Strategic Management at Sheraton Hotels and Resorts

Introduction

Sheraton is the largest subsidiary of the global leisure and hotel operator – Starwood hotels and resorts worldwide Incorporated. The latter firm is based in the United States and has three hundred and ninety-two hotels worldwide. One well-known hotel under this brand in the UK is Park lane Sheraton, London. Through the use of common theories and models, the paper will examine how strategy is relevant to corporations by the case study of Sheraton hotels and resorts.

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Aims and objectives

Sheraton Hotels and resorts were formed to provide hospitality services to high-end consumers in the hotel industry. It is driven by a major aim of becoming a market leader through revenue generation. This companies major objectives were to: grow their hotel business through the establishment of various Sheraton franchised hotels around the world, to provide top-notch guest satisfaction by all the hotels under the Sheraton brand, to manage their costs to increase their profit margins without compromising on service quality, to establish corporate cultures that permeate across all branches while reflecting Sheraton values of offering the best services to their clients and to focus on the consumer at all times. (Sheraton, 2010)

Company history, growth and development

Sheraton Hotels and resorts began humbly in 1937 through a small hotel called Stonehaven in Massachusetts. Its owners opted to adopt the name Sheraton after purchasing a hotel with a sign engraved ‘Sheraton’ that was too difficult to change. Its owners (Robert Moore and Ernest Henderson) therefore decided to alter the name of other brands to Sheraton. Two years after its conception, the hotel began growing with the acquisition of even more hotels outside of the state of Massachusetts, and by 1945; the company became the first to appear on the NYSE in its industry. Its first international expansion occurred in Canada through two hotel chains in 1949 and 1960; it internationalised by opening a hotel in Tel Aviv and Venezuela. Five years later, the company had approximately one hundred hotels under its wing. In 1968, ITT purchased this hotel chain and continued to run the business well into the late nineties i.e. 1998. In between these two years, the company enjoyed high growth by venturing into China and subsequently Italy. However, ITT undermined the effects of the economic recession in Europe and began facing losses. At that same time, it attempted to enter the mid-scale market by creating a number of hotels under the Four points brand. Later on, in 1998, Starwood hotels and resorts purchased the ITT-owned Sheraton. Sheraton, therefore, became part of a series of global leaders in luxury resorts and hotels and it still maintains this position to date (Sheraton Hotels, 2010).

Strategy management and the hotel industry

Performing strategic analyses for companies within the hospitality industry is a complex task because this is a service-oriented sector (Harrison, 2003), (Thomas, 1978). However, this does not imply that strategic management is not as important in the hotel industry as it is in other sectors such as manufacturing. Strategy management can assist hoteliers to align their day-to-day activities with their strategic objectives and aims. The strategy, therefore, provides a framework against which companies can carry out their tasks. The hotel industry is often characterised by mergers and acquisitions. Various brands keep joining specific names as the case is with Starwood acquiring several brands to work alongside Sheraton. This complex structure can lead to operational overlaps. Strategic management, therefore, assists in streamlining operations and thus maximising profitability. Hoteliers often need to establish methods of getting the best performance out of their systems. This ranges from reorganising corporate structure, consolidating various company functions, or implementing process transformations such as the six-sigma model. All these aspects fall under strategy management and they can be a reliable means of achieving one’s objectives within the hotel industry.

Internal company analysis and portfolio of activities

Mission statement: To maintain a commitment to innovation, signature services, traveler loyalty as well as the lifestyle-focused design of services that demonstrate the rewarding nature of the hotel experience.

Current operation: An internal company analysis can best be carried out through a three-pronged approach that consists of input, output and organisation. Input refers to financial aspects, human resources, stakeholders, and physical elements. Sheraton’s stakeholders play a critical role in the hotel’s performance. Some of them include labour unions, suppliers and shareholders. Currently, the company must deal with increasing unionisation, health-related and insurance-related compensation; these are heightening its operating expenditure. Its suppliers in the airline industry have minimised Sheraton’s output because of its market dominance. (Hudson & Webster, 1991). Shareholders’ interests take top priority when making decisions in this organisation, it can be said that Sheraton’s corporate culture permits minimal decision making by employees as this is often in the hands of Directors and managers. Therefore, the company has a hierarchical bureaucratic structure. This affects business because sometimes employees are ignorant of corporate objectives and fail to tie in their efforts with company targets. Additionally, because of the affiliation to Starwood, Sheraton managers are restricted in terms of organisational planning as they must give priority to their parent company’s obligations. (Sheraton hotels, 2008) Nonetheless, the corporation takes its social responsibilities seriously especially with the creation of green hotels in some locations.

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Its output involves all the services and products that the company produces (Race & Sirkis, 1981) Sheraton focuses on offering hotel services to up-market clients in the traveling or business categories. This brand’s unique selling point is its ability to offer comfort to clients; an aspect that has been perfected through careful choice of locations for its resorts and hotels around the world. Hotels under the Sheraton brand offer accommodation services i.e. bed and breakfast, fitness programs, dining services, and conference facilities. It should be noted that the level of performance reported by Sheraton in the previous year was not as high as it was in the previous years and this indicates that its output levels have diminished. (For a detailed illustration of this performance, refer to the business and corporate level strategy)

SWOT: Its major strength lies in the strength of its brand. Many people can recognise it and this contributes towards great consumer loyalty and returns. (Tse, 1988) Additionally, the affiliation to Starwood resorts means that the firm can benefit from an immense infrastructural support system and capital base. Also, management within the parent company frequently analyses the performance of their hotels to determine which ones are profitable. This emphasis on company analysis prior to action has contributed to the relative success of most of its newly opened hotels. (Sheraton, 2004).

Its weaknesses can be depicted by its vulnerability to the seasonal nature of the hotel industry (Uttall & Davidow, 1989). Sheraton must also negotiate for franchise agreements by competing with other hotel industries and this puts it at a disadvantage. It has not fully embraced the benefits of technology as the latter can be applied in assessing consumer loyalty, property management, distribution, brand compliance, and operation of guest amenities. Failure of the company to dedicate capital to these programs may be impeding its growth. The issue of debt financing of its new hotel investments may also be a big problem.

Major threats include trademark infringement by other hoteliers around the world who could infringe on their trademark rights and hence diminish the value of their brand. Other larger hotels exist in various markets around the world and these may employ their vast financial resources to outcompete Sheraton. The issue of online booking agents may also diminish consumer loyalty.

Opportunities that can boost Sheraton’s performance include the application of technology in other non-conventional aspects of the company’s operations such as procurement. Also, the company has the opportunity to boost revenue by refurbishing hotels in countries that are not conducive to the setting up of new ones. Additionally, many companies in the hotel industry are succeeding because of the increased acquisition of properties. Sheraton can also benefit from the same if it liaises with other partners. However, the company must be very cautious about the kind of partners it chooses because it may be responsible for its liabilities in the future.

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External environment

The macro external environmental analysis can be done through a PESTEL/PESTLE (political, economic, social, technological, legal, and environmental analysis) the political environment in which this company is currently operating is quite diverse as it is a global enterprise and different governments have their own rules. Certain governments frequently alter their land-use policies and these increase Sheraton’s expansion or investment costs. Terrorist activities have affected the company negatively as travel security has become a huge barrier to growth. Economically, Sheraton must contend with the effects of the global economic crisis and uncertainties surrounding recovery. Business travel has drastically reduced because of the crisis and so has the demand for luxurious hotels. Also, increased interest in vacation ownership may restrict the company’s flexibility in operations. Greater expansion activities make the company vulnerable to currency fluctuations. It is also highly affected by problems in the airline industry which form an important part of their supply chain.

Socially, potential Sheraton guests may be impeded from traveling because of the fear of getting contagious diseases, especially in tropical areas. Technologically, Sheraton is facing competition from online booking agents who are shifting consumer loyalty away from actual hotels to booking agents. Examples here include Travelocity.com. Additionally, the company’s heavy reliance on the internet especially for bookings has reduced communication costs with its clientele. Legally, the company must contend with rising costs of franchising, licensing labour, and corruption in foreign nations as it expands into various regions of the world. Sometimes competitors may create new hotels that borrow from their brand name. Environmentally, the company must build more eco-friendly facilities. (Schools & Johnson, 1988)

Wider external environment

The micro external environment can be analysed through PORTER’S FIVE FORCES which include the strength of suppliers, strength of consumers, ease of entry, barriers to exit, and degree of rivalry. Currently, Sheraton must contend with a high degree of rivalry since numerous high-end hotels exist around the world. Sometimes it is common to find these competitors are lowering prices or engaging in aggressive marketing so as to counteract Sheraton’s efforts. The strength of suppliers varies with the industry under consideration. The airline industry is quite strong because of its oligopolistic nature (Imrie, 2001). However, other suppliers such as those in the real estate sector that build facilities for Sheraton have relatively minimal influence since they are so many and rarely cooperate. Consumers do possess immense strength in this industry because they are well informed and they also have a vast number of other hotels to choose from. There are relatively many barriers to entry owing to the high infrastructural costs and immense legal and governmental regulations in the luxury hotel industry. Lastly, exit barriers are also immense because of franchising obligations and infrastructural constraints.

Financial information

Current financial situation: Sheraton together with other units in the firm has contributed ten percent to the total gross revenue of the parent company through the creation of new hotels. The company also enjoys 5% growth in RevPAR. Nonetheless, it also sold some of its assets amounting to a cash inflow of three hundred and twenty million dollars. Savings enjoyed by the group through corporate restructuring amount to one hundred million dollars. The company’s balance sheet, therefore, denotes that it is in a strong financial positioning that allows it to continue expanding. (Refer to appendix for figures)

Regional contribution to growth revenue: The Company’s activities have resulted in the following financial information about the firm; for the year 2009, Starwood recorded revenues of 5, 907 million dollars with income from operations amounting to six hundred and nineteen million dollars and dividends of 0.9 dollars per share. It should be noted that revenue from the previous year was 6, 153 million dollars thus denoting that there was a fall in profit for the fiscal year 2009. (Starwood hotels and resorts, 2009) (For a detailed summary of this contribution, refer to appendix).

Financial review: As it has been noted, the company’s revenues have been falling and the most likely causative factor is the issue of the economy. The future however looks promising owing to the investments made in additional units and expansion.

Recommendations for strategic choice and future direction

The parent company needs to diversify into other areas (Mc Name, 1985) so as to protect its subsidiaries such as Sheraton from the effects of the macroeconomic environment. It can do this by increasing its share in the casino area. It can also do so by boosting ancillary revenues from its current hotels. In other words, it can make its restaurants more elaborate and improve its fitness centres so as to generate greater income.

Technology presents a unique platform for Sheraton to gain a competitive advantage since it has been noted that a lot of rivalries exist in the hotel business. One way in which the company can achieve such an end is through technology application in brand compliance and distribution. The company also needs to empower its managers such that they are granted decision-making autonomy. (Hussey, 1985) These individuals interact with clients and have the capacity to assess the dynamics on the ground. Lastly, Sheraton needs to carry out more research prior to diversification so that the firm can forecast possible problems in the future and prevent their occurrence.

Conclusion

Sheraton Hotels and resorts are performing relatively well in the global arena. Their increased expansion and innovations have led to these results. However, its micro and macro external factors have affected the company negatively. Poor economic performance in most western nations, bad business conditions, and operational risks are eating on this company’s profitability. Since the company has minimal control over the external environment, it can deal with its effects by taking a proactive stance. It needs to continue with its growth strategies and also maximise revenues from current services. This could strengthen its profitability even in times of uncertainty.

Appendix

Country 2009(% contribution to revenue)
UK 3.3
Australia 4.3
Mexico 5.1
Italy 8.6
Canada 8.0

Regional contribution to group revenue

2009 (Millions of dollars) 2008 (Millions of dollars)
Revenues 5907 6153
Operating income 619 858
Earnings per share 1.37 dollars 2.57
Investment cash 646 215
Cash for finance 243 712

Summary of Income statement

References

Harrison, J. (2003). Strategic analysis for the hospitality industry. Cornel Hotel & Restaurant administration quarterly, 44(2), 139-152.

Sheraton Hotels (2010). Official company website. Web.

Imrie, R. (2001). Independent mid market UK hotels. Vacation marketing journa,l 7(1), 63-74.

Hudson, T. & Webster, M. (1991). Strategic management – application in hospitality industry. London: Mc Millan.

Chafe, E. (1985). Three models of strategy. Hospitality management journal, 3(4), 159-165.

Tse, E. (1988). Defining corporate weaknesses and strengths. Hospitality education & research, 12(2), 57-72.

Thomas, D. (1978). Strategy differs in service business. Harvard business review, 56(4), 158.

Schools, J. & Johnson, G. (1988). Exploring corporate strategy. NY: Prentice hall.

Race, S. & Sirkis, R. (1981). Food service planning in food service forums. Cornel quarterly, 22(1), 35.

Uttall, B. & Davidow, W. (1989). Service companies – focus or falter. Harvard business review 67(4), 77-85.

Sheraton (2004). Plan of merger. SEC report, No. 10.1.

Sheraton hotels (2008). Amended company by laws, SEC report, No. 8k.

Hussey, D. (1985). Introducing corporate planning. MA: Wesley.

Starwood Hotels (2009). Long term incentive plan, LTIP report, No. 19-k.

Starwood hotels and resort. (2009). Company annual report.

Mc Name, P. (1985). Techniques and tools of strategic planning. Oxford: Pergamon press.

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