The influence of business models on a company’s performance in the hotel industry

The  influence  of  business  models  on  a  

company’s  performance  in  the  hotel  industry  

By  F.T.V.M.  Brand:  S2545403  

Master  Thesis  Msc  BA  Small  Business  &  

Entrepreneurship  Rijksuniversiteit  Groningen  

Supervisor  Thesis:  J.  Kraaijenbrink  

Co-­‐assessor:  O.  Belousova  

Date:  22-­‐06-­‐15  

Word  count:  13013  

Abstract:  

The  hotel  industry  has  changed  since  the  introduction  of  the  Internet  and   the  crisis  in  2007/2008.  To  complement  the  research  of  Cross  et  al.  (2009)  who   investigated   the   influence   of   this   change   on   the   revenue   management   of   16   international   hotel   chains,   I   investigate   the   performance   impact   of   the   differences   and   commonalities   of   the   business   models   of   15   hotels   after   this   change.  A  lot  of  researchers  use  different  definitions  of  business  models  in  this   research   I   define   a   business   model   as:   a   model   that   describes   how   a   business   creates,  delivers,  and  captures  value  with  its  products  and/or  services.  By  using   this  definition,  the  focus  is  on  one  of  the  four  elements  of  the  business  model  the   profit   model   as   described   in   Johnson   et   al.   (2008).   With   the   use   of   structured   interviews   I   collected   qualitative   and   quantitative   data.   The   conclusion   after   analysing   this   data   is   that   the   business   models   of   hotels   indeed   have   changed   over   the   last   years.   These   changes   are   primarily   reflected   in   the   cost   structure   and   resource   velocity   of   the   hotels.   So   did   the   fixed-­‐to-­‐variable   cost   ratio   decreased   and   decreased   the   duration   per   stay   in   all   hotels.   The   revenue   structure   and   margin   model   of   the   hotels   did   not   change   enormously   after   the   change.  The  traditional  revenue  stream  still  has  the  highest  margin  and  provides   most  of  the  revenue.  Changing  those  structure  would  mostly  not  have  a  positive   influence  on  performance.    

1. Introduction  

1.1  Background  

The  hotel  industry  worked  the  traditional  way  for  many  years.  After  the   introduction  of  the  Internet,  the  industry  has  changed  quickly  as  is  highlighted  in   the  following  quote  of  Kandampully  (2006):  “Hospitality  firms  have  to  think  and   act   as   global   enterprises   as   they   face   the   economic,   technological,   and   market   challenges   of   the   modern   era”   (p.   173).   The   first   significant   change   resulting   from   the   Internet   was   the   introduction   of   online   booking   sites.   From   then   on,   people  could  use  the  Internet  to  book  hotel  rooms  and  no  longer  had  to  call  or   visit  travel  agencies.  The  second  significant  change  was  the  introduction  of  price   comparison  sites,  like  Trivago  (www.trivago.com).  This  change  ensured  that  the   market   became   even   more   transparent   than   before.   The   latest   significant   changes  are  the  introduction  of  large  online  apartment  booking  sites,  like  Airbnb   (www.airbnb.com)   and   Wimdu   (www.wimdu.com),   and   holiday   trading   sites,   like  Vakantieveilingen  (www.vakantieveilingen.nl),  as  well  as  the  introduction  of   sites   like   Couchsurfing   (www.couchsurfing.com),   where   one   can   sleep   for   free   most  of  the  time.    

1.2  Research  gap  

et  al.,  2009).  A  research  on  the  impact  of  this  change  on  the  business  models  of   the  hotels  themselves  has  never  been  executed.  While  this  is  very  interesting  to   research   since   the   hotels   feel   the   impact   of   the   change   best.   This   since   “some   business   models   are   better   than   other   out   of   the   gate,   so   establishing   a   good   model  does  have  a  performance  impact”  (Linder  &  Cantrell,  2001,  p.  14).    

1.3  Research  question  

From  this  research  gap  I  want  to  compare  the  different  business  models   of   hotels   to   determine   which   (parts   of)   business   models   lead   to   better   performances  after  the  change  in  the  industry.  The  following  research  question   is  formulated:  

What  is  the  performance  impact  of  the  differences  and  commonalities  of   different  hotels’  business  models?    

1.4  Research  contribution  

The  contribution  of  this  research  is  to  determine  what  parts  of  a  business   model   of   a   hotel   have   to   change   because   of   the   change   in   the   industry.   My   findings  will  help  the  management  of  hotels  to  achieve  a  greater  understanding   of  the  business  models  of  their  hotels.  This  knowledge  will  help  the  management   to  establish  well-­‐performing  business  model  after  the  change  in  the  market.  The   contribution   of   this   research   to   the   existing   literature   is   that   it   explains   the   change  in  the  industry  on  hotel  level  and  not  on  chain  level  as  it  was  done  before.   To  test  my  hypotheses  I  used  a  combination  of  surveys  and  interviews  to  test  my   hypotheses.  Previous  research  on  business  models  focused  on  only  one  of  these   two  approaches.  By  using  a  combination  of  surveys  and  interviews,  this  research   gets  a  more  thorough  inside  in  business  models.  

1.5  Outline    

is  explained.  Afterwards  an  overview  of  how  business  models  can  be  divided  in   different  elements  is  provided.  Subsequently  four  hypotheses  are  created  and  in   the  last  part  the  conceptual  model  is  created.  In  the  second  part  of  this  research   the  methodology  of  the  research  is  explained.  In  this  part  I  made  the  choice  to   combine  a  qualitative  and  quantitative  method  to  test  the  hypotheses.  In  the  next   chapter   I   provide   a   description   of   the   results   of   this   research.   This   part   firstly   analyses  the  general  findings,  followed  by  the  finding  per  hypotheses  and  ends   with   some   additional   findings.   Finally,   in   the   conclusion   I   answer   the   research   question   and   give   scientific   and   practical   implications.   This   last   chapter   ends   with  limitations  and  recommendations  for  future  research.  

2.  Literature  review  and  hypotheses  

In   the   literature   review   first   is   explained   how   business   models   are   defined   and   used   the   last   years.   Then   an   explanation   in   which   elements   a   business  model  can  be  divided  is  given.  This  is  followed  up  by  a  description  of   the   different   business   models   used   in   the   hotel   industry.   Subsequently   the   hypotheses   are   designed   and   lastly   the   conceptual   model   of   this   research   is   provided.    

2.1  Business  models  today  

Nowadays,   people   and   companies   increasingly   use   the   term   “business   model”.  The  use  of  this  term  is  quite  new.  Formal  studies  concluded  that  the  use   of   the   term   has   grown   exponentially   since   2000   (Osterwalder   et   al.,   2005;   George   &   Bock,   2011).   During   this   growth,   people   used   many   inconsistent   definitions   for   the   term   “business   model”   (George   &   Bock,   2011).   However,   whether  people  understand  the  concept  or  not,  a  successful  company  will  have   an   effective   business   model   by   fulfilling   a   real   customer   need   (Johnson   et   al.,   2008).   In   the   first   portion   of   this   review,   I   will   give   an   overview   of   the   most   recently  used  definitions.  

Table  1.  Overview  of  recently  used  business  model  definitions  

Author   Definition  

Margretta  (2002)   A  business  model  explains  how  the  business  works   Osterwalder,  

Pigneur,  &  Tucci   (2005)  

“A  business  model  is  a  conceptual  tool  containing  a  set  of   objects,  concepts  and  their  relationships  with  the  

objective  to  express  the  business  logic  of  a  specific  firm   (p.  3)  

Teece  (2010)   “A  business  model  articulates  the  logic  and  provides  data   and  other  evidence  that  demonstrates  how  a  business   creates  and  delivers  value  to  customers”  (p.  173)   Amit  &  Zott  (2001)   “A  business  model  depicts  the  design  of  transaction  

content,  structure,  and  governance  so  as  to  create  value   through  the  exploitation  of  business  opportunities”  (p.   493).  

Zott  &  Amit  (2008)   “The  business  model  is  a  structural  template  that   describes  the  organization  of  a  focal  firm’s  transactions   with  all  of  its  external  constituents  in  factor  and  product   markets”  (p.  1).  

Chesbrough  &   Rosenbloom  (2002)  

“A  focusing  device  that  mediates  between  technology   development  and  economic  value  creation”  (p.  532)   George  &  Bock  

(2011)  

“A  business  model  is  the  design  of  organizational   structures  to  enact  a  commercial  opportunity”  (p.  99)   Johnson,  

Christensen,  &   Kagermann  (2008)  

“A  business  model  consist  of  four  interlocking  elements   that,  taken  together,  create  and  deliver  value”:  (p.  52)   (1)  Customer  value  proposition,  (2)  profit  formula  of  the   business,  (3)  key  resources  of  a  business,  and  (4)  key   processes  of  a  business  

In   addition   to   the   differences   in   definitions,   researchers   use   the   terms   “business  models”  and  “strategies”  interchangeably;  these  terms  are  linked  but   are   not   the   same   (Magretta,   2002).   The   authors   who   recognize   the   difference   between   these   two   terms   describe   this   difference   similarly.   Magretta   (2002)   stated   that   a   business   model   is   missing   competition   in   the   dimension   of   performance,   which   is   in   line   with   Mansfield   and   Fourie   (2004),   who   stated,   “strategy  aims  for  sustainable  competitive  advantage;  business  models  are  said   to  be  the  sine  qua  non  of  value  creation”  (p.  35).  George  and  Bock  (2011)  were   more  extensive  and  specified  strategy  as  “a  dynamic  set  of  initiatives,  activities,   and   processes”   (p.   102).   A   business   model   was   defined   by   George   and   Bock   (2011)   as   “a   static   configuration   of   organizational   elements   and   activity   characteristics”   (p.   102).   They   added   that   a   strategy   is   more   focused   on   competitors   and   the   environment   and   a   business   model   is   opportunity-­‐centric   (George   &   Bock,   2011).   A   more   overall   difference   between   strategies   and   business   models   is   that   a   business   model   is   more   universal   than   a   strategy   (Teece,  2010).  

To  keep  the  differences  between  the  definitions  and  strategy  in  mind,  my   definition   is   focused   on   the   opportunity   of   the   firm,   the   value   creation   and   on   capturing   this   opportunity.   Thus,   in   this   research,   the   definition   of   a   business   model  is  as  follows:  A  model  that  describes  how  a  business  creates,  delivers,  and   captures  value  with  its  products  and/or  services.  

2.2  Elements  of  a  business  model  

Weill   et   al.   (2005),   who   studied   the   differences   between   the   business   models  of  the  1000  largest  U.S.  enterprises,  stated  that  business  models  consist   of  two  elements:  “(1)  what  the  business  does  and  (2)  how  the  business  makes   money  doing  these  things”  (p.  5).  Later,  in  2008,  Johnson  et  al.  (2008)  considered   that  a  business  model  consists  of  four  elements:  (1)  Customer  Value  Proposition   (CVP),  (2)  profit  formula  of  the  business,  (3)  key  resources  of  a  business,  and  (4)   key   processes   of   a   business.   A   more   extensive   view   of   business   models   is   Osterwalder   and   Pigneur’s   (2010)   view.   Osterwalder   and   Pigneur   (2010)   developed   a   design   approach   for   a   business   model,   termed   Business   Model   Canvas   (BMC).   In   the   BMC,   they   described   nine   elements   that   indicate   how   a   company  tries  to  make  money.  The  nine  elements  of  the  BMC  are  as  follows:  (1)   Customer   segments,   (2)   value   propositions,   (3)   channels,   (4)   customer   relationships,  (5)  revenue  streams,  (6)  key  resources,  (7)  key  activities,  (8)  key   partnerships,   and   (9)   cost   structure.   The   last   writers   who   made   a   clear   distinction   between   different   elements   of   a   business   model   where   George   and   Bock   (2011).   They   stated   a   business   model   consists   of   three   elements:   “(1)   resource  structure;  (2)  transactive  structure;  (3)  value  structure”  (p.  99).  

All   the   foregoing   elements   described   by   the   different   researchers   are   based  on  their  own  definitions.  The  definition  used  in  this  research  is  the  closest   to  the  definition  of  Johnson  et  al.  (2008).  To  go  more  in  depth  and  to  prevent  the   research  from  measurement  problems  by  measuring  the  CVP,  key  resources,  and   key   processes   of   different   hotels   I   chose   to   focus   on   the   second   element:   The   profit  formula.  This  element  consists  of  a  revenue  model,  cost  structure,  margin   model,   and   resource   velocity.   These   parts   together   are   the   blueprint   of   a   company   and   describe   how   the   company   captures   the   value   created   for   the   customers  (Johnson  et  al.,  2008).  

Johnson  et  al.  (2008),  describes  “how  much  money  can  be  made:  price  x  volume”   (p.  5).  Zott  and  Amit  (2001)  defined  a  revenue  model  in  their  article:  “A  revenue   model  refers  to  the  specific  modes  in  which  a  business  model  enables  revenue   generation”  (p.  515).  In  a  recent  paper,  DaSilva  and  Trkman  (2014)  described  a   revenue  model  as  “how  the  revenue  is  appropriated  by  the  firm  through  the  sale   of  it  goods  or  services”  (p.  385).  In  this  research,  the  revenue  model  is  defined  as   where  a  hotel  collects  revenue  by  offering  its  products  and  services.  The  revenue   of  a  business  will  influence  the  performance  of  a  company  because  it  concerns   the  total  income  of  a  business.  Whether  a  change  in  the  revenue  has  a  positive  or   negative   effect   on   performance   is   dependent   on   the   marginal   revenue   and   the   price  elasticity  of  the  product  or  service  (Besanko,  Dranove,  Shanley,  &  Schaefer,   2013)    

fixed  costs  and  low  variable  costs  in  good  times  can  lead  to  better  performance   because   of   the   higher   quantities   sold.   It   will   be   a   challenge   for   a   business   to   determine  the  right  balance  for  optimal  performance.    

The  third  element  of  the  profit  formula  is  the  margin  model.  As  the  phrase   implies,  this  element  concerns  the  margin  a  business  makes  over  its  products  or   services.   Johnson   et   al.   (2008)   defined   a   margin   model   as   “how   much   each   transaction  should  net  to  achieve  desired  profit  levels”  (p.  5).  In  this  research,  I   agree  with  Johnson  et  al.  (2008)  and  define  the  margin  model  as  the  percentage   profit   a   hotel   makes   on   every   transaction   (revenue   stream).   As   stated   in   the   revenue  section,  a  business’s  margin  on  a  product  or  service  will  have  an  effect   on  the  performance  of  a  business.  This  effect  is  due  to  the  margin  of  a  product  or   service   that   has   an   influence   on   supply   and   demand   of   that   product   or   service   (Besanko   et   al.,   2013).   This   supply   and   demand   leads   to   a   particular   quantity,   and   the   quantity   multiplied   by   margin   influences   performance.   Hence,   the   margin  of  a  product  or  service  of  a  business  leads  to  a  position  on  the  supply  and   demand  curve  that  will  influence  the  performance  of  that  business.  

The   last   element   of   the   profit   formula   is   the   resource   velocity.   Johnson   (2010)  is  the  only  author  who  defined  resource  velocity:    

How   quickly   resources   need   to   be   used   to   support   target   volume.   It   specifies   not   just   the   number   of   widgets   a   business   can   make,   but   how   many   it   can   invent,   design,   produce,   warehouse,   ship,   service,   sell,   and   pay   for   throughout   the   value   chain   for   a   given   amount   of   investment   during  a  given  amount  of  time.  (p.  37)  

For  the  hotel  business,  the  resource  velocity  can  be  seen  as  the  number  of  times   a   room   is   used   in   a   year   and   the   average   nights   per   booking.   The   resource   velocity   will   influence   performance   because   multiplying   the   number   of   used   rooms   with   the   margin   of   the   hotel   room   shows   the   performance   of   a   hotel   because   a   high   resource   velocity   and   a   low   profit   margin   can   lead   to   the   same   result  as  a  low  resource  velocity  and  a  high  profit  margin.  A  trade  off  between   these   two   factors   has   to   be   made   by   hotel’s   management/owner   to   maximize   performance.  

2.3  Different  hotel  business  models    

  According   to   Weil   et   al.   (2005),   there   are   four   basic   business   models   in   business:  Creator,  distributor,  landlord,  and  broker.  In  the  creator  model,  a  new   product  is  created  from  raw  materials  and  sold  to  customers.  In  the  distributor   model,   a   firm   buys   the   products   and   sells   them   in   the   same   condition   to   other   customers.   In   the   landlord   model,   a   firm   leases/rents   out   assets   for   a   specific   time  period.  In  the  last  model,  the  broker  model,  a  firm  mediates  between  buyer   and   seller   for   a   commission   fee.   Companies   modified   these   basic   models   into   their   own   business   models.   There   is   almost   no   literature   about   these   modified   models   except   some   articles   in   which   researchers   analyse   particular   firms’   business   models.   These   modified   business   models   are   often   named   with   their   firm  names,  e.g.,  McDonalds  business  model  or  Ryanair  business  model  (Baden-­‐ Fuller   &   Morgan,   2010).   Two   well-­‐known   business   models   are   Southwest’s   business  model  and  the  razor-­‐blade  model  (Teece,  2010).  Southwest’s  business   model  is  also  called  a  low-­‐cost  model  (Baden-­‐Fuller  &  Morgan,  2010).  This  model   concerns   offering   low   seat   prices   by   cutting   costs   through   optimization   of   the   process   due   to   standardization   and   direct   sales   (Teece,   2010).   The   basic   assumption  of  the  razor  blade  model  is  offering  razors  for  a  low  price,  making   low  margins,  and  offering  the  consumables  (blades)  for  a  high  price,  including  a   high  margin  (Johnson  et  al.,  2008;  Teece,  2010).  

  Searching   for   specific   business   models   for   the   hotels   showed   that,   generally,   hotel   chains   can   utilize   three   basic   types   of   business   models:   (1)   Managed,   (2)   Leasing,   (3)   and   Management   (Cleverhotelorg,   2012).   For   this   research,   I   chose   not   to   compare   the   business   models   of   these   different   hotels   chains   but   rather   to   compare   the   business   models   of   different   hotels   because   comparing   hotel   chains   would   not   give   insight   into   how   the   value   for   the   customer  is  created,  delivered,  and  captured  by  an  individual  business.    

compared  the  profit  formulas  of  the  different  revenue  streams  of  a  hotel.  In  the   literature,  scholars  determined  different  distributions  of  the  revenue  streams  of   hotels.  Min,  Min,  and  Joo  (2008)  divided  the  total  revenue  of  a  hotel  into  Rooms,   Food   and   Beverage,   and   other   services.   Ivanov   (2014)   divided   the   revenue   streams  of  a  hotel  in  seven  potential  streams:  “Rooms  division,  Food  &  Beverage,   Function   rooms,   Spa   &   Fitness   facilities,   Golf   courses,   Casino   and   gambling   facilities,  and  other  additional  services”  (p.  25).  However,  not  every  hotel  would   have   all   seven   revenue   streams   or   divide   their   revenue   streams   this   way.   For   example,   only   a   small   percentage   off   all   hotels   offer   golf   courses   and   gambling   facilities  to  their  guests.  Thus,  to  obtain  good  insight  into  the  different  revenue   streams,  total  hotel  revenue  was  divided  into  the  following  five  revenue  streams:  

• Hotel  rooms   • Function  rooms  

• Food  and  Beverage  (F&B)   • Spa  and  Fitness  facilities  

• Other  additional  services/products  

In   the   past,   managers   mainly   focused   on   the   revenue   stream   “hotel   rooms”  (Ivanov,  2014),  which  is  why,  in  this  research,  the  revenue  stream  hotel   rooms  is  named  “traditional  revenue  stream”  and  the  other  four  revenue  streams   are  named  “non-­‐traditional  revenue  streams”.  

2.4  Hypotheses      

performance.  In  this  research,  shareholder  return  was  excluded  since  the  hotels’   managers  almost  never  measure  this  in  the  hotel  industry.    

The   total   revenue   of   a   hotel   is   a   summation   of   its   different   revenue   streams.  In  the  past,  hotel  managers  focused  mostly  on  the  traditional  revenue   stream  (Cross,  Higbie,  &  Cross,  2009;  Ivanov,  2014).  In  the  research  of  Cross  et   al.   (2009),   the   authors   interviewed   16   hotel   revenue   management   leaders   of   large   hotel   chains.   After   these   interviews,   Cross   et   al.   (2009)   concluded   that   hotels   nowadays   have   to   focus   on   all   revenue   streams   and   not   only   on   the   traditional   revenue   stream.   Some   of   the   revenue   managers   in   this   research   stated   that   more   profit   was   made   on   the   revenue   stream   F&B   than   on   the   revenue   stream   hotel   rooms   (Cross   et   al.,   2009).   From   this   information,   I   assumed  that  hotels  focusing  less  on  the  traditional  revenue  stream  and  more  on   the   non-­‐traditional   revenue   streams   would   have   higher   performance.   This   assumption  led  to  the  following  hypothesis:  

H1.   The   percentage   of   revenue   obtained   from   non-­‐traditional   revenue   streams  has  a  positive  impact  on  performance  

A   characteristic   of   the   cost   structure   of   hotels   is   that   around   75%   of   a   hotel’s  total  costs  consists  of  fixed  costs  (Kotas,  2014).  Additionally,  the  revenue   stream  hotel  rooms  has  higher  fixed  costs  than  the  revenue  stream  F&B  (Harris   &  Mongiello,  2001;  Kotas,  2014).  Moreover,  Harris  and  Mongiello  (2001)  stated   that   the   higher   the   segment   of   a   hotel,   the   higher   its   fixed   cost   structure.   According   to   Kotas   (2014),   the   sales   of   a   hotel   are   seasonal,   which   means   that   the  hotel  industry  is  flexible  in  that  customer  demand  differs.  An  explanation  of   this   fluctuating   demand   could   be   the   existence   of   different   events   in   the   neighbourhood   and   during   holidays.  Because   of   these   seasonal   sales,   almost   every   hotel   utilizes   the   yield   management   approach.   The   yield   management   approach  means  that  hotels  adapt  prices  to  that  day’s  demands  (Relihan,  1989).  

opposing  cost  structures.  Therefore,  regarding  hotels  staying  competitive  in  the   market,  I  formulated  the  following  hypothesis:  

H2.  A  lower  fixed-­‐to-­‐variable  cost  ratio  leads  to  higher  performance    

  The   price   of   a   room   is   a   significant   factor   in   choosing   a   hotel   for   customers   (Chu   &   Choi,   2000;   Dolnicar   &   Otter,   2003).   The   introduction   of   Airbnb,   characterized   as   cheaper   than   traditional   hotels   (Guttentag,   2013),   should   thus   influence   customers’   choices.   Additional   benefits   of   Airbnb   are   as   follows:  “Tourist  may  prefer  the  feeling  of  being  in  a  home  over  a  hotel,  Airbnb   hosts   may   be   able   to   provide   useful   local   advice…and   have   access   to   practical   residential   amenities”   (Guttentag,   2013,   p.   5).   Yglesias   (as   cited   in   Guttentag,   2013)  stated  that  Airbnb  could  lead  to  a  reduction  of  hotel  room  prices.  Thus,  to   stay  competitive  in  today’s  market,  hotel  room  prices  must  go  down.  These  price   changes  should  be  permanent  since  Murphy,  Semrad,  and  Yost  (2013)  found  that   lowering   room   rates   off-­‐season   had   no   influence   on   the   restaurant   sales.   The   price   of   a   hotel   room   consists   of   a   high   percentage   of   fixed   costs   (Harris   &   Mongiello,  2001;  Kotas,  2014).  These  fixed  costs,  which  consist  in  large  part  of   rent   and   employees’   fixed   contracts,   are   hard   to   change   (Kotas,   2014),   which   means  either  the  flexible  costs  or  the  marginal  cost  must  go  down.  To  keep  the   performance  high,  a  hotel  could  adapt  the  razor  blade  model;  this  would  mean   offering   the   hotel   rooms   for   lower   prices   and   charging   high   margins   for   additional  products  and  services  (consumables).  This  model  was  already  partly   adapted   in   the   lodging   industry   by   companies   like   Roompot   and   Center   Parcs.   Roompot  and  Center  Parcs  rent  holiday  bungalows  on  bungalow  parks,  whereby   the  booking  price  is  relatively  low  because  it  does  not  consist  of  sheets  and  the   cleaning  costs.  Combining  this  knowledge  and  implementing  it  for  hotels  led  to   the  third  hypothesis:  

H3.   A   combination   of   low   margins   on   traditional   revenue   streams   with   high   margins   on   non-­‐traditional   revenue   streams   will   lead   to   higher   performance.  

velocity   will   be   influenced   by   the   price   the   hotel   advertises.   High   prices,   including   high   margins   for   rooms,   can   stimulate   short   stays,   whereas   giving   a   discount  to  long-­‐term  guest  by  lowering  the  margin  can  stimulate  people  to  stay   longer.  If  the  number  of  times  a  room  is  used  increases  because  the  number  of   bookings   or   duration   of   stays   increases,   the   occupancy   rate   of   the   hotel   will   increase.  However,  if  the  profit  margin  on  the  rooms  to  attract  guests  is  too  low,   then  the  total  profit  of  the  hotel  will  decrease.  In  addition,  the  quality  of  a  service   offered  by  service  firms  is  judged  by  customers  by  observing  the  price  (Blinder   et  al.,  1998).  Therefore,  it  is  not  always  wise  for  a  hotel  to  lower  its  prices  nor  to   increase  the  prices  too  much  since  the  customer’s  quality  expectations  will  not   be   met   if   prices   are   too   high.   Thus,   a   hotel   has   to   find   a   point   were   maximum   profit  can  be  made.  This  leads  me  to  assume  that  the  prices  and  the  duration  of   stay   in   a   hotel   will   have   an   optimum   point   where   performance   is   maximized.   These  findings  led  to  the  last  hypothesis:  

H4.   There   exists   an   inverted   U-­‐shaped   relationship   between   resource   velocity  and  performance  

2.5  Conceptual  model  

Figure  1.  Conceptual  model  

3.  Methodology  

To   answer   the   research   question   and   hypotheses   regarding   hotels’   business  models,  a  sample  of  hotels  that  explains  their  business  models  must  be   selected.  The  short  time  frame  to  arrange  respondents  and  the  sensitivity  of  the   information  led  me  to  decide  to  focus  on  qualitative  research.  By  adding  open-­‐ ended  questions  about  the  hotel  business  model,  I  was  able  to  make  statements   on   the   hypotheses   by   analysing   and   quoting   the   answers   of   different   hotel   professionals.    

To   compare   the   different   business   models,   the   research   needed   a   structured   approach   (Osterwalder   et   al.,   2005).   To   achieve   a   structured   approach   for   both   the   quantitative   and   qualitative   research,   I   developed   a   structured   interview   that   I   used   with   every   respondent.   These   interviews   consisted   of   a   descriptive   statistic   portion,   followed   by   open-­‐ended   questions   about   the   business   model,   and   ended   with   closed   questions   off   the   business   model.    

3.1  Sample  

The   research   sample   consisted   of   the   business   models   of   15   hotels,   explained  during  the  interviews  with  13  hotel  professionals.  These  professionals   provided  insights  into  the  business  model  of  the  hotels  for  which  they  worked.   The   interviewed   professionals   were   all   employed   in   management   functions   in   the  hotels.  Two  of  the  13  managers  in  the  sample  manage  two  hotels  at  the  same   time  for  the  same  owners.  The  sample  consisted  of  eight  women  and  five  men,   with   an   average   age   of   35   years.   The   professionals   had   around   11   years   of   working   experience   in   the   hotel   industry;   12   professionals   had   bachelor’s   degrees  and  only  one  professional  had  secondary  vocational  education.    

to   lower   the   influence   of   the   external   environment   on   the   business   model   because  a  guest  of  a  hotel  located  in  a  city  has  a  wider  choice  of  restaurants  than   the  guest  of  a  hotel  in  a  village.  The  number  of  full-­‐time  employees  (FTEs)  the   hotels  employed  varied  enormously  since  some  hotels  outsourced  work,  such  as   housekeeping,  and  others  did  not.  In  table  2  an  overview  of  the  characteristics  of   the  15  researched  hotels  is  given.    

Table  2.  Overview  of  the  characteristics  of  the  hotels   Hotel  

number  

Sleeping   guests  

Stars   Part  of   a  chain   Offered  facilities   1   11500   4   Yes   R-­‐F-­‐F&B   2   36500   4   No   R-­‐F-­‐F&B-­‐Spa   3   15000   4   Yes   R-­‐F-­‐F&B-­‐Spa   4   23000   3   Yes   R-­‐F&B   5   105000   4   Yes   R-­‐F-­‐F&B-­‐Spa   6   51000   3   No   R-­‐F-­‐F&B-­‐Spa   7   60000   4   Yes   R-­‐F-­‐F&B-­‐Spa   8   20000   4   Yes   R-­‐F&B   9   95000   4   Yes   R-­‐F-­‐F&B   10   49000   5   Yes   R-­‐F-­‐F&B-­‐Spa   11   135000   5   Yes   R-­‐F-­‐F&B-­‐Spa   12   90000   5   Yes   R-­‐F-­‐F&B   13   19000   4   Yes   R-­‐F-­‐F&B   14   38500   4   Yes   R-­‐F-­‐F&B   15   15000   4   Yes   R-­‐F-­‐F&B  

R  =  Rooms;  F  =  Function  rooms;  F&B  =  Food  and  Beverage;  Spa  =  Spa  and  Fitness      

3.2  Dependent  variable:  Organizational  performance  

2003).   For   this   research   we   use   capacity   utilization   as   market-­‐based   measure   and  profitability  as  financial  measure.  As  capacity  utilization  the  occupancy  rates   is  used  just  as  in  the  research  of  (Agarwal  et  al.,  2003)  to  measure  performance.   Profitability  is  measured  as  net  profit  just  as  in  the  research  of  Gil,  Jiménez,  and   Lorente  (2001).  

3.3  Independent  variables:  Elements  of  the  profit  formula  

  In   the   conceptual   model,   the   four   elements   of   the   profit   formula   of   a   business  model  were  the  independent  variables.  Details  of  these  elements  were   asked  with  open-­‐ended  questions.  For  the  first  three  elements  the  professionals   were  asked  how  the  hotels  designed  their  revenue  model,  cost  structure,  margin   model.  Additionally,  they  were  asked  why  the  elements  were  designed  like  this   and  if  the  design  had  recently  changed  or  if  they  were  intending  to  change  it.  For   the  last  element  the  professionals  were  asked  if  the  amount  of  bookings  and/or   the  duration  per  booking  changed  over  the  years.  In  addition  of  this  was  asked   how  they  thought  this  would  be  in  the  future.  All  the  answers  to  these  questions   where  written  down  and  compared.  The  similar  answers  were  grouped,  and  the   other  answers  were  annualized.      

4.0  Results  

4.1  Overview  

In   this   chapter,   the   important   results   of   the   13   interviews   with   professionals  will  be  discussed.  These  results  were  determined  by  analysing  and   quoting   the   answers   of   the   different   respondents   in   order   to   support   the   four   hypotheses.  The  majority  of  the  professionals  said  they  enjoyed  the  interviews   because  the  interviews  let  them  reflect  on  their  decisions.  Thereby  was  none  of   the  respondents  able  to  clearly  answer  the  question,  “How  would  you  describe   the   business   model   of   this   hotel?”   This   finding   is   inline   with   George   and   Bock   (2011),   who   found   that,   for   practitioners,   it   is   hard   to   explain   their   business   models.  The  decision  to  split  the  business  model  was  good  since  the  respondents   had  almost  no  problems  answering  the  questions  about  the  specific  parts  of  the   business  model.  These  findings  imply  hotel  business  models  often  are  based  on   the  experience  of  the  managers  and  also  show  that  many  give  too  little  specific   attention  to  their  business  models.  Before  reading  the  results  of  the  hypotheses,   it  is  important  to  know  that  the  majority  of  the  hotels  had  hard  times  during  and   after  the  crisis  in  2007/2008.  The  market  collapsed,  and  the  hotels  took  losses   after  several  good  years.  Today,  all  the  respondents  agree  the  market  is  past  the   nadir   and   is   increasing;   however,   to   reach   the   performance   level   of   before   the   crisis,   the   hotels   still   have   a   long   way   to   go.   In   table   3   the   results   of   the   quantitative  performance  indicators  of  2014  are  showed.  Since  some  values  are   missing   and   some   respondents   only   knew   the   Gross   Operating   Profit   (GOP)   of   their   company   I   decided   to   rank   the   performance   in   three   levels.   These   three   values  are  determined  as  follows:  net  profit  percentage  <0%  and  if  not  given  an   occupancy  rate  <60%  gives  the  performance  value  ‘Bad’,  net  profit  between  0%-­‐ 5%  and  if  not  given  an  occupancy  rate  between  60%-­‐70%  gives  the  performance   value  ‘Medium’,  net  profit  >5%  and  if  not  given  an  occupancy  rate   ≥70%  gives   the  performance  value  ‘Good’.  As  showed  in  table  3  are  seven  hotels  ranked  as   ‘Good’,  seven  hotels  ranked  as  ‘Medium’  and  one  hotel  ranked  as  ‘bad’.  

Table  3.  Ranked  Performance  of  the  15  Hotels   Hotel   number   Profit   Percentage  2014   Occupancy   rate  2014   Ranked   performance   1   10%   60%   Good   2   3%   63%   Medium   3   5%   65%   Medium   4   GOP  40%   70%   Good   5   6%   60%   Good   6   4%   71%   Medium   7   GOP  30%   62%   Medium   8   GOP  31%   62%   Medium   9   Missing   95%   Good   10   -­‐3%   56%   Bad   11   10%   87%   Good   12   GOP  43%   79%   Good   13   7%   69%   Good   14   5%   69%   Medium   15   4%   60%   Medium  

GOP=Gross  Operating  Profit  

4.2  Hypotheses  

4.2.1  Hypothesis  1  

I   have   a   F&B   heart,   and   I   am   always   looking   for   opportunities   to   add   a   restaurant   again   in   the   hotel,   but   till   now   the   management   of   the   chain   and  I  do  not  see  an  opportunity  for  this  that  lead  to  a  better  performance.     The  view,  as  shown  in  the  research  of  Cross  et  al.  (2009),  that  hotels  in  the  future   have  to  focus  more  on  F&B  was  only  shared  by  three  respondents.  These  three   respondents   stated   focusing   more   on   F&B   in   the   future   would   increase   the   performance  of  their  hotels:    

We  quit  offering  dinners  in  the  weekends  because  of  the  bad  performance   of  it.  This  resulted  in  a  decrease  of  the  good  performing  bar.  So  now  we   have   to   find   out   again   which   focus   lead   to   the   best   performance   of   our   hotel.    

  In   the   past,   only   two   hotels   tried   to   add   new   revenue   streams   to   their   revenue  models.  One  saw  the  opportunity  to  add  Spa  and  Fitness  facilities  to  the   revenue   model   1,5   years   ago.   This   change   was   intended   to   add   value   to   the   hotel’s  rooms  for  business  and  leisure  guests  by  using  it  as  a  unique  selling  point.   Unfortunately,  it  is  too  early  to  say  how  this  change  influenced  performance.  The   other   hotel   tried   to   increase   its   performance   by   adding   function   rooms   to   its   revenue   model   several   years   ago,   which   turned   into   a   disaster   and   large   loss   since   the   market   for   function   rooms   collapsed,   due   to   the   crisis,   just   when   its   function  rooms  were  put  into  operations.  In  the  future,  two  hotels  wanted  to  add   shops  as  new  revenue  streams  to  their  revenue  models.  With  a  shop,  one  hotel   wanted   to   sell   souvenirs   to   leisure   guests   and   goody-­‐bags   to   function   room   users.  The  other  hotel  thought  differently  and  wanted  to  sell  products  that  guests   consume   or   use   at   the   hotel,   like   coffee   and   self-­‐made   sweets.   As   one   of   the   respondents   said,   “Every   product   we   sell   additional   to   the   rooms   has   a   big   margins  and  so  will  have  a  positive  influence  on  our  profit”.    

qualitative   part   of   this   section.   The   quantitative   findings   as   shown   in   table   4   thereby  support  the  findings  of  the  qualitative  findings.  

So  after  analysing  the  qualitative  and  quantitative  data  both  show  that  a   focus  on  the  traditional  revenue  stream  led  to  higher  performance  than  a  focus   on   the   non-­‐traditional   revenue   streams.   This   finding   does   not   match   the   expectations   that   non-­‐traditional   revenue   streams   become   more   important   because  of  a  change  in  the  environment.    

Table  4.  Revenue  distribution  for  traditional  and  non-­‐traditional   revenue  streams  in  2014  

Hotel   number   Revenue  from   traditional   revenue  stream   Revenue  from   non-­‐traditional   revenue  streams   Ranked   performance   2014   8   87%   13%   Medium   4   78%   22%   Good   10   70%   30%   Bad   12   67%   33%   Good   2   65%   35%   Medium   11   61%   39%   Good   6   60%   40%   Medium   13   59%   41%   Good   7   55%   45%   Medium   5   55%   45%   Good   1   50%   50%   Good   15   45%   55%   Medium   9   45%   55%   Good   14   37%   63%   Medium   3   35%   65%   Medium  

Ranked  Performance  2014  is  based  on  Table  3     4.2.2.  Hypothesis  2  

outsourcing   the   housekeeping   and   renegotiating   the   contracts   with   all   of   our   suppliers”.   Another   respondent   decreased   the   fixed   costs   by   cooperating   with   another   hotel   to   create   a   purchasing   advantage.   In   addition,   this   hotel   quit   the   long-­‐term   contract   with   the   beer   brewery   that   also   included   purchasing   obligations  of  wine  and  soda.  Another  good  reason  for  the  higher  variable  cost   today   was   given   by   a   respondent   who   stated,   “in   the   past,   a   fixed   budget   was   used  for  marketing  and  sales.  This  budget  is  almost  reduced  to  zero,  and  instead,   the  hotel  has  to  pay  a  high  commission  fees  for  every  booked  room  at  a  booking   site”.  The  respondent  add  this:  “If  I  would  spend  the  same  amount  of  money  I  pay   to  the  bookings  sites  on  sales  and  marketing,  the  hotel  would  get  less  bookings”,   so   the   introduction   of   bookings   sites   had   a   positive   influence   on   performance,   according  to  this  respondent.    

  A   disadvantage   of   cutting   the   fixed   costs,   according   to   a   respondent,   is   that  essential  work  experience  is  lost  because  the  contracts  of  many  experienced   employees   changed   from   long-­‐term   contracts   to   short-­‐term   contracts.   As   another  respondent  stated,  “of  course  we  want  to  cut  our  costs,  but  we  have  to   keep  in  mind  the  quality  of  our  products  and  services  because  they  are  not  able   to   suffer   from   this”.   A   loss   of   quality   could   result   in   negative   performance,   according  to  the  same  respondent.  Therefore,  to  not  have  a  negative  influence  on   their   performance,   the   hotels   have   to   keep   in   mind   the   quality   level   of   their   services  and  products.    

  The  findings  in  table  5  show  that  only  nine  out  of  fifteen  hotels  were  able   to  show  their  cost  structure.  The  reason  why  these  respondents  could  not  share   the   cost   structure   of   their   hotel   was   that   the   hotel   they   work   for   does   not   distributes   their   costs   in   fixed-­‐   and   variable   costs.   Analysing   the   remaining   results   show   that   except   hotel   six   all   hotels   do   not   have   the   75%   fixed   cost   percentage   as   stated   in   Kotas   (2014).   This   let   me   assume   that   the   percentages   fixed   cost   has   decreased   in   the   hotel   industry.   Analysing   the   ranking   gives   not   much  value  to  this  hypothesis,  since  hotels  in  the  higher  segment  generally  show   a   higher   fixed   cost   structure   than   hotels   in   the   lower   segment   (Harris   &   Mongiello,  2001).    

becomes   more   flexible   the   cost   structure   also   has   to   become   more   flexible   to   have   a   high   performance.   The   findings   of   the   quantitative   part   cannot   fully   confirm  the  findings  of  the  qualitative  part  since  little  value  can  be  given  to  the   results  in  table  5.    

Table  5.  Cost  structure  distribution  from  fixed-­‐  and  variable   costs  2014  

Hotel   number  

Average  percentage   fixed  costs  of  all   revenue  streams  

Average  percentage   of  variable  costs  of   all  revenue  streams  

Ranked   performance   2014   1   23,33%   76,67%   Good   4   33,67%   76,33%   Good   3   43,75%   56,25%   Medium   13   46,67%   53,33%   Good   2   55,00%   45,00%   Medium   12   55,00%   45,00%   Good   10   62,50%   37,50%   Bad   11   65,00%   35,00%   Good   6   75,00%   25,00%   Medium  

Ranked  Performance  2014  is  based  on  Table  3   4.2.3.  Hypothesis  3  

The  profit  margin  among  the  revenue  streams  was  different.  Section  2.4   examined  whether  a  combination  of  low  margins  on  traditional  revenue  streams   with   high   margins   on   non-­‐traditional   revenue   streams   would   lead   to   higher   performance   for   the   hotels.   As   shown   in   Table   6,   eight   of   the   15   managers   ranked   the   traditional   revenue   stream   as   the   stream   with   the   highest   margin.   The  other  seven  ranked  one  of  the  non-­‐traditional  revenue  streams  as  the   one   the   highest   margin.   In   addition,   six   out   of   these   seven   respondents   ranked   the   traditional   revenue   stream   as   second.   That   the   traditional   revenue   stream   is   ranked  so  highly,  despite  the  proven  lower  prices,  was  well  explained  by  one  of   the  respondents:    

A   respondent   added   that   it   was   hard   to   make   high   profit   margins   on   F&B   because  of  the  following:    

The  prices  of  F&B  are  mostly  fixed  and  hard  to  increase.  Even  when   purchasing  prices  go  up,  it  is  hard  to  index  the  prices.  The  prices  of  our   rooms  are  fluctuating  all  the  time.  This  made  it  easier  to  change  the  price   all  the  time  and  to  get  high  margins  on  our  room.  

Thus,   if   a   hotel   is   not   able   to   index   the   higher   purchase   costs   in   a   new   higher   price,   the   profit   margin   will   decrease   and   have   a   negative   impact   on   the   performance  of  that  hotel.    

  Another   reason   why   the   margin   on   non-­‐traditional   revenue   streams   is   lower  than  on  the  traditional  revenue  streams  is  that  the  services  and  products   on  non-­‐traditional  streams  have  to  compensate  each  other.  An  example  from  one   of  the  respondents,  who  ranked  F&B  last,  was  “the  high  margins  on  our  breakfast   have  to  compensate  the  lower  margin  or  even  lost  on  the  dinner  we  make”.  The   three  respondents  who  stated  that  the  highest  profit  margin  was  made  on  F&B   mentioned  that  this  was  mainly  because  of  the  high  margins  they  made  on  the   bar.   The   three   respondents   who   ranked   additional   services   and   products   first   stated  this  was  because  of  the  high  margin  on  parking.  None  of  the  respondents   ranked   the   revenue   stream   Spa   and   Fitness   facilities   highly.   The   margin,   according  to  the  seven  respondents  who  offered  this  stream,  was  low,  and  they   only  offered  it  as  extra  facility  and  used  it  as  a  unique  selling  point.  Thus,  a  high   margin  on  this  revenue  stream  should  positively  influence  the  performance  of  a   hotel.  However,  the  impact  on  the  total  performance  was  too  little  to  compensate   for  the  suggested  lower  margins  on  the  traditional  revenue  stream  because  the   amount  of  revenue  these  high  margin  revenue  streams  had  was  too  low.    

The   findings   of   the   qualitative-­‐   and   quantitative   part   do   not   match   the   expectation   that   higher   margins   on   non-­‐traditional   revenue   streams   can   compensate  a  lower  margin  on  the  traditional  revenue  stream  and  thus  lead  to   higher  performance.  Rather,  it  seems  difficult  to  increase  the  amount  of  revenue   or   percentage   of   profit   margin   on   the   non-­‐traditional   revenue   streams   in   the   Netherlands.  

Table  6.  The  margin  on  every  revenue  stream  ranked   from  high  to  low  in  2014  

Hotel   number   Revenue  streams     ranked   Ranked   Performance  2014   1   R  -­‐  F  -­‐  F&B   Good  

9   R  -­‐  F  -­‐  F&B  -­‐  O   Good   4   R  -­‐  F&B  -­‐  O   Good   3   R  -­‐  F&B  -­‐  F  -­‐  Spa   Medium   7   R  -­‐  O  -­‐  F  -­‐  F&B   Medium   11   R  -­‐  O  -­‐  F  -­‐  F&B  -­‐  Spa   Good  

8   R  -­‐  O  -­‐  F&B   Medium   12   R  -­‐  O  -­‐  Spa  -­‐  F&B   Good  

5   F  -­‐  R  -­‐  F&B  -­‐  Spa   Good  

6   F&B  -­‐  R   Medium  

14   F&B  -­‐  R  -­‐  F  -­‐  O  -­‐  Spa   Medium   15   F&B  -­‐  R  -­‐  F  -­‐  O   Medium   2   O  -­‐  R  -­‐  F  -­‐  F&B   Medium   10   O  -­‐  R  -­‐  F&B  -­‐  F   Bad   13   O  -­‐  F  -­‐  R  -­‐  F&B   Good  

R  =  Rooms;  F  =  Function  rooms;  F&B  =  Food  and  Beverage;  Spa  =  Spa  and  Fitness;  O  =  Others   Ranked  Performance  2014  is  based  on  Table  3.    

4.2.4.  Hypothesis  4  

The   last   hypothesis   stated   there   is   an   inverted   U-­‐shaped   relationship   between   resource   velocity   and   performance.   All   the   respondents   used   fluctuating  prices,  which  is  a  characteristic  of  the  yield  management  approach.  A   good  example  one  of  the  respondents  gave  was  as  follows:    

where  used  less  but  the  cost  decreased  a  lot  too.  This  change  resulted  in  a   total  profit  increased  of  400%.    

Therefore,   the   optimum   inverted   U-­‐shape   must   be   found   for   optimal   performance.   As   stated   before,   the   hotel   industry   is   seasonal.   Therefore,   the   optimum  inverted  U-­‐shape  is  also  dynamic.  Off-­‐season,  several  hotels  advertised   with   package   deals   on   discount   websites.   These   deals   often   included   several   extras,  such  as  dinner  and  breakfast,  and  covered  the  fixed  costs,  as  well  as  kept   the  hotel  from  further  losses  during  the  off-­‐season.  One  of  the  respondents  had   an  example  of  this  practice:  “During  off-­‐season,  we  try  to  cover  the  fixed  costs  by   offering   package   deals   on   different   discount   sites   with   minimal   margin.   These   margins  are  sometimes  so  low  that  when  a  guest  drops  a  plate,  we  are  already   making   a   loss”.   Except   for   one   respondent   who   just   started   a   hotel,   all   respondents   had   to   deal   with   decreasing   duration   per   stay.   The   main   reason,   according   to   the   majority   of   the   respondents,   was   the   crisis   that   started   in   2007/2008.   A   trend   one   of   the   respondents   saw   was   as   follows:   “In   the   past,   guests  booked  two  nights  for  a  weekend  trip.  Today,  these  guest  still  come  for  a   city   trip   but   book   only   one   night   and   check   in   early   and   leave   late   from   the   parking”.   In   order   to   extend   a   guest’s   stay,   one   of   the   respondents   inserted   a   minimum  stay  of  two  nights  into  their  booking  systems.  This  resulted  in  a  higher   duration  of  stay  and  better  performance,  according  to  the  respondent.  However,   this  solution  will  not  work  for  most  of  the  hotels  because  of  the  different  external   environments.   In   2015,   most   of   the   respondents   saw   a   slight   increase   in   duration,  but  they  did  not  expect  to  reach  the  pre-­‐crisis  levels.    

The   quantitative   results   in   table   7   show   that   most   of   the   ‘good’   ranked   hotels   are   ranked   in   the   middle   of   the   table.   On   the   outer   sides   of   the   ranking   mainly   the   ‘Medium’   ranked   hotels   are   positioned.   This   indicates   that   there   exists  an  inverted  U-­‐shape  between  the  average  nights  of  stay  and  performance.   The  quantitative  results  thus  confirm  the  findings  of  the  qualitative  part  of  this   hypothesis.