hotel industry analysis

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Chapter 6

Market entry Choice and Organizational Development

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  • Because of today’s idea of the global hotel village, being an independent or regional player is hard to uphold. It is too costly to promote by yourself….That is why more than 70% of U.S. hotels are branded. Yet only 30% in Europe are branded, which makes it the next big opportunity.

Juergen Bartels

CEO of the Hotels Group

Starwood Hotels and Resorts Worldwide

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MARKET ENTRY CHOICES

  • Six market entry modes are commonly employed by hospitality corporations for global expansions: sole ownership, joint ventures, franchising, management contract, strategic alliances, and consortia.

  • Since market entry modes have a major impact on hospitality corporation performance in foreign countries, their selection is always regarded as a critical international business decision.

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Sole Ownership

  • A hospitality company can enter a foreign market by building a new hotel by itself, or by acquiring an existing hotel or an entire hotel company in the host country.

  • Building a new property in a foreign country thus allows the hotel company to have total control of the operations.

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Joint Ventures

  • Joint ventures refer to a partnership between a domestic company and a foreign company for jointly developing and managing hospitality operations.

  • Some countries require that the domestic companies take the majority control of the operation, while the foreign company holds the minority stake.

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Joint Ventures (Cont’d)

  • The 51 percent/49 percent majority-minority joint venture structure is quite common in some countries, such as France and China.

  • Joint ventures are commonly used as an effective market entry choice for hospitality development in most developing countries.

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Franchising

  • By a franchising agreement, a hospitality company (franchiser) sells limited rights to another company or independent operator (franchisee) for the use of its brand name in selling certain standardized products and services, in return for a lump sum payment and a share of the franchisee’s profits.

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Management contract companies

  • Hotel management requires specialized expertise and skills. Many inexperienced hotel owners, such as real estate developers and financial institutions, often find it very difficult to operate a profitable hotel.

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Management contract companies (Cont’d)

  • Hotels owned by the governments in the developing countries simply lack the professional managers to operate successfully. Therefore, these inexperienced hotel owners turn to professional hotel operators for assistance.

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Strategic Alliance

  • Strategic alliance refers to a cooperative agreement between two hotel companies from two different countries. The two hotel companies band together for mutual support and expansion of their global presence.

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Strategic Alliance (Cont’d)

  • In 1994, Carlson/Radisson launched a new global alliance with SAS International Hotels.

  • This alliance resulted in Radisson’s name being added to twenty-eight SAS hotels, and expanding Radisson’s presence in Europe (see Exhibit 6.3). In turn, SAS benefited from the strength of Radisson’s global brand.

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Consortia

  • The term “consortia” is used interchangeably with voluntary groups or membership affiliations in the lodging industry.

  • Consortia offer global marketing and reservation services to independent hotels and some chain hotels.

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Consortia (Cont’d)

  • Consortia differ from franchises in that members of consortia are not mandated to follow standardized operational procedures established by the franchisors.

  • Members pay initiation fees, and annual dues to use the marketing and reservation services, but remain autonomous in their management and operations.

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Consortia (Cont’d)

  • Consortia have a special appeal to independent and small property owners around the world. In today’s competitive lodging markets, independent operators find it very difficult to compete with the giant hotel chains.

  • But they do not want to give up their management autonomy by purchasing a franchise, because the franchisers require them to follow a set of standardized operational procedures.

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HOSPITALITY ORGANIZATIONAL STRUCTURES

  • As the hospitality industry is increasingly globalized, hospitality corporations have to go through fundamental organizational restructuring to meet the challenges of global expansions and overseas operations.

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HOSPITALITY ORGANIZATIONAL STRUCTURES (Cont’d)

  • Hospitality organizational structure refers to the degree of centralization, formalization, and complexity of a particular company.

  • Centralization refers to the locus of control and power relations in the company.

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HOSPITALITY ORGANIZATIONAL STRUCTURES (Cont’d)

  • Formalization refers to the policies, rules, and regulations that are formulated to keep the organization achieving its goals.

  • Complexity refers to the degree of specialization of operational functions within the corporation.

  • As hospitality corporations grow and expand into foreign countries, the management characteristics become more complicated.

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