BHMS4647

Hospitality Management and

Development

│ Lecture 4│

International Hospitality Market Entry

BHMS 4647 Hospitality Management and Development Dr. Bruce Tsui Lecture 4 1
 Learning Outcomes
By the end of the class, students should be able
to:
 identify the major international market entry
modes adopted by chains
 understand the pros and cons of various
market entry modes
 explain the criteria for changing
international chains' entry modes

BHMS 4647 Hospitality Management and Development Dr. Bruce Tsui Lecture 4 2
 Why do companies
choose to invest in an
international market?

BHMS 4647 Hospitality Management and Development Dr. Bruce Tsui Lecture 4 3
 Considerations for entering foreign markets

 Business growth
 International branding and recognition
 Economies of scale
 High competitiveness
 Incentives

BHMS 4647 Hospitality Management and Development Dr. Bruce Tsui Lecture 4 4
 Market Entry
 One of the various approaches to achieve
competitive advantage
 Six common foreign market entry modes
1. Wholly-owned subsidiary
2. Joint venture
3. Strategic alliance
4. Franchising
5. Management contract
6. Consortia
BHMS 4647 Hospitality Management and Development Dr. Bruce Tsui Lecture 4 5
 Entry modes for international expansion
Choice of
entry modes

Non-equity modes Equity (FDI) modes

Management Wholly owned

Exports Joint ventures (JVs)
Contracts subsidiaries

Licensing/
Direct exports Minority JVs Green-fields
Franchising

Indirect exports Turnkey projects 50/50 JVs Acquisitions

Others R&D contracts Majority JVs Others

Co-marketing

BHMS 4647 Hospitality Management and Development Dr. Bruce Tsui Lecture 4 6
 1. Wholly owned subsidiary (Foreign Direct
Investment -FDI)
 A company in which the parent company owns
100 percent of the subsidiary’s stock
 Main advantage  allow tight control of the
company
 Main disadvantage  costly to set up and
require knowledge of local conditions
 FDI involves the transfer of resources including
c__________________________________

BHMS 4647 Hospitality Management and Development Dr. Bruce Tsui Lecture 4 7
 2. Joint ventures
 a typical joint venture is where two partners
come together and take 50% responsibility
each for running the new venture, which often
results in the f___________________________
 Key issues – ownership, length of agreement,
pricing, technology transfer, local firm’s
capabilities and resources, and government
intentions
 IHG JV with ANA (2006)  IHG ANA Hotels
Group Japan (largest int’l hotel mgt company)

BHMS 4647 Hospitality Management and Development Dr. Bruce Tsui Lecture 4 8
 Joint ventures - Advantages

 Easier access to other countries

 Shared costs and risks
 Benefit of a local partner’s knowledge, and
synergies

BHMS 4647 Hospitality Management and Development Dr. Bruce Tsui Lecture 4 9
 Joint ventures - Disadvantages

 One of the companies may lose control over its

know-how and therefore could establish a
potential rival
 Conflicts of interest may occur, the partners
may not have the same priorities
 Sharing same risks and rewards (MUST)
 Cost control and coordination

BHMS 4647 Hospitality Management and Development Dr. Bruce Tsui Lecture 4 10
 3. Strategic alliances
 Companies are in the same line of business in
forming the strategic partnership
 It allows companies to co-operate for their
m___________________
 Hilton Hotel Corporation and Hilton
International – Development of Hilton brand,
sharing same loyalty programmes (HHonors)
 Qantas and Emirates, share the hub and flight
coding, not via Singapore as stopover

BHMS 4647 Hospitality Management and Development Dr. Bruce Tsui Lecture 4 11
 Strategic alliances
 Characteristics
 Remain independent
 Share the benefits of the alliance, and
control the performance of assigned tasks
 Make ongoing contributions in technology,
products, and other key areas
 Drawbacks
 Management challenges (cost control)
 Strengthening the competitor’s ability

BHMS 4647 Hospitality Management and Development Dr. Bruce Tsui Lecture 4 12
 4. Franchising

 A form of licensing granting the right to use

certain intellectual property rights, such as
trade names, designs, patents and copyrights
 Semi-independent business owners pay fees and
royalties to a parent company in exchange for
the right to sell its products and services under
the franchiser’s trade name and often to use
its business format and system

BHMS 4647 Hospitality Management and Development Dr. Bruce Tsui Lecture 4 13
 Advantages to the franchisor
 Faster growth/higher market share/ brand
awareness
 Lower capital requirements/ lower risk,
especially in global market
 Revenue stream – secured franchise
fees/royalties
 Equipments and ingredients supply
 Limited payroll
 Motivation – franchisors are owners of the
franchise and brand

BHMS 4647 Hospitality Management and Development Dr. Bruce Tsui Lecture 4 14
 Disadvantages to the franchisor

 Reduced control
 Profit sharing
 Problem franchisees
 Limited in flexibility
 Information feedback

BHMS 4647 Hospitality Management and Development Dr. Bruce Tsui Lecture 4 15
 Benefits for franchisees
 Management training and support
 Brand name appeal
 Standardized quality of goods and services
 National advertising program
 Financial assistance
 Proven products and business formats
 Centralized buying power
 Site selection and territorial protection
 Greater chance for success

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 Disadvantages for franchisees
 Franchise fees and profit sharing
 Strict adherence to standardized operations
 Restrictions on purchasing
 Limited product line
 Unsatisfactory training programs
 Market saturation
 Less freedom

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 5. Management contracts
 The best method of market entry, as the
contractor possesses management know-how
and the owner of the hotel wants no part in
the day to day operation of the business
 More than a franchise/license agreement
 Limited form of agency
 ability to recruit, dismiss and direct
employees
 restricted ability to contract on behalf of
principal/owner
BHMS 4647 Hospitality Management and Development Dr. Bruce Tsui Lecture 4 18
 Management contracts
 Shorter term (1-10 years)
 Contracts subject to termination clauses
 Management fees reduced and emphasis on
incentive fees tied to profits and subordinated
to owner’s return
 Owner has improved control of the operation
of hotel

BHMS 4647 Hospitality Management and Development Dr. Bruce Tsui Lecture 4 19
 Management contracts
Management companies advantages
 Fast chaining – fast development with limited
risks
 Financing the property – little or no initial
investment
 Reduced risk – building costs, market
recessions, high financial earning
 High return on investment (ROI)

BHMS 4647 Hospitality Management and Development Dr. Bruce Tsui Lecture 4 20
 Management contracts
Management companies disadvantages
 Only part of the profits
 Loss of the properties potential appreciation
 Potential interference from the owners
 May lose contract in certain stage

BHMS 4647 Hospitality Management and Development Dr. Bruce Tsui Lecture 4 21
 Management contracts
Investment companies advantages
 Reduced risks in running the hotel business
 Capital investment will be paid back
 With the connection of brand name, value of
the property may increase

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 Management contracts
Investment companies disadvantages
 Loss control of daily operations of the property
 Management company may not have the
necessary experience, knowledge or resources
in managing overseas’ business

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 6. International consortia
 An international hotel consortium is a
collection of independent hotels
(i.e. Best Western) which come together for
marketing and in some case purchasing
purposes. The well-known hotel consortia
include:
 Best Western,
 Golden Tulip,
 Logis de France and
 Leading Hotels of the World

BHMS 4647 Hospitality Management and Development Dr. Bruce Tsui Lecture 4 24
 Considerations of entry strategy

 Evaluation of the company’s resources and

capabilities
 Business environmental factors in host country
 Advantages and disadvantages of the choice 
Overall vision and objectives of the company

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 Considerations of entry strategy (cont’d)

 Capital
 Company size
 Branding
 Management skills
 Human resources
 Costs

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 References
 Clarke, A. and Chen, W. (2007). International
Hospitality Management: Concepts and Cases.
Taylor and Francis Group, Chapter 6
 Chuck, G. (2008). International Hotel Development
and Management. Educational Institute of the
American Hotel and Lodging Association, Chapter 7

BHMS 4647 Hospitality Management and Development Dr. Bruce Tsui Lecture 4 27