I.

FACTORS THAT WILL DETERMINE THE DEMAND FOR

HOTELS IN THE UK

Hotels play a big role in the hospitality industry, they provide not only a
place to stay and eat for travellers but also a good quality of service which is
sometimes compromised by some hotels due to other factors. As the number of
traveller increases every year, thus the demand for accommodation increases.
We will be looking on the Microeconomic Environment of hotels in United
Kingdom and determine different factors that affect consumer demands.

The UK is one of the top destinations in the world. According to NSO

(Office for National Statistics), the number of visits by overseas residents to the
UK decreased by nearly a million from 32.8 million in 2007 to 31.9 million in
2008, a fall of 2.7%. One main reason that has been the effect of the worldwide
economic recession. However, over the 28-period to 2008, domestic business
demand into hotels grew from 23 million room nights to 44 million, an average
annual growth rate of 2.4% reinforcing its position as the largest source of
demand into British hotels. Domestic leisure demand grew from 13 million room
nights to 18 million, an average annual growth of 1.1%. Foreign demand
continued its growth by an average of 1.4% per year to reach 45 million room
nights.

A demand for hotel services generates activity in a number of industries

and ancillary concerns. Its implication is that the economic effect of the demand
for hotel services are not confined to the hotel industry itself but are spread
throughout the economy. The effects of the demand for hotel products can be
related directly to the industry, secondary units such as suppliers or secondary
activities such as spending generated income for domestic products. (Sheela, A.)

Theory of Demand

If we would like to know how the price of a hotel room affects a traveller’s
decision to stay in a hotel, we need to take a look at the Theory of Demand
which will indeed help us to explain this. In simple terms, Demand is known as a
desire or wants for something, but if we are to explain it in economic terms,
Demand means the total amount of the product that consumers are willing and
able to purchase at a particular price over a given period of time. So demand in
economics is accompanied by money and money is a big factor that affects
consumer buying decision.

To illustrate the relationship between prices and demand, we can consider

the “Law of Demand” which is known to be “the quantity of a good demanded
per period of time which will fall as the price rises and rise as the price fall other
things being equal (ceteris paribus)”. This law arises due to the following
reasons:

a. Income Effect – The Effect of a change in price on quality demanded

arising from the consumer becoming better or worse off as a result of
 the price change. A traveller can only stay in a particular type of hotel
which s/he can afford.
b. Substitute Effect – This is simply means, “the effect of change in price
on quantity demanded arising from the consumer switching to or from
alternative products”. For example, if a person who wants to re-visit
London and he normally stays in 5 star hotels such as the Hilton, if the
Hilton room rate increased from the rate he used to pay before, then
he would be more likely to stay in a budget hotel for the time being
such as Premier Inn which offers cheaper or the same rate he used to
pay with Hilton.
A. Demand Curve

The Demand Curve will help us to illustrate how price affects the
demands for certain products. This is basically a graph showing the
relationship between the price of a good and the quantity of the good
demanded over a given time period. Price measured on the vertical axis;
quantity demanded is measured on the horizontal axis.

Figure 1: The demand for a standard room at a deluxe hotel (monthly)

B. Other Determinants of Demand

The price of a particular product is not the only issue to consider
which affects consumer demands. There are other determinants such as
follows:

a. Taste – The more desirable a traveller finds the hotel, the more they
will stay or intend to come back. Tastes are affected by previous
experiences, word of mouth and advertising.
b. Number and price of substitute goods – A pair of goods which are
considered by consumers to be alternatives to each other. For example
if the room rate of budget hotels goes up, the demand for deluxe
hotels will rise.
c. Number and price complementary goods – A pair of goods consumed
together. As the price of one goes up, the demand for both will fall. For
example if the cost of transportation such as airfare or taxi fare goes
up, the demand for hotel and transportation will fall.
d. Income – As people’s income rises, their demand for most goods will
rise. Real income is a big influence for most people who want to travel;
that is why most hotel rates are flexible and changing, based on
market demands.
– Normal goods – goods whose demand rises as people’s income rise.
– Inferior Goods – goods whose demand falls as people’s income rise.
Let’s say if a guest stays in a hotel, if his income is high, he would
probably book a suite room and stay comfortably rather than
staying in standard room.
 a. Expectations of future price changes – People are likely to buy goods in
advance if they know there will be an increase in price in the future. A
good example is that most people who travel purchase flight tickets as
early as they can to get the best price.

A. Shifts in the Demand Curve

If one of the other determinants of demand changes, a curve shift
will occur and this can be represented by the following diagram. Let’s say
if there is an increase in people’s income and the price of goods remain
the same, the whole curve will shift to the right.

Figure 2: Shift Curve

P particular example is the current high

To describe this shift, one
demand in hotel accommodation due to the Wimbledon Tennis
Tournament. For most visitors to the event, hotel price is not an issue as
their desire to be part of such an event is very important. The same thing
might happen for the 2012 Olympics as London will host the event and the
millions of visitors would expect to increase the demand for
0
accommodation. Q0 Q1

B. Price Elasticity of Demand

It is also important to compare the size of the change in quantity
demanded of a given product with the size of the change in price and this
is through determining the price elasticity of demand. Elasticity is
measured in proportionate or percentage and can be calculated by the
equation:
PED = _% change in QD of X_
% change in price of X
The results can be:
a. Elastic Demand (ε > 1) – If the change in quantity demanded is larger
than change in price.
b. Inelastic Demand (ε < 1) – If the change in quantity demanded is less
than change in price.
c. Unit Elastic Demand (ε = 1) – If the change in quantity demanded is
proportionately the same as price.

The elasticity of demand for a hotel is determined by the following factors:

a. Availability of substitutes – There are many budget hotels that have

opened in UK like Travelodge and Premier Inn that play as substitutes
for deluxe hotels. Due to income constraint among people, there will be
increased demand for these substitutes. As a result, elasticity of
demand is high.
b. Habits or degree of luxury – Some consumers addicted to particular
goods like iPhones or always going on holiday. They would not change
 their demand, even if the price of iPhones or airfare and
accommodation increased. This is described as inelastic demand.
c. Proportion of income – People still travel and stay in hotels even if fares
and room rates have increased as long as they can afford it. Thus, it
shows elastic demand.
d. Peak and Off-peak demand – Demand tends to be price inelastic at
peak times and elastic at off-peak times leading to lower prices for
consumers. Hotels usually offer cheaper deals on weekends and low-
seasons to boost their occupancy.
e. Brand Loyalty – There are lots of guests who stay in the same brand of
hotel every time they travel due to the satisfaction they receive from
that particular brand. This results in inelastic demand.
f. Who pays – some hotel guests don’t directly pay for the room they use,
such as with corporate expense accounts, demand is likely to be more
elastic.

Conclusions

The price elasticity of demand is crucial for hotels because the price
elasticity of demand has implications for setting the prices of their goods and
services as the price elasticity of demand has an impact on total revenue and
yield management. The main factor that influences the demand for hotels
particularly in UK are the seasonality of the industry and the availability of
substitutes or the level of competition in general. However, flexibility of room
rates can offset the increase and decrease in demands. Hotels must consider
price as a competitive strategy when there are similar products and substitutes
for their products.

The demand for rooms in the UK will continue to grow in the future as the
number of domestic and foreign visitors increases. The upcoming Olympics in
2012 will result in a high demand for hotel rooms particularly in London.
I. THE STRATEGIES NEED TO BE CONSIDERED AND USED IN A
GLOBALISED BUSINESS ENVIRONMENT OF HOSPITALITY
INDUSTRY

Strategy is a broad and general plan developed to reach long-term

organisational objectives. Particularly in the hospitality industry where activities
are crucial and vulnerable to external threats, effective strategic management
could endure each businesses and leads to success. Strategic management plays
an important role when multinational hospitality enterprises expand their
business and engage in the international market.

The globalisation of the hospitality industry has accelerated under the

pressure of advances in technology, communication and transportation,
deregulation, elimination of political barriers, socio-cultural changes, and global
economic development, as well as growing competition in a global economy
(Teare and Olsen, 1999). These factors that lead hospitality businesses to be
globalized have forced them to change their internal tactics and future goals
according to their capabilities. An integral part of globalizing is formulating
different strategies on different areas of a business to reach their goals and this
is what we will be looking at.

Below is the outline of

Functional level the elements in the basic
strategy strategic planning process.
Business level
Mission
strategyand
goals
Global strategy

Corporate level
strategy
External SWOT Internal
analysis: strategic analysis:
opportunities choice Strengths and
and threats weaknesses

As described in the diagram above, setting a goal and analyzing both

internal and external environments are key things to look at before going
through strategic planning. The more we come to understand the competences
and resources of our business, the more effective the strategies can be.

Strategies that can be considered in the globalised business environment

are classified below:

1. Functional Level Strategy

2. Business Level Strategy
3. Global Strategy
4. Corporate Level Strategy

Due to the broad scope of this topic, I will focus on two essential
strategies: the functional and global. To effectively describe this, I have used the
case of ‘The Intercontinental Hotels Group PLC’ as they are well-known in
pursuing a multiple strategies in globalisation.

Intercontinental Hotels Group (IHG)

IHG is an international hotel company considered to be the world’s largest

operator by number of rooms which is more than 650,000 in over 4,400 hotels in
100 countries. Their guests make over 130 million stays in IHG hotels every year.

They operate seven hotel brands – InterContinental, Crowne Plaza, Hotel

Indigo, Holiday Inn, Holiday Inn Express, Staybridge Suites and Candlewood
Suites.

IHG brands are in leadership positions in the 6 largest hotel markets in the
world, and have a global brand portfolio with measurable performance. IHG's
growth projection has never been higher: the pipeline currently outpaces all of
their competitors. Momentum continues to build in growth and performance, with
their brands outperforming their market segments.

The IHG business model keeps their goals and priorities closely aligned
with the needs of their owners. While IHG focuses primarily on franchising and
management contracts, they think like owners because they operate hotels as
well. IHG stays focused on the right areas: strong operations, brand relevance,
strategic growth, and an aligned organization that stands out in the burgeoning
global market.

Functional Level Strategy

Functional level strategy is concerned with coordinating the functional

areas of the organisation such as marketing, human resources, finance and
operations. This strategy is a focus for an efficient utilizing specialist within the
functional area. Outsourcing is the main issue we can consider in this aspect
where most hotels purchase from someone else products or services that have
been previously provided internally.

With IHG, the most common outsourcing they use is the recruitment of
low-skilled or temporary workers through employment agencies. Since 2006, IHG
has been affiliated with Convergys, a global leader in customer care, human
resources, and billing services. They in-charge of all aspects of the IHG’s
employment life cycle: recruiting & resourcing, compensation, HR administration,
payroll, benefits, performance management, learning, and business intelligence.
Outsourced HR services improve business performance through greater
efficiency, reduced administrative costs, and better utilization of strategic
workforce information. Furthermore, for smaller hotels such as Holiday Inn
Express, laundry services have being outsourced, they simply rent their linen
from a supplier who takes care of washing it.

Although outsourcing brings lot of advantages for IHG, some risks can be
seen such as:

– Too dependent on an outsourced activity

– Loss of control of scheduling
– Loss of competitive information

Business Level Strategy

Business level strategy refers to the action plan that managers adopt for
using a company’s resources and distinctive competences to gain a competitive
advantage over their competitors. Michael Porter (Harvard Business School) has
developed a framework of generic strategies that can be applied by any
industries. These generic strategies are being use by most companies especially
in the hospitality sector. The three business strategies are as follows:

– Cost leadership strategy

– Differentiation strategy
– Focus strategy

A. Cost Leadership Strategy

This strategy applies by producing goods and services at a lower cost. A

good example of a company outperforming through the use of cost leadership
strategy is EasyJet. They offer low-cost airfares because they have been reducing
their operational and maintenance costs such as: ticketless travel, no free meals
or drink on board, free sitting, use of secondary airports, point-to-point short-haul
flights and so on. Thus, they have attracted millions of travelers and became one
of the leading companies. With IHG, one of their brands Holiday Inn Express,
exists in a domain for reliable, “basic-plus” amenities and a friendly service
culture without costly unwanted extras. Their strategy is probably best described
as low-cost leadership because of its broad appeal to the mass market and
emphasis on limited services, cleanliness and cost efficiency. It doesn’t mean
that Holiday Inn Express is a low-quality lodging brand, they provide basic needs
for their customers with high focus on the quality of their products and services.
B. Differentiation Strategy

The objective of this strategy is to achieve a competitive advantage by

creating a product or service that is perceived to be unique which stands out
from their competitors. IHG has used this strategy by promoting “Priority Cub
Rewards -Any Hotel, Anywhere”. It is the only hotel rewards programme that
gives members the freedom of choice to redeem their stay almost anywhere
they like in the world, even with IHG’s rivals. It is urrently the world’s largest
hotel loyalty programme with 48 million members and with 500,000 new
members every month. The programme has proven effective in retaining their
guests globally.

C. Focus Strategy
The focus strategy is the position a company takes to compete for
customers in a particular market segment, based on geography, customer type
or market segment. IHG is one of the leading companies due to having seven
brands on their portfolio worldwide with different market segments.
Intercontinental Hotels and Resort, is focused on outstanding facilities and
superior service within local and unique local contexts and cultures. The Holiday
Inn brand offers full-service comfort and value to a broad market. Holiday-Inn
Express is focused on low-cost leadership. Candlewood Suites and Staybridge
Suites are high-quality accommodation which caters for mid-market business
and leisure travellers looking for a multiple night hotel stay. Hotel Indigo is a
boutique hotel, while the Crowne Plaza focus is on the convention and meetings
business.
Global Strategy
Large companies such as IHG are competing within a bigger market place.
They make sure that their competitive advantages are functioning in foreign
markets. To know how they do that, Hill and Jones (2004) presented four global
strategy options and these are as follows:
A. International Strategy - this is through transferring the skills and products
derived from distinctive competencies to foreign markets while
undertaking some limited local customization.
B. Multidomestic Strategy - this is to focus more on responding to local needs
by customization of product offering, marketing strategy and business
strategy.
C. Global Strategy - this is implemented for all countries regardless of their
social-cultural differences and focus on reaping the cost reduction.
D. Transnational Strategy – this is through use of global learning to achieve
low-cost status, differentiation and local responsiveness simultaneously.
IHG operates with multiple strategies as they are growing vastly in the
international market. The way they compete in the globalized market is through
transnational strategy as they have the ability to customize their product
offerings and marketing in accordance with local responsiveness. They also have
the ability to use experience-curve effects which means the more their company
grows, the less it costs for them to produce their products and services. It also
creates an economy of scale through frequent traveller programs (PriorityClub
Rewards), reservation system, global scale and marketing systems that take
advantage of their size. They also reduce their operational costs through efficient
energy consumption (well-known “Green Engage”) since energy is the second
largest cost in their hotels.
Transnational strategy has been very effective for IHG in competing within
the international market. However, implementation is risky as problems may
occur within their organisation.

Conclusions

Any strategies used by any organisations for globalising of their business

will be effective if they will critically analyze their internal and external
environment. I’ve found out that creating competitive advantage through
innovation and socio-cultural environment adjustment is the key element for the
sustainability of globalisation in the hospitality industry.

REFERENCES:

Textbooks:
• Sloman, J. (2008). Economic and the Business Environment. 2nd ed. Essex,
England: Pearson Education Limited. p23-57.

• Slatterry, P. (2009). The Economic Ascent of the Hotel Business. Oxford:

Goodfellow Publishers Limited. p.173-190.

• Clarke, A. and Chen W. (2007). International Hospitality Management.

Oxford: Butterworth-Heinemann. p.203-236.

• Sheela, A. (2002). Economics of Hotel Management. New Delhi: New Age

International Ltd., Publisher. p.13.
Websites:
• Directgov. (2010). Travel Trends - A report on the International Passenger
Survey. Available: http://www.statistics.gov.uk/statbase/Product.asp?
vlnk=1391. Last accessed 25 June 2010.

• Internet Center for Management and Business Administration, Inc. (2010).

Economics-Price Elasticity of Demand. Available:
http://www.quickmba.com/econ/micro/elas/ped.shtml. Last accessed 25
June 2010.

• InterContinental Hotels Group PLC. (2010). The IHG 2008 Corporate

Responsibility Report. Available:
http://www.ihgplc.com/files/pdf/2008_cr_report.pdf. Last accessed 26 June
2010.