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 f urnishings companies, architects, management and training service providers, marketing companies, industry consultants and ICT manufacturers. [1] [ 1]
1. Number of Suppliers Suppliers
Moderate (3)
- Significant number of real estate companies for a given locality - Few reliable ICT providers to manage property - Small no. of quality training providers and skilled employees
2. Availability of substitutes High (4)
- Substitutes for property (real estate agents), designers, employees etc are available
3. Switching cost
High (4)
- Hotels have higher bargaining power and can easily switch between suppliers
4. Suppliers's threat of forward integration
High (5)
- Suppliers are highly unlikely to forward integrate into the hotel business
5. Industry's threat of
High (4)
- Hotels could backward
backward integration
6. Contribution to quality
7. Contribution to cost
8. Industry's importance to supplier
integrate to own their own real estate company - They could have their own training wing
High (4)
- Property development and real estate companies add to the quality - So does skilled labour and quality training
Moderate (3)
- Most suppliers are much smaller companies compared to hotel companies - Hence hotel companies have a much higher bargaining power - Supplier contribution to cost is low
High (4)
- The few powerful players in the hotel industry are 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 e state 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
1. Number of Buyers
2. Availability of substitutes:
3. Switching cost:
4. Buyer's threat of backward integration:
High (5)
- Buyers are numerous and small in size. - Losing one customer in not going to make a difference. - Their bargaining power is low.
Medium (3)
- Multiple substitutes for a given hotel or brand is available - Alternate means of accomodation such as camping, RV etc is not popular in India - Informal accomadation with friends and family is a viable alternative - Corporate guest houses for the business traveller
Low (2)
- Switching costs are negligible - Buyers are price sensitive except in the premium segment
High (5)
- Customers are will not construct a hotel or buy a place of residence for each
place they visit 5. Industry's threat of forward integration:
6. Contribution to quality:
7. Contribution to cost:
8. Buyer's profitability:
Low (2)
- Low chances or forward integration
High (5)
- Additional facilities such as spas, gyms etc. are used my hotels to improve the quality of customer's stay
Low (2)
- Brand image is very important in this industry and leads to extra cost - Additional amenities, training of staff, location rent (like close to airport) etc.
High (4)
- Low buyers profitability - In the mid-segment, there are numerous buyers, of very small profitability - 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
1. Economies of scale
High (5)
- High economies of scale - Very important to operate a chain of hotels in multiple locations, especially for the premium segment - This reduces the dependence on tourism trends at any given location
2. Product differentiation
High (4)
- Highly differentiated - Brand names and values are very important in attracting and retaining customers
3. Brand identity
High (4)
- Branding is very important
4. Switching costs
Low(2)
- Low switching costs
High (4)
- Capital intensive - Staff, decor, infrastructure etc. are very expensive
6. Access to technology
Moderate (3)
- ICT is very is very important for property management etc.
7. Access to raw material
High (4)
- Labor, land and other essentials are easy to obtain
Moderate (3)
- The tourism industry receives government support - Eg: Incredible India
Low (2)
-High exit barriers -Specialized assets for the industry
5. Capital requirement
8. Government protection
9. Exit Barriers
Brand names are very important in the hotel industry. Companies use a their stron g 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) 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.[1]
Availability of close substitutes
Medium (3)
- Close substitutes such as informal accomodation with friends and family - Alternate forms of leisure accomodation such as camping and RVs - Corporate guesthouses for business travelers
Switching costs
Low (2)
- Negligible for informal accommodation
Low (2)
- Very high for informal accomodation - Moderate for other leisure accommodation
High (4)
- Producers aren't as profitable - Large hotel chains have greater bargaining power
Substitute's price value
Profitability of the producers of substitutes
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
Large
Low
2
of sale
Excess capacity
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.