Financial Decision Making in Tourism Industry

13 Pages   |   3,527 Words
Table of Contents
Introduction: 2
Tourism; A product of Economic Growth. 4
Factors Affecting Tourism.. 5
Challenges for Decision makers. 7
Conclusions. 8
Recommendations. 9
Bibliography. 10
 
Tourism businesses are generally characterised by high fixed cost, fixed capacity and seasonality. Discuss the challenges these characteristics bring to financial decision-making in this industry.

Introduction:

 Tourism sector, among the services economy, is supposed to be one of the most significant sector specifically in terms of generating revenues. The demand for tourism being so huge and propelling called for an equally specialized supply to bring forth a breathing sector of the economy which required an effective and an efficient management to cope with all national, regional and local issues relating to this sector (Wahab, 2007)[1].An idea that was once unthought-of is now one the most important contributing sectors of an economy. Global tourism generated revenue of $455 billion, as reported by the WTO in 1999, as a consequence of tourist influx of nearly $657 million (World Tourism Organization, 2000)[2]. And the market is expected to reach 1600 million which makes almost 20% of the world population by the time its year 2020(World Tourism Organization, 1997)[3]. The Global market tourism is becoming progressively more customer oriented and cut-throat with time and is offering opportunities to customers, to flourish, having well designed strategies. Also tourism provides countries, with natural advantage of resources, with opportunities to place themselves ahead of the dynamic trend in the market (Mahmoud Yasin, 2003)[4].
 

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Tourism sector of a country is potentially viable and can be manipulated, with time and development, into producing a plausible outcome both for the individual economy as well as the world, playing the role of a contributing member of the global village. WTOs forecast, on the long-term basis, and review of development for the first 20 years of the millennium is referred to as the 'Tourism 2020 Vision' as a consequence of which a quantitative forecast for 25 years, using the year 1995 as the base year, would become an essential asset for decision making and strategically implementing policies for Tourism sector to be in the year 2020(WTO, 2003)[1]. According to Tourism 2020 Vision forecasts, international tourism influx will, with expectation, touch 1.6 billion by 2020 of which 1.2 million are expected to be intra-regional while 378 million will be 'long-haul' travellers(WTO, 2003).

Source: World Tourism Organization (WTO, 2003).
 
Furthermore, Tourism vision 2020 also predicts that the top three regions with the highest concentrated inflow of tourists will include Europe; with717 million tourists, East Asia and the Pacific; with 397 million tourists and the USA; with 282 million tourists. A growth of above 5%, which is over the world average, is expected in East Asia and the Pacific, Asia, the Middle East and Africa while Europe and Americas are expected to show less than world average growth(WTO, 2003).
Source: World Tourism Organization(WTO, 2003).

Tourism; A product of Economic Growth

The demand for tourism depends heavily on the economic conditions that exist in a country. Tourism sector apparently flourishes with the growth in economy, as a healthy economy is responsible for generating more income for consumers. A larger amount of income leads to a higher propensity to consume and thus a larger part of disposable income is eventually sent on tourism sector. Same is true for an opposite case of dissolving economies which lead to lower spending on tourism and consequently cause the sector to undergo recessionary state (WTO, 2003)[2].
The Economic Growth thus tends to be a stimulus for growth in the Tourism industry. a benchmark perceptively set by the experts show that economic out above 4% instigates growth in the tourism industry induced by high volume of spending on tourism from a consequently increased disposable income. However, if the growth in the economy falls below 2%, then growth in tourism sector also inductively falls.  This phenomenon can be observed by a chart given that show percentage change over previous years in GDP along with change in growth of Tourism sector (WTO, 2003).

Source: World Tourism Organization; International Monetary Fund (WTO, 2003).
Tourism is an economic activity determined greatly by expenditure and places itself at the centre of economy with respect to economic measurement of tourism; therefore in order to take into account the effects of consumption expenditure would be to reaching the core of the matter (Mihalic, 2002)[3]. Even according to Frechtling (2006)[4] and Vanhove(2005)[5], who agree with Mihalic(2002),  tourism expenditure holds a centre position for the analysis of the impact of expenditure on tourism on the economy. The level of expenditure can, on the other hand, be explained extensively by the socio-demographic variables (Jang, 2004)[6], tourists characteristics (income, age, profession, status, nationality etc.), traveling factors (accommodation, amount of pre-arranged services, repetition levels) and motivation (price factor, hotel quality and the quality of surroundings) (Alegre and Juaneda, 2006)[7].

Factors Affecting Tourism

Two of the most important element for tour managers and marketers in the planning, designing and delivering services is the cost and the consumer expenditure (revenue) attached to the services being provided. In order to derive means or stimulus for planning and designing phase and in order to implement the effective policies and strategies, the know-how of the components determining the cost structure of tourism play an important part in the play(Anderson, 2010)[8]. And like any other business organization or entity, the goal ofa tourism organization is to maximize the revenue for the company while satisfying the customers need. Keeping the same intention at front, the tourism management manipulates the elements or factors determining the cost structure of the tourism in a way that helps confining 'Consumer Surplus', a nerve cell of the economy, as much as possible, while benefiting the tourism business on the whole (Anderson, 2010).
According to the United Nations Department for Economic and Social Information and Policy Analysis and World Tourism Organization, total expenditure is defined as "the total consumption expenditure made by a visitor or on behalf of a visitor for and during her trip and stay at the destination’’ (WTO, 1994)[9] where the word destination refers to the place being visited (WTO, 2005)[10].So a consumer expenditure on tourism is basically the revenue for any tourism organization and a plus to its country's GDP while the costs attached to it, incurred by the organization to maintain the tourism spots and marketing, are put up with these revenue in comparison to estimate and calculate present and future returns, and eventually coming up with means to financial and economic decision making for the organization as well as the industry as a whole.
Another factor affecting the decision making to an equally extreme extent is seasonality.  The seasonality factor refers to conditions both natural and economical that effect the business of tourism beyond the control of management and is irrespective of the expenditure and cost associated or the investment associated with tourism. Usually these conditions or evens come by unpredicted and are sometimes better for the business and at other extremely worse. These events may include Natural disasters like tsunamis, earthquakes, cyclones, flood etc., disasters brought onto the world by man like wars, terrorism, political mayhem, corruption and economic factors like exchange rate fluctuation, recession. These factors influence tourism as the visitors are concerned about their personal security and safety (Coshall, 2003)[11].
So it comes to us through vast range of sources, the conclusion, that International tourism is a business of extreme sensitivity, because any abrupt changes in the world's climate or home economy may affect the forecasted projections and a condoning attitude on part of home will only cause the visitor to choose a destination elsewhere for tourism (Guangrui Zhang, 2000)[12]. Moreover another factor that affects the decision making for tourism is the capacity building both for potential enhancements and improvements related to maintenance of the site and the accommodation of the tourists that that the sites may attract. If put into place the capacity, though may not be important as other factors, however, do significantly play its part in decision making by presenting current and projecting potential conditions and helping the policy makers analyze and contribute towards developing the sector further than what it stays to be at present.
All the factors that have been mentioned above play their imperative roles into shaping the tourism sector both individually as well as collectively. These factors along with the primary needs of the tourists, whose living standards differ variably, must be taken into consideration, for the development of tourist sector. Security and the physical infrastructure should be of top priorities in this regard. However even after establishment tourism continues to bring up issues and dilemmas that are considerably a challenge in the face for the government and the responsible organizations. Nevertheless tourism is, by all means, a very striking industry for many countries including the small ones like Malaysia, even though its success depends heavily on the marketing strategies and planning that it follows in the awake of competition and for the sake of development. Also service enhancement is also one of the major concerns for managers of the tourism organizations (Ingram, 1995)[13].
Since 1989, the tourist industry has been recorded to have been facing difficult conditions; especially in the US restaurant sector that had experienced 'overcapacity' and 'poor growth' that affected the performance of the tourist industry deeply. Other important income generating factors like ‘accommodation’ is also pooled in their parts of contribution and has been considered a vital tool for affecting performance of the industry. On one hand, these factors can be manipulated into controlling the performance and the outcome of the tourism sector or industry, on the other hand, they also play a role of putting challenges in face of financial decision-making process for the industry, which is an important operational component of any business that intends to operate in the long run, and becoming obstacles in the path of growth (Ingram, 1995).

Challenges for Decision makers

For long run feasibility, economically, tourism organizations must provide the tourist with an experience of tour that is both worth their money and rich in quality. However, it must also be noted that tourism can also become a curse more rather than a blessing. In some areas 'mass tourism' led to depletion of the resources (natural, social and cultural) while it also caused growth to go out of control. Furthermore crime, corruption, loss of heritage, cultural adaptation (like westernization in eastern countries) has also become the cause of many environmental and other problems that discourage the tourists to visit such places (Choi, 2003)[14]. In order to sustain tourism as a developing industry, thus, there are many criteria that need to be considered in face of the challenges that an organization has to face in carrying out their roles in sincerity (Jayawardena, Patterson, Choi, & Brain, 2008)[15].
The challenges mostly faced by the tourism organizations includes the demand uncertainty; which means the uncertainty of demand for the tourist sites visits, which makes it difficult for the analyst to project any future outcome and the businesses to expect any revenue and seek any potential development in the sector. The demand uncertainty can become worse when the factors causing it are covered with asymmetric information. This means the worse than having demand uncertainty, the reasons for having the conditions at your doorstep aren't known as well. A hit like this transfers all the powers of extracting any benefits, due to the prevalence of such conditions, from the tourism organizations to intermediaries with access to this knowledge and the ability to process the information in order to generate abnormal revenues.
Furthermore, the tourism industry is very vulnerable to the high fixed cost that is incurred in both in maintenance of tourism sector and development besides the funds for depreciation and the low variable costs of providing additional capacity. All the hotel operators and the airlines have to deal with similar issues except for a few that are exclusive to each one of them. In the hospitality industry as well, similar aspects are applied. Thus the directly controlled supply variables have a direct effect on the price and the profitability. Also having an over capacity during and off-peak season would incur fixed cost for operating while having an under capacity in peak season makes you lose potential client for not being able to accommodate.(Ryan & Hoontrakul, 2004)[16].

Conclusions

The discourse brings about to our attention, knowledge and some known facts related to tourism industry and its importance as a contributing sector of an economy. Tourism sector has, over the years, been developing as one of the most important sectors that contribute heavily to the GDP of the country. With regards to its feasibility, this sector can be manipulated and utilized into projecting and achieving outcomes, through proper decision making and strategic planning, that are plausible for both the individual industry as well as the economy. However, there are challenges that tourism industry faces that indirectly affect the financial decision making, by affecting adversely the returns and outcomes manipulated to make forecasts and future outcomes.
These problems that tourism industry face are related to the limitations imposed on the outcomes, imposed naturally as a result of unwise past decisions made based upon insufficient  and incorrect information, inefficient use of resources because of inadequate experience or solely because of not having sufficient resources in the first place. They include demand uncertainty, asymmetric information high fixed costs, over or under capacity and other seasonality factors.
The problems discussed above not only exacerbate the business conditions but also affect the decision making in terms of  financial and economic outlook of industry or the sector by adversely impinging upon the projection and the forecast for future based upon incorrect or insufficient knowledge or other perceptive or predictive short comings. The fixed costs that is incurred by the company or the organization limits the resources it can save for future and hence considerable amount of potential returns are not able to be acquired due to unproductive expenditure. This leads to financial decision making that is devoid of its promised resources to come with accurate and efficient outcomes and forecasted projections.

Recommendations

For the tourism industry to resolve its problems and achieve efficient, from the conclusions that have been derived from the findings of the research, the paper attempt to make an effort of putting together a few recommendations to be considered. Firstly referring to the challenge of having intermediaries take away business from the organizations, the hotels or tourism management should consider upon utilizing their operation scale and their capability of gathering and analyzing their own data. This would help not only to overcome the problem of exacerbating their forecasting ability but also resolve the problem of having incomplete or incorrect information or data -asymmetric information. Also for the purpose of future sale, a creation of market that is more liquid in terms of contracts would help the management avoid risk of uncertainty in demand by hedging against it and be able to generate higher profits (Jayawardena, Patterson, Choi, & Brain, 2008).
Moreover, talking in context of creating a liquid market for future sales, it helps smooth out the information friction and leading the organizations and intermediaries away from fight on single resource. And to come to the point of reaping the maximum benefit, that a tourism market in a region or place holds potential to provide with, the most important role played in helping to acquire this goal, is that of authorities at different regional, state or local level. These authorities, as a matter of fact hold great influence in shaping the tourism market in their respective area. Besides these, other positive aspects should be included as tourist attraction such as public sports facilities etc for the development of tourism. Meanwhile the historical monuments and tourism sites must be preserved and continuous effort must be made in terms of achieving it most efficiently while thinking of ways to minimize the cost that is incurred in the process. Competitive policies should be followed in making tourist sites more attractive and the experience beyond high quality. The process of planning and implementing strategies should also be strengthened in order to effectively incorporate effects to the stem by working at the roots (Keller, 1999)[17].

Bibliography

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