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9HOSPITALITY INDUSTRY CHANGE
Hospitality Industry Change
Hospitality Industry Change
In the last few decades, tourism and hospitality industry has emerged one of the leading industries in the global economy (Jones and Lockwood, 2004). Tourism industry is considered an important foreign exchange earner which contributes to the growth of the economy, creation of employment and attraction of investments. Nevertheless, over the years, the hospitality industry has undergone some changes that have affected its operations (Jones and Lockwood, 2004). This has made the industry more complicated and expensive. In order to overcome these changes, hotel businesses have the responsibility of coming up with strategies in order to prevent failure (DiPetro, 2010). This paper will outline the concept of change with regard to hospitality industry. It will also critically analyse the impact of change on the industry using relevant models and it will also discuss how corporations respond to these changes.
The hotel industry is undergoing a period of irreversible changes and is expected to be very different by 2020 (Davidson and Cope, 2003). The digital technologies are somewhat shifting power to the customers. In addition, customers are also changing. In the next years to come, there will be digital natives who would have the desire for authentic local experiences. In addition, technological innovation has changed the marketing and promotional strategies of hotel industry (Yang and Fu, 2007). Today, marketing is done by use of information technology systems. For instance, online booking has changed the operation of this industry. Also, there are new destinations emerging in the hotel industry. It is expected that the emerging markets will overtake developed markets with regard to international arrivals. Tourism is expected to grow in the long run. These can be attributed by the expected increase in the population of silvered hair tourists and growth of middle class people (Jin-zhao and Jing, 2009). Global population is aging thus increasing the amount of disposable income and more time to travel (Davidson and Cope, 2003). Another megatrend that supports the growth of hospitality industry is technological innovation. Digital innovations will enable travel and hospitality companies engage with customers and boost brand and loyalty. In addition, healthy lifestyle is expected to be important in tourist’s decisions. Aging tourists, a growing middleclass and technological revolution will contribute to boosting health trends (Chathoth, 2007).
The profitability of hospitality industry has declined as a result of economic recession (By, 2005). In the last 20 years, the hospitality industry has from time to time being affected by exogenous shocks from the drop in tourists flow but has recovered repeatedly. Global implications affect the ability of tourist to travel and has presented severe crisis in the industry. Decreasing demand for travel and leisure threatens the industry’s growth dramatically (By, 2005). Reasons include job uncertainty, economic failure, financial inability etc. However, in the years to come, turbulent times facing the hospitality industry is expected to decline. Porter’s Five Forces can be utilized as a business strategy in the Tourism and Hotel industry since it influences price, cost as well as investment. Therefore, feasibility and profitability of the industry can be resolved by getting solutions to the following aspects. They include barrier to entry, threat of substitute products and bargaining power of suppliers and buyers.
According to Porter’s Five Forces strategy, barriers to entry entail economies of scale which involves both the size and scope of the process needed to accomplish viable cost structures, switching costs, brand image and product differentiation to name a few (Porter, 2003). The growth of hospitality industry is limited by lack of suitable locations. Government policies are very hostel to new hotels. The industry has high entry barriers that tend to restrict new entrants due to factors associated with economies of scale and high cost of entry and limited suitable locations. In addition, the hotel industry is not faced by constant threat of substitute product. Therefore, this industry can participate on a low cost base in a niche section. It can also compete on levels which are characterised by modern, comfortable but not very luxurious. It is very uncertain whether this strategy will be sustainable over a long period of time since in a region with cost-conscious travellers may be ready to suffer inconveniences for cost savings. Nevertheless, the hotel industry is not faced with major threat of substitute products (Davidson and Cope, 2003). A hotel may not be vulnerable to rivalry due to the fragmented nature of competition and potential growth rate of market. There is little room for threat of substitute products and services especially to hotels that cater for business travellers or upper status customers (Porter, 2003). As a whole, threat of substitute is not a problem for tourism and hotel industry.
Suppliers to an industry are powerful if they are many compared to the customers (Porter, 2003). A customer will decide not to change a supplier if the change would have extra switching expenditure. Suppliers have higher bargaining power if their products and commodities are important to the industry success (Porter, 2003). There is a huge demand for global information and booking experiences in the hotel industry. Nevertheless, the only supplier who would exercise power over a company would be trained personal which is in high demand in the hospitality industry globally. Hotels are not considerably subject to bargaining power of suppliers and are under low level of pressure on competitiveness. On the other hand, the buyers may be powerful if they are many compared to the players in any industry and thus they have the ability to force prices down. A number of buyer groups can have a higher bargaining power due to their concentrations and huge purchases of hotel rooms. The factor is more severe in the lower level strategic groups than business travellers. When buyers are more concentrated, the prevalence of low profit margin is crucial and hospitality organisations which target concentrated buyers will be more bound by the bargaining power of buyers (Davidson and Cope, 2003).
Purchase of hotel rooms is fundamental to some categories of leisure traveller. The bargaining power of buyers often varies considerably within the hospitality industry hinging on a hotel’s buyer group (Davidson and Cope, 2003). However, this factor becomes severe in a circumstance of oversupply or where buyers are concentrated. Intensity of rivalry depends highly on number and size of competitors since some competitors may result to intense competition. The rivalry for market becomes intense especially when product differentiation and switching cost is low. In addition, rivalry becomes even intense when prices are fixed in industries such as hospitality industry. There is pressure to sell capacity by reducing prices except on holidays and weekends (Davidson and Cope, 2003). Capacity increase exists and addition to capacity has the ability to disrupt demand and supply balance leading to intense rivalry. Exist barriers are available due to economic factors which thus retain competitors in hospitality industry.
The PESTLE Analysis tool is used to identify the fundamental drivers of change in business environment. The factors in PESTLE Analysis include Political, Economic, Social, Technological, Legal and environmental. Political violence has damaged tourism in areas such as Asia and Pacific. Terror attacks have affected political stability of a country (Davidson and Cope, 2003). In addition, government taxation affects buying power of customers. Other political factors affecting the hospitality industry include nation’s currency exchange, inflation, safety regulations among others. Economic factors tend to have an effect on the purchasing power of customers and company’s offering. Hospitality industry is benefiting from low inflation from some countries such as United Kingdom. Employment availability also affects hospitality industry since this increases the spending by customers (Davidson and Cope, 2003). GDP growth, favourable exchange rates and economic growth also favours hotel industry. Concerning social factor, increasing expectations generates demand for discretionary expenditure on travel industry. In addition, the growing urban congestion has increased the need to escape to leisure destination (Jin-zhao and Jing, 2009). In many countries, there is an increase in the aging population that has promoted the need to travel. Also, changes in taste and preferences have forced hotels to specialise and carry out educational and cultural experience.
The advancement of technology has made more and more hotels to adapt to information technological system in their operations (Buhalis and O‘Connor, 2005). Technology has changed all aspects of the hospitality industry ranging from marketing to operation. Use of online marketing and ICT management tool has increased within the hotel industry. Intense capabilities have advanced from online booking and marketing to artificial intelligence (Yang and Fu, 2007). Moreover, hospitality industry is much dependent on strong legal framework that supports hotel operations. Ease of starting a hotel business, low taxation, and low tariffs are some factors that lead to the success of hotel industry. Tourism tariffs have increased in many countries negatively affecting hospitality industry. With regard to environmental factor, water shortage is a challenge that is affecting many countries thereby affecting hospitality industry. The new carbon economy has increased the demand for renewable energy use investment. This increases the expenses of industries including hotel industry. The climate change and warming will make more and more people opt for leisure holidays which will boost the hotel business (Yang and Fu, 2007).
Due to the uncertainty and changes in hospitality industry, cost-cutting measures are important but not enough. In order to expand on long-term revenue optimization, companies have invested in innovation which is very significant in preparation of product and technology portfolio (Buhalis and O‘Connor, 2005). Today, almost all destinations are exceedingly specialised on the basis of sports and culture. Therefore, innovation in concepts such as technology and customer service is fundamental in offering products of unique features such as e-ticketing, customized internet booking device, mobile information etc. (Yang and Fu, 2007). Social media on a website will offer authentic background information and online channel strategy can reduce overall revenues. In addition, product and service differentiation and positioning is important in this changing era of tourism industry. Travellers are becoming highly hybrid. Product leadership strategies must therefore not neglect price sensitivities. However, the differentiated cost leadership and positioning strategy must be approached with care and thought in order to avoid stuck of business models. Most business hotels suffer from pricy positioning coupled with narrow client focus. This therefore is expected to be corrected with immediate effect. Another strategy adopted by hotel business and CEO’s is cooperation and partnerships (Yang and Fu, 2007). The integration of tourism organisations has resulted to the development of a consolidated industry. Integrated companies have extended their operations on other areas of the value chain. Therefore, partnering along the travel value chain has become a success factor especially in economic crisis. Cooperation of joint activities like procurement, marketing and sales can save on costs for parties involved. A jointly integrated channel and internationalisation can result to innovative business operation models thereby creating possibilities for growth in this changing time.
In conclusion, hospitality and hotel industry has been faced with changes over the recent years. These changes have been presented in terms of technological advancement, changing preferences and shift of power to customers. These changes have affected the industry in many ways. For instance, technological advancement has forced the industry to adapt to the use of information systems in its marketing, promotional and operational strategy. In order to survive such changes in the hospitality and hotel industries, hotel business have changed their positioning and differentiation strategies, they have sort to partner and form joint ventures which has boosted their competitive advantage and they have also sort to be more innovative in relation to customer service and technology.
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