RICS Mandatory competencies - Business planning

Mandatory competencies - 1000 words in total (4 pages)

Business planning M002 – (Minimum Level 1)

At level 1

Demonstrate knowledge and understanding of how business planning activities contribute to the achievement of corporate objectives.

At level 2

Provide evidence of application of the principles and demonstrate your ability to use the tools of business planning appropriate to your area of practice.

At level 3

Provide evidence of reasoned advice given to clients and others of the principles and tools of business planning and be able to evaluate your performance and outcomes.

 Every company have their own corporate objectives. Business planning is to identify those objectives for the business and formulate realistic strategies for reaching those goals.

 Planning

- decides what objectives to pursue during a future period,

- what actions to undertake to achieve those objectives.

Business planning is a systematic and formalized approach to accomplishing targets such as  sales fore-casting, capital budgeting, cash flow  analysis,  inventory control,  and time and motion studies

Business Planning - Interim Strategic Analysis in Top Tier Hotel development in China

I have prepared a strategic Analysis Recommendation to assess the current competitive position of Hotel development in the luxury hospitality industries in China Market

In analyzing the potential feasibility of a proposed hotel, the process is to find out whether the market support a new hotel, will the hotel generate an acceptable return on investment. In order to answer these questions, a market study that analyzes supply and demand and provides only rate and occupancy information which may not tell the developer enough for him to make a thoughtful decision as the income potential is only one part of the equation. 

Now the market study comes in, the question is will the proposed hotel be able to achieve a rate and occupancy that supports the construction cost

Does the hotel has an above average competitor, achieving average daily rates in the middle of its competitive set and above average occupancy. Does the property consistently achieves 105 percent RevPAR penetration. Can the hotel achieve solid occupancy and average daily rates in the next 10 year period, In addition, there is a likely increase in new hotel and a conversion from a mid-price to upscale hotels open in the next 10 years, increasing the number of rooms in the upscale sub-market by 20 percent. These factors combined to produce a significant drop in market occupancy as the new properties gained their fair share of the upscale market. 

 In determining the success of many types of hotel properties, the construction cost of the project is probably the most critical determinant of hotel feasibility. In order to set up a framework with which to evaluate the potential success of a proposed hotel, we recommend to study based on the following criteria :

Strategic analysis and understanding competitive markets

An organization’s strategy is embodied in its mission, plan, and actions. The challenge is to identify value competitive positions at the intersection of values, capabilities, and opportunities. A firm whose return on equity is higher than its opportunity cost of capital definitely earns positive accounting profits and positive economic profits.

In tandem with the increased flow of tourist both within the country another distinct group of travelers emerged. As China shifted to a market oriented economy in the 1990s commercial activities spread throughout the country amid urbanization and as a regional business centres. Domestic and foreign companies have expanded into these areas, thus creating a greater need for business trips across the country.

 In China the high end hotel sector is dominated by international branded operators, whilst domestic form the bulk of the economy and budget hotels. The mid-tier market have a better foothold on developing larger footprints and have stronger brand power. Local and international hotel brands differ quite substantially in their clients and profit models. Both have their own niche markets,

Analyzing Industry structure

The spectacular growth in the number of hotels in China has inevitably led to concerns over the risk of oversupply. The situation is further magnified by the global financial tsunami which has already begun to contribute to the easing of Chinese economic growth.

The intense competition in the budget sector has already begun to squeeze profits due to increased operating costs from higher inflation and wages. Overall market entry is anticipated to become increasingly difficult as the industry matures and becomes more competitive.

International operators have been observed to tweak their hotel brand identities and make them relevant at a local level For example, Days Inn China, which operates under the parent US group chain, currently features five different grades in China tailored to local tastes to capture more customers.

The barriers to entry in a capital intensive industry such as top tier hotel development though is higher but capital investments can be fully recovered if the firm exits the industry at the right time of hotel boom. The deterrent to entry into this industry is when there is excess capacity within the industry and the economy is heading for slow growth.

Understanding industry structure is important for firms so that firms can position themselves to minimize the threats posed by competitive forces.

Analyzing Firm’s capabilities                         

For high end hotel developers, construction costs required may be too high if weighed against required return on investment. Although the current market is suffering from declining occupancy and stalled growth in room rates, the long term outlook of the China top-tier hotel market remains positive with tremendous potential in developing geographical coverage. In addition, the Central government are expected to promulgate more favourable policies to stimulate long term growth of tourism and the hotel industry.

Going forward, brands with larger operations and strong capital flows will have a competitive edge. Large international players still have a competitive advantage in brand recognition over local players as customers may prefer international branded lower cost alternatives to local owned five star hotels.

For a capability to provide a sustained competitive advantage it must be difficult for competitors to imitate, durable over time and aligned with the organization’s value proposition.

A brand like Shangri-La is competitively valuable because the brand has been built over time through substantial investment.  

 Therefore they have the capability to continue to produce economic profits even when one rival firm can develop a highly effective substitute for the asset.

They are also in a strong position to acquire value-creating asset from a competitor for less than the value of that asset because of superior information about the underlying value of the capability which are derive from tight combinations between resources and activities.

The organization has also built a superior capability from Investing in branding to technology innovation from development to operation.  

Analyzing competitive dynamics

Being a top leading brand hotel developer and operator may provide a competitive advantage. When there are significant learning curve effects, they have established pre-commitment contracts with their suppliers and customers.

 Leading brand proven luxury and high quality outfits is a mark on their IP being strong and generic, such patents are most likely to result in an innovator’s capturing most of the rents from an innovation.

Determining competitive positioning

The company pursuing a strategy of differentiation to occupy a generally profitable niche in a focused market leader in the industry is a good strategy for gaining generic competitive position in the high end market industry.

They can determine their competitive positioning within the organization and geographical by :

 - having a good strategic cost approach of a cost leader as they engage in cost-efficient, bulk purchase management

 - flexible procurement strategy with good contract and cost management

 - supply chain management;

 - build market share to gain economies of scale thus minimize development and hotel operation overheads and advertising;

 - harness the talents pool by rewards scheme, treat every employees with respect, honor by giving them a sense of accountability and ownership in the company;

 - harness on innovation and technology to improve on works processes, thus increasing productivity and minimizing waste and repetitive or recurring processes;

 - create a distinctive brand through long term high end customer focused which characterizes the strategic approach of a differentiated player;

 - adopt total top-tier hotel quality and value engineering with risk management in place techniques that characterize an integrated strategy;

The best competitive position in a market for a company is determined by how contested is that position, whether the company can establish and defend that position. I think Shangri-La Hotel chain has proven it through the years.