Hotel Chains Contractual Tools

Photo: www.5-star-hotels.com

Hotel chains contractual tools divided into four categories:

a.       Company ownership

A number of hotels are individual or family owned. They have the exclusive right and total control over the hotel. The advantages of these contractual are no sharing benefit and concentration of responsibility. However, the owners need high capital and it is high risk investment. Company ownership usually is the hotel which is belongs to one owner. When the unit is company owned, the central firm expects to receive all of the unit’s future profit (Lutz, 1995).

While most family run hotels are owned and operated on an individual basis many company hotel have an increasingly complex ownership structure. Company ownership hotels are often under capitalized, limited in scope for expansion, and difficulty in financing, marketing, facility improvements. However, the benefit from tourism incomes is often a valuable direct contribution to the local economy

b.      Leasing arrangement

There are various arrangements as to who is involved in property leasing (Dunning, John H and Matthew McQueen, 1982). A hotel operator may invest in property represented by land and buildings or enter into a leasing arrangement and invest only in the interior assets. Leasing arrangement related with the leasing property by the hotel company or hotel investment groups. Leasing arrangement is to rent a hotel to an external enterprise. The property owner is not doing the recruitment and management responsibilities. The companies develop managerial, marketing and other tasks. The leasing arrangements sign in term of responsibilities with high risk for investment.

c.       Management contracts

A management contract is an arrangement under which operational control of an enterprise is vested by contract in a separate enterprise. Management contract involve not just selling a method of doing things (as with franchising or licensing) but involve actually doing them. A management contract can involve a wide range of functions, such as technical operation of a production facility, management of personnel, accounting, marketing services and training. Hotel chain organization operates properties that are owned by others entities ranging from individual business people and partnership to large listed companies. There is a contract with a professional hotel management company to operate the proposed property, probably on a long term basis. Management contract perform the necessary of enterprise managerial functions in return for a fee.

Management contract is the alternative to foreign investment and solution for the lack of local skills with the high benefit and low risk. Some problems are related with the leakage of tourism revenue and dominance of reservation system used by foreign hotel companies. Management contract is most common hotel management now days. Management Company can provide technical design assistance, uniform name (branding), and management expertise. Some unique advantages are expertise in operation, financial management, staffing, marketing and sales, reservation services, and brand. There were situations that management could not control and that it should not have to take risk of resulting losses.

d.      Franchising

Franchising is a network of interdependent business relationship where the franchisor lends its trade and business system in return of a fee, it allows a number of people to share a brand identification, a successful method of doing business, and a proven marketing and distribution system. Franchising is a strategic alliance between groups of people who have a specific relationships and responsibilities with a common goal to dominate markets. A franchise network enables the entrepreneur to realize his expansion plans on the basis of an investment made by franchisee. That franchisee, having made a substantial investment in their own business, can be relied upon to maximize market penetration and operational efficiencies on an ongoing basis, and to deal with emergencies as they arise.

Franchising advantages over going into business for you include: opening quicker, experiencing success sooner, developing a customer base faster, having less risk and being profitable. A company franchises because it wants to quickly and in a great numbers replicate its successful company operations without significantly increasing its debt. Because it has been successful at teaching its own employee to operate the business, the company believes it can repeat the same success by teaching others to do it.

In franchising the operating system become identified with the brand or trade name that you license as a franchisee. Each franchisee system uses the precise methods to service and satisfy the customer. By documenting these practices, the franchisor institutionalizes the buying experience. Because the customers do not like surprises this consistency in operations, unit to unit, builds customer loyalty to the brand. Franchising is successful because the customers (for example American) are driven by brand when they purchase goods and services. They trust brands that they see everywhere and every day. They tend to be loyal to a product or service delivered in the same way all the time.

Franchisor offer the franchisee a package of operational know how including a successful operation system (product or service, trade mark, corporate image, reservation system) and essential assistance (locating, financial, training, pre opening operation, equipment), training, management and other techniques. Characteristics are large volume of mobility, wide geographic distribution, and search for familiar product. Advantages for franchisor are rapid expansion with limited resources, enjoy early entry into a market, a large share with higher revenue from the franchisee, and strengthen its position in the market. Some advantages for franchisee are easier market access, lower cost, benefit of share massive advertising campaigns, research and development, problem solving mechanism in network (Heung, Vincent C.S., Hanqin Zhang., Chen Jiang, 2008).