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Case study and comparative strategic analysis of Toyota and Ryanair

The key differences in the operations strategy of manufacturers and service firms in terms of process design, supply chain, human resources, capacity, innovation and quality management.

Research Paper (undergraduate) 2011 63 Pages

Business economics - Marketing, Corporate Communication, CRM, Market Research, Social Media

Excerpt

Table of contents

1 Introduction

2 Competitive factors

3 Competitive strategy

4 Process Design

5 Supply chain management

6 Human resources management

7 Capacity management

8 Innovation management

9 Quality management

10 Conclusion

11 References

12 Appendix

12.1 The convergence of products and services

13 Ryanair Competitive Analysis
13.1 Ryanair Five Forces Analysis
13.1.1 Barriers to entry
13.1.2 Power of suppliers
13.1.3 Power of buyers
13.1.4 Threat of substitution
13.1.5 Competitive rivalry
13.1.6 Competitive factors in the airline industry
13.1.7 Competition
13.2 Facts & figures of Ryanair and two major UK competitors
13.2.1 Flight ticket price comparison
13.3 SWOT Analysis
13.4 PESTEL Analysis
13.4.1 Political & Legal
13.4.2 Economic
13.4.3 Social
13.4.4 Technological
13.4.5 Environmental
13.5 Ryanair’s Strategic Capabilities
13.5.1 Physical Resources
13.5.2 Human Resources
13.5.3 Core Competences
13.6 Value Chain Analysis
13.7 Asset/Resource Analysis
13.8 How Ryanair adds value and differentiates itself from competitors
13.9 Industry Life Cycle / BCG Growth-Share Matrix

14 Conclusion

15 Recommendations on Ryanair’s future direction
15.1 Michael Porter’s Generic Strategies / Bowman’s Strategic Clock
15.2 ANSOFF Matrix
15.3 Strategic human resources and CSR
15.4 Lean thinking
15.5 Diversification

16 References - Ryanair Strategic Analysis

1 Introduction

This paper seeks to compare and contrast the differences in the way manufacturing firms and service firms operate. For this purpose the paper conducts a comparative analysis of the operations strategy of Toyota, the world’s leading car manufacturer and Ryanair, Europe’s leading low-cost airline. Firstly, it will be dealt with the competitive factors both companies need to excel at in order to gain competitive edge and sustain economic viability from a long-term perspective. Secondly, it will outline the major aspects that enable both companies to succeed in a highly competitive and dynamic business environment. In particular, it will draw on key components of successful operations strategies, such as process design, human resource management, innovation management, supply chain management and quality management. Finally, the paper concludes by summing up the key points and highlighting the respective implications. In addition, the paper provides a more comprehensive strategic analysis of Ryanair’s low-cost strategy in the appendix in order to promote understanding.

2 Competitive factors

“A competitive factor is a feature or benefit considered key or essential to the promotion of a product or service to its intended market” (Layton, 2007). The table below shows the key competitive factors of Toyota and Ryanair in terms of order winners and qualifiers.

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According to the OICA Toyota is regarded as the world’s largest car maker (OICA, 2009). It has gained a remarkable reputation of being one of the most effective and efficient manufacturers. Toyota produces cars in different segments which all offer great value for money. According to Michael Porter, “value is the ability to meet or exceed the needs of customers, and do so effectively” (Porter, 2008, xi). Toyota meets customer needs by manufacturing cars of high quality and safety standards, distinguished designs, sophisticated technology and high dependability. The latter is demonstrated by the 2006 Vehicle Dependability Study by JD Power which showed that Japanese cars are reliable and dependable in general, especially those of Toyota (Fallah, 2006). Customers can seek advice on and test drive Toyota’s cars at dealers world-wide. Every car is made-to-order according to individual customer specifications (Liker, 2004).

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(OICA, 2009)

Ryanair is one of the biggest and most successful European airlines dedicated to offer cheap flights. In order to make its low-cost strategy feasible it has eliminated lots of activities compared with its full-service competitors. For example, it offers no frills such as free on-board meals, movies and earplugs or free services such as lounges at airports. Furthermore, charging high fees for additional amenities and services and selling products of strategic partners are part of Ryanair’s low-cost strategy to increase revenues (Ryanair, 2009).

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(Information based on the official websites and annual reports.)

Nevertheless, Ryanair still manages to add significant value in a few activities which attract millions of customers each year (Ryanair, 2010a). In particular, Ryanair meets the needs of price-sensitive customers who seek affordable and safe air travel. Despite its attempt to keep costs low, it places much emphasis on quality in terms of air safety. In addition, significant order qualifiers customers might value are Ryanair’s relative punctuality and low lost baggage rate (Ryanair, 2010a).

As Porter (2008, p.38) put it: “A company can outperform rivals only if it can establish a difference that it can preserve. It must deliver greater value to customers or create comparable value at a lower cost, or do both” (Porter, 2008, p.38). In fact, in order to operate successfully and excel at key competitive factors in today’s business world companies need to adopt deliberate and emergent strategies “that reflect the conditions at hand, notably the ability to predict as well as the need to react to unexpected events” (Mintzberg, et al, 2009, p.13).

3 Competitive strategy

Bowman’s strategic clock (Johnson, et al, 2008) depicts Toyota’s and Ryanair’s strategy relative to other car makers. Essentially their strategy has a decisive impact on the way they operate and the trade-offs they need to make in terms of performance objectives (Slack, et al, 2010).

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4 Process Design

Process design has been regarded as the lifeblood of successful operations. According to Forman et al (1997, p. 21) a “process is a series of actions, changes or functions that bring about an end or result.”

Toyota is said to lead the way in effective process design. It comes with no surprise, then, that many companies have tried to adopt the “Toyota way”, which embodies the golden rules of war: speed, simplicity, and boldness. The Just-in-Time (JIT) concept is a key component of the Toyota Production System (TPS), which means making merely "what is needed, when it is needed, and in the amount needed" (Alukal et al, 2006, p. 164). Furthermore, Toyota has consistently reduced waste and work-in-process and has focused on effective material balance and zero inventories, an approach also known as “Lean Manufacturing” (Liker, 2004). In order to ensure effective and efficient production on a high variety and high volume basis, the TPS combines various process design techniques including factory networks, cellular layout, and supplier network coordination. These factors enhance production rates and ensure high utilization of resources. In a cellular layout, for example, the workstations are u-shaped and machines are positioned in such a way that workers can operate several machines simultaneously (William, 2000). Taiichi contends that through the adoption of lean manufacturing and effective process design profits will significantly increase (Taiichi, 1990).

Ryanair, as a low-cost carrier, concentrates more on removing intermediate link processes in order to reduce costs and increase operational efficiency. As Porter (2004, p.12) points out: “A low-cost producer must find and exploit all sources of cost advantage.” Thus, compared with full-service rivals, Ryanair flies direct non-stop short-haul routes and favours secondary less congested airports that ensure lower handling costs, higher rates of on-time departures and faster turnaround times to increase aircraft utilization. Furthermore, the outsourcing of various processes to third- parties, such as maintenance, significantly increases cost-efficiency (Ryanair, 2009).

However, the key to Ryanair’s success is its website, which serves as the primary distribution channel. Customers need to purchase tickets and check-in online and print their boarding passes at home. The implementation of web technology enabled Ryanair to eliminate unnecessary processes associated with customer service, which has a direct positive impact on key performance factors such as speed, flexibility, and cost.

Even though Toyota and Ryanair use a different process system, their goal in terms of process design is quite similar, especially when it comes to reducing waste. A major advantage of their processes is the fact that “rivals will get little benefit from imitation unless they successfully match the whole system” (Porter, 2008, p.63).

5 Supply chain management

Supply Chain Management (SCM) “is the management of relations and integrated business processes across the supply chain that produces products, services and information that add value for the end customer” (Jespersen, et al, 2005, p.12). Effective SCM has become increasingly important, because it enables companies to respond faster to changes in the external environment than competitors (Stalk and Hout, 2003).

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Toyota spends much time on evaluating potential suppliers in order to choose the right suppliers, agree on long-term contracts and establish long-term relationships based on mutual trust. Likewise, Toyota continuously assesses each supplier's performance with regard to quality, reliability, creative proposal and costs. In the years to come Toyota intends to reduce 30% of costs throughout the whole supply chain and share half of the profits with its suppliers (Iyer, et al, 2009).

In order to sell its cars to end customers Toyota has established a network of dealers across the world. All of them operate according to different distribution strategies to cater for local needs. It goes unquestioned that this requires high quality customer service and effective communication (Iyer, et al, 2009).

As such, a service company’s supply chain is not totally different. Similar to manufacturers, service companies focus on the management and coordination of all activities in the supply chain, yet place emphasis on aspects such as service capacity, waiting time, distribution channels and quality of service ( Wisner, et al, 2008 ).

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Since Ryanair sells directly to end customers it has more power and control over ticket sales. In terms of the supply chain it is therefore particularly concerned with establishing mutually beneficial long-term relationships with major suppliers, negotiating price discounts and hedging prices (Ryanair, 2009).

Ryanair primarily depends upon three key suppliers, which are aircraft makers, airports and the oil industry. Boeing and Airbus are the biggest suppliers for high quality passenger aircraft and therefore have remarkable bargaining power. For example, in 2009 Ryanair ended negotiations with Boeing to buy 200 new aircraft as Boeing didn’t agree to certain terms and conditions demanded by O’Leary (BBC, 2009). Primary airports in the major cities in Europe also have remarkable bargaining power as they attract the majority of travellers. Only secondary airports may have less bargaining power, because they are usually less congested and depend on airlines to generate profit. Finally, especially low-cost carriers are subject to unpredictable increases in oil prices. Ryanair can hardly cope with higher prices for crude oil; otherwise it would be forced to abandon its no-fuel-charge policy (Ryanair, 2010a).

6 Human resources management

Human resource management can be regarded as a specific functional role carried out by specialist staff. There is no doubt that human resource planning and effective employee utilization are central factors that contribute to achieving competitive advantage (Gilmore, 2009).

In order to attract, motivate and retain employees Toyota offers incentives such as single apartments, home loans, paid vacation, private health and dental care, sport areas and insurances (Kong, 2003). Furthermore, Toyota uses a skill-based pay system to increase flexibility and decision making and avoid employee turnover and absenteeism (Gerhart and Bretz, 1994). In addition, it has also developed a reward system and a general gain-sharing program based on achieving annual profit and quality goals for the organization (Chalice 2007).

However, Toyota’s formula of success is more concerned with learning and development. In fact, the adoption of the “Toyota way”, which encompasses the four P's - people,philosophy,process and problems - has enabled Toyota to establish a unique culture (Harbour, 2010). Vecchio (2000) contends that through social learning people develop their own capacity and ability which eventually increases productivity. In this respect, Toyota matches different development approaches to different needs (Liker and Hoseus, 2008). The model for developing people is called the “Job instruction method”, whereas the technique for training staff is termed “Training within Industry” (Liker and Meier, 2007). As Senge (2006, p.173) put it: ““There is nothing more important to an individual committed to his or her own growth than a supportive environment.”

By contrast, in terms of employee relations Ryanair places much emphasis on keeping costs low (Bamber, et al, 2009). Nevertheless, Ryanair realises that its success is dependent on highly trained and productive employees which make a key contribution to operational efficiency. Thus, in order to attract and retain employees Ryanair’s key staff, such as pilots, are paid wages above the industry average (Ryanair, 2009).

Ryanair’s flight attendants, however, are employed on a performance-pay basis (Ryanair, 2009). They can increase their relatively low base salary by selling food, drinks and ancillaries during the flight. Ryanair’s employees attend initial and recurrent training sessions including safety and fire drill courses, ground school training as well as pilot conversion courses (Sue, 2004).

Negative aspects of Ryanair's low-cost strategy include high work load and tight shift rotas as well as the fact that staff have to pay for their own training, uniforms, meals and drinks and even mobile phones used at work (BBC, 2009).

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(Ryanair, 2009)

In fact, Toyota’s approach towards human resource management differs significantly as it invests a lot in training and development and provides attractive incentives. Ryanair, conversely, focuses primarily on cost minimization and therefore gives its employees just as much as is needed to ensure a high level of productivity. If Ryanair was a full-service airline it would need to invest significantly more in its employees in order to ensure high employee morale and quality customer service.

7 Capacity management

The dilemma all managers have to cope with is balancing the right amount of outputs and demand in order to avoid wasted effort and capacity respectively (Brown, et al, 2001). Doll and Vonderembse (1991,] p.192) define capacity as the “organization’s ability to provide customers with the demanded services or goods in the amount requested over a specified period of time”.

In the airline industry it has conclusively been shown that setting fares to ensure the highest possible capacity is a complex process (Alderighi and Piga, 2010). In this respect, a critical determinant of Ryanair‘s success is sophisticated yield management. Brown et al’s comparative study (2001) found that yield management enables companies to maximize revenues by using different techniques to change demand, especially by varying prices. Ryanair‘s approach is to start pricing fares low in order to ensure that a proportion of capacity is sold and then increase prices as demand goes up. If the pre-determined capacity target is not reached, discounts might be the best tool to increase demand (Greasley, 2009). In fact, yield management can be a powerful approach to allow Ryanair changing ticket prices on any routes instantaneously as a function of forecast demand (Chase, et al, 2006).

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More recently, Ryanair even considered introducing new plane seats, depicted by the image, to increase capacity without compromising strict safety rules (Metro, 2010).

Toyota secures capacity mainly using two different ways: production control and workforce management. Toyota’s famous production control system is based on customer orders through deploying flexible capacity among each stage in order to either save time or increase capacity to meet demand (Weng, 1998). Strong evidence of ‘Monthly Planning’ was found at Toyota to support this point: the first month’s sales figures and market share determine the total production volume for the next month. This approach ensures a balanced capacity level (Stanford, 2005). Another feature of Toyota’s approach is internal workforce management (Nihon, 1986). In fact, all staff have to respect the work of the people at the core, which is termed ‘people-centred’, by making their work more consistent with the required demand in order to avoid overproduction and reduce the number of workers needed to accomplish specific tasks.

The above-mentioned aspects imply that service firms and manufacturers deal with the problem of capacity in various ways, yet they share the overall goal of ensuring optimal resource utilization.

8 Innovation management

In today’s competitive global business world organisations need to be capable of adapting to changing circumstances if they are to succeed. Peter Drucker, a great management thinker, “had continued to stress over the years that organisations that do not innovate will not survive” (Swaim, 2010, p.78).

In effect, it is not a single characteristic that makes an organisation innovative. Rather, organisations need to embrace a set of key characteristics, such as shared vision, inspiring leadership and the will to innovate, appropriate organisational structure, key individuals, effective team working, high- involvement, creative climate and external focus (Tidd and Bessand, 2009).

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Toyota is considered the world’s most innovative car maker (BusinessWeek, 2009). Its core innovation, without doubt, was the “Toyota Production System” which completely changed the way it had operated. This system incorporates “kaizen”, a continuous improvement philosophy, which has enabled Toyota to constantly improve its processes (Surowiecki, 2008). Likewise, Toyota focuses on product innovation considering both R&D (technology push) and customer needs (market pull). For example, it was the first car maker to introduce a hybrid car, the Prius, in 1997 (The Financial Express, 2010).

In fact, Toyota’s superiority is primarily attributed to its culture, which fosters mutual learning and encourages questioning the status quo (Gertner, 2007). Its entire achievements stem from the understanding that “employees themselves more often than not, know what needs to be done to improve operation” (Kanter, 1985, p. 64). Toyota’s bottom-up approach allows employees from all departments to come up with ideas of how to improve quality and operate more effectively and efficiently (Warner, 2002). In effect, every year employees generate more than two million ideas, of which up to one million is implemented (May, 2006). This approach is doubtlessly crucial for improvement, because “collectively, we can be more insightful, more intelligent than we can possibly be individually” (Senge, 2006, p. 221).

On the contrary, a low-cost airline like Ryanair primarily focuses on process improvement in order to cut costs and increase operational effectiveness, fully neglecting customers’ diverse needs (technology push). Instead of involving all employees in the innovation process Ryanair has adopted a top-down approach where any improvement initiatives are dictated by top management. Ryanair’s core innovation was its website which enabled it to markedly reduce costs through automation and disintermediation (Ryanair, 2010a).

In fact, Ryanair’s top-down approach adversely affects its culture, which is dominated by frugality and discipline, rather than commitment. In contrast to Toyota, Ryanair does not recognise that employees can be regarded as “the most effective consultants your organization could ever hire” (Clemmer, et al, 1990, p.69). It is arguable whether Ryanair could be even more successful if it adopted Toyota’s approach.

9 Quality management

Quality is an important concern for all companies. According to Natarajan (2002, p.69) quality “means meeting or exceeding the requirements, expectations, and needs of the customers”.

Even though Ryanair has eliminated lots of activities compared to its full-service competitors, it does not extend its low-cost strategy to safety. Maintenance, training and quality control is a priority for the company (Ryanair, 2010a). Indeed, just a single serious aircraft accident involving Ryanair might lead to disastrous results, since this directly affects Ryanair’s reliability and will put the safety of low cost carriers into question.

Ryanair gives a great importance to hiring and training its pilots, cabin crews and maintenance personnel. Routine aircraft maintenance and repair services are made by Ryanair as far as possible or by approved contractors. Ryanair maintains its aircraft in accordance with the highest European airline industry standards. Moreover, Ryanair runs one of the youngest fleets with only one type of aircraft (Boeing 737-800 NG). For this reason it is easier to ensure proper maintenance and cut costs at the same time (Ryanair, 2010a). Finally Ryanair has had no serious accidents in its 25-year operation history (Planecrashinfo, 2010).

Ryanair focuses strongly on the proper execution of all services. Indeed, through utilizing simple processes, it guarantees the lowest fares with no fuel surcharge, fewer delays and cancellations, fewer missing bags as well as commitment to air safety and the natural environment (Ryanair, 2010a).

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(Ryanair, 2010a)

Ryanair claims to “deliver to airline passengers what they really need, namely real commitments on pricing, on punctuality and on key services” (Ryanair, nd). To assure that it publishes its customer service statistics every month.

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(Ryanair, 2010b)

Customer’s trust in the automotive industry really depends on perceived quality. Toyota claims to provide “high-quality vehicles at an affordable price” (Toyota, 2009, p.10) and defines its vision of quality as “creating better cars through repeated improvement” (Toyota, 2010, p.3). While Ryanair uses a “value based approach”, Toyota uses a “product based approach” (Jones and Robinson, 2009).

The Toyota Production System, which is an example of Total Quality Management, pursues “performance excellence throughout the total system” (Natarajan, 2002, p.70). In fact, all of Toyota’s production lines have been designed in order to divide the stages of the manufacturing process into small standardized and sequenced tasks. Tasks are highly specified in terms of content, sequence timing and outcome. Moreover, Toyota wants to involve its workers in the whole process to the lowest possible organizational level: when a problem is identified workers have to stop the line and try to fix it quickly with the help of their supervisor. In this way, Toyota’s workers find out their work-rules as a consequence of solving problems (Spear and Bowen, 1999). Stopping the chain production facilitates the identification of problems and avoids defects down the line.

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Title: Case study and comparative strategic analysis of Toyota and Ryanair