The implications of affiliation strategies to the expansion of international hotels

Affiliation

Introduction

Recently, the hotel industry is increasingly becoming an important sector in the world economy amidst globalization. At the same time, it has become vital for hotels to expand their capacities through conversions of existing properties at international level. As Palmer (2008) explains, hotel industry is largely a hospitality industry. Usually, this industry focuses on services and products which are largely affected by preferences and emotions of the consumers. According to As Palmer (2008), companies offering such services and products need to expand their brand(s) with property widely in order to enhance tangibility and to enable them to compete effectively in the global market. Palmer (2008) explains that this objective can be achieved through choosing the best affiliation strategies and partners in the global market. The author further examines various options of affiliation strategies including wholly owned subsidiary, franchising with master franchising, lease and management contracts.

This paper gives focuses on the implications of affiliation strategies to the expansion of international hotels, giving focus to wholly owned subsidiary and franchising with master franchising. As well it looks at the impact of localization on the success of international hotels during expansion. In addition, this paper emphasizes on the importance of branding of international hotels in enhancing customer satisfaction during the time of expansion. Finally, points out that the management of the hotel companies is crucial to the performance of the employees and eventually to the services delivered to the customers after expansion. To enhance a better understanding of these points, this paper focuses on two international hotel companies; IH and Hyatt.

Implications of affiliation strategies

According to Bender et al (2008) each affiliation strategy can have unique implications on an international hotel company from the others. For example, an organization that chooses to use wholly owned subsidiary affiliation strategy invests and operates directly in foreign or domestic markets. This can be illustrated by the property ownership of IHG and Hyatt companies. According to (IHG, 2009), out of the 4,438 hotels owned by IHG, it operates only 17 of them. On the other hand, Hyatt operates 33.7% of the property of the property it owns. The main advantage of the wholly owned subsidiary affiliation strategy is that a company employing such strategy is able to operate the outlets in a flexible way and therefore, it would be easy to make decisions regarding the operations of the outlets. However, this strategy has a disadvantage in that it would be more difficult for a company to expand both the brand name and properties at international level. In addition, there is high risk involved in investing directly to properties in foreign countries, (Litteljohn and et al (2007)

On the other hand, Franchising and master franchising involves licensing of trademarks and methods of doing business and giving franchisees authority to have sub-franchises with an aim to expand sales of a company. To an international hotel company, this may include chain hotel outlets which share a brand name and central management and with exclusive right to sell the products and services of the company, (Hoffman and Preble, 2004 cited in Altinay, 2007). Franchising enhances fast growth of a company and it also leads to low levels of risk. This affiliation strategy has proved to be efficient and effective to many international hotel companies. In reference to the IHG company, it operates operate 3,479 (85%) out of 4,438 properties (IHG, 2009) while Hyatt has about 60% of total properties as franchisees. This explains that IHG has focused more on franchising compared to Hyatt Company. According to (IHG, 2009), this strategy has enabled IHG to grow fast and enjoyed low risk it its operations.

Location

One of the most crucial factors in establishment of an international hotel is its location, (Fitzsimmons and Fitzsimmons, 2006). The authors argue that hotels need to be located in strategic areas where they can be accessed by the maximum number of customers. Whitla et al (2007), explains that there are various factors that should be considered when choosing location for an international hotel. These include government, cost, market and competition drivers. According to Whitla et al (2007) explains that government drivers entail the legal and other constraints available in a foreign country to protect their local market. As well, consideration should be made of all other formalities required by a foreign country targeted for the purpose of investment. Secondly, cost driver refers to the measurement of costs expected to be incurred against the benefits expected to be realized in reference to the location being targeted. Thirdly, availability of ready market for the services and products of a hotel is crucial and should be given consideration when choosing a location for a hotel. Finally, it is vital to make an analysis of the competitors before making the final decision regarding the location of a hotel.

Various studies indicate that location is given priority by most consumers of products and services of international hotels when making choices of hotels, (Palmer, 2008). For example, a study conducted by independenttraveler.com (2010) in US showed that 36.60% out of 153 consumers considered location to be the most crucial factor in making choice of an international hotel. A similar study was conducted by USATODAY.com (2010) in US that involved 4878 consumers in international hotels. The findings of the study indicated that 38% out of the whole group of respondents ranked location as the most important factor in making choice of an international hotel. This explains the fact that investors of international hotels should make wise decisions when establishing the location of their hotels.

Remarkably, many international hotel companies have made significant consideration when locating their hotel outlets. A good example is the IHG Company which has franchises in over 100 countries. According to IHG, (2009), IHG has concentrated its business in USA in areas with lucrative market. In addition, this company has numerous hotel outlets in Europe and Asia to disseminate its name. IHG, (2009) explains further that this company has the biggest command in its field in those regions. IHG Company utilizes both concentration and diversification when establishing new hotels and in overall growth o the company, (IHG, (2009). In this regard, IHG Company can be said to be successful in terms of localization strategy.

Looking at the Hyatt Company, it operates 415 hotel properties which are located in 45 different countries. Based on demographic research conducted by Hyatt.com, (2009), the different hotel outlets of this company are located in 20 out of 25 most popular urban centers in US. This means that this company has been keen on localization of their hotel outlets. However, 303 out of 415 of the hotel outlets of this company are located in US which shows that this company has focused more on geographic concentration rather that diversification. As such, this company is likely to experience difficulties in gaining sales stability, market growth and product adaptation in the international market as compared to IHG Company, (Ayal and Zif’s 1979). As such, we can say that Hyatt Company is successful in localization strategy in the domestic market but it is not successful at international level.

Branding

Notably, branding has become one of the most common trends in the global hotel industry. According to O’Neill (2010) branding helps to circulate the image of an organization to potential customers. Consequently, it helps to increase awareness of the products and services offered by an international hotel. But as Dev et al, (2007) notes there is limited awareness among many executives of what is meant by hotel branding, the perspective it should be given and how it should be conducted. Evidently, most consumers prefer hotel brands that are well known to them or those that they have experience of, (O’ Neill 2010). The author further explains that this has much to do with customer’s preferences and emotions. According to Olsen et al (2005), global hotel branding has various advantages to both the business and to the customers. To the customer, hotel branding enables identification with a clear image of the hotel, its services and products. This enhances feelings of satisfaction to the customer. As a result, a hotel associated with such a brand is likely to secure such customers. According to Olsen et al (2005), such a business has a chance to realize consistent income from franchise and to grow rapidly compared to unbranded equivalents. The authors add that brand equity can be very beneficial to an international hotel when there is effective revenue management system, technology utilization, good location, reservation system, in-room amenities and loyalty program.

According to IHG, (2010), the success of IHG can greatly be attributed to hotel branding. IHG has 7 major brands namely; Intercontinental Hotels& Resort (9% of its whole capacities), Staybridge Suite (3%), Hotel Indigo (1%), Crown Plaza Hotels & Resorts (16%), Holiday Inn (38%), Holiday Inn Express (30%), Candlewood Suite (9%) and (IHG, 2009), (IHG, 2010). IHG, (2010) further explains that IHG offers differentiated products and services among the different brands. For example, the company adopts reasonable prices in Candlewood Suite while it provides competitive geographical presence to the customers in Holiday In. In Crown Plaza Hotels & Resort, the company offers full range of products and services including accommodation and rental services. In short, hotel branding is one of the key factors that can be attributed to the success in attraction of customers by the IHG Company, IHG, (2010). Therefore, international hotel companies should consider branding as one of the key strategies to achieve success in expansion globally.

Managers and People

According to Mather (1996), in the recent world, it has become increasingly important to manage human resources effectively in order to cope with the growing challenges caused by globalization. Consequently, the concept of Strategic human resource management (SHRM) has become of great importance to both academicians and managers, Becker and Huselid (2006). As well, SHRM is crucial to the success of international hotel companies amidst expansion. According to Roper et al (1999), the management team of any organization plays a great role in enhancing the culture within the organization. At the same time, the culture existing within an organization has a direct impact on job satisfaction and motivation of the employees. When expansion of an organization takes place, the organization undergoes structural as well as cultural changes. Cultural changes are likely to affect the employees either positively or negatively, Roper et al (1999). Therefore, it is the duty of the management to ensure that the workers are able to cope with the new culture especially when there is negative impact.

According to Roper et al (1999), there are various approaches that can be opted for by human resource management of an international hotel company in making their decisions. First, the resource management can opt for ethnocentric approach. This requires a business to adopt standard operations in all its branches irrespective of where they are located. Secondly, management team can choose polycentric approach which means that the decisions made would be in accordance with the operations adopted in the countries where different branches are located. Thirdly, management team can adopt geocentric approach which means that the decisions made would be dependent on economic and cultural background of the nations where the branches are located. Finally, the management can adopt region-centric approach whereby decisions are made based on regions in which the branches of the company are located.

In the case of IHG Company, it operates around 85% of its properties as franchisees. This means that expansion of this company does not lead to significant change in the existing culture of the organization. As such it is easy for this company to enhance management of its employees after an expansion. According to IHG, (2010), the management of IHG Company makes decisions based on economic and cultural background of the nations in which the branches of the company are located. In addition, decision makers are selected on their ability to contribute to the company and are diverse in terms of race. Therefore, IHG Company can be said to be geocentric in the management of its operations.

Conclusion

In conclusion, affiliation is an important concept which should be given consideration by an international hotel in the course of expansion. As it has been demonstrated, each affiliation strategy has unique implications to an organization from the others. As noted, one of the key factors that affect the success of a hotel is its location. When choosing location, an international hotel should give considerations such to factors as government, cost, market and competition drivers. Another important factor for international hotel company to consider during expansion is branding. As it has been illustrated, branding is crucial in circulating the image of an organization alongside increasing awareness of the customers’ o company services and products. With good management of related factors, branding can be very beneficial to an international hotel. Finally, as established in this paper, organizations usually go through significant cultural changes during expansion. These changes may have a negative impact to the performance of employees indirectly. Therefore, the concept of Strategic human resource management (SHRM) should be given maximum consideration to ensure that the employees are satisfied or are motivated to work as before the change.

References

Altinay, L. (2007) “The internationalization of hospitality firms: factors influencing a

franchise decision-making process”, Journal of Services Marketing, 21(6), pp.398-409

Altinay, L. and Roper, A. (2005) “Marketing standardisation: tour operators in the Nordic

region”, European Journal of Marketing, 39 (5/6), pp.514-527

Ayal, I. and Zif, J. (1979) “Market expansion strategies in multinational marketing”, Journal

of Marketing, 43(2), pp.84-94

Bender, B., Partlow, C. and Roth, M. (2008) “An examination of strategic drivers impacting

U.S. multinational lodging corporations”, International Journal of Hospitality & Tourism Administration, 9(3), pp.219-243

Becker, B. E. and Huselid, M. A. (2006) “Strategic Human Resource Management: Where Do

We Go From Here?”, Journal of Management, 32(6), pp.898-925

Campbell, D. R. and Sirmans, C. F. (2002) “Policy implications of structural options in the

development of real estate investment trusts in Europe: Lessons from the American experience”, Journal of property Investment and Finance, 20(4), pp.388-405

Dev, C. S., Brown, J. R. and Zhou, K. Z. (2007) “Global Brand Expansion”, Cornell Hotel

and Restaurant Administration Quarterly, 48(1), pp.13-27

Fitzsimmons, J. A. and Fitzsimmons, M. J. (2006) Service Management: Operations, Strategy,

Information Technology, 5th ed., New York: McGrawHill

Gannon, J., Roper, A. and Doherty, L. (2010) “The impact of hotel management contracting

on IHRM practices: Understanding the Bricks and Brains Split”, International Journal of Contemporary Hospitality Management, 22(5)

Johnson, C. and Vanetti, M. (2005) “Locational Strategies of International Hotel Chains”,

Annals of Tourism Research, 32(5), pp.1077-1099

Litteljohn, D., Roper, A. and Altinay, L (2007) “Territories still to find the business of hotel

internationalisation”, International Journal of Service Industry Management, 18(2), pp.167-183

Maher, A. (1996) “Measuring Human Resource Value: An Analysis Based on the Hotel

Industry”, Journal of Human Resource costing and Accounting, 1(1), pp.15-33

Olsen, M. D., Chung, Y., Graf, N., Lee, K. and Madanoglu, M. (2005) “Branding: Myth and

reality in the hotel industry.”, Journal of Retail & Leisure Property, 4(2), pp.146-162

Olsen, M.D., West, J. J. and Tse, E. C. Y. (2008) Strategic Management in the Hospitality

Industry, 3rd edn Pearson: Prentice Hall

O’Neill, J. W. and Mattila, A. S. (2010) “Hotel Brand Strategy”, Cornell Hospitality

Quarterly, 51(1), pp.27-34

Palmer, A. (2008), Principle of Services Marketing, 5th edition, McGraw-Hill Education

Roper, A., Brookes, M. and Hampton, A. (1999) “Investigating the centric profile of

international hotel groups: A pilot case study”, Journal of Retailing and Consumer Services, 6, pp.163-172.

Whitla, P., Walters, P. G. P. and Davies, H. (2007) “Global strategies in the international

hotel industry”, International Journal of Hospitality Management, 26, pp.777-792

IHG (2009) Business Review: Regional performance, Available at:

HYPERLINK “http://www.ihgplc.com/files/reports/ar2009/the-americas.html”http://www.ihgplc.com/files/reports/ar2009/the-americas.html (Accessed: 21 April 2010).

IHG (2010) Priority Club Rewards: Member benefit, Available at:

HYPERLINK “http://www.ichotelsgroup.com/h/d/pc/1/en/c/2/content/dec/pc/0/en/benefits.html?cm_re=newhmpg-_-N5-_-benefits” http://www.ichotelsgroup.com/h/d/pc/1/en/c/2/content/dec/pc/0/en/benefits.html?cm_re=newhmpg-_-N5-_-benefits (Accessed: 29 April 2010).

HOTELS (2008) HOTELS Giants Survey 2008, Available at

HYPERLINK “http://www.hotelsmag.com/article/364977-HOTELS_325.php”http://www.hotelsmag.com/article/364977-HOTELS_325.php (Accessed: 21 April 2010).

Hyatt hotels Corporation (2010) About Hyatt, Available at:

HYPERLINK “http://www.hyatt.com/hyatt/about/index.jsp”http://www.hyatt.com/hyatt/about/index.jsp (Accessed: 22 April 2010)