Background of Tourism Industry - Case Study Example

Strategic analysis of TUI Travels PLC Table of Contents 1. Introduction 1.1 Background of Tourism industry 1 1.2 Purpose of study 1 2. Overview of TUI 2.1 TUI at present 1 2.2 Environmental analysis 2.2.1 Porter’s five forces 2 2.2.2 PESTLE analysis 3 2.2.3 Discussion 5 3. TUI strategy 6 3.1 Differentiation strategy 6 3.2 Cost leadership 7 3.3 Focus 7 3.4 Difficult for competitors to imitate 7 4. Likely implications of their strategy 4.1 Future analysis 8 4.2 Recommendation 8 5. Resources 5.1 Use and limitation of resources 9 5.2 Resources implications 10 References 11 1. Introduction 1.1 Background of Tourism industry Tourism is an important global industry and international arrivals are expected to more than double by 2020 (Meyer, 2003). The tourism expenditure is expected to reach US$ 2 trillion. Tour operators in the developed world affect the nature of tourism. The tour operator is an intermediary between the customer and the hotel or the carrier. However, the travel trade, which includes travel agents and the tour operators, is undergoing turbulent times as airlines and hotels have gained direct access to customers. Nevertheless, tour operators are still in demand because most British holiday makers use package tours. The four main tour operators or the Big Four in the UK include TUI, MyTravel, First Choice and Thomas Cook. However, consolidation and mergers have taken place among the Big Four as Thomas Cook and MyTravel have merged while TUI has merged with Britain’s First Choice (FVW, 2006). 1.2 Purpose of study The growth of the British travel market has outpaced that of the rest of the developed world. The UK is an important originating market for long-haul travel and the British holiday makers have a tendency to use tour operators when traveling long-haul. The growth of TUI can be attributed to the growing demand in the UK. This paper proposes to understand how TUI could attain leadership in the European tourism industry and how they have been able to keep the competitors at bay. 2. Overview of TUI 2.1 TUI at present The history of TUI can be traced way back to 1923, the year in which the company was formed and started operating in industry, transport and natural resources (TUI, 2009). In 1997 the organization shifted its focus to travel and tourism. The 2001 year saw a new management structure coming into place which gave a new strategic focus to the organization. Today TUI is the market leader with 11 Boeing Dreamliners and 50 next generation 737s. It has around 200+ brands in its kitty. It operates in 180 countries worldwide serving more than 30 million customers. It employs 50,000 people and operates pan-Europe consisting 150 aircrafts (TUI, 2009a). they have set up their own low cost travel agencies across europe and in Germany they also sell their tour online through Touropa.com. In addition, they also sell through travel agencies, televison and call centers. This strategy gave a boost to TUI’s position in Europe as they became Europe leaders in direct sale of travel products with a turnover of €2.6bn in 2005. It then became the biggest tour operator in Europe. 2.2 Environmental analysis 2.2.1 Porter’s five forces The essence of strategy formulation is to cope with competition (Porter, 1979). Competition in an insutry is rooted in its underlying economics and competitive forces may be overlooked. According to Porter, five forces influence and help shape the strategy and the operating business environment of an organization. 1. Threat of new entrants – Consolidation is taking place in the industry which deters new entrants. Barriers of entry arise due to product differentiation, economies of scale, capital requirements, cost disadvantages, access to distribution channels, and governbment policies. The British holiday makers would use online booking for short-haul holidays but would use tour operators for long-haul destinations. TUI offers complete travel solution – it has its own fleet of aircrafts, its own hotels, operates as tour operators under different brands in different countries in Europe. Besides, 12 companies that are members of the FTO (Federation of Tour Operators) control 90% of the market share. TUI is the market leader and unless the new entrant is of equal size, TUI has no competition. The smaller operators have resorted to specialization in order to stay away from the mainstream territory. 2. Bargaining power of the suppliers – suppliers have the power to squeeze profitability in any industry. In the tourism sector, tour operators have been attempting horizontal integration as the capital requirement becomes low. The Big Four, are all, vertically integrated, which takes the form of control through ownership of a single group. Each of the Big Four have their own offices and their designated sub agents. TUI also has its own offices and agents, its own fleet, and own hotel rooms across Europe and hence the bargaining power is under control. They do not have to accede to the demands of the suppliers as it makes volume purchases. It has product differentiation as well. 3. Bargaining power of buyers – the customers too have the power to push the prices down in an industry. A survey of holiday makers on the quality of service, value for money and whether they would recommend the operator to a friend, showed that holday makers would prefer to book with smaller operators as they prvide best holiday deals (Mills, 2003). 4. Competitive Rivalry – apart from the Big Four there are several other known agents such as Kuoni, Vlub Meditation and Alltours. MyTravel has been undergoing a bad patch due to claims of accounting fraud and mismanagement. Rewe Touristik of Germany has a very strong position across Europe while First Choice Holidys is also well placed with number of distribution channels (Viardot, 2007). Hence, competitive rivalry is intense but TUI owns more than 100 aircrafts and 285 hotels. 5. Threat from substitutes – consumers in the UK have been threatening to buy packages from smaller operators. Substitues can limit profits in normal times as well as during the boom. The threat from substitues for TUI is high as consumers want value for money and alternatives are available as a number of smaller operators are succsfully operating across Europe. 2.2.2 PESTLE analysis Most organizational goals fail to achieve their destiny because of non-cognizance of strengths and weaknesses of the organization (Barney & Hesterly, p35, 2009.). 1. Political – UK tourism is not able to achieve its full potential and faces threat from international competitors. This is attributed to lack of governmental support despite tourism being the 5th largest sector of the UK economy (Caterer Search, 2009). The Department of Culture Media and Sport (DCMS), responsible for this sector, is not effective. It is not the investment that is required but the governent support is essential. A reform of the current system is essential as tourism directly and indirectly generates jobs, which impacts the economy. 2. Economic – The tourism industry’s contribution is measured in terms of the revenue generated bu tourists (Bardgett, 2000). Worldwide the tourism industry generated US$ 6201.49bn. Most nations have registered a positive growth and in 2005, Europe had lesser growth comparitivley of +2.4% (Tourism Ireland, 2009). It registered a mere +4 percent growth but overall tourism is expanding and shaping the future of the world economy and activity (Viardot, 2007). WTO forcasts that by 2020 international tourist arrivals would cross 1.6bn. VisitBritrain estimats that tourism could grow to a £113bn industry with 164,000 more jobs by 2018 (Caterer Search, 2009). Economic drivers such as low interest rates and the common euro currency has boosted consumer confidence and positively impacted the tourism sector (Tourism Ireland, 2009). 3. Sociocultural – Reunification of Germany, enlargement of the European Union, international terrorism and war has impacted the tourism sector (Tourism Ireland, 2009). Lifestyle in Europe has been changing as in the UK alone, £31.9bn have been spent by touriss in different sectors (Bardgett, 2000). This has influenced the choice of destinations and travel patterns. There are more singles and tourists in general looking for more authentic destinations. They seek adventure and enriching experiences. 4. Technological - Low cost airlines have added to the growth of the tourism sector as it has become more affordable (Tourism Ireland, 2009). High speed train networks, infiltration of the internet, which is used equally by the operators as a distrbution channel and by the consumers to search for information and make bookings, have added to the growth of the sector. Technology has thus empowered the consumer. Mobile technology and soicl networking are other factors that have impacted the growth of the tourism sector in Europe. 5. Environment – tourism can be detrimental to the ecologically sensitive areas which results in habitat degernation and destruction (Hobart, 2000). Rare species are disturbed and mass tourism also impacts the mountains and coasts. Loss of flora and fauna has also been reported and as land is abondoned for hotel and other construction, it increases the risk of fire. 6. Legal – The regulatory authorities in both UK and the Euhave challenged the dominance of the Big Four in the package holiday market (R&M, 1999). It is not only the market share they have that is being questioned. These companies exercise control at several stage in the supply or the distribution chain. This is vertical integration and amounts to control. Secondly, most of the larger agents have sub-agents or franchisees and use these as a platform for distributing their products. For instance, if a customer walked into a Travel Choice office, he is unaware that he was buying a package of a different operator (Meyer). This prompted the Monopolies and Mergers Commission (MMC) to order that the notice of ownership must be displayed outside the shop, in brochures, on official stationery and in advertisements. This would help to reduce misunderstandings. 2.2.3 Discussion The environmental analysis through Porter’s five forces strategy and PESTLE suggests that TUI is very well positioned in the industry. There is no threat from new entrants as consolidation is taking place in the industry but competitive rivalry is very strong. This is more from the smaller operators that are able to offer quality products and better rates. The buying power of consumers is enhance due to technological advancements, but as far as the suppliers is concerned, TUI has a strong position. Due to its sheer volume it is able to get the right rates from different suppliers. The threat from the substitutes is high, though. The PESTLE analysis suggests that the political condition is stable but the government support is lacking, especially in the UK. However, the economic drivers such as low interest rates and common euro currency have given a boost to tourism in Europe. Tourism generates employment and TUI alone employs over 50,000 people. The socio-cultural environment is conducive to growth as changing demographics and lifestyle has given rise to a new customer segment. Consumers have access to technology such as the internet and mobile technology which has added to the growth of TUI as they offer online packages and bookings. Since there are no legal hassles or restrictions, within Europe, TUI is able to market its products and services freely. 3. TUI strategy While the industry environment is conducive to growth, TUI’s position in the industry is equally important for sustained competitive advantage. Even with low profitability, a firm, if well positioned, can generate good returns. An analysis through Porter’s Generic Strategy would help to understand TUI’s position in the industry. A firm positions itself by leveraging its strengths and Porter argues that firm’s strength is either through cost leadership or through differentiation. Porter’s Generic Strategy thus comprises of three factors – cost leadership, differentiation and focus. 3.1 Differentiation strategy TUI’s focus, from the time it entered the travel market, was on being the European leader. To achieve this, they went in for massive acquisitions as they made three acquisitions in Germany in the first year itself. They then took a stake in one the largest travel and financial services group in Britain, namely Thomas Cook. This gave them entry into the entire European market. The French and Scandinavian acquisitions were all put together under the umbrella of ‘World of TUI’. This gave them a very strong positioning in the tourism industry in Europe. In strategic management merger is considered to be an effective expansion strategy which stands to benefit both the parties involved. TUI had been making acquisitions sometimes even at very high prices but when the situation warranted, they resorted to cost cutting measures. The merger of TUI with First Choice made them bigger market leaders in Europe with a turnover of some €18bn. 3.2 Cost leadership For instance, during the slump in 2003, they focused on cost savings of around €260m in 2003 and €100m in 2004. Their position was inimitable as no tour operator had achieved the economies of scale. TUI opened its first low-cost travel agency in Germany to sell low cost holiday packages. To maintain costs, they did not distribute brochures or catalogues, no decorations and no seats were allotted. Customers had to find the information themselves and were able to book on the spot. They sold their tours online as well as through agents and call centers, which further strengthened their position in the industry. 3.3 Focus The focus of TUI was on differentiation and what made them achieve the leading position is their right timing and the right approach. The change was very strategic as world over 1990s era is known as opening of the economies era. The timing was right as more and more people geared up for travel pleasure. This is also known as a period of information technology revolution. Internet made its way during this time and took strong hold as the most effective medium of communication and reaching people. New business sectors such as software opened up due to which traveling became really extensive. This gave a boom to the travel and tourism industry. Today although the traveling for business has considerably slowed down due to advent of the same internet access to business, the mindset has considerably changed towards travel and tourism. TUI AG rightly took advantage of it while diversifying itself to travel and tourism. 3.4 Difficult for competitors to imitate TUI is able to provide all services under one umbrella roof which makes it convenient for the traveler to take decisions. This is depicted in the organization’s vision itself which says, “To make every travel experience special”. It is supported by, “Supporting our vision is our strategic goal which 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, 2009b). What further differentiates them is a portfolio of 97 niche businesses within Activity and Specialist Sectors (AR&A, 2008). They provide circa 46% differentiated content in Mainstream. They offer 50,000 hotels in 100 countries through Online Destination Services. They have numerous distribution channels and brands and are the number one travel website in both UK and Germany. Their strategies of entering China, India and Russia have also been unique. In nutshell, their product is unique, the chain of hotels offered is exclusive and tailored to meet individual needs. This exclusivity has become their USP (unique selling point) and inimitable by other companies. The packages and facilities have contributed towards brand building and in retaining the customer. 4. Likely implications of their strategy 4.1 Future analysis The merger of Thomas Cook and MyTravel poses a fresh challenge to TUI. Both the merged units are now equally strong. At the same time, there has been a radical shift in customer behaviour. Regional crises such as SARS, Tsunami, competitive changes such as the proliferation of the internet and the expansion of budget airlines, an aging population, and a stagnant European economy will have a long-term impact on the travel sector (Döring & Neuhaus, 2005). Customers are better educated and are looking for newer destinations, shorter but frequent holidays and the window for bookings have shortened. Sports and wellness destinations are becoming popular. For instance, Thai Spas have generated immense interest and even Greece is becoming Spa destination. People wait until the last minute to book a holiday fearing some calamity, perhaps. The retired people segment has also entered the travel market and they look for longer holidays. So far all the travel agents and tour operators were vertically integrated and could control all elements in downstream areas of the value chain. However, due to a downturn in the travel market, the earnings have dipped. All these factors would need active consideration by TUI to maintain its position. 4.2 Recommendation Unforeseen circumstances can impact a particular destination and hence TUI should be prepared to offer other destinations at short notice. TUI should use their strong base and financial support to have a strong hold in the emerging economies such as China, Russia and India. TUI has been introducing new products to suit the changing customer preferences but they should ensure that their brand positioning is not diluted. They should conduct extensive research to determine the identity of new brands. TUI has already become aware of the consequences and does not hold all its air seats and hotel rooms exclusively for its own passengers. They have started selling through other operators. This suggests they have slightly altered their business design but remain vertically integrated. TUI should also consider other channels apart from internet as a means of distribution. Maintaining and focusing on the internet would make them vulnerable to compete with low-cost airlines or internet travel sites. TUI should adopt social networking as a means of reaching out to people or communicating new brands or product offers. They must have a focused multi-brand strategy for niche segments with high growth potential and high margins. TUI can also focus on airport-hotel transfers, shopping trips, excursions and meals. These are high revenue areas and required by every traveler. This is because a tourist spends about 20 to 25% of his vacation budget on such activities (Döring & Neuhaus, 2005). 5. Resources 5.1 Use and limitation of resources This analysis was based on the case study but additional data has been collected from different sources. The website of TUI has been used to extract current data and several internet sites have been used. These give the latest market tends. However, no journals could be obtained that dealt in particular with TUI and its strategy. Journals dealing with theories of strategy have been used, though. 5.2 Resources implications Limitation of resources is unlikely to impact the outcome of this study. The purpose was to understand how TUI could attain market leadership and this has been amply supported by evidence. Bibliography AR&A, 2008, 'Strategy & Imperatives', TUI TRavel PLC, retrieved online 20 November, 2009 from http://ara2008.tuitravelplc.com/tui-ar2008/pages/ourbusiness/strategy Bardgett, L 2008, 'The Tourism Industry', retrieved online 20 November, 2009 from http://www.parliament.uk/commons/lib/research/rp2000/rp00-066.pdf Barney, J & Hesterley, W 2009, 'Strategic Management and Competitive Advantages', Pearson Education. 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Meyer, D 2003, 'The UK Outbound Tour Operating Industry and Implications for Pro- Poor Tourism', PPT Working Paper No. 17, retrieved online 25 November, 2009 from http://www.propoortourism.org.uk/17_industry.pdf Mills, M 2003, 'Avoid big four travel firms, tourists told', The Guardian, retrieved online 25 November, 2009 from http://www.guardian.co.uk/uk_news/story/0,,869809,00.html Porter, ME 1979, 'How competitive forces shape strategy', Harvard Business Review Tourism Ireland, 2009, 'Mainland Europe - Sustaining our Success', retrieved online 25 November 2009 from http://www.tourismireland.com/CMSPages/GetFile.aspx?guid=d7d91a97-0058-4ae2-808e-8b780637014b TUI, 2009, 'TUI Travel PLC History', TUI TRavel PLC, retrieved online 20 November, 2009 from http://www.tuitravelplc.com/tui/pages/aboutus/history/tuihistory TUI, 2009a, 'Corporate Profile', TUI Travel PLC, retrieved online 20 November, 2009 from http://www.tuitravelplc.com/tui/pages/aboutus/corporateprofile TUI, 2009b, 'Strategy', TUI Travel PLC, retrieved online 20 November, 2009 from http://www.tuitravelplc.com/tui/pages/aboutus/strategy UN, 1987, 'Report of the World Commission on Environment and Development', United Nations General Assembly Resolution 42/187, 11 December 1987. 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