Investing in

Competitive Methods
Chapter 7

By: Fiona Caramba-Coker

For: 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

P1 S1

P2 S2

P3 S3
 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
Products/Services Competitive Method
P1
Outsource
Restaurant Asset
Productivity
Environmental
Expert
Events Systems

Assets and
Capital S1 Service
Training
Revenue
Maximization Resource
Strategic Allocation
Alliances

Adding Value Worksheet

Aggregated Cash Flow of Cash Flow

each Product per Share
and Service

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

Cash Flows

n
CFt
NPV   I Investment

t 1 1  k 
t

Cost of Capital

Length of Project
 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 flows
B. Capital
C. Balance sheet
D. 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 Management
1A.  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