Report On Travel Lodge New Operation Management Essay
Based on the agreement reached in the last Board of directors meeting for Travelodge to look at the opportunities in opening an operation as a strategic business unit within the air line industry, this report considers the option of rolling out Travelodge’s new plan to fly within the UK (the UK cities). It starts by conducting a critical analysis on the background of the company, looking at the option of business available and comes up with ranges of strategic option proposed for the operation and plan for implementation within a specific time frames
Background of Travelodge
Travelodge is the second largest budget hotel brand, third biggest hotel chain in terms of room numbers in the United Kingdom and the fastest growing hotel in the UK. It operates in the hospitality industry. From Organisational point of view, Travelodge has it’s headquarter at Thame, England, UK and its parent company is Dubai International Capital (www.travelodge.co.uk).
The year 2007 showed a strong financial performance with the following key figures in comparison to 2006:
UK operation revenue grow up by 20% to £243.8 million (from £203.5 million in 2006), London showed strong growth at 32% and room sales up by 14% at 5.5 million.
Spain saw occupancy rate up by 15 points and stable at 77% across the board.
Earnings before interest and Tax improved by 30% to £55.8 million (from £42.8 million in 2006).
Free cash flow generation in 2007 stood at 60%
The company has conceived a roll out plan to start a new operation in the airline industry starting with the UK route. This will operated as a new strategic unit of Travel Lodge Hotels, albeit under Travel Lodge – with the code name Travelodge airline. It is intended to embrace a low cost strategy (low cost travel tickets and other services), effectively rivaling Airlines within the low cost strategic group (such as EasyJet and Ryanair among others). The new operation will be based at Gatwick airport, which is a 20 to 30 minutes commuting distance by rail from London Victoria. The company will be getting a UK Civil Aviation Authority Type A Operating License permitting it to carry passengers, cargo and mail on aircraft with 20 or more seats, for its new operation into the UK. (http://www.caa.co.uk/default.aspx?catid=183&pagetype=90&pageid=340)
This report will therefore look at how the new operation should be approached strategically.
PART A: Strategy for the proposed operation
1.0 Stakeholder consideration for the new operation
Stakeholders are defined as “individuals or organizations who stand to gain or lose from the success or failure of a system” (Nuseibeh and Easterbrook, 2000). For an airline company these can include management, employees, government, community/Greenpeace/environmentalists, customers and suppliers among others. Since, by definition, stakeholders are those who are impacted by (or have an impact on) the project, their perspectives need to be taken into account in order for a project to be successful. Stakeholders can have positive or negative views regarding a given project, and often don’t agree with one another, making it a challenge to reconcile their varied viewpoints.
It is worth considering the history and lineage of the term “stakeholder analysis.” The term was introduced in a seminal book by R. Edward Freeman called Strategic Management (1984). The word stakeholder was used to stand in contrast to the neoclassical view of the firm as catering to stockholders. Freeman used the term stakeholder analysis to remind management that it was in the long-term interests of the company to pay attention to the interests of those who have an impact on or are impacted by the activities of the company. In the same focus, Travelodge management should endeavor to identify the key stakeholders, their interests and the potential influence they can exert on the proposed new operation.
The first step in stakeholder analysis is to identify who organisational stakeholders are. Think of all the people within the organization who are impacted by business activity, who have influence over it, or have a stake in its successful completion. The following stakeholders may feature prominently when Travelodge embarks on its new operation in the airline industry.
These are the owners of the company and the principal-agency relationship dictates that Travelodge should have fiduciary duty to put their interests first in terms of value creation. The new strategy to operate Air fleet should therefore be acceptable to them in terms of high return on their investment and low risk.
The airline industry is one of the highly regulated industries globally. Travelodge’s new strategy will face challenges in this area given that most world airlines are closely attached to national governments (the case in point are British Airways and American Airlines) or they are actually nationalised, for example the Malaysian Airlines (www.caa.gov.uk). Government as a stakeholder is of crucial importance to granting operating licence and in the case of Travelodge the licence may not be issued or withdrawn unless this group is fully satisfied with specific regulatory compliance such taxation and environmental laws.
This group of stakeholders has high interest but low power in the organisation. They can however, increase their overall influence by forming coalitions with other stakeholders, such as trade union in order to exert a greater pressure and thereby making themselves more powerful. The withdrawal of their labour is one such example. Travelodge’s strategy for dealing with this group would be to keep them happy by for example reassuring them of their job security, training and development.
The negative impact of a company’s business activities on the environment attracts the interests of this group of stakeholders. There have been serious criticisms of the Airline industry in recent times due to their bad policy on the environment (air transport pollution). The case in point is the recent protest by greenpeace and local community around Heathrow airport opposing the airport expansion programme by BAA (http://stopheathrowexpansion.com). This group of stakeholders has real potential to team up with others to lobby financial institutions to refuse financing Travelodge’s new operation should they not honor environmental laws. Travelodge will have to respond to the greenpeace/envrionmentalists’ demand by for instance buying environmentally friendly planes (Ecojets).
This group of stakeholders have both high interest and influence in Travelodge. Suppliers are described as market of inputs. Suppliers of raw materials, components, and services (such as expertise) to the firm can be a source of power over the firm. Suppliers may refuse to work with the firm, or for example charge excessively high prices for unique resources (for example, aircrafts in the case of Travelodge). The management strategy for dealing with this group should factor the following issues:
supplier switching costs relative to firm switching costs
presence of substitute inputs
supplier concentration to firm concentration ratio
threat of forward integration by suppliers relative to the threat of backward integration by firms
cost of inputs relative to selling price of the product
This group has high interest and can have high influence in the organisation especially if there are so many competing firms in an industry. Customers are described as the market of outputs. The ability of customers to put Travelodge under pressure due to sensitivity to price changes. Travelodge will have to observe the following factors when dealing with customers:
buyer concentration to firm concentration ratio.
bargaining leverage, particularly in industries with high fixed costs.
buyer switching costs relative to firm switching costs.
buyer information availability.
availability of existing substitutes products.
Collins and porrs, 1984 argued that The greatest value of a company is its image and brand (Collins ands Porras, 1994). By attempting to fulfil the needs and wants of many different people ranging from the local population and customers to their own employees and owners, companies can prevent damage to their image and brand, prevent losing large amounts of sales and disgruntled customers, and prevent costly legal expenses. While the stakeholder view has an increased cost, many firms have decided that the concept improves their image, increases sales, reduces the risks of liability for corporate negligence and makes them less likely to be targeted by pressure groups, campaigning groups and Non Governmental Organisations (NGOs). Travelodge’s management will therefore have to ensure that the strategy for the new operation complies with applicable laws governing the airline industry (such as environmental law, employment laws among others).
1.1 A review of potential strategic options
The new strategic direction undertaken by Travelodge to operate in the Airline industry represents a strategic change. The strategic review below explores what options are available to Travelodge in taking this operation.
to compete in terms of Porter’s generic strategies (Porter, 1980), the company would have to consider the three strategies as they were suggested by Michael porter
Overall cost leadership – this strategy puts much emphasis on efficiency. Companies that attempt to become the lowest-cost producers in an industry can be referred to as those following a cost leadership strategy. By producing high volumes of standardised products, the firm hopes to take advantage of economies of scale and experience curve effects. The product is often a basic no-frills product that is produced at a relatively low cost and made available to a very large customer base. Maintaining this strategy requires a continuous search for cost reductions in all aspects of the business.
This is the strategy which Travelodge has been and currently pursues in its other operations – low cost hotels (www.travelodge.com). The question of whether it’s proposed new operation will call for the use of this same strategy is matter of thorough strategic assessment by Travelodge management. The kind of product (UK flights) that Travelodge Airline will launch might call for a different option where in-flight services (such as drinks and meals) might have to be provided.
However, low cost leadership is disadvantageous because it leads to less customer loyalty and low price creates negative attitude towards the quality of the product in the mindset of the customers (Porter, 1980).
Differentiation strategy – this strategy is aimed at the broad market that involves the creation of a product or services that is perceived throughout its industry as unique. The company or business unit may then charge a premium for its product.
Among of the examples of differentiation include better service levels to customers and better product performance among others compared to the existing competitors. Following a differentiation strategy incurs extra costs in product/service delivery (Porter, 1980). Such costs include high advertising spending to promote a differentiated brand image for the product. Launching the new operation would mean that Travelodge will be taking up a strategy where drinks and meals are offered as differentiang factors. Research does suggest that a differentiation strategy is more likely to generate higher profits than is a low cost strategy because differentiation creates a better entry barrier. However, there are problems associated with this strategy, which include the difficulty on part of the firm to estimate if the extra costs entailed in differentiation can actually be recovered from the customer through premium pricing.
Focus – Michael Treacy and Fred Wiersema (1993) have modified Porter’s three strategies to describe three basic “value disciplines” that can create customer value and provide a competitive advantage. They are operational excellence, product leadership, and customer intimacy. Companies employ this strategy by focusing on the areas in a market where there is the least amount of competition. Companies can make use of the focus strategy by focusing on a specific niche in the market and offering specialised products for that niche. This strategy provides the company the possibility to charge a premium price for superior quality (differentiation focus) or by offering a low price product to a small and specialised group of buyers (cost focus). This strategy might be appropriate for Travelodge’s new operation where it will target rich pensioners who may want to travel to the countryside.
The problem with this strategy, however, is that the niche is small and may not be large enough to justify a company’s attention. The focus on costs can be difficult in industries where economies of scale play an important role. There is also a danger of larger better resourced competitors entering the same niche industry.
Porter (1908) argues that a organisation should choose one strategy and apply in order to avoid getting stuck in the middle. There is no competitive advantage for a company that is stuck in the middle and the result is often poor financial performance.
Where to compete in terms of Ansoff product market matrix (1957)
Market development – this option involves selling existing products in the new market. In marketing terms, a company is selling an established product in the marketplace targeted to a different customer segment (Kotler, 2003). This seems to be part of Travelodge’s strategic intent – developing a new product for a new market. However, there are risks associated with this strategic option such as experience of the market. In order to do this successfully, Travelodge would have to design a proper marketing strategy, starting with marketing research, segmentation, target the best segment and product positioning.
New product development (developing new products for existing market) – a firm with a market for its current products might embark on a strategy of developing other products for the same market. It would also appear that Travelodge’s strategy is to provide Air transport for it’s hotel guests. The risks poised by this strategy range from funding, performance to competition among others. This means that a company should undertake new product planning.
Diversification – This strategy results in the company entering new markets where it had no presence before. This is the strategy that Travelodge is pursuing – entering the Airline industry where it had no presence before. According to Ansoff (1957), this is the most unknown and riskiest strategy. He suggests that for a company to pursue this strategy there needs to be a common thread – where there are some common activity that links everything the firm does.
1.2 Resource implications of the strategy
The implication of the strategy in terms of resources centres on the following:
Managerial – this strategy will strain available managerial resources and may distract away from managing the core business. Travelodge should ensure that it has distinctively core competence in terms of management and staff who will be managing the Airline business.
Financial – strains the resources of the business leading to liquidity problems. It is also likely to involve reduced margins as Travelodge expands from more to less profitable operation (not yet tested). It should also be noted that that expansion strategy may attract attention from better resourced competitors. Therefore Travelodge will have to ensure that it puts in place barriers to entry into the industry. This requires constant research and development (innovation), which in turn requires funding.
Purchasing of new aircrafts – This is a new operation and as such Travelodge will have to have access or negotiate some form of loan from the financial institutions to finance the purchase of new aircraft.
Plan for implementation
Strategy formation and implementation is an on-going and integrated process requiring continuous reassessment and reformation. Strategic management operates on several time scales. Short term strategies involve planning and managing for the present. Long term strategies involve preparing for and preempting the future. Marketing strategist, Kotler (2003), has suggested that understanding this dual nature of strategic management is the least understood part of the process. He claims that balancing the temporal aspects of strategic planning requires the use of dual strategies simultaneously.
2.1 Proposed implementation time table
The table below sets out the proposed time table for implementing the new operation.
Planned implementation activity
April – May 2010
At the planning stage of the project:
Draw up an action plan to be followed through from the planning phase to the launch of the new operation.
At the planning stage, defining and review the funding level available for the new operation.
Consider competent staff who should be brought on board to form a team will work through the project.
Consider the need to recruit external experts to help guide the project where there is insufficient expertise in the organisation.
Consider the funding level available for the new operation.
June – July
At the stakeholder consultation stage:
Consult senior managers and board members on contentious issues that need to be addressed.
Involve other stakeholders (including employees, community and government agencies) of their views on the project.
august – september 2010
At the review stage:
Review outcomes of the strategy and any issues from budget monitoring
Consult with senior directors on key issues arsing from other stakeholders.
Communicate the strategy to all the staff in the organisation and keep regular updates across the organisation on the progress of the project.
Review and amend the financial forecasts in light of any new requirements arising from stakeholder consultation.
Conceder staff requirements for the new operation (that is, recruitment, training and development).
– Launch the new operation
– This stage will also require some form of feedback and control.
2.2 Systems and processes for dissemination
The process for disseminating information a clear co-ordination of strategy and ensuring every staff involved and affected by the plan are regularly informed of progress. Strategic implementation should not be divorced from formulation of strategy. Mintzberg terms this the “fallacy of detachment” arguing that such separation inhibits learning and flexibility. When a new strategy is designed, staff should be kept informed since it represents a change within an organisation. In the case of Travelodge, the plan to operate long haul route presents a change in the strategic direction within Travelodge. As such the following issues needs to be addressed:
Education – communicating and explaining the nature and reasons for change. The earlier it is done, the less opportunity for roumers and distortions that will complicate the change process.
Participation – the active involvement of those affected by the changes in the changing process. Questions arise, however, regarding the extent and the scope of the participation.
Facilitation – helping those affected by the change to accept and adjust to the changes. Management should integrate change within different levels in the organisation. Change needs to be encouraged and reinforced through training of staff.
Introduce change gradually, either on a side by side or step by step basis to reduce resistance. Pilot schemes are of value for learning and demonstration purposes.
2.3 Monitoring and evaluation
Any Successful strategic plan must have a clearly defined objective, careful assessment of both the internal and external situation when formulating and implementing the strategy.
The company must have a clear vision of its long term plans. These also involve evaluating the financial and strategic objectives. Financial objectives involve measures such as sales targets and earnings growth. Strategic objectives are related to the firm’s business position, and may include measures such as market share and reputation (quickmba, 2007). The Environmental scan includes internal analysis and external macro environment (PEST analysis) of the firm.
Johnson and Scholes (1999) argued that a model in which strategic options are evaluated against certain key success criteria laid down below:
Suitability – The strategy pursued by Travelodge should address the key strategic issues underlined by the organisation’s new strategic position. The question that Travelodge’s management should ask themselves should be whether the new operation makes economic sense; allow Travelodge to obtain the benefits of economies of scale (in terms of staff, marketing and sales) and it is environmental friendliness.
Feasibility – This is concerned with the resources availability to implement the strategy. The questions that Travelodge’s management should ask them before implementing this strategy should be whether the resources are available, can be developed or obtained cheaply from institutional stakeholders and the ease of investment recovery. Travelodge’s management should perform cash flow analysis and forecasting and resource deployment analysis to ascertain the worthiness of this investment.
Acceptability – The new operation should be acceptable by the various stakeholders of Travelodge, particularly, the institutional investors and ordinary shareholders. They would be concerned with the return on their investment in both financial and non-financial terms and the risk involved.
After analysis of the tasks in terms of organisation vision, mission and the objective in relation to the strategic planning and implementation with reference to several theories and principle, strategic plan should be designed in such a way that will facilitates easy implementation, monitoring and control mechanism. It vital that a full analysis of the process, controlling for variances is built into the strategy with a view to making provision for adjustments as and when needed to avoid implementation a failure.
Strategic managers of Travelodge should ensure that the following steps are taken when forming and implementing the strategy for the new operation:
Achieve executive sponsorship and commitment.
Involving a broad base of leaders, managers and employees in scorecard development by agreeing on terminology.
Beginning interactive (two-way) communication first.
Working through mission, vision, strategic results, and strategy mapping first to avoid rushing to judgement on measures.
Viewing the scorecard as a long-term journey rather than a short-term project.