All those responsible for the success and failure of organizations have to tackle with the different aspects of their corporate strategy if they want to achieve lasting success in the market. This includes timely analysis of the possible consequences that negative events have on these strategies.
The aim of generic strategy is to lay the foundations for the long-term success of an organization.
Competitive advantage, which must be considered from the customer’s point of view, embody a meaningful customer benefit, which ensures that the company, or product, permanently and clearly distinguishes itself from its competitors. Competitive advantages have, in order to be strategically significant, to fulfil three basic requirements:
• they must provide an important performance feature for the customer,
• actually be perceived by the customer, and
• be sustainable, that is, difficult for competitors to imitate.
In their basic form, there are two types of competitive advantage: cost advantage and differentiation advantage. Whilst the former achieves advantage by charging a lower price in comparison with the competition, for products with the equivalent benefits, differentiation advantage requires the company to create a unique benefit that justifies a higher price in the eyes of the consumer (Porter, 1998a).
Based upon the competitive advantages, cost advantage and differentiation advantage, and taking into account the scope of activities, three generic strategies can be distinguished:
• cost leadership,
• differentiation and
• focus strategy.
Porter (1998a) points out that a company can use strategies of cost leadership and differentiation at the same time completely successfully, if it is in a position to keep the different company units strictly separate. The essential criterion for this separation is the consumer’s perception.
5.1.1 Cost leadership
With a cost leadership strategy, the company offers a comparable standard product at a lower price than its competitors. It is important that the product attributes are perceived by the customers to be identical or equivalent to that of the competition.
The basis of this strategy is the company’s ability to produce at a lower cost than its competitors. The causes of this are diverse and can be based on the learning curve effect, particular preference conditions or technology exclusive to the firm. When following this strategy, the company must be aware that there can only be one cost leader in the sector, unless a focus strategy is followed for a certain segment of the market.
As a consequence of the necessary comparability of the products comes interchangeability. This possibility for substitution could be a considerable problem if there is a negative event. If one of the basic product characteristics is harmed by the negative event, the basis for cost advantage – comparability – is lost. Substitution products would be bought in place of the affected product. The same effect occurs when personal safety is threatened by a negative event. In this case, the perception of risk increases and the tourism product in question is – after the exceedance of a certain threshold value – no longer seen as comparable.
Since in both cases the necessary requirement of the comparable standard product is no longer fulfilled, the effect of cost advantage is lost. The only way to keep up this strategy in the long term and to make the product still saleable is with a price policy. This instrument can balance out the higher sensitivity by lowering the price. The leeway is, however, restricted because of the given cost structure. The consequences of lowering the price are short- and medium-term collapses in profit (there are also further consequences that limit the use of price instruments; see a discussion on this in Section 7.3).
The long-term problem lies in sustaining the cost advantage, since this is based as a rule on higher relative market shares. A change can cause a vicious circle effect: diminishing market shares, and disappearance of cost advantage, leading, in turn, to a limitation of the price policy. This effect can finally lead to the stage when a cost leadership strategy is no longer sustainable and must be changed completely.
The great susceptibility and limited possibilities for action in the framework of coping crisis management illustrate how important crisis precautions are in this case. They must be used to prevent the onset of such events, or to bring them to an end in good time.
5.1.2 Differentiation
With a differentiation strategy, the company’s aim is to differentiate itself from its competitors through the characteristics of the product in such a way that it allows the firm to charge a premium price for it.
Differentiation strategies are very important in tourism because the majority of products are interchangeable and there is little room for improvement in terms of objective differences. In contrast to a cost leadership strategy, several companies in the same sector can successfully follow a differentiation strategy.
The differentiation can be achieved both by material and immaterial changes to the product. The decisive thing is that as many customers of the sector as possible perceive the differentiation as unique and important. Only then is it possible for the organization to achieve long-term above-average profits that exceed the additional expenditure on differentiation.
While the aspect of material differentiation occupies an important position in the business travel market the immaterial differentiation is very important for holiday tourism. The exact immaterial differentiation is carried out by developing and implementing an experience value strategy. This strategy gives the product an image profile that has unique, distinctive and sustainable advantages over competing products. A clear dividing line has to be drawn between this strategy, which normally goes along with a ‘Total Quality Management’ strategy, and active publicity, which, in contrast to the experience value strategy, does not build ‘company-specific preferences’ (Konert, 1986; Kroeber-Riel, 1992).
To be relevant, experience value strategies must take the values, lifestyle and experiences of the target group into consideration. According to Kroeber-Riel (1993a) it must be checked whether the experience profile:
• has psychological relevance,
• is not in conflict with the company philosophy,
• appeals long-term to the target group and therefore keeps up with lifestyle trends,
• makes an effective positioning possible in comparison to the competition and
• is able to be introduced not only through advertising, but extensively.
Since image profiles can only be generated and established through ongoing and long-term conditioning, experience value strategies must not only be valid in the long term, but also developed with an eye to the future. This means that the development must be accompanied by a serious discussion of future social trends.
A point not considered until now is the demand for consistency and freedom from contradiction of experience-oriented positioning, also from the point of view of future negative events. Even at the conception and assessment of possible experience profiles, it is important to think about certain events that are more likely or more threatening than others. This can make a considerable contribution to preventive crisis management.
Example 28: The Experience Value Strategy of Liechtenstein
With only 34 000 inhabitants on 160 square km, the image of Liechtenstein has been suffering for decades from the fact that it is sandwiched between its two big neighbors Switzerland and Austria. Only the financial sector contributed to a diversification of the image of Liechtenstein, whose people lived off primarily of agriculture some 80 years ago, and helped to make the country known beyond the European boundaries. But this fame was of doubtful quality as it came together with the reputation of a paradise for letter-box companies and tax heaven. Finally in 2000, the OECD raised concerns that Liechtenstein had become a centre for money laundering. This was not only counter-productive for the tourism sector but also for all other economic activities as well as the self-understanding of the people of Liechtenstein. The culminating point was a rather emotional confrontation after the Prince won the right to veto laws and elect judges.
It became obvious that there was need for change. In 2001 the government decided not only to focus on those allegations but also to prepare the ground for attracting more foreign investments, companies and tourists. In March 2002 the ‘Image Liechtenstein Foun- dation Group’ was founded. Chaired by the prime minister, the group was composed of representatives from the government, state agencies and leading trade associations. The members started to assess the domestic and foreign perceptions of Liechtenstein and in May 2003, they submitted their recommenda- tions to overcome the identified weaknesses.
It was especially proposed to fundamentally improve the Internet presence of Liechten- stein, followed by the recommendation to expand the foreign missions from 2 to 8, besi- des Bern and Vienna also in Brussels, Berlin, New York City and Washington, D.C. It was also particularly recommended to develop a new positioning for Liechtenstein and to launch it as a brand.
For this, in November 2003 an international contest took place, and the winner was the international branding consultancy Wolff
Olins. This company which also produced the widely known campaign ‘I love New York’
systematically developed the elements which shall shape the image of Liechtenstein in the future.
Unknown in its consequent approach, the country developed a differentiation strategy and symbols, which will not replace the existing official emblems but complement them.
Elements of the new brand Liechtenstein
Source: Foundation Image Liechtenstein
On 20 September 2004 the Prime Minister officially launched the campaign to the world public in London.
The case of Liechtenstein is a remarkable example that destinations not only look after their image but also evaluate their positioning from scratch, plan and finally construct the new image through experience value strategies.
A further point to consider is based on the finding that destinations are strongly influenced by typical clichés and over-generalizations. This must likewise be considered while developing conceptually the image profile. The spillover effects of a regional image on those destinations that have not been affected by events will cause them to suffer indirectly from it. Indeed, in a normal situation, independent positioning goes hand-in-hand with increased expenditure; however, this effort pays off through a certain crisis resistance. In the practical implementation, the image dimensions, which are responsible for the whole region’s image in the source markets, must be included, analysed and finally changed in such a way that an independent sustained positioning is achieved.
Example 29: Egypt and its Beach Destinations
Although while developing the product of beach holidays as a new product area, Egypt did not explicitly consider it under the aspect of strategic crisis management, the later consequences proved that these decisions had positive results seeing it from the point of view of strategic crisis management.
The various terrorist attacks of 1992/1993 led to a negative overall image of Egypt. However, consumers in the various source markets did not perceive the beach destinations ‘Sinai’ and ‘Red Sea’ related to this image. This strategically unplanned separation of the two products, independent from each other as far as image was concerned, was quickly recognised and used by the destinations and tour operators alike.
Since then, the destinations on the Sinai and the Red Sea have been offered without making reference to Egypt. All textual and pictorial information was removed from advertising to prevent a connection between Egypt and the beach destinations.
This means that experience value strategies and experience profiles should be designed from the start in such a way that they can only be spoiled with difficulty by potential events. Even if as a consequence of negative events crisis circumstances cannot be totally excluded, there is the possibility of ruling out certain susceptible concepts in good time.
It remains to be emphasized that it is, above all the long-termness that demands a cautious and considered planning of the experience value strategy also from the point of view of negative events.
Investment in the development of immaterial differentiation is considerable and the company only makes a return on its investment in the medium or long term, in the form of higher profits. Developed experience value strategies and built-up image profiles are not really changeable in the short term.
Likewise destroyed and influenced image profiles mean the loss of considerable investment. For the tourism market, in which the number of products with interchangeable benefits is increasing and which is, therefore, more and more dependent upon immaterial differentiation, this kind of prevention is becoming ever more important.
5.1.3 Focus strategy
The focus strategy concentrates on a narrow segment and within that segment attempts to achieve either a cost advantage or differentiation. While the basis for the first strategy variation is different cost behaviour, the latter requires the existence of special customer needs. When there is sufficient structural attraction of the segment within the sector, several companies can, as with the differentiation strategy, follow a concentration strategy, as long as their target segments are different.
Typical for tour operators is concentration on segments of the supply market – destinations – or on segments of the sales market. From the point of view of a destination, the concentration strategy refers to the choice of certain customer segments.
Since concentration strategies go back to cost and differentiation advantages, observations made above are valid here too. However, in this case there is also the fact that a concentration on a particular segment follows. Dependence on the choice of this segment limits the leeway for action considerably.
Example 30: Risk of a Focus Strategy
The risks of a focus strategy are shown with the example of the German tour operator ‘OFT Reisen’. This tour operator concentrated on study trips to Egypt. Therefore, there was considerable dependency on the development of this customer segment and of the destination.
As a consequence of the attacks in 1997, participant numbers fell from over 30 000 to just 10 000 customers per annum. In the same period, turnover fell from 31.6 to 10.6 million Euro.
This effect was softened by changing the emphasis to other customer segments. Pure beach holidaymakers, whose share rose from 20 to 82 per cent, replaced the normal 80 per cent share of student tourists.
However, as a result of these developments, the tour operator had to give up some of its independence.
In spite of the risk that goes with a focus strategy in terms of negative events, this strategy is becoming ever more important as an answer to the individualization of consumption. In order to introduce measures in the framework of crisis management, it is recommendable to use the international dimensions of these developments. Since this fragmentation of segments also happens internationally, there are intercultural target groups, which show similar needs structures and can be appealed to in the same way. If it is considered that negative events are also judged differently due to national and cultural differences, it makes it clear that there are reaction possibilities. These require an appropriate international capability for action, which, if it is not yet given, can be a preventive crisis management measure.
Finally, it must be emphasized that especially for this strategy variation, the extent of the precautions must increase in relation to how small the market basis is. If this is not done in an area as sensitive as tourism, unforeseeable negative events lead with greater probability to an abandonment of business activity.