Problem Definition
Your client is the government of a region in southern Spain. Situated in this region are the country’s main tourist locations, mostly beaches.
The government is not satisfied with the revenues of the tourism sector. They have contacted our company to find a solution for this problem.
Comments
This case is made to be interviewer-led. Therefore the interviewer should guide the interviewee through the interview.
The case is split into two parts.
The first part describes more qualitative problems and has more open questions that should make the interviewee think about the problem and its solution.
The second part is more about quantitative problems and calculations. Here the interviewee should try to make his own calculations and solve the questions.
The questions in the big boxes should be read out and shared with the candidate.
Short Solution (Expand)
Detailed Solution
The following framework/structure provides an overview of the case:
I. Background
1. For what kind of information would you ask the government?
The answer should include some of the following points:
- Historical information on tourism revenue
- Number of tourists visiting
- Average number of activities done by tourists
- Average spending per tourists
2. How would you interpret the graphs provided by the government?
A good answer would include:
- It seems that the number of tourists increased by 30% over the last two years, while the total revenue only increased by 20%.
- As a result the total revenue per tourist is decreasing.
There could be several reasons for this:
- The supply of tourist offering could have increased faster than the demand could respond, leading to overcapacity and a decrease in price.
- The demographics of Spain’s tourists could have changed (for instance more old people, who do fewer activities and spend less money).
3. Why is decreasing revenue per tourist a problem?
Here the candidate should focus on the decreasing profit instead of only looking at the total revenue.
- The region is not maximizing revenue and therefore also not maximizing profit.
- As capacity is limited the region is getting less of a return on its limited resources.
- For the government itself it is bad due to the fact that they mainly make money through taxes like VAT on services in the tourism sector. They are getting less money but having more people using public goods, such as public transport, roads, etc., which will lead to higher costs.
II. Market
4. How could you measure the capacity on the market in this case?
There are many different capacities that can be measured:
Transport:
- Fixed capacity for handling flights at airports
- Fixed capacity for handling ships at ports
- Fixed capacity on roads and railroads
Accommodation:
- Capacity of hotel rooms
Other:
- Space on beaches
- Capacity of communal infrastructure (sewers, electricity, water)
Seasons:
- Bottle neck capacity during peak seasons
Capacity bottle necks in accommodation are considered to be more severe than in one of the transport sectors or on the beach. Without available accommodation no additional tourists will come to the region.
5. What are the following figures telling you about the capacity of the region?
This shows that the region’s capacity during August is getting pretty stretched and that there may be some capacity issues in the peak season.
The off-peak season on the other hand is not fully utilized and occupancy levels are even below the level of the competitor countries. This is partly due to the fact that there are no business activities in the region (conferences, etc.).
III. Capacity
6. The government wants to invest in a new terminal for their airport in Malaga, the biggest city in the region. Please assess the feasibility of this plan.
Information that should be shared with the interviewee:
- Current terminal holds up to 400 passengers per hour.
- A new terminal would be able to process up to 900 passengers per hour.
- 100% of airport traffic is caused by tourists.
The candidate should realise that he/she needs more information.
- Airport is open from 08.00 until 21.00 (13 hours).
- The maximum capacity is brought in every working hour.
- 6 million tourists per year. August is peak with 15% of the tourists.
- 40% of the tourists will go to Malaga, the rest has other destinations.
- 50% of the tourists arrive by plane.
Peak demand = 6 m tourists * 15% * 40% * 50% = 180,000 tourists
The main conclusion here should be that:
- The peak demand is already higher than the maximal capacity of the current terminal. It is obvious that on the long-run the terminal will be too small.
IV. Conclusion
7. If you have to report to the governor right now, what would you tell him/her?
The main conclusion should be:
- Although total revenue is increasing, the number of tourists is increasing faster and therefore the average revenue from each tourist is decreasing.
- To increase revenue the region has either to increase the average revenue from each tourist or increase the capacity in August.
- Expanding capacity will take more time and will lead to a lower occupancy during the rest of the year (which is already only at 35%).
- A better alternative would be to attract tourists in non-peak seasons. This solution has major cost advantages as it would take better advantage of the existing capacity. This could be done by introducing interesting opportunities for business activities as conferences or special programs for companies (team building).
Other possibilities would be to increase the average tourist spendings:
- Charge more for current activities, increase the average number of paid or introduce more premium activities.
- Attracting tourist segments that spend more money.
- The decreasing revenue per tourist could be a sign of quality issues related to the capacity problem during peak-season, as it does not seem to attract high spending tourist segments.
Dealing with the airport’s capacity problem:
- The new terminal will increase the capacity remarkably, but it is not clear if the future demand growth will reach such high limits. In addition the terminal is not fully utilized during off-peak season.
- A cheaper solution could be to renovate the existing terminal or extend the working hours during peak season.
- Also other possible bottlenecks at the airport (runways, gates, staff and flight restrictions during night time) should be checked before making a decision.
Difficult Questions
What different segments exist in the market?
Which one do you consider the most important?
Possible solutions:
- Distinction between domestic and international travel. Local and foreigners may have different opinions about area and also behaviours regarding tourism.
- Segmenting by distance to region. Tourists who are located far away face a different decision making process than nearer ones.
- Using demographic indicators: Age, income level, family status, etc. Different age groups and income levels could have an influence on the average spending of a tourist.
- Different types of tourism: winter, summer, health/spa, extreme tourism or ecotourism.
- Combining these segments: for instance trying to attract young, high income singles that prefer ecotourism and are willing to spend a certain amount of money.
More questions to be added by you, interviewer!
At the end of the case, you will have the opportunity to suggest challenging questions about this case (to be asked for instance if the next interviewees solve the case very fast).
