Chapter twelve. The Marriott Corporation
Marriott faced an incredible challenge in 1992. Times were bad. The game had changed drastically. Real estate had collapsed and hotel owners (Marriott's main customers) had lost more than 50% of the value of their properties and many were at the verge of bankruptcy. Furthermore, Corporate America (Marriott's major source of cash) was by necessity involved in so-called “right-sizing” and cut costs left and right. For Marriott to survive it was imperative to rescue its troubled ownership–customer base and extend a helping hand to its major source of cash, Corporate America. This forced Marriott to redesign itself to take an order-of-magnitude cost out of its operations. Parallel with dealing collectively with the banks to refinance all of the troubled properties, Marriott decided to engage in a redesign process to replace the ineffective and costly divisional structure with a noble design. The outcome was a profound transformation to a modular architecture that made it possible to generate sufficient cash flow to put the Marriott right back on the path to its continued success.
Keywords: Autonomy, Bottom-up business management, Brand management, Centralization, Complementary whole, Core component, Core knowledge, Culinary research, Cycle time, Cyclical, Decentralization, Differentiation, Early warning, Flexibility, Franchising, Integration, Inter-dependency, Marriott University, Owners/lenders relation, Predict and prepare, Process technology, Product/market niche, Project management, Real estate, Recession, Region/market, Simultaneous, Structural conflict, Uncertainty, Win/win
Kathy Dannemiller, a dear friend, had recommended me to the Marriott people. Dean Pat Stocker invited me to make a one-day presentation at the Aspen Institute, where Bill Tiefel, president of Marriott Lodging, and his direct reports were attending a week-long executive seminar.
The Marriott seminar was very exciting. The company faced an incredible challenge. Times were bad. The game had changed drastically. Real estate had collapsed, and hotel owners (Marriott's main customers) needed more cash to survive. Corporate America (Marriott's major source of cash) was involved in so-called “right-sizing” and cutting costs left and right.
A month after our first seminar, in the summer of 1992, the Lodging Executive Committee decided to engage in an ideal-design process to replace the ineffective and costly divisional structure with a noble design. The outcome was a profound transformation of Marriott, which put it right back on the path to its continued success.
Two parallel teams were formed: one for design and the other for “mess” formulation. The design team consisted of 24 members of Bill Tiefel's executive committee. The mess team consisted of six able Marriott Lodging professionals. However, the mess team's report, because of its confidential nature, will not be discussed here.
John Pourdehnad, my colleague and old friend, was my partner in this project. He not only guided the mess team to an outstanding mess formulation, but was also an indispensable participant in the design process.
What follows is a summary of the three iterations by the design team. The design process involved the following steps:
• Developing a collective understanding of the environment — “How is the game evolving?” and “What are the new bases for competition?”
• Identifying the purpose of the system to be designed (specifying the desired properties, core values, and mission)
• Creating a platform, a vision of a desired future for Marriott Lodging and a direction for its development, and a learning system that would be capable of responding continuously to the challenges of a changing environment
12.1. The environment: how the game is evolving
The future is not what it used to be. It is becoming increasingly difficult, if not impossible, to predict and prepare. Contemporary organizations, therefore, need to focus on creating their own futures rather than waste their time attempting to predict and prepare.
• The current state of the economy (1992) cannot be explained away only as a cyclical phenomenon. And it does not only imply recession. The economy seems to be restructuring toward a level more compatible with the emerging state of its competitiveness.
• The real estate market has changed. The current weakness of the real estate market is not temporary and is unlikely to change in the foreseeable future. Therefore, the game cannot be played on the assumption that one can win through asset appreciation alone.
• Consumer behavior is changing. Customers are becoming smarter and want more and more for less and less.
• Businesses face cost pressures and are becoming very price-sensitive.
• Demand is shifting from one tier to the next.
• Quality, cost, and time are interdependent and form a complementary whole. None can be compromised at the expense of the others.
12.1.1. Bases for Competition
• Learn to live with uncertainty. Become more flexible and agile — have an early warning capability.
• Reduce the cost of operation by an order of magnitude. Select the right services and improve their quality.
• Adopt price-competitive measures to fill up unused capacity.
• Redesign the product, the process, and the structure to reap a 20 to 30% cost reduction.
• Avoid being pushed into an undesirable product/market niche.
• Differentiate and match products in response to the market's emerging needs.
• Write down the assets (reflagging) — be a smart deal maker.
• Factor in the ratio of debt service to asset value. Factor in how the owner perceives value and is motivated to get into this business.
• Develop a strategy directed at the owners and the lenders.
• If the owners are failing, find out who is buying their assets. The asset management advisory group should be charged with developing both a strategy to deal with this situation and a capability to anticipate rather than react.
12.2. Purpose
12.2.1. Principles and Desired Characteristics
• Our commitment will be to total guest satisfaction.
• We will deliver value (benefits/costs) at all levels of the service value chain. We will define value at the end of the chain, “the guest,” and work our way back to property, owner, region, brand, division, and corporation.
• We will continuously match the product offerings with changing customer needs (strategic product-market fit).
• We will take responsibility for creating a win/win environment that dissolves conflict among guests, associates, shareholders, owners, and distributors at various levels of the operations.
• We will challenge the industry by becoming the undisputed leaders in hotel management. We will accomplish this by:
• Fostering a lean, simple, nonbureaucratic, and flexible organization in which formal and informal systems are in synch and easy organization-wide communication is enjoyed
• Creating a mutually supportive and interdependent system that takes full advantage of the synergy resulting from the interaction of technology, product/brands, and markets
• Being identified with value excellence through knowledge leadership
• Dissolving the dilemma between freedom and accountability, ensuring that authority and responsibility are matched at all levels
• Designing a throughput-oriented, win/win reward system that helps dissolve structural conflicts
• Leveraging technology to deliver value — doing more and more with less and less, resulting in higher resource productivity/yield
• We will attempt to achieve mutual satisfaction of all stakeholders by understanding the dynamic interaction of their needs. We cannot succeed unless all of our stakeholders — guests, associates, shareholders, owners, and distributors — are successful.
• We recognize our multi-tier customer base. In addition to our guests, property owners are the other critical customers. And when our customers are in trouble, we are in trouble.
12.2.2. Mission
We want to be your “FIRST CHOICE.”
At Marriott:
• Every guest will be eager to return.
• Every associate will be able to realize his/her potentials.
• Every owner will be supported by superior management services.
• Every shareholder will be rewarded by premium returns.
12.3. The architecture
The following architecture (Figure 12.1) was accepted as the basis for building an idealized Marriott Hotels, Resorts, and Suites (MHRS). The architecture, as represented in the following diagram, has four distinct dimensions:
1. Region/market operations: Representing the essence of the system. This is where MHRS ultimately happens — where the properties are located and where services are provided to guests.
2. Products/brands: Representing the output (end products) of the system.
3. Core components: Representing operating subsystems that are shared throughout the system and/or sold to external markets.
4. Core knowledge: Representing MHRS's unique state-of-the-art know-how to be used across the value chain by any or all of the above dimensions directly.
The architecture recognizes the necessity for achieving competitive advantage in all dimensions of market, product, and technology simultaneously. It therefore seeks to eliminate suboptimization around any one dimension. The objective is to actively generate synergy, latency, and efficiency by creating a win/win relationship among the three dimensions.
This architecture opens up possibilities that are usually closed to traditional approaches by:
• Adding new types of relationships to the superior–subordinate pairs as the fundamental blocks for organization building (customer–supplier)
• Changing the nature of control from supervision to learning — supervision is considered wasteful
• Dissolving structural conflicts between the requirements of the marketplace and the diverse interests of competing product groups
• Reducing complexity by developing integrated solutions instead of patching together a multitude of incompatible and discrete solutions
• Allowing centralization and decentralization, integration and differentiation, and interdependency and autonomy to all be realized simultaneously
12.3.1. Product/Market Mix
Matching products with markets is not a one-time proposition. It requires continuous research and redesign. Introducing the concept of brand managers as a new dimension in the architecture will institutionalize this function to provide an ongoing response to the challenge. The ideal company will also seek new opportunities for some of its core components and for its core knowledge (i.e., reservation/Honored Guest programs and training).
12.3.2. Region/Market Operation
Operations will be organized and managed across all lodging products according to each market's specific characteristics and requirements, taking advantage of the total opportunities presented by the marketplace. The markets will be segmented based on the behavioral characteristics and requirements of customers in any given economic region. This will reduce the structural conflict between competing product divisions and make it possible to create an optimum product mix for each regional operation to realize its maximum potential.
The total world market will be divided into ten regions. Each region will manage 50 to 75 different properties (including all brands). Large properties will have GMs, and smaller properties will be clustered into area management. The major concentration of effort will be to empower properties to do their work on their own and with minimal supervision.
Depending on the extent and diversity of functions, regional managers will have several assistants. These assistants to regional managers will be trained with candidacy for GM posts in mind. Assistant managers will be competent in several functions to avoid top-heavy bureaucratization and to promote managerial and organizational flexibility under changing environmental conditions.
Within each region, operations will be designed bottom-up, not top-down. First, those functions and services that are desired and can be best operated at the property level will be identified. Then, those functions and services that can be shared at the regional level will be identified before deciding which ones will best be provided at the regional level.
The organization of each geographical region will differ based on the market potential of each area. However, the following functions will be used as a model.
12.3.2.1. Business management
This function will include finance, accounting, administrative and human resources services, and any other regional management support operations (including owner relations). This group will be supported by the business services unit of the core component dimension.
12.3.2.2. Project management
Project teams will be organized around specific throughput processes, but will all have cross-functional expertise in information technology, total quality management (TQM), human systems, and design. The objective is proper implementation of the integrated solution (developed by each brand manager) at each site in the region, allowing all of the following critical goals for success to be accomplished simultaneously: reduction of cycle time, elimination of waste, creation of flexibility, and management of total quality. Rollout of any other projects developed by the core knowledge groups or the corporation as a whole will be undertaken by this function.
12.3.2.3. Maintenance management
All of the activities directed at the upkeep of the sites and the engineering and maintenance function will be grouped under this function, which will provide services to the regional bases.
12.3.2.4. Sales
The regional sales effort will include direct sales, pricing, positioning, and sales training.
12.3.3. Brand Management
Brand management will assume total responsibility for product development and product management. It will develop all the necessary operational procedures to operate a given type of lodging operation. Brand management will be the owner of the design and the lodging concept, and it will be a supplier to the region/market operations.
Initially, brand management will be limited to four models: basic, luxury, group, and convention. However, Courtyards, Fairfield Inn, and Residence Inn might be added later.
Product/brand management will perform the following functions:
• Concept development and concept implementation guidelines
• Brand marketing and positioning, guidelines, penetration, demand requirements, and competitive intelligence
• Franchising guidelines, business modeling, system integration, and core deliverables
• Operating procedures and maintaining brand identity (keeping the brand clean from other niches)
• Determining the appropriate standards for the product, deliveries in rooms, restaurant, lounge, catering, services, and amenities
• Feedback and interaction with advertising, promotion and public relations, price analysis, product criteria refinements/value engineering, emerging trends and market requirements, and adjustments to positioning
12.3.4. Core Components
Core component groups will make their services available to the internal customers at the lowest available price. Internal purchases might initially be subsidized by the corporation. The services will be sold at the market price to outside customers.
The following will constitute the core components of the lodging operations:
• Reservation system: The reservation system will be designed on a modular basis and offer its services on a differential price base depending on the needs of the user (services will be customized).
• Marketing and sales:
• Marriott video productions, advertising management, customer database, superior channel access, brand name, and other customer issues that go beyond one particular property.
• A customer survey system to measure guest satisfaction.
• The national sales system to include a sales deployment and lead referral system.
• A customer response (off property) system to be developed for escalation.
• A national public relations network to be utilized.
• Meeting and conference management services to be available.
• Human resources: The Associate Opinion Survey System, career planning system, succession planning, employee relations, recruitment, performance evaluation, promotions/transfers, training and development, compensation and benefits, termination, retirement, personnel audit, and quality of work life.
• Business management: Payroll and benefits administration, procurement, and accounting.
• Marriott University: A system will be created to offer continuous training and education as an integral part of the MHRS operation. Every member of the Marriott family will become a teacher and a student.
12.3.5. Core Knowledge
MHRS will develop state-of-the-art capabilities in the following areas:
• Information technology
• Process technology
• Culinary research
The expertise of this group will be utilized by all dimensions of the organization including core components, brand management, and regional and property management.
In MHRS, every unit will be a “performance center.” For each unit, a set of specific measures of performance will be developed. Each unit will be expected to add value to MHRS through its operations. Therefore, profitability will be a key factor in the performance measurement of each unit. Each unit's revenues will be derived from their “sales” to other units and/or to external customers.
To ensure cost and quality competitiveness, each of the component businesses will be capable of surviving on a stand-alone basis. Therefore, each of the units in this group will be treated as a separate business.
Units within the components dimension will have the option of selling their products and services outside MHRS. Likewise, regional managers will have the option of sourcing their core components from external suppliers.
At the beginning, it might be necessary for the MHRS to subsidize the core components provider before it can offer competitive prices to its internal customers.
12.3.6. Critical Processes
The design team concurred in using planning boards as a vehicle for creating and controlling the decision process in the ideal MHRS. In particular, the planning board concept will be utilized for the following reasons:
• To achieve consistency and empowerment at the same time.
• To eliminate supervision as a bureaucratic waste.
• To match authority with responsibility at all levels of the organization.
• The organization will be flat and decisions will be made at the lowest relevant level.
• Core competencies and values (parameters/customer-based) will be known at every level of the organization.
• A process that is proactive and anticipates the needs of the customer will be used.
• Feedback processes that surface mismatches (e.g., misalignment with customer expectations, mismatches with reality) will be developed so that corrective action can be taken.
Processes that anticipate the future needs and new ideas of our customers, and processes that surface problems that can be incorporated before a program is rolled out will be developed.
Interactive policy teams will be the main vehicle for alignment of policies and plans and for dissolving conflicts among units in MHRS.
Each interactive policy team will have a minimum of three levels of management as members: the manager whose team it is, his/her boss, and his/her direct reports. Other members may be added on a regular basis or on specific issues.
Each policy decision will explicitly specify assumptions under which the decision is made and its expected outcome, specifically on the impact of the decision on:
• Financial performance
• People
• Output (quality of service)
Interactive policy teams will be responsible for making policies. They will not get involved in operation decisions. Policies will establish the criteria by which managers make decisions. Agreement on decision criteria will be the key to successful decentralization. If no policy exists for a pending decision, the responsible manager will make the decision on his/her own. The appropriate interactive policy team may later decide to make a policy for future situations. Each policy will be made at the lowest level team possible.
Special interactive policy teams will be formed to coordinate policy on specific issues of strategic importance. Examples may be a technology team and area/market teams.
12.4. Recap
The design of a new architecture for Marriott is based on the following assumptions:
• Property owners (franchisees) are the real customers of Marriott Corporation; therefore, they have to be recognized and treated as such.
• Troubled customers are the most serious early warning system for any business concern.
• Current weakness in the real estate market is not temporary and is unlikely to change in the foreseeable future. The game can no longer be played on the assumption that asset appreciation generates sufficient return on investment for property owners.
• There is an urgent necessity to reduce costs by an order of magnitude and generate sufficient operating profit to overcome the weakness in the real estate market.
• Divisional structure with all its elegance and simplicity is a luxury that cannot be afforded any longer.
• Competition among various product divisions in Marriott in a given marketplace is much more intense than the conflict between Marriott and its competitors.
• Structural conflict among product divisions needs to be rationalized by optimizing the product mix in a given marketplace.
• Supplier–customer relations should govern the interactions among market management, brand management, and core components.
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