Hotels are world-beaters. They provide people comfort and luxury with over the edge technology. How do hotels function in this vast competitive market of travel and tourism? How do hotels operate by inculcating all the diversity and varied factors of globalisation? How do they develop themselves into a successful establishment by gaining an edge over its competitors? Dubai and its Burj AL Arab hotel are certainly successful cases. The aims and objectives of the project is to analyse and distinguish various strategies, which Burj AL Arab hotel follows to align with the risk environment in Dubai it functions, in order to increase its profit and to be one of the finest world recognition.
Dubai is situated in United Arab Emirates, which is bordered in the north by Arabian Gulf, east and south by sultanate of Oman and Saudi and to the west by Qatar and Saudi Arabia. It is a predominant Muslim country with Islam as its main religion. The country has a large dependence on oil and natural gas exports where business also follows. This has encouraged the flourishing of a large number of hotels in Dubai, which has created a lot of tourists visiting the country over a long period of time.
Burj AL Arab is referred to as the “Arabian tower”. Centrally located in Dubai and with a height of 321m, it is the tallest hotel in the world. The hotel was built on a man made island 280m offshore, appearing to look like a sail or a “jib” to devout sailors. It has a total of 202 duplex suites and it is an all suite hotel.
From risk analysis and review of the competitive environment aspects, this article expounds the intuition of Dubai and its Burj AL Arab hotel that is managing to strive the highest quality in the hotel industry. The risk analysis comprise cultural aspects, economical aspects, demographic aspects, social behavioural aspects, and political and legal aspects; the review of competitive environment consists of analysis of the nature of competitive environment, capitalizing Porter’s 5 forces, Porter’s competitive strategies and competitive tactics, and directional strategies based on the case of Dubai and its Burj AL Arab hotel.
ENVIRONMENT RISK ANALYSIS
Significant Cultural Influence
A bold and forward-looking society, Dubai proudly treasures its culture and traditions. It has a tolerant, cosmopolitan society that maintains its Islamic values and culture.
Although relatively tolerant and relaxed, Dubai’s culture is firmly rooted in Islam. Most Emiratis are Sunni Muslims, and many belong to the strict Wahhabi sect (www.zuji.com). Population makeup is quite diverse: only about a quarter of Dubai’s people are Emirati; Russian, Iranian, and Filipino traditions contribute to the overall feeling of Dubai. Arabic is the official language, but English is the language of business. Urdu, Farsi and Malayalam are also useful.
The Arab national dress worn in Dubai is well adapted to the high temperatures of the region. Most men wear a traditional long white robe, while women are usually covered entirely by a black abaya and a thin face veil.
Traditionally, the people in Dubai are courteous, kind and friendly and quite hospitable both in social matters and in business. But as in any Islamic country, they are expected to respect local customs, especially religious practice (www.sevenseashotels.com). Dubai is also home to the world’s richest horse race, the Dubai Cup, and championship golf courses.
The cultural environment holds deeply influence on marketing behaviour. Hotel industry needs to be sensitive to cultural variation in the environment and grasp opportunities for expanding. For instance, In Dubai there is 80 percent foreigners who have investments, businesses and employments. Over 1100 staff members from 50 different nationalities work in different areas of Burj AL Arab hotel. Therefore, they bring the diverse cultures from all different home countries such as religions, values, and social behaviours, etc. There will be slight or even severe varies between different guest groups, product suppliers, and hotel employees. It is crucial important for the managerial level to treat people with equal respect and revere different cultural norms.
The Relevant and Current Economic Climate
The relevant and current economic situation and climate of Dubai evident influenced the development and threats of Burj Al Arab-the Arabian Tower.
The city of Dubai has an open economy with a high per capita income and a sizable annual trade surplus. Its wealth is based on oil and gas output (about 33% of GDP), and the fortunes of the economy fluctuate with the prices of those commodities. At present levels of production, oil and gas reserves should last for more than 100 years. The government has increased spending on job creation and infrastructure expansion and is opening up its utilities to greater private sector involvement. (www.nbd.co.ae) The factors that distinguish Dubai are its attractive commercial and investment climate that made Dubai an important destination for international trade and tourism, investors, businessmen and shippers from neighbouring countries and other parts of the world coming to the Dubai thus making a positive impact on its economic and commercial activity.
Reflecting buoyant economic activity in trade, services and tourism and manufacturing sectors, the Gross Domestic Product (GDP) real growth rate is 5.6%(2001 EST.). The GDP Purchasing power parity is $51 billion and the GDP purchasing power parity-per capita is $21,100 (2001 EST.).
The GDP composition by sector is: Agriculture: 3%; Industry: 46%; Services:
51 %( 2001 EST.). And the labour force is 1.6 million include: Services 78%; industry 15%; agriculture 7% (2000 EST.) (www.emiratesbank.com).
The continued increased GDP, the structure of GDP, the labour force structure show that the service is a very important part in the GDP. And fiscal policies will promote the development of the non-oil industry like tourism and hospitality industry so that Burj AL Arab hotel will develop in this kind of economic environment.
This economic environment consists of factors that affect consumer purchasing power and spending patterns. Markets require buying power as well as people (Kotler et al, 1996). So the buying power of customers decides that whether they will consume in the Burj AL Arab, and also influence the consume class of the customers in the hotel of Burj AL Arab.
Demographic Profile and Effects on Business
Dubai is the second largest of seven Emirates that comprise the United Arab Emirates (UAE). It is the costal city of the United Arab Emirates, which located on the south eastern end of the Arabian Peninsula. Dubai’s area is 3,900 sq. km (www.tradepartners.gov.uk).
Dubai’s population is estimated at 700,000. All of Dubai’s citizens are Muslims, with approximately 85 percent followers of Sunni Islam and the remaining 15 percent followers of Shi’a Islam (www.planetgypsy.com). Naturalization of new citizens is limited to Sunni Muslims. Approximately 80 percent of the population are foreigners, predominantly from South and Southeast Asia. A substantial number of foreign professionals are citizens of countries in the Middle East, Europe, and North America. The population density is 24 inhabitants per sq km. The estimated population growth rate is 3.5% per year.
In the UAE, individual emirates as well as the Federal Government regulate economic activity. In Dubai, the authorities have deliberately sought to create an environment, which is well ordered without being unduly restrictive. As a result, Dubai offers businessmen operating conditions that are among the most liberal.
There are many options open to international companies seeking to establish a business relationship with Dubai. Apart from forming a trading relationship, many companies find that there are distinct advantages in having an on-the-spot presence in order to research market prospects, make contacts, liase with customers, and see through the details of any transactions and orders secured.
From that situation, Dubai have a strong demand on Burj AL Arab lodging industry from two largest market groups which are Business and Tourists travellers. Therefore, main target markets of Burj AL Arab will be both two types’ travellers. As other market segments, such as families, tourist etc, may as well provide large potential revenue, thus Burj AL Arab will also include these segments as target markets. Moreover, since Burj AL Arab only provide limited services charge with high prices, which therefore will attract top-tier segments with middle to higher income.
Dubai is a fine example of economic development triggering swift social changes. The city is constantly building up its infrastructure of transport facilities, schools, hospitals, tourism developments and other amenities of an advanced society (www.planetgypsy.com). It is a commercial city with cosmopolitan feature, but has not forsaken its ancient ways.
Attractive features offered have tempted international businesses in developing their market. The market has been increasing steady, although the UEA has a relatively smaller population than other Middle East countries.
Customer buying behaviour is influence by social factor, including the consumers’ reference groups, family, social rules and status (Kotler et al, 1999). Local communities accept the different culture and behaviour of tourists. In additional, Dubai is very safety and comfortable for tourists and hotels in doing their business. The social/behavioural in Dubai brings positive impact not only for Burj AL Arab Hotel, but also for others, such as Le Meridien Mina Seyahi Resort, Hyatt Regency Dubai, and Sheraton Jumeira Beach Resort and Towers that can increase visitors travelling to Dubai, and also makes the competition tighter between hotels.
Furthermore, Islamic law applies as social rules that companies must follow. As the country with major population of Islam, Burj AL Arab Hotel must follow the regulation on selling alcohol and pork and praying formulation.
Political and Legal aspects which support or constrain the business
Dubai government is circumspectly setting laws and regulations with regard to running business. Regulations such as Tax Treatment of offshore operations might bring negative benefit to the domestic operations. All foreign investors have to apply for a licence from the ministry of economy and commerce before they start their business (www.dibai.com), which will provide a more desirable environment. Foreign operators have to obtain required approvals from certain ministries and other authorities. This may decrease the virulent competition or entry of inappropriate companies or organizations.
In the case of the hotel Burj AL Arab, competition seems unavoidable. The policies and regulations is fair to any investors, even foreign companies may have more political benefit, it will encourage hotels running by the domestic owners to improve themselves to be more preponderant by changing their policies so that to be firm. With the regulation of government, if these regulations and policies were implemented authentically, the business environment would be comparatively more normal, easier for government to control and for investors to manage.
Other regulations such as: ‘No personal income tax is deducted from wages and salaries paid to employees or on other income earned.'(Taxation of Foreign Employees of Offshore Operations, Offshore legal and tax regimes in Dubai) may affect this hotel facing the poetical problems such as the increase of operating cost. Employees may job-hop to other hotels under the policy mentioned above, and then there will be an increase of the cost for recruitment and training. This might affect hotels in the host countries to change their policies or employee treatment, even the organizational culture to adapt to the policies, regulations and changes.
Recently, there was a rough period for the hospitality industry as it struggled to operate in a tense political and economical atmosphere, which was rocked by terrorist attacks. For the condition of the turbulence in the Middle East, Dubai as a neutral state since 1971 hasn’t been influenced negatively. However, the possible war against Iraq may cause negative effect over the development of Dubai tourism.
REVIEW OF THE COMPETITIVE ENVIROMNMENT
The Nature of the Competitive Environment
Dubai has experienced remarkable growth in the hospitality industry in both sides of availability and quality. Although recent political situation in Middle East reduced development, hospitality industry is predict to greatly expand in the coming years according to the developing trends.
From 1993 to 2001, hotel industry in Dubai grew at an annual average of 6.1 per cent, and hotels’ total revenues increase an average annual of 9.2 percent (www.hotelier-malta.com). By the end of 2001, Dubai possessed 69.5 percent of UAE Dh 2 billion total revenue from hotel and 72.5 percent of 364 total hotel amount. For the hotels occupancy, the more luxury the hotel is, the more occupancy rate occurs, for instance: 5 star hotels or up-71%, 4 star hotels-65%, 3 star hotels-53%, and 2 star hotel or under-47%.
According to Fred (1995), based on two evaluate dimensions: competitive position and market growth, appropriate strategies for any corporation are listed in each quadrant, which is called Grand Strategy Matrix. In the case of Burj AL Arab hotel in Dubai, due to the great occupancy rate and high industry’s growth rate, it experienced the high market growth and strong competitive position (More analysis of Burj AL Arab’s strong competitive advantage will be provided in Porter’s Competitive Strategy and Competitive Tactics). Thus, the hotel is positioned in Quadrant 1, “which means continual concentration on current markets penetrating and products developing are appropriate strategies” (Fred, 1995).
Figure 2. Grand Strategy Matrix
Rapid Market Growth
Quadrant 2 Quadrant 1
Market development Market development
Market penetration Market penetration
Product development Product development
Horizontal integration Forward integration
Divestitures Backward integration
Liquidation Horizontal integration
Weak Concentric diversification Strong
Quadrant 3 Quadrant 4
Retrenchment Concentric diversification
Concentric diversification Horizontal diversification
Horizontal diversification Conglomerate diversification
Slow Market Growth
Top-class leisure, sports event, and Dubai shopping festival have become the main dynamism for visiting Dubai. Leisure has surpassed business as the primary reason for visiting Dubai due to the deluxe hotel services and facilities. Dubai is also widely known as an international sporting venue holding many sport events such as Horse Races, International Power Boat Racing, Pedigree Camel Races, Dubai World Cup, Dubai Tennis Championships, etc. In addition, the well-known Dubai shopping festival, which offers shopping, world-class entertainment, daily raffles and arts, has been recognized as the world’s largest festival.
Porter’s 5 Forces
Michael Porter provided a framework, which models an industry influenced by five forces: threat of new entrants, bargaining power of supplier, rivalry among existing competitors, bargaining power of buyer and threat of substitute product and service. This model can be utilized to gain in-depth understanding of the industry context in which the firm operates, and assist the firm in achieving higher profit margins and remain competitiveness.
Rivalry Among Existing Firms
According to Grant (1998), there are several factors to examine when considering the rivalry among existing firms:
* Low demand of the products
* Low switching cost
* Exit barriers
* More equal size competitors
As a leading regional commercial hub with a state-of-the-art infrastructure and an excellent business environment, Dubai provides investors with a unique and comprehensive value-added platform that make Dubai a strategic location for conducting business. As evidences to Dubai success in attracting foreign investments, many hotels were built in the past and some are under development to meet the high demand of foreign customers and to support the economic growth of Dubai.
Burj AL Arab is one of the most obvious distinctions among them. It have a lot of competitor like Le Meredien Mina Sayahi, Hyatt Regency Dubai, Sheraton Jumeira Beach Hotel and much more, which have strong brand reputation among local and international travellers. In order to leverage its brand equity, Burj AL Arab Hotel must possess better quality of service and facilities above its competitors.
Threat of New entrants
According to Johnson et al (1999), there are several aspects when considering the power of the new entrants:
* Existing loyalty to major brands
* High fixed costs
* High costs of switching companies
* Government restrictions or legislation
For Burj AL Arab hotel, there also exists threat from the new entrants. Even though it has loyal customers, small mishandling in customers expectations may cause the loyal customers to switch preferences. Burj AL Arab has raised the customer expectations to a very high degree and failure to meet these expectations can disappoint the customers. This hotel has a particular advantage which other hotels are difficult to replace: the particularity of the product. Its idiographic makes the hotel became the primary choice for the guests who would like to have a deluxe and exiting stay in Dubai. In comparing this hotel with other new entrants, Burj AL Arab hotel possess competitive advantages in term of cost advantages such as hiring cost, recruiting cost, and operating cost, and strong brand recognition among top-tier travellers.
Bargaining Power of Buyers
The power of buyers is the impact that customers have on a producing industry. In general, when buyer power is strong, the relationship to the producing industry is near to what an economist terms a monophony – a market in which there are many suppliers and one buyer. According to Fred (1995), the analysis of competition of buyer power for Burj AL Arab hotel can be express in the following points:
* Price sensitivity
* Product differentiation
* Brand Identity
Majority of customers always pay close attention to the hotel’s price. Therefore Burj AL Arab hotel should raise or lowering prices to gain a temporary advantage based on the changes of high season or low season. A low level of product differentiation is associated with higher levels of rivalry. On the contrary, Burj AL Arab has great product differentiation with the only room type-suit rooms. It helps lower the rivalry levels.
Burj AL Arab hotel is a single marketed brand hotel. It doesn’t have the brand recognition when compared with Sheraton, Hyatt or the Le Meridien chain of hotels. However, this does not affect Burj Al Arab Hotel seem the hotel aims for a high profile customer who is willing to pay premium price for their unique experiences and first class services. In addition, it manages to maintain a high “buyer volume” with large number of guest staying at the hotel throughout the year and with high occupancy.
Bargaining Power of Supplier
“Suppliers are firm and individuals that provide the resources needed by the company to produce its goods and services” (Kotler et al, 1999).
Under the following conditions, supplier can assert large influence in the business transaction:
* There are few dominant suppliers of a particular product
* There are no substituted products
* Switching to another product is very costly
* The product is extremely important to hotel
If these situations occur, Burj AL Arab hotel has to face a pressure from their suppliers. However, the hotel can reduce the bargaining power of supplier by partnering with travel agency or big supermarket chain, purchasing extremely high volume of products, and reduce its dependency on suppliers by producing part of its own products such as detergent, pastry, etc. Moreover, the owner of Burj AL Arab Hotel is the sheik prime minister of UEA, thus it helps to build better relationship with suppliers in Dubai. Indirectly, this provides the hotel with some economic advantages resulted from political factors.
Threat of Substitute Products or Services
Knowles (1999) suggested that all firms in an industry are competing in a board sense with industries producing substitute products, thus creating revenue and profit pressures. Following is the key points of substitution’s threat:
* Fair price performance
* Low switching cost
* Buyer’s propensity
The chief point is the similarity of substitutes the existence of close substitutes presents a strong competitive threat, limiting the price a company can charge and thus its profitability (Hill et al, 2001). Nevertheless, if a company’s products have few close substitutes, the great opportunity does exist to raise prices and earn additional profits.
The competitive threat of the substitution for Buri AL Arab Hotel in Dubai is not critical strong, because of different room type (only suit rooms available) and valuable expectation from the service quality (designed as the first 7 star hotel in the world). Hence the room rate for Buri AL Arab is around $900-$7000 per night, which maximize the hotel profitable ability.
Porter’s Competitive Strategy and Competitive Tactics
As Wit (1998) mentioned that competitive strategy can be defined as the search for a favourable competitive position in the industry. Michael Porter determined that a business could follow one of three generic strategies: cost leadership, differentiation, and focus.