The Competitiveness Initiative (TCI) in Sri Lanka1

In 1997, responding to the demand of host governments, the USAID Global Bureau asked J.E.
Austin Associates to develop a prototype for a “competitiveness initiative” (TCI, hereafter). The
timeline for the Sri Lanka tourism is described below:
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Cluster Selection Process

Presentations were made to several industries, response varied, and based on self-selection and
study of cluster-economy linkages, five clusters were chosen. Criteria for the project were
announced as followed:

• Hiring a cluster coordinator at a fair market rate and pay him or her through funds
provided for by the industry

• A collaboration of senior private sector decisions makers dedicated at least two hours
weekly to meet and develop industry strategy

• An agreement on an open door policy that allowed representatives of the industry to quit
and join as they pleased

• The cluster be an accurate representation of the value chain and supporting institutions

1
Prepared by JE Austin Associates Inc. for the World Bank International Trade Department

1
• All involved sign a formal memorandum of understanding with TCI agreeing to all
criteria outlined

Initial funding allowed five clusters to be selected: rubber, tea, gems and jewelry, tourism and
information and communication technology. Later funding allowed for three additional clusters:
coir, ceramics and spices. This case study will illustrate the Cluster Initiatives through the
tourism cluster.

Key Challenges Faced in Forming the Tourism Cluster

The clustering concept was initially formed following a conference on Professor Michael
Porter’s cluster competitiveness concept in 1999, at which J.E. Austin presented a concept paper
titled “Up from Beaches”. Following the conference a few leading firms thought a more strategic
approach to tourism was essential for SL. Industry professionals knew that tourism arrivals to SL
(<35,000 per month in 2001) were a fraction of what they could be and the government was
interested in the enhanced employment potential in the tourism industry. At the time, the Sri
Lanka Association of Inbound Tours (SLAITO) and the Tourist Hotels Association of Sri Lanka
(THASL) were the industry organizations operating under the Sri Lank Tourism Board (SLTB).
The cluster came in as a second tier umbrella organization with SLTB as a member. The core
group was made up of the four big firms that represent about 75% of room strength and about
80% of inbound traffic.

The cluster faced several hurdles at initial stage. Sri Lanka Airlines, which had monopoly over
Sri Lankan air travel at the time, and an international hotel chain operating in Colombo refused
to join the Cluster at the time. On the one hand, TCI’s proposition for an open skies policy was
especially contested by the Sri Lanka Airlines. On the other hand, SMEs operating in other
tourism segments became apprehensive that larger firms in those segments were very willing to
spend money to form and operate a cluster. SMEs felt that a union of the big players would be
detrimental to them in the long run. With time, as players started to see benefits of the cluster
process, this issue was resolved positively and eventually they lent support to many of the key
projects undertaken by the cluster.

Since the conditions for joining were very clear, including the signing of MOU as part of the
cluster selection process, all industry leaders who joined the cluster participated actively. The
project, however, had to ensure that sensitive, firm-related proprietary data/information was not
discussed. Information such as profit margins and client sources were not shared.

The GAP analysis was particularly useful as an eye opener to all industry leaders. This
generated a good brainstorming among the industry leaders and actors which in turn gave clear
direction to develop cluster strategies. The cost benchmarking exercise also helped participating
cluster members to rethink their respective cost distributions and make firm level changes as
appropriate. Through such steps, the cluster created immediate value for its members.

In developing the industry strategy, the project used several local and international consultants to
direct this process. This created significant interest amongst the other industry leaders who were

2
not members of the cluster. One of the agreements in the MOU was having an open door policy;
the cluster was obliged to invite non-members into the cluster. However, as non-members joined
without contribution requirements, this created a “free rider” problem, making the existing,
contributing members unhappy. Thus, the project had to intervene by bearing the cost of a cluster
coordinator, so that no one company would feel more financially burdened than another. In turn,
cluster members agreed to invite all interested industry members, including members of related
and supporting service providers and any appropriate government officials.

The Cluster Coordinator (CC) performed a vital role in setting up the cluster as none of the
cluster members had too much time outside of their regular jobs to dedicate to cluster work full
time. The person was hired by the cluster to help set it up, get the people together and liaise with
the various organizations and individuals who had to be brought together to build a strategy. The
person hired was someone outside the industry with little or no experience in tourism. The
person was hired at a wage of US$8,500 a year, which was above the market rate at the time.
When the cluster members refused to pay the CC over the “free rider” issue, USAID agreed to
pay the coordinator out of project funds. Thus, the CC became an employee of TCI and was paid
on a USAID payment structure. Initially the CC worked mostly to inform people about the
concept of clustering and the new strategies it was to pursue. Once technical assistance
opportunities were identified the CC wrote the scope of work and coordinated the work of the
consultants. During the TCI era the CC performed administrative functions for the cluster. When
TCP started in 2004, the CC was promoted to a Program Specialist who oversaw the
implementation of most of the strategies set out. During this time the cluster was registered as a
company and a person was hired to perform the administrative functions. The CC not being a
person from the industry was a neutral person who had no loyalties to any one person and came
in with a fresh perspective which contributed significantly to the success of the cluster.

Among the positive results of clustering was the fresh thinking that brought about more strategic
ideas. It also brought about new leaders, more collective discussion and better dialogue with
government, a growing sense of private sector responsibility for taking industry leadership,
taking risks, as well as promoting trust and cooperation among competitors on issues of common
interest.

Unfortunately for the cluster, several initiatives could not be realized as the prospects for peace
did not progress beyond the Cease Fire Agreement of 2002. Even though the cluster became a
registered company that managed its budgets and functioned as a legal entity, it never evolved
into an apex body, although with the SLTB being dissolved as a result of the cluster exercise, the
tourism cluster is expected to create an apex body for the industry.

Sri Lankan Tourism Background Information

With worldwide tourism steadily expanding and often being a driving factor in development,
tourism was an attractive cluster to develop in Sri Lanka. However, Sri Lanka’s tourism industry
has been a victim of the ethnic conflict that has beleaguered Sri Lanka since the early 1980s. As
a result, compared to other Asian markets, growth rates of arrivals have shown significant
fluctuation. To capitalize on growing trends in the worldwide industry however Sri Lanka

3
needed to reorganize and restructure its tourism sector to not only increase the annual number of
visitors or revenue dollars but to increase its competitiveness with other destinations.
Average Annual Growth
Asian Arrivals (thousands)
(%)
Tourism
Markets 1990 1995 1999 2000 1990 - 1995- 1999 -
2000 2000 2000
Malaysia 7,446 7,469 7,931 10,222 3.2 6.5 28.9

Thailand 5,299 6,952 8,651 9,509 6 6.5 9.9

Indonesia 2,718 4,324 4,728 5,064 6.4 3.2 7.1

India 1,707 2,124 2,482 2,641 4.5 4.5 6.4

Vietnam 250 1,351 1,782 2,140 24 9.6 20.1

Sri
298 403 436 400 -3 -0.1 -8.3
Lanka
Source: World Tourism Organization, Tourism Market Trends Asia, 2001

Sri Lanka’s tourism industry was unique in that it was an industry entirely under the control of
the government in its policy making, implementation and regulation, with a majority of tourism
facilities such as hotels, resorts and travel companies owned by the private sector. This resulted
in a not-so-cohesive coexistence between the government’s Ministry of Tourism and the private
sector companies. The treasury allocation for the industry and the CESS collected from the
industry was controlled by solely the Sri Lanka Tourist Board (SLTB). This resulted in a severe
dearth of dynamic marketing of the country at a macro level. Majority of the promotion was
done by foreign tour operators tied up with local operators. There priority was volumes so they
promoted only the beaches with a mention of the cultural sites. A large part of the clientele who
came to Sri Lanka was sun and sand tourist on package tours.

One of TCI’s objectives was to steer the industry away from sun and sand tourist. These tourist,
people looking for a simply trip in a nice climate tend to be price adverse and avoid areas viewed
as having the potential for conflict, as has been the case with Sri Lanka. Instead TCI sought to
promote the country to a niche market as seen in other countries that have grown their tourism
industry despite ongoing internal unrest. The on-going conflict between the government and
militant organization commonly known as the Tamil Tigers was much to blame but other
geopolitical factors were dragging the industry down. Poor infrastructure and dependence on
low cost beach tourism were also a factor.

4
 Percentage Change in Tourist Arrivals and Highlights of Conflict
70% 1980-2006

60%
Government ends peace agreement and
50% declares w ar. Frequent bomb explosions in
rest of the country - 2007
40%
Change in government follow ed by
30% Presidential election - 2000-01
Start of the ethnic
20%
conflict as it is know n
10% today - 1983

0%

-10% Assassination of President

Premadasa - 1993
-20% Unilateral break of peace
Leftist uprising - 1987 agreement by LTTE - 1996
-30%
19 0
81

19 2
83

19 4
19 5
86

19 7
88

19 9
90

19 1
92

19 3
94

19 5
96

19 7
98

20 9
00

20 1
02

20 3
04

20 5
06
07
8

8
8

0
19

19

19

19

19

19

19

19

19

19

20

20

20

20
Source: Annual Statistical Report of Sri Lanka Tourism – 2006, Sri Lanka Tourist Board

By 1999, the year TCI was implemented, growth rates were strongly negative. The following
chart shows the poor performance of the Sri Lankan tourism industry in 1990s:

Average Growth Average Growth

20%
Rate of Arrivals Rate of Receipts
15%

10%

5%

0%

-5%
1990 - 1995 - 1990 - 1995 -
2000 2000 2000 2000
-10% 1999 - 1999 -
2000 2000

South East Asia South Asia Sri Lanka

Source: A Competitiveness Strategy for Sri Lanka’s Tourism Industry

5
Industry Analysis

To analyze the Sri Lankan tourism industry, JAA selected a number of competitive tools to
frame the project. This included the Porter Diamond, SWOT, GAP Analysis and a Value Chain
analysis. Extensive studies and interviews within the tourism cluster were conducted to obtain a
comprehensive picture of Sri Lankan tourism.

The Porter Diamond

The Porter Diamond was employed to assess key competitiveness attributes of Sri Lanka’s
Tourism Cluster. The analysis showed that Sri Lanka competed primarily in “sun and sand” (low
end) beach tourism. One implication for the project was to use to this insight to move away from
this segment towards the development of high end specialty tourism.

Context
for Firm
Strategy
and
Rivalry

+ Public agencies need to improve

and manage resources for
growth in visitation
Factor Demand
- Dominance of the Tourism Board
Conditions - Need to expand new tourism Conditions
segments such as cultural
monuments, national parks
- Over-dependence on beach
segment
+Basic: + Direct historic and cultural
connections with sophisticated UK
+ Geographic beauty and EU markets
+ Great beaches Related
+ Cultural and geographic proximity
+ Culture and to emerging niche markets with
+ Low labor costs Supporting unique preferences (Indian middle
Industries and upper classes)
+ Tour operators alliance + Niche market interest in tea
+ Unique cultural assets and
plantation tourism (agro-tourism)
heritage sites
and healing arts
- Poor road/travel infrastructure - Limited air transportation - Limited ability to “catch” these
services Î open skies proposal market signals and respond with
Advanced Factors - Clarify division of labor between innovative products
+ Unique architecture (Bawa SLTB and Ministry
School)
- Competition is global and intense
+ Unique cuisine
- Improve market intelligence for beach segment
+ Buddhist culture
- Strengthen institutions for
resource management
- Limited quality of tourism
training institutes
- Brain drain

Other insights from the analysis included:

• The relationship with supporting industries in the tourism sector was low. There was a
need to clarify division of roles between the SLTB and the Ministry of Tourism as well as

6
 needing to improve market intelligence and strengthen institutions for resource
management.

• On the demand side, the unsophisticated “sun and sand” segment puts pressure on local
resources while diminishing margins fort the industry, due to fierce competition from
other destinations around the world.

• Tourism in Sri Lanka was centered around the Tourism Board. The Private sector was
mostly engaged in a supporting role. There were movements to expand into new
segments such as cultural monuments and national parks but it was still over dependent
on beach tourism. Public agencies also needed to improve their resources for growing
their ability to attract new visitors.

• Regarding factor conditions, Sri Lanka was high on basic factor conditions such as cheap
labor and natural resources, but not so high on advanced factor conditions, such as
hospitality training institutions and poor travel infrastructure which was partially offset
by its cultural assets.

SWOT Analysis

A SWOT analysis (strengths, weaknesses, opportunities and threats) was initially employed to
help kick start the discussion with the Sri Lanka’s tourism cluster. THe analysis below shows
that, due to unique environmental and cultural attractions; Sri Lanka has options to develop new,
more attractive tourism segments. However, the perceived danger due to past conflict was a real
issue.

Strengths
•Unique combinations of attractions
Internal
•Ready name recognition
•Competitive
Strengths
pricing of tour packages
•Continuing hotel constructions
•Rising awareness of customer needs
Weaknesses
•Abrupt suspension of tourism during
hostilities, especially in Colombo
•Perception of violence widespread
•RemotenessWeaknesses
from OECD markets
•Limited international air access
•Underdeveloped infrastructure

Opportunities Threats

External •Pleasure cruise industry •Prolonged reliance on cheap beach

Environmen Opportunities
•Beach tourism as demand base
segments Threats
•Prolonged Asian financial crisis
•Destination for cultural tourism
•Labor unrest
•Growing Indian market
•No resumption of European carrier services
•Resumption of prolonged hostilities

7
The SWOT is a simple but effective tool used to assess the current state of the tourism cluster.
SWOT analyzes the strengths, weaknesses, opportunities and threats of a cluster to start a
discussion as to where investment should be directed. The analysis shows:

• The strengths identified included the unique landscape of Sri Lankan attractions, a
recognizable name in tourism, competitive tour packages on the basis of price as well as
construction of hotels and a rising industry awareness of customer needs.

• Opportunities available to Sri Lanka were the potential to leverage beach tourism as a
basis to develop a pleasure cruise industry and a possible destination for cultural tourism.
Sri Lanka would also be able tap into a growing market for tourists from India.

• The main threats to the tourism cluster pertain to continuous hostilities and the reliance
on low end beach tourism. When compared to Maldives, a similar island nation in the
region, Sri Lanka’s growth rates are significantly less.

Room Nights Tourism Expenditures Average Daily

(thousands) (US$ Millions) Expenditure (US$)
Maldives Sri Lanka Maldives Sri Lanka Maldives Sri Lanka
1995 2,725 4,024 210 225 77.06 55.91
1999 3,718 4,479 334 275 89.83 61.40
% Change 8.1% 2.7% 12.3% 5.1% 3.9% 2.4%
Source: World Trade Organization, Compendium of Tourism Statistics

• Weaknesses include a remote location from the principal markets of Europe and North
America, the lack of access to European carriers, current perception of widespread
violence in the country and an underdeveloped infrastructure.

GAP Analysis

Going beyond a general analysis and seeking a benchmark the tourism cluster to the global
competition, a GAP analysis was carried out. The GAP analysis compares key success drivers
for Sri Lankan companies (such as distribution channel and R&D) compared to international
firms. Marriott Hotels, a worldwide provider of quality hotels and logging, and Thompson Tour
Group, part of the world’s largest tourism tour group Preussag A.G., were selected as a basis for
comparison to the hotel and tour operator value-chains.

Based on information provided by a number of Sri Lanka tourist firms, the following analyses
show the average expenditure of Sri Lankan firms as a percentage of their total operating cost. 2
The gap is meant to show the difference as a percentage in how much more or less Sri Lankan
firms spend in comparison to the global benchmark. For example, materials account for 46.2%
of Marriott International’s total operating cost but in Sri Lanka the amount spent on materials is
only 43% of total operating cost, which is 7% less then Marriott. When the hotel industry as a

2
The international benchmark used in this analysis is Marriott International for hotels and Thompson Tour Group
for tour operators.

8
whole is examined, the segment is seen to be largely in line with established benchmark, but
high relative labor and administrative costs pointed to real productivity issues

Global Sri Lanka

Operational Value GAP Strategic Impact and Possible Actionable Opportunities for the Cluster
Benchmark Value
Lower material costs is indicative of resource advantages. Many
Materials 46.2% 43.0% 7% products, however, may still need to be imported and represent an
opportunity for cluster coordination through the leverage of combined
Having lower overhead costs is a good sign, particularly given the high
Overhead costs 20.2% 18.0% 11% costs of energy and financing in Sri Lanka. With maintenance being one
of the largest line items in this category, it could indicate the need for
Higher labor costs illustrates a serious productivity problem to be
Labor 15.6% 18.0% 15% explored through careful analysis of gov't policy and provides fuel for
examining technologies to increase productivity. Based solely on factor
Higher administrative costs are often indicative of inefficiencies in
Administrative
8.0% 13.0% 63% management and HQ operations. Where this can be solved through
Costs
investment in process and information technologies, these issues can be
The expenditure by Sri Lankan hotels is comparable to the benchmark
Marketing 5.1% 5.0% 2% and represents a clear indication of the importance of this process to
hotel performance. There are actionable cluster issues in
Since the distribution of hotel products is generally done through
Distribution 2.1% 1.0% 52% intermediaries (travel agents) this is usually a small percentage of the
whole. Internationally, franchising costs drive this up since most
Customer service is the major product of a hotel so few services are
Customer Service 1.8% 1.0% 44% required post sale. Loyalty programs require continued contact and
costs, but also represent additional opportunities for knowledge
Hotels are not an R&D driven industry, so Sri Lankan R&D expenditure is
R&D 1.0% 1.0% 0% in line with the norm for best performing companies. There may still be
opportunities to differentiate in R&D by developing new products
18 percent is an excellent profit margin and can only be maintained
Margin ? 18.0% ? through constant upgrading of the service offering and solid knowledge
of the customer

• Labor costs in Sri Lanka (18% vs. 15.6%) were significantly higher than the global
benchmark, despite the supposed low-wage advantage

• Administrative costs pointed to the highest gap in the analysis (13% vs. 8%,
or 63% gap), implying significant

• Distribution and customer service were significantly lower then Marriott’s averages but
only account for a small percentage of total expenditures at 1% each.

Among the tour operators, the TCI analysis found the gap between Sri Lankan firms and the
global benchmark (the Thompson Tour Group) to be higher, in a number of different factors.

• Sri Lankan firms spent considerably more on materials costs (e.g. hotel and airfare
charges), or 30% higher then the benchmark. The analysis showed that the local
operators were probably competing with low purchasing power, pointing to a possible
joint-negotiation activities in the cluster with their suppliers;

• Although labor costs are significantly lower (6% vs. 10%), the disparity in Sri Lankan
operator’s customer service (0.5% vs. 4%) and marketing (4% vs. 7.5%) is a source of
concern. Emphasis in these areas are likely to be critical to upgrade to sophisticated
tourism segments;

• Sri Lanka spent three times more on product development then the global benchmark, a
positive sign that Sri Lanka is willing to develop new tourist destinations. However, so
far, there has not been significant impact beyond sun and sand segments.

9
 Global Sri Lanka
Operational Value GAP Strategic Impact and Possible Actionable Opportunities for the Cluster
Benchmark Value
For a tour operator, the majority of material costs are in the hotel and
Materials 60.0% 78.0% 30% airfare charges that go to other suppliers. Higher material costs could
be indicative of a lack of leverage or purchasing power. Combined
Lower labor costs are indicative of factor advantages, but could also
Labor 10.0% 6.0% 40% indicate a smaller amount of time spent with the end customer on actual
tours
Lower administrative costs are indicative of factor and geographic
Administrative
9.0% 4.0% 56% advantages, but could also highlighrt insufficient investment in
Costs
management resources and process and information technologies --
Overhead costs are below a typical operator in the industry as would be
Overhead costs 8.0% 5.0% 38% expected given that it is not an energy intensive industry and tour
packages are generally paid up front which can help avoid the need for
Lower expenditure may be due to a de facto transfer of this
Marketing 7.5% 4.0% 47% responsibility to foreign tour companies that have better access to the
end customer. Finding better ways to reach and understand the end
Knowledge of product applications and the end consumer is imperative
Customer Service 4.0% 0.5% 88% to help any industry break out of the low value, low cost trap.
Investment in knowledge capture and post sales servicing can be
Lower expenditure here may also be due to a lack of end consumer
Distribution 1.0% 0.5% 50% contact and control over the channels of distribution. Costs can rise
quickly as more control is taken over the distribution channels, but can
The tour operator industry is characterized by mostly small companies
operating in well understood niches. Higher R&D is a promising sign
R&D 0.5% 2.0% 300%
that may indicate an understanding of what is necessary to close the
gap and make Sri Lankan products distinctive
Profitability is pretty good for a tour company but will need to be
Margin ? 12.0% ? sustained through strong product upgrading and marketing.
Seasonality is an area that will require particular attention.
Sources: TCI research and analysis

Value Chain Analysis 3

Sri Lankan hotels were further examined by breaking down its operations across the value chain.
The value chain analysis shown below seeks to examine a firm or cluster across all relevant
aspects of its operations.

As hinted in the GAP analysis, the value-chain analysis provides a nuanced understanding how
the lack of distribution and marketing is constraining Sri Lanka’s ability to independently attract
new visitors to the island. The following illustrates the value-chain for Sri Lanka’s hotels, a sub-
sector of the tourism cluster.

This analysis led to the following actionable insights across different stages of the value chain:

• Contracting original market research and new product development;

• Explore and assess outsourcing alternatives
• Evaluate HR incentives and compensation to mitigate the talent flight
• The lack of direct sales translates into missed opportunities for higher earnings, as foreign
intermediaries (international tour operators) are responsible for 75% of sales
• Use market research insights to develop a marketing and distribution strategy
• Come-up with a customer service strategy and training program

3
Tourism Benchmarks FINAL

10
 Administrative and Management Functions- Hotels
(Includes strategy function, process innovation and technology

Research & Procurement Production Distribution Sales & Customer

Development Marketing Service

• Very small • Virtually no • 2% investment • International • Lack of • Little direct

percentage spent outsourcing of in training to distribution is knowledge of contact with the
on market key activities improve service mainly through the end end customer
research and • Relatively small levels international consumer – prior to visit
new products percentage of • Difficult to tour operators middle man is • Contact on
• No contracted imported goods source app. 75% the source of arrival and
market research – approx.25% management • Need to target what little direct feedback
only trade level staff as more specialist knowledge there
publications/rep
• Most produce
labor moves to groups via new is • Few claims
purchased in made from tour
orts
local markets
Europe and channels • Attendance at operators over
• New Middle East • < 0.5% of sales key trade fairs is service issues
investment by • Cost of direct over good
major players is financing high internet • Funding for
• Current markets
are relatively
occurring • Little upgrade • Lack of airlines marketing of the unsophisticated
overseas – (renovation destination low
and frequency
Maldives, India, budget is < US$ 1million
Bangladesh 5% of cost)

Despite the roller coaster ride the industry was having at the time TCI came to Sri Lanka, the
industry showed much resilience. This is partly due to the fact that the larger companies that
control the majority of accommodation and the inbound traffic are subsidiaries of large
conglomerates who have access to financing even in down time. Once shown the results of the
analysis and the opportunities were identified, they were willing to explore new areas. Thus, for
the first time the industry came together to focus on macro issues through the formation of a
cluster and the development of a new strategy.

Implementation

Based on the Porter Diamond analysis, it was found that the strategy of low cost to appeal to
“sun and sand tourists” was not a sustainable advantage. The diamond revealed that both intense
global competition and an over-dependence on beach tourism were factors impeding the cluster’s
growth. Additionally, the SWOT analysis showed weaknesses in undeveloped infrastructure and
perception of widespread violence as well as threats in continued hostilities on the island and
labor unrest.

While low cost might be appealing to some budget travelers, over time this approach leads to
price cutting and low margins. Based on information obtained through the tools and the findings
of TCI, the tourism cluster in Sri Lanka decided to adapt a differentiation strategy.

To achieve this, Sri Lanka had to reinvent itself as a destination tourist sought for sophisticated,
high end tourist products and services. To reposition Sri Lanka to fit this segment, the TCI

11
facilitators launched four initiatives based on its findings, using the competitive tools described
above. 4

The first initiative sought to improve the tourism product mix. Sri Lanka traditionally relied
heavily on sun and sand tourism, a threat to the cluster according to the SWOT and the value-
chain analysis. To address this, Sri Lanka needed to develop new high end tourist packages that
would attract new tourists willing to pay a premium for a differentiated experience. Products and
segments proposed included ecotourism, adventure tourism, ayurveda tourism (ancient Hindu
health care) and cruises.

As a result of TCI, the industry has moved away from “sun and sand” and pushed into new
tourism segments including adventure-tourism and eco-tourism. This started with the creation of
a US$2.9 million Rain Forest Eco-Lodge situated in the UNESCO World Heritage Site of
Singharaja rain forest. This took into account Sri Lanka’s unique national qualities, including its
rich biodiversity. Initiated by six members of the cluster, this eco-lodge is of particular
importance as it was privately funded through a collaboration of Sri Lankan tour companies
within the tourism cluster, and was later awarded a Global Development Alliance Grant from the
USAID. It is an initiative that would have not been possible before.

The second initiative implemented by the TCI facilitators was to upgrade existing tourism
product offerings in Sri Lanka. Seeing that Sri Lanka had potential to take advantage of the
unique cultural heritage sites, two sites - the Sigiriya Sound & Light Project and the Galle Fort
(a UNESCO World Heritage Site)- were the center of the cluster upgrading activity. Along with
the development of cycle trails, these sites became the flagships in advertising Sri Lanka as a
destination for high end cultural and adventure tourism.

As a result of the increase in eco, adventure and cultural tourism, the boutique hotel industry has
developed rapidly in Sri Lanka. Even though still a very small segment of the industry, there is
definite growth in the number of high end tourist who are willing to come to Sri Lanka despite
the uncertainities.

Many of the projects developed to take Sri Lanka beyond sun and sand, the on going conflict has
prevented the industry from being able to benefit fully from the schemes.

In the aftermath of the December 2004 tsunami, a rapid response media campaign was set up by
TCI’s successor, The Competitive Program (TCP), to counter the negative images sent out in the
immediate aftermath of the news. While the campaign specifically addressed the negative
tsunami images, it also contributed to start longer term initiatives for the tourism industry by
spotlighting Sri Lanka’s variety of special attractions other than beaches, appealing to nature,
culture, history, and adventure enthusiasts. The project was initially to fund promotions in
Europe. However, in light of the importance of Indian tourist to Sri Lanka (see table below), a
campaign was launched in India. The “Small Island Big Trip” launched in India, consisted of

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A Competitiveness Strategy for Sri Lanka’s Tourism Industry

12
print, television, and Internet-based advertising aimed at middle and upper-income Indians
considering traveling to alternative destinations such as Malaysia, Singapore, Dubai or Thailand.

Significance of Indian Tourist Arrivals to Sri Lankan Tourism

2000 2001 2002 2003 2004 2005 2006
Indian tourist
arrivals 31,851 33,932 69,996 90,639 104,390 113,023 128,520
YoY % change 6.1% 51.5% 22.8% 13.2% 7.6% 12.1%
Total tourist
arrivals 400,414 336,794 393,171 500,642 566,202 549,308 559,603
YoY % change -18.9% 14.3% 21.5% 11.6% -3.1% 1.8%
Total arrivals
from Asian region 91,409 89,343 142,578 177,377 196,023 222,844 241,954
YoY % change -2.3% 37.3% 19.6% 9.5% 12.0% 7.9%
Indian arrivals
as % of total
arrivals 8.0% 10.1% 17.8% 18.1% 18.4% 20.6% 23.0%
Indian arrivals
as % of total
Asian arrivals 34.8% 38.0% 49.1% 51.1% 53.3% 50.7% 53.1%
Source: Annual Statistical Report of Sri Lanka Tourism – 2006, Sri Lanka Tourist Board

The next initiative was to modernize the industry’s organization and key institutions. The Porter
Diamond showed numerous weaknesses showed a lack of market intelligence, weak institutions,
and a lack of clarity on the role of the SLTB and Ministry of Tourism. The TCP facilitated the
creation of a tourism promotion bureau, responsible to setting up a tourism industry portal to
improve marketing and help make Sri Lanka competitive in the global tourism market.

As a result of the unified structure created through the clustering process, the private sector was
able to lobby for new legislation that clarified the division of labor between the SLTB and the
Ministry. With the enactment of the Tourism Development Authority Bill of 2005, the
government’s monopoly of the industry through the SLTB was dissolved, and five bodies with
greater private sector participation were set up to handle different areas of the tourist industry.

The lack of market feedback mechanisms was also addressed through the creation of a Tourism
Research Database with Technical Assistance from TCP. The initial plan was to improve
existing data gathering systems from SLAITO, THASL, and the Airlines to get a more accurate
understanding of “Leisure” visitors coming to Sri Lanka, and to build a forecasting model based
upon these organizations future bookings. A web-based database was developed to manage the
data and create printable online reports. The database would also include digital exit surveys at
the Katunayake International Airport capturing vital demographic, motivational, marketing
effectiveness, decision-making, satisfaction, product development and expenditure data.

The final initiative, based on the findings of the study, was to reform the policy environment for
tourism and tourism-related infrastructure. A major obstacle to attracting tourist was found to be
the lack of transportation options, both from abroad and within Sri Lanka. The focus of this

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initiative was an aviation policy and recommendations for tourism-related planning and
infrastructure services.

Old Laws New Law

ƒ Sri Lanka Tourist Board (SLTB) Act ƒ Tourism Development Authority Act
No. 10 of 1966 No.38 of 2005
ƒ Tourist Development Act No.14 of
1968.
Institutions
ƒ Sri Lanka Tourist Board ƒ Sri Lanka Tourist Development
Authority (SLTDA)
ƒ Sri Lanka Institute of Tourism and
Hotel Management (SLITHM)
ƒ Sri Lanka Tourism Promotion Bureau
(SLTPB)
ƒ Sri Lanka Convention Bureau (SLCB)
Administered by
ƒ Seven members of the Board led by a ƒ A Chairman
Chairman ƒ Director General/Managing
Director/Chief Executive Officer
ƒ Board members from the private sector
and the government (select positions
reserved for representatives of THASL,
SLAITO and Hotel School Graduates
Association among others)
Appointed by
ƒ Minister of Tourism ƒ Appointed mostly by the private sector
and approved by Minister
Financial Powers
ƒ All funds were collected and disbursed ƒ Budgets will be managed and decisions
by SLTB with little or no input from will be taken by each entity in the
the private sector. following manner:
 70% to the Sri Lankan Tourism
Promotion Bureau
 14% to Sri Lanka Tourism
Development Authority
 12% to Sri Lanka Institute of Tourism
and Hotel Management
 4% to Sri Lanka Convention Bureau

Results

As a result of TCI introducing competitiveness through clustering, Sri Lanka’s tourist industry
came together to focus on the country for the first time. It was further TCI was successful in
bringing together the industry leaders who devoted their time and effort to make strategic plans
for the industry and then execute the implementation of those strategies, in order to reduce the

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effects of the earnings fluctuations. The cluster re-positioned itself through market segmentation
and product development. In the course of implementing those strategies The overemphasis on
beach tourism was diluted with a shift to other areas with potential. As a result of the focus on
eco-tourism, Sri Lanka will gain a world class demonstration eco-lodge. Ayurveda tourism has
become so popular with Europeans that some companies are investing in off-shore facilities.
Companies engaged in adventure tourism have formed their own association. As a result of the
growth in adventure tourism, these companies are considering hosting international events such
as cycling marathons in Sri Lanka.

Another achievement of the clustering process was the policy changes that came about. With the
new legislation that the private sector lobbied for, they have a larger say and better control of the
industry than they had before, and work cordially with the government officials in managing all
important areas of the industry. As a result of the policy change, national level marketing has
become the responsibility of the private sector. In order to facilitate this, the cluster set up a
Tourism Research Database which will collect information that will allow the industry to better
profile the visitors and thereby provide a better service.

Sri Lanka’s tourism industry continues to be hampered by the on going war, escalation of
violence and political instability. However, despite fluctuating arrival numbers, there was a
notable increase in tourism revenues following the inception of the project. Following the attack
on the military and commercial aircraft at the Colombo Airport by the Tamil Tigers (2001), the
industry experienced a crisis as most international tour operators and tourists cancelled their trips.
TCP worked with the industry to fill hotel beds through an urgent and unprecedented campaign
targeting the Indian market. During the life of the TCI/TCP, gross receipts have increased from
US$253 million in 2000 to US$410 million in 2006, an increase of 62%. Receipts per tourist
have increased from US$62 in 2000 to US$83 in 2006, an increase of 34%. This shows that the
cluster achieved its main initial objectives to upgrade and diversify the tourism industry.

$450 $417 $90

$410
$400 $85
$362 $83
$340 $80
$350
$75
US$ million

$300 $75
US$

$253 $253 $72 $70

$250 $67
$211 $65
$200 $62 $63 $63
$60
$150 $55

$100 $50
2000 2001 2002 2003 2004 2005 2006

Gross Tourism Earnings Receipts per Tourist per Day

Source: Annual Statistical Report of Sri Lanka Tourism – 2006, Sri Lanka Tourist Board

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