Communication and Control Processes Key to Service Quality

Communication and Control Processes in the Delivery of
Service Quality
Author(s): Valarie A. Zeithaml, Leonard L. Berry and A.
Parasuraman
Source: Journal of Marketing, Vol. 52, No. 2 (Apr., 1988), pp.
35-48
Published by: American Marketing Association
Stable URL: http://www.jstor.org/stable/1251263
Accessed: 18-05-2017 23:45 UTC
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Valarie A. Zeithaml, Leonard L. Berry, & A. Parasuraman
Communication and Control
Processes in the Delivery
of Service Quality
Delivering consistently good service quality is difficult but
profitable for service organizations. Under-
standing why it is so difficult and how it might be facilitated is
the purpose of the article. The authors'
intent is to identify a reasonably exhaustive set of factors
potentially affecting the magnitude and direc-
tion of four gaps on the marketer's side of their service quality
model. Most factors involve (1) com-
munication and control processes implemented in service
organizations to manage employees and (2)
consequences of these processes, such as role clarity and role
conflict of contact personnel. Literature
from the marketing and organizational behavior fields on these
topics is reviewed and integrated with
qualitative data from an exploratory study. Discussion centers
on insights that can be obtained from

empirical testing of the extended model.
THE delivery of quality in goods and services has
become a marketing priority of the 1980s (Leon-
ard and Sasser 1982; Rabin 1983). Though marketers
of tangible goods have defined and measured quality
with increasing levels of precision (Crosby 1979; Gar-
vin 1983), marketers of services experience difficulty
in understanding and controlling quality. Because ser-
vices are performances rather than objects, precise
manufacturing specifications for uniform quality rarely
can be established and enforced by the firm. Quality
in services is not engineered at the manufacturing plant,
then delivered intact to the consumer. Most services
cannot be counted, measured, inventoried, tested, and
verified in advance of sale to ensure quality delivery.
Furthermore, the performance of services-especially
those with a high labor content-often differs among
employees, among customers, and from day to day.
Valarie A. Zeithaml is Visiting Associate Professor of
Marketing, Fuqua
School of Business, Duke University. Leonard L. Berry is
Foley's/Fed-
erated Professor of Retailing and Marketing Studies and
Director of the
Center for Retailing Studies, Texas A&M University. A.
Parasuraman is
Foley's/Federated Professor of Retailing and Marketing
Studies, Texas
A&M University. The authors thank the Marketing Science
Institute and
its corporate sponsors for the financial support and cooperation
pro-

vided for the study.
In most services, quality occurs during service deliv-
ery, usually in an interaction between the customer
and contact personnel of the service firm. For this rea-
son, service quality is highly dependent on the per-
formance of employees, an organizational resource that
cannot be controlled to the degree that components of
tangible goods can be engineered.
Research (Thompson, DeSouza, and Gale 1985)
and company experience (Rudie and Wansley 1985)
reveal that delivering high service quality produces
measurable benefits in profit, cost savings, and mar-
ket share. Therefore, an understanding of the nature
of service quality and how it is achieved in organi-
zations has become a priority for research. To that
end, we previously developed a service quality model
(Parasuraman, Zeithaml, and Berry 1985) indicating
that consumers' quality perceptions are influenced by
a series of four distinct gaps occurring in organiza-
tions (see Figure 1). These gaps on the service pro-
vider's side, which can impede delivery of services
that consumers perceive to be of high quality, are:
Gap 1: Difference between consumer expec-
tations and management perceptions
of consumer expectations.
Gap 2: Difference between management per-
Journal of Marketing
Vol. 52 (April 1988), 35-48. Delivery of Service Quality / 35
2017 23:45:28 UTC

FIGURE 1
Conceptual Model of Service Quality
CONSUMER
MARKETER
ceptions of consumer expectations and
service quality specifications.
Gap 3: Difference between service quality
specifications and the service actually
delivered.
Gap 4: Difference between service delivery
and what is communicated about the
service to consumers.
Perceived service quality is defined in the model as
the difference between consumer expectations and
perceptions (gap 5 in Figure 1), which in turn depends
on the size and direction of the four gaps associated
with the delivery of service quality on the marketer's
side.
Delivering consistently good service quality is dif-
ficult, as organizations have discovered. Understand-
ing why it is so difficult and how it might be facili-
tated is the purpose of our article. Our intent is to
identify a reasonably exhaustive set of factors poten-
tially affecting the magnitude and direction of the four

gaps on the marketer's side. Most of these factors in-
36 / Journal of Marketing, April 1988
2017 23:45:28 UTC
volve communication and control processes imple-
mented in organizations to manage employees. Other
factors involve consequences of these processes (e.g.,
role ambiguity and role conflict) that affect the deliv-
ery of service quality. Literature from the marketing
and organizational behavior fields on these topics is
reviewed and integrated with qualitative data from an
exploratory study to help understand the way orga-
nizational processes affect service quality.
After describing the exploratory study, we ex-
amine gaps 1 through 4 in Figure 1. The theoretical
constructs proposed to be responsible for each gap are
delineated. In addition, specific organizational vari-
ables that can be used to operationalize these con-
structs in service organizations are itemized and ex-
plained. The result is a detailed conceptual explication
of the service quality model that can be used as a blue-
print for developing measures of the gaps. The steps
necessary to develop these measures, and to test the
model empirically, are discussed in the final section.
The Exploratory Study
The qualitative technique used to learn about service
quality in organizations is what Mintzberg (1979) calls
"direct research." Our study was not designed to test

hypotheses because the literature on organizational
processes involved in service quality delivery is not
rich enough to suggest formal relationships among
variables. Instead, we sought insights by collecting
observations about service quality from managers and
employees in actual service organizations. Observa-
tions were collected in three research stages. The ap-
proach used is consistent with procedures recom-
mended for marketing theory development by several
scholars (Deshpande 1983; Peter and Olson 1983;
Zaltman, LeMasters, and Heffring 1982).
In the first stage, in-depth personal interviews
consisting of open-ended questions were conducted
with three or four executives in each of four nationally
recognized service organizations (a bank, a brokerage
house, a repair and maintenance firm, and a credit
card company). The executives were selected from
marketing operations, senior management, and cus-
tomer relations and held titles such as president, sen-
ior vice president, director of customer relations, and
manager of consumer market research. These execu-
tives were interviewed about a broad range of service
quality issues (e.g., consumer expectations about ser-
vice quality, what steps they took to control or im-
prove quality, and what problems they faced in deliv-
ering high quality services).
The second stage involved a comprehensive case
study of a nationally known bank. Three of the bank's
regions (each of which had at least 12 branches) were
selected. Managers and employees at various levels
of the bank were interviewed individually and in focus
groups. Top and middle managers responded to open-

ended questions about their perceptions of consumer
expectations of service quality (gap 1), service quality
standards set in the organization to deliver quality (gap
2), and differences between standards set by manage-
ment and the level of service actually delivered (gap
3). A total of seven focus group interviews with tell-
ers, customer service representatives, lending person-
nel, and branch managers from within the three re-
gions were held to identify factors contributing to gaps
3 and 4. Finally, managers associated with bank com-
munication with customers (bank marketing, adver-
tising, and consumer affairs executives, as well as the
president and creative director of the bank's advertis-
ing agency) were interviewed to identify the factors
responsible for gap 4.
The third stage of the exploratory study involved
a systematic group interview with 11 senior managers
of six nationally known service firms (two full service
banks, two national insurance companies, and two na-
tional telephone companies) and was intended to ver-
ify and generalize the findings from the two earlier
stages. We presented the conceptual framework, ex-
plained the four gaps, and questioned managers about
the factors responsible for the gaps in their firms. Lists
of factors derived from the first two phases were pre-
sented and discussed. Managers augmented the lists
and evaluated the factors on the basis of experience
in their industries and organizations.
In the following discussion, we combine insights
from the three exploratory phases with those from rel-
evant literature in marketing and organizational be-
havior to propose the main theoretical constructs and
specific variables associated with the four service
quality gaps that can be used to operationalize the

constructs.
The Four Gaps in Service Quality
Gap 1: Difference Between Consumer
Expectations and Management Perceptions
of Consumer Expectations
Service firm executives may not always understand
what features connote high quality to consumers, what
attributes a service must have in order to meet con-
sumer needs, and what levels of performance on those
features are necessary to deliver high quality service
(Langeard et al. 1981; Parasuraman and Zeithaml
1983). Because there are few clearly defined and tan-
gible cues for services, the gap between what con-
sumers expect and what managers think they expect
may be considerably larger than it is in firms that pro-
duce tangible goods (Gronroos 1982; Zeithaml 1981).
As shown in Table 1, the size of gap 1 in any service
firm is proposed to be a function of marketing re-
search orientation, upward communication, and levels
of management.
Delivery of Service Quality / 37
2017 23:45:28 UTC
Specific Variables
Amount of marketing
research
Usage of marketing

research
Degree to which marketing
research focuses on
service quality issues
Extent of direct interaction
between managers and
customers
Extent of employee-to-
manager communication
Extent to which inputs
from contact personnel
are sought
Quality of contact between
top managers and
contact personnel
Number of layers between
customer contact
personnel and top
managers
Marketing research orientation. Evidence indi-
cates that service firms lag behind goods firms in their
use of marketing research and in other facets of cus-
tomer orientation (George and Barksdale 1974;
Lovelock 1981; Parasuraman, Berry, and Zeithaml
1983). Service organizations also place less emphasis
than goods firms on marketing in general (Lovelock
1981), believing that the operations function is more

critical. An operations orientation diverts focus from
consumers and reduces efforts to understand their needs
and expectations. Banks that close their branch lob-
bies in midafternoon to facilitate balancing the day's
transactions and that issue monthly customer state-
ments designed without input from customers exem-
plify an operations orientation.
Because marketing research is a key vehicle for
understanding consumer expectations and perceptions
of services, the size of gap 1 should depend greatly
on the amount of marketing research conducted. Other
research-related variables include the extent to which
research data are used (i.e., read, understood, and ap-
plied) by managers in the organization and the degree
to which the research focuses on service quality is-
sues.
Another factor influencing degree of marketing re-
search orientation is the extent to which top managers
interact directly with consumers. In some service firms,
especially ones that are small and localized, owners
or managers may be in continual contact with con-
sumers, thereby gaining firsthand knowledge of con-
sumer expectations and perceptions. Even in large
service organizations, top managers can spend time
"on the line," interacting with consumers and expe-
riencing service delivery. Radio Shack, for example,
has a program called "Adopt a Store" through which
senior managers spend time in stores collecting in-
formation and interacting with the staff (Goyne 1985).
A major bank in the exploratory study required its
managers to interact regularly with customers by tele-

phone. As the degree of contact between top man-
agers and consumers increases, top managers should
understand the consumer better and the size of gap 1
should decrease.
Upward communication. Though top managers may
not have a firm grasp of consumer quality expecta-
tions, research suggests that customer-contact person-
nel can accurately predict consumer expectations and
perceptions of the service (Schneider and Bowen 1985).
Therefore, top managers' understanding of the con-
sumer may depend largely on the extent and types of
communication received from customer-contact per-
sonnel and from noncompany personnel (e.g., inde-
pendent insurance agents, retailers) who represent the
company and its services. Upward communication
typically provides information to upper level man-
agers about activities and performances throughout the
organization (Read 1962). Specific types of commu-
nication that may be relevant are formal (e.g., reports
of problems and exceptions in service delivery, per-
formance reports on contact personnel, and financial
and accounting information that would signal inferior
or superior performance) and informal (e.g., discus-
sions between contact personnel and upper level man-
agers).
An important facet of upward communication is
its quality or effectiveness, which in turn depends on
the medium through which it occurs. Face-to-face
communication, for example, is more effective than
written communication because it uses several com-
munication cues (verbal and visual) simultaneously.
Face-to-face communication is preferred when the
message is difficult or ambiguous, or when sender and

receiver differ in background or opinions (Daft and
Lengel 1984). In these situations, media such as writ-
ten reports do not provide sufficient richness. In ser-
vice organizations, the types of messages that need to
be conveyed are often complex and ambiguous (e.g.,
problems encountered in service delivery, how em-
ployees feel, morale and attitudes within the organi-
zation) and top managers often differ considerably in
background from contact personnel (Berry, Zeithaml,
and Parasuraman 1985). Many successful service or-
ganizations (e.g., Marriott, Delta Airlines) pride
themselves on using such rich communication chan-
nels as management by walking around (Clist 1985;
Peters and Waterman 1982) and employee gripe ses-
sions (Rout 1981).
TABLE 1
Service Quality Management Gap 1
Theoretical Constructs
Marketing research
orientation
Upward
communication
Levels of management
2017 23:45:28 UTC

In the focus group interviews conducted in the
second stage of the exploratory study, several bank
employees clearly illustrated the lack of effective
communication.
Branch manager: "I've been in this bank for 27 years
and this is the first time I have had a regional VP
that has never been in the branch." Another: "He never
will." Another: "I haven't seen the man in a year and
a half. That has a lot to do with our attitude. We're
getting orders from someone we never see."
Customer service representative: "We have three
floors. Our manager, when he first got here, sat on
the second floor. Now he is on the third floor in his
enclosed office. He told us he doesn't want to be with
the public. He needs time for himself. What are his
priorities? He doesn't know what's going on on the
first floor. I've had lots of customers ask for the man-
ager. I say, 'I'm sorry, he's on a month's vacation.'"
We therefore propose that three specific variables
influence the effectiveness of upward communication
and hence the size of gap 1: extent of employees-to-
managers communication, extent to which inputs from
contact personnel are sought, and quality of contact
between top managers and contact personnel.
Levels of management. The number of layers of
management between customer-contact personnel and
top managers is expected to affect the size of gap 1.
Layers of management inhibit communication and un-

derstanding because they place barriers between send-
ers and receivers of messages. Therefore, the greater
the number of layers between customer-contact per-
sonnel and top managers, the larger gap 1 is expected
to be.
As shown in Table 1, the gap between consumer
expectations and management perceptions of con-
sumer expectations depends on the extent to which a
company recognizes the importance of the consumer
(marketing research orientation), receives accurate
communication about consumers' needs (marketing
research orientation, upward communication), and
places barriers between contact personnel and top
managers (levels of management).
PI: The size of gap 1 is related to (a) extent
of marketing research orientation (-), (b)
extent and quality of upward communi-
cation (-), and (c) levels of management
(+).
Gap 2: Management Perception-Service
Quality Specification Gap
Managers of service firms often experience difficulty
in attempting to match or exceed customer expecta-
tions. A variety of factors-resource constraints, short-
term profit orientation, market conditions, manage-
ment indifference-may account for the discrepancy
between managers' perceptions of consumer expec-
tations and the actual specifications established by
management for a service. As shown in Table 2, the
size of gap 2 in any service firm is proposed to be a
function of management commitment to service qual-

ity, goal setting, task standardization, and perception
of feasibility.
Management commitment to service quality. One
explanation for gap 2 is the absence of total manage-
ment commitment to service quality. Emphasis on other
objectives such as cost reduction and short-term profit
has outcomes that are more easily measured and tracked
and may supercede emphasis on service quality. This
tendency to emphasize other objectives is illustrated
in the following statement.
Most U.S. firms suffer significantly from the use of
short-term, accounting-driven measures of perfor-
mance to establish the reward mechanisms for high-
level managers, who are mainly responsible for im-
plementing strategic actions (Hax and Majluf 1984,
p. 90).
Louis Gerstner, president of American Express, sug-
gests the following reason for lack of management
commitment to service quality.
Because of the structure of most companies, the guy
who puts in the service operation and bears the ex-
pense doesn't get the benefit. It'll show up in mar-
keting, even in new product development. But the
benefit never shows up in his own P&L statement
(Business Week 1984).
Often, service firms take a product-based approach to
quality rather than a user-based approach, which re-
sults in a de-emphasis on serving the customer (Garvin
1983). In contrast, American Express illustrates a user-
based approach to quality.

TABLE 2
Service Quality Management Gap 2
Theoretical
Constructs
Management
commitment
to service
quality
Goal-setting
Task
standardization
Perception of
feasibility
Specific Variables
Resource commitment to quality
Existence of internal quality
programs
Management perceptions of
recognition for quality
commitment
Existence of a formal process for
setting quality of service goals
Use of hard technology to
standardize operations

Use of soft technology to
standardize operations
Capabilities/systems for meeting
specifications
Extent to which managers
believe consumer expectations
can be met
Delivery of Service Quality / 39
2017 23:45:28 UTC
Overriding all other values is our dedication to qual-
ity. We are a market-driven institution, committed to
our customers in everything we do. We constantly
seek improvement and we encourage the unusual, even
the iconoclastic (Business Week 1981).
Specific variables related to management commitment
to service quality include the proportion of resources
committed to service quality (rather than to other goals),
the existence of an internal quality program, and the
extent to which managers believe their attempts to im-
prove service quality will be recognized and rewarded
in the organization.
Goal-setting. Research reveals that goal-setting not
only improves both organizational performance and
individual achievement, but also increases overall
control of the organization (Ivancevich and McMahon

1982; Latham and Locke 1979; Locke et al. 1981;
Sherwin 1976). Companies that have been successful
in delivering high service quality (e.g., American
Express, McDonald's, Delta Airlines) are noted for
establishing formal goals relating to service quality.
Because services are performances, the goals for ser-
vice delivery usually are set and measured in terms of
human or machine performance. American Express,
after analyzing customer complaints, found that time-
liness, accuracy, and responsiveness were the impor-
tant outputs to be achieved. Management then iden-
tified 180 goals for different aspects of service quality
provided to customers. After the formal goal-setting,
they developed monitoring devices to evaluate the speed
with which telephones were answered, complaints were
handled, bills were mailed, and new applications were
approved. The goals established by American Express
illustrate many of the characteristics of effective goals
(Locke et al. 1981): specific, accepted, cover impor-
tant job dimensions, reviewed with appropriate feed-
back, measurable, challenging but realistic, and match
individual characteristics.
The development of service goals involves defin-
ing service quality in ways that enable providers to
understand what management wants to deliver. Ex-
istence of a formal quality program that includes iden-
tification and measurement of service quality stan-
dards is expected to be one variable that reduces the
size of gap 2.
Task standardization. The effective translation of
managerial perceptions into specific service quality
standards depends on the degree to which tasks to be
performed can be standardized or routinized. Efforts

to conceptualize and measure the standardization of
tasks in organizational research have focused on the
construct of technology (Perrow 1979; Reeves and
Woodward 1970; Woodward 1965). This research
suggests that the organization's technology can serve
to standardize and regularize employee behavior. If
jobs or tasks are routine (such as those needed for
opening checking accounts or spraying lawns for pests),
specific rules and standards can be established and ef-
fectively executed. If services are customized for in-
dividual consumers (e.g., investment portfolio man-
agement or estate planning), specific standards (such
as those relating to time spent with the customer) are
difficult to establish. Even in highly customized ser-
vices, however, some aspects of service provision can
be routinized. Physicians and dentists, for example,
can standardize recurring and nontechnical aspects of
the service such as checking patients in, collecting
payment, weighing patients, and taking temperature.
According to Levitt (1976), standardization or (in
his terms) industrialization of service can take three
forms: (1) substitution of hard technology for personal
contact and human effort, (2) improvement in work
methods (soft technology), or (3) combinations of these
two methods. Hard technology includes automatic teller
machines, automatic car washes, and airport X-ray
machines, all of which allow standardization of ser-
vice provision by substituting machines for human ef-
fort. Soft technology is illustrated by restaurant salad
bars, prepackaged travel tours, and the standardized
training given to employees of organizations like
McDonald's. Effective combination of these two
methods is illustrated by Marshall Field's elimination

of "task-interfering duties" for salespeople. The retail
store automated check approval, implemented in-store
telephone directories, reorganized wrapping stations,
and simplified order forms, all of which resulted in
faster checkout and more attention to the customer.
We propose that the more managers can standard-
ize tasks for service delivery, the smaller gap 2 will
be.
Perception offeasibility. The exploratory research
revealed the size of gap 2 to be affected by the extent
to which managers perceive that meeting customer ex-
pectations is feasible. Executives in the repair service
firm participating in the exploratory study were fully
aware that consumers view quick response to appli-
ance breakdowns as a vital aspect of high quality ser-
vice. However, they believed that establishing spec-
ifications to deliver a quick response consistently was
not feasible for two reasons: (1) the time required to
provide a specific repair service was difficult to fore-
cast and (2) skilled service technicians were less avail-
able in peak season (the summer months) than at any
other time. Therefore, the greater the management
perception that consumer expectations cannot be ful-
filled, the larger gap 2 will be. Variables related to
this construct include the organizational capabilities
and systems for meeting specifications and the degree
to which managers believe expectations can be met
economically.
2017 23:45:28 UTC

P2: The size of gap 2 is related to (a) man-
agement commitment to service quality
(-), (b) setting of goals relating to ser-
vice quality (-), (c) task standardization
(-), and (d) perception of feasibility for
meeting customer expectations (-).
Gap 3: Service Quality Specification-Service
Delivery Gap
Gap 3 is the discrepancy between the specifications
for the service and the actual delivery of the service.
It can be referred to as the "service performance gap,"
that is, the extent to which service providers do not
perform at the level expected by management. The
service performance gap occurs when employees are
unable and/or unwilling to perform the service at the
desired level.
As shown in Table 3, the main theoretical con-
structs proposed to account for the size of gap 3 are
teamwork, employee-job fit, technology-job fit, per-
ceived control, supervisory control systems, role con-
flict, and role ambiguity.
Teamwork. As revealed in the following state-
ments from the exploratory study, bank employees did
not feel they were working together well.
Lending officer: "I worked in the bank 13 years. There
…

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
G
A
P

1
GAP 5
GAP 4
GAP 3
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
HandoutOwned PropertiesFranchised PropertiesPersonal,
Instinctive, Renewal InitiativeNumber of Hotels10Number of

Hotels125Money InxNumber of Rooms/Hotel418xNumber of
Rooms/Hotel418Owned Properties=Total Number of
Rooms4,178=Total Number of Rooms52,230Rooms
RevenuexDays/Yr365xDays/Yr365+Incremental Revenue=Total
# RmNts/yr1,525,127=Total # RmNts/yr19,064,086+(Marginal
Rooms Cost)+=Total from Owned
Properties5,755,371Incremental Money In From Personal,
Instinctive, Renewal Initiative ($ in Millions)Pre Initiative
RevPAR$ 133.79Pre Initiative RevPAR$ 133.79Increase in
Occupancy RatexIncrease in ADR1.00%xIncrease in
ADR1.00%Franchise
Properties60.0%0.5%1.0%1.5%2.0%2.5%3.0%3.5%4.0%4.5%5.
0%5.5%6.0%xIncrease in Occ %2.00%xIncrease in Occ
%2.00%Base Fee2,295,526Increase in ADR0.0%$ (2.000)$
(0.688)$ 0.623$ 1.935$ 3.247$ 4.559$ 5.870$ 7.182$
8.494$ 9.805$ 11.117$ 12.429$ 13.741=Incremental Gain
in RevPAR
tc={04101AD9-D408-264C-A1BC-D9ED274D4945}: [Threaded
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Comment:
SY:
RevPAR=ADR*Occupancy %
$ 4.01=Incremental Gain in RevPAR$ 4.01+Incentive
Fee2,4020.5%$ (0.597)$ 0.715$ 2.027$ 3.338$ 4.650$
5.962$ 7.274$ 8.585$ 9.897$ 11.209$ 12.520$ 13.832$
15.144+Incremental Other Department Revenue/RmNt$ -
0+Incremental Other Department Revenue/RmNt$ - 0+=Total
from Franchise Properties2,297,9281.0%$ 0.806$ 2.118$
3.430$ 4.742$ 6.053$ 7.365$ 8.677$ 9.988$ 11.300$

12.612$ 13.924$ 15.235$ 16.547x=Total incremental
revenue / RmNt$ 4.01=Total incremental revenue / RmNt$
4.011.5%$ 2.210$ 3.521$ 4.833$ 6.145$ 7.457$ 8.768$
10.080$ 11.392$ 12.703$ 14.015$ 15.327$ 16.639$
17.950=Total Money In$ 8,053,2992.0%$ 3.613$ 4.925$
6.236$ 7.548$ 8.860$ 10.171$ 11.483$ 12.795$ 14.107$
15.418$ 16.730$ 18.042$ 19.353=Incremental Gain in Total
Annual Revenue$ 6,121,402Incremental Gain in Total Annual
Revenue$ 76,517,5212.5%$ 5.016$ 6.328$ 7.640$ 8.951$
10.263$ 11.575$ 12.886$ 14.198$ 15.510$ 16.822$
18.133$ 19.445$ 20.757xBase Management Fee to Westin
%3.0%Money Out3.0%$ 6.419$ 7.731$ 9.043$ 10.354$
11.666$ 12.978$ 14.290$ 15.601$ 16.913$ 18.225$
19.536$ 20.848$ 22.160Marginal Cost per room$
12.00=Increment in Base Management Fee to Westin $$
2,295,526-All those costs of PIRthose ongoing costs of PIR$
2,000,0003.5%$ 7.823$ 9.134$ 10.446$ 11.758$ 13.069$
14.381$ 15.693$ 17.005$ 18.316$ 19.628$ 20.940$
22.251$ 23.563xIncrease in Rooms Sold30,5034.0%$ 9.226$
10.537$ 11.849$ 13.161$ 14.473$ 15.784$ 17.096$
18.408$ 19.719$ 21.031$ 22.343$ 23.655$ 24.966=Total
Marginal Cost on Increase in Rooms Sold$
366,030xFranchisee's NOI % of Sales0.3%4.5%$ 10.629$
11.941$ 13.252$ 14.564$ 15.876$ 17.188$ 18.499$
19.811$ 21.123$ 22.434$ 23.746$ 25.058$
26.370=Franchises's Increase in NOI240,223=Net Value of PIR$
6,053,2995.0%$ 12.032$ 13.344$ 14.656$ 15.967$
17.279$ 18.591$ 19.902$ 21.214$ 22.526$ 23.838$
25.149$ 26.461$ 27.773Incremental Gross Margin from
Owned Properties5,755,3715.5%$ 13.435$ 14.747$ 16.059$
17.371$ 18.682$ 19.994$ 21.306$ 22.617$ 23.929$
25.241$ 26.553$ 27.864$ 29.176xIncentive Management
Fee to Westin (% of NOI)1.0%6.0%$ 14.839$ 16.150$
17.462$ 18.774$ 20.086$ 21.397$ 22.709$ 24.021$
25.332$ 26.644$ 27.956$ 29.268$ 30.579=Incentive
Management Fee to Westin $2,4026.5%$ 16.242$ 17.554$

18.865$ 20.177$ 21.489$ 22.800$ 24.112$ 25.424$
26.736$ 28.047$ 29.359$ 30.671$ 31.9827.0%$ 17.645$
18.957$ 20.269$ 21.580$ 22.892$ 24.204$ 25.515$
26.827$ 28.139$ 29.451$ 30.762$ 32.074$ 33.3867.5%$
19.048$ 20.360$ 21.672$ 22.983$ 24.295$ 25.607$
26.919$ 28.230$ 29.542$ 30.854$ 32.165$ 33.477$
34.7898.0%$ 20.452$ 21.763$ 23.075$ 24.387$ 25.698$
27.010$ 28.322$ 29.634$ 30.945$ 32.257$ 33.569$
34.880$ 36.1928.5%$ 21.855$ 23.166$ 24.478$ 25.790$
27.102$ 28.413$ 29.725$ 31.037$ 32.348$ 33.660$
34.972$ 36.284$ 37.5959.0%$ 23.258$ 24.570$ 25.881$
27.193$ 28.505$ 29.817$ 31.128$ 32.440$ 33.752$
35.063$ 36.375$ 37.687$ 38.9999.5%$ 24.661$ 25.973$
27.285$ 28.596$ 29.908$ 31.220$ 32.531$ 33.843$
35.155$ 36.467$ 37.778$ 39.090$ 40.40210.0%$ 26.064$
27.376$ 28.688$ 30.000$ 31.311$ 32.623$ 33.935$
35.246$ 36.558$ 37.870$ 39.182$ 40.493$ 41.80510.5%$
27.468$ 28.779$ 30.091$ 31.403$ 32.715$ 34.026$
35.338$ 36.650$ 37.961$ 39.273$ 40.585$ 41.897$
43.20811.0%$ 28.871$ 30.183$ 31.494$ 32.806$ 34.118$
35.429$ 36.741$ 38.053$ 39.365$ 40.676$ 41.988$
43.300$ 44.61111.5%$ 30.274$ 31.586$ 32.898$ 34.209$
35.521$ 36.833$ 38.144$ 39.456$ 40.768$ 42.080$
43.391$ 44.703$ 46.01512.0%$ 31.677$ 32.989$ 34.301$
35.612$ 36.924$ 38.236$ 39.548$ 40.859$ 42.171$
43.483$ 44.794$ 46.106$ 47.41812.5%$ 33.081$ 34.392$
35.704$ 37.016$ 38.327$ 39.639$ 40.951$ 42.263$
43.574$ 44.886$ 46.198$ 47.509$ 48.82113.0%$ 34.484$
35.795$ 37.107$ 38.419$ 39.731$ 41.042$ 42.354$
43.666$ 44.977$ 46.289$ 47.601$ 48.913$ 50.22413.5%$
35.887$ 37.199$ 38.510$ 39.822$ 41.134$ 42.446$
43.757$ 45.069$ 46.381$ 47.692$ 49.004$ 50.316$
51.62814.0%$ 37.290$ 38.602$ 39.914$ 41.225$ 42.537$
43.849$ 45.160$ 46.472$ 47.784$ 49.096$ 50.407$
51.719$ 53.031
&8(c) Yang

WEstin Hotels & Resorts: Operations of a Lifestyle Experience
Quantitative Reasoning &5&Z&F
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 …
SFSU HTM531 - Hospitality Service Operations Management
Starbucks: Delivering Customer Service
Yang © Final Exam Questions
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FINAL EXAM PROMPT

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The final exam is your opportunity to demonstrate that you
understand and can apply the service design
analysis tools that we have used throughout the course this
semester. It is also your chance to demonstrate
that you understand, can relate, and communicate how and why
various hospitality companies have the
service designs that they have. Your final paper will be based
on situation in Harvard Business School case
#9-504-016, Starbucks Delivering Customer Service.
Question 1 (20%) – Describe, compare, and then contrast the
service offering (target market, values and
operationalizations) of the Starbucks of 1992 to the Starbucks
of 2002.
Question 2 (42%) – Based only on the information provided in
case, the argument can be made that
customer satisfaction scores with the service experience have
declined. Using the Zeithaml, Berry &
Parasuraman GAPS model, choose one ‘gap’ that you believe
best explains the primary reason for the
decline in customer satisfaction scores.
a. (1%) Which ‘gap’ did you choose?
b. (1%) What do you believe is the ‘primary reason’ for
customer satisfaction decline?
c. (40%) Explain how this ‘gap’ caused the primary reason for
customer satisfaction decline that
you’ve identified. Note – do not feel as if you’re constrained by
the single ‘gap’ or ‘reason’ that

you’ve chosen. If you believe that your gap and/or reason
impacts other gaps or creates secondary
or tertiary reasons, you are encouraged to state and explain their
effects as well.
Question 3 (15%) – Examine Exhibit 9. In dollar amounts, how
much more valuable is that a customer is
‘highly satisfied’ than for that customer to be simply:
a. A satisfied customer, or
b. An unsatisfied customer?
Conduct your calculations in Excel. Use formulas in your cell
calculations wherever you can, and make
sure you clearly label the units on your calculation (eg, months,
year, visits, dollars, etc.).
Question 4 (23%) - Offer Christine Day a clear recommendation
on how to proceed with the $40 million
proposal, and justify the reasoning behind your
recommendation.
a. (1%) Yes or No, should Starbucks make the $40 million
investment in labor in its stores? If not,
how would you recommend Starbucks spend $40 million to
improve customer satisfaction?
b. (2%) List two customer or employee management system
objectives/goals for that $40 million.
And suggest a way to measure those objectives/goals.
c. (20%) Explain why you think the objectives/goals you’ve
chosen can bridge the ‘gap’ or address

the ‘reason’ for customer satisfaction decline that you identified
in Question 2.
BONUS (Up to +3%) – From the cases discussed this semester,
choose two initiatives that you think
Starbucks could/should implement to help achieve the
objectives/goals that you described in Question 4b.
Explain why you chose those two initiatives, and how it would
be applicable to Starbucks’ customer
satisfaction dilemma.
SFSU HTM531 - Hospitality Service Operations Management
Yang © Final Exam Questions
Page 2 of 2
Guidelines & Specification
Your writeup does not have a page minimum or maximum. Use
your best judgment on whether you have
adequately addressed the requirements describe under
“Assignment Description.” Business writing is
succinct. Do not be verbose – more words and more pages are
not necessarily better than fewer words and
fewer pages. Utilize diagrams, tables, pictures…whatever you
need to help explain and advocate for your
recommendation.
You will turn in two files to the drop box on iLearn:
1. A Word file with your response – this should include your

responses to Questions 1 through 4c.
(Yes, including something written explaining Question 3.
2. An Excel file with your calculations for Question 3.
Other Logistics
There are shared/collaborative documents for the class to work
on, including a discussion forum – all on
iLearn. I will occasionally monitor these resources and answer
questions where appropriate. But realize,
that this is your work. You are free (and encouraged) to work
with each other, but whatever you ultimately
submit, must be of your own efforts and in your own words. I
take plagiarism, and violations of academic
integrity seriously – this is your only warning to submit your
own work.
I will be available for Zoom office hours on Sunday the 17th
and Monday the 18th from 5-7PM if you have
questions. Otherwise, please email me with any issues.
Good luck – I’ve really enjoyed having you all in class this
semester, and I appreciate how you all were
able to tough it through during these trying times.
9 - 5 0 4 - 0 1 6
R E V : O C T O B E R 5 , 2 0 1 8

Professors Youngme Moon and John Quelch prepared this case.
It was reviewed and approved before publication by a company
designate.
Funding for the development of this case was provided by
Harvard Business School and not by the company. 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, 2018 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 www.hbsp.harvard.edu. This publication may
not be digitized,
photocopied, or otherwise reproduced, posted, or transmitted,
without the permission of Harvard Business School.
Y O U N G M E M O O N
J O H N Q U E L C H
In late 2002, Christine Day, Starbucks’ senior vice president of
administration in North America, sat
in the seventh-floor conference room of Starbucks’ Seattle
headquarters and reached for her second
cup of toffee-nut latte. The handcrafted beverage—a buttery,
toffee-nut flavored espresso concoction
topped with whipped cream and toffee sprinkles—had become a
regular afternoon indulgence for Day
ever since its introduction earlier that year.

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