Business Strategy of TUI

1. Critically evaluate your TUIs business level generic strategies. 2. Describe and rationalize, in the light of the environmental context, a range of strategic options available to TUI explaining appropriate directions and methods associated with each 3. Critically evaluate one of the strategic options identified in 2 above clearly showing its suitability, feasibility and acceptability for TUI

4. Identify and briefly explain the main issues which would impact on implementation
of the strategic option from 3 above
NOTE: SEE APPENDICES FOR DETAILED ANALYSIS

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TABLE OF CONTENTS

1. 2.

INTRODUCTION------------------------------------------------------------------------------------STRATEGIC ANALYSIS ----------------------------------------------------------------------------2.1 2.2 2.3 2.4 TUI BUSINESS LEVEL GENERIC STRATEGIES --------------------------------------INDUSTRY ANALYSIS -------------------------------------------------------------------BUSINESS LEVEL ENVIRONMENTAL ANALYSIS -----------------------------------SUMMARY OF STRATEGIC ISSUES ---------------------------------------------------

02 02 02 03 04 05 05 05 06 06 07 08

3.

STRATEGIC EVALUATION -----------------------------------------------------------------------3.1 3.2 STRATEGY FORMULATION -----------------------------------------------------------ANALYSIS OF STRATEGIC OPTIONS --------------------------------------------------

4. 5.

STRATEGY IMPLEMENTATION ----------------------------------------------------------------CONCLUSION ---------------------------------------------------------------------------------------REFERENCES -----------------------------------------------------------------------------------------

APPENDIX A: FIGURE 1 TUI BUSINESS MODEL ------------------------------------------------------------FIGURE 2 COMPARISON BETWEEN THOMAS COOK AND TUI FINANCE FIGURES APPENDIX B: TABLE 1 PORTERS FIVE FORCES ANALYSIS OF TUI -------------------------------------TABLE 2 PESTEL ANALYSIS OF TUI TRAVEL PLC ------------------------------------------TABLE 3 SWOT ANALYSIS OF TUI TRAVEL PLC -------------------------------------------TABLE 4 KEY STRATEGIC ISSUES WITH TUI -----------------------------------------------TABLE 5 TOW MATRIX OF TUI ---------------------------------------------------------------TABLE 6 ANSOFF MATRIX FOR COMPARISON OF STRATEGIC OPTIONS -----------TABLE 7 FEASIBILITY, ACCEPTABILITY, AND SUITABILITY OF STRATEGIC OPTIONS TABLE 8 MAIN ISSUES IN IMPLEMENTING BROADER SERVICE OPTION -----------12 13 14 15 16 17 18 19 10 11

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1. INTRODUCTION

Tour operators and travel agencies represent a large part of the tourism industry and they also play a significant role within the service sector. TUI Travel PLC is one of the Worlds leading travel companies which was established in 2007 with the merger of two companies: Tourism Division of TUI AG and First Choice Holidays. Currently, TUI is running its operations in more than 180 countries with 30 million customers in 27 source markets (TUI, 2012). In addition, TUI has nearly 53,000 employees and its headquarter is located in the United Kingdom. The company is listed in London Stock Exchange with over 200 brands related to the travel and tourism business (TUI, 2012). Figure 1 in appendix A is showing the business model of TUI. The purpose of this report is threefold and accordingly the report has been divided into three sections. In the first section, Porters generic strategic analysis will be conducted to critically evaluate the business level strategies of TUI. The second section will be based on to describe and rationalise, in the light of the environmental context, a range of strategic options available to TUI. TOW matrix and SWOT analysis will be used to identify strategic options and ANSOFF matrix will be used to critically evaluate these options. The selected options then will be critically evaluated on the basis of their feasibility, acceptability, and suitability. The third section of the report will be consisted of identifying and briefly explaining the main issues which would impact on implementation of the selected strategies.
2. STRATEGIC ANALYSIS 2.1 TUI BUSINESS LEVEL GENERIC STRATEGIES

Porters generic strategies framework has great significance in critically evaluating any company on the basis of cost leadership, differentiation, and focus (Lynch, 2003; Johnson et al, 2008). From the past decade, TUI is struggling to gain competitive advantage in terms of cost leadership but due to the major focus on product diversification, company is making low profits over the years (Page and Connell, 2006). In a quick comparison of TUI with Thomas Cook, it is evident in figure 2 (see appendix A) that Thomas Cook is

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performing very well in terms key finance figures. Therefore, it can be said that TUI is not competing with the rivals in terms of cost leadership. Basically, TUI adopts a differentiation strategy by adding numbers of products in its portfolio that customers need on their holidays. TUI set particular targets in each area to improve the level of differentiation by continuously reviewing the product/service contents. One of the differentiation strategies where TUI has competitive advantage over the rivals is mainstream sector which is the largest in the group on the basis of its scale and scope. In this regards, TUI is offering Sensatori (suitable to couples) and First Choice Holiday Villages (suitable to families) in the UK (TUI mainstream, 2012). In comparison with Thomas Cook and other opponents, TUI obtains high margins due to products offered in portfolio because customers can make earlier bookings online that release the late market pressures (Goodway, 2012). In addition, high customer service quality, accommodation, transportation, travel insurance, and low-cost offers are stimulating
the demand of TUI products Worldwide.

According to the new differentiation policy, TUI is focusing on new markets where there is least amount of competition such as Asian markets including Russia and Ukraine (TUI Group, 2012). In addition, TUI Travel has reinforced its market position by establishing strategic collaboration with SunWing in Canada (TUI mainstream, 2012). In order to take competitive advantage over Thomas Cook and other competitors in the tourism industry, TUI has placed the order of Boeing 787 Dreamliner in mid 2010 which is expected to be delivered soon (Wilson, 2010).
2.2 INDUSTRY ANALYSIS Porters five forces framework can be used to conduct industry analysis of the travel sector of the UK which is primarily based on five forces: threat of new entrants, threat of substitutes, bargaining power of suppliers, bargaining power of customers, and rivalry among competitors (Mintzberg et al, 1999; Johnson et al., 2008). The application of Porters five forces framework on TUI will help to decide how TUI deals with threats and take advantage from the opportunities in the external environment. TUI currently has 155 aircrafts (Tender, 2011) and the new entrance of no-frill and low cost airlines can adversely affect the operations of its business. In addition, the weak profitability
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of TUI (Garside, 2012) may hinder the organisation to compete with new entrants. The threat of new entrants has middle level importance on the ordinary scale. Presently, TUI has competitive edge over other companies (i.e. Thomas Cook and Airtours) in the industry on the basis of low-cost, flexible offers, and largest distributors of global accommodation (TUI annual report, 2011, p. 5). Therefore, it can be said that the threat of substitutes is low as 2 to 5 on the scale. The impact of bargaining power of suppliers is high due to some major issues like increased fuel prices, dependence on third party services and facility providers, and rise in the prices of raw materials due to Worlds financial crisis (TUI regulatory news, 2011). In addition, the impact of bargaining power of customers is also high in terms of low-cost as customers often go for low price and better offers. In addition, TUI should ensure compliance with regulations from Civil Aviation Authority (CAA) and other regulatory institutions that protect the rights of the customers (Civil Aviation Authority, 2011). Finally, Thomas Cook and Airtours are the major rivals of TUI at this moment but they both are tour operators and only sell scheduled seats with low prices. On the other hand, Ryanair is also the main competitor of TUI on the basis of low fares and has shown continuous improvement in its services in last few years. Other emerging competitors are Virgin Express, Air Berlin, BMIbaby, and Buzz. TUI has competitive advantage over opponents due to its quality service, accommodation, transportation, travel insurance, low-cost offers, and product portfolio (TUI annual report, 2011). The summary of the Porters five forces framework is presented in table 1 (see appendix B). 2.3 BUSINESS LEVEL ENVIRONMENTAL ANALYSIS

According to Johnson et al (2008), PESTEL and SWOT analysis are important to examine any companys business level environment. The full PESTEL analysis has been conducted of TUI and presented in table 2 in appendix B. However, the major findings from the analysis are that few external factors are adversely affecting the profitability of the firm where UK tax system, increased fuel costs, exchange rates, economic crisis, health and safety concerns, and changing needs and demands of the customers are prominent factors.

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Similarly, SWOT analysis of TUI was conducted to analyse companys internal strengths and weaknesses as well as to identify potential opportunities and threats in the external environment. It was found that increased fuel costs, online competition with low-cost airlines, existing and emerging competitors, and focus on product diversification are the major impacts that are affecting the firms profitability. The full SWOT analysis is presented in table 3 in appendix B.
2.4 SUMMARY OF STRATEGIC ISSUES

There is no doubt that TUI is market leader in the tourism industry at this moment but on the basis of business level strategic analysis in environmental context, it can be said that TUI may face numbers of strategic issues in the near future. The summary of key findings of the strategic issues along with their major impacts is presented in table 4 (see appendix B).
3. STRATEGIC EVALUATION 3.1 STRATEGY FORMULATION

It is clearly evident from table 4 that key strategic issues are directly affecting the profitability of TIU. In this section of the paper, the attempt will be made to formulate and recommend a suitable strategy (or strategies) to TUI to overcome the weak profitability problem. According to Koontz and Weihrich (2006) and Johnson et al (2008), TOW matrix is a conceptual framework that helps the organisation to formulate an appropriate strategy by analysing its internal strengths and weaknesses and external opportunities and threats. In table 5 (appendix B), TOW matrix is identifying range of strategic options available to TUI in order to overcome key strategies issues. Stone (2011) stated that ANSOFF matrix helps the organisations to decide their products and market growth strategies on the basis of four growth strategies such as market penetration, market development, product development, and diversification. There are total 11 strategic options have been identified in table 5 for TUI to overcome the weaknesses and defending the upcoming threats. Many of these strategic options are already implemented by TUI such as differentiation strategy (see section 2.2.2), vertical integration, product line expansion, improving environmental stance, improve
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people/processes/technology and introducing complementary services (see SWOT analysis in table 3, appendix B). Therefore, these strategic options will be considered as low priority in the ANSOFF matrix during preliminary comparison of strategic options. Table 6 in appendix B is showing a comparison of identified strategies using ANSOFF matrix.
3.2 ANALYSIS OF STRATEGIC OPTIONS

After the comparison of the strategic options available to TUI as shown in table 6, it was found that two strategic options are imperative for the company in terms of increasing its profitability. These options are (1) decrease the business operations cost by employing appropriate cost control and cost estimation techniques such as Activity Based Costing, and (2) broader service offerings in emerging markets like India and China. The selected strategies for TUI to improve profitability can be critically reviewed in terms of Feasibility, Acceptability, and Suitability (FAS) framework suggested by Johnson et al (2008). It is revealed in table 7 (appendix B) that both strategic options are feasible for TUI because the company has the financial and other resources available to implement these options but in case of entering in emerging markets, TUI may need heavy investments in the beginning. Also, both strategic options are acceptable to the stakeholders because they will have direct impact on the profitability of the firm. In terms of suitability, the overall rationale of both strategic options is in the favour of the company because they will help TUI to retain its market position.
4. STRATEGY IMPLEMENTATION

It is evident from the strategic analysis that TUI is a successful organisation in terms of its strategy implementation and currently running its operations in 180 countries successfully, but establishing a tourism base or arranging tourism activities in other countries, which are different in many aspects such as culture, living standard, religion, and language, is not easy. In this section of the report, the attempt has been made to identify and briefly explain the main issues which would impact on the implementation of the strategic options. Table 8 in appendix B is showing the key issues that may hinder the
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successful implementation of broader service offerings in Asian countries especially in India and China where people are different in terms of culture, language, religion, and income level.
5. CONCLUSION

The report was based on the critical evaluation of TUI business level generic strategies and found that TUI has a competitive advantage over its competitors in terms of its focus and differentiation strategies but on the other hand, the company is way behind from its key competitor Thomas Cook in term of cost leadership (see section 2.2.1). Furthermore, TUI was evaluated critically in the light of the environmental context to discover at what extent the company is strategically fit and concluded that TUI is facing weak profitability problem over the years. To overcome this problem, a range of strategic options were identified using TOW matrix and selected two most critical options available to company (see table 5 and table 6 in appendix B). These options were than critically evaluated by showing their feasibility, acceptability, and suitability for the company (see table 7 in appendix B). It is recommended to TUI to implement cost control and cost estimation methods preferably Activity Based costing and also to expand its service offerings to emerging markets such as India and China. The research is mainly based on secondary information and there was no primary method was taken into consideration to complete this research. In addition, due to the restricted access to the companys information, the scope of this study is limited but it is believed that if TUI will follow the general directions mentioned in this paper than the company will be successful in retaining its leadership position in the tourism industry.

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REFERENCES 1. Civil Aviation Authority, (2011). CAA steps in to protect holidays 4 U customers, 03 August, 2011, [online]. Available from: http://www.caa.co.uk/application.aspx?catid=27&pagetype=65&appid=9&mode=deta il&nid=2020 [Accessed: 08 May 2012] 2. Dun, (2010). Equity research and valuation. Tata McGraw-Hill Education 3. Garside, J., (2012). TUI losses grow after weak winter holiday sales, The Guardian, 8 May 2012 4. Goodway, N., (2012). TUI finds chill spring winds blowing in more bookings, The Independent, 09 May 2012 5. Johnson, G., Scholes, K. and Whittington, R. (2008). Exploring Corporate Strategy, 8th edition, Prentice Hall 6. Koontz, H. and Weihrich, H., (2006). Essentials of management. 7th edition, Tata McGraw-Hill Education 7. Lynch, R., (2003). Corporate strategy, 3rd edition, London: Financial Times / Prentice Hall 8. Mintzberg. H., Quinn, J. B., and Ghoshal, S. (1999). The strategy process, Pearson Education 9. Page, S. and Connell, J., (2006). Tourism: A modern synthesis, 2nd edition, Cengage Learning EMEA 10. Stone, P., (2001). Make marketing work for you: boost your profits with proven marketing techniques, How to Books Ltd 11. Tender, M., (2011). Modern aircraft on long-term lease to TUI Travel, AWAS media release, 21 October 2011 12. Thomson, and Martin, F., (2010). Strategic management, 6th edition, Cengage Learning

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13. TUI Annual Report, (2011). Annual Report & Accounts for the year ended 30 September 2011, [online]. Available from: http://ara2011.tuitravelplc.com/uploads/annualreport/TUI_ara11.pdf [Accessed: 08 May 2012] 14. TUI Annual Report, (2008). Annual Report & Accounts for the year ended 30 September 2008, [online]. Available from: www.analist.nl/reports/TUI-2008.pdf [Accessed: 08 May 2012] 15. TUI Group, (2012). New markets, [online]. Available from: http://www.tuigroup.com/en/innovation/new_markets [Accessed: 08 May 2012] 16. TUI Regulatory news, (2011). Annual report and notice of 2011 annual general meeting, [online]. Available from: http://www.tuitravelplc.com/regulatorynews_item.jsp?ric=TT.L.TK&ref=50921&n= &s=&t= [Accessed: 08 May 2012] 17. TUI mainstream, (2012). Mainstream, [online]. Available from: http://www.tuitravelplc.com/about-us/our-business/mainstream [Accessed: 08 May 2012]

18. TUI Travel, (2012). Welcome to TUI Travel PLC, [online]. Available from: http://www.tuitravelplc.com/ [Accessed: 07 May 2012] 19. Wang, K., (2011). People, Process, and Technology management framework, Createspace 20. Wilson, A., (2010). TUI aims to take Dreamliner 787s early to gain long-haul advantage, The Telegraph, 20 July 2010

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APPENDIX A
Figure 1 TUI Business Model

Source: http://www.tuitravelplc.com/tmpl/a/g/business_model.png 10 | P a g e

Figure 2 Comparison between Thomas Cook and TUI finance figures

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APPENDIX B
Table 1 Porters Five Forces analysis of TUI FORCE Threat of new entrance No-frill or low-cost airlines Low profitability of TUI Threat of substitutes Short and long haul flights Relative price and performance of substitutes The cost of switching to substitutes is not very high Competitive edge due to low-cost, flexible offers, mainstream, and largest distributors of global accommodation Bargaining power of suppliers Increased fuel prices Dependence on third party service and facility providers Rise in the prices of raw materials Worlds financial crisis High switching costs Bargaining power of customers Low switching costs Customers often go substitutes in terms of low price and better offers Protection of rights of the customers by Civil Aviation Authority (CAA) Competitive rivalry between competitors Major competitors are Thomas Cook, Air Tours, Ryanair Emerging competitors are Virgin Express, Air Berlin, BMIbaby, and Buzz Degree of differentiation on the basis of quality service, accommodation, transportation, travel insurance, and low-cost offers IMPORTANCE MIDDLE SCALE 3 to 5

LOW

2 to 5

HIGH

4 to 5

HIGH

4 to 5

LOW

2 to 5

Source: Mintzberg (1999) and Johnson et al (2008) 12 | P a g e

Table 2 PESTEL analysis of TUI Travel PLC FACTOR o o o o o o o o o o o o o o o o o o o o o o o o o KEY FINDINGS UK Tax system and policies Insecurity due to Terrorist attacks Civil Aviation Authority (CAA) regulations to protect customers rights Package Travel Regulation act 1992 (www.legislation.gov.uk) Increasing fuel costs Exchange rates Globalisation The impact of UNWTOs tourism 2020 vision (http://www.unwto.org/facts/eng/vision.htm) The impact of global economic crisis Increasing unemployment rate in Europe Changes in the consumer perception about brand and destinations Changing needs and demands of the customers Consumer perception about safety and environment Increased trend of tourism education Life style changes GPS (Global Position System) Computerised technology Internet, mobile, TV, Google Maps, Blogs, Health and safety concerns Issues of Carbon gas emission Natural disasters in past few decades Air flight rationing Immigration issue Trade laws Laws for acquisition, mergers, and joint ventures Source: Johnson et al (2008)

POLITICAL

ECONOMIC

SOCIAL

TECHNOLOGICAL

ENVIRONMENTAL

LEGAL

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Table 3 SWOT analysis of TUI Travel PLC STRENGTHS

FAVOURABLE

LOCATION

WEAKNESSES
UNFAVOURABLE

INTERNAL

o Strong market position (market leader in tourism industry) o Comprehensive services o Strong performance of key segments o High quality customer service o Unique media marketing methods (i.e. TUI song: Lets make people smile) o Utilization of multi distribution channels such as internet to boost up sales o Vertically integrated: operating in multi sectors such as airline, hotel, and travel agency o Geographical diversity o Specially in holiday expansion OPPORTUNITIES o Strategic alliance, acquisition, and mergers with other businesses such as American Express and First Business Travel o Expansion to emerging Asian markets such as India and China o Growing hotels, cruise, and resorts o Recovery from recession o Glasgow Commonwealth games 2014 o Increased trend of tourism education

o Weak profitability as compared to key competitor (i.e. Thomas Cook) o Dependence on European operations o Net loss of Euro142 million in 2008 (TUI annual report, 2008) o Greater decrease in holiday packages due to the impact of financial crisis 2008 o Lack of flexibility in the operations due to extensive fixed assets (34%) (TUI annual report, 2008) o Major focus on product diversification

THREATS o Environmental and safety issues o Exchange rates o Online competition with low-cost and no-frill airlines o Increased fuel costs o Weak economic outlook for Eurozone and unemployment o Competitors (i.e. Thomas Cook and Air Tours) with more flexible business models and strategies Source: Thomson and Martin (2010)

EXTERNAL

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Table 4 Key strategic issues with TUI ANALYTICAL TOOL Porters Five Forces Porters Generic Strategies o o o o o o o o o o o o o o KEY ISSUE Bargaining power of suppliers Bargaining power of customers Cost leadership due to primary focus on product diversification Increasing fuel costs Existing and emerging competitors Online competition with low-cost airlines Major focus on product diversification UK Tax system Increased fuel costs Exchange rate impact Economic global crisis Health and safety concerns Laws for acquisition, mergers, and joint ventures Changing needs, demands, and expectations of customers MAJOR IMPACT Weak profitability Weak profitability

SWOT analysis

Weak profitability

PESTEL analysis

Weak profitability

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Table 5 TOW matrix of TUI EXTERNAL External Factors

OPPORTUNITIES THREATS

Internal Factors

o Strategic alliance, acquisition, and mergers o Expansion to emerging markets such as India and China o Glasgow Commonwealth games 2014 SO Strategy: Maxi-Maxi

o o o o o o

Increasing fuel prices Online competition Low-cost and no-frills airlines Exchange rates Weak economic outlook Environmental threats ST Strategy: Maxi-Mini

INTERNAL

o o o o o o o o o o

High quality customer service Strong market position Unique media marketing methods Vertically integrated Online sales Geographical diversity Weak profitability Dependence on European operations Greater losses in the past Major focus on product diversification

STRENGTHS

1. 2. 3. 4. 5. 6.

Segment focus Broader service offerings Use differentiation strategy Vertical integration Expand product line Complementary services

1. Diversification to other transport market 2. Overhaul marketing plan

WEAKNESSES

WO Strategy: Mini-Maxi 1. Implement the improvement strategy such as People, Processes, and Technology (Wang, 2011)

WT Strategy: Mini-Mini

1. Improve environmental stance 2. Decrease cost of the operations using ActivityBased Costing model Source: Koontz and Weihrich (2006) and Johnson et al (2008)

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Table 6 ANSOFF Matrix for comparison of strategic options Priority in terms of PROFITABILITY
(High, Medium, Low)

GROWTH STRATEGY

STRATEGIC OPTION Improvement to People, Processes, and Technology Improve environmental stance

DESCRIPTION Already used Already used Targeting the business class customers Implement cost control and cost estimation model (i.e. Activity Based Costing) Already used Already used Already used Expansion of service offering to emerging markets like India & China Already used Diversify in other transport market such as rail and bus services Already used

ACCEPT FOR FURTHER CONSIDERATION? No No No Yes No No No Yes No No No

Low Low Medium High Low Low Low High Low Medium Low

1. Market penetration

Segment focus Decrease operation costs Differentiation strategy

2. Product development

Complementary services Expand product line Broader service offerings Overhaul marketing plan

3. Market development

4. Diversification

Diversification to other transport markets Vertical integration

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Table 7 Feasibility, Acceptability, and Suitability of strategic options Criteria Resources / outcomes Strategic option 1: Decrease operations costs The reduction in cost always has deep impacts on the profitability.TUI has greater resources (i.e. funding, time, people, and information) to implement cost control and estimation models such as Activity Based Costing because no extensive cost is required in implementing cost models Lowering the cost of the operations is acceptable for the stakeholders because it will have direct impact on the productivity and profitability of TUI TUI is having weak profitability position as compared to its major competitor Thomas Cook. Therefore, the strategy is suitable for TUI because it will stimulate the strategic position of the company in terms of financial figures Strategic option 2: Broader service offerings TUI is already operating in 180 countries so targeting the emerging markets like China and India to gain competitive advantage as well as to increase the profitability should not be the problem for the company Entering in new emerging markets will open new doors of opportunities for the company which will be significant contributions to the profitability of the firm The strategy is perfectly suitable for the TUI because none of the competitors is currently operating in India and China at this moment Support Strategy?

FEASIBILITY

Availability of resources

YES

ACCEPTABILITY

Potential strategic outcomes

YES

SUITABILITY Criteria FEASIBILITY

Overall rationale of strategy Resources / outcomes Availability of resources

YES Support Strategy? YES

ACCEPTABILITY SUITABILITY

Potential strategic outcomes Overall rationale of strategy

YES YES

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Table 8 Main issues in implementing broader service option ISSUES Management related issues o o o o o o o o o o o o o o o o o o DESCRIPTION People related issues Employee management issues Which segment to focus? Control over distribution channels Market dominance Laws and regulations Insecurity and health problems Lack of quality hotels, cruise, and resorts Difficulty in media marketing due to lack of internet awareness Language barriers Different needs and wants of the customers Organisational cultural issues Credit risk Debt management issues Resource and capability acquisition Low or no preference to brand Low incomes of the people Exchange rate differences

Operational issues

Cultural issues

Finance related issues Product related issues Price related issues

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