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The role of risk in strategic decision making in the hospitality industry (Strategic Risk Management – 337).

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The role of risk in strategic decision making in the hospitality industry (Strategic Risk Management – 337).

Instructions

Strategic risks can be considered as the uncertainities and untapped opportunities embedded in your strategic intent and how well they are executed. As such, they are key matters for board and impinge on the whole business rather than just an isolated unit Mohammed, A. Sykes (2012)

Consider and evaluate the role of risk in strategic decision making in the contemporary tourism or hospitality industry.

  1. Do you agree with the one in the assignment
  2. Provide alternatives and discussion as to what constitutes risk
  3. Do you agree with this statement?
  4. If so why? Consider globalisation and rise of hypercompetition

Define and explain the concept of risk

Explain why and to what extent strategic risk has grown in importance

Consider how organisations can incorporate and mitigate risk in strategic planning

Provide a number of industry examples

Answer

Introduction

Allen (2011) posits that risk is inclusive of uncertainty and chances of success. It is thus correct to agree with Mohammed and Sykes’ (2012) definition of strategic risk as uncertainties and untapped opportunities embedded in the strategic intent. Additionally, as Allan and Beer (2006) point out, strategic management covers the entire organisation and thus it is agreeable as per the definition of Mohammed and Sykes’ (2012) that strategic risk impinges on the entire organisation and not a single unit. The prevalent elements of risk include uncertainty and opportunity for success. Verweire and Berghe (2004) view uncertainty as the unpredictability of events or business outcomes such as revenues, costs, market share and profits. In regard to opportunity for success, Dotzel, Shankar and Berry (2013) point out that the bigger the risk, the more the resultant success in the service-oriented industries. Risk, further, has to be understood according to its nature by categorizing it. Broad divisions of risk are internal and external risks. Internal strategic risks are those that can impair a firm’s goal from within such as operations risk and financial risk. External risk on the other hand can impair goals from the external environment. Such include natural calamities, forces of demand and supply and political involvements in business (Pinedo and Walter, 2013). The fundamental point in understanding the nature of strategic risk, according to Damodaran (2008), is to gain the ability to mitigate and use risk advantageously. To this end, this essay intends to demystify the role that risk plays in strategic decision making in the hospitality industry. To achieve this, the essay firstly discusses the extent and reason for growth in importance of strategic risk. The essay then discusses how risk can be incorporated in strategic decision making and how it can also be mitigated through strategic decision making using industry examples.

Role of risks in strategic decision making in the hospitality industry

The extent of growth in importance of strategic risk

The hospitality industry has a wide scope and encompasses a variety of definitions from different authors. However, the convergence of these definitions, as per Chan and Mackenzie (n.d.), is that hospitality centers on linking hosts with guests. Thusly, referring to the hospitality industry includes those organisations that offer hotel and accommodation services.          Notably, the current context of operations for firms in the hospitality industry is coupled with globalisation (Gustavo, 2013). New rules have emerged for firms operating in this industry as competiveness of the international market determines success whilst enterprise-level competition is stiffer with the integration of world-level value chains (Maria et al., 2008). As such, competency and clarity in strategic decision making becomes a prerequisite in the hospitality industry. This is also because the long-term survival of a firm depends on how well it can deal with externalities in its operating environment (Emilian et al., 2009). It is also imperative to mention that hospitality, according to Maria et al. (2008), is one of the most internationalized industries and thus existence of global companies operating as oligopolies is imminent. In addition, since destinations serve as the ultimate determinants of hospitality revenues, problems arise as small firms have become significant competitors in their local destinations (Gustavo, 2013). In summary, the current nature of growth in the importance of risk in strategic decision making stems from the fact that organisations need to implement decision that prove effective. This attributes to the fact that wrong decision can be costly and can also easily drive a firm from the market (Hommel et al., 2011).

Why the growth in strategic risk in the hospitality industry has occurred

The specific reason as to why there has been a continual growth in need to take risk is because of the hospitality industry’s dynamic nature. According to Gustavo (2013), the hospitality industry has changed over the years in both ends of demand and supply. The ends of demand is characterised by an ever burgeoning number of visitors to different destinations. According to the United Nation World Tourism Organisation, the increase between 1950 and 2015 was from 25 million tourists to 1,000 tourists. The same organisation projects that there shall be an equal increase between 2013 and 2030 (UNWTO, 2011: UNWTO, 2012). Principles of economics posit an automatic balance between demand and supply in a normal economic environment. As such, the rise in tourist travelers has led to an increase in the players in the hospitality industries. Similarly, with an increased number of players in an economy, the level of competition is bound to rise. According to Siguaw and Smith (2010) with reference to the hospitality industry, contemporary competitive practices actualize the adage that ‘the fittest will survive while the best will flourish’. Firms are coming up with new and innovative competitive strategies that necessitate taking risks that would have been irrational in the past when few firms dominated the industry. For example, Thomas Cook’s, a hospitality business giant, strategy in 2013 was to embrace internet marketing and business – a trend previously ignored – and the annual report at the end of the same year indicates that 30% of the sales were made online. Gustavo (2013) also notes that Thomas Cook and TUI merged forces and created a diversified portfolio in the hospitality industry just to edge out competition. Such are the risky strategic measures taken for survival in this industry.

How organisations can incorporate risks in strategic decision making

As inferred above, there is need for understanding the externalities surrounding the business operations if at all an organisation aims at achieving value (Emilian et al., 2009). However, this is not all as the internal environment of firms is as well dynamic and entirely unpredictable attributing to the changing technology and human capital requirements. The strategic decision making process of a firm needs to thusly consider both the internal and external environmental risks. Considering the market pressures, the need for competitive edges is inevitable, the main question remaining which facet of development can be capitalized since risk in prevalent in every option under consideration. O’Neill and Carlbäck (2011) note the trend in the major hotels is the development of business (risk taking) in the line of strategic partnerships and mergers and acquisitions as opposed to stand-alone enterprises. Brands therefore seem to come together in order to broaden their portfolio in the hospitality industry. Additionally, in regard to incorporation of risk, Queiroz (2002) evidences that decision makers have the task of managing risk and at the same time strategically minimizing costs. Unlike the past, contemporary business environments call for proactive risk management that optimizes risks as sources of competitive advantages. The main risks that are imminent in the hospitality industry center on brand image, financial hedging, safety and security, changing technology and asset utility cycles, human resource orientation and business structuring – models (Wood and Brotherton, 2008; Freema, 2013).

Branding

In the hospitality industry, branding is one of the fundamental risks that impact on the firms operating therein. Branding, which involves the creation of unique image and experience in the mind of the customer, is also inherently more important in service driven industries. In the words of Hui, ChangHong and HongLiang (2014), branding is the epitome of business in the 21st century service firms. Additionally, branding not only affects the customer end but also the morale and engagement of employees (Lee, Kim and Kim, 2013). The issues of branding risks are affecting businesses that have been around for years in the hospitality industry. A good case example is the legal suit on the Hilton hotel by the Prestige Resort and Destinations both players in this industry. Prestige Resort and Destination sued Hilton hotel on the premise that Hilton infringed the trademark of Prestige when it branded some of it portfolio as ‘prestige’ (Travel weekly, 2009). The case was argued on the basis that customers and trade members would confuse and mistake the two firms. The CEO of Prestige, Blair McKeever was quoted saying “It was necessary for us to take this action to protect our name, which we have built for more than 25 years in the hospitality industry” (Travel weekly, 2009). The paramount point in this, as Hui, ChangHong and HongLiang (2014) put it, is to maintain a distinct brand regardless of the risks since customer experience when attached to a brand drives the service industry. Branding in this case, besides being a risk factor, is a source of competitive advantage.

Innovativeness

The mainstream understanding of innovation is the creation of new concepts and ideas that are supposed to offer more satisfaction to the customer and more success to the business. However, Conrady and Buck (2011) challenge firms to transcend this basic definition into incorporating new dimensions of revenue generation. This means circling around the idea of business model innovation. The main attribution to such a radical advice is the effect that innovation creates on firms. Emilian et al. (2009) believes that innovation creates sustainability in business and thusly it is factual to posit that failure to innovate means utter failure in business survival. Innovation also stands as a prerequisite rather than an option given the technology and other market aspect keep changing with time. A case example of incorporating innovation is illustrated by Conrady and Buck (2011) on their comment on Starwood hotel. The hotel, in 2006, parallel to the invention of the flat screen television sets, managed to use this to massively save costs and attain customer satisfaction. The specifics are that the hotel management when constructing a new hotel reduced the floor space by a couple of centimeters because the new television sets did not need as much space as the big old ones. However, this is referred to by Conrady and Buck (2011) as a minor example basing on the fact that innovation is supposed to be monumental.

The Burning Man Project stands as the real definition of innovation – one that changes meaning or brings new meaning (Conrady and Buck, 2011). Essentially, innovation needs to be risk inclined for it to stand out. According to the Huffington post, innovation may come in different ways but the most prevalent ones are the ability to book destinations from anywhere in the world using the internet, the ability to cost share and book for other people (a concept intended to lure the millennial generation) and the ability to compare prices inclusive of additional fees (Costello, 2014). An example of such a mover is the collaboration between Tripadvisor and the Accor Hotels where Trip Advisor, being renown to offer best price comparisons, features on Accor Hotel’s website as a reassurance to customers of price fairness (Gustavo, 2013). Instead of such an innovation – Tripadvisor – being seen as an innovation risk, it is incorporated to offer competitive advantage.

Innovation, in the view of Emilian et al. (2009), is about influencing competition and thus transcends countless issues from business relations, human resources to technological advancement and even to marketing strategies. Risk is also implicit in innovation because it involves changing attributes of the firm while uncertain of the outcome. For example implementing new technology or adapting to a factor in the external environment (Emilian et al., 2009; Dotzel, Shankar and Berry, 2013). Thus, it is apt to conclude that risk plays an invaluable role in strategic decision making.

How organisations can mitigate risks in strategic decision making

Ribaric (2012) says that the hospitality industry, especially the hotels segment, faces a wide variety of risks that can easily jeopardize its operations in case they are handled well. Such risks remain imminent in the hotel industry because being a service industry; it is prone to risks similar to those of other industries and more. Extreme risk, as mentioned above, include financial, branding issues, externalities such as weather and terrorism, changing customer demands and globalisation. According to Ribaric (2012), risk mitigation needs to be the central focus of risk manager. Such should also involve proactive mitigation of risk.

One of the major issues that faces is branding. As Hui, ChangHong and HongLiang (2014) put it, brands take time to create and before financial benefits can be directly associated with a brand. Additionally, top management invests in the brand and getting the employee to buy in to the vision of the brand and actually live the brand. The harder part event emerges in making customers to actually associate a brand with value and quality. As such, it is crucial to mitigate any risks associated and detrimental to the brand image. One such risk is degradation of the brand image. For example, the Hard Rock Cafe Restaurant chain once filed a lawsuit against Hard Rock Hotel and Casino located in Las Vegas for damages on their brand image. The Hard Rock Hotel and Casino was running a reality TV show that ruined the image associated with the brand and also portray the brand as a place to associate with drunkenness, debauchery, vandalism and sexual harassment (Garcia, 2010). In order to mitigate against such brand destruction practices, the propositions of InterContinental Hotel Group can be implemented. For example, the firm can ensure proper vetting of sites and owner before entering into contracts with franchise manager. This will ensure compliance to standards and legal requirements and furtherance of the brand strength. Other measures related to branding include rewarding customers through customer loyalty programs, creating of international awareness and retaining local appeal et cetera (InterContinental, 2013).

In matters of technological changes, the mitigation of risks is also essential to help businesses stay afloat. Quinn (2012) addressing the issue of technology in her article emphasis the critical element of a firm keeping up with technological trends that are operational in the contemporary society. Customers have been accorded great ability by new technology and are now more aware of destinations, prices and best travel providers. This means that a firm that is not conversant with the modern customer stands to lose. A case example of firms in the hospitality industry being obligated to conform to changing technology includes the latest move by Hilton hotel and Starwood hotel to implement the use of mobile phones as the keys to rooms in a hotel. Starwood rolled this plan already through not throughout its hotels while Hilton plans to do the same later this year (2015) (CBC News, 2014). The actions that Hilton and Starwood have undertaken exemplify the practical ways of dealing with changes in the external environment.

 Additionally, as hotels embrace online transactions, issues of fraud have been on the rise. As Berezina et al. (2012) note, customers and reviewers affect the brand image should they come across issues of fraud associated with a particular brand. As a way of solving this, hotels are obligated to develop and upgrade online systems as a way of avoiding data phishing, hacking et cetera. Issues of guest security also include physical security that regards premises protection. A recent terror attack at the Le Bristol Hotel near the French presidential palace, for example, caused some of the expected guests to cancel their bookings and many more to reschedule. Further, it was reported that the bookings went down by between 3% and 4% compared to a similar time last year (Bender, 2015). A possible way of dealing with such a case besides upgrading the security systems is to side with the government in constantly reassuring guests of their security.

Lastly, the element of people and organisation culture is central to any service organisation and the hospitality industry relies heavily on people to deliver services. On their research on service innovativeness, Dotzel, Shankar and Berry (2013) maintain that internet and people are the ones that revolutionize innovation. As such, in order to shield against risks resulting from employee incompetency and internet innovation needs the development of the workforce and adaptation to changes in internet technology.  Focusing on people innovativeness and its appropriateness in the hospitality industry characterised by human interaction, it is essential to point out that it is the solution to human resource related risks. According to Dotzel, Shankar and Berry (2013) can improve customer satisfaction in the short-run and, if persistent, on the long-run. Other issues it addresses are customer loyalty and trust arising from human interaction. Failure to address risks associated with people talent and culture detriments service delivery, culture and long-term performance (Intercontinental, 2013). Boella and Goss-Turner (2013) maintain that to deal with people in an organisation require proper recruitment, training, development and reward whilst limiting the financial implications. Intercontinental Hotel Group boasts of such a system where it creates valuable employees creative recruitment, reward and succession plans (Intercontinental, 2013).

Mitigating risks in strategic decision-making is an important element as Talluri et al. (2013) notes that the more that risk is reduced along the supply chain the more the firm is bound to be sustainable. Talluri et al. (2013) continues to note that though often the contingency theory is applied in the mitigation of risk, there is no a one-fits-all strategy. Thusly, it is imperative for manager to identify the best risk reduction strategies in regard to their operating environments. This is also true for the hospitality industry.

Conclusion

The hospitality industry, as is the case in other industries, is faced by uncertainties in the decision making process. There are perceived risks regardless of a path that a manager may chose to focus on. Due to this, risk emerges as an important element in the process of making strategic decision because it influences the attainment of both the short-term and the long-term strategies. As argued by Emilian et al. (2009)., risk can be considered as a basis of making a strategic decision in which a risk analysis is carried out and decision made to take advantage of the prevalent risk. Else, risk can be avoided entirely whereby decisions are made in a way that they mitigate any risk involved – internal or external. A critical analysis of risk factors, strategic decision making and the hospitality industry has shown that specifically, globalisation and increased competition is the main source of the need to consider risk in strategic planning. Increased competition, resulting from rise in demand and consequently influx of firms, can only be curbed by creating a competitive edge. Firms achieve this edge by, as inferred earlier, incorporating risk or mitigating it through their strategic decisions. In both cases, there are accrued benefits such as market dominance, business sustainability, profitability and long-term survival. In conclusion therefore, the role of risk in strategic decision making in invaluable and cannot be downplayed.

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