Negative Economic Factors on Hotel Glorious - Case Study Example

Negative Economic Factors on Hotel Glorious Introduction The case examined here is of a fictional hotel in Leysin Switzerland. The hotel is a popular resort with about 40 rooms, a bar, and a small spa. Within the first six years since it was launched, the hotel realized steady growth. However, the dynamics of the world economic outlook and the national economy of Switzerland have had a significant impact on the hotel. The most notable negative factor is the global economic recession. In the hospitality industry, the impact of negative factors such as the economic recession can have adverse impacts on the occupancy of the hotels. This is highlighted by the fact that most customers tend to eliminate unnecessary spending. In many instances the most likely spending cuts that are taken by consumers are luxury related expenditure (Tribe 2007, pp 13). These are directly linked to the nature of business in the hospitality industry. Apart from the compulsory business travels, leisure travel and hospitality, is likely to be adversely affected by the recession. This is based on the fact that during a recession, most individuals limit their spending to the essential requirements. This paper tries to highlight the various effects of negative economic factors on hotel Glorious. To mitigate these challenges, the hotel could consider a merger to reduce costs through economies of scale. This strategy is likely to have both negative and positive impacts on the hotel. The ramifications of such a move are also discussed in this paper. Effects of the recession The effects of economic recession on businesses are in most cases negative. Consumers tend to reduce the level of expenditure. This directly impacts on the demand for the product or services of the firm. To counter this trend, the firm might decide to lower prices as a strategy to attract more customers. The result is the reduction of profit margins or sometimes the firm can record a loss. In a recession, most employees are forced to take pay cuts or sometimes lose their employment. The impact of this is that most people will find alternative or additional work to bridge the deficit. In an attempt to do this more time is spent generating the income with less time to engage in leisure (Tribe 2007, pp 67). The only expenditures that will not be greatly affected are those that deal directly with the basic needs. Due to this fact, the leisure industry is likely to be negatively affected by the recession. The possibility of growth in the wake of a recession is very minimal. This is occasioned by the sustained decline in demand. In the case of Glorious hotel, economic recession would provide an oblique future in the development. The possible reaction of this hotel to a global recession would be minimal as compared to the large reputable hotels in the leisure business. First the hotel is run by the family. This implies that the motivation of the labor force to achieve the objective of profitability will not be affected in to a greater percentage. The hotel can see significant reduction in productivity at lower employees but the general level of service remains constant due to family management. However, in the aspect of promotion, the hotel is likely to feel the heat. Advertisement is one of the key areas of that helps in improving sales of a product. In the event of a recession, the reduction of demand cuts into the profit margins, the most likely expenditure cutback that the management will take is directly linked to product promotions and advertisements (Khann 2007 pp 14). In the case of hotel Glorious, the recession is likely to limit its expansion and growth. However, should the economic situation improve, the chances of rise of the occupancy levels will not automatically an upward trend. Tribe (2007) explains that as the income levels of the population increases, the consumption of high-quality products increases. It gives an illustration of the likelihood of people shifting to the consumption of more reputable brand name products in the industry. Brands that are classified as inferior do not benefit from improvement of the economy. It also gives an example of the continued decline of morecombe seaside resort which it classifies as an inferior leisure destination (pp 47). Even in the leisure industry the demand for products are affected by the prices of the product and the prices of similar products. Tribe (2007, pp47) illustrates the similarity of products in the leisure industry using the Verbier skiing resort in Switzerland and Ellmau in Austria. It explains that the relativity of their prices will cause the trends of demand to change. The effect of a recession is that customers are more conservative on expenditure. This will force Hotel gracious to change its prices to the lower side to tilt the balance of demand to their advantage. This will generally aim at provoking the customers to try and benefit from the low prices while trying the products of the hotel Effects of a strong currency Globalization has changed the face of leisure business. Most hotels are majorly used by international tourists and business leaders. This implies that the hotel industry is a service exporter. As an exporter, the effect of a strong currency is a reduction in the sales. This is because many potential customers would opt for cheaper currencies to purchase more commodities at the same amount of money. The impact of this is a reduction in demand. In the event that demand is low, the most likely effect is a reduction in the supply in order to make sales. In the case of Hotel Glorious, the impact of a strong currency and globalization will be felt in the reduction in margins. Most clients who are able to use the services of international Hotels are generally wealthy clients. In (Tribe 2007, pp47) the impact of high-income has been discussed. It explains that the better the living standards of the population, the more they desire better and reputable product brands. Basing an argument on this, it can be taken that Hotel Glorious is not directly affected by steep foreign exchange rates while exporting its services. However, the hotel misses out on the opportunity to expand its market to meet the demands of this market segment. This is because; notwithstanding the steady growth within the first six years the hotel has not considered making a mark in the international markets. It is worth noting that the expansion into regions with a weaker currency would be cheaper than expanding locally due to favorable foreign exchange rates. The effects of a strong currency are not purely negative. There are a variety of advantages that are posed by a strong currency. For instance, the business can outsource some of its services from other regions with considerably weaker currencies. This will provide the business with an absolute cost advantage in production. The margins realized here can be transformed into price incentives for the customer. Strategies for mitigating the challenges Technological advancement Tribe (2007) identifies technological advancements as a means of dipping the costs of production and enhancing the quality of the existing product. It explains that if the product is more advanced and performs better the demand for the product will definitely go up. This is one way of improving the price levels of commodities. In the leisure industry, it gives the example of the advancement of the camera, for instance, as one step that led to an improvement on the demand of the commodity (pp 12). To attain good prices for its commodities, the skillful application of this methodology could provide great results. Most importantly, there are a number of established multinational chains of hotels in the leisure industry. Developing quality products using advanced technology could provide the hotel with a chance to increase its occupancy and provide competition to these hotels. An example of areas of technology that the hotel could consider is green energy. NH hotels in Spain have added value to their services by applying special design features to their hotel. The hotel uses card keys that have been customized for use on in that hotel by the guests. The energy system o the hotel is also revolutionary. The production of energy is from renewable and eco-friendly sources like wind and solar power (Jauhari 2014, pp 169). This makes the Hotel particularly appeal to the high number of individuals who have issues to do with the environment close to their heart. This development in technology also provides the hotel with an opportunity to reduce the cost of operations. The utility bills like power needed for moving the elevators within the building and other functions is totally generated from renewable sources. Innovation A strong currency provides the opportunity for the business within a strong currency zone to invest in research and development in regions with a weak currency. In doing this, the businesses are capable of reducing its operation cost and develop high-quality products. A good example of a company that exploits this cost advantage in the leisure business is Nike. Despite being a US based company, Nike outsources its production to other regions with weaker currencies than the US dollar. This in turn has given the company the comparative advantage in terms of cost. The cost advantage has been used by the company to foot an extensive and elaborate promotion plans in countries with strong currencies. Through this method, Nike has achieved a level of success in having larger sales in countries with strong currencies (Tribe 2007, pp14). This method can be used by Hotel gracious in advancing its innovation. The research and development team can identify a country with a weaker currency and set up a research facility. This will enable the hotel be a global leader in developing new standards in the leisure industry. I Leeds for examples most of the hotels offer their weekend customers overnight clubbing for free on Fridays to encourage them to stay at the hotels overnight. The bigger objective is to retain these customers for the whole weekend and increase occupancy. The research that was carried to develop this model of retaining customers has proved effective since the results show that the hotels in Leeds generally have a high occupancy in the UK (Lundtorp and Baum 2001, pp 139). Long-term customer relations A strategy that would aid its survival and long-term profitability is the retention of loyal customers. Hotel glorious can retain its loyal customers by offering the customers discounts or better deals. This will definitely cut into the profit margins of the Hotel in the short run. However, the cumulative effect is that the hotel could survive to see changes in the foreign exchange rates and eventually return to the initial profitability levels. While the price of a commodity is a major consideration in the demand of the product, some customers put more emphasis to quality and customer relations in the firms that they deal with. For hotel glorious, the reputation gained over time and its popularity among different clients should be the driving forces in retaining its customers. Providing discounts for this high-quality service will also prove challenging. This will cut the profit margins to nearly zero. The main consideration of the hotel at this point is to sustain it operations over the recession period and hope for a better future. Economies of scale To achieve economies of scale, the hotel can decide to join a chain of hotels. This will greatly reduce in many areas of operation. The maintenance of the hotel and the purchases are key areas where the economies could benefit the hotel. The redundancy of employees could also be avoided by downsizing to and restructuring of management. Peck and Temple (2013, pp 293) explain that the results do not directly translate to profits in the long run. This is because the transfer in management directly affects the productivity level of the employees. Strategic alliances would provide hotel Glorious with a good method to expand into new market territories even with the recession. This is since the alliance provides for the use of different resources in the custody of the firm in advancing in to new market segments. In a strategic relationship with an international firm, the Hotel could use a well-developed marketing channel to tap into new frontiers. This is a particularly advantageous to the firm because the experiences of the bigger Hotels would benefit the Glorious hotel. To advance the need to increase occupancy in the hotels, the Hotel could greatly benefit from the marketing power of the international reputable partners. It is noted by Tribe (2007, pp 47) that most customers who have a high-income develop a taste for high end and reputable luxurious brands. In the wake of a recession, these economies of scale must be transformed in to real incentives to attract customers. These can be done through promotions or price reduction to skew the demand in the favor of the entities forming a merger. It is worth noting that the hospitality industry is characterized by seasonal business environment. The variations in the pricing could be used occasionally to reduce or increase demand as appropriate. In reducing the entrance fees to the hotel facility, many individuals are likely to occupy the facility. Increasing the fee, however, reduces the demand. The impact of this could be felt in the increase (Inkson nad Minnaert, 2012 pp 304). It explains that such increases could potentially lower the secondary demand and expenditure within the facilities. An example of a strategic partnership in the hotel industry is that of the Hilton hotel international and Mc Donald’s fast foods. In this setup the fast foods produced by Mc Donald are sold in many of the international hotels worldwide (Hitt et al. 2014, pp 176). The benefits that are offered to Mc Donald in this setting are numerous. The market for their products has been expanded greatly with this setup. The chances of development and growth of business are also very high. This is because Mc Donald uses the readily available marketing platform and reputation of Hilton international hotels. Should Mc Donald wish to expand into this market, a strategic partnership provides it with the case to learn from. This makes the expansion a lot easy as compared to expanding into virgin territories. Conclusion Generally a recession impacts negatively on any business enterprise. This is because recession reduces the buying power of the population. In the event that the population becomes conservative on expenditure, the demand of various goods and services is greatly reduced. The effect can be registered in the significant reduction of profit margins by many firms and or possibly registration of losses. The losses are caused by reduction of prices by the manufacturers and different suppliers to provoke a spirit of buying in the population. A strong currency, on the other hand, has both positive and negative effects on a business. The challenge it poses is that it reduces the demand of products and services from the same economy. However, the challenge can be overcome by outsourcing production and reducing costs. When a cost advantage is achieved, the surplus saved from the cost of production can be channeled to cushion the customer from exorbitant prices (Tribe 2007, pp14). One of the main determinants of demand and supply of a product is the price. It is important to use pricing policies that are favorable to the customers and will at the same time provide the business with an opportunity to sustain itself in the face of recession. It is important for the management of any hotel in the leisure industry to fully understand the dynamics of the economy in which the business is located. This would be crucial in developing a strategic plan to counter the challenges posed by negative economic factors. A mixture of styles can be used to provide a solution to the challenges. This can provide a better solution as each method used counters a specific negative economic factor. References Hitt, M., Hoskisson,R. and Ireland, D.R. (2008). Understanding Business Strategy: Concepts and Cases. Canada. Cengage learning. Inksonn, C. and Minnaert, L. (2012). Tourism management: An introduction. Jauhari , V. (2014). Managing sustainability in the hospitality and tourism industry. Florida. CRC press Khann, B. R. (2007). Production and operations management. New Delhi. PHI learning private limited publishers. Peck, S. and Temple, P. (2013). Mergers and acquisitions: perspectives. New York. Taylor and Francis publishers. Tribe, J. (2007). The economics of recreation, leisure & tourism. 3rd ed. Oxford, Elsevier. Read More