Hospitality Industry

Hospitality innovation industry report: helping hoteliers better understand hospitality innovation strategies

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Dr Carlos Martin-Rios

Associate Professor at EHL

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Hotels are increasingly challenged by emerging competitors and shifting customer demands and expectations; Airbnb being just one example of the former and Millennials of the latter. It is becoming clear that all of the ‘traditional’ players in hospitality will need to innovate in order to meet these challenges. While some hotels recognize this, and even welcome it, others do not. Their conclusions can be summarized briefly as: “The only way that hotels can prosper in a more diverse economy is to cut costs relentlessly and accept lower profit margins.”

Yes, the challenges are significant. But I couldn’t disagree more with that opinion. At the same time, there are a number of outstanding examples of innovative hotels, that have developed new businesses, created new services, adopted new management practices, engaged in collaborative and open innovationinitiatives with customers, academic institutions and even competitors. Not to be forgotten, green, eco-innovations are increasingly popular.

Overall, there is a lot of interest among hoteliers and academics to ascertain how technological innovations and these so-called “non-technological innovations” contribute to new and profitable revenue streams, and a competitive advantage. Very few academic studies have helped hotels better understand the current state of hospitality innovation strategies – and evaluate how complex innovations affect the firm’s overall utility, despite the critical importance of these issues. These are some of the issues addressed in this report.

Almost 4% of the EU Gross Domestic Product is generated by the hospitality industry (EY, 2013)—such as hotels, restaurants and food service providers—and roughly one in ten of the EU working population is employed in this industry. These numbers are roughly the same in other parts of the world.

Hospitality is also considered among the most competitive businesses in the world. Despite the widely acknowledged importance of the activity, it is one of the least studied and understood industries of the economy. mResearch to identify and investigate the relevance of novel forms of innovation for hospitality to remain competitive is still needed. Investigating and responding to this research gap is of paramount importance.

Data from this report is the result of a research project sponsored by the Ecole hôteliere de Lausanne (EHL) and the HES-SO, the University of Applied Sciences Western Switzerland. EHL is considered by the industry to be the world’s best hospitality management school. Between October 2016 and December 2017, over 2500 hotel professionals ranging from CEOs to hotel General Managers were contacted. We obtained a +/- 12% response rate. Data analysis has resulted in a series of academic articles, professional publications as well as in working papers published by EHL.

Carlos Martin-Rios, professor at the Ecole hôtelière de Lausanne, has been tracking hospitality innovation for the past three years, surveying hundreds of managers and interviewing more than 50 executives and thought leaders to produce this annual report. The key objective is to increase knowledge about the adoption of innovative practices by global hospitality businesses and to support the integration of innovation strategy into hospitality business strategy.

Despite significant progress, hospitality innovation has arrived at a crossroads. On one hand, hospitality corporate leaders in innovation remain a minority, and are unevenly distributed across geographies and ownership structures. On the other hand, a few standout companies are demonstrating that innovation can be a driver of renewal, efficiency and lasting business value. It’s one of the central dilemmas of hospitality innovation: few disagree with it in principle, but why doesn’t it happen more often?

Many independent hotel owners believe they do not have the resources to develop their own innovation strategies. Several international multibrand firms are better prepared to develop innovation strategies and to implement a variety of innovative solutions.

Short-term strategic thinking and cost-driven management practices represent hurdles to a broader implementation of innovation management in hotels.

Fortunately, the path to value creation through innovation has become substantially clearer in recent years. Based on our multi-year research on hospitality innovation, we have identified seven evidence-based factors that drive innovative business practices, regardless of size, ownership structure or region.

Future scenarios

In terms of future scenarios, hospitality firms that will invest on a range of innovations will be better suited to increase competitiveness and reduce their productivity gap. The simple adoption of technological innovations alone is not sufficient to gain competitiveness; the full benefit of those technologies is only achieved if they are accompanied by a cluster of related innovations in organization, customer and supplier relationships, and a redesign of existing business models. Still, many companies will find it difficult to get the creativity skills and innovation mechanisms they need. Companies for which innovation remains elusive will find it difficult to obtain good results and to handle the innovation requirements.

There is an excellent opportunity for a formal innovation strategy for hotels worldwide. In the short to medium term, innovation is what will determine the productivity performance and competitiveness of hospitality companies, whether independent hotels or national or multinational hotel chains. With an ever increasing pace of competition in a highly convoluted industry, the costs of inaction will be considerably higher than initially believed. The choice hotels need to make is to innovate or face the painful process of obsolescence and irrelevancy.

Innovation Startegies and Best Practices in Innovation

Hospitality innovation management is one of the most salient topics in international hospitality, tourism and travel management, both at the academic and practitioner level.

For many, innovation is equated with technology, and only scientists and engineers bring new technologies to life. Yet, innovation can occur in many avenues that have little or nothing to do with technology or science. Service firms, including hospitality firms, can and often do innovate their service offerings, customer experiences and business processes and models.

The most comprehensive and widely accepted definitions of innovation are offered by the Organization for Economic Co-operation and Development (OECD) and the U.S. Department of Commerce. These definitions make reference to complex forms of innovation. It is important to note that innovation is not necessarily successful and tied to growth. According to the Oslo Manual (OECD, Statistical Office of the European Union) innovative firms often fail to generate economic returns from their innovations.

In Peter Druker’s words “Unexpected failure may be an equally important source of innovation opportunities”. Most innovative firms, however, especially the successful ones, put in play a conscious, purposeful innovation strategy that combines different innovation practices.

According to Schumpeter’s theory of innovation, a firm’s innovation strategy and, hence, its innovation intensity covers both technological and non-technological areas. Our definition of innovation strategy in hospitality firms includes combinations of a range of innovative activities encompassing technological innovations—including service, technology and process innovations, as well as non-technological innovations—management methods, organization, strategic and marketing innovations.

Firms with a formally defined innovation strategy often attempt complex forms of innovation, which results in high innovation intensity.

Best Practices: Technological Innovation

There is a clear and positive relationship between overall high-intensity innovation strategy and high-intensity technological innovation in hospitality. Results show that technological innovations are prominent in hospitality firms. Close to 72% of executives report to have implemented a considerable proportion of innovations in the technological domain during the period 2011-2016.

In terms of organizational outcomes, firms high in technological innovation outperform firms low in technological innovation in all of the six subjective measures of performance. Particularly positive and statistically significant differences include: ROI, overall customer retention, sales growth and average bed occupancy.

Best Practices: Non-Technological Innovation

With regard to non-technological innovation, two main findings stand out. First, non-technological innovation encompasses several forms of innovation. According to the statistical results, organizational innovation is a new method in a hotel’s business practices, workplace organization, marketing strategy or business model. It aims to optimize a hotel’s performance by cutting administrative and transaction costs, increasing workplace satisfaction, accessing non tradeable assets, or reducing supplies.

Moreover, two types of non-technological innovation can be distinguished: organizational innovations and managerial innovations. Organizational innovations deal with the organizational setting of the firm and the division of labor within it, whereas management innovations involve the operations and procedures by which the firm organizes its activities (i.e., HR, information flows).

According to the degree of innovation in new service development, about a third of the companies pursue an innovation strategy that includes a high degree of new management, marketing and business model capabilities.

The following sections highlight the wide range of relationships between technology innovation and non-technological innovation in practice. In hospitality, the innovation does not necessarily relate to the novelty of the technology itself but it often lies in the non-technological areas.

Best Practices: New Innovation Practices

Although sustainability and open innovation are not part of the innovation strategy of many hospitality firms, our results illustrate how certain hospitality firms are engaging in these novel forms of redesigning the consumer experience and developing broad networks of relationships to generate innovation returns and firm performance.

There is a positive relationship between devoting resources to novel forms of innovation and the other two strategic dimensions (technological and non-technological innovation) in firms with strong innovation intensity.

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