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The purpose of writing this article is to analyze the applicability of Porter's Generic Strategy to modern e-business. To begin with, there will be a PESTEL analysis for Thomas Cook Group (the third largest travel company which offer both online and offline business) and some factors identified in PESTLE would be used to support the following analysis.
According to the background articles and information on Euromonitor for Thomas Cook Group, a PESTLE analysis can be carried as follows:
The labor government raised £1 levy on package holidays to £2.50 and the charge may rise again. After the general election, the new government issued an emergency budget on June 2010 which announced that the VAT will be increased to 20% from 17.5%, the capital gains tax will be increased to 28 per cent (for higher and additional rate taxpayers) and entrepreneurs' relief lifetime limit will be raised to £5 million (Mark Hoban, Budget 2010). These policies would eliminate Thomas Cook's profit.
Terrorism around the world and war in middle-east have negative impact on the tourism industry since security is one of the most essential factor the consumer would considered. The number of tourists reduces sharply after September 11 attacks.
Owing to the credit crunch and continually recession of economy, Bank of England cut its growth out look for the UK and under the influence of the financial crisis, several tourism operators collapsed (i.e. Goldtrail and Sun4U).
Consumer spending, demand and confidence are lower due to the fears of rising mortgage costs and the rising unemployment rate. People are increasingly wary of expensive purchases and they want to save more for their pensions. As a result, the sales for tourism industry in 2009 decreased 7%. Therefore, Thomas Cook had to reduce its capacity by 30% in UK to reduce the loss.
The pound has recently strengthened lightly against the euro, making holidays in mainland Euro less expensive, it may creates favorable conditions for travelling abroad in Christmas vacation. However, the sterling is still weak in general and consumers' willingness to have a cheap holiday in abroad may disappear.
The fuel price is increasing and consumer needs to pay higher fuel surcharges. The number of long-distance travelled consumers decreased and it already brings a loss of £41.3 million for Thomas Cook (Travel and Tourism-Thomas Cook Group-World, 2010).
The 2012 London Olympic Games may provide more jobs to tourism industry and attract a great number of tourists to Britain.
Change in holiday pattern: There is a growing trend of (36% of Britain) spending holidays at home. Due to the Football World Cup 2010, a great number of people spent their summer vacations in home watching matches on Television.
Change in demographic:
a) The number of single and retired people is growing rapidly.
b) The population of students who have leisure time is increasing although this segment of the population is likely to be cost-conscious (Business planning and control, p 333).
With the innovation of technology, the methods to make purchases are diversified. For instance, through the internet or smart phones. Therefore, the online sale for Thomas Cook increased.
There are more means to display products and promote brand awareness. For instance, Thomas Cook launched a new digital marketing campaign using 3D technology.
There is new legislation for foreign travel restrictions which applied to the Northern Ireland. This will reduce Thomas Cook's business in Northern Ireland.
There are several changes in Employment law and Workplace Age Discrimination Law. For example, the default retirement age rose to 65 in 2010 and there would be additional paternity leave for parents of babies born after 3 April 2011. In addition, the national minimum wage rate raised from £5.80 to £5.93 on October 2010 and it indicates the labor cost will increase.
The closures of airspace caused by the Icelandic volcanic ash cloud and the unreasonably warm weather leading to a decline of the travelers.
The H1N1 virus outbreak in 2009 made the amount of tourists plummet and it accumulated losses of £20 million in 2009 (Travel and Tourism-Thomas Cook Group-World, 2010).
Since people become more aware of their carbon footprints, they may want to take fewer flights, thus, they will reduce long-distance travel.
Applicability of Porter's Generic Strategies to e-business
1. Porter's Generic Strategies
Porter concluded that a firm can get competitive advantage by concentrate on only one of cost leadership, differentiation or focus strategy. If a business pursues more than one strategy, it will become "stuck in the middle" since there are inherent contradictions among different strategies (Porter, 1980).
a) Cost leadership dictates that a company needs to have lower costs than its competitors to gain competitive advantages (Porter, 1980). On one hand, E-commerce allows firms to reduce transaction cost and offer products in lower price while lower price is still a most essential consideration for many online shoppers, especially first-time online shoppers (E. Kim et al 2004). On the other hand, there are more websites can be used to compare price, thus the buyers' bargaining power is increasing and it is easy to find a substitute online. Moreover, for e-business the barriers to entry are low and rivals could offer lower price products easily then it would make the firm locked in a price-cutting cycle. Therefore, a number of e-business firms have to use cost leadership strategy to provide lower price products to secure the numbers of consumers. Thomas Cook can be taken as an example: according to Thomas Cook's annual report 2009, the aggressive discounting by online rivals further threatens the cost effectiveness of the business. The company has to reduce the price online to maintain market share. As a result, the profit margin is lower.
b) Differentiation strategy means a firm could get competitive advantage through the development of unique dimension (i.e. product feature) and it will increase development and production costs (Porter, 1980). It is true that despite price, customers would consider about other elements like brand reputation, product features and customer service when they make purchasing online. They may prefer to spend more money to purchase a novel product with detailed instructions and good customer service but not the old one without any images about the product. In addition, differentiation is easier to achieve in e-business environment since more information and resources are easy to get, switching cost on internet is lower and more elements can be differentiated. For instance, Thomas Cook became a major sponsor of London Olympic Game 2012 then it put the logo of 2012 Olympic game on the top of their website and they create a series of new products and services linked with the Olympic game (i.e. a product names 'Game Break' which offer both hotel tickets bookings ). E-business firms would perform better if they can offer differentiation products and services.
c) Some firms may use Focus strategy by providing specific products, focusing on a particular market. Internet technology enable online firm target both on broad and narrow market more conveniently. A new internet company might not be able to compete in the whole market and it is wise to focus on a particular segment (E. Kim et al 2004). Moreover, e-business firm could use internet to collect data about customers' needs then provide specific service or product. For example, Thomas Cook can use their on-line system to analyze customer's bookings for hotels. If reservations are full every Thursday in a particular place, then the hotel could charge higher price on each Thursday.
2 Pure plays versus Clicks-and-Bricks, Single Strategy versus Mixed Strategy
There are two broad types of internet business, pure online firm (pure plays) and firms have both online and offline business (clicks-and-bricks). Since Clicks-and-bricks has more advantages than pure plays (i.e. has better brand recognition, reputation, and credibility), a huge amount of traditional firms now become clicks-and-bricks (E. Kim et al 2004). Thomas Cook could be taken as an example: the online business only increased 3% from 2008 to 2009(31% to 34%), it may indicate the online sector is mature and most customers are still nervous about online business, therefore, the company cannot just depend on pure plays.
Due to the economic factors identified in the PESTLE analysis, customers become more aware of the value of money and this result in the booming of last-minute deals. What is worth mention is that most of last-minute deals (usually have 10% discount) are made and only available online. Offer last-minute deal only online could reduce the cost thus eliminate profit loss; the company used the cost leadership strategy successfully. In addition, the last-minute deal can be treated as a differentiate product either and the company has improved the online content of its websites and dynamic packaging offerings; therefore, the company makes a good use differentiation strategy either. It is obvious that Thomas Cook Group uses an integrated strategy to reduce the perils of specialization on a singe strategy and allows the firm to profit from multiple abilities and exploits potential synergies among the different aspects of strategy (Danny Miller, 1992).
Based on the analysis above, we can conclude that an e-business firm could perform better by using differentiation strategy than use cost leadership. Moreover, the internet capabilities enable a firm serving both broad and narrow market by using cost leadership and differentiation strategy together, a firm could get higher performance by using a mixed approach.