these players operate (business models) and compete (drivers of .... Flight search engine technology: a key capability for travel eMediaries is that of being.
Using Concept Maps to Examine Business Models and Drivers of Competitive Advantage for Travel eMediaries Roberto Daniele Andrew J Frew SITI research centre Queen Margaret University College, Edinburgh UK {rdaniele; afrew}@qmuc.ac.uk Abstract This paper describes a study that has explored the body of literature on competitive advantage and placed this in the context of the development of travel eMediaries (online intermediaries). The work uses concept maps to highlight determinants of performance in online intermediation in this sector and the relationships among these variables. The paper identifies the most significant contributors to competitive advantage and examines their application through selected eMediaries. In conclusion, key areas for further research are suggested including proposed work from the authors on analysis of determinants of competitive advantage for eMediaries and their networks.
Keywords: travel agents, travel eMediaries, business models, competitive advantage, competitive strategy.
1
Background
The period from 1996 to present has seen the emergence of very powerful new players in the travel industry: online travel intermediaries (hereon referred to as travel eMediaries). Strong organic growth and a frantic schedule of mergers and acquisition have created new travel industry giants such as IAC Travel (a subsidiary of IAC) a company that started operations only in 1996 and is now the 4th largest agency in the USA with revenues of almost $US2.6 billion in 2003 (IAC:2004). These players are now having a considerable impact on the market, often altering long established balances of power between existing players and distribution channels. A report from Smith Travel Research for example estimated that in 2002, the adoption of the merchant model by several major eMediaries cost the USA hotel industry $US642 million in terms of profit leakages (4.5% of total profits) with an increased forecast to $US962 million for 2003 (6%). Despite the increasingly influential role played by travel eMediaries in the marketplace there is a relative paucity of academic literature on the subject and little work has been done to date to examine in detail how
these players operate (business models) and compete (drivers of competitive advantage).
2
Aims and Methodology
The aims of this research are firstly to examine the existing literature on competitive advantage to identify major schools of thought and approaches schemes and, secondly in the context of the major travel eMediaries to extract and examine their key drivers of competitive advantage through the use of concept maps. Key travel eMediaries (in terms of size, large market share, variety of business models) were identified and purposive sampling was applied. A total of six companies were analysed: Expedia (now part of IAC Travel), Travelocity, Orbitz, Priceline, eBookers and lastminute.com. Secondary data relating to these selected organisations was collected from a variety of sources including; company annual reports, investor presentations, conference calls, press releases, academic and trade journals, conference proceedings analyst’s reports, newspaper and magazine clippings, abstracting services, online sources and electronic databases and an average of two hundred documents per company were examined. The data was collected for the 1996-2003 period to cover the time since the inception of travel eMediaries. The data, both quantitative (reported elsewhere by the authors) and qualitative were treated using appropriate software tools, in the context of the work presented here, nVivo was used to import and organise the qualitative data, assist in generating categories, themes and patterns and for coding the data. Data was subsequently exported to Decision Explorer a qualitative data analysis software used to develop concept maps.
3
Competitive advantage and business models
Competitive advantage is a key concept with a long tradition in the strategic management literature. Wiggins and Ruefli (2002: 84) define competitive advantage as: “…a capability (or set of capabilities) or resource (or set of resources) that gives the firm an advantage over its competitors which ceteris paribus leads to higher relative performance”. Whilst many frameworks and schools of thought have developed around the key concepts of strategy, value creation and competitive advantage in organisations, two broad orientations have emerged as predominant paradigms namely that of the company position (resource-based view) and that of market-industry position (Porter’s school).
Proponents of the resource-based approach to strategy formulation (e.g. Penrose, 1959, Wernerfelt, 1984; Barney, 1991; Peteraf, 1993; Teece et al 1997) regard resources and capabilities within the organisation as the main source of competitive advantage. The organisation is therefore viewed as a portfolio of core competencies (Werthner and Klein, 1999). In the resource based approach, the ability to gather and uniquely combine a set of complementary and specialised resources and capabilities may lead to value creation. A company’s resources and capabilities are valuable if they either reduce a company’s costs or increase its revenues compared to what would have been the case if the company did not possess those resources. Proponents of the market-industry position shift the focus of strategy research outward towards the analysis of the company’s microeconomic environment. Porter’s core theory (1985) is that competitive advantage derives from the company’s ability to cope with the five competitive forces better than its rivals focusing on the situation of the company within the value chain. Strategic Networks theory is of particular interest for this study because of the importance of networks of suppliers and customers for eMediaries. Strategic networks are defined by Gulati et al (2000) as: “stable inter-organizational ties which are strategically important to participating firms. They may take form of strategic alliances, joint ventures, long term buyer-supplier partnerships and other ties” Recent literature however has started to question the validity of these orientations particularly when taken in isolation. Authors such as Amit and Zott (2000), Nickerson et al (2001), Fuentelsaz, Maicas-Lopez et al, 2002) are trying to make sense of the of eBusiness strategy by developing new constructs by drawing on and adapting multiple strategic analysis frameworks. Amit and Zott, (2001) in particular, observe that value creation (and consequent competitive advantage) in e-Business goes beyond the value that can be realised through the configuration of the value chain (Porter 1985), the formation of strategic networks among firms (Gulati et al, 2000; Dyer and Singh, 1988), or the exploitation of firm specific core competencies (Barney 1991). They argue that no single entrepreneurship or strategic management theory can fully explain the value creation potential of eBusiness, rather, each of the theories offers an important insight into one or more aspects of value creation in eBusiness. The difficulty that then arises for researchers in the field of competitive advantage is that of having a relevant unit of analysis to provide a cohesive analytical framework. Amitt and Zott (2001) propose the business model construct as a unifying unit of analysis that captures the value creation arising from multiple sources. “A business model is the architectural configuration of the components of transactions designed to exploit business opportunities” (Amit and Zott: 2001);
“A description of the roles and relationships among a firm's consumers, customers, allies and suppliers that identifies the major flows of product, information, and money, and the major benefits to participants” (Weill and Vitale: 2001); Some authors (Weill and Vitale: 2001, Hamel: 2000) have focused on the individual components or elements that constitute business models recognising that business models are always a collection of interrelated processes which may perform different functions and be configured in different ways depending on company strategy and industry configuration. Weill and Vitale (2001) for example break down business models into four components with corresponding levels of detail: Strategic objectives;
Atomic Model
Business
Sources of revenue; Critical success factors; Core competencies necessary for implementation. Role and relationships among a firm’s customers, allies and
E-Business Model
suppliers; Flows of product, information and money; Major benefits to participants – Value Proposition Customer segments Channels to those segments IT Infrastructure for implementation
E-business Initiative
Position in the industry Value Chain or Net Organisational form necessary for implementation Owner of 3 critical assets (Customer relationship; data; transaction) Key information required to succeed Financing
E-Business Implementation
Pricing Recruitment Marketing Incentives
Fig 1 Business Models levels (Weill and Vitale: 2001)
Hamel’s Business Model Framework (2000) identifies four major components of a business model which are linked to each other by “bridge components”, (Figure 2):
Fig. 2 Business Model Framework (Hamel: 2000)
Osterwalder and Pigneur (2002) suggest a further model that they conceptualise as an eBusiness Model ontology based around four pillars and their interrelationships. This model was ultimately selected by the authors as the most suitable to apply to travel eMediaries because overall it has the most comprehensive and relevant set of components and sub-components and also provides a detailed outline of the relationships between the different components and sub-components of the business model this providing a good framework for the development of a concept map.
Fig. 3 eBusiness Model Ontology (Osterwalder and Pigneur: 2002)
4
Key drivers for travel eMediaries competitive advantage
Osterwalder and Pigneur model was initially used as a framework for analysing and coding the data on eMediaries emerging from the literature review. Key drivers of competitive advantage were grouped in the four key areas of financials, infrastructure management, customer relationship and product innovation. The examination of these variables allowed the authors to develop a concept map to visualise in more detail the relationships between the different variables. 4.1 Financials: this is the key element of an e-business model. The best products and services and the finest levels of customer relationship are only valuable if they are factors that enable long-term financial success for the company (Osterwalder and Pigneur: 2002). Crucial items to examine here are both cost and revenue models. An analysis of the major global travel eMediaries (Daniele and Frew: 2004) has tentatively extracted several types of revenue models (agency, merchant, distressed inventory, demand collection, comparison shopping and auction). Whilst most of these models are still widely used and often coexist within the operations of the same travel eMediary, the merchant model seems to have emerged as the most profitable revenue model as it allows intermediaries to offer competitive pricing for their customers whilst maintaining considerable profit margins. Whilst the model is an ideal one from the eMediaries point of view, it has encountered mixed reactions from suppliers which have seen their profit margins considerably eroded by these developments and have experienced to some degree a loss of control on their distribution strategies. Some suppliers (large hotel chains in particular) have responded to these developments by imposing very specific restrictions on eMediaries merchant model contracts and have not hesitated to exit from relationships with eMediaries unwilling to accept their new terms (e.g. see IHG’s withdrawal from its relationship with Expedia (e-tid.com: 2004). Cost models for eMediaries are driven by two key areas: firstly the merchant model combined with their purchasing power allows eMediaries to keep suppliers’ rates very low, secondly improvements in infrastructure management (section 4.2 below) and customer relationship (section 4.3 below) allow them to reduce their transaction and customer acquisition and retention costs. 4.2 Infrastructure management: ICT and the Internet in particular have had a fundamental impact on the way companies organise their activities inside and at the boundaries of the firm: the de-composition and re-composition of the industry value chain has redistributed the activities among existing and new players. Infrastructure management describes the value system configuration that is necessary in order to deliver the company’s offering and to establish and maintain a customer relationship (Osterwalder and Pigneur: 2002). In the case of travel eMediaries several key technologies are used to provide a competitive infrastructure:
Flight search engine technology: a key capability for travel eMediaries is that of being able to allow its customers to rapidly find the best options/combinations for flights under a variety of parameters. Most of the larger online eMediaries have developed their own proprietary flight search engines e.g. Expedia’s Expert Searching and Pricing (ESP) platform, a technology that combines a fare searching engine enabling broad and deep airline fare and schedule searches, with a common database platform enabling the organisation to dynamically bundle all types of travel services together (Expedia: 2003) or The Orbitz Flight Search Engine, reputed to be one of the most comprehensive and fast search engines enabling travelers to search billions of fares and flight options in seconds and offering consumers the Web's widest selection of low-cost fares and flight options. Most travel eMediaries have also made significant investments in Customer Relationship Management (CRM) systems that enable them to interact with their customers in a personalised manner through their websites, email and customer service channels. By presenting customers with offers that are personal and relevant to their travel planning needs, travel eMediaries aim to increase sales and customer loyalty, reduce customer acquisition and maintenance costs as well as segment their customer database for their various travel suppliers. An increasingly important technology for travel eMediaries is dynamic packaging systems which enables customers to combine various travel components (e.g. flights, hotels and car rental) and inventory types into “build−your−own” holiday packages. Unlike standard brochure based holiday packages that offer few choices of departure times, accommodations, length of stay or destinations, customers can tailor their own packages to meet their exact needs, choosing their own components online and receiving immediate information about pricing and availability. Dynamic packaging of travel components also offers benefits to suppliers who are willing to offer lower prices on their inventory to travel eMediaries when it is sold in packages, provided that the prices of the individual components are not visible to the customer. This enables suppliers to discount without compromising the integrity of their published rates or revealing their pricing strategies to their competitors. This in turn benefits travel eMediaries’ customers by giving them access to discounted rates. Once again these solutions (e.g. Expedia’s Expert Searching and Pricing platform and Travelocity’s TotalTrip) or have bought the technology from third party suppliers (e.g. OTC’s, now part of lastminute.com, Build-Your-Own self-packaging technology). Direct connectivity: several travel eMediaries are also working to build direct connectivity with some air and hotel suppliers in order to improve the distribution process. Direct connectivity technology saves time and reduces costs for both travel eMediaries and suppliers by linking seamlessly to their central reservation systems, thus bypassing GDS fees and in the case of hotels, eliminating the need to allocate blocks of rooms and enter reservations from distributors, manually.
In 2002, for example Expedia acquired the assets of Newtrade Technologies Inc., a developer of software and information distribution services that help hotels deliver their rates and availability to the market more efficiently. Expedia is currently implementing direct connectivity with hotels in their merchant model program. Likewise Travelocity has been offering direct connectivity to the hotels in its merchant program since 2003. Whilst appropriate technologies are the basic enabler of most travel eMediaries business models, their ability to forge relationships with key suppliers is key to their operations: the vary nature of the intermediation business requires travel eMediaries to develop and maintain an extensive network of partner and suppliers in order to enable them to offer breath and depth of inventory to its customers. Thus Expedia for example now counts on a network which includes over 450 airlines, 60,000 hotels, 10,000 of which are participating in their Expedia Special Rate Program (merchant model), all major car rental companies & Destination services. Similarly, UK based lastminute.com quotes over 15,000 suppliers in its network (lastminute.com: 2004) 4.3 Customer relationship: through the use of ICT companies can improve or even re-define their concepts of customer relationship by supporting or in some instances substituting direct physical contact with the customer (Osterwalder and Pigneur: 2002). Most of the travel eMediaries analysed seem to follow a common 4 stage pattern with regards to building relationships with their customers: Awareness: brand awareness is achieved through both online (e.g. banners, popup advertising) and offline advertising (television, radio, print and outdoor) and public relations activities; Traffic: is generated by several main distribution channels: own websites; white label programs; affiliate programs, toll free numbers and in some cases such as Expedia and lastminute.com for example with the introduction of bricks & mortar travel agencies in key locations; Conversion: is achieved by offering depth and breath of inventory, competitive pricing, reach of qualified shoppers and, in some cases, deep linking into inventory; Retention: through customer relationship management (CRM) related activities. 4.4 Product innovation: this element covers all aspects related to the offerings of the organisation: not only its products and services but also the manner in which it differentiates itself from its competitors (Osterwalder & Pigneur: 2002). Travel eMediaries differentiate themselves from traditional travel agents on several fronts: firstly the widespread introduction of the merchant model and dynamic packaging facilities has created a dual role for intermediaries as they act at the same
time both as travel agents and tour operators; secondly they offer a compelling value proposition for both the consumer and the supplier: for the consumer they can offer the ability to have an overview of their whole trips rather than segments of it through supplier websites, comprehensive planning tools (e.g. destination guides, weather forecasts, currency converters, traveller discussion boards etc) ease and facilitate the customer travel planning task. Travel eMediaries also offer some level of transparency allowing the user to analyse a vast array of offers from competing suppliers and finally, thanks to the merchant model and the volumes of sales generated, they are also able to offer increasingly competitive pricing. Offerings for suppliers include a new volume creating distribution channel (although partially offset by often very tight demands on rate discounts demanded by the merchant model) and the potential for incremental business. Very importantly travel eMediaries have proven themselves as valuable partners in times of low demand as they are the ideal medium for last minute offers/promotions. Broad target markets (normally including both corporate and leisure markets) combined with either global or regional reach also appeals to suppliers who are seeking volume increases and cost effective exposure on a global scale. Figure 4 below provides a summary of eMediaries’ key drivers of competitive advantage and the relationships between these variables
13 Awareness 20 Choice/Transparency
18 Wide target market
14 Traffic
15 Conversion
19 Planning tools 16 Retention 21 Competitive pricing
22 The whole trip
4 Customer relationship
3 Product innovation
11 Financial backing 7 CRM Systems
2 Infrastucture management
1 Financials 10 Cost model
9 Direct connectivity 6 Search engine technology
Fig. 4
12 Partner network
23 Revenue Model
8 Dynamic packaging
eMediaries’s drivers of competitive advantage concept map.
5 Merchant model
5
Conclusions and Future Work
This paper has briefly examined the literature on business models and competitive advantage with a view to examining their theoretical frameworks and applying these in a travel industry environment with particular reference to travel eMediaries. The findings suggest that eMediaries have developed sophisticated business models based around key areas of financials, infrastructure management, product innovation and customer relationship. There are a number of areas for further research that will derive from this investigation, including a more detailed analysis of business modelling by eMediaries with particular emphasis on the structure and behaviour of eMediary networks, behaviour and relationships between firms within these networks, impacts of eMediaries on consumers, suppliers and existing distribution channels. Future work will concentrate on a more in-depth analysis of the relationships between the variables of competitive advantage identified in this paper.
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