Five Forces Analysis: Leisure, Tourism and Hospitality Industry

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6th Jun 2017 Tourism Reference this

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The tourism, Leisure and Hospitality industry is defined, not in terms of the production of special types of goods and services, but in terms of the circumstances at which goods and services are consumed. Hence, the sale of a particular good or service to a tourist is “tourist expenditure”. As a result of this difference in concept, this industry overlaps the usual classification of the industries defined according to the goods or services they produce (Luck & Lancaster, 2003)

This research paper analyzes the tourism, Leisure and Hospitality industry basing on the economic analysis tools by Porter, Porter (1980) proposed that firms benefit from the understanding of the forces which drive competition and the profitability in their industry, and he specifies that all firms should explicitly formulate a kind of competitor strategy. (Matthews, 2000) in order to understand the competition, a very competitive analysis should be undertaken. The Porter’s model is also referred to as the five forces competitive analysis.

Generally the tourism, Leisure and Hospitality industry has a unique business environment which affects all the competitors. According to Porter, five macro factors that influence the industry can be identified in relation to competition; (1) The bargaining power of the customers (buyers). This force shows the strength in the bargaining position, particularly the price, which the buyers have over their suppliers. (2) The bargaining power of the suppliers. The Suppliers, including the employees, influences the attractiveness and the profitability of the sector by increasing the prices (or the wages) thereby increasing the industrial costs and reducing the profit margins. Powerful suppliers are the organizations which control the supply of goods and services to the Tourism, Leisure and Hospitality industry. (3) The threat from the new entrants. The threat from the new entrants is dependent upon the barriers to entry into the industry. This is based on the ability to generate the economies of scale and experience, the opportunities for the product differentiation, the amount of capital which is required to buy into the industry, and access the distribution channels. In the tourism, Leisure and Hospitality, there are low barriers to the entry in most sectors. (4) The threat of the substitutes. The Substitute industries which provide the competing product with offers that perform the same function. The Continual advancement in the technology keeps on changing the potential threat from the substitute products. For instance, the rapid development of the video-conferencing is a substitute product for the hotel meetings.

Introduction

The Tourism, Leisure and Hospitality industry is an identifiable and nationally important industry. This industry involves a wide cross section of the component activities which includes the provision of the transportation, accommodation, recreation, food, and the related services .Tourism refers to the provision of the transportation, accommodation, recreation, food, and the related services both for the domestic and the overseas travelers. It involves travelling for all purposes, including recreational and business. Hospitality and tourism are certainly two of the most widely used words in the fields of hotels, restaurants, travel, and related areas.

Leisure is a sector that is growing rapidly, with the regular shows and events hosted regularly. Leisure is recognized as the essential factor which contributes to the demand for the tourism and recreation.( Kotler,& Keller, 2006). Leisure is an important factor which contributes to supply. It is therefore the anticipation of leisure which is the operational demand factor, whereas the use of leisure is a factor of supply. The Leisure time is the fundamental resource that is input and consumed in the tourism, Leisure and Hospitality industry. The leisure/entertainment events have created employment for thousands of people in a diverse range of roles. This is a multidimensional sector which provides a variety of services in the areas that include the corporate events such as the product launches, press conferences, corporate meetings and the conferences, the marketing programs; road shows and the grand opening events i.e special corporate hospitality events like the concerts, award ceremonies, film premieres, launch/release parties, the fashion shows, commercial events, private events such as the weddings and other parties. The industry also includes fields such as the exhibitions, conferences and the seminars as well as the live music and the sporting events. This research paper analyzes and links the tourism, leisure and Hospitality industry through the provision of the creative, technical and the logistical insights.

Methodology

This research employed a web based survey in gathering data on the industrial analysis. I analyzed several theories that act as the strategic tools for analysis. The instrument was divided into two parts;

The “Descriptive Analysis”, which describes the tourism, Leisure and Hospitality industrial analysis basing on Porters model of analysis.

The “Critical Analysis”, which assesses the extent to which various factors identified by Porter influence the Tourism, Leisure and Hospitality industry.

The contexts for the study were based on the distinctive nature of the Tourism, Leisure and Hospitality industry. Information was collected in the process of evaluation of the influences of the fundamental factors that determine the profitability: Industry structure, that determines the profitability of the average competitor and sustainable competitive advantage that allows a firm to outperform the average competitor” (Porter, 1979).

Analysis of selected industry

This paper examines the five forces which impact competitiveness within and thus the profitability of a competitor in the Tourism, Leisure and the Hospitality industry. From the guidance provided in the Five Factor Model recommendations are made to enhance and refine this industry.

Porter’s Five Factor Model

The five forces that impact on the competitiveness which are outlined in the Porter’s 1980 work are: the barriers to entry, threat of substitutes, the bargaining power of the buyers and sellers, and the rivalry among existing competitors. In considering these factors in light of the Tourism, Leisure and Hospitality industry, the theory provides the best means for analysis. According to Porter each of the above factors has a difference in relevance or impacts differently on the businesses so they are presented below in order of impact. Porter (1980) indicated that the most important determinant of a marketplace’s profit potential is the intrinsic power of the buyers and the sellers.

Threat of Substitute Goods

In the Tourism, Leisure and Hospitality industry there is usually higher chances to start a new business and progress successfully. The firms appear in all price ranges, with variations in the levels of service and the amenities. The constant challenge will always be to get the customers to choose your services over the competitor. With the technological advancements the internet makes the overall market to be more efficient while expanding the size of the potential market and creating the new substitution threats. Given the potency of this industry a superb strategic plan is vital.

The threat is that another firm chain may erode the customer base with a newly formulated internet approach or the marketing campaign. According to Porter the development of a value chain process analysis, supported by the collaborative event management, the structuring and sharing of the customer focused value chain data, powerfully enhances the performance of the value chains and of the electronic commerce.

Bargaining Power of Buyers

Business persons choosing a firm for business in the Tourism, Leisure and Hospitality industry are the savvy consumers and they are at par with the changes in the ability of their consumers. It has become very simple for the consumers to go online and survey on the best firm that offers great services. They no longer need the assistance from the travel agents, the corporate travel consultants or the middle men of any kind to determine where they will get their services. Porter’s model predicts the ability of the buyers bargaining power to elimination the intermediaries.

The Tourists who are the major consumers in the Tourism, Leisure and Hospitality industry are more and more capable of making use of the technological advancements in the means of communication such as the internet to increase their bargaining power thereby creating the fulfillment of Porter’s model. Due to the increased bargaining power of the consumers, they are finding internet businesses websites which will negotiate or discover the bargains for them. These processes shifts the bargaining power to the end user as it had been predicted by the Porter model and these buyer freedom reduces the cost of switching so that the loyalty to a single firm is a thing of the past unless the particular firm uses its one time opportunity when the customer sticks to the firm it deeply impress other customers with a very unique and valuable differentiator.

The Rivalry among existing competitors

The rivalry amongst the competitors in the Tourism, Leisure and Hospitality industry is fierce. When the potential customers learn about a hotel on line, the internet reduces the differences amongst the competitors. Business people tend to seek the best prices for the best experience and the tendency is to reduce the prices to a competitive level. This industry covers wide area so the market is widened which increases the number of the competitors. For example, someone who wants to spend the day in the historic site can easily choose a tourist firm in the nearby town if the amenities or the prices are low. The Variable and fixed costs can be different in the areas which are more expensive to live.

Barriers to Entry

The initial investments in the Tourism, Leisure and Hospitality industry creates quite a barrier to the entry but certain barriers to entering the tourism market are reduced by the internet. The presence on many efficient communication channels reduces the upstart marketing costs somewhat, and gives the new competitors the access to the potential suppliers and the resources. Even a starter in the industry can use the channels of large chains to understand the key marketing concepts and the lures for the customers.

A vital barrier is the differentiation. A firm that can successfully differential itself by the location, service, amenities or other quality has the greatest potential to attract and keep the clients. Another barrier to entry into business in the Tourism, Leisure and Hospitality industry would be the expertise. Unfortunately, in a mobile society employees can leave one firm chain to work in another and they take that expertise in terms of the training given or the experience with them. It is in the areas of expertise and of differentiation that a firm can make the greatest impacts on its clients and thereby on the bottom line. Many established tourism, leisure and Hospitality companies have the synergies between their established business and business channels.

Bargaining power of the suppliers

This is not a substantial threat in the Tourism, Leisure and Hospitality industry it can have the impacts especially in the area of the suppliers. The employees to the firms are the major suppliers, the bargaining power of the labor supply is higher when there are fewer people to fill service section of the industry, and the firms can attract excellent staff and create a chance for providing excellent and exceptional experiences to their clientele. As part of their strategy all the firm chains should have section employee recruitment. The other supplies that are needed by hotels are also easier to attain through internet channels whether originated by the supplier or by the hotel chain. With their products in the greater demand by greater numbers of the firms the suppliers gain more measure of power by competition for their offerings.

Findings about the industry

All of the firms in the Tourism, Leisure and Hospitality industry can benefit from Porters model of analysis because of the applications that produce greater value in the value chain, the industry is dominated by a few large companies. They have the greatest market shares and in most cases they influence the structure and shaping of the industry. The firm’s planning sector can benefit from analysis. They usually aim at making the profit and are usually commercial companies. When they fail to make a profit over a long period of time they are likely to cease trading. These include the parks, restaurants, tour operators and the travel agents. The Human resources can be managed by the analysis as part of the overall strategy as well as the provision for self service personnel and benefits, Value can be increased by standardizing the firms across multiple locations, forming knowledge directories, and allowing real time access to the resources by the consumers. , every firm could benefit by controlling and forecasting systems with suppliers as explained by Porter. These improvements can also lead to greater profitability (Porter, 1980)

Each type of firm needs to identify its unique strengths and the target market and align its strategy to support their identity, the firms’ chains choose to be low cost, or to command the premium price. Distinguishing a firm from the competition becomes vital. This can easily be enhanced by porter’s model, through the superior inputs, through better training of the staff as part of the supplier or through the better management. Differentiation adds value which makes it hard to maintain the distinctive strategic positions of a firm because it eases change to best practices and it improves the operational effectiveness. These distinctions make the business more profitable.

The firms in the Tourism, Leisure and Hospitality industry are fragmented. Therefore there is need for a strategy which makes it easier for consumers from far and wider areas to learn about the firms or to order for the services, the consumers must still access the services. It more likely for the profitability to be there for when process is easy to transact and complete. Porter points out similar examples within the industries. Dealing directly is great for the firms. Other than travel agencies who arranged hotel stays the tourism business has always been a face to face business and this normally sustains the economic value of the transactions. For all of the firms’ chains the porter’s model complements rather than cannibalizing the established ways of doing business. Hence it becomes a link in the value chain.

Conclusion

Whether a firm or its chain is well established or brand new, the underlying forces of competition will include: the threat of substitution, bargaining power of the buyers, the intensity of rivalry among competitors, the barriers to entry for new competitors, and the bargaining power of the suppliers helps to determine the profitability shapes its internet presence. When combined, these factors determine the economic value and even the survival. The porter’s model of industrial analysis provides the opportunities for the companies to communicate and establish the unique or distinctive positions for the businesses. In the case of tourism firms this is crucial.

The Porter’s five factor model helps to understand the rise of new ideas and the business firms in the context of the bargaining power of the Buyers. It helps in the understanding of what factors drives the businesses to differentiate themselves. It also helps in explaining why the labor may have greater bargaining power in the firms under the tourism industry; Porter’s concept of the “Bargaining power of Suppliers” determines the strength of the industry.

In reviewing the strategies of firm chains, differentiation is the key component. Some firms have chosen to differentiate by location and by very luxurious experience. Others have differentiated themselves by standardization means and by the price. The firms’ strategies must align with their business strategy in order to produce the desired profitability; Porter’s model leads the way of outlining the issues and the dangers which are inherent in each force.

In this paper, the recommendations for successful industrial analysis are made based on Porter’s model and the implementation of its suggestions could ensure a greater or continued profitability at the time planning and the structuring. This includes not only the customer interaction but also the applications in a variety of areas such as supply chain, the financial and Human Resources to increase the value chain. For the final analysis, however, Porter makes it clear that the model can add value when it is used in conjunction with other good business strategies.

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