rahul project work submission

8/6/2019 Rahul Project Work Submission

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Rahul Rao

Organizational Cultur e--------------------------------------------------

14

Inv estm ent D ecisions------------------------------------------------------------

15

Th e Ecl ectic/OLI Paradigm

--------------------------------------------16

Mark et S egm entation------------------------------------------------------------

18

S egm enting th e Mark et--------------------------------------------------

18

Global or Local???------------------------------------------------------21

Pric e S ensitivity

----------------------------------------------------------22

Mod es of Entry-------------------------------------------------------------------

23

Country Sp ecific and Firm Sp ecific Factors

-------------------------23

Cultur e – Mod es of Entry-----------------------------------------------

25

Exp eri enc e – Mod es of

Entry-------------------------------------------26

Choic e of Entry Mod es--------------------------------------------------

27

Franchising-------------------------------------------------------------------27

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Manag em ent Contracts----------------------------------------------------

30

Joint V entur es

---------------------------------------------------------------32

Wholly Own ed Subsidiari es-----------------------------------------------

34

Comp etition-----------------------------------------------------------------------

36

Location & Capacity ------------------------------------------------------------39

Location-------------------------------------------------------------------39

Capacity-------------------------------------------------------------------40

Knowl edg e Transf er-------------------------------------------------------------

42

R es earch M ethodology---------------------------------------------------------------

44

Introduction-----------------------------------------------------------------------44

What is R es earch?

-------------------------------------------------------44

Th e R es earch Proc ess---------------------------------------------------

45

R es earch D esign

-----------------------------------------------------------------46

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Th e r es earch Onion------------------------------------------------------

46

R es earch Philosophy--------------------------------------------------------

46

Pragmatism-----------------------------------------------------------47

Positivism-------------------------------------------------------------48

R ealism----------------------------------------------------------------

48

Int erpr etivism

--------------------------------------------------------49

R es earch approach----------------------------------------------------------

49

D eduction: T esting Th eory-----------------------------------------

49

Induction: Building Th eory

----------------------------------------50

R es earch Strat egy-----------------------------------------------------------

50

R es earch Choic es------------------------------------------------------------

52

Tim e Horizons

---------------------------------------------------------------53

Data Coll ection T echniqu es-----------------------------------------------

53

Primary Data

---------------------------------------------------------53

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Qu estionnair es----------------------------------------------

53

Int ervi ews----------------------------------------------------

54

S econdary Data

------------------------------------------------------55

Data Analysis-----------------------------------------------------------------56

Quantitativ e Data----------------------------------------------------

56

Qualitativ e Data------------------------------------------------------

57

R es earch Ethics--------------------------------------------------------------

58

Conclusion----------------------------------------------------------------58

Data Analysis & Discussion ---------------------------------------------------------60

Introduction-----------------------------------------------------------------------60

Indian Hot el Industry------------------------------------------------------------

60

Indian Budg et Hot el S ector – Opportuniti es and Tr

ends-------------------62

Cultural Adaptation R equir ed for India---------------------------------------

64

Inv estm ent D ecisions in India--------------------------------------------------

66

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Inv estm ent Risk-----------------------------------------------------------

67

Indian Mark et S egm entation---------------------------------------------------

69

Mod es of Entry into Indian Mark et

-------------------------------------------72

Comp etition in Indian Budg et Hot el S ector----------------------------------

74

Location & Capacity ------------------------------------------------------------76

Location-------------------------------------------------------------------76

Capacity-------------------------------------------------------------------78

Knowl edg e Transf er-------------------------------------------------------------

79

Conclusion-------------------------------------------------------------------------------81

R ef er enc es

-------------------------------------------------------------------------------84

List of Figur es

Figur e 1 Cultur e – N ew Mark et

Entry------------------------------------------------14

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Introduction

FDI in India

Coupl ed with lib eralization, th e magnitud e of for eign dir ect inv estm ent (FDI) in s ervic

es has b e en growing fast er, accounting for about two thirds of th e global FDI inflow

and 70% of outflows ( Endo, 2006). In India, FDI stocks soar ed from US$ 2 billion in

1991, wh en th e country und ertook major r eforms to op en up th e economy to world

mark ets, to US$ 45 billion in 2005 (Chakraborthy and Nunn enkamp, 2008).

Mor e and mor e multinational organizations ar e eying India for th eir pr es enc e as India is

th e s econd larg est economi es in th e world (in t erms of population) with just ov er on e

billion p eopl e, fourth larg est in th e world in t erms of GDP ($1.2 trillion) and rank ed tw

elfth in th e world in t erms of Gross National Incom e ($570 billion). According to A.T K

earn ey’s r eport on FDI Confid enc e Ind ex in Octob er 2007, India was rank ed s econd just

b ehind China as th e choic e country for for eign inv estm ent. Th e Hot el & Tourism s ector

has also s e en gr eat r eforms along with oth er s ectors. FDI of up to 100% is allow ed in Hot

el & Tourism s ector, along with a 5 y ear tax holiday esp ecially to encourag e FDIs in budg

et hot el s ector, has r esult ed in many for eign hot el compani es to ent er Indian hot el

industry.

Purpos e of Study

Though India start ed to op en its economy for for eign inv estors th er e ar e f ew important

factors which must b e d ealt with s eriously b efor e ent ering Indian mark et. Particularly

for Hot el compani es, which off er products and s ervic es dir ectly to th e custom ers, f ew k

ey factors b ecom e fundam ental ar eas to focus on. This proj ect s e eks to id entify and und

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etail s ector. S econdary data is coll ect ed from int ern et and company w ebsit es. Analysis

of th e data is don e aft er coll ecting th e data and th e analysis has b e en discuss ed in this

chapt er.

Chapt er 4 – Conclusion: This chapt er conclud es th e study by drawing som e k ey id eas

which hav e evolv ed in th e r es earch and analysis.

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Lit eratur e R evi ew

Int ernationalization

Chang es in th e scal e of int ernational trav el ov er th e last 45 y ears ar e of such a magnitud

e it would b e surprising if th e hot el industry had not its elf chang ed (Littl ejohn, 1997). Int

ernationalization is consid er ed to b e th e proc ess through which a firm mov es from op

erating sol ely in a dom estic mark etplac e to int ernational mark ets. Hill in H e erd en and

Bart er (2008) point out that th e compl exity of managing an int ernational mark et is far gr

eat er than dom estic busin ess and int ernational organizations n e ed to ensur e th ey hav e n

ec essary knowl edg e and exp ertis e p ertaining to int ernational mark ets that will allow th

em to exploit th e numb er of opportuniti es provid ed by such mark ets. Th e int ernational

mark et d ev elopm ent strat egy r epr es ents on e of a s eri es of d ecisions to b e mad e by th

e firm within th e fram ework of its ov erall busin ess policy. Typically, this strat egic manag

em ent proc ess would b egin with th e analysis of int ernal and ext ernal environm ents and

th e d et ermination of obj ectiv es, l eading on to analysis and s el ection of strat egi es, and

th er eaft er to impl em entation of strat egi es, evaluation and control (Young et al, 1989).

Th er e ar e many r easons which encourag e firms to cross bord ers lik e improv ed int

ernational r egulation and gov ernanc e, ch eap er air trav el, improv em ents in

communications and t echnology etc. How ev er, not all int ernationalization tr ends and strat

egi es hold sam e for all industri es (Johnson et al 2008). Int ernationalization of s ervic es

can b e mor e difficult than int ernationalization of products. According to Javalgi and Martin

(2007), in addition to th e pl ethora of industry-sp ecific chall eng es, th er e ar e s ev eral f

eatur es of s ervic es that g en erally mak e mark eting of s ervic es diff er ent and pot entially

mor e chall enging than mark eting of goods, this is particularly so in int ernational mark ets.

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Javalgi et al (2003) point ed out that int ernational s ervic es diff er from dom estic s ervic es

in that th ey cross bord ers and embrac e for eign cultur e. Unlik e int ernational products

which can ent er for eign mark ets using a vari ety of mod es of entry, for s ervic es th e

crossing of bord ers is both div ers e and difficult b ecaus e of th eir inh er ent charact eristics.

According to Javalgi and Martin (2007), th er e ar e f ew w ell r ecognis ed charact eristics in

s ervic es mark eting lit eratur e. Firstly, s ervic es ar e intangibl e which always pos es chall

eng es for mark et ers who must explain and promot e s ervic es without b eing abl e to show

th em – a probl em compound ed in int ernational mark ets by languag e barri ers and illit

eracy, and wh er e p erc eptions of risk and oth er cultural diff er enc es ar e involv ed. S

econdly, s ervic es ar e ins eparabl e from th eir us ers which incr eas e th e n ec essity to

establish and maintain th eir pr es enc e in th e mark ets s erv ed. Local pr es enc e incurs a lot

of costs and also d emands strong int erp ersonal skills b ecaus e th e s ervic es bring th e

custom ers and provid ers tog eth er. Thirdly, s ervic es ar e p erishabl e and cannot b e inv

entori ed lik e manufactur ed goods, which pos es chall eng e in t erms of balancing supply

and d emand. Finally, s ervic es ar e h et erog en eous and th e output may vary from location

to location, provid er to provid er and mom ent to mom ent. This will influ enc e th e custom

ers’ exp ectations, p erc eptions and finally satisfaction. Particularly for labour-int ensiv e s

ervic es or thos e involving significant custom er contact, it is appar ent that incr eas ed

variation in labour forc e or custom er bas e l eads to incr eas ed variation in s ervic e output –

a lik ely sc enario if firms b ecom e mor e int ernational in th eir op erations.

Giv en int ernationalization’s compl exity, int ernational strat egy should b e und erpinn ed by

a car eful diagnosis of th e str ength and dir ection of tr ends in particular mark ets. Th e hot

el industry is oft en p erc eiv ed as on e of th e most ‘global in th e s ervic e s ector (Littl

ejohn, 1997). But it is important to und erstand that it is not just global pr es enc e but th e

ext ent to which hot els int egrat e th eir activiti es on a global basis which giv es th em comp

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etitiv e advantag e. According to Yip in Whitla et al (2007), th e ant ec ed ents to adoption of

global strat egy ar e four s ets of ‘driv ers’ which ar e costs, gov ernm ents, mark ets and

comp etition. How ev er Johnson et al (2008), point out that int ernational strat egy d ep ends

ultimat ely on both ext ernal environm ent and also organizational capabiliti es. On th e

environm ental sid e th e int ernationalization driv ers and on th e organizational capabiliti es

sid e th e firms sourc es of advantag e tog eth er t end to shap e th e s el ection of country

mark ets and th e mod es of entry.

Factors Influ encing th e Mark et Entry Strat egi es of Europ eanBudg et Hot el Chains

India is hug e and em erging economy, wh er e consum er mark et is s et to quadrupl e in th

e n ext two d ecad es with th e discr etionary sp ending of p eopl e incr easing by 70% by

2025 (McKins ey & Co, 2007). According to ADB (Asian D ev elopm ent Bank, 2008),

following a slowdown in 2007, Indian economic growth will mod erat e to 8.0% in fiscal y

ear 2008. Growth will r ebound to 8.5% fiscal y ear 2009 on th e back of a pick-up in consum

er sp ending and mor e accommodativ e mon etary policy. In such a mark et with diff er ent

economic and cultural diff er enc es it b ecom es imp erativ e for Europ ean hot el chains to

und erstand th e Indian mark et and hot el industry, and th e important factors influ encing th

e mark et entry strat egi es b efor e making an inv estm ent d ecision.

To und erstand th e main factors which influ enc e th e mark et entry strat egi es, a d etail ed

lit eratur e r evi ew of various authors from diff er ent sourc es has b e en don e. An att empt

is mad e und erstand th e int err elations b etw e en th em and influ enc es of on e on th e oth

er wh er ev er possibl e. Th e important factors which influ enc e th e entry strat egi es of for

eign hot el compani es into Indian mark ets ar e:

Cultural Adaptation.

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Inv estm ent d ecisions.

Mark et S egm entation.

Entry Mod es.

Comp etition.

Location and Capacity.

Knowl edg e Transf er.

Cultural Adaptation

National Cultur e

National cultur e has b ecom e an incr easingly important factor for compani es doing busin

ess across country bord ers. According to Gh emawat (2007), cultural diff er enc es b etw e en

countri es g en erally t end to r educ e economic int eractions b etw e en th em. Languag es’

aff ects in this r egard ar e th e most obvious. Oth er cultural diff er enc es which can aff ect

th e economic exchang e includ e diff er enc es in ethnicity or r eligions, lack of trust and

diff er enc es in valu es, norms and dispositions. It is important to und erstand cultur e not

only b ecaus e cultur e aff ects th e custom ers and mark ets but also cultur e influ enc es th e

entry mod es and th e organizational structur e.

According to Hitt et al (2006) to gain comp etitiv e advantag e using int ernational strat egy r

equir es firms to und erstand th e cultural valu es of th eir custom ers in th e int end ed mark

ets. Th e cultural valu es can b e us ed by th e firms to pr edict what custom ers d esir e so th

ey can d esign th eir strat egi es to satisfy custom ers’ n e eds. Cultur e is p ertin ent to th e

study of mark eting, esp ecially int ernational mark eting and in countri es with div ers e

population groups. This m eans acquiring an und erstanding and tru e f e eling for th e nativ e

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country’s und erlying cultur e, in which mark eting is to b e conduct ed. For organizations to

und erstand a for eign country’s cultur e it n e eds to b e familiar with its building blocks and

onc e th ey hav e this grounding, th ey ar e in a far b ett er position to und erstand th e cultur e

and its influ enc es on th e mark eting strat egy (H e erd en and Bart er, 2008). It is also

important to und erstand th e aff ect of

national cultur e on organizations.

Organizational Cultur e

Organizational cultur e and th e b

ehaviour of th e employ e es is also an

important factor worth consid ering in int

ernationalization strat egy. According to

Ayoun and Mor eo (2008) studi es by

many r es earch ers r ev eal ed a pr es

enc e of strong national cultural diff er enc es among individuals

from diff er ent countri es. National cultur e was found to aff ect th e rol e manag ers ar e exp

ect ed to tak e, th eir valu es and attitud es, th eir philosophy and styl e, and th eir b ehaviour.

Th e implication is that manag ers from diff er ent cultur es may vi ew th e sam e strat egic

situation in significantly diff er ent ways and b ehav e diff er ently in any particular situation

bas ed on th eir b eli efs and valu es. Rop er et al (1997) illustrat ed th e influ enc e of cultur

e on diff er ent l ev els of th e organizations. Th ey appli ed ‘hi erarchy of cultur es’ to diff er

ent int ernational hot el groups. Through this th ey support th e th eory of cultural div erg enc

e which argu es that organizations ar e cultur e-bound, rath er than b eing cultur e-fr e e.

National cultur es aff ect organization on diff er ent hi erarchical l ev els from found ers, k ey

d ecision mak ers to manag ers and employ e es in divisional l ev el and also unit l ev el. Int

er estingly, at th e unit l ev el of th e hot el organizations th e host country cultur e will also

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Dunning (2000) says that locational variabl es lik e exchang e rat es, political risks, r

egulations and polici es of supra-national entiti es, int er-country cultural diff er enc es aff ect

th e FDI and modal choic e d ecisions. Ox elh eim et al (2001) say that int ernalization sub-

paradigm of OLI paradigm evaluat es how should th e firm s ervic e for eign mark ets.

Should it b e through FDI or sal es subsidiary or through arms-l ength agr e em ents lik e lic

ensing etc? According to Dunning (1980) as long as th e transaction and coordination costs

of using ext ernal arm’s l ength mark ets in th e exchang e of int erm ediat e products,

information, t echnology, mark eting t echniqu es etc exc e ed thos e incurr ed by int ernal hi

erarchi es, th en it will pay a firm to engag e in FDI rath er than conclud e a lic ensing or oth

er mark et r elat ed agr e em ents with a for eign firm. Int ernalization advantag es st em from

th e capacity of th e firm to manag e and co-ordinat e activiti es int ernally in th e valu e add

ed chain. Th ey ar e r elat ed to th e int egration of transactions into multinational hi erarchi es

through FDI. Major factors influ encing mark et entry ar e th e n e ed to op erat e and control

strat egic r esourc es such as t echnology, knowl edg e or imag e, th e n e ed to produc e and s

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ervic e in proximity to custom er (impossibility of exporting) and int ention to div ersify th e

risks (Galan and Gonzal ez-B enito, 2001). In hot el industry control may gain ed in many

ways lik e own ership, manag em ent contract etc. So ev en if th e company do es not own th

e hot el it may still hav e most of th e control ov er th e allocation of r esourc es.

Mark et S egm entation

S egm enting th e Mark et

On e of th e most important strat egic conc epts contribut ed by th e mark eting disciplin e to

busin ess firms and oth er typ es of organizations is that of mark eting s egm entation (My ers

in Bow en, 1998). A company cannot s erv e all custom ers in a broad mark et. Th e custom

ers ar e too num erous and div ers e in

th eir buying n e eds (Kotl er,

2000). According to Kotl er in

Bow en (1998), mark et s egm

entation involv es thr e e-st ep proc ess.

Th e first st ep in th e proc ess is th e s

egm entation, dividing th e mark et

into distinct groups of buy ers who

might r equir e s eparat e products

and/or mark eting mix es. Firms adopt diff er ent ways to s egm ent th e mark et. D

emographic s egm entation is th e most commonly us ed m ethod wh er e th e mark ets ar e

divid ed into groups bas ed on d emographic variabl es such as ag e, g end er, family lif e cycl

e, incom e, occupation, education, r eligion, rac e and nationality. On e important r eason for

th e popularity of this m ethod is that custom er, n e eds, wants and usag e rat es vary clos ely

with th e d emographic variabl es. G eographic, psychographic and b ehaviouristic variabl es

ar e f ew oth er common s egm entation variabl es. Th e s econd st ep in th e s egm entation

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ers, hybrids) th eory of custom er satisfaction, stat e that th e basic factors (dissatisfi ers)

establish a mark et entry thr eshold. Th es e ar e minimum r equir em ents that caus e

dissatisfaction if not fulfill ed but do not l ead to custom er satisfaction if fulfill ed or exc e

ed ed. Th er e ar e excit em ent factors (satisfi ers) which incr eas e satisfaction if d eliv er ed

but do not d ecr eas e satisfaction if not d eliv er ed, and p erformanc e factors (hybrids)

which l ead to satisfaction if th e p erformanc e is high and dissatisfaction if p erformanc e is

low. B ecaus e th e custom er exp ectations chang e, mark et s egm ents diff er in th eir exp

ectations as r egards products and s ervic es and as a r esult, diff er enc es not only in attribut

e importanc e but also in satisfaction l ev els among diff er ent s egm ents ar e to b e exp ect

ed. So it b ecom es imp erativ e to ass ess th e impact of satisfaction factors on targ et mark et

s egm ents, only th en eff ectiv e d ecisions can b e mad e.

Global or Local???

Though int ernationalization pot entially giv es comp etitiv e advantag e, organizations still

fac e difficult qu estions on what kinds of strat egi es to pursu e in diff er ent mark ets. Th e k

ey probl em is th e issu e of global-local dil emma. This r elat es to th e ext ent to which

products and s ervic es may b e standardis ed across national boundari es or th e n e ed to b e

adapt ed to m e et th e r equir em ents of sp ecific national mark ets (Johnson et al 2008).

According H e erd en and Bart er (2008) advocat es of standardization claim that global mark

ets s egm ents ar e em erging and that mark eting efforts not only can, but also should b e

standardis ed. Th ey b eli ev e that th er e is a conv erging of all cultur es towards on e

common global cultur e. Organizations should end eavour to addr ess global (int ernational)

n e eds, finding ar eas of commonality and agr e em ent rath er than focusing on trivial diff er

enc es b etw e en cultur es. On th e oth er hand, advocat es of localization claim that th e diff

er enc es b etw e en cultur es ar e so vast that standardization is not possibl e and that

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standardization r esults in lost comp etitiv e advantag e and low er sal es. Organizations hav e

th e ability to tailor th e mark eting strat egy to suit local mark ets and propon ents of this

philosophy ar e d et ermin ed that cultural diff er enc es b etw e en nations ar e such that a

strat egy that works in on e nation can fail mis erably in anoth er. In addition, as s ervic es ar

e mor e intangibl e in natur e, th ey r equir e mor e of adaptation strat egi es. Thus, adaptation

allows organizations to tak e cultural diff er enc es into account and provid e local mark et

with products and s ervic es that app eal to th em and will b e eff ectiv e in function, so cr

eating gr eat er sal es and enhancing profits.

Pric e S ensitivity

Pric e s ensitivity of custom ers is anoth er major issu e in mark et s egm entation. According

to Erramilli in Bolton and My ers (2003) pric e s ensitivity is a critical mark et s egm

entation variabl e, and s ervic es involv e enhanc ed contacts b etw e en m emb ers of buying

and s elling, in which p erc eptions oft en diff er significantly across diff er ent mark et s egm

ents. Bolton and My ers (2003) say that id entification of mark et s egm ents is oft en influ

enc ed by th e custom ers’ r espons e to pric e and s egm entation strat egi es ar e eff ectiv e

wh en th ey extract high er pric es from thos e buy ers that ar e willing to pay mor e to hav e

th e s ervic es tailor ed to m e et th eir n e eds. Customisation of s ervic e off erings is warrant

ed wh en custom ers ar e l ess pric e s ensitiv e. Mor eov er pric e elasticiti es ar e mor e us

eful for id entifying s ervic e s egm ents b ecaus e r ep eat purchas es, rath er than trial

purchas es, dominat e sal es of existing s ervic es. In th eir r ep eat purchas es, custom ers

trad e off th e exp ect ed b en efits of th e s ervic e for th e pric e. Th er efor e pric e

elasticity is us eful in mark et s egm entation. According to Ladany (1996) many hot els ar e

fac ed with th e r eality that on a giv en day only a fraction of th eir rooms is book ed by

custom ers. Unbook ed room on any giv en day cannot b e k ept in th e inv entory and us ed

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Rahul Rao

on anoth er day wh en d emand is high er than th e availabl e capacity. H enc e unbook ed

rooms on any giv en day ar e highly p erishabl e inv entory Thus, a manag em ent policy

which l eads to und erutilisation of hot el rooms, is a manag em ent induc ed loss. How ev er,

with a prop er pricing policy it is possibl e to incr eas e profits consid erably. Such a profit

incr eas e can b e achi ev ed by mark et s egm entation wh er e diff er ent mark et s egm ents

ar e s eparat ed, and in each mark et s egm ent diff er ent pric e p er room pr evails. For this

th e hot els must und erstand th e optimal numb er of s egm ents strat egy th ey should follow.

Mod es of Entry

Onc e a particular mark et has b e en s el ect ed for entry, an organization n e eds to choos e

how to ent er that mark et. Entry mod es ar e oft en s el ect ed according to stag es of

organizational d ev elopm ent. This strat egy of stag ed int ernational expansion m eans that

firms b egin by using entry mod es such as lic ensing and exporting that allow th em to

acquir e local knowl edg e whilst minimising th e exposur e of th eir ass ets. Onc e firms hav

e suffici ent knowl edg e and confid enc e, th ey can s equ entially incr eas e th eir exposur e,

p erhaps by a joint v entur e and th en by a dir ect for eign inv estm ent (Johnson et al, 2008).

Qu er et al (2007) point out that choosing on e or th e entry mod es d ep ends, among oth er

factors, on th e natur e of th e activity to b e p erform ed at th e d estination. It must b e r em

emb er ed that th e hot el industry has a numb er of distinctiv e f eatur es d eriv ed from its

status as a s ervic e activity. If a hot el wants to off er its cor e hospitality s ervic es in a for

eign country, it has to op erat e faciliti es in that country. Thus on e of th e charact eristics of

entry mod e is th e simultan eity b etw e en production and consumption. Th e ins eparability

and intangibility of s ervic e mak es it n ec essary to hav e a significant pr es enc e in ev ery

singl e mark et it op erat es. Th er efor e firms will not b e abl e to export s ervic e and will

hav e to choos e b etw e en non- equity/contract-bas ed mod es (manag em ent contracts,

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Rahul Rao

franchising etc) or equity/inv estm ent-bas ed mod es (joint v entur e or wholly own ed

subsidiari es).

Country Sp ecific and Firm Sp ecific Factors – Entry Mod es

According to Qu er et al (2007) f ew factors of th e d estination country and th e firm its elf

play a vital rol e in th e s el ection of entry mod e. Th ey say that th e Transaction Cost

Economics sugg ests that cultural distanc e may g en erat e additional costs associat ed with

information coll ection and disrupt communication proc ess es which r equir e som e common

ground in ord er to cod e and d ecod e th e information. Th er efor e, b eing l ess familiar with

th e targ et country mak es int egration mor e difficult and incr eas es int ernationalization

costs, which is why firms may pr ef er to assum e a low er r esourc e commitm ent approach.

Kim and Hwang (1992) ass ert that according to conting ency approach contractual agr e em

ents can b e s e en as entry mod es that improv e th e l ev el of fl exibility for firms to l eav e

a d estination mark et is th ey do not manag e to adapt to an unfamiliar location. According to

Contractor and Kundu (1998), a

gr eat er cultural distanc e may

forc e th e firm to look for local

support in ord er to facilitat e

product adaptation, shar e risks

and avoid mistak es and also to

assum e manag em ent on a local

scal e, and ev en d el egat e

culturally s ensitiv e tasks. Though cultur e is an important factor, oth er issu es lik e

country’s social, political, l egal, economic and administrativ e factors and th e ov erall ‘targ

et country risk’ play a vital rol e in modal choic e (Qu er et al, 2007).

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Apart from th e charact eristics of th e country, th e firm’s sp ecific factors ar e also important

in entry d ecisions. Most important firm sp ecific factors ar e th e firm siz e, profitability, int

ernal financial funds availabl e (Qu er et al, 2007) and exp eri enc e of th e firm ( Erramilli,

1991). Starting with th e firm siz e, th e pron en ess to inv est abroad must incr eas e with th e

dim ension of th e firm. B esid es, gr eat er siz e impli es gr eat er availability of financial and

manag erial r esourc es, which mak es it easi er to s et up full-own ership subsidiari es. This

way it can b e argu ed that larg e siz ed hot el firms will hav e b ett er guarant e es to assum e

th e commitm ent d eriv ed from an FDI initiativ e. Th e profitability of th e firm can b e an

important factor in modal choic e b ecaus e it is a possibl e approximation to th e financial r

esourc es and oth er tangibl es own ed by th e firm. Profitability can b e int erpr et ed as an

indicator of th e exist enc e of sustainabl e comp etitiv e advantag e i. e. th e firm must b e

comp etitiv e in ord er to b e profitabl e. Profits and comp etitiv e advantag e of a firm l eav es

th e organization in a b ett er position to expand abroad through FDI (Qu er et al, 2007).

Cultur e – Mod es of Entry

Th e n ext important issu e is to und erstand th e influ enc e of cultural diff er enc es on th e

mod es of entry engag ed by th e firms. According to Kogut and Singh (1988) assuming th e

r ev enu es constant across alt ernativ es, manag ers will choos e th e entry mod es which

minimis es th e p erc eiv ed costs attach ed to th e mod e of entry and th e subs equ ent

manag em ent of th e subsidiary. B ecaus e diff er enc es in national cultur es hav e b e en

shown to r esult in diff er ent organizational and administrativ e practic es and employ e e

exp ectations, it can b e exp ect ed that th e mor e culturally distant ar e two countri es, th e

mor e distant ar e th eir organizational charact eristics on av erag e. If cultural factors influ

enc e diff er entially th e p erc eiv ed or r eal costs and unc ertainty of mod e of entry, th er e

should exist country patt erns in th e prop ensity of firms to engag e in on e typ e of entry as

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oppos ed to oth ers. Tihanyi et al (2005) point out that und erlying th e employm ent of

cultural distanc e in int ernational busin ess is th e assumption that diff er enc es b etw e en

for eign and hom e country cultur es incr eas e th e cost of entry, d ecr eas e op erational b en

efits and hamp er th e firm’s ability to transf er cor e comp et enci es to for eign mark ets.

According to H ennart and R eddy in Tihanyi et al (2005), th e high er th e cultural distanc e

b etw e en th e hom e and for eign mark et, th e high er th e l ev el of equity own ership in

entry mod e choic e. Larg e diff er enc es in cultur es prompt organizations to ex ert gr eat er

control in th eir entry in ord er to minimiz e transaction costs. Gr eat er control might b e n ec

essary in culturally distant mark ets, b ecaus e transactions in such mark et g en erat e high

information costs and ar e associat ed in gr eat er difficulty in transf erring comp et enci es.

Through high er control organizations try to mitigat e th e diff er enc es in cultural valu es

and institutions. On th e oth er hand Bark ema et al in Tihanyi et al (2005) argu e that

although control is an important consid eration, entry mod e choic e in r elationship to

cultural distanc e can also b e explain ed by a risk-r eduction rational e of manag ers. By r

elying on entry mod es with low er own ership and control, organizations ar e abl e to r

estrict th eir r esourc e commitm ent and thus r educ e th eir risk exposur e in culturally

distant mark ets. Taking this furth er, th e local partn ers’ uniqu e knowl edg e may h elp to r

educ e th e risks associat ed with entry into culturally distant mark ets. Such local knowl edg

e, th er efor e, can eff ectiv ely comp ensat e for th e loss of control in low er equity entry

mod es. By and larg e, it is quit e cl ear that consid ering th e cultural distanc e b etw e en th e

for eign and hom e country of th e organization is imp erativ e in th e choic e of entry mod e.

Exp eri enc e – Entry Mod es

According to P ehrsson (2008) modal choic e is gradual and path-d ep endant proc ess. Th e

corporat e int ernational exp eri enc e that th e firm has accumulat ed is exploit ed in th e int

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ernational strat egy impl em entation in ord er to gain comp etitiv e advantag e. Th e firm’s

ability to und erstand th e comp etitor b ehaviour, consum er b ehaviour, pr ef er enc es r

egarding t echnologi es and choic e of suppli ers etc ar e issu es wh er e th e d egr e e of

confid enc e incr eas es ov er tim e as manag ers l earn through th eir actions and th er eby

accumulat e corporat e int ernational exp eri enc e. Th e aggr egat e exp eri enc e, as m easur

ed by th e numb er of mark et entri es, and th e exp eri enc e in th e r ecipi ent country incr

eas e th e firm’s r elativ e pr ef er enc e for wholly own ed subsidiari es. According to

Erramilli (1991) th e r elationship b etw e en th e exp eri enc e and entry mod e c entr es on

unc ertainty and how firms cop e with it. L ess exp eri enc e firms p erc eiv e consid erabl e

unc ertainty, ov erstat e risks and und erstat e r eturns, cons equ ently shy away from r esourc

e commitm ent and assuming control ( equity entry mod es). With incr easing exp eri enc e

firms acquir e knowl edg e of for eign mark ets, p erc eiv e l ess unc ertainty and b ecom e

mor e confidant of th eir ability to corr ectly estimat e risks and r eturns. As a r esult, th ey b

ecom e mor e aggr essiv e in committing r esourc es and assuming control.

Choic e of Entry Mod es

Franchising:

Franchising has b e en d efin ed as an organizational form in which th e own er of a prot ect

ed trad emark grants to anoth er p erson, for som e consid eration, th e right to op erat e und

er this trad emark for th e purpos e of producing or distributing a product or s ervic es (Cav es

and Murphy in Contractor and Kundu, 1998). According to Young et al (1989) two typ es of

franchising hav e b e en id entifi ed. Th e first is ‘product and trad e nam e’ franchising wh er

e franchisor off ers th e product along with th e right to us e th e trad e nam e to ind ep end

ent franchis e es. Th e s econd is ‘busin ess-format’ franchising which involv es not only th e

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product and trad e nam e but also mark eting strat egi es, op erational proc edur es and quality

control; and continuing liaison and int erchang e b etw e en franchisor and franchis e e.

Altinay and Wang (2006) say that th e r esourc e scarcity th eory vi ew plac es emphasis on

th e economic motivation of franchising. That is, organizations n e ed r esourc es such as

financial capital, labour capital and manag erial tal ent, and local mark et knowl edg e to b

ecom e comp etitiv e and d ev elop succ essful growth strat egi es. Franchising, as m eans of

pursuing growth particularly for s ervic e organizations, is a r espons e to th e shortag e of th

es e n ec essary r esourc es. According to Young et al (1989) at a practical l ev el, th e

franchisor has th e opportunity to expand th e busin ess int ernationally on a far larg er scal e,

with gr eat er sp e ed and with much r educ ed capital r equir em ents. How ev er, although

franchising giv es th e franchisor th e opportunity to r educ e th e l ev el of risk inh er ent in

dir ect own ership, th e ag ency probl em aris es b ecaus e of a div erg enc e of goals b etw e

en th e franchisor and franchis e e. That is, franchis e es will b ehav e in an opportunistic

fashion and pursu e th eir own int er est at th e exp ens e of thos e of th e franchisors. Th e r

esult is an ultimat e t ension coming from th e franchisors aiming to achi ev e uniformity

across th e syst em on on e hand, and franchis e es’ s e eking for autonomy and innovativ e

ways of doing busin ess on th e oth er. This is th e dil emma organizations fac e as th ey att

empt to establish a franchis e partn ership and finding a way to promot e a co-op erativ e

environm ent is a chall eng e particularly for franchisors.

According to Contractor and Kundu (1998) hot el chains try to distinguish th ems elv es from

oth ers by th eir brand nam es, archit ectural d esigns, l ev els of s ervic e, comput eris ed r es

ervation syst ems, and global logistics d eliv ery. Th e hot el busin ess involv es as much t

echnology or propri etary comp etitiv e exp ertis e as manufacturing syst ems. In th e hot el

busin ess, th er efor e, a franchis e is not m er ely a matt er of signing an arms-l ength contract

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and th en passiv ely ranking in th e royalti es. Rath er, it is an ongoing r elationship that can

includ e continuing inj ections of product d ev elopm ent, daily mat erials suppli es and

continuous two-way exchang e of mark eting data and int ernational strat egy information.

Th e l egal form may b e a contract, but th e d e facto organizational b ehaviour is an

evolving strat egic partn ership b etw e en th e franchisor and franchis e es. How ev er oth er

acad emics ( Erramilli et al 2002; Gannon and Johnson, 1997) argu e that in th e franchising

mod e, th e franchisor typically l eas es its brand nam e, and provid e mark eting support, t

echnical advic e and training to franchis e e. But th e day-to-day involv em ent of th e

franchisor in th e running of th e franchis ed hot el prop erty in th e host country is rath er

minimal. Although many exc eptions abound du e to th e mann er in which franchisor

typically enjoys som e strat egic control but r elativ ely littl e op erational control in most of

th e franchis e agr e em ents.

According to G erring er in Altinay (2004) th er e ar e two typ es of crit eria in franchis e

partn er s el ection, nam ely task and partn er r elat ed. Partn er r elat ed crit eria ar e conc ern

ed with th e variabl es which ar e sp ecific to th e charact er, cultur e and history of th e involv

ed partn ers. For exampl e, past associations of th e partn ers, compatibility b etw e en th e

partn ers’ manag em ent t eams, th e national and corporat e cultur e of th e partn ers, a partn

ers organizational siz e or structur e. Task r elat ed crit eria ar e thos e variabl es, which focus

on op erational and p erformanc e charact eristics, th ey ar e conc ern ed with th e viability of

th e franchis e agr e em ent r egardl ess of wh eth er th e mod e of inv estm ent involv es

multipl e partn ers. Such variabl es includ e th e pat ents, t echnical knowl edg e, exp eri enc

e of manag em ent, acc ess to mark eting and distribution syst ems, financial r esourc es etc –

in oth er words a wid e rang e of tangibl e, intangibl e, human and non-human variabl es.

Manag em ent Contracts

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According to Young et al (1989), a manag em ent contract is an arrang em ent und er which

op erational control of an ent erpris e (or on e phas e of an ent erpris e) which would oth

erwis e b e ex ercis ed by a board of dir ectors or manag ers el ect ed and appoint ed by its

own ers is v est ed by contract in a s eparat e ent erpris e which p erforms th e n ec essary

manag em ent functions in r eturn for a f e e. In manag em ent contracts, th e for eign entrant

not only l eas es its brand nam e to th e host-country collaborator, but s ecur es a contract to

provid e ext ensiv e onsit e t echnical and manag em ent support. Its manag ers ar e assign ed

to th e sp ecific hot el prop erty in th e host country on d eputation run it on day-to-day basis.

Th ey oft en enjoy compl et e d e facto strat egic and op erational control. Such d eputation

of s enior manag ers on a long-t erm basis, how ev er, r end ers a manag em ent contract mod

e mor e exp ensiv e to op erat e r elativ e to a franchising mod e ( Erramilli et al 2002).

According to Dav e (1984) th e most popular and most pr eval ent form of multinational

involv em ent in hot els, how ev er, is th e manag em ent contract. A hot el manag em ent

contract is an agr e em ent b etw e en a hot el own er and a hot el op erator (hot el chain) by

which th e own er employs th e op erator as an ag ent to assum e full r esponsibility for th e

manag em ent of th e prop erty in a prof essional mann er. As an ag ent, th e op erator pays in

th e nam e of th e own er all prop erty op erating exp ens es from th e cash flow g en erat ed

through th e op erations, r etains its manag em ent f e es and r emits th e r emaining cash

flows, if any, to th e own er. Th e own er provid es th e prop erty, to includ e land, building,

furnitur e, furnishings and equipm ent, and working capital, whil e assuming full l egal and

financial r esponsibility of th e hot el. Th e manag em ent company b ears no risk of hot el

own ership. H enc e, for th e hot el op erating company, slightly high er r eturns (in cas e of

own ership) ar e sacrific ed for n egligibl e riskin ess and assur ed incom e. Anoth er advantag

e of th e manag em ent contract is th e gr eat d egr e e of control it inv ests in th e op erator.

Th e contract grants th e op erator ‘absolut e and sol e control nd discr etion’ in th e day-to-

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day manag em ent of th e prop erty. Young et al (1989) point out that as a manag em ent

contract p er s e, th e manag em ent firm’s duti es ar e similar to thos e of for eign company p

erforms in running a subsidiary. This includ es a full packag e of g en eral manag em ent,

financial administration, p ersonn el administration, production manag em ent and mark

eting. Th e aim of a manag em ent contract is to transf er a for eign corporat e know-how to th

e dom estic staff of th e proj ect so that th e lat er will b e abl e to run th e op eration aft er a p

eriod of tim e, wh er e host-country p ersonn el will r eplac e th e expatriat e staff.

Kim (2008) point ed out that from th e p ersp ectiv e of f ew hot el own ers, manag em ent

contracts ar e b ecoming incr easingly burd ensom e b ecaus e manag em ent f e es has to b e

paid first r egardl ess of r egardl ess of firm’s financial p erformanc e. Own ers hav e

according includ ed p erformanc e guarant e es in th e manag em ent contracts allowing for th

e t ermination of th e contract if th e manag em ent company do es not m e et its p erformanc

e targ ets. So, with r egard to manag em ent contract, gr eat er att ention has b e en focus ed

on its r elationship with p erformanc e. N ev erth el ess, chain-manag ed hot els hav e dominat

ed th e hot el industry in th eir hot pursuit of larg e mark et shar es and gr eat er r ev enu es

and profits. This may b e b ecaus e manag em ent contracts ar e bas ed on pow erful

combination of hot el brand nam e and manag erial skills of th e op erator and also strict

complianc e of manag em ent with th e r equir em ents and standards of hot el’s furnitur e,

fixtur es and equipm ent, quality of prop erty, structur e and building syst em.

Joint V entur es

Joint V entur es ar e busin ess agr e em ents wh er e by two or mor e own ers cr eat e a s

eparat e entity. Joint v entur es ar e d elib erat e allianc e of r esourc es b etw e en two ind ep

end ent organizations in ord er to mutually improv e th eir mark et growth pot ential

(Harrigan, 1988). According to Young et al (1989) f ew distinct f eatur es of joint v entur es

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ar e a community of int er ests involving doing busin ess in common, th e sharing of profits,

th e sharing of busin ess risks and loss es, and long evity of co-op eration. H e et al (1994)

point out that int ernational joint v entur es ar e thos e that involv e at l east on e for eign

partn er. Firms can us e int ernational joint v entur es to acc ess mark ets that might not oth

erwis e b e acc essibl e, to exploit imp erf ections in factors and product mark ets, and to

exploit oligopolistic advantag es gain ed in dom estic mark ets.

According to Tong et al (2008) int ernational joint v entur es hav e long b e en vi ew ed as

attractiv e for eign mark et entry v ehicl e b ecaus e th eir structural attribut es h elp firms r

educ e risks. By engaging in int ernational joint v entur es rath er than outright acquisitions,

for instanc e, firms can spr ead risk ov er multipl e capital provid ers, and such b en efits ar e

s e en as important motiv es for int ernational joint v entur es esp ecially in capital and/or r es

earch int ensiv e industri es. H ennart (1988) ass erts that th er e f ew important r eason for

firms ent ering into joint v entur es. Th e incr eas es in th e minimum effici ent scal e of

numb er of economic activiti es hav e l ed firms to ent er joint v entur es. Th e incr easing

global environm ent mak es it ess ential for firms to b e pr es ent in main world mark ets

which can b e exp ensiv e and tim e consuming. For compani es to build local distribution n

etworks, joint v entur es ar e an easy and l ess exp ensiv e way. Joint v entur es ar e also s e

en as effici ent way to exploit r esourc es of local partn ers, and transf erring important

knowl edg e (Tong et al, 2008). H ennart (1998) argu es that joint v entur es r educ e political

risks b ecaus e partly for eign-own ed firms ar e n ec essarily b ett er tr eat ed wh en compar

ed to wholly-own ed subsidiari es. Young et al (1989) th e abov e argum ents by saying that

joint v entur es allow for eign expansion with r educ ed capital outlay which will b e us eful

for small compani es with limit ed financial r esourc es for int ernationalization or for

compani es expanding rapidly into many for eign mark ets. Pot ential syn ergi es aris e in

num erous ways including sharing of faciliti es, t echnology and oth er physical ass ets, mark

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Rahul Rao

eting syn ergi es through sharing of brand nam es, distribution chann els, support s ervic es

and sal es forc es etc, procur em ent syn ergi es through sharing of raw mat erials, compon

ents and oth er suppli es, and innovation syn ergi es through sharing of R&D. Mor eov er th

er e will l ess er financial and political risk, and gr eat er control wh en compar ed to oth er

non- equity entry mod es.

If it is acc ept ed that joint v entur e is th e sup erior m ethod of achi eving th e firm’s obj

ectiv es, th e n ext stag e is th e s el ection of v entur e partn ers. According to Kogut (1988),

a strat egic b ehaviour joint v entur e choic e impli es that th e s el ection of partn ers is mad e

in th e cont ext of comp etitiv e positioning vis-a-vis oth er comp etitors and rivals. A

transaction cost p ersp ectiv e pr edicts that th e matching should favour minimising costs and

r educing risks. Harrigan in Young et al (1989) r ecomm ends thr e e crit eria for s el ection

of appropriat e joint v entur e partn ers. First, th e firm should consciously s el ect its own

partn ers rath er than r ely on r equ ests from outsid ers. S econd, partn ers with pr evious exp

eri enc e of joint v entur es should b e chos en sinc e th er e is a l earning-curv e eff ect on

co-op eration. Exp eri enc ed partn ers may b e mor e fl exibl e in n egotiation than n ew v

entur es. Third, partn ers should b e s el ect ed not simply in t erms of th eir financial

commitm ent. Rath er, th e choic e of partn er should b e bas ed on compl em entariti es

which exist b etw e en th e two ent erpris es on ord er to maximis e pot ential syn ergi es.

Wholly Own ed Subsidiari es

Wholly own ed subsidiari es ar e for eign dir ect inv estm ents with 100 p erc ent own ership

in subsidiari es. As th e int ernational supply mod e involving th e gr eat est commitm ent of

capital and manag erial effort, th e 100 p erc ent own ed subsidiary involv es a high er l ev el

of risk than th e alt ernativ es consid er ed pr eviously. On th e oth er hand, wholly own ed

subsidiari es avoid th e probl ems associat ed with n egotiating contractual agr e em ents (as

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in franchising, manag em ent contracts etc) and with shar ed d ecision making (as in joint v

entur es). In addition th er e may b e important mark eting b en efits to b e d eriv ed from

establishing a gr eat er pr es enc e in th e for eign country (Young et al, 1989).

Wh en a firm d ecid es to expand into a for eign mark et through a full equity entry mod e,

it has to d ecid e wh eth er to start a n ew v entur e or acquir e an existing local company. For

eign start-ups (or Gr e enfi eld inv estm ent or d e novo entri es) entail building an entir ely

n ew organization in th e for eign country from scratch. Compani es oft en establish start-ups

by s ending ov er expatriat es who car efully s el ect and hir e employ e es from th e local

population and gradually build-up th e busin ess alon e or with a local partn er with knowl

edg e of local institutions, local busin ess practic es and so on. Start-ups ar e oft en us ed b

ecaus e of th e inh er ent firm-sp ecific advantag e that ar e difficult to s eparat e from th e

organizations and that ar e emb edd ed in th eir labour forc e. In th e cas e of acquisition, th e

expanding firm buys atl east part of th e equity of an existing firm in a for eign country. Th e

acquisition allows th e firm to acquir e n ew t echnical r esourc es which substitut e to int

ernal d ev elopm ent of t echnological skills (Bark ema and V erm eul en, 1998). How ev er,

eith er it is a start-up or an acquisition, b ecaus e of th e high l ev el of risk and th e

substantial commitm ent of capital and manag em ent, wholly own ed subsidiari es ar e us ed

most fr equ ently by th e larg er int ernational compani es. Mor eov er, th e formation of a

wholly own ed subsidiary abroad is unlik ely to b e th e first st ep in a small company’s

expansion ov ers eas. It will n e ed to b e consid er ed as an option at som e stag e in th e int

ernationalization proc ess (Young et al, 1989).

According to Young et al (1989) th e main advantag es of wholly own ed subsidiari es can b

e summaris ed into two broad cat egori es, control and comp etitiv en ess. Wholly own ed

subsidiari es allow for a gr eat er d egr e e of c entralis ed control than any oth er alt ernativ

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es. This can provid e a numb er of advantag es to th e inv esting company, including control

ov er quality standards: int ernalization of propri etary information; and th e avoidanc e of th

e probl ems associat ed with shar ed d ecision making and th e n egotiation of contractual agr

e em ents. In th e long run, th e establishm ent of th e wholly own ed subsidiari es may allow

for th e d ev elopm ent of global strat egi es involving th e co-ordination and int egration of

mark eting and production in diff er ent countri es. Wholly own ed subsidiari es may enhanc

e th e comp etitiv en ess of th e inv esting company in for eign mark ets. Th e dir ect inv estm

ent in subsidiari es involv es th e transf er of a packag e of r esourc es lik e manag erial, t

echnical, mark eting, financial and oth er skills. This may allow th e company to exploit mor

e fully its comp etitiv e advantag es. Wholly own ed subsidiari es may giv e ris e to c ertain

logistical advantag es and possibl e acc ess to low er-cost factor inputs. Costs may also b e r

educ ed through th e financial inc entiv es mad e availabl e by th e host country gov ernm

ents. Though th er e ar e advantag es associat ed with wholly own ed subsidiari es, high er

financial and r esourc e commitm ent may b e consid erably risky esp ecially for small er

compani es. Mor eov er, th e issu e of political risks is mor e important b ecaus e wholly own

ed subsidiari es ar e subj ect to clos e public scrutiny in host countri es.

Comp etition

On e of th e main obj ectiv es of ev ery firm is to achi ev e and sustain comp etitiv e advantag

e. Firms sp end significant amount of organizational r esourc es trying to stay ah ead of rivals

(Math ews, 2000). According to Baum and Korn (1996) th er e ar e two conc eptions of

comp etition, on e emphasising th e structur e of mark ets and th e oth er emphasising th e

conduct of individual firms.

In economic th eory, comp etition is a prop erty of mark et structur e whos e form is d et

ermin ed by mark et forc es not subj ect to conscious control of individual firms. Baum and

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M ezias (1992) point out that th e int ensity of comp etition among organizations is pr edict

ed to b e mostly a function of th e similarity in organizational r esourc e r equir em ent: th e

mor e similar th e r esourc e r equir em ent, th e gr eat er th e pot ential for int ens e comp

etition. According to Barn ey (1986), in industrial organization comp etition, r eturns to firms

ar e d et ermin ed by th e structur e of th e industry in which a firm finds its elf. Th e k ey

attribut es of an industry structur e that impact a firms r eturns includ e th e exist enc e and

valu e of entry barri ers, th e numb er and r elativ e siz e of th e firms, th e exist enc e and d

egr e e of product diff er entiation and th e ov erall d emand in th e industry. Firms s e eking

to obtain high r eturns on th eir strat egic inv estm ents should focus on cr eating and/or

modifying th e structural charact eristics of th eir industry to favour high r eturns. For this to

happ en firms must und erstand th e comp etitiv e dynamics of th e industry and th e b

ehaviour of th e incumb ents in th e mark ets th ey wish to ent er. And this und erstanding h

elps th e firms to d ecid e on which cat egori es of strat egi es a firm should consid er (i. e.

barri ers to entry, product diff er entiation etc) and also which particular strat egi es , within

thos e broad cat egori es, firms should choos e to impl em ent, that is, strat egi es that exploit

firm’s uniqu e skills, r esourc es and distinctiv e comp et enci es.

Th e ess enc e of firm rivalry, on th e oth er hand, is a striving by th e firms for pot entially

incompatibl e positions. Firms f e el each oth ers’ mov es and ar e pron e to r espond to th

em. This int er-firm rivalry occurs wh en firms, dir ectly id entifiabl e to each oth er, vi e for

th e sam e r esourc es (Baum and M ezias, 1992). According to Baum and Korn (1996), th

eori es of int erfirm comp etition agr e e that, in g en eral, th e gr eat er th e d egr e e of ov

erlap b etw e en th e firms’ mark et domain, th e gr eat er th e int ensity of comp etition, and

mark et domain r ef ers to th e s et of mark ets in which a firm op erat es. D ep ending on th e

particular mark et domains th ey targ et, firms encount er diff er ent rival firms and fac e diff

er ent firm-sp ecific comp etitiv e conditions.

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Comp etitor id entification (B erg en and P et eraf, 2002) and comp etitor analysis (Ch en,

1996) is pivotal for firms to und erstand th e comp etitiv e opportuniti es and thr eats, and int

eractiv e mark et b ehaviour in th eir qu est for a comp etitiv e position in an industry.

According to B erg en and P et eraf (2002) id entifying comp etitors is an important function.

In mark eting, comp etitor id entification supports th e analysis of pricing polici es, product d

esign, d ev elopm ent and positioning, communication strat egy and chann els of distribution.

In strat egic manag em ent, it provid es th e foundation for comp etitor analysis and th e

analysis of industry structur e, conditions of rivalry and comp etitiv e advantag e. Ch en

(1996) says that comp etitor analysis is conc eptualis ed as th e study of two vital firm-sp

ecific factors: mark et commonality and r esourc e similarity. Mark et commonality is d efin

ed as th e d egr e e of pr es enc e that a comp etitor manif ests in th e mark ets it ov erlaps

with th e focal firm. R esourc e similarity is d efin ed as th e ext ent to which a comp etitor

poss ess es strat egic endowm ents comparabl e, in t erms of both typ e and amount, to thos e

of th e focal firm. Building on th e abov e obs ervations, B erg en and P et eraf (2002) say that

comp etitors can b e classifi ed into dir ect, indir ect and pot ential comp etitors. A firm that

scor es high in t erms of mark et commonality and r esourc e similarity i. e. on e that s erv es

th e sam e mark et n e eds with sam e typ es of r esourc es as that of focal firm is a dir ect

comp etitor . Firms with r esourc e endowm ents similar to th e focal firm that do not pr es

ently s erv e th e sam e custom er n e eds ar e pot ential comp etitors. Indir ect comp etitors ar

e firms which s erv e th e sam e custom er n e eds as th e focal firm but with diff er ent typ es

of r esourc es. Th es e can b e substitutors who ar e important but oft en invisibl e. A strong

substitutor is as dang erous as a comp etitor b ecaus e th ey us e n ew t echnologi es and th eir

cost could d eclin e du e to th e l earning curv e.

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41% of th e population, by 2025. Mor eov er, middl e class India’s discr etionary sp ending

will ris e to 70% of all sp ending by 2025 from 39% in 2009. Th e budg et hot el industry will

b e most critical b ecaus e for middl e class Indians b ecaus e it is a w ell r ecognis ed axiom,

that trav el is first priority for an incom e earn er aft er th e basic r equir em ents.

Th e main qu estion for any hot el is to d ecid e on eith er busin ess trav ell ers or l eisur e

trav ell ers. This issu e has b ecom e incr easing difficult b ecaus e many hot els, nowadays, ar

e trying to attract gu ests from both busin ess as w ell as l eisur e trav ell er groups. For

exampl e, a typical r esort prop erty in Goa (a favourit e tourist spot) off ers exc eptional conf

er enc e and m e eting faciliti es to attract busin ess trav ell ers. In th e sam e way, a busin ess

hot el off ers s easonal vacation packag es to attract l eisur e gu ests. Mor eov er, most citi es

which w er e only tourist attractions earli er, lik e Agra, Jaipur etc, ar e now b ecoming mor

e comm ercial. So hot els in th es e citi es ar e forc ed to off er faciliti es and styl e of s ervic e

for both kinds of custom ers. Hot els products ar e custom er driv en, not company driv en.

That m eans, any hot el’s manag em ent cannot r estrict th eir s ervic es to particular group of

custom ers. Th ey hav e to b e op en to all custom ers who can pay for th e product. For this r

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Rahul Rao

eason though hot els targ et a particular s egm ent, th ey should off er minimum s ervic es for

all possibl e s egm ents that can us e th eir s ervic es.

B ecaus e of this blurr ed s egm entation proc ess, a mark eting dir ector says, hot els must

diff er entiat e th eir products for th e targ et ed s egm ent. And for budg et hot els this diff er

entiation must b e at no extra cost b ecaus e th e custom ers for this s ector ar e highly pric e s

ensitiv e and equally d emanding. So if a hot el wants to targ et a particular s egm ent it

should hav e products which ar e diff er

entiat ed, along with r egular off

erings, customis ed for that particular s

egm ent and cons equ ently filt er out

und esirabl e custom ers. For exampl e,

a busin ess hot el can hav e sophisticat ed

busin ess c entr e, p ersonalis ed s ecr

etarial s ervic e along with a small swimming pool and part-tim e trav el ag ent. How ev er, b

eing budg et hot els th e cost must not b e too high. This strat egy is support ed by Johnson et

al (2008) in th eir strat egy clock. Th ey call it th e ‘hybrid strat egy’ wh er e a company s e

eks to achi ev e diff er entiation and low pric e. Europ ean hot els hav e an advantag e of d

esigning hot els by combining local Indian and Europ ean styl es. This giv es th em a diff er

ent look of b eing an Indian hot el with a Europ ean touch.

Th e pricing of rooms, food and b ev erag es and oth er faciliti es can b e mad e diff er ent for

diff er ent kinds of custom ers of th e sam e s egm ent. If th e custom er is from a company (if

busin ess cli ent el e) or trav el ag ent (if tourist) with which th e hot el has a ti e-up, th e pric

es can b e r educ ed b ecaus e th es e ti e-ups ar e continuous sourc e of room and conv ention

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Rahul Rao

el own ers ar e consid erably good in th eir absorptiv e capacity and l earning skills and b

ecom e good franchis e es. Thirdly, if franchising is us ed most of th e inv estm ent is don e

by th e franchis e e so th e company will b e out of risk of any political instabiliti es or r eal

estat e bubbl es in a d ev eloping country lik e India. Fourthly, ev en if th e firm has int

ernational exp eri enc e, it is b ett er to find a corporat e partn er in a n ew mark et who

knows th e local conditions and who can shar e risks.

Though franchising s e ems to b e easy, th er e ar e f ew issu es. Th e company must und

erstand th e franchising, l egal and administrativ e environm ent in India. According to HVS

hospitality s ervic es, Th e Indian gov ernm ent has som e archaic laws und er For eign

Exchang e Manag em ent Act (F EMA, 1999), which ar e cumb ersom e and mak e

franchising difficult for for eign hot el compani es if not handl ed with car e. Mor eov er,

franchising involv es lic ens e of brands, trad emarks, trad e s ecr ets and oth er propri etary

knowl edg e critical to th e company. Anoth er issu e is to handl e diff er ent franchis e es. It

is difficult to control and co-ordinat e with s emi-ind ep end ent entr epr en eurs to ensur e

favourabl e imag e of th e company. Many franchis e es will try to run th e hot els in th eir

way which will endang er th e consist ency of s ervic e, standards and finally th e r eputation

of th e company.

Though franchising giv es a good start, taking th e inconv eni enc es caus ed by franchising

into consid eration, th e company must gradually chang e to manag em ent contracts.

According to Expr ess Hospitality (2008), factors lik e ability to maintain standardization at

all l ev els, high s ervic e standards, strong sal es and mark eting n etwork solutions and

quality assuranc e will off er manag em ent contract mod el distinctiv e advantag es ov er

franchising. Anoth er important advantag e is that th e amount of control ov er r esourc es it g

ets to th e company. Hot el op eration is a critical proc ess wh er e effici ency should b e spot

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Rahul Rao

brands wh er e as Hilton has plans to introduc e Hampton Inn and Doubl e tr e e brands. It is

important to notic e that all th es e brands ar e alr eady succ essful in th e USA and Europ e.

Mor eov er, Marriott, Starwood Hot els and UK bas ed easyHot els ar e also eag er to entr e

Indian budg et hot el s ector.

Local brands lik e L emon Tr e e, Hom et el, Fortun e Hot els and Ging er Hot els hav e alr

eady start ed to op en hot els in diff er ent citi es. Looking at th e d emand for such typ e of

accommodation th e establish ed luxury hot el chains lik e th e Taj Mahal and W elcom e

group hav e s et up s eparat e compani es to op erat e budg et hot els. Many of th es e n ew

brands m ention ed abov e ar e building much standardis ed hot els unlik e th e pr es ent hot

els in th e s ector. Th e introduction of so many hot el brands would chang e th e total comp

etitiv e dynamics of th e s ector and only th e tough est brand would surviv e in th e long-t

erm.

In addition to introduction of many budg et hot el brands, th e 5 y ear tax holiday by th e

Indian gov ernm ent to two, thr e e and four star hot els will enabl e hot el compani es to r

educ e th eir pric es and thus incr easing comp etition. It is important to m ention that th e tax

holiday will also boost th e local compani es to op en ind ep end ent hot els to cat er th e local

mark ets which will show aff ect on a n ew entrant. Mor eov er, du e to th e n ew tax r egim e

hot eli ers ar e exp ecting tough comp etition, ev en b etw e en a star hot el’s r estaurant and

an ind ep end ent eating joint, as th e r emoval of 10% hot el exp enditur e tax has brought th

em at par.

For a n ew company to und erstand th e comp etitors, its mark et s egm entation is th e k ey.

This is b ecaus e mark et s egm entation not only enabl es th e company to und erstand th e n

e eds of th e custom er but also th e comp etitors, prosp ectiv e comp etitors and substitut es

and th eir strat egi es in th e mark et s egm ent. Anoth er important thing to b e m ention ed is

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Rahul Rao

that wh en so many hot el chains ent er th e budg et hot el s ector, du e to high comp etition,

th er e ar e chanc es of pric e wars and if th e company tri es to d ecr eas e th e pric es mor e

than r equir ed th en it los es its profitability. Though budg et hot els ar e suppos ed to b e ‘ch

eap and b est’ for Indian middl e class custom ers, th ey should not compromis e on pric es

unl ess d emand ed by th e custom er. So pricing strat egy also b ecom es pivotal.

Location & Capacity

Location

For hot el compani es sit e s el ection strat egy is on e of th e most important strat egi es b

ecaus e it is clos ely r elat ed with th e mark et s egm entation and comp etition in th e

location th ey choos e, and all th e thr e e tog eth er influ enc e th e capacity strat egy which b

ecom es th e bas e for op erations. In fact, th e location of th e hot el d et ermin es th e s ervic

e styl e, d esign of th e prop erty and th e faciliti es to b e off er ed.

In a custom ers’ p ersp ectiv e th e location of th e hot el plays a big rol e in th e ov erall

enjoym ent of th e trip wh eth er it is l eisur e or a busin ess trip. That’s b ecaus e a w ell locat

ed hot el significantly cuts down on th e amount of tim e and mon ey wast ed in traffic or

navigating in an unfamiliar plac e. For busin ess trav ell ers, a c entrally locat ed hot el will

incr eas e productivity by allowing th em to work and m e et with coll eagu es. For vacation

ers, a hot el that is locat ed n ear a major attraction m eans l ess hassl e and mor e fun.

Aft er analysing th e data coll ect ed from int ervi ews and qu estionnair es f ew important

factors which influ enc e th e location strat egy w er e id entifi ed. Th ey ar e financial and

administrativ e factors in th e plac e, acc essibility from airports and railway stations, local

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Rahul Rao

support of suppli ers, local hot el supply (comp etition) and also local comm ercial activity at

pr es ent and in th e futur e.

Th e b est locations for budg et hot els ar e citi es lik e Agra, Bangalor e, Hyd erabad and Pun

e and also major citi es lik e Mumbai and D elhi b ecaus e th er e ar e no ‘strong budg et hot

el brands’ in th es e plac es and th er e is a growing d emand for hot el rooms in th es e citi es.

For exampl e in Bangalor e th er e is an estimat ed incr eas e of 6000 hot el rooms by 2012

and still th er e will b e a shortag e of rooms b ecaus e of high comm ercial activity in IT and

also m edical tourism. According to HVS r eport (2008) Hyd erabad is s et to incr eas e 10000

rooms by 2012/13. Mumbai and D elhi ar e citi es wh er e th er e ar e lots of n ew hot els

coming but still th es e ar e always und er-suppli ed b ecaus e of th eir high economic activiti

es. Th er e is a sp ecial n e ed for D elhi b ecaus e of coming Common W ealth Gam es. All th

es e citi es poss ess r elativ ely w ell supporting suppli ers in food, b ev erag es, laundry, and

car r entals etc which ar e r equir ed for hot els.

Th e 5 y ear tax holiday and also eas e of administrativ e issu es by th e local gov ernm ents

also add up to th e attractiv en ess of th es e plac es. In plac es lik e Hyd erabad, Bangalor e

and oth er citi es with f ew er rooms than r equir ed, th e local gov ernm ents ar e int er est ed

in allotting lands for subsidis ed rat es to hot el compani es. Though a for eign company is not

r ecomm end ed to start with a wholly own ed subsidiary, this subsidis ed land allocation will

h elp th e company to find a hot el inv estor who is int er est ed in constructing a hot el

according to th e d esign and capacity th e company wants, which can b e d ecid ed bas ed on

location, th e mark et in that location and comp etition in that location (i. e. local hot el

supply).

Capacity

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Rahul Rao

Th e op erational p ersp ectiv e d eals with day to day op erational issu es lik e numb er of

rooms and r estaurant s eats r equir ed to satisfy th e mark et d emands, and procuring labour

for th e d ecid ed capacity. Sinc e a high turnov er of custom ers is b eing for ecast ed, and th

er e is still a major d emand and supply gap in many Indian citi es, hot el compani es must

hav e hot els with high er capacity both in rooms and r estaurants. In budg et hot els ev en

food and b ev erag es ar e s e en as k ey r ev enu e g en erating d epartm ents b ecaus e th ey

attract non-r esid ent middl e class custom ers. Th er e ar e f ew advantag es of constructing

larg e hot els lik e r eduction of costs du e to economi es of scal e and scop e, and ability to

gain mor e mark et shar e in th e futur e.

Knowl edg e Transf er

For a Europ ean company which wants to ent er Indian mark et, on e of th e most important

conc erns is th e transf er of know-how and t echnological information. Knowl edg e transf er

b ecom es difficult wh en crossing bord ers b ecaus e knowl edg e transf er is influ enc ed by

cultur e, organizations and p eopl e (both in groups and individually). According to a s enior

manag er, cultur e has a dual rol e to play and it d ep ends on organization and its p eopl e to

tak e th e b est advantag e of div ers e cultur es. Though cultur e can d ebilitat e l earning in

organization b ecaus e it chang es th e way p eopl e work in diff er ent countri es, this can b e

tak en as a n ew l earning and p eopl e can l earn from diff er ent cultur es.

Out of all th e entry mod es, manag em ent contracts stand out wh en it com es to transf er of

knowl edg e. As th e hot el is fully controll ed by th e for eign company, th e for eign

company is bound to transf er knowl edg e in structur ed way. This b ecom es mor e

important b ecaus e th e company is paid high manag em ent f e es and it b ecom es th eir r

esponsibility to transf er knowl edg e. At th e sam e tim e, as th e host organization has to

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Rahul Rao

fully follow th e manag em ent styl e of for eign company, it must b e abl e to l earn and k e

en to know how to us e th e n ew skills and t echnology transf err ed. In franchising, th e

franchisor is bound to transf er knowl edg e and franchis e e can tak e th e opportunity, how

ev er as th e franchisor has l ess control ov er franchis e e, th e franchis e e its elf can b ecom

e hurdl e in knowl edg e transf er. Mor eov er, ev en if th e transf er tak es plac e, th e way a

franchis e e us es th e acquir ed knowl edg e d ep ends on th e way th e franchis e e handl es

th e organization. So th e franchisors must b e mor e cautious on hw th e knowl edg e is transf

err ed and how th e knowl edg e is us ed.

Th e Indian hot el industry is facing a major probl em of manpow er supply. According to

HVS r eport (2008), th e estimat ed manpow er r equir em ent can incr eas e up to 208%

from 2005/2006 to 2011/2012 i. e. from 44,840 to 138,308. This probl em is much high er in

citi es lik e Hyd erabad, Bangalor e and Pun e, with estimat es 512%, 411% and 117% incr

eas e in manpow er r equir em ent r esp ectiv ely, which ar e targ et mark ets for budg et hot

els. As budg et hot els must acquir e tal ent ed manpow er and also impl em ent knowl edg e

transf er at low er cost th e pr essur e incr eas es. Mor eov er, th e host organization must b e

abl e to tak e th e knowl edg e transf err ed by th e for eign company. And all this tog eth er

influ enc es th e knowl edg e transf er strat egy of any hot el company.

Conclusion

Indian budg et hot el s ector is in a tr em endous growth phas e. With rising economy du e to

growth in IT, IT enabl ed s ervic es, BPOs, r eal estat e and r etail s ectors th e country has b

ecom e th e fast ed growing economi es in th e world today. Th e hot el industry, and esp

ecially budg et hot el s ector, du e to incr eas ed sp ending ability of th e middl e-class

consum ers, is g etting right th er e wh er e th e growing economy is driving it. Th e gov

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Rahul Rao

ernm ent has mad e many r eforms for th e hot el s ector to initiat e mor e for eign inv estm

ent. And th e fact that, th er e is hug e d emand and supply gap in many fast growing citi es

op ens av enu es for many local and for eign inv estors to ent er th e mark et with a long-t

erm p ersp ectiv e. Though th er e ar e a lot of opportuniti es, Europ ean compani es must

fram e th eir strat egi es with utmost car e b ecaus e all th e opportuniti es ar e associat ed

with som e critical issu es lik e cultural, bur eaucracy etc. And in cas e of budg et hot el

industry, und erstanding th e custom er its elf is a major hurdl e b ecaus e th er e ar e hardly

any similariti es b etw e en Indian middl e class p eopl e and Europ ean custom ers.

No matt er which r egion in India th e Europ ean Hot el chain wants to ent er, cultur e plays

an important rol e. Th e mark et entry strat egy and Indian cultur e ar e int erwov en which is

b ecaus e of th e in extricabl e influ enc e of cultur e on th e oth er factors which ar e k ey to

Indian mark et entry. Aft er th e r es earch and analysis it has b e en notic ed that most of th e

‘cultural risk’ can b e avoid ed by using entry mod es lik e franchising. A local partn er

(franchis e e) would h elp th e company by diluting th e cultural compl exity as th ey ar e us

ed to th e local cultur e. Franchising is also favourabl e b ecaus e th e company n e ed not inv

est as much as it has to do in oth er entry mod es. Mor eov er, franchising incr eas es th e sp e

ed of expansion. How ev er th er e would b e l ess er control ov er r esourc es and d ecision

making in franchising.

So if th e company want to gain control th en it must switch to oth er mod es for th e futur e

hot els. B efor e switching to oth er mod es, it is pivotal to und erstand that in hot el industry

own ership and control can b e s eparat ed. It is not n ec essary to go for an equity mod e to

gain control. Manag em ent contract is not an equity mod e but giv es high l ev el of control.

Also, b ecaus e manag em ent contract f e es and royalti es, and ov erall control ar e high er

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Rahul Rao

this mod e b ecom es mor e d esirabl e in th e futur e rath er than franchising. Manag em ent

contract also incr eas es th e effici ency and quality standards of th e company.

Oth er important factors lik e mark et s egm entation, comp etition and location ar e also quit

e important. Esp ecially, in hot el industry, location and th e capacity of th e hot el prop erty

ar e most important factors as th ey ar e clos ely r elat ed with oth er factors. An important

obs ervation in th e inv estm ent d ecision factor is that it is not only important to und erstand

th e own ership, location and int ernalisation advantag es but it is also important to ass ess th

e possibl e risks associat ed with inv estm ent in th e r egions wh er e th e company wants to

ent er. Ev en if th e company is going for a non- equity mod e, it is important to und erstand

th e possibl e risks in India.

Ent ering into for eign mark ets with cultural and institutional environm ents that diff er

from thos e of a firm’s hom e mark et involv es significant busin ess risk. Firms may hav e

two options to ov ercom e th e disadvantag es inh er ent in for eignn ess. On e way is to ent

er th e mark et with comp etitiv e advantag e ov er local firms. And th e s econd is to gain

comp et enc e in th e for eign op eration and th er eby r educ e intrinsic disadvantag es ov er

tim e through exp eri enc e (Chang, 1995). As th e budg et hot el industry and th e custom ers

in India ar e clos ely r elat ed with th e cultur e of th e country, it b ecom es a Europ ean firm

to ent er th e mark et with a comp etitiv e advantag e ov er th e local firms. On th e oth er

hand, th es e firms must work with th e local hot els to gain comp et enc e in th e Indian mark

et. On th e whol e, it can b e said that a s equ ential entry is mor e suitabl e than a high volum

e entry and also non- equity mod es lik e franchising and manag em ent contracts ar e mor e

pr ef err ed than equity mod es. A s equ ential entry, starting with franchising, also h elps th

e company to und erstand th e cultural influ enc es, expand fast with l ess er inv estm ent.

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rahul project work submission

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