The Global Expansion Strategy of Australian Hotel Chain - Essay Example

The global expansion strategy of Australian hotel chain - Mantra Hotels in India" Executive Summary: The two densely populated nations India and China have also emerged as world fastest growing nations, and today they have become the center of foreign investment and business activities. The researcher has chosen India as a lucrative destination for international entry of which hotel industry is ‘second largest in Asia-Pacific’ region after China. The researcher has revealed that there is acute shortage of over 100,000 hotel rooms in India in 2009 – 2010 and the luxury hotels account for only 30 - 35% of India’s hotel industry (Mathur, 2008). Hence, it is recommended that Mantra Hotels should enter in Indian market through joint venture strategy so that it could share the risk on investment with local partners. Also, the strategy would enable the company to avert any socio-cultural management barriers, thereby maximising its efficiency and effectiveness. In short, the following points should be highlighted, 1) India’s hotel industry is highly lucrative 2) Politically certain and stable. 3) Government offers various incentives such as tax holidays to foreign investors. 4) Hotels and resorts could be opened in Mumbai, Bangalore, Kolkata and Delhi.   Australian Company: Mantra Hotels – www.mantra.com.au Chapter# 1 - Introduction: The rapid developments and technological advancements in the last 3 decades have resulted in globalisation, universalisation and internationalisation of this world. Indeed, the advent of the internet, infrastructural development and transportation have contributed significantly in dissemination of information, open communication and socialization worldwide. Nevertheless, the reduction of trade barriers and constrictions (such as quotas, tariffs, custom duties etc.) have not only resulted in growth of international trade but also raised the standard of living across the globe. The free trade agreements (NAFTA, SAFTA), eradication of quota system (WTO and GATT) and minimisation of duties are some of the major steps that provided new investment and business opportunities to enterprises. For instance, the ease of communication and construction of secure and reliable transportation networks provide firms an opportunity to expand in global markets and enhance their business volume and monetary profits. (Hardy et al, 2005) It should be highlighted that Australia is considered as a developed nation, with individualistic culture and values, among international community because of its phenomenal economic growth in last few decades. It’s highly developed secondary (industrial and manufacturing) and tertiary (services) sectors have contributed in nation’s economic prosperity and well – being. Nevertheless, the Per Capita Income in Australia is between the range $38,000 – 39000, which shows that Australia is among the rich nations worldwide (CIA Fact book - A, 2010). Indeed, the country was adversely impacted from global economic downturn and recession during 2008 – 2009, which resulted in economic contraction and decline in nation’s gross productivity and aggregate consumption. However, the economy is now recovering quickly after global shocks and the economic pundits are hopeful that Australia would once again observe positive growth rate in upcoming future. (CIA fact book - A, 2010) It is worthwhile to mention that the global economic outlook has improved after improvement in major economies such as USA, Japan, Germany, UK, France, Italy etc. In addition, the emerging countries, especially China and India, have already recorded single - digit growth during 2008 – 2010 and now expanding their economies faster amid improvement in global business environment (CIA fact book - I, 2010). It should be emphasised that it is the ideal time for companies from rich developed nations to invest in either of above mentioned emerging nations, because there is greater probability that business will flourish and profits could be generated. In fact, the analysts have expected that around 10 million foreign tourists and 350 million domestic travelers will demand budget and luxury hotel rooms across India during 2010 (Maps India Report). The author of this paper conducted extensive research on India and analysed that the country has unlimited potential due to increase in market size, especially the growth of middle – middle, upper – middle and elite market segments. India is, indeed, a country with GDP (Purchasing Power Parity) of over $3.5 trillion and a population of around 1.25 billion in which 350 million belongs to middle and elite social classes (CIA fact book - I, 2010). Also, the country has increased its exports as well as been developing its tourism industry because of ancient cultural heritage and historical importance. For instance, the figures about foreign business personnel, tourists and travelers visiting India have been increasing every year because of political certainty and excellent image among the international community. Also, India has a large coastal line of 7,000 Km because it borders with Arabian Sea in the South (CIA fact book - I, 2010). In the light of above, the research has chosen India’s hotel industry as one of the most lucrative business sectors for investment. Indeed, Mantra Hotels could establish 3-, 5- and 7- star luxury hotels and beach resorts across India so that it could not only expand in potential global markets but also reduce dependency on core Australian markets for business revenues. In short, the Indian tourism and hotel industry will thrive in future because of economic expansion and GDP growth in this emerging nation (Rowthorn, 2006). Chapter# 2 – Globalisation and International Entry Strategy: The researcher in this section will throw light over the 5 main drivers (economic neo-liberalism, spread of international governance and regulation, finance / capital spread, technology and socio0cultural convergence) of globalisation to further intensify the importance of international trade and expansion in lucrative foreign markets. It is worthwhile to mention the fact that Keynesian economic principles were followed across the world prior to 1970s. Nevertheless, some of the major contributions of Keynesians were formulation of ‘fiscal’ (government control and taxation system) and ‘monetary’ (defining discount or interest rates, controlling inflation and checking exchange rate fluctuations) (Palley, 2004). However, the Keynesian economics observed a breakdown in 1970s followed by the failure of Bretton Woods Agreement in 1973 (Blunden, 2006). In fact, the Keynesians economics was successfully replaced by Neo-liberalism, which endorsed the idea of free market enterprise system. For instance, neo-liberalism has supported that the interference of government in business markets (labor, goods, commodity and financial) should be minimised and let market demand and supply forces determine the equilibrium level of output, wages rate and employment. Indeed, it also highlighted that market efficiency could be enhanced because of increase in competition among operational firms in the industry (Palley, 2004). In short, this boosted the concept of private sector, which then invested heavily in the potential business sectors because of minimum intervention by state authorities. Nevertheless, the subsequent technological advancements coupled with implementation of neo-liberalism practices resulted in a globalised world, where firms from any region or country could interact with entities of other nations and offer global products to customers worldwide. Many Australian firms, such as Quality Farm Products (QFF), Pitcher Partners, Hartz Barn Wines, Soniclean Pty Ltd etc., have expressed inclination to enter in Indian market (setting up production facilities, trade offices or distribution networks) as part of their global expansion strategy (IACC Report, 2010). Second, the United Nations has also developed a ‘Global Compact’ which aimed to spread international governance, standards and regulations that are to be followed by firms operating in any nation. Indeed, the Global Compact includes principles to curb corruption and embezzlements, discrimination against employees, child labour, environmental degradation, human rights violations, organisational code of conduct, workplace conditions, health and safety of employees etc. In addition, there are international quality standards and certifications that have to be followed (Internet: UN Global Compact). Third, an international monetary framework was formulated and applied after collapse of Bretton Woods Agreement, which does not intervene or adjust currency exchange rates rather allow market forces to determine the value of currencies. In fact, balance of payments (BOP) plays an important role in this scenario. Also, the new framework endorses the idea of free market system because it gives greater value to private sector, which contributes in global financial and capital expansion. Indeed, this has driven the concept of globalisation as international markets are established, where enterprises from countries worldwide are indulged in trade and business activities (Chowla et al, 2009). The last driver of globalisation was Social and Cultural Convergence across the globe. Indeed, this could also be called as ‘Universalisation’ because world has become a global village, with fewer communication barriers and constrictions. Indeed, the free flow of information, knowledge and ideas has resulted in adoption of cultural and social values that are accepted worldwide. For example, western dresses have gained popularity and widely worn in Asian nations with strict eastern values and norms, including sub-continent countries such as India, Pakistan and Bangladesh etc. Similarly, products offered by multinational (FMCG, Electronics, Plastics etc.) companies are also being sold in India and other Asian nations. For instance, supranational corporations have established their separate subsidiaries in these nations that work in collaboration with parent companies. Also, the international festivals and events such as Christmas, Easter, Valentine’s Day, Mother / Father’s Day etc. are also celebrated in countries with eastern and more collectivistic values. Having explained the above, it should be noted that this globalised world has entered into 21st century in which competition among existing businesses has increased considerably amid free markets and free trade agreements. It is, therefore, a demand of this century to adopt the strategies of diversification and market development by entering into new business sectors as well as offering existing products to new customers in different geographic regions respectively. India has been providing facilities to Australian companies, so Mantra Hotels should also embrace this idea of international market entry to increase its market size, reach and financial gains (IACC Report, 2010). Chapter# 3 - PESTLE Analysis: The following chapter will provide a country wide analysis of external business environment and investment climate across India. The six factors I would like to elaborate on are as follows: 3.1 - Political: As far as the political factors in India, the chosen destination, are concerned, it is worthwhile to mention that the nation claims itself as world’s largest democratic secular nation where army does not intervene in state affairs and institutional matters. The civil authorities and institutions in India are extremely strong and government / rulers work in collaboration with such authorities to improve India’s image in the international community. In addition, the country has established strong diplomatic, economic and military relationships with all major powers such as America, Britain, Russia, France, Germany, Italy, Israel, Japan and now even China etc. Indeed, the nation has strong foreign policy followed by a stable internal political environment, which compels foreign countries to invest and enhance ties with India. Apparently, there is some political uncertainty and societal unrest across India (independent movements in some states) unlike great uncertainty in neighboring enemy countries (previously a part of sub-continent – India) including Pakistan and Bangladesh, where institutions are weak and military frequently interferes in state affairs (CIA Fact Book- I, 2010). It is, thus, justified to argue that India (with a huge middle class population) could be the right option for investment and business venture for Mantra Hotel chain because the company would be able to earn respectable profits from its new Indian operations. However, the only factor that needs to ascertained is that India and Pakistan have severe conflicts (on water, Kashmir, line of control, Siachen mountains etc.) and the probability that both nations would engage in a gruesome war in near future is relatively high. Obviously, any such grisly venture would prove to be catastrophic not only for both countries but also for international business organisations (CIA Fact Book- P, 2010). Nevertheless, Australian government authorities are eager to have cordial diplomatic, strategic and economic relationships with emerging India because it is among world’s fastest growing nations (DFAT Report, 2009). 3.2 - Economic: India has become world’s fastest growing economy as it has constantly observed double – digit or 10-12% Gross Domestic Product (GDP) growth prior to recession and almost 6-8% growth even during economic recession in 2008-2009. The country has population of over 1.2 billion in which nearly 350 million citizens belong to middle-middle, upper-middle and elite groups. Hence, India has become an attractive destination for international companies and supranational organisations because of large customer base with better purchasing power (CIA Fact Book- I, 2010). In addition, the nation attracts mammoth amount due to Foreign Direct Investment and the visitors from abroad frequently travel to India for business purposes, for tours and visit to historical places etc. It is, thus, justified to argue that demand of three-, four- and five-star hotels and resorts across India is extremely high. In addition, the demand of hotel rooms in Australia has reduced drastically in 2010 because consumers have tightened their belts, thereby reducing total spending on trips, adventures and tours. Westthorp (2010) summarized the fact that some hostels observed a decline of nearly ‘40 % against last business year’ while others reported business of ‘just 30 % capacity’. Moreover, the appreciation of Australian Dollar against world’s major currencies such as British Pound, Euro, US Dollar has also hampered growth because foreign tourists receive much lesser after exchange than what they used to get last year. It is, therefore, become essential for Australian hotel chains to expand in emerging markets, which would not only reduce their dependency on core Australian markets but also would maximise their sales and profitability. 3.3 - Socio-cultural: It is worthwhile to mention that India’s rapid economic growth created new employment, investment and business opportunities for both local and international entrepreneurs. For instance, the standard of living has increased in last 8-9 years across India because of creation of new middle-middle class segment. Hence, Indian customers are also willing to spend greater amounts on luxurious products, beach trips, leisure activities etc. because of relatively better purchasing power and increase in real incomes. It should be highlighted that this increase in standard would create new opportunities for Australian hotel chain to establish resorts and three-, four- and five-star hotels because the consumer demand has been constantly increasing in this sector (Hosts of India, 2009). 3.4 - Technological: The Australian Hotel Chain could make use of modern and highly sophisticated machinery equipment for construction of international standard budget / luxury hotels and resorts across India, which would not only reduce costs and time but also increase profitability. The domestic competitors, indeed, do not have highly sophisticated technology at their disposal because of technological backwardness. In addition, the organised research and development department of Mantra Hotels would enable the use of modern construction techniques and methods that obviously could benefit Australian hospitality business. 3.5 - Legal: It should be pinpointed that India always welcomes the foreign investors because its government endeavours to grapple with poverty monster and employment. Indeed, the country has eased legal formalities for establishment of subsidiary companies and new joint ventures of local – foreign business firms. In addition, the incentives such as tax holiday (for a certain time period), property leasing and transfer of money rights are also provided as an attempt to entice foreign investment. The hotel sector in India is still in a developing state, so Mantra Hotels could surely contribute in introducing international standards and hotel trends across India (CIA fact book- I, 2010). Nevertheless, the extremist elements in India that place greater value to religious matters, traditions, customs and societal values have formed pressure groups that serve as watch dogs. In fact, these groups protest openly if any foreign firm opts to bring western values in eastern India. For instance, if Mantra Hotels constructs beach resorts for Indian customers / tourists and endorses western cultural values as freedom of expression and personal rights in India, there is greater probability that such groups could protest, criticise, pressurise or blackmail for violation of eastern values, norms and standards. In simple words, these elements use ‘spread of vulgarity’ as an appropriate terminology for those who do not follow Indian dress code at beach resorts. Also, they demand ban on night clubs and presence of bars at luxury hotels and resorts. 3.6 - Environmental Forces: It should be noted that India is an environmentally polluted nation, which has now formulated and implemented certain environment protection laws and regulations to reduce carbon emissions and avert the issue of global warming. Hence, Mantra Hotels has to use appropriate methods and construction techniques that do not threaten environmental security and follow all Indian rules. Chapter# 4 - Porter’s Five Forces – India’s Industry sector analysis: 4.1 - Bargaining Power of Buyers: The bargaining power of targeted customers from upper – middle and elite segments across India is moderate because of relatively stable purchasing power and income level. Indeed, these segments are not adversely affected by surge in inflation and lack of short – term employment opportunities because of strong financial position and wealth accumulation. For instance, these customers do not compromise over comfort, luxury and convenience; therefore, are inclined to spend their holidays in leisure activities at top quality hotels and beach resorts. However, the large middle – middle target segment, which demands budget and affordable price hotels is somewhat affected from inflation and bleak employment prospects because of global economic downturn. Hence, it is worthwhile to pinpoint the fact that bargaining power of such consumers is relatively higher as they tend to demand greater value for monetary spending. Indeed, the Australian market is not fairly attractive because of weak economic scenario and customers are unable to spend greater number of days at Backpackers and luxury hotels amid inflation and exchange fluctuations. It is recommended that Mantra Hotels should enter in Australian market and adopt a rational pricing strategy to entice maximum middle-middle customers. Also, the hotel chain could charge its normal tariff from high income segment (Westthorp, 2010). 4.2 - Bargaining Power of Suppliers: The bargaining power of specific suppliers (raw materials and input providers such as furniture, hostel goods, food etc.) is medium because India is an emerging economy, where international hotel chains have plans for business expansion through construction of new five- and seven-star luxury hotels. At the same time, India’s growth has also been slowed down in last 2 years because of global economic turmoil followed by reduction in exports, closure of industries and unemployment. Hence, large international hospitality businesses with better feasibility reports have real ambitions to invest and enter in lucrative Indian markets, whereas small companies with limited financial resources are more careful in commencing new ventures. Indeed, suppliers’ business is directly dependent on hotels’ business and failure of the latter would also adversely impact the sales of suppliers (Jamieson, 2010). 4.3 - Potential New Entrants: Indeed, the aggregate demand of hotel rooms and resorts has not observed massive decline by foreign tourists, adventurists and business personnel although it somewhat reduced in 2009 compared to 2008 because of poor global economic outlook. In contrast, the domestic demand remained almost the same. Nevertheless, the fast economic recovery in India and improvement in international trade activities have compelled potential investors to redefine their aim of entering and investing in tourism and hospitality businesses across India. It should be highlighted that threat of potential new entrants in this sector is medium because of relatively higher returns and better consumer response after improvement in employment, business activities and real incomes. However, international firms are keen to enter in potential Indian market as this sector is still in a developing state (Hosts of India, 2009). 4.4 - Threats of Substitute Products: The threat of substitute products is relatively higher because existing international and domestic hotel chains and resorts could introduce additional services, attractive packages, and offers to tempt maximum entrepreneurs, adventurists, normal visitors and tourists. Indeed, this would be an attempt to increase market share in the wake of rising competition and moderate response at domestic hotels because of higher inflation (for middle-middle customers) across India. Nevertheless, luxury and budget hotels expect that demand of hotel rooms would pick up in September, October and November because a large number of foreign buyers would visit India for business deals prior to Christmas in western nations. In simple words, price factor will play extremely important role in contemporary economic conditions as resort owners and strategic planners will opt out to make the most of this going business season (Hosts of India, 2009). 4.5 - Rivalry among Competitors: It is worthwhile to mention that rivalry among domestic resorts, hotels chains and international competitors would be higher because of any expected price-wars and new product offerings in today’s challenging business environment. Indeed, Mantra Hotels have to focus on Service Differentiation, Value Addition, Proposition and effective Positioning followed by an aggressive advertising (informative and persuasive) to obtain a clear and distinctive image in the minds of consumers. In addition, the entrance of new hotel chains will further increase the competition and lead to rivalry (Srivastava, 2010). Chapter# 5 - SWOT Analysis: 5.1 - Strengths: 1) Mantra Hotel brand is well-recognized and widely accepted all across Australia because of premium quality hotel accommodation and resort services provided to target market. 2) Extensive financial resources at disposal because of successful operations in Australia and New Zealand. It has already received the Best Hotel Group 2010 award from AFTA National Travel Agency (Internet: Mantra.com.au). 3) Focus on innovation, differentiation and positioning through implementation of new ideas and additional services. 4) Could introduce new trends in Indian Hotel industry by replication of ideas implemented in Australia. 5.2 - Weaknesses: 1) Management issues may arise because of cultural differences between Australia and India. 2) Could face problems in finding appropriate domestic suppliers who could ensure smooth supply of food products at reasonable prices. Obviously, it will not be feasible to import directly food stuff from Australia. 5.3 - Opportunities: 1) Improvement in global economic conditions followed by rapid growth of Indian economy. Huge expected demand of around 10 million foreign tourists and 350 million domestic travelers by 2010 (Maps India Report). 2) Scarcity of over 100,000 hotel rooms to cater travelers across India (Hosts of India Report). 3) Chances to expand business to Delhi, Mumbai, Kolkata, Bangalore etc. 4) Future growth of Indian economy will enable business expansion and sustainability in the long run. 5) 4- and 5-star hotels are just 30% of Indian hotel sector, which is the evidence of huge scope (Mathur, 2008). 5.4 - Threats: 1) Open threat of potential new entrants as many international hotel chains are inclined to commence new business projects across India (Mathur, 2008). 2) Threat of Substitute products is higher from existing competitors that may lead to price wars. 3) Any breakdowns in global economy may lead to decline in tourists’ arrival to India that may hamper growth of Mantra Hotels. Chapter# 6 - Conclusions: 1) India is a densely populated nation that hosts 350 million consumers from middle and elite segments with relatively stable purchasing power and real incomes. 2) Hotel Sector across India is in a developing state, as it already faces the dearth of over 100,000 hotel rooms. There is immense business potential in budget and luxury hotel sector. 3) Cultural values and societal taboos have to be followed because of presence of extremist conservative elements in society. 4) Australian Mantra Hotel Chain could introduce new trends in India’s hotel industry. 5) Political certainty because of strong state institutions including civil authorities and judiciary. 6) Ideal destination for foreign investment because of business friendly policies and government incentives. Chapter# 7 - Recommendations: 1) It is recommended to CEO to create a subsidiary and adopt ‘Joint Venture’ international entry strategy. Indeed, risks involved in investment, conducting smooth operations and management could be divided among local and foreign business partners. The domestic partners could be given responsibility of management and administration, which will include implementation of policies, control measures, accomplishment of business targets and performance standards defined by strategic planners (of parent company). 2) To use the promotion-based pricing strategy in the first few months of operations so that brand awareness and recognition could be ensured. Later, the competitive pricing strategy could be used because the industry is open and threat of potential new foreign and domestic entrants is relatively high. 3) To offer products to all three segments including middle – middle, upper – middle and elite. 4) The company could first enter in business of 5- and 7-star luxury hotels and beach resorts, preferably in Mumbai, because it is India’s business hub and the demand from foreign business personnel and tourists for these hotels is constantly increasing. Also, the shortage of rooms will benefit the Mantra Hotel chain. Later, the company could develop budget hotels that are also heavily demanded by domestic travelers as they have to spend in local currency Rupee. (CIA Fact Book, 2010) 5) The company could expand its business to Bangalore (India’s IT hub), Kolkata and Delhi respectively, after investments in Mumbai. 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Palley “From Keynesianism to Neoliberalism: Shifting Paradigms in Economics” [Online] Available at http://www.thomaspalley.com/docs/articles/selected/Neo-liberalism%20-%20chapter.pdf Tiwari, Kuldeep (2010) “Prahladnagar to see mushrooming of 4-5-star hotels this year” [Online] Available at http://www.dnaindia.com/india/report_prahladnagar-to-see-mushrooming-of-4-5-star-hotels-this-year_1359200 Westthorp, Tanya (2010) “Backpacker numbers plummet on Coast” Gold Coast.com [Online] Available at http://www.goldcoast.com.au/article/2010/06/29/233451_gold-coast-news.html Appendix: Available at http://www.4hoteliers.com/4hots_nshw.php?mwi=6857 Number of hotels and restaurants in India: Hotel category No. of Hotels No. of Rooms 5 star deluxe/5 star 165 43, 965 4 Star 134 20, 770 3 Star 505 30,100 2 Star 495 22,950 1 Star 260 10,900 Heritage 70 4,200 Uncategorised 7,078 - Total 8,707 1,32,885 Restaurants 12,750 Available at http://www.hostsindia.in/index.php?option=com_content&task=view&id=18&Itemid=32 Read More