BE31503 INTERNATIONAL HOTEL MANAGEMENT

(GROUP ASSIGNMENT)

AMMIEZA ERMA BINTI MARLEH (BB12160808)

REBECA LAKOU (BB12110491)

Title: Discuss why do hotel companies choose to

invest in an international market

1.0 INTRODUCTION

According to BBC Website, globalization is the process by which the world is becoming increasingly interconnected as a result of massively increased trade and cultural exchange. Globalization has increased the production of goods and services. The biggest companies are no longer national firms but multinational corporations with subsidiaries in many countries. Globalization also has resulted in increased in international trade, a company operating in more than one country, greater dependence on the global economy, free movement of capital, goods, and services, and also recognition of companies. Globalization has relatively closing the gap between countries across the world. Hotel company saw this concept as a stepping stone of widening the range of the industry.

Tourism has become the world’s largest export industry, involving as it does enormous cross-border flows of people and capital (Cline R. S., 2015). In many countries, where tourism has become a major export industry, the hospitality sector is the focal point for concepts of globalization to take root.

Therefore, many hotel companies choose to invest in international market along with the ‘development’ of globalization. According to the article from Business Destinations, dated on April 2nd 2012, a number of major hotel chain are expanding their global presence by opening at new locations around the world. Despite the fact that economies are still struggling in many countries, luxury hotels are constantly opening. The main reasons that are motivating these hotel companies to invest in an international market are because of growth and profits, and economies of scale.

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1.1 What is Hotel Industries

Hotel is an establishment that provides lodging to anyone wishing to stay for a day or more to be paid in the short term (Wikipedia). It serves as temporary accommodation to tourists from home and abroad who live far away who need a place to relax and get cleaned up in time. According to Wikipedia sources, amenities available in the hotel is a bed and storage for clothes, special features such as en-suite shower room. In addition, other facilities such as swimming pool, business center, childcare, conference facilities and social function services.

Assessment system was also introduced to determine the feedback from customers on satisfaction they get after staying at a particular hotel (www.bizymoms.com). With that, the hotel will be marked from one to five stars, where star hotel that has a lot of star (5 stars) is much better than a hotel that has a little star. Indirectly, this allows the next user can get references from previous users. Among these hotels are famous and often get visits from tourists from home and abroad is the Le Meridien Hotel, Shangri-La Tanjung Aru, Nexus Resort & Spa, Four Points by Sheraton Sandakan, Gayana Eco Resort and Hyatt Regency Kota Kinabalu.

While, hospitality as a service industry, is one of the fastest growing industries globally. According to the Travel Industry Association of America, in 1997 more than 16.2 million jobs in the U.S. were supported directly or indirectly by the hospitality industry. The hospitality industry, then, includes hotels and restaurants. It also refers to other kinds of institutions that offer shelter or food or both to people away from their homes (Hyun Jin Yun, 2000).

2.0 REASONS

Why do hotel companies choose to invest in an international market? Absolutely, due to gain higher profit by traveling to the other places. On this paper work, we only discuss only two main reason that we think it is suitable, there are, growth and profitability and economic of scale.

2.1 Growth and Profitability

The most important reason for going international is growth and profitability. Of course every hotel concerned about profits and growth of their branches. Opportunities to earn high profits are not necessarily only in their own country, sometimes we also can successful on the other county. But before that, a good strategy and

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can contribute effectively to receive high profits while broaden their consumer base, sales and revenues.

As proposed by Prof. Czinkota M. (2012);“Profits are the major proactive motivation for international business. Management may perceive international sales as a potential source of higher profit margins or of more added-on profits. Reactive motivations influence firms to respond to environmental changes and pressures rather than blaze new trails. Competitive pressures are one example. A company may worry about losing domestic market share to competing firms that have benefited from the economies of scale gained through international business activities.”

Therefore profits should be in line with a proactive attitude from the company itself that measures should be effective to enhance the hotel chain management system. For example, InterContinental Hotels groupwork were in first place for the largest hotel chain was founded by William Bass in 1777. With the strategy of making some of their brands and develop themselves in the hotel industry, he just kept on developing well and until now no turning back. Until now, this hotel network in cooperation with the franchise, managers and owners of more than 2,000 hotels worldwide, the group aims to enhance the brand and continue to increase the number of hotel rooms around 5.9% per year.

2.2 Economies of Scale

Economies of scale occur when the cost of a product unit decreased due to increased in production. From Wikipedia, economics scale is where the companies gain cost advantages due to their size, production, or scale operation, with the cost per unit of output usually decreases with increasing scale as fixed costs are existed in more units of output. Through international approach provides economies of scale while sharing the cost and risk of the market. This economics scale usually occur in the long-term period. The graph below show the relationship between the average cost and output in the economics scale.

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From the graph above, LRAC (long run average costs) curve is due to the increasing of economics scale. Therefore the average cost will goes down (C to C1) due to the increasing of the output (Q to Q2).

2.2.1 Resources

Resources can contribute to the motivation to go international market. Due to the lack of resources in the domestic country or in companies that are better prioritize rate turns into global markets. International companies also continue to gather different ideas in different styles from different people, culture and surrounding.According to Wikipedia, is the source or sources of supply resulting benefits. Usually it is a source of materials, energy, services, personnel, knowledge, or other assets are altered to produce benefits and in the process made it edible or non-existent. Advantages of using resources may include increased wealth, meeting the needs or wants, to work with the system, or improve welfare. Furthermore, the source is to meet human needs.

Resources may includes capital and employee:

i. Capital

To start a business hotel chain, a business must have adequate resources and ideas to become a successful hotel in the whole world. Resources such as capital, labor and location should be identified. Capital can be obtained from their own savings or loans from family members, friends and bank. Meanwhile, the labor force can be found everywhere in accordance with the qualification that employers need. Location is also determined by the selection of strategic locations.

Another common source of economies of scale in purchasing bulk purchase of materials through long-term contracts, increasing specialization manager (management), get lower interest charges

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As quantity of production increases from Q to Q2, the average cost of each unit decreases from C to C1.(source:Wikipedia)

when making loans from banks and have access to a larger network of financial instruments (finance), spread the cost of advertising in a higher range of products in the media market (marketing) and take advantage of returns to scale in the production function (technology). Other example, for a 1 hotels you may only buy 1000 bar soap. But if you have 10 hotel you will buy 10,000 bars of soap. Then, you will be able to buy cheaper soaps because you buy a higher quantity and they will give you a better price or lower. Just as if a hotel has accounting department. But if you have 10 hotels you probably will not need 10 accounting department, maybe just in four until six accounting department. Thus, the hotel chain can reduce cost to produce a good service.

ii. Employee

According to business dictionary, employees or worker is “an individual who work part-time or full-time under a contract of employment, whether oral or written, express or implied, and has recognized rights and duties”. Workers is an important component in a business. workers also be considered as a very valuable capital in a business, because without workers manufacturing processes and production can not be carried out. the quality of the work produced is also very important, therefore, the employer is entitled to seek the best and skilled workers in a business.

Employees also play the important role in consideration of the hotel chain go to global. All organization wants skilled and well trained employees, as company goes to worldwide marketplace to find alternate source of the labor at lower cost such as from Russia to Malaysia. But, hotel chain also can suffer loss if the employee is not doing their job properly and systematically. Take the example of the hotel chain originating from Russia, namely Accor Group which operates The Hotel Novotel, Pullman and Ibis. Accor Group already operating in nearly 100 countries with 150,000 employees. It offers more than 40 years of expertise in hotel management, with 4,000 hotels in 90 countries, as well as business services that include employee and public benefits, rewards and motivation, and expense management (www.sabah-hotels.com). But The Novotel 1Borneo Kota Kinabalu had to be closed because of management and unsatisfactory services, additional liabilities they incur are high and this has made a cover and they had acquired by 1Borneo Hotel.

3.0 Challenges

3.1 Technological Changes

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Due to the fact that investing in international market will benefited more to these hotel companies, they are willing to take the opportunities eventhough there are high risks in doing so. However, in order to survive in the international market, there are challenges that need to be face by those companies. The hospitality industry nowadays must overcome its general reluctance to invest in new ideas and technologies and look for new applications that will drive the growth of the industry. This includes using the distribution channels, agents, and intermediaries to develop customer information sources and using technology to provide customer what they want, in real time anywhere in the world (Hyun Jin Yun, 2000).

With the growth of digital technology, industrial sector reorganization is being more accelerated and efficient. The development of information and telecommunication technology is connecting the entire industrial sector and increasing the specialization of the value chain. Thus, this matter has set up a new trend in various industries, where companies or industries that cannot adjust with this situation or changes cannot compete with others and consequently will be left out. Internet will take hold of businesses and individuals. It will set new opportunity especially for businesses.

For example, a large internet based company, Pegasus Solutions. Pegasus Solutions is the single largest processor of electronic hotel transactions, delivering advanced and affordable connectivity and distribution solutions to nearly 100,000 hotels worldwide (Hospitalitynet, 2015). Pegasus connects hotels to crucial sources of business, facilitating almost $16 billion for its clients annually. Pegasus delivers online, social marketing and booking solutions through its Open Hospitality division, and powerful reservation tools to convert and capture booking in addition to foundational global distribution system (GDS). Pegasus ia a trusted partner in generating guest room demand and sales. It also offers hotels actionable business intelligence through its PegasusView Market Performance reports to help hotels understand and respond to changing market conditions.

According to the PegasusView (2014), first quarter of 2014 global performance for the GDS channel reflects strong corporate travel demand that continues to expand. January kicked of the year with business booking ahead of January 2013 by +1.0%, with February and March bookings growing by +1.5% and +4.1% respectively. Overall, business travel demand is experiencing a steady rise that is

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affecting both the number of trips taken over prior year and room rates. Meanwhile, leisure travel delivered a powerful first quarter performance (PegasusView, 2014). Bookings increased by +3.1% over prior year in January, reaching growth of +4.3% for February. Reservation growth accompanied by rate growth demonstrates increasing demand. This situation shows a relatively increased in demand for technologies within the industry. People are being more comfortable and preferred more in such technologies.

Chuck Martin asserts in his book “Net Future: The 7 Cybertrends That will Drive Your Business, Create New Wealth, and Define Your Future”, ebusiness goes beyond electronic commerce. Electronic commerce involves the buying and selling of products, information, or services over the Net. E-business, in other words, involves the “Netting” of the entire value chain, from product conception and creation, all the way through manufacturing, production, distribution, and ultimately consumption. Companies that understand this and are willing to undergo the close self-scrutiny involved in becoming “Netted” will be the winners in the “Net Future” (Hyun Jin Yun, 2000).

3.2 Foreign Direct Investment (FDI)

Tourism or hospitality is an activity where capital, infrastructure, knowledge and access to global marketing and distribution chains are critical. FDI is often considered one of the most effective engines for harnessing these elements. Hence most developing countries place a high priority on attracting such investment, some by experimenting with a variety of policies (UNCTAD, 2007).

The role of FDI in tourism and hospitality is however more nuanced than it is in some other sectors of economy. FDI is valued because of what it can provide, but also feared for its ability and impact upon economic and cultural independence, and its potential damage to the communities and the environment. According to UNCTAD (2007), in some countries, efforts to attract FDI in tourism sit uneasily alongside complaints that there is already too much FDI, or that foreign investors dominate the sector and do not pass the benefits of tourism on to the domestic economy.

In Malaysia for example, Malaysia is expected to see another record breaking year of foreign direct investments (FDI) topping RM40 billion (thesundaily.com, 2014). According to the Department of Statistics Malaysia, actual FDI showed that the country attracted a higher net inflow of RM38.8 billion in 2013, which was not only 25%

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higher than the RM31.12 billion achieved in 2012, but also breaks the previous record of RM37.77 billion in 2011.

In addition, United Nation Conference on Trade and Development (UNCTAD) forecasted that FDI flows will rise gradually in 2014 and 2015, to US$1.6 trillion and US$1.8 trillion respectively. However, the uneven level of growth, fragility, and unpredictability in a number of economies, as well as the risks related to the tapering of quantitative easing could dampen the FDI recovery, said International Trade and Industry Minister Datuk Seri Mustapa Mohamed (thesundaily.com, 2014).

The continual increase of FDI since 1990 shows the trend of openness and integration of the world economy. Furthermore, the main reason for the increase in FDI is due to an increase in international M&A activities. The foreign capital flows can contribute to a country’s economic through the provision of productive financial resources, the creation of value-added job opportunities, and the transfer of technology and management know-how.

The hospitality industry may also benefited from the FDI in many ways. Thus, it is also clearly that chain hotel’s mission to go global can be influenced by FDI whether in positive or negative ways. Any changes in FDI will relatively effecting the entire industry. Clearly, a fine balance needs to be maintained in order for developing countries to capture the benefits of this growing economic activity at minimum or sustainable costs.

4.0 Conclusions and Recommendations

World maps portray national boundaries, but those lines bely the increasingly transparent nature of the global economy. Globalization is denoted by the rapid movement of people, information and capital across national borders worldwide in ways that would have been difficult to envision not too many years ago. Yet 'globalization,' accepted though it is as a contemporary force, is a big concept requiring careful definition. The hospitality industry is thus at the very core of the globalization of international business. Hospitality companies therefore need to consider the implications of the global context in which they operate and must be prepared to address the questions that arise from this changing environment.

Although global hotel companies aim for worldwide-scale, this momentum cannot be equally applied to all companies. Some hotel

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companies, especially Asian hotel should reduce their dependency on the global hotel chains and seek to differentiate their products, services, and target markets. Asian hotel companies should strengthen their position in the domestic market first. Then, they should be more aggressive to learn and acquire core competencies from global leaders. They also need to break away from dependency on the imported brands while establishing a clear vision and strategies.

Strong global networks, improved image, and strong brands must be concentrated first. Chain hotels should be enable to step into M&A and cooperative ties with global leaders as FDI grows in importance. An appropriate technologies and corporate resources are necessary to keep pace with the evolving times and business environment from continual investment in research and development which also growing in importance.

The global hotel industry is facing continuous changes in the business environment. Those hospitality companies that believe that they can grow and retain a niche position without acknowledging the essential of globalization need to take another look. In addition, most hospitality businesses will need to think globally if they are to survive. For example, organizations competing in the mature European and U.S. markets, which are now seeing stiff competition from other parts of the world, especially Asia. The sheer size of the vast U.S. market, in particular, can promote an insular point of view, but hotel companies that concern themselves only with the dynamics of this domestic arena also need to hear the wake up call.

Globalization will ultimately covered all aspects of the hospitality industry. Increasingly, customers, management processes, employees, products, and sources of capital will be competed for and will move across national boundaries. Companies which are unprepared for this will be left behind. Local or regional entities may believe that globalization is not their concern. However, competition in the future will come from global entities with the advantages that globalization brings.

In conclusion, investing in an international market will be able to provide a greater opportunity to be more successful. Motivation to start a business abroad is also very important in order not to deviate from the path at a time in heading to success now and in the future. Various factors can influence the success and failure in business.

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While it is true that successfully entered the global market can be challenging, complex, and time consuming, there are also many benefits associated with global reach. These benefits include increased sales, additional customers from countries all over the world, increase your international image, and access many businesses miss opportunities because they stubbornly refused to consider the international market because of the perception that it is, however, entered the global market is no more risky than expand your business in the country too risky. The only risk is different and they require the necessary research, preparation, and commitment. The risks, benefits to be gained higher. Thus, dare to take risks can also contribute to success in the future.

5.0 References

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Czinkota, M. 2012, January 31. Motivations in Going International. Retrieved from http://michaelczinkota.com/2012/01/motivations-to-go-international/#sthash.jfz8RpgX.dpuf

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