Hotel Strategy Management

CASES

430 CASES CASE STUDY MATRIX Case Title Chapters Topics Covered Industry Segment 1 The Fun Ship Experience at Carnival Cruise Lines 2, 4, 5, 7 Vision and Mission Five Forces Competitive Advantage Core Resources Business Level Strategies Corporate Strategy Cruise Industry 2 Building Capabilities at the Westward Hilton 3, 4, 5, 7, 8 Vision and Mission Five Forces Competitive Advantage Core Resources Business Level Strategies Corporate Strategy Organizational Design and Control Innovation and Entrepreneurship Ownership Group and Individual Hotel 3 Intercontinental Hotel Group ’ s Entry into China 2, 7, 9, 10 Environmental Analysis Competitive Advantage Core Resources Corporate Strategy Stakeholders and Partnerships Global Strategy International Chain of Hotels and Partners 4 The Summer of 2006 Union Negotiations: Unite Here ’ s Strategy 3, 4, 5, 7 Vision and Mission Environmental Analysis Competitive Advantage Core Resources Corporate Strategy Stakeholders and Partnerships Organizational Design and Control Hospitality Union

CASE STUDY MATRIX 431 5 Banyan Tree: Sustainability of a Brand during Rapid Global Expansion 2, 3, 6, 9, 10 Vision and Mission Environmental Analysis Five Forces Corporate Strategy Competitive Advantage Stakeholders and Partnerships Organizational Design and Control Innovation and Entrepreneurship Global Strategy Regional Chain of Hotels 6 Starwood Hotels and Resorts Brings Aloft to India 2, 5, 6, 7, 10 Environmental Analysis Competitive Advantage Corporate Strategy Stakeholders and Partnerships Innovation and Entrepreneurship Global Strategy International Chain of Hotels and Brand Introduction 7 The Commoditization of Starbucks 3, 5, 6, 9 Five Forces Competitive Advantage Core Resources Business Level Strategies Corporate Strategy Organizational Design and Control Innovation and Entrepreneurship Restaurant Industry 8 The Movement of Travel Services Online: Intermediaries and Branded Distribution 2, 4, 6, 7, 9 Environmental Analysis Five Forces Competitive Advantage Corporate Strategy Stakeholders and Partnerships Online Travel Intermediaries and Travel Suppliers Case Study Matrix tables cont...

432 CASES Topics Cases 1 2 3 4 5 6 7 8 Environmental Analysis x x x x x Five Forces x x x x x Vision and mission x x x x Competitive Advantage x x x x x x x x Core Resources x x x x x Business Level Strategies x x x Corporate Strategy x x x x x x x x Stakeholders and Partnerships x x x x x Organizational Design and Control x x x x Innovation and Entrepreneurship x x x x Global Strategy x x x

CASE NOTE: LEARNING THROUGH CASE ANALYSIS 433 CASE NOTE: LEARNING THROUGH CASE ANALYSIS Strategic management is an iterative, ongoing process designed to position a fi rm for competitive advantage in its ever - changing environment. To manage an organization strategically, a manager must understand and appreciate the desires of key organizational stakeholders, the industry environment, and the fi rm ’ s position relative to its stakeholders and industry. This knowledge allows a manager to set goals and direct the organization ’ s resources in a way that corrects weaknesses, overcomes threats, takes advantage of strengths and opportunities, and, ultimately, satisfi es stakeholders. Case analysis typically begins with a brief introduction of the company. The introduction, which sets the stage for the rest of the case, should include a brief description of the defi ning characteristics of the fi rm, including some of its outstanding qualities, past successes, failures, and products or services. The industries in which the fi rm is involved are also identifi ed. The next section of a case analysis can be either an environmental analysis or an internal resource analysis. Both types of analysis are required before all of the organization ’ s opportunities can be identifi ed. ENVIRONMENTAL ANALYSIS An analysis of the external environment includes an industry analysis and an examination of key external stakeholders and the broad environment. Findings are then summarized, with an emphasis on identifying industry growth and profi t potential and the keys to survival and success in the industry. Some organizations are involved in more than one industry. Consequently, a separate industry analysis is done for each of the industries in which a fi rm is involved. THE BROAD ENVIRONMENT A complete environmental analysis includes an assessment of the broad environment, including social infl uences, economic infl uences, political infl uences, and technological infl uences. These areas are evaluated only as they relate to the industry in question. They should be evaluated at the domestic and global levels, if appropriate. Forces in the broad environment may pose threats or provide opportunities.

434 CASES INDUSTRY ANALYSIS The fi rst step in industry analysis is to provide a basic description of the industry and the competitive forces that dominate it. Porter ’ s Five Forces are evaluated as follows, along with other relevant issues: 1. What is the product or service? What function does it serve? What are the channels of distribution? 2. What is the industry size in units and dollars? How fast is it growing? Are products differentiated? Are there high exit barriers? Are there high fi xed costs? These are some of the forces that determine the strength of competition among existing competitors. 3. Who are the major competitors? What are their market shares? In other words, is the industry consolidated or fragmented? 4. Who are the major customers of the industry? Are they powerful? What gives them power? 5. Who are the major suppliers to the industry? Are they powerful? What gives them power? 6. Do signifi cant entry barriers exist? What are they? Are they effective in protecting existing competitors, thus enhancing profi ts? 7. Are there any close substitutes for industry products and services? Do they provide pressure on prices charged in this industry? 8. What are the basic strategies of competitors? How successful are they? Are competitors likely to retaliate to competitive moves or countermoves? How rapidly do they respond? 9. Is the industry regulated? What infl uence do regulations have on industry competitiveness? 10. Are any other external stakeholders important in this industry? Examples might include labor unions, special - interest groups, fi nancial institutions, or local communities. 11. To what extent is the industry global? Are there any apparent advantages to being involved in more than one nation? The fi ndings of this part of the analysis will help you decide whether the industry is “ attractive ”(growing and profi table) and worthy of further investment (i.e., time, money, resources). It will also help you identify areas in which the fi rm may be able to excel in an effort to create a competitive advantage. STRATEGIC ISSUES FACING THE INDUSTRY A thorough environmental analysis provides the information needed to identify factors and forces that are important to the industry in which your organization is involved and, therefore, your organization. These factors and forces may be categorized as follows:

CASE NOTE: LEARNING THROUGH CASE ANALYSIS 435 1. Driving forces in the industry, which are trends that are so signifi cant that they are creating fundamental industry change, such as the opening up of Eastern Europe or networked computer communications. Each industry has its own unique set of driving forces. 2. Threats, defi ned as noteworthy trends or changes that threaten growth prospects, profi t potential, and traditional ways of doing business. 3. Opportunities, which are important trends, changes, or ideas that provide new opportunities for growth or profi ts. 4. Requirements for survival, identifi ed as resources and capabilities that all fi rms must possess to survive in the industry. An example in the pharmaceutical industry is “ product purity. ”These factors do not command a premium price. They are necessary, but not suffi cient to be successful. 5. Key success factors, which are factors fi rms typically should possess if they desire to be successful in the industry. An example in the pharmaceutical industry is the ability to create products with new therapeutic qualities. This ability may lead to high performance. Having completed an analysis of the external environment, you are ready to conduct a more specifi c analysis of the internal organization. ORGANIZATIONAL RESOURCE ANALYSIS Understanding industry trends, growth prospects, profi t potential, and key strategic issues can help you critique an organization ’ s strategies and evaluate its strengths and weaknesses. For example, what might qualify as a strength in one industry may be an ordinary characteristic in another industry. A good organizational analysis should begin with a general evaluation of the internal organization. EVALUATION OF STRATEGIC DIRECTION AND THE INTERNAL ENVIRONMENT The following questions are useful in beginning to assess the internal organization: 1. What is the company ’ s strategic direction, including its vision, business defi nition, and values? If these factors are contained in a formal mission, share it. If not, you may want to write one. Remember that organizations have a strategic direction even if it is not written down. 2. How has the strategic direction changed over time? In what way? Has the evolution been consistent with the organization ’ s capabilities and planned strategies?

436 CASES 3. Who are the principal internal stakeholders? In particular, who are the key managers, and what is their background? What are their strengths and weaknesses? Are they authoritarian or participative in their management style? Is this appropriate for the situation? What seems to drive their actions? 4. Who owns the organization? Is it a publicly traded company with a board of directors? If there is a board and you know who is on it, is the composition of the board appropriate? Is there an individual or group with a controlling interest? Is there evidence of agency problems? How active are the owners, and what do they value? 5. What are the operating characteristics of the company, including its size in sales, assets, and employees, its age, and its geographic locations (including international operations)? Does the company have any unique physical resources? 6. Are employees highly trained? If a union is present, how are relations with the union? 7. How would you describe the organization ’ s culture? Is it a high - performing culture? Is it supportive of the fi rm ’ s strategies? Most instructors also require a fi nancial analysis both to identify fi nancial strengths and weaknesses and to evaluate performance. A fi nancial analysis should include a comparison of ratios and fi nancial fi gures with major competitors or the industry in which the organization competes (cross sectional), as well as an analysis of trends in these ratios over several years (longitudinal). Financial ratio analysis can provide an indication as to whether the fi rm is pursuing appropriate strategies. Poor fi nancial trends are sometimes symptoms of greater problems. For example, a fi rm may discover that administrative costs are increasing at a faster rate than sales. This could be an indication of diseconomies of scale or the need for tighter controls on overhead costs. Financial analysis is also used to indicate the ability of the fi rm to fi nance growth. For example, managers of a fi rm that has very high leverage (long - term debt) may have to be less ambitious in their strategies for taking advantage of opportunities. On the other hand, an organization with a strong balance sheet is well poised to pursue a wide range of opportunities. Strong fi nancial resources are often diffi cult to imitate in the short term. ANALYSIS OF RESOURCES AND CAPABILITIES The foregoing analysis of the internal environment provides an excellent starting point for identifying key resources and capabilities. For example, outstanding resources and capabilities may result from (1) superior management, (2) well - trained employees, (3) an excellent board of directors, (4) a high - performance culture, (5) superior fi nancial resources, (6) effective knowledge - generating processes, or (7) the appropriate level and type of international involvement. However, these potential sources of competitive advantage barely scratch the organizational surface. You also should evaluate the organization ’ s primary value - chain activities to identify resources and capabilities. These activities include its (8) inbound logistics, (9) operations, (10) outbound logistics, (11) marketing and sales, and (12) service, as well as the support activities of (13) procurement, (14) technology development, (15) human resource management, and (16) administration. In addition, an organization may

CASE NOTE: LEARNING THROUGH CASE ANALYSIS 437 have (17) an excellent reputation, (18) a strong brand name, (19) patents and secrets, (20) excellent locations, (21) outstanding learning capabilities, or (22) strong or valuable ties (i.e., alliances, joint ventures, contracts, cooperation) with one or more external stakeholders. All of these potential resources and capabilities (and many others) have been discussed in this book. They form a starting point that you can use to help identify the potential sources of competitive advantage. Each company has its own unique list. It is useful to screen resources and capabilities based on their long - term strategic value. This process entails asking several questions: • Does the resource or capability have value in the market? • Is the resource or capability unique? • Is there a readily available substitute? Positive answers to the fi rst two questions and a negative answer to the third mean that the resource or capability has the ability to provide a source of competitive advantage. Two additional questions are then asked: • Do organizational systems exist that allow realization of potential? • Is the organization aware of and realizing the advantages? Opportunities can exist if an organization is not taking advantage of sources of competitive advantage, either because it is unaware of them or because systems are not yet in place to take advantage of them. A fi nal question is then asked: • Is the resource or capability diffi cult or costly to imitate? If it is diffi cult or costly to imitate the resource or capability, it can be a source of sustainable competitive advantage. A fi nal part of this analysis is to determine whether the resource or capability can be applied to multiple business areas. If this is the case, it can be classifi ed as a core competency or capability. PERFORMANCE EVALUATION The next step in internal analysis is to describe and critique the organization ’ s past strategies. In critiquing strategies, you will need to describe them in detail, discuss whether they have been successful, and then evaluate whether they fi t with the industry environment and the resources and capabilities of the organization: 1. What is the company ’ s pattern of past strategies (corporate - level, business - level, international)? 2. How successful has the company been in the past with its chosen strategies? How successful is the company now? 3. For each strategy, what explains success or failure? (Use your environmental and organizational resource analyses to support your answer.)

438 CASES SUMMARY OF SITUATION ANALYSIS: SWOT On the basis of your environmental and organizational analyses, you should be in a position to draw some conclusions about the situation your organization is facing, called a situation analysis. Many students will do this by creating lists of strengths and weaknesses, opportunities and threats. Strengths are defi ned as fi rm resources and capabilities that can lead to a competitive advantage. Weaknesses are resources and capabilities that the fi rm does not possess, resulting in a competitive disadvantage. Consequently, each of the resources and capabilities identifi ed during the organizational analysis should be measured against the factors identifi ed in the environmental analysis. Opportunities are conditions in the external environment that allow a fi rm to take advantage of organizational strengths, overcome organizational weaknesses, or neutralize environmental threats. Consequently, now that the organizational analysis is complete, you should reevaluate your list of opportunities to determine whether they apply to your organization. You should also evaluate threats to make sure they are applicable to your fi rm. Threats are conditions in the broad and operating environments that may impede organizational competitiveness or the achievement of stakeholder satisfaction. DEVELOPING A STRATEGIC PLAN Your environmental and organizational analyses helped you evaluate the past strategies and strategic direction of the fi rm, as well as develop a list of strengths, weaknesses, opportunities, and threats. The next step is to make recommendations concerning the strategies the fi rm may want to pursue in the future. If the fi rm is not a stellar performer, this should be an easy task. However, even fi rms that have been highly successful in the past should consider taking advantage of opportunities and should respond to threats. History has taught us that fi rms that are unwilling to move forward eventually decline. STRATEGIC DIRECTION AND MAJOR STRATEGIES You should probably begin your strategic recommendations by focusing on the strategic direction and major strategies of the fi rm. Based on your earlier analyses, you may want to consider adjustments to the mission of the fi rm, including its vision or business defi nition. Determine whether the business defi nition is still appropriate, given your environmental analysis. Is your dominant industry stagnant? Is it over - regulated? Is competition hurting profi tability? Should you consider investing in other industries? If so, what are their defi ning characteristics? What core competencies and capabilities could be applied elsewhere? What opportunities could be explored that relate to the corporate - level strategies?

CASE NOTE: LEARNING THROUGH CASE ANALYSIS 439 The business - level strategy should also be considered. If you determined earlier that the business - level strategy is not as successful as it should be, what adjustments should be made? Could the company have more success by focusing on one segment of the market? Or if the company is pursuing a focus strategy, would broadening the target market be appropriate? If the company is following cost leadership, would a differentiation strategy work better? If differentiation doesn ’ t seem to be working very well, would a cost leadership strategy be better? Finally, would a best - value strategy be the most appropriate? It is possible that you may want to leave the strategic direction and major strategies alone, especially if the organization has enjoyed recent success. Regardless of whether you altered the direction and strategies, at this point you have now established what you think they should be. The direction and corporate - and business - level strategies provide guidance for fi ne - tuning an organization ’ s strategies. Each of the recommendations you make from this point on should be consistent with the strategic direction and major strategies of the organization. At this point, it is time to explore strategic opportunities further. EVALUATION OF OPPORTUNITIES AND RECOMMENDATIONS Using the strategic direction and corporate -and business - level strategies as guides, strategic opportunities should be evaluated further. These alternatives were generated during earlier analyses. They include opportunities that allow a fi rm to take advantage of organizational strengths, overcome organizational weaknesses, and neutralize environmental threats. Evaluation of opportunities means much more than simply accepting them on the basis of earlier environmental and organizational analyses. They should also be evaluated based on factors such as the following: 1. Value added to the organization. Some alternatives may have high potential for growth in revenues, whereas others may be oriented toward improving effi ciency, eliminating problems, taking advantage of organizational strengths, or any of a wide range of other factors. Make sure that you look at long - term value as well as short - term value. 2. Organizational resources required to implement the alternative. The actual dollar costs to an organization are often diffi cult for a student to estimate. However, you should always provide a description of all of the resources needed to carry out the alternative. 3. The extent to which the alternative fi ts within the organization. Base this part of your analysis on such things as whether the alternative takes advantage of current distinctive competencies, the ability of the organization to successfully execute the alternative, and whether the existing culture, management, and resources of the organization will support implementation of the alternative. Make sure to specify whether this alternative is consistent with the current strategic direction of the company or requires new direction. 4. Risks associated with the alternative. Consider such things as fi nancial risk, risk to the fi rm ’ s reputation or its existing strengths, and risk to particular stakeholder groups, such as employees, managers, customers, or suppliers. Part of this analysis should anticipate

440 CASES the reactions of competitors to the strategy and what could happen if they respond adversely. 5. Future position. Will the strategy continue to be viable as the industry and the broad environment undergo their expected changes? Will it provide a foundation for survival or competitive success? The result of this analysis should be a recommendation or recommendations that the organization should pursue. You may not be required by your instructor to conduct a formal analysis of alternatives based on a standard set of criteria; however, you should still make recommendations concerning changes the organization should make to remain or become competitive and satisfy its stakeholders. Through this entire process, remember that many companies identify areas of strength that are no longer capable of giving the company a competitive edge. What was a key to success yesterday may be a requirement for survival today. IMPLEMENTATION AND CONTROL Recommendations should always be accompanied by an implementation plan and basic controls. The following are major questions that should be addressed during this section of a case analysis. Items 7 and 8 relate specifi cally to control. 1. How do the recommendations specifi cally address concerns that were identifi ed during the analysis? 2. What will be the roles and responsibilities of key internal and external stakeholders in carrying out the recommendations, and how are they expected to respond? What actions should be taken to smooth out the transition period or avoid stakeholder discontent? 3. Does the organization have the resources (funds, people, skills) to carry out the recommendations? If not, how should the organization proceed in developing or acquiring those resources? 4. Does the organization have the appropriate systems, structures, and processes to carry out the recommendations? If not, how should the organization proceed in creating the appropriate systems, structures, and processes? 5. What is the appropriate time horizon for implementing recommendations? What should the organization and its managers do immediately, in one month, in six months, in a year, etc.? 6. What are the roadblocks the organization could encounter while implementing the recommendations (i.e., fi nancing, skilled labor shortages)? How can the organization overcome these roadblocks? 7. What desired outcomes or changes should the organization expect once the recommendations have been implemented? How will the organization know if the recommendations have been successful? In other words, what objectives are associated with your recommendations?

CASE NOTE: LEARNING THROUGH CASE ANALYSIS 441 8. What were some of the major assumptions you made with regard to the external environment? Which of these factors, if different from expected, would require an adjustment to your recommendations? In addition, some instructors require separate functional plans for areas such as fi nance, human resources, or marketing. Chapter 7 contains information that should help you develop these plans. Following the implementation section, you may want to update your audience (your instructor or other students) concerning actions the fi rm has taken since the case was written. If a case update is required, it should center on actions that pertain to the focus of your case analysis. If you do an update, remember that what the organization did, even if it appears to have been successful, may not have been the optimal solution. A NOTE TO STUDENTS If you are reading this appendix early in the course, you will have the rest of the semester or quarter to practice the case analysis process and study the chapter readings. If you are reading this appendix later in the course, I encourage you to go back to earlier chapters and refresh your memory concerning the concepts that were covered. Just as this course integrates material you learned during your years of business study, the case analysis process integrates material from all sections of the strategic management course. Because there is not a standard method for analyzing cases, your instructor may teach a method of case analysis that differs from the approach contained herein. Also, cases can be treated in many different formats, including class discussions (complete with discussion questions to be answered before coming to class), written papers, formal presentations, and class debates. Finally, some cases do not lend themselves to comprehensive analysis. After reading this appendix, check with your instructor for specifi c instructions and requirements.

442 CASES CASE 1 THE FUN SHIP EXPERIENCE AT CARNIVAL CRUISE LINES We’re perfectly happy to be the Wal-Mart of the cruise industry.1 —Terry Thornton, vice president of marketing planning, Carnival Cruise Lines I n July 2005, the 2,974 - passenger, 110,000 - ton 2 Carnival Liberty set sail after being christened by its “ godmother, ”actress Mira Sorvino. Built for $ 500 million, the ship was the 21st vessel sailing in Carnival Cruise Lines ’fl eet, giving Carnival more passenger - carrying capacity than any other cruise line in the world. With 800 - plus oceanview or balcony staterooms, 22 lounges and bars, four swimming pools, and a spiral water slide, Carnival Liberty was a far cry from the Mardi Gras, Carnival ’ s fi rst ship, which was a converted transatlantic liner bought in 1972 for $ 6.5 million. For its part, the Mardi Gras seemed to signal an inauspicious beginning for Carnival when the ship ran aground at the tip of Miami Beach on its inaugural voyage — in full view of gawking vacationers. However, as Carnival lore had it, bartenders poured free drinks (including a new rum cocktail that a creative bartender dubbed a “ Mardi Gras on the Rocks ” 3 ), passengers had fun, and the spirit of the “ Fun Ships ”brand was born. The differences between the Mardi Gras and the Carnival Liberty symbolized the metamorphosis of the Carnival brand. Today ’ s Carnival was dramatically different than the company that cruise industry pioneer Ted Arison started with secondhand ships and savvy marketing. While North American passenger volume doubled between 1994 and 2004, Carnival ’ s volume tripled. More than 3 million guests sailed Carnival in 2004, the most in the company ’ s history, and a fi gure representing nearly one out of every three cruisers. For the fi scal year that included 2004, Carnival Corp. &plc, the parent company of Carnival Cruise Lines, reported record net income of $ 1.85 billion on revenues of $ 9.73 billion. Nine of Carnival ’ s ships, almost half of the line ’ s available berths, 4 had been launched since 2000. Through the years, Carnival had remained true to its Fun Ships lineage and its goal of providing a good - quality, affordable vacation to mainstream travelers. Nevertheless, company executives wondered whether it was time to set a new course for Carnival, and if so, how best to reinvent the brand without losing its essence. Written by Robert J. Kwortnik, Jr., who is an assistant professor of marketing at the Cornell University School of Hotel Administration ( [email protected] ). This case study was written for the purposes of classroom discussion.

CASE 1 THE FUN SHIP EXPERIENCE AT CARNIVAL CRUISE LINES 443 THE COMPETITIVE STRUCTURE OF THE CRUISE INDUSTRY The birth of the modern cruise industry can be traced to the 1960s, in the wake of the fi rst Boeing 707 fl ight from New York to Europe in 1958. 5 With a rapidly shrinking transatlantic passenger base, opportunistic shipping companies repositioned their service from transportation to vacation travel. Companies that did not “ come about ”to cruising soon foundered. At the same time, lines that led the transition, such as Princess Cruises (1965), Norwegian Caribbean Line (1966, now Norwegian Cruise Line, NCL), Royal Caribbean Cruise Line (1969, now Royal Caribbean International, RCI), and Carnival Cruise Lines (1972), paced the industry. Still, the passenger base was relatively small. In 1970, only 500,000 people took a cruise. 6 A cruise was an expensive, formal, and relatively lengthy vacation — 7 to 14 days on average — factors that contributed to the product ’ s snobby image and limited appeal. That perception began to change with the 1977 launch of “ The Love Boat ”TV series, when cruising in all its romanticized glory was popularized to mainstream America. Since then, the industry had grown tenfold to more than 9 million passengers in 2004 — an annual growth rate of 8.2 percent, making it the fastest - growing form of leisure travel. 7 The cruise industry was still young and evolving. Whereas luxury brands once held sway (at least in the public ’ s perception), less than 5 percent of current cruise capacity served this market (see Exhibit 1 ). 8 With the exception of Cunard ’ s behemoth Queen Mary 2, luxury lines tended to use smaller ships that carried only a few hundred guests and featured exotic itineraries, gourmet dining, a relatively formal atmosphere, and attentive personal service. Not surprisingly, this attracted a refi ned, affl uent clientele that was comfortable with paying $ 400 to $ 900 per person per day. An even smaller segment of the industry was served by destination or specialty cruise lines that sailed, for example, masted sailing vessels or replica paddle - wheeler ships for river cruises. Roughly one - third of the market, often veteran cruisers, sailed the premium cruise lines. These companies offered high - quality service on relatively large ships that typically accommodated 2,000 or fewer guests paying $ 250 to $ 450 per person per day. Premium - level cruises featured fi ne dining, a sophisticated atmosphere (though less formal than most luxury cruises), spa facilities, abundant entertainment, and a wide mix of destinations. Cruising was dominated by brands that served the “ contemporary ”segment, a clever label used by cruise marketers to describe the mass market. These cruise lines featured ever - larger ships that accommodated 2,000 to 3,400 guests who paid fares ranging from $ 150 to $ 300 per person per day. Although not heavy on personalized service, these fl oating resorts offered an abundance of good and varied food, plenty of activities to satisfy travelers ’diverse interests (including shopping, gaming, sports, shows, parties, dancing, movies), and itineraries that visited popular vacation destinations. Competition for the contemporary customer was fi erce, particularly between Carnival and RCI. Carnival executives argued, however, that the real competition came from outside the cruise industry in the form of land - based resorts and hotels in sightseeing destinations such as Las Vegas and Orlando. The competitive structure in the cruise industry changed dramatically around the turn of the 21st century. Price wars and soft demand decimated the budget sector, with brands such as Regal, Premier, and Commodore — “ bottom feeders ”with older ships — unable to compete with the bigger brands ’ new ships and attractive prices. Carnival Corp. won a battle with RCI to gain ownership of Princess Cruises in 2003; just fi ve years earlier, Carnival Corp. acquired Cunard Line in a move that sent

444 CASES Exhibit 1: North American Cruise Lines and Brand Positioning Ships Double Occupancy Market Share Market Positioning Carnival Corporation Carnival Cruise Lines 21 47,908 24.2% Contemporary Princess 13 28,820 14.5% Premium Holland America Line 12 16,978 8.6% Premium Costa Cruises (U.S. market) 2 4,224 2.1% Contemporary Cunard Line (U.S.) 2 4,411 2.2% Luxury Windstar Cruises 3 604 0.3% Destination Yachts of Seabourn 3 624 0.3% Luxury Total: 56 103,569 52.2% Royal Caribbean International Royal Caribbean International 19 44,108 22.3% Contemporary Celebrity Cruises 9 16,118 8.1% Premium Total: 28 60,226 30.4% Star Cruises Norwegian Cruise Line 9 16,734 8.4% Contemporary Orient Lines 1 826 0.4% Destination Total: 10 17,560 8.9% Other CLIA - Affi liated Brands Crystal Cruises 3 2,960 1.5% Luxury Disney Cruise Line 2 3,508 1.8% Contemporary MSC Cruises 3 4,410 2.2% Contemporary Oceania Cruises 3 2,052 1.0% Premium Radisson Seven Seas Cruises 5 2,604 1.3% Luxury Silversea Cruises 4 1,356 0.7% Luxury Total 20 16,890 8.5% Grand Total 114 198,245 Source: Cruise Lines International Association, 2005 Cruise Manual. Note: CLIA-member cruise lines comprise approximately 95 percent of the cruise capacity marketed from North America.

CASE 1 THE FUN SHIP EXPERIENCE AT CARNIVAL CRUISE LINES 445 shockwaves throughout the industry for its symbolic signifi cance as the venerable, upscale 150 - year - old British line was scooped up by the American company powered by the Fun Ships. Whereas the cruise market in the 1970s and ’ 80s was served by 30 brands, by 2005 only 10 brands owned by three corporations controlled 90 percent of the market. Carnival Corp. emerged as the largest cruise company in the world, with at least one brand positioned in each of the four main segments. Signifi cantly, Carnival Corp. ’ s fl agship brand had developed a formidable cost - leadership competitive strategy that enabled Carnival to deliver a good - value vacation that attracted price - sensitive cruisers and still produced profi t margins in excess of an astonishing 25 percent. Although Carnival ’ s executives dismissed competitive threats from rival RCI, the two companies had waged a marketing war for years. (In the past, when Carnival and RCI ships would pass each other, RCI ’ s cruise directors would launch a broadside: “ There goes the Kmart of the Caribbean. ” 9 ) One battleground involved an expensive game of one - upsmanship with industry “ hardware, ”the ships themselves. The hardware competition became hot starting in 1988, when RCI launched the fi rst purpose - built cruise “ mega ship, ” Sovereign of the Seas, which carried 2,250 passengers. 10 Carnival answered in 1990 with the brand ’ s own mega ship, the Fantasy, the fi rst of eight sister ships, each carrying 2,052 guests and noted for their six - deck - high, neon - trimmed grand atriums and spiral water slides on the pool deck — both signature Carnival elements. Carnival launched the next volley in 1996 with Carnival Destiny, the fi rst 100,000 - ton cruise ship, which carried 2,642 guests (although it often sailed with 3,000) and featured one of the largest casinos and spa and fi tness centers at sea. In 1999, though, RCI trumped the fi eld by launching the 137,000 - ton, 3,114 - passenger Voyager of the Seas, the fi rst of fi ve ships in the Voyager class. Voyager of the Seas featured amenities such as an ice - skating rink, inline - skating track, a basketball court, a mini - golf course, and a rock - climbing wall that traversed the back of the ship ’ s huge funnel. The latter feature became a signature element for RCI, one that cruisers and travel agents associated with the brand, and that was later added to all the ships in its fl eet. RCI also leveraged the design attributes of the new ships in the award - winning “ Get Out There ”promotions campaign launched in 2000. Featuring the tribal beats of the Iggy Pop song “ Lust for Life, ”fast - paced commercials showed passengers climbing, running, skating, kayaking — but hardly cruising. The campaign was intended to reposition the brand by targeting vacationers who had an “ explorer ”mindset and by focusing on active and adventurous dimensions of the experience. 11 In June 2006, RCI planned to up the stakes again by launching the 158,000 - ton, 3,600 - passenger Freedom of the Seas, featuring an “ aqua environment ”on the top deck of the ship with a sports pool, a family water playground (with fountains, water cannons, a lazy river, and a waterfall), a wave pool for surfi ng, and an adults - only swimming area with hot tubs suspended more than 100 feet above the sea. 12 Competition among cruise lines involved far more than building bigger ships. Brands jockeyed for position in the consumers ’(and travel agents ’ ) perceptual space. For example, Carnival continued to emphasize its Fun Ships positioning strategy, while RCI attempted to position as a more sophisticated product. A former RCI executive drew the analogy that the brand was in the “ wine and cheese ” category, whereas Carnival was in the “ beer and pretzels ”category. 13 RCI ’ s ship d é cor and overall atmosphere was described as more tasteful than Carnival ’ s glitzy environment. Critics noted though, that with the Voyager ships ( “ rather like a mall with a ship built around it ” ), RCI and Carnival had become similar 14 (see Exhibit 2 ). Cruise brands also stepped up the competition with new products and services. For example, Princess Cruises ’ Caribbean Princess sailed in April 2004 with a “ Movies Under the Stars ”program — the industry ’ s fi rst outdoor theater, with a poolside, 300 - square - foot screen. (A Princess executive suggested: “ This is our rock - climbing wall. ” 15) Just one year later, Carnival answered with “ Carnival ’ s Seaside Theatre ”on the Carnival Liberty . 16 NCL broke from the conventional big - ship dining model

446 CASES Exhibit 2: Cruise Ship Product Comparison — Carnival and Royal Caribbean Carnival Liberty RCI Mariner of the Seas Year Built: 2005 2003 Tonnage (GRT): 110,000 142,000 Pax (basis 2): 2,974 3,114 Max Pax (inc. Uppers): 3,700 3,835 Passenger Decks: 13 15 Number of Crew: 1,150 1,185 Offi cers ’Nationality: Italian Norwegian Cruise/Hotel Staff Nationality: International International Entertainment Bars/Lounges, Casino, Disco/ Nightclub, Card Room, Game Arcade, Movies Bars/Lounges, Casino, Disco/ Nightclub, Card Room, Game Arcade, Movies Spa, Wellness, Fitness Pool, Full - Service Spa, Sauna, Steam Room, Jacuzzi / Whirlpool, Group Fitness Classes, Weight Machines, Free Weights, Cardio Equipment, Putting Greens, Jogging Track, Volleyball, Shuffl eboard, Ping - Pong, Fitness Evaluation, Personal Trainer Pool, Full - Service Spa, Sauna, Jacuzzi / Whirlpool, Group Fitness Classes, Weight Machines, Free Weights, Cardio Equipment, Mini Golf, Basketball, Jogging Track, Shuffl eboard, Scuba Instructions, Golf Simulator, Ping - Pong, Rock Climbing, Fitness Evaluation, Personal Trainer Children/Teens Dedicated Children ’ s Center, Outdoor Children ’ s Play Area, Dedicated Teen Center, Teen Programs, Children ’ s Pool, Youth Counselor Staff, Babysitters Available Dedicated Children ’ s Center, Outdoor Children ’ s Play Area, Dedicated Teen Center, Teen Programs, Children ’ s Pool, Youth Counselor Staff, Babysitters Available Other Facilities/Services Elevators, ATM, Beauty Salon, Duty - free Shops, Photo - Processing Shop, Tuxedo Rental, Dry Cleaning/ Laundry, Self - Service Laundromat, Concierge Desk, Infi rmary/Medical Center, Safe Deposit Boxes Elevators, ATM, Beauty Salon, Duty - free Shops, Photo - Processing Shop, Dry Cleaning/Laundry, Concierge Desk, Infi rmary/Medical Center, Safe Deposit Boxes, Business Services Source: Cruise Lines International Association, Cruise/Ships, available at: www.cruising.org/CruiseLines

CASE 1 THE FUN SHIP EXPERIENCE AT CARNIVAL CRUISE LINES 447 in 2000 by introducing the “ revolutionary ”Freestyle Cruising concept, 17 which featured open seating in its ships ’dining rooms. Instead of the traditional requirement that guests choose a dining time, Freestyle Cruising emulated land - based resorts by permitting guests to dine when and with whom they wanted. One year later, Carnival answered with Total Choice Dining, which retained traditional fi xed - seating dining in the formal restaurants, but offered a choice of four rather than two dining times. This program was complemented by an array of alternative dining venues, such as specialty supper clubs that required a reservation and fee, sushi bars, and 24 - hour pizzerias. 18 Carnival executives believed that changes in the cruise product and cruise markets had blurred the distinction between brands competing in the contemporary and premium market segments. Research by industry analysts at Bear Stearns supported this view, showing that increasing similarity across brands in the design of new ships and in the services offered had made it diffi cult for consumers to discern differences between cruise lines. 19 As companies like Carnival and RCI continued to innovate to improve both product and service, and as premium lines like Princess and Celebrity pursued the upper end of the mass market by offering more casual vacation experiences, the markets were converging, as were customers ’brand perceptions. CARNIVAL ’ S FUN SHIP STRATEGY Carnival Cruise Lines ’early marketing strategy grew out of necessity. The age of the Mardi Gras made low fares necessary. At that time, Carnival did not have a national advertising campaign — in fact, no cruise line did. While the onboard product was limited during the lean start - up years, so were customers ’expectations, because the cruise product was still relatively new. Bob Dickinson illustrated: Years ago, the ship ’ s gym was small and hidden in the bowels of the ship below the water line. You could barely fi nd it. But nobody cared back then. If you did a vegetarian selection 30 years ago, nobody would have touched it. They wanted meat and potatoes. Everything today is much more elaborate — the fi tness centers, the menus, the activities. If people want it, we ’ ll give it to them. When Dickinson came on board as Carnival ’ s vice president of sales and marketing in 1973, he set in motion the Fun Ships concept that would serve as the brand ’ s cornerstone. Dickinson adopted the Fun Ships moniker for Carnival after seeing a brochure for the Boheme, which Commodore Cruise Lines promoted as the “ Happy Ship. ”Cruise marketing at the time tended to focus on destinations, rather than the ships themselves, and promoted cruising as a high - brow, luxurious experience. Dickinson reasoned that fun was what people really sought in a vacation. By promoting the Mardi Gras as a fun - ship experience, Carnival would send a message that was unique in the cruise industry. 20 Perhaps more important, by anchoring the brand with the Fun Ships positioning strategy, Carnival built an unmatched value proposition on the promise of fun — a promise that would direct the company ’ s marketing strategy for at least the next 30 years. In contrast to the typical cruise customers, a relatively young, middle - class clientele was attracted to the Fun Ships theme. Carnival offered an entertainment experience, with the industry ’ s fi rst full casinos, live music, discos, and wild daytime activities — including belly - fl op, beer - chugging, and hairy - chest contests — that were a complete change from the image of cruising as shuffl eboard and afternoon tea.

448 CASES Carnival ’ s hardware, in particular the new ships built in the 1980s, were visual bonanzas, with bright colors and neon lighting unlike anything before seen in a cruise ship (shocking to some ship traditionalists). Carnival pursued fi rst - time cruisers as part of a concerted market - development strategy. To demystify cruising for the uninitiated, Carnival crafted marketing communications that articulated the Fun Ships image by showing the ships and their entertainment architecture, as well as by featuring guests dining, dancing, playing, swimming, sunning, socializing — having fun — at an affordable price. At the heart of the message was new company spokesperson, Kathie Lee Gifford, singing, “ In the morning, in the evening, Carnival ’ s got the fun . . . . ”Carnival ’ s commercials starring Gifford in 1984 were the fi rst time a cruise line advertised on network television. The Carnival – Gifford relationship continued well into the mid - 1990s before giving way to ad campaigns that featured the Beach Boys ’ tune “ Fun, Fun, Fun ”and the Cyndi Lauper hit “ Girls Just Want to Have Fun. ”The marketing objective remained the same, however: to introduce vacationers to cruising and reinforce the image of Carnival as the essence of fun. “ Today ’ s Carnival, ”a label that company executives used to underscore changes in the brand, was different in form, but not necessarily direction, than the Carnival of the past. Carnival ’ s pricing continued to lead the industry, with an average price point per person per day of about $ 175, compared to an industry average of $ 235. 21 The ships and onboard product were improved. 22 Driving this change, according to Bob Dickinson, was Carnival ’ s vision: “ to consistently provide quality cruise vacations that exceed the expectations of our guests. ”However, the marketing department was still charged with not overpromising. Instead, Carnival ’ s marketing communications would create reasonable guest expectations — just high enough for them to buy; the product was then designed to deliver more. Dickinson estimated that only 16 percent of North Americans had ever taken a cruise, leaving a substantial untapped market of prospective customers. As such, Carnival continued to direct its marketing efforts at stimulating primary demand for cruising by converting land vacationers to sea vacationers. Carnival estimated that half of its guests were fi rst - time cruisers, and one - third of repeat cruisers had never sailed Carnival before. Dickinson saw this segment of repeaters as the low - hanging fruit. Because these customers understood cruising and loved the experience, it was only necessary to talk to them about the brand. The challenge, though, was reaching these customers and with the right message. Terry Thornton, vice president of marketing planning, explained: We don ’ t touch the customer or control the selling experience directly in most sales transactions — 80 - percent - plus come through travel agents. We still suffer from the perceptions of when our hardware was not so good and when our product had inconsistencies. Sometimes travel agents don ’ t sell with enough frequency to really know the difference, or haven ’ t been aboard one of our ships in years, even though we offer many opportunities for them to sample the product. Our challenge really is to get a little more credit for the product we ’ re providing. Carnival had a large fi eld - sales force who called on travel agents, as well as a growing direct - sales effort that included an inbound channel (Carnival.com and 1 - 800 - Carnival) and outbound channel of Personal Vacation Planners (PVPs) who followed up on leads obtained through the inbound channel. PVPs called or e - mailed leads to promote cruise sailings that Carnival ’ s revenue managers identifi ed as having soft demand. However, some people at Carnival worried that these “ One - Day Only ”sales sent the wrong message. Noted one manager: We are struggling with how we want to present the brand. This is a lovely vacation, and even though it ’ s an entry - level product for the cruise industry, it is still expensive relative to most vacation products,

CASE 1 THE FUN SHIP EXPERIENCE AT CARNIVAL CRUISE LINES 449 so we don ’ t want customers to perceive our direct marketing as this used - car sales approach. We have been travel agent focused for so long. The direct access is so new to us. Carnival was careful not to be too aggressive in its direct - sales efforts, especially in marketing to past guests who originally booked through agents. Still, the relationship between Carnival and travel agents had turbulent moments. Some agents, in particular the midsized Internet agencies, began to rebate part of their commission to customers to gain a price advantage in the market — a practice that led to channel confl ict. Carnival responded with an advertised - price policy, which meant agents could no longer promote a price lower than Carnival ’ s advertised price. Brenda Yester, vice president of revenue management, commented: “ It just became dysfunctional and was degrading the brand. There has to be price integrity in the market. Consumers need to shop for a Carnival cruise and not worry about where they ’ re buying it. ”Bob Dickinson added: “ Many travel agents are just order takers; they are driven by price. ” Carnival ’ s target market was broad — consumers 25 to 54 years old who made $ 40,000 or more per year. The average age of Carnival ’ s customer was 46 — only a few years younger than the industry average. 23 Carnival ’ s marketers believed that the product was popular with families, honeymooners, singles, and seniors. Bob Dickinson argued that demographic segmentation was irrelevant for Carnival, because there was no prototypical Carnival customer, except that person who cruised to have fun: “ If you have a vacation destination that has a wide bandwidth of choice, you ’ re casting a bigger net, and you ’ re going to get more fi sh. ” CARNIVAL CRUISE LINES ’EVOLUTION Maurice Zarmati, vice president of sales and one of the original employees of Carnival Cruise Lines, had seen the brand evolve considerably: We started Carnival with one old ship. We ’ ve upgraded the product tremendously over the years. For example, we serve lobsters on all the ships at least once during a cruise. We put in alternative bistro dining, supper clubs, and complementary 24 - hour cabin service. Guests can buy premium wine by the glass. Recently, we put duvets in the cabins, which would have been unheard of 10 years ago. The quality of food and service, in our estimation, is far better than our competitors. Of course, 15 years ago, our product was not at the standard that it is today … . Carnival executives pointed to inconsistent product quality as one of the blemishes on the brand in the past. Initially, secondhand ships were the issue, but even with new ships, service delivery and food quality were variable. It wasn ’ t until the mid - 1990s that Carnival began to focus on people and processes. The “ Carnival College ”in - house training program was started to offer crew the opportunity to enhance language and other skills. Hospitality training was also introduced to encourage crew to treat cruisers as “ guests, ”not passengers. Terry Thornton provided these examples: We ’ ve tried to focus training on the small things, like greeting guests. If a guest passes a crew member, the guest should be greeted. He should hear, “ Good morning, how are you, how was your day at shore, ”things like that. When we fi rst started this training, we measured how many greetings or

450 CASES similar recognition was offered out of all possible interactions, and it was less than 20 percent. Today, it ’ s 65 to 70 percent. Another simple service idea, which was implemented fl eet - wide in 2002, involved placing mirrors in the crew areas near the exit doors, along with a sign to “ Share a Smile. ”The idea was to remind crew to smile when interacting with guests. Thornton noted: “ That ’ s what people want today — to feel comfortable and to be recognized. ” In 2005, Carnival offered its fi rst customer - loyalty program in the form of a guest - recognition card. When guests embarked on a Carnival cruise, they received a “ Sail &Sign ”card that was identifi cation for boarding the ship, a cabin key, and a credit card for purchasing almost anything onboard. The new program gave repeat Carnival cruisers a gold Sail &Sign card that would offer a way for crew members to recognize guests for their patronage and to offer more personalized attention. Bob Dickinson believed that such recognition changed the dynamics of the guest – crew interaction and provided huge “ psychic income ” — an “ emotional stroke ”for the guest and at little cost. Terry Thornton added: The strategy is to push on the product, to continually improve it, because as people come back from their cruises, word - of - mouth promotion is getting stronger and stronger. People really are enjoying the product. Their satisfaction levels are high. They tell their travel agents and tell their friends. Carnival executives believed that brand perceptions still lagged reality, despite their efforts to persuade consumers and travel agents that “ Today ’ s Carnival ”was different than the all - out party Carnival of the past. Lingering misperceptions were partly a function of the underselling approach of brand promotion. Vicki Freed, senior vice president of sales and marketing, joined the Carnival sales team in 1978: We used to have travel agents complain, “ How come Carnival doesn ’ t have shampoo in the bathrooms? ”This amenity would have been a million - dollar upgrade. We would argue that people come with their own shampoo, but the agents would say, “ Go to any hotel and you ’ ll fi nd complementary shampoo! ”Well, they were right. The customer has changed — there ’ s a trading - up phenomenon. Now we provide brand - name amenities, and the consumer wants brand names now. Carnival began to investigate co - branding opportunities for the onboard product, to enhance both the guest experience and Carnival ’ s image. Although Carnival ’ s senior management knew that the cruise line would remain a mass - market product, there was a desire to refi ne the market — to “ push the needle up ”to a more discerning consumer. Bob Dickinson remarked: Just as Las Vegas or Orlando have redefi ned themselves, we ’ ve needed to do so, too. In the early days, in product delivery and in perception, we were like Daytona Beach, Spring Break at sea: a lot of kids, unchaperoned, anything goes, beer - drinking contests, things like that. By the mid - 1990s, we reengineered all that. We were the fi rst company in the cruise business to change the drinking age from 18 to 21. We also required anyone under the age of 21 to share a cabin with someone who was at least 25. Those two actions, coupled with strengthening of our Camp Carnival children ’ s program, created the same average age of passenger on Carnival, but the 19 - year - old was replaced with a 7 - year - old and an early - thirties set of parents. That was a much deeper market. By design, the Carnival experience was casual and unintimidating rather than upscale. Although the ships had sommeliers who offered expensive wines, Carnival sold far more beer, much of it poolside at $ 14 for a bucket of four bottles. Though some critics said that the ships were garish, the d é cor

CASE 1 THE FUN SHIP EXPERIENCE AT CARNIVAL CRUISE LINES 451 was designed to be “ different than people would ever see at home. ”Maintaining consistency of the brand message was considered vital to Carnival ’ s success. Terry Thornton explained: It ’ s often misunderstood why we are who we are. And we battle ourselves sometimes. We look at our competitors and it ’ s easy to be fooled into thinking we should be more like them. And then we say, “ That ’ s not who we are. That ’ s not what got us here. That ’ s not what our guests like. ” Bob Dickinson elaborated: As we build our ships and as we deal with our customers, we try very hard not to send mixed messages. We try to never use the word gourmet , though we think our food is as good as or better than anyone else in our market, including companies on the premium end. Still, we ’ re trying not to forget our roots. Carnival sought to anticipate what guests wanted in their cruise experience. Even as some things remained constant — the entertainment, casino gaming, dining choices, nightclubs, and bars — Carnival also adapted to trends, offering cigar bars, karaoke, and even airbrush tattoos. In 2005, Carnival introduced the Presidential Wine Club and hosted its fi rst Wine Club cruise later in the year (Dickinson is a noted wine collector and connoisseur). The search for new Fun Ships ideas was an ongoing process. Still, there was the sense within the industry that RCI had grabbed Carnival ’ s wind by launching its adventure - theme Voyager ships. Commented Brenda Yester: Royal Caribbean has had a great run with the “ Get Out There ”campaign. But it attracts a certain kind of person who may not be attracted to Carnival. The rock - climbing wall is their icon — that ’ s their brand. Our icon is fun — that ’ s our brand. Carnival was not daunted, however, as it continued to promote its augmented fun image with the biggest media buy in the company ’ s history. With the slogan “ Million Ways to Have Fun, ”the 2005 campaign was intended to build the brand by showcasing product enhancements. 24 New print ads targeted such publications as Travel & Leisure, Cond éNast Traveler, Vanity Fair, People , and Oprah , marking Carnival ’ s fi rst large - scale push into consumer magazines. Four television commercials, featuring Bobby Darin ’ s recording of “ Somewhere Beyond the Sea, ”coincided with the print campaign, running on The West Wing, The O.C., Law &Order , and The Amazing Race , as well as on such cable channels as VH1, A & E, The Travel Channel, and the Food Network. The television commercials were softer, subtler, slower - paced, and more sophisticated than past Carnival ads. For example, one spot showed an older couple having breakfast on the balcony, playing golf on shore, enjoying a massage in the spa, and dancing with servers in the dining room. In another spot, a young couple jogged on the deck of a Fun Ship, worked out in the fi tness center, fl ew on elevated cables during an adventurous canopy tour, and sampled a glass of wine at the bar. Another spot featured a family and child gliding down a Carnival waterslide and a cabin steward placing a “ towel animal ”on a bed. Each spot closed with a male voice - over: “ On a Carnival cruise, at any one moment, there are a million ways to have fun. Carnival. The Fun Ships. ”Vicki Freed explained the strategy behind the new campaign: Our other commercials didn ’ t really sell Carnival — they sold the category. We ’ ve always taken the high road at Carnival: We ’ ll sell the contemporary category and get our fair share because we ’ re the big brand. But now we want to sell Today ’ s Carnival. And that ’ s what the new commercials hopefully convey — a little more upscale, the food, the service. It ’ s important for us to show that we ’ re not the Kmart of the Caribbean!

452 CASES Carnival ’ s vice president of marketing services, Christine Arnholt, who was the primary contact with the advertising agency that created the campaign, added: One of the single most diffi cult things to do is change perception. Our product has changed so much! And we don ’ t get credit for that in the marketplace. We ’ ve been incredibly successful over the years, but from a brand standpoint, there are still these lingering perceptions. Some people hear “ Carnival ”and think, oh, that ’ s the party ships with all the 20 - year - olds. How do you change these perceptions? After all, we are the Fun Ships. We ’ ll always be the Fun Ships. Underlying these concerns about brand perceptions are more fundamental questions: Who are Carnival ’ s core guests, what do they want in a Fun Ship experience, and how should this customer information infl uence brand strategy in the future?

CASE 2 BUILDING CAPABILITIES AT THE WESTWARD HILTON S itting in the fashionable Caf éLupe, an upscale restaurant owned by the company Peter Green worked for, were the company ’ s owners, investors, and top corporate personnel. Hiller Hotels, a wholly owned subsidiary of the parent Hiller Enterprises, was headquartered in Phoenix, Arizona, with a portfolio of more than a dozen midscale and upscale hotels and three trendy, upscale restaurants. The hotel group was gathered for one of its irregular, informal celebrations of success. As Green, the executive vice president of operations, raised his glass to join in the merriment, he wondered whether his facial expression gave away the feelings he was suppressing. Green was torn — earlier in the day this same group discussed the possibility that the Westward Hilton and Towers, the only property in the Hiller portfolio he had personally ever run as a general manager, might be sold. An inquiry from a REIT (real estate investment trust 1 ) as to the property ’ s availability had prompted the discussion. The Hiller Hotels subsidiary owned and managed all of its hotels, branding them with a variety of different midpriced and upper - priced hotel franchisers. The portfolio had grown over a 12 - year period to around a dozen properties at any given time. The number wasn ’ t stable because the corporate strategy was to take advantage of opportunities to buy undervalued, underperforming properties and turn them around. Each hotel was operated as a fully self - suffi cient operation. When the opportunity to sell a property at a healthy profi t presented itself, Hiller ’ s management team had, in the past, generally taken advantage of the market opportunity. With the exception of a second Phoenix property managed as an independent (unbranded) hotel and acquired in 2006 to be the group ’ s fl agship, no property was supposed to be untouchable. Perhaps coincidentally, since Green had moved into his corporate position back in 2004, only one Hiller property had been sold. The portfolio had remained relatively stable, and its owners or investors had never broached selling the Westward. The investors were reaping healthy benefi ts from the portfolio. Green knew that Karen Connor, whose money was behind Hiller Hotels, felt as strongly about the Westward and the people who worked there as he did. Connor owned the largest share of Hiller Hotels, as well as a major share of the parent company. Her visibility in the local community as a patron of the arts and civic leader was legendary. While Connor was attached to the Westward, Green also understood that it was impossible for every decision to equally benefi t owners, customers, and employees. He knew there were times when decisions would have an obvious ill effect on one group of stakeholders. Was the possible sale of the Westward Hotel one of those decisions? Was he too attached to this particular hotel because he had been its general manager when Hiller bought it out of bankruptcy at the end of 2000? Green ’ s thoughts drifted back nearly 10 years to the year before he arrived in Phoenix. Written by Cathy A. Enz of Cornell University, David L. Corsun of the University of Denver, and Linda Canina of Cornell University. The case study is adapted from a case written by the authors and published in Case Research Journal. The names of the organization and its members have been disguised at the request of the owners and investors. The affi liation with the Hilton Brand was not altered. CASE 2 BUILDING CAPABILITIES AT THE WESTWARD HILTON

454 CASES PROJECT PERSPECTIVE Peter Green grew up in the hospitality industry. He worked as a teen in his family ’ s restaurant in Buffalo, New York. Through his twenties and thirties, Green used his restaurant experience to move into the hotel side of the industry, starting out in the food and beverage area. Over the course of about 20 years, he worked his way across the eastern half of the country, gaining the experience required to be a hotel general manager (GM). Prior to joining Hiller, Green had more than fi ve years of experience as a GM. When Hiller hired Green in 2000, he was brought on in a consulting role. Specifi cally, Green did project work for Hiller in the Midwest, solving previously identifi ed business problems. Project work gave him an opportunity to view an operation from a very different vantage point from when he was a GM. Being removed from the day - to - day operation, Green was able to see aspects of the business that might be less clear to the manager, who was occupied with running the entire operation. The short - term nature of his project assignments and their focus on specifi c problems with everything else removed from consideration allowed Green the liberty of a broader, big - picture perspective. He attributed two previous projects and experiences to radically shaping his feelings about the business when he entered the Westward. The fi rst project was a small Chicago hotel in which the employees were considering unionization. When Green arrived, he found an all - white management staff and an almost all - black employee population and no interaction between the two groups. On his fi rst visit, he went to the cafeteria and listened to employees. Through informal conversations, he learned which issues bothered the employees. The problems were mostly small things, like the quality of employee meals, that could easily be remedied. However, the senior management of the hotel was unaware of these employee issues, because they had separated themselves from employees and formed a tightly knit group. The management never ate in the employee cafeteria and spent very little time in communication with the staff. Green did not make radical changes at this hotel, but he did listen carefully to the employees and spent time with them. In describing this experience, Green said it “ taught me that managers devalue others when they overvalue themselves. I discovered the importance of creating a work environment that celebrates, nurtures, and values people. It is important to create a business environment in which every job and every employee is treated with dignity and respect. People want to care, but this work environment forced the workers to hide themselves. ” The impact the work environment has on the individual came home to Green one evening when he drove past a schoolyard and spotted one of the hotel ’ s employees playing basketball. As he watched the game, he noticed that this worker, whom Green knew to be slow, uncooperative, and lacking initiative at work, was leading a group of his friends in a fast - paced and cooperative team effort. Green wondered how this person could be so different outside the workplace. Perhaps, he thought, it ’ s because the work environment doesn ’ t give the worker permission to be himself. This thought stuck with Green. Before he left this hotel several months later, new management had been brought in, and the union drive was defeated by a vote of 72 – 2. Green elected to move on rather than serve as the new general manager, although the job was offered to him. Green ’ s second experience taught him to truly value the guests ’perspective and experiences. Living for 90 days in a hotel plagued with quality problems, Green was a guest of sorts himself, and he spoke with other guests daily. During this assignment, he rediscovered what he knew from childhood about committing to the satisfaction of the guest: “ I grew up in the restaurant business, and my

CASE 2 BUILDING CAPABILITIES AT THE WESTWARD HILTON 455 parents taught me to be close to the customer. It seems that when you become a manager, you start to focus on how to manage versus how to live a commitment to customers. ”Rather than viewing guest concerns as problems, he discovered through interaction with customers that one could trust their experiences and get something valuable and satisfying from responding to their concerns. He also noticed that most customers were present in the hotel at very specifi c times in the morning and evening, and these were the times it was most important for the manager to be available to talk with guests. An everyday commitment to listening to guests was one powerful way of committing to their satisfaction. These projects gave Green a new way of thinking and feeling about the hotel business. He began to feel his way toward a new management philosophy, but the quality of his personal life was suffering. After a year of living on the road and away from his family, Green wanted a stable position. However, to become a general manager again was not very appealing to him. As a GM, he had grown tired of the frustrations that came with the job. He was tired of the long hours, the constant people problems, and the cyclical nature of the business. In bad times, even when he worked very hard, the overleveraged and overbuilt industry had conspired to make him feel bad about his performance. The main people problems were high turnover and a lack of commitment from staff, who were not invested in what they were doing. He had felt frustration at his inability to get employees excited or committed in the past. Green learned a great deal from the project work that occupied his time, and he also knew he needed to make a change. His children and his wife needed him to be more present in their lives too. ARRIVING AT THE WESTWARD The Westward Hilton was bought out of bankruptcy when the previous owner was forced to sell the property. For nearly fi ve years, the hotel had been operating at a loss, and the property and the people who worked in it were depressed. The physical plant was in bad shape, and no capital had been devoted to renovation and upkeep. When Hiller purchased the hotel, Green was given the opportunity to become the Westward ’ s general manager. Mostly because of his desire to settle in one place for a while, he took the assignment. Green also thought he might take advantage of this opportunity to put his evolving management philosophy into practice. During his fi rst visit to the hotel — prior to becoming GM — none of the managers greeted him. Green was placed in a Towers level suite (one of the three fl oors of rooms with a private concierge and other special services) with “ a lot of stuff. ”He got chocolates, cheese, and a vast array of amenities, but not a note or phone call from the management. His fi rst impression was that the management of the hotel was not sensitive to what the guest might want, but had automatically assumed that more amenities in the sleeping room would satisfy the customer. “ They were thinking more and more stuff rather than sincere and genuine care. ”Green observed that the Westward ’ s management had a traditional command - and - control style. In addition, their beliefs statement was borrowed from Ritz Carlton Hotels, a chain of highly regarded luxury hotels (see Exhibit 1 ). In Green ’ s opinion, the hotel was trying to be something it was not, and the beliefs were not genuine. Green arrived at the Westward with a deep belief that all hotel companies and their managers have a moral obligation to make the work experience a positive one. Throughout his career, he had

456 CASES experienced the dark side of the hotel business, in which generations of negative conditioning and abusive behaviors justifi ed managers ’willingness to undervalue the people who clean rooms and sweep fl oors for a living. The managers in Chicago reminded him by their bad example that he must break down these beliefs. Deep inside, after years of experience in the business, he was convinced that caring about employees could be profi table. He said, “ I didn ’ t arrive at the Westward with a strategic plan, just a new feeling. My project work taught me to get close to the customer and value the employees. I was determined to start by making a real emotional commitment to the hotel. ” THE WESTWARD HILTON AND TOWERS The Westward Hilton was a 13 - story, full - service hotel built in1992. The hotel tower and attached lobby sat on 8.5 acres on a city block at the southeast corner of Camelback Drive and Northern Avenue in Central Phoenix. The hotel contained approximately 151,000 square feet, occupied by 300 guest rooms, board and conference rooms, executive offi ces, a fi tness center, and the main lobby area. The exterior of the hotel was refl ective glass over a structural steel frame. The main lobby area was situated in a single - story, attached building that included the main entrance to the hotel, reception desk, guest services area, a lobby lounge, and a gift shop. After several years of Hiller ’ s ownership, and substantial renovations, the hotel had 13,000 square feet of fl exible meeting space, including 14 salons and three ballrooms. The gift shop was leased month - to - month to a third party. The hotel also included a freestanding 8,000 - square - foot restaurant. The interior fi nish of the lobby area primarily consisted of inlaid terrazzo pavers, a combination of painted drywall and vinyl wall coverings, and recessed and track incandescent lighting. A landscaped courtyard led to the Hilton ’ s outdoor pool, hot tub, and sun deck. Directly off the lobby was a bright and airy Southwestern - style atrium fi nished in rich earth tones. Each guest room included a full bath, a king or two queen beds, a chaise lounge and ottoman, a work desk, an armoire, one or two nightstands, and three or four lamps. The standard guest rooms featured 24 - hour in - room dining, free cable channels with HBO, a coffee/tea maker, minibar, alarm The Credo The Ritz - Carlton Hotel is a place where the genuine care and comfort of our guests is our highest mission. We pledge to provide the fi nest personal service and facilities for our guests who will always enjoy a warm, relaxed, yet refi ned ambiance. The Ritz - Carlton experience enlivens the senses, instills well - being, and fulfi lls even the unexpressed wishes and needs of our guests. Motto We are Ladies and Gentlemen serving Ladies and Gentlemen. Source: Ritz-Carlton information that is printed by corporate headquarters on a small, laminated card that can be folded and placed in a wallet. Exhibit 1: The Ritz Carlton Gold Standards

CASE 2 BUILDING CAPABILITIES AT THE WESTWARD HILTON 457 clock radio, card key access, PC phone line, modem hookup, oversized desk, and complimentary newspaper. Executive business rooms also included a fax/copier machine, inkjet printer, VCR, two private phone lines with speakerphone, and a calculator. The top three Towers fl oors offered a complimentary Continental breakfast buffet every morning, hors d ’ oeuvres every evening, exclusive registration and checkout, business services, a cocktail honor bar, and video phone. Morning and evening maid service and nightly turndown service were also provided on these fl oors. THE VISION THING “ What does this hotel want to be? ”was a critical question for Green. He felt the previous management tried to make the hotel something it was not. But what was this hotel to become? This was clearly a critical question. By imitating the Malcolm Baldrige Award – winning Ritz Carlton Hotels ’beliefs, the previous management was not focused on how to position this hotel. For Green ’ s fi rst three or four months, during their meetings, the managers talked unendingly about the successful large convention hotel across the street. This hotel had a lounge and a constant fl ow of leisure and convention customers. The conversations all seemed to be variations of a “ Gee, if we were only like them ”theme. Finally, Green had enough. The turning point came in one staff meeting when he told his staff the following: Let ’ s not focus on what we are not. Focus on what we are. We don ’ t have to be that hotel. Let ’ s stop wishing we were that and start being this. Look, we are a small hotel — we don ’ t want lots of groups. We should be providing a different product and service to a different customer. Look at all the problems they have. It is a noisy hotel with long lines. Do we want that? No! We can become the number - one corporate FIT (frequent individual traveler) hotel in Phoenix. We are a small hotel, we can be warm and friendly, let ’ s use what we have and make it work. Stop focusing on them. Focus on what we are and what we can become. We are going to take the high - end guest, focus on the FIT through uncompromising superior quality and extraordinary service. We are going to actively listen to guests and employees, anticipate market needs, liberate ourselves from old ways of doing things, and provide a wonderful employee experience. The job of envisioning a new future for this hotel was made possible by years of capital investments and support from the new owners. Capital was needed to position the hotel above the competition. The repositioning would not have been possible if Hiller ’ s owners had not been willing to invest in fully renovating the hotel with a clean, modern, and comfortable look. Exhibit 2provides a summary of the capital improvement costs. The restaurant was redesigned and reconstructed in 2003, three years after the hotel ’ s purchase. The renovation was done at a cost of $ 2,200,000 (including furniture, fi xtures, and equipment). It was expanded from its original structure and leased to an independent restaurant group that raised the visibility and prestige of the food and beverage operation. Green believed the restaurant operation was a powerful tool in repositioning the hotel. The equal value and appreciation of the interests and needs of owners, customers, and employees was the foundation for the vision creation process, according to Green. Uninterrupted owner support,

458 CASES continued affi liation with a well - regarded hotel brand like Hilton, and management with a commitment to guest, employee, and owner satisfaction were essential. The vision emerged in discussion with the senior management staff, but was not written down initially. According to Green, it was a change in thinking, fi rst and foremost: We were going to become the best corporate hotel positioned at the top end, but I approached this vision by doing three things: living my values, constantly talking about our vision, and modeling the vision every day. The plan was shockingly devoid of systems or procedures. I felt it and was deeply into it. The hotel needed an identity in the minds of the employees, and my job was to bring a deep belief in what this hotel could become to these people. Leadership in my opinion is about believing so deeply that people don ’ t doubt. I was more a Civil War leader than a World War II general. My agenda? Focus and model, focus and model. I just did what seemed right at the time. Green ’ s vision of what the Westward aspired to become was the precursor to the formal corporate vision of Hiller Hotels and the foundation for the guiding principles that would follow. It was not until 2007, almost six years later and well into Green ’ s tenure as corporate executive vice president of operations, that he formally fashioned the set of guiding principles that explicitly conveyed the essence of Hiller Hotels and the Westward Hilton. The principles were taught companywide. Managers, upon completing their initial training and orientation, were given a daily planner with a 22 - page insert titled “ Our Daily Compass: Hiller Hotels, Inc. Guide to Leadership and Management. ” Among other things, including the corporate vision and mission, the insert included the following guiding principles: 1. Dignity — We value everyone equally and highly. 2. Values — We insist that values like honesty, trust, integrity, respect, and fairness determine our decisions. 3. Focus — We establish priorities and concentrate on doing the most important things fi rst. 4. Achievement — We all give our best effort to ensure team success. 5. Balance — We strive to maintain a balance among employees, customers, and owners. Back in 2001, Green also arrived at the simple statement, the friendliest place to visit. This was a vision that remained with him and came to guide all of the hotels in the portfolio. Green explained the meaning of the vision as follows: In the future, our customers and peers will say that we are the friendliest place to visit. The relationship between our employees and our guests should resemble that of the relationship between two Exhibit 2: Renovation and Capital Improvements Year Capital Improvement Costs 2002 $ 5,225,622 2003 $ 3,399,842 2004 $ 1,260,606

CASE 2 BUILDING CAPABILITIES AT THE WESTWARD HILTON 459 friends; this is the hospitality experience we wish to provide. We will achieve this vision when the customer experiences a total commitment from all of us to the friendliest customer service anywhere. The mission statement, which followed from the vision, was captured in the phrase “ Making people ’ s lives better through business. ”Green noted that: We will achieve our vision by making our employees ’ , customers ’ , and owners ’lives better. Employees ’lives are made better by treating them with dignity, rewarding and recognizing their contributions to our success, and providing a safe, secure, fl exible, and fun working environment. Customers ’ lives are made better by providing a safe environment, excellent service, friendliness, and that extra thoughtfulness that makes visiting the Westward like visiting a friend. Finally, we make our owners ’ lives better by ensuring that the hotel is a leader in return on investment, [a] positive infl uence on the local community, and successful on a long - term basis. We aspire to be a role model for other companies in the service industry: admired for the support we provide to our employees, the friendly experience we provide to our customers, and the exceptional rewards and satisfaction we provide to our owners. Green was determined that his vision would become more than the GM ’ s platitudes, neither acted on by subordinates nor lived by the executive in charge. He wanted to live his principles and pass them on to his management team to help guide their actions. It was his desire that all employees of the Westward share the vision, mission, and principles. He wanted to make being a part of the Westward Hilton a different work experience. For Green, the mutual success of owners and employees depended on the acceptance and practice of the vision. But Green knew that good practice required more than inspiration; it required good strategic thinking. STRATEGIC PLANNING “ What ’ s possible? ”is the question Green used to guide the strategic planning process. He insisted that the major issue for strategic thinking was to focus on what could be. “ Identifying and removing the barriers between what is and what ’ s possible ”is how he proceeded to develop the plan. Our strategic plan allowed us to dream, ponder, and wonder what could be. Most planning is from today forward in a process of increases over a fi ve - year period to get to a point. This is “ present - forward ”thinking. In this approach you rely on “ the plan ”and history to drive your thinking. In contrast, Green introduced a future - backward thinking approach in which one creates an almost impossible future position and determines what needs to be done to achieve this target. Our strategic planning forced us to change our operation by setting objectives that seemed impossible. By thinking about the future and backing into implementation, it was quite clear that we couldn ’ t get to what is possible by doing what we already were. Future - backward thinking forced the staff to rethink what they do. This approach could easily backfi re if failure to reach the target resulted in getting the crap kicked out of you. Trust was critical and made possible by having all targets and incentives at levels below the strategic plan. Green did not confuse strategic planning with making budget. There was no penalty for failure.

460 CASES Sure, there was tension. We wanted to create that. It ’ s okay if they felt like they failed. It ’ s not okay if they felt I felt like they failed. The difference is important. We seduced them into a future, but not at their expense. Green willingly admitted that he had no idea of how to get the hotel to the possible targets. “ All I knew is that we could only achieve these targets if we became more skilled and did things differently. ” Reports, forecasts, and analysis were the hallmarks of this strategic thinking system. In housekeeping, for example, daily labor costs were tracked, and scheduling of labor was carefully synchronized with forecasts. To produce loyalty and retention, revenue information was assembled on customer segments, and product/service offerings were bundled to provide a carefully targeted customer with the products she or he desired. Green did not believe in yield management, a system in which pricing is adjusted based on projected occupancy and proximity to the desired reservation date in order to fi ll the hotel. He believed in establishing relationships with guests and focusing on rates that were consistent and of high value. After setting a vision and defi ning the target guest, the Westward ’ s business mix changed with a decrease in group business and an increase in the business transient segment. Mini profi t - and - loss statements were created for each department so they could keep track of expenses as each day passed. Green believed that daily accountability versus monthly accountability was a key to enabling the staff to carefully and intelligently manage the business. CLOSE TO THE CUSTOMER Even fi ve years later, many employees remembered Green for his vigilance — standing in the lobby Monday through Friday from 7:00 a.m. to 9:00 a.m. when most customers entered or exited the hotel. During his ten - hour - a - week commitment to being close to the customer, he saw and solved problems. Green talked with guests and got a feel for what was and what was not working. If three or four guests mentioned they didn ’ t get a wake - up call, we could locate and solve that problem quickly. If people needed their bags carried in or employees needed a hand in performing a job, I was there to help. My job was to expedite, to help both employees and customers. Green accomplished two things by hanging out in the lobby: (1) he had the contact with the customer he so valued and believed in, and (2) he modeled the commitment to guest satisfaction. He also showed employees that he would and could do their jobs and that he was there to help them. I decided when I arrived at the Westward that I was willing to invest 10 hours of my 50 to 60 hours per week to contact with the guests. The key job of a manager is to lead, to set an example, and to focus on real problems and activities. Green ’ s actions were important, but getting others to live the vision required improving business practices too. He started by taking the customer comment card questions provided by the corporate staff of Hilton and using them somewhat differently. At the time, the typical approach in the industry

CASE 2 BUILDING CAPABILITIES AT THE WESTWARD HILTON 461 was to have customer comment cards in the sleeping rooms, and few customers ever responded. When customers did respond, the hotel or guest mailed the cards directly to the brand ’ s corporate headquarters, where the corporate staff provided a tracking service as part of the fees attached to brand affi liation. Problem issues were then identifi ed, and monthly or quarterly reports were passed back to the GM, management company, or owners of an individual hotel. General managers then chose to send a letter or call the dissatisfi ed customer and apologize or offer some form of service recovery. Some hotel chains responded from the corporate headquarters, and the individual hotels never received the comment card information. At the Westward, Green made small but signifi cant modifi cations in the existing system. First, customers were asked to complete the cards at checkout, substantially increasing the completed responses from 2 to 3 percent when he became GM to 75 percent of all guests. A core of 40 questions was put into 10 sets of four questions, with one set per comment card. The cards were randomly distributed so all 40 questions were responded to by multiple guests. Because they included only four questions, scored on a seven - point scale where 1 = poor and 7 = excellent, the guests completed the cards in 10 to 15 seconds while waiting for their folios to print. The cards were then entered and tracked through the property management system, and reports were created daily. The customer tracking report was provided to management, but also posted in the employee gathering places for all employees to view. A sample of the Daily Guest Comment Report is shown in Exhibit 3 . Daily huddles, or brief fi ve -to ten - minute meetings at the beginning or end of a shift, were used to share the survey results with employees. As Green noted: We had been doing the survey for some time, but didn ’ t realize the quantum improvement in the guest experience until we began sharing the guests ’feedback with the people who were actually doing the work. Once we started showing people the results of the survey, they started making changes on their own. The improved scores were a direct refl ection of team performance, and they all wanted to succeed. The sharing of information tapped into the employees ’basic desire to be whole and good. They wanted to fi ll the gap, and we did not need a program or process. It was magic. We gave people the information they needed to know, and they did what needed to be done. There was no structure or guide. Just a belief that you give people information and they will set about fi xing the problems. People love to close gaps. Evidence of our success lies in the data — 96 percent of the guests indicated their intent to return, and the repeat rate was 50 percent. VALUING OTHERS Green stated: Another strong, powerful part of our management philosophy was that you need to be willing to do what you ask of others. You can ’ t expect the people to care anymore than you do. People watch what you do. You lose ground if people can ’ t trust you. Green spent plenty of his time in the employee cafeteria and in the lobby with customers. These were lessons that his project days had brought home, and he put his learning to the test in his own

462 CASES Return Again as % Today ’s Total Score PTD Total Score 94.92% Goal Difference Critical Services OVERALL RESPONSIVENESS 6.36 6.48 6.50 (0.02) WILL RETURN AGAIN 6.54 6.64 6.50 0.14 RATE THIS HILTON OVERALL 6.48 6.26 6.5 (0.24) Friendliness RECEPTION STAFF FRIENDLINESS 6.57 6.51 6.50 0.01 DEPARTURE DESK FRIENDLINESS NA 6.75 6.50 0.25 LOBBY LOUNGE FRIENDLINESS 4.00 6.19 6.50 (0.31) OPERATOR FRIENDLINESS 6.50 6.48 6.50 (0.03) ROOM SERVICE FRIENDLINESS 7.00 6.60 6.50 0.10 BANQUET FRIENDLINESS NA 6.52 6.50 0.02 TTL 6.25 6.52 6.50 0.02 Exhibit 3: Guest Comment Daily Report Today ’ s Performance Metrics Period to Date (PTD) Performance TODAY ’ S % CARDS/W RM#S
45.6% PTD CHECK CUT
1401 TODAY ’ S CHECK OUT
68 PTD TOTAL CARDS
549 TODAY ’ S TOTAL CARDS
35 PTD % OF RETURN
39.2% TODAY ’ S % OF RETURN
51.5% PTD RIO CHARGES
23249 TODAY ’ S RIO CHARGES
1384 PTD RIO PER OCC RM $ 3.70 TODAY ’ S RIO PER OCC ROOM
$ 4.86

CASE 2 BUILDING CAPABILITIES AT THE WESTWARD HILTON 463 Cafe Tijera Restaurant DINING EXPERIENCE 6.00 5.96 6.50 (0.54) BREAKFAST F&B QUALITY NA 6.27 6.50 (0.23) BREAKFAST STAFF SERVICE 5.50 5.78 6.50 (0.72) DINNER STAFF SERVICE 6.00 6.10 6.50 (0.40) DINNER F&B SERVICE 6.67 6.00 6.50 (0.50) TTL 6.14 6.03 6.50 (0.47) Room Service PROMPT SERVICE 7.00 6.09 6.50 (0.41) FRIENDLY SERVICE 7.00 6.60 6.50 0.10 FOOD-BEVERAGE QUALITY 7.00 6.44 6.50 (0.06) OVERALL EXPERIENCE 5.83 6.18 6.50 (0.33) TTL 6.30 6.33 6.50 (0.17) Banquet Event PROMPT SERVICE 6.80 6.55 6.50 0.05 FRIENDLY SERVICE NA 6.52 6.50 0.02 FOOD-BEVERAGE QUALITY 6.00 6.27 6.50 (0.23) TTL 6.50 6.43 6.50 (0.07) Towers WILL RETURN AGAIN NA NA 6.50 NA TOWERS LOUNGE OVERALL NA 6.61 6.50 0.11 TTL NA 6.61 6.50 0.11

464 CASESReturn Again as % Today ’s Total Score PTD Total Score 94.92% Goal Difference Lobby Bar PROMPT SERVICE 6.33 6.37 6.50 (0.13) COMFORT & DÉCOR NA 6.11 6.50 (0.39) LOBBY STAFF FRIENDLINESS 4.00 6.19 6.50 (0.31) TTL 5.40 6.22 6.50 (0.28) Reception RECEPTION STAFF FRIENDLINESS 6.57 6.51 6.50 0.01 CHECK-IN EFFICIENCY 6.33 6.45 6.50 (0.05) DOOR/BELL STAFF ASSISTANCE NA 6.45 6.50 (0.05) TTL 6.50 6.47 6.50 (0.03) Departure FRONT DESK FRIENDLINESS NA 6.75 6.50 0.25 CHECK-OUT EFFICIENCY 7.00 6.77 6.50 0.27 BELL STAFF PROMPTNESS 6.75 6.52 6.50 0.02 TTL 6.80 6.68 6.50 0.18 Services TELE OPERATOR FRIENDLINESS 6.50 6.48 6.50 (0.03) MAIL-MESSAGE DELIVERY 6.00 6.46 6.50 (0.04) LAUNDRY-DRY CLEANING 7.00 6.70 6.50 0.20 Exhibit 3: Guest Comment Daily Report (Continued )

CASE 2 BUILDING CAPABILITIES AT THE WESTWARD HILTON 465 FITNESS CENTER 7.00 6.05 6.50 (0.45) TTL 6.50 6.41 6.50 (0.09) Accommodations ROOM CLEANLINESS 5.67 6.45 6.50 (0.05) ROOM COMFORT & DECOR 6.00 6.61 6.50 0.11 ROOM TV-RADIO QUALITY 6.33 6.09 6.50 (0.41) PRICE/VALUE OF ROOM 5.00 6.33 6.50 (0.17) TTL 5.75 6.39 6.50 (0.11) Bathroom BATHROOM CLEANLINESS 6.25 6.51 6.50 0.01 BATHROOM AMENITIES 7.00 6.48 6.50 (0.02) PUBLIC BATHROOM CLEANLINESS 6.00 6.38 6.50 (0.12) TTL 6.29 6.47 6.50 (0.03) Efficiency CHECK-IN EFFICIENCY 6.33 6.45 6.50 (0.05) CHECK-OUT EFFICIENCY 7.00 6.77 6.50 0.27 TTL 6.50 6.61 6.50 0.11 Total overall report w/o Rio 6.38 6.47 6.50 (0.03) Total overall report 6.37 6.44 6.50 (0.06) NA
Not Available

466 CASES Today’s Total Comment 1 2 3 4 5 6 7 Today’s Total Points Today’s Score PTD Total Points PTD Total Score PTD Total Comment EFFICIENT CHECK-IN 3 1 2 19 6.33 303.00 6.45 47 GUEST RM COMFORT & DÉCOR 3 1 1 1 18 6.00 304.00 6.61 46 EXP. OF ROOM FOR PRICE PAID 3 1 1 1 15 5.00 285.00 6.33 45 OVERALL DINING EXP. AT CAFE TIJERA 1 1 6 6.00 143.00 5.96 24 OVERALL RESPONSIVENESS TO NEEDS 11 1 4 6 70 6.36 1433.00 6.48 221 EFFICIENT ROOM SERVICE DELIVERY 1 1 7 7.00 201.00 6.09 33 TV PROG/RECEPTION QUALITY 3 2 1 19 6.33 286.00 6.09 47 BANQUET STAFF FRIENDLINESS 0 0 NA 137.00 6.52 21 RM SERVICE STAFF FRIENDLINESS 1 1 1 7 7.00 264.00 6.60 40 BATHROOM AMENITIES & TOWELS 1 1 7 7.00 311.00 6.48 48 EFFICIENT CHECK-OUT 1 1 7 7.00 318.00 6.77 47 GUEST ROOM CLEANLINESS 3 1 2 17 5.67 613.00 6.45 95 CAFE TIJERA DINNER STAFF SERVICE 1 1 6 6.00 177.00 6.10 29 Exhibit 3: Guest Comment Daily Report (Continued ) TOTAL OCCUPIED ROOMS
285 CALCARDS WITH ROOM #’s
31 TODAY’S CHECK OUT
68 TODAY’S TOTAL CARDS
35 TODAY’S % OF RETURN
51.37% TOTAL % CARDS W/RM #’s
45.59% TOTAL CAFE TIJERA CHANGES
1383.88

CASE 2 BUILDING CAPABILITIES AT THE WESTWARD HILTON 467 LOBBY LOUNGE STAFF FRIENDLINESS 2 1 8 4.00 198.00 6.19 32 GUEST ROOM BATH CLEANLINESS 4 3 1 25 6.25 332.00 6.51 51 ROOM SERVICE F&B QUALITY 2 2 14 7.00 218.00 6.44 34 LOBBY LOUNGE STAFF PROMPTNESS 3 2 1 19 6.33 242.00 6.37 38 RATE THIS HILTON ON OVERALL BASIS 21 3 5 13 136 6.48 1686.00 6.26 289 ARRIVAL-FRONT DESK FRIENDLINESS 7 1 6 46 6.57 384.00 6.51 59 OVERALL ROOM SERVICE EXPERIENCE 6 1 1 4 35 5.83 247.00 6.18 40 BANQUET STAFF RESPONSIVENESS 5 1 4 34 6.60 144.00 6.55 22 FITNESS CENTER 2 2 14 7.00 116.00 6.05 19 TELEPHONE OPERATOR FRIENDLINESS 6 1 1 4 39 6.50 259.00 6.48 40 MAIL/MESSAGE DELIVERY 4 1 2 1 24 6.00 181.00 6.46 28 CAFE TIJERA BREAKFAST F&B QUALITY 0 0 NA 163.00 6.27 26 DEPARTURE - FRONT DESK FRIENDLINESS 0 0 NA 297.00 6.75 44 PUBLIC BATHROOM CLEANLINESS 2 1 1 12 6.00 217.00 6.38 34 BANQUET F&B QUALITY 3 1 1 1 16 6.00 163.00 6.27 26 CAFE TIJERA BREAKFAST STAFF SERVICE 2 1 1 11 5.50 133.00 5.78 23 LAUNDRY/DRY CLEANING SERVICES 2 2 14 7.00 67.00 6.70 10 CAFE TIJERA DINNER F&B QUALITY 3 1 2 20 6.67 192.00 6.00 32 DEPARTURE-PROMPT BELLMAN ASSIST. 4 1 3 27 6.75 274.00 6.52 42 ARRIVAL-PROMPT BELLMAN ASSIST. 0 3 0 NA 213.00 6.45 33 LOBBY COMFORT & DÉCOR 0 0 NA 275.00 6.11 45 TOWERS LOUNGE OVERALL 0 0 NA 238.00 6.61 36 LIKELIHOOD YOU WILL RETURN 35 1 2 8 24 229 6.54 3641.00 6.64 548 TOTALS WITHOUT CAFE TIJERA 138 0 1 3 4 12 33 85 880 6.38 13846 6.47 2140 NA = Not Available

468 CASES hotel. Green ’ s human resource approach was deeply rooted in his belief in the dignity of all employees regardless of position or background. In describing his approach, he said: Human dignity was the most important principle for managing. My philosophy was that everyone must be treated with respect and given opportunities to learn and grow. A manager ’ s highest priority is to treat her or his employees with dignity. Employees, customers, and owners are all linked together, and excellent service and exceptional facilities are essential to compete, but something more is required to truly win. That something extra is the realization that keeping the customer is entirely in the hands of the employees. Each job and task and each person in the hotel is important and deserving of respect. I believe in nurturing the entrepreneurial spirit in everyone — whether the general manager, valet attendant, kitchen steward, or front desk. All people in the workplace perform better when treated with dignity. Green realized that in the Phoenix market, good service and quality facilities were a minimum expectation of customers. Excellent service was taken for granted, and the competition could deliver just as easily as the Westward could. Given this competitive environment, the question was, what could the Westward do to attract and retain customers over time? For Green, the answer was to build a strong system of rewards for the employees. “ The opportunity for advancement and bettering oneself must be available to each employee. Satisfi ed employees create satisfi ed guests, and satisfi ed guests return and remain loyal. ” The philosophy behind the design of the wage and benefi t system fi t with Green ’ s notion that dignity was important. He said: Wages had to be competitive and fair, but based on the position held, not seniority. We surveyed the market to determine what fair and competitive wage rates should be. By doing job analysis, we determined the worth of each position and then compensated on the worth of the job. I don ’ t believe in individual performance - based pay because I can ’ t fi gure out how to accurately measure individual performance. I ’ m better off not trying to reward performance when there is no good way to measure it. That ’ s why all merit pay was based on the performance of the hotel. Fifty percent of employee bonuses were tied to customer comment scores. In a simple and understandable bonus system, managers as well as hourly employees, both part - time and full - time, received quarterly bonuses based on customer scores, house profi t, and employee turnover. The details of the bonus plan are shown in Exhibit 4 . “ Performance appraisal was separate from salary review, ”Green said. “ Discussion of pay and performance together is confusing. Instead, we used performance appraisals to discuss future development and acknowledge contributions. ” SELECTION, ORIENTATION, AND TRAINING Green felt that getting the right people for the Westward culture was the key to implementing the hotel ’ s vision, but an intuitive and values - based process was required.

CASE 2 BUILDING CAPABILITIES AT THE WESTWARD HILTON 469 All employees are eligible unless they have had written disciplinary action during the quarter. You must be employed at the end of the quarter to be eligible for a bonus. The base salary on the attached schedule will be used, for any vacant positions, in determining bonuses. Employees hired during the quarter will receive a pro-rated bonus based on the following: Hired any time during the fi rst month of the quarter 66% Hired any time during the second month of the quarter 33% Hired any time during the last month of the quarter 0% “Bonus Quarters” are as follows: 1st Quarter December, January, February 2nd Quarter March, April, May 3rd Quarter June, July, August 4th Quarter September, October, November This is an optional program designed to reward employees for performance above the average. This program may be altered or discontinued at any time at the sole discretion of Hiller Hotels, Inc. A prerequisite to payment of any bonuses will be the achievement of at least the minimum/ maximum levels stated below for all three criteria as follows. Budgeted house profi t may be adjusted from published numbers to compensate for unusual or unbudgeted events or material time differences. Min/Max Employee turnover (annualized) 37.3% Customer comment card score 6.25 House profi t—1st quarter $1,380,000 2nd quarter $1,680,000 3rd quarter $1,440,000 4th quarter $1,500,000 Exhibit 4: Hiller Hotels Inc. Quarterly Bonus Program for the Westward Hilton

470 CASES Quarterly bonuses are based on the Hiller triangle as follows: Triangle Stakeholder Measurement Employee Employee turnover during the quarter, annualized Customer Customer comment card quarterly weighted average score Owner House profi t Year 6 Quarterly Bonus Program Westward Hilton—General Manager The criteria for receiving bonuses will be as follows: Level 1 Level 2 Level 3 Level 4 Employee turnover (annualized) 34.8% 32.3% 29.8% 27.3% Customer comment card score 6.30 6.35 6.40 6.45 House Profi t—1st quarter $1,430,000 $1,480,000 $1,530,000 $1,580,000 2nd quarter $1,730,000 $1,780,000 $1,830,000 $1,880,000 3rd quarter $1,490,000 $1,540,000 $1,590,000 $1,640,000 4th quarter $1,550,000 $1,600,000 $1,650,000 $1,700,000 The basis for calculation of the bonus will be a percentage of the employee’s quarterly base salary as follows: Level 1 Level 2 Level 3 Level 4 Employee turnover (annualized) 2.66% 5.66% 8.66% 11.66% Customer comment card score 2.66% 5.66% 8.66% 11.66% House profi t 2.66%+A 5.66%+A 8.66%+A 11.66%+A A. 3.25% of the fi rst $50,000 over minimum house profi t for the level achieved. Exhibit 4: (Continued ) We didn ’ t do anything special. We looked for fi t versus skill when we hired people. Did they share our values? After several years, we began to use a management committee consensus - process approach. Mostly, we tried to talk people out of coming to work for us. We were different, and if you couldn ’ t buy into our values, or you didn ’ t want to live with these principles, we didn ’ t want you. Our values were not negotiable. We didn ’ t have a formal orientation either. You picked up the values from

CASE 2 BUILDING CAPABILITIES AT THE WESTWARD HILTON 471 everyone in the hotel. It wasn ’ t necessary for top management to tell everyone — the people you worked with told you. We … saw training as a last resort. Training should be for helping people get over the hump once they ’ ve exhausted their own resources. If a person needed a skill, then they were provided training to handle that need. We were committed to fi lling the gaps, but we don ’ t have a formal training program. We supported cross - training to help build employee opportunities. ” In the last couple of years, Hiller invested in the Stephen Covey training on The Seven Habits of Highly Effective People to help managers and line employees live the company ’ s vision and were pleased with the results. Peter Green, along with a manager from each property, was certifi ed as a Covey trainer, so they were able to do this training in - house. COMMUNICATION Green expressed that “ providing information to people is a form of respect. Information not only fl ows to employees, but from them as well. ”All employees met once per quarter at a property - wide meeting to discuss and review quarterly results of the hotel. The meeting included a question - and - answer period and the distribution of quarterly bonuses. Department meetings were held once a month, and at daily huddles managers and line employees reviewed customer service issues. Surveys were used to obtain feedback from employees as well as guests and owners. Cross - department task forces were assembled and disassembled quickly to respond to special problems. Plus, the company communicated in many one - on - one, personal ways. Key to all of the information exchange was management ’ s emphasis on listening and praise. CULTURE In discussing the culture he and his team created at the Westward and were attempting to inculcate throughout Hiller, Green stated: We had a family environment and were dedicated to one another and to high levels of customer service. I believed that managers should fi gure out what employees value and value that. We started to do a back - to - school function for employees, because we knew how important the family and education was for our workers. We invited the families to the party and distributed school supplies. It made everyone feel good. We did a Christmas party too — focused around the family with gifts to all the kids from Santa Claus. I think our culture is strong because we have a sense of community and a sense of purpose outside of the job. I think we created a business environment where people could be themselves. They wanted to care. In the typical work environment, people must hide their true selves. I think we gave people permission to be themselves, to be different. I think our low levels of turnover were critical to our culture. Lots of people like to argue that low turnover is essential because of the costs, but I think high turnover does more damage because it assaults the culture.

472 CASES We had a high level of trust and also a level of tolerance and forgiving that I think are unique. We had an older woman in the laundry area who was with the hotel from the beginning who took two 15 - minute naps each day. Can you imagine how most hotels would deal with an employee who sleeps on the job? I think we may have less talent, but we leverage it by being stronger as a whole. It ’ s like a basketball team that doesn ’ t have one superstar, but a whole group of average players who together do extraordinary things. Success helps too. We started to see some dramatic positive results from our efforts at the Westward, and that certainly lifted people ’ s spirits. Good news feeds the emotional psyche. When we got into the Westward, it had good people in it, but the culture was dominated by a traditional command - and - control management that didn ’ t let the hard - working and caring employees contribute the way they could. The culture fl ourished with our guiding principles, and I don ’ t think management can easily change it. But sure, it could go back to that. You bring in bad management, good people leave, turnover increases, and suddenly the work environment is different. Nothing lasts forever. BUT DID IT MAKE MONEY? Living a vision is in the details. “ It is a slow and continuous process, and you must stick with it, ” refl ected Green. But the ability to do so with the performance pressures of owners and the demands of customers is an ongoing battle. The results at Westward were dramatic support for the Peter Green vision. For four years, the Westward Hilton performed at or near the top of the Phoenix market, as indicated by its occupancy percentage, shown in Exhibit 6 . According to the comparative data from Smith Travel Research, the Westward Hilton outperformed the Phoenix market in 2007, although demand was gradually slipping in the city. Exhibit 6shows the Hilton ’ s position among its primary market competitors, the luxury and upper upscale chain markets, the Phoenix market, and the Phoenix Central markets. This performance was due in part to the redirection of the hotel ’ s marketing efforts away from groups and more toward transient corporate travelers. According to recent investor reports, the above - average penetration was caused by the hotel ’ s chain affi liation with Hilton Hotels and its highly visible location. Westward Hilton was in the top 10 of all Hilton Hotels, with an increase in profi tability of about 273 percent over the 2001 – 2007 period. House profi t increased from the takeover (2001) fi gure of $ 1,817,137 to $ 6,769,482 (2007). Exhibit 5shows the changes in guest comment scores and employee turnover. The hotel ’ s revenue per available room (REVPAR, calculated by dividing room revenue by the number of available rooms) rose from a rate of $ 66.65 in 2001 to a 2007 rate of $ 122.10. Exhibit 6shows the Westward ’ s market performance based on data from Smith Travel Research. Exhibit 7provides income statements for the hotel for the seven years from 2001 to 2007. Exhibit 8provides additional fi nancial information, including the initial investment and estimated value of the hotel. The current value of the property if sold today is about $ 65 million. This value is derived from projected 2008 earnings and a terminal capitalization rate of 10.5 percent. The expected average annual asset return on this investment is 12.28 percent, and the expected average annual equity return is 30.23 percent, assuming

CASE 2 BUILDING CAPABILITIES AT THE WESTWARD HILTON 473 0 1 2 3 4 5 6 7 2000 2001 2002 2003 2004 2005 2006 2007 Guest Comment Cards 0 20 40 60 80 100 120 140 160 2000 2001 2002 2003 2004 2005 2006 2007 Employee Turnover Exhibit 5: Guest Comment Scores and Employee Turnover, 2001–2007 a loan - to - value ratio of 60 percent. These returns are the internal rate of return (IRR) on an initial investment of the current value of the property where the property is held through the end of 2016 and then sold at that time. Exhibit 9reports on returns from other investment opportunities, such as stocks and treasury bills.

474 CASES Exhibit 6: Phoenix Market Performance, 2001–2007 Occupancy Market Segment 2001 2002 2003 2004 2005 2006 2007 Westward Hilton 50.2 56.7 62.9 69.4 73.2 73 72.5 Luxury 62.2 62.2 63.8 68.6 71.4 70.9 70.9 Upscale 63.4 63.0 65.6 69.1 72.5 72.4 72.3 Phoenix Market 58.5 57.8 57.8 63.7 67.1 68.2 68.2 Phoenix Central 56.5 57.5 59.2 63.1 66.7 68.2 68.3 Competitive Set 60.5 60.6 62.4 66.6 69.9 70.3 70.3 ADR Market Segment 2001 2002 2003 2004 2005 2006 2007 Westward Hilton 132.77 130.71 133.18 136.25 147.37 159.33 168.42 Luxury 166.84 155.10 150.08 154.84 165.62 180.04 190.30 Upscale 136.14 127.25 128.17 134.48 145.75 157.96 166.97 Phoenix Market 96.84 92.23 92.66 95.74 102.84 113.28 119.73 Phoenix Central 138.02 131.87 124.25 123.65 129.92 139.32 147.26 Competitive Set 141.98 133.49 130.02 133.46 142.67 154.52 163.33 RevPAR Market Segment 2001 2002 2003 2004 2005 2006 2007 Westward Hilton 66.65 74.11 83.77 94.56 107.87 116.31 122.10 Luxury 103.72 96.48 95.80 106.17 118.26 127.67 134.83 Upscale 86.34 80.17 84.09 92.98 105.74 114.32 120.75 Phoenix Market 56.67 53.26 53.51 60.97 68.98 77.23 81.69 Phoenix Central 78.04 75.81 73.59 78.08 86.65 95.08 100.57 Competitive Set 85.89 80.88 81.10 88.92 99.73 108.59 114.76 Source: Smith Travel Research

CASE 2 BUILDING CAPABILITIES AT THE WESTWARD HILTON 475 Exhibit 7: Actual Income Before Other Fixed Charges, 2001–2007 Occupancy and Adr : 2001 2002 2003 2004 2005 2006 2007 Occupancy 50.20% 56.70% 62.90% 69.40% 73.20% 73.00% 72.50% ADR $132.77 $130.71 $133.18 $136.25 $147.37 $159.33 $168.42 Revenue and Expense: Revenues: Rooms $7,298,234 $8,115,326 $9,172,839 $10,354,046 $11,812,295 $12,736,044 $13,370,443 Food $2,687,639 $2,988,541 $3,377,979 $3,812,969 $4,349,982 $4,690,161 $4,923,784 Beverage $618,494 $687,740 $777,359 $877,462 $1,001,042 $1,079,326 $1,133,088 Telecommunications $101,208 $112,539 $127,204 $143,585 $163,807 $176,617 $185,414 Other Operated Departments $393,587 $437,652 $494,683 $558,385 $637,027 $686,844 $721,056 Rentals and Other Income $146,190 $162,557 $183,739 $207,400 $236,610 $255,113 $267,821 Total Revenues $11,245,353 $12,504,355 $14,133,804 $15,953,846 $18,200,763 $19,624,104 $20,601,607 Departmental Costs and Expenses: Rooms $2,260,316 $2,438,349 $2,586,486 $2,823,831 $3,185,133 $3,394,970 $3,522,875 Food $2,395,260 $2,525,880 $2,770,226 $3,063,138 $3,439,944 $3,669,707 $3,811,297 Beverage $393,587 $387,635 $395,747 $414,800 $418,618 $412,106 $432,634 Telecommunications $146,190 $137,548 $127,204 $127,631 $145,606 $137,369 $123,610 Other Operated Departments $393,587 $400,139 $367,479 $319,077 $345,814 $333,610 $309,024 Total Costs and Expenses $5,588,940 $5,889,551 $6,247,142 $6,748,477 $7,535,116 $7,947,762 $8,199,439 Total Operated Departmental Income $5,656,413 $6,614,804 $7,886,663 $9,205,369 $10,665,647 $11,676,342 $12,402,167

476 CASES Undistributed Operating Expenses: Administrative and General $1,236,989 $1,325,462 $1,356,845 $1,435,846 $1,619,868 $1,687,673 $1,751,137 Franchise Fees including Marketing Fees $656,841 $730,379 $825,556 $931,864 $1,063,107 $1,146,244 $1,203,340 Marketing $258,643 $287,600 $325,078 $239,308 $273,011 $255,113 $267,821 Property Operation and Maintenance $708,457 $787,774 $791,493 $717,923 $819,034 $883,085 $927,072 Utility Costs $517,286 $512,679 $551,218 $542,431 $582,424 $608,347 $638,650 Other Unallocated Operated Departments $0 $0 $0 $0 $0 $0 $0 Total Undistributed Expenses $3,378,217 $3,643,894 $3,850,190 $3,867,372 $4,357,445 $4,580,462 $4,788,019 Income before Fixed Charges $2,278,196 $2,970,910 $4,036,473 $5,337,997 $6,308,202 $7,095,880 $7,614,148 Management Fees, Property Taxes, and Insurance: Property Taxes and Other Municipal Charges $269,888 $300,105 $339,211 $382,892 $436,818 $470,978 $494,439 Insurance $191,171 $212,574 $240,275 $271,215 $309,413 $333,610 $350,227 Total Management Fees, Property Taxes, and Insurance $461,059 $512,679 $579,486 $654,108 $746,231 $804,588 $844,666 Income before other Fixed Charges $1,817,137 $2,458,231 $3,456,987 $4,683,890 $5,561,971 $6,291,292 $6,769,482 Exhibit 7: (Continued )

CASE 2 BUILDING CAPABILITIES AT THE WESTWARD HILTON 477 Exhibit 9: Annual Returns Year Stocks T.Bills T.Bonds 2001 11.85% 5.73% 5.57% 2002 21.98% 1.80% 15.12% 2003 28.41% 1.80% 0.38% 2004 10.70% 2.18% 4.49% 2005 4.85% 4.31% 2.87% 2006 15.63% 4.88% 1.96% 2007 5.48% 4.88% 10.21% Exhibit 8: Initial Investment, Estimated Value, and Estimated Returns Cost of Hotel in 2000 $39,075,000.00 Weighted Average Cost of Capital (WACC) 9.35% Estimated Sales Price in 2007 $65,082,568.10 Estimated Rate of Return on Asset 12.28% Estimated Rate of Return on Equity 30.23% NEW GENERAL MANAGERS ARRIVE As one subordinate noted, Green had a clear employee emphasis, he was a caring person, and people felt good working for him. This employee indicated that Green was a master at showing interest in people ’ s work. He noticed the small things and acknowledged everyone with a friendly greeting. He fostered a work environment that was informal, responsive, and trusting, not intimidating. The guide for behavior was “ do the right thing. ”His focus was always on the questions: “ How does it impact our employees, customers, and owners? ”and “ Are all three parties taken care of? ”He would be a hard act to follow, and for some at the property, the managers who followed Green were simply not up to the task. Five general managers came and went from the Westward Hilton in the four years after Green moved into his corporate position. While the departures of the managers were for a variety of reasons, Green blamed himself for being too controlling as the executive vice president of operations of Hiller

478 CASES Exhibit 10: Forecast Income Before Other Fixed Charges, 2008–2016 Occupancy and ADR : 2008 2009 2010 2011 2012 2013 2014 2015 2016 Occupancy 72.61% 72.50% 72.18% 71.96% 71.74% 71.53% 71.31% 71.20% 71.09% ADR $169.76 $172.84 $176.00 $179.29 $182.80 $186.50 $190.38 $194.44 $198.71 Revenue and Expense: Revenues: Rooms $13,497,220 $13,721,571 $13,909,504 $14,126,756 $14,360,441 $14,606,993 $14,865,420 $15,159,511 $15,468,835 Food $4,970,471 $5,053,090 $5,122,298 $5,202,303 $5,288,360 $5,379,155 $5,474,323 $5,582,624 $5,696,536 Beverage $1,143,832 $1,162,845 $1,178,772 $1,197,183 $1,216,987 $1,237,881 $1,259,781 $1,284,704 $1,310,918 Telecommunications $187,173 $190,284 $192,890 $195,903 $199,143 $202,562 $206,146 $210,224 $214,514 Other Operated Departments $727,893 $739,992 $750,127 $761,844 $774,446 $787,742 $801,679 $817,539 $834,221 Rentals and Other Income $270,360 $274,854 $278,619 $282,970 $287,651 $292,590 $297,767 $303,657 $309,853 Total Revenues $20,796,950 $21,142,636 $21,432,210 $21,766,959 $22,127,027 $22,506,923 $22,905,116 $23,358,261 $23,834,877 Departmental Costs and Expenses: Rooms $3,556,278 $3,615,391 $3,664,908 $3,722,150 $3,783,722 $3,848,684 $3,916,775 $3,994,263 $4,075,764 Food $3,847,436 $3,911,388 $3,964,959 $4,026,887 $4,093,500 $4,163,781 $4,237,446 $4,321,278 $4,409,452 Beverage $436,736 $443,995 $450,076 $457,106 $464,668 $472,645 $481,007 $490,523 $500,532 Telecommunications $124,782 $126,856 $128,593 $130,602 $132,762 $135,042 $137,431 $140,150 $143,009 Other Operated Departments $311,954 $317,140 $321,483 $326,504 $331,905 $337,604 $343,577 $350,374 $357,523 Total Costs and Expenses $8,277,186 $8,414,769 $8,530,019 $8,663,250 $8,806,557 $8,957,755 $9,116,236 $9,296,588 $9,486,281 Total Operated Departmental Income $12,519,764 $12,727,867 $12,902,190 $13,103,709 $13,320,470 $13,549,168 $13,788,880 $14,061,673 $14,348,596