The Management structure of Elite group is centralised. Williamson (1975) found that it creates a more efficient manner to organise activities within one hierarchy. Thus Avis brought the decentralised ex-Viscount hotels into a centralised structure with ex-Comet hotels. The main characteristics of a centralized approach include control, efficiency and economy. Centralized approaches are effective in gaining or regaining control over a company. At the time of Avis’s introduction the company was messy; a centralized structure ensured that his visions of change were filtered to all parts of the company.
Thus more control of these changes was permitted. The company has many hotels now, the information past back up can be wide-ranging. This leads to incorrect policies since head office cannot manifest a clear picture. The current global business environment is characterized by customer-driven markets (Palaniswamy & Frank, 2000). This reflects shorter product life cycles and narrow niches. This means a decentralized structure is better to assist the needs of the local market. The company is now mature and stable. Thus, there can be a shift from wholesale decisions made by the top, to decisions made separately by each hotel.
This increases autonomy and flexibility of hotel managers, since they are motivated to
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Quality standards needn’t be the same for all hotels since customers have different attractions to the hotel depending on its situation. Decentralization can motivate managers to understand which costs can be reduced, where quality reduction in line with the cost is not important to the overall image of the company. Changes made by decisions from closer contact than head office offers quicker strategies being implemented and a more effective control process. The management control system will then reflect the ‘real’ customer needs particular to each hotel.
Morgan (1986) regards culture as ‘shared meanings, shared understandings’. For meeting standards all divisions of the organisation have been trained to understand the importance of quality in service. Avis initiated a training course entitled ‘Putting customers first’. Employees do not think of themselves as merely workers in a service industry, instead they believe there work sets the standard for which all service organisations are judged. This employee culture has been the pre-requisite for high customer satisfaction and good financial performance in the mid to late 1980’s and the basic assumption for long term survival.
As a result of the gradual learning process, these assumptions have become part of the company’s culture. The endorsement of the CSD (Customer Service Department) strengthens the credibility of the culture. A strong culture facilitates goal alignment. The corporate culture is what differentiated Elite’s success to other competitors. An example of this is to only employ quality staff. Not low waged immigrants with poor English, as rival companies do to reduce labour costs. The culture worked well in the mid 1980’s and lead to high level of motivation.
However, to sustain high quality when demand is low is difficult due to the cost of financing a quality service. Elite’s management team have shown an understanding of this since reverting to a cost reduction strategy to maintain profits. The culture developed is hampering the company to move on. Preventing good economic performance. The culture which exists can only work effectively when the company is performing well. The high quality agenda instilled into the hearts and minds of everyone, created conflict in the meeting when deciding on what costs should be reduced.
Elite has the highest cost per room than any of its competitors, changing the labour force to reduce costs or removing complimentary flowers and chocolates in rooms would have been the right measure to take. Avis’s quality, quality, quality drumming in the past meant that there was no agreement to these changes from others. Schein (1985) argues that if the culture has worked well enough to be valid in the past, it should address the problems in the future. I disagree since it seems to have encouraged an idea that maintaining quality is the only way. This is self-destructive.
The organisational culture is neither static or permanent (Hannagan, 1998). The culture needs to change for two main reasons; firstly to move into the Semi-luxury market, since quality is less important; secondly, because it seems that the culture has become the mechanism of control itself (Flamholtz, 1985). In the absence of this strong culture, the management team can reduce costs more efficiently. Control of profits is regained quicker. The statistics show that there has been both an increase in the average percentage of rooms available and average cost per room occupied.
The increase in the later has been due to continual refurbishment programmes and customer services innovation. These initiatives increased revenue and occupancy rates during the mid 1980’s, however, a general decline in profit from 1989 onwards was attributable to higher interest charges charged on funding expansion. In addition a fall in occupancy rates, unit revenues and discounting prices saw profits tumble. The centralised structure means head office creates the budgets. The budget requires the company to cut 5% off its operating costs.
In theory, hotel managers have been asked to become cost centres rather than profit centres. Avis also plans to reduce staff in the marketing, planning, personnel departments and axe the CSD which in all will generate a further 20% cost saving. The problem is hotel managers cannot achieve the 5% cost cuts, since quality would be affected. Managers bonuses are based on quality indicators, thus reducing quality under the levels prescribed by head office would reduce their bonus. Ultimately, managers have less motivation to meet the cost reduction targets. This is agency theory.
Macintosh (1994) stated that the agency theory is built on the concept of self- interest. Managers may hold back information for self interest purposes. This creates inaccurate information feedback, synonymous with the problems shown under a centralised structure earlier. Negative feedback not good for planning. Avis is nai?? ve for thinking that managers will budget vigorously if there bonuses will be effected. The costing system employed is detrimental to shareholders wealth, since managers are pushed to act in self-interest. The quality culture drilled into employees by Avis serves as an excuse for not meeting the target.
Avis’s hard-line in the second meeting; ‘either meet the cuts or cut loose’ is probably in recognition of the problems described above. There is clearly a power struggle since managers have a lot of control of what information is released. Avis’s hard line is meant for rebalancing the power. Avis’s hard stance doesn’t solve the problem it only creates low morale for managers. Avis’s sees the hotels as cost centres. His understanding is that costs are common to all hotels thus targeting a 5% cost cut for all hotels is the most effective way to get costs reduced. This is not the case.
I think an ABC (Activity Based Costing) system should be incorporated for both the budget and cost reductions needed. Costs should be recognised by the major activities which drive them. Avis should pay more attention to this since there’s more competition, more hotels and more indirect costs. Company-wide cuts shows less understanding of cause and effect relationships of the costs. ABC is more accurate. In the second meeting, Avis’s called for further 5% cost cuts. Japanese companies usually set unachievable targets, with the assumption that what is achieved is the optimal amount.
However, since the agency theory applies the only solution is to change the bonus measurements. Healy (1984) suggested using cash flow as the measure for managers’ bonus since information in the cash flow is hard to manipulate. If the company was decentralised, manager’s bonuses could be based on financial performance. In this situation managers would be more motivated to work in the interest of the company, since both the managers and companies goals would be exclusively to optimise revenues.