An analysis of the Hotel Industry with Porter’s Five Forces
February 18, 2021|Hotel Marketing
Porter’s Five Forces is a business analysis model that determines a company’s competitiveness and explains why (and how) industries are able to sustain different levels of profitability. This tool is used to evaluate the attractiveness of the industry from its competitive intensity.
Let’s have a look at these Five Forces:
1. The bargaining power of the customers. This refers to the ability of customers to force down prices. A good example of this is when groups like tour operators bulk purchase or book hotel rooms. As customers gain greater bargaining power, hotels are likely to lower their prices. If the bargaining power is high, suppliers will have great difficulty hiking prices and can even incur losses. On the other hand, if the bargaining power is low, suppliers can raise their prices to gain more profits. Hotels that target tour groups or those that have concentrated buyers will be more subject to the bargaining power of customers. On the other hand, individual or walk-in customers have little to no bargaining power at all since they don’t hold a huge margin.
2. The bargaining power of suppliers. This force doesn’t usually pose too much threat to the hotel industry as compared to the bargaining power of the customers but it can still inflict some pressure on the company. The lower the supplier power, the more attractive the industry and thus an increase in profit potential. However, the fewer the suppliers to an industry, the more power that supplier has over them. This can affect input costs and puts a strain on the company that relies on their product and services. This puts hotel managers in a predicament but in order to stay competitive, they must find a way to cooperate with suppliers that will give them a cost advantage.
3. The threat of new entrants. This force is dependent on the ability of the new business to enter the industry. The hotel industry poses many levels of obstacles for a new entry and opening one in an area that is saturated with the competition will make it difficult to gain an advantage. However, it’s not unheard of. New businesses can still come into the market and comes as a threat to present competitors especially when they have an edge at differentiating themselves from others.
4. The threat of substitutes. Back in the day, substitute threats to the hotel industry were far and few but with the continued development of technology, innovative disruptions have proved to be quite the challenge for hoteliers. With the rise of technology came substitutions like Airbnb which launched in 2008, transient lodging/housing, homestays or Couchsurfing, and many more may impact the demand for hotel rooms. The 2019 COVID pandemic has given rise to an even newer substitute product: Video Conferencing. In lieu of face-to-face conferences and gatherings, people and many businesses have shifted to meeting at a virtual space, eliminating the need for travel and booking rooms, which put a huge strain on many hotels all across the country.
5. The intensity of the rivalry between competitors. Competition is thought determined to be very intense in the hotel industry. Many elements come into play to determine the competitiveness of an industry. The greater the number of competing hotels in the area along with near-identical products and services being offered, the weaker the competitive power the company may possess. The entry of new business in the market gives rise to even more competition and an even greater need to differentiate.
The Five Forces analysis is an essential tool that hotel managers can take advantage of to make the best strategy for their company. It will help with the dynamic changes in the industry and understanding how they apply can increase their ability to adjust and better use its resources to attract investors and generate higher profits.
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