Porter&#039s Five Forces Analysis on Hotel Industry

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The purpose of this study is to analyze the premium segment of the hotel industry. We have

carried out Porters Five Forces Model analysis of the premium segment of the hotel

industry and compared it with some industries like IT, Cement and Textiles which have

shown growth potential in recent times. This has been carried out to give an idea of the

forces relative to other industries for an investor. Next, we identified some of the

dimensions of strategy for the industry and analyzed the major players in the industry

based on these dimensions, to position them and apply a SWOT analysis on them. In this

regard, we used primary data to focus on two hotels within the groups discussed to

understand the relative importance of the strategic dimensions. Based on the positioning

obtained, we have tried to understand the strategic groups operating in the industry and

map them along certain key dimensions. We have concluded by analyzing the impacts of

the forces on members of different strategic groups.

1. Introduction

This is an intermediate progress report (of the group project). The industry chosen for the

analysis is the Hotel Industry in India. We have chosen to concentrate on Premium

Segment of the Hotel Industry.

2. Scope of Project

Hotels can be classified according to the type of property (premium/budget), type of player

(foreign/domestic), number of hotels (chains/single/dual).

We are focusing on the premium segment of the hotel industry. General industry analysis

and profiling of players form the major part of the project. These have been carried out

with the help of Porters Five Forces Model, SWOT analysis and Strategic Grouping. We

have also gathered information on the key dimensions of strategy as perceived by the

management at Taj Residency Ummed, Ahmedabad and Pride Hotel, Ahmedabad.

3. Description of the Industry

On an average setting of a Premium Segment Hotel with a capacity of approximately

eighty to hundred rooms costs Rs. 10 million per room. For budget segment it costs around

3-5 million (CRIS INFAC Hotels Annual Review, 2005). Premium hotels include 5-star

and 5-Delux star hotels. The segment is targeted primary to business persons / corporate,

upper economic class leisure trips and foreign tourists. The proportions of customers of

various types for 2004 are shown in Figure 1.

Major firms in this segment in India are: Indian Hotels Company Limited (Taj), Asian

Hotels Limited (Hyatt), East India Hotels Limited (Oberoi, Trident), Starwood Hotels (Le

Meridien), Pride Group and ITC.

In Ahmedabad following are the hotels in this segment:

a. Taj Residency Ummed

b. Holiday Inn Hotel

c. Le Meridien

d. Pride

Figure 1: Customer Profile for Hotel Industry

4. Analysis of the Industry

Hotel industry is more global in nature as compared to most of the other industries i.e. any

impact on most of the industries make an impact on the hotel industry (viz. 9/11 attack has

a lot of impact on the industry globally). Other industries like Fast moving goods industry

(FMCG), auto industry, banking industry (to a large extent) etc do not get affected so much

with global changes (http://www.equitymaster.com/ detail.asp?date=7/12/2003&story=5).

The demand in the industry has increased by more than 18%

(http://www.hotel-online.com/News/PR2004_4th/Nov04_HVSIndia.html). During the

same period average revenue per room has increased by 13% thereby increasing the

operating margin to 25% approximately. Average room demand is expected to increase by

18%, mainly due to business travelers and foreign tourists. Most of the firms do not have

any major plans of investment in the next few years and hence the interest cost is expected

to be lower thus higher overall profitability of the firms can be expected in the coming

year.

Indian Hotel Industry (premium segment) is internationally competitive. This has been

possible due to continuous improvement in the facilities and services provided by the

domestic players and due to presence of various multinational brands. Domestic players

have been forced to continuously improve so as to enable themselves to effectively

compete with foreign firms.

However the hotel industry in India in general faces the challenge of poor infrastructure,

lack of maintenance of historical and cultural places, and high taxes. The premium hotel

segment industry has been analyzed using Porters Five Forces Model which is also shown

in Figure 2. The five forces working on the Industry are:

A. Threat of Entry

Threat of entry can be assessed from the barriers of entry in the Industry which can be

created by various means. Establishing a Premium hotel requires huge investment of the

order of ten million per room for most of firms. The gestation period for a hotel is

expected to be around 30 months. The investment is risky in nature as well. Hence, it

automatically creates entry barriers of the new comers. Average employee cost in 2003-04

varied from Rs 4 lakhs to Rs. 6 lakhs in the industry (CRIS INFAC Hotels Annual Review,

2005). The average employee to room ratio in India is 1.8, which is higher than the

international standard of 1.5.

Also due to economy of scale a new firm will have to face this barrier. The room

occupancy in the initial years are expected to be low for a new comer, given that there are

already known (brand) hotels in this segment and the supply is more than the demand for

most of the year.

Entry barrier is created due to the strong brand image that the hotels in this sector enjoy.

Any new comer will have to either carry a brand name from other sectors or will have to

create a brand name to exist. Also many of the firms in this industry have presence in

various sectors which provide them a high financial backup.

Figure 2: Porters Framework Applied to Premium Hotel Industry

B. Bargaining Power of Suppliers

Suppliers are mainly of soap, toiletries, bed sheets and other clothes and similar articles.

The suppliers do not enjoy much power in this industry as these are available of the shelf

for the firms or there are enough providers for these articles. Some of the firms also have

in house production of these supplies. Most of the firms have a long term contract with the

suppliers to get them in bulk through their central warehouse and then distribute to their

hotels e.g. Taj group till recently used to get bed sheets and other clothes from Bombay

Dying through their Mumbai central warehouse. Of the total cost (excluding indirect cost)

employee cost is approximately 30%, food and beverage cost is 13%, fuel light and power

cost is 14%. Since the products are standard and are bought in bulk through a long term

contract (value of products is also very low), it can be said that this force is relatively

insignificant for this industry.

C. Bargaining Power of Buyers

Buyers in this industry are the customers who consume/wish to consume the facility and

the services provided by the hotels. Main customers of the (premier segment of) hotels are

business travelers/corporate customers, leisure trips makers and tourists. Proportions of

tourists are 30-40% of the total customers. Tourist demand is seasonal in nature and hence

to a large extent the industry faces a seasonal demand.

The number of tourists coming to a certain geographical area is a function of the scenery

of the area, business activities, and connectivity of the area with air, rail and road.

Corporate customers depend on the economic activity in the area. Both corporate

customers and individuals enjoy some bargaining power given that their switching cost is

negligible.

Customers enjoy a good amount of bargaining power on the quality of service provided in

this segment. Customers are more particular to the service provided than other factors such

as price charged by the hotels. Firms enjoy higher bargaining power due to high volume of

customers as well as across the year demand. This bargaining power allows them to get a

discount of 10-15% in monetary terms and higher quality in terms of service.

D. Rivalry among Existing Firms

This industry is growing at a good rate. In the last decade the industry size has nearly

doubled. The number of customers has increased due to high FDI and large scale of

economic activity in the country. The competition in this segment has increased in the last

one decade as foreign firms have started venturing. This has created pressure on the

existing firms to provide better services consistently. The competition is expected to

intensify more as there are high exit barriers in terms of the physical assets created. Also

competitors can imitate innovative service offerings in a short time.

E. Pressure from Substitute

With technical innovations and developments, this industry can perceive a functional threat

from Net meetings and video conferencing. Such substitutes can affect the business

traveler segment of the customers. The tourists have also been affected with the beauty of

the nature getting broadcasted to their home through Television. It has increased the

curiosity of some travelers, but by and large it had negative impact too. It is as yet not

clear whether the broadcasts about the natural beauty has increased or decreased the

number of domestic tourists. However, Tourists are expected to increase from countries

whose GDP has been performing well over the last few years due to increase in per capita

income. The domestic tourists are also expected to increase as the economy is booming in