key: cord-021818-s8kqfz6a authors: Tribe, John title: Recreation, leisure and tourism organizations date: 2011-04-29 journal: The Economics of Recreation, Leisure and Tourism DOI: 10.1016/b978-0-08-089050-0.00002-x sha: doc_id: 21818 cord_uid: s8kqfz6a nan Public-sector organizations are those owned by the government. This can be national government or local government. Leisure and tourism provision in the local government sector may include: It should be noted that sometimes services are free, sometimes they are subsidized and sometimes they are provided at full commercial rates. For example, charges for swimming pools are often subsidized but sometimes cover the full cost of provision. On the other hand, In order to analyse and understand the behaviour of organizations in the recreation, leisure and tourism sector, we need to be able to clarify their aims and objectives. An important initial question is whether the organization is in the private sector or government-run. For most private-sector organizations such as The Walt Disney Corporation, profits are the main objective. On the other hand, Tourism Concern is a not-for-profit organization and exists to encourage ethical and sustainable tourism. Organizations run by government were traditionally set up to provide services such as parks, museums and swimming pools that were desirable but not commercially profitable. But attitudes to the extent of government provision and use of subsidies vary across countries according to which party holds political power. By studying this chapter students should be able to: l distinguish between private-and public-sector organizations; l understand the differences in finance, control, structure and objectives of organizations; l understand ways in which capital can be raised; l analyse movements in share prices; l analyse the effects of different organizational structures on organizational behaviour. Organizations and Markets facilities such as parks, libraries and children's playgrounds are generally provided without charge. The finance of these organizations comes from: In essence, local government organizations are owned by the local population. Policy decisions or decisions of strategic management are taken on their behalf by the local council. Each local government area elects councillors or members to represent them. The political party which holds the majority of seats on the council will generally be able to dictate policy and such policy will be determined through a series of committees such as: The planning and resources committee is a particularly powerful one as it determines the medium-to long-term strategy of the council and thus provides the financial framework within which the other committees must operate. The day-to-day or operational management of local government-run services depends on the nature of the service being provided. Council employees are responsible for overall management and services which are spread out across a local government area, such as parks, will be run from the council offices. Larger services such as leisure centres will have their own management which in turn will be responsible to a service director at the council offices. The aims of local government and its organizations are largely determined by the political party or coalition of parties who hold the majority. This often means that leisure provision, for example, will vary between neighbouring local authorities which have different political parties in power. Administrations to the right of the political spectrum favour lower local taxes and market-driven provision. Those to the left favour public provision financed out of tax revenues and offered free or at subsidized prices. To determine the differing aims of political parties we need to consult their manifestos as well as review their actual provision. However, political parties do not operate in a vacuum. They will be influenced by: l pressure groups l trade unions l local press l national government. Edgecombe (2003) examined a major dilemma facing local government leisure facility managers in Australia -that of providing recreation services, whilst at the same time minimizing financial deficits and avoiding significant negative impacts on private enterprises providing similar services. National government-owned organizations can be further subdivided into public corporations, government departments and other government agencies. Public corporations are sometimes known as nationalized or state-run industries. They generally supply goods or services to the public. Examples of these include: But the extent of nationalization of recreation, leisure and tourism industries depends on the politics of individual countries. So in the USA, most television stations and airlines are in the private sector, and in the UK, railways are run by private-sector organizations. Government departments perform an executive role on behalf of governments in implementing policy. There are a number of government departments which impinge on the recreation leisure and tourism sector of the economy. Examples include: Organizations and Markets and tourism sectors. It also develops and delivers policies to increase Australia's international competitiveness, consistent with the principles of environmental responsibility and sustainable development. Other government agencies tend to work at a smaller level than government departments and provide more specific services. Examples include: l Tourism Australia l Visit Britain. The aims of nationalized industries vary from country to country. In some cases, public corporations aim for public service provision without the limitations imposed by the profit motive and are able to provide services that are loss making. In these instances, the rigours of efficiency and private-sector management styles may not be apparent. In other parts of the world (notably in the UK and in the USA) public corporations have been subjected to efficiency targets, performance indicators and target rates of return on investment, all of which have made them more closely mimic private-sector organizations. Nationalized industry's aims are generally contained within their charters or constitutions. The aim of government departments is to carry out the policy of the government of the day and includes planning, monitoring and reviewing of provision and legislation. Exhibit 2.2 illustrates the aims of the Government Department of Resources, Energy and Tourism in Australia. This department covers the three areas of energy, resources and tourism. From the exhibit it can be seen that this department, as with other similar departments worldwide, is to provide both policy advice and implement programme-delivery services. Sometimes Air India, originally known as Tata Airlines, started life with two planes, one palm-thatched shed, one full-time pilot, one part-time engineer and two apprentice-mechanics. In its first full year of operations (1933), it flew 160,000 miles, carrying155 passengers and 10.71 tonnes of mail. Tata Airlines was converted into a public company and renamed Air India in August 1946. However, by the early 1950s the financial condition of airlines operating in India had deteriorated so that the government made the decision to nationalize the air transport industry. On 1 August 1953, Indian Airlines was formed with the merger of eight domestic airlines to operate domestic services and Air India International was established to operate the overseas services. leisure, tourism and recreation fall under the same government department, but sometimes as in this case they are separated. The aims of other government agencies are specific to each organization and are generally targeted to a quite narrow field. This department covers the following areas: l Resources l Energy l Tourism. We enhance Australia's economic prosperity by improving productivity, competitiveness, security and sustainability of the resources, energy and tourism sectors through the provision of high-quality policy advice and programme-delivery services for the Australian government. Minister: We are responsive to our Minister in delivering apolitical, honest and frank policy advice and in implementing the government's policies and programmes. We focus on achieving constructive and collaborative relationships with our stakeholders including portfolio agency partners and other government departments, underpinned by genuine consultation, feedback and robust service delivery. Policy: We provide high-quality evidence-based advice, through informed judgement and prudent risk management. People: We encourage a positive workplace and display high levels of personal leadership and integrity. We are results focussed and continuously strive to learn and innovate. Resources: The Australian government is committed to creating a policy framework to expand Australia's resource base, increase the international competitiveness of our resources sector and improve the regulatory regime, consistent with the principles of environmental responsibility and sustainable development. Energy: The Australian government is committed to the provision of adequate, reliable and affordable energy to meet future energy consumption needs and to underpin strong economic growth, consistent with the principles of environmental responsibility and sustainable development. Tourism: The Australian government is committed to maximizing tourism's net economic contribution to the Australian economy and to fostering an industry that promotes the principles of environmental responsibility and sustainable development. Organizations and Markets National government organizations in the public sector are financed in the main from: l taxes l trading income. The dependence on tax funding can mean that public-sector organizations are very sensitive to the changing priorities of the government of the day. Equally if the state of the economy as a whole is unhealthy, spending cuts will generally be imposed through the public sector. National government organizations are owned by the government on behalf of the population at large. However, each type of organization is controlled in a different way. l Nationalized industries are typically given some autonomy and generally have a legal identity separate from the government. At the point of nationalization a law is passed outlining the aims, organization and control mechanism for each industry. A typical structure is one where a board of directors is established responsible for the day-to-day running of the industry. The chair of the board and its other members are appointed by an appropriate government minister and strategic decisions will be taken by the minister in consultation with the government. l Government departments are headed by a minister and staffed by government employees. Their actions are directly accountable through a minister to the national assembly such as parliament. The offices of government departments are generally located close to the national assembly. The degree of political control exerted over government departments is thus more direct than for nationalized industries. Private-sector organizations are those which are non-governmentowned. They can be further subdivided into profit-making organizations and non-profit-making organizations. Profit-making private-sector organizations consist of those with unlimited liability, those with limited liability and companies which are quoted on the stock exchange. Unlimited liability means that the owners of such companies face no limit to their contribution should the organization become indebted. Most of their personal assets can be used to settle debts should the business cease trading. This includes not only the value of anything saleable from the business, but also housing, cars, furniture and stereos. Because of the discipline that unlimited liability brings, there are often very few formalities required to start trading as this form of business. Sole proprietorships and partnerships are examples of this type of business organization and advantages include: In contrast, the formation of a limited liability company enables its owners to create a separate legal identity and this enables them to limit their exposure and liability in the case of company failure. Incorporation confers separate legal identity on the company. This may be contrasted with the position of unlimited liability organizations where the owners and the organization are legally the same. Limited liability places a limit to the contribution by an investor in an organization to the amount of capital that has been contributed. Should one of these organizations cease trading with debts, an investor may well lose the original investment, but liability would cease there and personal assets would not be at risk. The benefits of the limited liability company mean that they are bound by closer rules and regulations than are unlimited liability organizations. Typically such companies need to provide details of: Limited liability companies are further subdivided into private companies and public companies. It is the latter's shares which are freely tradable on the stock exchange. There are benefits and drawbacks of moving from a private limited company to a public limited company. Ability to raise more capital is a key advantage of becoming a public limited company as the stock exchange provides access to thousands of potential investors. On the other hand, there are considerable extra costs associated with flotation. These include the costs of bringing a company to the market as well as the costs of reporting and more burdensome governance requirements. Also there is a constant need to perform and produce high profits in the short term as a public limited company, and the risk of loss of control. The free access to share ownership and lack of control on transfer of shares mean that it is more difficult to retain control of public than private limited companies as groups of shareholders can build up controlling interests. Exhibit 2.3 provides an illustration of a company flotation in the travel industry. Amadeus, a leading travel IT company, was refloated on the Madrid Stock Exchange in 2010 meaning its shares were made available to the public and that the owners of the company were able to raise a large amount of capital. Amadeus, the Spanish travel reservations firm, has achieved a position as a leading transaction processor for the global travel and tourism industry. It provides transaction processing to both travel providers (including airlines, hotels, railways, cruise lines, ferries, car rental companies and tour operators) and travel agencies. Amadeus' distribution and IT systems cover itinerary planning, fare-searching, reservations, ticketing, airlines schedule and inventory control, passenger check-in and departure control. It earned a2.46 billion in revenues in 2009. The company which was originally listed on the Madrid Stock Exchange was delisted in 2006 when BC Partners and Cinven bought their stake from airlines Air France, Lufthansa and Iberia for a4.4 billion. This effectively meant that the company was taken into the ownership format of a private limited company. However, Amadeus returned to the Spanish Stock Exchange in 2010 to become one of Europe's largest flotations in that year. According to the prospectus lodged with stock market regulator Comisión Nacional del Mercado de Valores (CNMV), Amadeus offered 98.9 million shares in a primary offering and 36.9 million existing shares to institutional investors. This share offer represented about 25 per cent of the firm. The price range expected for the listing was estimated at between a9.2 and a12.2 per share. In the event it raised over a1.3 billion in the listing which meant it had a market capitalization of around. a4.9 billion. On the day of the flotation the share price rose by 7.36 per cent by midday to reach a figure of a11.81. Exhibit 2.4 examines the case of the Qantas group -the major national and international airline operating in Australia. As the exhibit explains Qantas was formerly a nationalized industry run by Qantas is Australia's largest domestic and international airline. It employs around 35,000 staff and serves 173 destinations in 42 countries (including those covered by its codeshare partners) in Australia, Asia and the Pacific, the Americas, Europe and Africa. The Qantas Group's main brands are: The Qantas Group's long-term vision is to operate the world's best premium airline, Qantas, and the world's best low-fares carrier, Jetstar. Qantas is a public limited company listed on the Australian Stock Exchange. However, Qantas was at one stage a nationalized industry owned by the Australian government. But in the 1990s, the government moved to privatize the airline. A public share offer was launched on 22 June 1995. The privatization was completed and Qantas shares listed on the Australian Stock Exchange on 31 July 1995 with a float price of AUS$1.90. Since then key variations in its share price have included: Organizations and Markets the Australian government and this was the case for many airlines. Government ownership meant that the airline was funded mainly from taxes. Some governments still maintain ownership of national airlines since it is believed that they play a strategic role in the economy. Additionally, airlines need to make very large capital purchases and these can be difficult to finance in the private sector. However, nationalization often means that competition and enterprise are stifled resulting in a poorer service for air travellers. Also as air travel is still something of a luxury it is argued that the state should not sub sidize this sector out of taxes. Finally, state-run industries can be run on bureaucratic lines meaning that they are inefficient and inflexible. Since these sources generally are only available to supply limited funds, this is a key reason why small firms remain small. On the other hand limited liability, incorporated firms are able to raise capital through the additional routes of: l shares (equity) l debentures. A share, or equity or stock (USA), represents a small portion of ownership of a company that is sold. The company issues shares certificates in return for capital. The price of shares goes up and down according to relative demand and supply in the market place -in this case a stock exchange. Shares can be seen from the perspective of a shareholder and of a company. From the company's point of view, share capital is generally of low risk since if the company does not make any profits then no dividends are paid. So unlike with bank loans a company is not saddled with the need to make payments if it is going through an unprofitable period. Shareholders are attracted to shares by the prospect of dividend payments (related to the level of company profits) as well as growth in the capital value of shares. Of course, there is some risk as there is no guarantee of dividend payments and the value of shares can go down as well as up, indeed the value of shares in failing companies will often become worthless. Debentures can be seen as a form of loan as they carry a fixed rate of interest. Thus to the company they pose a problem when profits are low because they still have to pay out the fixed interest, but their fixed interest rate is attractive when profits are high as the company will retain more of its profits. Debenture holders get a guaranteed rate of return and are paid before shareholders so they are generally less risky than shares. On the other hand, there is no opportunity to benefit from higher dividends when a company is growing and making good profits. Table 2 .1 illustrates many of the aspects of financing mentioned earlier through the case of Eurotunnel. Eurotunnel is the name given to the rail tunnel that was built between England and France in the 1990s. Of course, a massive amount of capital was required to finance this project. Several points emerge from Table 2 .1 which illustrates the financing of Eurotunnel. First, Eurotunnel's capital represents a mixture of loans from banks which carry interest payments until they are repaid, and share issues which will not pay dividends until profits are earned. If profits from the tunnel are insufficient to repay loans and interest, the company may be forced into liquidation by the banks. The assets of the company would then be sold to repay the banks. Under this scenario, shareholders would get nothing. This is because shareholders are assigned a lower priority than loan providers. However, because their liability is limited, neither would they stand to lose any personal assets, just the value of their shares. Under a more optimistic, high-profit scenario, payments to the banks are limited to previously negotiated rates, leaving substantial profits to be distributed in the form of high dividends to shareholders. Second, three different forms of share issue are illustrated by this case: l A placing in 1986: This is where Eurotunnel's shares were placed directly with institutions such as pension funds and insurance companies. This represents a direct negotiation between the merchant bank selling the shares and the target groups they wish to sell to. Organizations and Markets l An offer for sale in 1987: This is where shares are advertised and offered to the public. This is a more open and competitive market, but there is a risk that not all the offer will be taken up or that the price offered will be lower than anticipated. l A rights issue in 1990 and 1994: This is where existing shareholders are able to buy new shares at a discount. Their right to buy new shares is related to the size of their existing shareholding. Finally, the underwriting of share issues means that insurance has been taken out against the eventuality of shares remaining unsold. Should this be the case the underwriting firm would purchase the unsold shares at a pre-agreed price. Shares which are sold on the stock market are second-hand shares and thus their purchase does not provide new capital to companies. Prices of shares are determined by supply and demand. The stock market approximates to a perfect market (see Chapter 3) and thus prices are constantly changing to bring supply and demand into equilibrium. The demand for and the supply of shares depend upon the following: The main aim for organizations in the private sector is generally to maximize profits. For example, Exhibit 2.5 illustrates the objectives of 'The Walt Disney Company' where it can be seen that maximizing long-term shareholder value is a prime concern. The private sector consists of both small-and medium-sized enterprises (SMEs) and large corporations. These have previously been classified as sole proprietors and partnerships and limited liability corporations. Understanding small-business organizations is straightforward. The owner is the manager and this can act as a strong incentive to maximize profits. However, it may also mean that profit maximization is subject to personal considerations such as environmental concerns or hours worked. Indeed, the term 'Lifestyle Entrepreneur' has been used to describe small-business owners who construct a business around a hobby that enables them to earn an income whilst pursuing their interest. For corporations, size of operations and number of shareholders make the picture more complex. Companies are run along standard lines: the managing director is responsible for directing managers in the day-to-day running of the organization. The board of directors is responsible for determining company policy and for reporting annually to the shareholders. This can lead to a division between ownership (shareholders) and control (managers) and a potential conflict of interests. Shareholders generally wish to see their dividends and capital gains, and thus company profits, maximized. Managers will generally have this as an important objective since they are ultimately answerable to shareholders. However, they may seek other The Walt Disney Company, together with its subsidiaries and affiliates, is a leading diversified international family entertainment and media enterprise with four business segments: 1 media networks 2 parks and resorts 3 studio entertainment and 4 consumer products. The Walt Disney Company's objectives is to be one of the world's leading producers and providers of entertainment and information, using its portfolio of brands to differentiate its content, services and consumer products. The company's primary financial goals are to maximize earnings and cash flow, and to allocate capital toward growth initiatives that will drive long-term shareholder value. Organizations and Markets objectives -in particular, maximizing personal benefit -which may include kudos from concluding deals, good pension prospects and a variety of perks such as foreign travel, well-appointed offices and high-specification company cars. Non-profit organizations in the private sector vary considerably in size and in purpose. They span national organizations with large turnovers, smaller special interest groups, professional associations and local clubs and societies, and include: l The National Trust (UK): This is a charity trust and independent from the government. It derives its funds from membership subscriptions, legacies and gifts, and trading income from entrance fees, shops and restaurants. It is governed by an act of parliament -the National Trust Act 1907. Its main aim is to safeguard places of historic interest and natural beauty. l Surf Life Saving Australia (SLSA): This is Australia's major water safety and rescue authority and one of the largest volunteer organizations in the world. Their mission is 'to provide a safe beach and aquatic environment throughout Australia'. SLSA provides lifesaving patrol services on most of Australia's populated beaches in the swimming season. l Indigenous Tourism Rights International (USA): This is an indigenous peoples' organization collaborating with indigenous communities and networks to protect their territories, rights and cultures. Their mission is to exchange experiences in order to understand, challenge and take control of the ways in which tourism affects our lives. l Tourism Concern (UK): The vision of Tourism Concern is 'A world free from exploitation in which all parties involved in tourism benefit equally and in which relationships between industry, tourists and host communities are based on trust and respect'. Tourism Concern's mission is to ensure that tourism always benefits local people. Tourism Concern works with communities in destination countries to reduce social and environmental problems connected to tourism and with the outgoing tourism industry in the UK to find ways of improving tourism so that local benefits are increased. The aims and missions of voluntary groups are generally not profit driven. They include protection of special interests, promotion of ideas and ideals, regulation of sports and the provision of goods and services which are not catered for by the free market. Andersson and Getz (2009) offered a helpful examination of the differences between private, public and not-for-profit concepts with using festivals as their context. Plate 2 shows tourists (including the author on the right of the photo) at the David Sheldrick Wildlife Trusts' Orphans' Project in Nairobi, Kenya. This is a charity organization which depends entirely on donations. It has the specific aim of rehabilitating orphaned elephants. 1 Identify the different aspects of the mission agenda that are evident for each of the above organizations using Figure 2 .1, and discuss these differences. 2 Which aspects of the mission agenda are most likely to be found for (a) A private sector corporation (b) A not-for-profit organization (c) A local government organization. 3 Why is it important for economists to identify organizational type if they are to understand the pricing policy of recreation, leisure and tourism organizations? This was the beginning of the Virgin empire which demonstrated its maturity when Branson floated the company on the London Stock Exchange. However, in his autobiography, 'Losing My Virginity', Branson explains why he changed his mind about the benefits of being a public company so that the company's management executed a management buyout to take Virgin private again. He particularly pointed to the 'onerous obligations' which included the duty of appointing and working with outside directors. He also felt that he had lost the ability to make quick decisions: 'Our business was not one that could be boxed into a rigid timetable of meetings. We had to make decisions quickly, off-the-cuff: if we had to wait 4 weeks for the next board meeting before authorizing Simon to sign UB40, then we would probably lose them altogether'. Branson found the British tradition of paying a large dividend difficult to fit with his business philosophy which was to reinvest profits to increase the company's value and stated that the one year when Virgin was quoted on the stock exchange was the company's least creative year because the executives were taken away from management and strategy by the need to explain their business to fund managers and financial advisers. Virgin launched its low-cost carrier Virgin Blue in Australia in 2001. From that year to the end of March 2003 the airline had made a pretax profit of AUS$158 million on revenues of AUS$924 million and it is expected to report profits of about AUS$150 million for 2003-2004. Its owner Richard Branson has announced plans to float the company on the stock market by Christmas 2003. Virgin Blue was originally expected to come to the market in summer 2003 but a listing was postponed because of the adverse effects on the aviation sector from the impact of the severe acute respiratory syndrome (SARS) outbreak and the war in Iraq. The float valued the group at around AUS$2 billion (£832 million). The airline raised about AUS$400 million from the flotation on the Australian Stock Exchange. One of the principal reasons for the strategy is to give the company enough cash to expand internationally without having to obtain the money from existing shareholders. The airline wanted to use the cash raised to help fund its plans to launch a lowcost airline in the USA and Virgin Blue was also planning new routes to New Zealand, Papua New Guinea and the Polynesian islands. The group was also looking at speeding up the expansion of its Virgin Mobile operations in the USA. Commenting on the float, Grant Williams of brokerage firm Reynolds & Co said, 'There seems to be a strong interest in Virgin Blue's float but this is not a lot of money and there won't be much around for the retail market'. A Virgin spokesman said the money from Virgin Blue could be used to increase the Virgin group's 'war chest'. Plans for a low-cost carrier in the USA are described as 'quite advanced'. Launched in August 2007 with initial funding of $128 million, Virgin America is one of the best funded start-up airlines in history according to the Wall Street Journal. Virgin America positioned itself as a new, California-based airline. Its competitive edge is honed around a package that includes brand new planes, attractive fares, service excellence, in-flight Internet, mood-lit cabins, leather seats and on-demand menus. The Virgin Group has grown to become a leading global company operating in businesses in sectors ranging from mobile telephony to transportation, travel, financial services, media, music and fitness. It has created more than 300 branded companies worldwide, employing approximately 50,000 people, in 30 countries. Global branded revenues in 2009 exceeded £11.5 billion (approximately US$18 billion). Its portfolio includes: (a) A firm can be sued for damages. (b) A firm's owner is liable for all of its debts. they find that the solution is to set up their own business. This desire for quality of life merged with running a business means that Lifestyle Enterprises can allow for flexible hours, or a favoured location, or the specializing is certain products or services (often developing out of a passionate interest or hobby) or a particular stance with regard to ethical practices. Examples of such businesses include small accommodation providers, yoga retreats, specialized restaurants and organizers of leisure pursuits. Ateljevic and Doorne noted that the long-term survival of Lifestyle Entrepreneurs in tourism has been cited as a possible constraint on regional economic development. Their research is based on a cohort of Lifestyle Entrepreneurs in the New Zealand tourism sector. They focus on the values that motivate Lifestyle Entrepreneurs finding that typically the conscious rejection of economic and business growth opportunities is an expression of a specific, personal sociopolitical ideology. The authors found that this rejection of profit as an over-riding motive does not necessarily result in financial difficulties or a stagnation in the development of the business. Rather new opportunities are created to engage with niche consumers who portray common values. Their research also concluded that Lifestyle Entrepreneurs can be associated with the creation of innovative services and products and that this business format can make an important contribution to sustainability, the developing of a sense of place and community and be a point of stimulation for regional development. Recap Questions 1 What particular issues of expansion and growth are pertinent to Lifestyle Enterprises? 2 How do aims, mission, ownership and control differ between Lifestyle Enterprises and profit-maximizing businesses? 3 What factors are likely to influence the business decisions of Lifestyle Entrepreneurs? 4 Why would Lifestyle Entrepreneurs be unlikely to float their business on the stock exchange? 5 Locate, read and critique this article. British Tourist Authority: www.visitbritain.com Department for Culture, Media and Sport: www.culture.gov.uk Department of Resources, Energy and Tourism: www.ret.gov.au Department of the Interior Surf Life Saving Australia: www The British Broadcasting Corporation: www.bbc.co.uk The National Trust: www (d) A firm may be sued for libel. 3 Tourism Concern is:(a) A non-profit-making organization.(b) A local government organization.(c) A nationalized industry.(d) Quoted on the stock exchange. 4 Which of the following is a valid reason for holding shares:(a) A chance to benefit from a company's profit.