Marriott\'s Move Into China What

Marriott's Move Into China

What Benefits Does Expanding in China bring to Marriott?

Marriott International (NYSE: MAR) is a global leader in the travel and hospitality business, earning $11.43B in revenues in their latest fiscal year, yielding a gross profit of $8.92B. Corporate-wide Profit Margin is 3.42% and Operating Margin is 6.96% for the latest fiscal year. Despite a global economic downturn, Marriott International was also able to attain a Return on Assets of 5.83% and a Return on Equity of 33.42%. Marriott in their latest fiscal year results released in the 2009 Annual Report indicate that China is the fastest growing market they are competing in today, with a 20% growth in Revenue Per Available Room (RevPAR) (Marriott Investor Relations, 2010). In the executive summary of the Marriott Annual Report for 2009 the company's senior management also states that they anticipate having 60 hotels operating in that nation by the end of 2010, second only to the U.S. In total hotel count (Marriott Investor Relations, 2010). Clearly Marriott sees significant benefit from expanding so rapidly into China, with such a large commitment of corporate resources.

The macroeconomic factors of China, from its steadily increasing Goss Domestic Product (GDP), Gross National Product (GDP) and rising per capita incomes, combined with the central role the Chinese economy is playing in globalization are combining to create the second largest market globally for travel according to the World Travel and Tourism Council (WTO) (World Travel and Tourism Council, 2010). The WTO ranks China first in the world in terms of potential for long-term (10-year) growth (World Travel and Tourism Council, 2010). China continues to have lower-than-average construction costs relative to other Asia-Pacific regions and one of the highest anticipated market shares of travel through 2020 at 8.3% (World Travel and Tourism Council, 2010). It is the highest growth, most underserved market from a global hospitality brand standpoint globally today. Marriott International sees Chinese expansion as a central part of their growth strategies for the next five years, a point made clear from analyzing their latest annual report and financial statements (Marriott Investor Relations, 2010). In addition, Marriott senior management plans to have 90 hotels operating in China within five years according to the 200 annual Report (Marriott Investor Relations, 2010). The Marriott brands of Marriott Hotels & Resorts, JW Marriott, Renaissance Hotels, and Courtyard by Marriott are the most active in China as of 2010, with additional branded properties being added over the next five years. Independent research firm STR Global has also predicted the majority of business travel and greatest growth in hospitality spending will occur in China through 2015 (Stoessel, 2008). With all these factors taken into account, Marriott sees their investments in China and the commitment to increase their total property count to 90 by 2015 as strategic to their long-term profitable growth (Marriott Investor Relations, 2010).

Aim

The aim of this study is to evaluate the benefits Marriott gains by expanding into China.

Objectives

1. To determine the benefits to the Marriott brand globally by expanding into China, evaluating expansion methods and their effects on branding performance.

2. To evaluate the implications on the Marriott value chain of expanding into China from a market analysis standpoint, concentrating on the supply chain and electronic enablement standpoint.

3. To evaluate Marriott's expansion into China from a competitive analysis standpoint.

Literature Review

The ability of any business to stay competitive over the long-term is directly related to its innate ability to deliver value, continually seek out new strategies for differentiation, and attract and retain customers (Porter, 1986). In the travel and hospitality industry, long-term competitive differentiation and viability is directly related to delivering an exceptional customer experience as well (Pine, 2002). It is the quality of communication and service processes with a service provider that are the most sustainable long-term strategy for delivering value to customers and achieving long-term differentiation (Zeithaml, Berry, Parasuraman, 1988). When a hospitality business continues improves communications, service and support processes putting the client or guest at the center of them, customer loyalty and profitability increase as is evidenced by the most recent Marriott International financial performance (Marriott Investor Relations, 2010).

How Marriott and hotel chains like them expand so rapidly on a global scale yet stay consistent with their quality levels is directly tied to their approach to leadership and continual process improvement. Transformational leaders who continually reinforce service levels and accountability for results while being completely committed to customer satisfaction themselves are more effective than any extrinsic reward or punishment program (Bodla, Nawaz, 2010).

For Marriott and any global hospitality service provider, their brand is their service experience. To the extent to which it can be scaled globally and kept consistent is the extent to which the company can retain its competitive advantage entering new markets. An essential part of the branding strategy for Marriott is staying consistent with its physical presence and high standards of aesthetic design, cleanliness of facilities, and amenities that meet customers' preference and requirements. These factors are essential for attaining high service quality ratings on a SERVQUAL scale (Parasuraman, Zeithaml, Berry, 1985). The five components of the SERVQUAL scale include reliability, assurance, execution on tangibles, expression of empathy, and responsiveness (Parasuraman, Zeithaml, Berry, 1988). Each of these five dimensions are measured using Likert-based scales that generate ordinal- and interval-level-based data for further analysis and recommendations. SERVQUAL has been used in over 200 academic studies and is widely in use throughout the hospitality industry (Parasuraman, Zeithaml, Berry, 1991). As hospitality providers primarily compete on the five dimensions that SERVQUAL measures, concerted branding strategies that capitalize on its five dimensions are commonly used in this industry (Pine, 2002). SERVQUAL is used for benchmarking the performance of one hotel relative to another, in addition to analyzing what areas of a given property are doing exceptionally well, and which need to be improved. The collection of SERVQUAL metrics forms the foundation of balanced scorecards used for managing on-property performance and evaluating the role of supporting systems and processes at a property provider's headquarters (Denton, White, 2000). As the experience customers have is a large determinant of brand perception and an integral part of brand loyalty, SERVQUAL is also seen as a metric of brand performance as well. For any hospitality provider moving into a new market with a dissimilar culture, the ability to intermediate cultural differences will determine if the venture to expand is successful or not. This continues to be the case in China specifically, where the cultural differences across the five dimensions of the Hofstede Model in addition to the wide variations in the perception of acceptable service, perception of time itself, and authority vary widely (Gu, 2003). Western nations have struggled to propagate and promote their brand in services industries due to the wide gulf in perception's and values between China and western nations (Zhang, Wu, 2004). As for many hospitality service providers, their brand is the experience they deliver. Creating a unified culture within the Chinese subsidiary is a critical success factor for the long-term growth of the business (Auch, Smyth, 2010).

The strategies hospitality firms rely on to expand into foreign markets have long-term impacts on their value chains and global competitiveness (Porter, 1986). The expansion strategies most often considered include buying existing hotels or an entire hotel group, which are a very rapid way to expand yet requires debt financing or high levels of capital. Acquisitions of hotels or entire chains in foreign markets where the national and corporate cultures are significantly different than the acquiring company however often fail more than succeed (Chen, Dimou, 2005). This is due to the culture clash and lack of perceptual alignment on such fundamental points as the perception of what constitutes excellent service in a westernization country vs. China for instance (Gu, 2003). In foreign countries where the cultures are much more comparable, the success rate is higher however. Another strategy is to merge hotel groups or chains together, and seek to gain economies of scale at the system and process level to attain cost reductions (Yang, Kim, Qu, 2010). This strategy of merging operations requires the consolidation of systems and procedures at the process level, which can take up to a year or longer to attain the cost savings originally targeted (Yang, Kim, Qu, 2010). There is also the risk that the cultures of the two companies will not merge even after the systems and processes have been tightly integrated together (Chen, Dimou, 2005). A third strategy is a joint venture (JV), the most risk averse of all strategies that generates revenue for all companies participating (Yang, Kim, Qu, 2010). Marriott has used joint ventures successfully to gain access to foreign markets and have been able to successfully mitigate the risk of purchasing or merging entirely with another hotel chain as a result. Another aspect of joint ventures that they strengthen the value chains of each company participating by providing all the benefits of entering a new market with a significant reduction in overall risk (Porter, 1986). Another strategy companies often rely on are franchising their operations to attain economies of scale and global growth at the same time (Altinay, 2007). Franchising however has significant risk as it requires a high degree of branding consistency and brand enforcement over time (Altinay, 2007).

Any expansion strategy has a direct implication on a company's value chain. A merger, acquisition, alliance or joint venture can completely re-define the value chain of an organization (Porter, 1986). The value chain for Marriott's expansion into China is shown in Figure 1, Marriot Value Chain for China Expansion.

Figure 1: Marriott Value Chain for China Expansion

Based on the value chain model from Porter (1986)

The competitive dynamics throughout China are unique as the majority of hotels and revenue are state-controlled. As of 2010, 58% of hotels are state-owned and 37% are private. This makes the ownership of a private hotel in China exceptionally valuable, and places great emphasis on how well a hospitality chain can lobby the Chinese government for concessions and support for new venture creation. Global competitors in the Chinese market include Accor, Starwood, Shangri-La, Hyatt and Hilton. It is the most competitive region of the world for gaining new hotel rooms that are privatized, HENCE Marriott's prioritization of this market as their most important. Figure 2, Analysis of Hotel Ownership in China provides a graphical analysis of state-owned vs. privatized hotels in the country. Figure 3 provides an analysis of the total number of hotel rooms each global chain controls as of 2010. As can be seen this is quite literally a gold rush for hotel rooms that are not state-owned. Of all competitors, IHG continues to be the most adept at gaining the Chinese government's approval for new building and also for managing to grow their brand through joint ventures and alliances.

Figure 2: Analysis of Hotel Ownership in China

Source: (World Travel and Tourism Council, 2010)

Figure 3: 2010 Competitive Comparison Analysis

Based on analysis of the Marriott Annual Reports and 10Ks

(Marriott Investor Relations, 2010)

Research Methodology

Attaining a high level of reliability and validity is critical for any research project to make a lasting contribution to the body of knowledge of which it is a part. The intent of this research methodology is to accomplish the three objectives of determining the impact on the Marriott brand of pursuing specific expansion strategies, evaluate how the Chinese market dynamics will affect the Marriott global value chain, and evaluate the expansion of Marriott into China from a competitive analysis standpoint. Each of these objectives are accomplishable through secondary research methodologies that are defined in this analysis. Additionally, the longitudinal effects of these decisions can be seen in financial analysis of Marriott's revenue and RevPAR figures published annually in the 10Qs on file with the Securities and Exchange Commission (Marriott Investor Relations, 2010). Taken together, the secondary research and data analysis based on financial performance will attain each of the three objectives of this study.

Research Method

The research method will include the following data collection and data analysis strategies and processes to ensure the data is valid, reliable and contributes to the body of knowledge for this field of study.

Data Collection

Secondary data collection will be completed using the online databases available from the Glion Institute of Higher Education, specifically starting with EBSCO Host, ProQuest (ABI Inform), Business Source Complete and Lexis/Nexis. Morningstar and Standard and Poor's will be accessed from the library for financial analysis, in addition to using the downloads Marriott makes available from their investor relations page.

In any data collection effort, it is critically important to have a sampling frame and defining of the sampling universe. For purposes of this study, the sampling frame will be defined as the expansion strategies of those companies shown in Figure 3. Profiles of each of these competitors' value chains, timeline of strategies, market development and Chinese partnership strategies, and pricing strategies will be assessed. The value chain model (Porter, 1986) will also be completed for each competitor and assessed as part of the data analysis phase. In short, the replication of timelines, decisions made, value chain implications and the financial impact of these decisions on each competitor will be possible given the data collection phase of this methodology.