Strategic Management Assessment: The Package Holiday Industry and Thomas Cook - Assignment Example

Strategic Management Assessment: The Package Holiday Industry and Thomas Cook Introduction Tourism is one of the largest employers and major industry in the expanding market of overseas travel and its annual level is predicted to grow to an estimated 1.6 billion by 2020 (Swarbrook, J. and Horner, S. 2007). However the recent proliferation of the e-commerce business model has challenged traditional adage that “location, location, location” is critical to commercial success (Chaffey, D. 2006); effectively undermining the traditional travel agency distribution model, forcing travel agencies to re-develop and reformulate competitive strategies to sustain growth (Zhou, Z. 2003). This is further evidenced by the 2007 merger of package holiday specialists MyTravel and Thomas Cook in 2007 (Taylor, I. 2007). It was reported that the merger was driven by business necessity in order to ensure survival in the competitive nature of the market facilitated by the e-commerce business model (Taylor, I. 2007). Moreover, it was propounded that “the merger is predicted to save £75million a year by 2009/10 through cuts in duplicated services and assets including staff, shops, aircraft, offices and IT systems, particularly in the UK” (Taylor, I 2007). Additionally, the concomitant impact of globalisation on the traditional travel industry business model is in turn reflected by changing consumer habits and multi-chain retail strategy. Furthermore, the proliferation of the Internet and online growth has facilitated novel societal trends and business opportunities through the piecemeal evolution of electronic commerce, thereby creating a new social and business model accommodating the contemporary market and thereby redefining culture. Moreover, the globalisation empowerment of the consumer has led to market segmentation and a changing consumer market, forcing retailers to adopt a multi-retailer strategy. (Levy & Weitz, 2008: 27). Indeed, it is submitted that directly correlated to the proliferation of the globalised internet business model is the effects of customer relationship management systems (CRM). It has distinctly altered the way that companies view strategy, with a distinct shift from product focused strategy to customer relationship management, which is “underpinned by information systems convergence and the development (Ryals & Knox, 2001). In turn, it is submitted that the interrelationship between globalisation and its concomitant impact on the socio-cultural framework in turn impacts modes of travel and thereby the tourism industry. For example, Urry argues that the way in which tourists operate now book holidays has via the globalisation impact on the traditional tourist business model has created the “tourist gaze phenomenon” (Urry, 1990). This not only changes patterns of tourism via bespoke and cultural and urban tourism, it correlates to other social changes via globalisation (Urry, 1990). In further considering the impact of globalisation in tourism, Wahab & Cooper argue that the globalisation has fuelled increased competition between tourist destinations worldwide (Wahab & Cooper, 2001). Indeed, the internet business model has clearly segmented the retail marketplace and as such and the focus of this paper is to undertake a strategy management evaluation of the package holiday industry with a contextual focus on Thomas Cook. It is submitted at the outset that central to effective strategic management for Thomas Cook is understanding the interrelationship between globalisation, long term trends and increasing consumer control in order to ensure timely reaction to market demands whilst implementing a stable foundation for sustainable growth in the long term. 2. Market Environment Analysis The previous decade has seen a marked transformation in the tourism industry and despite the current economic downturn; overall the tourism industry is expected to continue growing over the next 20 years (Aramberri & Buttler, 2005). The continuing changes in consumer behaviour and composition of the tourist population requires the package holiday to continually adapt its business models and strategies in order to maintain sustainability and growth in the long term (Cooper, 2008). It is submitted that a key element of this is effective strategy management, which is imperative to the continued success of package holiday companies in the tourism industry as it continues to grow and diversify in accordance with consumer behavioural trends (Page, 2009). For example, Page comments that in the future: “New markets will emerge due to changing economic conditions, modified consumer behaviour and new technologies…. There will be greater emphasis on individual/self-determined holidays, and on education and active recreational pursuits” (2009, p3). Therefore, it is submitted that a market environment analysis of the tourism industry is imperative to understanding the tourism industry and the consideration of growth and development goals going forward in the delivery of package holidays. Additionally, it is submitted that a consideration of Thomas Cook’s background is further important in order to evaluate the interrelationship between market environment and long term strategy management (Page, 2009). The Thomas Cook Group plc is a key player in the package holiday industry market and provides services through approximately 3000 travel agents and serves over 19 million travellers to over 2000 destinations (Thomas Cook, 2009). The main brands under the Thomas Cook umbrella are Thomas Cook, Airtours, Neckerman, Condor, Vng, Direct Holidays and Sunquest. The conventional business model of Thomas Cook has been the high street travel agency, however if we consider developments within the market environment that Thomas Cook operates in, in the last decade it is evident that the rise of the digital economy and its concomitant impact on globalisation has significantly altered the marketplace and traditional tourism marketplace as customer requirements for holiday packages continue to change (Page, 2009). If we consider the UK, traditionally, travel agencies have played a central role within the UK tourist industry the industry’s growth is predicted to rise to an estimated 1.6 billion by 2020 (Swarbrook, J. and Horner, S. 2007). However, globalisation has undermined the traditional travel agency distribution model, and Hamal and Prahalad argue that a central element of this is the shift in how companies compete with each other, with the underlying basis of competition moving towards “soft” factors such as reputation, service and market placement and positioning (1996). This in turn reflects the evolution of the “knowledge-based economy” (Hamal and Prahalad, 1996). A prime example is the merger of MyTravel and Thomas Cook as referred to above. On the other hand, from a business perspective, it is arguable that the proliferation of the Internet and online growth could in fact have signalled a new tide against the recent trend of losses and closures within the travel agency industry. This is highlighted by the emerging online market as evidenced by the rapid growth of “virtual” travel agencies such as Expedia and lastminute.com (Evans et al, 2003). It is submitted that globalisation via proliferation of the Internet and e-commerce business model has played a vital role in reshaping marketing and distribution channels in the travel business, thereby reformulating the nature of supply and demand within the travel industry (Poon, A 1993). Within the conventional business model prior to the e-commerce boom, the role of the travel agency has been well defined as a key intermediary in acting on behalf of both buyers and sellers (Renshaw Bottomley, N. 1997). Moreover, whilst traditional figures demonstrate that business travel accounted for the higher share of the market, private travel is expected to continue to flourish (Swarbrook, J. and Horner, S. 2007). However, notwithstanding the growth of the private traveller market, consumer habits have continued to evolve outside the traditional marketing strategies of the high street travel agency. Indeed, a central underlying basis for the MyTravel and Thomas Cook merger was the declining popularity of the package holiday (Taylor, I. 2007) where it was asserted that competitor Thomson would be “counterbalancing the drop in pre-packaged sales by actively pushing its new strategy of uber-dynamic packaging” (Taylor, I. 2007). This is clearly a prime example of the practical impact of globalisation on the global marketplace. Moreover, the requirement for innovation in packaging holidays in the fragmented market further highlights the importance of effective strategy management. Furthermore, the Office of National Statistics indicated that package holidays accounted for 42.3per cent of overseas travel by UK residents in 2005, which is a marked difference from the 54 percent ten years ago (www.statistics.gov.uk). This in itself suggests that whilst Internet growth is undoubtedly an important contributing factor to the decline of the high street travel agent, the influence of evolving consumer habits as a result of globalisation cannot be ignored (Swarbrook, J. and Horner, S. 2007). In fact, it is imperative that agencies acknowledge the interdependence of these factors if the new e-commerce model is to be exploited with maximum commercial success to address declining profits in the industry. As such, the changing nature of travel habits and market shares has also impacted the previous monopoly of the travel agency as prime intermediary (Buhalis& Costa, 2005). This is further evidenced if we consider the traditional business distribution model between service provider and consumer in figure 1 below: Figure 1 The evolution of the traditional business model from deregulation of the travel business in 1978 to online business evolved an integrated group of players in the tourism industry; namely, airlines, online reservations, search engines, systems, travel agents companies. As such, the success of each player was interdependent (Lubbock, M. and Krosch, L., 2000). However, the growth of the web has enabled sellers such as airlines to have direct access to the consumer online, effectively shifting the balance of the role of the travel agent as intermediary having primary contact with the consumer as indicated in figure 1 (Swarbrook, J. and Horner, S. 2007). Conversely, prior to the e-commerce boom, travel agents were the key players in the distribution channel with access to the GDS and in which they can check availability of the inventory entries (Poon, A. 1993). However, the online business model has fuelled a competitive market, taking high street travel agencies outside their monopolistic comfort zone (Buhalis, D. & Costa, C. 2005). Additionally, outside of the obvious reduction to high street trade, the shifting business models and emergence of a competitive market has resulted in pressure for travel agents to change their revenue models from charging commissions on service providers to charging customers for service (Buhalis, D. & Costa, C. 2005). Indeed, prior to the e-commerce boom it was asserted that “Electronic Business will affect virtually every type of marketing expenditure. It will also affect every aspect of marketing itself from the creation of material to its distribution”. (Cunningham, P. and Froschl, F., 1999 179) It has been argued that the Internet continues to revolutionise tourism and overseas travel (Swarbrook, J. and Horner, S. 2007). According to the Association of British Travel Agents, it is forecasted that 53% of UK adults will have booked a holiday online by 2010 (www.abta.com). The primary driving force behind the augmentation in online agencies is the low overheads in advertising and online booking and the long term trend in shifting from package holidays (Taylor, I. 2007) Moreover, the private traveller market share is significantly increasing and the demands of the private traveller have shifted. Individuals prefer tailored holidays and consumer demands have developed outside the parameters of the narrow format of the package holidays (Page, 2009). Therefore the development and rapid growth of online agencies such as Ebooker, lastminute.com, Expedia, Orbitz and Travelocity have left the high street firms in their wake in offering flexibility denied by the high street travel agent ((Swarbrook, J. and Horner, S. 2007). Moreover, the availability of alternative outlets for travel purchase online has rendered the monopoly of travel agents redundant, forcing travel agencies to alter their pre-existing business and marketing strategies. Moreover, it is submitted that the concept of organisational change is inherently intertwined with external threats and opportunities, which businesses must adapt to as part of strategic planning to continue long term growth. Senior and Fleming argue that the concept of organisational change has many faces, namely “convergent changes and transformational change that is organisation wide and characterised by radical shifts in strategy, mission values and associated changes of structures and systems” (In Thompson & Martin, 2005, p.41). This further highlights the point that organisational change is shaped by the interrelationship of complex background factors such as market conditions, consumer habits and nature of the industry (Thompson & Martin, 2005, p.41). Moreover, it is submitted that the globalisation phenomenon is a significant factor in shaping an organisation’s approach to change as part of business strategy in the contemporary business environment. If we consider this contextually with regard to Thomas Cook, Page comments that Thomas Cook’s market share and ability to adapt to the continuous changes in the market environment has enabled it to survive and exploit opportunities arising from the new markets and demands within the package holiday industry (Page, 2009). A prime example is Thomas Cook’s recent £45million joint venture with Russia’s Intourist to enter the growing Russian tourist market (BBC, 2010). Thomas Cook highlighted that: “over six million Russians went overseas, packaged holidays last year, and the market is expected to grow by a double-digit percentage in the coming years” (BBC 2010). Additionally, from the UK perspective, a study by YouGov in online travel trends demonstrates that online bookers often come though family or friend referrals or online reviews then travel agents when seeking advice regarding travel (www.yougov.com). “However, the need for travel agents should not be underestimated as 46 per cent of online holidaying respondents still visit travel agents to collect destination brochures, which will impact online travel decisions” (www.yougov.com). As such, travel agents need to change their approach and exploit the manner in which online and offline consumer habits interweave and capitalise on this to drive offline consumer traffic to their online sites instead of competitor sites. As such, the e-commerce boom can potentially be utilised as tool to drive growth both online and offline. Moreover as highlighted above, it is submitted that directly correlated to globalisation and the proliferation of the internet business model is the effects of customer relationship management systems. Laing et al’s study gives the example of parallel channels in the tourist industry, for example one consumer type will call a travel agent for deals, search on the internet and then order online or through a travel agent (Laing et al, 2002). Alternatively, the Laing et al refer to a second consumer type which demonstrates a different holiday planning process undertaken by another consumer, who enjoys going to the travel agent and using other channels such as catalogues. Laing et al further argue that the central to this is the efficacy of information delivery across the various channels (Laing et al. 2003). To this end, it is submitted that effective CRM is vital to retail strategy in gaining new customers through online and offline marketing communication activities, promotion and direct email incentives (Trapp, 2007). It is further submitted that this backdrop correlates to Wheelan & Hunger’s (2008) discussion of the role of the strategic management model versus the strategic decision making process. Essentially the strategic management model focuses on strategic intent and long term goals in contrast to the strategic decision making model, which is rooted in implementation of decisions. These central differences in the two models as extrapolated by Wheelan and Hunger are further supported the commentary of Prahalad and Doz (1987) that “intent is used to describe long term goals and aims, rather than detailed plans” (in Rugman, 2009, p.518). Moreover Lynch (2003) highlights how “the mission of an organisation outlines the broad directions that it should and will follow and briefly summarises the reasoning and values that lie behind it (In Ackerman & Brown, 2005 p.189). 2.1. PEST ANALYSIS A key instrument utilised in strategic planning and strategic management is PEST analysis, which is imperative in organisational management to ensure market environment is understood as part of market strategy (Brooks et al, 2004, p.451). The PEST analysis enables organisations to strategically plan and implement problem solving initiatives as part of management strategy. Under the PEST analysis paradigm, the following elements within the marketing environment are important considerations: 1) Internal environment- staff, internal customers, office technology, wages and finance; 2) The micro-environment – external customers, agents and distributors, suppliers, competitors; 3) macro-environment – political, legal, economic forces, social forces and technological forces (Brooks et al, 2004, p.451). The following factors are relevant to Thomas Cook under the PEST analysis model: 1) Political Factors Growing social awareness and impact of tourism on host nation in certain countries; Impact of government policy and spending cuts on regulations and the economic framework within which businesses should operate; Terrorism and travel Government’s consideration of proposals regarding imposition of costs on travel in order to address environmental concerns (Sharpley, 2006; McCabe, 2009) 2) Economic and Social Factors Spending cuts and economic recession Higher unemployment Tough labour market Purchasing power Disparities in wealth, which creates implications for travel demand in certain parts Lifestyle changes Changing demand in holiday destinations and holiday trends Concerns over security (Smith et al, 2009) 3) Technological Factors Multi-channel retail format Digital Technology Website Mobile commerce E-commerce Social networking Distribution of products through different technologies such as marketing information systems and customer relationship management (McCabe, 2009) 2.3. Porter’s Five Forces Analysis In further considering marketing strategy within the competitive environment it is also necessary to apply Porter’s five forces analysis (Hill & Jones, 2007, p.46). The ultimate benefit for Thomas Cook in the package industry market is its global presence, branding and ability to evaluate and adapt to changes in the market environment and consumer trends (McCabe, 2009). This in turn enables Thomas Cook to position itself in the market as a viable joint venture partner for exploiting new trends and entering new markets as evidenced by its recent joint venture in Russia (BBC, 2010). Moreover, the Porter’s five forces’ model requires a consideration of Thomas Cook’s activities as a strategic business unit, which in turn requires an evaluation of the following factors: 1) Threat of Entry; 2) Power of Buyers; 3) Power of Suppliers; 4) Threat of Substitutes; and 5) Competitive rivalry (Hill & Jones, 2007 p.46) It is submitted that applying Porters’ five forces model to Thomas Cook in the package holiday market demonstrates the following: 1) Threat of Entry Competitors and lower overheads particularly in online marketplace Low level entry for small start-ups Fragmentation of market and increase consumer power has reduced travel agency access to distribution channels Proliferation of online market (Robinson, 2009). 2) Power of Buyers Increased income, however uneven wealth distribution Increased demand for bespoke packages Diverse consumer buyers and requirements Switching costs are low due to reduced brand loyalty Threat of backward integration due to the ability to buy directly from suppliers such as airlines and hotels Increased brand awareness and loyalty in the luxury package holidays market Cultural influence on holiday package demands, which impacts destination demand. (Robinson, 2009) 3) Power of Suppliers Direct supply from hotels and airlines Widespread fragmentation of direct suppliers such as airlines, hotels, car rentals and tour operators Airlines have more power to buyout suppliers in comparison to travel agencies (Robinson, 2009) 4) Threat of Substitutes Growth of discretionary spending Lots of possible substitutes due to e-commerce Travel industry expected to grow Economic downturn Low switching costs at consumer level (Robinson, 2009). 5) Competitive Rivalry The industry is extremely fragmented Most players in the market place struggle to secure 15-20% market share Most organised competitors are in urban areas and also have online presence Low switching costs at consumer level have increased competition Market growth is good and predicted to grow and there are low exit barriers and therefore scope for exploitation of continuing emerging trends in package holiday market. (McCabe, 2008; Robinson, 2009). 2.4. Boston Consulting Group Matrix In considering the competitive positioning of the Thomas Cook it is reiterated that the competitive positioning is intrinsically dependent on the successful strategy management of the company within the market and its ability to exploit and become a market leader in consumer trends in travel (Bhatia, 2008; McCabe, 2009). This in turn is the critical success factor in maintaining the optimum strategic fit that is the key factor in enabling Thomas Cook to continue to enter new markets and adapt to changes to its traditional business model as highlighted by the MyTravel merger. The Boston Consulting Group Matrix (BCG matrix) is rooted in the product life cycle theory that is utilised as a tool to aid strategy in terms of what should be a business priority in terms of strategy development for long term goals (Hooley et al, 2004, p.64). This is appropriate as an application to Thomas Cook as its ability to adapt to the multi-channel consumer market, changing consumer demands and emerging trends in holiday consumption has enabled it to continue evolving and strengthen long term sustainability in a vulnerable industry (Robinson, 2009). Accordingly, the central utility of using the BCG matrix is to contextually consider Thomas Cook’s product portfolio according to the following categorisation: 1) High growth products requiring cash inputs; and 2) Low growth products generating cash (Smith, 2003, p.163). Moreover, the BCG matrix comprises two facets, namely market share and market growth and the central premise is that the larger the market share a particular product has, the better it is as a critical success factor in long term growth (Hooley et al, 2004). Additionally, the BCG matrix culminates in 4 categories for a company; namely: 1) Stars (high growth and high market share); 2) Cash Cows (low growth and high market share); 3) Dogs (low growth and low market share); and 4) Question Marks (high growth and low market share) (Hooley et al, 2004). An example of the BCG matrix for is evidenced in Figure 1 below: Figure 1: Source: www.krikor.info (accessed December 2010). 3. Analysis and Strategic Fit As highlighted in the previous section, the fragmentation of the travel agency industry and increase in consumer power has not only forced the conventional travel agency business model to adapt to e-commerce; it has also forced established leaders in the marketplace to adapt to changing consumer requirements in their travel requirements. Additionally, the e-commerce business model has lowered barriers to entry in the package holiday market, which has also fuelled less commitment to brand loyalty and a move towards increased consumer power in dictating market trends (Robinson, 2009). Within this market environment, the business strategy of Thomas Cook has been to adapt to the trends and compete on the same level as other distributors in a multi-chain distribution channel. Additionally, Thomas Cook has not only adapted to changing consumer demands it has also evaluated and understood these changes in order to decipher long term trends. This understanding of the new channels of distribution, competition and market environment has enabled Thomas Cook to continue developing its brand and position itself as a market leader in order to exploit new opportunities in the continually evolving package holiday industry (Robnson, 2009). As such, the interrelationship between brand strategy and market environment continues to build momentum. Indeed, the interrelationship between critical success factors and key performance indicators are important in measuring the revenues of Thomas Cook as part of strategy development for long term growth (Robinson, 2009). Moreover, it is submitted that the critical success factor is instrumental in measuring and identifying the factors that are required for driving company growth (Robinson, 2009). To this end, the ability of Thomas Cook to establish an online presence, seek key business partners and exploit emerging trends in the package industry holiday along with the proliferation of the digital business model have provided the perfect market conditions for business diversification and expansion of the business. Moreover, the reciprocity of advantage to both the travel industry and the consumer has been the instrumental critical success factor in providing the strategic fit for Thomas Cook in terms of long term development. Additionally, it is also submitted that in terms of the strategic fit for Thomas Cook in the fragmented marketplace going forward, it is vital to continue building on the products that have worked well with consumers and continue leveraging its position in the market to evolve in accordance with continuing fluctuations in consumer demand. Bibliography Ackerman, F., Eden, C. & Brown, I. (2005). The Practice of Making Strategy. Sage Aramberri, J. & Buttler, R. (2005). Tourism development: issues for a vulnerable industry. Channel View Publications. Bhatia, A. K. (2006). The Business of Tourism: Concepts and Strategies. Sterling Publishers. BBC News, 2010. Thomas Cook joint venture deal with Russia’s Intourist. Retrieved at www.bbc.co.uk accessed December 2010. 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