Strategic Analysis Of First Choice Holidays Tourism Essay
This report is based on the strategic analysis of First Choice Holidays PLC, one of the world’s leading package holiday companies. An analysis of the company’s internal and external environments will be undertaken resulting in the researcher’s findings of the opportunities and threat that the industry faces.
A look at the industry’s competitive forces will determine show the profitability of different industries and the data found, analysed showing the different external competitive forces that affect organisation and how information can be used to counter them.
A strategic analysis of the company will show the company’s competitive and financial strength in which the company’s strengths and weaknesses will be highlighted. A strategic fit which will indicate whether the company’s mission and strategies fits its internal capabilities and its external environment.
1.0 Market Environment Analysis of First Choice Holidays PLC
First Choice Holidays PLC, trading name of TUI UK limited is part of the TUI Travel PLC Group of companies, one of the world’s leading travel companies, which operates in over 180 countries. The company boasts of having more than 30 million customers worldwide in 27 key source markets such as the United States, Italy, France, India and the United Kingdom. In addition to First Choice Holidays, the company has over 200 brands which are comprised of market leading mainstream brands and specialist brands.
The company operates in four sectors:
Mainstream – this is the largest sector in terms of the company’s financial performance and employee numbers. It comprises of leading tour operators and ‘power’ brands as well as it operates 146 aircraft and serves 22 million customers.
Activity – this sector has over 40 activity travel businesses that operate under five divisions which are Marine, Adventure, Ski, Student and Sport. The adventure businesses take more customers to iconic adventure destinations than any other operator and serve 1.1 million customers.
Specialist and Emerging markets – this is an international portfolio of travel businesses focusing on specific destinations, premium travel experiences or particular customer demographic segments, often with differentiated and exclusive products.
Accommodations and Destinations – this sector sells and provides a range of services in destination to tour operators, travel agents, corporate clients and direct to consumers worldwide. Some services include hotel accommodations, cruise handling and round trips for customers.
TUI Travel operates its headquarters from the U.K and employs approximately 50,000 people in over 200 travel businesses in the world.
First Choice Holidays PLC, formerly Owners Abroad (Wholesale) Limited and Owners Abroad PLC was formed in 1973. After launching an airline, Air2000, the company moved into Specialist holidays. The company was restructured and rebranded into First Choice Holidays PLC after several acquisitions and joint ventures with various tour companies and cruise liners. The group then structured itself into four sectors: Mainstream, Activity, Specialist and Online Destination Services before the merger with TUI Travel PLC in 2007. First Choice was awarded the Most Environmentally Responsible Large Tour Operator (2007-2009) from the British Travel Awards.
1.2 Vision and Strategic Goal
Since First Choice merged with TUI Travel, it shares the same vision and strategic goals. The company’s vision statement is ‘Making Travel Experiences Special’. The company’s strategic goals are to create superior shareholder value by being the leading global leisure travel group providing its customers with the widest choice of differentiated and flexible travel experiences to meet their changing needs and focusing their strategic initiatives for profitable growth. These include developing the company’s business model, continuous efficiency improvements and development of growth opportunities.
1.3 PEST Analysis
According to G. Johnson et al. in the text Exploring Corporate Strategy, PEST stands for Political, Economical, Social, Technological, Environmental and Legal. It provides a comprehensive list of influences on the possible success or failure of particular strategies that First Choice may face or is facing at present.
With the government’s hiking of aviation taxes and Air Passenger Duty (APD), this causes airline tickets to be expensive, therefore discouraging prospective customers from choosing the package holiday company.
Political unrest in some countries may cause customers to decide on not travelling to that particular destination out of fear for their safety.
Impact on individual of anti-terror measures likely to increase inconvenience of some travel options.
The government’s Fuel Price ‘escalator’ is a way of government making money while protecting the environment by discouraging people to travel less.
The May 2010 British elections caused political instability with certain actions destabilising the whole of Europe.
The government can form new regulations under which these companies can operate which may or may not be positive.
The current inflation rate of the U.K is 3.1% which affects air fares, clothing, food etc.
With the rise in petrol fuel which increased by 3% above inflation, customers are feeling the pinch of this and are less likely to choose taking a vacation with any package holiday company.
The unemployment rate is at 7.7% which lowered by 0.1% over the last quarter. Having a rise in employment will raise confidence in consumer spending.
The UK Pound Sterling Exchange Rate has shown recent developments which are indeed very much favourable for the citizens of the U.K. travelling abroad. At present the UK Pound Sterling Exchange Rate has posted the UK Pound Sterling at nearly double the worth of the US Dollar, which means that when British citizens travel to the U.S. they will be able to draw double bargains for their money's worth.
The number of people purchasing on the internet has been on a constant rise. In 2009, 18.31million U.K households have access to the internet. In a survey it was found that 69% of U.K households use the internet to purchase services related to travel & accommodation.
Increased popularity of foreign travel leading leads to a boom in demand for air travel. However, this has been adversely affected by international terrorism which causes concern for the safety and security of future package-holiday makers.
The interaction between tourists and the chosen host community can be one of the factors that may affect a community as tourists may not be sensitive to local customs, traditions and standards.
People’s life style changes cause package holiday companies to now offer customised packages and online booking facilities to meet customer expectations.
Today more companies are choosing to broadcast their products via the internet. Online booking has been one of the biggest factors affecting the package holiday industry. U.K residents are now constantly using the internet to book their holiday trips which saves on time for them as well as providing convenience.
Advertising on the internet has been proven to boost sales for companies; more and more people are using the internet as a way to communicate their needs and wants to the outside world.
1.4 Porter’s Five Forces Analysis
Figure 1. The Five Forces That Shape Industry Competition
First Choice is in a very dynamic and competitive industry, the Porter’s Five Forces Model was created to show the profitability of different industries. This model is used for analysing the different external competitive forces that affect organisation and how information can be used to counter them.
The following is an analysis using the model:
Threat of New Entrants
First Choice has direct ownership of its own airline and hotels. New entrants may not have the capital for such an investment and therefore may depend on external airlines and hotels to provide their customer with a service.
New competitors may not possess the “know-how” or have the necessary experience to begin operating a package holiday business.
Government regulations provides a list of rules that new competitors have to take into consideration before beginning operation, some of which may pose a problem for beginners in this industry.
In an already highly competitive market, there will be the issue of pricing to new competitors. Pricing packages in a way that it may be attractive for holiday travellers without being too low so that it may end up running at a loss.
Threat of Substitute Products or Services
First Choice’s main competitor, Thomas Cook, has dropped its prices to compete with them for lowest priced package holidays. If successful, customers may be lead to choose that company and divert from the services of First Choice.
Competitors may not possess assets such as its own airline or hotel but offers the same services at a cheaper cost.
Destinations that the company may not have package deals for, other competitors may provide causing prospective customers to switch to the competitor’s services.
Bargaining Power of Buyers
Buyers can dictate the price of package holidays being that the industry is a highly competitive one. Buyers have a lot more choices on package holiday services to choose from.
Market research has shown that buyers are taking fewer 7/14 night packages causing package holiday companies to attempt differentiation and specialisation of certain package deals to cater to those who take shorter trips.
The threat of buyers going directly to suppliers is possible. The purchasing of airplane tickets from the airline and the booking of accommodation is an imminent threat to the industry.
Convenience is key for today’s buyers. With the internet customers would choose the company which can provide the complete package holiday service without leaving the comfort of their homes.
Bargaining Power of Suppliers
If oil prices rise, suppliers of fuel for the airlines may raise their prices.
Fuel suppliers can dictate prices for their product depending on the demand for flights. Taxes applied to the cost price of fuel can affect the cost of package holiday deals.
Suppliers will have high negotiation powers for those package companies now entering the market but for those experienced and large companies such as First Choice or Thomas Cook, there will be a balance of power.
Rivalry Among Existing Competitors
Thomas Cook, the main competitor for First Choice and parent Company TUI Travel, has joined with the company offering cheap package deals which increased the already existing price competition.
First Choice was combined with its sister company Thomson award winning airline Thomson Airline to be one of the top package holiday airline in the UK which is acquiring the Boeing 787 Dreamliner which meant it will be a fifth more fuel efficient than its competitors Flybe and Thomas Cook Airlines.
Thomas Cook offers a range of financial services that First Choice does not which includes foreign exchange services, their own prepaid currency card and the recent innovation of creating an app for the Iphone and Android phones.
1.5 Industry Life Cycle
Figure 2. Industry Life Cycle
This model is used to showcase which stage the package holiday industry is at current. The industry is currently in the ‘Shakeout’ stage of the lifecycle. The barriers to entry are currently high, economies of scale have been achieved, forcing smaller companies to be acquired by bigger companies such as TUI Travel and Thomas Cook or exiting all together.
1.6 Critical Success Factors (CSFs)
The Critical Success Factors of the package holiday industry will highlight the key factors that present and upcoming companies should focus on that will bring satisfactory results, therefore ensuring successful competitive performance.
Creating a consolidated market – Combining companies or products into one provides opportunities for significant cost savings as well as revenue synergies.
Having more direct ownership of airlines and accommodation suppliers.
Having successful product differentiation will attract more customers from segments such as university students.
To raise awareness, influence choice, change behaviour, and develop and promote new products to encourage responsible holiday choices.
Maximised web sales and content.
1.7 Opportunities and Threats of the Market Environment
Having analysed the market environment of the industry, the following will highlight the various opportunities and threats the market faces.
To consolidate the market by taking over smaller companies.
The opportunity to come up with new innovative products/services because of the changing consumer market.
To build new capital to purchase assets such as aeroplanes and cruise ships, reducing dependency of suppliers with that mode of transport.
New mergers and strategic alliances to promote the maximisation of synergy profits.
To maximise on the use of the internet market, to make it more interactive for consumers.
Low cost airline competitors such Ryanair and EasyJet has relatively low prices.
Natural disasters that may occur at destinations or the home country.
People owning foreign property won’t be willing to take a full package holiday, just a cheap flight.
People booking their holidays for themselves and not through the package holiday companies.
Threat of terrorist attacks may change a customer’s perception on safety when travelling.
Table 1. The Opportunities and Threats of the Package Holiday Industry
Having analysed the market environment of the industry, this paper will now take a closer look at First Choice Holidays PLC’s strategies which will explain the company’s various operations and the resources to get it done.
2.0 Strategic Analysis of First Choice Holidays PLC
Strategy is concerned with matching a firm’s resources and capabilities to the opportunities that arise in the external environment. The following shows the strategic analysis of First Choice and the tools used.
2.1 Value Chain Analysis of First Choice Holidays PLC
A Value Chain Analysis describes the activities that take place in a business and relates them to an analysis of the competitive strength of the business.
Figure 3. Michael Porter’s Value Chain Model
The following is the value chain analysis for First Choice Holidays PLC:
Providing all working material for travel shops and tour operators.
Printing of travel brochures.
Liaising with suppliers of fuel for Thomson aircraft.
Liaising with financial institutions for the supply of various foreign exchange currencies to be made available online and at First Choice travel shops.
Communication with various hotels and other sources of accommodation.
Hiring of security for airport parking facilities.
Booking and pre-payment of hotels and other sources of accommodations for clients at various destinations.
Liaising with different tour operators, transport and excursion providers.
Booking and pre-payment of excursions providers.
Updating the travel website for online booking.
Securing flights for various destinations.
Liaising with insurance company, Mondial Assistance (UK) Ltd., for travel insurance for customers.
Fuelling of aircraft for flights.
Ensuring there is enough on board staff for flights.
Distributing brochures to customers.
Distribution of airline tickets or cruise ship passes to customers.
Marketing and Sales
Online booking as well as a pre-departure website for new and existing customers.
The availability of 300 travel shops spread conveniently across the UK.
Advertising of the company and airline by television and print also on the company’s website.
Call centre staff are readily available for customer support.
The offering of special package deals at a lower price.
Existing customers’ sharing their experiences about the company through word-of-mouth.
The service of travel insurance for all customers.
Airport parking so that customers can safely use their vehicles and park instead of hiring alternative transport to get them to the there.
The service of Traveller’s cheques is provided to customers who want to purchase foreign currency.
Seats on the plane can be reserved before customers travel, making it easier and more comfortable for a family to sit together.
Car hires are organised for customers in need of transport during their holiday.
Qualified child care-takers or nannies are provided to customers equipped with toys and other equipment from respected UK brands such as Crayola and Little Tikes.
The following departments make up First Choice’s company infrastructure.
Finance and Admin
Engineering and Research
IT and IS
Human Resource Management
Employees are trained to be knowledgeable about the industry and company.
Training is done for employees so that they can assist customers with choosing the perfect holiday option for their budget.
Nannies for baby-sitting services are trained and qualified with NNEB/CACHE (or equivalent).
Air hostesses are equipped with the necessary first aid and situation response training.
Continued development online booking and interactive websites such as the pre-departure site.
Outbound dialler system was installed to automate the call-in service for agents, giving them guidance through the many services and products First Choice has to offer.
A browser-based management information system enables management to access operational and business information to monitor how calls are made.
Research on various locations for new accommodation according to customers’ needs and wants.
Communication with vendors and other tour operators.
Acquisition of the necessary technology needed to run the company.
The purchasing of new aeroplanes for flights to more destinations at a greater speed.
2.2 The Strategic Capabilities of First Choice Holidays PLC
An organisation’s strategic capabilities are its capacities, resources and skills that create a long-term competitive advantage. The following shows the strategic capability of First Choice.
2.2.1 Resources and Competences
300 travel shops in the U.K
Airline – First Choice Airways
Expedition cruise ships
Over £2 billion in assets
4th largest package holiday company
Owner of several market leading brands such as 2wentys & Falcon
Online booking website
State of the art communication systems (MO Communicator)
A contributor to an £13.8 billion revenue
Deployment of travel shops in various key areas in the U.K.
To create a market leading presence in the Russian market through joint ventures
The introduction of Microsoft Office Communicator to implement an IP-based voice network to deliver better customer service.
Enhancing customers’ experience online by ways of after-sales services
Investments such as yachts, aeroplanes and expedition cruise ships that provide First Choice with a greater competitive advantage.
Capabilities for competitive advantage
Boeing 787 Dreamliner aeroplanes that are able to go greater distances and offers greater fuel efficiency.
First Choice Holiday Village designed for families and a 5-star spa concept for couples.
Powerful brand with the merger with the largest leisure company in the world.
37 years in the travel and leisure industry.
Relationships with suppliers to retain 150 million bed nights per year.
Operational profitability which allows First Choice to respond to changes in the trading environment.
Possessing profitable capacity by having individual flight allows the company to determine optimum seat capacity by each U.K airport and to ensure the most appropriate aircraft fleet size and type are maintained.
Consolidation of aircraft fleet as a fuel conservation measure and to reduce the company’s direct carbon footprint.
Table 2. Resources and Competences of First Choice Holidays PLC
2.3 The Financial Analysis of First Choice
Following a look at the company’s resources and competences, a brief analysis of the company is needed to see where it stands in the industry. First Choice is a part of TUI Travel PLC, therefore shares in the group’s profitability. Having merged with the group, First Choice has contributed to £93million in synergy profits as well as the group’s overall revenue of £18.6billion.
The following shows a break-down of the company’s financial capability in the following areas in 2009:
Gross Profit Margin – This is used to assess a firm's financial health by revealing the proportion of money left over from revenues after accounting for the cost of goods sold. The company’s Gross Profit Margin stood at 8.4% in 2009, an improvement of 1.1% of the previous year. This shows that the company’s pricing strategies have been effective.
Net Profit Margin – This is used to show how much profit a company makes for every £1 it generates in revenue or sales. The company’s net profit margin stood at -0.77% which states which has improved over the previous year of -2.1%. Therefore this shows a rise in efficiency after all expenses and that have been considered.
Return On Assets – This gives an idea as to how efficient management is at using its assets to generate earnings. The company earned 0.3% from invested capital (assets) compared to 2008’s -1.4% loss. As a result this shows the company is earning more money on less investment.
Return on Equity – This shows the amount of net income returned as a percentage of shareholders equity. The company showed a 1.2% profit made from shareholder investments, a rise from the previous year -0.1%. Thomas Cook, the company’s main competitor had a higher return at 2.37%.
Current Ratio – This is used to determine a company's ability to pay off its short-terms debts obligations. The company’s current ratio stands at 3:5 which means they can pay off its obligations should it become due at that point.
Acid Test Ratio – This indicates whether a firm has enough short-term assets to cover its immediate liabilities without selling inventory. The company showed a ratio of 1:2 for 2009, which means that the company has enough liquid assets to cover an unexpected drawdown of liabilities.
2.3.3 Leverage or Debt
Debt to Equity Ratio – This indicates what proportion of equity and debt the company is using to finance its assets. The company showed a ratio of -3% which means that they were not aggressive in financing it’s growth with debt and has the ability to repay loans.
Total Debt to Total Assets – This is used to measure a company's financial risk by determining how much of the company's assets have been financed by debt. The company showed a ratio of 3:4 meaning that 75% of the company’s assets are financed by the creditors or debt (and therefore 25% is financed by the owners).
2.3.4 Activity (see Appendix)
Asset Turnover – This shows the amount of sales generated for every dollar's worth of assets. The company showed a ratio of 1.5 which means for every dollar in total asset spent they gain 1.5 in revenue compared to the industry’s 0.34 ratio.
Despite a drop in revenue, the company still remained profitable and above its competition. It is seen that the company has an edge and is inviting for any investor. The following shows the companies. The following shows the strengths and weaknesses of the First Choice.
First Choice Holidays PLC
One of the market leaders in the package holiday industry both domestically and globally.
Technologically advanced, creating new ways using technology to make decisions on their own without going physically to an agent.
Offers a wide range of comprehensive services that customers enjoy.
Ability to consolidate the market.
Inability to fully penetrate the Western market resulting in dependency on the European market for revenues.
As at August 2010, there was a consistent decrease in bookings following the recurrence of airspace closures, the emergency budget and the UK weather.
Accounting errors on the part of executives.
3.0 The Strategic Fit Analysis of First Choice Holidays PLC
Strategic fit indicates how well the First Choice Holiday's mission and strategies fit its internal capabilities and its external environment. First Choice is the 4th largest package holiday company in the UK. Its main competitors are Airtours, Thomas Cook and its sister company Thomson Holidays, currently Thomsons dominates the industry.
According to Investopedia, competitive advantages give a company an edge over its rivals and an ability to generate greater value for the firm and its shareholders. The more sustainable the advantage, the more difficult it is for competitors to neutralize the advantage. It is the company’s competitive advantage that allows it to earn excess returns for its members. Having a competitive advantage is important to First Choice because without it, the company will have no economic reason to exist and will just simply wither away. Through the analysis done in this essay, although First Choice is ranked as #4, it still holds an advantage on its competitors.
First Choice used the strategy of backward integration, meaning the company purchased suppliers in order to reduce dependency. An example of this would be its own airline and the First Choice Holiday Village. The acquisition of new aeroplanes, the Boeing 787 Dreamliners, would prove to be a major advantage as consumers are now taking responsibility for the environment and with these aeroplanes; the company will showcase environmental performance by reducing their carbon emissions. Having these assets will give First Choice the advantage of delivering products or services of a higher value at a cheaper price, as a result gain cost leadership.
Using the internet for online sales has maximised their profits also the company retained their customers while gaining new ones. The company’s liquidity and financial situation is stable despite a drop in revenue in 2009, with that they are capable of market consolidation. An example of that would be the acquisition of C.I.T Holidays, a UK based company with extensive operations in Spain and Italy.
First Choice has a long history within the industry along with experience. They have proven to be well prepared to any changing environment. The company has achieved high economies of scale because of its access to larger market allowing them to operate with greater geographical reach. They have the ability to create value for money to its customers and have shown to be innovative by way of creating differentiated products such as its pre-departure website, an after-sales service.
3.1 The SWOT Analysis of First Choice Holidays
The SWOT Analysis provides information that is helpful in matching the firm’s resources and capabilities to the competitive environment it operates.
First Choice Holidays PLC
One of the market leaders in the industry.
Ability to offer differentiated products/services.
Commitment to customer service.
Wealth of knowledge of the industry.
Backward Integration which made them spread across the value chain.
Strong distribution channels, the strongest being online sales.
A 13.5% reduction in package prices because of a decrease in sales as a result of the recession and events such as the volcano ash disruption in mid-April 2010.
A loss of £69million in revenue in 2009 compared to the year before.
Further expansion through acquisitions and mergers.
With new mergers and alliances, an opportunity to create synergy profits arise.
Airlines and hotels are now offering package deals.
Threat to Thomson Airlines from low cost airlines such as Ryanair.
Terrorist threats or attacks will change customers’ perception of safety when travelling.
In conclusion, First Choice Holidays PLC is strategically fit and has a high advantage over the competition. The company is seen to be attractive for investment, although their profits fell for the previous financial year and sister company Thomson Holiday still stands at number one, but with new products underway, there may be a positive change.
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