Market share is often associated with profitability. And increase market share could also increase its bargaining power for negotiating with suppliers, distribution channels and customers. While InterContinental is seeking to increase their market share by increasing the sales, sometimes a higher volume sale could also lead to achieve economies of scale and develop a cost advantage.
The rapidly growth in economic and disposal income in Asia Pacific region has brought a great opportunity to boost the intra-Asia travel demand. Several Asian countries have improved the destination image and destination marketing activities. Moreover, most of the Asia Pacific countries are removing the trade barriers which may encourage international and domestic investment within the region and business travel demand to grow. Although the market is competitive, InterContinental is expected to increase its sales and market share within Asia Pacific region.
The Market Structure of InterContinental Hotels & Resorts
The market structures determine the degree of competition within an industry. The market structures are classified by number of firms, freedom of entry to industry, nature of product and nature of demand curve. It could be traditionally divided into four traditional categories according to the degree of competition within the industry. The four categories are shown in Appendix A.
The market structure will often determine and represent the firm’s operating platform, behaviors and performances. Firms behave quite differently when they are operating under different competitions. InterContinental is classified under the monopolistic competition, as there are many varieties of products or services being sold in this type of market. Monopolistic competition has following features:
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Large number of firms: Although InterContinental has a 21.7% of market share in Asia Pacific Region, we should not neglect that there are many other locally operated and independent hotels that are operating without being included in the above data. In addition, there is a freedom of entry which might threaten the InterContinental’s market shares and market positions.
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Close substitutes: Under monopolistic competition, InterContinental faces very close substitutes. However, the only difference may be some of variation in the quality of the product (Pinkmonkey.com, 2001). And normally, the more substitutes available in the market, the more elastic will be in response to a change in price.
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Product differentiation: Product differentiation is a characteristic of monopolistic competition. As we mentioned in previous section, InterContinental mainly focuses on product differentiation rather than price differentiation. Their product is differentiated in different ways, such as the prime locations in major cities or resorts and they offer a unique loyalty program which allows customers to accumulate the incentive points from its ten sub-categories hotel brands.
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Selling (advertising) cost: The advertising cost is another unique feature under monopolistic competition. Whenever the InterContinental’s products or services are differentiated, it is necessary to inform the buyers. The product differentiation and advertising cost will go along to enable InterContinental to influence the demand curve and to maintain market control.
Under the monopolistic competition, we could examine the price, output, and profit by distinguishing between short run and long run. In the short run, InterContinental would face competition from competitors or substitutes; and its demand and AR (average revenue) curve are more elastic compared with perfect competition situation. We could visualize short run monopolistic competition as:
Figure 1 – Short run monopolistic competition for InterContinental
Source: William-King.edu (1999)
In short run, InterContinental will still able to earn supernormal profit which shown in shaded by its high level of reputation and recognition. How much the profit InterContinental will make in the short run will mainly depends on the strength of its demand. InterContienetal has an elastic demand in its Asia Pacific market, because if there are any unexpected events, such as SARS and terrorist attack would affect its demand tremendously. And if there are more or close substitutes to replace InterContinental products or services, the more elastic demand for the product it would be.
In the long run, when a firm is able to make supernormal profit, new firms will set up and will become more and close substitutes in the long run. The long term monopolistic competition is demonstrated as following:
Figure 2 - Long run monopolistic competition for InterContinental
Source: William-King.edu (1999)
As the new hotels enter, they will attract the customers away from InterContinental. The demand curve of InterContinental will shift to the left. The long run equilibrium will be reached when only normal profits remains. It means that there is no further incentive for new firms to enter.
InterContinental will face some problems when long run equilibrium is reached. A market research by MacGeoch (2003) stated that there is an oversupply in supper scale segments where InterContinental is aiming for in prime cities across Asian countries. And in monopolistic competition, InterContinental could not remain its leading positions and market share without cutting the cost and advertising to attract more customers. Advertising will normally go alone with product differentiation.
Luxury, Normal, or Inferior?
InterContinental Hotels and Resorts attract both business and leisure travelers. For business travelers, the hotels offer the products and services to detail that the business travelers could not ask for more. According to InterContinental Hotels and Resorts’ website (2004), they believe that comfort is not a reward for doing a job well, but a requirement. Their business rooms are larger than the standard rooms; they also touch on the fine details on making sure that there is the perfect lighting for businessman when they use their laptops. Equipments such as printer, fax, or copier are within their reach from the spacious desks in the business rooms. In preventing business travelers from missing an important phone call, the Hotels’ rooms are also equipped with dual-line telephone system with voicemail functions.
For their leisure travelers, the rooms are designed with a sense of comfort when the guests enter their rooms. In addition, InterContinental also offers various kinds of cuisine in their hotels to accommodate different preferences for the guests. Overall, based on their products and services being offered, InterContinental Hotels and Resorts may be considered as a luxury hotel.
On the economical sense, the determination of the products and services offered by InterContinental Hotels and Resorts will be mainly based on the income elasticity of demand, which would be based on the income level and the corresponding spending level of consumers. According to QuickMBA.com (2004), the income elasticity of demand is the measurement of the responsiveness of quantity demanded to a change in price, while all other factors remain constant. The following formula explains the relationship of price elasticity of demand:
Elasticity of Demand = Proportionate Change in Quantities Demanded Proportionate Change in Income
When analyzing price elasticity, we are concerned with the price elasticity of demand and see how sensitive the demand for a good is to a price change. The higher the price elasticity, the more sensitive consumers are to the changes in prices. For example, if the number of price elasticity is high, it can suggest us that when the price of a good goes up, the consumers will buy less of it. A low elasticity in price means the opposite, where if there is a change in price, the demands from customers will be influenced only a little bit. (Moffatt, 2004) According to Department of Finance Canada (2004), business travelers are typically considered to be less price sensitive, least able to make travel commitment ahead of time or to make use of alternative travel arrangements at the last minute. Business travelers generally pay much higher prices than non-business travelers.
Differentiation
Product features and uniqueness normally affects the product promotion. The differentiation of product along key features is an important strategy in achieving strong image in customers’ mind. Differentiation is by creating unique product characteristics such as quality, design and reliability which in turn become their competitive advantage. Differentiation should create value for the customer needs.
InterContinental offers various services and facilities to a range of clients both globally and in the Asia Pacific region with prime location within key cities and resorts. This kind of strategy will reduce the chance of customers switching to their competitors. They are widely recognized due to their broad range of brand portfolio which specifically target niche market in order to satisfy customers’ needs and expectations. InterContinental invests a large amount of money annually in order to streamline process, cut unnecessary work and achieve high level of economics of scales which makes them more cost saving from their competitors.
InterContinental has introduced a fully integrated new electronic commerce service to enhance the online reservation experience. In addition, it is the world’s first hotel group that guarantees reservations on the website even if the customer does not use a credit card. For China, the largest market in Asia Pacific, people do not indulge in credit transactions, InterContinental has made reservation is extremely convenient and easy to make booking without the fear of getting rejected on the basis of not using a credit card.
InterContinental’s loyalty program members are allowed to accumulate the bonus points quickly from all the sub-brand hotels which strategically capture different market segments. This helps to increase customer loyalty.
Differentiation often results in higher costs, especially in the short run, as the company does the product development through innovation, design and research. The firm with high level of differentiation is often able to charge premium prices, revenues may hence increase more. However, it is very often that the tastes and fashion change could have a significant impact upon the sales of a differentiated product. Price differentiation could be problematic as the product nature usually outweighs price consideration to influence demand.
The more differentiation there are for the products, the less elastic demand InterContinental would have. A successful product differentiation is able to bring a supernormal profit for InterContinental. But, of course, supernormal profit would attract new competition until the economic profits are wiped out in the new long run equilibrium.
Factor That Affect Level of Demand
Every business and organization is highly concern on level of demand or their number of customer. Many marketing strategies and tactics are implemented to boost the demand in which it in turns generate revenue and profit to the organization. Demand could be affected by many factors around the environment of the organization. The economic environment can be categorized into two main categories, which are external and internal environment. In this project, PESTEL framework is used to analyze the external or far environment of the InterContinental Hotels & Resorts in Asia Pacific.
Political situation can affect the number of travelers to visit the destination and stay in the hotels. Travelers would feel insecure to travel to countries or regions where there are high possibilities of unsafe political movement. On the other hand, when the political situation is peaceful, it will boost the economy of the country. Thus, there will be more travelers visiting destinations in the countries. Asia Pacific is the region where politics are non-stable. Situations, such as Taiwan calling for independence for mainland China, nuclear threat was detected imposed by North Korea and its hostile attitude towards the United States, could be the major problems that affect hotels and travel industry. Moreover, China is now integrating its markets into free market economies by joining WTO. It is also playing a bigger role on the world scene of manufacturing, technology, and business trade, which can help boosting travel and hospitality industry to grow at the same time.
Asia Pacific is considered as the fastest growing market region in the world. Inflation rates in East Asia are within acceptable range, while it is increasing in Southeast Asia. It is one of the regions attracting international business investment. Hence, the high growth of economic draws more attention to business travelers to visit and invest. InterContinental Hotel is focusing on business travelers who are premium or high end markets. This category of market segmentation concerned more on time and convenience rather than price. In either economy booming or down turn, this group of market still travel due to business purposes. Moreover, the level of income has very low impact on this market. The expenses on business trip are covered by corporate rather than personal expense. These infer that the business travelers are less price-sensitive than the leisure travelers. Therefore, the state of the economy would not have much effect on the up-scale market group, which is the major market segment of InterContinental Hotel.
Asian Pacific region are occupied by one-third of the world’s population. Out of the total population in this region, the majority of the population is living in People’s Republic of China; there are approximately 1.29 trillion people in the country. Age is another important factor for companies that may help in identifying a possible target market within the region. United Nations Population Division (UNPD) has predicted the future population to the year 2025 that most places in East Asia will suffer from high birth rates and death rates. This means that there will be high turnover of population in each year (, 2004). Therefore, there will different age groups of people who demand for different products and services as the trend changed. Health and safety is a major issue in the region which mainly irrupted after the incidents of SARS, terrorism and the latest Chicken Flu disease. These incidents have affected the demand of the InterContinental Hotels & Resorts directly that people feel insecure to travel.
Technology is developing in a fast speed throughout the world. Information systems, computers, internet, and modern machines have increased convenience for people’s way of living. Transportation and communication systems have also been developed to be faster, easier, and especially cheaper. Asia Pacific has become major suppliers of manufacturing industry and also many other international business. Advanced and cheap technologies might be a very attractive opportunity for new businesses and foreign investors in the region. Hence, there will be higher numbers of business travelers.
The region of Asia Pacific consists of large areas of forest lands in Indonesia, Malaysia, S. Korea and Myanmar where it reaches more than 50% of the total land space of the country. In addition, countries such as Indonesia, Philippines, and Thailand are located along Pacific Rim where the countries can enjoy beaches and ocean as natural gift. These natural resources are free resources that hotels can benefit from by selecting the best location with beautiful environment and sceneries. Location and natural attractions affect the travelers demand by they are part attractions to attract people to visit the destinations and the stay in the hotel.
The transmission to the free market economies is rapidly expanding to most of the countries in the region with the exception of Cambodia. Yet, in China, government control is still imposed on some aspects of business operations and some industries and monopolized by the government. By doing so, it can be considered insignificant to Chinese market as comparing to the huge amount of competitiveness in the region and especially on the international level. Due to the disaster on SARS, chicken flu disease, and terrorism; many regulations are being formulated in order to secure the area to achieve stability and trust of foreign travelers and investors. By doing so, they hope to attract more people to travel and to boost demand for hospitality industry within the Asia Pacific region.
In additional, the demand of InterContinental Hotels & Resorts could also be affected by the characteristics of hospitality itself. The major characteristics of the hospitality business are intangibility and seasonality. Intangible is the nature of service providing business. Customers are unable to touch and know the quality of products/services until they reach the hotel and experience it by themselves. Media, such as brochures, pictures, and websites can only describe the services that will be provided by the properties. However, they are some way of promoting and creating good image to customers. Hotels are trying hard to compete with their competitors to create wonderful experience to every customer who visit the hotel. Customers might not experience any kind of description stated in the brochure or websites. When customers have a bad experience in the hotel, it could destroy the image of the whole hotel to those particular customers. Furthermore, the bad experience of one customer will be told to at least ten friends or relatives and thus making them hesitant from visiting the hotel again. Word of mouth is one of the most important marketing schemes. It is easier and less expensive to promote and attract new customers than delete and attract back the customers who had bad experience and image toward the hotel. This reason could affect on the demand to visit the hotel.
Seasonality is another factor that creates fluctuations of demand for tourism and hospitality industry. High and low seasons are at different period of time for different destinations. It is due to geographical location, weather, and events that will be happening in each destination. However, for InterContinental Hotel & Resort, the geographical location, weather, and events are not the major factors that will affect the occupancies due to business people travel because of business purpose that is happening all year round.
The mentioned above are issues that should be concerned by InterContinental Hotels & Resorts of their effects on demand. When the organizations aware of demand affecting factors, they can create and implement a strategies to go one step further the competitors and gain higher market shares.
Substitute Goods and Complementary Goods of IHG
Substitute Goods
Substitute goods means two kinds of products in which one can be consumed or used in place of another possible use. When one goods is substitutable for another, it has immediate economic consequences. The demand for the two kinds will compete to each other because customers can trade off one goods for the other if it is advantageous to do so. An increase in price for one kind of goods will result in an increase in demand for its substitute goods. And vice versa, a decrease in price of the first goods will result in a leftward shift of the entire demand for it substitutes (WordIQ 2004). (See Appendix F)
Substitute goods or services are businesses other than the competitors that are producing alternative products and/or services in which customers can switch to consume. InterContinental’s major product/service is to provide accommodations for business travelers. These international business travelers require for a place where they can stay over night with certain business facilities. InterContinental Hotel & Resorts is one of the major properties who have strong brand in providing quality service and all required business facilities. However, there are possible substitute goods that business travelers can switch to.
Condominium or luxurious service apartment is one of the high potential alternatives that customers can turn to. According to Salient Provisions of The Condominium Act, condominium is a property consisting of a separate unit in a residential, industrial, or commercial building and undivided in common area of the building. In addition, it may also include other separate parts of a condominium project, such as parking space (Insight Property Markets 1991). Rather than renting hotel rooms on a nightly basis, customers are able to substitute the hotel room by owning or renting a unit in condominium. However, there are many factors that customers might have to concern. There are different foreign property owning laws and regulations in different countries that customers need to acknowledge before buying a property. They might also think about if it is worthwhile to rent a unit in one place which depends on how often they travel to that destination. If customers desire or demand to rent/own a unit in condominium more, then the price of the hotel will be decreasing in order to attract the customer back.
Even though InterContinental Hotels & Resorts focuses more on business market segment, they also provide their products and services to resorts and leisure travelers. Hence, timeshare is another possible substitute product/service for customers. Timeshare Consumer Association has defined timeshare as a form of holiday ownership in which customers own a room unit for particular period of week during the year on a holiday resort. Timeshare customer has to pay for the unit for the right to use and annual fees for maintenance and local tax.
InterContinental Hotels & Resorts does not supply the market with any kind of service apartment, condominium, or timeshare. However, the willingness of customers to switch from staying in InterContinental Hotel to condominium might not be very high. It might be more convenient for business travelers to just check-in at the hotel in which they will be served with any kind of services they have requested. Moreover, in a hotel, all kinds of services such as restaurants, bar, business center, conference room, and internet access are available for all customers, unlike in condominium. Leisure customers might want to own timeshare, yet they might not desire to go to the same place for their holiday. Although, they can exchange to stay in different property but there might not be partners of the timeshare property in every destination they want to visit. And at the same time they have to still pay for the annual maintenance fee even they did not visit the place.
Complementary goods
Complementary goods are the two products for which if price of one product increase; it will cause a leftward shift of the entire demand for both products.(See Appendix G) This situation is applicable only when the two goods tend to be consumed or used together in a relatively proportions in at least some of their important uses (Johnson 2000).
As the complementary products/services will be consume together with the core product/services, demand of other facilities in hotel such as Food and Beverages, catering service, banqueting, and business center will also be increased. These examples of other facilities are also point of sales of the hotel in which revenue are also being generated. Travelers do not only desire for room in a hotel as an accommodations. Food and drinks are part of basic needs in our life. Therefore, when there is more demand for the hotel, consequently demand of restaurants and bars will also be increased. In every InterContinental Hotels & Resorts, food and beverages outlets are part of the hotels to provide the best food and drinks to customers. Moreover, business people are traveling for business purposes such as meeting, conference, or exhibition. InterContinental Hotels & Resorts provide conference rooms for meeting and events in which they have professional planners to help customers plan and arrange the events. These services are complimentary goods for hotel rooms that the demand will increase along with the demand of hotel rooms.
Economies of Scales
In economics, economies of scales are the situation where the cost of production decrease as the volume of production increases. The economies of scales help explain why a company grows larger in some industries and why the company is more efficient than its competitors.
The purchasing InterContinental have made with its suppliers tends to have contract bases. The purchase through different suppliers is normally based on price-orientation in Asia Pacific region. There are plenty of suppliers or order channels; therefore, InterContinental has very strong bargaining power over supplier base on the price and service provided as they may be able to obtain certain inputs cheaper by buying in bulk. The weak bargaining supplier power has brought a cost advantage for InterContinental in Asia Pacific. InterContinental Hotels and Resorts also enjoy the uniform marketing activities, technology and infrastructure from its corporate level, thus reducing operating costs.
InterContinental has high fixed costs which are mainly invested into the land and infrastructure of their properties. The investment in technology has been beneficial to them. The InterContinental online reservation system has reduced cost by almost ¼ for reservations, marketing, publicity and promotions.
A natural monopoly exists when there is great scope for economies of scales to be exploited over a very large range of output (Tutor2u.com, 2000). Nature monopoly is associated with industry where there is a high ratio of fixed and variable costs. The nature monopoly is illustrated as:
Figure 3 - Nature monopoly
Source: Tutor2u.com (2000)
InterContinental could beat other hotel competitors by achieving minimum efficient scale and they could also have high bargaining power over supplier. The nature monopoly may happen to InterContinental when the demand is stable and they are the only hotel group who could achieve minimum efficient scales. However, under current situation, it is difficult for InterContinental to achieve minimum efficient scale.
Keynesian or New Classical. Which Benefits Intercontinental Hotels & Resort?
New Classical advocates believe in a non-intervention government economy. They also support the theory that the economy will recover itself to reach its new equilibrium when there is disequilibrium in the economy. These people focus on the benefits that the economy will receive in the long run. On the other hand, the Keynesians have a totally opposite belief from the New Classical School. The Keynesian focuses on the short run gains the economy will receive; these advocates sometimes refer to a famous quote from John Maynard Keynes that “In the long run, we will be all dead”. The Keynesian theory asserts that the economy will not reach to its equilibrium without the intervention of the government, whom uses both the fiscal and monetary policies. By using the fiscal and monetary policies, the government is able to exercise the right to inject more government expenditures into the economy, to decrease tax rates in inspiring the general public to spend more, to lower the interest rate in providing incentives for firms to invest more in the market, or to increase money supply to encourage spending in the economy.
Keynesian beliefs can be illustrated in terms of the circular flow of income. (See Appendix C) If there was disequilibrium between leakage (taxes, savings, and imports) and withdraw (government expenditures, investments, and exports), then the government intervenes and try to balance the budget surplus or deficit. A budget surplus in the simplest definition is when the government receives more of tax revenue compared to the government expenditure. And budget deficit happens when the expenditure of government exceed the revenues it has received from tax payments. The business cycle can demonstrate the effect of economics on injections and withdrawals during economic booms and recessions. (See Appendix I)
In the hospitality industry, we believe that a Keynesian inspired government will be beneficial for us. Keynesians belief has also shown that the economy can settle at any equilibrium. Government will actively get involved to manage the economy on the level of demand, in which it is known as demand-management policies. In demand management, the government will reflate the economy when there is a shortfall in demand in economic recession. This policy is called Reflationary Policy. On the contrary, Deflationary Policy is when there is excess demand during the economic boom; the government will deflate the economy.
As the government uses Reflationary Policy to stimulate the level of demand, interest rates will be decrease to discourage saving and encourage more investment into the economy. Consequently, foreign companies will also be attracted to invest in these high potential growth countries. Thus, more international travels will be made by business travelers due to business purposes such as meetings, conferences, and exhibitions. InterContinental Hotels & Resorts will directly benefits from these high levels of demand on the overall revenue of the hotels.
Furthermore in the Reflationary Policy, government could also cut tax to boost the aggregate demand in the economy. In the InterContinental Hotels & Resorts case, the government may first give the hotels tax relieve, and that the hotels may use these extra funding to invest in newer technologies to serve their guests better. In addition, the income tax may also be cut in generating more spending in the economy. Not all the amounts will be spent in the hospitality industry; however, we believe that part of it will contribute towards the demand for InterContinental Hotels & Resorts.
Changes in the exchange rate can have a powerful effect on the economy; however, there are time lags for the effect to show. Many business organizations have identified the strength of the exchange rate as a major economic problem; InterContinental Hotels & Resorts also considers the strong exchange rate as an issue in bringing more customers into the country. In the Keynesian theory of government intervention, the government will step in and set a fix exchange rate relatively to the US currency. The government tries to keep exchange rate on tract by allowing only 2% of fluctuation. Nevertheless, when the currency deflates or inflates too much, the government will intervene by using money supply or interest rate as a tool to pull back the rate at the set level. According to Asian Development Bank (1999), most of the Asian countries have fixed exchange rate, they include: Thailand, Indonesia, Singapore, Korea, and the Philippines. These countries are the major destinations where Intercontinental Hotels & Resorts are located to attract both business and leisure travelers.
When local currency becomes weaker, travelers from abroad will increase due to the reason that the money in their hand has stronger value and thus, higher purchasing power. This in turn, will attract more of the foreign travelers to come and spend the money there, which is an injection to the economy. This injection into the economy can be account as another factor for the increased demand for the product or the service being offered. In addition, with the fixed exchange rate, the rate does not fluctuate a lot. This is beneficial to the InterContinental Hotels & Resorts as the travelers feel more secure with the exchange rate they will be encountering for their next travel plan.
With all being said about the benefits InterContinental Hotels & Resorts will gain from the Keynesian inspired government, we should also take the benefits the New Classical inspired government into consideration. Contradictory from Keynesians belief, New Classical theory believe in non-intervention by the government and emphasizing on free trade and free market. Moreover, the theory focuses on supply side managements, which includes improving training, skills of work force, and development of technologies to increase country’s productivity. The result of implementing New Classical theory will affect the long-run benefit of the country. Therefore, we believe that InterContinental Hotels & Resorts will gain more benefit through achieving higher productivity and be able to reduce their costs as the marginal profit increase.
We firmly believe in the benefits InterContinental Hotels & Resorts will receive from the Keynesians inspired government. The reason is based on the immediate results and benefits the company can receive. Overall, no one policy is perfect, therefore; in hoping to achieve the greatest benefit for InterContinental Hotels & Resorts the Keynesians and New Classical theories should be adapted for both the short and the long-run.
Conclusion
Businesses should always be aware of their own position in the economy. By knowing where they are positioned, they need to know about the nature of their business, competitors, and also the whole environment. This will allow the business to know how they have performed in the past. Furthermore, the business will also be able to predict the future economy and develop appropriate strategies to maximize the revenue of the company.
Demand is an important factor in the economy. Without demand, the circular flow of income will be affected as the economy would collapse. Furthermore, the economical situation could affect the demand of the society greatly. For example, in keeping the economy growing at a steady pace in increasing the aggregate demand by lowing tax and interest rate, and also increase money supply and government expenditure. In InterContinental Hotels & Resorts’ case, government’s intervention in creating greater aggregate demand in the economy will boost the perishable produces usage and therefore, increase the most revenue possible within the limited time frame.