Apart from the main challenges explained above, there are other kinds of barriers to overcome, related to the challenges to compete successfully in the market:
Supply-side economies of scale: They are created when large volumes of production manage to spread fixed costs over more units and thus lower the cost per unit, or obtain better deals with suppliers due to larger orders. That makes new entrants have to choose between investing on a large scale or assume a cost disadvantage that should be compensated via a differentiated product. Such is the case of mass tourism destinations, which can often be only competed against with smaller scale differentiated products at higher prices. Or even in the same destination, this is the competition between large hotels and boutique hotels. The most cost efficient level of production is termed Minimum Efficient Scale (MES). If MES for firms in an industry is known, then we can determine the amount of market share necessary for low cost entry or cost parity with rivals.
Demand-side benefits of scale: This advantage arises when a larger network of clients increases the attractiveness of the destination. In the tourism industry, this is the case of some popular destinations among a certain target of tourists, whose leaders attract most of the group, niche or segment to that destination, based on either objective or prestige criteria, or because spending holidays with the group is an essential part of the motivation.
Customer switching costs: These are costs that clients have to assume if they change to another supplier. In the tourism industry, this is the case of the residential tourism, in which the tourists own a property in the destination where they go most frequently. All the cost of selling the property and moving to the new destination is a significant barrier.
Incumbency advantages independent of size: Incumbents build often their competitive advantage on some proprietary assets such as exclusive licenses to access natural heritage or to operate in a certain location, reputable brand identity, or a specific know-how that sets them apart from competitors. This is the most typical kind of barrier to entry in the tourism industry, for which we could find an endless amount of examples, especially related to access to natural resources, geographic locations and brand identities. Technology in the tourism sector applies to the capacity to produce unique experiences due to a specific know-how, like the wellness & spa, gastronomy, cultural & art performances, etc.
Government advisories: countries presenting some kind of safety risk due to conflicts or health threats for travelers are evaluated by other countries governments, which advise their citizens about such threats. Presenting any relevant threat for the tourist is likely to prevent any destination from being marketed through the main distribution channels.
Investment and asset specificity: needless to say that for many tourism businesses, significant investments need to be carried out, some of which correspond to special equipment that cannot be used for other purposes or not easily sold if the venture fails, thus becoming a barrier to exit. Such is the case of ski resort lifts, sailing marinas and many others.
Brand loyalty and advertising expenses: incumbents’ brand loyalty may be a significant barrier to entry, as long as new entrants will have to develop expensive marketing campaigns to gain a position in the market. Those campaigns will only be profitable in the long term. Incumbents’ advertising expenses are themselves a barrier to entry, as new entrants will need to invest much more than incumbents to gain significant brand awareness and market share.
Apart from the barriers to entry, we should take into account the expected retaliation by incumbents towards new entrants. Newcomers are expected to fear retaliation if:
- Incumbents have previously reacted effectively against the entrance of new players.
- Incumbents have proven capacity to strike back (cash, borrowing power, productive capacity or influence in the distribution channels).
- Incumbents appear to be likely to cut prices in order to retain market share, due to a high fixed cost structure.
- The low industry growth so newcomers can only develop business by taking it from incumbents.
When carrying out the 5 competitive forces assessment for a destination’s strategy plan, we consider incumbents all the local operators: accommodation providers, local operators organizing activities, transport operators, and incoming agencies.
Would you consider other challenges to compete successfully?