Achieving and Maintaining Leadership in the European Tourism Industry - Case Study Example

 Table of Contents 1.0 INTRODUCTION 2 1.1 Background of Tourism Industries 2 1.2 What you going to do in this project 2 1.3 Overview of TUI 3 1.4 TUI at Present 3 2.0 ENVIRONMENTAL ANALYSIS 4 2.1 Porter five Forces 4 2.1.1 Bargaining power of buyers 4 2.1.2 Bargaining power of suppliers 5 2.1.3 Threat of Substitutes 5 2.1.4 Threat of New Entrants 6 2.1.5 Rivalry among competitors in the industry 6 2.2 PESTLE 6 2.2.1 Political 6 2.2.2 Economic 7 2.2.3 Social 7 2.2.4 Technological 8 2.2.5 Legal 8 2.2.5 Ethical/Environmental Issues 8 3.0 TUI: ACHIEVED AND MAINTAINED 9 3.1 Porter Generic Model 10 3.2 Why is Difficult for Competitors? 12 4.0 LIKELY IMPLICATIONS 13 4.1 Future Analysis 13 4.2 Recommendations 13 5.0 USE AND LIMITATIONS OF RESOURCES 14 5.1 Resources Implications 14 RESOURCES 16 APPENDIX 17 Achieving and Maintaining Leadership in the European Tourism Industry 1.0 INTRODUCTION 1.1 Background of Tourism Industries The world tourism industry is flourishing and its contribution towards GDP is 10.3 percent.1According to World Travel and Tourism Council, the tourism industry is expected to grow at a level of 4.0 percent for the next ten years.2 The European tourism industry is a very stable tourist destination as compared to the other regions of the world. Because of the growing opportunities in the tourism industry, a number of Tour and Travel operators have stepped in this industry. The question, which organizations will excel in this race, is debatable. 1.2 What you going to do in this project The aim of this project is to evaluate the strategies and decisions of TUI Group discussed in the case study, based on which they have reached to the heights of success. It also aims to evaluate the environmental forces, which have been influencing the industry and their impact of the company. Moreover, through various models, it analyzes the market positioning of the company in the tourism industry. Finally, the use and limitations of the model applied in the analysis will be discussed. 1.3 Overview of TUI Touristik Union International (TUI) is a leading travel group of Europe. It has been catering to three sectors including TUI Travel, TUI Hotels & Resorts and the cruise ship business. In addition, it also has 43.33 percent stakes in Hapag-Lloyd, which is a container shipping line. It is considered as one of the most profitable travel groups. The company is primarily a German company and its headquarters are in Hanover. The history of TUI dates back to mid-1990s when Preussag decided to exit the smelting and mining industry and planned to enter into European tourism industry because of the growing tourism opportunities. From 1997 to present, TUI has been making important strategic decisions such as acquisitions, joint ventures etc. 1.4 TUI at Present Today, TUI is the leading travel group of Europe and it is enjoying good financial position and popularity in World Tourism industry. In 2008, TUI Group reported the total earnings of €759 million and revenue of €24.9 billion. As reported by the company, the total number of employees in TUI was 70,200, on 31 December 2008. The group owns 238 hotels and 150,000 beds in 26 countries of the world.3 It is very impressive that more than 30 million customers entrust TUI to manage their holidays every year.4 Interestingly, TUI Travel is one of the largest Europe’s holiday craft fleets. 2.0 ENVIRONMENTAL ANALYSIS Like all other organizations, TUI also faces the external environment that is highly complex and turbulent. In order to cope with environmental influence and uncertainties, an external environmental analysis is essential. The major purpose of environment analysis is to identify the opportunities and threats faced by the organization. 2.1 Porter five Forces The Porter Five Forces Model is considered very important to analyze the external competitive environment of the organizations. (Figure 1 Appendix) 2.1.1 Bargaining power of buyers The bargaining power of buyers in tourism industry is high because of the following reasons. First, there are many small companies operating in tourism industry and number of buyers is huge. Second, travel packages are not cheap and they represent a large expense for the customers therefore, customers may price shop when choosing a travel package. Third, travelers have access to the market information and they are able to evaluate the information. Fourth, although the travel experience offered by various tour operators to the customers may differ however, when choosing a package customer can only check out the facilities in the package. Such facilities or services are usually same for most of the operators thereby, increasing the bargaining power of buyers. TUI has been able to make great profitability because it has been offering distinct raveling experience to the travelers. As mentioned in the case, TUI owned 37 incoming agencies with more than 5,000 staff and tour guides in 70 countries. The staff always took care of the travelers. Moreover, the company also organized transportation facilities, local excursions and car rentals etc. Therefore, although the customers could easily switch the customers however, through its wide range of services, TUI has relatively more control over its customers. 2.1.2 Bargaining power of suppliers The bargaining power of suppliers is high in tourism industry because of various reasons. First, the travel and tour operators have to depend on suppliers such as airlines. Although the competition among airlines is increasing because of the entrance of low cost airlines however, still the overall bargaining power of the suppliers is high. Second, since it is not possible for all the tour operators and travel organizers to go for backward integration because of the high cost of supplier and it is not very easy to switch suppliers. Third, the suppliers in tourism industry such as airlines can directly sell to the customers thereby, increasing the bargaining power of suppliers. In short, the bargaining power of suppliers is high in tourism industry however, TUI has advantage over the other companies because it shares more distribution of power. In the case study, it is mentioned that until 2005, the company owned 3,500 travel agencies in 17 countries, 75 operators active in 18 European markets and over 100 aircrafts with a control on many airlines such as Thomsonfly, Arkeyfly, Jetairfly, Corsairfly, Britannia and Hapagfly. Therefore, company has a significant impact on its suppliers unlike various other companies. 2.1.3 Threat of Substitutes The tourism industry is a service industry and nature of services provided by many travel operators is very similar. The threat of substitutes is high in this industry because travelers have little loyalty and it is easy for the customers to switch the operators. In 2005, being the market leader in Europe, TUI owned the tour operators, aircrafts, travel agencies, shipping business therefore, it was not facing significant threat of substitute. 2.1.4 Threat of New Entrants The threat of new entrants is high in the tourism industry because of various reasons. First, the services of tour operators are not protected by regulations or patents. Secondly, customers have little brand loyalty because of high competition in this industry. Third, the start-up costs for the new entrants are very low in this industry. Fourth, the switching costs are low and customers do not find problems in switching the suppliers. Another reason is that economies of scale are minimal in this industry and access to customers is easy. Moreover, the access to suppliers is easy in tourism industry because of the availability of various airlines, hotel services etc. Even in this highly competitive industry, TUI is not facing the threat of new entrants because of its highly diversified services. In short, for any tour operator to compete with TUI, a huge cost is required. 2.1.5 Rivalry among competitors in the industry The most intense rivalries occur in tourism industry because of various reasons. First, there are many small numbers of firms. However, TUI is the market leader and it has very diversified range of services. Second, the travelers can easily switch between the services. 2.2 PESTLE 2.2.1 Political It represents the influence of political systems, stability, laws, and regulations on the industry. Political forces may directly influence the tourism industry of a region. For example, the political relations between regions can influence the number of travelers. In 2005, TUI Group was operating in 17 countries; therefore, the company had to deal with different political influences. 2.2.2 Economic In the economic analysis the impact of growth rate of exchange, inflation, taxation, fiscal policies is evaluated on the tourism industry. The economic conditions may directly influence the tourism industry. For example, the increasing value of dollar will make the vacations for Americans cheaper in the UK. Moreover, the high economic growth of a region increases developments in the region, thereby, offering more facilities to the tourists. The financial crisis of early 2000 influenced TUI like other travel operators in Europe. Moreover, the global economic downturn and the health crisis also caused a slump in tourism in 2003. In order to adjust to the slump in tourism, TUI also initiated cost-cutting programs. 2.2.3 Social The social factors such as demographics, education, culture and nationalism affects the tourism industry. For example, TUI has been dealing with travelers coming from different cultures such as different languages. As mentioned in the case study, 5,000 staff and tour guides was hired by the company in order to take care of the customers. In September 2005, TUI had 58,191 employees from diverse cultures. As the company was operating in service industry therefore, employees directly influence the service experience of the travelers. The company remained successful in managing its employees from diverse background. In this way, TUI also encouraged the employees to satisfy the customers. 2.2.4 Technological The emerging technology directly influences the operations of the services providers in the tourism industry. For example, the internet technology has facilitated the tour operators to offer their services online. In order to manage the impact of technological influences, TUI launched the virtual tour operator Touropa.com in 2005. Because of this strategic move of the company, it made a total turnover of €2.6bn in 2005 and half of the turnover was made online. 2.2.5 Legal The deregulations in the airlines industry also influence the tourism industry. For example, Australian airline industry was deregulated in 1990 and in 1992, the plans for a new ‘open skies’ policy were agreed by European Union transport ministers. It encouraged the creation of private airlines, thereby, positively influenced the tourism industry. As mentioned in the case, the World Tourism Organization of UN also influences the policies of tourism industry. Moreover, the legal entry requirements for the travelers also influence the operations of tour operators. 2.2.5 Ethical/Environmental Issues The local, national and environmental issues directly affect the tourism industry. For example, the deregulation in airlines industry enhanced the number of travelers but raised the environmental concerns. The airlines industry is one of the major industries, which are contributing to air pollution. Therefore, airlines industry has been facing major oppositions when low cost airlines were entering into this industry. TUI was more prone to environmental concerns because it was not only dealing in traveling services but it was also catering to shipping business. 3.0 TUI: ACHIEVED AND MAINTAINED The period between 1997 to 2005 is really important in the history of TUI because during this period the company, made various important strategic moves. The give table summarizes the major acquisitions, joint ventures of TUI Group during this period. Table: Major Strategic Moves of TUI Group during 1997-2005 Origin Germany Germany British British French Scandinavia Other services travel agency/airline/logistics travel agency Financial services Service Tour Operator Holiday packages Holiday club chain Tourism Travel group Tour operator Tour operator Shares 29.4% more Acquisition Bought Hapag-Lloyd AG TUI Deutschland Magic Life Thomas Crook Thomas Crook Thomson Travel Group Nouvellese Frontieres Fritidsresor Creation Exit Smelting/ Mining industry Recognition of TUI Preussag HTU HTU HTU HTU HTU TUI Group TUI Group TUI Group YEARS Mid-1990s 1997 1997 1997 1998 1999 2000 2000 2000 Origin China Germany Russia Europe India Canada Other services low cost holidays Service online/ agencies /TV/call centres container shipping line Shares 100% with Touristik Express Joint venture with Mostravel Russia 50% 100% Acquisition Nouvellese Frontieres Le Passage to India CP Ship Creation TUI Air Management TUI China Low cost travel agency TUI Mostravel Russia Virtual tour operator Exit Recognition of TUI TUI Group TUI Group TUI Group TUI Group TUI Group TUI Group TUI Group YEARS 2002 2003 2004 2004 2005 2005 2005 3.1 Porter Generic Model If the attractiveness of the industry directly affects the profitability of the company, then positioning of the company in the industry is the second major determinant of its profitability. In order to evaluate the reason because of which TUI became the market leader in European tourism industry, the Porter Generic Model can be used. As shown in the figure, TUI’s strengths may fall into one of two headings including Cost leadership or differentiation. If these strengths of TUI are applied in either a broad or a narrow scope, the positioning of TUI in the industry can be determined. (Figure 2 Appendix) Figure: Porter Generic Model From the information given in the case study, it is clear that like other tour operators TUI Group was also offering the same services, which are offered in travel packages. Therefore, the competitive advantage of TUI Group was not based differentiation. The competitive advantage can be a result of cost leadership because TUI Group was not only a tour operator but it was also involved in managing six group airlines centrally and its shipping business. The ownership of more than 100 aircrafts, 3500 travel agencies, 285 hotels and 163,000 beds allowed the company to gain cost advantage over the other tour operators. The other tour operators had to rely on the hotel services, airlines etc. to provide their services to the customers. By providing such services directly to the customers, TUI Group had a cost advantage. The competitive or target scope of TUI was broad and it was not pursuing narrow market segments. Until 2005, the company had strong presence in 17 countries of the world including Germany, the UK, Netherlands, and Belgium etc. Therefore, TUI Group was pursuing low cost advantage in the broad market. Based on this, TUI could be position in the first column of Porter Generic Model, Cost Leadership. 3.2 Why is Difficult for Competitors? TUI Group became the market leader in European tourism industry just within eight years. The company was very sharp in recognizing the growing opportunities in tourism industry. Its acquisitions and joint ventures show how strategically it covered the steps to success. Although the external analysis of the company reflects that it has been operating in a very competitive market however, the important strategic decisions during its operations allowed the company to get advantage over its competitors. The company did not only make many huge investments but also the right and profitable investments. No doubt, the cost advantage was the primary advantage for TUI Group. Apart from that, TUI also created distinct and differentiated services by offering good value to vacationers. A typical package offered by a tour operator included the services such as traveling, residence, transportation etc. TUI Group offered additional value to the customers at every step of the service process. In 2005, TUI appeared as a market leader in Europe and reported 18 million customers and more than €14bn turnover. The other tour operators were involved in the price competition and promotional wars, and TUI excelled in the race. Moreover, through acquisitions and joint ventures, TUI has gained the low cost advantage while it is very difficult for the competitors to achieve this cost advantage. The Figure 3 Appendix, shows that how positioning of TUI have enabled it to combat the industry forces. The Figure 4 Appendix gives the SWOT analysis of the company and further gives an idea about the strengths of TUI over its competitors. Furthermore, the sustainable competitive advantage for a company is brought by its organizational culture and environment. TUI leaders well understand this fact. The CEO, Dr Michael Frenzel says, “Recognizing responsibility for employees, society and the environment is a significant factor for achieving sustainable corporate success”.5 Therefore, copying the culture and atmosphere of the organization is really challenging for the competitors. 4.0 LIKELY IMPLICATIONS 4.1 Future Analysis The growing business opportunities in world tourism industry encourage more and more businesses to enter into this industry. Apart from that, the environmental analysis reflects that business environment is also changing, which will surely have a great impact on the operations of the big giants such as TUI. The internationalization of businesses and globalization is increasing business travelling all over the world. More and more companies are going for internationalization, thereby creating more and more opportunities for the tour operators. The political relations between the countries are improving and more opportunities are being provided to the tourists for urban tourism and heritage tourism. The global financial crisis 2007-2009 has also influenced the operations of tour operators. No visa requirements in the European countries and Schengen visa have enhanced the convenience of the travelers. Moreover, the technological advancements and diversified work place atmosphere have also brought various changes in the business environment. 4.2 Recommendations The changing environmental conditions are creating both the threats and opportunities for TUI Group. The financial stability of TUI is its major strength and the company can get more benefit by availing the opportunity of growing business travel. TUI can offer business travelling by specifically targeting the corporate employees and executives. The tourism industry has faced a significant slump in the last three years (2007-2009). It has been noticed that the number of Asian travelers to Europe has significantly reduced. It may appear as a threat of the company because one of the weaknesses of TUI is that it is only catering to European market. TUI should expand its operations to the other regions of the world, so that it may well diversify its risks. The tourism industry is becoming more and more competitive and TUI has cost leadership advantage. In order to develop a sustainable competitive advantage, TUI should focus on differentiation strategies. It is a major challenge for the company however; the company can develop attractive tourism products and services to maintain its image. 5.0 USE AND LIMITATIONS OF RESOURCES The models that have been used in this analysis include Porter’s five forces model, Porter Generic Model, PESTLE analysis and SWOT analysis. The Porter five model is used to analyze the current situation of the industry and assists the managers in making important decisions such as divestment, investment etc. Although all of these models are very useful to analyze the impact of environment on the operations of the companies however, they do have some limitations. 5.1 Resources Implications Porter’s five forces model completely focuses on the company’s external competitive environment and it does not attempt to look inside the company. The major limitation of this model is its historical context, in which it was developed. When Porter developed this model, the industries were operating in stable and predictable environment and their ultimate objectives were profitability and survival however, today, the uncertainty is high and business environment is more dynamic. Today, businesses are more oriented towards their long term planning and expansion. Second, this model has its implications in a classic perfect market, which reduces its worth in a regulated market. Third, its analysis is best applicable to simple market structure however, tourism industry have a very complex structure. Fourth, the technology breakthroughs and dynamic business environment has reduced its implications because the relationship between the entry barriers and technological developments are changing the market conditions in short term. Moreover, this model is based on the competiveness of the industry and it does not take into consideration the strategic alliances. The PESTLE analysis has given a good overview of the external environmental analysis of the company however, it is a very broad analysis and becomes really difficult to select the relevant factors to conduct the analysis. In determining the relevant factors for a company, the public published information is not enough. The Porter Generic model describes the strategies, which lack flexibility and specificity. This model is limited because it only highlights two strategies to gain cost advantage. There are various other things based on which a company can achieve competitive advantage such as corporate culture however, this model lacks this specificity. Apart from these limitations, all of the used models have been really helpful to analyze the tourism industry and positioning of TUI as a market leader in this industry. RESOURCES Johnson et al. "Achieving and Maintaining Leadership in the European Tourism Industry ." (2008): 619-624. "TUI AG – Facts and figures." March 2009. TUI-Group. 18 November 2009 . "TUI: Fact and Figures ." October 2009. TUI-Group. 18 November 2009 . TUI-Group. July 2009. 21 November 2009 . "World Tourism Industry ." EconomyWatch. 18 November 2009 . World Travel and Tourism Council. 2009. 18 November 2009 . APPENDIX Figure 1: Porter’s Five Forces Source: www.stanford.edu/class/msande473/483primerV3.doc Figure 2: An Analysis of Services Offered by TUI Apart from the cost advantage to the company, TUI product and service analysis shows that the company is offering two major choices to the customers including the choice of product and the flexibility for the customer. Based on the information taken from the website of the company regarding its services, following is the analysis. This analysis is important to analyze whether the company is gaining the competitive advantage because of its cost leadership or product differentiation. The services of TUI offer Choice of product and flexibility for the customer. The choice of product is available because TUI is offering three offers to the customers including flights, hotel beds and car hire, transfers and excursions. The customers can enjoy the differentiation, exclusiveness, value addition, expertise and specialists offers of TUI services. The flexibility for the customer is provided by offering different deals such as self-selected individual components, dynamic packaging, traditional package holidays, exclusive/differentiated holidays and tailor-made holidays. It is also important to check out which service offered by the company is majorly contributing towards the customers’ satisfaction. The following chart taken from the website of the company shows that hotel accommodation service is the main factor in holiday differentiation of the company. Therefore, TUI has achieved this competitive advantage because of its differentiation and cost leadership. Since, the generic model presents the two factors at two extremes therefore, the cost advantage could be considered as a relatively more important factor that has allowed the company to attain its current position. It can be considered as a major limitation of this Porter Generic Model. Chart: Factors Influencing Customer Satisfaction Source: TUI Website Figure 3: Generic Forces and Industry Forces Industry Forces Generic Forces Cost Leadership Focus Entry Barriers Ability of TUI to cut prices because of cost leadership deters potential entrants Ability of TUI to focus on broader markets and develop competencies to create entry barriers Power of Buyers Ability of TUI to offer lower prices to business travelers and other major groups Focus of TUI on broader market relatively reduces the power of buyers Power of Suppliers Ability to insulate from powerful suppliers such as famous commercial airlines, hotels etc. TUI broader market allows its access to more resources, thereby, creating more investment opportunities (e.g. backward integration) for the company. As a result the relative power of suppliers is reduced Threats of Substitutes Ability of TUI to lower prices to avoid the threats of substitutes Special services to a broader market reduces the threats of substitutes Rivalries Ability of TUI to better compete in price war in future For a number of small rivals, targeting broader market is not very easy Figure 4: SWOT Analysis Strengths Weaknesses Market leader in Europe Financial stability (good turnover, profitability) Huge range of services Low cost services Success in accomplishing goals Profitable investments (strategic alliances) Ability to manage change International rating agencies confirmed that TUI offers sustainability performance. These indices include Dow Jones Sustainability Index, FTSE4Good, ASPI Eurozone, Ethibel Pioneer Index, ECPI Ethical Index Euro and Oekom Research Investment Status. Lack of focus Too broad target market Opportunities Threats Flourishing tourism industry at an annual pace of 4.1% As reported by WTO, 1 billion arrivals in 2010 and 1.6 billion international tourists arrival in 2020 Tourism products and services innovation Technological developments Financial and economic crisis such as recent 2007-2009 global financial crisis Increasing competition Terrorism Increasing inflation (cost of materials) The SWOT analysis shows that TUI has been successful in recognizing its strengths while availing the opportunities. For example, the ability of managing change is the strength for the company. Since the business environment was changing (such as technological advancements), therefore, the company recognized the opportunity to start virtual business and offered more convenience to the customers. It is important to note that all strategic decisions of the company are well planned and taken at the right time. Read More