Porter’s Five Factor Model and the Hotel Industry:

Review and Recommendations
Management Information Systems

Introduction


The combined forces of an economic recession and H1N1 epidemic are causing the hotel industry to suffer in a time of great challenge. Business travel is down because of the recession and the pandemic has significantly reduced tourism. This paper considers three types of hoteliers in current market conditions in light of Porter’s theories. Now, more than ever, Porter’s well regarded thoughts on business strategy and the Internet, first published in 2001, are crucial to consider and they contribute to an analysis and critique of the hotel industry’s internet strategy. In his Harvard Business Review article of 2001 Porter said “To find the answer we need to look beyond the immediate market signals to the two fundamental factors that determine profitability: Industry structure, which determines the profitability of the average competitor and sustainable competitive advantage which allows a company to outperform the average competitor” (Porter, 2001). This paper examines the five forces which impact competitiveness within and thus the profitability of a competitor in the hotel industry. From the guidance provided in the Five Factor Model recommendations are made to enhance and refine internet strategy for the considered hotel chains.



Hotels

The hotels chosen for this paper are: Vintage Inns primarily located in Niagara-on-the-Lake, Canada, Sheraton Hotel chain and Best Western Hotel Chain. “Every business must design a strategy for achieving its goals, consisting of marketing strategy and compatible technological strategy and sourcing strategy”. (Kotler & Keller,2006) “To identify rivals in the international hotel industry, current practice is to use price, segment and proximity” (Matthew, 2000). In previous work, Michael Porter outlined three additional generic strategies that could be used. These are: overall cost leadership, differentiation, and focus.

“The point to be understood here is that any company can have a core competence, but it is competitive competence which gives them a chance to win. For example, Ritz-Carlton, Fairmont, Loews, Four Seasons, Intern-Continental, W Hotel, Hotel Sofitel, Le Meridien are ruling the hospitality industry. This is because of there ability to set up state of the art hotels and their ability to provide exceptional customer service with focus on customer relationship management. The customer relationship is a unique selling point (USP). The “Service” is both their core competitiveness and also their competitive competence” (Trehan, 2005)

Porter’s Five Factor Model

According to Porter (2001) the internet is an enabling technology that can be used within the context of a good business strategy in any industry. Although the Internet alters industry structures and levels the competitive ground often dampening profitability in the industry, it can be used to encourage and promote greater profitability if properly implemented. The five forces that impact competitiveness which are outlined in Porter’s 1980 work are: barriers to entry, threat of substitutes, bargaining power of buyers and sellers, and the rivalry among existing competitors. In 2001 Porter considered these factors in light of the internet technologies. The influence of the internet has been profound especially in the hotel industry. According to Porter each factor has a different relevance or impact on different businesses so they are presented below in order of impact for hotels. Porter indicates that the great paradox of the internet is that the benefits it creates such as making information easily available, reducing purchasing hassles, and marketing which allow customers to find what is of interest are the very things that make it more difficult for companies to “capture those benefits as profits.” (2001). The most important determinant of a marketplace’s profit potential is the intrinsic power of buyers and sellers.

Threat of Substitute Goods

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

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. Porter’s 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 Porter’s 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.

Rivalry among existing competitors

The rivalry among competitors in the hotel industry is fierce. When potential customers can learn about a hotel on line, the internet reduces the differences among competitors. People tend to seek the best price for the best experience and the tendency is to reduce price to be competitive. The internet covers wide geographical areas so the market is widened increasing the number of competitors. For example, someone who wants to spend the day in the historic town of Niagara-on-the-:Lake can easily choose a hotel in a near by town if the amenities or the price are better. Variable and fixed costs can be different in areas that are more expensive to live and work making it more difficult for a hotel in Niagara on the Lake to reduce their prices to the level of one in nearby St. Catharines.

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 nil for a consumer. (McNurlin, 2006)

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.

Bargaining power of suppliers

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.

Recommendations
All of the hotels listed above can benefit from internet applications that produce greater value in the value chain. The firm’s infastructure can benefit from financial and ERP systems. Communicating with investors can also be done by internet. Human resources can be managed by the internet as part of the overall strategy as well providing internet based self service personnel and benefits, web based training, internet based sharing of information and knowledge and electronic time and expense reporting. Value can be increased by standardizing technology across multiple locations, forming knowledge directories, and allowing real time access to online booking information. Finally, every hotel could benefit by online inventory control and forecasting systems with suppliers. These improvements can all lead to greater profitability (Porter, 2001)

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.

Dealing directly is great for hotels. Other than travel agencies who arranged hotel stays the hotel business has always been a face to face business and this normally sustains the economic value of the transaction. For all of these chains the internet complements rather than cannibalizes established ways of doing business. It becomes one more link in the value chain.

Every chain listed below should use its website to attract employees and to communicate a philosophy of management. In the employment section the designers must remember that they are communicating not only to potential employees but also communicating the service standards that the guests can expect.

Vintage Inns

Vintage Inns started in Niagara-on-the-Lake approximately 25 years ago when a recent immigrant bought many of the established old hotels in town. Since that time a focused business strategy has born fruit. It has established itself as a premium priced set of four diamond and five star hotels in an historical town offering a unique and pampered experience to customers who wish to enjoy the old town atmosphere. Its vision is supported by its internet presence. The site is simple but elegant. It is unaffiliated with rewards programs or with alliance programs and it partners with only two other historical inns in Ontario. It caters to those who have the resources and the wish to experience luxurious accommodations, fine dining, spas and the Shaw Festival theatre and the town’s shopping district in the wine country of Niagara. They cater to tourists, business, and weddings. The Vintage Inn website has a high quality video presentation that attempts to give the viewer a sense of the luxury, indulgence and pleasures available while staying at Vintage Inns. It communicates that the experiences of the town and its resources and history are highly integrated with the luxury experience of the hotels. Internet brands are difficult to build because the tangible experience of physical presence and of human contact are missing but the Vintage Inns video on its website goes a long way toward addressing this branding need.

From Porter’s research a hotel chain such as this must differentiate itself to compete. It has chosen first class luxury and setting as differentials. The internet strategy must support those strategies emphasizing an all encompassing luxury in a setting that provides an arts, cultural and historical experience in every aspect. It needs a website to communicate luxury, unique and pampering experience, to take bookings and demonstrate potential products and services. Like many luxury items, marketing by referral and exclusivity has its appeal so it should not ally with other hotels for internet marketing. They must not join any sell-off sites or organizations to offer rooms at discount prices for that would undermine their luxury status. Similarly joining “reward programs” would reduce their sense of upper class exclusivity. Alliances on the website must be limited to other luxury experiences such as helicopter rides, exclusive golf clubs and Shaw festival theatre packages, horse and buggy rides to historical sites and specialized wine tour experiences. These act as ‘complements’ in Porter’s view and raise profitability by being uniquely paired with the service provided in a manner that is not available anywhere else. The website must also indicate the hotel’s expertise in providing uncomplicated luxury experience. It should also steer away from any vestige of “sale prices”. It must erect an internet barrier that says that there is no substitute for luxury and no replacement for a true historical experience.

Sheraton Hotels

Sheraton Hotels Chain is a world wide concern. They provide luxury and upscale full-service hotels, resorts and residence and is the largest brand serving in the Starwood alliance. The needs of luxury and upscale business and leisure travelers worldwide are their focus. “ From full-service hotels in major cities to luxurious resorts by the water, Sheraton can be found in the most sought-after cities and resort destinations around the world. Every guest at Sheraton hotels and resorts feels a warm and welcoming connection, the feeling you have when you walk into a place and your favorite song is playing - a sense of comfort and belonging. Our most recent innovation, the Link@Sheraton(SM) with Microsoft, encourages hotel guests to come out of their rooms to enjoy the energy and social opportunities of traveling. At Sheraton, we help our guests connect to what matters most to them, the office, home and the best spots in town.”

The luxury experience is limited and focused on the bed, bedding, modern room décor and complementary spa products in the room. It is augmented by staff training and room service.As Porter pointed out in his 2001 article, some things must be excluded to focus on what the company does best. The website must be easy to use, communicate a comfortable level of luxury for primarily modern business travelers to world wide destinations, and encourage booking. It also must indicate that the welcome feeling is part of what the staff is trained to provide as an expertise. IT also communicates the standardization of expectation world wide and the meeting of the human need for connection as a differential. Alliances and reward programs make the cost of switching higher. Especially for the business traveler, for whom rewards are personally redeemable, staying with the chain provides rewards that the individual can enjoy only if they return whether on more business that costs him personally nothing or for a discounted or free personal stay. This is a clever way to increase the cost of switching.

Best Western

The final hotel in this comparison is Best Western the world’s largest hotel chain.
ABOUT BEST WESTERN INTERNATIONAL

Best Western International is THE WORLD'S LARGEST HOTEL CHAIN®, providing marketing, reservations and operational support to over 4,000* independently owned and operated member hotels in 801 countries and territories worldwide. An industry pioneer since 1946, Best Western has grown into an iconic brand that hosts 400,000* worldwide guests each night. Best Western's diverse property portfolio, its greatest strength, stems from a business model designed to give owners maximum flexibility to address market-specific needs. Equally committed to the business and leisure traveler, Best Western recently embarked on a five-year mission to lead the hotel industry in customer care. Since 2004, Best Western has served as the Official Hotel of NASCAR®. For more information or to make a reservation, please visit www.bestwestern.com.

http://www bestwestern.com

It is clear that the company realized the importance of the website for a world wide company, of independently owned hotels because the website was awarded top honors for ease of use, design, innovation, content, technology, interactivity and copywriting achieving 67 of a possible 70 points to win the outstanding web site award in Hotel and Lodging category in Web Marketing Association’s 12th annual Webaward competition in 2008. This chain differentiates itself a bit like MacDonald’s does by offering a standardized experience world-wide so that there are no huge surprises and instant recognition. Décor may be different but the experience is on par no matter where the traveler lands. The internet must communicate a high quality experience at a reasonable price. It must communicate standardization of room quality, cleanliness, and high standard of service with a variety of amenities. Alliances and reward programs are vital for this chain too. They increase the cost of switching from Porter’s predictions to a different consumer in a different price grouping. Porter calls this effect such as reward programs create “stickiness” of a website. (Porter 2001)

Conclusion

Whether a hotel or hotel chain is well established or brand new, the five underlying forces of competition which include: the threat of substitution, the bargaining power of buyers, the intensity of rivalry among competitors, the barriers to entry for new competitors, and the bargaining power of suppliers helps determine its profitability and should it should shape its internet presence. Combined, these factors can determine economic value and even survival. Internet technology can provide opportunities for companies to communicate and establish unique or distinctive positions for their businesses. In the case of hoteliers this is crucial. Porter’s five factor model helps us understand the rise of new ideas and internet businesses like Cheaphotel.com in the context of the “Bargaining power of Buyers”. It helps us understand what drives businesses to differentiate themselves and their internet approach. It also explains why labor may have greater bargaining power in hotels who all need skilled workers as the population ages as it is predicted by Porter’s concept of the “Bargaining power of Suppliers”. In reviewing the internet strategies of three hotel chains, differentiation is clearly the key component. Some have chosen to differentiate by location and by luxurious experience. Others, like Best Western have differentiated themselves by standardization and by price. Their internet strategies must align with their business strategy to produce the desired profitability and Porter’s model leads the way by outlining the issues and the dangers inherent in each force. In this paper, recommendations for internet success were made based on Porter’s model and implementation of these suggestions could ensure greater or continued profitability in a time of great stress from both recession and the ongoing pandemic. They include not only customer interaction on the internet but also internet applications in a variety of areas such as supply chain, financial and Human Resources to increase the value chain. In the final analysis, however, Porter makes it clear that the internet can and will add value when it is used in conjunction with good business strategy,
References

Fairtheworld; Fairtheworld Launches a Full Cooperative Plan with Global Four and Five Star Hotels, Healthcare Mergers, Acquisition & Ventures Week. Atlanta: Jul 11, 2009. pg. 560

Kotler, P, Keller, K.L, (2006)Marketing Management, 12th edition, Upper Saddle River, New Jersey
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Matthews, V. E. (2000) International Journal of Contemporary Hospitality Management. 12-2, 114-118
McNurlin, B. C., & Sprague, R. H., Jr. (2006). Information systems management in practice (7th ed.). Upper Saddle River, NJ: Prentice Hall.
Porter, M. (2001). Strategy and the Internet. Harvard Business Review 79(3). 62-78

http://www.newsrx.com/library/topics/Fairtheworld.html> Fairtheworld



Trehan, R.(2005) http://www.hotel-line.com/News/PR2005_3rd/Aug05_



http://www.starwoodhotels.com/corporate/company_info.html



http://library.corporate-ir.net/library/78/786/78669/items/330217/E85B39E2-4450-44AF- 8EDD-99EC4B216C9C_HOT200810K.pdf

http://www bestwestern.com. /newsroom/pressreleases_detail.asp?NewsID=620