Executive summary of the case
The case study starts with a brief history of Mc Donald’s; how it came into being. McDonald’s “competency center” in each country uses their acquired to knowledge to innovate and develop strategies for growth of the company. The case focuses on the company’s Switzerland strategy. In 2001, McDonald’s diversified into hotel industry in Switzerland by setting up two hotels in Zurich and Lully. The hotels were operated under the brand name of "Golden Arch Hotel”. They were positioned as 4 stared hotels that were highly modern and technologically advanced in terms of interiors of the hotel (Michel, 2005). The case enlists experiences of some of the guests of the hotel. The responses of the guests were a mix of both positive and negative responses. In the course of the case, it is identified that there was a mismatch between the brand image of McDonalds and the four star hotels.
One of the fastest growing industries of the past couple of decades has been fast food industry. The hamburger market in several countries has reached saturation. To mitigate the challenges of a saturated market and ensure continued growth of the company, the corporate office of McDonald’s has started encouraging "diversification" strategy by identifying innovative concepts and opportunities globally. Based on this strategy, the CEO of McDonald's Switzerland, Urs Hammer, capitalized on his hotelier background and ventured into hotel industry by capitalizing the core competencies of cleanliness, quick service, friendly staff and atmosphere of McDonalds and using the strong brand image of McDonald's. Based on an initial study of the tourism industry and hotel industry of Switzerland, Hammer identified that the strategy of diversifying into hotel industry would be successful (Michel, 2005). In the fast developing infrastructure in Zurich, the analysts were of the opinion that the city would soon face the challenges of overcapacity. On expansion into the hotel industry, the major challenge for the company was to successfully and profitably indentify and cater to the target market segments (Michel, 2005). The case reflects on the aspects of global marketing, positioning, targeting and ensuring profitability of the company.
Why does McDonald’s need to venture outside its current business? Why do they decide to enter the new hotel venture? Was it a prudent decision?
According to Ansoff’s model, companies diversify to minimize their business risks and ensure increased growth (Kotler & Keller, 2011). The idea is to expand the business, in related or unrelated ways that will help the company to prevent its businesses to react negatively to the changes in the macro-environmental factors that impact the dynamics of the industry and the operations of the business. In case one of the businesses is being affected, the other business will help in continuing with generating profits, gaining and maintaining growth and market share; thus, offsetting the losses or saturated growth rate of one business. This increases viability of the business. The strategy of diversifying can also be looked upon as a growth strategy (Kotler & Keller, 2011).
Raymond Kroc in 1954 had taken the first franchisee from McDonald brothers to set up a fast food centre selling hamburgers, shakes and French fries. The objective was to set up fact food centres at different locations across the US under the brand name of McDonald’s (Michel, 2005). The chain was hugely successful and became iconic. In the decades to follow, the company expanded overseas and presently has presence in 122 countries. The company became listed in NYSE. From 1990, share trading of McDonald’s shares became a reality in Switzerland. But the late 1990s showed a decline in the share prices of McDonald’s. This led the company to re-evaluate its strategies and identify gaps and opportunities. The evaluation identified that the new outlets of McDonald’s that were developing in Switzerland was eating into the revenue share and market share of the existing outlets (Michel, 2005). The brand McDonald’s had one of the highest penetrations in Switzerland compared to any country globally and the market fast food market was saturated. To overcome the challenge, the company adopted diversification strategy. The competency centre in Switzerland identified that diversifying to hotel business can be an option to mitigate the challenges. Eventually the plan was developed to launch two hotels.
The decision to enter hotel industry was based on both internal and external factors. The major internal factor was the competency of the leadership of McDonald’s Switzerland. The CEO Hammer had an hotelier background and he aimed at creating synergy between the existing restaurant business and the proposed hotel business (Michel, 2005). The external factors included the socio-economic aspects of Zurich, Switzerland. Rümlang in Zurich was identified to the first location of the hotel. The economy and tourism industry in Zurich was on a rise and all the related industries and companies attempted to capitalize on the opportunity. The hotels in Zurich were experiencing an increase in occupancy rates, and increasing diversity of the tourists. The location successfully attracted a wide range of demographics – the location was considered to be trendy by the young and the elderly people visited Zurich for business purpose and its cultural aspects. Also, trendy local people of Zurich started to increasingly find Zurich interesting. All these factors contributed to increased number of visitors coming to Zurich and this opened up opportunities in the hospitality industry. Within Zurich, the airport area became more vibrant with opportunities for the hotel industry as the national carrier SWISSAIR as a part of its growth strategy set up its hub in Airport Zürich-Kloten. This, in turn, increased the traffic of tourists, business travelers and airlines crew (Michel, 2005).
The prudence of the decision has been analyzed from different aspects in the case. Based on the analysis, it can be rightly said that the decision was not prudent because of positioning gap, mismatched branding, undesired points of differentiation, etc.
Who are the hotel’s target markets? How does this links with the hotel’s service concept? Does it match customer’s expectations?
Being launched as an airport hotel, the Golden Arch Hotel in Zurich primarily targeted the tour operators and the airlines companies for the bulk bookings. Tour operators made bookings for both incoming and outgoing tourists. Being in hotel industry, the nature of business is seasonal, with more number of tourist traffic in summers and during the weekends. The airlines companies would book the hotel for their crew members and layover passengers. The pilots need better quality rooms than that of the other crew members. To get the business from the airlines companies for accommodation of the crew members, the hotel needs to make tie-ups with the airlines companies at corporate level. The layover passengers are them whose flights have been delayed or cancelled and the airlines provides for their rents. For these target customers, the hotel has to maintain high level of flexibility to accommodate the large number of customers in a short notice (Michel, 2005). Also, travelers travelling inter-country by busses prefer to halt at Autobahn which is a kilometer from Golden Arch Hotel. The next major target segment is the business travelers. The bookings for these travelers are done by the companies at a discounted rate, though higher than the average price. For this segment, tie ups need to be made with the companies. The next target segment of customers is the individual customers on leisure travel; mainly foreign travelers (Michel, 2005).
Service concept of the hotel
The service concept of the hotel is based on the service standards and parameters of McDonald’s outlets. The service concept includes cleanliness, quick service and friendly staff. For the hotels the priority is to ensure cleanliness of rooms. Similar to the staffing strategy of McDonald’s restaurant, permanent staff is recruited and trained to ensure the high service standards are maintained consistently. Similar to the McDonald’s restaurant, best service for every component of a task is ensured, so that the complete service delivered is of higher quality. Moreover, unlike practices other companies in the hotel industry, the Golden Arch Hotel focused on motivational job rotation strategy and adopted a flatter organization structure (Michel, 2005).
The uniqueness of Golden Arch Hotel lies in the unique features of the hotel. This includes tailor made trolley for carrying luggage, improving the efficiency of the check in and check- out system by using a credit card based system, using innovative hotel interiors comprising of curved walls and futuristic shower in bathrooms (Michel, 2005). All these features were added to improve customer experience of the hotel.
Analysis of whether it matched customer expectations
The customers who stayed in the Golden Arch Hotel had mixed reactions. Majority of them had unpleasant experience. Low awareness about the hotel was an issue. Also, there was no proper signage of the hotel. As the check-in system was automated, there were no staffs at the reception to give the customers a warm welcome. Though the company designed high-tech beds that would allow the guests to rest in any position they want, customers actually found such beds similar to the hospital beds and did not live up to a hotel accommodation experience. The customers found the room floors to very hard and uncomfortable to walk. The bar ambience was more like an airport lounge rather than that of a 4 star hotel. There was too much of reinforcement of the brand as the golden arches were found at every nook and corner of the hotel as well as the rooms. Overall, the hotel did not correspond to a 4 star hotel as the primary needs of comfort and service were not met. The only option for food that the customers had was McDonald’s restaurant attached to the hotel; whereas the customers of a 4 star hotel preferred a multi-cuisine fine dining restaurant (Michel, 2005). The major cause of dissatisfaction of the customers was the difference between customer expectation and customer experience in terms of the points of parity (PoP) and points of differentiation (PoD). Using a brand resonance pyramid, the PoP and PoD can be explained as below.
Figure 1 Brand resonance pyramid
It is important that the brand elements should contribute towards functional performance and imagery in a balanced manner. The reaction of the customers towards these brand elements is instrumental in forming the customer’s emotions to a brand and perceptions of the brand (Kotler & Keller, 2011). Golden Arch Hotel tried to differentiate itself using designs and technology. But they failed to match customers’ expectations of comfort, service, ambience and food and beverages from a 4 star hotel as these unique features that the hotel was offering were of low desirability among the customers.
What is the hotel brand positioning? What is your analysis of the hotel’s positioning in relation to the competitors?
Positioning refers to how a particular product occupies a clear distinguished position in the minds of the customers that differentiated its perception from that of the competitors’. Positioning strategy of a company is defined by its customer value creation, and differentiation (Kotler & Keller, 2011).
For ages, the brand name McDonald’s has a strong brand image that emphasizes on hospitality philosophy. The brand is associated with high quality standards, social gathering and interaction, low cost and recreation (Love, 1999). The Golden Arch Hotel is positioned as a 4-star hotel providing high end services. But the positioning strategy was not supported by value additions that the customers of 4 –star hotels demanded. McDonald’s brand stands for low price and affordability and Golden Arch Hotel stands for luxury – leading to a contrasting positioning that confuses the customers. The restaurant attracts low to middle class of customers and the hotel is positioned to attract high end wealthy customers. Moreover, this positioning strategy was in contrast with the age old perception of McDonald’s being cheap and low priced. There were several factors that led to the failure of the positioning strategy. Promise of high quality service was also not met. These factors are discussed in the section above and were the reasons behind the mismatch in customer expectations and experience. Also, the golden arch logo is uses in too many places inside the hotel to re-emphasize the fact that the hotel is a McDonald’s property. But the logo outside the hotel is different. So, there is inconsistency in positioning the imagery of the brand. This is reflects in the images in the appendix section of the case study.
The major competitors of the Golden Arch Hotel are the other 4 –star hotels in the area. This includes Mövenpick and Hilton. Another fast growing company that is soon catching up with these hotels is the Accor-Group (Michel, 2005). All these hotels successfully meet the customers’ expectations from a 4-start hotel. Increasing customer dissatisfaction from Golden Arch Hotel affects the hotel’s brand image and reputation. As a result, the company tends to lose its competitive advantage and its positioning strategy is affected.
Can McDonald’s hotel model be expanded and launched throughout the world?
The McDonald’s hotel model cannot be implemented globally. The different problems with the present hotel business model of McDonald’s are segmentation, targeting and positioning issues, failure to have artifacts and functions to support brand value, undesirable and irrelevant points of differentiation, and failure to provide friendly service. The most important and crucial problem is confusing positioning strategy. The positioning of the 4-star hotel is in contrast with the positioning of the positioning of the McDonald’s restaurant. As both the businesses targets two completely different customer segments- high end (for Golden Arch Hotel) and low to middle income group (for McDonald’s restaurant), the brand image fails to meet the range of customer perceptions and creates a perception gap. Moreover, customers do not expect a 4 star hotel to have only a fast food outlet as the only option for food. Also, in an attempt to make the services automated and hi-tech, Golden Arch Hotel eliminated to use of staff in reception desk (Michel, 2005). This is in contrast to the customer expectations of a warm welcome at a 4 star hotel. The points of differentiation used by Golden Arch Hotel were not what the customers desired and did almost nothing to add to the brand value.
In order the launch the model globally, it is important that the company diversifies horizontally where it can cater to the existing set of loyal customers, and the new products are offered in the similar economic environment (Kotler & Keller, 2011). So, to have an effective positioning strategy and develop the hotel model for global implementation, it is important that the new business fits in the existing image of McDonald’s as a family restaurant that is known for being cheap and having clean ambience. To serve the existing customer base, the company needs to operate a 2-3 star hotel that will cater to the middle class customers and focus on families with children (instead of business class and corporate guests), offer low tariffs and cater to the travelers travelling under budget constraint. Alternatively, the company can operate a 4-star hotel under a different brand name that is unrelated to the brand McDonald’s.
In summary, based on the case study “McDonald’s Adventure in the Hotel Industry”, the paper identified the reasons behind diversification of McDonald’s into the hotel industry. The decision to launch 4-star hotels was not prudent. The target markets for the hotel are identified and how the hotels services and offerings mismatched the customer expectations are discussed. The hotel’s positioning strategy is evaluated. In the end, it was identified that the hotel model cannot be replicated globally due to inherent problems in the strategy. These problems are evaluated and alternatives are identified.
Kotler, Philip & Keller, Kevin. Marketing Management, 14th ed. Prentice Hall, 2011. Print.
Love, J. McDonald's: behind the arches. New York: Bantam Books, 1999. Print.
Michel, Stefan. “McDonald’s Adventure in the Hotel Industry”. Thunderbird, The Garvin School of International Management (2005). Web. 06 December 2014