Due to the economic recession in the past, the business travel all over the world suffered a decline which consequently had a bad effect on the hotel industry. At the same time H1N1 epidemic (Swine Flu) hit the world and tourism deteriorated by various degrees. After suffering these blows, the hotel industry managed to gain back its footing on the economic map. With the help of the Porter’s Five Forces Model, it will be easier to comprehend the particulars of hotel industry and realize the solution that was devised to survive the recession.
As Porter says:
“To find an answer we need to look beyond the immediate and market signals to the two fundamental factors that determine profitability: Industry structure, which determines the profitability of the average competitor and sustainable competitive advantage which allows a company to outperform the average competitor.” (Porter 2001)
Competition in The Industry
The rivalry in the hotel industry is intense because the cost of product differentiation and switching costs are low. And the business growth required is greater than the rate at which the business is growing. (Cheng, 2013)
In an industry such as this where there is high capital costs, the pressure to sell the capacity by price cutting is high (except at weekends and holidays) and the competition becomes intense. (Cheng, 2013)
Potential Of New Entrants into The Industry
The hotel industry globally is characterized by high capital costs i.e. the total cost that is required to project a commercially operable status. The hotel has to make sure that the high capital cost is gaining its worth in the form of output and the resources are used to it utmost potential. The existing hotel chains have an advantage over local entrepreneurs in this industry as afar the brand image and customer loyalty are concerned. (Cheng, 2013)
The new entrants have to be conscious about target market and quality service. As the hotels run on product differentiation, the entrants have to invest in the innovation of the services that are provided to the customers. (Cheng, 2013)
Tariffs are determined on the basis of differentiation in location, management and guest ratios. The new entrants will be at disadvantage as the best locations are limited in the metropolitan cities. (Cheng, 2013)
Power of Suppliers
The power of suppliers over hotel industry is relatively low. The hotel industry is only subjected to the power of the labor, trained staff and personnel and the industry has a huge demand of them. (Cheng, 2013).Hotels are not subjected to the bargaining power of suppliers and it has low and indirect pressure on their competitiveness. In order to be in the leading league a hotel has to maintain a cost advantage over its rivals and be innovative about differentiating itself in its own strategic group. (Cheng, 2013)
Power of Buyers
When the concentration of the buyers is higher than the market players then the industry is subjected to the high power of buyers. In hotel industry such is the case. Certain groups of buyers exercise power over the hotel industry when the purchasing of hotel rooms in bulk is required. These groups include tour operators, domestic and international airlines and convention organizers and participants. (Cheng, 2013)
Where business travelers are concerned the differentiation becomes significant and the hotels are under pressure to keep their brand unique. On the other hand when leisure travelers and tourists are taken into consideration, the hotels have to compete in prices. (Cheng, 2013)
Threat Of Substitute Products
The threat of the substitutes in hotel industry is relatively low. Except in the times of recession the hotel industry can thrive without the threat. However people looking for cheap accommodation can easily opt to live in hostels, motels or with relatives. This market is price sensitive and the hotel’s target audience becomes the cost conscious people. (Cheng, 2013)
However in case of accommodating large group of people like travelling groups and business travelers. The hotel doesn’t face a threat of substitute however it faces competition of differentiation. (Cheng, 2013)
Conclusion
The two things the hotel industry thrives on is the ability to differentiate themselves and quality of service. The quality of service is dependent on the trained staff and personnel and good management. The hotel industry can expand their business by selling their products like foods and beverages, by organizing entertainment shows and exhibitions and conventional events.
In case of the economic recession, the hotel industry should be more durable than the tourist market because of the fluctuation in the tourist industry. However considering the less threat of substitutes and low power of suppliers over the industry, the hotel industry has very few hindrance in successful market growth. (Cheng, 2013)
Bibliography
Porter, M, (2001). Strategy and the Internet. Harvard Business Review 79(3). 62-78