Prospects of the Hotel Industry Worldwide - Research Paper Example

 Table of Contents Executive Summary 3 1. Introduction 3 2. Lokharst Hotels – entrance in the UK market 5 2.1 Analysis of the environment 7 2.1.1 Porter Five Forces 7 2.1.2 SWOT analysis 8 2.1.3 PESTEL analysis 9 2.2 Suggested entry strategy 11 2.3 Institutional and cultural differences between the British and the Indian hotel industry 12 3. Conclusions 14 4. Recommendations 15 References Appendices Executive Summary The increase of competition in all markets internationally has led the firms to change their strategic plans in order to keep their position within their industry; however, the effects of globalization on business activities cannot be easily controlled. Even firms that have a significant position in the international market may face pressures that require emergent measures; the positive performance of a firm in its market cannot guarantee its survival in the future. Lokharst Hotels is a firm well established in the Indian hotel industry; currently, the firm is considered to be the 3rd most powerful in its industry. The review of the firm’s performance up to now led to the conclusion that there are no major threats in regard to its survival – however, this assumption refers to the current market conditions. Current paper focuses on the potential effects of the firm’s internationalization; the firm’s current strategies and the conditions/ challenges of its environment have been studied and analyzed; it is concluded that the entrance of the firm in the British market would result to the increase of the firm’s power in the global hotel industry while its position in the Indian market would be further stabilized and secured. 1. Introduction Lokharst Hotels is among the key competitors in the Indian hotel industry; the firm was first established in 1984; since then the firm’s profitability has been increased at such level that in 2009 the firm ranked 3rd – in terms of its profits – in the Indian hotel industry. The global financial crisis has affected the firm’s performance – a problem common for most firms worldwide; however, still its financial strength is significant. At this point, it is considered that the survival of the firm in the long term is depended on its ability to expand its operations worldwide; of course, by avoiding its internationalization the firm could keep its costs at low levels. However, at the same time its potentials would remain limited. Under the influence of globalization the firms that wish to keep their position in the market need to fight for continuous expansion. Expanding in the international market is not necessarily risky; if appropriate plans are developed the international of a firm can become a strategic initiative of low risk; however, such target would be depended on certain factors. The research on the prospects of hotel industry worldwide – as analyzed below- led to the conclusion that the British market would be the most appropriate one – if the internationalization of the firm would proceed. Moreover, it has been proved that the risks that are related with globalization would be reduced in the case of the entrance in British market because of the following facts: a) British hotel industry is continuously increased and its prospects for future growth remain high – in July 2010 the occupancy of London Hotels reached the 92.2%, increased at 3.1% compared to 2009 (London Monthly Trends, September 2010); b) the firm could choose a mode of entrance that would be most convenience in accordance with existing resources; in case that a joint venture with an existing British hotel would be decided the cost of entering in the British market would be minimized, c) through the British market the firm would further expand in markets worldwide – with which the British market keeps a strategic cooperation in terms of trade, d) Indian market is already closely related with the British market; moreover, the number of Indians traveling to Britain regularly is high – the level of population of Indian communities across Britain should be also taken into consideration; in fact, Indian and British cultures have already co-existed for a long period of time. In practice, this means that cultural differences between the British and the Indian market would be easily controlled; the firm’s existing operational policies would be easily adapted to the rules of the British market. Moreover, any potential requirement for funding of the whole project would be easily met; the funding from financial institutions and investors in Britain could be secured with no severe obstacles since the development of trade between the two countries is strongly supported both the public and the private sector in Britain. Details on the above issues are presented in the sections that follow. The research on the existing performance of hotel industry in Britain – as member of the European Union – and the trends of the hotel industry worldwide has led to the conclusion that the entrance of the firm in the British market would be necessary for ensuring its competitiveness – referring especially to the firm’s future position in its industry. 2. Lokharst Hotels – entrance in the UK market The entrance of the business in the British market would result to a series of benefits, including the increase of customer base, the improvement of the firm’s position in its industry – through its internationalization – and the increase of funding potentials – since the business will become more attractive to potential investors. On the other hand, a series of challenges are related with the expansion of the firm’s activities in Britain: a) the firm’s operational costs will be significantly increased – an appropriate plan of costs should be prepared in advance, i.e. before the process of establishing a unit in Britain starts, b) employees need to be hired; existing staff is well trained and experienced – referring to the firm’s needs but also to the customers’ demands; hiring staff could be a critical procedure for the success of the specific initiative; locals – British – should be preferred since they are more likely to be aware of the needs and the preferences of customers in Britain, c) the firm will be exposed to a series of risks; up to now, the firm had to deal just with the authorities in India and face the risks of the Indian market; by entering the international market the firm will become more volatile to global financial crisis; at the same time, the firm will have to face the financial pressures developed within the British market; the economic conditions of the European Union zone are also likely to affect the firm’s financial performance; in other words, three different forces are expected to influence the firm’s performance after its internationalization; to these forces another five forces should be also added – referring to the five forces that the firm will have to face as a member of the international hotel industry, in the context of the theory of Porter. These issues are analytically explained below highlighting the positive and negative aspects of the particular initiative. At the same time, recommendations are made regarding the changes required on the firm’s existing operational practices and strategic priorities. In any case, the entrance of the firm in the British market is considered as a valuable strategic plan but its success is depended on the preparation made in regard to the development of all its phases. 2.1 Analysis of the environment In order to identify the prospects of the firm in the British market it would be necessary to analyze the organizational environment – referring mainly to the external organizational environment as it is defined through the theory of Porter – Five Forces and other relevant theories. Moreover, two theoretical models, the SWOT analysis and the PESTEL analysis will be used in order to highlight the potential challenges of the firm if its internationalization proceeds. Through the analysis of the firm’s environment, the challenges faced by firms operating in the hotel industry – at national and international level – would be also identified. 2.1.1 Porter Five Forces The theory of Porter refers to the existence of five forces that a firm has to face in the context of the international market; the Five Forces model of Porter is presented in the Appendix section (Figure 1). In accordance with the theory of Porter, in case that the firm decides to enter the British market, it will have to face the following forces: a) the competitors – referring to the competition within the UK hotel industry; the firm is expected to face difficulties in order to stabilize its position in the British market since the competition in the country’s hotel industry is strong; the development of strategic alliances would be proved particularly helpful for facing the pressure of competitors, b) the threat of substitute services; it is possible that substitute services are provided by other firms operating in the same industry; at this point, the quality of the firm’s services would help the organization to face the above threat, c) the bargaining power of customers; the pricing strategy followed by the firm should be aligned with the one followed by other firms operating in the same industry – in order to minimize the effects of the specific trend, d) the threat of new entrants; the British hotel industry is a sector that attracts many entrepreneurs and firms – not only locals but also foreigners; firm should keep its services at high quality – combined with reasonable pricing, in the terms of the British markets – aiming to face any potential competitor, e) the bargaining power of suppliers; the firm should ensure that its supply chain is expanded – no dependency should exist on specific suppliers; however, it is suggested that certain of the firm’s current suppliers could be also used by the firm’s branch in Britain – at the level that the cost involved could be kept below the profit expected. 2.1.2 SWOT analysis The success of the firm’s entrance in the British market is depended on a series of factors; apart from the five forces described above using the Porter’s Five Forces Model, the firm would have to face a series of challenges related with its environment – internal and external; these challenges refer to the firm’s: a) strengths, b) weaknesses, c) opportunities and d) threats – elements of the SWOT analysis. The analysis of the above factors would be developed as follows: a) strengths: a1) the firm’s experience in the specific industry, a2) the firm’s brand name in the Indian market – customers who are aware of the Indian market would prefer the firm’s branch in Britain, a3) the firm’s financial status; the firm would be able to respond to emergent financial needs with no severe pressures on its performance – at least for a specific period of time, b) weaknesses: b1) the firm enters the international market for the first time – lack of experience within the global market, b2) there are no strategic alliances – up to now – supporting the firm’s specific initiative; the firm will have to search for potential supporters within the British market, c) opportunities: c1) London Olympics are ahead; if an appropriate mode of entrance is chosen, the firm will have the chance to become known globally, c2) Indian community in Britain has a significant social and financial power and could help the firm to establish a significant customer network in Britain, d) threats: d1) the instability of the British market – under the influence of the global financial crisis, d2) the change in current exchange rates would lead the firm’s financial planning to failures. 2.1.3 PESTEL analysis The PESTEL analysis would be also used in order to identify the potential challenges for the firm in case of its internationalization. In the context of the PESTEL analysis, the following elements of the firm’s external environment would be examined: a) political, b) economic, c) social, d) technological, e) environmental and f) legal. The analysis of these elements could be developed as follows: a) political; Britain’s political environment can be characterized as stable and supportive towards entrepreneurial activities; a series of legislative texts have been developed ensuring equality among local and foreign entrepreneurs – foreign investment is also highly encouraged and supported; the political environment in Britain would be quite supportive to the firm’s entrance in the British market, b) economic; currently, the British economy faces turbulences as a result of the global crisis; the government has announced a series of measures for the limitation of the effects of the crisis across the country; however, it is expected that those measures may lead to the limitation of the consumption in Britain; the tourism and hotel industry could be also affected – as all other industries in the country; current economic conditions in Britain are rather discouraging regarding such initiative, c) social; the social environment in Britain is different from that of India; however, this fact does not affect the prospects of foreign enterprises in Britain; in fact, the specific country supports the entrepreneurship – in all its forms – a trend which is quite important for the firm’s prospects within the specific country, d) technological; Britain is a highly industrialized country; the firm’s unit in Britain can be supported by advanced information systems, a fact that could benefit the firm’s performance; on the other hand, a conflict between the firm and the British authorities in regard issues like ‘telecommunications and data processing’ (Roche, 1992, 7) may occur, e) environmental; the firm’s policies are aligned with the rules of sustainability; in practice, this means that the firm’s operations do not negatively affect the environment; the firm’s operation in Britain will be based on similar rules – referring to the respect of the environment – no differentiation would be required in regard to the firm’s current sustainable practices, f) legal; it is expected that the firm’s unit in Britain will be aligned with Britain’s legal rules regulating the hotel industry – either directly or indirectly, for instance the contract law or the tort law – in case of disputes related with the contract between the firm and a customer or in case of damages caused in the context of the firm’s daily operations. 2.2 Suggested entry strategy In accordance with the issues discussed above, the entrance of the firm in the British market should be carefully planned – in order to avoid delays and failures that could increase the cost of the relevant project. For this reason, it is suggested that the establishment of the firm in Britain is divided in 5 major phases; the successful completion of each phase will be the criterion for proceeding in the next phase; in case of failure in completing a phase of the project within the suggested period of time, then the cancellation of the project should be decided – in order to avoid severe financial losses: a) in the first phase, the current status of the British hotel industry should be examined and evaluated; figures related with the performance of major competitors would be critically studied in order to estimate the potential prospects – and profits – of the firm in the British market, b) in the second phase, the process should be designed – in details; c) at the next level, the cost of the project should be estimated; the potential funding from institutional or individual investors would be explored; the cost of the project’s cancellation – at any one of each phases should be also defined, d) a careful financial plan should be produced regarding the estimated annual cost of the firm’s operation in the British market, e) the time required for the completion of each phase of the project should be estimated – including the time required for all documentation and registration issues (Castellani et al., 2006, 24). At the next level, the entrance of the firm in the British market would begin. At this point the following points should be highlighted: a) normally, it is expected that the joint venture would be a less costly methodology for entering the British market; the establishment of a branch might be a risky initiative under current economic conditions in the international market; however, branding is considered – under certain terms – to be an investment tool appropriate for the hotel industry (Salver, 2009, 30), b) the employees involved in the project should be appropriately skilled – training would be provided where necessary in order to ensure the development of the project in accordance with the guidelines of its planners (Lipsey et al., 2002, 27), c) the project should be continuously monitored – as of the appropriate development of its various phases, d) the potential location of facilities in Britain might be considered as a solution for decreasing the cost of the firm’s operations in the specific country (Hitt et al., 2009, 217), e) the needs in Research and Development and advertising of the firm in Britain may be increased compared to India – following the view of Rugman et al. (2005) that ‘the R&D and advertising costs are higher in countries where FDI is higher’ (Rugman et al., 2005, 28). 2.3 Institutional and cultural differences between the British and the Indian hotel industry Cultural differences between the country of origin and the host country could set under risk the success of a firm’s effort to enter a specific market; in fact, the firm that attempt to enter a foreign market has to face two major challenges: ‘the physical distance and the cultural differences’ (Wagner, 2009, 1); the above challenge is made clearer when two different patterns of civilization have to be co-exist; the study of Wagner (2009) focus on the cultural challenges faced by the Western firms when trying to enter the Chinese market, the culture of which is totally different from the culture of West. In terms of the law, hotels in Britain need to align their strategies with specific legal rules – referring mostly to the Licensing Act 2003, which regulates all issues related with the activities of hotels across Britain. At the next level, hotels in Britain may choose to operate under one of the following legal forms: a) to enter a Hotel Management Agreement (HMA), b) to enter a franchise agreement and c) to be leased (Reed Smith, Environmental Law Resource, 2009); additional legal forms would be also available in the context of corporate law, for instance a joint venture – especially for foreign investors who are interested in entering the specific market. In India, foreigners who wish to enter the country’s hospitality industry need to follow the principles of the Foreign Contribution (Regulation) Act of 1976 – which was amended in 1984 and which is currently reviewed by the country’s government in order to be further amended (India Times, August 2010). As for the cultural differences between the Indian and the British hotel industry, these are characterized by the existence of Eastern and Western trends accordingly; however, today these differences have been limited – under the influence of globalization. 3. Conclusions The entrance of the firm in the British market would be an important strategic decision for the stabilization of the firm’s position in the international hotel industry; up to now, the firm avoided to expand its operations in other countries – perhaps because its performance in the Indian market was considered as satisfactory - the risk of a potential failure when trying to enter the international market has been proved to be high. On the other hand, in the long term, the profitability of the firm within the Indian market may be reduced significantly – especially if global competitors enter the specific market; the firm should change its existing strategic priorities – retention of profitability and gradual growth of profits with no increase of costs – and enter the international market (Borghoff, 2005, 19); in this way, it will be able to compete its rivals if the pressures in the international hotel industry become extremely strong. The analysis of the firm’s environment – as developed through appropriate theoretical models – leads to the conclusion that the internationalization of the firm would be important for its establishment in the global hotel industry; moreover, this initiative would increase the firm’s profitability. However, risks are difficult to be avoided. The development of a series of plans would decrease the chances for major financial losses; the initiatives described in the section that follows could result to the increase of the firm’s power against its competitors; additional plans could be developed taken into consideration the fact that the firm’s employees do not have experience on similar projects – the continuous monitoring of the project could ensure the limitation of failures and the rapid resolution of disputes regarding the phases through which the project should be completed. 4. Recommendations The success of the firm’s effort to enter the British market would be depended on certain factors: a) the ability of the firm’s employees to respond to the needs of the project, b) the stability of the British economy, c) the performance of competitors in the British hotel industry, d) the level of support provided by institutional and individual investors (Brotherton, 2009, 22), e) the firm’s profitability in the Indian market – which could influence its ability to fund the specific project and f) the policies of the British government in regard to Foreign investment across Britain – referring especially to the rules of the British taxation law focusing on the foreign enterprises operating in Britain (Feldstein et al., 1995, 2). Therefore, the firm’s entrance in the Britain market would proceed only if the following initiatives are developed: a) appropriate training schemes are provided to the employees involved in the specific project (Briscoe et al., 2004, 38), b) the part of the firm’s profits invested on the above project should be defined in advance – any increase of the project’s cost should lead to the project’s review – the cancellation of the project would be decided if the difference between the pre-defined cost of the project and its actual cost is above a certain level, c) a trial period would be defined in order to decide the permanent establishment of a firm’s unit in Britain; during this period a non-permanent business unit would be used as a ‘vehicle’ for estimating the firm’s potential profits in the British market – for instance, the firm would enter a joint venture scheme for a specific period of time and d) the legal rules regulating the firm’s operations in Britain should be carefully studied in advance; the firm’s policies should be aligned with the British legal framework without the cultural characteristics of the firm to be negatively affected. 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International Journal of Hospitality Management, Volume 27, Issue 4, 641-648 Online Sources India Times, August 2010, New law to regulate foreign contributions, available at http://timesofindia.indiatimes.com/business/india-business/New-law-to-regulate-foreign-contributions/articleshow/6445968.cms London Monthly Trends, September 2010, available at http://www.visitlondonmediacentre.com/images/uploads/monthly_trends_report_september_2010.pdf Reed Smith, Environmental Law Resource, 2009, available at http://www.environmentallawresource.com/2009/07/articles/climate-change/crc-in-the-uk-hotels-sector/ Appendices Figure 1 - Five Forces Model – Porter (Porter, 1998, p.22) Read More