47349495-Porters-Five-Forces-Analysis-for-Hotel-Industry by Manavalan_Rengarajan

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									Porters Five Forces Analysis for Hotel Industry:


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. [1]

                                                           - Significant number of real
                                                           estate companies for a
                                                           given locality
                                                           - Few reliable ICT
1. Number of Suppliers        Moderate (3)                 providers to manage
                                                           - 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 are highly
4. Suppliers's threat of                                   unlikely to forward
                              High (5)
forward integration                                        integrate into the hotel
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
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

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).


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
                                                          - 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
3. Switching cost:           Low (2)                      - Buyers are price sensitive
                                                          except in the premium
                                                          - 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)
                                                           - 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).

                                                         - 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
                                                         - Branding is very
3. Brand identity            High (4)
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)
                                                         - Eg: Incredible India
                                                         -High exit barriers
9. Exit Barriers             Low (2)                     -Specialized assets for the

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. [1]
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)


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.[1]

                                                              - 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)
                                                              - Very high for informal
Substitute's price value       Low (2)
                                                              - Moderate for other leisure
                                                              - 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


          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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