Global Economic Prospectives - Case Study Example

GLOBAL ECONOMIC PROSPECTIVES History and evolution of the Marriott group: Marriott was incorporated as Hot Shoppes inc. in 1929 after J. Willard Marriott started with a root beer stand in Washington D. C. Marriott went public in 1953 and opened its first hotel, the Twin Bridges Marriott Motor Hotel in Arlington, Virginia. Marriott became international in 1966 and increased its properties and size when in 1979 it moved to its new international headquarters in Bethesda, Maryland (Marriott corporate website www.marriott.com. Retrieved on May 3, 2009) Since then it has been prominently involved in the hospitality business and currently has more than 3,100 properties worldwide with 430 hotels outside the U.S. Marriott owns and operates properties in the premium, the business and budget hotels segment with its ‘Marriott Courtyard’ properties. Marriott also operates a significant portfolio of time share and serviced apartment properties across the world. All properties of Marriott are owned, leased, managed or franchised. A structure of the company allows a high degree of strategic flexibility at country level with a strong central leadership role and oversight. Decisions on expansion are made by the board of directors and approved by the C.E.O. of Marriott International. When the company enters a new market a certain amount of investment is made on the initial rollout. Subsequent to that, the company as to function profitably within that market, and has to expand on its own steam. This encourages a much more empowered group to function and define contextually relevant targets. The policy of encouraging diversity within the company ensures substantial local involvement, employment and empowerment. According to Belinda Pote, senior vice president, international marketing, Marriott international is interested in emerging markets including China, Russia and India. She believes that the vast untapped potential within these markets make them the source markets for future growth (Babitch & Chen 2,3). The presence of American hospitality brands in these nations has been limited due to the different social and cultural ethos of these countries. These nations have also traditionally been regarded as high risk markets, as a result of which American companies have not been very enthusiastic about entering then. The BRIC nations have suddenly realized their global clout and have shown eagerness towards larger involvement in global affairs. Currently, the sheer market size of these countries makes an entry imperative. India as an emerging economy: After its independence in 1947, India had continued a largely closed and protectionist economy, to prevent its markets from being flooded by cheaper and usually better international products and to give an impetus to its own manufacturing and service industry. It was in 1991 that the first comprehensive economic reform package was implemented, that opened up the Indian economy to the world and vice versa. It was realized that the only way for India to develop was to use its population as a magnet for affordable goods and services from all over the world. It was also realized that protectionism is counterproductive and a loss making idea in the medium to long term. Despite political uncertainty caused by periodic government and policy changes, India has firmly remained on its path of economic reform and has made numerous wide ranging policy decisions in this regard. Some of the policy decisions in this regards are as under. Abolition of import licensing. Exchange rate revaluation. Drastic reduction in Import duty tariffs. The New Telecom Policy opened the telecom sector for private sector entry. Currently, India’s telecom sector is the fastest growing in the world, and the second largest in size. Insurance has been opened up to the private sector, both domestic and foreign, and unrealistic subsidies have been reduced, albeit slowly. Allowing of FDI in many key sectors. FDI in India Foreign Direct investment is defined as ‘an investment made to acquire lasting interest in enterprises operating outside of the economy of the investor’ (UNCTAD, 1999). In other words, Foreign Direct Investment (FDI) refers to investment in a foreign country where the investor retains control over the investment. It typically takes the form of starting a subsidiary, acquiring a stake in an existing firm or starting joint venture in the foreign country (Prakash, 2002). The tables below exhibit data that confirms the Indian Government’s commitment to a wide-ranging commitment to encourage FDI. Sector-specific policies for FDI may be accessed at www.indiaonestop.com/FDI Sectors attracting highest FDI Equity Inflows (In Rs crore)  SECTOR 2005-06 2006-07 2007-08 2008-09 (April-Jan '09) Cumulative (Apr.2000- Jan 2009) % of total inflows* Services (Financial & non-financial) 2399 (543) 21047 (4664) 26589 (6615) 23045 (5061) 78742 (181189) 22% Computer Software & Hardware 6172 (1375) 11786 (2614) 5623 (1410) 6944 (1599) 39111 (8876) 11% Telecommunications 2776 (624) 2155 (478) 5103 (1261) 10797 (2374) 27544 (6216) 8% Construction 667 (151) 4424 (985) 6989 (1743) 6224 (1483) 19606 (4646) 6% Automobile 630 (143) 1254 (276) 2697 (675) 1792 (441) 11648 (2678) 4% Housing and Real estate 171 (38) 2121 (467) 8749 (2179) 10632 (2408) 21794 (5119) 6% Power 386 (87) 713 (157) 3875 (967) 4079 (924) 13709 (3130) 4% Metallurgical 6540 (147) 7866 (173) 4686 (1177) 3608 (850) 10956 (2613) 3% Chemicals (Other than fertilizers) 1731 (390) 930 (205) 920 (229) 2561 (579) 9442 (2244) 2% Petroleum & Natural Gas 64 (14) 401 (89) 5729 (1427) 1196 (263) 8509 (2043) 3% Figures in bracket are in US$ million * In terms of Rs. SOURCE: DIPP, Federal Ministry of Commerce and Industry, Government of India   FDI Inflows (as per international best practices)  FISCAL YEAR (APRIL-MARCH) EQUITY Reinvested earnings+ Other capital+ Total FDI inflows YOY growth (%) FIPB Route/ RBI's Automatic Route/ Acquisition Route Equity capital of unincorporated bodies#         1991(August)-2000 (March) 15483 - - - 15483 - 2000-01 2339 61 1350 279 4029 - 2001-02 3904 191 1645 390 6130 (+) 52 2002-03 2574 190 1833 438 5035 (-) 18 2003-04 2197 32 1460 633 4322 (-) 14 2004-05 3250 528 1904 369 6051 (+) 40 2005-06 5540 435 2760 226 8961 (+) 48 2006-07 (P)* 15585 896 5828 517 22826 (+) 146 2007-08 (P)* 24575 2292 7168 327 34362 (+) 51 2008-09 (April-Dec) 23885 334 3004 203 27426 - Cumulative Total (From August 1991-January 2009) 99332 4959 26952 3382 134625 - SOURCE: DIPP, Federal Ministry of Commerce and Industry, Government of India India allows 100% FDI through the automatic route, subject to some conditions of minimum amounts of capitalization and a fixed timeframe for the investment (Govindarajan 2003). The History and perception of the Hospitality industry in India. India has traditionally depended on its business travelers to fuel its hotel industry, as the mindset of most Indian families has been to go for leisure to places and cities where their relatives and friends put them up. This speaks well for india’s rich tradition of hospitality, but does not translate into occupancy for hotels. This had resulted in a relatively slow growth of India’s formal hospitality industry. Until economic reforms empowered the huge middle class with high disposable incomes. Post-reforms, India suddenly found itself with a huge demand for hotels and resort facilities, as a result of which occupancy rates stayed consistently over 80% at most 4- and 5 star hotels in tier 1 and tier 2 cities. The rack rates of 5 stars in Metropolitan cities start at $300 and above, with 100% occupancy through most of the year. With the IT boom in India, the demand for 3 star and budget business hotels has increased several fold, as has also the need for serviced apartments to house professionals for extended tours to outstation facilities. It is at this juncture that Marriott decided to invest in the Indian hospitality space. India as an investment destination: a SWOT study. Before committing large sums of finances and resources into a country, a SWOT study through the lens of the hospitality industry throws up the following: Strengths: Very large untapped market, for both Leisure and Business guests. 100% FDI ensures security for invested resources. Ensures a positive net risk assessment. No change in policy from successive governments ensures confidence in the commitment towards FDI. High English-speaking population and ` Weakness: Bureaucracy and red tape. Fluctuating speed of reform, with a real fear of slowdown in reform Infrastructure availability is not consistent throughout the country; Costs for infrastructure have to be built into the property development costs. Uninterrupted Electricity, water and good access continues to be an issue. Rampant corruption, despite government policies to streamline and speed up procedures, including single-window clearance. Cultural barriers Government involvement in economy. Opportunities: To imbibe a rich culture with the values of Marriott International, thereby providing an unparalleled hospitality experience. To tap the very large and upwardly mobile middle class, not only in metropolitan cities but also in smaller locations. Use the relatively low man-power and construction costs to position the brand competitively. Threats: Change in state level policies of the government. Constantly changing threat from communal and terrorist activity. Potential avenues of growth for Marriott in India. At the moment of entry of Marriott into India, a few important factors influence its strategy. Marriott’s identity as a global hospitality brand. Awareness of but lack of access to this brand by a huge potential customer base in India. Rapidly increasing competition in the hospitality sector, both from domestic and global players. Contrary to traditional models of international expansion that are based on all moves in an international scenario based on a company’s degree of risk aversion, the Uppsala model of gradual insertion into a foreign market would not be the optimum in the hospitality sector in India. The advantages of a large, highly publicized and high profile entry into the Indian market allows Marriott International to leverage the best manpower, the best properties and the overall economy of scale as it uses its brand value to target a significant market share from day One in its chosen theater of operations. The concept of ‘psychic distance’ does not affect Marriott’s entry into India due to the following reasons: Marriott international already has a significant presence in over 60 countries, some of which are much farther afield than India. Extensive economic and strategic groundwork is done before any humal or capital resource is invested in a new territory. All relevant economic and political data is available, making it possible to accurately assess risk. Due to a proud and long heritage of diversity and local empowerment, Marriott International functions as a local company with global values in its territories. Marriott functions in India as a fully managed subsidiary of Marriott international. The company is headed by a Managing Director (equivalent to a CEO in America), under whom are a group of Senior Vice-presidents, who oversee different aspects of the groups work in India. Individual properties are managed by the manager of the property, who reports directly to the VP in charge of whatever aspect needs to be reported. There is an independent accounts and finance department that allocate resources for new properties or extensive refurbishment or modifications to existing properties. The manager is in charge of all recruitment for a property, and is expected to follow the standards and norms that have been set down for all Marriott properties. As mentioned previously, Marriott international’s strategies are based on a risk assessment on the following parameters: Financial Political Cultural Ethical The broad outlines of strategies for risk mitigation from Marriott International’s perspective: Risk Strategy to minimize / eliminate it Financial Purchase several properties together in the first phase, to limit paying a premium being Marriott. Lease properties that have a longer potential ROI Concentrate on Teir 2 cities to maximise investment, as capital expenditure is lower is such cities Use Local experts to shortlist avenues of investment and gain an insight into viable revenue models. Due to relatively low internet penetration, position the brand at alternate locations to accelerate bookings and reservations. Appoint local consultants for developing properties (3% maximum expenditure allowed on consultants for FDI in automatic route) Acquire a land bank as an exit strategy, and a potential long- term asset. Political Study the political scenario and consult with political advisors before entering. Present a programme of social responsibility initiatives to the government. Cultural Lingual and cultural awareness. Understand local perceptions of business models, and modify them to suit local conditions. Understand the media and the target demographic for the hospitality product. Ethical Prevent negative spillover of entering the country, causing crowding out of domestic investment (Agosin and Mayer, 2000) Some other India-specific strategies: 1. Position the brand as an exclusive luxury brand, and thereafter introduce the budget brands like the Courtyard Marriott as distinct budget properties. Only 20-25% of the budget market is catered to by any branded player (Balasubramaniam, 2008) 2. Give a high priority to a distinct expansion from metropolitan cities towards smaller cities that have a much higher demand-supply gap, and where business hospitality and facilities, coupled with low land and other infrastructure costs would make the venture profitable. 3. Look at one bedroom serviced apartment complexes to manage within SEZ s. Ownership is not allowed, but there is significant profitability as there is a huge captive customer base within the SEZ itself. Marriott Suites? 4. The introduction of specific ‘wedding hotels’ that are a modification of conference centers, but provide turnkey solutions to host marriages. India has a seven month long marriage season, where one can expect a 90% occupancy for the period. The property may be used as a convention center for the rest of the year. 5. Due to its extensive experience with catering and facility management, Marriott International can diversify into corporate facility management. 6. Medical tourism is a huge source of income in India, with 75000 patients treated in 2007 (Keckley & Underwood,2008), and a very profitable venture may be properties that are Medical Hotels & recuperative resorts. Several Yoga-and naturopathy resorts, some of which are world class, already exist in India. However, Marriott, due to its global presence, can attract a large number of potential customers using its internet resources alone. (quoted by Yap, Chen & Nones, 2008) Ten Year Roadmap for Marriott International in India Development of a land bank. Currently low land prices encourage investment in land in and around tier 2 and tier 3 cities. Expand services into Services apartments, either owned or managed. Develop timeshare properties across the country, preferably by purchase and renovation. Greenfield properties can be added later. Consolidate and develop a comprehensive, India-specific corporate social responsibility plan. Medical tourism. Tie up with travel agents and with Indian railways and the Airports Authority of India to provide several thousand additional points of contact for reservations. The IRCTC website of the Indian Railways is accessed over a million times a day, and it would be profitable to position Marriott’s website as a link from that website. SOURCES CITED Babitch, Steven & Chen, Joyce (2005). Design for the Emerging Markets: Interview with Marriott International. Ed Patrick Whitney, Institute of Design, Illinois Institute of Technology. Marriott corporate website http://www.marriott.com/corporateinfo/default.mi. Retrieved on May 3, 2009 Agosin MR and R. Mayer (2000). Foreign investment in developing countries: does it crowd in domestic investment? UNCTAD paper, No. 146. UNCTAD, Geneva. Wamukonya N. 2001. Balasubramaniam, Chitra (2008). Great potential for budget hotels in India. www.hotelnewsnow.com online article. Govindarajan, V. Foreign Direct investment in India – Policy and Procedures. 2003. Dept of industrial Policy and Promotion, Govt of India Yap, Janson, Chen, Sim Siew & Nones, Nelson (2008) Medical Tourism: The Asian Chapter. Deloitte Center for Health Solutions, 2008 Keckley, Paul & Underwood, Howard R. (2008) Medical Tourism: Consumers in Search of Value. Deloitte Center for Health Solutions. UNCTAD. (1999). OECD Benchmark Definition of Foreign Direct Investment. Retrieved Nov 12, 2007, from www.unctad.org Prakash, D. N. (2002). Foreign Direct Investment in India. Retrieved Nov 18, 2007, from Institute of Cost and Works Accountants of India: http://myicwai.com/knowledgebank/fm25.pdf OTHER REFERRED TEXTS Ministry of External Affairs. (2007). Investing in India. Retrieved Nov 16, 2007, from Ministry of External Affairs: http://meaindia.nic.in/indiapublication/investing%20in%20india.htm Madaan & Co. (n.d.). Foreign Direct Investment: Investing in Real Estate in India. Retrieved Nov 18, 2007, from Madaan & Co: Attorneys at law: http://madaan.com/realestate.html Miller, J. D. (2007, October). Land Writes; Infrastructure: World Overview. Urban Land Raja, S. (Oct 2002). Investing in India. Urban Land India Ground. (2007). Real Estate FDI. Retrieved Nov 18, 2007, from India Ground: http://www.indianground.com/real_estate_fdi.aspx India Knowledge @ Wharton. (2006, Nov 16). For Surendra Hiranandani, the Future of Indian Real Estate is 'Definitely Bullish'. Retrieved 18 Nov, 2007, from India Knowledge @ Wharton: http://knowledge.wharton.upenn.edu/india/article.cfm?articleid=4120&CFID=48077422&CFTOKEN=48062069 &jsessionid=9a3086511e675666787e Hay, F. (2006). FDI and Globalization in India. International Conference on The Indian economy in the era of financial globalisation. Paris. Department of Industrial Policy & Promotion. (2007). Investing in India. Retrieved Nov 16, 2007, from Ministry of Commerce and Industry: http://dipp.nic.in/manual/fdi_manual_11_2006.pdf Websites used during research: www.archnet.com www.deloitte.com www.irctc.co.in www.yatra.com www.makemytrip.com www.hotelnewsnow.com www.google.com www.wikipedia.com www.economywatch.com/foreign-direct-investment . Read More