Takeover of Sunny Resort Hotels (SRH) Two years ago Oli, the Chief Executive of TTC, persuaded the Board to take a rushed decision to take over SRH, which owned six hotels in country Y. This was the first time TTC had owned any hotels. The company had previously relied on other businesses to provide hotel accommodation for its holiday packages. 'By buying and managing our own hotels we will effectively control our accommodation costs in country Y' Oli had told the other directors. 'We will not buy locally produced food and drinks, but instead we will export products from country X. Our objectives for these hotels should be: 80% capacity utilisation, 95% customer satisfaction rating and a low break-even point'. TTC quickly delayered the management structure within SRH. Employee contracts and payment methods within the six hotels were changed without consultation. All employees were expected to be available for flexible working. SRH, although it had not been very profitable, had a culture that 'put the customers first'. TTC adopted the same low-cost strategy for SRH that was being applied to the rest of the business. However, Oli is now disappointed with the failure to achieve TTC's original objectives for this takeover – see Table 1. Table 1: Comparing TTC objectives with actual performance in the SRH hotels Year ending 31 May 2017 Original objective Actual performance Annual break-even point 33800 customers 39000 customers Hotel employees leaving voluntarily (an average of 230 people employed) 42 95 Percentage of customers satisfied with food and accommodation 95% 69% Capacity utilisation (annual capacity = 78000 customers) 80% 68% (a) Refer to the data in Table 1. Calculate: (i) difference in labour turnover between the original objective and actual performance (ii) difference between the margin of safety originally aimed for and that actually achieved. (b) Assess the most likely reasons why the takeover of SRH has so far failed to achieve TTC's objectives.

Mark scheme

Marking points from the official mark scheme (May/June 2017). The mark or mark type is shown in brackets.

1. [Calculation (a)(i)] Labour turnover = number of workers leaving / number of workers employed
2. [1 for (a)(i)] [if no relevant calculation]
3. [Calculation (a)(i)] Original = 42 ÷ 230 × 100 = 18.3%
4. [Calculation (a)(i)] Actual = 95 ÷ 230 = 41.3%
5. [1 for (a)(i)] for each calculation
6. [Calculation (a)(i)] Difference = 23% points
7. [Calculation (a)(ii)] Margin of safety = output (or sales) – break-even level
8. [1 for (a)(ii)] [if no relevant calculation]
9. [Calculation (a)(ii) Annual] Original output 80% of 78 000 = 62 400 and/or Actual output 68% of 78 000 = 53 040
10. [1 for (a)(ii) Annual] Original output 80% of 78 000 = 62 400 and/or Actual output 68% of 78 000 = 53 040
11. [2 for (a)(ii) Annual] Safety margin original 28 600
12. [2 for (a)(ii) Annual] Safety margin actual 14 040
13. [5 for (a)(ii) Annual] Difference 14 560
14. [Calculation (a)(ii) Monthly] Original output per month 80% of 78 000 ÷ 12 = 5200 and/or Actual output per month 68% of 78 000 ÷ 12 = 4420
15. [1 for (a)(ii) Monthly] Original output per month 80% of 78 000 ÷ 12 = 5200 and/or Actual output per month 68% of 78 000 ÷ 12 = 4420
16. [2 for (a)(ii) Monthly] Safety margin original 2383.3
17. [2 for (a)(ii) Monthly] Safety margin actual 1170
18. [5 for (a)(ii) Monthly] Difference 1213.3
19. [Calculation (a)(ii) Weekly] Original output per week 80% of 78 000 ÷ 52 = 1200 and/or Actual output per week 68% of 78 000 ÷ 52 = 1020
20. [1 for (a)(ii) Weekly] Original output per week 80% of 78 000 ÷ 52 = 1200 and/or Actual output per week 68% of 78 000 ÷ 52 = 1020
21. [2 for (a)(ii) Weekly] Safety margin original 550
22. [2 for (a)(ii) Weekly] Safety margin actual 270
23. [5 for (a)(ii) Weekly] Difference 280
24. [Knowledge (b)] Definition of takeover: buying out of one company by another
25. [Knowledge (b)] Possible reasons for failure: Poor understanding of the new business
26. [Knowledge (b)] Possible reasons for failure: Poor management of integration
27. [Knowledge (b)] Possible reasons for failure: Paid too much for takeover
28. [Knowledge (b)] Possible reasons for failure: Poor planning
29. [Knowledge (b)] Possible reasons for failure: Problem areas not identified in due diligence
30. [Knowledge (b)] Possible reasons for failure: Lack of clear leadership
31. [Knowledge (b)] Possible reasons for failure: Poor communication
32. [Knowledge (b)] Possible reasons for failure: Cultural differences
33. [Application (b)] Fewer managers for each hotel (delayering) might help explain the poor customer rating
34. [Application (b)] Poor customer rating might also have been caused by demotivated workers due to imposition of flexible working contracts
35. [Application (b)] Rapid changes to organisational structure
36. [Application (b)] Lack of TTC experience in managing hotels – managing travel agencies is completely different e.g. no problems with food inventory control
37. [Application (b)] No consultation with employees
38. [Analysis (b)] Lack of synergy and culture clash between the two organisations – the difference in approach might have been very substantial and this resulted in managers/workers leaving and offering poorer customer service
39. [Analysis (b)] Delayering might have reduced career prospects and increased workloads - could have demotivated managers leading to increased labour turnover.
40. [Evaluation (b)] Objectives might have been too ambitious – were they set in consultation with managers of SRH?
41. [Evaluation (b)] Only one year's figures – the culture clash might be a short term issue and the hotel management might become accustomed to the new values, etc. over time
42. [Evaluation (b)] Other factors might have affected some of the data – downturn in demand for holidays cutting occupancy rates; higher local taxes might have increased fixed costs, reducing the BE point, etc.
43. [Evaluation (b)] Comparisons with other similar hotel chains would be useful – benchmarking
44. [Evaluation (b)] Most important factors? Accept any reasoned and supported conclusion