Organisational Strategy and Leadership

Introduction

The report primarily illustrates the fundamentals regarding the business environment of a particular industry. Major sections of the paper are about a critical review of the factors present in an industry that drive profitability. Evaluation of the profitability measures linked with a specific industry is the prime concern here by analyzing the current industrial environment can be understood profoundly (Bharadwaj et al., 2013). These factors have significant impacts on the profitability of companies belonging to different industries. However, these business environmental factors very often change and the changing nature of the factors has noteworthy effects on industry profitability-related changes. For an in-depth understanding of this context of discussion related to an industrial environment, a real-world example or case study has been taken into account (Colbert, Barrick & Bradley, 2014). The hospitality industry is the one that has been taken in this report to critically analyze the various factors driving profitability in the case of the international hotel business, restaurant and resort business, bars, serviced apartments, bed and breakfasts cafes, and other amusement parks of the leisure industry (Crane & Kuyken, 2013). The real-world scenario of hospitality industry analysis has been described here in this report which is based on the macro environment. This chosen industry is an international one as the scope, as well as operations and management of the companies and institutions belonging to the hospitality industries, has gone global. The impacts of the macro environment elements on the profitability and business of the industry also cover a major portion of the report.

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Factors that drive profitability in the industry

It has been seen that most of the top hotels in the international hospitality industry continue with a primary goal which is to gain more profitability. It is also a fact that, without profitability, a hotel can’t survive in case of long-run. Generally, top international hotel companies, such as Ashford Castle in Ireland, The Oberoi Udaivilas in India, Triple Creek Ranch in Montana, Farmhouse Inn in California, 41 in London, etc go with the same concept which is with the help of income as well as expenses, the profitability of the hospitality industry can be measured perfectly. Here, the incomes of the hotels are generated from the day-to-day activities going on in the industry. On the other hand, expenses in the hospitality industry reflect the cost of resources that are used up during those activities (Lechner & Gudmundsson, 2014).

On the whole, it wouldn’t be wrong to state that the total revenue generated by this industry can be defined the profitability. The entire cost structure in the hospitality industry along with revenue is highly dependent on the price as well as quantity of the sold products and services. For instance- food and beverages, various amenities and facilities, accommodation, corporate responsibility, property operations, like- maintenance, MRO, promotion, hotel utilities, recreation and leisure services, tourism services, etc. However, some imperative factors primarily drive profitability in the hospitality industry (McDermott et al., 2013).

Looking at the degree of competition in the hospitality industry, it can be mentioned that profitability in this sector is sky-high. There is no monopolistic nature that can be found in this industry as there are many illustrious establishments present all over the world for which demand always stays elastic. This factor of greater competitiveness helps the industry to increase its profits which is possible by raising the price. There are also government regulations that help the industry prevent the power abuse of the monopoly market. This also affects the hospitality industry positively by increasing profitability. When the market of hospitality industry gets more and more competitive, it becomes hard for hotels, restaurants, and resorts to gain more profitability (Rothaermel, 2015). It occurs because customers and guests are always attracted to the cheapest products and services. So, ultimately the profitability of the entire industry in a global manner gets reduced. The contestability concept in the hospitality industry plays a vital role as it is not that easy for a new entrant to enter a market with so many competitors already present. So, when entry becomes difficult, the profitability of the industry gets reduced (Crane & Kuyken, 2013). Strength related to the demands of products and services is also a factor that has a huge impact on the hotel business and it also drives profitability (Cameron & Green, 2015). Among other factors- the state of the economy also drives profitability towards the hospitality industry but only in case there is economic growth. The increased demand for luxury goods and services in this industry helpss a nation to benefit from economic growth even in times of recession (Colbert, Barrick & Bradley, 2014).

A net profit margin of the international hospitality industry is the perfect representation that illustrates the financial health as well as profitability. Sometimes, it has been seen that a hotel company’s net income is increasing at the same time its profitability decreases. It only means that the company has become relatively much less efficient (García-Morales et al., 2012). So, collective organizations’ efficiency is also a factor that drives profitability in the hospitality industry. But, on the contrary, the industry can’t gain profitability while losing money at the same time; it just doesn’t work this way. There are some quantitative factors and qualitative factors present in the industry environment that drive profitability.

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Quantitative Factors

The most identifiable factor that drives profitability in the hospitality industry is known as net profits. With greater net profits, the industry can enhance its level of profitability. Among the other quantitative factors yearly sales earnings, merchandise, and service costs also drive profitability (Colbert, Barrick & Bradley, 2014). The key variables that determine the profitability of a hotel can be understood by just looking at the income statements of major hotels. Net revenues of this international industry along with the cost of sold products and services are some of the major factors that drive profitability. It has been found that in the hospitality sector, sales prices play a very vital part when it comes to profitability and industry success (García-Morales et al., 2012). Most of the leading hotels and resorts effectively manage their merchandise costs to increase the sales price directly enhancing productivity. Here, inventory numbers of the industry also matter a lot as it is a major asset when it comes to the balance sheet. A highly valued inventory of resources can increase the profit margin. Sometimes, the key players in this industry get rid of the inventory by increasing sales which on the other hand increases profit margin (Colbert, Barrick & Bradley, 2014). Taxation affects the net income of the industry and it is quite an underrated factor but in case, there is a little cutback in the power of taxation policies the industry gains high-level profitability very quickly.

Qualitative Factors

The major qualitative factors that drive profitability in the hospitality sector are- market share, customer and guest preferences, seasonal changes, industrial leadership, advertising, training programs all over the industry, sales reward approaches and programs on an international level, competition strength, etc. (García-Morales et al., 2012). These elements affect the sales rate in the hospitality industry positively and thereby the profitability increases.

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Changing nature of the factors and their impact on industry profitability

Sometimes, it has been observed that the monopolistic nature of some hotels, resorts, restaurants, etc in the hospitality industry considerably decreases the degree of competition. Due to the changing nature of this factor, inelastic demand in the hospitality industry has increased. This situation causes a lowering in the rate of new entry into the market by which there is a chance of profitability decrease (Santos-Vijande, López-Sánchez & Trespalacios, 2012). Therefore, many government policies and regulations have been formulated to present the situation of a monopolistic nature in the hospitality sector. Changes in the economic system also have a severe impact on the profitability of the hospitality industry. Considerable economic growth internationally benefits the industry as more guests get involved and profitability goes up. Sometimes substitutes in place for expensive products and services also cause higher demands in this sector and it positively affects the profitability issue. However, in this case, product and service development with strategic innovation as per the modern market condition creates more profitable factors for the industry. Successful promotional activities and advertising campaigns raise the demands by which revenue of the entire industry increases (Spencer, Buhalis & Moital, 2012). But, here the companies have to think about whether that increased level of revenue can cover the advertising cost or not, otherwise, there is also a fair chance that instead of gaining profitability the industry will suffer loss. Significant changes in cost structure can also affect profitability either positively or negatively. When an increase in costs of products and services occurs profitability decreases, but when costs of labor, supply chain management, and raw materials decrease in the hospitality industry, a sharp increase in profitability can be observed. The exchange rate also plays a major role here, because the increasing nature of import costs can simultaneously increase the cost of products and services (West et al., 2014).

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External Environmental Factors and Impacts of macro environment on profitability

According to Huczynski and Buchanan, the surrounding business environment of an industry is the major factor when profitability comes to mind. It is because, the environmental factors linked with a particular industry help the industry figureheads to identify the issues, events, trends as well and other factors that can drive success in terms of profitability and these factors also influence the decision-making as well as organizational behavior present in the industry (Lechner & Gudmundsson, 2014). By analyzing the external environmental factors, the impacts on the profitability of the hospitality industry can be known. For detecting the early signs of industrial threats as well as opportunities, serious loss regarding profitability can be avoided by giant hotel companies, resorts, restaurants, pubs, recreation centers, sports clubs, etc. According to Oup, macro-environment factors play a significant role in case of determining the profitability of an industry. Tax changes, government policies, new laws and regulations, trade barriers, consumers, suppliers, and demographic changes are the main elements of the external environment of the hospitality industry.

With the help of PESTEL analysis, the external environment of the hospitality industry can be assessed. Strategic decision-making in the hospitality industry is affected by external environmental factors and it directly affects the profitability of different organizations belonging to this industry (Spencer, Buhalis & Moital, 2012). International expansion of this industry depends on external environmental factors and this critical review section regarding the external environmental factors is based on the secondary research analysis of the hospitality industry in over fifty countries and the top hotels, restaurants, resorts, etc that are situated thereby contributing a lot towards the international hospitality industry. The analytical study of the external environment of the hospitality industry has been described below.

Organisational Strategy and Leadership

Figure 1: PESTEL

Source: (Crane & Kuyken, 2013)

Political Factors

The possibility of tourist visits to different places is the factor that drives profitability in the hospitality industry and it here political factors play a very imperative role. It is a very fast-growing industry and the Schengen agreement is the perfect example of a political factor that gives tourists an easier chance to visit different countries the hospitality industry has a chance of providing them accommodation, F&B services, modern facilities, and amenities as well as other luxury services (García-Morales et al., 2012). With political factors, certain agreements, like Schengen have been implemented by which border control has been eliminated from the equation. The 25 EU participant nations in this way made it cheaper as well as easier for the visitors to stay at their hotels.

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Economic Factors

The economic factors determine the purchasing power of the visitors in the case of the hospitality industry as well as their spending patterns. In this case, the industry also has to think about the major trends as well as modern attractive factors to magnetize potential guests. With the commandment of FDI (Foreign Direct Investment), the economic condition of various countries has strengthened as has the hospitality industry. A considerable drop in the case of discretionary spending can be seen when the economic condition gets sour. Here, increase rates, foreign exchange rates, interest rates, and economic development designs play vital roles that are the economic factors of the external environment of the hospitality industry (Colbert, Barrick & Bradley, 2014). Economic systems, economic planning, growth strategy, economic reforms, human resources, financial as well as fiscal sectors, price and distribution controls, per capita along with national income, etc are the economic factors that can affect the profitability of the hospitality industry.

Organisational Strategy and Leadership

Figure 2: Economic Freedom Heat Map

Source: (Rothaermel, 2015)

Social Factors

The social environment of the international hospitality sector also has an impact on the profitability of the hospitality industry. It has been seen that during the holiday seasons, the sales rate and profitability of the hospitality industry increase to a greater extent (Bucolo, Wrigley & Matthews, 2012). The purchasing trends of the different people from different nations come under social factors. Cultural trends, population analytics, and demographics are some of the measurable factors that play crucial roles in case of examining the social environment of the hospitality industry.

Technological Factors

Mechanization, digitalization, incentives, research and development activities, and the rate of technological changes are the major factors that come under the external environment of the hospitality sector. Changes in technological factors significantly affect different areas, like- the quality of the products and services, costs, the efficiency of the production level, and other decision-making approaches (Crane & Kuyken, 2013). These areas define the profitability of the hospitality industry and therefore changes in the technological factors can cause changes in case of the profit margin, net income, revenue, and organisational success of the industry.

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Environmental Factors

These macro environment factors are directly linked with the profitability of the industry as these factors are also uncontrollable variables like the best ones. Weather, climate conditions, global climate change, assurance, geographical position, terrorism, etc are the environmental factors that can critically influence the various functions and activities of operations and management related to the hospitality industry. Very often, due to changes in environmental factors, the number of customers and guests gets reduced and it hurts the productivity of the various hotels and resorts.

Legal Factors

Various laws and regulations, like- discrimination law, antitrust law, consumer law, health and safety law, employment law, etc have a considerable impact on the productivity of the hospitality industry. However, when significant changes are observed in case of the legal factors, the profitability of this industry is also affected (García-Morales et al., 2012). Laws regarding taxation, exchange rates, etc when changed, influence the profitability of the industry. It has been observed that the regulatory environment of the hospitality industry changes from time to time. Rise in fuel prices, changes in tax as well and tourism costs also affect the hospitality industry’s profitability and these factors come under the legal factors of the macro environment.

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Conclusion

The entire report reflects the factors of profitability that can help an industry to develop to a greater level. Various analysis factors, such as RNOA (Return on Net Operating Assets), NBC (Net Borrowing Cost), Operating Profit Margin, Financial Liability Leverage (FLEV), Asset Turnover (ATO), Return on Common Equity, etc are utilized by illustrious organizations of the hospitality industry to identify the driving factors so that effective decision-making based on sustainable strategies can be formulated. This influences the profitability of the hospitality industry as these analytical methods help different companies gain a competitive advantage. In this market of high competitiveness, macro environmental analysis along with knowing about the external environmental factors can help numerous organizations, companies, and hospitality establishments to follow robust marketing approaches along with international business expansion (Hrebiniak, 2013). In the report, all the macro environment elements have been comprehensively analyzed by considering the real-world scenario of the hospitality industry. The key concern of the paper is to understand the factors that can drive profitability in the hospitality industry and all the data are based on previous research and annual reports of top organizations in the hospitality sector.