Thomas Cook opts for a different generic strategy for success

Fans of Porter’s Generic Strategies (yes, that should include all A2 business students) should keep an eye out for an important strategic announcement from troubled tour operator Thomas Cook in the next few days. We’ll post an update to this blog when the details are made public.

Why is Porter relevant? Because Thomas Cook management look set to signal a shift away from the traditional strategy of cost leadership to one of differentiation, in an attempt to re-establish the competitiveness of their struggling business.

Thomas Cook hit the business headlines recently for all the wrong reasons. After yet another warning about rising losses, the business was forced to renegotiate its banking facilities again. The Thomas Cook share price has effectively collapsed leaving many shareholders nursing heavy losses and customers uncertain about the future viability of the business. In the travel industry, consumer confidence is key and I have my doubts about whether Thomas Cook will indeed survive in its current form.

I ought to declare an interest in the story. For a couple of years I was Director of Strategy for Thomas Cook’s principal competitor - Thomson Holidays (now TUI plc) and I spent much time analysing and evaluating the most appropriate strategy for a vertically-integrated tour operator like Thomas Cook and Thomson. Cost leadership has long been viewed as the most appropriate strategy for such a substantial travel business, since the business model fits the criteria that Porter identified for a strategy of cost leadership to be successful, namely:

High asset turnover - e.g. being able to operate airlines at high capacity utilisation and intensively on short-haul routes

Low operating costs - achieved by offering relatively standardised products with few options for customer personalisation (e.g. filling 3 star hotels in Spain and Greece with passengers from the same flight)

Control of the supply chain & high bargaining power over suppliers - a tour operator flying over 4-5 million people to short-haul destinations each summer certainly has some useful bargaining clout with suppliers such as small hotel chains!

However, the cost leadership model is now under severe strain. UK holidaymakers are more confident in their ability to organise foreign holidays independently; they demand much greater personalisation and many look for a more specialised holiday experience. There is no shortage of specialist tour operators who can meet this demand, and the increasing irrelevance of the high street travel agent has weakened the power than the likes of Thomas Cook and Thomson/TUI have over distribution channels.

What will Thomas Cook’s response be? This article suggests that a strategy of differentiation is the chosen approach. If true, expect Thomas Cook to announce a signficant programme of change, involving retrenchment both in retail distribution and also in the product portfolio. That will leave just Thomson/TUI as the main mass market tour operator in the UK.