New economic geography

Economics of destinations

Prof. Peter F. Keller, PhD.

Visiting professor at the University of Bergamo

Fall Semester 2017_18

Tourism Economics

Chapter 2

2.1. Tourism as a territory bound sector

2.2. Attractions and tourism potential

2.3. Specialization on tourism

2.4. Nature of competition

2.5. Destinations as clusters

2.6. Destination as market place

2.7. Promotion of the place as new paradigm

2.8.Tourism organizations

2.9. The impact of digital revolution

Content

2.1. Tourism as a territory bound sector

Why is tourism always territory bound?

Keywords

Destination image

Global demand and local supply

Local territory dependency

The destination is the place where demand and supply of tourism

related goods and services meet

Demand side view

Destinations are point of attractions which are anchored in the mindset of potential

visitors. The travel decision is based on the destination image. The image is the sum

of beliefs, ideas and impressions that a person has about a destination.

Supply side view

The point of attractions are geographical places such as countries, regions or

cities where natural, cultural and social attractions are situated. These attractions are

the resources for the creation of value in the field of tourism.

The demand is global but the supply is local

Tourism is a demand driven phenomenon. The production of tourism related goods

and services depend on freely chosen travel decisions.

The object of the travel choice is a destination with its resources. Tourism is

therefore always territory bound.

The territorial resources are part of local socio-cultural and ecological systems

which determine tourism related activities.

Climate and topography limit all economic

activities

Agriculture is mostly limited to the breeding of

livestock. The investment costs for important

industrial activities are too high. The hope to

develop ICT based home offices in mountain

areas vanished. By far not all mountain places

are suitable for developing winter sports

tourism.

Tourism as territory bound economic system depends on the local resources

The most important Alpine products

Water

Hydroelectric energy

Dairy and cheese food

Timber and minerals

Tourism

There are only few economic alternatives

to tourism in nature near leisure territories

such as mountain or beach areas

Conclusions

Tourism is by definition always territory bound. Visitors travel to a place which is

called destination.

The paradox is that the demand is more or less global since visitors can travel to

almost all places. The production of goods and services is always local.

Tourism is together with agriculture and raw material extraction industries the only

economic phenomenon which is territory bound.

Virtual tourism, so-called “travel prototyping”, can never replace the destination.

Questions to be asked

Why do we say that tourism is global and local at the same time?

What do we understand by “territory bound” when it comes to tourism?

What is the consequences of the fact that tourism is territory bound?

2.2. Tourism potential

Why does the willingness to pay of the consumers determine tourism

potential and opportunities to build tourism related supply capacities?

Keywords

Destination goods

Willingness to pay for attractions

Destination building process

Hierarchy among destinations

There are given and man-made resources which attract visitors

First nature (physical geography)

Mountains, ski slopes

Sea, lakes, beaches

Rivers

Landscape

Climate

Second nature (man-made)

Towns, villages

Ports

Man-made landscape

Disneyland

Hotels

Destinations

Territory bound attractions Man made attractions

Attractions can be public and private destinations goods

Destination goods

Tourism related supply

Public goods

- Landscapes,

- culture, nature

Social resources

– Restaurant on

public places

Positive externalities

- Flower decoration

Private goods

- Hotels

Attractions determine the willingness to pay Attractions determine the willingness to pay

Cervino Swiss-Italian Alps Città Alta Bergamo

Principles of destination building

Growth factors

Agglomeration impacts

Increased returns

Endogenous Exogenous

Market potential

Transport and time costs

Destination as

growth pole

Exogenous demand driven factors make a resort accessible and endogenous

supply driven factors influence the size of a destination

„Value based pricing“

Unique Attractions

Differentiation Willingness to pay

Value of a brand as a rent

of a destination’s SMEs

Margin for prices above

those of the market

„Branding“

Willingness to pay for attractions give the destination its value

The attractions determine the size of the destination

Attractions

Agglomeration impacts

Bigger firms

External economies Increased returns

Bigger destination

Exercise: Petra, UNESCO Cultural heritage in the middle of Jordan’s desert

Why are there several 5 und 4 star hotels?

Marriott *****

Mövenpick Hotel &Resort *****

etc.

Berne: UNESCO World heritage

Bernese farm in the hinterland

Source: Prof. Peter Keller, HEC / UNIL

There is a hierarchy between destinations depending on the number and

the importance of the attractions

Big destination throw a shadow on the hinterland

Price equalizes supply and demand

Equalisation via prices: - Prices for tourism services

- Mark-up for destination goods

Destination goods Tourism demand

Price

Conclusion

Destination goods are resources which attract visitors.

Visitors are willing to pay for attractions which give a destination its value in the form of a

brand and allows companies to use “value based pricing”.

The importance of the attractions determine through increased returns and external

economies the size of a destination.

There is a hierarchy between destinations which depends on the number and the

importance of their attractions

The price is the variable which links the supply of destinations of destination goods with

the visitors’ demand.

Questions to be asked

What is a destination good?

What does determine the willingness to pay of visitors?

What are the profits from companies operating under the umbrella of the

destination?

What do we understand by « increasing returns » and « external economies »?

How does the building of destination function?

Why do we have a hierarchy among destinations?

2.3. Specialisation of countries and places on tourism

Do all countries have international tourism?

Keywords

Widespread attractions and decentralisation of international tourism

Advanced, catching up, raw material, Malthusian and isolated economies

Concentration on the best destination

International tourism is wide spread and not concentrated in only few

countries such as the other industries

Most of the countries profit from international tourism whether they are rich or

poor, open to the world or isolated. Raw material producers suffering from the

Dutch disease which means high service prices, attract also successfully

international visitors.

The reason is that most of the countries have either natural and cultural or

manmade unique attractions which are economically considered as „factor

endowments“.

Attractions are situated all over the world which contributes to a decentralised

tourism supply on worldwide scale

Highly developed countries

„Catching up“ developing countries

Raw material producer countries

Malthusian countries

Countries with

isolated economies

France

Thailand

Russia

Cambodia

Kyrgyzstan

77,148 10,872 20,271 2,399 1,316

USA Turkey United Arab

Emirates

Nepal Uzbekistan

59,793 27,000 7,432 0,603 0,975

There is a concentration on the best places

under conditions of global competition

REF_Hec_Tourism_Systems_ITD_032706

Leysin Ollon

Adelboden Lenk

Zermatt

Klosters-Serneus

Saanen

Laax

Engadin

Davos Scuol

Sammnaun

Bagnes

Saas Fee

Engelberg

Grindelwald

Lauterbrunnen

Disentis/ Mustér Arosa

Vaz/Obervaz

Montana

Hasliberg

Leukerbad

Conclusions

The reason why almost all countries of the world have international leisure tourism is the

fact that they have attractions which visitors want to see.

Furthermore, the world is no more closed. There are multiple physical contacts of

human beeings due to business, sports, politics and many other activities. Video

conferences cannot replace tourism.

For these reasons, there is no country which exists without offering tourism facilities

since it would not survive without exchange.

Questions to be asked

Why do most of countries receive visitors?

How can you explain the strong position of tourism in the balance of trade and

services?

Why is there a concentration on the best places in the field of leisure tourism?

2.4. The nature of competition between destinations

Why is the competition among destinations imperfect?

Keywords

First and second competition

Imperfect and monopolistic competition

Uniqueness and differentiation strategy

There is a first competition among destinations and only then a second

competition between the companies of a given place

There is a first competition between destinations when it comes to the travel

choice of the visitors.

There is a second competition between companies operating under the umbrella of

the destination.

Exercise: First and second competition

What do potential visitors choose first and why?

?

The uniqueness of destinations makes competition imperfect and

asks for a differentiation strategy

Monopolistic character

of competition

Differentiation strategy for

destinations

Uniqueness

of destinations

Conclusions

There is no perfect or total competition among hotels, restaurants, cable cars or

museums. The reason is that the provider of services can profit from the destination.

They operate under the umbrella of the destination.

The reason is that visitors choose first the destination where they want to go. They

compose only after this choice the bundle of services they need for travelling and

staying at another place than their own.

These facts make that competition is imperfect which means it is not total. The

destination protects the companies from to much competition.

Questions to be asked

How do we define “perfect” and “imperfect” competition?

What is a quasi-monopolistic competition?

What kind of competition takes places if the hotel is the destination?

2.5. Destinations are clusters

What are cluster advantages?

Keywords

Cluster advantages

Commonalities and externalities

Porter’s diamond

A cluster is a geographical proximate group of interconnected companies and

associated institutions in a particular field such as tourism, linked by

commonalities and profiting from externalities.

Commonalities are common tradition, explicit and implicit knowledge and the

proximity to visitors and competitors. Externalities are unintended impacts of the

destination building process which are in favor of the companies being part of the

cluster. Such externalities are e g external economies such a higher returns because

of outstanding attractions or agglomeration impacts such as a shopping street or an

airport.

Commonalities and externalities induce cluster advantages.

Destinations are clusters where companies are linked by commonalities

and externalities

Destinations are the resultant of a long specialisation processes

Experience to survive in

a competitive

environment

High level of quality of

providers

Destination Increasing number of

critical visitors with a lot

of experience

Long specialisation

process

Adapted and simplified diamond:

Porter, M. (2000), The competitive advantage of nations, Macmillan 1990

Clusters are in general the result of a long specialization processes to whom all

the companies operating in tourism contribute without loosing their independence.

In contrary, the fact that they fight for attracting the same visitors makes of them

competitors and forces them to be innovative and quality minded. They have to

survive in a very competitive environment.

Destinations profit from critical repeater who are a sort of test market.

The companies profit also from the quality of external providers of goods and

services.

The building of clusters is the result of long specialisation processes

Destinations are clusters of all companies operating under the umbrella of the

destination.

The fact that they fight for attracting the same visitors makes of them competitors

and forces them to be innovative and quality minded. They have to survive in a

very competitive environment.

Companies can internalise cluster advantages into their products

Conclusions

Clusters are places which are specialised on one or other sector or industry. The

companies being part of the cluster develop together during the long process of

specialisation commonalities and externalities.

They have a common past and know each other very well. They share the same

explicit and implicit knowledge about a given place.

They profit from the advantage to be part of cluster in the form of contacts,

networks and the willingness to cooperate of the partners who are all interested

that the cluster survives.

Questions to be asked

What is cluster?

What are commonalities and externalities in the field of clusters?

What are cluster advantages?

What do we understand by the “Diamond” of Porter?

2.6. Destinations are market places

Are destinations company-like or just a market structure?

Keywords

Market place

Resorts and traditional destinations

Standardisation against multi-optional supply

Destinations are in general market places

Destinations are places where consumers meet the producers. The consumers

are “prosumers” since they bundle their own product with the help of the providers of

services.

They can leave the task of bundling the services to tour operators which deal

then as intermediary and on behalf of the visitors with the local producers.

The providers of services of a destination are in a permanent competition between

each other for attracting and serving visitors.

Destination offer either multitude of goods or services or a single

bundle of services (product)

Destination with multi-optional offer

and numerous independent small

companies

Traditional destinations

in leisure tourism regions

Destinations with one product owned

and managed by one firm

Cruise ships

Theme parks

Golf or and beach resorts

Whistler Mountain

Horizontal and vertical cooperation at the level of the destination for

gaining size and offering more

Sports

etc.

Casinos

Restaurants

Hotels

Transportation

Products

Industries

Horizontal

cooperation

between tourism

related firms

Vertical cooperation at the level of the destination

Bergamo Lombardia Italy

Horizontal and vertical cooperation under the umbrella of the destination

is a must for SME’s

The competitive unit of the market place is the company which has to cooperate

horizontally and vertically if it wants to profit from the advantages the destination

provides. Horizontal cooperation means to cooperate with companies of the same

industry for gaining economies of scale. Vertical cooperation means to cooperate at the

level of the destination.

If horizontal and vertical cooperation is successful, destinations with multi-optional

offer can do as well as integrated resort. They can overcome the negative impact of

the small size of their firms by cooperation which increases their market power and

improves their competitive position.

The competitive unit is the individual company in the destination

The destination is a market place but in most cases not the competitive unit.

The competitive unit is the company which operates in the cluster and

promotes its product under the umbrella of the destination.

There are destinations which are steered from one development and management

company such as “Vails Mountain Resorts” in Colorado, USA. In this case, the

destination and the company are in the same hand and unified.

Destinations can be managed such as a company

Vail Resorts is the biggest mountain resort

management company of the world

Why did Vail Resorts (USA) acquire in August 2016 100% of the shares of Whistler-

Blackcomb (Can) for 1.1 billion US Dollars

for becoming the biggest resort of Northern America?

Exercise: Mammoth acquisition of Whistler-Blackcomb ski area (Can)

by Vail Mountain Resorts (USA)

Conclusions

Destinations are market places where consumer and producer meet. Consumer buy on

place their bundle of services from the producers. This is the case in all traditional resorts

with a multi-optional supply.

There are destinations where one company produces or manages all the services.

These destinations are called “resorts”. The French mono-functional ski resorts were the first

destination built and controlled by one development or management company.

Both kind of destination can work well. The multi-optional destinations offer more

possibilities of choice. The resorts can better control and guarantee the bundle of

services they offer or sell.

Questions to be asked

Why do we say that destinations are market places?

What is the advantage of a traditional destination?

What are the opportunities and threats of resorts built and managed by one

company?

2.7. Promotion of the place as new paradigma

Can all the promotion activities for a place be bundled and integrated

in one organisational form?

Keywords

Country brand

Focus and instruments of promotion of the place

Synergies between organisations in the field of promotion of the place

Globalisation mobilised governments

to promote places for staying competitive

Optimal use of the available resources

Additional growth and employment

Improving the

framework conditions

Targeted promotion

of the place

Competition between states

and places

inside the country outside the country

Promotion of the place

Wealth and quality of life

Promotion of the place can help to promote the country as business location,

export, working and holiday place

Image of the state

Influence of opinon leaders

Foreign consumers

Attraction of visitors

Promotion of agricultural

products

Foreign companies

Location promtion

Export promotion

Creation of employment and income for the resident population

Country image depends on excellency and promotion

Recognition

&

Reputation

Economic, cultural and political performances

Promotion of the place can enhance the existing image

cCreate

Reinforce

The criteria of the Anholt-GfK Country Brand Index

Italy is in the top

10 countries!

Page - 63

The impact of promotion of the place are questionable:

the case of Switzerland

Swiss Cheese

Marketing AG SCM

Conclusions

The coordinated or even integrated promotion of places is a concept which is not

yet introduced on the country level. The efforts to promote tourism, economy, culture

It makes sense to promote places under one umbrella for attracting visitors, scientists,

managers or professionals from abroad and for pushing exports of industrial or agricultural

goods.

All the actors of the promotion of the place could profit from strong country brand even if

the promotion of each sector has a different character. Tourism promotion is largely

directed to the large public.

It is also worthwhile to share the administration and the logistics in order to win

economies of scale and scope for reducing the costs and increasing the scope of the

promotional activities.

Questions to be asked

What do we understand by “promotion of the place”?

Why is there a competition among states for attracting foreign resources to a given

country?

What would be the advantages of an integrated promotion of the place?

Why is “promotion of the place” not yet established in advanced economies?

2.8. Tourism organisations

What are the principles for organising international tourism

promotion?

Keywords

Local, regional and national tourism organisation

Complementary and subsidiary destination promotion

Business models and instruments

Marketing funnel and strategies

The complementary and subsidiary mission of National Tourism

Organisations (NTO’s)

Tourism organisations are responsible for destination promotion which is

complementary and subsidiary to the promotion of the tourism related

companies and industries. They have often be created with the help of the state and

his sub territorial levels by the professional association of tourism.

Their mission is the promotion of destination by adapting and using all the

techniques of market communication.

There is a need for effective and efficient NTO’s

operating near to the tourism market

Destination promotion is not a political affair but market near activity that needs

expertise in tourism, communication and marketing.

Tourism organizations should have a vision and elaborate business models and

plans which indicate their major strategies, partnerships and financial tools and

receipts.

The business model of NTO’s is varying from country to country reflecting

different factors such as the experience with promoting tourism countries, the level of

development and the existing expertise.

Business model for the activities of NTO’s

Total Impact on contacts, page views,

flows and returns etc.

GU

ESTS

Use of funds

Marketing- program-

costs

Operating- costs

Enhancing profile and status of the brand

Stimulation of the demand through

sales promotion

MARKETING-ACTIVITIES

MARKETING-ACTIVITIES

STA

TE

The business model shows the scope of the country marketing in the field

of tourism

The business model summarize the strategic activities of an NTO in a simple way.

The NTO sees itself as the leader of the tourism brand. The organisation is trying to

bundle all the communication efforts when it comes to promote the country abroad.

An important focus is led to the sales promotion. The NTO should be as near to the

market as possible. The organisation has the ambition to follow the visitor from the travel

choice to the stay and to decision of coming back.

The business model reflects also that the NTO is commissioned by the state which is

– together with the commercial partners and the destinations – funding the activities.

The marketing of countries has to be a customer driven process

The marketing of tourism countries is customer driven. It has to be considered as a

process which can be represented by the following marketing funnel:

Analysing markets and advice for developing products

Getting attention

Creating interest and sympathy

Stimulating needs

Putting products on the market

Realising bookings

Keeping the visitor loyal

Exercise: The marketing strategy of the Swiss National Tourism Office

What is new?

Guest

E-Marketing

Key Media Management

Key Account Management

Promotion

Possible marketing mix of NTO’s which use the whole spectrum of media

for making visitors travel to their countries

Globalisation allowed traditional countries to explore successfully

new markets: the case of Switzerland

Market Growth of visitors nights Growth of the expenditure

2008-2012 2013-2017

Brazil 34.1% 20.3%

China 98.5% 90.7%

GCC 44.0% 24.0%

India 39.8% 78.4%

Poland 48.2% 24.3%

Russia 40.4% 30.0%

The sophisticated way to index market potential (Index: 0-100) by

Switzerland Tourism

Quelle: BFS Statistik (LN Entwicklung); ST / Tourism Monitor Switzerland 2010 (Anteil Erstbesucher & Durchschnittsalter < 35); IMF/WEO 2012 (GDP Wachstum); United States Census Bureau – IDB 2012 (Bevölkerungswachstum).

Criteria for the evaluation of market potential of countries of origin of visitors

Economy Macro-economic data (Inflation&Unemployment)

Currency Currency in relation to the destination

Substitution Possibility to outsource market activities to partners

Repeaters Part of repeaters (high part=low marketing costs)

Opening costs Cost of production, personal, taxes etc.

Accessibility Direct flights, Visa duties

Attractivness Quantitative and qualitative potential of the market

Advantage Competitive advantage in comparison with competitors

Seasonality Guests for intermediary and summer season are more interesting

Expenditure Average daily expenditure

There is general criticism from economist about the effectiveness and

efficiency of the promotion of places and destinations

Promotion of destinations is in advanced, innovative, efficient and open economies not

necessary. They can bring more export and visits. But the highly profitable and productive

projects, exports and visits take place without the help of the state.

The positive impacts of place and destination promotion are quantitative and not qualitative.

More quantities need additional workers which cannot be found on the labour market

when there is full employment.

Measures for the promotion of the place led to a higher income but also a higher

population. They do not increase the income per capita.

The impact of the promotion of the place on resources such as ground, infrastructure or

environment is negative.

Page - 79

Increasing international tourism increase the prices of internal tourism of the residents in a given country

Price (costs)

Revenues

E2

D2 D1

E1

Di A

P1

P2 C

B

S

Di = Internal demand Di = Internal and foreign

demand D2 = Effect of promotion

abroad S = Touristic supply E = Equilibrium of

demand/supply, marginal price/costs

Conclusions

The internationalisation of tourism increased the necessity to have effective and

efficient National Tourism Organisations (NTO).

NTO`s are brand leader of countries. They bundle the communication measure of the

private or half-private partners under the umbrella of the country destination.

NTO’s are the forerunners in the field of the application of ICT to tourism promotion.

They can track visitors from their travel decision to their return home.

Only few states control the performance of their NTO’s in a effective and efficient

way.

Questions to be asked

What do we mean by “complementary” and “subsidiary” role of NTO’s?

What is a marketing funnel?

Which are the criteria for opening and developing new markets?

What are the impacts of strong incoming tourism on the tourism prices in a given

country?

2.9. Digital revolution in the field of destination marketing

How does digital revolution change destination marketing?

Keywords

Technological innovation

New sovereignty of the consumer/visitor

Multimedia and travel prototyping

Multifunctional destination websites

Enlargement of the internet with second-

generation websites

Social Media

Wikis

Music and picture sharing platforms

Virtual games

Use of the internet via mobile

devices

Applications based on

Augmented reality

Location based services

Interface between tourism organization, TOs & TAs, and customer

Provide visitor with product information and booking facilities Support tourism enterprises to integrate into the tourism

The technological cycles in the field of ICT are getting shorter and

shorter and new e-markets are coming up

NTO’s and DMO’s are obliged to adapt to ICT innovation for attracting visitors

There are new possibilities to interact between visitors and providers of

services

« Mobile computing” assures information on place and allows to

communicate

NTO’s adapt to new ICT by “trial and error”. The investments in equipment, software and

human resources are heavy. The big portals of information, evaluation and booking compete

national and local information and reservation systems. The distribution costs will increase.

The way potential visitors inform themselves is changing

The sovereign consumer

“Web 2.0” created the consumer who produces its content himself. The visitors depend

less on the informations of the provider of services and win market power. “Web 3.0” will

offer them advice from provider of services on how and where to consume.

The price transparent hotel and destination evaluation system

The well established hotel and destination evaluation system provide potential visitors

with neutral transparency offer and prices. They have an impact on the reputation of

companies and organisations.

A credibility revolution took place

and increased the importance of social media

Potential visitors believe more to other visitors than to experts, tourism organisations

or companies. NTO’s and DMO’s are obliged to promote in a targeted way the

social media engagement of potential visitors by integrating “User Generated

Content” into its online and offline communication.

Example of the Switzerland Tourism:

The Swiss NTO has a social media strategy for “friends & followers” by using the hash

tag #INNAMORATIDELLASVIZZERA. The organisation put the stories of the Swiss

lovers worldwide on a “love map”.

Exercise: Role of the influencers in the travel decision process

Why are influencers the new ambassadors for tourism destinations?

Ranveer Singh, Urban India Actor, Influencer, Trendsetter 8.3 million fan on facebook 4.5 million fans on Twitte 7.2 million fans on instagram

The product must be shown

Photo gallery/videos/virtual visits/webcams, short texts with pricing and direct link to

bookings

Text in using multimedia + social medias on the web.

It is necessary to make potential visitors dream

eCommunication by

photograph and movies is

crucial

Vatnajökull, the largest ice cap in Island

Picture: Ragnar Th.Sigurðsson / Barcroft Media

The e marketing strategy should allow to accompany the potential visitor

before, during and after the travelling

Function of a web site for a destination

Dream Plan Go Come back

Audio-visuel

systems

Hotel Evaluation

system

Booking systems

Repeater system

CRM

Fa

Cornerstones of E-marketing on destination level

Make access easy (“searching engine”)

Give advice to potential visitors

Seduce potential visitors by multimedia tools

Communicate with the visitors

Cooperate with the partners by intranet

Gather common information in one date bank

Assure a worldwide distribution of the information

Creation of a eMarket

„Holiday homes of Switzerland“

t

Deskline REKA TOMAS Tiscover Interhome other

STNet

MetaDirectory

diverse

systems

STNet

suppliers

eMarketing contributes to internationalise tourism

The portal of Switzerland Tourism offers online 20’000 holiday appartements and villas to

foreign visitors with great success. These forms of accomodation are booked on internet by

60% of the customers

Conclusion

The digitalisation transforms the way potential visitors have to be attracted by tourism

organisations. They play an important role in e-marketing since they are the early

adapters of technological change to tourism in the real world.

Potential visitors are nowadays sovereign consumers. They believe more to peers by

using social medias and their ambassadors for travel decisions and consumption of

tourism related services.

Multimedia makes potential visitors dream and must be integrated in websites which

are multifunctional by creating dreams, giving information, allowing book and bringing

back customers for a second trip to the same destination.

Questions to be asked

Why do we say that visitors are “sovereign”?

What do we mean by “early adapters” of technological ICT change?

Why is multimedia so important for the travel decision process ?

What should a website of a tourism organisation include?

Are NTO’s and DMO’s still necessary in the era of online tour operators and

booking portals?

Reader:

Keller, P. (2009), Destination marketing, 3rd Advance in Tourism Marketing Conference,

Bournemouth, September

References:

Vanhove, N. (2011), The economics of tourism destinations, Second edition, Elsevier Insights,

London

Krugman, P. (1990), Increasing Returns and Economic Geography, NBER Working Papers

3275, National Bureau of Economic Research, Inc.

References and reader