Tag: profitability

Marketing 3.0

Changing forces, reshaping profitability

Industry structures tend to be rather stable, though there are usually some adjustments and occasionally some radical disruptions. Change drivers may come from outside or from within the industry: technological disruptions such as the rise of internet and social media, changes in customer needs and rise of new segments, development of new business models, etc.

Shifting threat of new entry. Changes in the aforementioned barriers to entry are to shift the threat of new entrants. One of the most usual barriers to entry is the Government policy in urban planning and license concessions for building and operating tourism facilities. They are also decisive in the development and maintenance of communication infrastructures to facilitate a good accessibility to the destination. A lack of Government commitment and investment is a considerable barrier to entry for the destination’s operators.

Another common barrier to entry, at least concerning distant markets, is the flight connection. A good case study is that of the low cost airlines -namely Ryanair- that created flight connections with many unknown destinations in Europe. In this case, the Government policy is also decisive, as owner and operator of the airports in most of the cases.

Changing supplier or buyer power.  The factors influencing the bargaining power of both buyers and suppliers are to change over time in both directions. The rise of the internet as sales and communication channel and internet based business models –namely low cost airlines- changed significantly the negotiation power of many local operators in front of the tour operators, as it was much easier for the suppliers to market their services directly to the client, and these two factors also boosted the rise of FITs, who could easily organize their trip comparing many options “at a click” at very competitive prices.

However, despite the loss of market share by the tour operators, this setback was rapidly countered through a process of concentration affecting many big and middle sized tour operators to regain negotiation power in front of the destinations’ operators.

Shifting threat of substitution. The shifts in the threat of new substitutes come from new product developments that shift the price-performance comparisons between different options. In the case of the tourism industry, the rise of the collaborative business models such as Airbnb is a serious threat for the traditional accommodation suppliers. Other examples are the car sharing models taking business from the regular transportation services, and even some platform based models where locals offer special interest experiences to visitors. In all cases, non-professional services are competing with the destinations’ operators, and so are considered as substitutes rather than rivals.

Do you think of other case studies in which a force shift significantly reshaped profitability?

IntelligenceIntelligence methodsStrategyStrategy planning & execution

Attractiveness assessment for the tourism industry

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?

StrategyStrategy planning & executionSustainability

Crafting the business portfolio strategy

When crafting Strategic Plans for destinations, one of the essential strategies to design is the Business Strategy, to depict the portfolio of sectors in which the destination will compete. Nowadays, more than ever before, the tourism market is segmented in an increasing amount of sectors or businesses, each of which has enough specificities to deserve its own competitiveness and attractiveness analysis and assessment.

Moreover, destinations need to diversify their risk, reduce demand seasonality, and renovate their products to sustain their competitive position. The ultimate purpose of this methodology is to establish a scale of priorities in the assignation of the funds to carry out the necessary renovations and investments.

In the case of Tourism 3.0, as explained in other Whitepapers, the Special Interest travel and other minor sectors play a very important role on the success of its development, and so a sound analysis should be carried out on an extensive range of Special Interest sectors.

The methodology based on the McKinsey matrix analyzes for every sector the capacity of the destination to compete and the attractiveness of the sector, considering the market volume and growth potential, seasonality of demand, tourists’ expenditure, multiplying effect, customer loyalty potential, and the 5 competitive forces that shape long term profitability. This 5 forces analysis is the most complex and sound to be carried out, for a specific section is dedicated to it in this Whitepaper.

Then, the challenge is to assess the proportional relevance of every player in relation with its corresponding force, and determine the proportional strength of every force in the sector. To rate the importance or strength of every force in shaping the industry’s long-term profitability, it is necessary to combine both quantitative and qualitative analysis. In this regard, statistical data corresponding to the business volume, the purchasing and sales volumes, prices and price differences between different dealers, margins corresponding to business with different dealers should be obtained for every incumbent.

Furthermore, it is necessary to gather data related to possible barriers to entrance, barriers to exit –it is possible to quantify the switching costs, for instance- and other factors mentioned in the explanation of the framework.

Finally, the assessment of a pool of industry experts is also necessary to find important insights that are specific to every sector, or not properly explained in the available secondary sources. Industry experts may also lead to new secondary sources, for it is convenient to interview them rather at the beginning of the research, so as to help us orientate its process.

An industry experts pool should comprehend many profiles, such as directors of travel agencies –outbound & incoming-, tour operators, hotels, tourism facilities, transportation services; consultants, journalists, government officials, etc.

What other methodologies would you use for the business portfolio strategy?

Marketing 3.0StrategyStrategy planning & execution

The Marketing Plan 3.0: selling the vision to investors

Whenever the new tourism development requires some significant investments, it may be convenient to attract investors instead of asking for credit loans. To do so, it is also necessary to prepare specific contents and presentations. In this case, it is convenient to present the business oriented Marketing Plan with the investment projects and their feasibility study.

In some cases it may be that there are some clearly profitable investments and others which are strategic or profitable in a less quantifiable way, because they affect all local businesses or they are just “socially profitable”. In these cases it is recommended to offer the first kind of investment projects to private investors and try to engage the government for the socially profitable or general interest project. However, in some cases the government may not be able to assume the investment or only a part of it, and then it is necessary to find imaginative models and formulas to make the project profitable for a private investor and calculate its estimated profitability.

Even if there may be these needs for external funding at the early stage of the project, in expecting a successful development of the project it is desirable that local stakeholders assume the ownership of these investments over time, to better guarantee a long term commitment to the destination and the business’ engagement with the mission accomplishment.

What other points would you consider when marketing the vision to investors?