The Portman Ritz Carlton, Shanghai – Resources & Capabilities by Luca Drago - 22 November 2010 (Global Business Strategies - School of Management University of St Andrews)

Contents ! The Ritz Carlton Hotel Company - The Portman Ritz Carlton, Shanghai ! What is the main source behind the Portman Ritz-Carlton’s performance? ! How valuable, rare, and hard-to-imitate are its human resources? ! How organizationally embedded are its capabilities? ! If you were the general manager of a rival hotel, how would you respond? ! The rethinking in the hospitality industry ! Bibliography

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The Ritz Carlton Hotel Company - The Portman Ritz Carlton, Shanghai Named ‘The New Gold Standard’, Joseph A. Michelli recently published a book about the Ritz Carlton Hotel Company based on their so-called golden standards, which Ritz Carlton states, are the foundation of the company. The Ritz Carlton Hotel Chain has always been within the top hotel chains worldwide and the title of the book indicates that the company tries to continuously advance. ‘The legacy of The Ritz-Carlton, Boston begins with the celebrated hotelier Cesar Ritz, the “king of hoteliers and hotelier to kings.” His philosophy of service and innovations redefined the luxury hotel experience in Europe through his management of The Ritz Paris and The Carlton in London’ (The Ritz Carlton, 2010). Today, 83 years after the first Ritz Carlton opened in Boston the company is still continuously searching new methods to improve the customer experience in their hotels. In his new book Joseph A. Michelli (2008) describes the leadership attitude that makes Ritz Carlton so unique in dealing with corporate culture, their remarkable staff empowerment as well as a result, its staff commitment towards the guests. The case study used by Peng (2009) describes more specific how the Portman in Shanghai being part of the Ritz Carlton chain is ahead of their competitors. Not only in Shanghai but within China they have been rewarded for their excellent performance as a hotel but also for being an outstanding employer. Moreover the case study shows some of the secrets of their success. Especially the excellent use of their human capital and managerial strategies stand out when reading it. According to Garavan, Morley, Gunnigle and Collins (2001) human capital has been recognized to be one of the most important assets and competencies of companies in today’s daily “fight” in the markets throughout all industries. Most of all in recent years this intangible capability has gained more and more importance regarding the strategical planning and decision making of companies. Particularly in the hospitality industry- where it is all about people- it is essential to have access to human resources with high standards. In the following the case study, ‘The Portman Ritz Carlton, Shanghai’ will be analyzed as well as questions regarding the case study will be discussed and findings will be presented. First of all, the analyses of the main sources for the Portman performance will be shown.

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What is the main source behind the Portman Ritz-Carlton’s performance? ‘We are Ladies and Gentlemen serving Ladies and Gentlemen’ (The Ritz Carlton, 2010). The above motto of Ritz Carlton probably describes best, the relationship of staff and customers at the Ritz Carlton and gives an indication what is the main source of Portman Ritz-Carlton’s performance. Simply said the main source behind the exceptional performance of the hotel is its human resources, which will be shown more precisely in the following. Through low employee turnover Ritz Carlton managed to keep its experienced and well-trained staff and is continuously improving its skills and abilities by offering them courses and training. The competitive strategy of the Portman is to differentiate themselves from other hotels through better staff in order to have a competitive advantage. According to Porter (1985) by using the differentiation strategy a company tries to be sensational in its industry in different areas on a big scale, which are valued by its customers. The Ritz Carlton has created a big competitive advantage by having exceptional staff. This is also due too the relationship created in-between front line staff and the managerial team from the beginning. It starts already with the GM personally interviewing every employee and by doing so creating a personal relationship with him or her. Also in general, the managerial style used by the GM and other heads in the hotel play a big role in the success of the Portman. According to the GM De Cocinis cited in Yeung (2006) empowerment plays a major role. By trusting the employees in deciding what is best for the guest they are given much freedom in their working environment, which leads to a much higher engagement and involvement then usual. This managerial strategy, also called energizing individuals (Mintzberg, 2009) is very time intensive but very effective and consists of the following. Persuading the staff, motivating them, convincing them, ing them, engaging them, encouraging them and lastly empowering them. By adapting these strategies De Cocinis, ‘helped to bring out the energy that exists naturally within people’ (Mintzberg, 2009). Naturally the resourcebased view introduced by Barney in 1991 has to be mentioned in this context as well. It has been perfectly recognized by Ritz Carlton that their main competitive edge differentiating them from the other hotels are its human resources. They are therefore adapting the resource-based view as their leading perspective of policy. ‘Sustained competitive advantage derives from the resources and capabilities a firm controls that are valuable, rare, imperfectly imitable, and not substitutable. These resources and capabilities can be viewed as bundles of tangible and intangible assets, including a firm’s management skills, its organizational processes and routines, and the information and 3

knowledge it controls’ (Barney, 1991). As mentioned above this strategy is perfectly adapted in the managerial style and the advanced usage of their human resources to gain competitive benefits. According to Peng (2009) the resource-based view focuses mainly on the internal strength and weaknesses in contrast to the industry based view emphasizing on the external opportunities and threads. The usage of internal strength can be perfectly seen in the example of the SARS crisis given by De Cocinis cited in Yeung (2006). Due to the high trust of staff in the company and managers giving good examples in cutting their pays the Porters managed to fight through the difficult times of low occupancy. By letting go people but ensuring them that their contracts would be renewed after the crisis and then really doing so the loyalty to the company increased enormously which led to even higher employee satisfaction. In the following it will be examined if the first 3 aspects of the VRIO- Framework can be applied to the human resources of the Portman.

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How valuable, rare, and hard-to-imitate are its human resources? As already mentioned above The Portman Ritz Carlton bases its enormous success on its human resources as well as their managerial strategies. According to Peng (2009) capabilities as well as valuable and rare resources are only an origin of competitive benefit once the rival has problems copying it. It is usually no problem copying other companies tangible resources like plants though it’s even harder or almost impossible to take over intangible capabilities such as the Portman’s superior staff motivation and managerial endowment. ‘Individual HRM practices may be imitable but HRM systems and routines, which develop over time, may be unique to a particular firm and contribute to the creation of specific human capital skills’ (Barney, Wright & Ketchen, 2001). When analyzing the history of Ritz Carlton it can be seen that the company is thinking long term by having introduced their principles: ‘1. Define and Refine 2. Empower through Trust 3. It’s Not about You 4. Deliver Wow! 5. Leave a Lasting Footprint’ (Michelli, 2008). By having introduced such principles and training every employee according to their corporate culture, every single one in their workforce becomes part of a whole system and can not just simply be removed out of this system (here hotel) and perform the same way in another one. Another major aspect, which plays a particular role in the Chinese market regarding human resources and their value, is culture. Especially one of the five dimensions introduced by Geert Hofstede is important in this case. According to Hofstede (1997) China is the country with the highest long-term orientation. This can of course also be adapted to employees looking for long-term relationships with their employers, which is very advantageous for the Portman as it makes it harder for competitors to headhunt their staff. As De Concinis cited by Yeung (2006) mentioned, his hotel is of course as well interested in long-term relationships with their staff and continuously try to stimulate their work with potential promotions, which again fit to the Chinese culture of long-term orientation. As per Mwaura, Sutton & Roberts (1998) another basic problem in China is the adaptation of the Chinese culture to the corporate culture of western companies in general. ‘It would seem to be the case in China’s hospitality industry that the prerequisite service ethos for a successful hotel operation is in direct conflict with many local cultural expectations which have been influenced by such factors as Confucianism, the modern history of communism, the lack of recent experience in the service industries, the lack of infrastructure and modern technology, and the apparent lack of management training and expertise in providing what have become the internationally- expected standards of hospitality in their hotel developments’ (Mwaura, Sutton & Roberts, 1998). That again 5

shows how valuable the employees are. Every employee adopted and learned the corporate culture of Ritz Carlton though it might have been very different to his or her own. Since taking over the hotel in 1998 Ritz Carlton had to work on all the abovementioned problems and difficulties and obviously did a good job which is the general outcome of the case study by Yeung. Though it shows that it takes quite an effort and the right strategies and people, to reach where the Portman stands today. It can be said that the HR of the Ritz Carlton in Shanghai are so valuable, rare, and hard-to-imitate for many different reasons. There is not only one reason or secret, which makes it even more difficult for competitors to achieve similar performance. Peng (2009) argues that imitation of a company’s performance, as it is case with the Portman is difficult because of causal ambiguity. It is defined as the complexity of perceiving the main determinants of an effective firm success. Last but not least even in their employee promise Ritz Carlton has grounded how valuable their human resources are: ‘At The Ritz-Carlton, our Ladies and Gentlemen are the most important resource in our service commitment to our guests. By applying the principles of trust, honesty, respect, integrity and commitment, we nurture and maximize talent to the benefit of each individual and the company. The Ritz-Carlton fosters a work environment where diversity is valued, quality of life is enhanced, individual aspirations are fulfilled, and The Ritz-Carlton Mystique is strengthened’ (The Ritz Carlton, 2010). In the next paragraph the last aspect of the VRIO- Framework, namely the organizational aspect and its potential adaptation to the Ritz Carlton in Shanghai will be evaluated.

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How organizationally embedded are its capabilities? Talking about capabilities of a company there has generally to be made a differentiation. According to Peng (2009) the best method is to separate capabilities or resources in tangible and intangible ones. Investigating hotels capabilities, and in our case the Portman in Shanghai, different aspects have to be taken into consideration. Like in any other industry, tangible capabilities for example the equipment of the hotel, its building or the property management systems used can be listed. They are all part of the organization, but nonetheless not embedded in a strong way and could be replaced quite easily. The intangible capabilities, namely the human resources with their managerial endowment, the organizational culture as well as the reputation of the hotel as a good employer with a superb customer service can be mentioned on the other hand side. They are embedded vigorously in the organization, which will be shown more precisely in the following (Peng, 2009). According to Hoetker (2006) there are various components in every company that need to be combined by an organizational strategy in order to get most out of their resources and capabilities. Peng (2009) suggests that complementary assets play a major role when aiming for a successful strategy. In the Portman, examples for these complementary assets are staff behind the scenes. Even the guest does not have personal with any of him or her, they play a major role in making the stay of each individual customer exceptional. ‘As in the resource-based view, the firm’s crucial task is to exploit its existing resources and capabilities while simultaneously developing new corporate assets for future business opportunities’ (Stieglitz & Heine, 2007). The Portman does that by continuous motivation not only of the front line staff but also the mentioned workers behind the scenes. They encourage each staff member in coming up with new ideas how goals can be met, so that everyone is involved and therefore strongly embedded in the organization. To motivate every single employee bonuses for everyone are based on improvements as Yeung (2006) reports. Another crucial aspect, which probably exists in many corporations, is the corporate identity. By treating every member of staff as part of a big family, in our case ‘The Ritz Carlton, Portman Family’, a strong sense of community in-between the staff is created. Again the SARS crisis can be mentioned here, that made all the staff move together to overcome the times of bad economy. Happenings like this create as Peng (2009) says invisible relationships that add value and can be counted as strong organizational capabilities. After having analyzed the last attribute of the VRIO- Framework it can be seen that the capabilities of the Ritz Carlton in Shanghai are deeply embedded, according to the 7

frameworks substance. It is fair to say, that based on a definition of a successful VRIOFramework by Fahy, Hooley, Beracs, Fonfara & Gabrijan (2003), the Portman is having a sustained competitive advantage and is continuously performing above the average. Hereinafter it will be determined how competitors could potentially react to improve their own operations and approach the remarkable success of the Ritz Carlton Portmans, in Shanghai.

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If you were the general manager of a rival hotel, how would you respond? Especially in new emerging markets for the hospitality industry like the Chinese market, general managers together with their human resources departments are struggling in finding qualified staff for their properties. Competitors of Ritz Carlton like the Intercontinental Hotel Group for instance are planning to open 107 new hotels in-between 2008 and 2013. According to Winnie Ng, the InterContinental Hotels HR director in China cited by Pollitt (2008) ‘There is a skill and training gap in China among front-line hotel workers such as front-desk and restaurant staff, as well as key executive positions in HR, finance and sales. The talent pool of executives with experience of working in multinational companies is small and highly sought after’. As a general manager of a rival hotel it would therefore be inevitable to first off all concentrate on staff training and think ahead by training potential new employees, which looking at the growth of the Chinese market would be definitely needed. As described by Pollitt (2008) Intercontinental responded to the need of education in the hospitality field in China by launching its InterContinental Hotels Academy in 2006. Since the launch 12 academies all over China were opened to secure the demand of qualified staff for the coming years. Alternatively by hiring more staff from other countries with more experienced human capital improvements could be made. ‘Organizations can increase their human capital levels through selection and/or training (i.e., buy and/or make). Selection refers to an organization’s efforts to increase its human capital by hiring employees with high levels of education and expertise from the external labor market’ (Skaggs & Youndt, 2004). That shows that existing staff training should be improved and internal resources should be identified and ed. As mentioned above, Mintzberg (2009) said that the energy exist naturally in everyone. There is no difference between people working in Ritz Carlton or their competitors in general. The difference is, that at the Ritz Carlton each individual’s energy is used and ed. As a GM of a competitor it would be essential to rethink if the managerial strategies used, every individual staff and if all the capabilities are exploited. To improve strategies, managerial trainings should be introduced as well and working conditions and working areas should be featured in a pleasant way to encourage every single employee to do his or her best. Again as in the Ritz Carlton bonuses should be based on improvements and every staff member should be involved in decision making to improve operations. Generally said, GM’s of competing hotels should improve regarding all aspects of the VRIO- Framework as described by Peng (2009). Value of resources should be increased by, briefly speaking, training staff. Rarity should be 9

increased by coming up with new ideas that differ from competitors and create a competitive edge. Imitability should be decreased by producing intangible resources as for example high staff motivation. Lastly all previous aspects would have to be deeply embedded in the organization. However every GM should realize that none of the above mentioned processes would be able to change a Hotel from one day to the other. Longterm preparation would be needed to eventually approach the results of Ritz Carlton. In the last paragraph the author concludes with a summary of human resources in hospitality and personal experiences made in this field.

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The rethinking in the hospitality industry To sum it all up there can be said that Ritz Carlton has successfully understood what are its capabilities compared to competitors and is trying to continuously redefine them in order to always stay a step ahead. Particularly in the Portman it can be seen that the company has a long tradition and is very experienced in its field. Being able to implement all aspects of the VRIO- Framework in such an advanced manner is not an easy task and requires experience and long-term strategy which cannot be boasted by many companies. The case also showed that primarily in the hotel industry a resource based view for companies is very adaptable. Nonetheless there has to be recognized as well that other big hotel companies have understood their problems and advanced their strategies as can be seen when looking at Intercontinental launching academies in China to create valuable human resources as mentioned above. Based on the author’s experience having worked in competitors of Ritz Carlton in the European as well as in the Asian market, it can be said that most companies have realized the demand to focus more on their staff. An example is the Pan Pacific Hotels chain having recently changed the name of their Human Resources Department to Human Capital and Development Department and through this emphasizing on the will to focus on staff training as well as enhancing the importance of staff as a pillar of the company. Moreover most international hotel companies have started in the last years to invest in the education of potential staff by offering special management training programmes, to graduates and trying to bind them to the company by financing their education. Though all the mentioned strategies should of course also be used in other industries to improve working environments for staff as well as satisfying customers and ultimately increase profitability.

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Bibliography: Books: Hofstede, G. (1997) Cultures and Organizations: Software of the Mind. New York: McGraw- Hill Michelli, J. A. (2008) The New Gold Standard. USA: McGraw- Hill Mintzberg, H. (2009) Managing. Harlow: Pearson Education Limited Peng, M. W. (2009) Global Strategic Management 2nd ed. Canada: Cengage Learning Porter, M. (1985) Competitive Advantage. New York: The Free Press Journals: Barney, J. B. (1991) ‘Firm resources and sustained competitive advantage’. Journal of Management, 17: 99 - 120 Barney, J. B. Wright, M. & Ketchen, D. J. (2001) ‘The resource-based view of the firm: Ten years after 1991’. Journal of Management, 27: 625 - 641 Fahy, J. Hooley, G. Beracs, J. Fonfara, K. & Gabrijan, V. (2003) ‘Privatisation and Sustainable Competitive Advantage in the Emerging Economies of Central Europe’. Management International Review, 43: 407 - 428 Garavan, T. N. Morley, M. Gunnigle, P. & Collins, E. (2001) ‘Human capital accumulation: the role of human resource development’. Journal of European Industrial Training, 25/2/3/4: 48 – 68 Hoetker, G. (2006) ‘Do Modular Products Lead To Modular Organizations’. Strategic Management Journal, 27: 501 - 518 Mwaura, G. Sutton, J. & Roberts, D. (1998) ‘Corporate and national culture – an irreconcilable dilemma for the hospitality manager?’. International Journal of Contemporary Hospitality Management, 10/6: 212 - 220 Pollitt, D. (2008) ‘Recruitment goes into overdrive as InterContinental Hotels battles for talent’. Human Resource Management International Digest, 16/5: 1 - 8 Skaggs, B. C. & Youndt, M. (2004) ‘Strategic Positioning, Human capital and Performance in service Organisations: A Customer Interaction Approach’. Strategic Management Journal, 25: 85 - 99 Stieglitz, N. & Heine, K. (2007) ‘Innovations and the Role of Complementarities in a Strategic Theory of the Firm’. Strategic Management Journal, 28: 1 - 15

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Yeung, A. (2006) ‘Setting people up for success: How The Portman Ritz- Carlton Hotel gets the best from its people’. Human Resource Management, 45/2: 267 - 275 Internet: The Ritz Carlton, (2010) ‘Our History’. Available: http://corporate.ritzcarlton.com/en/About/OurHistory.htm (Accessed: 2010, November 11)

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