A Study on Value Innovation Strategies of Chinas Economy Hotel

Industry
LIU Tao, XU Fuying
College of business administration, Shandong Institute of Business and Technology, China, 264005
tomliutao@sina.com
Abstract: Chinas economy hotel industry has great achievement by a series of value innovation
strategies. This paper firstly formulates the current situation of Chinas economy hotel industry, and then
draws the strategy canvas economy hotel by comparison with high-star hotels, low-star hotels and social
lodging institutes. According to the above, this paper discusses four value innovation strategies of
economy hotel from the following four aspects: value/cost ratio, convenience and rapidity, chain
operation and hotel E-commerce.
Keywords: economy hotel, value innovation, strategy canvas, blue ocean strategy

1 Introduction
In the end of 2008, there were over 300,000 lodging enterprises in China, which included counted
16,528 star hotels, hosted institution by Beijing office of local government, hosted institutions by state
ministries and other non-star hotels started by every walk of life. Surging lodging industry scale made
hotel industry market face oversupply deeply in China, which could be called Red Ocean. Under the
circumstances, star hotels especially for high-star hotels have been experiencing the increasingly fierce
competition. According to statistics, by the power of the financial crisis, the average occupancy rate of
star hotels was only 62.5%, fell 5% in first quarter year-on-year. Against the dilemma of star hotels,
Chinas economy hotel industry had good performance in the global financial crisis by a series of value
innovation strategies, which created so-called Blue Ocean. Accompanying with the industry
development, domestic theoretical researches on economy hotels started at the end of the 20th century
and became the hot spot and focus of both industry and educational circles in 21st century. Based on
analysis and summary of relative research results, this paper finds out domestic researches mainly
concentrate on the following aspects: studies on the concept, type, and characteristic of economy hotel;
studies on the background, existing problems and corresponding countermeasure in the course of
development of economy hotel industry nationwide or regional; studies on the development patterns,
branding path and means, and core competitiveness of economy hotel; studies on comparison between
the economy hotel industry of our country and overseas', and so on. Although more and more scholars
pay attention to the development of Chinas economy hotel industry, some problems still have not
enough time to do further research and dont put forward better solutions due to its late start but fast
development. Overall, the whole research level is not high because of the short research time, which is
mainly reflected by the following aspects: more qualitative researches and less quantitative analysis,
more normative research and less case study and empirical research. Therefore, quantitative analysis,
case study, and empirical research on economy hotel will be the trend and topics in the future.

2 The Current Situation

Economy hotel, also called limited-service hotel, appeared in America in the 1950s, which mainly
supplied Bed and Breakfast for low and middle-end customers such as the ordinary tourists and
business travelers and so on. Jinjiang Inn was the first economy hotel in China founded in 1996.
Although the lagged start, Chinas economy hotel have developed rapidly by annual growth rate
200% - 300% since 2005, which reached 2,805 hotels and 312,930 rooms in 2008, separately 122
times and 96.7 times as many as in 2000. In addition, national brands included Jinjiang Inn, Home
662

Inn, Seven Days, and Motel 168 set up hotels in main cities of China, other local brands also maintained
good momentum of development. Meanwhile, international brands such as Super 8 and IBIS have
entered China on a large scale in recent years. Even so, economy hotel only occupied 10-20% of the
hotel totals in China, however it reached 60-70% in Euro and American developed countries, market
still appears huge growing space for Chinas economy hotel industry. Therefore, each brand will speed
up the pace of expansion in 2009. For example, Hanting Hotels Group will open 100 new hotels, Home
Inn Group will open 130-150 new hotels, and Seven Days Group will open 150-180 new hotels
nationwide. Besides these, Motel Group, Green Tree Inns, IBIS and Super 8 will expand their branches
by all means. All of these prove Chinas economy hotel industry will have a significant progress
hereafter.

3 Strategy Canvas
In highly saturated hotel industry market, economy hotel industry has broken away from the Red
Ocean competition to the Blue Ocean market, which mainly depended on the value innovation
strategies of economy hotel. Value innovation is the cornerstone of blue ocean strategy. We call it value
innovation because instead of focusing on beating the competition, you focus on making the competition
irrelevant by creating a leap in value for buyers and your company, thereby opening up new and
uncontested market space. Value innovation places equal emphasis on value and innovation. Value
without innovation tends to focus on value creation on an incremental scale, something that improves
value but is not sufficient to make you stand out in the marketplace. Innovation without value tends to
be technology-driven, market pioneering, or futuristic, often shooting beyond what buyers are ready to
accept and pay for. In this sense, it is important to distinguish between value innovation as opposed to
technology innovation and market pioneering. [] Strategy canvas is an analytic framework that is central
to value innovation and the creation of blue oceans. It can capture the current state of play in the known
market space. This allows you to understand where the competition is currently investing, the factors the
industry currently competes on in products, service, and delivery, and what customers receive from the
existing competitive offerings on the market. Figure 1 describes the strategy canvas of Chinas economy
hotel industry. The horizontal axis captures the range of factors the industry competes on and invests in.
High

High-star hotels

Low

Economy hotels

Place Safety Sanitat Brand Price F&B

ion

Recre Staff
ation

Low-star hotels and social

lodging institutes

Invest Service Room Chain Conve E-com

ment
design opera nience merce
tion

Figure 1 The Strategy Canvas of Chinas economy hotel industry

Figure 1 show that, compared with high-star hotels, low-star hotels and social lodging institutes, Chinas
economy hotels maintains the core competitive factors firstly, which are place, safety, sanitation and
comfort. Secondly, they eliminate recreation and most food and beverage factors. And then, staff,
investment and individual service factors are reduced. In the end, chain operation and E-commerce are
applied by economy hotels. Through the above measures, they reconstruct the market boundary of hotel.

4 Analysis on Value Innovation Strategies

663

4.1 High value/cost is the biggest competitive advantage

4.1.1 Pragmatic is the basic service concept of economy hotels. In the course of rooms designing, the
characteristics of modern household are fully integrated, which includes sanitation, condensation,
freshness and cleanness, warmth and comfort. Beds in room are matched according to three-star hotels
standard or even higher from mattress to beddings in economy hotels. Besides these, economy hotels
supply free broadband, sanitary and convenient popular breakfast (such as bread, coffee, etc.), and other
comprehensive service which includes laundry service, business agency, etc. All of these make guests
feel like home.
4.1.2 Economy hotels attached great importance to cost reduction. Firstly, compared with other hotels
and lodging institutes, economy hotels reduce operation costs and fees observably by simplifying or
eliminating food and beverage activities, shopping center and recreation secretary. Secondly, energy,
water resource, human resource, supplies and facility instruments are obviously saved for streamlining
business operations in economy hotels. For example, star hotels need at least 1.2 employees per room,
but economy hotels only employ around 0.5 per room. In Home Inn Group, the ratio changes 0.3 per
room that is equal to 1/5-1/7 of star hotels.
4.1.3 On the one hand, economy hotels satisfy the demand on accommodation for sanitation, safety and
comfort by business reengineering; on the other hand, cost reduction makes economy hotels obtain
unique price advantage relative to competitors. Room rate of economy hotels maintain between 120
RMB and 250 RMB, which is lower than traditional three-star hotels. High value/ cost ratio leads to
high occupancy rate, according to relative statistics, average occupancy rate of economy hotels keeps at
least 70% with a 10-point lead over star hotels. Moreover, international financial crisis have little
negative influence due to the mid-low client structure. Enterprises that selected high-star hotels when
holding or attending meetings or business travelling in the past turn to selecting economy hotels for
saving costs, which will bring new customer groups for economy hotels. Considering the low
construction cost, economy hotels will gain profits only if occupancy rate surpasses 60%. Therefore,
high value/cost is the fundamental reason for continuous good performance of Chinas economy hotel
industry in recent years.
4.2 Rapidity and convenience are the powerful means responding to competing
Economy hotels dont put emphasis on supplying individual service, but rapidity and convenience.
Firstly, the places of economy hotels are mostly near to the business district, airport, railway station or
bus station, which not only makes hotels founded easily, but also saves time for guests. Secondly,
economy hotels generally realize the automation and electronic in reception services, and flow line
operation for room arrangement. Besides this, some hotels outsource their room cleaning business to
professional cleaning companies. All of these improve the service efficiency of economy hotels for
guests greatly. Finally, economy hotels resort to job enlargement due to the business concentration on
front office and room arrangement, that is to say, one employee can expert in one thing and good at
many. Under the circumstances, front desk can deal with all things including complaints from guests
and other business within its capacity, which both saves human resource cost and realizes one-stop
service.
4.3 Chain operation is the competitive foundation
It is necessary for economy hotels to realize the economic benefit by numbers of rooms or hotels
because of the profit model of SPQR (small profits but quick turnover).Compared with star hotels,
economy hotels are equipped with inherent advantages.
4.3.1 Generally speaking, the investment of building a five-star hotel needs 600 million yuan to 1,500
million Yuan, a four-star hotel needs 200 million Yuan to 300 million Yuan, a three-star hotel needs not
more than 100 million Yuan. Contrast to this, the budget of building an economy hotel that needs 5000
m2 building area is about 10 million Yuan, which is far below star hotels and can be returned within 3 to
5 years. Furthermore, the systematic operation and management model is formed and fixed easily for

664

economy hotels due to the elimination of F&B and recreation business. Therefore, low-investment and
mature operation and management model can allow economy hotels with certain brand effect realizing
chain expansion rapidly by self-building, franchising, merger and acquisition, and management contract,
etc. Home Inn Group bought total stock ownership of 26 chain hotels of Shanghai Top Star Hotel
Management Co Ltd by 340 million Yuan on October 22 in 2007. In 2009, Hanting Hotels will open
100 new stores in which the ratio of chain store and franchise store will be half, Jinjiang Inn will keep
the ratio of 4:6 all the time, Home Inn drop the ratio from 7:3 to 6:4. Besides these, Seven Days Group
and Green Tree Inns also announce the franchise store will surpass half of new opening stores. This
indicates franchise will become the main expansion model.
4.3.2 Economy hotels can obtain large numbers of external funds due to the good expectation and
support from external financial capital. Home Inn Group laid a foundation for the future expansion by
financing 109 million dollars from Nasdaq stock market on October 26 in 2006. Seven Days Group also
announced that Merrill Lynch, Deutsche bank and American Huaping Investment Group jointly invested
95 million dollars to its expansion on September 4 in 2007. Besides these, Motel, Super 8, Green Tree
Inns, and Hanting Hotels obtained huge external investment to support the expansion early or late.
4.4 E-commerce is the trump to the success
Different to traditional hotel sales model, chain economy hotels have self-establishing place, which are
open to customer for reserving easily by building own website. On the one hand, this help economy
hotels improving the capacity of room-controlling to drop vacancy rate by statistics of reservation; on
the other hand, customers are willing to reserve rooms by Internet, except for convenience, extra
benefits which includes lower price discount, higher priority, room upgrading, and VIP service brought
from the increasing reservation frequency, are the important reasons. Nowadays, many economy hotels,
such as Jinjiang Inn, Home Inn, and Seven Days Group and so on, opened online payment service by the
cooperation with the third party platform. This not only pays easily for customers, but also improves the
efficiency of financial management and capital operation for hotels.

5 Conclusion
An effective blue ocean strategy has three complementary qualities: focus, divergence, and a compelling
tagline. Without these qualities, a companys strategy will likely be muddled, undifferentiated, and hard
to communicate with a high cost structure. Current economy hotel industry is in accordance with above
three qualities. However, the reality is that industries never stand still. They continuously evolve, and
economy hotel industry is no exception. Eventually, almost every blue ocean strategy will be imitated.
As rivalry intensifies and total supply exceeds demand, bloody competition commences and the blue
ocean will turn red, in which economy hotel should begin reaching out for another value innovation to
create a new blue ocean by deciding which factors to eliminate and reduceand not only those to raise
and createto construct a divergent value curve. Except the above, this paper thinks the further division
and reposition of market, the redefinition of industrial boundary, and establishment of industrial criteria
and regulations, and strengthen of supervision will provide the foundation of sustainable development of
Chinas economy hotel industry.

References
[1]. W. Chan Kim, Rene Mauborgne. Blue Ocean Strategy. Boston: Harvard Business School Press,
2005:18 48,188 190
[2]. HOU Bing, CHEN Xiaojing. An Overview of Development Studies on Economical-type Hotels of
China. Journal of Guilin Institute of Tourism, 6(2007), p879 883(in Chinese)
[3]. LIU Jingyan .Reflections over Value Innovation of Budget Hotels in China with the Blue Ocean

665

Strategy. Tourism Science, 1(2008) , p35 40(in Chinese)

[4]. ZHAO Xiaoyun.A Study on the Evolution of Industrial Organization of Chinas Economical-type
Hotels Based on SCP Theory. Tourism Tribune, 9(2007) , p29 34(in Chinese)
[5]. SHEN Han. Product Innovation and Market Segmentation of Economic/Budget Hotels. Tourism
Tribune, 10(2007) , p40 43(in Chinese)
[6]. CHEN Junliang. Study on the Developing Model of Chinas Economical Hotel Chains. World
Regional Studies, 3(2008) , p164 170(in Chinese)
[7]. LI Ping, XU Qing. On the Management Innovation in Chinese Economy Hotels. Journal of
Mianyang Normal University,12(2008) , p8 12(in Chinese)

Author in brief
LIU Tao(1980.2-), male, came from Linyi of Shandong Province, master degree graduated from
Qingdao University in 2006.7,lecturer of Shandong Institute of Business and Technology from 2007.12,
majored at tourism enterprise management.
XU Fuying(1979.10-), female, came from Qingdao of Shandong Province, master degree graduated
from Qingdao University in 2006.7,lecturer of Shandong Institute of Business and Technology from
2008.12, majored at tourism industrial economic theory and policy.
Contact information
Mailing Address: College of business administration, Shandong Institute of Business and Technology
(No191of Binhai mid-road in Lai Shan district, Yantai)
Zip Code: 264005
Mobile telephone: 13562544820
E-mail: tomliutao@sina.com

666