UFI Operations Focus Meeting - Paris 2010 - Raul Sanchez

©2010 Deloitte, S.L. All rights reserved.

April 2010

Low-cost Business models Experiences among other industries


Agenda

General framework

Alternative strategies

- Reverse positioning

- Focus strategy

- Low-cost through efficient Operations

Operations Excellence Enterprise Cost reduction


Low cost models General framework


Porter’s Competitive Strategy Model

Porter’s Generic Strategies

A. Be the best in a segment or group of segments

B. Uniqueness along some dimensions widely valued by consumers

C. To become the low cost producer (Often achieved by economies of scale)

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Source: Porter’s Generic Strategies (Porter, 1980)

(C) Cost

Leadership

(B) Differentiation

(A) Focus / Segmentation

Mar

ket S

cope

High

Uniqueness / value Low

Cost

Product approach


• Focus/segmentation just compete where you can achieve a strategic position

• Cost / Differentiation pricing for value method implying as main trigger ‒ Cost advantage ‒ Balanced value/price

avoiding the classical paradigm (quality = price)

‒ Low price as differentiation leverage

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(C) Cost

Leadership (B)

Differentiation

(A) Focus / Segmentation

Mar

ket S

cope

High Uniqueness / value

Low

Cost

Product approach

Low-cost strategies do not fit in any generic pure strategy sharing elements from the three generic ones

Low-Cost Strategies

Source: Porter’s Generic Strategies (Porter, 1980)


Reverse positioning Product/service proposal generating new categories

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Differentiation

Segmentation

Low-cost

Focus strategy Efforts focused on a few consumer segments or products

Low-cost through efficient Operations Redefine value chain according to customer perspective

But there are some different approaches…

©2010 Deloitte, S.L. All rights reserved. 7

The business model above is a framework to summarize and describe the rationale of how an organization creates, delivers, and captures value

Value chain, resources and associated cost

estructure

Products & Services

Customers & delivery model

Source: Wikipedia (Business model definition)


In general terms low-cost strategies are build around business model innovation in the following key areas:

Disruptive innovation, changing industry’s paradigm

Price for value,

customer centric

approach

Extending consumer base,

un-attended consumer

groups


Market leaders exceed client needs

opportunity frame for disruptive innovation

Low-cost or distribution brands increasing market

share

Industry leaders increasing market share in amounts

but not in volumes

Relevant consumers out of

the market

Consumers not accepting new

product versions or upgrades

Low-cost companies appear when consumer needs are significantly exceeded, and back to basics is a need

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Sharing the following elements (1/2)

• Traditional and mature business

• Leverage on a macro-trend (consumers needs and change in perceptions on prices):

‒ Not always related to quality

‒ Dynamic vs. static

‒ Trigger for consumer decisions

• Price for value, combining product attributes to configure the best price/value/margin option

• Increase in operations throughout

‒ Extended client base

‒ Increase in frequency

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Sharing the following elements (2/2)

• Customer ownership through:

‒ Strong, notorious, own brands

‒ Easy to reach own distribution models

• Extended scope and ancillary revenues

• Efficient operating models

‒ Continuous cost efficiency programs

‒ Cost oriented culture

‒ Higher degree of collaboration / power within value chain or vertical integration

‒ Flexible cost structure, centered on key operations (mainly around client & product)

‒ Talented and productive people (high variable proportion of salary)

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Low cost models Aldi & Mercadona focus strategy


Savings & low prices proposition

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Mercadona vs Carrefour Easy to reach…

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Carrefour Mercadona

46 provinces with a network of 1,270 supermarkets. > 1,5 mio sq m Turnover of 13.986 million € during 2007 (15% growth) 62,000 people (100% in fixed) Average showroom of 1.300 m2 per Supermarket Urban neighborhood trade model: food -fresh and dried-, drugstore, perfumery


‘Select assortment is smarter’

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• Reducing store operations cost by managing their assortment to a smaller number of SKU

• Customer oriented selling what is most popular among them


Pricing value and operating efficiency as part of their philosophy

• Own distribution model

• Strong relationships with suppliers getting better prices

• Simply the product eliminating frills but always keeping the best quality

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Low cost models Ikea reverse positioning


Product & value proposal

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The basic thinking behind all IKEA products is that low prices make well-designed, functional home furnishings available to everyone

The value proposal


Price & quality focussed on customer needs

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Customer perspective - Price Cost - Low-cost resulting from

design and customer cooperation not only quality

- Availability to upgrade product/services

- Use of dynamic pricing

• Low-end segment as extended client base

• Increase frequency based on affordable prices and supplementary products triggered by price

• Value chain integration


Efficient operating model

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• High level of collaboration with their manufacturing partners

• Promoting cost-efficiency initiatives

• Own distribution

• Stores structure & Desing

• Logistics efficiency through flat packs

• Low price location


Extended scope offering food service as a part of the purchase experience

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Other issues & curiosities

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• 175 Mio copies annually (3 times the bible)

• 27 languages / 35 countries

• 70% marketing budget


Low cost models Ryanair Low-cost through efficient Operations


Low Cost Carriers The key principle

“The other airlines are asking how they can put up fares. We are asking how we could get rid of them”

Michael O’Leary Ryanair Ceo

Uk Sunday times interview 2001

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Ryanair is Europe’s leading scheduled passenger airline

2009 key figures • Traffic grew by 15% to 59m

passengers • Average scheduled turnaround 25

minutes • Average fare 40€ • Operating revenue amounted to

2.942m€ • In 2009, Ryanair has opened 223 new

routes • Year end feet with 181 Boeing

737-800 • 6.369 employees

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The growth of low cost airlines has radically altered the nature of competition within the airline industry

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• In terms of operating costs per available seat Kilometre (ASK), the gap of the three top three players and Ryanair was 64%, mainly due to lower distribution cost and aircraft efficiency

• High level of customer service is provided in LCC (more flights on time and less missed bags per 1.000 pax)

• Employee productivity is one of the main differences between the top three and LCC

• The load factor of LCC on average is up to 80% while regular airlines achieve 75%. Ryanair has increased the number of passengers carried during 2009 up to 58,6m

Ryanair Top 3 average

Passengers 58,6m 33,1m

Flights on time 90% 83%

Missed bags per 1.000 pax 0,6 15

Passenger per employee 9.195 693

Source: IATA

Source: Ryanair’s annual report 2009

Source: IATA cost analysis 2005


The main differences between Low-cost and traditional carriers

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Low cost airline

Utilization

Frills

Aiports

Retail

Fleet

Traditional airline

• Higher seat density (single class) • Fast turnarounds (25min aprox.) • Short-haul flights

• Different passengers class • Slow turnaround by using major airports

with more traffic • Long and short haul routes with transfers

• No frills • Catering, lounges, entertaiment programmes

• Secondary airports with lower landing fees

• Main airports (more expensive)

• Online booking • Use of direct and indirect channels

• Standarized fleet • Various aircrafts

Personnel • High variable proportion of salary • No unions

• High basic salaries (less variable perct.) • Trade union affiliation

Source: ELFAA presentation (2005)


Ryanair operating revenue come from ticketing and ancillary revenues mainly sold in their web page

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Scheduled revenues

Ancillary revenues


In 2009, Ryanair’s ancillary revenues represented 20% of their operating revenue

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Non-flight schedules

In-flight

Internet

Car hire

Differentiated between booked in ryanair.com or via a Call Centre or Airport

• Onboard sales of beverages, food and merchandise

• Overhead lockers • Advertising onboard,

• Ryanair in-flight magazine • Communications service (On Air)

• Credit card • Bus & rail tickets • Accommodation reservations • Merchandise: gift vouchers

• Cruises (Costa) • Gambling • Travel insurance

• Ryanair has an exclusive relationship with Hertz and receives a fee per passenger

• Online Check-In • Administration Fee • Priority Boarding Fee • Airport Boarding Card Re-issue • Infant Fee

• Checked Baggage Fees • Infant Equipment • Sports Equipment • Musical Instrument • Flight Change Fees


Ryanair continuously focuses on cost-containment and operating efficiencies

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Aircraft operating costs & maintenance

Airport access and handling

cost

• Standarized fleet 737-800 buyed to a single manufacturer:

• Single class • Leather seats

• External contractors for ticketing, passenger & aircraft handling

• Productivity-based pay incentives • Kiosk-based check-in

• Operate in secondary airports • Short-haul routes (1.55h on average) and fast

turnarounds (25 min) • Outdoor boarding stairs and less convenient

gates • Baggage check-in fee

Distribution

Staff

Strategies

• Direct sales via www.ryanair.com

Cost impact Revenue impact

• Aircraft utilization

• Traffic • Ancillary

revenues


Spanish airports evolution

Source: AENA

0

500

1.000

1.500

2.000

2.500

3.000

3.500

4.000

4.500

5.000

5.500

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Unit or additional information

Uni

ts

Units

Girona

Santander

Average Spanish Airports

Text

Santiago

Reus

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(20%)

20%

60%

100%

140%

180%

1999 2003 2007

VARIATION IN TRAFFIC PASSENGERS / AIRPORT

Girona

Santander

Average Spanish Airports

Reus

Spanish airports evolution

Source: AENA

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Operations Excellence Enterprise Cost reduction


Deloitte’s Operations Excellence

Operations Excellence brings together our cross-functional and infrastructure solutions to stimulate operation efficiency that will affect the bottom line. The main purpose of ECR work is not simply to reduce cost Operations Excellence is focused in helping our

clients improve profitability and business productivity through the analysis of main core dimensions of the business model:

- Business Model Configuration - Process Design - Organization Design - Capital and Facility Configuration - Service Delivery Models and Deployment - Operating Governance and Management

The integrated Service Offerings are customized to address the unique business issues facing our clients. We provide our clients with holistic, actionable solutions focused on value creation

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There are three different cost reduction approaches, depending on company’s strategic position, finance situation and timing to achieve the expected savings

Implications: • Primarily short-term

projects (quick hits) • Short-term results may be

at expense of long-term • Cash generation is primary

focus

Implications: • Balance of short-term,

long-term projects drives momentum

• Moderate Investment

Implications: • Long-term projects and lack of

immediate results • Significant investment required • “Game Changing” initiatives

(i.e., ERP, Global Supply Chain Restructuring, etc.)

(1)

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But any cost reduction or profitability improvement methodology begins asking about cost needs and ends establishing procedures to control it

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PROCUREMENT Do I’m contracting properly?

• Procurement practices / centr. • Alternative products or services

suppliers • Recruitment and contract renewal • Level of centralization of

expenditure management •

NEED

It’s a need or adds value? Will change quality of service perception?

• Reduced frequency • Elimination of non-valued tasks • Simplification of service rendered or contracted

• Product port-folio optimization

OPERATIONAL EFFICIENCY AND DEMAND MANAGEMENT If needed, do I manage properly the

consumption / perfomance? • Improving efficiency by outsourcing / in

sourcing • Processes reengineering • Elimination of tasks duplicated • Sizing • Alternative services at lower cost • Procedures for internal request and

approval

CONTROL Do I have a good control

environment & accountability model?

• Control policies and procedures • Responsible for categories / costs • Allocation of costs by activity /

management accountability • Tracking Information

4 1

2 3


¿Questions?


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Raul Sanchez [email protected] Consulting - Strategy & Operations

UFI Operations Focus Meeting - Paris 2010 - Raul Sanchez

Business

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