pacedimensions.com

Digitisation in travel and

hospitality: Part 2 -

Strategies to successfully

compete 2 0 17

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Contents

1. Challenges for incumbent business

i. Reliance on existing lines of business

ii. The “me-too” approach

2. New strategies for success

i. Define a distinctive vision

ii. Build defendable strengths

iii. Design for scalable growth

iv. Become a market maker

v. Platforms vs. solutions

vi. Decompose multi-faceted businesses

vii. Carve out and commercialise

3. Essential capabilities

i. Customer centricity

ii. Iterative learning at pace and scale

iii. Design and innovate at speed

iv. Dynamic distribution management

v. Revenue productivity

vi. Build and shape brand reputation

vii. Business intelligence

viii.Operational productivity

4. Conclusion

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1. Challenges for incumbent businesses

The nature of competition in the travel market is

evolving at an increasingly fast pace. To survive and

thrive, incumbent businesses must understand the

nature of these changes and formulate actionable

strategies to respond.

Our first paper in this series identified three key imperatives for change:

• High levels of growth

Travel and tourism outperformed the global economy for the sixth year running in

2016¹

• Increased competition

Digitisation has increased the level of competition in the industry. The World

Economic Forum predicts a shift of $100 billion from traditional players to new

competitors.²

• Changing Expectations

Customer expectations are changing rapidly. Technology innovation is

empowering customers and they are becoming more discerning.

Digital readiness is about more than technology. It’s about new business models

and processes, company mind-set and culture. To be ready for the next decade

operational processes – as well as technical systems – need to evolve. This

includes the way businesses learn, make decisions and develop products.

Those leading the field are streamlining and accelerating their systems to increase

the rate of customer feedback and product iteration. Online travel agencies are

reaching customers through apps, websites, social media and voice -activated

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search. New business models in the sharing economy , such as Airbnb, have made

a virtue of their people-powered platforms and are seeing significant growth; 49%

said they had replaced a traditional hotel stay with an Airbnb stay in 2016³.

This paper examines the ways in which incumbent businesses in trave l and

hospitality can most successfully compete in the current market.

i. Reliance on existing lines of business

Where existing revenue streams remain strong it is tempting to ignore the imperative

for change and continue with business as usual.

Figure 1 shows the rise and fall of individual business models over time. Noticing and

responding to disruption at the early stages allows time to develop alternative lines of

business, which will later overtake the existing model.

Regular reinvention allows incumbent businesses to maintain performance over time

Fig. 1 Business performance for any given model declines over time. By reinventing for evolving markets it becomes possible to sustain high performance over time.

Existing business structures can obstruct the path to digital development. Success

comes not from ‘adding on’ the digital component, but from re -evaluating the core

business function and redesigning to compete now and in the immediate future.

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“Technology enables a business; it shouldn’t be the

driver for the business. You need to understand what

you’re trying to achieve and then look to the technology

to try to achieve those goals, rather than the other way

around.”⁴

John Seaton, Managing Director, Cendyn

ii. The “me-too” approach

It is common for incumbent businesses to try to replicate new entrants or disruptor

strategies. This can succeed where the strategy is tailored to fit existing business

strengths, but risks failure where business strengths and strategy ar e misaligned.

Figure 2 shows how the effects of a good fast -follower strategy coupled with

exemplary execution can counterbalance lost revenue as a result of digitisation. The

crucial point here is that exemplary execution constitutes the largest part of success.

For a replication or “fast follower”⁵ strategy to be successful, the necessary digital

capabilities need to be in place.

Fast-follower strategy and strong execution can counteract the effect of digitisation. Revenue-growth profile, %

Fig 2. Fast-follower strategy and execution. Source: McKinsey. Feb 2017

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2. New strategies for success For digital development strategies to be successful, an “all -in” approach is essential.

Digital strategy should be tied to an overall growth or development strat egy, rather

than isolated as a separate business function. It is important not to underestimate the

cultural shifts that go with digital expansion, including openness to experimentation

and a more rapid pace of development. This may challenge existing organisational

structures.

Core to success is a deep understanding of your target customers. This should include

psychographic profiling of interests, preferences, attitudes and expectations as well

as online behaviour. Digital development should be led by a clear vision of value for

your customers.

“Hoteliers are going to have to learn to

accommodate multiple segments of consumers

who want to interact with the property and

technologies in different ways.” ⁶

Alex Alt Past President, Sabre Hospitality

i. Define a distinctive vision

1) Build off existing business or brand strengths

2) Solve a problem that is significant for a large number of consumers

3) Focus on specific customer segments to better understand their needs

Brands can establish a strong vision by focusing on the needs of valuable customer

segments where the company has most relevance. By focusing on penetration rather

than scale there is the opportunity to develop a product that serves a designated

consumer niche better than any other providers. La rge hotel companies already do

this through the use of smaller brands that correspond to particular customer groups.

A company vision must hold weight for both customers and staff. Kurt Ekert recently

led the digital transformation of Carlson Wagonlit Tra vel to add value through an

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improved user experience. He highlights the importance of client and staff

investment:

“The interesting thing is it’s relatively intellectually

simple to develop a new strategy, but winning the

hearts and minds of the customers, the market, and

especially the employee is the hardest thing.” ⁷

Kurt Ekert President and CEO, Carlson Wagonlit Travel

ii. Build defendable strengths

Understanding your ‘core strengths’ or areas of advantage over other businesses is

the crucial starting point. Mapping these areas of excellence against the attributes

your target customers most value helps clarify the areas for focus and development.

By targeting those strengths that are more difficult for others to replicate it is

possible to build a more resilient business model.

Examples of defendable strengths are:

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“Hotels worry about how they can beat their

competitors at what their competitors are

best at. It’s very unlikely that you’ll provide a

better booking experience than booking.com;

it’s very unlikely that you’ll provide more

choice than Expedia. Success is about

identifying where your real strengths lie. For

hotels this is in the guest experience and level

of service.” ⁸

Maarten Plesman CRO, Revinate

iii. Design for scalable growth

Fifteen years ago the top five hospitality groups used to own and operate their hotels.

Now practically all have sold their properties, have divested hotel operations and are

focusing on growing brands through representation, fra nchise or management. This is

a scalable model for growth and companies like Hilton, Marriott and IHG have moved

from representing hundreds to thousands of hotels.

Scalable businesses can attain exponential growth with incremental increases in

resources. An asset-light structure has enabled digital challengers like Airbnb and

booking.com to quickly aggregate huge pools of inventory with no stake in the

properties themselves.

Core to scalable growth are a few key factors:

Centrally accessible assets

Business intelligence, intellectual property, capabilities and core assets including

distribution, online retailing, loyalty and advocacy programmes that can be translated

across multiple channels.

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Synergies for scale Investing in one kind of activity to grow the business that has a ‘halo effect’ on

growing another element. This can include promoting additional services, upselling

and cross-selling. Expedia’s platform makes money from travel bookings but

additionally gathers market insights and sells advertising.

Repeatable processes

Automating product search, discovery and purchase pathways allows for rapid scaling

through repetition. As an example, global distribution systems enable multiple

concurrent transactions, rapidly accelerating the booking pro cess.

Rapid data processing

Gathering and utilising meaningful data to improve existing purchase pathways and

build reliable insights about customer behaviour to inform future business direction.

“A guest touches multiple systems, from searching

on Google to booking on the hotel website or an

OTA, followed by the check-in system. It’s vital to

aggregate this data and create a single version of

truth about that guest so that you can engage

with them on a meaningful level through the right

channels, at the right time.” ⁹

John Seaton Managing Director, Cendyn

iv. Become a market maker

Google, Expedia, TripAdvisor, Priceline and major hotel groups hold significant power

because they aggregate both customers and suppliers.

The market-maker strategy places the business at the centre of all transactions. The

business is no longer the source of the supply, but polarises demand between

suppliers and consumers. Brand value rests on providing choice and immediate

availability to customers, and distribution channels to suppliers. By contrast hotel

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owners, car rental companies and airlines produce and sell in a linear fashion, without

the aggregation function.

The emphasis on aggregation has changed the nature of competition in the travel

industry. Any business that takes a cut of the total revenue is now an indirect

competitor. This includes payment providers along with media, distribution and

advertising channels. The definition of the travel industry is blurring , allowing for

disruptive strategies to provide value to customers.

v. Platforms vs. solutions

Platform business models facilitate the exchange of goods or services between

producers and consumers. In this sense they can be considered an extension of the

market maker strategy.

Platforms create value by curating an ecosystem of producers and consumers, offering

an interconnected suite of services or providing the foundation to build new

products. Platforms give rise to organic network effects in which the platform

becomes more valuable as more people use it and begins a cycle of self -reinforcing

growth. As of 2015, 70% of ‘unicorn’ startups valued over $1bn were platform

businesses.¹⁰ Average market cap valuations for platform companies stood at $2.56

trillion as of 2015, compared with $16.75 billion for Internet companies in 1995 (see

Fig.4).

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Market cap valuations for platform companies far exceeds that of Internet companies. Market cap valuations - Top 15 Internet vs Platform companies

Fig. 4 Comparison of market cap valuations for Internet companies (1995) and Platform companies (2015)

Source: Accenture 2016

Platforms add value in three ways:

1) Transactional platforms

Facilitating transactions between individuals and organisations. These platforms

add value predominantly by aggregating relevant providers and suppliers, aiding

discoverability (through search, recommendation algorithms or pairings of

suppliers and consumers) and reducing transactional friction.

Examples: Uber, Airbnb, Google Search, Amazon Marketplace, Ebay, OTAs, major

hotel brand websites and other online booking applications offering more than

one product.

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Airbnb 2015 valuation exceeds that of leading competitors :

Airbnb vs. Public Competitors: Valuations Over Time ($B)

2011 – 2015YTD (6/18/2015)

Fig. 5 Airbnb vs public competitors: Valuations over time ($B)

Source: CBInsights, June 2015

“Airbnb has affected the hotel trade in a number

of different ways. It is going to act as a brake on

RevPAR in the hotel trade, because supply and

demand will balance in a different place.” ¹¹

David Roche

Chairman, Guestline, Past SVP, Expedia

2) Service platforms

Provide a collection of connected products or solutions that can function

together or separately. Integration with other applications is a key advantage.

Established service platforms can become the commonplace standard with other

companies providing complementary services and integrations.

Examples: Amadeus provides a suite of travel serv ices that can function in

concert or in isolation; SalesForce provides a platform of cloud -based CRM

services.

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3) Innovation platforms

Provides the technical building blocks as a foundation on which innovators can

build complementary products and services. This involves an open access

approach, providing the tools and connectivity for others to build and add to the

platform. The platform provides value through an evolving ecosystem of related

products and services relevant to one or more core user groups.

Examples: The Apple App Store and Google Play allow independent developers to

create apps for their platforms; Sabre Platform Services allows web developers

to access applications and transaction data to build new travel tools¹².

vi. Decompose multi-faceted businesses

Package holiday providers like TUI benefit from a multifaceted business that bundles

products and services for customers. For other companies there are benefits to

separating and scaling separate business elements.

Established businesses often have several lines of revenue. While there can be

beneficial synergies to this, decomposing strands of business is preferable where

growth has slowed and the market has reached maturity. Particularly where other

businesses stand to outcompete you, the wiser move may be to separate and scale

independently.

One example is the launch of UberEats as a separate offering to Uber rides. This

diversification enabled UberEats to compete directly with other food delivery apps

including GrubHub and Deliveroo. Similarly as Google has grown it has separated

multiple different strands of the businesses, some far afield of Google itself, which

are now housed under the holding company Alphabet Inc¹³. This allows for the

independent focus and scaling of business lines th at are largely unrelated or

independent of each other.

In the case of hospitality, restaurants of established hotel brands can be scaled

independently to reach expanded markets while exploiting their existing strengths.

Independently scaling each line of business opens opportunities to target and

differentiate customer groups. In a market crowded with competition this specificity

in targeting is crucial to creating a differentiated brand.

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vii. Carve out and commercialise The digital economy has increased the level of competition. With this it has become

harder to succeed in many different fields at once. Those companies that succeed in

the current climate focus their efforts on being exceptional in a core field.

Where a business process or service is not core to a company’s overall business

strategy, a carve-out can be advantageous. In a study of professionals involved in

carve-outs or divestitures, 81% said that one of their two main reasons for divesting

was that the entity was considered non-core to the business¹³. Separate management

and distinct areas of focus can lead to better performance for both entities.

Non-core assets are the most important reason for divesting

Fig 6: Most important reasons for divesting a business

Source: Deloitte 2013

In some instances it can be preferable to outsource non -core functions. This was the

case for IHG who outsourced the development of their new reservations system in a

partnership with Amadeus. Matt Luscombe, who was CCO of Europe at the time of the

deal, explains how IHG was able to retain a competitive advantage:

“It’s all about competitive advantage. We have

intellectual property rights over the components

that we think of as being differentiating in terms

of guest experience, so they can’t be reused or

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sold to a competitor. That’s an example of trying

to ring-fence the elements which are core when

we’re outsourcing.” ¹⁵

Matt Luscombe, Past CCO, Europe, IHG

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3. Develop essential capabilities

to compete

The existing capabilities of incumbent businesses need to change in order to keep

pace with the evolution of the digital economy. This isn’t simply about adding new

skills, but reviewing and updating existing structures.

In the current market incumbents are competing with “born digital” businesses.

While incumbent businesses should not necessarily look to copy such ventures, it is

essential to identify the skills and expertise that will determine the future success of

the business.

“We have to transition in our skills, capabilities

and mindsets to deliver a great experience

physically, along with creating great experiences

digitally.” ¹⁶

Matt Luscombe, Past CCO, Europe, IHG

The following capabilities are core to future development in travel and hospitality:

i. Customer-centricity

It is now possible to orchestrate 1-1 customer engagement on a mass scale.

Personalised marketing and responsive user experiences are key differentiators in the

crowded consumer market. Success relies on up-to-the-minute, meaningful consumer

insights to inform action.

Customer profiling that relies on demographics alone is now outdated. Psychographic

profiling reveals personality, interests, habits and opinions, while behavioural

targeting responds to customers’ online actions. Understanding these characteristics,

along with the purpose of travel, provides a meaningful basis for segmentation.

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ii. Iterative learning at pace and scale

89% of business leaders believe that customer experience is already becoming their

main point of competition¹⁷. Tracking digital behaviour over time and at scale enables

sound decision-making based on statistically significant user data. This allows teams

to iteratively improve on existing customer insights. A/B testing accelerates the

learning and improvement process.

“We see customer experience, personalisation and

our hotel offering, along with data, as unique or

differentiating opportunities for this company. So

we’re investing very aggressively in those specific

areas.” ¹⁸

Kurt Ekert President and CEO, Carlson Wagonlit Travel

iii. Design and innovate at speed

The product innovation process is a good example of how digital capabilities extend

into culture and operational strategy. Implementing agile organisational processes

along with a company culture equipped for rapid innovation can help incumbent

businesses keep pace with competitors.

In practice, an agile process means an incremental, iterative approach allowing for

change and evolution during the project, rather than a single heavy planning stage at

the start. For many incumbent businesses this is a significant change from processes

that demand signoff on detailed plans before work can begin.

“What truly distinguishes and gives a digital

enterprise its competitive advantage is its culture,

strategy and way of operating.” ¹⁹

Digital Transformation of Industries World Economic Forum.

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iv. Dynamic distribution management

Businesses need to be able to segment costs and revenues by channel, customer

group and market in order to accurately assess and manage profit contribution.

Most hotels currently measure the bookings they receive and the revenue from

bookings, but can’t accurately measure the cost elements in bringing that booking

into the hotel. They structure costs by departments, rather than by channel. Moving

to an attribution system in which revenue and costs are allocated by channel will

enable more profitable distribution management, coordinating pricing and availability

based on direct profit contribution.

“It’s one thing to know in real time that a guest

has certain preferences but the ability to actually

act on that at the guest level is much more

difficult. There’s a lot of great technology, but

operationalizing is going to be the challenge.”²⁰

Alex Alt Past President, Sabre Hospitality Solutions

v. Revenue productivity

Advanced data gathering coupled with artificial intelligence is already a differentiator

for predicting and responding to demand. Machine learning and natural language

processing enable direct responses to consumers in real time. Many companies,

including Kayak²¹, are already using this technology.

Dynamic pricing and fare forecasting is not new, but more advanced and precise

means of analysing and responding to market changes and consumer behaviour have

made significant improvements. With techniques like Expected Marginal Seat Revenue

(EMSR) airfares are optimised in real time, factoring in not only the given route but

including revenue-generating opportunities across the airline network.²²

Airfare checker Hopper takes the reverse approach, using data sci ence to help

customers book the cheapest flights using predictive analysis. The app has already

gained popularity, raising $104m in funding and selling $1m in flights per day.²³

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v. Revenue productivity

88% of consumers say they trust online reviews as much as personal

recommendations²⁴. Brand reputations are made and broken online. Harnessing

customer support and motivating advocacy through peer reviews and social media

activity are now core to brand building.

With the wealth of choice available, consumers are increasingly motivated and able to

search out better deals and better experiences. In this context loyalty takes on a new

shape; it is not just the price of the room or flight that matters, but the process and

customer engagement involved. 59% of people are likely to recommend a brand if it

delivers a frictionless experience across channels²⁵ and 65% of TripAdvisor users are

more likely to book a hotel that responds to traveller reviews²⁶. Successfully

orchestrating this level of engagement and frictionless experience across channels will

continue to differentiate the industry leaders in the coming years.

“TripAdvisor’s consumer reviews, whether they’re

for hotels or restaurants or attractions, have been

fundamental to changing and improving the

consumer experience.” ²⁷

David Scowsill Past President & CEO, World Travel & Tourism Council

vii. Business intelligence

Having a full view of essential commercial data puts businesses in a position of

strength to make the swift and accurate decisions demanded in the current market.

Making the right data immediately available can empower front line staff to take

timely and relevant action.

Many businesses have strong financial reporting, but lack readily available insights

into other business areas. Modern business intelligence should include: reporting on

essential KPIs, customer intelligence, relevant market changes, and process

improvement insights alongside costs and revenues by channel. Automated alerts and

updates reduce time spent in spreadsheets and increase time available for decision-

making.

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“Hotel companies have to invest heavily in shifting

from transactional-based data to event-based

data, meaning that we understand what our

customers do at every step in their journey and we

collect that in order that we can learn about them,

so that we can personalise in a relevant way.”²⁸

Chris Silcock EVP & CCO, Hilton

viii. Operational productivity

Existing forecasting processes are often slow and clunky, without options to increase

efficiency using automation.

With end-to-end automation, pricing modifications can be made in minutes with low -

level automated decisions occurring at regular intervals. To keep pace with “born

digital” enterprises, incumbent businesses must evaluate end-to-end processes and

find ways to streamline and automate.

“You want to create a skill level in your hotel that

becomes an advantage. If you ask your people to

do something, make sure they can focus on the

content and results, and not on the mechanics. For

hotels, the mechanics underlying are not a

competitive advantage.”²⁹

Maarten Plesman CRO, Revinate

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4. Conclusion

Successful competition in our digitally saturated age

requires a holistic approach to clarify and establish

business value for todays’ consumers. A relentless

customer-focus goes hand in hand with digital

strategy; evolving products from a place of deep

consumer insight and implementing a process for

iterative development is the only thing that will

ensure lasting product-market coherence.

Digital capabilities are not a “bolt -on”, but require deep strategy change. By

understanding the nature of today’s competition, and the challenges on the horizon,

incumbent businesses can prepare themselves for lasting success.

The final paper in this series will address the barriers to digital change for incumbent

businesses in travel and hospitality.

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1. World Travel & Tourism Council. Travel & Tourism Global Economic Impact & Issues 2017 2. Digital transformation initiative: aviation, travel and tourism industry. WEF, January 2017 3. Who will Airbnb hurt more – Hotels or OTAs? ...One year later. Morgan Stanley, 2016 4. Pace Dimensions, independent research, July 2017 5. The case for digital reinvention. McKinsey, February 2017 6. Pace Dimensions, independent research, July 2017 7. Pace Dimensions, independent research, July 2017 8. Pace Dimensions, independent research, July 2017 9. Pace Dimensions, independent research, July 2017 10. The rise of the platform enterprise: A global survey. The Centre for Global Enterprise, January 2016 11. Pace Dimensions, independent research, July 2017 12. Sabre dev studio developer.sabre.com 13. About Alphabet abc.xyz 14. Deloitte Divestiture Survey Report, 2013 15. Pace Dimensions, independent research, July 2017 16. Pace Dimensions, independent research, July 2017 17. Top 10 Strategic Predictions for 2015 and Beyond: Digital Business is Driving 'Big Change'. Gartner, October 2014 18. Pace Dimensions, independent research, July 2017 19. World Economic Forum: Digital Transformation of Industries. January 2016 20. Pace Dimensions, independent research, July 2017 21. Kayak product news release, July 2017 22. Airline pricing secrets: How carriers come up with fares. CNN, June 2017 23. Hopper closes $82M series C. Hopper, December 2015 24. BrightLocal Consumer review survey 2014/Think with Google. July 2016 25. Rising Expectations in Consumer Experiences. Google/Greenberg. March 2017 26. TripAdvisor network effect and the benefits of total engagement. January 2017 27. Pace Dimensions, independent research, July 2017 28. Pace Dimensions, independent research, July 2017 29. Pace Dimensions, independent research, July 2017