CASE 5

INTELLIGENT LEISURE SOLUTIONS

Intelligent Leisure Solutions.case study 

Case Analysis:
            Class members will be required to complete several written case analyses. Written case analyses should be no more than 5 pages, excluding any appendices and diagrams attached. All papers should be typed double-spaced using a 12-point font with a one-inch margin on all sides, including a cover page with the name of the case and the last 4 digits of the student ID#..
            The following criteria will constitute the core elements for evaluating case analyses: completeness, clarity of expression, relevance, integration, and insight. All written assignments are due at the beginning of the class session, and considering the availability of word-processing tools, appropriate grammar, punctuation, sentence structure, and spelling are expected.
            To summarize what’s to come, here are some important guidelines for your written case analysis:
 
(1)    Read the case more than once. Figure out and explain what the most important issues are.
(2)    You do not need to conduct outside research for the case analysis. In fact, you should pretend that you are facing exactly the same situation and information presented in the case.
(3)    Conduct a comprehensive analysis of the current situation and alternatives. In other words, make sure you consider the key external and internal factors affecting the entrepreneur (do not leave any critical variables out of the analysis). The case analysis framework we discuss in class provides an excellent template for use in the analysis.
(4)    Identify the best alternatives available to the entrepreneur using the case data, logical reasoning, and creative thinking.
(5)    Define and explain the course of action that you think the entrepreneur should follow. (Your conclusions should fit logically with your analysis of the situation). Explain how your suggestions may be implemented.
(6)    

INTRODUCTION

Intelligent Leisure Solutions (ILS) is a group of five com- panies based in Brazil working to create, implement, and manage intelligent solutions. As a completely technology- based solutions company, ILS is unique in its approach to travel, real estate, technology, and sustainable tourism. With high growth in the tourism industry, Intelligent Lei- sure Solutions’ founding entrepreneur, Robert Phillips, is working to find the most appropriate, innovative growth strategy for expansion and sustainability of the business.

GEOGRAPHIC BACKGROUND

Brazil is located on the Atlantic Coast of South America with a slightly smaller geographic area than the United States (see Exhibit 1). With the fifth largest country population in the world, it is home to more than 200 mil- lion people. Brazil’s economy is larger than that of all other South American countries, characterized by devel- oped mining, manufacturing, agricultural, and service sectors, and is increasing its presence in world markets. After the global recession in 2008, Brazil was one of the first emerging markets to begin recovering with about a 5 percent growth in 2010 (Central Intelligence Agency [CIA], 2010).

Brazil’s economy is now the eighth largest in the world. It has recently acquired a temporary seat on the United Nations Security Council until the end of 2011 and is seeking a growing international role and geopo-litical influence (Economist Intelligence Unit, 2010a). Brazil’s government, led by Dilma Rousseff of the Worker’s Party, welcomes private sector concessions, although bureaucracy still impairs efficiency. Foreign direct investment is welcomed, although domestic investors receive priority in certain areas, especially in the oil and energy sectors. Development of the export industry continues to be a priority and trade barriers are expected to be lowered. Brazil’s tax system is poorly structured and tax evasion is widespread while the tax breaks applied to lessen the burden of the financial crisis of 2008 are scheduled to be lifted; yet, the overall tax burden will continue to be high. Both foreign and national companies spend considerable resources toward managing their tax issues. Compliance with environ- mental law is a new crucial aspect of doing business in Brazil, and intellectual property rights must be respected (Economist Intelligence Unit, 2010b). The looming 2014 World Cup and 2016 Olympics are expected to bring an increase in public–private partnerships (Econo- mist Intelligence Unit, 2010a).

Brazil’s middle class is expanding due to the pros- perity brought about by sound macroeconomic poli- cies since 2000 (Euromonitor International, 2010). For the first time in Brazil’s history, 50 percent of its citi- zens, more than 94 million people, belong to the mid- dle class. Many low-income Brazilians have benefit- ted from new opportunities for stable jobs in the past decade. Because more people are being hired in the formal economy, access to working benefits such as health care, transportation, and food has increased. The real average monthly income grew 2.3 percent between 2008 and 2009 (Euromonitor International, 2010); this new middle class has access to certain products and services for the first time in their lives and are demand- ing more products and higher quality of service.

Lower fertility rates are also contributing to higher disposable incomes. Brazil’s fertility rate of 1.9 chil- dren per woman in 2009 has allowed parents to spend more on consumer goods and services (Euromonitor International, 2010). This has also resulted in a rise in demand for travel services, as families are increasingly able to afford vacations.

Brazil has a very young population, with 33.2 per- cent of its population in its twenties and thirties (see Exhibit 2). This segment of the population is technol- ogy savvy with financial independence and the means to travel (Euromonitor International, 2010). They tend to travel to different regions of Brazil and to other coun- tries over the holidays, and are looking for comfort and efficiency in their services. The annual disposable in- come will increase by 2020 (see Exhibit 3). The number of families in the US$75,000 income bracket will more than double from 1.7 million households in 2010 to 3.6 million in 2020 (Euromonitor International, 2010).

The tourism industry in Brazil grew 22 percent from 2003 to 2007, almost 3 percent more than the overall Brazilian economy during that time (Euro- monitor International, 2010). Leisure and recreation spending is expected to grow by 65 percent by 2020 (see Exhibit 4) with more Brazilians traveling dur- ing Carnival, Christmas, and other vacation times. Many Brazilians are starting to buy vacation packages through travel agencies and airlines that can be paid for in installments; the amount spent in this area grew 27.5 percent from 2005 to $5 billion Brazilian reals in 2009 (see Exhibit 5) (Euromonitor International, 2010). People in the upper and upper-middle classes are the primary customers for these packages.

HISTORY OF THE ENTREPRENEUR AND COMPANY

Robert Phillips, founder and CEO of Intelligent Leisure Solutions, has a BS in electrical engineering and an MS in space power. He worked in space power and in oil exploration in the United States and received an MBA from Thunderbird School of Global Management in 1994. He is a U.S. citizen who spent most of his child-hood living in South America, specifically in Brazil, Bolivia, and Colombia (Guthry, 2010).

Phillips began Intelligent Leisure Solutions in 1998 while working at Odebrecht, the largest engineering, construction, chemical, and petrochemical company in Latin America. As an internal consultant for tourism, tourism development, and real estate projects in Brazil, Phillips acted as a liaison between McKinsey and Ernst & Young, two large consulting firms in the United States, who were hired to evaluate tourism industry pos- sibilities for Odebrecht. When Odebrecht decided not to invest in the tourism sector, Phillips saw a market op- portunity and developed a Web-based travel company to sell Brazil to the world. Focused completely on Internet marketing, the company was unique among travel com- panies in Brazil in its innovative marketing strategy. In 2003, Phillips left Odebrecht to start DiscoverBrazil. com, a self-funded, Web-based travel company (now Intelligent Travel Solutions, or ITS), with the help of two partners, both colleagues from Odebrecht.

DiscoverBrazil.com began selling travel from Phillips’ home office, and expanded to offer Central and South American luxury vacation packages, growing to 11 tra- vel consultants, four websites, and monthly sales of US$300,000. The team acquired expert knowledge in Internet marketing and technology through their appli- cation of solely Internet marketing during their first few years of operations, allowing them to attain first-place results in Google’s and Yahoo’s search engine results pages (SERPs) for their business keywords.

Phillips and the team began setting up websites for Brazilian companies using the Internet marketing tech- niques they had developed for the Discover Brazil sites. Within weeks, these sites attained first placements in SERPs, something that usually took at least 3 to 6 months to achieve in the travel sector in English. In 2007, Intel- ligent Web Solutions (IWS) was created out of these re- sults, and soon after, Intelligent Content Solutions (ICS) was created when Phillips partnered with another entre- preneur with translation experience. The result was an award-winning, integrated service that included Web marketing, Web business services, Web content creation, and translation service (see Exhibit 6).

ORGANIZATIONAL STRUCTURE

Intelligent Leisure Solutions Consulting (ILSC) is an efficient outsourcing service, with a broad network of specialized partners for each outsourced service Demand is identified, and innovative, intelligent solu- tions are created, turning this demand into business op- portunities. ILSC started with two employees. In 2007, the company had 26 employees. The company was re- structured because of the financial crisis of 2008 and foreign exchange debt to 12 employees, which then grew again to 16 employees in 2009 (Guthry, 2010).

Throughout the creation of IWS, ICS, ITS, and IRES (Intelligent Real Estate Solutions), Phillips continued his work with ILSC, which helped fund new projects. In 2009, Phillips brought three new partners into ILSC who helped Discover Brazil evolve into a group of five companies. Due to tax structure requirements in Brazil, companies need to be kept separate to qualify for cer- tain tax incentives.

The group has incorporated Internet technology into the horizontally integrated leisure chain. The companies in the group offer a range of services from leisure devel- opment to the marketing and distribution of products. It is able to use shared knowledge between the five compa- nies resulting in a strategic advantage. The group consid- ers itself unique in that it has its own business laboratory (ITS) where it is able to test and develop its integrated services and Web techniques.

Intelligent Leisure Solutions is made up of five com- panies, each focusing on its own market niche:

Intelligent Leisure Solutions Consulting (ILSC)

is a leisure, real estate, travel, tourism, and entertain- ment development consulting company with custom- ers ranging from independent project owners, banks, investment funds, universities, and municipal, state, and federal governments. The company has a strong international and multicultural team located within Brazil. Its strategic advantage is its knowledge of the entire travel real estate and its all-in-one solutions com- prising tourism consulting, Web marketing, real estate brokerage, and travel consulting. With rapidly growing tourism and real estate industries in Brazil, ILSC hopes to capitalize on increased foreign investors in the next decade. Sample clients include the Ministry of Tourism of Brazil, the Secretariat of Tourism of Bahia, the World Bank, the Inter-American Development Bank, the CERT Foundation, Sapiens Park, and Zank Boutique Hotel. ILSC is also the exclusive representative for Odebrecht and Gehry Technology in Brazil and has re- cently won the bid to provide services for the Panama Metro and the Olympics and World Cup arenas in Brazil.

Intelligent Real Estate Solutions (IRES) offers complete real estate brokerage solutions in Brazil with clients such as international investors, banks, and funds investing in real estate and real estate projects in Brazil. This member company also has a cross-cultural and multilingual team that is able to provide foreign inves- tors with services in their own languages. Because most ILSC clients need real estate consulting and brokerage services, IRES is able to offer these additional services as part of an integrated solution.

Intelligent Web Solutions (IWS) offers Internet marketing and business plan consulting and develop- ment, specializing in both search engine optimization and search engine marketing. Customers of IWS want a presence online and include small, medium, and large companies, artists, banks, universities and gov- ernments. Since few companies in the tourism sector offer content creation solutions, IWS offers this com- bined with project management and global services knowledge.

IWS believes it will be able to grow efficiently be- cause of the lower costs of Internet marketing compared to traditional marketing, offering cost savings up to 90 percent. Internet marketing can reach anyone around the world with access to the Internet. Since any com- pany interested in using Internet marketing is a poten- tial IWS client, the firm capitalized on this by holding its second Internet Marketing Road Show in 2010. Through this, Intelligent Leisure Solutions entered the European market in 2009 with two new large clients.

Sample clients include in Spain—Universitat Oberta de Catalunya (www.uoc.edu) and Costa Brava of Girona (www.costabrava.org); in Argentina—Festival de Verão and Pepsi (www.sociallize.com.br), and Finca don Otaviano (www.FincadonOtaviano.com.ar); in Brazil— Carlinhos Brown (www.CarlinhosBrown.com.br),Physio Pilates (www.PhysioPilates.com), and Odebrecht Real Estate and Tourism projects, including Reserva do Paiva (www.reservadopaiva.com), Hangar Business Park (www.hangarsalvador.com.br), Boulevard Side (www. boulevardside.com.br), Quintas Private (www.quintaspri- vate.com.br), Mitchell (www.mitchell.com.br), and The Planet Fashion Wear (www.theplanet.com.br).

Intelligent Content Solutions (ICS) provides full service Web content creation and translation to both individuals and companies needing translations and Web copywriting services. The company offers Web site translation into any language through its interna- tional team working within Brazil and its consultants located around the world. Only techniques that have been tested in the business laboratory (ITS) are offered to clients. Since companies increasingly want to sell their products globally, ICS has many opportunities for growth.

Intelligent Travel Solutions (ITS) offers personal- ized luxury travel solutions in Central and South Amer- ica to individual travelers, travel agencies, tour opera- tors, schools, universities, churches, other institutions, companies from diverse sectors, and countries offering incentive trips. All ITS’s employees are multicultural and multilingual consultants, not travel agents, who ap- ply in-house Web marketing techniques to establish the image of Central and South America as luxury travel destinations.

ITS is the first Web-based tour operator in Brazil and it promotes local development of sustainable tourist ac- tivity through excellence in its services. Opportunities for growth can be seen in applying this low-cost model to smaller regional and specialty travel websites.

OBSTACLES FACED

•2008 Economic Crisis—This represented a significant challenge to Intelligent Leisure Solutions as the decrease in demand led to a loss in revenue for the business. This was addressed by restructuring the business to travel consultants working from home instead of from corporate office space. This allowed the company to cut costs and implement a differentiated commission structure (Guthry, 2010).

•Human Resources—In Phillips’ words, “What I have found to be one of the primary obstacles is human resources and human resource selection. If I were hiring a lawyer or a finance guy, that’s all pretty standard. But when you go to set up an Internet-based travel company, who do you use as your foundation?” Phillips identified capable staff and implemented quality training, procedures, and a business culture appropriate for each company.

•Lack of Understanding of the Need for the Products—Since IWS offers an integrated travel solution, something not currently seen on the market, many prospective clients need to be educated about the company’s products. The sales strategy for Intelligent Leisure Solutions was designed to first educate consumers about the product, overcome skepticism of the Web-based approach, and effectively present the quality of its products. A network of past clients was then built to demonstrate credibility and generate new clients.

•Project Management Standards—These standards, not yet developed in the industry, were developed by the group through trial and error.

FINANCIAL INFORMATION

Intelligent Leisure Solutions was initially self-funded by Phillips until 2005, when it received investments from two individuals. It has been funded periodically by investments throughout the life of the business. The business is currently being funded by the group’s opera- tions (see Exhibit 7).INDUSTRY OVERVIEWS Marketing Consulting Industry Overview

The management and marketing consultancy market in the United States had a value of $106.9 billion in 2009 (Exhib- its 8 and 9), with a compound annual growth rate (CAGR) of 4.4 percent between 2005 and 2009 (Datamonitor, 2010d). This market has experienced steady growth, and is forecasted to reach $161.2 billion in 2014, an in- crease of 50.7 percent since 2009, representing a CAGR of 8.6 percent between 2009 and 2014 (Exhibit 10). The largest segment of the management and marketing consultancy market in the United States is corporate strategy with 27.8 percent of the total market, while the operations management segment accounts for 26.5 per- cent (Exhibit 11). The United States represents 39.3 per- cent of the global market value (Datamonitor, 2010d).

The size of this market is the total revenues received from corporate strategy services, operations manage- ment services, information technology solutions, human resource management services, and outsourcing serv- ices. Since management and marketing consultancies provide objective external advice to improve business performance, this service involves specific professional knowledge, which can be costly.

Strong brand reputations are important in this industry, as evidenced by the success of large global organizations such as PriceWaterhouseCoopers and Deloitte. The time and experience required to build this reputation presents a strong barrier to entry in this industry. Also, many large organizations employ in-house analysts and marketing teams as a substitute for consultancy services.

The leading management and marketing consulting firms employ economies of scale and are multinational and multidisciplinary. Reputation for cost-effectiveness and an excellent track record are keys to success in this market. There is significant fragmentation within the market with smaller companies focusing on specific markets and industries and servicing particular buyers that they are more suited for (Datamonitor, 2010d).

Internet Marketing Industry Overview

The Internet marketing industry consists of the search engine marketing industry and the social media indus- try. The search engine marketing industry is segmented into money spent on paid search marketing and search engine optimization (SEO), as well as spending on search engine marketing technology (Econsultancy, 2010). The North American search engine marketing industry grew from $13.5 billion in 2008 to $14.6 bil- lion in 2009. Due to the recession, market conditions were difficult and 2009 was a relatively slow year for the industry (Exhibit 12) (Econsultancy, 2010). Of the four media forms—Internet/social media, newspaper, magazine, and TV—only the percentage of time spent using Internet/media is on the rise, while the percentage of time spent using the other forms is de- creasing. This has led to an increase in companies shift- ing spending into search engine marketing from other marketing and IT activity (Exhibit 13) (Econsultancy,