CHAPTER 4
THE HOSPITALITY AND TOURISM INDUSTRY CONTEXT
Learning Objectives
After reading this chapter, you should be able to:
Define and explain the role of the external environment in the context of the H&T businesses.
Explain strategic analysis for hospitality and tourism organizations.
Classify the environment into specific categories.
Identify and describe the characteristics of a sustainable firm.
Define and analyse the firm’s general environment
Define and analyze the firm's task environment.
Assess industry-related competitive factors and structures.
Discuss challenges in analyzing the general macro and the task environments.
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Opening Case
Assess the impact of the environment on the Orient Grand Hotel. Make assumptions where necessary.
How do customer-related factors affect the hotel as well as its competitors? Make assumptions where necessary.
How does the external environment affect the hotel's formulation of strategies?
The External Environment
The external environment lies outside the firm.
It includes individuals, firms, systems, and institutions.
Influences from the external environment come in the form of changes that occur due to the forces that
emanate from it.
Trends in the macro and micro environments could present opportunities or pose threats.
Organizations must track changes and assess the impact of changes in terms of cause and effect.
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The Internal Environment
Internal environment is the firm’s environment.
It contains social and physical factors.
Components of the internal environment include:
The human-resource component.
The organizational functional component refers to operations, sales and marketing, human resources,
materials management, and administration.
The organizational level component refers to products and services, goals and objectives, and the
process that integrates personnel with the organization.
Alignment of Environments
Organizations should cope with the forces emanating from the environment.
They should ensure that the internal resources and capabilities are aligned with external opportunities.
Organizations must be able to counter the threats posed by the changes in the environment.
Strengths and weaknesses lie within the internal environment.
Opportunities and threats are external to the firm and emanate from macro (general) and micro
(industry) environments.
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Strategic Fit
The SWOT analysis provides the firm with an overview of how it is positioned in a given market to tap
opportunities and counter threats.
The alignment between the firm’s internal resources and capabilities and external opportunities is
referred to as “strategic fit.”
The “fit” ensures that firms can align themselves with emerging opportunities.
The timing of the “fit” is essential.
Strategic Fit
The complexity associated with acquiring the resources and capabilities should also be considered.
The firm needs to use these strategic resources and capabilities to develop products and services
to tap the opportunities.
Opportunities that emerge today cannot be tapped immediately unless there are sufficient
resources and capabilities.
Competitive advantage in such cases may not be sustainable owing to the less strategic nature of
the resources and capabilities employed to create competitive advantage.
Achieving and maintaining strategic fit is often challenging.
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Strategic Intent
Firms can create sustainable competitive advantage through strategic resources and capabilities.
Resources should be acquired, and capabilities be developed to tap tomorrow’s opportunities and threats.
The sustainable competitive advantage created by such an approach drives the firm to investigate the
future to identify potential opportunities and threats.
Environment Characteristics
Environmental Description
Characteristics
Environmental Uncertainty Difficulty in accurately predicting the occurrence of an event
Environmental Volatility Rate of change related to factors in the external environment
Environmental Munificence The availability of slack resources and the opportunities for firms to grow
Illiberality The opposite of munificence; an environment in which the scope for growth is limited
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Environment Characteristics
Environmental Degree of change in key factors in the environment categories, especially the general
Dynamism and task environments
Environmental The unfavorable conditions in the firm's general environment that have a negative
Hostility impact on the firm
Market Hostility Pertains to the unfavorable conditions in the firm's task environment
Environmental Amount of change in the firm's external environments, as well as the complexity
Turbulence (number of factors) in those environmental categories
Environment Dimensions
The simple-complex dimension and the static-dynamic dimension
The simple-complex dimension:
It refers to the number of factors or variables that influence the environment
The lesser the number of factors, the more stable the environment
The more the factors, the more complex the environment
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Environment Dimensions
The static-dynamic dimension
Refers to the degree of change over time related to the factors or variables pertaining to the internal
and external environments
The lesser the change, the more static is the environment and vice versa
Duncan (1972) refers to two subdimensions of the static-dynamic dimension as:
The degree of change over time (stability/instability) in the factors firms’ managers consider during
the decision-making process
The frequency with which the decision makers consider new or different factors
Environment Types
The general environment is macro in terms of its effect on the firm.
The task environment is more immediate and is the business environment within which the firm operates.
The firm environment is its internal environment comprising personnel and functions.
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The Macro Environment
The macro environment influences the firm from sociocultural, economic, technological, political (including
legal), and ecological perspectives
Five categories represent the macro environment:
Political/legal environment
Economic environment
Sociocultural environment
Technological environment
Ecological environment
Class Discussion
Define and discuss key variables/issues under the following areas:
The political/legal environment
The economic environment
The sociocultural environment
The technological environment
The ecological environment
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Political/Legal
Regional policies
Change in government
Terrorism
Wars
New regulations impacting
Policies related to protectionism
International trade-related policies
Health-related policies
Labor law and hiring workforce locally versus from abroad
Policies related to the ecology including global warming, greenhouse gas emissions, and so on
Policies related to corporate and personal taxation
Economic
Interest rates
Inflation rate
Gross Domestic Product (GDP) growth rate
Cost of input factors
Consumer price index
Consumer confidence
Price of oil and commodities
Stock market
Mortgage rates
Balance of trade/exports and imports
Exchange rates and purchasing power parity
Corporate, personal, and capital gains taxes
Availability of credit
Unemployment rate
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Sociocultural
Demographic changes
Birth and death rates
Immigration
Emigration
Age-related changes
Gender-related changes
Education-related developments
Psychographic changes
Life style of the baby-boomer generation
Life styles of generations X and Y
Cultural changes
Multiculturalism
Other factors
Spread of diseases, work–life balance, religion and nationalism
Technological
New technology-related hardware
New technology-related software
New technology applications
Development of new products
Investments in technology-related R&D
Safety and security related technological developments
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Ecological
Demand for “green” products
Supply of “green products”
Global warming and greenhouse gas emissions
Disposal of waste
Recycling paper and landfills
Deforestation and climatic changes
Protecting the natural environment/flora and fauna
The Five Forces Model
Porter’s five forces industry structure analysis comprise:
Potential competitors
Competitiveness among industry incumbents
Buyer’s influence
Supplier’s influence
Substitute products
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Competition Among Industry Incumbents
This threat is high when the industry growth rate has slowed down.
It is low if the environment is liberal, seen especially in growing markets.
Firms avoid direct competition in mature markets.
Buyers’ Bargaining Power
Is a threat when buyers’ buying power and influence on the firm are high.
Buyers’ influence comes in the form of price discounts, demand for better quality and level of service,
especially after-sales service.
Buyers could switch to other products and services quite easily when switching costs are low.
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Suppliers’ Bargaining Power
The threat from suppliers is high when they can charge higher prices for raw materials and finished goods.
Threat arises when few suppliers can provide customized goods with access to unique raw materials,
technology, and other relevant resources.
Threat is high when suppliers can control the quality and price of raw materials.
When the supplier has higher influence, incumbent firms have no choice but to accept or switch suppliers,
which is difficult when only a few suppliers exist.
Substitutes
Fads, trends, and consumer buying behaviour influence markets to pursue alternative products.
Substitute products are considered when markets are exposed to threats—for example, health-related
and so forth.
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Newcomers
This threat is high when industry barrier to entry is low.
Established firms hold their position and discourage firms from entering their market through price and
margin reductions.
This threat is low when firms have established best practices in marketing, management, production, and
administration.
High brand loyalty enables firms to mitigate this risk.
Strategic Groups
Firms that are part of a given strategic group are almost similar in terms of products and services.
These firms tend to compete directly against each other.
The firms’ products and services are close substitutes for each other.
They are often part of the options that customers choose between during transactions.
Since the competition among firms within a given group is direct, firms are often vying for position
within these groups, including access to resources and supplier/buyer contacts.
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Discussion Questions
Why do we need to analyze the external environment?
How can we classify the external environment?
What is the task environment, and how does it influence the firm?
How can Porter’s five forces model be used to analyze the task environment?
What are the potential challenges in analyzing the external environment?
Who should analyze the external environment and how often?
What is strategic myopia, and how can it be overcome?
Summary
The external environment refers to ...
Environmental characteristics are ...
The task environment refers to ...
PESTE analysis refers to ...
SWOT analysis refers to ...
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