Devising a Strategy for Accor - Research Paper Example

Introduction: Strategy is defined as "the pattern or plan that integrates an organisation's major goals, policies and action sequences into a cohesive whole. A well formulated strategy helps to marshal and allocate an organisation's resources into a unique and viable posture based on its relative internal competencies and shortcomings, anticipated changes in the environment and contingent moves by intelligent opponents. (Mintzberg et al. 1999 5). The objective of a strategy therefore, is to achieve organisational goals through action sequences determined by policies following an audit of strengths (internal competencies) and weaknesses (shortcomings) based on an appraisal of opportunities (changes in the environment) and threats (contingent moves by intelligent opponents) Johnson et al. confer additional dimensions to strategy in their definition: i) long-term perspective, ii) meeting competition and iii) stakeholder value. According to them a strategy is " the direction and scope of an organisation over the long term which achieves advantage for the organisation through its configuration of resources within changing environment and to fulfil stakeholder expectations. (2004) After understanding what 'strategy' means the next logical step is to design the 'strategy' and work it. Of the four elements that make 'strategy', according to Mintzberg's definition, internal competencies and shortcomings are internal and therefore within the organisation's control. The other two, viz. changes in the environment and contingent moves by intelligent opponents are external and therefore need to be carefully monitored to be turned into an advantage or counter-acted. The external elements, according to Porter evolve into five forces that impact business success as i) industry competitors, ii) potential new entrants, iii) substitutes, iv) suppliers and v) buyers. (2004 4). In order to meet the challenges of the five forces and out-perform competitors, according to him there are three generic (meaning they are applicable across industries) strategies. They are i) cost leadership, ii) differentiation and iii) focus. (2004 35) Ireland et al. describe six components of strategic leadership that help organisations navigate the choppy waters of the twenty-first century businesses: they are i) determining the firm's purpose or vision, ii) exploiting and maintaining core competencies, iii) developing human capital, iv) sustaining an effective organisational culture, v) emphasizing ethical practices and vi) establishing balanced organisational controls. (2005) In order to devise a strategy for Accor, it is necessary to review the company's current status and activities and make a SWOT analysis. 1.1 Accor Group - Current status and activities: The hotel, tourism and leisure services company is one of the world's largest hotel groups running 4065 hotels offering 475,433 rooms in 140 countries and employs 168,500 employees. The company manages hotels across market segments - from luxury hotels to economy hotels under various brand names. They are Sofitel (upscale segment), Novotel, Mercure, Suitehotel and Parthenon, (mid range segment) Libertel, Orbis, All Seasons, Ibis, Etap, Formule1, Red Roof Inn, Motel 6 and Studio 6 (economy hotels), Accor Vacances (resorts) and Accor Thalassa (health resorts). The company's leisure and tourism businesses include travel agencies, restaurants and casinos. The company is the world leader in the food/luncheon voucher market with its flagship product Ticket Restaurant (Luncheon Vouchers), with over 300,000 corporate clients and 19 million users in 34 countries. In addition to food vouchers, the company offers transport vouchers, eye care vouchers, services that help corporates and government agencies manage social policies, uniform cleaning services, vehicle fleet management services and facility maintenance services. 1.2 Accor's financials: The company's consolidated sales were 7,622 million in 2005, operating profit was 603 million (registering growth for the first time in three years), net income 333 million and net worth (market capitalisation) was over 10 billion. The company's activity-wise revenue break up was 68% from hotels, 8% from services and 22% from other activities (travel agencies, casinos, restaurants, on board train services and others). The region-wise break up of revenues was 68% from Europe, 17% from North America and the remaining 15% from other countries. The Accor Group's 2005 revenues @ 7.62bn, represented an increase of 7.9% over the previous year. (Financial Briefs 2006). In 2004 the company had an operating profit of 513 million indicating a decline in profits for two years in a row. The company's profits for 2003 fell by 25.6% to 523 million. The company roughed it out in the first half of the year but was said to be showing signs of recovery in the later part of the year especially in its operations in the US, UK and Germany. (Financial Briefs. 2004) 1.3 Appointment of new CEO: Gilles Plisson, nephew of Accor co-founder Gerard Plisson, has been appointed as the new CEO, effective on January 15, 2006 to replace Jean-Marc Espalioux. Gilles Plisson has served as chairman of NOOS the leading cable network in France; as chairman and CEO of Euro Disney; and then as head of Bouygues Telecom since 2001. Gilles Plisson last worked with Accor in 1994 as the co-chairman of the Novotel brand. In order to ward off shareholder concerns of nepotism, Accor appointed Serge Weinberg, head of Weinberg Capital Partners as chairman of the supervisory board, to replace the senior Plisson in that role. (Europe 2005) 1.4 Expansion in Asia & Oceania: Accor opened a new five-star hotel Novotel Thalassa, in Neve-Zohar, Israel in 2005. The hotel has 280 rooms and suites. All the rooms offer a view of Dead Sea. The hotel's facilities include sauna, Jacuzzi, and indoor and outdoor pools. The hotel, in a first of its kind facility offers seawater-based treatments such as aromatherapy, effusion massage, aqua gymnastics and hydrotherapy to help with stress management, fitness and toning and more. (A place to call home 2005) Oil rich Persian Gulf is an enticing new pasture for international hotel chains. Accor's Sofitel will operate one of Dubai Properties' four hotels to be built in the Jumeirah Beach Residence complex. Canada's NORR Group Consultants International will build the 450-room property. (News In Brief 2005) Many international hotel chains like J.W. Marriott and Ritz-Carlton view China as an emerging market. Not to be outdone, the Accor group is all set to open the Sofitel Sheshan Resort in Shanghai, China. Earlier in January 2006, the company has struck a deal to manage Pudi Boutique Hotel Fuxing Parc Shanghai. (Megatropolis now 2005) After taking over the Vomo Island Resort in Fiji the company fully renovated it and opened for business in early 2005. The resort targets honeymooners who are transported by seaplane or helicopter form Nadi International Airport. The facility has comfortable villas only few steps from the beach and also offers a range of water sports and leisure activities. (Resort reopens ... 2005) The demand from both the business and leisure market the Accor group has put up hotels at all major Australian airports. Peter Hook the spokesman of Accor Asia Pacific Ltd. spokesman Peter Hook informed the company's plans to expand the new Hotel Formule 1 at Perth Airport. (Lindstrm. 2005b) 1.5And Latin America: The major tourist attractions in Colombia are the islands of San Andrs and Providencia, Cartagena city and the archaeological park at San Augustn. The tourism industry in Colombia suffers from the country's chronic security problems and poor international image. Accor operates hotels belonging to its Sofitel, Novotel and Mercure brands in Colombia. (Colombia: Market profile. 2004) 1.6 Information technology as a tool for competitive advantage: The Accor Group's Internet bookings grew 63 per cent in Australia in 2004 over the previous year. Peter Hook, the General Manager, Communications predicted a 10 per cent share of the Australian market for Accor's online bookings by 2008. The reason for this According to Hook was that the site was the website was Australia-specific. Acknowledging the web success, the company's main rival, Marriott Corp. is expected to follow suit by launching its own Australian website and the company's sixteenth international site. Accor claims its online growth did not affect the company's traditional booking methods, in other words, the online bookings was bringing in additional business. (Lindstrm, 2005a) In addition to its own web services the group tied up with Eurovactions.com offering its 'time-cool, cash rich' customers a variety of tourism solutions. By logging on to the site the customer can choose the price, plan and availability within a minute with or without an agent's help. (Schwalb 2000) 1.7 Financial blues and blips: Accor is reported to be on the move to access the loan syndication market for refinancing. Earlier on it was trying to service its revolving loan in June 2000. (Accor to tap market 2004) Colony Capital, which has invested 1 billion ( 675 million) - said to be Colony's largest investment in Europe to date - has been manoeuvring for greater control of the Accor group. (Gander 2005) 1.8 Divestments fuelling expansion plans: Accor divests stake in CWT: There was some speculation that the consolidation of the travel management industry especially the corporate reorganisations of BTI, TQ3, Navigant, the Travel Co. and BCD would not leave Accor unaffected. In spite of new CEO, Gilles Plisson's assurance, market analysts were sceptical about Accor's continuation in the company's joint venture with Carlson Wagonlit as Carlson Wagonlit Travel (CWT) in which Accor owns 50%. (Merry-go-round 2006). The sceptics however were proved right and the group did divest its 50% stake to Carlson Wagonlit for $ 465 million. In a three-year renewable partnership agreement signed at the same time the two companies agreed that CWT will be the preferred distributor of Accor hotels and Accor will be CWT's preferred travel agency. CEO Gilles Plisson described the divestment as a strategic move, which will help the company focus on its core businesses: hotels and travel services. During the early part of 2005 some of world's top hotel groups were considering the idea of divesting their properties so that they can concentrate more on running them. Marriott, Hilton, InterContinental Hotels and the Accor group were among these. In February/March, 2005 the company announced plans to sell more of its upmarket hotels while at the same time retaining their management. Thus the group expects to run 75% of its Sofitel brand hotels in this manner as against 60% at the time. The company plans to use the funds thus liberated - 250 million - for its expansion plans. Economy hotels built and owned by Accor outside America earned 15% on capital twice the margins the group earned on its Sofitel and mid-market Novotel hotels in the previous year. The economy segment in countries like Spain, Italy, Central Europe and Russia is vast and unexploited. In addition to these countries Accor has plans for massive expansion in China. The group has hotels in China for tourists and the affluent but intends to make a surge into the economy segment with its Ibis brand of hotels. The returns it got for its hotel in Tianjin, a big city 120 kilometres southeast of Beijing last year were quite encouraging. The hotel recorded an occupancy rate of 94% and returned 13% on capital even with a low tariff of the equivalent to only $22 a night. The company aims to have 50 such hotels in China by 2010. (Budget room 2005) 1.9 Marketing strategies: Accor launched a major promotional campaign to create awareness and promote its numerous hotel brands. The campaign entitled - "Accor Hotels Destinations" - is through a series of advertisements in local and regional consumer publications and in the International Herald Tribune. The objective is to highlight the group's expansion across Asia anticipating revival of the Asian travel industry. It targets Asian destinations offering tourism packages such as US $89 per night at the group's Sofitel Silom in Bangkok. The group's differentiating position was that it could offer accommodation across the spectrum from budget/economy to five-star hotels in different areas. 1.10 Customer relationship management (CRM) in action: The success of any innovation in the service industry depends on the way the customer deals with the innovation. This is because of two reasons: the intangible nature of the service and simultaneous production and consumption unlike in a product offering. Customer's validation of the service offering depends on customer's recognition of the value addition to the service, participation in the consequences of the service, ability to do so and customer's communication. This is precisely what the Accor group could achieve in its Formule1 budget hotels. The concept is to reduce the infrastructure and production costs of hotel services in order to respond to the demand of budget hotels for e.g. at a tariff of less than 100 in 1985. A study was made to find out customer expectations of price and the service quality expectations that go with the price with a standard reference price. The hotel was thus able to offer 'clean sound-proof rooms with comfortable beds' but with common baths that would reduce the production costs. (Abramovici et al. 2004). It was essentially a marketing strategy to tap into a potential segment and it certainly paid dividends in the long run. 1.11 HRM initiatives: The advantage the hotel chain offers is that it has worldwide brands and helps employees who choose to relocate with paperwork. Prospective employees can browse through the group's Springboard award winning website and apply while continuing their present employment. The group offers fast track growth for the right candidates. The philosophy behind the group's HRM concept is that satisfied/loyal employees will work to satisfy customers to make them loyal customers. (Druce 2003) Similarly the group was able to successfully undertake major organisational changes in its Novotel hotels when occupancy rates fell sharply after the 1991 gulf war. Co-presidents Philippe Brizon and Gilles Plisson achieved the smooth transition by forging alliances with the general managers of the chain's 200 hotels. The general managers were considered natural allies, as they were the first to educate the top management that the business model 'four star facilities at three star prices' has lost its charm to customers. Brizon and Plisson eliminated two of the five tiers in the managerial hierarchy and gave managers more control over room tariffs, work practices and the layout of community areas in the hotels. They then removed the central quality control department to give greater autonomy to the general managers. These initiatives were not only cost saving but turned bureaucratic management into entrepreneurial management where the local managers have greater 'say' but also greater responsibility to produce results. 2.1 Accor' strengths: Accor has been able to introduce innovative methods in its real estate management. As described in 1.8 above, Accor has sold a portion of the portfolio to focus on operations and brand management. The group sold up to 75% of its Sofitel hotels but retaining lease, management or franchising of the hotels. The company utilised the proceeds of 250 million to finance its expansion plans especially in Asia. During the 1990s the strategy of sale and leaseback adopted by Accor has been hailed as innovative. The strategy 'lightened' its balance sheet by reducing debt while retaining control of its products for over 20 years with the possible 'buy option' after the expiry the contracts. This strategy benefited the company in potential capital gains from 'buy options' while pinning it to fixed-rent regimes a risk the company gambled in case of market downtrends. In subsequent transactions the company grew wiser and the agreements it signed with the pool of investors led by Foncire des Rgions to refinance 128 hotels under existing lease contracts were for variable lease contracts. The consortium has agreed to make a cash payment of 140 million apart from investing 100 million in the hotels, thus sharing the capital gains obtained as a result of real estate sale. The group also signed a twelve-year contract to operate the hotels giving Accor the option to renew the contract every three years. All this without a minimum guarantee proviso is a first, which no other hotel group has achieved so far. The strategy brings down the fixed costs of running the hotels from 85% to 70%, is likely to increase earnings on capital employed and represents a great advance in finance optimisation. This is not all. The company has 900 establishments under leaseback contract, which can be renegotiated. If the company could swing the same terms as the earlier agreement, it could net 700 in the next few years. Although the group has hotels across market segments, it has a dominant position in the budget hotels segment (66% of its hotels are in the budget category and 29.5% are mid-range hotels). Its Ibis and Etap brands recorded the highest growth rates among the category. According to Lodging Econometrics the group has 13% market share in terms of number of rooms and 16% in terms of brand. Accor's major presence in budget hotels has the strength of returning regular revenues, as these hotels are not subject to cyclical variations of luxury hotels. The group has a diversified product mix and operates hotels in all segments and has presence in 140 countries. The company is the world leader in travel and tourism services with partnerships in the leisure industry (Club Mditerrane), casinos (Lucien Barrire SAS), restaurants and catering services (Lentre, Gemeaz Cusin, Compagnie des Wagons-Lits) and travel agencies (Carlson Wagonlit Travel). (Datamonitor 2005) The group's products and services portfolio are described in section 1.1. 2.2 Weaknesses: As we have seen in section 1.2, the company's revenues declined by a compounded rate of 12.9% between the years 2002-2004 mainly because of its US operations. At the same time the company undertook refurbishing of 30 units (Red Roof and Motel 6). Its competitors like InterContinental and Marriott are well entrenched in the US hotels' market and difficult to contend with. Further we have seen that major portions of the group's revenues are from Europe (68%) of which 50% or 34% of total revenues are from France. France also accounts for 40% of the group's EBIT and with 33% (1319) of its hotels situated in France accounts for 52% of EBIT for the segment. As we have also seen in section 1.2, almost 70% of the group's revenues are from hotels, only 8% from services and 22% from other activities. This reflects the company's over dependence on its hotels for revenues. The company's financial position, which caused concern during the years 2000 to 2004, has perked up in 2005. The company's long-term debt was 3371 million against its equity of 3755 million. The group's ROCE has declined from 11.7% to 10% from 2000 to 2004. Coverage of the interest component in the EBIT has increased from 5.1% 2000 to 5.6% in 2004 but the value creation has reduced from 270 million in 2002 to 219 million in 2004. There has been an improvement in these figures in 2005 as a result of the strategic decisions taken in 2005 like divestments and re-negotiating debt etc. For example ROCE has improved from 8.1% to 8.6% and WACC (weighted average cost of capital) marginally from 6.4% to 6.5%, while the debt equity ratio substantially reduced from 72% to 32%. All in all the worst seems to be over and the company can now look for its economic upsurge. 2.3 Opportunities: According research reports travel and tourism are expected to grow fast in Asia especially in China and India where the expected growth rate is twice that of the rest of the world. These two large countries account for 5% of the international travel and tourism trade. Their market share is expected to increase to 10.2% by 2015 at a compounded annual growth rate (CAGR) of 9% and China is expected to be the number one travel destination in the world by 2015. Accor's long presence in Asia - for well over thirty years - especially in the budget/economy segment (see section 1.8) will stand it in good stead. The company has already allocated 100 million for development in China for the next three years. The company entered into strategic joint ventures with big tourism operating companies in the region. Accor has 24 hotels in China and is planning to have 100 by 2010. In size and preferences India is similar to China. India has a growing upwardly mobile middle class and the country's airline sector opened up. All these forebode a fast growing demand for hotels across segments with the maximum demand for budget/economy class hotels. India is a virgin field for Accor, and if it provides a taste of its brand experience to the nation, can carve a niche for itself. Even in mature markets, the business hotel segment continued to grow in the past few years and 8000 hotel rooms were added in the previous year alone. The company opened 40 new hotels in France, 20 in Germany including the including the 400-room Dorint Sofitel Bayerpost Munich and the 600-room Etap- Ibis-Suitehotel complex in Berlin. The group has also opened nine new hotels in Spain, five in Switzerland, six in the UK, eight in Italy and two in central Europe (its first hotel in Vilnius, Lithuania and the third Ibis in Prague). The company has twenty projects under way in Spain (half of them Ibis), twelve in the UK and eight in Italy for opening in 2005-06 Most of these hotels will be owned by the group except in France where they are franchised. The European Commission authorised Accor's acquisition of a 28.9% stake in Club Mditerrane. This equity participation helps both companies leverage their strengths for an increased pie in the travel and tourism market. Club Mditerrane is a globally recognised brand offering tourism solutions to exceptional locations. Colony Capital announced 1 billion investment in Accor in 2005 (see section 1.7), through 500 million in bonds redeemable in shares and 500 million in convertible bonds convertible bonds (equivalent to 10% equity stake on total conversion). Colony Capital has also financed the Novotel Tour Eiffel hotel in Paris. These initiatives have eased Accor's financial planning over the next five years thus helping the company focus on its growth plans. (Datamonitor 2005, World 2005) 2.4 Threats: As new markets like China and India emerge and markets in the developed world mature, so does competition intensify. Hotel groups like InterContinental, Hilton Group, Marriott International and Hyatt Corporation, are also large, powerful and are driven by ambitious growth plans. InterContinental already has 45 hotels in China and plans to double the number by 2007. Marriott has 20 and is planning to add another 55 by 2010. Whereas Accor is yet to enter India, InterContinental already has 15 hotels and Hilton, which has earlier pulled out, finding potential opportunities has re-entered the market. The entry of all these hotels into the emerging as well as mature markets is likely to pressurize tariffs and revenues. As the group has worldwide operations, fluctuating currencies - for e.g. strengthening Asian currencies and weakening dollars and euros will adversely affect the company's profitability. This happened in the past too, for e.g. during 2003, weakened Latin American and US currencies reduced its revenues by 4.3% over corresponding figures in 2002. Finally travel, tourism and leisure industries are affected by threats from terrorism and natural calamities. The industry worldwide has seen a downtrend after the September 11, 2001 attack on New York but picked up since then. Last year's attacks on London and elsewhere in the world also have had their impact on travel and tourism as also the Tsunami disaster that struck south Asia in December 2004. Although such contingencies are common to the entire industry, they may adversely affect companies with weak financial strategies for e.g. companies with a large debt equity ratio or serviceable debt. 3.1 Strategic plan: The company has specified its 'strategy' as 'long term growth' and 'sustainable development'. Under long term growth plan, the company expects to 'consolidating market share and accelerating expansion', 'attracting and retaining customers' and 'developing human capital'. For sustainable development the company aims to focus on shareholders, employees, customers, local communities, suppliers and environmental protection. These expressions among them cover the whole gamut of business management activities as described by Minzberg et al. cited in the introductory part. Paraphrasing, Porter and Hamel and Prahlad, Peircy argues strategy is all about breaking free from obsession with management tools, industry dogma and industry rules. (2002 283) 3.2 Apply Pareto's principle: Accor group might consider whether it would like to be all things to all people just 'to keep up with the Joneses'. The company's hotels business contributes approximately 70% of its revenues while services business contributes a mere 8% of its revenues. This business must in all probability be consuming as much managerial time and effort as the other businesses - according to Pareto's principle. It would make sound business sense to divest the services business to concentrate more on the hotels business, which contributes 70% and the 'other' activities, which contribute 22%. 3.3 Express brand value in enlightened terms: The company's main strength is mid-range hotels. Kotler (like Ireland et al. 2005 cited in the introductory part) advocates holding a distinctive set of values, without deviation, develop a vision of the future and express business purpose in enlightened terms. Kotler cites the examples of Xerox, which expressed its business purpose as seeking to improve 'office productivity' or Monsanto seeking to 'help end hunger in the world'. These expressions mean more than a tagline. Accor might consider expressing the purpose of its mid-range hotels in terms of delivering of superior customer value and experience. For instance the Ibis brand simply states that it offers round the clock service at budget prices. So does every other hotel in its genre. This is just one example. Accor might consider building up each brand and express it in 'enlightened' terms of customer value and experience. (2004 69) The company has been to some extent following 'cost leadership' strategy. The company might consider adopting 'focus' which combines the principles of both cost leadership and differentiation as a strategy. (Porter 2004 35) 3.3 Expand horizons: We have seen in the introductory part and in the SWOT analysis that although Accor has operations the 'world over' in 140 countries as per its brochures, its mainstay is Europe and more importantly France. The company can tap the large emerging potential in Asia (India, China, South Korea and other ASEAN countries) Africa, which has huge tourism potential with its wild life tourism and many countries in Latin America. 3.4 Constantly strive to improve customer experience: Explaining value driven market strategy Piercy observes that it is easier to drop off a Hertz rental car than checking into the Hilton which is a big hassle with its long form-filling formalities. His question whether the hotel expects the customer to steal a room may be rhetorical - hotels have to observe some precautions especially in today's 'terrorism riddled world'. But they may think up of innovative ways to make checking in less of a bother and this could well be the differentiator. In fact such a service may extend from 'check in' to 'check out'. (2002 56) 3.5 Constantly train and develop employees: Hotel industry has cyclical peaks and valleys in its business cycles. 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