Hotel Opening Processes in Greater China - An Analysis of Problems & Issues.
By Gert Noordzy & Richard Whitfield Ph.D. - December 2011
Recent months have seen increasing attention in the international press regarding the focus of major global hotel management companies on the importance of China as a growth market. A key difference between the US and China is that the US growth was less steep and took place over a longer period of time.
Moreover, several major hotel management companies achieved their current US size through acquisition, as well as from organic growth. While there will be growth through acquisition, the bulk of the openings in China will be achieved through new built projects.
These differences require international hotel management companies to completely rethink the way that they open new properties in China. In this article we argue that well proven project management approaches that are widely used in engineering and construction are the best way forward to improve the efficiency and effectiveness of opening hotels in China. However, this requires significant organization cultural change.
The Outlook for China:
China's tourism & hotel industries are booming. The State Council included tourism in 2009 as a pillar industry in its 12th Five-Year Plan. Tourism is anticipated to contribute 4.5% to China's GDP by 2015, with 12% annual revenue growth.
China is projected to overtake Japan as the world's second largest tourist market by 2013 with an 8% share of global tourists, according to a report from the Boston Consulting Group. Similarly, the 2011 China Hotel Market Outlook, produced by Jones Lang Lasalle in conjunction with the China National Tourism Hotel Association, notes that domestic arrivals in 2010 totaled 2.1 billion and will reach 3.3 billion by 2015.
China is currently the third most visited country in the world. According to the China National Tourist Office the total number of inbound visitors reached almost 56 million in 2010 (in 2003, the WTO predicted that China would receive 61.8 million tourists by 2010 and 130 million by 2020), while the number of domestic travelers was 1.6 billion.
Also, in a recent study, the China Tourist Academy indicated that the number of domestic travelers had surpassed the 2 billion mark in the first 9 months of 2011.
China's National Bureau of Statistics predict that the number of hotel rooms in China will more than double to 6.1 million by 2025, equaling the expected US number by that time. Then by 2039 China is expected to reach 9.1 million hotel rooms, four times the current number.
A tourist industry expert with the Shanghai Academy of Social Sciences expects China to add more than 1,500 new hotels each year from 2010 to 2015 with a total investment of US$62.5 billion. According to the September 2011 STR Global Construction Pipeline Report, the Asia Pacific hotel supply outlook was for 1,309 more hotels with a total of over 314,000 rooms. China reported a +13.4% growth with the planned addition of more than 172,000 rooms.
The Plans of Major Industry Players:
IHG Chief Executive Andy Cosslett announced during an earnings update in February 2011 that China is among the highest priorities for InterContinental Hotels Group PLC and that the next 20 years would see almost an eightfold increase in IHG's rooms in Greater China. Moreover, in July 2011 IHG China CEO Keith Barr said that the company will recruit 90,000 employees to support the 250 hotels that are planned for Greater China during the next three to five years. At that time IHG managed 154 properties in China and had 142 in its development pipeline.
Starwood President & CEO Frits van Paaschen moved his Senior Leadership Team to Shanghai for 1 month in June 2011. He said: "Eighty percent of our future pipeline is outside of North America, and nowhere is more emblematic of our global growth than China, where we will open one hotel every two weeks this year." China is Starwood's second largest market outside of the US, and is it's fastest growing, where it currently has more than 70 hotels and another 90 properties in its pipeline.
Wyndham Worldwide Chairman Steve Holmes said in the company's Q2 2011 Results - Earnings Call: "We are the largest US hotel company in China with over 50,000 rooms. We expect to double that number in the next 5 years, and our long-term vision is to have a footprint in China that rivals our presence in the US". Wyndham currently operates 457 hotels in Asia, of which 401 are in China.
Hilton Worldwide announced in August 2011 the appointment of industry veteran Edmond Ip as Chairman Greater China to oversee all of the company's operational interests there, including aggregating the growth from numerous hotel openings in the next few years. In September 2011 Hilton announced its plans to quadruple the number of its hotels in China before 2014. Hilton currently has 25 hotels in China.
In October 2011, Accor Asia Pacific chairman Michael Issenberg mentioned in a telephone interview that 40 percent of the group's global pipeline of hotels is in the Asia Pacific and that the group will focus on China, India and Indonesia. In China, the group plans to add 60 hotels to its current 108.
Marriott International issued a press release announcing its 100th hotel in China on 15 November 2011. The release stated that China is one of Marriott's most important markets outside of the US, and the company is committed to long-term growth and robust expansion throughout the region. It expects to open one hotel a month in China for at least the next 3 years. President and managing director for the Asia Pacific, Simon Cooper, commented on the growth plans: "...Asia is a key market for us, and China is the driver of Asia: we are totally committed to the country and our operations here." Marriott International currently operates 56 hotels in China and has a pipeline of 44 confirmed hotel projects.
The anticipated phenomenal China growth begs the question: how can hotel operators open new properties (under executed management and franchise agreements) on this scale effectively and efficiently, and in a consistent and predictable manner?
Traditionally, hotel opening efforts are driven by Corporate Operations, invariably supported by task force teams drawn from existing hotels, ie when a new hotel is opened, staff are seconded from existing hotels to form a full-time team to do the opening. This specific approach only works on small scale and has several limitations. A major drawback of this system is that the timing of task force requirements versus task force availability frequently does not match.
Additionally, there are many logistical challenges for the receiving hotels, while increased workload burdens are placed on the sending hotels. Finally, the challenge of individual projects running simultaneously instead of sequentially (which invariably happens) prohibits the concept of "permanent" task forces.
These and other problems have recently led to some hotel management companies establishing dedicated corporate hotel opening support functions (some of which are using elements of project management) to support hotel management teams. However, this approach alone cannot meet the challenges and dynamics of new hotel development on large scale.
It will contribute to causing delays in the technical, operational and commercial readiness of hotel projects. The consequences of delays hurt hotel owners and operators alike: increased pre-opening expenses, delayed cash flow generation, delayed business ramp up, delayed GOP and ROI, delayed owner and operator income, missed business opportunities and negative impact on (non-financial) key metrics. A different approach is needed and other options must be considered.
First of all, we need to understand that the opening of a hotel is in fact a project. A guide to the Project Management Body of Knowledge 01 defines a project as "a temporary endeavor undertaken to create a unique product, service, or result. The temporary nature of projects indicates a definite beginning and end." Projects are usually undertaken to bring about beneficial change or added value.
The temporary nature of projects stands in sharp contrast to operations, which is repetitive, permanent or semi-permanent functional work to produce products or services. Like we do not ask a pilot to design an airplane, nor ask the engineer to fly it, we should not automatically assume that a hotel general manager is qualified to manage a hotel opening project.
Standard project management methodology is very well suited to apply to hotel opening projects on a large scale. The processes involved in each hotel opening are virtually identical, which allows for project management plans and schedules to be standardized. And even if the levels of complexity and the length of the critical path increase for larger, higher tier new hotel projects, the processes involved remain fundamentally the same.
To open new hotels on a large scale effectively, the hotel industry needs to significantly upgrade its understanding of project management, methodology and techniques. The Project Management Institute, one of the world's leading organizations for the project management profession, notes: "Project Management is a strategic competence: the ability to consistently predictably deliver projects for strategic goals."
Furthermore, PricewaterhouseCoopers states 02: "The ability to successfully execute these projects is what drives the realization of intended benefits and the achievement of business strategies. Organizations that execute projects successfully employ effective project management practices as a tool to drive change and achieve business objectives. Given the strategic impact that projects have on a business, organizations must follow effective project management processes that measure progress and risks and ensure the right projects can be delivered in alignment with organizational priorities."
Hotel Industry Challenges:
The hotel industry faces several major challenges in adopting project management methodologies for new hotel openings.
Firstly, general senior leadership has limited understanding of project management as a strategic competence. (Most hospitality executives claiming to be experienced in project management are neither able to provide a reasonable definition of a project, nor map out a project following a life cycle structure). One senior corporate hospitality executive when asked about project management stated: "We don't do construction management" But, just as general project management has learned from construction management, the hotel industry can learn to improve the execution of its hotel opening projects without becoming construction managers.
Secondly, the hotel industry has few "internal" project management champions. While various hotel management companies employ a specialized hotel opening function or utilize components of project management, none have embraced and institutionalized project management as a corporate culture. Currently virtually none of the international hospitality management companies in China employ certified project management professionals, let alone certified project management professionals with a hospitality background. This stands in sharp contrast to companies like IBM, which employs more than 10,000 certified project management professionals worldwide, and Huawei (a major China-based international telecommunications company), which has over 2,000 certified project managers in China.
Not surprisingly, the majority of executive search agencies specializing in hospitality placements do generally not know about the Project Management Institute, and very little about project management. By contrast, head hunters specializing in recruitment for engineering, construction, information technology, pharmaceuticals, oil drilling, etc are commonly better informed about how project management contributes to the success of projects.
Thirdly, hotel management companies are traditionally conservative. In standard innovation adoption life cycle models they would be considered late majority adopters, or even laggards. One can draw this conclusion from the speed at which Revenue Management and Total Quality Management concepts were taken up by hotels - only well after these had already been embraced in other industries.
A fourth point is that most hotel management companies are set up as functional rather than matrix organizations. This often prevents effective project integration management, which is the implementation of processes required to ensure that all project components are coordinated. Consequently, opportunities for synergistic improvements to hotel opening projects are missed, and one functional area is often surprised by delays in other functional areas because they are unaware of them until a deadline is missed.
Fifthly is a general misunderstanding in the industry as to what causes new hotel opening project delays. A recent survey among senior hotel management executives 03 provides some insights. The vast majority of managers seem to be convinced that delays are caused by problems in design and construction, fire life safety and licensing issues, delays in pre-opening activities and poor execution, delays in procurement and non-compliance with brand standards.
Based on the data from the study, however, a root cause analysis 04 was conducted that strongly suggests "no project management culture" and "management company modus operandi" are the key causes. This hints that unsuccessful projects are more often linked to internal, rather than external, factors.
The industry seems to not link project delays to the absence of a project management culture and the lack of an all-encompassing project management methodology. But the point is that the application of project management could, and would, often bring potential problems to light early enough to change the outcome.
Further, the project management emphasis on planning would result in better understanding of the risks associated with the problems cited by the hotel management executives above and allow project managers to deal with these problems before they become acute.
The Way Forward:
Project management is a key tool for companies to achieve strategic objectives and is closely linked to project performance. To be able to effectively and efficiently utilize project management, hotel management companies will need to make fundamental changes. Following are five building blocks:
First of all, project management needs to be made part of the company culture and embedded in the corporate DNA. To do so successfully it will need to be driven from the very top down. It will take significant effort, resources, time, effective change management and extreme commitment to become a basic way of working. Companies like IBM, Nokia and Cisco did not achieve their current project management excellence overnight either.
In 2008 the Project Management Institute presented the results of a 3-year, USD 2.5 million study conducted among 60 companies 05 that underlines that project management delivers most value when supported by top leadership (and is reinforced by continuous training). It also stresses that only commitment from the top can deliver project management aligned with organizational strategy.
The second one is for hotel management companies to review the structural aspects of project management. These include best practices such as having a project management office, certification of project managers and key personnel, and clearly defined roles and responsibilities.
Third is implementation of standard project management methodologies. There is no need to reinvent the wheel as there are various internationally accredited organizations supporting the project management profession, such as the Project Management Institute 06 and the International Project Management Association 07. These provide practitioners and organizations with standards, credentials that verify knowledge and experience, resources for professional development, networking and community (PMI© maintains an ISO 9000 certification in Quality Management Systems, whilst its Project Management Professional (PMP©) credential process received ISO 17024 accreditation in 2006).
Fourth, well-defined project management processes will enable companies to consistently deliver superior project results. There are clearly defined Project Management Processes 08 and competent company staff can successfully implement a project using the processes associated with initiating --> planning --> executing --> closing a project while monitoring & controlling it by constantly checking the actions from a current group of processes with those of the preceding or forthcoming processes, to make a positive impact on the organization.
The fifth one is training and continuous development. Hotel management companies must go beyond perceived "solutions" such as critical paths and project management software, and upgrade the knowledge and skills of the dedicated hotel opening (support) teams. Another step in the right direction would be to train, to a lesser extent, pre-opening hotel general managers (eCornell provides an online course on project leadership 09, for example). According to a 2007 study by PricewaterhouseCoopers "The existence of staff development programmes positively impacts performance" and "Staff development programmes have the greatest impact on project performance when they are used on a regular basis."
To take these steps and others will bring about the ability to consistently and predictably open new hotels to support company growth and expansion goals. The financial rewards of doing it correctly will be huge and the ability to do so will further help accelerate growth.
Statistics from the PMI© tell us that the annual global turn over for fixed capital projects is USD 12 trillion. This figure becomes USD 20 trillion annually if IT projects and others are included.
In terms of success, the earlier mentioned PricewaterhouseCoopers study reports that 80% of higher-performing projects use a Certified Project Manager, whilst 50% of project failure can be traced to poor or no project management (bad estimates and deadlines, scope changes and poor resource planning).
For these reasons alone it is a necessity to make project management a strategic competence, indispensable for business results.
About the co-author:
Richard Whitfield is professor in the School of Intelligent Systems and Technology at the University of Saint Joseph, Macau. Richard's undergraduate and doctoral degrees are in Manufacturing from the University of Melbourne, Australia. One of the MBA classes he teaches is Process & Technology Management.
Gert and Richard first started researching hotel opening processes in 2008.
Copyright:© 2011-2013 Gert Noordzy. All rights reserved. Redistribution without prior written permission is prohibited.
Any permitted redistribution must include the following byline: "The article was first published on www.4Hoteiers.com (direct live link) on 09 December 2011."
Disclaimer: The views, opinions, positions or strategies expressed by the authors are theirs alone and do not necessarily reflect the views, opinions, positions or strategies of other parties. They do not in any way constitute a list of referrals and / or recommendations nor shall the authors be legally liable in any way.
01 A guide to the Project Management Body of Knowledge (PMBOK©) Fourth Edition - Library of PMI Global Standards - pmi.org.
02 Insights and Trends: Current Programme and Project Management Practices - PricewaterhouseCoopers, The second global survey on the current state of project management maturity in organizations across the word - pwc.com/es_CL/cl/publicaciones/assets/insighttrends.pdf
03 Survey: How various hotel management companies in Greater China approach hotel opening processes - © 2009 Gert Noordzy. All rights reserved.
04 Root Cause Analysis & Causal Chain for Hotel Opening Delays - © 2009 Gert Noordzy. All rights reserved.
05 Researching the Value of Project Management - PMI Marketplace - Janice Thomas, PhD and Mark Mullaly,PMP - pmi.org.
08 Project Management Process Groups - A guide to the Project Management Body of Knowledge (PMBOK©) Fourth Edition - Library of PMI Global Standards - pmi.org.
About this site
Hotel Opening Processes explores ways to better manage new hotel openings and improve the efficiency and effectiveness of processes.
Hotel Opening Processes endeavours to conduct and publish research in this field and challenges the hotel industry to improve its new hotel opening track record. Initially, the primary focus will be on Greater China.
- Root cause analysis & causal chain of hotel opening delays
- Quantifying new hotel opening delays
- Impact of psychological typology and cultural dimensions on new hotel opening processes