While hotels have long used traditional management accounting practices, their use of contemporary strategic management accounting (SMA) techniques has not been as widespread. As researchers, this intrigued us because studies conducted outside the hotel industry had found that the relationship between firm strategy and firm performance was significantly enhanced through the use of SMA techniques.
NB: This is an article from Michael Turner, Ph.D, Senior Lecturer in Accounting at the UQ Business School, The University of Queensland and Demian Hodari, Ph.D, Associate Professor of Strategic Management at the Ecole Hôtelière Lausanne.
In our recent publication in the International Journal of Hospitality Management, we set out to determine which type(s) of hotel strategy act as the key precursor(s) of hotel property SMA use, and whether the use of SMA had a positive impact on hotel property performance.
So what exactly are Strategic Management Accounting (SMA) techniques?
At the hotel property level, they involve the collection of long-term, externally-focused and forward-looking information for the purpose of:
- Customer profitability analysis – involves calculating profit earned from a specific customer or customer segment. The profit calculation is based on costs and sales that can be traced to a specific customer or to a specific customer segment;
- Benchmarking – the comparison of company performance to an ideal standard;
- Competitor cost assessment – the provision of regularly-scheduled and updated estimates of competitor’s unit costs;
- Strategic pricing – the analysis of strategic factors in the pricing decision process. These factors may include: competitor price reaction, elasticity, market growth, economies of scale, and experience;
- Value chain analysis – involves viewing the organization as a link in the chain of all value-creating activities;
- Integrated performance measurement – a measurement system which focuses typically on acquiring performance knowledge based on customer requirements and may encompass non-financial measures. This measure involves departments monitoring those factors which are critical to securing customer satisfaction;
- Competitor performance appraisal – the numerical analysis of a competitor’s published statements as a part of an assessment of a competitor’s key sources of competitive advantage;
- Attribute costing – of specific product attributes that appeal to customers. Attributes that may be costed include: operating performance variables, and after sales service; and
- Strategic costing – the use of cost data based on strategic and marketing information to develop and identify superior strategies that will produce a sustainable competitive advantage.
To conduct our study, we gathered data via a survey from 80 hotel properties.
Our primary finding was that the key precursor to hotel property SMA usage is a hotel property’s adoption of market orientation business strategy; and where this is the case, superior hotel property financial performance was in evidence.
So what exactly is a market orientation business strategy?
A hotel which adopts this type of business strategy will tend to operate in a highly competitive market, and therefore puts their customers at the center of their strategic and operational thinking. To implement this strategy, the hotel will need to gather market information related their target customers’ needs, as well as of their competitors’ capabilities, to deliver superior customer value. Knowing this will enable the property manager to discontinue product offerings that add no value, and to include only value-added services.
Realizing that in a competitive environment, competitors’ capabilities and target customers’ needs are in a constant state of flux, there is often a feedback loop and learning is essential. The focus is on offering only those products for which customers find value and are willing to pay. We find that the information generated through adoption of SMA techniques assists managers with these needs, and they enjoy superior hotel property performance.
Sales orientation business strategy
On the other side of the constellation is the sales orientation business strategy. A hotel which follows such a strategy will usually only do so where they compete in a market with a low level of competition. Hotel managers are able to offer their product to the market in way that is somewhat divorced from – or at least shows little correlation with – customer and competitor considerations. Management considers that there are few, if any, alternatives for customers in their market and so they see little merit in expending the resources and effort needed to gather competitor or customer information (e.g., through SMA). Instead they are able to set a price up to the maximum customers are willing to pay. Our findings suggest that the further a hotel moves away from a market orientation business strategy, the less benefit there will be from adopting SMA techniques.
Hospitality industry: highly competitive industry
In summary, while there may remain some locations globally where hotels operate in less competitive markets, the overarching trend is toward hotels facing higher levels of competition. Where there is greater competition, there will be a need for hotels to adopt a market orientation business strategy, and our findings highlight that such hotels will be unequivocally better off in terms of superior hotel property performance by adopting SMA.
This article is based on the following research paper:
Turner, M. J., Way, S. A., Hodari, D., & Witteman, W. (2017). Hotel property performance: The role of strategic management accounting. International Journal of Hospitality Management, 63(May), 33-43.
You can access the paper here
