An Aid in Selecting the Brand,Size and Other Strategic Choices for a Hotel

Abstract

The “go/no-go” decision for a candidate property, i.e., whether or not to actually acquire the site, choose the brand (flag), build and operate the hotel, requires the explicit consideration of the interconnectedness of the many myriad elements affecting the property's potential profits. The many facility design decisions (number and mix of rooms, capacity for F&B operations etc.) as well as other strategic choices (e.g., size of marketing program, level of service aimed for) must recognize the site's competitive features and interactions with the above. Also, the particular design and operational features for a given property will affect its different revenue streams, fixed and variable costs, efficiency and profits. The authors consider developers contemplating acquiring a given site, choosing a brand, building and operating a new hotel. They offer a normative approach for this type of decision which arrives endogenously at possibly attractive options for the brand, design and strategic choices for the site. The final decision as to which option to actually use, if any, should be based on subjecting the above identified scenarios, as well as others, to traditional feasibility analyses where judgment and expert opinion are applied. The authors' implementable approach integrates a “best practices” benchmarking methodology with regression analysis to yield a mathematical programming optimization model. A key advantage of this approach lies in its contrast to conventional approaches for site selection which often ignore the more detailed design and strategic choices. The approach deals explicitly with the complex interfaces between marketing and operations management as the endogenous site and competitive environmental factors interact with the endogenous brand and facility design choices. By identifying attractive options to be further explored (that might otherwise be overlooked), several types of errors are avoided: i) an incorrect “go/no go” decision could be recommended for the site in question; ii) even if the right decision to proceed is made, the forecasted level of annualized profits could be in error, leading to an incorrect priority for the activity; iii) the incorrect brand and facility design choices could be made for the site. Other key advantages of the suggested approach are that 1) various substitution possibilities (between more or less capital, labor, materials etc.) are considered; 2) not only is the best brand and configuration identified, but also a ranking of other brands is available if the “best” brand is not available; 3) the “best practices” at other specific sites (which serve as the basis for the recommendations) are identified, thereby enabling management (possibly through site visits) to isolate the actual cultures, processes and procedures to be transported and emulated at the candidate site. This paper illustrates the approach for two different sites.