The Intercontinental Hotels Group (IHG) is a transnational corporation, which was formed in the early 2000s. Its main offices are in the UK. The company is one of the largest businesses in the hospitality industry, receiving guests who are mainly tourists from all over the globe (FTSE Index Report, 2012). IHG has more than 600,000 hotel rooms in about 4,600 branches located in over 100 nations across the world. The company receives more than 150 million customers annually. The figure is indicative of the company’s strong brand equity (Quek, 2012).
The strong customer base that the company commands has propelled it ahead of its rivals as evidenced by the huge profits that are recorded annually. The company’s fast growth is attributed to its strong growth strategies that ensure that it retains its competitive advantage over its rivals. The rapid expansion is also attributable to the corporation’s strong brand equity. The company operates a wide variety of brands, which range from Hotel Indigo, Crowne Plaza, and InterContinental, to Holiday Inn among others (Quek, 2012).
The listed brands have gained a high acceptance from customers around the globe. Ever since its incorporation, the business has remained innovative to introduce more brands into its menu. Recently, the company introduced the EVEN brand, which allows travelers to engage in healthy activities such as physical exercise inside the business facilities. This innovative endeavor has greatly improved customers’ loyalty against the backdrop of the intensifying campaigns about healthy feeding and regular exercise to mitigate certain chronic illnesses. This paper explores the administration strategies for the company with reference to financial, operational, and risk management. In achieving this objective, the paper examines the internal and external environments of the company.
IHG’s Financial Management
One of the strategies used by the company to ensure that it remains profitable is by managing its profit margins to maintain a good markup. The company may be said to be performing well financially, considering that its revenues have remained stable ever since its inception. As illustrated in Appendix 1, the company’s highest annual revenues were 1,903 million dollars while the lowest were 1538 million dollars in 2009 (InterContinental Hotels Group, 2017). The stability of revenues is associated with good financial management, which implies that the company is financially sound. Although the company’s profits were adversely affected by the 2009 financial crisis, the impact was not severe since it only resulted in a slight decrease in profits.
IHG manages its financial assets by analyzing its liquid assets using the liquidity ratios at the end of every financial year. The liquidity ratios depict a company’s ability not only to meet its short-term obligations (Zygmunt, 2013). As illustrated Appendix 1, the company’s liquidity ratios have been shaky over the past 10 years. However, the current ratio has not exceeded 2:1, which is the acceptable threshold. Additionally, the company’s quick ratio has not exceeded 1:1. This relative amount is illustrative of IHG’s financial soundness (InterContinental Hotels Group, 2017).
Besides, the company has maintained a cash ratio of below 1:1, which is considered the benchmark. Based on the analysis, it may be concluded that the company is “a going concern” since it has the capacity to meet its short-term obligations. Therefore, it cannot be forced into liquidation on the grounds of failure to meet the short-term requirements.
The other strategy used by the company to track its financial performance is the composition of profitability ratios at the end of each financial year. The profitability ratios are used to determine if a company is lucrative and/or can be used to forecast the future of the concerned business (Zygmunt, 2013). A profitable firm is likely to have a bright future compared to one that records recurrent losses. As illustrated by Appendix 1, the company’s gross profit margin has exhibited an upward trend, implying that the business’ gross profits have been increasing year after another for the period under consideration. The operating margin has grown tremendously over the period under consideration.
As of 2015, the company had an operating margin of 39.53% up from 30.15% in 2007 based on IHG’s financial analysis (InterContinental Hotels Group, 2017). The company’s pretax and after-tax profit ratios also exhibit an upward trend, which is indicative of a business that has been recording positive profits. The profitability ratios are set to increase tremendously over the next ten years if the current trends are to be considered. The business has recorded an increase in the ratios for the past decade, implying that it has been growing its profitability (FTSE Index Report, 2012). In the event that the annual revenues of the business grow by the estimated rates, the profits will also go up, thus increasing the profitability ratios.
|Strengths ||Weaknesses |
Overinvestment in developed markets
|Opportunities ||Threats |
The SWOT analysis as depicted in the above table is crucial in assessing a company’s areas of strength, limitations, prospects, and threats. The company’s major source of strength is its strong brand equity. Since its inception, its operations have been guided by the customer-centered strategy, which entails prioritizing customers’ interests, hence achieving exceptional customer satisfaction.
The other factor that seems to work for the company is its strong balance sheet, meaning that the business does not over-rely on loans to fund its assets. The company reports high end of year profits, a situation that has pushed the prices of its stock high, not to mention that it has enabled the business to avoid debt finance. Another strength, which the company has, is its qualified employees (Azhimuratovaa, Tulekbayevaa, Sabyrhanova, Shakkalievb, & Meshcheryakovac, 2016). It recruits highly qualified staff members with exceptional skills in their respective lines of duty.
One of the weaknesses of the firm is its concentration on developing markets and the tendency to overlook the potential of such upcoming trading zones (Mazumder & Hasan, 2014). As it stands now, the company’s major subsidiaries are located in developed nations. In the recent past, the economy of industrialized countries has exhibited a slowdown relative to that of developing countries, which are recording a rapid growth. In this regard, the company needs to invest more in the emerging markets, as opposed to the developed ones.
However, the business has the opportunity to exploit the Internet to market its products and services in the backdrop of the increasing embracement online-based social media platforms. Internet marketing is cheaper relative to the traditional media. Hence, adopting the former marking method may lead to reduced operational costs. The evolution of the middle class is also another opportunity available to the company (Brosius, 2012). The mentioned group is willing to pay more for quality products since it has much money to spend on luxury. Lastly, the company may exploit the emerging markets to maximize its profits (Quek, 2012).
The company faces stiff rivalry from competitor businesses, which include Marriott International, Inc., Starwood Hotels & Resorts Worldwide, Inc., Choice Hotels International, Inc., Best Western International, Inc., and Hilton Hotels Corporation among others (Hawkins & Bohdanowicz, 2012). The listed companies are big enough to enjoy the economies of scale, implying that they have the ability to exploit the low pricing strategy.
The company’s political environment is made up of forces, which influence its operations. Such political forces include domestic warfare, terrorism, and diplomatic rows, just to mention a few. Political conflicts between the UK and any other country in which the hotel has a subsidiary may lead to license issues or even closure of the company. Mitigating this issue has made the company open branches in many countries to diversify risks.
The company is predisposed to the risk of poor profits during the periods of economic crisis such as the 2008-2009 financial predicament (Brosius, 2012). In such periods, people have little money to spend on luxurious activities such as tourism. Given that IHG is in the tourism sector, it may be affected by such slowdowns. To minimize the impact of such slowdowns, the company invests heavily in opening new stores in many markets all over the world.
One of the social factors that affect the company’s operations is the culture of the tourists. The company receives tourists from many parts of the globe, implying that it has to customize its menu to address the needs of all its customers. Seasons also influence its operations since tourists from various countries tend to travel at different times based on the weather in their respective nations (Scott, Hall, & Stefan, 2012).
Technology seems to be a double-edged sword. On one hand, it favors the company’s growth by providing opportunities such as Internet marketing and improved customer experience. On the other hand, it increases competition in the industry.
The company also faces a major threat in the form of changes in legislations regarding environmental conservation. Currently, the hotel industry is accused of contributing to environmental pollution due to the carbon emitted during the heating endeavors.
In terms of legal forces, the minimum wage bill is likely to affect the company’s operations as countries continue to enact laws, which set the minimum wages that low earners should be paid (Scott et al., 2012). Such legislations may affect IHG’s profitability in the future since salaries and wages are set off against the incomes of a business.
IHG’s Risk Management
One of the major risks that the company is predisposed to is competition. Stiff competition is in the industry has compelled the business to continuously improve the quality while at the same time selling the products at cheap prices (Hociung & Frâncu, 2012). This situation leads to poor profits for businesses in the sector, hence threatening their future. To counter the risk of possible loss of market share, the company focuses on innovation to continuously improve customer experience. The corporation invites reviews from clients through the social media and comment cards to gain insight into the customers’ needs that are not yet covered in the current services. Based on such reviews, the company seals the gaps in customer satisfaction to retain its market share.
The new technology plays a pivotal role in the company’s strategy for improving customer experience. For example, IHG allows its customers to order their meals online using their tablets and other supported devices. The increased use of technology in the business has led to a decrease in the operation cost, thus allowing the company to charge lower fees in line with its policy. Consequently, the company has established a good reputation among its customers. Besides, it has indisputable strength compared to its competitors. The business also counters rivalry by hiring and maintaining excellent talents. Human capital is one of the most precious resources of a company.
Successful companies invest heavily in the workforce to motivate them to produce high-quality products (Tafti, Kordnaeij, Hoseini, & Jamali, 2015). In this regard, IHG makes a considerable investment in its labor force to increase its productivity while boosting employees’ morale. In addition to hiring qualified staffs and remunerating them competitively, the company operates a nondiscriminatory continuous training program for its workforce. The hospitality industry is rapidly evolving, with the needs of different customers exhibiting great variances and hence the need to train workers to handle new challenges in the industry (Sarif, 2014).
The other risk that the company is predisposed to is that of economic slowdown similar to the 2009 situation. IHG uses the diversification and globalization strategy to counter the risk of economic crisis. The company continues to open new stores in new markets to avert risks associated with losses from one market. Currently, the business has numerous stores in different countries all over the world, a situation that makes the diversification of risks possible. Losses in one country can be offset by profits realized from another nation. From experience, global economic crises affect countries differently. This claim underscores the need to invest in different countries.
The company’s globalization agenda is greatly favored by its strong brand equity. The corporation uses its strong brand equity to penetrate new markets with ease to increase its profitability. The company also partners with other reputable international businesses for easier entry to the global market. The world market makes the company more profitable since it acts as a supplement to the domestic revenue. Moreover, it acts as a security for the company against loss in case the domestic market fails in the future. Additionally, by opening more branches worldwide, the company increases its purchase volumes, which enable it to enjoy the economies of scale to lower its operations costs. Any savings are converted into low prices for its meals, thus giving it a competitive advantage over its rivals.
Next, the company is also predisposed to the risk of diminishing profits because of changes in customers’ tastes and preferences in the future (Parvin, Perveen, & Afsana, 2014). In the recent past, consumers have become enlightened about health feeding, which threatens the future of some of the meals served in the hotel. Customers’ cultural and religious backgrounds also influence their tastes, implying that some customers may not find their favorite meals in hotels.
To counter the mentioned risk, the company has innovatively come up with a strategy that allows clients to customize their meals to facilitate the accommodation of the prevailing diverse needs. The company’s clients mostly include tourists who come from different parts of the world. The tastes and preferences of such customers largely depend on their respective cultures (Parvin et al., 2014). Currently, the company offers the western foods in most of its hotels, a situation that limits customers’ choices. By empowering clients to customize their food during the ordering stage, the company will achieve an enhanced competitive advantage compared to its rivals. Additionally, this strategy increases the level of customer satisfaction, which is at the heart of the company’s operations.
IHG is a multinational company that operates within the hospitality industry. The company commenced its operations in 2003, with its initial businesses being limited to Denham, the UK, where its headquarters are located. However, today, the company has penetrated the global market in an attempt to maximize its market share and profitability. By the end of 2015, the company had about 4600 branches in over 100 countries around the globe.
The rapid growth of the business in the recent past is attributed to some major strengths, which include strong brand equity, competent workforce, and innovation among others. However, various external forces seem to threaten the company’s growth. The factors fall under the purview of political, economic, social, technological, and economical forces. This paper has examined the company’s financial, operational, and risk management strategies. In the achievement of the stated purpose, the paper has explored the internal and external factors that have boosted or hindered the company’s growth through SWOT and PESTEL analysis tools.
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Appendix 1: IHG’s Financial Analysis
|Revenue USD Mil||1,771||1,897||1,538||1,628||1,768||1,835||1,903||1,858||1,803||1,715||1,715|
|Gross Margin %||53.4||55.1||44.1||53.7||56.4||57.9||58.8||60.1||64.5||66.2||66.2|
|Operating Income USD Mil||534||417||-10||437||605||601||673||680||1,499||678||678|
|Operating Margin %||30.2||22.0||-0.7||26.8||34.2||32.8||35.4||36.6||83.1||39.5||39.5|
|Net Income USD Mil||463||262||213||280||465||537||372||391||1,222||414||414|
|Earnings Per Share USD||2.05||1.29||1.05||1.37||2.29||2.50||1.75||1.63||5.36||2.02||2.02|
|Payout Ratio % *||33.3||49.4||59.1||44.7||39.1||33.3||29.4||64.9||34.9||18.6||51.2|
|Book Value Per Share * USD||0.45||-0.03||0.76||1.36||2.40||1.56||2.14||-0.52||-2.68||-5.50||-4.03|
|Operating Cash Flow USD Mil||461||641||432||462||479||472||624||543||628||752||752|
|Cap Spending USD Mil||-153||-102||-133||-91||-103||-128||-245||-248||-203||-209||-209|
|Free Cash Flow USD Mil||308||539||299||371||376||344||379||295||425||543||543|
|Free Cash Flow Per Share * USD||1.36||2.65||1.47||1.82||1.67||1.60||1.62||1.91||1.68||3.10||—|
|Working Capital USD Mil||-510||-597||-634||-477||-282||-120||-228||-9||237||-356||—|
|Margins % of Sales||2007-12||2008-12||2009-12||2010-12||2011-12||2012-12||2013-12||2014-12||2015-12||2016-12||TTM|
|Net Int Inc & Other||-5.08||-5.32||-3.51||-3.81||-3.51||-2.94||-3.84||-4.31||-4.83||-5.07||-5.07|
|Tax Rate %||21.78||17.88||—||25.87||14.62||1.98||37.67||34.67||13.31||29.44||29.44|
|Net Margin %||26.18||14.13||13.85||17.20||26.75||29.65||19.55||21.04||67.78||24.14||24.14|
|Asset Turnover (Average)||0.48||0.55||0.51||0.57||0.61||0.58||0.61||0.64||0.55||0.51||0.51|
|Return on Assets %||12.58||7.82||7.09||9.86||16.44||17.46||11.97||13.55||37.10||12.37||12.37|
|Financial Leverage (Average)||39.42||—||19.42||10.28||5.43||10.59||—||—||12.20||—||—|
|Return on Equity %||64.69||616.47||297.90||133.33||115.65||127.25||329.20||—||—||—||—|
|Return on Invested Capital %||28.02||19.03||14.01||23.76||45.67||42.58||29.35||—||—||—||—|
Source: (InterContinental Hotels Group, 2017)