HOTEL MANAGEMENT AND OPERATIONS
CHAPTER ONE
BACKGROUND OF THE STUDY
INTRODUCTION
Kenya’s hotel industry has flourished in the last decade and is seen to have a great deal of potential for future economic development. The World Tourism Organization has predicted that Kenya will be the world’s number-three tourist destination after China, South Africa by 2020 with annual arrivals of 56 million. In order to meet the growing demand from both international and domestic travelers, Kenya’s hotel and beverage industry need to expand and develop further. However, Kenya’s own hotel and members clubs are relatively small and immature when compared with foreign multinational members clubs and hotel companies.
Besides, Kenya’s accession to WTO and the formation of East African Community has exposed the local and international membership and club and hotel industry to greater competition from foreign companies. In order to survive in the face of keen competition from the leading international and star hotels, Kenya’s hotel and membership clubs industry need to adopt advanced operational management methods. Among these methods, revenue management is a highly suitable management tool to be used for Kenya’s hotel industry to survive in the changing market dynamics.
Revenue management and maximization is concerned with members’ and food outlets effective use of the resources at their disposal. It aims to maximize business revenue by managing pricing, sales volumes, room inventory and operating margins. A modern management technique, revenue management has come into vogue in the food and beverage outlets industry during the past two decades and been very successful in North America and Europe. However, the main literature on revenue management focuses on its application to large hotels and international chains in western countries with little attention accorded to members’ clubs and food and beverage outlets.
Every business concern has major objectives for which it was established but whatever may be the goal, the overriding force undoubtedly remains revenue and profit maximization. To accomplish the foretasted, these businesses make conscious efforts of findings out what their customers want, producing them, creating the needed awareness on the availability of these goods and services and offering them at the right place, time and cost. It is by so doing that such a business as members’ clubs can assuredly claim greater percentage of the market share and at the center of these activities is the pivot, the stimulant, the propelled, the sole of business called revenue management.
STATEMENT OF PROBLEM
Food and beverage outlet businesses market their goods and services to both sitting and ex-members in order to real and profit and revenue for further survival and growth of the variables. Cost minimization and revenue maximization are some of the variables of the marketing communication helps in actualizing not only marketing objectives of the organization. However, with intense and fair competition that the hotel and food industry exhibits, it is increasingly becoming complex for the members’ clubs to remain operational and break-even. In some cases, it is hard for the food and beverage outlets mainly serving the members to register excess returns of revenue over cash-outflows. Besides, these institutions barely pay their suppliers and debtors when their liabilities fall due. For this reason, the industry has suffered financial discrepancy and economic fallout, rendering the outlets economically unsustainable. Their modus operandi and the likes to such (these hotels) the minimal revenue accruing to the business is enough.
Such financial contagion in the members’ clubs and beverage industry has seen this industry solely rely on the vote head financial allocation from the government and other state bodies. Notably, this industry has the potential of achieving financial self-reliance and thus reducing their dependence on financial allocation by the treasury. Such a desirable position is attainable through revenue maximization and sound financial management, which are the major barriers in the industry.
The unavoidable consequences are:
These members’ clubs and food and beverage remain perpetually hidden and unknown.
They end up operating below their capacities.
Business yields continually decrease over the years.
Some end up paying the supreme sacrifice of untimely demise.
It is therefore the intention of this study to critically review the likely benefits the food and beverage business will accrue in terms of revenue maximization by availing modern, technical approach to revenue and operational management.
OBJECTIVES OF THE STUDY
The prime objective of this study is to find out the effectiveness of revenue and sound financial management in the realization of revenue and profit maximization in the beverage and food sector of membership clubs and hotel business in Kenya.
Additionally, the study will also aim at the following:
Determining the general impact of effective revenue management on the performance of the labour force.
To establish modern approaches to achieving consistency in revenue collection.
To determine the extent to which revenue maximization determines the supply of valuable items in the industry.
To identify what consumer patronage of these hotels are as a result of revenue maximization.
To make recommendations in line with our observations.
RESEARCH QUESTION
This research seeks to answer the following questions in line with the research objectives founded herein:
Does effective and sound financial accountability and management lead to increase in revenues of food and beverage hotel enterprises in Kenya?
Is the adoption of modern approaches in revenue collection and management in the food and beverage industry resulting into revenue consistency?
Is staff inducement and motivation significantly contributing to revenue maximization and increasing profit margins?
To what extent do the missing items linked with inconsistency in revenue collection in the beverage and food industry?
To what extent do these self sustainability and profitability index influence customer patronage of these hotels?
FORMULATION OF HYPOTHESIS
Ho: The effectiveness and sound financial leads to revenue maximization of food and beverage hotel business in Kenya.
Hi: There is no significant relationship between modern approach to financial management and maximization of revenue.
Hii: There is no sufficient relationship between employees’ motivation/incentives and the level of revenue collected in the hotel.
Hiii: There is no significant linkage between the missing items and revenue maximization.
SIGNIFICANCE OF THE STUDY
This proposed research paper is the first (to the authors’ knowledge) to empirically test RM performance drivers across a large sample size. This work contributes to the academic literature by empirically testing if the RM elements suggested by the academic literature impact RM performance. Furthermore, this work combines both technical and social support skills. Previous work tended to look at one or the other in isolation. This work suggests that both are important aspects of RM success. The existing rich analytical research stream has provided many insights. We argue that it needs a parallel, and supporting empirical stream to test and validate the existing theories.
This proposed study will of great important to academicians and professional who would love to conduct a research on tourism and hotel industry in Kenya. This is because the outcome of this proposed study will provide a deeper insight into understanding the industry. Moreover, the outcome of this research will prove significant to the Ministry of Tourism as it will propose inferential guide into the modern approaches of increasing returns in the food and beverage industry of Kenya.
Finally, this proposed research will play a fundamental role to the business community as a whole. Potential investors with passion to investing resources in hotel, beverage and food, and membership clubs will rely on the outcomes and recommendations herein in undertaking their investments.
SCOPE OF THE STUDY
The study will cover only major food and beverage hotel in the urban and leading cities across the country. Besides, this proposed study will be restricted to members’ clubs. Food and beverage hotels outside this zone will not be studied so as to make more realistic investigation. In addition, the selected hotels and membership clubs will be restricted to food and beverage services.
LIMITATION OF THE STUDY
The limitation of this paper can be viewed in terms of methodology. This paper is a qualitative research. The analysis is based on the interview of various hotels in Nairobi, Kenya covering 3 to 5 stars hotels and members’ clubs. At this stage, the purpose is to identify the issues of the hotels and suggest a RM (revenue maximization) approach. As the future research potential, quantitative survey should be carried out to obtain data.
Time and money constant constituted a serious log in the wheel of progress of this proposed study.
Literacy level and the culture of secrecy nearly hamper the success of the work pressure of work will also be a major source of worry to the researcher.
With all sense of humility, the researcher lacked the requisite expert knowledge on data analysis- the use of high scientific equipments such as the computer which could have aided and speeded up the effective analysis of collected data, such aspects of the investigation were done normally.
DEFITION OF TERMS
Break-even point – this is the point of operation in a firm in which the revenue collected are only sufficient to pay for the cost incurred in running the operations and management of the firm. That is, it is the point at which a firm records zero profit but remains in operation.
Maximum Revenue – this is defined as the upper limit amount of cash inflow gains that a business can accrue over a specified accounting period.
Membership clubs – this are clubs or hotels which are formed with the sole objective of only serving a restricted group of individuals with their membership registered in the system. They are not open to the general pubic access.
Revenue management – is the process of allocating the “right type of capacity to the right kind of customer at the right place at the right time”. Donaghy et al. (1995) defined revenue management in a hotel context based on its goal: “revenue management is a revenue maximization technique which aims to increase net yield through the predicted allocation of available bedroom capacity to pre-determined market segments at optimum price”. Jauncey et al. (1995) suggested that “revenue management is concerned with maximization of room revenue through the manipulation of room rates in a structure fashion, so as to take into account forecasted patterns of demand.” In a word, revenue management within the context of hotel industry is concerned with maximizing the profitability of a hotel through manipulation of its pricing and booking policies.
CHAPTER TWO: LITERATURE REVIEW
2.0. Introduction
This review synthesizes the current literatures that are Revenue Maximization to facilities management and hotel businesses. The purpose is to highlight the issues useful to the successful completion of this study. However, it must be stated that this review is eclectic due to the fact that there are limited works in this area.
2.1. Hotel Organizations
Rutherford (2002) examined the organization of hotels by tracing hotel organization development in the United States at the turn of the twentieth century. Basically, hotel organizations were built around the chef or “king” of the kitchen and the “maitre d’hotel” or the master of the hotel. But with time, especially with radical changes in management, hotel organization structures also changed. Rutherford (2002) explained that today’s hotel organization structure is based on line and staff structure hierarchically organized with GM at the top and assisted by the executive assistant manager to whom reports the line managers consisting of the rooms’ divisional head, personnel, accounting, marketing and sales, engineering, purchasing, food and beverage.
Rutherford’s work was just factual and qualitative but essentially conservative in that the idea of engineering maintenance department is still being propagated. Thus, it means facilities management department cannot replace engineering maintenance department.
Eddystone and Nebel (2002) were even more conservative than Rutherford in that they accepted the line and staff organization structure but eliminated the engineering department without suggesting an alternative to keep the facilities going and functional.
Conklin (2002) was radical in his approach when he introduced the reverse organization chart as shown in Figure 1 below:
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Figure 2.2: Reverse Organization Chart
Source: Conklin (2002: 53)
Conklin’s work is innovative and qualitative and it emphasizes the need to take into cognizance the three interrelated partners in the hotel running; the customers, the employees or what he called associates and the GM. Therefore any research in the hotel process to be cogent must be conscious of this. This introduces the human dimension into the whole process. The GM must be an element of change; a proactive person apart from his training.
2.2 Operations Management Literature
The revenue maximization research within the operations management field focuses on Revenue Maximizationative modeling. The field has made great progress in modeling three different areas: forecasting, pricing, and capacity allocation. This study present an overview of these research streams.
Forecasting methods used in revenue maximization follow the same trends as the general forecasting literature. this large stream of research, specific to revenue maximization, includes arrival pattern approximations, unconstraining and forecasting. most of the research uses some variation of poisson arrival process (see mcgill and van ryzin 1999: pg 237 for a review). the unconstraining literature provides statistical methods to approximate total demand for goods or services that have sold out, thus providing more accurate historical data on which to base future forecasts (see mcgill and van ryzin 1999: pg 237; crystal et al. 2007, ratliff 2006). Member club Revenue maximization borrows from the inventory related forecasting stream and uses methods such as smoothing, moving average, box-jenkins, etc. (talluri and van ryzin 2004, chapter 9). Arrival rates, unconstraining methods and aggregate forecasting methods all contribute to the quality of a forecast and differing use of these tools among practitioners will lead to differences in forecasting quality. This literature emphasizes the importance of forecasting and the elements of a quality forecast. This literature is extended by testing how forecasting impacts Revenue Maximization.
The operations management in the field of non-profit hotels has made significant improvements in capacity allocation algorithms, improving from single-leg (Littlewood 1972, Belobaba 1989, Curry 1990, Wollmer 1992, Brumelle and McGill 1993, Robinson 1995, van Ryzin and McGill 2000) to network control (Dror et al. 1988, Curry 1990, Talluri and van Ryzin 1999, Cooper 2002). Modelers in this area continue to produce more complex and complete models. Some airlines incorporate aspects of these advanced models into practice (Vinod 2006). this literature stream indicates that capacity allocation plays an important role within revenue maximization systems. However, most hotel revenue maximization systems today use emsr-b (Belobaba 1989), a method developed by Belobaba in the 1980’s, instead of a more advanced method (Steve Swope, personal communication, February 2006). It has been proposed by some revenue maximization experts that many hotels have not adopted updated allocation algorithms because potential return on other investments is larger than potential return on upgrading algorithms.
Pricing in revenue management is also a large and growing research stream. Bitran and Caldentey (2003) summarize analytical modeling research in this area. The core model assumes price is a function of inventory (or capacity) and time until the product perishes (Bitran and Caldentey 2003). From these basic assumptions, researchers have discovered how to optimally price products given constraints on pricing functions for a single product with deteRevenue Maximizationinistic demand (Bitran and Caldentey 2003). Chatwin (2000) and Feng and Xiao (2000) assume a finite set of price changes allowable over time and show that the optimal price is non-increasing in the inventory and decreasing in the time remaining. For multiple products, and/or stochastic demand, the problem cannot be solved in a closed Revenue Maximization solution and researchers have found approximations for the whole problem (Gallego and van Ryzin 1994), or closed Revenue Maximization solutions once simplifying assumptions have been made. This no-Revenue Maximizationative stream of research suggests how to optimally change prices over time based on demand curves and time to perishability, given certain constraints. However, it does not suggest how to set prices to an actual number. The marketing literature takes a strategic view of how to set prices, using a more qualitative perspective.
Research specific to hotel Revenue Maximization literature differs greatly from the mainstream revenue maximization literature in that there are few analytical models. Instead, the hotel revenue maximization literature largely consists of case studies and prescriptive discussions of best practices, with little empirical testing of ideas. kimes’ (1989) seminal article codified revenue maximization for the hotel industry. kimes (1989) described the concept of revenue maximization and the industry characteristics which make an industry conducive to revenue maximization implementation. Both the work of Jones and Hamilton (1992) and Donaghy et al. (1997) yield valuable info-revenue maximization about steps needed for successful revenue maximization implementation within the hotel industry. Neither, however, has rigorous methodology supporting their claims. Farrell and Whelan-ryan (1998) used a semi-structured interview process to gather data from over 50 hotels to support their proposed model of best implementation, including an education and training step and the development of a [revenue maximization] culture. Brotherton and turner (2001) conduct a case study of a revenue maximization implementation, including delineation of success factors. Manzier (2004) describes revenue maximization implementations in hotels in general, including areas for implementation improvement. Importantly, he describes the differences between the airline industry and the hotel industry, which explains some significant differences between hotel and airline revenue maximization implementation.
2.3 Members club Hotel Businesses and Facilities Management
The trend in world today is that facilities maintenance and sustenance must be geared up in all the sectors of the economy, member’s club hotels inclusive (Bode-Thomas, 2003; Okungbowa, 2005; Olusola-Obasa, 2005). Thus, in order for business to be conducted in any hotel, it is essential for constructed assets to be appropriately managed if the business is to maintain the capital invested, enhance its value and sustain reasonable return (Hanford, 1970). If we are to give fillip to the tourism sector of the economy as a veritable and dependable source of foreign exchange; the backbone of which is the hotel and hospitality industry, then there is the need to explore every available strategy to make this sector of the economy more vibrant.
2.3.1 The Need for Proactive Management in Hotel Businesses
Members club Hotels; just like any other investment outlets are established for revenue maximization purposes apart from the fact that they are facilitators to other sectors of the economy like tourism. Being an investment, they must be managed effectively. This is because the business of every business is to remain in business and to achieve this; members club business increase revenue by obtaining members and retaining them (Bevan, 1991). However, the business world of today is demand led as against supply led prompting attention to Revenue Maximization what members want, how they want it and where they want it and at what price. A cursory look at the Kenyan Hotels clearly shows that they still believe in a supply led economy. Customers will come. The present circumstances had clearly shown that customers might not come. They will only come if and only if their needs are met and met effectively.
2.3.2 Hotel Leadership
Leadership and objectivity is in the realms of management particularly the members’ club hotel general manager (GM). The GM is the link between the board (if any) and the operational staff and the customers they are supposed to serve. He is responsible for interpreting and implementing policy objectives. The GM is the key implementer of the business strategy for the member’s hotel and the behavioral role model for the entire management team. It can thus be argued that the GM is the central management figure in the member’s club hotel business. Objectives are the end points or some things that one aims for and tries to reach. In business generally, member’s club inclusive, areas that need objectives include public and social responsibility, worker performance Revenue Maximization and attitudes, manager performance and development, innovation, profitability, market standing, productivity and physical and financial resources (College of Estate Management, 1994: 10)
Most organizations have a set of multiple objectives which involve “trade – offs” if the objectives are to be accomplished. These “trade-offs” in turn cause conflicts in the ends and means, which are necessary for goal accomplishment. In short, the multiplicity of goals lays the groundwork for the need for conflict management. If objectives are realistically set, they will provide the basis for individual motivation. Objectives, if they are too low will not provide a challenge; if they are too high they may not be accepted or may lead to frustration. Objectives, which are achieved, lead to a sense of accomplishment. The tangling objectives necessitate objectivity in objectives and goals setting. In addition, for effective operational excellence, management needs to be flexible to accommodate changing circumstances and to meet the needs of different people also; different managers have different styles of management. The same manager may also have a number of different styles depending on the different situations. What is becoming clear is that a manager with only one style of management may be ill-equipped for the variety of different tasks and people to be handled (Torkildsen, 1992).
To Torkildsen (1992) good management is largely the result of good managers. They are the individuals who are responsible and have the ability to move it towards its goals. Managers are therefore directly responsible for much of the success or failure of an organization. Management, to be effective, needs to be flexible enough to accommodate changing circumstances and to meet the different needs of different people. Managers, therefore, have substantial influence not only in what they do, but in the way they do it. They have influence on the objectives and targets, programs, activities and the results; their style of management can influence dramatically both staff and customers. Therefore, managers can be assessed through goals achievement and the meeting of the needs of customers. This work clearly shows the dynamic relationship between leadership, workers and customers, which help to accentuate excellence in the organization. For member’s club hotel, the crucial role that hotel general managers play cannot be over emphasized and this is crucial to this present work in that it helps to fashion out the conceptual framework.
Nebel and Ghei (2002) argued that General Manager is the central management figure in the hotel business today. They tried to develop a conceptual framework of the hotel general manager’s job by looking at jobs demands and relationship issues in the short run. The purpose of the work was in part, to better understand the nature of the GM’s job, and through this understanding develop a conceptual framework of it. In doing this, ten extremely successful GMs of some America’s finest hotels responsible for managing hotels that exhibited the fullest range of operational and managerial complexity were studied. Thus, they used a combination of participant observation of GMs work, extensive personal interviews with both GMs and 53 of their key divisional heads, background surveys, and analysis of organizational and operational from each hotel. They came up with a model of the influences that shape the GM’s job as shown in Figure 1 below: –
Figure 2: Influences that Shape the General Manager’s Job
Source: Nebel and Ghei (2002: 70)
This work gave pre-eminence to the GMs of hotel organization at the expense of line managers, staff and customers. Good may not necessarily and all the time is the result of good managers. It is obvious that hotels cannot function without the facilities working efficiently through the active participation of line managers and staff and the customers getting value for their money. There is the need to explore also a conceptual framework for facilities management compliance hotel organization if customers must continue to get value for their money.
Hassanien and Losekoot (2002) carried out a study into the attitudes of hotel general managers and the importance attached to hotel renovation and refurbishment in Egypt. The findings showed that whilst hotel managers express a belief in the importance of hotel renovation, there is little evidence of strategic thought in the renovation process. Instead, the focus appeared to be on customer satisfaction with emphasis on service delivery. They opined that there is scope for a more strategic view of FM among hotel managers and owners. Renovation and strategic real estate are just an aspect of facilities management. Others such as space management, churn management, life cycles costing and so on are not considered. As a matter of fact, singling out the hotel manager as the centre point of the investigation is really not comprehensive enough. There is the need to consider the views of the customers and the workers as far as facilities management are concerned.
2.3.3 Marketing
Care of customers is anchored to the principle that the customer is the king (Conklin, 2002). The business of leisure and hotel is where people choose what they want and where staffs have to be flexible and work unsocial hours (Torkildsen, 1992). This calls for style of management that is flexible in keeping and providing good customer care and service. This in turn calls for operational excellence. Operational excellence is nothing but ‘everything and all things’ functionally possible to do and put in place to keep the organization and its services in top for Revenue Maximization always. Waller (2002) is of the opinion that a healthy marketing process results in rising room revenues per available room and rising food and beverage (F & B) revenues per available seat and catering space; rising market share to a share index over 100 and falling costs of acquiring customers etc
Revenue maximization in food and beverage member’s club crosses two functional disciplines: operations management (OM) and marketing. Two marketing topics particularly impact revenue maximization: pricing and market segmentation. It is not necessary to presume to cover the entire literature in these two areas, but instead provide a general overview, especially as these topics apply to revenue maximization. The marketing function within Revenue Maximizations typically controls pricing decisions and bases these decisions on the Revenue Maximization’s strategy. A Revenue Maximizing club may want to set prices to survive, or to maximize profit, revenue, sales growth, or market skimming (Kotler 1998).
Depending on the Revenue Maximization strategy, upper and lower price bounds may be set to accomplish these strategies. Within these bounds, a Revenue Maximizing member’s club hotel must consider three C’s in order to set an actual price: cost, competitors’ prices, and member’s/customer’s assessment of the product (Kotler 1988). Since marginal cost for another customer is negligible for yield management, it is proper to ignore cost and focus more on competitors’ prices and customers’ assessment of the product within this research. Smart pricing decisions incorporate demand volume, price elasticity, competitors’ price, pricing strategy, value of the good or service, and regulatory constraints (Kotler 1988, Dutta et al. 2003, Monroe 2003). Many Revenue Maximizations do not possess the knowledge and processes to consistently translate these factors into optimal or near-optimal pricing decisions (Cressman 1997, Smith 1995, Ross 1984) and therefore pricing can be a key competitive advantage (Monroe 2003, Dutta et al. 2003). From both operations and marketing, pricing is an important component of revenue maximization and hence it is included as a driver of revenue maximization success.
One of the most outstanding works on need study is Maslow’s Hierarchy of Needs (Weiten, 2001). According to Maslow, human needs are arranged in a hierarchy, and people must satisfy their basic needs before they can satisfy higher needs as reflected in Figure 3 below:
Figure 3: – Maslow’s Hierarchy of Needs
Source: – Weiten (2001: 506)
Need analysis is a double-edged sword. The providers of products need it so also the products users. It is not just providing hotel support services but recognizing what customer wants and in what way(s) they want it. This will lead to many questions. Who are our customers? What do they want? Where are they based and how can they be reached?
Marketing researchers have also investigated market segmentation and concluded that six characteristics determining Revenue Maximization are the desirability of segmentation: identifiability, substantiality, reachability, stability, responsiveness, and actionability (Frank et al. 1972, Loudon and Della Bitta 1984, Baker 1988, Kotler 1988). Identifiability is defined as the extent to which distinct groups of customers can be recognized in the marketplace by using specific segmentation bases. Substantiality measures whether the targeted segments represent a large enough portion of the market to ensure the profitability of targeted marketing programs. Accessibility measures the degree to which the targeted segments can be reached through promotional or distributional efforts. Responsiveness measures the extent to which segments respond uniqu
