Applying 'Porters 5 forces' in the hospitality industry
Force #1: Competitors in the industry
Harvard Professor Michael Porter identifies competitors as the core of this strategic framework. When several hotels of similar standards and star ratings operate in the same area, competition can be fierce - especially where supply supersedes demand. Too many rivals fighting to get a bigger share of the supply pie creates the ideal scenario; giving the customer many options.
Customers generally make their decision after selecting where they wish to travel (location), by evaluating the price, ratings, and reviews of a hotel. For example if there are two hotels in the same location with identical star-ratings, (i.e. all things been equal), but where hotel A is $ 35 more expensive than hotel B, then it is likely that most customers will choose hotel B. It is however important to note that competition is not just a matter of price alone.
Where customers hear the same rate from several hotels in the same ‘competitor set’, they will be influenced by the hotel that offers extra value for that price – for example, extended checkout time. Competition also puts pressure on hotels to introduce new products and innovative service methods that enable them to offer authenticity and a quality of service that appeals to today’s customers. I.e. compete by offering the greatest value.
Force #2: The threat of new entrants
The threat of new entrants, or potential for a new business to appear in the industry is one component to be mindful of when evaluating the company's risks. The threat of new entrants is mostly determined by barriers to entry. The barriers of entry could be financial and non-financial factors as well as existing competition. The threat of new competitors entering the hotel industry also depends on the ‘height’ of entry, which can be categorized into high, medium and low.
From a financial factor, the hotel industry is characterised as an industry with high capital costs, including costs of construction, furnishing, fittings and equipment as well as pre-operational expenses and funding. Other barriers to entry include brand loyalty, where customers show a strong preference for existing hotels. For example if there is a Marriot and /or Hilton hotel the threat for these two hotel brands from a new entrant would be low since the new entrant would require huge capital investment in infrastructure and advertisements to challenge the positioning of either of these two globally recognised brands.
For long, hoteliers were apathetic on Airbnb and on Online Vacation Rental Platforms (OVRP). It is only after the full weight of Airbnb and OVRP’s came down heavily, especially after an economic downward correction, that hotel operators came to recognise this form of threat from these new entrants to the hospitality industry.
Force #3: Bargaining power of suppliers
Michael Porter makes the point that suppliers of raw materials, products, etc. can drive the cost of a hotel’s product offering and compel businesses to rethink their strategy. The lesser number of suppliers in an industry, the more power they’ll have and vice versa. I.e. the concentration of suppliers determines their bargaining power. It’s a case of “less demanding more” or “more selling for less”.
A café purchases various ingredients necessary to prepare coffee from different supplier groups. However, there is only one supplier in the region who delivers coffee beans. Short of taking coffee off the menu, the café has no other choice, but pay whatever price the supplier asks if it is to continue serving coffee to its customers. Conversely, if there are several suppliers of coffee beans, the café can select the most suitable supplier in terms of price and quality, it seeks.
Smaller niche businesses, such as a restaurant that specialises in unique dishes may encounter the threat of price hikes from suppliers unlike, for example McDonalds, which is not at the mercy of its suppliers since it has a wide distribution network. The threat of disproportionate supplier bargaining power is typically a problem for smaller companies.
Force #4: Bargaining power of buyers
The fourth of five forces by Porter is the power and role of customers. Hotels and restaurants that operate in a competitive environment present the customer with numerous options to choose – ranging from price, quality and service. Customers enjoy a high bargaining power because they can switch to competitors if their needs are not met. Low switching costs makes it easier for customers to ditch a hotel / restaurant for another. Furthermore, customers bargaining power is enhanced by online reviews and experience sharing – which can have an impact on any business’s reputation and ability to retain and attract new customers.
Force #5: The threat of substitutes
The hospitality industry, particularly those in the restaurant business, face several substitution possibilities; such as diners choosing to eat at a sit-down restaurant instead of at a fast food restaurant or opting for an altogether different cuisine, maybe even cooking something at home rather than dine out.
One way of mitigating the threat of substitution is to focus on customer preferences, including substitute ingredients that foster healthy eating such as preferences for vegan food that is on the rise. For instance, milk-based ice creams are being substituted with diary-free versions that taste almost like milk-based ice creams. Statistics reveal that the revenue of dairy-free frozen desserts in Europe in 2016 was US$ 123 million. In 2021 it was over $184 and it is expected to cross $230 million in 2024.
Substituting certain ingredients can also diffuse supplier demand especially when suppliers arbitrarily raise prices.
Shafeek Wahab – Editor, Hospitality Sri Lanka, Consultant, Trainer, Ex-Hotelier
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