Strategy for Tourism

1. Strategy for Tourism Part 3, Lecture 7 Strategic Options Professor John Tribe

2. 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. 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.

5. 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 92 countries with more than 180,000 employees and its brands represent around 3800 hotels and provide 500,000 rooms. Accor covers all the main market segments. The three segments and associated hotel brands are: • Luxury and Upscale: Sofitel Legend, Sofitel Luxury, Pullman, MGallery • Midscale: Novotel, Mercure, Mama • Economy: Ibis, Ibis Budget, Hotel Formule 1

6. 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

7. 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.

8. 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).

9. 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.

10. 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

11. Price / Quality Matrix

12. 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)

13. 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

14. 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.

15. Route to Hybrid Strategies

16. 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).

17. 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.

18. 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 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

19. 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.

20. 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?

21. Strategy for Tourism Part 3, Lecture 7 Strategic Options The End