TOURISM ENTERPRISES • Alternative Business Objectives 1. Profit maximization 2. Sales revenue maximization 3. Output maximization 4. ‘Satisficing’ 5. Quiet Life
1. Profit Maximization • The classical objective of profit maximization - requires a firm to maximize the difference between long-run total revenue and total cost, - which further requires the ability to identify marginalrevenuesand costs. • This may be relatively easyin the very short run (especially where the majority of costs are fixed and profit-maximizing tactics are concerned with filling unused capacity), but it is very difficult in the long run. • Thus, many tourism enterprises work with series of short-run goals rather than single long-term strategy.
2. Sales Revenue Maximization • Sales revenue maximization may occur for one of three reasons: 1. A business with relatively fixed capacity, as above, concentrates on revenue far more than on costs. 2. Innew and growingenterprises, managers perceive the need to establish a market base for future growth and long-term profits. This need leads to a series of short-rungrowth decisions. Example: some ‘new’ destinations and travel insurance businesses. 3.Marketing-oriented managers frequently measure success by sales revenue and market share; heavy promotion costs are likely.
2. Sales Revenue Maximization • Growth and revenue maximization can only continue subject to a minimum profit constraint(MAPC). This is - the level of profit required to maintain the viability of the enterprise. - the level will be the opportunity profit level obtainable within the market for stock in that type of business, below which stockholderswould sell outandinvest elsewhere.
3. Output Maximization • Output maximization implies that revenue is secondary to volume of goods services produced. The enterprise supplying in this fashion - it is product-orientedrather than market-oriented, and - it may reduce price to clear supply, perhaps even by giving the product away. • Such enterprises can be seen in collectivist economies; i.e.‘Intourist’ • NTOs often work partly with this objective, in terms of the number of tourists they attract from other countries. • Protecting and enhancing market share in a sector with intense competition also leads in the same direction.
4. ‘Satisficing’ • ‘Satisficing’implies the setting of a satisfactory or target rate of profit. • Good examples of satisficingwould include large enterprisesthat are: 1. multinational, or so large and diverse 2. publicly-owned, 3. non-commercial operations such as National Parks Authorities or heritage conservation foundations • State tourism enterprises in collectivist economies, large national airlines and international hotel chains have all been satisficers at some stage.
5. A Quiet life (Profit Minimization) • Though a minimum return is required to stay in existence, such enterprises will tend not to expand, diversify, nor engage in aggressive market activity. • This type of objective is most often found with small sole-proprietor businesses, whose aims are the personal aims of the owners. > Running a small hotel, motel restaurant almost as a hobby, and because they ‘like to meet people’ > a person sets up as a travel agent, primarily to enjoy the benefits > Owners of boats, stables or attractive rural properties
TOURISM ENTERPRISES (Cnt’d) 1. Carriers 2. Accommodation 3. Attractions and Support Services 4. Middlemen 5. Integration 6. Diversification 7. Concentration
1. Carriers • Carriage for tourism dominated by > private vehicles- mostly cars- for short distance (mostly domestic) travel, and > air transportfor international or longdistance travel. • Airlines have developed in different ways in different places.
1. Carriers (cont.) • In the US, major airlines are large,commercial corporations with profit and revenue maximizationobjectives. Since deregulation, competition has produced a situation where: > The product is made up almost entirely of scheduled services > Airlines concentrate on business tourists > An oligopoly exists, with eight major carriers supplying 95% of the US market >Price competition is obscured by product differences (schedule convenience, routes offered).
1. Carriers (cont.) • In Europe, most of the major airlines, have been under partialor total government control, provide‘socially necessary’ air services or ‘flag waving’ routes. This has allowed the emergence of charter airlines such as Sterling, Britannia and Aero Lloyd. These airlines: • concentrated on recreational tourists • operate with very cheap faresand high load factors • usually provide air travel as part of an IT • are often owned by tour operating enterprises • use capacity off-season to provide some scheduledservices or lease to carriers elsewhere.
1. Carriers (cont.) • Increasingprivatization or competition has forced carriers to become more profit-oriented, to suit the needs of themarket by flight-code sharing, joint operations or consolidations with other carriers. • Both road/rail and sea carriage also pass through phases of governmentownership and deregulation/privatization competition.
1. Carriers (cont.) • Sea transport for tourism, as distinct from cruising, is relatively unimportant except for ferry travel. Ex: Mediterranean • Rail travel is important to European and domestic Japanese tourism, owing to population densities and route networks • Intercity bus enterprises have far more prominence for recreationaltourism, particularly where they supply inclusive bus-tours as well as scheduled line services.
2. Accommodation • The lodging industry is perhaps morediverse and fragmented than any other sector in tourism (1)commercially provided accommodation must compete with hosting by VFR and even BTs (2)the range of product types varies from unserviced rough bush campsites through to luxury hotels and cruise vessels. (3)the supplying enterprises range from state-owned National Parksthrough individuals orfamiliesto MNCs.
2. Accommodation (cont.) • In general, ‘the accommodation product’ canbedivided into three main sub-products > Property: land/space, building/vehicle, location > Lodging services: housekeeping, food & beverage, personal service > Style and other services: theme/decor, activities, ‘quality’/image • The way in which these sub-products are combined controls the market position of a specific lodging product
2. Accommodation (cont.) • Competition in accommodation also depends on the geographical market coverage possible. > Domestic markets; limited competition, prices reflect local conditions. > International markets; competition with other countries-different cost structures, with other large and efficient suppliers, and for consumers with widely varying demand patterns. This structure is especially true for:
2. Accommodation (cont.) • multinationallodgingchains (such as Holiday Corporation, Sheraton, Ramada) • multinational referral chains(such as Best Western) • exclusive, high-quality suppliers whose prices and style restrict demand to a necessarily worldwide clientele (e.g. the Paris Ritz, Cunard cruises) • international timesharing consortia.
3. Attractions and Support Services • Like accommodation, the sector supplying tourism attractions and support services is highly fragmentedand diverse. • Unlike accommodation and transport, > its products tend to be dedicated specifically to particular tourist markets, > suppliers admit to being within the tourism industry.
3. Attractions and support services • Attractions can cover the following ranges: >resource-based------------ user-oriented > public goods -------- full-profit commercial > publicly-owned ---------- privately-owned > 'lifestyle'----- events----- fixed attractions • In view of such diversity, it is hard to claim that there is a single tourism attractions sector.
3. Attractions and support servicesExamples of Tourism Industry support services; Generating vs. Destination Area
3. Attractions and support services • Most National Tourist Office (NTO) and Regional or State Tourist Office (RTO) have objective to maximize tourist numbers or revenue. • The CRS industry has become an international oligopoly of groupings dominated by a few systems with worldwide coverage
4. Middlemen - Travel Agents • ‘Middlemen‘: arrange and distribute tourism products. • These are mainly travel agents and tour operators. • Travel agents, as selling agents for principals supplying transport, accommodation and so on, are supplying > the service of selling to the principals who are the buyers of the service. > the service ofselecting a principal to intending tourists. * Their incomeis derived from commissions paid by principals as the price of the service of selling.
4. Middlemen - Travel Agents • In major generating countries, travel agents are operating in a situation of pure competition, as there are many of them offering very similar services with basically only location or selling skills as differential advantages. • Where standard rates of commission are negotiated by travel agents, this effectively constitutes a cartel, which is sometimes defended by both agents and principals in the interests of 'orderly distribution'. However, the cartel's dominance is broken in three ways:
4. Middlemen - Travel Agents (1)Principals offer a system of overriding commissions to preferred agents or for special services (2)Agents use part of their commission to give discounts on principals' prices to tourists. Though this could be regarded as a marketing cost to travel agentsbut competition often makes discounting a normal activity (3)Distributionof tourism services may omit the travel agent as middlemen. Ex: Direct selling
4. Middlemen - Tour Operators • Tour operators, or tour wholesalers, are really manufacturers of a specific tourism product. • The product is an inclusive tour (IT), which may consist of one or more tourism services 'packaged' to tourists. • They are principals, and the buyers of their products are tourists. • They supply the quintessential (concise) tourism product -if anyone can be said to supply 'tourism', tour operators do.
4. Middlemen - Travel Agents • There are many different kinds of operator, such as: > Generating-area based enterprises supplyingITs by air -either charter or scheduled > Suppliers of extended bus toursor other land or sea-basedITs > Those who act only as a wholesale outlet for groups of accommodations, vehicle renters and so on >Destination based excursion operators who act as local ground handling agents for offshore enterprises.
5. Integration • Long-run decision-making by a produceris likely to concentrate on three main areas: > the opportunity for economies of scalein large-scale operations > the ability to control and develop inputs and markets > the chance to use existing differential advantagesto operate profitably in related fields. • They include: - horizontal integration - complementary integration - backward vertical and forward vertical integration
5. Integration (cont.) • As in other industries, forms of integration in tourism industry vary from its > straight takeovers or buyouts, through > corporate mergers, to > minority and majority cross-stockholdingsor > merely joint management or consortiumagreements. These last forms of looser, more flexible 'integration' have tended to predominate intourism industry.
5. IntegrationHorizontal integration • Enterprises at the same stage in the same industry usually join forces > to obtain externaleconomies of scale in production, > to obtain power in purchasing or distribution, > to remove or countermandcompetition. * Because the capital requirement is relatively small, integration amongst travel agents and tour operators frequently means full mergersandbuyouts.
5. IntegrationHorizontal integration • Code-sharing, and co-operative promotionare the easier forms of integration. • The objectives of such joint working arrangements are clearly > to secure demand in competitive markets rather than to obtain production economies. • The major economies in tour operating, for example, are in securinglarge volume discounts from suppliers.
5. IntegrationHorizontal integration • The same is mostly true in lodging and other sectors of tourism, particularly where efficiency means controlling demand to match a fixed supply. • Hotel and motel chains can obtain some economies in centralized management, finance acquisition and purchasingbut the greatest value of horizontal integration is in marketing, including distribution.
Vertical integration and complementarity • Marketinganddistributionadvantages are the main reason in tourism for vertical integration. • An airline may set up its own tour operating subsidiary to act as a distributor for output which is difficult to sell directly; • The airline may also buy into travel agents to ensure that its products are distributed more strongly than those of its competitors.
Vertical integration and complementarity (cont.) Equivalent reasoning applies to integration between suppliers of complementary products, referred to as complementary integration. • An airline or tour operator might buy or become associated with hotels and motels in cities, which it serves in order to reinforce their flight-purchasing decision. • The group might acquire a bus company in order to control ground transfers and provide excursions, and develop tourism attractions to reinforce the tourists' need to travel.
6. Diversification • Diversification into and out of tourism • It is relatively rare for enterprises wholly or mostly within tourism industry to diversify into other non-tourist industries. Possible reasons are: 1. few enterprises in tourism are large, highly cashed-up and have a large asset base 2. enterprises within tourism industry (a) that are struggling are not in a financial position to diversify and (b) those that do well ascribe success to the above-average growth obtainable in tourism compared with many other industries; they would therefore to expand within the sector.
6. Diversification (cont.) • By contrast, we frequently find diversification into tourism from all manner of industries and government activities. • This is caused by > the generally limited barriers to entry (including in many areas of tourism industry a low capital requirement), > perceptions of industry growth, > a counterbalance of activity and seasonality to other sectors, > perceptions (often misinformed) of the pleasures and ease of operating within this industry and opportunities for investment in alternative-use resources
7. Concentration • The result of individual enterprise growth and integration within tourism is an increase in the concentration of that industry • Concentration: is the degree to which output is produced by fewer and fewer enterprises. • This can only be accounted for realistically within the context of an individual economy.
7. Concentration (cont.) • Levels of concentration in any part of tourism in the future are likely to depend on two opposing factors; > firstly, the constant demand which encourages the development and survival of more and diverse enterprises and therefore leads to the reduction of concentration; > secondly, technology promotes integration and large-scale enterprise, especially in air travel and non-personal services (marketing and information communication, travel insurance, tourism payment methods). In these areas, concentration will undoubtedly increase.