Saturday, May 23, 2020

Marriott's changed strategy when it realized it was competing on the wrong dimension

New paper identifies a strategy mistake by Marriott:
Early in the 1980s, Marriott operated a chain of large, higher-end full-service hotels that typically had 300-500 rooms.

While attractive to higher-income tourists, these hotels were not attractive to business travelers who wanted lower-prices and larger rooms.  Marriott surveyed its business customers and learned exactly what these customers valued, and what they didn't:
...many business travelers did not value out-of-room amenities such as full service restaurants, lobbies, or meeting space as much as firms believed, and valued in-room amenities such as larger and better-appointed rooms more than they thought.
The results of this analysis were a surprise to Marriott executives ... The results indicated that some out-of-room amenities that many hotels offered were not valued by business travelers and as a result certain features, which were “often provided based on traditional hotel management beliefs were not retained [in the new chain], for example, an ‘action’ lounge, a more upscale restaurant and room service, and more meeting space.”

So they launched a new brand aimed at business travelers. 
Based on this survey, Marriott also decided that the new chain would not offer several typical out-of-room services such as bellmen or concierges.  Instead, hotels in the new chain (Courtyard by Marriott) emphasized features of the room itself. The rooms were somewhat larger than standard rooms, with room for a large desk and sofa, and had nicer décor and larger bathtubs than mid-range competitors’ rooms had. These hotels did have pools and restaurants, but the pools were mainly functional and did not have slides or diving boards, and the restaurants were small and offered only a limited menu – in part because Marriott’s customer survey indicated that the business travelers they were targeting valued having a good restaurant nearby, but not necessarily in the hotel itself.

And, of course, you can guess the rest of the story.  Competitors copied Marriott's innovation:
... “limited service” chains such as Holiday Inn Express, Hampton Inn, and Fairfield Inn, among others. 

This story illustrates several themes from the book:
  • Chapter 17 (Uncertainty): gather information to make better decisions; 
  • Chapter 10 (Strategy): do something with the information to develop a "sustainable competitive advantage;"
  • Chapter 14 (Indirect Price Discrimination):  they introduced a lower-priced brand that appeals to business travelers but does not cannibalize vacation demand for their other brand; and
  • Chapter 9 (Long-run Competition): keep innovating because imitation erodes competitive advantage.  

Not sure this gives Marriott enough credit, though.  After all, all of Marriott's competitors were competing inefficiently as well, and Marriott was the first to figure it out.

There is a fun backstory to the series of events that your students might like.  It turns out that this series of events was catalyzed by an executive, Lee Pillsbury, who was a student in one of Kellogg's executive degree programs.  He took some marketing classes and saw what academics were doing in terms of conjoint analyses and surveys -- stuff that was innovative at the time.  He went back to Marriott and got others to agree to studies that utilized these methods, and what they found surprised them and changed the direction of the company.  So what you see in the paper has its roots in the MBA classroom -- what you learn there can end up changing an industry.

Jerry Wind --- one of the Wharton guys that was involved in the study -- told us that at the time, the design and attributes of hotels were largely determined by engineers and property development people -- individuals who had little contact with hotels' customers.  These individuals had very strong believes on what hotels "had to have," but did not realize that tastes were changing as how business travelers used hotels (more as a workplace, less as a place to entertain or be entertained) were changing.  Marriott's study was probably the first application of advanced marketing techniques to the industry, and Marriott's success with Courtyard ended up being proof in concept.


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