The business environment is often an uncertain one, where managers are faced with many factors that impact on and influence the organisation. The micro-environment includes suppliers, customers and stakeholders, all of which influence the organisation directly. The macro-environment, however, includes factors that influence the organisation but are out of its direct control. The micro-environment is often determined by the industry the organisation operates within. Competition becomes a critical influencing factor.
Johnson et al (2002) states that managers should understand the competitive forces that exist between organisations in the same industry because this will determine its attractiveness. De Swaan Arons, et al (1999) refer to Porter’s Five Forces framework as a tool to assess profit potential within an organisation. These forces include; supplier and buyer power; threat of substitutes; and barriers to entry. At the centre of the five forces is competitive rivalry between organisations in the same industry/sector.
The level of competitive aggressiveness will be determined by factors such as the number of competitors, industry growth, high fixed costs, and amount of differentiation (De Swaan Arons, et al, 1999, pp 3). According to Harrison (2003), success in the hotel industry is often provided by being located near existing hotel properties. This may be as a result of a tested market-place and assurance that if hotels can profit in that area, then it becomes an attractive market to enter. Supplier and buyer power are closely linked due to the resulting relationship they have in influencing the organisation.
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Porter’s Five Forces Framework states that supplier power is high when there is a concentration of suppliers within the same industry. However; following the comments of Harrison (2003), several hotel properties within the same geographic area will be competing for customers, often basing their strategy on price; hence the customer has the power to influence the supplier, otherwise known as buyer power. A high concentration of suppliers in one geographic area often results in a saturated market. The Life-Cycle Model highlights the importance between growth and maturity stages.
Johnson et al (2002) illustrate that in market growth situations, an organisation is likely to achieve growth through the resulting growth of the marketplace. However, when markets are mature, organisational growth can only be achieved by taking market share from competitors. Research conducted within the Swiss Hotel Industry, (Sund, 2004), showed that it had been experiencing a period of stagnation and even decline. Sund (2004) suggests this is due to the concentration of hotel properties in the area as a result of increased international travel post-World War II and the increase in hotel chains and franchises.
In research carried out by Audretsch et al (1996), where the innovative activity takes place is a key contributor to the phase of the industry life cycle. Substitution reduces demand for a particular type of product or service. For example, the presence of all-inclusive hotel resorts is a threat to small independent Bed & Bedfast establishments. Barriers to entry consist of a number of factors, for example; economies of scale, capital requirement, access to distribution channels, experience expected, retaliation, legislation/government action, and differentiation (Johnson et al, 2002, pp 115).
For the hotel industry, the threat of entry is likely to be high in places where there is a high concentration of hotel accommodation. However; some may argue that high concentration may be a reason not to enter the market because competition is fierce. According to Harrison (2003), Porter’s Five Forces model has limitations in terms of its practical application. Although the five forces aims to provide organisations with a definition of competitive factors, it does not include an evaluation of other stakeholders equally as important. This may include unions, financial institutions, the media and local communities.
Harrison (2003) also identifies the importance of political factors. Where micro analysis of the organisation consists of direct factors such as customers, stakeholders and competition, the macro environment considers elements of the environment on a wider scale. The PESTEL model is a useful tool for use in strategic decision making. It consists of political, economic, social, technological, environmental and legal issues affecting drivers of change within an organisation. Political factors refer to governments, society or regulators that can take action to influence an organisation’s performance.
Political decisions can also affect a company’s success and future planning as shown in many war zone scenarios. A country’s decision to go to war curbs travel and thus, hotels, restaurants and tourist attractions suffer. Harrison (2003) quotes the example of the 1991 war in the Persian Gulf. Hotels were left empty until the war ended and travellers felt confident to venture into that geographic region again. Economic factors include interest rates, taxation changes, economic growth, inflation and exchange rates. These factors can be critical to the success of companies operating within the hospitality industry.
A hotel company may have to review its pricing strategy dependant on consumer demand. This relates to Porter’s forces where buyer and supplier power are linked as a result of where most of the concentration is. Social factors relate to social trends such as the demand for a company's products and services. Awareness of societal factors is also important in reputation management where a company aims to promote itself as interested in the values of its customers. Marriott Hotels (cited in Harrison, 2003), considered societal trends in its development of housing for people who may require a form of assisted living.
This development was due to Marriott’s recognition of the ageing baby-boom era. Technological factors are important to consider when new markets are being established. New technologies create new products and new processes. Technological developments can benefit consumers as well as the organisations providing the products. In the hotel industry, technology advancement should be centred on customer service and the experience one should expect. According to Connolly et al (2000), the hospitality industry should be preparing for the future by readying itself for technological advancements.
This way, hotel companies will be well positioned to meet the needs of their customers. One of the most popular advances in technology for the hotel industry would be computer advances and the wide use of Internet. Hotels are now expected to have online booking facilities, which are easy to use, install confidence and assurances for the online customer that their booking has been received and processed accordingly. Websites are commonly an organisation’s first point of contact with potential customers. Therefore, branding and corporate image is important.
Customer relationship management is possible with the advancement of computer technology. Marketing strategies centre around the potential to follow-up on previous customer’s hotel stays by offering return offers and discounts for loyalty. The Ritz-Carlton, for example, uses their contact database to maintain customer profiles that details individual tastes and preferences (Harrison, 2003). They also use this technology to speed up check-in procedures for regular guests. Differentiation within the hotel industry is also possible through the use of technology.
Harrison (2003) uses the example of Wingate Inns who attracted business customers by offering free to use, high-speed Internet in every room. Environmental factors such as climate change have the potential to impact on every industry and should be considered as a driver for change. Becoming ‘greener’ has been a significant change in the running of many hotel chains throughout the world. Advertising the use of environmentally friendly products and processes is affecting customer demand. This produces more business opportunities and creates greater supplier power.
Legal factors are related to the legal environment in which companies operate. Health and Safety legislation is a major driver of change in all industries, especially service-based industries such as hospitality. Not only does this affect the company’s workforce, it also affects the customer and his/her experience. Hotel owners are duty holders in providing a safe environment for their employees and customers. In the event of an accident or a breach of legislation, a hotel company can incur substantial penalties, which will ultimately affect future profits and corporate reputation.
Analysis of the external environment, using tools such as PESTEL, allows organisations to make important decisions and strategic changes to create competitive advantage. In evaluating growth strategies, an analysis involving suitability, acceptability and feasibility is vital. Although these models of analysis help organisations to understand the factors that may impact and influence their business strategies, it is also important to understand in more detail what will result in success and failure. One of the many approaches is to perform a SWOT analysis.
Another is to identify opportunities and threats via strategic gaps. Johnson et al (2002) refer to this as identifying ‘new market space’. Strategic gaps are found by looking across the industry for potential substitutes, new product/service offerings and new market segments. According to Pryce (2001), many hotel operators are lagging behind other industries with regards to corporate sustainability. Research has suggested that there is a significant gap between attitudes and action (Pryce, 2001), which provides hotel owners with promotional opportunities and drivers for change to capitalise on environmental management.
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