Wayside inns, inc group m

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  • 1. 9/3/2011CASEANALYSIS WAYSIDE INNS, INC.REPORTSubmitted by: Submitted to:Group M Dr. Monica Singhania Management Control Systems | N-49, N-89, S-51, S-72, S-75 N- S- S- S-
  • 2. Introduction:The Wayside Inns, Corp., located in Kansas City Missouri was formed in 1980 as thesuccessor corporation of the united Motel enterprises, a company that operated sever-al franchisee motels from two national motel chains. Because of the complicated andrestrictive contract covenants, United was unable to expand the business. The succes-sor corporation, the Wayside Inns Inc. was formed to own, operate and license a chainof motels under the name Wayside Inns as well as to continue to operate the presentfranchises held by United. The Wayside Inns was a public corporation listed on theAmerican stock Exchange. It had 1,542,850 shares outstanding. The common stockprice had appreciated considerably and analysts felt that investor interest was due tonumber of factors but primarily linked to innovative marketing strategy. The WaysideInns average occupancy rate was 10-20 % higher than competitive motels.Strategy:Strategy:The Company’s fundamental strategy was to cater to those business travelers whowere generally not interested in elaborate settings. In fact 80% revenue of Airport Way-side Inns was due to the salesmen and business travelers alone. There were no com-mon areas such as lobbies, convention rooms, bars or restaurants. The chain empha-sized clean rooms, dependable service, and rates that are generally 15 to 20 percentlower than national motel chains. A free standing restaurant was always located on themotels property- in some cases it was operated by the Wayside Inns. In general con-cessionary leases were granted to regional restaurants chains.Most of their motels were located near interstate highways or major arteries convenientto commercial districts, airports and industrial or shopping facilities. The strategy wasto have a total of 600 rooms in five or more different locations within a city rather thanhaving one large hotel with 600 rooms. The Wayside Inns were usually constructed inone of the three sizes-76 rooms, 116 rooms or 156 rooms. The firm had grown substan-tially since its inception and the prospects for future growth were favourable. The com-pany had three tiered expansion strategy: 1. Construction of new motels seeking ever widening geographical distribution, 2. Expansion of existing properties if operating at full or near full capacity. 3. Selling of the old properties that became financial burden or did not provide required rate of return.Strength:The competitive strength of the Wayside Inns were: 1. Targeted market segment unaffected by seasonal or environmental factors. 2. Aggressive management. 3. Reduction of construction cost and completion times due to standardization. 4. Efficient quality control. 2
  • 3. Management Compensation ModelsThe chapter talks about two philosophies of Incentive Compensation • Fixed Pay • Performance Based Pay Fixed Pay Recruit Good People Pay them well Expect good performance Performance Based Pay Recruit Good People Expect good performance Pay them well if performance is actually goodSince the Corporate Management at Wayside Inns wished that the Unit Managers mustfollow the Corporate Strategy, a multifaceted compensation plan tied to profitability ofthe company was followed at Wayside Inns. This compensation plan was of mixed types– neither too fixed, nor too variable.Compensation Plan The compensation plan composed of four elements: Plan: • A base salary on the basis of number of years of service, dollar value of sales and adherence to corporate goals, • An Incentive Bonus on the basis of sales volume increases, • An additional incentive on the basis of return on investment, • Fringe benefits not linked to sales, 3
  • 4. Case Facts: Facts:The company is planning to have a 40 room expansion at Memphis Airport Wayside InnsMotel, where it already has 116 rooms. The motel was located at the intersection ofBrooks road and Airways road. By 1991, it was operating at near full capacity for fivenights a week, except Saturdays and Sundays. It had average turn away of 31.7 per-cent during Monday to Friday, whereas on Saturday and Sunday average turn away wasonly 9.05. Within two mile radius of the Memphis Inn there were 10 other competitivemotels, which were franchises of the major national chains besides no. of independentmotels. In addition there were number of independent motels. According to recent sur-veys by the Memphis Chamber of Commerce, the average occupancy hovered around72 percent and the expansion plans by the major chains were expected to account foran additional 800 rooms across the whole city in the following 18 months. Inns managerLayne Rembert also expressed concern about the proposed expansion especially inview of 80 room expansion at another motel; the central Toledo property lowered its re-turn on investment.The case shapes from the conversation when the Regional General Manager of theWayside Inns Kevin Gray visited the Memphis Airport Wayside Inn for an inspection andstarted discussing this idea with Layne Rembert- the Inn’s Manager. Rembert was skep-tical of the new investment as the compensation was linked to ROI and as he had al-ready seen in case of Toledo, the ROI with the new investment comes down, impactinghis compensation adversely. On the other hand Gray expected the market to grow con-siderably.In the end we came to know about a 20 point performance evaluation report used byGray to consider merit increases in the salary. This report was so important to him fordecision making that he wanted the company to make it an enterprise wide basis to de-termine the merit increases in one’s salary. This report laid emphasis on factors otherthan ROI as well. The report takes care of uncontrollable factors for the manager andhence laid more emphasis on customer satisfaction which was expected to permeateinto an efficient operations for an organization.Case Numbers/Financials:Even though we can see exhibits in the enclosed draft of the case, some of the impor-tant numbers of the case are as follows:Revenues: 1991(Actuals) 1992(Proposed) $1049729 $1485589Operating Expenses 1991(Actuals) 1992(Proposed) $652225 $861624 4
  • 5. Operating Income 1991(Actuals) 1992(Proposed) $397504 $624235Return on Investment 1991(Actuals) 1992(Proposed) 27.06 % 24.25 %Compensation Variable linked to InvestmentsReturn on Investment Bonus is part of the overall compensation of the Inns Managerwhere the bonus was calculated as:ROI X PF = ROI Bonus; ROI=Return on Investments, PF=Performance Factor defined as: Investments ($) PF ($) 0-600000 15000 600000-1200000 25000 1200000-1800000 36000 1800000-2500000 45000 2500000 and above 50000Direct construction related cost:Construction cost + additional parking =$1,050,000Engineering & legal fees =$18,000Environmental Impact studies + Local building permission =$12,000Total =$1,080,000Non direct operating cost (annual) =$46,000(For personnel, utilities and maintenance) expenses enses:Direct room expenses:Direct room expenses = 23% of room revenue.Management and reservation fees =5% of room revenue + $30 per room per yearData Analysis: • Addition of 40 rooms will lead to increase in revenue by 41.5%, • Out of this 41.5%, 16.37% is attributed to rise in average room rate, • Operating income will go up by 57.04%, • Return on investment (24.25%) will come down slightly from 27.06 %, 5
  • 6. Case Questions:Question No 1:Is the proposed investment likely to be a good one for Wayside Inns, Inc.?Our Views:Even though the ROI in the first year of operations after the proposed investments willget a beating, we are of the opinion that the proposed investment is likely to be a goodone for Wayside Inns because of the following factors: • The present turnaways (Opportunity Loss) can be converted into revenue, • The future ROI backed by an increased depreciation may be higher than the next year’s one, Infact for a long term project we should have a long term perspec- tive. • The expansion gels with the Business Level strategy of the company to expand if the existing one is running at full capacity, • The competitors are expected to expand and if Wayside does not expand, the turnaways and new customers may further get shifted to other competitors.Question No 2:Is Layne Rembert’s concern justified?Our Views:The concerns of unit manager Layne are not justified at all as the ROI linked bonustakes care of the dip in ROI with increased investments. Even though the concept saysthat the compensation management should be such that the unit manager should have acontrol over all factors which is not there in this case- he’s having a control over reve-nue, but then not over investments as that is expected to be done through a corporatecall. We are however of the opinion that given this fact as also given the fact that theBusiness Level strategy is to expand, we have to draw the line somewhere and if thebusiness level strategy of expanding takes care of the effects of bonus which was takenin this case, there is no harm in implementing such investments. We can see from theexhibit on Performance Factor that as the size of investment increases, though ROI maygo down due to potential downside on capacity utilization, there is an upside in the per-formance factor and hence no incremental loss on compensation. If we believe the cal-culations by gray, we find that the compensation is infact increasing from $29712 to$33775 within which the ROI Bonus too is on the rise from $ 9743 to $10914 after theinvestment. 6
  • 7. Question No 3:Is the current compensation package for in managers as appropriate one? If not, whatwould be?Our Views:The current compensation management system is more or less appropriate to the ex-tant that factors other than ROI, Age in the organization, following Corporate Policiesetc.. does not give emphasis to Customer Satisfaction. Therefore if Gray’s 20 Point Per-formance Evaluation Report can be institutionalized and given a weightage in the an-nual compensation of unit manager, we feel that the compensation management will bemore customer oriented and less revenue oriented. After all it’s a customer service andnot a money making industry alone. This apart if we look at certain positives in theshape of fringe benefits and graded performance factor, the company has already wellthought off for the employees motivation that comes through increased rewards suita-ble to satisfy one’s needs.Question No 4:Should the performance measurement system for a regional general manager be fo-cussed upon the same factors that are used by Kevin Gray and Wayside Inns to eva-luate and compensate an inn manager? (An RGM has responsibility for a geographicalare containing anywhere from 10 to 15 motels).Our Views:The ultimate aim of any compensation system is to enthuse the workers, motivate theworkers so that the Corporate Level and Business level strategies can be implementedand corporate goals can be achieved. Employee does get motivated if there is a proce-dural justice as also a distributive justice. If an employee realize that there are two setsof performance evaluation systems- one for the unit managers and another for RegionalGeneral Manager, come whatever may, since the factors affecting one’s compensationare not totally in one’s hands- Investments in this case, a sense of suspicion and dissa-tisfaction may prevail. On the other hand if an employee realize that he will be weighedunder the same system as that of a regional general manager, assessed under the samevariables as that for his superior, a sense of belief and trust will prevail ultimately pool-ing the energies in the organization for achievement of the corporate objectives. In theextant case apart from the 4 point total compensation systems, a 20 point performanceevaluation report with related variables (Cleanliness, customer satisfaction for Rembertand Occupancy, location, training etc for Gray) should also be institutionalized. 7