Question: Benefits and costs of decentralization. Host Hotels, a small chain of business hotels in the MidAtlantic region, is interested in gaining access to the boutique lodging market by acquiring a hotel group in that sector. Host Hotels intends to operate the newly acquired hotels independently from the rest of its chain, while pursuing other boutique market opportunities in other cities. One of the prospects is Bennington Properties, a group of 10 historic hotels in Philadelphia, Baltimore, and Washington. All hotels in the group include the name "Bennington," as in Mainline Bennington, Georgetown Bennington, etc. Buying for all 20 hotels is done by the company's central office. Hotel managers must follow strict guidelines for all aspects of hotel management in an attempt to maintain consistency across locations. Hotel managers are evaluated on the basis of achieving profit goals developed by the central office. The other prospect is Eastern Innkeepers, a group of 25 spa retreats, bed and breakfasts, and country inns in rural Virginia and North Carolina. Each property in the group was previously an independently owned company. Many of the previous owners are now employed as individual property managers. These managers are given significant flexibility in decision making, allowing them to negotiate purchases with suppliers and develop property marketing plans. Managers are rewarded for exceeding self-developed return-on investment goals with company stock options. Some managers have become significant shareholders in the company, and some managers have even recommended decisions to acquire additional real estate. However, the increased autonomy has led to competition and price cutting among Eastern Innkeepers properties within the same geographic market, resulting in lower margins.
1. Would you describe Bennington Properties as having a centralized or a decentralized structure? Explain.
2. Would you describe Eastern Innkeepers as having a centralized or a decentralized structure? Discuss some of the benefits and costs of that type of structure.
3. Would hotels in each chain be considered cost centers, revenue centers, profit centers, or investment centers? How does that tie into the evaluation of property managers?
4. Assume that Host Hotels chooses to acquire Eastern Innkeepers. What steps can the management of Host Hotels take to improve goal congruence between property managers and the larger company?