Business Strategy Formulation
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HTM590-Chapter5.pdf
STRATEGY FORMULATION
AT THE BUSINESS - UNIT LEVEL
YOU SHOULD BE ABLE TO DO THE FOLLOWING AFTER READING THIS CHAPTER:
1. Distinguish the business - level strategy of any hospitality organization by determining if it is a cost leader, differentiator, or best value and whether it addresses a broad or narrow market focus.
2. Identify the risk factors associated with pursuing various business strategies.
3. Explain the key factors fi rms use to create a low - cost or differentiation strategy.
4. Know the defi nition of creative destruction and why it is important for making sense of com- petitive dynamics.
5. List the offensive and defensive strategies fi rms can use to compete effectively.
6. Create a strategic group map to help you understand the strategies of competitors in an industry.
CHAPTER 5
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165FEATURE STORY
FEATURE STORYFEATURE STORY FEATURE STORYFEATURE STORY
BETTING ON LUXURY
Picture a famous casino real estate developer and idea maker atop the 50th fl oor of a $ 2.7 billion dollar Las Vegas casino in a television advertisement proclaiming, “ I ’ m Steve Wynn, and this is my hotel — the only one I ’ ve ever signed my name to. ” Steve Wynn, formerly the Chairman of the Board, President, and CEO of Mirage Resorts, Inc., and credited with development of the Bellagio, the Mirage, Treasure Island, and the Golden Nugget, has now changed all the rules in his own company.
In contrast to luring guests with visible outdoor attractions like his dancing waters at the Bellagio, pirate ship at Treasure Island, and volcano at the Mirage, Wynn ’ s newest high - end creation was designed from the inside out. Wynn Las Vegas has put its waterfalls and giant screens behind human - made mountains, reserving them for diners, gamblers, and guests. It ’ s buzz, not glitz, that ’ s intended to draw them to the place. Dropping the theme - hotel motif, this new luxury casino hotel has low hallways and intimate spaces.
Picture a beautiful and opulent property with fl owers, mosaic tiles inlaid inside the fl oors, and a 150 - foot - tall artifi cial pine - covered mountain and a waterfall that cascades into a human - made lake. While maintaining the Vegas focus on entertainment, Wynn has again broken the most basic rules of casinos by fl ooding the new hotel with natural light and focusing on small, calm spaces.
Wynn Resorts, Ltd. owns and operates two luxury hotels and destination casino resorts, one in Las Vegas and a second in Macau, China. The Wynn Las Vegas, LLC is the fl agship of the company, opening in 2005 at one of the best locations on the strip. The previous home of the historic Desert Inn Hotel was imploded to make room for this new highly differentiated casino hotel and golf course project.
The Wynn Las Vegas features 2,716 guest rooms and suites; a 111,000 - square - foot casino; 22 food and beverage outlets; an on - site 18 - hole golf course; approximately 223,000 square feet of meeting space; an on - site Ferrari and Maserati dealership; and approximately 76,000 square feet of retail space. This luxury resort offers up food from some of the most famous chefs in the world, including Alex Stratta (Alex), Paul Bartolotta (Bartolotta Ristorante di Mare), Takashi Yagihashi (Okada), and Daniel Boulud, whose New York restaurants (Daniel, DB Bistro Moderne, and Caf é Boulud) have dazzled diners. The Daniel Boulud Brasserie overlooks the Lake of Dreams. When the sun goes down, both the waterfall wall and lake become projection screens for a light show that is visible from the Brasserie and SW Steakhouse.
Quality entertainment includes shows, such as the Tony Award – winning Spamalot, and nightclubs. Wynn has expanded his theater ’ s balcony so he can sell 1,500 tickets to each
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CHAPTER 5 ■ STRATEGY FORMULATION AT THE BUSINESS - UNIT LEVEL166
show, and his deal with Spamalot bars the show from playing in Southern California and Arizona, two states that provide one - third of Vegas ’ visitors. To enable the show to run twice a night, Wynn has also hired the co - writer of the musical to trim 20 minutes from the original version. This not only lets him run two shows a night, but also gets guests out and into the shopping, dining, and gambling areas in less time.
The Tower Suites at Wynn Las Vegas feature a private drive, check - in area, pool, and eleva- tors. These rooms and suites were evaluated independently from the rest of the property by both the Mobil Five Star and the AAA Five Diamond ratings, becoming the only casino resort in the world to gain both accolades. In addition, the resort is the fi rst Las Vegas prop- erty in Mobil ’ s 49 - year rating history to earn the Five Star recognition. Mobil Five Star des- tinations are exceptionally distinctive luxury environments, offering expanded amenities and consistently superlative service, with attention to detail and the anticipation of every need.
Technological innovations were created to offer unique features valued by customers and perceived to be different from those of competitors. Among its many distinguishing characteristics, the Wynn Las Vegas is the fi rst casino to combine the room key and the casino frequent - player card in one card, keeping track of each guest ’ s every purchase. It is the fi rst casino resort to include a luxury car dealership (Ferrari - Maserati). Each of the rooms is connected to one another and the outside world via the largest installation of Voice over IP technology. High - speed Cat - 6 Ethernet cables help make Internet access extremely fast. It is also the fi rst hotel to install radio frequency identifi cation (RFID) tags inside chips to better discover counterfeiting.
What could possibly be more luxurious than this upscale resort? Try the Encore, a $ 1.4 billion project next door that is planned to be an even more upscale version of its sister property. Encore features approximately 2,000 guest rooms, an intimate casino, 45,000 square feet of meeting space, and design details like an entrance area that is entirely separate from the casino experience and guest rooms that are each about 100 square feet larger than those at Wynn Las Vegas. In Las Vegas, creating a new over - the - top casino is harder than beating the house, but Wynn Resorts Limited is giving it a go. 1
DISCUSSION QUESTIONS:
1. What, if anything, makes the Wynn Las Vegas different from other casinos on the strip?
2. Why do you think Steve Wynn plans to put a second mega resort, the Encore, next to the Wynn Las Vegas?
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167GENERIC BUSINESS STRATEGIES
I N T R O D U C T I O N
Business - level strategy defi nes an organization ’ s approach to competing in its chosen mar-kets. Sometimes this type of strategy is referred to as competitive strategy. However, all strategies are competitive strategies, so, to avoid confusion, this book uses the term “ business level ” to describe strategies within particular businesses. The strategy of Wynn Las Vegas can be described as differentiation, which is a popular approach to creating value in the hospitality industry. Wynn Las Vegas achieves differentiation by creating a distinctive luxury experience in gaming, rooms, entertainment, and food and beverage. Offering unique spa and golf amenities, superlative service with attention to detail and guest needs, all in a prime loca- tion are other differentiating features of this casino resort. A differentiation strategy requires creating something that is perceived as unique and provides superior value for customers, not an easy feat in the extravaganza - focused gaming business of Las Vegas.
The golf course, for example, is the only one on the Las Vegas Strip that is restricted to hotel guests and costs more than $ 500 per round, illustrating one way in which Steve Wynn has sought to develop a value - added unique feature to his operation. 2 More than 800,000 cubic yards of earth were moved to create the dramatic elevation changes designed into the 18 - hole course developed by Tom Fazio and considered impossible on the Las Vegas Strip. 3 The success of Wynn ’ s differentiation strategy will depend on his being able to charge a pre- mium price to cover the additional costs.
This chapter will begin with a discussion of the basis for competing in particular markets through specifi c business - level strategies. Attention will then turn to competitive dynamics — the moves and countermoves of fi rms and their competitors. Some of the major strategic management responsibilities of business - level managers are listed in Table 5.1 . They include establishing the overall direction of the business unit, conducting ongoing analysis of the chang- ing business situation, selecting a generic strategy and the specifi c strategies needed to carry it out ( strategic posture ), and managing resources to produce a sustainable competitive advan- tage. These responsibilities and the methods for carrying them out are similar in for - profi t and nonprofi t organizations. 4 They are also similar in both manufacturing and service settings.
GENERIC BUSINESS STRATEGIES
Business strategies are as different as the organizations that create them. That is, no two busi- ness strategies are exactly alike. However, classifying strategies into generic types helps fi rms identify common strategic characteristics. For example, a fi rm that is trying to achieve a com- petitive advantage by producing at lowest cost should seek some combination of effi ciency, low levels of overhead, and high volume. Also, because generic strategies are widely under- stood, they provide a means of meaningful communication. Instead of having to explain the strategy each time, managers can simply use the generic label.
The generic strategy types proposed by Michael Porter are perhaps the most widely used and understood. Porter advanced the idea that a sustainable competitive advantage is related to
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CHAPTER 5 ■ STRATEGY FORMULATION AT THE BUSINESS - UNIT LEVEL168
TABLE 5.1 Major Business - Level Strategic Management Responsibilities
Major Responsibilities Key Issues
Direction Setting Establishment and communication of mission, vision, ethics, and long-term goals of a single business unit Creation and communication of shorter - term goals and objectives
Analysis of Business Situation
Compilation and assessment of information from stakeholders, broad environmental analysis, and other sources Internal resource analysis Identifi cation of strengths, weaknesses, opportunities, threats, sources of sustainable competitive advantage
Selection of Strategy Selection of a generic approach to competition — cost leadership, differentiation, focus, or best value Selection of a strategic posture — specifi c strategies needed to carry out the generic strategy
Management of Resources
Acquisition of resources and/or development of competencies leading to a sustainable competitive advantage Ensuring development of functional strategies and an appropriate organizational design (management structure) to support business strategy Development of control systems to ensure that strategies remain relevant and that the business unit continues to progress toward its goals
the amount of value a fi rm creates for its most important stakeholder, the customer. 5 According to Porter, fi rms create superior value for customers by offering them either a basic product or service that is produced at the lowest possible cost or a preferred product or service at a somewhat higher price, where the additional value received exceeds the additional cost of obtaining it.
The fi rst option, called low - cost leadership , is based on effi cient cost production. In this book, as in practice, the terms low - cost leadership and cost leadership are used interchangeably. The second option, referred to as differentiation , requires the company to distinguish its products or services on the basis of an attribute such as higher - quality product features, location, the skill and experience of employees, technology embodied in design, better service, or intense mar- keting activities. Both of these strategies assume that an organization is marketing its products or services to a very broad segment of the market.
Porter identifi ed a third strategic option, called focus , in which companies target a narrow segment of the market. According to Porter, a fi rm can focus on a particular segment of the market through either low - cost leadership or differentiation. Consequently, Porter ’ s original generic strategies were low - cost leadership, differentiation, and focus through either low cost or differentiation (for a total of four strategic approaches). JetBlue Airlines, for example, pursues a strategy of low - cost leadership for a broad market, whereas Four Seasons Hotels and Resorts
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169GENERIC BUSINESS STRATEGIES
relies on a strategy of differentiation. An example of a differentiation focus strategy would be the hotels catering to gay and lesbian travelers developed by Milagro Properties. (See the “Hospitality Focus” boxed section above.)
Porter referred to companies that were not pursuing a distinct generic strategy as “ stuck - in - the - middle . ” 7 According to Porter, these uncommitted fi rms should have lower performance than committed fi rms because they lack a consistent basis for creating superior value. He argued that companies that exclusively pursue one of the generic strategies center all of their resources on becoming good at that strategy. More recently, many fi rms have succeeded at pursuing elements associated with cost leadership and differentiation simultaneously. In this book, we refer to this hybrid as best value . Increasing global competition has made a best - value strategy increasingly popular.
Combining low cost, differentiation, and best - value approaches with a broad - versus - narrow market focus results in six generic - strategy types, outlined in Table 5.2 . Notice that for each strategy, the phrase “ fi rms attempt ” is used. These describe strategies that businesses are pursuing and do not depend on whether a company is successful in pursuing their strategy. For example, fi ve fi rms can pursue a cost - leadership strategy, while only one of them will be the cost leader.
It is important to understand that one corporation can be pursuing several business - level strategies simultaneously through its different business units. For example, InterContinental Hotels Group owns many brands with a wide variety of strategies, as shown in Figure 5.1 .
CASA CUPULA: FOCUSES ON GAY/LESBIAN CLIENTELLE
It ’ s just like a mini – Four Seasons for gay people! ” says Don Pickens, founder of Milagro Properties Development. Don opened Casa Cupula in Puerto Vallarta in 2002 to cater to gay travelers. A member hotel of the World ’ s Foremost Gay and Lesbian Hotels — an international alliance of upscale gay and/ or lesbian hotels, resorts, guesthouses, and inns — Don recognized the need for
upscale accommodations as Vallarta ’ s reputation as a gay destination became more well known. Combining the elegance of an upscale boutique hotel (a differentiation strategy) with the friendliness and comfort of a gay - friendly guesthouse (focused market segment) led to the establishment of Casa Cupula. The hotel has become incredibly popular, with more than 50 percent of guests now being return guests or referrals.
Casa Cupula provides the kind of romantic environment his guests appreciate. As the hotel tells its guest, “ no kids, no package - deal cruise ship patrons to look at you funny because you ’ re with your boyfriend. Go ahead: hold hands, kiss, and swim naked! ” The hotel believes it is small enough to feel comfortable, but large enough to fi nd a private spot to snuggle.
Don notes that it has been extremely rewarding to have made a difference in the lives of hundreds of guests. For some, it ’ s their fi rst time at a gay hotel. Others have returned half a dozen times and have made Casa Cupula their vacation home. The hotel offers a welcoming and warm embrace to people from every walk of life: men, women, bisexuals, straight friends, singles, couples, threesomes, circuit boys, bears, nerds, politicos, older, younger, people of every color and nationality. This focused hotel was named one of the “ Top 5 Most Luxurious Gay Guesthouses ” and one of the “ Top 10 North American Gay and Lesbian Guesthouses ” by the editors of Out & About and Gay.com . 6
“eHOSPITALITY FOCUS
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CHAPTER 5 ■ STRATEGY FORMULATION AT THE BUSINESS - UNIT LEVEL170
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CHAPTER 5 ■ STRATEGY FORMULATION AT THE BUSINESS - UNIT LEVEL172
The strategy of Holiday Inn Express is probably best described as low - cost leadership because of its broad appeal to the mass market and emphasis on limited service, cleanliness, timeless- ness, and cost effi ciency — to ensure optimal use of space, ease of maintenance, and a higher return on investment for owners. This is not to say that Holiday Inn Express is a low - quality lodging brand. In contrast, the prestige brand of the company, InterContinental Hotels and Resorts, is focused on outstanding facilities and superior service within unique local contexts and cultures. The Holiday Inn brand offers full - service comfort and value to a broad market, while Candlewood Suites offers a hotel experience created for stays of a week or longer. Hotel Indigo (featured in Chapter 4 ) is a boutique hotel, while Crowne Plaza focuses on the convention and meetings business. Because a single corporation can pursue multiple strate- gies, this chapter will discuss specifi c brands instead of their corporate parents. Each of the strategy types will now be discussed in detail.
Cost Leadership
Firms pursuing cost leadership set out to become the lowest - cost providers of a good or ser- vice. The broad scope of cost leaders means that they attempt to serve a large percentage of the total market. For instance, Etap and Motel 6 are both pursuing cost leadership. (See the “Hospitality Focus” boxed section on page 173.)
Some hoteliers would bristle at the thought that they are pursuing a low - cost leadership strategy. Rather, they envision their fi rms as pursuing some sort of balance between low costs and differentiation. While a clean room and linens and some level of comfort (i.e., telephone and television) is expected at every lodging property, efforts to differentiate may result in increased cost but not added value, making a fi rm more stuck - in - the middle than competitive. Once the basic quality standards have been met, differentiation occurs as companies offer sig- nifi cantly more than just a clean, comfortable room. Brands like Etap and Motel 6 do not offer signifi cantly more than the basics — simply furnished rooms with a bed, shower, and toilet.
Ryanair and JetBlue provide no - frills fl ights at the lowest prices possible. Burger King and Taco Bell work on value pricing to deliver food fast to those who want convenience and low price. Management in these companies is very good at keeping costs at a minimum. Consequently, they can keep prices low and attract a wide segment of the market that is inter- ested in an inexpensive product or service offering.
To appreciate the signifi cance of the cost - leadership strategy, it is important to understand the factors that underlie cost structures in fi rms. Companies pursuing a low - cost strategy will typically employ one or more of the following factors to create their low - cost positions:
1. Accurate demand forecasting combined with high - capacity utilization
2. Economies of scale
3. Technological advances
4. Outsourcing
5. Learning/experience effects 8
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173GENERIC BUSINESS STRATEGIES
HIGH - CAPACITY UTILIZATION When demand is high and capacity is fully used, a fi rm ’ s fi xed costs are spread over more units, which lowers average unit costs. However, when demand falls off, the fi xed costs are spread over fewer units, so unit costs increase. This basic concept suggests that a fi rm that is able to maintain higher levels of capacity utilization, through better demand forecasting, conservative capacity - expansion policies, or aggressive pricing, will be better able to maintain a lower - cost structure than a competitor of equal size and capability. Consequently, the lodging industry puts high importance on occupancy rates, and restaurants pay close attention to meals served per hour and day parts. In the airline industry, the metrics of interest are load and yield per passenger mile. (See the “Hospitality Focus” boxed section on page 174.)
High - capacity utilization is particularly important in industries like hotels, rental cars, and airlines, in which fi xed costs represent a large percentage of total costs. In these situations, entry barriers make industry participants extremely sensitive to even small fl uctuations in demand.
MOTEL 6: COST LEADERSHIP
We ’ ll leave the light on for you, ” says the folksy voice of Tom Bodett, in a well - known television advertisement for Motel 6, the economy hotel brand with more than 850 properties in the United States and Canada. Owned by French hotel giant Accor, Motel 6 had its beginnings in 1962, when two California building contractors, William Becker and Paul Greene,
developed a plan to build motels with rooms at bargain rates. They decided on a $ 6 room rate per night that would cover building costs, land leases, mortgages, managers ’ salaries, and maid service, hence the company name.
Becker and Greene specialized in building low - cost housing developments, and spent two years formulating a business model for Motel 6 based on cutting costs as much as possible to offer an alternative to other major hotel chains, such as Holiday Inn, whose locations were becom- ing increasingly upscale in quality and price. Motel 6 emphasized no - frills lodging with rooms featuring coin - operated black - and - white TVs instead of the free color TVs found in the more expensive motels, along with shower - only bathrooms and functional interior d é cor (to reduce the time it took to clean the rooms). The fi rst location in Santa Barbara had no restaurant on - site, a notable difference from other hotels of the era. Unlike most hotel chains, Motel 6 allows pets and directly owns and operates most of its locations. In 1990, the company was bought by Accor and began franchising in 1994. Accor is the largest owner - operator of economy lodging in the world. In Europe, Accor has the Etap brand. Etap hotels are located in city centers and near airports, with more than 370 hotels across Europe, primarily in France.
Today, both of these brands cater to a large segment of the population that is interested in eco- nomical lodging. They are both large enough to enjoy economies of scale and provide travelers with the opportunity to stay within the chain on longer trips. They both have huge informa- tion and reservation networks. And they both strive to keep costs at absolute minimums while providing clean, functional, and modestly comfortable rooms. Motel 6 claims to be the lowest - priced budget hotel in the United States. 9
“eHOSPITALITY FOCUS
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CHAPTER 5 ■ STRATEGY FORMULATION AT THE BUSINESS - UNIT LEVEL174
For example, small variations in demand can cause wide fl uctuations in profi tability. In these types of businesses, where capacity utilization is so important, companies that are faced with falling demand typically attempt to stimulate sales by employing massive price - cutting.
Despite industry efforts to price discount when demand fl attens, research on hotels has revealed that customer demand does not appear to be easily stimulated by price reductions. 11 Figure 5.2 shows how customer demand (occupancy levels) remains constant (fl at) for hotels in both the United States and Asia, even when the hotels price below their competitors. The fi gure also shows that revenue per available room (RevPAR) rises when hotels price higher than their competitors do and falls when hotels price below their direct competition. Nevertheless, care- ful revenue management can help fi rms maximize revenue by knowing when to raise or lower prices according to occupancy levels. In short, while hotel demand (occupancy levels) cannot easily be stimulated, a hotel can engage in dynamic pricing to effectively manage inventory. 12
ECONOMIES OF SCALE The second major factor with the potential to lead to cost advantages is economies of scale. Economies of scale are often confused with increases in volume. As described previously, increases in capacity utilization that spread fi xed expenses can lead to lower unit costs. However, true economies of scale are associated with size rather than capacity utilization. The central prin- ciple of economies of scale is that costs per unit are less when a fi rm expands its scale or size of operation. For example, the cost of constructing a 200 - room hotel will not necessarily be twice the cost of building a 100 - room hotel, so the initial fi xed cost per unit of capacity will be lower. Also, the manager of the larger facility will not generally receive double the salary of the manager of the smaller facility. In addition, activities such as quality control, purchasing, and reservations typically do not require twice as much time or twice as many laborers.
Large hotel brands with growing portfolios create economies of scale through frequent trav- eler programs, reservation systems, and global sales and marketing programs that take advantage of their size. Owners and developers who select a well - regarded brand may fi nd they can obtain
JETBLUE’S CAPACITY MANAGEMENT
Our customers love to fl y JetBlue, and our load factors have historically been industry leading, ” says the CEO of the airline. A load factor is the ratio of revenue passenger miles to available seat miles of a particu- lar fl ight. In 2006, JetBlue made the strategic decision to price their product to achieve a higher yield, at the expense of load factor. This decision means that the
airline monitored how seats were being reserved and reacted accordingly, by offering discounts when it appeared as if seats would otherwise be vacant. By year end, the load factor was 81.6 percent, and yield per passenger mile climbed to 9.53 cents — nearly a 19 percent increase year over year. Despite additional capacity in many of their markets, the revenue management strate- gies resulted in higher passenger yields. Distribution costs were minimized by using online sys- tems, with nearly 80 percent of total ticket sales booked via the web site. 10
“eHOSPITALITY FOCUS
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175GENERIC BUSINESS STRATEGIES
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c05.indd Sec2:175c05.indd Sec2:175 2/23/09 7:17:31 PM2/23/09 7:17:31 PM
CHAPTER 5 ■ STRATEGY FORMULATION AT THE BUSINESS - UNIT LEVEL176
lower interest charges when borrowing from banks and have access to a greater range of fi nancial instruments because of the size of the brand. For the brand, its marketing costs can be spread over a greater range of properties as it grows in size. Finally, owners and franchisees of large hotel companies can enjoy the managerial specialization of the brand company in hotel development and renovation projects. Support in the areas of architectural and interior design, project and construction management, and procurement - related services can reduce the long - run average cost of running an individual hotel.
In summary, the larger hotel fi rm may be able to provide an owner and operator with per - unit savings in fi xed costs and indirect labor costs. Diseconomies of scale occur when a fi rm builds facilities that are so large that the sheer administrative costs and confusion associated with the added bureaucracy overwhelm any potential cost savings. Many of the largest hotel companies view their scale of operations as a key competitive strength. Starwood Hotels and Resorts Worldwide believes that its scale is one of the foundations of its business strategy, as noted in Chapter 4 . In addition to having the scale to support their marketing and reservation functions, the company relies on their large portfolio of luxury and upscale hotels to lower the cost of operations through purchasing synergies. 14
TECHNOLOGICAL ADVANCES Companies that make investments in cost - saving technologies are often trading an increase in fi xed costs for a reduction in variable costs. If technological improvements result in lower total - unit costs, then fi rms have achieved a cost advantage from their investments referred to as economies of technology. 15 The reservation systems maintained by the major airlines and lodging companies represent investments in technology that reduce overall costs and provide a degree of information control that was previously impossible. (See the “Hospitality Focus” boxed section above.)
OUTSOURCING — MAKE VERSUS BUY Traditional thinking in management was that organizations should perform as many value - adding functions as possible in - house in order to retain control of the production process and
MARRIOTT’S AUTOMATED RESERVATION SYSTEM FOR HOTEL ACCOMODATIONS (MARSHA) AS A MANAGEMENT TOOL
Marriott ’ s Automated Reservation System for Hotel Accommodations (MARSHA) is a reservation network and demand management tool. MARSHA is linked directly with the global distribution sys- tems (GDS) operated by major airlines and travel organizations, and leads the
industry in GDS productivity. With 3 percent of the worldwide supply of hotel rooms, Marriott International realizes 20 percent of all reservations made via the GDS. MARSHA generated nearly one out of every fi ve room nights booked through GDS. In 2005, MARSHA handled 70 million reservations, 168 million gross room nights, and US $ 22 billion in gross room revenue, including US $ 280 million in cross - sales among Marriott brands. 13
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177GENERIC BUSINESS STRATEGIES
gain technological effi ciencies through creating synergies among processes. However, competi- tive reality has set in, and corporations realize that sometimes another company can perform a process better or more effi ciently than they can. This has led to outsourcing , which means contracting with another fi rm to provide services that were previously supplied from within the company. For example, a hospitality fi rm could subcontract its accounting, reservations, information systems, or even hotel management. A real estate investment trust is, in essence, subcontracting management of the properties it owns to other fi rms. An individual hotel might outsource food and beverage, janitorial, airport shuttle, valet, human resources, or even house- keeping services. A restaurant could outsource cleaning, marketing, and many other activities, perhaps even the chef. SoulFire, a 75 - seat casual barbecue restaurant, used a consulting chef to help with the initial design of the kitchen and menu. 17 Now the outsourced chef meets with the owner regularly to discuss the menu as well as operational procedures.
Purchasing value - creating activities through outsourcing can increase a fi rm ’ s fl exibility, while reducing risk and costs. However, it does require effective coordination and selection of the right activities to outsource. In addition, recent studies have revealed that unforeseen complexity and confl icts with outsourcing have led to higher total costs than anticipated. 18 Outsourcing allows a fi rm to concentrate resources on the core business activities, but too much outsourcing may lead to a loss of innovative activity. When costs begin to rise, which is in direct contrast to the primary motive of outsourcing, fi rms bring the outsourced service or good back in - house, a practice called backsourcing . (See the “Hospitality Focus” boxed section above.)
LE COLONIAL: OUTSOURCING HOME DELIVERY
Le Colonial, a premier upscale French - Vietnamese restaurant in Chicago ’ s Gold Coast neighborhood, offers fi ne food in a beautiful environment. The fi rst - fl oor dining room uses a tasteful d é cor to transport guests to tropi- cal Southeast Asia of the 1920s. The main - fl oor dining room, seasonal caf é , bar, lounge, and all - season terrace of this charming two - story vintage rowhouse offer
customers excellent cuisine in a romantic setting. What would you outsource in this restaurant?
The answer is home delivery. Only three years ago, customers who lived within walking dis- tance of this 120 - seat restaurant could phone in orders and busboys would walk to customers ’ homes (or go by cab in bad weather) with meals. To expand its delivery business without addi- tional payroll or overhead costs, the restaurant decided to outsource its delivery operation.
Joe King, a partner at Le Colonial, chose a contractor who delivers to most Chicago neigh- borhoods and uses an online web site. With a menu posted online, the contractor receives an order, routes it to the restaurant, and then picks it up for delivery. If a customer complains about cold or messy food or a late - arriving order, the delivery company absorbs the cost of the order. The service fee to the contractor is 30 percent of each delivery.
Using the service has increased delivery orders from about 1 percent of business to 4 percent of sales and is cost - effective because the restaurant is no longer using restaurant staff to per- form these tasks and is able to expand its operation. 16
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CHAPTER 5 ■ STRATEGY FORMULATION AT THE BUSINESS - UNIT LEVEL178
Local outsourcing, like that used by Le Colonial to respond to home delivery, is in con- trast to offshoring. Offshoring is when a company outsources to a supplier in a foreign country. Foreign labor costs and supportive regulatory environments are the primary reasons why fi rms select to outsource abroad. Whether local or offshore, outsourcing can be a source of effi ciency and cost reduction. However, it is important that a fi rm continue to control delivery of the unique features that provide competitive advantage to the company. In other words, it should nurture a few core competencies and focus on them while outsourcing noncore activities.
LEARNING EFFECTS A fi nal factor that infl uences cost structures is learning effects. 19 If you are a student, you prob- ably spent a long time the fi rst time you registered for classes. Now, as a veteran of several regis- trations, you know how to get through the process much faster. When an employee learns to do a job more effi ciently with repetition, then learning is taking place. The learning - curve effect says that the time required to complete a task will decrease as a predictable function of the number of times the task is repeated. Dramatic time savings are achieved early in the life of a company. However, as the company matures, tangible cost savings from labor learning are more diffi cult to achieve, because it takes longer to see a true doubling of cumulative volume, and because most of the opportunities for learning have already been exploited. Also, learning effects do not just happen. They occur only when management creates an environment that is favorable to both learning and change and then rewards employees for their productivity improvements.
Learning effects can be described by a curve such as the one found in Figure 5.3 . 20 Following from the logic of this curve, a market - share leader should enjoy a cost advantage relative to competitors because of the extra learning and experience that has occurred by pro- ducing the additional output. This concept has led many fi rms to fi ght aggressively on price in order to obtain the highest market share and thus move to the right on the curve as far as possible. As the curve fl attens, it becomes increasingly diffi cult to gain cost advantages from learning effects. The same sort of phenomenon exists with respect to economies of scale.
Companies that are able to achieve the lowest cost do not have to charge the lowest price. In other words, a cost leader does not have to be a price leader. If an organization is able to achieve the lowest cost but charge a price that is the same as competitors charge, then it will enjoy higher profi ts. However, if the low - cost leader ’ s price is the same as or higher than the
FIGURE 5.3 A typical learning curve
Total Cumulative Output
Unit Cost
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179GENERIC BUSINESS STRATEGIES
price others charge, then customers may switch to a competitor, undermining the low - cost producer ’ s efforts to benefi t from capacity utilization, learning effects, or other sources of low cost. Consequently, many low - cost leaders try to underprice competitors slightly in order to give customers an incentive to buy from them and to keep their volumes high enough to sup- port their low - cost strategy.
RISKS ASSOCIATED WITH A COST - LEADERSHIP STRATEGY There are some risks associated with a cost - leadership strategy. Firms pursuing cost leadership may not detect changes in services that are becoming expected because of a preoccupation with cost. They run the risk of making large investments in new properties or businesses only to see them become obsolete because of changing trends. Their large investments make them reluctant to keep up with changes that are not compatible with their existing facilities. Another risk is that com- petitors will quickly imitate the technologies that are resulting in lower costs. As Michael Porter observed, “ A company can outperform rivals only if it can establish a difference it can preserve. ” 21
Another risk associated with a cost - leadership strategy is that the company will go too far and perhaps even endanger customers or employees in the process. ValuJet ’ s penny - pinching allowed it to achieve a very low - cost position in the airline industry. ValuJet passed the sav- ings on to consumers and experienced unprecedented growth. However, their stinginess came under close scrutiny after the crash of ValuJet fl ight 592 into the Florida Everglades. Federal investigators found that some of ValuJet ’ s procedures, especially maintenance procedures, were unsafe, and they ultimately shut down the airline until safety concerns could be worked out. 22
Differentiation
In differentiation strategies, the emphasis is on creating value through uniqueness, as opposed to lowest cost. Hospitality services are often complex and satisfy self - identity and social affi li- ation needs, creating tremendous opportunities for differentiation, which explains why this business - level strategy is so popular. Unlike products that are often simple and require perfor- mance to a technical standard, tourism products, such as a vacation, do not conform to detailed technical standards and offer limitless opportunities for differentiation. Service experiences that complement consumers ’ lifestyles and brands that communicate their aspirations may allow the fi rm that creates these products and services to charge a premium price. The higher price is necessary to cover the extra costs incurred in offering the unique experience. To understand and profi t from a differentiation strategy, it is important to understand customer lifestyles and aspirations so that the unique offerings are valued by customers.
LIFESTYLE AND EXPERIENCE The customer of the future is expected to be more demanding, self - indulgent, and hedonistic. 23 As markets mature, and consumers become increasingly cynical and distrusting, hospitality fi rms will be
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CHAPTER 5 ■ STRATEGY FORMULATION AT THE BUSINESS - UNIT LEVEL180
expected to provide higher - quality services tailored to meet evolving lifestyles. In Chapter 2 , we dis- cussed consumer trends, and we return to this topic now to highlight the importance of understanding and identifying what customers are willing to pay for in hospitality and travel services. “ Lifestyle really applies to customers ’ growing desires to take the lifestyle they either have at home or the lifestyle that they imagine themselves having at home and take it on the road, ” according to Mike Depatie, presi- dent of San Francisco – based Kimpton Hotels & Restaurants. 25 Key questions should include, “ What motivates the customer? ” and “ By what criteria do they select a hospitality product? ” 26 In a recent Pricewaterhouse Coopers European lifestyle survey, the challenge of reading consumer patterns and the importance of creating value were noted. (See the “Hospitality Focus” boxed section above.)
A customer lifestyle approach to hospitality is based on customer aspirations, meaning that as customers become more affl uent and sophisticated, they want travel and leisure offerings that are as nice, if not nicer, than what they have at home. Operators report that people ’ s bathrooms and bedrooms are now nicer than those of traditional hotels. This shift in consumer wants cre- ates new opportunities for differentiation. However, building unique value - enhancing service experiences is not easy.
In the book The Experience Economy , Joseph Pine and James Gilmore argue that experiences are as distinct from services as services are from goods. They go on to suggest that staging experi- ences is not about entertaining customers, but engaging them. 27 New lifestyle hotels, such as aloft by Starwood, NYLO, and Cambria Suites by Choice, are in different ways hoping to provide travelers with alternatives to the traditional unemotional hotel experience. Figure 5.3 provides a summary of the top European hotels that are carving out what is now called the lifestyle hotel.
Uniqueness can be achieved in an almost unlimited number of ways, including:
• Product features
• Complimentary services
• Technology embodied in design
• Location
• Service innovations
PRICE WATERHOUSE COOPERS EUROPEAN LIFESTYLE SURVEY: READING CONSUMER PATTERNS
Research shows that we will pay more for food that we perceive to be better for us. Similarly with hotels, we are more likely to pay for attri-butes and experiences we value, such as location, safety, experience, ambience, and ‘ ego - fi t ’ . It is not just about money and ‘ premiumisation ’ of the
offer that endorses the value shift. Value has emotional as well as fi nancial attributes; for example, Malmaison - branded iPods connected to a play list are already offered to hotel guests, but now the group plans to create compilation CDs and single - artist albums that refl ect the ‘ Malmaison experience ’ and encourage an emotional link with the brand. Hotels will need to ensure this means they know what consumers really value and what they will pay for; it ’ s no good adding amenities consumers don ’ t value and could lose operators an operating advantage. ” 24
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TABLE 5.3 Top 25 European Lifestyle Hotel Companies
Hotels (Owner/Operator) Number of Hotels 2006 Number of Rooms 2006
1. Sorat Hotels 16 1,376
2. Innside Premium Hotels 8 1,072
3. Malmaison Hotels (MWB) 10 1,031
4. Derby Hotels Collection 9 850
5. Melia Boutique (Sol Melia) 13 838
6. Silken Group 3 715
7. Artotels (Park Plaza) 5 653
8. Red Camation Collection 7 543
9. Stein Hotels 14 518
10. Habitat Hotels 5 489
11. Morgans Hotel Group (formerly Lan Schrager)
2 354
12. Hotel du Vin (MWB) 8 338
13. Firmdale Hotels (Kemps) 7 404
14. Eton Hotels Group 5 272
15. JJW Luxury Hotels & Resorts 3 203
16. Quest 1 200
17. Como Group 2 196
18. Dakota 2 184
19. Columbus 1 181
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CHAPTER 5 ■ STRATEGY FORMULATION AT THE BUSINESS - UNIT LEVEL182
• Superior service
• Creative advertising
• Better supplier relationships leading to better services
The key to success is that customers must be willing to pay more for the uniqueness of a service than the fi rm paid to create it. As in the cost - leadership strategy, an organization pursuing a differentiation strategy is targeting a broad market; consequently, the differentiated product or ser- vice should be designed so that it has wide appeal to many market sectors. Returning to Starwood Hotels, another factor they have identifi ed as contributing to their position in the industry is their high - quality guest experiences that appeal to both business and personal travelers. (See the fi rst “Hospitality Focus” boxed section on page 183.)
Companies like Starwood cannot ignore their cost positions, as we saw in their emphasis on scale as well and distinctiveness. When its costs are too high relative to competitors ’ costs, a fi rm may not be able to recover enough of the additional costs through higher prices. Therefore, differentiators have to keep costs low in the areas that are not directly related to the sources of differentiation. Many large hotel companies reduce their investments in owning properties so that they can focus on brand and franchise versus real estate. (See the second “Hospitality Focus” boxed section on page 183.)
DIFFERENTIATION VERSUS SEGMENTATION It is easy to confuse differentiation with segmentation, but they are not the same. Differentiation focuses on offering unique products or services that customers perceive to be different and
20. ABode 3 180
21. Lungarno Hotels (Ferragarno) 5 180
22. Loock 3 175
23. Alias Hotels 3 149
24. Big Sleep (Bedfactory Hotels) 2 144
25. Town House Company 4 141
Total 141 11,386
Based on the best of our knowledge at August 2006 - some may not open or they may add more rooms. Alas: The Rosetti will be re-branded ABode in 2007. JJW Luxury Hotels & Resorts is part of MBI which acquired the former Bootsman Group. Note: We have excluded the Guoman brand this year as despite some great design, it is just too large for the survey. Tristie have added the Tower Hotel in London to this brand and these two hotels would, had we included them, have accounted for around 1,700 rooms. Source: Pricewaterhouse Coopers Lifestyle Hotels Survey, 2006.
TABLE 5.3 (Continued )
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183GENERIC BUSINESS STRATEGIES
better than the offerings of the competition. Segmentation is the grouping together of cus- tomers and their demand based on their behaving in the same way or having similar needs. For example, just because a hotel is located within the same upscale segment of the market as its competitors does not mean it has differentiated itself from them. Competitive convergence exists when companies are indistinguishable from each other. 30 While the potential for dif- ferentiation is great in service businesses, the ease of imitation can make it diffi cult to avoid competitive convergence. Some might even argue the following:
The hotel industry has a surplus of similar companies, employing similar people, with similar educational backgrounds, working in similar jobs, coming up with similar ideas, producing similar things, with similar prices and similar quality. 31
STARWOOD HOTELS: QUALITY STRATEGY THROUGH DISTINCTIVE PROPERTIES
The St. Regis in New York, New York; The Phoenician in Scottsdale, Arizona; the Hotel Gritti Palace in Venice, Italy; and the St. Regis in Beijing, China, are a few examples of the distinctive properties in the Starwood portfolio. Many of the brand ’ s hotels are consistently recognized as
the best of the best by readers of Cond é Nast Traveler magazine, providing the highest quality and service. Recent issues of Cond é Nast Traveler have included over 35 Starwood properties among its prestigious Gold List. 28
STARWOOD HOTELS: COST STRATEGY THROUGH REDUCED INVESTMENT IN REAL ESTATE
At Starwood, we have implemented a strategy of reducing our investment in owned real estate and increasing our focus on the management and franchise business. In furtherance of this strategy, during 2006 we sold a total of 43 hotels for approximately $ 4.5 billion, including 33 properties to Host
for approximately $ 4.1 billion in stock, cash, and debt assumption.
As a result, our primary business objective is to maximize earnings and cash fl ow by increasing the number of our hotel management contracts and franchise agreements; acquiring and devel- oping vacation ownership resorts and selling VOIs (vacation ownership interests); and investing in real estate assets where there is a strategic rationale for doing so, which may include selectively acquiring interests in additional assets and disposing of noncore hotels (including hotels where the return on invested capital is not adequate) and trophy assets that may be sold at signifi cant premiums. We plan to meet these objectives by leveraging our global assets, broad customer base, and other resources and by taking advantage of our scale to reduce costs. 29
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CHAPTER 5 ■ STRATEGY FORMULATION AT THE BUSINESS - UNIT LEVEL184
Differentiation is a strategic choice, not a feature of the market, and as such needs to be based on creating a bundle of resource capabilities. Chapter 3 contained a detailed discussion of resource - based sources of competitive advantage. No attempt will be made to repeat that discussion here, but it is worth mentioning that some resources are more likely to lead to a source of sustainable differentiation. For example, reputations and brands are diffi cult to imitate, whereas particular service features may be easy to imitate.
In general, intangible resources, such as a high - performance organizational culture, are diffi cult to imitate, whereas tangible resources, such as the fi xtures and furnishings in a hotel, are easy to imitate. Diffi cult - to - imitate resources are more likely to lead to a sustainable advan- tage. So, creating value extends beyond just the product, as Starbucks has illustrated with its fostering of an overall “ Starbucks Experience. ” The ability of Starbucks to get a price premium for a cup of coffee rests in part on the overall experience it has created. However, sustain- ing the differentiation advantage of a fi rm is not easy, as the chairman of Starbucks, Howard Schultz warns in a leaked internal memo sent to the CEO. Schultz fears that rapid expansion has led to the dilution of the customer experience and the commoditization of the brand. He notes in the memo, “ I have said for 20 years that our success is not an entitlement and now it ’ s proving to be a reality. Let ’ s be smarter about how we are spending our time, money, and resources. Let ’ s get back to the core. Push for innovation and do the things necessary to once again differentiate Starbucks from all others. ” 32
RISKS ASSOCIATED WITH A DIFFERENTIATION STRATEGY It is important to recognize that differences in value may be a result of buyer perceptions rather than actual service attributes. Furthermore, it is not always easy to recognize the value added from a hospitality service, because production and consumption occur at the same time. Economists distinguish experience goods , in which it is diffi cult to determine product character- istics in advance of consumption, from search goods , which a consumer can inspect in advance of purchase. 33 Before you buy an MP3 player, you can go to several stores, touch and listen to various products, and compare prices. In contrast, a dinner or hotel stay cannot be assessed by the potential buyer beforehand. To resolve this problem, branding and advertising are used to signal quality and credibility. Effective advertising may result in a strong brand preference, even though the services in a particular segment of the industry are essentially the same.
Consequently, the major risks associated with a differentiation strategy center on the dif- ference between added costs and incremental price. One risk is that customers will sacrifi ce some of the features, services, or image possessed by a unique service because it costs too much. Another risk is that customers will no longer perceive an attribute as differentiating. They may come to a point at which they are so familiar with a service that brand image is no longer important. If a source of differentiation is easy to imitate, then imitation by competitors can also eliminate perceived differentiation among products or services.
For example, as Wi - Fi becomes a standard feature on planes or in hotel rooms, it will no longer be a source of differentiation. Consequently, staying ahead of the competition in service development requires constant innovation. 34 As one business writer put it: “ For outstanding performance, a company has to beat the competition. The trouble is the competition has heard the same message. ” 35
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185GENERIC BUSINESS STRATEGIES
Best Value
Some strategy scholars argue that a combination of strategic elements from both differentiation and low cost may be necessary to create a sustainable competitive advantage: “ The immediate effect of differentiation will be to increase unit costs. However, if costs fall with increasing volume, the long - run effect may be to reduce unit costs. ” 36 Volume is expected to increase because differentiation makes the product or service more attractive to the market. Then, as volume increases, costs will decrease. For example, Anheuser - Busch has created brewing products that have a good image and high quality, yet the company is a cost leader because of effi ciencies created by high - volume production and sales.
The key to a best - value strategy is simple supply - and - demand economics. For example, assume that three vendors sell hot dogs on the street corners of a major city. The fi rst vendor pursues a low - cost strategy. She is able to buy hot dogs at 20 cents each and buns at 8 cents each. Her hot dogs are known by locals to be of low quality, but some of them buy from her anyway, and she gets almost all of the drive - by business at a price of $ 1. Her average daily sales are $ 100, for a gross profi t of $ 72. Her cart costs are $ 30 per day, so she nets $ 42.
Another vendor specializes in the highest - quality imported sausages. They cost him $ 2 each, and he buys a little better bun at 10 cents each. He sells an average of 40 sausages for $ 4 each. His nicer cart costs him $ 40 per day. After making the calculations, you will see that his gross is $ 76 and his net is $ 36.
However, assume that a third vendor can buy a domestic sausage that is almost as good as the imported sausage and sell 80 per day at $ 3. She buys the sausages locally for $ 1 each, which is fi ve times as much as the fi rst vendor pays for cheap hot dogs but half the cost of the imported sausages. The better buns are 10 cents each, and the nicer cart is $ 40 per day. Gross profi t is $ 152 and net is $ 112. Obviously, this third vendor has found a better strategy.
Hospitality is often a lot like the hot dog vendors. A little extra service in a room, better technology, or a fun and engaging service provider are not very expensive. Taken together, however, they can enhance the guest experience and thus make the service more valuable in the eyes of consumers. Best value is about making sure that the things that provide the most perceived value to a customer are done very well, while looking for ways to keep costs low through technology, economies of scale, learning, or reducing waste.
QUALITY AND BEST VALUE An emphasis on quality may help hospitality fi rms that want to pursue a best - value strategy. Much has been said and written on the topic of quality. According to the American Assembly, which consists of 65 leaders of business, labor, government, and academia: “ This does not mean quality merely to specifi cations but that improves constantly, quality that is characterized by constant innovations that create a loyal customer. It means achieving this attitude from top to bottom, from the board room to the factory fl oor. ” 37 W. Edwards Deming, an expert on quality, argued that producing higher - quality products through superior designs also reduces costs. 38 It is less expensive to produce 10 products right the fi rst time than to build 11 products and have to throw one away because of quality defects.
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CHAPTER 5 ■ STRATEGY FORMULATION AT THE BUSINESS - UNIT LEVEL186
Although these concepts were developed in a manufacturing setting, there is little reason to believe that they cannot apply equally well in services. Many organizations have imple- mented in the past, and some are still pursuing, Total Quality Management (TQM) programs in an effort to improve quality. TQM is so comprehensive in its scope that virtually all parts of an organization are affected. However, implementation of TQM has been found to be particularly diffi cult in small and medium - sized hotels in developing regions of the world, such as Cyprus, because of high employee turnover and seasonality. 39
SIX SIGMA Six Sigma, a quality - control process, has also had a pervasive effect on organizations in the United States and elsewhere. It is a philosophy based on minimizing the number of defects found in a manufacturing operation or service function. Originally developed by Motorola in the 1980s, the term comes from Sigma, the Greek letter that statisticians use to defi ne one standard
IMPLEMENTING SIX SIGMA
Since 2001, Starwood has found Six Sigma to be a powerful way to combine creativity and effi ciency. Hundreds of projects have been completed using the process, including a menu engineering program that reworks the con- tents of an in - room refrigerator based on their popularity to drive higher profi ts, and the development of a pool concierge who helps guests in Latin American
resorts book spa appointments and restaurant reservations.
Since the program launch, the vice president of Six Sigma and his group have trained 150 employees as “ black belts ” and more than 2,700 as “ green belts ” in the arts of Six Sigma. Based mostly at the hotels, the specialists are change agents who help dream up and oversee the development of projects. The key to their success is that the Six Sigma specialists operate like partners to help the hotels meet their own objectives.
One project devised by the Westin group is called “ Unwind, ” the purpose of which is to imag- ine a set of nightly activities that would draw guests out of their rooms and into the lobby where they could meet and mingle, in the hopes of developing greater loyalty to the hotel. One local hotel, the Westin Chicago River North, came up with the idea of offering a massage.
After fi guring out the logistics and pilot - testing the concept, the project was turned over to the hotel sponsor. After rolling out the prototype, the Six Sigma team shifts to analysis. A web - based system allows Starwood to monitor performance metrics to gauge the success or failure of a new project. In the case of Unwind, the hotel kept close tabs on the massage revenue produced by each room, revealing that revenues from massages in the hotel spa jumped 30 percent after the hotel launched the lobby chair massage program. 42
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187GENERIC BUSINESS STRATEGIES
deviation from the center of the normal bell - shaped curve. At one Sigma, about one - third of whatever is being observed falls outside the range. Two Sigmas means that about 5 percent falls outside the range. Six Sigmas is so far out that virtually nothing is out there. This is the goal with regard to the number of defects that are considered acceptable. According to C. H. Deutsch:
In consultant - speak, it denotes the path to a corporate nirvana where everything — from product design to manufacturing to billing — proceeds without a hitch. In engineer - speak, it means no more than 3.4 defects per million widgets or procedures. In practice, Six Sigma is a statisti- cal quality control method that combines the art of the effi ciency expert with the science of the computer geek. 40
Starwood was one of the fi rst hospitality companies to implement a Six Sigma program, and it claims to have delivered more than $ 100 million in profi t to its bottom line annually through the use of the techniques. 41 (See the “Hospitality Focus” boxed section on page 186.)
RISKS ASSOCIATED WITH A BEST - VALUE STRATEGY To review, cost leadership is associated with risks that:
1. A fi rm will become preoccupied with cost and lose sight of the market.
2. Technological breakthroughs will make process - cost savings obsolete.
3. Competitors will quickly imitate any sources of cost advantage.
4. The company will take the cost - reduction emphasis too far, thus endan- gering stakeholders.
The risks associated with differentiation are that:
1. The company will spend more to differentiate its service than it can re- cover in the selling price.
2. Competitors will quickly imitate the source of differentiation.
3. The source of differentiation will no longer be considered valid by customers.
A best - value strategy represents somewhat of a trade - off between the risks of a cost - leadership strategy and the risks of a differentiation strategy. The risk that technological break- throughs will make the strategy obsolete is as much a problem with best value as it is with cost leadership. Also, the risk of imitation, found in both of the other two strategies, is evident in a best - value strategy as well. Conversely, a fi rm pursuing best value is unlikely to become preoc- cupied with either cost or differentiation; instead, it should try to balance these two factors. Also, the company probably would not be prone to take the cost - saving strategy too far, thus endangering employees or customers. Finally, because of the balance between cost and differ- entiation, a hospitality fi rm pursuing a best - value strategy is less likely than a pure differentiator to put so much into differentiating a service that the company will be unable to recover the additional costs through the selling price.
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Focus
Focus strategies can be based on differentiation, lowest cost, or best value, but a focus strategy emphasizing lowest cost would be diffi cult in the hospitality industry because it is diffi cult to please a particular guest segment without some form of differentiation. The key to a focus strategy is providing a product or service that caters to a particular segment in the market. For example, Bedandbreakfast.com is an online travel service that has targeted a niche market of users who can bypass navigating through sites designed for a broad array of travel services. Cereality Cereal Bar and Caf é offers 40 varieties of breakfast cereals with 30 choices of toppings and nine varieties of milk.
Firms pursuing focus strategies have to be able to identify their target market segment and both assess and meet the needs and desires of buyers in that segment better than any other competitor. Hotels that provide services exclusively for guests with pets might be pursuing a focus strategy, as would those who specialize in gay and lesbian customers. Four Seasons focuses on the luxury consumer. In articulating their focus, this company notes:
We have chosen to specialize within the hospitality industry, by offering only experiences of excep- tional quality. Our objective is to be recognized as the company that manages the fi nest hotels, resorts, residence clubs and other residential projects wherever we locate. We create properties of enduring value using superior design and fi nishes, and support them with a deeply instilled ethic of personal service. Doing so allows Four Seasons to satisfy the needs and tastes of our discriminating customers, and to maintain our position as the world ’ s premier luxury hospitality company. 43
The Jumeirah Group ’ s Burj Al Arab hotel, a sail - shaped hotel built on a human - made island, is an extreme example of catering to a focused elite. (See the “Hospitality Focus” boxed section on page 189.)
Another group of lodging companies is focusing on young and affl uent travelers who have different ideas than their parents about what makes a good hotel. These trendy boutique, or designer, hotels “ typically emphasize provocative modern design, encourage ‘ lobby social- izing, ’ and are often anchored by bars or restaurants favored by locals, not just standard travelers. They are also celebrity magnets, if one is to believe gossip columnists. ” 44 W Hotels, owned by Starwood, were born of the frustration of its then CEO, Barry Sternlicht (now Executive Chair of the Board), over hotel monotony. They have striking interiors and run wild promotions. 45 Many of the lifestyle hotels noted in discussing differentiation may be considered as focused differentiators if they are targeting a narrow segment of the market.
The risks of pursuing a focus strategy depend on whether the strategy is pursued through differentiation, cost leadership, or best value. The risks of each of these strategies are similar to the risks faced by adopters of the pure strategies. However, the focus strategy has two risks that are not associated with any of the three pure strategies. First, the desires of the narrow target market may become similar to the desires of the market as a whole, thus eliminating the advan- tage associated with focusing. Second, a competitor may be able to focus on an even more narrowly defi ned target and essentially outfocus the focuser. Take Four Seasons Hotels, for example: they focus on a high - end discriminating customer, but it is possible that new luxury boutique and lifestyle hotels have outfocused this focuser.
Business - level strategies should be formulated on the basis of the existing or potential resources and abilities of the organization. However, they should also be selected on the basis
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189COMPETITIVE DYNAMICS
of how well the resulting products and services are expected to be received in the market. Otherwise, an organization might develop a wonderful product or service that is largely unsuc- cessful. “ It would be a little like having a concert pianist in a street gang who has a skill that is unique in that environment, but that hardly helps to attain the gang ’ s goals. ” 47
COMPETITIVE DYNAMICS
Even well - designed strategies may not be as successful as anticipated due to the reactions of competitors. For instance, suppose a large independent hotel decides to pursue a low - cost leadership strategy through cutting the price of rooms to increase sales volume. To meet antici- pated demand, the company expands its inventory by building a new addition. However, when the fi rm cuts prices, competitors do likewise. So the organization launches a major advertis- ing campaign. Competitors also increase advertising. These actions may increase demand in the area as a whole, but the increased demand probably is not enough to cover the increased expenses and loss of profi t margins. The result is that the organization still has approximately the same market share as before, with an expensive new addition that is not being fully used.
BURJ AL ARAB HOTEL: CATERING TO THE ELITE
The Burj Al Arab stands 321 meters above sea level in the gulf waters of Dubai in the United Arab Emirates. The hotel has 202 suites ranging from about US $ 1,000 to $ 6,000. The hotel is targeted at members of royal families who visit from Europe, Asia, and the Middle East, as well as celebrities and wealthy industrialists and visitors. Regarded as one of the most luxurious and
innovative hotels in the world, the mission of the hotel is “ to be the world ’ s most luxurious hotel with a team dedicated to outstanding personalized service, surpassing guest expectations, by pro- viding the ultimate Arabian hospitality experience. ” Those who stay at this sail - shaped hotel can enjoy a chauffeur - driven Rolls Royce, discreet in - suite check - in, a private reception desk on every fl oor, and highly trained butlers who provide around - the - clock personalized service.
The Jumeirah Group is a fast - growing, Dubai - based hospitality group, with hotels such as the Jumeirah Beach Hotel, Jumeirah Emirates Towers, Madinat Jumeirah and Jumeirah Bab Al Shams Desert Resort and Spa in Dubai, the Jumeirah Carlton Tower and Jumeirah Lowndes Hotel in London, and the Jumeirah Essex House on Central Park South in New York. The group ’ s port- folio also includes Wild Wadi, regarded as one of the premier water parks outside of North America, and The Emirates Academy of Hospitality Management, the region ’ s only third - level academic institution specializing in the hospitality and tourism sectors. Jumeirah plans to grow its portfolio of luxury hotels and resorts worldwide to 57 by 2011. 46
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Competitive dynamics are particularly important because of what a well - known econ- omist, Joseph Schumpeter, called “ creative destruction. ” 49 Creative destruction describes the inevitable decline of leading fi rms due to competitive moves and countermoves. Competitors pursue creative opportunities in an attempt to eliminate the competitive advantages of market leaders. As long as the playing fi eld is level, which means that the government enforces rules of fair competition, eventually competitors will succeed.
In the past few decades, increasing globalization of markets has made competitive dynamics even more important, as fi rms now have to contend with a larger group of competitors. Most recently, the Internet has dramatically increased the amount of information available to consum- ers and hotel competitors around the world. For example, if you want to book a room in Spain from Japan, it is easy to go on the Internet to read blogs and consumer reviews, and then book the trip on any one of several websites including the hotel ’ s site or numerous intermediaries.
Innovations are also being adopted at a higher rate. Consequently, the actions of a hospital- ity company anywhere in the world now have a ripple effect on all other industry participants. For example, if Hyatt develops a more effi cient process for maintaining its customer databases, the technology is likely to be communicated and adopted at other lodging companies in a relatively short amount of time.
Markets are always in a state of fl ux: in Asia, we have seen currency devaluations, devas- tating bombings, the tsunami, SARS, bird fl u, and earthquakes, to name a few regional fac- tors. The actions of one competitor result in countermoves from other industry participants. 50 Countermoves set off another series of actions, and then reactions to those actions. (See the “Hospitality Focus” boxed section above.)
Across all industries, the number of competitive moves and countermoves has been increasing. 51 In addition, the number of new products introduced and the number of patents issued have both increased. Along with these trends, brand loyalty has been dropping, and the popularity of foreign brands has been steadily increasing. Consequently, increasingly disloyal
TRAVELOCITY TERMINATOR: FIVE AIRLINES RESPOND TO ONLINE TRAVEL SERVICES
Five leading airlines in response to the online travel services of Expedia and Travelocity pooled their efforts in the early 21st century to sell discounted tickets. With a combined investment of $ 145 million, Delta Air Lines, United Airlines, Northwest Airlines, and Continental Airlines started a project
code named T2 — some claimed to mean “ Travelocity Terminator. ” The brand name Orbitz was attached to the business, with a corporate identity as DUNC, LLC (the initials of its fi rst four founding airlines). Travelocity, Sabre, and others objected to the business, stating that not making these tickets available on other sites would create a de facto monopoly for the fi ve major airlines. After years of intense antitrust claims and battles, the Department of Justice ruled that Orbitz was not a cartel and did not pose a threat to competition. Orbitz was later acquired by Cendant Corporation. Even more recently, Cendant sold its travel distribution subsidiary, which includes the Orbitz travel reservation web site, the Galileo computer reservations system used by airlines and travel agents, Gulliver ’ s Travels and Associates — a wholesale travel business, and other travel - related software brands to a subsidiary of the Blackstone Group, a private equity fi rm. 48
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191COMPETITIVE DYNAMICS
consumers now have more to choose from, and it comes from a lot more places. It is not sur- prising, then, that the number of new - business failures is also increasing. 52
Strategies That Refl ect Competitive Dynamics
Given these trends, it is clear that competitive dynamics plays an important role in strategy for- mulation. An organization can respond in many ways to the dynamics in its industry. Offensive strategies such as aggressive competition or seeking fi rst - mover advantages are intended to increase market share and diminish the ability of competitors to compete. Defensive strate- gies such as threatening retaliation, seeking government intervention, or erecting barriers to imitation are intended to deter or slow down rivals from taking actions that would reduce the effectiveness of a fi rm ’ s own strategies. Collaboration with stakeholders can be used offensively or defensively. Finally, a fi rm may avoid direct competition (avoidance) or be so fl exible that it can easily leave an industry segment if the battle becomes too intense.
AGGRESSIVE COMPETITION Aggressive competitors use every available resource in an effort to overwhelm rivals, thus reduc- ing the chance that any countermove will be effective. The opening of the Borgata Casino in Atlantic City is an example of overwhelming the competition. (See the “Hospitality Focus” boxed section on page 192.)
Walt Disney Company is another example. Disney uses the most - advanced technologies and the most - talented workers in producing its animated feature fi lms. Then the company fl oods the market with advertising and promotion. A similar offensive strategy is pursued in its theme parks. High - tech, innovative rides and world - class entertainment based on Disney characters and feature fi lms create a “ magical ” place that is especially appealing to young people and families.
To be successful, aggressive competition requires signifi cant resources that have high value and are at least somewhat rare. In addition, if those resources are diffi cult or costly to imitate, the attack may be effective over a longer time frame. Disney has been effective for many years at overwhelming competitors in theme parks and animated feature fi lms due largely to its incredible brand name and its ability to attract the most - talented people for feature fi lms and to attract and train low - cost laborers for its theme parks. Resources that tend to provide a strong base for aggressive competition include:
• Superior market position
• Strong fi nancial position
• Possession of patents or trade secrets
• Exclusive contracts
• Involvement in a well - organized network of external stakeholders that includes major suppliers, fi nancial institutions, government leaders, and other competitors
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RISKS OF AGGRESSIVE COMPETITION One of the greatest risks of aggressive competition is that a rival will try to match the attack or even top it. Another risk is that the basis for competition may lose power over time. Disney, for instance, enjoyed many decades of almost unchallenged domination in the theme - park industry. The company built its dominant position through a strategy that focused on children and the families that bring them to the parks, with little that appealed directly to teenagers and young adults with no children. Now Americans are having fewer children and having them later in life. Furthermore, several major competitors have entered the scene with products that have specifi c appeal to teenagers and young adults. For example, in Orlando, Universal Studios was expanded to become Universal Escape, a complete vacation destination featuring themed resorts and Islands of Adventure, a state - of - the - art, high - tech adventure park that appeals to almost every- one under age 40. Universal Studios Japan competes directly with Disneyland Tokyo. Disney is still “ top dog ” in the theme - park market, but its position is weakening, and its original strategy in this segment is losing some of its power. In response, Disney expanded the resort to include Tokyo DisneySea in 2001 and built Hong Kong Disneyland several years later.
Despite these hazards, aggressive fi rms tend to have higher performance than do laggards. For example, software fi rms that engage rivals with a greater number of competitive moves have the highest performance. 54 Also, these sorts of companies tend to elicit slower responses to their moves by competitors, an indication that intimidation is working. 55
FIRST - MOVER ADVANTAGE First - movers also tend to enjoy a competitive advantage. These are fi rms that stay at the forefront of advances in their industries. Domino ’ s Pizza is an example of a company that has benefi ted by being a fi rst - mover. (See the “Hospitality Focus” boxed section on page 193.)
THE BORGATA CASINO OVERWHELMS THE COMPETITION
The debut of the $ 1.1 billion Borgata Hotel, Casino and Spa was heralded by an enthusiastic critique of current competitors. “ There is, to a large degree, a generation gap between Borgata and existing properties in Atlantic City, ” said Robert L. Boughner, CEO of the casino that rises like a 40 - story
gold ingot at the north end of this island city. “ Many of the other places are just reincarnated old hotels, and they just don ’ t have the technology and the amenities to keep up with us. ”
Dressed in gunfi ghter black, Mr. Boughner took a few more shots at his competitors. The other casinos are “ slots warehouses, ” he said in an interview just as the casino opened, and because they have inadequate ventilation, they smell. “ They do — they can ’ t help it, ” he said. The Borgata, a joint venture between MGM Mirage Inc. and the Boyd Gaming Corporation, entered the market with all the latest casino technology. Instead of opening new restaurants, it featured well - known establishments such as the Old Homestead Steakhouse in New York. In addition, the casino fea- tured a 35,000 - square - foot spa and Borgata Babes, reminiscent of the extinct Playboy Bunnys. 53
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Consistent with the principle of creative destruction, industry leaders are often dethroned by aggressive moves by number - two competitors. 57 Consequently, to remain the fi rst - mover in an industry, signifi cant investments in research and development typically are required. Organizational learning ability is also important to this strategy. Not only fi rst - movers, but early imitators as well, or second - movers may enjoy higher performance. 58 Some fi rms have a deliberate strategy of rapidly imitating the innovations of competitors. They enjoy many of the same benefi ts without all of the research - and - development costs.
COLLABORATION Organizations often combine resources in an effort to gain a stronger resource position, as the airlines did to compete with online travel services. In some cases, a leading fi rm will collaborate with a handpicked group of fi rms and deliberately exclude others in an effort to weaken them or put them out of business. Or weaker rivals may join forces to gain position relative to a mar- ket leader. Many small travel agencies have joined travel consortiums to protect the industry from complete consolidation by mega - agencies.
Collaborative relationships can be diffi cult to duplicate, thus increasing their value as a competitive tool. The joint venture described in Chapter 2 among major competitors Hilton, Hyatt, Marriott, Six Continents, and Starwood to sell discounted hotel rooms over the Internet is an excellent example of this type of collaboration. 59 Rivals should have a diffi cult time duplicating the collective clout of these industry giants. In the airline industry, code - sharing agreements allow airlines to sell one another ’ s seats. These types of agreements put airlines without such arrangements at a competitive disadvantage.
THREAT OF RETALIATION Sometimes organizations will threaten severe retaliation in an effort to discourage competitors from taking actions. For a threat to be believable, an organization should be perceived as having enough resources to carry out an effective battle if one ensues. High liquidity, excess capacity, and new - product designs that are being held back for a rainy day can be signifi cant in convinc- ing competitors that they would lose more than gain from the confl ict. 60
DOMINO’S PIZZA AS A FIRST-MOVER
Domino ’ s Pizza built an initial advantage over rivals by being the fi rst to offer home delivery in a half hour or less with a free product guaran-tee. Rivals at fi rst scorned that tactic, but they eventually imitated it. Once most pizza retailers offered home delivery, Domino ’ s initial advantage was gone. Domino ’ s second action was to offer a giant pizza, the “ Big Foot. ” Later
it distributed direct - mail coupons and gave its customers handy magnets for easy access to Domino ’ s phone number. Only through a string of actions could Domino ’ s maintain its advan- tage and keep rivals off guard. 56
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Multimarket competition means that fi rms compete in multiple markets simultaneously. When this is the case, a company may fear that its actions in one market could lead to retalia- tion in another market. (See the “Hospitality Focus” boxed section above.)
These developments mean that two previously separate transportation segments will be com- peting against each other in multipoint competition, which is likely to change the dynamics of competition in both industry segments over time. Industries consisting of competitors with a lot of multimarket competition are expected to demonstrate a lot of mutual forbearance, which limits rivalry. 62 Because rivalry is limited, profi t margins are expected to be higher in these situations. 63 However, lack of multimarket contact can lead to more - intense rivalry and lower profi t margins. 64
GOVERNMENT INTERVENTION Political and legal strategies can be used in an attempt to help shape the rules of competition or change the competitive landscape altogether. Online gaming is one area in which legal issues are particularly complex. Various countries have approached the legality of Internet gambling differently. Many Caribbean nations have chosen to permit and license Internet gambling operations. For example, Antigua has registered more than 31 Internet gambling operations. 65 Other Caribbean states, such as Curacao, Grenada, Netherland Antilles, Trinidad, St. Vincent, the Cayman Islands, and the Dominican Republic, have issued Internet gambling licenses. In contrast, the Bahamian government plans to completely prohibit all Internet gambling in the Bahamas. In Australia, the Queensland government and the Government of the Northern ter- ritory have developed legislation designed to permit and regulate Internet gaming operations. (See the “Hospitality Focus” boxed section on page 195.)
BARRIERS TO IMITATION One of the most common competitive countermoves is imitation. A follower organization can simply imitate the leader ’ s strategy point by point. In fact, most innovations in hospitality are very easy to imitate. Consequently, some leading companies attempt to thwart imitation by erecting a variety of barriers. Some barriers to imitation are similar to the barriers to entry
RETALIATION: EUROPEAN CHARTER CARRIERS vs. REGULAR AIRLINES
Historically, Europe ’ s charter carriers did not compete directly with regu-lar airlines. In addition, low - cost carriers were not particularly inter-ested in holiday destinations served by the charter airlines. However, the UK ’ s low - cost carriers are now encroaching on holiday business in areas such
as Malaga, Alicante, and Palma de Mallorca. Also, a sluggish packaged holiday business has led the major charter travel groups to compete more directly with low - cost carriers. For example, the UK company MyTravel (formerly Airtours) has started the budget airline MyTravelLite, and in Germany TUI formed a venture with Germania to launch Hapag - Lloyd Express. 61
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195COMPETITIVE DYNAMICS
discussed in Chapter 2 . The primary difference is that barriers to imitation are intended to pre- vent existing competitors from imitating sources of cost savings or differentiation, whereas barriers to entry are created to discourage other companies from entering the industry. Also, many barriers to entry are possessed by most existing fi rms; therefore, they affect new entrants rather than incumbent fi rms. As a practical matter, many of the entry barriers are the same as imitation barriers.
Organizations may discourage imitation in several ways. A company may build a signifi - cantly larger portfolio of hotels or stores, thus achieving economies of scale that are diffi cult to duplicate. A fi rm may develop a highly valuable and diffi cult - to - imitate brand name or trademark. In addition, special relationships with external stakeholders can be diffi cult to copy. For example, an organization may have special arrangements with a fi nancial institution, an excellent relationship with its union, or an exclusive - supply agreement with one of its suppli- ers. In addition, an organization may deter entry through new service proliferation, signifi cant investments in advertising, cutting prices, or withholding information about the profi tability of a service so that potential competitors will not be eager to duplicate it. 67
As discussed in Chapter 3 , intangible assets are among the most diffi cult to imitate. For example, a particular service is fairly easy to imitate, but the research - and - development pro- cesses that went into creating the service are more diffi cult to reproduce. Consequently, an organization with an excellent ability to innovate may be able to create a barrier to imitation. By the time competitors have imitated a service, the company has moved on to other new
AUSTRALIAN GOVERNMENT INTERVENTION IN INTERNET GAMING OPERATIONS
Online gaming is illegal in the United States under the Wire Act of 1961, which prohibits “ knowingly using a wire communication facility for the transmission in interstate or foreign commerce of bets or wagers, or information assisting in the placing of bets or wagers, on any sporting event or
contest, ” although three states — North Dakota, Georgia, and Illinois — are considering making the practice legal, a move that would likely lead to court battles between the federal and state governments. American law is glaringly inconsistent as it has strengthened rules against some forms of online gambling while allowing bets on horse races and state lotteries. The World Trade Organization ruled that America ’ s practice of allowing state - authorized fi rms to take online bets on horse races was inconsistent and discriminated against foreign operators.
The overall market for online gambling is estimated to be approximately $ 49 billion worldwide, making it a large and profi table business. With online gambling illegal in the United States, it is likely to put American fi rms at a competitive disadvantage. As one expert notes, “ In the long run, America ’ s prohibition is unsustainable because regulating, taxing and letting American fi rms compete against offshore rivals makes far more sense. Australia allows online gambling, but regulates it and collects tax revenues. ” New laws in Britain permitting online casino operations have helped to bring betting fi rms that were moving rapidly offshore back to the country. The British government has seen these online operators willingly accepting regulation in exchange for more legitimacy with their customers. 66
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services. Organizational - learning ability is similarly diffi cult to imitate. Organizational learning can lead to private information (secrets) that results in higher performance. Consequently, an organization can build a barrier to imitation by fostering learning processes (Chapter 9 will cover this topic in detail). Finally, a high - performance organizational culture is diffi cult to copy.
STRATEGIC FLEXIBILITY Strategic fl exibility allows a fi rm to earn high returns while managing the amount of risk it faces. 69 Flexibility means that a company can move its resources out of declining markets and into more - prosperous ones in a minimum amount of time. Exit barriers infl uence a fi rm to remain in a market or industry after it is no longer attractive for investment. For example, an organization may have a signifi cant investment in a large resort. Selling the resort would result in a major loss, and closing it is not a reasonable option. Strategic exit barriers can also reduce fl exibility. These barriers are a result of reluctance to sacrifi ce the benefi ts of intangible assets that have accumulated through previous investments. Some of these may include loss of synergies created through linkages with other businesses, loss of customers, or loss of a market position.
Organizations can retain strategic fl exibility by reducing investments in assets that are likely to create large exit barriers. For example, lodging companies greatly enhance their strategic fl exibility when they manage properties that are owned by others. Similarly, restaurants often lease space, and many airlines lease their planes. Keeping large capital assets off the balance sheet frees up capital for expansion and reduces potential losses if the assets become unproduc- tive. However, companies forego the additional revenue potential from owning the assets. The important thing to remember at this point is that the level of strategic fl exibility is a decision.
AVOIDANCE Each of these strategies can require a great deal of managerial attention and, in some cases, signifi cant other resources. However, some fi rms simply avoid confrontation completely by focusing on a particular niche in the market in which other fi rms have little interest (Porter ’ s focus strategy). In hospitality, a niche can be a small segment of the market or a small geographic area. A restaurant company, for instance, might specialize in a particular nationality of food that does not draw a lot of customers. Or a company could locate its hotels in out - of - the - way areas. A small travel agency might rely on a key corporate account from one of the smaller businesses
HVS INTERNATIONAL FINDS A NICHE
Steve Rushmore, founder and president of hotel consulting company HVS International, got his start by performing hotel feasibility studies and apprais-als. “ Back then [the early 1980s], you had companies such as Laventhol and PKF, both of which could do feasibility studies, but not appraisals, ” Rushmore recalls. “ Then there were the appraisers, and they were regionally oriented general-
ists. All of the appraisers were economic majors and some were engineers, but none were from hotel schools. ” 68
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(those with fewer than 100 employees) that gets better served by a small agency. Or, as in the case of Steve Rushmore, a company can offer services that nobody else is offering. (See the “Hospitality Focus” boxed section on page 196.)
Resources, Industry Structure, and Firm Actions
Many of the strategies contained in this section require a strong resource position or excellent stakeholder relationships. 70 For example, for aggressive competition to succeed, a fi rm must have better or more resources than competitors do. First - movers need signifi cant resources associated with innovation and learning. Collaboration requires a network of excellent relationships with external stakeholders. Successful government intervention comes from excellent relationships with government leaders or parties. Firms with strong or unused (slack) resources are in a strong position to pursue most of the strategic options, but fi rms with poor resources are limited in their abilities to pursue aggressive strategies. They may need to avoid direct competition or to develop strategic fl exibility until their resource positions are stronger.
The characteristics of an industry determine, in part, the tactics an organization will pursue. Rapid industry growth typically is associated with lower levels of rivalry because fi rms do not have to steal market share to increase sales. 71 Also, a high level of concentration
FIGURE 5.4 The relationship among resources, industry structure, and actions over time Source: This model was inspired by K. G. Smith, W. J. Ferrier, and H. Ndofor, “Competitive Dynamics Research: Critique and Future Directions,” in The Blackwell Handbook of Strategic Management, ed. M. A. Hitt, R. E. Freeman, and J. S. Harrison (Oxford: Blackwell Publishers, 2001), 315–368.
Firm A Resources
Industry Structure
Firm B Resources
Firm C Resources
Change in Firm A
Resources
New Industry Structure
Change in Firm B
Resources
More Actions
and Reactions
Time
Change in Firm C
Resources
Firm A Action
Firm B Reaction
Firm C Reaction
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CHAPTER 5 ■ STRATEGY FORMULATION AT THE BUSINESS - UNIT LEVEL198
(a few fi rms hold most of the market share) should reduce the motivation of rivals to com- pete aggressively. If entry or imitation barriers are high, there is less competitive pressure from potential entrants. 73 Figure 5.4 illustrates the effect fi rm resources and industry structure have on fi rm actions and competitor reactions over time. After an organization acts, competitors will respond in turn, thus changing the resource positions of each company, as well as industry structure. The cycle then continues with moves, countermoves, and resulting changes.
COUNTERMOVES OF RIVALS Thus far, this discussion has centered on specifi c strategies fi rms might pursue to deal with competitive dynamics. Another important aspect of competitive dynamics is anticipating the countermoves of rivals. The question is, “ How are competitors likely to respond to a strategic move? ” Anticipation of competitor reactions is vital to understanding how effective a strategy may be. The two factors already identifi ed in this section — resource position and industry char- acteristics — are very important to predicting countermoves. For example, a rival with a strong resource position is much more likely to respond with a countermove. Also, a slow - growing industry is more likely to elicit a response from competitors than is an industry that is grow- ing rapidly. However, several other factors can play a role in determining whether a fi rm will deploy a countermove and what form the response will take.
Predicting the potential response of a competitor also has a lot to do with the goals of its managers. 74 If a planned strategy is likely to interfere with the goals found in a competitor orga- nization, that organization is likely to respond with a countermove. For example, a company may launch a strategy to grow in a particular market. If another company ’ s goals depend on that market, a strong reaction can be expected. (See the “Hospitality Focus” boxed section above.)
On the other hand, sometimes companies pursue different segments of the market (avoid- ance strategy), allowing a less aggressive atmosphere to develop. An organization should also try to understand the assumptions of competing fi rm managers about their organization and the industry. For example, managers may assume that a countermove will be detrimental because such moves have been harmful in the past. Or fi rm managers may see their organization as a follower.
Of course, a competitor is not likely to respond if it is unaware that a fi rm has pursued a strategic action. Consequently, the strength of a fi rm ’ s environmental - scanning and - analysis
BOEING’S COUNTERMOVE AGAINST AIRBUS
Boeing has historically dominated the Japanese market for commercial aircraft. In fact, Boeing ’ s planes account for 84 percent of the nation ’ s commercial fl eets. Recently, the European rival Airbus Industrie began an attack on Boeing ’ s dominance through expanding its Japanese offi ce and making allies of Japanese businesses. Airbus recently targeted Japan with its new A380
super jumbo jet, which holds up to 800 people. Large jets are important in Japan because its air- ports are so congested. Airbus should have expected a strong reaction. It came in the form of a newly designed Boeing 747X, a stretch model that will accommodate up to 520 passengers and will cost $ 20 million less than the Airbus A380. 72
eHOSPITALITYFOCUS
e
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199STRATEGIC GROUP MAPPING
abilities and the awareness of its top managers about signifi cant events in the industry also play a role in whether a countermove will be pursued. 75 Newer or smaller organizations are less likely to be aware of precisely what larger, older competitors are doing.
In summary, some of the characteristics that help an organization anticipate the response of a competitor to a particular strategic move include strength of its resource position, char- acteristics of the industry, goals and assumptions of competing - fi rm managers, and awareness of competitive actions. When a strategy is formulated, managers should try to anticipate the reactions of competitors in order to more accurately assess the potential outcomes.
STRATEGIC GROUP MAPPING
One way to keep track of the strategies of competing fi rms is with a strategic - group map such as the one in Figure 5.5 . A strategic - group map categorizes existing industry competitors into groups that follow similar strategies. Rather than look at the industry as a whole or individual
FIGURE 5.5 Strategic - group map of hotel size by country of origin
10
8
6
Hyatt Extended Stay La Quinta
Hilton Marriott Carlson Starwood
Golden Tulip
Vantage Hospitality Group Barcelo Hotels
TUI
Societe du Louvre
Jun Jiang
JAL
Prince Tokyu CHE
Group
Shangri-La Hotels
Whitbread Hotels
InterContinental Hotels
Occidental Hotels
Tharaldson Fairmont
Four Seasons Group Posadas
Walt Disney World
John Q Hammons
Hospitality International
Accor Wyndham Best Western Choice
4
Si ze
o f H
ot el
Po rt
fo lio
2
0
Canada USA Mexico Spain Germany France
Country Location of Corporation
China Japan EnglandHong Kong
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CHAPTER 5 ■ STRATEGY FORMULATION AT THE BUSINESS - UNIT LEVEL200
fi rms, this technique helps to understand clusters of competitors. Paying attention to what other competitors are doing is critical to making appropriate competitive moves and counter- moves. The hotel strategic - group map in the fi gure shows that most of the large hotel compa- nies are located in key countries, primarily the United States, France, and England.
Developing a Strategic - Group Map
To construct a strategic - group map, a series of steps can be followed:
Step 1: First identify strategic dimensions that are important in the indus- try, such as breadth of services (limited or full service), quality/price level (high, medium, low), geographic coverage (local, regional, national, or international), or use of distribution channels (one, some, many). See Table 5.4 for a list of possible dimensions to use in creating a strategic map.
Step 2: Map the fi rms on a two - variable grid using different strategic dimensions. The axes of a strategic - group map should describe strategy and not performance. Therefore, variables such as pricing strategy, cus- tomer - service approach, level of advertising, and service mix are appropri- ate, whereas return on assets and earnings per share are not. Furthermore, to reveal more about the industry, the dimensions should not be highly correlated with one another. Once the variables are selected, a map may be constructed by plotting industry rivals on the relevant dimensions.
Step 3: Put fi rms that fall in about the same space in the same strategic group. You can draw circles around each strategic group. The circles should be pro- portional to the size of the group ’ s share of total industry sales revenues.
Organizations that end up in the same general location on a map are called strategic groups. Consequently, they have similar strategies based on the dimensions found in the map. Strategic - group maps can help an organization understand the strategies of competitors. For example, competitors within the same strategic group, such as Applebee ’ s and Chili ’ s, are in direct competition for customers, whereas competitors in different strategic groups, such as McDonald ’ s and Sodexho, do not compete directly. Strategic - group maps sometimes highlight an area in the industry in which no fi rms are currently competing (a strategic opportunity). For instance, short - haul, no - frills airlines occupy a competitive arena that was almost empty before airline deregulation.
Strategic - group maps may also be used to track the evolution of an industry over time. In the past few years, traditional low - end fast - food restaurants have moved closer to fast - casual restaurants with upgrades to products and d é cor. In addition, lower - end family restaurants like Denny ’ s have given up market share to more upscale family restaurants such as Applebee ’ s and Cracker Barrel. As casual - dining sales have slumped, operators like Olive Garden and Red Lobster have retooled menus and marketing efforts. These moves may reveal shifting strategic - group membership.
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201STRATEGIC GROUP MAPPING
One of the weaknesses associated with strategic - group maps is that organizations can belong to several strategic groups, depending on the dimensions that are used to form the groups. Because the choice of dimensions is somewhat subjective and dependent entirely on the industry under study, strategic - group maps do not provide answers, but they help raise rel- evant questions about the current state and direction of competitive rivalry. As noted, they may also help fi rms discover untapped market opportunities.
TABLE 5.4 Possible Dimensions for Strategic - Group Maps
Dimension Explanation
1. Specialization 1. Narrow or broad range of services
2. Quality 2. Level of quality, consistency of quality
3. Distribution channels 3. Use of channels (few, some, many)
4. Vertical integration 4. Extent of backward or forward integration into sources of supply or customer markets (none, partial, full)
5. Cost position 5. High cost vs. low cost
6. Service 6. Degree of service (no-frills, limited, full-service)
7. Pricing policy 7. High price vs. low price, aggressive pricing vs. reactive pricing, inclusive or àla carte
8. Geographic coverage 8. Local, regional, national, global
KEY POINTS SUMMARY
• The responsibilities of business - level managers include establishing the overall direc- tion of a business unit, conducting ongoing analysis of the changing business situation, selecting a generic strategy and a strategic posture through which to implement it, and acquiring and managing resources.
• The generic business - level strategies described in this chapter are cost leadership, dif- ferentiation, best value, and focus.
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CHAPTER 5 ■ STRATEGY FORMULATION AT THE BUSINESS - UNIT LEVEL202
• Firms may focus through cost leadership, differentiation, or best value. The distinguish- ing feature of a focus strategy is that energy is focused on a narrow, as opposed to a broad, segment of the market.
• Companies that pursue cost leadership actively seek resources that will allow them to produce services at the lowest possible cost.
• Hospitality fi rms that pursue differentiation attempt to distinguish services in such a way that they have greater value to their consumers.
• Best - value strategies combine elements of both differentiation and low cost. Many organizations have implemented programs that enhance speed or quality in an effort to produce a service that is the best value.
• Organizational dynamics is defi ned as the moves and countermoves of industry com- petitors. Organizations can pursue a variety of strategies in response to competitive dynamics, sometimes combining these approaches.
• Competitive moves include aggressive competition, seeking a fi rst - mover advantage, collaborative agreements with stakeholders, threats of retaliation, seeking government intervention, erecting barriers to imitation, remaining fl exible enough to move in and out of markets with relative ease, and avoiding direct competition completely. Groups of fi rms that pursue similar types of strategies within the same industry can be clustered using a mapping technique discussed in the chapter. Competitive pressures often favor some strategic groups over others.
• Strategic - group maps help identify strategic opportunities by revealing areas in the industry in which no or very few fi rms currently compete.
REVIEW QUESTIONS
1. What are the strategic management responsibilities of a business - unit manager? Explain what each of these responsibilities entails.
2. Describe the generic business - level strategies found in this chapter. Provide an example of hospitality brands that you think are pursuing each of these strategies.
3. How can an organization pursue the business - level strategy of low - cost leadership?
4. How can an organization pursue a differentiation strategy?
5. What are some of the risks associated with a cost leadership, differentiation, best value, and focus strategy?
6. How can an emphasis on quality help a fi rm that is pursuing a best - value strategy?
7. What are competitive dynamics? Why has competition become more dynamic in the past few decades?
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203STRATEGIC GROUP MAPPING
8. Describe the eight strategies that refl ect competitive dynamics.
9. Of the strategies that refl ect competitive dynamics, which one seems to be the high- est risk? Why? Which one seems to be the lowest risk? Why?
10. If you were a market leader in a segment of the hotel industry, which of the strate- gies that refl ect competitive dynamics would probably be the most attractive to you? If you were a weak competitor with few resources, which strategy would you likely fi nd attractive?
CRITICAL THINKING AND APPLICATION QUESTIONS
1. You have been asked to develop two contrasting brand concepts for presentation to the senior management of a major chain. Begin by deciding what business - level strategies your two concepts will be based on (i.e., low cost, differentiation, best value, either narrow or broad). Using the following table, prepare your strategic analysis for each concept.
Concept A Concept B
What business strategy did you select?
What factors will you take into consideration in creating your strategy?
Describe the main features of your concept.
Identify three specifi c skills or resources you will use to create your concept.
What risks are associated with your concept and our strategy for making it a reality?
2. Select any two hospitality fi rms that compete on the basis of differentiation. Compare and contrast these two players. Which one is more successful and why? If a fi rm were to enter the market and pursue a focused differentiation strategy, how might it outfocus the two fi rms you examined.
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CHAPTER 5 ■ STRATEGY FORMULATION AT THE BUSINESS - UNIT LEVEL204
3. Develop a strategic - group map. First, identify characteristics that differentiate fi rms in the industry. Plot the fi rms on a two - variable map. Assign fi rms that fall in about the same space to the same strategic group. Draw circles around each group, making the circles proportional to the size of the group ’ s respective share of the total indus- try sales revenues. What does this group map tell you about the current state of the industry? What does it reveal about future opportunities?
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