Investing in Competitive

MethodsChapter 7

By: Fiona Caramba-CokerFor: Dr. Fred DeMicco

OBJECTIVES

Upon completion of this chapter, you will be able to:

1. understand the role of the manager in adding value to the firm.

2. develop an understanding of the investor’s requirements for return on invested capital.

3. relate the estimation of cash flows, cost of capital, risk, and investment to the responsibility of adding value.

4. relate the use of the net present value (NPV) discounted cash flow technique to the adding value imperative of all managers.

5. apply the concepts of this chapter to the case study.

The Role of the Manager in Adding Value to the Firm

• In the past few chapters you have learned the importance of first scanning your environment.

• This chapter will introduce the second step in the coalignment theory, strategy choice.

• Making the right strategic choices requires managers to invest in CMs that create lasting economic value for the firm and its investors.

◦ Read pages 205-208 in your book

The Role of the Manager in Adding Value to the Firm

• In the Strategic Management Model the environment and strategy choice construct come together in a synthesis of strategic management thinking and financial management.

• It is important that managers consider their competitive method via the mix of products and services they offer.

• Putting together the best possible mix can add tremendous value to the firm.

◦ Visit the Strategic Management Model again; it is present on the next slide.

Strategic Management Model

Competitive Methods

S2P2

P3 S3

P1 S1

The Role of the Manager in Adding Value to the Firm

• Hospitality managers must capitalize on opportunities that arise, as a means of possibly adding value to their firm.

• One new booming niche in the hospitality industry is group travel. Read about how different firms are utilizing this new niche as part of their strategy choice.

◦ Read Article ONE

Investor’s Requirements for Return on Invested Capital

• Now that you have learned about the importance of managers making the right investment choices, it is also vital to gain an understanding of how the concept of capital fits into the picture.

• The launching of a business requires money.

• This money must come from investors who expect wealth and returns maximization.

◦ Read Pages 208-212 in your book.

Investor’s Requirements for Return on Invested Capital

• When a firm does not have a high return on invested capital it greatly impacts the investors and their decision to continue to invest in that particular firm.

• The performance of the stock market greatly impacts investors and their return on invested capital.

• For a real life scenario: ◦ Read Article TWO

Cash Flows, Cost of Capital, Risk, and Investment and Their Responsibility to

Adding Value

• The decision made by managers from the strategic perspective links to the cash flow streams of the firm.

• Their decision also impacts cost of capital, risk, and investment. And all of this components impact value added.

◦ Read Pages 212-222 in your book.

Cash Flows, Cost of Capital, Risk, and Investment and Their Responsibility to

Adding Value

• The diagram on the next slide will present graphically the merging of these different ideas in their responsibility to add value.

Synthesizing Coalignment Theory with the Realities of the Firms Need to Produce Cash Flow

The Value Adding Model

Adding Value Worksheet

The Reality

Environmental Events

Expert Systems

P1Outsource Restaurant

Strategic Alliances

S1 Service Training Revenue

Maximization

Assets and Capital

Asset Productivity

ResourceAllocation

Cash Flow per Share

Aggregated Cash Flow of each Productand Service

Products/Services Competitive Method

Cash Flows, Cost of Capital, Risk, and Investment and Their Responsibility to

Adding Value

• When making an investment decision, there are four factors that a manager must first consider.

• These four things are considered to be “the pillars of the investment decision in competitive methods”.

The Pillars of the Investment Decision in Competitive Methods

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Factors to be evaluated in every investment decision

Cash Flows, Cost of Capital, Risk, and Investment and Their Responsibility to

Adding Value

• The investment a manger makes can be vital in bringing in cash flow and adding value, though there may be some risk involved in the decision.

• A real life example:◦ Read about how luxury hotels with spas have greater

pricing power.◦ Read Article THREE

Operating Leverage and Risk

Some investments may have risks. It is important to measure the operating leverage and risk for a given investment, in order to estimate the break even point and amount of profit possible.

Net Present Value (NPV) and Discounted Cash Flow (DCF) Technique

• Discounted cash flow techniques refer to forecasting the cash flows of a CM into the future.

• There are two primary DCF techniques employed by investors: net present value (NPV) and internal rate and return (IRR).

• To gain a better understanding of these techniques:◦ Read Pages 222-224 in your book.

Ik

CFNPV

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Length of Project

Cost of Capital

Cash Flows

Investment

The Net Present Value Formula

The equation for NPV looks difficult, but it’s much easier than you think. Lets break it down.

What Now???

• Now that you have gone through the chapter, lets test your knowledge….

Multiple Choice

Discounted cash flow techniques refer to forecasting the ________ of a competitive method into the future.

A. Cash flowsB. CapitalC. Balance sheetD. Assets

Managers should consider some factors when making investments, EXCEPT:

A. The capital outlay.B. Quality and life of investment materials.C. New ideas.D. Design, engineering, and construction.

True or False?!?!

If the net present value (NPV) is zero or greater, the manager can make the investment.

True  False

Investors can avoid unnecessary risk by making the right investments based upon their effective environmental scanning.

True  False

The money provided by investment banks, institutional investors, individuals, friends, family, and in-laws is referred to as debt capital.

True  False

Capital can be obtained through debt.

True  False

Short Answer Response

What are the pillars of the investment decision in competitive methods?

What are the factors affecting the investment decision?

What are two primary discounted cash flow (DCF) techniques employed by analysts?

According to the information below, try to answer the questions: The cost of debt is 2 percent.The cost of equity is 10 percent. The total of long-term liabilities and stockholder's equity is $600,000. The total amount of the long-term liabilities is $300,000. The total amount of the stockholder's equity is $100,000.

1a. The proportion of debt to total capital is ____________ .

1b. The proportion of equity to total capital is ____________ .

1c. The weighted average cost of capital is ____________ .

Case Study: Hilton Hotels – Brand Differentiation through Customer

Relationship Management

• Executive Summary

• Problems

• Causes of the Problems

• Solutions to Problems

• Recommendations

Case Study: Hilton Hotels – Brand Differentiation through Customer

Relationship Management1A.  Soundness of content: Is the case credible?  As far as you know, does the case depict the industry with reasonable

accuracy?  Note any factual errors.

1. Pedagogical value: In its coverage of CRM-customer relationship management, does the case satisfactorily address learning objectives that are important in a marketing management course?  Why or why not?

2. Quality of presentation: Does the depiction of Hilton's organization and executive leadership strike you as balanced and objective?  If not, why not? Is the case story interesting and fluently told?  Was it engaging to you?  What more, if anything, should the authors do to inject energy or drama into the case? 

4.    Exhibits: This case has an unusually large number of exhibits for an HBSP Brief Case.  Are they all valuable?  Can you recommend one or two that might, in the interest of brevity, be eliminated without damaging the pedagogical purpose?

5.    Quantitative aspect:  Please evaluate carefully the quantitative challenge that the case presents to you.  Will good students correctly perceive the quantitative analysis and interpretation that is expected of them?  Should the assignment be made more or less explicit in the case?  Is the quantitative assignment pegged at roughly the right level for your good students?  Please review the TN's discussion of the quantitative aspect of the case: simply put, is the math correct?  Is the analysis appropriate and intellectually sound?

6. Breadth and depth: Is the case sufficiently broad in focus and deep in detail to support a full-class discussion in your course?  Conversely, is the case too ambitious in scope and complexity for a single session of homework plus class discussion?   If the latter, what topics should be dropped or trimmed back?

7. Which statement below best reflects the case's readiness for publication? ◦ A first-rate case: Ready for publishing with virtually no changes. ◦ A good case nearly ready for publication, but needs minor refinements or improvements. ◦ A good case, but needs major refinements or improvements before ready for publication. ◦ I doubt this case is worthy of publication even if further work is invested.

Supplemental Readings

• Article ONE: Group Travel Is Booming Niche◦ Monica M. Clark

• Article TWO: Lately, Stocks Going Nowhere, Fast◦ Tom Lauricella

• Article THREE: Luxury Hotels with Spas Have Greater Pricing Power◦ Jan Freitag

• Answer Key: For the Hilton Case Study

Answer Key: Case Study

Executive Summary In there efforts to become one of the world’s premier hospitality firms,

Hilton Hotels identified some key problems within the firm that need to be solved. One problem the firm identified was that Hilton Hotels lacked outstanding technological innovations. They also saw a problem with the lack of IT infrastructure in the firm, and that the organization had no way of maintaining its relationship with its valued customers. Another problem that the firm saw was that there was a need for man-power in order to properly build and maintain these strong relationships with customers. The causes of these problems were due to forces in the industry, both from competitors and consumers. Hilton Hotels conjured up some great solutions for there different problems, and the solutions were all found in technology. Solutions for the problems included, Hilton OnQ, CRM, Using Call Centers to optimize the CRM concept, Best Guest Arrival Reports, and The Satisfaction and Loyalty Tracking (SALT). In hopes that Hilton Hotels would continue in their growth via the use of technology, my recommendations were also centered around technology. I recommend the expansion of the OnQ and CRM technologies, as well as the implementation of free internet access for guests at all properties.

Problems

• Hilton Hotels was lacking the technological innovations that made other firms in the industry really stand out to new customers while, maintaining and building relationships with their valued customers.

• Lack of an IT infrastructure that would enable employees to deliver great customer service.

• Hilton Hotel did not have an innovative way to maintain and strengthen the relationship they had with their valued customers.

• There was a need for man-power along with technology in order to strengthen these relationships.

Causes of the Problems

• The pace of innovation, via technology, in the hospitality industry was growing tremendously and Hilton Hotels needed to keep up to remain competitive in the industry. The force from their competitors was weighing in on them.

• Hilton also had no way of tracking/monitoring their premier customers, in a way that would build a stronger relationship with each of them. The force from their consumers was a cause In the problems.

Solutions to Problems• Hilton OnQ – this IT Infrastructure created by the Hilton gave

their firm a nervous system. This allowed customers to have a one-stop shopping of an integrated solution, and also allowed employees to provide excellent customer service on cue. The system was able to support the property-level operations of every Hilton Hotel, regardless of its size or segment. OnQ is a competitive advantage and, it helped Hilton to aggressively expand at a quicker and more consistent pace.

• CRM – CRM was an addition made to the OnQ infrastructure. It utilized technology to give Hilton a solidified relationship with its premier customers. CRM added a holistic view to excellent service, and it allowed Hilton to foster a closer relationship with the Best Guests throughout their life cycle of interactions with the Hilton Family Brands.

More Solutions to Problem• Using Call Centers to optimize the CRM concept – The Hilton Hotels

wanted to optimize the new CRM portion of the OnQ system, so they utilized the call centers to gather more information about their customers during the reservation process. “OnQ Reservation allows the agents to access callers’ personal dossiers and update their preferences. This information shortens the time on the phone and it enables better cross-selling.”

• Best Guest Arrival Report – This was a useful tool, because it allowed the property to prepare for receiving guests. This report was useful to the property because it listed and ranked all expected guests that had a profile in OnQ and formatted relevant information from their dossier in an easily s canned format. This allowed the property to pre-assign guests to a room that was prepared according to their preferences. This helped the firm to become more efficient in the services they provided to their valued guests.

• The Satisfaction and Loyalty Tracking (SALT) – SALT was a survey that a sample of departing guests were asked to complete. This survey was an important measuring tool because it assessed whether the CRM initiative was truly working and how it could be tweaked.

Recommendations• I would recommend that Hilton expands their OnQ and CRM

technology to include all of the properties that they own. Meaning, whether a customer stays at an Hilton Hotel, a Homewood Suites, or a Waldorf-Astoria, their preferences would still be available at the various properties.

• With the growing need for technology for most consumers even when they are away from their homes and offices. Therefore, it would be beneficial to Hilton Hotels to be the first hospitality firm to offer FREE unlimited internet service to all hotel guests. It can be up to the firm to decide whether the free internet should be wireless or via Ethernet. By adding this feature to all of their hotels, Hilton Hotels will attract many new customers that will become faithful customers due to the free access to the internet.

• This concludes Chapter 7