The business environment of a firm consists of all the external influences that affect its decisions and performance. These can be categorised as Political, Economic, Socio-cultural and Technological factors, and fitted into a framework called the PEST analysis (Grant, 2001). Let us now conduct a PEST analysis for Ryan Air in the market environment it operates in.
The PEST Analysis identifies a number of key environmental influences that are, in effect, drivers of change (Johnson et al, 2001). The political, economic, socio-cultural and technological factors that influence the market development are listed systematically and assessed. It offers a checklist that enables market entrants and participants to consider and assess the external risks and opportunities the particular market is exposed to and to implement the adequate strategies and measures to hedge or harness them respectively.
A schematic of the PEST analysis diagram is shown in the next page as an indicator of the way in which the tool can be applied for environmental analysis along four paradigms, one of which is macroeconomic forces(Williams & Curtis, 2006).
The essay now discusses the political factors impacting RyanAir. Being a relatively new player in the market, Ryan Air benefits from the monopolistic trade practice related rules and regulations in the market, as a result of which Ryan Air finds itself protected from the relatively established players within the industry, such as British Air, Lufthansa, KLM, etc. Besides, given that Ryan Air largely operates within Europe in general, and Western Europe in particular, wars and conflict have a major role to play, as they tend to insulate RyanAir from the major airlines customers that it could otherwise have added to its customer base. Besides, given the general condition of turmoil in the overall political environment globally, Ryan Air stands to gain should conflicts die down on an international scale.
Among the economic factors, lower interest rates are characterised by lower rates for loans, thereby supporting fervent activity in the assets market. On the other hand, high levels of interest rates increase banks’ gross interest income on the liabilities side. Needless to say, lower interest rates are accompanied by cheaper access to international travel, thereby attracting more business to RyanAir. Besides, the inflation, unemployment and GDP growth rates of a geographical market are known to drive the level of economic activity in general, which directly impacts the lending and borrowing rates of Banks. This in turn adds to the costs faced by RyanAir and other lean organisations, thereby increasing their costs and reducing the attractiveness of their business model.
Among social factors, given the propensity of the society in general to indulge in air travel, RyanAir finds itself in the unique position of being able to make the world a smaller place for its customers in general, at the cost of being perceived as a cheap low cost airline, thereby suffering from a lack of premium associated with its overall brand image. Also, the general antipathy towards the growing global warming and the associated calamities could result in a reduced patronage for air travel in general, which could affect Ryan Air and its business revenues in general. This should be factored into any discussion surrounding the core competencies of Ryan Air and the social ramifications thereof.
Finally, moving to technological factors, advances in the technology relating to flying aircrafts have generally stood the whole industry in good stead, as a result of which industry constituents tend to reap rich dividends in general, reducing costs and increasing flight turnover. This however, is often coupled with excessive price cutting among popular carriers, and needs to be accompanied by price cutting by the likes of EasyJet and RyanAir, both of them being the low cost airlines options available to Europeans in general.
- Legislation with regard to monopolistic trade practices
- Regulatory bodies
- Local government and trading policies
- Wars and conflict
Minimum wages and employee benefits
- Home and target market economy situation
- Taxation and import duties where applicable in a foreign market
- Interest and exchange rates
- Government interventionism
- Inflation, unemployment and GDP growth rates
- Projected brand image and consistency across the global markets
- Impulse-buying behaviour
- Health and environment consciousness
- associated/dependent technologies towards more efficient production
- investment into R&D for new variants of existing products and new product launches
The industry life cycle school of thought regards strategy formation as an emergent process, where the management of an organization pays close attention to what works and doesn’t work over time, and incorporates these ‘lessons learned’ into their overall plan of action. One of the factors that cause the strategy to be revised with passage of time is the Product Life Cycle of a product or service. The Product Life Cycle (Kotler, 1988) refers to the stages that a product goes through depending on the revenue it generates at each stage. The marketing mix dynamics also change with these changes.
- Introduction: This is the phase when the product is introduced in the target market and hence the related costs are high and the returns low. The aim is to communicate about the product and its benefits to the consumer. The price is important as it determines what segment the product is being targeted at. The distribution is selective and therefore costs are high.
- Growth: The product sales tend to grow during this stage, leading to rapid sales growth. Additional features could be added to the product or the packaging options could be re-considered. The price could be increased if the demand was high or lowered to capture more customers. The distribution network would start increasing. The promotion would increase now to focus on brand preference.
- Maturity: During this stage, the revenue generated is the most and the focus is on trying to maintain the leadership of the brand. The aim would be to retain market share and extend this stage of the product life cycle as long as possible. The product features could be modified to differentiate the product from other competing products. The price could be reduced in order to compete with other brands. The distribution channels could be offered incentives or discounts to retain shelf space. Brand awareness would be strong at this point and the promotion costs would be reduced. The emphasis would be on building brand loyalty and getting customers to choose over the competing brands.
- Decline: As the market becomes saturated, either due to the product becoming technically obsolete or due to changes in the customer preferences, the sales begin to decline. During this stage the firm can decide either to continue with the product in the hope that the competition will reduce or reduce marketing support until no profits can be made or discontinue the product. The number of products produced could be brought down and the look of the products could be redesigned while finding new uses for the product. For products continuing in the market the price could be maintained as before or reduced for the clearance of the products to be discontinued. The distribution channels could be reduced depending on their profitability. The promotion would aim to maintain the brand image and hence expenditures would be low.
Of the above, the airline industry finds itself in the maturity phase of its industry life cycle, as a result of which most companies focus on price reduction. This offers RyanAir a major competitive advantage, given that the organisation is characterised by a distinct advantage in terms of costs as compared to other industry competitors.
Michael Porter (1998) suggested that for an organisation to evolve a business strategy, it had to consider its position in the industry and its strengths and weaknesses relative to its competitors. Based on these, there are three different strategies that an organisation can choose to adopt to progress its business:
Cost leadership – A firm that chooses to adopt the cost leadership strategy has to clearly acquire or develop a clear competitive advantage in terms of the operational costs that it incurs in the production of its commodity or services as compared to its competitors. This could be in the area of manufacturing, such as the advantage attained by Ford in the wake of the Industrial Revolution, which was characterised by concepts of time and motion studies, application of F W Taylor’s scientific management principles such as division of labour and so on. It could also be in the field of procurement, an example of this being the Walmart chain of stores or Asda in the United Kingdom, who achieve economies by buying their goods from their suppliers in bulk. It could also be in the area of logistics and distribution such as companies like Dell and Amazon, who have secured cost advantages in this area. Finally, cost leadership can also be achieved through warehousing (or lack of it), illustrations being companies such as Argos, who save on display space through catalogue selling.
One critical assumption here is that a company adopting a cost leadership strategy is clear about what its customers are prepared to forgo in return for a reduced price (Shaw, 2004). To illustrate, while passengers taking RyanAir flights can go without the frills of free drinks on board, they would not want the safety and security of the flight experience to be compromised for the sake of a few dollars.
Differentiation – This translates to making one’s product or service sufficiently different from competing product offerings, such that customers are willing to pay a premium for the differentiated attribute of the product (Williams, 2004). This strategy is a useful shield for organisations from competitors and substitute products, as it enables them to retain existing customers and protect them from being acquired by competitive product offerings. An example of a product that uses the differentiation strategy is the HBO premium subscription channel. While its main line of business is buying the rights to movie channels and then broadcasting them like its competitors, it also differentiates its product offerings by broadcasting homemade productions, soaps and mini-series. This ensures that the differentiated product offering from HBO is preferred by the subscribers, giving it a bulk of the premium channels market.
Focus – Focus strategies draw upon concepts of positioning and addressing the needs of niche markets with a product using a specific attribute or a set of attributes. Here, organisations typically conduct detailed research into desirable attributes in a product, and the market segment that prefers these attributes. Once it sees a market that is large enough to cater to, so as to ensure it breaks even and makes desirable profits, it goes ahead and applies this strategy. To illustrate, Rolls Royce focus on the exclusive segment of car purchasers and cater to them, Dell focuses on the direct selling market to sell its products, etc.