Strategic Analysis on the UK Hotel Industry - Report Example

Strategic Industry Analysis – UK Hotels & Motels Industry Strategic Industry Analysis – UK Hotels & Motels Industry Executive Summary The following report is focused on the UK Hotels and Motels Industry. The industry is explained for its business, participants and regions it is typically dividend into. The industry is analyzed using two methodologies for its strategy and key drivers. These methodologies are PESTEL analysis and Porter’s Five Forces Model. PESTEL analysis evaluates the factors that prevail in the environment while on the other hand Porter’s Model examines the characteristics of the industry. Both analyses would then formulate potential opportunities and threats for the target audience of the present report that is any new individual or company planning to enter into this industry. The report concludes with key drivers for change and success in the selected industry. Industry Profile The UK Hotels and Motels Industry comprises of establishments that are providing short-term lodging including hotels, motor hotels, resort hotels, and motels. In addition to the lodging services they also offer services, such as food and beverage services, recreational services, conference rooms and convention services, laundry services, parking, and other services1. The UK hotels and motels industry could be segregated into different groups according to the type of customers they serve including domestic consumers, domestic business and international business & consumers. Evaluation of the UK hotels and motels industry suggest that the main revenue drivers other than providing accommodation are from services such as casinos, conferences, matrimonial gatherings, social functions, shops and telecommunication services. A recent survey carried out by Data Monitor, a research company, highlighted that the total revenues of the UK Hotels and Motels Industry were $35 billion in 2008 that implies a CAGR of 5.6% over the period 2004-2008. However, the same report expects that the industry will slow down because of the poor economic conditions currently prevailing in the global market and lower spending on travel and tourism. The industry is expected to grow at a lower CAGR of 3% till 2013 to reach a level of $40.1 billion2. PESTEL Analysis The PESTEL analysis underlines the political, economical, social, technological, environmental and legal factors which affect businesses in the global hotels and motels industry. Political The international political scenario is negating the growth prospects of the hotels and motels industry. The political risks have direct correlation with the investment decisions of international hotel companies in developing countries. Political instability in a country creates social unrest that could affect the flow of travellers to that country that may in return affect the sales of hotels and motels. These political risks could also be viewed as the government interventions and local bodies’ inferences about foreign businesses entering the market. These factors could be considered as threats for hotel and motel business and can surely limit the business ability to remain feasible. Economical Over the last decade or so the industry has experienced both upside and downside trends mainly due to the changing global economic scenario. The industry is currently facing greater challenges due to poor economic turnover. The major reasons for this situation are that customers’ worldwide have become more cautious about their spending on travelling and tourism. The poor economic conditions are considered as threats to the business as returns shrink and for new business the breakeven levels of investment becomes unachievable in the short or medium term. However, as the economic situation moves towards betterment there could be opportunities for businesses that would have worked out their strategies in low times well. Social The global social issues pertaining to the terrorism, prejudice, and restrictions on travelling contribute to lower demand for lodging in certain tourist areas. Issues like safety, personal rights and support from the local administrative bodies, impact upon decisions and attitudes of travellers. Difficulties in visa arrangements and scrutiny at airports have also affected the willingness of travellers from certain countries to visit countries. Fears of diseases such as SARS, bird flu, Swine Flu etc. can also contribute to lower demand for lodging in the UK. These issues are threats to the hotels and motels industry as their extent and degree of influence is increasing that could push down further the demand for lodging. Technological Technology contributes a major role in the success of hotels and motels business. Customers seek innovative services and provision of technological solutions. Technology can also improve the booking and allocation systems. In addition, the systems pertaining to accounting and reporting can also be supported by induction of better technologies. In this way companies can save their administrative expenses and offer better services to their customers3. The use of technology is considered as an opportunity for businesses to improve their efficiency, attract new customers and at the same time achieve customer loyalty. Environmental The natural catastrophes and traumas are also affecting accommodation business particularly in coastal areas of the UK. Tougher regulations over conservation and environmental issues related to business operations imply higher costs of operations and they can also result in penalties and litigation cases against companies. Furthermore, the safety issues in the working environment also require due consideration. Certain environmental factors that are beyond control are threats to the business whereas others can be managed to create opportunities. For example, certain hotels are marketing themselves as green hotels and environmental friendly that could attract cautious customers. Legal The legal framework of countries affects the hotels and motels industry. This could be in the issues pertaining to the safeguard of trademark rights, foreign investors’ rights, contractual obligations, alcohol servings, union rights, employee relationships and overall business rights4. The existence of a strong and unbiased judicial setup is necessary for businesses to feel secure and protected for their rights. Some countries have poor framework supporting both customers and companies which could affect the overall business. These issues have mixed response such that they can be considered as threats in certain countries with weak framework whereas they could be favouring businesses to bring investment and create business and employment opportunities. The key drivers of change are presented from the above analysis as follows: Key Drivers of Change Market Globalization With globalization hotels need to adapt ways and change their systems to meet the requirements of diversified customer profile comprising of travellers and tourists from different countries having differences in behaviour and needs. Furthermore, pricing strategies of companies are also affected as customers have become more aware of the alternatives and can easily move in the market as the switching cost is very low in the industry. The expectations of customers are varied and hotels need to be able to fulfil them in the best possible manner. Moreover, competition in the industry makes it difficult for companies to compete and remain profitable. Information Sharing Customers do tend to rely upon the information other individuals share about their experiences at a particular hotel to plan their lodging. The internet networks are a source of such information where individuals can provide their experiences. This has added pressures on hotels to keep their quality standards high and provide the best service to retain customers and their loyalty. Technological Integration Technological advancements are at the basis for major transition in the business activities of hotels. They can help businesses to achieve integration at all levels of business including distribution, channel and content management (Hotel Marketing, 2008). With new technologies such as mobiles and PDAs have pushed companies to develop systems that can help customers to experience a newer side of business. Climate Change As global efforts converge on the effects of climate change on human beings the hotel industry is also faced with challenges to cut back their carbon emissions. Hotels need to ensure efficient energy management and waste disposal to reduce their burden on the environment. Global Economic Scenario Global economic recession has pushed some companies to go out of business. This requires a change for better risk management and understanding of the business cycle that tends to repeat itself after some time. The companies need to prepare themselves for such tougher conditions and have recovery plans for getting back into the successful stream of business. Globalization of Labour Regulations The hotel industry is labour intensive and problems with managing relationship with labour groups can force change in business. Globalization and understanding of labour rights have caused business to be more watchful and manage their relationships in a better way. Cost Drivers Every business aims to cut back its cost of operations. This could have affects on the long term viability of the business. Similarly, hotel industry where it is faced with low customer traffic and consumer spending needs to focus on the ways to reduce its costs of operations. This could be achieved by gaining efficiencies in their activities. Porter’s Five Forces Model The Porter’s Five Forces analysis is carried out in the following highlights market forces including buyer power, supplier power, new entrants, substitutes and rivalry. Buyer Power The hotels and motels industry is considered to be highly competitive and mature it is therefore important for companies to focus on their branding strategies5. The switching costs are very low in the industry therefore companies through branding activities can create customer affiliations that can help them in repeated sales. Innovation within premises, loyalty programmes and marketing and selling via internet could allow companies to direct their efforts in much regular and rigorous manner to achieve greater sales. Buyers are also highly price sensitive other than in the premium segment of the market therefore pricing strategy needs to be competitive and in line with the market segment companies want to serve6. Supplier Power Suppliers in this industry are all those parties which are related to the industry in different area of operations. These include land owners, property developers, employees, franchisees, goods suppliers etc.7 and companies’ dependency and relationship with these parties could either help the business to grow or it may severely affect its long term profitability and sustainability. New Entrants The entry barriers to this industry are relatively low but require intensive capital investment for new entrants. Although the market is considered to be mature and saturated there is still potential for new entrants as the demand for luxury and even cheaper accommodation is on the rise at the same time. However, this needs to be considered in light of the poor economic conditions that are presently affecting the tourism and travelling industries8. Substitutes The hotels and motels industry has a number of substitutes that could affect the business of its participants. These substitutes exist in the form of camping, caravans, paid-guests residential setup etc. The switching cost in some cases is very negligible. However, the threat of substitutes is very restricted and it is limited to certain countries where such outdoor activities are common. Rivalry The branding strategy including franchise schemes led by major companies of the industry suggests that the degree of rivalry is quite high. All major companies tend to offer loyalty programs and special offerings to attract customers. In times of economic difficulties low costs hotels can benefit from customer turnover faced by luxury providers. However, the competition between hotels and motels under similar settings and offering similar services is intense and makes the market difficult to penetrate and succeed. Evaluation From the above analysis global hotels and motels industry it could be inferred that factors identified in PESTEL surely have implications for any new business that plans to set up a new hotel or motel. There are certain factors that are present in the business environment that negate the possibilities of a successful and sustainable business. However, businesses needs to strategically plan out to succeed taking into consideration the above analysis presented as Porter’s Five Forces Model. The competitive forces in the industry suggest its hypercompetitive nature where there are a large number of competitors and it is not possible for one company to hold its competitive position for a longer period. It is observed that decrease in pricing for lodging does tend to increase the market share little bit but revenues do not increase relatively. This implies that demand is inelastic to the pricing strategy9. The degree of rivalry between major companies is fierce however it is moved away from price war towards developing unique branding strategies and innovation to attract customer loyalty. Moreover, the life cycle of the industry suggests that the industry is at its maturity level and it is saturated. The key drivers in the environment identified above suggest that the market conditions are not in favour of any new business to find suitable opportunities10. Perhaps different innovative and environmental friendly approaches can help new businesses. Possibilities do exist where companies can innovate and offer high quality services at competitive prices. The threats in the market in the shape of political, social and economical stability surely pose a difficult scenario for new businesses. The present market conditions make it very difficult for new businesses to make an entry into this industry when poor macroeconomic conditions prevail globally and the industry’s competitive forces have set up higher entry barriers. Globalization of major companies entering into newer markets with large foreign direct investments must raise concerns for smaller local businesses. However, this could also be viewed as an opportunity to work with major companies on franchise basis. Assessment of governments’ role in placing higher limitation on foreign companies to protect their local industries has impact on the competition making it more difficult for new businesses to enter foreign markets. Furthermore, it can be concluded that the external forces contributing to the business structure, relationships, existence and profitability of companies are on a moderate level that suggests that there is still great potential in the industry by exploring new locations and offer better services to customers. Bibliography Data Monitor. (2009). Hotels & Motels in the United Kingdom. New York: Data Monitor. Enz, C. A. (2009). Hospitality Strategic Management: Concepts and Cases. Retrieved March 16, 2010, from Google Books: http://books.google.com.pk/books?id=x77o93fmiKQC&dq=hypercompetition+in+hotel+industry&source=gbs_navlinks_s Hong, J. H., Jones, P., & Song, H. (1999). Political Risk and Foreign Investment Decision of International Hotel Companies. Retrieved March 16, 2010, from Hotel Online: http://www.hotel-online.com/Trends/PanAmerProceedingsMay99/PolRiskInvestHotels.html Whitla, P., Walters, P. G., & Davies, H. (2007). Global strategies in the international hotel industry. International Journal of Hospitality Management , 26 (4), 777-792. Read More