You're losing money when you don't have a competitive strategy to guide your day-to-day business operations.
Whether you're a small one-man business or a larger 30-person team, without a solid plan that highlights how you intend to compete in your market, you end up wasting precious time and money on systems and processes that do not add value to your services.
In this article, I hope to help you get the foundations of your business right with clear goals and strategies using the following analytical frameworks.
As this is a rather long article, here's what we'll be covering. Feel free to scroll down to the parts that interest you the most.
- Defining "strategy"
- Analysing your business environment with SWOT
- Deep diving into your internal business environment with the Resource Based View and the VRIO Model to determine the Core Competencies, Strengths and Weaknesses of your business.
- Zooming out to analyse the external environment in which your business operates on a macro and micro scale using PESTLE and Porter's Five Forces, and uncovering potential Opportunities and Threats.
- Putting all the information and analysis together to craft a strategy
A strategy is a high-level, overarching vision and plan that outlines the steps that your business needs to take to reach its goals. Strategies don't work without goals and goals don't work without strategies - they go hand in hand. Think of it like this: a goal is the destination you want to get to and a strategy is the route that will get you there.
Extending this concept further, a competitive strategy is therefore a plan to compete furiously in the marketplace and to eventually beat your competition.
Analysing your business environment
The best strategy accounts for your current and future, internal and external business environment to help you figure out how to use your capabilities to compete effectively.
SWOT is a quick and dirty way to analyse your business. Use it to identify Strengths, Weaknesses, Opportunities and Threats in your business. It's the most basic of frameworks and helps decision makers get a rough outline of all the factors that affect the business.
Here's how to do it:
- Create a scope for analysis - Define your objective and the aspects of the business you want to work on. How far into the future do you want to plan for? Create a scope to guide your analysis.
- List everything - State all your company's Strengths and Weakness, and the external Opportunities and Threats. I prefer to list out everything in a grid as it helps me to visualise my performance.
- Review your list - Can you back each item with solid evidence? Discuss why an item is a strength, weakness, opportunity or threat. Say one of your strengths is your social media marketing, can you back this with facts and figures? If you can't, remove it from your list.
- Connect the dots - Look at where your strengths lie and what opportunities best fit them. Do the same for your strengths and potential threats to identify areas you can easily apply your strengths to counter the threats. Repeat these steps for weaknesses too.
After completing this exercise, you should have a clearer idea of where your business stands in the coming months. However, as this is a quick and dirty way of analysing the business environment, it doesn't provide guidelines about which metrics or factors to look out for, or how we should think about other macro and micro economic factors.
Let's begin with tools for more comprehensive internal analysis of your business. I like the following models because they help you identify the resources and capabilities you possess, and guide you to discover how they work together to keep your business running. These frameworks should help you pinpoint your company's unique Strengths and Weaknesses.
This framework highlights the resources needed to run and sustain your business. According to this framework, resources can be categorised into three main groups:
- Tangible resources - Physical assets that your company owns such as offices, diving equipment; as well as financial assets.
- Intangible resources - These are assets that cannot be physically held onto like brand reputation that takes years to build, intellectual property, specialised knowledge, unique market insight and so on.
- Human resources - Your staff are the most valuable resources you own. The skills and knowledge they possess can be a source of competitive advantage if you, as a manager, can draw the best out of them.
What resources do you currently possess? List them down.
Further reading: This article gives you a comprehensive guide on the Resource Based View.
From your pool of resources, VRIO helps you identify which of these can become a source of sustainable competitive advantage for your company.
Are your resources:
- Valuable - Does the resource add value to the service you're delivering? Does it help you seize opportunities or defend threats? If it satisfies at least one of these questions, your resource is valuable.
- Rare - Is your resource hard to obtain? If it's rare or can be gained by very few businesses, then you're in good shape.
- Inimitable - Can your resource be duplicated or substituted by competitors? If it can be in the future, you currently possess temporary advantage and should make the most of the head start you have.
- Organisational capabilities - Does your company have effective strategies, systems and process to make the most of these resources? If you can nail this final element, you're well on your way to creating a competitive advantage.
This way of thinking should help you narrow down your resources to a few core elements that can become your source of competitive advantage. Remember to regularly review your resources to make sure they continue to bring your business the competitive advantage it needs to survive.
- For an in-depth write-up about this model, check out this article.
- For examples of how this model is applied, head over to this site.
A core competence is an intangible resource, something your company does particularly well compared to competitors. It's usually a set of 5 to 6 competencies that relate to the production or coordination of your tours or activities. For larger businesses with multiple product lines, this assessment of your business is particularly important.
If a particular skill or expertise your company possesses satisfies these three criterias, you've got a core competence.
Can this unique expertise appeal to diverse markets?
Does it increase perceived customer value?
How difficult is it to replicate this core competency?
In my opinion, every tour and activity company should possess fantastic customer service online and offline as its' core competency.
You differentiate yourself from your competitors in terms of how the experience is delivered, who you're delivering it to and the tone of each customer interaction.
- Head over here for a detailed article by The Economist to understand the concept of core competencies.
- Better identify the core competencies of your company with these key points by Bain & Company.
Now that we're done with the internal analysis of a business, grab a fresh cup of coffee and let's continue with the external analysis of a business' environment.
Frameworks for External Analysis
Here, I've highlighted two commonly used frameworks for analysis that can help you identify external business factors that make up the Opportunities and Threats in SWOT.
PESTLE is a mnemonic for the six factors that shape the macroeconomic environment that every business operates in.
It helps you seek out opportunities that exist and avoid or plan for threats that might take place in the future.
You can use this analysis in three ways:
- Analyse the current market you operate in
- Analyse a potential market you'd like to expand into
- Analyse a potential market you'd like to attract to your tours or activities
- Political situation
- What's the local political climate like? Is the region part of certain free trade or free movement areas? What about the region's political relations with the rest of the world and other key markets like the US, Europe and Asia?
- This is important for us to understand the kind of policies, like taxation, that might take place in the coming years. It can affect the business environment greatly.
- Economic climate
- What does the local economy look like? Are there high levels of inflation or unemployment?
- The economic climate can affect consumers' purchasing power and the general demand and supply for your tourism product. It also impacts the exchange rate which affects the number of bookings you'll get.
- Social-cultural setting
- What are some cultural trends prevalent in the region? What's the demographic of the local population? What are the consumers' behaviours like?
- You can use these social factors to guide your research into the local market.
- Technological advancements
- What sort of technological infrastructure does the local market possess? Do they have a large and advanced one? Or a developing one?
- How can your business take advantage of each situation?
- Legal factors
- What are the laws and legislations governing the region? What are the regulations around products, services, employment, health and safety and so on?
- Environmental or ecological factors
- What is the climate and weather in the region? How do people view the environment and conservation efforts? What about waste laws?
- These are especially important for tour and activity companies as there might be licenses and certifications to obtain to legally operate your business.
- If you're still unsure about what environmental analysis is, check out this article.
- For a more in-depth explanation and examples of how PESTLE is applied, check out this article or this article.
Porter's Five forces
Porter's Five Forces is the most common framework used to analyse a business' external micro-economic environment. The premise of this model is that competition is made up of five complex forces and that a company's success doesn't depend on size, but on profitability.
According to Porter, here are the five forces that drive competition:
Bargaining power of customers - Customers always aim to get the best value for their money and will leverage their bargaining power to achieve this.
These are the factors that affect their bargaining power:
- Number of customers - The more customers you have, the less dependent on any one customer to survive, hence reducing the bargaining power each customer possesses.
- Size of each booking - The larger the value of a booking, the larger the bargaining power this customer will possess.
- Differences between competitors - Can your customers effectively differentiate your tours and activities from your competitors? If they can't, price becomes the only differentiator.
- Price sensitivity - How sensitive are your customers to price changes? This greatly depends on your target market.
- Ability to substitute - Is your tour or activity easily replaced by a similar one? A substitute might not develop from your competitors, but from someone operating in a similar space. For example kayaking and canoeing - these activities are similar and can be easily substituted for one another.
- Switching costs - What is the cost of switching from one tour company to another? You could impose a penalty fee to customers who cancel your tours at the last-minute but that's usually the extent of their switching cost. There is little to no incentive for customers to be loyal to your brand since they're only going to interact with you once in their lives, while they're on holiday. So what can you do?
Bargaining power of suppliers - For tour and activity companies, it is crucial to identify who your suppliers are because they form the experience you're selling. These could be your guides, the companies supplying your equipment, the people who run the farms or wine cellars you bring your customers to.
Here are the factors that affect the bargaining power of suppliers:
- Number of suppliers - How many suppliers do you work with? Is the supplier market a fragmented or more unified one? The more fragmented a market, the less combined bargaining power it tends to have.
- Size of suppliers - How big are your suppliers compared to your business, and compared to the supplier market? Do they have market dominance? If they do, do they also control the prices in the market?
- Differentiation of service - Why are you working with your supplier instead of someone else? What makes them stand out from other businesses? Does their differentiation justify their cost?
- Ability to substituted - How easy or difficult is it for you to find a substitute? The easier it is to find a substitute, the less bargaining power they have.
- Switching cost - How much resources will it take, in terms of time, energy and money, to switch to another supplier? The lower the switching costs, the less bargaining power suppliers will have.
Threat of substitute products - Are there similar activities that customers can book instead of yours? Also, depending on what type of tour or activity you run, substitutes might not present themselves in the form of direct competitors.
The two factors that you should consider here are:
- Substitute performance - How do substitutes compare to your services?
- Cost to change - What's the cost for customers to switch to another business?
Threat of new entrants - In any market, there's always the threat of new businesses entering your market. Coupled with technology, new entrants possess a real threat to the existing market.
Consider the following:
- Barriers to entry - What are the barriers to entering your market? What are the costs involved (think of time, money and effort) to start a business in your market? Are there any rules, regulations or certifications that make it difficult for new companies?
- Economies of scale - Most businesses profit greatly by securing enough bookings to achieve economies of scale (i.e. the minimum number of bookings required to be profitable). How long will it take a new entrant to achieve this?
- Technology - What new technology might a new entrant bring to the market? Might it be able to disrupt the current forces of the market? Think about Uber and Airbnb.
Competition from existing rivals - If you've been in business long enough, you should be aware of who your competitors are and how they compete in the market. Here are some things you should look out for when analysing your competition:
- Number of competitors in the market - The more competitors there are, the harder you need to work to capture the market share you want.
- Differentiation strategy - How do they differentiate their brand and tourism products from everyone else? Does that differentiation strategy work? Or is everyone operating according to a similar strategy?
- Price sensitivity and cost of switching - How sensitive are customers to price changes within the industry?
- Customer loyalty - Are customers likely to develop loyalty to brands in your market? If so, how can you win over competitor customers?
- Costs to exit market - Are there high barriers to exiting the market? Is it expensive or troublesome to leave? Would it be difficult to dispose of existing equipment?
To apply this analysis framework to your business, go through each point and try to answer the questions stated. At the end of the exercise, you should come away with a clearer idea of who holds most of the bargaining power in your market.
You should also be able to identify current and potential opportunities that you can seize to grow your business, and more importantly, identify potential threats in your industry and plan contingencies for those.
Interestingly, you can apply Porter's framework to your tour and activity business from two angles:
- You as the supplier to travellers
- You as the supplier to DMOs, inbound tour operators, and wholesale buyers
For more information about Porter's Five Forces:
- Check out this article by Smart Insights for examples of how to apply this model
- Head over to this one by TheManager.org to learn about the critiques of this model
Taking together all the information you have about your business and the environment you're operating in, you can begin to work out which strategy best fits your company. The key here is to create a strategy that makes the most of your existing and most valuable resources and not the other way around, i.e. creating new resources to fit your ideal strategy.
Here are 4 typical ways you can configure your resources to create a competitive strategy
- Cost leadership - Appealing to a broad market and offering your tourism products at the lowest price. Here you compete on price alone.
- Differentiation - Appealing to the general market while differentiating your products from your competitors. Here, you can differentiate your products with your brand.
- Cost focus - Targeting a niche market and selling your tours and activities at the lowest price within that niche.
- Differentiation focus - Targeting a niche market while differentiating your products from competitors in that niche.
When crafting a strategy for your company, ask yourself these 5 simple questions created by Roger L. Martin:
- What are our broad aspirations for our organisation and the concrete goals against which we can measure our progress?
- Across the potential field available to us, where will we choose to play and not play?
- In our chosen place to play, how will we choose to win against the competitors there?
- What capabilities are necessary to build and maintain to win in our chosen manner?
- What management systems are necessary to operate to build and maintain the key capabilities?
Recommended reading: Read the full article here to better understand his philosophy to crafting a competitive strategy for your business.
What does this look like day-to-day?
Translating your strategy into day-to-day goals and plans can be tricky. Your strategy needs to be reviewed regularly to make sure that it remains effective in our fast-paced industry. Here are some tips to stay focused on implementing your strategy every day:
- Stay updated with trends and changes in your local destination, within your target market and about the global tourism industry.
- Use a reporting and analytics tool to collect data about your business' performance to find your strengths and weaknesses, benchmark your performance against competitors and use data to drive your decisions.
- Communicate clearly to your employees what your goals and strategies are, and why they're important. Without the buy-in of your employees, your strategy will forever remain as a document stored somewhere on your hard drive.
- Most of your core competencies that truly differentiate you from your competitors come from your staff so make sure that they are valued in your company.
- Invest in technology to create better internal systems and processes to strengthen core capabilities.
- Think about other companies you can collaborate and partner with to accelerate your strategy. How can you create a win-win situation for both parties?
- Learn how to carry out strategic planning in your company with this article.
- If you're interested in testing and measuring your strategies, here's another great (and rather long) article by McKinsey & Company.
- You can also dig deeper into scenario planning with this article to help you navigate uncertainties, especially when there's economic or political instability.
- Stay updated with travel trends driving the tourism industry with our 2017 Travel Trends Report.
Having an overall business strategy should then guide the other parts of your business like your marketing efforts, hiring (or firing) more guides, procuring more equipment for your tours or activities and so on.
Create a competitive business strategy for your tour or activity company with our Business Strategy Worksheets.