Unit 9 Evaluation of Strategies

Reading Book Ch Tribe, J, (2010) Strategy for Tourism, Goodfellow Publishers, Oxford. 9 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 Hempstead. 10

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.

Case Study 9: The merger of TUI Tourism and First Choice to 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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Evaluation Framework

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 be initially divided into environmental resource fit, and cultural fit

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 factors which emerged from the C-PEST analysis. The Competitive Environment The Political Environment The Economic Environment The Socio-Cultural Environment The Technological Environment

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 strategy and reality can be analysed using resource audit portfolio analysis product life cycle analysis, and value chain analysis

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 in terms of the organisation's competitive position (strong / weak), and industry attractiveness (high / low)

General Electric Business Screen Key: TUI tourism (TT) First Choice (FC) TUI Airline Management (TAM) Combined group (CG)

Cultural fit Cultural fit considers how well a proposed strategy can be accommodated by an organisation. Lack of cultural fit of a proposed strategy should not necessarily rule it out. It may be that an organisation's existing culture is in need of change.

Acceptability Acceptability scrutinises strategic options in terms of whether organisational objectives are fulfilled and thus investigates factors such as profitability (in the private sector) social profitability (in the public sector) risk, and stakeholder satisfaction

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.

Social Profitability 1 Profitability analysis only includes expenditures and revenues which are internal to an organisation (i.e. directly received or paid). Such a narrow view of profitability (i.e. private profitability), whilst appropriate to many private sector organisations, is not appropriate to the public sector, or for example, for evaluation of strategies of tourism destinations. In such cases social profitability will be a more useful indicator of acceptability The technique used to determine social profitability is cost benefit analysis. Social profitability attempts to measure the total costs and benefits of a strategic option beyond those that just affect the organisation sponsoring the project. These external costs and benefits are not visible in an organisation's profit and loss account but may have strong impacts on the wider community affected by an organisation's activities.

Social Profitability 2 Thus an acceptable project in terms of private profitability would be one where ΣBp - ΣCp is maximised, whilst an acceptable project in terms of social profitability would be one where Σ(Bp + Bs) - Σ(Cp + Cs) is maximised, where, Σ = the sum of Bp = private (internal) benefits Bs = social (external) benefits Cp = private (internal) costs Cs = social (external) costs

Risk The pursuance of a new strategy inevitably exposes an organisation to some risk, and an evaluation of the risk factors will help to determine the acceptability of a particular strategy. In particular the risk of a strategy may be evaluated in terms of financial risk and sensitivity.

Financial Risk The financial risk inherent in a strategy will depend 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 liquidity position and the likely period of negative cash flow before a project breaks even.

Sensitivity Analysis Taylor and Sparkes (1977) discuss the importance of sensitivity analysis in strategic evaluation. Sensitivity analysis considers how sensitive a project is to changes in the assumptions that underlie profitability forecasts. Important factors to consider may include how the following 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 considered and computer simulations can plot the predicted effects of changes revealed in these scenarios.

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.

Stakeholder Satisfaction Stakeholder analysis enables the key stakeholders who will be affected by a particular strategy to be identified. Once again, those stakeholders with high power / interest will be the key players to whom stakeholder satisfaction analysis needs to be primarily addressed. Typical stakeholders that need to be considered include: 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?)

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. It therefore subjects strategic options to scrutiny in terms of: funding human resourcing, and timing / logistics competitive reaction

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 a particular strategy. Strategies will generally be funded from: retained profits disposals loans new share capital

Human Resourcing The feasibility of a strategy may also be reviewed in terms of the skills of an organisation's workforce. An audit can be useful in determining whether the skills necessary for the success of a particular strategy are available 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 a particular 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 project management as well as a range of team attributes. For example is project team balanced in terms of innovators, team workers, finishers, and sceptics?

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's estimated scheduling. Here break even analysis can be a useful device.

Competitive reaction Competitive reaction is an important consideration for the feasibility of any new strategy. Competitor reaction is likely to be fierce when there is a high degree of competitive rivalry

Choosing between Options Evaluation of options may generate a series of mixed results with each strategic option having a conflicting list of good and bad points. Such a situation requires prioritisation 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 of ownership 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 may then be ranked according to their performance against the other, weighted criteria.

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 in terms of whether organisational objectives are fulfilled. Test of acceptability: Profitability (in the private sector), social profitability (in the public sector), risk and stakeholder satisfaction. Feasibility: Test whether a strategy can be realistically achieved Tests of feasibility: funding, human resourcing and timing / logistics Screening of options: Ruling out options according to specific criteria Ranking: Putting strategic options in order of preference

Discussion Questions 1. What is meant by cultural fit? Which factors suggest a 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 the acceptability 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 would the merger between TUI Tourism and First Choice be sensitive to and with what effects?

Unit 9 Evaluation of Strategies The End