Chapter 5 Building Competitive Advantage Through Business-Level Strategy
5.1 STRATEGY IN ACTION
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Ryanair Takes Control over the Sky in Europe
Ryanair, based in Dublin, Ireland, imitated and improved on the cost-leadership business model pioneered by Southwest Airlines in the United States and used it to become a leading player in the European air travel mar-ket. Ryanair's CEO, the flamboyant Michael O'Leary, copied the specific strategies Southwest had developed to cut costs and position Ryanair as the lowest-cost, lowest-priced European airline. The average cost of a Ryanair ticket within Europe is $48, compared to $330 on British Airways and $277 on Lufthansa, which have long dominated the European air travel market.The result is that Ryanair now flies more passengers inside Britain than British Airways, and its share of the European mar-ket is growing as fast as it can gain access to new land-ing spots and buy the new planes needed to service its expanding route structure. O'Leary also worked to improve Southwest's low-cost business model. Ryanair imitated the main ele-ments of Southwest's model, such as using only one plane, the 737, to reduce maintenance costs, selling tick-ets directly to customers, and eliminating seat assign-ments and free in-flight meals. It also avoids high-cost airports like Heathrow and chooses smaller ones outside big cities, such as Luton, its London hub. However, to reduce airplane operating costs, O'Leary also eliminated free blankets, pillows, sodas or snacks, and even "sick" bags—perks a passenger expects to receive on a more
differentiated airline. "You get what you pay for" is Ryanair's philosophy. To implement his cost-leadership strategy, O'Leary and all employees are expected to find ways to continually shrink the operating costs that arise in performing the thousands of specific tasks needed to run an airline. Through these tactics, Ryanair has lowered its cost structure so far that no other European airline can come close to offering its low-cost fares and break even, let alone make a profit. The other side of Ryanair's business model is to add to its revenues by getting its customers to spend as much as possible while they are on its flights. To this end, Ryanair offers snacks, meals, and a variety of drinks to encourage customers to open their wallets. In addition, to cut costs his planes have no back-seat LCD screens for viewing movies and playing games; passen-gers can rent a digital handheld device for $6 a flight to watch movies and sitcoms or play games or music. 14% of its revenues come from thesez sources; they are so important that the airline gives away millions of its unsold seats free to customers so that it can at least generate some revenue from passengers sitting in what other-wise would be empty seats. Ryanair and Southwest have together shown that the cost-leadership business model is the only one that will work in the future and globally; all large airlines are rushing to adopt the specific strategies that will allow them to pursue it.
Sources: D. McGinn, "Is This Any Way to Run an Airline?" Newsweek, October 4, 2004, E14-19; Torbenson, "Budget Carriers Rule the European Skies," Dallas Morning News, September 22, 2004, D1. http://www.ryanair.com.
it has a lower cost structure. Its lower costs also mean that it will be less affected than its competitors by increases in the price of inputs if there are powerful suppliers and less affected by the lower prices it can charge if powerful buyers exist. Moreover, because cost leadership usually requires a large market share, the cost leader pur-chases in relatively large quantities, increasing its bargaining power over suppliers, just as Walmart does. If substitute products begin to come onto the market, the cost leader can reduce its price to compete with them and retain its market share. Finally, the leader's cost advantage constitutes a barrier to entry because other companies are unable to enter the industry and match the leader's low costs or prices. The cost leader is therefore relatively safe as long as it can maintain its low-cost advantage. The principal dangers of the cost-leadership approach arise when competitors are able to develop new strategies that lower their cost structure and beat the cost leader at its own game. For instance, if technological change makes experience-curve