Hospitality industry is very vibrant and dynamic in nature. The hotels in the industry are required to be upgraded and innovated from time to time to deliver competitive services to their clients. This study prepares a report to the Executive board of Universal hotel Group and evaluates the validity of the investor's criticisms done for the hotel group. It will discover the reason why investors are criticizing the board. The following report requires demonstrating of knowledge and understanding of the issues surrounding the performance and financial.
Company uses KPI's at different levels to examine the success at reaching the targets (Chen and Schwartz, 2013). High level KPI's emphasis on overall performance of the enterprise while low level KPI's may emphasize on individual departments. It is only as valuable as the action it inspires. Generally firms make use of industry-recognized KPIs in blindly way and after that they doubt why that KPI does not reflect their own business and not able to make any positive change (Gayar and et.al., 2011). One of their most important characteristic, but which is generally unobserved, is that they are a form of communication. Clear and relevant information is more likely to be grasped and reacted to.
Critical success factor - These refers to specific activities, procedures or areas which are used by the companies for the purpose of its survival. These factors are developed in the context of the organizational goals and objectives. It is to be noted that critical success factors are different from success criteria (Maier, 2012). Success criteria are results of a project or achievements of the business. CSF is very essential for the business strategy to be successful. It makes the strategy to drive forward. These factors are to be given special attention for the purpose of bringing out high quality performance. It handles the issues which are vital for the operational activities of the company and for its future success (Wang, 2012).
Revenue per Available Room - REVPAR measures the utilization of the hotel and the average daily revenue generated by every room. This parameter does not include other revenue centres such as food & beverages, retail, conferencing etc. Hotel organizations make use of RevPar in order to compare their results with other hotels but there is a question on authenticity and reliability of the comparative data (Hellermann, 2006). It offers a time-based print of the hotel performance and as a hotel performance parameter it differs from market, segment and timing.
Universal Hotel Group has been facing lot of criticism from the institutional investors. Different types of reasons have been given behind such criticism and there are as follows:
Inflexibility of Management - Investors are of belief that management of the UHG is very inflexible with the adoption of new technologies and business approaches. On the other side, CEO of the UHG is of the opinion that investors are carrying a short term view and they do not understand that under people business, they cannot afford to upset the staff with big changes. But it can be argued that this criticism is valid because change is the need of time. In the present context, the employees also shows their support towards change if it is adopted for the benefit of them as well as for the business. Big changes if adopted with utmost intelligence and soundness cannot upset the employees of the company. Hotel industry is of dynamic nature because it is a consumer centric industry (Rouse and Maguire, 2011). The hoteliers are required to design and modify their services at regular interval of time in accordance with the needs and requirements of the customers. The wants of the people also changes with the passing of time. Their level of expectation always becomes higher and higher. Further it is essential to go parallel with the new and latest trends in the industry because business cannot be run by relying on traditional methods always (Tranter, Stuart-Hill and Parke, 2011). Technology is the need of time and it enhances the performance and productivity of the business. Hence UHG must have to become flexible in adopting technology and new trends within their business.
Deceptive appearance of buildings - The investors criticise that UHG buildings are of deceptive nature. This criticism may have some validity because it is evident that majority of the hotels of Universal Hotel Group are more than 50 years old and even in some cases 100 years old. The buildings of these hotels are very grand but are very old in nature (Argouslidis, 2008). On the other side CEO stated that their hotel premises are often praise for their architectural beauty and make them distinctive as compared to other industries. But the thing is doing business operations under the roofs of such type of old buildings can prove to be dangerous and unsafe. Further they are very expensive to maintain. UHG are required to do modification and renovations in their infrastructure because customers always carry a image of the product or service in their minds. They are hugely influenced from the appearance of the service (Bourne, franco and Wilkes, 2006).
Outdated business models - Investors are of the view that business models of the hotel are not flexible and are outdated. Managers failed to leave their mark as great leaders. This criticism may have some validity because managers play an important role in the organization. They are responsible for organizing, managing and controlling the workforce. Employees follow them and deliver the performance on the basis of the learning and knowledge imparted by them. As a manager one should understand his accountability and duties towards the company. Hence UHG must have to use models which are more consumer oriented and which teaches to run parallel with the market trends. Their managers are required to show their real talent and capabilities which can take the business of the company at top level.
Inability to understand the importance of hotel location- UGH is being criticized for having second tier that means stand alone locations of their hotels. This criticism has some validity and it is being admitted by the CEO also. Location of the hotel plays a very important role in its performance (Broadbent and Cullen, 2012). Lot of things depends upon the locations. The place is required to be eco friendly far away from the threat of pollution. It should be easily accessible and reachable. A nasty location can negatively affect the performance and productivity of the hotel. Customers are influenced from many factors including the location of the hotel (Paramasivan, 2009).
Over-leverage with debt- Investors claim that UHG is over-leveraged with debt. It is very difficult to deal with the debt financing. The thing is borrowed sum is required to repaid at an stipulated period of time no matter what the condition of the business is. Heavily dependency on financing with debt, end up in creating great cash flow issues (Ittelson, 2009). A lot of imbalance can be seen between cash inflow and cash outflow. Firms which carry excessive debts are rated as high risk organizations by the potential investors. Hence in this manner it can be very difficult for the Universal Hotel Group to approach investors to raise capital for the business. Investors probably would like to part ways from the company who is over leveraged with debt (Siano, kitchen and Confetto, 2010). This is a sign of negative reputation for the business. They have to be careful about the loan covenant. Under the condition of loan covenant, the organization is required to fulfil certain conditions or they can also be restricted from taking some actions. It can also possible restricts specific activities to situations when other conditions are fulfilled. It is to be noted that violation of a covenant may be treated as default on the loan from the side of borrower and then penalties may also be applied.
Unable to understand the importance of KPIs and CSF - Key performance indicators play an important role in the hotel industry. Many hotel organizations make use of key performance indicators as part of their strategic planning activity. It helps in providing an immediate summary of the overall business performance of the company (Theeke and Mitchell, 2008). This ensures sound decision making and make ways for improving the performance. It also provides essence to the high level aspirations outlined in the strategic documents of the company. UHG should understand that it is a mean for ensuring that the right individuals within the institutions are preserved up to date with progress. It makes sure that overall progress towards the agreed goals can be measured (Thomas, 2010). On the other side critical success factors are important for the long term success of the business. These are regarded as the core elements of the business activities. Organizations generally develop a list of critical success factors, considering it as a part of strategic development and corporate planning. This list integrates with the mission statement and primary objectives (Tranter, Stuart-Hill and Parke, 2011). Once the company has a mission and set objectives, it needs to recognize the most critical factors that will contribute towards the success and failure of the mission and goals.
Profitability - In terms of revenue generation it can be noticed that UHG far exceeds its competitor. Operating profit of UHG is higher than the competitor but in case of net profit, UHG fall below. Competitor is achieving higher net profit that means they are well managing their business affairs (Theeke and Mitchell, 2008). They are efficient of converting their revenues into profits available for the shareholders. UHG must make efforts to improve their net profits and this can be done by generating more revenues and revenues will be generated if services are outstanding.UHG can generate profits if they invite changes in their business. They have to focus on improving their key performance indicators and critical success factors (Siano, kitchen and Confetto, 2010). The goals and objectives are required to be achieved in effective manner. ROCE was also calculated and it can be seen that competitor's ROCE is far better than UHG. That means returns on capital are higher for competitor.
Revenue per available room - This parameter compares the rooms' revenue to the number of rooms available. There is a difference between the RevPar of both the companies. Competitor is having better RevPar as theirper room earning is higher. It suggests that their number of customers is higher comparatively (Theeke and Mitchell, 2008). Competitor is succeeding in attracting the people towards their services. On the other side UHG have to focus on their business approaches. They have to make efforts to increase their RevPar.
Average room rate - This measure discloses the average rate charged per paid room occupied and is computed by dividing the rooms' revenue by the number of paid rooms occupied. The average room rates for both the hotels are the same (Thomas, 2010). This is probably because they are operating within the same sector of the market.
Current ratio - This ratio measures the liquidity position of the business. It is computed by dividing the current assets by current liabilities. The current ratio for UGH, falls below 1 and this is signifying that liabilities are exceeding the total current assets (Tracy, 2012). On the other side competitor is having showing better current ratio comparatively. Competitor is efficiently managing its working capital and it day to day operations. UGH has to work on improving their current ratio as they are struggling with their debt payments (Chen and Schwartz, 2013).
Acid test ratio- It is the ratio of the sum of cash and cash equivalents, marketable securities and account receivable to the current liabilities. It examines the potential of the business to pay its debts by making use of cash and near cash current assets (Rouse and Maguire, 2011). Again the acid test ratio of the competitor is higher as compared to UGH. It indicates that the other company is well capable of paying its short term obligations when they arise due only with the quick assets. UGH is struggling to keep in pace with this ratio because they are not capable of paying their debt by using their liquid assets (Tranter, Stuart-Hill and Parke, 2011).
Net profit ratio- This ratio shows the relationship between the net profit and sales of the company. There is a computation of the profitability after the subtraction of the tax within the business. Here the competitor is showing very impressive net profit ratio as compared to UGH. It means UGH is struggling to convert its sales into net income (Theeke and Mitchell, 2008). There is an issue with the management of the expenses.
Interest coverage ratio - This ratio is used to identify how a firm can pay interest on outstanding debt. It is computed by dividing the EBIT (Earnings before interest and taxes) of one period by the interest expenses of the similar period within the business. As per the loan agreement the interest cover ratio should not fall below 2 times (Gayar and et.al., 2011). That is correct because lower the ratio, more the business will be burdened with the debt expenses. In this type of situation, there can be doubts regarding meeting of interest expenses. If the ratio is lower, then debt burden of the business will increase and there may be chances of getting bankruptcy or default. Some legal charges and penalties will be applied or even the bank has the right to acquire the property if the conditions are that much poor and vulnerable. Hence it is suggested that UGH must have to generate sufficient revenues in order satisfy their interest expenses.
Overall it can be said that competitor is delivering good financial results as compared to UGH. The CEO of the company is of the view that investors are having a short term view and they do not understand certain things of the business. He thinks that they cannot upset their staff with making big changes in their business structure (Bourne, franco and Wilkes, 2006). But it is to be argued that change is the need of time. In this highly competitive and vibrant business atmosphere, firms cannot rely on traditional approaches of business. There is a need to drive parallel with the ongoing trends and processes so that sustainability and stability can be achieved in the business. Further it is essential to make employees appropriately understand about the necessity of change. Resistance and confrontation issues will not occur if the staff of the hotel is familiarized with the ways to tackle the changes (Siano, kitchen, and Confetto, 2010). Talking about locations, most of the hotels of the Group are situated in standalone locations. There is a need to focus on this issue because location of the hotel plays an very important role in the hospital sector. The hotel should be placed at location where it can be easily accessible by the customers. It is important that it should be enclosed with favourable and pleasant environmental conditions so that people could come to the hotel again and again (Broadben and Cullen, 2012). Further it is really essential that they should work on identifying their key performance indicators and critical success factors. Several measures are available which can be used by the UGH for the measuring the performance of their business such as Average room rate, bedroom occupancy rate, revenue per available room, cost per occupied room and labour cost ratio etc. These approaches are best measures in the hotel industry. The group have to make sure that their interest cover ratio does not fall below 2 times because there is a threat of overburdening of debt expenses (Chen and Schwartz, 2013). They have to work on improving their revenues so that expenses related to interest can be satisfied adequately.
It can be concluded that financial condition of the Universal Hotel Group is ensuring the validity of the criticism generated by the investors. Competitor of UHG is showing better and sound financial results. There is a need to bring modification and changes in the structure of the hotel group. They have to show flexibility with regard to adoption of new technologies and business practices (Gaya and et.al., 2011). Now-a-days every organization is becoming techno-friendly and lot of advancements and technicality can be seen in their business approaches. Hence the group have to learn from that. They are required to make the appearance of their buildings more delightful. It was reported that they are having outdated business model which is making the whole organization inflexible. This should not be the scenario; they have to focus on improving their business model (Hellermann, 2006). Their model should relate to their vision and mission.
Hotel industry is a consumer centric industry hence their business strategies should be based on consumer perceptions and attitude towards the hotel services. Further the company is overleveraged with debt that is too expensive. Debt financing comes with the tag of "highly risked organizations", so this is very negative from the investor's point of view. People would not like spend money in the company who is running with debts (Rouse and Maguire 2011). Again there is a need to identify the key performance indicators which can enhance their performance. Regular monitoring and enhancements can bring valuable financial results for the Universal Hotel Group. It is important that company should live up with positive views and opinions of the investors. Investors are responsible for creating the goodwill and reputation of the company in the market (Tranter,Stuart-Hill, and Parke, 2011). Negative reputation will decrease the rate of potential customers for the organization.
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