The economic system is the the method in which a country produces, distributes and consumes goods and services. An economic system must answer four basic economic questions that will direct a nation’s economic activity (Pride, Hughes and Kapoor, 2010): • What goods and services- and how much of each- will be produced? • How will these goods and services be produced? • For whom will these goods and services be produced? • Who owns and who controls the major factors of production? Four types of economic systems have been formulated and implemented throughout human history.
These are: traditional economy, command economy, capitalist/free economy and mixed economy. Traditional economy is based on culture, tradition and rituals. This type of economy, which developed gradually characterized by slow productivity and low rising capital-labor ratios, usually consist of agriculture based societies (Mokyr, 1989). Command economies are economies in which the government owns and controls major factors of production. Also called centrally planned economy, the government decides on all issues regarding labor, mode of production and what goods and services to produce.
Socialist and communist societies are examples of command economies. However, most leaders of these forms of government realized that although it was based on the principle of equality, the system was inefficient leading to shortages or surplus of products which usually resulted in political unrest (Taylor, 2007). Capitalist economic system is a system wherein individuals and private enterprises own and operate the major factors of production. Based on the lassiez-faire theories of Adam Smith in which individuals are given the freedom to utilize resources as they deem fit.
The role of the government is limited to regulation and creating economic rules. This system promotes competition and prices of goods and services are determined by the mechanisms of supply and demand (Pride et. al. 2010). The last type of economy is the mixed economy wherein the advantages of capitalism or free market economy is combined with some of the principles of a command economy. In this economic form, goods and services are exchanged between households and firms.
The government, on the other hand still regulates and imposes rules, but i\an important responsibility of it is to collect taxes from business owners and its citizens, which will enable to also provide goods and services such as education, infrastructure and security (Pride et. al. , 2010). In this context, the market (producers of goods) answer the “wants” while the government provides the “need”. Economic Shift These economic systems have created economic shifts that determined the primary products of that economic era and the modes of production.
In the traditional economies, agriculture was the main form of industry. In fact, economists estimate that the British economy in 1760 was comprised of almost 90% agriculture industries (Mokyr, 1989). However, the advent of the Industrial revolution changed the economic landscape from agriculture to industrial. The introduction of machines, technological innovations and assembly lines in to the modes of production shifted the economy form producing agricultural products to manufactured products. Post-World War Two and increasing globalization would witness another global economic shift.
Again, technology played key role in the rise of service economies. Service economies are not directly engaged in manufacturing but is involved in the “provision of human value added in the form of labour, advice, managerial skill, entertainment, training, intermediation and the like” (OECD, 2000). The rapid development of information and communication (ICT) technologies have allowed companies to tap on the knowledge and intellectual properties of economies packaging them as a distinct economic output.
This form of economy has bled into different industry sectors such as ICTs and healthcare, as companies are pressured to “concentrate on core competencies, reduce costs, exploit external, specialized expertise, giving rise to business process outsourcing companies. This has enabled foreign companies to tap into other foreign countries’ labor providing much needed jobs especially for developing countries. The shifting of economies, the development of technology and the success of mass production has led to the commodification of products and services.
This has stripped away the personalization of products and services, mutating relationships into an exchange relation or as Karl Marx (1978) called it “callous cash payment”. Pine and Gilmore (1999), point out that although commodification has led to cost-savings, it no longer breeds growth and profitability. Thus, they reveal that there is another aspect of economy that has not fully been explored and tapped by businesses. They labelled this new approach as the Experience economy. Companies that identify experience as a distinct “economic output” are given new horizons to expand their businesses.
Experience= “Economic Output” The concept of an experience economy is rooted in the principles of creating “sensations” between the consumer and the product creating “memorable” experiences (Pine and Gilmore, 1999). This economic strategy engages the customer, customizing products and services according to their needs and wants, turning the them into not just passive users of products but as important factors in the creation and marketing of the product. Pine and Gilmore (1999) refer to the coffee bean as a perfect example of the effect of experience as an “economic output”.
The coffee bean is a commodity that if manufactured and sold as a good in a grocery sees a jump of between 5-10 percent in ts price from a raw commodity to a manufactured and packaged good. However, when a cup of coffee is sold in cafe’s and coffee shops, its effectively jumps to 100-300% percent of its raw price and people are still willing to pay for it? Why? Pine and Gilmore attribute this willingness to the “experience” factor that cafe’s and coffee shops add to the cup of coffee. The added experience of an ambiance of comfort, relaxation and satisfaction effectively raises the value of the cup of coffee.
And yet, customers are willing to pay for that expensive cup of coffee because the drinking of one is no longer focused on the coffee itself (although the quality of the product still has the biggest percentage in the satisfaction criteria) but on the whole experience of drinking it. Experience itself is not a new concept, but economists and producers of goods have , in the past, attached it to the delivery of services that it’s power is largely unappreciated and tapped (p. 2). However, Pine and Gilmore (1999) reiterate that “experiences are as distinct from services as services are from goods” (p.
3). When a person buys a service, he purchases a set of intangible activities carried out on his behalf. But when a buys an experience, he pays to spend time enjoying a series of memorable events that a company stages-as in a theatrical play- to engage him in a personal way. (p. 2) It is through this concept of a theatre and stage that the authors initially frame the concept of experience economy. The consumers are the actors in theatres, stages and plays which are prepared, scripted and planned by companies.
Thus, for the experience to be truly credible and believable, manufacturers and suppliers must change their perspective from merely providers to “stagers of events”. Customers and clients are no longer viewed as just but are treated as guests. The stagers of events must therefore be flexible, ready to adapt to the demands of their guests. This relationship between the stager and guest is much more deeper than “the callous payment of cash” referred to by Marx (1978) but actually creates a relationship between both parties building on trust and quality service.
Although experience economy have primarily been associated with the entertainment industry, with the efforts of theme parks and movies to deliver realistic and truly interactive attractions through the use of 3D technology, surround sound and, in the case of Walt Disney theme parks, productions that immerse the “sights, sounds, tastes, aromas and textures” of their guests (Gilmore and Pine, p. 3). However, other industries have taken notice of this approach. Service industries such as restaurants are investing on ambiance and in services that engage all the sensations of their guests to create unique dining experiences.
IT companies are racing to create much more powerful processors to create ICT experiences that are “interactive and life-like” (Grove, 1996). It has also been adapted by parking lots, department stores, appliance repairmen, and increasingly by businesses themselves to create much more dynamic and productive workplaces by bringing employees and the products closer. Evidently, the experience economy has become a philosophy for companies that seek to distinguish themselves from the competition.
In this light, what industries have been greatly transformed by this philosophy? What strategies did they create in order to provide their guests with unique experiences? Did the adoption of this philosophy bring about positive effects? Or did it further lead to consumer alienation? This paper will attempt to answer these questions by reviewing cases of experience cases and provide a picture of the effect of this strategies. A critique of the philosophy will attempt to reveal its strengths, weaknesses and limitations when applied in the real world.
Review of Related Literature The Cruise Ship Experience A doctoral dissertation study by Hosany and Witham (2009) focused on the cruisers’ experiences and analyzed the relationships between tourists’ experiences and personal evaluation of satisfaction and feedback. Based on the conceptualization of tourism experiences by Oh, Fiore and Jeoung (2007), the study hoped to contribute on the experiential concept of tourism by enhancing its theoretical progress and advancing important implications for cruise markets (Hosany and Witham, 2009).
Oh, Fiore and Jeoung (2007) conduced a study that sought to provide empirical evidences of the experience economy as posited by Pine and Gilmore (1999). Using the setting of a Bed and Breakfast Inn, which has been identified as highly experiential in nature (McIntosh and Siggs, 2005), guests were asked to measure their lodging experiences. Utilizing a rigorous and methodologically sound approach to scale development, Oh et. al.
(2007) were able to create a sound and valid scale which measured tourism experiences. The main objective of Hosany and Whitham’s study therefore was to validate the measure developed by Oh et. al. (2007) by applying it to the context of cruise tourism. This main objective was supported by two specific objectives: • to identify the underlying dimensions of cruisers experiences • to investigate the relationship between cruisers’ experiences, satisfaction and intention to recommend
The study chose to examine the cruiser experience since these trips offered “total escape, safe transportation to exotic destinations, Vegas style entertainment, luxurious pampering service, quality food and beverage, innovative onboard features and awe-inspiring aesthetics among others” (p. 5). Cruise vacations are chosen because of their promise of luxurious care and entertainment (Cartwright and Baird, 1999) and are laden with experiential benefits that engage tourists in a unique social experience (Kwortnik, 2006). Employing survey method, the Oh et. al.
(2007) tourism experience scale was reworked in order to apply to the context of the study. Variables such as: cruiser’s experience, memory, arousal, overall perceived quality, intention to recommend and satisfaction were measured along with other variable of interest such as demographic variables that included: gender, age, travel companion, number of past cruises taken, and nationality. The four dimensions of experience: education, entertainment, aesthetics and escapism were represented with four statements and were rated using a 7-point scale ranging from  strongly disagree to  strongly agree.
Variables such as arousal and memories about the cruise experience were also measured using 7-point scales. Overall perceived quality and overall satisfaction were assessed through two items each (poor/excellent and inferior/superior, and extremely dissatisfied/extremely satisfied and terrible/delighted respectively). Finally, respondent;s intention to recommend were measured using the question “How likely is it that you would recommend this cruise to family and friends or family members” and through a scale of [-3] extremely unlikely and [+3] extremely likely.
Data collection was done aboard the cruise ship “Rhapsody of the Seas” which is owned and operated by Royal Caribbean International Cruise Line. It was achieved by approaching the cruisers less than hour after disembarking from the ship and while waiting for their coach transfers. All in all, 169 questionnaires were accomplished out of the 1859 guests onboard. The study established the validity and generalisability of the Oh et. al. (2007) measure for tourism experience.
Data also revealed that the four realms of experience (education, entertainment, aesthetics and escapism) can be applied in the context of cruise experiences and still be proved reliable and valid. Although the four dimensions varied in their importance in explaining the variable outcomes of arousal, memory, overall perceived quality, satisfaction and intention to recommend, the results were similar with Oh et. al. (2007) which identified aesthetics as the main factor in experiential outcomes.
This also agrees with Kwortnik’s (2008) conclusions that a ship’s design and ambient features affect cruiser’s emotions and behaviors. Hosany and Witham’s (2009) findings on entertainment contradicted Oh et. al. (2007) in that it was found to be the second strongest determinant of outcome variables. The study attributes this to the reputation of cruise ships as entertainment havens. Education and escapism dimensions were found to be of little consequence to the cruise ship experience. The study also found out that the four dimensions of cruisers’ experiences have direct impacts on passenger’s intention to recommend.
Overall, Hosany and Witham’s study provide tangible and empirical findings that back-up the concept of experience economy posited by Gilmore and Pine (1999). The study’s initiative to investigate the concept’s application on an industry that has yet to be fully explored but is a perfect setting for investigating experience economy is the its greatest strength. The literature review of the study provides rich, background detail on the concepts of experience economy and other recent studies on the cruise ship industry.
However, the sample of the study barely scratched the population of the its main study. The time constraint (two weeks) and the focus on only one cruise ship could be seen as the greatest weaknesses of the study. It would have been interesting to see a comparison of experiences between two cruise ships that ply the same cruise route. A lack of the effect of cruise ship employee behavior on the overall experience is an area that should have been investigated but was overlooked.
This should have been an important factor for the study since Gilmore and Pine reinforces the importance of the company’s interaction in setting the feel for the “stage of experience. ” the study also did not take into account the sociological aspect of the cruise, such as the effect of other cruiser’s behavior on the whole experience. Despite these, the findings of the study that revealed its greatest contribution by proving the validity of Oh et. al. ‘s (2007) tourism measure. This is a giant step for the further investigation of experience economy by providing a reliable test that can be applied in different tourism contexts.
Experience Economy in the Rural Context Isaac Kwamena Arthur’s (2008) paper entitled “Conceptualisation of Experience Economy as Competitive Advantage for Rural Food Industry and Rural development” sought to introduce a framework which can be applied to the rural food industry in order for it to attain a competitive edge in an experience economy. The paper presents evidences that point to the positive implications of experience economy on business profits and community development.
Studies have proven that experience economies add value to rural businesses (Fiore et. al, 2007), its usefulness in industries such as tourism (Richard, 2001; Hayes and Macleod, 2006; Oh et,al. 2007), small city development (Lorentzen et. al. , 2007) and its implication on the development of urban sports and recreation settings (Howell, 2005). Despite most experience economists identifying its products as “competitive” (Lorentzen, 2008) and providing a higher degree of “customer satisfaction and profitability” (Sims et. al.
, 2007), they do not present any framework or theory to guide firm’s in maintaining this competitive advantage. Thus, Arthur’s paper sought to provide a deeper understanding of experience economy through the presentation of strategic approaches that can be adapted by rural food industries to maintain competitive advantage. Guided by the research question: “what is the experience economy and what strategic approaches exist for experience producers in the rural food industry to utilize in achieving competitive advantage? ” (Arthur 2008, p.
2), the paper analyzed different views on strategic management concepts while adapting on Gilmore and Pine (1999) concept of experience economy. Employing an extensive literature review, Arthur (2008) explores the concepts of experience economy and its applications drawing mostly on the works of Gilmore and Pine (1999). he reveal that although earlier authors have identified the concept of “experience industries” (Toffler 1970, p. 221), it was Gilmore and Pine that “indicated a new orientation of experience, which is central to creating events around products” (Arthur 2008, p.
3). This idea of creating events around products therefore create experiences (such as an educational show on how a product is manufactured) which becomes the package in which products are marketed and sold. In applying the experiential economy concept on rural food industry, Arthur (2008) focused on the two forms of experience realms: customer’s “passive” or “active” involvement and the level of “immersion” or “absorption”. These two forms delineate the individual’s participation in the experience and the bond that is created between the consumer and the experience (Gilmore and Pine 1999, p.
30-31). Arthur (2008) then enumerates different examples of experiential economy at work in the rural food industry, such as the local food producers organizing food processing festivals wherein consumers can watch how food products are prepared. For further immersion, Arthur (2008) suggests educational tours that introduce consumers to the inner workings of food processing plants and by encouraging their participation in some of the processes. The escapist realm of experience can be attained by customers “being engaged in the production and processing of their product” (Arthur 2008, p.
5). He also suggests the creation of theme parks and utilization of venues where consumers can purchase various food products in order to engage the aesthetic realm of experience economy. In discovering a framework for maintaining competitive advantage, Arthur (2008) first defined the parameters of competitive advantage. He cites Besanko,et. al. (2007) definition as his basis for identifying competitive advantage as the “firms specific abilities to do or achieve things which are superior over their competitors in the market (Arthur 2008, p. 7).
Arthur identifies three models which can be utilized to attain competitive advantage in the rural food industry: five Force model, resource-base view, and the relational view. The five force model identifies an industry’s profitability (Porter, 1985; Grant, 2002 and Xu et. al. , 2006) and offers an understanding that competition is not merely between competitors but involves the whole process of production and its players. The identification of these five forces are attributed to Porter (1985, p. 4): • threat of new market entrants • threat of substitute products or services
• bargaining power of suppliers • bargaining power of buyers • rivalry among competitors The resource base view looks at the “internal organizational resources and capabilities to achieve competitive advancement in a selected environment” (Douglas and Ryman, 2002). This framework looks at how a firm’s uniqueness can give it an edge against its competitors (Grant, 2002). Various management literatures identify relational view as the “inter-firm relations” which gives rise to a firm’s profitability (Dyer and Singh, 1998; Duschek, 2003; Douglas and Ryman, 2003).
It sheds light on the importance of networking in creating competitive advantage. In combining these three models, Arthur (2008) provides a framework for rural food industries that builds upon the five force understanding of the prospects of obtaining competitive advantage through experience offerings in the rural food industry, strengthened by the firm’s identification and utilization of its capabilities and resources according to the resource base view model, and finally, through a seeking out and building of strategic alliances (based on the relational view model) to cement its position in the industry.
Although Arthur (2008) was able to identify the contribution and importance of experience economy in different industry sectors,it was not able to provide new insight on the topic. This can be attributed to the methodology adapted by the study and its heavy reliance on the works of Gilmore and Pine (1999). However, it was able to achieve its both its objectives with the discovery of a framework for maintaining competitive advantage in rural food industries by reviewing and combining three strategic management models.
This is the study greatest strength since it pioneers initiatives towards the creation of frameworks which cater to the performance of industries in the experience economy. But, its the study’s greatest strength is also its biggest pitfall. With the absence of a real data gathering research methodology and reliance on previous works, Arthur’s (2008) suggested framework remains a hypothesis and not yet a valid theory as it remains to be tested and operationalized within the context of the rural food industry.
On a positive note, the author does plan to test his conceptual framework in a empirical case study of the Thisted food industry in Denmark. Exploring the Inner Sanctum of Experience Mark van Doorn of Philips Research presents a fresh look at the concept of experinec economy in his paper entitled An Inside Story on the Experience Economy (2006). In this paper, Doorn (2006) explores the concept of experience as a cognitive process that shapes the individual’s consumption behavior and answers the need for “psychological self-determination and well-being” (p.
1). An analysis of literature leads Doorn (2006) to cite Turner’s Literary Mind which explains that top understand the mind, one must dwell on the body and the “primitive underpinnings of the mind” (Doorn 2006, p. 2). Turner gives importance to the story or “narrative imaging” as the main component of “thought, crucial for planning, evaluating, explaining, for recalling the past and imaging the future” (Turner 1996, p. 4-5). Turner reveals that the human mind engages in experiences by creating narratives to explain even the simplest of acts (p.
13). This follows with Cognitive Science Theories that state that experiences are absorbed by the senses and processed by the mind. Doorn (2006) also explores the concept of ambient narratives wherein individuals are immersed in an interactive experience created from a mixture of virtual and real world concepts which they can change according to their own experiences. Doorn’s (2006) analysis of experience economy is such a departure from the usual studies on the topic.
His paper reveals the connection between economics, psychology and literature by dispelling normal academic notions of experience economy as rooted in the delivery of personalized and highly specialized products and services. He posits that the melding of literature and performance with business and technology can actually lead to a much more interactive and effective experiential economy. However, Doorn’s (2006) analysis only reveals these connections and yet ends up with more questions regarding the creation of a “grand unification theory” (p. 10) that will answer and describe the cognitive processes of experience economy.
Impacts of Experience Most studies undertaken under experience economy seeks to measure the “experience”, overlooking the impact of “experience economy” on the society in general and its effects on tourism. Joanie Willet answers this dearth of literature in her study entitled Cornwall’s Experience of the Experience Economy; Longitudinal impacts (2009). The paper will investigate the impact of experience economy on a selected area by evaluating socio-economic changes which have resulted from regional experience strategies and the impact of experience economy discourses on the area.
Cornwall, England will be the case study of regional economies that really heavily on tourism. The paper is guided by the following objectives: • Review the Key Tenets of the Experience Economy according to Gilmore and Pine (1999) • Discuss experience economy with regards to Cornwall • Trace socio-economic changes in Cornwall brought about by experience economy Findings of the study reveal that underneath Cornwall’s image as a wealthy tourism destination is a society plagued by “severe inequalities and deprivation” (p. 10).
Government efforts to create an idealized English setting to promote tourism has constrained the economic opportunities in Cornwall. Willet (2009) reveals that efforts to create a unique English “experience” for tourists have led to sociological impacts detrimental on the Cornish locals. However, Willet (2009) discovers that Gilmore and Pine (1999) provides a provision wherein the personalization of “guest’s experiences” require locals to adopt advanced skills and educational assessments which will balance out the detrimental effects of the experiential economy.
Willet’s (2009) study provides a holistic picture on the true sociological impacts of the rise of experience economies. This study revealed that the ideals of Gilmore and Pine’s (1999) of customized services and unique services does not necessarily lead to the development of both the consumer and producer. However, the study would have yielded deeper empirical evidence by employing research methods a such as surveys with both tourists and locales ad interviews with the key players in the Cornwall micro-economy. But overall, Willet’s study is a cautionary tale that reveals the two-sides of economic ideas.
Lise Lyck’s lecture on Experience Economy as an Instrument to Create Economic Profitability presents the other side of Willet’s study. Employing case study to describe the hotel economic landscape of Copenhagen and analysis on three frontrunner hotels in Copenhagen, the investigation sought to answer two primary objectives: “Shall hotels invest in experience economy? ” and “How do risk and business cycle development influence decision-making and profitability? ” The methods revealed that with the construction of the Oresund Bridge brought a large influx of clients in accommodations for Copenhagen, Denmark and Malmo, Sweden.
This led to an expansion in the number of hotels in the Oresund region, totaling to 196 hotels with 19,036 rooms in total. This economic expansion has led to hotels banking on a delivery of unique accommodations through the employment of experience economy. The case study focused on three hotels in particular: Hotel Fox (formerly Old Park Hotel), Hotel Skt,. Petri and Guldsmeden Hotel. The utilization of unique marketing techniques, innovations in core values and hotel concepts and the focus on consumer behavior have indeed turned the hotel’s adoption of the experience economy into profits and the establishment of new and better images.
The case study also revealed that there was a dependency to business cycle development, which guided the creation of a framework that was specifically catered to the investment in hotels. This model, when applied to the case studies, rendered useful decision-making insights in the context of experience economy investment projects. This study presents another framework that is useful in the application of experience economy in real world situations.
The study was able to demonstrate that through innovative industry practices and a full commitment to the delivery of unique experiences can indeed yield profits especially for service sectors such as hotel chains. Once again, this study blurs the distinction between the delivery of service and experience. Is is however evident that in the context of hotels, the delivery services are much more effective and appreciated when packaged as an experiential product. Research Proposal The review of related literature revealed the different aspects in which the economics of experience have been investigated.
The manner in which experience economy was investigated mirrored an outward spiral model in which early studies focused on the description, distinction and investigation of the “experience” itself. Studies that focused on these were able to reveal the importance of consumer behavior in influencing the type of experience to be delivered. Most early studies also sought to prove or disprove the initial principles posited by Gilmore and Pine in their assertion of the experience as a separate “genre of economic output” (Gilmore and Pine, introduction) “distinct from services as services are from goods” (p. 2).
However, recent studies on the topic have led to a widening of horizons, and stepping out from the core of the spiral model of experiential economic research. These studies, such as Willet and Lyke, explore the socio-economic impacts of the real world implementation of experience economy. These studies have revealed the positive and negative impacts on businesses and communities, both cautioning and encouraging economic policy-makers and decision-makers. Useful data culled from the review of related experience economy literature for the research proposal would be the tourism experience measure of Oh et.
al. (2007) discussed and adapted by Hosany and Witham (2009) in their own investigation of cruisers’ experiences. The study can utilize and adapt this tool in measuring tourist behavior and satisfaction towards Thai indigenous tourism products. Although Arthur’s study is merely a proposal, its ideas on the local implementation of experience economy and its framework for competitive advantage can be applied on the case study of the Four Seasons hotel and the Rose Garden Hotel.
The numerous case studies presented in the review of related literature can provide a useful guide for analyzing the economic viability of experience economy in the context of Thai tourism. Especially of value is the last case study of hotels in Copenhagen which provided a framework and guidelines in the implementation of investment projects based on experience economy. The research proposal can then prove or disprove the validity of the framework by applying it to experience economy investment projects in the context of Asian countries. References: Taylor, John. (2007). “Economics.
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