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MATCHING STRATEG Y WIT H STRUCTURE: TH

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MATCHING STRATEG Y WIT H STRUCTURE : TH E CAS E O F
HOTEL INDUSTR Y I N MALAYSI A

BY:

MOHAMMED AMRA N
SALLEH MOHD RADZI
ABDUL RAZAK AZI Z
AZLAN SUPARD I

JULY 2003

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 Matching Strategy with Structure: Th e Case of Hotel Industry in
Malaysia
By
Professor Mady a Mohamme d Amra n
Salleh Mohd Radz i
Abdul Razak Azi z
Azlan Supard i

(ABSTRACT)

The majo r purpose of this study was to examine the relationshi p of

strategy and structure to performance. Porter' s (1980 ) strategi c typology

was utilize d to classify hote l firms by strategic orientation; and, an analysis

of variance was performe d to determine the differences i n their

performance. Structura l Equation Modelin g was use d to confirm the

factors underlying the strategy and structure constructs. Th e thre e

performance variable s use d i n this study were: 1 ) Occupancy percentage ,

2) Retur n o n sales, and 3) Retur n on assets.

The result s were tabulated and analyzed base d o n primar y data derive d

from a mail survey questionnaires. A total of 283 hote l firms across the

country that are rate d as 5-star, 4-star , and 3-star were invite d for

participation. Th e respons e rate was 44.2 percent o r 12 5 hotel s

responded within the required 5-wee k duratio n for data collection.

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Results indicate d that strategy was no t related to structure i n hotel firms.

It was found that all the three performance measure s were no t related to

structure. Thes e findings were inconclusiv e i n validating Porter' s model.

The probabl e reaso n i s that Porter's generic strategies may no t be

applicable for the service industr y due to the existence of the fundamenta l

differences i n manufacturing an d service.

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Tarikh:18hb Julai 2003
FAKULTI PENGURUSAN HOTEL & PELANCONGAN
No Rujukan: 600-FHOTOU R (PTA . 5/3) 40450 SHAH ALAM, SELANGOR DARUL EHSAN
Tel: 03-55435689/5706/5705/5704/5687/5656/5657/569 3
.-Fax:03-55435698 ' »

Prof. Dr Azni Zain Ahmad

Penolong Naib Canselor
Penyelidikan
Biro Penyelidikan dan Perundingan L
UiTM

Prof,

Laporan Akhi r Proje k Penyelidika n "Matchin g Strateg y wit h Structure :

The Cas e of H o t e l I n d u s t r y i n M a l a y s i a "

Sukacita dimaklumkan bahawa projek penyelidikan bertajuk seperti diatas telah

dapat kami sempurnakan. Denga n ini kami serahkan tiga (3) salinan naskah
laporan akhir seperti yang disyaratkan

Kami ingin merakamkan ucapan terima kasih kami kepada Unit BRC yang
telah banyak memberi sokongan dan dorongan berterusan didalam usaha-
usaha penyelidikan kami

Sekian, terima kasih.

Mohammed Amran
Professor Madya
Fakulti Pengurusan Hotel dan Pelancongan

s.k. 1 . Deka n
Fakulti Pengurusan Hotel dan Pelancongan

2. Uni t Penyelidikan dan Perundingan

Fakulti Pengurusan Hotel dan Pelancongan

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RESEARCH PROJEC T GROU P

MOHAMMED AMRAN
PROJECT LEADER

SALLEH MOHD RADZI

MEMBER

AZLAN SUPARDI
MEMBER

SIGNATURE

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ACKNOWLEDGEMENT

SYUKUR ALHAMDULILLAH , THANK YOU T O ALLAH S.W.T . fo r giving

us the time, patience an d wisdom to complete this research effort .

The successfu l execution o f this research projec t reflects the guidanc e

and encouragement o f the staff and management o f the Facult y of Hotel
and Tourism Managemen t Thi s research was mad e possibl e with the
participation of the hote l organizations. Th e managemen t hav e take n
time out of their busy schedule to provide u s with the primar y dat a
required, some of which are quite confidential. Thei r generou s
assistance an d untirin g cooperation, i n spite of a very bus y schedule,
has made the timely completion of this research possible .

We ar e grateful to the Burea u of Research an d Consultancy , UiT M for

financial support that helped defray expenses associate d wit h data
collection. W e than k the unit's head and the Coordinator for their tireless
effort i n encouraging an d supporting the researc h activities .

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TABLE OF CONTENTS

CHAPTER 1

1.1 Th e Hote l Industr y in Malaysia 1

1.2 Theoretica l Underpinnin g 5
1.2.1 Strateg y 5
1.2.2 Structur e 9
1.2.3 Strateg y and Structure 1 0
1.2.4 Strategy , Structur e an d Performanc e 1 2
1.3 Proble m Statemen t 1 3
1.4 Researc h Objective s 1 5
1.5 Researc h Question s 1 7
1.6 Hypothese s1 7
1.7 Significanc e o f the Stud y 1 9

CHAPTER 2

2.1 Th e Definition s of Strategy 2 1

2.2 Strategi c Typologies 2 4
2.2.1 Th e Mile s and Sno w Typology 2 5
2.2.2 Porter' s Typology 2 8
2.3 Definition s of Structure 3 4
2.3.1 Th e Concep t o f Structure 3 5
2.3.2 Dimensio n o f Structure 3 7
a) Formalizatio n3 9
b) Centralizatio n4 0
c) Complexit y4 1
2.4 Performanc e4 2
2.5 Strateg y an d Structure 4 5
2.6 Strateg y and Performanc e 5 0
2.7 Strategy-Structure-Performanc e5 3

Chapter 3

3.1 Conceptua l Framewor k 5 9

3.2 Operationa l Definition s : Key Variables 6 1
3.2.1 Generi c Strateg y 6 1
3.2.2 Structur e 6 2
3.2.3 Performanc e 6 2

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3.3 Dat a Collectio n 6 4
3.3.1 Selectio n Proces s 6 4
3.3.2 Dat a Gatherin g Proces s 6 5
3.3.3 Dat a Analysis 6 6
3.4 Instrumen t Developmen t 6 7
3.4.1 Strategie s 6 7
3.4.2 Organizationa l Structur e 6 8
3.4.3 Financia l Performanc e 6 9
3.5 Reliabilit y and Validity 7 0

Chapter 4

4.0 Researc h Result s 7 2

4.1 Pre-tes t Result s 7 2
4.2 Th e Sampl e 7 3
4.3 Descriptio n of Participating Hotel s 7 5
4.3.1' Affiliatio n 7 5
4.3.2 Siz e 7 7
4.3.3 Segmen t 7 8
4.4 Confirmator y Facto r Analysis 7 9
4.4.1 Reliabilit y and Validity 8 3
4.5 Multicollinearit y8 7
4.6 Statistica l Analysis of Hypotheses 9 0
4.6.1 Hypothese s On e 9 0
4.6.2 Hypothese s Tw o 9 3
4.6.3 Hypothese s Three 9 7
4.6.4 Hypothese s Fou r 10 2
4.7 Summar y o f Hypotheses Testing 10 4

Chapter 5

5.0 Discussio n of the Results 10 7

5.1 Strategie s and Structur e 10 8
5.2 Strateg y and Performanc e 10 9
5.3 Structur e and Performanc e 11 0
5.4 Strategy , Structur e an d Performanc e 11 1
5.5 Limitatio n of the Study 11 2
5.6 Contributio n of the Stud y 11 3
5.7 Futur e Researc h 11 4
5.8 Summar y 11 5

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LIST OF TABLES

Table 1 Numbe r o f Hotels by Star Rating s 3

Table 2 Hote l Industr y Outloo k 199 8 - 199 9

Average Occupanc y Percentag e 4

Table 3 Mile s and Snow' s Strategy-Structur e

Characteristics 2 8

Table 4 Distributio n of Hotels by Region an d

Star Rating s (2000 ) 6 5

Table 5 Summar y o f Survey Respondent s an d

Demographic Informatio n of
Respondents 7 3

Table 6 Titl e of Respondent s 7 4

Table 7 Sta r Rating s of Hotels by Segments 7 6

Table 8 Siz e of Responding Hotel s 7 7

Table 9 Operatin g Segmen t 7 8

Table 1 0 Hote l Segment b y Star Rating s 7 9

Table 1 1 Descriptio n o f Modification Proces s

Of the Strateg y Factor s 8 1

Table 1 2 Descriptio n of Modification Proces s

Of the Structur e Factor s 8 2

Table 1 3 Unidimensionalit y an d Reliabilit y

Indices o f Strategy and Structure 8 3

Table 1 4 Strategy-Structure-Performanc e

Variabiles 8 6

Table 1 5 Multicollinearit y Diagnosti c 8 8

Table 1 6 Correlatio n (Strateg y an d Structure) 9 1

Table 1 7 One-wa y ANOVA: Strateg y an d

Structure (Difference s i n the Degre e

iii

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 Of Formalizatio n 9 2

Table 1 8 One-wa y ANOVA: Strateg y an d

Structure (Difference s i n the Degre e
Of Centralization 9 2

Table 1 9 One-wa y ANOVA: Strateg y an d

Structure (Difference s i n the Degre e
Of Complexity 9 2

Table 2 0 Correlation s (Strateg y and Performance ) . . 9 4

Table 2 1 One-wa y ANOVA: Strateg y an d

Performance (Difference s i n the
Strategy Choic e a s Measured b y
Average Occupancy 9 6

Table 2 2 ' One-wa y ANOVA: Strateg y an d

Performance (Difference s i n the
Strategy Choice as Measured b y
Return on Sales 9 6

Table 2 3 One-wa y ANOVA: Strateg y an d

Performance (Difference s i n the
Strategy Choic e as Measured b y
Return on Assets 9 7

Table 2 4 Correlation : Structur e an d

Performance 9 9

Table 2 5 One-wa y ANOVA: Structur e an d

Performance (Difference s i n the
Degree o f Structure as Measure d
By Average Occupancy 10 0

Table 26 One-wa y ANOVA: Structur e an d

Performance (Difference s i n the
Degree of Structure as Measure d
By Return on Sales 10 1

Table 2 7 One-wa y ANOVA: Structur e an d

Performance (Difference s i n the
Degree of Structure as Measure d
By Return on Assets 10 1

iv

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Table 28 Structura l Equation Modelin g
Summary Statistic s 10 3

Table 2 9 Paramete r Estimate s for Structura l

Equations o f Strategy Structur e
And Performance 10 4

Table 3 0 Summar y o f Hypotheses Testing 10 6

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LIST OF ILLUSTRATION S

Figure 1 Industria l Organization Mode l of

Performance Modifie d To Includ e
Strategy

Figure 2 Framewor k o f Strategy-Structure -

Performance Linkag e

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 CHAPTER 1

INTRODUCTION

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1.1

The hote l industry i n Malaysia was booming i n the 1970' s du e to the

arrival patterns to the country. A ras h of hotel construction signale d the

government's inten t to raise tourism to the nation's third largest industr y

from it s fifth because of its potential to boost Malaysia' s income . Th e

government encourage d hote l development becaus e there weren't

enough first-class rooms for a viable tourism industry. Malaysia' s

attraction as a tourist and business destination ha s encourage d

international chains to develop throughout the country. Th e ke y to

successful hote l operations i n Malaysia was the ability to offer multi-cente r

arrangements t o tour operators and particularly , to conference an d

incentive organizers .

Hotel industry in Malaysia i s currently thriving as i t moves along with the

tourism industry . Touris m industr y is among the importan t service industr y

in Malaysia, a s it will generate a significant foreign exchang e to the

country. I n 1995 , tourism industry generated RM9.9 b an d was ranke d

third i n foreign exchange earner with tourists' arrival of 7.5 million . Thes e

figures increase d to RM11.2b i n 1996 an d was ranke d second eve n

though the numbe r of arrivals decreased t o 7.2 millio n tourists. Fo r the

year 1999 , incom e generated from tourism industr y increase d to RM13.5 b

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and it was predicte d that this sector would continue to generate incom e in

terms of foreign exchange (Annua l Tourism Statistical Report , 2000) .

Under the 6 Malaysi a Plan , 30 internationa l hotel s were built . Betwee n

th

1998 an d 2000, there were 9 1 application s to build hotel s throughout the

country was received . Th e numbe r of hotels in 199 5 wa s 1,22 0 wit h total

number of rooms of 76,373, an d 67,214 employees . Th e numbe r ha d

risen to 1,48 2 wit h 110,00 0 room s in the year 2000. I t is estimated tha t

the numbe r of hotels will continue to increase to 2,019 hotel s if the growt h

rate of this sector will continue to increase a t 6.5 percen t a year. Base d

on the employee pe r roo m ratio of 0.93: 1 , total number of employee s

needed will be 157,724 . Th e hote l and lodgin g sector contributed RM43 6

million in 199 5 compare d to RM30 7 millio n in 1991, RM367 millio n in

1993, an d R M 403 millio n in 1994. Thi s sector employed 73,12 7 worker s

in 1998 compare d to 65,377 worker s in 1997 , which i s a change of 11. 9

percent (Sevent h Malaysi a Pla n 1 9 9 6 - 2 0 0 0 ) .

The hote l industry uses the Star Rating Syste m for classifying hotel s of

similar attributes. Th e ratin g ranges from 5 star indicating an upscal e type

accommodation an d facilities to 1 star hote l with minimum standar d of

accommodation an d facilities. I n Tourism Malaysia' s lis t of hotels by star

rating for the year 2001, ther e are 37 6 hotel s registere d with Touris m

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Malaysia rangin g from 1 star to 5 star rating. Th e followin g i s the

summary of the numbe r of hotels available:

Table 1

Number of Hotels by Star Rating (2000)

State 1 star 2 star 3 star 4 5 star Total

star
Kedah 2 6 13 8 7 36
Penang 5 3 7 13 8 36
Perak 3 8 9 6 1 27
Perlis - - - 1 - 1
Kuala Lumpu r 6 16 22 17 13 74
Selangor 1 2 7 9 12 31
Negeri Sembila n - 3 4 6 1 14
Melaka 3 4 7 3 3 20
Johor 5 10 10 6 5 36
Pahang 4 11 11 12 5 43
Terengganu 2 3 5 1 2 13
Kelantan - 4 1 3 1 9
Sarawak 7 2 11 7 5 32
Sabah 8 13 9 6 6 42
Total 46 85 116 98 69 414

Source: Accommodation Guid e 200 1

In spite of the economic downturn since 1997 , significan t oversupply of

hotel rooms continues to plague the hote l sector. Averag e occupanc y rat e

in 199 9 was 51.7 percent , which is 1.8 percen t highe r than occupancy rat e

in 199 8 (Malaysia n Tourism Promotio n Boar d 2000). Nevertheles s th e

average occupanc y rat e in 2000 ha s increased to 59 percen t and i t is

projected that the average occupanc y rat e in 2001 t o ease to 52.5 percen t

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and this rate is still considered belo w par since the break-even poin t for a

hotel operator i s at 60 percen t occupanc y (Li m 2001).

Table 2

Hotel Industry Outlook 199 8 - 1 9 9 9

Average Occupancy Percentag e

Month 1999 (% ) 1998(%) % Points

January 40.2 42.5 -2.3
February 48.6 50.2 -1.6
March 50.4 51.4 -1.0
April 45.7 49.3 -3.6
May 49.6 52.4 -2.8
June 52.7 53.5 -0.8
July 52.9 50.1 2.8
August 55.7 53.2 2.5
September 53.2 49.6 3.6
October 55.1 45.8 9.3
November 57.8 49.1 8.7
December 59.2 51.8 7.4
Jan - De c 51.7 49.9 1.8

Source: Malaysian Touris m Promotio n Boar d 200 0

The natur e of the hote l industry seems to possess characteristics that fit

well into what Porte r (1980 ) ha s defined as a fragmented industry .

According to Porter (1980) , a fragmented industr y i s an industr y i n which

no firm has a significant market share, can strongly influenc e the

industry's outcome, and essentially involve s undifferentiate d products .

Hotel industr y clearly possesses man y of the characteristics that would

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classify i t as a fragmented, lo w market share and hostil e environmen t

(Schaffer 1986) .

1.2 Theoretica l Underpinnin g

In light of the growing importance of the service industry , unfortunatel y

only a small percentage o f strategy literature has focused o n servic e

industry. Th e larg e number s of strategic studies have primaril y focused

on manufacturing firms. Separat e strateg y studies i n service industrie s

are neede d becaus e strategic studies i n manufacturing ma y no t always b e

generalizable to service industries . Significan t differences betwee n

service industr y and manufacturin g industr y ma y mean that strateg y

research findings are no t generalizable to service industry . I n order to

discuss strategy and structure relationship an d it s effect on performance in

the service industry, theories and model s from the manufacturin g firm s will

be adapted an d will be the starting point of the discussion.

1.2.1 Strateg y

According to Simon (1993) strateg y design mus t go on continually. Th e

time when a company i s enjoying its most recent success i s the time when

it needs to be planning its next initiatives. Strategi c planning i s aimed a t

dealing with the enormous uncertaint y an d constant change that moder n

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organizations find in the environments to which they must adapt.

"Strategy i s the abilit y of an organization to think and behav e strategically .

It involves paradig m (perspective s o n how and where to compete - a s a

whole and with respect to every product and service i n the activit y

portfolio), issue s of positioning i n relation to identifiabl e competitors an d

markets, an d the ability to change" (Thompson 199 8 p . 276). Accordin g to

Olsen et al (1992) the concept of strategy i s a necessar y ingredien t i n the

portfolio of management skill s of every hospitalit y managers . Strateg y i s

different i n service businesse s and especially i n the hote l industr y with its

unique mi x of goods and services offered.

Galbraith an d Schendel (1983 ) an d Mile s and Sno w (1978) defin e strateg y

as the consistent patter n i n the decisions that guide a firm i n competing a

given business. Sno w and Hambric k (1980 ) further added tha t thes e

decisions should b e directed a t 1 ) maintaining the organization' s

alignment with its environment and, 2) managin g the majo r interna l

interdependences. Accordin g to them, studies on strategy hav e mainl y

focused o n i t as a mediatin g variable betwee n environmenta l variable s

and organizational structur e and the interna l process; and the leve l of

analysis ha s been restricte d to mainly the corporate level . Corporate-leve l

strategy addresses what business an organization will be i n and ho w

resources will be allocated amon g those businesses . Business-leve l

strategy, howeve r focuses on how to compete i n a particular industr y or

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product/market segmen t - tha t is , what sustainable competitiv e advantag e

should be developed o r maintained to compete successfully (Sno w an d

Hambrick, ibid) . Accordin g to Thorelli (1977) strateg y i s the primar y way

of achieving the central objective. Th e central of focal objective is

whatever objectiv e i s in mind at the moment. Thorell i (ibid) further state s

that it is meaningless to talk about strategy without havin g an objectiv e in

mind and therefore, strategy becom e a n integral part of the ends-mean s

hierarchy.

According to Porter (1980 ) competitiv e strategy involve s positioning a

business to maximize the value of the capabilities that distinguish it from

its competitors. Ansof f (1965 ) state s that competitive advantag e add s a

dimension to strategy, bot h in search and i n evaluation o f opportunities.

Deciding on how to compete i n the hotel industry may includ e action s

such as adding ne w strategic business unit s or divesting current ones in

order to revitalize old ones. On e recen t approach to operationalizin g

business leve l strategy is by strategy typologies. Strateg y typology

developed b y Porter (1980) an d Miles and Sno w (1978 ) hav e found the

way to application i n the hospitalit y industr y research . Porte r (1980) ha s

presented three generic strategies: cost leadership, differentiation an d

focus. H e argue s that an organization will have to make a choice betwee n

these generic strategies i f it is to achieve a competitive advantage . Th e

organization will either have to keep it s costs lower than it s competitors or

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differentiate it s products/services s o that they are perceive d a s providin g

higher value when compare d with products/services o f competitors. Th e

focus strategy mean s product rang e or geographic market .

Miles and Sno w (1978 ) identif y four strategic types: prospector, defender ,

analyzer an d reactor . The y propos e a typology based o n the

organization's orientatio n toward product-marke t development .

Prospector, defende r an d analyzer strategy type represen t stabl e forms of

decision-making, whereas reacto r is not considered t o be a viable strateg y

in the lon g term. Mile s and Snow (1978) develo p a comprehensiv e

framework that addresses the alternative ways i n which organization s

define an d approac h their product-market domain s an d construc t

structures and processe s to achieve succes s i n those domains. Othe r

researchers hav e addressed the question from a differen t poin t of view

and developed a paralle l typology to describe the strategy-makin g

process. Mintzber g (1979 ) suggest s three mode s o f strategy making : the

entrepreneurial, the adaptive and the planning. H e focuses mainl y on the

motives for decisions, who makes them, how alternatives ar e evaluated,

the decisions' horizons , linkages, organizational goals , flexibility of modes,

age o f organization, and types of environments beneficia l to each mod e

(Segev 1987) .

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1.2.2 Structur e

According to Schaffer (1984 ) organizatio n structur e can be thought of as

comprehending th e parameters , which define the way an organization is

assembled. I t is through an organization's structur e that a framework for

integrating the organization's strategi c plans for the allocation of its

resources i s achieved. Dalto n et al (1980) conside r organization structur e

as the anatomy of the organization, providing a foundation within which

the organization functions and affect the behavio r of organizatio n

members. Perro w (1967 ) refer s to structure as follows, "In the course of

changing materia l i n an organizational setting, the individua l must interact

with others. Th e form of interaction i s called structure and involve s

arrangements o r relationships that permit coordination an d control of

work" (p. 195) .

To the Aston group, organization ha d three components : 1 ) structuring of

activities, 2) concentration o f authority, and 3 ) lin e control of workflow.

Structuring of activities refers to the degree to which jobs were specifie d in

detail, an d the degree to which rules and procedure s were formalized an d

documented. Concentratio n o f authority consists of three factors namely :

1) the overall degree to which decisions i n the organization wer e

centralized, 2) ho w much autonomy the organization ha d in relations to its

parent firm, and 3) the degree to which selection and promotio n

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procedures were standardized. Lin e control of workflow reflect s the

degree to which supervisors controlled the workflow i n the firm.

1.2.3 Strateg y and Structure

An organization's structural framework ca n be viewed a s an importan t

element relativ e to it s overall strategy. I t represents the means throug h

which organizational resource s are employed t o meet organizationa l

objectives an d the accomplishment o f the organization's purpose . It s

strategy, culture , managemen t styl e and attitudes, employee involvemen t

and satisfaction an d channel s of communication influenc e structur e i n an

organization. Th e interes t in the linkag e betwee n strateg y an d structur e

was demonstrated b y Alfred Chandler's stud y in 1962 . Chandle r (1962 )

proposes that strategy of diversification le d to organizational problem s and

eventually to the emergence o f a ne w corporate structure . Understandin g

the components o f structure and the contingencies that affect thes e

components ar e prerequisites to implementing structural configuration s

that will match situational requirements an d resul t in a greater likelihoo d of

organizational effectiveness (Schaffe r 1984) . Chandle r (1962 ) conclude s

that strategy will determine structure. H e hypothesize s that there will be a

positive relationship betwee n strategy and structure and Rumel t (1974 )

tests this hypothesis statistically and the result s support Chandler' s

hypothesis.

10

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 According to Robbins et al (1999) mos t current strategy-structur e

contingency framework tend s to focus on three strategy dimensions: 1 )

innovation, which reflect s the organization's pursui t of meaningful an d

unique innovations ; 2) cos t minimization, which reflect s the organization' s

pursuit of tightly controlled costs; and 3 ) imitation , which reflect s a n

organization's seekin g to minimize ris k and maximiz e profi t opportunitie s

by copying the market leaders . Th e belie f that the relationshi p betwee n

organizational strategy and structure i s reciprocal ha s been challenge d

recently. Man y no w believe that structure can have a profoun d impac t on

strategy through it s direct effect on the strategic decision-making process .

A stud y by Fredrickson (1986 ) synthesize s an d integrate s previou s work

and offers ne w explanations to fill unspecified gaps . Fredrickso n

concludes that a structure's pervasive impac t offers a reasonabl e

explanation o f why a firm develops a particular way o f making strategi c

decisions. Thre e different structures ar e discussed, and the prevalen t

strategic decision proces s for each i s evaluated. Highl y centralized firm s

are likel y to use a strategic decision proces s that i s best understoo d b y

using an individua l uni t of analysis. A firm dominated b y formalizations

would likel y use an organizational decision process. Finally , comple x

organizations ma y employ small groups for their decisions.

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