Intercontinental Hotel Group

Internal risks

Among the major risks which might affect the revenue, operating profit and brand image of IHG there are several groups of internal risks. First internal risk group derives from IHG reservation system HolidexPlus. The Group heavily relies on its reservation system and therefore, failures of this system expose IHG to a great risk of losing customers and having increased competition in the reservation sector. Troubles in HolidexPlus operation might lead to interruption of business and thus, can result in serious financial losses. Also, there are third party intermediaries in many areas providing reservation infrastructure.

A related group of IHG risks is technology-related: IT systems and technological structures strongly integrated into IHG business structure are the source of high business risk. This risk can be reduced by improving existing technologies and integrating new solutions, as well as by developing parallel lines of solutions in order to cover critical processes and ensure their functionality.

Separate group of risks are HR risks: the Group needs highly skilled employees, and in case of lack of such personnel, IHG business strategy would suffer. This problem could first of al be solved by creating own training centers and partnering with educational institutions in order to get skilled workforce.

Finally, the most important group of risks which could significantly affect functioning and strategic planning of IHG are operational risks. There are several directions of IHG operations that can be the sources of risk. Debt covenants are a source of IHG financing, and if its economical figures do not match the expected capital requirements, another group of risks will emerge. Since the availability of capital is crucial for the operation of IHG, the company’s strategy should necessarily take into account market and financial expectations and plan to cover the planned values beforehand. Other group of financial risks is related to pension plans of IHG. According to law requirements, the Group should have sufficient capital in order to cover the pension plans of members, and moreover, the trustees can demand the increase of pension rates. Lack of financing or increase of rates could impact IHG financial performance. Thirdly, the processes of conducting management and franchise agreements are the basis of IHG growth, and thus the risks related to identifying such agreements as well as securing and maintaining them can significantly impact IHG performance. Conflicts between groups of franchisees, changing environment and competitive pressure, as well as legal image and image of the brand might affect the process of conducting agreements. This group of risks was classified to internal operational risks since IHG is a compound structure, and the relations between its departments, their franchising terms and similar issues depend on IHG government, and not on the external environment.

For further consideration, I have chosen the operational group of risks from internal risks since it is crucial for the development of the company. In general, franchising companies gains are directly linked with development and expansion, and thus, in order to reach success, IHG needs to assess operational risks and develop appropriate strategies. Currently this group of risks is addressed by the following actions: a) management control is performed over financial reporting and planning; b) liquidity risk exposure is controlled by the treasure group. Operational risks are likely to sustain since the effects of the recession still take place and the forecasted growth in hotel industry might be rather slow. It is likely that operational risks will sustain for at least during 3 years, and in my opinion, it is necessary to reconsider the strategy of addressing them.

External risks

There are also different groups of risks that can be classified as external. First of all, the Group highly relies on brand reputation and intellectual property protection. In case the brand name of the company loses popularity or has some public issues, revenues of IHG might significantly decrease. This threat is addressed by compliant policies, ongoing checks and quality standards maintained by the company. Such issues as consumer preferences and perception as well as intellectual property laws are the factors that can hardly be controlled by IHG, and the company needs to implement long-term strategies in order to mitigate these risks. However, IHG also might not enforce franchisees to comply with own standards and regulations, which increases the possibility of this risk occurrence. In my opinion, litigation risks and possible lawsuits facing the company also relate to this type of risks.

Changes in political and economical regulations might also affect IHG revenues and change the flow of tourists to the hotels. Economic fluctuations have already affected the Group’s revenues and development. Tax regulations, interest rates and economical health of every country which hosts associated hotels also determine the measure of IHG success. Reported earnings of the Group might change as a result of the changes in currency exchange rates. It is necessary to take into account that IHG financial reporting is strongly linked with the position of the dollar.

Hotel industry is strongly dependent on cycle fluctuations of supply and demand for hotel and leisure services. IHG planning and forecasting is already based on these cycles; however, the tendencies in the demand and supply should also be taken into account (they are possible risks as well).

Furthermore, a group of risks is related to factors influencing international and domestic travel rates. Among these factors are such issues as weather conditions, international relations, epidemics, terrorist actions etc. These factors might impact not only the flow of IHG customers but the performance of the hotels as well.

Finally, the largest group of external risks is related to competition. International players and local competition are both the factors serving as risk sources. According to Appendix E, it is possible to determine that highest competition takes place between such major players as Marriott Intl Inc., Starwood Hotels and Resorts and Assor SA. Since IHG is franchise-based, the speed of growth is more important for it, than for companies operating own hotels, and thus the importance of gaining competitive advantages is higher. A partial consequence of competition is the risk of inability to reach the projected development opportunities, or to expand to new locations.

Analysis of Intercontinental Hotel Group risks has shown that there are internal and external groups of risk. Internal risks include risks related to reservation system, technological risks, HR risks and operational risks. External risks include risks related to political and economical environment, brand reputation risks, risks related to travel-affecting factors, cycle fluctuation risks and competitive risks. Two risks, operational from internal group and competitive from external group, were selected for risk assessment and analysis.

Two method of risk mapping (coordinate space risk map and Raafat nomograms) have indicated that competitive risk is high priority risk, and operational risk belongs to the “detect and monitor” category. Three strategies were suggested for each type of risk. For external risk (competition), such methods as expansion, diversification of offers and partnering with a competitor were analyzed. For operating risk, strategies were: improve performance, attract additional capital and increase control. Risk map analysis by two methods of each of these strategy groups showed that for operating risk, the best strategy wil be to improve performance of the hotel network, while for competitive risk the optimal strategy will be to diversify market supply and offers.

 

References

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Cendrowsky, H. & Mair, W.C. & Mair, W. 2009. Enterprise Risk Management and COSO: A Guide for Directors, Executives and Practitioners. John Wiley and Sons.

Enz, C.A. 2009. Hospitality Strategic Management: Concepts and Cases. John Wiley and Sons.

Jolly, A. 2003. Managing business risk. Kogan Page Publishers.

Moeller, Robert R. 2007. COSO enterprise risk management: understanding the new integrated ERM framework. John Wiley and Sons.

Reuvid, J. 2005. Managing business risk: a practical guide to protecting your business. Kogan Page Publishers.

Rittenberg L. E. & Johnstone K. & Gramling A.A. 2010. Auditing: a business risk approach. South-Western Cengage Learning.