Portman Hotel Co. – Case Solution

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Portman Hotel Co. Case Answers

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I.  Five Factors Analysis – Portman Hotel Co.

A. ENVIRONMENT: The industry to which Portman Hotel Co. belongs is highly competitive, with enormous fixed costs.  Labor is highly unionized and quite mobile (and militant).

There is a glut of hotel rooms, reflecting excess capacity created during the 1980s.  The business is seasonal and highly cyclical.  Labor costs three times more than in Asia.  The prospective American travelers and employees are unfamiliar with the service concept here.

B.  STRATEGY:  To differentiate itself, Portman seeks to provide unparalleled service, which means doing more things, faster, better than competitors, and anticipating, rather than merely responding to, customer needs.  They seek to create a “total experience,” which is hoped to generate a price premium and/or higher occupancy (see section II below).

The full-service nature of their strategy implies being more labor-intensive and having higher labor costs. Still, they apparently seek the same labor costs and staffing ratios as their competitors.  By empowering PVs and reducing costly management layers, they hope to minimize overhead costs.

To succeed, they must build “reputational capital” with customers and employees; the former will be unfamiliar with Portman Hotel Co.’s service concept. The latter will be unfamiliar with the Portman model for how to run the organization.  Therefore, they need to be “zero-defect” out the door in their dealings with customers and employees to capture the hearts and minds of both.

Given intense competition, enormous fixed costs, and excess capacity in the industry, Portman needs to differentiate itself in a major way to be successful.  They need not simply do better what other hotels are already doing, but rather have a break-through type of service that clearly distinguishes them from the competition (e.g., Mandarin, Nikko).

C.  TECHNOLOGY/WORK ORGANIZATION:  The PVs are key.  They will have broad jobs, autonomously carrying out duties normally done by numerous specialists and under close supervision in traditional hotels.

Delivering the exceptional service Portman Hotel Co. seeks will require tremendous interdependence and coordination among PVs (who will work in teams) and between PVs and other areas of the hotel.

Territoriality is to be avoided here at all costs.  Flexibility is critical, along several dimensions: within individuals (multi-tasking), across individuals (cross-training; teamwork), across parts of the hotel; and over time (ability to up-size and down-size in response to peak-load problems).

The PV job would seem to entail a mixing of star (service) and guardian (maintenance) elements.  (This will be discussed in detail more below.)

D.  CULTURE: Portman Hotel Co. seeks mutual trust; a sense of membership (versus employment); pride; endowed rights (via a formal contract); openness; voice; fairness; and a “no rules” climate for customers.

E.  WORKFORCE:  Portman seems to seek the following kind of person as a PV: people-oriented; respectful/deferential; team player; excellent interpersonal skills; flexible and able to deal with ambiguity (versus structure-oriented types); able to work autonomously; friendly; limited growth needs, due to short ladders; detail-oriented; reasonably educated and articulate so they can interact well with affluent clientele.

They probably want to avoid risk-averse people (given fluctuations in demand and newness of the concept, with implications for tip income).  Some of these attributes may not be congruent with others.

II.  What is Portman Hotel Co.’s strategy worth?

A.  What do they get if they can implement this strategy?: A price premium and/or increased room occupancy at a given price.^[1]

(1)  Look first at the price premium.  Portman’s rooms sell for $185-320 per night; the competition goes for $140-250.  This implies a premium of 32.1% at the low end to 28% at the high end, so let’s assume an average premium of 30% throughout the hotel.

If Portman’s budgeted goal for its average tariff ($220) was comparably higher, then this implies the competition’s price for a comparable average room was $220/1.3 = $169.23, for an average price premium of $51 per room per night.

At their budgeted occupancy level of 65%, the price premium, produced through Portman Hotel Co.’s distinctive service, is worth (348 rooms * 65% * $51 * 365 days) = $4.21M per year in revenue.  At full occupancy, the premium is roughly $6.5M in revenue annually.

(2)  Alternatively, consider occupancy.  Their target is 65%, and they’ve achieved 44%.  At least to some extent (and perhaps primarily), this 21% shortfall is due to service failures.

It costs them: 348 rooms * 21% * $220 (average tariff) * 365 days = $5.87M in annual revenue.  In other words, each percentage increase in occupancy is worth about $280,000 in revenue, which is almost all profit.^[2]

(3)  Another way to think about this is in terms of return on capital investment.  We are told that capitalization comes out to $310,000 per room.

PVs oversee 5-7 rooms, so we have the equivalent of having a worker overseeing a machine with a capitalization of $1,550,000 to $2,170,000 (roughly analogous to a chemical refinery operative).  But we are engaging in nickel and dime tactics on compensation and staffing levels (see below).

(4)  Note: it may be worth looking at the underlying financials to examine whether this hotel could achieve a positive net present value with its intended strategy.

Admittedly, this calculation is going to be difficult because there are many things we don’t know, including a realistic cost of capital, how the capital costs are distributed across parts of the hotel, effects of taxes, and, quite importantly, what non-room sources of revenue the hotel enjoys.  (Note, for instance, that rooms start on floor 5; presumably, floors 1-4 have conference facilities, ballrooms, and rental space.  They also have a garage, restaurants, and bars open to the foot trade, etc.)

But the more fundamental point is that whether or not the hotel is worth holding on to, if Portman Hotel Co. can make a positive return from driving occupancy up (which, in turn, is likely to require good service), then it is…