Porters Five Force Analysis on Whitbreads competitiveness in Hotel Industry - Essay Example

? BUSINESS Porter (Strategy) Analysis Of Whitbread ……………………… College………………………………. …………………. Word-count: 2527 Table of Contents Table of Contents 2 Section- 1 3 Porter’s Five Force Analysis on Whitbread’s competitiveness in Hotel Industry 3 Threats of New Entrants: 3 Threats of Substitutes 5 Bargaining power of Suppliers 5 Bargaining power of buyers 5 Competitive Rivalry: Analysis 6 Section- 2 6 Porter’s Generic Strategy: 6 Whitbread in Hotel Industry 7 Whitbread In Coffee Industry 9 Section- 3 11 Diversification Strategy 11 Whitbread’s Diversification until 2000 11 Section- 4 13 Whitbread’s Transformation: Why it was successful? 13 References 14 Section- 1 Porter’s Five Force Analysis on Whitbread’s competitiveness in Hotel Industry Porter’s five force analysis is one of the most powerful strategic analysis tools. This model is undertaken from the perspective of an organization that is already operating within an industry (Henry, 2008, p. 69) and it attempts to measure and evaluate the factors that determine the competitive strength of the firm within its industry domain. As Cheverton (2004, p. 80) noted, the Porter’s five force analysis comes in two stages, one is the analysis and the second is the conclusion and action. Porter’s five force model considers the five major forces in the market, they are competition, bargaining power of suppliers and buyers, threats of new entrants and substitutes. Threats of New Entrants: Until the last years of 20th century, Whitbread has long been concentrating on brewing, but it has started its own restaurants, pub partnerships, inns, health and fitness service, drinks etc and has recognized that this will eventually give greater benefits to the business than the marketing potential of brewing. When it comes to hotel industry, the threat of new entrants is a big issue since it requires relatively less initial investment. The threat of new entrants in the case of brewing is also same, but hotel industry is more likely to attract customers if the hotel or restaurant can provide unique quality of goods and services. Differentiation matters a lot to hotel industry. A restaurant that is able to differentiate its products through innovation can substantially achieve significant competitive advantage. Whitbread’s Annual report (1999, p. 15) reported that innovation has been critically significant strategy to its business as it listened to its customers for valuable research and thus its products and services were constantly adapted to changes. As shown in the figure above, Whitbread has identified that the contribution from restaurants, hotels and health and fitness were much better than that of other sectors and this showed how competitive the company can be in hotel industry. Threats of Substitutes As far as hotel industry is concerned, threat of substitutes is greater since there are close substitutes available in the market. Confectionaries such as small treats, chocolates, soft drinks, packaged food or drinks are close substitutes. Apart from this, the switching costs will be less for customers as they can easily obtain substitutes. But, threat of the substitutes to the services provided by hotel industry seems less significant as hotel industry can attract and retain its customers by facilitating supreme quality services. Restaurants, resorts and hotels have greater opportunities to convert the existing customers to loyal customers if they provide highly valuable services (Hayes and Miller, 2010, p. 365). Bargaining power of Suppliers Suppliers in the hotel industry are farmers, companies, retailers or wholesaler. As far as hotel industry is concerned, the demand for fresh and quality materials will be higher and suppliers of quality fruits or food items have relatively medium bargaining power. Since there are large numbers of suppliers available in the market, bargaining power is relatively less. Bargaining power of buyers For customers of hotel industry, there are more substitutes and therefore they may seek only those hotels that ensure meeting customers’ needs such as fresh, quality, clean environment etc. Though buyers have relatively high bargaining power and switching costs seem to be less, hotels or restaurants that have differentiated its products or services and positioned as unique in the market can enjoy sustainable competitive advantage. Low price is never a priority to the hotel and restaurant-customers, but service quality matters to them (Pollin, 2008, p. 88). Competitive Rivalry: Analysis Hotel industry faces fierce competition and it is a difficult task to achieve competitive advantages unless the firm takes effective strategies to gain high attraction from the customers. Whitbread has innovated and differentiated its products and services, which might have been a reason why it could achieve success in the early years of 20th century once it shifted from brewing to hospitality. Bargaining power of customers and buyers and threat of substitute as well as new entrants seem to be issues in the hotel industry, however hotels or restaurants can always take better advantages of competition if they ensure quality goods and services, customer loyalty strategies, differentiation, innovation etc. Section- 2 Porter’s Generic Strategy: According to Porter’s Generic Strategy, there are basically three potentially successful generic strategies or strategic approaches that outperform other firms in the industry. these three generic strategic approaches are overall cost leadership, differentiation and focus. Cost leadership will be generally to a firm that has been able to offer lowest possible price. A firm gets the advantage of differentiation when it is able to create something which is perceived to be industry-wide unique and customers will be willing to pay a premium for that uniqueness. Focus means a firm’s offering of narrow strategic target more effectively than its counterparts competing more broadly (Botten, 2009, p. 275). In order to ensure competitive advantage and dilute the risk of competitive rivalry, the management should concentrate at least one of these three types of strategic approaches. The company therefore requires to keep its price lower than that of competitors, or bring differentiated products through innovation so that customers can find additional values that they may even pay more for that or the company must focus on a specific group of buyers or specific segment or geographical area of the market (Karlof, 1993, p. 190). Whitbread in Hotel Industry Whitbread PLC, established as a brewer in 18th century, has now emerged to be UK’s largest hospitality company being engaged in the operation of hotels, restaurants and coffee shops (Datamonitor, 2011, p. 4). The company itself has redefined and modernized its business in the current century by focusing on budget hotels, pub-restaurants, sophisticated coffee-shops etc (Caterersearch.com, 2012). Whitbread’s hotels have substantially important segment to its overall business revenues. Premier inns and restaurants are the two major segments of its hotel business. All these segments have recorded significant growth in revenues in 2011 from the revenue records of 2010. Whitbread’s annual report (2011) reported that premier inns’ revenues increased by 10.9 percent and restaurants’ revenues by 1.7 percent. The like for like premier inns recorded significant growth in occupancy levels and total earnings per year as well. Porter’s generic strategy analysis of Whitbread’s Hotel business, as depicted in the figure below, shows that premier inns, budget hotels and like for like inns were major differentiation that the company brought as strategic change in its business. This has not only helped the company increase its revenues and earnings, but has contributed much towards establishing strong brand reputation since customers value the service and are more likely to pay higher for this premium and uniqueness. Whitbread’s Annual report (2011) emphasized that premier inn’s strategy was to increase occupancy by targeting leisure customers. More over, the like for like inns also proved occupancy growth of 6.6 %. Innovation is always an important aspect to bring innovation to business. Whitbread’s emphasis on innovation has also been critical to establishing strong brand image. For instance, premier inn’s automated check-in kiosks were proving greater success and is going to be implemented in almost all of its hotel locations. Whitbread may not be able to claim cost leadership, however its dynamic pricing strategy is a success pathway for it to improve the capability to manage rates to maximize market demand (Annual Report, 2011, p. 6). As far as ‘Focus’ strategy aspect is concerned, Whitbread has focused on specific segmentation of its hotels in to Hilton, Marriott, Travelodge, Holiday Inns, Best Western, Comfort Inns etc (Annual Report, 2011, p. 9). The company has also focused on great value aspect among its customers. Its hotels, as 2011 Annual report (p. 10) denoted, continued to attract more people who were looking for great value food and drink in highly comfortable environment. Whitbread In Coffee Industry Costa is the largest and fastest growing coffee chain shop in the UK. Costa has also been voted to be nation’s most favorite coffee in 2010 (Whitbread.co.uk, 2012). According to Datamonitor (2010), Costa continued to show strong performance and that represents the major business strength of the company. Cost has recorded a 27.8 percent growth in the revenue of 2011 from that of 2010. Costa’s main competitor-Starbuck-is aiming to differentiate based on quality, whereas Whitbread differentiated its coffee Costa by convenient distribution system. Costa has successfully established balanced portfolio across high streets, retails parks, airports, rail and travel hubs etc (Annual Report, 2011, p. 6). Costa also cannot claim cost leadership, but it can certainly claim value for the money that customers need to pay for the goods and service. Customers do certainly add the ‘convenience’ of getting a product in to their hand to the monetary value of that product. As far as focus strategy is concerned, Costa has long been driven by the market factor of convenience rather than quality (Whitbread.co.uk, 2012). As part of improving the convenience, Whitbread has always taken sincere attention to add more stores of Costa to provide greater convenience to customers. For instance, In 2004 alone Whitbread added 66 coffee stores (Annual Report, 2004, p. 17) and in 2011 it added 271 stores across the globe. Its Coffee segment has been divided in to Costa, subway, pret a manger etc which in turn provide convenience to its customers. Section- 3 Diversification Strategy As and when firms grow, businesses become generally diverse. When the business experiences slow-growth in the existing market and decides to start business in another segment or industry, the strategy is known as diversification (Fitzroy and Hulbert, 2005, p. 244). Management’s decision regarding diversification strategy can largely impact the business since there are other stakeholders such as shareholders, creditors, suppliers, customers etc and all they will be impacted by any decision that management takes in relation to diversifying the business. In order to benefit the shareholders, managers may accompany some synergies related to transferring of tangible and intangible resources, market and management skills etc. Literatures have distinguished related and unrelated diversification. Fitzroy and Hulbert (2005, p. 246) stressed that related diversification occurs when the firm shares or transfers the resources and capabilities among the different businesses that it diversified. Tangible and intangible resources, market and management capabilities are the major things that are to be shared and transferred from the existing business to the new one with a view to maximum benefit its shareholders and others. Unrelated diversification occurs when there is little or absolutely no relationship between businesses in the firm’s portfolio. Whitbread’s Diversification until 2000 Between the business years of 1999 and 2000 of Whitbread, the company experienced a change as it sold out its breweries and stopped its pubs as well as bars. With no major changes in its business ideas or market potentials, Whitbread moved to hospitality industry by refocusing on the growth areas of Hotels, Restaurants, coffee shop etc. Until the years since 2000, Whitbread has diversified its business, but later it reduced its diversification by exiting many hubs, clubs and breweries. As Enz (2009) noted, Whitbread has been pursuing related diversification strategy. The company actively reduced its diversification in the beginning of 21st century by selling various brands and licensed franchises, freeing the company up to focusing on a few marketing leading business. Related diversification can be justified only if it is limited to those business with synergy, the corporate focus is on exploiting core competencies across different businesses and it is depending on building a portfolio of business that fits managerial ‘dominant logic’ (Goold and Luchs, 1993, p. 16). Many literatures argued that related diversification is a better strategy if the management can make use of same resources and capabilities across the varying segments it operates. Until 2000, Whitbread has depended on concentric diversification strategy as the firm has been expanding by creating or acquiring new businesses that were related to firm’s core business. The company had benefited by this diversification in a number of ways. The company could exploit its resources in related markets, captured the benefits of synergies, controlled markets and supplies through vertical integration and spread the risks between businesses. If the business is diversified in related business sectors, as mentioned earlier, there must be synergy that occurs when the performance of the business portfolio adds up to more than the total sum of its parts. The Whitbread story tells that it reduced its diversification by exiting many hubs and bras and concentrated on few markets such as restaurants, hotels and coffee shops, and the outcome was that it outperformed the other way it had run its business for decades. Section- 4 Whitbread’s Transformation: Why it was successful? The transformation that occurred in the business history of Whitbread was highly successful as the company until now is continually gaining increased revenues and earnings year on year as well as achieving competitive advantages through strong brand image and increased openings of stores worldwide. Following are the reasons that explain why Whitbread’s transformation has been successful. Whitbread’s Costa Coffee is the fastest growing UK’s coffee and most favorite coffee of 2010. Whitbread, comprising of all its segments of hotels, restaurants, coffee, health and fitness centers have premier presence in the UK. The company is adding more and more hotels and coffee stores every year. All of its segments have reported both revenue and returns growth in the last few years. Whitbread has become highly positioned among its customers for quality food and drinks, high valued coffee items, convenience shops at airport or railway terminals etc. Whitbread has long been a brewer until 1999 and has emerged to be a main market player in Hospitality Industry after a major strategic change in 2000. As the latest Annual Report (2011) stressed, the company is continually fostering on building strong brand by strengthening the customer proposition and accelerating the expansion of its networks to achieve better market share in its future. 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