SME travel agency marketing strategy
THE ENGAGEMENT TO MARKETING STRATEGIES OF SMEs
WITHIN THE TRAVEL AGENCY INDUSTRY
Nature of Marketing Environment
Operations of Travel Agencies
In travel agency operations, the profit of agents is equal to the difference between the supplier’s price and the price that the service is advertised to customers. To compromise this, suppliers sell the service in the form of “tickets” to agents at a discount or smaller price which stands for agency commission. Being a licensed travel agent, there is a large exposure to risks such as customer refund or guarantee for equivalent travel terms in case suppliers are in default and failed to deliver the promised service during customer-agency transaction. As a result, there is commonly a requirement to join a large association of travel agents and/ or to pay a bond on travel advertisements. Profits are usually derived from big suppliers since small or specialized companies have no ways to pay the commission of travel agents.
Trade intermediary is a person or company who acts as distributor, sales representative, marketing agent or broker who facilitates the function of arranging provision of export trade facilitation services (2003). Such services often include information, aggregation, assortment, transport, storage, selling transactions and after-sales service (2001). According to (2002), international intermediaries are motivated by the presence of incomplete information and foreign contacts. They also hypothesized that the initial strategy before becoming an entrepreneur-intermediary is to accumulate foreign networks and working as an employee of a production firm (2006).
Intermediaries assist new and inexperienced producers in reaching wider market base specifically across country borders while minimizing the latter transaction and agency cost due to the former trade specialty (1994). Intermediaries provide suppliers a quantum leap to export market and diminish the traditional, often long, internationalization stage that producers should face (1994). As a compensation for this, intermediaries have their way to sustain profits from their producer-clients by controlling the advancement of the latter according to the former strategies (2001). The dilemma of such is that it can force prospective suppliers in making relations with intermediaries because it minimizes their international trade potential, thus, directly transact with customers.
There is a threat to intermediary performance due to the promising capabilities of information and communication technologies or ICT (2001). This is the hypothesis called disintermediation which primarily revolves on the idea that necessity of wholesales and retailers decrease over time. Producers and consumers can transact directly due to reduction in time and cost of gathering necessary information for trading transactions. However, counter studies supported the cognition that intermediary functions and ICT are not substitutes but complementary. In addition, sales volume arising from direct producers-to-consumers transactions is relatively very minimal (2001). As a result, a more relevant issue is who among intermediaries can perform superior service either online or offline.
Characteristics of SMEs
Small firms are faced with difficulties in creating capabilities due to the pressure of obtaining efficiency in scale and size as well as the possibility of a takeover (2003). The European Union (EU) limits the definition of SMEs with regards to size of at most 250 employees and financial structure of about 40M Euro or $50M turn-over as well 27M or $34M worth of balance sheet (2006). Although alliances and cooperation can stand as a solution, the study of (2005) showed that cooperation and alliances between Spanish SMEs is not significant contributor of competitive advantage. However, it should be noted that local environment possesses mostly informal networks that ultimately undermine agreements between firms ( 1996). Even so, new crisis follow that link the importance of promoting intangible factors of SMEs like large corporations
The results of a survey conducted to 1,351 Spanish SMEs showed in high percentage that firms focus their attention on intangible resources and capabilities of technology/ innovation, organizational design and human resources to achieve sustainable competitive advantage (2005). This confirmed the previous studies about resource-based theory where SMEs can pull their management strategies. The theory insisted the importance of internal and intangible resources for business competitiveness (1992). The Spanish study also illustrates the distinctive nature of internal resources of SMEs as they are hard to imitate making their operations more profitable in the long-run.
According to (1980), the strategic-orientation of firms can be the key element for managing SMEs. This is what they use on whether to choose a prospector, analyzer or defender business approach. The survey revealed that SMEs with a prospector-orientation are characterized by better technological position, greater innovation and greater use of information technologies. With these features, prospectors outperform defenders. The latter is characterized by inflexible practices as it may obstruct efficiency and cost-minimization ( 1990). On the other hand, analyzers are less interest to analysis because it lies on the middle of the two strategic-orientations available to SMES. With this, the study pointed that SMEs should desire the typical strategic orientation of large firms. The results of the study supported this idea that small firms that aspire for their large counterparts usually obtain a prospector stance and become more successful.
Direct Marketing (DM) is a consumer-direct channel that directly sends corporate messages, delivers products/ services and seeks measurable responses from customers without middlemen or use of other forms of media that operate in a unidirectional manner (2003). It basically fosters the importance of personal and interactive contact between the firm and customers, and so with the aid of technology, alternative communication devices became popular due to cost and scope efficiencies like direct mail, telephone and web sites. As a result, the communication loop is completed due to unambiguous and identifiable feedback from customers to be gathered by marketers on field or on virtual highway.
In effect, the mass level scale of the product in terms of distribution does not undermine the importance of customer relationship (due to absence of customization) because concerns of customers are handled and addressed. DM is practical and helpful for firms offering expensive and risky products ( 2003) that are purchased occasionally (computers, cars) or those that suggest status or taste to the user (jewelries, dresses). It became widely used as technology continuously provide and upgrade the communication platform while firms wanted to prevent middlemen mark-ups and other transaction costs associated with distribution channels making prices uncompetitive in the market. It is also designed a firm to control and standardized customer service and obtains flexibility in operations as middlemen could have conflicting goals to the detriment of corporate objectives.
As the plan basically involves market and product compatibility, the inability to satisfy customer needs by the available offerings would only result to a futile strategy, tactics and budgeting. The weakness tends to be contagious since products are not adjusted to the market or vice versa. However, when a firm is market-oriented, it can easily identify and act in terms of the difference of B2B and B2C relationships (2003). This inclination has critical role in rationalizing (if not, classifying) effective programs relating to four Ps of marketing. For example, B2C relationships emphasize more of the pricing aspect of the product (except for high-end, specialty ones) while B2B is on informative nature in promotions. With such distinction, the plan can avoid misleading analysis and proposals. For example, there is a statement on the plan that relationship marketing is important to a certain program success. As B2B largely depends on personal relations not on well-defined product features in B2C, market-led cognition makes the firm aware on the extent of the program and its impact to individual as well as group customers including the associated costs and benefits.
On the verge of plan approval, funding requirements to the plan proposals are also resolved by a market-led organization. Since market-orientation gives the firm the ability to align vertical functions and horizontal processes (2003 ), the plan is basically prepared under the conditions of value-creating and cost-saving framework. This is because when the value chain is made lean but mean, it develops integrated links where knowledge can be shared, quality is standardized and inefficient associate is improved. On the other hand, similar chains can achieve economies of scale when processes are done in a coordinating manner. Operational defects, wastes and mediocrity are resolved in a choral manner. The motivation to do so come from the awareness of every organizational member that the end-result of what they do is intended to satisfy customer needs, boost sales and receive benefits from result outcomes. This scenario makes the market-led plan financially and strategically feasible.
Marketing Problems and Solutions
The general environment in which SMEs of in travel agency is full of ambiguity in terms of timing and carrying amount of cash inflows, cash outflows and other cash-related outcome of certain transactions. In transaction flow number 1, problems are eminent such as cost variances of finding compatible irregular suppliers, inflexible irregular customer delivery date and likelihood of longer completion of the contract due to design complexity and unfamiliar working relations. In transaction flow number 2, inherent problems are much more predictable but the company does not know how to solve it due to protection of customer relations. These are the inflexibility of regular supplier payment policy, too much cost variances and flexibility of customer payment policy and the adverse position of the company because it has lesser purchasing power at both ends of the business transaction (e.g. against supplier and customer). This is unlike transaction 1 in which it has an upper hand to irregular suppliers in terms of having flexible payment term.
However, there are also positive aspects with regards to transaction flow 1; namely, the inability of irregular customers to bargain for longer payment term or higher credit limit and flexible terms from irregular suppliers. Transaction flow 2 also has positive aspects like low levels of cancelled bookings, continuous order from regular customers and assured quality service from regular suppliers. In summary, all these problems can be improved and positive aspects to be maximized by realizing the changes in payment term and policy, installing financial budgeting and development of operational expenses guide which can be made through the use of e-banking platform. Each problem and positive aspect will be discussed according on how SMEs can approach them. This will be done by returning to literature review and introductory notes done earlier which will help the analysis:
1. Cost variances of finding compatible irregular suppliers. According to transaction cost theory, this part of costs that the company must be able to minimize in a level less than customers would accrue to be competitive as intermediary. In addition, this can be related to (2000) ability of the company for company-wide strategy rather than focusing on costs. The regular customer market is an important market for the company and expansion in this region is very lucrative. These two literatures suggested that cost variances in finding irregular suppliers are not bad at all. The company can adopt the FBS framework of (2002). Using this framework, the company cannot only determine adverse effects of cost variances to cash flows but can also pass these costs to the payment policy of suppliers or customers.
2. Inflexible irregular customer delivery date. This problem stems to the advantage of the company to limit the haggling tendencies of irregular customers to minimum by making the business relationship more formal. There is a low level of relationship marketing. As payment term is a mere component of relationship marketing according to (2002), the company can improve its relationship marketing by installing irregular customer databases and technology (i.e. e-banking) for the purpose of monitoring their payment and order performance. Inflexible delivery date from irregular customers can affect the bank balance of the company because if problems from its progress or supplier service ensue the customer will not pay its balances to the firm. However, with effective relationship marketing through upgrading of accounting tools to monitor customer performance, the company can offer irregular customers advantages that commonly held by regular customers.
3. Likelihood of longer completion of the contract due to design complexity and unfamiliar working relations. Continuous trend of this situation would lead to unresolved bad debt issue of the company as well as deepening the problem on cost variances. Contracts are agreed at the time when bookings are approved from production and so contract price already reflects the revenues the company can gain from customers as well the profit after excluding supplier and other administrative expenses. In this regard, the complexity of design must have unique payment policy in which risks associated with the ambiguity of the output is taken into account. As stated, FBS must increase the rate of the company to generate sales. In effect, allocating payment policy should be different for complex designs and unfamiliar working conditions.
4. Inflexibility of regular supplier payment policy. This is somewhat advantageous to the firm in the aspect of having quality products and on-time delivery of service. When the suppliers know that the company will not exercise change in contract terms through haggling, they will be motivated to act in efficient manner. On the contrary, this situation becomes problematic as the company is confronted with late payments and sub-optimal face value of such payments from the haggling customers. In effect, the bank balances are used up unnecessary to retain supplier’s motivation as well as provide incentive to regular customers. This aggravating situation, however, can be mitigated by increasing managerial accountability in controlling bank balances. Bank balances withdrawal will be based on FBS estimation of finance managers and SM cannot press their customer relations when they are established.
5. Too much cost variances and flexibility of customer payment policy. This is solved in connection with the problems of inflexible regular supplier payment policy. SM, who naturally protects flexible contracts with regular customers, will be more financially accountable with his actions. In effect, results of FBS estimation will be the limitations set on flexible customer contracts. Although (2000) argues that it can depose managerial creativity on the part of SM, it actually serves as expense control actions. In effect, cash flow can be predictable and bank balances would not be withdrawn to settle payments to demanding suppliers.
6. Inability of irregular customers to bargain for longer payment term or higher credit limit and flexible terms from irregular suppliers. This contributes to healthy operating cycle of the company, thus, must be in continuous trend. Debtor days can be shortened by using resource-based theory (1997) in which the company can hide its capabilities as well as the background of suppliers from irregular customers to persist shorter payment policies. It can also increase the fees to be paid by irregular customers to cover the various and unpredictable expenses of the typically complex designs that they order. This will protect cash flows and prevent the company from using bank balances to fund an ambiguous contract as well as enhance the bad debt standing of the company due to cancelled or pending orders. Quality assurance department must also cooperate to prevent adverse irregular customer’s problems regarding specifications of the complex product.
The use of e-banking as a marketing strategy in the present situation of SMEs can improve its financial stability. However, the cost of ensuring that appropriate security measures of e-banking would cancel the efficiency and value-added factor of the technology. In the end, keeping important customers will be the key in order for cash inflows to exceed cash outflows. For suppliers, e-banking can also expedite and automatically gives the commission of SMEs and also other travel agencies dealing business with them. In the advent that suppliers also collaborates e-banking technology with SMEs and other agencies, the online security would be more acceptable to customers. The convenience as well as security factors will make traditional payers more inclined with e-banking. At this rate, government officials will then concretize laws for e-banking technology.
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