Porters Five Forces Analysis for Hotel Industry:

BARGAINING POWER Of SUPPLIERS

The term 'suppliers' comprises all sources for inputs that are needed in order to
provide goods or services. The two key suppliers to the Hotel industry are:

- Labour
- Real estate

Over all the suppliers in this market are defined as property owners, developers and
real estate companies, interior design and furnishings companies, architects,
management and training service providers, marketing companies, industry
consultants and ICT manufacturers. [1]

- Significant number of real

estate companies for a
given locality
- Few reliable ICT
1. Number of Suppliers  Moderate (3) providers to manage
property
- Small no. of quality
training providers and
skilled employees
- Substitutes for property
2. Availability of (real estate agents),
High (4)
substitutes designers, employees etc
are available
- Hotels have higher
bargaining power and can
3. Switching cost High (4) 
easily switch between
suppliers
- Suppliers are highly
4. Suppliers's threat of unlikely to forward
High (5)
forward integration integrate into the hotel
business 
 - Hotels could backward
integrate to own their own
5. Industry's threat of
High (4) real estate company
backward integration
- They could have their
own training wing
- Property development and
real estate companies add
6. Contribution to quality High (4) to the quality
- So does skilled labour and
quality training 
- Most suppliers are much
smaller companies
compared to hotel
companies
7. Contribution to cost Moderate (3) - Hence hotel companies
have a much higher
bargaining power
- Supplier contribution to
cost is low
- The few powerful players
8. Industry's importance to in the hotel industry are
High (4)
supplier indispensable to their
suppliers

Overall, the number of suppliers for the Hotel industry is quite large and each supplier
is very small in size compared to the leading players in the industry. These few
powerful players are indispensible to the suppliers. Substitutability of the suppliers is
also quite feasible and inexpensive. Switching between real estate agents is not going
to affect a particular Hotel company significantly. However in terms of quality,
training centers for employees and ICT manufacturers who provide IT systems that
for property management are relatively more difficult to replace. Therefore in terms of
substitute suppliers industry attractiveness is moderately high.

Unlike the supplier’s threat of forward integration, Industry’s threat of backward

integration is pretty high since large hotel chains like ITC or IHCL would have no
qualms expanding into the real estate business or developing employee training
facilities in-house. Similarly the industry’s contribution to both cost and quality is
relatively high.
Overall bargaining power of suppliers is low and industry’s attractiveness in terms of
supplier bargaining power is high (4).

BARGAINING POWER OF BUYERS

The bargaining power of buyers determines how much customers can impose pressure
on margins and volumes.

The end-users of the high-end hotel industry are:

- Leisure traveler
- Business traveler
- Customers who require space for conferences or other events

- Buyers are numerous and

small in size.
- Losing one customer in
1. Number of Buyers  High (5)
not going to make a
difference. - Their
bargaining power is low.
- Multiple substitutes for a
given hotel or brand is
available
- Alternate means of
accomodation such as
2. Availability of camping, RV etc is not
Medium (3) 
substitutes: popular in India
- Informal accomadation
with friends and family is a
viable alternative
- Corporate guest houses
for the business traveller 
- Switching costs are
negligible
3. Switching cost: Low (2) - Buyers are price sensitive
except in the premium
segment
4. Buyer's threat of High (5) - Customers are will not
backward integration: construct a hotel or buy a
 place of residence for each
place they visit
5. Industry's threat of - Low chances or forward
Low (2)
forward integration: integration
- Additional facilities such
as spas, gyms etc. are used
6. Contribution to quality: High (5)
my hotels to improve the
quality of customer's stay  
- Brand image is very
important in this industry
and leads to extra cost
7. Contribution to cost: Low (2) - Additional amenities,
training of staff, location
rent (like close to airport)
etc. 
- Low buyers profitability
- In the mid-segment, there
are numerous buyers, of
very small profitability
8. Buyer's profitability: High (4) - In the premium segment,
buyers are very affluent,
and they have greater
bargaining power compared
to the mid-segment

This industry has numerous customers who are relatively very small in size. Loss of a
single customer has little impact on a hotel company and this drives down the buyers
bargaining power. Similarly buyers threat of backward integration is almost
impossible and so is the industry’s threat of forward integration. However the industry
does have several substitutes such as camping and recreational vehicles for tourists,
corporate guesthouses for business travelers and other informal means of
accommodation with friends and family. Switching cost for all these options is very
low, except for the RV.

Apart from the provision of accommodation, hotels also provide additional facilities
and services such as restaurants, gyms, spas etc. Therefore their contribution to
quality as well as cost for the buyer is very high.
Overall, bargaining power of buyers and the industry attractiveness in this respect is
moderate (3.5).

BARRIERS TO ENTRY

- High economies of scale

- Very important to operate
a chain of hotels in multiple
locations, especially for the
1. Economies of scale High (5)
premium segment
- This reduces the
dependence on tourism
trends at any given location
- Highly differentiated
- Brand names and values
2. Product differentiation High (4) are very important in
attracting and retaining
customers
- Branding is very
3. Brand identity High (4)
important
4. Switching costs Low(2) - Low switching costs
- Capital intensive
5. Capital requirement High (4) - Staff, decor, infrastructure
etc. are very expensive
- ICT is very is very
6. Access to technology Moderate (3) important for property
management etc.
- Labor, land and other
7. Access to raw material High (4)
essentials are easy to obtain
- The tourism industry
receives government
8. Government protection  Moderate (3)
support
- Eg: Incredible India
-High exit barriers
9. Exit Barriers Low (2) -Specialized assets for the
industry
Brand names are very important in the hotel industry. Companies use a their strong
brand names to attract new customers and retain old ones. Besides, economies of scale
is also a huge factor in this industry. Profitability of hotel chains is drastically higher
than individual operations. A new entrant cannot compete with established players in
terms or quality and price if they cannot establish significant economies of scale.
Being a capital intensive industry with a large amount of it, tied down in fixed costs,
makes entry even the more difficult. Similarly high exit barriers due to specialized
assets makes the industry less attractive.

The hospitality industry is strongly influenced by travel and tourism trends. [1]
Government protection for the tourism industry is very high and this in turn rubs off
on the hotel industry making it thereby making the industry attractive in general.

Hence in terms if Entry barriers, the industry is moderately attractive (3.44)

THREAT OF SUBSTITUTES

A threat from substitutes exists if there are alternative products with lower prices of
better performance parameters for the same purpose. They could potentially attract a
significant proportion of market volume and hence reduce the potential sales volume
for existing players. This category also relates to complementary products.[1]

- Close substitutes such as

informal accomodation
with friends and family
Availability of close - Alternate forms of leisure
Medium (3)
substitutes accomodation such as
camping and RVs
- Corporate guesthouses for
business travelers
- Negligible for informal
Switching costs Low (2)
accommodation
- Very high for informal
accomodation
Substitute's price value Low (2)
- Moderate for other leisure
accommodation
Profitability of the High (4) - Producers aren't as
producers of substitutes profitable
 - Large hotel chains have
greater bargaining power

The major substitutes for the hotel industry are camping and recreational vehicles for
tourists, corporate guesthouses for business travelers and other informal means of
accommodation with friends and family. Compared to the hotel industry, these are
much cheaper alternatives, making their price values very high and the switching
costs very low. This makes the industry attractiveness in terms of substitutes, low
(2.75)

COMPETITIVE POWER OF RIVALRY PLAYERS

This force describes the intensity of competition between existing players (companies)
in an industry. High competitive pressure results in pressure on prices, margins, and
hence, on profitability for every single company in the industry.

Factors Comment Attractiveness Remarks

No. of competitors Small High 4 • Small number of large operators

Industry growth Moderate Moderate 3 • Annual growth rate of 13%

• Mature industry

Fixed cost High Low 1 • Highly capital intensive

Differentiation High High 4 • Strong brand image commands a very high

price premium

Switching cost Low Low 2 • Low cost switching to similar brands

Openness of terms Open High 4 • Price break up into cost, taxes etc. are known
of sale

Excess capacity Large Low 2 • Only 69% rooms are occupied

• Tourism industry is seeing strong growth

Strategic stakes Large Low 2 • Although large hotel companies have
diversified they still have a majority stake in
the hotel industry

There are a few large hotel chains that dominate the industry in India. They have very strong brand
names and identities and high stake in this industry which requires very high fixed costs.

But Hotels also face excess capacity since one 69% of their rooms are occupied on an average. With
moderate industry growth the overall attractiveness of industry in terms of competitors is low (2.75)

Overall the industry is moderately (3.28) attractive.