Competitive Agility: How The Hospitality Industry Can Win Amidst New Challenges
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The hospitality industry has faced unprecedent disruption over the last two decades, and now, the spread of the coronavirus pandemic around the world has brought the worldwide tourism industry to a sudden freeze.
For the tourism industry, the COVID-19 outbreak is turning out to be a bigger crisis than the SARS outbreak, the 9/11 incidents, and the 2008 financial crisis. According to STR, a US-based research company, average daily rate (ADR) in the US takes quite a lot of time to recover from incidents like these- it took 36 months and close to six years to recover from post 9/11 and post-2008, respectively.
In these uncertain times, hotel operators must master competitive agility to bring back profitability, and produce the significant value that has been lost over the last months. Competitive agility means they need to be prepared for boosting growth, become a champion at optimizing costs, and refresh the operating model by streamlining the way of working. Of course, all this needs to be done while also protecting the health and safety of employees, consumers, and business partners.
In this article, I want to focus on the strategies that the hotel industry should start designing not only to return to profitability as quickly as possible, but also to make it in a sustainable way for the future. Here are the three components one needs to do just that:
1. REDESIGN THE JOURNEY
Before the COVID-19 crisis, operators around the world were committed to innovating across the value chain in order to remain hyper-relevant to guests. The operators that were serious about mastering competitive agility in the “now” and in the “new” were thinking of providing rich and individualized experiences through game-changing innovation such as connected rooms (for example, the Marriott innovation center, and the room of the future), or frictionless-automated processes (from the booking and payment process, to the seamless check-in or the automatic invoicing), so as to increase the guest experience and optimize operations.
Hospitality leaders have also understood that innovation goes beyond the adoption of technologies- now, the challenge is for it to scale up and get prepared to face not only the current pandemic issue, but also the potential new ones that represent the main risks for the travel industry. So, how does one get prepared for all of this? Redesigning the journey means capitalizing on existing technologies to not only make the hospitality and travel experience frictionless, but also touchless: employees, guests, and partners need to be enabled to work as much as possible through the use of technology.
For guests Today’s consumers are increasingly self-reliant, mobile-independent, and tech-savvy. They want to use apps and mobile devices to take a much more active role in researching and booking all elements of their travel experience, from lodging to food and entertainment. They expect efficient, secure, and personalized experiences from their travel tools and providers. Thinking about the guest experience of the future, these are simple existing technologies supporting the seamless and touchless experience:
For employees and partners-owners From operations to marketing, smart hotel technology offers not only a variety of cost savings and revenue opportunities, but also allow for hotel operations to be executed in a safe environment. Some examples are listed here below– it is clear that the redesign of processes and procedures of front- (for example, check-in), middle- (for example, room service activities), and back-office (for example, payment and invoicing) activities is to be measured based on long-term impact.
The big challenge here is that hospitality players need to build the capabilities to capture the full value that can be generated by these technologies. For example, 85% of artificial intelligence projects, across different industries, are expected to fail since many companies do not have the foundations or the capital to implement such technologies. This is where the question of finding fuel for change and the operating model streamlining challenges rise.
2. FIND FUEL FOR CHANGE
While hospitality players recognize that they need to innovate to remain hyper-relevant for guests, as well as to grow, they have not necessarily turned this awareness into action. The industry has been lagging behind innovation efforts- one of the reasons for that failure is the fragmentation of decision-making processes, the lack of costs accountability, and the dispersion of the budgeting process.
That said, owners and franchisors should put in place a set of actions for finding out fuel for change not by incrementing innovation and technology budgets, but by optimizing the existing costs of people and non-people. This action is directly connected to the hospitality operating model revamp, and to the need of increasing automation and efficiency.
Hospitality players can optimize costs by adopting a zero-based mindset: zero based budgeting (ZBB) means starting the cost budgeting and planning from scratch, while zero based organization (ZBO) is meant to redesign organizations as from a white piece of paper. As for why we need that, there are different reasons:
- To understand who spends how much on what
- To promote cost-conscious organizations
- To drive cost ownership and accountability
- To forget the heritage of year-on-year budgeting methodologies
- To readapt the cost and capital expenditures to what is really needed
- To revamp the organization according to the new normal, strategic capabilities, and sustainable cost basis
- To design a flexible and scalable operating model
- To focus on key capabilities
- To aggregate repetitive activities in shared services
At a time of uncertainty, making use of ZBB and ZBO would help realize the following two fundamental objectives. For starters, ZBB would attack selling, general, and administrative expenses (SG&A), and find the money for funding new projects, embracing the change needed in the industry and enhance competitive agility. Meanwhile, ZBO would reshape the capability model, the organization, and the operating model for facing the future in an agile and scalable manner, so as to move talent and resources away from non-differentiating activities to focus on distinctive ones instead. These actions can have significant impact on the P&L of organizations. Some examples:
Of course, depending on the cost category to be addressed, different timeframes can be expected for the realization of savings. For sure, the short-term actions can be considered as quick wins and bring immediate cash to be reinvested, while the mid- to long-term ones can be realized according to a horizon of one or two years. The two time difference between the two is because of the need of renegotiating contracts with suppliers and providers, which might take some time according to the type of existing agreement.
3. ENHANCE THE OPERATING MODEL
To gain competitive agility by infusing innovation and optimizing costs, hospitality players will have to set up their ecosystems to capitalize on its power and potential. By collaborating with specialized players from other industries, startups, and even with competitors, hospitality players can design, build, and execute the needed capabilities to lead in the “new,” gain speed to market, and accelerate the return on investment.
The principle driving the design of an ecosystem is specialization and orchestration. The rapid growth of business ecosystems in recent years challenges the thinking that market positioning and resource-based view is the real source of competitive advantage. Most of these ecosystem orchestrators, like Google, Alibaba, and Uber, don’t make the things they sell; they exist to link others together, and this makes the old positioning-based logic less relevant. And, of course, they don’t have many assets either. They create value through relationships and networks, not through physical goods or infrastructure, so arguments built around asset ownership are equally challenging. These firms are also looking to grow the market -by increasing the flow of people and goods- rather than to capture as much of the existing market as possible.
It’s time for the hospitality sector to embrace the source of the new competitive advantage: considering the disperse network of assets (the hotels), orchestrating a set of specialized partners in any strategic activity, which can be performed by third parties much better than if it was internalized, is key. What are the big advantages of an ecosystem? Here’s a primer:
- The value proposition can keep evolving, thanks to the innovation capabilities brought in the picture
- The model is scalable, both in terms of number of partners, and in terms of dimension of the partners
- It is based on respect, considering respect as not only the consideration of each partner’s specific capability, but also as the competitive dimension– no one is supposed stealing business to the other ecosystem players
- It is profitable, as the marginal cost of any activity is lower if delivered in large volumes
Hospitality players would then gain competitive advantage by turning into ecosystem orchestrators, coordinators, and pioneers. The future competitive strategy for such a traditional industry is revamping the operating model and capitalizing on continuous innovation (products, services, customers, and partners) to define the real entry barriers for the “new.”
Thinking about existing ecosystems in hospitality, there is different cases where the new strategic approach to value creation has been applied. Airbnb, TripAdvisor, Open Table are clear examples of asset-free business ecosystems that are generating new sources of competitive advantage, as much as Uber or Alibaba in the service and retail industries. So, what are the big challenges for hospitality players for facing the “new”?
Different innovation maturity across markets Global hospitality players fail to provide a consistent experience across countries, because there is a gap in both resources available across countries and innovation maturity. Given the differences across markets, there is no doubt that innovation strategies need to be somehow “localized.” Yet, orchestrators redefine localization by connecting hospitality players with local partners, sponsors, and suppliers in the ecosystem, who are the most suitable in driving the global innovation strategy.
Contention between fixing legacy systems and innovating Due to the inorganic growth operations in the hospitality industry, it often happens that players’ IT systems are fragmented and different. This has pushed hospitality players to fix the legacy systems in place. Yet, the longer players take to innovate, the less relevant they will be for guests. Fixing legacy system and innovating are not mutually exclusive– both can happen concurrently, and orchestrators can support player to innovate through the ecosystem.
Hospitality players can overcome these challenges by setting up an ecosystem, and leveraging an orchestrator who seeks to captures value by not only facilitating interactions among startups and other innovation partners, but also other hotel operators. Making it happen is not complicated, but it requires a cultural change across the entire organization.