The Tourism Industry remains one of the key pillars of the Maltese Economy contributing 23.7% of the labour market. Over the past forty years the continuous growth of the Industry has been a contributory factor in encouraging local business men to increase the number of hotels on the island thus creating healthy competition, particularly in the Five Star segment. However, despite the structural differences, each hotel faces the same environmental forces. Therefore, the key to survival lies with the strategies implemented to gain competitive advantage.
This report examines how each of the various Forces has shaped Corinthia Palace Hotel & Spa’s business decisions. In this assignment, The Director of Finance Claire Mifsud, and The Director of Sales Karl Schranz, give their views on the macro and micro environmental forces that relate to Porter’s Five Forces Model.
Section 2 – Company History
At the tender age of twenty three, Mr Alfred Pisani saw a window of opportunity to enable him to enter the hotel industry. Three years after purchasing a 1920 private residence then called ‘Villa Refalo’, the Pisani family began to operate this property as the ‘Villa Corinthia Restaurant’ (IL-Haddiem, 1968). His dreams of becoming a hotelier coupled with business acumen led him to seek ways to expand the family business. When he became aware of an opportunity to receive a soft government loan, he engaged the services of architect Dom Mintoff, who drew up the plans for a 152 bedroom hotel which was to be amongst one of the first 5 star hotels having full conference facilities. Mr. Pisani’s sheer determination and vision, drove him to present a business plan which convinced The British Collonial Government to award him a loan of 1.2 million US dollars. The hotel construction project commenced under the supervision of architect Dom Mintoff and Four years later, in June of 1968, Mr Pisani held the official opening ceremony in the presence of, prominent society figures such as the then Minister of Education, Culture and Tourism, Doctor George Borg Olivier, His Excellency Duke of Edinburgh and renowned actor Roger Moore (IL-Haddiem, 1968).
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This grand ‘Boutique’ style hotel is located near the official residence of the Official Residence of the President of the Republic of Malta and the San Anton Botanical Gardens. This hotel has since gained an excellent reputation and has been given many prestigious awards in the Global Travel and Tourism Industry with the most recent being that of ‘Malta’s Leading Hotel’ [1] in the 2010 World Travel Awards. The current General Manager, Mr. Rota, acclaims the hotel’s success to its Trademark Maltese Hospitality. This hospitality is also the Unique Selling Point (USP) of the ‘Corinthia Brand’.
2.1 Company Mission Statement
‘Our Mission is to provide our guests with the craftsmanship of care’
2.2 Research Methodology
The information to meet the objectives of this assignment was gathered from the following sources :-
I conducted a series of interviews with Key Management members who are instrumental in formulating business strategies for the Company, namely, Ms. Claire Mifsud, Director of Finance at The Corinthia Hotel and Spa and Mr. Karl Schranz, Director of Sales at Corinthia Central Sales Office who were also given questionnaires to complete.
The second means was in terms of Desk Research through various media sources.
Section 3 – Definition of an Industry
‘The Oxford English Dictionary’ succinct description of an ‘Industry’ is :-
‘a particular form or branch of economic or commercial activity’
Snapshot of the Tourism Industry in Malta
3.1 World Tourism Benchmarking
There is a wealth of information available to assist the Business Sector to assess the viability of the Tourism Industry. One medium used by the Corinthia Palace Hotel is the report published by ‘The World Travel and Tourism Council’. The report uses Set Indices which may be valuable to ascertain an Industry’s attractiveness and future economic potential. However, as Malta is a Small Island Destination, competition must also be measured from a global perspective of tourism.
3.2 Tourism’s Economic Performance on the Island
According to the World Travel and Tourism Council 2010 report [2] , Travel and Tourism contributes towards 19.4% of the Maltese Islands GDP (EUR1,151.4 million) with a forecasted increase of a further 3.6 % by 2020. Export Earnings from International Visitors is expected to reap in the region of € 777 million, with a forecasted growth to € 1443.4 million by 2020. Currently, 23.7% of the Labour Market is employed in Industry Related Occupations and it is anticipated that this will rise to 28.9 % by 2020. These statistics substantiate the theory that Travel and Tourism will remain one of the key engines for growth in the Maltese Economy.
3.3 Tourist Performance
At the time of preparing this assignment, the National Statistics Office had not yet issued the official statistics for 2010. However, in a press conference held in January 2011, the Parliamentary Secretary for Tourism, Mr. Mario De Marco, estimated that the total number of Tourists was estimated to be in the region of 1.3 million [3] . This equates to a 0.1 million increase on 2009 figures [4] .
During the first 11 months of the 2010, Cruise Liner Traffic reached a total of 467,142 passengers [5] , however only 3 % of passengers (14,441) landed in Malta. Therefore despite the fact that nearly half a million cruise passengers visited the island, very few stayed in hotels overnight. According to the Domestic Market, the local preference is to reside in Four Star Hotels and statistics show that during the month of November, the 5 Star segment produced a total of 9,638 bed nights.
3.4 Collective Accommodation Establishments on the Maltese Islands :
There are a total of 158 accommodation establishments on the Maltese Islands [6] , fifteen of which are classified with a 5 Star Rating. Renowned International Hotel Brands such as Hilton, InterContinental, Kempinski Resorts, Radisson and Starwood Hotels currently compete for the same market. The two longest established 5 Star Hotels on the island are The Phoenicia and The Corinthia Palace Hotel and Spa. During the month of October, the 5 Star Hotel accommodation tier yielded an average occupancy of 73 %.
Section 4 -The use of ‘PESTLE’ to scan the Broad Environment for drivers of change.
There are numerous characteristics or strategic elements that may influence the life cycle of the local tourism industry.
‘One organisation, acting independently, may have very little influence on the broad environment: however, the forces in this environment can have a tremendous impact on the organisation’ (Enz, C.A, 2010).p16 [7] .
Consequentially, in today’s local business scenario, if one was to consider this statement it confirms the school of thought that organisations within the tourism industry, will face difficulties when trying to manipulate the broad environment.
However, according to ‘The principle of Enactment’
‘organisations do not have to submit to the existing forces in the environment’. (St.John, Harrison ,2010) [8] .
A high percentage of local hoteliers have opted for Management Agreements with Internationally Renowned Brands. Such strategy allows local operators to capitalise on the Brand Marketing and Existing Customer Base to attract business, however, Corinthia Palace Hotel has evolved its own Brand. This strategic decision was taken as a means to differentiate from other hotels by offering authentic ‘Maltese Hospitality’. This in itself is believed to create a competitive edge over the International Brand Names which currently operate on the island, namely, Hilton, Inter Continental, Marriot and Starwood Hotels. These days travellers are far more discerning and many seek new insights into the local culture, as apposed to a reproduction of International Hospitality.
Through successful ‘Backward Integration’ the Corinthia Brand has eliminated substantial contributions to Third Party Management Companies by forming its own unique Brand Identity. Furthermore, in contrast to most local operators, the company has been able to penetrate the International Tourism Industry by offering Management Contracts to overseas operators in the Industry.
The task of measuring competitiveness is full of complexities as there are numerous forces at play. Therefore, it is of paramount importance to have a thorough understanding of both the potential threats and the opportunities available. This will then provide the basis for which a company responds to Trends and Influences by integrating its resources to achieve a strategic advantage on its competitors.
Invariably, local firms competing within the Tourism Industry, have similar resources available to them and each one is challenged by similar forces. Therefore, it is safe to assume that most will pursue similar strategies. Making the company that best acclimatises itself to the broad environment more likely to be successful. Under the current scenario, the well coined phrase ‘The survival of the fittest’ could not be more appropriate for hotels competing within the same industry.
Despite being one of the older Five Star Hotels on the island, The Corinthia Palace Hotel still competes well with the newer properties. It appears that customers tend to opt for older properties where Customer Service is at the optimum. The Corinthia Palace Hotel has achieved worldwide acclaim for its high level of service and currently holds the World Travel Award ‘Malta’s Leading Hotel’. This prestigious award is a great accolade to the Industry as it is believed to be the equivalent of the ‘Oscars’. Such recognition is an excellent marketing tool as given the choice, most potential customers would prefer to stay in a reputable hotel.
4.1 PESTLE Analysis – Views of the Financial Controller
An interview was conducted with the Financial Controller, Ms. Claire Mifsud who provided an insight as to how the company conducts a Situational Analysis of the Broad Environment. According to her Corinthia uses a PESTLE Analysis Template which define the following six areas that form the context of its operation :-
Political Forces
Economical Forces
Socio-cultural Forces
Technological Forces
Legal Forces
Environmental Forces
The forces listed above significantly influence both the industry and the organisations that operate within it.
She perceives that the Maltese Government recognises the fact that Tourism is a key contributor to the Maltese Economy and therefore continues to invest and work closely with stakeholders within the industry. This year the government has awarded The Malta Tourism Authority a total of 35 million Euro for 2011 [9] . The main vision for 2015 is to promote the Maltese Islands as a Unique Mediterranean Destination [10] , hence the reasoning behind the substantial investment to improve the product.
Through the European Social Fund, the Malta Tourism Authority is investing in a three million Euro program to improve the skills of those currently working within the Industry. The Advance Training Tourism Leaders Program [11] is being offered free of charge, to both employers and managers in the industry. The aim of this program is to enhance the Current Skill Set and to create a Culture of Innovation. As the Group Training Manager, I can disclose that seven managers working at the Corinthia Palace Hotel are currently taking this Diploma Course.
When asked what perceived barriers had been identified by the hotel, Ms. Mifsud referred to the government’s stronger stance to align with European Regulations, particularly in areas such as Health & Safety and Environmental Issues. Being an older property, substantial investment is required to conform with some of the regulations. The forecasted economic recovery is more subdued than that of other small economies [12] . Ms Mifsud then expressed her concern on escalating operational costs and stated that the 2% increase of VAT on accommodation and the budgeted cost of living increase bear a great influence on profitability. She also remarked that nowadays, business customers require their rooms to be an extension of their offices when travelling, therefore, adequate technology has become a norm rather than an ancillary service. Hence, in order to remain competitive and meet the customer’s needs additional investment in this area is required.
Section 5 The Broad Environment.
Forces within both the Broad and Task Environment are critical determinants for Strategy Formulation for any organisation. However, the core of a Firm’s Task Environment is formed by its interaction between the following three key stakeholders and their impact on the market place :-
Customers
Suppliers
Competitors
All contemporary organisations, irrespective of type of Industry, face forces that can significantly affect profitability.
‘If a firm understands these forces, then it can develop a business level strategy that allows the business to either take advantage or protect itself from these forces, which in turn allows the firm to be consistently profitable.’ (Ahlstrom.D, 2009) [13] .
5.1 Swot Analysis
An internal audit provides an opportunity for a company to have a greater understanding of the capabilities and limitations of its resources. Such information will provide a platform from which Operational Strategy will be focused.
The identified strengths and weaknesses of the hotel are as follows :-
5.2 Strengths
Location
The location of this hotel has the potential to attract the following ‘niche markets’.
The close proximity to the Presidential Palace makes it the ideal location for Diplomatic Delegations.
Its remote location and proximity to the National Stadium is also key selling point to attract Foreign Football Teams who come to Malta for Training Camps and Official Matches.
Being close to the Malta Fairs and Convention Centre offers potential for business in accommodating delegates who are participating in large scale forums.
Global Reputation for Excellent Service
This property enjoys 20% Repeat Business which is amongst the highest on the island. This reputation is also achieved on a local level as there is a high percentage of locals who frequent the Food and Beverage outlets.
Accommodation
Hotel rooms are much more spacious than the newer five star properties on the island. In 2009 all rooms were refurbished to optimum condition. The hotel offers great value for money when one considers the level of service offered. The customers comments posted on Travel Review sites such as ‘Trip Advisor’ are very positive.
Spa
The Athenaeum Spa by Algotherm has now established itself as one of the best Medical Spas on the island.
Market
Unlike many of the other hotels, the Corinthia Palace is not dependant on one Nationality or Market Segment and therefore a drastic drop in one of these areas will not cause catastrophic consequences.
5.3 Weaknesses
Meeting Rooms
The main meeting rooms are small in severe need of refurbishment as they are inferior to what the competition is offering. This may be a contributory factor why some Destination Management Companies direct Group Business elsewhere, which causes ‘opportunity cost’ situation for the hotel when having to refuse business that exceeds the capacity required.
Loyalty Program
Unlike all the competitors there is not Loyalty Program in place to reward customers for their loyalty to the company.
Working Environment
Investment is required to totally refurbish the main kitchen as the current structure not adequate for the volume of work being produced nowadays.
Executive Lounge Facilities
Unlike all the five star hotels within the same Competitive Set this hotel does not have an Executive Lounge. Most corporate clients seek this facility as it provides an additional area, where they can conduct their business and entertain their clients.
In order to measure the potential of an Industry most companies use the framework of Environmental Understanding as established by the Economist Michael Porter.
Section 6 Porter’s Five Forces Model
In March-April 1979, Professor Michael. E. Porter, published an article in the Harvard Business Review, titled ‘How Competitive Forces Shape Strategy.’ [14] . In this article he wrote :
‘Competition in an industry is rooted in its underlying economics, and competitive forces exist that go well beyond the established combatants in a particular industry. Customers, suppliers, potential entrants, and substitute products are all competitors that may be more or less prominent or active depending on the industry. The state of competition in an industry depends on five basic forces. The collective strength of these forces determines the ultimate profit potential of an industry.’
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This article formed the basis of ‘Porter’s Five Forces Model.’ This ‘user friendly’ model is now widely employed by many organisations to formulate the firm’s business level strategy. Corinthia Palace Hotel is no exception. Key strategic decision makers within the company use this model during their business planning process to represent their analysis of the dynamics of the competitive structure and how the combined strength of these forces influence the Maltese Tourist Industry. Strong forces will suggest lower prices and higher costs, whereas weak forces suggest the contrary.
6.1 Bargaining Power of Customers and Suppliers
‘Informed customers become empowered customers’ [15] (Dubrin,2008) .
Trends show that a high percentage of travellers book their travel arrangements directly through the internet. Budget airline sites such as Ryan Air and Easyjet, provide a ‘one stop shop’ that is accessible around the clock. Nowadays, middlemen such as travel agents are gradually being eliminated. The internet has accelerated the power of this competitive force. Customers now have an advantage over the organisations, as they are able to conduct frugal searches of the web from the comfort of their own home. This provides them with ample opportunity to compare rates and subsequently purchase the best deals.
Since opening, the hotel has witnessed changes in booking channels. Customers are more likely to book directly through the internet. Price wars with competitors are prevalent, however despite this, Corinthia’s pricing strategy is based on past performance and forecasted demand. Much focus is placed on safeguarding Gross Operating Profit and as the company is apposed to reducing rates ,added value is offered instead. During my interview with Mr. Schranz I asked who has the strongest leverage when negotiating rates with suppliers. His reply indicated that the key to successful negotiation is to create a ‘win win’ situation giving them equal leverage.
6.2 Threat of New Entrants
According to Slocum et al [16] the phrase ‘New Entrants’ refers to the relative ease with which new firms can compete with established firms.
Over the past forty years the number of companies operating 5 Star Hotels has risen substantially. Empirical data issued by the National Statistics Office of Malta indicates that in 1996 there were only six Five Star Hotels operating on the Maltese Islands. Today, some fifteen years later, the amount of five star hotels has almost tripled increasing to fifteen. The high concentration of upscale hotels on the market, has made it essential to create barriers. Recent Government Regulations, Capital Requirements and Rising Operating Costs are forecasted to affect profitability. Such contributory factors may defer new entrants in the future.
During my interview with Director of Sales and Marketing, Mr Karl Schranz, he revealed that he does not envisage any other Five Star Hotels entering the market this year. He further elaborated that in his opinion the industry does not require more 5 star properties.
‘The industry has seen an explosion of Five Star Room Stock on the market in the last 5 years. There is a surplus of Hotel Rooms in low season due to the seasonality of our business. On the other hand, all five star properties run at very high occupancies from May till October. In my opinion, it all boils down to market forces. When market conditions permitted and when it was highly feasible for other hotels to join, most local and foreign business men invested heavily in the Hotel Sector.’
6.3 The Threat of Substitute Products or Services
Organisations that provide services that adequately substitute those offered by competitors within the same industry are considered as a threat to those competing within the same industry. In the local context, substitutes to Five Star hotels can be identified as either the Chartering of Yachts or Opting for a Cruise. However, with high level of accessibility offered by budget airlines, emerging tourist destinations poise a bigger threat to the industry. Central and Eastern European destinations are offering similar products at more competitive rates. However, if one was to consider the high concentration of natural disasters or adverse weather conditions many countries have recently experienced many travelers may be influenced by Malta’s more agreeable climate. Furthermore, political instability in emerging destinations like Tunisa may also defer travellers to choose alternative destinations.
6.4 Existing Competition
The level of competition is a key determinant of how other hotels in the industry are likely to behave. Hotels within the same Competitive Set strive for market share. From the fifteen 5 Star Hotels on the island, the only four categorised in the same Competitive Set as the Corinthia Palace and Spa are Phoenicia, Excelsior, Intercontinental and the Meridien. However, both the Director of Finance and the Director of Sales consider the Phoenicia as their main competitor. This is attributed to the fact that both hotels have been in competition for the past forty years and that both properties appeal to the same markets. According to the information provided by Mr. Shranz, the hotel’s average market share is approximately 10.5 %.
Karl Schranz commented as follows :
‘Price Wars are tremendous in all Hotel Categories in Malta. We had managed to reduce price wars significantly before 2008 when demand was in line with supply. Since more Five Star Properties opened in Malta and since the recession set in, most hotels started slashing rates in order to generate advance and last minute business’
As operating costs are rising, the onus must remain on targeting specific markets that can yield the highest profits. Although perceived as a business hotel, leisure travellers remain the key market. The Tour Operator and Leisure Segments approximately constitute to 64% of the hotel’s market share.
Section 7 Conclusion
7.1 Industry Life Cycle
As each industry evolves it goes through a sequence of phases. Factors used to ascertain at which stage the Industry is currently in, is by assessing both the number of firms operating and their potential for profitability. Desk research conducted for this assignment indicates that despite global economic recessions, the Maltese Tourist Industry has shown growth. Furthermore, projections for the coming years also indicate growth. All in all, it appears that Tourism remains a promising Industry for the near future.
7.2 Strategic Direction for the Hotel
The way forward for the company is to maintain its high level of customer retention rate which currently averages in the region of 20%. This relatively high percentage of customer loyalty is attributed to the General Manger’s high level of customer orientation in conjunction with the very high level of personalised services. The recent award should feature more prominently on the hotel’s website, thus using this as an extra tool to market the hotel.
From a financial perspective, costs must be closely monitored and opportunities to generate income should be exploited. The hotel management should pool their resources together to create a culture that encourages innovation. Investment in alternative sources of energy should be studied and the possibility of acquiring EU Funding explored. Investment should also be made to upgrade the property seeking in order to gain a return on investments through increased room rates.
Future growth should stem from the hotel’s Unique Selling Point, which is the ability to offer a memorable experience. The Sales Team needs to take a more aggressive approach to tap into unexploited markets and offer innovative packages based on value. Finally, with the continued commitment to fulfil the company’s mission, the team must drive the Corinthia Brand Identity by offering authentic Maltese Hospitality. By focusing on the main priority which is Customer Satisfaction, the hotel will not only remain profitable but will also remain a strong competitor.
‘For many, tourism is a source of employment and income. The tourism industry is responsible for 5.2% of the EU’s employment and accounts for 5% of Europe’s Wealth. It is therefore a strategic sector of our economy, facing new challenges that ought to be kept in check and opportunities that need to be taken. With 380 million international arrivals annually and market share of more than 40% of global tourism Europe commands the position as the number one tourist destination’
European Commission Vice-president Antonio Tajani-
‘Journal of the Institute of Tourism Studies’ Dec 2010 pg 30.
References
http://www.worldtravelawards.com/award-maltas-leading-hotel-2010
‘IL-Haddiem’ ‘Corinthia Palace Hotel’ 11 June 1968 pg 5
http://www.wttc.org/bin/pdf/original_pdf_file/malta.pdf
http://www.maltatoday.com.mt/news/national/tourist-arrivals-expected-to-reach-1-3-million-by-end-2010
http://www.nso.gov.mt/statdoc/document_file.aspx?id=2873
http://www.nso.gov.mt/statdoc/document_file.aspx?id=2928
http://finance.gov.mt/image.aspx?site=MFIN&ref=2011_BudgetSpeech2011_English
https://opm.gov.mt/vizjoni-2015
http://hbr.org/1979/03/how-competitive-forces-shape-strategy/ar/1
Daily Telegragh ‘Malta Centre of Excellence in the Mediterranean’ 16 June 2000
NSO news release 242/2010 ‘ Collective accommodation establishments :Oct 2010’ Dec 22, 2010
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