Investment Analysis for the Okura Hotels and Resorts in Connection with Indian Market Entry - Assignment Example

An investment analysis integrating, political, economic, social, technological, ethical and environmental issues Contents Introduction 3 Company and Country Profile 4 Reasons for investment 5 PESTEL analysis 6 Foreign investment trends 9 Competitive analysis 10 SWOT analysis 11 Competitive strategy 13 Conclusion 15 References 16 Introduction Over the last few years, India has witnessed a mad rush for business opportunities in the hotel sector. This has been on account of the fast growing economy with the dramatic growth of the tourism sector in the country. There has been a subsequent shortfall in the number of hotel rooms to meet the demand in the country. This has been the cause of fuelling room rates across the nation and India turning into a popular hotel destination for businesses. There are a number of MNC hotel giants flocking in the country and many of them are also seen to be entering into joint ventures. The nation’s government has been showing approval for the setting up of a number of new hotels, which is also viewed positively by both local and foreign businesses. The hotel industry in India is growing at a rate of 15% since 2010 and is forecasted to a skyrocket growth in the recent future (CNBC, 2012). The hotel chain groups and hotel industry are seen to be showing bullish behavior and optimistic attitude about their investments plans. This will not only add to the growth of the sector but contribute favorably to the growth of the Indian economy as well. The project seeks to provide a feasibility analysis report for the Okura Hotels and Resorts which is based in Japan and is seeking to expand operations in India. Firstly, it makes an analysis of the company and the services in offers. This is followed by making a thorough external environmental analysis of the hotel industry in India through PESTEL. A study of Porter’s Five Forces is employed to make a competitive analysis study of the hotel. This is followed by making a SWOT analysis of the company. Finally considering the various strengths, weaknesses, opportunities and threats, a suitable competitive strategy is recommended for the hotel’s establishment in India. Company and Country Profile The company selected for the project is Hotel Okura Co, Ltd. As the name suggests the company operates in the hotel industry. The company was established in the year 1958. Okura Hotels and Resorts are owned by the company. The portfolio of the company comprises of 23 renowned hotels. Of them, 16 are located in Japan while the rest are located in Overseas. In the year 1985, Euromoney regarded the flagship of the company named as Hotel Okura Tokyo as the best hotel in the world. The hotel was ranked second in the year 1981 by institutional investors. Currently it is the leading hotel in the world and ranked first in the country of Japan. Some of the well known hotels under the wing of the considered organization include Okura Garden Hotel in Shanghai, hotel Okura in Amsterdam and among the others are Halekulani in Hawaii and The Shilla in Seoul. The company in collaboration with the JAL Hotels took part in the convention of Global Business travel Association for the first time in 2011. In the month of September, 2010 the company acquired the JAL Hotels which was the operator of the Nikko Hotels International as well as the JAL City hotel groups (Hotel Okura Co., Ltd., 2011). Suppose the company under consideration in willing to expand the business in India. The nominal GDP of the country in ranked eleventh worldwide and third when measured in terms of purchasing power parity. According to the economic reforms, the country became the fastest growing economy. However, the country still suffers from the vicious circle of poverty, corruption and illiteracy. The country provides the world’s second largest workforce and the service sector contributes the major share in the GDP. Now, the company selects Mumbai to set up their hotels. Mumbai is the one of the prime tourist destinations of the country apart from being the financial hub. It is also the fourth most populous city in the world. Mumbai offers the tourist a variety of experiences ranging from beaches to hills. The culture of the country is incorporated in the city as one can find people throughout the world living in the city. In course of time, Mumbai has become one of the attractive tourist destinations of the country as all are inclined to experience the entertainment industry. Reasons for investment The first and the foremost reason for investing in the country is the fast growing economy of the country. The GDP of the nation is expected to grow at a rapid pace in the years to come. The foreign investment regime of the country is transparent. The capital market is vibrant and the banking system of the country is well developed. The judicial system is strong and independent. The country provides one of the highest returns on investment. The business schools provide high level of scientific and technical manpower. Due to the lack of available opportunity the foreign companies can get easy access to quality labor. The cost of labor is much less when compared to other parts of the world (OECD India Investment Roundtable, 2004, p. 7-8). There is prevalence of licensing of foreign technology and there is also prevalence of innovation as well as technology absorption at the firm level. The licensing policy of the industry is easy and the license is required only in cases where the products fall under the compulsory licensing or the industry is based in the restricted areas. The tax regime is stable and the capital investment as well as the profits can be repatriated. The investor has the potential to bring automatic route cases under the approval of the Foreign Investment Promotion Board. The country has emerged as one of the major destinations for venture capital funds. The ministry of tourism will approve the projects on the basis of documentation. There are two types of categorization namely the star hotels and the heritage Basic Category. Even after being operational the project can ask for the grading classification if they satisfy the norms prescribed. The abolition of the Fringe benefit tax is a major advantage of the hospitality industry. Such taxes is payable by the employer on the benefits that are received by the employees during their period of employment. According the tourism ministry the tourism industry of the country is on course to become the third largest earner of foreign exchange over the next three years. Economic liberalization is acting as the new force to the hospitality industry (Dreyfus, 2011, p. 1). The annual rate of growth of the sector is around 15%. The number of tourist arrival is likely to increase in the country as the stable economic as well as political conditions are prevailing in the country. The government is also implementing the policy of opening up of partial skies which will allow the domestic airline operators to avail the Indian sky (Australia Trade Commission, 2011, p. 2). PESTEL analysis Political The recent India political conditions are unstable; however, that has not retarded the growth of the hotel industry in the region. After the slowdown of the economy, Government has been trying to boost up the tourism sector which has consequently led to the rise of the hotel sector too. The World Trade Organization (WTO) has imposed great pressure on the Indian Government to reduce duties and tariffs on various items which consequently proved to be attractive for the foreign investors and traders. Political relations with other nations have also shown stability which is conducive for the foreign investors (Kalro, n.d., p.13). Economic The nation is fast developing into an open market economy of the world. Coupled with economic liberalization and industrial deregulation, the country has emerged as a popular place for private and foreign investors. Privatization of the enterprises which were owned by the state and declining control on foreign investments and trade have helped in accelerating the economic growth of the nation. The average economic growth of India since 1997 has been more than 7%. Although a large part of the population is engaged in agricultural activities, where agriculture accounts for the prime source of income of the masses, the major source economic growth lies with the service sector in the country. This accounts for more the 50% of the output in India employing only one third of the total labor force of the country. The Indian economy made a dramatic comeback after the global financial crisis which is mainly because of its strong and high domestic demand. Growth since 2010 has been consistently above 8% in real terms. However, since 2011 the economy has been confronted with a bit of instability because of high inflation and interest rates and the country has also little progress on its economic reforms. High international crude oil prices have only aggravated the fuel subsidy expenditures of the governments which has led to a higher fiscal deficit leading to worsening of the current account deficit of the country (CIA World Factbook, 2012). Socio-Cultural Though a traditional and ritualistic society is depicted by the culture in India, it also has a large urban population having modern and free living. This population has accounted for the major demand for the tourism and hotel industry in India. There has been an upwards social mobility and a great many opportunities in the private sector of the economy. This has brought about a general transformation and change in the lifestyle and living of people. The young generation aged below 25 years has been particularly following the western lifestyle with regards to their clothing, eating habits, etc. The combined effects of all the above factors have caused a general increase in demand for the hotel sector in the country (Department of State, 2012). Technological Software technology has been increasingly improving in India. The country today accounts for one of the major providers of software services across the world. It has successfully replaced its old and obsolete technology to new ones throughout all its sectors. It has also reduced the use of manpower substantially across different sectors of services. Technology has largely advanced in the healthcare and agricultural sector which have consequently caused a general boost to the economy. The booking systems in hotels have been revolutionized through the application of technology. Apart from influencing the basic products in the hotel industry, technology has also supplemented the other services considerably. Right from the billing to the payments is completely computerized nowadays. High end technology has been the prime cause of interest of foreign investors in the region (Kalro, n.d., p.13). Environmental The growing concern for protection of the environment has impacted in numerous industries particularly in the travel and transportation sector. The general move towards a more environmental friendly protective products and services has been influencing demand patterns of customers and business opportunities at large. Besides the above factors, India is a country where environmental conditions remain extreme. In this context, it is worth mentioning about the Mumbai floods affecting millions of population every year since 2005. Businesses are required to be particularly cautious about the period between June and September as this is the period mostly affected by extreme environmental conditions. Other factors such earthquakes and tsunamis have directly impacted on the occupancy rates in hotels over the past few years. That is why government has been increasingly concerned about the emergency situation plans of these hotels operating in the country. Legal Though the Indian economy has been liberalized to a substantial extent, the Government is particularly concerned about the legal regulations that businesses must comply with. This is with regards to the environmental laws and regulations. Businesses must also comply with the labor laws and regulations which includes the health and safety laws for workers. India has a disability discrimination law according to which each and every star hotel operating in the nation must provide rooms for disabled guests and provide special features for the blind, deaf, hand and leg impaired people. These rooms are particularly placed in the first floor and special care is taken for them. Besides the above facts, hotels must get prior approval from the Ministry of Tourism before their establishment in the country. They must also acquire approval from municipalities, police authorities, and other local authority in the region. They are also required to acquire an NOC from the Airport Authority of India. Foreign investment trends The hotel industry of India is undergoing a transformation. It has gained the level of acceptance across the globe. The industry is experiencing significant growth in rooms across all categories and extensive use of technology and market segmentation has penetrated the industry. According to the reports of World Travel and Tourism Council, the Indian hotel industry will get benefitted from the investment of more than 100 billion U.S. dollars by the year 2020. Therefore, around 8% of the total investment of the country will be diverted to this sector (NIPS GROUP, 2012). The industry is expecting an investment of more than 10 billion U.S. dollars. Such investment will create more than 2,000 employment opportunities. The big hotel brands are planning for expansion within the country. The renowned hotel brand Starwood is planning is to expand in a big way by opening up of 50 new hotels in this year itself. The same organization is looking to double the number in the coming three years. The management is planning to introduce a new brand as they are currently operating in the four star category. They believe that India possess huge potential in three or less than that category. Marriott, another hotel brand is planning to initiate 24 hotels by the year 2015. IHCL is planning to open 50 budget hotels under the Ginger brand in the four year period of 2009 to 2013. EIH is on the verge of developing 750 additional rooms under the brand of Trident by 2013. Carlson will increase 50 hotels by 2012 while it was only 28 in 2009. The cumulative FDI inflows into this sector are estimated to be at more than 2,000 million dollars between the periods of 2000 to 2010 (India Brand Equity Foundation, 2010, pp. 4-5). Competitive analysis The hotel and tourism industry is a relatively mature market and there are only few options to develop in productivity terms. The market remains active in terms of brand activity. An existing or penetrating hotel brands will always the threat of new competition. Competition in this market is not product oriented but service oriented. Competition is on the ground on how to provide the customers the best services at low cost. Budget hotels are emerging in the country and with the recent initiatives form the part of the government are attracting many new brands of hotels that were operating in the other parts of the globe. In India, the already existing brand names include The Taj Group of hotels, The ITC, The Oberoi Group of hotels and Le Meridien Group of Hotels. The proposed project enjoys the advantage of unusual business concept. The competitive situation can be analyzed using three sets of variables namely direct versus indirect competition, quantitative as well as qualitative analysis and monopolistic or oligopolistic competition. The company’s operating in the similar industries provides direct competition to the concerned company. There may be more than one five star hotels in the same destination each one competing to acquire the maximum share of the tourists visiting the destination. The hotels of lower category or that do not match with the category of the considered hotels provide indirect competition (Indira Gandhi National Open University, n.d., pp.18-19). SWOT analysis Strengths The multinational presence of the hotel accounts for its biggest strengths. This is because its’ success and profitability does not depend on a single hotel. It is a wide chain network which mutually supports each other and the downfall of any hotel can be easily supported by the others. Iwajiro Noda, the cofounder of Okura Hotels and Resorts is a highly distinguished entrepreneur of the world and his works has been appreciated and esteemed highly. He has made significant contributions to the travel and tourism industry in Japan. Thus his subsequent works is likely to earn faith and appreciation of the masses. The hotel accounts for one of the best luxury hotels in Japan and also in other countries where it operates. Its strength also lies in the fact that it constantly tries to redesign and reinvent itself with the changing demands and trends which keeps it ahead of competitors (Hotel Okura, 2010). Weaknesses The Okura Hotels and Resorts are accounts for one of the finest luxury hotels of the world and are developed highly on the western pattern and style. The Japanese attention and sensibility to detail is coupled with western high functionality offering relaxation and comfort to the guests across the world. However, since the lifestyles and pattern of living in the eastern countries like India are different, the establishment costs for this hotel in India can be extremely expensive. The tastes, preferences and cultures are different which means that the establishment of the hotel in this region also involves risks. Opportunities The hospitality sector in India is projected to grow at the rate of 8.8% between the years 2006 and 2017. The country also demonstrates the second fastest growing tourism sector of the world. The government has taken immense interest in this sector in the form of making investments in the hotel infrastructures. Open sky policies made by the government are particularly meant to drive the hotel industry. The hospitality industry and hotels also accounts for the major employment generators in the region. Decisions taken by the Indian government to upgrade the regional airports in the small towns, along with privatization of the Delhi and Mumbai airports which are the main metropolitan regions of the country have particularly opened up avenues for the establishment and development of hotels in the country. Moreover the availability of qualified workforce in the sector account for immense growth prospects for the sector (The Economic Times, 2009). Threats There has been emerging popularity and demand for guest houses in India which could replace the demand for hotels which are comparatively expensive. This trend has been growing in the western countries and is followed in India which is diverting the hotel traffic substantially. There are also political turbulences, like inflation, interest rate increases which is causing apprehensions among businessmen in setting up operations in the country. The economic conditions in the country have a direct impact on the demand for hotel services in a country and economic conditions in India at the present moment seems to be highly unstable. Also there is lack of trained manpower in the hotel sector in India (Kanjilal, 2008). Competitive strategy The differentiation strategy is that the enterprises should provide customers with unique products and services in comparison with other competitors, thus, companies can set up an unique competitive advantage as a competitive strategy. The hotels in Mumbai are mostly of budget hotels and there is lack of brand hotels. Therefore, in order to achieve a strong foothold the company must take the advantage of the comparative advantage. The competitiveness of the budget hotels is to reduce the costs of operation through the process of standardization. The hotel can standardize the rooms into different standards which will pave the way for customer segmentation and the customers will be provided with unique features of the considered company. There are many hotels in Mumbai with little or no reputation. Due to this situation, the company willing to penetrate into the hotel industry of the country must integrate the advantages that the resources that the province provides, spend time as well as efforts in order to create brand within the country which have high prestige along with high sense of value. The company can also think of sub-brands and derivative brands which will help in diversifying the business of the company in other parts of India as well. The company can also launch different level of budget hotels so that it will be able to attract customers from all categories of income and cement the consumer base. Some of the centers of the country especially the metro cities have become the attractions of the tourists with the positive initiatives from the government. As a result it is supposed to bring huge foreign exchange for the country and will the space for development. The tourists may evolve as collective units and thus the company can provide related services for the needs of the customers. The company can launch the strategy of branding and advertising. Internet marketing can act as an effective tool to promote the hotel. Foreign tourists prefer to select the hotels which carry brand names and so if the company is able to create the brand value it will automatically attract the foreign tourists. Improvement of the services will act as another strategy for the company. The company can offer some special discounts in the off seasons or issue some privilege cards to the customers. This kind of strategy will stabilize the consumer base of the company as the customers will prefer to stay in the hotel in their next visit in order to avail the discounts. The hotel industry suffers from strong seasonal characteristics. So the price elasticity should be taken into account. The prices should correspond to the qualitative value. The pricing structure should be made flexible as in the peak seasons the competition among the hotels is fierce. The demand is often not matched with the supply. When supply is greater than demand, the hotel is left unused but when demand is greater than supply the hotel is short of options and is forced to turn down the customers. The hotel should formulate a strategy so that the supporting equipment and the service personnel match the demand at any point of time. The chances of occurrence of bottlenecks within the operation must be reduced to zero although this is not an attainable situation. The levels of demand fluctuate in an unpredictable fashion in the hotel industry (Mostert, Steyn and Petzer, 2008, pp. 3-6). Conclusion The above analysis reveals that the prospects of setting up establishments for Okura Hotels and Resorts in India are highly favorable. The hotel chain accounts for one of the finest deliverer of luxury services in countries like Japan and America. As India has been depicting a transformation of culture from the traditional society to the urban and westernized society, it is expected that the hotel in India would be successful and highly demanded by the society. A forecasted high demand for travel and tourism sector in India at the rate of 8.8% annually provides great impetus and prospects for this hotel chain. Also the role of the government in making the sector demanding and prospective works in its favor. However, some of the weaknesses and threats for the company in establishing in India is the fact the cost of land account for 50% of the project costs which is substantially less at the rate of 15% aboard. Also the existence of large, renowned and international players like Taj and Oberoi are expected to significant competitive threat for the company. Thus such competitive strategies have been recommended for the hotel chain as providing customized services for guests. Apart from delivering high end luxurious services, it is recommended that it offers packaged services for different classes of society in order to attract people and generate demand. This would not only help to attain the high classes of society but also the middle and upper middle class as well. Lastly, it is recommended that the company offers price flexibility charging low prices in peak seasons and low prices in off-seasons in order to maintain consistent revenue throughout the year. References Hotel Okura Co., Ltd. ,2011, Okura Hotels & Resorts and JAL Hotels to Exhibit Together at GBTA Convention 2011. [online]. Available at: http://www.hospitalitynet.org/news/4052491.html. [Accessed:25th May, 2012]. Indira Gandhi National Open University, n.d., COMPETITIVE ANALYSIS AND STRATEGIES. [pdf]. Available at: http://www.egyankosh.ac.in/bitstream/123456789/36301/1/Unit-5.pdf. [Accessed:25th May, 2012]. Petzer, D., Steyn, T. and Mostert, P. 2008. 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