Hotel Business Management and Valuation
By Thomas E. Pastore CEO & Founder, Sanli Pastore & Hill | June 15, 2010
Effective and efficient management is one of the most crucial factors to a business' success and survival. An essential responsibility of management is to formulate and execute strategies that increase shareholder value. This is often referred to as strategic planning, which "consists of the process of developing strategies to reach a defined objective. Strategic management is used by businesses to provide overall direction for company operations and establish specific goals and duties in the areas of marketing, finance, human resources, and information technology.
Proper strategic management and planning focuses on setting realistic goals, communicating objectives within the entire organization, and ensuring the most effective allocation of resources. Business schools present diverse courses in strategic management. For example, the University of Michigan's Stephen M. Ross School of Business offers a "Corporate Strategy" course, which covers "on the job perspective, and skills of the general manager in diagnosing what is critical in complex business situations and finding realistic solutions to strategic and organizational problems." Similarly, the School of Hotel Administration at Cornell University introduces various professional development programs in strategic hospitality. Topics include strategic planning and thinking, exploiting change for competitive advantage, risk and strategy, control strategic initiatives, and creating value.
During the process of strategic planning, a hotel group can thoroughly analyze its current business situation, develop long-term goals, and eventually outline the procedures to reach these goals. In addition, through strategic management, the hotel group is able to strengthen the communication between staff, managers, and the board of directors. Additional consequences of good strategic management include resolving major problems that the hotel group faces, improving productivity, and gaining competitive advantages over its rivals.
In the hospitality industry, one of the most important goals of strategic management is to increase shareholder value. Therefore, it is necessary to measure the effectiveness of strategic planning. An example of one tool used for this purpose is the strategic planning index (SPI) developed by professors Phillips and Moutinho. Let us take a look at the major attributes relating to the calculation of SPI below:
The strategic planning index is measured based on the following factors: planning implementation, past performance, expected future performance, functional coverage, reliance on analytical techniques, and staff planning assistance. With the availability of SPI, hoteliers can compare the hotel's strategic planning effectiveness with other competitors in the industry. Management also can use SPI to identify the hotel's strengths and weaknesses in strategic planning, thus be able to better target areas needing improvement.
As stated above, a key result of successful strategic planning is to increase shareholder value. What drives the value of a hotel or hotel group? The answer is: earnings, i.e. sustainable revenues less costs. How are earnings used to value a hotel or hotel group? To demonstrate this, we will use a most commonly employed valuation method, the earnings multiple approach. This approach is applied with the following formula: