Hospitality Industry PESTEL Analysis

The process of conducting research on the business environment within which the organization operates and on the organization itself, in order to formulate and implementation of strategy for future business operations can be mentioned as Strategic analysis of hospitality organization. To do the assessment can use number of tools to process of strategic analysis, including PEST (sometimes PESTLE) for analyze external environment and, SWOT analysis use for the internal environmental scanning, and Michael Porter’s five forces model use to assists to understand the competitive forces, the attractiveness and current position in the industry.

An effective way to know the past, present and future potentials regarding the industry development is analyzing the industry background as the part of strategic analysis. The External analysis can assess the factors affecting the industry to be existed including political, economical, social, technological, legal and environmental which have great impacts to run the business and use PESTLE analysis.

In any industry which it is domestic or international, whether relating to products or services, the rules of competition are personified in five competitive forces of entry of new competitors, threat of substitutes, bargaining power of buyers, bargaining power of suppliers, and rivalry among the existing competitors. According to Porter, one of the crucial determinants of firm profitability is industrial attractiveness.

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In this assignment, a strategic analysis of the Galadhari hotel which is in hospitality industry has been done through the combination of both theoretical and practical facts regarding this property including organizational background and industry background of this hospitality sector in Sri Lanka, an assessment of the forces affecting the external environment (the use of PESTLE analysis) and an assessment of the attractiveness of this industry (the use of Porter’s 5 forces) regarding the future strategic action to grab more hospitality market share.

Background of the industry and about Organization

By concerning about the Sri Lankan market of tourism there can be seen growth in the tourist market. All this euphoria gives rise to the doubt about whether Sri Lanka Tourism is well on the way to recovery and growth or not. For the last seven months that ended July this year (2010), arrivals are up almost 50% year-on-year (YOY) (341,991), with income also keeping pace at 69% growth (Quarter 2; US$ 244.5 million). The hotel and travel Colombo Stock Exchange (CSE) index has been increased by almost 200% for 2009. Today tourism is running on everyone’s minds, and it is difficult to open a local newspaper without seeing at least one written article on tourism.

The reason for the dramatic improvement in Sri Lanka’s tourism data is the victory of war in May 2009. This would be a remarkable result when compared with other regional tourism destinations. Another reason for this improvement was the leader of the terrorist has killed and there is reason for cautious optimism that the social situation in Sri Lanka can improve rapidly. We can hope the company can take advantage of the ‘peace dividend’ by increasing the number of destinations the airline serves.

Hotel Galadhari is one of the leading five star luxury hotels in the Sri Lanka. The story of the Galadari Hotel, Colombo which opened its doors in 1984, is a splendid tale of continual improvement of product and highest standard of quality in hospitality over the past 25 years.

The vision & beliefs of the hotel is firmly grounded in extending a true personalized service to all our guests, laced with an unforgettable luxury hotel experience with the finest traditions of international hotel-keeping.

The Galadari Hotel, Colombo, meticulous about maintaining the privacy of its guests has drawn in many an elite personality from around the world such as heads of government, prime ministers of leading nations, royalty, well known sports & music personalities over the past two and half decades.

Situated in Colombo city with many a historical building within walking distance and a panoramic view of the magnificent Indian ocean, the Galadari Hotel offers a rich blend of service and quality in five star luxury living with 450 room super luxury hotel in Sri Lanka that overlooks the Indian Ocean and is adjacent to the Presidential Secretariat, Banks and the World Trade Center, with easy access to the shopping areas in Colombo. In hotel they are so many facilities are available, coffee shop lobby bar, chine’s restaurant, Scheherazade Arabic restaurant, pastry shop and garden terrace, karaoke, pub and also have health club and pool, body care and massage therapy ,bed-and-breakfast hospitality properties are available to accommodate the guests and the basic requirements of their comfortable stay.

Hospitality sector is a great source of income generation for the new investors.For instance, annual turnover (in2008) was Rs. 164 (million), operating profit (in2008) was Rs.13.65(million), growth in turnover (in 2009) was 25 percent, number of rooms is 450 rooms, average occupancy rate was 80 percent and growth in local hospitality sector is 15 percent. Now, it is easy to understand that how much revenue earning Galadhari hotel in its sector of hospitality.

Mission of Hotel Galadari

We are exceptional operators of contemporary 4 and 5 star hotels and create value in every encounter with our owners, guests and associates.

Vision

Exceptional and personalized service, exceeding expectations, and inspiring a connection to our brand in the experiences we provide.

Values

Exceptional Service – Company understand that the value can be created with every encounter and this is reflected in its superior standard of service.

Integrity – honest and straightforward in our interactions with hotel owners, guests, colleagues and the communities in which hotel operate

Respect – Hotel Galadari respect the objectives of our stakeholders, the values of its guests, and the cultural difference in the locations that it operate.

Teamwork and Passion – We bring our individual expertise, creativity and passion for industry as a Hotel Galadari team member.

Continuous Improvement – Hotel is innovative and utilizes best practices to continually improve its management techniques, and the quality of products and services.

Strengths and Weakness

Strengths

• Visitors from Western Europe also prefer to stay in hotels in the southern coastal belt where the main attraction is the beaches. So Location of the Hotel Galadhari is strength to the organization to enhance their businesses.
• There has also been a downturn in the arrival of Indians, who prefer Colombo hotels.
• Colombo city hotels have been able to maintain higher occupancy levels than hotels on the southern coastal belt because of more business travelers, and special visitors such as those coming for conferences. Hence Galadhari also have more business opportunities in the Colombo city.
• Since then the leisure sector has under-performed hugely, and Galadhari hotel has more facilities to spend the day more leisurely.
• Well expertise work group has Galadhari to give satisfied service to their customers

Weaknesses

• The location of the hotel is in the high security zone in Colombo which is Located in Galle Face Green promenade and with views over the Indian Ocean, this property offers a high level of service and security. Hence it could get difficulties to the tourists. Situated right next to the World Trade Center and the President’s Residence, the hotel enjoys the most secure part of the city.
• The distance to hotel between airport is very far and gets more time to re ach hotel. It could cause to the business conferences which are held in the hotel. The main purpose of the established of Galadari Hotel is to attract the overseas seminars & conferences to the Sri Lanka. Because of the distance to Airport and hotel is too far and get more time to reach to the destination. And also the traffic on the roads is mainly impact to the time it takes to come to the hotel. Because of these reasons the main purpose has not been achieved.
• Galadhari has only few room facilities and they have enough land to build new hotel rooms in their own land.
• Hotels Galadhari has high gearing, high costs to maintain staff, and for refurbishment.

Factors affecting the external environment in hospitality

In strategic planning, external analysis of hospitality industry has been done with the use of PESTLE analysis and Porter’s 5 (five) forces in defining the strategy, making decisions on allocating resources to pursue the strategy.

Source: http://www.sltda.lk/sites/default/files/Statistics_book.pdf (Access: 15th September 2010)

Source: http://www.sltda.lk/sites/default/files/Statistics_book.pdf (Access: 15th September 2010)

PESTLE Analysis

(P)olitical Factors

In Sri Lanka it is socialist republic, state. The government is a mixture of the parliamentary and presidential system. Head of the state is president and current President is Mr. Mahinda Rajapaksha and he is the chief of armed forces and head of government.

When the companies formulate and implement the strategies the political arena has a huge impact upon the regulation of businesses, and the spending power of consumers and other businesses. We have to concern about how stable is the political environment, influence of polices, laws that regulate or tax your business, What is the government’s position on marketing ethics, government’s policy on the economy, government view on culture and religion, government involvement in trading agreements.

State has main responsibility to facilitate to the tourists and funding to the tourism products development projects and do promotions to attract the tourists to the country. On the other hand government has to encourage local and foreign investors to invest their money to develop tourism products and liberate taxes.

To growth of the tourism infrastructure facilities are directly affect. So government has the main responsibility to develop and maintain infrastructure. Educated workforce in international standard is also important to give good and satisfactory service to the customers. Because of that government has make rules and regulations to standardize.

A change in government party is directly impact to the any industry in the country because their policies it will effect to run the business. When the government strict their security policies it highly impact to the Galadhari hotel. Because tourist who are coming to the hotel. It leads to waste time and may be getting bad image among the tourists.

The Tourism Act No 38 of 2005 came into effect in October 2007. With the flow of the new Tourism act, the Sri Lanka Tourist Board Act No 10 of 1966, which was in effect for the past 41 years, was replaced.

In terms of the requirements contained in the new act, the Tourism Development Fund was officially constituted, with 2 main sources remitting finances to the fund. By way of 1/3 of the Airport Tax collections and 1% of the Turnover of all Sri Lanka Tourist Board registered establishments. The Act provided for the setting up of the Sri Lanka Tourism Development Authority, thereby replacing the Sri Lanka Tourist Board.

(E)conomic factors

In Sri Lanka it has open economy and the Gross Domestic Pproduct grew at an average annual rate of 5.5% in the country. In Sri Lanka service sector is strong in the economy and it indicate 58%, fro agriculture its’ 12.8% and from industry 29.2%.

Almost everyone talks about Sri Lanka tourism being the engine of growth and expects it to play a pivotal role in the economy and it has improved in 6% in this year.

Tourism give benefits to the economy as well as it are the cost to the economy. Tourism process also involves economic costs, including the direct costs incurred by tourism businesses, government costs for infrastructure to better serve tourists, congestion and related costs borne by individuals in the community.

Economic impacts are also become crucial factors in marketing and management decisions which are directly effecting. Communities therefore need to understand the relative importance of tourism to their region, state or community.

Tourism provides great opportunities for regional development particularly for regional areas undergoing structural change. Being a labor intensive industry, with the right motivation tourism can deliver great employment and training opportunities particularly for young people who like to be professionals in this field.

(S)ocial Factor

Sri Lanka being a multi-religious, multi-ethnic country with a population of 22 million plus’s Lankan culture is a rich blend of the interaction of diverse cultural patterns both indigenous and derived from, trade, religions which are Buddhism – 69%, Islam – 15%, hinduism – 8%, Christianity – 8%. The cultural patterns of Sri Lanka today show the lasting impact of a diverse range of cultures..

The overall culture is largely the result of the impact of the introduction of Buddhism, more than 2,300 years ago and Hinduism the second most prevalent religion in Sri Lanka. This does not erase the heavy influence of Hinduism, together with the lesser impact of Islam, and Christianity.

By concerning about the education background the literacy rate of 92%, and 83% of the total population having had secondary education in the country. Sri Lanka has one of the most literate populations amongst developing countries.

Tourists appreciate the hospitality of Sri Lankan People. When the hotel Galadhari provide the services like cabare dancing, supplying prostitutes are not suitable to the Sri Lankan culture.

The bad effects of the tourism can said that tourism has affected the values of our people, particularly our youth. It is true that some tourists engage in anti – social acts. Some of the tourists are drug addicts or perverts and corrupt our youth and they spread incurable diseases such as aids. But we should keep in mind that all the tourists are not black sheep.

(T)echnological Factors

Technological factors are also important fact which effect to the hotel industry in many ways which are comprises the utilization of the latest inventions and technologies facilitate the business activities which are digital telephone facilities, broadband Internet connection, Wi-Fi technology, multimedia projector, LCD screens, online reservation systems, property management software and online information exchange program (Point of Sale) etc.

Now a day’s technology is rapidly changing in the world day by day. As the five star hotel Galadhari should doubt to the new technology in the market. It will help the organization to have competitive advantages. Technology can used to reservation, online services like online booking, do the promotions.

The rapid development of technology is affecting the businesses in Sri Lanka and all over the world. Changes in the technology have changed the way businesses operate i.e. Internet booking for tickets and holidays.

Faster changing development in technology creates a need to react quickly for different businesses in order they want to maintain the competitive environment by providing the same innovative services, which their competitors are offering. Distribution of products by the use of technologies.

(L)egal Factor

When concerning about the legal factors include tourism act, discrimination law, consumer law, employment law and health and safety. These factors can affect how a hotel operates, its costs, and the demand for its products in tourist industry.

The Tourism Act No 38 of 2005 came into consequence in October 2007. With the flow of the new Tourism act, the Sri Lanka Tourist Board Act No 10 of 1966, which was in achieve for the past more than forty years, was replaced. In conditions of the supplies controlled in the new act, the Tourism Development Fund was legally constituted, with two main sources remitting funds to the fund. By way of 1/3 of the Airport Tax collections and 1% of the earnings of all Sri Lanka Tourist Board registered establishments.

Attracting and promotion is handled by the Tourism Promotion Bureau. Tourism HRD functions and the Hotels School operations are undertaken by the Sri Lanka Institute of Tourism & Hotel Management. The Sri Lanka Convention Bureau was also restructured as a statutory body like other Institutions to be managed by an independent Board of Management

(E)nvironmental Factor

Hotel Galadhari is situated in the Colombo and in Colombo it hasn’t proper drainage disposal system and the hotel dispose its drainage to the sea. Because of that so many environmental issues occurred around that. When we promote tourism there are thousands and thousands of tourists unleashed annually in the country, without proper planning, there is bound to be serious environmental and sustainability issues. Such large-scale and fast track growth has to be carefully planned and managed within specific tourism zones to prevent environmental and cultural degradation.

Individual hotel developments will not suffice. Such well-planned, large-scale tourist resorts can be designed to encompass sound sustainable environmental practices (e.g., common self-contained sewage disposal facilities with recycling of water, solar lighting for resort public areas, no-build green belts within resorts, etc).

Such organized and well-managed, large-scale developments contained in several designated zones will help mitigate most of the possible negative fallout of the socio-cultural and environmental aspects. Building and subsequent maintenance should be under strict environmentally-sustainable guidelines.

Hotel industry directly affect to the environmental pollution in the country. As the five stars category hotel, Galadhari has the responsibility to protect our environment and also developments in the country and have to think about the pollution

Assessing the Attractiveness of the Hotel in the Industry

Threat of new entity

According to tourism act the new entrant has to abide by this regulation to establish a hotel as well as charges for the services. In the business arena, the number of competitors increases when any business organization makes good profit and has a good potentiality for future.

According to current situation, entry barriers are high and exit barriers are low, few new firms can enter into the industry and poorly performing firms can easily exit. After the war Sri Lankan government has opened the market to new investors to invest their money to build new hotels as the hotel industry is now booming in the country.

In that situation so many hotels are building in the north area and customers willing to go in those areas. New entities are use new technology and specialist knowledge to develop their business and it may be affect growth of the business of Galadhari hotel.

There are factors related with the threats of new entrants in the hotel industry in Sri Lanka which are as follows-

• Easy credit facilities for new entrepreneurs in hospitality industry and Legal supports from the government for local entrepreneurs
• Infrastructure development
• Policies for foreign investors to establish world-class organization including tax exemptions, ownership, duty, tax law and remittance,
• ‘National Tourism Policy and Vision’ to boost up the tourism and hospitality industry,
• Fewer numbers of competitors in the current marketplace. (Only 5 five-star hotels in Sri Lanka).
• Higher profit margin

Threat of substitute products

As the hotel industry specifically targets on accommodation, entertainment and fooding facilities, the substitutes of these facilities may include other food industries (fast food and restaurants), entertainment (bar, discos, clubs etc.) and for accommodation facilities sharing with private establishment (visiting friends and relatives) and others related with accommodation facilities.

Every customer looks for high perceive value in their owned products. Substitute products are goods and services from outside a given industry that perform similar or the same function as a product that the industry produces. In this context, many organizations focus on their competitors rather than substitute products and the market share declines concurrently, therefore the market strategies should be flexible to cope with such threats.

In the hospitality industry, the substitutes may include various types of guest houses, inns, motels, private-owned guest houses, condominiums, small boutique hotels, bread-and-breakfast hotels and apartment hotels which might be the threats for a specific star-category hotel like Galadhari.

In this current marketplace, there are many substitutes of the star-category hotels in Colombo for accommodation – Jaj -Samudra, Gall face Hotel, Hilton, Mount Lavinia,.; for food – KFC, McDonalds, Pizza Hut, BFC, Pizza Corner, Dominos Pizza etc.; for entertainment – night Clubs, many more which might distract the customers rather than the hospitality industry to have the products and services of a hotel.

Competitive Rivalry among existing players

In the conventional financial mock-up, contest between rival companies drives profits to zero and is not ideal and companies are not simple inactive price takers. Rather, companies struggle for a competitive benefit over their rivals. The strength of rivalry among firms varies across industries, and tactical analysts are paying attention in these differences.

In this current competitive period, the tough contest among business organizations increases when number of competitors are in the same marketplace based on their products categories, target markets, types of services, financial affordability, volume of the organization, profitability and potentiality of the market trends for long term business. In this case, price discount, special offers, lower profit margin and turn down in the market share are generally occurring between competitors.

In Colombo, the rivalry among competitors is really high as this hospitality is a booming sector in Sri Lanka and only few competitors in the five-star category hotels in Sri Lanka to serve the customers.

Moreover, the customers are trying to defend each other through products variation, service quality improvement, defining new target markets, exploring new products innovation and development and providing exclusive facilities to the guests.

The competitive rivalry is happening in hospitality industry in the Sri Lanka and it is also affect to the hotel like Galadhari. When the company implements their strategies they should have Varity in their products and services.

Bargaining power of suppliers

The suppliers can play one of the main roles in developing or declining the reflection of an organization .When the suppliers are more, the bargaining power of them generally goes down whereas fewer suppliers can demand more benefits from the organization.

Suppliers are those firms or individuals that provide contribution into the creation of an industry’s production on time. It could be in forms of resources and raw materials, services, employment, direct products and others obligatory stuff by the organization.

Now a day most of the services have out source in the companies. In the hotel industry, the suppliers are involved in various departments including rooms, food and beverages, IT, guest and travel bookings, security assurance, property management, transport, ensuring business facilities etc. The suppliers in case of hotel of Galadhari is including travel agents and tour operators for guest reservations as well as corporate clients, educational institutions for manpower supply, IT firms for property management software and IT solutions, local importers for international food and beverages supply, security agents for safety and security, local rent-a-car for special arrangement etc.

Bargaining power of customers

One of the main parties is customer in every organization. Customers mean consumers or intermediaries those who buy the production of an organization to have or resell it to someone else in the market. If there are various products and huge competition, customer bargaining power rises up and vice versa.

The bargaining power of customers depends on some factors like requirements of the customers, time and convenience to the desired destinations and thus, they can easily toggle into another product.

By considering the hotel industry in Sri Lanka, the bargaining power of customers are very high and they have enough options to toggle into another hotels by comparing in terms of costs, quality of service, product categories and special offers provided particularly for group bookings and long-term stay. Sometimes Galadhari hotel has rack rate of the hotel facilities.

In the pick seasons like December, the bargaining power of the customers becomes lower and lower. When in the tourism season the hotel has unbearable customers and their bargaining power also very high in this season.

7.0 Conclusion

The process of conducting research on the business environment within which the organization operates and on the organization itself, in order to formulate and implementation of strategy for future business operations can be mentioned as Strategic analysis of hospitality organization. To do the assessment can use number of tools to process of strategic analysis, including PEST (sometimes PESTLE) for analyze external environment and, SWOT analysis use for the internal environmental scanning, and Michael Porter’s five forces model use to assists to understand the competitive forces, the attractiveness and current position in the industry.