Hospitality Industry and China

INTERCONTINENTAL HOTEL GROUP'S ENTRY INTO CHINA Organizational Background The International Hotels Group (IHG) is a British multinational hotel chain. The history of IHG dates back to 1777 when William Bass founded the company originally as a beer brewing company in England, called the Bass Beer PLC. After nearly two centuries predominantly in the beer industry, Bass entered the hospitality industry in 1970 by purchasing hotel assets. Three decades later, Bass sold all of his beer assets to focus completely on the hospitality industry, renaming the company to Six Continents PLC.

To focus even more completely on the hospitality industry, the company demerged is hotel and soft drink assets and rebranded itself to International Hotels Group PLC in 2003. Keen on making the IHG brand the first choice for travellers and hotel owners, the chain has become one of the largest hotel chains worldwide. Through management contracts, franchise agreements, and direct ownership, the group presently has over 750,000 rooms in more than 5,000 hotels spread across 100 countries around the world.

Some of the major brands associated with the group include Holiday Inn, Intercontinental Hotels and Resorts, Hotel Indigo, Candlewood Suites, Kimpton Hotels and Restaurants, Holiday Inn Express, and Crowne Plaza Hotels and Resorts. In China alone, IHG currently has 277 hotels and more than 89,000 rooms, making it the largest hotel chain in the country. This case study explores IHG's operations in the Chinese market, with a specific focus on major strategic issues, strategic direction, macro and micro-environmental factors, diversification issues, competitive advantage, and market entry strategy.

Question 1: Major Issues IHG was among the first international hotel chains to offer services in the Chinese market. Under the management of IHG, Lido Holiday Inn was established in Beijing in 1984, becoming the first hotel in China to be managed by an international hotel chain. One year in business, Lido had exemplified tremendous success, and within 10 years, the hotel had become a popular brand in China with an impressive financial performance. Today, IHG has over 270 hotels in China under its different brands.

IHG's entry into China came against the backdrop of increased economic liberalisation in the late 1970s and early 1980s, which opened the country's doors to international tourists and businesses. Increased international tourism to China created the need for hotels with standards that would measure up to the people travelling from across the world. This provided an ideal opportunity for IHG.

What added to the attraction of the Chinese market to IHG were the following factors: • China's massive population • China's impressive economic growth • China's crucial role in the global Impressive economic growth increased consumer incomes, consequently resulting in the rise of the middle class. This in turn increased the demand for domestic travel, further providing a lucrative opportunity for IHG.

The pronouncement by the Chinese Government that the Tourism Sector would be one of the key drivers of economic growth and the introduction of Vacation Incentives, further propelled the domestic travel segment. Taking due advantage of these positive events, IHG has successfully established its presence in the Chinese market. Nonetheless, the entry has not come without its fair share of difficulties. IHG has had to grapple with institutional and cultural challenges as well as competition.

Question 2: Strategic Direction Today Today, IHG is one of the major players in the Chinese hospitality market. The success of the hotel chain in China can be attributed to its unique strategy.

As a part of this unique strategy IHG decided to focus on the following: • Strengthening of its diverse portfolio of differentiated brands • Making its Brands the number one choice for travellers • Identifying and pursuing markets where the scale counts and growth potential is high • Developing and maintaining enduring Guest relationships • Lastly and most importantly, delivering revenue to hotel owners As opposed to the conventional industry categories, IHG's broad portfolio of hotels is a clear reflection of what the customer needs and wants to experience.

Whether a family vacation, an overnight stay, or a business trip, the group's brands seek to fulfil these needs, underpinned by an unmatched loyalty programme and technological innovation. IHG's business model has three dimensions: • Franchising, • Management contracts • Direct ownership and leasing. With over 3,900 hotels worldwide, franchising accounts for majority of the group's business. About 650 hotels worldwide fall under the management model. Direct ownership accounts for less than 1% of the group's business, with only 16 hotels under this model.

Question 3: PEST and Porter's Five Forces Analysis The impact of the macroeconomic environment (political, economic, social, and technological factors) on business operations have become dominant factors towards sustainability and growth. Political and economic factors have particularly affected the operations of IHG in China. From a political perspective, the Chinese government, in the last three decades or so, has introduced a number of legal reforms aimed at opening up the domestic economy. These reforms have particularly benefited the hospitality industry. Joint ventures and management contracts in the industry are now common.

In spite of favourable policies, the legal environment remains a challenge, as some business models such as franchising may not thrive. From an economic point-of-view, China has experienced tremendous economic growth since the early 1980s. It is now the second largest economy in the world after the U.S. Rapid economic growth in China has meant increased per capita income. This is an important advantage for hoteliers as the consumption of their offerings is largely driven by the level of consumer's purchasing power.

In addition to economic growth, China is home to approximately 1.3 billion people. This provides for a lucrative market for IHG, which seeks to pursue high-growth markets. Business operations are affected by not only macro, but also micro-environmental forces. A particularly important micro-environmental factor in this case is competition. The threat of rivalry in the Chinese hospitality industry can be characterized as strong. Other international hotel chains have also taken advantage of the opportunities offered by the Chinese market.

Today, all major international hotel chains have their presence in China, Wyndham, Marriott, Accor, Starwood, Best Western International, and Hilton, to name a few. The threat of rivalry is further compounded by the presence of local chains, which are equally powerful. As China increasingly becomes an attractive destination, more international and local hotel chains are likely to enter the market, meaning the threat of entrants is also high.

Though IHG is the largest hotel chain in China in terms of number of rooms and hotels, it must remain aggressive to avoid the invasion of its market share by incumbent and new rivals. Question 4: Diversification IHG has come a long way. Having entered the market with Beer as its focus and operating successfully for nearly two centuries, the company decided to diversify into the totally new area -- the[[:blank:]]Hospitality Industry.

In 1970, however, the original company diversified into the hospitality industry, though still with significant interests in the beer industry. The company completely abandoned the beer business in 2000 to focus exclusively on the hospitality industry. This is an ideal case of unrelated diversification, where a firm ventures into a very different business or product line. The beer and the hospitality businesses are two very different industries. Indeed, one is product-oriented and the other one is service-oriented. Additionally, each business targets a different market segment and is subject to unique regulatory requirements.

All the same, the shift of strategic focus appears to have been beneficial for the company. IHG is now a successful international hotel chain. Question 5: Competitive Advantage A major source of competitive advantage for IHG is its focus on economies of scale. Having 5,000 hotels and 750,000 rooms worldwide currently means that the group targets a broad customer base. In 2005, the group recorded approximately 126 million stays and $5 billion in revenue. In China, IHG is the largest international hotel chain in terms of number of rooms.

In addition, the group has extensive presence in major cities around the country. This gives the group an important advantage as compared to its rivals. Moreover, IHG boasts of the best loyalty programme and most-visited website in the industry, which is an addition to its competitive advantage. Whereas IHG is the largest international hotel chain in China, there are some domestic hotel chains with a larger presence, notably the Shanghai Jinjiang Group.

Nonetheless, IHG China benefits from the marketing and operational support it gets from the larger parent company, placing it at a better competitive position compared to domestic rivals. Another source of competitive advantage for IHG is the strong relationships it has built with key local stakeholders. As a Western company, IHG understands that relationships are important for business success in China. The group boasts of robust relationships with stakeholders such as the China Tourist Hotel Association, Hospitals, Communities, as well as Hotel Owners.

IHG assumes a leadership status in the market because of the above-mentioned relationships. It is likely that IHG's competitive advantage in the Chinese hospitality industry will be sustainable in the long-term. The strong relationships the group has built with its customers and local stakeholders, coupled with the unrelenting support of the parent brand, embody a robust foundation that can counter different market threats effectively. Question 6: New Market Entry Generally, firms.