Case of Roaring Dragon Hotel:
Read the case and answer the following 3 questions as outline format. (Please include the bullet points). Be sure to be comprehensible and detailed; and really ANSWER THE QUESTIONS.
(1) Please identify and BRIEFLY explain the challenges faced by Fortune when he assumed his role. These should include but are not limited to the several specific differences in “organizational culture” between HI and RDH (former) management. Please make sure that you include these cultural differences.
(2) What should Fortune, Erhi T, and the provincial government have done differently?
(3) What lessons did you learn from this case that you would apply to any transaction or situation that covers two or more cultures including mergers, acquisitions, J-Vs, takeovers, etc.?
ROARING DRAGON HOTEL:
Stephen Grainger wrote this case solely to provide material for class discussion. The author does not intend to illustrate either effective or ineffective handling of a managerial situation. The author may have disguised certain names and other identifying information to protect confidentiality.
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BACKGROUND:
The Roaring Dragon Hotel (RDH), a state owned enterprise (SOE), was one of the original three-star hotels in south-west China. Since the early 1950s it had enjoyed a long, colourful history and reputation as the region’s premium guesthouse.
To staff the hotel, employees were usually transferred in from other SOEs and government departments primarily on the strength of their guanxi or connections. Having secured employment, RDH employees felt excited and very proud. Some recalled “if your relatives or your friends knew that you were working at the Roaring Dragon, you would be admired.”
In 2000, the then-Chinese general manager (GM) Tian Wen’s management practices were from the planned economy era, with minimal concern for the development or expansion of the hotel’s business. Employees’ jobs and salaries were secure and their working conditions and benefits much better when compared to other jobs. The RMB 580 (US$75) per month paid to a barman or the RMB 1,500 (US$185) per month paid to a manager, combined with the easy work, neat uniforms, complimentary meals, health cover, accommodation and fringe benefits for employees made the hotel an attractive and respectable place of work. The organizational culture was relaxed with many employees managing to find time to read newspapers, drink tea and some managers even conducting private business and leaving the premises during working hours.
Although the market economy was slowly developing in the region, RDH management did not want to embrace new work practices nor was it concerned about the hotel’s decline in popularity and income. The RDH’s planned economy management processes were not changing and there was minimal concern for generating profit or delivering quality standards of service.
The provincial government was concerned that the potential of the hotel was not being realized and decided in 2001 that the RDH needed modernization. They commenced the search for an international management company to arrest the declining fortunes of the RDH and identified the Hotel International This document is authorized for use only by Sean McGrath ([email protected]). Copying or posting is an infringement of copyright. Please contact
@harvardbusiness.org or 800-988-0886 for additional copies.
(HI) as an organization with the right international reputation, credentials and brand name to take over management of the RDH and help realize the hotel’s potential.
By late 2001, after considerable negotiations, it was agreed in principle that in 2002 HI would take over management control of the RDH. The incumbent GM, Wen, would take the new position of acting as a conduit through which the HI communicated with the hotel’s board.
April 2002
Paul Fortune, the GM appointed by HI, arrived from England in April 2002 to commence the preparations for the RDH to begin its transition from a Chinese-managed SOE to management by the HI.
Fortune soon realized that a takeover involved massive changes in the hotel’s organizational culture. Entrenched guanxi practices, an ordinary quality of customer service and the occasional annual loss had to be converted into accountable, quality service practices provided by dynamic, motivated employees. Fortune’s team would need to identify efficient and effective employees who could produce the HI standard of excellence at the hotel. He also realized that many of the existing staff, who had been employed for as long as 30 years, were limited in their work professionalism, efficiency or the ability to communicate in English. The challenge was to transform a large group of relaxed family-based employees, working under an ad-hoc management style, into a professional group of dynamic employees operating within a structured international organizational culture.
With HI’s proposed arrival, the hotel’s Chinese board of management suddenly expanded from four to 20 members — with 11 new representatives from the co-owners of the RDH, local tobacco producers Erhi T.
The final contract signed between HI, Erhi T and the provincial government stipulated that HI would take over the management of the hotel from August 1, 2002, but the RDH would not be re-named as a HI hotel until such time as significant progress had been made towards improving the quality of service, as well as construction being completed on a proposed new five-star wing to replace the old section of the hotel. Once the quality of service in the modern extension was brought up to HI’s international standard, the hotel would then be re-branded the Hotel International Roaring Dragon Hotel.
It was proposed that by November 2002, the old section of the hotel would be closed and stripped for demolition. All that would remain open for guests was the modern, more expensive section of the hotel. Left with a significantly smaller number of rooms to service, employees’ redundancies were imminent as the 675 employees HI were inheriting were well in excess of the 350 employees they estimated would be needed to service the reduced number of rooms at capacity. Whilst many of the existing staff would be made redundant, HI planned to bring in eight expatriate professionals to manage the takeover and later, when the time was right, expand their international management team to include pastry chefs, an executive chef, food and beverage managers and a much stronger professional management team.
Fortune felt confident that within two years his team would be able to bring the service skills and professionalism of the local Chinese employees up to the HI’s world-class standard. With this goal in mind, he announced that, from the beginning of August 2002, a two-month training period for all employees would begin in search for employees with the right attitude and ability. In the HI human resource selection process, previously valued guanxi networks would become irrelevant and powerless. Co-owners Erhi T and the provincial government would have no control over the selection process and Erhi T would be financing employee redundancies or re-employing them elsewhere. Young employees This document is authorized for use only by Sean McGrath ([email protected]). Copying or posting is an infringement of copyright.
Fortune realized that the RDH’s nepotistic history was one of HI’s obstacles in choosing the best employees to remain at the hotel. There had been as many as 32 families with more than two family members working at the hotel, the kitchen had more than 70 chefs and departmental workloads were unbalanced with young employees putting in long hours compared to those working behind the scenes. Often older, more experienced employees found time to chat, play cards and read newspapers during working hours. HI had to change some deeply entrenched non-productive work behaviours.
July
In late July, HI’s international management team arrived to join Fortune to takeover administration of the front office, accounts, food and beverage, housekeeping and supply departments. Immediately they began working with employees to assess their performance under strict, demanding conditions and to determine who was adapting well to the new regime. Any employee who failed to meet the new, higher standards would be asked to leave by the end of November.
Around the same time, a significant event occurred with Nu Fu Travel, an agency that in the past had provided many accommodation and banquet customers to the RDH. Nu Fu’s manager rang to offer the hotel a Japanese tour group that required a small banquet at the hotel as part of their tour package. New HI food and beverage manager, Mike Thomason, told the manager that their package deal offer “was too cheap” and refused to accept, stating that he “wanted them to pay the full price.” Upon learning this, the Chinese head of food and beverage, Cui Fang, advised him that “if he refused the offer he would be effectively excluding HI from any future bookings from Nu Fu Travel.” Thomason refused to agree on the cheaper price and in retaliation Nu Fu cancelled all future tours booked at the hotel. This consequently resulted in the loss of business for RDH at a crucial time of increased competition from rival hotels in the region.
After a short time under HI’s management, employees realized they had to work much harder and staff who had strong guanxi connections and did not like to work hard or who realized they were likely to be laid off requested transfers out of the RDH.
While voluntarily redundancies were welcome, the down-side was the loss of critical industry contacts and guanxi connections. One of the oldest members of the Chinese management team, Fang, decided to leave, taking with her a large percentage of guaranteed income-generating contacts. After witnessing Thomason’s style of management, she opted for a transfer to another government hotel. Whether HI was aware or not, their number one guanxi holder was going to work for a rival competitor.
August
On August 1, 2002, each employee was issued a short-term contract guaranteeing their position for three months, out of which two months would be concentrated on training followed by a month’s probation focused on their ability, attitude and approach to the job. All managers and supervisors now worked an eight-hour day and were no longer able to conduct private business. Employees who used to sit around smoking and reading the papers in May, were now busy all the time or, if lucky, might be relaxing out of sight somewhere. This document is authorized for use only by Sean McGrath ([email protected]). Copying or posting is an infringement of copyright.
September
For contracted employees with less than five years’ service, a voluntary redundancy package was drawn up offering them RMB 1,000 (US$125) for each year of completed service. HI saw retrenching younger employees as an attractive option as the payout for those with only a few years service was significantly less than the larger sums needed to pay-out long serving staff, some with more than 30 years service. HI re-confirmed that no new staff would be hired for some time. Seventeen young employees accepted the redundancy package on offer.
Although the RDH was now under HI management, it remained Chinese in many aspects. For instance, some old practices had merely gone underground. Captains still hid in vacant guest rooms to watch TV, sleep or play cards — however, someone was now on watch outside the door at all times as immediate dismissal faced those caught.
Several more managers with important guanxi retired or moved on as news spread regarding the hotel’s forthcoming downsizing. Members of Erhi T and the provincial government were still scrutinizing HI’s performance closely as the rumblings of discontent began to grow.
October
Five talented young staff members from the front office and food and beverage departments gave notice in October that they were going to seek better opportunities elsewhere. Some had secured positions in other Chinese hotels or at foreign-managed hotels where guanxi connections did not hold any advantage.
The new standard of work demanded by HI at the RDH meant that many older employees could not cope with the faster and more demanding pace of the job. With no education and simple backgrounds, they had difficulty relating to the concept of five-star service and working under non-Mandarin speaking managers.
As a result of HI’s new meal roster, employees now ate alone or with someone from another department. The prevailing atmosphere in the cafeteria was glum and contrasted markedly with that of previous years when employees enjoyed staff camaraderie with their fellow workers over meal breaks. They had great difficulty understanding why they now had to eat alone.
November
With a small number of staying guests and only two restaurants open, business was slow for the food and beverage department. As expected, no further bookings for banquets or accommodation came from the Nu Fu agency. With the restaurant in the old section now closed, other agents looked elsewhere as the local Chinese business clientele did not like the lack of privacy offered by the restaurants in the modern section of the hotel. Business was very quiet and over eight days straight the HI managers were the only people who dined at the hotel’s Western restaurant.
Following the completion of the three-month training and assessment program, the scheduled redundancy program began. The objective was to release about 60 workers per week from the beginning of November. Fortune said “it would be done as quietly as possible with a few from each department being made redundant each week.” On the first Monday in November, a group of workers was given their redundancy payouts late in the afternoon. No prior warning was given to them as HI feared that any advanced notice This document is authorized for use only by Sean McGrath ([email protected]). Copying or posting is an infringement of copyright.
Would result in damage and equipment being stolen before their departure. Employees made redundant were told to proceed directly to the payroll department to collect their pay out, hand in their uniform, leave the building and not report for work again.
No official reason was offered as to why those employees were no longer required nor were they thanked for their years of service. In the locker room where they handed in their uniform for the final time, many voiced their complaints. Several senior managers commented that “if the Chinese managers had been in charge of the redundancy process, they would have handled it differently.” What had transpired was a market-driven action by the HI and it contrasted markedly to the traditional Chinese way of dealing with co-workers and minimizing the loss of face.
Each Monday that November, the redundancies continued. There were tears, sadness, surprise and anger at the pay-out window. With the onset of the redundancy process and the change in organization culture, the work atmosphere had become very uncertain. Employees had lost confidence in the hotel and some who had served many years of service no longer feared redundancy. Upon receiving their payout, some redundant staff commented that the RDH’s “once friendly and supportive atmosphere no longer existed.” One manager observed that each employee now wore two faces, a fake smile for the HI managers and a worried frown in reality.
Occupancy levels continued to decline. On one night, there was only one paying customer staying in the entire 200-room hotel. By late November, concern was growing that the hotel did not have sufficient funds remaining to pay operating expenses, let alone wages. All advanced tour group bookings had expired and no future bookings were confirmed. The tourism industry in the region had now had time to assess the HI’s management style and from the Chinese perspective, the conclusions drawn did not augur well for the future.
By the end of November, many of the hotel’s young workers had been made redundant whilst older staff remained. Fortune admitted that each day was a struggle but progress was being made.
In late November, Fortune expected to take to the board the final list of employees to be made redundant — they were a group of 30 well-connected, older staff who did not fit the HI mould but who had the connections with the Chinese board to protect their positions. Fortune admitted that he was “prepared to make a few changes to his list but did not want to end up with a bunch of useless staff.”
The RDH continued to have a very low occupancy rate and was losing money. HI had an accounting manager, a marketing manager, a house keeping manager, two food and beverage managers and a reception manager working full time at the hotel being paid at international rates and making co-owner Erhi T unhappy to “pay those foreigners working in our empty hotel.” The original objectives of improving the quality of service and occupancy at the RDH were fading and the disgruntled voices among the hotel’s board members were growing louder.
The small cash reserve, which had been accumulated by the RDH over the last decade, was rapidly being used up and rumours began to circulate that for the next pay period, the hotel would not have the money to pay employees’ wages.
Although some remaining employees were told their jobs were secure, there was still an air of depression in the work place. RDH occupancy was now averaging just six per cent whilst other competing hotels in the vicinity were enjoying 20 per cent occupancy rates.
December
The hotel’s reserve fund was now exhausted and there was insufficient money left for payroll without extra funding injections by Erhi T. HI’s front office and food and beverage managers tried to collect their wages at the end of the month and were told that there were no funds left to pay them. It was then the board realized that to complete all of the transition plans, Erhi T would be asked to spend over one hundred million Yuan. This was to finance the construction of a new five-star wing, fund the wages of more than 350 employees, pay the redundancies of more than 200 employees and cover the salaries and expenses of nine expatriate HI managers at a crucial time when income generation at the hotel was very low. Erhi T did not like being saddled with those large and unwanted expenses. A flood of unpaid suppliers was also at the hotel’s door pleading to be paid for its goods and services. On December 16, Erhi T injected half-a-million Yuan into the RDH account and it was spent within a week to cover operating expenses, accounts payable and basic four-star hotel requirements such as air conditioning and power. Two of the three passenger lifts in the hotel were taken out of use and the air conditioning was now turned off in the evenings.
Development projects planned by HI were now stalled as the flow of money from Erhi T had again dried up. New computers were installed but not paid for. There was fear that employees would not get their December wages and rumours were rife that employees may have to take a pay cut. Workloads had increased with one employee now doing the work of three employed under the former Chinese organizational structure.
In late December, Erhi T’s directors and provincial government officials held a critical meeting to discuss the future. By originally inviting the HI to manage the RDH, the provincial government felt that they had made the right decision and expected to see improvements in the number of customers coming through the door much sooner. Some expected the hotel to be full of guests and after five months of observation of HI’s style of management and the developing financial crisis, both Erhi T and the provincial government wanted to end their association with HI.
Before leaving for Christmas in Europe, Fortune met with the chairman of the Erhi T board to arrange for more funds to be released to finance RDH improvements planned for 2003 and beyond. In pursuing his original mandate, Fortune had embarked on a costly long term program to develop the RDH into a quality five-star hotel. In contrast, Erhi T had expected the hotel to be self-funding much sooner. They did not expect to face the prospect of providing such a large amount of extra funds to maintain basic operations and had become reluctant to continue injecting more money into the hotel’s operations.
The provincial government and the Erhi T-dominated board waited for Fortune to leave for the Christmas holidays in Europe before ordering the immediate halt to the planned redundancies for the final 30 long-term employees.
2003
In mid-January, HI’s board of directors in Europe received official notification from the local Chinese provincial government of its intention to terminate the contract. Fortune remained at the RDH to finalize the termination contract and to recover HI’s outstanding debt as both parties worked towards a “Termination of the Management Agreement” to be signed on the last Friday in March. Aside from Fortune, all of HI’s expatriate management had left the RDH.
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Following the departure of HI and the reinstatement of the former GM Tian Wen, there was an immediate improvement in the hotel’s occupancy levels. By the beginning of June, 60 of the employees made redundant had been re-employed. It seemed as if the RDH had avoided the forces of change but how much longer could it avoid the growing market forces?