1 The Firm’s Strategy and its Negotiation Capability: the Ryanair Case Andrea Caputo, Lincoln International Business School Adrian Borbély, IESEG School of Management Paper presented at the 16th European Academy of Management Annual Conference, Paris, 1-4 June 2016 Abstract This paper investigates the potentially reciprocal relationship between negotiation and corporate strategy, with the aim to start answering the following two questions: how does the strategic positioning of a firm impact its negotiation practices and how does negotiation influence strategy implementation? We assemble literature in strategy with research in negotiation, focusing on the concepts of the integrated approach to negotiation and dynamic capabilities. To unveil the intricate relationship between our two fields of interest, we use Ryanair as a case study, as this company has built a unique negotiation approach, based on its market power, which stands at the roots of its competitive advantage. This has implications for both practice and research, as an integrated study of negotiation and strategy could lead to a better understanding of the strategy making process and its foundations for success. Keywords: Negotiation, Capabilities, Ryanair, RBV, Case Study, Competitive Advantage
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The Firm’s Strategy and its Negotiation Capability: the Ryanair Case
Andrea Caputo, Lincoln International Business School
Adrian Borbély, IESEG School of Management
Paper presented at the 16th European Academy of Management Annual Conference,
Paris, 1-4 June 2016
Abstract
This paper investigates the potentially reciprocal relationship between negotiation and
corporate strategy, with the aim to start answering the following two questions: how does the
strategic positioning of a firm impact its negotiation practices and how does negotiation
influence strategy implementation? We assemble literature in strategy with research in
negotiation, focusing on the concepts of the integrated approach to negotiation and dynamic
capabilities. To unveil the intricate relationship between our two fields of interest, we use
Ryanair as a case study, as this company has built a unique negotiation approach, based on its
market power, which stands at the roots of its competitive advantage. This has implications
for both practice and research, as an integrated study of negotiation and strategy could lead to
a better understanding of the strategy making process and its foundations for success.
Keywords: Negotiation, Capabilities, Ryanair, RBV, Case Study, Competitive Advantage
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The Firm’s Strategy and its Negotiation Capability: the Ryanair Case
Introduction
Management scholars have paid too much attention to competition and top down
approaches to strategy and management (EURAM, 2015). Responding to the call of the 2016
EURAM’s annual conference, our paper intends to contribute to the research in strategy and
cooperation by trying to unveil how negotiation is part of the backbones of strategy. Our
paper starts from the following two ideas, which mix insights from the two disciplines of its
authors: negotiation and strategy.
First, individuals rarely negotiate for themselves but instead act on behalf of their
team, department, business unit or entire organization. Negotiation research clearly
establishes that people negotiate differently depending on the organization they serve, which
determines their role into the negotiation (e.g., Appelt & Higgins, 2010; McCracken, Salterio,
& Schmidt, 2011). By taking the argument from a strategy perspective, this leads us to think
about the influence of an organization's strategy and strategic positioning on its agents’
negotiation practices and effectiveness.
Second, in order to successfully implement its strategy, an organization has to
We know that a dynamic capability has to have the form of a “specific organizational
and strategic process by which managers alter their resource base” (Eisenhardt & Martin,
2000: 1111). By analyzing Ryanair’s negotiation behaviors, we can imply how negotiation
for them is a specific process, largely adopted to alter their resource base (e.g., airport slots,
airplanes, employee contracts, etc.). Moreover, we have argued that negotiation is a process
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(Zartman, 1977) centered on trade-offs that include, but are not limited to, the exchange of
goods and services. In the words of Quélin and Duhamel, managers “should be able both to
conduct negotiations for large scale contracts and provide guidelines for their businesses. In
particular, they should be able to provide framework contracts to ensure a high level of
consistency and cohesiveness in their organizations” (Quélin & Duhamel, 2003: 658).
A second aspect of dynamic capabilities is that a firm demonstrating a dynamic
capability shares commonalities, or best practices, with other firms in its industry, but also
shows idiosyncratic details which make the analyzed firm different from the rest of its
industry. Ryanair is an example of a company with a successful, but idiosyncratic,
negotiating capability. They use largely known negotiation tactics, such as their take it or
leave it approach and information leaking, in an idiosyncratic fashion.
Third, the pattern of effective dynamic capabilities is influenced by market dynamism.
The pattern of a negotiation capability shows the same dependence on market conditions.
Indeed, Ryanair alternates the use of standardized negotiation practices to on-time
experiences based on market dynamism and stakeholder’s characteristics. The negotiation
capability rely in some cases more on structured routines based on pre-existing knowledge
(Kesting & Smolinski, 2007), in others will evolve through trial and error, simple and
experiential events. In such markets, pre-existing knowledge and experience may harm
negotiation (Moran & Ritov, 2007); the use of negotiating routines is difficult.
Fourth, the outcome of a capability follows the same general path as the pattern of the
capability. In less dynamic markets, where negotiation capabilities are structured through
routines and systems that allow less freedom of movement to the negotiators, the outcome of
negotiations can be considered more predictable (Adair & Brett, 2005). Conversely, in highly
dynamic markets, where emergent patterns of the negotiation capability rely less on routines,
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more on experience, the outcome of negotiations is more difficult to predict (Lax & Sebenius,
1986).
In terms of contribution to competitive advantage, we have described how Ryanair’s
negotiation capability drives and sustain its competitive advantage. Competitive advantage is
achieved through the possession of valuable resources for a specific use, and additional value
can be generated by combining original resources from the firm with those of other firms
(Lippman & Rumelt, 2003). Is negotiation a capability, able to bring competitive advantage if
used appropriately? In Lippman and Rumelt's words: “in such a resource assembly, skill at
bargaining and negotiation would further enhance value creation” (p. 1082). Susskind and
Movius support such an idea in blunt terms: “organizations that look past negotiation as a
core capability do so at their own peril” (Susskind and Movius 2013, p.5).
Finally, the negotiation capability has elements of an evolutionary process that
follows a unique path, shaped by learning and experience. Ryanair’s negotiation behaviors
changed and evolved over its history. Despite on-going controversies in negotiation theory
about the exact role of learning and experience in increasing negotiation performance
(Caputo, 2013), the body of research nonetheless shows how individual negotiation ability is
definitely shaped by learning and experience (Ness & Haugland, 2005). One might not
become a better negotiator over time, but ability in negotiation is a function of previous
engagements. Negotiation could therefore be considered as a dynamic capability of the firm.
Despite the scarcity of references shedding direct light on this issue, negotiation
appears to play the role of a capability within a firm or an organization; more precisely, a
dynamic capability, in the sense of Eisenhardt and Martin (2000). We now present
suggestions for future research.
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Conclusions and future research directions
The Ryanair case study enables to show the clear link between performance in
negotiation and success in strategy implementation. But at the same time, it clearly shows
that what Ryanair achieves in negotiation would not be possible without the position the
airline enjoys as a market leader. We have demonstrated how the possible reciprocal
relationship between strategy and negotiation, as negotiation practices are influenced by the
organization’s strategic positioning and, in turn, plays a large role in the strategy’s
implementation.
Future research, and indeed our project, might focus on comparing the Ryanair
experience with other successfully negotiating companies and unveil common features
associated with best negotiating practices. This will not only serve our understanding of
negotiation but also give us a more pragmatic vision of strategy formulation and
implementation.
Reversing the argument, any strategy, as solid as it is, cannot be implemented if the
organization cannot successfully negotiate with its key stakeholders. An example drawn from
the airline industry is Air France, the French flag carrier, which has been struggling recently
with the implementation of different strategic moves because of failed negotiation with its
personnel and unions. Latest to date, they have had to abandon the idea of a European-wide
low-cost branch because of a strike of its pilots and have had a hard time convincing unions
of the need to adapt the flying personnel’s work time to the standards set by the competition
(Borbély & Caputo, 2015; Clark, 2014). Consequently, Air France struggles to turn in a
profit, despite the fact that it stands among the most renowned airlines in the world and are
engaged in one of the most successful merger in the industry (with the Dutch flag carrier,
KLM). We can argue that failed negotiations with key stakeholders may hinder the
implementation of an otherwise promising strategy.
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It remains that success in negotiation is more than a quantitative result – “I did
negotiate well or not” – but requires some form of fit with the organization’s positioning and
strategic objectives. This requires studying and categorizing strategic factors that will have an
impact on negotiations throughout the organization. Although we have listed some in our
literature review, this was just a logical argument; empirical efforts may be called for to
ascertain such relationships. We argue that several strategic variables impact the way people
negotiate for their organization.
For a company to ensure that negotiators actually use their organization’s strengths
and act in the direction of the stated objectives requires a carefully crafted set of incentives
and controls. We suggested the concept of “negotiation infrastructure” to define how an
organization may ensure its agents negotiate along the lines of its strategic objectives. By
this, we infer than an organization that considers its negotiations from a systemic perspective
– and act upon it – may find there some sources of performance. Indeed, properly
incentivizing negotiators through a systemic approach to negotiation will help organizations
better achieve their strategic objectives.
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Table 1 – Some interrelations between strategy and negotiation (Our elaboration)
Strategic dimension Negotiation aspect Strategic decision-making Structured and idiosyncratic way of negotiating Outsourcing negotiation / contracts Negotiation within strategy making teams Market characteristics and market power
External negotiations differ according to market structure, e.g. monopoly vs oligopoly
Employee relations and negotiations Company vs stakeholders characteristics
Negotiation is influenced by relative power
Firm size and lifecycle Negotiating for or with an established firm is different than for a start-up
Strategic ambition Negotiations influenced by bureaucracy
Background Founded in 1985 by the Ryan brothers, now a publicly quoted company. Strategy Relatively low operating costs and provides an inexpensive and convenient ‘no-frills’ service. Mission Ryanair will become Europe's most profitable lowest cost airline by rolling out our proven
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‘low-fare–no-frills’ service in all markets in which we operate, to the benefit of our passengers, people, and shareholders.
Strategy statement Ryanair's strategy is to operate a ‘low-fare, no-frills’ service. To do this it has realised that it is imperative to become the low cost airline. Since 1991 it has concentrated on driving costs down so as to maintain low fares and remain profitable on low yields. The main areas which have been the focus of the airline's concentration on costs have been: fleet commonality, contracting out of services, airport and handling charges, staff costs and productivity, marketing costs.
Outsourcing implications Contracted out all noncore activities: heavy maintenance, significant proportion of ground and passenger handling, on long-term contracts. Maintains its own handling and ticketing services at its home airport in Dublin, but has contracted out these services elsewhere.
Employment practices Operates a flexible labor system. Has a small core staff and brings in temporary contract workers when needed. Operates an activity-related pay scheme for both pilots and flight deck crew. Ryanair employs a flexible labor policy whereby employees are expected to do more than one job, e.g., cabin crew also tidy up the aircraft between flights.
Marketing strategy Ryanair's commission to travel agents is among the lowest paid by a scheduled carrier (7.5% as opposed to the typical 9% on ticket sales). In order to further cut this cost, Ryanair Direct was created which centralizes in Dublin all direct reservation services for the airline. The airline benefited from an attractive tax and grant regime from the Irish Government. This airline does not have a frequent flier program and does not provide or support dedicated lounges at airports.
Table 4 – Application of the Eisenhardt and Martin’s framework to the Negotiation Capability of Ryanair (Our elaboration on Eisenhardt & Martin, 2000)
Eisenhardt and Martin’s
conceptualization of dynamic capabilities
Ryanair’s Negotiation capability
Definition Specific organizational and strategic processes by which managers alter their resource base.
Ryanair shows specific organizational and strategic processes within its negotiations.
Heterogeneity Commonalities (i.e. best practice) with some idiosyncratic details.
Ryanair masters largely common negotiation strategies and tactics (e.g. take-it-or-leave-it) in an idiosyncratic fashion that exploit its market dominance.
Pattern Depending on market dynamism, ranging from detailed, analytic routines to simple, experiential, ones.
Ryanair adapts negotiation behaviors to specific markets and stakeholders.
Outcome Depending on market dynamism, predictable or unpredictable.
Negotiation outcome depends on market dynamism, predictable or unpredictable.
Competitive Advantage
Competitive advantage from valuable somewhat rare, equifinal, substitutable, and fungible dynamic capabilities.
Ryanair’s negotiation capability is fundamental contribution to its competitive advantage.
Evolution Unique path shaped by learning mechanisms such as practice, codification, mistakes, and pacing.
Ryanair’s negotiation capability has evolved over time, taking advantage of external changes (e.g. the 1997 deregulation of the market) and adapting to its growing market dominance.
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Figure 1 - Ryanair's share price in 2015 (Center for Aviation, 2015)
Figure 2 – Ryanair’s Income Statement Data (Ryanair Annual Report, 2015)
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Figure 3 – Importance of Negotiations within Ryanair Business Model (Our elaboration on Casadesus-Masanell & Ricart, 2010)