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Slide 1: Low-cost Business models Experiences among other industries April 2010 ©2010 Deloitte, S.L. All rights reserved.
Slide 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.
Slide 3: Low cost models General framework ©2010 Deloitte, S.L. All rights reserved.
Slide 4: Porter’s Competitive Strategy Model Porter’s Generic Strategies High Market Scope (A) Focus / Segmentation 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) (B) Differentiation Uniqueness / value (C) Cost Leadership Cost Low Product approach Source: Porter’s Generic Strategies (Porter, 1980) 4 ©2010 Deloitte, S.L. All rights reserved.
Slide 5: Low-cost strategies do not fit in any generic pure strategy sharing elements from the three generic ones Low (A) Focus / Segmentation Low-Cost Strategies High (B) Differentiation Uniqueness / value (C) Cost Leadership Cost Product approach Source: Porter’s Generic Strategies (Porter, 1980) • 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 Market Scope 5 ©2010 Deloitte, S.L. All rights reserved.
Slide 6: But there are some different approaches… Differentiation Reverse positioning Product/service proposal generating new categories Segmentation Focus strategy Efforts focused on a few consumer segments or products Low-cost Low-cost through efficient Operations Redefine value chain according to customer perspective ©2010 Deloitte, S.L. All rights reserved. 6
Slide 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) 7 ©2010 Deloitte, S.L. All rights reserved.
Slide 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 8 ©2010 Deloitte, S.L. All rights reserved.
Slide 9: Low-cost companies appear when consumer needs are significantly exceeded, and back to basics is a need Consumers not accepting new product versions or upgrades Market leaders exceed client needs  opportunity frame for disruptive innovation Industry leaders increasing market share in amounts but not in volumes Low-cost or distribution brands increasing market share Relevant consumers out of the market 9 ©2010 Deloitte, S.L. All rights reserved.
Slide 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.
Slide 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.
Slide 12: Low cost models Aldi & Mercadona focus strategy ©2010 Deloitte, S.L. All rights reserved.
Slide 13: Savings & low prices proposition 13 ©2010 Deloitte, S.L. All rights reserved.
Slide 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.
Slide 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.
Slide 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.
Slide 17: Low cost models Ikea reverse positioning ©2010 Deloitte, S.L. All rights reserved.
Slide 18: Product & value proposal 18 ©2010 Deloitte, S.L. All rights reserved.
Slide 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.
Slide 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.
Slide 21: Efficient operating model •  High level of collaboration with their manufacturing partners •  Promoting costefficiency initiatives •  Own distribution •  Stores structure & Desing •  Logistics efficiency through flat packs •  Low price location 21 ©2010 Deloitte, S.L. All rights reserved.
Slide 22: Extended scope offering food service as a part of the purchase experience 22 ©2010 Deloitte, S.L. All rights reserved.
Slide 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.
Slide 24: Low cost models Ryanair Low-cost through efficient Operations ©2010 Deloitte, S.L. All rights reserved.
Slide 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.
Slide 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.
Slide 27: The growth of low cost airlines has radically altered the nature of competition within the airline industry •  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 27 Ryanair Top 3 average Passengers Flights on time Missed bags per 1.000 pax Passenger per employee 58,6m 90% 0,6 9.195 33,1m 83% 15 693 Source: Ryanair’s annual report 2009 Source: IATA Source: IATA cost analysis 2005 ©2010 Deloitte, S.L. All rights reserved.
Slide 28: The main differences between Low-cost and traditional carriers Low cost airline •  Higher seat density (single class) Utilization •  Fast turnarounds (25min aprox.) •  Short-haul flights Traditional airline •  Different passengers class •  Slow turnaround by using major airports with more traffic •  Long and short haul routes with transfers Frills •  No frills •  Catering, lounges, entertaiment programmes •  Main airports (more expensive) Aiports •  Secondary airports with lower landing fees •  Online booking •  Standarized fleet Retail Fleet •  Use of direct and indirect channels •  Various aircrafts Personnel •  High variable proportion of salary •  No unions •  High basic salaries (less variable perct.) •  Trade union affiliation ©2010 Deloitte, S.L. All rights reserved. 28 Source: ELFAA presentation (2005)
Slide 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.
Slide 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 Non-flight schedules •  •  •  •  •  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 In-flight •  Onboard sales of beverages, food and •  Ryanair in-flight magazine merchandise •  Communications service (On Air) •  Overhead lockers •  Advertising onboard, •  •  •  •  Credit card Bus & rail tickets Accommodation reservations Merchandise: gift vouchers •  Cruises (Costa) •  Gambling •  Travel insurance Internet Car hire •  Ryanair has an exclusive relationship with Hertz and receives a fee per passenger 30 ©2010 Deloitte, S.L. All rights reserved.
Slide 31: Ryanair continuously focuses on cost-containment and operating efficiencies Strategies •  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 •  Standarized fleet 737-800 buyed to a single manufacturer: •  Single class •  Leather seats •  Direct sales via www.ryanair.com •  External contractors for ticketing, passenger & aircraft handling •  Productivity-based pay incentives •  Kiosk-based check-in 31 Cost impact Airport access and handling cost Revenue impact Aircraft operating costs & maintenance Distribution •  Aircraft utilization •  Traffic •  Ancillary revenues Staff ©2010 Deloitte, S.L. All rights reserved.
Slide 32: Spanish airports evolution Text Unit or additional information 5.500 5.000 4.500 4.000 3.500 Average Spanish Airports Girona Units 3.000 2.500 2.000 1.500 1.000 500 0 1999 2000 2001 2002 2003 2004 2005 2006 2007 Santiago Reus Santander 2008 2009 Units Source: AENA 32 ©2010 Deloitte, S.L. All rights reserved.
Slide 33: Spanish airports evolution VARIATION IN TRAFFIC PASSENGERS / AIRPORT 180% 140% 100% Girona Santander 60% Reus 20% Average Spanish Airports 2003 2007 1999 (20%) Source: AENA 33 ©2010 Deloitte, S.L. All rights reserved.
Slide 34: Operations Excellence Enterprise Cost reduction ©2010 Deloitte, S.L. All rights reserved.
Slide 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.
Slide 36: There are three different cost reduction approaches, depending on company’s strategic position, finance situation and timing to achieve the expected savings (1) 36 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.) ©2010 Deloitte, S.L. All rights reserved.
Slide 37: But any cost reduction or profitability improvement methodology begins asking about cost needs and ends establishing procedures to control it 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 NEED It’s a need or adds value? Will change quality of service perception? 4 1 • 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? 3 2 PROCUREMENT Do I’m contracting properly? •  Procurement practices / centr. •  Alternative products or services suppliers •  Recruitment and contract renewal •  Level of centralization of expenditure management •  37 •  Improving efficiency by outsourcing / in sourcing •  Processes reengineering •  Elimination of tasks duplicated •  Sizing •  Alternative services at lower cost •  Procedures for internal request and approval ©2010 Deloitte, S.L. All rights reserved.
Slide 38: ¿Questions? ©2010 Deloitte, S.L. All rights reserved.
Slide 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.