As with any other industry, the development of the tourism businesses requires a prior strategic assessment on the attractiveness of its various sectors to determine the optimum business portfolio to invest in. To do so, the 5 competitive forces framework analyses the structure of every sector through the five forces that shape its long term profitability:
- The threat of new entrants
- The suppliers’ negotiation power
- The buyers’ negotiation power
- The threat of substitutes
- The competitive rivalry
These five forces determine how the generated value is to be distributed among the different types of players: how much is retained by incumbents, how much is taken by suppliers and customers using their bargaining power, and also how the profitability is limited by the threat of new entrants and substitutes.
The strength balance between the different forces is to determine the average industry profitability, and a key to formulate the adequate strategy. Hereby, we will analyze the application of the five forces model for the tourism industry.
Apart from the 5 forces analysis, there are some more factors to be considered when assessing the sectors’ attractiveness:
- Market volume and main segments volume
- Market growth trends and potential: current and foreseen market growth
- Seasonality of demand, considering length of high, mid and low seasons.
- Price elasticity of the demand: price sensitivity of all kinds of buyers, adjusted according to the share of everyone.
- Expenditure in accommodation, food & beverage, activities and shopping (% of each).
- Multiplying effect: strategic value of the business in terms of its capacity of fostering the prestige of the destination and marketing it for other businesses.
- Loyalty potential: capacity of the business in retaining customers (%)
When composing the attractiveness matrix we will adjust the value of every factor according to its impact on the sector attractiveness.
Would you consider other factors when assessing a sector’s attractiveness?