DESIGN AND CONTROL OF INTERNATIONAL ORGANIZATIONS
ARIZONA STATE UNIVERSITY
OMT 440 - INTERNATIONAL BUSINESS
WEEK 7
Definition of Organizational Design:
Organizational design is the overall pattern of components and structural configurations
used to manage the entire organization. The right design for the organization depends on the
size, strategy, technology and environment of the company (Griffin & Pustay, 2006). The
global design used by each company must consider the need to integrate three types of
knowledge in order to compete effectively globally, namely:
a. Area knowledge: Managers must understand the cultural, trade, social and economic
conditions of each destination market in which the company does business.
b. Product knowledge: Managers must understand factors such as technological trends,
consumer needs, and competitive forces that affect the goods the company produces and
sells.
c. Functional knowledge: Managers should have access to workers who have expertise in
basic business functions such as production, marketing, finance, accounting, human
resource management, and information technology.
The five most common forms of global organizational design are product, area,
functional, customer, and matrix. Company International companies typically employ one of
three managerial philosophies that guide their approach to functions such as organizational
design and marketing. The ethnocentric approach is used by companies that run their
international operations in the same way as their domestic operations. The polycentric
approach is used by companies that modify their operations in each market they enter. The
geocentric approach is used by companies that analyze consumer needs around the world and
then use standardized operations for all markets served (Griffin & Pustay, 2006).
10.2. Types of Organizational Design
According to Griffin & Pustay (2006), the types of organizational design and their
examples are presented below:
1. Global Product Design
2. Global area design
3. Global functional design
4. Global customer design
5. Global matrix design
6. Hybrid design
10.3. Control Functions in International Business:
Controlling is the process of monitoring ongoing performance and making any changes
deemed necessary to keep the organization moving towards its stated performance goals.
Strategic control to monitor both how well the international company formulates the strategy
and how well the company implements the strategy. Control techniques include accounting
systems, procedures, and performance ratios (Griffin & Pustay, 2006).
10.4. International Control Measures:
The control steps are (1) developing control standards to assess performance, (2)
measuring actual performance, (3) comparing performance with standards, (4) responding to
deviations.
Case Study
ORGANIZATIONAL STRUCTURE OF ANGKASA PURA II:
PT Angkasa Pura II (Persero) is one of the State-Owned Enterprises engaged in the
business of airport services and airport-related services. PT Angkasa Pura II has been
entrusted by the Government of the Republic of Indonesia to manage and operate the Jakarta
Cengkareng Airport, which is now renamed Jakarta Soekarno-Hatta International Airport and
Halim Perdanakusuma Airport since August 13, 1984. The establishment of Angkasa Pura II
aims to carry out management and business in the field of airport services and airport-related
services by optimizing the empowerment of potential resources owned and the application of
good corporate governance practices. Angkasa Pura II's work has shown progress and rapid
business improvement in the airport services business through the addition of various
infrastructure facilities and improving the quality of services at the airports it manages. Now,
Angkasa Pura II manages 16 Indonesian airports. Figure 1 shows the organizational structure
of Angkasa Pura II.
Case Question:
1. Explain the meaning of organizational design?
2. Based on the picture of Angkasa Pura II's organizational structure above, what form of
organizational design/structure does Angkasa Pura II use?
3. Explain what is meant by organizational control?
INTERNATIONAL MARKETING MANAGEMENT
11.1. Definition of International Marketing:
Marketing is the process of planning and executing the concept, pricing, promotion, and
distribution of ideas, goods, and services to create transactions that meet individual or
organizational objectives. International marketing is the process of conducting these activities
beyond national borders (Griffin & Pustay, 2006).
11.2. Marketing Mix Elements in an International Company:
According to Griffin & Pustay (2006), international marketing managers must address
the following four issues:
1. How to develop the company's products.
2. How to price the product.
3. How to sell the product.
4. How to distribute the product to customers.
These four elements are known as the marketing mix and are often referred to as the
four P's of marketing: product, pricing, promotion, and place.
Product:
The product marketing strategy is defined with respect to whether the product is
standardized or customized (customization to the product) special needs) (Griffin & Pustay,
2006). According to Griffin & Pustay (2006), there are three approaches in determining
product marketing strategy, namely:
1. Ethnocentric approach, the company markets its products in the international market by
using the same marketing mix that the company uses in the local market, thus the
company does not need to incur the cost of developing new marketing techniques to
serve foreign customers.
2. In a polycentric approach, international marketers seek to customize the marketing mix
in each market entered to meet the specific needs of consumers in that market.
3. The geocentric approach requires standardization of the marketing mix, which requires
companies to provide essentially the same products or services in different markets and
use essentially the same approach to sell their products or services globally.
Products include some tangible factors that are commonly seen or touched (the physical
product and its packaging) and some intangible factors such as product image, installation,
warranty and payment terms. An important factor in a company's ability to compete
internationally is its success in developing products with features, both tangible and
intangible, that meet the wants and needs of customers in each country.
Pricing:
There are three basic philosophies in pricing: standard pricing, two-tiered pricing, and
market pricing. Market pricing, the most complex and widely used policy, involves setting
different prices in each market. International companies that take a geocentric approach to
international marketing will use a standard pricing policy, where the company charges the
same price for products and services regardless of where they are sold and the nationality of
the customer. International companies that ethnocentric marketing approach will use a two-
tier pricing policy, where the firm sets one price for all sales in the domestic market and
another price for all sales in the international market. International companies that take a
polycentric approach will use a market pricing policy (Griffin & Pustay, 2006).
Promotion:
Promotional issues and decisions are generally related to the use of advertising and
other forms of promotion. The promotional mix is a combination of advertising, personal
selling, sales promotion, and public relations. Each of these elements is usually carefully
tailored to the market it is entering and implementing each of these elements (Griffin &
Pustay, 2006).
Place (distribution):
International distribution involves various means of transportation, each with its own
advantages and disadvantages. Companies must also develop suitable distribution channels
involving wholesalers and retailers. Effective distribution has a significant impact on a
company's profitability (Griffin & Pustay, 2006).
CASE STUDY:
ANGKASA PURA AIRPORTS WON 3 AWARDS IN THE "BUMN BRANDING &
MARKETING AWARD 2020" EVENT:
Angkasa Pura Airports won 3 awards in the prestigious "BUMN Branding & Marketing
Award 2020" organized by BUMN Track and Arrbey Consulting.
The three awards achieved by Angkasa Pura Airports are the Branding Award category
"Branding The Innovation", the Marketing Award category "Creative Competition Strategy"
and The Best Chief Marketing Officer (CMO) BUMN "Marketing Leadership" which was
successfully achieved by Angkasa Pura Airports Marketing and Services Director Devy
Suradji.
The award was presented by the Chairman of the Jury of the "BUMN Branding &
Marketing Award 2020" Sugiharto to Angkasa Pura Airports' Director of Marketing and
Services Devy Suradji in Jakarta, Thursday (5/11) morning.
"This award is an appreciation for the optimal performance of Angkasa Pura Airports
which has been able to compete in the global market through branding and marketing
innovation through Omni Channel optimization. This is also inseparable from the company's
commitment to always provide a valuable experience to airport service users in realizing the
vision of 'Connecting the World Beyond Airport Operators with Indonesian Experience' even
in the current situation of the global Covid-19 pandemic, "said Angkasa Pura Airports
Director of Marketing and Services Devy Suradji.
BUMN Branding & Marketing Award 2020 is a prestigious event that gives
appreciation to BUMN companies and BUMN subsidiaries that show superior performance
in branding and marketing innovation. Entering its 8th year of implementation, this event
was attended by 114 BUMN companies and BUMN subsidiaries with the theme "Optimizing
Omni Channel on Branding and Marketing".
Chairman of the 2020 BUMN Branding and Marketing Award Jury and Minister of
SOEs 2004-2007, Dr. Sugiharto, stated that the theme is "Optimizing Omni Channel" chosen
this year is very relevant to the current developments. Omni Channel has a linear or relevant
relationship between the branding and marketing achievements of each SOE to revenue, the
company's health level and the company's profits," explained Dr Sugiharto.
The winning categories are divided into three sectors, namely SOEs, SOE Subsidiaries
and Tbk SOEs. The 2020 BUMN Branding and Marketing SOE judging process took place in
two stages, namely first, filling out a questionnaire on September 8-October 6, 2020.
Furthermore, participants who passed the stage 1 selection continued the presentation and
interview session in front of the jury on October 13-21, 2020. Different from previous years,
the process of filling out questionnaires and judging is done online through the zoom meeting
application.
BUMN Branding & Marketing Award 2020 is supported by a competent team of judges
from various professions, representing academics, professionals and branding marketing
experts and is expected to be a reference for the management of BUMNs that are increasingly
agile, innovative and competitive.
Case Question:
1. Describe the marketing mix (Product, Price, Promotion and Place/Distribution) at
Angkasa Pura Airport!
LEADERSHIP, INDIVIDUAL BEHAVIOR AND INTERNATIONAL HUMAN
RESOURCE MANAGEMENT
12.1. Dimensions of Individual Behavior in International Business:
Individual behavior in international business is strongly influenced by various
individual differences - specific dimensions or characteristics of a person that affect that
person. Most patterns of individual differences are, ultimately, based on personality. Other
important dimensions related to individual behavior include attitude, perception, creativity,
and stress (Griffin & Pustay, 2006).
Personality is a relatively stable psychological attribute that distinguishes a person from
others. There is a difference among psychologists whether personality is biologically
inherited or shaped by the social and cultural environment in which the person grew up. In
the real world, both biological and environmental factors play an important role. Therefore,
international managers should recognize the limitations of broad generalizations about
people's behavior based on cultural backgrounds, recognizing that individual differences also
exist within any cultural group. There are five major personality traits: agreeableness,
conscientiousness, emotional stability, extroversion (Griffin & Pustay, 2006).
An attitude is a set of beliefs and feelings that a person has about ideas, situations or
people. Some attitudes are deeply rooted and long-lasting, but some attitudes can also be
formed or changed quickly. Attitudes that are very important in most organizations are job
satisfaction and commitment to the organization (Griffin & Pustay, 2006).
Perception is the process by which individuals realize and interpret information about
the environment. Stereotyping is a common perception process that affects international
business. Stereotyping occurs when we make inferences about a person according to one or
more characteristics that person has (Griffin & Pustay, 2006).
Stress is an individual's response to a strong stimulus. This stimulus is called a stressor.
Stress is not always bad. In the absence of stress, employees may experience boredom and
stagnation. Conversely, stress at optimal levels can increase motivation and excitement;
however, excessive stress can have a negative impact (Griffin & Pustay, 2006).
12.2. Leadership in International Business:
Leadership is the use of noncoercive influence to shape the goals of a group or
organization, to motivate behavior to achieve those goals, and to help define the culture of the
group or organization (Griffin & Pustay, 2006). Leadership is different from management.
The differences between leadership and management are presented in Table 12.1.
12.3. Nature of International Human Resource Management:
Human resource management (HRM) is the set of activities undertaken to attract,
develop and retain the effective workforce needed to achieve company goals. Human
resource management includes recruiting and selecting managers and non-managers,
providing training and development programs, assessing performance, and providing
compensation and benefits. International HR managers face challenges that purely domestic
companies do not. The challenges include cultural differences, the level of economic
development, and the legal systems of the countries in which the company operates, requiring
the company to adapt its recruitment, termination, training, and compensation programs in
each country.
12.4. International Managerial Labor Requirements:
Scope of internationalization:
According to Griffin & Pustay, 2006), to meet the needs of international managerial
labor, it is necessary to pay attention to the international scope of the company, namely:
1. Export department. A company's initial foray into international business usually
involves small-scale exports of products using output from domestic production
facilities. International activities are organized by an export department whose
managers report to the company's executives. The manager is usually a resident of the
company's home country.
2. International division. As international operations become more important, companies
will create a separate international division to manage all their international activities.
Generally, the international division is located in the company's home country
headquarters and headed by a resident of the company's home country, to facilitate
communication and coordination between international and domestic operations.
3. Global organization. Companies that have gone further in the internationalization
process usually take the form of a global organization.
Centralization vs. Decentralization:
HR managers of international companies are also influenced by whether the company
wants decision-making to be centralized at the corporate headquarters or delegated
(decentralized) to subsidiary operations. Companies that take a centralized approach often
prefer to hire people from the home country to be country managers. Companies that follow a
decentralized decision-making philosophy tend to hire local managers (Griffin & Pustay,
2006).
Staffing Philosophy
There are three philosophies for hiring international managers:
a. Parent country national (PCN), is a resident of the international company's home country.
b. Host country national (HCN), is a resident of the destination country.
c. Third country national (TCN), is a staff member who is not a citizen of the company's home
country or destination country.
CASE STUDY
INTERNATIONAL HUMAN RESOURCE MANAGEMENT CHALLENGES:
Human resource management is a set of activities designed to attract, develop and
retain the effective workforce needed to achieve corporate goals. International HR needs are
partly determined by the degree of internationalization of the company. The relative degree of
centralization versus decentralization of control also plays an important role. A basic staffing
philosophy must also be developed and implemented.
The recruitment and selection process is an important element of international HR
management. Some companies prefer to recruit experienced managers for overseas
assignments. Others prefer younger, less experienced managers. Various venues are used for
recruitment using either approach. The process of selecting managers for overseas
assignments usually involves consideration of both business and international skills.
Managers and companies should be mindful of patriation and repatriation issues.
Training and development is also an important aspect of international HR management.
The two main components of this activity include the assessment of training needs and the
selection of basic training methods and procedures.
Companies must also assess the performance of international managers and determine
compensation. Compensation for expatriate managers usually includes cost-of-living
adjustments and special benefits. Given the high cost of expatriate training and development,
companies need to pay special attention to managing retention and turnover rates. Every part
of international HR management should also be directed at the company's non-managerial
employees.
An illustration of international HR management challenges is experienced in the
aviation industry. The United States airline industry has faced increasing challenges in
retaining its best pilots. Over the years, as airlines experienced one financial hardship after
another, pilots saw their pay cut, their benefits reduced, and/or their job security eliminated.
As new foreign airlines emerged, they came to see the United States labor pool as a ready
source of pilots. For example, Dubai-based Emirates Airline offers its pilots freshly ironed
uniforms and chauffeur-driven rides to the airport every day they fly. Emirates pilots also get
twice the vacation time of US airlines, as well as guaranteed annual salary increases and
strong benefits. All told, there are more than 100 former United States pilots now working for
Emirates. Emirates has routinely hired pilots from other countries. Several airlines in China
and India have also adopted this. New airlines in China and India are also aggressively
recruiting United States pilots.
Case Question:
1. Describe the challenges facing international human resource management?
2. International managerial workforce needs are determined by the scope of a company's
internationalization, level of decision-making (centralization vs. decentralization) and
staffing philosophy, Explain all of these!
3. Based on the above case, Emirates Airline uses which staffing philosophy?
INTERNATIONAL FINANCIAL MANAGEMENT, ACCOUNTING AND
TAXATION
13.1. Currency Options
One issue unique to international business is choosing the currency in which to conduct
transactions. Exporters and importers usually have a clear and conflicting choice of which
currency to use. The exporter usually prefers payment to be made in his currency so that he
can know the exact amount he will receive from the importer. The importer usually prefers to
make payments in his country's currency so that he can know the amount that will be paid to
the exporter. Sometimes exporters and importers choose to use a third currency. For example,
if both parties are from countries with weak or vulnerable currencies, they will prefer to
transact in a more stable currency.
13.2. Managing International Corporate Finance:
International companies should strive to minimize the impact of exchange rate
fluctuations on the company's operations. There are three main types of exchange rate
exposure. Transaction exposure represents the impact of exchange rate fluctuations on the
profitability of business transactions conducted in foreign currency denominations.
Translation exposure reflects the impact of exchange rate fluctuations on the book value of a
company's operations in the accounting records. Economic exposure is the unanticipated
impact of exchange rate movements on the value of a company's operations (Griffin &
Pustay, 2006).
Working capital balance management presents unique challenges for international
businesses. A company and each of its subsidiaries must have sufficient cash to fund day-to-
day operations and meet sudden cash needs. The company must also monitor the holdings of
each currency both at the parent company and across its subsidiaries. Multinational
companies often use centralized cash management and currency netting operations to control
the amount of working capital, reduce currency conversion costs, and minimize exposure to
unwanted changes in exchange rates (Griffin & Pustay, 2006).
Finance staff of international companies must adapt capital budgeting techniques to
meet the unique requirements of international business. Standard investment evaluation
techniques, such as net present value, internal rate of return, and payback period, must also
be modified to account for differences in risk, government restrictions on currency
movements, and various payments between the parent company and overseas subsidiaries
that do not affect the net cash flows generated from an investment project. Finally, finance
staff should look for low-cost sources of capital around the world. The continuing operations
of the parent company and overseas subsidiaries are often an important internal source of
investment capital. Developed international debt and equity markets can provide the best
external sources of investment capital. International businesses also often use swap markets
to reduce exposure to adverse changes in exchange rates or interest rates (Griffin & Pustay,
2006).
13.3. International Accounting System:
The accounting tasks facing multinational companies are much more complex than
those facing multidomestic companies. A multinational company must meet the accounting
requirements set by its home country and each and every country in which it operates.
Unfortunately, there are significant philosophical and operational differences in accounting
standards and procedures around the world (Griffin & Pustay, 2006).
In order to reduce the costs that arise due to the different accounting systems applied to
international businesses and investors in each country, several attempts are made to
harmonize accounting systems in developed trading countries. Companies doing business
internationally generally face the following two special accounting challenges: accounting for
transactions denominated in foreign currencies and translating the statements of operations of
overseas subsidiaries into the parent company's currency for the purpose of preparing
consolidated statements (Griffin & Pustay, 2006).
CASE STUDY MATERIALS
FINANCIAL MANAGEMENT OF SINGAPORE AIRLINES AROUND THE WORLD
Singapore Airline's life and death depends on the international market. Singapore
Airlines has no domestic market due to the limited availability of land in Singapore, only
about 267 miles2 (693 km2 ). Singapore Airlines competes with several major airline
companies, such as Air France, American Airlines, British Airways, Cathay Pacific, KLM,
Japan Air Lines, United, and Qantas.
Fundamental to Singapore Airlines' global success is its reputation for delivering high-
quality service. Singapore Airlines attracts passengers from all over the world to its flights,
especially high-end business travelers who are willing to pay a premium for safety and
reliable service. Only 30% of its business activities are conducted in the East Asia region. Its
operations in Europe account for 22%. Singapore Airlines also provides services in West
Asia, the Pacific and Africa.
Singapore Airlines is a truly international airline that flies to more than 62 cities in 35
countries across all continents. However, this international success brings with it a huge
financial challenge - managing the various currencies used to run its business. Singapore
Airlines accepts a variety of currencies from customers, including baht, ringgit, rupee, rand,
krone, dollars (Australian, Canadian, Hong Kong, New Zealand, and American), as well as
yen, yuan, pound, Swiss franc, euro, and of course Singapore dollars. Singapore Airlines
must also pay for local services - landing fees, ground handling services, travel agent
commissions, and so on - using the local currency in each country where Singapore Airlines
operates.
Managing the company's income, expenses, assets and liabilities, all of which are made
up of various currencies, is a big task for Singapore Airlines' finance officers. To pay local
fees, Singapore Airlines' finance officers must provide cash balances in the local currency of
each country. Singapore Airlines' financial officers must also look around the world for low-
cost sources of capital to modernize the company's aircraft in order to maintain its reputation
for high quality service. In addition, Singapore Airlines' financial officers must also protect
the company from currency exchange rate fluctuations that can change the value of the home
currency received from customers as well as the costs incurred for aircraft, fuel, flight
services, and ground handling. Executives must thoroughly understand how the international
monetary system operates on a temporary basis. They must keep an eye on any potential
changes to government economic policies in the major markets where Singapore Airlines
operates, and shop around for favorable credit conditions and terms in capital markets such as
Amsterdam, London, Frankfurt, New York, Singapore and Tokyo.
Discussion Questions
1. What special problems arise in financing and payment arrangements for international
transactions?
INTERNATIONAL OPERATIONS MANAGEMENT
14.1. International Operations Management Process:
Operations management is the set of activities that companies use to transform various
inputs (raw materials, labor, etc.) into final products and services. International operations
management refers to activities related to the transformation process in international
companies (Griffin & Pustay, 2006).
According to Griffin & Pustay (2006, international operations management presents
one of the most complex and challenging tasks that managers have to face today. Operations
managers usually have to deal with important and complex issues in the following three
areas:
1. Resources: Managers must decide where and how to obtain the resources the company
needs to produce products. This important decision relates to supply chain management
and vertical integration.
2. Location: Managers must decide where to build administrative facilities, sales offices
and factories; how to design them, and so on.
3. Logistics: Managers must decide on means of transportation and methods of inventory
control.
14.2. International Service Operations:
International services businesses are companies that transfer resources into intangible
outputs that benefit customers. Services have some unique characteristics that create various
challenges for companies that want to sell services in international markets. The
characteristics of international services include services are intangible goods, services usually
cannot be stored, services often require customer participation, many services are related to
the purchase of other products (Griffin & Pustay, 2006).
The role of government in the international services market is very important.
Generally, governments seek to protect local firms and ensure that domestic standards and
domestic paperwork requirements are enforced by limiting the ability of foreigners to practice
professions such as law, accounting and healthcare. Government regulations determine which
companies can enter the service industry market and the prices charged. For example, foreign
banks and corporations in the United States are heavily regulated and must follow various
regulations set by state and federal law agencies. In many countries, telecommunications,
transportation and electricity companies usually require government permission to serve
individual markets. For example, flight routes between the United States and France are
governed by a bilateral agreement between the two countries. Air France can fly passengers
between Paris and Dallas and between Paris and New York, but cannot pick up passengers in
New York and fly them to Dallas (Griffin & Pustay, 2006).
The management of international service operations involves a number of basic issues,
such as:
a. Capacity planning, deciding on the number of customers a company is able to serve in a
given period of time. Failure to provide enough capacity means lost sales, while
providing too much capacity will increase costs and decrease company profits.
b. Location planning, service providers should be located close to the customers to be
served (exception for providers of information that relies on electronic communication).
Generally, international service operations establish branch offices in each overseas
market and then staff each office with local staff.
c. Layout of facilities, carefully designed so that the right appearance and layout can be
obtained.
d. Operating schedules, for example in airline service operations, take into account factors
such as customer preferences, time zones, jet lag, and aircraft usage and maintenance
requirements.
14.3. Managing Productivity
Productivity is a measure of economic efficiency that expresses the value of outputs
compared to the value of inputs used to create these outputs. Productivity is important to
manage because it helps determine the overall success of the company and contributes to its
long-term survival. Furthermore, productivity contributes directly to the overall standard of
living in a given country. There are three distinctive approaches that can help companies
become more productive: (1) further increasing research and development (R&D), (2)
improving operations, and (3) increasing employee engagement (Griffin & Pustay, 2006).
14.4. Managing Quality:
Operations management also helps companies maintain and improve the quality of their
products and/or services. Quality as the totality of features and characteristics of a product or
service that demonstrate its ability to satisfy expressed or implied needs. As quality is
becoming more and more important, companies all over the world are putting more and more
emphasis on improving the quality of their products and services. Many companies refer to
this endeavor as total quality management. Total Quality Management (TQM) is an
integrated effort to systematically and continuously improve the quality of an organization's
products and/or services (Griffin & Pustay, 2006).
14.5. Managing the Information System:
A final and increasingly important aspect of operations in international business
concerns information. Information is data in a form that has value for managers to make
decisions and perform tasks. How important information management is depends on the type
of strategy and organizational design used by the company. If the company uses related
diversification, it is very important that various parts of the company can communicate with
other parts of the company. If the company is highly centralized, information systems are
vital to top-level management so that they can maintain the control they exercise from using a
particular design. On the other hand, if a company uses unrelated diversification, the need for
information systems is different. Communication between the various businesses within a
company becomes less important. If the company uses a decentralized design for its
organizational design, top managers will need and expect less important information reported
by managers from various divisions and lower-level units (Griffin & Pustay, 2006).
CASE STUDY MATERIAL:
COST-EFFECTIVE IN AIRLINE COMPANIES
RyanAir is like Europe's Air Asia, both in terms of low prices and popularity. The
airline, which serves routes between continental Europe, has a motto that is deeply
ingrained: save money wherever possible!
Cost-effective for RyanAir does not mean inadequate facilities or perfunctory service.
Their cost-effective motto is coupled with a commitment to safety and maintaining quality
and value for customers. That's why the Irish airline attracts so many customers every day,
and is the largest airline in Europe by passenger numbers. The airline serves around 1,000
routes from 40 airports, and has more than 200 aircraft.
All Low Cost at RyanAir:
RyanAir's business strategy can be summed up in just one sentence: low cost and no
frills. With a stoic "crash diet", the company even has a vision to make its passengers fly for
free!
The airline is clearly targeting a market of passengers who prefer cheap, efficient
flights over first-class flights. RyanAir is not trying to capture the entire market, and that
allows them to focus on retaining the market they have already gained. Their strategy can be
described as "very focused on cost savings". This can be seen from the choice of point to
point flights from smaller cities, and flights at secondary airports.
RyanAir's business strategy fits the Operational Excellence model, with reliable service
and schedules, fewer flight cancellations, exceptional punctuality, and fewer cases of lost
baggage compared to other airlines.
Reducing Operating Costs:
The operational side is the part that gets the most efficiency share at RyanAir. RyanAir
management believes that the cost of The company's operating expenses are the lowest of any
European airline. RyanAir strictly reduces and controls the four main costs that a typical
airline must meet: aircraft equipment costs, employee productivity and effectiveness,
customer service costs, airport access and handling costs, and marketing and promotion costs.
1. Aircraft Equipment Cost:
RyanAir's strategy in keeping aircraft procurement costs low is to buy discounted prices
and concessions from aircraft suppliers (Boeing) and airports. RyanAir has a special contract
with Boeing. They also only operate one type of aircraft, the Boeing 737-800, to keep
maintenance simple and cost effective, also by purchasing spare parts in bulk. Aircraft
turnaround time on the ground is also minimized.
2. Employee Productivity & Effectiveness:
RyanAir operates aircraft with minimum staffing. Crews can work on any aircraft as
they only have one type of aircraft, and thus training costs and materials are more cost-
effective and simple. All possible ways to maintain high productivity.
RyanAir strives to control labor costs by consequently making improvements in the
productivity of all employees, who are already productive. As of March 31, 2004, the
productivity level calculated based on the number of ticket bookings per employee continued
to increase, to 10,049 passengers, an increase of 21% compared to the previous year in the
same month.
Compensation and incentives for employees are determined based on productivity
levels, including commissions on sales of products in the on-board catalog for flight
attendants, number of flying hours for pilots, and so on.
3. Customer Service Fee:
RyanAir has signed agreements with several third parties such as contractors at each
airport, aircrafthandling, ticketing, and several other services that allow them to issue costs
less than if they had to do it themselves. They also make the most of the internet to reduce
ticket booking costs.
RyanAir also had the idea of providing standing seats for passengers, which cost far
less than the price of a ticket with a conventional seat. Passengers would stand against a
narrow shelf with a padded backrest. However, this idea was rejected by an unnamed
regulator last year.
4. Airport Access Fees:
RyanAir seeks to control airport access and service costs by using airports that offer
competitive costs. Management believes that with RyanAir's high passenger traffic, they will
be able to negotiate more favorable terms with airports to access more of their facilities. The
airline was even able to lower customers' airport charges by renting less expensive gate
locations or through outdoor boarding stairs instead of expensive jetways.
5. Marketing and Promotion Costs
In order to keep marketing costs low, CEO Michael O'Leary secured many free
publicity opportunities with stunts and enacted an aggressive marketing strategy that was
different from competitors or authorities. They use full-page ads to promote RyanAir, which
offers low prices. RyanAir also promotes its website through newspaper, radio and television
advertisements.
Quality and Safety First
Although RyanAir employs a cost-effective strategy in its operations, the areas of
safety, quality assurance, training, and maintenance are never touched by the program. They
adhere to aviation safety standards that apply in Europe. So far, they have recorded a good
safety record, which is more than 20 years from 20 years of operation has never had an
accident resulting in serious injury.
Other sources of revenue earned by RyanAir are through car rentals, ground
transportation services, travel and hotel insurance, as well as on-board sales such as food,
beverages, and scratch cards. Revenue also comes from additional baggage fees purchased
by passengers. In 2010, the secondary lines mentioned above accounted for 15-20% of
RyanAir's total revenue.
Recently, a new austerity strategy was implemented by RyanAir, by reducing the
weight of the aircraft in the air so that it would save fuel. The method is quite controversial,
asking the crew to stay slim and not overweight. In addition, they also swapped trolleys and
seats with lighter types. Other austerity measures include reducing the size of magazines and
menus from A4 to A5, and reducing the amount of ice used on board.
In conclusion, RyanAir's business strategy is fanatical about cost savings and
efficiency, which allows them to sell cheap tickets, but with a reliable service, which is now
the most sought after by potential passengers.
