Management Economics: Market Structure and Optimal Strategies for IHG

This article discusses the market structure of IHG, a global hotel corporation, and explores the optimal strategies for the company in the field of management economics. It provides an overview of IHG's historical background, key products/services, and its position in the market. The article also highlights the benefits of operating in different market structures for IHG.

Management
Economics

Table of Contents
INTRODUCTION...........................................................................................................................3
MAIN BODY..................................................................................................................................3
1. Company Overview, its key products/services as well as historical background:.............3
2. Market Structure of Company:...........................................................................................4
3. Analysis of historic market structure of IHG:....................................................................6
4 (a). Operating in different market structure is more optimal for IHG:................................7
4 (a). major suggestions on interferences of government on operational activities of IHG in
terms of societal benefits:.......................................................................................................9
CONCLUSION.............................................................................................................................10
REFERENCES..............................................................................................................................11

INTRODUCTION
Management economics relates to science that helps understand how to effectively
distribute resources like manpower, technologies, assets, and capital. Comprehending
managerial economics is enabling people to consistently make rational choices and decisions.
Management economics is associated with identifying alternatives for the various management
problems within a specific business. Therefore it's closer to microeconomics (Athey and Luca,
2019). The study Evaluate economic statistics and information critically as framework for policy
making in organisational context. For study purpose InterContinental Hotels Group plc has been
selected which is UK based multinational hospitality corporation headquartered in
Buckinghamshire, England. Study covers detailed discussion about selected company's
products/services and historical background as well as analysis of its market structure to
recognise most optimal structure for corporation.
MAIN BODY
1. Company Overview, its key products/services as well as historical background:
The InterContinental Hotels Group or IHG is a global hotel corporation headquartered in
the UK, with many hotel chains located there. Its main office is situated near London, Denham,
Buckinghamshire. IHG had also kept UK soft drink firm Britvic within its business portfolio till
year 2005. As on first January 2016, IHG group was world's third largest leading hotel group in
respect of room numbers, with portfolio of 5,032 hotels totalling almost 744,368 rooms.
In Jul. 2015, IHG sales one of its biggest hotels, InterContinental Hong Kong, to investor group
for around $938 million. IHG declares in Feb 2019 that it will buy Six Senses Hotels for
around $300 million. The group runs 883,563 rooms globally, almost 60% in Americas, 25% in
Africa, Europe, Asia and Middle-East, as well as remaining 15% in China, as per company's
2019 annual-report data. Hotels and resorts are owned , operated, rented, and franchised by the
IHG. It runs standard, premium and luxury hotel-chain under different brands, including, Hotel
Indigo, Regent, EVEN Hotels, InterContinental, HUALUXE, Holiday Inn Resort, Crowne Plaza,
VOCO, Holiday Inn, Holiday Inn Express, Candlewood Suites, avid, Kimpton, Staybridge
Suites and, Holiday-Inn Club-Vacations among others. Its hotels provide accommodations,
dining, business facilities, spa facilities, lounge area, pool facilities, conference and event rooms.

It also runs IHG Rewards Group, hotel reward scheme (About us: InterContinental Hotels
Group plc. 2020).
2. Market Structure of Company:
The market structure corresponds to interconnected features of market, including the
number and comparative intensity of producers and consumers and the magnitude of collusion
between them, the intensity and types of competitiveness, the degree of the product-
differentiation as well as ease of entrance and exit from market. Four fundamental forms of
the market structure. First one is Perfect competition where multiple sellers and buyers
but none of whom are capable to control prices. Second Oligopoly, where a few big sellers who
retain some influence over prices. Third Monopoly where single-seller with substantial power
over supply chain and prices; and last one is Monopsony where single seller with significant
influence over demands and prices (Thampapillai and Ruth, 2019).
Amid a more competitive global economic context contributing to moderate growth ,
increased room supply reflects the sector 's overall favourable trends, like rising disposable
incomes and growing demand for known brands hotels. Around $535 billion hotel market
remains segregated, with a multinational or local chain associated with 54 per cent of rooms.
Competitive rivalry among developed players tends to rise as corporations pursue growth in their
offerings in acquisitions/mergers, organic-expansion as well as diversification.
IHG adopts an asset-light strategy, franchising or third-party management of hotels. Its
primary chain named Holiday Inn, provides mid-market accommodations, whereas Holiday Inn
Express brand provides limited-service places. IHG also targets upscale market with
company's Crowne Plaza and InterContinental brands, and provides extended stay
accommodation in thier Staybridge and Candlewood Suites. With such a presence in about 100
nations in the US, Europe region and Asia, most revenues comes from outside United Kingdom.
As this industry is expanding rapidly, IHG faced monopolistic competition but the
market structure of IHG has been transformed into oligopoly. A monopolistic competitive firm
encounters a market for its products that lies among perfect competition and monopoly.
A demand curve faced by perfectly competitive company is perfectly-elastic or flat, since a
perfectly competitive company sells whatever quantity it desires at prevailing market price.
While, at other hand, demand curve, as experienced by monopolist, is market demand curve,
because monopolist is only corporation within market and is thus downward sloping (Teleaba,

Popescu and Santa, 2019). IHG's main competitors are: Best Western International, Marriott
International, Choice Hotels International, Accor, Hilton Hotels Corporation, Four Seasons
Hotels, Wyndham Worldwide Corporation and Starwood Hotels & Resorts Worldwide,
IHG has reported revenue of USD 4,627 million in year 2019 which was 4337 million in
year 2018. Company's revenue in year 2015 was 1803 million which has been reached to 1715
million and 1784 million respectively in year 2016 and 2017. There was sudden increment in
company's sales after 2017 due to company's expansion and acquisition strategy. After 2018
there is incremental upward trend in sales of company. There is another notable aspect is that
company faced decline in net profit level with increase in sales in 2018. But as compare to 2018
company's net profit level has been improved (Nan and et. al., 2019).
INTERCONTINENTAL HOTELS GROUP PLC INCOME STATEMENT
Fiscal year ends in December. USD in millions
except per share data. 2015-12
2016-
12
2017-
12
2018-
12 2019-12
Revenue 1803 1715 1784 4337 4627
Cost of revenue 640 580 608 3256 3383
Gross profit 1163 1135 1176 1081 1244
Operating expenses
Research and development 5
Sales, General and administrative 395 339 328 344 385
Restructuring, merger and acquisition 16 13 51 71 -27
Other operating expenses -811 74 41 -5 122
Total operating expenses -395 426 420 410 480
Operating income 1558 709 756 671 764
Interest Expense 92 93 89 81 114
Other income (expense) -54 -25 11 -105 -108
Income before taxes 1412 591 678 485 542
Provision for income taxes 188 174 85 133 156
Net income from continuing operations 1224 417 593 352 386
Other -2 -3 -1 -1 -1
Net income 1222 414 592 351 385
Net income available to common shareholders 1222 414 592 351 385

Earnings per share
Basic 6.86 2.15 3.23 1.94 2.1
Diluted 6.77 2.13 3.21 1.92 2.09
Weighted average shares outstanding
Basic 178 193 183 180 183
Diluted 180 195 184 182 184
EBITDA 1600 811 906 691 826
IHG
3. Analysis of historic market structure of IHG:
Currently, IHG operates in oligopoly market structure as there are several leading and
large hotel groups who have control over product/service prices to an extent. But at the time
when company inter into this sector there was very few competitors. Being an UK based
corporation, company faced monopolist competition while conducting business at global level.
The international market for hotels has an total room size of around 18 million rooms. It has
risen to about 2% every year over last five years. Business rivals involve other hotel firms, both
big and medium, and privately operated hotels. The market continues fragmented,
with estimated 8 million branded hotel-rooms (roughly 45 percent of total market share). IHG
Revenues

has estimated 8 percent market share of branded market (around 3 percent of the overall market).
The top 6 big firms, including the IHG, together occupy nearly 41 per cent of total branded
rooms and just 18 per cent of aggregate hotel rooms. Geographically, industry seems to be more
concentrated, with top 20 nations accounting for yet more-than 80 percent of global hotel-rooms.
Under this system, US is more dominant (around 25%) with China, Spain and Italy being next
biggest markets. Group's hotels have more leading positions (upper three in room-numbers)
in six largest regional markets then any other main hotel corporation. Here are several major
features of monopolist competition as discussed in the context of IHG, as follows:
Product Differentiation: In a monopoly competition, all players and brands are trying to establish
product differentiation to introduce an aspect of monopoly status over competitive products.
This means that there is no ideal replacement for product sold by the company. In hotel industry
each company try to provide unique and innovative services and food items to attract customers
and create monopoly. IHG also focused on product differentiation to reach at current market
position (Kamien and Schwartz, 2012).
Large number of service providers: In hotel industry there are large number of competitors but
have small share in market. But presently in hotel industry, several large players thus market
structure has been changed to oligopoly.
Freedom of entry or exit: There are no major barriers for new entrants in market like as in
perfect competition. Thus IHG entered easily in the market currently this is tuff for companies to
enter into this sector because of oligopolistic competition.
Non-price competition: In monopolistic market competition, mostly sellers compete on variables
other then product/service price. Such variables involve aggressive ads, product developments,
improved delivery, after-sales facilities, etc. Sellers do not decrease price of their items but pay
higher costs for the marketing of their products. When firms engage in price-wars, that is a
probability of perfect competition, several firms may be thrown out of market (Callan and
Thomas, 2013).
In monopoly competition, as commodity/products is differentiated among companies,
each company doesn't even have perfectly elastic market for its goods. In such sector, all
companies shall decide price of their own services. It poses a downside sloping demand slope,
thus. Overall, can conclude that elasticity of demand is increasing as the distinction among
products decreases. All the features as discussed above can be seen within hotel industry. IHG

has experienced Monopolistc competition at initial phase after formation but due to emergence
of large players this market transformed to oligopoly.
4 (a). Operating in different market structure is more optimal for IHG:
As multiple market structures lead to various sets of options made by decision-makers,
recognizing the market structure is valuable tool in evaluating problems like the company's
pricing of items and, more generally, its capacity to improve profitability.
In longer run, profitability of the company would be ascertained by the strengths aligned
with market structure under which it functions. Long-term profits would be pushed downward
by forces of competition in highly competitive market. And in longer term, significant profits are
probable in lower competitive markets; in short term, any result is probable (Keller, 2015).
A corporation must consider characteristics of different market structures in attempt to
better predict the potential profit flow. Optimal marginal income equals to marginal cost.
Although, only under perfect competition marginal revenue equals to the price. Under certain
market suture , price usually reaches marginal revenue since a business could sell more products
only by decreasing price per unit. The quantities sold is highest volume under perfect
competition. Product/service price under perfect competition is typically lowest, however this
relies on variables like demand elasticity as well as increased returns to the scale (which can
minimize marginal cost of producer). Monopolists, oligopolistic and monopolistic market
companies are seeking to distinguish their goods so that companies can charge more prices.
Company should operate in different market-structure which is favourable for company and
where company can effectively utilise their available resources. Oligopoly is distinguished
by importance of strategic behaviour. Companies can adjust the prices, quantities, qualities and
advertising of the product in order to achieve advantage over its competitors. Numerous forms of
equilibrium can emerge that influence the probability of economic gains being made by each
of incumbents (and new competitors in long run). Price wars could begin to cause weak rivals to
leave market (Vanek, 2017).
A different market structure enable company to grasp all the opportunities and gain
competitive advantages. However there are also chances of failure due to unavoidable
circumstances in market. There are also possibility that company may not adjust with new
market structure. Thus before entering into a market-structure company has to evaluate all the
key constraints and features of such market-structure as to enhance operational efficiencies. As

IHG has encountered monopolistic competition during its initial phase post formation but
afterwards company has adopted expansion strategy to increase their market share and become a
leading player in industry. Company presently operating in Oligopoly structure and IHG is one
of the large player in market who has some control over prices. There for form above discussion
this has been analysed that operating in a totally different could be optimal if company has
analysed all the key aspects of such market.
4 (a). major suggestions on interferences of government on operational activities of IHG in terms
of societal benefits:
Governments are sensitive to inefficiency within markets. In an efficiently efficient
markets, resources are ideally distributed to those who need them in quantities they require. This
is not case in the inefficient markets; certain may have very much of resource, while others don't
have sufficient. Inefficiency may take a number of types. The government is seeking to address
these inequities by legislation, taxes, and incentives. Governments can intervene to
reduce damages caused by natural economical events. Financial crises, recession etc. are part
of normal economic cycle, but may have devastating impact on companies. In such situations,
governments interfere by subsidizing and manipulating money supply to reduce the extreme
effect of economic influences on their constituents (Hassan, Mungatana and Akpalu, 2019).
Governments also interfere on markets to encourage general economical fairness.
Governments interfere, through taxes and welfare services, to redistribute economic means from
the affluent to those desperately in needs. Other manifestations of market interference for socio-
economic benefits include job regulations to safeguard certain groups of population and the
control of manufacture of such goods to ensure health and also well-being of buyers. As in hotel
industry, government makes regulations for food safety and building criteria of hotels within
industry. These may not be in favour of companies operating in industry. In economic
downturns, private sector expenditure and investment are dropping sharply, contributing to
slower economic development. If government also cuts expenditure at same time , economic-
growth is falling even further and morale is declining. In deep recession time, governments can
borrow from private sector and invest their money to hire unemployed workers. If money supply
collapses, Central Bank or Government will have a function to play in printing money.
Similarly, government could need to avoid economic boom and credit explosion. Government
may have a positive effect on economy through monetary policy. Monetary policy will help to

maintain economic stability, although an autonomous central bank could not be regarded a
government interference.
From as per above discussion this has been analysed that government government
intervention is good for society as well as business. For society government intervention is must
as to safeguard the interest of common people. Thus greater government invention is suggested
here as government always takes steps to minimise the excess utilisation of human-resources,
safeguard human rights, lower the impact of high competition or monopoly on society as well as
to regulate overall growth of economy (Sazanova, Sharipov and Dyakonova, 2019).
CONCLUSION
This has been articulated from the above study that term management economics is much
more of mechanism than a principle where a business organization's market framework as well
as competitive environment is analysed. The above study is a review of company's market
review and this study has enabled to infer that co has begun operating in a mail order sales sector
but has steadily emerged as an industry leader within hospitality industry. It's also been
ascertained that company operates in a competitive market environment because there are wide
number of companies in this industry.

REFERENCES
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policy, and applications. Cengage Learning.
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Online:
About us: InterContinental Hotels Group plc. 2020. [Online]. Available through:
<https://www.ihgplc.com/about-us>