Asset Light Strategies Are the Only Way Ahead for International Hospitality Companies

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Topic 6: “Asset light strategies are the only way ahead for international hospitality companies.”

In the topic asset light strategies refers to international hospitality companies owning less assets. Assets are “items of economic value owned by an individual or corporation, especially that which could be converted to cash” (www.investorwords.com). The various different strategies international hospitality companies use in order to ‘lighten’ their assets could be by franchising, management contracts and offshoring (also known as outsourcing). Each of these strategies will be explained in depth throughout the essay. The reason why businesses would want to have fewer assets is because they want to get out of having asset-heavy balance sheets. By the strategies mentioned above international hospitality companies can lighten their balance sheets substantially.

Franchising is probably used by most major international hospitality companies in our days. “A franchise is a right granted to an individual or group to market a company's goods or services within a certain territory or location” (www.franchises.about.com). There are hundreds of well known franchise businesses in today’s world, some of them are Mc. Donald’s, Starbucks, Subway and the Hilton etc. Franchising does not only serve its purpose in the hospitality sector but also in more than 120 different industries such as the “automotive, cleaning & maintenance, health & fitness, financial services, and pet-related franchises, just to name a few” (www.franchises.about.com).

The concept of franchising revolves upon a franchisor and a franchisee. The franchisor who is the owner of the business grants a licence to the franchisee to use their products and business idea in return for a percentage of gross monthly sales and a royalty fee. The franchisor will provide help and support to the franchisee which will be selling the franchisors product or services which will also be using the franchisors trademark. The help and support the franchisor will provide advertising, staff training and set up the venue with all the necessary equipment. Franchisors will have direct control over how their business idea is used and how their product or services are marketed and sold. The franchisor benefits from this by increasing its market share thus leading to higher profits, more advertising will therefore be possible and finally they will gain from economies of scale. On the down side it is hard to find a franchisee that meets the standards of the franchisor as the franchisee will be representing the franchisors business. It is also difficult to maintain quality and service standards. On the other hand for the franchisee it is a great opportunity as the benefit from an easier access to finance, easier start up as the franchisor is obliged to provide this, business assistance from the franchisor, the product is already well known and is advertised to a large extent and access to discounted vendor relationships. Unfortunately for the franchisee s a percentage of gross monthly sales and a royalty fee must be paid, the franchisee will have no operational power, the franchisee is obligated to conform to franchisors agreement and finally standards must be followed strictly set by the franchisor.

Franchising will allow the franchisor to expand internationally without owning the ventures but having total control over them.

Management contracts will be another asset light strategy which is commonly used in the hospitality industry. Unlike franchising management contracts “is a written agreement between the owner of a hotel management organisation, which is appointed to operate and manage the hotel on behalf of, and for the account of, the owner in return for the payment of a management fee” (Eyster, 1997). In the hotel industry it is quite common as the owner of the hotel will sign a contract with a separate company or operator to run a hotel. A good example of a large hotel...
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