Lodging Industry Transformation – How Will It Affect Your Company’s Future?
19 Jun 2006
Multi-dimensional Transformation
Executive Summary
The lodging industry is in the midst of a fundamental business transformation that is neither forgiving, nor for the faint of heart. Success will require near flawless execution or the consequences could be devastating. The last thing a company will be able to afford is to hang its value proposition on the promise of a strong brand and then fail to deliver against that promise. This article will explore the transformation as it affects the lodging industry.
The lodging industry is in the midst of a fundamental business transformation that will affect every stakeholder in the industry. The drivers behind the transformation are many and the business ramifications will be significant. While existing traditional skills are still in demand – new skills, capabilities and supporting infrastructures will be required to deal with the business impacts.
New skills in marketing, relationship management, information technology, merchandising and operations will augment traditional capabilities to position companies for success in the future. Developing these new capabilities and infrastructure will require changes in strategic focus, organizational composition, workforce structure and management, as well as the investment direction of the company.
What is the Transformation?
The lodging industry is evolving from a product-focused, physical asset-intensive industry to a customer focused and brand intensive business. This is not to say that the end goal has significantly changed - value maximization remains important for investors, owners and managers. Yet, the ‘means to the end’ is what is in the transformation process.
Lodging’s historical emphasis has been on developing physical products and supporting services based upon their understanding of customer wants, then deploying the sales, marketing and distribution resources necessary to sell these products to the customers. In short, a more product focused strategy. In the future, companies’ activities will be oriented around developing an understanding that encompasses the emotional and psychological wants and needs of the target customers with a more customer focused strategy. This insight will be used to market a wider array of product and services through strong brand association designed to build loyalty across a customer’s lifetime.
The following table below provides a high level overview of transformation activities expected in the future.
Shifting from Product to Customer Focus
The capabilities and infrastructure required to acquire, assess and operationalize customer information into sales and marketing strategies at the property level is no easy task.
For one thing, product will encompass a customizable, end-to-end combination of physical attributes, ambience, service levels and style as well as communication and messaging across all touch points, distribution, and post-experience customer follow-up.
Future products will likely extend beyond the corporate boundaries to include transportation, food and beverage, retail, distribution and travel intermediaries, as well as sports and entertainment suppliers. Assuming these products connect with the customers on an emotional level, they will be both enduring and difficult for competitors to replicate. A strong brand efficiently conveys a company’s offering, and thereby creates preference and value for owners.
The following graphic shows the “Big Picture” aspects of the lodging industry transformation.
Transformation Drivers
A number of factors are driving the transformation of the lodging industry, including, among others, the following:
- Physical Constraints – Companies have and will continue to use distinctive architectural design and physical product to differentiate themselves, but such innovations tend to be expensive and easily replicated.
- Investors/Analysts – The desire for the more stable and predictable income streams associated with fee and services income has led many global hotel companies to divest many of their owned hotel properties. Management, franchise and licensing income has different growth drivers than property ownership - principally system growth. These are driven by strong brands that are preferred by hotel owners and management companies because of their ability to produce greater profits.
- Technology – This is both a driver of and a constraint to industry transformation. IT is a driver because many of the capabilities required to understand a customer needs and wants can only be enabled by technology. Increasingly robust applications, infrastructure, networks and global communications – all at declining costs – are providing hotels with unprecedented opportunities to cost effectively deliver customized service.
- Demographics and Psychographics – Working largely in tandem, the industry will soon be simultaneously servicing the two largest demographic groups in history: the Baby Boomers and the Millennials, or Echo Boomers. However, these two groups are quite distinct in their preferences. Satisfying the needs of both groups will be driving the need for industry transformation.
- Globalization – This is a huge driver of the industries transformation process. As business and leisure pursuits become global, so too does the need to provide an integral, multi-cultural and consistent customer experience. China and India represent the fastest growing outbound markets. Asian and Indian hotel companies are aggressively expanding into Europe and US for the first time.
- Costs – From operating, to construction, to financing all costs are rising. Labor costs are among the highest and an impending labor shortage and resultant compression in the labor markets will likely exacerbate this trend among increasingly fickle and less skilled pool of labor. Customer acquisition costs are also increasing due to a more informed consumer.
Business Ramifications
The most important aspects of the industry’s transformation is the impact it will have on a company’s day to day business going forward. The ramifications will impact virtually every facet of their business, including:
- Impact on traditional competencies – Central reservations, call centers, sales and marketing and back office processes, such as procurement, finance and accounting will benefit from economies of scale. As many of these transaction-intensive activities become automated, they will be less important as sources of competitive differentiation.
- IT investment – The nature and direction of IT investment will change. Using 75 -90% of the IT budget for maintaining existing systems will become unacceptable. Companies will need to find ways to reduce costs and re-invest the savings into enabling technologies that add value for the guest.
- Strategic Focus – The strategic focus will shift from gaining efficiencies in finding and servicing guests, processing support functions and managing the books to building powerful brands that promote continuous improvement over the lifetime of targeted customers.
- Operationalized CRM – Understanding what and how to use valuable customer knowledge will be essential to sustainable competitive advantage and a lynchpin of a successful transformation going forward.
- Workforce Management – Technology allows support functions to be centralized into the most cost effective locations. Technology will enable guests to participate in service delivery through the use of self-service technologies and the creation of innovative combinations of functions at the property level.
- Organizational Flexibility – everything from ad hoc partnering capabilities associated with emerging value ecosystems to the centralized location of support services will required unprecedented levels of organizational flexibility. This flexibility will be key to sustainable competitive advantage.
Conclusion
In the future, the relative importance of a number of traditional competencies will diminish, and many companies will be forced to develop new competencies and capabilities to remain competitive. If properly executed, the transformation will create self-funding mechanisms. Augmented by information technology, the transformational activities will create numerous opportunities to substantially decrease the cost, while simultaneously improving the efficiency and effectiveness of both core and non-core business processes.
Successful transformations will demonstrate the veracity of the axiom that “Success rewards the prepared.” Companies will need to think through their transformation strategy, determine their strategic focus, assess their own strengths and weaknesses, and consider working with partners experienced in the activities that are either no longer core to the business or for which they are not internally well-prepared.
About Clay Dickinson
Clay Dickinson is a vice president-client industry executive for EDS' Global Travel and Hospitality segment. In this capacity, he brings specific solutions to business issues faced by EDS clients and the industry as a whole. Contact Clay at: clay.dickinson@eds.com.