Align expansion strategy, organizational capabilities
 
Align expansion strategy, organizational capabilities
24 NOVEMBER 2020 8:28 AM

The industrywide disconnect between expansion strategy ambitions and the organizational capabilities to achieve these ambitions causes hotel company growth strategies to fail. Strengthening that connection can ensure a prudently balanced strategy and execution.

The hospitality industry has suffered from the tendency to announce huge scale-up visions in five-year plans, but they are seldom accompanied by resource and capability development plans.

Senior leadership often fails to see the connection between ambitions and ability to execute. The gap is often exacerbated because the strategizers do not consider the development of competencies and capabilities an integral part of strategy. Ambitious market strategies are considered symbolic of leadership genius, while organizational resources and competencies are deemed to be pedestrian at best and irrelevant at worst.

Consider the recent example of Oyo Rooms, over the period of 2013 to 2019, as a vivid illustration of how ignoring resources and competencies could lead to disaster.

Founded in 2013, Oyo Rooms made early headlines about “remaking India’s hotel business and going global” and “aiming to disrupt the global hotel industry.” In 2019, Oyo Rooms was ranked as the world’s third-largest hotel company by number of rooms, up from eighth in 2018.

Unfortunately, unraveling of the start-up online aggregator and franchisor of budget hotels started several years earlier. Numerous reports reinforced the trend of “slashing footprint and headcount.”

COVID-19 has only accelerated the decline of Oyo Rooms, though it should be noted that the dynamics of the pandemic have been explicitly excluded from our data and analysis, as these are proving to be disruptive and challenging to the hospitality industry for very different reasons.

Problems as symptoms
Typically, as start-ups scale up and operational plans are executed, core financial metrics improve toward profitability. In contrast, the exact opposite has happened to Oyo Rooms. The company reported financial losses of $67 million in 2016$42 million in 2017 and $52 million in 2018. Losses increased to $335 million in 2019, while “internal projections showed it may not make a profit in India and China until 2022.”

Our extensive review illustrates a multitude of problems, including soaring valuation and lack of profits, regulatory and governance concerns, massive layoffs, disgruntled hotel and industry partners, poor customer experiences, failure to deliver core brand promises and legal actions by numerous powerful stakeholders.

The disconnect
A study of what causes potentially effective strategies to fail indicated that more than 60% of firms struggled to bridge the gap between strategy formulation and implementation.

In Oyo Rooms’ case, the disconnect could be traced to two mentor-investors following their own playbook of global domination of a vertical (Masayoshi Son’s $100 billion Vision Fund and Peter Thiel’s Fellowship for monopoly drivers) behind Oyo Founder and CEO Ritesh Agarwal.

Despite the open checkbook from Soft Bank’s Vision Fund, the leadership of the company lacked the required deep and intuitive conviction of connecting strategic planning with capabilities and resources needed to execute it. Oyo Rooms’ CEO, with the explicit support of his mentor-investors, simply failed to resource and scale up his organizational capabilities.

Inside-out or outside-in?
The dilemma of whether competitive strategy defines the required core competencies, resources and capabilities; or the organizational core competencies define the limits of competitive strategy is a chicken-and-egg conundrum.

Fortunately, this conundrum has been resolved with the Resource-based View, which prescribes that the competitiveness of a business is determined by the quality of the resources it develops, controls and masters. Strategy and capabilities are the proverbial two sides of the same coin of competitiveness, and must be addressed in an integrated fashion, simultaneously.

What does this mean for hospitality?
The ambitions of many “blue chip” hospitality leaders dictate massive scale-up, but without much attention to designing the strategy of developing and securing resources to grow the organization. Scaling-up of resources and capabilities is too often an afterthought, and the lack of ready-to-exploit resources and capabilities results in doomed-to-fail firefighting during execution.

We are convinced that this disconnect could be naturally resolved through Program & Project Management (PPM) methodology—more specifically, anchoring the development pipeline in the framework of Aggregate Project Planning (APP). This means developing resources and capabilities in synchronicity with the requirements of the business development pipeline.

Integrating expansion strategy and capabilities
A necessary tool for success is workflow that integrates expansion strategy, and the required capabilities and resources stemming from it (illustrated in the below chart).

The workflow captures the essence of the required methodologies for a prudent and focused expansion strategy implementation. On the strategy side, it is driven by a well-defined business case, anchored in specific parameters of the expansion. On the execution side, the two-step analysis imposes a rigorous reality test of feasibility and risk and informs the business case about the gaps and hurdles that must be addressed.

First, project management must be a given baseline when initiating, planning and executing global strategic initiatives. We insist that a hotel company that manages complex and large-scale strategic initiatives must have an adequate level of Project Management Maturity.

Second, we apply the APP tools to ensure that the collective set of projects in the development pipeline would accomplish the objectives of the business case and build on organizational capabilities needed for ongoing success. Starting with the top-down flow, APP uses expansion strategy business case parameters, such as scale, scope and location, to identify pipeline capabilities and resources required down to the individual project level. Then, bottom-up, from individual properties to regional and finally to corporate level, APP provides the information from the execution side to the expansion strategy side about the gaps in capabilities and resources.

These gaps must be addressed by modifications to expansion strategy and/or development of capabilities and reallocation and rescheduling the resources. Money cannot compensate for compressed execution schedule, as training and learning, the “soft resources,” take time.

In conclusion, opening new and onboarding existing properties on a large scale requires any hospitality company to scale-up organizational capabilities and resources.

This methodology will need to be adapted to the much more challenging predicament facing the hospitality industry with post-pandemic realignment. How should hoteliers right-size and scale down to survive and thrive again?

Gert Noordzy is a hotel opening specialist and organizational project management expert. He is managing director of Northside Consulting and member of the International Society of Hospitality Consultants. Gert is the author of Project Management of Hotel Opening Processes. He can be reached at gert.noordzy@northside-consulting.com

Oscar Hauptman is principal at Northside Consulting. He is an expert in project, program and innovation management, with a PhD in Management and Technology Innovation from Massachusetts Institute of Technology. Oscar has taught as faculty member at Harvard Business School. He can be reached at oscar.hauptman@northside-consulting.com

Northside Consulting is a boutique firm specializing in the tactical and strategic aspects of hotel opening processes.

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