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Porters Five Forces Analysis for Hotel Industry: BARGAINING POWER Of SUPPLIERS The term 'suppliers' comprises all sources for inputs that are needed in order to provide goods or services. The two key suppliers to the Hotel industry are: - Labour - Real estate Over all the suppliers in this market are defined as property owners, developers and real estate companies, interior design and furnishings companies, architects, management and training service providers, marketing companies, industry consultants and ICT manufacturers.  - Significant number of real estate companies for a given locality - Few reliable ICT 1. Number of Suppliers Moderate (3) providers to manage property - Small no. of quality training providers and skilled employees - Substitutes for property (real estate agents), 2. Availability of substitutes High (4) designers, employees etc are available - Hotels have higher bargaining power and can 3. Switching cost High (4) easily switch between suppliers - Suppliers are highly 4. Suppliers's threat of unlikely to forward High (5) forward integration integrate into the hotel business 5. Industry's threat of High (4) - Hotels could backward backward integration integrate to own their own real estate company - They could have their own training wing - Property development and real estate companies add to 6. Contribution to quality High (4) the quality - So does skilled labour and quality training - Most suppliers are much smaller companies compared to hotel companies 7. Contribution to cost Moderate (3) - Hence hotel companies have a much higher bargaining power - Supplier contribution to cost is low - The few powerful players 8. Industry's importance to in the hotel industry are High (4) supplier indispensable to their suppliers Overall, the number of suppliers for the Hotel industry is quite large and each supplier is very small in size compared to the leading players in the industry. These few powerful players are indispensible to the suppliers. Substitutability of the suppliers is also quite feasible and inexpensive. Switching between real estate agents is not going to affect a particular Hotel company significantly. However in terms of quality, training centers for employees and ICT manufacturers who provide IT systems that for property management are relatively more difficult to replace. Therefore in terms of substitute suppliers industry attractiveness is moderately high. Unlike the supplier’s threat of forward integration, Industry’s threat of backward integration is pretty high since large hotel chains like ITC or IHCL would have no qualms expanding into the real estate business or developing employee training facilities in-house. Similarly the industry’s contribution to both cost and quality is relatively high. Overall bargaining power of suppliers is low and industry’s attractiveness in terms of supplier bargaining power is high (4). BARGAINING POWER OF BUYERS The bargaining power of buyers determines how much customers can impose pressure on margins and volumes. The end-users of the high-end hotel industry are: - Leisure traveler - Business traveler - Customers who require space for conferences or other events - Buyers are numerous and small in size. - Losing one customer in 1. Number of Buyers High (5) not going to make a difference. - Their bargaining power is low. - Multiple substitutes for a given hotel or brand is available - Alternate means of accomodation such as 2. Availability of camping, RV etc is not Medium (3) substitutes: popular in India - Informal accomadation with friends and family is a viable alternative - Corporate guest houses for the business traveller - Switching costs are negligible 3. Switching cost: Low (2) - Buyers are price sensitive except in the premium segment - Customers are will not 4. Buyer's threat of High (5) construct a hotel or buy a backward integration: place of residence for each place they visit 5. Industry's threat of - Low chances or forward Low (2) forward integration: integration - Additional facilities such as spas, gyms etc. are used 6. Contribution to quality: High (5) my hotels to improve the quality of customer's stay - Brand image is very important in this industry and leads to extra cost 7. Contribution to cost: Low (2) - Additional amenities, training of staff, location rent (like close to airport) etc. - Low buyers profitability - In the mid-segment, there are numerous buyers, of very small profitability 8. Buyer's profitability: High (4) - In the premium segment, buyers are very affluent, and they have greater bargaining power compared to the mid-segment This industry has numerous customers who are relatively very small in size. Loss of a single customer has little impact on a hotel company and this drives down the buyers bargaining power. Similarly buyers threat of backward integration is almost impossible and so is the industry’s threat of forward integration. However the industry does have several substitutes such as camping and recreational vehicles for tourists, corporate guesthouses for business travelers and other informal means of accommodation with friends and family. Switching cost for all these options is very low, except for the RV. Apart from the provision of accommodation, hotels also provide additional facilities and services such as restaurants, gyms, spas etc. Therefore their contribution to quality as well as cost for the buyer is very high. Overall, bargaining power of buyers and the industry attractiveness in this respect is moderate (3.5). BARRIERS TO ENTRY - High economies of scale - Very important to operate a chain of hotels in multiple locations, especially for the 1. Economies of scale High (5) premium segment - This reduces the dependence on tourism trends at any given location - Highly differentiated - Brand names and values 2. Product differentiation High (4) are very important in attracting and retaining customers - Branding is very 3. Brand identity High (4) important 4. Switching costs Low(2) - Low switching costs - Capital intensive 5. Capital requirement High (4) - Staff, decor, infrastructure etc. are very expensive - ICT is very is very 6. Access to technology Moderate (3) important for property management etc. - Labor, land and other 7. Access to raw material High (4) essentials are easy to obtain - The tourism industry receives government 8. Government protection Moderate (3) support - Eg: Incredible India -High exit barriers 9. Exit Barriers Low (2) -Specialized assets for the industry Brand names are very important in the hotel industry. Companies use a their strong brand names to attract new customers and retain old ones. Besides, economies of scale is also a huge factor in this industry. Profitability of hotel chains is drastically higher than individual operations. A new entrant cannot compete with established players in terms or quality and price if they cannot establish significant economies of scale. Being a capital intensive industry with a large amount of it, tied down in fixed costs, makes entry even the more difficult. Similarly high exit barriers due to specialized assets makes the industry less attractive. The hospitality industry is strongly influenced by travel and tourism trends.  Government protection for the tourism industry is very high and this in turn rubs off on the hotel industry making it thereby making the industry attractive in general. Hence in terms if Entry barriers, the industry is moderately attractive (3.44) THREAT OF SUBSTITUTES A threat from substitutes exists if there are alternative products with lower prices of better performance parameters for the same purpose. They could potentially attract a significant proportion of market volume and hence reduce the potential sales volume for existing players. This category also relates to complementary products. - Close substitutes such as informal accomodation with friends and family Availability of close - Alternate forms of leisure Medium (3) substitutes accomodation such as camping and RVs - Corporate guesthouses for business travelers - Negligible for informal Switching costs Low (2) accommodation - Very high for informal accomodation Substitute's price value Low (2) - Moderate for other leisure accommodation - Producers aren't as Profitability of the profitable High (4) producers of substitutes - Large hotel chains have greater bargaining power The major substitutes for the hotel industry are camping and recreational vehicles for tourists, corporate guesthouses for business travelers and other informal means of accommodation with friends and family. Compared to the hotel industry, these are much cheaper alternatives, making their price values very high and the switching costs very low. This makes the industry attractiveness in terms of substitutes, low (2.75) COMPETITIVE POWER OF RIVALRY PLAYERS This force describes the intensity of competition between existing players (companies) in an industry. High competitive pressure results in pressure on prices, margins, and hence, on profitability for every single company in the industry. Factors Comment Attractiveness Remarks No. of competitors Small High 4 • Small number of large operators Industry growth Moderate Moderate 3 • Annual growth rate of 13% • Mature industry Fixed cost High Low 1 • Highly capital intensive Differentiation High High 4 • Strong brand image commands a very high price premium Switching cost Low Low 2 • Low cost switching to similar brands Openness of terms Open High 4 • Price break up into cost, taxes etc. are known of sale Excess capacity Large Low 2 • Only 69% rooms are occupied • Tourism industry is seeing strong growth Strategic stakes Large Low 2 • Although large hotel companies have diversified they still have a majority stake in the hotel industry There are a few large hotel chains that dominate the industry in India. They have very strong brand names and identities and high stake in this industry which requires very high fixed costs. But Hotels also face excess capacity since one 69% of their rooms are occupied on an average. With moderate industry growth the overall attractiveness of industry in terms of competitors is low (2. 75) Overall the industry is moderately (3.28) attractive.
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