Hotel business represents one of the least profitable industries along with airlines, textiles, and several others (Porter, 2008).
Threat of New Entrants
New entrants pose a relatively low threat in the hotel industry. Primarily, this is due to high entry barriers set by a combination of factors. Specifically, they include high capital expenses associated with the entry, economies of scale, and a severely limited supply of attractive locations. As a result, it is difficult to enter this industry, so the threat of new entrants is not a major factor that can negatively affect profitability.
Threat of Substitute Products or Services
Substitute services such as motels, apartments for rent, and other affordable options such as eco-tourism may pose a high threat to the profitability of hotels. However, this force seriously affects only hotels in the lower price segment. Profitability levels of premium and middle-segment hotels are not majorly endangered, because there are no apparent substitutes available. Therefore, the threat of substitute services can considerably lower profitability of cheaper hotels, but its impact is relatively weak within the middle and high-price segments.
Bargaining Power of Suppliers
Suppliers do not represent a potent force that exerts strong influence over profitability levels within the industry. The majority of service providers can be replaced easily, and the cost of switching suppliers is relatively low. The only suppliers that possess substantial bargaining power in the hotel industry are the recruitment agencies that provide highly qualified and competent staff, which is in great demand in this business.
Bargaining Power of Buyers
Buyers hold a considerable bargaining power in the hotel industry. Generally, they are very price sensitive, as there are many options available. Consequently, players of the industry are forced to engage in intense price competition, which is always disadvantageous for the levels of profits. This force does not affect some hotels as strongly, but they represent only a small percentage of the industry, and occupy specific narrow niches that provide them with a distinctive competitive advantage, and allowing them to avoid competition based solely on price.
Rivalry Among Existing Competitors
Intensity of rivalry between competitors is incredibly high in the hotel industry, especially during weekends and holiday seasons. Very price-sensitive customers, low margins, and the complexity of offering unique, distinctive services form a highly competitive business environment. Therefore, this force can lower profitability levels of the hotel industry quite substantially.
References
Porter, M. E. (2008, Jan.). The Five Competitive Forces That Shape Strategy. Harvard Business Review. Retrieved from https://hbr.org/2008/01/the-five-competitive-forces-that-shape-strategy
