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CHAPTER THREE ENVIRONMENTAL ASSESSMENT By Maris Chen for Dr. DeMicco OBJECTIVES 1. Describe the importance of the environment in making strategic decisions that are future oriented. 2. Define the major concepts underpinning the environmental assessment process. 3. Explain the dynamic and complex nature of the business environment. 4. Identify the challenges and uncertainties associated with the business environment. Vision Future 1) Describe the importance of the environment in making strategic decisions that are future oriented. Visioning the future is the ability to understand how the business environment provides opportunities and threats. This ability begins by asking, and answering, the questions outlined below. How will the guests be traveling in the future? How will be guests be communicating in the future? How will be the firm’s products and services be distributed to the guests in the future? What new customer benefits will be needed to meet future demand? What competencies will be needed to serve the guest in the future? What standards will be accepted in the future? What will be successful hospitality firm look like in the future? What new competitive methods will demand the majority of your resources in the future? Please read article 1-4 and 10 to gain knowledge of the trends in the hospitality industry. Parable of Boiling Frog What does the parable of the boiling frog tell us? The need for anticipating the future and monitoring change and developing a forward- thinking philosophy. Ex1: Disappearance of small roadside due to ignorance the signs of a warming competitive environment. Ex 2:Failure of Hotel Corporation of America and Victoria Station Restaurant because the owners failed to recognize changing consumer patterns and shifts in capital market requirements. Please read page 63 and 64 in the textbook for the details of these examples. These examples demonstrate that to be at the cutting edge, managers must develop the ability to identify the forces driving change, understand the variables making up these forces, and assess how they will impact the organization. Rearview Mirror The metaphor of Rearview Mirror: we try to interpret the future by looking at the past. Ex1: Managers count on boomers driving their unlimited growth plan. Ex 2: Managers have usually relied on basic forecasting models to project future cash flow. Please read page 64 in the textbook for the details of these examples. What the metaphors of boiling frog and rearview mirror suggest is that to be effective in tomorrow’s competitive and complex environment, managers must develop a forward-thinking philosophy. Major Concepts 2) Define the major concepts underpinning the environmental assessment process. Managers today must enhance their conceptual toolbox to understand the complex and dynamic nat ure of the business environment. The more tools and frameworks that managers possess, the greater likelihood that they will come up with better solutions. The following slide contains a list of these key concepts essential to understanding how to manage changes in an increasingly complex environment. Please pay attention to their definitions. Concepts of the Environment Environmental Volatility Perception is Reality •Objective measures •Subjective measures Environmental Dimensions •Uncertainty/dynamism •Simple/complex •Illiberality/munificence The Power and Rules Dimension Environmental Domain •Remote •Task •Industry Segment •Firm •Functional Environment Major Issues in Environmental Analysis •Lack of clarity, reliability and validity of information •Uncertainty of causal relationships between organizations and their environments – impact upon the firm •Time span of feedback about attempts to manage within the environment is often too long Perception Perception Perception is the mental image we develop regarding our world. This image is based on past experiences accumulated throughout life. Many opportunities or threats are missed because we are viewing the world from a small perceptual window. Perception is also a function of emotion. Often, it is emotion rather than objectivity that controls how the environment is viewed and subsequent decisions made. The strength of the cognitive skills of each individual involved in scanning the business environment can improve the perceptual abilities. Perception is also a function of emotion. Often, it is emotion rather than objectivity that controls how the environment is viewed and subsequent decisions made. The following slide illustrates the relationships among uncertainty, information , perception, and cognitive process. The Relationships among Uncertainty, Information, Perception, and Cognitive Processes Amount and Quality of Information Range of Uncertainty To enhance the perceptual window through: utilizing a wide range of Information of high quality; expanding cognitive skills; building on a wide range of previous experiences. Ex: To contemplate an investment in a new marketing database. Please read page 68 in the textbook for the details of this examples. Individual Perceptual and Cognitive Processes Previous Experience Uncertainty Uncertainty Uncertainty is defined as the degree of change occurring in the environment and the rate of that change. The old phrase “Nothing is more certain today than change” clearly states it all. Changes is generally function of value drivers. Uncertainty results from a wide range of activities emanating from the actions of competitors, suppliers, customers, and regulators. In these contemporary times, few business have the luxury of a stable environment. It continues to grow more uncertain as the world moves toward greater globalization. The variables that contribute to uncertainty and related examples are identified in the following slide. Complexity Complexity The larger the number of variables, the more complex is the environment. The number of potential variables for complexity can be compounded for hospitality firms that operate in several market areas and/or internationally. Each market area has its own set of va riables. The exhibit on the next slide shows that many potential variables can be an active part of a business environment. Munificence Munificence Munificence refers to the amount of potential capacity for growth that exists in an industry environment. In today’s mature hospitality environment, few would suggest there is much excess capacity. Ex: The restaurant industry in the United States, with an approximate ratio of one restaurant f or every 330 people. The less munificence in the environment, the more unforgiving it becomes. Illiberality is often used to describe this intolerance. Uncertainty & Complexity 3) Explain the dynamic and complex nature of the business environment. Uncertain or Very Volatile The wide array of different symbols, shapes, and sized indicates much diversity and variability and many variables—— Complex and uncertain environment Simple Complex Few symbols of the same shape and similar size indicate few variables—— Simple and stable environment Certain or Very Stable Uncertainty & Complexity This exhibit is developed based on the one in the previous slide. uncertainty Ex:High Customers’ taste High uncertainty Less complex High uncertainty High complex Simple Ex: • Hotels in New York have high occupancy due to a lot of travelers Ex1: Changing menu weekly in Seaon52 Restaurant: Ex 2: Hotels in Atlanta during this tornado Complex Low uncertainty Less complex Low uncertainty Low uncertainty High complex Ex: The process of producing deluxe food Complexity Dimensions Complexity Dimensions Ex: Disney parks outside US such as European and Japa nese confront the need to ad just their operation to local culture. Ex: Virtual meetings online are beginning to replace quick business trips by one or two executives. • Number and variety of suppliers • Geographic concentration of suppliers • Dispersion of the labor force • Number of brands in competition • Number of political bodies affecting market • Economic variables creating risk • Concentration of customers • Number of potential target markets • Degree of social/cultural diversity • Variety and volume of businesses in market • Potential substitutes for products/ services • Number of steps in the service delivery process • Interdependencies among firms Ex: Since 1996, more than 14,000 new regulations have been enacted in the U.S. Restaurant operators will have to spend a growing fraction of their time coping with government regulations. Article 3“Global Development Pipeline”: The figures in the article reveals the volume of hotel market worldwide. Uncertainty Dimensions Labor supply: “Productivity is likely to suffer to as Baby-Boom executives are replaced by their Generation X and Dot-com successors. Restaurants depend on automation to make up for shortages of workers. Labor cost: Hospitality industry has depend more heavily than most of female employees. Women’s salaries grew from 61% of men’s in 1960 to 76% in 2003”. Article 7:Restaurant drive-throughs face the uncertainty whether they will be regulated because of their environmental impact. Article 8: The probable menu labeling bill for restaurants. Uncertainty Dimensions • Prices charged by suppliers/ competitors • Labor force supply and cost • Demand curve for products and services • Cost of Capital - Capital availability • Financing opportunities • Competitive methods used by competitors • Regulatory activity in the market area • New product introductions • New entrants in the market • Taxation • Product quality expectations • Technology • Cost of raw materials • Overall economic conditions • Real estate values • Safety and security • Changing profile of labor force Article 5:Spa hotels have more pricing advantage compared to their competitors without spas. Article 2:The demand of group travel is increasing and group travel is becoming a major growth opportunity for the hospitality industry . Article 8: whether restaurateurs negotiate lower transaction fees successfully would affect operating cost and benefit the capital in restaurants. Ex: according to customer demand, hotels have offered new service from free internet access to Wi-Fi. Uncertainty Dimensions Uncertainty Dimensions Article 9 says increasing wheat price would lead to the higher price of raw materials such as beef and dairy for restaurateurs. Restaurants: Food contamination has become a greater threat. Hiring security experts to look for vulnerabilities in restaurants. Hotels: Hotels have become soft targets of terrorism attacks such as the Marriott Hotel Complex in Jakarta. Security cameras, electronic locks, and increased identity checking. • Prices charged by suppliers/ competitors • Labor force supply and cost • Demand curve for products and services • Cost of Capital - Capital availability • Financing opportunities • Competitive methods used by competitors • Regulatory activity in the market area • New product introductions • New entrants in the market • Taxation • Product quality expectations • Technology • Cost of raw materials • Overall economic conditions • Real estate values • Safety and security • Changing profile of labor force Ex: Virtual meetings online are Beginning to replace quick business trips. Ex, the increasing price of gasoline and unexpected economy recess. The work ethic is vanishing. Finding motivated, reliable workers is likely to be much harder. Keeping motivated employee will require constant attention from managers and upper executives. Readings Article 1 – Hospitality 2010 Article 2 – Group Travel Is Booming Niche Article 3 – Global Development Pipeline Article 4– Trends (Audio) Article 5– Luxury Hotels with Spas Have Greater Pricing Power Article 6 – Bill introduced to check credit card fees Article 7 – Cities Examine Environmental Impact of Restaurant Drive-throughs Article 8– Chicago alderman resurrects menu-labeling bill Article 9– Wheat shortage fears cause futures prices to reach record highs Article 10 – The Hotel Asset Manager’s Guide to Information Technology Turnaround Chapter Questions 1. What was not the reason that many motels and restaurant failed in the 1960s? They did not realize that some chain companies were emerging. They did not see the warning signs of a competitive environment. They did not recognize the change of customer patterns. They did not see the new technological development in the industry. They did not follow the shifts in market requirements. 2. When an individual is able to maximize the information scanned, the cognitive and perceptual process used, and previous experience, he or she is able to: reduce the risk of an investment in a competitive method. reduce the range of uncertainty associated with an investment. minimize the variance of cash flows predicted for a particular investment. all of the above. reduce the risk of an investment in a competitive method; minimize the variance of cash flows predicted for a particular investment. Chapter Questions 3. When considering the role of perception in scanning the business environment, an individual: has a limited threshold of awareness. has a short list of cues about the environment. has a narrow perceptual window of the environment. has life experiences which occur in a narrow band of activity. all of the above. 4. In understanding the relationships between complexity and uncertainty, the manager of tomorrow must be able to: explain the cause and effect relationships between the two and likely cash flows from investments. made in competitive methods, which reflect these environmental dimensions. estimate the reliability and validity of the information used in making the investment decision. estimate the probabilities associated with events emerging from this complexity and uncertainty. appreciate the time gap necessary to realize the results of an investment decision in competitive methods. All of the above Chapter Questions 5.Which of the following is not a way to improve your ability to estimate possible scenarios and their probabilities? Identifying the events that will impact the firm Understanding the cause and effect relationship Defining the domain of the firm Limiting the domain of the firm to the industry segment 6.Improving your understanding of the body of knowledge suggests that you are able to: estimate probabilities that an event will occur. know the subject well enough so that you will be able to see subtle changes occurring. identify more competitive methods in which to invest. improve your understanding of your perceptual window. Chapter Questions 7. The parable of the "boiling frog" describes the need for anticipating the future and monitoring change. True False 8. Wise investment decisions heavily rely upon thoroughly understanding the forces driving change in the business environment. True False 9. Complexity refers to the degree of change and the rate of change in the environment. True False Chapter Questions 10. What does a manager need to do in order to visualize and compete for the future? 11. Use the boiling frog metaphor to explain how business fails to anticipate future changes in the business environment. 12. What does the metaphor "rear view mirror" suggest? 13. How can a manager enhance his/her perceptual window? 14. What are the major issues in understanding the environment? Student Learning Outcomes On completion of this chapter, you will be able to: 1. Give an description about the importance of the environment in making strategic decisions that are future oriented. 2. Define the major concepts underpinning the environmental assessment process such as perception, uncertainty/dynamism, simple/complex, and illiberality/munificence. 3. Develop an appreciation for the challenges and uncertainties associated with the business environment. 4. Give examples about the dynamic and complex nature of the business environment. Case Study Case Study Case Study Case Study Case Study Case Study Answers 1. The first challenge in the forefront for hotels is to educate their staff and customers to understand the environmental issues. Specifically, the training involving environmental information can help employees develop a greater sense of environmental awareness, and encourage them to apply this knowledge to improving service quality. On the other hand, customers can be educated to perceive the environmental initiatives as well as the appeal of green product and service, for example, the Orchid Evergreen Loyalty Program in this case. Another challenge is how to make such “eco-literacy” practical and easy to access. Put in another way, hotels should integrate “green” business practices into their daily operation. A variety of eco-friendly actions include steps to reduce, recycle and reuse raw materials and waste materials , to minimize the impact of transportation, energy and water usage, and to donate or contribute to environmental groups. 2. The environmentally-responsible strategy allows Orchid Hotel to be seen as a leading eco-friendly company by the public, which definitely can increase its customer satisfaction. What’s more, a green strategy allows Orchid Hotel to gain a competitive advantage in the field of product and service innovation, and operation cost. Finally, by promoting a green perspective, Orchid Hotel has obtained the strategic support of government and stakeholder groups, won certifications or rewards from the national and international organizations, and gained an advantage over existing “dirty” technologies. Case Study Answers 3. The greening of the hospitality will continue in the future. One reason is that “green tourists” will demand green accommodation. In order to increase customer satisfaction, hotels have to meet this green demand and undertake environmental programs. Second, the increasing pressure from government regulation and agencies also facilitates the creation of environmentally responsible hotels. Another important reason is the continued increase in energy usage and other operation cost, which forces hotels to adopt environmental improvement and gain cost-saving or another tangible benefit. 4. First, the organization structure should make some changes. For large hospitality firms, a specific functional department or team should be established to handle the environmental issue; for small firms, at least one employee must monitor eco-friendly process. This environmental department or position will be responsible for training, conducting refresher courses, solving ”green” problems, and collecting statistics and other ideas to formulate environmental strategy. Additionally, hotels should integrate environmental reporting in their control system and draw up detailed environmental report regularly to ensure their green strategies on the right track. Case Study Answers 5. At the beginning of the green wave, it is possible that guests do not perceive green factor alternatives as more efficient and appealing than the normally used products. In this sense, to ensure customer satisfaction, the types of environmental programs are probably limited to the actions where cost-saving and other tangible benefits are identified. Increasingly, governmental regulations and hotel guests are demanding green operation. At this stage, being green is an effective promotional tool and a competitive advantage. So, hotels are likely to adopt more and more eco-friendly actions, for example, local purchasing, energy-efficient equipment, interior decorations and green loyalty program. So, it is essential for hotels to recognize environmental issues in real time and take a proactive and appropriate approach to address the concerns as the timing of the decisions and the environment are changing. 6. In my opinion, the most valid and reliable sources of information are the government report, statistics from national or international hotel association, and academic publications in hospitality industry or in other fields, for example, economy and environment science. Additionally, hoteliers can also get valuable information by distributing customer survey or questionnaire directly.