Contents:

Introduction Page 2
Macro Environment Page 2
Competitive Forces in the Tourism Industry Page 4
Conclusion Page 6
References Page 6

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Introduction:
This paper will be dynamically examining the tourism industry during the 2000s. It will
begin by using the PESTEL framework to analyse the macro environment and determine
which factors drive the competitive forces within the industry. Following this, Porter’s
Five Forces model will be used to analyse the actual competitive forces at work within
the industry and determine the relative importance of these forces.

The macro environment

Before one can look at specific factors relating to the firm itself, it is necessary to first
examine the nature of the external or macro environment. This involves using the
PESTEL framework (Johnson, et al, 2008) which includes analyzing the political,
economic, social, technological, environmental and legal forces applicable to the
industry.

When looking at the tourism industry during the 2000s, it is important to realise that it is
a very volatile, constantly changing atmosphere, due to a number of environmental
factors. The first major factor that one must consider with regards to the tourism industry
as a whole is the number of terrorist attacks that took place in this period, including the
infamous September 11th attack in 2001, as well as the Madrid bombings in 2004 and
London bombings in 2005. The first area this would have affected would have been the
political environment. A great deal of political instability was created, mainly due to public
fear and lack of knowledge on behalf of governments. This forced governments to
implement greater security and control mechanisms at airports and other transport
services. This would have the effect of increasing the cost associated with travel.
Another political issue would have been the wars between America and Iraq and
between Israel and Palestine. These would have caused a decrease in demand for
travel to these areas.

In addition to these political effects, the terrorist attacks would also have affected the
legal and social environments. From a legal perspective, many countries were forced to
dramatically decrease the ease with which one could obtain visas. This would mean that
the opportunity cost of travel would increase as a result of additional time needing to be
spent filling out paperwork etc, which would impact negatively on demand. From a social

2
perspective, a number of travelers became extremely paranoid about the safety of their
journey and many decided to postpone or cancel trips all together. Apart from the
terrorist attacks, there were other social factors such as changes in consumers’
preferences for certain holiday destinations over others. Another aspect affecting this
phenomenon was the outbreak of SARS, which saw a significant decrease in visits to
the Far East in 2003 (Asian Market Research, 2003).

With regards to economic factors, it is evident that between 2001 and 2007 the world
saw phenomenal GDP growth, especially in developing countries (Wade, 2008). This
would cause an increase in demand for travel from citizens in these countries, as
illustrated by the statistics in the case study (Viardot, 2005). Another positive factor
would have been the integration of countries within the European Union. This would
have resulted in exchange rate stability and a decrease in immigration controls, which
makes it easier for people to travel between countries (Liverpool Business School, 2009)
One must however bear in mind that the case study was written in 2007, which suggests
that it doesn’t take into account the effects of the global recession that began in 2008.
This would have certainly had a negative effect on tourism, which can be regarded as a
luxury good.

Another factor which would have had a significant impact would have been the
technological advances of the time. Many countries upgraded their infrastructure,
thereby providing things like better water and health services, which would impact
positively on demand for travel to these places. The largest advancement though would
undoubtedly be the dramatic increase in the use of online bookings (Ecclesbourne,
2007).This makes planning shorter trips more convenient, as it removes the need to visit
a travel agency. It also allows more bookings to be made simultaneously, which will
make it possible for airlines to process more bookings more quickly.

From an environmental perspective, it is apparent that the world is starting to realise that
increases in tourism are having a negative impact on the environment. This is due to
increases in energy consumption, which in turn heightens the effects of global warming
(Neto, 2002). There are many controls that governments are trying to put into place,
such as flight rationing (Liverpool Business School, 2009). However, it can be argued
that these have not really begun to have a significant effect on tourism, as they are still

3
insufficient to dampen demand. It may become a problem in future years, as the number
of controls is likely to increase. Perhaps the largest environmental factor would be
natural disasters, like Hurricane Katrina (Cashell, 2005) and the tsunami that hit Asia in
December 2004 (Birkland, 2006). These will impact negatively on people’s confidence in
visiting places that have been hit severely by such disasters.

As can be seen, the macro environment has had a significant impact on the tourism
industry during the 2000s. The key factors affecting tourism negatively would be the
political, social and legal consequences of the terrorist attacks, as well the social
consequences of SARS and the environmental consequences of natural disasters. A
positive impact would have been brought about by an increase in world GDP and
technological advances in the form of increased online bookings.

Competitive Forces in the Tourism Industry:

It is very important for managers to be able to understand the competitive forces in an
industry, as these help to determine how attractive the industry is and whether an
organization is likely to succeed (Johnson et al, 2008). In this regard, Porter’s Five
Forces model will be used, in order to determine how new entrants, substitutes, the
power of buyers and power of suppliers affect the competitive rivalry within the industry.

The threat of new entrants:

The first major issue that a firm in the tourism industry would have to consider when it
comes to the threat of potential new entrants, is the fact that there are extremely high
capital requirements. Examples of capital requirements… This acts as a large barrier to
entry. It is also the case that, according to the case study, the ten biggest tour operators
control approximately 80% of the market. This means that there is less likely to be price
retaliation amongst the top firms, and they also possess extremely high economies of
scale (Liverpool Business School…). In addition to this, brand recognition is very
prominent, with many people being very aware of and loyal to brand names such as TUI,
Thomas Cook, My Travel and Club Med. All these factors mean that barriers to entry in
the tourism industry are high and that, therefore, the threat of new entrants is relatively
low.

4
The threats of substitutes:
When one looks at tourism in general, it is difficult to imagine viable substitutes. It is
possible to watch cinema or engage in other social activities, rather than travel, but
these activities cannot be regarded in the same light as tourism and are therefore not
effective substitutes (Liverpool Business School…). The rise in telecommunications
technology could be regarded as a substitute, due to the fact that businesses will often
conduct meetings via satellite, rather than arrange transport for delegates. However, a
tour operator like TUI would be more concerned with the “leisure” aspect of travel, as
opposed to the corporate side. There is also low differentiation, due to the fact that the
packages sold are typically very similar in nature and don’t vary a great deal from one
operator to another. Hence the threat of substitutes can be regarded as low.

The bargaining power of buyers:

Tour operators typically deal with a wide range of customers; hence it is very difficult for
buyers to exert significant power. One advantage that buyers have is the fact that it is
relatively costless to switch between operators, especially with the increase in online
sales (Liverpool Business School…). However, as has already been mentioned, there is
little differentiation amongst products and there is a lack of effective substitutes. These
factors make the bargaining power of buyers rather low.

The bargaining power of suppliers:

It is true that suppliers will have large negotiation powers against firms with a low market
share. However, one must bear in mind once again that this an extremely concentrated
market, with the top firms being able to exert significant power of their own. These firms
would have the ability to threaten suppliers with possible vertical integration (Liverpool
Business School…), which could have a significant impact on suppliers’ revenue due to
size of these firms. Hence it can be argued that the bargaining power of suppliers is
moderate.

Competitive Rivalry:
There are a number of firms in the market and, therefore one would expect rivalry
amongst competitors to be quite high. However, what one must take into account is the
fact that the tourism industry is highly concentrated, with the biggest ten tour operators

5
controlling over 70% of the market (Viardot, 2005). In addition to this there is also a large
difference of 8% between the market share of the first two firms, TUI and Thomas Cook,
and a 5% difference between Thomas Cook and the third firm, My Travel (Viardot,
2005).These substantial variations in market share between firms, combined with very
high fixed costs, means that the competitive rivalry in the tourism industry is only
moderate.

Conclusion:
This paper provided a thorough analysis of the tourism industry during the first few years
of this century. After analysing the macro environment, it was found that the major
factors affecting the tourism industry were the terrorist attacks, diseases such as SARS,
natural disasters like Hurricane Katrina and the tsunami, as well as increasing world
GDP and the increased use of online reservations. After examining the competitive
forces at play within the industry, it was found that the bargaining of suppliers and the
rivalry amongst competitors could be regarded as moderate, whereas the other forces
could be regarded as low.

References:
Asian Market Research, 2003. “SARS, Thailand, tourism and business travel: How fast
for recovery?” [online] Available: http://www.asiamarketresearch.com/news/000305.htm

Birkland, T.A. 2006. “Impact of the Boxing Day Tsunami on Tourism in Thailand” [online]
Available:www.eng.rpi.edu/.../Tsunami/asa%20paper%20version%202.2%20RL%20add
%20in%20no%20endnote.doc - Similar [20 September 2010]

Cashell, B.W. 2005, “The Macroeconomic Effects of Hurricane Katrina” [online]

Available: fpc.state.gov/documents/organization/53572.pdf [20 September 2010]

Ecclesbourne, 2007. “Factors Affecting Tourism – Technological Factors”. Derbyshire,

U.K. [online] Available: www.ecclesbourne.derbyshire.sch.uk/.../A2%20Student
%20Tourism%20Essays/Technology%20 [21 September 2010]

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Johnson, G., Scholes, K., Whittington, R. 2008. “Exploring Corporate Strategy: Text and
Cases”. London: Prentice Hall

Neto, F, 2002. “Sustainable Tourism, Environmental Protection and Natural Resource

Management: Paradise on Earth?” United Nations [online] Available:
http://www.mtnforum.org/oldocs/1423.pdf [21 September 2010]

Liverpool Business School, 2009, “Strategic Management: Environmental Analysis of the

Tourism Industry” [online] Available:http://www.scribd.com/doc/25781511/TUI-Analysis-
and-Implications [21 September 2010]

Viardot, E. 2005, in: Johnson, G., Scholes, K., Whittington, R. 2008. “Exploring
Corporate Strategy: Text and Cases”. London: Prentice Hall

Wade, R. 2008. “The First-World Debt Crisis of 2007–2010 in Global Perspective”.

Challenge Magazine. [online] Available:
http://www.challengemagazine.com/extra/023_054.pdf [20 September 2010]