IMPLEMENTING THE TRADITIONAL COMMUNITY VALUES FOR THE DEVELOPMENT OF CITY HOTEL FRANCHISING MODEL IN BALI, INDONESIA1
By
Ni Ketut Supasti Dharmawan, I Made Sarjana, Made Suksma Prinjandhini Devi Salain, Ni Luh Gede Astariyani, Anak Agung Ari Atu Dewi2
Abstract
I. INTRODUCTION
City Hotel is one of the important components of tourism activities in Bali. The existence of City Hotels which are owned and managed by the local entrepreneurs that usually using traditional or family management in Bali Indonesia increasingly threatened by the presence of various International city hotels that are operated and managed under franchising model or franchising management as well as owned by big corporations with their excellent standard of hotel hospitality. It is of course not comparable to the local City Hotels which are managed locally and owned by Balinese local people. This current phenomenon where the emerge of various franchising City Hotels in Bali more and less is also influenced by the regime of WTO Agreement in which based on "Non-Discrimination Principle" of this multinational agreement, all member countries are treated equally both foreign and local. It means that from this perspective, for example it is not allowed to prohibit City Hotels of the WTO member countries to be established in Bali if those City Hotels have met the requirements of the hotel establishment. But the problem is, it turns out its existence threatens the sustainability of the local city hotel, causing the local City Hotels unable to compete in terms of both infrastructure and quality management services. To overcome these problems, it is important to find a solution in the form of constructing a new legal form for the reinforcement of local City Hotels but not contrary to the WTO Agreement.
Through the new regulatory model such as "legal framework" in the form of local by law regulated by the Regional Government and “self-regulatory body” created as well as issued for instance by the association of hotel sector can be considered will have the juridical force in manipulating the stakeholders to jointly help and strength the local City Hotels to be able compete competitively with the franchising Hotels through a partnership programs such as access to international management, capital, marketing, services standards, as well as CSR program. Even in the long term by utilized this legal framework model it may able create opportunity for the local City Hotel in Bali emerge and develop becoming franchising hotel which operates not only in Bali but also in the center of world tourism. CSR models from John Elkington, 1997, "Triple Bottom Line" 3-based P (Profit, People, Planet), and the Pyramid of CSR models from Carroll, 2003, with their partnership models may able to strengthen the people or companies that are weaker around them. Grat van Den Heuvel, 2013, noted the importance of harmonizing the regulation of self-regulation by the state in order to realize better business
1The paper presented in the International Seminar Traditional Community In A Global World Facing ASEAN Economic Community 2015, Jointly Organized by FL Udayana University, ASEAN Secretariat, Charles Darwin University School of Law, at the Inna Grand Bali Beach Hotel Sanur ,Denpasar Bali Indonesia, 25 September 2014
2Dr Ni Ketut Supasti Dharmawan,SH,MHum, LLM ,et.al. are lecturer at Faculty of Law Udayana University, Bali, Indonesia.
practices in the tourism sector. Based on previous studies, it is important to examine and discuss the role of local by law regulated by the Regional Government and “self-regulatory body” that harmonizes the legal arrangements made by the local government with the setting-based self- regulation by the tourism sector in order to strength local City Hotel. The following problems examined: to what extent should the local or regional government regulate partnership model of tourism sector in Bali in order to strength the local City Hotel that is not contrary with the completion of non discrimination principle? What is the role of tourism sector especially hotel association in empowering local City Hotel to be able compete competitively with the franchising hotels?
II. THE DEVELOPMENT OF FRANCHISING HOTEL AND ITS ECOMONIC ASPECT IN NATIONAL AND INTERNATIONAL DIMENSION
The development of franchising business model including Hotel Franchising originated from the Developed Countries like USA. According to the history, business with franchising model or widely known as Franchise System developed in America in the 1860s and 1950s. Nowadays this business has become a mainstream business model of a typical American business format (Debra Burke & Malcolm E. Abel II, 2003, p. 355).
Business in hotel sector is one of many kind of business that require large amount of capital, or often also classified as a type of “Capital Intensive” company. With regards to that, it is not surprising if at the end the franchising business model become a choice that is seen as really beneficial in order to expand the hotel business because franchising gives opportunity to franchisees to develop their hotel businesses with not too high investment capital nor risk but what they get is an opportunity to use the famous international brand name including its reputation and recognition, its economic scale, and its managerial expertise from the Franchisor with obligation to pay some amount of initial fee and royalty. This kind of franchising business is also allowing the Franchisor with its franchisee to do joint venture (sharing) in developing the hotel investment in international economic scale (Ilan Alon, et.al., 2012, p.379).
In reality, the development of international franchise hotel not only enters the developed countries like USA, Canada, UK, and Western Europe, but also enters the centers of world tourism countries like China and other Asian nation-states. As one of the top 5 toursit destination in the world, China is very promising as a place to growth and development of an international hotel chain, and indeed the reality is true, especially the five stars hotels are growing so rapidly in China. According to the United Nations World Tourism Organization (UNWTO), in 2020, China will become number one tourist destination with tourist arrivals level that is approximately 130 million travelers per year. Therefore, it is logic if the hotel development and growth in China is very rapid. For example, based on data in 2002 shows that the number of international franchising hotels and state owned hotel in China, starting from one star hotels until five star hotels, are in total 8880 hotels (Vincent CS et.al., 2008, p.368-369).
International hotel franchising is also growing very rapidly in Indonesia including in Bali which is also very famous as the center of the world tourism destination. As in China, the development of the chain stars-hotels is very rapid. Based on the directory data in 2013 of Bali Provincial Tourism Office, the amount of stars-hotels in 2009-2013 is 223 hotels with 21,704 rooms (Bali Provincial Tourism Office, 2013, p.3).
According to the directory data in 2013 of Bali Provincial Tourism Office that has been processed, of a number of 223 stars-hotels that are operated in Bali, the research result shows
that international franchise hotels in total are 46 hotels (21%) that are operated in Badung Regency and Denpasar City, beside that there are also 177 hotels (79%) are hotels with local label attached to it. Actually, the existence and development of international hotel franchising or widely known as city hotel franchising (chain hotels with international brand) in Bali has started since 5 years ago. The result shows that 38% respondents stated that the franchising hotel where she worked has existed in Bali for more than 5 years.
From the economic perspective, the development of the international hotel franchising model has bring lots of advantages and benefits especially for the business man who engages in that field. The success of this business model also has positive impact for the society and employee that worked for such hotels because this development open more job field for people and given that this business is managed by professional and modern management. Agency theory is used as a theory that can explain why this is franchising can grow so revolutionary and become the model strategy that is selected to develop business activity. Baker and Dant, 2008, explains that agency theory is the dominant paradigm that is able to explain what is meant by franchising especially in the USA. This theory suggests that there is an agency relationship between franchisor and franchisee (agent). Furthermore (Elsenhardt 1989; Jensen and Meckling 1976) asserts that “since the parties may have divergent goals, agency costs arise along with the risk of opportunism. Principals can reduce agency costs and opportunism through direct observation and monitoring or through a system of aligned incentives”(Ilan Alon et.al.,Op.Cit., p. 381).
According to Asosiasi Franchise Indonesia (Indonesian Franchise Association), franchise is a distribution system of goods or services to end consumers in which the brand owner (the franchisor) gives right to individual or corporations to conduct business with trademark, name, system, producer and ways that already set up before, in certain term of time and cover certain areas (Ibid., p. 20). Based on Government regulation No. 42 of 2007 concerning Franchise, franchise is a special right owned by individual or business entity to business system with business characteristic in order to market their goods and/or services that have been proven successful and may be utilized and/or used by other party based on franchise agreement (Andri WB, 2013,p.26).
Franchising, especially with the type of business format, is perceived to bring benefits and proven success to bring success for both business in general and hotel business in reality life.
With regard to that, hotels in Bali do not want to miss franchising management in their hotel businesses in order to facilitate the tourists both from domestic, national and international.
Hoteliers develop their hotel services by utilizing the type of franchising hotel business format.
Based on empirical study conducted in hotels sector in Bali, 23% of respondents show that City Hotels are operated with international franchising management in which hotel with management and brand name like that not only operate in Bali but also developed almost in all over the world.
The examples of this are Marriott Hotel, Holiday Inn, Ibis Hotel, and other chain hotels that can be found almost in all over the world. The result also shows that 31% of respondents stated that City Hotels that are operated in Bali are using national franchising management.
III. Legal Aspects of Business Franchise In National and International Dimensions
At the international level, the World Intellectual Property Organization (WIPO) regulates the business of franchising through a set of rules known as the Franchising Guide. It is relevance
that WIPO internationally regulates matter concerning franchising due to franchising business is really intertwined with the Intellectual Property Rights, especially Trade Mark and Trade Secret as in the business franchising of Mc. Donalds.
Basically, the Franchising Guide established by the WIPO in essence regulates various important elements in the development of business franchising, such as: Standard License Agreement, Franchising Arrangements, A License to Use the System, Grant of a License to Use the Franchised, Licensing of a Uniform System, “business format” franchises, Service Franchises, Distribution Franchises, Franchise Developer Agreement, Master Franchising, Combined Structures (WIPO, 1994, p.22-23). Besides that the Franchising Guide also regulates matters concerning Rights and Obligations of the Franchisor that consist of: Operating Manual, Training, Opening Assistant and Continued Support. The Rights and Obligations of the franchisee consist of: 1. Development Schedule, 2. Payment of Fees that consist of: Initial Fee, Ongoing Fee, Advertising and Promoting Fee, Fee for Specific Services, and 3. Compliance with Quality Control to Allow Inspection, and Requirement to Order Supplies from an Approved Source, 4. Confidentiality Requirements (Ibid., p.35-37). The WIPO’s Franchising Guide also regulates the rights and obligations of the parties primarily concerning the expiration of franchising, transfer of agreement, and the renewal of franchising agreement.
Besides through the WIPO’s Franchising Guide, the countries around the world are also regulating the franchising business whether as part of the investment and consumer protection law or specifically regulating it in a sui generis provision concerning franchising. United States for example that has set some rules concerning franchising business such as: Federal Trade Commission’s Franchise Rule (“FTC Rule”), The Uniform Franchise Offering Circular (“UFOC”), The Small Business Franchise Act, meanwhile in the state level, has enacted rules concerning State Franchising and Disclosure Laws and Deceptive Trade Practices Acts (“DTPAs”) which is also often known as “Little FTC Acts” (Debra Burke & E. Malcolm Abel II, p.371-380). Some countries like Malaysia and China regulate franchising business by hybrid model through Foreign Trade and Investment Franchise Laws. The South African country regulates it through Consumer Protection Act 2009 which also shows the existence of hybrid model of regulation between anti-trust regulations and pure franchise regulations. In contrary to those countries, New Zealand, it does not choose to regulate franchising in specific and decides to regulate it as part of Investment Law especially investment concerning foreign capital investment (Mark Abell, 2010). Overall there are some similarities concerning regulation of franchising that is regulating about (Ibid): basic details of the franchisor, description of the franchise and of the market, financial information about the franchisor, details of the franchise network, litigation details, initial fee, initial investment and continuing fees, earning claims, restriction on the franchisee, descriptions of the obligations that the parties owe towards another, purchase ties and personal involvement of franchisee; term, termination, renewal details about franchisors’ IP rights; and details of financing arrangements offered by the franchisor;
exclusively.
In Indonesia, franchising is regulated both that specifically concerning franchising and scattered in several provisions of regulations (embracing the hybrid model) such as: the Law No.
20 of 2008 concerning UMKM, the Law No. 10 of 2009 concerning Tourism, the Law No. 25 of 2007 concerning Capital Investment, Government Regulation No. 44 of 2007 concerning Partnership, the Government Regulation No. 42 of 2007 concerning Franchising, Ministry of Trade Regulation No. 53/M-DAG/8/2012 concerning the Implementation of Franchising, the Decision on the Business Competition Supervisory Commission No. 57/KPPU/Kep/III/2009,
Article 50 letter b, especially concerning Agreement that is related with Franchising, Guideline of the Implementation of Article 50 Letter b concerning the Exemption of the Application of the Law No.5 of 1999 towards Agreement that is related with Franchising, Ministry of Trade regulation No. 07/M-DAG/PER/2/2013 concerning the Development of Partnership in Franchising for Food and Drink Service-Typed of Business.
Various regulations as mentioned above have been enacted as the umbrella of law to underpin the development of a very fast franchising business including the business of hotels. In one side, the existence of hotel franchising business can provide satisfaction and maximum services to the guests or tourists. For example in China as one of the world tourism destination, the research result shows that almost 83% of the GM respondents state that the companies of hotel franchising are benefited by the famous reputation of the internationally hotel franchising’
big name so that consumers usually choose them (Vincent C.S Heung, et.al., 2008,Op.Cit,p.374).
The independent hotels may not be able to use the management of international hotel franchising, they think they will take 5 years to reach the franchising fee in relation with the using of the international hotel franchising (Vincent C.S Heung, et.al., 2008,Op.Cit,p.377).
Hoteliers who have been following the international franchising business can feel such a great amount of the management fee and loyalty that need to be paid as an obligation of using the brand name of the international hotel franchising. In other words, it seems that big benefits are flowing into franchisor. Therefore, some franchisees finally decide to stop the use of international brand name and start to use their own brand with international management capacity. Dicky Sumarsono delivers several evidences from business hotel that originally were used international franchising have now changed the name into a new local brand and the results are much better. The examples of that are: Aston Hotel Serpom into Hotel Atria, Hilton Hotel into Sultan Hotel, Quality Hotel into Hotel Sunan Solo, Ritz Calton Bali into The Ayana Bali, Lotus Garden Hotel Kediri and Sahra Hotel Kediri (Dicky Sumarsono, 2014,hlm.60).
Furthermore, Dicky SUmarsono also suggests that in order to develop the business of hotels in Indonesia it is better if the hoteliers build budget hotel and no need to create image by using other hotel franchising. In this context, it is suggested to build their own groups (Dicky Sumarsono, 2014,Ibid).
III. BALINESE TRADITIONAL COMMUNITY VALUES AND CSR
In order to create and run a sustainable and long term business that is still intertwined to the roots of local community, the business industry, including those who engage in the field of city hotel, can utilize what has been available since the old time, which so called traditional community values. With regard to that matter, the city hotels located in Bali can also implement those values especially rooted from Balinese traditional community, which is Tri Hita Karana (THK). The traditional community values contained in THK itself are widely used and implemented by the Balinese local community since long time ago. Further, this THK is actually quite similar with the concept of Corporate Social Responsibility (CSR) which is internationally used in the international fora by corporations (including hotels around the world) to maintain the existence of their business in a sustainable and long term way.
The values to keep balance relationships in human’s life is already widely known and implemented by Balinese community. They really put attention on those balanced life. THK itself stands for the sources of wealth or happiness which consisted of three balanced and
harmonious relationships, which are: (1) cultural aspects (the balance relationship between humans and God); (2) community aspects (the balance relationship between humans and humans); (3) environmental aspects (the balance relationship between humans and their environments)3. Therefore, corporations which engage their business in city hotels sector in Bali need to utilize these values to keep their business sustainable and not only look for profit but also how to keep their business balanced to the three other aspects of life. In practice these balanced and harmonious relationships can be seen through several examples such as the religious opening ceremony held by the hotels management to ask for God’s blessing towards their business, how they share and held social activities to help the local societies and when they build their hotels they put attention towards nature and not destroying the trees.
The above mentioned traditional community values of CSR seems similar with the concepts of CSR which also aims to keep a business sustainable and exist for long term. There are lot definitions of CSR and one of them is given by the ISO 26000. According to ISO 26000, CSR is:
“The responsibility for the impacts of its decisions and activities on society and the environment, through transparent and ethical behavior that: contributes to sustainable development, health and the welfare of society; takes into account the expectations of stakeholders; is in compliance with applicable law and consistent with international norms of behavior; and is integrated throughout the organization and practiced in its relationship.”4
Nowadays, it is impossible for them to focus only for their profit maximization. In order to survive in the business industry, the city hotels management also uses CSR to gain attention from the society that they are aware and care upon international, national or local issues. They have to do something more than gain profits to create a sustainable development. One concept of CSR which is similar to THK is the Triple Bottom Line (TBL) by John Elkington. If according to THK the three values of balanced relationship are between humans and humans, God, environments; pursuant to Elkington, corporations who engage their business shall consider three aspects, namely: People, Planet, Profit dimensions or known as 3Ps.5 Therefore, in conducting their business, city hotels need to put attention: on their economic aspects which is reflected in their financial condition (Profit), on how they interact and aware upon social issues as well as fulfill the quality of community around them (People), and on environment, which is participate in the protection of the environment (Planet).6
CSR is basically used by the corporations to show the society how far they are socially and environmentally responsible towards surrounding community. Both THK as part of Balinese traditional values or TBL as part of internationally recognized concept of CSR guide the corporations to balance their daily business activity whether with their environments, societies,
3 Anak Agung Gde. Raka Dalem, Achievements and Challenges of Implementation of “Tri Hita Karana” for Creating Sustainable Tourism in Bali-Indonesia: A Case Study in Hotel Sectors, p 5, available online:
http://www.ritsumei.ac.jp/acd/re/k-rsc/hss/book/pdf/vol03_02.pdf, accessed on 22 September 2014.
4 International Guidelines: ISO 26000 on Social Responsibility, available online:
http://www.google.nl/url?sa=t&rct=j&q=&esrc=s&source=web&cd=1&ved=0CCAQFjAA&url=http%3A%2F%2F www.cbi.eu%2Fsystem%2Ffiles%2Fmarketintel%2FISO26000.pdf&ei=khnhU5GcFImsPMCigYAP&usg=AFQjC NGzvyTNKhGU_tHKzjrG5SMw27mm0Q&bvm=bv.72197243,d.ZWU, accessed on 22 September 2014.
5Grat Van Den Heuvel and Ni Ketut Supasti Dharmawan, Corporate Responsibility and Crime Control in Tourism, in Michael Gerbert Faure, Ni Ketut Supasti Dharmawan and I Made Budi Arsika, Sustainable Tourism and Law, (Eds.), The Hague: Eleven International Publishing, 2014, p 288.
6Ibid.
economic or religious aspects/values. However, there is also classification of CSR given by Doreen Mc. Barnet that touches law aspect. Mc. Barnet’s CSR classifications are: (1) beyond the law, (2) through the law and (3) for law. If a business conducts CSR policy which beyond what is actually required by law, that is so called beyond the law, in which the adoption of CSR policy is characterized as voluntary.7 Meanwhile, if CSR is introduced in different forms of formal regulations that is called through law.8 Further, for law is how to put pressure upon the corporations to review their compliance of law, shift the social responsibility and ethical legitimacy threshold and rise the legal control effectiveness.9
IV. DEVELOPING BALINESE CITY HOTEL AS A FRANCHISING MODEL BY IMPLEMENTING TRADITIONAL COMMUNITY VALUES AND CSR
Regarding the development of franchising hotel in Bali to support tourism activities, the study shows that around 57 % come from developed countries such as America and Europe, 25
% from Asia, and 18 % unclear yet, the respondent mentioned they do not know exactly the head quarter of corporations .10 In addition, the study also saw that although the ownerships of franchising hotel gradually have improved to Indonesian people, as franchisee, they still feel to get paying high rate of royalty as required by the franchisor related to the right to use, operate, manage as well as develop hotel with the famous brand name of franchising hotel.11 Face such phenomena, there are some hotels in Indonesia including in Bali that previously used international franchising hotel further decided to create their own brand hotel such as Aston Hotel Serpong become Hotel Atria, The Hilton Hotel become Sultan Hotel as well as The Ritz Calton Bali become The Ayana Bali.12 It can be considered that may there are some better possibilities for the future in managing hotel by creating our own brand of international franchising hotel. We can learn from those that mentioned above they changed and stopped to use their famous brand name of franchising hotel and chose creating as well as developing their own. They show reality why we not.
As we know that establishing business hotel is very capital-intensive. Therefore, by choosing international franchising hotel model the corporations may take some advantages such as: less capita intensive, a chance to use the name of well-known reputation and recognition brand image, available chain hotel networking, managed by a professional and modern management expertise, excellent hospitality based on international standard management hotel as well as representative or competitive price. However, this famous business hotel model also brings some disadvantages namely: tend to exist with a rigid license agreement, expensive royalty and criticized that finally profit goes to franchisor rather than to empowering communities host countries where the franchising hotel took place. Lesson learned from those
7Doreen McBarnet, Aurora Voiculescu & Tom Campbell., (Eds.); The New Corporate Accountability Corporate Social Responsibility and the Law. Cambridge: Cambridge University Press, 2009, p 11.
8Ibid, p 27.
9Ibid, p 54.
10NK Supasti Dharmawan, et.al.,The Model Regulation to Strength Local City Hotel in Bali Based on Partnership from Various Stakeholders, Invention Research Grand LPPM Udayana University Bali No.238-
39/UN14.2/PNL.01.03.002/2014, p. 40
11Ibid, p. 42.
12Dicky Sumarsono, 2014,Dahsyatnya Bisnis Hotel Di Indonesia Smart Strategy, High Revenue, PT Gramedia Pustaka Utama, p. 60.
realities, Dicky Sumarsono , 2014 suggests that in developing hotel business it seems better to create our own group to be international franchising rather than choosing chain-image hotels. As small business enterprises, it can be startedfrom “budget hotel.”13
V. CONCLUSION
1. The model regulation of City Hotel in Bali related with tourism activity in order to compete with international chine hotel beside regulated based on international and national regulation it will be suitable also regulated under the local Government regulation or “PERDA Provinsi Bali”
2. The CSR based on Indonesian Limited Liability Company and Indonesian Investment Capital Law can be employed is a form to strength the local city hotel in Bali toward in facing globalization movement.
VI. RECOMMENDATION
The Government of Bali as well as the Legislative Branch and Business Community especially Hotel association and aslso community have to work together to anticipate the development of International City Hotel in Bali and its negative impact for local City Hotel and find solution.
13Ibid.