The Choice Hotels International Corporation is an example of a corporation involved in the competitive domestic lodging industry. In this paper, Choice Hotels will be analyzed using the PESTLE analysis, Porter’s “Five Forces” approach, a value chain analysis, and overall business strategy. Moreover, the vertical and horizontal integration of Choice Hotel in the industry will also be analyzed, as well as comparative market segmentation, competitive advantages as compared to industry rivals, and a discussion section regarding the future of the company as it continues to develop.
Choice Hotels does not face any major political difficulties in its domestic business transactions. While trade restrictions and related factors apply to overseas operations with regards to expansion efforts abroad, it is clear that as a primarily North American operation, Choice Hotels is not adversely nor positively impacted by the presence of political factors in its internal decision-making. With regards to economic factors, the situation has room for expansion and growth. The lodging industry is based on “standardization of service and quality” and an effort to maintain low prices while sacrificing some quality (1). Differentiation of market products by Choice Hotels, or the offering of subsidiary brands that maintain higher quality and overall price, is an effective business model that the corporation chose to use in order to maximize its appeal to the entire market segment. Moreover, the use of “franchising [as] forming the basis for the industry’s growth” is a key economic factor in establishing the profitability of consumer lodging on an industrial scale. The lack of local, independent hotel owners to compete with standardized chains is a powerful sign that the era of the independent hotel is at an end.
Socially, Choice Hotels benefits from an increased sense of civic insistence on standardized brand names and service across the country. Consumers like the idea of standardized service regardless of location, thus the insistence on consistency is a key element to Choice Hotel’s continued expansion efforts aimed at ensuring the growth of a reasonably priced hotel option for travelers on the move. Specifically, the use of “all-suite concepts” such as the Comfort Suite, Quality Suite, and Clarion Suite all appeal to various levels of the economic spectrum (3). In addition, this market segmentation appeals to the vertical integration of Choice Hotels in that modern consumer lodging markets endeavor to meet the needs of all of its guests through the use of differently priced segments of the market. In other words, Choice Hotels offers a variety of available options based on the guest’s budget and willingness to pay, with a large set of subsidiary companies designed to match specific guests’ socioeconomic level. This is related to the technological aspect of the analysis, which offers threats to the business model of the hotel, as increased capabilities of mass transportation may result in consumers only availing themselves of hotels in regions they are visiting, and may not need lodging while in transit. Moreover, increased technological use offers opportunities for a stronger social media presence and the ability to market discount rooms online.
Moreover, vertical integration allows Choice Hotels the ability to exert control over decisions made both up and down the stream of the value chain. At every point, Choice is able to decide which services are offered in its various brand names, as well as control the quality and consistency of its products. However, this is not without its downsides, as vertical integration necessarily entails high entry costs, reduces the ability of a firm to deal with alternative business partners, and requires similar usage of manpower and resources all down the value chain.
In terms of legal and environmental factors, Choice Hotels is forbidden by law to discriminate to any patrons. Legal issues may arise with the matter of union organization, and rising labor costs may become an increasingly important factor in business considerations. For environmental impact, it is clear that so long as Choice Hotels remains environmentally friendly, any legal prosecution or negative media can be negated. Indeed, there may be financial incentives in the form of tax breaks by state and federal governments to encourage eco-friendly policy adoption.
Choice Hotels operates from the core business concept of providing standardized quality of reasonably priced consumer lodging across the United States. It assumes several factors including: consumers need and desire lodging during trips; consumers prefer standardized quality; consumers are willing to sacrifice quality for the assurance of consistency across brand, and that consumers prefer to adjust their lodgings to their economic status. Moreover, Choice Hotels assumes the continued success of the franchise model of business operations in its underlying core strategic bargain with the industry.
In terms of functional capability, policies, and boundaries, Choice Hotels exists in a strong position to experience further growth. Choice Hotels operates some 2,280 hotels worldwide, with 2,181 of them located in the United States. Most of these hotels are concentrated in the Pacific Northwest and California, with a strong center in the American Midwest, a popular region for hotels and other consumer lodging given its geographic location as a common overnight stopping point for travelers. With an income statement of $283 (in millions) in 1994 and a net income of $53 that same year, Choice Hotels operates with a healthy profit margin that enables continued growth and development of the company. Moreover, growth from 1992 to 1994 has been marked, as 1992 saw a total revenue of only $198, compared to 1994’s figures of $283. These figures are indicative of the health of the consumer lodging industry and Choice Hotel’s important strategic role in providing for the desires of its consumers.
The most significant critical success factors utilized by Choice Hotels is its powerful method of market segmentation and vertical integration. Choice Hotels is successful in the sense that it markets a complete brand (Sunburst) in order to offer specific accommodations for specific needs. This is a complete and total vertical integration of the lodging industry in that it appeals to all available consumers through complete control of the entire chain of the lodging industry chain. Specifically, Choice Hotels offers its “all-suite” concepts, which are as follows.
There are two primary vertical integration groups offered by Choice Hotels. The first, the Sunburst tier, consists of the Clarion, Quality, Comfort, and Sleep brands. The second, called the Economy tier, consists of Econo Lodge, Rodeway, and Friendship brands. For the Sunburst tier, Choice maintains vertical integration in the sense that it controls the quality of the components of the entire system through which it then distributes downstream. Choice owns the real estate that its hotels are built on, followed by the buildings themselves, then controls the services performed internally by owning the cleaning services, repairmen, and hospitality staff. Specifically, the Sunburst tier integrates greater levels of technology and business-orientated features into its offerings, namely through the use of internal business centers, printing areas, and conference rooms. The economy tier, on the other hand, is oriented towards more basic quality at a low cost, meaning that Choice instead chooses to control the supply chain of the core elements of that business brand model. By exerting control over the basic quality supply needs (such as utensils, cheaper quality sheets and furniture, and even food for the famous “free breakfast”), Choice integrates its two different groups very differently.
Inconsistences in the firm’s strategy and structure include an overconcentration of brand names in the economic market segment, a proliferation of brand names and positions, many of which compete for the same customers, and insufficient market penetration in geographic regions such as the South and East Coast. The problem of brand saturation is both a curse and blessing, as the proliferation of many market segments means that individual brands can cater to specific market needs. At the same time, there is a reluctance to consolidate existing overlapping brand names given that the loss of a brand name can detract customers from staying in lodging that they perceive as being under new management.
The competitive advantage of Choice Hotels is found in its ability to integrate the entirety of the consumer lodging industry into a single cohesive corporate structure while simultaneously positioning unique brands that can appeal to different market segments. Overall, Choice Hotels avoids competitors by creating a business strategy that focuses on complete integration of the lodging industry into the umbrella of its operations. Through this method, Choice Hotels can both erect entry barriers to new competitors, as well as guarantee mobility barriers and isolate the niche market that it competes in. By isolating the consumer lodging industry, Choice Hotels maintains a significant competitive advantage over its competitors. Moreover, the company can outperform its competitors in terms of cost advantage and differentiation advantage. It offers the economic capacity to lower costs and reduce rates while retaining quality, something that a startup company or other firm without the strong infrastructure and brand name of Choice Hotels can afford to attempt. Through an aggressive pricing approach, Choice Hotels can retain significant market share while reducing the ability of smaller competitors to compete. The downside to this approach, of course, is that local competitors can potentially gain entrance into the industry in regions where Choice Hotels is not present, where the brand name does not appeal, or where standardization and consistency is better served by rival offerings.
Hospitality Franchise Systems (HFS), Best Western International, and Marriott and Promus are the prime competitors for Choice. The advantages of Choice as compared to competitors can be found when one considers the superior growth rate of HFS in contrast to Choice. HFS maintains more properties, has superior expansion rates, and is diversified far more with regards to its activities with alternative gaming markets. Moreover, HFS operates low-rate brands overseas, something Choice has failed at doing. Western Union, on the other hand, has much higher customer retention through its membership system, and maintains a distinct competitive advantage with regards to its easily recognizable logo. Marriott and Promus are not as relevant as competitors, but nonetheless offer highly ranked hotels in the “moderately priced” category (11). In fact, their low-cost options are ranked higher than the comparative Choice brands, meaning they represent a successful alternative to Choice Hotels in the market.
The five forces are barriers to entry, bargaining power of customers, threat of substitutes, bargaining power of suppliers, and rivalry among existing competitors. Barriers to entry, such as patents rights, and economics of scale, are very high in the consumer lodging industry. The decline of the independent hotel-owner in favor of industrial economies of scale with regards to the mass proliferation of hotel chains is a prominent indicator of the entry barriers for this industry. New competitors find it difficult to engage with Choice Hotels and other corporations on their own turf, and entering the market as a newcomer carries with it an incredible amount of required capital and aggressive market penetration policies.
Bargaining power of customers, or the market of outputs, consists of the ways in which a firm’s customers are capable of manipulating the policies of the firm itself via pressuring tactics and other factors. For Choice Hotels, customers do retain significant bargaining power and the firm can utilize this by insuring it provides consistent quality care that appeals to its customer base. The loss of an individual client is largely irrelevant, and individual purchases themselves count for little in the scope of the firm’s business. At the same time, word-of-mouth can be a potent force for a firm’s reputation and negative experiences can affect the bottom line of a brand. Likewise, buyers form the absolute bottom line of the firm, thus the bargaining power of customers is high.
Bargaining power of suppliers, however, is not as potent. For the hotel industry, the primary suppliers of goods and services can be broadly defined as belonging to two primary sources: labor and real estate. These, however, are markets where integration into the primary firm is common, and Choice Hotels maintains sizeable assets in real estate given its 3,400 properties across the globe. Thus, the bargaining power of suppliers is low.
The threat of substitute products is dangerous, as the entrance of a competitor that offers cheaper lodging at better quality can detract immensely from the brand loyalty that Choice Hotels has garnered. The entire hotel industry is highly subject to public perception and the quality and consistency of service—this is highly variable, and a few bad experiences runs the risk of ruining an otherwise consistent firm’s reputation., As such, the risk of substitute players is quite high.
Lastly, rivalry among existing firms is high. Choice Hotels is not unique in its market niche, nor does it maintain a monopoly. Hospitality Franchise Systems (HFS), Best Western International, as well as Marriott and Promus offer similar business models with similar levels of quality. Rivalry among existing firms is arguably the most potent of these five forces, and it is argued here that the strongest threat to Choice Hotels comes from continued rivalry with these other major firms. Indeed, strong enough competition or superior pricing models can go so far as to reduce local revenue to something approximating zero, which would be a disastrous loss of revenue as well as a failure to return on an original investment into the infrastructure needed to create a hotel.
The value chain analysis is a method of analysis that allows the analyst to represent all the combined values of components needed to eventually market a product to a consumer. At its core, the hotel industry is a service industry, meaning that customer satisfaction is the mechanism by which future profits are assured. Specifically, the value chain analysis shows the many areas in which a competitor can attempt to involve himself in the market and divert profits downstream.
Lastly, it is recommended that Choice Hotels pursues an aggressive model of low-cost financing and expansions for its economy-tier brands. It loses significant market share to superior competition from other low-cost providers and this must be addressed. In addition, it is argued that Choice should implement a better membership program or some form of horizontal integration between its brands to enable it to come off as a more cohesive corporate structure, especially when contrasted with Western Union. In addition, an easily recognizable brand logo would help create better brand loyalty to Choice as a whole, and integrating more opportunities for overseas expansion will play a major role in the future of the company.