Impact Of Financial Stability On The Sustainability Of Hospitality Industry

Previous research work

Discuss about the Impact of Financial Stability on the Sustainability of Hospitality Industry.

In this chapter of the literature review various research works reacted with the topic had been analyzed. These research works helped to gain ample knowledge about the topic. The concept of financial stability and sustainability had been discussed in this chapter as well. Different theories such as four capital theory and natural capitalism theory had been analyzed in this section as well.  It had been found that there are various strategies that can help a company to achieve financial stability. The importance of sustainability in hospitality industry had been analyzed in this chapter as well.    

Houdré (2008) had developed a research work to analyze sustainable development in the hotel industry. From this research work, it had been found that sustainable development is a holistic concept that was developed on simple concept. It had been found that outline of sustainable development in hospitality industry was first provided in the Brundtland report, published in the year of 1987. The concept of sustainability is the development of an organization that can fulfill the requirements of the present without hampering the ability of future generation. This research work explained how the concept of sustainability can be applied in the corporate world. It was indicated as triple bottom line approach. This strategy can help a company to maintain its focus on operation’s profitability. It also includes profitability and people as a significant part of this strategy.

Goldstein et al. (2012) had developed a research work to find out current opportunities and trends in hotel sustainability. It had been found from this research study that, in past several decades, awareness among hoteliers and investors were developed regarding environmental, economic and social impact on sustainability on hotel industry. It had been analyzed that, these factors are driven by different factors. It includes operators and owners’ desire to reduce operational costs. In addition, the emergence of corporate social responsibility program had indicated the change of investor’s attitude toward sustainability.  It had been found that realization of bottom line financial return is considered as the strongest motivating factor that can encourage private sector privatization.

Bjornefors and Kjellsson (2014) had developed a research work related with hospitality and sustainability. In this research work, a comparison and case study had been developed to find out sustainability work in the Gothenburg area. It had been found that in the tourism industry, sustainability has become an important. Over the last decade, there was an increment in the consciousness of the sustainability issues among investors and hoteliers had been found. It had been found from this report that hospitality and tourism industry was the largest service industry in Gothenburg. Aim of this research work is to indicate how five hotels in this area deal with sustainability issues. Their sustainability operations were compared with each other and as well as with global hospitality sector. From the outcome of this research work, it had been found that sustainability strategies used by these companies are similar to each other. They are also similar to the sustainability strategies used by Global hotels. However, there were some differences of sustainability strategies can be found due to the difference of experiences. It had been found from this research work that the difference between these five hotels and global hotels is related with the utilization of eco-labels. The limitation of this study is that, the findings were gathered from a smaller group of hotels. Hence, this research work was not able to reflect how all the hotels in the Gothenburg area had adopted sustainability efforts.                    

The concept of financial stability and sustainability

Another research work was developed by Roth and Fishbin (2015) to find out the insight of global hospitality industry. It had been mentioned in this research work that global investment in hotel industry continues to increase at a steady rate. It had been expected that leisure transition and global hospitality expenditure would increase 8% year over year. From 2013 to 2014, the cross-border investment in US was increased approximately by 135%. Investors from various countries such as Japan, China, Canada and Middle East region had selected US hotels to make large amount of investment. However, economic growth is lower in European countries compare to US. Despite of the slow economic growth, Europe had witnessed a rejuvenated hospitality industry.

Investors had shown significant confidence in the hotels of London. During the year of 2014, Hospitality investment in Germany increased up to US$ 1.9 billion. It had caused 100% increment in the transaction volume compare to the sales figure of 2013. It had been found that low level of interest rate and high level of debt liquidity had increased financial stability of the hospitality industry. It had fueled the level of investment in the hospitality sector. On the other hand African hotels had faced issues related with investment in construction and lower rate of occupancy. It had decreased the foreign capital investment in the hospitality sector. On the other hand, in Asia-pacific region the level of investment decreased from US$ 6.4 billion from the first half of 2013 to US$ 3.3 billion.

Bruns-Smith et al.  (2015) stated that financial stability is the term used to define the state of financial health of a company for two or more than two years. Castro (2016) mentioned that financial stability of an organization can indicate the standard of performance and level of efficiency during a specific period of time. Achieving economic stability is very important for organizations as it can enhance the business scope of an organization. Matthew et al. (2016) supported by mention that if an organization is financially stable, then it can invest higher amount of fund in business development projects. Bjornefors and Kjellsson (2014) had provided an example of Standard Chartered Bank, as it is considered as a stable organization in UK. For this reason, the company is also able to invest huge amount of funds to expand its business in other countries. Hence, it can be stated that it is important for companies to become financially stable.

On the contrary, Jones et al. (2016) stated that sustainability refers to a specific situation, in which all the needs of a company are met without compromising any vital requirement of the future. Rodríguez Bolívar et al. (2016) mentioned that sustainability can be defined as the assurance related to secure future of a business organization. In the present competitive business scenario, achieving sustainability has become one of the major objectives for any organization. Mayo et al. (2015) opined that, in terms of ecology, sustainability can be defined as the property of biological system that remains diverse and productive for indefinite time. It can also be defined in terms of socio- ecological process. Castro (2016) mentiond that, in terms of socio-ecology sustainability can be defined as the endurance of processes and systems. It had been found that, there are four interconnected domains are related with sustainable development. They are such as culture, ecology, economics and politics.   

Jones et al. (2016) stated that, while a company tries to move towards sustainability, it has to various challenges. These challenges include national and international law, transport and urban planning, ethical consumerism and individual lifestyles.  Palich and Reed (2016) mentioned that sustainability has to be viewed as the target of the humanity so that equilibrium of the ecosystem can be maintained. While sustainable development indicates the holistic approach and temporal method that can lead to the end point of sustainability. Melissen et al. (2016) stated that, in order to pursuit unlimited economic growth or financial stability, a company has to take care of some specific issues. These issues are such as climate change, environmental degradation and overconsumption.           

Shkurkin et al. (2016) mentioned that, there are mainly two theories of sustainability. They are such as four capital theory and natural capitalism theory. In accordance to the four capital theory, in order to achieve overall sustainability, a company requires to achieve sustainability in four major areas. They are such as social sustainability, environmental sustainability, economic stability and manufacturing sustainability. Xu and Gursoy (2015) stated that social sustainability can be defined as the stability of human capital within an organization. This theory suggested that a company can achieve social responsibility by utilizing and recruiting skilled and experienced workforce. According to Melissen (2016), developing team bonding, establishing social networks and developing good relationship with employees can also enhance it. Shkurkin et al. (2016) mentioned that financial stability can be achieved with the help of appropriate budgeting, enhancing cash flow and controlling cost level. A company can achieve environmental sustainability by utilizing resources. Melissen (2016) stated that manufacturing sustainability can be achieved by an organization by developing appropriate infrastructure of business.     

According to Raguseo and Vitari (2017), Naturalism theory includes various approaches like Radical resource productivity, Biomimicry, Services and flow economy and Investing in natural capital.  From the first approach it had been analyzed that a company has to utilize resources in such a way that It can reduce any kind of pollution and damage occur to the natural environment and resource (Raguseo and Vitari 2017). On the contrary, Jones et al. (2016) stated that the second approach is about implementation of reuse strategies in a business entity. It can help a company to avoid resource crisis. Raguseo and Vitari (2017) also mentioned that the third approach is about maintaining smooth flow of service in the economy to maintain the level of consumption. On the other hand, last approach of this theory suggested that restoring natural resources can maintain sustainability of a company (Jones et al. 2016). 

Tsaur et al. (2016) mentioned that financial stability is a very significant aspect for every company. The management of the company applies various strategies in order to gain stable financial condition. There are mentioned below:

Maintaining cost level

Castro (2016) stated that cost control is also known as cost containment or cost management. It has the common objective to enhance cost-efficiency by making reduction of cost or restricting the growth rate of cost. There is various cost control methods used in business such as supervising different divisions of business, controlling product lines within company operation. According to Gómez?Bezares et al. (2017), a company must have strong control over its cost levels. In addition, companies must try to minimize its level of cost as much as possible. This can actually help a company to keep the expense level under control. Ultimately it can help a company to achieve financial stability.  Baum et al. (2016) mentioned that during 1990s cost reduction initiatives receive high amount of attention from the corporate. It often take form of divestment, corporate restructuring, mass layoffs and outsourcing.  All these strategies can help a company to gain competitive advantage in the market.           

Maintaining positive flow of cash

Castro (2016) stated that, in order to gain financial sustainability, a company has to maintain positive cash flow. For this reason, management of a company has to be aware of the expenses. They also have to encourage sales and productions. If the sales of a company can be enhanced by remaining the expenses same, then positive cash flow can be maintained. There are various ways in which flow of cash can be maintained. For instance, if a company wants to make payment to its clients within 30 days, then the terms with the vendor has to be similar. It will help the company to take advantage of the 30 days grace period to maintain positive cash flow. Castro (2016) stated that, a company can offer incentives for prompt payment. It will help to create urgency among customers to pay bills as fast as possible. In addition, Baum et al. (2016) mentioned that, if a company is performing well financially, then the company should develop business line of credit with a bank. Rodríguez Bolívar et al. (2016) mentioned that it will provide a safety for the future and help a company to gain an extended line of credit. The company also has to monitor the level of inventory turnover to make sure that product is constantly moved out of the store. If it does not happen, then the management team has to provide discount on products to move them out of the door. Baum et al. (2016) mentioned that, it will help the company to enter higher profiting items in market.  

Preparing appropriate budget 

While preparing the budget, a company has to make sure that all the possible situations are considered in appropriate manner. Raguseo and Vitari (2017) stated that, while developing budget, the management team has to gather all information regarding services, products and income of the organization. There are some specific stages in which budget can be developed in appropriate manner. They are mentioned below:

• Update the business assumptions
• Review the bottlenecks
• Review the available funding
• Step costing points
• Create budget package
• Obtain the revenue forecast
• Issue the budget package
• Obtain the department budgets
• Obtain capital budget requests
• Modify the budget model
• Review the company budget
• Process budget iterations
• Issue the budget
• Load the budget

Hospitality sector of Saudi Arabia has gained importance in the global market. Rodríguez Bolívar et al. (2016) argued that Saudi Arabia economies have been heavily reliant on oil industry. However, this region has witnessed various changes of economy in the past few years as the government started to focus on non-oil sector (Aljaziracapital 2017). Tourism has been identified as the primary driver of the hospitality industry. According to Mueller and Jungwirth (2016), as of 2011, accommodation sector grabbed the largest portion of tourist spending. It had been found that while in other regions 458, 045 rooms are accommodated till the end of 2013 (Aljaziracapital 2017). Saudi Arabia had the largest amount share in it (63.6%). Within the time of 2006 to 2013, highest number of hotel rooms developed in Saudi Arabia (95, 627) (Aljaziracapital 2017).

Jones et al. (2016) mentioned that hospitality industry of Saudi Arabia is mainly centered on the holy cities of Makkah and Madinah. These two holy places are situated at the western part of the kingdom. It has been analyzed that hospitality industry of both these cities are related with pilgrims perform Umrah or Hajj in Makkah and after that travel to Madinah in order to visit Mosque of the Prophet named as Al Masjid (Aljaziracapital 2017).

According to Rodríguez Bolívar et al. (2016), every year the number of tourists is increased in both these cities. It has been found that during the month of Ramdan, tourist arrival increase in this region (Mostly September and October) (Aljaziracapital 2017). Raguseo and Vitari (2017) stated that visiting Hajj is a propitious, mandatory and once in a lifetime opportunity for Muslim. In the point of view of Jones et al. (2016), Saudi Arabia has witnessed this surge since 2012 (Aljaziracapital 2017). It had increased the total number of tourist visits at a CAGR of 5.0% to 3.2 million (Aljaziracapital 2017). However, during 2013 and 2014, the number pilgrims fell approximately 2.1 million due to visa restriction (Aljaziracapital 2017). Sáez-Martínez et al. (2016) stated that Middle East Respiratory Syndrome (MERS) virus is also another significant reason for this restriction.

Raguseo and Vitari (2017) stated that hospitality industry In Makkah can be categorized in two parts.  They are such as high quality luxury hotels and unfurnished and unbranded hotels. It has been found that during the year of 2014, there are 107, 230 hotel rooms can be found in Makkah (Aljaziracapital 2017). Among them 13% rooms were five star, 11% rooms were four star and 19% rooms were three star (Aljaziracapital 2017). 37% of these hotel rooms are unbranded. It has been found that majority of these luxurious rooms are located near the Masjid of Al Haram (Aljaziracapital 2017). Both these cities have significant opportunity of growth in future. However, they have to maintain their financial stability and improve sustainability for this purpose. It is estimated by Jones et al. (2016), that Makkah will receive around 17 million pilgrims per annum by the year of 2025.        

Raguseo and Vitari (2017) stated that over that last decade hotels have turned their focus to improve sustainability in the hospitality industry as it is related with business operation and hotel development. It also includes other important factors like social impact, economic impact, and environmental impact. Shkurkin et al. (2016) mentioned that sustainability is one of the major issues that hospitality industry is facing recently. It had been found that hospitality industry had a dramatic environmental impact with the help of water and energy consumption. Raguseo and Vitari (2017) stated that the management of hotels have increased to control their effort on the use of durable and consumable goods and restricted the creation of hazardous waste. 

In terms of economic stability, Jones et al. (2016) had stated that green operation is more expensive and the customers and guests are not much interested in sustainability. However Jones et al. (2016) argued that, this opinion is not appropriate in every case. Recent advancement of technology related with different renewable energy sources had made green operation easier for the hospitality industry. Raguseo and Vitari (2017) stated that, use of alternative energy sources had enhanced both economic and environmental sustainability.

Shkurkin et al. (2016) stated that, in social context, there is remarkable shift had been observed in hospitality industry. Along with corporate social responsibility programs and green building projects, hospitality industry also provides educational programs. Jones et al. (2016) mentioned that, it helps to develop critical thinking about various sustainability issues and challenges faced by the hospitality industry. There are some specific strategies have been identified by hoteliers that can enhance guest experience and sustainability. All these strategies are mentioned below:

1. Cost saving strategy

According to Jones et al. (2016), cost saving is always considered as divining factor in economic sustainability. Hoteliers can gain compelling incentive by reducing its operating costs. Raguseo and Vitari (2017) stated that, by adopting new environmental technologies and enhanced operational procedures, efficiency strategies and cost reduction methods can be achieved. Many hotels have implemented different strategies to reduce and recycle wastes. Jones et al. (2016) stated that, there are various other areas that a hotel can improve to achieve sustainability. They are such as staff tanning programs, indoor environmental quality and sustainable procurement.     

2. Getting economic incentives

Jones et al. (2016) stated that government of different organizations has enacted various economic incentives in order to support the development of environmental sustainability and development of “green building.” It includes various benefits such as tax concessions, discounts on insurance premium, financial grants and getting regulatory permits.     

3. Regulatory affairs

Castro  (2016) stated that all the existing environmental laws targeted towards hospitality industry is significantly focused on different operations. They are like handling of hazardous materials, storm-water management and environmental safety and health. However, it had been found that there is a huge range of future and existing legislative activities that have significant impact on a hotel’s method of construction, approaches of operation and design of hotel.  

4. Customer experience

Jones et al. (2016) mentioned that, in the era of modern technology many hotel owners have understand the necessity of investing on environmental technologies. They came to understand that technological adaptation has significant impact on the customer’s experience as well.   Raguseo and Vitari (2017) stated that there are various aspects of hotel that can leave an impression on customers. They are such as furnishing, lighting, front of house products and cleaners. All these aspects can increase occupancy rate of a company.

5. Corporate brand image

According to Castro  (2016), development of sustainable corporate culture, can provide a specific level of advantage to hotel in terms of hiring and retaining talented employees. Every hotel must develop a management team to focus on transforming business by making practical application of sustainability. From a survey analysis it had been found that more than half of the American workers proffered to work for “green hotels” (Raguseo and Vitari 2017). It is specifically applicable for female and younger employees. Castro (2016) stated that, they always try to look beyond profitability and try to provide benefit to a larger community. It had been analyzed that these employees prefer to work for companies in which they feel that they can make differences.   

Figure 1: conceptual framework 

(Source: created by author)

In this research work, various previous research works related with financial stability and sustainability had been analyzed in terms of hospitality industry. Various concepts and theirs related with financial stability and sustainability had been discussed in this chapter as well. As the aim of this research work is to find out the relationship between financial stability and sustainability in context of Saudi Arabia hotel industry, it had been found that financial stability can be achieved through maintaining cost level, maintaining positive flow of cash and by preparing an appropriate budget plan. It has been analysed that financial stability is major part of sustainability of an organization. In order to become more sustainable, a hotel has to develop a cost saving strategy and  getting economic incentives. It also has to improve regulatory affairs and customer experience. All these aspects can help hotel of Saudi Arabia to achieve both financial stability and sustainability.  Thus, it can be stated in terms of hospitality industry that both financial stability and sustainability are related with each other.   

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