fileCh9v2.ppt2

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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

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