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Asset light strategies are the only way ahead

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Asset light strategies are the only way ahead for international hospitality companies. ” In the topic asset light strategies refers to international hospitality companies owning less assets. Assets are “ items of economic value owned by an individual or corporation, especially that which could be converted to cash” (www.

investorwords. com). The various different strategies international hospitality companies use in order to ‘ lighten’ their assets could be by franchising, management contracts and offshoring (also known as outsourcing). Each of these strategies will be explained in depth throughout the essay.

The reason why businesses would want to have fewer assets is because they want to get out of having asset-heavy balance sheets.

By the strategies mentioned above international hospitality companies can lighten their balance sheets substantially. Franchising is probably used by most major international hospitality companies in our days. “ A franchise is a right granted to an individual or group to market a company’s goods or services within a certain territory or location” (www. franchises. about.

com). There are hundreds of well known franchise businesses in today’s world, some of them are Mc.

Donald’s, Starbucks, Subway and the Hilton etc. Franchising does not only serve its purpose in the hospitality sector but also in more than 120 different industries such as the “ automotive, cleaning ; maintenance, health ; fitness, financial services, and pet-related franchises, just to name a few” (www. franchises. about.

com). The concept of franchising revolves upon a franchisor and a franchisee. The franchisor who is the owner of the business grants a licence to the franchisee to use their products and business idea in return for a percentage of gross monthly sales and a royalty fee.

The franchisor will provide help and support to the franchisee which will be selling the franchisors product or services which will also be using the franchisors trademark.

The help and support the franchisor will provide advertising, staff training and set up the venue with all the necessary equipment. Franchisors will have direct control over how their business idea is used and how their product or services are marketed and sold. The franchisor benefits from this by increasing its market share thus leading to higher profits, more advertising will therefore be possible and finally they will gain from economies of scale.

On the down side it is hard to find a franchisee that meets the standards of the franchisor as the franchisee will be representing the franchisors business.

It is also difficult to maintain quality and service standards. On the other hand for the franchisee it is a great opportunity as the benefit from an easier access to finance, easier start up as the franchisor is obliged to provide this, business assistance from the franchisor, the product is already well known and is advertised to a large extent and access to discounted vendor relationships.

Unfortunately for the franchisee s a percentage of gross monthly sales and a royalty fee must be paid, the franchisee will have no operational power, the franchisee is obligated to conform to franchisors agreement and finally standards must be followed strictly set by the franchisor. Franchising will allow the franchisor to expand internationally without owning the ventures but having total control over them.

Management contracts will be another asset light strategy which is commonly used in the hospitality industry.

Unlike franchising management contracts “ is a written agreement between the owner of a hotel management organisation, which is appointed to operate and manage the hotel on behalf of, and for the account of, the owner in return for the payment of a management fee” (Eyster, 1997). In the hotel industry it is quite common as the owner of the hotel will sign a contract with a separate company or operator to run a hotel. A good example of a large hotel that operates solely on management contract is the Marriott International Corporation.

A hotel owner will hire a hotel management company to run its hotel company, this will provide “ supervision, expertise, established methods and procedures and normally also a track record of verifiable past performance. The operator runs the hotel for a fee according to specified terms negotiated with the owner; the most common of these terms are described below in more detail” (www.

hospitalitynet. org). However by hospitality companies using management contracts to run companies then they can gain from economies of scale, gain brand recognition and obtain a global reservation system.

Alternatively there are some downfalls to management contracts such as conflict of interest (Outcome and behaviour control). “ Outsourcing is a business process term for what has literally become known as hiring a consultant, independent contractor, or freelancer to do a specific task or tasks for an organization in which the organization either does not have the time or the expertise to do on their own” (www.

internetbasedmoms. com). Outsourcing is commonly said to be the same as offshoring but with the increase in globalisation the distinction between the two has and will become less overtime.

Outsourcing is commonly used in business segments such as real estate management, human resources, facilities, accounting, information technology and in this case in the hospitality industry.

In the hospitality industry, more specifically in hotels functions such as “ Reservation/ Loyalty Contact Centres; Distribution; Fulfilment; Customer Relationship Management (CRM), Human Resources (HR), IT / Technical Support; Help Desk; Training; Procurement; Concierge, (e. g. , “ Virtual Concierge”); Finance ; Accounting; Business Centre; House Keeping; Laundry/Dry Cleaning; and Food ; Beverage Operations” (www. inkedin. com) could be outsourced. In large hotels franchises such as “ Subway and Little Ceasers” (www.

linkedin. com) can be outsourced providing to the customer brands that they will trust and already be familiar with. All hospitality industries entail customer contact, so it would be best to keep the jobs such as Food and Beverage and Help Desk under the control of the hotel and functions such as the kitchen, marketing and housekeeping for example outsourced as customer contact is limited.

Studies have shown that throughout the years hotel restraurants have become “ under-achieveing and in many cases hotel restaurants have become unprofitable” (Nigel, 2000). For hospitality companies to gain an interntational success they must create a “ network of franchisees and operating hotels under management contracts – in addition to direct ownership – can enable global chains to capture some of the vital economies necessary for competitive international operations” (Panvisavas, 2006). There are many advantages when outsourcing is being used, this could be less apital being spent as capital used for expensive hardware or software in some cases.

Management complications can be avoided as hospitality companies can hire other businesses to handle their accounting personnel. Outsourcing will allow the hospitality company to focus and specialise on their strengths giving them a competitive advantage allowing the outsourced company concentrating on the non-core related processes. This will increase efficiency and will lead to the business being more successful.

On the other hand there will be less managerial control and conflicts with the outsourced service provider may arise.

The danger of the outsource provider going out of businesses is definitely a risk that a company wishing to outsource their business must take into account. This is because if the outsource provider goes out of business or bankrupt the company outsourcing their business must quickly respond to this by either outsourcing that function to another company or handling that function and taking total control taking the process back in-house.

In most cases outsourcing could be a money issue as it is expensive and sometimes it is cheaper to keep the functions that run the company effectively in-house and not outsource them to other specialised companies. Outsourcing most often leads to redundancies and employers mad react negatively to outsourcing, this may cause the quality of work to suffer and give a bad reputation to the public if many employees are being redundant due to outsourcing.

The loss of talent internally in the business is a subject of matter as if a hospitality company outsources many processes of their business there is less likely for talent to be found. Offshoring does not occur that often in the hospitality industry but as a businesses want to get out of asset-heavy balance sheets, they are starting to offshore their business in order to lessen costs.

These hospitality companies can reduce their “ operating cost significantly (in the range of 25-32%) by leveraging a global delivery model” (www. t. hvs. com).

These hospitality companies offshore processes to explore efficiencies and cost benefits. For an example Infosys is an offshore supplier that performs the following activities for an outsourced hotel accounting process: “ Purchase Order Match, Sales ; Use tax calculation, and posting in ERP” (www. pt. hvs.

com). In addition the real estate cycle has taught hotel companies the lesson of an ‘ asset light strategy’. For example, owners of otels would want to sell their hotel as the real estate cycle goes into a recession and as the market starts to grow again the previous owners of the hotel “ execute share buy-backs, thereby increasing their share price” (www. oppapers. com). Offshoring can be defined as “ a type of business process outsourcing (BPO), is the exporting of IT-related work from the United States and other developed countries to areas of the world where there is both political stability and lower labour costs or tax savings”(www.

sawaal. ibibo. com).

Offshoring can be extremely beneficial for a hospitality company as they will chose vendors who are already experienced and specialised in that specific field. Labour, Capital and Labour management is a lot cheaper in other countries (for example India); this is why most offshore companies choose to set up in other countries so they can get some significant cost advantages. There is usually fast turnaround time, for example if the business is located in the USA and they offshore to India then they “ have a zonal time difference of about 12 hours” (www.

utorial-reports. com). This would give the business a 24 hour continuous work environment. This will give them the chance to get more work complicated each day.

There will be however some disadvantages for offshoring certain processes within a business. Economics stability of the offshore company is a risk as it could be quite unstable in India and other Asian countries as they are usually “ involved in politics and religious activities” (www. ezinearticles. com).

Confidential data will be known to the offshoring company so this could be a high risk for the company especially if this data could affect their business if it leaked out to any competitors. In addition to these disadvantages it could also be said that the same disadvantages for ‘ outsourcing’ would be the same for offshoring as the same concept is applied that the company higher another company to overtake and complete some processes.

In conclusion, ‘ asset light strategies’ have been used for many years now by companies in order to gain a competitive advantage over their competitors.

Hospitality companies always look for ways to lighten their balance sheets and by the strategies stated above they are able to do so. It may not be the only way ahead for international hospitality companies but it is the most commonly used approach companies use in order to promise a successful future for their business. The reason why most companies have become globally successful is because they used one of the strategies, for example franchising is used by hundreds of businesses and the only way they have become globally recognised is for the franchising strategy itself.

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