Unit 5 The External Environment: Competition Professor John Tribe Strategy for Tourism Unit 5 The External Environment: Competition Professor John Tribe

Learning Outcomes After studying this chapter and related materials you should be able to understand: Industries, markets and strategic groups Porter’s five forces Competitor analysis Destination 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 production Markets are focused on customers and therefore on the demand side It 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 entrants 2 the power of suppliers 3 the power of consumers 4 the threat of substitutes 5 competitive rivalry

Porter’s Five Forces

The threat of entrants Any significant recent or future entrants for your organisation / destination? The extent of the threat of new entrants will depend upon barriers to entry such as: Economies of scale Capital requirements of entry Availability of supply and distribution channels Expected retaliation: Price and advertising barriers Product differentiation Government policy

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 costs Large volume purchasers Homogeneous products Buyer 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 concentration Switching costs Uniqueness of the supplied resource

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. January 2012: Kodak files for bankruptcy

The degree of competitive rivalry Competitive rivalry measures the intensity of competition in an industry. It is determined by the competitive conditions in the four forces analysed above and in addition: Degree of market leadership (dominant firm) Industry growth rate Perishability of products Marginal costs of sales High exit costs Cross subsidisation

Changing Competitive Rivalry It’s not static! Seasonal pricing Dynamic pricing

Porter’s Diamond for National Competitive Advantage

Destination Competitiveness Crouch and Ritchie (1999, p. 146) argued for a model where tourism destination competitiveness is determined by four major components: Core resources and attractors* Supporting factors and resources* Destination management* Qualifying determinants*

Destination Competitiveness Core resources and attractors include the primary markers of a destination which are important in differentiating one from another. They include landscape, climate, culture, history, links with tourism originating regions as well as accommodation, food services, transportation, tourist attractions and special events. Supporting factors and resources include the extent and condition of the general infrastructure of the destination and factors that influence its accessibility. Destination management includes destination marketing and the management, co-ordination and maintenance of supporting services, tourism resources and attractors. Qualifying determinants refers to factors that can impinge on the other three components. These include safety, location and overall costs.

Destination Competitiveness Dwyer et al. (2003) proposed a modified model of determinants of competitiveness comprising of: Inherited Resources Created Resources Supporting Factors and Resources Destination Management Situational Conditions Demand Conditions.

Discussion Questions Distinguish between an industry, markets and strategic groups using a tourism example and explain their usefulness for competitor analysis. 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). 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. What factors affect destination competitiveness? To what extent can Porter’s five forces framework be used to understand destination competitiveness?

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.

Unit 5 The External Environment: Competition The End Strategy for Tourism Unit 5 The External Environment: Competition The End