The purpose of this study is to analyze the premium segment of the hotel industry. We have carried out Porter’s Five Forces Model analysis of the premium segment of the hotel industry and compared it with some industries like IT, Cement and Textiles which have shown growth potential in recent times. This has been carried out to give an idea of the forces relative to other industries for an investor. Next, we identified some of the dimensions of strategy for the industry and analyzed the major players in the industry based on these dimensions, to position them and apply a SWOT analysis on them.
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In this regard, we used primary data to focus on two hotels within the groups discussed to understand the relative importance of the strategic dimensions. Based on the positioning obtained, we have tried to understand the strategic groups operating in the industry and map them along certain key dimensions. We have concluded by analyzing the impacts of the forces on members of different strategic groups. 1. Introduction This is an intermediate progress report (of the group project). The industry chosen for the analysis is the Hotel Industry in India. We have chosen to concentrate on Premium Segment of the Hotel Industry. . Scope of Project Hotels can be classified according to the type of property (premium/budget), type of player (foreign/domestic), number of hotels (chains/single/dual). We are focusing on the premium segment of the hotel industry. General industry analysis and profiling of players form the major part of the project.
These have been carried out with the help of Porter’s Five Forces Model, SWOT analysis and Strategic Grouping. We have also gathered information on the key dimensions of strategy as perceived by the management at Taj Residency Ummed, Ahmedabad and Pride Hotel, Ahmedabad. . Description of the Industry On an average setting of a Premium Segment Hotel with a capacity of approximately eighty to hundred rooms costs Rs. 10 million per room. For budget segment it costs around 3-5 million (CRIS INFAC Hotels Annual Review, 2005). Premium hotels include 5-star and 5-Delux star hotels. The segment is targeted primary to business persons / corporate, upper economic class leisure trips and foreign tourists. The proportions of customers of various types for 2004 are shown in Figure 1.
Major firms in this segment in India are: Indian Hotels Company Limited (Taj), Asian Hotels Limited (Hyatt), East India Hotels Limited (Oberoi, Trident), Starwood Hotels (Le Meridien), Pride Group and ITC. In Ahmedabad following are the hotels in this segment: a. Taj Residency Ummed b. Holiday Inn Hotel c. Le Meridien d. Pride Figure 1: Customer Profile for Hotel Industry 4. Analysis of the Industry Hotel industry is more global in nature as compared to most of the other industries i. e. any impact on most of the industries make an impact on the hotel industry (viz. /11 attack has a lot of impact on the industry globally). Other industries like Fast moving goods industry (FMCG), auto industry, banking industry (to a large extent) etc do not get affected so much with global changes (http://www. equitymaster. com/ detail. asp? date=7/12/2003&story=5). The demand in the industry has increased by more than 18% (http://www. hotel-online. com/News/PR2004_4th/Nov04_HVSIndia. html). During the same period average revenue per room has increased by 13% thereby increasing the operating margin to 25% approximately.
Average room demand is expected to increase by 18%, mainly due to business travelers and foreign tourists. Most of the firms do not have any major plans of investment in the next few years and hence the interest cost is expected to be lower thus higher overall profitability of the firms can be expected in the coming year. Indian Hotel Industry (premium segment) is internationally competitive. This has been possible due to continuous improvement in the facilities and services provided by the domestic players and due to presence of various multinational brands.
Domestic players have been forced to continuously improve so as to enable themselves to effectively compete with foreign firms. However the hotel industry in India in general faces the challenge of poor infrastructure, lack of maintenance of historical and cultural places, and high taxes. The premium hotel segment industry has been analyzed using Porters Five Forces Model which is also shown in Figure 2. The five forces working on the Industry are: A. Threat of Entry Threat of entry can be assessed from the barriers of entry in the Industry which can be created by various means.
Establishing a Premium hotel requires huge investment of the order of ten million per room for most of firms. The gestation period for a hotel is expected to be around 30 months. The investment is risky in nature as well. Hence, it automatically creates entry barriers of the new comers. Average employee cost in 2003-04 varied from Rs 4 lakhs to Rs. 6 lakhs in the industry (CRIS INFAC Hotels Annual Review, 2005). The average employee to room ratio in India is 1. 8, which is higher than the international standard of 1. 5. Also due to economy of scale a new firm will have to face this barrier.
The room occupancy in the initial years are expected to be low for a new comer, given that there are already known (brand) hotels in this segment and the supply is more than the demand for most of the year. Entry barrier is created due to the strong brand image that the hotels in this sector enjoy. Any new comer will have to either carry a brand name from other sectors or will have to create a brand name to exist. Also many of the firms in this industry have presence in various sectors which provide them a high financial backup. Figure 2: Porter’s Framework Applied to Premium Hotel Industry B.
Bargaining Power of Suppliers Suppliers are mainly of soap, toiletries, bed sheets and other clothes and similar articles. The suppliers do not enjoy much power in this industry as these are available of the shelf for the firms or there are enough providers for these articles. Some of the firms also have in house production of these supplies. Most of the firms have a long term contract with the suppliers to get them in bulk through their central warehouse and then distribute to their hotels e. g. Taj group till recently used to get bed sheets and other clothes from Bombay Dying through their Mumbai central warehouse.
Of the total cost (excluding indirect cost) employee cost is approximately 30%, food and beverage cost is 13%, fuel light and power cost is 14%. Since the products are standard and are bought in bulk through a long term contract (value of products is also very low), it can be said that this force is relatively insignificant for this industry. C. Bargaining Power of Buyers Buyers in this industry are the customers who consume/wish to consume the facility and the services provided by the hotels. Main customers of the (premier segment of) hotels are business travelers/corporate customers, leisure trips makers and tourists.
Proportions of tourists are 30-40% of the total customers. Tourist demand is seasonal in nature and hence to a large extent the industry faces a seasonal demand. The number of tourists coming to a certain geographical area is a function of the scenery of the area, business activities, and connectivity of the area with air, rail and road. Corporate customers depend on the economic activity in the area. Both corporate customers and individuals enjoy some bargaining power given that their switching cost is negligible. Customers enjoy a good amount of bargaining power on the quality of service provided in this segment.
Customers are more particular to the service provided than other factors such as price charged by the hotels. Firms enjoy higher bargaining power due to high volume of customers as well as across the year demand. This bargaining power allows them to get a discount of 10-15% in monetary terms and higher quality in terms of service. D. Rivalry among Existing Firms This industry is growing at a good rate. In the last decade the industry size has nearly doubled. The number of customers has increased due to high FDI and large scale of economic activity in the country.
The competition in this segment has increased in the last one decade as foreign firms have started venturing. This has created pressure on the existing firms to provide better services consistently. The competition is expected to intensify more as there are high exit barriers in terms of the physical assets created. Also competitors can imitate innovative service offerings in a short time. E. Pressure from Substitute With technical innovations and developments, this industry can perceive a functional threat from Net meetings and video conferencing. Such substitutes can affect the business traveler segment of the customers.
The tourists have also been affected with the beauty of the nature getting broadcasted to their home through Television. It has increased the curiosity of some travelers, but by and large it had negative impact too. It is as yet not clear whether the broadcasts about the natural beauty has increased or decreased the number of domestic tourists. However, Tourists are expected to increase from countries whose GDP has been performing well over the last few years due to increase in per capita income. The domestic tourists are also expected to increase as the economy is booming in India too. 5. Comparison with Other Industries
Apart from analyzing the hotel industry using Porter’s frame work we have also tried to compare them with other industries that have shown a promising growth in the recent past. Table 1 provides the summary of the forces acting on various industries to get a comparative feel for an investor. Table 1: Industry Forces on Various Industries in India Industry/ ForcesPremium HotelITCementTextileAirline Rivalry among existing firmsHighHighLowHighHigh Bargaining Power of Supplier LowHighHighHighModerate Bargaining Power of BuyersHighHighModerateHighHigh Threat of substitutesLowLowLowLowLow Threat of Potential entrantsLowModerateLowLowLow
The above observations are based on the following understanding of the industries: IT Industry •The competition in the IT industry is high due to large number of well established players existing in the market. •The supplier bargaining power in the IT industry is high because the operations in this industry are driven by intellectual capital and to rise up the value chain, a company is dependent on its highly skilled workforce. •The bargaining power of the buyers in IT industry is high because the buyers are generally corporate clients who can source their IT needs from a plethora of service providers. The threat of substitutes is low because it is highly unlikely that substitutes to IT services would be developed in near future. •The threat of potential entries is moderate because the level of entry barriers that exist in the industry is low, but it takes time and effort to build up a skilled workforce. Cement Industry •The competition in the cement industry is low because there are very few well established players in the market. •The bargaining power of the suppliers is high because cement industry is largely dependent on a regular supply of raw materials. •The bargaining power of the buyers is moderate.
The buyers are the masses who are generally price sensitive as well as quality conscious. But they have a lack of available substitutes and only a few firms to deal with. •The threat of substitutes in the cement industry is low because there is no visible development of technology that can substitute cement. •The threat of potential entrants is low because of the high level of entry barriers in terms of high investment costs. Textile Industry •The competition in the textile industry is high due to large number of well established players existing in the market as well as competition from the unorganized sector. The supplier bargaining power is high because the textile sector is highly dependent on regular supply of raw materials.