Introduction
TUI AG is a German travel company. It dominates the travel industry in its source markets (UK, France, Germany, Netherlands, and Nordic countries) through its subsidiaries. The firm has numerous travel agencies, cruise ships, hotels and airlines. It is estimated that there are about 3,500 travel agencies, 285 hotels managed by 12 hotel brands and 120 aircrafts in more than 180 countries under the organisation’s wing.
Porter’s 5 forces
Threat of new entrants: The travel industry requires high amounts of capital for entry; this acts as a barrier to new entrants. Furthermore, because the company dominates the European travel industry, it has the benefit of using economies of scale. Annual reports indicate that the firm buys approximately 150 million bed nights annually.
New entrants cannot use price as a retaliatory strategy because they do not have these same economies. Travel consumers recognise the TUI’s brand; this is an important trait in the industry, and makes it quite difficult for new entrants to penetrate the market (Porter, 2006).
Threat of substitutes: The leisure industry is unrivalled by numerous entertainment industries. One may argue that locally available social activities such as movie watching, sports and music events can provide customers with enjoyable alternatives, however none of them can replace travelling.
Besides that, the substitutes have a low level of differentiation that makes them an insignificant threat to TUI AG. Nonetheless, the economic downturn has caused a number of consumers to reconsider local options as travelling can be an expensive venture. If the poor economic conditions persist in Europe, then these substitutes may become a formidable threat to stakeholders in the travel industry.
Bargaining power of suppliers: If a market is flooded with many travel companies with low market shares, then suppliers would have great negotiating powers. Fortunately, this is not the case for TUI AG. The European market has approximately four market leaders in the travel industry.
Together, these companies account for over fifty percent of the market share in the entire travel industry. This means that TUI and its other competitors have very strong negotiating powers. They can integrate upwards and thus put suppliers out of business. As a result, the suppliers do not have strong bargaining powers.
Bargaining power of buyers: As stated earlier, consumers in the travel industry value a company’s brand. Furthermore, the travel industry has few substitutes that can provide its kind of value. The sector has minimal levels of differentiation; this does not give customers an incentive to stick to one seller.
As a result of all these issues, consumers’ options are rather limited. On the other hand, the internet makes switching between travelling agencies so easy. Furthermore, the internet has facilitated online sales. These qualities neutralise the negative effects of a strong brand. In the end, one may say that buyers have moderate bargaining power.
Competitive rivalry: Owing to the high fixed costs inherent in this industry, it is difficult to witness high levels of competition in the industry (Porter, 2006). Established companies such as TUI already have an advantage because they can handle these costs comfortably. On the other hand, most of the players in the European travel and tourism market have dissimilar market shares.
In fact, TUI and its nearest rival Thomas Cook have a difference of 8% in market share. This means that one organisation has to implement a dramatic strategic change in order to catch up with the nearest competitor. Since it is easier to maintain one’s market share than to increase it, this makes the travel industry’s competitive market relatively stable.
TUI’s competitive advantages and their sustainability
TUI’s major competitive advantage is its market leadership. Through increased diversification, mergers and acquisitions, the company has grown to become one of the most reputable firms in the European market. This market leadership allows the organisation to leverage on its brand. It uses this position to maintain its current consumers and to attract new ones. It also uses its high level of profitability to offer greatly valued services at relatively affordable prices.
The company consolidates its value chain thus allowing it to leverage on price. The firm uses backward vertical integration to maximise the gains that can be made from its value chain. Currently, the organisation acts as its own supplier in certain areas of operation such as logistics and air travel. This gives it leverage over many others competitors who depend on different providers for their supplies. The latter companies must negotiate with their partners, and sometimes loose out on crucial savings.
Besides this, TUI AG has a multi-channel distribution strategy in its value chain. One of the methods that it depends on is online sales (TUI AG, 2011). This channel allows the organisation to obtain and retain customers and gain new customers.
Investing in direct distribution has allowed the company to grow and reach markets that it would not have accessed if it depended on traditional methods of distribution. This approach is highly sustainable because online sales are dramatically changing the travel and tourism sector. Therefore, the company is heading in the right direction.
This organisation’s phenomenal growth rates have solidified its position in the travel industry. It has bought numerous travel subsidiaries in the region. Furthermore it has engaged in mergers and joint ventures such as the 2007 merger between TUI AG tourism and First Choice Holidays to create TUI Travel. The company’s growth and expansion approaches are determined by its strategic business interests. It is done in order to increase profitability in key areas (Companies and markets, 2011).
The firm also engages in growth in order to increase its capacity so as to respond to changes in demand. This minimises profit volatility that may arise out of an oversupply in certain parts of the business cycle. In other words, high growth and expansion rates accord the firm economies of scale. Therefore, the firm leverages on its vast resources and capabilities in order to offer cheaper prices for its services. This company also invests in organic growth among its niche specialists.
The reason behind this move is the counter-seasonal profitability that occurs among niche specialists. They also have the ability to generate high profit margins even when this was not expected. The company’s acquisition strategy is designed to take on new markets and grow its market positions there. For specialist sectors, the portfolio of business entities found in those organisations makes them difficult to imitate because they are quite unique.
This makes the company quite differentiated from its competitors. Differentiation also emanates from the acquisition of companies in different sectors of the tourism industry such as hotels, cruises, shipping, airlines and many more. Such an approach is sustainable; however, if it only focuses on the European continent in the future, then this might reduce the organisation’s profitability owing to market saturation.
The company also offers superior services. This company has excellent operational services and is also respected for its high-quality customer service. TUI AG has achieved this through a highly experienced managerial team. The latter group has delivered on long term strategies while still focusing on alterations in consumer demand.
Besides this, the company has also benefited from supportive shareholders who allow the organisation to invest in its service offerings. This is also a sustainable strategy because it incorporates the business interests of one of the key drivers in the company; its shareholders.
Possible long term strategic plans and changes for TUI
TUI deals with numerous short haul flights. Owing to the recession and other economic challenges in the continent, many consumers may be looking for cheaper methods of travelling. This implies that they can use other options such as buses, rails and ferries. TUI focuses exclusively on airline transport. It may need to consider these alternatives in the future. Land transportation can be the ultimate solution to the loss of short-haul consumers during economic downturns.
While the company has already harnessed the benefits of online selling, it may need to invest more time and resources in building its technological infrastructure. Currently, the company needs to translate its market domination from the traditional distribution sectors to the internet.
Organisations such as lastminute.com are considered as authorities in the online tourism market. This organisation could also benefit from doing the same in the future. In fact, the internet could prove to be the key approach for countering high barriers of entry in this market.
Currently, the organisation has solidified its place in the European market; it is likely that in the future, TUI may consider replicating the same success in emerging markets. It has already started investing in countries like India, Russia, China, and Brazil (TUI, 2009). In the long term, TUI AG may invest more in these countries than it does currently, the organisation might achieve this through joint ventures as well as acquisitions of successful travel organisations in those countries.
This new direction should not derail the organisation from maintaining market leadership in Europe. What’s more, the company is likely to experience a post recession boom. This was the case in the early 1990s, the same thing had taken place. Countries recovered and citizens were willing to engage in more travels than had previously been recorded before the recession. TUI AG needs to keep an eye on these possibilities so as to capitalise on them.
In the future, the UK is likely to pass greater legislative restrictions in the airline industry. This is already evident from the government’s air flight rationing proposal (Drury, 2009). Other entities in government are advocating for green holiday locations. Environmental concerns are a serious issue in the European consumer market. TUI AG may be forced to focus on some of these matters. For instance, it may have to increase its local UK services.
Conclusion
TUI AG is a leading European travel company because of its strong brand, continuous expansion and value chain integration. However, the company must deal with challenges in short-haul travel, government legislations and emerging growth market. These factors may cause the company to invest more on land transport, emerging markets, the internet and environmental initiatives.
References
Companies and markets (2011). TUI AG – Mergers and acquisitions, partnerships and alliances and investment report. Web.
Drury, I. (2009). Ration Holiday flights to cut pollution, says Brown’s adviser. Daily Mail, p. 4.
Porter, M. (2006). What is strategy? Harvard Business Review, 61, 78.
TUI AG (2011). About us. Web. TUI AG.
TUI (2009). Annual report. Web. TUI Travel Plc. Web.