Question

Discuss exactly how you would perform a comprehensive (internal and external) environmental analysis for a small or micro enterprise in the TOURISM industry in your region/district. Your answer should include a realistic range of specific variables associated with current conditions in the mentioned industry.
TOTAL: 100 marks

Answer 1

The tourism marketing environment consists of internal and external forces which could impact

the organisations’ performance. To be successful, companies must adapt to ongoing trends and

developments in their macro and micro environments. When organisations scan their marketing

environment they will be in a position to deal with any possible threats from the market and to

capitalise on any available opportunities. Therefore, this chapter explains the external

environmental factors of tourist destinations, including; political, economic, social and

technological influences. It also considers their internal environmental factors, including;

capital structures, resources, capabilities and marketing intermediaries; as it identifies

competitive forces from differentiated or low-cost service providers.

Keywords: tourism marketing, destination marketing, marketing environment, competitive

forces, tourism macro environment, tourism micro environments, environmental scanning.

1

Department of Corporate Communication, Faculty of Media and Knowledge Sciences, University of Malta,

Msida, MSD2080, MALTA. Email: [email protected]

2

The Business School, University of Edinburgh, Bucchleuch Place, Edinburgh, EH89JS, SCOTLAND.

1.1 INTRODUCTION

A sound knowledge of the customer requirements is an essential ingredient for any successful

business. For this reason, destination management organisations (DMOs) should consistently

monitor their marketing environment. The marketing environment is continuously changing,

as it consists of a number of unpredictable forces which surround the company.

As well as conducting a thorough analysis of the actual marketing environment, the tourism

businesses must investigate the conditions in which they operate. The regulatory and

competitive conditions as well as other market forces, including; political, economic, social

and technological forces, could affect the organisational performance of the tourism businesses.

Hence, this chapter will look into some of these issues. The tourism industry is highly

influenced by economic factors, including; strong exchange rate fluctuations, the price of oil

and other commodities, among other matters. Moreover, social factors including global

concerns about safety and security could influence tourist behaviours. Notwithstanding, the

regulatory environments will also have an impact on tourism and airline businesses (Belobaba,

Odoni & Barnhart, 2015). For instance, the airline industry’s deregulation and liberalisation

has created numerous opportunities for many airlines, including low-cost carriers. At the same

time, it has threatened inefficient airlines who have been protected by regulation.

Undoubtedly, competition is a vitally important element in the marketing environment and it

should not be under-estimated. The businesses competitors comprise suppliers of substitute

products. They may be new entrants in the marketplace. Alternatively, they may include

customers and suppliers who were stakeholders of the business. In this light, tourism marketers,

including DMOs should be knowledgeable of different business models as competition can

take different forms, like for example, differentiated, full-service companies or low-cost

service providers. For these reasons, organisations should have effective mechanisms to

monitor the latest developments in the marketing environment.

1.2 ENVIRONMENTAL SCANNING

Environmental scanning entails the collection of information relating to the various forces

within the marketing environment. This involves the observation and examination of primary

and secondary sources of information, including online content from business, trade, media

and the government, among others. The environmental analysis is the process of assessing and

interpreting the information gathered. An ongoing analysis of the gathered data may be carried

out by marketing managers or by researchers who have been commissioned to conduct market

research. Through analysis, marketing managers can attempt to identify extant environmental

patterns and could even predict future trends. By evaluating trends and tendencies, the

marketing managers should be able to determine possible threats and opportunities that are

associated with environmental fluctuations. When discussing the ‘marketing environment’ we

must consider both the external environment (i.e. the macro-environment) as well as the

internal environment (i.e. the micro-environment) (Kotler, Armstrong, Frank & Bunn, 1990).

1.3 THE MACRO ENVIRONMENT

The tourism businesses must constantly assess the marketing environment. It is crucial for their

survival and achievement of their long-term economic goals. Therefore, marketing managers

must engage in environmental scanning and analysis. Most firms are comfortable assessing the

political climates in their home countries. However, the evaluation of political climates in

foreign territories is far more problematic for them. Experienced international businesses

engage in political risk assessment, as they need to carry out ongoing systematic analyses of

the political risks they face in foreign countries. Political risks are any changes in the political

environment that may adversely affect the value of any firm’s business activities. Most political

risks may result from governmental actions, such as; the passage of laws that expropriate

private property, an increase in operating costs, the devaluation of the currency or constraints

in the repatriation of funds, among others. Political risks may also arise from non-governmental

actions when there is criminality (for example: kidnappings, extortion and acts of terrorism, et

cetera). Political risks may equally affect all firms or may have an impact on particular sectors,

as featured in Table 1.1. Non-governmental political risks should also be considered. For

example, Disneyland Paris and McDonalds have been the target of numerous symbolic protests

by French farmers, who view them as a convenient target for venting their unhappiness with

US international agricultural policies. In some instances, protests could turn violent, and may

even force firms to shut down their operations, in particular contexts.

Table 1.1: Typical Examples of Political Risks

Type Impact on Firms

Expropriation Loss of future profits.

Confiscation Loss of assets, loss of profits.

Campaigns against businesses Loss of sales; increased costs of public

relation; efforts to improve public image.

Mandatory labour benefits legislation

Increased operating costs.

Kidnappings, terrorist threats and other

forms of violence

Increased security costs; increased

managerial costs; lower productivity.

Civil wars Destruction of property; lost sales; increased

security costs.

Inflation Higher operating costs.

Repatriation Inability to transfer funds freely.

Currency devaluations Reduced value of repatriated earnings.

Increased taxation Lower after-tax profits.

(adapted from: Camilleri, 2018a)

International corporations who intend investing in different markets should consider asking

these simple questions: Is the host country business-friendly? Is its government a democracy

or a dictatorship? Is the authoritative power concentrated in the hands of one person or on one

political party? Does the country rely on the free market or on governmental controls to allocate

resources? How much of a contribution is the private sector expected to make in helping the

government achieve its overall economic objectives? Does the government view foreign firms

as a means of promoting or hindering its economic goals? When making changes in its policies,

does the government act arbitrarily, or does it rely on the rule of law? How stable is the existing

government? If it leaves office, are there going to be any drastic changes in the economic

policies of the new government? Firms should always contemplate (research) these issues

before entering into a new market. They should be knowledgeable about the host country’s

political and economic structures, in order to minimise uncertainty and unnecessary risks.

Appendix A. provides a good background on the aviation industry’s regulatory environment.

A PEST analysis (political, economic, social and technological) provides a useful framework

to analyse macro-environmental factors. The businesses should carefully analyse these issues

before considering their expansion in a different country through foreign direct investment.

1.3.1 Political, Legal and Regulatory Issues

The political analysis relates to how governments influence the companies’ strategy and

operations. The political environment encompasses laws, government agencies and pressure

groups which could have an effect on tourism organisations and entrepreneurs. Such factors

include; national politics on financial matters, including; foreign debt, and the rates of inflation

(i.e. increase in prices), recession; policies and regulatory legislation on reciprocal trade and

foreign investment; travel restrictions, the governments’ tourism policies; as well as ecological

considerations, among other issues.

Political, legal and regulatory issues can affect the viability of tourism firms. Therefore, any

prospective changes in the governments’ priorities (for example; public spending) or a change

in government can lead to the opening-up or the closing of markets. The business activity tends

to grow and thrive when a nation is politically stable. National governments and their legal

systems could could facilitate or hinder businesses, in many areas. Therefore, any political

changes are closely related with the legal and economic matters (for example: employment

laws, minimum wage laws, health and safety laws, zoning regulations, environmental

protection laws, consumer protection laws, tax laws, et cetera). For instance, new European

Union regulations have led to greater levels of competition in European aviation. However,

many stakeholders are concerned about the environmental impact from airlines.

Many nations are increasingly encouraging free trade by inviting firms to invest in their

country, whilst allowing their domestic firms to engage in overseas business. These nations

may decide not to impose conditions on imports, or they would not discriminate against

foreign-based firms. On the other hand, there are other governments who may oppose free

trade. The most common form of trade restrictions is the tariff, (i.e. a tax that is placed on

imported goods). Tariffs or levies are usually established to protect domestic manufacturers

against competitors by raising the prices of imported goods. Multinational firms may face the

risk of expropriation. This happens when the government will take ownership of land, buildings

and / or other fixed assets; sometimes, without compensating the rightful owners for their loss.

When there is the risk of expropriation, multinational firms will be at the mercy of foreign

administrations. Unstable governments may have the authority to change their laws and

regulations at any point in time, to meet their needs.

Very often, the best sources of information are their own employees. Whether they are citizens

of the business’ home country or of their host country, employees possess first-hand knowledge

of the local issues, and are a valuable source of risk information. The views of local staff should

be supplemented with the views from outsiders. The government, embassy officials,

international chambers and industry associations are often rich sources of information. Many

governments will usually signal their economic and political agendas during their political

campaigns before being elected in parliament. Once in office, several governments continue to

provide useful information about their current and future plans. Moreover, numerous

consulting firms specialise in political risk assessment. Their role is to assist those firms who

are considering foreign direct investment, those who would like to penetrate into a particular

market. To reduce the risk of foreign operations, many developed countries have created

government-owned or government-sponsored organisations which insure firms against

political risks. For instance, the Overseas Private Investment Corporation (OPIC) insures US

overseas investments against nationalisation. The Multilateral Investment Guarantee Agency

(MIGA), a subsidiary of the World Bank provides similar insurance against political risks.

Private insurance firms such as Lloyds’ of London also underwrite political risk insurance.

1.3.2 The Economic Issues

The economic analysis will involve an examination of the foreign countries’ monetary, fiscal

and economic policies. The factors affecting consumer purchasing and spending patterns,

include; wealth per capita; discretionary income; industrial development; currency restrictions;

balance of payments; leave of imports / exports; fluctuations in interest and foreign exchange

rates, among other issues. The exchange rate of a country’s currency represents its value in

relation to that of another country’s currency. Currency rates fluctuate on a daily basis, thus

creating high risks for many industries, including the travel and hospitality sectors. Tourism

businesses will be more encouraged to expand and to take calculated risks when economic

conditions are right. For example, when there are low interest rates, and when they are

experiencing rising demand. Rising incomes and higher standards of living have often

translated to more disposable money on luxuries like; long-haul travel and other hedonic

behaviours.

1.3.3 Social Issues

A social analysis delves into societal behaviours, customs, values, norms, lifestyles and

preferences. Demographic factors, including the age structure of the population may also

change, over time (for example, there are many developed countries that are already having an

ageing population). Moreover, social issues could also comprise the cultural environment,

which is influenced by the individual populations’ size, race, religious beliefs, gender, family,

education, occupation, and the individuals’ position in the social stata, among other variables.

Institutions could influence society’s basic values, perceptions and preferences. For instance,

there may be changes in consumer behaviours which could be attributed to trending fashions

and styles. Climate and seasonal variations could also affect consumer behaviours, and their

travelling propensity. Of course, there may be other factors that could affect the consumers’

inclination to travel, including; credit facilities and attitudes, competition from other spending

behaviours, et cetera. In addition, social issues may also relate to distances to be travelled;

urban versus rural lifestyles and attitudes to travel; emigration, school vacation periods,

perceptions on international commuting, et cetera.

Tourism marketers ought to be sensitive to different social issues. A good understanding of

societal changes could help them position their business, and to anticipate market demands.

For the time being, many countries are experiencing a surge in popularity, particularly in short-

break itineraries. This has inevitably led to a boom in demand for tourism products in the off-

peak and low seasons. At the same time, airports and airlines are striving in their endeavours

to improve their levels of security, in the wake of the latest terrorist attacks. Currently, there is

also the possibility that the U.S. government could ban laptops from aircraft. Other social

factors that must be taken into consideration, include; civil wars, assassinations or kidnappings

of foreign people. These contingent matters are equally dangerous for the viability of the

tourism firms’ operations.

1.3.4 Technological Issues

A technological analysis is required as marketers need to keep themselves up-to-date with the

latest innovations in the tourism industry. Like any other business, the tourism firms, including

airlines are affected by new technologies, which could create new products and market

opportunities (Sigala, 2018; Gretzel, Werthner, Koo & Lamsfus, 2015). For example, larger

and faster aircraft which are more pleasing to the customer, as well as airport developments

and their facilities, including; efficient check-in desks; lounges, shuttles and online travel

booking sites, among other things, have surely improved the customer experience. Moreover,

recently there have been a number of interesting developments in the field of airport security.

The need for quicker, seamless processing and baggage checks has led the Transportation

Security Administration (TSA) to explore the possibility of new security lanes. There have also

been significant efforts to improve the accuracy of threat detection. New emerging

technologies are providing better security but can also help to enhance the passenger

experience. Recently, many airlines are also considering the introduction of facial recognition

devices that may be used for the boarding of passengers.

The rapid pace of technological change has been forcing travel and tourism businesses to spend

heavily to remain on the cutting edge. This way they could better serve their customers. In the

90s, many full-service, legacy airlines have introduced elaborate reservation systems which

enabled them to improve their services to passengers. Subsequently, they introduced big data,

analytics and customer relationship management systems that have improved their customer-

centric approaches. In addition, many airlines, particularly, the full-service carriers have

established sophisticated frequent flyer programmes, as they forged industry partnerships and

/ or code-sharing agreements with other carriers.

Recently, the uses of digital media, electronic databases and interactive communications have

enabled vast quantities of information to be shared and distributed online, in an efficient

manner. Tourism marketers are increasingly using technology to improve the standards of

service. Several innovative destination management organisations (DMOs) are utilising a range

of smart technologies to improve their customer service levels. For instance, KTO Tourist

Information Centre (TIC) of Seoul, in South Korea, has adopted a mix of information,

communication technologies (ICTs), including a visitor website with an interactive map

featuring pre-arrival information. Facebook, Twitter, Instagram and Snapchat are being used

by marketing and public relations executives for customer engagement and wide array of

mobile application are being used by many travellers. For instance, the city of Montreal Tourist

Office promotes its attractions through an interactive video that provides virtual experiences to

tourists; while, Las Vegas Tourism Office provides personalised itineraries and Tourism New

Zealand have come up with an interactive trip planner with customisable maps, price ranges

and activities. Tourism businesses are increasingly expected to be knowledgeable and

proficient in the use of internet (Buhalis & Law, 2008). The ongoing developments in

technology and the proliferation of ubiquitous media and mobile communications have affected

tourism businesses, in many ways. Many customers and prospects are using interactive media

to engage with the business in two-way communications. They may also get involved in

electronic word-of-mouth publicity (which can be either positive or negative) in social media,

and by using review and rating sites like TripAdvisor or Yelp.

1.4 THE MICRO ENVIRONMENT

Many travel and tourism businesses including DMOs, are continuously monitoring the

countries’ political, economic, social and technological changes to reduce their risks. However,

the external environmental forces will also affect the organisations’ micro environment. The

micro environment consists of forces which are close to the companies themselves, forces

which will affect their ability to serve customers. These forces include the organisations’

capital structure, resources, capabilities of management and staff, companies’ aims and

objectives, the companies’ marketing intermediaries, customer markets, competitors and all

other stakeholders that may have an interest or an impact on the organisations’ ability to

achieve their objectives (for example, financial, media and government stakeholders, among

others).

1.4.1 Capital Structure

The organisations’ capital structure and how finance is allocated across departments and units

will have an effect on the companies’ marketing programmes.

1.4.2 Resources

The firms’ specific assets are useful for creating a cost or differentiation advantage over other

competitors. The organisations’ resources may include; patents and trademarks, intellectual

capital, installed customer bases, reputation and brand equity, among others. For example, the

size and type of fleet of aircraft that are owned and controlled by airlines will determine the

type of service which they can offer to the market.

1.4.3 Capabilities

The firms’ ability to utilise resources is one of their capabilities. When organisations introduce

a product to the market before their rivals, they will achieve a competitive advantage. Such

capabilities may be embedded in organisational routines and may not be documented as

strategic procedures. Moreover, the organisations’ structures and the leadership of their various

departments, and the relationship between management and staff may not be easily replicated

by other businesses. The competitors may not always be in a position to mimic the capabilities

of successful businesses.

The firms’ resources and capabilities together form their distinctive competences. These

competences enable innovation, efficiency, quality and customer responsiveness; all of which

can be leveraged to create cost or differentiation advantages.

1.4.4 Company Aims and Objectives

When companies decide which market segments to target, they must carefully evaluate their

internal strengths and weaknesses, and communicate their value propositions to their chosen

markets.

1.4.5 Marketing Intermediaries

Marketing intermediaries are firms which help companies to promote, sell and distribute their

goods or services to customers. When discussing about the tourism industry, tour operators and

travel agents will usually act as intermediaries. Therefore, travel and hospitality businesses,

including airlines and hotels, need to develop a sound relationship, loyalty and a strong

bargaining power with tour operators, travel agents to sell their products. Moreover, the tourism

industry and its distribution network are exposed to a number of changing internal and external

environmental forces (these have been mentioned in the previous sections). With technological

developments, there may be variations in economies and consumers could become more

sophisticated and demanding. For example, today’s customers have access to price comparison

web sites, like; Google Flights, Kayak, Momondo, TravelSupermarket.com, Expedia, et cetera.

1.5 IDENTIFYING COMPETITION

An adequate knowledge and understanding of competitive trends in the market place is

necessary, as competition is a vitally important element in the marketing environment (Kotler

et al. 1990). The competitive forces determine whether there is profit potential for a specific

industry. The starting point of the competitive analysis is the identification of competitors.

Porter (1979) identified five forces that govern industry competition: the threat of new entrants;

the bargaining power of suppliers; current competitors; the bargaining power of customers; and

the threat of substitute products or services. According to Porter (1979), the key to growth and

survival, is to use one’s knowledge of these five forces to “stake out a position that is less

vulnerable to attack from head-to-head opponents, whether established or new, and less

vulnerable to erosion from the direction of buyers, suppliers, and substitute goods.” Such a

position, he argues, can be gained by solidifying relationships with profitable customers, by

integrating operations, or by gaining technical leadership.

In the tourism industry, the suppliers of tourism amenities can exert pressures over other

businesses. For instance, these suppliers may refuse to work with the firm or they may charge

excessively, high prices for their services. In this day and age, digital media has facilitated

offline and online sales as it has provided a platform for interactive communications between

businesses and their customers. Moreover, the competition from new entrants has also posed

significant threats to businesses (Della Corte & Aria, 2016). The profitable markets that yield

high returns will obviously attract new firms. The arrival of new competitors could eventually

decrease the profitability for all other incumbent firms within the industry.

For example, the airline industry is a growing one, and extant carriers who fail to enhance their

route network may be bypassed by competing airlines (Belobaba et al, 2015). There may be a

number of national or low-cost carriers who may be competing for the same customers, on the

same route. Furthermore, the bargaining power of customers could also exert pressure on

businesses. If a large number of customers ask for lower prices from companies, they will have

no other choice but to succumb to their requests. On the other hand, the buyer power is low

when the customers act independently. The buyer power is high if the customers have a wide

selection of service providers to choose from. When customers are buying in large quantities

from a supplier; a temptation exits for the customers to move back along the chain, to become

direct competitors with the supplier, rather than to remain their customers. This may be the

case for those established tour operators who frequently block pre-negotiated carrier seats or

hotel rooms. These travel organisations have grown to a point where it would be more viable