Strategic Management at TUI Travel Plc - Case Study Example

Strategic Management Introduction This report looks into the strategic management of TUI Travel Plc and the respective package tourism industry. The paper has used various industry analysis models such as PESTLE and Porter’s five forces model to have more insight of the respective sector. The company has been discussed with a discussion of strengths, weaknesses, threats and opportunities. The value chain of the company has been discussed later on. A conclusion has been inferred from the whole analysis part. TUI Travel Plc TUI Travel PLC is one of the leading leisure travel company operating in more than 180 countries across the globe. The company is one of the big names in industry with more than 30 million customers in some 27 key source markets.TUI Travel is connected with 200 brands consisting market leading mainstream brands as well as specialist travel businesses. The organisation operates in four significant sectors including Mainstream, Accommodation & Destinations, Specialist & Activity and Emerging Markets. With this wide range of services, TUI Travel offers its customers to fetch the experience of differentiated and flexible travel experiences in compliance to their changing requirements. This global company has its base in UK with around 50,000 people employed worldwide. The company enjoys the admiration of being only leisure travel company getting listed on the London Stock Exchange; it is a significant entity of FTSE 100 index (TUI Travel, 2010). Porter’s Five Forces Analysis Five forces framework is a significant tool to identify and analyze the significant competitive forces and key drivers in the macro environment. Threat of New Entrants The package tour industry demands a high amount of capital investment. High capital requirement creates a high entry barrier for the new entrants in this industry. The leading companies in this industry control a major portion of the market share. This has reduced the possibility of price retaliation and maintains the economies of scale. These two factors also have emerged as the entry barriers for the new players entering into the industry. Brand recognition is also a significant barrier to the new entrants. As a result, the threat of potential entrants is low in this industry. Bargaining Power of Suppliers The suppliers have moderate bargaining power in this industry. Suppliers have high negotiation power against the companies with low share market. The top market leaders cover a large portion of the market and hence, possess a threat of backward integration. Leading companies like TUI involves vertical integration which can emerge as a threat to the suppliers. Bargaining Power of Buyers The buyers have to incur low switching cost as the emergence of internet and online sales have made it easy for the buyers to choose from a wide range of travel packages. However, low differentiation of products has limited the bargaining power of the buyers. Competitive Rivalry The competitive rivalry is moderate in this industry. The top companies such as TUI and Thomas Cook have been controlling a large chunk of market share. Large incumbents can only be achieved with higher fixed cost. However, in recent days, the rivalry has increased due to the declining demand in the market. The recent recession has decreased the purchasing power of the travelers. As a consequence, travel spending as a percentage total consumer spending has decreased, increasing the competition among the players operating in this industry. Threat of Substitutes Travelling can be seen as a means of entertainment. In today’s world, there are a number of products like TV, video games and some other social activities, which can emerge as means to entertainment. However, they cannot be the perfect substitute of travelling. Moreover, there is little difference among the products and services offered by the package travel companies. As a consequence, the threat of substitutes is quite low. However, people may prefer to arrange the transportation and accommodation individually, if they found the travel companies’ services comparatively expensive than the earlier. The following table displays the number of package holidays and number of independent holidays. Table 1: The number of package holidays and the number of independent holidays (UK residents’ visit to Europe) (Source: European Commission, n.d., p.10) PESTLE Analysis PESTLE analysis is a significant tool to analyze the industry. This segment encompasses the political, economic, social, technological and environmental factors of the package tour industry. Political Factors The terrorist attack in the year 2001 has put an adverse effect on the travel and tourism industry. People were skeptical to move to other places or travel through airplanes. This had reduced the demand in the package tours and travel market. Adding to it, after these terrorist attacks even the Foreign Commonwealth Office (FCO) put an obligation to the travel destinations. As a consequence, tourism industry suffered a prolonged period of continual decline in the market demand. Adding to it, the wars in Iraq and Afghanistan have also affected the tourism industry in a negative way. Political instability affects the particular countries as well as their neighbor countries. Economic Factors Globalization has increased travelling across the regions, countries and continents. This provides the world with a number of opportunities with the emergence of numerous tourism ventures such as travel agencies, package tour and travel organisations and a number of related organisations. This has encouraged the companies to enter into new markets and extend the operation in other regions in some other verticals. Groups like Virgin have also extended its operation to the arena of packaged tour and travel providers. This has surely increased the customer base. Now the companies can extend its service not only to the domestic customers, but also can extend the service to the prospective travelers across the globe. However, on the flip side, due to increasing globalization, the operators are exposed to intensified competition among themselves. The recent recession has reduced the percentage spending amount on travel and tourism. Increasing aviation charges and fluctuating oil prices have also played significant role in this package tourism industry. Exchange rate also is an important factor in the international tourism and trade. In the year 2007, Gallego discussed the impact of exchanges rates and found that more fluctuations in the exchange rate arrangements generate a positive impact on tourism. In the current scenario, EURO has decreased the gap with Pound Sterling which has the influence to affect the outbound tourism from the UK to other European Union Nations. This situation is bound to affect tourism agents. In the wake of recent recession, the tourism industry is going through a troubled time. In the year 2008, the GDP growth in the travel and tourism economy has reduced by 1 %. The very next year, the GDP growth was contracted by 3 %. In this situation, the tourism industry is expected to grow only by 0.3 %. According to a World Travel and Tourism Council (WTTC), industry is expected to resume it significant role in global growth. The 2020 vision of UNWTO’s tourism forecasts that international tourist arrivals are expected to grow to reach at 1.6 billion by the year 2020. According to Tourism 2020 vision, Europe is supposed to experience the maximum number of international tourist arrivals by tourist generating regions. Figure 1: Number of International Tourists by Tourist Generating Regions (Source: World Tourism Organisation, n.d., p12) The present recession can have positive and negative impact on the tourism industry. Economic crisis is one of the significant threats resulting in collapse of a number of major players in the industry. As an instance, XL leisure group has closed down due to the trembled situation. However, this has emerged an opportunity for the survivors as they would get enough market space and wide spread customer base. Moreover, a boom can be expected in the post recession period, where the companies can expect an enhanced market in near future. In a report, the researcher has revealed that economic trends in UK is supposed to be same in the next year, while price competitiveness is supposed to significantly add to the demand in the tourism industry. Table 2: Economic Factors in Different Regions (Source: Canadian Tourism, 2009, p.4) Socio Cultural Factors With the increase in per capita income, the socio cultural lifestyle of the people has enhanced, increasing the opportunities in the package tourism market. Tourism agencies offer individual travel components, online booking facilities and packaged tours in accordance with the customers’ expectations and requirements. Brand consciousness is one of the significant socio cultural factors. Brand loyalty can remain same or change based on the customers’ past experiences of the brand image. In the wake of recent environmental awareness, customers are getting more conscious about environment and the surroundings. They are more prone to move towards the companies with better environment policy. Technological Factors With the advancement in technology, internet and online sales are increasing day by day. According to Office for National Statistics, around 70 % of the UK households have access to internet ad it will not be wrong to say that the percentage portion is increasing day by day. The following table displays the growth rate in the internet users across regions and the world. Even the companies are moving towards web marketing to curve out the cost by reducing staff and intermediaries. However, this also can emerge as a threat to the companies operating in this industry as internet has a low barrier of entry. As a consequence, new comers can easily pop into the competition. Table 3: Growth in the Number of Internet Users (Source: Internet World Stats, 2010) Technology has raised a number of entertainment options to the population. Substitutes such as television and games can emerge as a threat to the tourism industry. Advanced technology can reduce the frequency of physical mobility of the people. For an instance, business people are going for video conferencing to connect with other branches rather than travelling to that respective region. Still, it can be said that the introduction of enhanced technology has reduced the cost of the tourism industries as now they can use devices like TV hotlines and call center facilities to maintain the customer relationships. Environmental Factors Increased carbon emission has been a significant threat to the climate conditions and airline companies are major contributor of CO2. The airlines are supposed to reduce the carbon emission to reduce the air pollution. As a consequence, the airline companies are adding carbon footprint charges in their airfares (Kandari & Chandra, 2004). The UK government has decided that it would not offer any aid to the ailed airline companies. Tourism industry is expected to suffer due to these regulations. Adding to it, the UK government is promoting greener holiday locations. This also may put an impact on the package tour providing companies. Health issues have also been significant reasons affecting this industry. Even there had been travel restrictions related to the outbreak of H1N1 virus. The world health organisation raised worldwide pandemic alert with a number of recommendations for the travelers mentioning the flu affected areas. These are supposed to be significant concern for the packaged tour organisations. Adding to it, natural disasters can also be major concern for the tourism companies. Legal Factors The UK government has recommended a number of regulations to regulate the aviation industry to maintain aviation safety and security. These regulations encompass domestic, health and environmental issues. Even the aviation permits come under the legal factors. The package tour providers are required to be aware of the legal issues of several countries, if they want to expand its business to those countries. Trade laws play a critical role in today’s competitive business environment. Critical Success Factors of TUI Travel Plc In the current situation, the boom period in the tourism industry is at its revival stage. The customers’ spending in tour and travelling purposes are increasing at a consistent pace. During the recession time, many small players have disappeared due to shrinking demand. At the same time, the large players such as TUI Travel Plc and Thomas Cook have extended market place to attract more customers to these companies. One of the significant success factors for TUI Travel Plc is its strategy based on vertical integration with tour operations and retail distribution, seven airlines, hotels and resorts and a total fleet of 160 aircrafts. This seems to be the most significant success factor of TUI Travel Plc. Lifecycle The lifecycle of the tourism products differs based on the regions and the pertaining seasons. The tourism products, offered by TUI Plc, would have seasonal lifecycle of the products. The customers may not like to move to the places in winter, which they may like to move in summers. So, the full life cycle of the products depend on present seasons. Opportunities and Threats Opportunities According to TUI, Russia and Asia offer intensive growth opportunities in the near future. Mr. Peter Long from the company said that in the next five years the company is expecting to experience another 600- 700 million people travelling from and within Asia. The company has its presence in Asia with brands like Pacific World, Asia Rooms, Turismo Asia, Hotel Beds, Aitken Spence, TUI China and Le Passage (Asia Travel, 2010). The market analysts also expect that online sales are supposed to increase. As a consequence, TUI is expected to grow further as it has been the leader in the online market for the last few years. So, despite of the intense competition from online intermediaries, the company is expected to expand further in the near future. TUI expects that Asian markets are expected to show some different patterns from the European sources. In the European markets, the interest lies in the mass market products. However, it is expected that in the Asian markets, the demand would be for inter regional destinations. That is why the company is developing infrastructure in the respective region. This is supposed to emerge as an opportunity for the company in the near future. Threats In the recent recession, the market demand in the package tourism industry has decreased drastically. In the recent years, the market has revived a lot; however, the growth rate is still not much encouraging. With the new entrants in this industry, the large companies also have a threat to lose on their specific market shares. So, the company is required to add new places under its sleeves. Value Chain Figure 2: Value Chain Components (Source: Porter, 1985) The value chain of the company seems to be quite strong. The primary activities of the company include its service, marketing and sales. The company had made its service quite strong as it holds a number of leading brands under its sleeves. The marketing and sales of the company depends on the attractive advertisements and efficient marketing personnel of the company. The company has clear targets in its mind regarding retention of its own position (TUI China Travel, 2010). The support services include firm structure, technology development, procurement and technology development. The group is going through huge investment and disinvestment process. The company has been using the technology in an effective way. The company’s website is one of the top websites in travel and tourism industry. This has enabled the company to have a strong value chain to add value to the customers. Financial Capability TUI Travel Plc has been able to fetch profit despite of the financial downturn across the globe. The biggest travel firm in Europe had revealed that the full year pre-tax profitability increased by 43 % to $ 489.5 m. This has been possible due to intensive cost cutting of the company (BBC, 2008). However, in the year 2009 and 2010, the company failed to fetch any profit amount. In both the years, the company’s net profit margins are -0.6 % and -1.0 %. In these two years, the company has increased its debt amount from 52 % to 79 % of the equity amount. The rationale could be that the company was trying to gain from the tax shield on the debt amount. The book value per share has decreased from $3.04 to $ 2.79 (MSN Money, 2010). It seems that the organisation is in a trembled situation. However, looking at the opportunities it seems that the organisation can enhance its performance in the near future. Strengths and Weaknesses Strengths of TUI TUI has the leading tour brands across the world. The company offers differentiated service range in alignment with the changing requirements of its customers. According to them, no tour operator can easily match their wide service range. The company holds specialist niche brands with high growth and high margins. This package tour service provider is quite strong in online marketing. TUI has the leading website in UK and Germany by the number of visitors (Tamasy, Taylor & Taylor, 2008). The company holds a leading position in major mainstream market. Adding to it, the company maintains its lead in snow sports, water-based holidays, education, adventure, Arctic and Antarctic expedition cruising and sports tours. The company is the first global tour operator offering service to Russia and CIS (TUI Travel, 2010). TUI has a desirable product range with some 200 brands ranging from the mass market programs to luxury holiday products and a leading market position (Asia Travel, 2010). TUI also has a strong vertical integration. Weaknesses The financial state of the company is quite trembled at this time. In the last years, the company has not been able to fetch any profit amount. Although the company is now looking forward to the Asian market, but as of now it was only focused on the European tourism market. This can emerge as the weakness for the company as companies like Thomas Cook has already a strong base in the Asian market. Conclusion In this competitive environment the package tour industry has emerged as more competitive than ever. The industry is mostly controlled by large companies such as Thomas Cook and TUI Travel Plc. However, there are certain other players which can threaten the market share and position of these big names. TUI travel Plc is one of the leading package tour companies across the globe. There are a number of factors which can affect the industry in one or the other way. The company has its operation spread worldwide with a large number of employees working for it. The company believes in virtual integration of the related industries. TUI has a wide range of products and significant brands to offer to the customers. The company has a number of strengths as well as few weaknesses. TUI is required to remove its weaknesses and threats as well as to explore the opportunities to retain its leading position in the package tour market. Reference Asia Travel. 2010. Asia a Major Growth Source for TUI. [Online]. Available at: http://www.asiatraveltips.com/news08/2410-TUIAsia.shtml [Accessed on December 09, 2010]. BBC. 2008. TUI enjoys strong holiday demand. [Online]. Available at: http://news.bbc.co.uk/2/hi/business/7560173.stm [Accessed on December 09, 2010]. Canadian Tourism. September, 2009. 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