The entrance of new competitors in the industry expands the overall offer and challenges the market share of the incumbents, pressing on prices, costs, value added and investment needed to keep their position in the market.
In the tourism industry, the new entrants tend to be the focus of attention of many travelers, at least those who are always willing to explore unknown destinations. Needless to say that there is an almost unlimited number of potential new entrants, if we consider the entire tourism industry, though we will carry out this analysis for each tourism sector separately, thus reducing significantly the number of potential entrants. In general, new destinations have to face some particular challenges or initial barriers to enter the market:
Product differentiation: a new entrant has to have a unique selling proposition and enjoy a credible image as a tourist destination. This is not easy to achieve in a few years, given that brand image is a result of consistent communication efforts over a long period. Positive image development takes time and should be followed by substantive action.
Capital investment: any territory that wants to develop tourism needs substantial investments in hotels, roads and other infrastructures to meet demand requirements. To do so, it will have to convince investors proving political stability and offering a business friendly environment.
Access to distribution channels: most destinations will need well-established distribution of their new products via tour operators. In that respect there has been a process of concentration in the tour operating industry, thus playing a key role and strengthening their force. Despite the increasing role of the internet as a direct distribution channel, tour operators still play a major role and tend to promote only easy to sell destinations due to high demand.
Government policy: Governments often regulate the industry including limiting the entrance of new operators through a licensing system to protect the heritage or the environment. Many kinds of regulations may limit the development of tourism, such as those related to either natural or cultural heritage protection, environmental protection affecting the development of ski or golf resorts, regulation against gambling, etc. Governments may also subsidize some incumbents thus creating a disadvantage for potential entrants.
The threat of entry –and not the fact that new entries actually occur- puts a cap on the profitability potential of the industry, as if the threat is high, incumbents have to hold down their prices to deter new competitors. This threat will depend on the extent of entry barriers and the retaliation that new entrants may expect from incumbents.
Would you consider other key challenges as initial barriers to entry?