Strategic Management in the Hospitality Industry PDF

Module 1: Intro and Origin of Strategic Management and The Strategic Management Process Mr. Adrian Jasper C. Cruz, MBA-TQM, PH.D.-Mgt. (Cand.) Doctor of Philosophy major in Management (Candidate) De La Salle Araneta University  Master of Business Ad...

Module 1: Intro and Origin of Strategic Management and The Strategic Management Process Mr. Adrian Jasper C. Cruz, MBA-TQM, PH.D.-Mgt. (Cand.) Doctor of Philosophy major in Management (Candidate) De La Salle Araneta University  Master of Business Administration major in Total Quality Management Centro Escolar University College Instructor, Pamantasan Ng Lungsod Ng Maynila (PLM) College Instructor, Our Lady of Fatima University (OLFU) Introduction The increasing importance of strategic management may be a result of several trends. Increasing competition in most industries has made it difficult to compete.  Modern and cheaper transportation and communication have led to increasing global trade and awareness. Technological development has led to accelerated changes in the global economy. Origin of Strategic Management As the field of strategic management began to emerge in the latter part of the 20th century, scholars borrowed heavily from the field of economics. For some time, economists had been actively studying topics associated with the competitiveness of industries.  These topics included industry concentration, diversification, product differentiation, and market power. Origin of Strategic Management However, much of the economics research at that time focused on industries as a whole, and some of it even assumed that individual firm differences did not matter.  Other fields also influenced early strategic management thought, including marketing, finance, psychology, and management. Origin of Strategic Management The traditional process for developing strategy consists of analyzing the internal and external environments of the company to arrive at organizational strengths, weaknesses, opportunities, and threats (SWOT).  The results from this “situation analysis” as this process is sometimes called, are the basis for developing missions, goals, and strategies. Strategic Management Process In general, a company should select strategies that: (1) take advantage of organizational strengths and environmental opportunities or  (2) neutralize or overcome organizational weaknesses and environmental threats. After strategies are formulated, plans for implementing them are established and carried out. The Principle of Enactment The principle of enactment assumes that organizations do not have to submit to existing forces in the environment; they can….. …create their environments through strategic alliances with stakeholders, investments in leading technologies, advertising, political lobbying, and a variety of other activities. Strategic Alliances Also, they may form alliances with other entities. The Global Hotel Alliance is one example, in which Omni Hotels, Kempinski Hotels & Resorts, Pan Pacific Hotels and Resorts, Rydges Hotels & Resorts, Marco Polo Group, Dusit Hotels & Resorts and Landis Hotels & Resorts have joined forces to compete against the mega chains. Deliberate Strategy Vs. Emergent Strategy Deliberate strategy implies that managers plan to pursue an intended strategic course. In some cases, however, strategy simply emerges from a stream of decisions. Managers learn as they go.  An emergent strategy is one that was not planned or intended. According to this perspective, managers learn what will work through a process of trial and error. SWOT Analysis A SWOT analysis is a tool strategists use to evaluate Strengths, Weaknesses, Opportunities, and Threats. Strengths are company resources and capabilities that can lead to a competitive advantage.  Weaknesses are resources and capabilities that a company does not possess, to the extent that their absence places the firm at a competitive disadvantage. SWOT Analysis Opportunities are conditions in the broad and operating environments that allow a firm to take advantage of organizational strengths, overcome organizational weaknesses, and/or neutralize environmental threats.  Threats are conditions in the broad and operating environments that may impede organizational competitiveness or the achievement of stakeholder satisfaction. Strategic Direction Strategic direction pertains to the longer - term goals and objectives of the organization.  At a more fundamental level, strategic direction defines the purposes for which a company exists and operates. This direction is often contained in mission and vision statements. Mission and Vision An organization’s mission is its current purpose and scope of operation… ….. while its vision is a forward - looking statement of what it wants to be in the future. Shangri - La Hotels and Resorts For example, the philosophy, vision, mission, and guiding principles of Shangri - La Hotels and Resorts are: Our Philosophy: Shangri - La hospitality from caring people Our Vision: The first choice for customers, employees, shareholders, and business partners Shangri - La Hotels and Resorts Our Mission: Delighting customers each and every time Our Guiding Principles (Core Values): We will ensure leadership drives for results. We will make customer loyalty a key driver of our business. We will enable decision making at customer contact point. Shangri - La Hotels and Resorts We will be committed to the financial success of our own unit and of our company. Our Guiding Principles (Core Values): We will create an environment where our colleagues may achieve their personal and career goals. We will demonstrate honesty, care, and integrity in all our relationships. Shangri - La Hotels and Resorts We will ensure our policies and processes are customer and employee friendly. We will be environmentally conscientious and provide safety and security for our customers and our colleagues.  Strategy Defined A strategy can be thought of in either of two ways: (1) as a pattern that emerges in a sequence of decisions over time, or (2) as an organizational plan of action that is intended to move a company toward the achievement of its shorter - term goals and, ultimately, its fundamental purposes.  Strategy Formulation Strategy formulation, the process of planning strategies, is often divided into three levels: (1) Corporate – level strategy (2) Business – level strategy (3) Functional – level strategy Strategy Formulation Corporate - level strategy is to define a company’s domain of activity through selection of business areas in which the company will compete. Business - level strategy formulation pertains to domain direction and navigation, or how businesses should compete in the areas they have selected. Sometimes business - level strategies are also referred to as competitive strategies.  Functional - level strategy contain the details of how functional resource areas, such as marketing, operations, and finance, should be used to implement business - level strategies and achieve competitive advantage.  Strategy Decision Level Another way to distinguish among the three levels — perhaps a more accurate one — is to determine the level at which decisions are made: (1) Corporate - level decision (2) Business - level decision (3) Functional - level decision Strategy Decision Level Corporate - level decisions are typically made at the highest levels of the organization by the CEO and/or board of directors, although these individuals may receive input from managers at other levels. Business - level decisions in organizations that have diversified into multiple areas, which are represented by different operating divisions or lines of business, are made by division heads or business - unit managers.  Functional - level decisions are made by functional managers, who represent organizational areas such as operations, finance, personnel, accounting, research and development, or information systems. Strategy Implementation Strategy implementation represents a pattern of decisions and actions that are intended to carry out the plan. Strategy implementation involves managing stakeholder relationships and organizational resources in a manner that moves the business toward the successful execution of its strategies, consistent with its strategic direction. Strategy Implementation Implementation activities also involve creating an organizational design and organizational control systems to keep the company on the right course.  Organizational control refers to the processes that lead to adjustments in strategic direction, strategies, or the implementation plan, when necessary. Thus, managers may collect information that leads them to believe that the organizational mission is no longer appropriate or that its strategies are not leading to the desired outcomes.  Four Basic Strategic Management Processes Four basic processes associated with strategic management are: (1)Situation Analysis (2)Establishment of Strategic Direction (3)Strategy Formulation (4)Strategy Implementation THANK YOU!  Module 2: Global Competitiveness and Strategic Management in Hospitality Industry Mr. Adrian Jasper C. Cruz, MBA-TQM, PH.D.-Mgt. (Cand.) Doctor of Philosophy major in Management (Candidate) De La Salle Araneta University Master of Business Administration major in Total Quality Management Centro Escolar University College Instructor, Pamantasan Ng Lungsod Ng Maynila (PLM)  College Instructor, Our Lady of Fatima University (OLFU) Variables Affecting Strategic Management 1. Analysis of the environment associated with a situation analysis is complicated by the fact that the organization is involved in multiple environments with varying characteristics. 2. Strategic direction must consider stakeholders with a much broader range of needs. Variables Affecting Strategic Management 3. The number of alternative strategies is greatly increased as a firm considers options arising from foreign environments. 4. The specific details associated with implementing strategies will be very different from country to country because of differences in laws, customs, resources, and accepted business practices. Strategic Thinking The term strategic thinking is used in so many ways that it is difficult to determine what people mean when they use it. In fact, most people probably do not know exactly what they mean: they may use the word to mean “thinking about strategy” or use it interchangeably with “strategic management ”or “ strategic planning” Strategic Thinking According to a well - known strategist, Henry Mintzberg, strategic planning is an analytical process aimed at carrying out strategies that have already been identified. Strategic planning results in the creation of a plan. On the other hand, strategic thinking involves intuition and creativity. It is a way to synthesize stimuli from the internal and external environments to create “an integrated perspective of the enterprise.” Motivating Managers and Employees to Think Strategically Organizations can encourage strategic thinking in several ways. First, managers and employees can receive training that describes strategic thinking and how to do it.  Second, an organization can encourage and reward employees who generate new ideas (hypotheses). For example, Disney allows some of its employees an opportunity each year to present new ideas to top managers. Strategic Management in the Hospitality Industry Hotels and restaurants are among the most competitive businesses in the world. The hospitality industry primarily consists of businesses that provide accommodation, food and beverage, or some combination of these activities. Hospitality businesses provide services, which differ from tangible products because they are immediately consumed and require a people - intensive creation process. Strategic Management in the Hospitality Industry The offering of an experience is also becoming an important component of hospitality.  In addition, a wide range of business structures exist in hospitality, such as (1) direct ownership by chains, (2) franchising, (3) asset management, and (4) consortia. Business Structure in Hospitality 1) Direct Ownership by Chains With direct ownership, a corporate chain owns all the stores or units, which provide customers with an almost identical experience and product from one store to Business Structure in Hospitality the next. As a direct owner, you and your team are responsible for running the day-to-day operations of each unit. Business Structure in Hospitality Example of Direct Ownership by Chains Marriott International owns over 36 hotel and timeshare brands with 8,785 locations and 1,597,380 rooms across its network (as of 2023). Business Structure in Hospitality 2.) Franchising The franchisee invests in building the hotel, while the brand name and operational structure come from the franchisor. In this model, the franchisor Business Structure in Hospitality provides products and grants the franchisee the rights to distribute those products within a specific territory. Example of Franchising Business Structure in Hospitality PHINMA Microtel Hotels Inc. is the Philippine master franchise holder of Microtel by Wyndham, an international chain of limited- service hotels with 300+ properties worldwide and TRYP by Wyndham, a select-service urban hotel chain with over 100 properties. Business Structure in Hospitality 3.) Asset Management Asset management modeling is a complete system for managing the lifecycle of controlled assets. Asset management models Business Structure in Hospitality use various criteria to maximize performance, efficiency, and resources.  Hotel Asset Management What Does Hotel Asset Management Include? Five Main Areas of the Hotel Asset Management (1)Revenue Management (2)Capital Expenditure (3)Operations Analysis (4)Regular Audits and Reviews (5)Risk Management Hotel Asset Management 1. Revenue Management One major component of hotel asset management is revenue management. Revenue management uses data and analytics to predict future consumer Hotel Asset Management behavior, set prices, and manage inventory based on this predicted demand pattern. 2. Capital Expenditure Over a hotel’s life span, it will require much investment in physical assets. From the purchase or construction of the hotel itself to renovation, refurbishment, furnishings, hotel technology, and more, this investment will be ongoing and needs to produce Hotel Asset Management results at every stage. Capital expenditure, or CapEx, is the name given to these investments. For a hotel to maintain its competitive edge and provide a quality guest experience, CapEx is essential. 3. Operations Analysis Hotel operations management involves using the hotel’s capabilities and resources to Hotel Asset Management meet business goals, both financial and operational. These targets need to be quantifiable, measurable, and specific. They must also be realistic, aligning with the hotel’s situation: its possibilities and potential, its prospects over the short, medium, and long term, and its positioning in the market. Hotel Asset Management 4. Regular Audits and Reviews To be effective, hotel asset management needs to be regularly assessed. This means audits and reviews to ensure everything is done correctly and the systems used are current. Practices need to be kept in line with industry standards Physical assets must be maintained in good condition Hotel Asset Management Software used for asset management must be updated regularly. 5. Risk Management Risks may impact hotel operations, profitability, or your hotel’s reputation. Risk analysis means identifying, assessing, and mitigating any threats to your hotel business. Hotel Asset Management Risk management (1) helps you to protect your assets, (2) minimize disruptions to hotel operations, (3) maintain a good reputation, and (4) avoid any expensive surprises. Business Structure in Hospitality 4.) Consortia Companies that form a consortium combine their resources (financial, expert, or others) so that they complement and enhance each other. Except for the mutual project, entities that form a consortium remain independent and maintain their own business activities and obligations. Business Structure in Hospitality Example of Consortia Examples of Consortia are American Express, Carlson Wagonlit, BCD Travel or HRG. The consortia rate is negotiated between the hotels and travel agencies and is only available to contracted consortia. Strategic Management in Hospitality Industry “Travel and tourism” is a broad term used to capture a variety of interrelated businesses that provide services to travelers. Tourism is the largest industry worldwide, the second largest services export industry, and the third largest retail sales industry in the United States. It is the first, second, or third largest employer in 30 of the 50 states. The Foodservice Industry - The Players Contract companies are highly consolidated after aggressive merger and acquisition activities that gave them strong positions in the various on - site segments (e.g., school, corporate, and health care). Compass Group’s Americas Division, for example, is the largest contract foodservice company, with $ 7.5 billion in revenues. Its purchase of Bon Appetit Management Company, a $ 300 million provider of upscale foodservice for corporations and universities, is one example of its expanded coverage in various key segments. The Foodservice Industry – The Players Large companies in the restaurant industry, such as Yum! Brands (which owns many of the aforementioned brands such as Pizza Hut and Taco Bell), are aggressively developing portfolios of restaurants, and international expansion continues to serve as a viable growth strategy for firms like Starbucks. Small operators and independent restaurants compete with the large chains in an industry known for its low barriers to entry and entrepreneurial opportunities. The Lodging Industry – The Players Lodging in the United States is a $113.7 billion industry, with more than 47,000 hotels and around 4.4 million guest rooms (as of 2010). Like the foodservice industry, consolidation has been a theme for the last decade, with most of the largest companies being publicly owned. Hyatt Hotels, owned by the Pritzker family, and Carlson Companies are exceptions to this rule, with Carlson being one of the largest privately held companies in the United States. Segmentation Providing a bed, bathroom, television, and phone are hotel basics, but additional amenities and services are common. Segmentation is a strategy that distinguishes properties on the basis of price, service, function, style, offerings, and type of guest served. The Lodging Industry – The Players Marriott, Accor, InterContinental, and Starwood are also franchisors and owners of hotels. Based on Table 1.4, the top five franchise hotels worldwide are Wyndham Worldwide, Choice Hotels International, InterContinental Hotels Group, Hilton Hotels Corporation, and Marriott International. The Lodging Industry – The Players Overall, the top players based on the number of rooms they hold around the world are, in that order: InterContinental Hotels Group, Wyndham Worldwide (formerly Cendant Hotel Group), Marriott International, Hilton Hotels Corporation, Choice Hotels International, Accor, Best Western International, Starwood Hotels &Resorts Worldwide, Carlson Hospitality Worldwide, and Global Hyatt Corporation. Module 3: Assessment of the External Environment Mr. Adrian Jasper C. Cruz, MBA-TQM, PH.D.-Mgt. (Cand.) Doctor of Philosophy major in Management (Candidate) De La Salle Araneta University Master of Business Administration major in Total Quality Management Centro Escolar University College Instructor, Pamantasan Ng Lungsod Ng Maynila (PLM)  College Instructor, Our Lady of Fatima University (OLFU) Key Elements in Broad Environment The key elements in the broad environment, as it relates to a business organization and its operating environment are: 1.Political influences 2.Economic influences 3.Sociocultural influences 4.Technological influences The Political Context Political forces, both local and abroad, are among the most significant determinants of organizational success.  Governments provide and enforce the rules by which organizations operate. These rules include laws, regulations, and policies. The Economic Context Economic forces can have a profound influence on organizational behavior and performance.  Economic forces that create growth and profit opportunities allow organizations to take actions that satisfy many stakeholders simultaneously, particularly owners, employees, and suppliers. The Economic Context (1) Economic growth, (2) interest rates, (3) the availability of credit, (4) inflation rates, (5) foreign exchange rates, and (6) foreign - trade balances are among the most critical economic factor. The Sociocultural Context Society is composed of the individuals who make up a particular geographic region. Some sociocultural trends are applicable to the citizens of an entire country. For example, a few of the major social issues currently facing are: Role of government in health care and elder care Terrorism and levels of violent crime The Sociocultural Context Security of travel and public places Global warming Another major social issues currently facing are: War and role of the military Declining quality of education Financial market failures Quality and health levels of various imported and manufactured food products The Sociocultural Context Pollution and disposal of toxic and nontoxic wasteAnalysis of Societal Trends The value of watching social trends is that it helps firms to understand preferences, strengthen ties with existing customers, and create innovative products. The Sociocultural Context The rising popularity of green hotels and restaurant menus with organic foods are two examples of how broader social trends can shape the industry. Hospitality firms that pay attention to social trends are able to: Recognize opportunities Identify unique generational and cultural differences The Sociocultural Context Enhance corporate reputation Avoid unwanted legislation Opportunity Creation The health and wellness trends in the industry have evolved a host of intriguing concept ideas such as airport spas, while treatments have ranged from the typical Swedish massage to exotic snake and cactus massages, bird - dropping facials, and toxin - reducing suction - cupping treatments. As the population group becomes elderly and retires, they will continue to shape the hospitality industry in new ways, providing opportunities for companies in recreation and nursing homes. Generational and Cultural Awareness Culture is defined as an evolving set of shared beliefs, values, and attitudes that help shape how a social group thinks, sees, acts, and reacts to various events and situations.  A generation may shape its identity or distinctive beliefs and views as a result of social, political, and economic events that occur during the preadult years. These groups are called generational cohorts, because they experience the same events at the same time. Corporate Reputation A positive organizational reputation among stakeholders such as customers and suppliers may increase demand for products or lead to increased business opportunities. Awareness of and compliance with the attitudes of society can also help an organization avoid problems associated with being perceived as a “bad corporate citizen”. Corporate Reputation Each year, Fortune magazine rates corporations on the basis of their reputations.  Four Seasons, Starbucks, and Marriott are hospitality favorites on the Fortune 100 best companies to work for list. A corporate reputation can be a very important organizational resource, because it cannot be imitated completely. The Technological Context Technological change creates new products, processes, and services, and, in some cases, entire new industries. It also can change the way society behaves and what society expects. Notebook computers, compact discs and MP3 players, direct satellite systems, and cellular telephones are technological innovations that have experienced extraordinary growth in the  last decade, leaving formerly well - established industries stunned, creating whole industries, and influencing the way many people approach work and leisure. The Technological Context Paints a picture of the future in which hotels offer “services that may not necessarily be performed by humans. Food and drinks could be dispensed by machines or robots.  Rooms could be cleaned by built - in vacuum and disinfecting systems. Quick back - and - foot massage could be provided by a robotic apparatus. THANK YOU!  Module 4: Analysis of External Stakeholders and the Operating Environment Mr. Adrian Jasper C. Cruz, MBA-TQM, PH.D.-Mgt. (Cand.) Doctor of Philosophy major in Management (Candidate) De La Salle Araneta University  Master of Business Administration major in Total Quality Management Centro Escolar University College Instructor, Pamantasan Ng Lungsod Ng Maynila (PLM) College Instructor, Our Lady of Fatima University (OLFU) Operating Environment The operating environment consists of stakeholders with whom organizations interact on a fairly regular basis, including (1) customers, (2) suppliers, (3) competitors, (4) government agencies and administrators, (5) local communities, (6) activist groups, unions, the media, and financial intermediaries. Porter’s Five Forces, Economic Power, and Industry Characteristics The first step in any type of industry analysis is to determine the boundaries of the industry to be analyzed. Hospitality can be divided into several major industries, as illustrated in the following list: Hotels Resorts Bed and Breakfasts (B & Bs)  Inns Golf and country clubs Restaurants Foodservice Cruise lines Airlines Gaming/casinos Travel and tourism operators Online and regular travel agencies Global reservation distribution systems Trade associations  Nightclubs Meeting and convention planners Time - share/vacation ownership Theme parks Spas Ski industry Real estate development for these enterprises Franchise development for these enterprises Consultants, attorneys and accountants, and vendors to all of these sectors Hospitality trade media An analysis of the five forces is useful from several perspectives: First, by understanding how the five forces influence competition and profitability in an industry, a firm can better understand how to position itself relative to the forces, determine any sources of competitive advantage now and in the future, and estimate the profits that can be expected.  For small and start - up businesses, a five forces analysis can reveal opportunities for market entry that will not attract the attention of the larger competitors. An organization can also conduct a five forces analysis of an industry before entry to determine the sector’s attractiveness If the firm is already involved in the industry, a five forces analysis can serve as a basis for deciding to leave it.  Finally, company managers may decide to alter the five forces through specific actions. ECONOMIC POWER OF CUSTOMERS Economic Power of Customers Customers provide demand for products and services, without which an organization would cease to exist. Because customers can withhold demand, they have bargaining power, a form of economic power. They can influence a firm’s behavior. However, not all customers have the same amount of bargaining power. Economic Power of Customers For example, a tour operator who buys 60 percent of rooms inventory of a given hotel has substantial influence over that operation. According to Porter, customers tend to exhibit greater bargaining power under the following conditions: (1) They are few in number. This creates a situation in which an industry competitor can’t afford to lose a customer. Economic Power of Customers The number of customers to hospitality firms tends to be large, so this typically is not much of a factor. According to Porter, customers tend to exhibit greater bargaining power under the following conditions: (2) They make high - volume (regular) purchases. High - volume purchasers in the hospitality industry can often dictate contract terms, force price concessions, or demand special services. Economic Power of Customers For example, when a corporate client books many room nights per year. According to Porter, customers tend to exhibit greater bargaining power under the following conditions: (3) The products they are buying are undifferentiated (also known as standard or generic) and plentiful. This means that customers can find alternative suppliers. Economic Power of Customers Higher-end hotels tend to focus on creating differentiated elements to retain guests, while budget or economy hotels focus on efficient operation. All hotels worry about their products and services being too similar to those of their competitors, what is called competitive convergence. According to Porter, customers tend to exhibit greater bargaining power under the following conditions: Economic Power of Customers (4) They are highly motivated to get good deals. This happens when they earn low profits or when a lot of what they buy comes from the same industry. Terms of a deal may greatly influence whether they will be successful in the next year. It is interesting to note that airlines are asking for concessions from the airports they use because they are making such low profits. Economic Power of Customers According to Porter, customers tend to exhibit greater bargaining power under the following conditions: (5) They can easily integrate backward and thus become their own suppliers. Vertical integration means that a firm moves forward to become its own customer or, in this case, backward to become its own supplier. Economic Power of Customers TUI (Touristik Union International), the giant German company, owns hotels, airlines, travel agencies, and cruise ships. According to Porter, customers tend to exhibit greater bargaining power under the following conditions: (6) They are not concerned about the quality of what they are buying. This happens when the products or services don’t influence the quality of the buyers own products or services. Because Economic Power of Customers quality is not affected, customers will be interested primarily in obtaining the lowest possible price. For example, office supplies don’t influence the quality of services provided by a high-quality hotel or restaurant. According to Porter, customers tend to exhibit greater bargaining power under the following conditions: Economic Power of Customers (7) They have an information advantage when compared to the firms from which they buy products and services. Information creates bargaining power. If customers know a lot about the cost and profit structure of firms from whom they are buying, they can use this information to their advantage. For instance, Web - based discount hotel retailers have substantial information about the lodging companies from whom they buy inventory. This puts them at a relative advantage at the bargaining table. Economic Power of Customers According to Porter, customers tend to exhibit greater bargaining power under the following conditions: (8) They are well organized. Sometimes weaker customers come together to increase their bargaining power. For example, tourists may join clubs or associations to increase their ability to get relevant information or to obtain discounts. ECONOMIC POWER OF Economic Power of Suppliers SUPPLIERS Powerful suppliers can raise their prices and therefore reduce profitability levels in the buying industry. They can also exert influence and increase environmental uncertainty by threatening to raise Economic Power of Suppliers prices, reducing the quality of goods or services provided, or not delivering supplies when needed. Many of the factors that give suppliers power are similar to the factors that give customers power, only in the opposite direction. Economic Power of Suppliers (1) Suppliers are few in number, or, in the extreme case, there is only one supplier for a good or service. This limits the ability of buying organizations to negotiate better prices, delivery arrangements, or quality. Economic Power of Suppliers In the hospitality industry, this often applies to landowners at popular destinations and airline or cruise ship builders. (2) They sell products and services that cannot be substituted with other products and services. If there are no substitutes, the buying industry is compelled to pay a higher price or accept less - favorable terms. Economic Power of Suppliers Exotic, but popular, foods are often sold at very high prices, even to restaurants, because they are not substitutable. (3) They do not sell a large percentage of their products or services to the buying industry. Because the buying industry is not an important customer, suppliers can reduce shipments during capacity shortages, ship partial orders or late Economic Power of Suppliers orders, or refuse to accept orders at all, all of which can create turbulence for the buying industry, reduce profits, and increase competition. (4) They have differentiated their products or in other ways made it costly to switch suppliers. For example, smaller hotel companies sometimes contract with a reservation service to handle their Economic Power of Suppliers bookings. If the company later chooses to purchase these services from a different supplier, it must remove the reservation system, purchase or contract for a new system, and retrain employees to use it. (5) They have a dependent customer. In other words, the buying industry must have what the suppliers provide in order to provide its own services. Economic Power of Suppliers In a literal way, restaurants must have the foods they prepare in order to remain in business; however, in most markets, the abundance of potential suppliers offsets this factor. Economic Power of Suppliers (6) They can easily integrate forward and thus compete directly with their former buyers. This happened when PepsiCo. acquired several quick - service restaurants, including Taco Bell, KFC, and Pizza Hut. Economic Power of Suppliers (7) They have an information advantage relative to the fi rms they are supplying. If a supplier knows a lot about the cost and profit structure of firms to which it is selling, the supplier can use this information to its advantage. For instance, if a supplier knows that a buyer is making high profits, a more attractive sales price can probably be negotiated. Economic Power of Suppliers (8) They are well organized. Sometimes suppliers form associations to enhance their bargaining power. In a sense, employees who organize into a union are an example of increasing supplier power. Module 5: Strategic Direction Mr. Adrian Jasper C. Cruz, MBA-TQM, PH.D.-Mgt. (Cand.) Doctor of Philosophy major in Management (Candidate) De La Salle Araneta University Master of Business Administration major in Total Quality Management Centro Escolar University College Instructor, Pamantasan Ng Lungsod Ng Maynila (PLM) College Instructor, Our Lady of Fatima University (OLFU) Influences on Strategic Direction Five Theoretical Models that Influence Organizational Decisions 1. Economic Theory 2. Legal Theory 3. Religion 4. Utilitarian Theory 5. Universalist Theory Five Theoretical Models that Influence Organizational Decisions 1. Economic Theory. Under economic theory, the purpose of a business organization is to maximize profits. Profit maximization will lead to the greatest benefit for the most people. Other than profit maximization, there are no ethical issues in business. Five Theoretical Models that Influence Limitations of Economic Theory: Assumptions of profits being evenly distributed is naive. Not all business decisions relate to profit making, and some ways of increasing profits hurt society. Organizational Decisions 2. Legal Theory. Laws are a reflection of what society has determined is right and wrong. Compliance with the law ensures ethical behavior. Five Theoretical Models that Influence Limitations of Legal Theory: The social and political processes used to formulate laws are complex and time consuming. Because the processes are subject to manipulation, the laws may not truly reflect the interests of society. Organizational Decisions 3. Religion. Everyone should act in accordance with religious teachings. Five Theoretical Models that Influence Limitations of Religion: As a model for business decision making, religious values are difficult to apply. There are many different religious beliefs, and there is no consensus on the behaviors that are consistent with the beliefs. Organizational Decisions 4. Utilitarian Theory. Utilitarian theory says to focus on the outcome of a decision. Everyone Five Theoretical Models that Influence should act in a way that generates the greatest benefits for the largest number of people. Limitations of Utilitarian Theory: Under this model, immoral acts that hurt society or a minority group can be justified if they benefit the majority. Five Theoretical Models that Influence Organizational Decisions 5. Universalist Theory. Universalist theory says to focus on the intent of the decision. Every person is subject to the same standards. Weigh each decision against the screen: Would I be willing for everyone else in the world to make the same decision? Five Theoretical Models that Influence Limitations of Universalist Theory: This model provides no absolutes. What one person believes is acceptable for all in society may be offensive to others.