, I,~ , It h '

Strategic Alliances
in the Hotel Industry

Although strategic alliances have their pitfalls, a well-conceived alliance can offer both
partners competitive advantages that they could not attain separately

by Chekitan S. Dev
and Saul Klein
STRATEGIC ALLIANCES are
becoming an important form of
business activity m many indus-
tries, particularly m wew of the
reahzatlon th at travel and tourism
companms are competing on a
global field In the words of one
analyst, globahzation mandates
alhances 1 In the travel industry,
which IS global by definltmn, we
are witnessing the formation of
global alliances between firms of
~Kemchl Ohmae, The Borderless World
Power and Strategy ~n the Interhnked Economy
(New York Harper Colhns, 1990)
different types (e g , hotel firms
with alrhnes) as well as by similar
businesses (e g , Marriott and New
Otanl) In this article, we will
elaborate on the development of
such alliances m the hotel industry
and offer some lmphcatlons for
hospitality managers
Industry Environment
The key to prosperity in the
current hotel-industry environ-
ment is growth With the location-
specific nature of the hotel indus-
try, growth translates into greater
market coverage, increased wslbi1-
© 1993, Cornell University
lty,and greater opportunltms for
cross-destination m arket i ng --in
addition to the benefits of econo-
mms of scale and scope Hotel
companies continue to seek new
ways to increase their market
share in changing markets
A frequent contributor to The
Quarterly, C h e k i t a n S. Dev,
Ph D , ~s an assistant professor of
strategic marketing at Cornell
Unwers~ty's School of Hotel A d m m -
tstratton S a u l Klein, Ph D , ~s an
assistant professor of marketing
and tnternatmnal business at
Northeastern Unwers~ty's College of
Busmess A d m m t s t r a t w n

42 THE CORNELL H.R.A. QUARTERLY

The first factor dmwng this push
for expansion is globahzatlon In
the United States, globahzatlon is
manifested as an increase in the
number of customers from over-
seas 2 and greater acqmsltlon of
domestic hotels by international
investors Recent examples include
the acqulsltmn of Hilton Interna-
tmnal by Ladbroke (Umted King-
dom), Inter-Continental by Selbu
Salson (Japan), Westm by Aolo
(Japan), Ramada Internatmnal by
World (Hong Kong), and Motel 6 by
Groupe Accor (France) Regardless
of the location or ownership of a
company, there is pressure on all
hotel companies to become signifi-
cant players in the global hotel
business For example, Choice
Hotels' CEO Robert Hazard has
lndmated that global expansion is
the ticket to Choice's future
Another strong drlwng force for
strategic alhances is heavy compe-
tition and low profitablhty Despite
the growth m demand of the 1980s,
supply expanded even faster,
leawng hotel occupancy rates to
dechne from 71 percent in 1979 to
61 percent in 1991 3 (The estimated
break-even point is in the mld-
60s 4) Driven by a need to gam
greater market presence and
market share, hotel companies
have continued to acqmre, convert,
and build new propertms
Although there has been consid-
erable consohdatlon m recent
years, the hotel industry remains
relatively fragmented In contrast
to the alrhne industry, where the
top five companies control over 80
percent of domestic capacity, the
top 12 hotel companies account for
just over 50 percent of capacity 5
2PKF International, annual report, 1991
~Pauhne YoshlhashL "Hotel Recovery Will Be
a Late Arrival," Wall Street Journal, July 27,
1992, p B1
4Faye Rme, "Where the Bargains Are m
Hotels," Fortune, April 20, 1992, pp 91-98
°Michael S Morgan, Chekltan S Dev, and
Frank S Chamg, "Serwce Market Structure and
Strateguc Groups," Cornell Umverslty School of
Hotel Admmmtratmn, 1992, p 47
F E B R U A R Y 1993
Companms operating in a frag-
mented environment must seek
growth and counter the
dlseconomles of scale associated
with small market shares 6
While the pressure for expan-
stun mounts, the lndustry's llhqmd-
lty creates problems in achlewng
expansion With the unfavorable
treatment being accorded to real
estate by U S tax law and the
d~smal performance of most
investors' hotel portfohos, the pool
of capital available for hotel
development has been severely
restricted The shortage of funds is
not expected to ease in the near
future, since lenders have been
slow to return to mal~ng loans to
the hotel developers
Routes to Expansion
Hotel companies can expand in
different ways They can grow
through mternal, incremental
means, but the process is slow and
ties up considerable capital m
facflltms Moreover, incremental
expansmn offers a company only a
hmlted ablhty to respond quickly to
either customer demand or com-
petitive pressure Compames can
also grow by acquls~tlon, a popular
route in recent years Ownership of
several brands, however, may be
unwieldy and compromise an
organlzatmn's ablhty to respond to
changing market cond~tlons
Choice Hotels, which once offered a
clearly diversified portfoho of hotel
brands, has been having indiges-
tion ever since it gobbled up
Econolodge, Rodeway, and Frmnd-
ship Customers are confused
about the pomtmmng of the brands,
and franchisees are concerned
about the impact of having co-
owned brands on adjacent corners
Likewise, franchisees of Ramada,
Howard Johnson, and Days Inns
are not certain that their best
6Michael E Porter, Competztwe Strategy
Techmques for Analyztng Industmes and
Competitors (New York Free Press, 1980)
43
interests are being served in the
wake of Hospltahty Franchise
Systems' purchase of those brands
Moreover, recent acquisitions have
not been free of legal entanglement
Bass Brothers has filed smt against
Promus Corporation for unloading
what Bass says is a non-performing
asset m the form of Hohday Inn
Worldwide In another case, SAS
reversed its partial purchase of
Inter-Continental for financial
reasons and because the two com-
panies' operational procedures and
corporate cultures d~d not mix well
We think it ~s fair to conclude
that the aggresslve-acqmsltlon
strategy to grow market share has
had mixed results The challenge
for hotel chains, then, is to find a
way to maximize market coverage,
while also achlewng economies of
scale and scope and minimizing
capital investment
One such methodology is to form
alhances by whmh firms develop
long-term relationships for specific
purposes Hawng full control of an
asset does not necessarily mean it
is being managed ideally In fact,
performance may be enhanced
when one company compensates
for another firm's weak points
Advocates of alliances argue that
acting independently is usually
more difficult, expensive, and
time-consuming than acting col-
laboratlvely 7 To date, httle system-
at~c analysis of the benefits and
risks of such collaboration has been
conducted, and the particular
characteristics of the hotel industry
with regard to alhances have not
been assessed
Types of Alliances
Alhances are relatmnshlps between
independent parties that agree to
cooperate but still retain their
separate identities Still uncom-
mon, alhances between hotel
companms are begunmng to
7Ohmae, p 135

emerge There has been a longer
history of alhances between hotel
compames and other firms in the
travel industry, such as mrhnes
and car-rental compames Alli-
ances are akin to interpersonal
relatmnshlps and may be catego-
rized accordingly
O n e - n i g h t s t a n d s . There are
short-term, opportunistic relation-
ships th at have a hmlted focus--
essentmlly, one-mght stands
While each party receives some
satlsfactmn through a clearly
defined set of expectations, there is
no commitment to the relatmnshlp
Hotels have engaged in hmlted
promotmns w~th other businesses,
including cross-advertising and
joint coupons Between hotel
companies, one example of an
opportumstlc alhance ~s the cross-
selhng agreement between Radls-
son Hotels and Britain's
Edwardmn Hotels
Affairs. A second category is
medmm-term, tactical relation-
ships, similar to affmrs or llmsons
While such relationships are
characterized by some degree of
sharing and are clearly deeper
than the short-term relationships,
there remains a strong sense of
self-protection among the partners,
and the alhances' durations are
hmlted Hotels partmlpate m such
alhances with mrhnes m their
frequent-flyer programs Between
hotel compames, an example of a
tactical alhance is the marketlng-
servmes agreement between
Marriott and New Otam
I do. The third alhance category
is long-term, strategic relatmn-
shzps, the equivalent of marriages
The parties m these arrangements
clearly expect continuity and
mutual commitment The level of
sharmg is high, and these relatzon-
ships offer considerable opportu-
nity for synergy Strategm relation-
shzps are becoming common m
mdustrms other than hospltahty,
and hotel compames are beginning
to follow suit Competing computer
grants IBM and Apple have formed
an alhance, as have General
Motors and Toyota and SAS and
Continental Airlines In m any
cases, such alhances are cemented
by eqmty cross-znvestments
Alhances need not be confined to
two partms Sixteen of the largest
hotel chains m the United States,
for example, are cooperatzng m
THISCO,The Hotel Industry Switch
Company THISCOinvolves a
computer product tamed at glwng
travel agents more-direct access to
member compames' databases of
more than four mflhon rooms
worldwide
The three types of alhances
represent a hmrarchy, m the sense
that relatmnshlps can progress
from a simple level to a more-
44
involved arrangement Reversion to
a lower level, however, is rare
Problems arme when the parties
disagree as to what type of alhance
they are consummating
Only the strategm alhance offers
companies the ablhty to respond to
the pressures of global competition
and llhquldlty Potential benefits
include enhanced market coverage,
both geographmally and by seg-
ment, and greater economies of
scale in advertising, sales, dlstmbu-
tlon, and purchasing, and comple-
mentary strengths in operations
and marketing
Benefits from alhances may be
reflected on the cost or revenue side
of a firm's business Alliances
intended to minimize costs mm to
enhance efficmncy by improving
operations On the revenue side,
alhances aim to increase effective-
ness by attracting more, higher-
paying customers We expect that
strategic alhances will become the
market-expansion strategy of choice
in the hotel industry
In theory, alhances allow firms
to focus on their core strengths and
offer a stronger product hne with
better market coverage In practme,
however, alhances are character-
lzed by high rates of failure 8 An
alhance-based expansmn strategy
c a m e s r~sks, as divorce rates are
high and the pitfalls are many (as
explained in the next sectmn)
Partner Selection
Choosing the mght partner is a
cmtlcal part of making an alhance
work Some winters argue that
alhances between strong and weak
partners rarely work, they fail to
prowde the missing attributes nec-
essary for growth, and they lead to
medmcre performance 9
~Mmhael Hergert and Delgan Morns, "Trends
m Internatmnal Collaborative Agreements," m
Cooperattve Strategtes zn International Business,
eds, F J Contractor and P Lorange (Lexington,
MA Lexington Books, 1988)
"Joel Bleeke and David Ernst, "The Way to
Wm Cross-Border Alhances," Harvard Buszne~
Revtew, November-December 1991
THE CORNELL H.R A. Q U A R T E R L Y

Ascertammg that the partners
offer complementary strengths is
the key matter, but care must also
be taken to find compames w~th
compatible objectives and styles
Alhances rinse the poss~bfllty of
conflict between the partners and
the risks of dependence on one
another They also bring about
new problems m performance
evaluatmn It ~s often difficult to
estabhsh whose performance
should be measured, to agree on
the appropriate time schedule for
evaluatmn, and to make trade-offs
between partners' d~vergent
mterests
Alhances mvariably create
tensmn Would-be partners should
be aware of the sources of that
tensmn, ~ts potentml negative
consequences, and possible coping
strategies for deahng w~th the
unavoidable by-products of alh-
ances lo Socm-cultural forces can
create differences m perceptmn and
mterpretatmn of phenomena The
chmf reason for the divorce of
Inter-Continental and SAS Hotels
was a poor fit of corporate culture
SAS is an entrepreneurial-style
company with a troy executive staff
and a flat orgamzatmnal pyramid
~°Arwnd Parkhe, "Interfirm Diversity,
Orgamzatmnal Learmng, and Longewty m
Global Strategic Alhances," Journal of
Internattonal Bustne~ Studtes, 22, No 4 (1991),
pp 579 601
FEBRUARY 1993
environments Selecting a compat-
ible partner at one point m time is
no guarantee that this will also be
true m the future Hilton Hotels
(Umted States) and Hilton Interna-
tlonal worked together on sales and
advertising efforts, but now the
international company is suing the
U S firm for going overseas under
the "Conrad International" brand
(despite the fact that Hilton
Internatmnal does business in the
U S as Vista) Flexible partnership
structures must be developed,
either through a commitment to
lncrementahsm or by building m
extra slack at the
~~~
Declsmn-makmg . outset On a
authority is left ~ . ~ o functional level,
with the property , ~ ~ t ~ f r , , b e c a u s e different
GM as much as ~ --~s ~ _ ~ - m a n a g e m e n t
possible On the i ~ ~/¢9~ ~ practmes and
other hand, Inter- ~'~, [ ~ ] ~ ~ ~ styles and
Continental has a
deep organlza-
~-~'~(,.~) different organl-
~ ~ ' ~ y ] zatlonal struc-
tmnal pyramid, ~ ~ - ~ / ~ , ~ tures exist,
with several ~'-~~____~-~ authority and
layers of executwe ~ ~ ~ . ~ / ~ levels of depen-
staff Declsmns _~x ~ " ~ j ) ~ deuce must be
are generally ~ ~ 1 ~ [ t = = clarified An
made centrally ~ ~ ~ alhance may
Those two cul- ~ c~(~ ~ otherwise become
tures could not - bogged down in
coexist poor communica-
To overcome sources of misun- tions and slow decision-making
derstanding, both formal and cross- processes
cultural training programs and F u r t h e r r e s e a r c h . Alhances
extensive informal contacts must are not a panacea for the hotel
be maintained Differences m lndustry's current ailments In fact,
home-country enwronments, as alhances can be difficult to manage
reflected in government pohcles and prone to failure if they are not
toward cooperatmn, industry thought out and negotiated m
structures, and mstltutmnal advance Nevertheless, the use of
support systems, create differences alhances will grow in the future
in expectatmns and experiences because the combmatlon of
Different corporate cultures, with strengths found m a well-arranged
umque ideologies and grading alhance will serve as an antidote to
values, may reqmre alhance many of the lndustry's dlfficultms
partners to restructure their norms We predict that an analysis of
and behef systems strategic alhances m the lnterna-
Differences m the strategic tmnal travel mdustry that focuses
d~rectmn between partners may on the issues of risks and rewards
emerge from changes m their would confirm the value of such
individual external or internal orgamzatlonal partnerships c o
45