Transcript Document

Strategy for Tourism
Unit 8
Directions and
Tribe, J, (2010) Strategy for Tourism, Goodfellow
Publishers, Oxford.
Capon, C. (2008) Understanding Strategic
Management, Prentice Hall: Hemel Hempstead.
Tribe, J. (2005) The Economics of Recreation, Leisure
and Tourism, Butterworth Heinemann, Oxford.
Johnson, G., Scholes, K., and Whittington, R. (2008)
Exploring Corporate Strategy, Prentice Hall: Hemel
7, 9, 10
Learning Outcomes
 After studying this chapter and related materials you
should be able to understand:
 Strategic directions such as consolidation, market
penetration, market development, product development,
diversification and withdrawal.
 Strategic methods of growth including internal growth,
mergers and take-overs, and joint ventures and alliances.
 Strategic methods of development such as innovation and
 and critically evaluate, explain and apply the above
Case Study 8: Merlin
 Merlin Entertainment is an international attractions based
 Its strategy is “To become the world wide leader in branded,
location based entertainment.”
 It plans to achieve its staregy bu
 Product Development
 Rolling out its proven chainable brands internationally.
 Acquisitions of other operators in the attractions industry
 Merlin’s roll out strategy is illustrated by the following:
 Madame Tussauds waxworks museums which have been opened
in London, New York, Amsterdam, Las Vegas, Shanghai, Hong
Kong, Washington DC, Berlin and Hollywood.
 Sea Life is the world's biggest aquarium brand with over 30
centres in more than 11 countries including UK, Spain , the USA,
Germany and Portugal.
 Five Dungeon sites in London, Hamburg, Amsterdam, Edinburgh
and York.
The Merlin Entertainments
London Eye
Plate 8: The Merlin Entertainments London Eye
This section considers the strategic directions
an organisation might take in pursuit of its
overall strategy. The main directions are:
 withdrawal
 consolidation
 market penetration
 market development
 product development
 diversification
The Ansoff Matrix
There are some cases in which an
organisation may withdraw from a
particular market. These might include:
 De-cluttering
 Contracting out
 Raising Money
 Legal Compliance
 Competition
 Market decline / economic prospects
 Liquidation
 Privatisation
Consolidation implies a period of
concentrating an organisation's efforts on
existing products and existing markets.
 It may result from a period of rapid change to
enable an organisation to settle down
 or may result from a lack of resources to pursue a
more active policy.
Market Penetration
Market penetration involves increasing
market share and is an important aim of
generic strategies previously discussed.
 In the short term market penetration may be won
by reducing margins and prices.
 Sustainable market penetration can only be
achieved by price-based strategies that are
coupled with cost reductions, or by differentiation
or hybrid strategies.
 The exception to this is if a price war is successful
in forcing a weaker competitor out of business.
Market Development
Market development generally involves an
attempt to take the existing product range into
new market areas which can include new
geographical areas and new market
It may be that some product development is
required to adapt the product range to the
new market areas.
Product Development
Product development encompasses the
development of existing products and the
development of completely new products.
Diversification involves an organisation
moving into completely new products and
markets which are unrelated to its present
The motives for this may be
 to take advantage of a new growing market particularly if an existing product has a static or
declining market
 to allow an organisation to spread its risks.
 economies of scope
Methods: Growth
This section examines the main methods by
which a particular strategy may be developed
which include:
 internal growth
 mergers and take-overs
 joint ventures and alliances
Internal Growth
Internal growth means that markets and
products are developed without recourse to
mergers with other organisations. This route
may be chosen because:
 owners and managers wish to retain control of an
 organic growth is less disruptive and can be more
readily accommodated
 finance may be limited
 there may be no suitable targets for mergers
 problems of cultural fit between merging
organisations can be avoided.
Mergers and Takeovers
Whilst mergers represent voluntary
integration between organisations, take-overs
may occur without the consent of the target
company. Integration can be divided into
three main types:
 horizontal integration
 vertical integration, and
 diversification or conglomerate integration
Horizontal Integration
Horizontal integration occurs between firms
operating at the same stage of production in
the same industry.
Motives for horizontal integration can include,
 market development
 market penetration
 economies of scale and rationalisation
 a short cut to product development reducing
TUI Travel profits surge
on merger benefits
 TRAVELMOLE 27 November, 2008
 Europe's biggest travel firm TUI Travel saw full year
pre-tax profits rise by 43 per cent.
 The group, created last year from the tie-up between
TUI AG's travel division and First Choice, made a
pre-tax profit for the year to Sept 30 of £319.7
million, compared with a proforma figure of £222.8
million the year before.
 The increase came as the Thomson parent group
benefited from a strong performance in the UK and
merger synergies.
 Synergy savings are now expected to rise by £25
million to £175 million.
Vertical Integration
Vertical integration occurs where two
organisations at different stages of production
in the same industry merge.
 Market penetration has been an important motive
for forward (towards the consumer) vertical
integration in the package tour industry.
 Product development is another important motive
for vertical integration.
The Thomas Cook Group
In 2010 the Thomas Cook Group
demonstrated strong vertical integration
through its ownership of a fleet of 93 aircraft,
a network of over 3,400 owned and
franchised travel stores and interests in 86
hotels and resort properties.
Problems with mergers
Some of the potential problems of mergers
can also be noted.
 First there is the potential problem of lack of fit in
terms of products, or processes ( information
technology system incompatibility can be a
problem here), or the culture of merging
 Secondly diseconomies of scale may arise.
 Finally there is monopolies and mergers and antitrust legislation.
Case Study: TUI / First
Choice Merger 2007
 Below is the link to the prospectus for the TUI /
First Choice merger
 What are the key benefits of the merger?
 To what extent have the possible risk
factors identified emerged as significant
Joint Ventures and Alliances
This method of strategic development
represents a desire for the benefits of
collaboration without complete merging of
ownership and resources. It can take the
following forms:
 franchising and licensing
 joint ventures
 alliances
Franchising and licensing
 This can be appropriate when a successful product
would benefit from rapid market development but funds
for expansion are insufficient to cope with the product's
development potential.
 The IHG case study in unit 6 referred to franchising as
a key driver of growth to the group with over 3,700
franchised hotels operating under IHG brands .
 The owner of a successful brand undertakes
marketing, and is responsible for ensuring quality
control, but outlets are franchised out in return for an
initial fee and royalties.
 Thus the product can be expanded quickly as new
capital is available and the brand owner can extend
profits, whilst the franchise holder enjoys the marketing
benefits of a well-known brand.
Joint Ventures
Joint ventures have typified tourism
developments with governments of the exSoviet bloc of countries, and the governments
of China and Cuba. Experienced companies
provide expertise and finance with land and
some labour being supplied locally.
 Strategic alliances are a way of capturing some of the benefits
of globalization, that is producing and marketing a product to a
world-wide market. Alliances can therefore help to win global
coverage for marketing a product and use the expertise that
alliance partners have developed in different parts of the world.
They can also reduce competitive pressures as former rivals
seek to co-operate. Research and development costs may be
 Alliances may take many forms from partial share holdings,
collaboration on specific projects to loose networks for
marketing. They avoid the problems of full mergers such as
expense and re-organisation. They are easier to withdraw from
and are more flexible in that they can be used to focus on
particular aspects of an organisations strategy.
 Key airline alliances: Star Alliance, One World, Sky Team
Star Alliance
Which is the odd one out?
 Air New Zealand is not a
member of the one
world alliance
Methods: Innovation
Innovation is a key method to achieve costs
reductions or differentiation.
Hall & Williams (2008) identify a number of
key drivers of tourism innovation that include:
 competition and protection
 knowledge and creativity
 innovation policies
 firm-led strategies
 entrepreneurship
Review of Key Terms 1
 Strategic Directions: How an entity should develop its products
and services as well as the markets
 Consolidation: Concentrating an organisation's efforts on
existing products and existing markets.
 Market penetration: Increasing market share in exiting markets
using existing products or services.
 Market development: Taking an existing product range into
new market areas.
 Product development: The development of existing products
and the development of completely new products for existing
 Diversification: Moving into completely new products and
markets which are unrelated to an entity’s present portfolio.
 Withdrawal: Removal of product or service or pulling out from a
Review of Key Terms 2
 Strategic methods: How a strategy may be developed by
growth, development, innovation and entrepreneurship.
 Internal growth: Development of markets and products without
recourse to mergers with other organisations.
 Merger: Integration between organisations.
 Horizontal integration: Merger between firms operating at the
same stage of production in the same industry.
 Vertical integration: Where two organisations at different
stages of production in the same industry merge.
 Diversification: Taking over a firm in a different line of business.
 Franchise: New owners and businesses are recruited to
replicate a successful business model.
 Joint venture: Where two or more parties agree to cooperate in
business activities.
 Strategic Alliance: An agreement between two or more parties
to co-operate on some aspects of mutual interest while
remaining independent organizations.
 Innovation: Bringing newness or positive change to products,
processes, thinking, or organizations.
Discussion Questions
1. Examine the advantages and disadvantages to producers and
consumers of the strong vertical integration that is evident in the
package holiday industry.
2. Locate two recent examples of horizontal integration in the tourism
industry and critically evaluate the success of each.
3. Discuss the relative merits of mergers versus alliances for airlines.
4. With reference to a tourism organisation of your choice explain
which of the following methods would be most appropriate for a
programme of international expansion:
• internal growth
• mergers
• franchising
• joint ventures
• alliances
5. How can successful innovation be encouraged on tourism
destinations or business organisations?
Case Study: InterContinental
InterContinental Hotels
The following site includes some data on
InterContinental Hotels’ strategy for growth
through franchising and managing:
Strategy for Tourism
Unit 8
Directions and
The End