Hotel Business Management Training Simulation Handbook

Hotel Business Management Training Simulation Handbook Dogan Gursoy, Ph.D. School of Hospitality Business Management College of Business Washington State University I

TABLE OF CONTENTS INTRODUCTION... 1 Basic Idea of the Hotel Business Management Training Simulation... 1 Playing the Simulation... 3 MARKET SEGMENTS INCLUDED IN THE SIMULATION... 6 Business Segment... 7 Small Business Segment... 8 Corporate Contract Segment... 9 Family Segment... 10 Affluent Mature Travelers Segment... 11 International Travelers Segment... 12 Corporate/Business Meetings Segment... 13 Association Meeting Segment... 14 FACTORS TO CONSIDER WHEN MAKING DECISIONS... 16 Hotel Attributes and Amenities... 17 Guest Room Quality... 18 Reservations... 18 Guest Check In/Out... 18 Fitness Center... 19 Business Center... 19 Golf Course... 19 Other Recreation Facilities - Pools, game rooms, tennis courts, ect... 19 Sales/Management Attention... 20 Restaurants... 20 Bars... 20 Room Service... 21 Banquet & Catering... 21 Meeting Rooms... 21 Entertainment... 21 Courtesy... 22 II

Concierge... 22 Housekeeping... 22 Maintenance and security... 22 Building... 23 MARKET DEMAND... 24 PLAYING THE SIMULATION... 26 Registration Process... 27 How to Purchase a Student License... 27 How to Register... 28 How to Access the Simulation... 31 How to Change Your Password... 32 What to Do If You Forget Your Password and/or Username?... 33 Adding a New Class or Changing the Class... 33 PERFORMANCE MEASURES USED IN THIS SIMULATION... 35 Occupancy Rate... 35 Room s Revenue... 36 Total Revenue... 36 Market Share Based on Number of Rooms Sold... 36 Market Share Based on Revenues... 37 Revenue Per Available Room (RevPAR)... 37 Average Daily Rate (ADR)... 38 Yield Management... 38 Operating Efficiency Ratio... 39 Profit Margin... 40 How to Enter Your Objectives into the Simulation... 41 HOTEL ATTRIBUTE AND AMENITIES DECISIONS... 43 Difference between capital and operating expenditures... 43 Importance of capital and operating expenditures for each attribute and amenity... 45 Ideal Quality Level Expectations of Each Segment for each Hotel Amenity and Attribute... 46 ROOM RATE DECISIONS... 49 III

Cost of Distributing (Selling) your Rooms... 50 MARKETING DECISIONS... 52 ROOM ALLOCATION DECISION... 54 HOW TO ENTER YOUR DECISIONS... 55 How to Enter Room Allocation Decisions... 56 How to Enter Hotel Attributes and Amenities Decisions... 57 How to Enter Room Rate Decisions... 58 How to Enter Marketing Decision... 59 How to Borrow or Pay Your Loans... 60 How to View Reports... 61 How to View Performance Statistics Reports... 64 STRATEGIC BUSINESS PLANNING PROCESS (SBPP)... 67 Introduction... 67 Identification of Performance Gaps... 67 Identification of Causes of Performance Gaps... 69 Determining Action Steps... 70 IDENTIFICATION OF PERFORMANCE GAPS... 72 Step 1: Calculate Performance Measures and Compare Them to Decision Criteria... 72 Step 2: Rank Performance Gaps to Determine Top 5 and Top 3 Critical Performance Gaps. 75 Summary of identification of Performance Gaps... 77 IDENTIFICATION OF CAUSES OF PERFORMANCE GAPS... 78 Analysis 1: Actual Market Share versus Market Share by Positioning Alone... 78 Summary of Analysis 1... 80 Analysis 2: Determining Causes of Performance Gaps Using Positioning Maps... 80 Summary of Analysis 2... 84 Identification of Most Critical Causes of the Performance Gaps... 85 Summary of Identification Of Causes Of Performance Gaps... 86 DEMAND ANALYSIS... 87 IV

DETERMINING STRATEGIC BUSINESS PLAN FOR THE UPCOMING BUSINESS PERIOD... 90 Summary of Determining the Business Action Plan for the upcoming Period... 92 V

INTRODUCTION Welcome to Hotel Business Management Training Simulation Game! Your team has just been hired to manage a simulated 500-room full service resort hotel located in a large city. The previous management team was fired because the simulated resort hotel was managed poorly by them. The simulated hotel is in a bad condition. Most part of the simulated hotel and services provided are in need of renovations and updates. Your team is expected to turn this run down simulated hotel into a competitive and profitable hotel in the city you operate. Your team is expected to perform the following activities during the operation of this simulated hotel: Situation analysis of o your hotel o your customers o competitors o market conditions Evaluate your simulated hotel s performance Identify performance problems Identify the causes of those problems Determine your operational objectives Make operating decisions to solve those problems and to accomplish your operational objectives. Basic Idea of the Hotel Business Management Training Simulation The Hotel Business Management Training Simulation is a virtual management training game where participants are divided into teams and assigned the task of running 500-room hotels in a competitive virtual marketplace. Each 500-room hotel competes against other 500-room hotels located in the same destination that are managed by other participants. Just like in the real world, hotels compete against each other to attract customers from their target markets that will generate the most revenue and enable the management team to reach their monthly and annual financial and operational objectives. 1

The Hotel Business Management Training Simulation utilizes both operational decisions made by the management team for their hotel and operational decisions made by competing hotels to determine demand and revenue for each hotel. Operational decisions include, but are not limited to, capital investment, operating expenditures, marketing expenditures and pricing strategies. The external factors such as day of the week, demand patterns, etc. are also factored in the simulation. At the beginning of each month (round of simulation), each hotel management team must determine their objectives and primary and secondary market segments from eight market segments included in the simulation. Afterwards, just like in the real world, the management team must make decisions relating to hotel operations, marketing, distribution, pricing, operational and capital investment decisions, and financing decisions to fund capital and operational expenditures. The challenge is to develop and implement a competitive business strategy that results in a competitive positioning in the marketplace and produces good financial performance as measured by market share, occupancy, RevPAR, ADR, total revenues, net operating earnings and net profits After making decisions for each month, results are made available to all management teams so that they can see how their actions and their competitors actions impact the performance of their businesses. Just like in the real world, each management team must analyze their previous months decisions and the outcomes of those decisions, competitors actions and strategies in the previous months, market and demand conditions for each segment before making their decisions. In order to be successful, decisions must be rational and logical based on thorough analysis of data from previous months and projections (forecast) for the future. The Hotel Business Management Training Simulation game provides invaluable training opportunities for managers and management trainees to improve their managerial and operational skills and efficiencies. It also provides great learning experiences to students who are studying hospitality business management. 2

Playing the Simulation This simulation is a competitive business game in which you make a series of business decisions for each period (month). Each decision period is equivalent to one month. At the conclusion of each decision period, i.e. month, you will receive a set of financial and operational reports for your hotel and competing hotels that are operated by other teams from your class. The simulation is designed help participants develop analytical, critical thinking, teamwork and leadership skills by providing a project based learning environment through which they practice and integrate skills and knowledge they have. This simulation will engage you in a challenging learning project in which you and your team will effectively frame and solve problems, demonstrate knowledge of research and information retrieval strategies, and evaluate and compare information in order to develop business strategies that are most appropriate for your situation. Your hotel team will consist of 4-5 members. Each member will take a role (i.e. General Manager, Director of Sales, Director of Rooms, etc) and be the main resource for that specific function. However, it is important to note that the most valuable tool for outstanding performance in this simulation is the communication that takes place among your team members. Sharing timely information and exchanging ideas with your team members is the most significant activity that will determine the quality of your decisions. You will need to work together as a team to make the most appropriate operational decisions and analyze performance. It will probably take about one and one-half to two hours for your team to make the entire set of decisions required for each period. This time will vary depending on the extent to which your team has established and agreed upon a strategy for your simulated hotel. Of course, agreeing on a strategy does not necessarily mean smooth sailing during team decision making. You must also share some common beliefs about the best way to implement that strategy and have some confidence that it will work! Your instructor will determine the expected average market occupancy percentage for each period (month). However, since your simulated hotel is in a really bad shape, at the beginning of 3

the simulation, actual average market occupancy percentage will be around 14 15 percent lower than the expected average market occupancy percentage set by your instructor. You will need to improve the quality of your hotel in order to close this gap. There are eight market segments in the Hotel Business Management Training Simulation. Those are: 1. Business 2. Small Business 3. Corporate contract 4. Families 5. Affluent Mature Travelers 6. International leisure travelers 7. Corporate/Business Meetings 8. Association Meetings Each of these segments has their own wants and needs (explained later); your hotel will establish a strategy of which segment(s) you wish to target (as primarily and secondary segments) and make decisions to entice that specific target market. Make sure that you target all segments as a primary, a secondary or a tertiary segment. Completely ignoring a segment will result in a disastrous financial performance. Each decision period, you will make room allocations for each segment, determine the amount of money you will be spending on marketing activities, establish room rates, and determine capital and operational expenditures. The decisions you make (entered into the simulation) will come back with results of how pleased/ displeased each segment is, which is quantified by attribute scores, occupancy percentage, overall demand, etc. It is up to your group to decide where your weaknesses as an operating team lie (performance gaps), identify why you have those weaknesses (causes), and establish action plans that will solve your biggest problems (Business Action Plans). 4

As with all businesses, the point of your hotel is to make money. At the end of the decisions, you will be requesting funds for continued operations. You will present your performance, your problems, and how you wish to solve them to prove your hotel is worth investment. Enjoy the competition, but remember that in the long run, winning or losing the simulation will make no difference. The important outcome is what you have learned in the process. 5

MARKET SEGMENTS INCLUDED IN THE SIMULATION In the ultimate mass market, all customers would want the same products and the same services. The opposite would be a completely tailored product or service for each individual. The real world is somewhere in between. How similar are hotel customers? Do they all want a traditional room in a full-service hotel or do some want suites? Do others want a low cost room with limited services or do they prefer a luxury hotel with a full range of services and benefits? Obviously, there are a variety of types of hotel customers. This poses a challenge for the hotel managers. Which customers do you want to serve? Which customers can we best serve? How can we organize those customers into groups or segments, so they can be targeted through our services and marketing strategies? How can we achieve competitive advantage with our targeted customers? A market segment is simply a group of customers who have common requirements for a product or a service. Different segments have different needs and requirements. Segments require evaluation and adjustment according to their responsiveness to your decisions. Segments also show different patterns of usage in terms of days of the week and seasons. Segments present opportunities for developing strategies which cater to the specific needs and requirements of that segment. Your team will be able to set operating budgets and make capital investments that can improve your levels of service of selected attributes. This can help you target segments and result in improved occupancy and, if investments are made wisely, improved profitability for your hotel. The eight market segments in the Hotel Business Management Training Simulation are: 1. Business 2. Small Business 3. Corporate contract 4. Families 5. Affluent Mature Travelers 6

6. International leisure travelers 7. Corporate/Business Meetings 8. Association Meetings Business Segment Business segment includes people who travel for business reasons. Their travel expenses are usually covered by the companies they work for. Since they travel to conduct business, most of the time, they will travel during the week. However, a small portion (around 10 percent) may travel during the weekends too. The duration of their stay is one to two nights. Many are frequent travelers and represent opportunities for repeat buying. They tend to be the very demanding in terms of overall levels of services, but are generally willing to pay for added value. Travelers in this segment tend to generate around 15 percent of the demand for the hotels in the area. Importance of Hotel Attributes and Amenities Business Segment As you can see from the chart above, quality of guest rooms is the most important criterion for this segment, but courtesy, guaranteed reservations, and the speed of check-in/out are also important. Golf course, concierge service, fitness center, business center, restaurants 7

and bars are also important for this segment. If your team chooses to serve the Business segment, these attributes would be the target of your operating budgets and capital investments. Small Business Segment People in this segment also travel for business reasons. However, travelers included in this segment tend to be owners of small businesses or work for small businesses with limited resources. Like business segment, they travel to conduct business. Most of the time, they will travel during the week. However, a small portion (around 15 percent) may travel during the weekends too. The duration of their stay is one to two nights. Since they travel on a budget, they are not as demanding as business travelers. Travelers in this segment tend to generate around 15 percent of the demand for the hotels in the area. Importance of Hotel Attributes and Amenities for Small Business Segment As you can see from the chart above, most important hotel attributes and amenities for this segment are guest rooms, and business center, but courtesy, guaranteed reservations, the speed of check-in/out and quality restaurants are also important. If your team chooses to 8

serve the Small Business segment, these attributes would be the target of your operating budgets and capital investments. Corporate Contract Segment Like business segment, people in this segment also travel for business reasons. However, they are required to stay at hotels that have a contract with the company they work for. Many large corporations have contracts with hotels that guarantees a certain number of room nights in return for discounts. Most of the time, the level of discount they receive depends on the number of room nights they can guarantee to generate; higher the room night, higher the discount. Companies may have contractual rate agreements with more than one hotel in your area. Most of the time, travelers in this segment will travel during the week; only a small portion (around 5 percent) may travel during the weekends. The duration of their stay is one to two nights. Since they have limited options in terms of the number of hotels they can stay, they are not as demanding as business travelers. Travelers in this segment tend to generate around 5 percent of the demand for the hotels in the area. Importance of Hotel Attributes and Amenities Corporate Contract Segment 9

As you can see from the chart above, most important hotel attributes and amenities for this segment are guest rooms, guaranteed reservations, and the speed of check-in/out but courtesy, and concierge services are also important. They also value quality restaurants and business centers. If your team chooses to serve the Corporate Contract segment, these attributes would be the target of your operating budgets and capital investments. Family Segment Family segment includes families with and without kids who travel for pleasure and leisure activities and is the best segment for selling rooms on weekends (Friday, Saturday, & Sunday). Research suggests that around 80% of them travel during the weekend. Around 10% of the market demand is generated by family segment Importance of Hotel Attributes and Amenities Family Segment 10

Family segment tend to place high value on guest rooms, guest check in/out, restaurants, room service, other recreational facilities such as pools, game rooms, ect. and courtesy They also value courtesy, golf course and spa. If your team chooses to serve the Family segment, these attributes would be the target of your operating budgets and capital investments. Affluent Mature Travelers Segment Affluent mature traveler segment includes mostly retired people with high disposable income. They are highly educated. They travel for pleasure and leisure activities such as spa, golfing and other high end activities. Most of them travel during the weekend (70%). Since some of them are retired they are also able to travel during the week (30). When they travel, they like to be pampered. They are very demanding. Around 10 percent of the market demand comes from this segment. Importance of Hotel Attributes and Amenities for Affluent Mature Travelers Segment 11

As presented in the figure above, the most important criterion for them is the quality and comfort of the guest room. They also place great importance on courtesy, golf course and spa. Food and beverage and entertainment are also important for this segment. If your team chooses to serve the Affluent Mature Travelers segment, these attributes would be the target of your operating budgets and capital investments. International Travelers Segment This segment includes international traveler to your destination. These international travelers tend to be highly educated with higher than median income. They are very well traveled and very knowledgeable about travel products. Their length of stay is usually longer than domestic travelers. Since they are on a vacation, they are able to travel both during the week (50) and during the weekend (50%). Around 10 percent of the market demand comes from this segment. Importance of Hotel Attributes and Amenities for International Travelers Segment 12

As presented in the figure above, most important attributes for this segment is quality and comfort of the room. They also value golf course, concierge service, courtesy, entertainment restaurants and spa. Other important attributes include reservations, check in/out and bars. If your team chooses to serve the International Travelers segment, these attributes would be the target of your operating budgets and capital investments. Corporate/Business Meetings Segment People in this segment travel to attend corporate and/or business meetings. Most of the people in this segment hold middle to high level managerial positions in the companies they work for. Since they travel to attend business meetings, all of their expenses are covered by their companies. Most of them travel during the week (80%). Around 15 percent of the market demand comes from this segment. Importance of Hotel Attributes and Amenities for Corporate/Business Meetings Segment 13

As shown in the figure above, meeting rooms and attention they receive from management and sales are extremely important for this group. They also place high importance on quality and comfort of the rooms, ease of check in/out, and the business center. They also value courtesy, golf course and banquet and catering services. If your team chooses to serve the Corporate/Business Meetings segment, these attributes would be the target of your operating budgets and capital investments. Association Meeting Segment This segment includes people who travel to attend association meetings. Since attendance to association meetings are voluntary, most of them pays for their own expenses. These association meetings can be small meetings of as few as 30 to 40 people or enormous conventions with thousands of members attending. Most of these meeting are held during the weekend (80%). Around 20 percent of the market demand is generated by this segment. When shopping for hotels for groups, the following eight attributes are considered to be most important: 1. Meeting rooms 2. Sales and management attention 3. Banquet and Catering 4. Guest Rooms 5. Check in/out 6. Courtesy 7. Reservations 8. Entertainment If your team chooses to serve the Association Meetings segment, these eight attributes would be the target of your operating budgets and capital investments. The following chart reflects relative values of all attributes for this segment. 14

Importance of Hotel Attributes and Amenities for Association Meetings Segment 15

FACTORS TO CONSIDER WHEN MAKING DECISIONS Demand for a hotel is driven by three demand criteria. 1. Quality of hotel s attributes and amenities 2. Room rates 3. Marketing expenditures. In this simulation, each segment places a different emphasis on three demand criteria. The table below illustrates examples of the relative importance of demand criteria for each segment. Relative Importance of Demand Criteria for Each Segment Market Segments Attributes and Amenities Room Rate Marketing Operating Business 50% 25% 25% Small Business 30% 45% 25% Corporate contract 35% 40% 25% Families 30% 45% 25% Affluent Mature Travelers International Leisure travelers Corporate/Business Meetings Association Meetings 45% 30% 25% 40% 35% 25% 40% 35% 25% 35% 40% 25% 16

Hotel Attributes and Amenities Customers overall quality perception of a hotel and the quality perceptions of a hotel s individual amenities and attributes are likely to play a significant role in consumers hotel selection process. Consumers are likely to choose a hotel that is most likely to satisfy their needs by offering amenities and attributes up to their perception. Research indicates that customers are likely to use 19 buying criteria (hotel attributes and amenities) for full service hotels in your marketplace. The 19 hotel attributes and amenities that are important for your customers are: 1. Guest Rooms Quality 2. Reservations 3. Guest Check in/guest Check out 4. Fitness Center 5. Business Center 6. Golf Course 7. Other Recreation Facilities - Pools, game rooms, tennis courts, ect. 8. Management/Sales Attention 9. Restaurants 10. Bars 11. Room Service 12. Banquet & Catering 13. Meeting Rooms 14. Entertainment 15. Courtesy 16. Concierge 17. Housekeeping 18. Maintenance and security 19. Building 17

Guest Room Quality Customers assess the quality of the guest rooms based upon cleanliness, quality and comfort of bedding and furnishings, size of the room, location of the room, working order of all appliances and faucets, number of desks, phones, TV sets in the room, internet access, amenities, etc. Research suggests that around two third of the operational expenditures in rooms division goes to labor and one third is spent on other operating expenses. Reservations One of the major concerns for customers about reservations is the ease of making a reservation. Another major concern is that their reservations are honored, i.e. they are guaranteed a room. Not only do they expect a guaranteed room, but they expect to reserve a specific type of room, e.g. king size bed, non-smoking room, and receive that specific type of room upon check-in. Reservations are affected by the technology you employ and the care and efficiency of your reservations staff. Research suggests that slightly higher than 50 percent of operational expenses are spent on other operating expenses and the rest goes to labor expenditures. Guest Check In/Out How efficient and easy is it to check in and out of the hotel? Do I have to wait in line? Is express check-in/out available? Can I get help with my bags if I need it? Am I greeted at the door? Do I feel welcome upon arrival? Are the front desk personnel polite, efficient, and helpful? In addition to front desk staff and bellmen performance, this criterion is affected by technology, counter space, and customer flow. Research suggests that around two third of the operational expenditures on guest check in and check out goes to labor and one third is spent on other operating expenses. 18

Fitness Center Availability of fitness center is an important criterion for some customers. Besides availability, operating hours, size, number, availability and working order of exercise equipment, cleanliness, availability of services such as towel service etc. are likely to influence the quality perception of the fitness center. Privacy and quietness are also valued by customers. Research suggests that around one third of the operational expenditures for the fitness center goes to labor and two third is spent on other operating expenses. Business Center Availability of business center is an important criterion for some customers. Besides availability, operating hours, size, number, availability and working order of equipment such as computers, fax machines, photocopy machine, cleanliness, availability of services such as receiving, package holding, secretarial service etc. are likely to influence the quality perception of the business center. Privacy and quietness are also valued by customers. Research suggests that around one third of the operational expenditures for the business center goes to labor and two third is spent on other operating expenses. Golf Course Availability and quality of golf course plays a significant role for choosing a hotel to stay for some customers. In addition to availability and quality, customers also value availability of club house, caddy service, food and beverage, ease booking, etc. Maintenance, supervision, and general appearance of golf course are also extremely important for customers. Research suggests that around half of the operational expenditures for the golf course goes to labor and the other half is spent on other operating expenses. Other Recreation Facilities - Pools, game rooms, tennis courts, ect Some customers reported recreation facilities such as pool, sauna, whirlpool, tennis courts, game room, etc. as important considerations in their selection of a hotel. They were 19

concerned not only about the scope of facilities, but their maintenance, supervision, and general appearance. Research suggests that around half of the operational expenditures for other recreation facilities (pools, game rooms, tennis courts, ect) goes to labor and the other half is spent on other operating expenses. Sales/Management Attention Some customers, especially meeting and association managers and those who labeled themselves as frequent travelers, expressed an interest in the personal attention they received from management. Personal attention for the meeting and association managers includes having one contact person for planning and taking care of problems during meetings, frequent calls or checking by staff to see that everything is going well. Frequent travelers pay more attention to special amenities in their rooms or an occasional call from management to check on their room and offer any assistance. Research suggests that around half of the operational expenditures for sales/management attention goes to labor and the other half is spent on other operating expenses. Restaurants Availability and quality of restaurants are likely to play a significant role for some customers in choosing a hotel. These customers also value service and food quality, menu variety, operating hours, efficiency of staff, seating arrangements, availability of private rooms to hold working business lunches and dinners, cleanliness, quality of furnishing and décor, etc. Research suggests that slightly higher percentage of the operational expenditures for restaurants goes to labor and the other half is spent on other operating expenses. Bars For some customers, availability and quality of bars tend to play a significant role in choosing a hotel. These customers also value service quality, availability of variety of 20

beverages, operating hours, availability of food, cleanliness, quality of furnishing and décor, etc. Research suggests that slightly higher percentage of the operational expenditures for bars goes to labor and the other half is spent on other operating expenses. Room Service Some customers value availability and quality of room service. For these customers, operating hours, menu variety, service quality, courtesy and friendliness of service employees, food quality, ect. are also important. Research suggests that slightly higher percentage of the operational expenditures for bars goes to other operating expenses and the other half is spent on labor expenses. Banquet & Catering Individuals sponsoring special events, association and meeting managers are especially concerned about banquet facilities, ballroom size and decorations, banquet menus, special features of food service, and service during breaks at meetings, etc. Research suggests that around half of the operational expenditures for banquet & catering goes to labor and the other half is spent on other operating expenses. Meeting Rooms Meeting and association managers express a strong interest in the quality of meeting rooms: size, access, acoustics, comfort of chairs, audio-video equipment, and lighting. Research suggests that around one third of the operational expenditures for meeting rooms goes to labor and two third is spent on other operating expenses. Entertainment For some customers availability of entertainment opportunities plays an important role in selecting hotels. These customers value variety, quality, and operating hours etc. 21

Research suggests that around two third of the operational expenditures for entertainment goes to labor and one third is spent on other operating expenses. Courtesy Customers reported that the friendliness and helpfulness of staff are important considerations for them in selecting a hotel to stay. Research suggests that employee morale and training have a substantial impact on courtesy. Research suggests that around one third of the operational expenditures for courtesy goes to labor and two third is spent on other operating expenses. Concierge Some customers reported that availability of concierge services is important for them in their selection of a hotel, especially if they are not very familiar with the area. Those customers indicated that friendliness, helpfulness and knowledge of staff are extremely important. Research suggests that around half of the operational expenditures for concierge goes to labor and the other half is spent on other operating expenses. Housekeeping Customers indicated that quality of services provided by housekeeping is extremely important, especially when it comes to cleanliness of the room, privacy and safety issues. It is important for hotels to hire right people and provide adequate training to ensure they will perform their duties thoroughly while respecting customers privacy. Research indicates that this is equally important for every segment. Research also suggests that around two third of the operational expenditures for housekeeping goes to labor and one third is spent on other operating expenses. Maintenance and security Customers reported that maintenance and security plays a significant role in determining where to stay. Customers prefer to stay at a well maintained property. Research suggests that prompt action and pro-active maintenance management within a hotel avoids frustration for 22

the customer at all times. Customers also indicated that a well maintained property enforces customers positive opinions about the property and their perception of security. Research indicates that this is equally important for every segment. Research also suggests that around half of the operational expenditures for maintenance and security goes to labor and the other half is spent on other operating expenses. Building Research indicated that customers form their first impressions within the first few minutes of seeing a hotel s building. Appearance of the hotel building plays an important role in forming customers quality perceptions. Therefore, it is important to make sure that the appearance of the building says the right things to help create the right first impression. Research also indicated that customers assume that all hotel buildings are structurally safe and meets the building code requirements. Research indicates that this is equally important for every segment. Research also suggests that around half of the operational expenditures for building goes to labor and the other half is spent on other operating expenses. 23

MARKET DEMAND Overall expected market demand for reach business period ((month) in the simulation is determined by your instructor. It should be noted that the expected average market occupancy percentage determined by your instructor for each period (month) is simply a demand forecast that is estimated based on the data from previous years and months. Drastic changes in the destination and in the quality of the hotels in the destination are likely to have significant impact on the actual demand for the destination and for your hotel. As indicated earlier, all the simulated hotels in the destination are in a really bad shape. Most of the quests that stayed at those hotels agree that quality of services and amenities provided do not meet their expectations. Most of the guests are not satisfied; in fact they are extremely dissatisfied. However, previous research indicates that about 50 percent of dissatisfied customers choose not to complain directly to the service provider because of three primary reasons: (1) it is not worth the time and effort, (2) they do not know where or how to complain, and (3) they believe that nothing will be done even if they do complain. Instead, they tend to engage in a variety of activities, such as boycotting the product and/or engaging in adverse word of mouth advertising, which are likely to be detrimental to the service provider. As suggested by previous research, those guests who are extremely dissatisfied with their experiences at the simulated hotels are not shy of expressing their opinions about the destination and the hotels they stayed on online websites such as Trip Advisor and through their social networks. This is likely to result in an unexpected decrease in the overall market demand. The consulting company we use, Gursoy Solutions, suggests that at the beginning of the simulation, actual average market occupancy percentage is likely to be significantly lower than the expected average market occupancy percentage set by your instructor. The Gursoy Solutions estimates that the actual demand to be 14-15 percent lower than the expected average market occupancy percentage determined by your instructor because of extremely high number of dissatisfied customers. In order to close the gap between the expected average market occupancy percentage and actual market occupancy percentage, you will need to improve the quality of your hotel in order 24

to close this gap. However, this problem will not be solved by the efforts of one hotel in the destination. This gap can only be closed by collective efforts of all the hotels in the destination. All the hotels in the destination should make significant capital investment on their hotels and amenities they provide and increase operating budgets in order to improve the overall quality. Once all or most of the hotels are able to provide services that meet customers expectations, than the occupancy gap is likely to be closed. In fact, if most hotels quality exceeds customers expectations in the long term, actual market demand may even be higher than the expected average market occupancy percentage determined by your instructor. 25

PLAYING THE SIMULATION PAY CLOSE ATTENTION TO THESE: Your instructor will determine the demand - expected average market occupancy percentage for each period (month). However, since your simulated hotel is in a really bad shape, at the beginning of the simulation, actual average market occupancy percentage will be around 14 15 percent lower than the expected average market occupancy percentage set by your instructor. You will need to improve the quality of your hotel in order to close this gap. Please read the market demand section for details. Each decision period is equivalent to one month (30 days). There are 17 weekdays and 13 weekend days. Friday, Saturday and Sunday are considered as weekend days Make sure that you target all segments as a primary, a secondary or a tertiary segment. Completely ignoring a segment will result in a disastrous financial performance Make sure you allocate all 500 rooms. You will not be able to sell the rooms you do not allocate. The amount of dollars spent on capital, operating and marketing expenditures have an upper limit on their effectiveness. This is also known as the diminishing marginal returns. The law of diminishing marginal returns states that if one factor in production is held constant, an increase in the other factor of production will be beneficial up until a point, but beyond that point returns will decrease. 26

Registration Process The first thing students need to do is to register in order to participate in the Hotel Business Management Training Simulation game. Once you register, you will be able to make decisions for your hotel, review the results and reports. Since only registered participants can log-in to make decisions, review results and reports, all team members must register. Here are the steps: Purchase a student license Register Access the website How to Purchase a Student License Before you can register, you need to purchase a student license. Go to http://www.hotelsimulation.com/ Click on the Purchase a Student License link located in the navigation menu on the left side of the main page. Using your credit card for PayPal, complete the purchase process. After you complete the purchase, you will receive a confirmation email and your receipt. You will need to enter the Receipt No in the receipt as your payment code during the registration process. 27

How to Register To register, please go to: http://www.hotelsimulation.com/ You will see the registration link in the navigation menu on the left side of the main page. Click on register link. In this page, you are asked to provide a class ID in order to be enrolled into the particular training class you are in. The class ID will be provided by the trainers/instructors of the class. Enter the class ID code you received from your instructor. Click on the Next button. Enter the payment code (the Receipt No in the receipt) you received in your email after you purchased your student license to access the simulation. 28

Choose the Paid User option. Click on the Next button. In this page, you are asked to provide basic information such as your first name, last name and institution to identify yourself. All personal information you provide during registration is used only to establish you as an officially registered participant in the Hotel Business Management Training Simulation game. Your personal information will not be shared with any other party beyond your instructor(s) and/or game administrator(s). Enter your profile information. Click on the Next button Enter the username and password you want to use with this simulation Please make sure that you keep your password in a safe place. Enter a valid email address because if you ever need to retrieve your password, your password will be emailed to this email address. You can change your password later. Your registration will be completed and an account will be created for you once you click the Create User button. Click on the Create User button. You will be directed to the simulation 29

main page. Now, you are ready to login and start using the Hotel Business Management Training Simulation game. Using the username and password you have just entered, click on the Login button located on the left panel. Until your instructor generates the reports for month one, and assigns you a role and to a group, you will not be able to view any of the reports. 30

How to Access the Simulation Once your instructor generates the reports for the first month, assigns you a role and to a group, you will be able to view the reports and enter your decisions. When you login, you will see the menu on the left panel. Using this menu, you will be able to perform the followings: o Change your password, o Add/change class, o Set your objectives for the simulation game, o Make your decisions, o View reports o Borrow/Pay your loans 31

How to Change Your Password After you login the simulation, you can change your password. To change your password, click on the Change Your Password link in the navigation menu on the left side of the main page. Follow the instructions in the next page Click on Change Password button. Your password is changed. Please make sure you keep your new password in safe place. 32

What to Do If You Forget Your Password and/or Username? If you forget your password, click on the Forget Your Password link located underneath the Log In button. In the next page, enter your username. Your new password will be emailed to the email address you provided during registration. Adding a New Class or Changing the Class To add a new class or to change the class you are viewing, Login the simulation, Click on Add/Change class link in the navigation menu on the left side of the main page. 33

To add a new class, enter the Class ID you received for the new class in to box located under the Add Another Class subtitle. To change the class you are viewing or to make another class as the defult class (meaning when you login you will be directed to that class), choose the class and then click on the Select button. This will make the selected class the default class. Next time when you login, you will be autometcially directed to the class you have choosen. After you login, the class you are in will be shown on the upper left corner of each page. 34

PERFORMANCE MEASURES USED IN THIS SIMULATION This section presents the ten performance measures (PMs) used in the Hotel Business Management Training Simulation game and the decision rules to determine if there is a performance gap (PGs). Those ten performance measures are: 1. Occupancy 2. Rooms Revenue 3. Total Revenue 4. Market Share based on Number of Rooms Sold 5. Market Share based on Revenues 6. Revenue Per Available Room (REVPAR) 7. Average Daily Rate (ADR) 8. Yield Management 9. Operating Efficiency Ratio 10. Profit Margin Performance measures (PMs) provide a benchmark to monitor managerial decisions. There are performance gaps (PGs) if you fall below the objectives you set, norm, rule of thumb, or the results of your competitors for each of the performance measures. Occupancy Rate Occupancy rate is an important operational ratio that indicates the percentage of rooms sold (rented) at a particular property in a given time period. A property's occupancy rates along with the property s average daily rate (ADR) are the foundations for the property's financial performance. Decision Rules: When does a company have a performance gap? A company has a performance gap if the performance is lower than: The objective set by the management at the beginning of the business period. 35

Lower than the industry average Lower than competitors results. Room s Revenue Revenue generated from room sales at a particular property in a given time period. Decision Rules: When does a company have a performance gap? A company has a performance gap if the performance is lower than: The objective set by the management at the beginning of the business period. Lower than the industry average Lower than competitors results. Total Revenue Total revenue generated from all business activities at a particular property in a given time period. Decision Rules: When does a company have a performance gap? A company has a performance gap if the performance is lower than: The objective set by the management at the beginning of the business period. Lower than the industry average Lower than competitors results. Market Share Based on Number of Rooms Sold Market share based on number of rooms sold refers to the percentage of a market's total room sales that is sold by a particular company over a specified time period. Market share is calculated by taking the company's total room sales over the period and dividing it by the total number of rooms sold in the market over the same period. Decision Rules: When does a company have a performance gap? A company has a performance gap if the performance is lower than: The objective set by the management at the beginning of the business period. 36

If your actual market share is lower than your fair market share, there is a performance gap. In other words, if the market share variance is negative, there is a gap. Market Share Based on Revenues Market share based on revenues refers to the percentage of a market's total room s revenue that is generated by a particular company over a specified time period. Market share based on revenues is calculated by taking the company's rooms revenue over the period and dividing it by the total rooms revenue in the market over the same period. Decision Rules: When does a company have a performance gap? A company has a performance gap if the performance is lower than: The objective set by the management at the beginning of the business period. If your actual market share is lower than your fair market share, there is a performance gap. In other words, if the market share variance is negative, there is a gap. Revenue Per Available Room (RevPAR) Revenue per available room (RevPAR) is an important metric used to measure financial performance in the hospitality industry. The metric, which is a function of both room rates and occupancy, is one of the most important measures of health among hotel operators. The RevPAR provides rooms revenue information for each available room, which enables managers and operators to compare their performance to their competitors with varying sizes. Decision Rules: When does a company have a performance gap? A company has a performance gap if the performance is lower than: The objective set by the management at the beginning of the business period. Lower than the industry average Lower than competitors results. 37

Average Daily Rate (ADR) Average Daily Rate (ADR) is another important financial performance metric that represents the average room rate (rental income) per occupied room in a given time period. ADR along with the property's occupancy are the foundations for the property's financial performance. Decision Rules: When does a company have a performance gap? A company has a performance gap if the performance is lower than: The objective set by the management at the beginning of the business period. Lower than the industry average Lower than competitors results. Yield Management Yield management is the process of understanding, anticipating and influencing consumer behavior in order to maximize yield or profits from a fixed, perishable resource (such as airline seats or hotel room reservations). As a specific, inventory-focused branch of Revenue Management, Yield Management involves strategic control of inventory to sell it to the right customer at the right time for the right price. This process can result in price discrimination, where a firm charges customers consuming otherwise identical goods or services a different price for doing so. Decision Rules: When does a company have a performance gap? A company has a performance gap if the performance is lower than: The objective set by the management at the beginning of the business period. Lower than the industry norm. Industry Norm (Rule of Thumb) a. Higher than 90: Think about raising room rates b. Between 70 and 90: good. c. Between 30-70: Acceptable, but a lot of work needs to be done to bring it up d. Lower than 30: BAD. 38

Operating Efficiency Ratio Operating efficiency ratio is also known as GOP ratio and managerial efficiency ratio, measures management s overall ability to produce profits by generating sales and controlling the operating expenses they have the most direct control. It is a measurement of what proportion of a company's revenue is left over, before taxes, after paying for variable costs of production as wages, raw materials, etc. A good operating margin is needed for a company to be able to pay for its fixed costs, as interest on debt, insurance, etc. Decision Rules: When does a company have a performance gap? A company has a performance gap if the performance is lower than: The objective set by the management at the beginning of the business period. Lower than the industry norm. Industry Norm (Rule of Thumb): Lower than Norm is a gap! a. Industry norm is between 30 to 40% b. Higher than 40: Very tight cost control. This may work as a good short-term strategy but it may not be a long-term strategy. Because if you have a very tight cost control, you are likely to budget too little on your operating expenditures. As a result, the quality of your product and the customer satisfaction scores are likely to decrease in the long term, which is likely to have negative impact on the demand for your product. c. Between 30 and 40: good. d. Lower than 30: Either you do not do a good job controlling your cost or your sales are low or both. Increase sales while lowering cost. 39

Profit Margin Profit margin is a ratio of profitability calculated as net income divided by revenues. It measures how much out of every dollar of sales a company actually keeps in earnings. Decision Rules: When does a company have a performance gap? A company has a performance gap if the performance is lower than: The objective set by the management at the beginning of the business period. Lower than the industry average Lower than competitors results. IMPORTANT TO NOTE ABOUT SETTING OBJECTIVES: Your objectives should be higher than the fair market share or market average. Setting an objective at the fair market share / market average or lower than fair market share / market average may suggest that your team believes your management team has an average or lower than average management skills. 40

How to Enter Your Objectives into the Simulation In the Hotel Business Management Training Simulation game, each decision period represents a month. One of the first things you will do in the Hotel Business Management Training Simulation game is to determine your objectives for the month and for the year. To enter your objectives, click on the Set your objectives link in the navigation menu on the left side of the main page. In the Hotel Business Management Training Simulation game, you are required to set your monthly objectives for ten different performance measures. Remember, one of the criteria that will be used to evaluate your performance is the objectives you determine. Having an actual performance that is lower than your objective for any of the performance measures will indicate a performance problem. That s why it is important to determine the right objectives for each performance measure. Your objectives should be realistic and attainable. As presented in the Objective Reports of the simulation, your actual performance will also be compared to market averages. Having an actual performance that is lower than the market average will also indicate a problem for that performance measure. 41

Input the monthly and annual objectives for all ten performance measures, and then, click "Submit". 42

HOTEL ATTRIBUTE AND AMENITIES DECISIONS Difference between capital and operating expenditures Before making attributes and amenities decisions, it is important to understand the difference between capital expenditures and operating expenditures because in this simulation you will make capital investment and operating budget decisions. The distinction between a capital expenditure and an operating budget is important. Capital investment refers to money invested in a business with an expectation of income, and recovered through earnings generated by the business over several years. It is generally understood to be used for capital expenditure rather than for day-to-day operations. A capital expenditure is incurred when a business spends money either to buy fixed assets or to add to the value of an existing fixed asset with a useful life that extends beyond the taxable year. Capital expenditures are used to improve physical assets such as carpeting, furniture, grounds, recreational facilities, kitchen equipment, etc. The improvements you make through capital expenditures last beyond the month in which you make the expenditure. For example, a capital expenditure for guest rooms might include new furniture (hard goods). Your cost for this furniture is a one-time expense and has a life expectancy well beyond the month in which the money is spent. Capital assets do wear out over the course of the game at a rate that varies with the type of asset, but it would be foolish to continue to make heavy capital expenditures for the same item month after month. Industry experts suggest that hotels should allocate 5-8 percent of their gross revenue to capital expenditures. Capital expenditures are treated as investments and amortized over time. As presented in the simulation, capital expenditures accumulate and depreciate over time. Investment in hard goods and equipment is depreciated over five years. The hotel building is depreciated over 30 years. Investment made in the golf course is depreciated over a shorter period. If you neglect to continue making capital expenditures over the life of the game, your quality score will decline. If your quality score falls below the market average for several attributes, an entire market segment could drastically reduce its patronage at your hotel. 43

Operating expenditures are everyday expense items associated with operating a hotel. Since they do not accumulate, operating expenditures must be renewed each month. They include items such as salaries, food, routine maintenance, cleaning, etc. For example, Management/Sales Attention requires some time and effort be expended by your management team in taking care of customer concerns. Whatever was spent last month cannot be accumulated and carried over into the next month. You must allocate a certain amount of management time through your operating budget to provide special attention to your customers each month. Since hotel industry is a labor intensive industry, the operating expenditures in the Hotel Business Management Training Simulation divided into two sections: Labor and other operating expenditures. Labor operating expenditures refers to operating expenditures that are related to employees such as salaries, benefits, training, compensation pay, ect. Other operating expenditures refers to expenditures related to supplies that are needed to operate the business such as cleaning supplies needed for cleaning the rooms and other facilities, toilet papers, soaps, shampoos and other supplies needed for guest room and public bathrooms, ect. Operating budgets are set for all attributes and amenities. In general you will increase your operating budgets for those attributes pertaining to the primary customer segment you target. IMPORTANT TO NOTE: The previous management team was fired because they did not do a good job managing the hotel. The simulated hotel is in a bad condition. Almost all of the amenities provided in the simulated hotel are in need of renovations and updates. Your team is expected to turn this run down hotel into a competitive and profitable hotel in the city you operate. Therefore, you should make significant capital investments in most of the attributes early in the simulation in order to improve overall quality. You are also expected to improve service level by increasing your operating budget. 44

Importance of capital and operating expenditures for each attribute and amenity Table below presents the importance level of capital expenditures and operating expenditures for each attribute and amenity using a 0 to 1 point scale. Table also provides the breakdown of labor and other operating expenditures. For example, table below suggests that capital expenditures play a more significant role in providing a quality spa experience compared to operating expenditures. Table also suggests that when it comes to operating expenditures three quarters of operating expenditures should be budgeted for labor while only one quarter should be budgeted for other operating expenditures. Capital and Operating Expenditures Weights Capital Expenditures Operating Expenditures Labor Other Spa 0.60 0.30 0.10 Fitness Center 0.60 0.20 0.20 Business Center 0.60 0.20 0.20 Golf Course 0.50 0.30 0.20 Other Recreation Facilities - Pools, game rooms, tennis courts, ect 0.50 0.30 0.30 Management/Sales Attention 0.30 0.50 0.20 Restaurants 0.40 0.40 0.20 Bars 0.40 0.40 0.20 Room Service 0.40 0.30 0.30 Banquet & Catering 0.40 0.40 0.20 Meeting Rooms 0.70 0.15 0.15 Entertainment 0.40 0.40 0.20 Courtesy 0.40 0.40 0.20 Guest Rooms 0.60 0.20 0.20 45

Reservations 0.30 0.50 0.20 Guest Check in/guest Check out 0.30 0.50 0.20 Concierge 0.30 0.50 0.20 Housekeeping 0.30 0.40 0.30 Maintenance and security 0.40 0.40 0.20 Building 0.70 0.30 0.30 Ideal Quality Level Expectations of Each Segment for each Hotel Amenity and Attribute It is also important to remember that the amount of dollars spent on capital and operating expenditures have an upper limit on their effectiveness. This is also known as the diminishing marginal returns. The law of diminishing marginal returns states that if one factor in production is held constant, an increase in the other factor of production will be beneficial up until a point, but beyond that point returns will decrease. Put another way, if I have a fifty acre strawberry field and one week to pick the berries before they spoil, the fifty acres of berries is the factor of production that is a constant. I always have fifty acres; my field doesn t magically shrink or expand. The factor that changes is the amount of people I hire to pick these berries. Hiring additional employees is beneficial up until a point. When each employee is picking the maximum number of berries they can every day and the berries will all be picked before they spoil, that is the ideal level of employment. If I hire additional units of labor after this point, each worker will pick less than their potential in berries because there aren t enough berries for every worker to reach their potential. This wasted potential is costing me money in wages. The more people I higher, the more money I am wasting. This money comes out of my bottom line or returns. So by hiring more employees then I need I am diminishing my returns. In the hotel industry you can take the business segment s ideal check in/out score. If we spend money to increase this attribute in our hotel past their ideal, we may be simply wasting money. Since we already hit the segments ideal score, they will use our hotel. Any additional money spent is money wasted that does not bring in additional revenue and therefore, leads to diminishing returns. 46

Therefore, it is important to identify the ideal ratings for each attribute and amenity for each segment. Ideal quality rating represents the quality expectations of a customer segment for a hotel amenity or attribute. In this simulation, the maximum rating is 10, but customers may not want the levels of service associated with a 10 rating, especially if it would require them to pay a higher rate. You might ask, "If there is a possible performance level of 10, why wouldn't those customers who care about any specific attribute or amenity want an ideal level of 10?" The answer is that at some point customers are satisfied with a service and any additional service levels may not add much to their satisfaction. For example, when describing the attribute and different levels of performance to customers and asking them to choose the level of service they desire, they simply say that 7.0 is all they want for housekeeping. Any level of service above 7.0 is providing services they do not care for and do not want to pay a higher rate to obtain. If the hotel is willing to give them this level of service without any increase in rate, they would take it, but it will not increase your customer loyalty and substantial operating expense or capital investment may be required to achieve a rating of 10. Table below presents the ideal scores for each segment for each attributes. It is strongly recommended that after you identify your segmentation strategy, you closely examine the table below to find out the ideal service quality expectations of your target segments for each of the attributes and amenities. Afterwards, examine your hotel's actual quality rating for performance on the attributes and amenities. It is extremely important that you develop an understanding of your current levels of performance relative to the ideal rating. You can increase your quality rating on any attribute and amenity by increasing the operating budget for that attribute or by making capital investments or by taking both actions. Expenditures that increase your hotel s customer quality perception above these ideals in a given market could be a waste of money (depending on your objectives). More specifically, around the ideal for each of the market drivers, the diminishing marginal returns tend to approach 0. 47

Ideal Quality Expectation Scores for each Segment Business Small Business Corporate Contract Families Affluent Mature Travelers International Travelers Corporate Business Meeting Spa 2 1 1 6 9 8 3 2 Fitness Center 7 4 4 3 7 4 2 3 Business Center 7 7 5 1 1 1 9 2 Golf Course 6 2 4 6 9 8 8 7 Other Recreation Facilities - Pools, game rooms, tennis courts, ect Management/Sales Attention 1 1 1 8 7 3 2 3 1 1 1 2 1 1 1 8 Restaurants 7 4 5 7 8 8 2 2 Bars 6 2 3 2 7 6 3 3 Room Service 4 2 1 7 8 3 2 2 Banquet & Catering 1 1 1 1 1 1 8 8 Meeting Rooms 1 1 1 1 1 1 1 8 Entertainment 2 2 1 2 8 8 2 5 Courtesy 9 6 7 7 9 8 8 6 Guest Rooms 10 7 8 9 10 9 9 7 Reservations 9 7 8 1 5 7 2 6 Guest Check in/ Guest Check out 9 7 8 8 7 6 9 7 Concierge 8 3 6 3 7 8 2 2 Housekeeping 7 7 7 7 7 7 7 7 Maintenance and security 7 7 7 7 7 7 7 7 Building 7 7 7 7 7 7 7 7 Association Meetings 48

ROOM RATE DECISIONS Room rates play a significant role determining the demand level to a hotel. Room rate is the most important decision criteria for small business, corporate contract, families, and association meetings segments. Therefore, it is vital for the success of your team to charge a room rate that correspondent with the quality of your product. Table below presents the average room rates charged in the market for over a 2 year period for each segment. Further, consumer behavior research has indicated that if a hotel sets its room rates slightly below or equal to average room rates, it could conceivably maximize the contribution of room rate to hotel demand. Furthermore, research results also suggest that if a manager sets his/her room rates higher than the average rates, the contribution of room rates to hotel demand for any given segment will be lower than maximum. In other words, higher than average prices tend to decrease demand. It is always a good idea to examine the elasticity of demand before finalizing room rate decisions for each segment. Average Room Rates Weekday Weekend Business 200 165 Small Business 150 125 Corporate contract 160 160 Families 125 150 Affluent Mature 165 200 Travelers International leisure travelers 175 175 Corporate/Business 200 165 Meetings Association Meetings 150 175 49

Cost of Distributing (Selling) your Rooms You will make room rate decisions for four different distribution channels for both weekday and weekend. It is important to remember that how the customer books your room can make a big difference to your hotel s bottom line. Intermediaries can take a good chunk out the gross amount a guest pays for his/her room. In this simulation, we will be using four different distribution channels. The first one is the direct distribution. Direct distribution means that the hotel sells the rooms directly to the customer. Customers can call the hotel directly or book through hotel s own reservation site. Research suggest that this is the least expensive method of distributing (selling) a hotel s rooms. On average, it costs about 5 percent of the reservation s total. The second distribution channel is the brick and mortar travel agencies. Even though their numbers are rapidly decreasing, still a significant number of travelers make their hotel bookings through them. A room booked through a brick and mortar travel agent typically costs the hotel 10% of the reservation s total. The third distribution channel is the online travel agency websites such as Expedia, Orbitz, ect. Contrary to popular belief, a room booked through an online travel agent and the GDS (global distribution system) typically costs the hotel 15% of the reservation s total. The fourth distribution channel is the opaque websites. The opaque distribution channels operate significantly different from other online travel agency sites such as Expedia.com and Orbitz.com. While online travel agency are transparent meaning that they identify the service providers with whom you are dealing with, opaque sites like Hotwire.com and Priceline.com will not identify the company you will be doing business with until you purchase the product. By then, what you see is what you got: Everything is final, with no refunds or exchanges. A room booked through an opaque site typically costs the hotel 25% of the reservation s total. 50

It is extremely important to consider the cost of distribution when you determine room rates for each distribution channel because it is likely to have significant impact on your hotel s bottom line. 51

MARKETING DECISIONS Marketing decisions plays a significant role in generating demand and attracting customers to each property. Research indicated that around one fourth of the demand for business is generated by marketing activities. While the impact of marketing is similar for each segment, impact of specific marketing activities is likely to be different for each segment. For example, as presented in the table below, while sales force is extremely important for corporate contract, corporate/business meeting and association meetings segments, advertising is more important for families, affluent mature travelers and international leisure travelers segments. Importance of each Marketing Activity for Each Segment Market Segments Advertising Sales Force Promotions Public Relations Business 30% 50% 5% 15% Small Business 30% 30% 30% 10% Corporate contract 5% 90% 0% 5% Families 50% 0% 30% 20% Affluent Mature Travelers 70% 0% 10% 20% International leisure travelers 65% 0% 10% 25% Corporate/Business Meetings 5% 90% 0% 5% Association Meetings 5% 80% 0% 15% Research suggests that companies allocate around 4 percent of their gross revenue to other marketing activities while cost of labor is around 5 percent. Therefore, it is suggested that you also allocate around 8-10 percent of your gross revenue to marketing activities (labor and other). However, the allocation to each specific marketing activity should be determined based on your strategy. Labor expenditures refer to cost of labor for marketing activities such as salaries, benefits, training, compensation, ect. Other marketing expenditures refer to expenditures related to delivering the marketing activity such as cost of advertising, travel cost, phone and mail cost, etc. 52

It is also important to note that most of the marketing activities have lag effect; you may not see an immediate increase in demand when you spend money on specific marketing activities. While lag effects for advertising and promotions are minimal, sales force will have a two- or threemonth lag effect. For example, you will see an immediate increase in demand for the following month if you decide to spend money on advertising and/or sales promotions. On the other hand, you may not see an immediate increase in the following month s demand when you spend money on sales force. You are likely to see an increase in demand for the month after. For public relation activities, you will see an increase in the demand immediately and you will see similar level of increase in the demand for following month too. All marketing expenditures will continue to effect demand at a lower rate in the coming months. However, the level of increase will depend on marketing expenditures of all other hotels in the market. Research suggests that labor cost and operating cost is likely to vary from one marketing activity to another. For example, while 60 percent of money spent on sales force goes to labor (40 percent on other operating expenditures), other operating expenditures constitutes about 70 percent of the cost for both advertising and promotion activities (labor cost is about 30 percent). For public relations activities, cost of labor is about 50 percent and cost of other operating activities is about 50 percent of total cost. 53

ROOM ALLOCATION DECISION Before you make your room allocation decisions, the first thing you should do is to determine the market segments you will target and develop your business strategy. Afterwards, you should allocate appropriate number of rooms to each segment. You will need to determine your allocations for weekdays and weekends. Since you have 500 rooms, you can allocate up to 500 rooms for weekdays and weekends. You will not be able to allocate more than 500 rooms. Due to the importance of Room Allocations, there has been considerable research on leftover rooms. Leftover rooms are the rooms that were allocated to a certain segment but not sold in that segment. In order to minimize the number of leftover rooms, rooms should be allocated by management utilizing BOOKING CURVES analysis. Hotels that do not allocate rooms according to demand as reflected in booking curve analysis may be severely hindered and in essence will be punishing themselves. Research suggests that if you cannot sell the rooms you allocate to certain segment, you may not be able to sell/allocate a certain percentage of those leftover rooms to other segments. Table below shows the percentage of leftover rooms that will be lost because of misallocation of the rooms. Percentage of Leftover Rooms that will be Lost because of Misallocation of the Rooms Segment % of rooms you will not be able to sell to other segments Business 60% Corporate contract 60% Small Business 60% Affluent Mature Travelers 40% International leisure travelers 40% Families 40% Corporate/Business Meetings 20% Association Meetings 20% 54

HOW TO ENTER YOUR DECISIONS You are expected to make four sets of decisions as seen below: room allocation decisions, hotel attributes and amenities decisions, room rate decisions and marketing decisions. Whenever you start a new month, previous month decisions will appear in the decision boxes as a reference point for the new month s decisions. To enter your decisions for the simulation game, Login the simulation, Click on Make your decisions link in the navigation menu on the left side of the main page. Click on the decision you want to enter. 55

How to Enter Room Allocation Decisions In this game, each hotel has 500 rooms and there are eight market segments as can be seen below. You are required to allocate (block) a number of rooms to (for) each market segments. Of course, the number of rooms you allocate to each segment will depend on your strategy. Since the weekday and weekend market customer profiles are likely to be different, you are required to determine room allocations for one weekday and one weekend. The simulation assumes that there are 12 weekends and 18 week days in a month. The same room allocation strategy will be applied to those 12 weekend days and 18 week days. The total number of rooms you can allocate cannot be than 500 for weekday or weekend allocations. After you enter your weekday and weekend room allocation decisions, click on Update Decisions button to update and save your decisions. You are also required to confirm your decisions by clicking "confirm all" button. 56

How to Enter Hotel Attributes and Amenities Decisions The second set of decisions you will make is the hotel attributes and amenities decisions. Please read the criteria for the hotel attributes and amenities decisions before you make your decisions. The criteria for the hotel attributes and amenities decisions document will provide the guidance you need to make your hotel attributes and amenities decisions. You will make 19 hotel attributes and amenities decisions. As can be seen below, for each hotel attribute and/or amenity you will make capital expenditures and operating expenditure decisions. Also, you will need to make two separate decisions for operating expenditures: labor and other expenditures. It is crucial that you read the criteria for the hotel attributes and amenities decisions document first. After you enter your decisions into the correct box, click on Update Decisions button to update and save your decisions. You are also required to confirm your decisions by clicking "confirm all" button. 57

How to Enter Room Rate Decisions Room rate decisions are the third set of decisions you will make in this simulation. Again, before you make your decisions, it is strongly recommended that you read the criteria for making room rate decisions document. You will make weekday and weekend room rate decisions for each of the eight segments included in this simulation for each distribution channel. There are total of four distribution channels in this simulation: direct, travel agent, online travel agents and opaque. After you enter your room rate decisions into the correct box, click on Update Decisions button to update and save your decisions. You are also required to confirm your decisions by clicking "confirm all" button. 58

How to Enter Marketing Decision Marketing decisions are the fourth set of decisions you will make in this simulation. Again, before you make your decisions, it is strongly recommended that you read the criteria for making marketing decisions document. You will determine labor and other expenditures for each of the marketing strategies (e.g. advertising, sales force, promotions and public relations) you will utilize to attract customers from each segments. Once you make your marketing expenditures decisions, enter the amount you would like to spend into the correct box, click on Update Decisions button to update and save your decisions. You are also required to confirm your decisions by clicking "confirm all" button. 59

How to Borrow or Pay Your Loans It is crucial to remember that whenever you decide to spend money, you have enough cash to cover that expenditure. As you know, in this simulation game you are required to make capital expenditures and operating expenditures decisions. To pay for capital expenditures, you will need to have adequate cash or borrow money. To cover your operating expenditures, you will need to generate adequate income. To determine if you need to borrow money, you will need to examine your cash flow statement. If you cash flow statement suggests that you will need cash to cover your expenditures, you will need to borrow enough money to cover your expenses. The interest rate is 8 percent. However, if you do not plan well and spend more money than you can afford, you will end up getting a short-term emergency loan with an interest rate of 16 percent. That s why it is strongly recommended that you pay close attention to your cash flow situation. It is also recommended that if you have cash either you should invest in capital or pay some of your loans in order to decrease or avoid interest charges. 60

How to View Reports After you make your decisions, your decisions will be process at a predetermined time and the simulation will create a series of reports for you to analyze. To access the reports for each month, you will need to login and click on the view reports button in the main menu on the left. Clicking on the View reports button will take you to the page where all the reports are listed. Once you are there, click on the report you would like to view. It is strongly recommended that you view and analyze all available reports before you make your decisions for the upcoming business period. These reports will provide detailed information about your hotel s financial and operational performance along with detailed information about market performance and your competitors financial and operational performance. By analyzing these reports, you will be able to determine your competitors business strategy including, but not limited to, segmentation strategy, marketing strategy, pricing strategy and operational strategies. A thorough analysis of these reports will help you to identify your hotel s strength and weaknesses relative to other hotels in the market. You will also be able to identify opportunities and threats in the market. Overall, analysis of these reports will enable you to develop the most appropriate strategy for the market conditions that will give the best competitive positioning in the market place. The figure below presents the list of reports generated by the simulation game. 61

Clicking on the Objective reports will take you to the page where your performance is compered to market average and the objectives you determined before you make your decisions. By examining this report, you will be able to determine how well you do compare to market average for the month and for the year and whether you reach the objectives you determined. 62

Also, from this page, you will be access the reports for pervious months if you wish to view them. To access the previous month s reports, you need to click on the Select month drop down menu and then click on the month. This will bring up the report for that month. Every single report has the same function. Even though in real life you will not be able to access your competitors detailed financial and operational performance reports, this simulation game will provide access to your competitors financial and operational reports for learning purposes. You can also access your competitors reports, click on the Select hotel drop down menu and click on the hotel name. This will bring up the reports for that hotel. Every single report has the same function. 63

How to View Performance Statistics Reports Clicking on the Performance statistics reports in the reports page will take you to the page where your performance is compered to market average and the objectives you determined before you make your decisions. The performance statistics report provides your financial and operational performance. As can be seem in the figure below, it provides the performance results for monthly profit, accumulated 64

profit, market share percentage based on the number of rooms sold, market share percentage based on revenues, the number of rooms sold, occupancy percentage and RevPAR. Like all the other reports, from this page, you can access the reports for pervious months if you wish to view them. To access the previous month s reports, you need to click on the Select 65

month drop down menu and then click on the month. This will bring up the report for that month. Every single report has the same function. Even though in real life you will not be able to access your competitors detailed financial and operational performance reports, this simulation game will provide access to your competitors financial and operational reports for learning purposes. You can also access your competitors reports, click on the Select hotel drop down menu and click on the hotel name. This will bring up the reports for that hotel. Every single report has the same function. 66

STRATEGIC BUSINESS PLANNING PROCESS (SBPP) Introduction What is the overall purpose of the strategic business planning process for a company? Essentially it is the development of a strategic business plan for the next business period. Managers usually go through a three step process to develop the strategic business plan. 1. Identification of performance gaps. 2. Identification of causes of those performance gaps. 3. Determining action steps. Managers develop solutions for the performance gaps utilizing the identified causes of those performance gaps. This section delineates the elements of the SBPP. However, it is necessary to be more specific to learn to accomplish the SBPP. One can break the SBPP down by subtasks to better understand, organize, and accomplish the concurrent, predecessor, and successor set of tasks. Please realize that a manager goes through the entire for each business period. This introduction suggests that there are three parts (3 major tasks for a manager) to the SBPP. Identification of Performance Gaps Managers are required to set a series of financial and operational objectives for each business period at the beginning of each period. It is vital for managers to make sure that their financial and operational objectives are realistic and achievable because they will be held accountable if they cannot deliver those objectives. Owners and/or corporate office will, in most cases, evaluate managers performance using those objectives. In other words, they will become the performance measures that will be used to assess management teams performance in a given period. The first criteria owners and /or corporate office will use to determine the success of a management team is the objectives set by the management team unless those objectives are 67

lower than close competitors performances and /or market norms or averages. A successful management team is expected to deliver financial and operational performances that are better than the market average. A management team that consistently delivers financial and operational performances that are average cannot be considered a successful management team. A management team that delivers below the average financial and operational performances over several business periods is likely to be replaced by a management team that is likely to deliver better performance. Identification of performance gaps requires the management team to analyze each of their financial and operational performance measures and compare them to: Objectives set by the management team. Competitors performances. Market norms and averages. For any of the performance measures, if the performance is lower than the any of the three criteria listed above, then there is a performance gap. This is just the starting point for the whole process of developing a strategic business plan for the next business period. If appropriate, the management team will need to further analyze the performance gap to find out if the particular performance gap was due to performance during the week or weekend; or due to performance of a specific segment. It is possible that there will be more than one performance gaps. However, in most cases, it will almost be impossible to solve all performance gaps at the same time because most businesses are likely to have limited resources. Therefore, if a management team identifies several performance gaps, the team will need to pick the most important performance gaps to solve. In our case, the team will pick top three performance gaps to solve. 68

Identification of Causes of Performance Gaps The second step in the process requires the management team to identify the causes of those performance gaps. In order to identify causes, the management team will need to analyze their own actions, their competitors actions, demand, and the environmental factors and trends. There is no particular "order" in which each of these should be accomplished. Thus, one could analyze these "one at a time" in some sequence or simultaneously (depending on the resources and number of personnel in the management team). Why are these analyzed? These four sets of variables are essentially the ones that are likely to cause those performance gaps. The set of decisions a management team makes and the way they react to exogenous factors (outside of management control) are likely to affect their performance. It is also important to understand that in a competitive market environment, competitors decisions and actions are also likely to influence the financial and operational performances of a particular property. That s why it is also important to analyze competitors decisions and actions. Another factor that may influence a property s performance is the external factors and trends. Fluctuations in demand are another factor that may influence a property s performance. However, remember that demand affects every property in the same market the same way. If a particular property s performance is significantly lower than competitors performance, the management of that particular property may not be able to blame demand fluctuations for that relatively lower performance because demand affects every property in the market the same way. If someone has to be held accountable (blamed) for the performance that is lower than competitors performance, it is most likely that the management of the particular property will be held accountable (blamed) because of the way they reacted the fluctuations in demand. Realize that each of these variables has a rather large set of variables within. Identification of causes will be a lengthy and a time consuming process. However, if you conduct a thorough analysis, this process will enable you to deliver a better performance than your competitors. After identifying the causes of the most important performance gaps, management teams will be expected to identify the most important top three causes of those gaps. The reason for this 69

is that most management teams have limited resources and they are expected to manage (keep under control) expenditures while increasing revenues. Since the management team will not have the resources to focus on every single cause at the same time, the team will need to choose a limited number of causes that will have the highest impact on the performance gaps. After choosing those most critical causes, the management team will develop action plans for each of those causes. Determining Action Steps After identifying top three performance gaps and the most critical causes of those performance gaps, managers will be expected to develop solutions. The management team will be expected to develop at least three different action plans utilizing the causes identified to solve the performance gaps. The management team will determine how much of the scarce resources will be utilized to solve those performance gaps. The management team will be expected to forecast how each of the proposed action plans will improve performance gaps and how each plan will affect other operational and financial performance measures. Please remember that this is a very complex and lengthy process. It will initially take a lot of thinking and work. But if a management team learning this process systematically goes through all of the possible causes and determines which are the most critical causes, then the team can develop a business action plan that will enable them to solve the most important performance gaps and deliver a performance that is better than the market average and competitors. Using a case simulation, one can apply the three step process. However, it should be noted that a case simulation is a rather simplified version of the world, which makes it easier to learn the basic essentials... Things such as weather, demographic trends, financial crises etc. are excluded. But realize that the same procedures hold for their analysis and subsequent decision making, implementation, control and monitoring. Also note that management teams do not have to implement anything in a case simulation that they would in real world organizations. And this is a very hard part of management: encouraging the work force to accomplish the Business Action Plan. In fact, the "SBPP" only takes up about 10% of a manager's time in actual organizations." The other 90% of a manager's 70

time is spent implementing the BAP. If a manager does not do a good-job in the ten percent use of her/his time, the remaining 90% of a manager's time is wasted (and time is money)! Accordingly, one primary purpose of this process is to learn procedures for doing a better job of analyzing and forecasting to make better decisions. Remember: Managers solve problems! 71

IDENTIFICATION OF PERFORMANCE GAPS Identification of performance gaps is the most critical step in strategic business planning process. If you make mistakes in identifying performance gaps at this stage, you will end up developing a business action plan that will require you to use your scarce resources to solve those gaps you have incorrectly identified. In other words, you will use your management team s time, effort and company resources to improve performance measures that may not need any improvement while your actual performance gaps will be worsen. That is why it is crucial to identify the most critical performance gaps that may be negatively influencing your company s performance. In order to identify the most critical performance gaps, the first step is to calculate all performance measures and compare each one of them to the decision criteria. The second step is to rank all of the performance gaps in order to identify the most critical gaps. Step 1: Calculate Performance Measures and Compare Them to Decision Criteria The first step in this process is to calculate the performance measures for each month and compare those measures to decision criteria. Since the simulation software calculates all of the performance measures and provides the results, you do not need to calculate performance measures manually. However, it is strongly recommended that you study the formulas and the calculation for each performance measure. Studying how they are calculated will help you to have a better understanding of each performance measure. Next, you will compare your results to Monthly objectives set by your management team. Your competitors monthly performances. Market averages for each month. Industry norm (may not apply to all performance measures). For some of the performance measures, there are acceptable ranges or ratios that are established industry norms. For example, 30% to 40% is an acceptable range and the industry norm for operating efficiency ratio. It is a good idea to compare your monthly results to established industry norms (acceptable ranges or ratios) to fully understand your group s performance. 72

The comparison of your objectives for each month and the actual results are provided by the simulation software. The simulation software also provides differences between your results and market averages. You will use these numbers provided by the simulation to compare your results to market averages. You are also expected to compare your performance to your competitors performances and the established industry norm (if there is an established industry norm for the performance measure in question). In order to be able to compare your results to your competitors, you will need to identify your competitors. You can identify your competitors using different methods but you need to make sure that you identify your competitors correctly. Identifying a company that is not really one of your competitors as your main competitor may have devastating consequences for your strategy formulation. It is vital to identify your major competitors because they will have an impact on your business over time. Simply stated, your direct competitors are companies that target the same market segments you target. These companies offer very similar or identical products or services as your company and charge rates similar to your rates. Products and services offered by those companies and your company are likely to satisfy the same or similar customer needs. Therefore, target customers can easily go to your competitors to satisfy their needs instead of going to your company, so these companies represent your most intense competition. By examining the positioning maps presented in the simulation, you can easily identify your main competitors for overall business and for each segment. Companies that are located close to your business in the positioning map are likely to be your main competitors. Once you have identified your main competitors, you will obtain their performance information from the simulation. Afterwards, you will calculate the difference between your performance and their performances. You are expected to calculate the difference between your results and your competitors results, and the difference between your result and the industry norm manually for each month. You can create a table similar to the table presented below to keep track of performance measures for each month utilizing excel. The first column of the table is for the name of the 73

performance measure you are analyzing. The second column is for the actual performance for the month. Third column is for decision criteria you use for analysis. The last column is for results of the comparison of your decision criteria to the actual performance for the month. Analysis of Performance Measures Performance Measures Month 1 Actual Performance Decision Criteria Performance Decision Criteria Operating Efficiency Objective Performance - Objective Market Average Performance - Market Average Competitor 1 Performance - Competitor 1 Competitor 2 Performance - Competitor 2 Norm 30% to 40% Performance - Norm You should perform the same analysis for each performance measure for every single month up to the current month. You should also create a line graph for each performance measure to show changes over time. These line graphs will present a visual representation of comparisons of your hotel s actual performance to decision criteria. The line graph for each performance measure should include the following lines: your hotel actual performance, your objective, market average, your competitors, market average and the industry norm. Figure 1 presents a sample line graph for the Sunshine Hotel s yield management performance for the business segment. As presented in Figure 1, the norm for the yield management is between 70% and 90%. A visual examination of the graph reveals that Hotel 4 s performance is close to the market average but 74

lower than the objective and the norm. According to the graph, except for the first month, no one was able to reach the norm. Be sure to include accurate labels for each graph! Figure 1 Yield Management Performance for the Business Segment 95.00% Sunshine Hotel Yield Management Business Segment 90.00% 85.00% Percentage 80.00% 75.00% 70.00% 65.00% 60.00% 55.00% 50.00% 45.00% 1 2 3 4 5 6 7 8 Months Actual Objective Upper Norm Lower Norm Compet it ion Market Hotel 4 Step 2: Rank Performance Gaps to Determine Top 5 and Top 3 Critical Performance Gaps The next step in identifying performance gaps is to rank the gaps that you discovered when comparing your performance to decision criteria and to the market. For each performance gap identified, you must identify/calculate the extent, impact and magnitude of the gap. Extent refers to how long the problem has been occurring. Specifically, for one month, two, three or more. 75

A problem with great extent should be a priority over one with less of an extent or a sporadic extent (only occurs randomly or only during high or low demand periods). Magnitude refers to how large the problem is.. first an actual measure: e.g., measure is.34 below some criteria such as objective. second, convert this to PERCENTAGE so one can compare with other measures using different scales which may hide the magnitude of the problem... Yield Management (0-100) vs Monthly Profits (which may be, hopefully, in the millions). Impact refers to the amount of money your company lost because of the performance gap. You should create three different tables one for the extent, one for the impact and one for the magnitude and provide a ranking of the performance gaps for each of these three measures. Next, determine your overall ranking of your performance gaps based on your comparisons and the extent, magnitude and impact rankings. It is critical that you provide adequate supporting evidence (charts, graphs, exhibits, etc. from previous analyses) to justify the identified performance gaps and their overall rankings. Next you will need to choose the top five performance gaps. Do not determine top five performance gaps purely based on rankings. Make sure that you discuss each performance gap as a management team to determine its significance. Determine top five performance gaps after this discussion and make sure as a team you can explain why you picked those specific performance gaps. You will need to provide a clear and sound justification for your selection. Next your group will prioritize the top three critical performance gaps. You will need to provide a clear justification for why those three were selected as the most critical performance gaps. 76

Summary of identification of Performance Gaps The purpose of the first step is to calculate the performance measures and compare those measures to decision criteria. To accomplish this, we need to perform the following: 1. Calculate performance measures and summarize results in a table 2. Compare the difference between your hotel s actual performances to decision criteria for each month in a table. a. Performance - Objective b. Performance - Market Average c. Performance - Competitor 1 d. Performance - Competitor 2 e. Performance - Norm 3. Create a line graph for each performance measure to show changes over time. a. The line graph will also present a visual representation of comparisons of your hotel s actual performance to decision criteria. b. The line graph should include the following lines: your hotel actual performance, your objectives, market average, your competitors and the industry norm. 4. Create three different tables that present the ranking of all of those performance gaps you identified by extent, magnitude and impact. 5. Create a table that presents overall ranking of all the performance gaps you identified. a. Make sure that this overall ranking table is referenced by charts, graphs, exhibits, etc. from previous analyses. b. Briefly explain each charts, graphs, exhibits, etc. 6. Choose the top five performance gaps. a. Briefly explain why you picked those specific performance gaps. 7. Prioritize your top three, most critical performance gaps. a. Provide a clear justification for why those three were selected as the most critical performance gaps. 8. Provide a brief conclusion for your document. 77

IDENTIFICATION OF CAUSES OF PERFORMANCE GAPS Earlier you identified the most critical top three performance gaps for your business. Now you will identify the causes of those performance gaps. To identify causes, you will analyze your own actions, your competitors actions, demand, environmental factors and trends. There is no particular "order" in which each of these should be accomplished. Thus, one could analyze these "one at a time" in some sequence or simultaneously (depending on the resources and number of personnel in the management team). To determine the causes of your performance gaps, you will conduct two analyses. After you perform these two analyses, you are required to identify the top three causes of your performance gaps. The following analyses can be accomplished simultaneously if the resources are available. No particular order is the most appropriate. This is usually the case in the industry but not for this learning experience. One might also consider these three analyses the most important part of the SBPP because: 1. These analyses are the most difficult and challenging and require more tools, resources, and analytical thinking to accomplish. 2. These analyses are the most time consuming and require the greatest amount of thinking and information processing. Analysis 1: Actual Market Share versus Market Share by Positioning Alone Actual market share refers to the market share your hotel receives in a given month. Your hotel s actual market share is determined by your own business decisions, your competitors business decisions and overall business decisions on capital and operating expenditures, room rates, and marketing expenditures of all hotels located in your area. Market share by positioning alone refers to the market share you would have received if none of the hotels in the market spent any money on marketing. Simply, the market share by positioning alone is determined by your own business decisions, your competitors business decisions and 78

overall business decisions on capital and operating expenditures, and room rates of all hotels located in your area. It is the market share you would have received if marketing did not exist. The purpose of comparing your actual market share to your market share by positioning alone for each segment is to determine if the source of the problem is your marketing expenditure decisions or your other business decisions. In the reports section of the simulation you can find the Actual Market Share versus Market Share by Positioning Alone report. If your analysis reveals that your market share by positioning alone for a specific segment is higher than your actual market share, it suggests you have good quality product at the right rate, but you are not creating demand with correct allocation of your communication budget, e.g., advertising, sales force, promotions and public relations. In this case, first thing you need to do is to find out which of the marketing activities (advertising, sales force, promotions and public relations) are important for that segment. After you identify the most critical marketing activities for the segment in question, you need to compare your expenditures to your competitors expenditures and market averages. To compare your expenditures to your competitors expenditures and market averages, you should create a bar chart for each specific marketing activity. The bar chart should include a bar for your expenditure, your competitors expenditures and the market average for the marketing activity in question (e.g., advertising, sales force, etc.). After you identify the cause of the problem, develop strategies to solve the problem. Include your explanation of the problem and your solution strategy after each bar chart. If your analysis reveals that your market share by positioning alone for a specific segment is lower than your actual market share, it may suggest that your products quality is not up to your customers expectations, or your room rate might be too high. If this is the case you will need to pay special attention to the analysis of positioning maps (Analysis 2). 79

Summary of Analysis 1 1. Examine your actual market share and your market share by positioning alone for each segment. 2. Determine if there is a difference between your market share by positioning alone and your actual market share for each segment. 3. Create a bar chart for each specific marketing activity. The bar chart should include a bar for your expenditure, your competitors expenditures and market average for the marketing activity in question (e.g., advertising, sales force, etc.). 4. Provide an explanation for the cause of your problem, and a potential solution after each bar chart. a. If your market share by positioning alone for a specific segment is higher than your actual market share, You have good quality product at the right rate, but you are not creating demand with correct allocation of your communication budget, e.g., advertising, sales force, promotions and public relations. Determine which of the marketing activities (advertising, sales force, promotions and public relations) are important for that segment. Compare your expenditures to your competitors expenditures and market averages. b. If your market share by positioning alone for a specific segment is lower than your actual market share Your products quality may not be up to your customers expectations Your room rate might be too high. If this is the case you will need to pay special attention to the analysis of positioning maps. Analysis 2: Determining Causes of Performance Gaps Using Positioning Maps A product s position is the way the product is defined by consumers on important attributes. The positioning map is a graphical representation of the place the product occupies in consumers minds relative to competing products. It can be used to study and analyze the positions or 80

customers perception of each of a group of competing products based on two specific product characteristic. A positioning map is basically a graph that represents the strength or extent of the two product characteristics on x and y-axis. For example, to find the relative position of different hotel brands in respect to customer perception of quality and price, the graph may represent the price along x- axis and quality along y-axis. Each hotel can be plotted on this graph according to the assessment of customer perception of these two characteristics. The simulation presents an overall positioning map and a separate positioning map for each segment in the reports section. The positioning map can help you identify your hotel s overall positioning and your hotels positioning in each target market segment relative to your competitors based on quality of your hotel and the rate you charge. An examination of your overall positioning in the market and positioning in each segment will help you identify how well your hotel does in terms of quality and your rate. The examination of positioning maps will also help you pinpoint the sources of your performance gaps by narrowing it to the rate you charge or the quality of your offering for each segment. Therefore, it is crucial that you perform a thorough examination of each positioning maps. Once you know the source of the problem, you can further analyze the data from Analysis 1 and from the simulation to figure out the causes of your problems. Positioning and repositioning strategies can be identified by examining the positioning maps. For example, the positioning map presented below for the Ocean Front Hotel indicates that they have the second lowest product quality score. However, the room rate the hotel charges is relatively high compare to other hotels in the market. This suggests that the Ocean Front Hotel may not be very competitive in the market. The management team of the hotel needs to reposition the hotel by either investing in attributes and amenities that are important for this segment in order to improve quality or lower the price to match the quality of their product. If the management team fails to reposition the hotel in this segment, the hotel is not likely to be very competitive and will, therefore, lose potential customers to competitors. 81

Positioning maps can also be used to identify the competitors of your hotel in each segment. Hotels that are located close to your hotel on the positioning map are likely to be your competitors in that segment. The main purpose of examining the positioning maps is to find out how competitive your hotel is in the market based on the quality and price criteria. To accomplish this, first, you will need to examine the overall positioning map. This positioning map will help you identify your overall competitiveness in the market. Second, you will need to examine the positioning maps for each segment. You need to pay close attention to the segments you target. This examination will help you determine if you have competitive offering to your customers. If your analysis indicates any of the following, you will need to develop strategies to resolve the issue: Your quality score is similar to your competitors, but your room rate is relatively high compare to your competitors. 82

o You will need to compare your room rate to your competitors and market average to identify the problem. o Revise your room rate to become more competitive o You should create a bar chart for each room rate comparison. The bar chart should have a bar for your room rate, your competitors room rates and the market average. Your room rate is similar to your competitors, but your product s quality score is relatively low in a specific segment. o Identify the attributes and amenities that are important for that segment. o Compare your hotel s scores for attributes and amenities that are important for that segment to your competitors and market average. o Identify the attributes that have low scores relative to your competitors and the market average. o Develop strategies to improve the scores of those attributes. o You should create a bar chart for each hotel amenity and attribute comparison. The bar chart should have a bar for your attribute quality score, competitors quality score, ideal score and market average. The number of bar charts you need to create will depend on the number of attributes and amenities valued by that segment. Be sure to include accurate labels on each bar chart, and an explanation of each chart. Your room rate is similar to your competitors, but your product s quality score is relatively high in a specific segment. o Basically, this suggests that the rate you charge is too low for the product you have. This may not sound like a big problem, but this is likely to lower your operating efficiency score, your yield management ratio, your net operating earnings and profits. o In this case, you have two options: (1) Increase your room rate or (2) lower your attribute scores. 83

To increase the room rate, estimate the room rate that will generate the most revenue for your hotel. You will need to utilize a forecast method to determine the room rate that will generate the most net operating earnings and net profits. You should create a line graph that shows the changes in demand, net operating revenue and net profit as you increase/decrease your room rate. This graph will be helpful for determining the best rate for each segment. If you decide to lower your attribute scores, you will need to: Find out what hotel amenities and attributes are important for that segment. Compare the scores for attributes and amenities that are important for that segment to your competitors, ideal scores and market average. Identify the attributes that have high scores relative to your competitors, ideal scores and the market average. Develop strategies to lower those scores of those attributes. You should create a bar chart for each hotel amenity and attribute comparison. The bar chart should have a bar for your attribute quality score, competitors quality score, ideal scoree and market average. Summary of Analysis 2 1. Examine your overall positioning map 2. Examine the positioning map for each segment, pay special attention to your positioning in your target segments. 3. Determine the segments you have positioning problems. 4. For each segment you have a positioning problem: a. Determine if your room rate is causing the problem. b. Determine if the quality of your product is causing the problem. 5. If your room rate is causing the problem a. Create bar charts to compare the room rates. 84

b. Compare and contrast your room rates to market average and your competitors rates. c. Develop room rate strategies to reposition your product. 6. If the quality of your product is causing the problem a. Determine the amenities and attributes important for that segment b. Create bar charts for each of those attributes to compare your hotel s quality scores to market average, ideal score and your competitors quality scores of each attribute important to that segment. c. Develop strategies to reposition your product in that segment. Identification of Most Critical Causes of the Performance Gaps In this section you are expected to summarize the causes of the performance gaps and choose the most critical causes. The first thing you will do is to present your top three performance gaps. Then, you are expected to identify the most critical causes of those three performance gaps. Obviously, there is always more than one cause of a performance gap. However, due to resource limitations of a firm (time and money), it is imperative that the most critical causes be isolated. In the real world, companies generally use their top five to ten causes to work on solutions. Since we are learning this process, we shall limit our choice to the top three causes. In order to identify the top three causes of your performance gaps, first, you are should create three different tables that present the ranking of causes you identified by extent, magnitude and impact. Second, you should create a table that presents overall ranking of all the causes you identified. This table should include a column that provides a full explanation of why these causes affect specific performance measures. It is critical that this overall ranking table is supported by charts, graphs, exhibits, etc. from previous analyses These evidences and arguments are used as support to justify identified causes and their rankings. Next you will need to choose the top five causes of your performance gaps. Do not determine the top five causes of your performance gaps purely based on the rankings. Make sure that you 85

discuss each cause and its relation to performance gaps as a management team to determine its significance. Determine the top five causes after this discussion and make sure as a team you can explain why you picked those specific causes and how they relate to your performance gaps. You will need to provide a clear and sound justification for your selection. After selecting the top five causes, you must prioritize top three most critical causes of the performance gaps. You will need to provide a clear justification for why those three causes were selected as the most critical causes of your top three performance gaps. Summary of Identification Of Causes Of Performance Gaps 1. Present your top three performance gaps. 2. Rank the causes you identified by extent 3. Rank the causes you identified by impact 4. Rank the causes you identified by magnitude 5. Create an overall ranking of the causes a. Include a column that provides a full explanation of why these causes affect which performance measures. b. Provide supporting evidence such as charts, graphs, exhibits, etc. 6. Identify top five causes of the performance gaps. a. Provide a clear and sound justification for why those five causes were chosen. 7. Prioritize top three most critical causes of the performance gaps. a. Provide a clear and sound justification for why those three causes were chosen. 86

DEMAND ANALYSIS The purpose of the demand analysis is to (1) examine current and past overall market demand, overall demand for each segment, and overall and segment demand for your property and your competitors, and to (2) forecast demand for ensuing (3 or more) months. Demand affects all the firms in the industry and in the market area equally. Demand analyses must be included as evidence to show and support the arguments related to causes of performance gaps. Realize that market demand and segment demand cannot be considered a cause of a performance gap since it affects all of the companies and competitors in a given marketplace the same way. It is a cause only in terms of how a company responds to demand conditions. Demand cannot be controlled the way a company can control price, advertising, wages, etc., but the company must react to and take into account the demand by forecasting and considering past history. The analysis of demand not only explains why occupancy is lower, etc., but it allows management to have some clue or ideas on how to respond to different demand conditions in the future for strategic business decisions. Examination of the current and past overall and segment demand for the overall market, your property and your competitors will enable you to determine if your previous management decisions were accurate and if you reacted to changes in demand appropriately. It will also enable you to examine if your competitors reacted to changes in demand accurately. Examining how you reacted in the past to changes in demand will enable you to identify your weaknesses and develop strategies to eliminate them. Forecasting will enable you to identify opportunities for future growth and threats that must be minimized. If you can forecast the demand levels for each segment for the upcoming few months, you can easily use that knowledge to develop strategies that may give you a competitive advantage over your competitors, assuming that you will do a better job forecasting the demand than your competitors. Forecasting the overall and segment demand for the market and for your property 87

will influence the type of operational decisions you will make. For example, if you forecast that the demand for a specific segment is likely to increase, you may want to allocate more rooms to that segment and budget more resources to amenities and attributes important to that segment. You may also spend more money on marketing tools that are critical for that segment. To analyze demand, you should calculate the past demand from the beginning of the simulation and then forecast the demand for ensuing (at least 3) months for: Overall market area demand and each segment market area demand. Overall demand and demand for each segment for your hotel, your competitors and average overall market and segment demand. Using the same information, you should also create line charts for: Overall market area demand for all months Each segment market area demand for all months These line charts will provide a visual representation of demand and changes in demand over time for your property, for your competitors and for the overall market You should also create charts for: Overall demand for your hotel, your competitors and average overall market demand. Each segment demand for your hotel, your competitors and average overall segment demand. At this stage, it is important to examine if you are able to meet the room demand from each segment. The demand report of the simulation gives you information regarding rooms demanded, rooms allocated and rooms sold. If the report indicates that there was a deficit, this suggest that your management team either did not do a good job of forecasting demand or your team did not react the changes in demand appropriately. If the demand report indicates that there was a deficit (your property was not able to meet the demand for certain segments), you will need to: Reexamine your segmentation strategy 88

Reexamine your room allocation strategy. Reexamine your pricing strategy Reexamine your capital and operating expenditure decisions To better analyze your room allocation strategy, you should create a table showing the number of rooms you allocated to each segment, number of rooms demanded by each segment and the number of rooms sold to each segment. Then, you should create a bar chart for each segment, similar to the one presented below. 89

DETERMINING STRATEGIC BUSINESS PLAN FOR THE UPCOMING BUSINESS PERIOD The purpose of this section is to develop strategic business plan for the next business period that will solve the top three performance gaps you identified earlier. In order to come up with the perfect plan, first, you should develop a few alternative business plans, three strategic business action plans for our purposes, utilizing the most critical causes you identified in the previous section for the upcoming business period. It is critical that each of the three plans you develop provides acceptable solutions to your top three performance gaps. You should provide a sound justification for each of the proposed strategic business plan. Then you should choose the business action plan that will provide the best solution to the three performance gaps identified earlier. You should develop your three proposed strategic business plans using the most critical top three causes you identified in the previous section. Therefore, it is critical that causes you identified are directly related to your performance gaps. Present your three proposed strategic business plan (SBP) in a 3 by 3 table as shown below. Proposed Strategic Business Plans for the Upcoming Month Room Rate Family Segment Advertising Affluent Mature Rooms Business Segment Traveler Segment SBP 1 $200 $40,000 $500,000 SBP 2 $185 $60,000 $300,000 SBP 3 $210 $50,000 $550,000 After you develop these three proposed strategic business plans, you should provide a sound justification for each plan. Next, you will choose the one that will provide the best solution for all of your three performance gaps. 90

To determine the strategic business plan that will provide the best solution for your performance gaps, you must forecast how much each of the proposed plans will improve each of your performance gaps. You are also expected to estimate how each proposed business action plan will impact some of the financial performance measures. You must include at least three financial ratios in your analysis. You should present your forecast in a table format and as a bar chart. Below are examples of the table format and the bar chart. You should also create a similar table and charts for financial performance measures. In addition to presenting the actual numbers, you should also show the absolute change and percentage change for each of the performance measures and financial ratios. Yield Management Operating REVPAR Efficiency Ratio SBP 1 60%.30 170 SBP 2 80%.25 180 SBP 3 70%.35 185 91

After creating these tables and charts, you are expected to explain the assumptions you made in the forecasted business action plans; specifically, demand and competitor action and reaction assumptions (e.g., in terms of price (rates) and marketing activities, etc.) Provide supporting graphs, charts and data to support your explanation. Summary of Determining the Business Action Plan for the upcoming Period State your performance gaps State the causes of the performance gaps Develop three proposed business action plans (BAP) o Use a 3x3 table 3 BAP by 3 major causes o Explain each proposed plan in detail o Write a clear justification for the differences in business action plans Determine the best strategic business plan of the 3 proposed o Forecast how much each of the proposed plans will improve each of your performance gaps o Include at least 3 financial rations o Present the changes using both tables and bar charts for the 3 performance measures associated with the biggest performance gaps and in the 3 selected financial ratios o Provide a clear interpretation of each table, graph and chart State your assumptions about competitors actions and future demand o Explain your demand forecast assumptions o Explain your assumptions about your competitors future actions in terms of price (rates), marketing activities, and operating and capital investment o Provide evidence (charts, graphs, tables, etc.) to justify your assumptions 92

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