Failure is always disappointing in business, and managers are paid handsomely to avoid it. When they don’t quite succeed, one possible defence is the claim that no matter the fate which befell their enterprise, they “couldn’t possibly have seen it coming.”
The Five Forces model eliminates that excuse, since it provides executives with a clear framework in which to imagine all those things they otherwise might not see coming, and to prepare strategies to deal with them before they strike.
Of course, it’s not only about avoiding disaster. There is also room for the positive and proactive manager to go forth and prosper – but the underlying theme is one of analysis and anticipation, giving your business a chance to survive and thrive by staying one step ahead of the competition and the market.
The model comprises five sections: New entrant threats; Substitute threats; Customer bargaining power; Supplier bargaining power, and Industry rivalries. Analysis of these five factors is traditionally carried out to determine the potential profitability of a business since all five have an influence on market share, the extent to which you will find yourself at the mercy of market forces, and the ability you might have to control your own destiny. For hoteliers, consideration of the five forces can help in better understanding the market in which you operate and the particular challenges you face.
New entrant threats
It is expensive to build and operate a new hotel, as well as taking time to get things off the ground, so if a new rival enters your neighbourhood you’ll have a few months’ warning. The main tools you can use to your advantage are differentiation and expertise – because any new entrant to your local market will need a few unique selling points to compete in the same sector with yours, and they’ll also need the staff to deliver the product. Look to provide service standards and facilities that new entrants won’t be able to match, and make sure your best staff don’t feel the need to seek work elsewhere when the new entrant is recruiting.
Substitutes don’t include direct competitors, so we’re not talking about other hotels here. We’re talking about alternatives to staying in your hotel. We could consider factors such as Airbnb and camping, but the more likely reason why people would no longer stay in a hotel could be quite different. One example occurs when cities get better transport connections, so visitors no longer have to stay overnight. Another possibility is that the main attractions in your destination are surpassed by an alternative attraction somewhere else which draws visitors away.
Customer bargaining power
One problem faced by hotels is that customers face almost no switching costs, so they have almost perfect flexibility in choosing and changing their hotel. The internet has also helped customers by giving them instant access to all the information they need to make their choice, and this can put guests in a very strong position. Squeezing profits out of these consumers requires subtlety, the provision of unique benefits, and the ability to make money while offering great value. Of course, for an individual property, the equation might be more favourable. If you’re the only hotel with a sea-view, customers can’t really hold out for a better deal elsewhere. For this reason you need to know what you can offer, and have a very good idea of the value customers will place upon your product.
Supplier bargaining power
The most important suppliers in the hotel industry are those people who supply their labour – your staff. Of course, as the cost of employing someone rises, their value to the organization declines, but in many areas the employees hold the upper hand in terms of supply and demand. Suppliers of other products and services may also be well placed in areas where strong competition among hotels leads to high levels of demand for hotel supplies. Your suppliers may be taking advantage of that high demand at your expense. This is one reason why it’s important to build good relationships with your local community, including suppliers and the potential labour force. You’ll need these people somewhere down the line.
The final threat to your profitability comes from your existing competitors. We need to take into account the activities of all the hotels which might be competing for the same target market. If you understand your own target sector particularly well, you may have a shortlist of competitors with only a handful of names on it, because many of the hotels which might ostensibly be considered rivals aren’t actually competing with you directly for the same guests. In fact, they may even be benefitting your business by creating additional interest in your destination. However, given the ability of customers to check out information online and quickly determine the differences between hotels and the prices they charge, you need to keep a close eye on your main rivals to make sure your product doesn’t suddenly become uncompetitive.
To stay ahead and stay profitable in any competitive industry takes vigilance, and hotels are no exception.