International Strategy Plan - BMGM Corporation
Executive Summary
This report aims to enact the analysis of the development and formulation of an International Expansion Plan for the organization The Address that incorporates under its umbrella several brands of luxury hotels and resorts. For the time being the organization is operating exclusively on the UAE market and have developed strong differentiated brand in this location.
The report will look at the specific country of entry – Japan that was placed into the focus of the expansion strategy. The analysis reveals potential room for development and favorable political and economic environment in Japan that will enable The Address to build on its brand. Some of the major concerns in regards to the country of entry are related to the cultural and social aspects. These elements can affect brand image and potentially result in slow growth. Correctly identified and incorporated to the strategy, however, the impact of cultural element can be minimized. The conclusions and recommendations for International Strategy Plan are based on the evaluation and theoretical study of the country of entry external environment, its fit with the organizational culture of The Address and possible synergies that would give competitive advantage to this corporation for effective market entry.
The report suggests that the most appropriate entry strategy to Japan at this point in time and given the fact that overseas operations will be new for The Address is the purchase of existing hotel facility and establishment of its flag with minimum entry costs. This would be called a pilot project that will put the foundation for the 10 years growth strategy, opening 5 hotels on the territory of Japan.
Introduction
It is not a secret that UAE hotel industry has become an example for the international Hotels, restaurants and Cafes (Horeca) industry all over the world. All the major hotel chains, such as Intercontinental, Accor, Hyatt and the other, aim to grow and develop its operations across the country. There are for several reasons that make UAE so attractive for this business. First of all, space and favorable legislation conditions make the investment very interesting. Secondly, Dubai as well as UAE in general is a fast expanding international tourism market and the country does a great job attracting more and more tourism categories, such as casino, resort tourism and lately even eco tourists. Finally, Dubai domestic tourism market consumption is extremely high and multinational structure of the internal environment creates potential for test and evaluation, especially in the luxury segment. This, along with open economy and very employer-oriented labor market opens up significant opportunities for the pilot projects and tests for local and international corporations before expanding to other countries.
Japan, in terms of domestic market as well as tourism activities has a different profile. The challenges that the organization face at times has more cultural and social character rather than financial due to the specificity of the country profile in general.
The UAE hotel industry started to be born in late seventeenth as a result of rapidly growing demand for international level accommodation in the country, especially for oil industry related activities. Since 1960, when the country experienced oil boom, with offshore reserves being discovered, a number of hotel chains have established themselves in Dubai.
Since the first hotel Chicago Beach Hotel was built in the country, USE went a long way to become one of the top luxury destinations, setting example in hotel industry. The growth that the country had seen over the past fifty years is the result of a combination of natural factors, such as discovery of the oil reserves as much as the effect of the governmental policies that all times created the base for foreign investments and international corporations.
Currently, the country has one of the highest Gross National Income per capita (GNI) index of $ 35,700 in and counts with average of $ 7.7 billion in foreign Direct Investments (FDIs). These factors along with extremely low inflation rate of 0.9% in 2012 and stability of the banking sector give confidence to domestic and international players.
It is interesting to observe the evolution of the market over the past decade that reflects the change of equilibrium between local market players and international organizations. Favorable investment policy and banking legislation allowed a number of local corporations to grow and expand their business. Currently, Horeca luxury sector is represented in the country to a great extent by UAE companies, hiring international labor and employing FDIs.
Profile of Japan
Extended PEST Analysis
Economic Environment
Japan is the third largest economy in the world and one of the major sources of global capital. The country counts with one of the highest indexes of domestic savings. Latest GNI data for 2012 reflects $ 47,870 per capita, with GDP of $ 5,959 million. Tourism sector contributes about 16% to the Gross Domestic Product (GDP) of the country and is a part of the service sector that provides 69.7% of employment in the country. With that it is difficult to argue the importance of this subsector of the Japan economy.
According to Japan National Tourism Organization (JNTO) the number of international tourists arriving to the country border in 2013 had a 31.5% increase comparing with 2012, reaching average of 930,000 people on a monthly basis. The profile of the tourists has changed profoundly over the years, with noticeable growth in Asian tourist inflow to Japan, mainly from Thailand and China, whereas the country saw 93.4% and 74.1% increase in tourists respectively. One of the fast growing tourism categories is Western Europe, bringing on average 6,000 tourists per month to Japanese destination.
Recent natural disasters, such as earthquake and tsunami that took place over the last decade had significant influence on the country´s economy. It is possible to see, however, that the Japanese government managed to leverage the impact by high investments into infrastructure and recovery packages for the locations affected by the events. At the same time, latest economic issues unleashed some of the economic challenges of the country, majorly related to the high social security costs and liquidity of the Japan capital. With that the country has experienced further increase on taxation, reaching 9.1% of the GDP in 2011, up 0.4% since 2009.
Latest Liberal Democratic government in Japan places a lot of emphasis on the infrastructural issues of the country. Governmental expenditure grew significantly not only due to the recovery packages to the regions like Fukushima, suffered from natural disasters, but also to the high concentration centers, like Tokyo and Osaka. Stimulus package for the infrastructure positively reflected on the FDI growth over the last five years and a number of companies and projects in the sector have been privatized. This process especially benefited the tourism sector, highly affected by access and costs of supportive to Horeca sectors (E&Y, 2013, pp.23-26). According to the E&Y report it is likely that the government will continue with the privatization of the infrastructure, such as transport, in order to leverage the negative impact of the budget deficit on the development of this sector.
Political Environment
Japan is a parliamentary democracy with the Emperor being the head of the state. The head of the government is the Prime Minister that is elected for a four year period. Current government is led by one of the strongest historically parties – Liberal Democratic Party of Japan. Legislative system is based on bicameral structure with reasonably high level of bureaucracy.
Tourism legislation is regulated on the accepted in 2006 Basic Act of Promotion of Tourim Nation. Main responsible organ for infrastructure, tourism and transport is the Ministry of land, Infrastructure, Transport and Tourism (MLIT). The Ministtry is the largest law-making institution in the country and also considered the largest public employer in the country. MLIT is actively involved in the promotion of overseas tourism. Some of the latest projects of the Japanese government is Inbound Travel Promotion Project 2012 and Fly Free to Japan in 2011, aimed at increasing country brand recognition among foreign tourists.
Governmental legislation in regards to the foreign companies and FDI can be classified as reasonably favorable. The country went through a number of adaptations in its FDI regulations, mainly determined by the investment need in manufacturing sector. Started back in the seventieth, modern political environment shows more and more progress in opening up the opportunities for the service sector investments as a part of the privatization assistance initiative. This loosening of the regulatory base comes along with adjustments in taxation and investment requirements, beneficial for foreign corporations.
Another interesting characteristic for Japan legislator base is the gaming regulations. The country is one of little international players that still widely accepts and promotes gaming industry. This legislation currently being limited to the inside the city establishments, is receiving a lot of attention from the government in view of the recently approved draft of the casino Gambling Bill that allows casinos to be built in Japan. This approval is received very positively by the foreign investors in hotel industry and tertiary sector in general as one more step towards the allowance of gambling resorts on the territory of the country (Hirokawa, 2013)..
Cultural and Social Environment
In spite of the fast economic growth and internationalization of the country in economic terms, Japan remains one of the most traditional societies in the world. This traditionalism also reflected in the working structure and employer-employee relationships that are still often built on a life time employment practices, especially among male population in the country.
Traditionalism as the aspect of Japanese culture has deep roots in the social behavior and preferences. This can be seen in high seasonality of the tourism and spending habits of local population. Some of cultural elements and even religious influence still determine the direction in which the industry moves forward. This can create significant barriers for the adaptation of foreign leisure context to the reality of Japan, especially in view of luxury market, which understanding in Japan is very different.
IT Environment
Technology is the pillar of Japanese “brand recognition” on international arena. Innovation in technology and fast-paced research and development allow newest technological assets to become affordable and adaptable to the needs of the sector.
Japanese IT sector have experienced significant shifts in its regularity system, aimed at mass-production and availability for further boost of innovation and growth within private sector of the country. As a result of these efforts, local IT sector experienced further cost reductions, favoring final users and corporations as well as SMEs operating in the sector (Jorgenson and Motohashi, 2005).
Financial Market
Financial markets provide very favorable environment for the current batch of international investments, however, it should be considered that the long term influence of the tragic triple catastrophe in Japan will continue to influence financial indicators and impact the financial market in general for at least 2-3 coming years. Solid investment portfolio that the Japanese government created to recover the situation in suffered regions talks in favor of the accelerated economic recovery. The statement is supported by the growing levels of the firm’s use of bank financing and significant reduction of bad debts in the country.
High public debt and slow growth of the country economy, at the same time, still present the risk for financial stability in Japan. It is critical that the country continues closely control and evaluate its contingency planning programs. Japan does not have a robust financial reform planning that would enable private sector growth in the country, which puts additional pressure on the businesses within growth-enhancing sectors, such as transport and accommodation. The main challenge from financial perspective is weak internal structure of private enterprises that can support the growth along with foreign investments in hotel sector.
Market Entry Strategy
Competition
Accommodation market in Japan can be divided into hotels, traditional inns, guesthouses and membership resort clubs. According to the data provided by the Ministry of Health, Labor and Welfare of Japan, total accommodation market is reducing over the last 10 years, while hotel sector specifically have experienced double digit growth. Such a statistics talks in favor of investment opportunities for hotel segment (JETCO, 2007; Appendix).
Given the profile of The Address it is possible to limit the competition to the luxury and upscale hotels only, as the pricing strategy, scale of operations and investments as well as customers profile will differ significantly from other categories. Some of the major competitors in the outlined segment include Park Hyatt Tokyo, Conrad Tokyo, Mandarin Orient Tokyo and Ritz-Carlton Tokyo. Some of the successful upscale hotels that should be in the focus of the competition are Hotel Okura, The Westin Tokyo, Prince Hotel Tokyo among others.
According to JETCO 2007, a lot of hotel chains, including Hyatt entered the market through Mergers & Acquisition strategy that allowed them to test the market and reduce the size of initial investment. In total only the period of 2000-2006 resulted in $ 2.9 billion in such transactions with 173 hotel units revived to the upscale or luxury level.
With the above in mind, the competition in the country for the luxury segment is extremely concentrated around the business centers, primarily Tokyo as the culture of resort is not well developed as well as the potential of casino leisure center is still work in progress. Competitive environment is very taught due to the long-term presence of the World´s best hotel chains that benefited from the regulatory base and financial benefits given by the government for M&A entrance strategy.
Entry barriers for the market are extremely high due to initial investment requirements and oligopolistic competition, determined by several major brand players. Low brand loyalty profile of the Japanese tourists in general increases the switching possibility of consumers and opens the opportunity for the newcomer brands (Hill and Jones, 2010, pp.41-48).
Competitive Advantage of The Address
The Address is the company within one of the largest construction corporations within the UAE. With that the experience and economies of scales bring additional competitive advantage to the company in terms of supply chain and in-house expertise. The company is a recognized market leader in the luxury hotel segment, known abroad by European and Asian customers that visit the UAE. This recognition can benefit the brand going global, should the company maintain its high level standard and core competence. Along with the strong knowledge of luxury market segment the company already built its customer base with business tourists and leisure seekers on upscale level, which will contribute towards the first growth impulse on Japanese market.
The Address Hotels and resorts are well known for the services of leisure segment, such as spa, restaurant, entertainment and casino service within their establishments. This element can build on competitive advantage towards luxury hotels already existing in the heart of Tokyo, as neither Hyatt, nor Conrad have focus on this customer experience leverage.
Product Analysis
The product is the luxury accommodation, offered in the business center of Japan capital that will offer exclusive service for high-end customers. While the focus of the company is business sales it will leverage the occupation strategy through offering additional leisure activities. Segmentation of the offer will be determined by three customer needs: availability of business facilities, weekend package and location. These three elements will become the pillar of the customer offer.
It should be taken into consideration that starting with the pilot project, as it was initially suggested the company should look for M&A opportunity with mid-size hotel in a noble area that will leave room for further growth and adjustment. With that the initial offer of The Address can be classified as a boutique hotel, combining leisure and business tourism.
Pricing Strategy
It is critical to focus on the brand identity and bring to the overseas expansion experience what the company knows how to do the best – offer luxury without limits. This means that The Address boutique hotel will compete on top notch level with pricing strategy targeting the top level customers. This customer segment generally is not concerned as much with the price how it is focused on the experience and value.
It is important to introduce the brand from the entrance and given the fact that the size of the hotel will be relatively small, comparing to competition it would be reasonable to adapt a two-step pricing strategy (Pride et al, 2012, p. 389):
- Entrance penetration pricing that will offer small competitive advantage against the competition on the luxury level. The objective of this exclusive offer is to make The Address target customer to get know the hotel and try it. Consequently the feedback received from these users will contribute towards the final alignment of the offer.
- Further premium pricing strategy that will align the offer with the level of the competition. Price is not the element on which The Address should compete on Japanese market, but it should be able to offer a superb product that will make customers choose The Address Boutique Hotel against the competition.
Distribution Channels
On the initial stages of the entrance and hotel introduction it is critical to build on the sales agency network. Given the importance of the online sales channels it is critical that the company focuses on positioning of its hotel through main hotel booking websites on the target markets, such as www.booking.com, www.expedia.com, and other websites, targeting European, North American and Asian tourists.
At the same time luxury segment is the most tangible service that accommodation market can offer. In other terms it is important that the company offers several physical distribution channels:
- Direct contracts with large multinational corporations that already make the part of The Address portfolio on UAE market.
- Office representation in London, New York and Tokyo. This position can be also outsourced to already existing tourism and business agents that should trained specifically to present the values and competitive advantage of The Address Boutique hotel.
Leveraging its distribution channels will add visibility and outreach to the operations of the hotel and will allow access to new potential markets in the future.
Promotional Strategy
The Address is a premium brand that should continue to be exclusive and promotional strategy in its target segment should be selected very carefully in order not to damage the image of the company globally. One of primary promotional channels should be direct corporate contract with special pricing. This will build on exclusivity and personalization of the offer and will not damage brand image by dumping prices.
Additional promotional action for the first operational year could be done through one of the online hotel booking channels, linked to the joint purchase with a recognized airline company. This offer should give exclusivity to only one partner and should be linked to a high segment, for example business class passengers.
Indirect Influences on Entry Strategy
There are numerous side factors that can influence the entry strategy of the company and that often cannot be built into the initial formulation of the strategic plan. Such elements for The Address case include the following:
- Potential changes in the facility and location, depending on availability of the real estate options on the market.
- Economic or environment conditions, such as economic crisis or natural disaster, like it was seen in the past decade in Japan with triple tragedy can have tremendous impact on the entrance strategy.
- Change in preferences in domestic and international leisure activities can influence the decisions on the competitive advantage strategy. For example, should the Gambling Bill go further with the allowance of casino resorts, The Address should rethink the type of accommodation that is chosen for the entry to Japan.
Conclusions and Recommendations
The report presented the analysis of external market environment for the corporation The Address that offers luxury hotel accommodation presently on United Arab Emirates market exclusively. It was determined that brand identity and strong position on the existing market among European, North American and Asian tourists allows the company space to grow its operations abroad.
The analysis of the country of entry, Japan, shows that current economic and financial environment offers a number of long-term opportunities, based on potential legislation changes and opportunities for gambling industry. That said, The Address should incorporate robust contingency plan strategy to face prolonged slow recovery rate of the economy.
Additional challenges relevant to the market entry strategy are related to the oligopolistic nature of the competition that is presented by the World´s top hotels brands, competing on luxury segment of business and leisure accommodation. Given the competition environment it is recommended that The Address looks for the M&A entrance strategy through mid-size hotel that will respect three pillars of the customer proposition: location, availability of business facilities, weekend package. It is also suggested that the company will build its competitive advantage on the combination of leisure activities, such as spa treatments and special cuisine offers, as these elements already comprise the brand identity of existing establishments of the corporation.
The Address is a highly valued high end accommodation provider and, thus, it is critical that the corporation continue to focus on its brand identity overseas. It is recommended that the pilot hotel project is established in Tokyo as the business tourism center with high acceptance rate among the target segment and low brand loyalty. This will allow to enter the market with penetration pricing to test and ensure final alignment of the offer to best meet the needs and expectations of the customers.
References
Sahoo, S. (2013) ‘UAE’s hotel industry: the jewel in the crown that’s reaching for the sky.’ The national, November 28, 2013. Retrieved from: http://www.thenational.ae/business/industry-insights/tourism/uaes-hotel-industry-the-jewel-in-the-crown-thats-reaching-for-the-sky
The World Bank. World Databank. ‘United Arab Emirates.’ Retrieved from: http://databank.worldbank.org/data/views/reports/tableview.aspx
Japan Tourism Marketing Co.(2012). ‘Tourism Statistics.’ Retrieved from: http://www.tourism.jp/en/statistics/
E&Y (2013). ‘Infrastructure 2013. Global Priorities, Global Insights.’ Ernst and Young. Washington: Urban Land Institute. Print.
Hirokawa, T. (2013). ‘Japan Ruling LDP Panel Approves Draft of Casino Gambling Bill.’ Bloomberg News, 22 November, 2013. Retrieved from: http://www.bloomberg.com/news/2013-11-22/japan-ruling-ldp-panel-approves-draft-of-casino-gambling-bill.html
Jorgenson, D. and Motohashi, K. (2005). ‘Information technology and the Japanese Economy.’ Cambridge: NBER Working Paper Series. Print.
JETRO (2007). Japan´s Hotel Industry. Japanese Economy Division. Industrial Report. Retrieved from: http://www.jetro.go.jp/en/reports/market/pdf/2007_01_j.pdf
Hill, Ch. And Jones, G. (2010). ‘Strategic Management - Theory: An Integrated Approach.’ 9th Edition. Mason: Cengage Learning. Print.
Pride W, Highes R.J., and Kapoor J. (2012). ‘Business.’ Mason: South Western Cengage Learning. Print.
Appendix – Hotel Market in Japan 1989 - 2005
