The Mode of Entry in the Hotel Sector and Managing Contracting - Essay Example

The hospitality sector has been growing globally and many multinational hotels have been seeking to venture overseas. While the sector has seen growth, the entry strategy is important because wrong choices made initially can lead to lost market potential, loss of resources such as management, time and money (Rajan & Pangarkar, 2000). ABC Hotels Plc (a hypothetical multinational hotel chain), headquartered in Switzerland, plans to enter India (an emerging economy) and Ireland (in the European Union) in the near future. ABC has presence in several Asian countries, the North America and several European countries. It foresees growth potential in India and Ireland but the entry strategy needs to be assessed. The choice of the entry mode depends upon the external and the internal business environment. The external environment comprises of the macro-environment and includes the political and economic factors of the host country, the government rules and legislation, the barriers in the sector and the host country market environment. The economic and political factors are inter-related and it becomes difficult to identify only the economic or only the political factors separately (Altinay, 2005). The micro-environment is the internal environment which comprises of the corporate goals and objectives, the corporate strengths and weaknesses and the service factors. In addition to these, the location is equally important (Ekeledo & Sivakumar, 1998). Zhao and Decker (2004) contend that size of the firm, the technology transfer if required, the cultural distance, the market size, risks and uncertainties, sectoral barriers, and the international experience also influence the entry strategy. Taking these factors into account, the market entry strategy for ABC in India and Ireland would be recommended. While market entry is generally through exports, licensing, joint venture or opening of wholly owned subsidiaries, in the hospitality sector the mode of entry is different. In this sector direct ownership or any form of equity partnership is not preferred in countries with high economic or political risks, and of the level of economic development is low (Altinay, 2005). If the risks are high entry modes with low resource commitment is preferred. Franchising and management contracts are the most preferred modes of entry in the hotel sector in international expansion. In both these formats capital-intensive assets and knowledge-based assets can be separated. Service firms may enter foreign markets using a variety of modes but control is the most vital factor. Control ensures achievement of the ultimate purpose of the organization. Control also determines risks and returns; control ensures quality service which protects firm reputation (Blomstermo, Deo Sharma, & Sallis, 2006). High control entry modes demand resource commitment thus reducing the uncertainty exposure of the firm that expands into foreign markets. Such strategy enables building personal relationships and also adapt to the needs of the foreign customers. The hotel industry is a soft service sector and hence high control entry mode is preferred. Service firms develop experience in foreign markets and they prefer high control entry modes as they develop administrative and management skills in operating in foreign markets. In high cultural distance situations also, the foreign firms would opt for high control entry mode. India Political and economic condition The Indian hotels and motels industry generated total revenues of $5.6 billion in 2008 which represents a CAGR (compound annual growth rate) of 13.3% for the period 2004-2008 (Datamonitor, 2009). However, the sector is forecast to decelerate with the CAGR reducing to 12.5% between 2008 and 2013. The economic liberalization in India has given a new impetus to the hospitality industry. The government has declared the hotel and tourism sector as the high priority sector where 100% FDI is permitted (Bhatnagar, 2010). This has given an impetus in attracting investment to the industry. The hospitality sector is growing at 15% annually and there is a huge gap between the demand (90,000 rooms) and supply (61,000) which is expected to widen further as the economy grows (Ontrack, 2010). The factors that contribute to the growth of the sector are the growing middle class with higher purchasing power, the increase in corporate incentive travel, and the presence of the multinational companies in India. Besides, the overall boom in the economy with growth in the sectors such as the IT, the telecom, the retail and the real estate sectors have contributed to the growth (Bhatnagar, 2010). There is an increase in the number of international meetings being held in India which demonstrates the growing importance of Indian economy in the world market (Weinstein, 1996). Numerous joint ventures are taking place between the US and the Indian companies which further implies the growth in the hotel sector in India. The visa entry rules have been relaxed and several fast food companies have been granted licenses to operate in India (Ontrack, 2010). Major hotel chains like the Hilton, Accor, Marriott International, Berggruen Hotels, Cabana Hotels, Premier Travel Inn (PTI), InterContinental Hotels group and Hampshire have announced major investment plans in India. The hospitality sector is likely to see about 40 international hotel brands in India by 2011 (Bhatnagar, 2010). Entry mode decisions The entry mode decisions are based on location advantages, the transaction costs and the resource-based approach. India as a location offers distinctive advantages as the growth potential is tremendous. Moreover, ABC has distinct resources and core competencies. Location advantages India as a destination for the hotel industry has tremendous potential for growth. It is the ideal destination for tourists with the most diverse topography and political stability. It is the fourth most preferred travel destination with Lonely Planet selecting India among the top five destinations from 167 countries (Bhatnagar, 2010). As per the government regulations, the multinational hotels in India can be owned, leased or acquired under management contract (Srinivasan, 2006). These hotels in India are looking for management expertise and brand equity with no capital investments. Most hotels in the sector have entered into marketing tie-ups with major hotel chains. The Hyatt Regency has tied up with AHL and the Leela with Kempinski. It suits the Indian hotel owners because it puts them on the global map while the international hotel chain benefits without any capital investment in infra-structure and facilities. Association with foreign hotel brands gives an image boost to the Indian hotels and could attract more foreign visitors and tourists. The domestic consumer segment and the international segment both have registered growth (Datamonitor, 2009) but the bulk of the business comes from the domestic consumer (Appendix A). This suggests that the cultural factors have to taken into account in deciding the entry mode. Resource-based approach According to this view, as the degree of control increases, the chances of success increases as the firm can deploy the key resources essential to success. The key resources can be intangible assets such as brand equity and marketing knowledge (Johnson & Tellis, 2008). In emerging markets control provide two benefits – it safeguards the key resources from theft and leakage and it allows for internal operational control. Brand recognition is important to the consumers in the Indian market. As switching costs are negligible in the sector, it is important to attract and retain the customers in the first instance (Datamonitor, 2009). The consumers are price sensitive but they are willing to pay a premium for quality and innovation. This requires high control to maintain quality service. This would ensure the reputation of ABC which it has in the global market. ABC’s core competency lies in marketing and has a very well organized marketing set-up. In international expansion the core competencies have to be protected. ABC possesses deeply embedded attributes and has excellent marketing infra-structure, which can remain protected if high control entry mode is opted for. Brand value of ABC is high and in such cases also high control entry mode is preferred (Blomstermo, Deo Sharma, & Sallis, 2006). Based on the above factors of the hotel sector in India, ABC should enter into management contract with focus on marketing with some hotel owners in India. Moreover, even though India attracts foreign tourists, the bulk of the business still comes from the domestic consumer. The labour market in India, even though highly educated, requires ongoing training and support. If the labour market requires ongoing assistance and development, then management contracting is preferred over franchising (Altinay, 2005). Ireland Political and economic condition Ireland has moderate levels of economic risks and low levels of political and financial system risk (AMB, 2009). In 2008 the economy stared to slow sharply and further declined in 2009. The housing market declined and the financial sector came under tremendous pressure. Ireland’s economy depends heavily on foreign trade and investment. Ireland is a member of the European Union and one of the original 11 countries to adopt euro as its currency. Ireland’s financial regulations are largely consistent with the EU directives. Because of low political risk, adverse developments are not likely. The government is stable and the country has a reliable legal system. The Irish hotel sector has seen the introduction of branded hotels that was traditionally family-run business. This has intensified competition in the industry. Like India, the Irish hotel industry also relies heavily on domestic business. In 2007, 60% of the rooms sold came from domestic business (Accountancy Ireland, 2008). Thus the economic climate impacts the sector, the occupancy levels and the turnover. The International brands have entered the Irish hotel industry with private investments and have engage management companies to operate the hotels. The management fee is charged as fixed percentage of the turnover and the incentive fee is based on profitability. In the last decade 27,000 additional rooms have been added to the Republic of Ireland. In 1997, 10 million guest nights were sold which has gone up to 20 million in 2007. The supply has thus kept in line with the demand in the hotel sector. However, the developers built the hotel not based on forecast demand but because it could attract international hotel chains. Location advantages The quality of life is considered to be one of the best in the world, as assessed by the Economist Magazine (BBC News, 2004). Ireland has low unemployment and political liberties, stable family life, preservation of traditional values despite increasing wealth. Ireland has the fourth highest gross domestic product per head in the world in 2005 and is the fourth richest country in the world (Bowcott, 2004). In the hospitality sector, Ireland follows certain norms and regulations under the EU directive. Data Protection and consumer rights are paramount. Brand recognition is important in the hotel sector to maintain their position but ‘brand hijacking’ has been taking place when it comes to online brand promotion (Kilroy, 2008). This can impact the brand image and value leading to loss of revenue. Trade marks should also be registered in Ireland as they are valuable commercial assets. The Consumer Protection Act protects the interests of the consumers and hence advertising should not be misleading and ensure fair trade. While in cities like Dublin, hotels have higher levels of occupancy, hotels located outside the main cities are impacted by the seasonality factor. Dublin occupancy level remains above 70% for nine months of the year and never falls below 55 percent (Murphy, 2008). This has been shown in Appendix B. Ireland has been hosting major events such as Ryder Cup and the Volvo Round the World Yacht Race. In addition, the Open Skies Agreement between Europe and the US ensures additional I million US visitors to Ireland which could create additional two million guest nights for the Irish hotels. Thus there is potential of an increase of 10% from one source alone. Dublin has the National Conference Centre which attracts major conferences. This too could boost the hotel sector and enhance the demand for rooms. Discounting in rooms is prevalent in the Irish hotel sector to keep the occupancy levels high. This could result in losses if there is 20% reduced turnover. Ireland is perceived as Europe’s most expensive destinations in the tourism sector. Ireland has not marketed itself as a mass tourism destination but the objective is to deliver a quality experience as they have the key attributes of people, place and pace (TTG, 2003). Aggressive marketing and promotional measures are required to boost the hotel sector in Ireland. Visitors from the E.U., Australia, North America, South Africa and New Zealand do not need a visa to enter Ireland for a holiday. Resource-based approach The workforce in the hotels in Ireland comprise of a diverse population of people. About 25,000 of the country’s hospitality workers are non-nationals (Devine, Baum, Hearns & Devine, 2007). To meet labour shortages, non-nationals have to be employed which poses challenges for the employers as the employees have distinct work and lifestyle expectations. This also creates problems in recruitment, retention, skills and image. The hospitality sector has the highest turnover of employees as the migrant labour faces challenges of acclimatising and acculturalising. Managers in Ireland hence need to be sensitive to the needs of the employees and understand the different cultural nuances. These also pose communication challenges and discrimination issues. ABC has hotels across the world and its managers have experience of working with people from different cultural backgrounds. Theirs being a global hotel chain, their experience in the sector makes them the most sought after for partnerships in the hotel sector. Apart from marketing, this is also a key resource and competency of the ABC group. Their managers and workers are well trained in the field. Moreover, Ireland has a system of work-visas and work-authorisation schemes to attract particular skills. Other EU members have also relaxed the visa requirements that enable them to attract skills required for the growth and development of any sector and for the overall economy. Thus the government rules are conducive to allow migrant labour in the sector. ABC would be free to send their own people from different cultural backgrounds. Ireland is attracting visitors and tourists from across the globe and hence the labour should be able to understand the demands of the customers. This too requires ABC to ensure that the staff that they bring in to Ireland is well-versed in different languages and cultures. ABC does not have only low-skilled workers, as is generally assumed. They have workers of every category including managers that can handle challenges. Human resource is their greatest strength and hence based on this resource, ABC should enter into a management contract that would take care of the administrative and the marketing activities. This requires minimal investment while the brand image of ABC would lend credence to the hotel in Ireland. Conclusion Thus in both an emerging economy (India) and a triad member (Ireland) the mode of entry in the hotel sector should be through management contracting. Both have location advantages and both have problems unique to their locations. India lacks in marketing abilities but the government allows the foreign hotels to own or lease hotels. ABC would be able to extend its brand name and offer marketing services. Ireland lacks skilled manpower and the government regulation permits work-visas as the country faces acute workforce shortages. ABC could use its human resource strength to benefit from its entry into Ireland while extending its brand image to the Ireland hotel. Both these locations attract international visitors and hence ABC gets huge exposure and can enhance its image through this mode of entry. References ABM. (2009). AMB Country Risk Report - Ireland. Retrieved online 9 July, 2010 from http://www3.ambest.com/ratings/cr/reports/Ireland.pdf Altinay, L. (2005). Factors Influencing Entry Mode Choices: Empirical Findings from an International Hotel Organization. Journal of Hospitality & Leisure Marketing. 12 (3). BBC News. (2004). Ireland is named best country. Retrieved online 9 July, 2010 from http://news.bbc.co.uk/2/hi/4020523.stm Bhatnagar, P. (2010). Growth of The Hotel Industry In India. Retrieved online 9 July, 2010 from http://www.buzzle.com/articles/growth-of-the-hotel-industry-in-india.html Blomstermo, A., Deo Sharma, D., & Sallis, J. (2006). Choice of foreign market entry mode in service firms. International Marketing Review. 23 (23), 211-229 Bowcott, O. (2004). Ireland leads world for quality of life. The Guardian. Retrieved online 9 July, 2010 from http://www.guardian.co.uk/world/2004/nov/18/population.ireland Datamonitor. (2009). Hotels & Motels Industry Profile: India. Dec2009, p1, 25p Devine, F., Baum, T.,Hearns, N., & Devine, A. (2007). Managing cultural diversity: opportunities and challenges for Northern Ireland hoteliers. International Journal of Contemporary Hospitality Management. 19 (2), 120-132 Ekeledo, I., & Sivakumar, K. (1998). Foreign Market Entry Mode Choice of Service Firms: A Contingency Perspective. Journal of the Academy of Marketing Science. 26, 274 Johnson, J., & Tellis, G.J. (2008). Drivers of Success for Market Entry into China and India. Journal of Marketing, 72, 1-13 Kilroy, D. (2008). Hospitality Sector in Ireland: Five Golden Rules for Doing Business Online. Retrieved online 9 July, 2010 from http://www.lkshields.ie/htmdocs/publications/pub282.htm Murphy, A. (2008). Hotel Industry Challenges and Prospects for Ireland /Northern Ireland. Accountancy Ireland. December 2008 Vol.40 No.6 Ontrack. (2010). Top sector for foreign direct investment in India. Retrieved online 9 July, 2010 from http://www.indiaonestop.com/fdi-hospitality.htm Rajan, K.S., & Pangarkar, N. (2000). Mode of entry choice: An empirical study of Singaporean Multinationals. ASIA PACIFIC JOURNAL OF MANAGEMENT, 17, 49-66. Srinivasan, P. (2006). Role of multinational chains/groups of Hotels in the Indian hospitality industry and their contribution to the Indian Economy. Retrieved online 9 July, 2010 from http://www.indianmba.com/Articles_on_Management/AOM18/aom18.html TTG. (2003). Hotels in Ireland rocked by insurance hike. Travel Trade Gazette UK & Ireland; 7/7/2003, Issue 2571, p37, 1/8p Weinstein, J. (1996). Hilton enters India market. Hotels; Jan96, Vol. 30 Issue 1, p18 Zhao, X., & Decker, R. (2004). Choice of Foreign Market Entry Mode. Retrieved online 9 July, 2010 from http://bieson.ub.uni-bielefeld.de/volltexte/2004/507/pdf/m_entry.pdf Appendix A Source: Datamonitor (2009). Appendix B Source: Murphy (2008). Read More