ICT driven transformation and growth in the tourism industry – a business model perspective

Stefan Klein

Drivers of growth in tourism?

• Increased ratio of consumer expenses on tourism services and products, or

• Increased relative market share of a region vis-à-vis other regions

A business model perspective

A simple definition:

• An architecture for the product, service and information flows, including a description of the various business actors and their roles; and

• A description of the potential benefits for the various business actors; and

• A description of the sources of revenues.

Source: Timmers 1998

A business model thus

… is a simplified version of a company‘s strategy

… captures the core business idea

… focuses on innovation and customer value

… describes a simple model of an enterprise

… addresses forms of collaborative, interorganizational value generation

Key issues • Product innovation:

What business the company is in, the product innovation and the value proposition offered on the market.

• Customer relationships: Who the company's target customers are, how it delivers them the products, and how it builds a strong relationships with them.

• Infrastructure management: How the company efficiently performs infrastructure or logistics issues, with whom, and as which kind of virtual enterprise.

• Financials: What is the revenue model (transaction, subscription/membership, advertising, commission, licensing) and the cost model (cost of goods sold, operating expenses for R&D, sales and marketing, general and administrative)?

(Osterwalder, Pigneur,

2002)

Example 1: Ryanair [accessed 20060315]

1.Average fares reduced by 9% – a £2.50/€3.50 fare cut.

2.New web check-in service gives passengers priority boarding and avoids check-in and boarding gate queues.

3.Total baggage allowance now increased to 30kgs per person - 10kg for cabin baggage and 20kg for checked bag.

4.Only pay for the services you use. 5.No checked in bags = No Charge. 6.Pay only £2.50/€3.50 per checked in bag

per flight.

Example 1: Ryanair• Product innovation:

Ryanair has redefined air travel no frills, low fares, low cost, point-to-point service within a limited geographical radius.

• Customer relationships: Web-based direct sales model, consistent communication, more frequent transactions

• Infrastructure management:Alliances with related tourism principals, such as car rental companies or hotels to provide bundling opportunities.

• Financials: Yield management and commissions from partners

The role of ICT

• Strategic alignment addresses the linkages between business strategy/ organisation and ICT.

Business strategy

I/T strategy

Organizational infrastructure and processes

I/T infrastructure and processes

Strategy execution

(adapted from: Henderson; Venkatraman 1993)

Spill-over effects

• By consistently and rigorously pursuing a low cost strategy, no frills airlines have changed the value proposition and service and created a new market segment: – new customer groups,– increase of the overall volume of air travel.

• Other segments of the industry - in particular car rental or car sharing services and hotels, which have introduced a variety of self service models, e.g. a chip card to get access to cars as part of the car sharing service of German rail - are following a similar direction.

Customer relationship: ProSuming

Level ofcustomer

activity

Level of provider activity

Internalization

Externalization

Extended scopeof services

Reducedscope ofservice bundles

Automation and/orstandardization of

processes andmodules

Learning relation-ship to facilitatethe configuration of complex andversatile services

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Spill-over effects

• New models of flexible service bundling have been introduced.

• The informational efficiency is increased by an intense competition among online intermediaries, who provide price comparison for different segments of the market. – Next to online travel supermarkets such as

Travelocity, Expedia, Opodo, etc., – specialized brokers have entered the online

market focusing on hotel accommodation (e.g. www.HRS.com) or car rental (e.g. www.billigermietwagen.de).

Example 2:Cama e Café

Cama e Café is the first bed and breakfast network in Brazil. With more than 50

registered houses and trained hosts, Cama e Café offers hospitality in family houses at

Santa Teresa, a charming neighbourhood in Rio de Janeiro.

www.camaecafe.com.br [accessed 20060315]

Example 2: Cama e Café

• Product innovation:Adapted model of B&B, network creation with training and matching component.

• Customer relationships & Infrastructure management : Web based portal to facilitate the provision of information, capturing of guest profiles, profile matching and reservations combined with personal touch and sense of hospitality.

• Financials: Commissions.

The role of ICT

Strategic alignment: strategy driven, execution through close linkage between organizational and technical infrastructures, processes and competencies.

Business strategy

I/T strategy

Organizational infrastructure and processes

I/T infrastructure and processes

Strategy execution: IT enabled business

model implementation

(adapted from: Henderson; Venkatraman 1993)

ICT effects

• Search or informational economies refer to increased transparency about prices, services and available capacities. Extended functionalities include the analysis of customer buying or more generally behavioral patterns and the matching of profiles.

• Exchange or allocation economies refer to operational efficiencies, in particular during the reservation and booking processes. The information intensity of travel, its complexity and uncertainty as well as the frequency of bookings (transactions) influence transaction costs.

ICT driven transformation

• Information and communication services are provided to complement the physical service and in many cases transform the customer experience.

• The role and extend of the informational components are increasing and they are effectively used to change the customer’s role into a more active self-service or prosuming role.

Tourism life cycle

Marketing SalesPlanning Monitoring

Processes of the supply side

Service delivery

Relationship Community

pre trip on site after trip

Tourist life cycle

Marketing SalesPlanning Monitoring

Processes of the supply side

Service delivery

Relationship Community

pre trip on site after trip

Tourist life cycle

Tourist life cycle and companies’ processes – both suppliers and intermediaries (source: Werthner 2003)

eBusiness self-assessment tool

• http://www.enterprise-ireland.com/ebusiness

Business and market driven assessment of eBusiness opportunities and internal capabilities.

Conclusions

• Business models: idea driven innovation & change– Strategic alignment, i.e. business-driven,

technology-enabled innovation – linkage between organizational and technical infrastructures, processes and competencies

– Collaborative generation of value

• Technology– Digital divide in tourism– Even commodity technology solutions provide space

for customer-focused added value (HBTA, Google map)

• Tourist: understanding customer needs– New roles (Prosumer)– Abundant information facilitates empowerment, but

makes tourists also more independent and unpredictable

Questions

1. How could tourism better benefit from existing support measures for ICT at different levels (information networks, training opportunities...)?

Main trends:

• Changes in the product structure and production processes, which have lead to increasing productivity in some segments (e.g. car sharing with unmanned car pick-up and return, hotels with electronic access to rooms etc.).

• Extended provision of information for travellers along the tourism life cycle (including recommender systems, multi-vendor platforms etc.).

• Extended availability of customer information for tourism managers (CRM etc.).

2. How can we use ICT as a tool for growth? Possible indicators?

• ICT can function as an enabler of new or adapted business models and/ or to reduce the cost of tourism services. Both potentially make travel more attractive and increase the volume of travel (and related transactions).

• Possible indicators:– productivity of tourism principals,– volume of travel,– structure of travellers.

3. What are the changes in the employment situation in tourism due to the increasing use of ICT?

• While productivity gains reduce the number of employees/ service unit (e.g. traveller nights), it potentially increases the overall volume of travel and consequently yields positive employment effects.

• Moreover, employment effects in related sectors (ICT and content production) are expected.

4. What are the major areas of ICT and tourism that need special attention among politicians and other decision-makers (infrastructure, funds, training...)• Support is needed to explore innovative ICT applications in

tourism (mobile services, extended information services …). More emphasis might be put on living labs, whereby the use of (advanced) technology (prototypes) is studied in real world settings.

• Oftentimes training is needed to develop an understanding of the impact of ICT on business and to explore ways of adjusting or developing processes to make better use of ICT. ICT alone does not increase productivity.

• A growing part of ICT applications focus not on individual tourism principals but on supply chains, destinations etc. Hence there is a growing need to understand the networking side of ICT use.

Four Propositions• Proposition 1: Real-time communication will facilitate a

transformation of travel and tourism from a communication poor environment into a communication rich environment.

• Proposition 2: New forms of collaboration between service providers will emerge in order to create superior customer care. This may take the form of smart business networks, as they can already be partly observed today, with adaptive nodes (e.g., participating organizations). And most probably those networks will operate without central governance, no central node.

• Proposition 3: Customer empowerment and the extension of prosumer roles, which combine service production and consumption elements are a prerequisite for extended service customization. Service providers need to develop modes of interaction which can be familiarized quickly.

• Proposition 4: Two opposing trends: Unbundling of services and increasing shift of tasks to customers vs. seamless integration of services and customer care across numerous service providers. Customers will be able to select the level of required customer care and support.

(Werthner; Klein 2005)

Living lab

“…kind of socio-technical approach is mainly meant for developing and elaborating sensitizing concepts that draw attention to central characteristics of socially implicated ICT usage. The later may then be further explored through continued design. In this way – underscoring the notion of mutual shaping – ICT becomes a vehicle for social research, the results of which in turn drive design.” (Pierson & Lievens, 2005)

Ryanair Passenger Growth

http://www.ryanair.com/site/DE/about.php [accessed: 20060315]

New qualities of information

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20 30 40 50 60 70 80 90

(A) ICT Infrastructure

(B) e

-Bus

ines

s A

ctiv

ity

ICT services

BankingInsurance

ElectronicsTourism

Red: Manufacturing sectorsBlue: Service sectorsOrange: Financial services

Food

Retail

HealthMetal

Transportequipm.

Chemical Machinery

Media

Real estate

Business services

e-Champion(s)

e-IntensiveSectorse-Specific

SectorsLatee-Adopters

Source:

ICT for marketing & sales

Innovation activity

CRM cystems by sector

Mobile information needs …

eBusiness Scoreboard

Source: www.ebusiness-watch.org e-Business Survey 2005

Level ofcustomer

activity

Level of provider activity

Internalization

Externalization

2

1

Extended scopeof services

Reducedscope ofservice bundles

Automation and/orstandardization of

processes andmodules

Learning relation-ship to facilitatethe configuration of complex andversatile services

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+