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1. Background of TUI
TUI is the best example which describes the most amazing and strategic changes of a firm. The firm initially was into the smelting and mining industry which was too cyclical, whose profitability was decreasing year to year, and had no clear future with the closing of the last German coal mines and the growth of the aggressive competition of emergent countries. In mid-1990's, though economic situation, Michael Frenzal and his team at Preussag made the decision to quit this and enter the tourism industry which was later named TUI, the undisputed European leader in tourism industry.
TUI is the leader in the tourism industry not only in European countries but also in America. They provide holiday packages in most competitive prices with high comfort and quality. They not only provide the travel but also the hotel accommodation, transfers from the airport to the hotel and back, tour guides, optional items such as insurance, meals, excursions etc, hence they are also named as a Tour Wholesaler.
In order to become the European leader, the group embarked on steady programmed major acquisitions while divesting the non-core businesses. This started at the end of 1997, when Preussag bought Hapag-Lloyd AG, a large German tour operator.
2. Main Trend in Tourism Industry
The trend in tourism industry started changing in the mid-2000's. In 2005, the tourism industry was a significant industry. Worldwide it generated US$6,201.49bn of economic activity, which represented 10.6% of the total world GDP.
In the previous 10 years, the tourism industry had been growing at an annual pace of 4.1%.2005 was the best year ever for this industry because for the first time ever the number of internationals tourist arrivals recorded worldwide exceeded 800 million, according to the WTO (World Tourism Organization), a specialized agency of the United states for tourism policy issues.
In 2005 TUI was the biggest tour operator in Europe which offers packaged or ‘all-inclusive' prepaid and pre-planned holidays to its customers, usually through travel agents. This was a pre-assembly of basic travel components sold for a fixed price. A standard package was composed of air transportation, hotel accommodation, transfers from airport to hotel and back etc.
The company had steady programmed major acquisitions while divesting the non-core businesses. This started with the Hapag-Lloyd AG, a large German tour operator with its own travel agency chain, airline and logistic services, in end of 1997. This was followed by TUI Deutschland, which was the first German travel agency chain and then took a significant, equity share of Magic life,a leading all-inclusive holiday club chain. This continued till 2005 which included some major companies like Hapag Tourstik Union in 1998, a majority stake in Thomas Cook in 1999, Nouvelles Frontiers in 2002, Russian tour operator Mostravel in 2004 and so on. In March 2005 TUI launched the virtual tour operator Touropa.com, in Germany, selling travel tours not only online, but also through travel agencies, televisions and call centres. In 2005, TUI took the full control of CP ship, the leading Canadian container shipping line and merged its container shipping division with it.
3. External Environment Analysis
Environmental forces which are especially important for one organisation may not be same for another: and, over time, their importance may change. A multinational might be concerned with government relations and understanding policies of local governments, since it may be operating plants or subsidiaries within many different countries with political systems (Johnson, G & Scholes, K, 2002).
According to Walsh (2005) PESTEL analysis means the political, economic, social, technological, environmental, and legal factors influencing the environment in which an organization operates.
Government at both national and local levels can affect companies not only on a day-to-day basis through laws, policies and its authority, but also at a strategic level by creating opportunities and threats. The activity & policies are always the key factor that affects the external environment of an industry. In 1990 the political change means that all the trading nation works on market based economy. This will increase the flow of companies entering into UK. Also the introduction of market-based economies led to a new imperative for profit. Before entering the new markets companies must keep in mind the stability of political environment of the country, so that they won't face problems in future. The best example for the effect of political factors in tourism industry was during the period 2001-2003.During this period there was general insecurity created after the various terrorist attacks in New York (2001), Djerba (2002), Bali (2003) and Madrid (2004). The global economic turndown, and the health crisis, such as the outbreak of SARS in 2003, had also a traumatic effect on international travel from 2000-2004. These consequences caused number of problems for the tourist due t which there was a significant fall in the tourism industry.
Economic forces affect organizations in every part of their activities as they are a major influence on the various exchange processes. In 2005 Tourism Industry generated US$6,201.49bn of economic activity worldwide. The key factors effecting the economic environment of a firm are costs and prices, foreign exchange rates, taxation (on profits, employees and goods sold), economic mood of country etc.
TUI opened its low cost travel agency in 2004 where the customers can book their holidays on spot, so there would not be cost of the catalogues, no decorations and no seats, customers obtained information about the latest holiday offers by themselves and were able to book. This affected the firm's costs and prices as they were able to provide the holiday packages at competitive prices and high quality and comfort. Next comes the foreign exchange rates which are more favorable in UK as EURO is single currency used in many of the European countries and its strong position in the world market. The Economic mood of the country influences tourism industry a lot. During the recession the people avoid holidays and traveling as they first need to fulfill their basic needs and avoid luxury.
Social changes are very rapid example fashion and fads. The company should focus on the latest trends on day to day basis.
For example: Now a days everything is done online so people prefer booking holidays through internet. So the company should provide online booking for the customers for the easy booking. The travel packages should include the new exciting offers changing according to the new trends so that the customers can find some new things which are exciting for the next time they visit. This grabs the customer attention and satisfaction.
Technology development is a boom for everyone, tourism industry also adapted to catch up with market. The changes in technology have changed the way in which the business operates that is the booking of holidays, tickets online and easy online payment. Now a day's internet usage in very high so the firm can use it for advertising the new packages, offers etc rather than television or radio. Hence the travelers can find the information related to popular destinations, accommodations, flights, cab services etc without much effort and arrange everything as needed. Technology developments have made it very easy for the payers to cross border business and easy to interact with their business partners.
Environment plays a vital role in tourism industry. They're always a concern about selecting an appropriate location for setting up new travel agencies which must be easily accessible by the travelers. Over the last decade or so, there has been more importance given to the environmental factors and how to be in close contact with the customers. One example which affected the tourism industry environmentally was the impact of SARS in south Asia and Australia and the others could be the diseases. Another major thing affecting the tourism industry might be the public opinion about the company as it changes from location to location.
Everyday changing government legal policies like taxation policy, health & safety, employment law and quality assurance. This will also affect the companies a lot. One of the major legal factors affecting the tourism industry is the procedures for getting visa when visiting aboard. Now a days the visa procedure has been a bit complicated due to the fear of the terrorist's attacks all over the world.
Porter Five-Force Model
Industry structure analysis of tourism industry can be developed with the help of porter's Five-Force model.
Threat of New Entrant
If for some reason an industry is attractive to a company it may choose to enter. Considering the TUI, because of its high start up cost of business, the value of shares, the competitive prices, its experience in tourism industry have chances to attract the companies. It is very difficult for a new player to enter this industry because the market concentrating in the hands of big players, who can offer their product in low price, standard and quality offered by them, customer are brand conscious, it becomes very difficult for a new player to establish its own identity, and the government regulations, its very tough for a new player to enter in this market because profit level in very high, the capital requirements, the set up cost is very high. Market leaders can take the pressure of losses and can experiment with the market trend, but it's very difficult for a new player to follow the trends of the already existing big players of the market.
Intensity of Rivalry
PORTER, M, E, (1980) says that rivalry occurs between two competitors therefore due to the competition either of them will feel the pressure or sees the opportunity to improve position. It also involves new technology, price-Competition, introducing new product. The current trend of consolidation in European will increase and there will be small number of big players left in this tourism industry. Firms which are bigger than others or are part of a large parent company, are better to cope with fluctuations in demand and could sustain a price war longer than smaller companies. The main rivals for the TUI are Thomas Cook, My travel Group, Rewe Touristik and First choice Holidays.
Bargaining power of Suppliers
Suppliers may pose a threat to profitability in some industries; this force is not as influential in most market situations. There should be full information about the suppliers and the alternatives also so that it would help in the crisis situation.For tourism industry the need of substitutes are very low.
Buying power of Buyers
The consumers of this industry can make a direct impact on the company, as they have lots of choices as there are many companies and there number of agents available in market. Even though customer stick to one particular brand but the still look around in the market, to get the best possible deal. Now-a-days much option available in the market in same segment. The packages cost should be at a competitive price than the other competitors. The switching cost from one supplier should be low so that the powers of the buyers over the industry are greatly increased and hence the buyers during recession are very much considered with the price so that they can bargain, this increases the power of the buyer.
Advantage of Five-Force Model
According to Hill, W.L & Jones, G.R (2007) there are many advantages of Porter's Five Forces, according to him if these forces were strong, then it would be very difficult for a company to increase price and earn huge profits in the industry. If the competitive force is weak then it will be easier to earn high profits, these forces may change with the change in the industry environment. The managing team of the company makes out how changes in these five forces can give rise and the new opportunities and threats so that they can take suitable steps. It is through the strategy that the companies can change the strength of one or more of these five forces to its advantage.
Limitation of Five-Force Model
Despite the fact it is a useful tool to understand the competitiveness of environment, porter's framework is subject to several limit. Campbell, Stonehouse and Huston (2002) there are many limitations to the five forces of Porter; the major limitations are discussed below:
- It claims to assess industry profitable
- It implies that five forces apply equally to all competitors in an industry
- It does not adequately cover product and resource market
- It cannot be applied in isolation
- It assumes that relationship with competitors, buyers and suppliers are adversarial.
A SWOT analysis can find the relationship between the external and internal environmental factors influences and the strategic capabilities of the company. It is acronym of Strength, Weakness, Opportunities, and Threats. SWOT identifying strategy to strengthen weaknesses and exploit strategy.
“SWOT Analysis summarizes the key issues from the business environment and the strategic capability of an organization that are most likely to impact on strategy development”. (Scholes, 2002).
- Major acquisitions which helped TUI as a Global leader in tourism.
- Cost cutting strategy
- Better liquidity maintained during the odd times for tourism industry.
- Its value chain is better linked and it has maintained all its services which it provides to its customers, thus gaining a competitive edge over its rivals.
- The brand image is the major strength for TUI by this it will have high hopes from its customers.
- Effective use of information systems and technology which is
- Maintenance of fixed assets during odd times in the tourism industry.
- Personnel management and Co-ordination among its subsidiaries in the view of further expansion.
Uses of SWOT
- It helps in quickly analyzing the complex situation.
- It helps in identifying the relevant information and in turn addresses the key issues.
- After analyzing the above mentioned factors an organization can support its future plans related to strategic development effectively
Limitations for SWOT
- The SWOT analysis helps to identify a lot of factors related to strengths, weaknesses, Opportunities and Threats, however it does not gives clear understanding of the level of importance.
- The SWOT analysis gives an overview of the subject but doesn't help to get the details.
- The categorization of some aspects as strengths or weaknesses, or as opportunities and threats is to some extent subjective.
The Value Chain Analysis:
According to Porter, the value chain divides the organization activities into primary activities and supporting activities. The primary activities for a travel company in the tourism industry are retail distribution, transportation, marketing and sales and customer service whereas the supporting activities include Infrastructure, human resource management, product and service development, technology and information system development and procurement. The primary activities add value directly to the final product but supporting activities add value indirectly to final product by supporting to primary activities. (Refer Appendix 1).
TUI is spread throughout the value chain and TUI is a vertically integrated company, by which it offers its customers everything in the value chain, thus gaining a competitive advantage. TUI is having efficient resources by which its advances earlier in every aspect by the help of its supporting activities, such as in service onsite, TUI hotels, and technology advancements by starting online sales, product development by wholesale the tour package etc.
Critical Success Factor
According to Johnson, G & Scholes, K, (2006), if we see from the potential provider's viewpoint it is valuable to understand which features are of particular importance to a group of customers (market segment). These are known as critical success factors. As discussed in the above these are the critical success factors, which are as follows:
- Technological and knowledge base.
- Mature and Consolidate market.
- Product excellence and Quality
- Branding & Positioning
- Customer satisfaction
- Strategic Relationship for new products.
The concept of defining CSFs is more essential to gain competitive advantage. Therefore their market image & position will not be affected.
Competitive Strategy of TUI
According to Porter (1985), “A firm's relative position within its industry determines whether a firm's profitability is above or below the industry average. The fundamental basis of above average profitability in the long run is sustainable competitive advantage.” There are two of competitive advantage a firm can posses are low cost or differentiation.
TUI had adapted a low cost strategy to get its boom in the market. Also build a strategy of low cost through innovative marketing tools & product excellence factors. They chose internet based environmental and sustainability communication because of its easy access, updatability, and transparency to target the consumer market. TUI develops a marketing strategy based on critical factor to give them a competitive edge over other player in the market.
Consolidate market - TUI tourism with its low cost travel and excellence in customer service from booking to accommodation in its own hotels is winning the customers thus consolidating its market.
Product excellence and Quality - They maintain their quality & standard by changing the technology.
Branding & Positioning - There brand popularity is rising & customer list was too long. This happen because they maintain their position (target customer) & brand image.
Customer Satisfaction - Improving their technology & along with that provide their customer a reliable and safe product. Maintain their quality standards, with gives them a competitive advantage.
- Diversify the range of products it offers.
- Eco-friendly tourism development: Tourism industry is a fast and volatile industry in which TUI has to look after a long term future by adopting a sustainable and environmental friendly ways.
- The count of international travelers is increasing year by year, so TUI has to maintain its customers and need to attract the new customers.
- TUI has to maintain its brand image and introducing new products with innovative ideas as to attract the new market segments.
Value Chain Model: