Part 3, Unit 7

1
Strategy for Tourism

• Part 3, Unit 7
• Strategic Options

2
Reading
3
Part 3 Strategic Choice

• The next stage of strategy for tourism is
  strategic choice and by the end of part 3 it
  should be possible to propose and justify a
  particular strategy for a tourism entity.
  Strategic choice follows logically from the
  previous two stages. Strategic analysis resulted
  in a summary of the opportunities and threats
  evident in the tourism organisation's external
  environment and of its internal strengths and
  weaknesses and it is in the light of this
  analysis that strategy can be formulated, guided
  by the organisation's mission. A framework for
  strategic choice is developed to assist tourism
  entities in the development of an appropriate
  strategy.
• Chapter 7 introduces the main types of strategy,
  using Porter's (1998) generic strategies as a
  starting point.
• Chapter 8 considers the directions methods by
  which an organisation can pursue its strategy.
• Chapter 9 offers a template that can be used to
  evaluate competing strategies so that an
  appropriate strategy can be chosen.

4
(No Transcript)
5
Learning Outcomes

• After studying this chapter and related materials
  you should be able to understand
• Porter's generic strategies
• Critiques of Porter
• Price-based strategies
• Differentiation-based strategies
• Hybrid Strategies
• Focus strategies
• Elasticity and margins
• Sustaining competitive advantage
• Game theory
• and critically evaluate, explain and apply the
  above concepts.

6
Case Study 7 Accor Hospitality Worldwide

• Accor Hospitality is a global player with more
  than 40 years of expertise in its two core
  businesses of hotels and services. Accor operates
  in 100 countries with more than 150,000 employees
  and its brands represent around 4,000 hotels and
  provide 500,000 rooms. Accor occupies a unique
  position as the worlds only hotel operator that
  covers all the main market segments. The five
  segments and the associated hotel brands are
• Luxury Sofitel
• Upscale Pullman, MGallery
• Midscale Novotel, Mercure, Suitehotel, Adagio
• Economy Ibis, All seasons
• Budget Etap, Hotel, Formule 1, hotelF1 and Motel
  6

7
Porter's Generic Strategies

• A generic strategy is a strategy of a particular
  type or form designed to promote a lasting
  competitive advantage for an organisation.
• Porter (1980) identified three generic strategies
  that organisations could use to achieve
  competitive advantage. He argued that it was
  important for organisations to be clear about
  which strategy was being followed and that lack
  of a clear strategy could result in muddle and
  confusion. Porter's generic strategies are
• cost leadership
• differentiation, and,
• focus

8
Cost leadership

• This strategy involves an organisation becoming
  the lowest cost provider in an industry.
• Porter's logic for this strategy is that if a
  firm can charge industry-average prices, but
  sustains below industry-average costs it will be
  an above average performer.

9
Differentiation

• A differentiation strategy is where an
  organisation seeks product uniqueness. It will
  attempt to establish real (by product design) or
  perceived (by advertising) differences between
  its products and those of its competitors so that
  a premium price can be charged without loss of
  customers.
• Porter's logic for this strategy is that an
  organisation will be an above industry-average
  performer if the price premium exceeds the extra
  costs of providing differentiation.

10
Focus

• A focus strategy occurs where strategy is
  tailored towards a particular market segment
  rather than to the whole market and may take the
  form of cost focus or differentiation focus.

11
Problems with Porter 1

• Poon (1993 239) concludes that "Porter's generic
  strategies have little value in today's tourism
  industry." Poon identifies four principles for an
  effective tourism strategy
• be a leader in quality
• develop radical innovations
• put customers first
• strengthen the firm's strategic position within
  the value chain
• However these principles can be accommodated in
  an adapted version of Porter, and price remains
  an important part of strategy which Poon ignores.

12
Problems with Porter 2

• Cost leadership is a problematic concept for
  several reasons.
• First, many of the routes to lower costs are
  easily followed by competitors and therefore
  leadership may be elusive. It is perhaps only
  where a firm can achieve economies of scale by
  market leadership that costs may be reduced
  without compromising the quality of output.
• Second, where cost leadership is achieved by
  stripped-down products, consumers are unlikely to
  pay industry-average price. Price may well follow
  costs down thus reducing any extra margins.
• Third there is a tendency for Porter to use the
  terms cost and price interchangeably. But they
  are very different terms - the first measuring
  input costs (paid by firms) and the second
  measuring market prices (paid by consumers).

13
Problems with Porter 3

• Differentiation may be misinterpreted by managers
  as being merely a matter of improved technique of
  production. What is more important in terms of
  selling a product or service is the notion of
  consumer perception - does a particular product
  offer improved quality or value added over the
  competition in the eyes of the consumer?
• Porter's typology also polarises costs leadership
  and differentiation. There is evidence that many
  organisations seek to operate in a hybrid region
  which encompasses both low costs whilst
  attempting to market a distinctive product.

14
Porter Adapted

• Bowman (Bowman Faulkner, 1995) and Johnson et
  al. (2008) et al. have sought to rework Porter's
  typology of generic strategies to take into
  account some of the issues raised above. have
  sought to rework Porter's typology of generic
  strategies to take into account some of the
  issues raised above.
• The typology is adapted to reflect the consumer
  view of things.
• Consumers are more sensitive to prices than costs
• Consumers consider perceived quality or value
  added rather than differentiation

15
Price / Quality Matrix
16
Price-based strategies

• Price-based strategy is similar to cost
  leadership, but emphasises the fact that low
  costs are passed on to the customer in the form
  of lower prices. Products are thus likely to be
  standardised, and unnecessary but costly extras
  will have been stripped away.
• Value chain analysis can be a useful tool for
  highlighting extras which can be removed (eg.
  Ryanair)

17
Price based strategies

• McDonald's restaurants Its use of standardized
  products and processes, self service, self
  clearing up and huge economies of scale are key
  factors enabling low prices.
• Hotel Première Classe (France) Hotels are
  located where land prices are cheap but demand
  strong (e.g. industrial estates near motorway
  junctions). Fittings are standardised and with no
  frills. Use of automation reduces labour costs.
• Cheap Package Holidays These cut costs all along
  the value chain. Internet sales reduce
  distribution costs. The use of charter flights
  with high load factors, night flights and
  secondary airports, together with coach transfers
  reduce transport costs. High density, no frills
  hotels in mass tourism destinations and bulk
  buying power reduce accommodation costs. Vertical
  integration along the supply chain reduces
  middleman costs.

18
Differentiation-based strategies

• This is similar to Porter's differentiation
  strategy, but with an emphasis on providing extra
  qualities which are valued by the consumer. This
  value added may be provided by
• design
• exploitation of the value chain
• advertising

19
Differentiation based strategies

• 7 Hotels e.g. the Burj Al Arab in Dubai, United
  Arab Emirates which offers guests a chauffeur
  driven Rolls Royce, discreet in-suite check in, a
  private reception desk on every floor and a
  private butler service. It is located in the
  exclusive Jumeirah Beach area of Dubai and its
  Royal Suite offers private elevator access, a
  private cinema and a rotating four-poster canopy
  bed.
• St Moritz, Switzerland This is a destination
  that has managed to cultivate an up-market
  exclusive image and appeal to the luxury end of
  the market. Its very expense differentiates it
  from other destinations and its popularity
  amongst celebrities helps to differentiate it
  from competing destinations and sustain its elite
  and glamorous image.
• The Michelin Star rating of restaurants can
  provide a distinctive marker of differentiation.
  Three Stars is the highest rating which means
  Exceptional cuisine and worth the journey. In
  2010 there were less than one hundred 3 rated
  restaurants including El Bulli (Roses, Spain),
  The Fat Duck (Bray, UK), Lung King Heen (Hong
  Kong, China) and L'Osier (Tokyo, Japan).

20
Differentiation Airline Seats
21
Destination Differentiation
22
Destination Differentiation
23
Destination Differentiation
24
Destination Differentiation
25
Destination Differentiation
26
Destination Differentiation
27
Destination Differentiation
28
Hybrid strategies

• A hybrid strategy is an attempt to provide
  quality products and services at low prices.
• It seems contradictory because adding value adds
  to costs which should preclude low prices.
• The key to a successful hybrid strategy is
  therefore to reduce average costs.
• The first route to this is achieving of economies
  of scale. Economies of scale are therefore open
  to firms which can achieve high market share, and
  a virtuous circle may become established.
• The second route, important to service providers
  such as tourism organisations, is to ensure high
  load factors.

29
Hybrid strategies
30
Route to Hybrid Strategies
31
Hybrid Strategy

• Virgin Blue is an example of an airline following
  a hybrid strategy. Virgin Blue operates in
  Australia and describes how
• Unlike traditional no frills low-cost
  carriers, Virgin Blues approach is to offer
  consistently affordable fares, outstanding
  service and a host of other options available on
  a pay for use basis (Virgin Blue, 2008)

32
Virgin Blue
33
Focused strategies

• Price-based and differentiation strategies may
  each be focused on a particular market segment
  and it is increasingly common for organisations
  to seek to serve a number of different market
  segments.
• Examples in the tourism industry.
• In the hotels sectors IHG operates both
  InterContinental and Formule 1 hotels.
• In the airline industry Qantas offers four
  different classes of travel Economy, Premium
  Economy, Business Class and First Class.
• At the destination level the island of Mallorca,
  Spain offers holidays to both mass budget
  tourists (e.g. the resorts of Magaluf and Palma
  Nova) as well as to the upscale segment of the
  market (e.g. Deja).

34
Zone X

• Zone X (Tribe, 1997) represents a combination of
  high prices and low quality and will generally
  therefore lead to failure. However there are
  exceptions to this.
• First, where an organisation has a monopoly it
  can operate in zone x without fear of loosing
  customers
• Second, where consumers have lack of information
  about quality, or competitive prices, zone x
  strategies may persist. Tourist areas represent a
  potential site within which organisations may
  operate such strategies since new and naive
  tourists are continually arriving. Restaurants,
  hotels and taxis may be able to operate zone x
  strategies under such conditions.

35
Elasticity and Margins

• Understanding elasticity of demand can be helpful
  to organisations when looking at strategic
  options.
• Elasticity of demand measures the responsiveness
  of demand to a change in price. Its definition
  is
• Where demand is sensitive to changes in price
  demand is said to be elastic and where a change
  in price has less of an effect on demand it is
  inelastic.
• A price leadership strategy will therefore be
  appropriate in a market or market segment where
  demand is elastic. This is because for any
  percentage reduction in price, demand will rise
  by a greater percentage.
• Elasticity theory helps us to understand that
  effective differentiation strategies will result
  in demand becoming more inelastic.

36
Sustaining Competitive Advantage

• Becoming the industry leader.
• Protecting invention and innovation through
  patents.
• Maintaining leadership through innovation and
  organisational responsiveness.
• Cross subsidization from elsewhere in an
  organisations business portfolio where
  competition is less.
• Exploiting deep pockets that is substantial
  surplus financial resources.
• Concentrating on a set of organisational
  capabilities that are difficult to replicate..
• Collaboration to obtain competitive advantage
• Seeking the benefits of clustering.
• Revolutionizing the business model

37
Game Theory

• Game theory can be used to model behavior in
  strategic situations.
• The problem is that any move made by one party in
  a competitive situation will cause subsequent
  moves in others and each of those moves will
  cause further moves.
• So a strategy which might appear successful based
  upon current configurations of competitor actions
  may well turn out to have different consequences
  once competitor actions and reactions have taken
  place.

38
Review of Key Terms

• Generic strategy A strategy of a particular type
  or form designed to promote a lasting competitive
  advantage.
• Cost leadership Becoming the lowest cost
  provider in an industry.
• Differentiation Seeking product or service
  uniqueness.
• Focus strategy A strategy tailored towards a
  particular market segment.
• Price-based strategy Reducing costs and prices.
• Hybrid strategy Providing high quality products
  and services at low prices.
• Zone X A combination of high prices and low
  quality.
• Elasticity of demand The responsiveness of
  demand to a change in price.
• Game theory Used to model competitor reactions
  in situations of interdependence.

39
Discussion Questions

• 1. "Market share is crucial for a hybrid
  strategy." Explain, using examples from tourism,
  what is meant by this statement.
• 2. Explain how a hotel brand could achieve price
  leadership.
• 3. Explain how a no frills airline could maintain
  competitive advantage.
• 4. Explain how the concept of elasticity of
  demand helps to understand the logic of price and
  differentiation strategies.
• 5. Under what circumstances is it possible for a
  tourism organisation to survive by charging high
  prices for low quality services?

40
Case Study Visit Britain

• The following link is to Visit Britains 2006
  2009 Strategy
• http//www.culture.gov.uk/NR/rdonlyres/B63AF049-75
  A6-415F-83BF-1EAA4549C558/0/tourismstrategyfor2012
  _fullreport.pdf
• To what extent do you agree that Visit Britain
  exploits and extends Britains competitive
  advantage as a tourism destination?

41
Strategy for Tourism

• Part 3, Unit 7
• Strategic Options
• The End