1 TOURISM AS AN INNOVATION BASED INDUSTRY Abraham Pizam Rosen College of Hospitality Management University of Central Florida Orlando, Florida, USA.

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TOURISM AS AN INNOVATION BASED INDUSTRY

Abraham PizamRosen College of Hospitality Management

University of Central FloridaOrlando, Florida, USA

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Innovate or be left behind

• The basic premise of this presentation is that developed economies are entering into a new phase, namely the era of innovation.

• Therefore, those businesses that will continuously innovate their products, services and/or business models, will be able to successfully compete in the market place while all others will fall on the wayside.

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Innovation and the Economy• Most modern economists agree that

innovation is a major force in economic growth.

• Some even claim that innovative activity has been the single, most important component of long-term economic growth, (Rosenberg, 2004).

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Innovation and the Economy• Their rationale is based on the notion

that basically there are only two ways of increasing the output of the economy: • increasing the number of inputs that go into

the productive process, or • designing new ways to get more output

from the same number of inputs.

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Innovation and the Economy• Some suggest that the old model for

business success which was based on efficient utilization of capital and labor will no longer be relevant in the next phase of the economy.

• The new emerging model for this phase is the creation and application of innovative products, services and business models to serve the ever changing world.

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Innovation and the Economy• However, as is evidenced by now, not

all innovations lead to the same economic growth.

• Some may just cause a minute increase in efficiency and productivity.

• Others may cause a quantum jump and change the nature of both the production and consumption of a product or service.

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Innovation and the Economy• We suggest that in the next phase of all

developed economies including tourism-dependent economies significant economic and business growth could be achieved only through: • the development and adoption of one type

of innovation, namely disruptive innovation.

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Disruptive vs. Incremental Innovations• Innovations can be classified

into two types:•Disruptive, •Incremental.

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Disruptive Innovation: Definition

• “A term used to describe an innovation that is of highly discontinuous or revolutionary nature, which is the opposite of ‘evolutionary’ ‘incremental’ or ‘sustaining’ innovation” (Thomond & Lettice, 2002)

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Disruptive Innovation: Definition

• A disruptive innovation is a successfully exploited product, service or business model that significantly transforms the demands and needs of a mainstream market and disrupts its former key players.

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Incremental Innovation: Definition

• “A change in an existing technology or combination of technologies that does not significantly alter functionality, but incrementally and continuously improves performance, features, safety, quality or lowers cost…

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Incremental Innovation: Definition

• Incremental innovation occurs as a result of:• improvements suggested by those

directly engaged in the design and production process, or

• initiatives and proposals by users” (Strategies 2 Innovate, 2006).

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Disruptive vs. Incremental Innovation

• Some suggest (Leifer et al. 2000) that incremental innovation can keep large companies competitive in the short term.

• But only disruptive innovation can change the game, leading the way to long-term growth.

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Examples of Destructive Innovations

• Digital cameras that disrupted film cameras • Desktop computers that disrupted mainframe

computers.• CD’s that have displaced vinyl records.• Automobiles that displaced horses as means of

transportation.• Transistors that displaced vacuum tubes.• Antibiotics that displaced sulfa and other

antibacterial drugs.

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Examples of Destructive Innovations• Digital communications and transmissions (i.e.

fax machines and E-mails) that have displaced analogue communication and transmissions (i.e. telegrams).

• Mobile (cellular) phones that will probably displace land phones

• VoIP (Voice over Internet Protocol) that will probably displace traditional and mobile telephone service.

• Flash cards that will probably disrupt if not displace disk drives (Stabe, 2002).

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Examples of incremental innovation products• Color TV’s which are an improvement of Black

and White TV’s• Flat panel TV’s (LCD or Plasma) which are an

improvement over tube-based TV’s• Zip disks which are an improvement on Floppy

disks• Lap top computers which are an improvement

on desktop computers• Upgrades to existing software, etc.

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Business-Model vs. Technological Innovations

• A business-model innovation is the discovery of a fundamentally different way of doing business in an existing business.

• To qualify as an disruptive innovation, the new business model must enlarge the existing economic pie, either by :• attracting new customers into the

market, or • encouraging existing markets to

consume more.

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Business-Model vs. Technological Innovations

• Business model innovators do not discover new products or services;

• They simply redefine what an existing product or service is and how it is provided to the customer (Markides, 2006:20).

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Examples of disruptive business-model innovations

• Amazon, • E-Bay, • Dell computers, • Swatch watches, • Charles Schwab stock brokers, • NetBank, etc.

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Examples of disruptive business-model innovations

• None of the above invented the products or services that they manufacture or sell.

• But they redefined their products/services and invented new ways of offering these to the customer.

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Examples of disruptive business-model innovations

• For example: • Amazon did not discover book selling but

offered new ways of providing books to customers.

• E-bay did not invent auctions, • Dell did not invent computers, • Swatch did not invent watches, • Charles Schwab did not invent stock

broking, and • NetBank did not invent banking.

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Examples of disruptive business-model innovations

• These business-model innovators invaded an existing market by emphasizing different product or service attributes to those emphasized by the traditional business models of the established competitors.

• By doing so they enlarged the existing markets and attracted new customers (Markides, 2006:20).

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New definition of disruptive business-model innovations

• Until recently, business–model disruptive innovations were thought to possess the same characteristics as technological or product/service disruptive innovations.

• For example, Christensen (1997) and many of his followers suggested that: • “disruptive technologies tend to be

associated with the replacement of the incumbents by entrants” (Danneels, 2004:247).

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New definition of disruptive business-model innovations

• If this holds true for business models as well, than sooner or later: • All the traditional book sellers would be

replaced by Amazon type book-sellers, • Charles Schwab type of discount stock-

brokerage houses would replace all the traditional stock-brokers, etc.

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New definition of disruptive business-model innovations

• This claim is challenged by Markides (2006) who points out that the available business literature suggests that:• New business-model innovations grow

quickly in the initial phase of their introduction but fail to completely overtake the traditional way of competing.

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New definition of disruptive business-model innovations

• For example, Internet banking and Internet brokerage have grown rapidly in the last five years but have captured only 10-20% of the market share.

• In market after market, new ways of competing grow to a respectable size but never really replace the old ways.

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New definition of disruptive business-model innovations

• This leads some researchers to the conclusions that:• New business models are not

necessarily superior to the ones established companies employ and,

• To compete with the new entrants, existing companies do not have to adopt these new business models by themselves or create separate units (Markides, 2006).

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Innovation in the Tourism Industry• Like most other industries, the tourism

industry has seen its share of innovative products and services that were introduced in the last fifty years.

• However, with very few exceptions, most products and service innovations were of an incremental rather that disruptive nature.

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Innovation in the Tourism Industry

• Such innovations as: • the airline industry that displaced maritime

passenger transportation, • online (Internet) booking and reservation that

displaced most of the travel agency business, • the theme parks industry that displaced the

amusement park business,

• Can be considered disruptive innovations.

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Innovation in the Tourism Industry

• But in most other cases the verdict isn’t out yet whether a particular product/service innovation could be considered as a disruptive innovation or an incremental innovation.

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Incremental tourism innovations• In the last century we have seen a

whole new range of innovative tourism products/services that never existed before.

• Products/services such as: • winter tourism, • cruise lines, • convention centers, etc.

• Have many of the characteristics of disruptive innovations.

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Incremental tourism innovations

• But none of them have yet managed to disrupt its key players and therefore at this stage they might be considered only incremental.

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Business models disruptive innovations in tourism• The tourism industry has created many new

business models that have the characteristics of disruptive innovations. • time shares, • condo hotels, • fast food restaurants, • all-you-can-eat restaurants, • chain of franchised hotels or restaurants, • no-frills airlines, etc.

• Are typical examples of the numerous disruptive innovations that were created in the last 2-3 decades.

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Business models disruptive innovations in tourism

• These new business models did not succeed in capturing the entire share of their markets.

• But they managed to enlarge the existing markets by attracting new customers into the markets and/or by encouraging existing customers to consume more.

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Business models disruptive innovations in tourism• For example, time shares and condo

hotels have managed to capture a significant and growing share of the lodging market.

• But they have not destroyed the traditional hotel industry which still dominates the market.

• The same is true for the fast food, the all-you-can-eat restaurant businesses and the no-frills airlines that have not even made a dent in their respective traditional industries.

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Business models disruptive innovations in tourism

• Many new business processing techniques in the hospitality/tourism industry have some, if not all, of the characteristics of disruptive innovations.

• For example: • Yield Management, • Destination Management Systems, • Frequent Flyer/Guest Programs, • Energy Management Systems, • Electronic Locking Systems, • Global Distribution Systems,

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Business models disruptive innovations in tourism

• Mass Customization, • Property Management Systems, • Revenue Management, • Self-Service Technologies (i.e. Self

Check-out Systems), and • Central Reservations Systems (CRS),

etc.

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Business models disruptive innovations in tourism

• As previously mentioned one of the best examples of disruptive innovation in the tourism industry is the online reservation, purchasing and ticketing of airline and other transportation products, such as cruises, bus tours, rental cars, etc.

• During the last decade the Internet has managed to single-handedly transform the role of travel agents, and sharply reduce the size of the travel agent industry.

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Business models disruptive innovations in tourism

• Those travel agencies that survived have done so by providing a new bundle of services to potential travelers that require expert knowledge and advice that can only be delivered through personal customer relationship.

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Business models disruptive innovations in tourism

• In essence these businesses have transformed themselves from agencies that: • provide information, • book and sell travel products, and• earn their profits from commissions,

• to travel consultancies that: • advise their customers on anything related

to travel, • in exchange for professional fees.

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Survival of tourism businesses

• If tourism businesses are to survive and flourish in the next phase of the economy, they will have to continuously develop, adopt and market innovative:• products, • services, • business models, • work processes and • management techniques.

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Survival of tourism businesses

• This could be achieved only through the elimination of the major barriers which currently prevent most tourism/hospitality businesses from being truly innovative.

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Survival of tourism businesses

• These barriers are: • Failure to adopt innovative ideas that are

produced in the knowledge shops of academic and research institutions,

• Failure to recognize changes, threats and opportunities in the global society,

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Survival of tourism businesses

• Lack of organizational ambition and vision,

• Aversion to take risks, • Lack of market understanding, • Lack of expertise in their service or

production processes, and • Lack of finance (Beacham, 2006).

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Thank you for your undivided attention

This presentation was based on the following article: Abraham Pizam and Robertico Croes, “Tourism Through Times:

From Agrarian Societies to innovation-based Economies,” Asian Journal of Tourism and Hospitality Research, Vol. 1 No.1 (2007) pp. 3-22.