The oldest travel company in the world, Thomas Cook, has collapsed following failed negotiations and stranded more than half a million travelers.
Digital transformation dramatically changes profit pools, creating losers and winners. Yet, most leaders think margins go up for their companies. We recently confirmed this in a survey of business leaders at a business forum in Dubai. We asked them whether they agree that digitalization will drive down their profitability. More than half of the respondents rejected this hypothesis, indicating that they expect a positive impact from digital on their margins.
With shifting profit pools in today’s digital markets there are a number of tell-tale signs that show whether companies are winning or losing. My research indicates that your company is losing its profit pool when several of the following takes place. The first three factors apply to Thomas Cook.
- Your company is an intermediary and your service can be digitized
Thomas cook still relied heavily on physical travel agencies whereas most of its competitors – companies like EasyJet and Airbnb – survive on direct online bookings. Booking Holdings had the highest market capitalization out of all tour operators and digital travel platforms in June 2019.
- Customers stop paying for personal service when the digital service is “good enough”
With the wide range of digital platforms available to book travel, most customers feel that they don’t need personal assistance booking their holidays. Thomas Cook suffered greatly from this.
- You lose direct access to your customers because of a digital platform.
While Thomas Cook’s digital bookings were on the rise, 64% of its bookings were made online in 2018, up from 49% in 2017, it lost the place as the main source for travel booking to online platforms.
In addition to the three factors that caused profit pools to shift away from Thomas Cook, there are four additional factors you have to look out for:
- Your business function is reduced to producing commoditized products
The more commoditized your product, the more likely will it be traded on the Internet for the lowest price. Even if you are the biggest and most efficient player in the market, price transparency will likely cause costly price wars.
- Digital technologies create entry barriers and you don’t have the critical mass
While many brick-and-mortar department stores understand the importance of digital marketing and mobile shopping, they often don’t have means to invest in a superior multichannel user experience.
- Your competitors don’t need to make a profit and are funded for growth
This is what we sometimes call “death by unicorn”. If you compete against a company that is in the race for growth, even unprofitable growth, it is very hard to be profitable. Book stores who lost again to Amazon, taxi drivers who watch Uber drivers picking up their former passengers know exactly how that feels.
- You don’t have the resources to develop digital technology to the level that gives you “the right to play”
Some incumbent companies do have the deep pockets to invest in technology, but they lack the talent and culture to make it work. Taxi companies around the world knew that customers want to both order their taxi and pay online. And even if the investment would not have been prohibitively high, they were not able to create something similar to the Uber app in 10 years.
Thomas Cook’s journey ended yesterday. To make sure that your company does not face the same fate, assessing the seven factors that endanger your profit pool is a good first step toward a proactive strategic response.
Stefan Michel is Professor of Marketing at IMD and Dean of the Executive MBA program.
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