Unit 5 The External

Environment: Competition

Strategy for Tourism

Reading

Book Ch

Tribe, J, (2010) Strategy for Tourism, Goodfellow Publishers, Oxford.

5

Capon, C. (2008) Understanding Strategic Management, Prentice Hall: Hemel Hempstead.

2

Tribe, J. (2005) The Economics of Recreation, Leisure and Tourism, Butterworth Heinemann, Oxford.

8

Johnson, G., Scholes, K., and Whittington, R. (2008) Exploring Corporate Strategy, Prentice Hall: Hemel Hempstead.

2

Learning Outcomes

After studying this chapter and related materials you should be able to understand:Industries, markets and strategic groupsPorter’s five forcesCompetitor analysisDestination competitiveness

and critically evaluate, explain and apply the above concepts

Case Study 5: Global Airlines

Competition in the airline industry is intense. But it hasn’t always been so.

For a long while the ‘legacy carriers’ (carriers such as British Airways, American Airlines and Lufthansa) were protected from competition by regulation that included protective entry barriers and price agreements.

But the 1978 Airline Deregulation Act liberalised national aviation markets in the U.S. opening them up to competition. Subsequently the E.U. aviation markets were deregulated in the 1980s and 1990s and the USA and E.U. agreed on the Open Aviation Area in 2008.

Deregulation ushered in wave after wave of ‘low cost carriers’, notably South West Airlines in the U.S. and Ryanair in the U.K and the airline industry was rocked by the low-cost revolution. Low-cost carriers offer no-frills services and hence not only low costs but also low prices.

Industries, Markets and Strategic Groups

Industries are is focused on productionMarkets are focused on customers and

therefore on the demand sideIt is sometimes the case that the notions

of "industry" or “market” are too wide to allow for useful consideration of an organisation's competitive position. Strategic group analysis can be used to focus on defined business units (which may be part of a larger organisation) which compete on similar territory.

Strategic Groups for Paris Hotels

The competitive environment

In his book Competitive Strategy (1980), Porter proposes the following model (‘the five forces’) for investigating the competitive environment:1 the threat of entrants2 the power of suppliers3 the power of consumers4 the threat of substitutes5 competitive rivalry

Porter’s Five Forces

The threat of entrants

The extent of the threat of new entrants will depend upon barriers to entry such as:Economies of scaleCapital requirements of entryAvailability of supply and distribution

channelsExpected retaliation: Price and advertising

barriersProduct differentiationGovernment policy

How does Coca-Cola co attempt to reduce the threat of entrants?

economies of scale

capital and experience barriers to entry

advertising barriers to entry

availability of distribution channels (vertical integration)

product differentiation barriers

The bargaining power of buyers

The bargaining power of buyers measures the relative power of customers in relation to the producers in a particular market. Buyer bargaining power is affected by:Switching costsLarge volume purchasersHomogeneous productsBuyer knowledge of competition

The bargaining power of suppliers

The bargaining power of suppliers is the relative power of suppliers in relation to producers. Key factors affecting supplier power include:Supplier size and concentrationSwitching costsUniqueness of the supplied resource

The bargaining power of suppliers

Assess the power of suppliers to Emirates AirwaysAircraft suppliersAirport ownersFuel suppliers

The threat of substitutes

The threat of substitutes describes the likelihood of other services or products being used in place of any existing product or service. When analysing the treat of substitutes the following are of relevance:Price/ performance ratioExtra-industry effects

The degree of competitive rivalry

Competitive rivalry measures of the intensity of competition in an industry.

It is is determined by the competitive conditions in the four forces analysed above and in addition:Degree of market leadership (dominant firm)Industry growth ratePerishability of productsMarginal costs of salesHigh exit costsCross subsidisation

Competitive Rivalry: Santorini, Greece

Competitor Analysis

This involves a more detailed look at a tourism entity’s existing and potential competitors in the form of a profile that might include:product linesbuyerspricesqualitydifferentiationadvertisingmarket segmentmarketing practicesgrowth and prospectsfinancial resourceshuman resources

Destination Competitiveness

Dwyer et al. (2003) proposed a modified model of determinants of competitiveness comprising of:Inherited ResourcesCreated ResourcesSupporting Factors and ResourcesDestination Management, Situational ConditionsDemand Conditions.

Review of Key Terms

Legacy carriers: Airlines which were founded before deregulation.

Strategic group: Collection of defined suppliers who compete on a similar territory.

Porter's five forces: The threat of new entrants, the bargaining power of buyers, the bargaining power of suppliers, the threat of substitutes and the degree of rivalry between competitors.

The threat of new entrants: The ease with which new firms may enter an industry.

The bargaining power of buyers: The relative power of customers in relation to the producers.

The bargaining power of suppliers: The relative power of suppliers in relation to producers.

The threat of substitutes: The likelihood of other services or products being used in place of any existing product or service.

The degree of competitive rivalry: An overall measure of the intensity of competition in an industry.

Competitor analysis: An analysis to formulate a strategy in the light of an assessment of key rivals.

Discussion Questions

1. Distinguish between an industry, markets and strategic groups using a tourism example and explain their usefulness for competitor analysis.

2. Conduct a five force analysis on the competitive environment for a named tourism firm. Explain how this will enable the director of strategy and planning of that firm to "find a position in the industry where his or her company can best defend itself against these forces or can influence them in its favour" (Porter, 1998).

3. Conduct a competitor analysis for a tourism firm. Identify its key competitor and prepare a competitor response profile to show how this organisation may react to a low price strategy from your chosen firm.

4. What factors affect destination competitiveness?5. To what extent can Porter’s five forces framework be

used to understand destination competitiveness?

Conduct a C-PEST O/T analysis for a named tourism organisation

Opportunities Threats

Unit 5 The External

Environment: Competition The End

Strategy for Tourism