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Part 3, Unit 7 Strategic Options. Strategy for Tourism. Reading. Part 3: Strategic Choice.
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Part 3, Unit 7 Strategic Options Strategy for Tourism
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.
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. Learning Outcomes
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 world’s 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 Case Study 7: Accor Hospitality Worldwide
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 Porter's Generic Strategies
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.
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. Differentiation
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. Focus
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. Problems with Porter 1
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). Problems with Porter 2
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. Problems with Porter 3
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 Porter Adapted
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)
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
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 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). Differentiation based 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. Hybrid strategies
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
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
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
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. Elasticity and Margins
Becoming the industry leader. Protecting invention and innovation through patents. Maintaining leadership through innovation and organisational responsiveness. Cross subsidization from elsewhere in an organisation’s 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 Sustaining Competitive Advantage
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. Game Theory
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. Review of Key Terms
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? Discussion Questions
The following link is to Visit Britain’s 2006 – 2009 Strategy http://www.culture.gov.uk/NR/rdonlyres/B63AF049-75A6-415F-83BF-1EAA4549C558/0/tourismstrategyfor2012_fullreport.pdf To what extent do you agree that Visit Britain exploits and extends Britain’s competitive advantage as a tourism destination? Case Study: Visit Britain
Part 3, Unit 7 Strategic Options The End Strategy for Tourism
