Magoosh GRE

Strategic Management: What’s Brewing at Whitbread?

| April 6, 2015

Introduction

At the beginning of the 21st century Whitbread, decided to leave its 250 year history of brewing and beer sales behind by divesting of its brewing interest and pubs and refocusing on the hotel sector among other interests (Whitbread 2011a [online]). Among a number of strategic and circumstantial considerations was an increasingly favourable competitive situation in the hotel sector, the forces shaping this situation are clarified by modelling based on Porter’s Five Forces.

Competitive Rivalry – High, but favourable to Whitbread
Competition within the existing UK hotel around the millennium was intense, Whitbread’s 2001/02 annual report acknowledged that the competition created “a difficult market” (Whitbread 2002; pp. 3), hundreds of different hotel companies of all types and sizes compete nationally at close quarters. However the company had a good deal of capital behind it and the right core competences to be competitive. Competitive success in the sector at this time was perceived to be built upon managerial and infrastructural core competences of meticulous forward-planning, sophisticated value provision and the ability to involve staff and stakeholders in company policy (Phillips 1999). The aforementioned study found that hotel chains with these particular core competences performed well financially and that the competition in the sector was defined thus. Given this characterisation, Whitbread was well placed to excel in the market given its corporate vision (Appendix 1) which involves “creating a great place to work”, “making everyday experiences feel special” and “Driving efficiencies and investing in long term growth”. Arguably these three statements could be seen respectively as commitments to staff involvement, sophisticated ‘special’ value provision and meticulous forward planning.

New Entrant Threat – Quite Low
At the beginning of the century Whitbread were a large and well funded new Entrant in the market, their change of focus to the hotel and restaurant sectors in this period was remarkably rapid, with £3 Billion of transactions in the 1999 – 2002 period alone (Whitbread 2002; pp. 3). This means that low barriers to entrance would have at the time been a benefit to Whitbread, only becoming a threat per se. when the company was occupying a solid position in the market toward the end of the period in question. Organisational barriers to entrance in the budget hotel market are low; there is a good range of easily available expertise, single hotels do not require extensive infrastructure and companies can gain legal approval easily. As Whitbread already had similar expertise and mass catering infrastructure they benefited hugely from this (Ruetz & Marvel 2011). The high financial barriers to entrance were likely the factor which made the market attractive to Whitbread in their situation though: As they were selling large interests in public houses and breweries Whitbread could overcome these barriers, even exchanging pubs for hotels directly (Whitbread 2008; pp. 3). When they were established, they would not be overly threatened by subsequent new entrants who could not afford proper entrance.

Substitute Product Threat – Medium
The traditional substitute product for a budget hotel would be a standard, full service hotel where customers pay more for better service. However, given the low pricing and lesser provision of budget hotels, this is not the most direct substitute. Hostels traditionally occupy a lower pricing slot than hotels but Ruetz and Marvel (2011) point out that the simultaneous emergence of budget hotels and higher quality hostels puts the two products in ever closer contention. This study focused on continental hostels in Holland though, where a boutique, luxury hostel trend has taken hold much more firmly than in the UK. Closer to home the threat from hostel substitute is less direct: Research in Scotland has revealed that the purchase motivations for a hostel differ significantly from those of a budget hotel, with the latter being much more formal and the former more casual and self service oriented (Nash et al. 2006). Bed and Breakfasts provide a similar threat as hostels but, like hostels, their purchase motivations and operations make them indirect substitutes. Their size makes them unfeasible for business use and their operation discourages long stays (Ingram 1996); these differences together eliminate around 80% of the budget hotels customer base as reviewed in 2009 (Ruetz & Marvel 2011; pp. 102)

Customer Bargaining Power – Very Low
The horizontal factors of Porter’s five forces; competitive rivalry and substitute products are generally quite strong. This allows customers a lot of selective control over how much they spend and what they get, a factor which has been magnified recently by the selective bargaining efficacy of customer comparison websites (Petre et al. 2011). However the budget hotel customer, identified specifically in terms of how much he or she will pay, has practically no direct bargaining power with the hotel provider. This is partly due to narrow profit margins, partly because of the scale of mass catering and partly because of the formality of mass pricing regulation; the price is set and paid with no compromise. This is one of the truths that budget hotels are founded upon, and one of the things which makes the sector so attractive to a pre-existing mass caterer in a different sector.

Supplier Bargaining Power – Very Low
There are a huge number of suppliers available to caterers, simply because there are a huge number of caterers. Whilst this means that the hotels do not dominate the transaction, it also makes for a fairly idealised market where prices normalize, modern service infrastructure enables wide sourcing of everything a hotel owner needs (Kim & Oh 2004). On top of this the fact that Whitbread were already quite dominant in the restaurant market gave them existing suppliers with good relationships as a base, reducing the power of suppliers even more.
2. Using Porter’s generic strategies identify and discuss Whitbread’s approach to competing in:
a. The hotel market
As a ‘budget’ hotel chain, Premier Inn’s primary competitive advantage is gained from being able to offer large numbers of rooms at significantly low prices or, in the words of Porter, attaining cost leadership in the Hotel segment. The company’s successful pursuit of this strategy was confirmed recently by its attainment of the Business Travel Awards’ ‘Best Budget Hotel Brand’ award in 2012 (Revel, 2012 [online]). The company’s pursuit of organisational economies to allow cost leadership whilst maintaining a good profit margin is central to its success. Recently Premier Inn has begun to pursue a ‘joint site’ strategy where one team is employed to run both a restaurant and a hotel at one location (Rogers & Foster, 2008). The resultant savings on staffing and operation costs as well as the purchase and construction of premises are significant contributants to the company’s increasing organisational economy.

The hotel market in general is so crowded though that even the budget sector of it has become defined as a seriously competitive sector; making cost leadership alone a difficult and ineffective strategy, brands must differentiate within the constraints of the cost-leadership strategy (Ruetz & Marvel 2011). In 2001 budget hotels were an emerging contended and compromised sector in the UK, they had been accepted in the US but the national identity of the promising sector was jeopardized by several pour example businesses (Fiorentino 1995). In a similar situation a US chain called Hampton Inns had successfully and profitably differentiated itself in the national budget market by offering a 100% money back guarantee of a satisfactory stay. Having found that cost leadership alone was profitable but not supreme, Whitbread decided to differentiate their offering within the UK budget hotel market in a similar way to Hampton Inns, offering a 100% ‘Good Night Guarantee’ to customers (McCaskey 2004). This differentiation was particularly effective at the time given that it mitigated the risk from bad customer perceptions of emerging budget hotels as a whole. More recently the company’s differentiation strategies have moved on to the popular area of social responsibility perception with their ‘Good Together’ Health, Community and Environment Programme (Whitbread PLC 2011b). Looking at Premier Inn from a generic strategies point of view, one sees a company which has successfully achieved profitable cost leadership and has gone on to press its competitive advantage by differentiating itself within the low cost sub-sector.
b. The coffee market
Coffee is one of a number of products which might functionally be seen as a basic commodity but which have taken on many of the aspects of a lifestyle product. Differentiation in the coffee itself primarily involves practical considerations such as flavour and cost leadership requires better sourcing and logistics. However, for Costa, the coffee itself is ironically not the prime focus of value creation strategies, nor is it in the strategies of its rivals. Coffee shops are lifestyle products, selling an ambience and an image which works particularly well in the modern market, differentiation here is much more creative and subjective to the customer (Fitter & Kaplinsky 2009). So the coffee is largely decommodified and becomes a service provided by Costa, the potential for valuable differentiation in the market is great and Costa takes advantage of this. A powerful, often used method of differentiation used by Costa is high level customer involvement and club membership. Costa’s ‘Coffee Club’ gives the user points which can be spent in store. More than this it builds involvement and brand image, the advertising is casual, abstract and conversational and some research is required to discover how the card actually works (Costa 2012a [online]). This fact illustrates the importance of brand image creation and lifestyle to Costa’s differentiation strategy. Whilst many coffee shops promote themselves as socially responsible Costa, along with Starbucks, have taken this aspect on strongly, engaging in a Pepsi vs. Coke-like brand battle to dominate (Linton et al. 2006). Costa has the Costa Foundation to help farmers and recently debuted unprecedented Rainforest Alliance certification of its sources, taking this differentiation strategy one step beyond Starbucks (Costa 2012b [online]). Given the scope for differentiation in the coffee market, cost leadership is a minimal consideration. It is also interesting to note how Costa’s differentiation strategies have progressed oxymoronically along very similar lines to its competitors creating brands where differences are largely superficial.

3. The corporate strategy literature distinguishes between related and unrelated diversification. To what extent does the development of Whitbread in the years since 2000 illustrate this theoretical discussion of diversification?

Financially and industrially, the rapid changes which Whitbread has recently undergone may be viewed easily as a break with company tradition and as the beginning of the conglomerated “diversity of operations and acquisitions” posited by Judleston (1969) as the ‘corporation of the future’. However a look to the past reveals that recent developments are not the brash, unrelated diversification of a corporate portfolio but a more gradual move to build corporate synergies and capitalise on competences in distribution and mass catering. In reality the diversification away from beer production into hospitality and catering began in 1974 when Whitbread setup Beefeater (Whitbread 2011a) to sell its Beer together with traditional food in a family atmosphere; here the relationship is incontrovertible. This sector of the business gradually grew and expanded much faster than the core beer production interest of the company until, in 2000, beer sales only accounted for just over a quarter of the company’s turnover (Whitbread 2000; pp. 1).
Coming into the new millennium the company was in a situation where successful growth and operation of its hospitality services meant that all of the company’s catering and hospitality interests were highly profitable, accounting for around seven eighths of profits (Whitbread 2000). Looking beyond the purely financial this illustrates a company whose competences and success factors are oriented around catering, hospitality and leisure and whose brewing interests are a burden. Given this context the ensuing development of Whitbread can be seen as the type of careful strategic resource allocation that Norman Berg (1969) witnessed in his review of corporate conglomerate strategy. Further to this the divestment of the breweries in 2001 (Whitbread 2011a) can be seen as an example of profit maximisation focused portfolio planning, a similar strategy for managing unrelated conglomerate interests to attain balance.
The aforementioned strategic pursuits were originally related closely to unrelated conglomerate operation in the academic mind, however they are not exclusive to such operations. In fact the way that they are implemented in Whitbread’s case is much more similar to a closely related and integrated ‘core portfolio’ of catering skills and hospitality resources. This strategy relates more to Bhagart et al’s (1990) ‘corporate specialization strategy’ or Bettis’ (1981) high performing interrelated interest firms than to Berg’s earlier conceived conglomerates. Pursuing Bettis’ own academic ‘discussion’ on dominant logic (Bettis & Prahaland 1995); the idea of a strategic ‘core’ is not based on product focus but on strategic, logical synergy, the ability to translate skills, strategies and competences between portfolio interests so that they may be operated effectively as one. Whereas a superficial view of Whitbread’s recent development yields a view of unrelated conglomerate expansion, deeper consideration along these lines shows that in fact it is a process of increasingly dominant core logic: In their catering operations the pubs and restaurants yielding majority profits for Whitbread in the year 2000 were much more similar to the hotels that they would later invest in than they were to the producers of the beers they sold. Though they enjoyed vertical production economies the logical core of related hospitality and catering businesses was seen as much more valuable, thus this review of academic discussion concludes that Whitbread’s progress has moved extensively in the logically related direction of a core. The core has merely moved from brewing to catering.

Bibliography
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Appendices
Appendix 1: Whitbread Vision & Values (Source:Customer

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