855 Million
Delta 69,150 $217,919 $566 Million
Strategy or “being on the right side of history” i.e., luck?Strategy or “being on the right side of history” i.e., luck?