Huboi Amy TIP-Four Seasons Resorts and Hotels The company that I have chosen for the theory in practice report is the Four Seasons Resorts and Hotels. The company is dually listed on the New York Stock Exchange under the ticker symbol FS and it is listed on the Toronto Stock Exchange under the ticker symbol FSH. The company originated in Toronto, Canada over forty years ago when owner and CEO, Isadore Sharp, opened up the first Four Seasons hotel. His concept was to create a chain of luxury hotels that offered excellence in service and amenities. The hotel currently has sixty-four properties in twenty-nine countries. The majority of properties are held under the Four Seasons and Regent hotel brands. The company has also established branded share ownership properties and private residences. My personal interest in this company is a result of my husband's employment at the Four Seasons Aviara over the last nine years. I have seen first hand how this company takes immense pride in their staff and their well-being. The company also has extensive training for employees and provides many benefits, such as promotions and management training programs. The company has been extremely successful throughout the years because of their strong focus on specific market segments and their needs. The company has utilized successful strategies, which have aided in their financial success and stability when other competitors have failed or taken a loss.
Chapter 1
Mission Statement and Values The Four Season's has created a mission and values statement that encompasses the company's goals, beliefs and principles. The mission statement has been developed to serve as a starting point for the company's overall business strategy. It is also meant to be a source of guidance for Four Season's employees. Their mission statement incorporates four important attributes of the company; "who we are," "what we believe," "how we behave," and "how we succeed1."
1
Four Seasons Annual Report, (2003), p. 6, www.fourseasons.com
The Four Seasons main purpose is to provide the finest luxury accommodations to their guests. The company's goal is to be regarded as the best in hotel and resort management. The Four Seasons believes their employees are their most vital assets. The quality of the employees is paramount for the company in their achievement of organizational objectives. Four Seasons believes it takes a unified and cooperative employee effort to satisfy the guests' needs and to achieve success in the industry2. The company has developed the philosophy that individuals (employees and guests) should be treated fairly, ethically, and respectfully. Four Seasons has adopted the "Golden Rule," which states: "Do unto others as you would have others do unto you3." This has become the underlying foundation for the Four Seasons company culture. Although the Four Seasons wants to be known as the leader in the luxury hospitality industry, they have a strong belief that the pursuit of this objective should not overshadow their high ethical standards. The overall financial goal of the company is to earn "a fair and reasonable profit" in order to protect the investments of all stakeholders4. Four Seasons also focuses on long-term strategies, which ensures profitable growth.
Chapter 2
Porter's Five Forces Model Risk of Entry by Potential Competitors: Low The companies in this specific industry offer customers a highly differentiated product. The luxury hotel industry has high brand loyalty among their customers. This can be justified by the premium price customers are willing to pay for a hotel room. According to Karl Huboi: "Once a guest experiences luxury hospitality they will never settle for anything less5. The existence of strong brand loyalty is difficult for new entrants to break unless they offer a superior service, which can be quite costly. It is difficult for new entrants to gain access to the capital requirements needed to develop and build a luxury hotel. It can cost over $200 million to build a new luxury hotel and this does not include the cost of employees and marketing6. The industry's
2 3
Four Seasons Annual Report, p. 6 Four Seasons EmPact, Karl Huboi's Employee Handbook, p. 8 4 Four Seasons Annual Report, p. 6 5 Karl Huboi , Interview with Four Seasons Employee, (December 1, 2004) 6 Karl Huboi
incumbents have established relationships and experience, which enables them to achieve significant cost savings. In addition to brand loyalty and costs the new entrants must also contend with the probability of retaliation from the established hotels. Rivalry Among Established Companies: High The luxury hospitality industry is fairly concentrated. There are approximately 10 key competitors of the Four Seasons. The hotel companies are: Accor, Fairmont Hotels, Hilton, Hyatt, Millennium & Copthorne Hotels, Orient-Express Hotels, Ritz-Carlton, Starwood Hotels and Resorts, Thistle Hotels and Wyndam7. The level of diversity among the companies is medium to low because the majority of the companies provide similar types of high quality service. The high cost of building, furnishing and servicing the hotels in the industry create high fixed costs and high exit barriers. In addition to monetary costs the companies also have strong relationships and bonds with employees, investors and guests, which are difficult (financially and emotionally) to divest. As a result of the economic downturn in the last few years the hotel industry has experienced slow or even stagnant growth. There were several hotel companies that held back development projects and laid off employees in order to avoid a financial loss. Currently, there has been a steadily increasing demand for luxury hotels in the lodging industry. The Four Seasons, Ritz-Carlton, Starwood luxury collection, St. Regis and W Hotels luxury chains are the primary hotels that have begun to witness the increase in consumer demand8. Power of Buyers: Low The consumers of the luxury hotel industry purchase a low volume in relation to the industry's total capacity. The level of differentiation that the companies offer is high. This makes it difficult for consumers to compare luxury accommodations with standard accommodations. Consumers that want to stay at hotels, such as the Four Seasons, are willing to pay the higher premium because they value the service. When the quality of the service is high the buyer usually has low pricing power. There is very little threat of backward integration from the consumer due to the high costs of startup in the luxury hotel industry.
7 8
Hoover's Company profiles, Four Seasons Hotels Inc. (November 14, 2004), www.factiva .com. Albert Warson, "Hotels are Hot," Mortgage Banking 65, (October 1, 2004), www.factiva.com.
Power of Suppliers: Medium The number of suppliers to the hotel industry is extremely high. The types of suppliers for hotels include: furniture suppliers, linen and bedding suppliers, food suppliers, decor suppliers, appliance suppliers, and uniform suppliers. The availability of substitutes is generally high, except when supplies are developed exclusively for hotels. For example the Four Seasons uses specially made Bulgari and L'Occitaine products in their hotel bathrooms. The Four Seasons also has mattresses made specifically for the hotel rooms. In instances like these hotels can become reliant on specific supplies. The majority of hotels have regional contracts with suppliers. This locks the hotel companies into using certain suppliers and creates switching costs. Supplier power is slightly reduced by their reliance on the hotel industry, especially in the case of uniform and food suppliers9. Power of Substitutes: Low There are substitutes for lodging, such as camping, hostels and motels, but none of these offers the service and amenities that luxury hotels provide to their guests. This is the main reason why there is a low threat of substitutes to the luxury hotel industry. Overall, the luxury hotel industry can be relatively profitable due to the low threat of new entrants, low power of buyers and low threat of substitutes.
Chapter 3
Building Blocks of Competitive Advantage There are four "building blocks" that create a competitive advantage for companies: superior efficiency, superior quality, superior innovation and superior customer responsiveness. Each of these factors can contribute to increasing the consumer's perception of quality and decreasing the company's cost structure10. The Four Seasons Hotels strives to achieve superiority in each of these components thus allowing them to maintain an advantage over their key competitors.
9
Karl Huboi. Charles W. L. Hill and Gareth R. Jones, Strategic Management Theory: An Integrated Approach (Boston: Houghton Mifflin Company, 2004), p. 86
10
At the Four Seasons employee productivity is the main measure of efficiency. The company has developed a rigorous interview process to ensure the hotel hires employees that match the Four Seasons criteria. Four Seasons requires that their employees have strong moral values, teamwork mentality and high quality work ethics11. The Four Seasons has also developed extensive employee training in order to further develop the employee's skills and traits. The company believes in empowering their employees in order to shorten the process when dealing with problems. This gives the employees a sense of importance and pride at work regardless of their status at the hotel. The Four Seasons also provides full benefits and other perks, such as "comp nights," in order to further generate employee satisfaction, productivity and to realize the guests experience12. The superior quality of the Four Seasons experience is measured by the guest's perception of service and value. A key indicator of the consumer's value for the Hotel's service is the achieved daily room rates (ADR). If a guest perceives the quality and value of the Four Seasons to be high then he/she is willing to pay a higher room rate. The company's overall ADR has increased by 4.3% in 2003. This was above the average ADR for the luxury hotel segment. The high quality of the Four Seasons service/product is also reflected in the numerous awards and accolades they have received. Several of the Four Seasons have achieved the five diamond status, which is a prestigious award given by the American Automobile Association (AAA). In 2004 the company had 19 properties that were awarded five diamonds13The Four Seasons has also dominated many surveys and polls, such as Andrew Harper's Hideaway Report. In 2003 the company had over 13 hotels listed on the top fifty of the Harper's Hideaway Report14. The Four Seasons has been a pioneer in developing innovative standards in the hotel industry15. They were the first U.S. company to include bathroom amenities, like
11 12
Karl Huboi Karl Huboi 13 Four Seasons Annual Report, p. 11 14 "Four Seasons Receives Top Billings by Readers of Andrew Harper's Report Rank as Best City Hotel in the U.S. and Abroad Plus Best Hotel in 10 Major Cities," PR Newswire (September 9, 2003), www.factiva.com. 15 Four Seasons EmPact, p. 7
shampoo, bathrobes, hairdryers and make-up mirrors in their hotel rooms16. The Four Seasons provides 24-hour room service, overnight dry cleaning, shoe shining and fitness centers. The hotels also prepare specialty meals for guests who prefer low fat meals or who have dietary requirements. The innovation of these standards has created and strengthened brand loyalty among guests who value these types of services and attention to detail. The Four Seasons has made an unwavering commitment on providing "uncompromising service" to their guests17. "Uncompromising service is more than a paper strategy, it has become the defining competitive difference for Four Seasons18." The power that the company gives to their employees allows them to quickly and efficiently handle the most unusual requests. This enables the company to exceed the guest's expectations of consumer responsiveness.
Chapter 5
Business-Level Strategy The Four Seasons has developed their business strategy based off the concept of differentiation. They provide their guests with a distinctive and unique level of service. Their customer focus is primarily business travelers, corporate groups and leisure travelers. Although the hotels generally attract certain clientele the Four Seasons policy does not allow for discrimination and believes all guests deserve the same exceptional experience19. The company has created a strategy that focuses on four important components. The Four Seasons concentrates on "small to medium sized luxury hotels20." This allows hotel management to effectively operate each hotel and provide the guests with more intimacy. The hotel company also concentrates on hotel management services instead of hotel ownership. Management service is one of the Four Seasons main distinctive competencies. The company has established partnerships with investors who provide the backing for hotel development. The investors receive ownership in the hotels while the
16 17
Four Seasons EmPact, p. 7 Four Seasons Annual Report, p. 8 18 Four Seasons Annual Report, p. 8 19 Karl Huboi 20 Four Seasons Annual Report, p. 7
Four Seasons takes sole responsibility for managing the hotels and resorts. Approximately, ninety to ninety-five percent of the companies earnings are a result of the management fees21 The company currently has majority ownership in only three properties22. Another of component Four Seasons strategy is their "golden rule" philosophy. The company believes it is important for every level of employee to participate in treating others fairly and respectfully. This principle creates an atmosphere, which facilitates a positive work environment and adds to the guest's experience. The Four Seasons has also identified their "uncompromising service" as another component of their strategy and as their "distinctive edge" against competitors23. The company's knowledge and background in creating unique experiences for customers provides the Four Seasons with pricing power thus giving the company an advantage over rivals.
Chapter 6
Mature Industries The hotel industry is a mature industry. There are several different types and sizes of hotel companies, but the larger companies generally dominate the industry. The luxury hotel segment focuses more on non-price competition to deter new entrants, such as market penetration, product development and market development. The Four Seasons concentrates on increasing their market share and continuous growth by developing new hotels in different regions. At the end of 2004 the number of Four Seasons properties will have reached 70. The company president, Isadore Sharp, hopes to have a total of 100 properties by 201024. The Four Seasons has also begun to expand into new niches or markets with product proliferation. In 1997 the company opened its first luxury vacation ownerships (timeshares) at the Four Seasons Resort Aviara in Carlsbad, California. The company believes this is another way to reach and satisfy guests who value the quality of Four Seasons experience. "The Four Seasons Residence Club experience will bring an
21
Matthew Garrahan, "A New Spring for Four Seasons," Financial Times (November 26, 2004), www.factiva.com. 22 Four Seasons Annual Report, p. 7 23 Four Seasons Annual Report, p. 7 24 Matthew Garrahan
exclusivity, privacy, luxury and service level never before available in the vacation ownership arena25." They have also opened up residence clubs at the Scottsdale, Jackson Hole, and Punta Mita properties. In addition to the fractional ownership venture the company has also developed private residences in Jackson Hole, San Francisco, Miami and Scottsdale. The luxury hotel segment rarely uses price-based competition, such as price signaling or pricing games. These types of tactics can drive down room rates to a level that is not profitable for any company in the industry. This is not the goal in the luxury hotel segment. Many companies, like the Four Seasons, want to create superior value so they can justify the premium room rates. The Four Seasons does not believe in using pricing games as a strategy to deter entry. It against their policy to cut prices as a competitive means. This strategy is warranted by the fact that the hotels attract guests based on the product not the cost26.
Chapter 7
Technical Standards There are many established standards or specifications that must be upheld for a hotel to be classified as a luxury accommodation. These standards are also important in the selection of hotels to be deemed a five diamond or five star establishment. According to the AAA the factors to be considered when judging a hotel are its age, size, architectural design and appeal. In addition the AAA bases its assessment on the guests overall impression of the establishment27. It is important for luxury hotels to follow these criteria and to receive superior evaluations because these ratings impact the hotels credibility among consumers. There are also other specific features that hotels must have in order to achieve five star or five-diamond status. Some of the examples are: valet service, 24 hour room service, live flowers and plants inside the rooms and premises, real wood detailing, fine art work, fitness centers, minimum of two restaurants (one being fine dining) and
25 26
Four Seasons EmPact, p. 8 Matthew Garrahan 27 AAA Five Diamond Award, (2004), www.ouraaa.com.
pressing services28. These standards make up the dominant design for each Four Seasons Hotel. This means that every hotel that is built must adhere to certain specifications that have been established by the industry. The differences that do exist among the hotels are seen in varying features such as the furnishings, architectural layouts, color schemes and locations.
Chapter 8
Multidomestic Strategy The Four Seasons has followed a multidomestic strategy throughout their expansion into international and domestic regions. "The key distinguishing feature of multidomestic companies is that they extensively customize both their product offering and their marketing strategy to match different national conditions29." This strategy is also feasible when the company is not reliant on cost reductions for maximizing profitability. In the luxury hotel industry it is necessary to modify certain aspects when entering the global market. The Four Seasons has maintained the highest levels of local responsiveness in their aggressive overseas expansion. The modification of the hotels for different regions is often reflected in the hotel design and in the service features. When the Four Seasons builds hotels they always take into account the natural environment of the location. For example the, Four Seasons Resort Maldives at Kuda Huraa have been designed to resemble the tropical huts of the region30. The Four Seasons also considers the size of the hotel when entering a new location. It is important to not build a hotel that over scales its environment because it could be seen as offensive to the community. The Four Seasons is also conscious of blending the local culture in with the service features of the hotels. For example each hotel offers cuisine that is unique to its location31. The Four Seasons has been successful at transferring their distinct corporate culture and core standards to each hotel it manages. The company is not overly
28 29
Karl Huboi Charles W. L. Hill and Gareth R. Jones, p. 272 30 www.fourseasons.com/maldives/index.html. 31 Karl Huboi
concerned with lowering costs thus making it possible for them to provide customized service and quality regardless of the hotels location. The premium rates charged by the Four Seasons for their customized product offering offsets the added costs of being locally responsive.
Chapter 9
Horizontal Integration In the mid 1990's the Four Seasons decided to horizontally integrate by acquiring Regent International Hotels, a luxury hotel chain in Asia32. The Regent brand was experiencing a significant financial burden and was on the verge of bankruptcy. The Four Seasons decided that acquiring the Regent Hotels would help them build their market share. After being extensively investigated by Regents investors, the Four Seasons was sold the right to takeover Regent's fifteen properties33. The acquisition allowed the Four Seasons to become "the dominant company in the luxury hotel market worldwide34." After the Four Seasons became listed on the New York Stock Exchange and the Toronto and Montreal Stock Exchanges in 1997, the company decided to sell off the Regent brand. The Four Seasons sold only the "rights to future development of the Regent Brand name to Carlson Hospitality Worldwide, a global leader in hospitality services35." The agreement between Carlson and Four Seasons allowed both companies to utilize the Regent brand reputation as a source of competitive development. The Four Seasons still maintains ownership rights to eight of the established Regent Hotels. The Four Seasons was fortunate to acquire another company that actually increased their overall value and market share. Traditionally it is difficult for firms to successfully horizontally integrate because of the difficulties associated with merging company cultures and accurately estimating the benefits of integration36. The company was able to look past any potential risks in order to see the future opportunity for growth.
32 33
Four Seasons EmPact, p. 8 Four Seasons EmPact, p. 8 34 Four Seasons EmPact, p. 8 35 Four Seasons EmPact, p. 8 36 Charles W. L. Hill and Gareth R. Jones, p.304
Chapter 10
Joint Ventures The Four Seasons has recently formed a joint venture with the cruise ship developer, Ocean Development Group. The companies plan to develop and launch the luxury cruise ship by 200637. The Four Seasons will be responsible for managing the cruise ship. The concept for the cruise ship is similar to the ResidenSea, which provides its guest with the atmosphere of home while at sea. The joint venture is beneficial for both companies because they can share the risks and costs associated with the development and marketing of the cruise ship. The business venture also allows each company to focus on providing their specific assets and capabilities that will enhance the success of the project. The Ocean Development Group will own the cruise ship and will be responsible for the cost of development. The Four Seasons will use their distinctive competencies in management service to operate the hotel under their name. The company will use their skills in customer service to create an atmosphere that is comparable to any Four Seasons on land.
IRME's
SouthWest: Both the Four Seasons and Soutwest airlines have developed strong company cultures. The companies also view their employees as their most important asset. Both companies believe that productive and loyal employees are a source of efficiency and profitability for the company. Southwest uses employee efficiency to lower costs and the Four Seasons uses their employees to create high differentiation. Harley Davidson: Both Harley Davidson and Four Seasons focus on providing their customers with a highly differentiated product/service. The companies have also developed strong brand loyalty among their customers by providing a unique experience and by being responsive to customer needs.
37
Hoover's Company profiles
Airborne Express: Both companies have not developed extensive advertising campaigns (i.e. TV ads). Airborne Express has avoided this because they want to avoid attracting certain customers (like non-business shippers). The Four Seasons does not advertise on a large scale because they do not need to appeal to the general public. Their customer focus is only on specific market segments, like the business traveler. It would be a waste of resources for both companies to participate in mass marketing because of their customer focus. Dell & Shaw: The Four Seasons, Dell and Shaw have all developed strong business models, which have added to their profitability and allowed the companies to experience significant advantages. Dell developed the direct selling business model, which allowed the company to capture a specific market (big businesses and knowledgeable buyers). Shaw developed a business model focused on providing inexpensive wine by mass marketing. This allowed the company to realize economies of scale and lower cost savings. The Four Seasons has developed a business model that is based on providing differentiated service by focusing on their expertise in hotel management services instead of hotel ownership. Coke & Pepsi: The Four Season's key competitor is the Ritz-Carlton, but unlike Coke and Pepsi the companies do not participate in competitive pricing and marketing strategies.
Interesting Points
An interesting fact that I have learned from doing this report is that the Four Seasons main business focus is in providing hotel management services. I was unaware that they only had majority ownership in three properties. I also did not realize that they had several different investors for each developed property. This strategy has been successful for the Four Seasons, because it allows them to earn significant profits (an operating margin of 53% in 2003) through the use of specific skills and assets38.
38
Four Seasons Annual Report, p. 12
Another interesting thing I have learned is that the Four Seasons was able to maintain profit levels well above their competitors throughout the past economic downturn. The company refused to lay off employees and cut room rates (which is important to my husband and I) when several other hotel companies made significant cutbacks to decrease their overall costs. The Four Seasons believed that lowering cost and service standards would ultimately have an adverse effect on the company's reputation and established brand loyalty. This strategy has allowed the company to retain their status and to earn higher ADR than their competitors.
Works Cited AAA Five Diamond Award. 2004. www.ouraaa.com Four Seasons Annual Report. 2003. www.fourseasons.com. Four Seasons EmPact. 2004. Karl Huboi's Employee Handbook.
"Four Seasons Receives Top Billing by Readers of Andrew Harper's Report Rank as Best City Hotel in the U.S. and Abroad Plus Best Hotel in 10 Major Cities." PR Newswire. (September 9, 2003). www.factiva.com. Four Seasons Resort Maldives at Kura Huraa. 2004. www.fourseasons.com. Garrahan, Matthew. "A New Spring for Four Seasons." Financial Times. (November 26, 2004). www.factiva.com Hill W. L., Charles and Gareth R. Jones. Strategic Management Theory: An Integrated Approach. (Boston: Houghton Mifflin Company, 2004). Hoover's Company Profiles. Four Seasons Hotels Inc. (November 14, 2004). www.factiva.com. Huboi, Karl. Interview with Four Seasons Employee. (December 1, 2004) Warson, Albert. "Hotels are Hot." Mortgage Banking 65. (October 1, 2004). www.factiva.com.