Beyond analyzing the five competitive forces that shape the industry structure and its long term profitability, there are other factors that are usually analyzed but also overvalued as key indicators when estimating long term profitability. These are the following:

Industry growth rate. A usual mistake is to overestimate the importance of industry growth. This only means that the industry business is going to grow in volume, but not necessarily in profitability. It only occurs so long as there are few or no entrants and the incumbents manage to develop further economies of scale as a result of the business volume increase. But still, many other forces play a decisive role in shaping profitability.

Innovation. In Tourism this refers mostly to business model and product innovation. Even if new technologies are developed to optimize operational efficiency, this is rarely a significant advantage for a destination, mainly because new technologies are developed by third party players –not tourism operators- and therefore the technology is soon available to all operators.

Government. To properly assess the influence of government policies in the industry, it is convenient to analyze how every policy affects each of the competitive forces.  In the tourism industry, the government plays a decisive role, being the owner of key infrastructures, the license/permit provider either for the construction of facilities or for the exploitation of cultural or natural resources as tourist attractions, responsible for the planning of the territory and quite often also responsible for the marketing of the territory as a tourist destination.

Complementary products and services. Some products or services are consumed or used along with others as a matter of need or to enhance value. Complements become relevant to the strategic analysis when they influence the demand for the industry product, and influence profitability through the way they influence the 5 forces.

The strategist should assess whether the influence of every component on every force is positive or negative, as well as to estimate the strength of such influence. For instance, complements usually directly affect the barriers to entry, depending on the nature of the complement and its relationship with the main product or service. It also tends to affect the thread of substitutes. In the tourism industry, all tourism activities requiring specific equipment (golf, ski, sailing, etc.) are subject to such complement factor, especially as they create a barrier to entry for new customers.

Complements may also affect other forces as they raise switching cost or reduce product differentiation, up to the extent that some companies enter the complement industry to alter it in their favor. This is to say that analyzing complement industries and its impact in the five forces may be an essential part of the strategist work.

Would you consider other factors?

Posted by Jordi Pera

Jordi Pera is an economist passionate about tourism, strategy, marketing, sustainability, business modelling and open innovation. He has international experience in marketing, intelligence research, strategy planning, business model innovation and lecturing, having developed most of his career in the tourism industry. Jordi is keen on tackling innovation and strategy challenges that require imagination, entail thoughtful analysis and are to be solved with creative solutions.

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