Environmental Analysis Of The Tourism Industry
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Published: Mon, 5 Dec 2016
The TUI is a global leading leisure travel group intending to provide customers with a wide choice of differentiated and flexible travel experiences to meet their changing needs. This course work explains the various strategies being used by this organisation. Strategy includes perspective, position, plan, and pattern. Strategy is the bridge between policy or high-order goals on one hand and tactics or concrete actions on the other. Strategy and tactics together straddle the gap between ends and means. In short, strategy is a term that refers to a complex web of thoughts, ideas, insights, experiences, goals, expertise, memories, perceptions, and expectations that provide general guidance for specific actions in pursuit of particular results (Whittington 1993).
ENVIRONMENTAL ANALYSIS OF THE TOURISM INDUSTRY WITH IMPLICATIONS TO TUI
The environment to be analysed is considered to be of two kinds namely the macro environment and the micro environment. The tool used to analyse the macro environment is PESTEL, and the tool used to analyse the micro environment is Porter`s five forces analysis.
Porter`s five forces analysis deals with the factors that are outside the industry which influences within the industry, and could predict the profitability. This eventually influences the competencies of the firm. In order to compete effectively, the business should understand its industry and market. Porter has defined the forces contending that a competitive environment is created within the industry by the interaction of five different forces acting on a business. The five forces are rivalry among existing firms, threat of new entrants into market, supplier power, power of buyers, and threat of substitute products or services. Understanding these forces will help to generate the appropriate strategies for the firm to be successful ( Porter 2005).
Rivalry occurs between the existing sellers in the market. In the case of TUI, it could be other tourism organisations. Rivalry determines the attractiveness of the customers towards an industry or a specific organisation. For the TUI, the rivalries were Thomas Cook, MyTravel Group, ReweTouristik and First Choice Holidays. Having a market share of more than 32 percent, TUI was the first player in the concentrated market. This indicates the high concentration for TUI in the market. This could be closely related to monopoly that is, the lack of economic competition.
The threat of entry for new firm is usually based on the market entry barriers. The barriers for entry into the market could be the scale of economy, cost of entry, distribution channels, cost advantage, government legislation, differentiation etc. TUI was able to stand well in the industry because it had a large scale investment, good tour packages, low cost packages, and good services. All these factors helped TUI to cut off the threat of entry into the market as a new firm.
The threat of substitute products or services could be technical threats, where in the latest technology is used to replace a product with some other industry which gives the same level of satisfaction or even better, and same outcome. TUI launched the virtual tour operator Touropa.com selling travel tours online, through travel agencies, television, call centres etc. These are the modes through which TUI obtained the direct sale of travel products through technology.
The buyer power has got two important determinants which are the size and concentration of customers. If an industry has to attract a large number of customers, then it should have a greater concentration in the market. TUI can be considered to be a powerful buyer because there is just one buyer or very few buyers and a lot of sellers.TUI bought suppliers such as travel agency chain, airline and logistic services, various leading package holidays, all inclusive holiday club chain etc. TUI was then a leading company in tourism with over 200 tourism brands around the world making it a very powerful buyer.
The supplier power is a mirror image of the buyer power. Suppliers of raw materials, labour and services to the firm can be a source of power over the firm if they are unique enough and well established suppliers. Supplier power can exist when there is switching costs, power of brands, possibility of forward integration of suppliers, fragmentation of customers. With regards to the case study TUI does not have powerful suppliers, because they bought most of them such as travel agency chain, airline and logistics services, tour operators etc. Other tour operators appeared to be the most vulnerable because they were handicapped by a high level of fixed assets and less able to manage their airline and hotel capacities.
In analyzing the macro-environment, it is important to identify the factors that might in turn affect a number of vital variables that are likely to influence the organization’s supply and demand levels and its costs (Johnson and Scholes, 2001).
A number of checklists have been developed as ways of cataloguing the vast number of possible issues that might affect an industry. A PESTEL analysis is one of them that is merely a framework that categorizes environmental influences as political, economic, social, technological, environmental and legal forces.
Political factors include government regulations and legal issues and define both formal and informal rules under which the firm must operate. The political factors include tax policy, employment laws, environmental regulations, trade restrictions and tariffs, political stability.
For the TUI, issues with political factors could be terrorism, taxation etc. Different countries will have different taxation policies. Since TUI works on different countries, it will have to manage these policies with a strong management team. There were several terrorist attacks in tourist spots like New York, Djerba, Bali, Madrid etc. These attacks had created a feeling of insecurity among the tourists to visit the place again, which eventually affected the tourism industry.
Economic factors affect the purchasing power of potential customers and the firm’s cost of capital. The economic factors include economic growth, interest rates, exchange rates, inflation rate etc. Tour operators appeared to be the most exposed to the economic crisis due to the high level of fixed assets and less able to manage their airline and hotel capacities. The global economic downturn and health crisis has also had an ill effect on the international travel, thus affecting the TUI.
Social factors include the demographic and cultural aspects of the external macro environment. These factors affect customer needs and the size of potential markets. Some social factors include health consciousness, population growth rate, age distribution, career attitudes, emphasis on safety etc. If a demographic data is collected about tourism and even if the result is positive, it`s not really reliable because, the opinion given during the research could change with changes in the economy of the country.
Technological factors can lower barriers to entry, reduce minimum efficient production levels, and influence outsourcing decisions. Some technological factors include, R&D activity, automation, technology incentives, rate of technological change. TUI has got the latest technology to convey information through media. TUI has launched the virtual tour operator Touropa.com through which travel tours are sold online, and also with the help of travel agencies, television and call centres.
Environmental factors include weather, climate, and climate change, which may especially affect tourism industry. Climatic change could affect the international travel, but it`s not a prolonged problem. Environmental factors could also include pollution created by the flight fuel, food packages etc. TUI has got its own flight for travel and it emits co2 which is harmful to the environment. TUI also provides food services and hotel services. If they use plastic food packages it could be harmful to the environment as well. Such factors should be taken into account and tried to reduce as much as possible.
Legal factors include discrimination law, consumer law, antitrust law, employment law, and health and safety law. Since TUI works on different countries for import, export and shipping purposes, there might be restrictions or rules and regulations that vary for different countries which could create an inflexible environment for the company.
COMPETITIVE ADVANTAGE OF TUI
When a firm sustains profits that exceed the average for its industry, the firm is said to possess a competitive advantage over its rivals. The goal of much of business strategy is to achieve a sustainable competitive advantage. There are two basic types of competitive advantage namely cost advantage and differentiation advantage.
A competitive advantage exists when the firm is able to deliver the same benefits as competitors but at a lower cost (cost advantage), or deliver benefits that exceed those of competing products (differentiation advantage). Thus, a competitive advantage enables the firm to create superior value for its customers and superior profits for itself. Cost and differentiation advantages are known as positional advantages since they describe the firm’s position in the industry as a leader in either cost or differentiation. A resource-based view emphasizes that a firm utilizes its resources and capabilities to create a competitive advantage that ultimately results in superior value creation (Porter 1985).
COST ADVANTAGE AND DIFFERENTIATION ADVANTAGE
Competitive advantage is created by using resources and capabilities to achieve either a lower cost structure or a differentiated product. A firm positions itself in its industry through its choice of low cost or differentiation. This decision is a central component of the firm’s competitive strategy.
Another important decision is how broad or narrow is a market segment to target. Porter formed a matrix using cost advantage, differentiation advantage, and a broad or narrow focus to identify a set of generic strategies that the firm can pursue to create and sustain a competitive advantage.
COST LEADERSHIP STRATEGY IN TUI
Cost leadership is a concept developed by Michael Porter, used in business strategy. It `means the lowest cost of operation in the industry. The cost leadership is often driven by company efficiency, size, scale, scope and cumulative experience. A cost leadership strategy aims to exploit scale of production, well defined scope and other economies producing highly standardized products, using high technology. In order to sustain during the slump in tourism, TUI introduced a new cost cutting programme strategy targeting yearly savings which they achieved. They were able to sell low cost holidays even without catalogues, decorations or seats, but customers got information about this and booked for the holiday themselves. TUI was also present in the low cost airline market in Germany and the UK.
The firm creates value by performing a series of activities that Porter identified as the value chain. In addition to the firm’s own value-creating activities, the firm operates in a value system of vertical activities including those of upstream suppliers and downstream channel members.
To achieve a competitive advantage, the firm must perform one or more value creating activities in a way that creates more overall value than competitors. Superior value is created through lower costs or superior benefits to the consumer (differentiation).
RESOURCES AND CAPABILITIES
According to the resource-based view, in order to develop a competitive advantage the firm must have resources and capabilities that are superior to those of its competitors. Without this superiority, the competitors simply could replicate what the firm was doing and any advantage quickly would disappear. Resources are the firm-specific assets useful for creating a cost or differentiation advantage and that few competitors can acquire easily. The following are some examples of such resources:
Patents and trademarks
Installed customer base
Reputation of the firm
Capabilities refer to the firm’s ability to utilize its resources effectively. An example of a capability is the ability to bring a product to market faster than competitors. Such capabilities are embedded in the routines of the organization and are not easily documented as procedures and thus are difficult for competitors to replicate.TUI has got efficient distribution channels and good economies of scale which are considered to be the attributes that other organisations cannot imitate.
The firm’s resources and capabilities together form its distinctive competencies. These competencies enable innovation, efficiency, quality, and customer responsiveness, all of which can be leveraged to create a cost advantage or a differentiation advantage.
STRENGTH AND WEAKNESS OF TUI
A firm’s strengths are its resources and capabilities that can be used as a basis for developing a competitive advantage. Examples of such strengths include patents, strong brand names, good reputation among customers, cost advantages from proprietary know-how, exclusive access to high grade natural resources, favourable access to distribution networks.
The absence of certain strengths may be viewed as a weakness. For example, each of the following may be considered weaknesses lack of patent protection, a weak brand name, poor reputation among customers, high cost structure, lack of access to the best natural resources, lack of access to key distribution channels.
In some cases, a weakness may be the flip side of a strength. Take the case in which a firm has a large amount of manufacturing capacity. While this capacity may be considered a strength that competitors do not share, it also may be a considered a weakness if the large investment in manufacturing capacity prevents the firm from reacting quickly to changes in the strategic environment.
LIMITATIONS OF THE TOOLS USED FOR ANALYSIS
Porter’s model is a strategic tool used to identify whether new products, services or businesses have the potential to be profitable. However it can also be very illuminating when used to understand the balance of power in other situations.
Porter argues that five forces determine the profitability of an industry. At the heart of industry are rivals and their competitive strategies linked to, for example, pricing or advertising but, he contends, it is important to look beyond one’s immediate competitors as there are other determines of profitability. Specifically, there might be competition from substitute`s products or services. These alternatives may be perceived as substitutes by buyers even though they are part of a different industry. An example would be plastic bottles, cans and glass bottle for packaging soft drinks. There may also be potential threat of new entrants, although some competitors will see this as an opportunity to strengthen their position in the market by ensuring, as far as they can, customer loyalty. Finally, it is important to appreciate that companies purchase from suppliers and sell to buyers. If they are powerful they are in a position to bargain profits away through reduced margins, by forcing either cost increases or price decreases. This relates to the strategic option of vertical integration, when the company acquires, or mergers with, a supplier or customer and thereby gains greater control over the chain of activities which leads from basic materials through to final consumption.
Further limitations are that it is not necessary that new business models and the dynamism of the industries, such as technological innovations and dynamic market entrants from start-up will completely change business models within short times. For instance, the tourism industry is considered as being competitive and also being revolutionized by innovation that indicates Five Forces model being of limited value since it represents no more than snapshots of a moving picture. Therefore, it is not advisable to develop a strategy purely on a model basis, but to examine it in addition to other strategic frameworks of analysis.
Nevertheless, that does not mean that Porters theories became invalid. What needs to be done is to adopt the model with the knowledge of their limitations and to use them as a part of a larger framework of management tools, techniques and theories. The model assumes that all business relationships are competitive, and that industry boundaries are stable over time, ignoring innovation and entrepreneurship(Grant 2007). Limitations of PESTEL model is that they come to some conclusion which is not exactly what the organisation is looking for, but the ways as to how the organisation could be improved. SWOT framework has a tendency to oversimplify the situation by classifying the firm`s environmental factors into categories in which they may not always fit. The classification of some factors as strengths, or weaknesses, or as opportunities or threats is somewhat arbitrary. For instance, a particular company culture can either be strength or weakness. A technological change can either be a threat or an opportunity. The firm should be aware of these factors and develop a strategic plan to use them to its advantage.
Strategy is that which top management does that is of great importance to the organization. The above study is about the environmental analysis of the tourism industry with implications to TUI. The tools that has been used to analyse are Porter`s five force model and PESTEL model. A study about the competitive advantage, strength and weakness of TUI is also done along with the limitations of the tools that has been applied to analyse. Competitive advantage of the TUI is its cost leadership strategy and it has been successful with this strategy so far. Even with the changing business environment TUI would most likely be successful for its strategy.
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