Strategic Alliances

Cornell University School of Hotel Administration
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2-1993
Strategic Alliances in the Hotel Industry
Chekitan S. Dev
Cornell University School of Hotel Administration, [email protected]
Saul Klein
Cornell University
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Recommended Citation
Dev, C. S., & Klein, S. (1993). Strategic alliances in the hotel industry. Cornell Hotel and Restaurant
Administration Quarterly, 34(1). 42-45. doi:10.1016/0010-8804(93)90029-I
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Strategic Alliances in the Hotel Industry
Abstract
[Excerpt] Strategic alliances are becoming an important form of business activity in many industries,
particularly in view of the realization that travel and tourism companies are competing on a global feld. In
the words of one analyst, globalization mandates alliances.1 In the travel industry, which is global by
defnition, we are witnessing the formation of global alliances between frms of different types (e.g., hotel
frms with airlines) as well as by similar businesses (e.g., Marriott and New Otani). In this article, we will
elaborate on the development of such alliances in the hotel industry and offer some implications for
hospitality managers.
Keywords
hotel industry, market share, marketing, competitive strategy, strategic alliances
Disciplines
Hospitality Administration and Management | Marketing
Comments
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This article or chapter is available at The Scholarly Commons: https://scholarship.sha.cornell.edu/articles/782
Strategic Alliances
in the Hotel Industry
Although strategic alliances have their pitfalls, a well-conceived alliance can offer both
partners competitive advantages that they could not attain separately
by Chekitan S. Dev
and Saul Klein
STRATEGIC ALLIANCES are
becoming an important form of
business activity in many industries, particularly in view of the
realization that travel and tourism
companies are competing on a
global field. In the words of one
analyst, globalization mandates
alliances.1 In the travel industry,
which is global by definition, we
are witnessing the formation of
global alliances between firms of
^enichi Ohmae, The Borderless World:
Power and Strategy in the Interlinked Economy
(New York: Harper Collins, 1990).
different types (e.g., hotel firms
with airlines) as well as by similar
businesses (e.g., Marriott and New
Otani). In this article, we will
elaborate on the development of
such alliances in the hotel industry
and offer some implications for
hospitality managers.
Industry Environment
The key to prosperity in the
current hotel-industiy environment is growth. With the locationspecific nature of the hotel industry, growth translates into greater
market coverage, increased visibil-
© 1993, Cornell University.
ity, and greater opportunities for
cross-destination marketing—in
addition to the benefits of economies of scale and scope. Hotel
companies continue to seek new
ways to increase their market
share in changing markets.
A frequent contributor to The
Quarterly, Chekitan S. Dev,
Ph.D., is an assistant professor of
strategic marketing at Cornell
University’s School of Hotel Administration. Saul Klein, Ph.D., is an
assistant professor of marketing
and international business at
Northeastern University’s College of
Business Administration.
42 THE CORNELL H.R.A. QUARTERLY
from the SAGE Social Science Collections. All Rights Reserved.
The first factor driving this push
for expansion is globalization. In
the United States, globalization is
manifested as an increase in the
number of customers from overseas2 and greater acquisition of
domestic hotels by international
investors. Recent examples include
the acquisition of Hilton International by Ladbroke (United Kingdom), Inter-Continental by Seibu
Saison (Japan), Westin by Aoki
(Japan), Ramada International by
World (Hong Kong), and Motel 6 by
Groupe Accor (France). Regardless
of the location or ownership of a
company, there is pressure on all
hotel companies to become significant players in the global hotel
business. For example, Choice
Hotels’ CEO Robert Hazard has
indicated that global expansion is
the ticket to Choice’s future.
Another strong driving force for
strategic alliances is heavy competition and low profitability. Despite
the growth in demand of the 1980s,
supply expanded even faster,
leaving hotel occupancy rates to
decline from 71 percent in 1979 to
61 percent in 1991.3 (The estimated
break-even point is in the mid-
60s.4) Driven by a need to gain
greater market presence and
market share, hotel companies
have continued to acquire, convert,
and build new properties.
Although there has been considerable consolidation in recent
years, the hotel industry remains
relatively fragmented. In contrast
to the airline industry, where the
top five companies control over 80
percent of domestic capacity, the
top 12 hotel companies account for
just over 50 percent of capacity.5
2PKF International, annual report, 1991.
3Pauline Yoshihashi, “Hotel Recovery Will Be
a Late Arrival,” Wall Street Journal, July 27,
1992, p. Bl.
4Faye Rice, “Where the Bargains Are in
Hotels,” Fortune, April 20, 1992, pp. 91-98.
5Michael S. Morgan, Chekitan S. Dev, and
Frank S. Chaing, “Service Market Structure and
Strategic Groups,” Cornell University School of
Hotel Administration, 1992, p. 47.
Companies operating in a fragmented environment must seek
growth and counter the
diseconomies of scale associated
with small market shares.6
While the pressure for expansion mounts, the industry’s illiquidity creates problems in achieving
expansion. With the unfavorable
treatment being accorded to real
estate by U.S. tax law and the
dismal performance of most
investors’ hotel portfolios, the pool
of capital available for hotel
development has been severely
restricted. The shortage of funds is
not expected to ease in the near
future, since lenders have been
slow to return to making loans to
the hotel developers.
Routes to Expansion
Hotel companies can expand in
different ways. They can grow
through internal, incremental
means, but the process is slow and
ties up considerable capital in
facilities. Moreover, incremental
expansion offers a company only a
limited ability to respond quickly to
either customer demand or competitive pressure. Companies can
also grow by acquisition, a popular
route in recent years. Ownership of
several brands, however, may be
unwieldy and compromise an
organization’s ability to respond to
changing market conditions.
Choice Hotels, which once offered a
clearly diversified portfolio of hotel
brands, has been having indigestion ever since it gobbled up
Econolodge, Rodeway, and Friendship. Customers are confused
about the positioning of the brands,
and franchisees are concerned
about the impact of having coowned brands on adjacent comers.
Likewise, franchisees of Ramada,
Howard Johnson, and Days Inns
are not certain that their best
6Michael E. Porter, Competitive Strategy:
Techniques for Analyzing Industries and
Competitors (New York: Free Press, 1980).
interests are being served in the
wake of Hospitality Franchise
Systems’ purchase of those brands.
Moreover, recent acquisitions have
not been free of legal entanglement.
Bass Brothers has filed suit against
Promus Corporation for unloading
what Bass says is a non-performing
asset in the form of Holiday Inn
Worldwide. In another case, SAS
reversed its partial purchase of
Inter-Continental for financial
reasons and because the two companies’ operational procedures and
corporate cultures did not mix well.
We think it is fair to conclude
that the aggressive-acquisition
strategy to grow market share has
had mixed results. The challenge
for hotel chains, then, is to find a
way to maximize market coverage,
while also achieving economies of
scale and scope and minimizing
capital investment.
One such methodology is to form
alliances by which firms develop
long-term relationships for specific
purposes. Having full control of an
asset does not necessarily mean it
is being managed ideally. In fact,
performance may be enhanced
when one company compensates
for another firm’s weak points.
Advocates of alliances argue that
acting independently is usually
more difficult, expensive, and
time-consuming than acting collaboratively.7 To date, little systematic analysis of the benefits and
risks of such collaboration has been
conducted, and the particular
characteristics of the hotel industry
with regard to alliances have not
been assessed.
Types of Alliances
Alliances are relationships between
independent parties that agree to
cooperate but still retain their
separate identities. Still uncommon, alliances between hotel
companies are beginning to
7Ohmae, p. 135.
emerge. There has been a longer
history of alliances between hotel
companies and other firms in the
travel industry, such as airlines
and car-rental companies. Alliances are akin to interpersonal
relationships and may be categorized accordingly.
One-night stands. There are
short-term, opportunistic relationships that have a limited focus—
essentially, one-night stands.
While each party receives some
satisfaction through a clearly
defined set of expectations, there is
no commitment to the relationship.
Hotels have engaged in limited
promotions with other businesses,
including cross-advertising and
joint coupons. Between hotel
companies, one example of an
opportunistic alliance is the crossselling agreement between Radisson Hotels and Britain’s
Edwardian Hotels.
Affairs. A second category is
medium-term, tactical relationships, similar to affairs or liaisons.
While such relationships are
characterized by some degree of
sharing and are clearly deeper
than the short-term relationships,
there remains a strong sense of
self-protection among the partners,
and the alliances’ durations are
limited. Hotels participate in such
alliances with airlines in their
frequent-flyer programs. Between
hotel companies, an example of a
tactical alliance is the marketingservices agreement between
Marriott and New Otani.
I do. The third alliance category
is long-term, strategic relationships, the equivalent of marriages.
The parties in these arrangements
clearly expect continuity and
mutual commitment. The level of
sharing is high, and these relationships offer considerable opportunity for synergy. Strategic relationships are becoming common in
industries other than hospitality,
and hotel companies are beginning
to follow suit. Competing computer
giants IBM and Apple have formed
an alliance, as have General
Motors and Toyota and SAS and
Continental Airlines. In many
cases, such alliances are cemented
by equity cross-investments.
Alliances need not be confined to
two parties. Sixteen of the largest
hotel chains in the United States,
for example, are cooperating in
Tfflsco, The Hotel Industry Switch
Company. T hisco involves a
computer product aimed at giving
travel agents more-direct access to
member companies’ databases of
more than four million rooms
worldwide.
The three types of alliances
represent a hierarchy, in the sense
that relationships can progress
from a simple level to a moreinvolved arrangement. Reversion to
a lower level, however, is rare.
Problems arise when the parties
disagree as to what type of alliance
they are consummating.
Only the strategic alliance offers
companies the ability to respond to
the pressures of global competition
and illiquidity. Potential benefits
include enhanced market coverage,
both geographically and by segment; and greater economies of
scale in advertising, sales, distribution, and purchasing; and complementary strengths in operations
and marketing.
Benefits from alliances may be
reflected on the cost or revenue side
of a firm’s business. Alliances
intended to minimize costs aim to
enhance efficiency by improving
operations. On the revenue side,
alliances aim to increase effectiveness by attracting more, higherpaying customers. We expect that
strategic alliances will become the
market-expansion strategy of choice
in the hotel industry.
In theory, alliances allow firms
to focus on their core strengths and
offer a stronger product line with
better market coverage. In practice,
however, alliances are characterized by high rates of failure.8 An
alliance-based expansion strategy
carries risks, as divorce rates are
high and the pitfalls are many (as
explained in the next section).
Partner Selection
Choosing the right partner is a
critical part of making an alliance
work. Some writers argue that
alliances between strong and weak
partners rarely work; they fail to
provide the missing attributes necessary for growth; and they lead to
mediocre performance.9
8Michael Hergert and Deigan Morris, “Trends
in International Collaborative Agreements,” in
Cooperative Strategies in International Business,
eds., F.J. Contractor and P. Lorange (Lexington,
MA: Lexington Books, 1988).
9Joel Bleeke and David Ernst, “The Way to
Win Cross-Border Alliances,” Harvard Business
Review, November-December 1991.
44 THE CORNELL H.R.A. QUARTERLY
”f A c T i e A l^ A ^ A l f ^ ——
Ascertaining that the partners
offer complementary strengths is
the key matter, but care must also
be taken to find companies with
compatible objectives and styles.
Alliances raise the possibility of
conflict between the partners and
the risks of dependence on one
another. They also bring about
new problems in performance
evaluation. It is often difficult to
establish whose performance
should be measured, to agree on
the appropriate time schedule for
evaluation, and to make trade-offs
between partners’ divergent
interests.
Alliances invariably create
tension. Would-be partners should
be aware of the sources of that
tension, its potential negative
consequences, and possible coping
strategies for dealing with the
unavoidable by-products of alliances.10 Socio-cultural forces can
create differences in perception and
interpretation of phenomena. The
chief reason for the divorce of
Inter-Continental and SAS Hotels
was a poor fit of corporate culture.
SAS is an entrepreneurial-style
company with a tiny executive staff
and a flat organizational pyramid.
10Arvind Parkhe, “Interfirm Diversity,
Organizational Learning, and Longevity in
Global Strategic Alliances,” Journal of
International Business Studies, 22, No. 4 (1991),
pp. 579-601.
Decision-making
authority is left
with the property
GM as much as
possible. On the
other hand, InterContinental has a
deep organizational pyramid,
with several
layers of executive
staff. Decisions
are generally
made centrally.
Those two cultures could not
coexist.
To overcome sources of misunderstanding, both formal and crosscultural training programs and
extensive informal contacts must
be maintained. Differences in
home-country environments, as
reflected in government policies
toward cooperation, industry
structures, and institutional
support systems, create differences
in expectations and experiences.
Different corporate cultures, with
unique ideologies and guiding
values, may require alliance
partners to restructure their norms
and belief systems.
Differences in the strategic
direction between partners may
emerge from changes in their
individual external or internal
environments. Selecting a compatible partner at one point in time is
no guarantee that this will also be
true in the future. Hilton Hotels
(United States) and Hilton International worked together on sales and
advertising efforts, but now the
international company is suing the
U.S. firm for going overseas under
the “Conrad International” brand
(despite the fact that Hilton
International does business in the
U.S. as Vista). Flexible partnership
structures must be developed,
either through a commitment to
incrementalism or by building in
extra slack at the
outset. On a
functional level,
because different
management
practices and
styles and
different organizational structures exist,
authority and
levels of dependence must be
clarified. An
alliance may
otherwise become
bogged down in
poor communications and slow decision-making
processes.
Further research. Alliances
are not a panacea for the hotel
industry’s current ailments. In fact,
alliances can be difficult to manage
and prone to failure if they are not
thought out and negotiated in
advance. Nevertheless, the use of
alliances will grow in the future
because the combination of
strengths found in a well-arranged
alliance will serve as an antidote to
many of the industry’s difficulties.
We predict that an analysis of
strategic alliances in the international travel industry that focuses
on the issues of risks and rewards
would confirm the value of such
organizational partnerships. CQ