Locational strategies of international hotel chains

Annals of Tourism Research, Vol. 32, No. 4, pp. 1077–1099, 2005� 2005 Elsevier Ltd. All rights reserved.

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LOCATIONAL STRATEGIES OFINTERNATIONAL HOTEL CHAINS

Colin JohnsonSan Jose State University, USA

Maurizio VanettiFribourg University, Switzerland

Abstract: An empirical study was undertaken into the expansion strategies of internationalhotel operators in five countries in Eastern Central Europe. A questionnaire survey was con-ducted of the leading chains, framed around an eclectic paradigm. The analysis was comple-mented with multivariate analysis of competitive and locational strengths, thereby permittingadditional insights into the relative positions of the major companies. The major ownershipadvantages were knowledge of guest requirements, strategic planning, and reservation sys-tems. Locational advantages identified consisted of the size and nature of the city in whichthe hotel was to be located, the infrastructure within the region, and the perception of theregion as an attractive business destination. Keywords: internationalization, hotel sector, com-petitive advantage. � 2005 Elsevier Ltd. All rights reserved.

Resume: Strategies de localisation des chaınes internationales d’hotels. On a entrepris uneetude empirique des strategies d’expansion des directeurs des hotels internationaux danscinq pays de l’est de l’Europe centrale. Une enquete par sondage a ete menee aupres deschaınes principales, charpentee autour d’un paradigme eclectique. L’analyse est complemen-tee d’une analyse multivariable des forces competitives et localisationnelles, ce qui permetdes eclaircissements supplementaires sur les positions relatives des principales entreprises.Les principaux avantages des proprietaires etaient la connaissance des exigences des clients,la planification strategique et les systemes de reservation. On identifie les avantages localisa-tionnels comme l’importance et la nature de la ville dans laquelle on va situer l’hotel, l’infra-structure regionale et la perception de la region comme une destination d’affaires attrayante.Mots-cles: internationalisation, secteur hotelier, avantage competitif. � 2005 Elsevier Ltd. Allrights reserved.

INTRODUCTION

It is clear that services, and often particularly tourism, have becomethe major area of economic activity in developed countries (WTTC2001). However, there have been relatively few studies that have at-tempted to apply conceptual models to one of the most importantbranches of the tourism industry: the international hotel sector. Dun-ning is an exception with the development of the eclectic paradigm,

Colin Johnson is Professor and Chair, Department of Hospitality Management, San JoseState University (San Jose, 95192-0211 CA, USA. Email <[email protected]>). Hisresearch interests focus upon services internationalization and the development of the hoteland tourism businesses in Eastern Central Europe. Maurizio Vanetti is Professor and Chair ofMarketing at Fribourg University in Switzerland. His research interests include marketingresearch, e-marketing, and destination marketing.

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1078 LOCATIONAL STRATEGIES

which has become a reference for studies in internationalization,and has been applied to the worldwide hotel sector (Dunning andMcQueen 1982; Kundu 1994).In relation to Eastern Central Europe, there has been much aca-

demic interest in tourism with researchers including Hall (1992,1995, 1998a,b, 2000) who extensively examines various elements ofits development in the region; Williams and Balaz (2002) who havewritten indepth studies with specific reference to the Czech and Slovakrepublics; and authors such as Szivas and Riley (1998) who discussemployment in tourism during economic transition.Specific academic studies devoted to the hotel sector are varied and

often focus upon one country and one-topic issues, for example: hotelinvestment and Hungary (Lorenz and Cullen 1994), hospitality train-ing needs in Poland (Airey 1994), and the effects of the market econ-omy on the Hungarian hotel sector (Johnson 1997). However, despitethis variety, there has not been a comprehensive academic study ofinternationalization and the hotel sector in Eastern Central Europe.Three questions provided a framework for the paper. First, which are

the major competitive advantages considered important to an interna-tional operator when it decides to ‘‘go international’’? Second, whatare the critical considerations for a hotel operator in relation to East-ern Central Europe? Third, what are the major reasons determiningthe entry mode for hotel development in Eastern Central Europe?

INTERNATIONALIZATION AND LOCATIONAL STRATEGIES

In generic terms, there are many schools of thought on internation-alization, and the literature is rich and complex. The establishmentchain model was one of the first major attempts to conceptualize theway in which firms internationalize. It was suggested that this is a pro-cess for an orderly sequence of growth in incremental stages (Johansonand Vahlne 1979; Johanson and Wiedersheim-Paul 1975). The estab-lishment chain consists of four stages: from no regular export activities,through export via independent representatives (agents), which leadsto sales subsidiaries and to manufacturing. Two of the major elementsof the model are knowledge and commitment. An understanding ofthe foreign markets is crucial in determining the commitment of thecompany in terms of entry. As the company learns more about thenew markets, more resources are committed with expansion initiallytaking place in those countries with which the psychic distance in termsof the consumer, market, and sector structure is the least. The modelwas highly respected for a number of years, but has been found increas-ingly difficult to reconcile with the rapid change characteristic ofservice economies.

Economic Models

Economists have been extremely influential with the internalization,foreign direct investment (FDI), and eclectic paradigm models. The

JOHNSON AND VANETTI 1079

internalization paradigm has been in existence since the late 70s. Cen-tral to this view is the avoidance of transaction costs by companies inter-nalizing the intermediate product market. Growth in firms continuesuntil the benefits of further internalization are outweighed by thecosts. Although the paradigm has remained one of the major schoolsof thought in internationalization theory and has been tested in severaldifferent domains (Buckley and Casson 1996; Oviatt and McDougall1994), it is unable to explain the level, structure, or location of interna-tional production (Kundu 1994). FDI postulates that, in addition tothe internalization advantages proposed by the previous school, theremust also be some unique firm specific advantages that must beexploited before competitors’ copy them, with the inevitable erosionthat follows. Critics of generic FDI theory state that while it explainspatterns of investment, it does not elucidate a long-term process ofinternational expansion. The theory has been refined by Dunning(1993), who for the past 30 years has been advocating the eclectic par-adigm. This is the most all-encompassing version of it, and has beenrigorously tested in a number of different industry sectors, in bothmanufacturing and services. The eclectic paradigm considers interna-tionalization within the framework of three types of interrelated advan-tages defined as ownership, location, and internalization advantages.More recently, network theory has been proposed and appears to

hold promise, especially for service industries. Developed from the late80s, it makes use of social exchange and resource dependency theories(Coviello and McAuley 1999). It states that firms engaged in distribu-tion and production form systems of relationships developed mainlyamong customers, suppliers, competitors, and governments (Johans-son and Mattsson 1993). Networks may take many forms and includestrategic alliances, joint ventures, licensing agreements, subcontract-ing, joint research and development, and joint marketing activities(Ireland, Hitt, Camp and Sexton 2001). The networks that developare the result of a cumulative process with relationships being made,extended, and terminated. As firms internationalize, the number andstrength of the relationships among different parts of the network in-crease. As internationalization is based upon the organization’s set ofnetwork relationships rather than company-specific advantages, exter-nalization rather than internalization takes place (Coviello and McAu-ley 1999). An important point is that the long-term survival of the firmis dependent upon resources controlled by others. A firm’s success inentering new international markets may be more dependent on itsrelationships within current ones than it is on the cultural and othercharacteristics of the chosen one. Johanson and Mattsson (1993) iden-tified four types of firms going international: ‘‘early starter’’, ‘‘lonelyinternational’’, ‘‘late starter’’ and ‘‘international among others.’’As network theory is newer than the stages, internalization, and FDI

models, there are fewer academic studies, especially of an empiricalnature. However, some criticisms of the model may be leveled at thepossible overlaps among the four, blurred categories (as it is possibleto be both in the early starter and international among othersstages); the FDI and the eclectic paradigm do not take account of


the decisionmaking and strategic intent of the company. Further, themodel does not include exogenous variables that often result in inter-nalization, such as the level of domestic competition and governmentpolicies towards FDI (Chetty and Blankenburg Hom 2000).A later school of thought is that which may be termed a form of con-

vergence theory propounded by Segal-Horn (1998) and others, whereit is suggested that—owing to fundamental changes in the nature ofservices—these developments have led to increased concentration,with service industries moving away from highly fragmented marketsto greater concentration, with clear market leaders. In many cases(including the international hotel sector), they resemble oligopolies.Additionally, many services are seen to comprise hard tangible ele-ments that may now be industrialized and separated from the pointof service delivery (McLaughlin and Fitzsimmons 1996). It is also pos-sible to codify, and thus transfer internationally, the all-important corecompetencies and information-specific assets of service enterprises (to-gether with, for example, consumer franchises relating to stronglybranded services). The end result is a greater similarity betweenmanufacturing and service firms.Specifically in relation to hotel internationalization, Contractor and

Kundu (1998) have combined elements from several disciplines—including transaction cost, agency theory, corporate knowledge andorganizational capability theories—in the production of their syncreticmodel which addresses some of the key decisions behind the choice ofmethods of international expansion. While the model may be seen tobe robust and intellectually rigorous, it is relatively new and, althoughit has not been tested to any large degree, it does attempt to deal withthe lack of strategic intent missing from the eclectic paradigm. But itdoes not contain all the answers, hence the decision not to use it asthe basis for the present study.In the last couple of years, more recent research has embraced alter-

native methodologies, stressing the importance of learning and inter-nal resources of the firm (Tallman and Lindquist 2002) within theorganization. Recent literature maintains that internationalization isnot mainly export driven (considered from an external viewpoint)but is increasingly—due to the increasing use of strategic alliances,counter trade and joint manufacturing—a linked or integratedphenomenon (Fletcher 2001).

Eclectic Paradigm

Dunning’s (1993) eclectic paradigm was selected as the methodolog-ical framework for the study, as it had previously been rigorously testedin sectors including hotel (Dunning and Kundu 1995). The model of-fers a good fit with tourism and its hotel sector through the emphasisgiven to the importance of location as one of its three principle pillars.The paradigm is useful for explaining the extent, pattern, and growthof value-added activities undertaken by multinational firms outsidetheir national boundaries. The first pillar is the ownership advantages,


which may be of a structural or behavioral nature. These include thesize of the company and its ability to obtain economies of scale, inter-national experience and strategic brand development, and level oftechnological advancement of the company. The second is the loca-tion-specific advantages. These are the factors that make the locationattractive to international hotel companies. Specific factors includethe size, growth and stage of development of the overall tourism mar-ket in the host country, tourism facilities, the policy of the host govern-ment towards FDI in the country, the number and type of attractions,the stability of the host government, and the cultural and psychic dis-tance between the home and host countries (Kundu 1994; UN 1993).The third is the internalization advantages that companies derive fromthe modality of foreign involvement selected when going international.Owing to the diversity in the tourism and the difficulties in organizingintermediary product markets, there are significant incentives for hotelcompanies to internalize (Go and Pine 1995).There have been two major trends with regard to the choice of ap-

proach by hotel companies in recent years: expanding acquisition/merger activity and increased non-equity utilization. Merger and acqui-sition activity is highly prevalent in the international hotel sector.There is evidence of a clear trend by major companies to expandthrough non-equity methods (Contractor and Kundu 1998). Thegrowth in such arrangements is due to a convergence of factors, includ-ing a ‘‘risk minimizing strategy’’ (Dave 1984). Hotel operators pursu-ing international expansion may pursue both defensive and offensivestrategies (avoiding losing home market share, and gaining significantnew reach abroad). Furthermore, international hotel chains were seento possess certain proprietary competitive advantages that would allowthem to increase market penetration (Litteljohn 1985), includingeconomies of scale, a more profound knowledge of international guestrequirements, better-trained personnel, better management and reser-vation systems, and strong brand name (Dunning and Kundu 1995;Dunning and McQueen 1982). In addition to such factors, the hotelsector is well suited to non-equity forms of expansion owing to certaincharacteristics, including a willingness to transfer knowhow, ease ofcodification of management systems, and the control that can beexerted over franchisees in the industry.Internalization occurs when a firm believes that internal transaction

costs are more efficient than external markets. Therefore, multina-tional enterprises can benefit from such advantages, but there are alsocosts associated with internalization, including increased communica-tion and scale costs (Buckley and Casson 1999). This often dependson a firm’s capabilities and capacity and whether it decides to produceinternally or to outsource the function; this is the make-or-buy businessdecision. It is presumed that companies that outsource have lesserinternalization capability to those that opt to keep the functions inhouse. Criticisms of the eclectic paradigm included the static natureof the model, and the need to integrate the strategic intent of compa-nies into the paradigm. Dunning (2001) acknowledged these short-comings and proposed improvements. So as to provide as complete a


picture of the market as possible, the survey was supplemented withmultivariate analysis including cluster and correspondence analysis.

Tourism Development in Eastern Central Europe

Although there are many different geographical groupings of East-ern Central Europe, for the purpose of this paper, Kostecki’s (1994)grouping of Hungary, Poland, and the Czech and Slovak Republics isused, together with Slovenia that had a border with the West. Thesefive countries are at comparable stages of economic transformation,have all been integrated into the European Union, and each has wit-nessed momentous changes over the past decade and a half in termsof growth of tourist arrivals and receipts. However, there is a caveatof likely distortion in the statistics due to cross-border traders and localcross-border customers for many services ranging from medicinal toprostitution, reflecting differences and availability of goods and ser-vices (Hall 1995). Despite these influences, by 1994, Hungary, Poland,and the Czech Republic were in the top 10 rankings of the World Tour-ism Organization, in 4th, 7th, and 8th positions, respectively. Thechange was the most dramatic for Poland, which had been ranked16th in the world just ten years before. Unfortunately for the countriesconcerned, these huge increases were not sustainable over the longer-term; by 1999 Poland had slipped to 10th place, with the Czech Repub-lic and Hungary 13th and 14th, respectively.Table 1 shows the three major tourism markets of Hungary, the

Czech Republic, and Poland as recording the most impressive growthin tourism receipts during this period. The first two both increasedtheir receipts during the period by a factor of 7, while in comparisonwith 1988 Poland does so by a factor of 42. Again at a much lower over-all level, Slovakia and Slovenia have 9 and 3.6 times more revenues,respectively. Despite relative stagnation in terms of arrivals, withinthe last five years Slovakia and Slovenia have both managed to increasetheir receipts. However, Table 1 should be interpreted with some cau-tion. While it shows significant, even spectacular, growth in receipts,one should remember that the base was extremely low, when the vastmajority of international arrivals were from within Comecon countries,with extremely limited spending power (Hall 1995). Eastern Central

Table 1. International Tourism Receiptsa (US$ Million per Year)

Country 1988 1989 1991 1993 1995 1997 1999 2004b % Growth 1999/2004

Czech Republic 608 492 714 1,559 2,875 3,700 4,121 4,292 4.1Hungary 532 542 1,002 1,181 1,723 2,570 2,936 3,945 34.3Poland 206 202 2,800 4,400 6,600 8,700 8,185 8,739 6.8Slovakia 89 135 390 620 535 714 836 2.9Slovenia 275 734 1,082 1,275 1,005

a Excluding international transport.b Figures for 2004 are estimates. Source: Euromonitor 1995, 2001; WTO, 2000.


Europe still lags behind the rest of Europe in terms of tourism per ca-pita income. Although the region takes 25% of all European arrivals, itreceives only one-eighth of the revenues (WTO 1999). These trendsare clearly important for international hotel operators consideringexpansion into the area.Turning now to the study methods, one of the major problems with

empirical research in this field is that of defining whom or what shouldbe included as the population for the hotel sector. As a whole it couldbe considered an amalgam of at least three different subsectors: prop-erty (real estate) developers, hotel management companies, and fran-chisors (Lewis, Chambers and Chacko 1998). In addition, there arealso significant differences among major hotel chains and indepen-dent properties which comprise the majority of the rooms worldwide(WTO 1998). The sector is highly fragmented, especially in Europewhere tourism is dominated by the small and medium size enterprise.In fact, 94.2% of all enterprises employ fewer than 10 persons withmore than 99% of companies employing less than 250 persons (Euro-pean Commission 2002).Therefore, the problem was to determine a precise target population

for the study. As may be identified from databases and journals such asthe Hotels annual listing, there are approximately 300–400 large chainsworldwide, which control approximately 5.6 million rooms worldwide.Not all are international companies, however, and this article is con-cerned only with the locational strategies of those hotels which aremultinational enterprises. Because of these issues, the internationalhotel sector does not easily allow for stratified or other type of randomsampling. In determining an appropriate methodology, it was decidedto use the cut-off method. This methodology is widely used in appliedresearch on business sectors (for example, the US Energy InformationAdministration uses the method for monthly reporting) and consists ofranking companies from the largest to the smallest; starting with theformer; further companies are added until the sample represents atleast 75% of the total market (Kuhn and Fankhauser 1996). In thepresent study, over 80% of the hotel rooms controlled by internationaloperators were included in the sample. The population consisted of 86of the largest international companies identified from the directory ofthe American Hotel and Lodging Association, from the annual hotelranking of the International Hotel and Restaurant Association, andfrom the Hotel Report of Travel and Tourism Intelligence (2001).The total number of rooms controlled by these 86 companies was3,987,595, about 24% of total rooms worldwide. All major internationalhotel chains have been included. The many large chains that operatesolely within national borders, notably in the United States, accountfor the discrepancy with the overall world total supply by chains.

Survey Instrument and Findings

A seven-page questionnaire was developed and sent to three execu-tives of major international hotel companies as a pilot study. Questions


were also introduced to determine strategic planning and the study re-gion. Following their comments and recommendations, the instru-ment was amended and sent to the Director of Development orDirector of Marketing of the respective companies. The survey wasundertaken from May to December of 2001. It was made up of four sec-tions. The first sought general historical information concerning thecompany. The second attempted to ask two related questions: whichare the structural and behavioral variables considered important toan international hotel operator when it decides to go international,and what are the perceived competitive strengths of international hotelcompanies compared to other major competitors in the arena? Thethird focused on the critical locational considerations for hotel opera-tors when deciding on international expansion. The last section at-tempted to identify the major factors behind the choice of entrymode for hotel development in the region, the numbers of propertiesheld, and the time frame for beginning operations in the case of com-panies that were not currently represented.Respondents were asked to rate on an 11-point Likert scale (from �5

‘‘significant disadvantage’’ to +5 ‘‘significant advantage’’) their percep-tions of the competitive advantages, the ownership, ‘‘0’’ advantages oftheir company, and perceived sources of specific locational ‘‘L’’ advan-tages within the region. The resulting rankings for the major variableswere then averaged and the results displayed in graphical and tabularform. Completed questionnaires were received from 41 out of the 86companies originating from 13 countries that controlled 3,504,694 ho-tel rooms. This represented 87.84% of the total rooms in the popula-tion. Each of the ten major companies by number of rooms and 15out of the top 20 hotel operators were included in the sample.The major countries represented in the population are the United

States (31 companies), United Kingdom (8), Japan and China (7),Spain (6), Germany and Switzerland (3). The population reflectsthe domination of the international hotel sector by the developedworld, with only 13 companies (15% of the total) from the developingworld.By the end of 2001, there were 19 international companies with rep-

resentation in the region. Of these, 14 are included in the sample forthe study. Nine of the top ten companies have hotels in the region,with only Hilton Hotel Corporation (a separate company from HiltonInternational that has been in the region for a number of years) not yetoperating a property in Eastern Central Europe. With regard to thereasons for entry into the study region, 75% cited this as part of thecompany’s strategic plan, with 25% stating they entered when anopportunity arose. In terms of the timeframe necessary for enteringthe region for those 27 chains not yet represented, less than 20%had immediate plans, 31% were thinking in the medium-term, while50% only saw an opening in the long-term.The bulk of the hotel properties are in Poland and Hungary,

accounting for 82% of all developments. This is mainly due to Accor’slong-term strategy of investment in the region, particularly in these twocountries (the company has 19 properties in Hungary and 62 in


Poland). With a total of 84 in the region, Accor’s development repre-sents 65% of all international hotel developments. Intercontinental(known formerly as Bass and Six Continents), second in worldwideranking scale, is far behind with just 14%, but is the only company rep-resented in all five countries. Marriott with six hotels (4.6%) andChoice with four (3%) are next in line.

Perceptions of Ownership, Location and Internalization Advantages

The major variables relating to perceived ownership, location, andinternalization advantages from the 41 major international hotel com-panies included in the sample were drawn from the literature. Care wastaken in attempting to identify the major contextual variables that hadthe greatest impact upon the data. These were found to be size of thecompany and regions of origin. Specific tests were conducted for levelof internationalization (through the construction of an index), but itwas discovered that differences by level of internationalization weresignificantly less marked.

Ownership Advantages by Company Size. The first contextual variableused was the size of the company (in terms of number of rooms oper-ated) with perceived ownership advantages presented in relation toother international hotel operators. The perceived ranking for eachof the variables was averaged and the rankings shown in the graphicalform (Figure 1). Rankings on the left-hand side of the axis represent asignificant competitive disadvantage to the company, while those in themiddle a neutral position; a significant competitive advantage to thecompany appears as one moves to the right-hand side (11:00). Thereare four categories of hotel companies: small (400–4999), medium(5,000–49,999), large (50,000–99,000), and very large companies (over100,000).As shown by Figure 1, size is considered a major factor in the percep-

tion of the executives. There are considerable differences between theperceived strengths of those of the largest companies compared to thesmallest (in this case represented by the lighter and darker circleson either side of the chart). Overall, the perceived key competitivestrengths are knowledge of guest needs, strategic planning, and tech-nological advancement. The very large companies believe that theyhave a considerable advantage and consistently score their perceivedstrengths higher. The very large companies’ perceptions of their keyadvantages are reservations systems, human resources, and brand/international experience. These are attributable to the distributionadvantages made possible through the global reservation and com-puter reservation systems used by the largest companies. Humanresources have also long been considered a key attribute of interna-tional operators (Dunning and McQueen 1982) and are stressed byall major players. International experience often goes with size, andcertainly is the case in terms of such companies as Intercontinentaland Accor, which are present in over 80 countries. The importance

Neutralge11.00

Size

Int.Exp

Long Term Presence

Network Strategic Alliances

Brand Name

Human Resources

Marketing Expertise

Tech Advance't.

Financial Strength

Strategic Planning

Reservation Systems

Knowledge Guest Needs

Economies Joint Supply

Economies Scale

1.00

400-4999 5,000-49,999 50,000-99,000

Over 100,000 TOTAL

Significantdisadvantage

Significant advanta

Figure 1. Ownership Advantages of International Hotel Companies by Size


of the brand may also be considered fundamental, as brand equity hasbeen a major issue in the sector in the past decade.Large chains shadow the advantages of the very large ones quite clo-

sely in most of their attributes (especially regarding size, their networkof strategic alliances, and strategic planning), and even score higher interms of technological advancement and long term-presence in the re-gion. But they score particularly low, in terms of international experi-ence and knowledge of guest needs. These perceptions may be dueto the fact that while many such companies are substantial, they areaware of the differences in scale between themselves and those of pre-mier league companies such as Cendant, Intercontinental and Marri-ott, which have significant resources available for marketing research(to determine guest needs in the future), and for establishing newinternational operations. Medium and small companies in the studymay also be seen to shadow each other. The key strengths for the med-ium group are knowledge of guest needs, strategic planning, and finan-cial strength. The smallest companies perceive that they are also strong


in knowing guest needs, in strategic planning, and in technological ad-vance. The medium and smallest groups are particularly close in termsof international experience, human resource management, strategicplanning, and especially in joint economies of supply and scale. Thesmallest companies score particularly low on long-term presence inthe region, in their network of strategic alliances, and in their brandnames.

Ownership Advantages by Region of Origin. Previous studies on thehotel sector (Dunning and McQueen 1982; Gannon and Johnson1995; Kundu 1994) have identified the region of origin as an importantcontextual variable in the determination of company policy. In this in-stance, it was considered useful to contrast the perceived advantages ofchains from the three major hotel operating regions: North America,Europe, and Asia.Figure 2 shows the overall averages of the variables, and the intrare-

gional differences. Although not quite so marked as the differences be-tween the sizes of companies, there are still distinct differences amongcompanies emanating from North America, Europe, the Middle East,and Asia. Overall, the three most important attributes are knowledgeof guest needs, strategic planning, and reservation systems. As maybe seen, the North American chains consistently rate their competitivestrengths higher than the Europeans, and considerably higher thanthe Asian chains. The most important variables for the North Americanchains are knowledge of guest needs, reservation systems, and strategic

International Size

International Experience

International Long Tem Presence

International Network Strategic Alliance

International Brand

International Human Resource Management

International Marketing Expertise

International Technical Advancement

International Financial Strength

International Strategic Planning

International Reservation System

International Knowledge of Guest's Needs

International Ec Suppliers

International Economic of Scale

1.00 11.00

North America Europe & Middle East AsiaTOTAL

Neutral Significant

disadvantage Significant advantage

Figure 2. Ownership Advantages of Hotel Companies by Region of Origin


planning. Given the history of the latter chains (which are the oldest-established and have adopted a follow-the-customer internationaliza-tion mode), it is not surprising that they consider their knowledge ofguests’ expectations (especially business guests) to be a competitiveadvantage.In addition, the North American chains enjoy the economies of scale

in such areas as reservation systems that facilitate global distribution.The very high rating given to strategic planning (which is also seento be important by European and Asian companies) may derive fromthe fact that many respondents were directors of development respon-sible for setting and meeting global targets in terms of establishing newproperties. European chains achieve an average rating, and mirror theNorth American rankings, albeit consistently one to two points lower.Asian companies rank finance, knowledge of guest needs, and strategicplanning as their main strengths, and exceed the European rating withrespect to financial strength of the company. This may derive from thefact that many Asian companies are part of major groups (Shangri-la,Fujita Kanko, and New Otani). This also reflects an important culturaldifference between Asian companies’ international expansion strate-gies and that of the US and European chains. Asian companies growtypically through equity, shunning the management contract and fran-chise modes that constitute the preferred method of the other compa-nies from the other regions. Again, all regions rank long-term presencein the region the lowest, and the Asian companies (owing mainly totheir size and history) also give low ratings to their ability to create anetwork of strategic alliances and international experience.

Location-specific Advantages

Locational attributes and features are obviously of fundamentalimportance for the development of the international hotel sector.Again, detailed analysis was undertaken of the perceived advantagesof the region. To ensure consistency, the same contextual variablesof size and origin were used in each case.It was considered important to determine if the perceptions of the

study region differed according to the size of the company. Figure 3presents the profiles of the major attributes by size, showing that cer-tain variables are considered the most important by all categories ofchain, and certain ones specific to certain categories. Overall, the threemost important variables for the region are the size and nature of thecity in which the hotel is located, the infrastructure within the region,and the perception of the region as an attractive business location. Thesize and nature of the city in which the hotel is located are seen to beimportant by all categories, appearing as the most important factor forboth the medium and smallest chains. The very large ones see theopportunities for business tourism as the most important factor, andrank the degree of market economy development as the third mostimportant perception. For the large chains, the government policy to-wards FDI is seen to be the most important locational variable, with the

Size & Growth Econ'y.

Gov.PolicyFDI

Dev.Mkt.Econ'y

Leisure Tourism

Bus.Tourism

Domestic Demand

Service Mentality

Tourist Atractions

GovSigTourism

City Size

Infra-stucture

Prox.hostcountry

1.0 11.00

400-4,999 5,000-49,999 50,000-99,000

Over 100,000 TOTAL

Neutral0 Significantdisadvantage

Significant advantage

Figure 3. Location-Specific Advantages by Size of Company


region infrastructure appearing as number two. For medium ones,alongside the city size already mentioned, opportunities for both busi-ness and leisure tourism are second and third, respectively. The small-est hotel chains also perceive the country infrastructure to beimportant, and believe that there are strong possibilities for businesstourism.The highest rated sources of perceived advantage are the size and

nature of the city in which the hotel is located, the importance of na-tional infrastructure, and a perception of the region as an attractivebusiness destination. The identification of the first of these factorscould be due to the various primary locations, such as Prague andBudapest, which have been singled out as of great importance forthe very large chains seeking to have a global network of properties.There are also a number of secondary and even tertiary locations whichto date have been under or unexploited (which, for example in Polandcould result in at least 20 locations for a mid-tier or budget brand suchas Ibis/Comfort Inn/Courtyard by Marriott). The importance of infra-structure is more difficult to explain, but could be a result of the largescale funding which has been agreed, in many cases from the Euro-pean Union, for upgrades of major road and rail links. The fact that


the region is seen as an important business destination (in preferenceto leisure tourism) may result from the increasing interest shown in theregion by international businesses, with Poland especially receivingincreasing FDI.To date it is apparent that the hotels have been pursuing a follow-

the-market strategy, with top rank hotels being constructed in gatewaycities, mainly for an international business clientele. However, recentlythere has been evidence of a switch by hotel chains to a more mid-mar-ket range of properties. Equally importantly are statistics that showincreasing indigenization of hotel usage. For example, again in Poland,the number of tourists using hotels has been growing, especially due tothe increases in the number of short domestic trips. The developmentof hotel facilities has been stimulated by favorable land ownership reg-ulations, and preferential value-added tax rates on hotel services (7%for one, two, and three-star hotels). In general, in Western Europethe ratio of domestic guests to foreign guests is 50:50, whereas in Po-land it is 76:24, which illustrates strong potential for growth. The hotelsector is lucrative in Poland, with a net profitability of 5.15% in 1997,and sector sales of US$1.38 billion. Hotel services are concentratedaround Warsaw, which has 20% concentration of the total market(CEEBIC 2001). Prices are high, with most upper- and middle-class ho-tels too expensive for domestic guests. It would appear, therefore, thatthere are still insufficient numbers of relatively inexpensive inter-national standard two- and three-star hotels.The size and nature of the city is clearly seen to be the most impor-

tant factor for the region by all three areas of origin. Infrastructure wasseen to be the next most important factor by North American andAsian executives. Europeans, however, believed that the size of theeconomy was more important, with infrastructure considered third.The third most important factor for Asian companies was the presenceof attractions of international standard. There is marked difference onwhich aspects are rated the lowest. The North Americans rate the per-ception of the region as an attractive leisure destination as the weakestfactor. The European chains evidently perceive that there are problemswith the service orientation of the workforce and the Asian chainsbelieve that the weakest factor is governmental policies towards FDIin terms of incentives and regulations.

Correspondence Analysis

Correspondence analysis was undertaken of the largest five chainsthat had completed the questionnaires (Cendant, Intercontinental,Accor, Choice, and Hilton Hotel Corporation). This is a multivariatetechnique used to depict the relative position of objects and variablesin a single mapping. It scales the rows and columns in correspondingunits, enabling graphical representation in the same low-dimensionalspace (Malhotra 1996). It is used to obtain compact representationsof respondents’ perceptions and preferences, providing in effect aphotograph of the market. Correspondence analysis has been used re-


cently in tourism research, notably by Chen and Uysal (2002), Chen(2001), and Chen and Gursoy (2000). Two examples of correspon-dence analysis were undertaken of the five major players: first of thecompany-specific proprietary advantages as perceived by hotel execu-tives in relation to other international operators, and, second, of theperceived locational attractiveness of Eastern Central Europe. Theresulting analysis provides an insight into the perceptions of individualcompany executives from North America, Europe, and Asia towardstheir ownership advantages (against other international companiesand those solely operating in the region), together with an image ofthe hotel market in Eastern Central Europe.

Ownership Advantages between International Operators. Figure 4, plot-ting the major perceived ownership attributes, shows the results as theobjects (companies labeled with a pentagon) are correlated with theownership attributes (variables, labeled with a square). This chartwas interpreted along two axes. The x-axis from left to right is primar-ily in relation to the internationalization of the company and the de-gree of long-term presence in the region. The y-axis is primarily inrelation to resources, both human and financial. All five competitorsare distributed across the chart with great distance between them. The

Cloud is jitteredFinancial factors

Nat

ion

al p

rese

nce

Human factors

Inte

rnat

ion

al p

rese

nce

-0.50000 -0.25000 0.00000 0.25000 0.50000

-0.50000

0.00000

0.50000

1.00000

Cendant

Bass

Accor

Choice

HiltonSze

InExp

Long Term presence

Strategic Alliances

Brand

Human Resources

Marketing

Technology

Fin. stength

Res. sys

Knw guest

Eco. supply

Figure 4. Ownership Advantages of International Hotel Chains


two closest competitors are Cendant and Intercontinental (formerlyknown as Bass) who are first and second in terms of size. Both com-panies perceive their financial strength as being a competitive asset.Cendant, as part of a diversified multinational enterprise, seems alsoto have substantial financial backing. The company is also particularlystrong in marketing, and there is synergy from strong brands in Cen-dant’s real estate and tourism businesses. On the left hand side of thefigure, Accor is clearly positioned at a considerable distance fromCendant and Intercontinental. The most important competitive attri-butes for the former are international experience and human re-source management. The international element is readily explained,as it is the second most international hotel company in terms of num-ber of countries in which it operates (over 80), and has experience ininternational tourism through its Carlson Wagon Lit travel agency (ajoint venture with Carlson Companies of the United States), whichhas a network of over 5,000 retail units, is present in over 150 coun-tries and is one of the five leading retailers in terms of sales. BothIntercontinental and Accor stress their long-term presence in the re-gion. In fact, Accor has been in Eastern Central Europe for over aquarter of a century. Intercontinental, started in 1980, is the onlyoperator in all five countries in the region. Accor, with by far thehighest number of properties (84), emphasizes the importance of hu-man resources throughout its organization, by incorporating in thecompany symbol a number of geese flying together as a family/teamunit. Choice and Hilton are in the right hand lower quadrant. Bothmay be seen to be considerably less internationalized, to have lessknowhow, and to have been in the region for much less time thanAccor or Intercontinental. Choice only started operating in the regionin the last five years, and Hilton Hotel Corporation has not yetopened a property in the region. It has stated that it has a long-termperspective on starting operations in the region. Hilton’s maincompetitive advantages are perceived in terms of marketing andknowledge of guest needs, along with its reservation system and tech-nology. Choice is the company that believes it derives the most com-petitive advantage from economies of supply and also knowledge ofthe guest needs. Economies of supply are evident for franchising com-panies, as almost all revenues derived from additional customers con-tribute directly to increased profits.

Locational Advantages. As mentioned previously, it was also consid-ered useful to undertake correspondence in relation to the locationalattributes of Eastern Central Europe, and the same five companieswere analyzed, this time with specific locational variables. Figure 5 pro-vides an overview of the most important variables for the major chainsin the region. From left to right, the x-axis relates to general countryfeatures and proximity to specific tourism development features; they-axis relates to general development and to business segment develop-ment. The five major companies are situated throughout the graph,with Hilton and Cendant more prominently situated closer to thehome country variable. This may be explained by the fact that these

Cloud is jitteredGeneral country development

Pro

xim

ity

to h

om

e co

un

try

Specific business development

Sp

ecif

ic t

ou

rism

dev

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ent

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-0.50000 -0.25000 0.00000 0.25000 0.50000

-0.30000

-0.10000

0.10000

0.30000

Cendant

Bass

Accor

Choice

Hilton Hotels

Size & growth of economy

Gov. policy to FDIl

Market economy devel't.

Lesiure tourism

Business tourism

Domestic Demand

Workforce is service oriented

Tourist Attractions

Gov significance of tourism

City size and nature

Country Infrastructure

Proximity to home country

Figure 5. Locational Advantages to International Hotel Chains


two companies are the least internationalized, being in only 16 and 24countries, respectively.The perceived wisdom, however, suggests that home country proxim-

ity is more important in the earlier stages of internationalization.Country infrastructure is also considered important for Hilton andeven more so by Cendant. Its properties also consider the growth ofdomestic demand to be important for the region. This is thought tobe even more important by Accor, together with the degree of marketeconomy development. As mentioned, this is hardly surprising, asAccor has invested in two domestic chains (Pannanonia and Orbis),and with their portfolio of budget and lower-end properties, is target-ing the local population as well as an international business clientele.Intercontinental is in the same quadrant as Accor, although at somedistance removed. There are several factors that the chain believesare advantages for the region, including the development of leisuretourism, domestic demand, the presence in the region of worldclasstourist attractions, and a workforce that is service oriented. Interconti-nental and Choice also believe that the size and nature of the city inwhich the hotel is located is very important, and the latter is also inter-ested in exploiting business tourism, that is seen to be attractive. Itfurther believes that governments in the region have recognized thesignificance of tourism in the development of the economy.


CONCLUSION

The study provided insights into the evolution of the ownership,location, and internalization advantages since the last major study ofthe industry conducted a decade ago (Kundu 1994). Results showedthat some advantages, such as knowledge of guest requirements andproprietary reservation systems had remained consistent from earlierstudies, but also that strategic planning was perceived as an importantadvantage, especially by North American chains. This high rating forthe strategic planning may be attributed to the fact that the question-naires were completed by directors of international development andmarketing, who are responsible for setting and meeting global targetsin terms of new properties, and thus are heavily implicated in the plan-ning process for their companies. But it is important to note that if allcompanies perceive that they have a competitive advantage throughtheir planning, this may, in fact be nullified in reality, as most compa-nies are apparently taking the planning process extremely seriouslyand hence comparative advantage will not be possible.Some differences with Dunning and McQueen’s (1982) and Kundu’s

(1994) studies may be attributed to both changes in perceptions andalso as a result of the overall framing of the questions. While there isroom for modification, it is believed that the present questionnaire,developed specifically for the hotel sector in a specific location, couldserve as a template for in further studies, thereby adding to the under-standing of the international development of the sector and tourism ingeneral.The practical implications from the study are also clear. First, it is

apparent from the model that size and region of origin played a majorrole in the perceptions of the international hotel executives. The liter-ature on internationalization emphasizes size as being a major determi-nate of it. This was categorically backed up by the field research. Thelarger the company, the more confident the hotel executives were oftheir position. Conversely, the smaller chains perceived that in factorssuch as ability to form a network of strategic alliances, physical size, andbrand name, they were at a significant disadvantage compared to theirlarger competitors. However, in terms of strategic planning and knowl-edge of guest needs, the perceived gap is much narrower. This indi-cates that smaller companies undertake strategic planning to almostthe same level as the larger ones, and that they are as able to analyzeand provide for guest needs as the larger hotel corporations.A final practical aspect that was elucidated is the integration of mar-

ket entry modes used by the sample group. The use of non-equitymeans of distribution was not surprising. However, of particular inter-est was the development of strategic alliances: it was found that over40% of the firms surveyed had entered into schemes with other hospi-tality entities. There has also been a quantum increase in the formationof external networks by companies of all sizes. The old question iswhich form of involvement has been replaced with which form ofinvolvement in which market with companies such as Intercontinental,Accor, and Marriott using several forms of market involvement in the


same market. This is mainly due to the fact that, in order to attain trulyglobal distribution of brands and properties, non-equity methodsthrough strategic alliances, franchising, and management contractsare the only means of reaching the required size for effective econo-mies of scale and scope (Contractor and Kundu 1998). In perceivedrisky environments, such as Eastern Central Europe, contractualarrangements are extremely attractive, as the high capital costs associ-ated with hotel property development are thus borne by the real estatecompanies, and not by the hotel firms themselves per se, although theremay be a requirement for a minority equity stake so as to gain the con-tract in the first place. It has also been noted that in contrast to otherindustries, non-equity development in the hotel sector does not equateto a loss of control, due to the ease of codification of managementcompetencies and systems, and the importance of the right to usethe brand name and reservation systems—key attributes that couldbe withdrawn if franchisees and owners do not comply with minimumstandards and procedures.Although this study has attempted to shed new light on the develop-

ment of transnational hotel corporations and Eastern Central Europe,it is limited by a number of factors. First, the research questions raisedat the beginning of this article in relation to the perceived issues con-sidered important when a company decided to go international, werelargely answered; it was unfortunate that sufficient data was not avail-able in relation to the entry mode choice. The lack of data meant thatinternalization advantages could not be calculated with the same de-gree of precision as ownership and location advantages. Second, thestudy chose to be qualitative in nature, with the advantages and disad-vantages entailed by this approach. Some extremely rich data weregathered concerning aspects of internationalization, as well as compa-nies’ perceived competitive advantages and views of Central and East-ern Europe. However, despite the fact that the study had one of thelargest reply responses by size and number, it was not possible, for rea-sons already stated, to have a random sample, and inferential statisticscould not be used.In spite of these limitations, this research has added to the under-

standing of the manner in which hotel chains internationalize, espe-cially with regard to Eastern Central Europe. There was clearevidence from the study of the importance of size and region of inter-national hotel operators. It is equally clear that some of the largestchains have extremely limited knowledge of Eastern Central Europe.Overall, although the paradigm could not provide all the answers, itdid fulfil the function of being an ‘‘intellectual coat hanger’’ (Cantwelland Narula 2001) on which the major factors for the development ofthe international hotel sector in Eastern Central Europe could beplaced so as to allow examination of the fabric of development. Severalother areas can complement the research reported here, includinginvestigating the changing dynamics of the eclectic paradigm in rela-tion to ownership and internalization advantages. This is especially per-tinent in an industry sector such as hotel, where strategic alliances andnon-equity forms of distribution are the norm.


Another question alluded to earlier is the importance of size as acompetitive advantage. In a location-bound tourism sector such as ho-tel, this question could be addressed from two perspectives. Either sizeis the main factor in order for companies to be able to compete effec-tively or else the attractiveness of the location is everything. Althoughsize has not been seen to be vital for internationalization, and thereare examples of highly internationalized, smaller companies such asFour Seasons and Raffles in this study, it has been seen that to competesuccessfully in the mainstream hotel business (excluding high value-added niche markets) requires a minimum size of at least 100,000rooms.Finally, in respect to ownership advantages of corporations, it would

be interesting to conduct longitudinal studies to monitor changes byhotel companies in their perceived advantages over time. Similarly lon-gitudinal studies could also be undertaken with regard to perceptionsof Eastern Central Europe and the market opportunities identifiedtherein. Comparative studies with other tourism markets, such as inSouth East Asia and South America, would also provide rich areas ofresearch activity and material for fascinating case studies.The study has further contributed to the understanding of the inter-

national expansion of an important tourism sector in an increasinglysignificant destination. The actual development of the sector can en-hance the employment possibilities and improve the services offeredto both international and domestic markets, while at the same timeexploiting market niches mentioned in the text, specifically by focus-ing on green, rural, and spa tourism activities that are sustainable overthe long-term, thereby ensuring the attractiveness of the region forfuture generations.

Acknowledgements—The authors wish to thank S. Kundu for his advice on the initial phase ofthe study. Elements from previous questionnaires developed by Dunning and McQueen(1982) and by Kundu (1994) were used as a base for the current questionnaire.

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Locational strategies of international hotel chains