Rivalry In The Global Hospitality Industry Marketing Essay

Assess the factors affecting the intensity of rivalry in the global hospitality industry. Pinpoint the specific factors most affecting competitive intensity and prioritize the rivalry among hotels or resorts in the industry as brutal, strong, moderate, or relatively weak and justify why.

Introduction

In trends dated many years back, the escalating competition (Sheridian, 1997; Andorka, 1997) has established pervasive acknowledgement within the lodging industry (Singh, 1999). The competitive theory was primarily introduced by Charles Darwin’s earliest writings on “competition by natural selection, survival of the fittest” concept. Intriguingly, this theory is then further developed into more a complex model used by many philosophers till today. How does rivalry takes place in the context of the global hospitality industry? Rivalry ensues when businesses attempt to associate competitive asymmetry (Caves, 1984; Scherer and Ross, 1990). Referring to Thompson and Martin (2010), in order for a company to post ostentatious profits, the key factor is for the firm to have competitive dynamics over their rivals by creating opportunities and sustaining them. This will then distinct the firm from competitors and at the same time impose customer loyalty. Besides that, Thompson and Martin (2010) also claimed that competition impulses domino effects whereby when a business rival introduces a ground-breaking approach, other competitors will seize to implement changes as well to continue the cycle. So why is there rivalry? Writing in 1982, Ohmae oppose that business strategy contemplates mainly on competitive advantage. He contends that strategy is only applicable when there are competitors, otherwise the existences of strategic management which is to have a viable edge over its competitors is of no use to revise a business’s strength comparative to that of its competitors in the most proficient way. On the other hand, in Ansoff’s model (1987), specified that “to survive and succeed in an industry, the firm must match the aggressiveness of its operating and strategic behaviours to the changeability of demands and opportunities in the marketplace”. In Porter’s (1980) five forces framework, he deliberates that the intensity of rivalry between firms is one of fundamental forces that forms the competitive structure of an industry. Based on academic findings on the background of competitive rivalry, this paper examines on the dynamic, tactical changes in a competitive environment. Besides that, this paper also confers about how a firm distinct itself among its rivals by having their own core competence. Moreover, this essay also indicates what pushes competitive relationship between firms to the extent in which pairs of firms share and compete within the same sets of market. Deriving to the question of; what type of competition are the industry players of hospitality facing? And how it is affecting things in a broader scale?

Strategic issues are highly inferred to as a significant topic for discussion or contemplations by hospitality management sectors (Zhen and Chiang, 2003). According to Olsen et al. (1998) clinched; “The forces affecting the hospitality environment are becoming so complex and changing with such speed that it is increasingly difficult to monitor or predict the impact they will have on hospitality organizations”. So what then are the forces influencing such disastrous strategic impacts? Michael Porter (1985) created a framework called Porter’s five forces. Its determination is to recognise potential profitability in an industry (Dess et al., 2004) by analysing the threats of new market entrants, threat of substitute products, the suppliers’ bargaining power, customer’s bargaining power and rivalry among existing firms. According to Kim and Oh (2004), industry forces are used to describe performances of a firm’s success depending on the market signals and also how precise it predicts the development of industry forces. This model can be utilised to identify and analyse the opportunities and risk that the business may encounter in the industry.

Threat of New Entrants

One of the primary forces which influence competition within an industry is the threat of new entrants. This barrier includes the economies of scale, product differentiation, capital costs, cost advantages independent of scale, access to distribution channels and also Government agencies (Botten and McManus, 1999). For illustration in hotels, economies of scale can be depicted from the ability to share marketing and sales infrastructure which contributes to increment of capacity. Besides that, central reservation system (CRS) also serves as an example for economies of scale since the structure is shared by a large number of hotels, it helps to reduce the unit per cost of a reservation (Burns, 1997; Coyne and Burns, 1996). In addition, product differentiation also creates a barrier to entry by pushing new entrants to incur expenditure to obtain existing customer loyalties. This means that the new entrants must invest a great amount of money and time to overcome this barrier. For example, in hotels, the new entrants have to invest more on extensive advertising strategies in order to get recognition as well as to build up their brand equity. At the same time, providing a unique selling proposition in terms of customer service is also important for hotels to distinguish themselves from existing competitors. Unfortunately, capital costs to getting established in a market are so vast that it will dampen all but the largest companies. For instance, brand presence requires massive amount of investment on advertisements plus market research and development also takes up a lot of money and time to develop results. Moreover, in order to run a hotel, there are also various amount of cost incurred on start-up losses, fixed assets, inventories and much more.

Cost advantages independent of scale also acts as a barrier in entry. Generally, since existing firms have been in the industry for very long, they are usually given cost advantages which are not easily available to prospective entrants irrespective of the entrant’s size. In hotels, these advantages comprise access to the best and cheapest raw materials, proprietorship of patents and trademarked technology. Even the benefits of learning and experience curve effects (Dess et al., 2004), having built and equipped infrastructure years earlier at lower costs, strategic locations, and low borrowing costs. In addition, access to distribution channels can also act as a barrier to entry because new entrants have to obtain distribution for its product. Thus, it can be a threat to the new entrant because in order to persuade the distribution channels to accept its product, the new entrant might need to provide extra incentives to tour operators and even websites which reduce profits relatively. Government agencies also play a role as a barrier in limiting entry by demanding licenses and permits. National governments also raise entry barriers of foreign firms by implementing tariffs and trade restrictions; e.g. antidumping rules, local content requirements. The efficiency of all these barriers to entry in eliminating potential entrants is dependent on the entrants’ capability to retaliate against the established firms. Retaliation contrary to a new entrant may include aggressive price-cutting, more aggressive advertising, or a variety of legal manoeuvres. In a case study done by Kandampully and Suhartanto (2000) they contended that today, the biggest challenge for hotel businesses is the ever-growing volume and pace of competitors and hence there is very little to differentiate from one hotel’s product to another causing it to become imperative for hotel organizations to gain a competitive advantage (Hamel and Prahalad, 1993). Take for example two luxury hotels which offer the exact same room facilities, restaurants, spa and even gymnasium etc. How then this two hotel of the same segment overcome the issue of rivalry since they share the exact same market share? In order for most hotels to overcome this situation, hotel managers actually used two main strategies to gain competitive advantage. First of all, the hotels usually will apply the low-cost leadership strategy (Mintzberg, 1978) which is through price discounting. The next alternative is to develop customer loyalty by providing unique benefits to customers. The author on the other hand begs to differ, because the approach of decreasing prices to boost up market share will probably help to accomplish a big sales volume at a faster pace and it will lower marginal cost. However, this might also post a major threat on the hotels medium and if in a long run, it will also affect hotel’s profitability. Perhaps the existing hotels can retaliate against new entrants by utilizing Henry Mintzberg’s approach of image differentiating strategy by creating a special image for the hotel; e.g. Singapore Marriott was launched after a US$28 million refurbishment in which immediately boosted up sales (Market Watch, 2012).

Bargaining Power of Suppliers

The next factor of intensive rivalry is the bargaining power of suppliers. In general, supplier power denotes the ability of providers of goods and services to determine the price and terms of supply. The main suppliers of the hotel industry are labour as well as real estate; which includes real estate companies, developers, interior design companies, furnishing firms, architects, suppliers of raw materials, management and training service providers, industry consultants and ICT manufacturers. Generally, the number of suppliers catered for the hotel industry is fairly huge and each supplier is just small in size comparing to the major players in the industry. Knowingly, the few dominant players are indispensable to the suppliers. Besides that, the substitution of suppliers is also feasible and inexpensive. Moreover switching cost between real estate agents is not going to significantly affect much of the hotel organization. However, as for the quality it is more difficult to compromise, since training centers for employees and ICT manufacturers who provides the property management is more difficult to replace. Hence, substitute of supplier industry attractiveness is temperately high. Contrasting to the suppliers’ threat of forward integration, hotels industry threat of backwards integration is high because big hotels like Marriot and Hilton are capable of owning their own real estate agency as well as even having their own training centres for staffs in-house and recently even their own supplier chain management system in which helps to control who and how much the raw materials will be charged for the purpose of reducing supplier’s bargaining power. As an example, in Hilton Worldwide, a supplier chain management has been established to help to ensure consistency of procurement amongst all the Hilton’s hotel. But having to practise this system in hotels also brings in risk in the sense that if it is not properly managed, possibility of agency-theory practices might occur, hence it might even lead to increasing the suppliers bargaining power. Similarly the industry’s contribution to both cost and quality is relatively high. Therefore, judging the overall power of supplier in hospitality sector, it can be said to be just moderate because of the massive amount of supplier (Kim and Oh, 2004; Olsen and Roper, 1998). This exhibits that no supplier is governing the lodging market.

Threat of Substitute

Besides that, the threat of substitute in a hotel is also one of the dynamics of the intensity of rivalry in hotels. The threat of substitutes occurs when there are possible alternative of products with relatively lower prices of better performance scopes for the same purpose. Unfortunately, the substitutes are prospected to attract a substantial share of market capacity hence resulting in the depreciation of sales volumes for existing players. Take the case of AirAsia for example; the Airline Company was bought over by Tony Fernandez at the price of RM1.00 or US$0.26 with an accumulated debt of RM40million and business associates of Tony Fernandez despise his foolishness to buyout the AirAsia with so much debt. Today however, AirAsia is ranked as World’s Best Low-Cost Airline (AirAsia, 2012) it is till now such a big threat to the Malaysian Airline company that they are almost out of business (Free Malaysia Today, 2012). The AirAsia Company actually practices Ansoff’s generic strategy of market development (Ansoff, 1989); which is to increase the sales of existing product by penetrating new market. In this case the budget conscious consumer is their new market segmentation. Thus, this shows that the new threats of substitute in an industry can easily penetrate into a market, depending on how saturated the market is. The key substitutes for hotel sectors are camp sites, recreational vehicles, corporate guesthouses for business travelers and other informal means of accommodation with family and friends. Hence comparing to the hotel business, these choices are most affordable alternatives, making the price values to be very high and switching cost to be very low. Thus, the appeal of industry in terms of substitutes is relatively moderate.

Bargaining Power of Buyers

Moving on to the fourth factor, the bargaining power of buyers in which helps to determine how much customers can inflict pressure on price and with the bargain of higher quality or perhaps more services (Botten and McManus, 1999). A study of Taylor and Finley (2009) specified that one of the key forces affecting the hospitality environment is customers. The greater volume of product buying, the cheaper price gets. Therefore, the bargaining power of the customer increases. Therefore, many hospitality companies pursue to diminish customers’ authority by crafting loyalty programs that reward customers for reiteration purchases and by differentiating product and service offerings (Crook et al., 2003). Take

Hilton Worldwide for example, they were one of the pioneers to start the customer loyalty programme the HHonors distinguishing their products and services by being more customers oriented; whereby every time a guest stays at any Hilton Worldwide property their personal preferences are updated and be made available to all properties (Hilton Worldwide, 2012). By implementing this programme, more and more guests are being fascinated to the attractive offers and ending up being a loyal customer to Hilton. This shows that in order to be ahead of the market, core competencies like ‘customerizing’ (Hall, 1992 cited in Thompson, J. and Martin, F., 2010) a term used to reflect the prominence of customers as individuals rather than a segment who constitute a market. The question is this, so what if they are a member of the loyalty club. Does it mean they are going to continue spending in Hilton (Kurtz and Clow, 1998)? Or perhaps the next trip they might just go to the direct competitors like Marriott?

Usually the users of high-end hotels are leisure guests, business traveler or guest who requires spaces for meeting conference or other events. In hotel industry, there are various clienteles who are small in size. Therefore a loss of a single customer does not create much impact to a hotel and this makes the buyers bargaining power to be low. Besides that, a buyer’s threat of forward integration is quite impossible and so is the hotel industry’s threat of forward integration too. However, since there are so many choices of substitutes as such the camp sites, recreational vehicles, corporate guesthouses for business travelers and other informal means of accommodation with family and friends; switching cost of these choices is relatively low except for the recreational vehicles. In addition, apart from the facility of accommodation, hotels also provide additional services and facilities such as restaurant, bar, spas, health centers and gym etc. Hence, the contribution to quality and cost for the buyer is very high. Generally, the bargaining power of buyers as well as the industry attractiveness is moderate in this instance.

Rivalry among Firms

As for the factor most affecting competitive intensity is the competitive power of rivalry players. This force ensues when there is intensity of competition between existing players. The intensity of rivalry defines the degree to which value created by an industry is dissipated through head-to-head competition (Karagiannopoulos et al., 2005). High competitive tension will have domino effect on prices and margins thus it affects the whole industry’s profitability and well-being. Intense rivalry is the result of interaction among structural factors; numerous or equally balanced competitors, slow industry growth, high fixed or storage costs, lack of differentiation or switching costs, capacity augmented in large increments, and diverse competitors (Botten and McManus, 1999). Competitive intensity in the hospitality industry advances because of the increased number of businesses, new product introductions, and market entries of non-traditional products such as corporate housing (Kim and Oh, 2004). Rivalry takes place when firms attempt to gain incompatible competitive positions (Caves, 1984; Scherer and Ross, 1990). Therefore, in order to compare inter-firm rivalries, the main focus is to predict first the competition between firms (Chen, 1996). Also, there are issues to be considered when firms jockey for competitive positions because if the firm fails to see the prospective competitor due to competitive ‘blind spots’, it might lead to the depletion of one’s competitive position (Zajac and Bazerman, 1991). In year 2009, the lawsuit of Starwood against Hilton Worldwide in regards to the stolen trade secret of their new boutique hotel concept (Hilzenrath and Douglas, 2010); illustrates how Hilton practices mimetic isomorphism whereby firms imitates other firms in which they perceived to be successful (DiMaggio and Powell, 1983). This proves that a company should always be aware of their competitors to eliminate the possibility of being eliminated out from the industry. However such practises are actually not practical because once a firm starts to imitate another, it becomes an obligatory action of the company (DiMaggio and Powell, 1983); which might affect the organizational performance (Meyer and Rowan, 1977). Hence, “A company must change more rapidly than its rival can steal its ideas!”(Thompson and Martin, 2010).

For the hotel business, most competitors are categorised according to similarity of price, segment, and proximity (Mathews, 2000). The hotel can reduce the intensity of rivalry of existing hotels by distinguishing hotel products and services (Enz, 2010). In the hospitality sector, there are few very large hotel chains which are dominating the global market. These companies have very strong brand identities and equity and thus it involves very high fixed costs. Nonetheless, hotels also have excess capacity since occupancy rates depending on seasons might not be full. The hotel industry have moderate growth hence the overall attractiveness of the industry in terms of competitor is low. In general, the overall of the industry is moderately attractive.

Conclusion

Among the factors affecting the intensity of rivalry among global hospitality sector, the bargaining power of suppliers and threat of substitutes does not really cause major effects on competitive strategies. Bargaining power of suppliers in the hospitality industry is relatively low because of the massive amount of supplier (Kim and Oh, 2004; Olsen and Roper, 1998). This shows that no supplier is dominating the lodging market. Subsequently, substitutes are only a slight threat in the hotel industry. This happens when hotels offers similar or mass products and services (Dale, 2000). Since the bargaining power of supplier and the threat of substitutes have less impact on the competitive strategies, the lodging business is mostly driven by customers, competitors as well as new entrants. Hence, rivalry among existing hotels, bargaining power of customers and threats of new hotel entrant will be the few key factors.

The rivalry among hotels can possibly be brutal, strong, moderate and even weak depending on which hotel is being put into contemplation. Take for example a luxury hotel; who are the competitors of a luxury hotel? Is it other luxury hotels, or possibly a mid-scale hotel or probably even a budget hotel? Take for example a luxury hotel, the Waldorf Astoria Hilton, and compare it to another luxury hotel, the JW Marriott the rivalry tension among this two hotels are definitely brutal since both the hotels are sharing the same target market of elite class guests; making each other as direct competitors. But for example, if Waldorf Astoria Hilton is being compared to Motel 6; in this case, the intensity of rivalry among these two hotels will be low because Motel 6 is not having the same target market as Hilton for they specialised in catering to budget conscious segments; hence, the relationship here is less competitive. However, it also depends on whether its peak season or off peak season, because luxury hotels might have price discounts to attract more customers during non-peak seasons then this means that they are now becoming the direct competitors of the mid-scale hotels.

Therefore, the author contends that competitive rivalry in the hotels are relatively strong but in the future, as the liminal stage of the lodging sectors passes away, the possibility of competitive rivalry might even get lower since there are so many unpredictable concepts of hotels targeting all very different types of clientele or probably higher because there are too much supply of hotels and too little potential customers. Besides that, the author suggests that a company should have their very own adaptive strategies (Thompson and Martin, 2010) planned well ahead of time to seize opportunities as well as to encounter future threats. Henceforth, the author accepts as true that competition is prevalent nowadays; hence, a business should always look for faults before they even take place.

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