Bachelor Thesis, 2013
50 Pages, Grade: 1,7
II Table of contents
III List of figures
IV List of abbreviations
2 Hospitality industry
2.1 Significance for overall economy
2.2 Hotel sector profile
3 Blue Ocean Strategy
3.2 Creating Blue Oceans
3.2.3 Tools and frameworks
3.2.4 Red vs. Blue Oceans
3.2.5 Benefits and value
4 Positioning for hotels
4.1 SWOT Analysis
5.2 W Hotels
8 Critical evaluation
B Web links
A W Hotels TripAdvisor overview
B MotelOne TripAdvisor overview
The hospitality industry experiences abundant growth rates, although it is one of the world’s toughest markets. Therefore, entrepreneurs need to aim for differentiation in order to gain an uncontested market position.
Blue Oceans are more than a natural wonder and a loophole for mass-market participants: It is an efficient strategy management tool that focuses on finding innovative business concepts and thus the key to success for adaptive companies. In contrast to saturated Red Oceans, Blue Oceans feature value innovation through an adjusted offering with costs benefits.
Similar to the Darwin’s “Survival of the Fittest”-approach the Blue Ocean Strategy depends on customizing and enhancing an already existing concept with innovative features.
In such highly competitive markets, monopolists - those who are able to find a market niche - exhibit the best chances for economic success.
W Hotels and MotelOne are two well-established paradigms for innovativeness in the hospitality industry. While W Hotels succeeded in adopting an exclusive lifestyle hotel destination with a focus on design, fashion and music, MotelOne concentrated on a premium low-cost oriented design-approach. Together both parties reinvented their segment through implementing trailblazing new concepts combined with the value- adding design factor. Moreover, Blue Oceans need to eliminate dispensable options, as W is less formal and more liberal than all its competitors, whereas MotelOne discarded unprofitable amenities like telephones, minibars or room service.
The economic surplus derives from wider target groups as well as higher profit margins, which is why trendsetting Blue Oceans are classified as a future-proof and promising corporate path.
Figure 1: STR Global Hotel Stats 2013
Figure 2: Strategy Canvas
Figure 3: Four Actions Framework
Figure 4: Red vs. Blue Oceans
Figure 5: Value Innovation
Figure 6: SWOT-Analysis Hotel Sector
Figure 7: Four Actions of MotelOne
Figure 8: MotelOne New Value Curve
Figure 9: Four Actions of W Hotels
Figure 10: W Hotels New Value Curve
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Hospitality is a billion-dollar industry and encompasses much more than just about travelling. The business ranks among the world’s biggest and most global industries, and is something that everyone encounters with at some point.
Hotels serve as the industry’s heart and connect humanity on a global scale. Nevertheless, there is much more to it behind the scenes. Hotel companies need to compete for customers in a highly competitive market and thereby bank on elaborated business strategies together with marketing operations.
In order to escape from less cost-effective market conditions, companies aim for innovative - and more profitable - business models by identifying a market niche.
The Blue Ocean Strategy is one very promising corporate approach, which is specifically defined and evaluated in the following. This research involves a first-time adaption for the hospitality industry and examines both how successful the method can be for hotels and how often it occurs.
General facts about the sector get presented at the outset, followed by a critical analysis of the Blue Ocean Strategy. In addition, the hotel business is subjected to a distinct SWOT-analysis that concludes with why innovative concepts are essential for hotels to survive.
The main body of the text concentrates on scrutinizing and evaluating two industryspecific prime examples. W Hotels is the international role model, whereas MotelOne is considered as pioneer for the German market. Together both concepts constitute a cutting-edge practice for outplaying the competition.
The author presents an outlook along with his personal critical opinion at the end.
In 2012 the world had over one billion international tourists for the first time ever (UNWTO, 2013, p.2) . The volume of international travelers together and their overnight stays is steadily growing - just a couple of the many records set by the global hospitality sector, making it one of the largest and fastest-growing economic industries in the world.
Hospitality is about serving guests during their time away from home and will remain the main function for all hosts, whereas consumer attitudes and demands are changing faster than ever before. It includes various service-based businesses like lodging, restaurants, event planning, theme parks, transportation and cruises (Maier & Chon, 2009, p.10). All those sectors unify the same features that they are intangible, not transportable, non-repairable and non-storable as well as consumed at the time of creation combines all those sectors. Unlike physical goods these services oftentimes are a company’s only USP.
The overall supply and demand for hospitality prospers in equal measure, just like the two major types of travel - business and leisure tourism, which have begun to merge into the trend of “Bleisure” travel - a combination of meeting both needs (The Sunday Times, 2010).
Customer loyalty and branding, the growth of emerging markets, new consumer- facing technologies, sustainability as well as the sourcing, development and retention of human resources together with general demographics will challenge and shape the industry’s future long-term feasibility. Therefore, differentiation from the competition, being up-to-date with all trends plus meeting consumers’ wants and needs are vital. China and India are playing game-changing roles as dominant destinations in the future hospitality market, while the affluent baby boomer generation will be responsible for the lion’s share of tourism spending (Deloitte, 2010, p.14). In addition, the emerging middle classes of the BRIC and MIST nations1 will increase their significance as feeder markets (Bloomberg, 2012).
China is currently the world’s new top nation of tourism spenders with a total of US$ 102 billion expenditures in 2012, exceeding Germany (83.8) and the USA (83.7) by far . The volume of inbound tourism grew intense to a new peak of international tourism receipts in the USA with US$ 128.6 billions, followed by Spain (55.9) and France (52.7). In addition, France announced another record with 83 million international tourist arrivals, followed by the USA (67) and China (57.7) (UNWTO, 2013, p.6).
The travel and tourism industry is an economic powerhouse, as it accounts for a higher GDP than automotive manufacturing in every region of the world. More than 100 million people work directly for the travel industry, which is about 4% of all jobs worldwide. Tourism with all its facets contributes US$ 2.1 trillion to the world’s GDP - 3% of the entire economy - and continues to gain importance with a global annual growth rate between 3-5% (WTTC, 2013, p.3).
Hospitality has immensely benefited from ongoing globalization and constantly falling relative costs for travel (ILO, 2010, p.5). Nevertheless, although the general global economy undergoes tough times, the demand for both international leisure and business tourism remains high, which makes tourism a key global market for the world economy.
The hotel sector in particular is the driving force for global tourism. Despite all economic crises, hotel companies literally spread everywhere by increasing their global footprint and bank on ubiquity in order to weather the highly competitive market. In doing so international hotel chains overwhelm smaller private hotel with their power for backing high investments at the expanse of stockholders.
The leader in hotel benchmarking STR Global predicts in their census from 2012 that 13.4 million hotel rooms exist worldwide with numbers rising continuously. The ten biggest hotel groups hold a combined 37,367 hotels with 4,512,022 rooms (March 2012 ) under their entire umbrella of brands - and thus control about 1/3 of all hotel rooms worldwide. According to the latest STR Global hotel pipeline report, 6,441 properties with a total of 1,065,711 rooms are under construction or in a genuine planning phase at the moment (STR Global, 2013).
The hotel market remains a highly fragmented industry: Over 70% of hotels in the USA are already branded hotels, while in Europe only 40% of all hotels belong to a chain thus far. In addition, the hotel market on average is segmented into 20% luxury and upper upscale properties, 40% upper upscale and midscale objects as well as 40% economy midscale businesses (STR Global, 2012).
The overall performance of all four regions is satisfying as the average hotel rates from June 2013 show in the table, while Europe can be named as the most effective destination:
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Figure 1: STR Global Hotel Stats 2013 (STR Global, 2013)
Assuming that the conclusion of hospitality expert and populist Jacob Tomsky - that US$ 40 for a hotel room is the break-even point - roughly is correct, implies that almost every hotel is making profit with such operational performance figures (Tomsky, 2012, p.14).
The number of hotel rooms sold to guests is growing faster than the actual quantity of new rooms, which is why demand outpaces supply - enabling hotels retain pricing power. The groundbreaking record of 1.1 billion sold room nights in 2012 will not stand for long, as both supply and demand will continue to prosper by 3.5% during the next year. Simultaneously, room rates are expected to increase by 4.5% (ILO, 2010, p.5).
While luxury and upscale hotels are the industry’s flagships, branded mid-market and lifestyle budget hotels possess the greatest growth potential (Deloitte, 2010, p.2). As the overall competition increases, hotels need to focus on delivering differentiation by innovation plus value for the consumers and consistent brand experiences.
Summing up, the Blue Ocean Strategy is about forming an entirely new industry through fundamental differentiation and innovation as opposed to competing in existing traditional competitive markets with many mainstream models (Osterwalder & Pigneur, 2010, p.226).
According to this strategy, businesses should not advance into saturated markets, called Red Oceans, but rather penetrate seminal Blue Oceans with creativity and new ideas.
The two INSEAD professors W. Chan Kim and Renée Mauborgne developed the Blue Ocean Strategy. It was published under the same title by Harvard Business Press in 2005 and describes the difference between survivors and winners.
The BOS introduces a systematic way for entrepreneurs and innovators to create new demand with the highest profitable growth. The aim of the Blue Ocean Strategy is to develop innovative products or services for new markets and leave the competition behind through this process. A Blue Ocean is truly differentiated and yields long-lasting customer value (Kim & Mauborgne, 2005, p.12).
Most companies swim in a Red Ocean, where they struggle with competition trying to increase demand and optimize costs. Red Ocean participants solely depend on the strategic intention, whether to refine the product or to reduce costs.
Companies on the other side that sail on Blue Oceans create new markets with innovative products and as trendsetters therefore are free to determine the price. In addition, they enhance their product plus cut costs (Mauborgne, 2012).
The example of the airline industry captures the basic idea of the strategy: While most airlines fight their competition in the mid- to high-price segment with corresponding benefits (Red Ocean), the path for low-budget carrier Southwest Airlines was free to do exactly the opposite (Blue Ocean) (Kim & Mauborgne, 2005, p.38).
In order to invent a Blue Ocean, the industry and market needs to be analyzed. But instead of focusing too much on competition like traditional approaches recommend, BOS is about detecting and seizing on customer needs that are not served by the competition yet (Kim & Mauborgne, 2005, p.4).
After finding a promising proposition, it needs to be honed by reducing or removing dispensable parts as well as improving operations plus adding reforms. In order to benefit as long as possible from the fertile Blue Ocean, it is vital to always take the customer wants and needs seriously. The Blue Ocean Strategy is an important strategic tool that blossoms into a real competitive advantage, if businesses comply with the following three factors that characterize a Blue Ocean.
An accurately focused strategy can succeed on its own, requiring a clearly defined value curve and a sound showcasing of cost reduction and differentiation (Kim & Mauborgne, 2005, p.39).
Second, a Blue Ocean concept needs to be truly unique instead of resembling any Red Oceans, especially in our globalized business environment. “Blue" value curves must possess explicit characteristics that make them easily distinguishable from Red Oceans for consumers (Kim & Mauborgne, 2005, p.39).
Likewise a "blue" product or service always needs a distinctive slogan that is not only good in promotion, but embodies a genuine truth with an additional benefit (Kim & Mauborgne, 2005, p.39).
In order to establish a solid system behind the creative process of finding Blue Oceans, Kim and Mauborgne assembled six guidelines that allows manager to look beyond market boundaries and review common industry characteristics from a whole new perspective.
Companies must analyze alternative industries whose offering indeed differs from their own, but serves the same purpose and thus could replace their product in the form of a serious substitute (Kim & Mauborgne, 2005, p.49).
Several segments exist within an industry, each attracting different groups of buyers, which is why companies often only compete within their sub-region, but not other areas. Therefore, it can be profitable to integrate competitive factors from other segments into their own strategy (Kim & Mauborgne, 2005, p.55).
Moreover, all buyer groups should be considered and the most suitable represented as an outcome of this process. However, the business should serve the demand for more than one major group of customers to ensure its overall corporate success (Kim & Mauborgne, 2005, p.61).
In addition, complementary products or services need to be examined in order to assure an effective Blue Ocean settlement, since consumption of an offer is not always settled with one single purchase. This results in utilization synergies for consumers and thus can attract absent clients (Kim & Mauborgne, 2005, p.65).
Furthermore, it is advisable for entrepreneurs to focus on consumers with both emotional and functional buying motives. Usually buying decisions stem from either one of the two types, but Blue Oceans can realize benefits through emotionalizing functional products and vice versa (Kim & Mauborgne, 2005, p.65).
A trend analysis needs to be conducted as well, since today’s economy is fastmoving and highly affected by changes. In the end, an enterprise must be based on sustainable business activities (Kim & Mauborgne, 2005, p.75).
According to the publication “Strategy Safari” and its categorization of different business strategies (Mintzberg et al., 2005, p.124), the Blue Ocean Strategy belongs to the “Entrepreneurial School”, which emphasizes visions and innovation. Kim and Mauborgne provide various methods and tools for strategically implementing an invention.
The “Strategy Canvas” is the most important Blue Ocean framework and visualizes all those factors from one industry, which are most critical for withstanding the Competing Factors
Figure 2: Strategy Canvas (Kim & Mauborgne, 2005)
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competition. These “Competing Factors” lie on the X-axis and define a business. As a parameter, the “Industry Value Curve” represents the occurrence from low to high among existing market competitors. All factors are identified and thus determine, which attributes are relevant, giving orientation for finding a Blue Ocean. To ensure that a “Blue Harbor” full of innovative product features has been found, at least three factors must deviate from the competition - regardless of whether their “Offering Level” is low or high (Kim & Mauborgne, 2005, p.25).
For reconstructing the elements identified by the “Strategy Canvas” plus achieving “Value Innovation”, a new ”Value Curve” needs to be created by analyzing the following four questions (Osterwalder & Pigneur, 2010, p.227):
1. Which factors that the industry takes for granted must be eliminated?
2. Which factors should be reduced due to negligibility?
3. Which factors should be raised for surpassing the current industry standards?
4. Which new factors need to be created?
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Figure 3: Four Actions Framework (Kim & Mauborgne, 2005)
The first two questions identify those factors that have little or no use anymore - for example, due to changing customer interests - and therefore can be reduced or eliminated, which simultaneously saves costs. The third and fourth questions target those factors, which previously were hardly distinctive or simply non-existent due to prohibitive costs or a lack of innovation. The creation or increase of attributes generates new demand and boosts the customer benefit.
Kim and Mauborgne place special emphasis on elimination and creation, since ordinary “red” companies align their utility maximization with existing competitive factors, whereas innovative “blue” entrepreneurs are supposed to change the factors themselves and hence make the present rules of competition irrelevant (Kim & Mauborgne, 2005, p.5).
According to Kim and Mauborgne, our business environment is comprised of two types of markets - the Red and Blue Oceans (Kim & Mauborgne, 2005, p.18)
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Figure 4: Red vs. Blue Oceans (Kim & Mauborgne, 2005, p.18)
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