Intercontinental Group Of Hotels Case Study: Growth And Challenges In The Chinese Hotel Industry

Identification of important facts

Discuss about the Intercontinental Group of Hotels Case Study.

Growth in the Chinese hotel industry:

The hotel industry in China experienced phenomenal growth in the recent years and has emerged one of the fastest growing hotel industries in the world. The value of the hotel industry in China is estimated to more than $ 71 billion. China has emerged as one of the most sought after tourist destinations in the world and this has attracted the international hotel chains to the country(O'Hare, 2017). The Intercontinental Hotel Group is a British multinational hotel group which has very strong presence in China. The country is experiencing increase in the emerging of hotel groups in its domestic chains of hotels as well(Our global presence, 2017).

Drivers of the Hotel industries:

There are a number of factors which have led to this development of a strong and dynamic hotel industry in China. The first factor is the influx of foreign tourists as China is among the most visited countries in the world. The increase in the income of the Chinese people have also promoted to the growth of the industries because this allows them to spend money on vacations and hotels. The growing investment of international hotel chains have also led to the growth of hotel industries(Leung et al., 2014). Thus the Chinese hotel industry have emerged to be very competitive and profitable owing to strong presence of both Chinese and international hotels.

Chinese pattern of running hotels:

The Chinese as opposed to the Americans and the Europe hotel chains do not emphasis on franchisee models of running hotels. They stress on direct management which necessitate the international hotel chains to run their Chinese branches following the directly managed format(Altinay et al., 2014)

Oversupply of rooms and its impact on the industry:

The Chinese hotel industry is characterised by supply of excess rooms in the accommodations. This oversupply of rooms in the hotels causes the hotel owners to reduce the rates of rooms due to excess of supply.

Clear identifications of the key issues:

A study of the case study reveals the following key issues:

Lack of flexibility in the hotel management patterns:

The hotel industry in China is characterised by limitations in hotel management formats. Global trends in the hotel industries show that the dominant feature of international hotel management pattern is franchisee model. The dominant management pattern of hotels in China is direct management. An analysis of the discussion shows that franchisee model is preferred by the international hotel chains and is the most common business format followed internationally. However, direct management is the most established format in China which requires heavy initial investments from the international hotel chains in fixed assets acquisitions (land, building), human resource acquisition and supply chain establishment. This is one of the main issues which the international hotel chains face while entering and operating the Chinese hotel industry(Yang, Luo & Law, 2014).

Growth in the Chinese hotel industry

Oversupply of accommodation:

The next issue in the Chinese hotel industry is oversupply of rooms in the hotels and accommodations. This availability of rooms increases the bargaining power of the customers because of the multiple numbers of rooms available to them. The availability of excess number of rooms intensified the competition among hotels which forced the leading market players to lower rates of their rooms. The discussion clearly points out that the fall in the rates of rooms reduced the revenue the international hotel chains like Intercontinental Group of Hotels earned on offering of rooms to their guests. The expenses of maintaining properties direct management system prevailing in China further increased the cost of operations(Dzhandzhugazova et al., 2015).

Outlining of alternative courses of actions:

The above discussion outlines two issues namely, oversupply of rooms which reduced revenue earned per rooms and prevalence of direct management of hotel properties. The alternative courses of actions those can be outlined as follows:

Strengthening of franchisee model:

An analysis of the prevailing business models in the Chinese hotel industry shows that the direct management model is the most prevailing model. The application of franchisee model in the Chinese hotel industry is very limited which increases the operational costs of the international hotel chains. It can be outlined the franchisee model should be accepted more strongly as an alternative model in the Chinese hotel industry which will make it more profitable(Santos, Pache & Birkholz, 2015).

Acquisitions of more properties and reducing the number of rooms in the accommodations:

It can be outlined that the alternative course of action to large numbers of low rate rooms would less rooms and more properties in multinational locations. The international hotel chains like the InterContinental Groups of Hotels should reduce the numbers of rooms available pre property which will allow them to charge more and increase the revenue per room. They should expand their hotel chain into new locations to increase their market penetration and revenue generation(Calderon-Monge, Pastor-Sanz & Huerta-Zavala, 2017).

Acquire Chinese hotels:

It can be outlined that the InterContinental Hotels Group should acquire Chinese hotels to strengthen its position in the Chinese markets. The Chinese market is composed of Chinese hotels and government owned hotels which compete with the international hotel chains like InterContinental Hotel Group PLC (ICG). Thus acquiring Chinese hotels would strengthen the position of ICG and allow it to acquire control over the domestic hotel business in China to certain extent(Brand, Croonen & Leenders, 2017).

Drivers of the Hotel industries

Strengthening of franchisee model:

The dominant business model used internationally in the hotel industry is franchisee but  the preferred model used in the Chinese market is direct management. An evaluation of the international hotel market shows that the franchisee model is dominantly preferred in the developed western markets because it leads to mutual benefit for both the franchisor and the franchisee. As far as the franchisor international hotel chains are concerned, franchisee model helps them to enter new markets and find established franchisees which use their brand names to conduct hotel business. The franchisors can easily expand their business in the new market taking advantage of the knowledge of the franchisees about the local market conditions(Bharadwaj, Varadarajan & Fahy, 2015). The franchising international hotel chain does not have to invest in acquiring and developing properties to make hotels, they can allow franchisees use their brand names to conduct business which saves their costs. The franchisee on the other hand advantages from the franchisee model established strongly in the international hotel industry. The franchisee can exploit the brand equity of the international franchisor hotel chains like Intercontinental Group of Hotels to conduct business and earn huge profits. The second advantage is that the franchisees can use the brand power of the franchisor to attract high profile customers and earn huge revenue. The franchisor provides training to the staff of the franchisee after their own international standards which make them efficient. This ensures that the hotel staff serves the customers most professionally and ensures customer loyalty.  An evaluation of the direct management shows that it requires the international hotel chains to invest huge amount of money in acquisition of property, human resources and supply chain. This comparison clearly points out that compared to direct management franchisee would be a profitable model of business for the Chinese hotel industry. Thus, strengthening of franchisee model will make the Chinese hotel industry more profitable(Gaul, 2015).

Acquisitions of more properties and reducing the number of rooms in the accommodations:

An evaluation of the practice of maintaining large number of rooms in the hotels in China show that large numbers of rooms lead to reduction in the rates of the rooms. This reduces the price per rooms and the resultant revenue earned by offering them to the customers. An evaluation of the accommodation style followed in the western markets show that hotels have less number of rooms. This gives an opportunities to the hotel chains in the west charge high prices for offering the rooms which consequently increases the profit margin per room.  Thus, the hotels in China should also follow the system of reducing the available number of rooms to earn more profit per room(Golubov, Petmezas & Travlos, 2015).

Chinese pattern of running hotels

Acquire Chinese hotels:

An evaluation of the Chinese hotel industry shows that it is expanding owing to the presence of international foreign hotel chains, domestic hotel chains and the state owned hotel chains. The domestic hotel chains and the state owned hotel chains compete with the international hotel chains like ICG. Thus, acquiring Chinese hotels would allow the international hotels to control China’s domestic hotel market as well which would increase their competitive advantage in the hotel market of China(Lougui & Broström, 2016).

The following recommendations can be made based on the above discussion:

It is recommended that the Chinese hotel industry should adopt the franchisee business model which would allow it to operate more profitably. Adoption of the franchise model would allow the Chinese domestic hotel owners run their business using the brand power of the international hotel chains. It would allow them to get easy market penetration and earn huge profits.

It is recommended that the Chinese hotel industry should strengthen its promotion and marketing activities. The hotels must enter into partnership with international chains to promote their business. This will make the hotel industry more competitive and profitable

References:

Altinay, L., Brookes, M., Yeung, R., & Aktas, G. (2014). Franchisees’ perceptions of relationship development in franchise partnerships. Journal of Services Marketing, 28(6), 509-519.

Bharadwaj, S. G., Varadarajan, P. R., & Fahy, J. (2015). Sustainable competitive advantage in service industries: a conceptual model and research propositions. In Proceedings of the 1992 Academy of Marketing Science (AMS) annual conference, Springer International Publishing (pp. 441-443).

Brand, M. J., Croonen, E. P., & Leenders, R. T. (2017). Entrepreneurial networking: a blessing or a curse? Differential effects for low, medium and high performing franchisees. Small Business Economics, 1-23.

Calderon-Monge, E., Pastor-Sanz, I., & Huerta-Zavala, P. (2017). Economic Sustainability in Franchising: A Model to Predict Franchisor Success or Failure. Sustainability, 9(8), 1419.

Dzhandzhugazova, E. A., Zaitseva, N. A., Larionova, A. A., & Pervunin, S. N. (2015). The Russian hotel market: Condition and development under the crisis. Mediterranean Journal of Social Sciences, 6(3 S5), 289.

Gaul, C. (2015). What Makes a Franchisee Successful: Attitudes and Pre-requisites of Profitable Franchise Partners. The International Business & Economics Research Journal (Online), 14(2), 387.

Golubov, A., Petmezas, D., & Travlos, N. G. (2015). Do stock-financed acquisitions destroy value? New methods and evidence. Review of Finance, 20(1), 161-200.

Leung, D., Li, G., Fong, L. H. N., Law, R., & Lo, A. (2014). Current state of China tourism research. Current Issues in Tourism, 17(8), 679-704.

Lougui, M., & Broström, A. (2016). New firm formation in the wake of mergers and acquisitions: Are employees pushed or pulled into entrepreneurship?(No. 427). Royal Institute of Technology, CESIS-Centre of Excellence for Science and Innovation Studies.

O'Hare, M. (2017). CNN Travel. Retrieved 23 August 2017, from https://edition.cnn.com/travel/article/most-visited-cities-euromonitor-2017/index.html

Our global presence. (2017). InterContinental Hotels Group PLC. Retrieved 23 August 2017, from https://www.ihgplc.com/en/about-us/our-global-presence?region=china

Santos, F., Pache, A. C., & Birkholz, C. (2015). Making hybrids work: Aligning business models and organizational design for social enterprises (Paper IV). Christoph Birkholz, 153.

Yang, Y., Luo, H., & Law, R. (2014). Theoretical, empirical, and operational models in hotel location research. International Journal of Hospitality Management, 36, 209-220.