Unit 8 Strategic Directions and Methods

1. Unit 8 Strategic Directions and Methods

2. Reading

4. 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 entrepreneurship. and critically evaluate, explain and apply the above concepts. Learning Outcomes

5. Merlin Entertainment is an international attractions based organisation 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. Case Study 8: Merlin Entertainment

6. The Merlin Entertainments London Eye

7. 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 Directions

8. The Ansoff Matrix

9. 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 Withdrawal

10. 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. Consolidation

11. 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 Penetration

12. 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 segments. It may be that some product development is required to adapt the product range to the new market areas. Market Development

13. Product development encompasses the development of existing products and the development of completely new products. Product Development

14. Diversification involves an organisation moving into completely new products and markets which are unrelated to its present portfolio. 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 Diversification

15. 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 Methods: Growth

16. 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 organisation 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. Internal Growth

17. 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 Mergers and Takeovers

18. 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 competition Horizontal Integration

19. 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. TUI Travel profits surge on merger benefits

20. 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. Vertical Integration

21. 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. The Thomas Cook Group

22. 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 organisations. Secondly diseconomies of scale may arise. Finally there is monopolies and mergers and anti-trust legislation. Problems with mergers

23. Below is the link to the prospectus for the TUI / First Choice merger http://www.tuitravelplc.com/tuitravel/uploads/mediapress/070629TUITravelPLCprospectusFINAL.pdf What are the key benefits of the merger? To what extent have the possible risk factors identified emerged as significant problems? Case Study: TUI / First Choice Merger 2007

24. 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 Joint Ventures and Alliances

25. 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. Franchising and licensing

26. Joint ventures have typified tourism developments with governments of the ex-Soviet bloc of countries, and the governments of China and Cuba. Experienced companies provide expertise and finance with land and some labour being supplied locally. Joint Ventures

27. 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 shared. 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 Alliances

28. Star Alliance

29. Which is the odd one out?

30. Answer • Air New Zealand is not a member of the one world alliance

31. 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 Methods: Innovation

32. 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 markets. 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 market. Review of Key Terms 1

33. 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. Review of Key Terms 2

34. 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? Discussion Questions

35. Case Study: InterContinental Hotels

36. The following site includes some data on InterContinental Hotels’ strategy for growth through franchising and managing: http://www.ihgplc.com/files/presentations/061005/061005_growing.pdf InterContinental Hotels

37. Unit 8 Strategic Directions and Methods The End