Conceptualization of Hotel Chain Development in China: Stimulation, Evaluation and Formation

By Ray Pine, Department of Hotel and Tourism Management, The Hong Kong Polytechnic
University, Hong Kong

Fourth International Conference "Tourism in Southeast Asia & IndoChina: Development, Marketing and Sustainability" June 24-26, 2000

Hanqin Ziu Zhang, Department of Hotel and Tourism Management, The Hong Kong
Polytechnic University, Hong Kong PingShu Pi, Department of Hotel and Tourism Management, The Hong Kong Polytechnic University, Hong Kong

39 indigenous hotel management companies have emerged in China to sponsor the indigenous hotel chains. market situation. INTRODUCTION The fast growth of hotels in recent years and the dominance of multinational hotel management companies in China greatly changed the market structure of the Chinese hotel industry. economic and social system. The formation of a hotel chain is even more complicated. Local hotel management companies emerged and endeavored to form indigenous hotel chains to improve the management expertise and competitiveness of Chinese hotels over foreign counterparts in the local market. which involves many aspects of business e. evaluation and formation) to assist hotel chain formation in China.After twenty years of hotel industry development. development. However. The task environment (Dill. diversification and rationalization to optimize further development. External environment covers five aspects: economic. 1990). technological. socio-cultural. This paper intends to develop a model of hotel chain formation from broader perspectives to assist in such development in China. 1998. industry structure and behaviors of various hotels.g. 1998. and protectionism of the local authority (Du & Dai. franchising and management (Go. Zou. 1998). For instance the government owned property rights of hotels. . 1997). though it is often argued that environment is unmeasurable and uncertain to analyze. However. political. more in-depth research beyond the business environment issues should be conducted to reach a more detailed explanation of the actual process of hotel chain formation and expansion. Past studies attribute the slow growth and failure of Chinese hotel chains mostly to the business environment and the unique aspects of Chinese political. The environment factors can be analyzed as the macro external environment and micro task environment (Zhao & Olsen. The formation of a hotel chain is an interaction of the external environment and the internal capability of the hotel management company and individual hotels. and ecological. the understanding of environment can still be very important for the growth of a company. Wang. et al. Hotels in China were led in a direction toward re-organization. and the lack of management expertise slowed the formation and expansion of these hotel chains This paper examines the growth of indigenous hotel chains in China and proposes a three stage model of hotel chain development (stimulation. Most hotel chains started from the growth of hotel management companies and expanded on the base of the ability of the management companies. whereas the formation and growth of the Chinese hotel chains is still limited and faced with many challenges during the course of expansion. 1996) requires real estate investment and specialized management expertise in the service business. Environment Scan Environment is the field that hotel chains root in and grow from. 1958) focuses upon forces affecting the industry and its structure. as it concerns not only one hotel project. but also the environment. which is given by Porter (1980) as forces from competitors. ownership. the complexity of the Chinese economy mechanism and business environment. CONCEPTUAL FRAMEWORK The dual nature of the hotel industry as a property business and a retailing operation (Ingram.

changes in transportation methods and travel patterns and the emergence of franchising. . why some hotels can form chains while others fail depends on the organizational capability of the firm. Murthy & Teare. suppliers. firms should be sensitive to changes in the environment and take opportunities for growth. which needs further rationalization at the macro level. and substitutes. changes in the technical environment especially the accounting and management information systems. the complexity of the environment prevents the growth of the hotel company.customers. 1992. Organizational capability. He attributed the success of hotel chains to the changes in the operating environment faced by chains. Ingram (1996) explained it was difficult to operate a hotel chain in the business environment of the past century. 1997). Hotel companies should scan the environment to evaluate the firms' intangible assets. 1994). In others. a recent theory in management to exploit the sustainable advantages of a firm. 1990). the internal strengths and weaknesses within the organization and competitiveness within its task environment (Hall. or core competence. On the other side. Organizational ecology and institutional theory can be used to explain the affect of environment on chain operations. In some countries the environment still lacks basic driving forces and the necessary resources for hotel chain growth. that combines and integrates the skills of a set of practitioners working across different business units. which mainly were the supply of professional managers to the hotel industry and the sophistication of control systems. match the threats and opportunities in that environment with appropriate strategies and then determine how to grow (Olson. Core Competence Faced with the same business environment and market structure. Zhao & Olsen. is defined as an organization based capability. and creates superior value for a client (Prahalad & Hamel.

from 1993 to 1997. 1997). the identification and development of core competencies. According to the statistics of the China National Tourism Administration (CNTA). for the first time.stimulation. which included the marketing directed factors of sales.but also paying more attention to the development of hotel chains to rationalize the hotel sector through concentration and consolidation. competition from the multinational hotel companies and so on. which includes the further reform of the Chinese economy toward more market orientation. multiform ownership and management systems. 1989. 1989. Pine.700 (CNTA. mainly the recent overprovision of hotel rooms. However. 1990). The formation of core competence of hotel management companies largely determined their ability of operation and expansion. Stimulation China has started to transform its economy from the previous soviet style philosophy to a market oriented economy and tried to establish a modern enterprise system (Chai. 1996). and imbalanced geographic distribution (Zhao. Zhang. 1999. Yu. not only adding new hotel inventory . human resource management. this is not so specific for hotel chains. A freer economic system provided more players and competitors in the hotel industry. Chain operation is being .656 billion RMB (approximately US$563 million). evaluation and formation. Horsburgh (1991) suggested that hotel chains should identify the sources of advantages and invest in the assets. Problems of over capacity and a slump in operating profit may caution the government and industry to change strategies. China doubled its hotel capacity from 2552 to 5201 hotels. The formation of core competence is a process of 'business integration": hotel chains need to integrate their know-how. Horsburgh (1991) put forward some aspects of hotel chain competence such as real estate development. pricing and marketing planning. and expertise in choosing superior site locations. The fast growth of hotels in last two decades in China has brought about major changes in the industry. the Chinese hotel industry as a whole had a loss of 4. and facility management. Pressured by the increasing competitive environment and the structural change of the market. 1995). the overprovision of accommodation facilities. A THREE STAGE MODEL OF HOTEL CHAIN FORMATION IN CHINA A three stage conceptual model is proposed for hotel chain formation in China . In 1998. particularly the invisible assets to develop the core competence to achieve the competitive advantage. the local hotel management companies and thousands of independent hotels need to find ways to improve their competitiveness and performance to survive. 2000).Overmeer (1997) identified a set of core capabilities in the hotel industry. expertise in brand development and trademark. operation of management contracts and franchising. 1993-1998). the operation directed factors of intangible and tangible assets. which made the industry more market oriented. setting up group enterprises or conglomerates as an important strategy (Li. coordinate diverse production skills and integrate multiple streams of technology (Prahalad and Hamel. This is even more important for hotel chains that experience expansion by merger and acquisition. fierce competition. They should focus on their tangible and intangible resources. 1998). knowledge and existing competence together (Overmeer. with room supply increasing from 386.000 to 701. and produce stronger competencies (Roberts & Shea.

management contract. Core competence is a key factor in determining why some hotel companies can form chains while others fail. while other forms such as franchising need to be tried. and maintain their market position to outperform independent hotels and rivals. the internal strengths and weaknesses within the organization and competitiveness within its task environment (Hall.market system. where market principles and the central planning mechanisms often conflict. and independent hotels are motivated to join a hotel chain by stable profit. they need to analyze the comparative advantages of joining hotel chains over staying independent. creating a very complex decision making process as the government agencies are seldom willing to lose control of their hotel assets. the forms of alliance e. market penetration and brand recognition. the differences between various chains. merger / acquisition. Hotel chains need to employ different strategies to improve productivity and competitiveness.experimented with to optimize the hotel industry in China. Currently direct investment and management contracts are the most often used methods in chain formation in China. which will influence the hotel management companies to develop their capabilities to attract independent hotels. Once the hotel management companies and independent hotels desire to come together. as the ownership system belongs to different government bodies. the economy is in a transition from a planned system to . Environment has a interrelationship with the development of core competence of a hotel management company. Hotel management companies need to develop their core competencies to gain the organization capability. then the strategies of further development need to be formulated. resource acquiring. franchising. In regard to independent hotels. 1997). brand names. management expertise. match the threats and opportunities in that environment with appropriate strategies and then determine how to grow (Olson. Hotel companies should also scan the environment to evaluate the firms' intangible assets.owned hotels. This is a key point for the state.reach an agreement toward a common goal. or referral systems. as in China's case. Generally firms have four broad categories of . Zhao & Olsen. 1992. the benefit versus costs of joining a chain. various kinds of assistance. The external pressure and the internal motivations drive the hotel management companies and independent hotels in the direction of alliance.hotel management company and independent hotels . 1994).g. consortia. need to be examined to find one or a mixed mode to form a chain. corporate culture to run hotels and scan the environment to determine the most appropriate steps to attract independent hotels to form a chain and expand the chain to more locations. direct investment. etc. The further reform policies and the legal system have substantial impacts on the business environment in the hotel industry. product diversification. Evaluation Both hotel management companies and Independent hotels need to evaluate the possible approaches in their respective circumstances during the course of hotel chain formation. Hotel management companies are motivated to grow by sales growth. know-how. Formation Once the two parties . etc. Murthy & Teare.

1990). and integration of operation. How hotel management companies and independent hotels in China face the changes in the environment and the industry. and product market position. etc. However the complication of the Chinese economic system and business environment makes the growth of indigenous hotel chains very difficult. Kogut. the chain could expand to a larger scale.objectives: achieving operating efficiency. evaluate their market situation. Figure 1. achieving uniqueness. and based on the new capability of the organization. the hotel chain could be formed. To the indigenous hotel companies. Through affiliation between hotel management companies and more individual hotels. technology. 1987. then to identity their strategies on geographic expansion. managing risk. and form new strategies toward chain formation will be . and learning (Ghosha. segmentation. A Three Stage Model of Hotel Chain Formation CONCLUSIONS AND SUGGESTIONS FOR FURTHER STUDY At present the hotel industry in China is facing structural change and the formation of hotel chains is a preferred way to rationalize the fragmented hotel sector. branding is the urgent topic for them to create their identity in the market.

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