In my report I will analyse the hotel industry using macro-environmental and structural analysis such as PEST and Porters Five Forces Model analyses. The aim of my work is discussion of current political, economical social and technological climate and how it affects the hotel industry. Structural analysis will help me to assess possible competitive strategy which I can follow in this industry.
Macro Environmental PEST Analysis
I will use PEST analysis for tourist hotel industry introduction. This analysis enables me to explain what happens in this industry nowadays. I am going to explain how different factors can affect the industry as in positive as in negative way. Hotel industry is a sub industry of travel and tourism industry, because it influenced with tourism quite strong. Tourism nowadays has a global meaning and for analysing the hotel industry I have to think globally about it. There is variety of factors affecting hotel industry, but they can’t be concentrated just in one country, because the consumers of the hotels can be people from the entire world, not only from the country where the hotel is situated. There is inside and outside tourism existing in each country, so there are so many potential customers, who can book a hotel. Political and economical factors of other countries can influence the hotel industry of the country where the hotel situated, this influence level depend on how popular is a tourist destination for outside tourists. If it is popular, this means that outside tourism is very developed on this place and hotels there just makes their profit on foreign visitors as well as local travellers. Tourism is a global activity since its beginnings, from the moment a passage was made from travels (reserved for people with money) to using the spare time of the worker in order to produce profit.
Political and Economical Factors
I am going to write about these two factors in one section just because these factors are very closely related to each other.
Tourism industry is a fast growing industry. Hotels exist for giving the tourist a possibility to stay at the place where they are not living. Schengen agreement has given for tourists a chance easier to move from one country to another. This agreement has increased the number of potential customers of the hotels. This agreement removes border control between 25 EU countries. These countries are: Austria, Belgium, Bulgaria, Cyprus, The Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Iceland, Italy, Latvia, Lichtenstein, Lithuania, Luxemburg, Malta, The Netherlands, Norway, Poland, Portugal, Romania, Slovakia, Slovenia, Spain, Sweden and Switzerland. So, this agreement makes travelling process between these countries easier and cheaper. People do not need to spend their time and money for sorting out the problems with visa. They can just easily travel straightaway from one country to another; just take a transport and go. Of course, this fact affects the whole hotel industry in positive way. Moreover, according to Schengen agreement for The USA, Australia, New Zealand and Canada visit of Schengen area is possible without a visa, but there is a time limited for 90 days. This means that people from 4 more countries can travel easily. The UK and Ireland remained outside the agreement due to fears of terrorism. . But these countries are members of EU, which is partly economic union. This level of economic integration means free movement of commodities and people. If people can freely move between EU countries, it means that they are able to travel, but if they are able to travel it means that they may decide to book a hotel for a short stay while visiting new destinations.
16 countries from EU use the same currency, which is euro (â‚¬). This fact makes tourism safer and favourable between those 16 countries. Tourists, for example travelling from France to Spain, do not lose their money on foreign currency exchange. These factors give some advantages for those countries. But more advantageous are countries where the currency of this country is cheaper comparable to other currency. If the tourism and hotel services are developed in this country, this might mean a big popularity of this country among tourists. And if country is popular among tourists, the hotel industry can definitely take an advantage of this fact. But nowadays after financial crunch the currency rate has changed. For example 1 British pound now is 1.10914434 Euros; this means that euro became more expensive than before. Due to this fact travelling from UK to countries using Euro became more expensive. This situation has two sides of medal, from one side the Euro countries and their hotels might lose some tourists from UK. But from other side the UK hotels might take advantage on it, I mean if it became too expensive to travel abroad, people might spend money to travel insight the UK. I am just looking on some situations with currency and how they affect the hotel industry. Currency exchange is a very important factor and can influence the industry both ways actually.
Economical changes in any country can affect the hotel industry, because they will affect the tourism industry. For example if in some countries there will be too high level of unemployment and too low level of income, people will not have money for booking a hotel, they will prefer to stay at home rather than traveling.
People are inquisitive, this is their nature. Lots of them want to travel in spare time, to visit new places. If somebody decides to travel he will anyway need to stay somewhere; that the hotel is for. In today’s life people are very busy, they working hard and definitely will need a time to rest. They will need it to change scenery, to see something new, to visit some interesting places and to have some new experiences. All this affect hotel industry in positive way, just because people will travel and use the hotels as accommodation to meet their wants.
Another factor is people’s lifestyle. Some people travel because they have to, this might be one of their responsibilities at work. If this business travels takes more than a day, the employer will book a hotel for person travelling with aim to sort out the business issues.
Some people find staying in hotel too expensive or just find it more comfortable and interesting to stay in camping or caravan parks for their holiday. These people’s habits affect the hotel industry as a whole. Caravan parks and camping became quite strong competitors of hotels. The hotels are not the only existing place to stay on holidays.
The hotels offer a good service to their customers. Service is actually the product which they sell. Hotels are a complex of variety of services. They are not only a bed space and breakfast. Lots of hotels have sport facilities, swimming pools, GYM, beauty centres, golf clubs, massage rooms and so on. All this facilities are working to attract the customers. Moreover, there is the information about tourist destinations, attractions and entertainment available in tourist hotels. Some hotels, especially situated in tourist resort destinations, have a night program of guests’ entertainment. All of these factors favourably influence the hotel industry. This greatly facilitates the life of tourists. They do not have to think and worry about anything; if they pay money they can also spend a great time but not only sleep and eat. The staff of the hotel will be able to answer all of your questions. It is very good when you can find everything in one place.
The globalization has taken a place in our modern life. Now it is possible to book nearly any country’s hotel on internet. Doing like this, people always have a chance to compare hotel prices and facilities because there is a lot of information available on internet. Hotels usually cooperate with tour operators. Usually, when people book a holiday, they book a hotel as well as airplane tickets and hotel transfers. Cooperation with tour operators is useful for both sides, for people and for hotels. Tour operators find the customers for the hotel so, of course, this technological factor is important in hotel industry.
Porters Five Forces Model – The Way of Structural Analysis of the Industry
To select the desirable competitive position in the business, I need to start with evaluation and analysing the industry to which your business belongs, using Porters Five Forces Model. This model can be used for identifying and analysing the opportunities and risk that the company can meet in the industry. According to Michael E. Porter model, there are 5 competitive forces existing and he created a diagram showing how these forces driving the industry competition. These 5 forces are:
The rivalry among existing firms.
This force is a core of the Porters’ diagram. The intensity of rivalry between firms will be high if there is a presence of the following factors in the industry:
Large number of companies
Small degree of differentiation
Low growth of industry
High fixed costs
Possibility of increasing production capacity only through the large capacity
High strategic stakes
High barriers to exit because of economic, strategic or emotional reasons
The risk of entry of potential competitors.
A new competitor maintains a threat for the market share of existing competitors. The higher is a barrier to entry into the industry, the lower is risk of potential competitor’s entry. According to M. Porter, there are 6 major sources of barriers to entry:
Economies of the scale
This is reduction in cost per unit resulting from increased production, realized through operational efficiencies.
This happens when existing firms have well known brand and customers loyalty.
The barrier is high if the firm’s entry expenses of investments needs are too heavy.
Access do distribution channels
The company have to convince the distribution channels to cooperate.
Government can limit or foreclose the access to the industry with such controls as licensing or limits to access raw materials. (Porter M., (2004), p.13)
The threat of substitute products.
Availability of substitutes determines the upper limit of the price for the product in the industry. The buyer can switch to substitutes when the prices of the existing goods rise above this boundary. The existence of completely replacing products will limit the company’s profit, because it may cause the serious competition.
Bargaining power of buyers.
The market power of buyers is reflected in their ability to reduce prices in the industry, by reducing the number of purchased goods, or to demand better quality product for the same price. Factors leading to greater bargaining power of buyers are:
The concentration of buyers is higher than concentration of manufacturers in the industry
Large volume of purchases
Undifferentiated or standardized products or services
Existing the threat of backward integration of buyer with manufacturer
Openness of information about manufacturer’s costs
High price elasticity of demand in the industry. If buyers are sensitive to changes in market prices, this mean that market power of manufacturer is low.
Bargaining power of suppliers.
Suppliers may threat to raise prices, forcing the company to reduce the number of products, and as a consequence of it, to reduce their profit. Bargaining power of suppliers is high in following conditions:
The dominance of the few suppliers
The concentration of industry suppliers is higher than concentration of industry manufacturers
Inaccessibility of substitutes
The relative insignificance of the manufacturer to the supplier
The importance of supplying product to the manufacturers
High supplier differentiation
If the cost to change the supplier is high for the manufacturer
Possibility of direct integration of supplier with manufacturer
The collective strength of these forces determines the ultimate profit potential in the industry, where profit potential is measured in terms of long run return on invested capital. (Porter M., (2004), p. 3). It is not necessarily to use all of the five forces analyzing the industry because not all of them will be important in any one industry. Analyzing a tourist hotel industry I am going to use just three forces from five existing, because I think these three forces are more important in my chosen industry. I will write about the risk of entry of potential competitors, bargaining power of buyers and the threat of substitute products. Analyzing a hotel industry in this certain way will enable me to choose the competitive strategy for my own hotel in future.
Porters Five Forces Analysis
Risk of Entry of Potential Competitors
The hotel industry is very tempting industry for new entrants because of their benefits from tourism development.
If the risk of entry of new competitors is low, the company can raise prices and increase profitability. As I told before, the level of this risk depends on barriers of entry.
To determine how high risk of entrance of new competitors is, I chose capital requirements and product differentiation sources of barriers. To build a new hotel and to buy all the essential things, which helps to offer a good service, are quite expensive, so the cost of the building itself and cost of furniture and equipment maintain a high barrier to entry the industry. Moreover, to employ people is also quite expensive because for normal hotel functioning it needs to employ lots of staff. Opening a new hotel may have additional legal or financial complexities and company may need to pay for professionals in this field to sort these complexities out.
Byeong Yong Kim and Haemoon Oh have the same opinion, in their article they wrote: Although the lodging industry has high entry barriers such as huge amount of investment required to build a building and a need for a national service network. . Other reason of high barriers is that new company might not have effect of economy of scale. The economies of scale that may provide a barrier to entry exist primarily in equipment-based, and not in people-based, service businesses. Where economies of scale cannot be developed easily, two other barriers to entry can be used: proprietary technology, and/or service differentiation. . I think the hotel industry’s service is people based so, as told in Dan R. E. Thomas article, economies of the scale can not be developed easily. Product (service) differentiation maintain quite high level of barrier as well because existing hotels or hotel chains have well known brands and positive reputation, which is even more important, like Holyday Inn, Premier Inn, or more luxury hotels like Marriott or Hilton. Customers have a choice, so if they need to stay in the hotel they will choose hotel with already existing good reputation and good service rather than new hotel, which they don’t know anything about.
Bargaining Power of Buyers
Buyers compete with the industry by forcing down prices, bargaining for higher quality or more services, and playing competitors against each other – all at the expense of industry profitability. (Porter M., (2004), p. 24) Lots of potential buyers exist in the industry and no single buyer is dominating, so their power is quite low. However, this power is increasing because of new technologies that enable traveller to reserve hotel from anywhere in the world. .The buyer now is well informed about the hotel even if he never seen it and never been in town where the hotel is situated. And if buyer do not know about the new competitor it may be unprofitable for competitor. Brand recognition attracts new customers and makes customers to repeat the purchases. The buyers are independent and this fact makes buyers powerful. Hotel industry buyers are quite sensitive to price, because hotels are mostly identical and because tourism as well as hotel service is not product of first necessity. As the tourism is mostly seasonal activity and the influence of tourism industry on hotels is quite high means that tourist hotels profit may be cyclical. Moreover the hotels have substitutes. All these facts give the buyers some power. Taking on account all the facts determined above, I would say power of buyers is neither too low nor too high.
Threat of Substitutes
Substitute in this particular case is alternative of the hotel. The substitutes represent the competitors and if the substitutes will be more preferable or more accessible for customers than hotels, the hotel industry may have problems. I think the threat of substitutes is quite high, but not the highest one.
Staying with friends or family members can be a hotel substitute as well. People may have friends in town where they are going to travel and they may prefer to stay with them. This is cheaper than staying in hotel. However, not all the tourists have relatives and friends where they can stay.
Other substitutes are caravan parks and camping. People may decide that this is better accommodation for travelers, and that being away from town is more interesting, healthier and cheaper, and camping is the best place for ideal rest. But, despite the fact that camping offers the same accommodation function, hotels can have some additional services like GYM or massage saloon. So camping is not completely the same as hotel and many people may decide not to change the hotel stay for something else.
The substitute like teleconferences using video equipment or phone exists for business travelers. They do not actually need to go somewhere to deal with their business problems face to face, they just can use technologies to sort majority of problems from home or workplace. This fact enables them to choose if they want to go somewhere and stay in hotel or just ring somewhere to be on contact. Substitute like this has more serious affection and business hotels may lose quite many of clients. However, not all the problems can be easily sorted on the phone, so necessity of face to face conferences is still relevant.
Hotel is a service industry and service is more abstract than a product. To develop the strategy for the hotel I have to take this fact into account.
According to Emerald article suggested strategies are differentiation and low costs.
A differentiation strategy calls for the development of a product or service that offers unique attributes that are valued by customers and that customers perceive to be better than or different from the products of the competition.
Majority of hotels are identical (homogenous), so the best way to lure customers is creating something unusual, which can surprise customers and make them interested in. I need to create the unique hotel which will not have analogues in the district around. For example, I can open a hotel inside an ancient castle or build a good imitation of ancient castle, if there are no castles in the area I want. Such hotels nowadays already exist (for example South Cave Castle hotel in East Yorkshire, UK or Amberley Castle Hotel in West Sussex, UK); nevertheless, they are not common. I just need to choose location where the castle hotels are in minority or not presented at all. The castle-hotel has unusual, mysterious atmosphere as well as contrast between modern equipment and services and old fashioned interior. These qualities certainly make the hotel unique. The main thing is not too emphasize an old fashion; service should be of the highest current modern standard. Although, I can make differentiation in service as well, for example differentiation in hotel entertainment such as offering the carriage with horses or possibility to arrange a costume masquerade party. In this case my hotel will be not only accommodation and standard service but also entertainment complex. Firstly, this strategy can attract new segment of customers market, not only tourists. Tourists come not to spend all the time in the hotel. Hotel is just accommodation with additional services provided. But the castle is interesting by itself and people may take fancy of celebrating weddings and anniversaries in this hotel as a way to get unforgettable impressions and memories. I think described strategy will decrease in numbers dependence of the hotel from international tourism, because tourists will not be the only customers of this hotel.
But implementation of such idea has some difficulties; the most important of them is expensiveness of the whole enterprise. Uniqueness costs big money and low cost strategy is inappropriate in this particular case. This expensiveness has one positive moment, because it maintain very high barrier of entry the industry with similar or completely the same idea. This way, if the firm have enough investments to implement the idea of castle hotel and realized it, it will be difficult for new competitors to repeat the same strategy.
As a conclusion, I would like to add, that analyzing the industry is essential to choose strategic position. Understanding of what happens in the industry is the best way to achieve positive results, make a profit and compete successfully.
Porter, E. M. Competitive Strategy. Techniques for Analyzing Industries and Competitors, (2004), Free Press, New York
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