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Organisational Environment

Assignment
Adenike Alabi

SECTION ONE

ACTIVITY ONE
The Pest Analysis is as follows:
POLITICAL:

The expansion strategy beyond South African borders could be affected by various political and
regulatory uncertainties, transparency in land ownership, corruption and timeframe in obtaining
licenses in various countries.
With utilities being state-owned monopolies, there are operational challenges with the continuing
disruption in supply.
Government continues to actively promote the tourism sector (7.2% of total investments in 2011),
impacting positively on occupancy levels.

ECONOMIC:

Current global economic uncertainties continue to affect access to, cost and terms of funding for
expansion both inside and outside South Africa.
The onset of the global financial crisis and slow GDP growth has limited peoples ability and
willingness to travel, both domestically and internationally.
The effect of increases in municipal rates and energy costs, coupled with food inflation have
impacted the groups cost base

SOCIAL:

High crime levels continue to impact on the decisions of foreign travellers to choose South Africa
as a safe and secured travel destination.
New capacity has resulted in consumers being spoilt for choice and possibly viewing the brand
unfavourably given its relative age
Increased demand for skilled hotel staff potentially can erode the groups skills base

TECHNOLOGY:

Excellent technology infrastructure in South Africa continues to give the country the edge as the
preferred destination especially amongst multinationals
Advances in telecommunications such as videoconferencing create a credible substitute for
business travel in challenging economic period
The increased use of social media and the internet continue to shape how the group engages with
its stakeholders.

ACTIVITY TWO
Porters Five Model application is as follows:
THREAT OF ENTRY OF NEW COMPETITORS:
Being one of the biggest hotel chains in the country, City Lodge is able to offer a variety of locations,
features and budget choices with major international hotel players also well established in the country.
The groups size enables it to carry large economies of scale within its business activities, thereby
minimizing cost. Current funding limitation also means that new hotel developments lack significant
capital required to compete with well established brands like City Lodge Hotel Group. With high entry
barriers, the threat is therefore LOW.
BARGAINING POWER OF CUSTOMERS:
Even though customers are many and diverse with no single large buyer, the power of the customer
remains HIGH. New capacity and oversupply of rooms, increased access to information via the internet
and rise in social media sites such as TripAdvisor means that customers are spoilt for choice. Other
factors include low shopping costs, non-existing costs of switching to a competitor and price sensitivity.
BARGAINING POWER OF SUPPLIERS:
Large hotel chains like City Lodge have a lot of power over the suppliers since there are many companies
providing the same services or products in the country, with intense competition to win contracts with the
group. Even with legislation providing for preferential procurement contracts for previously
disadvantaged groups, the bargaining power of City Lodge Hotel suppliers is LOW.
COMPETITIVE RIVALRY WITHIN THE INDUSTRY:
South Africas re-engagement and integration into the international and business economy post 1994 and
the successful hosting of the 2012 FIFA World Cup have led to unprecedented growth in tourism. Growth
of new hotels across the country has been phenomenal making competition stiff with factors such as
price, service quality and location critical in gaining market share. Competitive rivalry is therefore HIGH.
THREAT OF SUBSTITUTES:
Generally, business and international travellers especially will consider the stay at a lodging facility a
necessity once decision is made to travel. Therefore, this threat for City Lodge is LOW.

ACTIVITY THREE:
Having expanded from a 182 room hotel to its current 6440 rooms across 52 locations and expansion
outside South Africa, the company can be categorized as a CASH COW in South Africa and a
QUESTION MARK outside the country.
At the cash cow stage, a company is expected to operate with a range of formalized procedures covering
all aspects of its business operations. There is a high level commitment to HR polices as it continues to
view its staff as an important asset to maintaining its market share. It is therefore likely to offer effective
compromises in labour related negotiations. The HR function is well established with specialist expertise
in many areas. However, this period of relative stability may be interrupted by unforeseen situations such
as global events. As the stage progresses, there is an increased focus on the control of labour costs which
becomes harder to achieve as employees have become accustomed to increased pay. Staff replacements
are no longer automatic and HR initiatives such as training and development programmes become harder
to justify.
The groups HR strategy appears to be in line with the BCG Matrix position discussed above.
Independent research by CRF Institute in 2012 shows the company is highly rated on primary benefits
provided to employees and career development plans with an average rating in the secondary benefits and
working conditions. There are detailed HR policies in place. Comments by two members of staff
corroborate the companys well-developed and implemented HR policies and procedures. The company is
expected to exhibit these same characteristics in its locations outside of South Africa even though it is still
a question mark in these countries as it should be able to leverage on the experience of its South African
operations.

ACTIVITY FOUR:
The three identified employment trends are:
1. HIGH UNEMPLOYMENT AND INEQUALITY: In 2009-2010, South Africa lost about
750,000 jobs as a result of the 2008 recession, increasing unemployment to 25%. The loss has
been across the board, both in formal and informal sectors, in spite of the governments
aggressive counter cyclical fiscal policy which resulted in a substantial increase in public sector
employment (IMF, 2012)
2. STRONG COLLECTIVE BARGAINING FRAMEWORK: The direct result of this has been
a rapid increase in real wages without the comparable growth in labour productivity.
3. RELATIONS BETWEEN TRADE UNION, BUSINESS AND GOVERNMENT: The
Congress of South African Trade Unions (COSATU) is the third leg of the Tripartite Alliance that
governs the country. Unlike in most countries, government is not neutral, often making business
the weakest link in labour negotiations. The recent tragedy at the Marikana Miners Strike aptly
demonstrates these relations.

ACTIVITY FIVE:
The enactment and implementation of legislation in post 1994 South Africa aims to foster good industrial
relations, overcome the legacy of discrimination with regards to race, gender and disabilities and to
ensure fairer practices in a democratic society.

The Labour Relations Act (1995) covers all the formal economic sectors and lays down
procedures for dismissals, resolution of disputes through the Commission for Conciliation
Mediation and Arbitration.
Employment Equity Act (1998) promotes equal opportunity and fair treatment by implementing
affirmative action measures aimed at redressing disadvantage among designated groups. It applies
to companies with more than 50 employees or with a turnover of over R2 million.
Skills Development Act (1998) aims to improve the level of education of workers, and also
established the Sectorial Education and Training Associations, including THETA, responsible for
training and development in hospitality and tourism sector.
Broad Based Black Economic Empowerment Act (2003) is designed to improve the
participation of black people in the economy by encouraging and fostering more black ownership
and management.
The Sectorial Determination for the Hospitality Sector (2007) lays down the conditions of
employment for workers in the sector and prescribes a minimum wage large and small employers
should pay and prohibits forced and child labour. An update to the minimum wage was made in
June 2012.

ACTIVITY SIX:
The Groups financial analysis were analysed for the financial year ending 30 June 2011.
LIQUIDITTY:
Even though cash generated by operations is down on previous year and loan facility taken for new
developments become payable within the next 12 months leading to lower liquidity, the company remains
in overall good financial position and is able to meet foreseeable cash requirements.
PROFITABILITY:
Revenue grew by 5.5%, resulting from softer demand and oversupply of rooms. Costs increased at a
higher rate due to factors such as additional property rental expenses, 50% increase in electricity expense
and a 54% increase in depreciation as a result of capitalising new hotels. Margins are therefore down. It
continues to able to generate returns from its capital base.
EFFICIENCY:
The company continues to be efficient at credit control, reducing its debt collection days. A significant
reduction from 2010 in creditor payment days indicates the company is comfortable meeting its cash
obligations. Even though there has been a slight decrease in its utilization of its assets to generate revenue

in the year, expectations are that increased occupancy levels for existing and expanded asset base will
increase revenue in the coming years.
RISK:
As a result of increased borrowings to finance the new hotel developments, the company continues to be
highly geared. Despite the downturn in business, the company continues to be able to service its interest
expense from annual revenue. The gearing ratio is expected to improve once long term borrowing is paid.
Its interest cover well above the generally accepted level of 2 gives further assurance that the company
continues to be able to meet its interest payments out of current earnings.

ACTIVITY SEVEN:
The performance of Gooderson Leisure Group, another publicly listed hotel chain was used for
comparison over the last five years.

Profitability Ratios

Activity Ratios

80

100%
80%

60

60%

40

40%
20%

20

0%
City Lodge

0
Gooderson Leisure
City Lodge

Gooderson Leisure

Return on Capital Employed


Asset Turnover Ratio
40%

80%

30%

60%

20%

40%

10%

20%

0%

0%
City Lodge

Gooderson Leisure

City Lodge

Gooderson Leisure

Debt Ratios

Liquidity Ratios
2.00

400.00
300.00

1.50

200.00

1.00

100.00

0.50

0.00
City Lodge

0.00
Gooderson Leisure
City Lodge

Gooderson Leisure

PE Ratio Comparison as October 2012


25
20
15
10
5
0

Industry

City Lodge Hotel

Gooderson Leisure

Oct-12

City Lodge outperformed Gooderson Leisure Group on profitability, efficiency and activity ratios,
generating better returns on its capital base. Even though City Lodge remains the riskier of the two, its
shares is significantly more attractive to investors with better performance than industry average.

SECTION TWO

INTRODUCTION
The opening of the first City Lodge Hotel in Jonannesburg in 1985 pioneered the limited or selected
services hotel concept in South Africa, marking the opening a new market segment which had not been
explored by the existing hotel groups at the time. The Swiss-born Founder, Hans Enderle had extensively
investigated the selected service concept while he was the Managing Director of Holiday Inn South Africa
and felt it was a model that could be adapted successfully in the country.
From its beginnings with 123 rooms, it currently offers 6,440 rooms at 52 locations throughout South
Africa. The group has four brands offering a variety of locations, features and budget choices to
travellers. It has grown to one of the leading South African hotel chains, listing on the JSE in 1992 and
expanding to other African countries.

CURRENT STRATEGIC DIRECTION


The City Lodge strategy since its inception has been to focus on achieving high margins by offering
travellers a selected services concept without the often under-utilised services and facilities and the high
staff-to-guest ratios of full service hotels. It has remained loyal to this strategy of selected services model
even though there have been minor adjustments to facilities provided such as boardroom, fitness rooms
and coffee shops in response to customers needs.

As a chain, the group has expanded mainly through internal growth. It has shunned the growth path of
franchising and use of management contracts common with other selected services hotels in the United
States. Rather, it has expanded through a strategy of brand diversification and further market
segmentation of its selected service model of hotel development (Rogerson, 2011). In 1990, it established
the first Town Lodge as a two star offering and further segmented in 1995, to both one and four star
markets with the Road Lodge and the Courtyard Hotels respectively. Asides from adopting the external
growth strategy with a joint venture arrangement for the Courtyard Hotels, it has used the internal growth
strategy for its other diversifications and expansion.
In recognition of its core customer base i.e. the domestic business traveller, City Lodges location strategy
has been to have a presence in all major South African urban locations. In establishing any of their four
brands in a new location, careful research is undertaken with consideration given to the cost of proposed
development, what the market can afford and the supply situation of other accommodation providers. The
close association of City Lodge operations with the business tourism economy is reflected by the
continued concentration in Johannesburg and Pretoria (25 hotels), as opposed with 6 hotels in Cape Town
and Durban, the two leading leisure tourism destinations in South Africa.
With the current downturn in the hospitality sector, the groups strategy is one of consolidation with no
more developments planned in South Africa. However, in anticipation of positive future upturns, the
company is banking suitable lands, aiming to be ready for future developments at the appropriate times.
While pursuing the consolidation in South Africa, the company has started an expansion strategy to other
African countries, taking advantage of the unprecedented growth being experienced in these countries and
the continued expansion of many South African companies to these countries. It is using both internal
growth strategy (Town Lodge in Gabarone, Botswana) and external growth strategy with the acquisition
of 50% stake in Fairview Hotels in Nairobi, Kenya. Other opportunities in Ghana, Namibia, Zambia,
Mozambique and Mauritius are also been considered.
Having embarked upon the consolidation strategy, the company is now turning its attention to being more
competitive and innovative with a strategy to increase its service levels. This according to Marcel
Koblinski, the Human Resources Director entails changing the way employees think in order to come up
with new and improved ways of doing things. It has developed the Im Kind programme which aims to
drive service delivery and encourage creativity amongst its employees. The group, understanding that the
key element in service excellence is its people, has a strategic priority to develop and acknowledge its
people on a job well done, ensuring they are fairly rewarded in return.

RECOMMENDATIONS
The success of any companys strategy, especially those in the services sector depends greatly on its
people. While City Lodge has made great strides to improve the skills shortage amongst its African
employees, there is still a lot of room for improvement. An examination of the Employee Profile 2012
reveals no African in top management. Of the 69 people in senior management, only 6 are Africans,
Indians or Coloured. The figure improves at the middle management although there has been no
improvement between 2011 and 2012. Specific programmes must be implemented to redress its
employment inequity.

As the group expands into other African countries, it needs to decide on the strategy for parent-subsidiary
relationship. It is critical for the group to understand the national cultures of its new acquisitions and
strive to get a balance between its organizational culture and that of its host country, seeking to think
globally but act locally.
Even though the pioneer and still remains a leader in the selected services concept, other hotel groups
have introduced their own brands in this market segment and therefore, competition. The need for
continuous improvement in service delivery levels has to be a core strategy. This must however, be
balanced with ensuring that any operating cost increases result in increased revenues.
Substantial effort has been made in the utilisation of information technology in the running of the
business. The companys website is being extensively designed and in roads has been made in using the
social media. However, there is a need for investment in its IT infrastructure to meet both the companys
growing needs (fast and efficient reservations, check-in/out experience and monitoring guest feedback) as
well its customers growing needs, especially the increased dependence by business travellers on the
internet. It can, for instance, increase the free internet access time of 15 minutes in its three and four star
offerings in the first instance.

SUMMARY
The City Lodge Hotel Group was founded on a market differentiation strategy the selected services
hotel concept. In its 27 years, it has remained true to the concept even though adjustments have been
made to reflect customers needs. It has further diversified within this market segment and grown
substantially using both internal and external growth strategies.
The group, having identified its core customer base, has expanded in correlation to areas in South Africa
with high business tourism activities. In recognition of the current tough economic conditions, it has
adopted a consolidation strategy within the country whilst seeking new growth market by international
expansion to other African countries currently experiencing great economic growth. In the wake of
increased competition, it has initiated a number of programmes to improve its service delivery to build on
a strategy of innovation and creativity.
Finally, a number of recommendations are provided in the report specifically relating to City Lodges
human capital management, organisation culture, innovation and IT infrastructure provisions.

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