Introduction
THL is one of the leading tour firms in the New Zealand’s tourism industry. The core business activities of the firm involve providing tourism related services which include rental motor-homes, car and couches rental services. Apart from New Zealand, the firm also operates in Australia, Fiji and South Africa.
THL’s mission is to utilize its attractions and investments in the overseas markets to become the leading operator in the industry. In order to realize its growth objectives, THL has always embarked on diversifying its investments and divesting its underperforming business segments. This paper thus seeks to evaluate the effectiveness of this strategy.
Success of the Strategy used by THL
The financial analysis in the appendix indicates that the firm has been able to realize a steady growth in revenue for the last three years. Even though the net profit has been on the decline between 2006 to the year 2009, the firm is still financially stable. The decline in net profit is attributable to the rapid rise in cost rather than the growth strategy adopted by the firm.
This means that the firm’s growth strategy of acquiring related businesses and selling off its non-performing business segments has been successful. This can be justified by the following reasons. First, the firm has been able to increase its market share through acquisition of various firms or related businesses in both local and international tourism industry.
Through acquisitions, the firm has become the main player in the New Zealand and Australian markets. For example, the firm currently operates over 4300 rental motor homes after it acquired both Maui and Mount Cook motor homes. This has not only enabled the firm to increase its market share but has also contributed significantly towards the improvement of the visibility of its products.
Given the large number of motor homes operated by THL, the firm has been able to target two market segments with specialized products. For example, the Maui brand targets families while the Britz brand focuses on the independent travelers segment. The increase in market share has thus helped the firm to increase its revenue and product visibility.
Second, through acquisition of related businesses, the firm has been able to achieve economies of scale. The increase in revenue associated with the acquired businesses has enabled THL to effectively implement its marketing and expansion plan. Besides, the firm has a single central administration that manages all the business segments.
This has contributed towards cost reduction by eliminating the need to establish separate administrations for each business segment. Third, acquisition of related businesses has enabled the firm to increase its bargaining power. For example, through the acquisition of Caravan international, the firm now has full control over the terms at which it purchases campervans and motor homes.
Fourth, the firm has been able to offer a wide variety of products through acquisitions. Consequently, THL is in a position to satisfy the needs or preferences of clients from different parts of the world. For example, the firm’s clients can now choose to travel either through motor homes or through buses following the acquisition of Kiwi Experience. This not only improves customer experience and satisfaction but also leads to high revenue and profits.
Finally, divesting underperforming or non-core business segments has enabled the firm to concentrate on its most profitable segments. By focusing on the most profitable segments of its business, the firm has been able to create competitive advantages through high product quality. Besides, it has been able to eliminate the unnecessary costs associated with operating the non performing business segments.
Strategy to be used by the Firm
In order to improve its profitability and to maintain or increase its market share, THL should continue to diversify into related businesses. Diversification will help the firm to remain resilient due to the following reason. First, the tourism industry is generally volatile across most markets. However, the degree of volatility and the response measures used to mitigate the risks associated with such volatility varies from market to market.
The high level of volatility means that the industry is not stable and thus a firm can easily collapse if it is not able to cushion its investment from the risks orchestrated by the volatility. Unforeseeable risks such as bad weather and acts of terror have adverse effects on the demand for tourism products. For example, the September 11th terrorist attack in US led to significant reduction in the level of tourist arrivals.
As a result, the firms that had no alternative sources of income were not able to sustain their operations due to the low demand. Thus diversification will enable the firm to utilize the profits accruing from its business segments that are not affected by the unforeseeable risks to boost the segments adversely affected by such risks.
Second, the business of tour operators is seasonal in nature. This means that it is characterized by periods of high demand and periods of very low demand. The seasonality is mainly attributed to changes in weather patterns which have direct impact on outdoor activities such as visiting parks.
The financial economies of scale resulting from diversifying into related business will thus enable the firm to write-off the losses incurred in its segments which are greatly affected by the seasonality of demand. During low demands, most firms lay off their employees in order to reduce costs. However, diversification will enable the firm to retain its employees by redeploying them to the related business segments.
Consequently, when the demand picks up, the firm will not face difficulty in searching for talent. This will enable the firm to create competitive advantages through skilled employees. Finally, diversification through acquisition of related businesses leads to quick expansion at relatively low costs.
Through partnering with existing firms, THL can easily join various overseas markets and begin its operations immediately. This can also be achieved by acquiring businesses as on-going-concerns. The firm will thus be able to realize returns on its investments within a relatively short period and this allows it to continue with its expansion plan.
New Zealand Verses International Market
Even though the international market is characterized by high volatility or difficulties, THL should not concentrate solely in the New Zealand market. This means that the firm should focus on joining more overseas markets despite the challenges associated with them. However, the firm must first asses its ability to overcome the challenges associated with the overseas markets alongside the benefits associated with such markets.
Only markets that are likely to contribute significantly to the profitability of the firm should be considered. The decision to join the international market is informed by the following reasons. First, New Zealand, just like the overseas markets is prone to volatility. Research in the New Zealand tourism industry indicates that the failure rate for new entrants is 95%.
The incumbents are also adversely affected by the factors that lead to the failures of the new entrants. This means that the firm will be subjecting itself to very high risks if it concentrates only in the New Zealand’s market. By expanding into the international market, the firm will be able to spread its risks across the markets. This is because all markets can not experience periods of low demand or difficulties at the same time.
For example, while demand in Australia could be low due to poor weather, in South Africa the demand could be high due to improved weather situations. Thus the firm will still be able to make profits from the stable markets. Second, due to the interconnectedness of the tourism industry, shocks in the international market will still have adverse effects in the New Zealand market.
For example, “the occurrence of diseases such as foot and mouth” in Europe still affected the demand in New Zealand due to travel restrictions. Thus avoiding expansions into the international market due to the difficulties associated with it will not help the firm to mitigate the effects of such difficulties. It will be better to join the international market and take advantage of its large size.
Third, the large size of the international market is an opportunity for the firm to maximize its profits. Through its financial stability, the firm can easily increase its output in the international market, thus making more profits and value for the shareholders. Finally, joining the international market gives the firm the opportunity to take advantage of the cheap capital and unique scenic features in overseas markets.
Unlike New Zealand, various markets across Africa and Asia are associated with cheap labor. This will enable the firm to reduce its operating costs through low staff costs. Besides, a variety of unique tourist attractions are available in overseas markets. Joining such markets will thus enable the firm to acquire such features thereby increasing its portfolio of tourist attractions and products. This will translates into high sales volume and profits.
Planning for Negative Contingencies
Even though the tourism industry is associated with volatility resulting from unforeseeable factors such as sever weather conditions or wars, the incumbent firms can still maintain their competitiveness if they plan effectively for such contingencies. THL can achieve this objective through the following measures. First, the firm should embark on horizontal integration in the markets it operates in.
This will involve investing in substitute products that will satisfy the needs of the clients in the event that the mainstream products can not be offered given the occurrence of a contingency. For example, when bad weather prevents tourist from flying to the tourism sites, the firm should be able to recommend alternative modes of transportation such as sea travelling.
The firm can partner with shipping companies to offer such products. Besides, the high costs of fuel can lead to low demand for the firm’s car and buses rental services as it transfers the high costs to the customers through high prices. This can be eliminated by partnering with or co-owning the local railway system to transport its clients. Thus the firm will not only help its clients to lower the cost of travelling but it will also share the profits accruing from the alternative mode of transportation.
Second, the firm’s strategic planning process should incorporate crisis management. This will involve developing a sound risk management framework which includes the following elements; “readiness, response, reduction and recovery”. THL should always be ready for contingencies by planning for them.
This involves setting a side a risk fund to cater for the losses associated with the contingencies. Response to the crisis will involve providing alternative products to customers. For example, in the event that the customers from the main markets can not travel to New Zealand, the firm should be able to offer them alternative products in their countries. This explains the importance of joining the international market.
The firm should also be able to reduce the effects of the crisis through rapid response mechanisms. It should be able to respond to changes in the market during crisis situations within a very short time in order to avoid losses. The aftermath of the crisis must also be evaluated and the results used for future planning.
Third, THL should clearly “define decision roles and responsibilities” in regard to crisis management. This means that the firm should indentify talented employees and entrust them with the responsibility of making sound decisions during a time of crisis. This will not only help in reducing the confusion in policy making during crisis situations, but will also improve the efficiency of making such decisions.
The overall result will be an effective policy formulation and implementation framework. Finally, the firm should maintain an optimum degree of flexibility in its operation as a response to the expected crisis. It should be in a position to raise the capital that may be used to alter the methods of service provision as well as being able to alter the methods of service provision through appropriate technologies.
Overall International Strategy
As discussed earlier, the firm’s expansion plan through acquisition of related business and divesting underperforming segments has been successful. Consequently, it has been recommended that the firm should continue with its strategy of diversification into related businesses. This will involve joining the international market in order to increase the market share.
The above discussion also shows that joining the international market will be advantageous since the risks associated with it can be managed effectively. Thus in order to increase its market share and profitability, the firm should embark on internationalization through joint venture as its market entry mode. A joint venture strategy will benefit the firm as follows.
First, by using the assets of its partners, the firm will reduce the market entry risks. Second, it will enable the firm to gain knowledge of the overseas market and industry. Third, the participation of its national partners will enable it to gain access to national resources. For example, it can simplify the process of acquiring tourist attractions which may be reserved for local firms only.
Besides, the firm will gain the power to borrow in the overseas market. Finally, it will benefit from the goodwill of its partners to popularize its brand within a very short time. This will enhance market penetration and rapid growth.
Conclusion
The above discussion indicates that the success of the firm is attributed to its rapid expansion through acquiring related businesses and divesting its segments that are underperforming. This strategy has enabled the firm to increase its market share and revenue over the years. Consequently, the firm’s future growth strategy should focus on diversification into related businesses.
Focusing solely on the New Zealand market is not advisable since shocks in the international market will still affect it. Joining the international market on the other hand helps in spreading risks and increasing the market share. Besides, the risks associated with the international market can be reduced as discussed above.
Consequently, the firm should consider internationalization through joint ventures as its market entry mode. This will enable the firm to increase its profitability and competitiveness as discussed above.
Appendix – Financial Analysis
In 2010, the total revenue increased by 7% to 182 million. This translated into a net profit of 9.8 million which represents a 778% increase in profits. In 2009, the firm realized total revenue of 169 million which was 12% higher as compared to the previous financial year. However, the net profits reduced by 94.4% to 1. 1million.The firm’s total revenue in 2008 was 151 million, representing a 9.5% growth.
Despite the increase in revenue, the firm’s net profit declined by 12.4% to 17 million. In 2007, the total revenue was 138 million, which was 21.6% less as compared to the previous financial year. The net profit also reduced by 10.7%. Finally, in 2006, the total revenue increased by 4.7% to 176.1 million which translated to a net profit of 21.8 million. The net profit was however, less by 31.2% as compared to previous financial year.
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