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VILLA D’ESTE UNTIL 1985 Villa d’Este is considered one of the most beautiful architectural works of the sixteenth century. Designed by Pellegrino Pellegrini called “Il Tibaldi”, famous architect of the time, it is surrounded by a private park with centennial plants, renowned statues and astounding amenities. In 1568 the architect Pellegrino Pellegrini builds the Villa as a summer residence for the Cardinal of Como. In 1815, after many owners, Caroline of Brunswick, Princess of Wales changes its name into the current Villa d’Este. In 1873 a group of wealthy businessmen purchase the property and opens it to the public as a Luxury Hotel, they run it successfully until the depression on 1923 when Second World War led to a profit loss and a general fall, especially in North American guests, who represented most of the company’s clients. It is in 1963 that a significant turning point arrives when Marc Droulers, French textile entrepreneurs takes control over the estate and appoints Mario Arrigo General Manager, running with success until his death in 1966, when his son Jean Marc Droulers took over the business. He appointed, in 1968 a couple of successful intrapreneurs as PR Managers and Sales Manager, thus beginning the course of actions that brought Villa d’Este estate to be the most luxurious hotel in the world by many travel publications such as Forbes Traveler and Condè Nast. It is in the seventies that Villa d’Este starts to register a significant increase of fame in the north American market, thanks to the new marketing office and its series of promotional activities with the aim of changing Villa d’Este perception as a destination itself and not simply as a hotel situated on lake Como. This new communication strategy, brought a consistent increase in hotel’s margins and room occupancy rates, mostly linked to the North American clientele which is still today the most loyal to the Villa d’Este group. Its is clear that the group has found great opportunity into the North American luxury niche market and its following strategies evidently aim to take the most advantage from the status of the American economy related to the post-industrial economy following the Second World War. This period was a golden era of economic growth for the United states of America. GDP and productivity rose exponentially. This growth was distributed fairly evenly across the economic classes until the advent of deindustrialization in the late 1960s and early 1970s saw income inequality increase dramatically to the point where today the top 20% of Americans owned 85% of the country's wealth

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and the bottom 80% of the population owned 15%. Villa d’Este group has always targeted that significant top 20% of rich wealthy Americans until today. VILLA D’ESTE IN THE NINETIES In the mid-eighties the group begin a clear diversification strategy of prudent growth that brought to the purchase of a new four-star facility in downtown Como, the Hotel Barchetta Excelsior. The main reason behind this choice was to stabilize customer flow by utilizing a business market which runs year-round, as it does the MICE (meetings, incentives, conventions, and exhibitions) market. While at Villa d’Este the situation was stable, at Barchetta Excelsior, following the first loss in profit in 1997, many initiatives took place in order to improve management and hotel organization: 1. A heavy investment was made into renovating the building itself and its décor. 2. Changes were made into the hotel’s organizational structure 3. Updated operative system were introduced for human resources 4. Strengthen marketing operation were used to reduce seasonality and attract new guest 5. A new Yield management system was introduced to improve profitability Many of the successful changes, especially the introduction of a yield management system, were also added to Villa d’Este in the following years. It is at this point in the history of the group where they truly implement a diversification strategy as they aim to broaden the luxury five-star network in order to strengthen Villa d’Este image around the world. Also considered a prudent growth strategy at this particular moment when many difficult changes are taking place all over the company. In fact, to diversify their offer, the group acquires a catering company in 1991 and 1993 a restaurant in the Rockefeller center in downtown Manhattan. However, this particular diversification led the company too far from their area of expertise and from their core business, so after these two initiatives brought a profit lower than expected the company board of directors decided to sell both: the catering business was sold in 2001 and the Manhattan restaurant in 2002. In 1998, Jean Marc Droulers son, François Droulers takes direct involvement in the management of the group, following the acquisition of Villa la Massa, a Medici Villa only 5 km from Florence. Clearly in the effort of diversifying and attracting more customers by using the second most common “doorway” into Italy, being Florence so close to Rome and Lake Como to Milan, now the 2

group has all the potential to open up development opportunities towards new markets like the business tourism, the MICE market and also sports, health and beauty tourism. VILLA D’ESTE FROM 2003 FORWARD As of today, the Villa d’Este group has over 700 shareholders, both private and corporate investors and controls four different sources of revenue: 1. Grand Hotel Villa d’Este in Cernobbio 2. Hotel Barchetta Excelsior in Como 3. Hotel Villa la Massa near Florence 4. Grand Hotel Villa d’Este Restaurant

The Board of Directors counts seven members including Jean Marc Droulers, President and Chief Executive Officer (CEO), as well as his son François Droulers. The management Committee is made up of the CEO, the Chief Financial Officer as well as the managers of the three hotels, which are all free to make their own management decision in each of their respectively managed hotels by following the Groups guiding lines in regards of Administration, Purchasing, Human Resources and Marketing: all functions performed centrally for all three properties. Out of three properties is clearly Villa d’Este the most profitable as well as the most important for the groups image. In 2000 the hotel recorded a peek occupancy rate of 83%, which was negatively affected by the tragedy of September 11th 2001, that led the groups steady downfall in the following years after the terrorist attack. In 2001 occupancy rates fell to 73% and in 2002 to 71%. Looking at the company profit and loss statements of the years between 2002 and 2017, available online on Villa d’Este website, we can conclude that occupancy rate is been going down exponentially since 2001, reaching an all-time low of 54% occupancy in 2009, but in 2010 the company has started registering a higher percentage of occupancy with a steady growth and today, following 2017 profit and loss statement of Villa d’Este, occupancy rate has reached 68% and in 2018 is expected to reach 71% occupancy. The Group is evidently currently facing a conservative growth strategy, they have interrupted their diversification approach to focus more on a red ocean strategy as to compete in the existing market and beat the incoming competition of the last few years. At the same time, they are exploiting the 3

existing demand in the market they feel most comfortable and where they can take advantage of their extensive knowledge acquired through the years. VILLA D’ESTE STRATEGY SINCE THE MID-EIGHTIES Villa d’Este group began a development program in the mid-eighties which let to enormous changes in its own profile in order to reach higher level of competitive and economic performance and consolidate a significant market position in the international luxury hotel sector. Before the tragic events of September 11th 2001, especially in the nineties, the company main objective was to raise Return on Equity, given the large number of share holders and their power as investors. This was achieved mostly thanks to the industrial background of certain board members which were clearly focused on raising productivity rates. Second most important mean to achieve a higher Roe was to improve also operational performance and consolidate their position in the luxury hotel sector. Relying only or almost exclusively, on the American luxury market, the events of September 11th 2001 were crucial to Villa d’Este group profit, and not being able to truly find a new single rich market to depend on, made the downfall of the company, which is only now, in the past 6/7 registering better profit, although it never reached the peak of 2000 ever again. The reason behind this downfall are to be attributed partially to the fear of travelling that generated from these terrorist attacks but most importantly they came from the shift of economy, we changed from and industrial economy to an experience economy and Villa d’Este group is still, to this day, trying to adapt to it. This explains why American market was targeted in the first place: being North Americans the greatest example of industrialized economy, it was an easy choice to make for the group. At the same time Italian internationally known service levels and weather conditions made it for an easy to sell destination that could benefit from the mouth to mouth publicity through a niche clientele. Therefore, we can conclude that before 2001, in their growth stage of maturity, the main strategies for Villa d’Este group were first and foremost, a target market-based strategy aimed at the United States of America, following a clear diversification strategy to solidify that market. Although the first on was overall successful, some action undertaken following the company diversification

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strategy weren’t equally successful, as mentioned in the previous chapter, following the purchases of two different type of businesses that differentiate too much from the group’s business model. Following 2001 losses, the company has partially adapted to the new market condition and to the new experience economy which means Villa d’Este group has reached its maturity stage in 2000 and it was in need of a new competitive advantage in order to regain their position in the market. From 2003 on the group has experienced losses until finally in 2009 has started regaining some margin but still much lower than compared to its golden years. Looking at the tables showing occupancy rates and nationality of guest we can conclude that maintaining such a selected target as a main source of business it resulted in a general loss for the group. As many recent economists have pointed out, after the internet we now live in a “flat world” where information and, most importantly, wealth is shared and available to anyone that has means and ways to exploit it. The group has evidently only slightly opened to the Asian market, particularly Japan, failing to recognizing Asian late wealth derived by their current industrial economy. When most Asian countries, such as China and India have experienced the benefits of industrial economy, having then logistical advantage by being near most primary resources and by having plentiful cheap labor, they became leaders in global industrial production, giving them also economic leverage in the market. Villa d’Este group has not completely adapted to these changes of powers and economy therefore switching to a decline stage of product life cycle, until the recent year 2009, when ROA and ROE, finally after almost 10 years, registered higher than the previous quarter. In modern economy tourism businesses are transformed into factories for emotions, impressions, thrills and memories. Looking at Maslow’s pyramid of needs, hospitality in now focusing on the top side of the pyramid, which includes personal and social psychological needs and self fulfilment needs. However, regardless of how sophisticated guests needs are turning, they always expect a professionally prepared, all-inclusive offer, which will meet their expectations. Treating emotions and experiences as a particular market value that guests are ready to pay more for is reflected very well in Villa d’Este group philosophy. Facing such high sophisticated expectations, it was necessary to construct a well-thought-out, wide-ranging new offer, in which the guest and his/ her emotions occupy the central position and which will guarantee an expected level of experience. More or less consciously, perhaps intuitively Villa d’Este group has tried to meet these expectations. The main methods of intensifying guests experience and therefore profitability in my opinion were: − investing in building amenities to offer unique experiences 5

− differentiating their product by different levels experience and emotion − creating a personalized and exclusive experience VILLA D’ESTE BUSINESS MODEL AND ITS SUCCESS Villa d’Este, although it’s a seasonal hotel, has undoubtably been on top of its category for many consecutive years and its business model reflects these main characteristics:

− Offering exclusive and unique experience − Creating a personalized service at the greatest level − Utilizing strategic targeted (Business to client) marketing

To achieve its success until 2001, Villa d’Este, in line with its business model, uses first and foremost his great ability throughout the years to adapt in many diverse business aspects and obtain profits, such as:

− Adapting to changes in economy and power shifts that derived from them − Adapting to changes in customer’s needs − Adapting to changes in the local labor market

Just like we can attribute to their success their ability to adapt and evolve to different changes involving their business, we can account a possible reason for their decline to their static and prudent positioning following 2001 and therefore, their partial ability to adapt to further changes. As the aforementioned economy change happened, from industrial to experience economy, the group has only partially aligned their business model to the new market, probably lacking the research power and the general capabilities of the big franchising companies such as Marriott or Hilton. With the arrival of the Droulers family, and the beginning of the group’s innovation process, we saw a clear market-based approach where once established the main target market, the company has built a product around their needs. As per after the 2000’s Villa d’Este has switched their approach 6

to a product-based approach, meaning that, having already a product to sell they only looked for a new market to expand and profit from it.

VILLA D’ESTE TYPE OF COMPETITIVE ADVANTAGE AND ITS SOURCES Adding values for customers, employees, and owners has become a central theme in strategic management for hospitality companies. To create values for all stakeholders, Villa d’Este group has achieved a competitive advantage over its competitors by adapting itself to the uncertain industry environment, understanding the changing needs of customers, and responding to new market entries. As achieving competitive advantage has been recognized as the single most important goal of a firm (Porter, 1980), it is also clearly visible in Villa d’Este strategy, as they consistently offer their selected niche group of guests: 1. luxury accommodation 2. unique experience 3. personalized service 4. competent staff 5. differentiated offer to their guest This classifies their competitive advantage approach as a Resource Based Approach.

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contrast with the Porter’s five-forces approach, the basic assumption of the Resource Based Approach is that the qualities and quantities of resources are unequally dispersed among competitors (Barney, 1991). The heterogeneity of the resource bases of different firms suggests that firms are presented with different opportunities for sharing and adapting their portfolios of assets. The Resource Based Approach holds that competitive advantage stems from internally developed resources with characteristics of value, rareness, inimitability, and non-substitutability, because resources with such characteristics can be neither commonly traded nor easily acquired by their competitors (Barney, 1991). Thus, the Resource Based Approach adopts an internal perspective in understanding competitive advantage in that it views competitive advantage as emanating from resources unique to a firm. It is to be noted that the term “resource” includes competencies, assets, capabilities, resources, information, and knowledge, as it can be viewed from the five aforementioned competitive advantage sources. Using only one of the three main competitor’s advantage approach and not developing also the Porter’s five-forces approach and the Relations Based approach Villa d’Este group has failed to recognize and utilize the potential synergistic 7

effects of these three approaches put together when attempting to increase revenue. Because these three methods pursue similar goals in somewhat different ways, a more appropriate approach, following the events of 2001, could have been an integrated one, therefore a combination of all three of them, in order to strengthen Villa d’Este group strategic management process.

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