7 Tourism and Digitalization
Tourism was one of the most important economic sectors in the world in 2019, contributing 10.14% to global GDP and 10.6% of workers worldwide (Juc & Misrahi, 2021). With the advent of the COVID-19 pandemic, the contribution of tourism to GDP has practically been reduced by half in 2020. However, the estimates of the main international economic organizations (UNWTO, 2021) point to a strong recovery for 2022 as the epidemiological situation improves. Be that as it may, tourism has proved to be a major growth engine for the economies of developed and developing countries around the world. Furthermore, as more and more parts of the world’s population travel, whether for pleasure or work, tourism has become a great source of opportunities that contribute to reducing poverty and narrowing the income gap between citizens.
Tourism is undergoing a radical transformation as a result of advances in information technology and digitalization. The internet has been a before and after in this process, allowing customers to search for and book travel tickets, book their accommodation online, or share their experience with friends and family through social media. It is not surprising that tourism is one of the sectors that is leading the development of digital technologies and platforms in the world, driven by strong global demand, the growing middle class in emerging markets, and the increasing relevance of experiences in modern societies.
Today no one doubts that technological advances are having a profound impact on tourist services. These developments span a wide variety of areas, from business management technologies (e.g., mobile technologies, robotics, blockchain, cloud computing), technologies for product and service delivery (e.g., virtual and augmented reality, Internet of Things), to technologies that are capable of generating deeper knowledge about customers and markets (e.g., Big Data, analytics, artificial intelligence) (OECD, 2017b). This suggests that digitalization has become an unstoppable phenomenon that is vital for the firm to meet consumer expectations in the future (Tajeddini et al., 2019; Weinelt & Moavenzadeh, 2017). Ordinary tourism firms have had no choice but to start incorporating more digital elements into their business models, at a time when native digital giants (e.g., Airbnb, Booking.com, Tripadvisor) are consolidating and shaking up the traditional tourism value chain (Ozdemir et al., 2020; Weinelt & Moavenzadeh, 2017).
This convergence of industry, customer, and technology trends is redefining business and operating models in the whole tourism ecosystem, with tourism SMEs being particularly affected as digitalization moves tourism activities from linear value chains to highly complex value networks (Kelly, 2015). Understanding how value is created and captured among the multiple stakeholders operating in emerging tourism ecosystems is now critical to unlocking the full potential of digitalization. For example, the benefits obtained from the expansion of markets, the productivity gains in firms, or the substantial changes in the way in which customers and firms interact and communicate (OECD, 2020; Tajeddini et al., 2019) are greatly increasing the complexity of the tourism ecosystem, posing significant challenges for tourism SMEs.
Whilst much emphasis has been placed on the positive effects of digital transformation, it is also important to be aware of the negative effects that need to be addressed with speed and vigour. Tourism firms are not usually at the forefront of digitalization efforts and, when they are, they often do not have the will or the necessary capacities to embark on the deep transformation process that the tourism organization needs. That is why it is very important that those organizations that are falling behind change their mentality and the way they work to start reaping the benefits promised by digital and smart transformation.
7.1 What Makes Tourism Unique?
Although many of the challenges and opportunities that digital transformation represents for tourism firms are similar to those of other industries, tourism has some particularities that make it unique. The tourism ecosystem is highly fragmented and involves a wide variety of actors that are heterogeneous and cover a broad range of services. It is a sector characterized by the overwhelming presence of SMEs (around 85% of the firms with a relevant role in the provision of tourist services according to the OECD) that coexist with a small group of large companies and especially with micro-enterprises.
Tourism is, by definition, information-intensive, which means that many tourism services are eligible for digitalization and smartization. However, since the average size of tourism firms is small, there is a significant challenge when it comes to integrating technologies and investing in customer relations through digital means. Another peculiarity is that tourism firms operate in a global marketplace, although they deliver locally. Furthermore, they are part of unique tourist destinations, with which they are intimately connected in terms of service delivery and consumer decision-making. The attractiveness and accessibility of destinations is thus a factor that greatly influences the ability of tourism firms to generate business and stay competitive. There are tourism firms that can overcome the role reserved for destinations and attract visitors due to their special service attributes, but the general rule is that the choice of destination is an inherent part of tourist decision-making and influences business. On the other hand, digital tourism firms, i.e., those firms whose business model is totally digital, such as online travel agencies (OTAs) and accommodation platforms, are playing a key role and helping to transform tourism by connecting tourism products and services with customers from anywhere in the world in real time. The good news for tourism SMEs is that they can significantly increase their visibility in the market at relatively low costs. The downside is that many tourism SMEs now depend, at least in part, on large intermediaries who dominate online consumer traffic and impose their business terms often unilaterally.
These are not the only challenges facing tourism firms. In addition to the strict conditions imposed by the intermediaries on the platforms, the customers also demand that firms improve the quality of their services (i.e., the best possible service at the lowest possible price) and deliver experiences that always meet their needs. Traditional tourism firms are risk averse and far more concerned with their business survival than with the appetite for innovation and technology. This will have to change drastically if they want to be alive in a few years.
7.2 The State of Digitalization in Tourism
Digitalization represents a major opportunity for tourism firms with the potential to unlock approximately US$1 trillion of value for the industry and society over the next decade (Weinelt & Moavenzadeh, 2017). The World Economic Forum (2017) has estimated that by 2025, digitalization will create up to US$305 billion of additional value only for the tourism sector thanks to higher profitability. It is worth noting that a significant part of this value will be transferred from traditional tourism firms to digital businesses. Digital transformation is also expected to generate US$700 billion in benefits by reducing the environmental footprint, improving safety, and saving time and costs for consumers. Notwithstanding these somewhat optimistic estimates, the reality shows some imbalances between aspirations and achievements. Recent research by the European Commission found significant imbalances in the adoption of digital technologies in tourism across Europe. The geographical location of the firms and their size are factors that could explain these differences; for example, firms located in the Nordic countries show a higher level of acceptance of digital technologies than those located in Eastern and Southern European countries.
SMEs are also lagging behind large companies (e.g., hotel chains, airlines, big tour operators), especially in those technologies that are more sophisticated or that require greater integration at an organizational or technological level, such as Big Data, analytics, artificial intelligence, or cloud computing (Dredge et al., 2019). According to the European Commission, tourism SMEs are characterized by a low level of digitalization, with most of the technologies they use focused on enabling e-commerce and social media. Furthermore, SMEs fall short in mid- and high-level digitalization technologies, and there is little evidence that major steps are being taken towards the implementation of smart technologies and their interoperability. The European Commission also highlights some political-institutional and policy-making factors that have an impact on the digitalization of tourism firms. For example, the higher the level of education, the greater the access to digital technologies, and the higher the public sector spending, the higher the level of digitalization is reached, as is the case of the Nordic countries, compared to the countries of Eastern Europe (Dredge et al., 2019). Despite this unequal assimilation of digital technologies by tourism SMEs, digital transformation is having and will continue to have a crucial role in transforming tourism, driven by the cumulative nature of technological change, the convergence of technologies, and the progressive price reduction (UNCTAD, 2018).
The shift to a digital economy offers great opportunities for tourism firms of all sizes wherever they are. These opportunities translate into access to new markets and knowledge networks, the provision of new tourism services to consumers on a global scale at a relatively low cost, the improvement of competitiveness, and higher performance and improvement of business productivity (OECD, 2017a). However, capturing these benefits will depend on achieving a balanced combination of investment in digital infrastructure, development of human capital skills, and innovation in business models (OECD, 2019). But this is not a rapid or easy task. This balance is key to starting a transition towards the digitalization of tourism SMEs and then continuing to smartization. Unfortunately, in some countries there are still significant gaps between the investment of tourism firms in digital technologies and those made by firms in other sectors.
7.3 Drivers of Digitalization in Tourism
The use of ICTs in the tourism industry has a long tradition that becomes more evident from the year 2000 when many of the repetitive tasks of the tourism business begin to be automated (e.g., buying tickets, booking accommodation, etc.), and electronic commerce emerges strongly introducing new technological capabilities that allow completely new ways of distributing and marketing tourism products and services. Similarly, as consumers become more accustomed to searching, planning, and booking travel online, digital technologies emerge powerfully, driving new advanced capabilities for tourism firms.
But what really are the key drivers that motivate tourism firms to make the transition to digitalization? This section summarizes some of the main drivers of digitalization that business owners and managers should be aware of (Fig. 7.1).
7.3.1 Consumer demand
The appetite for travel is growing strongly due to the demographic evolution of the population on a global scale. The increasing incorporation of millennials into travel, the expansion of the size of the middle class in the regions with the highest demographic potential, and the general increase in disposable income are making this growth in tourism demand quite robust everywhere. The International Air Transport Association (IATA) forecast sees the total number of travelers reaching 4 billion in 2024, surpassing pre-COVID-19 levels (103% of the 2019 total) (IATA, 2022). A little more time will be needed for international passenger traffic to reach pre-COVID-19 levels, as it will not do so until a year later, in 2025, according to the IATA forecast (Fig. 7.2).
Growing demand certainly brings great opportunities, but it also challenges stakeholders in the tourism ecosystem to quickly adapt their strategies to capture growth. For example, tourism firms are increasingly seeking stronger and more stable interactions with their customers, while trying to adapt operations according to the better knowledge they have about customer demands and preferences. Connected wearable devices and artificial intelligence are already providing opportunities to make operations efficient and enable collaboration by sharing knowledge assets between firms. Ultimately, digital technologies are also having an impact on the workforce, allowing employees to have real-time information to speed up decision-making and focus on their strengths (Weinelt & Moavenzadeh, 2017).
7.3.2 Benefits perceived by firms
Dredge et al. (2019) provide the following reasons why tourism SMEs perceive significant benefits from digitalization based on their survey of thousands of European SMEs.
Growth: Two of the top benefits perceived by SMEs include “improving online presence” and “improving growth”. Both are indicators of how tourism firms are confident that digitalization can be instrumental in achieving their growth ambitions.
Future opportunities: Tourism SMEs rely on the opportunities that digitalization offers for their businesses. Interestingly, this situation contrasts with the observations made by other studies according to which SMEs lack awareness and knowledge about the opportunities of digitalization.
Cost savings: For many SMEs, digitalization is nothing more than a way to reduce costs and improve access to markets when dealing with fluctuations in demand, such as those caused by seasonality, economic crisis or pandemic.
Interactivity with the ecosystem: Tourism SMEs also perceive digitalization as a source of opportunities to strengthen connections between the different actors that make up the tourism ecosystem. Through digitalization, tourism SMEs can improve their links with other SMEs, with destinations, with consumers, and with other subsectors (e.g., transport, accommodation, attractions, etc.). This logic also suggests the perception on the part of SMEs that digitalization can help make supply chains more flexible and create new value through participation in expanded digital business ecosystems.
7.3.3 Personalization of experiences
With the rise of the digital consumer and the emerging new trends in tourism, there is a growing demand for tailor-made products and services beyond mass tourism, as consumers expect increasingly personalized solutions that meet their individual habits and preferences (Zsarnoczky, 2018). This phenomenon is more noticeable among younger tourists, who are individualists and seek experiences that respond to their own ideas and preferences.
The emergence of individualism creates numerous opportunities, which may explain why a good number of new start-ups in the tourism sector are led by young people. Individualism also leads to customer fragmentation, which in turn leads to market fragmentation. In such a disintegrated market, consumers tend to behave selfishly, paving the way for personalized services and tailored solutions. As a result, tourism firms are driven to optimize the use of the resources at their disposal to provide flexible experiences to customers, which means they must continually collect and exchange data and extract useful insights from it.
Today, most tourism firms have access to extensive information about their customers and are able to monitor and track consumer behavior and changes in preferences in a cost-effective manner. Moreover, basic capabilities for customizable experiences are available through various tools, such as customer relationship management (CRM) customer databases. For example, cloud-based CRM systems can configure effective value propositions by analyzing past sales records and demographics (Zsarnoczky, 2018). Leading firms in the tourism sector are able to analyze huge datasets and use scalable Big Data analytics methods to search for patterns of behavior. This process of extracting value from data is one of the critical foundations of smartization.
7.3.4 Disruptive innovations
Innovations in tourism manifest in many different ways. Some of the most powerful are the result of disruptive changes in customer behavior and expectations, shifts in the competitive landscape, and the availability of data (Högberg, 2021). Today’s tourists are highly knowledgeable thanks to digital technologies. They can easily move from one digital channel to another (e.g., from hotel websites to OTAs) and between different devices (e.g., from mobile phones to tablets, and to PCs). With the use of digital technologies and mobile devices, hotel guests can manage their reservation and search for information on their smart phones before their arrival at a destination or at their convenience during their stay. Social media technologies, such as mobile phone applications and real-time instant communication, are also part of this new context that enables customers to become co-creators of tourist experiences (Tajeddini et al., 2019). Consequently, the expectations of the guests are greatly affected and become much broader and more demanding.
This new panorama of ever-greater and always unsatisfied customer expectations is proving to be an ideal breeding ground for the emergence of new non-traditional players (e.g., Airbnb, Tripadvisor, OTAs such as Expedia, Booking.com, etc.) that compete to establish new alliances with customers through highly differentiated digital ecosystems. Tourism firms become dependent on the one hand, on these platforms that provide them with the visibility to attract customers and the trust to generate new leads (i.e., through their pricing policy, reviews made by other guests); on the other hand, firms compete with the platforms themselves in attracting customers and avoiding the intermediation commissions that they charge for each reservation made through the platform. The engagement of tourism firms in digital platforms has drastically altered the power relationship between firms and their customers, as firms now have much more information available about their customers than ever before, allowing them to act in a more informed and accurate way.
Furthermore, some of the predictions made about the future of product development strategies in various industries indicate that within a short period of time almost all of our everyday objects and equipment will be accessible via the internet. The devices of the future, unlike the devices of today, will communicate bidirectionally, providing the user experience with new capabilities linked to personalized differentiation and autonomy of decision. New emerging demands for continuous real-time connectivity will mean continuous data collection while using smart devices. Eventually, all relevant information will combine together into a centralized real-time data and service management system known as the Internet of Things (IoT), which will provide robust and secure data handling for all connected devices (Zsarnoczky, 2018). However, a major problem is that firms need Big Data and artificial intelligence-based computing solutions to store, manage, and organize all this enormous amount of information, and these new innovations affect the speed, efficiency, and current computing capabilities of most firms to deliver consistent tourism experiences.
7.3.5 State intervention
States intervene in the tourism ecosystem through policies of different scope at the national, regional, and local level with the aim of accelerating the adoption of digital technologies. These policies are conditioned by a wide variety of factors, including the business structure of the ecosystem, the political and institutional context, the legal framework, the geospatial conditions, the social and demographic characteristics, the climate of confidence for investment, the competitive environment, etc. (Dredge et al., 2019). These influences manifest themselves with different degrees of intensity in the different states and in the components of the tourism ecosystem, leading to digitalization processes at different speeds. The way states design and implement their digitalization policies affects the likelihood that tourism firms will embrace digitalization, so it is important that states consider the aforementioned factors to improve their success rate in digital initiatives.
7.3.6 Safety and security
As digital acquires a more relevant role in the management of tourism firms, a greater collaborative effort to promote cybersecurity and protect the privacy of tourist data becomes imperative (Weinelt & Moavenzadeh, 2017). Security concerns are relevant both for physical environments (e.g., airport controls, city mobility systems, hotel facilities)) and for digital environments (e.g., data privacy, veracity of electronic transactions). Security breaches and accidents, whether in the physical or digital realm, can lead to severe financial and reputational damage to tourism firms. Similar risks exist when geopolitical tensions or terrorist activity occur, all of which fuels an unprecedented interest in safety and security. The real challenge for tourism stakeholders today is how to support the growing demand for seamless tourism experiences, while improving safety standards. As tourism firms continue to move down the digital path, security and cybersecurity-focused digital technologies (e.g., biometrics, crowd analytics, artificial intelligence applied to video monitoring, etc.) will continue to evolve to create a safe and secure ubiquitous environment. After all, higher levels of cybersecurity are critical to maintaining customer trust and public safety.
7.4 Opportunities of Digitalization
Digital technologies are bringing substantial transformations to the tourism business, revolutionizing tourism firms, business ecosystems, consumers and destinations. Digitalization is changing the traditional roles of tourism firms and consumers, giving rise to new relationship models between them and changing the way institutions manage tourism public policies. The spread of smart devices has transformed the way tourism firms manage their operations and has opened up new horizons for innovation in sales and marketing throughout the tourism industry. As a result, new business models are emerging, many of them driven by new digital platforms that build alliances and link the objectives of stakeholders in the tourism ecosystem, increasing the quantity and variety of products, services, and experiences.
In the digital era, digital platforms become new sources of value creation, since they allow expanding connections with many external actors and facilitate innovation from abroad. This becomes key for tourism firms to remain relevant in the digital economy. Nonetheless, there are tradeoffs. The emergence of the digital platforms is also aggravating the fragmentation of the tourism market, and the competition between traditional and non-traditional competitors is intensifying, not to mention that tourism SMEs are very often subject to harsh commercial conditions imposed by the platforms given the control of the market they have. All these changes are creating many opportunities, as well as challenges, for tourism firms, the customer and society in general. Figure 7.3 shows a comparison between the market capitalization of OTAs and that of traditional players in the tourism industry, which justifies the true dimension of this phenomenon.
Tourism firms can fundamentally benefit at the operational level through lower unit costs thanks to improvements in the efficiency of customer relationship processes and a higher volume of demand generated by personalized products and services and better experiences provided. Intelligent automation (e.g., artificial intelligence, Internet of Things, robotics) is making it possible for tourism firms to produce products and services at reduced cost and with a smaller environmental footprint. Powered by smart technologies, the next wave of solutions will collect massive amounts of data from all kinds of systems across multiple touchpoints between customers and tourism service providers. By combining data, people, and things, the customer experience will be transformed, leading to an increased likelihood of new bookings.
The benefits for customers are also apparent, such as the opportunity to enjoy seamless experiences tailored to individual preferences and demands across the entire tourism ecosystem. However, the extent to which customers realize these benefits will depend on their willingness to provide data to tourism service providers.
On a societal level, digitalization can help generate higher income for those participating in the sharing economy using their own assets (e.g., houses, vehicles, bicycles, etc.), as well as contribute to a lower environmental impact through improvements in the efficiency of production processes and the optimized use of assets involved in tourism experiences (Weinelt & Moavenzadeh, 2017). Now that digital technologies have become more affordable and portable, there are no longer barriers preventing people and things from connecting. Digital trust has become a cornerstone of the tourism industry, since without digital trust firms cannot use and share the data that enhance their operations. Fortunately, tourism consumers are likely to share more information when they feel it is necessary for safety reasons or when they are looking for more personalized experiences.
Very often tourism SMEs perceive the opportunities of digitalization as short-term market-focused advantage. This is far from recognizing the potential that digitalization has for innovation and the development of new products and services, or for building a more efficient ecosystem. Less digitally mature SMEs are often more interested in digital technologies as tools that can help them improve service quality, increase customer retention and streamline processes, while SMEs with a medium level of digitalization are looking more for ways to expand their commercial reach internationally (Dredge et al., 2019).
Moreover, the particularities of digitalization in tourism SMEs still need to be nuanced when we look at the different subsectors of tourism. For example, in the accommodation subsector, SMEs with a lower level of digitalization are more concerned about the international outreach of their operations, perhaps due to the important role that online booking and accommodation sharing platforms play in it. On the other hand, more mature SMEs prefer that digitalization facilitates the entry of new intermediaries into the market, thus increasing the opportunities to create new value through the expansion of the tourism ecosystem. In contrast, in the travel subsector, less mature SMEs are more interested in using digitalization to generate profitability and acquire customer insights. All in all, digitalization provides a vast range of opportunities that are multidirectional and that can help tourism firms create new sources of value, both inside and outside of tourism.
7.5 Challenges to the Digitalization of Tourism Firms
Due to the traditional nature of most tourism firms, digitalization brings with it several challenges that have a significant impact on SMEs. We have just seen in the previous section how the tourism ecosystem is fragmented into several subsectors (e.g., transport, accommodation, restaurants, personal services, etc.), which in turn are subject to different challenges (and opportunities) in terms of digitalization. Each subsector has its own particularities in human resources, digital skills and abilities, different levels of access to resources (financial and non-financial), and different levels of awareness. These differences in turn are magnified or attenuated according to the particularities of the ecosystem and the destination in which firms operate. Weinelt and Moavenzadeh (2017) have identified the following five challenges that digital transformation is expected to have for tourism.
Regulation: Regulation has a significant impact on the speed of digital transformation and can either be a great enabler of transformation or pose serious obstacles. In some cases, regulatory regimes may deter tourism firms from implementing new technologies because they are unable to capitalize on them. It is also quite common for innovation to advance at a faster rate than regulation and supporting policies, urging institutions to formulate new regulations for new technological developments.
Infrastructure: As digital business models gain more and more prominence, physical assets are beginning to lose the central role they used to have. This means that tourism firms must pay more attention to the quality and level of service provided by their digital assets and the investments they make in digital infrastructures (without neglecting their physical assets, which will continue to be important). The costs of implementing new digital technologies are a major concern, especially if we compare SMEs with more limited financial resources and large enterprises. Furthermore, SMEs located in urban settings benefit from modern fiber broadband and wireless connections, while in more remote or rural areas the infrastructure is usually underprovided.
Legacy systems: Non-digital native firms pursuing digital transformation need their legacy systems to continue operating for some time while new systems are developed and implemented. Transitioning from old to new systems reduces the organization’s agility to transform quickly, so finding a way to manage the process of transformation with different speeds in mind is one way to curb the negative impact of this challenge.
Jobs and skills: Digital transformation requires a skill set that differs from what workers have today. This represents a great challenge for tourism firms and society in general, as it suggests a hard transition for one in every 11 jobs worldwide by 2025. Digitalization is also transforming the tourism ecosystem by creating new types of jobs. Addressing this challenge requires a concerted effort among tourism leaders, government, educational institutions, and civil society to reskill and upskill human capital, thereby mitigating digitalization potential negative impacts.
Demographics: Demographic trends have an important influence on the speed of adoption of digital technologies and on the world tourism market. Although the growing middle classes of Asia and Latin America will lead the growth of travel worldwide in the coming decades, technology adoption will continue to be led by markets in developed countries rather than those in emerging countries.
It is important that owners and managers consider digitalization as a means to improve the customer experience, but never to complicate it. In other words, tourism firms should make digitalization work seamlessly and transparently for the customer, without bothering them or requiring them to go the extra mile (Seigneur, 2018). Otherwise, digitalization can easily become a barrier that the customer rejects.
Digitalization should also seek to increase the income level of local communities in destinations, thus capturing a part of the value that is appropriated by GAFA companies (Google, Apple, Facebook, Amazon) and the big digital platforms (e.g., Booking.com, Tripadvisor, etc.) through their service fees. In this vein, the implementation of smart technologies in destinations and local firms that are based on the Internet of Things could create new data lakes beyond the scope of GAFA companies and lead to new ways of capturing value that can be transferred from the giants to the locals.
Other key challenges facing tourism SMEs include difficulties in accessing financial resources, the high costs of training and high-speed broadband connectivity, the availability of technology and skilled human resources, and the rapid pace of technological change, thus making technology investments obsolete very quickly. In addition to these “tangible” challenges, there are other “intangible” challenges, such as those related to corporate culture that lead to a lack of understanding of digital opportunities and to considering the current levels of digitalization sufficient and questioning the strategies that are most suitable for transformation in the short and long term (Dredge et al., 2019).
Some of the main challenges outlined above reflect a conspicuous lack of understanding of digitalization, its opportunities and challenges by tourism SMEs. This is a major constraint that prevents firms from making informed decisions and acting decisively in the face of changing customer needs and threats from new market entrants, limiting themselves to being reactive in their responses and missing opportunities that arise.
7.6 Discussion Questions
How are tourism firms affected by digital innovations and what patterns of response do they typically use for their adoption?
What innovative formulas could be implemented in the tourism ecosystem so that tourism firms have access to human and financial resources?
How can tourism firms encourage customers to share personal data in exchange for tangible benefits (i.e., highly personalized experiences) while ensuring the customer’s right to privacy?
What collaboration mechanisms with other actors in the tourism ecosystem could be established so that tourism firms can increase their chances of success in digital transformation?
How should the operating models of tourism firms change in an increasingly connected business ecosystem where the boundaries between online and offline are blurring? How will these changes affect the behavior of the tourism consumer?
To what extent is the regulatory framework in your country or region contributing to accelerating the digital transformation process of tourism firms? • Through what mechanisms can local tourism firms capture more value that is now appropriated by the digital giants?