Porter 5 forces on Tourism industry and explanation Essay
Porter 5 forces on Tourism industry and explanation
The UK Inbound Tourism IndustryIntroduction:Tourism is seventh of the largest industries in the UK, worth £74 billion to the UK economy. There are currently 2.1 million jobs in the industry. Within the inbound Tourism to the UK, 30 million overseas visitors who came in 2005 spent £14 billion on holidays 2005 was a record year for UK inbound tourism both in terms of volume and value. The UK ranks fifth in when compared international tourism earnings league behind the USA, Spain, France and Italy. Within UK home Tourism, UK residents in 2005 took 59.3 million holidays of one night or more spending £11.5 billion. They even took 22.5 million overnight business trips spending £5.3 billion and £52.7 million overnight trips to friends, family& relatives spending £5.4 billion (Mintel 2008)(Visit Britain, ).
Porters Five Forces:Fig 1:Threat of New EntrantsThreat of new entrants into the tourism industry is very high; there were a handful of low-priced carriers in the UK, flying mostly to holiday destinations. The market valuation of Ryan air become more than that of British Airways.
Since then, there are many more new entrants in the low-cost carrier sector, posing major threats to the front runners, Ryan air and Easy Jet. A shake-out of the low-cost segment is taking place. The share price of Ryan air has begun to decline because of the threat of new entrants (Beech and Chadwick, 2006).
Factor 1 – Economies of ScaleNew entrants have to match existing providers to be able to survive and grow. One appeal for new airline entrants is the forecast increases in UK air travel from 200 million at present to 500 million journeys in 2030. The World Tourism Organisation estimates the doubling of air journeys over the same time period.
Matching the cost base of existing new careers, new entrants could control a share of the air journeys. Within this long-term trend, there are likely to be reductions caused by events of and the wars in Afghanistan and Iraq. This can lead to consolidation through takeovers, as this happened through the merger of Klm and Air France, TUI taking over Thomson and Thomas Cook merging with German-based tour operators. These have led to companies with a global presence in the tourism market (Beech and Chadwick, 2006).
Factor 2 – Product DifferentiationA new entrant has to have a unique selling point to attract customers. In tourism, there is a major tendency among tourists to be tempted by special offers in the form of discounts, add-ons and novelty value. Tourists have changed destinations, or choose different offerings in the same destination, depending on what was on offer and at what price and quality, or have moved from high-cost to low-cost carriers for their travel. There are companies that look to develop a unique product and branding, such as Thomas Cook (offering Club 18-30) and Saga (providing holidays and other products for the 50+ age group), and ecotourist holidays by TUI (Beech and Chadwick, 2006).
Factor 3 – Switching CostsThese are one-time for the customer in switching from one supplier to another. In booking a holiday, travel agents shops tend to be in close immediacy to one another, and can be accessed by the internet and the telephone. Customers are used to shopping around and especially, in a culture driven by bargain hunting. Selecting which country to visit is influenced by whether it offers value for money (Beech and Chadwick, 2006).
Factor 4 Capital Investment and Working CapitalThis can be a considerable entry barrier. For example, Iberostar are expanding by creating resorts in Croatia and the Caribbean. These require large capital investment and operating costs and a long-term commitment, which is predicted on an assessment of economic and political stability in these destinations. Existing resorts will need renewed investment to preserve their competitiveness (Beech and Chadwick, 2006).
Factor 5 – Access to Distribution ChannelsConsolidation in the holiday market means that organisations such as Thomas Cook and TUI have considerable vertical integration involving hotels, airlines and travel agents and by market development have expanded their distribution channels. Independents have to develop their own networks. However, telesales and internet intermediaries have created new opportunities for new entrants to sell their services (Beech and Chadwick, 2006).
Factor 6 – Government Policy and Regulation:Laws passed by governments can act as an individual to new entrants. Some governments require investment to be linked to a local partner. The Maastricht Treaty of 1991 freed up the free movement of capital from one member state to another within the European Union. In the Mallorcan resort of Palma Nova/Magaluf, the local organisation of tourism businesses is lobbying municipal and regional government not to allow the development of all inclusive resorts because their members will lose sales to these tourists (Beech and Chadwick, 2006).
Threat of SubstitutesThe threat of substitutes is low for the tourism industry. British people took their holidays in UK resorts before the 1960s. However, since the late 1950s, the development of jet travel has opened up travel to European destinations that leads to the decline of UK resorts. However, there has been the potential to develop sales to UK destinations.
Power of CustomersThe power of customers is high, because they can have a huge power and influence profitability. Tour operators such as Thomas Cook and TUI purchase large volumes of hotel accommodation at the lowest prices. A common complaint by hoteliers is that if they do not comply, tour operators take their custom elsewhere. Tour operators identify a new destination with low start-up costs, and compete with existing destinations, which are then forced to lower their prices. Holiday-makers make choices based on quality at the lowest price and choose destinations different from the previous year .
Power of SuppliersPower of suppliers is low. When suppliers have bargaining power, they can vary prices and quality of their services. In tourism, suppliers include raw materials, equipment, financial services and sources of labour. Tour operators have been evading travel agents by selling direct to holiday-makers through telesales and the internet .
Intensity of Competition RivalryIntensity of competitive rivalry is very high, because organisations can face direct and indirect competitors. In tourism, direct competitors will depend on the sector of activity.
In hotels, there are companies providing an economy, mid-range or top-level service, for which they charge an appropriate price. They compete within their own segment.
By contrast, low-cost airlines operating short hauls were better able to survive and grow. The high-cost airlines were forced to engage in price cutting and competing with low-cost airlines to retain business. The long haul airlines have learnt to reduce turnaround times between flights, reduce operating costs and become leaner and meaner. The low-cost airline sector is competitive with 50 firms in Europe alone. There is the threat of high cost carriers competing in the no-frills sector as British Airways is threatening to do (Beech and Chadwick).
Conclusion:To sum it up, competition in the UK tourism industry is fierce. Investment is so risky that responsible ethical investment companies withdraw from investing, and therefore the opportunity of ethical investment power is lost. It has become harder for travel companies to compete, because the products they offer are relatively the same. They have higher margins because of lower price sensitivity of wealthy customers. After all, companies goal is to have high profits and high sales. The nature of the relationship between a small business firm and its customers is trust. The answers to certain questions concerning practices with probable ethical consequences can be used by small business owner to prevent the perception of unethical practices.
Mintel Reports Accessed from http://reports.mintel.com/ Dated 8th of November.
Robert M Grant (2008) Contemporary strategy analysis,6th Ed, BlackwellBeech, J. and Chadwick, S (2006) Accessed from The Business of Tourism Management on Dated 8th of NovemberVisit Britain (2006). Booking Patterns International versus Domestic Tourism Travel Accessed from www.tourismtrade.org.uk on dated 10th of November.