Intermediaries, Please Do Not Disturb - Assignment Example

"Examine the reasons for the increasing growth of 'disintermediation' within the tourism industry and the implications of this for tourists, tour operators and travel agents." An economic supply chain is often made up of many entities or intermediaries, who work together to bring products and services to the customers. Disintermediation is when one or more of these intermediaries are removed from the supply chain, or simply: “cutting out the middleman” (Disintermediation, 2007). Disintermediation became rampant at the onset of the World Wide Web. Many companies opted to sell directly to the customers through the Internet instead of going through the traditional distribution channels, which involved intermediaries such as distributors, wholesalers, and agents. In the travel and tourism industry, the Internet has changed the business model and had almost driven travel agents and storefront travel agencies to extinction. Below is a diagram of the traditional tourism supply chain and how disintermediation alters this chain: The traditional supply chain had travel agents and agencies as the intermediary between the supplier and the customer. The supplier, in this case, are the airlines and hotels offering their products and services to the customer. The primary function of the travel agent is to use information to sell travel products. They handle other functions for both the customer and supplier as well, including assisting customers in searching and evaluating travel options, providing advice, and limiting risk by bonding. On the supplier’s side, travel agents not only distribute information, they can influence customers, and return customer information to the supplier for various market research (Dilworth, 1996). In the old business model, hotels and airlines relied on travel agents to bring business to them. Hotels gave agents a net rate to sell their rooms and make profit, without having to make the customers pay any more than they did if they had booked the hotel themselves. Meanwhile, airlines gave agents a commission for every ticket they sold (Barrett, n.d.). The disintermediation resulting from the new business model has considerably reduced the number of agency locations. In the U.S. alone, agency locations had been reduced to 29,018 in 2001, from 33,500 in 1995. This reduction was due mainly to agencies closing down because airlines had reduced their commissions, from which they generate about 54% of their revenue (Hill & Hill, 2001). The airlines and hotels, having saved on intermediary costs, had consequently been able to lower their prices, gaining more competitive advantage. Due to this price reduction, travellers had also increased in numbers, contributing to the demand for travel services. However, even with this increased demand, the number of travel agents continues to decrease. In 1997, the U.S. Census Bureau reported 183,178 travel agents in employment (Hill & Hill, 2001). In 2004, this number has reduced to about 103,000, with 14% of these agents self-employed (Travel Agents, 2007). This constitutes a 43% reduction in travel agent jobs in a span of 8 years, and this decline is expected to continue up to 2014. Reasons for Disintermediation The onset of e-commerce had altered the face of how the travel and tourism industry conducts its businesses. Disintermediation in the travel industry is, in most cases, a by-product of organizations engaging in e-commerce. E-commerce provides companies with business values that allow them to improve, transform, and redefine their organizations. Organizations engage in e-commerce for various process improvement reasons, including: 1) improving product promotion through mass-customization and direct marketing; 2) offering new direct sales channels; 3) reducing process costs (such as cost for information distribution); 4) reducing time to market; 5) customer service improvement through automated service and 24-hr operation; and 6) improving brand image by offering electronic access to customers (Bloch & Segev, 1996). E-commerce has also opened the doors for companies to transform the way they deal with customers. The Internet makes it easy for companies to acquire and record customer preferences and buying habits, target them with special offers, and to deal with them in a personalized one-to-one system (Bloch & Segev, 1996). To redefine products, e-commerce provides the avenue for organizations to adapt new business models and market new product capabilities (Bloch & Segev, 1996). The Internet extends the tourism market and reaches many customers worldwide, without time restraints, allowing the company to save on advertising and promotion. It also provides a ground for cost-cutting measures as it lowers staff requirements due to the automatic nature of the Internet. Furthermore, it lowers the cost for promotion and publicity, reducing the need for traditional catalogues. Also, with the advent of e-ticketing systems, the need for printed tickets are reduced, reducing paper consumption and advancing environmental responsibility (Electronic Commerce Applied to Tourism, 2005). In a nutshell, the Internet has given the supplier the capability to directly deal with the customers, duplicating the key features of travel agents, at a lower cost and with time-efficient means. Perhaps the one thing that suppliers cannot yet offer through the Internet is personalized quality service, and some tourists do find this more valuable than cost savings and fast transactions. For most companies, engaging in e-commerce is just evolving with the times, and not a conscious attempt to drive intermediaries out of the chain. Statistics prove how lucrative engaging in e-commerce can become. In the U.S., income from online tourism in 2004 reached 52.8 billion dollars, 34% higher than that of 2003. In the same year, the Internet was used to make 51% of business trip reservations and 45% of private trips (Electronic Commerce Applied to Tourism, 2005). However, many companies do see disintermediation as a way to drive costs down and increase profitability. By building their own websites and reservation systems, hotels and airlines no longer need to pay commissions to travel agents, reducing their distribution costs. In the case of airlines, e-commerce increases their market visibility, and this coupled with cost savings derived from disintermediation, allows them to lower their airfares. Lowered airfares leads to an increase in travellers, and the more travellers there are in a single flight, the more the airlines are able to distribute the high costs of maintenance and fuel surcharge, further increasing their profit margins. This becomes a win-win situation for both the airlines and the customer. Implications of Distintermediation for Tourists Because of more affordable rates, the number of tourists continues to increase. People are now able to go almost anywhere they want minus the barrier of high vacation and travel costs. Also, with suppliers posting their offerings and services on their websites, customers have the option to be informed of the newest updates and rates. This gives the customers more power over their preferences, granted that they know how to look for the information, and how to use the information to their benefit. Disintermediation promotes the culture of customer self-service. Customers can plan for the vacation or trip that they want right from the comfort of their own homes. There is no need for customers to commute to travel agencies to request for information or purchase tickets. The Internet---the virtual world of self-service---has brought convenience, speed, access, and control to the customers. Customers, traditionally insulated from the underlying complexities of booking travels, now enjoy more choices about how and where they book and more services from which to choose. Furthermore, their selection is not just limited to destinations, dates, times, couriers, and seats, they also have the option to research a trip independently or enlist the help of an agent, receive paper or electronic ticket, self-select destinations and logistics or have the provider select for them at discounted prices based on excess inventory. Tourists can take virtual tours of hotel rooms, and find references from other travellers to aid in their selections (Harrell Associates, 2002). Disintermediation has brought information to the fingertips of the customers, whether they like it or not. Services of travel agents often have accompanying commissions. It used to be that the commissions that the travel agents enjoy come from the suppliers themselves, but with the rise of e-commerce and with many suppliers cutting the commissions of agents, travel agents had turned to charging customers for a greater part of their services. Commissions are now coming from customers instead of the suppliers. Disintermediation and bypassing the travel agents gives customers the low-cost alternative. However, along with these opportunities, there are also risks that customers had been subjected to because of disintermediation. E-commerce is still a fledgling business practice and is continually evolving and adjusting to the growing pains of being a new business. In the travel sector, improvements can be seen in five key areas: the provision for low fares, viable itineraries, ease of use, customer service, and privacy and security policies. However, many problems still remain to be solved (Harrell Associates, 2002). Customers mainly face two uncertainties when dealing direct with suppliers: 1) uncertainty as to the management of the particular transaction especially when it comes to quality, and 2) uncertainty related to the system of the transaction (questions like is it safe to make a visit or will I get my money back if something goes wrong?) (Wiig, 2004). The Internet is an information-intensive environment. For customers adept at using the Internet, they are able to enjoy the full benefits of disintermediation. However, for customers who are not well-versed with how the internet works, they can fall victims to withheld information and are at a disadvantage when it comes to selecting prices and services. The Internet, being a relatively new business frontier, does not operate on the same regulations as non-virtual businesses, hence there are less restrictions and regulations that protect consumer rights. Websites can exhibit bias in terms of what organizations they advertise or promote. A website claiming to have information on all airlines so the customer can search for the lowest fares can find a number of ways to twist of hide information so that customers are unconsciously guided to choose carriers that the website promotes, or carriers that pay the website more. Also, searching for the best prices involves accessing travel inventories of different carriers. Some websites reduce inventory access because of exclusive agreements with suppliers or other distributors, conflicts of interest because of company ownership or controlling factors, suppliers reserving special discounts for their own websites, or suppliers deciding not to share data for their own business reasons (Hill & Hill, 2001). Suppliers can reduce price transparency, that it, it gets harder and harder to perform automatic price comparisons because of the rising number of suppliers and increasing degree of a multitude of price differences (Klein, 2006). For suppliers, it’s all about the profits. Suppliers operating their own websites are not concerned about getting the customers the best value for their money, but are more focused on selling their services, regardless of whether or not there are better-existing deals out there. In the traditional business model, travel agents have years of experience to back them up and so are able to provide sound advice to customers on how to make the right choices. Travel agents also provide customers security in that they can get their money back in case something goes wrong. Implications for travel agents and tour operators Travel agents and tour operators are both distributors in the tourism supply chain threatened with disintermediation, yet even among themselves, competition is stiff. Tour operators aim to bypass travel agencies by using the Internet to directly reach customers. Travel agencies, meanwhile, can also use the Internet to create their own personalized packages and sell them on-line, increasing the tour operators’ risk for disintermediation. Apparently, the more players there are in the distribution channel, the more commissions and fees need to be generated, which increase the price of the final product (Kim 2005). Distributors disintermediate each other to reduce their own costs, reduce final product prices, and emerge as more competitive players in the tourism market. However, the greatest impact or risk of disintermediation is to travel agents. Travel agents face business shutdown and unemployment. In fact, over the years, their numbers had continually decreased. Only those who were able to adapt with the times remained and profited from the Internet revolution. When the Internet came into play, and suppliers started cutting travel agents’ commissions, many store-front travel agencies shut down and agents moved business into their own homes to reduce overhead costs. The home-based travel agents then conducted business through the Internet, making use of its vast information repository and fast communication channels. However, these small businesses are often eclipsed by large online travel agencies that had sprouted over the years. The large online travel agencies had a lot to offer customers---price comparisons, packaged deals, etc.---all at the convenience of the customer. As a result, retail travel agents have to affiliate themselves and act as agents of the bigger agencies or move into smaller niches, cater to a more specific customer group, or focus on other products such as cruise lines and train excursions. Some travel agents now act as travel consultants and no longer rely on revenue from ticket sales or commissions from hotels and airlines. Some of the population might still remain in need of the service of an intermediary. This will however, depend on how well travel agents can adapt to the new environment created by the Internet and provide customers “value for their money”. Agents will probably remain the most informative sources in the industry and their services will likely remain required for advice and guidance on travelling. Customers can look to agents to provide accurate information, and customers wouldn’t have to break a sweat doing so. The likelihood of this survivability is however, also dependent on the Internet’s ability to provide the same quality of information for these requirements (Dilworth, 1996). Conclusion Industries evolve with the times. For the travel industry, businesses had morphed into self-service markets. Suppliers had managed to cut costs and reduce prices, to the benefit of the customers and the industry, but at the cost of disintermediating distributors such as travel agents and tour operators. Total disintermediation, however, will most likely not happen, as there are still people who prefer the services of these distributors. Travel agents and tour operators can either evolve with the times and use the new found knowledge and environments such as the Internet to their advantage or they can allow disintermediation to happen and move out of the market. References Barrett, M. 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