Risk Management in the Jinjiang International Hotel in China - Case Study Example

One of the major issues facing organisations today is the management of risks. With the increasing rate of change, customer demands and globalisation, proper management of business risks is essential for survival in the market. The key issue is balancing opportunities as well as threats. The probability that a disaster will occur is referred to as risk. Risks are future issues which can be managed and mitigated. Management of risk involves assessing and quantifying the damage and later taking measures to reduce or control risks (Arthurs 1994). According to Ehrbar (1998) management of organisational risk is presented with three outcomes. The first one is the intolerable situation which means that the source of the risk has to be abandoned or in cases where the source was technology then it can be replaced. If the risk is a natural hazard then vulnerabilities are reduced. The second outcome is in tolerable situations. This shows that risks are to be handled within the limits of practical resource investments. This can be conducted either by corporate risk managers or regulatory agencies. The third outcome is that of acceptable situations. This can only be applied where the risks are small or negligible. This study shows the tools and techniques used in management of risks and the implementation of the mechanism in both theory and practical examples. In order to control and evaluate risks, certain objectives are identified, these include; one, identifying the risk in time. The second objective is viewing the likelihood of the risk and the financial impact on the business. The third is allocating resources available for control in order of priorities and later setting clear control objectives. Thompson (2002) shows fraud occurs in many ways depending on the authority granted in Hotels. Hotels are fixed cost and therefore and therefore implementing loss controls measures maximises cash flows. In order to avoid occurrence of risks in hotels the following method should be followed. First one needs to identify and assess the threats involved as well as the vulnerability of critical assets to specific threats (Kotler 1998). Ways of reducing these risks should be identified and the measures based on strategies should be prioritised. According to Cannon (1999) the principles of risk management should; create value by improving the organisational position. They should also be part of decision making and act as an integral part of the organisational processes. The principles should also aim at addressing uncertainty through systematic and structured ways basing on the best available information. They should be tailored in order to take account of the human factors. Higuera and Haimes (1996) describe that a good risk plan for managing risk should contain a schedule to control implementation and responsible persons to be appointed for the actions. This paper studies The Jinjiang International Hotel in China that deals with restaurant services, fitness center, internet access, parking and room service. The five star deluxe hotels mostly targets both tourists and locals living around. It offers an ideal location at the centre of Wuhan’s Central Business District. The size of the business is quite large as it can accommodate about 1000 guests per night. It plans to improve its quality in order to bring it to the standards that the guests expect. It is located 30 minutes from the International Airport and 5 minutes from the railway station thus making it a good choice for both businessmen and leisure travellers. The hotel offers leisure, business and meeting stand points with a destination restaurant, a hot spot bar and a retail store. The company provides employment to about 400 people (Matthew 2002). Hotel management has to ensure that accounting records are maintained to protect guests from fraud. Relating to the management of Hotels we first analyse the PESTEL model. PEST analysis is an important tool is strategic management as it enables managers to understand the market growth or decline, the position of the business in addition to the direction of operation. Kendall (1998) argues that the model is applied by businesses to review a strategic direction such as market proposition. PEST ensures that the company’s performance is positively aligned with the forces of change affecting the business environment. It is mostly useful in cases where a particular business is entering into new markets or a new country this is because it breaks unconscious assumptions thus helping the business to effectively adapt to the realities of the new environment (Byars 1991). Politically the sector observes government regulations and protections. Other factors include tax policies, international trade regulations, contract enforcement law, employment laws and safety regulations. The tax policies include the amount of tax that tends to hinder business operation. If there are tax incentives then businesses will grow and enhance more recruitment, induction and training. It also depends on the tax incentives that government provide to businesses in order to improve their operation (Hull and Suo 2001). According to the trade regulations and restrictions, it shows if the government encourages exports or if it has put high tariffs on imports. If exports policies are liberal then the industry will expand and put an impact on Human resources. Melchers (1998) shows political influence also looks at the enforcement laws or the consumer protection laws that government places on businesses for instance in hotels, the government ensures that cleanliness is observed to protect the consumers well-being. Employment laws deals with encouraging skilled immigrants with temporally permits to work in the country. Where the government encourages skilled migrants more emphasis will be put on foreign recruitment, development of overseas contracts and training managers to manage diversity (Clement 1996). Another influence of the government is the attitude that it puts towards that particular industry in this case the hotel industry. In most cases the government has a positive attitude towards the hotel industry as it encourages tourists into the country. Competition regulations show if there are any laws that limit competition within the industry. Political stability is also an important aspect because if a country is politically stable then the sectors are able to run smoothly. Safety regulations also hinder business operations in cases where the government has adopted modern methods (Pearce and Robinson 2005). Other influences affecting the hotel industry include the economic factors. First the economic growth rate of the country is considered and the reasons that have led to that rate for example if is in recession or boom. In recession the volume of the business drops as well as the demand and therefore the management is forced to recruit less people, increase on training to improve productivity and more incentives will be needed for productivity gain. Interest rates and monetary policies are also considered as they influence the economic stability of a country. The government spending should be significant and should be controlled to sustain the economy. According to Jan (2002, p. 283) unemployment policies and taxation should be in such a way that they encourage the industry in its operations. The exchange rates should be well managed and controlled to help the industry example in Hotels where most tourists are found. Inflation rates ought to be controlled as the industry determines its growth pattern in terms of the business cycle which tends to encourage consumer confidence. Social environment encapsulates demand and tastes which vary in terms of fashion and disposable income. Kotter and Schlesinger (1991) describes that the social factors affecting businesses determine whether the income distribution is balanced or not and if there are policies of distribution. As the income distribution improves, the demand for services and products improves and thus the business improves. Population growth rate, age distribution and demographics are also considered. The industry also examines the labour policies and looks at the labour mobility. Changes in lifestyles have to be observed in terms of modernisation for the industry to cope with the styles. The population around the industry is examines to determine if they are career minded and if they seek a better lifestyle (Tsiakkiros 2002). Education policies should be considered if they are successful or not, fashion and hype is also relevant to determine the kind of fashion to be embraced by the sector. The Paramount Hotel in this case is very classy, modern and has wonderful staffs that provide early check-ins. The hotel’s lobby is also spectacular and elegant thus the management has been able to cope with the changes in fashions. Health consciousness and the feelings on safety have to be observed in such industries. The living conditions are considered to determine the spread and how fast they rise. As the income levels rise, the living conditions improves as well as the consumers demand for products (Zask 1999). Technology is recognised in strategic management as it plays a major role in achieving competitive advantage. Technological factors affecting the industry are very important. These include; the government research spending that is meant to show how the government spend on research and development. The industries focus on technological effort is examined and if the industry is reluctant to changes then measures should be taken to instil the change. These new interventions should enhance development and not depreciate. The rate of technology transfer should speed up to enhance efficient production. The industry ought to consider the changes in Information Technology and if there is government support. Internet usage ought to be examined to determine the methods to be used in for example advertising and what target group is to be reached by the message. The industry also considers if the mobile technology is rapidly developing and if the government supports the development. This eases customer reach though contacts in case of hotel bookings (Green and Figlewski 1999). SWOT analysis analyses the business’s strengths, weaknesses, threats and opportunities. The strength of China Hotels lies in the fact that the location is a leading destination with rising international brands; the government has also made a concerted effort in improving domestic brands through changes and regulations. Many hotel operations have been hindered by inefficient state ownership and management. This has lead to overleveraged and unprofitable business. This kind of situation opens a big opportunity for managers who are willing to upgrade their existing hotel businesses. Appraisers also have an opportunity if the properties are privatised. The education institution will have an opportunity to train a new generation to yield professional managers. Johnson and Scholes (1993) shows SWOT analysis reveals development opportunities in addition to internal organisation and external organisational change. Strengths include a growing international market and tourism destination for example in New York there is a rapid growth in hotel industry due to the aggressive economic reforms. The other strength is the governments push to upgrade all the hotel standards operating in that location. Diversity and quality of hotels product is the other strength that the business faces. Efforts have been put in standardising operations as well as improving the service quality this is mostly by training the staffs and employing skilled personnel. The hotels also operate under various ownership structures for instance in China most of the hotels are state owned. The five star hotel ranking was developed in 1990s so as to standardise hotel operations and services. The weaknesses that face this hotel include international challenges. These include ownership structures, debt issues and the financial performance. Since most hotels are state owned, their operations have been slow thus has made the industry slow in its development. This is due to lack of good management, bureaucratic controls, lack of innovation, and lack of fiscal discipline as well as low operating deficiency. These weaknesses limit productivity and competitiveness. The second aspect is excessive indebtness that has mostly plagued the hotel. Increased competition at home has also been a major business weakness. The hotels reforms and opportunities are those intended to transform the hotel into a profitable one. These include the partnership between current management and new investors this is where the hotel aims at changing management to a more effective one since the existing one lack sufficient financial resources (Deherty 2000). The existence of joint venture projects is also another opportunity to be used by the hotel to enhance diversity. The other opportunity is the creation of domestic hotel holding and management group. Haimes (1998) describes that outright sale is also considered as it seeks business diversification by developing the real estate and expansion to a hospitality industry. The threats faced by the hotel industry include the overprovision of hotels. This poses a threat to profitable operations. The economic slowdown is the other threat which has been stirred by the loan problem faced by most state-owned hotels. If the government fails to engineer a better policy for the rapid growth of the economy, then the country will experience economic slowdown which may be triggered by sudden and uncontrollable forces that would affect the hotel industry. The forth threat is the competition from the neighbouring countries that compete for international tourism market. In this sense, use of aggressive marketing by other established destinations in the region challenges the organisation’s position as visitors may move to those regions. Finally, the political tension between China and Taiwan pose potential threats to the political stability of the region. Though the threats are remote, they should be included in the strategic planning by the hotel developers as well as investors (Borodovsky 2000). The organisation’s particular position in relation to risk can be discussed using the management maturity model. This model involves four levels of organisational competence which include competent, novice, proficient and expert. Dowd (1998) state that competence is defined in four attributes which include culture, process, experience and application. For the organisation to be naive, the attributes are at their lowest level. The business culture is also reluctant to manage risks, the organisation lack experience in risk management and therefore no process is applied. According to Dunbar (1999) corporate risk management is based on the static models that show how market imperfections give businesses an incentive to reduce risks. Issues that are difficult to address are analysed such as optimal timing which helps to initiate risk management contracts. Most of these static models assume that firms one particular decision which is irreversible and countless. Treating management choices as irreversible limits the ability of recognising the value of dynamic risk management. Hull (2000) states this model motivates the management of risks through financial distress costs incurred when the business’s products declines below costs. In this model, the organisation faces the challenge of using short-term instruments to hedge long –term operations. However, risks can never be fully mitigated due to financial and practical limitations. Organisations therefore have to accept levels of residual risks. Risk management process builds up important inputs for business continuity planning such include assets and cost estimates. Risk managements tools include capital asset pricing model, operational risk management model, and probabilistic risk assessment. The later evaluates the risks associated with complex technological entity for instance an airliner. It is consists of the magnitude and the likelihood of the occurrence expressed numerically (Glasserman and Kou 2000). Financial economics approach has been used in corporate risk management as it builds upon classic Modigliani-Miller paradigm which states the conditions necessary for the irrelevance of financial structure for corporate value. Panjer et al. (1998) describes that the approach stimulates that hedging leads to lower volatility of cash flows thus lowers the firm’s value. The rationales for risk management included irrelevant conditions such as high debt capacity, progressive tax rates and bankruptcy, securing internal financing, information asymmetry and finally comparative advantage in information. The agency theory analyses the firm through the separation of ownership and control and managerial motivation. In corporate risk management, some issues have been identified to be influencing managerial attitudes towards risk taking and hedging. This explains a mismatch of interest between shareholders, debt holders and the managers brought about by the asymmetries in earning distribution (Cox and Taint 1991). According to Longstaff and Schwartz (2002) stakeholder theory focuses mostly on equilibrium of stakeholder interests as the main determinant of corporate policy. This contributes to risk management through extending implicit contracts theory from employment to other contracts such as sales and financing. In most organisations, consumers trust and the ability of a firm to continue offering its services in future substantially contribute to company value. The value of these claims is very sensitive to expected costs of financial distress and bankruptcy. According to Capron and Glazer (1987, p. 11) corporate risk management practices decreases expected costs thus raising the company’s value. In business operations, risks can either destroy or build a business. It all depends on how one responds to risk. (Cooper 2000, p. 11) describes that there are five ways of using risks to build competitive advantage. The first method is the access to better and more timely information. This includes the events of the business as they occur and their impact to the business operation. This enables a manager to plan a superior response to the situation. The second way is determined by the speed within which one responds to the situation. This is by modifying the weaknesses of the business for instance in the case of the hotel where it was faced by poor technology the management can respond to this by making sure that the business grows with technology (Robinson et al. 1978, p. 10). According to Porter (1985) by acting faster than other competitor turns a threat into opportunity. The third advantage involves derivatives from past experiences. This is where managers deal with a situation that they had dealt with earlier and so they know exactly how to go about it. This enables one to respond better that other businesses operating in the region. The forth advantage is the availability of financial and personnel resources. This allows management to ride out rough periods better than other sectors. In recession periods most firms beat competing firms by using their financial resources kept for such times. It is therefore important for all businesses to keep reserves. The final advantage is the flexibility of finance and operations (Fusaro 1998). This is the ability to change technological base, operations or the financial structure in response to changes in environment. The major role of these five advantages is that a firm gets to emerge from the crisis stronger that the position it was prior to the crisis basing on the competitive position (PricewaterhouseCoopers 1999). In conclusion, uncertainty is seen as the heart of every business venture. Decision makers are therefore very keen not only to seek the best components for a strategic success but also to derive the most cost efficient modus systematically. Uncertainty exists in our day to day business operations and regards core utility and chance. It poses a role to corporate executives of making decisions meant to yield good outcomes. They should therefore devise a structured framework to address risks at all levels of the strategic continuum. Risks found in business entities depend on the economic sector, the market situation and position and finally the strategic direction. References Arthus, M 1994, integrated compliance and total risk management: Creating a bank wide compliance system that works, McGraw-Hill. Borodovsky, L 2000, Practitioner’s handbook of financial risk management, Butterworth-Heinemann. Byars, L 1991, Strategic management, formulation and implementation, Concepts and cases, New York: HarperCollins. Cannon, T 1999, A guide to integrated risk management, London. Capron, N& Glazer, R 1987, Marketing and technology: a strategic co alignment, Journal of Marketing, vol. 51 Issue 3, pp. 10-21. Clement, T 1996, Making hard decisions, 2nd ed, Duxbury Press. Cooper, L 2000, Strategic marketing planning for radically new products, Journal of Marketing, vol. 64, issue 1, pp. 1-15. Cox, J & Taint, N 1991, Reliability, safety and risk management, Butterworth-Heinemann. Deherty, A 2000, Integrated Risk management: Techniques and strategies for managing corporate risk, McGraw Hill, Dowd, K 1998, Beyond value at risk: The new science of risk management, John Wiley & Sons. Dunbar, N 1999, Inventing Money, Chichester. Ehrbar, E 1998, The real key to creating wealth, Stern Stewart & Co. Fusaro, C 1998, Energy risk management: Heading strategies and instruments for the international energy markets, McGraw-Hill. Glasserman, P & Kou, SG 2000, The Term Structure of Simple Forward Rates with Jump Risk, Columbia University. Green, TC & Figlewski, S 1999, Market risk and model risk for a financial institution writing options. Haimes, Y 1998, Risk modeling, assessment and management, Wiley-Interscience. Higuera, R & Haimes, Y 1996, Software risk management, Technical Report, Hull, J & Suo, W 2001, A methodology for assessing model risk and its application to the implied volatility function model, working paper, University of Toronto. Hull, J 2000, Options, futures and other derivatives, Prentice-Hall. Jan, Y 2002, A three-step matrix method for strategic marketing management, Marketing Intelligence and Planning, vol. 20, Issue 5, pp. 269-272. Johnson, G. & Scholes, K 1993, Exploring Corporate Strategy: Text and Cases, Hemel Hempstead: Prentice-Hall. Kendall, R 1998, Risk management for executives, FT Prentice Hall. Kotler, P 1998, Marketing management: Analysis, planning, implementation, and control, 9th ed, Englewood Cliffs: Prentice-Hall. Kotter, J & Schlesinger, L 1991, Choosing strategies for change, Harvard Business Review, pp. 24-29. Longstaff, FA & Schwartz, E 2002, Throwing away a billion dollars: The case of sub- optimal exercise strategies in the swaptions market, Journal of Financial Economics. Matthew, T 2002, Hotels in China: A Market Analysis, China’s Tourism Industry, Beijing, China: State Information Center. Viewed 17 May 2010, Melchers, R 1998, Integrated risk assessment: Applications and Regulations, Newcastle, Australia. Panjer, H et al 1998, Financial economics: With applications to investments, insurance and pensions, The Actual Foundation. Pearce, J & Robinson, R 2005, Strategic management, 9th ed, New York: McGraw-Hill. Porter, M 1985, Competitive advantage, New York: Free Press. PricewaterhouseCoopers 1999, The regulatory risk management handbook, Sharpe Inc. Robinson, S, Hichens, R & Wade, D 1978, The directional policy matrix-tool for strategic planning, Long Range Planning Journal, vol. 11, pp. 8-15. Thompson, J 2002, Strategic management, 4th Edition, London: Thomson. Tsiakkiros A 2002, Strategic planning and education: The case of Cyprus, The International Journal of Educational Management, Bradford. Zask, E 1999, Global investment risk management, McGraw-Hill. Read More