Risk Management and Strategic Planning

1. Part 3, Unit 7 Strategic Options Risk Management and Strategic Planning

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.

5. After studying this chapter and related materials you should be able to understand: Price-based strategies Differentiation-based strategies Hybrid Strategies Focus strategies and critically evaluate, explain and apply the above concepts. Learning Outcomes

6. Discussion Point What kinds of strategy could an organisation / destination follow to gain competitive advantage?

7. Bowman (Bowman & Faulkner, 1995) and Johnson et al. (2008) et al. have sought to rework Porter's typology of generic strategies. The typology is adapted to reflect the consumer view of things. Consumers are sensitive to prices Consumers consider perceived quality or value added Porter Adapted

8. Price / Quality Matrix

9. Price-based strategies • Price-based strategy 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)

10. 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. Price based strategies

11. These have 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 Differentiation-based strategies

12. 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). Differentiation based strategies

13. Differentiation: Airline Seats

14. Destination Differentiation

15. Destination Differentiation

16. Destination Differentiation

17. Destination Differentiation

18. Destination Differentiation

19. Destination Differentiation

20. Destination Differentiation

21. 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. Hybrid strategies

22. Hybrid strategies

23. Route to Hybrid Strategies

24. 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 Blue’s 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) Hybrid Strategy

25. Virgin Blue

26. 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). Focused strategies

27. 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. Zone X

28. Part 3, Unit 7 Strategic Options The End Risk Management and Strategic Planning