An Issue of Shangri-La Hotels - Essay Example

A Case Study of Shangri-La Hotels 0 MACRO-ENVIRONMENT ANALYSIS Shangri-La grew from a regionally focused business into a rapidly expanding firmwith global presence. The company has hotels operating in Asia and expansion programs in Europe and North America. The macro-environment analysis is centred on three major geographical areas: China, Europe and United States. These are the three regions where the company has issues with in reference to the case. 1.1 Political/ Legal China is a communist state with an authoritarian government. The government impose restrictions on several areas of human rights particularly freedom of press, assembly, religion and even the Internet. These restrictions can affect the attractiveness of industry growth and the stability of the country. Shangri-La's operations are dependent on the laws of the country in order to have smooth operations. However, with the liberalization of the PRC and the opening of its doors to foreign relations and businesses, the government has become less restrictive on certain areas for economic growth. The policies have boosted the country's appeal to companies willing to invest in China which also increases the demand for hotel accommodations. Europe's political landscape is deeply rooted in the philosophy of democracy. Several countries in the region are developed countries which have stable systems of governance. The governments relatively ensure the stability of their respective macro-economic policies and strong position in global politics. However, the region is also facing public perception of corruptions that affects the political stability to a certain extent. People perceive that the governments were not effective in dealing with corruption. Corruption can greatly affect the operations and expansion programs of Shangri-La in the region. United States is also rooted in the culture of democracy with a federal government. It is a capitalist country where the government and its policies are stable. Operating in a capitalist country is fairly beneficial to Shangri-La. However, the recent economic recession in the US has affected the fiscal policies of the country. Also, the country's war on terrorism makes the region a vulnerable target from terrorist attacks. Terrorism is a major threat for Shangri-La operations. 1.2 Economical China's economic environment is experiencing growth. The country's growth is due to the success of Beijing's stimulus package. Government relaxation of travel restrictions and the rising urban incomes makes the country an attractive market for the hotel industry. Chinese domestic and outbound travel has increased in Europe and the US economy is experiencing financial crisis and economic downturn. Unemployment is high and people are tightening their belts. Fiscal stimulus package which was recently approved is needed to contain the deteriorating public finances. Performance of the auto industry, which is the country's major employer, is currently experiencing setbacks. An economic recession and high unemployment state will greatly affect the performance of Shangri-La hotels in the region. 1.3 Social/ Cultural The Beijing Olympics of 2008 is a major influence of the country's foreign relations. It creates camaraderie among nations and puts China in the centre of event. The Olympics boosts the culture the Chinese people as well as opens up the country to the rest of the world. Although the standard of living in China is not equal between rural and urban regions, investments in the cityscapes have created urban migration and rising income. Residents in Europe enjoy a standard of living comparable to most develop countries which is due to decades of solid economic growth. The economic growth is funnelled into the development of a stable social structure. Governments are addressing the challenges posed by an aging population. The establishment of European Union creates a single market that brings in younger, working age population. US citizens have a high standard of living and greater disposable income that sustains its economy. However, recession has caused an increase in unemployment in the country. 1.4 Technological Advances in information technology are available in the market. Management systems such as Customer Relations Management, Corporate Performance Management, and Enterprise Management are mostly utilised by most organisations in order to improve their performance, business intelligence and customer relationships. Information technology has become an essential strategic investment for companies in order to sustain and grow their business. 1.5 Environmental and Sustainability Occupancy of hotels and its subsequent operations are greatly affected by natural calamities such as earthquakes and adverse weather conditions. Hotel accommodations are dependent on the travel industry which can be affected by weather conditions. Travel bans to countries due to a medical epidemic or health-related issues can affect the tourism industry which can also affect the hotel industry. The current corporate social responsibility trend is concern for environment. Large organisations are required by some countries to become eco-friendly and environmentally safe. Regulations and policies can affect the industries growth and profitability. 1.6 International The international growth is experiencing growth especially in other parts of the world. Emerging markets in Africa are potential targets for international business. Russia has also opened its doors for foreign investors and its economy is growing amidst its political and social uncertainties. Growing markets of India can be an opportunity for the hotel industry to explore. Air travel has become less restricted and has experienced increase tourist traffic that created demand for hotels and resorts. 2.0 INDUSTRY ANALYSIS 2.1 Threat of New Entrants The potential for new entrants in the hotel and resort industry acts as a direct constraint on the profit margin that Shangri-La can earn. However, in the luxury hotel industry where Shangri-La is a market leader in Asia, new entrants cannot enter on equal terms with them. 2.1.1 Economies of scale The luxury hotel and resort industry is capital intensive on its service offers as well as research intensive on its customer relations management. Efficiency requires hotel services on a large scale especially on training and development of employees and product promotions. 2.1.2 Working capital requirements The high cost of development and operations of a hotel chain reduces the threats of new entrants. Hotel industry requires substantial amount of capital investments in order to establish a business. Major competitors of the hotel industry still capture the biggest market share in developed countries. However, on emerging markets particularly China, the attractiveness of the industry would enable new entrants 2.1.3 Proprietary product differences The products and services on the hotel industry are highly differentiated. Established firms such as Shangri-La possess an advantage over new entrants by virtue of brand recognition and customer loyalty. Satisfied customers of Shangri-La return to the services and hospitality of the hotel chain which is consistent throughout. The appeal and familiarity of the organisation makes it difficult for an entrant to obtain significant market share in the region where the company operates. 2.1.4 Brand identity The Shangri-La brand is a strong brand in the luxury hotels and resorts. It is perceived as high a company that offers high quality products and services. 2.1.5 Access to distribution Established hotel firms like Shangri-La have access to channels of distribution. These channels include airline companies, local businesses, tourism initiatives as well as travel agencies. Established names are perceived to be significant partners for distribution channels. 2.1.6 Expected retaliation Marketing strategies of established firms would show retaliation to the new entrant. These strategies could include aggressive price cutting, increased advertising, local partnership with complementary products such as airlines and tourism agencies. 2.2 Bargaining Power of Suppliers Suppliers are powerful to the extent that they are large and concentrated. However, in a service oriented industry, the bargaining power of suppliers is less of a threat. Established hotel firms have greater buyer power to their suppliers such that some hotel organisations are implementing backward integration where they create their own brand of products to promote in the hotel accommodations. 2.2.1 Differentiation of inputs Inputs of the hotel business are not highly differentiated. Most firms own the proprietary rights of their inputs such as brand of mattresses and other consumer products. Suppliers of utility goods have monopolistic hold with the industry. 2.2.2 Switching costs of suppliers and the firms in the industry Firms in the industry relatively hold the bargaining power towards suppliers of consumer goods because these suppliers offer lowest price and better quality to gain long term contract. The cost of switching suppliers by the firm is perceived to be low. However, suppliers of essential products such as electricity, gas, water and skilled employment can have high switching costs. 2.2.3 Supplier concentration relative to industry concentration Supplier concentration is higher relative to industry concentration because hotels require different types of inputs in the different aspect of their operations and the various services they promote. 2.2.4 Threat of forward integration There is no perceived threat of forward integration from suppliers because the hotel industry is highly differentiated and core competencies of suppliers are unrelated to the hotel industry. 2.3 Bargaining Power of Buyers When customers can easily switch suppliers, there is greater customer buying power. In the hotel and resort industry, greater bargaining power of buyers lowers market attractiveness and increase competition. 2.3.1 Switching costs of buyers There are no switching costs of buyers because they are relatively free to choose the hotel organisation for their preferred accommodation. As any traveller knows, the greater the number of hotels in the area, the greater the choices and the more likely there is to be aggressive competition over pricing. Internet marketing and online reservation further provides information and accessibility to customers. 2.3.2 Price sensitivity Buyers are most sensitive to the price of hotel accommodations for which the costs are relatively large portion of the buyer's total cost. Strong competition between buyers results to low price offerings from hotel firms. However, Shangri-La caters to the luxury hotel industry where buyers are less price-sensitive and prefer quality service accommodations. Some customers prefer Shangri-La for the perceived status quo it carries. Luxury hotels serve the higher income group. 2.4 Power of Substitutes The availability of substitutes is a major factor that can influence the customer's willingness to pay a premium price for a product. The more substitute products available to customers, the easier for them to switch. Substitute products of hotels and resorts are lower category inexpensive hotels as well as service apartments and holiday resorts. The power of substitutes is high in emerging markets. For developed tourism markets such as Europe and North America, the substitutes include luxury cruise lines which have gained fleet growth before the financial crisis. With the economic downturn, the cruise lines are experiencing losses and lower revenues which make them a lesser threat to the hotel industry. 2.4.1 Relative price/ performance of substitutes Substitute products of hotels and resorts are lower category inexpensive hotels as well as service apartments and holiday resorts. The power of substitutes is high in emerging markets. For developed tourism markets such as Europe and North America, the substitutes include luxury cruise lines which have gained fleet growth before the financial crisis. With the economic downturn, the cruise lines are experiencing losses and lower revenues which make them a lesser threat to the hotel industry. Without switching costs, the relative price of substitutes is solely a function of current situation because customers can rapidly switch between the product and the substitute. 2.4.2 Buyer propensity to substitutes Customers with different circumstances do not have equal propensity to substitutes in a given economic motivation. Differences in circumstances would lead customers to respond to a given relative price of substitutes. Customers who are satisfied with a hotel firm's services and are non-price sensitive may have lower propensity to substitutes. 2.5 Intensity of Industry Rivalry More competitors in an industry cause lower differentiation between competitors. The large excess of industry capacity would engage hotel firms in intense competitive rivalry. The net effect is a less attractive competitive environment in which profit potential is lower. 2.5.1 High fixed costs Hotels do not entirely utilise their full capacity. Excess capacity exists in the hotel industry depending on the season and price competition depends on the cost structure of the organisation. High fixed costs in hotel operations and seasonal excess capacity tends to be associated with heavy discounting and industry-wide losses. Discounting increases intensity of rivalry between hotel firms. 2.5.2 Product differences In a service oriented business such as hotels and resorts, the products are largely differentiated. In such circumstances, price is only one variable influencing customer choice and competition occur primarily based on quality, service design, advertising and promotions. Competition is intense but at the same time profit margins tend to remain at healthy levels. 2.5.3 Industry growth rate Growth rate of the industry depends on the maturity of the market in the region. China has high market growth rate which attracts new entrants and competition. Europe and US have a mature market where intense competition between hotels are focused on acquiring market share from each other in order to achieve growth. 2.5.4 Brand identity Brand reputations of major competitors are also strongly positioned in the regions where Shangri-La operates. Intense competition among competitors is visible through their pricing and promotion strategies. 2.5.5 Switching costs There are no switching costs of customer from one competitor to another. These circumstance further increase rivalry among hotel brands. 2.5.6 Diversity of competitors Luxury hotels and resort has less diversity in competing products. Lesser diversity would intensify rivalry among hotel firms. 2.5.7 Exit barriers Hotel resources are durable and specialised. Their physical assets are capital intensive. Employees are entitled to job protection. With these circumstances, barriers to exit are substantial even if fixed costs are high. 3.0 INTERNAL ANALYSIS 3.1 Resources The resources of Shangri-La are the firm's most fundamental characteristics which are their tools and their personality. These are the individual assets of the firm such as items of capital equipment, employee skills, brand names, and the like. 3.1.1 Tangible resources: 3.1.1.1 Physical resources In reference to the case, Shangri-La Hotel has 50 hotels and $842 million in revenues. It has a total inventory of 23,000 rooms across 39 locations. The company has over 40 projects under development in Asia, Europe and North America. The land and location values can be used in strategic planning. 3.1.1.2 Technological resources Technological resources include booking and reservation management system, property management system, and other information management software and hardware. Other resources include state of the art hotel amenities and functional services essential for delivering quality accommodations. 3.1.1.3 Products and services Shangri-La provides several products and services with their hotels and resorts aside from luxury accommodations. The hotel services include suites, deluxe rooms and restaurants. The resort services include service apartments and spa. The hotels also offer guest recognition programmes for loyal customers through their Golden Circle program where guests are treated with special attention. 3.1.2 Intangible resources: 3.1.2.1 Brand The company's brand includes Shangri-La Hotels, Shangri-La Resorts, Traders Hotel, and Chi, The Spa. Shangri-La Hotels are five-star luxury hotels located in premier cities across Asia, the Middle East, and future hotels in Europe and US. Shangri-La Resorts offer customers a relaxing and engaging vacation in some of the world's exotic destinations. Traders Hotels, the company's four-star brand, are alternative choices for value-conscious and price-sensitive customers and business travellers. Chi, the Spa at the Shangri-La is inspired from traditional healing practices from China and the Himalayas where expansive spa suites are available for the personal well-being of the customers. 3.1.2.2 Image The Shangri-La image reflects Asian hospitality, serenity and caring service. The name is recognised by customers as synonymous to trusted and quality service and accommodations. 3.1.2.3 Positioning Shangri-La has positioned itself as a market leader in Asia in the segment of luxury hotels and resorts. The products and services that the company have are well differentiated from competitors and it is offered at a premium price. Shangri-La's brand is promoted as Asian hospitality to its customers. 3.1.2.4 Human resources As of case date, the company employs 18,400 people in all its operation. Training and development is a priority through the Shangri-La Academy that promotes a standard service for customer satisfaction. The Academy is also used as a career growth path for employees. By investing heavily in employee development, the company was not only making its employees valuable to Shangri-La but also to its competitors. 3.1.2.5 Leadership Shangri-La utilises a 5-level organisational design. Level 1 includes divisional managers. Level 2 involves departmental managers. Level 3 includes sectional managers. Level 4 involves front-line supervisors. Level 5 encompasses all front-line employees. Each level has separate guidelines, discretion and decision-making power. Authority is delegated across all levels. 3.2 Capabilities 3.2.1 Operation The operations of Shangri-La are centred on its service model which they named as "Shangri-La Hospitality". With its Asian foundations, Shangri-La's service model of "Shangri-La Hospitality" was built around five core principles: respect, humility, courtesy, helpfulness, and sincerity. Resources are invested in the service model in order to strengthen their commitment to highly personalised guest service. Consistent performance of their hotels is made possible through their hotel management capability. 3.2.2 Marketing Marketing of Shangri-La hotels and resorts are localised by the country it operates. Marketing strategies includes promotions, advertising and pricing. Brochures and hotel information are readily available on site and on the Internet. The company has partnership with different travel firms, tourism agencies and airline companies in order to heighten their market presence and to increase customer awareness on their products and services. 3.2.3 Information technology Information on market demand and guest profiles can be accessed from different hotels of the company. Communicating and networking between the organisation have been more efficient and effective in maintaining a communication network and channels. 3.2.4 Finance and accounting The company has generated revenues of $842 million, as of case date. At present, it has increased their revenues by 12%. Both room and food & beverage revenues continued to improve and occupancy rates of Shangri-La hotels increased to 73% in 2005, compared with 71% for 2004. While hotel operating costs were market-specific, labour, utilities, and maintenance costs together accounted for approximately 32% of gross operating revenue in a typical Shangri-La property in Asia with2}% due to labour costs and the remaining l2% due to utilities (7%) and maintenance (5%) costs. 3.3 Core Capabilities/Competencies Shangri-La's core competencies are the collective learning in the organisation. The core competencies of the company are centred on their ability to learn and innovate in order to enhance the customer satisfaction and perception of their services. 3.3.1 Ability to learn (as a competitive advantage) The ability to learn has become a competitive advantage for companies in a highly competitive industry. Shangri-La has enhanced its commitment to learning through the Shangri-La Academy. The academy teaches and trains employees from different hotels in order to transfer skills and knowledge from one country to another. It also develops a standardised service model to the whole organisation for consistency of customer service. 3.3.2 Ability to innovate (as a competitive advantage) Innovation is important in order for an organisation to grow and compete in the world market. In Shangri-La, innovation at the corporate level is highly visible in the design and location strategies of their hotels and resorts. At the business level, employees are trained and developed in their ability to innovate in terms of their decision-making skills when facing a customer. As an organisation that is committed to personalised guest service, front-line employees must be creative and innovative in addressing concerns from customers. 4.0 GAP ANALYSIS AND SUMMARY 4.1 Macro Environment Analysis- Business Strategy Gaps Opportunities in China for expansion projects are perceived as profitable for the company even if the political atmosphere of the country has several restrictions and uncertainties. However, Europe and US are experiencing economic slowdown that may affect the performance and return on investments of the company's entry to market projects. The increasing wage requirements for Asia, Europe and the US are threats to the company that can affect their profit margins. Employee salaries eat up a large chunk of the company's cost drivers. Technological advances in management systems can be a valuable resource for Shangri-La in terms of performance management, asset management and customer relations management. Government regulations on environmental issues can be recognised by Shangri-La as an opportunity to promote social responsibility. As people become more concern for the environment, an organisation that promotes itself as a company that cares for the environment and the community can boosts its image and reputation by implementing environmental management and safety. 4.2 Industry Analysis- Business Strategy Gaps There is a perceived threat for new entrants in the Chinese market because of the attractiveness in the industry. High threats in industry rivalry are observed in matured markets such as Europe and the US. Bargaining power of employees as the primary supplier of service increases in the hotel industry because of an increase in demand of labour as well as wages. The bargaining power of buyers increases in regions of high competition because of different choices available to them. 4.3 Key Competitor- Business Strategy Gaps Top competitors of Shangri-La in the Asian market are Banyan Tree Hotel, Aman Resorts and Four Seasons. However, Shangri-La is the market leader in the region where they have the competitive advantage. Threats from competition are not high. For the European and the American market, competition is high because of the presence of major hotel players in the region. Shangri-La is a late mover in the market and has the disadvantage of breaking barriers of entry and counter-acting rival retaliations. 5.0 STRATEGIES 5.1 Current Strategy The current strategy of Shangri-La is focus-differentiation in the hotel market. Their focus is on the luxury hotels and resorts market segment. The products and services that the company provides are well-differentiated from competition through their Asian inspired service model and hotel designs. Quality of service and commitment personalised guest relations have gained the company a premium price in the market. 5.2 Business Strategy The business strategy of local Shangri-La hotels is centred on guest satisfaction through effective training and development of front line employees. In order to differentiate their services from other hotels, personalised guest services are provided so that customers can feel that they are valued in the organisation. Their operations strategy is focused on quality service, efficient booking and reservation and effective customer relations. Human resource strategy is concentrated on talent recruitment and management as well as lowering employee turnover. 5.3 Corporate Strategy The corporate strategy of Shangri-La is on expansion of its market presence in different regions of Asia and also entry to markets in developed countries such as Europe and North America. This strategy aims at growing the company's revenues and increasing its profitability. 5.3.1 Does the organization plan to grow (profitably) Growth and profitability is the focus of the current corporate strategy while taking advantage of the opportunities that the company has faced. Shangri-La has several hotels and resorts expansion projects under development in Asia, Europe and North America. The company also initiated some management partnership with various third-party hotels through their hotel management services. 5.3.2 How does the corporation create value across the business The organisation create value across the business through their supply chain management initiatives such as partnership with suppliers, training and development of employees, improvement and renovation of facilities, and partnership with channels of distributions like travel and tourism agencies. Effective and efficient information technology focused on communication and network between hotels creates added value in the business. 5.3.3 What position does corporation want to achieve The organisation is the market leader in luxury hotels and resorts in Asia and aims at defending such market position. In the rest of the world, Shangri-La aims at entering the markets in Europe and North America and become competitive by taking a piece of the market share. 5.3.4 Diversification The organisation is focused on the luxury hotel business. Diversification in the corporate level is not visible. 6.0 IMPLEMENTING STRATEGY 6.1 How are they implementing this The strategies are implemented through different initiatives. The corporate mission and values spells out the commitment of the organisation in providing the best service to customers. Resources and capital investments are provided in order to fund the projects under development. The Shangri-La Academy was established to train and develop employees. Budgets were allocated in order to train potential assets of the company. 6.2 How is the implementation of strategy affected by leadership, people and culture The success of the business and corporate strategies are dependent on the commitment of management and people. The management of Shangri-La are keen on improving the performance of the hotels and resorts and they are committed to make the company profitable and sustainable. Corporate events and human resource initiatives are made in order to inform the people of the company's direction and performance. Internal marketing is used in order to educate the employees and make them aware of the different programs and strategies of the company. The Shangri-La Care program is implemented in order to establish a corporate culture of respect, humility, courtesy, helpfulness and sincerity. The Shangri-La Care program has reached four modules of promoting the Shangri-La Way philosophy. 7.0 RECOMMENDATIONS As for business level, it is recommended that the company would diversify its business in order to generate more revenues and spread out the high fixed costs of operations. The company can diversify in the entertainment industry by providing casinos and gaming products and services. They may consider creating a unique brand for their restaurants in order to increase customer awareness and recall. The Shangri-La Academy is an effective means of training and development. It is recommended that the company would increase its resources and provide more academies in different parts of Asia. The academy is also a good business to diversify where it will be open to people outside the organisation. With the increasing demand of skilled and trained workforce in the hospitality industry, the academy can be a good source of revenues. Making the academy as an independent entity that generates its own revenues will also provide increased knowledge and experience to the company which is essential for catering different locations with different cultures. As for the corporate level, it is recommended that the company would exploit the growing market of China through additional projects on regions with high economic activity and tourist traffic. China is expected to grow in the years to come and the demand for hotels would also grow. The European and American market is experiencing economic downturn. It is not recommended to focus the organisation's expansion in these areas because of its economic uncertainty and lack of attractiveness. A market presence can be the primary aim for projects existing in the area. The barriers of entry are high in this region due to large capital requirements and increasing wages of labour. As a late mover in the market, aiming for market leadership through expansion of operations can be very costly. On the other hand, emerging and growing markets such Middle East, India, Russia and Africa are good regions to enter. Emerging and growing markets have increasing income which can be exploited. These markets have also increasing demands for hotel accommodations and services. It is recommended that the company should consider moving in these countries. Investing in effective and efficient information systems can add value to the company. It is recommended that the company would acquire a unifying information system that would manage the knowledge and information gathered around the business. This would make the hotel operations smooth and the hotel management more effective. It is also recommended that the company would consider backward integration strategies that would acquire travel agencies in order to boost the company's capabilities of attracting more guests. Customers appreciate a personalised service with less hassle and lesser time, acquiring travel agencies can help the business travellers and tourist in their dilemma of reservations and booking. 8.0 POSSIBLE FUTURE DIRECTION The success of Shangri-La in Asia can be an effective formula for successful ventures in different parts of the world. As a company that aims at competing at a global scale, Shangri-La can be a leading rival of major players in the industry. The company has more opportunities to create a diverse range of products and services. The Spa business can become more profitable as the population of develop countries age and as people become more health conscious. 9.0 REFERENCES Datamonitor. (2008). People's Republic of China - Country Analysis Report. London: Datamonitor. Datamonitor. (2008). United Kingdom - Country Analysis Report. London: Datamonitor. Datamonitor. (2008). United States - Country Analysis Report. London: Datamonitor. Porter, M. (1985). Competitive Advantage. New York: The Free Press. Sadler, P. (1993). Strategic Management, Sterling VA: Kogan Page Limited. Shangrila. (2006). 2006 Annual Report. Retrieved June 20, 2009, from Shangri-La Investor Relations - Financial Reports: www.shangri-la.com Shangrila. (2007). 2007 Annual Report. Retrieved June 20, 2009, from Shangri-La Investor Relations - Financial Reports: www.shangri-la.com Shangrila. (2008). 2008 Annual Report. Retrieved June 20, 2009, from Shangri-La Investor Relations - Financial Reports: www.shangri-la.com Read More