Chapter 7 Chapter 7

TOURISM ENTERPRISESTOURISM ENTERPRISES

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TOURISM ENTERPRISESTOURISM ENTERPRISES

Alternative Business ObjectivesAlternative Business Objectives

1. 1. Profit Profit maximizationmaximization

2. 2. Sales revenueSales revenue maximization maximization

3. 3. OutputOutput maximization maximization

4. ‘4. ‘SatisficingSatisficing’’

5. 5. Quiet LifeQuiet Life

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Alternative Business ObjectivesAlternative Business Objectives

ObjectiveObjective ConditionsConditions Likely type of Likely type of enterpriseenterprise

Profit maximizationProfit maximization -- Competitive or Competitive or monopolistic owner monopolistic owner driven business driven business

Sales Revenue Sales Revenue MaximizationMaximization

Maybe short term Maybe short term onlyonly

Minumum Minumum acceptable profit acceptable profit constraint (MAPC)constraint (MAPC)

Aggressive growth Aggressive growth seekerseeker

Board heavily Board heavily influenced by influenced by marketersmarketers

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Alternative Business ObjectivesAlternative Business Objectives

ObjectiveObjective ConditionsConditions Likely type of enterpriseLikely type of enterprise

Output Output maximizationmaximization

-- Public enterprise in a Public enterprise in a collectivistic economycollectivistic economy

‘‘Satisficing’Satisficing’ MAPCMAPC Large public or private Large public or private enterprise in market enterprise in market economyeconomy

Board heavily influenced by Board heavily influenced by accountantsaccountants

A quite life (profit A quite life (profit minimization)minimization)

MAPCMAPC Sole proprietorship, owner Sole proprietorship, owner seeking simple living with seeking simple living with minumum problems/effortminumum problems/effort

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1. Profit Maximization1. Profit Maximization

The classical objective of profit maximizationThe classical objective of profit maximization - - requires a firm to maximize the requires a firm to maximize the difference difference between between long-run total revenue and total costlong-run total revenue and total cost,,

- - which further requires the ability to identify which further requires the ability to identify marginalmarginal revenuesrevenues andand costscosts. .

This may be relatively easyThis may be relatively easy in the very short runin the very short run (especially where the majority of costs are fixed and (especially where the majority of costs are fixed and profit-maximizing tactics are concerned with filling profit-maximizing tactics are concerned with filling unused capacity), but it is unused capacity), but it is very difficult in the long runvery difficult in the long run..

ThusThus, , many tourism enterprises work with series of many tourism enterprises work with series of short-run goalsshort-run goals rather than rather than single long-term strategysingle long-term strategy..

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2. Sales Revenue Maximization2. Sales Revenue Maximization

Sales revenue maximizationSales revenue maximization may occur for one of may occur for one of threethree reasons: reasons:

1. A business with relatively 1. A business with relatively fixed capacityfixed capacity, as above, , as above, concentrates on revenue far more than on costs.concentrates on revenue far more than on costs.

2. In2. In new and growingnew and growing enterprises, managers perceive enterprises, managers perceive the need to establish a market base for future growth the need to establish a market base for future growth and long-term profits. This need leads to a and long-term profits. This need leads to a series of series of short-runshort-run growthgrowth decisions. Example: some decisions. Example: some ‘new’ ‘new’ destinationsdestinations and and travel insurancetravel insurance businesses. businesses.

3.3. Marketing-orientedMarketing-oriented managers frequently measure managers frequently measure success by success by sales revenuesales revenue and and market sharemarket share;; heavy heavy promotion costspromotion costs are likely. are likely.

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2. Sales Revenue Maximization2. Sales Revenue Maximization

Growth and revenue maximizationGrowth and revenue maximization can only can only continue subject to a continue subject to a minimum profit constraintminimum profit constraint (MAPC)(MAPC). This is . This is

- - the level of profit required to maintain the the level of profit required to maintain the viabilityviability of the enterprise. of the enterprise.

- - the level will be the the level will be the opportunity profitopportunity profit level level obtainable within the market for stock in that type of obtainable within the market for stock in that type of business, below which business, below which stockholdersstockholders would would sell outsell out andand investinvest elsewhere. elsewhere.

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3. Output Maximization3. Output Maximization

Output maximization Output maximization implimplies ies that that revenue is revenue is secondarysecondary to volume of goods services produced. The to volume of goods services produced. The enterprise supplying in this fashion enterprise supplying in this fashion - it - it is is product-orientedproduct-oriented rather than rather than market-orientedmarket-oriented,, and and - it - it may may reduce pricereduce price to clear supply, perhaps even by to clear supply, perhaps even by giving the product away. giving the product away.

Such eSuch enterprises nterprises can be seen can be seen in in collectivistcollectivist economieseconomies; ; i.e.i.e. ‘‘IntouristIntourist’’

NTOs often work partly with this objective, in terms of NTOs often work partly with this objective, in terms of the the number of touristsnumber of tourists they attract from other they attract from other countries. countries.

ProtectingProtecting and and enhancingenhancing market share in a sector market share in a sector with intense competition also leads in the same with intense competition also leads in the same direction. direction.

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4. ‘Satisficing4. ‘Satisficing’’ ‘‘SSatisfatisfiicingcing’’ implies the setting of a satisfactory or implies the setting of a satisfactory or

target rate of profit.target rate of profit. Good examples of satisfGood examples of satisfiicing cing would include would include large large

enterprisesenterprises that that are:are:

1. 1. multinational,multinational, or so large and diverse or so large and diverse

2. 2. publicly-owned,publicly-owned,

3. 3. non-cnon-commercial operationsommercial operations such as National Parks such as National Parks Authorities or heritage conservation foundationsAuthorities or heritage conservation foundations

State tourism enterprisesState tourism enterprises in collectivist economies, in collectivist economies, large national airlines and international hotel chains large national airlines and international hotel chains have all been have all been satisfsatisfiicerscers at some stage at some stage. .

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5. A Quiet life 5. A Quiet life (Profit Minimization)(Profit Minimization)

Though Though a a minimum returnminimum return is required to stay in is required to stay in existence, such enterprises will tend not to expand, existence, such enterprises will tend not to expand, diversifydiversify, nor engage in , nor engage in aggressive market activityaggressive market activity. .

This type of objective is most often found with small This type of objective is most often found with small sole-proprietor businessessole-proprietor businesses, whose aims are the , whose aims are the personal aims of the owners.personal aims of the owners.

> > Running Running a small hotel, motel restaurant almost as a a small hotel, motel restaurant almost as a hobby, and because they ‘hobby, and because they ‘like to meet peoplelike to meet people’’

> > a person sets up as a a person sets up as a travel agenttravel agent,, primarily to enjoy primarily to enjoy the benefitsthe benefits

> > Owners Owners of boatsof boats, stables or attractive rural , stables or attractive rural propertiesproperties

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1. Carriers1. Carriers

2. Accommodation2. Accommodation

3. Attractions and Support Services3. Attractions and Support Services

4. Middlemen4. Middlemen

Integration in Tourism SectorIntegration in Tourism Sector

TOURISM ENTERPRISES TOURISM ENTERPRISES (Cnt’d)(Cnt’d)

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1. Carriers1. Carriers

Carriage for Carriage for tourism tourism dominated dominated by by

> > private vehiclesprivate vehicles - mostly - mostly carscars- for short - for short distance distance (mostly domestic) (mostly domestic) travel, and travel, and

> > air transportair transport for for internationalinternational or or longlong distance traveldistance travel..

Airlines have developed in different ways Airlines have developed in different ways in different places. in different places.

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1. Carriers (cont.)1. Carriers (cont.) In the US, major airlines are In the US, major airlines are largelarge,, commercialcommercial

corporations with corporations with profit and revenue maximizationprofit and revenue maximization objectives. Since deregulation, competition has objectives. Since deregulation, competition has produced a situation where:produced a situation where:

> > The product is made up almost The product is made up almost entirelyentirely of of scheduled scheduled servicesservices

> > Airlines concentrate on Airlines concentrate on businessbusiness tourists tourists

> > An An oligopolyoligopoly exists, with eight major carriers exists, with eight major carriers supplying supplying 9595 %% of the US market of the US market

>> Price competitionPrice competition is obscured is obscured (darkened)(darkened) by product by product differences differences (schedule convenience, routes offered).(schedule convenience, routes offered).

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1. Carriers (cont.)1. Carriers (cont.) In Europe, most of the major airlinesIn Europe, most of the major airlines, , have been have been

under under partialpartial or or total government controltotal government control, , provideprovide ‘socially necessary’‘socially necessary’ air services or air services or ‘‘flag wavingflag waving’’ routes. Thisroutes. This h has allowed the emergence of as allowed the emergence of charter charter airlines airlines such as such as Sterling, Britannia and Aero LloydSterling, Britannia and Aero Lloyd. . These airlines:These airlines:

concentrated on concentrated on recreational touristsrecreational tourists operate with very operate with very cheap farescheap fares and and high load factorshigh load factors usually provide usually provide air travel as part of an ITair travel as part of an IT are often owned by are often owned by tour operating enterprisestour operating enterprises use use capacity off-seasoncapacity off-season to provide some to provide some scheduledscheduled

services or leaseservices or lease to carriers elsewhere. to carriers elsewhere.

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1. Carriers 1. Carriers (cont.)(cont.)

IncreasingIncreasing privatizationprivatization or or competitioncompetition has has forced carriers to become more profit-orientedforced carriers to become more profit-oriented, , to suit the needs of theto suit the needs of the market market by by flight-code flight-code sharingsharing, , joint operationsjoint operations or or consolidationsconsolidations with with other carriers. other carriers.

Both Both road/railroad/rail and and sea carriagesea carriage also pass also pass through phases of governmentthrough phases of government ownership ownership and and deregulation/privatization competition. deregulation/privatization competition.

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1. Carriers (cont.)1. Carriers (cont.)

Sea transport for tourism, as distinct from Sea transport for tourism, as distinct from cruisingcruising, is relatively unimportant ex, is relatively unimportant except cept for for ferryferry travel travel. Ex: . Ex: Mediterranean Mediterranean

Rail travelRail travel is important to European and is important to European and domestic Japanese tourism, owing to domestic Japanese tourism, owing to population densitiespopulation densities and and route networksroute networks

Intercity bus enterprisesIntercity bus enterprises have far more have far more prominence for prominence for recreationalrecreational tourism, tourism, particularly particularly where they supply inclusive bus-tours as well where they supply inclusive bus-tours as well as scheduled line services. as scheduled line services.

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2. Accommodation2. Accommodation The lThe lodging industry is perhaps moreodging industry is perhaps more diverse diverse

and and fragmentedfragmented than any other sector in than any other sector in tourismtourism

(1)(1) commercially provided accommodation must commercially provided accommodation must compete with hosting by compete with hosting by VFR and even BTsVFR and even BTs

(2)(2) the range of product typesthe range of product types varies from varies from unserviced rough bush campsitesunserviced rough bush campsites through to through to luxury hotelsluxury hotels and and cruise vesselscruise vessels. .

(3)(3) the supplying enterprisesthe supplying enterprises range from range from state-state-owned National Parksowned National Parks through through individuals orindividuals or familiesfamilies to MNCs.to MNCs.

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2. Accommodation 2. Accommodation (cont.)(cont.)

In general, ‘In general, ‘the accommodation productthe accommodation product’ can’ can bebe divided into three main sub-productsdivided into three main sub-products

> > Property:Property: land/space, building/vehicle, location land/space, building/vehicle, location

> > Lodging servicesLodging services: housekeeping, food & : housekeeping, food & beverage, personal servicebeverage, personal service

> > Style and other servicesStyle and other services: theme/decor, activities, : theme/decor, activities, ‘quality’/image‘quality’/image

The way in which these The way in which these sub-productssub-products are combined are combined controls the market position of a specific lodging controls the market position of a specific lodging productproduct

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2. 2. AccommodationAccommodation (cont.)(cont.)

CompetitionCompetition in accommodation also depends in accommodation also depends on the on the geographical market coveragegeographical market coverage possible. possible.

> > Domestic marketsDomestic markets; ; limited competitionlimited competition, , pricprices reflect local conditions. es reflect local conditions.

> > IInternational marketsnternational markets; competition ; competition with other with other countriescountries--different cost structuresdifferent cost structures, , with other with other large and efficient suppliers, and for large and efficient suppliers, and for consumers with widely varying demand consumers with widely varying demand patterns. This structure is especially true for:patterns. This structure is especially true for:

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2. 2. Accommodation Accommodation (cont.)(cont.)

multinationalmultinational lodginglodging chains chains (such as Holiday (such as Holiday Corporation, Sheraton, Ramada)Corporation, Sheraton, Ramada)

multinational multinational referralreferral chains chains (such as Best (such as Best Western)Western)

exclusive, exclusive, high-qualityhigh-quality suppliers suppliers whose whose prices and style restrict demand to a prices and style restrict demand to a necessarily worldwide clientele necessarily worldwide clientele (e.g. the Paris (e.g. the Paris Ritz, Cunard cruises)Ritz, Cunard cruises)

international international timesharing consortiatimesharing consortia..

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33. Attractions and Support Services. Attractions and Support Services

Like accommodation, the sector supplying Like accommodation, the sector supplying tourism attractions and support services is tourism attractions and support services is highly highly fragmentedfragmented and and diversediverse. .

Unlike accommodation and transport, Unlike accommodation and transport,

> > its products tend to be dedicated its products tend to be dedicated specifically to specifically to particular tourist marketsparticular tourist markets, ,

> > suppliers suppliers admit to being within the admit to being within the tourism tourism industry.industry.

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3. Attractions and support services3. Attractions and support services

AttractionsAttractions can cover the following ranges: can cover the following ranges:

>> resource-basedresource-based ------------ ------------ user-orienteduser-oriented

> > public goodspublic goods -------- -------- full-profit commercialfull-profit commercial

> > publicly-ownedpublicly-owned ---------- ---------- privatelyprivately -- owneownedd

> > 'lifestyle''lifestyle' ----- ----- eventsevents ----- ----- fixed attractionsfixed attractions In view of such In view of such diversitydiversity,, it is hard to claim it is hard to claim

that there is a single tourism attractions that there is a single tourism attractions sector.sector.

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33.. Attractions and support services Attractions and support servicesExamples of Tourism Industry support services; Generating Examples of Tourism Industry support services; Generating

vs. Destination Areavs. Destination Area

GASGAS Services to touristsServices to tourists Travel financeTravel finance Travel insurance Travel insurance visas& passportsvisas& passports NTO informationNTO information

Services to suppliersServices to suppliers Trade pressTrade press Guides&timetablesGuides&timetables CRS and hotel repsCRS and hotel reps Brochure distributionBrochure distribution

DASDAS MedicalMedical BankingBanking Tour guiding Tour guiding Local informationLocal information

NTO/RTO supportNTO/RTO support Tourism training Tourism training Marketing supportMarketing support Specialist financingSpecialist financing

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3. Attractions and support services3. Attractions and support services

Most National Tourist Office (Most National Tourist Office (NTONTO) and ) and Regional or State Tourist Office (Regional or State Tourist Office (RTORTO) ) have objective have objective to to maximizemaximize tourist tourist numbers or revenue. numbers or revenue.

TThe CRS industry has become an he CRS industry has become an international oligopoly of groupings international oligopoly of groupings dominated by a few systems with dominated by a few systems with worldwide worldwide coveragecoverage

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4. Middlemen - Travel Agents4. Middlemen - Travel Agents

‘‘MiddlemenMiddlemen‘‘: : arrange and distribute arrange and distribute tourism tourism products. products.

These are mainly travel agents and tour operators. These are mainly travel agents and tour operators.

Travel agentsTravel agents, , as selling agents for principals as selling agents for principals supplying transport, accommodation and so on, are supplying transport, accommodation and so on, are supplying supplying

> > the service of sellingthe service of selling to the to the principalsprincipals who are the who are the buyers of the service. buyers of the service.

> > the service ofthe service of selecting a principalselecting a principal to intending to intending tourists.tourists.

** Their incomeTheir income is derived from commissions paid by is derived from commissions paid by principals as the price of the service of selling. principals as the price of the service of selling.

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4. Middlemen - Travel Agents4. Middlemen - Travel Agents In major generating countries, travel agents are In major generating countries, travel agents are

operating in a situation of operating in a situation of pure competitionpure competition, as , as there are many of them offering very there are many of them offering very similarsimilar services with basically only location or selling services with basically only location or selling skills as skills as differential advantagesdifferential advantages..

Where standard rates of commission are Where standard rates of commission are negotiatednegotiated by travel agents, this effectively by travel agents, this effectively constitutes a constitutes a cartelcartel, which is sometimes , which is sometimes defended by both agents and principals in the defended by both agents and principals in the interests of interests of 'orderly distribution'.'orderly distribution'. However, the However, the cartel's dominance is broken in three ways:cartel's dominance is broken in three ways:

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4. Middlemen - Travel Agents4. Middlemen - Travel Agents

(1)(1)Principals offer a system of Principals offer a system of overriding overriding commissionscommissions to preferred agents or for special to preferred agents or for special servicesservices

(2)(2)Agents use part of their commission to give Agents use part of their commission to give discountsdiscounts on principals' prices to tourists. on principals' prices to tourists. Though Though this could be regarded as a marketing this could be regarded as a marketing costcost to travel agents to travel agents but competition often but competition often makes discounting a normalmakes discounting a normal activity activity

(3)(3)DistributionDistribution of of tourism tourism services may omit the services may omit the travel agent as middlemen.travel agent as middlemen. Ex: Ex: Direct sellingDirect selling

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4. Middlemen - Tour Operators 4. Middlemen - Tour Operators Tour operators, or tour wholesalersTour operators, or tour wholesalers, are really , are really

manufacturersmanufacturers of a specific tourism product. of a specific tourism product.

The productThe product is an is an inclusive tourinclusive tour (IT), (IT), which may which may consist of one or more consist of one or more tourism tourism services services 'packaged' to tourists. 'packaged' to tourists.

They They are are principalsprincipals, and the buyers of their , and the buyers of their products are tourists. products are tourists.

They They supply the supply the quintessential (concise) quintessential (concise) tourism tourism product -if anyone can be said to product -if anyone can be said to supply 'supply 'tourismtourism', tour operators do. ', tour operators do.

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4. Middlemen - Travel Agents4. Middlemen - Travel Agents

There are many different kinds of operator, such as:There are many different kinds of operator, such as:

> > Generating-area basedGenerating-area based enterprises enterprises supplyingsupplying ITsITs by air -either charter or scheduledby air -either charter or scheduled

> > Suppliers of Suppliers of extended bus toursextended bus tours or other or other land or land or sea-basedsea-based ITsITs

> > Those who act only as a Those who act only as a wholesale outletwholesale outlet for for groups of accommodations, vehicle renters and so groups of accommodations, vehicle renters and so onon

>> Destination based excursionDestination based excursion operators who act as operators who act as local ground handling agents for offshore local ground handling agents for offshore enterprises.enterprises.

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5. Integration5. Integration Long-run decision-making by a producerLong-run decision-making by a producer is likely to is likely to

concentrate on three main areas:concentrate on three main areas:

> > the opportunity for the opportunity for economies of scaleeconomies of scale in large-scale in large-scale operationsoperations

> > the ability to control and develop the ability to control and develop inputsinputs and and marketsmarkets

> > the chance to use existing the chance to use existing differential advantagesdifferential advantages to to operate profitably in related fields.operate profitably in related fields.

They include:They include:

- - horizontal integrationhorizontal integration

- complementary integration- complementary integration

- backward vertical and forward vertical integration- backward vertical and forward vertical integration

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5. Integration (cont.)5. Integration (cont.)

As in other industries, forms of As in other industries, forms of integrationintegration in in tourism industry tourism industry vary from its vary from its > > straight straight takeovers takeovers oror buyouts buyouts,, through through > > corporate corporate mergersmergers, to , to > > minority and majority minority and majority cross-stockholdingscross-stockholdings or or

> > merely joint merely joint management or consortiummanagement or consortium agreements. agreements. These last forms of looser, more flexible These last forms of looser, more flexible 'integration' have tended to predominate 'integration' have tended to predominate inintourism industry.tourism industry.

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5. Integration5. IntegrationHorizontal integrationHorizontal integration

Enterprises at the same stage in the same Enterprises at the same stage in the same industry usually join forces industry usually join forces > > to obtain to obtain externalexternal economies of scale economies of scale in in production, production, > to obtain > to obtain power power in in purchasingpurchasing or or distributiondistribution, , > > to to removeremove or or countermandcountermand competition.competition.

* * Because the capital requirement is relatively Because the capital requirement is relatively small, integration amongst travel agents and small, integration amongst travel agents and tour operators frequently means full tour operators frequently means full mergersmergers andand buyoutsbuyouts. .

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5. Integration5. IntegrationHorizontal integrationHorizontal integration

CCode-ode-sharingsharing, and , and co-operative promotionco-operative promotion are are the the easier formeasier formss of integration. of integration.

The The objectivesobjectives of such joint working of such joint working arrangements are clearly arrangements are clearly

> > to to securesecure demand in competitive markets demand in competitive markets rather thanrather than to obtain production economies. to obtain production economies.

The major economies in tour operating, for The major economies in tour operating, for example, are in example, are in securingsecuring large volume large volume discounts from suppliers.discounts from suppliers.

5. Integration5. Integration

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5.5. Integration IntegrationHorizontal integrationHorizontal integration

The same is mostly true in lodging and other The same is mostly true in lodging and other sectors of sectors of tourismtourism, particularly where , particularly where efficiency means controlling demand to efficiency means controlling demand to match a match a fixed supplyfixed supply. .

Hotel and motel chains can obtain some Hotel and motel chains can obtain some economies in economies in centralized managementcentralized management, , finance acquisitionfinance acquisition and and purchasingpurchasing but the but the greatest value of horizontal integration is in greatest value of horizontal integration is in marketingmarketing, including , including distributiondistribution. .

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Vertical integration and complementarityVertical integration and complementarity

MarketingMarketing andand distributiondistribution advantagesadvantages are the are the main reason in main reason in tourism tourism for vertical integration. for vertical integration.

An airline may set up its own tour operating An airline may set up its own tour operating subsidiarysubsidiary to act as a to act as a distributordistributor for output for output which is difficult to sell which is difficult to sell directlydirectly;;

The airline may also buy into travel agents to The airline may also buy into travel agents to ensure that its products are ensure that its products are distributeddistributed more more strongly than those of its competitors.strongly than those of its competitors.

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Vertical integration and complementarity Vertical integration and complementarity (cont.)(cont.)

Equivalent reasoning applies to integration Equivalent reasoning applies to integration between suppliers of complementary products, between suppliers of complementary products, referred to as referred to as complementarycomplementary integration. integration.

An airline or tour operator might buy or become An airline or tour operator might buy or become associated with hotels and motels in cities, which it associated with hotels and motels in cities, which it serves in order to reinforce their flight-purchasing serves in order to reinforce their flight-purchasing decision. decision.

The group might acquire a bus company in order to The group might acquire a bus company in order to control ground transfers and provide excursions, and control ground transfers and provide excursions, and develop tourism attractions to reinforce the tourists' develop tourism attractions to reinforce the tourists' need to travel. need to travel.

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