ExpectedServicePerceivedServiceServiceDelivery.docx

Expected
Service
Perceived
Service
Service
Delivery
External
Communication
Translation of
Perceptions to
Specifications
(Operationalization)
Mgmt
Perception of
Expectations
WOM Personal Needs Past Experiences
HTMX31 – Model of Service Quality (GAPS). Based on the
article:
Zeithaml, V.A., Berry, L.L. & Parasuraman, A. (1988).
Communication and Control Processes in the Delivery of
Service Quality, Journal of Marketing 52(2), 35-48.
GAP 2

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GAP 5
GAP 4
GAP 3
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IMPACT OF CORONA VIRUS ON THE TOURISM INDUSTRY
OF UAE
1. INTRODUCTION
The COVID-19 pandemic and the steps taken to curtail its
spread have a strong effect on the tourism market. According to
the United Nations (UNWTO), in 2020 the COVID-19 pandemic
would result in a 20 to 30 percent reduction of the tourism
industry. This estimate is likely to be cautious for countries that
rely on foreign tourists, as recent data on daily air traffic show
a decrease of nearly 80% since January2020.
While several economic sectors are supposed to rebound as
restrictive restrictions are removed, the pandemic has a longer-
lasting effect on foreign tourism. This is primarily attributed to
decreased consumer trust and the likelihood that the free
migration of human beings would be limited longer. COVID-19
impact on tourism The link between Coronavirus (COVID-19)
and News, Analysis and Resources The average recovery time
for visitors to a destination was about 19 months in previous
viral epidemics, according to World Travel and Tourism
Commission (WTTC).
The rapid, severe and undoubtedly protracted downturn in the
travel and tourism industry has forced international tourism
countries to depend heavily on their finances. This involve the
tiny developing island countries (SIDS), which are not only
most fragile because they are heavily tourist-dependent but also
because any shock of this size is challenging for tiny economies
to cope with. On average, according to WTTC statistics, the
tourism sector accounts for almost 30% of the SIDS gross
domestic product (GDP). Of the Maldives, Seychelles, St. Kitts
and Nevis and Grenada, this proportion is more than 50%. In
general, travel and tourism raise around $30 billion annually in

SIDS. A 25% decrease in tourism receipts would result in $7.4
billion or 7.3% decrease in GDP. The decline in certain SIDS
may be considerably larger, hitting 16% on the Maldives and
Seychelles.
The COVID-19 pandemic is projected to contribute, for several
SIDS, to large levels of sales losses immediately without the
requirement for an alternate source of foreign currency revenues
to fund international debt and pay for imports.
Devastating economic consequences Countries can generally
cope with economic storms through additional debt or by using
foreign reserves that are available.
Nevertheless, access to global capital markets is becoming more
restricting, particularly for small countries like SIDS, which are
mostly highly indebted and not quite diversified. The SIDS
Group's foreign debt accounts for an total of 72.4% of GDP,
rising up to 200% in the Seychelles and the Bahamas.
Global reserves are usually low, with several SIDS only having
adequate reserves for a few months of imports. Despite these
figures, it is clear that the economic effects of the pandemic are
disastrous for all of the SIDS without external assistance.
Immediate financial needs By considering the economic impact
of reduced tourism revenues (assuming a 25% decline in
tourism receipts ) and restoring the minimum level of import
coverage (three months), it is possible to provide a rough
estimate of each country’s immediate financial needs to offset
the damage of the pandemic. SIDS is reportedly in search of
nearly $5.5 billion to combat the negative impact of the
pandemic on their economies. The Maldives are in need of $1.2
billion because of their reliance on tourism sales, led by the
Bahamas and Jamaica.
The Indian tourism industry is expected to book Rs 1.25 trillion

in revenue in calendar 2020 as part of a decrease in hotel
shutdown and flight suspension following the onset and spread
of the coronavirus (Covid-19) pandemic. A research by
Treatment Ratings shows that the percentage is 40% smaller
than the 2019 year.
The report assumes the tourism impact of the pandemic to be
around 50% during January and February 2020, while in March
alone, it could be 70 % higher after international flights are
suspended. The Indian tourist industry is expected to book a
revenue loss of Rs 69,400 crore in April-June, indicating a 30
percent loss year-on-year (y-o - y).
"In the course of H2 2020, assuming the virus impact allowance
subsidies, we expect FTAs will still be lower with a FEE impact
by approximately 50 per cent, reaching the Rs 56.150 compared
with Rs 112.300 crore in H2 2019," the report said. ALSO
READ: Covid-19: Lockdown leaves Chhattisgarh petroleum
pumps fight for survival The most immediate and visible effect
of Covid-19 can be seen in the hotel.
The 2019 Coronavirus Disease (COVID-19) outbreak has
created a worldwide unprecedented level of uncertainty.
Countries worldwide are addressing growing health threats and
implementing broad socially distant standards, while companies
and governments are uniting to support less fortunate people
and provide financial support packages to stabilize economic
conditions. This is Singapore's greatest obstacle in its 56-year
existence and it is not pleasant to tackle with the globe holding
still.
COVID-19 has a very steep effect, to say the least, on transport,
tourism, aviation and hospitality. We originally predicted a
25%-30% decrease in the amount of tourists traveling
worldwide, but we foresee more decreases as more countries
have been identified of diseases and travel restrictions

worldwide.
The key goal for all of us in this sector today is to promote
steps taken by our governments to ensure that people and
communities stay as secure and healthy as possible, and to
minimize the risk of infections with any form of transport.
Since the beginning of the COVID-19 epidemic, a number of
steps have been slowly introduced by the Singapore government
to reduce the possibility of imports and the transmission of the
virus. We do consult with our trusted collaborators periodically
to hold them up-to-date on the situation in Singapore and the
steps we take to avoid the spread of the virus.
The Singapore Tourism Board (STB) has initiated many new
programs in order to better help tourist enterprises and
stakeholders in these difficult times and guide them towards
their recovery.
We have launched a Tourism Recovery Action Task Force
(TRAC) to develop , implement strategies to support the tourism
industry and rehabilitate. In addition, we have been
collaborating together with the National Environment Authority
(NEA) and other government departments to enforce the 'SG
Safe' initiative, with the aim of ensuring the general population
that our local businesses uphold high levels of cleanliness and
sanitation. As a sign of the government's commitment to high
levels of public health, SG Clean Quality marking certification
fees for more than 32,000 premises will be waived this year and
next.
STB India took the # UnitedWeStand Commercial Engagement
Initiative and shared emails, a Letter of Unity and video
messages to keep travel business up to date and show solidarity
and unity with the travel community in these difficult times. We
have also stepped up our market activities by upgrading our
Destination Singapore sessions with our clients to improve their

client awareness of both the leisure and corporate travel
offerings in Singapore. This is really a perfect opportunity for
tourism to invest in its residents. We have given our trading
partners the online edition of the STB Marketing Course. This
helps to build your marketing capabilities and enables you to be
'Agile, fierce and creative' in your Singapore marketing.
Although travel restrictions remain, this is an important time for
travel agencies to engage more consumers than ever before.
Over the last couple of years, we have actively marketed and
delivered Passion Made Possible, the destination brand, to
audiences in India-families, early and developed jobs, cruise
passengers, meetings and reward parties, and travellers from
main underground and secondary cities. At present we've been
in a position of uncertainty with the global foundation of
airlines, but after international travel constraints are lifted, we
hope to re-activate and promote our primary markets, including
India.
India appears to be Singapore's third-largest source sector, with
Tourist Arrivals in Singapore at the 1 millionth level for the
fifth consecutive year in 2019.
Singapore has been very resilient in handling the difficulties as
a government. Firstly, we invested in a robust system to deal
with the SARS outbreak and strengthened our health
infrastructure. We do have committed frontline workers that are
actively assisted and motivated by the local group.
We trust that we can overcome this because our tourism
industry's fundamentals remain strong. Strong development in
tourism over recent years demonstrates that our destination is an
desirable place for recreational and business tourists. We do
have a broad product range with a large pipeline of long-term
initiatives that will be built in collaboration with the industry.

The 2019 Coronavirus Disease (COVID-19) outbreak has
created a worldwide unprecedented level of uncertainty.
Countries worldwide are addressing growing health threats and
implementing broad socially distant standards, while companies
and governments are uniting to support less fortunate people
and provide financial support packages to stabilize economic
conditions. This is Singapore's greatest obstacle in its 56-year
existence and it is not pleasant to tackle with the globe holding
still.
COVID-19 has a very steep effect, to say the least, on transport,
tourism, aviation and hospitality. We originally predicted a
25%-30% decrease in the amount of tourists traveling
worldwide, but we foresee more decreases as more countries
have been identified of diseases and travel restrictions
worldwide.
The key goal for all of us in this sector today is to promote
steps taken by our governments to ensure that people and
communities stay as secure and healthy as possible, and to
minimize the risk of infections with any form of transport.
Since the beginning of the COVID-19 epidemic, a number of
steps have been slowly introduced by the Singapore government
to reduce the possibility of imports and the transmission of the
virus. We do consult with our trusted collaborators periodically
to hold them up-to-date on the situation in Singapore and the
steps we take to avoid the spread of the virus.
The Singapore Tourism Board (STB) has initiated many new
programs in order to better help tourist enterprises and
stakeholders in these difficult times and guide them towards
their recovery.
We have launched a Tourism Recovery Action Task Force
(TRAC) to develop , implement strategies to support the tourism
industry and rehabilitate. In addition, we have been

collaborating together with the National Environment Authority
(NEA) and other government departments to enforce the 'SG
Safe' initiative, with the aim of ensuring the general population
that our local businesses uphold high levels of cleanliness and
sanitation. As a sign of the government's commitment to high
levels of public health, SG Clean Quality marking certification
fees for more than 32,000 premises will be waived this year and
next.
STB India took the # UnitedWeStand Commercial Engagement
Initiative and shared emails, a Letter of Unity and video
messages to keep travel business up to date and show solidarity
and unity with the travel community in these difficult times. We
have also stepped up our market activities by upgrading our
Destination Singapore sessions with our clients to improve their
client awareness of both the leisure and corporate travel
offerings in Singapore. This is really a perfect opportunity for
tourism to invest in its residents. We have given our trading
partners the online edition of the STB Marketing Course. This
helps to build your marketing capabilities and enables you to be
'Agile, fierce and creative' in your Singapore marketing.
Although travel restrictions remain, this is an important time for
travel agencies to engage more consumers than ever before.
Over the last couple of years, we have actively marketed and
delivered Passion Made Possible, the destination brand, to
audiences in India-families, early and developed jobs, cruise
passengers, meetings and reward parties, and travellers from
main underground and secondary cities. At present we've been
in a position of uncertainty with the global foundation of
airlines, but after international travel constraints are lifted, we
hope to re-activate and promote our primary markets, including
India.
India appears to be Singapore's third-largest source sector, with
Tourist Arrivals in Singapore at the 1 millionth level for the

fifth consecutive year in 2019.
Singapore has been very resilient in handling the difficulties as
a government. Firstly, we invested in a robust system to deal
with the SARS outbreak and strengthened our health
infrastructure. We do have committed frontline workers that are
actively assisted and motivated by the local group.
We trust that we can overcome this because our tourism
industry's fundamentals remain strong. Strong development in
tourism over recent years demonstrates that our destination is an
desirable place for recreational and business tourists. We do
have a broad product range with a large pipeline of long-term
initiatives that will be built in collaboration with the industry.
COVID-19, a modern coronavirus strain dubbed Extreme Acute
Respiratory Syndrome Coronavirus 2 (SARS-CoV-2), has had
more impact on tourism and travel comportament than any live
memory disease epidemic. Tourism has been one of the key
popular images of COVID-19 in foreign media in the realm of
public health. The essence of the tourism mechanism implies
that tourism has also led to the spread of the disease and has
endured the effects of the disease in the tourism benefit and
supply chains. The global reach of this disease and the
implementation of conventional disease controls in the form of
quarantine, reduced mobility and isolation, together with a
variety of sector-specific impacts, including transport, travel
and reservation, hostels, restaurants, conventions and events
and attraction have had a dramatic impact on international
tourism and home affairs.
To maps out the effect of COVID-19 on tourism and the sector's
reaction at different scales and to contribute for a deeper
understanding, Current issues in tourism call for analytical
papers based on the influence of COVID-19 on economies,
locations, organisations, businesses, customers, locations,
transit areas and tourism transport. These correspondence are

especially tailored to CIT study letters and study observations,
but we also accept more detailed submissions, including those
attempting to recognize shifts in the course of time as a
consequence of COVID-19, or to add to a wider theoretical view
of stability, crisis and catastrophe. Although all COVID-19
articles must be checked by colleagues, we must try to publish
them as quickly as possible in order to help spread related work.
Not only has the global pandemic of the new corona stopped
entire socio-economic structures, it also challenged
globalization and corporate global operations. Paradoxically,
the possible effects and alternate consequences are still
uncertain. But in most weakening economic sectors a permanent
and fresh start is required to rapidly restore and reclaim the
market, employment and company functions. Conventionally, an
illness was used to target disadvantaged populations in their
diet with food, safety deprivation, and they typically were the
poor citizens of community. Ironically, the latest Corona virus
first struck overseas tourists and sparked the pandemic during
flight, which primarily challenged the wealthy social class
worldwide.
Because tourism is one of the world's largest and fastest
growing sectors, after the Covid 19 pandemic, it is expected to
play an significant role in restoring socio-economic stability. It
is a big contributor to the economies of the Iceland and one of
India 's main industries that produce much required foreign
currency. Long-suffering tourism on the island was recently hit
hard by the Easter bombing in many areas including in the
country's luxurious hotels. The tourism industry in India is in
danger of having the first successful check conducted by the
Indian national COVID-19 who was a local patient on 10 March
2020. The victims were again a tourism team, who worked with
a group of Italian visitors for a 52-year-old tour guide. The
continuing threats to the country arise.

Tourism with effect to the outbreak of the virus led to the
suspension of the visas for tourists on 11 March 2020 in
government hospitals, which includes eight foreigners,
following the new developments.
Unfortunately, this exponential spread of the virus actually
exceeded 233 (as at 15 April 2020 and continues to grow), even
as the specific government activity to defend citizens against
the epidemic is well managed and treated properly. As a
consequence, aviation has been one of the main contributors to
the global transport of the virus, and has created tremendous
strain on foreign transportation and aviation activities ,
particularly the airline industry. Recently, it has been reported
that Qantas has accepted virus infection through a wide number
of its staff, which is a global problem. As an business umbrella
activity, the shipping, leisure, hotel and MICE sectors are
currently facing massive challenges. This review critically
evaluates the global and local context of the outbreak, the
impact of the outbreak and recommendations for a rapid
recovery (short and long term).
GLOBAL PANDEMIC OF NOVel CORONA (COVID 19) Much
human longevity in the modern world can be traced to tourism.
International tourism has recorded sustained progress for the ten
consecutive year, according to the World Tourism Organisation
(2020), with 1.5 billion foreign tourist arrivals in 2019 and an
expected 1.8 billion global tourist arrivals in 2030 (UN news,
2017). The reporting of the COVID 19 or the Corona outbreak
started in the province of Hubei (Wuhan) City in India in
November 2019, and spread around the world by March 2020
was remarkable in the world history as the world's most
challenging tragedy following decades may be the Second
World War. Effective constructive and preventive steps will
tackle the problem creatively in view of the current
circumstance and resolve potential challenges to the socio-
economic well-being of everybody who has the room for

expanded travel and tourism.
However, decisions to regulate people's and goods movements
primarily impact sectors such as tourism, as tourism involves
transportation, sea transport, handling of food, accommodation,
entertainment, leisure etc. Despite the pandemic of Covid 19 on
Indian tourism, page 2 of 19 states that India is best known for
managing the COVID 19 pandemic than other countries in the
world, and that quarantine and medical facilities too have been
provided for foreigners while other developing countries have
declared that non-residents quit the region, personal appliances,
etc. In the future, therefore, this situation would be good for
flourishing India tourism, even if it gains losses today.
As a country with much less experience of global epidemics
over the last few decades, there was no clear technical agenda
for such a worse tragedy in India. However, with this limited
experience, India was the first country after India to undertake
the mitigation and control measures necessary for COVID 19.
Also India has taken measures as cases have begun to be
identified of deaths from the region. Before India's first case,
the Indian government began with quarantining and some
specific health measures and airport preparedness, with thermal
scanners. In the first case of Corona infected patients (a Chinese
tourist) the second patient was reported from India on February
18, 2020.
CHAPTER 2 LITERATURE REVIEW
J. T., Ajelli, M., Gioannini, C., Litvinova, M., Merler, S(2020)
suggested that Complete COVID 19 New infections recorded in
India World Complete infections 218 1,934,557 New deaths 8
120,438 Total recoveries 59 456,737 Total infection in the
Indian area Source: worldometers.info & Ministry of Health,
India, IMPACTS ON Travel, HOTEL AND MICE INDUSTRY
The effects of the deadly virus are extreme than predicted by

rate of pace As India is a country lacking resources, strategic
approaches to minimize economic recession are important to
incorporate. In this context, tourism as the country's third
largest foreign exchange operator has collapsed totally with the
fear of travel and the need to maintain social distance. Over the
last 40 days, visa requirements were imposed and the
international airport closed, the countries and cities were
curfewed and locked, allowing citizens to return to their
countries with different flight arrangements in various
countries. At present it's a bad problem, because the entire
planet is shut away or socially isolated, people are reluctant to
book something before the agony of the outbreak subsides and
the epidemic is regulated in the planet.
Remuzzi, A., & Remuzzi, G. (2020), suggested that tourism is a
networked industry with many other business sectors, including
hotel, local, education, finance, agriculture, medical, travel and
transport, construction, real estate, retail and vice versa. Since
the country's economy is heavily influenced by tourism, it is
important to research how industry dependence will influence
the recovery of its key sub-sectors after a pandemic subsides.
The indirect effect on the travel and tourism sector can not be
conveniently and necessarily calculated in this sense is a major
loss in both the short and long term. Since India is a country
which plays a major role in developing countries, relying
heavily on the services sector, the tourism industry. Over the
past year it was 12,5 per cent for travel and tourism, whereas
the ratio of travel and tourism to GDP is 19,4 per cent on page
4. It is also evident that the tourism industry is benefiting
developed countries tremendously. Protecting this industry will
therefore be a major investment in the countries' potential
prospects for growth. Therefore, if we have to concentrate on
the future development of India through the tourism sector, we
must protect all the tourism service providers.
Daily FT. (2020). Suggested that there are many service

providers, including accommodation providers, travel agencies,
event coordinators and transport providers. They earn no
revenue from their tourism goods in the current scenario. It is
therefore necessary to protect these sectors and to retain them to
meet the country's potential tourism demand. Otherwise the
money might be diverted to other sectors under which the
tourism sector faces the struggle to locate its service suppliers
in the future. To resolve this condition, it is ideal to temporarily
free them from their company debts, help maintain their staff
and use tourism services such as hotels as quarantine centers,
with a monthly rental to the organisation. The technologies and
media advances available are expected to overcome this
emergency in a short space of time. Protecting the tourism
industry will also be a strong investment in the country's future
growth.
Litvinova (2020), suggested that one of the main foundations of
contemporary economies and social structures is urban tourism
and hospitality. Similarly, for several countries in the world, the
hotel industry constitutes a major revenue generation market
similar to India. After a global recession, though, the tourism
and hospitality sector is also the first to be severely affected.
According to the March 2020 research published by the
multinational hospitality data company STR, it reveals that the
current COVID-19 coronavirus pandemic has seen a dramatic
decline in occupancy levels of nearly 96% around the world's
hospitality industry. This pandemic also affects India's tourism
sector and the data from the Indian Tourism Development
Authority showed a decrease of 30% from total tourist arrivals
as compared to the 1st quarter of 2019.
Gioannini,(2020) suggested that the decline in Indian tourism
revenues may range between USD 107 million – USD 319
million, according to ADB's March 6, 2020 estimates. The
epidemic influenced both the public and private sectors in the
country and is visible in the activities of the Colombo Stock

Exchange. Moreover, this form of crisis has a detrimental effect
on the country 's attractiveness to foreign direct investments.
Though recognizing the current and post-negative effects of this
pandemic, the Government of India (GoSL) has taken many
action on page 5 of 19 to allow India to react to the COVID-19
pandemic. Indefinite curfew, transport restrictions and vigorous
social distancing initiatives throughout the world are some of
the main steps that the Government has reportedly implemented
in order to control the spread of the Covid 19 epidemic.
Daily FT. (2020). Suggested that there is no question that this
pandemic has had a great deal of adverse effects on Indian
Tourism, hotel and MICE industries. The tourism industry in
India has slowly recovered since the April 2019 Easter attacks.
India was also a country that eradicated the civil war for 30
years in 2009. It is therefore important to enhance public safety
preparedness in the country and to take appropriate steps to
cope with certain forms of unforeseen risks / challenges. Any of
the main suggestions were then created to resolve the adverse
impacts of the epidemic of corona-19. First, it is important to
spread the positive news to potential tourists through news
networks and social media platforms. Maintaining foreign
promotional drives is also an significant factor in Indian
tourism and hospitality marketing and promotion. Furthermore,
since pre-paid rates are unlikely to be booked with current
market uncertainties, the removal of non-cancelation fees is
highly recommended.
Remuzzi, A., & Remuzzi, G. (2020), suggested that
furthermore, encouraging convenience levels and allowing
visitors to switch their reservations to a new date is another
effective tactic to grow the hotel company for emergency
cancels coverage. In addition , it is essential to amend existing
hotel policies in a timely manner, such as flexic cancelation
policies, flexibly charges for all services and ensuring strict
hygiene policies. The usage of simplicity as a key marketing

tool is highly encouraged, because it can help draw a number of
companies. Given the current scenario, citizens are fearful of
traveling to city-limited resorts, encouraging remote resorts is
another effective tactic to draw visitors. Particularly resort-type
hotels, environmentally sustainable hotels and remote
attractions / locations focused on nature and culture may have
great potential to promote themselves. Such tactics will also
help draw visitors from MICE and raise F&B sales. Since this
type of crisis has an effect on global hospitality, it is important
to recognize the value of domestic tourism promotion Page 6 of
19. In particular, virtually all hotels will lower rates in
circumstances which minimize the perishability of the facility.
Chinazzi, M., Davis, J. T., Ajelli, M., Gioannini, C., Litvinova,
M., Merler, S
(2020) suggested that it will be also a perfect chance for
experienced visitors to use a hotel or utilize facilities at even
cheaper costs in a hotel. Around the same period, it is often
advised that versatile resources be marketed rather than value
added resources. Due to the pandemic situation, people are
extremely concerned about their health and safety. It is also
necessary to take some additional time to clean up the whole
hotel. These strategies will have a positive effect on ensuring
clean safety and a safe environment for guests. Finally, joint
approaches between the public and private sectors are
suggested. Specially, government could initiate tax reduction
schemes (for certain period of time) for both micro and macro
level business owners, could think of introducing interest-free
capital loan schemes and job guarantees for permanent carder
employees.
RESEARCH METHODOLOGY
The goal of the analysis is to calculate the effect on the tourism
industry in India of the incidence of corona virus. The
secondary approach for analysis has been applied. Several

literature records, journal articles, work or thesis reports,
government documents, etc., is regarded as gathering the details
required for the study. For data analysis, detailed literature
analyses also gathered secondary data. Government statistics on
corona virus incidences have been obtained. In order to
understand the effect of the Corona virus on the Chinese tourist
industry, statistical data from renowned and genuine data
sources were collected.
Research reveals that corona virus activity in India has major
consequences worldwide. Global tourists have cancelled their
visit to India programs, and Chinese visitors are forbidden from
entering places that are monitored. The fast dissemination of the
Corona virus in India interrupted people's usual lives in India.
This apprehension has influenced the domestic and foreign
tourism industry. The airlines have recently cancelled all
services to and from India, to avoid the infection from being
exported to other nations. This has significantly influenced the
economy of the region. The intensification of the Corona virus
is projected to have a long-term effect on India's tourism
industry.
RESEARCH OBJECTIVES
1. To study about the corona virus and its various factors
2. To study about the impact of corona virus on tourism
industry of UAE
CHAPTER 4 DATA …
9-603-096
R E V : S E P T E M B E R 8 , 2 0 0 5
_____________________________________________________

_____________________________________________________
______
Professor Frances X. Frei, Research Associate Corey Hajim, and
Christian Hempell (MBA ’03) prepared this case. HBS cases are
developed solely
as the basis for class discussion. Cases are not intended to serve
as endorsements, sources of primary data, or illustrations of
effective or
ineffective management.
Copyright © 2003 President and Fellows of Harvard College.
To order copies or request permission to reproduce materials,
call 1-800-545-7685,
write Harvard Business School Publishing, Boston, MA 02163,
or go to http://www.hbsp.harvard.edu. No part of this
publication may be
reproduced, stored in a retrieval system, used in a spreadsheet,
or transmitted in any form or by any means—electronic,
mechanical,
photocopying, recording, or otherwise—without the permission
of Harvard Business School.
F R A N C E S X . F R E I
Celebrity Cruises, Inc.: A Taste of Luxury
Introduction
An elderly couple, both dressed in plaid, danced to the poolside
band on Deck 10 as a waiter
politely cleared an empty bowl from in front of Dietmar
Wertanzl, senior vice president of fleet

operations for Celebrity Cruises, Inc. It was January 2003 and a
beautiful day at sea on board the MS
Millennium, one of Celebrity’s newer ships. The scoop of
homemade chocolate ice cream had
quelled Wertanzl’s appetite, but not his quandary. Gazing from
his table toward the pool area, he
pondered the diversity of the guests. The hot tub was brimming
with 20-something men wearing
baseball caps emblazoned with fraternity Greek letters. Three
single young women started to join
them, then reconsidered and climbed the stairs to the sun deck.
A group of older women playing
cards dominated a corner of the lounging area. Young parents
helped their little girl swim as the
older husband and wife danced beside the pool, celebrating
decades of commitment to one another.
Sandwiched between mass-market players such as Carnival and
luxury lines such as Crystal
Cruises, Celebrity aimed to make a name for itself in the
midtier premium market by offering an
“upscale experience at an intelligent price.” Given this
positioning, guests migrated to Celebrity’s
premium cruises from both mass and luxury markets. Repeat
cruisers made up about half the guests,
who were further differentiated by the type of stateroom they
had booked. Whereas common areas
and facilities aboard its liners were fairly egalitarian, two
2,500-square-foot penthouse suites
contrasted with the 170-square-foot inside staterooms.1 Suite
guests were assigned extra staff and
were given preferential treatment, but little of this was visible
to other guests. Celebrity wrestled
with the right way to treat customers who were often paying 10
times what other guests might be
spending.

Celebrity’s explicit value proposition was rejuvenation,
enrichment, and connection. “Royal
Caribbean,” maintained Celebrity President and Chief Operating
Officer Jack Williams, “is about
action and adventure; Celebrity is about the spirit.” Enrichment
included educational opportunities;
connection meant reconnecting with family and friends and
crew. “Instead of going after a
demographic,” explained Williams, “we decided to create a
mind-set: the savvy traveler.” These
savvy travelers were profiled in Celebrity’s new advertisements,
part of an $11 million integrated
marketing campaign (see Exhibit 1 for the press release).
Antony Papageorgiou, director of brand
1 Inside staterooms did not have a window.
For the exclusive use of J. Zhang, 2020.
This document is authorized for use only by Jennie Zhang in
HTM531 - Spring 2020 taught by Sybil Yang, San Francisco
State University from Jan 2020 to Jun 2020.
603-096 Celebrity Cruises, Inc.: A Taste of Luxury
2
essence, described the significance of Celebrity’s logo: “The
company used the brand’s logo of an X to
define the commonly used variable in algebra to stand for X
equals unknown. Based on consumer
research, the mind-set defined by X resulted in the brand’s

value proposition.”
150 New Tastes
In 2002, Celebrity launched a series of new initiatives aimed at
making the on-board experience
even more luxurious. One hundred and fifty offerings were
tested on board. Examples included
champagne during embarkation, longer meal hours, icy towels at
poolside, art tours, and star gazing
with an astrologer. Each was implemented, then measured in
terms of guest reception (via surveys),
impact on on-board operations, and cost. The objective was to
add a “taste of luxury” through
various low-cost, high-impact initiatives that were valued by
guests. (Exhibit 2 presents a sample list
of initiatives.)
Captain’s Club
Celebrity’s Captain’s Club was a loyalty program that frequent
cruisers could join for $35. The
club was divided into three groups based on number of previous
cruises. Guests who had cruised 1
to 5 times were accorded a classic, 5 to 10 times a select, and
more than 11 times an elite membership.
Rewards and benefits awarded according to membership level
ranged from complimentary golf
clinics to a free wine seminar to vouchers for the casino and
special Captain’s Club parties (see
Exhibit 3). A typical cruise found from 250 to 500 Captain’s
Club members on board, but the group
was growing, and Celebrity was considering offering new
benefits. Presently, the Captain’s Club
was the only way for Celebrity to distinguish its loyal
customers from other cruisers.

Concierge Class
Celebrity planned to upgrade 100 staterooms to a new class of
service. As the physical layout of
these staterooms could not be changed, the company was
pondering how to create a differentiated
experience. Ideas for Concierge Class services included adding
bathroom amenities such as higher-
end soaps and shampoos, higher-quality towels, and fluffy
robes. The hope was that Concierge Class
customers would be willing to spend up to $50 per night extra
for added service features.
Were these programs the right way for Celebrity to differentiate
itself within the premium
market? Wertanzl debated the options and outcomes as he cha-
cha-cha-ed past the lovebirds and
made his way to Deck 11.
History
The Chandris Group, a Greek company with roots in the
shipping business, founded Celebrity
Cruises, Inc. in 1989. Celebrity began with three ships; the
47,000-ton vessels, with lower-berth
capacity of 1,400 guests, cruised primarily to the Caribbean,
Bermuda, and Alaska. Three additional
ships were built from 1995 to 1997, each weighing 70,000 tons.
In 1997 Celebrity merged with Royal Caribbean International
(in a $1.3 billion deal, the single
biggest transaction in the cruise industry to date [Exhibit 4
presents Celebrity financials, and Exhibit
5 presents comparative information for the entire industry]). A
larger company with a fleet of 11

Celebrity Cruises, Inc.: A Taste of Luxury 603-096
3
ships, Royal Caribbean was a mass-market cruise line. The
decision was made to keep the two
brands’ marketing and operations separate to enable each to
target its market segment.
Between 1997 and 2002, Celebrity continued to build larger
ships, adding four ships each
weighing 91,000 tons. (Exhibit 6 provides a description of each
ship.) Celebrity did not plan to build
ships for the following two years (2003–2004).2
Sailing the Seven Seas
Demand and Demographics
From 1995 to 2001, demand in the North American cruise
industry grew from 4.4 million to 6.9
million guests.3 Royal Caribbean and Celebrity captured about
a third of the market (2.4 million
guests in 2001), making it the second-largest cruise operator.
Occupancy for both cruise lines was as
high as 101.8% in 2001.4

Eight-five percent of cruise guests were American. In 2001,
11% of Americans had been on at least
one cruise. Within the United States, approximately one-third
of all “cruisers” were “baby
boomers,”5 defined as having an average age of 55 and earning
approximately $64,000 per year.
Historically, baby boomers represented 53% of all cruisers
worldwide. This segment was expected to
drive cruise demand growth through 2010.
Average annual growth rate in guests over the past 20 years had
been 8.4%.6 Going forward, two
significant external influences stood to affect the cruise
industry overall. Tightened security both on
board and at ports of call was by far the potentially greatest
influence. In addition, environmental
regulation had changed a great deal over the past decade with
significantly more stringent exhaust
emission and sanitary requirements. Thus far, the tighter
environmental restrictions had inspired
successful innovation in engines and waste disposal. Future
regulations would likely require further
innovation and corresponding investments.
Luxury Market
Luxury lines offered the most diversified and varied destination
options, including a world cruise
that circumnavigated the globe in approximately 100 days. The
crew-to-guest ratio was the highest
in the industry with a minimum of one crew member serving
every two guests. Ships were designed
in grander style with expensive fabrics and furniture, more
space per guest, and the largest
staterooms and balconies in the industry. Dining was on an
open-seating basis as opposed to the

scheduled times that were the norm in other markets, with meals
prepared as they were ordered.
2 In 2002, Royal Caribbean Cruise Lines (RCCL) attempted to
merge with P&O Princess, a company of approximately equal
size, but the plan was interrupted by a hostile takeover of
Princess by Carnival Corporation, the world’s largest and most
profitable cruise line. Carnival’s acquisition of Princess was
valued at approximately $5.3 billion.
3 2001 Annual Report, Royal Caribbean Cruises, Ltd., p. 11.
4 One hundred percent occupancy meant double occupancy in
each stateroom; sailing at occupancy exceeding 100% meant
that third or fourth guests had been added to some staterooms
(Exhibit 7 tallies North American supply and demand).
5 Individuals born between 1946 and 1964.
6 http://www.cruising.org/press/overview/ind_overview.cfm#a,
accessed February 10, 2003.
4
Luxury guests were encouraged to make special requests

throughout their trip, with the crew doing
everything within its power to satisfy their needs. Sailings
ranged in price from $2,500 to more than
$11,000 per person for a seven-day trip. Luxury cruises often
offered all-inclusive pricing packages
that included alcoholic beverages with meals and tips to the
crew. These smaller ships outfitted
exclusively with suites or outside cabins nevertheless afforded
guests many opportunities to spend
money on gaming, port excursions, spa treatments, and
shopping.
Mass Market
Carnival, Royal Caribbean, Norwegian Cruise Lines, and Disney
dominated the mass-market
arena. Carnival, the most successful cruise company in the
industry, owned 66 ships (Exhibit 8
presents Carnival’s financials). Royal Caribbean had carved a
niche within the mass-market segment
focused on the explorer mind-set. Cruises in this less expensive
segment had limited itineraries and
shorter sailings, usually between three and seven days. The
ships accommodated as many as 3,300
guests per cruise. Although cabin rates and on-board spending
averaged only $75–$100 (gross
revenue) per person per day, the margins for the mass market
tended to be the highest in the
industry.
Premium Market
Floating between and sometimes drifting into mass and luxury
waters, premium cruise lines such
as Celebrity, Princess, and Holland America offered trips that
followed standard itineraries, visiting

the same ports each trip. Guest capacity on ships in the
premium market ranged from 1,800 to 2,500
guests, trips from seven to 10 days. Staterooms, offered in a
wide range of sizes and shapes, included
inside quarters. Crew-to-guest ratio in the premium market was
typically one crew member for
every two guests. The space ratio of total gross tonnage divided
by number of lower berths was
between that of the mass-market and luxury cruise lines.
Guests in this segment spent
approximately $150 (gross revenue) per person per day, 20% on
board and 80% for the stateroom.
Role of Travel Agents
Williams mused: “Trying to describe to someone what a cruise
is like is like trying to explain what
chocolate tastes like. You just can’t do it.” In the cruise
industry, it fell to travel agents to describe
what the chocolate tasted like. Cruises were different from
most other vacations. They were
complicated in terms of brands, destinations, accommodations,
and activities. “This is your vacation
for the whole year,” Williams emphasized. “You want to see
your cabin, what you will eat, where
you will go, how you will spend your time. It is not like buying
a plane ticket. You would never ask
to see your airplane seat prior to buying a ticket, because if you
did, you’d never go. Airline seats are
bought; cruise vacations are sold.”
The highest rate in the leisure industry, 90% of cruise vacations
were sold through travel agents,
who helped customers navigate the complexity of options and
price points (Exhibit 9 provides a
sampling of published prices). Agents assisted with everything

from explaining the packages offered
by cruise companies to helping customers choose staterooms,
destinations, ships, and land tours
while in port; secure airline tickets; and make other
arrangements for accommodating physical
restrictions or planning for special occasions. Agents’ efforts
were rewarded with sales commissions
of 10% to 16% of total cruise price per booking. Sales
commissions were based on volume to a
particular cruise company; the higher the volume, the higher the
commission percentage.
5
Larger travel agencies (e.g., American Express, Carlson
Wagonlit) typically bought large blocks of
cabins well in advance of sail dates and provided significant
discounts off list price. The return
policy for tickets was the same for customers as for agents
(Exhibit 10 details Celebrity’s cancellation
policy). Travel agencies sometimes rebated part of their
commissions back to guests as an added
incentive to book.
If a cruise company lowered list prices below the level a
customer had already paid, the customer

could qualify for a refund of the difference by proactively
contacting the company. Cruise lines used
price reductions to spur demand for most trips. Explained
Rodney Pick, associate vice president of
fleet operations planning and administration: “No one pays list
price for tickets, except maybe on the
most popular holiday cruises.” In contrast to premium and
mass-market lines, luxury lines offered
automated price protection and tended to avoid price reduction
as a mechanism to fill ships because,
as Wertanzl explained, “Luxury trips will sail with lower
occupancies because they cannot afford to
refund ticket prices. In addition, at different price points, you
attract different customers who may
not maintain the desired atmosphere on board.”
Shipshape
Celebrity cruises ran 6 million passenger days per year across
nine ships. Standardization
achieved efficiencies in many areas. Itineraries, entertainment,
daily activities, and even menus were
often the same across sailings. All seven-day Caribbean
cruises, for example, might originate in Ft.
Lauderdale, sail first to the Dominican Republic, offer the same
Tuesday night dinner special, and
debut the comedian on the first evening.7
Fleet operations were divided into hotel, marine technical, and
marine nautical (an organizational
chart is presented in Exhibit 11). According to Papageorgiou,
“Hotel operations, our largest group,
was responsible for what we call total guest satisfaction. They
accomplish this by focusing on the
three esses: safety, service, and style. Safety is the first
priority of any trip, and service means

delivering a quality and satisfying list of offerings to guests.
Style is characterized by a gracious
attitude and sophisticated presentation.”
Employees were encouraged to greet guests with a formal style,
for example to bid “Good
morning” instead of “Hi” or reply “With pleasure” instead of
“No problem.” Dress and decorum
were also important. It was important that staff and crew,
comprising individuals from as many as
60 different countries, behave in consistent ways. “In some
countries,” Papageorgiou explained,
“smiling is considered silly, so you have to communicate to
some of the staff that most guests like to
see a smile and it is not a ridiculous thing to do.”8
Staff and Crew
Cruise ship employees included officers, staff, and crew. Staff
members were higher in the
hierarchy and included managers, officers, and members of the
guest relations and concierge group,
many with 15 or more years of ship experience. Crew consisted
of waiters, bar staff, and stateroom
attendants. A ship with 1,950 lower berths employed as many
as 970 people of varied nationalities.
Ships’ crews had military-style ranking systems because,
although these were leisure cruises, the
7 Itinerary schedules might vary by location and season, but
repeat trips were consistent.
8 Preferred phrases, a dress code, and virtually every other
aspect of customer interaction were detailed in the training
manual

given to all employees on their first day.
6
complex, technical nature of the operations made it essential
that all understood who was in a
position of authority. Food and beverage, the largest
department, averaged 460 employees per
Millennium-class ship.
Ships’ officers were responsible for the safe operation of their
vessels. The captain, at the top of
the organization, was ultimately responsible for ship safety,
stability, and operations, both while at
sea and during ports of call, as well as for most journey
operating expenses, the majority being
related to the movement of the vessel. Fuel, the second-largest
operational cost (crew expense was
first), was consumed at progressively higher rates as speed
increased. The captain also had an
important social role, frequently hosting dinners for 10 to 12
guests at a time.
Shipboard employees at all levels did not receive annualized
salaries but were hired under
contract. These employment agreements could range from four

to nine months, after which
employees typically took six to eight weeks off.9 Other
employees signed on to see the world, travel,
meet interesting people, and gain job experience in an unusual
environment. “It is a difficult job,”
acknowledged Renato Chizzola, a Celebrity food manager. “We
work seven days a week, but we
have chosen to be here so we might as well give our best. I feel
that I am the luckiest man on earth
because I have seen all of the world.” Even with intense
schedules, employees often stayed with a
particular cruise company for years.10
Training
The cruise industry typically relied on an apprenticeship,
whereby knowledge was passed from
incumbent to new employees. New crew members often
required a period of adjustment to the job
and to life on a ship where space both physical (e.g., shared
cabins) and mental (e.g., personal time)
was limited. Celebrity generated a wide array of manuals to
help employees learn everything from
mixing martinis to consoling guests whose luggage had been
lost (a guest relations manual is
excerpted in Exhibit 12).
Instinct and attitude were a big part of providing a satisfying
customer experience. Explained
Wertanzl: “Our service delivery is comprised of three employee
elements: ability, function, and
motivation. The first two are straightforward to manage, but
people are not machines; they are
emotional, and motivation is the most difficult part.” As
Celebrity bar manager Hakan Oral put it:
“If you use a machine you just turn it on; humans have their

own minds.”
Employees were encouraged to consider creative ways to serve
customers. Papageorgiou recalled
an instance of this philosophy in action:
There was a woman who had just finished dinner and felt
completely full. She said to her
waiter when he asked if she would like dessert, “I can’t eat
another bite; I don’t want anything
for dessert. I want absolutely nothing.” She was seated at a
table of eight, and when he
delivered desserts to the others, he brought her a plate that
simply had the word “nothing”
spelled out in chocolate. She laughed and didn’t feel left out.
We encourage that kind of
initiative to do a little something extra to make a guest feel
good.
9 Because cruise lines operated in international waters, income
for employees from most countries was not subject to income
tax. This was not the case for U.S. employees, who did have to
pay taxes.
10 It was not unusual for Celebrity waiters and stateroom
attendants to remain in their jobs for five to seven years.

7
Compensation
For wait and housekeeping staff, 95% of their salaries was paid
in tips. The system was explained
to guests in the details of the vacation package sent to them in
advance of their trip. Envelopes with
suggested gratuities were provided to each guest on their
departure date to encourage tipping
(Exhibit 13). “Guests from the United States,” Papageorgiou
observed, “were accustomed to tipping,
but international travelers were not always comfortable with it.
It makes a big difference to a
stateroom attendant if one of their guests does not leave them
tips for the week. How do you
motivate an attendant in that situation?” Although the amounts
seemed small, from $0.75 to $3.50
per day, tips added up. A successful stateroom attendant or
waiter could take home $25,000 per year.
A True Departure
The Journey
A seven-day cruise typically visited four ports of call. On
average, guests ranged in age from 30
to 75. There might be as many as 45 couples celebrating
honeymoons and 70 anniversaries on a
single trip (cruise statistics are provided in Exhibit 14).
Itineraries for the Celebrity fleet were set 18 to 24 months in
advance. Ports of call and navigation
schedules were calculated based on seasonal weather and

expected demand for particular
combinations of destinations.
The Ship
The design and building of an approximately $350 million
Millennium-class ship took three years.
The largest vessel designed to navigate the Panama Canal, the
1,000-foot-long, 12-deck floating
metropolis was complete with a three-deck hotel lobby; a 1,200-
seat dining room; many other food
and beverage venues; bar, lounge, and disco areas; a 36,000-
square-foot Aqua Spa; a casino; a
swimming pool complex; a grand theater with seating for 1,400;
an Internet café; a library; a bridge
room; a 12-store shopping mall; a children’s fun factory; a
medical operating room; and even a
morgue. The back of the house complex included quarters for
960 crew, kitchen and food storage
areas, laundry facilities, a dozen elevators, lifeboats for 3,500
people, water-treatment and garbage-
disposal facilities, and mechanical and technical areas.
Celebrity’s fleet averaged less than five years in age, and ships
averaged 30 years of useful life.11
The smokeless turbine engines that powered the Millennium-
class ships replaced diesel engines,
saving approximately 8,500 square feet per ship. Gas turbine
engines were more environmentally
friendly than diesel engines but burned fuel at a higher rate, 10
tons of fuel per hour at a cost of $300
per ton, compared with four to five tons of fuel per hour at a
cost of $120 per ton for diesel engines.
The fuel tanks on Millennium-class vessels held 3,500 metric
tons.

11 After 10 to 15 years of service, a ship was often sold to a
lesser cruise line and extensively refurbished to extend its
useful
life.
8
The Stateroom
The stateroom set the tone for the entire cruise experience.
Room layout, design, and size were
critical elements in the rating and pricing capability of cruise
lines (Exhibit 15 provides descriptions
of staterooms).
All You Can Eat
Food was an important part of the cruise experience. At
Celebrity, everything served on board
was made from scratch. “There are no can openers in our
galley,” maintained Chizzola. The main
dining room served breakfast, lunch, and dinner. The two
seatings available for dinner
accommodated as many as 2,500 guests. The menu offered four
courses, with a selection of three to

five items per course. The galley was an intricate and well-
planned operation. Salads and other
appetizers were prepared in batches several hours before dinner.
Each salad was prepared exactly
the same way, with one galley member distributing the lettuce
on every plate, followed by another
member placing the tomatoes, and so on. At each of the more
than three-dozen food-preparation
stations, pictures and detailed descriptions of each plate were
readily visible and used as a guide for
the staff to prepare everything in a standard way. Data gathered
over previous cruises for every item
on the menu were used to forecast supplies for each sailing.
The executive chef and his team
orchestrated production: 160 people in the galley, 2 restaurant
managers, 6 assistant restaurant
managers, 73 waiters, 59 assistant waiters, 11 sommeliers, 31
cleaners, and 20 bar waiters.
Guests chose seating times for dinner through the travel agent
prior to sailing. Preference could
be specified for table size, seating time, specific company, and
even location (if the guest was familiar
with the dining room layout). Celebrity determined table
combinations before sailing. Guests were
typically seated with other people in their age group. The
restaurant manager could make changes to
accommodate unsatisfied guests’ requests for different seating.
Tables were often the source of new
friendships, even the occasional romance, as well as a place to
discuss the cruise and cruise pricing.
In addition to the main dining room, the Millennium offered a
café poolside with spa food, a buffet
for breakfast and lunch, a casual-dining dinner alternative venue
with relaxed dress code, a coffee
café, and 24-hour in-room dining service.

Another dining option aboard the Millennium was the Olympic
restaurant, a lavish specialty
venue available by reservation for $25 per person.12
Program Activities and Facilities
At almost every moment of every day guests could be found
engaging in activities ranging from
golf to massage, art buying, shopping, learning about wine,
lounging, sightseeing, or playing games
(Exhibit 16 presents a sample list of daily activities, and a
sample of spa service offerings and prices
is provided in Exhibit 17).
Cruisers
Notwithstanding the myriad activities available on board and
exotic ports shoreside, many
cruisers believed the experience to be about the people more
than anything else. In 12 years Ron
Deutschman and Dan Vanderpaal, regulars on Celebrity, had
cruised 54 times together, 32 times on
12 In 2001, the cost was $12 per person. Olympic waiters’ tips
were paid with a portion of …
TB0109
Copyright © 2005 Thunderbird, The Garvin School of
International Management. All rights reserved. This case was
prepared by Professor Stefan Michel for the purpose of
classroom discussion only, and not to indicate either effective

or
ineffective management. The case was prepared from published
sources, and neither McDonald’s nor Golden Arch is in
any way responsible for the completeness, accuracy, or fairness
of the presentation of any information contained herein.
The author thanks Nancy Stephens, Professor at Arizona State
University, for sharing her pictures and her experi-
ence, and Daniel Deutscher, hotel expert, for providing
benchmark financial data. The following graduate students at
Thunderbird, The Garvin School of International Management,
translated part of the case from German to English:
Trevor Bundy, Patrick Häberli, Gian McCoy, Oliver Sanders,
and Bjorn Van den Berghe.
Stefan Michel
McDonald’s Adventure
in the Hotel Industry
In spring 2001, McDonald’s Corporation opened its first hotel
in the Swiss town of Rümlang. The 211-
bed, four-star Golden Arch Hotel, situated close to Airport
Zürich-Kloten, was followed in the same
month with the opening of a second hotel in the town of Lully.
Heading this project was Urs Hammer,
longtime chairman of McDonald’s Switzerland. Hammer hoped
the hotels would continue “the spirit
of McDonald’s hospitality philosophy.” Jack Greenberg, CEO
of the McDonald’s Corporation, viewed
Hammer’s concept as a way forward for the company—since
McDonald’s competed in many saturated
markets with its restaurant business, diversification was a
promising way for future growth.1
McDonald’s

The McDonald’s story began in 1954, when a self-employed
salesman named Raymond Kroc sold a
popular milkshake mixer in Southern California. Oddly, many
of his clients referred to his product as
the mixer that the McDonald brothers used in San Bernardino.
As the number of these references
increased, Kroc asked himself why the McDonald brothers were
so well known and what was their
secret? He decided to find out by driving down to San
Bernardino. The “secret” was a restaurant on the
outer limits of the city.
Through observation, Kroc noticed that many of the customers
had come from far away (far
being, of course, more than 25 miles!—remember, this was
1954), and the reason they came was un-
common for the time: hamburgers, cheeseburgers, French fries,
a soda, and a milkshake made with the
same mixer that Kroc himself sold. Kroc questioned some of the
customers in the restaurant and discov-
ered that the reason they came was that they could get the
freshest burger and fries all at one price (think
Value Meals and Happy Meals). Also, what impressed Kroc
during his visit to the restaurant was that
the food was served in a clean environment and it provided “fast
and friendly” service—the service was
so quick that none of the customers had to wait in line.
1
http://www.leisureopportunities.co.uk/newsdetail.cfm?codeID=1
80, dated Spring 2001, accessed Nov 13,
2004.
October 20, 2005

2 TB0109
Impressed with the consistent quality and taste, day or night,
that the McDonald system pro-
vided, Kroc offered the McDonald brothers the chance to open
more restaurants. His original intent
was to make more sales with his mixers, but the McDonalds
refused his offer under the auspices that
they didn’t want to leave San Bernardino. Kroc was still so
convinced that this system of food service
would work that he offered to buy the rights to the McDonald
brothers’ concept and open his own
restaurants under their name.
Kroc then left San Bernardino with the first McDonald’s
franchise contract in hand. One year
later, he opened his first McDonald’s Family Restaurant in Des
Plaines, California. The success of the
restaurants is one for the history books, as in the following
years McDonald’s popped up everywhere in
the country and became an American icon.
The first McDonald’s openings outside of the U.S. began in
1967 with Canada, Japan, Holland,
Australia, and Great Britain. In the 1970s, there was continued
success with restaurants opening in
Germany, Hong Kong, Sweden, the Far East, and Latin
America. With the fall of the Iron Curtain in

1989, McDonald’s expanded into Eastern Europe in Russia,
Poland, Hungary, and the Czech Republic.
As of 2005, McDonald’s Corporation operates more than 30,000
quick-service restaurant businesses
under the McDonald’s brand in 122 countries around the
world.2,3 Every five hours a new franchisee
joins the McDonald’s chain.4
In 1976, McDonald’s began to build its base in Switzerland.
Today there are 142 McDonald’s
restaurants there. The Swiss affiliate has grown so much in the
last 29 years that it now has 7,200 full-
time employees. There are approximately 1.62 McDonald’s for
every 100,000 citizens in Switzerland,
versus 4.72 restaurants per 100,000 in the USA. Financial
analysts have determined the market to be
saturated in America, and it is a major concern in Switzerland
as well. The Swiss head office of McDonald’s
is based in Crissier (VD). The CEO, Urs Hammer, is well
recognized by the public at large, because he
comes from a well-known Swiss hotelier family.
In every country, one of the main concerns is the relationship
that McDonald’s builds with its
neighbors, local communities, and clubs. Children play an
important role in the McDonald’s corporate
plan: One quarter of all restaurants have a built-in “Playland”
where children can play freely and parents
can host birthday parties for their children. The restaurants
incorporate a family atmosphere where the
McDonald’s clown, Ronald McDonald, plays an important
educational, as well as an entertaining, role.
Altered Market Circumstances
In 1965, McDonald’s held its IPO (Initial Public Offering) on

the New York Stock Exchange. Today,
their stock is an essential part of the Dow Jones index and is
also exchanged in Tokyo, Toronto, Paris,
Frankfurt, and London. Since 1990, one can buy and sell
McDonald’s stock in Zürich, Basel, and
Geneva. Within a few months—between November 1999 and
February 2000—the stock declined
from $48 to $32 per share. Why was there such a decrease in
price share? The financial analysts sur-
mised that McDonald’s in the U.S. had reached market
saturation. Martin Huber, CFO of McDonald’s
Switzerland and General Manager of the Swiss corporate office,
concluded that every opening of a new
McDonald’s restaurant intruded upon the revenues of other
restaurants already in operation.
As a result, McDonald’s decided to pursue a “diversification”
strategy: In pre-selected countries,
General Management would develop core competencies, the
purpose of which was 1) to build more
profit and revenue-winning restaurants, and 2) to develop these
core competencies for use as a model
throughout the corporation. This “competency center” in each
country would share its acquired knowl-
2 http://en.wikipedia.org/wiki/McDonald’s.
3
http://www.fifa.com/de/marketing/partners/index/0,1355,21,00.
html.
4 See
http://www.wemweb.com/chr66a/sbr66_museum/sbmcdonalds_h
istory.html for historic details and
pictures.

TB0109 3
edge with other restaurants so that new products or services
could be implemented to generate new
growth.
The Swiss Strategy
McDonald’s Switzerland, along with its CEO Urs Hammer,
chose to pursue the “hotel” venture, and in
1999 received the green light from the executive board in
Chicago. In the spring of 2001, two hotels
with associated restaurants were scheduled to open. Alongside
the centerpiece of this study (the hotel in
Zürich-Rümlang), a second hotel was being constructed in
Lully, near the A-1 interstate stretch Yverdon-
Payerne.
The crucial factor in deciding to pursue the hotel strategy and
create a synergy with the already
existing restaurant and catering business was the fact that CEO
Urs Hammer came from a hotelier
background. The Swiss General Manager had presented the
McDonald’s hotel concept to the corporate
headquarters in Chicago three years before and got the nod to
establish the world’s first McDonald’s
Hotel. Should the Swiss managers succeed, there was the chance
that they could manage operations of
this strategic business unit for the entire corporation, from
Switzerland.

Rümlang, a small town on the fringe of Zürich, was chosen as
the first location. Zürich was on the
upswing, and its hotel managers were thrilled to ride the wave
of success. Their occupancy rates were
high, and there was much diversity. Young people considered
Zürich trendy, while older people enjoyed
its culture and businesses. Almost overnight, Zürich, long
classified as moderately interesting, for a long
time became the destination for trendy insiders. Suddenly,
guests were coming and the prices were
paid.5
Even more promising was the airport area. The national airline
SWISSAIR, focusing on a growth
strategy by acquiring many smaller European airlines, used the
Airport Zürich-Kloten as a hub. The
hub, in turn, generated more demand for hotel beds by tourists,
business travelers, and airline crews. A
major expansion of the airport was likely to increase its
capacity by 50% in the first decade of the new
millennium.
The Hotel Project
With a 32 million CHF (Swiss Franc)—about $26 million
USD—investment, the Swiss subsidiary of
McDonald’s formulated a strategy to open a middle-class hotel
in Rümlang. When the hotel opened it
doors in March 2001, the five-story building featured 211
rooms, along with a 170-seat drive-through
McDonald’s restaurant open 24 hours a day (very unusual in
Switzerland). The restaurant was separated
from the hotel so that only hotel guests had access to the hotel
building. The plans also included a 110-
car underground garage, as well as a 40-car above-ground

parking lot.
Hotel Division executive Stefan Döni explained that with
regards to competition, not only was
the hotel competing with other four-star hotels like the
Mövenpick and Hilton, but also with the
world’s fastest-growing hotel group, the Accor-Group. Döni
was so convinced that the hotel would be
a success that he and his team adopted the McDonald’s service
standards for their hotel, with high
priority given to room cleanliness.
Two types of rooms were offered: room type I offered an
oversized king-sized bed (200cm x
200cm), and room type II offered two oversized single beds
(200cm x 140cm) (see Exhibit 1). The price
range was set from 150 CHF to 200 CHF ($120 USD to $160
USD) per night. To ensure efficient
luggage handling, McDonald’s developed a custom-made trolley
for both hotels. In accordance with the
McDonald’s restaurant philosophy, the hotel crew would consist
of a similar, permanent, employee
pool that could implement the consistent service standards for
every task in order to better serve the
5 Ein Hotel in Zürich müsste man haben, NZZ (2000) 5 August,
S. 41.

4 TB0109
guests. The motivational job rotation principle would therefore
replace the traditional hotel industry-
applied job specialization and hierarchy system.
Because of the different peak-period demands for restaurants
and hotels, the synergy effect would
also be used to assign employees different positions and tasks.
In order to bypass the rush of the check-
in and check-out process, guests would have the opportunity for
self-check-in. Through the simple use
of a credit card, the guest would have the opportunity to check
in and out of the hotel at the airport
terminal. In total, there would be nine meeting rooms with the
possibility of being transformed, due to
a foldable-wall technology, into a larger 30-person conference
room.
To provide optimal comfort for guests, management decided
against saving on beds and mat-
tresses. Due to this, future McDonald’s hotel guests would lie in
comfort on the same beds and mat-
tresses as guests of the world-famous, five-star Quellenhof
Hotel in Bad Ragaz. What made the room
layout unique was the “curved wall,” which bestowed the room
with a special atmosphere and design.
The “curved wall” was a one-piece, ready-to-use design that
would be patent-protected by McDonald’s
Switzerland.
One feature of the hotel room design was a futuristic shower
that projected into the bedroom.
While it made the room look bigger, from the inside the glass
tube was claustrophobic. Originally, the
tube was completely transparent, but after guests complained

about the lack of privacy (e.g., two busi-
nessmen sharing a two-bedroom or a family traveling with
teenagers), the glass was frosted6 (see Exhibit
2).
The Market
The nearest hotel was a family-owned Airotel Rümlang (5 km
from the airport, three stars), with 34
rooms and no airport shuttle. The room rates were 120 CHF
($96 USD to 170 CHF ($137 USD). A
more significant competitor was the Allegra Hotel in Kloten,
since it competed in the same price range,
but Allegra was closer to the airport (2.2 km), had more rooms,
fewer (but larger) meeting rooms, and
a fine-dining restaurant. It was owned by the Wohlgemuth
family who owned and operated several
hotels in the Zürich airport market. Another hotel they operated
was the 44-room, four-star Airport
Hotel Glattbrugg.
Very close to Golden Arch’s property was the Mövenpick hotel
(1.5 km from the airport) with
three restaurants and large meeting rooms. Mövenpick offered a
frequent-guest rewards program and
operated more than 50 hotels around the world. A direct
competitor was Novotel, which was located
directly at the Autobahn between Zürich-Airport (3km) and
Zürich downtown, close to several major
business centers (e.g., Headquarters of Zürich Insurance,
General Motors Europe, World Trade Center,
and the Textile & Mode Center). Several other new projects had
been recently announced. One hotel
was to be built directly at the airport, with many conference
facilities already built nearby.

In the Zürich region (city of Zürich and the airport area), there
were 17 new hotels, as well as two
extensive enhancements planned, currently under construction,
or already finished (see Exhibits 3 and
4). Within three years, the 7,500 hotel rooms were to be
supplemented by around 3,000 more rooms,
or a 40% increase.
By far, the largest increase in hotel rooms has emerged on the
Zürich-Airport axis. The hotel chain
Accor alone contributed 738 rooms to this additional volume.
Of these, 457 rooms were put into
operation at the beginning of May next to the Technopark near
downtown Zürich. The building would
contain an IBIS-Hotel (two stars), an Etap-Hotel (three stars),
and a Novotel-Hotel (four stars). An
additional 281 rooms were being built at the World Trade
Center in Seebach (Ibis, Formule 1). Besides
6 Bernstein, Fred, “Want Fries with that McDonald’s Room?”
Washington Post (2002) September 1, S. E 05.
TB0109 5
the four new projects, the first Women’s Hotel was being built
in Zürich downtown and the exhibition
hotel, Turicum, was being planned.

But even with the 3,000 additional hotel rooms, growth
continued. The hotel chain Hyatt had
been planning for a long time to build a convention hotel in
Escherwiese, even though the project had
been blocked for several years. Hotels were also planned in the
consumer electronics complex in Oerlikon
called Magic Park, and in the Diax-Towers in north Zürich or in
Eurogate.7
“The current events are blowing us away,” said Guglielmo
Brentel, President of the Hotel Associa-
tion. At the beginning of the year, he expected the development
of 2,000 additional hotel rooms in the
city of Zürich and the airport region within the next two to three
years. This amount was greater than
one-quarter of the then-current supply of 7,500 hotel rooms (as
of January 12, 2000). Even six months
later, Brentel admitted that there were actually many more:
3,000 rooms, or 40%.8
Business was still excellent for the hotel operators. In the city
of Zürich, hotel occupancy rates in
1999 were 73%, and in the previous year 71%.9 The region
around the airport was up to 80% capac-
ity—like in the boom of the 1980s. According to Brentel, it
would be another one or two years before
the hotel managers felt the effects of the extra capacity, because
contracts with the tour operators were
booked in advance: “If all of the projects realize, the market
will not be able to absorb them. The market
might be able to assimilate 1,000 additional rooms; 2,000 under
certain circumstances—if the economy
continues to flourish, the airport is expanded, and a convention
infrastructure is created, and if the
Olympic Games take place in Switzerland.” Anything over an
additional 2,000 rooms, according to

Brentel, would be too many.10
It seems that managers do not learn from history. In the early
1970s, Hotel Atlantis (now Arabella
Sheraton), Hotel Zürich (now Marriott), Hotel International
(now Swissotel), and Hotel Nova Park
(now Inter-Continental) were built. A little later, the first hotels
in the airport region added to the
offering with the Holiday Inn (now Mövenpick Hotel Airport)
and the first part of the Hilton. Between
1970 and 1975, capacity increased by 2,500 hotel beds in the
four-star category. Although it was said
that the new hotels would bring new guests and businesses, the
hotel bed occupancy rate dropped from
above 70% to a tight 50%.11
It also seems that the hotel managers overlooked another
challenge in the Swiss hospitality indus-
try. Indeed, three-, four-, and five-star hotels can be built
quickly. The construction industry has the
ability and capacity to build them. However, running these
operations is more difficult. It takes person-
nel. The Swiss human resources market was dried out. It was
almost impossible to find cooks and chefs.
Staff for the reception desk was also rare. Domestic workers
were preferred in hiring, but with so many
jobs needing to be filled, who would perform the simple work?
This was problematic because quite a
few conservative hoteliers who asked for foreign labor also
complained about the high ratio of foreign-
ers. If many low-budget hotels had no staff, Zürich would not
create a destination market, no matter
how trendy it was. For this reason, it was suggested that those
who intended to build a hotel in Zürich
should be required to secure the operational staff first.12
Reputable experts also acknowledged that this

would not be possible without labor piracy, i.e., luring away
staff from existing hotels.
7 Hosp, Janine, Bald blässt ein scharfer Wind, Tages-Anzeiger
(2000) 17 Juni, S. 13.
8 Ibid.
9 Reported 59.2% occupied beds, and 74.5% occupied rooms,
according to http://www.zuerich.com/about/
de/statistiken/jahresstatistik_2001.pdf.
10 Hosp, Bald blässt ein scharfer Wind.
11 Ein Hotel in Zürich müsste man haben, NZZ (2000) 5.
August, S. 41.
12 Ibid.
6 TB0109
Market Analysis
Most analysts were not very convinced that this expansion fit
well with McDonald’s overall strategy.
“I’ve just came back from lunch at McDonald’s. But I can’t
imagine staying at a McDonald’s hotel on a
business trip,” said Rene Weber at Bank Vontobel.13 Erwin
Brunner, an asset manager at Brunner Invest
AG, was more open-minded: “I usually stay in five-stars. But if
there isn’t one around, why not stay at
McDonald’s?”14 Peter Oakes, an industry expert at Merrill
Lynch, was less optimistic, and “would be

surprised if the Golden Arch Hotel expands to other countries.”
Robert LaFleur, an analyst with Bear
Stearns in New York, noted that while McDonald’s had a
favorable brand image associated with conve-
nience, hospitality, and cleanliness, he didn’t expect the
company to begin rapid expansion of hotels in
the next few years. LaFleur described the Swiss venture as a
blip on the radar screen for major U.S. hotel
chains:
I don’t see this as a competitive threat to the lodging industry.
There are 38,000 hotels with about
four million rooms in the United States, and this is a test in
Switzerland. It will be interesting to see if
this succeeds. But even if it is wildly successful, I still don’t
see it as any short-term or medium-term risk
to hotel players in the United States. Switzerland is a small
market, and the penetration of branded
hotels is much lower in Europe than it is in the United States.15
Mr. Hammer, McDonald’s Switzerland CEO, was a frequent
traveler and knew exactly what
customers wanted in a hotel. “On arrival, there will be an
automatic check-in,” said Beat Kuhn, man-
ager at the Golden Arch in Rümlang. “An electronic key will
give guests access to the facilities. The
room will be equipped with a large bed that has three built-in
motors for a variety of positions. It will
also have Internet and computer facilities, with the TV screen
serving as a computer screen, and a cable-
free keyboard.” As Urs Hammer argued: “Our restaurants serve
74 million customers in a country with
a population of 7 million. If only one in 1,000 of those guests
chooses the Golden Arch Hotel, the
project will be a success.”16 McDonald’s planned to watch the
progress of the hotel, but there was no

plan for a widespread launch of McDonald’s-branded hotels,
according to U.S.-based company spokes-
person Walt Riker. “Each of the 100 countries where we operate
is free to unleash innovation and new
ideas to develop the brand. This is an individual, innovative
approach by one company in our system.”17
Customer Experience
Nancy Stephens, a professor from Arizona, stayed in the Golden
Arch Hotel in 2001. She was surprised
that she had never heard about McDonald’s move into the hotel
industry before she actually gave a guest
lecture in Switzerland. She recalls her stay at the Golden Arch:
The beds go up and down electrically, like a hospital bed. The
green part of the hotel room floor was
hard as rock and extremely uncomfortable, even a bit painful, to
walk on. The bar, downstairs behind
the lobby, is cold and unwelcoming. It feels like a lounge in a
small city airport. Plastic all the way.
The only bar snacks were chicken McNuggets and party mix
(pretzels, nuts, etc.). The bar has large
windows looking out on a scene of green grass and trees. I
found it more suggestive of having a picnic
than having a drink in a bar. Not the right ambiance at all. The
rooms are somewhat noisy, being
located right by the airport. The Internet keyboard is wireless,
very advanced for summer 2001, when
I stayed there. I believe the hotel had just opened; there weren’t
many people around and it had the
feel of a large, empty hotel. The only food available is
McDonald’s, at the restaurant attached to the
hotel. Furthermore, the hotel is relatively isolated. There isn’t
much of anything in walking distance,

13 Studer, Margaret, und Jennifer Ordonez, “The Golden
Arches: Burgers, Fries and 4-Star Rooms:
McDonald’s Plans to Open Two Hotels in Switzerland, Will
Business Travelers Bite?” Wall Street Journal
(2000) 17 November, S. B1.
14 Ibid.
15 Zuber, Amy, “McD Eyes Hotels on the Swiss Horizon,”
Nation’s Restaurant News 34 (2000) 49, S. 1-2.
16 Studer und Ordonez, “The Golden Arches: Burgers, Fries and
4-Star Rooms.”
17"Swiss McDonald’s to Open Two Hotels,” 2000,
www.cnn.com/2000/TRAVEL/NEWS/11/17/
leisure.McDonald’s.reut/, November 17.
TB0109 7
making one a captive market for McDonald’s food or forcing
one to spend money on a cab to a
restaurant, which would be expensive in a fairly non-urban
location. As I think about this hotel visit
in retrospect, the entire feeling was one of oddity and
discomfort. It just felt off and I’m not sure I can
say exactly why. Maybe it’s the sum of all my particular
memories. I don’t think of it as anywhere I
would want to return.
Fred Bernstein liked the experience when he stayed at the
Golden Arch in Lully. After visiting the

Swiss National Exhibition, he was looking for a room and
learned that the rate was 180 CHF ($120
USD). When he asked whether there was a better rate available,
the receptionist offered the post-9 p.m.
walk-in rate of 83 CHF ($55 USD) since he did not have a
guaranteed booking for a higher rate:
For $55 USD, we weren’t expecting much. But the room, though
garishly painted, was exceedingly
cheerful. Large windows, excellent air conditioning, and
comfortable furniture made the room seem
like a bargain. Better yet, at the touch of a button, the beds
(twins pushed together) adjusted to every
conceivable position. Plus, there was an Internet access, via the
TV, with a wireless keyboard—so I
could lounge in bed and answer e-mail. There were subtle
reminders that we were in a McDonald’s
hotel, including headboards shaped like the Golden Arches, but
I found them witty rather than cloy-
ing.18
Upendra Dixit, an Indian businessman who lived and worked in
Germany for five years, recalls
his only experience at the Golden Arch Hotel in Lully:
One long weekend, we were traveling towards Lausanne from
the Interlaken area escorting my fa-
ther-in-law. We had left Stuttgart in the morning, spent time at
the Rhine Falls at Schaffhausen, then
the best part of the day in the Interlaken and Jungfrau region.
Late evening we were heading for
Lausanne where we wanted to spend the night. The next day, we
had a plan to spend the morning
there and head out to the Zermatt region. At the Bern junction
of the two highways coming from Basel
and Interlaken, our car had an accident with some construction

barricade material and was dam-
aged. We were shaken up after experience and wanted to stop
for the night. We came across our
familiar McDonald’s restaurant on the highway at Lully and
stopped for dinner. Till then, despite our
several visits, we had not noticed the hotel, which was quietly
situated to the side. The signage was
not that prominent. This time we did notice it and felt that it
was a good place to stop. First, the
Golden Arch Hotel was immediately associated in the mind with
the McDonald’s brand. We expected
that the hotel would be one to two stars, matching the
McDonald’s brand image. We noticed that the
hotel was unusually quiet, with not much activity and few cars
parked outside. One concern for the
family was safety. Was it safe to stay on the highway with so
few people around? When we entered the
lobby, it was very quiet with no activity and no one at
reception. This was different from McDonald’s
restaurants where there was immediate service. So for the
family, this was a very unwelcoming expe-
rience, especially since we were all a bit upset after the
accident. While we had no intentions to do
much that evening, and it was already late, we noticed that there
was not much that could really be
done there, so it was ideally a bed-and-breakfast kind of place
for an evening’s stay. All this had an
association with a certain price expectation. When we finally
rang the bell and got someone to come
to the reception desk, we were told the tariffs would be around
150 CHF ($120 USD), which was a
very high and upper-class hotel range. We were also told that
we needed three rooms for five people.
We felt that this was too high compared to our expectations.
Given the low occupancy, there was little
effort to sell the rooms to us and the front-desk person was not

very friendly or welcoming either.
Thus, we decided not to stay there and continued on to
Lausanne where we had a miserable experi-
ence in the other direction with Formula 1 hotel, but that is
another story.
Daniel Deutscher, owner of DEKA Treuhand, a hospitality
consulting firm in Frauenfeld (TG),
was very surprised when he learned that the Golden Arch Hotel
was positioned as a four-star hotel:
In Switzerland, McDonald’s restaurants are perceived as cheap
fast-food places, while a four-star
hotel …
70 Harvard Business Review | April 2008 | hbr.org
AS THE WORLD’S MAJOR ECONOMIES
have matured, they have become dom-
inated by service-focused businesses.
But many of the management tools
and techniques that service managers
use were designed to tackle the chal-
lenges of product companies. Are these
suffi cient, or do we need new ones? Ja
so
n
Le
e
by Frances X. Frei

Let me submit that some new tools
are necessary. When a business takes a
product to market, whether it’s a basic
commodity like corn or a highly engi-
neered offering like a digital camera,
the company must make the product
itself compelling and also fi eld a work-
force capable of producing it at an
The
Four
Things
a Service
Business
Must Get
Right
Extensive study
of the world’s
best service
companies reveals
the principles on
which they’re built.
1084 Frei.indd 701084 Frei.indd 70 3/4/08 10:12:24
PM3/4/08 10:12:24 PM
hbr.org | April 2008 | Harvard Business Review 71
PM3/4/08 10:12:31 PM

The Four Things a Service Business Must Get Right
72 Harvard Business Review | April 2008 | hbr.org
attractive price. To be sure, neither job is easy to do well;
enormous amounts of management attention and academic
research have been devoted to these challenges. But deliver-
ing a service entails something else as well: the management
of customers, who are not simply consumers of the service
but can also be integral to its production. And because cus-
tomers’ involvement as producers can wreak havoc on costs,
service companies must also develop creative ways to fund
their distinctive advantages.
Any of these four elements – the offering or its funding
mechanism, the employee management system or the cus-
tomer management system – can be the undoing of a ser-
vice business. This is amply demonstrated by my analysis
of service companies that have struggled over the past de-
cade. What is just as clear, however, is that there is no “right”
way to combine the elements. The ap-
propriate design of any one of them
depends upon the other three. When
we look at service businesses that have
grown and prospered – companies like
Wal-Mart in retail, Commerce Bank in
banking, and the Cleveland Clinic in
health care – it is their effective inte-
gration of the elements that stands out
more than the cleverness of any ele-
ment in isolation.
This article outlines an approach for crafting a profi table
service business based on these four critical elements (col-
lectively called the “service model”). Developed as a core

teaching module at Harvard Business School, this approach
recognizes the differences between service businesses and
product businesses. Students in my course learn to think
about those differences and their implications for manage-
ment practice. Above all, they learn that to build a great
service business, managers must get the core elements
of service design pulling together or else risk pulling the
business apart.
1 The Offering
The challenge of service-
business management be-
gins with design. As with
product companies, a ser-
vice business can’t last long
if the offering itself is fatally
fl awed. It must effectively
meet the needs and desires of an attractive group of cus-
tomers. In thinking about the design of a service, however,
managers must undergo an important shift in perspective:
Whereas product designers focus on the characteristics buy-
ers will value, service designers do better to focus on the
experiences customers want to have. For example, customers
may attribute convenience or friendly interaction to your
service brand. They may compare your offering favorably
with competitors’ because of extended hours, closer proxim-
ity, greater scope, or lower prices. Your management team
must be absolutely clear about which attributes of service
the business will compete on.
Strategy is often defi ned as what a business chooses not
to do. Similarly, service excellence can be defi ned as what a
business chooses not to do well. If this sounds odd, it should.
Rarely do we advise that the path to excellence is through in-
ferior performance. But since service businesses usually don’t

have the luxury of simply failing to deliver some aspects of
their service – every physical store must have employees
on-site, for example, even if they’re not particularly skilled
or plentiful – most successful companies choose to deliver a
subset of that package poorly. They don’t make this choice
casually. Instead, my research has shown, they perform badly
at some things in order to excel at others. This can be consid-
ered a hard-coded trade-off. Think about the company that
can afford to stay open for longer hours because it charges
more than the competition. This business is excelling on con-
venience and has relatively inferior performance on price.
The price dimension fuels the service dimension.
To create a successful service offering, managers need
to determine which attributes to target for excellence and
which to target for inferior performance. These choices
should be heavily informed by the needs of customers.
Managers should discover the relative importance custom-
ers place on attributes and then match the investment in
excellence with those priorities. At Wal-Mart, for example,
ambience and sales help are least valued by its customers,
low prices and wide selection are most valued, and several
other attributes rank at points in between. (See the exhibit
“Wal-Mart’s Value Proposition” in David J. Collis and Michael
G. Rukstad’s article “Can You Say What Your Strategy Is?” in
this issue.) The trade-offs Wal-Mart makes are deliberately
informed by these preferences. The company optimizes spe-
cifi c aspects of its service offering to cater to its customers’
Frances X. Frei ([email protected]) is an associate professor of
busi-
ness administration in the Technology and Operations
Management

unit at Harvard Business School in Boston.
Service excellence can be defi ned
as what a business chooses not
to do well.
PM3/4/08 10:12:40 PM
hbr.org | April 2008 | Harvard Business Review 73
priorities, and it refuses to overinvest in underappreciated
attributes. The fact that it takes a drubbing from competi-
tors on things its customers care less about drives its overall
performance.
The phenomenon, of course, has a circular aspect. Shop-
pers whose preferences match Wal-Mart’s strengths self-
select into its customer base. Meanwhile, those who don’t
prefer Wal-Mart’s attributes buy elsewhere. It is important
therefore to identify customer segments in terms of attri-
bute preferences – or as some marketers prefer, in terms
of customer needs. Identifying what might be called cus-
tomer operating segments is not the same exercise as tradi-
tional psychographic segmentation. Rather than stressing
differences that enable increasingly targeted and potent
messaging, this type of segmentation aims to fi nd popula-
tions of customers who share a notion of what constitutes
excellent service.
Once an attractive customer operating segment is found,
the mission is clear: Management should design a new offer-
ing or tweak an existing one to line up with that segment’s

preferences. Look, for example, at the fi t achieved by Com-
merce Bank, which has been able to grow its retail customer
base dramatically even though its rates are among the worst
in its markets and it has made limited acquisitions. Com-
merce Bank focuses on the set of customers who care about
the experience of visiting a physical branch. These customers
come in all shapes and sizes – from young, fi rst-time bank-
ing clients to time-strapped urban professionals to elderly
retirees. As an operating segment, however, they all believe
that convenience is a bank’s most important attribute and
choose Commerce Bank because of its evening and week-
end hours. Second most important to them is the friendli-
ness of interactions with employees, and so the promise of
a cheerful, familiar teller has become part of the bank’s
core offering. Commerce has added to its branch ambience
with interior elements both lovely (high ceilings and natural
light) and fun (an amusing contraption for redeeming loose
change). When it comes to attributes less important to the
bank’s customers – price and product range – management
is willing to cede the battle to competitors.
It is tempting to think, “If I’m a really good manager,
then I don’t have to cede anything to the competition.” This
well-intentioned logic can lead, ironically, to not excelling
at anything. The only organizations I have seen that are
superior at most service attributes demand a price premium
of 50% over their competitors. Most industries don’t support
this type of premium, and so trade-offs are necessary. I like
to tell managers that they are choosing between excellence
paired with inferior performance on one hand and medi-
ocrity across all dimensions on the other. When managers
understand that inferior performance in one dimension fu-
els superior performance in another, the design of excellent
service is not far behind.
2 The Funding Mechanism

All managers, and even most cus-
tomers, agree that there is no
such thing as a free lunch. Excel-
lence comes at a cost, and the
cost must ultimately be covered.
With a tangible product, a compa-
ny’s mechanism for funding superior
performance is usually relatively simple: the price tag. Only
the customers who forfeit the extra cash can avail them-
selves of the premium offering. In a service business, devel-
oping a way to fund excellence can be more complicated.
Many times, pricing is not transaction based but involves
the bundling of various elements of value or entails some
kind of subscription, such as a monthly fee. In these cases,
buyers can extract uneven amounts of value for their money.
Indeed, even nonbuyers may derive value in certain service
environments. For example, a shopper might spend time
learning from a knowledgeable salesperson, only to leave
the store empty-handed.
In a service business, therefore, management must give
careful thought to how excellence will be paid for. There
must be a funding mechanism in place to allow the company
to outshine competitors in the attributes it has chosen. In my
study of successful service businesses, I’ve seen the funding
mechanism take four basic forms. Two are ways of having
the customer pay, and two cover the cost of excellence with
operational savings.
Charge the customer in a palatable way. The classic ap-
proach to funding something of value is simply to have the
customer pay for it, but often it is possible to make the form
that payment takes less objectionable to customers. Rarely
is that done with à la carte pricing for the niceties. A large
part of Starbucks’s appeal is that a customer can linger al-
most indefi nitely in a coffeehouse setting. It’s unthinkable

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