UFI Operations Focus Meeting - Paris 2010 - Raul Sanchez


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Learning from other sectors: How did low-cost business models change an industry?
By: Raúl Sánchez, Director, Strategy & Operations, Deloitte, Barcelona, Spain

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UFI Operations Focus Meeting - Paris 2010 - Raul Sanchez

  1. 1. Low-cost Business models Experiences among other industries April 2010 ©2010 Deloitte, S.L. All rights reserved.
  2. 2. 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.
  3. 3. Low cost models General framework ©2010 Deloitte, S.L. All rights reserved.
  4. 4. Porter’s Competitive Strategy Model Porter’s Generic Strategies High A.  Be the best in a segment or (A) group of segments Market Scope Focus / Segmentation B.  Uniqueness along some dimensions widely valued by consumers (C) (B) Cost Differentiation C.  To become the low cost Leadership producer (Often achieved by Low economies of scale) Uniqueness / value Cost Product approach Source: Porter’s Generic Strategies (Porter, 1980) 4 ©2010 Deloitte, S.L. All rights reserved.
  5. 5. Low-cost strategies do not fit in any generic pure strategy sharing elements from the three generic ones Low (A) • Focus/segmentation  just Focus / Segmentation compete where you can achieve a strategic position Market Scope • Cost / Differentiation  pricing for value method Low-Cost implying as main trigger Strategies (C) ‒  Cost advantage (B) Cost ‒  Balanced value/price High Differentiation Leadership avoiding the classical Uniqueness / value Cost paradigm (quality = price) Product approach ‒  Low price as differentiation Source: Porter’s Generic Strategies (Porter, 1980) leverage 5 ©2010 Deloitte, S.L. All rights reserved.
  6. 6. But there are some different approaches… Reverse positioning Differentiation Product/service proposal generating new categories Focus strategy Segmentation Efforts focused on a few consumer segments or products Low-cost through efficient Operations Low-cost Redefine value chain according to customer perspective 6 ©2010 Deloitte, S.L. All rights reserved.
  7. 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 Products & Customers & delivery and associated cost Services model estructure Source: Wikipedia (Business model definition) 7 ©2010 Deloitte, S.L. All rights reserved.
  8. 8. In general terms low-cost strategies are build around business model innovation in the following key areas: Disruptive Price for Extending innovation, value, consumer base, changing customer un-attended industry’s centric consumer paradigm approach groups 8 ©2010 Deloitte, S.L. All rights reserved.
  9. 9. Low-cost companies appear when consumer needs are significantly exceeded, and back to basics is a need Consumers not Low-cost or accepting new distribution brands product versions or increasing market upgrades share Market leaders exceed client needs  opportunity frame for disruptive innovation Industry leaders Relevant increasing market consumers out of share in amounts the market but not in volumes 9 ©2010 Deloitte, S.L. All rights reserved.
  10. 10. 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.
  11. 11. 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.
  12. 12. Low cost models Aldi & Mercadona focus strategy ©2010 Deloitte, S.L. All rights reserved.
  13. 13. Savings & low prices proposition 13 ©2010 Deloitte, S.L. All rights reserved.
  14. 14. Mercadona vs Carrefour Easy to reach…  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 Carrefour Mercadona 14 ©2010 Deloitte, S.L. All rights reserved.
  15. 15. ‘Select assortment is smarter’ •  Reducing store operations cost by managing their assortment to a smaller number of SKU •  Customer oriented selling what is most popular among them 15 ©2010 Deloitte, S.L. All rights reserved.
  16. 16. 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.
  17. 17. Low cost models Ikea reverse positioning ©2010 Deloitte, S.L. All rights reserved.
  18. 18. Product & value proposal 18 ©2010 Deloitte, S.L. All rights reserved.
  19. 19. The value proposal The basic thinking behind all IKEA products is that low prices make well-designed, functional home furnishings available to everyone 19 ©2010 Deloitte, S.L. All rights reserved.
  20. 20. Price & quality focussed on customer needs  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 20 ©2010 Deloitte, S.L. All rights reserved.
  21. 21. Efficient operating model •  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 21 ©2010 Deloitte, S.L. All rights reserved.
  22. 22. Extended scope offering food service as a part of the purchase experience 22 ©2010 Deloitte, S.L. All rights reserved.
  23. 23. Other issues & curiosities •  175 Mio copies annually (3 times the bible) •  27 languages / 35 countries •  70% marketing budget 23 ©2010 Deloitte, S.L. All rights reserved.
  24. 24. Low cost models Ryanair Low-cost through efficient Operations ©2010 Deloitte, S.L. All rights reserved.
  25. 25. 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.
  26. 26. 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.
  27. 27. The growth of low cost airlines has radically altered the nature of competition within the airline industry Ryanair Top 3 average •  In terms of operating costs per available seat Kilometre (ASK), Passengers 58,6m 33,1m the gap of the three top three Flights on time 90% 83% players and Ryanair was 64%, Missed bags per 1.000 pax 0,6 15 mainly due to lower distribution Passenger per employee 9.195 693 cost and aircraft efficiency •  High level of customer service Source: Ryanair’s annual report 2009 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 Source: IATA during 2009 up to 58,6m Source: IATA cost analysis 2005 27 ©2010 Deloitte, S.L. All rights reserved.
  28. 28. The main differences between Low-cost and traditional carriers Low cost airline Traditional airline •  Higher seat density (single class) •  Different passengers class •  Fast turnarounds (25min aprox.) •  Slow turnaround by using major airports Utilization •  Short-haul flights with more traffic •  Long and short haul routes with transfers •  No frills •  Catering, lounges, entertaiment Frills programmes •  Secondary airports with lower •  Main airports (more expensive) Aiports landing fees •  Online booking •  Use of direct and indirect channels Retail •  Standarized fleet •  Various aircrafts Fleet •  High variable proportion of salary •  High basic salaries (less variable perct.) Personnel •  No unions •  Trade union affiliation 28 Source: ELFAA presentation (2005) ©2010 Deloitte, S.L. All rights reserved.
  29. 29. Ryanair operating revenue come from ticketing and ancillary revenues mainly sold in their web page Ancillary revenues Scheduled revenues 29 ©2010 Deloitte, S.L. All rights reserved.
  30. 30. In 2009, Ryanair’s ancillary revenues represented 20% of their operating revenue Differentiated between booked in ryanair.com or via a Call Centre or Airport •  Online Check-In •  Checked Baggage Fees Non-flight •  Administration Fee •  Infant Equipment schedules •  Priority Boarding Fee •  Sports Equipment •  Airport Boarding Card Re-issue •  Musical Instrument •  Infant Fee •  Flight Change Fees •  Onboard sales of beverages, food and •  Ryanair in-flight magazine merchandise •  Communications service (On Air) In-flight •  Overhead lockers •  Advertising onboard, •  Credit card •  Cruises (Costa) •  Bus & rail tickets •  Gambling Internet •  Accommodation reservations •  Travel insurance •  Merchandise: gift vouchers Car hire •  Ryanair has an exclusive relationship with Hertz and receives a fee per passenger 30 ©2010 Deloitte, S.L. All rights reserved.
  31. 31. Ryanair continuously focuses on cost-containment and operating efficiencies Strategies Cost impact Revenue impact •  Operate in secondary airports •  Short-haul routes (1.55h on average) and fast Airport access turnarounds (25 min) and handling •  Outdoor boarding stairs and less convenient cost gates •  Baggage check-in fee •  Standarized fleet 737-800 buyed to a single manufacturer: Aircraft operating costs •  Aircraft •  Single class utilization & maintenance •  Leather seats •  Traffic •  Ancillary revenues •  Direct sales via www.ryanair.com Distribution •  External contractors for ticketing, passenger & aircraft handling •  Productivity-based pay incentives Staff •  Kiosk-based check-in 31 ©2010 Deloitte, S.L. All rights reserved.
  32. 32. Spanish airports evolution Text Unit or additional information Girona 5.500 5.000 4.500 Average 4.000 Spanish 3.500 Airports Units 3.000 2.500 Santiago 2.000 1.500 Reus 1.000 500 Santander 0 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Units Source: AENA 32 ©2010 Deloitte, S.L. All rights reserved.
  33. 33. Spanish airports evolution VARIATION IN TRAFFIC PASSENGERS / AIRPORT 180% 140% Girona 100% Santander 60% Reus 20% Average Spanish Airports 1999 2003 2007 (20%) Source: AENA 33 ©2010 Deloitte, S.L. All rights reserved.
  34. 34. Operations Excellence Enterprise Cost reduction ©2010 Deloitte, S.L. All rights reserved.
  35. 35. 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.
  36. 36. There are three different cost reduction approaches, depending on company’s strategic position, finance situation and timing to achieve the expected savings (1) Implications: Implications: Implications: • Primarily short-term • Balance of short-term, • Long-term projects and lack of projects (quick hits) long-term projects drives immediate results • Short-term results may be momentum • Significant investment required at expense of long-term • Moderate Investment • “Game Changing” initiatives • Cash generation is primary (i.e., ERP, Global Supply Chain focus Restructuring, etc.) 36 ©2010 Deloitte, S.L. All rights reserved.
  37. 37. But any cost reduction or profitability improvement methodology begins asking about cost needs and ends establishing procedures to control it NEED CONTROL It’s a need or adds value? Will change Do I have a good control quality of service perception? environment & accountability • Reduced frequency model? 4 1 • Elimination of non-valued tasks •  Control policies and procedures • Simplification of service rendered or •  Responsible for categories / costs contracted •  Allocation of costs by activity / • Product port-folio optimization management accountability •  Tracking Information OPERATIONAL EFFICIENCY AND DEMAND MANAGEMENT If needed, do I manage properly the PROCUREMENT consumption / perfomance? Do I’m contracting properly? 3 2 •  Improving efficiency by outsourcing / in •  Procurement practices / centr. sourcing •  Alternative products or services •  Processes reengineering suppliers •  Elimination of tasks duplicated •  Recruitment and contract renewal •  Sizing •  Level of centralization of •  Alternative services at lower cost expenditure management •  Procedures for internal request and •  approval 37 ©2010 Deloitte, S.L. All rights reserved.
  38. 38. ¿Questions? ©2010 Deloitte, S.L. All rights reserved.
  39. 39. Raul Sanchez rasanchezsanchez@deloitte.es Consulting - Strategy & Operations 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. ©2010 Deloitte, S.L. All rights reserved.