Organisational Diagnosis: Travelodge - Case Study Example

Organisational Diagnosis Introduction Travelodge is a low budget Hotel Chain and has approximately 20,000 rooms under its ownership. It is the second largest hotel chain in the UK. (Caterer Search)1 The brand Travelodge was created in 1980 when Lord Forte, later Baron Forte, bought over the US Travelodge brand in the US and established it in the UK. His own chain of hotels called Little Chefs was renamed as Travelodge. In 1995 the chain was bought by Granada of US in a hostile takeover of the entire Forte Group. Thereafter it continued to change hands; in 2001 to Compass Group, in 2003 to Permira of TLLC Group and finally in 2006 to Dubai International Group who have retained ownership until now. However DIC is mainly an investment company created to generate wealth for its stakeholders so it may yet change hands again. (DIC)2. Travelodge has over 300 hotels and it is the fastest growing hotel chain in the UK, with a new hotel opening approximately every nine days. (Caterer Search).3 It is low a cost budget hotel chain with rooms starting at £ 15 and have special rates for block bookings and corporate bookings (Travelodge website).4 In 2004, it bought the Drury Lane Moat House hotel for £11millions and the London Ryan and London Islington Thistle hotels for £55millions In July of that year, it decided to sell 136 of its hotels for £400million, and then lease them back. It plans to build twenty more budget hotels in London (costing £140million), in preparation for the London 2012 Olympics. 1.1 The Problem There are several issues that demonstrate that Travelodge, despite its phenomenal growth, has failed to lay down any policy for strategic management. A. The ownership of Travelodge has changed several times during the lat 10 years but it is still on high growth trajectory. This seems to be a build up for the London Olympics in 2012. However this is surface reality. What will happen when property prices and room rates shoot up at the time of Olympics and then plummet after the event? Are the owners looking at long term strategy? B. Travelodge has presently got 25% market share of hotels in UK (see Appendix) but when compared with the growth rate it appears low. Apparently new hotel properties are small as a result they cannot offer more rooms. C. Although the online presence looks good but the abysmally low hit rate of below 4% compared to the industry average of 28% tells a different story. (see Appendix) D. There have been reports of customer dissatisfaction as well as satisfaction in equal proportion. This is not a healthy sign and can deteriorate with competition geared up to do better. (Reviews)5 E. It has sold 136 of its properties in 2004 and has leased them back. This reflects unsound financial policy and shortage of cash flow. This can prove to be a debacle at the crunch time of the London Olympics in 2012 when cash reserves should be all time high to cater to sudden large influx of clients. Lack of ownership will also reduce capacity to raise working capital when needed. In fact raising capital for asset acquisition too will be difficult as the balance sheets will show signs of poor fund management or a financial crisis. The incumbent has been retained to offer advice on how to deal with the above issues and I have identified the following to be the main problem areas: Current Management Challenges. Doing business on a large scale for maximum market share Making the most of mergers and acquisitions and marketplace consolidation Reducing costs and enhancing efficiency in core business operations Gaining maximum value from human capital Need for a vision beyond the London Olympics of 2012 1.3 Research Objectives New Management Strategies need to be adopted to meet these challenges in order to convert opportunities into profitable business. In order to make these assessments we will first look at the nature of Strategic Management. “Strategic management is an ongoing process that assesses the business and the industries in which the company is involved; assesses its competitors and sets goals and strategies to meet all existing and potential competitors; and then reassesses each strategy annually or quarterly [i.e. regularly] to determine how it has been implemented and whether it has succeeded or needs replacement by a new strategy to meet changed circumstances, new technology, new competitors, a new economic environment., or a new social, financial, or political environment.” (Lamb, 1984:ix)6 Literature Review 2 Strategic Management Strategy should be inventive. It is a thought process that requires perception and flexibility. Determining the strategic drive of the company is the primary task of top management. This mission is aided by above assessments. With this assessment, objectives are set. This involves formulation of: Vision statements – this is the long term goal of the company like what the company should look like 10 years from now keeping in mind the changing PEST scenario. Travelodge should look beyond 2012 and visualize what it wants to become in 2017. It could remain a Budget Hotel but could develop a side business of catering or restaurant chain or even build a few luxury class Hotels for the discerning crowd. Mission statements – this is the short term objective like the London Olympic and the need to build capacity. Corporate objectives – this is the benchmarking of excellence within the company and outside. It needs to evaluate the quality standards and set rules for itself and discipline its employees to achieve these standards in a short period. Customer satisfaction should be one singular aim. The formulation and implementation of the market communication strategies falls under this objective. Strategic Business Unit (SBU) objectives – this the defining of the core activity of the business and its main profit centers like the catering division, the beverages division, travel insurance division etc Tactical objectives – these are measures to take care of all above goals at different points in time like training the staff and installing a supply chain management system. These objectives suggest a strategic plan. The plan provides the details of how to achieve these objectives. Once the plan is formulated it needs to be implemented. The implementation process must be detailed to the minutest degree as this is the crux of the whole strategy. A strategy that is on paper only is a wasted exercise. 2.1 Planning Planning precedes all activities in strategy. It calls for critical review of past performances by all departments. The SWOT, Five Force and PEST analysis will be useful here to determine the future course to be taken. This will lead to developing a strategy for the medium term say next one to two years. This may also be split region wise to cater to the specific geographical requirements. This is the appropriate time to work out the details of the vision and mission statements and decide on targets and objectives. However these should be cohesive and must be coordinated with all concerned divisions or departments and evenly spread and distributed. 2.2 Revenues No planning can be complete without considering and allocating funds for its execution. All required expenditure or investment, as the case maybe, has to be spelled out and compared with the revenues it will generate or the return that it will fetch. Business activities are planned for generation of revenues, and positive revenues generate profits. Investment decisions are based on profits generated and that can be ploughed back into these activities. It is a cycle of events and since all actions are interdependent, the resulting revenues also affect them. The contributions from the SBU are the most important part here as this is the mainstay of the business and its revenue generation capacity is what will sustain the planning functions. 2.3 Unit & Price Another area of strategic managements is to plan the unit and price of the product or service. Here the management first decided on the type and varieties of units or services they will offer. Considerations have to be given to existing models and future development of new models and redefining or redesigning of previous ones. Pricing is often a vexing problem and is liable to change very quickly. To perceive the optimum price a product or service can achieve is a constant struggle and the management needs to be highly flexible on this to meet the demand of customers or to meet the challenge of the competition. In case of the hotel industry the change in weather, the seasonal ups and downs and special occasions all require changes to be made quickly to be effective and attractive to the traveller and the tourist. 2.4 Potential, Penetration & Capacity For any business strategy the company’s own status is to be known and understood. The current capacity to fulfil this plan is what the plan is usually based on. But if expansions are underway, or in planning, then these extra revenue earning potentials are to be considered, It is not essential that all plans are going to be fulfilled as per design and there are bound to be failures or shortcomings or a wrong assessment can leave unutilised capacity. Determination of potential is difficult and is largely dependant on external factors and here the PEST analysis will help the management to arrive at a reasonable accurate figure or target. 2.5 Growth Hamel and Prahalad argue that companies which are not engaged in competing for future market opportunities are already doomed to an arena of corporate value creation which lies largely in their past. (Hamel & Prahalad).9 Keeping up the momentum is an important part of business strategy. It is natural to expect some growth in return on investment and profits each year. There are two ways of achieving this. One is by raising prices of the product or service while the output or availability remains stagnant. The hazard here is that the product or service may become outdated or there will be competition which will entice some customers away. This will result in fall in return and profits. The other route is by increasing product or service range and availability to raise returns and profits. Growth is a very difficult decision as it involves investments and an investment may become wasteful or a burden if there is no adequate return in a reasonable period of time. Again the SWOT and PEST analysis will be useful in determining the growth patterns and management can rely on these to be guided more accurately. 2.6 Implementation There are many reasons why strategic management plans fail and Travelodge is apparently falling in the same trap. The implementation of the plan is to be determined on the basis of the plan that has been finalised. Important milestones must be highlighted and the route to be taken is to be stated. Responsibilities on departments, and if possible, on individuals, must be set out. Monitoring methods must be put in place and review committees should also be framed to follow through with the activities and suggests improvements or to help out in case of problems. Methodology Having realized that company’s problems can be solved by relying on Strategic Management, the issue was how to achieve these objectives. The best methodology is to analyse the current status with the help of management tools like SWOT, PEST and Five Force analysis. These help to bring forth the capabilities and shortcomings which can then be addressed by setting up of Management Policies for the benefit of the business. 3.1 SWOT Analysis SWOT is a very simple but effective method of analysing the current status of a business that gives the management a clear depiction of its position in the market place. SWOT stands for Strengths, Weaknesses, Opportunities and Threats (Dibbs, Sally.& Simkins, Lyndon.1996)7. Based on information available earlier, the SWOT analysis of Travelodge appears as follows. Strengths 1 It is a budget Hotel 2 Its rate starting at £ 15 are the lowest in industry 3 Its expansion at one additional hotel every 9 days is phenomenal 4 It has 25% market share 5 It is forefront in fighting for customers rights 6 It provides extra care for pets 7 It offers Travel Insurance at Discount 8 In case of overbooking it helps customer with alternate accommodation at other hotels Weaknesses 1 Low customer satisfaction 2 Poor hit rate at website 3 Absence of training of staff 4 Sale and Leaseback reduces Asset Base 5 Too many changes in Ownership 6 Owners looking at London Olympics and not at broad basing the company 7 Caters to only the budget class leaving out other mid level business executive travellers which pays well for little more comfort 8 Brand Image is not strong despite huge market share Opportunities 1 It can use its Brand awareness to expand into related business for surviving lean periods 2 Current cash flow should be utilised more for improvements of hotel environment and refurbishing 3 Better and improved strategy of marketing communication should be adopted to consolidate customer base 4 Improve Customer relations online as well as off line by better practice of CRM 5 Improve employee training 6 Improve supply chain management by including suppliers into the final delivery of service 7 Introduce Quality upgrading in services Threats 1 Too many ownership changes make the company vulnerable in the eyes of the financing community 2 In lean periods the management cannot depend upon owners to bail out the company as they are not committed to its basic cause 3 Adding too many properties with eye on London Olympics will pose a burden after the event when demand will fall sharply 4 Being focussed only on budget travellers give little opportunity to cater to other paying segments of the market 5 Selling and lease back of properties weakens the asset base for future financial support if required A study of the SWOT highlights the fact that the management is not really looking to consolidating the future of the company but is making most of the current buoyancy in the market which is lead by the spectre of the London Olympics. What will happen after the event is left to imagination. There is a great opportunity for budget hotels for catering to mid-level business executives as well as for foreign visitors who are on a low budget but still look for a good life. After all the visitors to the Olympics will be of the same kind and a little investment now will cater to the other type of customers. Segmentation is very important and will prove profitable. 3.2 Force Five Analysis Another method of finding the competitiveness of Travelodge is by using the Five Force Analysis devised by Porter, often called the Porter’s five force analysis. This will help the management to devise appropriate marketing strategy to take care of vital issues. Porter divides the competitive environment into five forces of ‘powers’, these are Power of buyers, Power of suppliers, Threat of new entrants, Threat of substitutes, Intensity of rivalry between existing firms. (Porter, M. E.).8 "Relative Power of Other Stakeholders". In Travelodge’s case this is a real threat as with frequent ownership changes the power of the stakeholders to undo the strategy looms very large indeed. This threat alone has the potential to demoralize the management and thus falter in its strategy. 3.3 PEST Analysis PEST stands for Political, Economical, Social and Technological influences that affect a business. These are all external factors that are beyond the control of management but deeply affect its business strategies. Travelodge is not really troubled by PEST factors as at this point in time the external factors are all focussed on making the London Olympics a success. Hence the current expansion moves are in line with current external environment. 4 Recommendations Strategic Management is the process of the management that gives direction to the company about its objectives and the details of how these are intended to be achieved. There are four characteristics of Strategic Management. “Consistency: The strategy must not present mutually inconsistent goals and policies. Consonance: The strategy must represent an adaptive response to the environment and the critical changes occurring within it. Advantage: The strategy must provide for the creation and/or maintenance of a competitive advantage in the selected area of activity Feasibility: The strategy must neither overtax valuable resources nor create unresolvable sub problems”. (Rumelt)10 The success of the company lies in first appropriately designing the corporate strategy and then suitably implementing it. The tools available to the management in arriving at these decisions are through the use of SWOT, Five Forces and the PEST analysis. These offer the company a comprehensive insight of its own capabilities and the external factors that are likely to affect its decisions. For achieving best results the management needs to deliberate these analyses and conclude what is best for it. The consultant advises that on these the Management should decide on a healthy approach to diversifying into catering and related activities to cushion the drop in demand for hotel rooms after 2012 and to build up other SBU’s to maintain profitability. The stress should now be more on stability rather than expansion. With more information a full scale projection and the implementation plan can be arranged. 5 References 1 Caterer Search available at http://www.caterersearch.com/Articles/2007/03/08/312095/travelodge.html 2 DIC available at: http://news.bbc.co.uk/2/hi/business/5265438.stm 3 Caterer Search available at http://www.caterersearch.com/Articles/2006/05/11/306673/bed-tax-hearns- way.html 4 Travelodge website available at: http://www.travelodge.co.uk/ Consumer - Reports. bbc.co.uk (2006-10-24). Retrieved on 2007-06-18.  5 Reviews available at: http://www.reviewcentre.com/reviews-all-55571.html 6 Lamb, Robert, Boyden Competitive strategic management, Englewood Cliffs, NJ Prentice-Hall, 1984 7 Dibbs, Sally.& Simkins, Lyndon. The Market Segmentation Workbook,Thomson (London) 1996 8 Porter, M.E. (1985) "Competitive Advantage", The Free Press, New York, 1985. 9 Gary Hamel and C.K. Prahalad, .The Core Competence of the Corporation. Harvard Business Review, May-June, 1990. 10 Richard Rumelt, .Evaluating Business Strategy., in Readings in the Strategy Process, Ed. Henry Mintzberg, Prentice Hall, (New Jersey: 1998) 6 Appendix Available at: http://www.travelmole.com/stories/1118846.php?mpnlog=1 Travelodge top online hotel chain Travelodge has emerged as the most popular hotel chain searched for by UK internet users. The budget chain claimed a 25% market share, followed by InterContinental Hotels (19%) and Premier Travel Inn (14%). The ratings are based on a top 20 analysis by online competitive intelligence firm Hitwise based on UK internet visits in April.  A Hitwise spokesman said: "Hotel brands have made great efforts in the past two years to strengthen their online presence, and have made public commitments to offer the best price by booking on the hotel website. "They have also stepped up their online marketing efforts and are in many cases competing directly with travel agencies. While hotel websites are making gains from search engines, they continue to rely heavily on their brand for traffic with more than half of traffic coming from search, according to Hitwise. Search Engines category accounted for 52.55% of visits, while traffic from search engines increased year on year by 9.4%. Yahoo! UK had the largest increase year on year of the top five search engines with 29% increase in visits to hotels. More than 15% of traffic came from other hotel websites and agencies such as Active Hotels and Lastminute.com. Buy the number one search term accounting for 7.39% of search traffic was "travel lodge". Yet Travelodge, the number one hotel website, receives the smallest amount of traffic from paid search, with 3% of search traffic coming from paid listings, according to Hitwise. This is far below the average for the top 10 hotel websites of 28.9%: Meanwhile, Intercontinental Hotels received the largest share of its search traffic from paid listings among the top 10 Hotels websites, at 57%. Top 20 Hotels by market share of UK internet visits, April 2007 (Source: Hitwise UK)       Rank    Name    Market Share Session Duration         1    Travelodge UK     25.38% 06:35   2   InterContinental Hotels Group 18.95% 08:47 3 Premier Travel Inn 14.51% 08:14 4 Hilton 7.01% 07:15 5 Macdonald Hotels and Resorts 3.83% 05:46    6 Best Western Great Britain      3.31% 06:08     7 Marriott UK & Ireland 3.29% 06:23 8 Best Western International 3.15%    08:14   9 Accor Hotels      2.65%     08:18 10 Ibis Hotel      2.59% 09:10 11   De Vere Hotels     2.58% 06:57 12 Marriott International      2.31% 05:42 13 Hilton Hotels Online      1.84% 06:18 14 Thistle Hotels 1.49% 04:41 15 Novotel 1.40% 07:33 16 Paramount Group of Hotels      1.29% 07:33 17 SOL Melia Hotels 1.28%   07:26 18 Logis de France   1.09%   13:07 19 JurysDoyle 1.05% 05:09 20 Q Hotels      0.98% 05:59 by Phil Davies     Read More