Holiday Inn Corporation Analysis

I. Introduction (600)

The term of globalization describes a number of processes by which products, people, companies, money and information are able to move freely and quickly around, unimpeded by national borders or other territorial limitations (Morrison, 2002). Benefited from that, multinational organizations are booming in the world market.

Globalization opens up new opportunities for multinational corporations, but it also creates new risks and something uncertainties. The aim of this paper is to examine the internationalization process of Holiday Inn hotel chain, one of the famous multinational corporations in budget hotel industry, with the framework of Porter’s Diamond and transnational management typology.

1.1 Overview of Budget hotel industry in the USA

A budget hotel is described as a hotel that is economical, as well as being clean and comfortable. “Generally, budget hotels only provide bed and breakfast. They are as good as three-star hotels, but have no resplendent lobby, no conference rooms or entertainment centers. Some don’t even have dining halls. The budget hotel sector exists as a hotel business as part of to the traditional full service hotel business that offers standard facilities and services.” (Xinhua Daily, retrieved 2007) After the Second World War, the prosperity of America’s economy led to the development of domestic tourism, which resulted in a great demand for inexpensive accommodation; furthermore, the building of an inter-city expressway network led to the motels becoming popular.

For instance, in 1952, the Holiday Inn chain of hotels was founded by Kemmons Wilson to provide inexpensive family accommodation for travelers within the USA. From the late 1980s to the late 1990s, Large hotel groups preferred merger and acquisition of existing brands to create new brands. Since entering the 21st century, the budget hotel sector has started a new rapid growth. The main manifestation of this stage is the development of budget hotels in developing countries. The famous budget hotel brands, such as Ibis, Formula 1, Super 8, Days Inn, and Holiday Inn Express, have been entered into the Asian market (green).

Due to Luxury hotels were considered as not economical, and inexpensive hotels were neither sanitary nor practical, the growth of budget hotels is increasing fast. According to statistical data collected by AHLA (American Hotel & Lodging Association) in 2006, the number of budget hotels in the US is about 60,000 and the average occupied rate approximately 70 percent of the U.S. hotel market. Meanwhile, a survey of oversea tourism shows the proportion of revenue of budget hotels is 64% in the US hotel industry.

C. The Holiday Inn Corporation overview

Holiday Inn hotel is one of typical international budget hotels chains. It was founded in 1952 in the USA to provide inexpensive family accommodation for travelers within the USA. By 1968 there were 1000 Inns across the country. In 1988, Holiday Inns International was purchased by Bass PLC, the owner of a UK’s beer brand, followed by the remaining domestic Holiday Inn hotels in 1990. The remainder of Holiday Corporation was spun off to shareholders as Promus Companies Incorporated. In March 1998, Bass acquired the InterContinental brand, expanding into the luxury hotel market. With more than 1,400 properties worldwide and nearly 1,000 in the U.S., Holiday Inn is the most recognized lodging brand in the world. (Holiday Inn from Wikipedia: retrieved 2007).

D. Structure of the project

This paper will be mainly organized as four parts: introduction, literature review, company analysis and conclusion. In the literature review section, the framework of Porter’s Diamond transnational management typology will be explained in details. After the competitive advantage analysis of American Budget Hotel industry, a company analysis of Holiday Inn chain of hotels will be discussed from competitive challenge, collaborative challenge, organizational challenge, and cultural challenge aspects.

II. Literature review

Porter’s Diamond Analysis

Traditionally, economic theory discuss many factors for comparative advantage for regions or nations, such as land, location, natural resources (minerals, energy, etc.), labor force, and local population known as Heckscher-Ohlin Theory (Ball and McCulloch, 1999). However, by studying a hundred firms in ten developed countries, Michael Porter argued that a nation can create new advanced factors such as knowledge based workforce, advanced technology, and government support, etc. He believed those classical theories of comparative advantage are incomprehensive, so that he claimed Porter’s Diamond of national competitive advantage (Porter, 1990).

Porter’s Diamond (Figure 1) is a diamond shaped diagram of the basis of a framework to illustrate the determinations of national competitive advantage. This model represents why the nation achieve in a particular industry from four factors: Factor conditions, Demand Conditions, Related and Supporting Industries, and Firm Strategy, Structure and Rivalry. Besides, chance and government are two extended factors in the model. The factor of chance is uncontrollable, while the impact of government is hard to neglect ().

Factor Condition

Factor conditions (also called as Factor Endowments) refer to inputs used as factors of production. Porter divided factors into basic factors (Heckscher-Ohlin theory) and advanced factors; general factors and specialized factors (Ball and McCulloch, 1999). Porter emphasized that the "key" factors of production (or specialized factors) are created, not inherited (Porter, 1990)

The basic factors include raw materials, unskilled labor, climate, location, etc, while the advanced factors refer to technology, information, transportation and other infrastructure, skilled labor, and research and development sectors. Porter believes that the importance of basic factors is much less than the advanced factors, due to the decrease of demand (Porter. 1990). And an international firm can easily gain those basic factors from the whole world network. In contrast, the importance of advanced factors in achieving competitive advantages is indubitable.

Due to the difficulty of gaining advanced factors from outside, firms must take effort on the staff training and investment heavy and continually. Specialized factors are necessary in each specialized industry, and lead to bring more competitive advantages. Porter pointed out that if a country builds up its competitive advantages on the basic and general factors, it is unsteadily. In real competition, abundant resources and cheap cost may lead to inefficiency on utilizing resources. In contrast, some disadvantages may make the stress on innovation (Porter, 1990).

Demand conditions

Domestic and local demand shapes the attributes of domestically made products and encourages upgrading competitive advantage (Bartlett, 2008). Firms that face a sophisticated domestic market are likely to sell superior products. Because of the market demands on high quality products, firms are able to get better understanding of the needs and desires of the fastidious customers (ibid). The other aspect is anticipatory buyer needs. If the nation’s discriminating values spread to other countries, it helps local firms anticipate global trends. And then the local firms will be competitive in the global market ().

Related and supporting industries

Porter pointed out that a series of strong related and supporting industries is also vital for the competitiveness of firms. He mentioned that “Home-based competitiveness in related industries provides similar benefits: Information flow and technical interchange speed the rate of innovation and upgrading. A home-based related industry also increase the likelihood that companies will embrace new skills, and it also provides a source of entrants who will bring a novel approach to competing” (Bartlett, 2000, pp230).

Porter also pointed out the impact of Industrial Cluster, a phenomenon of competitors locating in the same area. It brings both positive and negative influence, i.e., it helps the cooperation with the first class suppliers, and builds a close relationship with upstream and/or downstream industries. However, it has potential risks that poaching of employees by rival companies and obvious increasing in competition ().

Firm strategy, structure and rivalry

Porter emphasized that the motivation, which leads firms to be international, is very important. It may be from the international demand, the stress from local rival, or the market base. Nations are more likely to gain success “where the management practices and modes of organization favored by the national environment are well suited to the industries’ sources of competitive advantage” (Porter, 1990. pp108). Porter also argues that countries will tend to be more competitive in particular industries because of they have fit management style which may be differed from others.

Meanwhile, intense competition helps the process of innovation. In addition, international competition is not as intense as the general consideration. In international market, companies are different enough due to their own national environment, culture and value to survival in each particular industry. The other reason is a successful product, before being international, must experience an intense competition and then gain achievement in its domestic market (Porter, 1990).

Chance and government

Along with the four competitive determinants, Porter also emphasized the role of chance and government in the diamond model. Chance events are defined as the ones that have little to do with circumstances in a nation which are uncontrollable of firms (Porter, 1998). Random events can either show positive or negative effect on a firm’s competitive position. These can be anything like major technological breakthroughs or inventions, acts of war and destruction, suddenly increasing of the production cost (e.g. the increasing price of oil), sharply change of the market demand or dramatic shifts in exchange rates.

It may bring competitive advantages to new rivals but make the formal one loose its position. The government plays an important role in Porter’s Diamond model. “Government’s proper role is as a catalyst and challenger; it is to encourage or even push companies to raise their aspirations and move to higher levels of competitive performance…” (Porter, 1998) Governments can impact all the four of Porter’s determinants through a variety of actions such as subsidies to firms, changes of taxation, business or property ownership policies, educational support, establishing high technical, and regulating product standards. The role of government in the diamond model is to encourage companies to raise their performance, stimulate early demand for advanced products, focus on specialized factor creation, and stimulate local rivalry by limiting direct cooperation and enforcing antitrust regulations (webMBA).

Criticism

Although Porter theory is well-know and has world wide reputation, it has a number of criticisms. Porter developed his theory based on case studies only covering about 100 industries and 10 developed countries. Therefore, it has been considered as not adoptable in developing economies. Besides, the model does not adequately concern with the role of MNCs which seems to be ample evidence that the diamond is influenced by factors outside the home country (12). Dunning commented that the competitive advantages of a country has been affected by the globalization of production and markets (Dunning, 1993).

Rugman and D’Cruz argued that a major problem of Porter’s model is Porter’s Flawed understanding on the two-way nature of foreign direct investments (FDI) (Lee, 1998, pp15). Porter believed that only outward-FDI is valuable in creating competitive advantage, and inbound-FDI does not increase domestic competition significantly because the domestic firms lack the capability to defend their own markets and face a process of market-share erosion and decline (web). Additionally, raw materials and other resources could largely provided by international competitive supplier.

Thus, related and supporting industries within a particular nation may not as important as Porter’s theory mentioned. (Jin and Moon, 2006) Meanwhile, Ruman and Verbeke (1993) pointed out that Porter’s diamond does not give a clear reason that why use national level as the geographic indicator for an industry’s environment. Referring to international success, the local, regional or global level may be more suitable for particular determinants.

Finally, Porter’s diamond is used to analyze firm’s condition afterward and it does not have predictive function. Particularly, the join of chance makes the model further weaken predictions (12). As a result, it is necessary to think about whether Porter’s theory is persuasive to the industry you are going to analyze.

As Hedlund and Ridderstrale(1997) demonstrated, Bartlett and Ghoshal’s study was suffering from a lack of emipirical grounding. The provided ones were dispersive and not concrete enough to give a rough sketch of the research. They would mainly focus on the leading MNCs rather than a more representative sample. Meanwhile, it is also argued by Harzing(2000) that the sample size in their research was too small, that is, only nine MNCs, which would not cover all the characteristics of various MNCs integratedly. He also pointed out that in many researches, the authors failed to tick out international firms from other types of firms, including Multinational, Global and Transnational corporations.

However, in several researches, international firms were simply regarded as Transnational Companies, while in others, they were referred to as low integration and low responsiveness. Therefore, whether Bartlett and Ghoshal’s competitive challenge theory is valid is still unknown to us. As Gtote(2002) said, in this theory, they supposed most industries may have the opportunity to become transnational firms but the degree or level varies among the three different types discussed above.

There is a possibility that the costs arises from the risk of disintegration, coordination and control of a transnational company might offset the higher profit related to a transnational strategy in a multi-domestic industry. Thus, sometimes regional strategies might be more proper than global strategies to smooth competitiveness since it could be viewed as a fixed level between two countries while more vulnerable in a multi-country environment.

III. Company analysis

Competitive analysis of American Budget Hotel industry

The hotel industry is considered as one of the most glory industry in the USA. Budget hotel sector is one of the most unique sectors in the hospitality industry which is original start in the US and exploiting to the worldwide. According to the data from American Hotel & Lodging Association in 2006, the number of budget hotels in the US is about 60,000 and the average occupied rate approximately 70 percent of the U.S. hotel market. In addition, a survey of oversea tourism exhibits the proportion of revenue of budget hotels is 64% in the US hotel industry.

Factor endowment

It is easy to achieve each of the fundamental needed in the US due to its large land and a large amount of migrated workers. Discussing about the hospitality industry, from the human resources aspect, those migrated and unskilled workers could always support the most basic cleaning jobs in hotel and only require little wages. On the other hand, America is a nation that attracts many knowledgeable and skilled workers worldwide. In this case, the staff in management and R&D departments is professional and competitive.

For another aspect, indications from the USA suggest that long-term commercial success will not be achieved on price cutting or product augmentation strategies, but could be achieved on providing service quality. This strategy though may be self-defeatingsince it is likely to elevate these so-called "budget" hotels into the full-service sector where competition is equally intense.

In that case, since the 1990s, the budget hotels in the USA are developing their services and equipment. They begin to build swimming pools, game centers, and other entertainment facilities. These kinds of innovation make the budget hotel in the US more competitive in the global market, and help the achievement for going international.

In addition, budget hotels tend to located in the sides of public roads, such as highways, there is a very developed and completed transportation network which can easily link hotels and city centre. The National Highway System (NHS) covers approximately 160,000 miles (256,000 kilometers) of roadway, including the Interstate Highway System, a separate system within the NHS that the total length is about 46,837 miles (75,376 km),as well as other roads, which are important to the nation's economy, defense, and mobility. Besides, the high developed road network promotes the in-country travel, therefore, also contributes to the hospitality industry.

Demand conditions

The US has more than 300 million populations so that the potential demand of local hotels is considerable. Large proportions of the hotel rooms’occupation rate in the US are contributed from the business travel and leisure travelers. The large demand encourages the investment on this industry. Since the 1980s, there is a booming in the budget hotel sector. The intensive competition in hospitality industry drives the hotels more concern with custom services.

As a result, they focus on the quality management. Quality has long been a mantra of the U.S hotel industry. Countless hotel properties have spent time and money on quality assurance, benchmarking, assessing the cost of error, continuous improvement (Quality). It is considerable that the American budget hotels are highly anticipatory worldwide.

C. Related and supporting industries

The hotel industry has many related and supporting industries that enable the well operation of it. They also contribute to its development and help to achieve worldwide competitive strategies.

The supporting industries include:

Tourism: the development of local tourism is the largest motivation for the hotel industry. Hotels, which run in the “hot” hit travel place, always gain more space to survival in the intensive competition. Meanwhile, the cooperation with travel agents ensures the stable customer flow.

Business conferences: it brings another target customer cluster. It could also solve the problem of variation that influenced by travel season.

Design and Decoration: to make each hotel be unique or consistent.

The related industries include:

Entertainment: televisions, network, electronic game, etc

Furniture: Beds, chairs, sofas, etc

Textiles : blankets, towels, carpets, uniforms, etc

Firm strategy, structure and rivalry

In the recent years, the American hotels focus on quality management as one of the most important competitive strategies rather than global exploiting (quality). Due to the market environment, many companies are likely to follow long-term strategies to keep or win more market share. Under the intensive competition in the US, a large number of hotel chains are taking efforts on the global market and take actions of joint venture, acquisitions and mergers. The major hotel chains in the US, such as, are more common to be multinational companies that. Domestic competition in the hotel industry in the US helps, to some extent, to promote innovation. There are mainly six levels of American hotel chains:

  • Luxury – Four Seasons, Ritz Carlton, Fairmont
  • Upper Upscale – Embassy, Hilton, Marriott, Sheraton
  • Upscale – Hilton Garden Inn, Courtyard, Crowne Plaza
  • Mid with F&B – Holiday Inn, Ramada, Best Western

Mid no F&B – Hampton Inn, HI Express, Comfort Inn

  • Economy – Motel 6, Red Roof, Days Inn

According to the Hotel Development Cost Survey 2008 by Elaine Sahlins, the senior vice president of HVS San Francisco, hotels are doing effort on new room construction and room standard shift.

(development cost) http://www.hospitalitynet.org/file/152003497.pdf

Hotel Dvelopment Cost Survey per-Room of Cost for 2005-2007

2005

2006

2007

Luxury

1490900

1659400

1725800

Upper Upscale

373700

633700

665400

Upscale

260700

321200

337300

Midscale with F&B

222700

286800

301100

Midscale w/out F&B

335400

4132200

433900

Economy

121100

149200

156700

It can be seen from the table that the cost on room development is continuous increasing. Thus, the domestic intensive competition becomes a great motivation of the development for existing hotels. Because of the development, the hotel industry in the US shows more competitive in the global market.

Chance and government

For Chance factor, it is uncontrollable, but sometimes predictable. A good example for that is like holding the Olympics. The US has hosted four times Summer Olympics and four times Winter Olympics. Those events had largely promoted the development for both local tourism and the hotels which located around those areas. Besides, the improved technology on hotels’ facilities, the changes on exchange rate, etc, could bring more chances to the industry. These chances may help companies to gain competitive advantages among the rivals. However, these advantages are changeable. If hotels do not innovate and make improvement, their will loose their own position by not catch those chances.

Meanwhile, the influence from government is also hard to neglect. For instance, Financial Preferential Policy to companies benefits each American firm from the taxation aspect. Such kinds of policies on taxation, education, shareholder policy could bring the American companies many benefits. On the other hand, the influence from the government sometimes blocks the pace of companies. As mentioned above, the local tourism makes great and unavoidable impact on hotel industry.

For example, from the figure, it is obvious that during the years from 2001 to 2003, there was a shape decrease of the room demand. The reason for that may be larger related to the 911 issue. During that period, the American government began to control the inflow passages so that make the tourism met a decline. Consequently, it embroiled the hotel industry indirectly.

  • Challenges analysis
  • competitive challenge:
  • exploit labor costs by national differences to achieve efficiency;

“Business effectiveness is key, partly fuelled by a pay portfolio designed to reward and retain high performers”, she says. “Competitive advantage through people and a focus on performance indicators are absolute.” Significant growth in product distribution and profitability has been achieved in the three regional divisions of the Americas, Europe/Middle East/Africa, and Asia-Pacific. Strong hotel occupancy levels are reported, along with lower-than-average labour turnover rates, the latter a key performance indicator for the sector.

  • a wide range of orientation (different types of inns) provides economies of scope and flexibilities; servicing multinational customer worldwide;

Upgrades. Given this environment, the stated position of Holiday was to concentrate on upgrading existing properties rather than expansion. Holiday focused marketing efforts on its traditional niche of business, leisure, senior, government, and military segments and believed that upgrading hotels in these chosen markets would do more for increasing dominance than growth could alone. By 1991, every Holiday Inn would have upgraded all guest rooms, public space, parking lots, and landscaping.

As a result, high performance role models were constructed and refined on the basis of nine core competencies of value to the organization. Seven were initially piloted at headquarters before group-wide implementation:

(1) Customer service orientation. Understanding and acting on the needs of others to better serve them.

(2) Flexibility: being able to adapt and work effectively in varied groups and situations.

(3) Commitment to organizational values. Acting consistently, in accordance with corporate values and standards.

(4) Achievement orientation. A desire for improved performance, challenging objectives, and standards of excellence.

(5) Initiative and proactivity. Self-motivation, persistence and going beyond the job description for potential outcomes.

(6) Organizational influence. Influencing others effectively.

(7) Creative problem solving. Identifying patterns in problem situations that are not obviously related and achieving solutions.

Innovation

Says Carol E. Chapman: “We decided to pilot at headquarters for two reasons: each competency had to be tested for clarity before rollout to business units, as each had varying job populations and cultures. Four functional categories were developed – administrative/ support; professional/technical; managerial/supervisory; and executive – each with different standards of expected competence. We wanted to make sure that performance correlated with the position in each job category and opportunities for demonstrating competence in the organization.”

In effect, she explains, this gives a correlation reality check for any competence – expected level of performance and opportunity to demonstrate these competencies.

A competency-based pay programme, piloted at corporate headquarters in 1991 and cascaded within 18 months throughout the entire complement of around 200 company owned and managed hotels and numerous franchises, became a critical link between new human resource (HR) and remuneration strategies and those of business.

Though the programme was innovative and effective for its 30,000 employees, Carol E. Chapman, director of Compensation and Benefits, remarks that it was then perceived as a one-off real driver of change. On reflection, it was just a forerunner of others to come which emanate from a redefined and everwidening HR agenda.

(1) Business strategy:

• Achieve preferred hotel brand;

• Improve operational results for premium returns;

• Restructure to provide high-quality, costeffective services;

• Hotel base growth to expand brand and product distribution; and

• Explore new strategic advantages.

(2) HR strategy:

• Become the preferred hotel employer worldwide;

• Ensure recruitment, selection and training systems attract higher quality employees;

• Devise organizational structures to achieve business potential and empower employees;

• Develop a performance-oriented culture which motivates and retains employees.

(3) Remuneration strategy:

• Devise a total remuneration programme to utilize all forms of compensation and benefits;

• Provide competitive schemes to attract, retain and motivate new employees;

• Ensure that critical positions and superior performance earn higher remuneration levels; and

• Develop a programme related to qualitative and quantitative results.

Over the last 20 years there were certainly mixed opinions about actions the company took, such as:

• Entering the gaming business;

• Establishing new product segments with their potential for severe competition and violations of "territorial integrity";

• Decentralizing corporate operations;

• Proposing increases in franchise fees;

• Demanding different quality standards for company-owned and franchisee-owned properties;

• Failing to impose sufficiently high quality standards on franchisees in a uniform and timely manner

• Creating Holiday Inn Express (by HIWW); and

• Failing to maintain adequate communications between the company and franchisees.

Says Carol E. Chapman: “We decided to pilot at headquarters for two reasons: each competency had to be tested for clarity before rollout to business units, as each had varying job populations and cultures. Four functional categories were developed – administrative/support; professional/technical; managerial/supervisory; and executive – each with different standards of expected competence. We wanted to make sure that performance correlated with the position in each job category and opportunities for demonstrating competence in the organization.”

In effect, she explains, this gives a correlation reality check for any competence – expected level of performance and opportunity to demonstrate these competencies.