TUI a leading international leisure travel group which has over 200 different tourism brands around the world. The business activities of the TUI Group were attributed to the tourism, logistics and the former industry divisions. Objective of this report is to analyse the strategic position of TUI by applying various tools such as PESTLE, Five forces framework, SWOT and analyse and predict the future implications of its strategic capabilities using Generic strategy and Ansoff’s matrix to the case study. Limitations of the tool applied are discussed with the analysis.
TUI group earlier known as Hapag Touristik Union of Preussag launched itself in tourism market at the end of 1997 with the purchase of Hapag-Lloyd AG. TUI expended its business using the expansion strategy through acquisition, mergers, and investment through joint ventures all over Europe. TUI AG was spread in three sectors TUI Travel (tour operating, airlines and incoming agencies), TUI Hotels & Resorts and the cruise ship business form the World of TUI. TUI AG holds, in addition, a financial investment in the container shipping industry. TUI in 2005 was the tour leaders with 3500 travel agencies in 17 countries with 37 incoming agencies. TUI owned more than 100 aircrafts and was the largest Hotelier in Europe with 285 hotels (Case study). Currently, the group owns 43,3 percent stake in Hapag-Lloyd AG. In the 2008 financial year TUI AG returned a revenue of â‚¬24.9 billion with total earnings (underlying EBITA) of â‚¬759 million. As at 31 December 2008 the Group had 70,200 employees (TUI group, company profile).
3.0 ENVIRONEMNTAL ANALYSIS:
To understand and apply the Environmental analysis on TUI it is essential to perform an internal and an external analysis. External analysis on an industry is further sub-divided in two environment macro-environment and micro-environment. In order to understand the likely impact of these environments on the tourism industry PESTEL analysis and Porter’s five forces is under taken for possible impacts on the industry competitive strength and advantage over competitors.
3.1 PESTLE ANALYSIS
Political factors have a moderate impact on the performance and the growth on tourism industry. Where Political instability generates negative publicity and the risk perception influences the tourists decisions which results in an unavoidable decrease in tourist arrivals (Hall and O’ Sullivan, 1996). On the other side Terrorism has led serious tourism crisis, and has been affecting the financial condition significantly in recent periods (Sonmez et al 1999). Terrorist attacks, the Iraq war has reflected a decline of approximately 6.6% in TUI’s tourism turnover from the first six months of 2002 to the first six months of 2003 (excluding turnover contributed by Nouvelles Frontiers, which we acquired later in 2002). Health Crisis like SARS in 2003 has also had a traumatic effect on international travel (Case study).
Tourism is one of the growing industries, fuelling the growth and employment and has become a critical component of the world of economy. Due to Recession, a downward momentum was seen because most of the tourism operators were handicapped by the high level of fixed assets and less able to manage their airlines and hotel industry(case study). Fluctuations in fuel costs, Exchange rates and currency fluctuations, The Growth of low cost airlines has lead to economic risk in tourism industry.
Change in lifestyle has changed the demands of consumer; they have become more price sensitive and has increased its demand for new experiences. Consumer has developed a new attitude of WAIT AND SEE ATTITUDE (Reisinger 2009) facilitated by last minute purchase resulting in late bookings. As tourism involve movement of people to different locations which calls for cultural clashes. Tourism has also Led to commercialization of local culture, standardization of destinations and adaptation to tourist demands (coastlearn.org)
Use of information technology gave a boost to tourism business for reservations and administrative operations. With the advent of the internet, tour operators can now spread out their activities and make available appropriate information, conquering new customers (Wyner, 2000). With launch of touropa.com in Germany, TUI captured a top position in European market in 2005 with a turnover of 2.6bn euro (Case study). Similarly in Island locations high-tech venue networking was adopted to attract new visitors and to communicate to tourists (The Daily Business Buzz, Nov. 2/09)
Air Travel Organizer’s License “ATOL Regulations” were imposed on any person who advertises or sells air-inclusive holidays in the United Kingdom,granted by the Civil Aviation Authority. A number of TUI’s businesses operating in the United Kingdom, including Thomson Holidays and Lunn Poly, hold ATOLs. There were many European and national restrictions on airline ownership which could loss of airline operating and route licenses and cause other adverse effects on tourism business. TUI’s hotels and destination agencies are subject to a variety of laws and regulations in the countries in which they operate and, on a periodic basis, must obtain various licenses and permits. They are subject to a broad range of labour, environmental and health and safety regulations in each jurisdiction in which they operate (Listing Memorandum, TUI group).
“International tourism can play the role of both victim and villain when it comes to climate change”(Holmes 2007 BBC news). To attain sustainability TUI is continuously improving on environmental performance, TUI focuses on ISO 14001 environmental standards. Hence TUI strongly supports the environmental protection policies like, species protection, nature protection and landscape protection. TUI’s main area of concern is the efficient use of energy and climate protection. (TUI Group, environment management)
3.2 PORTER’S FIVE FORCES FRAMEWORK:
A firm needs to neutralise as many as possible of the five forcers in order to create competitive advantage.(Porter 1998) Porter defines five forces impacting a firm’s competitiveness- threat of substitutes, threat of new entrants in the industry, bargaining power of suppliers, bargaining power of customers, and the intensity of competition within the industry. Understanding the nature of each of these forces gives organizations the necessary insights to enable them to create the appropriate strategies to be successful in their market (Thurlby, 1998) .
3.2(a) Threat of New Entrants (Medium)
For a new company to launch itself in the tourism industry needs a high investment and innovative ideas to sustain its presence in the highly competitive tourism market. The existing company have the capabilities of providing tailored deals on cheap prices because of their established brands and long chains of tour operator. TUI being the market leaders of tourism industry does not have much effect of threats developed by new entrants.
3.2(b) Bargaining Power of Buyers (High)
Tourism industry fluctuates with the buyers changing needs. With increase in competition, buyers have a wider range of services to choose from hence the tourism industry are forced to comply with changing demands and needs of customers. As the switching cost is not too high Brand loyalty is low and with increase in purchasing power of a buyer the likelihood of travelling also increases. Buyers even eliminate the tour operators and prefer make a direct sale from suppliers (hotels, airlines ect).
3.3(c) Bargaining Power of Suppliers (Low)
TUI uses backward integration which means it has its own suppliers; in fact TUI itself acts as its own suppliers.
3.3(d) Threat of Substitutes (High)
With the growing world of tourism there is a demand for strategic differentiation. Customers are looking for new experiences, diversified attractions around the world. The wide spread of TUI in Europe increases the threat of substitute due to growth of tourism industry in other parts of world.
3.3(e) Competitive Rivalry (medium)
Tourism industry involves many competitors with an approach of performing better than the other. The competition level increases because of distribution of market based on the regional operators, privately owned, highly fragmented, and geographically marketed. Even though there was a moderate level of service differentiation, TUI has sustained the competition because of its brand and leadership in market
4.0 TUI’S CURRENT POSITION AND STRATEGY:
“TUI’s strategic goal is to create superior shareholder value by being a global leading leisure travel group providing customers with a wide choice of differentiated and flexible travel experiences to meet their changing needs. TUI’s five strategic priorities for sustainable development are Embedding, Climate Change, Destinations, Our People and Our Customers” (TUI Travel PLC, Strategy) .
Since 1998 to 2005 main focus of TUI was on achieving cost control and differentiating its product in market. This was achieved by adopting Hybrid strategy which is a combination of differentiation, price and cost control (Campbell 2002) refer to Appendix (A). TUI creates enhancing margin quality through product differentiation by creating unique travel experiences for its customers which helps them achieve brand loyalty and competitive advantage. With controlled distribution process the cost of acquisition can be reduced and flexibility is achieved.
The five key elements of TUI’ strategy:
Expand our core tourism business
Exploit synergies and cost efficiencies across our markets and products
Leverage the benefits of our vertically integrated tourism model and our wide distribution network
Identify new trends and exploit developments in the tourism industry
Continue to grow our container shipping business
Over the years TUI has maintained its position as the market leaders of tourism industry by covering all the stages of tourism value chain by owning its own travel agencies, hotels, incoming agencies, airlines and cruises (Business week 2009). It has positioned itself to be its own supplies, buyers and travel services and had become a strong example of vertical integration. Vertical growth can be accomplished by forward and backward integration. Though the vertical integration does not give 100 percent success guarantee in complete value chain, TUI has successfully build its business with selection of travel agencies in European market by having Thomas cook airlines with 100 aircrafts and owning more than 3000 travel agencies (case study). Vertical integration also helps in attracting more customers, differentiate its product and gain more power in market and gain economies of scale by reducing the coordination cost and reducing the profit margins of intermediaries (Enz 2009). Other advantages and disadvantages can be referred in Appendix (B).
Major strengths on which TUI had built its leadership and its weaknesses which empowered them to overcome and maintain its position.
TUI’s greatest strength is its brand recognition and fully integrated business model with wide spread distribution network to provide operational advantages. “TUI’s confidence is based on (i) ability to recover increases in input costs, (ii) flexible business model, (iii) delivery of merger synergies, and (iv) diversity of the Group’s businesses”(TUI Travel Plc, third quarter report). Appropriate strategic choices with the diverse work force and economic of scale in competitive marketing and efficient distribution has proved to be its core competence. TUI’s global presence provides wide variety of holiday services and has successful container shipping business.
TUI Travel’s existing shareholder loan amounts to approximately £900 million is the major drawback for TUI (financial times 2009). The consumers are increasingly holding off on booking holidays in order to save money in recession. Whereas limited bookings transparency (growing trend toward short-term travel bookings; uncertain earnings performance) has also effected the revenue growth of TUI. Another factor is the impact of seasonality on sustained growth and performance of nature based tourism.
5.0 CHANGING TRENDS AND TUI’s FUTURE:
5.1 Key Drivers of change
Beside PESTLE (Appendix (C)) it is important to identify the number of key drivers of changes which are forces likely to affect the structure of a business (Johnson et al 2005). To understand the drivers of changes in tourism industry it is required to analyse the change in consumer’s behaviour, lifestyle and priorities. In years to come the demographic shifts (ageing population), technology penetration, changes in work pattern, time pressure and changing modes of consumption (further destinations, greater expectations, more specialization) will make heavy impact on travel and tourism industry(Lockwood and Medlik 2002). According to Peter Long, chief executive of TUI Travel (sustainable development report 2008), Sustainability is one of the four key drivers for growth in TUI, the four main drivers for a sustainability programme for TUI Travel:
Aviation and climate change
Protecting destinations from the impact of climate change
Protecting destinations from the impact of tourism
Shifting demographics and consumer trends
These aspects will analyse progress of TUI which is made towards providing holidays that cause minimal environmental impact, respect the culture and people of destinations, and offer real economic benefit to local communities.
5.2 Ansoff’s Matrix
According to Johnson et al. (2008) Ansoff Product/market growth can be used to analyse the implications of corporate strategy applied to look for the opportunities open to the industry. This matrix consists of four quadrants which are used to evaluate four types of strategic decision(Appendix (D)). It allows marketers to consider ways to develop the business via existing and/or new products, in existing and/or new markets.
With an initial start in tourism business from end of 1997 to 1999 TUI saw a real scope of penetration of its business in German market with its existing products and aim to increase its market share. With a vision of new opportunities TUI expanded its horizons by stepping into European market in 2000 with complete dominance and strong market share with existing products in new markets by taking over Thomson travel group, Nouvelles Frontieres(France) and Fritidsresor(Scandinavia) developing its market. With time TUI focused on Product development and introduced low-cost travel airlines in 2003, setting up TUI china and then increased its cash flow by signing joint ventures in Russia. In 2005 with launch of a virtual tour operator, TUI captured the top position in tourism industry and was able to develop a successful brand Image. In 2005 TUI penetrated in most of the Europe, tourism division was subdivided into the five sectors Central Europe, Northern Europe, Western Europe, destinations and other tourism activities. TUI was diversifying geographically and that has helped to compensate the ups and downs of individual countries, which can be due to any macroeconomic factor. TUI has diversified geographically in Europe, India and China. They have also diversified in their business segments in logistics of container shipping department in order to achieve economies of scale. TUI opted consolidation for long term growth and global brand development to ensure cash flow from developed market in economic downturn hence TUI considered consolidation has one of their product and market strategy suggested by Johnson et al.(2008).
5.3 EXTERNAL OPPORTUNITIES AND THREATS
Changes in emerging and fragmented markets provide greater opportunity for growth in TUI, acquisition and joint ventures can provide a platform to build stronger product portfolio. Improving TUI’s local business, improving in marketing, sales and distribution can support growing demands for specialist holidays. Tour operators still have scope for consolidation by easing geopolitical tensions. Refer to Appendix (E) for more information about the opportunities and TUI’s approach towards it.
Protracted economic downturn has been a major threat to the tourism industry. Geopolitical uncertainties (terrorist attacks and natural calamities), operators relatively high debts, limited earning transparency of some companies and seasonal-led volatile earnings performances are some other setbacks for tourism industry. Less attention towards environment and global warming may cause a devastating impact on travel business.
6.0 LIMITATIONS OF TOOLS
6.1 PESTEL FACTORS
PESTLE analysis is done to simplify the decision making process while following a strategy. PESTLE factors helps in identifying the past trend of an organisation on which future trends are identified. Practically PESTLE analysis makes it difficult for a company to analyse the entire macro-economic factor as it can be very time consuming and costly. In this fast changing environment, capturing adequate data might be difficult and capturing too much of data can cause ‘Paralysis by analysis’ this predicted data might not be accurate. PESTLE does not help is finding out the level of uncertainty in an organisation. For effective results this process needs to be undertaken on regular basis. (Cipd, 2008).
6.2 PORTER’S FIVE FORCE
Porter’s five forces model works on relatively static market structure because of which it cannot explain or analyze today’s dynamic changes (Recklies 2001). This model equally imply to all the competitors in an industry and this model cannot be applied in isolation where porter accepted that outcome by applying his framework were only relevant while the macro environment remained constant (Campbell et al., 2002). Five force analyses takes into consideration industry as a whole but it does not segregate different segments. The individual analysis of each of the segment can be of much assistance than industry as a whole. It even assumes that relationships with competitors, buyers and suppliers are adversarial. It oversimplifies industry value chains (Grundy, 2006) and It ignores the human resource aspect of the strategy
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. From the case study numerous strength and weaknesses were identified, but those all were a snapshot of the success and failure on TUI over all business performance. According to Mintzberg (1990) the assessment of strengths and weaknesses may be unreliable, being bound up with aspirations, biases and hopes. Moreover, Frost (2003) describes SWOT’s downsides from a manager’s point of view as it would be difficult for a manager to identify strengths than things they see as wrong with the organization and managers tend to describe an effect as a weakness and do not get to the causes. (Zarkos et al., 2007) states, an opportunity can also be a threat for a company; hence the same problem appears in the distinction of strengths and weaknesses.
6.4 ANSOFF’S MATRIX
Ansoff’s matrix is only focussed on growth of a company it focuses on the tangible aspects of products and services and very little attention is paid to intangible aspect like brand. Another weakness of the Ansoff Matrix approach is that it doesn’t really address the issue of brand elasticity as a part of the strategic decision-making process.( pringle and field, 2008). the use of Ansoff matrix as a marketing tool may not be really useful as the matrix is critical for analysing the strategic path that the brand may be following, and does not essentially identify marketing options(Macmillan et al., 2000).
In this report the strategic analysis is carried out on TUI tourism industry using various tools. Firstly, macro-environment was analysed to understand the possible impacts on the industry competitive strength and advantage over competitors and develop an appropriate strategy. On a corporate level hybrid strategy and vertical integration was discussed in support to TUI’s success. Next segment of internal analysis described TUI’s core competences and focussed on future trends of TUI. The analysis of this case study concluded high level of sustainable development which is inimitable.
8.0 REFERENCE LIST
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Market price responsiveness
Price insensitivity Price sensitivity
Stuck in the middle strategy
Appropriate strategic approach
Adopted form David Campbell, George Stonehouse andBill Houuston , Business Strategy (2000), 2nd edition.
Advantages and Disadvantages of vertical Integration
Can eliminate steps and reduce duplication
1)need for overheads to coordinate vertical integration
Avoid time consuming tasks and negotiate contracts
Burden of excess capacity if not at all output is used.
Improve marketing or technological intelligence
Obsolete process may be penetrated
Can create differentiation through coordination process
Reduce strategic flexibility due to being locked in a business
Provide superior control of firms market environment
May link to an unprofitable adjacent business
Offers an increased ability to create credibility for new products.
May not be potential for synergy
Adopted from Enz, A. C., (2009), “Hospitality Strategic Management: Concept and Cases”, 2nd Edition.
Political instability of developing countries
Government regulations and regulatory reforms.
High taxation policies of developed countries.
labour, environmental and health and safety regulations
Rise in disposable income in developing countries
Rise in fuel cost
Changing priorities of consumers
Health and safety concerns
Disposal income in consumer level
Use of information technologies systems for reservations
Use of internet
Implementation of new sales and distribution channels
Global warming – limitation on carbon emission
STRATEGIC DIRECTION ANSOFF MATRIX
Existing Product New Product
Adapted from H. Ansoff, Corporate Strategy, Penguin, 1988, Chapter 6
Embedding into our core business
Ensure our business decisions take into account sustainable development principles
Minimise the negative sustainability impacts (particularly on climate change) of our day-to-day operations
Supply chain management
Support our supply chain in managing their sustainability impacts
‘Edit out’ the holiday options that do not meet our minimum sustainability standards
Make it easy for customers to choose a more sustainable holiday
Help customers appreciate the sustainability impacts of tourism, driving demand for more sustainable holidays
Encourage customers to change their actions in a way that maximises the positive and minimises the negative impacts of their holiday
Innovation and product development
Develop new, more sustainable experiences in response to demand
Collaborating with our industry
Share best practice with others in the tourism industry where our competitiveness is not affected
Use our influence responsibly and in line with our commitment to sustainable development
Putting something back
Put something back into the environment or community wherever we cannot avoid a negative impact
Threat of new Entrant
Wide range of holiday packages
Threat of substitute
Worldwide tourism attractions
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