TUIs Business Strategy and Benefits TUI Achieve through Its Integrated Tourism Supply Chai - Essay Example

How would you characterize TUI’s business strategy? Assess the role and contribution of TUI’s operations in this business strategy. Overall, TUI’sbusiness strategy is a growth strategy since it involves activities geared towards achieving specific growth objectives by increasing the level of the firm’s operations within the broad tourism supply chain. The specific growth objective is identified by the Dr. Michael Frenzel, the TUI CEO, as the capability to offer TUI products everywhere where the customer books his holiday travel (Sigala, 2008). In pursuing its overall growth strategy, TUI applies multiple business strategies, namely: Product-Market diversification, vertical integration and horizontal integration. Product-market diversification refers to the strategy where the company simultaneously seeks to expand both into new products and new markets. New product expansion is manifested through activities such as the opening of the “World of TUI Travel Mall” in Berlin whereas new market expansion is characterized by the acquisitions and joint ventures done throughout the organizations growth. Vertical integration strategy involves TUI AG seeking to gain control of both inputs and outputs within the tourism industry’s supply chain. TUI does this through owning and operating companies in both the tourism destinations and source markets as well as the distribution channels, hotels and airlines (Sigala, 2008). Horizontal integration refers to when the company combines with competitors operating in the same industry and doing the same things for example in 1998 HTU took a minority stake in First Reiseburo Management GmbH & Co. KG., a competitor in Germany (Sigala, 2008). TUI’s operations enable its business strategies to be successful through a number of ways. Firstly, through operations the company is able to set and control quality levels uniformly across its integrated tourism supply chain. This assures customers of receiving the given quality across the company’s array of products regardless of location. Secondly, operations allow the company to benefit from economies of scale for example by reducing resource acquisition costs and increasing efficiency as well as economies of scope since its management best practices can be spread across the European countries it operates in. 2-What benefits does TUI AG achieve through its integrated tourism supply chain? Are there any disadvantages to this? The three major benefits to TUI AG of having an integrated tourism supply chain are: increased guarantee of product quality, better protection of proprietary technologies and processes, and lower transaction costs. By controlling both its inputs and outputs, TUI AG has a greater ability than a non-integrated tourism company to implement standard quality control systems as well as share best practices across all its products. Further, the organization can integrate operations across its supply chain to create a seamless experience for its customers. With regards to better protection of proprietary technologies and/or processes, TUI could have developed a more effective way of, say, minimizing the time it takes a customer to move from holiday planning to actually going for the holiday. If the company were to use an external service provider it may have to share some of its knowledge to make the experience seamless. On the other hand, by having all service providers within its supply chain, the company can keep the process secret or as a competitive advantage for a much longer period. Lower transaction costs are achieved in two ways. To begin with, TUI could standardize infrastructure and procedures across all its subsidiary companies which would make transactions cheaper and less time consuming across the supply chain. Secondly, by having an integrated supply chain TUI is guaranteed of retaining maximum value from the customers thus the margins set across the value chain are lower. This implies that the subsidiary companies across the value chain face lower costs than those faced by non-integrated supply chain companies. There are two major disadvantages of having an integrated tourism supply chain. First, the company has invested so much that it becomes an exit barrier. This means that were the industry profitability to go down, TUI would find it very difficult to dispose of its assets and move to a different industry. Secondly, the huge investment in products and technology reduces the company’s flexibility. If there is a disruptive change in the tourism industry, TUI may be unable to make the rapid change required in order to survive. 3-How has TUI configured its operations internationally in order to serve its various markets? What benefits does this provide? Are there any disadvantages? To serve its various markets, TUI has restructured and rebranded its “World of TUI” companies around similar groups of companies representing the different components of tour packages. These packages are tour operators, flight, destination, hotels and cruises. With regards to operations, TUI AG uses a combination of two approaches: regional operations and global co-ordinated operations. Regional operations are manifested in the tour operators’ packages. Tour operators are grouped according to three regions: Central Europe, Northern Europe and Western Europe (Sigala, 2008). These three regions reflect the major tourism outbound markets and as such enable the company to be closer to their market in order to better match their needs and wants. Global co-ordinated operations are manifest in the flight, destination, hotels and cruises groups of companies. These companies have their operations, co-ordinated and controlled centrally from Hanover (Sigala, 2008). The greatest benefit of this approach is demonstrated in the flight segment where the company has been able to offer lower cost travel. Centralized purchase, flight operation and maintenance and repair enable the international TUI Airline Management operations to benefit from economies of scale. The global co-ordinated operations of TUI Hotels & Resorts that manages the World of TUI hotel companies maximizes economies of scope as best practices are transferred from a hotel in one region to another at a different region. The disadvantage of the global co-ordinated operations is that it requires huge investment in IT infrastructure and staff training if it is to be efficiently and effectively executed. Secondly with the rise in modular travellers who are looking for individuality and personalization in tour planning, direct sales with suppliers, combination options and late bookings (Sigala, 2008), the huge distance of management from the customer lowers business-to-customer intimacy. This may adversely affect the customer’s perception of the brand. Customers may begin to feel distanced from the brand. 4-What is the preferred strategy used by TUI to penetrate new international markets? What are the benefits of this strategy? Are there any disadvantages? TUI AG prefers entering into new international markets through joint ventures. Joint ventures enable TUI to benefit from the local organization’s competencies, gaining market access at lower cost and tackling pre-determined government restrictions. Through joint ventures TUI is able to access, transfer, and acquire tacit knowledge and new competencies about its new market more quickly than if it were to use any other international market entry strategy. With these local competencies, TUI is better able to evaluate the market risk and also to share in transaction costs needed to establish its presence in the new market. Finally, in certain foreign countries such as India and China, the local legislations require multinational corporations to have a minimum percentage of local ownership before they are permitted to operate. Joint ventures enable the company to meet this requirement by default. The disadvantage of joint ventures is the increased risk of competitive compromise. Employees at either the market entrant or the local company may divulge too much information to the partner company. This may make either company vulnerable to the other if the partnership were to end. For example the local company may more easily lose market share to the new entrant if the market entrant opts to go it alone. 5-What are likely to be the most significant future challenges for the management of TUI’s operations arising from its entry into the Chinese, Russian and Indian tourism markets? There are two challenges that are likely to pose the greatest challenge for the management of TUI’s operations arising from its entry into the Chinese, Russian and Indian tourism markets. The first challenge will be the effect of culture on the organization’s strategic success. TUI’s operations have predominantly been within Europe where cultural differences between the regions may not be as different as that between them and Asia (China and India). According to Whittington (2001) multinational organisations are deeply influenced by the industrial cultures, class structures, politics and professional biases of their home nations. This means that TUI will have the challenge of transferring its “home culture” to a workforce that has predominantly been raised in a different social system. The second major challenge for TUI’s management will be learning how to operate in macro-environments characterised by high government interference. In China, TUI’s management have to contend with the communist party and its policies. In India, TUI has to meet the minimal local ownership and supply chain criteria set forth by the government. In Russia, the company has to operate in a company that has yet to fully transition from its communist and strong government past. References Sigala, M. (2008). Case Study: TUI AG. Operations Management: An International Perspective (pp. 94–104). London: Cengage Learning. Whittington, R. (2001). What is strategy - and does it matter? (2nd ed.). London: Thomson Learning.  Read More