The Howard Johnson Company
The case of the Howard Johnson Company depicts a pertinent example of the consequences of a weak strategic plan for businesses. Within its decades of existence, it has been sold thrice. This proves that the life of the company is a notable sample for textbooks on how to manage a business predominantly dealing with hospitality services.
The company was a realization of the owner, Howard Johnson Jr., of the American dream. It was among the well-established dining establishment during the 1950's. It provided the consuming public the prerogative to patronize restaurants that caters to the dining needs of all generations. Nonetheless, the company began its protracted yet constant degeneration when the founder of the company died and replaced by his son, Howard Jr. The son tried to surpass the legacy that has been handed to him by his senior, yet he ended up selling the company to a British company named the Imperial Group. The latter instituted several revolutionary changes in the firm. In fact, the company's name was altered although it didn't liberate itself on the name established by the older Johnson.
The path that the company undertook was very disruptive. That is why in the course of the case study, their shortcomings were highlighted. Probably because the company did not really had things going for them, they were a company whose credibility has been tarnished by the inefficiency of its previous management.
At this point, this paper shall analyze the company based on the situations provided by the case study. Apparently, the companies in the industry sell to only many small customers, particularly those who have the money to afford their services. Moreover, the case study provided the impression that the products/services offered by companies in the industry are very different from one another in features, design, pricing, and so forth. No two products or services are the same. Although their services are the same, it is the quality of their products that are deemed as the point of reference among consumers. Moreover, the customers generally avail of the services of the hospitality industry from multiple sources. This provides the impression that Howard Johnson is among a number of competitors in the said industry. It is also said in the case study that the cost of the products and services represents a relatively large percentage of the customers' total cost. Although the study stated that the company has been cutting off its price to attract consumers, it is still apparent that majority of the cost of their services come from the contributions of its patrons. This provides the reason why customers of the industry's products and services have good margins and are quite profitable. Moreover, if the customers deemed it, they could backward-integrate. Conversely, companies in the industry are not likely to forward-integrate. Considering that they are competing for the loyalty of a large population, they still have to contend with a growing number of competitors. Nonetheless, it could be posited that the products and services provided by the hospitality industry is very important to the customers.
Based on the above observation, buyers and customers could be considered as a moderate force in the industry. Powerful buyers drive down profitability because they bargain for lower prices, demand better product features for the same price, and play one competitor against another. Weak buyers are not likely to be as price-sensitive or to impose demands on companies in the industry. Based on the study, Howard Johnson practically spent its whole existence trying to keep up with its competitors, and most of the time they kept failing. Apparently, they failed to offer additional services or support to customers in exchange for a larger share of their total purchases. They also neglected the development of services that make it easier for the customers to work with the company as a single source supplier. Concurrently, they failed to fill in gaps in their portfolio of goods so that their customers don't have to look elsewhere for related products. The company also failed to combine a reduction in the buyer's overall cost of doing business with them with the creation of switching costs. For instance, they should have offered a lower price in exchange for a long-term contract.
The case study also affirmed that the products and services offered by companies in the industry are very different from one another in features, design, pricing, and so forth. No two products or services are the same. Moreover, one could not discount the presence of a few large competitors that dominate the industry. Nonetheless, the companies in the industry are not the same size - there are both large and small competitors in the industry. The study also insinuated that the companies in the industry have high fixed costs and spend a lot of money on plant and equipment. This means that production capacity can be added in small, inexpensive increments. The study also provided the impression that there is little prevents companies from voluntarily exiting the industry. Nonetheless, staying in the industry is of great strategic importance to companies in the industry. This might be due to the probability that they have nowhere else to go. Furthermore, the companies in the industry could be considered as diverse in their history and culture and in how they do business. This furnishes the consumer with a wide array of choices that would be able to heighten the standards of the industry. In addition, the product/service sold by the industry has low storage costs or is slightly perishable. This allows the companies to maintain a limited budget for storage and allow other funds to be allocated to more pressing areas.
Notwithstanding the discussions, it could be assumed that the industry is experiencing fast market growth. Unfortunately, Howard Johnson fails to keep up with it. This prompts the researcher to state that the rivalry among competitors in the industry is weak considering the ambiguity of the services that Howard Johnson provides. Competitors can drive down industry profitability by cutting prices or offering more product features for the same price. When rivalry is most intense, competitors often compete head-to-head on price. When competition is disciplined and constrained by industry norms, rivalry is weak. Moreover, this might be predominantly caused by the company's inadequacy to minimize its investment in plant and equipment. They would have opted to lease rather than buy. They could also choose to outsource activities that are not within their core competency. Moreover, they should also work to reduce the fixed assets on the balance sheet and get rid of outdated facilities and equipment. They should have actively participated in industry trade associations and to increase their communication their competitors. Likewise, they should have also worked toward the establishment of industry norms/standards. These can be either formal or informal. More importantly, they failed to track their competitors closely and be flexible in their strategy.
In terms of suppliers for the industry, the case study insinuated that there are many suppliers that provide raw materials to the industry. Likewise, companies in the industry can easily switch from one supplier to another with minimal cost. Moreover, it is also apparent that companies in the industry could backward-integrate if desired. Moreover, these companies are only a minor source of revenues for the suppliers, which have bigger fish to fry. If raw -material costs get out of line, companies in the industry could use a different type of raw material to produce the products and services. Nevertheless, companies in the industry determine the quality and cost of their products and services. Raw material quality and cost are of minor importance. This means that the raw materials provided by suppliers are essentially interchangeable and indistinguishable. The raw materials are essentially commodities. Moreover, the suppliers of the industry are not likely to acquire a company in the hospitality industry.
Based on the profile provided by the case study, suppliers are a weak force in the industry. Powerful suppliers drive down the profitability of companies in the industry because they can charge higher prices for the products and services they sell. Weak suppliers are not likely to bargain on price or impose demands on companies in the industry. In the case of Howard Johnson, they failed to form a partnership with a medium-size supplier and become a major account in its portfolio. Help the supplier grow its business and it will help you grow your business.
Another information provided by the case study is the fact that the price of substitute products is more expensive. The quality, features and benefits of substitute products are generally higher. A substitute product provides the same functionality but is not identical to potentially competitive products. For instance, train travel is a substitute for air travel since both are a means of traveling long distances; movies are a substitute for television since both provide visual entertainment. Substitute products are a powerful force in the industry. Substitute products constrain industry profitability by limiting the selling price companies in the industry can charge. If airfares rise too high, people will start using trains. Moreover, if the quality of the substitute is higher, buyers will switch to the substitute. That's why more people fly than take the bus across country. Too often companies focus myopically on their immediate competitors, the ones in their industry, only to be ambushed by a product outside their industry. This was among the problem of Howard Johnson. They failed to expand the range of companies that they consider competitors. They were inefficient in thinking beyond their own industry. They should have considered other products or services that buyers might use as a substitute.
The case study also insinuated that the products and services offered by companies in the industry are very different from one another in features, design, pricing, and so forth. Moreover, the economies of scale play a significant role in the cost of producing the products and services furnished by the company. Similarly, the companies in the industry have low fixed costs and spend relatively little on plant and equipment. Governmental regulations have little or no impact on whether new companies enter the industry. This makes the entrance of new companies easier. Competitors in the industry are not likely to cut their price to defend their market position. Ironically, the said technique is the only means employed by Howard Johnson to defend their market position. Concurrently, new entrants could easily gain access to the industry's distribution channels. Moreover, patents, proprietary knowledge, and brand reputation are not a barrier for companies entering the industry.
The Howard Johnson Company failed to realize the potential of new entrants in the industry. New entrants are potential competitors. Although, new entrants are a moderate force in the industry, one cannot discount the fact that a neophyte in the hospitality industry in the form of Marriott's Courtyard became the reason for the company to be sold the second time to Marriott Corporation. The easier it is for new companies to enter the industry the greater the competition in the industry. New entrants will often attempt to break into the industry with low prices, innovative products, or new features and benefits. When it is difficult to enter an industry, the threats of new entrants are low.
Howard Johnson practically failed to minimize the intensity of new entrants in the industry. They were ineffective in working with regulatory bodies to establish industry policies and procedures. This would allow them to make it hard for new entrants to be certified. The more stringent the requirements, the lower the likelihood of new companies entering the industry; the cost will be too high. This is one time that industry regulations are good business. Moreover, the company was a wimp. They failed to go after new entrants aggressively and defend their market. They were left hanging and unsure whether they were adding more value than the new entrants. They should have formed partnerships with their key distributors to keep new entrants out of the market. The company should have given key suppliers price breaks or provide supplemental services in exchange for exclusive distribution rights. Howard Johnson took its distribution channel for granted and failed to recognize that others are waiting in the aisles for the company to sink even further. The ideal think to do was to make sure that the company is growing faster than the industry. They should have made new entrants fight for every customer. Howard Johnson became complacent and assumed that there is enough business for everyone. It failed to recognize not long after, they were in a head-to-head battle with the company that they just let steal a part of their market.
Strategic Changes towards Degeneration
Based on the case study, the company has apparently been in the crosshairs of its competitors. Growing faster than the competition is a key indicator of a strong competitive position. Most of Howard Johnson's strategy does not appear to be working. They apparently have a problem with strategy formulation, strategy implementation, or both.
Among the strategic mistakes, that Howard Jr. committed in running the business, was the establishment of new subsidiaries without carefully planning the trend of the changing times. Planning for new endeavors particularly those directly affecting the company should be greatly monitored. In the case of Howard Johnson, the company engaged in installing quite a number of establishments without consulting several factors such as the social acceptability and more importantly the profitability of the said establishments. Although it was a great idea to convert a company from a dining industry magnate into a multibrand company, Howard Jr. apparently lacked the business skills that the company needed. With the conversion to a multibrand company, Howard Johnson inevitably embraced the fact that they have to contend with a larger market. A larger market comes with intense competition; the company was evidently overwhelmed by this. The company retaliated by "repositioning" itself and focused more on the selling of liquor. This is another reason why they have collapsed; Howard Jr. lost touch on the inherent vision that his father has created for the company. The company became confused on what its target market were at that time. The loss of the company's focal position in terms of its mandated thrust inexorably resulted to its dissolution and submission to failure.
Moreover, another indicator of competitive strength is superior profitability. It is apparent that either Howard Johnson is not providing sufficient added value to its customers or its operations are not as efficient as provided by its competitors', or both. Similarly, the company is obviously losing customers because of their image of inefficiency. Losing key customers to competitors is a warning sign that they need to change strategy. The company's strategy is be faltering from the start. This resulted to the sale of the company thrice. Competitors may have found better ways to meet the customers' needs. Hopefully, it's not too late to make corrections. Howard Johnson should have rethought their company's strategy and position in the market. A major overhaul is predominantly needed. There is only one boss: the customer. In addition, he/she can fire everybody in the company, from the chairman on down, simply by spending his money somewhere else.
The strategic mistake made by Hostage, during the ownership of the Imperial group, is that he exhausted s huge amount of the company's time and resources in changing the image of the company. In turn, he inevitably neglected the importance of quality and the morale of his crew. The success of an organization depends on the morale of the people involved in the organization. Moreover, the apparent plummeting of the motivation level of its crew has consequently resulted to the attitude problems of the employees which in turn affected the perception of the customers regarding the services provided by the company.
Although refurbishing the tarnished image of the company is a great idea at that time, it proved to be merely superficial. The façade of reconstructed Howard Johnson buildings were but mere physical changes. Apparently the services were the same, the culture of the company were still adhered. Moreover, the company's competitors were not adequately monitored resulting to the loss of several customers. Their competitive advantage remained stagnant and played catch-up with its competitors on the winning side.
Furthermore, it would be possibly to insinuate that the company might be suffering from impairment in its strategy formulation.
Strategy is as much about deciding what not to do as it is about what to do. Howard Johnson appears to have a clear strategic direction. They should have been doing better than the competition by staying focused on its target market. Otherwise, the company should have looked for other growth opportunities where it can leverage the company's capabilities and resources. Moreover, there are two basic ways to compete within a market. One is price -- customers buy from a company because of the company's below market price. The other is differentiation -- customers buy from the company because its products and services provide some unique features and benefits they are willing to pay for. While being both, low price and differentiated, may appear to be the best strategy, it's not! This is what happened to Howard Johnson in pursuit to defend their market. A few companies have succeeded at both. But the vast majority has failed because each strategy requires different capabilities and resources. They should have chosen one strategy or the other based on the company's capabilities. If a company tries to do both, it will most likely be beaten by competitors on both ends.
On the other hand, all successful strategies are customer focused. Really understanding the customers is the first step to developing a sound strategy. Just having a great idea doesn't mean that customers will buy it. It would be beneficial for them to conduct some focus groups or interviews with customers. Furthermore, the old 80/20 rule: 80 percent of a business probably comes form 20 percent of the customers. Howard Johnson's "best customers" might actually be their worst customers. It would be profitable for the company if they analyze their sales and profits from each customer/market segment.
In order to effectively compete you need to know your adversary. Howard Johnson could be considered as a formidable competitor if only they took the necessary adjustments. For instance, they should continue to track competitors' moves and fill gaps in the company's competitive intelligence. Likewise, a major concern for the Howard Johnson Company is that they have missed some major shifts in the industry. Changes in the industry or market create new growth opportunities or threats that can undermine the existing business. By understanding the changes taking place, the company can ride the current rather than swim upstream. Howard Johnson should have identified ten trends that will impact the industry and its market in the next five years. Planning is daunting if it is done right, because what the company is really talking about is change. It's much easier to just say, next year's going to be better, and leave it at that. This is among the shortcomings of the company.
The third strategic mistake that the company incurred is the fact that they were aggressively hunting for potential franchisers, apparently to save the company. Moreover, they also provided perks for its customers by providing discounts and other programs to attract a bigger following notwithstanding the capacity of the company to shoulder the incurred liabilities resulting from the said strategy. The problem with that strategy is finding a sane mind that would take a franchise of an establishment branded by the American society as a provider of substandard assistance. Moreover, looking for franchisers would also be difficult considering that they are trying to sell a parchment to businessmen to run a company that has been sold twice. The frequency of the company's change of management reflects the rather inferior ability to become profitable. This obviously is a permanent demerit. Thus, franchising was a bad idea of that time.
With regards to the execution, the company has failed to execute some of its strategies because it lacked necessary resources or capabilities. Having the right strategy is just a first step; successfully executing it requires action and ingenuity. In order to successfully conduct strategies, the company must have the capabilities and skills -- to transform it from hope to reality. The company should continue to develop its capabilities, resources, and knowledge as their strategy evolves. Strategy is about stretching limited resources to fit ambitious aspirations.
Moreover, the company's strategy must permeate everything it does -- from accounting to inventory, production to personnel, and sales to service. Clear, well-defined objectives will support the strategy, correlate it to operations, and synthesize all company functions. As the company create or change objectives, put them to the SMART test. (Smart objectives are Specific, Measurable, Achievable, Relevant, and Time bound). If the test brought positive results, then the strategy should be effective. Furthermore, the more united the team is around the company's strategy, the more committed and successful they will be in implementing it. Strategy is more about what's rooted in team members' minds than what's written in the document on the bookshelf. Continue to involve the management team in strategy formulation and execution. What one does to keep the enthusiasm up after he/she made it to the zenith of a challenge is to find another challenge.
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