Majestica Hotel in Shanghai Case Solution
1. Case Review
-1 Majestic Hotels, Inc, Background
Majestic Hotels, Inc. established in 1970 in Western Europe and it’s a private company which expanded to the North America, U.S and UK. In addition, it has four hotels settle down in Charleston, Asheville, Savannah and West Palm Beach located in Florida, all these hotels work for providing the best vacation to travelers’ .the hotel management is elite, well-groomed and professional executives that matches the Brand image of Majestica as they attract the developers and owners of luxury hotels in the world. Since 1999 Majestica tried to enter the mainland China. Richard Roy-the executive vice-president, at Majestica Hotels Inc. took the responsibility to start negotiations with (CPS) the Commercial Properties of Shanghai about having a contract to decide the operator of a new luxury hotel, which will be owned by Shanghai Industrial Holdings. On 20 of August 2004 CPS signed the letter of intent with Majestica’s which make them being the operator for the new luxury hotel that will be under construction in Shanghai. However, Majestica’s working philosophy to hold the full control of the hotels that are managed by them, make it face the deadlock regarding two key issues, the first one was about contract term and second one was about the responsibilities and rights for both parties and, if they fail to solve those issues, the Majestica will lose the game to enter the China market and expand thereafter in other emerging markets.
1-2 CPS Background
Commercial Properties of Shanghai is one of the biggest investment holdings companies where it is considered one of the important investment overseas companies to the Government of Shanghai. In addition, the CPS was the parent companies for the biggest abroad aggregation totally owned under shanghai municipal government. On the other hand, the CPS had interest in many countries and cities such as: - Shanghai, Hong Kong and some cities between Americas. The most things to consider about CPS that it was on the list of the stock exchange of Hong Kong it realized gains and successful obsession operations and this lead to raising the market value for CPS company.
Majestica want to get involved in the hotel business in shanghai due to the growing market and potential in the area but every company has its own rules, CPS and Majestica have their own interests and rule and both companies did not want to change the rules. The basic and immediate issues which was most important for the deal, is the process of the negotiation which involves the contract and which is defines the involvement of the both groups in the hotel management. These issues are considered as very important because it involves the stakes and rules of both companies.
2-1 Immediate Issue
Length of contract
The immediate situation for Majestica is to deal with the period and length of the contract, Majestica hotel is involved in long term contracts while due to strict regulation from government, it was creating difficulty in achieving approach .The case study shows that Majestica wants maximum period of contract like 55 to 60 years, while the laws of CPS don’t allow them to sign contract more than 12 years. CPS wants to sign the contract of 30 years which currently is unacceptable for Majestica. As it is known that the Business development in Shanghai for Majestica is very important because of the potential in the area. So they put forward their concern before CPS. The issue was negotiated between two parties and this cause resolved as CPS showed some relaxation and they have extended the period of contract for 30 years. But it is also not good with the negotiating team of the Majestica hotels, they wanted the period not less than 55 years.
Equity & Ownership Structure
The control of the hotel is another issue for both terms and parties, as both of them wants to get control of the hotel. According to the rules the ownerships is limited to 20% for the business companies. The current operating procedure of Majestica is to focus on the management of the hotels but CPS wanted to limits the role of the Majestica in the management and they wanted the minor involvement in the management system of the hotel of Majestica management.
2-2 Basic Issues
Both companies are taking much time and it is causing problems for the Majestica team because it is not giving any profit to the company. The problems which seem to be minor but have great impact on the business are also causing hurdle in the finalization of the contract. The below mentioned are the basic issues being faced by Majestica and CPS:..................................................
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Majestica, a luxury hotel management service business began in 1970 in Western Europe. Majestica gradually expand to United Kingdom, United States, North America, Asia and so on. After a gradual expansion in Asia, Majestica become the world’s largest operators of luxury hotel and resort. Majestica earn by hotel ownership operation and hotel management but last five years they are concerning to managing hotel. All over the world, owner and developer of luxury hotels are attracted by Majestica because of their excellent quality. Their key success factor is management pointed to a service culture that they had fostered for decade. Moreover, their service culture is personal service oriented. Majestica’s try best to delight their customer by response to unusual request of the guest. This unique service culture leads Majestica to icon in hotel management business in the world. They had two strategies to expand their business those are cautious to increase number of hotel and resort in their portfolio and operating philosophy.
In Asia pacific region Majestica didn’t take first moving advantage because of high cost to established new industry and they didn’t convince about political situation stability and existence of service culture. Majestica follow other major international luxury hotel chain and enter in Asian market. In 1990, Majestica changed its strategy to enter Asian market because it was the alarming time for them. China becoming the most competitive hotel industry and china’s economic develop and open door policy leads to china the second largest foreign direct investment recipient in the world. Finally, Majestica took the right decision to change strategy and enter in Asia’s largest competitive hotel business market.
China was sixth most popular destination for business and tourist and would be first positioned by 2020. In 2004, there were 423 hotels with 68000 rooms which expected to increase 11 percent by 2005. Shanghai Tourism Administrative Commission also forecast that tourist visiting will increase by 5 percent. Mid 1998 international luxury hotel chains took the advantage of changed government policy soon they took place in Shanghai. Shangri-la,
Hyatt international etc established and imbued thoroughly Shanghai luxury hotel market.
On that time Shanghai was the best location for Majestica because of market demand, future benefit, resource, competition as well as government policy. While CPS was publicly listed in Hong Kong gave Majestica more confidence about business transparency and independence from government influence. Majestica’s excellent performance and reputation attracted CPS and property owner to invest in Shanghai. As a result Majestica and CPS signed an intent and start negotiation. The challenging issue was the length of the contract and the control over the management of the hotel.
First of all, Majestica wants the agreement for 55 years while it was 10 years normal hotel management term in china. So both CPS and Majestica had to change their policy and agreed to 30 years operation period with a option to extend operation period. Secondly, Majestica expect to design and construct by their senior people while CPS interfere to take decision. Than Majestica convince CPS that it is important to take senior people to keep chain of consistency of a world class luxury hotel construction. Selecting the name of the hotel, Majestica don’t want to compromise. Then, Majestica want experienced person as general manager who will accountable for over all operation. CPS wants a Chinese person to be a general manager though there was not any enough experience Chinese person.
Then about expatriates, CPS wishes Majestica to train the local employees and eventually use them to replace the expatriates. Then CPS requested to Majestica to take a Deputy General Manager. In negotiation, CPS suggested to Majestica for purchasing all necessity from the local market. Majestica disagreed to CPS for allowing access to hotel rooms because of confusion. Finally, Majestica want to appoint a third party to resolve any condition but CPS didn’t agree to interfere of a third from outside China. For foreign investment law of China Majestica had to take 25 percent equity by the Majestica had to change the upper limit minority investment policy.
To increase the market share Majestica should relax its operating philosophy and take the opportunity to grave the leadership position in hotel industry in the world. If Majestica could change their philosophy and business practice than not only china but it could lead whole world and become global. To take this position Majestica need to change their management policy, market segmentation, human resource policy and aggressive expansion of hotel operating business.