Hotel Industry

- Porters five forces model

Introduction
The Hotel industry in Romania is a very dynamic industry, being ruled by a great
number of competitors, most of them being part of several major corporations. The high
dynamism is not only influenced by the large number of competitors, but also by the wide
range of products, targeting different kinds of customers.
Within the context of hotel industry from Romania, recent changes have seriously
affected industry profitability, forcing hotels to adopt a variety of business strategies. For
that reason, we have assumed to find hotels pursuing Porters generic strategies in both a
mutually exclusive manner, as well as in hybrid forms. Although various studies have
examined the application of Porters strategies to different industries, no study has
examined to what extent the various strategic types are prevalent in the Romanian hotel
industry.
In order to perform a viable and realistic analysis of the Hotel industry in Romania,
we are going to use Porters five forces model, which creates a great image of an
industrys or products development within one country or area. Porter identified five
factors that act together to determine the nature of competition within an industry. As the
image shows, these forces are the:

Threat of new entrants to a market

Bargaining power of suppliers
Bargaining power of customers (buyers)
Threat of substitute products
Degree of competitive rivalry

The purpose of our paper is to take each force one by one and adapt in order to
analyze the hotel industry in Romania.

The intensity of competitive rivalry

The hospitality industry which includes the restaurant, accommodation, entertainment
and transportation businesses is facing fiercely competition. Accordingly, the approaches
that the hotels take in making strategic choices need careful consideration if they are to
gain or retain competitive advantage.
In the present time Romanias hotel industry is characterized as having diverse products
that are addressed to various market segments (Borza and Bordean, 2008). The last years
brought an increased involvement by international hotel companies like Marriott, Best
Western, Howard Johnson, Golden Tulip, Accor, Cendant, IBIS, Ramada, Sofitel,
Hunguest, etc. Market entry by international hotel companies has brought not only

competition but also management know-how from developed countries (Yu and Huimin,
2005). With that added expertise, the gap between domestically operated hotels and those
run by international companies has narrowed substantially. Moreover, hotels operating
under international standards have contributed to enhancing the productivity and
efficiency of domestically operated hotels. However, the international hotel chains did
not penetrate in the same way all over Romania (Bordean, 2010). For example, in ClujNapoca there are only two hotels that run under an international franchisee, namely Best
Western Topaz and Tulip Inn Sunny Hill, respectively.
The Romanian market is dominated by 3 and 4 star hotels, local standards, representing
over 69% of the total existing hotel facilities. As far as the 5 star hotels in Romania are
concerned, the numbers of those that comply or significantly approach the exigencies of
this category are limited to six properties, with a total capacity of less than 1,500 rooms.
According to our earlier forecasts and to WTTC studies, the main international networks
that intend to enter the Romanian market, with the perspective of the next years, are
Kempinsky, Hyatt, Starwood, Le Meridian or Sheraton.

Barriers to entry
The initial investment in the hotel industry creates quite a barrier to entry but certain
barriers to entering the hotel market are reduced by the internet. A presence on the
internet reduces upstart marketing costs somewhat, and gives the new competitor access
to potential suppliers and resources. Even a bed and breakfast can use the websites of
large chains to understand the key marketing concepts and the lures for customers.
Switching costs are usually low for a consumer. (McNurlin, 2006)
Research shows the close values of the 6 means, which can suggest either the lack of real
concern of the managers in hospitality industry towards this aspect of a strategy, or a
recently emerged concern, managers thinking all resources are equally important. The
fact that "human resources" obtained the lowest score shows an industrial type approach
(in which only material resources are considered truly important).
The importance of resources in obtaining competitive advantage
Resources
Average score
Materials
4,3
Human
3,9
financial
4,6
informational
4,1
technological
4,7
managerial
4,5

(1 represents the least important, 5 very important)

Further research showed which factors helped some managers to gain their actual
position on the market. The average scores obtained by the factors mentioned above are
shown in the table below:
Competitiveness factors
Competitiveness factors
Score
competitive environment
legislation
general infrastructure (access ways, telecommunications, public utilities,
etc.)
level and evolution of demand
hotel emplacement
the business environments quality from an ethical point of view
ability to innovate
quality of human resources
tariffs
cost control
service quality
the diversity of services offered
brand
ability of interacting with partners
adaptation to the changes in the external environment
promotion

3,2
1,8
1,7

4,4
2,9
1,75
2,7
3,85
4,1
4,2
4,5
4,3
2,8
2,6
3,6
3,9

A vital barrier would be differentiation. A hotel that can differential itself by location, by
service, amenities or some other quality has the potential to attract and keep its clients.
Another barrier to entry would be expertise. Unfortunately, in a mobile society employees
frequently leave one hotel chain to work in another and they take that expertise in terms
of training or of experience with them. It is in the areas of expertise and of differentiation
that a hotel can make the greatest impact on its client and thereby on its bottom line. In
fact many established companies have synergies between their established business and
online technology. Very important is also the characteristics of the personnel working in
direct contact with the customers. The authenticity, professionalism, and actual concern
for the happiness and well-being of the customers that is communicated by successful
organizations is a clear competitive advantage
Among the 13 regions monitored by the WTTC, Central and Eastern Europe Travel and
Tourism economy is ranked number 4 in absolute size worldwide, 10 in relative
contribution to national economies and number 4 in long-term (10 year) growth. Even
though the long term implications of the current global financial and economic crisis are
not yet weighted, the actual results for 2008 will probably suffer serious corrections from
expectations.

Despite being part of a promising emerging market, the hotel industries in Central and
Eastern Europe are starting to be affected by the global crisis. As it is the case with
numerous multinational companies, many brands are postponing their projects in the
region. Harsh financing conditions forced developers and investors to focus on current
projects, while performance indicators in the region started to deteriorate comparing with
the previous years. Hence, it is not surprising that leading European hotel companies,
although considering the emerging markets in Central and Eastern Europe having a great
potential for growth, decided to delay their projects. Industry experts cited in a recent
article published by Bucharest Business Week, report that among these postponed
projects are a Sheraton managed hotel (200 rooms) near Romexpo, a Meridian Hotel on
Calea Victoriei, and a Ramada Inn in Baneasa Business Park. Other delayed
developments include Bulevard hotel, a Starwood managed property, located in the heart
of Bucharest near Casa Armatei, Lebada in the outskirts of Bucharest, a Golden Tulip
with 140 rooms close to DN1 and a complex including a conference center, hotel and
office near DN1, also managed by Starwood.
In spite of the presence in the region of low cost carriers such as BlueAir of Romania,
Centralwings of Poland, MyAir of Italy, SkyEurope of Austria/Slovakia, GermanWings
of Germany, Rynair of Ireland, Wizzair of Hungary and others a number of international
airports in CEE region reported a decrease in passanger numbers in the latter part of
2008. Overall, the hotel performance for 2008 recorded a setback across the CEE region
form the previous year. According to a recent study released by CBRE Hotels CEE,
occupancy rate dropped 6.7% while average daily rate (ADR) increased by 7.4% leading
to a small rise in RevPAR (revenue per available rooms) of 0.2%. Amongst the worst
performing capitals in the CEE region, Bucharest and Prague recorded a drop in RevPAR
of more than 11%.

Threat of substitute products or service

A threat from substitutes exists if there are alternative products with lower prices of better
performance parameters for the same purpose. They could potentially attract a significant
proportion of market volume and hence reduce the potential sales volume for existing
players. This category also relates to complementary products The major substitutes for
the hotel industry are camping and recreational vehicles for tourists, corporate
guesthouses for business travelers and other informal means of accommodation with
friends and family. Compared to the hotel industry, these are much cheaper alternatives,
making their price values very high and the switching costs very low. This makes
the industry attractiveness in terms of substitutes is low.
In the hotel industry there is usually another hotel just around the corner. They appear in
all price ranges, with varying levels of service and amenities. The constant challenge will
always be to get the guest to choose your hotel over the competitor. The internet makes
the overall market more efficient while expanding the size of the potential market and
creating new substitution threats. Given the potency of this threat a superb internet

presence is vital.
Another ongoing threat is that another hotel chain may erode your customer base with a
newly formulated internet approach or marketing campaign. This is supported by the
following quote from Luck and Lancaster (2003):
The development of value chain process analysis, supported by collaborative event
management over the Internet, the structuring and the sharing of customer focused value
chain data, powerfully enhance the performance of value chains and of electronic
commerce.

Bargaining power of buyers

The bargaining power of buyers determines how much customers can impose pressure on
margins and volumes.
The end-users of the high-end hotel industry are:
- Leisure traveler - depending on the traveler might require cheap hotels like the local
ones or luxury hotels.
- Business traveler - usually require luxury hotels. In Bucharest, the luxury hotels are
considered those of five stars such as: Continental, Hilton, J.W.Marriot, Howard Johnson,
Carol Parc, Casa Capa, etc. These hotels are aimed for people with income much higher
than the average.
-Customers who require space for conferences or other events.
This industry has numerous customers who are relatively very small in size. Loss of a
single customer has little impact on a hotel company and this drives down the
buyers bargaining power. Similarly buyers threat of backward integration is almost
impossible and so is the industrys threat of forward integration. However the industry
does have several substitutes such as camping and recreational vehicles for tourists,
corporate guesthouses for business travelers and other informal means of accommodation
with friends and family. Switching cost for all these options is very low. Apart from the
provision of accommodation, hotels also provide additional facilities and services such as
restaurants, gyms, spas etc. Therefore their contribution totality as well as cost for the
buyer is very high. Overall, bargaining power of buyers and the industry attractiveness in
this respect is moderate
Business persons choosing a hotel for business travel are savvy consumers and they are
comfortable with computer technology. It has become very simple for them to go online
and book a hotel. They no longer need travel agents, corporate travel consultants or
middle men of any kind to determine where they will stay. Porters model predicts this
elimination of intermediaries.
Tourists are more and more capable of using the internet in the same way but in another

fulfillment of Porters model, they are more often bonding together in a novel way. They
are finding internet businesses like cheaphotels.com which will negotiate or discover
bargains for them. Both of these processes shift the bargaining power to the end user as
the Porter model predicts and these same freedoms reduce the cost of switching so that
loyalty is a thing of the past unless a particular hotel uses its one time opportunity when a
customer stays at the hotel to deeply impress the customer with a unique and valuable
differentiator.

Number of Buyers -High (5)

- Buyers are numerous and small in size.- Losing one customer in not going to make a
difference. - Their bargaining power is low.

Availability of substitutes - Medium (3)

- Multiple substitutes for a given hotel or brand is available- Alternate means

of accomodation such as is popular in Romania - Informal accomadation with friends
and family is avilable alternative

Switching cost-Low (2)

- Switching costs are negligible- Buyers are price sensitive except in the premium
segment

Buyer's threat of backward integration -High (5)

- Customers are will not construct a hotel or buy a place of residence for each place they
visit.
Industry's threat of forward integration - Low (2)
- Low chances or forward integration

Contribution to quality: High (5)

- Additional facilities such as spas, gyms etc. are used by hotels to improve the quality of
customer's stay.
Contribution to cost: Low (2)
- Brand image is very important in this industry and leads to extra cost
- Additional amenities, training of staff, location rent (like close to airport)etc..

Buyer's profitability: High (4)

- Low buyers profitability- In the mid-segment, thereare numerous buyers, of very small
profitability- In the premium segment, buyers are very affluent, and they have
greater bargaining power compared to the mid-segment.

Bargaining power of suppliers

The term 'suppliers' comprises all sources for inputs that are needed in order to provide
goods or services. The two key suppliers to the Hotel industry are: labour and real estate.
Over all the suppliers in this market are defined as property owners, developers and real
estate companies, interior design and furnishings companies, architects, management and
training service providers, marketing companies, industry consultants and manufacturers.
Overall, the number of suppliers for the Hotel industry is quite large and each supplier is
very small in size compared to the leading players in the industry. These few powerful
players are indispensible to the suppliers. Substitutability of the suppliers is also quite
feasible and inexpensive. Switching between real estate agents is not going to affect a
particular Hotel company significantly. However in terms of quality, training centers for
employees and ICT manufacturers who provide IT systems that for property management
are relatively more difficult to replace. Therefore in terms of substitute suppliers industry
attractiveness is moderately high. Unlike the suppliers threat of forward integration,
Industrys threat of backward integration is high.

The number of suppliers is moderate

The availability of substitutes is high substitutes for property (real estate
agents), designers, emplyers are available.
Switching cost is high - Hotels have higher bargaining power and can switch
between suppliers
Supplierss threat of forward integration is high Suppliers are highly unlikely
to foreward integrate into the hotel business
Industrys threat of backward integration high Hotels can backward integrate
into their own real estate company
Contribution to quality is high Property development and real estate companies
add to the quality. So does skilled labor and quality training
Contribution to cost is moderate - Most suppliers are much smaller companies
compared to hotel companies. Hence hotel company have a much
higher bargaining power
Industry's importance to supplier high- The few powerful players in the hotel
industry are indispensable to their suppliers

Overall bargaining power of suppliers is low and industrys attractiveness in terms

of supplier bargaining power is high.
While this is not a substantial threat in the hotel industry it can have impact especially in
the area of labor. With an aging population, there are fewer people to fill service industry
jobs and hotels which can attract excellent staff have a greater chance of providing
excellent and exceptional experiences to their clientele. As part of their internet strategy
all hotel chains should have a section on recruitment for employment.
The other supplies that are needed by hotels are also easier to attain through internet
channels whether originated by the supplier or by the hotel chain. With their products in
greater demand by greater numbers of hoteliers suppliers gain some measure of power by
competition for their offerings.

Conclusion
Each type of hotel needs to identify its unique strengths and target market and align its
internet strategy to support that identity Will the chain choose to be low cost, or to
command a premium price? Distinguishing oneself from the competition becomes vital.
This can be enhanced by superior technology, through superior inputs, through better
training of staff or through better management. Differentiation adds value but the internet
makes it hard to maintain those distinctive strategic positions because it eases change to
best practices and it improves operational effectiveness. Never the less such distinctions
make the business more profitable.
By its basic nature the hotel industry is fragmented. The internet makes it easier for
travelers from far and wide to learn about the hotel or to order a room but the customer
must still come to the hotel for the service. This makes it more likely that the profitability
will be there for when sale is easy to transact and complete the profit margin usually
decreases. Porter points out similar examples with Real Estate and with furniture sales.

Bibliography:
www.doingbusiness.ro
http://themarketplaceoflife.blogspot.ro
www.mnmk.ro

Written by:
Achim Irina
Anton Alina
Calinet-Petre Antonia
Constantinescu Raluca

Group 942, REI, E, II