Organizational Structure | TUI Suisse – Profit Center Conflict due to Weak Incentive System

Facts & Figures

TUI Suisse Ltd is the number three travel company in Switzerland (sales: 700 mio CHF; employees: 600). As a tour operator, TUI Suisse specializes in package vacation. The portfolio boasts strong brands such as Imholz, TUI, Vögele Reisen, Robinson and others. 70 owned travel agencies throughout Switzerland guarantee first class know-how in leisure and business travel.

History

TUI Suisse is a product from multiple mergers. Even though using the same major brand in the market, Imholz, until 1999 the firm’s main activities tour production and retailing were separated into two legally independent firms with partially different shareholders. In 1999 the two entities were merged: 

halden-zimmermann-TUI-merger

The TUI Merger

Activities

Tour production activities include the purchasing of touristic services such as hotel beds and flight seats, handling charter flight risks and marketing of the products. The travel packages then are being distributed both internally via TUI’s own 70 travel agencies and externally via non-owned retailers (wholesale).

If a package is sold via one of TUI’s own agencies, the agency receives a sales commission at market conditions. There is no cash out to the firm but rather money transferred from the left pocket to the right. However, if programs sold via non-owned retailers (wholesale), the firm cashes out the equivalent sales commission to a third party.

Problems

After the merger, both the tour production and the retailing division maintained their own corporate cultures. Marketing activities were rarely coordinated between tour production and retailing and employees from either division competed with each other. 

Although it was one of the firm’s major goals to gain from verticalization, the corresponding incentive system was poorly designed. Both divisions were rewarded with substantial incentives, mainly based upon their division EBIT performance. The incentive system was intended to maximize firm profit and to stimulate some internal competition.

The distribution division, driven by these incentives and with the appropriate decision rights for its assortment composition placed more sales at third party tour operators, after they negotiated higher sales and override commission with competitors than were received from the firm’s own products. 

Not surprisingly, the sales of own products in the distribution division sank dramatically. At the end of the fiscal year, the Chief Operating Officer Distribution reported an increase on EBIT of some 20%. He had maximized his unit result and was rewarded according to his incentive schedule.  

The tour production, on the other hand, had huge problems in compensating the drop of sales in the firm’s own retailing chain. Given the firm’s high charter volume (high financial risk), combined with overcapacity in the market, tour production had to drop prices and suffered from a substantial drop in its yield. More capacity had to be sold via non-owned retailers and the commission cash outflow melted away the increase on EBIT from the distribution division. The merged firm’s fiscal year ended with substantial losses.

-Halden Zimmermann, 2002