Table 4.4 (for hotels with low cost strategic orientation) and Table 4.5 (for hotels with differentiation strategic orientation) present the results for regression analysis.
Outcomes are arranged in hierarchical order to depict the variance explained by the different sets of predictor variables.
In hypothesis 2, researches are checking relative importance of various intellectual capital categories on low-cost leadership oriented hotels’ financial performance.
Particularly, in hypothesis 2a and 2b we predicted that for hotels pursuing a low-cost leadership strategic orientation, higher investment in systems capital and higher investment in customer capital would produce higher firm performance. The hypothesis was tested and the result is summarized in Table 4.4’s Model 1 and 2 (all of the models include dummy variables for year, coefficients are not shown). Model 1 indicates that structural capital coefficient was positive and significant, indicating that investments in this intellectual capital category yields firm profitability for low-cost leaders. It is important to highlight the relative magnitude of the systems capital (16.43 at p-value=0.00), and 98% of variance in firm performance in model 1 can be explained by changes in systems capital. Correlation coefficient (R2) for the model is statistically significant (R2 =98% at p<0.001) indicating the impact of additional investment in structural capital enhances profitability, so hypothesis 2a that for hotels pursuing a low-cost leadership strategic orientation, higher investment in systems capital would produce higher firm performance is statistically supported.
In the Model 2 the impact of customer capital on firm performance impact is summarized, as shown its coefficient is not statistically significant (t-value=1.78 at p-value=0.89), so cannot explain any additional variance in firm performance, meaning that hypothesis 2b that low-cost leaders in Taiwan do realize additional fruitfulness from greater expenditure on customer capital is not statistically supported.
Model 3 in Table 4.4 is important. It summarizes impact of investment in human
capital on profitability for companies pursuing low-cost leadership strategic orientation and indicates that human capital coefficient was positive and significant (t-value=4.89 at p-value=0.003 and R2 =89% at p<0.01), meaning that additional investment in human capital cause higher profitability of a firm with low-cost leadership strategic orientation. Result summarized in Model 3 rejects our hypothesis 2c that for hotels pursuing a low-cost leadership strategic orientation, higher investment in human capital would not produce higher firm performance.
Checking group of hypothesis 4, this study aimed to prove relative importance of interaction effects among various intellectual capital categories on financial performance of firms pursuing low-cost leadership strategic orientation. In hypothesis 4a, researchers predicted that interaction of structural and customer capitals has an incremental positive effect on firm profitability for Taiwanese hotels with low-cost strategic orientation. We found support for this hypothesis. As shown in Table 4.4’s Model 4, the interaction effect of structural and customer capitals on financial performance is positive and statistically significant (t-value=6.884 at p-value=0.000 and R2 =93.8% at p<0.01). Even though our hypothesis 2b to explain firm profitability only by customer capital was not supported (Table 4.4, Model 2), however we succeeded to prove that firm profitability can be explained by interaction of structural and customer capitals, because the relative magnitude of customer capital impact on performance grows up under the presence of structural capital (t-value=6.884 at p<0.001). The estimates support importance and significance of structural capital and incremental positive effect of systems and customer capitals’
interactions.
The estimates in Table 4.4’s Model 5 provide information related to hypothesis 4b, which proposes an additional positive effect of structural and human capitals interaction on hotel performance for firms with low-cost strategic orientation. The result supports this hypothesis. Interaction of structural capital and human capital is positive and significant (13.85 at p-value=0.000) and explains (R2 =98.3%) variations in firm performance. Result also shows, that investment in systems capital will boost human capital performance and bring profitability to low-cost leaders, because before two-way interaction, the human capital t-value was 4.89 at p<0.01, however under interaction effect the t-value increased to 13.85 at p <0.001.
The only capital interaction that didn’t bring incremental positive effect for low-cost leadership strategic oriented firms is interaction between human capital and customer capital (t-value=1.998 at p-value=0.093), which was summarized in hypothesis 4c.
Even though it is positively related, it is not significant and can’t explain firm performance variations, meaning that human capital contribution is not strong enough and the interaction effect failed to provide additional positive impact on profitability.
All in all, the results show that structural capital is more important than human capital or customer capital for low-cost leaders in Taiwan lodging industry.
Table 4.4
Effects of Various Intellectual Capital on Firm Performance for Hotels with Low-Cost Strategic Orientation
Variables Model 1 Model 2 Model 3 Model 4 Model 5 Model 6
Constant -0.2133 0.144 0.2918 0.2822 0.110 0.2104
Intellectual capital
Structural capital (SC) 16.43***
Customer capital (CC) 1.78
Human capital (HC) 4.89**
SC*CC 6.884***
SC*HC 13.85***
HC*CC 1.998
Control variablesa
Physical asset -1.94 2.83* 3.93** -0.658 -1.4373 3.08*
Consumer price index 0.66 -0.45 -0.77 -0.182 0.2436 -0.53 Market demand -3.71* 2.5* 4.89** -0.693 -2.92* 2.74*
Number of observations
12 12 12 12 12 12
R2 98.8% 64% 89% 93.8% 98.3% 67%
Adjusted R2 97.8% 34.% 79.8% 88.68% 96.95% 39.5%
F 99.27*** 2.14 9.7** 18.23** 70.8*** 2.43
a. Dummy-coded variables for three years (2009-2011) were included as controls
*p<0.05. **p<0.01. ***p<0.001.
Table 4.5 represents results of Taiwanese hotels that pursue a differentiation strategic orientation. Through hypothesis 3, this study is tested relative importance of various intellectual capital categories on financial performance of firms pursuing differentiation strategic orientation. In hypothesis 3a, we predicted that greater investments in structural capital would lead to higher firm performance of differentiation-oriented Taiwanese hotels. The results are shown in Model 1 of Table 4.5, depicted a statistically significant, positive effect of investments in structural capital on firm performance (t-value=4.52, at p<0.001, R2=74.3%, F=8.71, at p<0.01).
The hypothesis is accepted.
Table 4.5
Effects of Various Intellectual Capital on Firm Performance for Hotels with Differentiation Strategic Orientation
Variables Model 1 Model 2 Model 3 Model 4 Model 5 Model 6
Constant -0.1 -0.13 0.03 -0.148 0.033 -0.117
Intellectual capital
Systems capital (SC) 4.52***
Customer capital (CC) 0.98
Human capital (HC) 4.47***
SC*CC 3.15**
SC*HC 4.39**
HC*CC 3.1**
Control variablesa
Physical asset 0.78 1.79 0.79 0.903 1.008 0.68
Consumer price index 0.17 0.09 -0.04 0.136 -0.001 0.001
Market demand 0.06 0.87 1.44 0.56 -0.089 1.933
Number of observations
21 21 21 21 21 21
R2 74.3% 43% 74% 64% 73.5% 63%
Adjusted R2 65.8% 24% 65% 51% 64.6% 51%
F 8.71** 2.27 8.54** 5.239** 8.32*** 5.1**
a. Dummy-coded variables for three years (2009-2011) were included as controls
*p<0.05. **p<0.01. ***p<0.001.
In hypothesis 3b, we predicted that for Taiwanese hotels that pursue a differentiation strategic orientation, greater investments in customer capital would lead to higher firm performance. The results summarized in Model 2 of Table 4.5 (t-value= 0.98 at p-value>0.05, R2=43%, F=2.27, at p-value=0.342) do not support his hypothesis, meaning that for Taiwanese hotels that pursue a differentiation strategic orientation, greater investments in only customer capital would not lead to higher firm profitability. Hypothesis is rejected.
Hypothesis 3c suggested that for Taiwanese hotels that pursue a differentiation strategic orientation, greater investments in human capital would lead to higher firm performance. As in Table 4.5’s Model 3 the significant, positive coefficients (t-value=4.47 at p-value=0.000 R2=74%, F= 8.54 at p<0.01) revealed, this hypothesis is supported.
Checking group of hypothesis 5, this study intended to prove relative importance of interaction effects among various intellectual capital categories on financial performance of firms pursuing differentiation strategic orientation.
Particularly, Model 4 in Table 4.5 summarizes positive and significant relationships between systems capital and customer capital interaction effect on financial performance (t-value=3.15 at p-value=0.007, R2=64%, F=5.239 at p-value=0.00557), indicating that hypothesis 5a that interaction of structural and customer capitals has an incremental positive effect on firm profitability for Taiwanese differentiation-oriented hotels is accepted.
In hypothesis 5b we predicted that the interaction of human capital and systems capital would have an additional positive effect on firm profitability for Taiwanese hotels that pursue a differentiation strategic orientation. As shown in Table 4.5’s Model 5, the interactive effect of human capital and systems capital on firm performance is positive and significant (t-value=4.39 at p-value=0.001, R2=73.5%, F=8.32 at p-value=0.0001).
Model 6 in Table 4.5 represents the results of hypothesis 5c, which indicates that interaction of human capital and customer capital would have an incremental positive effect on firm profitability for Taiwanese hotels that pursue differentiation strategic
orientation. The two-way interaction was positive and significant (t-value=3.1 at p-value =0.007, R2=63%, F=5.1 at p-value=0.006), representing acceptance of hypothesis 5c.
Overall, the results suggest that investing in structural capital and human capital has a positive and significant impact on hospitality industry firm performance. While the magnitude of return from investment in human capital depends on a firm’s strategic orientation, returns from systems capital investment are the highest among all studied firms. Findings show that for Taiwanese hotels that pursue differentiation strategic orientation there is positive and significant internal consistency between all three aspects of intellectual capital that can explain changes in firm performance. Though for Taiwanese hotels pursuing a low-cost leadership strategic orientation, interaction effect only between human capital & systems capital, and systems capital & customer capital has an incremental positive and significant impact on firm’s profitability, highlighting the importance of structural capital for low-cost leaders.
However, when calculating an absolute value between the three different components, it was found that for both Taiwanese hotels that pursue differentiation strategic orientation and hotels with low-cost strategic orientation the relationship is closer between structural and human capital (t-value=4.39**, and t-value=13.85***
respectively) than between any of the other possible combinations of intangibles. This result is consistent with Engstrom, Westnes and Westnes (2003), who succeeded to prove that there is a stronger relationship between human capital and structural capital than between human capital and customer capital or customer capital and systems capital, and this strong relationship has an additional effect on financial performance.
All in all, the coefficient estimates reveal that bigger investments in human capital impact customer service low-cost leaders’ financial performance less than performance of the service firms that pursue a differentiation strategic orientation.
Chapter Five
Conclusion, Recommendations and Limitations
The purpose of this study was to examine the relative importance of various intellectual capital categories on financial performance of lodging industry firms pursuing different strategic orientations. This research found that, firstly, strategic orientation provides templates for lodging industry firms to make investment decisions in intellectual capital categories and secondly, accurate choice of intellectual capital investment category is a key for future firm’s profitability and success. The following chapter would also provide practitioners and future researchers with recommendations according to the results of a current study.
5.1 Conclusion
First of all, it is clearly shown that choice of a strategic orientation would impact firm’s competitive advantages, core values, positioning and financial performance.
Companies pursuing differentiation strategic orientation are found to charge higher prices, invest more in intangible assets and get higher profits.
This study proves that intangible assets are critical for an organization to accomplish its above-norm performance. The findings show whether lodging industry firms choose to pursue a differentiation or low-cost leadership strategic orientation, greater investment in structural capital enhance profitability. Through payment to external management companies property owners get an immediate access to operations knowledge. By acquisition and future application of outsourced proficiency and expertise, firms can standardize their processes and improve efficiency of their routines. The results reveal that this is especially important for low-cost leaders (structural capital is more critical than human or customer capitals for Taiwanese hotels pursuing a low-cost leadership strategic orientation), who realize much greater profitability from investments in operational knowledge and acquisition of best-practice process information and innovation created by external vendors. Besides, by
purchasing the services from larger organizations, low-cost leaders can obtain essential for their strategy economies of scale (Inma C. 2005). For firms with differentiation strategy, systems capital plays an important role too. It improves efficiency and effectiveness of managerial and operation systems and procedures, transaction time also decreases. Besides, updated supportive technology provides opportunity for development of new ideas and effective maintenance of customer databases, which are important elements of successful running a hotel property in a competitive environment. Findings regarding systems capital relative importance are consistent with Engstrom, and Westnes (2003) research.
The finding that investment in human capital is a highly critical resource for service firms pursuing differentiation strategy is consistent with the theory, as well as empirical findings of previous researches (Bontis 1998, Walsh K., C.A. Enz and L.
Canina 2008). For customized service providers, investment in employees is a must-have. Employees generate intellectual capital through their competence, intellectual agility and attitude towards job. Innovative ideas, effective and efficient solutions to problems, task performance - all come from the firm’s employees. Professional employees understand and execute positioning strategy of the firm on each organizational level, so the whole company is moving in the same direction. Besides, the departmental managers who understand the firm’s resources and competitive advantages, know how to plan, organize and lead the followers would enhance firm performance. Besides, investment in service employees is essential for differentiators, because development of specialized knowledge, employees’ attitude and intellectual agility enable employees to deliver high-quality, courteous, specialized service.
Furthermore, employees hold the unique tacit knowledge about firm’s customers, and build relationships with them creating inimitable value, because of the unique social capital and social complexity involved in applying the specialized knowledge bases, rooted in human capital to serve the client. Providing the unique customer experience, firms are developing long-term relationships with their clients that result in high repurchase behaviors, so differentiated firms can gain great benefit from investing in human capital.
Taiwanese hotels pursuing a low-cost leadership strategic orientation similar to those with differentiation strategy also benefit from investing in people. We suggest that
even though low-cost leaders are used to provide basic products at a minimal cost, investments in human capital are still necessary, because firstly, the hotels in our sample size are in upscale hotels category, so customer’s expectations are still high, secondly, in Taiwan, where historically a big portion (more than 40 percent) of foreign visitors come from Japan (1992~2001, Taiwan Bureau), service industry develops and pays a lot of attention to the quality of service. It is well known that Japanese would choose and stay in those hotels that provide customized service, so investment in human capital has its returns. Thirdly, our findings are consistent with Carlzon (1986), according to who, consumer contact with an employee represents an organizational “moment of truth”, for that reason front line or high contact employees play a very significant role in shaping customer’s opinion about the organization. For low-cost leaders “investment in people” will improve service, increase customers’
satisfaction and lead to profitability. However, especially for low-cost leaders, it is important not only to “procure” valuable capital, but also to create the conditions for their effective and efficient utilization. Thus, firms that have best-suited internal practice (structural capital) aimed at maximizing the use of such capital will gain the most economic rents (Goold and Campbell, 2002). So, the investment in human capital should go along with investment in systems capital. Besides, in the two-way interaction structural capital boosts both: human and customer capitals, meaning that for hoteliers with low-cost leadership strategic orientation, additional investments in human capital enhance firm performance, but in a smaller percentage, than systems capital.
Unfortunately, low-cost leaders are well known for minimizing costs by minimizing investments in human capital, paying low wages or recruit low-skilled part-time workers. However, there is a critical problem of high turnover and unsatisfied, unhappy employees, what eventually leads to unsatisfied customers and low retention rate. The delivery of expected service may suffer from service provider’s: a) lack of particular kind or amount of knowledge required to recognize customer’s need or b) create a suitable service to fulfill and satisfy this need (Namasivayam and Hinkin, 2003) or c) unwillingness to do so. Unfortunately, trying to minimize expenses companies often spend less on training, lose their internal and external clients and damage their reputation. We believe that some firms, especially the upscale level players, should revise this practice. Besides, this study as well as previous studies
succeeded to show that investment in employees helps to realize higher net operating income.
The biggest difference between low-cost leaders and differentiators is that for the second type of firms all three capitals are interrelated, support and boost efficiency and productivity of each other. For example, customer capital by itself has no direct significant effect on firm profitability, but through support of skilled, educated, knowledgeable and capable experts (both professionals and service employees) investment in customer capital brings its result and enhance performance in differentiation-oriented firms. Yet, for low-cost leaders interaction of human and customer capitals didn’t show any significant effect on changes in firm profitability, while interrelations of structural and human capitals, and structural and customer capitals did.
In this study, for firms pursuing differentiation strategic orientation, interaction effect between customer capital and structural capital, and customer capital and human capital have a significant incremental positive impact on firm performance. Meaning, that in order to benefit and get high return on investment in customer capital, hospitality industry players should first create the conditions and develop the base, consisted of capable employees, who would maintain the brand and service at required level or acquire information technology and established management philosophy, culture and business process to maintain the brand positioning and then increase financial profitability through investing in customer capital (Rudez, 2004).
Under franchising contract, customer knowledge provides firms with expensive advertisement at a lower price, an immediate reputation via brand logo, access to a global reservation system and participation in a customer loyalty program (Walsh, Enz and Canina, 2008). Customer capital contributes to greater customer loyalty leading to high retention rates, hence lowering cash flow vulnerability, risks, and, therefore, decreasing costs of capital and increasing price-earning multiples (Srivastava, 1998). However, it is necessary to highlight that all upper-mentioned results and firm’s benefits are not outcomes of customer capital alone, but of its effect from interaction and interrelation with human capital (analysis, decision making, management, service delivery, etc.) and structural capital (IT systems, information support, procedure monitoring, etc.). Three capitals together provide a brand with a
consistency between brand associations and consumers’ experiences. So far, for differentiation-oriented firms higher investments in market-based assets’ development and leverage leads to higher firm’s performance.
Customer capital for low-cost leaders impacts profitability only through systems capital, what provides them with efficiency and cost reduction. Findings suggest that many low-cost leaders sign managerial contracts, that include marketing service, what helps firms to minimize marketing expenses, save on human capital, get essential databases, trademarks, management processes, financial relations and economies of scale. So, high investments in structural capital enable low-cost leaders reach high productivity, profitability and success.
To conclude, the research builds a theoretical foundation how lodging industry firms that are cost efficient as well as differentiators can succeed financially through investment in different intellectual capital categories. The results should be helpful in addressing some of the challenges (high turnover rate, inefficient resources utilization, inability to create or deliver high-quality service, etc.) in customer service firms and provide managers with deeper understanding of business performance improvement through the appropriate investment and management of business intangibles. Besides, our findings help investors to forecast more accurately future returns and long-term value of the hotels.