Choice Hotels update

   1995: Landry refocuses Choice’s strategy: – New mission "to be the market leader serving those who serve travelers“: new relationships with travel agents and other travel industry businesses – Restaurant chains into Choice hotels – Friendship phased out; focus on brands and differentiation Innovations (among many others) – 1995: first major chain to go on www; – 1996: first to introduce geo-coding (find hotels close to points of interest) Acquisitions/brands: 1996 Mainstay (extended-stay), 2005 Cambia Suites (upscale, all-suites), 2005 acquires Suburban Extended Stay Hotel chain

Choice Hotels takeaways: Economies of scope

 What determines firms’ choice of horizontal (products) and vertical (value chain) scope?

 There are many bad reasons to diversify, acquire other firms etc.

– Next week!

 Main good reason to look for: economies of scope (“synergies”)

Sources of economies of scope

 On cost side: doing A and B together is less costly than doing them separately – Use of common resources, e.g. reservation system – Umbrella branding  On benefit side: doing A and B together creates greater benefit for customers (=more business) than doing them separately – Convenient of choice and cross-selling – Lower search/transaction costs for buyers by bringing in partners

Most economies of scope can be quantified!

 In this case, enough detailed info to put a number on almost every source of economies of scope  Numbers are important because changes in strategy (e.g. marketing) often affect ability to benefit from economies of scope

Scope and brand management/competitive environment  Here, tension between product differentiation (segmentation) and ability to benefit from cross-selling economies  Tension compounded by conflict of interest between Choice Hotels and franchisees (agency problem)

Economies of scope and integration

 The deeper question: when do synergies really require integration?

 If synergies can be realized by contract, that’s usually easier  Integration becomes necessary when contracts are difficult to write/enforce – More next week!