Services are becoming increasingly an important part of the global economy. It is estimated that on average 70 percent of the gross domestic product (GDP) of the Organization for Economic Co-Operation and Development (OECD) (2007) countries come from service industries. Moreover, it is predicted that the importance of services will continue to increase worldwide not only in the developed parts of the world but also in developing countries.
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Certainly hospitality is an important sector in services particularly in the developed countries. Under the services sector, the hospitality is often named as the number one industry worldwide in terms of generation of income and employment. Over the last three decades, the hospitality has grown rapidly, and now it has become one of the most prominent sectors of the service industry. It produces over 11 percent of the world’s gross domestic product and employs over 10 percent of the global workforce (UNWTO, 2003).
In 2006, international tourism arrivals worldwide achieved an all-time record of 842 million tourists. In the same year, tourism receipts, including international passenger transport, were estimated about $883 billion, which means that international tourism generated over $2.4 billion a day in 2006 (UNWTO, 2007). As an export category, the tourism industry ranks fourth after fuels, chemicals, and automotive products (UNWTO, 2007). Despite the presence of terrorism, natural disasters, health scares, fluctuations in exchange rates, and uncertainties in economic and political arenas, the hospitality industry have experienced positive growth for the last two decades. This growth has not only been observed in developed parts of the world but also in developing parts of the world such as Africa, Asia, and the Middle East. It is predicted that the hospitality industry will continue growing rapidly worldwide. Following economic, sociocultural trends and developments, more people will be participating both in domestic and international tourism. In meeting this growing demand, many new hospitality businesses will be opened; new tourism destinations will emerge, and new tourism services and products will be introduced.
Although it is one of the largest industries worldwide, providing a concise definition for the hospitality industry has been a major challenge for professionals and academics. As often acknowledged, there continues to be a lack of agreement as to exactly what hospitality and tourism encompasses and the relationship between them. According to Nykiel (2005), definitions of the hospitality industry are often limited by the unique viewpoints of sectors within the industry. For example, a hotel operator may see the industry as accommodations with food and beverages. A food and beverage operator may view the industry as a dining experience with the focus on menu offerings and food service. A travel agency manager might believe that providing travel related services to people for business and leisure defines the industry best. An executive of a theme park may see hospitality as providing a unique entertainment and educational experience. In order to overcome this confusion, Nykiel (2005) placed all of these viewpoints under a wider perspective called “hospitality” and further stated that the hospitality industry passes travel, accommodations, food service, clubs, gaming, attractions, entertainment, and recreation.
Kandampully (2007) notes that hospitality organizations operate within a network of service organizations. To a large extent, they are interrelated and interdependent, and include the following:
Tour operators, travel agents, and tourism organizations
Travel and transport operators
Leisure, recreation, and entertainment venue
Restaurants, bars, clubs, and cafes
Hotels, resorts, motels, camping grounds, bed & breakfast (B&B) establishments, and hostels.
TYPES OF HOSPITALITY AND TOURISM ORGANIZATIONS
Organizations that operate in the hospitality industry can be grouped under different categories depending on their primary activities, size, profit motives, and geographical coverage. In terms of their primary services, organizations can be categorized as follows:
Travel and transport
Accommodations (lodging)
Food and beverages
Entertainment and recreation
Tourism offices or destination management organizations
Nongovernmental tourism organizations
Each of these is often identified as a subsector under the hospitality industry. In addition, each can be further broken into several subgroupings. For example, under accommodations, there are hotels, motels, guest houses, hostels, villas, and time-shares. Some of these organizations can be further grouped depending on their service level, such as luxury hotels, boutique hotels, midmarket hotels, and budget hotels, or according to their star ratings, such as five-star (diamond), four-star, and three-star hotels.
A further grouping of the hospitality organizations can be made based on their size such as small, medium, and large. Independent and flexible small and medium-sized enterprises (SMEs) dominate the tourism market worldwide.
An SME is defined in employment terms as a company with a workforce of fewer than 250 employees (European Commission, 2002; Wanhill, 2000). For example, it is reported that around more than 90 percent of tourism and hospitality organizations in Europe are SMEs (Bastakis, Buhalis, and Butler, 2004; European Commission, 2002, Wanhill, 2000) which are usually ownermanaged, being run either by an individual or by small groups of people.
Managing SMEs is different from managing larger enterprises. For example, Quinn, Larmour, and McQuillan (1992) state that smaller hotels are not simply smaller versions of large hotel groups. They have distinct organizational structures and cultures that are often influenced by their owners. The business objectives of smaller hotels may have a different emphasis compared to large hotel groups. According to Quinn and colleagues (1992), profitability, market share, and productivity are less important to small businesses. In addition, they may have less desire to expand and achieve high profitability and productivity ratios. Their views on the external environment, long-term strategies, generic positions, competitive advantages, and allocations of financial and human resources may not be similar to those of large organizations. We know that many SMEs face financial and managerial challenges (Hwang and Lockwood, 2006), and their ratio of business failures is higher compared to larger organizations (Wanhill, 2000).
Another classification of hospitality organizations can be made according to profit motive. A high majority of hospitality organizations aim to make a profit and achieve some financial objectives in order to satisfy their owners and shareholders. On the other hand, nongovernmental tourism organizations, associations, tourism destination management, and marketing organizations can be placed under non-profit tourism organizations. Their primary aim is often not to make profit but to achieve other nonfinancial objectives, such as serving society, protecting the environment, and achieving sustainable tourism development in their regions over the long term.
CHARACTERISTICS OF HOSPITALITY AND TOURISM ORGANIZATIONS
Essentially, service sector organizations, including the hospitality organizations, possess certain unique features. Ignoring the differences between service organizations and manufacturing organizations can lead to unexpected outcomes. The following are some closely related, unique characteristics of hospitality organizations (Fitzsimmons and Fitzsimmons, 2004; Gronoos, 2007; Kandampully, 2007):
Inseparability-customer participation in the service process
Simultaneity
Perishability
Intangibility (the tangible-intangible continuum)
Heterogeneity
Cost structure
Labor intensive
Inseparability
In hospitality organizations, customers need to be present and participate in the service delivery process. This is certainly not common in manufacturing industries. This means that the separation of the production and marketing functions, which are important characteristics of the traditional manufacturing industry, is not possible in the service delivery process that is found in hospitality. Therefore, hospitality must communicate with and motivate their customers to actively participate in the service delivery process.
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Attracting and bringing customers to hospitality requires careful attention to their location, brand image, and ongoing marketing and promotional activities. In addition, the presence of customers and the requirement for them to play an active role in the service delivery process necessitates ongoing careful attention to behavior, the physical appearance of employees, the interior design and decoration of facilities, furnishings, layout, and noise.
This means that like Fitzsimmons and Fitzsimmons’s (2004) comments on managing service organizations, operations, marketing and HRM functions in hospitality need to be very closely integrated. Compared to manufacturing firms, this certainly requires that a different managerial approach, organizational structure, and culture must be developed and maintained in hospitality.
Simultaneity
Typical manufactured goods, such as a refrigerator or a television, can be inspected before it is delivered to retail outlets, where they are then sold to customers. However, services in hospitality are created and consumed simultaneously, which can prevent employing active quality control mechanisms. In addition, as just noted, customers and employees need to participate and coordinate in the service delivery process. It is almost impossible to have one manager for every employee to monitor the service delivery process and make sure that frontline employees are doing their jobs well, in addition to guiding the customers’ participation in the process.
Therefore, in order to make sure that services are produced and offered to customers at an expected quality that meets consistent standards, hospitality should rely on other measures such as investing in human resources, use of technology, building desired physical facilities, and decoration to ensure the quality of services delivered. This has implications on decision-making practices, resource allocations, operations, marketing, and human resource management practices.
Perishability
As production and consumption in hospitality are simultaneous, services become perishable if they are not sold. Subsequently, their value is lost forever. For example, an airline seat or a hotel room will perish if a customer does not purchase it at the time of production. Therefore, the full utilization of service capacity is a strategic task for much hospitality.
It is particularly important to emphasize that demand for a hospitality services often fluctuates considerably, depending on the external developments and changes, such as seasonality and crises. For instance, terrorist attacks (such as September 11, 2001 in New York), disease outbreaks (such as SARS in the Far East), and natural weather phenomena (such as tornadoes or hurricanes) all had a negative impact on the demand for services offered by the hospitality industry worldwide. Because hospitality cannot sell their services when such circumstances arise, they lose a considerable amount of non-recoverable income. When the demand is low or there are sudden fluctuations in demand, it is neither easy nor recommended for hospitality to lower their rates greatly, since it may influence their image, change their customer segment, and upset their regular customers.
A further issue in terms of perishability is that consumer demand for hospitality services exhibits very cyclic behavior over a short period of time. For example, restaurants are busy during lunchtime, evenings, and weekends, but they may not be very busy at other times. Demand for many hospitality, such as restaurants and theme parks, increases during public holidays such as Christmas, New Year’s Day, and spring break. Depending on the location, many hotels and restaurants experience great variances in summers and winters. This puts much responsibility on the management of these firms in planning for the future and allocating their resources quickly and adequately to the right purposes. In short, expected and unexpected fluctuations in demand have implications on cost structure, pricing, staffing, and resource allocation decisions.
Tangibility
Hospitality and tourism organizations offer a combination of tangible and intangible products (Kandampully, 2007). For example, a hotel room or a meal in a restaurant has both tangible and intangible qualities. Again, there may be major differences between a budget hotel and a luxury hotel or between a fast-food restaurant and an upscale restaurant in terms of tangible and intangible qualities offered. However, services are often ideas, concepts, interactions, relationships, and experiences that are not often patentable. It is essential to note that the intangible aspects of services offered by hospitality are critical in customer satisfaction. This is because the main difficulty related to the intangibility of services is that customers cannot often see, feel, and test these services when they order or buy them (Gronroos, 2007; Kandampully, 2007). Prior to their purchase, they may try to evaluate services as much as they can by looking at the interior of a hotel or a restaurant and the appearance and behavior of the employees. In most cases, customers tend to rely on the image or the goodwill of hospitality. In order to overcome potential problems and dissatisfaction in these areas, some hospitality companies publicize their service promises and offer a 100 percent satisfaction guarantee.
Legal requirements have also been proposed for hospitality to provide acceptable service performance for customers. However, these legal requirements vary among different countries. The expectations of customers may also vary, depending on the country or geographical location of the hospitality enterprise. We know that customers’ demands and expectations are constantly increasing, which puts more pressure on hospitality to improve their services and management practices.
Heterogeneity
Services provided by hospitality may also vary considerably. One hotel unit in a chain hotel, one unit in a restaurant chain, or one holiday experience of a traveler to the same destination is unlikely to be identical to another. Many factors, particularly the human element, result in variations of the service delivery process. In other words, services will be heterogeneous, and variations in service delivery from customer to customer and from time to time will always occur. It is often difficult to standardize every employee- customer interaction in the hospitality business. In addition, in many hospitality organizations, customers interact not only with employees but with other customers. This customer-to-customer interaction in certain service organizations, such as pubs, discos, nightclubs, and cruises, can be an important aspect of the total service delivery process.
Hospitality is also highly susceptible to external changes. One example of an external factor is the weather. Visiting an outdoor theme park can be very pleasant and entertaining on a nice day, but it can be a miserable experience if it is raining and cold.
In recent years, through the intensive use of information technology and active training of employees and design of physical facilities, attempts to improve and standardize the service delivery process have greatly increased. On the other hand, some customers expect a high level of service delivery, but this does not mean that they prefer standardized services. Therefore, hospitality need to achieve some degree of balance between standardization and differentiation in meeting the demands and expectations of their customers.
Cost Structure
The cost structure of hospitality influences their managerial and resource allocation decisions. For example, luxury hospitality is capital, labor, and energy intensive. Typically, they have high property costs and also employ large numbers of full-time employees. It can be difficult for them to reduce such cost items even if the demand is low. In addition, they may need to renovate their facilities every five to ten years to stay competitive in their field. Another issue is that given the vast amount of investment made in these organizations, investors and owners often look very carefully at their return on investment. Therefore, these companies need to maintain a steady flow of customers to maintain the profitability of their businesses. This often leads to creative marketing and product development strategies as well as pricing strategies.
Labor Intensive
Installing machines and computers on a car factory’s assembly line or in an ice cream factory can reduce the number of employees. However, compared to many organizations in other industries, hospitality requires a great many employees. To put it simply, hospitality are labor intensive. This is because personal interactions and experiences are important parts of services, and employees play a key role in this process. Despite using many machines, computers, and technological developments, hospitality still rely primarily on their employees to deliver a memorable and positive experience. Being served and treated nicely by employees is a major factor in getting repeat customers.
APPLYING STRATEGIC MANAGEMENT IN THE HOSPITALITY CONTEXT
One emerging question is how we can use and apply generic strategic management theories and models in specific hospitality industry context. In this section, we will examine how such theories and models can be applied in the particular context of hospitality and tourism. Most of the strategic management tools, models, techniques, and theories have traditionally been developed mainly for the manufacturing sector in the United States and have subsequently been applied to other industrial sectors (Okumus and Wong, 2005). However, hospitality that is concerned with a service-based output reflects the typical characteristics found across the service sector.
These include customer participation in the service delivery process, simultaneity, perishability, intangibility, heterogeneity, and high fixed costs of the services provided. As explained previously, there are different types of firms with unique features in the hospitality industry.
McGahan and Porter (1997) and Porter (1980) claimed that the industry context does matter because it can have a direct or an indirect impact on the strategy-making process and on the productivity and profitability of organizations. This reflects the so-called “outside-in” view that we saw in Chapter
Conversely, Baden-Fuller and Stopford (1994) argued that it is the internal characteristics of firm-the “inside-out” views-that matters most, not the industry. According to Baden-Fuller and Stopford (1994), successful organizations can skillfully ride the waves of industry crises, and less successful ones can disappear due to industry misfortunes besetting the industry. For example, Southwest Airlines has been profitable and successful since the early 1970s, while many other major airlines have faced serious challenges, with some declaring bankruptcy. Here, the industry structure and characteristics are considered to be of secondary importance.
Given these conflicting views as to whether the industry context or that of the individual firm is more important when devising a strategic plan, we propose a different but more holistic view on this controversial issue. In support of McGahan and Porter (1997), we believe that the industry structure and the unique characteristics of the hospitality sector do matter and that they can have a clear impact on the strategy-making process and on the productivity and profitability of hospitality.
Therefore, we need to have a better and deeper understanding of how the external environment affects the hospitality industry. We further acknowledge that the industry context is one of the dimensions impacting the management practices in hospitality and their performance.
In short, the context at both the industry and the organizational levels is crucial if one is to effectively use and apply the strategic management theories and models in hospitality. The importance of context to strategy making means that the preceding argument holds across all industrial sectors and not just hospitality and tourism. All issues related to the strategy process and the strategy content must always be framed in that specific context. In other words, we cannot meaningfully separate strategy from its industry context or from its internal organizational context.
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