Rosenbluth International Strategic Transformation of a Successful Enterprise

Rosenbluth International: Strategic Transformation of a Successful Enterprise Eric K. Clemons and Il-horn Hann Fall 1999, Vol 16, No. 2 pp. 9 -27 Journal of Management Information systems

Case Introduction • The environment of travel agencies has undergone fundamental changes – Commission caps(1995) and cuts(1997) – Reactions • Value position • Fee structure • Relationships with key accounts • Issues – The nature of the competitive forces – The nature of Rosenbluth’s competitive response – The reasons that the company was able to response successfully and – The firm’s prospects going forward

Background (I) • The structure of the travel-agency (TA) and air-travel industry – TWA 25% most profitable customers account for 50% of its revenues – Delta 9% 45% • Before 1978, there is no differences between business and leisure travel – Role was in advising and destination-based expertise • After deregulations, shifted from supporting leisure travel to supporting corporate customers – Price control, negotiation of preferred fares, and preparation of travel activity reports – IT applications

Background (II) • Rosenbluth’s changes – After 1978, grew from the largest leisure travel TA to a predominantly corporate travel oriented agency • Rosenbluth’s IT applications – Initial advantage was based on point-of-sale tools and fare search engines, seamlessly linked to back-office reporting and inquiring systems – New value proposition is its ability to deliver travel management services and documented savings in travel spending • Patent-pending client yield management system called DACODA (Discount Analysis Containing Optimal Decision Algorithms) – Shift market share from one airline to another and to establish credibility in fare negotiations with the airlines

Competitive Forces • Rebates • Commission Caps and Cuts • The Disintermediation Threat

Rebates(退費) • The first threat encountered by most major agencies in their corporate business • Traditionally, travel agents have been paid principally through commissions(10%) • Rebating would reduce the money available for their own investment – Quality • Travel agents started competing for corporate client by offering commission-sharing arrangement (3%)

Commission Caps and Cuts • Airlines, corporate customers • In February 1995, Delta airlines introduced the cap of $50 on the 10 % commission for all domestic tickets • In October 1997, United Airlines went even further and cut the commissions to 8% or $50, which ever is less – Save the carrier estimated $80 million to 100 million annually • International Flight

The Disintermediation Threat • The third threat – This threat is still emerging but could prove to be the most dangerous of the three • The bypass of travel agencies and the reduction or elimination of their role in the distribution of travel services

Intermediation • Intermediaries provide two types of services – Matching and providing information and – Value added services such as consulting • The first type of services can be fully automated – Likely to be assume by e-marketplaces and portals that provide free services • The second types requires expertise – Can only be partially automated

The Effects of the Internet • Intermediation – Intermediaries traditionally provided trading infrastructure and they manage the complexity of matching buyers’ and seller’ needs • Disintermediation – Elimination of intermediaries; removal of the layers of intermediaries between sellers and buyers • Reintermediation – The agent’s role changed in a process

Cybermediation • There is a completely new role in EC – Or electronic intermediary • Cybermediation can perform many roles in EC • Can affect most of the market functions and more – Intelligent agents can find when and where an item that a consumer wants will be auctioned – Conduct price comparison of insurance plicies, long distance call

Hypermediation • Certain EC transactions require extensive human and electronic intermediation • Content providers, affiliate sites, search engines, portals, ISPs, software makers and more are needed in many cases of EC • Hypermediation is running opposite to disintermediation, providing intermediaries with a chance to profit greatly from EC

Rosenbluth’s Management’s view of Disintermediation • Some customers are just too easy to serve – Unwilling to pay 10% of commissions • The disintermediation proved to be shortlived and misdirected – New form of EDI – New CRS

World Wide Webs’ Drives • Computer reservation systems, travel technology vendors, and airlines have devoted considerable resources to increase the corporate on-line segment – $15 to 20 cost saving per tickets – Neither commission nor overrides to be paid • Corporate travel manager started to negotiate with airlines, attempt to share the cost savings – 1/3 of one percent of coporations • Soft-dollar agreement – Perks, bonus

Love’ems • The most attractive business travelers • Airlines have had two incentives to establish a direct relationship – To remove the agencies’ ability to reroute these travelers to other carries, as part of a program to maximize the savings from negotiated fares – To capture the commissions that were paid to agencies for serving these travelers, which frequently amounted to little more than directing them to the lowest-cost fares

Competitive Response • Define the field you can win on • Leisure travel – The continuation of leisure travel as a core part of Rosenbluth’s business strategy needed to be reconsidered • Role of commission rebating in corporate level – Hal Rosenbluth’s avoidance of rebates likewise needed to be reconsidered

Divestiture of the Retail Business • Divest the leisure business • Focus solely on the corporate market – While this decision appears to be rational and can be defended, it was quite a difficult one for the company to make – Ha been in leisure business since its inception in 1892

Leisure Business Alternatives • Developing targeting mechanisms to sell to less labor-intensive customers, or to customers who are purchasing higher-profit packages or higherprofit services, perhaps as a vacation-planning perk for its corporate clientele • Developing lower-cost alternative distribution channels for technically savvy, computerliterature consumers, perhaps in conjunction with the first point above • Developing a fee-for-services approach to leisure travel, much as they have developed in the corporate market

Moving from Commissions to Transaction Fees • Cut the airlines’ incentive to attack his corporate business by rebating his full commissions back to his corporate accounts • Introduce a new fee structure – Compute a transaction cost • Restructure the services – Service level by percentage of calls that are answered in a certain period time – Other services • Advisory service, consultation to lower costs, development of travel policies, negotiation of preferred supplier rates, enforcement of travel policies, provision of international service capabilities and assistance in planning group meetings

IT Usage • • To reduce Rosenbluth’s own costs To document Rosebluth’s own costs To reduce clients’ travel expenses To document the reduction in clients’ travel expenses

Managing Strategic Transition • Reasons for Resistance to Change • Rational Resistance and the Principal. Agent Problem • Bounded Rationality and Resistance to Change • Successful Managing the Transition at Rosenbluth International

Resistance to Change • Why the officers of successful companies resist making changes? – Why is strategic transformation so difficult for established and successful players who have dominated their industry – What are the specific factors that cause management team members previously successful firms to have difficulty making strategically necessary, economically justifiable change? • Explanations – Some resistance is economically rational • Principal-agent problem – Some resistance to change may be economically irrational • Bounded rationality • Decision traps

Principal-Agent Problem • Self-interest-driven-resistance – Firm benefited, individual harmed • Come in many forms – Stranded asset with limited usefulness – Require new skills – Incentive problem

Bounded Rationality • An inability to deal with the complexity of the changes that are required – Fail to perceive the environmental shifts – Fail to sense the severity of the problems – Unable to develop the necessary strategic responses • Forms – Status quo bias – Perform previously successful behaviors – Unable to treat low-probability, high-significance events accurate when planning – Exhibit risk aversion – Exhibit an aversion to ambiguity