Advaned Diploma - Strategic Management

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Product life cycle

_We define a _.p[Qduct . as "anything that is capable of satisfying custorner_o~.eds. This de'fi'2~0?n.!nCtudesboth.E!ii'jiC~Dj-r:?_9Yf.!S (e_JL cars," was~fn!~LI';,act1ine~, PVD players) as

Wella.:~_selvices-(e""'g. insurance, banking"p!._iv~te_health care). -

-'~-' -'---, _ .. -'----_-.~ -.~-.'.-- -.,-~ '~--"-'-'-"- - "

Businesses should manage their products carefully over time to ensure that they deliver products that continue to meet customer wants. The process of managing groups of brands

and product lines is called portfolio planning. --" .'--.--'--~--.- .... __ .. -., ,

- .. ---~-.----.--~---~ .. --- -_.-_- --- - --_._--_ -"

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The ~~thro~~h wh~<:.h ~al.produ~!s- q_e~elop ()ver ,t!meis@iied commonly known

as the "Product life Cycl:-". .

~="-'-~'-

The classic product life cycle has four stages (illustrated in the diagram below): introduction; growth; maturity and decline

. 1

!

.. OJ iii UI

~----......-...,..--,~

----40>_ ............. ,,_

-..,_.~~

---.-'--_'_'_'_ .. _._-_. __ ._.-.--_-'_------ - .. ,-,-.-.~.---- ... -".--:..~

Gto1llfh

Decline

Maturity

-

Introduction Stage

----.~.~---

At the Introduction (or development) Stage market size and growth is slight. it is ossible that substantial research and development costs have been incurred in getting the product to this stage. In addition. marketing costs may be high in order to test the market, undergo launch promotion and set up distribution channels. Jt is highly unlikely th,at,<;.Q_tI!P_9nJ~s will

make profits on___Q!:9ducts at t.be.-lQtr.QQyctio.n. Stage. Prq_ducts at this stage .Jla'{_~ t9. be

carefutly-mo-nitored to ensure t~at.they.mI.tg:> groW: Otherwise,"ihe-best option maY"be't'O

wTihdyaw-or endihe 'proa9~:--"- '_~.r·

c' '\

::::;I::age ischaract"rised by rapid growth in sales and prof!!s. _f'r.9fi_ts~aris~dueto ~ ,an increase in output (ecoriornies of scale@D_cf_j:l9ssibly better prices. At this stage.) it is --~~~~!2.r...9!)~ines~es- t9_inves..!JI1Jn..£[~asi_n~~ir ~~Tket ~h,~re_~_well_~~:enjpyI)1~

~~all___g[cLV1:h __ of ._t~~ _ market. Accordingly, significant promotional resources are traditionally invested in products that are firmly in the Growth Stage.

@ Maturity Stage

1.:.'2_e Maturity Stage is, perhaps, the most commoO:1tag~_f(n:_al!market$-"l! ~~jn this stage. thatcompetition is most intens~as companiesJ!g~t ton}aintain "th~ir market~s.hare. Here, Doth marketilJgandHnance-t)€c9"me-key activities. Marketing spend has to be-niOnTforea

,",,"~~_r~1.u[l~ since a ny stgntttcant movesare-likely"to't:;eCopiedDY' competjtors:-Tl:~e-Matur!iv Sta~Hb~j;_ime_~"[I]Q~i~js earned by_!he mar~~t as"~ ~!:,?!e.: Any expetl"Clltureon research and development is likely to be restricted to product modification and improvement and perhaps to improve production efficiency and quality.

Decline Stage

~"'~"'."".::'::!':"'::"'-'-"-" .--~

In the Decline Stage, the market is shrinking, reducing the overall amount of profit that can ~~1i_aJe.a ariiongs.t' t!1i0emalojng competi!!2~_? At this stage~_gr:ea,t S_i:lr~_ bilS"~O _~_J~1~n to manage tht:' p~()duc!,_c_Qrefldk It may be possible to take out some production cosf~-lo transfe~i"'"proauction to a cheaper facility, sell the product into other, cheaper markets.

Care shouldJ2~J:aken_to_C_QDj:[_QLtbg_Q_rDQ.IlnLQf stocksof Jbe product. Ultimately, depending on whether- the product remains profitable, a company may decideto end the product.

__ 'T"___ • • ..... "., .. .. ~,_. _",_ _'._" • ...._.."_ .• ,,,., •

Examples

Set out below are some suggested examples of products that are currently at different stages of the product life-cycle:

INTRODUCTION GROWTH MATURITY DECLINE
Third generation mobile Portable DVD Players Personal Computers Typewriters
phones
E -conferencing Email Faxes Handwritten
letters
All-in-one racing skin- Breathable synthetic Cotton t-shirts Shell Suits
suits fabrics
iris-based personal Smart cards Credit cards Cheque books
identity cards chandlerRevision[2]

Chandler's explanation of the devel opment of the ITlQderrll1!!si ness organi zati on ·'Tf1e.!!L~lrket cont i nues to generate the deman~.~f.9r goo~~J.an.c;I_ the managers' make

Bl"ei.c.de.ci s i oris·:...ori the; . . . - ....

-~asis of their estimates of market demand. The visible hand of managerial

illYe-c:tlo·n--has"r-epl aced the·-~·-·--·-·-··· ~

invisible hand of market mechanisms, however, in co-ordinating flows and allocating resources in major

modern industries." Chandler's aim is to explain how this funda~entc1l .1ransformation took place .... ··· - ....

The modern b~siness entefprise is distinguished by two major features.

Qff~~e~~~:~%-e~;~ r\.~~~.:t;jIlC1:.oE~!atj"Q.9.Ynj.!_~, each wi th .. i ts own admi ni str?t.~ ve

Ji:C~9unts th.at c.an.i(jeiitify the costs anc:f.pr.ofi1:~ __ associated with the operation

o·f the uni tal one. Ea.ch .:.:.-----.- .... -.- '. . ._ .... -. ..... .

~:~i ~~~i[i;~:l':·d~~f~~~n~!~i~g~i J~~~~H:~~;;~~;:: ~i.~~~~~ r.g~.~h_~ .. th~

us 1 nes ses COu·tft!- .. --·~"

. ~~~~~f~'~:d~{-m"f_~i~ ~~~¥th r~ugh_~._cen1:.r.<il_i s~d m.~na_~~ri a ~. hi~~?-.r~hy th,an by

--ma:rket' mechani sms. So. hi 5 argument is based squarely in economi c ., ogi c.

-Mal1age-rs fi gure out the

form of organizational structure that will be most profitable, and, one way or the other, organisations

with these structures then come to predominate.

chandl er argues, that the basi c advantages of hi er-archfca l ... £rgan; satiOns are the

-Fouti ni sati on of' . ----... ..- .

, transact; ons a:rrrrrn..9 4Dit5 and....t:he. i.nte.g.rati on of uni1:s .. for producti on,

-purchasing, ·a~d.dJ~:tri~ution,. all of' .

-'which re@cecf costs. fFie abiltty·-tdsthedul e the flow of raw maten al and

--rrill shedgoods'mori! closely

and to standardise the processes involved made it possible for firms to use their resources more

intensively. However, it was only possible to realise these gains "after the development of technology

and the growth of the market increased economic activity to a speed and volume sufficient to make

existing mechanisms of co-ordination by market forces cumbersome."

While goods were produced and moved by traditional methods and sources of energy - wood. wind

and water, animals - the daily output of a production unit could easily be supervised by the owners

assisted by one or two managers. This changed with the development of the railway and telegraph, and

the simultaneous availability of large quantities of coal. These new technologies made possible much

greater speed and volume in the production and movement of goods, and necessitated the development

of management hierarchies to supervise, monitor, and co-ordinate the new processes of production and

distribution. Th~ top-level managers of a few multi-unit companies made the decisions that had

previously been made by thousands of small firms.

The first modern business enterprises in the US, the large railway and telegraph companies, appeared in

the 1850s. The former became the first "big business." They required centralised operatin~ control and

hierarchles when they operated more miles of track than could be personally managed by a single

superintendent. These advances were quickly reflected in the development of new forms of

distribution. But it took longer for the revolution in production to appear, because more technological

development was required. Railways and telegraph encouraged technological innovations that

increased output by making it possible for materials to pass through manufacturing plants more rapidly

and with 9reater regularity, a process that was helped further by the new availabillty of coal as a source

page 1

ChandlerRevision[2]

of power. Large-batch and continuous-process production methods followed these developments.

After WW1, the large, integrated enterprises adopted an explicit strategy of diversifying into new

products for new markets; the searched for products that made use of their technological, marketing,

and managerial techniques and skills rather than those that used only existing purchasi~g, production,

and marketing facilities. The strategy of diversification quickly caused administrative problems,

however. Middle managers were unable to handle the very different co-ordinating requirements of the

several lines of business. TOp managers were overwhelmed by the need to supervise by the need to

supervise and to allocate resources to many businesses that varied greatly. The response to these

problems was the multi-divisional (M-form) organization.

A similar process occurred in the UK, but at a slower pace. Less use was made of mass production, so

co-ordination of the flow of goods was less complex, and so management structures were simpler.

Entrepreneurs and their families continued to make policy decisions, so the managerial class remained

much smaller than in the us.

This difference may be partly due to the much small domestic markets in the UK. So, there was less

incentive to adopt mass production or mass distribution. There were also legal differences, such as the

sherman Act outlawing trusts and cartels in the us. Class and cultural differences may also have been

factors.

Criticisms of Chandler (see Du Boff and Herman) 1. Excessive technological determinism.

Technology is the main driving force in chandler's models - its effects are seen as inevitable.

However, there is much evidence that social factors determine how advances in technology will -

or will not - be selectively drawn upon to produce goods and services. A good example is the

standard QWERTY keyboard. This is a very inefficient technology that can easily be superseded.

However, social factors (the very large number of people who are skilled in its use) effectively

prevent technological development. Technology typically affords a wide range of choices.

~ler al_so ignores the._jmp_c?_'=-!~_r:!~~ __ ~f-tac~ory organization as a means of if; s c i]Ti1i'1..Q.9._ WQ.f_ke r s. I n -----------------------------~

1 ts ~To·rmiib ve-- years:;::::..the._.fB_c:tory system was onl yin part a response to

J.e£_h[1~.o.gjcaL .. .c.b.~O~ ..-.----...... . ".....-. "--

2. Managers' object1ves and role

Managers came to power with the rise of big business, but what were their objectives? What was

the impact of managerial (as opposed to owner) control on corporate goals? Chandler has little

conclusive evidence. Why should managers share the interests of owners as Chandler assumes they

do? Chandler assumes managers have long-term planning horizons - is this really Arue?

~. Market cQ~

~~a~~~~~~~. ~j~~92.e-~.L,i[l._gff_ec!z- .. '!!.".~1-~.~~---~-l!si-ne-?s d~~.i,~_i o.!ls_~..!:_.p_q.l i c.i es th~t:

.... ·empfiasfse:sut: there are others, such as a desi re to gai n market control. By

=focus i hg'l>n ---'-~

liiiP'NJvements in admi ni strati ve.CQ:-_Q_rdi natiol1,_.ch.an.dl er downpl ays the

.J'!2..fl~_-e~~a.rfclfr~r eJfe·cts.of .d ' -.---:----.-------.

tFi~antecedent 1ncrease_1nmo,oopoly pgwer. Chandler 1S thus too qu+ck to trumpet

fIleeffi ci ency .. ----

advantages of modern business organisations, and to assume that these advantages page 2

--~J--'.-~'" ~~~ .. ~ •• --,.. ~"O"'~' •• ~.~.~, -.-.---------------- .. ----- __ ......

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chandlerRevision[2)

were the sole

reason for their success.

14~ ~Strategic change and structural nonresponse

._2ome organisations,reated successful multi-unit businesses without a pew managerlal hierarchy~

-(e.g., us steel). Even GM, which did adapt its structure, can we seen as having been successful

primarily because of its market power rather than as a result of its administrative structure.

page 3

/PEST analysis template

Other than the four main headings, the questions and issues in the template below are examples and not exhaustive - add your own and amend these prompts to suit your situation, the experience and skill level of whoever is completing the analysis, and what you aim to produce from the analysis.

If Environmental is a more relevant heading than Economic, then substitute it. Ensure you consider the three additional 'PESTELI' headings: Ecological (or Environmental), Legislative (or Legal), and Industry Analysis.

The analysis can be converted into a more scientific measurement by scoring the items in each of the sections. There are established good or bad reference points - these are for you to decide. Scoring is particularly beneficial if more than one market is being analysed, for the purpose of comparing which market or opportunity holds most potential and/or obstacles. This is useful when considertnq business development and investment options, ie, whether to develop market A or B; whether to concentrate on local distribution or export; whether to acquire company X or company Y., etc. If helpful when comparing more than one different market analysis, scoring can also be weighted according to the more or less Significant factors.

political

I __.,...' .....

( '''.

•

ecological/environmental issues

~\ current legislation home market

(!) future legislation

/.) European/international legislation

• regulatory bodies and processes

(~) government policies

• government term and change

• trading policies

• funding, grants and initiatives G home market lobbying/pressure groups

• international pressure groups

~ home economy situation (:1> home economy trends

• overseas economies and trends

Q general taxation issues

• taxation specific to product/services

• seasonality/weather issues

• market and trade cycles (~) specific industry factors

• market routes and distribution trends

C~) customer/end-user drivers C) interest and exchange rates

social

lifestyle trends demographics consumer attitudes and

opinions

• media views

(;) law changes affecting social factors

• brand, company, technology image

• consumer buying patterns /'.j fashion and role models

'.. - .. ~/

• major events and influences

• buying access and trends /~~ ethnic/religious factors

( .) advertising and publicity

competing technology development

~ research funding

• associated/dependent technologies

e replacement technology/solutions

• maturity of technology

• manufacturing maturity and capacity

G 1 information and communications (."" consumer buying

,,-- .. ' mechanisms/technology

• technology legislation (~;) innovation potential

C!") technology access, llcencinq, patents

• intellectual property issues

SWOT Analysis is a powerful technique for identifying Strengths and , Weaknesses, and for examlninq th~ Opportunities and T_hreats you_!~~~~_~

Used in a business context, it helps you<~r_v~ __ asustainableniche in your ___ rr,arR~r-Used in a personal·confexf,·-ifJleJpsyou_develop your careerihjt way that takes best advantage of your talents, abilities and opportunities.

_, • ,, •• ,'-'o __ •• __ -,_.'.>._ .. __ •. ". _. ...• """'_'M __ ~~

What makes SWOT particularly powerful is that with a little thought, it can help you uncover opportunities that you are well placed to take advantage of.

And by understanding your weaknesses, you can manage and eliminate threats that would otherwise catch you unawares.

More than this, by looking at yourself and your competitors using the SWOT framework, you can start to craft a strategy that helps you distinguish yourself from your competitors, so that you can compete successfully in your market.

Strengths:

What advantages does your company have? What do you do better than anyone else?

What unique or lowest-cost resources do you have access to? ~. What do people in your market see as your strengths?

Consider this from an internal perspective, and from the point of view of your customers and people in your market. And be realistic: It's far too easy to fall prey to "not invented here syndrome". Also, if you are having any difficulty with this, try writing down a list of your characteristics. Some of these will hopefully be strengths!

~OYL§1(_eD~S, think about them in relation-toyoorcompetitors .... ,J.QLexam2!_e,lt.all your competitors provide high quality. products.Jhen a hig~ quality productiofiprocess is not a str~Ogth in the market, it is a necessity.

_. ~"M • _.,_ " - ••••••••• __ , • __ ,,__ - •••••• ,,~._.

Weaknesses:

......__-~-- -._."---

.,

,<_~~ What could you improve? ~) What should you avoid?

. '. ' What are people in your market likely to see as weaknesses?

Again, consider this from an internal and external basis: Do other people seem to perceive weaknesses that you do not see? Are. your competitors doing any better than you? It is best to be realistic "riow,-andface-- any

c-' """ - .. .-----.------, .

unpleasant truths as soon as possible.

Opportunities:

G Where are the good opportunities facing you? (.<~~) What are the interesting trends you are aware of?

.,.LJseful opportunities can corne from such things as:

". . .... '~~.-~.,.~.~-~, ",. -_' :;'''''. "'" .. ~~ ,..-, -, '.

( .. i Changes in technology and markets on both a broad and narrow scale G Changes in government policy related to your field

• Changes in social patterns, population profiles, lifestyle changes, etc. -'0 Local Events

A useful approach to looking at opportunities is to look at your strengths and ask yourself whether these open up any opportunities.

• We are able to respond very quickly as we have no red tape, no need for higher management approval, etc.

• We are able to give really good customer care, as the current small amount of work means we have plenty of time to devote to customers

• Our lead consultant has strong reputation within the market

• We can change direction quickly if we find that our marketing is not working

1 i

I

i

,

Alternatively, look at your weaknesses and ask yourself whether you could open up opportunities by eliminating them.

• What obstacles do you face? @ What is your competition doing?

& Are the required specifications for your job, products or services changing?

Q Is changing technology threatening your position? (J Do you have bad debt or cash-flow problems?

• Could any of your weaknesses seriously threaten your business?

Threats:

~;.,,,.,-

Carrying out this analysis will often be illuminating - both in terms of pointing out what needs to be done, and in putting problems into perspective.

You can also apply SWOT analysis to your competitors. As you do this, you'll start to see how and where you should compete against them.

Example:

,....

A start-up small consultancy business might carry out the following SWOT analysis:

Strengths:

• We have little overhead, so can offer good value to customers

Weaknesses:

• Our company has no market presence or reputation

• We have a small staff with a shallow skills base in many areas

• We are vulnerable to vital staff being sick, leaving, etc.

• Our cash flow will be unreliable in the early stages

Opportunities:

• Our business sector is expanding, with many future opportunities for success

• Our local council wants to encourage local businesses with work where possible

• Our competitors may be slow to adopt new technologies

Threats:

• Will developments in technology change this market beyond our ability to adapt?

• A small change in focus of a large competitor might wipe out any market position we achieve

The consultancy may therefore decide to specialize in rapid response, good value services to local businesses. Marketing would be in selected local publications, to get the greatest possible market presence for a set advertising budget. The consultancy should keep up-to-date with changes in technology where possible.

Key points:

8\1\10T analysis_L§.i3Jra_rnework for .analyzinq your company's strengths and

-weakness'es, and the opportunities and threatsyou face. ., _ .

~Ihi?_\lVi II h~lp ygu tofQ.c.USOIl.YQ.YLS.!IE3Qgt~ ~ii!~.~ea_~Q~§.§e~,(l_l1d take the greatest .possible advantagegt opportunities available.-~

__ .. _ .- ... -.-.-~-- .. ,- ..... _-.--------.- .. _ ---' '. -

_-"

What is Culture?

•

Basically, organizational culture is _th~ per.so!l"l.!!!Y Of the organization, Culture is

cOIIY1ri~d_ -_qf_ the__~su_mptj2ns, valu~§!_l!c!'_~_ ru_id~-"iangible .. s:igrii''{artTfacts) of

- o~ru*ati(J!! members ~!1qll1eii behaviQ_r~,-~Members of an organization soon come to sense the particular culture of an organization. Culture is one of those terms that's difficult to express distinctly, but everyone knows it when they sense it. ~le .. the culture of a large, for-profit corporation jcs"q_uit~ slifferenUhan that qf a hospital

_-.,------... ,_ ._...... -..,...., .. ._ __ ... -~ _- ....-.-.......t= - -.' .. ~_ ... ..._ __ .. __ ._. -.----,._

which is quitediffCrent tIifujIi~LQr_a __ univer~. You can tell the culture ofan

orgamzation--by lookingatthe arrangement of furnifure, what they brag about, what members wear, etc. -- similar to what you can use to get a feeling about someone's personality.

C_.Sl_rporate~ul!'!f~_~~_n_~I?oked at as ~ sy.st.e~ Inpy,t~. include feedback frOJI!, e.g., society, professio~_,Jaws,,-_m:(l.rie.s1._heroes, values oIl_competition or service, etc. The Pro~is-sJs_b~e4 o!!___(Jurassll~tiQ_n_?, vatues--and norms, e.g~:· our values on money, time, facilities, space and' people. Outputs or effects of our culture are, e.g., _2!g<mjzat_ional_behaviors, technologies, strategies; -_ unage~-pr~ducts, services, appearance, etc.

~ "'

The concept of culture is particularly important when attempting to manage organization-wide change. Practitioners are coming to realize that, despite the bestlaid plans, organizational change must include not only changing structures and processes, but also changing the corporate culture as well.

There's been a great deal of literature generated over the past decade about the concept of organizational culture -- particularly in regard to learning how to change organizational culture. Organizational change efforts are rumored to fail the vast majority of the time. Usually, this failure is credited to lack of understanding about the strong role of culture and the role it plays in organizations. That's one of the reasons that many strategic planners now place as much emphasis on identifying strategic values as they do mission and vision.

Some Types ofCulture .. _,

There are different types of culture just like there are different types ofpersonality.

Researcher Jeffrey Sonnenfeld identified the following four types of cultures.

Ctt") Academy Culture

"Employees are highlyskilledandtend.to stay.inthe organizatiQIh~e:working their - way u!,_ theranks. Th_e_ organization provides a stable environment in which

-employees can development and exercise their skills. Examples are universities,

fiospitals, large corporations, etc. . .~

-." _.

,1'.1!_..!!a.~e!!all Team Culture.

,-,., Employees are "free agents" who have highlyprized.skills, They are in highdemand

and c~ rathereasify g~!j~l)~ eIs~wl_1~~e. This type of c:tllmr§=~xis1sinf~!-:paced, rugh-riskorganizitiolls, such as investmentbankizii _ _l!dyert~itJ.g, etc. -- '--

----- _. -_...-.-~---.-.

"

~.

'-.. •....

.f:;l_y.!!.. Culture,

The most important requirement for employees.in this culture is to fit into the group. Usually emplQy~~s.:staliatthebOttQl!~_alldstay with the organaatlo.i1.'The" -- -_. ' ..

~_._".- . .. ,_ ,.-.~." ..• _, .• _" ,_~~._c: •• -:..-'c·", •

.£rganizatiQ_I!J2rQ~Ul~~~:from within and highly values seniority. Examples are the

mili~ SOllle_ill..wl1!I!~ etc. -. .

-.:..~

Fortress Culture

- EI!wlQyt:;_e~~\;lQ!}lt .~()w if they'll be laid off or not.These organi!51tiops 0ft:~n_ undergo

-m1!§_siv.~1:~ganization. There ?J~_!'t@).YQP_PQr.tunities foi those with timely, "'_'-~

specialized sk~lls. Examples are savings and loans, large car compallics~ctc:

__ --.----- - ..... -, .. '.~, .'. -,_'" ..._..,.,. ,"",-- .. """ .. ~---___,~_.._,..._..-.--".---- ... ~. . ~-'''-~''_- -~-'-'-""'- .. ,.- .. ,~ ... ;.- '"-

Human Resource AUdit)

., ' ........ ' ........ "" .. --.~... . .. ,. "'." .. " .".. . _.'- _ _._ - -"' ... .,..

An HR "Early Warning System" that works!

Your tool to assess the present. Your blueprint for the future. Your commitment to excellence.

Tying policies, programs and practices to people

If you are guiding your HR function through compliance and employee relations issues, you know how challenging your work can be. So how do you know if you are on a solid foundation? With a Human Resource Audit, you determine where you are, prioritize what you have to do. The Result? Your comfort level and professional contribution will be enhanced, and you will be confident about moving forward.

Evaluate and Improve Your HR Practices In:

--'-~- - -- -. --

_--

G) Staffing

/":'J Compensation and Benefits "/

G Performance Management

G Employee Development o Employee Relations

~) Safety

• Reporting and Recordkeeping

How Does the Audit Process Work?

(~~) Interview key sta.ff

------:

GO) Review relevant documentation

rJ Complete a comprehensive questionnaire

_/

(:) Compile data a prepare and customized written report

0'" Make specific recommendations to improve the efficiency and performance of your HR function

tmmedtate Audit Benefits

«('~ Create an HR business plan

'.:._.,"-

(.'~;' Streamline HR work processes {/' .i4 /_./

j '~ c:(p (JUfe 51 b :4-,. r C

• Monitor compliancewith established regulations and

procedures

(3 Develop user-friendly HR systems

•

,

(Kurt Lewin: organizational change ')

-r.-------- .... -- ... - .. - ... --~---. -

In "Transforming Managers for Organizational Change," Paul O'NeiU (1990) summarizes the work of Edgar Schein, which was built on the earlier work of Kurt Lewin, in developing a model tor organizational change. Schein's model features

three stages~f change: - .

.,.-- -.~ ,.

L ~n .. (re..~z.illg: Workers are motivated to unlearn current behaviors and attitudes. 2_ Changing! Workers learn about new behaviors and attitudes.

3.-ji-efreezing: Workers are supported ao;; they iiiiegrate their' new behaviors and attitudes into routine activities.

Schein reports that three variables are critical to the success of any change in the culture of the organization: (1) the degree to which the leaders can make a clean break with past practices; (2) the significance and comprehensiveness of the change; and (3) the extent to which the head of the organization is proactively involved in the changes.

The connection to implementing systemic reform is clear. Each stage ofchange .. will reguire exten .. sive involvement by all.stakehoI(i_~:rs.-inJhe_organTiatioriwho"are,likel)' to

~ be __ ~ifecte~rby_ the chaIi~ Systelnic- ~eform of science education will require leaders whoTiiiderstand and are committed to the reforms, teachers who are given the necessary time and support to learn and accept the reforms, and community members who understand and support the changes being made in their schools.

Jhe difference between PEST and SWOT

--'"

-- .... '.-=~--""',.><..~ ..... ,,_,_ .. _ ...... ,__ •..•.• ~ .".~--- •• - •. ,,- '. - ," "~" ... ~-.-~~-.__.".__.._.

_ PEST is useful before SWOT - not generally vic~vers.a - PEST definitely helps c ~t6-fdentify SWOT factors.ThereIs overlap between PESt and SWOT/ in that -similar factors would appear in each. That said, PESf and SWOT are certainly two different perspectives:

PEST assesses a market, including competitors, from the standpoint of a

-partICular propositiOn ora "blJsrness~-' . __ ._ '-. '. ...

SWOT.i~_an_a~e§.sment of a business or a proposition, whether your own or a

-competitor's. .u____. .- . '-- - -_. . ~ ._.... ~-~ _

Strategic planning is not a precise science - no tool is mandatory - it's a matter of pragmatic choice as to what helps best to identify and explain the issues.

PEST becomes more useful and relevant the larger and more complex the business or proposition, but even for a very small local businesses a PEST analysis can still throw up one or two very significant issues that might otherwise be missed.

The four quadrants in PEST vary in significance depending on the type of business, eg., social factors are more obviously relevant to consumer businesses or a B2B business close to the consumer-end of the supply chain, whereas political factors are more obvlouslv.relevant to a global munitions supplier or aerosol propellant manufacturer.

All busines~s..~nefit from a_S_V!LOI_c~_na!y~isJ and .~II businesses benefit from _ compieting_aSWQT~mQJy~i§__()f their main competitors, which interestingly·.·. canthen provide some feed back into the economic aspects of the PEST analysis.

Effects of Nationality on Global Strategy in Major American, European, and Japanese Multinational Companies

'"~orge S- Yip, Johny K Johansson, and Jonen ROGs; 44 pages: 1996

~"J.- -

- - ~ ~ -- .. -'~

Investigates the role of nationality in global strategy by interviewing senior executives in 63 worldwide businesses.

An increasing amount of research is being conducted on the topic of global strategy, including the industry conditions that might favor the use of global strategy and the organizational aspects that affect its implementation. The limited empirical work has tended to address only in passing the issue of nationality and its possible effect on global strategy. In one sense, however, the effectiveness of global strategy depends on overcoming the effects of national differences. Some have gone so far as to maintain that multinational companies (MNCs) should consider themselves stateless, whereas others argue strongly for the importance of the role of the home country.

In this study, professors i Johansson, nd Roos investigate the role of nationality in global

strategy by Lnterviewing . mar .. x et;in.63American,. European, and Japanese \Norldwide

businesses. In other ~ords, are tnere Slgnificanfdjffererices among American, Eur()pe·~in. and

- J_?panese companies in how they perceive al)gi~SRo.nd1o-"':gllilianzs;ltIQ6.T6rces. In how they'organize-rorgrooal strategy, and rn'the-gTob~aJ strategies that they actually impJ'ement?

-~-.-~' -, - .... ""-.--~.".+-.. . .• -"

r'h~;t;~~dth~

_.--.-. - . - ... - .. -.--1

~ Nationality does have significant effects. Overall, the Japanese make significantly more \.._I use of global strategy, and the Europeans slightly more use, than the American businesses,

ej The_g\JI()R~anJ)usinesses perceive that they face significantly stronger industry globalization drivers, and the Americans perceive that they face significantly weaker drivers, whereas the Japanese effect is negligible.

~) ~~busines~s have organization structures that are more globall~ centralized than those of the Japanese and the Americans. Only 29% of European ousiii-esseshave'aseparcifelriternational division (as compared to 95% of Japanese businesses and 74% of American). Similarly, the Europeans have a higher incidence of globaUine heads for individual functions.

(jl luthe areasQf~!!.ag~f!1e.ntP5.Q.Q.e~, h.t!!!!~. re~(_)urc.~ a~cGulture, the American busil}e~ses have tbe..Je§tsteff~~tive processes for global integratioii~--

G 'tliflEwopean_busin.e~,§.~s .. hay~_both human resource practicesand cultures that are the

~t sujt_~~ for 910_bal_~trQte~ - . -----. .-- .. --- '-- ... -

• The Japanese businesses offset their apparently non global formal organization structure with informal global management processes.

Implications for Managers

Nationality does matter in current approaches to global strategy. American companies need to make major efforts to catch up with their Japanese and European rivals in global stra1egy. In particular, they need to change their organization structures, management processes, human

resource practices, and culture to make it easier to implement global strategy.

Europeans tend to focus on their differences from each other and the uniqueness of their '--partlcUTa.1soUli(n~s. 'But the large" i1umber'6fSl9IllfiCantEUr5pearni~itf6nattveTfeCfs-suggests a ~high degree of homogeneity within the group of European businesses, higher even than that

within the group of Japanese businesses. f;1lropean_companies should. fO~L!.s more on global~n9 E_uropean commonality. The 9":e~ glObalization challenge for th.".t'{pical European MNC see~ to be to mo.y..~.f(9Il\ tl1e <i\'@lon of local autonomy toward global integration.

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Porters 5 Forces \

1 Introduction

The model of the Five Competitive Forces was developed by Michael E. Porter in his book "Competitive Strategy: Techniques for Analyzing Industries and Competitors" in 1980, Since that time it has become an important tool for analyzing an organizations industry structure in strategic processes.

Porter's model is based on the insight that a corporate strategy should meet the opportunities and threats in the organizations external environment. Especially, competitive strategy should base on and understanding of industry structures and the way they change.

_Pprter has identifi~~. five competifive forces that_sh.~pe every industry and every market. These forces determine the intensity of' compethion and h~nce--flie profitabilitY and attractiveness of an industry. The objective of corporate strategy should be to modify these competitive forces in a way that improves the position of the organization. Porters model supports analysis of the driving forces in an industry. Based on the information derived from the Five Forces Analysis, management can decide how to influence or to exploit particular characteristics of their industry.

2 The Five Competitive Forces

_.____ ___. ,_' __ . __ r'_ ---._ •• _.'_ ---,.----'- ____

The Five Competitive Forces are typically described as follows: ~

Threat of new entrants

/""' l'

o

Competitive rivalery within the ind ustry

Bargaining power of customers

Bargaining power of suppliers

Threat of substitutes

.. reluctance to accept new releases of products), • The buying industry has low barriers to entry.

GJ Bargainin!! Po,~~ o!".~,:,ppl~~ers

The term 'suppliers' comprises all sources for inputs that are needed in order to provide goods or services.

Supplier bargaining power is likely to be high when:

<:_ .... - .'. ",

{~;-, The market is dominated by a few large suppliers rather than a fragmented source of

..__./

supply,

I\~\ There are no substitutes for the particular input,

..

The suppliers customers are fragmented, so their bargaining power is low, The switching costs from one supplier to another are high,

There is the possibility of the supplier integrating forwards in order to obtain higher prices and margins. This threat is especially high when

~) The buying industry has a higher profitability than the supplying industry, (_?, Forward integration provides economies of scale for the supplier,

• The buying industry hinders the supplying industry in their development (e.g.

In such situations, the buying industry often faces a high pressure on margins from their suppliers. The relationship to powerful suppliers can potentially reduce strategic options for the organization.

0~;) Bargaining Power of Customers

~., -"'~-'~''<-.

Similarly, the bargaining power of customers determines how much customers can impose

pressure on margins and volumes.

Cystgll}ers bargaJ[1ingJ~p.we.r_is~~ to be high when

(~ They buy large volumes, there is -~~~~-c~~tr~ti~;-~t buyers,

• The supplying industry comprises a large number of small operators

The supplying industry operates with high fixed costs,

The product is undifferentiated and can be replaces by substitutes,

Switching to an alternative product is relatively simple and is not related to high costs,

•

G Customers have low margins and are price-sensitive, ~ Customers could produce the product themselves,

~ The productrs not of strategical importance for the customer, . \! I The customer knows about the production costs of the product U There is the possibility for the customer integrating backwards.

G~ T~atof~ew~~a_!lts_

The competition in an industry will be the higher, the easier it is for other companies to enter

...... -;-.....--. _ .. , ... , - ... -" '-~--'--~-'--'-'-'-"-----~-.- ~--~-- .. - ..•. :. --.- _ .....

thiS industry. Insuch a situation, new entrants could change major determinants of the market

~:-:-c--... - . ;::..- -- .. --- .• "-.'.-~-- -.-. L_ •• ,. -_- _'-- _. . __ , • _. .... •

L~~~.2!!!!!.e~'1!-(~:SL~~ket shares, prices. customer loyal~) at any time. There is always a latent pressure for reaction and adjustment for existing players in this industry.

The threat of n~ntri~~.YiUl depend on the extent to which there are b..arr~ers to erltry.:.'these are typically

...-.------_.

(;'" Economies of scale (minimum size requirements for profitable operations), '7

(' -High initial investments and fixed costs,

- Cost advantages of existing players due to experience curve effects of operation with fully depreciated assets,

C~)

•

Brand loyalty of customers

Protected intellectual property like patents, licenses etc, Scarcity of important resources, e.q, qualified expert staff

(-.) Access to raw materials is controlled by existing players,

I, :-.

( .~, Distribution channels are controlled by existing players,

-. )

'. Existing players have close customer relatlons.ie.q. from long-term service contracts,

",,-'

G High switching costs for customers

G Legislation and government action

& __ Threat of ~~~sti~te~_ ...

A threat from substitutes exists if there are altemative products ~ith lowe~ pri~s aC~r

• _ ._. ._ ,_, ... ~_, ,,~_·r

performance parar:ne~fQr. the same purpose. They could potentially attract a significant proportion of market volume and hence reduce the potential sales volume for existing players. ~biSGategory also relates to complementary products,

Similarly to the threat of new entrants, the treat of substitutes is ~lIDln_e.~Lby_factors like

~ •. Brand loyalty of customers, --.. .-- ----- - .. ~-- -~

f ej Close customer relationships,

y'

• Switching costs for customers,

"

• The relative price for performance of substitutes, , .• ' Current trends.

~ Competitive Rivalry between ExistingPla~Et~ .. _

-....,:nisJorce describes the int~nSitY'of ~~Qe@on betw~~_I1~}(i~ting ~~~y~~(companieS) in an _iD£ustry. High competitive pressure results in pressure on prices, margins, and hence, on profitability for every Single company in the industry.

Competition between existing players is likely to be high when

.~ many players of about the same size, '4

C.~) Players have similar strategies

o There is not much differentiation between players and their pro~~ hence, there is much price competition

G Low market growth rat~growth of a particular company is possible only at the expense of a competitor),

o Barriers for exit are high (e.g. expensive and highly specialized equipment).

3 Use of the Information form Five Forces Analysis

Five Forces Analysis can provide valuable information for three aspects of corporate planning:

J

&tatical Analy~is..;_

. ---"--.'.-"---"~' _" , .. - .,_

TheEiv~ Forces Analysis allows determining the attractiveness of an lndustry. It provides

iI1~ghts 0;; pfofrfaoility. Thus, 'it supports decisions about entry to or exit from ~nd industry or a market segment Moreover, the model can be used to compare the impact of competitive forces on the own organization with their impact on competitors. ~~itors max._~a.~_e ~differeflt optioDs to react to ch~09.-esJn_Q_ompetitive forces from !heir...d.ifferenLceSQ.l,lfces and

~ cornpetences. Thisn~ayi~ft~;nce the struct~~eonhe Whole il1d~stry. .---- ...

~yna~~c"tAnaIYSj$:._

In combination with a PEST-Analysis, which reveals drivers for change in an industry, Five Forces Analysis can reveal insights about the potential future attractiveness of the industry. Expected political, economical, socio-demographical and technological chanqes can influence "thefive competit"iv'e f9rce~.aod thus have impact on industry structures.

~~'~ __ "_ •. • •.• _.' __ ~ __ ._~._ . -_N. __ .. ... _ •• _" ..... -.~.--....,.~-.' _, - " .•. '_" - ". __ ~ •. _''' .. ..._

Useful tools to determine potential changes of competitive forces are scenarios.

Analysis of Options:

With the knowledge about intensity and power of competitive forces, organizations can develop options to influence them in a way that improves their own competitive position. The result could be a new strategiC direction, e.g. a new positioning, differentiation for competitive products of strategic partnerships (see section 4).

IhU~)!,ort.~r.~ '!l_~_de~.?!.£i':_e_~~p§!titiv~ fQ!ke~ allow$a_s_y~t~Q!a_tjy_ am:i strl!c~lJ~ed ... ~~aly~i~ of market structure and competitive situation. The model eCin be applied to particular rCOm-pani;s~~(k;tsegm-e~indUStriesoriegTons. 'Th~r:.~f()r~, it-is negessary to deter~ifle .:J.~--£!Jh~ m arket~?_b~ anaIY~~d in ;; _firs_! :t:£I~owing, all relev.~~t_f~rces· for this market are identified and analyzed. Hence, it is not necessary to analyze all elements of all

competitive forces with the same depth.

The Five Forces Mod~I.ls. based 011 microeconomics. It talie.s. jrl~()_account supply an~

• '- . - ~ _.' .. _ .. _ .0' • ._" __

demand, complementary products and §u~~t_itl!!es, the relationship between volume 01

~'~-"-~7- -,~ 'r-------- ._

pro_<iuctLon and cost of production, and market structures like monopoly, oligopoly or perfect

.,,_.-- ---_ ----- --_.------

com petition. ~

-~-.- ... , .... -........_ ..

4 Influencing the Power of Five Forces

After the analysis of current and potential future state of the five competitive forces, managers can search for options to influence these forces in their organization's interest. Although industry-specific business models will limit options, the own strategy can change the impact of competitive forces on the organization. The objective is to reduce the power of competitive forces.

The following figure provides some examples. They are of general nature. Hence, they have to be adjusted to each organization's specific situation. The options of an organization are

. @)RedUCing the,~~rgaining Rower of Customers

:- ;,' .....

determined not only by the external market environment, but also by its own internal resources, competences and objectives.

( ... :~) Reducing the Bargaining Power·of

-,....~-:<.. Suppliers

(~ Reducing the Treat of New Entrants C./ Increase minimum efficient scales of

· operations

G Create a marketing / brand image (loyalty as a barrier)

• Patents, protection of intellectual

property

• Alliances with linked products / services

t:) Tie up with suppliers

(5 Tie up with distributors

• Retaliation tactics

/?

4.5 ) Reducing the Competitive Rivalry

(~ (~ M

'-".'.-

•

Partnering

Supply chain management Supply chain training Increase dependency

Build knowledge of supplier costs and methods

Take over a supplier

Partnering

Supply chain management Increase loyalty

Increase incentives and value added Move purchase decision away from price Cut put powerful intermediaries (go

directly to customer)

•

between Existing Players Avoid price competition Differentiate your product Buyout competition

Reduce industry over-capacity Focus on different segments Communicate with competitors

•

•

4.4

Reducing the Threat of Substitutes

~~

•

5

Critique

Legal actions

Increase switching costs Alliances

Customer surveys to learn about their preferences

Enter substitute market and influence from within

Accentuate differences (real or perceived)

•

•

Porter's model of Five Competitive Forces has been subject of much critique. Its main weakness results from the historical context in which it was developed. In the early eighties, cyclical growth characterized the global economy. Thus, primary corporate objectives consisted of profitability and survival. A major prerequisite for achieving these objectives has been optimization of strategy in relation to the external environment. At that time, development in most industries has been fairly stable and predictable, compared with today's dynamics.

In general, the meaningfulness of this model is reduced by the following factors:

• In the economic sense, the model assumes a classic perfect market. The more an

industry is regulated, the less meaningful insights the model can deliver.

• The model is best applicable for analysis of simple market structures. A comprehensive description and analysis of all five forces gets very difficult in complex industries with multiple interrelations, product groups, by-products and segments. A too narrow focus on

particular segments of such industries, however, bears the risk of missing important elements.

• The model assumes relatively static market structures. This is hardly the case in today's dynamic markets. Technological breakthroughs and dynamic market entrants from startups or other industries may completely change business models, entry barriers and relationships along the supply chain within short times. The Five Forces model may have some use for later analysis of the new situation; but it will hardly provide much meaningful advice for preventive actions.

• The model is based on the idea of competition. It assumes that companies try' to achieve competitive advantages over other players in the markets as well as over suppliers or customers. With this focus, it dos not really take into consideration strategies like strategic alliances, electronic linking of information systems of all companies along a value chain, virtual enterprise-networks or others.

Over~II, Porters Five Forces Model has some major limitations in today's market environment. It is not able to take into account new business models and the dynamics of markets. The value of Porters model is more that it enables managers to think about the current situation of their industry in a structured, easy-to-understand way - as a starting point for further analysis.

CONFEDERATION OF

lOR

TOURISM· HOTEL· CATERING

MANAG ElvlENT

118-120 Great Titchfield Street, London, WI W 6SS

EXAMINATION

CTHCM Advanced Diploma in Tour Operations Management

Sul?Ject:

Strategic Tourism l\1anagement (ADTM 221)

June 2005

Time .Alknued:

3 hours

I nstructions:

You arc allowed TEN MINUTES to read through this examination paper before the commencement of the examination. Please read ths; questions carefully, paying particular attention to the marks allocated to each question or part of a question, and taking account of any special instructions or requirements laid down in any of the questions. Where you are asked to calculate using numbers you may use a calculator, but you must show your method in addition to giving the answer.

This Examination Paper contains TWO SECTIONS. Answer ALL questions in Section A.

Answer any THREE questions in Section B.

011 completion of yosr examination:

Make sure that your name, CTHCM membership number, and centre number are dearly marked on each answer sheet and any other material you hand in.

Marks .Allocation

Section A = 40% of the module grade Section B = 60% of the module grade

r©Copyright CTHCM 2005

C()Nf~'nfl.1f ,~'I'I()N O!

linn

ADTM 22.1: Strategic Tourism Management Examination June ZOOS

TOURISM· J lOTH.' CATERING

:'viANACF.MFNT

A10.

A14.

SECTION A

AlISJlJer all questions in this section. This section carries a total 0/ 40 marks.

Al.

The tourist industry has a number of distinctive features. Name two of them.

A2.

Name two disadvantages of organic development within an organisation.

(2 !llark.~

(2 mares)

A3.

According to Porter (1992), what two factors does a global competitive advantage

depend on? (2 marks)

A4.

The definition of markets can be based on ~sfiacto:::;Name two of them.

(2 mares)

AS.

'.X'hat are the two main purposes of a mission statement?

A6.

Name two ways the problem of intangibility in the travel industry may be overcome when trying to sell a product to a client.

A7.

Identify two types of organizational culture .. ~ 4~

In a pyramid used to show the structure of an organisation, what would

determine the pyramid's height and width? .::

A8.

A9.

What do the acronyms ARR and NPV stand for when considering the investment appraisal method for evaluating decisions? ~

In 1947 Kurt Lewin said that organisational change could be understood in terms of three consecutive processes. Name two of them.

All.

Give four of the characteristics of service products. ___./

A12.

Businesses may be viewed as systems with inputs and outputs. Give two examples of each.

A13.

A product can be said to have a life cycle. Name the stages in this life cycle.

What is a SWOT analysis?

(2 mark.r)
(2 marks)
(2 marks)
\
\ (2 marks)
(2 marks)
(2 mar.ks)
(4 marks)
(4 marks)
(4 marks)
(4 marks)
(4 marks) ©Copyright CTHCM 2005

2

C(lNF~J)ERATl0N 01'

AVTM 221: Strategic Tourism Management EYHminatiOIl • June 2005

MANAGEMENT

TOUR fSM' HOTEl.· CATERING

SECTION B

Answer dny J quest;ow in tbis section. F,lch iuli qlle.rtion carries a total if 20 marks.

Bl.

Two key theorists, Porter and Yip, have made a substantial contribution to the concept of global strategy.

a) Explain, using diagrams where possible, Porter's theory on global strategy.

b) Yip's 1992 study was based on a comprehensive globalisation of 'drivers'. Explain what is meant by this.

(10 marks)

B2.

(10 marks)

When discussing the strategic process, it is understood that there are three main levels to strategic decisi~ Explain each of these three levels, givingex;m;ples from the travel and tourism industry.

B3.

(20 marks)

a) Travel and tourism organisations should carry out an internal analysis for a

number of reasons. Explain what these are. (12 marks)

b) Explain whichpar.ts...~ are examined by internal

analysis p;~~edures. (8 marks)

B4.

The human element of the travel and tourism industry is very important and can

be one of the factors that leads to the success of an organisation within the industry.

a) What may be written in the contents of alli_I._!!llil~~

b) \X1hat is the purpose of the audit?

c) \'\lhat steps may management take as a result of the audit?

(5 marks)

(5 marks)

©Copyright CTHCM 2005

3

b) What are the major criticisms of Porter's framework?

(5 marks)

ADTh1221: Strategic Tourism Management Exarninatiou .Iune 200S

TOURISM· HOTEL· CATERING

Mt\NAcrMENT

B5.

Porter, (1980), identified five competitive forces which determine the degree of competition in an industry. Consequently, he developed the five forces framework.

a) Identify and explain these five forces.

(15 marks)

©Copyright CTHCM 2005

4

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ADHM 212 - Strategic Hospitality Ma!1~gement

Strategic Hospitality Management Week.2

The environment (I)

I. Layers of the business environment

The macro-environment

Industry (or sector) Strategic groups The organisation Markets Organisational field

II. The macro-environment

1. The PESTEL framework
a. Political
1) Government stability
2) Taxation policy
3) Foreign trade regulations
4) Social welfare policies
b. Economic factors
1) Business cycles
2) GNP trends
3) Interest rates
4) Money supply
5) Inflation
6) Unemployment
7) Disposable income
c. Sociocultural factors
1) Population demographics
2) Income distribution
3) Social mobility
4) Lifestyle changes
5) Attitudes to work and leisure
6) Consumerism
7) Levels of education
d. Technological
1) Govermnent spending on research Yi Lee (li(a)oxfordhousegroup.c.om)

Strategic Hospitality Management

Oxford House College

ADHM 212 - Strategic Hospitality Management ' .. ,,,·)1;"'-

2) Government and industry focus on teclmological effort

3) New discoveries/development

4) Speed of technology transfer

5) Rates of obsolescence

e. Environmental

1) Environmental protection laws

2) Waste disposal

3) Energy consumption

r Legal

1) Monopolies legislation

2) Employment law

3) Health and safety

4) Product safety 2. Structural drivers of change

• What are structural drivers of change?

They are forces likely to affect the structure of an industry, sector or market.

Vi Lee (li@oxfordhousegroup.com)



III. Industry and sectors

1. What is industry?

An industry is a group of firms producing the same principle product.

2. What is convergence?

Convergence is where previously separate industries begin to overlap in terms of activities, technologies, products and customers.

3. Three issues about competitive forces in an organisation's industry or

sector:

a. Sources of competition - use of the five forces framework

b. The dynamics of competition and hypercompetition

c. An industry or sector is made up of a significant number of 'players' who are different from each other in terms of their characteristics and the strategies that they are pursuing.

ADHM 2! 2 - Strategic Hospitality Management

Strategic Hospitality Management Week. 3

Organizational resources and competitive advantage

L Internal analysis and competitive advantage
1. Financial resources
a. Excellent cash flow
b. Strong balance sheet
c. Superior past performance
d. Strong links to financiers
2. Physical resources
a. State-of-the art plant or machinery
b. Superiority in a value-adding process or function
c. Superior locations or raw materials
d. Outstanding products and services
'" Human resources
-'.
a. Superior CEO characteristics
b. Experienced managers
c. Well-trained, motivated, loyal employees
d. High-performance structure or culture
4. Knowledge and learning
a. Superior technology development
b. Excellent innovation processes and organisational
entrepreneurship
c. Outstanding learning processes
5. General organisational
a. Excellent reputation or brand name
h. Patents
c. Exclusive contracts
d. Superior linkages with stakeholders
II. Six questions that determine the competitive value of resources and
capabilities 1. Does the resource or capability have value in the market?

2. Is the resource or capability unique?

3. Is there a readily available substitute for the resource or capability?

4. Do organisational systems exist that allow realization of potential?

Yi Lee (li@oxfordhousegroup.com)



" ,~::·.;~.;"::.~~t .. ~' ~': .. ~

ADHM 212 - Strategic Hospitality Management ",,"V'l ',' ';,.t',',~, "'"J,II'~'''J,~

5. Is the resource or capability difficult or costly to imitate?

III. Financial resources and financial analysis

1. Cash flow

2. Levels of debt

3. Credit rating

4. Access to low-interest capital

5. A reputation for creditworthiness

IV. Physical resources and value-adding activities

1. Physical resources are physical assets and processes.

2. Value-adding activities are a source of strength or competitive advantage.

V. Human based resources

1. Strategic leadership

2. Creating organisational vision

3. Establishing core values

4. Developing strategies and structure

5. Fostering organisational learning

VI. Organisational governance

1. Establishment of organisational governance

Individual shareholders Board of directors
• Widely dispersed • Outsiders (external
• Very little influence stakeholders, such as
Large-block shareholders financial experts,
• Concentrated ownership directors of other
• Significant influence companies, etc)
• Insiders (internal
stakeholders, such as
the CEO and other
executives)
.!.
Top management
• Chief executive officer
• Top-management team
• Other high-ranking executives

.!. .!. ~ .!.
l Manager J I Manager I Manager I I Manager I Manager I Yi Lee (Ii@oxfordhousegrollp,com)



ADHM 212 - Strategic Hospitality Management


Strategic direction

1. Introduction

II. Influences on strategic direction

1. Strategic direction is established and communicated through tools such as visions, missions, business definitions, and values.

2. Regardless of the medium of communication, high-performing companies tend to create an organisational identity that is understood by both internal and external stakeholders.

3. A well-established organisational identity can provide guidance to managers at all levels as they make strategic decisions.

4. Communicating strategic direction to external stakeholders can increase their understanding of the motives of the organisation, and it may also facilitate the creation of interorganisational relationships, since potential partners have a greater ability to judge the existence of common goals.

----..j Internal stakeholders --. Strategic direction
H Board environment ~
• Vision
• Mission
-+I History and Inertia 1--. Business definition
• H External stakeholders ~
• Organisational
values

Organisational actions
• Competitive strategies
• Implementation and
control
• Management of internal
stakeholders
• Management of external
stakeholders

Organisational outcomes
• Market success and failures
• Financial performance and growth
• Behavior of internal stakeholders
• Behavior of external stakeholders
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AOHM 212 - Strategic Hospitality Management

III. Mission statements

1, An organisation's mission statement provides an important vehicle for

communicating ideals and a sense of direction and purpose to internal and external stakeholders.

2. It can inspire employees and managers.

3. It can al so help guide organisational managers in resource-allocation decisions.

IV. Business definition

1. The definition of business

When defining a business, the question 'What is our business?' should be answered from three perspectives:

(1) Who is being satisfied?

(2) What is being satisfied?

(3) How are customer needs satisfied?

2. Defining a business is helpful in communicating to internal and external stakeholders what the organisation is all about.

3. The business definition should not constrain strategic choice.

V. Organisational vision

An organisational vision is a definite sense of what it wants to be in the future

VI. Organisational values

1. Integrity
2. Leadership
" People focus
".
4. Customer satisfaction
5. Continuous improvement
6. Community involvement
7. Commitment to stakeholders VII. Social responsibility

1. Economic responsibilities

2. A legal responsibility to achieve economic goals within the confines of written law

3. Moral obligations to abide by unwritten codes, norms and values implicitly derived from society

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4. Discretionary responsibilities that are volitional or philanthropic in

nature

VIII. Enterprise strategy

Enterprise strategy determines the purpose of the organisation: What do we stand for?

IX. Ethical frames of reference

1. Economic theory
'1 Legal theory
k.
3. Religion
4. Utilitarian theory
5. Universalist theory Yi Lee (Ii@,oxfordhousegroup,com)



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AOHM 212- Strategic Hospitality Management


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Strategy formulation at the business-unit level

1. Introduction

1. Business-level strategy defines an organisation's approach to competing in its chosen markets. And this type of strategy is referred to as competitive strategy.

2. The major strategic management responsibilities of business-level

managers:

a. Direction setting

b. Analysis of business situation

c. Selection of strategy

d. Management of resources

II. Generic business strategies

Narrow Market $cope

Broad Market.

Seo.-

Uniqueness comptnency

Low Cost competency

1. Cost leadership

Companies pursuing cost leadership set out to become the lowest-cost providers of a good or service.

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c. Technological advances (Y(}:.2/v'. _ ~ I. ir'Lv ,,} - ( cwe.rJ

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d. Outsourcing ~I"( ! C Cl'+~

e. Learning effects 2. Differentiation

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In differentiation strategies, the emphasis is on creating value through

uniqueness, as opposed to lowest cost.

a. Resource-based differentiation

b. Risks Associated with a differentiation strategy

3. Best value

The key to a best-value strategy is simple supply-and-demand economies.

~.1

a. Quality and best value

b. Risks associated with a best-value strategy

4. Focus

The key to a focus strategy is providing a product or service that caters to a particular segment in the market.

III. Competitive dynamics

1. Strategies that reflect competitive dynamics

a. Aggressive competition

b. First-mover advantage

c. Collaboration

d. Threat of retaliation

e. Government intervention f Barriers to imitation

g. Strategic flexibility

h. Avoidance

2. Resources, industry structure, and finn actions

IV. Tracking competitor movement

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nd restructuring

I. Introduction

1. At the corporate level, primary strategy-formulation responsibilities include setting the direction of the entire organisation, formulation of a corporate strategy, selection of businesses in which to compete, selection of tactics for diversification and growth, and management of corporate resources and capabilities.

2. These responsibilities and the key issues associated with each responsibility are:

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a. tree Ion se mg ~ I I'

b. Development of corporate-level strategy

c. Selection of businesses an~orttWiQsmanagement

d. Selection of tactics for diversification and growth

e. Management of resources

3. The three basic corporate-level strategies are:

a. Concentration strategies

b. Vertical integration

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Concentration strategies

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1. Concentration means entrepreneurial venture. ~ H: It", =-) PI'" ~,M...~ q \C-<¥'l: r~+.) '-<\'\~

2. Advantages of a concentration strategy:

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a. Allows an organization to master one business.

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opportunity to develop a sustainable competitive

advantage. \

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c. Lack of ambiguity concerning strategic direction.

d. Often found to be a profitable strategy, depending on the industry.

3. Disadvantages of a concentration strategy

a. Dependence on one area is problematic ifthe industry is unstable.

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d. lSi.a!~n~ ch3!!1W in the industry can be very hard to

deal with.

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III. Vertical integration strategies ,

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a. If the future is highly uncertain, it may be too costly or impossible to identify all of the possible situations that may occur, and to incorporate these possibilities into the contract.

•. If there is only one or a small number of suppliers or

distributions of a good or service and these companies +''1 ~i,I'''' (veL

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party can take advantage of the producer after the asset

is in place.

IV. Diversification strategies

1. Related diversification: implies organizational involvement in activities that are related to the dominant or core business of the

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technologies.

2. Unrelated diversification: does not depend on any pattern of relatedness.

3. The common reasons for diversification are:

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b. Stabilization or improvement in earnings.

c. Improvement in growth.

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1. Increase in market power.

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Strategy implementation through interorganizational relationships and management of 'J functional resources

o __ o_oo_o _

1. Introduction

1. What is cooperative interfirm relationships?

It involves two firms working together for mutual strategic value and companies may also develop competitive advantages through superior acquisition, development, and management of internal resources and

...

capabilities.

2. After establishing an appropriate strategic direction and strategies at the corporate and business levels, companies then need to develop specific tactics for executing those strategies.

II. Interorganizational relationships and stakeholder management in the tourism industry

1. The tourism industry can be divided into three types of organizational

sectors:

a. the direct providers of travel services

b. support services or suppliers to the industry

c. tourism development organizations, agencies, and institutions that affect provider firms, support services organizations, and the traveller.

2. Potential advantages of interorganizational relationships

a. Gain access to a particular resources
b. Speed to market
c. Enter a foreign market
d. Economies of scale
e. Risk and cost sharing
f. Service development learning
g. Strategic flexibility
h. Collective political clout
l. Neutralizing or blocking competitors 3. Disadvantages of interorganizational relationships:

Yi Lee (Iiliiloxlordhousegrollp.com)




a. One organization has only partial control over the

activity and enjoys only a percentage of the growth and profitability that are sometimes created

."

b. Joint decision making can be slow and result in too many compromises.

4. Selection of stakeholders for partnerships

a. Formal power

b. Economic power

c. Political power

d. Influence on environmental uncertainty facing the finn

e. Possession of knowledge or resources not found in film 5. Effective stakeholder management

a. Customers

b. Suppliers

c. Competitors

d. Government agencies and administrators

e. Local communities

f. Activist groups

g. The media

h. Unions

1. Financial intermediaries

6. Managing partnerships

a. Through careful systematic study, identify an alliance partner that can provide the capabilities that are needed.

b. Clearly define the roles of each partner and ensure that every joint project is of value to both.

c. Develop a strategic plan for the venture that outlines specific objectives for each partner.

d. Keep top managers involved so that middle managers will stay committed.

e. Meet often, informally, at all managerial levels.

f Appoint someone to monitor all aspects of the partnership, and use an outside mediator when disputes

arise.

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ADHM 2 \2 - Strategic Hospitality Management

g. Maintain enough independence to develop your own

area of expertise.

h. Anticipate and plan for cultural differences.

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Strategic Hospitality Management Week. 8

Strategy implern~~tation through~rg~.ni~ati~al_ des~E___ll~c! control_ _ ]

I. Introduction

The organisation that is appropriately organized a.nd has activities, budgets, and programs directed toward the desired objectives will likely succeed in the implementation of strategy.

II. Organisational structures

1. One of the most important activities associated with strategy implementation is designing a strategy-supportive organisation.

2. Designing an organisation involves defining organisational roles, determining reporting relationships, establishing how to group individuals, and creating ways to coordinate employee efforts.

3. Dimensions of organisational structure

a. Hierarchy of authority
b. Degree of centralization
c. Complexity
d. Specialisation
e. F ormalisation
f Professionalism 4. When making decisions about how to structure an organisation, it is important to remember the following:

a. Structure is not an end; it is a means to an end. The 'end' is successful organisational performance.

b. There is no one best structure. A change in organisation strategy may require a corresponding change in structure to avoid administrative inefficiencies, but the organisation's size, strategies, external environment, stakeholder relationships, and management style all influence the appropriateness of a given structure. all structures embody trade-offs.

c. Once in place, the new structure becomes a characteristic ofthe organisation that will serve as a constraint on future strategic choices.



ADHM 212- Strategic Hospitality Management

d. Administrative inefficiencies, poor service to

customers, communication problems, or employee frustrations may indicate a strategy-structure mismatch. 5. Business-level structures

a. Functional structures

b. Geographic and customer-based structures

c. Project matrix structures

6. Corporate-level structures

a. Multidivisional structures

b. Strategic-business-unit structures

c. Corporate-level matrix structures III Organisational control

1. Strategic Vs. financial controls

2. Feedback-control systems

a. Determination of broad goals

b. Identification of resource areas or activities

c. Creation of measurable operating goals

d. Facilitation of operating goals 3. Other types of controls

a. Bureaucratic controls

b. Clan control

c. Process controls





C '-- Strategies for entrepreneurship and innovation

L II.

Introduction Entrepreneurial start-ups L The entrepreneur

The entrepreneurs are opportunists, in that they recognize and take advantage of opportunities and are also resourceful, creative, visionary, hardworking, and optimistic. And they are independent thinkers who are willing to take risks and innovate and also tend to be excellent leaders.

2. Entrepreneurial tasks
a. Opportunity recognition or creation
b. Creation of a business plan
1) Executive summary
2) Business description
3) Environmental analysis
4) Resource analysis
5) Functional plans
6) Financial projections
7) Implementation schedule
8) End-game strategy
9) Risk analysis
c. Securing start-up capital
1) Commercial banks
2) Personal contacts 3) Venture capitalists
4) Invesbnentgroups
5) Business angels
6) Initial public offerings
d. Managing the venture
1) Financial management
2) Marketing
3) Services development
4) Resources acquisition
5) Process development Yi Lee (Ii@oxfordhousegroup.com)




6) Management and staffing

7) Legal requirements

3. Franchising

4. Causes of failure

Yi Lee (li(a)oxlordhousegroup.com)



a. Management skills

b. Lack of adequate capitalization

c. Service delivery problems

d. External market conditions

III. Corporate entrepreneurship and innovation 1. Factors encouraging innovation

a. vision and culture that support innovation, personal growth and risk taking.

b. top management support and organizational

champions

c. teamwork and collaboration

d. decentralized approval process

e. valuing the ideas of every employee f_ excellent communications

g. innovation grants and time off to pursue projects

h. large rewards for successful entrepreneurs 1. focus on learning

2. Factors discouraging innovation

a. rigid bureaucracy and conservatism in decision

making

b. absence of management support or champions

c. authoritarian leadership and traditional hierarchy

d. difficult approval process

e. attention given to the ideas of only certain people

f. closed-door offices

g. inadequate resources devoted to entrepreneurial activities

h. harsh penalties for failure

1. exclusive emphasis on measurable outcomes

The Center for Hospitality Research

-_ ~----.--~~-. ..---------

AT CORNELL UNIVERSITY

'Six Continents De-merging for a better future?

Introduction

How would you choos~to spe~ billiQ9p, It may sound like an easy question, but it is one that the UK conglomerate Six Continents has been struggling to answer. The' ability to make a decision has been a catalyst for change at Six Continents. Today, Six Continents is on the precipice 0 a major ttansformation. The failure to spend the $3 billion gained from the sale of their

Bass Brewing business ~ "area-~rn a portion of this

capital to their sha eholders. Additionally, Six Continents will begin the process

of de-merging their tel and soft drink bus' fi their restaurant and pub

business.

Chairman Ian Prosser said, "over the past 5 years we have narrowed ou;,

business focus and have paid significant sums to our shareholders. The _j

progression of this strate' atio hotels and soft rinks

usinesses from the reta' £700m ($1.1

bi ion). Our hotel and retail businesses are.both very strong businesses with great pote1'l.'t'fru."1

In order to best understand Six Continents' corporate strategy, it is essential to first understand the evolution of this conglomerate.

Written by Adam Baru, Yinian Hou, Vikas Patel, Bill Spinnenweber, Anjali Talera and Kem Wilson under the direction of Jeffrey S. Harrison at the School of Hotel Administration, Cornell University. Copyright c Jeffrey S. Harrison.

This case study was written for the purposes of classroom discussion. It is not to be duplicated or cited in any form without the copyright holder's express permission. For permission to reproduce or cite this case, contact Jeffrey S. Harrison Qsh36@comeILedu). Permission to use in the classroom will be granted free of charge.

Do Not Duplicate

Six Continents: De-merging for a better future? 2

History

Six Continents PI,C, formerly Bass PLC...was_fQ1lndcdiI\_1772'J2Y vy'i11iam Ba~.cs.tabl.i.shOO-a~-in-theEnglisl~l of BurtQ!1-on-Trent By the early 1800's, the size of the brewery doubled as volume increased to 2,000 barrels per year. By the time Michael Thomas Bass, William Bass' grandson, took over in 1827, the brewery was producing 10,000 barrels per year.2

~837, Bass formed a parh1ership with ohn Grctton apd Richard Ratcliffe tolJeCOme nown as Bass, Ratcliffe & Gretton. Business growth coilliiiUed with an enormous boost from the expansion of railroads. Railways allowed BasS-to transport its barrels across England and popularized Bass ales amongst the masses. By 1860, Bass had expanded to three breweries as output neared 420,000 barrels.s

The year 1876 was a landmark year for Bass as they were recognized as the larg~England. Even more notably, it was also this year that Bas?"red tnangle trademark became the first trademark to be registered in England. In 1888, the company was incorporated as Bass, Ratcliffe & Gretton Ltd. Output had risen to nearly one million barrels a year and more than 2,500 men and boys were employed at the breweries.?

Beer consumption took a big hit during the WWI era as the radio, cinema, and other forms of entertainment lured customers away from pubs. It was also during this time that the government dealt the brewing industry a blow when it increased taxes. Furthermore, during the early 1900's, it was commonplace for English breweries to run their own pubs as outlets to retail their beer. Therefore, many breweries invested large amounts of capital to improve their pubs. Although Bass owned a number of pubs, they neglected to improve their pubs

l'J/'">n / and instead relied on the popularity of their brand and the acquisitions of ~trJ, breweries such as Worthington & Company Ltd to spur further expansion.

tx<y£1Aj Despite this strategy, Bass' failure to modernize proved to be costly.

Competitors such as Mitchells & Butler not only improved their pubs, but also coerced their pub managers to sell their firm's beer. Such tactics undercut Bass' market position. By the 1930' s, these issues along with a declining economy forced Bass to layoff workers, close factories, and decrease production.?

J3y the late 1940's, recovery was in fnll stride.and.Bass-continued its

- -

~nsion through acquisitions. Between the late 1940's and late 1950's, Bass

acquired holdings in William Hancock & Company and Wenlock Brewing Company while seeing its net profits increase by over 120%. Nevertheless, problems still remained as Bass continued to be obstinate towards change.


Notably. Bass refused to update its pricing system, ignored the public's desire for milder beers, and failed to integrate its operations.s

Under the leadership of James Grigg, Bass finally recognized the need for modernization. During the 1960' S, Bass made two strategic and ~1;lificant mergers. In 1 ~ Bass merged with Mitchells & Butler becoming Bass, Mi4if:hcUs ~ortantly, both companies were able to successfully integrate and modermze tI'leTr companies' operations. Additionally, both companies recognized the need to diversify and in 1967 Bass, Mitchells & Butleriherged with Charrington Umted Breweries to become Bass harrington Ltd. Although Charrington nited Breweries controlled a number of regional beer brands, they lacked a premium beer such as Bass. Likewise, Bass, Mitchells & Butler lacked the spirit and soft drinks business Charrington United Breweries excelled in. Therefore, the merger proved extremely beneficial especially through its improvement of the two companies' national distribution networks.?

The ear 1970 marked Bass' entrance into the world of hospitali as it purchased about 01iotels from the oil giant Esso} These hotel holdings became k~w; as _gest H~ls. Renamed Bass PLC in the early 1980' s, the company's leisure subsidiaries including its hotel division "contributed substantially to Bass' growth and profits."! Recently promoted Chairman and CEO Ian Prosser saw great growth potential in the hotel industry despite its being minor compared to the brewing business. Therefore, it came as no surprise in 1987

when Bass' hotel division began to make its presence felt. Following a failed V attempt to buy the Hilton International hotel chain, Bass won the exclusive rights

to the Holiday Inn name outside the US, Canada, and Mexico for $475 million on September 15, 1987.5

The year 1989 saw the advent of legislation upon the brewing industry through Beer Orders. Through Beer Orders legislation, the government sought to limit the vertical integration within the brewing industry by limiting the number of pubs a brewer could own." Bassi response was to continue its focus on and development of its international hotel business, Therefore, on August 25,

8989, Bass made a monumental decision by purchasing Holiday Corporation's flagship Holiday Inn chain for $2.23 billion. Included in this purchase were 1,410 ranchised Holiday Inns and 177 company-owned/managed Holiday Inns.? The remainder of Holiday Corporation including Embassy Suites, Hampton Inns,

Homewood Suites, and Harrah's Casinos of Nevada and New Jersey was spun off to shareholders as Promus Companies Inc.2,7

Founded by Kemmons Wilson in 1952, Holiday Inns quickly grew into the largest lodging corporation in the world. A 1951 road trip to Washington D.C. with his wife and five children had convinced Wilson of a great need for a brand

Do Not Duplicate


name hotel! motel that families could trust anywhere they traveled. Importantly, Wilson was aware of the soon-to-be construction on a $76-billion federal interstate highway system and planned to take full advantage by building Holiday Inns alongside it. Indeed, his foresight paid off as the interstate highway system popularized travel from coast to coast. Later, in his book The Fifties, Pulitzer-prize winning author David Halberstam would call this trip to Washington D.C., lithe vacation that changed the face of the American road.r" With the purchase of the Holiday Inn chain, Bass' strive to focus on and develop their hospitality division came full circle. The importance of such a decision is still felt as the hospitality industry defines the company today.

When Bass purchased Holiday Inn, the chain was in the midst of a decline due to aged properties and poor service. Most notably, the all important

business traveler was dissatisfied and unwilling to pay the rates charged at most Holiday Inns. Additionally, the hotel industry was seeing great growth in

budget hotel chains such as Hampton Inn. To counter these issues, Bass began a $1 billion renovation project for the Holiday Inn brand, initiated an expansion of its high-end Crowne Plaza hotels, and launched its own budget hotel chain

called Holiday Inn Express. Additionally, to improve the reservation capabilities of their hotels, Bass invested $60 million in technology upgrades in 1992.2~ ___

Despite these investments, Bass' hotel division saw sharp declines in 1991 and 1992, which lowered the overall companies operating results. A lawsuit filed in 1992 against Promus revealed Bass' discontent with their acquisition as many hotels failed to meet zoning laws. The lawsuit was settled in 1995 for $49 million." It was at this time that Bass finally began to see some turnaround in its hotel division. The timing could not have been better as Bass was beginning to experience difficulties in its brewing business.

Between 1994 and 1995, beer sales for Bass declined about 6%.

Nevertheless, Bass continued to expand this business through a 34% acquisition of Prague Breweries in 1993, a strategic alignment with Grolsch to form Grolsch UK in 1994, and the formation of Bass Ginsber Beer Company in China in 1995.10 However, it was Bass' blocked attempt to acquire 50% of Carlsberg-Tetley in 1996, which defined Bass' brewing business in the 1990' s. In fact, Bass was poised to become the number one brewing company in England with a 37% market share before the deal was blocked for antitrust reasons.I

Meanwhile, significant changes were also taking place within Bass' soft drinks division. In 1995, Bass added Robinsons soft drinks to its Britvic brand by acquiring it from Reckitt & Coleman for 103 million pounds. Under a complicated structure, Robinsons became a subsidiary of Britannia Soft Drinks Ltd., which was 50% owned by Bass. Furthermore, Britannia held a 90% stake in

Do Not Duplicate


Britvic with the other 10% held by Pepsico Holdings Ltd. According to Chairman and CEO Ian Prosser, "there were substantial synergies between Britvic and Robinson brands."ll

Bass' retail division also experienced significant changes during the

1990' s. Bass' retail division consisting of bars, pubs, and restaurants grew with the branding of 0' Neills pubs in 1994, the acquisition of the Harvester restaurant chain from Forte in 1995, and the acquisition of Browns Restaurants in 1998.6 Additionally, from 1997 to 1998 Bass sold off various retail businesses including about 300 small pubs, their Coral chain of gambling houses, their Gala bingo chain, and their subsidiaries that focused on manufacturing electronic entertainment and gaming machines. In the process, Bass was able to raise 1.3 billion pounds.s

Having raised such a significant amount of cash, Bass was now poised to make a much anticipated major acquisition. In March of 1998, Bass outbid Marriott International, Patriot American Hospitality, and Ladbroke Group to acquire the luxury Inter-Continental hotel chain from Japan's Saison Group for $2.9 billion. Included in the acquisition were Inter-Continental's 211 hotels in 77 different countries.P Thomas Oliver, then Chairman and CEO of Bass' hotel division (Holiday Hospitality), summed up the acquisition well when he said that Inter-Continental provides an II excellent geographic complement to Holiday Hospitality's current structure and gives us a broader portfolio of brands spanning the mid-scale and upscale markets around the globe. The purchase .. .is consistent with our strategy of growing Bass' business in markets which offer long-term growth opportunities."13 Around the same time, Bass announced its plans to enter the fast-growing extended-stay hotel market with the development of its Staybridge Suites.l+ This development would allow Bass to both enter into a new segment of the hotel market and compete with the likes of Marriott's Residence Inns and Choice Hotels' Mainstay Suites. Even further expansion occurred in early 2000 when Bass acquired 59 hotels from SPHC in Australia for 128 million pounds. This acquisition gave Bass a greater presence in the AsiaPacific region.?

On June 14, 2000, Bass severed its 223 year-old tie to the brewing industry when it entered into an agreement to sell its beer brewing division to Interbrew,

a Belgian brewing company, for $3 billion. According to then Chairman and CEO Ian Prosser, the beer industry "was consolidating rapidly and only the very biggest players were likely to remain successful."15 Prosser also stated that Bass would use the proceeds to expand its global hotel business.ls Analysts praised the sale stating it was the "right strategic move" at a "phenomenal price".15 Along with Bass' sale came the cessation of their name and on June 28, 2001 Bass officially became known as Six Continents PLC. The name Six Continents

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alludes to the number of different continents in which the company has a hotel. When asked why they did not rename the company "Seven Continents" r present-day CEO Tim Clarke replied, II as we have no intention of opening an outlet in Antarctica, we decided on six."?"

Today Six Continents PLC s operations include three divisions: hotel,

retail, and Britvic (soft drinks). Six Continents PLC's strategy is to "create long- [

term sustainable growth in shareholder value through developing and

Aengthening the leading brands within its core businesses of high-growth International hotels and high-return restaurants and pubs. Six Continents is

e. ploying its stro. ng management, global infrastructure and substantial financial esources to drive superior returns from the expansion of its proven brands."18 SiX Continents Hotels owns, operates, or franchises over 3,200 hotels in close to '-' 100 countries under the brands Holiday IlU1, Holiday IlU1 Express, Crowne Plaza,

Inter-Continental, and Staybridge Suites.l? Six Continents Hotels aspires to both leverage its competitive position as a global hotel brand owner and drive high returns from brand ownership. They plan to accomplish this by:

• "using their worldwide experience further to develop strongly

differentiated hotel brand offers that appeal to the high value market segments in which Hotels can build a sustainable competitive advantage;

• leveraging the synergies of the global system scale in revenue generation and operations to build RevP AR and GOP premiums for its brands in

their target markets and to operate a highly efficient support infrastructure;

• using this superior performance to create an unparalleled network of upscale hotels and domestic depth for mid-scale hotels in major markets;

and

• redeploying capital from owned and leased assets once superior performance is achieved; and continuing to develop their people to ensu e consistently high service delivery."!

Six Continents Retail owns and manages over 2,000 bars, pubs, and restaurants in the UK and Germany. Its strategy is to strengthen its market leadership, by driving both growth and returns through:

,

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• "creating and sustaining consumer brands and formats with high levels of amenity, service and value;

• developing prime sites into these brands and formats; and

• maximizing the benefits from corporate, brand and unit scale."!

Britvic is a manufacturer of soft drinks and still maintains its complicated structure in which 90% is owned by Britannia Soft Drinks of which Six Continents has a 50% majority interest in.19 Britvic's vision is to become the UK's leading soft drinks company.s' Notably, Six Continents has been looking to sell its stake in Britvic. In fact, a sale almost took place with Pepsi in 2000 but controlling shareholders of Britvic could not reach an agreement."

With the horde of cash gained from their sale to Interbrew, Six Continents began to aggressively seek a large hotel purchase. In fact, Six Continents has

recently been linked to rOl1S large hotel acquisitions. For instance, in

August of 2001 Six ontinents came very close to sealing a deal to buy

Wyndham Intern tional for 3 billie' pounds.F' Nevertheless, Six Continents has been unable to ake any large hotel quisitions, but have instead only managed to acquire the 7 hotel Posthouse chai and the legendary Regent Hong Kong.12 This unfruitfutgressive hotel acqui ition strategy has angered major shareholders and ed to Ian Prosser's nnouncement that he will not seek

n in 2003.9

Despite this unease, Six Continents has continued to focus on the future of _ the company. On October 1, 2002, Six Continents announced that it would be de(merging Six Continents Hotels and Britvic from Six Continents Retail. As part of : the split, Six Continents plans on returning $1.1 billion in dividends to

shareholders. Under this proposal, Tim Clarke, now CEO of Six Continents PLC, will become head of Six Continents Retail and Richard North, now Finance Director and Chairman of Britvic, will head up Six Continents Hotels and Britvic. The process is expected to become final in April 2003 and shareholders are expected to receive shares in both entities.P The separation will have the followin~

• "Two separate UK listed companies offering discrete investment

propositions and with clear market valuations.

• Greater flexibility for Hotels and Retail to manage their own resources and pursue strategies appropriate to their markets, which have different characteristics and opportunities.

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x

Six Continents; De-merging for a better future? 8

• Management rewards more directly aligned with business and stock market performances, helping to attract retain and motivate the best people.

• Sharpened management focus, helping the two businesses maximize their performance and make full use of their available resources.

•

Improved ability for Hotels and Retail to develop their strong positions through participation in industry restructuring and consolidation, if appropriate.

Transparent capital structure and an efficient balance sheet for each business."!

j

•

Commenting on this announcement, Tim Clarke said, "I look forward to the benefits that additional management focus and appropriate balance sheets that separating the two businesses will provide. Our Retail business has a strong track record. With proven retail brands and a strong pipeline, I am very confident about our prospects. II Additionally, Richard North remarked, "We have a great Hotels business, with the enviable combination of first class people

i/ and a strong global brand portfolio. As a separate company we will build on the

( Hotels business's leading positions to increase market penetration, operational

""--efficiencies and return on capital employed."!

Environmental Analysis: The Broad Environment Social Trends and Influences

. The media has had a powerful influence on people's behavior. Television,

~newspaper, and Internet images of the September 11 terrorist attacks along with

(new reports of terrorist events have caused society to lose confidence and changed peoples' traveling habits. Following are some of the major affects that these global events have had on travel: • Consumers have had a tendency to travel to closer destinations and

domestic travel. Compared with the first half of 2001, U,S. in-region trips have increased 8% in the first half of 2002.22

• Consumers have shown a tendency for "safer" transportation methods, and air travel has significantly decreased. Compared to the first half of

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2001, air travel has declined over 10% in 2002. Meanwhile, during the same time period, auto travel has increased more than 3%.23

• Consumers are staying away from home for shorter durations of time. In 2001, most of the travel in the U.S. was made up short trips. More than half (about 55%) of all travel was for two nights or less.24

Economic Trends and Influences

.. '"

The U .. economicrecession that began in late 2000 has had a tremendous

affect on the h spitalityindustry. The Travel Industry Association of America

(TIA) expected "after falling nearly 6% in 2001, domestic and international

travel spending would continue to be soft in 2002. Further, it is not expected to recover to the record 2000 levels until sometime in 2004,25 The following industry indicators further depict the influence that the recession has had on the industry:

• Industry occupancy was 63.3 % in the second quarter of 2002, which is

down from the 64.5% occupancy rate in the second quarter of 2002.

• The average daily rate was $83.80 in the second quarter of 2002, which is 3.1 % less than the corresponding 2001 figure.

• Revenue per available room (REVP AR), which is a key indicator of industry productivity, was $53.06 in the second quarter of 2002, which is a 4.8% decrease from second quarter of 2001.

• Industry room supply increased 1.7% in the second quarter of 2002.

However, this is significantly down from the 2.6% supply growth that took place in the second quarter of 2001. 26

Political Trends and Influences

Politics has had both a positive and negative impact on the hospitality industry. The SQSjtive impact bas resulted from yarious new pQ!icies and programs that the F . lemented to sti ulate the

11 ill ustry. For example, the Travel Industry Association of America

~ U.S. Department of Transportation's National Scenic Byways program have announced a joint marketing partnership called "See America's Byways". This program began in the fall of 2002. "This new partnership is yet another example of how public and private industry can work together to leverage our resources and to use the See America brand to promote the entire

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USA," remarked William S. Norman, president and CEO of TIA. He further stated that "Through See America's Byways, we will be promoting the allAmerican road trip on the most scenic, historically and culturally significant roads in our nation."27

At the same time, the uncer C~tionship between the U'.S, and the

Middle East has significantly' enci the domestic and international tourists'

decision. Further, a possible w r wi)11 Iraq could have an even more detrimental impact on the industry. The eco mists at the Hospitality Research Group and Torto Wheaton Research have pointed out that, "If war occurs, the RevPAR growth in this segment will be significantly reduced in the case of a 'Short War' scenario, while it will turn negative in the case of a 'Long War' scenario. The 'Short War' scenario assumes that the war will last for only one quarter while the 'Long War' scenario accounts for a protracted engagement with the Iraqi forces that lasts for four quarters." 28

Technological Trends and Influences

Cutting-edge technology hasgreatlyinfluenced traveler behavior and the industry's way of doing bus' ,e~s. Prom.the consumer's point of view, technology has created a h ightenedexpectation. In addition, the increased use

./

of all types of electronic de . eans that the hospitality industry must be able

to accommodate the needs of its traveling customers. Some of the specific effects of technology on the industry are:

• A higher demand for customized holidays: Consumers believe that

vacations should be suited to their specific needs. Although this requires more effort for hospitality companies, advanced information

technology does make greater custornization possible. 29

• An increase in online booking: Out of all consumers that used the Internet to make travel arrangements in 2002:

o 77 % bought airline tickets for a trip taken in the past year (30

million adults)

o 57% booked overnight lodging accommodations (22 million adults)

o 37% percent made rental car reservations

o 25% percent purchased tickets to a cultural event.

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-------_ .. -

In addition to consumers, the industry itself has been influenced by hnological advances. New Customer Relations Management and web

I customer tracking software can provide hotel companies with the opportunity to , learn more about their customers and provide customized service at the

I individual level. In addition, the integration of computer systems within a

~ property and between a property, the chain, and Global Distribution Systems can

~~ reduce costs while improving communication, efficiency, and effectiveness. The

- ~ hotel industry has made an effort to reap the benefits of technology, as the U.S. hotel industry alone spent close to $8 billion on information technology between

q:es> 1995 and 1999. However, while technology can provide distinct advantages,

~~

~


A smaller proportion of online travel bookers purchased travel packages, sporting events tickets, amusement park tickets, and museum tickets online for a trip taken within the past year.

• A need to stay "wired" while traveling: 2002 trends indicate that business travelers have a high propensity to staying wired through portable electronics. Specifically:

o 69% brought a cellular phone,

o 25% brought a laptop computer,

o 16% brought a handheld personal digital assistant, and

o 13% brought a pager

on at least one business trip. Leisure travelers were less likely to stay connected when traveling, however, the numbers show that a significant proportion does travel with portable communication devices:

o 61°.1) brought a cellular phone,

o 9% brought a laptop computer,

o 9% brought a pager, and

o 5 % brought a handheld personal digital assistant.

In addition, a significant proportion of travelers used the Internet or e-mail when away from home. This includes 42% of business travelers and 22% of leisure travelers.s"

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these expenditures have not provided the same kind of return that has been realized in other industries.s!

Environmental Analysis: The Industry Industry Overview

The hospitality industry is comprised of various levels of hotels that share a common objective of providing the traveling public with adequate shelter when they are away from horne. Beyond this basic definition, the industry has evolved to providing a consistent, unique, and pleasant experience for guests. Large chains playa significant role in the industry. These chains typically take the form of companies that own and operate large chains of hotels and franchising companies that sell the use of their brand names to buyers that uphold the standards of the chain.

In addition, because the industry seeks to appeal to such a wide consumer base, hotels within a particular chain tend to offer similar amenities, services, and prices in order to provide a consistent "face" to the consumer. Further, the chains, and therefore the hotels within them, are categorized into one of the following six segments:

• Luxury: Luxury hotel chains offer the most in-room and on-property

amenities of all hotel segments. They usually offer meeting services and on-site retailers! and they must have at least one restaurant. These hotels typically have the highest levels of customer satisfaction. Luxury hotels have an average daily rate of $199 per night and fall within the top 10% to 15% of their markets' price tier. Chains in this segment include InterContinental, Ritz-Carlton, and Four Seasons.s- 33

• Upscale: Upscale chains include full-service restaurants, meeting facilities, and a full range of hotel services. Upscale hotels have an average daily rate of $121 and fall within the top 25% to 30% of their markets' price tier, although they will not have the highest rates if the market also includes a luxury hotel. Chains in this segment include Crowne Plaza, Marriott, and Hilton.32,33

• Extended Stay: Extended stay chains are a relatively new concept. Rooms at these hotels include a sitting room, bedroom, and kitchen area. These

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Although each of these segments is affiliated with a number of chains, it is important to note that independent hotels are also classified into one of these segments. However, since the industry is dominated by chains, independent hotels arc typically left out of any discussion regarding the industry's segments.

Distribution Channels

Hotel rooms are generally sold through four distribution channels. These four channels are via the chain or hotel, in person (walk-ins), through a travel agent, or via the Internet. It is estimated that breakdown of reservations by booking source is as follows:

• 65% to 70% are made through the chain or hotel

• 5% to 10% are walk ins

• 10% to 15% arc made though a travel agent

• 5% to 10% are made via the Internet.v

Internet bookings can be further broken down into those that are made directly with a hotel company's website and those that are made through an intermediary such as Orbitz.com, PriceLine.com, or Hotels.com. In 2002, it is estimated that 54% of booking will be made via the hotel company while 46% will be made via an intermediary's site. This trend should continue into 2003; however, the percentage of reservations made via the hotel company has been declining slightly since 1999. Intermediary sites are beneficial to consumers because they provide a means to compare hotels and offer lower prices. On the other hand, they are detrimental to hotel companies because they promote "brand erosion", which is the removal of any differentiation that may exist between competitors.P Although hotel companies may prefer not to sell their product through intermediary sites, the events of September 11, 2001 forced them to sell rooms through every possible channel.v

Customers

The customers of the hotel industry tend to travel for four main reasons: vacation, business, group meetings and conventions, and other reasons such as to visit family or to attend a special event. For 2001, the breakdown of the four categories shows that:

• 29.5% are traveling for business

• 27.0% are traveling for a group meeting or convention

• 23.7% are traveling for vacation

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hotels also have on-property laundry facilities and often provide a complimentary full breakfast. As the name implies, guests usually stay at these hotels for extended periods of time. Rates are usually quoted on a weekly or monthly basis; however, the average daily rate for this segment is $89 and hotels in this segment usually fall between the 40th and 70th percentile of the local markets' price tier. Chains in this segment include Staybridge Suites, TownePlace Suites by Marriott, and Homewood Suites by Hilton.32,33

• Mid-Scale with Full Food Service: These chains include hotels with an onproperty f full service restaurant. Hotels in this segment may also offer meeting facilities, business amenities, and fitness services. Hotels in this segment have an average daily rate of $83 and are typically between the 40th and 70th percentile of the local markets' price tier. Chains in this segment include Holiday Inn Select, Holiday Inn Hotels and Resorts, Courtyard by Marriott, and Wyndham Garden Hotels.V. 33

• Mid-Scale with Limited Food Service: Chains in this segment do not have 011- property restaurants and offer limited services. The segment has an average daily rate of $75 and includes hotels that typically fall within the 40th and 70th percentile of the local markets' price tier. Chains in this segment include Holiday Inn Express, Comfort Inn, Hampton Inn, and Best Western. 32, 33

• Economu/Budgei: Economy/Budget chains offer very limited services and do not have restaurants or food service (except for coffee and light breakfast). Hotels in this segment differ from mid-scale hotels because they are cheaper to build and therefore have lower quality interior and exterior features. Economy/Budget hotels have an average daily rate of $63 and are included in the bottom 30% of their markets' price tier. Chains in this segment include Super 8, Days Inn, Motel 6, and Econo Lodge.w 33

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1

I


• 19.8% are traveling for other reasons."

2001 averages indicate that the typical leisure guest rooms consists of two adults who are between 35 and 54 years of age, have a household income of $69,147, travel by car, and pay an average daily rate of $87. On the other hand, the typical business guest rooms consist of one male who is between 35 and 54 years of age, is employed in a professional or manager revel position, has an average household income of $76,394, and pays an average daily rate of $95.36 This age group, which is typically referred to as the Baby Boomers, accounted for more stays in 2001 than any other age group. This age group registered more than 248 million trips, and excluding the cost of transportation to their destination, they spent an average of $489 per tripP

Besides the breakdown mentioned above, it is also important to note the significance of international guests. 2001 was a record year, as 45.5 million international travelers visited the Ll.S. Out of these guests, slightly over half were from Canada and Western Europe (22.9 million). Although 2001 was a record year, September 11 had a significant effect on the international traveler (and the domestic traveler), as the increase in international travelers between 2001 and 2000 was 10.7% less than it was between 2000 and 1999.36

Industry Size and Grouitb

Figures for 2001 indicate that the U.S. hotel market was comprised of 41,393 properties and 4.2 million rooms. Industry wide sales were $103.6 billion, and occupancy percentage of the entire industry was 60.3% (2.53 million room nights sold). Pretax profits were $16.1 billion.v

Although the supply of rooms increased by 100,000 between 2000 and 2001, the number of properties actually decreased. Sales and occupancy also decreased from 2000 to 2001. Sales decreased by $4.9 billion and occupancy

decreased by 3.4% (2.61 million rooms nights sold). Finally, pretax profits ~

decreased by 33%.36.38 Much of this downturn can be attributed to the affect that} r ..

September 11 had on the latter half of 2001. However, the downturn of the 'J I\.

economy has also had an impact that has carried into 2002 and will probably

continue through 2003. A more positive outlook is in store for 2004.39

The hotel industry is certainly reactive to outside forces. At the same

time, it is important to note that the industry is also resilient and has still )

sustained long term growth. Industry revenue has steadily risen from $62.8 p .. U L h

't''''~1 ttl' lAi~ billion in 1990 to $103.5 billion in 2001. In addition, the average daily rate has

risen every year between 1991, which had an average daily rate of $58.08, and

2001, which had an average daily rate of $88.27.36

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Competition

While the hotel industry is divided into six segments, most of the major

hotel companies operate chains in more than one of the segments. Therefore, it ~~ beneficial to compare the size of various competitors within each segment and .. / across the industry as a whole.

In terms of rooms, at the end of 2001 the five largest companies across all six segments were: 1). Cendant with 553,771 rooms and 6,624 hotels, 2). Six Continents with 511,072 rooms and 3,274 hotels, 3). Marriott International with 435,983 rooms and 2,398 hotels, 4). Accor with 415,774 rooms and 3,654 hotels, and 5). Choice Hotels International with 362,549 rooms and 4,545 hotels.w Descriptions of Six Continents' four main competitors are as follows:

• Cendant is a diversified company that is involved with financial services,

real estate services, car rental agencies, travel services, and the hotel industry. Its hotel operations include franchising over 6,400 hotels under the following brands: Amerihost Inn, Days Inn, Howard Johnson, Knights Inn, Ramada, Super 8, Travelodge, Villager, and Wingate Inn, The brands are primarily within the mid-scale and economy /budget segments of the industry. Cendant is based in Parsippany, NJ.41

• Marriott International operates and franchises over 2,200 hotels via the following brands: Marriott, Renaissance, Courtyard by Marriott, Residence Inn by Marriott, Fairfield Inn by Marriott, TownePlace Suites, SpringHill Suites, The Ritz Carlton, Ramada, and Marriott Conference Centers. Marriott's brands fall within each of the six hospitality segments. The company is based in Washington, D.C.42

• Accor is a company that is involved in hotel industry, travel services, casinos, and other specialized services such as employee care and assistance. Its hotel operations include owning, franchising, and leasing over 3,700 hotels under the Motel 6, Studio 6, Red Roof, Coralia, Thalassa, Sofitel, Novotel, Atria, Orbis, Parthenon, All Seasons, Mercure, Suitehotel, Ibis, Etap Hotel, and Formule 1 brands. Accor's presence is within each

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1. Inter-Continental (Six Continents) - 45,278 rooms

2. Westin (Starwood) - 44,965 rooms

3. Renaissance (Marriott) - 44,773 rooms

4. Le Meridien - 37,667 rooms

5. Fairmont - 19,222 rooms

• Upscale:

1. Marriott - 158,112 rooms

2. Sheraton -127,904 rooms

3. Radisson - 100,874 rooms

4. Hilton Hotels - 86,063 rooms

5. Hilton International- 66,246 rooms

• Extended Stay:

1. Studio Plus Deluxe Studios (Extended Stay America) - 32,809 rooms

hotel segment except for the luxury segment. The company is based in Paris, France.w

• Choice Hotels international franchises approximately 4,400 hotels under the Comfort, Comfort Inn, Comfort Suites, Quality Inn, Sleep Inn, Clarion, Econo Lodge, Rodeway Inn, and MainStay Suites brands. The brands arc primarily in the mid-scale, economy/budget, and extended stay segments. The company is based in Silver Spring, MD.44

A further examination of competition by segment shows that the five largest brands within each of the six industry segments are as follows:

• Luxury:

2. Suburban Lodge (Suburban Lodges of America, Inc.) -16,885 rooms

3. Homestead Studio Suites - 14,899 rooms

4. Hawthorne Suites (U.S. Franchise Systems, Inc.) -12,711 rooms

5. Homestead Suites by Hilton -11,603 rooms

• Mid-Scale with Full Food Service:

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1. Holiday Inn (Six Continents) - 294,493 rOOlDS

2. Quality Inn (Choice) - 84,760 rooms

3. Courtyard by Marriott - 78,785 rooms

4. Mercure (Accor) - 72,536 rooms

5. Four Points by Sheraton - 27,631 rooms

• Mid-Scale with Limited Food Service:

1. Best Western - 306,851 rooms

2. Comfort Inn (Choice) - 131,647 rooms

3. Hampton Inn (Hilton) - 117,806 rooms

4. Holiday Inn Express (Six Continents) - 103,522 rooms

5. Novotel (Accor) - 57,917 rooms
Economy / Budget: -,
• >(
1. Days Inn (Cendant) - 164,092 rooms
2. Super 8 (Cendant) - 125,016 rooms
3, Ramada (Cendant) - 120,515 rooms
4. Motel 6 (Accor) - 90,276 rooms
5. Ibis (Accor) - 60,939 rooms45 Although the industry is divided and competition exists within and across each segment, hotel companies are having a tough time creating services that are unique to their operations. This brand erosion, as described above, is the result of companies following in the successes of their competition. In other words, different hotel companies are offering very similar products. Additionally f the proliferation of the Internet has also reduced any differences between the various hotels companies.

Nevertheless, there are several innovations that have been successful. For example, Westin has introduced the concept of the Heavenly Bed, a comfortable bed distinct to their hotels that has proven to be a customer favorite. Technology has also been an enabler of differentiation, as Carlson has used it to implement "Look to Book" f a patented program through which travel agents receive frequency points for booking stays at Carlson properties.v Finally, in an attempt to provide the guest with a different experience at each hotel property, hotel

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Six Continents: De-merging for a. better future? 20

time determining whether a particular product is within the pre-established standards of the chain. An example of this type of intermediary supplier is ChoiccBuys.com, which provides one location through which hotels in any of Choice Hotels International's eight chains can buy all the supplies they need to run their hote1.53

Substitutes

The hotel industry has several major substitutes which depend on the type

of traveler. The major substitutes for the leisure traveler are friends and family, 6

recreational vehicles, and cruise boats. For business travelers, corporate

apartments and teleconferencing have become the major substitutes to the hotel

industry .

.J

The most used substitute for the leisure traveler would be friends and family. Homes are larger than they use to be, and extra bedrooms have allowed friends and family to stay in their hosts' home rather than at a hotel. In response to this, some chains recently encouraged people to put up their friends and family at hotels as a simpler, less-hectic solution.

Another substitute for the leisure guest is the recreational vehicle. A 2001 study conducted by the University of Michigan shows that u.s. ownership of RVs has reached record levels. Nearly 1 in 12 of the nearly 7 million vehicleowning households in the U.S. now owns an RV. This is a 7.8% increase from the past 4 years and a 42% gain over the past 21 years.54 Older generations as well as families with children are taking advantage of this option because it is generally a less stressful means of traveling. Traveling and sleeping in an RV equates to having all the comforts of home at all times, including full kitchens and even bathrooms with showers. RVs are no longer simple vehicles characterized by the pop-up camper and communal bathrooms.

Lastly, cruise boats are acting as substitutes to leisure travelers vacationing at coastal destinations. Travelers who would normally travel these destinations by plane and stay in hotels or resorts are now able to visit tourist locations by day and sleep on the cruise boat by night, as it travels to the next destination. This option has given travelers the comfort of unpacking one time for trips spanning several locations. After September 11, cruise travel has rebounded dramatically increasing 3.8% in the first half of 2002. It is expected to meet its target of 7.4 million cruisers by the end of the year.22

For business travelers, a substitute is the corporate apartment. Some companies are realizing that renting apartments for employees that are doing temporary projects away from home is cheaper then putting them up in hotels

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companies such as Loews Hotels are moving away from a standard hotel type to a more diversified hotel that represents the uniqueness of its location.

Entry Barriers, Exit Barriers, and Fixed Costs

Entering the hotel industry has become quite a daunting task. The overbuilding that took place throughout the 1990s has saturated most of the key u.s. markets, making it extremely difficult to find a good site on which to build a hotel.V In addition, the prevalence of brand erosion, high capital costs, and high fixed costs (Fixed costs typically account for 10% to 15% of a hotel's revenue.) have recently acted as deterrents for entering the industry.w 49 These deterrents coupled with the fact that financial institutions are unwilling to provide capital for new projects has made it extremely difficult to enter the industry.w

For companies that are already in the industry, it is just as difficult to leave as it is to enter. The hotel product is very specific, and this makes it very difficult to apply the industry's tangible resources to other industries. Possible scenarios include the conversion of hotels to apartments, condominiums, or office buildings. However, these are costly scenarios and are therefore rarely a reality. The only plausible option would be to reuse the land, as it has become a scarce commodity. But because this option requires the demolition of existing capital, it could only be justified if the site was extremely valuable and unique.

Suppliers

A large variety of industries provide the products and services that are .'

necessary to operate a hotel. Some of the major product categories of suppliers include cleaning and maintenance, food and beverage, soft goods, furniture, technology, and guest amenities. Service supplier categories include education and associations, professional services such as housekeeping assistance, and

sales and marketing.v Most of the suppliers distribute their goods via a variety

of outlets including the Internet, phone, and catalogs. Regardless of the category, almost all of suppliers offer generic goods that could be used in the hotels of almost any segment. On the other hand, there are exceptions which allow

brands to incorporate unique elements into their hotels. For example, as mentioned above, the Westin hotels feature the Heavenly Bed. This bed, which

is specially created for Westin by Simmons, is one of the few items that can only

be purchased via one supplier.v

Along with the suppliers mentioned above, a new type of supplier is also emerging at the chain level. Many chains are now setting up intermediary web sites that often offer lower prices than other outlets. This type of procurement has made it even easier for hotels because all of the products on the intermediary sites are from pre-approved vendors. Therefore, hotels do not have to spend

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Six Continent.'>: De-merging for a better future? 21

for weeks at times. It is estimated that more than 64,000 people will live in corporate apartments in 2002. These apartments often come with weekly or even daily housekeeping. Corporate apartments are approximately $14/ day cheaper than extended stay hotels, and they provide the advantage of knowing that there will be a vacancy for the entire stay. Companies no longer have to worry about major events that may occupy all of the hotel rooms in a particular city.55 Lastly, while the quality of room supplied by certain hotel chains may be unknown, corporate apartments provide companies with the certainty that their employees will receive quality accommodations.

Another option for business travelers is to simply not travel at all.

"Corporate America is scaling back company travel policies ... and even canceling meetings in favor of teleconferences.v= The events of September 11 th have increased this trend. Technology has rapidly developed to accommodate both audio and video conference calling as substitutes to travel. Businesses are now able to save on travel costs by conducting meetings from their own offices via telecommunication lines. In most cases, the equipment cost of these technologies can be paid off within a few cancelled trips.

Basic Strategies of Competitors

Every hotel chain has the strategy to be the best at what they do. While some hotel chains are better than others, they are all striving to come up with some sort of a sustainable competitive advantage. Most hotel companies struggle to define their competitive advantage. In fact, most changes in the industry are the result of hotel companies "copying" innovations created by the competition. For example, at one point, a hotel made the historical decision to include shampoo with the room. This would be its competitive advantage. But once an innovation such as this is introduced, every hotel adopts the same practice and the competitive advantage disappears. This "fellow-the-leader" mentality has been occurring for decades. Other examples of this trend range from providing a free breakfast to including basic amenities like irons and boards in all of the guest rooms.

In-room high-speed Internet access has been the latest industry attempt to differentiate from one hotel to the next. Mark Hamilton, director of The Technology Research and Education Center at the Conrad N. Hilton of Hotel and Restaurant Management, comments, "From an overall technology standpoint in the hospitality industry, hotels are in catch-up mode as related to other industries in the world. The hospitality industry is conservative in nature and hotel companies are reluctant to invest in new amenities without knowing whether they will recover their costs in the end. It would be a competitive disadvantage for hotels of the future not to have high-speed Internet access." 57

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Another strategy hotels use in trying to differentiate themselves is

through sheer numbers. For example, larger chains have a greater ability to retain their customers by referring other hotels within their chain. By operating under one brand, the customer recognizes that an expected level of quality comes with each hotel whether it operates in the United States or Brazil.

A newer strategy being adopted by hotel chains is customer relations management. Wyndham's ByRequest program is one of the innovative leaders in this area. By consistently customizing their guest's rooms and amenities across all hotels and for every stay, Wyndham may have found a competitive advantage over its competition.v Whether it will be sustainable is yet to be seen. The company presently feels that this service level might lead to a successful edge over the competition. However, if other chains copy the program, Wyndham would experience brand erosion.

Overall, it is very difficult to develop a significant and successful strategy over other competing hotel chains. It has been proven that hotel chains retaliate to competitive moves by matching or exceeding any other chain that comes up with a new advantage in the industry. For customers, aggressive competition has led to hotels offering more amenities and customized services for equal or lower rates. However, such tactics have also proven to hurt hotels by requiring them to offer more value to keep up with the competition, and this correlates to a decrease in profits.

External Stakeholders

The key external stakeholders in the hotel industry are the financial institutions, local communities, distribution channels, labor unions, suppliers, and customers. Each of these stakeholders has a different level of importance that depends on location.

Financial Institutions control the industry'S ability to grow or remodel.

When markets become too saturated, these institutions tend to not loan as much money to new construction as it would in an area that is not as developed. Additionally, depending on the economYr financial institutions know when hotels are earning low revenue that could affect whether loans are paid on time. This could make loans for remodeling difficult to obtain.

Local communities also have a large impact on the hotel industry. In fact, community-supported hotels have much higher rates of survivaL A local community provides a source of labor and supports the areas surrounding the hotel by developing restaurants and other entertainment facilities. Safety, friendliness, and respect for the environment around the hotel are key aspects of a community that attracts customers to a hotel.v'


Distribution channels, which include everything from travel agents to online booking agents such as Expedia, are major industry stakeholders.

Without them, the hotel industry would not be as developed as it is today. Although many distribution channels promote brand erosion, the advancements in technology have caused Internet bookings to become an important factor for many hotel chains. Through this technology, customers have the ability to

search hotel listings quickly and make decisions based on cost as well as quality. Rates along with pictures and descriptions aid in this process. Even though there are issues pertaining to electronic distribution, the Internet will continue to be a driving force in the industry.

In certain geographic areas, labor unions are very important to hotels.

While it is difficult to thoroughly discuss labor unions in all areas, it is important to note that for some areas, labor unions can be the most important stakeholder. Without proper negotiations and careful detail to maintaining relationships, a labor union can lead to the demise of a successful hoteL

Although suppliers offer many similar products that hotels can choose from, they also can be important stakeholders because they give the industry new innovations that help develop competitive advantages. This can range from Kohler's BodySpa showers? to OnCommand's pay-per-view systems.s? By building partnerships with suppliers, hotel chains can offer amenities that were previously not available. As mentioned earlier, an example would be Westin's "Heavenly Bed", which resulted from a partnership with Simmons Beautyres. Through this innovation, Westin has had incredible success in increasing occupancy, overall guest satisfaction, guest loyalty, and even at-home sales of the mattress.st.

Finally, Customers are the stakeholders that have most dramatically shaped the industry. Hotels must change as customer's needs and wants change. As mentioned earlier, the story of Charles Kemmons Wilson shows how the hotel industry can adapt to consumer needs. Wilson's 1951 trip with his wife and five children helped him realize that roadside motels were generally unclean, cramped, and overpriced. In addition, these hotels charged additional fees for each child. As a customer, he saw a need for better accommodations for traveling families, and in 1952, he opened the first Holiday Inn as a response to the need for a family-friendly hotel. Holiday Inn is an example of a company that entered the hotel industry in order to satisfy the needs of the customer.w

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Six Continents: De-merging for it better future? 24

Global Industry

The hotel industry can be found in practically every country in the world.

The World Travel Tourism Council (WTTq states that global tourism, of which hotels are a major part, is the largest in the world with $4 trillion in annual sales and a workforce that exceeds 260 million people.s- Wherever people live, there is a need for hotels to house others who come to visit. There arc many advantages for a hotel chain to be represented in more than one nation. Brand recognition is one of the most important motivators in developing a multi-national or global strategy. Having a global presence provides loyal guests with the ability to stay with a brand they trust, regardless of where they are traveling to. With over 3,200 hotels in 100 countries, Six Continents is an example of a globally recognized brand.s''

SIS

Six Continents aims to create long-term sustainable growth in shareholder value

high-growth international hotels and high-return restaurants and pubs, Six Continents is deployi1lg its strong management, global infrastructure and substantial financial resources to drive superior returns from the expansion of its proven brands. 64

Corporate Vision Statement

How we do business is I1n integral part of why we do business. INe want to inspire our customers to return to our brands again and again and the way we behave is key to delivering this vision. 65

Corporate Value Statement

Our values outline how we aim to conduct business and motivate people to succeed within Six Continents. These values are:

• Delighting our customers again and again

• Winning by a mile

• Generating innovation and change

• Behaving with integrihj

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• Valuing and trusting our people

• Respecting our communities

Every one of Six Continents' hotels, restaurants and pubs and bars is part oj a wider community. All carry the responsibility to act in a way that respects the social, economic and enuironmenial well-being of the wider world. As a company, we recognize that we will win in the long term and deliver shareholder value only if we behave properly at all times. Responsible corporate citizenship has a direct impact 011 our shareholder value. 65

Hotel Business StrategM

Six Continents Hotels' goal is to extend the worldwide distribution of its range of high-quality hotel brands through a diverse portfolio of owned and leased hotels, managed contracts and franchises. The strategy for achieving this is to make its brands the preferred choice for the guest, so enhancing revenues and returns for the hotels in its system, which, in most cases, is owned by third party investors.

Retail (Restaurant) Business Strategy

Six Continents Retail's strategy is to concentrate on expanding the distribution of distinctive retail brands and format in the attractive segments of the pub, bar and restaurant markets.

Management Action & Influential Stakeholders

As previously mentioned, management at Six Continents was divided on the strategic direction of the company. A report in the August 2002 edition of Caterer & Hotelkeeper magazine states that "chief executive Tim Clarke reportedly favors a de-merger, while Chairman Ian Prosser is reportedly against a Split."66 One of the more outspoken and harsh critics of Six Continents' corporate strategy and of Chairman Ian Prosser is fund manager Hermes.

In October 1, 2002 Six Continents finally made the decision to de-merge their hotel and retail businesses and return the cash to shareholders from the sale of Bass to Interbrew. Upon announcing the move to de-merge and return investor capital, David Pitt Watson, managing director of Hermes UK Focus Fund, which owns three percent of Six Continents, stated "We are very pleased at the de-merger and return of cash to shareholders. This will form two strong focused companies, which will deliver good returns to shareholders."67

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··1


Prior to the de-merger announcement, it was decided that Ian Prosser would step down as Chairman at the end of 2002. A supposedly tricky negotiation, since it was reported that Prosser had planned to stay on as Chairman for another two to three years. This report had supposedly "prompted fury among shareholders, led by Hermes, Axa Investment Managers and M&G Group. "There would have been war if Ian had not agreed to go next year," said one company insider.67

In 2003, when Six Continents effectively changes their corporate structure and de-merges the two business units, there will be management change that coincides. Richard North who is currently the Finance Director will assume the roll of Chief Executive of the Hotel Group; current chief executive of hotels, Tim Clarke, will occupy the same position with the Pubs Group.

Change is occurring throughout the entire Six Continents organization and franchisees are glad to see it In June 2002, Steven Porter was named the new president of North American operations, replacing John Sweetwood who stepped down in June to pursue other opportunities. Also stepping down was Ravi Saligman, brand president of the Americas. Six weeks after Porter took over the position, a new executive team was named. According to Porter, the strategy behind the change was "building its mid-scale and upscale brands, upgrading its technology infrastructure and finding additional ways to increase revenue through operations and major hotel investments around the world."68 Please refer to Appendices A and B for more detailed information on the Senior Management Team and Board of Directors.

Influential franchisees applauded the move for several reasons. First, they were glad to see someone from inside the organization take the helm of North American Operations (Porter's previous position was Chief operating Officer of

the Americas.) Second, the franchisees were excited that Porter came into the .

position with an hotelier background and experience in franchising. \ .)

The support of the franchisees is important to Six Continents, especially in X the United States. The Americas is the largest operating region of Six Continents, encompassing the United States, Canada, Mexico, Central and South America

and the Caribbean. It includes 2,700 properties and nearly 300,000 guestrooms.s?

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Operating Characteristics

Today, Six Continents is a hospitality conglomerate that employs approximately 80,000 employees worldwide. 57% of these employees were full time and 43% were part time.?" Currently, the organization is divided into three


distinct businesses: Retail (Restaurant and Pub), Hotels and Soft Drinks. In 2001, total sales for Six Continents PLC reached over $5.9 billion.

The Retail (Restaurant and Pubs) unit was operating only in the UK, but recently entered the German market. The operation includes two groups: the first is the Restaurant Group, with over 500 branded suburban restaurants and food-led outlets. The second is the Pubs & Bars Group, with over 350 branded outlets." In 2001, the Six Continents retail business reached $2.3 billion.

The hotel business is made up of owned and leased, franchised and management contract hotels in nearly 100 countries. Six Continents offers a wide spectrum of global hotel brand accommodations that suit a variety of markets rom the upscale to the budget conscience. Hotels in the Six Continents portfolio include: Inter-Continental, Crowne Plaza, Holiday Inn, Holiday Inn Select, Holiday Inn SunSpree, Holiday Inn Express and Holiday and Staybridge Suites.

Hotel assets grew in 2002 and continued growth looks promising.

According to the 2002 Interim Financial Statement" An indicator of future growth, the pipeline of hotels waiting to enter the Six Continents Hotel system remains healthy despite the difficulties surrounding the hotel industry; at 31 March 2002 the pipeline stood at 490 hotels with 66,800 rooms, of which 28% of he rooms were in the upscale brands."72 The number of hotels in the Six Continents system grew over the 12-month period. At the end of March 2002, there were 3,279 hotels compared with 3,267 the year before. In 2001, sales for the Six Continents hotel and soft drink businesses reached $3.6 billion.

• Inter-Continental: An international upper-upscale brand that is dedicated

to meeting the needs of discriminating travelers at each of its 135 locations in more than 75 countries. Generally located in the heart of the world's major cities and in exclusive resort locations.

• Croume Plaza: An upscale, international brand that operates 160 hotels in 40 countries, Crowne Plaza is renowned for its expertise in managing meetings and in servicing the needs of business travelers. Meeting facilities are flexible, with professionally trained staff to handle any request. Crowne Plaza is positioned in key urban, suburban and airport locations.

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• Holiday Inn: The full-service Holiday 11m Hotels and resorts have become "America's Favorite Hotel" by offering guests the dependable service and amenities for both business and leisure travelers.

•

• Holiday Inn Select: Located throughout North and South America near business centers and airports. Holiday Inn Select provides business travelers with special services and amenities to make their stay as comfortable and productive as possible.

• Holiday Inn SunSpree Resorts: Found in more than 25 locations in the U'S; Canada, the Caribbean, and Mexico. The casual atmosphere and modern facilities make it easy for families to relax and have fun together.

• Holiday Inn Express: The modern limited service hotel for value oriented travelers who expect clean rooms and convenience, all delivered in an atmosphere of informal hospitality. Holiday Inn Express hotels are the smart choice for travelers who want dependable quality, co~rt ana> //

convenience without all of the extras. /'

I

Staybridge by Holiday Inn: The newest member of the Six Coptine ts

Hotels, Inc. corporate family and is the latest evolution ofthe all-suite

extended stay concept.

Unique Physical Resources

The global network of hotels provides Six Continents with tremendous economies of scale. In addition, the portfolio of brands owned by Six Continents, has a high level of brand identity. Holiday Inn alone is one of the most recognizable hotel brands in the world with locations in nearly 100 countries,

The large amount of capital ($3 billion) from the sale of the Bass Brewing business has allowed Six Continents to purchase highly recognizable properties which bring immediate attention to their hotel brands. An example is the recent flag change of the Regent in Hong Kong to an Inter-Continental. This 514 room, 5 star hotel was purchased in December 2001 for $346 million. The strategy behind the purchase was to re-launch the Inter-Continental brand. Kevin Croley, Six Continents Hotel's vice president sales, Asia Pacific, and marketing, southern Asia points out, "The Regent Hong Kong maintained a landmark identity. It


offered a high degree of elegance and sophistication. In this regard, as the Hotel Inter-Continental Hong Kong, it is a defining property for the new InterContinental style."73 The acquisition of this property allows Six Continents an immediate opportunity to showcase the Inter-Continental hotel brand.

In addition to the financial assets that allow Six Continents to purchase a hotel such as the Hong Kong Regent, the company has also developed value through strong brand identity. In June 2001, the company completed a deal in

)< Sao Paulo to flag an enormous 780-room convention center and hotel with the Holiday Inn brand. Once completed, in 2003, the $50 million doIlar hotel wiIl be the largest Holiday Inn in the world, connected to the largest convention center

. in Latin America.o A strong brand also translates into a loyal network of

franchisees. As one hotelier, George Glover, stated, "Holiday Inn Franchisees are

a little different - they bleed green," referring to the brand's long association with the color green in its logo."?"

Six Continents was the first hotel company to offer web bookings more than seven years ago. And today, Information Technology software and hardware is another unique resource that drives Six Continents' business. According to Eric Pearson, vice president of E-Commerce 1/ earlier this year, we passed another major milestone - $2 million booked in a Single day direct to our Web sites."76

Currently, Six Continents is in the process of centralizing all of the hotels within their portfolio. Complete migration of all Six Continents' hotels to the

new Central reservation system (CRS) - HOLIDEXPlus should be completed by tv\..,f

mid-2003. This new system means hotels can now provide more detailed

descriptions of their properties, rates and promotions to the various Global

Distribution Systems (GDS) and travel websites.?

Using Day Communique technology, Six Continents has recently ()

reengineered their global Internet reservation system. Six Continents has I \111 if

assimilated disparate content into a unified Six Continents Hotel Internet

platform. Guests, who reserve through any Six Continents Hotels Web site, can

choose from anyone of the 3,300 properties throughout the world and check availability, rate and then book on-line.?"

In late October 2002, Six Continents agreed to a deal with ATG, a leading developer of online Customer Relation Management (CRM) applications. ATG will develop software that will provide Six Continents with more precision in marketing campaigns, and personalization for the company's network of websites. According to Eric Pearson, vice president of e-cornmerce, /I A TG Commerce allows Six Continents Hotels to standardize on a platform that

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•

Six Continents: De-merging for a better future? :10

incorporates our existing back-end systems into our long term Internet strategy."?"

A last component to the Six Continents technology strategy is the implementation of the webValidator™ by iPerceptions Inc. The purpose of the software is to "provide fast and economical market research on a user's behavior

throughout their we ' erience.T"

')

eting Strategy /

In the wake of the e-merger news, Six Continent's marketing shoategy has received a lot of attention. Six Continents is now a multi-branded, global lodging company that is no longer part of a publicly held, Britain-based conglomerate.

Six Continents presented this simplified and refocused business model to 1600 franchisees in November 2002.81

An article from Hotelbusiness.com noted that the strategy for Six Continents moving forward is to clearly define each of its brands in the marketplace with consistent service and product throughout its system. The following outlines the brand marketing strategy for each of the hotels:

• Staybridge Suites is putting an emphasis on its long-staying customers,

rather than trying to fill units with transient guests who may be cutting into opportunities to host extended stay visitors.

• Holiday Inn Express has a new breakfast concept in the form of Express Start, a sharply defined breakfast experience that is being mandated for all 1,200 North American properties beginning next year.

• Holiday Inn has its new balanced, full-service prototype, aimed at bein more appealing to developers with its lower cost per key. The carefully planned model may be used to replace aging Holiday Inns throughout the system, said executives.

• In the upscale arena, Crowne Plaza is now the "Place To Meet," having staked its future on small to mid-scale meetings. A new logo will also be introduced. These initiatives are an attempt to create a niche for a brand name that doesn't "own a space in the public's mind." 7-

Inter-Continental has a $20 million advertising campaign to pull i e

international business traveler whose many needs will now be

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consistently met at every property carrying the upper upscale's moniker throughout the globe.

Marketing Tactics

Six Continents uses a variety of marketing effort s to draw customers to their hotels. Major initiatives for the corporation have included: Priority Club Rewards, Six Continents Club, Internet Based Marketing, Direct Mail, Advertising and Promotion.

Priority Rewards, Six Continents' loyalty program, includes 13 million members and includes all of Six Continents' brands. In April 2002, Six Continents re-launched their rewards program to make it easier and faster for guests to use and redeem points. The reason for the re-launch and the renewed focus on ease and speed was addressed by Susan Mulder, Director of Consumer Marketing, "It used to be all about getting people in your program. Once they were in, you were done. Now everybody carries two or three frequent guest cards in their wallet, so the challenge now is much greater.tl82

The Six Continents Club is another marketing tool that is specific to the chain of Inter-Continental hotels. With a membership base of roughly 130,000, the Six Continents Club offers guests value added benefits and rewards for each stay at an Inter-Continental. The importance of this program is highlighted in Six Continents marketing collateral, "Six Continents Club members account for approximately two percent of Inter-Continental guests, yet yield more than 10% of total room revenue.P

One of the newer marketing tactics that has been extremely successful for Six Continents is their new web based "best rate" initiative called "Lowest Internet Rate Guaranteed". According to an article in TravellNeekly, the initiative is a promise to beat by 10% the cheapest rate that a customer can obtain through any online travel site."84 According to a six-month review of the program, it is working: 85

• Internet bookings have shot up 80% over last year - compared to Internet

bookings in general! which averaged 40%

• Hotels are regaining control of their inventory and capturing the margins that would have otherwise gone to wholesalers

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• Challenges to the Guarantee average about lout of 1000 bookings, or less than 1/10 of one percent of people who book on the Internet confirming Six Continents pricing is the best available

Much of the refocusing change that is now occurring within the Six Continents organization may have been foreshadowed in a June 2001 interview that Tom Oliver chairman/ CEO of Hotels did with Hotelbusiness.com. In the interview, Oliver states, "trying to drive brand development in a market with so many moving parts" is probably the company's top problem at this time, though trepidations about human resources, return on investment and quality assurance similarly take priority on a regular basis."B6

Employee Benefits and Training

At the end of fiscal 2001, Six Continents offered various incentive programs to its employees. For example, employees can participate in the "Employee Savings Share Scheme", which provides employees the option to buy ordinary shares at a very nominal price. This opportunity is provided to employees who have been with the company for at least one year and is open to

all employees including executive directors. t~P

Six Continents also offers a variety of training programs to ensure that its employees have all the necessary skills required to perform and enhance their ~ daily duties. /I At Six Continents Hotels we are committed to 'growing our own'

- providing employees with training and development opportunities throughout

their career with the organization."B7 /'

Employees of the group are provided training skills based upon individual needs and assessments. They receive managerial training to enhance their leadership and communication skills as well as technological training in computer applications. Training opportunities are available irrespective of their position in the company. Some of the specific training programs include:

• Your Career With Six Continents Hotels: The goal of this program is to

ensure that all employees in the Six Continents Hotels network have the opportunity for ongoing professional and personal development. The program is comprised of four distinct phases including entry level training, supervisory training, operational management, and management education program. Within each phase, employees work at their own

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Relationships toiih. Customers, Suppliers, and the Community

Six Continents attempts to develop customer relationships by providing unique services that are not provided by other hotel companies. Six Continents was the first hotel chain to provide customers with the service of booking rooms with mobile devices and credit cards. They used Air2Web technology to provide access to loyalty accounts! itineraries, hotel directories, and other customer services.

Six Continents Hotels has also helped to create an online supply system called A vendra. Through A vendra, Six Continents Hotels allows its owners and operators to experience significant cost savings by providing them with procurement and purchasing power capabilities. A vendra, which Six Continents Hotels is a founding member of, is a "web enabled strategic supplier of businessto-business procurement solutions for the hospitality and related industries." According to Six Continents, A vendra adds worth to owners and operators through "hospitality expertise, largest purchasing power, supply chain management expertise, and flexible access to programs.l"?

In regards to community relations, Chairman and CEO of Six Continents Hotels, Tom Oliver, states that "Six Continents Hotels strongly believes in supporting communities in which our hotel brands have a presence. Through our charitable giving programs we are able to positively impact the well-being of our consumers all over the world;" Six Continents donates to a number of charities and social organizations. Specifically, the company gifts to educational institutions, raises funds for children organizations, and contributes to environmental conservation programs through the 'Conserving Our Planet' program.?' Additionally, employees are encouraged to participate in the community and share in the sense of responsibility to the social, economic and environmental well being of society.

Organizational Culture

Six Continents high performing culture is supportive of the organization! s overall strategy. As stated earlier, Six Continents corporate value statement notes the importance of 1/ delighting our customers again and again." Therefore, Six Continents prides itself in providing guests with the best service possible. This is further supported by the multitude of training programs available to employees. Furthermore, the company bases its success on its employees'

e'havior with customers and the company's relationship with shareholders.

Hence, the culture works in line with the interests of the customers, i

shareholders, suppliers and others.S

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pace, and their learning is supported by workshops that strengthen skills and emphasize matters important to the company and the individuals."

• In the Customers' Shoes; The objective of the program is to better enhance customer satisfaction by developing excellent service skills among employees.

• Corporate Management Traineeships: This is a twelve to eighteen-month training program that focuses on hotel operations and people

management.

• Hospitality Operations Traineeships: This program focuses on practical training in various key areas of the hospitality industry such as Front Office, F&B, Housekeeping, and Kitchen Attending.

• Apprenticeships: The company provides apprenticeships to chefs in the first four years at the hotels. After completing the program, chefs can transfer to different properties within the group.

• Milestones: This program allows employees with potential to become General Managers by learning from current General Managers and other senior management. It provides development in leadership and management capability, technical competences, use of initiative and strategic thinking.

Labor Unions

As stated in the industry analysis, hotels have been significantly affected by the September 11 attacks. In spite of this fact, labor unions have continued to pressure hotel employers and have scored some victories in key cities. Specific to Six Continents, Holiday Inn has had some serious problems with labor unions. Recently, employees have used guerrilla tactics to boycott against non-union

hotels. For examPI.e, during a Realtors conference at st. Paul, the employee ~

demonstrators gave hotel guests unexpected wake-up callsat 7 a.m. (Y~,

Consequently, the hotel owner agreed to the 'labor peace agreement'.88.89 .,

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Competitive Advantage

Six Continents Hotels competes with a wide range of facilities offering various types of lodging options and related services to the public. The competition includes several large and moderate sized hotel chains offering luxury, upscale, extended stay, and mid-scale accommodations.

<,

As noted earlier, the Six Continents loyalty program, Prioritv Rewards, is one of the largest of its kind. The program has ties with over 47 airlines, which offer frequent flyer miles for stays at any Six Continents property. The program also has similar tie-ins with credit card and car rental companies. Enhancing Six Continents' marketing competency is their cutting edge technological advancements that are leveraged to manage both existing and new customer relations.F? Some of these advancements include e-comrnerce, reservation technology (Holidex and HIRO) as well as guest tracking systems.

Performance of individual hotels is highly seasonal; however, with 3200 hotels in almost 100 countries, Six Continents is able to use diversity as a means to combat this seasonality. Additionally, Six Continents Hotels includes a strong portfolio of five recognizable hotel brands across each price point. A clear indicator of their brand cache is evidenced through the nearly 70% of Holiday Inn customers who are walk-ins,

Financial Summary

Despite recessionary market conditions, Six Continents has posted favorable results over the past year. This favorable performance is attributed to continued development within their retail and hotel businesses. Some key statistics from their 2001 earnings release are as follows:

• Turnover was up 6.8% to £4.03 million

• Operating profit was up 2.1 % to £792 million. The increase for each

division is as follows:

o Six Continents Hotels increased by 13.6%

o Six Continents Retail increased by 1.1 %

o Britvic Soft Drinks increased by 23.9%

• Profit before tax and major exceptional items was down 3.3% to £731 million

• Adjusted earnings per share were down 3,4% to 60.1 pence

• Dividends per share increased 3% to 34.3 pence.v'

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Please refer to Appendices C through G for more financial information regard ing sales and assets figures, income statements, balance sheets, profit and loss statements, and Rev P AR statistics.

Conclusion

Six Continents is a company that is on the path to change. While shareholders and stakeholders have applauded the recent decisions made by the company, there are always inherent risks and uncertainties that may create obstacles to the successful implementation of new corporate strategy. As noted by Mark Reed, an analyst at Teather and Greenwood, "The timing of it is

bold ... the usual advantage for a de-merger is to unlock value, but given the weakness in hotels sector it exposes the hotel business to extreme volatility."94 At the same time, there can be a tremendous upside to such dramatic change, as observed by David Pitt-Watson, "There are two separate businesses in Six Continents and the management has recognized that and taken the appropriate step.Jl95 It remains to be seen how this dramatic transformation will affect the individual moving parts of the businesses.

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Appendix A - Senior Management Biographies=

Sir Ian Prosser

Joined the Group in 1969 and was appointed to the Board in 1978. He became Group Managing Director in 1984 and Chairman and Chief Executive in 1987, relinquishing the role of Chief Executive on 1 October 2000. He is a n011- executive deputy chairman of BP PLC and a non-executive director of Glaxo SmithKline PLC. He is a member of the CBI President's Committee and Chairman of the Executive Committee of the World Travel & Tourism Council.

Tim Clarke

Joined the Group in 1990, was appointed to the Board in 1996 and became Chief Executive on 1 October 2000, having previously been Chief Executive of Six Continents Retail. He is a non-executive director of Debenhams PLC.

Richard North

Joined the Group in 1994 as Group Finance Director. He is responsible for finance, pensions, tax and treasury. He is Chairman of Britvic Soft Drinks and is a non-executive director of Leeds United PLC and FelCor Lodging Trust Inc.

Tom Oliver

Joined the Group in 1997 and was appointed to the Board in 1998. A US citizen, he is Chairman and CEO of Six Continents Hotels and a non-executive director of Interface Inc. Prior to Six Continents, Oliver was CEO of Fed Ex.

Richard Winter

Joined the Group in 1994. He is Company Secretary, responsible for legal, secretarial, assurance and internal audit services and risk management.

Karrim Naffah

Joined the Group in 1991. He is Strategy Director, responsible for Group Strategy, with additional responsibility for Group IT and property development.

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Appendix B - Board of Directors

Six Continents is a publicly held company traded on various stock exchanges. The managing body of the organization is a Board of Directors, comprised of eleven members. Of the eleven, six are corporate agents and five are executives from outside the firm. Having already discussed the biographies of the executive team, the following is a list of board members and their backgroundsr"

Richard Carr

Appointed a director in 1996, he is the Company's senior independent director. He is Chairman of Chubb PLC, a non-executive director of Centric a PLC and Cadbury Schweppes PLC and a member of the CEl Council.

Robert Larson

Appointed a director in 1996. A US citizen, he is a Managing Director of Lazard and Chairman of Lazard Freres Real Estate Investors, LLC.

Sir Geoffrey Mulcahy

Appointed a director in 1989. He is Group Chief Executive of Kingfisher PLC.

Brqan Sanderson

Appointed a director in August 2001. A former Managing Director of BP PLC, he is Chairman of BUP A, Sunderland PLC and the Learning and Skills Council.

Sir Howard Stringer

Appointed a director in May 2002. Formerly CEO of Tele- TV, he is Chairman and CEO of Sony Corporation of America, is Chairman of Sony Canada, Chairman of Sony Electronics Inc, and is on the Board of Sony Europe.

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Appendix C - Sales and Assets Figures

2001 Sales
~ in Millions % of Total
UK $ 3,602 61%
US $ 1,337 23%
Other regions in Europe,
Middle East and Africa $ 649 11%
Other Americas $ 202 3%
Asia/PacIfic $ 149 2%
TOTAL $ 5,939 100% 2001 Sales by Division
~ in Millions '% of Total
Hotels $ 2,792 47%
Restaurants $ 2,293 39%
Soft Drinks & Other $ 864 14%
(Adjustments) $ (10) N/A
TOTAL $ 5,939 100% Six Continents: De-merging for a better future? 40

Appendix D - Income Statements

Cousoltduted Income Sbtl{'OH'lI1 Data

Amounts in accordance with UK CAAP

Turnover:

Continuing operations .......•.. Discontinued operations (3) .....

Total operating profit before operating exceptional uems:

Continuing operations .

Discontinued operationsB)

Operating exceptional items:

Continuing operations Discontinued operations (3)

Total operating prof t:

Continuing operations .

Discontinued operations (3) .

Vrllr "n(1I,(' St'pll'l11b"r: 30 i I)

21Ml1 1.1) $

2001 llWO 19'19

£

5,929

4,0:13 3.775 3.11<) 2.731 2,465
1.383 ...1lli 1.878 2.789
4,O.B 5,158 4 .. 686 4,609 5,254
792 776 664 572 498
_!32 160 186 303
792 905 824 758 801
(43) 1,164

1,164

(63)

~) (43)
r.un 749 776 664 572 498
129 160 186 303
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4l


Appendix E - Balance Sheets

COIl"'Olilhdcd Bahlllcc Sheet Dnta

Sep'emlter 30 (I)

20111 (2! $

2O!11 £

211UII 19\19

t £

1\l9l! £

1m £:

(10 mlllh'nst
Amount .. ill accordance with UK GAAP
Intangible assets ~ " , · ~ .. ,. , ,. , , , · . 256 174 189 ts
Tangible assets . ~ ~ . · ~ . , .". " , , .. .. , . 11,110 1,558 6,683 5,794 4,870 4.431
Investments , , .',. , ., ,. ., ., ~ , , . " , . 391 266 249 528 706 596
Current assets · ... , . , . , . , . " , ~ , · . 1.617 1,100 1.684 1,405 1,396 1.631
Toml assets .. · , , . · , · ~ .. ., . . , ., 13,374 9,098 8,805 7,740 6.972 6,658
= ==== ==== =
Current liabilities (5) ~ .. · . " · . .. 2,953 2,009 1,604 1.803 1,989 1.470
Long-term debt (5) , ., . .. ,., .. , ~ , , ~ , , . 1.498 1,019 1,213 2,101 1,886 l.091
Share cllpital . . " .. < • ~ • " ., ., ". " · . 356 242 246 141 271 222
Shareholders' funds · ~ .. · ~ .. " ... · , . , " . 8,010 5,449 5,379 3.313 2,577 3,769
Amounts in accordnnce with US (jAAP
Intangible assets < ••• < • ~ • " , " . , . ~ . · . 4,063 2,764 2,818 2,594 2,572 1,512
'Iangible assets ~ " . ,. , , . , , , , · ' 9,379 6.380 5,130 4,211 3,956 3,153
Investments . . · , , . , . · . · . · , .' 301 205 254 505 603 578
Current assets • > ~ • . , " ,. ., ,,< · ~ ... " . 1.767 1,202 1.796 1,438 1,437 1,679
Total assets '. , , · , · . · . . , · . · , ,. ., " . 15,510 10,551 .9.998 8,748 8,568 6,922
==== = =
Current liabilities (5) · , .. ' . · , , , , , .' .. 2,989 2,033 1,46l 2,595 2,834 1,533
Long-term debt (5) . · ~ . " ." .. · , .. " .. ,. , 1,166 779 1,152 i.ui 822 846
Redeemable preference share capital. , .. 18 48
Share capital ~ ... .. , . . . .. ". " ., · . ~ . · , 356 242 246 223 223 222
Shareholders' equity, . , . · . . . , . · . , . .. 9,217 6,270 5,975 3,72.'5 3,565 3,700 (1) The results for fiscal 1999 include 53 weeks' trading (Six Continents Hotels 12 months); all other fiscal years include 52 weeks' trading (Six Continents Hotels 12 months).

(2) US dollar amounts have been translated at the Noon Duying Rate on September 30,2001 of $1.47 solely for convenience.

(3) For the purposes of UK GAAP, discontinued operations comprise Bass Brewers, Gala, Coral, Barcrest, BLMS and the leased pub business. Under US GAAP, discontinued operations comprise Bass Brewers, Gala, Coral, Barcrest and BLMS, but exclude the leased pub business which is not classified as a diseontlnued operation for the purposes of US GAAP ..

(4) Each American Depositary Share represents one ordinary share.

(5) Long-term debt under UK GAAP includes amounts supported by long-term facilities, which are classified as current liabilities under US GAAP.

(6) Adjusted earnings per share are disclosed in order to show performance undistorted by abnormal Items 01', in respect of Financial Reporting Standard 15, the impact of adopting this standard.

f)lvidends

The Company has paid dividends on its ordinary shares each year since its formation in 1961. An interim dividend is nommlly declared by the board of directors in May of each year and paid in the following July. A final dividend is nonnally recommended by the board of directors in December following the end of the fiscal year to which it relates lind is paid in the following February after approval by shareholders at the Annual General Meeting.

Do Not Duplicate

Appendix F - Profit and Loss Statement

SIX CO~TJNEN1S l'tC CONSOLUMTED PRO ... T ANlI I.OSS ACCOIJ:'I1T


·1

B~'foN IUlljvr ",ill'~'plivm.f ih.'n1'"

\-bjur t''«'t':p.1it>lw'

"l1mr;; Tflt.al

4.011

Anllly;r;ed ~I":

Ong(1inp: tlpefnlions.

Ak.X.Jl.1.j~iLi(lIL~. . ••••••••• " ••. ~ ~.

Continning operations . ,

[)I ~r:odl inned ( :al'iOIl!o

1.889 1H

4.fl.1.1

fO-;!j; and mn 'l!lIdlllt, less olh:r

rucomc .• _. (Nllte 3) .. , ,

(!in::rtIll upcralillJot l'mfil "

Sruifl: (If .'J~'CinJc~· operating pruli, .. ,

'Ibr-dl oJu.'nI'in;:, pr.:tllt ~'.-. ~N')tc 2; .

(3,l.j1j 79~

)i~' :IS:

Onp_uhlg \~(XTJjhon~ A'-'lui"ion~ .. Continuing oper'.lt"ivl.fJl .

Discomtnued 0

7.1~ .17

7'12

AuulYl.cd ';:1":

Continuing ~'Jpr'.nltkmll

(Lolr.YpwijJ 00 di!.poliial of ,lixl:"d

~~LJ.,., .••..

1),111-~ (111 (.U"fJ("J of Clp::"iHit~n" .•...• Pn:~i'!tipn Ilgbhl~t fixoJ .\:w.:t nwesunem

(2)

(1)

Di s~onl Inui.:d O)X.'fIU(.'1fRi:

Protit on dl .... pOii<1_1 of the'd iJ$!i~l'i ••. Pmtlt nn disposal of operutioua

liMIO

lkl"flT'" nm}." 1Ii.',\,·~·plii,niiill llj\n\S,

\b.tul' ~(.~·lJUnJW:t

ihm"" '1'o1~,J

tlefon'. major '~\""'f)tji·n~1 ih'fu",

:\tajbr \:'<,!j,l't'l,tj~."at

ttli'll1.11; 'lhl1lJ

4 )31 ~.15S
:':)"S9 .1,77~
144
41),B 3.775
U83
(HI (.~.lS4) (t.~)
(41) 749 ,R9-I
11
(4J) 74'] yoj
(25) ],\0 77.
(J.~) 19
(43) 749 776
11() 5,158 4.686
3!77~ .\.1I1l
.l,n~ '\,110
L.lIH 1"~76
(4,2(#) i~J:'Tij)
R94 III)K
11 ~
')()5 814
716 664
'176 (l6.I
12') tOO
Ll~1 1,2,14
m (2)

4,686

s.uo 1~76

(3,H7S1 ~O!\ 16

~24

664

(J6)

(2) 2
(lfi)
(~g) 2
:>8
.1K
749 908
HI$ 57
_illil ~)
tI')O 756
(209) (197)
<l.~l !\.W
~) .....Q!l
4$'.' ~3
(29:J) (:1'12)
166 2~1
- ===
53.2p
~2,8p
(,2.2p 48.51' 47,\11'

~) (112)

.18 18

1.231 1.2.>1

(2)
1.2.11
1~12
l.Ll9 3n
57 48
...E!!2 ~.I
1,911] IiU
(21\7) (117)
L7(X) 'O~
~I ,,__,J!)
1 .. 684 497
(292) (277)
J,J92 2,20
== =
192.91'
t91.6p
SUp 790 165

1.231

(I) A summary of the stgnllicllllludJl.I&lments to earnings avallnblc for shareholders (net Income) that would 00 required had United Stales gl'1lcmlly acceptcc a~!)U11ting prlnciples OOC11 applied instead of those ~!leJlllly IIl'l'l'Jllcd in the UnH,'U Kingdmn Is set <lui ill Note 3.1 (~. Notes 10 tile Hnanclai Stutements.

l~'IJIj( 011 'JfrlillalY a(l,i\.il"i.e~ before

inlen:st ._-- (Jilote ,2) .. ,. _ .

Int.C1\"!iI_ l"n:er.·llble ...

Inl.cl"ctiL paYllblc and. simllar (hllr~~ ,_. (N~~lc: 6J

t~nlH on ordinary ll.'i,tvi.tiC:1< l"Cf.ore taxulion

'1111 on pmfH (111 onlhuu)' ~ctj'ii,Licjf, -

(Nole 7) .

Pri.lfil ou nrdul!'uy nclNi,Lie!i. Wlm'

taxation ......•.•. ,

Millont" equity inl...-rcsts.,. , •

F.lfIlli.np aY1.iI{lhle: [llr "l'an~blildc.n: (i) Dhidclld", 011 equity acd mllH-quity

I<Iwre. - (NOlo 8) , .,.

Reta.ined ror mfWt'5Lrnenl in the

(124'1

731

(190)

hus.JnCAA ..

Earnings per ordhtary !lhare - (Nlll(' 9)

J~ll.1i~ .•.....•.....•.......•• ,,'.

nil.'rd .

1u:!I"<'oo .

60.11'

(41)

(Ill))

712 4S

~)

(4t)

tHJ

(lW)

572

(90)

(171)

1,141

ItlCl)

39~ ~) .J87

(i'Cf)

(tiC))

1.I4t

It to)

(211)

(00)

=

1.141

]10

==

Do Not Duplicate

Six Continents: De-merging fOI" a better future? 43

Appendix G - RevP AR Statistics

RevPAR by Region, Ownership & Brand (Quarter Ended June 2002)
Americas: Occupancy % ADR US$) RevPAR (US$)
Growth Growth Growth
Actual %Pts Actual %Pts Actual %Pts
Owned & Leased
I ntercontine ntial 65.0% 0.4% 166.25% -10.3% 107.99% -9.7%
Crowne Plaza 71.0% -4.4% 116.28% -3.3% 82.59% -8.9%
Holiday Inn 65.5% -1.1% 76.03% -6.1% 49.80% -8.0%
Staybridge 70.1% -4.3% 85.84% -2.6% 60.18% -8.2%
Managed
Intercontinential 50.6% -6.1% 130.65% -6.1% 66.10% -16.2%
Crowne Plaza 65.3% -0.9% 110.00% -11.0% 71.95% -12.3%
Holiday Inn 66.5% -4.9% 61.26% -6.2% 54.04% -12.6%
Holiday Inn Express 65.7% 3.9% 84.93% -15.0% 55.79% -9.6%
Franchised
Intercontinential 51.1% 2.9% 104.10% -11.9% 53.18% -6.6%
Crowns Plaza 55.9% -8.4% 106.64% 7.4% 59.59% -6.6%
Holiday Inn 64.2% -1.7% 79.81% -2.2% 51.16% -4.7%
Holiday Inn Express 66.7% -0.2% 72.81% -07% 48.59% -0.9%
Staybridge 66.7% 9.6% 82.56% -1.1% 55.09% 15.5%
Total
Intercontinential 55.1% -0.8% 134.38% -9.1% 74.04% -10.3%
Crowne Plaza 59.5% -6.4% 108.54% n/a 64.59% -9.6%
Holiday Inn 64.5% -1.9% 79.74% -2.6% 51.39% -5.4%
Holiday Inn Express 66.7% -0.1% 72.92% -0.8% 48.65% -1.0%
Staybrldge 68.3% 2.0% 84.15% -2.4% 57.50% -0.5%
http://www.sixcontinents.com/pdf/011002t.pdf RevPAR variance to last year
Americas: 11 months H2 H2 v H1
to Aug 2002 (to Aug 2002) (% pts)
Intercontinential Owned & Leased -16.5% -4.2% 20.9%
Crowne Plaza Owned & Leased -21.9% -16.2% 10.7%
Holiday Inn -total system -8.6% -4.4% 8.4%
Holiday Inn Express -total system -1.8% 0.0% 3.8%
http://www.sixcontinents.com/pdfJ011002t.pdf Do Not Duplicate

Do Not Duplicate


Bibliography

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2 Pederson, Jay P, ed. International Directory oj Companv Histories. Vol. 38 Detroit. St. James Press. 2001.

J Atkinson, Dan. "Bass to sell Crest Group to concentrate on Holiday Inns." The Guardian (London). 1 March 1990.

4 Butler, Steven. "Bass Pays 55 M (Pds) for Four Holiday Inn Hotels." Financial Times (London). 22 May 1987.

5 Churchill, David. "Bass Buys a Holiday Inn Hotel Chain for 475 M." Financial Times (London). 16 September 1987.

6 Six Continents. History Page. http://www.sixcontinents.com/aboutus/history.htm. Visited November 15, 2002.

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Hambleton-Hill. 1996.

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Do Not Duplicate

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23 Hospitality Net. "Leisure Travel Up, Business Travel Down For First Six Months Of Year - TTA Reports". http://www.hospitalitynet.org/news/9-11_Aftermath/4013245.htmI. Visited November 19,2002.

24 Travel Industry Association of America "Length of trip" http://www.tia.orgJTravel/tripChar.asp. Visited November 28,2002. 25 Travel Industry Association of America. "Travel Market Segments" http:/ jwww.tia.orgJTravel!TraveITrends.asp. Visited Nov 28,2002.

26 Hospitality Net. "Smith Travel Research Announces Second Quarter And First Half 2002 U.S. Lodging Industry Results". http:j Iwww.hospitalitynet.orgjnews/Market_Reports/STR__Market_Reports/4012814.hhnl. Visited November 28,2002.

27 Hospitality Net. "Travel Industry Partners With U.s. Department Of Transportation For Joint Promotion To See America's Byways". http://www.hospitaIitynet.org/news/4012126.htmi. Visited November 19,2002.

28 Hospitality Net. "War Dampens Hotel Turnaround in 2003 - Research Companies Estimate How War Effects the Recovery for Branded Hotels". http://www.hospitaJitynet.org/news/Market_Reports/PKF_Consulting_(USA)/4013464.html. Visited November 19,2002.

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30 Travel Industry Association of America. "Travel Market Segments". http://www.tia.org/Travel/TraveITrends.asp. Visited November 28,2002

31 Brown, Paul. "Investment in Information Technology: The Multi-Billion Dollar Game of Chance". Hospitality Business Review. Volume 4, Number 1,2002. pp.28-38.

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34 Starkov, Mark. Hospitality Net. "The Internet: Hotelier's Best Ally or Worst Enemy? - What Went Wrong with Direct Web Distribution in Hospitality?". http://www.hospitalitynet.orgjnews/4013469.html. Visited November 19, 2002.

35 Piccoli, Gabriele. "Wyndham International: Fostering High-Touch with High-Tech". Teaching note created October 10, 2002. p. 3.

36 American Hotel and Lodging Association. 2002 Lodging Industry Profile. http://www.ahla.com/infocenter/lip.asp. Visited November 18, 2002. 37http://www.tia.org/Travel/TraveITrends.asp Nov 28,2002

38 American Hotel and Lodging Association. 2001 Lodging Industry Profile. http:/ jwww.ahla.com/infocenterj2001.pdf. Visited November 18, 2002.

39 Amstutz, Wendy. Hospitality Net. "Economic Events to Restrain Lodging Demand Growth Through Remainder of 2002 PwC Reports". http://www.hospitalitynet.org/news/4013058.html, Visited November 18, 2002.

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