Comparing Strategic Management Accounting with Traditional Management Accounting

“Strategy is the direction in which the organization plans to move to attain its long-term goal” (Anthony & Govindarajan, 2007). Strategy is concerned with the long-term direction of the business organization, the scope of its operational activities, the matching of operational activities to its resource capabilities and its competitive environment, giving consideration its stakeholders values and expectations (Porter, 1996 ; Anthony & Govindarajan, 2007).

Traditional Management Accounting has tended to concentrate on the tactical and operational decisions in the organization by focussing strictly on financial measures for monitoring and controlling short term activities. It predominately emphasizes on allocating business costs to goods or services and prepare accounting reports using historical and quantitative financial data for internal management business decisions. It is inward-looking with short-term outlook and focussing too much on internal organizational efficiency. In the new competitive environment, for a business to remain healthy there are other aspects that need to be considered such as information on competitors, human resources, customers, suppliers and technologies for developing and monitoring a business strategy.

By focussing only on the cost side of things more heavily than other aspects of the business,traditional management accounting has tended to neglect to provide information to support and attain strategic goals of organizations. Therefore traditional management accounting is considered to be inadequate due to its failure to generate relevant and futuristic non-financial information required to support strategic decision-making (Bromwich, 1990).

Strategic management accounting (SMA) is a newer version of management accounting which adds the strategic perspective to traditional management accounting. SMA is defined as “The provision and analysis of financial information on the firm’s markets ,competitors’ costs, cost structures and the monitoring of the organization's strategies and those of its competitors in these markets over a number of periods” (Bromwich, 1990) . SMA attempts to rectify the weakness of Traditional management Accounting by including (i) Both financial and non-financial indicators and (ii) Both internal and external information.

According to Porter (1996) business strategy, involves (i) Competitive advantage, which focusses on choices and trade-offs between alternatives based on external industry analysis , and (ii) “operational effectiveness,” which focuses on cost minimization based on internal value chain analysis. Thus, SMA can be compared to Traditional Management Accounting from these two perspectives of external competitive environment and internal strategic costing ;

External competitive environment perspective

For an organization to be successful, it is important to gain or sustain its competitive advantage. According to Porter 's (1996) strategy framework, for businesses to generate a sustainable competitive advantage, they have three strategies to choose from. They are the low cost leadership strategy, product or service differentiation strategy, and focussed strategy. A low cost leadership strategy involves seeking to become the lowest cost producer of a product or service in order to earn above-average profits. A differentiation strategy seeks to create a customer perception that a product or service is superior compared to that of the competitor's products or services, based on brand, quality, and performance. A focus strategy involves either a differentiation or cost leadership strategy, but seeks to provide a high perceived value product or service to customers in a niche segment of the market, justifying a price premium. In order to gain competitive advantage, an organization requires constant monitoring of the external competitive environment and must be flexible, adaptable and needs continuous improvement (Porter, 1996).

SMA incorporates strategic thinking into management accounting by including non-financial measures to capture the qualitative attributes and aspects of competitive management. A key component of SMA is analyzing and incorporating external factors such as industry competition to determine the organization's biggest competitors, competitor's positions in the market, threat of new competition in the market, and the cost of entering the market, the threat of substitute products or services which can obsolete the existing product. SMA conveys an externally oriented perspective and helps in the development of long-term plans by collecting and analyzing information on competitors costs, market shares, sales volumes, and resource utilization for comparison against its own internal information. Such competitor data helps business to protect its strategic position or make strategic changes to improve future competitiveness. Thus , SMA looks to the future by measuring trends in the external environment and supports positive longer-term decision makings rather than short-term reactive ones.

Traditional Management Accounting does not offer a full understanding of the external competitive situation. Its focus is on determining costs and financial control, by using methodologies such as budgeting and cost accounting, thus making the organization rigid and not adaptable to the dynamic nature of the external competitive markets. Traditional Management Accounting is inward looking as it focuses largely on accounting functions within internal business units to meet the requirements of the business unit managers. While greater emphasis is given to the internal operations side of the organization, it overlooks potential external competitive threats and external opportunities. Traditional Management Accounting excludes information about competitors, without the information of competition taking advantage of them is impossible. By focussing purely on financial information, Traditional Management Accounting coveys on short-term outlook. Thus, traditional management accounting is considered to be too limited to provide necessary and meaningful information for long-term planning .

Compared to Traditional Management Accounting, Strategic Management Accounting (SMA) is outward looking and helps businesses to evaluate its relative competitive position in industry it operates in. By providing strategic competitive data, SMA helps businesses to analyze the actions of its customers and competitors. In the absence of such information, businesses will be incapacitated in formulation and implementation of business strategies for competitive advantage. Therefore, Strategic Management Accounting (SMA) entails providing management accounting in the context of planning and implementing business strategies.

Internal Strategic Costing perspective

From Porter's (1996) strategy framework, businesses have three strategies at their disposal : product or service differentiation, low-cost leadership and focus strategy . However, to implement any of these strategies , the management must manage costs strictly . Therefore cost management system is a critical source of building a competitive advantage. The 21^st century business environment is characterized by intense competitive rivalry and as a result, businesses have to constantly adapt and change their internal operations in order to maintain or gain a competitive advantage . Successful organizations are those that are able to (i) lower costs and (ii) improve the quality and efficiency of operations. Therefore, an organization's internal cost management system must be aligned to its business strategy

Traditional Management accounting features management control techniques such as budget control and standard costing. Such costing models incorporates arbitrary allocation instead of the cause-and-effect allocations of indirect costs, and they do not provide accurate product cost information in a multi-product organization. Such techniques could lead to accurate product costs in mass-production organizations where direct costs are considerably high and indirect costs are typically low. This was appropriate in mass-production industries which were dominant around 50 years ago, however, the current organizations are characterized with having lower direct costs and higher indirect costs. This makes accurate calculation of product profitability in a modern organization not possible. It is impossible to establish and/or sustain competitiveness without an actual cost calculation mechanism. Also, traditional management accounting has failed to adapt to the modern competitive environment that requires continuous improvement in the entire value chain. The value chain is the set of all the activities involved in the product, from the beginning with the extraction of raw materials to the end with the post-delivery customer support activities (Anthony & Govindarajan, 2007).Traditional Management Accounting does not analyze non-manufacturing costs or the costs of pre-conversion and post-conversion activities. Thus, it fails to evaluate the relative cost positions of competitors as it is concerned more with the internal cost position of the company such as focussing on existing activities and managing the internal resources of the organization. This makes traditionally management accounting backward-looking and reactive to competitive pressure.

For this reason management accounting processes shifted to using costing models under SMA such as activity-based costing methodology. The Activity-Based Costing (ABC) is costing system methodology that reflects the modern complex business environment and facilitates the organization to allocate costs more accurately. ABC assesses and identifies activities in the value chain of the organization and assigns the cost of each activity with resources to all products and services according to the actual consumption by each of them (Anthony and Govindarajan, 2007). Therefore, an organization can accurately estimate the cost elements of the entire range of its product and/or service and to help in management decisions. By identifying and allocating costs to each activity, ABC helps the company to determine whether to lower or raise the activities cost based on the relative cost position. Also, ABC model offers valuable insights toward the strategic planning process (Anthony and Govindarajan, 2007) . ABC focus is not just on the costs of the activities but also value added by these activities from both internal and external positions. SMA views cost drivers by looking at the value they provide to achieve the company's strategic/long-term objectives. In areas where opportunities for lowering costs exists, the long-term impact are addressed, such as the possibility of declining market demand and/or quality. In areas where investment opportunities exists, long-term advantages and/or disadvantages are evaluated, such as whether increasing value-adding activities or eliminating non-value adding activities will raise the profit margin in the future. By integrating costs into strategy, SMA enhances the strategic position of the firm through the exploitation of the linkages in the value chain and optimizing cost drivers. Thus, compared to Traditional Management accounting, SMA uses cost information to formulate strategies and carry out tactics to implement those strategies (Anthony and Govindarajan, 2007).

In conclusion, today's organizations face a lot of competition due to the rapidly changing, complex and uncertain economic environment. For an organization to be successful, it is critical for it to maintain or improve its competitive advantage. By focussing too much on internal organizational efficiency , Traditional Management Accounting does not offer a full understanding of the external competitive situation. It is considered inward-looking aiming to fulfill short-term objectives rather than long-term objectives of the business. Strategic Management Accounting (SMA) looks not only at the internal efficiency of the organization in terms of its resources and operations, but also on the external business environment . SMA aims to provide relevant and both financial and non-financial information on competitors, customers, suppliers, and the external environment to the organization’s management. With such information, organizations can monitor and evaluate the changes in the external environment in which the company operates and enable them to make strategic plans and strategic decisions. SMA also integrates costing into strategy. SMA uses the cost information to improve the strategic cost position of the business and carry out long-term strategic objectives by using cost management as a tool to improve productivity, increase customer satisfactions and increase revenues. Thus, the approach of SMA is in line with the business strategy objectives that produces long-term objectives for the business, taking into consideration competitor's plans and their possible actions, as well as analyzing and improving the value chain to align with the strategic objectives of the organization.

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Case Study: Apple, Inc. Strategy Analysis - Part 2

 

...continued from Part 1

4  Strategy Analysis (2007 – present)

Apple has utilized its unique resources and  core competences to obtain tremendous success over the last five years .Today it has annual revenue in excess of $125 billion compared to $20 billion in end of 2006  and in the span of  5 years between 2007 to 2012 Apple's stock value increased more than 500% from $85 to $542 per share  (wikiinvest-APPL, 2012).

 4.1  Strategic choice

Apple products follow a Focussed differentiation strategy. According to Johnson et al (2008), a focussed differentiating strategy seeks to provide high perceived product value to customers, justifying a price premium and aimed at a niche segment of the market.  Apple has been very successful in creating innovative products targeted at higher income customers who are willing to pay premium price for superior user experience.

  On the surface, it could appear that Apple's competitive advantage is solely due to product differentiation. But on a closer look, Apple's success is not entirely because of its ability to consistently create innovative products. Creating innovative products gives Apple only a temporary advantage as its competitors have imitated and launched their own versions of product in a matter of months.  Apple's success lies in its ability to create a platform around their products that drives and sustains growth.  A platform strategy is one in which third party developers and media companies can sell their contents that runs on Apple's products. 

Apple is unique in that it enters a red ocean, i.e., a highly competitive market and succeeds by changing the market paradigm. Apple combines its 'Product strategy' with a 'Platform strategy' that is free of threats and sustain long term growth. Apple's “Product+Platform” strategy can be summarized as a two phase strategy;

1. Product differentiation focussing on innovation and consumer experience to enter a new market; i.e., Product Strategy.
2. Platform development to build, adopt and then consolidate the platform that is centric to its products to achieve long term growth; i.e. , Platform Strategy.

In the last 5 years the most important products from Apple was the launch of iPhone in 2007 and launch of iPad in 2010. Both of these products were diversification to new industries and today constitutes about 70% of Apple's revenue (Apple, Inc. FY12 10-Q Form Apple).  To understand  Apple's iPhone success and subsequent iPad success, its important to understand what Apple did with iPod+iTunes business.

When iPod was launched it was a very innovative product that made technology easy to use. It was hugely successful among the early adopters  but its long term success was primarily due to iTunes music store. The iTunes music store created a platform for online music downloads and iPod was the perfect companion for this platform. This digital music platform is the reason why the iPod dominats the portable digital player market even today, in spite of its competitors coming up with digital music players that were technologically superior to iPods. For example, Microsoft's 'Zune' music player had color screen and video capabilities even before Apple introduced them in their iterations of iPods. However Microsoft's Zune was not successful because it did not have that convenient music platform like iTunes. By 2007, iTunes had evolved considerably enough that customers were locked-in to this platform due to its convenience and ease of use. As more people buy iPods, more media houses want to sell their content in iTunes and as more entertainment are available on iTunes, consumers are more likely to buy iPods.  This self-reinforcing cycle can sustain and reinforce growth by raising barriers to competitors (Lohr, 2011).  Apple repeated this same  “Product+Platform” strategy with their iPhone and iPad products.

 4.2  iPhone in 2007

In 2007, Apple entered the highly competitive mobile phone market with iPhone. iPhone was a product extension of iPod. The iPhone primarily differentiated itself from other mobile phones by its user interface which was the industry-first multi-touch screen.  From Ansoff’s Product/Market Matrix (A12), iPhone targeted both existing Apple customers and also new customers by diversification to mobile phone market.  

Apple's first movers advantage was short-lived as their competitors like Nokia and Samsung introduced their own version of iPhone-look-feel phones within few months. In 2008, Apple launched “App Store”. The word “apps”, short for applications that run on iPhones was introduced by Apple during the launch of App Store. The App Store allowed third party developers to create application to run on iOS which consumers can download onto their iPhones.  This was the beginning of Apple's mobile platform. While competitors were busy making feature-level comparisons to their products, Apple consolidated its iPhone platform and laid the foundations of a new growth engine that revolutionized mobile phone industry. 

Apple makes 30% commission on all apps revenue. On March 4th 2012, Apple announced that 25 billion Apps were downloaded from its App store (Brian, 2012).  As more 'apps' are available for people to download, Apple's mobile platform gets dominant which in turn sells more iPhones. From Ansoff’s Product/Market Matrix (A8), success of App stores along with iTunes consolidated the existing iPhone market and also developed new market as iPhone customers were introduced to other Apple products like iPods and Mac computers.

 4.3  iPad in 2010

After iPhone, the next major product launch from Apple was the iPad, a tablet computer. Apple introduced iPad in 2010, positioning it between the laptops and smart phones as a companion product in Apple's product lineup.  Apple leveraged the iPhone and iPod designs, and integrated iTunes store and the App store in iPad. iPad was a diversification towards the e-reader market as iPad presented opportunities to the publication and content industry. During the iPad launch Apple also announced “ibook store” which is an extension of its Apps store targeting media publishers. The ibook store launch was accompanied by Apple's partnership announcement with five large book publishers: Penguin Group, Harper Collins, Hachette Book Group, Simon & Schuster and McGraw-Hill. This laid the foundation of a e-reader platform with iPad.

  In January, 2012 Apple consolidated the iPad+iBook platform further by releasing the iBook2, and iBooks author which lets anyone author and create digital books on iPad. The ipad+ibook platform has potential to revolutionize educational sector  by giving teachers and any other authors the ability to create their own interactive books.

 4.4  Product Iterations & Market Expansion (2007-present)

Apple operates a very short product life cycle. Throughout the last five years Apple has continuously  updates product line with innovative features that has kept it one step ahead of its competitors and at the same time consolidating its platform adoption. Popularity of iPod, iPhone and now with iPad has strengthened Apple's brand which in turn is drawing more customers to Apple's Mac computer products. Apple reports that half of all computer sales through its retail channel are to people new to Mac computers, Mac products saw an increase of 21% in 2011 (Apple, Inc., FY12 10-Q Form).

The popularity of iPhone and iPad has penetrated the corporate business market segment which Apple had no presence before the introduction of iPhone. Adoption of iPhone among the corporate users has increased Mac computer sales among the corporate users. Apple introduced Macbook Air in 2008 targeting the corporate uses. Even though Macbook Air sales is relatively small compared to overall Apple products sales, it has seen year over year increase (Apple, Inc., FY12 10-Q Form). 

 5  Conclusion

Apple has built a culture of transforming industries by introducing innovative products. iPad is likely to become another big platform for Apple. With iPad, Apple has created a completely new market, just like they did first with the iPod and then with iPhone. Success of the iPhone, and iPad does not appear to be slowing and should continue into 2012 and beyond. Besides these products, Apple’s biggest competitive advantage is its digital content service business based on iTunes and Apps Store, which no other competitor can replicate in the short-term.  Apple remains promising because of is strong brand combined with the halo effect of iPod, iPhone and iPad products have on its other businesses.

 6  References

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Case Study: Apple, Inc. Strategy Analysis - Part 1

 1  Introduction

Apple, Inc. is a US multinational corporation that needs no introduction.  Apple Inc. with its “Think Differently" motto has been Fortune magazine's  “World's most admired company in the World” for the last 4 consecutive years (Fortune, 2012). On February 28th, 2012, Apple, Inc.'s market value toped $500 billion (Blodget, H, 2012).

'Apple Computers' as it was called prior to 2007 had primarily focused on its core computer business. In 2001, it shifted its strategy by entering the portable digital music player business with the introduction of iPod, and in 2003 entered the music business with the introduction of iTunes music store. According to Apple's FY'07 10-Q, by end of 2006, the iPod & iTunes business contributed to more than half of its revenue. In 2007, “Apple Computer” changed its name to “Apple, Inc.” This paper focuses on Apple, Inc.'s  business strategy in the last five years starting from 2007 to present and throughout this paper 'Apple, Inc.' will be simply referred as 'Apple'.

 2   External Analysis

 Apple competes in the following four industries ;

• Computer Hardware and Software – with 'Mac' line of computers, Mac OS X & iOS
• Portable media devices – iPod, iPad & appleTV
• Smart Phone – iPhone 
• Music, Media and Content Service – iTunes, iBook, App Store and Mac Store

A firm's business strategies are influenced by the forces in its external environment. PESTEL and Porter's five forces framework can be used to analyze the factors influencing the firm's macro-environmental and industry sectors respectively (Johnson et al, 2008, p.55). From Apple's PESTEL Analysis (A1) and Porter's Five Forces Analysis (A2), the key external drivers of change affecting Apple are ;

Political Threat

Apple manufactures and assembles all of its products in Asia (Apple, Inc. FY12 10-Q Form , p36). Hence it is dependent on political stability in these countries. Any political conflict between these countries and the US can have a negative effect on Apple's operations.

Legal Threat

Apple is a successful company and with success comes persistent threat of litigation from any number of sources, e.g., Apple had legal disputes with Beatles on Apple trademark which was settled in late 2006. Currently Apple is fighting Antitrust lawsuit filed against its iTunes download business (Apple, Inc. FY12 10-Q, p33)

Economic Threat

Apple is subject to global economic cycles, like inflation, GDP, interest rates and levels of disposable income. Apple products are considered premium products and puts Apple in disadvantage during economic downturns as consumers are weary of big-ticket purchases like computers, iPhones or iPads. 

Apple is a multinational company maintaining huge cash reserves which is not fully repatriated. Global interest rate fluctuation will have impact on Apple's income as the company earns interest on its cash reserves. Fluctuation in US dollar exchange rate will have significant effect on its profits as more than half of its revenue coming from outside US (Apple, Inc. FY12 10-Q Form, p18). 

Threats from Competitors 

  Apple's competitors are established companies with substantial resources. Any advantage that Apple gains by product differentiation is short lived as competitors have copied them immediately, e.g., mobile phone companies like Samsung, Nokia, Motorola released their version of touch screen smart phones and tablet computers within months after the introduction of iPhone & iPad.   

Threat of  New Entrants

Even though cost can be a significant barrier to entry, some of potential competitors with substantial resources have diversified into Apple's music and smartphone businesses. New entrants to music industry like Amazon, started their own online music business. Microsoft launched the 'Zune' music player to compete against iPod. Google entered smartphone business with Android based phones to compete  against  iPhone & iOS.

 3  Internal Analysis 

In spite of all four of these industries being highly competitive, we can see from Apple's SWOT analysis (A3), that they are all fast growing industries with huge potential. Apple has been able to successfully exploit these opportunities by entering and then creating a sustainable market for its products.

 3.1  Competitive Advantage

A firm achieves competitive advantage when it has one or more core competencies which is a combination of unique resources and capabilities (Johnson et al, 2011, p.97). From Porter’s value chain analysis (A4) and SWOT analysis (A3)  Apple's success factors can be attributed to its unique Resources and capabilities of ;

Leadership and Talented Employees

Even after Steve Job's death, who was the iconic leader of the company, Apple’s executive  management team, that was hand picked and groomed by Steve Jobs are embedded with  “Think Different” philosophy (Lee, 2011).   Tim Cook, the current CEO, took over day-to-day CEO duties from Steve Jobs since his first medical leave of absence back in 2006. Apple under the leadership of Tim Cook, has done extremely well. Apple recruits the best talents available and Apple has one of the best design team headed by Chief designer Jonathan Ive.

Cash

As of December 31, 2011 Apple has about $92 billion in cash (Apple, Inc. FY12 10-Q Form). This gives the company strategic advantage as Apple can pay in cash upfront to its suppliers and lock out crucial supply parts from the suppliers years in advance (Wingfield, 2011). Having huge cash resources protects Apple in fighting legal battles against it and also aggressively pursue legal actions on any firm that steals Apple's intellectual property. 

Brand

Apple is the world's valuable brand valued at $153 billion (Culpam, 2011). Apple brand stands for innovation and design and has a cult like following. 

Culture of Innovation

From Apple's culture web analysis (A7), an innovation culture has permeated throughout Apple's history by Steve Job's “Think Different” philosophy. This has become a self enforcing and self sustaining culture. Apple's culture of innovation is not just limited to products development, but also to its business model, innovative marketing and captivating communications. It not only boosts sales, but enhances the brand value too. This culture of innovation gives Apple a strategic advantage.

Technology with Integrated Value Chain

Apple puts consumer experience more than the technical prowess of the product. Apple is the only vertically integrated company and thus can manage all aspects of the consumer experience. Vertical integration refers to owning all parts of the product value chain. Apple designs and develops its own Hardware and Software platforms for its products, content service via iTunes and App stores, uses its own sales and service via Apple Retail store and online store. By controlling the whole value chain, Apple is in position to extract all the value from it, and also provide an outstanding value in all aspects of consumer experience. This gives Apple a strategic advantage. 

 3.2  Sustainable Competitive Advantage

An organization can attain sustainable competitive advantage if its unique resources and core competencies are rare, inimitable, valued by customers and embedded within its organization (Johnson et al, 2008, p107). Analyzing Apple's Unique Resources and Core Competencies (A5) using VRIO framework (A6) we can conclude that the above mentioned Unique resources and core competencies give Apple a sustained competitive advantage.

   ... continued in Part 2

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CASE STUDY: RyanAir, Strategy Analysis - 2012

1 INTRODUCTION

Ryanair was founded in 1985 with only two aircrafts and a single Dublin-London route . By

2010 Ryanair had transformed itself into Europe's leading low cost airlines with 232 aircrafts flying to

153 destination. Ryan Air's strategic objective has been to offer the lowest possible air fare to its

passengers and strive towards becoming europe No.1 Low Cost airlines. In this paper we will explore

and analyze Ryanair's competitive position, strategic capabilities and sustainability of its strategies.

2 COMPETETIVE POSITION

2.1 PORTER'S FIVE FORCES FRAMEWORK;

Threat of New Entrants: LOW

• High entry barrier due to large capital requirement, longer procurement and marketing period.
• Restricted airport slots availability.

Threat of Substitutes: MEDIUM

• Threat of alternative mode of transportation like high-speed train and ferries within Europe.
• Customers can easily switch to driving.

Buyer's Bargaining Power: MEDIUM

• Customers are price sensitive.
• No customer loyalty as customers can easily switch to another airline offering lower price

Supplier's Bargaining Power : HIGH

• Entire fleet is made up of Boeing aircrafts.
• Fuel prices are fluctuating.
• Regional Airports can increase the fees.

Internal Rivalry : HIGH

• Highly competitive Low Cost market with Easyjet, Aer Lingus,etc.
• Easy to imitate the Low Cost model by a Full Service airline.

2.2 PESTEL ANALYSIS;

Political: HIGH

• Political stability within europe but risk of tighter regulations.
• Airport Security restriction and enhanced passenger screening measures.
• Risk of labour law changes.
• Airport subsidies dependent on regional/local government.

Economical:HIGH

• Eurozone financial crisis, economic downturn.
• Rising and uncertainty in fuel cost.
• Falling US Dollar.

Social Cultural: LOW

• Change in consumer travel lifestyle and demographics.
• Customer environmental awareness.
• Increase in discretionary income, making air travel popular.
• Business travelers forced to fly in Low-cost airlines due to slowdown.

Technological:LOW

• Increase in aircraft R&D resulting in newer fuel efficient and quieter aircrafts.
• Internet technology helps to lower operational costs and create new business opportunities within the airline industry .
• Technological growth in the cheaper high-speed trains, ferries services.

Environmental:LOW

• Laws to curb Carbon footprint and global warming concerns.
• Airport curfew regulations for controlling noise pollution.

Legal:MEDIUM

• Potential lawsuits against the legality of subsidies received from regional airport governments.
• Allegation on misleading advertisements.
• Potential lawsuits on passenger discriminations (fat tax, wheelchair fees).

2.3 SWOT ANALYSIS;

Strength:

• Strong Brand Recognition as a low cost leader.
• Cost conscious corporate culture with innovative cost reductions.
• Flight punctuality due to operational efficiency.
• First mover advantage and high experience curve.
• Modern and uniform fleet of aircraft.
• Happy Employees

Weakness:

• Negative publicity
• Poor customer service, so customers are coming to Ryanair only for the value for money.
• Does not fly to major airports.
• Regional airports limits passenger market.

Threats:

• Full Service airline can easily start a low cost spin-off.
• Substitute mode of transportation like Cars, Trains & Ferries.
• Pressure to unionize.
• Fuel Price fluctuations.

Opportunities:

• Expanding tourism industry.
• Eastern european expansion.
• Gain further market share by introducing medium haul destinations in eastern europe.

From the PESTEL and Porter's Five Forces analysis, it is evident that Ryan Air is operating in a

highly competitive and unfavorable business environment. The biggest macro environment threat

facing Ryanair is the political environment and fluctuations in fuel prices, both of which are not in

Ryanair's control.

From the SWOT analysis, Ryanair strength is being the leader in low cost airline industry.

However this cost leadership has come at the expense of customer service. Ryanair should improve its

customer service to build customer loyalty. Ryanair faces threats from competitors and substitutes

mode of transportation, but should seize opportunities in the eastern European expansion.

3 STRATEGIC CAPABILITIES

Strategic Capabilities and Competitive Analysis;

Resources Competencies

Threshold Capabilities

• Aircrafts
• Employees
• Financial resources
• Point-to-point short haul flights
• Flying to secondary airports
• Online booking system with www.ryanair.com

Competitive Advantage Unique Resources

• Management and leadership of Micheal O'Leary.
• “Ryanair” Brand name

Unique(Core) competencies

• Innovative cost cutting
• Alternative revenue generation

Ryanair’s Strategic Capabilities and Competitive advantage can be attributed to its Unique

Resources and its Unique(Core) Competencies;

Management and Leadership:

Michael O'Leary, the CEO of Ryanair is instrumental in the Low Cost Strategy of

Ryanair. Some of the most creative cost cutting methods implemented in Ryanair came directly

from him. He has been effective in exploiting and managing the core competencies of Ryanair.

By developing the human and Social capital overtime, the cost cutting culture is embedded

throughout the organization.

Ryanair brand :

Ryanair has built a strong brand based on cost. The Ryanair brand sends a simple, consistent

and compelling message, i.e low cost.

Innovative cost cutting method:

The heart of Ryanair's strategy involves reduce cost at wherever possible and pass the

savings to the customer with low ticket prices. All the activities in its operations are designed to

increase efficiency and reduce costs. To achieve this Ryanair had to continuously come up with

very Innovative Cost reduction methods across each and every stages of its supply chain. For

example by offering a very few services at the airport, like limited airport check-in facilities or

removal of baggage transfer, Ryan Air doesn't have to have personnel in these areas.

Lower customer service cost and elimination of ticket agent fees by high utilization of

internet to sell tickets.

Ryan Air uses only single type of aircraft, Boeing 737. By having a uniform fleet, it has

helped to lower its maintenance costs and time. This reduces cost in maintaining only fewer

inventory of aircraft maintenance parts and training of maintenance engineers. Also engineers

have become experts in this aircraft and contribute towards innovation on aircraft efficiency.

Having fleet commonality helps with quick and flexible cabin crew and pilot assignments.

Ryanair flies offers only point-to-point route and flies to less expensive secondary

airports which charges lower airport fees. Since these airports are not very congested, Ryanair

can attain fewer delays and higher turnaround times.

Ryanair employs a non unionized workforce. Ryanair employees are tied to performance

related salary model which forces high productivity among employees.

Alternative revenue generation/Ancillary Revenue:

Ryanair's ultimate goal is to offer free flights by generating revenue through other

means. It has constantly been creative in finding new sources of revenue onboard their flights.

Some examples of this are inflight advertisements, on-board shopping and gambling, pay-perview

television. All the flight attendants get commission on the items they sell onboard.

Customer amenities like food and beverages, airport checkin, baggage checkin and any other

additional passenger service is charged higher than normal. RyanAir currently generates non-air

revenue from third party service provides like car rental, hotel reservation, travel

insurance,ground and rail transportation which it sells on its website.

4 SUSTAINABILITY OF STRATEGY

A corporate strategy is sustainable as long its competitive advantage is maintained. Ryanair will

undoubtedly face challenges in the future, however its strategy is sustainable because of its unique

resources of 'Ryanair Brand', 'Cost Conscious Management ' and its core competency of ‘Innovative

cost cutting strategy’.

RyanAir's goal is to offer the lowest ticket price and establish itself as a leader in the European

low cost airline market by focussing on cost cutting and achieving operational efficiency. Ryanair's

corporate policies are all based on cost cutting. Irrespective of whether Michael O'Leary stays or not,

the low cost culture is deeply embedded throughout Ryanair’s organization and this culture is

sustainable. Ryanair's management and employees have continuously come up with creative and

innovative ideas to cut cost throughout its value chain. Also, throughout the years Ryanair has built up

a huge low cost operations experience curve which will help it sustain in the future.

Ryanair brand is synonymous with low cost airline. The Ryan Air brand along with its market

dominance gives it a huge bargaining power that will help it to sustain it’s low cost operations. Ryanair

has been the most profitable airline and is financially stable to counteract any uncertainty. Now that

Ryanair is a leader in low cost airlines industry, it can benefit from economies of scale, corporate

infrastructure to achieve lower costs and higher profits.

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CASE STUDY: SABMMiller Acquisition Strategy

Up until1990s, SAB was a regional player in South Africa. With the ending of apartheid a range

of new growth opportunities opened up for SAB. The 1990's saw SAB's strategic focus shift from

pursuing purely regional growth to towards globalization. It began expanding and growing

internationally by acquisition. SABMiller's acquisition strategy was based on three key trends ;

• Growth in emerging markets
• Increasing popularity of premium brands
• Industry consolidation

SABMiller 's strategic logic behind acquisitions can be viewed from its acquisition management in

emerging market and the acquisition management in developed markets.

• Acquisitions in Emerging markets;

SAB's first wave of acquisition started with acquisitions of small local breweries in the easter

european countries and continued within the other developing countries in Asia & Latin

America. Its growth during 1990-2000 has come through entering developing markets,

acquiring businesses and brands, and growing them. Its acquisition philosophy can be summed

up as;

• Acquire a local established brand, value-add by leveraging SABMiller's capabilities to improve local brewer's financial and operating performance.
• Use SABMiller's marketing efficiencies to increase the value of the local brand, then penetrate the local market further with efficient branding & distribution strategy.
• Once business in the local market is well positioned, then continue to make other local acquisitions, which adds further value by operational synergies.

During the 1990s, SAB expanded into Africa, Hungary, Romania, Poland, Slovakia, Russia.

When acquisitions was not possible it had pursued Joint Venture or partnerships in India,

Vietnam & China. Some of the joint ventures was later acquired completely by SAB.

SABMiller's has traditionally pursued growth with expanding into emerging markets,

however starting early 2000 onwards, it moved towards a balanced diversified portfolio by

entering developed markets. Emerging markets offer high growth but are very risky, where as

in a less risky developed markets, SABMiller can maintain margin and volume.

• Acquisitions in Developed market;

The next wave of acquisitions which began around 2001 onwards, was more about mergers of

larger & established brewing companies in developed countries in US & Western Europe. The

acquisitions from 2001 – today was motivated towards building a balanced brand portfolio

supported by a global operational consolidation, but at the same time taking advantages of

economic growth in emerging markets.

In 2001,SAB acquired Miller Brewing Company. Acquisition of Miller which was a

large company gave a significant market share in US, immediate visibility in developed market

and an opportunity to apply SABMiller's capabilities to improve Miller's operating performance

and increase economics of scale. It also gave new sales opportunities to position other

international brand from its brand portfolio to the US market.

In developed mature markets, beer consumption is declining and consumers are moving

towards “premiumisation”, the process where the consumers move from mainstream brands to

premium brands (Elliot, 2009). The premium beer segment made the industry attractive as it is

fast growing. SABMiller had to build a portfolio of international brands to be strategically

competitive. During 2003 onwards premiumisation had formed an important element of

SABMiller’s growth strategy (Annual report 2003).

SABMiller started acquiring brands in developed countries like Grolsch, Perroni, to get

immediate access to established market and also to enhance its market share in premium beer

markets. This strategic logic for the acquisitions in the developed countries acquisition can be

summed up as;

• Acquire a well established brand to get immediate market access,
• Renovate and relaunch the core brand and strengthen it. For Ex; Miller Draft & Miller Lite in US, relaunch of Perroni in UK.
• Broaden the brand portfolio to include international brands and leverage global capabilities to optimize both local and global brands.
• Introduce premium brand when the market gap for premium beer exists.
• From SABMiller's Ansoff Matrix analysis (Appendix E), SABMiller had exploited the brand extensions opportunities in both emerging and developed markets by product development and market development.

• Acquisition of Fosters in 2011;

Acquisition of Fosters' can be looked along the same lines as SAB's acquisition of Miller

to enter US. This acquisition will allow SABMiller an industry visibility in Australia. Foster is

an established company with a significant brand portfolio in Australia with 40% export market

(SABMiller Fosters Presentation, 2012). The acquisition of Foster also gives SABMiller the

turnaround opportunity to apply its capabilities to improve operating performance,improve

quality and gain further market share and Brand extensions.

Mergers and acquisitions has been the most important strategic choice for SABMiller to achieve

globalization. Emerging markets are important for SABMiller as developing countries have the high

growth potential, whilst the beer consumption in developed economies are declining. SABMiller

should continue building an international premium beer portfolio which is a growth segment in the

developed economies, but at the same time focus on emerging market expansion especially China and

India.

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