Corporate Strategy - Case Study Example

1 Critically analyse the structure of TUI. How and why did it change? Does it fit their corporate strategy? It is presumed that the original company, Preussag, a German company engaged in smelting and mining, has at its top management, senior executives with engineering and technical backgrounds, whose strong inclination are towards methodical products and process improvement. Such expertise is expected to produce intricate and complex products that demand precision manufacturing, and which calls for a highly disciplined management structure. Given this management structure, it is not highly likely that corporate success will be seen in service industry such as tourism. There are certain managerial approaches and organizational skills that are required for a particular industry, but certainly it cannot be a generic approach and presumed that such expertise will work on another type of industry. In other words, what would likely work as an organizational and management expertise in the mining industry, may not necessarily, and understandably work for a tourism industry. As stated in the case, in the middle of the 1990s, Preussag has encountered several difficulties in its mining and smelting operations. Such difficulties have been brought about by the too cyclical nature of the industry, declining profit, and whose future seemed to be bleak and foreboding, given the development in the German coal industry, and the increasing competition by firms from other neighboring countries. In other words, Preussag has experienced a decline in profitability due to lack of growth opportunity and increasing competition. This has led to the consideration of top management to consider alternative business ventures that will assure growth, profitability, and sustained success. Tourism, then a rising and top performing industry, has become an attractive alternative considered by Preussag. It was considered as a growth service business, and Preussag thought that there was much promise in the tourism industry than in the mining business. Thus in 1997, it started to establish its presence in the tourism sector, by acquiring leading companies in and outside Germany. By doing so, Preussag aimed at establishing itself as Europe’s leading company in the tourism business, fully integrating its operations vertically, acquiring major businesses engaged in travel and tours, hotels, airline, cruise, shipping, and packaged holiday tours. This was done step by step, each major acquisition being planned and timed strategically, until the full restructuring from just a tourism division of Preussag, to a full-pledged tourism company named TUI, becoming the biggest tour operator in Europe by 2005.   2.)    How well does the TUI manage its stakeholders? What future problems might be caused by their stakeholder relationships and what is the best way to handle them? According to the case, TUI enjoyed a “stable and management-friendly shareholders”. At least 30 percent of the company is owned by a state-owned German company, and the rest are held by private institutions. Given the shift from the mining to tourism industry without any whimper of protest from the investors and shareholders, TUI has become successful in its shift of corporate strategy through the sustained investment and unusual commitment of its shareholders to the company. Probably because the company has attained a leading position in the industry it has chosen to engage in, the stakeholders are happy with the corporate goals and strategies, and the directions that are being taken by TUI. Most shares in German companies are held by institutions for extended period, and they are said to be rarely traded, according to Porter. He further added that banks usually play important roles on the board, rendering advice and guiding corporate investments. Such is probably the situation in TUI, where the state-owned Landesbank plays a major role in the board. Banks being conservative, this could have been the source of confidence of shareholders as to the company’s investment decisions, particularly its decision to shift from mining to tourism service business. Privately held companies are at the mercy of its stakeholders, if such stakeholders decide to have a change of management team that will run the company. The board of directors, elected by shareholders to represent them in stockholders’ meetings, sets the policy directions of the company. Such policy directions constitute the foundation for strategic and operational goals and tactics implemented by the top executives comprising the management team. Should the board decide to revert back to mining industry, and divest itself of its stakes from the tourism business, management has no recourse but to implement the board’s decisions, or resign their position if they are in disagreement with the board. Publicly listed corporations have a freer hand running the company, as management team can directly gauge the pulse of its shareholders through its public listing of stocks. TUI may opt to have the company publicly listed in order to gain a larger base of capital resources at the same time affording itself of some sort of protection from future problems that may be caused by blocks of shares held privately by current stakeholders.   3.)    What should TUI do next and why? In 2005, TUI has already achieved its goal of becoming a European leader, since it has become the biggest tour operator at this time. In so short a time (just a few years, about 10 years since it first acquired a leading German tour operator) it has already achieved this position of being the biggest in whole of Europe, but does it spell out success for the firm? Several problems are being encountered, such as increased debt burden, while operational synergies from all the businesses that were acquired are said to be “not yet being realized”. There was also the problem of decreasing revenues due to recent economic downturn, where travel and tours budget, both from individuals and corporate accounts are first to suffer budget cut-down. TUI should probably slow down and reflect on its current position as the leader in the industry. It has acquired too many businesses in an industry that only recently it has been unfamiliar with. The consequential build up of organizational skills and managerial expertise brought about by long experience in the tourism industry may have not yet fully developed in the firm, and thus there are more learnings to be had to make the firm more productive, efficient, and adept to the needs of the customers. TUI gained expertise only because it acquired the leading companies engaged in the tourism business. It does not necessarily mean that they have fully acquired the knowledge and wisdom on how companies gain competitive edge in the industry. Know the market, know the industry, should be the theme of the reflection of top management. TUI should also allow some time to fully realize the synergistic effect of its major acquisitions. It has acquired fiefdoms here and there, but it has not yet fully integrated its operations to become the unbeatable world leader. Based from the facts of the case, it seemed that the firm is still vulnerable to economic downturns, and other operational distractions. It should build up first its capability from what it has right now, and concentrate on its core business in order to build the empire not only in Europe but throughout the entire global tourism industry. TUI should also focus on its bottom line: its profits. By being the leader in European market in 2005, has it delivered its bottom line? Comparing the profit and loss statement for 204 and 2005, profit has decreased. Financial expenses have increased probably because of the continuing asset acquisitions. TUI has to focus first on its bottom line, since it has somehow already achieved the first part of its corporate strategy, that is on being a European leader. It now has to focus on profits, and the sustainability of the operations of the business it has acquired.  4.)    What is the structure of the TUI industry? How is it likely to change in the nest 5 years and why? As mentioned in the case, the tourism industry in 2005 was a “significant industry” generating a worldwide economic activity worth US$ 6 billion or about € 5 billion, which is about 11 percent of the total world GDP. In recent years, it exhibited an average growth rate of four percent worldwide, four percent in Europe, and six percent in Germany, posting the biggest increase in Western Europe. Why is it relevant to study the industry structure in which TUI competes for profitability and sustainability? Porter highlighted two elements as underlying concerns in determining a firm’s competitive strategy. These elements are industry structure and positioning. These two elements, however, are not the only elements, and may not be sufficient, as guide to the choice of strategy, Porter further added, as both are said to be “dynamic”, and are affected by other elements in the industry structure, such as barriers to entry, nature of competition, and other factors comprising the five forces of industry. Industry structure type. There are five industry structure types, and these are pure monopoly, pure oligopoly, differentiated oligopoly, monopolistic competition, and pure competition. The global tourism industry in which TUI operates can be described as belonging to the fourth type, which is monopolistic competition, where the industry is consisted of many competitors able to differentiate their offers in whole or part (holiday tour packages, hotel accommodations, chartered flights, etc.). Such differentiations can be seen in terms of degree of service quality, added product features, complimentary services, and the likes. In this industry structure type, many of the competitors will focus on market segments where they can meet customer needs in a superior way. The unique attributes of certain product or service types offered by TUI can command a better, premium price. If TUI maintains, and even become more aggressive in assuming a leadership position in the tourism industry, it can even turn industry structure from a monopolistic type into a differentiated oligopoly, where there are only a few companies producing partially differentiated products. With the binge of buying off competitors and perceived industry leaders in the European market, TUI has somehow reduced the number of companies that it directly competes with. Entry and mobility barriers. There are high barriers to entry in the tourism industry, given the high capital requirements and economies of scale. TUI has acquired industry leaders at a very high cost, but probably in a cost effective strategy brought about by economies of scale. Exit and shrinkage barriers. There are high barriers to exit as well, due to the high level of fixed assets that need to be maintained during operations. Given the high vertical integration being engaged in by TUI and other major industry players, there is a sense of high exit and shrinkage barriers in to the tourism industry. Vertical integration. In the global tourism industry, many companies, such as the TUI, have engaged in backward and forward integration. This strategy has offered firms the possibility of effecting lower costs and thus gaining more control over the value-added stream. This has allowed TUI to become the biggest tour operator in Europe, offering all-inclusive tour packages comprising of air transportation, hotel accommodation, transfers from airport to hotel and back, insurance, meals, and excursions. Rivalry among existing competitors. The tourism industry has become global in reach, thus making TUI compete not only in Europe, but even establishing subsidiaries in Russia and China. Companies in the tourism industry need to compete on a global basis if they are to achieve economies of scale and keep up with the latest product demand of consumers. Given the analysis of the tourism industry structure in which TUI operates, it is more likely that over time, or at least within the next five years, significant changes will further shape the industry, given the volatile nature of world economy in recent years. World tourism has been largely affected by security concerns not only brought about by geo-political issues but also because of rising and menacing threats of health-related concerns such as SARS, Avian flu, swine flu virus, AIDS, etc. The advent of low cost carriers is also one significant development in the tourism industry that forced companies to look for ways to cut-cost and compete head on with rivals in terms of pricing, as consumers have become more budget conscious and are always in search for bargain tour prices.   References Kotler, P. 1994. Marketing management: analysis, planning, implementation, and control. Prentice-Hall, Inc. New Jersey, U.S.A. Porter, M.E. 1994. The competitive advantages of nations. The Macmillan Press Ltd. London Viardot, E. 2007. TUI: achieving and maintaining leadership in the European tourism industry. A case study. Ceram European Business School. Read More