UFI Operations Focus Meeting - Paris 2010 - Raul Sanchez

Low-cost Business models
Experiences among other
industries

April 2010

©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


Low cost models
General framework


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.

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


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


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)


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


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


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


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)


Low cost models
Aldi & Mercadona
focus strategy


Savings & low prices proposition


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


‘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


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


Low cost models
Ikea reverse
positioning


Product & value proposal


The value proposal

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


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

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


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


Other issues & curiosities

• 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


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


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


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.

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

Ancillary
revenues

Scheduled
revenues


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


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


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


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


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

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.)

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

¿Questions?


Raul Sanchez
rasanchezsanchez@deloitte.es
Consulting - Strategy & Operations

Member of Deloitte Touche Tohmatsu

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