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Strategy for Tourism
Unit 9
Evaluation of
Strategies
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Reading
Book Ch
Tribe, J, (2010) Strategy for Tourism, Goodfellow
Publishers, Oxford.
9
Capon, C. (2008) Understanding StrategicManagement, 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
Hempstead.
10
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Learning Outcomes
After studying this unit and related materials you
should be able to understand:
suitability analysis
acceptability analysis
feasibility analysis
ranking
and critically evaluate, explain and apply the above
concepts.
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Case Study 9: The merger of
TUI Tourism and First Choiceto form TUI Travel In 2007 the boards of TUI AG and First Choice
recommended a merger between TUI Tourism and
First Choice to form the 12 billion travel group TUI
Travel plc.
The benefits of the merger include:
offering a comprehensive range of travel products
increasing its share of controlled distribution
developing the brand portfolio
improving yield management
maintaining an efficient and flexible business model
making quality acquisitions
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TUI Logo
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Evaluation Framework
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Suitability
Suitability analysis aims to test whether a
strategy fits the situation facing a tourism
organisation or destination as identified by
strategic analysis. Therefore suitability can beinitially divided into
environmental
resource fit, and
cultural fit
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Environmental Fit
The key questions relating to a strategy's fit with
external environmental factors are whether the
strategy exploits opportunities and whether it
effectively counters threats. Therefore strategic
options need to be evaluated against the factorswhich emerged from the C-PEST analysis.
The Competitive Environment
The Political Environment
The Economic Environment The Socio-Cultural Environment
The Technological Environment
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Resource Fit
Consideration of strategies in terms of an
organisation's internal strengths and
weaknesses enables the degree of resource
fit to be evaluated. This fit between strategyand reality can be analysed using
resource audit
portfolio analysis
product life cycle analysis, and
value chain analysis
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Suitability
The General Electric Business Screen (Hofer
and Schendel, 1970) can also be a useful
tool in assessing the suitability of a strategy.
It analyses current and future products interms of
the organisation's competitive position (strong /
weak), and
industry attractiveness (high / low)
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General Electric Business
Screen
Key:
TUI tourism (TT)
First Choice (FC)
TUI Airline Management (TAM)
Combined group (CG)
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Cultural fit
Cultural fit considers how well a proposed
strategy can be accommodated by an
organisation.
Lack of cultural fit of a proposed strategyshould not necessarily rule it out. It may be
that an organisation's existing culture is in
need of change.
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Acceptability
Acceptability scrutinises strategic options in
terms of whether organisational objectives
are fulfilled and thus investigates factors such
asprofitability (in the private sector)
social profitability (in the public sector)
risk, and
stakeholder satisfaction
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Profitabilty
Since profit is a key element of the mission of
most private sector organisations, profitability
will be one of the most important ways of
assessing the merits of a strategic option.Strategies with highest projected profitability
will tend to be favoured.
The main tests for profitability include
return on capital employed
and payback period.
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Social Profitability 1
Profitability analysis only includes expenditures and revenueswhich are internal to an organisation (i.e. directly received orpaid). Such a narrow view of profitability (i.e. privateprofitability), whilst appropriate to many private sectororganisations, is not appropriate to the public sector, or forexample, for evaluation of strategies of tourism destinations. In
such cases social profitability will be a more useful indicator ofacceptability
The technique used to determine social profitability is costbenefit analysis.
Social profitability attempts to measure the total costs andbenefits of a strategic option beyond those that just affect the
organisation sponsoring the project. These external costs andbenefits are not visible in an organisation's profit and lossaccount but may have strong impacts on the wider communityaffected by an organisation's activities.
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Social Profitability 2
Thus an acceptable project in terms of privateprofitability would be one where Bp - Cp is maximised,
whilst an acceptable project in terms of social
profitability would be one where (Bp + Bs) - (Cp + Cs) is maximised,
where, = the sum of
Bp = private (internal) benefits
Bs = social (external) benefits
Cp = private (internal) costs
Cs = social (external) costs
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Risk
The pursuance of a newstrategy inevitablyexposes an organisationto some risk, and an
evaluation of the riskfactors will help todetermine theacceptability of aparticular strategy.
In particular the risk of astrategy may beevaluated in terms of financial risk and
sensitivity.
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Financial Risk
The financial risk inherent in a strategy willdepend upon the capital cost of the project in comparison to the
current capitalisation and turnover of an
organisation.
It is also important to consider the sources of funds to finance the project
its effects on the organisation's overall liquidityposition
and the likely period of negative cash flow beforea project breaks even.
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Sensitivity Analysis
Taylor and Sparkes (1977) discuss the importance ofsensitivity analysis in strategic evaluation. Sensitivityanalysis considers how sensitive a project is tochanges in the assumptions that underlie profitabilityforecasts.
Important factors to consider may include how thefollowing affect profitability: changes in sales
changes in prices
changes in interest rates
changes in costs changes in exchange rates
A number of different scenarios may be consideredand computer simulations can plot the predictedeffects of changes revealed in these scenarios.
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Risk Factors associated with
the TUI Tourism / First
Choice merger Concerns over the environmental impact of airline travel Competition could lead to reduced prices or a loss of
customers
Political instability, terrorism or natural disasters
Fluctuations in exchange rates
Fuel costs
Changes to regulations
Loss of key personnel
Industrial relations
Inability to develop information technology
Liabilities in connection with under-funded pension schemes
Failure to satisfy conditions to completion of the merger
Inability to achieve the anticipated synergies and cost savings
Fall in the price of TUI Travel Shares.
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Stakeholder Satisfaction
Stakeholder analysis enables the key stakeholderswho will be affected by a particular strategy to beidentified.
Once again, those stakeholders with high power /interest will be the key players to whom stakeholder
satisfaction analysis needs to be primarilyaddressed.
Typical stakeholders that need to be consideredinclude: shareholders (how will share prices / dividends be
affected?) bankers (will the strategy affect credit worthiness?)
unions (what impact will the strategy have on employment?)
government (will the strategy infringe monopoly laws?)
local people (how will local environment be affected?)
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Feasibility
Feasibility seeks to test whether a strategy
can be realistically achieved, and asks
whether an organisation already possesses
or has access to the necessary resources. Ittherefore subjects strategic options to
scrutiny in terms of:
funding
human resourcing, and
timing / logistics
competitive reaction
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Funding
Whilst profitability analysis tests whether a
strategy yields an acceptable rate of return,
funding analysis seeks to ascertain whether
an organisation can actually finance aparticular strategy.
Strategies will generally be funded from:
retained profits
disposals
loans
new share capital
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Human Resourcing
The feasibility of a strategy may also be reviewed interms of the skills of an organisation's workforce. Anaudit can be useful in determining whether the skillsnecessary for the success of a particular strategy areavailable or accessible. Such audits need to consider
several dimensions. are skills available in the relevant functional area - e.g.
marketing, operations management, financial management,purchasing.
it may be important to have personnel with knowledge of aparticular market e.g. hotels, airlines, theme parks, or
geographical area. the dynamics of a team assigned to a particular strategy are
important. Here considerations include skills in projectmanagement as well as a range of team attributes. Forexample is project team balanced in terms of innovators,team workers, finishers, and sceptics?
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Timing / Logistics
Timing and logistics are crucial to some
projects, and timing has a knock on effect on
profitability. Therefore consideration needs to
be given to the feasibility of a project'sestimated scheduling.
Here break even analysis can be a useful
device.
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Competitive reaction
Competitivereaction is an
important
consideration for
the feasibility ofany new strategy.
Competitor
reaction is likely to
be fierce whenthere is a high
degree of
competitive rivalry
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Choosing between Options
Evaluation of options may generate a series of mixedresults with each strategic option having a conflictinglist of good and bad points. Such a situation requiresprioritisation of evaluation criteria.
This may involve
listing some objectives that must be achieved (e.g.minimum ROCE)
and some effects that must be avoided (e.g. loss ofownership and overall control of the organisation).
These may be classed as essential criteria.
It is then possible to attach weightings to other criteria to
reflect their relative importance. Thus an initial screening of options can rule out
those which fail the essential tests, and options maythen be ranked according to their performanceagainst the other, weighted criteria.
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Review of Key Terms
Suitability analysis: Tests whether a strategy fits the
situation facing a tourism organisation Teats of suitability: Environmental fit, resource fit and
cultural fit
Acceptability analysis: Scrutinises strategic options interms of whether organisational objectives are fulfilled.
Test of acceptability: Profitability (in the private sector),social profitability (in the public sector), risk andstakeholder satisfaction.
Feasibility: Test whether a strategy can be realisticallyachieved
Tests of feasibility: funding, human resourcing andtiming / logistics
Screening of options: Ruling out options according tospecific criteria
Ranking: Putting strategic options in order ofpreference
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Discussion Questions
1. What is meant by cultural fit? Which factors suggesta good cultural fit, and which suggest a poor one,between TUI Tourism and First Choice?
2. Under what circumstances will cost benefit analysis
rather than profitability be used to determine theacceptability of a strategy?
3. What factors would make a strategy a high risk one?
4. Evaluate a recent or proposed merger or take-over
between tourism organisations.5. What is sensitivity analysis? What variables wouldthe merger between TUI Tourism and First Choicebe sensitive to and with what effects?
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Strategy for Tourism
Unit 9
Evaluation of
Strategies The End