PRAGUE UNIVERSITY OF ECONOMICS AND BUSINESS
BACHELOR THESIS
2021 Kyryl Tereshchenko
Prague University of Economics and Business International Business
Business Strategy of An Accommodation Provider in The European Market and Its
Response to COVID-19
Author of the bachelor thesis: Kyryl Tereshchenko
Bachelor Thesis supervisor: Ing. Jaroslav Halík, MBA, Ph.D.
Scholar year: 2020/2021
Declaration:
I hereby declare that I am the sole author of the thesis entitled “Business Strategy of An Accommodation Provider in The European Market and its response to COVID-19“. I duly marked out all quotations. The used literature and sources are stated in the attached list of references.
In Prague on 28.04.2021 Signature
Kyryl Tereshchenko
Acknowledgement
I hereby wish to express my appreciation and gratitude to the supervisor of my thesis, Ing.
Jaroslav Halík, MBA, Ph.D., for his valuable guidance, practical advice and continuous support.
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Table of Contents
Introduction ... 2
Literature Review ... 4
Methodology ... 6
1. Theoretical Part ... 7
1.1. Business Strategy ... 7
1.2. Strategic Planning ... 7
1.2.1. Crisis Management in Business ... 10
1.3. External Analysis ... 13
1.3.1. Macroeconomic Environment ... 13
1.3.2. Microeconomic Environment ... 17
1.4. Internal Analysis ... 21
2. Practical Part ... 28
2.1. Introduction of the Company ... 28
2.1.1. Company ABC in Numbers ... 29
2.1.2. Customer Base... 30
2.1.3. Description of Portfolio ... 31
2.2. Impact of COVID-19 on the Tourism Industry ... 33
2.2.1. Impact of COVID on the Company ABC ... 36
2.3. Strategic Analysis of the Company ... 38
2.3.1. PEST Analysis... 38
2.3.2. Porter`s Five Forces Model ... 44
2.3.3. Balanced Scorecard ... 50
2.4. Response to COVID-19 by the Company ... 61
2.5. Personal Recommendations ... 64
Conclusion ... 66
Bibliography ... 68
List of Objects ... 74
Annexes ... 75
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Introduction
Nowadays tourism plays a leading role in the global economy, as it contributes to a significant portion of the world's GDP and ensures cultural integration. In many states of the world, tourism is developing as a system that provides possibilities for acquaintance with the history, culture, customs, spiritual and religious values of a particular country and its people. Currently, the tourism industry is one of the most dynamically developing forms of international trade in services, despite the crisis that has affected almost all areas of the world economy. In my opinion, this sector of the economy is developing at a very fast pace and in the coming years can become its most important sector, because investments in the tourism industry are increasing annually. It is also worth adding that international tourism has a serious impact on the life of population and is an important source of the flow of foreign currency, which affects the balance of payments of a country.
The development of the tourism industry today is influenced by the following factors.
Firstly, it is the financial crisis associated with the coronavirus pandemic, which has affected all areas of human life. The tourism industry is not an exception, since travelling is not a primary necessity and requirement of an ordinary person. This means giving up on travelling is not so difficult, since staying at home and taking care of health are now priorities for almost all of the people. In this regard, mass tourism has already suffered significantly from this. Secondly, another decisive factor are regulations and directives made by governments of various countries, which are based on introduction of restrictive measures related to tourism.
Given that a tourism market is now going through very difficult times, it is extremely important to have an appropriate strategic management in companies that monitor daily changes in market trends and introduce special measures to overcome crisis situations. A significant slowdown in the growth of international tourism is a challenge for this industry, especially for major players in the tourism market, as they need to develop strategic plans to overcome difficult times and keep themselves in their current market positions. Such companies need to carefully analyze the current situation, develop products and rules that correspond to the possibilities for the existence of a business during the pandemic, as the situation changes on a daily basis. Accordingly, the work of business analysts, marketers and crisis managers is now essential for many companies operating in this market.
This work is based on an analysis of the operating performance of a company ABC (for data security reasons, the real name of a company is changed to a fictitious one). The main
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motivation for writing this work is my interest in the business strategy of the company I am working for. Since I have been working in it for two years, I am interested in applying the knowledge gained during the period of studying from a practical point of view. Moreover, getting a broader understanding of the internal processes that are carried out within different departments of the firm is also a primary interest of mine and, therefore, motivation for writing this thesis.
The research is split into two parts: theoretical and practical. Theoretical part encompasses basic concepts related to business strategy and its formation and general theoretical background about the tools for assessment of external and internal environment of a firm.
Practical part of the work is based on analytical data that was provided by the company for the purposes of writing the diploma. This data is a basis for conduction of external analysis of the firm, which includes PEST Analysis and Porter`s five forces, as well as for carrying out internal analysis, which is represented in a form of Balanced Scorecard. An interview with the leading manager of the company describes in details how the company is dealing with COVID-19. My personal recommendations based on possible improvements in activities of the firm will be expressed in the end of the practical part.
Thus, the goal of the bachelor thesis is to analyze the business strategy of the company ABC by conducting external and internal analysis of the firm as a major rental property manager on the European market. In addition, I would like to draw a special attention to the activities and innovations that the company has been implementing in response to the COVID-19, pandemic, which inevitably affected not only the firm`s activities, but tourism industry in general.
In this way, I would like to set 3 hypotheses, which I would like to prove in my work:
1) A qualitative optimization of company's operational costs affects the ability to maintain positions in the market for rental property managers.
2) Daily monitoring of the regulation measures made by governments of the countries and prompt response to existing customer demand during the pandemic affects the conditions for provision of services by the company.
3) An effective personnel policy, which includes balancing the level of personnel costs, providing acceptable working conditions, improving quality control and staff training as well as developing a fair system of staff motivation affects the company's general performance on a market.
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Literature Review
According to Smith (2016), it is very important for each company to develop its competitive advantage while setting business strategy. Cadle, Paul and Turner (2014) in their book wrote about importance of such workers like business analysts, who track changes in market trends on a daily basis and give suggestions on possible improvements in internal processes of a company.
A book written by Matrisian and Bogan (2013) indicates that strategic plan demonstrates direction in which a company decides to move and shows what it has to do in order to achieve its goals. Authors also described steps necessary in order to develop a perfect strategic plan for an organization. These steps are setting a vision, evaluating the landscape, developing a plan, executing the plan, monitoring the plan and measuring the performance. Flamholtz and Randle (2015) mentioned in their writing that strategic plan is very influential for the long- term growth of each company and that by setting an appropriate plan a firm can create a perfect perception of what it is intending to become in the future.
Jennifer and Samuel Elder (2019) gave a clear definition of a business and described, which negative aspects unforeseen events might have for any business sticking to initially developed strategic plan. Authors emphasized on the fact that it is necessary to have a business continuity planning in order to be at least somehow prepared for business disasters and in order to make proper adjustments when a crisis strikes an industry where a company is operating. All the necessary steps of business continuity planning from obtaining management support to evaluating and updating the whole plan are clearly described by authors in their book.
Shimizu (2011) in his textbook emphasized on the fact that each company has to set its primary focus on 3 factors starting with the letter “C”. These are customers, competition and company itself. Author also stated that it is very fundamental for a firm to identify its competitive advantages, because they help to differentiate from others on a market. The writer also listed the main external factors for any entity, such as demographic changes, economic conditions, political, social environment and changes in technologies. In his writing Chapman (2011) gave a clear definition to PEST analysis and explained that this is primarily a business measurement tool, which helps companies to assess external environment and make correct decisions in response to situations happening on particular market. The author provided aspects, which might be taken into consideration, while analyzing each component of this tool. In his research paper Halík (2012) also wrote about
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usefulness of this framework and provided a practical example of implementation of PEST analysis by logistics company in particular European regions. The main thing the author pointed out is that there is no primary or the most important aspect in PEST analysis.
According to the researcher, each factor separately has an important impact on company`s viability.
Schwartz (2010) in his book provided a clear distinction of micro market from a macro one, which is explained by noting that micro market – is a market for a certain product, such as book or a specific service, such as education. He noted that micro environment has a much narrower sense than a macro environment. Weilkiens, Weiss and Grass (2011) mentioned in their writing that entity`s success strongly depends on the structure of a market, on which a company operates. Authors emphasized on an importance of Michael Porter`s 5 forces of competitiveness, which are competition, potential market entrants, substitution, suppliers and buyers. More specific information about each of 5 forces is described in a book published by OpenStax (2019). Bazerman (2001) made a research regarding a customer decision making process. In his work he compares the complexity of buyer`s decision making, while purchasing a commonly used product, such as toothpaste or cereal with the one, when a buyer decides to acquire a car or a house. It was determined by the author that decisions are taken differently, since in the first case a buyer does not spend such a significant amount of money, as in the second one. By doing this comparison, researcher explained that customer`s decision making accuracy highly depends on the product he or she purchases.
Kaplan and Norton (1992) emphasized on the fact that a couple of decades ago, many analysts were sticking to financial indicators that did not really give them a full information about internal processes of a company. That is why 2 authors came up with an idea of creating a Balanced Scorecard, which is currently one of the best frameworks to assess internal performance of the company. In their work scientists pointed out that this tool helps to analyze strategic management of a company and to find links between particular measurements and strategy of the company.
Rincones-Gómez and Rodríguez-Campos (2012) in their writing gave an identification of situation and explained that understanding of current situation helps to determine potential opportunities and threats. The authors stated that in order to get a greater overview of the current situation, it is necessary to carry out observations of day-to-day activities of the working unit.
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Methodology
A research goal of the following bachelor thesis is to analyze a business strategy of an accommodation provider in the European market. Research was carried out by using a primary data collection. This data was provided by the company itself for writing this thesis.
This is mainly related to financial indicators, which were used in order to make a comparison of turnover made by the company before and during COVID-19 outbreak. Analysis of external environment was implemented by using PEST analysis and Porter`s five forces model. Internal analysis was conducted by visual representation of balanced scorecard strategy map. A questionnaire is another method, which was used in this work in order to show how the organization takes care about its existing employees, by asking them questions related to working atmosphere. The part dedicated to response to COVID-19 by the company is based on interview with the Country Director of the firm. Summary of the whole interview is provided in respective section of the thesis. Observational method was also applied in order to express personal recommendations and to share own attitude regarding strategic decisions the company is making.
Generally speaking, the analytical method is the major approach, which was used in this study. This implies data collection, analysis of this data and synthesis of major findings.
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1. Theoretical Part
1.1. Business Strategy
Nowadays, it is important for every company, regardless of field of activity, to have an appropriate business strategy. In fact, it is an action plan that must be very precisely developed by company's managers to achieve the goals set by company`s owners, such as maximizing profits, increasing liquidity of company's assets, establishing a leading position and brand awareness in the market. A business strategy must take into account many factors, such as competitors, conditions for business development in the country in which the company operates, and, obviously, firm`s own strengths and weaknesses.
It is very important to understand that in today's world it is not enough just to develop a business strategy, it is also essential to effectively allocate company`s resources in order to achieve maximum efficiency. Another significant element of business strategy implementation is a daily monitoring of current trends and changing consumer needs, which is normally done in order to promptly make appropriate adjustments to the company's strategy (Cadle et al., 2014).
Business strategy is directly related to understanding the field and industry, in which a company operates. Its development requires an in-depth analysis of the market for corresponding services and desired position of the company in this market. This plan should include such important elements as unique identification of the company from other similar operators in the market, which can allow it to differentiate itself from its competitors to such an extent that it can lead to greater customer satisfaction (Smith, 2016). Michael Porter once mentioned: “Strategy is about setting yourself apart from the competition. It’s not a matter of being better at what you do – it’s a matter of being different at what you do"(Porter, 1997, p. 17). To generate higher economic returns than competitors, a firm must clearly define its competitive advantage, which does not only make it special, but also creates a positive perception in the minds of consumers.
1.2. Strategic Planning
Strategic planning is associated with a detailed process of developing activities and deep analysis of the market, which involves analytical data of the company's performance. Based on the information received, relevant specialists of a company make decisions about the methods and forms of implementation of a plan in order to increase company's performance in the market and set its activities in the right direction for future development. This process
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is important for each firm, because it helps to adapt to the changing environment, in which it operates and helps to be prepared for unexpected market fluctuations (Flamholtz & Randle, 2015).
In addition, strategic planning promotes control and discipline among company`s staff. It establishes a clear working schedule for personnel, regulations and relevant rules that employees of a company must follow. It should also be noted that success of a company depends on the work of its staff. Thus, significant attention should be paid to correct selection of personnel and its motivation. The more qualified a staff, the better the performance of a company. To achieve this, a firm must conduct appropriate trainings for its employees as well as develop an effective motivation system (Flamholtz & Randle, 2015).
In order for a strategic planning to be effective, each company has to develop a sequence of steps, which can be pursued throughout the whole period of implementation. These steps have to go along with the goals, set by the leaders of the company and have to enable a proper transition from one stage of business life cycle to another with an emphasis on growth.
The following diagram illustrates a general view of the strategic planning process:
Figure 1: Strategic planning process
Source: The Strategic Planning Process: A Fundamental View. (Rao & Team, 2016), own construction.
Mission, objectives and targets Environmental scan
Strategy formulation
Implementation of the plan
Performance measurement
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Figure 1 depicts a flow of actions needed to be taken by each company in order to develop a proper strategic plan. It is based on 5 steps, which lead a company through the whole process dedicated to implementation of desired goal.
1. Mission, objectives and targets.
The first step is to identify company`s missions, objectives and targets, which are usually based on the values of a firm and its vision of the current situation on particular market. A company has to decide, in which direction it wants to go and what kind of impact it wants to do with its activities. Each company operating in the specific field has to identify its main goals, which it wants to achieve within a specific period of time. This first step is actually based on the idea, which has to differentiate a company from its competitors and attract a higher demand (Matrisian & Bogan, 2013). But an idea is just a beginning, further steps are absolutely necessary in the strategic planning process.
2. Environmental scan
Second step, and also one of the most important things that every company must do, is to scan its environment. Basically, this means that a company must analyze a market in which it operates, figuring out the strategies of its competitors. By understanding competitors' strategies, a company can come up with something unique that can differentiate it from other players on the market. A firm must also keep in mind underlying market trends that distinguish one particular market from another. If a company manages to find a major trend, then it has a clear understanding of what customers really want, which leads to increased recognition and awareness. Another important thing in this step is an assessment of the current state of a company. Thus, it is also important not only to find out how other companies are doing in this segment, but also to assess company`s own strengths and weaknesses (Matrisian & Bogan, 2013). By doing so, it is easier to understand, if a company at the current point of time with current available resources is capable of achieving an objective, set in the first step.
3. Strategy formulation
Based on company`s general mission, environment and internal capabilities, company can set an appropriate strategy for achievement of goals. By doing so, it is very important to develop a competitive advantage – a certain criteria, in which a company is better than other companies operating on the market (Rao & Team, 2016). Strategy formulation process is related to an idea of how to position a firm, which group of consumers to target, how to communicate a product, how to set appropriate prices and which place to choose to sell the product (Matrisian & Bogan, 2013). Through analysis done in the previous step, company
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is able to answer these questions and is ready to formulate its main strategy and direction for future development.
4. Implementation of the plan
Once the main strategy is identified, it is time to start the process of its implementation.
And it does not really matter, if a strategy is defined on one piece of paper or on 100-page document full of complicated tactics, the main issue here is to provide control, stability and ability of execution (Matrisian & Bogan, 2013). Therefore, the strategy hast to be clearly understandable to every single worker in the company. It also has to be assured that the strategy is realistic and attainable, so that all the planned activities can actually be performed.
Thus, the most essential thing here is to make all the departments aware of the plan, make sure that all resources are allocated efficiently, so that each worker understands personal role and knows how to perform an assigned task (Rao & Team, 2016). By implementing a plan, it is also necessary to motivate each employee by providing incentives for efficient fulfillment of obligations. If everything is under a strict control of managers, then the company flows smoothly towards achieving its final goal. The only exception might happen during some unforeseen events, such as crisis or market failure. The following issues are discussed further in the theoretical part.
5. Performance measurement
Finally, managers need to understand how to measure the overall performance of a company based on an established strategy. It is very important for a business to have a system that evaluates performance of various departments within an organization. In order to do this, strategic plan establishes intermediate and key performance indicators that help to track functionality of the most important areas of the business (Matrisian & Bogan, 2013). Proper assessment of these measures helps managers to understand if a company is moving towards direction of fulfillment of its strategy. Thus, key performance indicators help to clarify if there are any lagging areas in the business that need reassessment and subsequent adjustments for further improvement.
1.2.1. Crisis Management in Business
In order for every company to work effectively and achieve goals set by company's shareholders, there is a business planning process. A result of this process is preparation of strategic plan. On the basis of this plan a company carries out its work and achieves required results. Of course, such plans typically take into account risks that may affect
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implementation of the plan, for example, currency risks, political instability and other important points. Therefore, companies try to consider risks that they may face and provide measures necessary to hedge these risks. But, in the real world there are events that cannot be foreseen, they are usually called world crises or business disasters. In fact, none of the companies in the world is insured against the risk of such events and not a single plan, unfortunately, contains answers on what companies should do in case of business disasters.
There are several cases in the history of mankind, such as Great Depression of the 1930s, financial crises of the 1990s, Great Recession of 2008, which affected the entire global economy. Because of these global disasters, many countries have started to default. This, in turn, led to the bankruptcy of many companies operating in various sectors of the economy.
When it comes to business disasters, it is appropriate to mention the definition written by Jennifer and Samuel Elder: “A business disaster is any unplanned interruption of normal business functions or processes for an unacceptable period of time” (Elder & Elder, 2019, p.
2). In fact, all of the above events are inevitable disasters for which no one can prepare. The main thing is how the companies respond to these disasters? Some of them default, others manage to survive and still function on the market.
One of the main features of business disasters is the fact that they happen suddenly, their duration and consequences cannot be foreseen, so companies do not have much time to properly respond to them. Companies are trying in different ways to mitigate the damage from these so-called business disasters, and many of them simply decide to shut down in order to avoid a total default (Elder & Elder, 2019). There are companies that make a decision to maximize their position in the market, as a rule, these are companies that have the ability to quickly respond to rapidly changing trends, conduct daily monitoring of changes associated with the crisis, and implement strategic measures that help to keep a firm at its current positions. As a rule, there are few such companies in the world. These are companies that have departments of analysts and crisis managers who track changes affecting the company's operations and can offer an effective plan of action to overcome current difficulties. This action plan in the business world is commonly referred to as a
"Business Continuity Plan" (BCP). It is important to note that this plan is different from the strategic plan of the company mentioned above. This is a plan that contains a list of measures to reduce the company's losses, and its main goal is to keep the profitability of the company and the brand as a whole in the existing market.
Business continuity planning not only helps to cope with a crisis, but also improves organization`s chances for long-term sustainability in case of possible disasters occurring in
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the future (Elder & Elder, 2019). This process basically consists of 10 steps, which are recommended to each company facing crisis:
Step 1: Obtain Management Support. In order for BCP not to fail, it should get a full control and support of company`s management.
Step 2: Assemble a Planning Team. BCP should be developed by skillful analytics and crisis managers, who track changes on the market on a daily basis.
Step 3: Collect data. Before launching BCP, planning team must collect a lot of information about the current business activities of the company, its employees, customers and, most importantly, assess financial condition of the company, its existing losses and possibility of covering them through insurance.
Step 4: Evaluate operations. Every single area of company's activity must be carefully assessed to identify the most vulnerable processes in the company's work that require appropriate adjustments.
Step 5: Identify and Evaluate Risks. Identify potential threats that the company may face in the course of its activities, and assess how they may affect the initially established strategic plan and financial performance of the company.
Step 6: Determine Recovery Strategies. Step-by-step development of measures to normalize the company's work. It evaluates the possibilities of insurance policies and introduces various ways to optimize work processes.
Step 7: Organize and Document a Written Plan. A written document, which serves as a
“template” for a company in case some urgency happens. This is basically a structured set of steps, which is prepared in a written form in order to know how to deal with tough for business situations.
Step 8: Communicate the Plan. Make sure that everybody in the company is familiar with a plan and understands personal role in performing this plan. It is very important to inform the staff about the measures implemented by this plan, since the accuracy of implementation of the plan is in the area of responsibility of employees themselves.
Step 9: Test the Plan. It is not possible to know if the plan was worth it, without giving it a try. It is impossible to be 100% confident about success of the plan. However, it is always better to give it a try or even make a kind of simulation in order to understand if a plan can lead to improvement of current situation and to mitigation of already identified risks.
Step 10: Evaluate and Update the Plan. Business Continuity Planning should be checked on the daily basis in order to make necessary adjustments when they are needed (Elder &
Elder, 2019).
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1.3. External Analysis
Each firm in any industry is trying to set its primary focus on 3Cs: customers, competition and company itself (Shimizu, 2011). An analysis of company's external factors helps to develop a strategic decision that provides an algorithm for a company's interaction with external and internal environment in the short and long term, which allows maintaining its potential at the level necessary to achieve goals, and also helps to anticipate potential risks and open up new opportunities.
1.3.1. Macroeconomic Environment
One of the most fundamental things for any firm before setting an appropriate strategy lays upon analysis of macroeconomic environment. Macroeconomic environment takes into consideration a set of factors, which affect sustainability of a company and its operations on a particular market. The most important factors are economic conditions, political stability, social environment, changes in demography and technological advancements (Shimizu, 2011). All of these factors are tracked by analysts and specialists in companies in order to develop the most efficient strategy, which corresponds to goals of a firm and its vision. Any changes in the macro environment can, both positively and negatively, affect the existence of the business as a whole. Thus, a lot of time has to be dedicated to learning the industry from all the angles in order to make sure that a company is ready for sometimes unpredictable trends on the market. Most of the firms implement PEST analysis in order to make a proper assessment of macroeconomic environment.
PEST Analysis
PEST analysis is a very valuable tool, which is used in order to assess main external factors, that might have a significant impact on organization`s operations on market. This method is widely used by analysts in order to assess potential opportunities and risks of particular sectors of economy. As businesses have to immediately react to continuous changes in industry, it is very important for them to be able to understand market growth and downturns. PEST analysis implies a market research, which can help a firm to seize a perfect moment for actions and to anticipate market variabilities (Chapman, 2011). This in turn, allows companies to be ahead of their competitors, because they are able to make strategic plans based on predictions or current trends in the industry. Practically speaking, in order to make effective decisions, company has to track market amendments on the daily basis. Thus,
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many firms find it very important to undertake PEST analysis, because it enables them to have a clear vision of the situation on macroeconomic level. PEST analysis is especially useful for companies, which are considering entering a certain market. “The use of PEST, helps to break free of unconscious assumptions, and helps to effectively adapt to the realities of the new environment” (Halík, 2012, p. 14). From general perspective, this tool consists of 4 main factors or so-called areas of economy: political, economic, social and technological. And it is very difficult to claim, which of them is more or less important for a company (Halík, 2012). The thing is that even though 3 of these factors might work well, the remaining 1 can be so disruptive that it can spoil all the soaring plans of a company very quickly. That is why it is very important to consider all of the branches of economy in order to be sure that there are no complications to development of the business.
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Political
Political factor focuses on changes in regulations within a particular country, which are done by its authority on local, national and international levels (Chapman, 2011). These decisions have a major impact on the whole economy, and thus, on the industry, in which a company operates. Political aspects are very necessary to consider, since any restrictive measures taken by a government can threaten the business perspectives of a company. Not to mention that the changes in political regulations might affect costs a firm is bearing and customer demand on a product this firm produces. Primary policy areas, which might particularly affect doing business are tax and employment laws (Chapman, 2011). Taxes and government spending directly influence consumer behavior, spending tendency and employment (Chapman, 2011). In the crisis times, it is very difficult to underestimate a role of government. In EU it is a well-known practice that governments give subsidies to private organizations in order to help these firms to recover from financial problems. This might be also a great incentive for many businesses understanding that if an unforeseen event happens, they might expect a state support. Speaking of corporate taxation, it undoubtedly has an impact on company`s profitability. Another important thing to take into consideration is a competition law, because it clearly lets every business know what is allowed and what is forbidden to do in a certain industry (Chapman, 2011). Hence, each company before entering any market has to thoroughly familiarize itself with policies and regulations in a country it is planning to operate.
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Economic
Economic factor analyzes different economic issues, such as GDP, interest rates, exchange rates, inflation, levels of unemployment and their impact on doing business in particular country (Chapman, 2011).
It is very important to understand and track economic trends on particular market: whether a country is experiencing economic growth and majority of industries are prospering or a country is in a recession and development of business is getting slower due to high rates of unemployment, low confidence of investors and decrease of loans issued by banks, which are afraid that debtors may not be able to pay out their liabilities (Chapman, 2011).
Moreover, it is also very important to take into consideration that some sectors suffer more from recession than another. It is determined by elasticity of demand. For instance, demand for medicine and food is less elastic than for travelling or buying luxury goods. A nice proof of it is a current situation related to COVID-19. Travelling companies as well as airlines are being bankrupted one after another due to the fact that travelling is not a primary need of a human being, whereas food stuff and medicine are primary goods, without which a person cannot exist. Therefore, it is essential to consider a potential influence of recessions and economic booms on an industry, where a company operates.
Employment level is another major aspect to take into account (Chapman, 2011). With high levels of unemployment in a region one might understand that there is not a high demand on workers there. On the other hand, it is possible to come to conclusion that high rates of unemployment lead lo low prices of the workers, thus, there is an opportunity to have an advantage of a cheap labor force.
Inflation is undoubtedly one of the aspects that affects the whole business activity from the global perspective, because significant increase in prices may lead to significant losses, which a company would have never expected (Chapman, 2011).
Exchange rate in a country is also a very important economic factor, which determines success of a company working internationally (Halík, 2012). Any deviations in exchange rate may lead to unexpected losses. Thus, it is extremely recommended for many companies to insure themselves from such risks by means of hedging currency fluctuations.
Hence, economic factors give a clear picture of the market in which the company exists, and at the same time monitoring and analysis of the above-mentioned indicators are decisive for achieving the company's financial performance.
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Social
Social factors are most often related to demographic changes of population, changes in values, habits, attitudes, lifestyles and cultural diversity (Chapman, 2011). Constant analysis of these factors enables a company to determine the needs of customers regarding its products in a specific period of time. And even though a product that a company is producing might not correspond to a certain segment`s needs, by doing proper analysis of a market, company can make adjustments, which can lead to better customer satisfaction and consequent expansion. For a company working internationally it should be clearly understandable that particular product might evoke absolutely different emotions among customers from different countries. One of the great examples would be expansion of IKEA to India, where analysts came to conclusion that it was necessary to remove its signature meatballs, which are made of pork and beef, from menu in café in order to satisfy needs of local customers (Lifestyle Desk, 2018).
Another important criterion to be considered is population growth, since it has a direct impact on the size of the market a company potentially is trying to target (Chapman, 2011).
One of the most discussed and threatening problems nowadays is an aging population in most of the countries of the world. Average age of people in the world is getting higher and higher every single year, which can have a negative impact on doing business, due to low spending mentality of elderly people (Jones, 2020). Therefore, a company must take this factor into account in its strategic plans and develop a product that can meet the needs of a specific target group.
Moreover, it is very essential for each company to properly take care of its workers.
Nowadays this notion is called corporate social responsibility, which basically means providing employees of a company with acceptable and safe conditions for work. Besides that, companies also have to make sure that there is an appropriate degree of personnel involvement in solving internal management tasks.
Cultural differentiations should be also considered (Chapman, 2011). What is appropriate in one country, is unacceptable in another. A well-known social psychologist Gert Hofstede once mentioned: “Culture – is a collective programming of the mind distinguishing the members of one group or category of people from others” (Hofstede, 1980, p.21). Thus, while planning expansion to particular country, it is necessary to get acquainted with its culture, traditions and beliefs in order to match local needs.
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• Technological
Throughout the years, technological advancements have gained a great appreciation among businesses and are currently considered to be a very important factor that has to be analyzed before entering a certain market (Chapman, 2011). Technological changes may have a significant impact on development of the business, since they influence quality, pace and efficiency of completed work. Technologies help company to quicker analyze the data, produce more qualitative goods and to boost its general performance. Moreover, introduction of technologies may lead to opening new opportunities and new markets for a company, which brings uniqueness to a product it is going to offer to customers. Inventions are also considered as a source of competitive advantage against other companies on the market (Chapman, 2011). Human capital is considered one of the most impactful factors, when it comes to company`s decision making, since intelligent specialists can come up with unique ideas, which can make a company more competitive on a market. Accordingly, state policy has a huge role in the development and quality of education. Furthermore, such things like quality and speed of internet, transportation should be also taken into account, when considering a certain market, because they are incremental details, which make company`s performance more efficient (Halík, 2012).
Thus, technological factor has a great potential for development of a company and contributes to achievement of primary goals of a firm.
1.3.2. Microeconomic Environment
The whole economy consists of variety of markets, in which multiple actors interact in order to get the best benefits for each other. Whereas macroeconomic environment considers an economy from the broad perspective, microeconomic environment puts emphasis on particular market for specific product or service (Schwartz, 2010). It is very important to understand that all the firms are a part of a certain industry. In this industry all organizations compete against each other for market share, since they are offering similar types of products to a customer. In order to be successful in a market full of sharks, it is fundamental to carry out microeconomic analysis, because they can help to define a typical customer, to check reliability of suppliers and to understand potential threat from competitors. One of the best ways to make this analysis is to use a famous marketing tool created by professor Michael Porter – Porter`s Five Forces Model.
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Porter`s Five Forces Model
Porter`s model of competitive forces is a widely used marketing tool in order to examine the main microeconomic factors, which affect activities of a company. A performance of an organization heavily depends on a strategic approach that is usually determined by structure of a market in which this organization is operating (Weilkiens, 2011). Thus, the main idea of the framework is to consider strong and weak points of already existing and potentially developed external processes that influence company`s competitive strategy on a market. A figure 2 represents 5 most impactful forces, which individually affect viability of a business in particular sector of an economy.
Figure 2: Porter`s Five Forces Model
Source: OCEB Certification Guide: Business Process Management - Fundamental Level.
(Weilkiens, 2011), own construction
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Rivalry among competitors.
Industry rivalry is the most important factor in the model. Therefore, it is represented in the center of a diagram. This aspect takes into consideration competitiveness on a market.
The main issue of rivalry is how hard it is for a firm to compete against other firms in an Rivalry
among competitors
Potential competitors
Consumers / Buyers
Substitute products Suppliers
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industry (OpenStax, 2019). It is very important to consider the fact, whether there is a perfect competition on a market or there is a monopoly. In second case it would be very difficult to resist a dominance of the most powerful player on a market. In case of perfect competition, there is a chance for firms to take over a market by doing innovations, by making promotions, having strong advertisement, creating products of a better quality than others: there is a room for development and desire of being greater than others. Moreover, perfect competition not only has advantages for firms, but also for consumers, who can enjoy cheaper prices, since companies compete from the perspective of price attractiveness. On a market, where everyone is equal it is extremely crucial for a firm to develop its competitive advantage – unique feature, which distinguishes it from other firms in an industry. It can be access to natural resources, great location, human capital, low manufacturing costs, access to more advanced technologies, etc. By having competitive advantage, a company is able to excel others in a certain aspect, which might lead to better profits. Therefore, it is very important to analyze competition on a market in order to have an understanding of a market share that is possible to be gained by pursuing an already existing goal (OpenStax, 2019).
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Potential competitors
One thing is to consider already existing competitors, but another thing is to predict potential opponents. This market force analyzes easiness of entering a market. It helps to understand, whether there is a threat of potential newcomers to an industry, who also pretend to their market share and thus, are ready to take away their “piece of cake”. As a matter of fact, if a certain industry tends to be fast growing and has potential to bring high profits, it attracts more and more companies desired to have an advantage of it (OpenStax, 2019). This might be firms, which just start their professional activities, or even already existing firms from another sectors of economy, which already have their own customer base. It is worth mentioning, that industries differentiate in easiness of entering them (OpenStax, 2019). That is because there are different barriers to entry in various sectors. It is much easier to open a café or flower shop than to open own airlines or start managing a bank. Why? Because of low capital requirement. The easier the effort for entering a market, the more competition there might be faced. There are higher barriers to entry in sectors that are difficult to enter, since they may require very unique skills or high investment. Another barrier to entry might be a strong brand loyalty (OpenStax, 2019). If a company has loyal customers, who do not tend to switch among brands, it practically protects itself from new companies in an industry,
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since it relies on an already existing customer base. This in turn, makes it more challenging for new market entrants, because they already understand that they are restricted to a certain extent in terms of market share.
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Substitute products
Another very considerable factor is uniqueness of a product. This factor tries to examine whether there are goods or services, which can be perceived by customers as substitutes of other products on the market. The very important thing here is to distinguish between rival and substitute products. Rival products are discussed in the first market force dedicated to competition on the market. When it comes to substitutes, these products do not specifically compete with existing products on a market, they just can steal attention of potential customers (OpenStax, 2019). They are “hidden competitors”. For example, in a restaurant business, one might consider other restaurants in the operating area, or other restaurants that focus on a specific cuisine as direct competitors. However, one should also take into account the fact, that customers might just go to a local grocery shop to buy some food and cook it at home. This grocery shop is an indirect competitor and is a potential substitute to a service one is offering at his or her restaurant. Hence, successful business leader does not only have to focus on direct competitors of an organization, but also has to track indirect competitors that offer services or goods, which might substitute a certain activity offered by his or her firm from seemingly different market.
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Supplier power
Another impactful factor is supplier power. This factor is very crucial, because only successful companies on a market manage to have reliable suppliers, which can provide raw materials, inventories, details, products of a good quality (OpenStax, 2019). It is very important not to underestimate the role of suppliers, because exactly they can be providers of extremely valuable resource, which brings the already mentioned competitive advantage.
It is worth mentioning that existence of suppliers also depends on complexity of a market.
When it comes to technologies, there are too many suppliers of complicated details or chips.
But when taking suppliers of food, textile or medical stuff into consideration, it is obvious that there is a large range of suppliers offering these services. Thus, if a company is producing a really unique product, which does not only require human capital and ability to
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complete efficient work, but also supply of valuable materials, it should analyze the market from perspective of existence of reliable suppliers.
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Buyer power
And of course, last, but not the least factor is a buyer. Buyer or customer is a person, who purchases a product. Thus, it is very important to satisfy needs of this person, in order to gain success on a market. If a company does not manage to provide a product that corresponds to customer`s expectations, then all of the above-mentioned analyses are not worth carrying out. CEO of Amazon Jeff Bezos once mentioned: “We see our customers as invited guests to a party, and we are the hosts. It is our job every day to make every important aspect of the customer experience a little bit better” (Eikenberry, 2010. p.2). Considering the fact that customer is a primary source of demand and that only customer`s existence motivates firms to produce and to innovate by creating a unique offer, customer has to be treated as one of the most important variables. Hence, companies have to pay a special attention to analyze customer tendencies in order to be successful on a market. Moreover, it is very essential to understand how customers make their decisions while purchasing a certain good or service. It is worth mentioning that decision-making differentiates according to a type of product. When it comes to rarely bought consumer goods and services, such as house, car or a family trip to Maldives, the decision is usually made in a very considerate way, since such purchases are done on a rare basis and require rationality in the mindset of a customer. But when it comes to regularly purchased consumer goods, customer does not really take too much time to decide, which toothpaste to buy or which kind of cheese to eat today. These types of products do not necessarily require a very balanced decision, since customer can just accept being wrong in case of unsuccessful purchase (Bazerman, 2001).
Hence, analysis of customer behavior and tendencies has to be dedicated to very well- qualified marketers and analysts, who are able to develop a great marketing strategy in order to attract a bigger customer base. And then, after gathering a pool of customers, it is crucial to offer them the best quality on a market, based on analysis of above-mentioned forces described by professor Michael Porter.
1.4. Internal Analysis
As mentioned earlier, each company sets a primary focus on 3Cs: customers, competition and company itself (Shimizu, 2011). The customer and competition perspectives are
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described in details in external analysis part, whereas a company`s own perspective is represented in this part, which is dedicated to internal analysis. The aim of internal analysis is to take company`s internal processes into consideration. It is related to decision-making process of company`s board of directors, efficiency of employees, satisfactory working environment, role splitting in different departments and working as a cohesive unit on achieving particular goal. Strategic concepts may not only emerge from the opportunities determined in external analysis, but can also be derived based on analysis of capacity and capabilities of a company as a whole. Generally speaking, internal analysis helps to understand what assets a company possesses and which use it can make of them. These assets can be tangible assets, such as raw materials, building, cars, computers, as well as intangible assets, such as patents and software (Kaplan & Norton, 1992). But it is worth mentioning that it really does not matter, which assets a company owns, if it does not have smart people in charge of it. Thus, one of the most impactful assets of a company is considered to be human capital (Kaplan & Norton, 1992). Company`s success therefore depends on decisions of its managers and on efficiency of its workers – things, which are a primary focus of internal analysis.
Balanced Scorecard
One of the best methods to make an internal analysis of a firm is to use a balanced scorecard. This tool was introduced back in 1992 by professors Robert Kaplan and David Norton. As a matter of fact, a couple of decades ago, many analysts were sticking to financial indicators that did not really give them a full information about internal processes of a company (Kaplan & Norton, 1992). Therefore, it was possible to see if a company generates profit or losses, but the main reasons and connection were not possible to be identified. That is why 2 authors came up with an idea of creating a balanced scorecard.
Currently it is one of the best frameworks to assess internal performance of a company.
First and foremost, it helps to analyze strategic management of a firm and to find links between particular indicators and strategy of a company. Balanced scorecard is constructed on cause-and-effect linkages, which lead to achievement of particular goal (Kaplan &
Norton, 1992).
Secondly, it is a great method to make a proper evaluation of intangible assets` efficiency.
It was the case of previous centuries, when tangible assets used to play the most crucial role in success of a company. But not anymore. Nowadays, intangible assets tend to be a source
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of competitive advantage. Evidently, value generation techniques have transitioned from management of tangible assets to strategies that generate intangible assets of an enterprise and make a proper deployment of them (Kaplan & Norton, 1992). These new strategies are based on relationships with customers, efficient operating processes, proper usage of technologies, organizational climate, highly innovative products and professional competence of work force (Kaplan & Norton, 1992).
Everything is closely interrelated and in order to get to the main goal, it is very important to ensure a multistage connection between different activities in a company. For instance, let`s take the following linkage as a proof of my point:
• A company takes a random worker and discusses with him the points or activities, which belong to his area of responsibility, in which he feels uncomfortable (interviews with employees). It is very important to keep a close contact with workers in order to show that company cares.
• By identifying week points, company sets a training for this worker in order to improve efficiency and correctness of performance.
• By making this, a company improves quality of its service, which leads to better customer satisfaction.
• Better customer satisfaction leads to bigger number of loyal customers, which can share information about a company with friends and relatives.
• Increased customer loyalty and larger number of customers lead to higher revenues.
Thus, intangible assets do not create value by themselves, they usually connect with other intangible or tangible assets in order to increase a value of a company for consumers as well as shareholders and in order to generate higher revenues. If by tangible assets, results are evident, since they are represented in financial statements of a company, by intangible assets there has to be another framework, which is able to track effectiveness of above-mentioned criteria. This is basically a logic behind a balanced scorecard. The above-represented map describes this tool more specifically.
24 Figure 3: Balanced Scorecard Strategy Map
Source: Transforming the balanced scorecard from performance measurement to strategic management. (Kaplan & Norton, 1992), own construction.
As it is visible from figure 3, balanced scorecard consists of circle of activities.
Performance of each activity impacts performance of others. The tool provides a structure for organizing strategic objectives of a company based on 4 perspectives, which are financial, customer based, internal business processes, and learning and growth. This strategy map shows the cause-and-effect linkages between these 4 perspectives, which are aligned with company`s main goals (Kaplan & Norton, 1992).
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Learning and growth
Starting from the bottom of a map, the first aspect is a learning & growth perspective. This is a base of any strategy. In learning and growth perspective managers of a company try to identify skills and capabilities of each individual worker and try to maintain such an organizational environment, which is required to support company`s strategy (Kaplan &
Norton, 1992). This perspective is mostly related to employees and investing in human capital. The main idea of it is the fact that it is an ordinary employee, who completes a work, necessary to fulfill a desired goal set by a company.
Each person to a certain extent contributes to success or failure of a company. Therefore, it is in a firm`s highest interest to provide a worker with such great conditions and preparation, that he or she completes an assigned task in an excellent way. Everything starts
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with a training. Company has to provide a good training and base of knowledge to an employee, so that the person feels confident in his or her area of responsibility. Moreover, it is a sign of a great company, when trainings are done not only to newcomers, but are also provided on a regular basis to already experienced workers. This helps to maintain a level of competence and boosts performance of employees.
Another thing, which is also a fundamental part of learning and growth perspective is motivation of workers. Company has to regularly offer competitions with reward, bonuses and other motivational things to its worker. This leads to better efficiency and keeps employees focused on particular task (Kaplan & Norton, 1992)..
Hence, learning and growth perspective tries to put the emphasis on a worker, as the most incremental detail in a system. Investing in human capital makes a great contribution to the further described perspectives.
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Internal process
Internal process perspective is related to operation management processes. It enables a company to determine the tactics and methods, which are used in order to create a value for customers, and sets up a proper working environment, which guarantees efficient production of each working unit. Internal process perspective is divided into 4 high-level processes:
a) Innovation processes. Create a franchise by developing innovative goods and services and expanding to new industries and consumer segments by implementing creative and attractive ideas (Kaplan & Norton, 1992).
b) Customer management processes. Increase the value of already existing customers by building even stronger and more reliable relationships with them (Kaplan &
Norton, 1992).
c) Operations and logistics processes. Proper adjustments in supply-chain management, utilization of assets and management of capital resources contribute to achievement of operational excellence (Kaplan & Norton, 1992).
d) Regulatory & environmental processes. Assuring favorable corporate relations with suppliers, customers, creditors, shareholders and society in general. Strongly related to CSR activities (Kaplan & Norton, 1992).
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•
Customer
As explained in previous subchapter, it is very important for each company to create the best value as possible for a customer. Customer - is basically a core for firm`s activities, since any organization makes decisions based on customer needs, beliefs and demand. Each company has to offer a unique mix of price, quality, image and awareness of a product to a customer. And this is the role of this perspective. It explains how a business differentiates itself from competition in order to retain and deepen relationships with specific customer base. These relationships are built on the value of a product. Companies can propose a value to a customer in different ways (Kaplan & Norton, 1992).
First of all, they can achieve operational excellence. These are companies, that can offer the best quality on a market, the most favorable prices, the biggest range of portfolio or the fastest delivery time (Kaplan & Norton, 1992).
Secondly, they can pursue a strategy of customer intimacy. For such firms it is crucial to build perfect relationships with customers through exceptional service and range of the most suitable solutions based on individual needs (Kaplan & Norton, 1992).
Thirdly, they can also select a product leadership strategy, which is based on performance of a service and main features of a product (Kaplan & Norton, 1992).
Either of these strategies puts the emphasis on customer`s importance to a company. This is usually achieved through different advertising tactics aimed at boosting brand awareness, image and perception of a product in mindsets of customers.
• Financial
Each company seeks to do great financially. Financial perspective is not surprisingly at the top of the framework. Three perspectives mentioned above simultaneously lead to ultimate goal of generating profits. Each step thought over by company`s management is done in order to succeed finance-wise, in order to get a greater market share and in order to convince shareholders to make more capital investments in the future. Organizations normally increase their financial value through two methods: revenue growth and productivity.
Revenue growth strategy implies building a franchise through new revenue sources. These new sources might arise from expanding to new markets, introducing new products or attracting new customers (Kaplan & Norton, 1992). This strategy also aims to increase customer value by the means described in previous section about customer perspective.
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When it comes to productivity strategy, a firm has to improve a cost structure (Kaplan &
Norton, 1992). This is usually done by reducing manufacturing, logistics costs or even laying off unnecessary or inefficient workers in order to cut off expenses. A firm can also improve asset utilization. For instance, come up with more efficient techniques necessary for a certain task or to create a perfect sample, which will be followed by other workers in order to improve the lead time (Kaplan & Norton, 1992).
Each of these strategies eventually leads to greater financial results, independently of what a company has improved: increased profits or managed to cut expenses. The main goal of this perspective is to achieve such a financial performance, which can appreciate shareholders` value (Kaplan & Norton, 1992).
Hence, balanced scorecard is a very valuable tool for management of internal processes within a company. It does not only provide a command-and-control basis for an organization, but also helps to find valuable linkages between different working units within an entity (Kaplan & Norton, 1992).
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2. Practical Part
2.1. Introduction of the Company
The company ABC was founded in 1965 in Switzerland. With a long history of establishment as an accommodation provider in the European market, the company ABC is currently a leading provider of holiday homes and apartments all across the world. The head office of the firm is located in Glattbrugg, Switzerland. It is a wholly owned subsidiary, which is a part of large corporation of holiday home providers. In the tourism industry, this firm was one of the first to implement an information system that connects all of the agencies and allows bookings. The company ABC is one of the first firms, which started to offer its portfolio to customers online. Bookings online have been possible since 1999. Nowadays, the company serves as an online portal for reservation of accommodations in many countries of the world (Internal Documents of the company ABC).
The main aim of the company is to provide holiday homes and apartments to customers from different parts of the world. The vision of the firm is: “we are the best partner to market your vacation homes successfully and individually manage on spot, offering a carefree rental of the properties”. According to CEO of the firm, the main mission is “to stand for individual, personally inspected holiday homes and apartments and offer above-average service”
(Internal Documents of the company ABC). One important note about the firm`s activities, is that it normally rents for a short period of time, which is not more than 28 days. This strategy is very valuable, since the company minimizes the risks of depreciation of its properties, which would be much higher if the customers booked for the periods of several months or years.
In order to provide such type of service, a company ABC concludes the contracts with owners of the properties all across the world and offers respective accommodations to its customers through media resources, such as own website and different social networks, like Facebook, Instagram, etc. Thus, the company does not own properties itself, but just acts as an intermediary between owner and customer. To provide a satisfactory service on spot, so when the customer arrives, company ABC has the local service offices, which are responsible for preparation of accommodations and handling over the keys to the guests.
Thus, it has to be clearly emphasized, that company does not manage logistics, or so-called transfers of its guest. Customers take care of the modes of travelling on their own. For example, if customer`s flight is canceled due to COVID-19, the company does not take any responsibility for that. With the unique sales point of having local presence, expertise and
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personal support, the company ABC is operating on the market of accommodation providers for already more than 50 years (Internal Documents of the company ABC).
2.1.1. Company ABC in Numbers
This part of the work is designed to show the company ABC in numbers. Here the number of offices and the number of employees of the firm are going to be represented in order to show the complexity of the whole business.
Firstly, it is necessary to mention the total number of offices, the company ABC has.
Currently the number of actively functionable offices of the firm ABC accounts to 193.
These offices are located in 20 countries of the world. Figure 4 represents the offices of the company ABC according to the countries of their location.
Figure 4: Number of offices of the company ABC according to countries (2021)
Source: (Internal Documents of the company ABC), own construction
According to the above-represented graph, the majority of offices is located in France, where there are 52 offices. In the homeland of the company ABC, Switzerland, there are 51 offices, including the head office in Glattbrugg. On the third spot is Spain with 37 offices.
Moreover, a large number is represented in Italy, where there are 15 enterprises.
Generally, there are 2 types of offices: sales offices and local service offices. There is a total of 75 sales offices of the company ABC. These offices have the main departments within the organization, such as financial, HR, marketing, review team and reservations department. One of the biggest sales offices of the company is located in Prague. There the
52 51
37
15
6 5 5 4 3 2 2 2 2 1 1 1 1 1 1 1 0
10 20 30 40 50 60
