Tourism

The tourism industry comprises multiple interrelated business sectors. Greater mobility and ease travel has made networking among these sectors key to successful business expansion and market reach. Networking across these business sectors is called vertical integration, which is done through large scale cooperation among different service chains such as acquisitions, mergers, joint ventures or other similar levels of partnership. (Ratz  Katay, 2007) In the tourism industry, attempts at vertical integration have led to successes and failures. While vertical integration offers benefits, there may also be downsides.

Vertical integration offers a number of advantages to the tourism industry. The first advantage is internationalisation or regional and global expansion. This happens when firms acquire, merge or partner with businesses in other tourism sectors to gain a foothold in new markets. The attractiveness of the European tourism market because of heightened regional integration (Ratz  Katay, 2007) encouraged the integration of hotels, car transportation, and travel agencies. This allowed the firms to access the markets in tourism sectors andor to provide continuity in providing complete tourism service to customers (Renshaw, 1994). The second advantage is the standardisation of service quality. Vertical integration involves the alignment of service values and competencies (Theuvsen, 2004). Part of the partnership that emerges is the development of standardised practices to ensure service quality. The company with a better standard can influence the improvement of the standards in the other business for the partnership to succeed. No business with superior standards would network with another company without ensuring similar standards. The third advantage is better control over competition and the market (Lafferty  Van Fossen, 2001). The size of the tourism market and ease of entry of competitors led to fierce competition. Vertical integration was a means through which firms can gain a certain level of competitive edge in gaining a significant market base. The vertical integration of transportation, tour operators and travel agents in the UK to create three large companies controlling majority of the market is an example (Renshaw, 1994). The fourth advantage is financial gains from economies of scale (Renshaw, 1994 Lafferty  Van Fossen, 2001 Ratz  Katay, 2007). Engaging in vertical networks cuts cost by allowing firms to enter or expand markets and tourism sectors without much capital investment (Theuvsen, 2004) such as a travel agency gaining a niche market by partnering with a spa resort. This creates and brings more business to the firm to increase sales. The fifth advantage is paving the way for new opportunities (Renshaw, 1994 Ratz  Katay, 2007). Examples include the retailer Owners Abroad integrating upward to become a supplier of tour packages to the global market (Renshaw, 1994) and Hilton Hotel entering the gambling and entertainment sector to create casino hotels (Lafferty  Van Fossen, 2001). One, some or all of these benefits continue to justify vertical integration in the tourism sector.

However, there are also disadvantages to vertical integration. The encompassing disadvantage is business risk or the likelihood that vertical integration would fail or would have an adverse effect. The disadvantages of vertical integration come from the business risk emerging from the type of vertical integration and selected business partner as well as the impact on the stakeholders of the firms, especially consumers. (Ratz  Katay, 2007) The first disadvantage of vertical integration is the high risk of failure when complementarities are not well aligned. An example is the failure after failure of vertical integration between airlines and hotels explained by the differences in the service values of these two tourism sectors that prevents the sharing of critical resources or the existence of complementarities. Another explanation is the necessity of conditions such as Fordism or economic-political ties, which has gone out of trend, to sustain vertical integration (Theuvsen, 2004) and the limitation of vertical integration to large firms with enough capital to buffer risks (Lafferty  Van Fossen, 2001). The second disadvantage is rise in cost due to conflicts between synergising firms. An example is the recurring conflicts between hotels and tour operators in the Mediterranean over price and payment that have increased cost for hotels. (Buhalis, 2000) A third disadvantage is the adverse impact on independent players and consumers. Vertical integration by large firms can create monopolistic networks to the detriment of small and independent players. The indirect effect is the limited choice for consumers. This becomes a bigger problem for consumers, when the large networks establish non-competitive pricing. (Renshaw, 1994)

Vertical integration remains a viable strategy in the tourism industry. The range of benefits that could accrue to synergising firms supports this contention. However, there are also downsides relating to the risks of engaging in vertical integration that require prudent consideration of tourism sectors and specific business partners as well as external factors such as regulation and market conditions.