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Global strategies in the international hotel industry
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Hospitality Management 26 (2007) 777–792 www.elsevier.com/locate/ijhosman
Global strategies in the international hotel industry Paul Whitlaa,, Peter G.P. Waltersb, Howard Daviesb a
Department of Marketing and International Business, Lingnan University, Tuen Mun, Hong Kong, PR China Department of Management and Marketing, Hong Kong Polytechnic University, Hung Hom, Hong Kong, PR China
b
Abstract A two stage qualitative research methodology is used to evaluate the forces driving the adoption of global strategies in the hotel industry and the strategic response of international hotel chains to those ‘‘drivers’’. Information gathered from industry experts is used to develop a set of hypotheses which are then tested against evidence provided by interviews with senior executives and other data. The results indicate that global strategy is most influenced by market factors, other drivers having much less influence. Cost drivers are constrained by limited economies of scale and standardization opportunities. Globalization is most marked in the thrust for a broad geographic presence in key overseas markets, the pursuit of global branding, positioning and uniform service standards. At the same time, customers expect ‘‘responsive’’ policies in areas such as facilities and services provided. Opportunities for greater integration and concentration of ‘‘back-office’’ functions, where information-based systems allow for cost economies and enhanced coordination, often remain relatively unexploited, primarily due to institutionalized management practice and control constraints. r 2006 Elsevier Ltd. All rights reserved. Keywords: Hotels; Global; Strategy
1. Introduction The hotel industry is often perceived as one of the most ‘global’ in the service sector (Mace, 1995; Litteljohn, 1997). In order to understand whether that image is aligned with Corresponding author. Tel.: +852 2616 8237; fax: +852 2467 3049.
E-mail addresses: [email protected] (P. Whitla), [email protected] (P.G.P. Walters), mshoward@ polyu.edu.hk (H. Davies). 0278-4319/$ - see front matter r 2006 Elsevier Ltd. All rights reserved. doi:10.1016/j.ijhm.2006.08.001
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practice, this paper first examines the forces driving globalization in the sector and then the extent to which international hotel chains actually pursue global strategies. As the issue of what constitutes a ‘global strategy’ is hotly debated (Prahalad and Doz, 1987; Bartlett and Ghoshal 1989; Zou and Cavusgil, 1996) the construct itself first needs to be explored. The existing literature provides useful starting points. Work on internationalization in the hotel sector, reviewed by Burgess et al. (1995), has examined a number of issues facing multinational operators, including entry mode strategy (Litteljohn and Roper, 1991 Slattery, 1996) and international marketing strategies (Crawford-Welch, 1991; Alexander and Lockwood, 1996). Particularly pertinent are studies by Go and Pine (1995), who describe the key factors driving the development of global strategies, and Go et al. (1996) on the operations of the Four Seasons group. Key findings are: the importance of a ‘balanced’ global presence involving both urban and resort hotels; policies to integrate international value added activities in areas like training and purchasing, and; an emphasis on developing global brands. However, their analysis also showed that in many operational activities, policy is substantially localized. These studies are useful, but there have been no empirical studies which systematically evaluate the extent to which major international hotel chains are integrating their activities on a global basis. In this paper key dimensions of globalization are examined and hypotheses are then developed relating to the nature and impact of the forces driving global integration in the industry. Practice in leading British-based international hotel chains is then evaluated. The conceptual foundation adopted is drawn from Yip’s global strategy framework (1992, 2003), which has been described as ‘the most widely used framework for assessing the extent of, and potential for, industry and market globalization’ (Stonehouse et al., 2000). The primary advantage of Yip’s approach is that it is eclectic, drawing upon multiple conceptualizations of the ‘global strategy’ construct. Thus account is taken of the reduction of costs through standardization and centralization (Levitt, 1983; Bartlett and Ghoshal, 1989); the extent of worldwide market participation (Ohmae, 1995); crosssubsidization (Hamel and Prahalad, 1985); configuration of value-added activities (Porter, 1986); and globally integrated marketing (Jain, 1989). In Yip’s model, ‘global strategy’ is construed as the extent of world-wide co-ordination and integration in respect of five strategic ‘levers’ namely: the scope of overseas participation; uniformity of products and services; location of activities; marketing policy; and competitive moves. The antecedents to the adoption of global strategy are described in terms of four sets of ‘drivers’, involving: markets; costs; governments, and; competition. These drivers render it profitable to make greater or lesser use of the global strategy ‘‘levers’’ which can be conceptualized in terms of a continuum. At one end lies a ‘multidomestic’ strategy, where the activities in each overseas location are determined without reference to conditions in other markets. At the other end, ‘global’ strategy is defined as an approach ‘‘that integrates and manages for worldwide business leverage and competitive advantage’’ (Yip, 1992, p. 7). The strength of the drivers varies across industries, with firms integrating activities in such a way that the use of the ‘levers’ is aligned with the industry ‘drivers’ (see Fig. 1). While the framework has limitations, especially in respect of the failure to articulate detailed paths from drivers to levers (Whitla et al., 2005), it remains an inclusive approach to the analysis of both the antecedents to global strategy and firm-level strategic responses.
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Global Drivers Cost -Market -Government -Competitive
Global Strategy Levers Global Market Participation Global Products and Services Global Location of Activities Global Marketing Global Competitive Moves
Benefits of Global Strategy
Fig. 1. Yip’s framework of global strategy.
Table 1 Geographic spread of hotels in study Hotel chain
Hotels
Rooms
Countries
Inter-continental Holiday inn (owned by Inter-continental) Millennium & Copthorne Hilton Le Meridien
135 1567 91 418 130
44,545 293,346 24,200 n/a 34,000
60 70+ 16 70 56
Source: corporate data as at June 2004.
2. Research design and methodology A qualitative, multiple case study research design was adopted as this is appropriate when knowledge is relatively undeveloped, and when a significant amount of data needs to be collected from each respondent (Patton, 2002). Yin (1984) argues that qualitative methods are most appropriate for ‘process studies’ which examine how underlying industry factors influence firms’ choice of strategy (Pettigrew, 1988) and empirical studies of globalization in the service sector are often qualitative (Greenwood et al., 1999). The population comprises hotel firms with a significant engagement in the international marketplace and the sample examined consisted of British-owned multinational operators as shown in Table 1. While that has the advantage of controlling for nationality effects, and British owned hotel groups are key players in the global industry, it also restricts the generalizability of the findings. As the industry ‘drivers’ are the independent variables, antecedent to the levers, there would be a common method problem if the evidence on both were collected from the same
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source. Hence data collection and analysis proceeded in two stages, using independent sources of data. In the first stage, at industry level, experts on the hotel industry were drawn from consultancy firms, industry associations, and universities and interviewed on the nature of the drivers affecting the hotel sector. In the second stage, senior managers from the hotel companies were interviewed on their firm’s use of the levers. Respondents were the highest placed directors responsible for setting international strategy, in most cases the managing director. The interviews adopted a semi-structured format (Stroh, 2000), adapted as conversations progressed (Marshall and Rossman, 1989). Sixteen interviews were conducted, eight with the industry experts and eight with hotel executives. Interviews were recorded and verbatim transcripts prepared, generating some 280 pages of script. To guard against premature or false conclusions (Miles and Huberman, 1984), use was made of qualitative research software in the data analysis phase. Each transcript was coded using NUD*IST (volume 4) software which allowed pattern searches and comparisons to be run on the data sets generated for each case (Gahan and Hannibal, 1998). Although the thrust of the research is qualitative, important elements of the evidence were quantified, to enable more systematic comparison between companies and to facilitate interpretation of the results (Johnson and Johnson, 1990; Bryman, 2004). Data analysis involved firstly evaluating the strength of industry drivers (Yip and Coundouriotis, 1991). The impact of each driver group—market, cost, government and competitive—was assessed in quantitative terms by evaluating the raw interview data obtained from the industry experts. Assigned values were initially set by the author responsible for the interviews and those were then evaluated by the two other authors, working independently. An external judge then independently examined a sample of the evidence and assigned scores which were compared with those arrived at by the authors. There was a high degree of consistency in scores with an average inter-rater reliability of 94%. Propositions regarding expected use of the levers in international hotel chains were arrived at by assessing the combined impact of all drivers on the use of each lever. Actual use of the levers by each hotel firm was determined by evaluating the raw data derived from the executive interviews, and other sources, in the same way as for the drivers. The data are presented in diagrammatic form, by lever, with a continuum shown between the two polar anchor points. This allows for comparison between the expected use of a lever, derived from the experts’ input, and practice for each firm. 3. Forces for globalization—the global drivers The evidence gathered from industry experts is reviewed below. 3.1. Cost drivers Three potential areas where hotel chains may gain cost economies through integration of worldwide activities were identified. The first was purchasing, where quantity buying may allow for ‘sourcing efficiencies’. However, savings in this area were seen as limited. One expert summarised the consensus. I wouldn’t expect, if Hilton had a good European supplier of furniture, for them to be using that same supplier in the Far East because; you start running into transport
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costs; they like to give their hotels a slight regional feel; and, a high proportion of international hotels are operated under management contract or where the hotel operator has only a part share in the underlying equity. It is the hotel owner who does quite a lot of the buyingy The second area concerns the concentration of ‘back-office’ services, such as the location of accounting services in a low-wage environment. Arthur Andersen (1999) suggested that most of these functions are inefficiently replicated on a hotel by hotel basis, and that ‘the hospitality industry bears a disproportionately high cost for its finance and accounting processes compared to other industries, far above best practice benchmarks’, with consolidation savings in the region of 2% of hotel revenues feasible. The experts, however, suggested that achievement of such economies was problematic on an international basis, with savings more related to size rather than global reach. The third area where cost factors favour an integrated approach worldwide concerns guest reservation and information systems. Where these can be leveraged globally, international chains can generate cost savings, while improving revenues through yield management systems which can also direct potential customers to other hotels within the chain where appropriate. The high cost of the systems, and the importance of all hotels in a chain co-operating for efficient performance, indicates the need for integration when developing a single worldwide system. 3.2. Market drivers Hotel chains need to balance the provision of a standardized level of service and amenities with customers’ interest in some degree of local adaptation. The feedback affirmed that guests, especially business travelers, expected a similar range of services. Thus in-room international direct dialling (IDD), internet services, a business centre, 24hour room service and a gymnasium, are seen as ‘minimum entry standards’ for an international business hotel. One expert suggested: As other companies have become more global and as travelers have become more globalyif somebody rolls up in the Far East and they roll up in the States then there is just that expectation that the product will be consistenty However the experts also saw responsiveness as important, especially for leisure travelers. On the need for local differentiation, it was noted that the role of hotels within countries differed. Hotels in western countries typically rely on accommodation charges for the majority of their sales, whereas in Asia food and beverage charges often make up the bulk of hotels’ revenues. Asian hotels therefore need to concentrate on providing more and larger restaurant outlets, targeting local diners as well as overnight guests. Many ‘global customers’ purchase hotel services centrally and multinational firms often appoint particular hotel chains as ‘preferred’ suppliers for their employees. This has implications for global participation as many corporate customers will only deal with chains having adequate geographic coverage. Second, the chains need to integrate marketing resources to sell the worldwide chain where the customers are making decisions. Information systems also need to be coordinated so customers can access guest reservation systems and make bookings from a central location.
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3.3. Government drivers The experts saw little evidence that government policy limits the ability of hotel chains to expand internationally or constrains foreign ownership, as the fragmented nature of the industry limits concerns over market domination. There are few price and marketing controls and, apart from examples of alcohol restrictions, few limits on the range of services that hotels can provide. Additionally, it seems that governments had few concerns about the impact of international hotels on the local culture or competitors and the chains are generally welcomed due to tourism and employment benefits. Some legal constraints limiting the opportunities for standardization and integration of international operations were identified. Labour legislation affects working hours and wage rates resulting, for example, in higher staff to guest ratios in some countries. Stringent fire and safety regulations in more developed markets, and different standards regarding kitchen and serving facilities, impact hotel design and cost levels. Finally, zoning regulations vary between countries, making it difficult to adopt standard hotel designs that facilitate the delivery of a uniform image and service. 3.4. Competitive drivers The experts pointed out that there is ‘multi-pronged’ competition with chains based in North America, Europe and Asia competing in most of the world’s largest markets. Country operations are seen as interdependent in that hotels within a chain share marketing and other centralized costs associated with guest information and reservation systems. Furthermore, the guest experience in one country influences the propensity to stay with the same chain in other countries. The performance of hotels in each country therefore affects the revenues and costs of other hotels within the network. It was also noted that in areas such as reward, reservation and information systems, international chains that did not adopt uniform worldwide systems would find it difficult to compete. 4. Hypotheses Despite the potential for cost savings, it was found that these are not easily realized. The experts’ view was that cost drivers are not very powerful as a force for globalization in the hotel industry. Their view was that although there are important forces favouring responsiveness and customization, business customers are more interested in common service standards, particularly when they are looking for a preferred worldwide supplier. Government drivers pose few barriers to integration and competitive drivers also favour an integrated global approach. In this light, the following hypotheses were developed. Hypothesis 1. Firms will seek broad geographic coverage in major markets ‘Global presence’ refers primarily to the geographic scope of operations, but also reflects the extent to which location decisions are informed by overall corporate interest as opposed to stand-alone considerations. Market drivers push for a balanced presence in major markets and there are few governmental and other barriers to international growth.
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However, there are few cost advantages to be gained either from broadening geographical coverage or from being present in strategically important locations. Indeed analysis of the cost drivers suggests an approach favouring depth within countries rather than geographic breadth. The nature of the competitive drivers promotes participation in ‘strategically important countries’, with a focus on major business centres and ‘gateway cities’, which serve as the ‘first point of entry’ for international visitors. Hypothesis 2. Substantial customization of many hotel services will be implemented. Hotel chains need to standardize significant aspects of their amenities and service, particularly for business travelers. However, guests also look for ‘local flavour’ in hotels and are not expecting a replication of all services in all locations (Armstrong et al., 1997). The need to satisfy local clients, differing government regulations and varying ‘roles’ for hotels in different countries all point to significant localization. As there are few economies of scale to be had from standardization, cost drivers are a relatively unimportant force for service uniformity. Hypothesis 3. Hotel firms will make significant use of ‘standardized marketing’. Analysis of the drivers suggests that there are clear advantages to be gained from the use of a common brand name worldwide, primarily to overcome the ‘intangibility’ of service products. A global brand allows for consumer recognition worldwide and assurance regarding the range and quality of services that the hotel provides. Global branding also facilitates the development of a ‘uniform image’ which can be supported by promotional activity of a relatively standard nature. The targeting of global travelers, and the development of a common image, are also facilitated by standard positioning and pricing strategies. Hypothesis 4. Value-added activities will be undertaken locally, with the exception of some ‘back-office’ functions. Hotels are ‘location bound’ and many services such as housekeeping, food and beverage preparation and serving, laundry and reception duties must be performed in, or close to, the hotel itself. However, there are opportunities for cost savings and quality improvements through concentration of ‘back-office’ activities such as account management, finance, training, and other support activities which do not directly involve guest contact. With advances in information technology, the ability to centralize such functions has increased. Hypothesis 5. Use of competitive levers will be limited by the low scope for cost economies and fragmentation of the market. Internationally active competitors, and inter-dependencies between markets, favour use of the competitive lever which is not restricted by government controls on cross-national
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competitive actions. However, limited economies of scale and experience effects mean that the pressures to build market share are not as strong as in many other industries. In addition, the presence of many small hotels and the fragmentation of many overseas markets limit the usefulness of coordinated global competitive moves.
5. Use of global strategies—the global levers The actual use of the global levers was evaluated using the evidence gathered from senior managers and other sources. Fig. 2 shows each firms’ use of each lever and compares this to the anticipated use of that lever as outlined in the hypotheses above. Each hotel chain has been identified by a code letter in order to protect the confidentiality of individual respondents. 5.1. Global participation Fig. 2(a) shows that each group makes significant use of the global participation lever, with broad international coverage a common goal. All chains made more use of this lever than was predicted from the feedback on the industry drivers provided by the experts. Evaluation of the geographic scope of the hotel groups indicates that they all have limited coverage in at least one major region, so that none of them could claim global coverage. One executive stated: We are in (a) quarter of all the countries in the world, we may be in the more important countries but we are not global in that sense. Coca Cola is global we’re just international. However, most of the hotel chains had achieved a significant presence in most regions and there is a general tendency to further broaden geographic scope of overseas operations. This primarily reflects the impact of customer needs, as is made clear in the following interview quotes: It is very much the requirement of the third party customerythe agent, the international incentive buyer, they really want to sit down with hotels that have a high quality portfolio in all parts of the worldywhich can include the representation of the major global gateways. Being global is very important and we need a major hotel in every major city, gateway city, because that’s predominantly what the brand is about and that’s what our customers are looking for. So that’s what is driving internationalization. One chain demonstrated a different international expansion path. This hotel group has decided to develop significant positions in a few core markets. Midrange consumers are targeted; cost control has a higher priority; and seeking strength in a limited number of national markets is seen as most cost efficient. For both participation strategies, the parent company is responsible for selecting locations on the basis of potential integration benefits where ‘managers select countries for entry and investment on the basis of overall strategic importance as well as stand-alone attractiveness’ (Yip, 2003, p. 86). The evidence indicates that, in general, global strategic
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Use of the Global Participation Lever No Particular
Significant Share
Pattern
in Major Markets A
0
1
(a)
2
CE
BF
D
3
4
5
Global Market Participation Use of the Global Services Lever
Fully Standardised in Each Country
Fully Customised in Each Country F 0
1
(b)
BC DE
A
3 2 Products/Services Standardisation
4
Use of the Global Marketing Lever Local BE
C
5
Uniform Worldwide DF
A 0
1
(c)
2
3
4
5
Marketing Approach Use of the Global Location of Activities Lever
All Activities in Each Country
CF
Concentrated
B
DE A
0
1
(d)
2
3
4
5
Location of Value-Added Activities Use of the Global Competitive Moves Lever
Stand-Alone by Country C
E
DF
0
1
2
Integrated Across Countries
B A
(e)
3
4
5
Global Competitive Moves
Key: A =Anticipated Usage B-F =Hotel Chains Fig. 2. Use of global levers.
rationales were important in the sample firms. In the first case, the benefits of a ‘breadth’ strategy arise primarily through being able to serve global customers with a widespread international network. In the second case, market depth offers integration benefits by
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lowering costs. Despite the differences in the participation strategies, both use the participation lever by focusing on the overall strategic implications of location decisions. 5.2. Global services The evidence provided by executives revealed lower than anticipated standardization of facilities and amenities; higher than anticipated uniformity of customer service and quality standards; and, substantial potential for further use of standardized information services. In general, as shown in Fig. 2(b), there was somewhat more uniformity than anticipated. Overall, the evidence indicates a significant degree of localization of facilities and amenities. For example, a chain may have a centrally located hotel providing business services but few other amenities and, at the same time, may run resort locations with a different facilities mix. Each interviewee stressed the need to provide clean, safe accommodation, but generally there was a significant degree of flexibility accorded to local managers regarding physical facilities in individual hotels. However, the leading franchised group in the study did pursue more standardized policies than the other brands. Franchisees are required to provide certain facilities and there was central purchasing of consumables. An executive from this company summarized: If you take a fairly standard (hotel name), you are going to get a greater degree of standardization because that is part of having a brand, it makes it recognizable and that is what people are looking for, the consistency, the predictability of that. In terms of ‘service standards’ (rather than physical amenities) the hotels seek to achieve significant standardization. All of the executives spoke of a need to maintain a consistent level of service and each chain had methods in place to ensure these standards were being met. Training courses are uniform and hotel General Managers are often rotated between countries. One hotel director habitually referred to the ‘golden thread’ that ran through all hotels in that chain. Another hotel group states in its promotional materials that ‘our hotels are widely accepted because they recognize cultural differences within universal standards’. Each of the hotel groups, in both the interviews and published documentation, identified their particular standards and distinct ways of operating. Another interviewee noted the linkage between common service standards and differentiated ‘products’: These are standards that we don’t want to compromise because they are geared to customer service, geared to customer expectation. But we have purposefully been moderate in terms of food and beverageywe believe that food and beverage is an opportunity to deliver personality and we always encourage our management at local level to be quite individualistic. But there are other things that we would be quite tough on; like the phone will never ring more than three times whether its London, Singapore or New York. Now how that phone is answeredywe will have criteria that it must be efficient, it must be polite, it must be giving service to the consumerybut the local acknowledgment and greeting is important. We don’t want to be saying, Good Morning America. Finally, in terms of information systems, it was anticipated that international chains would be making significant use of common global systems. Guest reservation, yield
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management and guest information systems are all costly with high economies of scale. Such systems work best as part of a network where, for example, one hotel can store guest preferences which can be accessed by other hotels in the chain. Although most of the hotel groups did have networked reservation systems, the integration of other information systems was lower than anticipated. None of the hotels, for example, claimed to have an international guest recognition system. Most of the hoteliers suggested that guest recognition systems worked only within individual hotels and they had not yet tried to implement it even within a single country. Further, it was reported that different yield management systems were often used within the same chain. 5.3. Global marketing As anticipated, the firms make significant use of this lever, with marketing activities increasingly integrated on a worldwide basis (Fig. 2(c)). Many groups encourage the use of a single advertising agency worldwide and they all work to develop a ‘global’ brand, or brands, requiring that all hotels in the chain carry the global marque and market themselves under the brand. Those chains that had grown by acquisition were concerned that new additions to the group were quickly integrated into the group, except in cases where the positioning of the acquired chain is not compatible with the parent’s. When positioning was similar, then rapid assimilation into the core brand is encouraged. Each chain has its own promotional rewards scheme and all hotels within the chain are required to participate in the scheme. Although individual hotels also conduct ‘local marketing’, and each had its own sale teams, marketing activities generally were integrated under the ‘corporate umbrella’ of the hotel’s parent brand. One interviewee suggested that coordinated global marketing activity could largely be separated from the sales function which occurs on a local basis. 5.4. Location of activities Fig. 2(d) shows that relatively little use is made of the ‘location of activities’ lever. Even in the case of back-office functions, there was modest evidence of centralization beyond reservations and rewards procedures. In other areas of operation, hotels are run as independent entities with each hotel carrying out nearly all of the activities necessary for its own day-to-day functioning. International integration of functional activities was thus limited, with the few cases of shared resources being confined to hotels operating within the same country. Only one (smaller) chain had seriously considered ways of integrating backoffice activities beyond the information systems already mentioned. Many of the executives indicated that they did see possibilities for cost savings within countries, but opportunities for savings between countries were perceived as much more limited. One interviewee noted: We have probably only got about sixty hotels that we own ourselves (in Europe) and those are spread all around a huge number of countries so the relative complexity of providing centralized accounting in X different countries from one central officeyyou know the economics doesn’t work. Similar comments were made with regard to concentrating purchasing, training and other back-office activities. The smaller chain had recently established a management
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services centre at their corporate headquarters and, in the future, they intend to undertake some activities (such as printing of brochures, menus, etc.) for all hotels from that central location. However few other examples where concentration had taken place were noted. 5.5. Competitive strategy Integrated competitive strategies involving pre-emptive competitive moves and crosssubsidization are not common in the hotel industry (Fig. 2(e)), and there was less use of this lever than expected. A reluctance to use competitive levers is mainly due to the fragmentation of the market place, the variety and changing nature of the competitive context from market to market and consequent difficulties in defining and pre-empting the competition. It was clear that no market would be entered for purely competitive reasons and if there was no potential for profit in a market the prospects for entry were negligible. Two interviewees commented on the competitive situation as follows: The major competitors are the five major hotel groups around the world. Individually there are tens of other competitors, because certainly they are not everywhere where we are and vice versa. And even when they are where we are, they are not always competitors because they could be on the other side of town or have a different type of hotel and there’s a lot of regional companies and local companies, so in every different destination there will be other competitors. If you look at the global market and the fragmentation of the global market, you can’t hope to be absolutely everywhere. Each place has got to be a self-standing correct business decision. If you start getting into well we must have this place in Moscow because Marriot has gone into Moscow even though we know we are going to make a loss on it, its not the way to do business. Because even when you go to Moscow you wouldn’t be competing necessarily head to head against Marriot. 6. Conclusions The patterns of strategy and operational policies observed were most influenced by market drivers. Many customers, particularly those making single-sourcing decisions for business travellers, place a premium on the broad geographic availability of the product and the provision of a given set of services that meet consistent quality standards. Management attention to global branding and positioning, and dependable quality reflects the need to project a common image that provides assurance to customers purchasing an intangible service product internationally. At the same time, many hotel customers are local, and international travelers are also often interested in a unique experience which reflects the foreign context. There is thus a need to be ‘responsive’ in areas such as facilities, amenities and the service portfolio offered. Cost drivers do not have a dominant impact in the industry. The nature of hotel operations provides few opportunities for economies of scale and the savings from standardization are frequently limited. It is noteworthy that system integration is poorly developed in many areas and there are significant opportunities for rationalization and international co-ordination that appear to be under-exploited.
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Government and competitive drivers are not very influential. Although markets are generally open to entry without government-imposed constraints, and industry competition is intense, high market share does not generate the economies of scale seen in many other industries. Identifying competitors to target consistently in overseas markets is problematic and consequently, globally integrated competitive ‘‘moves’’ are not common. The data gathered provides support for hypotheses 1 and 2. However, global participation was higher than expected and customer service and quality standards were more uniform than anticipated. There was a widespread interest in achieving a ‘presence’ in major markets around the world, particularly in gateway locations. Additionally, location decisions were commonly made in the context of a global perspective. Standard management and work practices were common in order to facilitate the achievement of uniform service standards around the world. However this did not imply standardization of amenities and the service portfolio offered globally, where significant variance is common. There was substantial evidence of uniform global marketing by the hotel chains in the development of powerful global brands and common worldwide positioning. The evidence also indicates relatively uniform strategies in areas such as pricing and promotion; hypothesis 3 is thus supported. Value-added activity was even less centralized than expected, and there was minimal evidence of globally integrated competitive ‘‘moves’’. Accordingly, the analysis provides partial support for hypothesis 4 but does not support hypothesis 5. 7. Implications For the practicing executive in the hotel industry these results suggest that there remains significant further potential for additional integration of international activities. Despite relatively high levels of global participation, many chains are seeking even broader geographic representation and the value of globally oriented decision making is widely acknowledged. The value of powerful global brands, which support a uniform positioning strategy underpinned by consistent service standards, is a significant force in the sector, having a strong impact on strategic behaviour. At the same time, it is evident that the pursuit of market share through aggressive globally integrated ‘‘competitive moves’’ has limited value, primarily because of the fragmented competitive context and the limited scope for scale economy based cost savings. The results provide a plausible rationale for the localization of many hotel amenities and key elements of the service portfolio offered in overseas markets, but within a context of uniform service standards, in order to respond to local market needs. Moving forward, one would expect international chains to concentrate on further integrating information systems and centralising more back-office functions. Apart from reservation systems, there is limited recognition of the potential efficiencies arising from greater concentration of back-office functions where integrated information systems allow for better coordination and significant potential cost savings. There are, however, important reasons for the apparent failure to pursue opportunities in respect of global systems integration and centralization. First, when hotels are managed, but not owned, it is more difficult to integrate operations into a single network. Often the local owner retains significant control and put their own interests above that of the group as a whole. As a result, they may be unwilling to share information and resources with
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other hotels in the chain. The separation of hotel ownership and management thus poses obvious constraints to the adoption of integrated global systems and strategy in the hotel industry. Clearly, the negotiation of franchise agreements and management contracts by international hoteliers will need to address these issues. Additionally, there is often a reluctance to invest in and adopt new technologies, and this also constrains integration opportunities. The industry has been historically conservative and traditional ways of doing things stand in the way of introducing new systems even though the benefits seem clear to the outside observer. Several respondents compared themselves unfavourably to the airline industry and suggested that the in-bred nature of executives within the industry has held back technological innovation. To maximize integration opportunities hotel firms may need to look outside the industry for management talent with the vision and willingness to invest in new approaches and systems. Implications arise with regard to the future structure of international competition in the industry. Market drivers are the primary force pushing globalization and cost drivers are relatively unimportant due primarily to low economies of scale. This has resulted in a ‘polarization’ of the industry, with the high-end of the market being increasingly controlled by multinationals which focus on developing a world-wide presence, global branding and image building, positioning uniformity and service consistency. This presents challenges to high-end hotels which have not developed an international presence and global brand recognition, these ‘independents’ will find it harder to survive, given the pressure of competing against global chains. Roper (1995) has indicated that many independent operators have entered into consortia to share training and marketing costs and for purposes of joint purchasing. However a lack of strategic integration and focus in such ‘‘alliances’’ limit their competitive effectiveness. For those international chains entering the international market at the lower end of the price spectrum, such a strategy may find success within a single nation, however this study indicates that cost benefits are difficult to gain on a cross-national basis. Operating on a global basis can incur significant incremental costs, which suggests challenges for the ‘down-market’ international operators, and continuing opportunities for local low-cost independent hotels which are highly responsive to local needs. This research adds to the existing literature in the hospitality industry by comprehensively evaluating the impact of key forces for globalization, and the impact of these ‘‘drivers’’ on strategy. In addition, opportunities for enhanced global integration, and the constraints limiting the exploitation of such initiatives, are identified. Further work is desirable on whether there are significant differences in the international strategy of hotel chains which are not based in the United Kingdom and on the implementation of global strategy, particularly in respect of the development of integrated managerial practice and operating systems in areas such as yield management, training and global brand management. Although the Yip framework provides a useful analytical tool, its utility in predicting overseas strategic behaviour in the hotel sector was less useful than anticipated. In a significant number of areas, practice in the survey firms did not align with what was expected following analysis of the industry drivers. This is partly due to difficulties in explicitly accounting for the impact of factors such as the conservative nature of the industry, resource issues and the nature of competition in the hotel business. This indicates a need for ‘‘models’’ which are more robust in accounting for the impact of idiosyncratic
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factors when seeking to understand strategic behaviour in international markets in a particular industrial context.
References Alexander, N., Lockwood, A., 1996. Internationalisation: a comparison of the hotel and retail sectors. The Service Industries Journal 16 (4), 458–473. Armstrong, R.W., Chan, A.K.K., Go, F.M., Mok, C., 1997. The importance of cross-cultural expectations in the measurement of service quality perceptions in the hotel industry. International Journal of Hospitality Management 16 (2), 181–190. Andersen,, 1999. Global Hospitality Looks to the New Millennium: Hotel and Leisure Executive Report. Arthur Andersen, London. Bartlett, C.A., Ghoshal, S., 1989. Managing Across Borders: the Transnational Solution. Harvard Business School Press, Boston. Bryman, A., 2004. Social Research Methods, second ed. Oxford University Press, Oxford. Burgess, C., Hampton, A., Price, L., Roper, A., 1995. International Journal of Contemporary Hospitality Management 7 (2/3), 74–80. Crawford-Welch, S., 1991. International marketing in the hospitality industry. In: Teare, R., Boer, A. (Eds.), Strategic Hospitality Management. Cassell, London, pp. 166–193. Gahan, C., Hannibal, M., 1998. Doing Qualitative Research Using QSR Nudist. Sage Publications, London. Go, F., Pine, R., 1995. Globalization Strategy in the Hotel Industry. Routledge, London. Go, F., Choi, T., Chan, C., 1996. Four seasons—regent: building a global presence in the luxury market. Cornell Hotel and Restaurant Administration Quarterly 37 (4), 58–65. Greenwood, R., Rose, T., Brown, J.L., Cooper, D.J., Hinings, B., 1999. The global management of professional services: the example of accounting. In: Clegg, S., Ibarra-Colado, E., Bueno-Rodriquez, L. (Eds.), Global Management: Universal Theories and Local Realities. Sage, London, pp. 265–296. Hamel, G., Prahalad, C.K., 1985. Do you really have a global strategy? Harvard Business Review 63 (4), 139–148. Jain, S.C., 1989. Standardization of international marketing strategy: some research hypotheses. Journal of Marketing 53. Johnson, A., Johnson, O., 1990. Quality into quantity: on the measurement potential of ethnographic fieldnotes. In: Fieldnotes: The Making of Anthropology, pp. 161–186. Levitt, T., 1983. The globalisation of markets. Harvard Business Review, 92–102. Litteljohn, D., 1997. Internationalization in hotels: current aspects and developments. International Journal of Contemporary Hospitality Management 9 (5/6), 187–198. Litteljohn, D., Roper, A., 1991. Changes in international hotel companies’ strategies. In: Teare, R., Boer, A. (Eds.), Strategic Hospitality Management. Cassell, London, pp. 194–212. Mace, E., 1995. International trends in the hotel industry or, survival in the global economy. Hotel and Motel Management 210 (10), 11–13. Marshall, C., Rossman, G.B., 1989. Designing Qualitative Research. Sage, Newbury Park. Miles, M.B., Huberman, A., 1984. Qualitative Data Analysis: A Sourcebook of New Methods. Sage, Beverly Hills. Ohmae, K., 1995. The End of the Nation State. Free Press, New York. Patton, M.Q., 2002. Qualitative Research & Evaluation Methods, third ed. Sage, London. Pettigrew, A., 1988. Longitudinal field research on change: theory and practice. Paper presented at the National Science Foundation Conference on Longitudinal Research Methods in Organisations, Austin, Texas. Porter, M.E., 1986. Competition in global industries: a conceptual framework. In: Michael, E.P. (Ed.), Competition in Global Industries. Harvard University Press, Boston, MA. Prahalad, C.K., Doz, Y.L., 1987. The Multinational Mission. Free Press, New York. Roper, A., 1995. The emergence of hotel consortia as transorganizational forms. International Journal of Contemporary Hospitality Management 7 (1), 4–9. Slattery, P., 1996. International development of hotel chains. In: Kotas, R., Teare, R., Logie, J., Jayawardena, C., Bowen, J. (Eds.), The International Hospitality Business. Cassell, London, pp. 30–36. Stonehouse, G., Hamill, J., Campbell, D., Purdie, T., 2000. Global and Transnational Business: Strategy and Management. Wiley, Chichester.
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Stroh, M., 2000. Qualitative interviewing. In: Burton, D. (Ed.), Research Training for Social Scientists. Sage, London, pp. 196–214. Whitla, P., Walters, P., Davies, H., 2005. A critique of Yip’s framework of global strategy. Paper Presented at the Asian Regional Academy of International Business Annual Conference, Manila, 23–25 November. Yin, R.K., 1984. Case Study Research: Design and Methods. Sage, Newbury Park. Yip, G.S., 1992. Total Global Strategy: Managing for Worldwide Competitive Advantage. Prentice-Hall, Englewood Cliffs. Yip, G.S., 2003. Total Global Strategy II. Prentice-Hall, New Jersey. Yip, G.S., Coundouriotis, G.A., 1991. Diagnosing global strategy potential: the world chocolate confectionary industry. Planning Review, 4–14. Zou, S., Cavusgil, S.T., 1996. Global Strategy: a review and integrated conceptual framework. European Journal of Marketing 30 (1), 52–69.
Hospitality Management 26 (2007) 777–792 www.elsevier.com/locate/ijhosman
Global strategies in the international hotel industry Paul Whitlaa,, Peter G.P. Waltersb, Howard Daviesb a
Department of Marketing and International Business, Lingnan University, Tuen Mun, Hong Kong, PR China Department of Management and Marketing, Hong Kong Polytechnic University, Hung Hom, Hong Kong, PR China
b
Abstract A two stage qualitative research methodology is used to evaluate the forces driving the adoption of global strategies in the hotel industry and the strategic response of international hotel chains to those ‘‘drivers’’. Information gathered from industry experts is used to develop a set of hypotheses which are then tested against evidence provided by interviews with senior executives and other data. The results indicate that global strategy is most influenced by market factors, other drivers having much less influence. Cost drivers are constrained by limited economies of scale and standardization opportunities. Globalization is most marked in the thrust for a broad geographic presence in key overseas markets, the pursuit of global branding, positioning and uniform service standards. At the same time, customers expect ‘‘responsive’’ policies in areas such as facilities and services provided. Opportunities for greater integration and concentration of ‘‘back-office’’ functions, where information-based systems allow for cost economies and enhanced coordination, often remain relatively unexploited, primarily due to institutionalized management practice and control constraints. r 2006 Elsevier Ltd. All rights reserved. Keywords: Hotels; Global; Strategy
1. Introduction The hotel industry is often perceived as one of the most ‘global’ in the service sector (Mace, 1995; Litteljohn, 1997). In order to understand whether that image is aligned with Corresponding author. Tel.: +852 2616 8237; fax: +852 2467 3049.
E-mail addresses: [email protected] (P. Whitla), [email protected] (P.G.P. Walters), mshoward@ polyu.edu.hk (H. Davies). 0278-4319/$ - see front matter r 2006 Elsevier Ltd. All rights reserved. doi:10.1016/j.ijhm.2006.08.001
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practice, this paper first examines the forces driving globalization in the sector and then the extent to which international hotel chains actually pursue global strategies. As the issue of what constitutes a ‘global strategy’ is hotly debated (Prahalad and Doz, 1987; Bartlett and Ghoshal 1989; Zou and Cavusgil, 1996) the construct itself first needs to be explored. The existing literature provides useful starting points. Work on internationalization in the hotel sector, reviewed by Burgess et al. (1995), has examined a number of issues facing multinational operators, including entry mode strategy (Litteljohn and Roper, 1991 Slattery, 1996) and international marketing strategies (Crawford-Welch, 1991; Alexander and Lockwood, 1996). Particularly pertinent are studies by Go and Pine (1995), who describe the key factors driving the development of global strategies, and Go et al. (1996) on the operations of the Four Seasons group. Key findings are: the importance of a ‘balanced’ global presence involving both urban and resort hotels; policies to integrate international value added activities in areas like training and purchasing, and; an emphasis on developing global brands. However, their analysis also showed that in many operational activities, policy is substantially localized. These studies are useful, but there have been no empirical studies which systematically evaluate the extent to which major international hotel chains are integrating their activities on a global basis. In this paper key dimensions of globalization are examined and hypotheses are then developed relating to the nature and impact of the forces driving global integration in the industry. Practice in leading British-based international hotel chains is then evaluated. The conceptual foundation adopted is drawn from Yip’s global strategy framework (1992, 2003), which has been described as ‘the most widely used framework for assessing the extent of, and potential for, industry and market globalization’ (Stonehouse et al., 2000). The primary advantage of Yip’s approach is that it is eclectic, drawing upon multiple conceptualizations of the ‘global strategy’ construct. Thus account is taken of the reduction of costs through standardization and centralization (Levitt, 1983; Bartlett and Ghoshal, 1989); the extent of worldwide market participation (Ohmae, 1995); crosssubsidization (Hamel and Prahalad, 1985); configuration of value-added activities (Porter, 1986); and globally integrated marketing (Jain, 1989). In Yip’s model, ‘global strategy’ is construed as the extent of world-wide co-ordination and integration in respect of five strategic ‘levers’ namely: the scope of overseas participation; uniformity of products and services; location of activities; marketing policy; and competitive moves. The antecedents to the adoption of global strategy are described in terms of four sets of ‘drivers’, involving: markets; costs; governments, and; competition. These drivers render it profitable to make greater or lesser use of the global strategy ‘‘levers’’ which can be conceptualized in terms of a continuum. At one end lies a ‘multidomestic’ strategy, where the activities in each overseas location are determined without reference to conditions in other markets. At the other end, ‘global’ strategy is defined as an approach ‘‘that integrates and manages for worldwide business leverage and competitive advantage’’ (Yip, 1992, p. 7). The strength of the drivers varies across industries, with firms integrating activities in such a way that the use of the ‘levers’ is aligned with the industry ‘drivers’ (see Fig. 1). While the framework has limitations, especially in respect of the failure to articulate detailed paths from drivers to levers (Whitla et al., 2005), it remains an inclusive approach to the analysis of both the antecedents to global strategy and firm-level strategic responses.
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Global Drivers Cost -Market -Government -Competitive
Global Strategy Levers Global Market Participation Global Products and Services Global Location of Activities Global Marketing Global Competitive Moves
Benefits of Global Strategy
Fig. 1. Yip’s framework of global strategy.
Table 1 Geographic spread of hotels in study Hotel chain
Hotels
Rooms
Countries
Inter-continental Holiday inn (owned by Inter-continental) Millennium & Copthorne Hilton Le Meridien
135 1567 91 418 130
44,545 293,346 24,200 n/a 34,000
60 70+ 16 70 56
Source: corporate data as at June 2004.
2. Research design and methodology A qualitative, multiple case study research design was adopted as this is appropriate when knowledge is relatively undeveloped, and when a significant amount of data needs to be collected from each respondent (Patton, 2002). Yin (1984) argues that qualitative methods are most appropriate for ‘process studies’ which examine how underlying industry factors influence firms’ choice of strategy (Pettigrew, 1988) and empirical studies of globalization in the service sector are often qualitative (Greenwood et al., 1999). The population comprises hotel firms with a significant engagement in the international marketplace and the sample examined consisted of British-owned multinational operators as shown in Table 1. While that has the advantage of controlling for nationality effects, and British owned hotel groups are key players in the global industry, it also restricts the generalizability of the findings. As the industry ‘drivers’ are the independent variables, antecedent to the levers, there would be a common method problem if the evidence on both were collected from the same
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source. Hence data collection and analysis proceeded in two stages, using independent sources of data. In the first stage, at industry level, experts on the hotel industry were drawn from consultancy firms, industry associations, and universities and interviewed on the nature of the drivers affecting the hotel sector. In the second stage, senior managers from the hotel companies were interviewed on their firm’s use of the levers. Respondents were the highest placed directors responsible for setting international strategy, in most cases the managing director. The interviews adopted a semi-structured format (Stroh, 2000), adapted as conversations progressed (Marshall and Rossman, 1989). Sixteen interviews were conducted, eight with the industry experts and eight with hotel executives. Interviews were recorded and verbatim transcripts prepared, generating some 280 pages of script. To guard against premature or false conclusions (Miles and Huberman, 1984), use was made of qualitative research software in the data analysis phase. Each transcript was coded using NUD*IST (volume 4) software which allowed pattern searches and comparisons to be run on the data sets generated for each case (Gahan and Hannibal, 1998). Although the thrust of the research is qualitative, important elements of the evidence were quantified, to enable more systematic comparison between companies and to facilitate interpretation of the results (Johnson and Johnson, 1990; Bryman, 2004). Data analysis involved firstly evaluating the strength of industry drivers (Yip and Coundouriotis, 1991). The impact of each driver group—market, cost, government and competitive—was assessed in quantitative terms by evaluating the raw interview data obtained from the industry experts. Assigned values were initially set by the author responsible for the interviews and those were then evaluated by the two other authors, working independently. An external judge then independently examined a sample of the evidence and assigned scores which were compared with those arrived at by the authors. There was a high degree of consistency in scores with an average inter-rater reliability of 94%. Propositions regarding expected use of the levers in international hotel chains were arrived at by assessing the combined impact of all drivers on the use of each lever. Actual use of the levers by each hotel firm was determined by evaluating the raw data derived from the executive interviews, and other sources, in the same way as for the drivers. The data are presented in diagrammatic form, by lever, with a continuum shown between the two polar anchor points. This allows for comparison between the expected use of a lever, derived from the experts’ input, and practice for each firm. 3. Forces for globalization—the global drivers The evidence gathered from industry experts is reviewed below. 3.1. Cost drivers Three potential areas where hotel chains may gain cost economies through integration of worldwide activities were identified. The first was purchasing, where quantity buying may allow for ‘sourcing efficiencies’. However, savings in this area were seen as limited. One expert summarised the consensus. I wouldn’t expect, if Hilton had a good European supplier of furniture, for them to be using that same supplier in the Far East because; you start running into transport
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costs; they like to give their hotels a slight regional feel; and, a high proportion of international hotels are operated under management contract or where the hotel operator has only a part share in the underlying equity. It is the hotel owner who does quite a lot of the buyingy The second area concerns the concentration of ‘back-office’ services, such as the location of accounting services in a low-wage environment. Arthur Andersen (1999) suggested that most of these functions are inefficiently replicated on a hotel by hotel basis, and that ‘the hospitality industry bears a disproportionately high cost for its finance and accounting processes compared to other industries, far above best practice benchmarks’, with consolidation savings in the region of 2% of hotel revenues feasible. The experts, however, suggested that achievement of such economies was problematic on an international basis, with savings more related to size rather than global reach. The third area where cost factors favour an integrated approach worldwide concerns guest reservation and information systems. Where these can be leveraged globally, international chains can generate cost savings, while improving revenues through yield management systems which can also direct potential customers to other hotels within the chain where appropriate. The high cost of the systems, and the importance of all hotels in a chain co-operating for efficient performance, indicates the need for integration when developing a single worldwide system. 3.2. Market drivers Hotel chains need to balance the provision of a standardized level of service and amenities with customers’ interest in some degree of local adaptation. The feedback affirmed that guests, especially business travelers, expected a similar range of services. Thus in-room international direct dialling (IDD), internet services, a business centre, 24hour room service and a gymnasium, are seen as ‘minimum entry standards’ for an international business hotel. One expert suggested: As other companies have become more global and as travelers have become more globalyif somebody rolls up in the Far East and they roll up in the States then there is just that expectation that the product will be consistenty However the experts also saw responsiveness as important, especially for leisure travelers. On the need for local differentiation, it was noted that the role of hotels within countries differed. Hotels in western countries typically rely on accommodation charges for the majority of their sales, whereas in Asia food and beverage charges often make up the bulk of hotels’ revenues. Asian hotels therefore need to concentrate on providing more and larger restaurant outlets, targeting local diners as well as overnight guests. Many ‘global customers’ purchase hotel services centrally and multinational firms often appoint particular hotel chains as ‘preferred’ suppliers for their employees. This has implications for global participation as many corporate customers will only deal with chains having adequate geographic coverage. Second, the chains need to integrate marketing resources to sell the worldwide chain where the customers are making decisions. Information systems also need to be coordinated so customers can access guest reservation systems and make bookings from a central location.
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3.3. Government drivers The experts saw little evidence that government policy limits the ability of hotel chains to expand internationally or constrains foreign ownership, as the fragmented nature of the industry limits concerns over market domination. There are few price and marketing controls and, apart from examples of alcohol restrictions, few limits on the range of services that hotels can provide. Additionally, it seems that governments had few concerns about the impact of international hotels on the local culture or competitors and the chains are generally welcomed due to tourism and employment benefits. Some legal constraints limiting the opportunities for standardization and integration of international operations were identified. Labour legislation affects working hours and wage rates resulting, for example, in higher staff to guest ratios in some countries. Stringent fire and safety regulations in more developed markets, and different standards regarding kitchen and serving facilities, impact hotel design and cost levels. Finally, zoning regulations vary between countries, making it difficult to adopt standard hotel designs that facilitate the delivery of a uniform image and service. 3.4. Competitive drivers The experts pointed out that there is ‘multi-pronged’ competition with chains based in North America, Europe and Asia competing in most of the world’s largest markets. Country operations are seen as interdependent in that hotels within a chain share marketing and other centralized costs associated with guest information and reservation systems. Furthermore, the guest experience in one country influences the propensity to stay with the same chain in other countries. The performance of hotels in each country therefore affects the revenues and costs of other hotels within the network. It was also noted that in areas such as reward, reservation and information systems, international chains that did not adopt uniform worldwide systems would find it difficult to compete. 4. Hypotheses Despite the potential for cost savings, it was found that these are not easily realized. The experts’ view was that cost drivers are not very powerful as a force for globalization in the hotel industry. Their view was that although there are important forces favouring responsiveness and customization, business customers are more interested in common service standards, particularly when they are looking for a preferred worldwide supplier. Government drivers pose few barriers to integration and competitive drivers also favour an integrated global approach. In this light, the following hypotheses were developed. Hypothesis 1. Firms will seek broad geographic coverage in major markets ‘Global presence’ refers primarily to the geographic scope of operations, but also reflects the extent to which location decisions are informed by overall corporate interest as opposed to stand-alone considerations. Market drivers push for a balanced presence in major markets and there are few governmental and other barriers to international growth.
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However, there are few cost advantages to be gained either from broadening geographical coverage or from being present in strategically important locations. Indeed analysis of the cost drivers suggests an approach favouring depth within countries rather than geographic breadth. The nature of the competitive drivers promotes participation in ‘strategically important countries’, with a focus on major business centres and ‘gateway cities’, which serve as the ‘first point of entry’ for international visitors. Hypothesis 2. Substantial customization of many hotel services will be implemented. Hotel chains need to standardize significant aspects of their amenities and service, particularly for business travelers. However, guests also look for ‘local flavour’ in hotels and are not expecting a replication of all services in all locations (Armstrong et al., 1997). The need to satisfy local clients, differing government regulations and varying ‘roles’ for hotels in different countries all point to significant localization. As there are few economies of scale to be had from standardization, cost drivers are a relatively unimportant force for service uniformity. Hypothesis 3. Hotel firms will make significant use of ‘standardized marketing’. Analysis of the drivers suggests that there are clear advantages to be gained from the use of a common brand name worldwide, primarily to overcome the ‘intangibility’ of service products. A global brand allows for consumer recognition worldwide and assurance regarding the range and quality of services that the hotel provides. Global branding also facilitates the development of a ‘uniform image’ which can be supported by promotional activity of a relatively standard nature. The targeting of global travelers, and the development of a common image, are also facilitated by standard positioning and pricing strategies. Hypothesis 4. Value-added activities will be undertaken locally, with the exception of some ‘back-office’ functions. Hotels are ‘location bound’ and many services such as housekeeping, food and beverage preparation and serving, laundry and reception duties must be performed in, or close to, the hotel itself. However, there are opportunities for cost savings and quality improvements through concentration of ‘back-office’ activities such as account management, finance, training, and other support activities which do not directly involve guest contact. With advances in information technology, the ability to centralize such functions has increased. Hypothesis 5. Use of competitive levers will be limited by the low scope for cost economies and fragmentation of the market. Internationally active competitors, and inter-dependencies between markets, favour use of the competitive lever which is not restricted by government controls on cross-national
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competitive actions. However, limited economies of scale and experience effects mean that the pressures to build market share are not as strong as in many other industries. In addition, the presence of many small hotels and the fragmentation of many overseas markets limit the usefulness of coordinated global competitive moves.
5. Use of global strategies—the global levers The actual use of the global levers was evaluated using the evidence gathered from senior managers and other sources. Fig. 2 shows each firms’ use of each lever and compares this to the anticipated use of that lever as outlined in the hypotheses above. Each hotel chain has been identified by a code letter in order to protect the confidentiality of individual respondents. 5.1. Global participation Fig. 2(a) shows that each group makes significant use of the global participation lever, with broad international coverage a common goal. All chains made more use of this lever than was predicted from the feedback on the industry drivers provided by the experts. Evaluation of the geographic scope of the hotel groups indicates that they all have limited coverage in at least one major region, so that none of them could claim global coverage. One executive stated: We are in (a) quarter of all the countries in the world, we may be in the more important countries but we are not global in that sense. Coca Cola is global we’re just international. However, most of the hotel chains had achieved a significant presence in most regions and there is a general tendency to further broaden geographic scope of overseas operations. This primarily reflects the impact of customer needs, as is made clear in the following interview quotes: It is very much the requirement of the third party customerythe agent, the international incentive buyer, they really want to sit down with hotels that have a high quality portfolio in all parts of the worldywhich can include the representation of the major global gateways. Being global is very important and we need a major hotel in every major city, gateway city, because that’s predominantly what the brand is about and that’s what our customers are looking for. So that’s what is driving internationalization. One chain demonstrated a different international expansion path. This hotel group has decided to develop significant positions in a few core markets. Midrange consumers are targeted; cost control has a higher priority; and seeking strength in a limited number of national markets is seen as most cost efficient. For both participation strategies, the parent company is responsible for selecting locations on the basis of potential integration benefits where ‘managers select countries for entry and investment on the basis of overall strategic importance as well as stand-alone attractiveness’ (Yip, 2003, p. 86). The evidence indicates that, in general, global strategic
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Use of the Global Participation Lever No Particular
Significant Share
Pattern
in Major Markets A
0
1
(a)
2
CE
BF
D
3
4
5
Global Market Participation Use of the Global Services Lever
Fully Standardised in Each Country
Fully Customised in Each Country F 0
1
(b)
BC DE
A
3 2 Products/Services Standardisation
4
Use of the Global Marketing Lever Local BE
C
5
Uniform Worldwide DF
A 0
1
(c)
2
3
4
5
Marketing Approach Use of the Global Location of Activities Lever
All Activities in Each Country
CF
Concentrated
B
DE A
0
1
(d)
2
3
4
5
Location of Value-Added Activities Use of the Global Competitive Moves Lever
Stand-Alone by Country C
E
DF
0
1
2
Integrated Across Countries
B A
(e)
3
4
5
Global Competitive Moves
Key: A =Anticipated Usage B-F =Hotel Chains Fig. 2. Use of global levers.
rationales were important in the sample firms. In the first case, the benefits of a ‘breadth’ strategy arise primarily through being able to serve global customers with a widespread international network. In the second case, market depth offers integration benefits by
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lowering costs. Despite the differences in the participation strategies, both use the participation lever by focusing on the overall strategic implications of location decisions. 5.2. Global services The evidence provided by executives revealed lower than anticipated standardization of facilities and amenities; higher than anticipated uniformity of customer service and quality standards; and, substantial potential for further use of standardized information services. In general, as shown in Fig. 2(b), there was somewhat more uniformity than anticipated. Overall, the evidence indicates a significant degree of localization of facilities and amenities. For example, a chain may have a centrally located hotel providing business services but few other amenities and, at the same time, may run resort locations with a different facilities mix. Each interviewee stressed the need to provide clean, safe accommodation, but generally there was a significant degree of flexibility accorded to local managers regarding physical facilities in individual hotels. However, the leading franchised group in the study did pursue more standardized policies than the other brands. Franchisees are required to provide certain facilities and there was central purchasing of consumables. An executive from this company summarized: If you take a fairly standard (hotel name), you are going to get a greater degree of standardization because that is part of having a brand, it makes it recognizable and that is what people are looking for, the consistency, the predictability of that. In terms of ‘service standards’ (rather than physical amenities) the hotels seek to achieve significant standardization. All of the executives spoke of a need to maintain a consistent level of service and each chain had methods in place to ensure these standards were being met. Training courses are uniform and hotel General Managers are often rotated between countries. One hotel director habitually referred to the ‘golden thread’ that ran through all hotels in that chain. Another hotel group states in its promotional materials that ‘our hotels are widely accepted because they recognize cultural differences within universal standards’. Each of the hotel groups, in both the interviews and published documentation, identified their particular standards and distinct ways of operating. Another interviewee noted the linkage between common service standards and differentiated ‘products’: These are standards that we don’t want to compromise because they are geared to customer service, geared to customer expectation. But we have purposefully been moderate in terms of food and beverageywe believe that food and beverage is an opportunity to deliver personality and we always encourage our management at local level to be quite individualistic. But there are other things that we would be quite tough on; like the phone will never ring more than three times whether its London, Singapore or New York. Now how that phone is answeredywe will have criteria that it must be efficient, it must be polite, it must be giving service to the consumerybut the local acknowledgment and greeting is important. We don’t want to be saying, Good Morning America. Finally, in terms of information systems, it was anticipated that international chains would be making significant use of common global systems. Guest reservation, yield
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management and guest information systems are all costly with high economies of scale. Such systems work best as part of a network where, for example, one hotel can store guest preferences which can be accessed by other hotels in the chain. Although most of the hotel groups did have networked reservation systems, the integration of other information systems was lower than anticipated. None of the hotels, for example, claimed to have an international guest recognition system. Most of the hoteliers suggested that guest recognition systems worked only within individual hotels and they had not yet tried to implement it even within a single country. Further, it was reported that different yield management systems were often used within the same chain. 5.3. Global marketing As anticipated, the firms make significant use of this lever, with marketing activities increasingly integrated on a worldwide basis (Fig. 2(c)). Many groups encourage the use of a single advertising agency worldwide and they all work to develop a ‘global’ brand, or brands, requiring that all hotels in the chain carry the global marque and market themselves under the brand. Those chains that had grown by acquisition were concerned that new additions to the group were quickly integrated into the group, except in cases where the positioning of the acquired chain is not compatible with the parent’s. When positioning was similar, then rapid assimilation into the core brand is encouraged. Each chain has its own promotional rewards scheme and all hotels within the chain are required to participate in the scheme. Although individual hotels also conduct ‘local marketing’, and each had its own sale teams, marketing activities generally were integrated under the ‘corporate umbrella’ of the hotel’s parent brand. One interviewee suggested that coordinated global marketing activity could largely be separated from the sales function which occurs on a local basis. 5.4. Location of activities Fig. 2(d) shows that relatively little use is made of the ‘location of activities’ lever. Even in the case of back-office functions, there was modest evidence of centralization beyond reservations and rewards procedures. In other areas of operation, hotels are run as independent entities with each hotel carrying out nearly all of the activities necessary for its own day-to-day functioning. International integration of functional activities was thus limited, with the few cases of shared resources being confined to hotels operating within the same country. Only one (smaller) chain had seriously considered ways of integrating backoffice activities beyond the information systems already mentioned. Many of the executives indicated that they did see possibilities for cost savings within countries, but opportunities for savings between countries were perceived as much more limited. One interviewee noted: We have probably only got about sixty hotels that we own ourselves (in Europe) and those are spread all around a huge number of countries so the relative complexity of providing centralized accounting in X different countries from one central officeyyou know the economics doesn’t work. Similar comments were made with regard to concentrating purchasing, training and other back-office activities. The smaller chain had recently established a management
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services centre at their corporate headquarters and, in the future, they intend to undertake some activities (such as printing of brochures, menus, etc.) for all hotels from that central location. However few other examples where concentration had taken place were noted. 5.5. Competitive strategy Integrated competitive strategies involving pre-emptive competitive moves and crosssubsidization are not common in the hotel industry (Fig. 2(e)), and there was less use of this lever than expected. A reluctance to use competitive levers is mainly due to the fragmentation of the market place, the variety and changing nature of the competitive context from market to market and consequent difficulties in defining and pre-empting the competition. It was clear that no market would be entered for purely competitive reasons and if there was no potential for profit in a market the prospects for entry were negligible. Two interviewees commented on the competitive situation as follows: The major competitors are the five major hotel groups around the world. Individually there are tens of other competitors, because certainly they are not everywhere where we are and vice versa. And even when they are where we are, they are not always competitors because they could be on the other side of town or have a different type of hotel and there’s a lot of regional companies and local companies, so in every different destination there will be other competitors. If you look at the global market and the fragmentation of the global market, you can’t hope to be absolutely everywhere. Each place has got to be a self-standing correct business decision. If you start getting into well we must have this place in Moscow because Marriot has gone into Moscow even though we know we are going to make a loss on it, its not the way to do business. Because even when you go to Moscow you wouldn’t be competing necessarily head to head against Marriot. 6. Conclusions The patterns of strategy and operational policies observed were most influenced by market drivers. Many customers, particularly those making single-sourcing decisions for business travellers, place a premium on the broad geographic availability of the product and the provision of a given set of services that meet consistent quality standards. Management attention to global branding and positioning, and dependable quality reflects the need to project a common image that provides assurance to customers purchasing an intangible service product internationally. At the same time, many hotel customers are local, and international travelers are also often interested in a unique experience which reflects the foreign context. There is thus a need to be ‘responsive’ in areas such as facilities, amenities and the service portfolio offered. Cost drivers do not have a dominant impact in the industry. The nature of hotel operations provides few opportunities for economies of scale and the savings from standardization are frequently limited. It is noteworthy that system integration is poorly developed in many areas and there are significant opportunities for rationalization and international co-ordination that appear to be under-exploited.
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Government and competitive drivers are not very influential. Although markets are generally open to entry without government-imposed constraints, and industry competition is intense, high market share does not generate the economies of scale seen in many other industries. Identifying competitors to target consistently in overseas markets is problematic and consequently, globally integrated competitive ‘‘moves’’ are not common. The data gathered provides support for hypotheses 1 and 2. However, global participation was higher than expected and customer service and quality standards were more uniform than anticipated. There was a widespread interest in achieving a ‘presence’ in major markets around the world, particularly in gateway locations. Additionally, location decisions were commonly made in the context of a global perspective. Standard management and work practices were common in order to facilitate the achievement of uniform service standards around the world. However this did not imply standardization of amenities and the service portfolio offered globally, where significant variance is common. There was substantial evidence of uniform global marketing by the hotel chains in the development of powerful global brands and common worldwide positioning. The evidence also indicates relatively uniform strategies in areas such as pricing and promotion; hypothesis 3 is thus supported. Value-added activity was even less centralized than expected, and there was minimal evidence of globally integrated competitive ‘‘moves’’. Accordingly, the analysis provides partial support for hypothesis 4 but does not support hypothesis 5. 7. Implications For the practicing executive in the hotel industry these results suggest that there remains significant further potential for additional integration of international activities. Despite relatively high levels of global participation, many chains are seeking even broader geographic representation and the value of globally oriented decision making is widely acknowledged. The value of powerful global brands, which support a uniform positioning strategy underpinned by consistent service standards, is a significant force in the sector, having a strong impact on strategic behaviour. At the same time, it is evident that the pursuit of market share through aggressive globally integrated ‘‘competitive moves’’ has limited value, primarily because of the fragmented competitive context and the limited scope for scale economy based cost savings. The results provide a plausible rationale for the localization of many hotel amenities and key elements of the service portfolio offered in overseas markets, but within a context of uniform service standards, in order to respond to local market needs. Moving forward, one would expect international chains to concentrate on further integrating information systems and centralising more back-office functions. Apart from reservation systems, there is limited recognition of the potential efficiencies arising from greater concentration of back-office functions where integrated information systems allow for better coordination and significant potential cost savings. There are, however, important reasons for the apparent failure to pursue opportunities in respect of global systems integration and centralization. First, when hotels are managed, but not owned, it is more difficult to integrate operations into a single network. Often the local owner retains significant control and put their own interests above that of the group as a whole. As a result, they may be unwilling to share information and resources with
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other hotels in the chain. The separation of hotel ownership and management thus poses obvious constraints to the adoption of integrated global systems and strategy in the hotel industry. Clearly, the negotiation of franchise agreements and management contracts by international hoteliers will need to address these issues. Additionally, there is often a reluctance to invest in and adopt new technologies, and this also constrains integration opportunities. The industry has been historically conservative and traditional ways of doing things stand in the way of introducing new systems even though the benefits seem clear to the outside observer. Several respondents compared themselves unfavourably to the airline industry and suggested that the in-bred nature of executives within the industry has held back technological innovation. To maximize integration opportunities hotel firms may need to look outside the industry for management talent with the vision and willingness to invest in new approaches and systems. Implications arise with regard to the future structure of international competition in the industry. Market drivers are the primary force pushing globalization and cost drivers are relatively unimportant due primarily to low economies of scale. This has resulted in a ‘polarization’ of the industry, with the high-end of the market being increasingly controlled by multinationals which focus on developing a world-wide presence, global branding and image building, positioning uniformity and service consistency. This presents challenges to high-end hotels which have not developed an international presence and global brand recognition, these ‘independents’ will find it harder to survive, given the pressure of competing against global chains. Roper (1995) has indicated that many independent operators have entered into consortia to share training and marketing costs and for purposes of joint purchasing. However a lack of strategic integration and focus in such ‘‘alliances’’ limit their competitive effectiveness. For those international chains entering the international market at the lower end of the price spectrum, such a strategy may find success within a single nation, however this study indicates that cost benefits are difficult to gain on a cross-national basis. Operating on a global basis can incur significant incremental costs, which suggests challenges for the ‘down-market’ international operators, and continuing opportunities for local low-cost independent hotels which are highly responsive to local needs. This research adds to the existing literature in the hospitality industry by comprehensively evaluating the impact of key forces for globalization, and the impact of these ‘‘drivers’’ on strategy. In addition, opportunities for enhanced global integration, and the constraints limiting the exploitation of such initiatives, are identified. Further work is desirable on whether there are significant differences in the international strategy of hotel chains which are not based in the United Kingdom and on the implementation of global strategy, particularly in respect of the development of integrated managerial practice and operating systems in areas such as yield management, training and global brand management. Although the Yip framework provides a useful analytical tool, its utility in predicting overseas strategic behaviour in the hotel sector was less useful than anticipated. In a significant number of areas, practice in the survey firms did not align with what was expected following analysis of the industry drivers. This is partly due to difficulties in explicitly accounting for the impact of factors such as the conservative nature of the industry, resource issues and the nature of competition in the hotel business. This indicates a need for ‘‘models’’ which are more robust in accounting for the impact of idiosyncratic
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factors when seeking to understand strategic behaviour in international markets in a particular industrial context.
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