Multinational Operation and Competitive Status of Intercontinental Hotels Group Plc - Case Study Example

MULTINATIONAL OPERATION AND COMPETITIVE STATUS STUDY OF INTERCONTINENTAL HOTELS GROUP PLC 0 Introduction 1 Background and outline to the company Based in Denham, UK, InterContinental Hotel Group plc (IHG) has over 670,000 rooms in 4,600 hotels scattered across more than 100 countries (Roger, 2014). This makes the company a major multinational company in the hospitality sector. Some of the globally known brands of the company include Holiday Inn Express, Hotel Indigo and Candlewood Suites. The company is versatile with its service approach as it has a target market that includes people of all social standings. One of the company’s key business models is the use of franchising, resulting in 3,934 out of 4,602 hotels being operated under franchise (The Wall Street Journal, 2014). With an operating income of £421 million in 2013, the company was able to £1,201 million revenue, out of which 236 million came as net income (InterContinental Hotels, 2014). Below is a table of IHG’s key financials in the past 5 years. Figure 1: Key financials of IHG £ million 2009 2010 2011 2012 2013 Revenues 871.30 886.2 913.2 993.2 1,003.2 Net income (loss) 185.67 173.92 323.23 434.2 264.5 Total assets 1,827.02 1,732.56 1,932 2,234.63 1,932 Total liabilities 1,728.51 1,535.3 1,490.5 1,932 2,032.3 1.2 Rationale for selected company From the competitor analysis presented below, it would be noted that even though IHG performs far better than the industry average, the company has refused to be a market leader because it is yet to overtake most of its key competitors in terms of market capital (International Travel News, 2014). Under situations like this, Hotel News Now (2012) noted that there may be chances that the company’s strategic management is focused on internal growth without major regard for the competitive external environment. IHG was therefore selected as a company of interest as its analysis would help to bring out the effect of competitive positioning and social impact as external forces on companies. Table 1: Key competitor analysis for IHG 1.3 Research aim Based on the rationale for selecting IHG the current research is being undertaken with the aim of knowing how multinational companies such as IHG can identify their global external competitive forces and respond to these in a manner that creates competitive advantage for them. This will be done with the need to knowing how IHG is well positioned to be part of a 41.3% growth projection made for the global hotels and motels industry by 2018 by MarketLine (2014). As depicted below, MarketLine actually estimates that there is an impressive £492 billion value growth for the industry. But until IHG grabs its part in this, a very good understanding of its competitive environment and social impacts will be most necessary (Aragon-Correa and Sharma, 2013). Figure 2: Global hotels and motels industry value forecast 1.4 Approach to the project This project is being undertaken as a qualitative research that employees the use of case study research strategy. As a case study, the researcher shall select a specific issue within a research setting, which shall b critically analysed through the collection of data. The issue at hand is the multinational operation and competitive status IHG. This means that IHG doubles as the research setting. Data collection to be used in studying this issue shall come in the form of secondary data on the company’s current competitive position and social impact. 2.0 Comparative Analysis of the company’s competitive position 2.1 Porter’s five forces analysis As a multinational company striving to compete beyond itself into a global position, there are a number of industry wide forces that affect IHG’s ambitions (Oblinger, 2002). Five of these are discussed as part of the Porter’s five forces analysis. The first force is threat of new entrants, which describes how easy it is for new companies to come on board and compete in the same market that IHG finds itself. Here, it would be noted that the market structure of the UK hotel industry is a perfect competition (Sutton, 1999). What this means is that it is easy for new companies to come on board (Weaver, 2004). However, a number of restrictions exist in the form of legal accreditation and meeting standards. This is a situation that Arrow (1959) found to be an advantage of IHG over new entrants. This is because of most forms of start-up requirements have put new entrants off, making the industry revolve round older names like IHG. The second force is threat of substitute products or services. Certainly, not much substitutes can be found for most of the services provided by hotels and motels especially when it comes to accommodation. In terms of the offering of public space for events however, a number of substitutes exist. Having said this, Cyrek (2009) stressed that potential factors such relative price performance of substitute services in the hotel business often come at higher cost (Wilson and Dalton, 1997). This is a major advantage for IHG because the higher the prices for substitutes, the more likely it is that customers will stay with original service providers (Bryson and Einsweiler, 1988). Almost the same case can be made for other potential factors like substandard products and quality depreciation. This is because IHG’s experience in the industry makes it more advantaged to offer standard services and quality services than substitutes would. In a situation like this, an advantage is earned in the favour of IHG (Cash, 2012). Aumann (2006) saw bargaining power of customers as one of the worse forces that confront industry players, including IHG. Explaining the situation, Cunningham (1996) stressed that bargaining power of customers has existed in the industry as part of a long standing industry-wide behaviour. This is because several companies have preferred the use of price differentiations in winning competitive advantage. As a result, customers have constantly waged in to put firms under pressure to reduce prices (Plakoyinnaki and Dimitratos, 2013). What is more, IGH can be found to be faced with a peculiar problem of buyer concentration to firm concentration, whereby the limited numbers of customers that patronise hotels create an artificial imbalance which favours customers. In effect, buyer power is high for IGH and this is a situation that can negatively impact on the company’s revenue generation (Barton, 2004). Interestingly, customers may not directly bargain on prices but their attitude towards patronage can automatically make management review prices downwards (Doherty, 2007). Also, bargaining power of suppliers is one other crucial force that affects IGH and other industry players negatively. This is largely because of the limited number of credible suppliers in the industry (Gilligan, 1982). Gurnick (2011) also lamented about a situation whereby big industry players including IGH have overly relied on external sourcing of most of its raw materials. Because of this, suppliers always seem to have an urge over the companies in making the companies deal with them at prices best suitable for the suppliers (Moore, Doyle and Morgan, 2011). What is even more disturbing is the possibility of suppliers to fail with their part of the bargain by providing supplies on time. Once this happens, company operations are negatively affected (Gleason and Wiggenhorn, 2007). For IGH to overcome this force, it is important that the company secures supply contracts with as many suppliers as possible. By so doing, the company would rather cause competition among suppliers, forcing them to review their prices in a manner that is suitable for IGH (Noora, Tuunanen and Alon, 2005). Still on the industry-wide forces, intensity of competitive rivalry is another factor that affects the competitive of IGH. This is because intensity of competitive rivalry has been described as a major source of competitiveness in the industry (Bhattacharya, Sen and Korschun, 2011). More specifically in the case of IGH, there are two potential factors that affect its intensity of competitive rivalry. The first of this is sustainable competitive advantage through innovation. As far as this is concerned, IGH can be praised for upholding to innovative strategies that have become the bedrock of the company’s competitive advantage over the years (Minkov, 2007). It is not surprising that in the key financials of the company as seen in the figure below, it has been seen to be increasing in revenues over the years. Figure 3: Revenue growth for IHG in 5 years Source: company fillings The second major factor under intensity of competitive rivalry is firm concentration ratio, where IHG can be said to have a very high concentration ratio based on the measure of its total output produced within the industry wide scope (OGrady and Lane, 2012). 2.2 PEST Analysis Most of IHG’s key global competitors are located outside of the UK. Because of this, it is possible to have a PEST analysis that compares the competitive climate of UK to the company’s major competitors, especially those in America and Asia. From a political perspective, engaging in hotel business in UK is one that Nidumolu, Prahalad and Rangaswami (2009) noted to be highly restrictive with the need to obliging to several legal provisions and requirements. Even though similar situation may prevail in the US, OSullivan and Sheffrin (2003) lamented that the situation in the UK has often been likened to resistance to growth by industry players. In Asia however, companies in the industry are not faced with a lot of legalities when it comes to issues such as merger, acquisition and franchising, which help in making them more globally competitive (Blaug, 2008). From an economic perspective, a major competitive urge that IHG can be seen to have over its international competitors is the strength of the British currency, which is the Pound Sterling (Porter, 2008). This is because the Pound Sterling is the world’s strongest currency, which helps multinationals from the UK to avoid most forms of currency risk associated with doing global business (McNeil and Mumvuma, 2006). IHG can however take more advantage of the currency situation than it has now. This can be done by focusing more UK expansion as compared to international expansion. The company could also choose to concentrate more on forex trading as a form of hedging against currency shock in foreign markets. A major social factor that affects the business atmosphere of the hotel industry is the ratio of people across the social status demography (Wiggen and Bowmann-Larsen, 2004). What this means is that the number of people at the higher social class against those in the middle class and those at the lower class is an important determinant of success for the industry (Blum-Kusterer and Hussain, 2001). This is so as the patronage of hotels is mostly seen by many as a luxurious lifestyle reserved for the elite (Pavelin and Brammer, 2004). With this said, IHG can be said to enjoy a fairly balanced elite population when compared to what may be seen in other countries of origin of competitors, particularly those in Asia. Today, technology has become a major drive that pulls businesses along its path of trending (Lambert, 1996). According to Blythe (2008), the hotel business is no exception of this as electronic commerce has been highly popularised in this area of business. With this said, IHG can be said to be well placed as UK is highly developed with sufficient information technology infrastructure on which the company can focus its attention of electronic commerce on. What is more, the people within the markets forming the target market of the company also have the technological knowledge and platform to respond to the company’s technology drive. 2.3 Porter’s generic strategies Porter’s generic strategies seem to highlight three major strategies that companies may use as a competitive advantage in global business (Watanabe, 2007). As far as IHK is concerned, it can be said that each of the three generic strategies namely cost leadership, focus, and differentiation may be used. However, it is important to choose the right target market and market segment to practice any of these. To use the cost leadership strategic option, the company will be required to charge the lowest forms of prices on the market (Porter, Argyres and McGahan, 2012). This will be useful in attracting as many people from the lower class and middle class as possible. It will also help in clearing the notion that the patronage of hotels is only the reserve of the rich (Rainer and Turban, 2009). But to apply this strategic option without running at a lost, it is strongly recommended that the company focuses this strategic option in UK markets, where the strength of the currency can be a hedge against price deflation (Porter, 1980). To use the focus strategic option also, the company will be required to identify very special and unique market segments to who the company will be offering its services in a more sustainable manner (Treven, 2003). With this said, it is strongly recommended that the focus group that the company uses will be the business community, where the company will create a business to business focus group. The rationale for this is due to the attitude of the business community towards the hotel industry. It is common knowledge that more businesses and for that matter corporate people are involved in travelling, which improves the chances that these people would patronise hotel services more often (Rieger, 2006). By concentrating on business to business focus strategy, the company can have long term reservation agreements with a good number of companies who will be using the company’s hotels on long term basis. When it comes to the differentiation strategic option, it is recommended that the company will use this in an opposite way to how it is to use the cost leadership in terms of prices. This is because the differentiation will require the company raising its standard of service above what it usually offers (Usher, 2007). By implication, value addition will be a crucial issue with differentiation strategic option. By raising value, chances that cost of production will go up are also higher (Peter and Olson, 2007). In the light of this, it is recommended that the differentiation strategy will be used within a market segment made up of the high class people, celebrities and famous personalities. In the hotel business, and other service sectors, people are always ready to pay higher for differentiated and customised services (Wang, Chen and Chu, 2011). This is where the company can take advantage of the differentiation to charge higher to improve its revenue position against competitors (Office for National Statistics, 2013). 3.0 Creating Social Impact 3.1 Existing social activities (300 words 3.2 Balancing social responsibilities with corporate activities (500 words) 3.3 Applicable theories of social engagements (1000 words) 4.0 Enhancing business through theories 4.1 Enhancing business through theories of comparative analysis 4.2 Enhancing business through theories of social responsibilities 5.0 Conclusion (500 words) Read More