©2010 Deloitte, S.L. All rights reserved.
April 2010
Low-cost Business models Experiences among other industries
©2010 Deloitte, S.L. All rights reserved.
Agenda
General framework
Alternative strategies
- Reverse positioning
- Focus strategy
- Low-cost through efficient Operations
Operations Excellence Enterprise Cost reduction
©2010 Deloitte, S.L. All rights reserved.
Low cost models General framework
©2010 Deloitte, S.L. All rights reserved.
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)
4
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
©2010 Deloitte, S.L. All rights reserved.
• 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
5
(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)
©2010 Deloitte, S.L. All rights reserved.
Reverse positioning Product/service proposal generating new categories
6
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)
©2010 Deloitte, S.L. All rights reserved. 8
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
©2010 Deloitte, S.L. All rights reserved.
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
9
©2010 Deloitte, S.L. All rights reserved.
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
10
©2010 Deloitte, S.L. All rights reserved.
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)
11
©2010 Deloitte, S.L. All rights reserved.
Low cost models Aldi & Mercadona focus strategy
©2010 Deloitte, S.L. All rights reserved.
Savings & low prices proposition
13
©2010 Deloitte, S.L. All rights reserved.
Mercadona vs Carrefour Easy to reach…
14
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
©2010 Deloitte, S.L. All rights reserved.
‘Select assortment is smarter’
15
• Reducing store operations cost by managing their assortment to a smaller number of SKU
• Customer oriented selling what is most popular among them
©2010 Deloitte, S.L. All rights reserved.
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
16
©2010 Deloitte, S.L. All rights reserved.
Low cost models Ikea reverse positioning
©2010 Deloitte, S.L. All rights reserved.
Product & value proposal
18
©2010 Deloitte, S.L. All rights reserved. 19
The basic thinking behind all IKEA products is that low prices make well-designed, functional home furnishings available to everyone
The value proposal
©2010 Deloitte, S.L. All rights reserved.
Price & quality focussed on customer needs
20
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
©2010 Deloitte, S.L. All rights reserved.
Efficient operating model
21
• 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
©2010 Deloitte, S.L. All rights reserved.
Extended scope offering food service as a part of the purchase experience
22
©2010 Deloitte, S.L. All rights reserved.
Other issues & curiosities
23
• 175 Mio copies annually (3 times the bible)
• 27 languages / 35 countries
• 70% marketing budget
©2010 Deloitte, S.L. All rights reserved.
Low cost models Ryanair Low-cost through efficient Operations
©2010 Deloitte, S.L. All rights reserved.
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
25
©2010 Deloitte, S.L. All rights reserved.
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
26
©2010 Deloitte, S.L. All rights reserved.
The growth of low cost airlines has radically altered the nature of competition within the airline industry
27
• 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
©2010 Deloitte, S.L. All rights reserved.
The main differences between Low-cost and traditional carriers
28
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)
©2010 Deloitte, S.L. All rights reserved.
Ryanair operating revenue come from ticketing and ancillary revenues mainly sold in their web page
29
Scheduled revenues
Ancillary revenues
©2010 Deloitte, S.L. All rights reserved.
In 2009, Ryanair’s ancillary revenues represented 20% of their operating revenue
30
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
©2010 Deloitte, S.L. All rights reserved.
Ryanair continuously focuses on cost-containment and operating efficiencies
31
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
©2010 Deloitte, S.L. All rights reserved.
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
32
©2010 Deloitte, S.L. All rights reserved.
(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
33
©2010 Deloitte, S.L. All rights reserved.
Operations Excellence Enterprise Cost reduction
©2010 Deloitte, S.L. All rights reserved.
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
35
©2010 Deloitte, S.L. All rights reserved.
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)
36
©2010 Deloitte, S.L. All rights reserved.
But any cost reduction or profitability improvement methodology begins asking about cost needs and ends establishing procedures to control it
37
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
©2010 Deloitte, S.L. All rights reserved.
¿Questions?
©2010 Deloitte, S.L. All rights reserved.
Member of Deloitte Touche Tohmatsu
Deloitte se refiere a Deloitte Touche Tohmatsu (Swiss Verein) y a su red de firmas miembro, cada una de las cuales es una entidad independiente. En www.deloitte.com/about se ofrece una descripción detallada de la estructura legal de Deloitte Touche Tohmatsu y sus firmas miembro. Deloitte presta servicios de auditoría, asesoramiento fiscal y legal, consultoría y asesoramiento en transacciones corporativas a entidades que operan en un elevado número de sectores de actividad. La firma aporta su experiencia y alto nivel profesional ayudando a sus clientes a alcanzar sus objetivos empresariales en cualquier lugar del mundo. Para ello cuenta con el apoyo de una red global de firmas miembro presentes en 140 países y con 165.000 profesionales que han asumido el compromiso de ser modelo de excelencia. Los profesionales de Deloitte comparten una cultura de colaboración basada en el compromiso mutuo, en la integridad y en la aportación de valor al mercado y a los clientes, apoyándose para ello en la riqueza derivada de la diversidad cultural y el aprendizaje continuo obtenido de nuevas experiencias y desafíos y que contribuyen, asimismo, al desarrollo de su carrera profesional. Los profesionales de Deloitte contribuyen a cumplir con la responsabilidad de la firma, generando confianza en el mercado y logrando un impacto positivo entre sus grupos de interés. El contenido de esta publicación no puede ser total ni parcialmente reproducido, transmitido ni registrado por ningún sistema de recuperación de información, de ninguna forma ni a través de ningún medio o soporte, sin el previo consentimiento por escrito de los titulares del copyright. Deloitte no se hace responsable del uso que de esta información puedan hacer terceras personas. Nadie puede hacer uso de este material salvo autorización expresa por parte de Deloitte.
Raul Sanchez [email protected] Consulting - Strategy & Operations
Top Related