Business strategy whitepaper

The 5 Competitive Forces
& Business Strategy
<<PLANNING METHODS WHITEPAPER SERIES >>
1. Renovating the business portfolio to ensure a sustainable
development
2
2. The tourism industry structure and its key players 3
3. The 5 competitive forces in the tourism industry 5
4. The business portfolio strategy method for destinations 16
CONTENTS
Jordi Pera Segarra
Envisioning Tourism 3.0 CEO
October 2016

THE 5 COMPETITIVE FORCES & BUSINESS STRATEGY
w w w . e n v i s i o n i n g t o u r i s m . c o m 2
1. Renovating the business portfolio to ensure a sustainable
development
When crafting Strategic Plans for destinations, one of the essential strategies to design is the
Business Strategy, to depict the portfolio of sectors in which the destination will compete.
Nowadays, more than ever before, the tourism market is segmented in an increasing amount
of sectors or businesses, each of which has enough specificities to deserve its own
competitiveness and attractiveness analysis and assessment.
Moreover, destinations need to diversify their risk, reduce demand seasonality, and renovate
their products to sustain their competitive position. The ultimate purpose of this methodology
is to establish a scale of priorities in the funding of renovations and investments.
In the case of Tourism 3.0, as explained in other Whitepapers, the Special Interest travel and
other minor sectors play a very important role on the success of its development, and so a
sound analysis should be carried out on an extensive range of Special Interest sectors.
The methodology based on the McKinsey matrix analyzes for every sector the capacity of the
destination to compete and the attractiveness of the sector, considering the market volume
and growth potential, seasonality of demand, tourists’ expenditure, multiplying effect,
customer loyalty potential, and the 5 competitive forces that shape long term profitability. This
5 forces analysis is the most complex and sound to be carried out, for a specific section is
dedicated to it in this Whitepaper.
A brief explanation of the generic industry players is given to help the readers understand and
apply the 5 forces framework in the strategy analysis process. It is then the role of the analyst
or the strategist to identify all the relevant industry players and assign them to their
corresponding category in relation with every competitive force.
Then, the challenge is to assess the proportional relevance of every player in relation with its
corresponding force, and determine the proportional strength of every force in the sector. To
rate the importance or strength of every force in shaping the industry’s long-term profitability,
it is necessary to combine both quantitative and qualitative analysis. In this regard, statistical
data corresponding to the business volume, the purchasing and sales volumes, prices and price
differences between different dealers, margins corresponding to business with different dealers
should be obtained for every incumbent.
Furthermore, it is necessary to gather data related to possible barriers to entrance, barriers to
exit –it is possible to quantify the switching costs, for instance- and other factors mentioned in
the explanation of the framework.
Finally, the assessment of a pool of industry experts is also necessary to find important
insights that are specific to every sector, or not properly explained in the available secondary
sources. Industry experts may also lead to new secondary sources, for it is convenient to
interview them rather at the beginning of the research, so as to help us orientate its process.
An industry experts pool should comprehend many profiles, such as directors of travel
agencies –outbound & incoming-, tour operators, hotels, tourism facilities, transportation
services; consultants, journalists, government officials, etc.

2. The tourism industry structure and its key players
Prior to analyzing the sector’s 5 competitive forces as the key component of the business long
term profitability, it is necessary to point out some other relevant factors affecting the
business attractiveness and the types of industry players we have to consider in the analysis.
2.1 Attractiveness assessment for the tourism industry
Apart from the 5 forces analysis, there are some more factors to be considered when assessing
the attractiveness of a tourism sector:
 Market volume and main segments volume
 Market growth trends and potential: current and foreseen market growth
 Seasonality of demand, considering length of high, mid and low seasons.
 Price elasticity of the demand: price sensitivity of all kinds of buyers, adjusted according to
the share of everyone.
 Expenditure in accommodation, food & beverage, activities and shopping (% of each).
 Multiplying effect: strategic value of the business in terms of its capacity of fostering the
prestige of the destination and marketing it for other businesses.
 Loyalty potential: capacity of the business in retaining customers (%)
When composing the attractiveness matrix we will adjust the value of every factor according to
its impact on the sector attractiveness.
2.2 Tourism industry players
There are 3 groups of players: first level suppliers, service operators and marketing operators

This diagram presents all the typologies of suppliers, services’ operators and marketing
operators of the tourism industry. Hereby we explain each one of them:
1st level suppliers. Human resources, land owners, infrastructure operators, utility
operators, government as license supplier and the construction sector are the basic suppliers
for the tourism industry operators. As we have seen in the five forces model, they play a key
role in defining the industry’s profitability when tourism is not so developed in a territory or we
are analyzing the attractiveness of a tourism sector that would require the construction of new
facilities and services. We may take into account Governments as active players in the industry
whenever they are in charge of marketing the destinations.
Service operators. Food & beverage, accommodation, transport and activities providers are
the key operators of the industry, as service providers. Whenever we analyze the
attractiveness of tourism business that would be based on existing services and facilities, we
will consider them as suppliers, except for the activities’ operators, which could be considered
as incumbents in this case.
Marketing operators. Here lies the complexity of the tourism industry, where we define
several kinds of operators, which may be either competitors or partners.
 Booking centers & portals: online and/or telephone based commercial platforms managing
bookings for one or more kinds of services operators –mostly focused on accommodation
and also activities-, usually gathering the tourism services offered within a local or regional
territory. They usually get their profits by keeping a percentage of the business they bring
to their local service suppliers. In this concept we can also include new business models like
Airbnb, whose service suppliers are local householders marketing their spare rooms.
 Incoming agencies: operators located in the destination in charge of creating packages
including accommodation, transportation and activities. These are the most genuine
marketing operators, as they are in charge of product development, combining services and
experiences available in the destination for the satisfaction of every target. They may sell
their packages to tour operators, travel agencies or directly to the final customer. In many
cases, they are also the activity providers.
 Tour operators: operators located in the outbound market in charge of creating packages,
usually marketing several destinations and several kinds of products. However they may be
tour operators specialized in one destination and more often in one kind of product (golf,
ski, sun & beach, cultural touring, incentive trips, etc.). These may deal directly with the
service operators or with the incoming agencies, and then sell their packages to the travel
agencies or directly to the final customer. They usually buy service capacity long in advance
to the service operators or incoming agencies at a lower price ensuring them business, and
then have to sell this capacity to the outbound markets.
 Travel agencies: service retailers usually located near to the customer, selling either
incoming agencies’ or tour operator’s packages, or directly booking to the services’
operators. Many travel agencies sell through the internet. Their value is based on the
confidence of the customer, offering packages from different operators and sometimes
specialization in certain products.
 Travel social media sites: even if they are not included in the previous scheme as business
players, sites like Tripadvisor and many similar models are key influencers in the decision
making process of both the chosen destination and mostly the chosen operators within,
therefore they deserve a relevant mention as key players in the tourism industry.

In this table are summarized the main features that define each of the marketing operators:
Marketing operators conceptual features
Location
Product
development
Dealing with
final customer
Marketing focus
Booking center Destination No 
One destination. One
or many products
Incoming agency Destination Yes 
One destination. One
or many products
Tour operator
Outbound
market
Yes 
Many destinations.
One or many products
Travel agency
Outbound
market
No 
Many destinations.
One or many products
Travel social site Internet No 
All destinations.
All services
Being that this conceptual outline is representative for most of the industry operators’ models,
we should also note that many operators have developed business models integrating several
concepts and functions altogether, in most cases as a result of a forward integration process.
3. The 5 competitive forces in the tourism industry
As with any other industry, the development of the tourism businesses requires a prior
strategic assessment on the attractiveness of its various sectors to determine the optimum
business portfolio to invest in. To do so, the 5 competitive forces framework analyses the
structure of every sector through the five forces that shape its long term profitability:
 The threat of new entrants
 The suppliers’ negotiation power
 The buyers’ negotiation power
 The threat of substitutes
 The competitive rivalry
These five forces determine how the generated value is to be distributed among the different
types of players: how much is retained by incumbents, how much is taken by suppliers and
customers using their bargaining power, and also how the profitability is limited by the threat
of new entrants and substitutes.
The strength balance between the different forces is to determine the average industry
profitability, and a key to formulate the adequate strategy. Hereby, we will analyze the
application of the five forces model for the tourism industry.
3.1 Threat of new entrants
The entrance of new competitors in the industry expands the overall offer and challenges the
market share of the incumbents, pressing on prices, costs, value added and investment
needed to keep their position in the market.

In the tourism industry, the new entrants tend to be the focus of attention of many travelers,
at least those who are always willing to explore unknown destinations. Needless to say that
there is an almost unlimited number of potential new entrants, if we consider the entire
tourism industry, though we will carry out this analysis for each tourism sector separately,
thus reducing significantly the number of potential entrants. In general, new destinations have
to face some particular challenges or initial barriers to entry:
Product differentiation: a new entrant has to have a unique selling proposition and enjoy a
credible image as a tourist destination. This is not easy to achieve in a few years, given that
brand image is a result of consistent communication efforts over a long period. Positive image
development takes time and should be followed by substantive action.
Capital investment: any territory that wants to develop tourism needs substantial investments
in hotels, roads and other infrastructures to meet demand requirements. To do so, it will have
to convince investors proving political stability and offering a business friendly environment.
Access to distribution channels: most destinations will need well-established distribution of
their new products via tour operators. In that respect there has been a process of
concentration in the tour operating industry, thus playing a key role and strengthening their
force. Despite the increasing role of the internet as a direct distribution channel, tour operators
still play a major role and tend to promote only easy to sell destinations due to high demand.
Government advisories: countries presenting some kind of safety risk due to conflicts or health
threats for travelers are evaluated by other countries governments, which advise their citizens
about such threats. Presenting any relevant threat for the tourist is likely to prevent any
destination from being marketed through the main distribution channels.
The threat of entry –and not the fact that new entries actually occur- puts a cap on the
profitability potential of the industry, as if the threat is high, incumbents have to hold down
their prices to deter new competitors. This threat will depend on the extent of entry barriers
and the retaliation that new entrants may expect from incumbents.
Apart from the main challenges explained above, there are other kinds of barriers to entry:
Supply-side economies of scale: They are created when large volumes of production manage
to spread fixed costs over more units and thus lower the cost per unit, or obtain better deals
with suppliers due to larger orders. That makes new entrants have to choose between
investing on a large scale or assume a cost disadvantage that should be compensated via a
differentiated product. Such is the case of mass tourism destinations, which can often be only
competed against with smaller scale differentiated products at higher prices. Or even in the
same destination, this is the competition between large hotels and boutique hotels. The most
cost efficient level of production is termed Minimum Efficient Scale (MES). If MES for firms in
an industry is known, then we can determine the amount of market share necessary for low
cost entry or cost parity with rivals.
Demand-side benefits of scale: This advantage arises when a larger network of clients
increases the attractiveness of the destination. In the tourism industry, this is the case of
some popular destinations among a certain target of tourists, whose leaders attract most of
the group, niche or segment to that destination, based on either objective or prestige criteria,
or because spending holidays with the group is an essential part of the motivation.

Customer switching costs: These are costs that clients have to assume if they change to
another supplier. In the tourism industry, this is the case of the residential tourism, in which
the tourists own a property in the destination where they go most frequently. All the cost of
selling the property and moving to the new destination is a significant barrier.
Incumbency advantages independent of size: Incumbents build often their competitive
advantage on some proprietary assets such as exclusive licenses to access natural heritage or
to operate in a certain location, reputable brand identity, or a specific know-how that sets
them apart from competitors. This is the most typical kind of barrier to entry in the tourism
industry, for which we could find an endless amount of examples, especially related to access
to natural resources, geographic locations and brand identities. Technology in the tourism
sector applies to the capacity to produce unique experiences due to a specific know-how, like
the wellness & spa, gastronomy, cultural & art performances, etc.
Government policy: Governments often regulate the industry including limiting the entrance of
new operators through a licensing system to protect the heritage or the environment. Many
kinds of regulations may limit the development of tourism, such as those related to either
natural or cultural heritage protection, environmental protection affecting the development of
ski or golf resorts, regulation against gambling, etc. Governments may also subsidize some
incumbents thus creating a disadvantage for potential entrants.
Investment and asset specificity: needless to say that for many tourism businesses, significant
investments need to be carried out, some of which correspond to special equipment that
cannot be used for other purposes or not easily sold if the venture fails, thus becoming a
barrier to exit. Such is the case of ski resort lifts, sailing marinas and many others.
Brand loyalty and advertising expenses: incumbents’ brand loyalty may be a significant barrier
to entry, as long as new entrants will have to develop expensive marketing campaigns to gain
a position in the market. Those campaigns will only be profitable in the long term. Incumbents’
advertising expenses are themselves a barrier to entry, as new entrants will need to invest
much more than incumbents to gain significant brand awareness and market share.
Apart from the barriers to entry, we should take into account the expected retaliation by
incumbents towards new entrants. Newcomers are expected to fear retaliation if:
 Incumbents have previously reacted effectively against the entrance of new players.
 Incumbents have proven capacity to strike back (cash, borrowing power, productive
capacity or influence in the distribution channels).
 Incumbents appear to be likely to cut prices in order to retain market share, due to a high
fixed cost structure.
 The low industry growth so newcomers can only develop business by taking it from
incumbents.
When carrying out the 5 competitive forces assessment for a destination’s strategy plan, we
consider incumbents all the local operators: accommodation providers, local operators
organizing activities, transport operators, and incoming agencies.

3.2 The power of suppliers
Powerful suppliers may leverage their bargaining power by raising prices, or by reducing
product quality or related services among many possibilities. A supplier is powerful when:
 Its business volume is much larger than its clients’ or there is higher concentration in the
suppliers’ side than in the client side.
 It supplies to several industries and therefore its business does not depend on one industry.
 The supplied inputs are critical for the industry.
 Its clients have to face switching costs when changing to another supplier.
 It markets differentiated products.
 Its product has no possible substitutes
 It can seriously threaten its clients to integrate forward into the industry.
In the tourism industry, the main suppliers to be considered are human resources, land
owners, energy and utility suppliers and the government as license provider, responsible for
urban planning and key infrastructure owner. Besides, every sector may have their specific
suppliers related exclusively to their activity. Whenever we are analyzing a sector for a
developed destination, in which there is no need to build new accommodation, we may take
the accommodation and transport providers as suppliers as long as this sector needs the tour
operators to market the destination –because they provide key added value- or the rate of
FITs in this sector is insignificant.
3.3 The power of buyers
In a similar way, powerful clients can leverage their bargaining power by pushing prices down,
demanding higher product quality or more added services, etc. In the tourism industry, buyers
are FIT, outbound tour operators, internet portals, travel agencies, corporate clients and
sometimes also DMCs. However, every tourist sector may have a different buyer structure
(%FIT, TTOO concentration, relevance of corporate clients and associated clients). Tour
operators can be identified as the main buyers of most tourist products. Buyers have
negotiating power when:
 There is higher concentration in the buyers’ side than in the suppliers’, or the business
volume of the buyers is significantly larger than their suppliers’. In this respect, there has
been an increasing concentration of the outbound tour operators in the major outbound
markets, especially in the sectors with the highest concentration of travelers.
 The products tend to be commoditized. That occurs with destinations that do not care for
their heritage and do not foster their culture as an essential part of the experience, in those
sectors that are not culture focused.
 There are few or no switching costs for customers. Switching costs are barely ever relevant
apart from residential tourism (when the tourist own a property in the destination).
 Customers may seriously threaten with backward integration to take a stake on suppliers’
business. Some outbound tour operators buy hotels in the destinations and set their own
inbound travel services.
 Buyers have very good information about the demand, prices and the supplier. In the
tourism industry it is not easy to hide information of the suppliers.

 If the utility of the product is low for the buyer, this will be more likely to press the prices
down to compensate the low utility. This is unlikely to happen in the tourism industry.
Instead, buyers are weak if:
 Producers threaten with forward integration, acquiring the distribution channel. This
happens when accommodation operators market their services directly to the client, usually
through the internet. It could also happen that these operators create packages including
transportation and activities and market directly to the final customer through the internet,
travel agencies or its own retailers.
 Significant buyer switching costs. Only in the case of residential tourism.
 Buyers are fragmented. This is the case of FITs and sometimes small tour operators.
 Producers supply critical portions of buyers’ input distribution of purchases. This refers to
the uniqueness of the accommodation or activities operator as a supplier within the tour
operator package.
A buyer group is price sensitive if:
 The purchased product accounts for a significant proportion of the procurement budget.
Accommodation is usually the most significant fraction of the package, along with
transportation depending on the length of the trip.
 The customer is under pressure to reduce its costs due to low profits, tensions in the cash
flow, etc. This happens quite often with the tour operators when negotiating with incoming
services suppliers.
 The product object of negotiation has little impact on the buyer’s product quality. This
cannot happen in the tourism business, as all the main components are clearly visible to the
final customer.
 The product has little impact on the customer’s other costs. This is not likely to apply to the
tourism industry. Only in very special cases.
Many producers try to counter the channel power with exclusive deals with specific distributors
or simply by selling directly to final customers through their own channel.
Through a series of mergers and acquisitions, a few tour operators control most of the sales
outlets today. Operators such as Kuoni are also in a position to centralize purchasing for an
entire brand in all European countries. A common complaint by hoteliers is that if the
requested price is not given, tour operators have the ability to take their clients to another
destination. Tour operators identify new destinations with low startup costs and compete with
existing destinations which are then forced to reduce prices. Certain European charters
recently pulled out citing price issues.
3.4 The threat of substitutes
A substitute is a product or service that satisfies the same need in a different way. A threat of
substitutes exists when a product’s demand is affected by the price change of a substitute
product. A product’s price elasticity is affected by substitute products –as more substitutes
become available, demand becomes more elastic since customers have more alternatives.

Many substitutes may be overlooked because of their different nature, as they are not direct
competitors. They limit the industry’s profitability by pressing the product prices, just as
another competitor would. There is a high threat of substitutes when:
 The substitute product or service offers an advantageous price-performance relationship
compared to the industry product
 There are little or no switching costs associated to the substitute product or service.
Strategists should monitor all the potential substitute industries’ evolution, to detect changes
that may turn these potential substitutes into attractive alternatives due to a price downturn,
emerging risks concerning security or health issues, a crisis diminishing the buyer’s available
budget, or new entertainment trends, for instance. In the tourism industry we consider
substitutes –in most cases- those other tourism sectors that may satisfy the same or similar
needs. For instance, we consider that two ski resorts are competitors, but a rural villa or a golf
resort is a potential substitute as long as it satisfies the need for vacation. Other conventional
substitutes could be residential tourism with relatives or friends, or activities related to the
entertainment industry. However, sometimes the substitutes may come from technological
industries, such as videoconference services in the case of business tourism.
3.5 Rivalry among competitors
Competitors’ rivalry may be shown through much evidence, such as advertising campaigns,
new product launches, price discount campaigns, product or service improvements, etc. The
extent to which rivalry affects the industry’s profitability depends upon the intensity of the
competition and the basis of the competition.
The intensity of rivalry is greater when:
 There are a large number of competitors, or many of them are similar in size.
 The slow industry growth intensifies the fights for market share.
 Participants have industry leadership aspirations beyond economic performance, and so
they have a passionate commitment to their business. This happens sometimes in the great
international events, which are not profitable themselves but foster the reputation of the
destination.
 Different business models measure performance in different ways due to different strategic
goals, and so it is difficult for them to monitor their rivals’ evolution, success and chances to
gain market share. A diversity of rivals with different cultures, histories and philosophies
make an industry unstable. There is greater possibility for mavericks and for misjudging
rival’s moves.
 Strategic stakes (investments) are high when a firm is losing market position or has
potential for great gains. Over the last decade there has been a process of concentration
affecting most of the major tour operators throughout Europe, taking advantage of the
market growth.
 Industry shakeout. The industry may become crowded if its growth rate slows and the
market becomes saturated, creating a situation of excess capacity with too many goods
chasing too few buyers. A shakeout ensues, with intense competition, price wars, and
company failures.

 Significant increase of the used production capacity increases offer and hence competition.
 High exit barriers. This happens in some businesses with very specific assets that cannot be
resold for other purposes, thus making it imperative to compete to recover the investment.
The dimensions in which rivals compete and the extent to which they compete in the same
dimensions have a significant impact on the industry’s profitability. Rivalry is especially
harmful to profitability when it is focused on price competition, as this pushes the prices down
and favors only the customers. Price competition also makes the customers overlook other
product features and focus only on price. Price competition is more likely to take place when:
 Product differentiation is low (and there are few switching costs for buyers).
 The overheads are high and the variable costs are proportionately low, pushing the prices
down in some cases to near the marginal costs. This happens especially in the low season.
 There needs to be a significant increase in capacity to make the business profitable.
 The perishability of the product forces the price down to what the market is willing to pay,
which in some cases is ridiculous. Over the last years there has been a trend to market the
vacant rooms or packages through specialized “last minute” channels.
When the competition is based in other dimensions such as product differentiation, design, or
branding, profitability is less likely to be damaged, as the competition drives rivals to innovate
in creating more value for the customer, which is actually likely to end up pushing the prices
up rather than cutting them. Further, value based competition builds barriers to entry and
makes the potential substitutes less attractive or suitable.
Stronger rivalry occurs when competitors aim for the same positioning in the market, focusing
on the same dimensions and so are trying to satisfy the same needs for the same targets. This
usually ends up in a zero-sum competition, not increasing the profitability.
Rivalry turns into a positive sum –increase the industry’s average profitability- when each
participant focuses on different targets, offering different products and services adapted to the
target segment’s needs, with different features, different value added services, different
branding, different price mix, etc. In this case, so long as the companies’ products satisfy
better the clients’ needs, they build more barriers to entry, differentiate from substitutes and
so they can also charge higher prices and increase their margins, increasing the business
profitability. It is the challenge of the strategist to shift the nature of competition towards
segmentation and differentiation in order to increase and secure profitability.
Industry rivalry may be measured by the Concentration Ratio (CR), indicating the percentage
of market share held by the four largest firms in the industry. With only a few firms holding a
large market share, the competitive landscape is less competitive (closer to a monopoly). A
low concentration ratio indicates that the industry is characterized by many rivals, none of
which have a significant market share. These fragmented markets are said to be competitive.
If rivalry among firms in an industry is low, the industry is considered to be disciplined.
However, a maverick firm seeking a competitive advantage can displace the otherwise
disciplined market. The intensity of rivalry commonly is referred to as being cutthroat, intense,
moderate or weak, based on the firms’ aggressiveness in attempting to gain an advantage.
In the tourism industry, there are two key trends that favor value based rivalry: market
segmentation and leverage of the destination’s cultural identity to build more powerful brands.

However there is a considerable market for price sensitive customers, and once in the
destination there is usually plenty of information about all accommodation and services
choices, in which the price is one of the most visible features. Massive tourism destinations
tend to compete on a price based type of rivalry.
To gain advantage over rivals, a destination may choose among several strategic moves:
 Developing new products
 Improving their segmentation strategy
 Using the distribution channels more creatively to gain awareness and offer attractive deals
 Developing a cost advantage to lower prices
 Improving other aspects related to the destination’s competitiveness
3.6 Factors to consider when analyzing the industry profitability
Beyond analyzing the five competitive forces that shape the industry structure and its long
term profitability, there are other factors that are usually analyzed but also overvalued as key
indicators when estimating long term profitability. These are the following:
Industry growth rate. A usual mistake is to overestimate the importance of industry growth.
This only means that the industry business is going to grow in volume, but not necessarily in
profitability. It only occurs so long as there are few or no entrants and the incumbents manage
to develop further economies of scale as a result of the business volume increase. But still,
many other forces play a decisive role in shaping profitability.
Innovation. In Tourism this refers mostly to business model and product innovation. Even if
new technologies are developed to optimize operational efficiency, this is rarely a significant
advantage for a destination, mainly because new technologies are developed by third party
players –not tourism operators- and therefore the technology is soon available to all operators.
Government. To properly assess the influence of government policies in the industry, it is
convenient to analyze how every policy affects each of the competitive forces. In the tourism
industry, the government plays a decisive role, being the owner of key infrastructures, the
license/permit provider either for the construction of facilities or for the exploitation of cultural
or natural resources as tourist attractions, responsible for the planning of the territory and
quite often also responsible for the marketing of the territory as a tourist destination.
Complementary products and services. Some products or services are consumed or used
along with others as a matter of need or to enhance value. Complements become relevant to
the strategic analysis when they influence the demand for the industry product, and influence
profitability through the way they influence the 5 forces.
The strategist should assess whether the influence of every component on every force is
positive or negative, as well as to estimate the strength of such influence. For instance,
complements usually directly affect the barriers to entry, depending on the nature of the
complement and its relationship with the main product or service. It also tends to affect the
thread of substitutes. In the tourism industry, all tourism activities requiring specific
equipment (golf, ski, sailing, etc.) are subject to such complement factor, especially as they
create a barrier to entry for new customers.

Complements may also affect other forces as they raise switching cost or reduce product
differentiation, up to the extent that some companies enter the complement industry to alter it
in their favor. This is to say that analyzing complement industries and its impact in the five
forces may be an essential part of the strategist work.
3.7 Changing forces, reshaping profitability
Industry structures tend to be rather stable, though there are usually some adjustments and
occasionally some radical disruptions. Change drivers may come from outside or from within
the industry: technological disruptions such as the rise of internet and social media, changes in
customer needs and rise of new segments, development of new business models, etc.
Shifting threat of new entry. Changes in the aforementioned barriers to entry are to shift
the threat of new entrants. One of the most usual barriers to entry is the Government policy in
urban planning and license concessions for building and operating tourism facilities. They are
also decisive in the development and maintenance of communication infrastructures to
facilitate a good accessibility to the destination. A lack of Government commitment and
investment is a considerable barrier to entry for the destination’s operators.
Another common barrier to entry, at least concerning distant markets, is the flight connection.
A good case study is that of the low cost airlines -namely Ryanair- that created flight
connections with many unknown destinations in Europe. In this case, the Government policy is
also decisive, as owner and operator of the airports in most of the cases.
Changing supplier or buyer power. The factors influencing the bargaining power of both
buyers and suppliers are to change over time in both directions. The rise of the internet as
sales and communication channel and the internet based business models –namely low cost
airlines- changed significantly the negotiation power of many local operators in front of the
tour operators, as it was much easier for the suppliers to market their services directly to the
client, and these two factors also boosted the rise of FITs, who could easily organize their trip
comparing many options “at a click” at very competitive prices. However, despite the loss of
market share by the tour operators, this setback was rapidly countered through a process of
concentration in the tour operating industry.
Shifting threat of substitution. The shifts in the threat of new substitutes come from new
product developments that shift the price-performance comparisons between different options.
In the case of the tourism industry, the rise of the collaborative business models such as
Airbnb is a serious threat for the traditional accommodation suppliers. Other examples are the
car sharing models taking business from the regular transportation services, and even some
platform based models where locals offer special interest experiences to visitors. In all cases,
non-professional services are considered as substitutes rather than rivals.
3.8 Understanding the forces to design strategy
Understanding the five competitive forces that shape industry’s structure is the first step in the
strategy design process. Every business should understand the key factors that determine the
current profitability, as well as the ones responsible for the profitability shifts.

Understanding the industry structure orientates corporate strategists in finding the best
opportunities and shaping the right strategies to catch them, or foreseeing threats and
designing the strategies to anticipate and prevent them from harming the business. Some of
the strategic moves that the 5 forces analysis may suggest to do are the following:
Positioning the destination. This strategy is to find a position in the market where the
destination businesses are better protected from the strongest forces threatening the business
profitability. Furthermore, the five forces analysis may also help the businesses analyze the
convenience of entry or exit in an industry. A thorough foresight analysis of an industry’s 5
forces may even spot levels of profitability that are not yet reflected in the share value of
incumbents. A good case study of a destination finding its most profitable positioning is that of
Macau (PRC), which positioned itself as the best destination for gambling all over Asia, and is
actually the world’s number 1 destination making profits from gambling, ahead of Las Vegas.
Exploiting industry change. Industry changes are source of threats and opportunities, and
so the visionary strategists have to be the first to foresee these changes and drive the
business towards advantageous positions to catch the new opportunities and avoid the new
threats. Structural changes may generate new needs or new ways to satisfy the current ones.
Industry leaders are more likely to overlook some of the new opportunities and may have
more difficulties to change their business model due to their size constraints. So these changes
are usually the opportunity of small or middle size players to grow towards industry leadership
positions, thanks to the agility allowed by their smaller size.
In Europe, the boom of Ryanair as a low cost carrier operating in small airports some
kilometers away from the main destinations changed the airline industry boosting the number
of travelers and taking business from the tour operating industry in favor of the FITs. This
benefited many businesses developing a strategy to get the Ryanair travelers, many of whom
used to travel through tour operators’ packages. At the same time, many new destinations
emerged, especially those near the airports where Ryanair was flying, many of whom were not
so popular before Ryanair’s flights.
Shaping industry structure. Sometimes, a company manages to transform the industry
structure through revamping their business model and altering the 5 forces. In these cases,
the other players are somehow forced to follow this leader so as not to lose their market
position and eventually the entire industry structure is transformed. The new leader reshaping
the industry structure is likely to get the most benefit by reshaping competition in a way that
can let its strengths shine. The industry restructure may be carried out in two different ways:
redistributing profitability among incumbents or expanding the overall profitability.
Redistributing profitability. To attract more profits to the industry it is necessary to identify the
main force or forces that are most constraining to profitability and neutralize them. A firm may
potentially influence any of the competitive forces. To counter supplier power, the incumbents
may standardize the features of its inputs to reduce or eliminate switching costs.
To neutralize buyer power, incumbents may offer value added services that raise customers’
switching costs, or find new channels to reach customers directly or at a lower cost. To keep
new entrants away from the industry, incumbents may create barriers to entry such as the
marketing expenditure or the R+D budget. To reduce the threat of substitutes, companies can
differentiate the product with new features or value added services to better satisfy the clients.

Expanding the overall profit. When the “industry pie” expands all players are likely to benefit
from the growth. That occurs when the industry discovers new markets to satisfy undiscovered
needs that were not satisfied, or by developing new product categories that generate new
demand and expand the potential market.
Overall profitability may also grow due to improved collaboration with suppliers or buyers to
reduce inefficiencies. Also, agreeing on industrywide quality standards raises the reputation of
the whole industry benefiting all players and allowing price raises. The distribution of the newly
expanded profit pie is to be determined by the five forces. The most successful strategists will
be those who manage their business to take the highest percentage of the new profits.
Continuing with the Ryanair case study, this expanded the tourism business in existing
destinations and also developed many new local destinations. The low cost flights stimulated
new demand both from the current outbound markets and from some new outbound markets
that were not used to having international flights to travel abroad directly.
Defining the industry. It is necessary for companies operating in many industries to well
define the industry boundaries, to assign every business unit to the corresponding industry and
to analyze profitability and design strategy for every business unit separately. It is essential to
identify when two similar products are different enough to actually play in different industries,
and so they are to be separated in two business units to properly set their own strategy.
In the hotel industry, it is quite common –among large hotel operators- to create different
brands depending on the segment they are operating in or targeting: business, vocational, city
trip, luxury, etc.
3.9 A tool to estimate long term profitability
The five competitive forces framework unfolds the key drivers of the industry competition, and
therefore a good understanding of these drivers is essential to foresee future threats and
opportunities, and hence to design the best possible strategy to move the business to a new
advantageous position and successfully compete in the industry.
Beyond orientating strategists, the five forces analysis also serves as a synthetic indicator of
the industry’s attractiveness for investors; provides a much wider vision on the industry past,
present and likely future; helps envisioning future shifts influencing profitability, and assess
proportionately the influence of the current moves and trends in the industry structure.
This deeper analysis of the industry structure and competition dynamics is much more holistic
and consistent than the financial projections usually highlighted in the investment analysis
reports, as it gets to the causes and factors that truly shape long term profitability.
The five forces analysis may also orientate investors on whether it is convenient to invest in
some of the other industry players responsible for the most decisive forces or factors, in order
to control the forces’ balance and therefore guarantee a stable profitability.
This may take the form of forward or backward vertical integration, but also consist of
investment in the complements industry –when applicable-, acquisition of competitors to build
barriers to entry, or even investing in potential substitutes to diversify risk.

4. The business portfolio strategy method for destinations
To define the investment priorities in the business portfolio strategy, it is necessary to assess
both the competitiveness of the destination for every sector and the attractiveness of each
sector. Hereby we use the term sector as a synonym of industry or “type of business”,
referring to a tourism segment such as Golf tourism, City breaks, or International conventions,
for instance. For such purpose there are two matrixes, each of which classifies every sector
according to its degree of competitiveness and attractiveness. The two matrixes are:
 Sector attractiveness matrix
 Sector competitiveness matrix
Once these two matrixes are completed, they are merged into a synthetic matrix where both
dimensions –competitiveness and attractiveness- are integrated, hence depicting the different
degrees of investment prioritization and positioning each business according to its
corresponding prioritization degree. This final integrated matrix is the one that shapes the
destination’s business portfolio and the investment priorities.
4.1 Sector attractiveness matrix
This matrix describes the attractiveness of each selected tourism sector for the destination.
The attractiveness of a sector is a combination of two concepts:
1) Sector’s long term profitability, defined by its seasonality, tourist expenditure, multiplying
effect, loyalty potential and the five competitive forces (threat of new entrants, buyer
power, supplier power, threat of substitutes and rivalry).
2) Sector’s market potential is defined by its volume and its growth trends.
Factor Rating (0-1) Weighting (0-100) Hierarchy
Seasonality 15
Expenditure 15
Multiplying effect 10
Loyalty potential 10
Threat of new entrants 10
Buyer power 10
Supplier power 10
Threat of substitutes 10
Rivalry 10
Long term profitability 100
Market volume 50
Market growth trends 50
Market potential 100

Out of the factors’ evaluation comes the hierarchy assessment on whether the sectors’ long
term profitability and market potential is high (67-100), medium (34-66) or low (0-33) and so
we will place every sector in its corresponding position in the matrix:
1) The vertical axis of the matrix shows the assessment of how attractive each sector is for the
destination based on the sector’s long term profitability.
2) The horizontal axis of the matrix shows the assessment of how attractive each sector is for
the destination is based on the sector’s market potential.
The assessment of the factors which are not measurable by reliable statistic data should be
carried out through interviews with industry experts. This would be the case of the Multiplying
effect and the loyalty potential especially.
4.2 Sector competitiveness matrix
Competitiveness may be defined as the capacity of the destination to perform successfully in a
specific business sector, in relation to the other rival destinations. When assessing the
destination’s competitiveness for a certain sector, we may be in two different scenarios that
will require different methodologies:
The destination is currently competing in the sector: the matrix describes the competitiveness
of each selected tourism sector for the destination. The competitiveness of a sector is a
combination of two concepts:
1) Competitive position, defined by the destination’s relative market share in the sector
(destination revenues in the sector/main competitor revenues in the sector) and
destination’s relative market share growth in the sector.
2) Competitive potential, defined by its leadership in quality, resources and experiences,
discomforts and insecurities, costs and marketing.
Factor Rating (0-1) Weighting (0-100) Hierarchy
Relative market share 70
Relative market share growth 30
Competitive position 100
Service quality 10
Resources and experiences 30
Discomforts and insecurities 15
Costs 15
Marketing 30
Competitive potential 100
The negative impacts that concern to the sustainability of the business are to be included in
the assessment of the costs.

Out of the factors evaluation comes the hierarchy assessment on whether the sectors’
competitive position and competitive potential is high (67-100), medium (34-66) or low (0-33)
and so we will place every sector in its corresponding position in the matrix:
1) The vertical axis of the matrix shows the assessment of how competitive each sector is for
the destination based on the sector’s competitive position.
2) The horizontal axis of the matrix shows the assessment of how competitive each sector is
for the destination is based on the sector’s competitive potential.
The destination is not competing in the sector: we will define the key success factors (KSF) for
the sector, analyse and compare international standard requirements with the destination’s
current performance. This way we can measure the specific competitive gap for each factor
and the gap matching capabilities of the destination.
Key success factors
(international
requirements)
Requirements
assessment or
relevance
Destination
current
performance
Gap
Gap matching
capabilities
Uniqueness of attractions 10 8 -2 M
Overall assessment on meeting key success factors M
Overall assessment on gap matching capabilities H
Regarding the methodology used to elaborate this matrix:
 Key success factors (KSF): international requirements in terms of attractions & resources,
infrastructures & services and management & marketing. A key requirement to consider will
be the lack of negative impacts of the tourism activity on the destination hence the degree of
negative impacts will determine the accomplishment of this key success factor.
 Requirements assessment or relevance: it grades the importance of those requirements; 10
points means a “must have” requirement, 8 points is a very important requirement and 6 an
important requirement;
 The destination’s current performance: assessment of KSF according to the present situation
 Gap: between the market requirements (according to international standards) and the
destination’s current performance;
 Gap matching capability: for those KSF with a consistent gap, we evaluate the objective and
real possibilities (high, medium or low) to meet those requirements at a reasonable cost and
in the short / mid-term.
Out of the meeting requirements and gap matching capabilities assessment (high, medium or
low), every sector is located in the Competitiveness matrix.
Merging the assessments contained in the two first matrixes, every sector is placed in its
corresponding location in the sector portfolio matrix that defines the final investment priorities
according to the competitiveness and attractiveness of each sector. In order to highlight the
most relevant sectors, the matrixes show the green areas where the investment for
development should be focused, the yellow area is less important to develop, while sectors in
the red area would be better to abandon.

4.3 Merging the matrixes into the final business portfolio matrix
The business portfolio matrix depicts the investment priority level corresponding to every
business sector object of analysis, and is the result of merging the Sector competitiveness
matrix and the Sector attractiveness matrix.
As we have seen in the previous section, the Sector competitiveness matrix is different
depending on whether the destination is currently competing in the sector focus of the analysis
or not. Therefore, considering both scenarios –analysing competitiveness for businesses in
which the destination is already competing and for businesses in which the destination is not
competing- there have to be designed two different methodologies -2 different kinds of Sector
competitiveness matrix, as explained in the last section-, to obtain a comprehensive Business
portfolio matrix.
In the case of the destination already competing in the sector focus of analysis, the Sector
competitiveness matrix is obtained through the competitive position analysis –relative market
share and relative market share growth- and the competitive potential analysis –considering
service quality, resources and experiences, discomforts and insecurities, costs, and marketing-
whereas the Sector attractiveness matrix is the same in both cases:
In most cases it will be necessary to use both methodologies, as in assessing the business
sectors adequacy for the destination’s portfolio it is always necessary to review the existing
business needs, but also to consider the development of new business sectors according to the
capabilities and the opportunities available in the market.

In the case of the destination not competing in the sector focus of analysis, the
competitiveness matrix is obtained through the “Meeting requirements analysis” and the “Gap
matching capabilities”, whereas the attractiveness matrix is the same in both cases:
4.4 Investment priorities assessment
Given the resulting business portfolio matrix, the position of every business in a different box
indicates the recommended level of investment priority and the purpose of the investment.
Priority A –
Make it excellent
Sectors that have high market attractiveness and at the same time high potential
to compete. Investment should be focused on marketing, promotion and
commercialisation of these sectors.
Priority B –
Improve
competitiveness
Sectors with high attractiveness, but requiring improvement in their capacity to
compete. Therefore, investments should be made to reduce the competitiveness
gaps.
Priority C –
Improve
attractiveness
Sectors with high capacity to compete, but with medium attractiveness. Efforts
should be made to increase attractiveness, especially by improving the
profitability result of the pressure of the four competitive forces.
Priority D –
Invest selectively
Sectors that have a medium attractiveness level, as well as medium capacity to
compete. Therefore, investments should be directed to those activities that will
improve the competitiveness level of the sectors while increasing their
attractiveness.

About Envisioning Tourism 3.0 Ltd.
Envisioning Tourism 3.0 Ltd. is a consulting firm building thought leadership in
strategy innovation for tourism destinations, designing innovative business models,
intelligence and marketing systems to envision how tourism destinations may
embrace the trends labelled under “The vision of tourism 3.0”, encompassing
collaborative models, open innovation, human spirit marketing, product co-
creation, storytelling and culture shift towards innovation and collaboration, among
others.
This way, as it happens with other similar methodologies, the destination is to assign resources
to the sectors that may potentially bring more revenues and carefully select investments in the
least profitable businesses. The sector portfolio is therefore likely to change over time, as
many new sectors emerge taking many of the mature sectors’ customers, other sectors get
mature, and mature sectors get stagnant or tend to die over time.
A very accurate data collection and analysis is necessary to ultimately decide the optimum
combination of sectors to operate in the destination. In this point, it is also necessary to
remark that some sectors might not be compatible with each other, due to branding reasons,
for instance. Some sectors may contribute to create an image of the destination that is
counterproductive for other sectors, or attracting some kinds of tourists that are not welcomed
by other sectors’ tourists. The compatibility analysis between sectors is therefore critical in
many cases, and should not be overlooked.
Finally, it is essential for the destination to have an Observatory monitoring both the
attractiveness of the potentially interesting sectors as well as the competitiveness evolution of
the destination in every business, its profitability and the business development in all target
markets, so to reorient the strategy as soon as possible whenever necessary.
Envisioning Tourism 3.0 Ltd. invites all readers to share their opinions on the exposed visions
and methods in the blog www.envisioningtourism.com. Readers’ reviews and contributions are
very appreciated, as they help us to improve the quality of our contents as well as extending
the explanation of our visions whenever necessary. You are welcomed to participate in
depicting how Tourism 3.0 may shape the future destination development strategies.
References
 Michael E. Porter. The Five Competitive Forces That Shape Strategy. HBR. January 2008.
© 2016 Envisioning tourism 3.0 Ltd. All rights reserved

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