Astor Lodge & Suites, Inc (35%) � Kerin & Peterson page 338
Part B: Competitive Strategy Questions � worth up to 17.5%
In Australia the hotel industry is in the mature growth phase of its life cycle (IBISWorld (2014) – H4401
Hotels and Resorts in Australia Industry Report_IBISWorld July 2014). In this part you are required to
study the Australian Hotel industry and then develop and justify an alternative viable blue ocean strategy
approach(s) for Astor Lodges if it were to set up business in Australia. To successfully complete this
component you must be able to demonstrate at least a clear understanding of the application of Blue
Ocean principles and methods to the Astor lodge context. To achieve higher grades you must be able
demonstrate a realistic and viable (both logically and financially) Blue Ocean opportunity which is
consistent with the theory.
Criteria for Part B
- Maximum length 10 pages excluding appendices; cover page and table of contents.
- Your write-up can be a mixture of bullet point form and essay style [Times Roman, 12 point font
single spacing, 2.5cm margins]. - Structure your answers using headings and sub-headings if necessary to make it clear that you
have used an analytical approach to reach your answers. The grader will be treating (apparently)
random lists of issues with caution. - Use of at least 7 academic sources from peer reviewed journal articles to emphasise theoretical
aspects of strategy and Harvard referencing is required
Astor Lodge & suites Inc. Case Study Part B
Introduction
In today’s world of business the activities of key stakeholders is directly impacted by how
specific business entities perform in their respective micro and macro environments. The key
issue in the external environment is the development of strategies that will enable a business
entity to successfully capture a large enough market share so as to ensure optimal and sustainable
profitability. The idea here is often to beat the competition through a myriad of strategies. The
most common strategies that firms use in an effort to beat their competition is through price
wars, aggressive marketing and at times activities as low as smear campaigns which shed bad
light on the competition. All of these are done with the hope of shepherding the finite number of
potential buyers towards one’s own business at the expense of the competition. The above
mentioned strategies while effective only tend to benefit the firm for a short period of time
before things go back to the unpleasant normal when they are once again desperate to increase
their turnover through increasing their market share. In any market or industry there can only be
two kinds of products. These are either the tangible or the intangible products. These are more
commonly referred to as goods and services respectively. The marketing and promotion of
tangible consumer goods is fairly straight forward since the product is something that needs to be
prepared then transported to establishments from where the customers can view them and make
purchases. Purchases need not to be made immediately production has happened as the products
can be stored for short or extended periods depending on their nature and durability. The
marketing of these products is often rigid over time with little changes being made save for the
packaging and maybe a few ingredients.
Services on the other hand are a completely different ball game. The Service industry’s products
pose unique challenges to those who are charged with the responsibility of producing and
marketing them. The challenges that are associated with the promotion and marketing of services
lies in the fact that they are intangible, very much unlike the commodities mentioned above.
Services have to be consumed as soon at the same time they are being produced or rendered.
What this means is that customer experiences will tend to be highly subjective to the customers
and the service providers. Despite these challenges, those employed in the service industry are
obliged to put their best foot forward when it comes to the development of products on offer.
This obligation is legitimized by the fact that the service industry is not in any way exempt from
the market forces such as supply, demand and also competition. For short term gains ahead of the
competition business entities in the service industry may also resort to aggressive marketing and
the lowering of prices to get ahead of the competition. This, as stated above is only bound to
bring about short term gains and not have any lasting impact on the firm’s market share and
profitability. One of the best examples of the service industry is hotels. The reason for this is that
hotels are in the business of providing hospitality to their guests in exchange for money. In this
exercise an analysis will be conducted on the Australian Hospitality Industry to find out how
Astor Lodges Inc. can successfully make inroads into this industry through the application of the
Blue Oceans Strategy.
The Blue Oceans Strategy is an approach to marketing that steers clear of conventional
competitive strategies that have proved to be largely ineffective when it comes to the impact they
have on helping the market share to grow. The Blue Ocean Strategy refers to the act of a
business entity creating for itself a market space that is devoid of competition. This market place
is usually carved out of an already existing industry. This strategy to business is often compared
to other methods of approaching the competition head-on or by going on the offensive. The latter
approaches in their totality are referred to as Red Ocean which is relatively chaotic in
comparison to the new alternative approach. In market environments where the Red Ocean
approach reigns supreme there is usually a sizeable number of firms that fail due to the
unsustainable practices that are employed. Those that manage to survive and maintain their place
in the market usually do so at the cost of having to contend with constrained profits as well as a
limited pool of customers to attract. The Blue Oceans strategy was developed as the result of two
decades of research on the most successful strategies that had been employed by business entities
over the past century. The developers of this strategy laud it for having a much higher potential
for profitability than the other approaches which give false impressions such as increased sales
but lower profits due to reduction in pricing or increments in various marketing strategies. With
the Blue Oceans strategy a firm that is within an already existing industry may choose to take up
innovation or expansion with the hope of creating for itself what is known as a Blue Ocean. It
will be tapping into a part of the industry whose potential has not been realized by other
mainstream players in the industry. If this is approached correctly the firm stands to benefit in
the long run by having what is tantamount to a monopoly within an industry that was seemingly
saturated.
For the Blue Oceans strategy to be applied by Astor Lodges Inc, it is imperative that a proper
analysis of Australia’s Hospitality Industry be conducted (Roger, 2010). At the same time it is
also very important to take an in depth look at Astor Lodges so as to see how it could best create
for itself a Blue Ocean in Australia’s hospitality industry. This will need an analysis that is
similar to the conventional SWOT analysis though in this case the most important element will
be the Opportunities that exist in this industry coupled with the Strengths that can be adequately
leveraged by the management of Astor Lodge to ensure that the opportunities are actually
transformed into business (Friesner, 2011). The Opportunities need to be those that have not yet
been tapped but actually exist. Through the seizure of these opportunities, Astor Lodges Inc will
have effectively created for itself a Blue Ocean since it will have joined an existent industry and
capitalized on an innovation that opened up a totally new market that is growing at an
exponential rate.
Current position of Astor Lodge Inc.
Astor Lodges is a hospitality based business enterprise that was created in 1979 and have been in
operation ever since. Between 2000 and 2005 the company has not been profitable. This
hospitality enterprise has divided its operations into two main categories. These are Astor Lodge
which specializes in the provision of services in its Economy Class hotels. The other branch of
its operations is Astor Lodges and Suites. This other branch specializes in the provision of
hospitality services in middle class hotels which do not provide beverages or food (Roger, 2010).
This company has made considerable investments in the hospitality sector. It has a total of 250
properties across the country. Astor Lodge has 200 while Astor Lodges and Suites has 50
facilities. Astor Lodges’ main instruments of competition are its low pricing regime, high quality
customer service and also a wide range of amenities. The hotel chain’s range of services can be
divided into 6 categories. These include luxury, Upper scale facilities, upscale, mid-scale with
food, mid-scale without food and finally economy accommodation. The customers who
patronize the company’s properties are split 50/50 with half of the total customers being leisure
guests while the other half are business travellers. Business travellers are predominantly males
aged between 34 and 54 who take up singles room that cost on average 96$ per night. Leisure
travellers on the other hand travel in pairs taking up rooms that cost 89$ per night. The average
income of business travellers is 81,000 annually while leisure travellers earn 72000 on average a
year (Roger, 2010).
The occupancy rates of Astor Lodge Suites have been relatively favorable at 67% compared to
the industry’s 61%. This has been attributed to its customers exhibiting high brand loyalty. While
the company’s occupancy in its properties is much higher than the industry average it is also
important to point out that the average price it charges per unit is lower than the industry
average. The industry average is 61$ while the company charges on average 57$.
While the company’s revenues are mainly supported by both leisure and business customers, it
emerged that business customers have perennially complained about disturbances from leisure
customers. As yet this problem is yet to be effectively resolved due to the complexity involved.
The hotel has been striving to grow its leisure segment through the provision of special offers to
families looking for accommodation on a tight budget. A strategy that is currently in place to
attract more leisure and business customers is known as a ‘free night’s stay.’ While this attracted
more customers it proved to be detrimental to the finances of the lodges since it ate into the
revenues coming in. In light of this it had been proposed that the free night’s stay be replaced
with a weekend special.
A SWOT analysis of Astor Lodges Inc.
Strengths of Astor Lodges
A large number of fixed assets
An occupancy rate that is higher than that of the industry
A high level of brand loyalty exhibited by the hotel’s customers.
Weaknesses of Astor Lodges
The main weakness of Astor Lodges its inability to generate profits for the past five
years.
There is bad blood brewing between its business segment and the leisure travellers and
this threatens the brand loyalty.
A low occupancy rate on weekends
Opportunities for Astor Lodges
Lower prices than those of the Industry is bound to attract more customers given that
online portals prioritize lower prices for those who book on such platforms.
High possibility of repeat guests
Upward trend in the growth of the industry.
Threats to Astor Lodges’ business
International travel has significantly reduced since the 9/11 attacks
Large hotel chains are putting up more competitive offers to customers.
Potential reduction in business guest numbers due to apparent disturbance from the
leisure travellers.
Australia’s Hospitality Industry
Prior to the formulation of possible strategies that can be used to grant Astor Lodges a Blue
Ocean for it to conduct its business more profitably it is important to analyze the current status of
Australia’s Hospitality and Tourism Industry so as to provide logical support for the innovations
that need to be carried out. Australia’s accommodation sector is expected to grow by about 4% in
the year between 2014 and 2015 due to a surge in consumer confidence. The country’s
accommodation industry comprises of Hotels and Resorts (Ruhanen et al, 2013). Presently the
industry is experiencing an upward trend in its international arrivals while the domestic customer
numbers decline. The reason for the upward trend in international arrivals is the gradual
improvement in the economies of source markets such as Europe and Asia, specifically China
(Chon, 2013).
When business was at its worst due to the Global Financial Crisis’ impacts a large number of
hotels were forced to lower their room rates and compliment their service offerings in a bid to
attract customers and therefore stay afloat. The domestic market on the other hand is continuing
to reduce due to the transportation element. Majority of the local travellers prefer to travel by air
and this is what leads them away from the country’s hotels and resorts. There domestic flights
are relatively expensive if they are compared with the outbound ones to the Asian sub-continent
(Chon, 2013). This makes leisure travel to these countries an attractive prospect due to the
perceived higher value for money. Nationally the revenue per room for hotels and resorts across
the board is still at an all-time low but the story is different in the country’s cities where revenue
is gradually increasing due to high occupancy in the hotels situated in urban area. It is estimated
that the Hotel and Resorts sector of Australia’s economy is bound to experience improvement
due to the shift in focus towards Asian economies that are doing relatively well. This will be the
direct result of travellers from these countries coming to enjoy the country’s tourist products
(Ruhanen et al, 2013).
As stated above the Blue Oceans strategy is a revolutionary approach to increasing market share
while averting a scenario where the firm is involved in competitive strategies that only grant
minimal short term gains (Kim and Mauborgne, 2004). Industry knowledge is important for this
initiative to work out well. The Blue Ocean will only be realized when the innovation being
undertaken targets the sectors of the industry that have the most promising potential for growing
market share and turnover. Analytical tools that can be carried out on the industry are a SWOT
analysis as well as a PESTLE analysis so as to enable Astor Lodges Ltd to figure out where it
could best apply its strengths. The results of the Porter’s five forces Analysis may also prove
useful for this to work since the management will be leveraging the best qualities of the company
in combination with the strengths of the Australian Hospitality Industry and using them to seize
opportunities that come up in this market. The porter’s analysis will however be done in a
hypothetical situation given that Astor Lodges aims to make inroads into this market (Porter,
2008).
A Hypothetical Five Force Analysis of Astor’s operation in the Australian Hospitality Industry
The five force analysis will briefly analyze the different forces that have a direct impact on the
ability of Astor Lodges to compete in the hospitality industry in Australia. This will also provide
pointers regarding the competitive environment and where the company can thrive without going
head-on against the competition. The five forces to be considered are Astor’s competitive rivalry,
the threat of New entrants to the market, the customers’ bargaining power, the suppliers’
bargaining power and finally the threat of substitution. In a blue ocean business environment the
competitive rivalry will be a non-entity while the rest of the forces will be greatly minimized.
This is in the ideal Porter’s five forces environment. While the Porter’s five force analysis is
mainly meant for application in highly competitive environments, it can also be used to analyze
or in this case predict if the firm will be operating in a Blue Ocean or a Red Ocean.
Competitive Rivalry
Given that the firm is making in-roads into the Australian-market with the aim of operating in a
Blue Ocean environment the competitive rivalry will not be considered. The strategy being
applied seeks to avoid competing for an already existing market segment as the projected
operation will be akin to a monopoly in the market segment created by Astor Lodges’
innovativeness.
Threat of New Entrants
The blue oceans approach is also characterized by a relative difficulty for other experienced
operators to easily break into the market segment that the company being analyzed has carved
out for itself. What this however means is that Astor Lodges needs to keep this factor in mind so
as to stop its prospective blue ocean from becoming red as competition creeps in.
Theoretically it is expected that there will be zero competition in this new market segment. The
reality on the ground however is that the firm will have to tale proactive measures to ensure that
there is minimal competition for its market segment. This will be achieved through ensuring that
the product offering that Astor has makes it very difficult for other hotels and resorts to offer the
same.
Power of Suppliers
Being a largely service-oriented industry it is likely that the bulk of the supply will be labor.
These are the different individuals who will be working on the front-line as well as behind the
scenes to ensure that business is going on smoothly. The power of suppliers of labor will be
relatively high initially since they have a direct impact on the supply and regardless of the
position they hold within the establishment their input remains crucial for the supply of
hospitality services to the company’s guests. Their remuneration and working conditions will
have to be satisfactory to them but still within the capacity of Astor Lodges.
Other suppliers in this context are the entities that will provide marketing services, an online
portal for the website and an online tool that will link the hotel’s reservation system to the
internet. These providers are abundant and this serves to diminish the power they have over the
organization.
Suppliers of tangible products such as food items and toiletries will have a relatively lower
power since the hotel has a wide pool of suppliers to choose from.
Astor Lodges should therefore ensure that this power of suppliers remains low though it needs to
be careful to ensure that it doesn’t serve to compromise on the quality of accommodation
services it delivers to its customers.
Power of Customers
The Australian market can be divided in two main ways. The first approach to segmenting the
market is inbound travellers on one side and domestic arrivals on the other. The second approach
to segmenting this market is Business travellers and Leisure Travellers. At present the foreign
tourists are abundant while the number of domestic arrivals are limited. From a marketing point
of view the power of international tourists is diminished in comparison to the domestic travellers
who are scarce and therefore have a greater bargaining power. This means that higher prices can
be set for the international travellers as opposed to the domestic visitors who are fewer due to the
prohibitive costs of flight.
From the company’s summary however it appears that its capacity to supply to leisure travellers
and that to cater to the needs of business travellers is at par since their arrivals matched up on a
1:1 ratio. Business traveller were however more favorable since they spend more per person and
have little qualms about paying for a higher price. The fact that their complaints were the most
prevalent indicates that they have abit more power but this comes with the benefit of higher
value purchases. With respect to this analysis they will be considered to have minimal bargaining
power since their travel expense are often footed on a corporate account and not a personal one
thus making them less sensitive to price increments (Welch et al, 2007).
Astor Lodges needs to maximize on where the power of customers is least manifested and this
will be in the international arrivals segment and this is a potential candidate segment where the
blue oceans strategy needs to be applied given their increasing number (Kim and Mauborgne,
2004). While domestic visitors are highly sensitive to prices this too can be eliminated through
the introduction of special rates for them or combined hotel and flight packages that are
subsidized so as to ensure they remain at home instead of going to the Asian sub-continent for
their holidays due to cheaper flights (Chon, 2013).
Threat of Substitution
At present the threat of substitution is very high given the fact that its current product offering is
very much similar to the services that are on offer by the companies that fall under the umbrella
of Australia’s hotel and resorts sector. With regard to destinations it is clear that those in the
Asian sub-continent are increasingly becoming a viable option for the locally based travellers
(Chon, 2013). What this does is deny the country’s hotels and resorts is to deny them a chance to
provide their services to this market. For the in-bound travellers this threat is much more
pronounced given the fact that operators in New Zealand, the USA and Thailand are stepping up
their campaigns.
A SWOT analysis of Australia’s Hospitality Industry
The purpose of this analysis is to aid in the identification of opportunities that provide a fertile
ground for the implementation of the Blue Oceans strategy (Friesner, 2011). The weaknesses that
emerge from this analysis will also aid the management of Astor in ensuring it doesn’t set itself
up for failure (Kim and Mauborgne, 2009).
Strengths of Australia’s Hotels and Resorts sector
Australia is attractive to tourists and this buoys the hospitality sector considering the
tourists have to make use of the existent accommodation facilities (IBIS World, 2014).
A weakening local currency compared to the standard US dollar makes it economical for
foreign travellers to patronize the country’s hotels due to a higher purchasing power.
The hospitality industry is experiencing an upward trend in its growth given that the
world economy is gradually recovering from the Global Financial Crisis whose impacts
included the lowest occupancy numbers in recent history for the hotels and resorts.
The continued shift of hospitality and tourism related enterprises to online platforms is a
big plus for smaller players and new entrants who can compete on the same platform as
larger more experienced players.
The international aviation sector is highly competitive and this grants travellers from the
Asian market a chance to travel to Australia at affordable air fares.
Weaknesses of Australia’s Hospitality Sector
Majority of the hotels and resorts coupled with the country’s tourism sector was highly
dependent on travellers from Europe. The economic challenges facing the Eurozone has
limited the capacity of these travellers to visit Australia. This is a situation whose
resolution is expected to take at least two years (IBIS World, 2014).
On a domestic front the economy of Australia is performing below par and the short to
medium term challenge of this will be an increase in unemployment as well as decreasing
disposable incomes thus making it difficult for the locals to patronize the existing
accommodation facilities.
Hotels that offer business travellers accommodation facilities and other amenities are
increasingly lowering their rates in an effort to sustain their customer-base as numbers
dwindle.
Opportunities in Australia’s Hotels and Resorts Sector
Australia is located near the Asian sub-continent and this makes it very much accessible
to tourists travelling from this part of the world.
The intense competition between low cost and full service airlines makes it possible for
customers from the Asian region easily come to Australia (Ruhanen et al, 2013).
There is limited investment being carried out in the urban areas’ accommodation facilities
and this serves to drive demand towards dispersal areas. This increases the potential for
leisure travel.
The fact that the Australian dollar is depreciating is likely to increase the value of
inbound tourism since international travellers will be attracted by a higher purchasing
power.
The weakening Australian dollar will also benefit domestic travel since outbound travel
will become more expensive due to lower purchasing power for those who hold the local
currency.
Threats to Australian Hospitality Sector
The unresolved challenge of the United States’ debt ceiling continues to cause challenges
in economies that are key to sustaining Australia’s Hospitality sector. Examples of such
economies are Japan and the countries in the Eurozone (IBIS World, 2014).
While economic growth is bound to increase travel, the corporate segment is bound to
continue being slow since this market segment’s travel behavior is not regular and what
this means is that business travel is bound to remain low (Ruhanen et al, 2013).
The country’s hospitality is also threatened by intense competitiveness being exhibited by
its neighbors such as New Zealand and Thailand.
Application of the Blue Ocean Strategy to Astor Lodges in Australian Market
The Blue Ocean Strategy will be formulated based on the above analyses with the aim of adding
value for the customer while consecutively bringing down the costs of operation thus creating
mutual benefits for the end consumer and the company (Chan and Renee, 2014). The company’s
benefits will be realized through positive economies of scale combined with a high turnover
(Kim and Mauborgne, 2009).
For Astor Lodges an ideal approach to ensuring that a Blue Ocean operating environment can be
created if it were to capitalize on package tours with airlines for the leisure segment in the
domestic tourist market (Hudson and Ritchie, 2002). The reason for this is the fact that the local
hotels and resorts have pretty much given up on this market. The fact that they are travelling
abroad to enjoy their holidays in Asian tourist attractions suggests that they have the disposable
income for holidays. To accomplish this, the Astor Lodges needs to capitalize on the existent
potential for travel by offering packages that combine air travel and hotel stays. The catch in this
is to get into an agreement with domestic one or more domestic airlines and convince them to
subsidize their flight costs on condition that the company guarantees a specified number of seats
per flight. In line with this, it will also be important to rope in the existent out-bound tour
operators and pay competitive commissions for their part in channeling tourists towards this new
combined package (Hudson and Ritchie, 2002).
An alternative approach can be for the company to focus its energy on the provision of
hospitality and accommodation strictly to the business clientele and at the same time giving them
subsidized rates if they combine their flights bookings with their trips. The hotels should also
find a way of covering all travel arrangements for the business travellers while they are in
Australia (Welch et al, 2007). This too is a potential blue ocean since majority of the
establishments that offer services to the business travellers provide only hotel services and this at
times causes conflicts for them as was the case in several properties operated by Astor Lodges
and Suites (Chan and Renee, 2014). Such an arrangement will save these travellers time and thus
add value to their travels while lowering their costs. The current low occupancy in dispersal
areas makes this ideal since it is an indication of this resource being greatly underutilized. Given
that Astor Lodges has mastered the art of operating by charging lower rates than its competitors
in the past, charging rates affordable for domestic travellers will not be difficult. Its experience in
the hospitality industry will also contribute to ensuring the customers get quality service which
translates to value for money and a potential for repeat customers. This will play a major role in
aiding to grow this operation.
The two proposed strategies could be used concurrently through run independently so as to
ensure one does not interfere with the other. These two are considered to be blue oceans since the
markets being targeted are currently on the decline and many of the hotels and resorts are turning
their attention towards inbound leisure tourists. Astor Lodges can therefore create for itself a
niche in Australia’s accommodation sector by following these strategies. They promise to add
value to the hotel given that it will capitalize on the revenue the industry foregoes when domestic
travellers spend their holidays abroad. The second option is also a promising endeavor since
business travellers will be willing to pay premium prices to ensure that they enjoy premium
facilities without interruption from holiday goers (Chan and Renee, 2014).
Blue ocean strategies fulfilled by the above proposals.
By reaching out to two markets that are quickly declining the strategy is bound to redefine this
market’s boundaries in real time.
The focus has been turned to business travellers as well as home-based travellers whose current
numbers are not at all attractive to the industry. Once the strategy gains momentum however
Astor Lodges will be reaping all the benefits.
The above approaches will reach beyond the existing demand which seems to be largely based
on the influx of Asian travellers.
These proposals also get the strategic sequence right since they are based on several analyses that
have been conducted on both the business and the industry.
By separating leisure and business travellers, Astor Lodges will have overcome its main
organizational hurdle to the provision of quality services to its customers as personnel dealing
with the respective groups will give them specialized attention.
The two approaches if executed will be in themselves strategies being implemented since they
aim to steer Astor Lodges towards its own Blue Ocean in Australia’s hospitality Industry (Chan
and Renee, 2014).
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