International Marketing Review
The impact of the Internet on the distribution value chain: The case of the South African
tourism industry
Clive Wynne Pierre Berthon Leyland Pitt Michael Ewing Julie Napoli
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Marketing
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420
Received March 2000
Revised June 2000,
October 2000
Accepted December 2000
The current issue and full text archive of this journal is available at
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The impact of the Internet on
the distribution value chain
The case of the South African
tourism industry
Clive Wynne
Graduate School of Business, University of Cape Town, Cape Town,
South Africa
Pierre Berthon
Department of Marketing, University of Bath, Bath, UK
Leyland Pitt, Michael Ewing and Julie Napoli
School of Marketing, Curtin University of Technology, Perth,
Western Australia
Keywords Internet, Distribution, Value chain, South Africa, Tourism
Abstract The Internet is an important new channel for commerce in a wide range of industries.
While the opportunities afforded by this phenomenon seem readily apparent, there is still much
debate and speculation on exactly how the use of the Internet and in particular the World Wide
Web will affect established industries. In this article we analyse the value chain of the tourism
industry, using as a case study the tourism industry in South Africa. Specifically, we examine the
roles played by intermediaries in the distribution chain and explore the threats and opportunities
that the emergence of the Internet, and other associated trends, present for the industry. Based
on this, a profile is made for successful new intermediaries and, finally, we assess the implications
of this profile on the control of the electronic channel.
Vol. 18 No. 4, 2001, pp. 420-431.
# MCB UniversityPress, 0265-1335
International Marketing Review,
Introduction
The Internet is
fast becoming
an important
new channel for
commerce in a
wide range of
industries.
While the
opportunities
presented
bythis channel
seem
readilyapparent
(e.g. bypassing
others in the
value chain),
there is still
much debate
and speculation
on exactlyhow
the use of the
Internet and in
particular the
World Wide
Web (WWW)
will affect
established
industries. In
most
contemporarym
arkets, the
disparities
inherent in
mass
production and
mass
consumption
have caused
intermediaries
to enter into
the distribution
chain between
buyers and
sellers. What
seems clear is
that the
Internet as a new medium undermines manyof the keyassumptions on which
traditional distribution philosophies are based and that it has the potential to
transform and even obliterate some distribution channels. For example, no
longer does a consumer have to wait for a retailer (who does not carrya good
inventoryof the latest products) to open, drive there, attempt to find a
salesperson who is generallyill-informed, and then payover the odds to
purchase a product. Products and prices can be compared on the Web and
lots of information can quite easilybe gleaned. If one supplier is out of stock or
too expensive, there is
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no need to drive miles to a competitor (competitors abound and all are
equidistant ± a mere mouseclick away). In so doing the Internet could render
manydistribution intermediaries obsolete, while simultaneouslycreating new
channels and new intermediaries. To date most research into the implications
of the Internet has focussed on the Web from a general marketing perspective,
or on its use as a marketing communication medium (Hoffman and Novak,
1996). Yet the impact of the Web on distribution channels mayturn out to be a
significant offshoot of its impact on communication (Pitt et al., 1999; Watson et
al., 1999). Of course, communication remains the essence of the Internet, but
what changes is a firms' abilityto communicate easilywith members of a
distribution channel with whom theypreviouslyhad difficultycommunicating.
The development of the Internet and in particular its application to the industry
distribution chain thus raises two critical questions. Will the Internet lead to
mass disintermediation? Secondly, will the Internet lead to many small
intermediaries, or a few powerful ones that control the channel? This article
analyses the value chain of the tourism industry, using as a case study the
South African tourism industry. It examines the roles played by intermediaries
in the distribution chain and the threats and opportunities that the emergence
of the Internet presents for the industryand concludes byassessing the
implications of these changes on the control of the electronic channel.
The South African tourism industry
The last decade has witnessed the increased internationalisation of the tourism
industry, which has forced participants to seek global business strategies and
to achieve effective cross-border integration, co-ordination and control of
activities in order to generate a sustainable competitive advantage. Tourism is
one of the world's largest industries and has historicallybeen an earlyadopter
of new technology(Bloch, 1996). As will be discussed, tourism possesses
certain features that make it an industrysuited to the application of ecommerce. According to a South African Tourism Association (Satour) survey
conducted in 1997, holidaymakers constitute 45 per cent of all foreign visitors
to South Africa. Generallythe proportion of holidayvisitors is higher for
European visitors ± for example 75 per cent of French tourists are on holiday.
Business visitors account for 29 per cent and those visiting friends and family
make up another 27 per cent. The proportion of holidayvisitors has been rising
steadilysince 1995 (Satour, 1998). The surveyalso concluded that the two main
sources of information for visitors are personal experiences/advice/word-ofmouth (70 per cent) and promotional sources (37 per cent). Europeans and
visitors from the Far East reported a much higher use of promotional sources.
Of the promotional sources used, 18 per cent are brochures, 9 per cent are travel
agents and 5 per cent of visitors use the Internet (10 per cent in North America).
There is a growing use of tours ± in 1997, 37 per cent of all holidayvisitors
made use of the services of a tour operator. Moreover, around 70 per cent of
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421
non-African visitors are visiting the countryfor the first time.
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Figure 1.
Value chain members in
the tourism industry
The value chain and the need for intermediation
Intermediaries typically perform three main functions. First, they adjust the
discrepancy of assortment through the processes of sorting, accumulation,
allocation and assorting. Second, they minimise distribution costs through
routinising and standardising transactions, which makes the exchange more
efficient and effective. Finally, intermediaries facilitate the searching process of
both buyers and sellers by structuring the information essential to both parties,
providing a place for both parties to meet each other and reducing uncertainty
(Pitt et al., 1999). The international tourism industryis characterised by large
numbers of small suppliers who are globally scattered. In Third World
destinations this is compounded by the secluded locations of many of the
attractions, limited domestic markets and weak infrastructures. Likewise,
tourists are numerous, diverse and are geographically separated from the
suppliers. Many live in different time zones. A vacation to Africa may well
represent a large expense for the individual tourist, but each destination will
onlycapture a small part of this as revenue. An overseas holidayto a particular
destination is not a regular purchase for the average tourist, although many
will go on numerous overseas holidays in their lifetime. It is thus difficult for
each supplier to obtain information on each customer (large hotel chains are an
exception), but it is possible for an intermediaryto build long-term
relationships with its regular customers. In response to these challenges, the
industryhas developed a complex value chain, utilising the services of several
intermediaries. In its simplest form, the chain members include the destination
service provider, the inbound tour operator, the outbound tour operator and the
local travel agent. This is shown in Figure 1.
In reality, these functions are not clearly demarcated and many
transactions will bypass some of the intermediaries. Some tourists will do
their own searching, but use a travel agent to do the bookings; others will try
to search and make reservations on their own, while manywill want complete
advice and the securityof a fullyarranged tour. Business travellers might
book through a travel agent, or, in the case of repeated travel, negotiate
corporate contracts directlywith the final service providers. Business
conventions might be organised byan inboard tour operator (IBTO)
specialising in that sector. Those visiting friends and familymight book their
flights through a travel agent, but make the rest of their holidayarrangements
onlyonce in the destination countryafter consulting their relatives and/or
relevant travel guides. Some of this complexityis revealed in Figure 2.
Likewise, manyorganisations exhibit an overlapping of roles. For example, an
overland tour operator exhibits the characteristics of both the destination
service provider and the IBTO.
Distribution
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423
Figure 2.
The value chain
Members of the value chain: roles and responsibilities
Following is an overview of the various industry players and their respective
roles in the value chain. Specifically, we discuss destinations and final service
providers, IBTOs, outbound tour operators (OBTOs), travel agents and
reservation systems.
Destinations and final service providers
These are the suppliers and producers of tourism products and services. They
include hotel and B&B operators, restaurants, safari lodges and game parks,
theatres, museums, rafting operators, bus operators, airlines and car hire
companies. In broader terms, we define these as the organisations that manage
the interactions and the experiences of individual tourists with each tourist
attraction. Typically, final service providers are characterised by small and
medium enterprises with little technological infrastructure, financial power or
marketing expertise. Theygenerallycater to onlya few of the needs of a tourist's
holidayand each onlycaptures a small part of the revenue. Often destinations
are geographicallyscattered and, especiallyin Africa, maynot be served byfirstworld infrastructure. Until the advent of the Internet, theyhad little abilityto
directlycontact the customer. Manywill cater to local tastes as well as those of
foreign tourists. Some maynot even consider themselves as part of the tourism
industry, yet derive a significant part of their incomes from foreign tourists (e.g.
theatres, restaurants) and form an important part of each tourist's experience.
The activities of the service providers are inherentlyphysical.
IBTOs
These constitute the first intermediaryin the value chain. Theyare also small
and medium sized enterprises. A typical IBTO will specialise in a particular
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segment of the industryand often a specific geographical region ± for example
adventure tours in Southern Africa. IBTOs add value to the industrythrough
their expert knowledge of local destinations, customs and culture. In this way
theyreduce search costs for other players in the value chain, and through
regular use of certain destinations, theyfacilitate the routinisation of
transactions between destinations and other players. Finally, they facilitate reassortment and sorting bypackaging manyactivities into a single tour. An
example of an IBTO is an organisation that arranges golf tours around South
Africa, or Springbok Atlas, which organises coach tours for groups of foreign
tourists from destination to destination. Others arrange safari tours, that allow
visitors to spend time at several game parks rather than just one. The activities
of the IBTO are partlyphysical and partlyinformation based. Theyexist
because tour groups in foreign countries do not have the detailed knowledge of
the local market and customs to make all the necessaryarrangements, and
because there is a need for tour groups to have an organisation in the host
countryto ensure that everything runs smoothlyand to whom theycan turn to
sort out unanticipated problems.
OBTOs
These make up the second intermediary. A typical OBTO is based in a
developed countryand will offer packaged tours to manydestination countries.
Usuallythese organisations will be strong in the marketing department and
will often be the largest player in the value chain. They are often the main
source of promotional information for the prospective visitor as theypublish
brochures containing details and comparisons on all their destinations. They
fulfil all the functions of the intermediary. In general they do not make
arrangements directlyin the destination country, but will work through several
local IBTOs, who will arrange tours on their behalf. Byoffering manydifferent
types of tours all over the world, they reduce the searching costs of the tourist.
Byarranging package tours, theyroutinise all the activities associated with
booking a holidayand effectivelyfulfil the assorting function. However, they
do not cater for the independent traveller who wishes to simplyarrive in a
countryand make his or her own arrangements, or for the business traveller,
who will usuallybypass the OBTO. In conjunction with IBTOs, theywill
usuallyuse their combined expert knowledge to customise tours for more
discerning groups of tourists, but will do so for a premium. Examples include
Abercrombie and Kent, Jagged Globe Mountaineering, Virgin Ski Holidays.
Manyof the larger travel agencies also playthe OBTO role.
Travel agents
Travel agents add value in several ways. They are geographically close to the
tourist and assist the customer bydoing much of the searching on their behalf.
Unlike the tour operators, theyare better able to cater to the individual
requirements of each tourist and can customise a holidayto suit each client.
Theyare able to cater to independent travellers, business visitors,
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holidaymakers and tour groups. Through access to the booking systems, they
routinise transactions and payments and coupled with their experience and
expert knowledge of the industry, facilitate searching. They are also
aggregators in that theywill stock the brochures of manyOBTOs, so the
customer can choose his or her particular holidayfrom a large number of
different offerings. As the intermediaryclosest to the customer, theyare in the
best position to build relationships with customers. This is particularlytrue in
the business travel market.
Reservation systems
This is a relativelynew intermediaryin the global market and has not been
shown in either of the value chain diagrams (Figures 1 and 2). Known as
computer reservation systems (CRS), they have evolved from the proprietary
systems used by the major US airlines and travel agents to make flight
bookings (e.g. SABRE), but are increasinglyexpanding into other sectors.
While not yet significant intermediaries in the South African market, they are
possiblythe first e-commerce intermediaries and, as will be shown, are
potentiallycritical players in the future.
The impact of the Internet on tourism distribution theory
Four decades ago, Alderson (1958) summarised the importance of distribution,
stating that the goal of marketing is the matching of segments of supplyand
demand; and 30, years later, Stern and El-Ansary (1988) defined a distribution
channel as ``sets of independent organisations involved in the process of
making a product or service available for use or consumption.'' Quite simply,
the purpose of a distribution channel is to make the right quantities of the right
product or service available at the right place, at the right time. What makes
distribution strategyunique vis-aÁ -vis other marketing mix decisions is that it
depends almost entirely on physical location. The old saying among retailers is
that the three keys to success are location, location and location. Alderson
(1958) argued that intermediaries provide economies of distribution by
increasing the efficiencyof the process. Theydo this bycreating time, place,
and possession utility± right product, right place, right time. He maintained
that intermediaries fulfil three basic functions, which Stern and El-Ansary
(1988) have distilled into the following three essential purposes of distribution
channels:
(1)
Intermediaries support economies of scope by adjusting the discrepancy
of assortments. Producers supply large quantities of a relatively small
assortment of products or services, while customers require relatively
small quantities of a large assortment of products and services. Through
the process of exchange, intermediaries create possession utility, in
Distribution
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addition to creating utilities of time and place.
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(2)
Intermediaries routinise transactions so that the cost of distribution can
be minimised. Because of this, transactions do not need to be bargained
on an individual basis, which would tend to be inefficient in most
markets. Routinisation facilitates exchange byleading to
standardisation and automation. Standardising products and services
enables comparison and assessment, which in turn abet the production
of the most highlyvalued items. Bystandardising issues such as lot size,
delivery frequency, payment and communication, a routine is created to
make the exchange relationship between buyers and sellers both
effective and efficient. In channels where it has been possible to
automate activities, the costs of such tasks as reordering can be
minimised ± an order is placed automaticallywhen inventories reach a
certain minimum level. In essence, automation involves machines or
systems, performing tasks previously performed by humans thereby
eliminating errors and reducing labour costs.
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(3)
Intermediaries facilitate the searching processes of both producers and
customers bystructuring the information essential to both parties.
Sellers are searching for buyers and buyers are searching for sellers; at
the simplest level, intermediaries provide a place for these parties to find
each other. Producers are not sure about customers' needs and
customers are not sure their needs can be satisfied. Intermediaries
reduce this uncertainlyfor both parties.
A number of authors have attempted to identifyand classifythe potential
benefits and implications of doing business on the Internet (e.g. Verityand
Hoff, 1994; Quelch and Klein, 1996; Berthon et al., 1996). Rayport and Sviokla
(1994) distinguish between the physical value chain (PVC) and the virtual value
chain (VVC) and introduce the concept of the ``Marketspace'', a virtual realm
where products and services exist as digital information and can be delivered
through information based channels. Theycontend that managers who
understand how to master both their physical and virtual value chains will be
able to extract value in the most efficient and effective manner. Pitt et al. (1999)
identifythree related macro effects of the new technologies on the distribution
activities in the value chain that flow from the notion of a virtual marketspace.
The ``Death of Distance'' describes how the Internet can eliminate the barriers
caused bydistance while the ``Homogeneityof Time'' refers to the abilityof
virtual businesses to operate 24 hours a day 365 days a year, overcoming both
the limitations of human working hours and geographical time zones. Finally,
the ``Irrelevance of Location'' concept shows how the inherentlyglobal
marketspace challenges conventional ideas on physical location.
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Emerging trends and their implications on the tourism industry
The tourism market is increasinglyorganised on a global level, with
heightened competition being characterised bya network of interactions.
Tourists are travelling more frequently, but for shorter periods. They
increasinglyrequest more specialised trips, and have increasing expectations
in terms of convenience, value and customisation. Consumers are becoming
more knowledgeable, are becoming increasinglyaccustomed to automation
and are developing a self-service mentality. They want global advice, service
qualityand market transparency. Yet theyare increasinglymaking onlylast
minute reservations (Bloch et al., 1996, Bloch and Segev, 1996). There have been
two main trends in consumer marketing over the last few years. The first is a
move towards relationship marketing and the introduction of the concept of
customer equity. This has led to a focus on encouraging the customer to make
repeat purchases through fullyunderstanding the needs of the customer and
customising the offering to meet those needs. The second is towards experience
marketing, where the customer becomes an integral part of the experience and
the marketer attempts to engage and involve all five senses of the customer.
The tourism industryhas become inherentlyglobal and this is reinforced by
the use of the Internet, which is a medium that has no geographical boundaries.
Local players in the industry will have to fit into the new global structure. At
the simplest level, the growth of the Internet provides a new distribution
channel for the industryand facilitates the development of a virtual value
chain. In light of the trends observed in the industryand the opportunities
presented bye-commerce, it is likelythat the growth of the Internet as a
medium in the tourism industrywill have the following impacts. Firstly, the
physical activities surrounding the tourist experience will not fundamentally
change. Technologymaybe harnessed to improve the experience, reduce costs
and improve efficiencies and service. Those firms that concentrate on
providing good service and expertlymanaging the tourist experience will be
the most successful. This is particularlytrue in Africa. However, there will
definitelybe opportunities for suppliers to add new value in the virtual realm.
Current examples of this are the site www.africam.com and the tourist
discussion groups set up byvarious Internet sites. Secondly, it is likelythat all
virtual activities will move to the new channel. The provision of information,
the arranging of reservations and searching for destinations are all activities
that can be done far more efficientlyon the Internet than through printed
brochures and current intermediaries. Free information will reduce the power
of the current intermediaries and could remove the advantages of proprietary
networks such as computer reservation systems (Bloch and Segev, 1996).
However, the Internet does not remove the need for intermediaries.
The case for re-intermediation
Much of the hype around the Internet focuses on its ability to directly link
suppliers and customers and hence the potential to cause mass
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disintermediation in the value chain. Indeed, the first actors to launch on line
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ventures were focussed on disintermediation. However, the market is realising
that, just as in the physical world, consumers do not want to deal with the
problems of contacting multiple suppliers to compare and shop. Some, if not
most, will want and will be prepared to payfor the level of service that comes
from dealing with an intermediary, who will offer them advice and save them
time and money(Bloch and Segev, 1996).
Bloch et al. (1996) contend that potential tourists face a wide range of
problems when trying to book directly with suppliers on the Internet. For
example, theyrequire knowledge of where to search for the destination sites,
since conventional search engines are not effective. It also takes time to visit
each destination site to view the information. Different servers typically
present information in different formats and it requires perseverance to make
valid comparisons. Often, it is not possible to book online, and in many
instances, tourists cannot book separate parts of a trip through the same
supplier (essentially, no supplier caters for all tourist segments). Moreover,
individual destination service providers are not in a position to benefit from the
abilitythe Internet provides to build up customer profiles, since most
customers are first-time visitors. However, intermediaries can potentiallybuild
up verydetailed customer profiles. If this is considered in relation to the earlier
discussion on the original need for intermediation in the tourism industry, it
should be clear that mass disintermediation is highlyunlikely. Instead it is
almost certain that new virtual intermediaries will develop.
In order to take advantage of the opportunities presented bythe virtual
channel and the trends in marketing and the industry, successful
intermediaries will have to aggregate information and specialised knowledge in
a single format at a single virtual destination. Theywill need to routinise
transactions byproviding a single integrated reservation system that allows
customers to book all parts of their holidayin a single transaction and facilitate
customisation byoffering the customer the abilityto create his or her own
itineraryin whatever manner suits the customer. Theywill also have to permit
comparisons byoffering information in a uniform layout, providing access to
comments made byprevious tourists, and operating a grading system. Since
the Internet transcends location and political boundaries, new intermediaries
will also have to transcend location. Theywill also have to offer comprehensive
services that allow customers to make all their travel arrangements at one site
and maintain a database that will allow the intermediaryto build up an
accurate profile of each tourist and use this to customise the services to each
customer. Possiblythe technicallymost difficult task in this list is the building
of an integrated reservation system for the whole industry and hence the
current CRS owners have a potential advantage to leverage their technologyto
become the core intermediary.
The case for an industry magnet
Ghosh (1998) highlighted the opportunitythat the Internet presents for an
organisation to control the electronic channel. He argues that the traditional
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reasons for having numerous suppliers in an industryare not relevant on the
Internet and contends that the Web is a natural concentrating medium and that
an organisation can control the channel bybecoming the site that can provide
the customers with everything they could want. He uses the term ``magnet'' to
describe an organisation that controls its particular channel and believes that a
given industrycan onlysupport a few such magnets. He further notes that new
companies have no existing value chains to protect and can thus set up their
businesses to take full advantage of the Internet. This is relevant to the tourist
industry, since many of the issues identified above are applicable. Unlike most
other industries, the physical distance between tourists and their destinations
cannot be changed. A British tourist cannot have a South African safari in
France, but must travel to South Africa. So bybeing absolute, physical distance
has always been beyond the control of the destinations. However, to a large
extent, the physical distance between suppliers and consumers has been
instrumental in the development of the value chain and its numerous small and
specialised intermediaries. IBTO needed to be close to the supplier, travel
Agents were close to the customer and the OBTO provided the link across
geographical boundaries. In the virtual realm there is no concept of
geographical location. A travel site on the Web is as close to a customer in the
UK as it is to one in America or the Far East. It is as close to a destination in
Africa as it is to a destination in India. This implies that a single intermediary
can undertake all activities in the virtual value chain.
Second, if we assume that new intermediaries in the new channel will be
purelyvirtual organisations that concentrate information, reduce search costs
and facilitate transactions, we see that there are veryfew constraints on the
growth of such an organisation. Once the basic transaction system has been
designed, the customer database created, and the initial links made to
suppliers, the onlyobvious constraint on the growth rate of the organisation is
its abilityto build up the network of destinations. One of the reasons discussed
earlier for the complex nature of the traditional distribution chain was the
varying needs and buying behaviours of tourists. However, in the virtual
realm, it is possible to customise the buying process to the needs of each
customer. Provided the intermediaryoffers an integrated booking system, a
customer who wishes to arrange his/her entire tour on his/her own could select
each part of his/her vacation as if he/she were specifying the components of a
computer at Dell Online, or filling his/her shopping basket at a virtual
department store. This would probablyentail visiting each destination's page,
browsing the information on that sub-site and then comparing prices, before
paying for the selection in a single transaction. Likewise, a customer with less
time could search for packaged tours, visit the pages of the relevant tour
operators and select the most appropriate pre-arranged tour. A single
intermediarywould have the added advantage of being able to build up a
customer database, since customers would make all their travel arrangements
through the same site. Hence theywould eventuallybe able to suggest
appropriate holidays to the customers and ensure that the travel arrangements
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suited the particular needs of the customer (e.g. Ms Jones always specifies a
non-smoking aisle seat, and prefers to hire a BMW over a Mercedes). This
relationship marketing would build customer loyalty and switching costs that
no other industryplayer could achieve.
Similarly, customers will prefer to arrange all their travel at one single site
than have to visit different sites for different types of holidays. The information
on each destination or tour operator would be presented in the same format.
Where traditional intermediaries specialised in particular types of holidays, the
Internet will allow a single intermediaryto cover the entire spectrum, since
there is no limitation on scope. Bloch (1996) draws similar conclusions,
identifying the Internet shopping malls (e.g. Travelocity, Expedia) as the future
industrymagnets. These organisations have both evolved from computer
reservation systems.
Conclusion: implications for existingintermediaries
Clearly, such developments imply significant threats for those organisations in
the current value chain. Theyare especiallyrelevant to the travel industryin
developing countries such as South Africa. Several commentators (Bloch, 1996,
Travel Weekly, 1998) have drawn similar conclusions for, and offered the same
advice to, travel agents. Theymust refocus and leverage their strength:
knowledge about their consumers, the travel market and supplier offerings.
Theyhave the choice of attempting to become an industrymagnet, which
requires deep pockets, technical expertise and massive advertising, or
repositioning themselves as travel management consultants, who assist
customers with personalised service and advice, and redesign business travel
management processes. Theycan gain competitive advantage byimproving
the real world shopping experience.
OBTOs are arguablythe most endangered intermediaries. Theymust either
attempt to become an industrymagnet or join forces with one. Their activities
are inherentlyvirtual and as such are better suited to the Internet. IBTOs and
destination service providers will have to leverage their expertise of local
markets and concentrate on their physical value chains. They will differentiate
themselves bytheir qualityof service and bycreating memorable experiences.
Theywill gain greater benefit byjoining an Internet travel mall than bytrying
to bypass the industry magnet. However, they should benefit from the reduced
number of intermediaries, both because of the global reach of the Internet travel
malls and the reduced transaction costs of the new medium.
References
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Distribution
value chain
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