Case Study 4 Global Hotels and Resorts PDF

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CASE STUDY 4

Global Hotels and Resorts: Building Long-Term Customer Relationships1 THE EARLY YEARS OF GLOBAL HOTELS AND RESORTS2 For confidentiality purposes, the actual name of the case study company is disguised, and it will hereafter be referred to as Global Hotels and Resorts (GHR). GHR was founded as a subsidiary of an airline company in the mid1940s and operated three distinct types of hotels: five star (up-market), fourstar (midmarket), and global partner hotels. GHR was primarily a hotel management company, although it did own and lease hotels and undertake joint venture and franchise arrangements. As illustrated in Exhibit 1, the company had 178 hotels in over 70 countries, and a further 24 hotel units were under development in early 1999. The hotel group owned 23 hotels from this total portfolio, the majority of the units being operated under a management contract. Throughout its history, several conglomerates had acquired the company, and these previous owners had tended to control the hotel group using a holding company structure. Until the late 1990s, a Japanese conglomerate had owned GHR, but in early 1998. a U.K.-based conglomerate acquired it. This new owner already operated a global hotel group, and this was a unique situation: For

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This case was written by Dr. Fevzi Okumus, University of Central Florida, and Dr. Angela Roper, University of Surrey, United Kingdom. The main author conducted nearly 60 interviews with company respondents across the different levels of the organisation. He also spent a period of participant observation in one regional sales office and collected internal and external data about the company and the implementation project. The case is intended to reconstruct the challenges and issues facing management in implementing strategic decisions. It is not intended to convey any criticism of any individual or group of individuals. For confidentiality purposes, the actual name of the case study company is disguised. Therefore, it will be referred to as Global Hotels and Resorts.

CONTENTS The Early Years of Global Hotels and Resorts Developing Relationships with Business Travelers The Global Hotel Industry in the 1990s Organisational Structure from 1994 to 1998 Marketing and Sales Organisation Managers in GHR The Initial Implementation of the KCMP: 1994–1997 Project Rollout Training Implementation Challenges The Implementation Process between 1995 and 1997 Implementation under New Ownership Outcomes of the Key Client Management Project Discussion Questions References

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278 CASE STUDY 4: Global Hotels and Resorts: Building Long-Term Customer Relationships

Exhibit 1

Portfolio of Global Hotels and Resorts

Hotel Portfolio

Number of Hotels

Management Contracts Global Partners Owned Hotels Franchised Hotels Joint Ventures Leased Hotels under Development Total Number

62 41 23 23 18 11 24 202

Number of Countries 36 14 11 15 7 8 19 75

Source: Company data (as of January 1999).

the first time in GHR’s history, it was going to join an already established worldwide hotel portfolio that included hotels across the market segments. GHRs stated strategy since its inception has been to provide “international” standards together with local flavour. It referred to itself as having the “unique ability to reflect the vibrance of the countries in which it operates.” The main form of control in implementing this strategy has been through the agency of the General Hotel Managers and the senior executives who have been rigorously socialised into the company culture. People in the company argue that this culture is truly international, since it requires senior people to travel extensively with the company, cast off their own national roots, and “often marry outside their own nationality.” National passports are seen to be insignificant due to the fact that the only passport that really matters is the “company passport.”

DEVELOPING RELATIONSHIPS WITH BUSINESS TRAVELERS Since its early days, the frequent international business traveler had been the target market of the company, accounting for more than 80 percent of the company’s business worldwide. Moreover, a research project carried out by the company revealed that the typical GHR business traveler was from a large company originating in the United States, Europe, or Japan, and that this business traveler was male (over 85 percent), around 40 years of age, and occupied a senior management position. It was also identified that 80 percent of room revenue was generated by only 25 percent of total clients. In short, it was evident that the company had targeted a niche market segment for many years and that the success of the company was highly

Developing Relationships with Business Travelers

linked with working and satisfying business travelers. In order to maintain and strengthen this ongoing working relationship between the hotel group and the organisations originating frequent business travelers, in 1994 the company decided to introduce a Key Client Management Project (KCMP). Company executives, mainly from the head office and regional sales offices, for a number of years had been of the opinion that finding new customers and building long-term reliable working relationships would become more difficult and expensive for the company. The KCMP was therefore seen as the best option for the company to strengthen its ongoing relationship with existing client companies. In addition, it was clear that the KCMP would play an important role in achieving the company’s business objectives. Key aspects of the company’s business objectives were outlined by the chief operating officer in 1994 in a video presentation to managers and employees (Exhibit 2). Other managers referred to achieving high customer satisfaction and applying good management practices as other key aspects of the company’s business strategy. Therefore, the key client management strategy was seen as the most efficient way to achieve the business objectives of the company, particularly financial ones. For example, in the project proposal it was stated that: In 1993, 66 percent of the business produced by our top 200 corporate customers came from just 20 accounts. It is probable that a small increase in a correctly qualified customer base would produce a large increase in room-nights. The same large accounts are also the major customers of our competition, so it follows that the single biggest opportunity we have to increase sales lies with our existing customers. Prior to the KCMP, the company had mainly focused on local or regional markets. By introducing this new project, it aimed to look at the full needs of all the hotels and find a clear path to identify the key customers and markets on a global basis. Senior sales and marketing executives claimed that the KCMP was essential to fully utilise the full sales resources of the company in

Exhibit 2 1. 2. 3. 4. 5.

Key Aspects of Global Hotels and Resorts Business Strategy

Increase revenues and profits of existing hotels Renew 30 management contracts Expand the company’s portfolio to 200 hotels worldwide Reduce corporate overheads Create a sustainable competitive advantage with the customers, owners, and investors

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meeting customers’ needs and demands. Before the KCMP, there had been no reliable system for collecting, storing, and analysing information about the market and key client companies. Moreover, salespeople in regional sales offices and hotels had not had the knowledge or skills necessary to collect and analyse the information on a systematic and continuous basis. Therefore, through implementing this project, it was hoped that salespeople would improve their knowledge and skills and manage sales activities more professionally. The KCMP was introduced as a more disciplined and focused sales approach, whereas prior to the project, there were variances in managing sales activities across the company. The key objectives for implementing the KCMP are illustrated in Exhibit 3. Company executives were particularly driven to achieve the objective of seven percent (7 percent) compound revenue growth from existing hotels. In the mid-1990s, the global economy was actually growing at a rate of around three to four percent (3–4 percent). Therefore, to reach this objective, the company wanted to develop and implement a strategy that would assist it in growing revenues at a rate faster than the economy was growing. Sales executives in the company noted that due to the high globalisation of markets, many more client companies had started to operate worldwide, and therefore, in order to maximise the potential of these large corporations to the hotel group, these companies needed to be approached on a global basis. In addition, due to rapid technological advancements, more that 60 percent of the hotel group bookings were electronically generated, and over 65 percent of the clients never contacted the hotel unit until they actually arrived there. Given this, having worldwide regional sales offices with the authority and skills was seen as essential to communicate and negotiate with key companies globally on behalf of the hotel units. The KCMP would require salespeople at Exhibit 3

Key Objectives for Implementing the Key Client Management Project

Increase the company’s revenue through working with large global client companies Develop long-term revenue orientation rather than short-term yield orientation & Develop a market-oriented sales approach rather than product orientation & Have a global market focus in approaching large client firms & Achieve a more strategic thinking and leadership position for the sales department & Design a more focused and structured sales approach across the company, and aim to utilise fully the sales resources of the company

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Source: Adapted from project proposal and interviews.

The Global Hotel Industry in the 1990s 281

regional and hotel levels to work continuously with clients, monitor their activities, analyse their potential, and report all sales activities and progress for each client. The logic was that through understanding key clients’ needs and expectations and offering them “a cannot be beaten deal,” the company would increase its share and build a long-term working relationship with these clients. Salespeople from hotels and regional sales offices would have the authority to make commitments and solve problems. This would mean a leading role for the Sales and Marketing Department in the company. In addition to the introduction of the KCMP, other projects and developments were also taking place in the company. For example, the KCMP was actually part of a reengineering process that consisted of several other projects: &

Expansion Strategy: Through joint ventures, franchising, and finding partnerships, the company aimed to expand its portfolio to 200 hotels by the year 2000 (a target that had already been exceeded by 1999). Executives indicated further expansion plans, particularly in South America and the Middle East.

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Expansion of the Four-Star Hotel Brand: This project had been under discussion for several years, and in 1997 a project proposal was awaiting authorisation by the board of the parent company. However, it was understood that due to financial difficulties faced by the owning company, no financial investment was to be made in this project.

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A Revenue (or Yield) Management Project: A project proposal had previously been developed and submitted to the previous owner. However, due to financial difficulties, the project had never been approved. The revenue management project would have been highly complementary to the KCMP.

THE GLOBAL HOTEL INDUSTRY IN THE 1990s The global hotel industry had a difficult start in the 1990s, as the first four years of the decade were troublesome, with economic slowdowns in most parts of the world. In addition, the Gulf War in 1991 had forced many companies to cut their travel budgets (Todd and Mather, 1995). However, market conditions began to improve by 1994, and performance continued to improve from that point, although there were clearly some exceptions, such as Germany (Bailey, 1998). Between 1994 and 1997, the global environment was relatively positive, and there were increases in GDPs in many countries, which had a positive impact on the world’s

282 CASE STUDY 4: Global Hotels and Resorts: Building Long-Term Customer Relationships

Exhibit 4

The World Hotel Industry: Occupancy and Average Daily Room Rates 1994–1997

Occupancy ( Percent)

1994

1995

1996

1997

Africa & Middle East Asia Australia North America Latin America Europe World

60.9 70.3 — 70.5 60.1 62.2 66.5

60.7 75.6 74.8 69.2 61.0 64.1 67.2

61.5 72.9 75.1 69.2 62.7 64.6 67.7

62.3 72.3 73.0 70.3 62.7 64.5 67.6

Average Daily Room Rate (US$) Africa & Middle East Asia Australia North America Latin America Europe World

1994

1995

1996

1997

74.08 84.70 — 80.84 58.74 89.84 81.02

85.39 111.88 83.78 95.44 69.99 92.04 88.57

101.55 104.04 100.6 90.65 76.61 78.50 87.02

97.58 105.67 94.66 93.93 85.31 84.24 88.83

Source: Bailey, M. (1998). The International Hotel Industry: Corporate Strategies and Global Opportunities, 2nd ed. Research Report, Travel & Tourism Intelligence.

hotel industry performance. Exhibit 4 summarises the average occupancies and daily room rates for major regions of the world from 1994 to 1997. People in the company remembered this period as being one where demand for the company’s hotels had been buoyant, particularly in key cities. It was referred to it as a “seller’s market.” Bailey’s (1998) report on the hotel industry also supports these views (Exhibit 5). This buoyant market for hotels meant that it was difficult to sell the idea of a KCMP in the company, particularly to hotel general managers. The latter, of course, saw no immediate benefits from offering low rates to large key client companies. This created a major problem for the corporate executives responsible for implementing the KCMP because it was recognised that if the global economy had been less favourable, the project would have been received with “open arms.” Having said this, managers in Asia Pacific, who were experiencing economic turmoil in their region, were not optimistic about the benefits of the project, arguing that client companies would always think about their budgets before their relationships. Internally, this different regional perspective was further emphasised by the fact that there were differences in working and developing relationships with key client companies across the globe. For example, client companies, mainly

Organisational Structure from 1994 to 1998

Exhibit 5

Average Occupancy Rates in Major Cities Worldwide between 1995 and 1997

City

1995

1996

1997

Amsterdam Berlin Brussels Istanbul London Paris Hong Kong (5 Star Hotels) Singapore (5 Star hotels) Tokyo (4 Star Hotels) Cairo New York

74.9 62.8 65.9 70.2 83.7 68.2 72.5 72.1 70.3 — 79.0

79.0 59.4 69.7 72.9 84.6 71.0 77.6 72.8 76.3 74.0 81.7

83.3 61.7 71.4 75.9 85.0 74.5 67.8 69.4 78.4 76.8 81.4

Source: Bailey, M. (1998). The International Hotel Industry: Corporate Strategies and Global Opportunities, 2nd ed. Research Report, Travel & Tourism Intelligence.

from the United States and the United Kingdom, had travel managers and worked in certain policies and procedures. Meanwhile, companies in the Far and Middle East did not have travel managers or clear travel policies and therefore imposed no restrictions on their managers and executives when choosing airlines and hotels. Again in the Far East, Middle East, and Latin America, travel managers seemed to prefer more informal relationships rather than signing formal agreements or contracts. Conversely, managers at the corporate level argued against any major cultural differences in working practices. Instead, they argued that there was a growing global trend in the utilisation and popularity of the key client management concept, which had originated from the United States.

ORGANISATIONAL STRUCTURE FROM 1994 TO 1998 No structural changes took place as a result of the new ownership of the company until the beginning of 1999. Prior to this year, GHR was organised into three areas: operations, finance, and property management (Exhibit 6). The chief operating officer (COO) was responsible for managing all hotels globally. In operations, the scattered portfolio of the hotel group was managed by utilising an organisation structure based on geographic areas of the world.

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Exhibit 6

GHR Organisational Structure before Takeover CHAIRMAN

CHIEF EXECUTIVE OFFICER

CHIEF OPERATING OFFICER

PRESIDENT EUROPE

SVP GLOBAL PARTNERS

PRESIDENT AMERICAS

PRESIDENT ASIA PACIFIC

SVP PURCHASING & STANDARDS

CHIEF FINANCIAL OFFICER

PRESIDENT MIDDLE EAST AFRICA

SVP SALES & MARKETING

SVP HUMAN RESOURCES

CHIEF PROPERTY OFFICER

GENERAL COUNSEL LEGAL

SVP DEVELOPMENT

Four divisions therefore oversaw the operations of hotels in four continental regions—the Americas, Europe, the Middle East, and the Far East—and each area had a high level of decision-making power and freedom in running operations. In each region, hotels were further divided into separate territories, and local decision making finally rested at the hotel level.

MARKETING AND SALES ORGANISATION As illustrated in Exhibit 7, the Sales and Marketing Department was divided into two subdepartments: the Marketing Department and the Sales Department. The role of the Marketing Department was to work on advertising and branding activities. This department was also responsible for having close relationships with customers who actually stayed in the hotels; these were referred to as “sleepers.” In each region there was a regional vice president of Marketing, who mainly worked with, and reported directly to, the area vice president of Operations. The Sales Department’s main task was to work with key client companies, particularly with their travel managers and other

Marketing and Sales Organisation

Exhibit 7

Structure of the Marketing and Sales Organisation SVP SALES AND MARKETING

VP SALES PLANNING AND DEVELOPMENT

AREA VP SALES EUROPE-MIDDLE EAST AFRICA

REGIONAL SALES OFFICES

AREA VP SALES AMERICAS

REGIONAL SALES OFFICES

INDEPENDENT SALES AGENTS (7)

PRESIDENT OPERATIONS ASIA PACIFIC

PRESIDENT OPERATIONS EUROPE

PRESIDENT OPERATIONS MIDDLE EAST AFRICA

PRESIDENT OPERATIONS AMERICA

VP MARKETING

AREA VP SALES AND MARKETING ASIA PACIFIC

REGIONAL SALES OFFICES

AREA VP MARKETING EUROPE

REGIONAL MARKETING OFFICES

AREA VP MARKETING MIDDLE EAST AND AFRICA

REGIONAL MARKETING OFFICES

REGIONAL MARKETING OFFICES

relevant executives. There were three area vice presidents of Sales, and in total there were 15 regional sales offices worldwide. These offices were managed through a centralised organisational ...