Study Of Manhattan Hotel Industry Shows Entrepreneurs & Chains Have Edge On Established Hotels

August 31, 1998

LINTHICUM, MD, August 31--In the competition among Big Apple hotels, entrepreneurs who do their homework and chains whose New York managers compare notes are more likely to succeed, according to a study in the current edition of a journal published by the Institute for Operations Research and the Management Sciences (INFORMS).

The study, which examines hotel failure in relation to the way businesses learn, is entitled "Survival-Enhancing Learning in the Manhattan Hotel Industry, 1898 - 1980." It is written by Dr. Joel A. C. Baum, University of Toronto, Joseph L. Rotman School of Management, and Dr. Paul Ingram, Columbia Business School, Columbia University, and appears in the current edition of Management Science.

Entrepreneurs Must Do Their Homework

Contrasting start-ups with established hotels, the authors found that those creating new ventures are free to do extensive, insightful research into the business methods of incumbents before opening their doors. Established hotels, in contrast, often suffer from organizational inertia - or else find their best talent hired away by competitors and the new kids on the block.

"New hotels seem to take good advantage of the incumbents' best practices and then proceed to beat them up," observes Dr. Baum.

During the nearly 100 years of the study, successive generations of new hotels exploited their industry's experience at the time they were founded, but then remained largely unable to take advantage of subsequent advances, the authors found.

Among the practices that must be mastered, said Dr. Baum, are pricing strategies, room rates, overall structure, construction of facilities, location, size, and the combination of size, location and price. Because the physical structure of a hotel is modified at great cost after completion, research that leads to good design is important. The cost of missing these lessons has been high.

"The striking thing we found when we began collecting data was the extent of turnover in the industry," says Professor Baum. "There are 165 hotels in Manhattan now. Over the last 100 years, 425 have been founded and over 300 have disappeared. In fact, twice as many have disappeared as exist right now." Of the hotels that existed in 1898, the first year for which rColumbia Business School, Columbia Universityeliable data is available, only two, very different New York landmarks remain: The Plaza and the Chelsea Hotel.

An Exception to the Rule: Chains

Among established hotels, those most likely to survive are chains, the authors found. "There is evidence that chains are inter-organizational learning communities," says Dr. Baum. "They are efficient at sharing their experiences. If I have three hotels in Manhattan, I can generate a wealth of experience and share it. So while independent hotels are not keeping pace with new entrants, the chains are."

There is a down side to the way chains learn, he explained. Experience must come from the local environment. Sharing of information among members of a chain based in Manhattan produces a benefit. But if the chain is gaining too much experience in varying regions with different competitive needs, attempting to use that knowledge in Manhattan may prove harmful and failure is more likely.

Reluctance to Learn from Others

In the hotel industry, as well as other industries in which the organization itself is a product or physical asset, the authors found, decisions made at the times of founding - the learning that the founding team engages in during this formative period of the organization's history - are critical. Once in place, organizations often have difficulty adapting to new advances.

Part of the problem, the authors write, is that as organizations evolve, they become more likely to rely on their own past experience - which may or may not still be relevant - and less likely to take advantage of the new experiences of others.

The data suggests, says Dr. Baum, that "Ultimately, hotels must turn outward and look at their competitors to keep pace with their evolving industry. In the Manhattan hotel industry, that doesn't seem to be happening."

Nearly A Century of Data

The data examined in the study includes life history information on 558 transient hotels that operated in Manhattan between 1898 and 1980. Transient hotels are those catering to short-term visitors. Four archival sources were used to construct these life histories: The Hotel Redbook, published annually since 1887; the Manhattan Classified Directory/Yellow Pages, published since 1929; the Annual Directory of the Hotel Association of New York City, published since 1940; and the Hotel and Travel Index, published since 1951.

The Institute for Operations Research and the Management Sciences (INFORMS) is an international scientific society with 12,000 members, including Nobel Prize laureates, dedicated to applying scientific methods to help improve decision-making, management, and operations. Members of INFORMS work primarily in business, government, and academia. They are represented in fields as diverse as airlines, health care, law enforcement, the military, the stock market, and telecommunications.

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