Managing Capability - Firm Resources and Sustained Competitive Advantage - Case Study Example

? xxxxx No. 12345 (BUSINESS) MANAGING CAPABILITY ABC Xxxxx xxxx College Department of XXXX XXXX 27 April, Tableof Contents Contents Page No 1. Capabilities and its Importance 04 2. Resources and Capabilities of TUI 05 2.1 Background 05 2.2 Resources 06 2.2.1 Tangible Resources. 06 2.2.2 Intangible Resources 06 2.3 Capabilities 07 3. Value Chain Analysis 08 3.1 Inbound Logistics 09 3.2 Operations 09 3.3 Outbound Logistics 09 3.4 Service 10 3.5 Sales and Marketing 10 4. Porter’s Five Forces Analysis 10 4.1 Competitive Rivalry 10 4.1.1 Industry Competitors 10 4.1.2 Industry Growth (rate) 10 4.1.3 Degree of Differentiation 10 4.1.4 High Fixed Costs 11 4.1.5 Exit Barriers 11 4.2 The Threat of Substitutes 11 4.3 Bargaining Power of Suppliers 11 4.4 Bargaining Power of Buyers 12 4.5 Threat of New Entry 12 5. SWOT Analysis 12 5.1 Strengths 13 5.2 Weaknesses 13 5.3 Opportunities 13 5.4 Threats 13 6. The Balanced Scorecard 14 6.1 Balanced Scorecard as a Measure of Strategic Capabilities 14 6.1.1 Translating the Vision 15 6.1.2 Communicating and Linking  15 6.1.3 Business Planning 15 6.1.4 Feedback and Learning 15 7. Resource Based View (RBV) 15 Appendices 17 Appendix-I: Tour Operator Market Share in Europe 17 Appendix-II: Four Perspectives of Balanced Scorecard 18 Bibliography 19 1. Capabilities and its Importance Generally capabilities and competencies are used interchangeably in literature, however in terms of business and organizational culture, the scope of capabilities is not only specific but its horizon is also quite vast. A capability is a fairly large scale unit of analysis which makes the organization and individual to recognize its purpose with respect to substantial outcomes (Dosi et al, 2000). According to Leonard (1992), “capability is the knowledge set that distinguishes and provides competitive advantage”. This short definition clears the concept that the better organizational capabilities are the real and key motivator for organizations to progress. Organizational capabilities support the organization in the following ways to enhance the capabilities of its employees to judge their strategic competencies to compete the rivalries in the market. (a) Organizational capabilities enable the management authorities to establish HRM policies according to the requirement of the organization and develop these HRM functions as strategic partner. Therefore, organizational capabilities play a key role between human resource and the business strategy, thus making it a proactive source of competitive advantage (Ulrick and Lake 1991). (b) Organizational capabilities raise the competency level of individuals and reinforce positive values in the organization. (c) Organizational capabilities help the managing staff to formulate the business strategies basing on the strengths and weaknesses of the available manpower (Barney 1991). (d) These capabilities derive the required consequences like satisfaction of both the stakeholders and customers (Ulrich and Lake 1991; Yeung and Berman 1997). 2. Resources and Capabilities of TUI 2.1 Background TUI, abbreviated for Touristik Union International, was established in 1968 with headquarters located at Berlin, Germany. TUI is the largest integrated tourism group in Europe, lagging far behind its competitors with a turnover of about € 21,866 million in 2008. Initially, it worked as Preussag AG and gained a renowned fame in the field of transportation and industrial sector till 2001. This year, it became a 100% subsidiary of Preussag AG. In next year, Preussag AG was transformed into TUI AG (http://www.tui.com). During next few years, TUI developed and changed its production from industrial segment to a modern tourism and shipping company. The general credibility of the TUI is quite excellent and strategically today TUI is the largest and leading tourism and shipping organization of the world, operationally active mainly in Central, Northern and Western Europe while it has the networks across the Europe as well. The inventory of TUI is decorated with hotels, restaurants, retail stores, container ships, travel agencies and airlines. One of the unmatchable entrepreneurial landmarks of TUI is its continuous structural progress and upgrading services offered to worldwide customers. Contrary to its rivalries, TUI is very successful in both the tourism and shipping divisions because of its advanced attractive products and services as well as the expansion of new and strong brands. Prior to 9/11, TUI had more dynamic growth from 1995 to 2001. Post 9/11 affects really restricted the TUI’s expansion strategy especially in various countries of Asia. Since China is an emerging market, therefore TUI had planned a broad strategy but war in Afghanistan and its further affects in Pakistan kept TUI to hold up its venture in China (http://www.tui.com). The main resources and capabilities of the company are listed below. 2.2 Resources Resources are also of two types, (1) tangible resources, and (2) intangible resources. 2.2.1 Tangible Resources. The tangible resources are further divided into physical and financial resources. Physical Resources include: (a) 120 aircraft (b) Almost 285 hotels with 163,000 beds in 28 countries, 13 hotels are considered as the world’s biggest hotels (c) 10 cruise liners (d) 3500 travelling agencies in 17 countries (e) 79 tour operators in 18 countries (f) 443 subsidiary companies (g) Container ships, 19% of the Group’s turnover, ( http://www.tui.com) Financial Resources are debtors, creditors, and shareholders. Both debtors and creditors are customers while shareholders are among suppliers of money. Westdeutsche Landesbank has the highest share i.e. 33% while German Institutional Investors with 14% (TUI Annual Report, 2008). During the fiscal year 2008, TUI had revenue about €759 million. 2.2.2 Intangible Resources Intangible resources of TUI include: (a) Intangible resources are also of four types. The first one and the most important intangible source for any organization is always the human resource. In 2008, TUI had 72,300 employees working in many countries out of which 85.7% were in tourism, 7.8% in logistics, 4.5% in sales operations and 2% in trading. (b) Generally the second one is considered as intellectual capital. In case of TUI, these are the different brands which the company operates or offers like travel agencies of Hapag-Lloyd Reiseb and TUI TravelCenter, famous tour operators like TUI, Nouvelles Frontis or Thomson, airlines like Britannia or Thomsonfly, and shipping companies such as Hapag-Lloyd Cruises, Hapag-Loyed-AG, and CP Ships. (c) Only in 2005, TUI had entertained 18 million customers (d) TUI's business system which is very advanced and integrated. 2.3 Capabilities Organizational capabilities are vital to obtain a sustainable competitive advantage. In case of TUI, some underpinning capabilities and competencies are listed below to achieve the key success factor i.e. the full capacity utilization. These capabilities can be related to operations and marketing segments of TUI. In terms of operation capabilities, the services and facilities must be established near the resources and markets. In one perspective, TUI has 3500 travel agencies and 79 tour operators working across more than 17 countries and has a close existence in most of the European markets like Germany, UK, etc. secondly, TUI is operating more than 75 countries throughout the world. TUI focuses on growth strategy and continuously expanding its network in India, Russia, and now for China as well. But Asian Pacific must be an area of interest for TUI as this region has the best growth rates. TUI has chosen great strategic locations suitably located near main travelling as well as shipping business areas e.g. its shipping unit Hapag-Lloyd AG is located in export-driven market of Germany where millions of dollars business takes place with lot of international companies. It is interesting to figure out the competencies of TUI in the field of operations. Although, there are several companies in the group, however, TUI has much better competencies. For example, TUI offers lot of exclusive packages to its customers as arranging of special tours for Chinese delegations to Germany. Further, it also provides a lot of pricing packages as well e.g. from cheap travelling package to the executive class travelling and accommodation accordingly. With respect to marketing, the leading competence is the market segmentation. Since it provides travel for each incoming class, therefore, it also offers different other services which include study tourism, official tourism, and advanced booking system all inclusive holiday package. Despite of its vast network operating more than 70 destination countries, even then, global recession and other factors demand that it should venture into Australia, Africa, or Asian pacific. With a turnover of about € 21,866 million in 2007, TUI is the largest integrated tourism group in Europe, lagging far behind its competitors. According to the Annual Report 2008, TUI has a market share of 21% in Europe; the Thomas Cook Group is the second largest company in Europe followed by MyTravel, REWE Group and Kuoni in UK, Germany, and Switzerland respectively. UK, France and Germany are heavily populated countries of Europe and TUI is the market leader in these countries. Moreover, TUI stands in top three companies in 09 other European countries and is the leader of the emerging tourism markets in Eastern Europe. TUI has significant and variety of contributions to the tourism industry and no other company has such a broad involvement. It is simply very hard to search a segment in which TUI is not competing. 3. Value Chain Analysis TUI is a global leading tourism and shipping company which provides a variety of tourism and shipping services to its clients with best quality. The shipping operations of TUI facilitate the customers to get their tangible products in a secured system. The value chain of TUI is virtual in nature because the main system of tools, technologies, and services of TUI are centralized, however, in order to rectify some global level issues e.g. shipping of goods, description of products in local languages, and transaction of payment in local currencies, TUI has decentralized its value chain configuration. For this TUI established independent subsidiaries. Almost 443 subsidiaries are on its inventory which maintain and strengthen the virtual ties of customers and take them to the real business. The value chain analysis is associated with five components i.e. inbound logistics, operations, outbound logistics, services, and sales and marketing. 3.1 Inbound Logistics TUI offers both online and physical platforms of business where TUI itself and its subsidiaries remains involve dealing their customers. Inbound logistics of TUI include the facilities for tourists in terms of guide, accommodations, travelling modes, and the receiving and storing of their materials for distribution to desired destinations through online booking or some manual process. 3.2 Operations This component involves in transformation of inputs into arranged facilitations. It includes categorized products, building database, currency changing facilities, shipping, travelling, hospitality, accommodations, and gastronomy. 3.3 Outbound Logistics In terms of shipping, it entails storing and transportations of the products like shipment of items to wholesalers, retailers, or some other destinations. In terms of tourism, it deals with hotel services like pick and drop, hospitality, rent-a-car services etc. 3.4 Service The fourth component of value chain of TUI is service which deals with the maintenance and repair of company’s tangible resources and services. This area includes all services such as customer dealing, customers’ feedback system, employees training, and their management etc. 3.5 Sales and Marketing It is the last component of value chain analysis which includes the promotion and marketing of products e.g. advertisement. 4. Porter’s Five Forces Analysis 4.1 Competitive Rivalry 4.1.1 Industry Competitors TUI has almost 21% share of the European tourism industry while Thomas Cook is its closest competitor having a share of 13% as shown in Appendix-I. The data in Appendix-I shows that there are not huge numbers of competitors in the market while existing competitors are smaller than TUI which really provides a strong edge to TUI Group. 4.1.2 Industry Growth (rate) During last 50 years or so, a steady growth has been observed in tourism industry across the world (Page & Connel, 2009). Within the tourism industry, this growth kept a low competition between companies and thus resulted in erasing of huge revenue. However, the recent global turndown has increased the competition level. 4.1.3 Degree of Differentiation Although setting up a differentiation level is high amongst tour operators, however, TUI is trying to create differentiated services and products through their three business sectors which include Mainstream, Specialist & Emerging Markets, Activity and Accommodation & Destinations (TUI Group – at a glance, Group Presentation, Feb 2010, p. 9.) 4.1.4 High Fixed Costs The tourism industry is highly associated with high fixed costs because the industry by default has the nature to invest high volumes. For TUI, more than 120 planes and 10 cruises are good example of high fixed costs. 4.1.5 Exit Barriers The nature of tourism industry makes the exit barrier very high for tour operators because it is not only time consuming but they have also high investments in assets. Exit barrier is especially very high for TUI being their huge reserves and infrastructure. 4.2 The Threat of Substitutes Presently several options are available against the substitution of services of TUI e.g. a family may opt to go for dinning out or to see the relatives instead of going for tourism. Therefore TUI is planning to introduce some substituting options like camping and music festival for young generation or volunteer work at some places etc. however, all such substitutes are completely dependent on its cost and customers trends. 4.3 Bargaining Power of Suppliers This is very important component of taking a competitive advantage over the rivalries. For TUI, the main suppliers are TUI’s hotels of any standards located at different areas and its airlines. Airlines get more powers than tour operators because they have direct access to the customers through business, and thus they manage to negotiate contracts (Johnson et al, 2008). In order to attract the customers or to make them coming again and again, most of the times, these suppliers offer their services on discount prices but offer some other privileges at high rates. However, when its peak season, each of the tour operators try to offer all of their services on low prices to attract the customers. Thus, in case of TUI or tourism industry, the bargaining power of suppliers is high and should not be taken too lightly. 4.4 Bargaining Power of Buyers In recent past, the trend has been observed that people are getting more and more price oriented instead of some other factors. This trend has really made the companies to take trigger actions accordingly. Due to global recession and health issues, customers are no more concerned with brands loyalty. Therefore, the bargaining powers of buyers can be taken as high as well as a potential threat for TUI. 4.5 Threat of New Entry These are actually the different barriers which prevent new companies to enter into a specific industry. Due to strict policies of European Union, there were strong barriers for new entrants till 1994, however, later on the regulations were softened and thus it created the existing competition. TUI still has the potential to differentiate its services to attract more and more customers. The biggest threat for new entrants is also the requirement of huge capital cost because the industry by default needs strong strategic assets. 5. SWOT Analysis SWOT analysis is the most commonly used technique to identify the strategic capabilities and a base to formulate the future planning. It deals with the factors that have the influence either on internal or external environment of the company. These factors cover four aspects i.e. Strengths (S), Weaknesses (W), Opportunities (O) and Threats (T). The first two are related to the internal environment of the company while the other two deals with the external environment (Fine, 2009). 5.1 Strengths No. 1 standing in the tourism industry Strong vertical integration enabled the TUI to expand its network throughout the value chain Cost effective multi-channel distribution mainly emphasizing on online dealings Very strong strategic assets, healthy liquidity, and financial situations High quality customer services with proper trained staff Stable shareholders with strong friendly management 5.2 Weaknesses TUI faced a net loss of EUR142 million in 2008 (Annual Report, 2008) Negatively affected by global recession and economic restraints. TUI has reduced a substantial volume of holiday packages due financial uncertainties Fixed assets cover 34% of total assets (Annual Report, 2008) 5.3 Opportunities Potential to effectively venture into markets like China, India, and Africa Expansion options through further acquisition and mergers 5.4 Threats Due to global turndown and war on terrorism in many parts of the world, consumer behaviour may be changed and can have a negative impact on company’s strategy Customers’ inclination to opt rails and buses instead of air travelling Threats to losing the customers who wish to choose low cast packages as TUI mainly operates 4-star hotels 6. The Balanced Scorecard Balanced Scorecard is a measuring and strategic management tool that is used to bring all the organizational activities and employees’ performance with respect to its vision and strategies (Harvard Business Review, 1992 & 1993). It identifies a small number of financial and non-financial measures along with attached targets to them, so that they are assessed to verify whether or not the contemporary performance would meet the expected standards or goals. The Balanced Scorecard, developed by Dr. Robert Kaplan and Dr. David P. Norton, can be effectively and productively used in communications as well as to evaluate goals and enhancing the performance and capabilities of the whole organization. According to David Norton, almost 60% of large US companies are using those Balanced Scorecard that merge financial and non-financial measures. The four perspectives of The Balanced Scorecard are shown in Appendix-II. 6.1 Balanced Scorecard as a Measure of Strategic Capabilities The Balanced Scorecard is a very supportive tool to measure the strategic capabilities in an organization by assessing the organizational goals and vision, general business strategy, identification of business procedures, and measurement of organizational activities which reveal the picture of its progress toward the set objectives (Bremser & White, 2000). The Balanced Scorecard allows the managers to build up the strategic capabilities in the following processes. 6.1.1 Translating the Vision It expresses the mission and vision statements along with integrated set of objectives and measures. For TUI, it forces the higher authorities to develop operational measures in terms of strategic objectives. 6.1.2 Communicating and Linking  This process assists the managers to communicate the strategies throughout the organization. The important point is that there should be harmony between organizational and individual objectives through evaluation procedures and incentives. By using scorecard to create this harmony, TUI applies three techniques (1) communicating and educating, (2) setting goals, and (3) linking rewards to performance measures. 6.1.3 Business Planning The application of Balanced Scorecard integrates the budgeting processes and strategic planning of an organization. The managers set targets by picking measures to represent each of the four perspectives, thus, Balanced Scorecard polishes the capabilities to choose specific actions with respect to certain tasks. 6.1.4 Feedback and Learning The final process is feedback and learning by which managers keep an eye on feedback and then relate it to the organization’s strategy. The first three processes revolve around a constant objective but the scorecard becomes balanced by adding the feedback and learning process. 7. Resource Based View (RBV) Resource Based View (RBV) is a management tool used in the field of business to identify the strategic resources of a company. The main application of the RBV is that it recognizes the competitive advantage of the company which is primarily based on its variety of resources (Rumelt, 1984). VRIN is also a part of RBV and it has been proved that it widely supports the RBV (Crook et al, 2008). VRIN stands for Valuable, Rare, In-imitable, and No-substitutable. It means VRIN highlights those resources of the company which have worth, they are not in abundance rather in small quantities, they are quite unique and no other thing can replace it. The resources which fulfill the criteria of VRIN are the competitive advantage of the company on the basis of its resources (Dierickx and Cool, 1989). For TUI, the strong infrastructure is the competitive advantage against its rivalries. The group strong resources and a market share of more than 21% are unmatchable right now. Appendices Appendix-I: Tour Operator Market Share in Europe (Sources: FTDetschland, annual reports, FVW) Copied from the case of Eric Viardot: “TUI: achieving and maintaining leadership in the European tourism industry” (Exploring Corporate Strategy, p. 623) Appendix-II: Four Perspectives of Balanced Scorecard Perspectives Generic Measurements Financial (a) Goals: Survival, prosperity, success and growth (b) Measures: Revenue growth, cash flow, return on capital, economic value added, cost reduction, performance reliability Customer (a) Goals: Customer’s satisfaction, profitability, retention, acquisition (b) Measures: Transaction cost ratios, key accounts, market share Internal Business Process (a) Goals: Core Competence, business procedures, critical technologies, key skills (b) Measures: How well the company recognizes the future trends, quality, cost, and time, warranty, repair and deficiencies Learning and Growth (a) Goals: Continuous improvement and development (b)Training, motivation and retention of human resource, critical information for front line employees, productivity of entrepreneurship (Source: Kaplan & Norton, 1996) Bibliography Barney, J. (1991), Firm resources and sustained competitive advantage, Journal of Management, 17(1): 99-120 Bremser, W. G. & L. F. White. (2000). An experiential approach to learning about the balanced scorecard, Journal of Accounting Education 18(3): 241-255. Crook, T. R., Ketchen Jr., D. J., Combs, J. G., & Todd, S. Y. (2008). Strategic resources and performance: A meta-analysis. Strategic Management Journal; 29, pp.1141-1154 Dierickx, I., Cool, K. (1989), Asset stock accumulation and sustainability of competitive advantage, Management Science; 35, (12), pp. 1504–1511. Dosi, G., Nelson R. and Winter S.G. (2000). The nature and dynamic of organizational capabilities. Oxford/New York, Oxford University Press Fine, L.G. (2009). The SWOT Analysis: Using your strength to overcome weaknesses, using opportunities to overcome threats, Create Space Publishers http://www.tui.com Johnson, G., Scholes, K., & Whittington, R. (2008). Exploring corporate strategy - text and cases, 8th edition, FT Prentice Hall, 2008, p. 63 Kaplan, R.S & Norton, D..P. (1993). Putting the balanced scorecard to work, Harvard Business Review, Kaplan, R.S & Norton, D..P. (1996). The balanced scorecard - measures that drive performance, Harvard Business Review Kaplan, R.S & Norton, D.P (1996). The balanced scorecard: Translating strategy into action, Harvard Business School Press, Boston Leonard, B. D. (1992). Core capabilities and core rigidities: A paradox in managing new Page, S. & Connel, J. (2009). Tourism: A modern synthesis, South-Western Cengage Learning Rumelt, D.P., (1984), Towards a strategic theory of the firm. Alternative theories of the firm; 2002, (2) pp. 286–300, American International Distribution Corporation, Williston, Vt. TUI Annual Report, 2008 Ulrich, D. and D. Lake (1991). Organizational capability: Creating competitive advantage, Academy of Management Executive 5 (1991), pp. 77-92 Yeung, K. A. and B. Berman (1997). Adding value through human resources: reorienting Read More