- Email: [email protected]
Hilton Hotels
HiltonHotels A Comprehensive Approach to DeliveringValue
Hilton’s goal is to create value for its constituents-customers,
owners and shareholders,
employees (known as “team members”), strategic partners, and the communities
for All Stakeholders
where each hotel is located-by delivering a consistent value proposition. To achieve that goal, the company relies on the axiom that what gets measured and managed gets delivered.
by Dieter Huckestein and Robert Dubof
E
merging from the economic turbulence of the Gulf War, hotel overbuilding, and the recession that rocked the hospitality industry in the early 199Os, Hilton Hotels Corporation faced a pressing need for a new, comprehensive approach to creating value in its hotel operations. The economic downturn is often cited as the primary cause of the industry’s troubles in the early ’90s. The greater issue, however, was the capacity overhang remaining from the 198Os, which drove down occupancy levels, RevPAR, and profits. Moreover, new brands created ever-narrowing market segments, increasing consumer choice and making it more difficult for hotel chains to differentiate their products and services. Meeting customer expectations based on evolving value perceptions became, and continues to be, in-
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i,HOTELANDRESTAURANTADMlNlSTRATlONQUARTERLY CORM
creasingly more challenging. Success for Hilton (and all hotel companies) in dealing with this situation lies in understanding the essential drivers of value and how to deliver against them consistently. In response, Hilton’s top management took two steps. First, the company adopted an aggressive growth strategy to realize the full value of the Hilton brand-essentially to ensure that customers would find a Hilton property in appropriate market locations. Second, since research indicated performance disparities
Dieter Huckestein
is president-hotel operations at Hilton Hotels Corporation (([email protected]. Robert Duboflis a vice president at Mercev Management Consulting, based in Boston [email protected])>. 0 1999, Cornell University
among its hotels, the company implemented a systematic business approach to ensure consistency from property to property. The first objective was achieved by a combination of record franchise expansion, over $1 billion of full-service-hotel acquisitions, and the formation of a strategic alliance with Hilton Group PLC, owner of the Hilton name outside the United States. With those steps, the newly unified and expanded Hilton brand established a strong platform for hotel operations. Having expanded the brand, the firm needed to concentrate urgently on the second goal, which required an alignment of processes, people, and technology. Hilton addressed that second objective by adopting the Hilton Balanced Scorecard, as it is known, which measures Hilton’s creation of value. The balanced-scorecard concept was developed in the early 1990s by Robert Kaplan, an accounting professor at the Harvard Business School, and David Norton, president of Renaissance Strategy Group.’ This article describes how the Hilton Balanced Scorecard fits into the firm’s strategic business design, how management practice was reoriented around the scorecard, and what results have been achieved. It also reviews lessons learned and proposes next steps. The point of the story is not so much that Hilton embraced the balanced-scorecard concept but that the scorecard was implemented in a way that integrated all aspects of the business and changed the company’s culture to achieve the desired results. We contend that Hilton’s multifaceted approach, of which the balanced scorecard is pivotal, has markedly transformed the company’s hotel operations. ’ Robert S. Kaplan and David “The Balanced Scorecard-Measures Performance,” Harvard Businexr February 1992, pp. 71-79.
P. Norton, That Drive Review, January-
StrategicBusinessDesign Hilton began its strategic-planning effort by examining its position in the marketplace. Using comprehensive conjoint analysis,2 the research identified how Hilton compared with its competitors as well as the key attributes on which Hilton hotels were not meeting customer expectations. Ironically, those key attributes were not at all surprising: customers want a clean, quiet, comfortable room (see Exhibit 1). This study provided the necessary catalyst for managers to ask whether Hilton was delivering on this standard at all times. The research suggested that if hoteliers do not satisfy those core desires, all other hotel services make little difference to guests. Most critical, the research revealed that despite steps to improve performance the quality of the guest experience was inconsistent among Hilton properties, especially between franchised properties and company ownedand-managed hotels. A new model. Hilton changed its business design-the system by which a company delivers value (or utility) to its customers-by focusing on action-oriented tactics to redesign its organizational and support structure. The linchpin for this effort was the balanced scorecard, which allowed Hilton to translate its strategy into operations through measurement and communication throughout the organization.
Exhibit 1 Tap-ten hotel attributes (1)
Cleanliness
(2)
Feeling
(3)
Overall
(4)
Good
(5)
Availability
of the bathroom
of safety cleanliness
of the room
shower of the type of room
reserved (6)
Quiet
(7)
Room’s
room
(6)
Responsiveness
(9)
Helpfulness
odor (on initial entry)’ to requests and courtesy
at
check-in (10)
Handling
of billing errors
Based on a conjoint study of hotel patrons conducted by Hilton Hotels.
‘For a discussion of smoke-free guestrooms, see: Arthur Field, “Clean Air at Niaht: Suoolv and Demand of Smoke-Gee Hotel kooms,” Cornell Hotel and Restaurant Administration Quarterly Vol. 40, No. 1 (February 1999), pp. 60-67.
The Hilton ValueChain The Hilton value chain is a conceptual model of the process that links long-term strategic objectives to short-term tactics (see Exhibit 2, overleaf). The chain is a graphic depiction of how the company’s * For an application of conjoint analysis, see: Leo M. Renaahan and Michael Z. Kay,“What Meeting Plan&rs Want: The Conjoint-Analysis Approach,” Cornell Hotel and Restaurant Administratim Quarterly, Vol. 28, No. 1 (May 1987), pp. 66-76.
August 1999
l
29
Exhibit 2 Hilton value chain
aligned with its vision of creating value. and shareholders are the people for whom Hilton creates profits and enhanced property and share values. Strategic partners and vendorsare firms with whom Hilton works to offer the best possible products and services. Community involvement reflects Hilton’s commitment to be an integral contributor in each area where its hotels are located. Four components. To serve those constituencies, the value chain links four components: value drivers, businessstrategy, processes,and the balanced scorecard. l
Value drivers
I
Brand management Revenue maximization Operational effectiveness l Value proposition l
1
l
l
Owners
l
l
Hilton Value Drivers Business
processes
Company business plan l Hotel business plan l Department business plan Individual performance management l Recognition and reward l
l
vision and strategic plan are linked to value drivers that direct strategy and tactical processes, and how those elements ultimately are manifested in Hilton’s balanced scorecard. The purpose of applying the value-chain concept is to focus on Hilton’s constituents (the stakeholders identified in the center) through every action the company takes. A continuous-improvement process is applied to each element in the value chain to ensure that performance levels increase as customers’ demands and expectations evolve (and as competition strengthens).
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At the heart of the value chain are the five constituencies Hilton serves: Customers are the key ingredient to any business’ssuccess.Hilton focuses on consumers’ everchanging priorities, delivering against their expectations with an aim to delight them (e.g., by giving them more value than they anticipated). Zam members are Hilton employees.The company encourages an entrepreneurial spirit, encourages empowerment and a sense of pride, and establishesprocesses l
l
INXFI i,,HOTELANDRESTAURANTADMlNlSTRATlONQUARTERLY I
Value drivers are the elements that directly contribute to the successof the value equation. Hilton has identified the following four value drivers that together create value for Hilton’s constituents. Brand management. This involves promoting and maintaining consistency in the delivery of services and products expected by customers. Revenue maximization. Hilton implemented flexible, rational pricing in response to current levels of demand in individual property markets and in consideration of the demand elasticity of different customer segments-especially targeting customers who provided the greatest profit. Operational efictiveness. The company seeksto achieve the maximum value and return from its resources through continually improving existing processesand developing new ones. Valueproposition. Above all, Hilton seeksto build loyalty among its customers by aiming to delight them and anticipating their everchanging desireswhile ensuring that team members, who are essential contributors to meeting this objec-
tive, are also satisfied (and ultimately loyal).
Hilton BusinessStrategy Hilton’s business strategy is built on three pillars, namely, research, education and training, and brand standards. First, extensive research determines what’s important to Hilton’s customers and how the company is performing on those important attributes. The company applies a variety of qualitative and quantitative techniques to make this assessment, depending on the decisionmaking information desired. In particular, by using data from internal proprietary data and syndicated research, the balanced scorecard provides information on how individual hotels perform against key competitors, as well as their own historical ratios and other Hilton properties. Careful monitoring helps managers anticipate the changing needs of internal and external customers. The second pillar, education and training, acknowledges the importance of today’s information-based environment by communicating brand standards, as well as developing and using team-member knowledge. Finally, the three-pillar approach explicitly recognizes the importance of adhering to brand standards, for the price of failing to do so involves unnecessary expenses for service recovery and lost revenue. Therefore, not only are hotel team members trained in brand standards, but so are the outside vendors who provide the products and services that customers expect and Hilton promises to deliver.
BusinessProcessesand the Hilton BalancedScorecard Hilton uses a rigorous annual business-planning process that links its business strategy with tactical actions. This linkage, however, is not reserved for a select few manag-
Exhibit 3 Measures tor Hilton value drivers Value
driver
Revenue maximization
Measure l
l
Operational effectiveness
l
Value proposition
l
l
l
l
Brand management
ers or team members and emphasized just once a year. Instead, each team member (even the newly hired) is exposed constantly to Hilton’s operating strategy. For example, a computer-based program allows each hotel to customize its orientation presentations to describe the individual property while at the same time conveying a consistent messageto ensure that every new team member receives the same up-to-date information about Hilton overall. Such a program would not be possible without a performance-reporting tool that combines both financial and nonfinancial indicators to gauge whether the company’s strategy is working. The strategy is also reinforced continuously in all communications throughout the year, asstaff members manage actions and measure results. Hilton useseight measurements to provide a balanced view (scorecard) of the business’spresent and future performance (seeExhibit
Room RevPAR (revenue per available room) RevPAR index (RevPAR versus competitors in the local market) EBITDA (earnings before interest, taxes, depreciation, and amortization) Guest-comment cards (overall satisfaction score from cards filled out by customers) Customer-satisfaction-tracking study (overall satisfaction score from a sample of guests interviewed via telephone) Team-member survey (overall satisfaction score from a comprehensive survey of all hotel employees) Mystery shopper (average of scores from random visits by a third-party auditor)
. Standards compliance (a measurement based on a hotel’s compliance with brand standards)
3). Some of the measurements are lag indicators that show the outcomes of a strategy, while others are lead indicators that help the company modify its businessdesign so that it can take advantage of future opportunities. Property-specific goals are linked to incentive bonuses, performance reviews, merit-based salary increases, and stock-option grants. The result of setting the standardsand making sure that everyone understands how those standards are measured is an alignment of actions with goals. Clearly, this approach supports the concept of measuring whatever is valued so that it gets delivered. People at every level of the organization, from the president to frontline team members, know what is expected of them and how they are doing. The balanced scorecard quickly translates corporate strategic direction into property-level goals and thus becomes the critical link in Hilton’s value chain.
August 1999 31 l
Exhibit 4
Sample balanced scorecard
A Tool for Driving Performance Measuring performance using the Hilton Balanced Scorecard is distinctive in two ways (see Exhibit 4). First, it involves all employees &t a property, including managers, frontline team members, and corporatesupport-staff members. In general, the financial goals and performance compared to competitors are determined by the property manager and senior corporate managers during Hilton’s annual business-planning period. Nonfinancial goals usually are set at a percentage improvement over the previous year’s score. Corporate employees have their own individual balanced scorecard that is tallied in a way that supports the company’s overall objectives. Second, the diagnostic results are communicated in a simple manner. Although the measures are reported as numerical scores, each measure is also designated as being in one of three color zones, which take in a range of scores. The green zone indicates that the property is meeting or exceeding the goal; yellow designates results slightly below the goal; and a red color flags performance that is well below the goal. Because the color zone comprises a
32
range of outcomes, the process remains flexible while still communicating a single, company-wide system of targets. This simple visual feature also helps indicate a sense of direction. Team members can easily see how well their property is performingboth in a quick-to-see electronic format and on graphs posted at most team-member entrances or other back-of-the-house areas. Some hotels have creatively added colored lights to highlight the results. By communicating results visually to show strengths and weaknesses, the color-coding system leaves little doubt in anyone’s mind regarding how a particular unit is performing on its specific objectives.
Identifying What’s important While the balanced scorecard sets forth the measurement framework, Hilton’s managers needed tools to bring clarity to decision making and problem solving. In the past, for example, managers’ efforts were hindered by the lack of clear guidance on where to focus their efforts (not to mention their limited resources). The point of focusing on customer satisfaction is to go beyond
I:IIi'!!I;lI11 J HOTELAND RESTAURANTADMINISTRATIONQUARTERLY
merely solving problems by knowing what specific issues drive the customers’ value perceptions. To assist in identifying areas of potential value growth, customized priority reports identify the key drivers of customer satisfaction on which team members should focus, thus concentrating the efforts of each hotel operating unit on those areas most important to customers. The illustrative hotel-priority report in Exhibit 5 shows that guests’ ratings improved in many areas from the prior period, but staff members still need to devote their attention to the “fix it now” attributes, shown in the upper left quadrant of the exhibit. Those are items of great importance to the customer (plotted on the vertical axis) and are farthest from lOOpercent satisfaction (plotted on the horizontal axis). While identifying what to fix is essential, team members also need to determine how to address the challenge of continuous improvement. To that end, Hilton developed a continuous-improvement process that goes by the abbreviation STP standing for Situation-TargetProposal (see Exhibit 6, overleaf).
Each phase comprises several steps for determining a course of action. The priority report thus transforms data into actionable information while the STR (continuousimprovement process) helps determine the actions needed to address those problems. The following example shows how this process works. Fix it now. The balanced scorecard for one particular hotel revealed relatively low scores on guest-comment cards. In reviewing the priority report, the hotel’s staff members discovered that bath and shower facilities fell into the “fix it now” quadrant, with a score of 5.09 on the guest-comment card’s sevenpoint scale. Examining that score, the employees identified the problem as being one of inadequate pressure in the shower. The staff members suspected that the cause was inadequate water-pump and pipe sizes for certain room locations, and so they measured water flow by timing the amount of water discharged in a specific period of time in various rooms on different floors and in each of the hotel’s three buildings. To the team’s surprise, however, nothing indicated that the problem was related to the pumps or plumbing. Next, team members took apart the showerhead, and here they found the problem. Each unit’s centrifugal flow restricter was constraining the water flow by an amount greater than the manufacturer’s specification. When the team removed the restricter, not only did the water pressure improve, but so did customer satisfaction. “The solution was simple and quick,” recalled the hotel’s general manager, “but we would not have found it without the continuousimprovement process, because we thought the showers’ low water pressure was due to building-infrastructure issues.” Even while the work was in progress, the comment-
Exhibit 5 Sample priority report
60%
75%
80%
85%
90%
95%
100%
Note: Values in (parentheses) indicate point changes from previous reporting period. Hilton is currently in the process of redesigning the priority report from the fourquadrant matrix seen here to a cascading chart. This new approach will more clearly show how much improvement is needed in each particular attribute to reach the green zone while simultaneously moving beyond benchmarking satisfaction to measuring loyalty by focusing on what drives customer loyalty, not simply satisfaction.
card score increased to 5.95 and then to 6.07. Today, customers rate the hotel’s bath and shower facilities at 6.43 on the seven-point scalemoving this attribute from the “fix it now” quadrant to the “keep up the good work” quadrant. Outside audit. The improvement process also involves an outsider’s point of view. Hilton’s audit firm, Arthur Andersen, reviews each property’s priority report to ensure that the hotel staff is focusing on the issues that customers care about. The auditors explore how the continuous-improvement process has added value since their prior review, as well as make suggestions based on their experience with other hotels and companies.
Outcomes Thus Far The balanced scorecard has become the primary tool for translating the company’s strategic vision to daily operations. Financial results bear out the effectiveness of this approach. According to Smith Travel Research, between 1995-the year prior to implementation-and yearend 1998, Hilton’s owned and managed hotels in the United States improved their RevPAR index with regard to competitors3 Properties in Hilton’s franchise system, which implemented the value-creation strategy one year later, have already ’ The index gauges the extent hotel is capturing or exceeding of the market.
to which a its fair share
August1999 l 33
Exhibit 6 STP: Continuous-improvement process Hilton’s STP (Situation-Target-Proposal) making tool used in analyzing a situation course of action. An ideal STP proceeds
Once the STP is completed,
process is a decisionand recommending a as follows.
take place:
Plan. Determine what needs to be done; who needs to be involved, who is responsible for completing what actions and by when, overall deadline for the pilot test, who tracks results, and how those results are to be tracked and reviewed;
l
Situation. Identify (1) area to improve, (2) baseline measurement and measurement system, (3) root causes, and (4) process that needs to be addressed;
l
Target. Include (1) the standard for the process to be addressed, (2) the measurement goal, and (3) the date for completion; and Proposal. State (1) recommendation to be improved, (2) resources (3) time required to implement
four action steps
l
l
or solution for the process needed for the proposed idea, pilot.
Do. Implement
pilot project;
Check. Determine whether the pilot project indicated in the plan; and
produced
the result
Act. If the objectives of the target statement were met, standardize the process. If not, extend the pilot test or return to the situation step and reconsider the root causes of the matter.
The continuous-improvement process involves applying these steps with the objective of improving performance and creating value for Hilton’s constituents.
Sample STP (situation-target-proposal) Situation: To remain competitive, Hilton needs continued improvements in the use of new technology. Technology can be an enabler to improve efficiency, exceed customer expectations, and improve internal-customer satisfaction. The use of wireless technology and speech recognition would be an industry first, positioning Hilton as a leader.
Target (goal): To pilot-test wireless-technology hotel by year end 1998.
and speech-recognition
solutions
for check-in
and check-out
at a minimum
of one owned-and-managed
Proposal: Plan Interim steps
cost of each step
Identify functionality desired in a hand-held speech-recognition solution for check-in and check-out Develop solution in conjunction with vendor partners Beta project at one hotel
Evaluate usefulness, success, and customer acceptance of the solution
Total cost:
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$12,000
Do Supporting depts.
Check
Begin date
End date
Person responsible
Hilton IT, marketing
Now
l/31/98
Luke
Hilton IT, marketing
l/1/98
4130198
411198
7/l 198
Hilton
IT
$42,000
I:IIKMl 11 i HOTELAND RESTAURANTADMINISTRATIONQUARTERLY
Act
Goals measured?
“Do” date met?
Budget met?
Yes
Yes
Yes
Director, front-office systems
Yes
Yes
Yes
6130198
Director, front-office systems
Yes
No
Yes
6130199
Director, front-off ice systems
Ongoing
1 Ongoing
1 Ongoing
Next steps
Adjust evaluation dates
shown tremendous improvement. Formerly operating at less than their fair market share, today they capture more than their fair share of RevPAR. Nonfinancial measures show improvement, as well. Among Hilton’s company-owned and -managed hotels, the latest guest-satisfactiontracking study revealed strong increases in customers’ opinions on overall satisfaction, their likelihood of recommending Hilton hotels, and their likelihood to return to a given hotel. Those three factors (i.e., satisfaction, recommendations, and return likelihood) comprise a measure of customer loyalty that Hilton tracks closely-and that customerloyalty score recently reached its highest level ever. Moreover, a major industry syndicated research project, by J.D. Power and Associates, has shown Hilton improving decisively during the past three years (systemwide and including franchises). Thus, instead of seeing customers’ view of the price-value equation dimmed by rising room rates, the company is improving that pricevalue relationship even as average rates increase (along with corresponding guest expectations). Consistency. The balanced scorecard has proven successful on many fronts. By implementing the scorecard throughout the organization, Hilton has reinforced consistency in its business culture. That consistency is critical in a business with so many separate operating units, as well as in an industry that has such personnel volatility. Reaction in the field, given the shift in perspective required of team members, has been surprisingly positive. Interviews conducted by Mercer Management Consulting with managers throughout Hilton Hotels returned the following findings regarding the balanced scorecard. (1) It encourages managers to focus on both short- and long-term
The Hilton Pride Innovation Award One part of the recognition and reward component of the Hilton Value Chain is the Hilton Pride program. A key aspect of that program is the Hilton Pride Innovation Award. This recognition is designed for Hilton team members who generate original and innovative value-creating ideas at the company’s US hotels, whether owned or managed by Hilton or a franchiser. Top ideas from each property are eligible for a quarterly cash grand prize. The first hotel to win the Hilton Million $ The first innovative grand-prize winner, for Team Pride award (described on the next instance, was a guest-service agent whose page) was Pointe Resorts. Above, team idea was for team members to wear a button members celebrate the moment. simply stating: “We want to know.” The button was an effective way of starting a conversation with guests, who would naturally ask team members, “What do you want to know?” This allowed the team members to ask guests how their stay experience is going, or whether the customer is a member of Hilton’s HHonors frequent-stay program. Hotels using this approach experienced marked increases in guest-comment-card response and HHonors enrollment. Another winner was the head concierge at the New Orleans Riverside, one of Hilton’s busiest convention hotels. Noting that customers often asked for a way to send or carry items accumulated during their stay back to their home or office, the concierge helped develop a sturdy disposable cardboard suitcase that is sold for a nominal fee. The idea solved a guest need, while generating a small revenue stream. Additional innovative ideas include such things as a Texas property that washes guests’ cars in the valet lot. On the dashboard inside the clean car is a note suggesting that the guest can “clearly see” why Hilton leads the competition. At yet another property, a team member suggested attaching power strips under boardroom tables to allow meeting participants to plug in their equipment without unsightly (and possibly hazardous) extension cords.43.H. and RD.
drivers of success. Because they are more aware of the long-term implications of their actions, managers have become more willing to take risks in improving both service and financial performance, while being aware of tradeoffs and position relative to the competitive marketplace. The previous reward structure, which focused mostly on financial performance, created a cultural focus that was too narrow and too shortsighted. This approach also failed to link with the company’s customer-marketing strategy. In contrast, because results on the scorecard are linked to bonus payouts, managers pay careful attention to far more than just finances. (2) At a strategic level, use of the balanced scorecard has increased brand equity by reinforcing quality control of the “Hilton experience.”
This consistency has enabled the new Hilton Garden Inn4 franchise properties to command a rate premium over competitors. (Hilton Garden Inn hotels constitute over $1 billion in new hotel construction underway at this writing.) (3) Use of the scorecard cultivates and rewards teamwork, since the hotel property is assessed as a whole. The balanced scorecard moves Hilton’s employees to a frame of mind that is attuned to external competition and to customers. Once again, the company has recast its reward structure in a way that reinforces a teamwork mentality. Those rewards include a $1-million pool of Hilton stock shared among all top-performing team members; quarterly awards to encourage 4 Garden
Inn’
is a registered
trademark
August1999 l 35
Hilton Pride reward and recognition programs Program
Hilton Pride Innovation Award
1 Objective
1 Participants
To reward team members for generating original, innovative, valuecreating ideas
U.S. corporateowned and -managed, and participating franchise hotels
Team members submit best valuecreating ideas related to any of five constituents: external customers, internal customers, shareholders and owners, community, and vendors and suppliers
‘The eight measures for properties in the Hilton Million $ program guest-comment cards, mystery shopper, customer-satisfaction-tracking ** The four value-proposition team-member survey.
measurements
internal-process innovation; and team-pride awards to encourage healthy internal competition within hotel product lines (commercial, airport, resort, and suite and focused service). The balanced scorecard has thus not only become an effective measure, but a motivation tool to encourage breakthrough thinking and innovation (seethe box on the previous page). (4) The scorecard makes performance reviews more objective. The reviewing manager is called on to offer lesssubjective opinion and more objective feedback on how well the team member did in achieving the agreed-upon, company-wide goals. Incentives that flow from performance evaluations
36
1 Awards
Program basics
are guest-comment
First-, second-, and thirdplace winners selected at each location each quarter; first-place winners receive a “Thanks for Making It Happen” exclusive Hilton key chain and are eligible for quarterly corporate grand prize of $2,000 for an individual (after taxes) or a team shares the $2,000
are EBITDA, room RevPAR, study, and team-member cards,
mystery
shopper,
RevPAR survey.
index,
brand
customer-satisfaction-tracking
such asmerit-based salary increases, bonus awards,and stock-option grants are also linked to objective balanced-scorecard results. (5) As part of Hilton’s unified, system-wide approach to measuring results, the scorecard encourages sharing of best practices with other hotels. Individual hotels have devised solutions to a variety of issues, from noise to pillow comfort to restaurant service. The continuousimprovement processis a fact-based method that demands a focused and disciplined approach to decision making and problem solving. Solutions to common problems are disseminated throughout the organization via regional directors in their regular visits to hotels and by post-
CIJKNEII 1i HOTEL ANDRESTAURANT ADMINISTRATION QUARTERLY
1 Timing
Started April 1997; repeats every quarter through the end of 1999; grand prize winner announced on last day of month following end of quarter
management, study,
and
ing best-practice casestudies on the company intranet. Outside auditors and vendors also spread learning by sharing best practices of companies in different industries. (6) Finally, rather than leaving strategy information trapped in the domain of a few senior managers, Hilton executives use the balanced scorecard to communicate how the company creates value throughout the entire organization.
Early Lessons Without any doubt, we conclude that the benefits far outweigh the time and resources required for Hilton to implement the valuecreation processand delivery outlined here. Having said that, we
must also warn that one should not underestimate the challenges in moving a company from static, backward-looking measurements to a comprehensive business design that integrates a forward-looking approach. Such an effort requires senior managers’ commitment and continual communication at all levels of the organization. Hilton’s experience offers insights for other hospitality companies (indeed, companies in any industry) considering a similar approach to creating value. The following are some of the challenges Hilton had to address.
Framework and tools to succeed. Without the fundamental building blocks-a well-thought-out strategy, a roadmap, and proper tools-and a long-term commitment to training and improvement, the effort will be doomed to failure. Careful selection of measurements. People should be measured on goals over which they have control, responsibility, and authority to improve. These goals should be related to the hotel attributes that are important to customers and, therefore, should be critical drivers for the business. Particularly when linking compensation to scorecard measures, senior managers must be confident that they have the right measures on the scorecard and have collected valid and reliable data for the selected measures. Simple, yet comprehensive. The program should be easy to understand, and it must be communicated to all levels of the organization. Hilton’s green-yellow-red rating scheme helps keep the message clear and the process simple. The integration of actions and measures into the value-chain business model ensures that the balanced scorecard supports the overall company strategy and vision.
Realistic andflexible target setting. Targets should be relevant to the snecific hotel or oneratina unit,
Wall Street’s View One of Hilton’s goals in implementing its balanced scorecard is to provide a strong return to owners and stockholders. In the stock-market climate of mid-1999, however, a lodging company’s stock price is not always the sharpest indicator of its actual performance. Hilton’s stock price was struggling in mid-1999, as were those of many other lodging firms. That stock-price weakness stemmed both from factors relating to Hilton specifically and to the fundamental prospects for the lodging industry. As explained by Jason N. Ader, an analyst with Bear Stearns who follows the lodging industry, Hilton’s performance for the second quarter of 1999 met Wall Street analysts’ consensus expectations. The company reported earnings of 25 cents per share (about the same as 1998’s second quarter), and its earnings before interest, taxes, depreciationand amortization (EBITDA) rose 14 percent from the year-earlier period to $198 million. In one sense, making a comparison to 1998’s results is difficult, because 1998 was Hilton’s last year as a combined gaming and lodging firm. The reported results are for the lodging operation only, but the gaming operation still had an effect on the 1998 results simply because the two operations were part of one company. Bear Stearns makes the following points about Hilton’s situation. A large portion of the company’s business comes from groups, which book rooms far in advance. In some cases those groups subsequently either cancelled or reduced their room blocks. Bear Stearns notes that Hilton’s management is excellent at filling those empty rooms with independent travelers. However, the company (like most others) cannot do so at the 1998 rates at which the canceled groups originally booked, because room rates are not as strong in 1999 as they were in 1998. The result is a sinking or flat ADR, and weakening RevPAR. Even with the deterioration of the group business, though, Hilton would have recorded a systemwide increase in RevPAR, but for another factor-namely, the continuing weakness of the lodging market in Hawaii, where Hilton operates two hotels. Two other markets caused disappointments: New York, where the New York Hilton is being rehabilitated and transient demand has softened; and Chicago, where the number of conventions has diminished while at the same time other operators have opened directly competitive hotels. In keeping with the strategy outlined in the accompanying article, Hilton acquired some $950 million in real-estate assets in 1998, according to Bear Stearns’s Ader. In 1998 the company purchased properties in La Jolla, Phoenix, Charlotte (North Carolina), Dallas-Fort Worth, and East Brunswick (New Jersey). Acquisitions in 1999, worth some $215 million by mid-year, included another Phoenix property and hotels in Boston and Alexandria, Virginia. Other chains. The experience of other hotel chains during the same time period may provide some perspective. Choice Hotels, which is not a part of Hilton’s competitive set, beat Wall Street’s earnings expectations by one cent, earning 26 cents per share for the second quarter of 1999. Choice had a good quarter, according to Bear Stearns, with a “surprisingly strong” RevPAR increase of 4.2 percent. Much of Choice’s revenue stream is franchise royalties. Bear Stearns noted that the effective royalty rate continues to increase, which is a major reason for Choice’s performance. Another source of increased revenue was its franchisee-vendor program, “Choicebuys.com,” the revenues of which grew 61 percent in 1999 compared to 1998. Buoying Choice’s RevPAR is leisure travel, in Ader’s view, which remains strong even as groups and corporations are reconsidering travel plans. Choice has also been coaching its franchisees on how to manage revenues and has installed profit managers at many franchises. The result, as Ader puts it, is “the franchisees see their revenue increase and Choice sees its fees increase.” Ironically, Choice’s only full-service brand, Clarion, had one of the most difficult quarters of all the Choice brands. Marriott, which can be considered part of Hilton’s competitive set, earned a penny more per share than Bear Stearns expected, at 42 cents per share, up from 37 cents per share in the second quarter of 1998. Marriott’s profits came in part from the addition of 26,500 rooms to the system, but also from improvements in operating margins, strong international results, and strong revenues from its timeshare division-G. W.
and not just broad-brush benchmarks. Hilton customizes measurements for each hotel by taking into account historical performance and local market condition. Moreover,
the green-yellow-red system provides a margin of error, in case the original targets turn out to be inappropriate. Hilton also allows for some adjustment of targets in case
August 1999
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37
Value creation is not just another “program du @ur.” Instead, it requires a change in the corporate culture.
38
of extraordinary occurrences outside the control of the hotel manager, such as change in local regulations or severe weather damage. At the same time, because the Hilton balanced scorecard is flexible, management can encourage continuous improvement by setting incrementally higher, yet attainable, targets. Follow-through and commitment. Incentives, rewards, and constructive feedback should be an integral part of this or any measurement approach. Furthermore, regular reports let people know how they’re doing and provide opportunities for team members to share best practices and learn. As a final note, it’s essential that value creation not become just another “program du jaw,” as has occurred with so many would-be quality-improvement efforts. Instead, a value-creation approach must be ingrained in the business culture and be supported by management through daily activities to counter a naturally occurring resistance to change. Such management consistency is what wins over skeptical or disaffected employees. The Hilton balanced scorecard assesses the effectiveness of the company’s business design by building diagnostic measures into the company’s daily operations while aligning the efforts of team members across hundreds of properties to improve operations and deliver a distinctive value proposition to customers. It provides managers with better information for selecting investments and initiatives that further the goal of enhancing shareholder value. Finally, it supports Hilton’s decentralized operations by encouraging an innovative entrepreneurial spirit focused on its constituents, by keeping those closest to the customer accountable for fulfilling customer priorities-and it shows that what is valued gets delivered.
I:IIt#I > 21 1 HOTELAND RESTAURANTADMINISTRATIONQUARTERLY
NextSteps Hilton views the balanced scorecard and its value-creation strategy as dynamic processes. Managers have added and adjusted measures of value creation along the way as they become more familiar with the actions that create an effective outcome. Experience leads to more-powerful ways to use the program, such as testing what-if scenarios, identifying cause-andeffect relationships, and creating a continuous-improvement index. Information technology will allow the implementation of a key ingredient for success in the near future. Hilton will operate integrated information systems that permit data consolidation, while at the same time allowing access to information for all properties. With enhanced connectivity, Hilton plans to capitalize on its team members’ collective experience and the resources of the entire organization. With the implementation of the firm’s enterprise-resource-planning software, Hilton’s managers will be able to fully explore the issues that drive the value-creation process by adding an analytic layer of information processing to their continuousimprovement effort. The ability to better plan and integrate operations across all operating units will result in delivering the highest value services at the lowest cost. An effective balanced scorecard, as Kaplan and Norton point out, should tell the story of a company’s strategy. Just so: Hilton’s balanced scorecard makes it possible to evaluate the vision for the organization and to create shared understanding, so that all team members see how they can contribute to making the company’s business design and value creation efforts succeed for all of its constituents. Most important, it’s working-enabling Hilton to deliver more value in the eyes of its customers. CQ
Hilton’s goal is to create value for its constituents-customers,
owners and shareholders,
employees (known as “team members”), strategic partners, and the communities
for All Stakeholders
where each hotel is located-by delivering a consistent value proposition. To achieve that goal, the company relies on the axiom that what gets measured and managed gets delivered.
by Dieter Huckestein and Robert Dubof
E
merging from the economic turbulence of the Gulf War, hotel overbuilding, and the recession that rocked the hospitality industry in the early 199Os, Hilton Hotels Corporation faced a pressing need for a new, comprehensive approach to creating value in its hotel operations. The economic downturn is often cited as the primary cause of the industry’s troubles in the early ’90s. The greater issue, however, was the capacity overhang remaining from the 198Os, which drove down occupancy levels, RevPAR, and profits. Moreover, new brands created ever-narrowing market segments, increasing consumer choice and making it more difficult for hotel chains to differentiate their products and services. Meeting customer expectations based on evolving value perceptions became, and continues to be, in-
28
i,HOTELANDRESTAURANTADMlNlSTRATlONQUARTERLY CORM
creasingly more challenging. Success for Hilton (and all hotel companies) in dealing with this situation lies in understanding the essential drivers of value and how to deliver against them consistently. In response, Hilton’s top management took two steps. First, the company adopted an aggressive growth strategy to realize the full value of the Hilton brand-essentially to ensure that customers would find a Hilton property in appropriate market locations. Second, since research indicated performance disparities
Dieter Huckestein
is president-hotel operations at Hilton Hotels Corporation (([email protected]. Robert Duboflis a vice president at Mercev Management Consulting, based in Boston [email protected])>. 0 1999, Cornell University
among its hotels, the company implemented a systematic business approach to ensure consistency from property to property. The first objective was achieved by a combination of record franchise expansion, over $1 billion of full-service-hotel acquisitions, and the formation of a strategic alliance with Hilton Group PLC, owner of the Hilton name outside the United States. With those steps, the newly unified and expanded Hilton brand established a strong platform for hotel operations. Having expanded the brand, the firm needed to concentrate urgently on the second goal, which required an alignment of processes, people, and technology. Hilton addressed that second objective by adopting the Hilton Balanced Scorecard, as it is known, which measures Hilton’s creation of value. The balanced-scorecard concept was developed in the early 1990s by Robert Kaplan, an accounting professor at the Harvard Business School, and David Norton, president of Renaissance Strategy Group.’ This article describes how the Hilton Balanced Scorecard fits into the firm’s strategic business design, how management practice was reoriented around the scorecard, and what results have been achieved. It also reviews lessons learned and proposes next steps. The point of the story is not so much that Hilton embraced the balanced-scorecard concept but that the scorecard was implemented in a way that integrated all aspects of the business and changed the company’s culture to achieve the desired results. We contend that Hilton’s multifaceted approach, of which the balanced scorecard is pivotal, has markedly transformed the company’s hotel operations. ’ Robert S. Kaplan and David “The Balanced Scorecard-Measures Performance,” Harvard Businexr February 1992, pp. 71-79.
P. Norton, That Drive Review, January-
StrategicBusinessDesign Hilton began its strategic-planning effort by examining its position in the marketplace. Using comprehensive conjoint analysis,2 the research identified how Hilton compared with its competitors as well as the key attributes on which Hilton hotels were not meeting customer expectations. Ironically, those key attributes were not at all surprising: customers want a clean, quiet, comfortable room (see Exhibit 1). This study provided the necessary catalyst for managers to ask whether Hilton was delivering on this standard at all times. The research suggested that if hoteliers do not satisfy those core desires, all other hotel services make little difference to guests. Most critical, the research revealed that despite steps to improve performance the quality of the guest experience was inconsistent among Hilton properties, especially between franchised properties and company ownedand-managed hotels. A new model. Hilton changed its business design-the system by which a company delivers value (or utility) to its customers-by focusing on action-oriented tactics to redesign its organizational and support structure. The linchpin for this effort was the balanced scorecard, which allowed Hilton to translate its strategy into operations through measurement and communication throughout the organization.
Exhibit 1 Tap-ten hotel attributes (1)
Cleanliness
(2)
Feeling
(3)
Overall
(4)
Good
(5)
Availability
of the bathroom
of safety cleanliness
of the room
shower of the type of room
reserved (6)
Quiet
(7)
Room’s
room
(6)
Responsiveness
(9)
Helpfulness
odor (on initial entry)’ to requests and courtesy
at
check-in (10)
Handling
of billing errors
Based on a conjoint study of hotel patrons conducted by Hilton Hotels.
‘For a discussion of smoke-free guestrooms, see: Arthur Field, “Clean Air at Niaht: Suoolv and Demand of Smoke-Gee Hotel kooms,” Cornell Hotel and Restaurant Administration Quarterly Vol. 40, No. 1 (February 1999), pp. 60-67.
The Hilton ValueChain The Hilton value chain is a conceptual model of the process that links long-term strategic objectives to short-term tactics (see Exhibit 2, overleaf). The chain is a graphic depiction of how the company’s * For an application of conjoint analysis, see: Leo M. Renaahan and Michael Z. Kay,“What Meeting Plan&rs Want: The Conjoint-Analysis Approach,” Cornell Hotel and Restaurant Administratim Quarterly, Vol. 28, No. 1 (May 1987), pp. 66-76.
August 1999
l
29
Exhibit 2 Hilton value chain
aligned with its vision of creating value. and shareholders are the people for whom Hilton creates profits and enhanced property and share values. Strategic partners and vendorsare firms with whom Hilton works to offer the best possible products and services. Community involvement reflects Hilton’s commitment to be an integral contributor in each area where its hotels are located. Four components. To serve those constituencies, the value chain links four components: value drivers, businessstrategy, processes,and the balanced scorecard. l
Value drivers
I
Brand management Revenue maximization Operational effectiveness l Value proposition l
1
l
l
Owners
l
l
Hilton Value Drivers Business
processes
Company business plan l Hotel business plan l Department business plan Individual performance management l Recognition and reward l
l
vision and strategic plan are linked to value drivers that direct strategy and tactical processes, and how those elements ultimately are manifested in Hilton’s balanced scorecard. The purpose of applying the value-chain concept is to focus on Hilton’s constituents (the stakeholders identified in the center) through every action the company takes. A continuous-improvement process is applied to each element in the value chain to ensure that performance levels increase as customers’ demands and expectations evolve (and as competition strengthens).
30
At the heart of the value chain are the five constituencies Hilton serves: Customers are the key ingredient to any business’ssuccess.Hilton focuses on consumers’ everchanging priorities, delivering against their expectations with an aim to delight them (e.g., by giving them more value than they anticipated). Zam members are Hilton employees.The company encourages an entrepreneurial spirit, encourages empowerment and a sense of pride, and establishesprocesses l
l
INXFI i,,HOTELANDRESTAURANTADMlNlSTRATlONQUARTERLY I
Value drivers are the elements that directly contribute to the successof the value equation. Hilton has identified the following four value drivers that together create value for Hilton’s constituents. Brand management. This involves promoting and maintaining consistency in the delivery of services and products expected by customers. Revenue maximization. Hilton implemented flexible, rational pricing in response to current levels of demand in individual property markets and in consideration of the demand elasticity of different customer segments-especially targeting customers who provided the greatest profit. Operational efictiveness. The company seeksto achieve the maximum value and return from its resources through continually improving existing processesand developing new ones. Valueproposition. Above all, Hilton seeksto build loyalty among its customers by aiming to delight them and anticipating their everchanging desireswhile ensuring that team members, who are essential contributors to meeting this objec-
tive, are also satisfied (and ultimately loyal).
Hilton BusinessStrategy Hilton’s business strategy is built on three pillars, namely, research, education and training, and brand standards. First, extensive research determines what’s important to Hilton’s customers and how the company is performing on those important attributes. The company applies a variety of qualitative and quantitative techniques to make this assessment, depending on the decisionmaking information desired. In particular, by using data from internal proprietary data and syndicated research, the balanced scorecard provides information on how individual hotels perform against key competitors, as well as their own historical ratios and other Hilton properties. Careful monitoring helps managers anticipate the changing needs of internal and external customers. The second pillar, education and training, acknowledges the importance of today’s information-based environment by communicating brand standards, as well as developing and using team-member knowledge. Finally, the three-pillar approach explicitly recognizes the importance of adhering to brand standards, for the price of failing to do so involves unnecessary expenses for service recovery and lost revenue. Therefore, not only are hotel team members trained in brand standards, but so are the outside vendors who provide the products and services that customers expect and Hilton promises to deliver.
BusinessProcessesand the Hilton BalancedScorecard Hilton uses a rigorous annual business-planning process that links its business strategy with tactical actions. This linkage, however, is not reserved for a select few manag-
Exhibit 3 Measures tor Hilton value drivers Value
driver
Revenue maximization
Measure l
l
Operational effectiveness
l
Value proposition
l
l
l
l
Brand management
ers or team members and emphasized just once a year. Instead, each team member (even the newly hired) is exposed constantly to Hilton’s operating strategy. For example, a computer-based program allows each hotel to customize its orientation presentations to describe the individual property while at the same time conveying a consistent messageto ensure that every new team member receives the same up-to-date information about Hilton overall. Such a program would not be possible without a performance-reporting tool that combines both financial and nonfinancial indicators to gauge whether the company’s strategy is working. The strategy is also reinforced continuously in all communications throughout the year, asstaff members manage actions and measure results. Hilton useseight measurements to provide a balanced view (scorecard) of the business’spresent and future performance (seeExhibit
Room RevPAR (revenue per available room) RevPAR index (RevPAR versus competitors in the local market) EBITDA (earnings before interest, taxes, depreciation, and amortization) Guest-comment cards (overall satisfaction score from cards filled out by customers) Customer-satisfaction-tracking study (overall satisfaction score from a sample of guests interviewed via telephone) Team-member survey (overall satisfaction score from a comprehensive survey of all hotel employees) Mystery shopper (average of scores from random visits by a third-party auditor)
. Standards compliance (a measurement based on a hotel’s compliance with brand standards)
3). Some of the measurements are lag indicators that show the outcomes of a strategy, while others are lead indicators that help the company modify its businessdesign so that it can take advantage of future opportunities. Property-specific goals are linked to incentive bonuses, performance reviews, merit-based salary increases, and stock-option grants. The result of setting the standardsand making sure that everyone understands how those standards are measured is an alignment of actions with goals. Clearly, this approach supports the concept of measuring whatever is valued so that it gets delivered. People at every level of the organization, from the president to frontline team members, know what is expected of them and how they are doing. The balanced scorecard quickly translates corporate strategic direction into property-level goals and thus becomes the critical link in Hilton’s value chain.
August 1999 31 l
Exhibit 4
Sample balanced scorecard
A Tool for Driving Performance Measuring performance using the Hilton Balanced Scorecard is distinctive in two ways (see Exhibit 4). First, it involves all employees &t a property, including managers, frontline team members, and corporatesupport-staff members. In general, the financial goals and performance compared to competitors are determined by the property manager and senior corporate managers during Hilton’s annual business-planning period. Nonfinancial goals usually are set at a percentage improvement over the previous year’s score. Corporate employees have their own individual balanced scorecard that is tallied in a way that supports the company’s overall objectives. Second, the diagnostic results are communicated in a simple manner. Although the measures are reported as numerical scores, each measure is also designated as being in one of three color zones, which take in a range of scores. The green zone indicates that the property is meeting or exceeding the goal; yellow designates results slightly below the goal; and a red color flags performance that is well below the goal. Because the color zone comprises a
32
range of outcomes, the process remains flexible while still communicating a single, company-wide system of targets. This simple visual feature also helps indicate a sense of direction. Team members can easily see how well their property is performingboth in a quick-to-see electronic format and on graphs posted at most team-member entrances or other back-of-the-house areas. Some hotels have creatively added colored lights to highlight the results. By communicating results visually to show strengths and weaknesses, the color-coding system leaves little doubt in anyone’s mind regarding how a particular unit is performing on its specific objectives.
Identifying What’s important While the balanced scorecard sets forth the measurement framework, Hilton’s managers needed tools to bring clarity to decision making and problem solving. In the past, for example, managers’ efforts were hindered by the lack of clear guidance on where to focus their efforts (not to mention their limited resources). The point of focusing on customer satisfaction is to go beyond
I:IIi'!!I;lI11 J HOTELAND RESTAURANTADMINISTRATIONQUARTERLY
merely solving problems by knowing what specific issues drive the customers’ value perceptions. To assist in identifying areas of potential value growth, customized priority reports identify the key drivers of customer satisfaction on which team members should focus, thus concentrating the efforts of each hotel operating unit on those areas most important to customers. The illustrative hotel-priority report in Exhibit 5 shows that guests’ ratings improved in many areas from the prior period, but staff members still need to devote their attention to the “fix it now” attributes, shown in the upper left quadrant of the exhibit. Those are items of great importance to the customer (plotted on the vertical axis) and are farthest from lOOpercent satisfaction (plotted on the horizontal axis). While identifying what to fix is essential, team members also need to determine how to address the challenge of continuous improvement. To that end, Hilton developed a continuous-improvement process that goes by the abbreviation STP standing for Situation-TargetProposal (see Exhibit 6, overleaf).
Each phase comprises several steps for determining a course of action. The priority report thus transforms data into actionable information while the STR (continuousimprovement process) helps determine the actions needed to address those problems. The following example shows how this process works. Fix it now. The balanced scorecard for one particular hotel revealed relatively low scores on guest-comment cards. In reviewing the priority report, the hotel’s staff members discovered that bath and shower facilities fell into the “fix it now” quadrant, with a score of 5.09 on the guest-comment card’s sevenpoint scale. Examining that score, the employees identified the problem as being one of inadequate pressure in the shower. The staff members suspected that the cause was inadequate water-pump and pipe sizes for certain room locations, and so they measured water flow by timing the amount of water discharged in a specific period of time in various rooms on different floors and in each of the hotel’s three buildings. To the team’s surprise, however, nothing indicated that the problem was related to the pumps or plumbing. Next, team members took apart the showerhead, and here they found the problem. Each unit’s centrifugal flow restricter was constraining the water flow by an amount greater than the manufacturer’s specification. When the team removed the restricter, not only did the water pressure improve, but so did customer satisfaction. “The solution was simple and quick,” recalled the hotel’s general manager, “but we would not have found it without the continuousimprovement process, because we thought the showers’ low water pressure was due to building-infrastructure issues.” Even while the work was in progress, the comment-
Exhibit 5 Sample priority report
60%
75%
80%
85%
90%
95%
100%
Note: Values in (parentheses) indicate point changes from previous reporting period. Hilton is currently in the process of redesigning the priority report from the fourquadrant matrix seen here to a cascading chart. This new approach will more clearly show how much improvement is needed in each particular attribute to reach the green zone while simultaneously moving beyond benchmarking satisfaction to measuring loyalty by focusing on what drives customer loyalty, not simply satisfaction.
card score increased to 5.95 and then to 6.07. Today, customers rate the hotel’s bath and shower facilities at 6.43 on the seven-point scalemoving this attribute from the “fix it now” quadrant to the “keep up the good work” quadrant. Outside audit. The improvement process also involves an outsider’s point of view. Hilton’s audit firm, Arthur Andersen, reviews each property’s priority report to ensure that the hotel staff is focusing on the issues that customers care about. The auditors explore how the continuous-improvement process has added value since their prior review, as well as make suggestions based on their experience with other hotels and companies.
Outcomes Thus Far The balanced scorecard has become the primary tool for translating the company’s strategic vision to daily operations. Financial results bear out the effectiveness of this approach. According to Smith Travel Research, between 1995-the year prior to implementation-and yearend 1998, Hilton’s owned and managed hotels in the United States improved their RevPAR index with regard to competitors3 Properties in Hilton’s franchise system, which implemented the value-creation strategy one year later, have already ’ The index gauges the extent hotel is capturing or exceeding of the market.
to which a its fair share
August1999 l 33
Exhibit 6 STP: Continuous-improvement process Hilton’s STP (Situation-Target-Proposal) making tool used in analyzing a situation course of action. An ideal STP proceeds
Once the STP is completed,
process is a decisionand recommending a as follows.
take place:
Plan. Determine what needs to be done; who needs to be involved, who is responsible for completing what actions and by when, overall deadline for the pilot test, who tracks results, and how those results are to be tracked and reviewed;
l
Situation. Identify (1) area to improve, (2) baseline measurement and measurement system, (3) root causes, and (4) process that needs to be addressed;
l
Target. Include (1) the standard for the process to be addressed, (2) the measurement goal, and (3) the date for completion; and Proposal. State (1) recommendation to be improved, (2) resources (3) time required to implement
four action steps
l
l
or solution for the process needed for the proposed idea, pilot.
Do. Implement
pilot project;
Check. Determine whether the pilot project indicated in the plan; and
produced
the result
Act. If the objectives of the target statement were met, standardize the process. If not, extend the pilot test or return to the situation step and reconsider the root causes of the matter.
The continuous-improvement process involves applying these steps with the objective of improving performance and creating value for Hilton’s constituents.
Sample STP (situation-target-proposal) Situation: To remain competitive, Hilton needs continued improvements in the use of new technology. Technology can be an enabler to improve efficiency, exceed customer expectations, and improve internal-customer satisfaction. The use of wireless technology and speech recognition would be an industry first, positioning Hilton as a leader.
Target (goal): To pilot-test wireless-technology hotel by year end 1998.
and speech-recognition
solutions
for check-in
and check-out
at a minimum
of one owned-and-managed
Proposal: Plan Interim steps
cost of each step
Identify functionality desired in a hand-held speech-recognition solution for check-in and check-out Develop solution in conjunction with vendor partners Beta project at one hotel
Evaluate usefulness, success, and customer acceptance of the solution
Total cost:
34
$12,000
Do Supporting depts.
Check
Begin date
End date
Person responsible
Hilton IT, marketing
Now
l/31/98
Luke
Hilton IT, marketing
l/1/98
4130198
411198
7/l 198
Hilton
IT
$42,000
I:IIKMl 11 i HOTELAND RESTAURANTADMINISTRATIONQUARTERLY
Act
Goals measured?
“Do” date met?
Budget met?
Yes
Yes
Yes
Director, front-office systems
Yes
Yes
Yes
6130198
Director, front-office systems
Yes
No
Yes
6130199
Director, front-off ice systems
Ongoing
1 Ongoing
1 Ongoing
Next steps
Adjust evaluation dates
shown tremendous improvement. Formerly operating at less than their fair market share, today they capture more than their fair share of RevPAR. Nonfinancial measures show improvement, as well. Among Hilton’s company-owned and -managed hotels, the latest guest-satisfactiontracking study revealed strong increases in customers’ opinions on overall satisfaction, their likelihood of recommending Hilton hotels, and their likelihood to return to a given hotel. Those three factors (i.e., satisfaction, recommendations, and return likelihood) comprise a measure of customer loyalty that Hilton tracks closely-and that customerloyalty score recently reached its highest level ever. Moreover, a major industry syndicated research project, by J.D. Power and Associates, has shown Hilton improving decisively during the past three years (systemwide and including franchises). Thus, instead of seeing customers’ view of the price-value equation dimmed by rising room rates, the company is improving that pricevalue relationship even as average rates increase (along with corresponding guest expectations). Consistency. The balanced scorecard has proven successful on many fronts. By implementing the scorecard throughout the organization, Hilton has reinforced consistency in its business culture. That consistency is critical in a business with so many separate operating units, as well as in an industry that has such personnel volatility. Reaction in the field, given the shift in perspective required of team members, has been surprisingly positive. Interviews conducted by Mercer Management Consulting with managers throughout Hilton Hotels returned the following findings regarding the balanced scorecard. (1) It encourages managers to focus on both short- and long-term
The Hilton Pride Innovation Award One part of the recognition and reward component of the Hilton Value Chain is the Hilton Pride program. A key aspect of that program is the Hilton Pride Innovation Award. This recognition is designed for Hilton team members who generate original and innovative value-creating ideas at the company’s US hotels, whether owned or managed by Hilton or a franchiser. Top ideas from each property are eligible for a quarterly cash grand prize. The first hotel to win the Hilton Million $ The first innovative grand-prize winner, for Team Pride award (described on the next instance, was a guest-service agent whose page) was Pointe Resorts. Above, team idea was for team members to wear a button members celebrate the moment. simply stating: “We want to know.” The button was an effective way of starting a conversation with guests, who would naturally ask team members, “What do you want to know?” This allowed the team members to ask guests how their stay experience is going, or whether the customer is a member of Hilton’s HHonors frequent-stay program. Hotels using this approach experienced marked increases in guest-comment-card response and HHonors enrollment. Another winner was the head concierge at the New Orleans Riverside, one of Hilton’s busiest convention hotels. Noting that customers often asked for a way to send or carry items accumulated during their stay back to their home or office, the concierge helped develop a sturdy disposable cardboard suitcase that is sold for a nominal fee. The idea solved a guest need, while generating a small revenue stream. Additional innovative ideas include such things as a Texas property that washes guests’ cars in the valet lot. On the dashboard inside the clean car is a note suggesting that the guest can “clearly see” why Hilton leads the competition. At yet another property, a team member suggested attaching power strips under boardroom tables to allow meeting participants to plug in their equipment without unsightly (and possibly hazardous) extension cords.43.H. and RD.
drivers of success. Because they are more aware of the long-term implications of their actions, managers have become more willing to take risks in improving both service and financial performance, while being aware of tradeoffs and position relative to the competitive marketplace. The previous reward structure, which focused mostly on financial performance, created a cultural focus that was too narrow and too shortsighted. This approach also failed to link with the company’s customer-marketing strategy. In contrast, because results on the scorecard are linked to bonus payouts, managers pay careful attention to far more than just finances. (2) At a strategic level, use of the balanced scorecard has increased brand equity by reinforcing quality control of the “Hilton experience.”
This consistency has enabled the new Hilton Garden Inn4 franchise properties to command a rate premium over competitors. (Hilton Garden Inn hotels constitute over $1 billion in new hotel construction underway at this writing.) (3) Use of the scorecard cultivates and rewards teamwork, since the hotel property is assessed as a whole. The balanced scorecard moves Hilton’s employees to a frame of mind that is attuned to external competition and to customers. Once again, the company has recast its reward structure in a way that reinforces a teamwork mentality. Those rewards include a $1-million pool of Hilton stock shared among all top-performing team members; quarterly awards to encourage 4 Garden
Inn’
is a registered
trademark
August1999 l 35
Hilton Pride reward and recognition programs Program
Hilton Pride Innovation Award
1 Objective
1 Participants
To reward team members for generating original, innovative, valuecreating ideas
U.S. corporateowned and -managed, and participating franchise hotels
Team members submit best valuecreating ideas related to any of five constituents: external customers, internal customers, shareholders and owners, community, and vendors and suppliers
‘The eight measures for properties in the Hilton Million $ program guest-comment cards, mystery shopper, customer-satisfaction-tracking ** The four value-proposition team-member survey.
measurements
internal-process innovation; and team-pride awards to encourage healthy internal competition within hotel product lines (commercial, airport, resort, and suite and focused service). The balanced scorecard has thus not only become an effective measure, but a motivation tool to encourage breakthrough thinking and innovation (seethe box on the previous page). (4) The scorecard makes performance reviews more objective. The reviewing manager is called on to offer lesssubjective opinion and more objective feedback on how well the team member did in achieving the agreed-upon, company-wide goals. Incentives that flow from performance evaluations
36
1 Awards
Program basics
are guest-comment
First-, second-, and thirdplace winners selected at each location each quarter; first-place winners receive a “Thanks for Making It Happen” exclusive Hilton key chain and are eligible for quarterly corporate grand prize of $2,000 for an individual (after taxes) or a team shares the $2,000
are EBITDA, room RevPAR, study, and team-member cards,
mystery
shopper,
RevPAR survey.
index,
brand
customer-satisfaction-tracking
such asmerit-based salary increases, bonus awards,and stock-option grants are also linked to objective balanced-scorecard results. (5) As part of Hilton’s unified, system-wide approach to measuring results, the scorecard encourages sharing of best practices with other hotels. Individual hotels have devised solutions to a variety of issues, from noise to pillow comfort to restaurant service. The continuousimprovement processis a fact-based method that demands a focused and disciplined approach to decision making and problem solving. Solutions to common problems are disseminated throughout the organization via regional directors in their regular visits to hotels and by post-
CIJKNEII 1i HOTEL ANDRESTAURANT ADMINISTRATION QUARTERLY
1 Timing
Started April 1997; repeats every quarter through the end of 1999; grand prize winner announced on last day of month following end of quarter
management, study,
and
ing best-practice casestudies on the company intranet. Outside auditors and vendors also spread learning by sharing best practices of companies in different industries. (6) Finally, rather than leaving strategy information trapped in the domain of a few senior managers, Hilton executives use the balanced scorecard to communicate how the company creates value throughout the entire organization.
Early Lessons Without any doubt, we conclude that the benefits far outweigh the time and resources required for Hilton to implement the valuecreation processand delivery outlined here. Having said that, we
must also warn that one should not underestimate the challenges in moving a company from static, backward-looking measurements to a comprehensive business design that integrates a forward-looking approach. Such an effort requires senior managers’ commitment and continual communication at all levels of the organization. Hilton’s experience offers insights for other hospitality companies (indeed, companies in any industry) considering a similar approach to creating value. The following are some of the challenges Hilton had to address.
Framework and tools to succeed. Without the fundamental building blocks-a well-thought-out strategy, a roadmap, and proper tools-and a long-term commitment to training and improvement, the effort will be doomed to failure. Careful selection of measurements. People should be measured on goals over which they have control, responsibility, and authority to improve. These goals should be related to the hotel attributes that are important to customers and, therefore, should be critical drivers for the business. Particularly when linking compensation to scorecard measures, senior managers must be confident that they have the right measures on the scorecard and have collected valid and reliable data for the selected measures. Simple, yet comprehensive. The program should be easy to understand, and it must be communicated to all levels of the organization. Hilton’s green-yellow-red rating scheme helps keep the message clear and the process simple. The integration of actions and measures into the value-chain business model ensures that the balanced scorecard supports the overall company strategy and vision.
Realistic andflexible target setting. Targets should be relevant to the snecific hotel or oneratina unit,
Wall Street’s View One of Hilton’s goals in implementing its balanced scorecard is to provide a strong return to owners and stockholders. In the stock-market climate of mid-1999, however, a lodging company’s stock price is not always the sharpest indicator of its actual performance. Hilton’s stock price was struggling in mid-1999, as were those of many other lodging firms. That stock-price weakness stemmed both from factors relating to Hilton specifically and to the fundamental prospects for the lodging industry. As explained by Jason N. Ader, an analyst with Bear Stearns who follows the lodging industry, Hilton’s performance for the second quarter of 1999 met Wall Street analysts’ consensus expectations. The company reported earnings of 25 cents per share (about the same as 1998’s second quarter), and its earnings before interest, taxes, depreciationand amortization (EBITDA) rose 14 percent from the year-earlier period to $198 million. In one sense, making a comparison to 1998’s results is difficult, because 1998 was Hilton’s last year as a combined gaming and lodging firm. The reported results are for the lodging operation only, but the gaming operation still had an effect on the 1998 results simply because the two operations were part of one company. Bear Stearns makes the following points about Hilton’s situation. A large portion of the company’s business comes from groups, which book rooms far in advance. In some cases those groups subsequently either cancelled or reduced their room blocks. Bear Stearns notes that Hilton’s management is excellent at filling those empty rooms with independent travelers. However, the company (like most others) cannot do so at the 1998 rates at which the canceled groups originally booked, because room rates are not as strong in 1999 as they were in 1998. The result is a sinking or flat ADR, and weakening RevPAR. Even with the deterioration of the group business, though, Hilton would have recorded a systemwide increase in RevPAR, but for another factor-namely, the continuing weakness of the lodging market in Hawaii, where Hilton operates two hotels. Two other markets caused disappointments: New York, where the New York Hilton is being rehabilitated and transient demand has softened; and Chicago, where the number of conventions has diminished while at the same time other operators have opened directly competitive hotels. In keeping with the strategy outlined in the accompanying article, Hilton acquired some $950 million in real-estate assets in 1998, according to Bear Stearns’s Ader. In 1998 the company purchased properties in La Jolla, Phoenix, Charlotte (North Carolina), Dallas-Fort Worth, and East Brunswick (New Jersey). Acquisitions in 1999, worth some $215 million by mid-year, included another Phoenix property and hotels in Boston and Alexandria, Virginia. Other chains. The experience of other hotel chains during the same time period may provide some perspective. Choice Hotels, which is not a part of Hilton’s competitive set, beat Wall Street’s earnings expectations by one cent, earning 26 cents per share for the second quarter of 1999. Choice had a good quarter, according to Bear Stearns, with a “surprisingly strong” RevPAR increase of 4.2 percent. Much of Choice’s revenue stream is franchise royalties. Bear Stearns noted that the effective royalty rate continues to increase, which is a major reason for Choice’s performance. Another source of increased revenue was its franchisee-vendor program, “Choicebuys.com,” the revenues of which grew 61 percent in 1999 compared to 1998. Buoying Choice’s RevPAR is leisure travel, in Ader’s view, which remains strong even as groups and corporations are reconsidering travel plans. Choice has also been coaching its franchisees on how to manage revenues and has installed profit managers at many franchises. The result, as Ader puts it, is “the franchisees see their revenue increase and Choice sees its fees increase.” Ironically, Choice’s only full-service brand, Clarion, had one of the most difficult quarters of all the Choice brands. Marriott, which can be considered part of Hilton’s competitive set, earned a penny more per share than Bear Stearns expected, at 42 cents per share, up from 37 cents per share in the second quarter of 1998. Marriott’s profits came in part from the addition of 26,500 rooms to the system, but also from improvements in operating margins, strong international results, and strong revenues from its timeshare division-G. W.
and not just broad-brush benchmarks. Hilton customizes measurements for each hotel by taking into account historical performance and local market condition. Moreover,
the green-yellow-red system provides a margin of error, in case the original targets turn out to be inappropriate. Hilton also allows for some adjustment of targets in case
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Value creation is not just another “program du @ur.” Instead, it requires a change in the corporate culture.
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of extraordinary occurrences outside the control of the hotel manager, such as change in local regulations or severe weather damage. At the same time, because the Hilton balanced scorecard is flexible, management can encourage continuous improvement by setting incrementally higher, yet attainable, targets. Follow-through and commitment. Incentives, rewards, and constructive feedback should be an integral part of this or any measurement approach. Furthermore, regular reports let people know how they’re doing and provide opportunities for team members to share best practices and learn. As a final note, it’s essential that value creation not become just another “program du jaw,” as has occurred with so many would-be quality-improvement efforts. Instead, a value-creation approach must be ingrained in the business culture and be supported by management through daily activities to counter a naturally occurring resistance to change. Such management consistency is what wins over skeptical or disaffected employees. The Hilton balanced scorecard assesses the effectiveness of the company’s business design by building diagnostic measures into the company’s daily operations while aligning the efforts of team members across hundreds of properties to improve operations and deliver a distinctive value proposition to customers. It provides managers with better information for selecting investments and initiatives that further the goal of enhancing shareholder value. Finally, it supports Hilton’s decentralized operations by encouraging an innovative entrepreneurial spirit focused on its constituents, by keeping those closest to the customer accountable for fulfilling customer priorities-and it shows that what is valued gets delivered.
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NextSteps Hilton views the balanced scorecard and its value-creation strategy as dynamic processes. Managers have added and adjusted measures of value creation along the way as they become more familiar with the actions that create an effective outcome. Experience leads to more-powerful ways to use the program, such as testing what-if scenarios, identifying cause-andeffect relationships, and creating a continuous-improvement index. Information technology will allow the implementation of a key ingredient for success in the near future. Hilton will operate integrated information systems that permit data consolidation, while at the same time allowing access to information for all properties. With enhanced connectivity, Hilton plans to capitalize on its team members’ collective experience and the resources of the entire organization. With the implementation of the firm’s enterprise-resource-planning software, Hilton’s managers will be able to fully explore the issues that drive the value-creation process by adding an analytic layer of information processing to their continuousimprovement effort. The ability to better plan and integrate operations across all operating units will result in delivering the highest value services at the lowest cost. An effective balanced scorecard, as Kaplan and Norton point out, should tell the story of a company’s strategy. Just so: Hilton’s balanced scorecard makes it possible to evaluate the vision for the organization and to create shared understanding, so that all team members see how they can contribute to making the company’s business design and value creation efforts succeed for all of its constituents. Most important, it’s working-enabling Hilton to deliver more value in the eyes of its customers. CQ