Information and communication technology's impact on the hospitality industry

¶ … Communication Technology in the Hospitality Industry

Computers, global telecommunications and the Internet have all fundamentally changed the manner in which companies of all types and sizes operate and market their businesses today. In fact, information and communication technology (ICT) have been responsible for fueling the globalization of the marketplace and these same forces have contributed to the resurrection of the travel and tourism industry following the major downturn the industry experienced following the terrorist attacks of September 11, 2001. Today, the tourism industry is the largest industry in the world and the hospitality sector that is supports has enjoyed the results of this upsurge. Some hospitality organizations, though, have benefited from their ICT initiatives in more significant ways than others, but it is clear that virtually any type of company competing in the hospitality industry can benefit from the use of ICT provided that certain factors are taken into account during its selection, implementation and administration. Therefore, to gain some valuable insights into what is involved, this paper provides an overview of the use of information and communication technology in the hospitality industry today to determine the impact that information technologies have had on the industry's structure as well as an examination of ways in companies are using these technologies to add value to their business proposition by measuring the added value originating from IT. A Porter's five forces analysis of the hospitality industry is followed by an analysis concerning how both existing and emerging IT technologies can be used as a source of competitive advantage. Finally, a summary of the research and important findings are presented in the conclusion.

Review and Discussion

Background and Overview

The term "hospitality industry" is an umbrella reference for all of those companies that have as their primary purpose the provision of food, beverages and accommodations for sale on a commercial basis (Lucas 2003). The most common activities or sub-sectors in the International Standard Industrial Classification of all Economic Activities (ISIC) Division 55 (Hotels and restaurants) are (a) hotels, (b) restaurants, (c) bars (this designation includes pubs and clubs) and contract catering (Lucas 2003). As noted above, the hospitality industry is part of the tourism sector which is the largest industry in the world and is estimated to employ more than 255 million people, accounting for fully 10% of employment worldwide (Spillane 2001). Given the enormous numbers of people that are competing in the hospitality industry, it is clear that a competitive advantage is needed to survive and grow. Because the hospitality industry depends on delivering high quality products and services with a view towards providing high levels of customer satisfaction, this competitive advantage will naturally be related to this function. For instance, according to Spillane, the tourism industry "has now grown into a modern, mature industry where workers are forming their professional identity. These 'hospitality professionals' are primarily concerned with customer satisfaction. But that's not always easy to achieve and many problems can -- and do -- arise" (2001, 16).

Problems with customer satisfaction are certainly not unique to the hospitality industry, of course, but companies competing in this service industry in particular must depend on a track record of satisfied customers in order to sustain their existing levels of operations and to grow their businesses in the future. Because the hospital industry typically caters to a global consumer base, providing consistently top-notch services in such a transcultural environment can be a daunting enterprise that is fraught with opportunities for failure. Indeed, the tourism and hospitality industry have had a global focus in the past, of course, but this focus has become increasingly pronounced in recent years due in large part to the innovations introduced by ICT. In fact, according to Egger and Buhalis (2008), "As more consumers move online, travel has become the most commonly sold online product" (16). As a result, the competitive environment in which companies in the hospitality industry operate has become increasingly fierce in recent years and there has been a push among many companies to "reinvent or differentiate themselves successfully, especially if they become homogenized as predicted by some researchers. In particular, destination organisations will need to seek competitive advantage by providing a quality service product" (Wahab & Cooper 2001, 37). Therefore, companies competing in the hospitality industry must take advantage of every resource available to help them achieve the operational capability to both deliver high quality customer services as well as to communicate this feature to the prospective clientele. These companies must also be able to identify trends in the marketplace that have the potential to affect their operations and to monitor costs and other operational data in the process. All in all, it is hard to imagine how these processes were ever accomplished efficiently without ICT, and these issues are discussed further below.

Porter's Five Forces Analysis

According to Kermally (2003), Porter's five forces framework can provide an improved analysis and understanding of the competition that exists in a particular industry. This author points out that, "In order to construct a competitive strategy, an organization needs to know what is likely to happen in the markets in which the organization delivers its products and services. It also has to know who its competitors are in a particular industry structure" (Kermally 2003, 58). In order to accomplish this type of strategic analysis, it is helpful to refer to the rules of the competition governed by the five competitive forces described by Porter in his five forces model, and these forces are applied to the hospitality industry and its competitive environment in Table 1 below.

Table 1

Porter's Five-Force Hospitality Industry Analysis

Force

Overall Assessment

Analyses and Comments

Power of Buyers

ICT provides travelers and other potential customers with the ability to shop and compare offerings and prices and can even give them a virtual tour of a company's facilities before they make a purchase decision. Internet usage statistics point to more than one billion users worldwide, with an astronomical growth rate of about 15% per month, a growth rate that translates to 180% per annum, compounded monthly (Eger 2006). The Internet's most popular component is the World Wide Web which has been widely integrated into the marketing, information, and communications strategies of almost every major corporation, educational institution, charitable and political organization, community service agency, and government entity in the developed world; there has never been an innovation in communications that has been so widely or rapidly adopted by the public (Eger 2006, 18).

ICT levels the playing field for companies competing in the hospitality industry, with small- to medium-sized enterprises enjoying the same opportunities for promotion and customer relationship marketing as their larger counterparts. This point is made by Richer (2010) who advises, "New entrants into the marketplace are using the latest development languages to construct straightforward yet reasonably comprehensive reservation systems that are specifically designed for online sales" (3). In addition, Richer notes that, "Selling online need no longer be an expensive exercise. There has never been a better time for smaller operators to compete on a level playing field with their larger competitors who can more easily afford heavy investment in technology" (4).

Power of Suppliers

ICT provides hospitality organizations with the ability to customize their offerings and promote them in a cost-effective fashion based on current trends and the analysis of their customer relationship marketing data. In addition, hospitality organizations can use information technologies to improve their internal operations by automating many human resource functions and by improving communication throughout the organization (Conophy 2005).

The cost-effectiveness of information technology applications mean that smaller marketing budgets can be translated into more competitive pricing levels.

Threat of Substitution

The hospitality industry survived for thousands of years without ICT, but it is reasonable to suggest that the ubiquity of these technologies and their importance to the operation of businesses of all types today indicate that there are no viable substitutions currently available to replace them.

Some low-tech alternatives remain useful in the hospitality industry; for example, customer comment cards are an effective way to collect customer satisfaction feedback and brochures and fliers continue to be used as responses to mailed inquiries for information.

Threat of Entry

The barriers to entry for the hospitality industry are directly related to what type of enterprise is involved. Restaurants or bars can be launched for far less, for example, than a hotel.

Major chains enjoy brand recognition creating a major hurdle for start-ups.

Internal Rivalry

The research was consistent in showing that although ICT has made the hospitality industry more competitive, some hospitality organizations collaborate with their competitors (and others) to help redefine their destination and improve business for all.

For instance, Domke-Damonte and Levsen note that, "A firm may collaborate with direct competitors, customers, suppliers, and other organizations providing services to their customers in an effort to build its competitive position" (31).

Overall Industry Assessment

As part of the travel and tourism industry, the hospitality industry has regained much of the business that was lost immediately following the terrorist attacks of September 11, 2001;

The current global economic downturn has affected this industry as well.

Using IT Technologies to Achieve a Competitive Advantage

Perhaps the most important contribution that information technologies have made to the hospitality industry in recent years is the manner in which it has improved customer service and the level of professionalism among hospitality organizations, and these outcomes can be used to gain a competitive advantage. In this regard, Jafari emphasizes that, "During the past several years, nothing has increased professionalism or more greatly enhanced customer services within the tourism industry than automation. Technology will continue to change the way companies plan, co-ordinate, control and evaluate operations" (46). Given recent trends in the widespread use of information technologies by industries of all types, these trends will likely continue into the foreseeable future until the march to ubiquitous computing is achieved. Even then, though, software engineers will be working on "the next big thing" in information and communications technology.

Just a few years ago, computers were prohibitively expensive, cumbersome, difficult to use and required a significant amount of training to use effectively. By sharp contrast, the situation is much different today and even computer novices can become proficient in the use of sophisticated customer relationship marketing packages quickly thanks to intuitive graphic-user interfaces and user-friendly software applications. As Jafari points out:

Automated information system design and implementation is one of the fastest changing aspects of the industry. Future technological developments will be more intuitive, object-oriented, global and portable. The traditional approach of cultivating an appropriate level of computer literacy in order to render a more effective utilization of technology is rapidly changing. (Jafari 2000, 46).

A study by Piccoli, O'Connor and others (2003) examined the risks and benefits of customer relationship management in the hospitality industry. According to O'Connor and Murphy (2005), the CRM approach "can lower marketing expenditures and increase sales through closer relationships and increased satisfaction. For this to occur, the entire hotel chain must cooperate in the collection, management and dissemination of customer information -- an expensive and complicated process" (p. 10). In their study, Picolli et al. point out that a potential data-ownership problem exists that is related to the structure of the lodging industry in the United States in which owners, management companies, and brands are required to collaborate to effectively operate their properties but the structure makes it particularly difficult for all three of these segments to effectively share customer data. Because these three entities are in competition as often as they are cooperating, implementing CRM initiatives could be constrained or entirely unsuccessful in achieving their corporate goals. In this regard, Piccoli and his associates (2003) maintain that in order to overcome these constraints, it is important to identify situations that are amenable to the use of CRM. Consequently, Picolli and his associates (2003) suggest that within the hospitality industry, CRM applications have the best chance of success when they are implemented at the brand level and cite the results of two case studies of brands with strong CRM programs (i.e., Wyndam International and Harrah's Hotels and Casinos); the latter example also highlights the value of data mining techniques when using CRM applications. According to O'Connor and Murphy (2005), "This procedure applies artificial intelligence and sophisticated statistical techniques to customer data to perform five tasks: classification, clustering, deviation detection, associations and forecasting, and can be a valuable tool for hotels seeking to better understand and predict guest behavior" (p. 10). Other factors that must be taken into account when implementing a CRM initiative include how customers will be interfacing with the hospitality company's Web-based services. In this regard, O'Connor and Murphy (2005) emphasize that, "Consumers increasingly use a variety of devices (for example cell phones, Interactive television and kiosks) to access the Web, and need different types of interactions, information and procedures depending on the relationship stage" (p. 11). As a result, any type of "one-size-fits-all" approach for operating a CRM approach will likely fail to provide the desired results (O'Connor & Murphy, 2005). The research to date indicates that in order to successfully integrate a CRM application in the hospitality industry, the specific characteristics of XML that use content-specific tags instead of stylistic ones could assist hotel companies in their implementation of the needed device specific and loyalty level personalization that are needed (O'Connor & Murphy 2005).

In order to use these technologies to their best effect in achieving a competitive advantage, though, there must be some overarching vision or plan to guide the process, which naturally begins with the company's top leadership. According to Taylor, "No number of operational or computerized systems can provide good customer service without good leaders to learn and teach the processes. The hotel, resort, or restaurant must have a vision about where it is heading, must have strategies in place for meeting that vision, and must have inspired and motivated employees to meet the challenges associated with the vision and strategies" (36). Likewise, in their study of the effects of information technology on the hospitality industry, Bassoppo-Moyo, Bassoppo-Moyo and Dube (2002) emphasize that, "For information technology to be applied in any given entity, there must be managers assigned to running the affairs of that environment. Management can be defined as the person or persons that manage an organization" (289). Although many larger organizations in the hospitality industry enjoy economies of scale in their marketing efforts, smaller organizations can use ICT to overcome to these competitive disadvantages. In this regard, Domke-Damonte and Levsen point out that, "One significant advantage to Internet usage for small business falls in the marketing realm. Almost 9% of all Internet users made travel reservations through the Internet in 1998. By having an interactive Web site online, small hotels and other small businesses are offering their services to a global market at an inexpensive rate" (2002, 31).

As noted above, access to timely information about the market, current trends and the initiatives being taken by competitors represent the foundation of an effective marketing plan for hospitality organizations and this same information can be used to help achieve a competitive advantage. For example, Domke-Damonte and Levsen report that, "[Hospitality organizations] can emphasize their individual services and competencies, a capability not available within a cooperative marketing plan. This could increase competitive moves by offering niche services the industry does not usually provide. Access to competitors' sites also provides timely information, but increases the turbulence of the task environment, resulting in higher levels of competition within the industry" (2002, 31).

A fundamental constraint to successful imitation that is capable of preventing or at least delaying the loss of sustainable competitive advantage that result from IT-enabled strategic initiatives is the preemption barrier which is shown in Figure 1 below.

Figure 1. Preemption Barrier

Source: Luftman, 2003 at p. 124

A number of the classic examples of IT-enabled strategic initiatives that have emerged in recent years have provided first-movers with a competitive advantage as well as the capacity to prevent preemptive retaliation by competitors (Luftman 2003). According to Luftman, "Initiatives such as Merrill Lynch's Cash Management Account, American Airlines' SABRE, American Hospital Supply Corporation's ASAP, and Pacific Pride System's Cardlock seem to owe much of their success to their ability to leverage their pioneering efforts" (p. 125). Because they were the "first-est with the most-est," these early IT-enabled strategic movers were able to forge lasting relationships with their customers and other players in the value system in ways that created significant barriers to imitation that also protected their competitive advantage (Luftman 2003). Yet another way in which early movers enjoy a competitive advantage is the ability to make the costs associated with switching prohibitively expensive or difficult for competitors. In this regard, Luftman advises, "IT-enabled strategic initiatives, heavily relying on the collection, storage, manipulation, and distribution of information, are particularly suited to the creation and exploitation of switching costs" (p. 125). Here, Luftman defines switching costs as "the total costs, including psychological, physical, and economic costs, borne by the parties of an exchange when one of them leaves the exchange. Switching costs stem from investments that are specific to the IT-enabled strategic initiative, where the term 'specific' indicates that the value of these complementary investments is significantly lower in any alternative use" (2003, 126). A useful instance of switching costs that are commonplace are the entire costs associated with a change from one type of computer platform to another such as takes place when companies switch from Microsoft to Macintosh (Luftman 2003). While some switching costs are relatively minimal, others can add up, making the transition more time-consuming and costly; some switching costs that may not be readily discernible during such transitions include the costs of the platform- specific training, software, peripherals, data conversion costs, any data loss experienced, and so forth (Luftman 2003).

Finally, Luftman points out that the foregoing costs may not be all of the expenses involved during an IT transition initiative. According to Luftman, "Switching costs are not only associated with the tangible and intangible investments needed to obtain and operate the necessary IT infrastructure; they also include opportunity costs associated with abandoning the initiative to adopt competitors' offers" (2003, p. 126). As an example, Luftman cites the case of firms such as Avendra in the hospitality industry that have used an electronic procurement marketplace for a significant amount of time. These types of companies might be reluctant to switch to a competitor since it would involve the loss of the historical transaction data that had been acquired over time that might be not readily transferable in an integrated fashion (Luftman, 2003).

Conclusion

The research showed that like virtually every other type of industry, the hospitality industry has been profoundly affected by the introduction of information and communication technologies. Because of the global focus of the industry, the importance of ICT was shown to be especially pronounced for the hospitality industry. Besides the off-the-shelf software applications and integrated customer relationship marketing programs that are being developed specifically for the hospitality industry, the research showed that companies competing in this industry can benefit from information and communication technologies in a wide range of ways, including market research, collaboration with customers and suppliers -- and even competitors -- to their mutual advantage. For companies competing for a bigger share of a global consumer base, it is reasonable to conclude that hospitality organizations that use information technology in the ways described above will enjoy a competitive advantage over those that do not. Given the enormous size of the hospitality industry and the rocky economic environment that exists today, even a slight competitive advantage may spell the difference between success and failure for many hospitality organizations.