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Mallorca Hotel Industry: Porter Five Forces Report

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Updated: Jun 2nd, 2019

Introduction

Porter’s five forces analysis is necessary for the Mallorca Hotel Industry as it assists in comprehension of the market strengths and weaknesses. Although the Mallorca Hotel Industry has been a household name in the general tourism industry in the last five decades, the hotels in Mallorca Island have expanded business portfolio as a strategic competitive advantage initiative.

The expanded portfolio provides the hotels within the Mallorca Hotel Industry with a competitive advantage in the sense that they can still maintain profitable performance even in instances where the market swings in the tourism industry are negatively skewed. Through diversification and portfolio balance, the hotels within the Mallorca Hotel Industry are in a position to survive turbulence in the harsh economic environment characterized by stiff competition and sensitivity to market dynamics.

The paper attempts to explicitly carry out a Porter’s five forces analysis for the Mallorca Hotel Industry by reviews the elements such as bargaining power of suppliers, bargaining power of buyers, threat of new entrants, threat of substitutes, and industry rivalry. Besides the paper explores the hotel target market in Mallorca and how the market will evolve by 2020.

Mallorca Hotel Industry: Porter Five Forces

The five forces determining the competitive advantage of hotels operating within the Mallorca Hotel Industry in the Mallorca Island are discussed below.

Potential entrants

The current players in the Mallorca Hotel Industry have been in existence for long and have very large production capacities. For instance, Palma de Mallorca, Acudia, and Playa de Plama hotels among others have diverse and very attractive tourism packages spread across the island. In fact, there are more than 1,200 well established hotels ranging from three stars, four stars, and five stars within the island.

Therefore, it is easy for these players to lower their prices as a competitive strategy since they directly benefit from economies of scale. Thus, a new entrant is disadvantaged in terms of pricing of its hotel services since it will not benefit from economies of scale in the same magnitude as the current industry players (Porter 21).

The cost of putting up a single well furnished hotel within the Mallorca Island is very expensive for a new entrant since the current players such as Palma de Mallorca, Acudia, and Playa de Plama hotels among others have breakeven and can easily manage the cost of running the hotels with clear market projections.

A new entrant will find itself in the mucky waters of trying to manage the cost of creating a new hotel brand name to compete the average industry cost, which may not be practical for a small establishment (Tynan and McKechnie 510). Players in the industry such as Palma de Mallorca, Acudia, and Playa de Plama hotels among others have diversified their products as part of portfolio balance strategy.

For instance, each of the above players have diversified hotel services to include business package, premium package, and economy package to boost the total revenues each year by serving clients within the high, middle, and low economic ends. A new entrant may not be able to compete with these players since their diverse products and strong brand presence is almost impossible to challenge, especially when the new entrant plans to start small (Porter 39).

The Mallorca Hotel Industry is characterized by capital intensive ventures since most of the hotel establishments are very expensive to maintain because of the high service quality standards and high cost of running the hotels. For instance, Playa de Plama has a capital worth of 1.2 billion dollars.

It is very difficult for a new entrant to easily enter this market and breakeven within two to three years since such ventures require a lot of capital in putting up the hotel, hiring skilled workers, and creating affordable and quality hotel services and packages targeting different classes of domestic and international tourists.

The cost of switching to different hotel service packages at the peak and off-peak periods is very high since it requires complete overhaul of the pricing, billing, service chatter, and logistic support (Tynan and McKechnie 509). This is not sustainable in the short run for new player with relatively limited capital. Within this aspect, switching cost for a new entrant may translate into closing down such a hotel.

The players in the Mallorca Hotel Industry such as Palma de Mallorca, Acudia, and Playa de Plama hotels among others have partnered booking agents spread across the Island and beyond, opening numerous business opportunities in all major cities and centers within the Spain territory. It would require massive capital for an aspiring investor to outperform their business prowess, in terms of established distribution channels.

A new entrant will be in a disadvantaged position when attempting to penetrate this industry. There are stringent rules by the government that must be followed by any player in this industry. As a legal requirement, each company in the industry is expected by the regulatory authorities to be tax compliant and meet the minimal threshold in terms of safety, environmental friendliness, labor laws, and other business requirements (Porter 36).

The approval process is very long and expensive for a new entrant with limited capital. From this analysis, it is apparent that the threat of a new entrant is very low since the switching cost and capital requirement are very high for a new player. Besides, the current players have high competitive advantage as a result of benefits from brand differentiation and economies of scale.

Threat of substitutes

Palma de Mallorca, Acudia, Playa de Plama, and other hotels pose the greatest threat to existence and business performance of a new player in the Mallorca Hotel Industry. These hotels have been in the industry for long period and are well established. The above hotels have almost similar hotel service packages that are customized and sometimes offer big discounts to customers.

In the Mallorca Hotel Industry, loyalty to a brand plays an important role in customer behavior since the hotel industry is very sensitive to changes in customer preference for different products and services (Tynan and McKechnie 511). Therefore, Palma de Mallorca, Acudia, and Playa de Plama among other hotels have the ability to offer an alternative perfect substitute to customers who may be unsatisfied with hotel service packages offered by other players within the Mallorca Hotel Industry.

Unsatisfied customers have other alternatives from where they can get similar and competitive hotel service packages within the Mallorca Hotel Industry from the numerous players (Porter 34).

However, the threat of substitutes is moderate since changing a brand is very expensive for customers in terms changing loyalty points, flexible services for repeat visits, and customized nature of the services in each hotel. In order to remain relevant, the hotels within the Mallorca Hotel Industry have established unique market for their customer through tailored optometry hotel products that are customized.

Power of suppliers

Suppliers in the Mallorca Hotel Industry have power owing to the existence of many players and high demand for different hotel related services used by the establishments within the Mallorca Island. Since suppliers within the Mallorca Hotel Industry operate at local and international levels, their influence differs (Tynan and McKechnie 513). For instance, China, India, and Spain supply the largest volume of services to the hotels within the Mallorca Island.

As a matter of fact, suppliers may instigate market demand and supply variances since most of the raw materials used in this industry such as menus, ingredients, transport services and booking are imported from Asia, Europe, and the US. All the players depend on the suppliers such as tour company operators directly for the delivery customers that can pay competitive prices for different services offered by hotels within the Mallorca Hotel Industry.

This leaves the suppliers with the power to dictate on proceedings in the industry such as the cost of agency fees as a percentage of each hotel service package and their availability (Tynan and McKechnie 513). However, through series of partnership agreements with independent manufacturers and ticket vendors, the players in the Mallorca Hotel Industry have managed to curtail the power of the suppliers to moderate since there are series of jointly negotiated deals on the cost of these services through formal contracts and outsourcing from more than one supplier. Besides, the major players in the Mallorca Hotel Industry have endeavored to use their deep reservoirs as a strategy for balancing the supply forces in the fragile hotel services market of the Mallorca Island.

Power of buyers

Reflectively, the amount of output in terms of turn over sales depends on the buyers’ purchasing power within the Mallorca Hotel Industry since the hotels fully depend on the availability of customers. The higher the purchasing power, the better the turnover in total sales realized over a definite period of time.

The performances of Palma de Mallorca, Acudia, and Playa de Plama among other hotels in the Mallorca Hotel Industry depend highly on the power of the hotel service package consumers who are local and international tourists visiting the Mallorca Island. On the other hand, unreliable and weak purchasing power translates into losses and underperformance (Porter 24).

For instance, during the off-peak (winter), most the hotels record booking equivalent to half of their capacity during peak season. The players must therefore do everything within their means to ensure that service delivery and quality meets the expectations of customers since the power of the buyers is very high in this industry by customizing the hotel service packages, offering discounts, and delivering high end services.

Rivalry

There are several players such as Palma de Mallorca, Acudia, and Playa de Plama among other hotels operating in the Mallorca Hotel Industry with virtually all of them dealing in a variety of hotel service packages, which can perform similar functions to customers. With many customers looking for good value for their money, quality, and affordability of the hotel service packages have remained the main basis upon which customers make their final decision to purchase products in the dynamic and stratified Mallorca Hotel Industry.

All the players in the industry are putting measures in place to ensure they attract more customers and therefore expand their market share through creation of a smooth supply chain, diversification, and brand positioning (Porter 19). Therefore, the size, in terms of space occupied by business premises, defines the temperature of the competition.

For instance, the hotels are divided into three stars, four stars, and five stars to serve specific customer segments. In line with this, the Playa de Plama boosts of being the biggest and most luxurious hotel in the Mallorca Island. The influence of rivalry is very high due to existence of very many players with the same product brands that have similar price range (Porter 24).

Conclusion

From the above analysis, it is apparent that the Mallorca Hotel Industry is dominated by strong hotel brands that have been in the market for a long period of time. The players in the industry offer very competitive hotel service packages as a strategy for sustaining their business activities in the dynamic Mallorca Island. Apparently, the influences of all the five force of porter are very high in the Mallorca Hotel Industry.

For instance, it is difficult for a new hotel brand to enter and penetrate the industry due to high capital outlay, strong brand presence, and stringent registration and regulation laws. In terms of threat of substitute, a new entrant in the market will have to come up with very unique products since hotel package services within the Mallorca Hotel Industry are perfect substitutes, despite slight variances in pricing and packaging.

Suppliers in the Mallorca Hotel Industry have very high power due to existence of many hotels within the Mallorca Island demanding for services such as ticketing agencies, tour guides, and different menus/ingredients for local and international clients. The power of the buyer is very high since the common business-to-customer platform is dependent on customer satisfaction and perception of quality of the hotel package service.

The hotels within the Mallorca Hotel Industry are very sensitive to changes in customer preference. Therefore, the players in the industry must Endeavour to create high quality products that meet the expectations of customers to remain competitive.

Lastly, in terms of rivalry, the industry has several players such as Palma de Mallorca, Acudia, and Playa de Plama among other hotels competing for similar customer and market segments. Therefore, each player must expand its market share through creation of a smooth supply chain, diversification, and brand positioning to survive rivalry since the impact of rivalry is very high in the Mallorca Hotel Industry.

Hotel Target Market in Mallorca

Targeted clients

The hotels in Mallorca target the domestic and international tourists in need of hotel package products such as accommodation, meals, and other services. The clients are further segmented into low end and high end customers. The low end customers are clients in need of affordable but comfortable hotel services while the high end customers are tourist in need of luxury hotel services (Cheverton 35). Each segment of the customers may consist of family, individual, corporate, and institution tourists visiting the Mallorca Island.

The needs of the targeted clients

The needs of the target customers are competitive prices, high quality products, flexible services, friendly environment, and authentic product presentation as part of the outcome driven creativity. This means that the targeted customer are interested in innovative service provision model that guarantee their satisfaction since choosing these hotels signifies deep trust they have towards the different hotel brand within the Mallorca Hotel Industry (Ulwick 28).

There is need to increase the scope of operations through strategic and innovative ideas of tourism service delivery to customers to meet the desires of the clients. There is also need to provide efficient, cost effective, and comprehensive logistics services to customers to guarantee complete satisfaction (Ulwick 29).

Te customer expect the hotels to incorporate interesting features to the existing hotel service so as to cater to the changing demands and needs of different service packages. Besides, the targeted customers want excellent marketing, advertisement and promotional strategies that can win their confidence and loyalty to the different hotel brands within the Mallorca Hotel Industry (Ulwick 31).

The other factor is the choice of distribution channel that the company decides to use. A company should choose a channel that is most appealing and convenient to customers. The second factor that determines success is the product line breadth of the company in addressing the desires of customers. For a company to be successful, it must offer a wide variety of differentiated products that are designed to meet the needs of different customers.

The third factor is the pricing strategy that the hotels use. A hotel within the Mallorca Hotel Industry will be well positioned in a business industry when its products are relatively cheaper as compared to its competitors as perceived by the customer. The final factor that can contribute to success as perceived by the customer in the Mallorca Hotel Industry is the geographical coverage of the hotel in terms of multiple product brands with different purchase/uptake bundles (Ulwick 21).

How Mallorca Market Will Evolve by 2020

The Mallorca market will evolve by 2020 into a more complex, technological oriented and highly stratified as the demographic dynamics of customers are not static. Since the industry targets clients across the globe, the customers may not be the same if integrative marketing strategies are misapplied.

In trying to ensure that the marketing strategies for the industry are effective, there is the challenge of sustainability, especially in the dynamic Mallorca market since majority of the targeted customers in this sector can easily change their preference (Bowden 69). It may not be easy to create a sustainable marketing plan to cover the market dynamics of the 2020 if the strategic marketing approach is skewed towards a single business platform.

Besides, the needs of the customers will not remain the same since clients are often responsive to innovative ideas and would want to associate with what they perceive as ideal. The difference in the need by the year 2020 could be attributed to the dynamics that determine customer behavior as influenced by the current and future customer relationship management strategies.

It is very difficult to create a strategic and effective customer relationship management approaches to guarantee customer loyalty for a period of more than five years since the needs of customers will not be the same. Through the laggard activism strategy, some hotels might be able to guarantee customer loyalty in the long term by offering premium customer experience, low charges, and compact customer care support.

In the long term, any hotel that wants to remain competitive by the year 2020 must establish a contact management system that integrates the standard operating procedures that promote consistency in customer service. These strategies are aimed at ensuring continuous expansion and customer satisfaction through the business to customer (B2C) strategy for sustainable business (Blythe 34).

Works Cited

Blythe, Jean. Essentials of Marketing Communications, New York, NY: FT/Prentice Hall, 2006. Print.

Bowden, John. “The Process of Customer Engagement: A Conceptual Framework.” Journal of Marketing Theory & Practice, 17.1(2009): 63-74. Print.

Cheverton, Philip. Key Marketing Skills: Strategies, Tools, and Techniques for Marketing Success, London, UK: Kogan Page, 2004. Print.

Porter, Michael. Competitive Strategy: Techniques for Analyzing Industries and Competitors, New York, NY: Simon and Schuster, 2008. Print.

Tynan, Caroline and Sandra McKechnie. “Experience Marketing: A Review and Reassessment.” Journal of Marketing Management 25.6 (2008): 501-527. Print.

Ulwick, Anthony. What Customers Want: Using Outcome-Driven Innovation to Create Breakthrough Products and Services: Using Outcome-Driven Innovation to Create Breakthrough Products and Services, New York, NY: McGraw Hill Professional, 2005. Print.

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