FAIRFIELD INN (A) CASE

Question 1- Does Fairfield Inn have a competitive advantage? If so, what is it? Yes, we have found two main competitive advantages: employee satisfaction, which translates into 50% lower than industry turnover, and industry know how derived from the Mariott's Lodging Group. Fairfield Inn Human Resources strategy is based upon having highly motivated staff. Therefore they have various activities to ensure that they hire the best people, train them and reward them in order to keep them. The most noticeable icon is its Scorecard System, by which employees bonus are based on the customers perception of each employees individual and team performance. This initiative, combined with more than competitive industry salaries, the Bonus Pay Program and the extra holidays based on perfect attendance, leads to a very low annual turnover: 91% versus for hourly employees (half the industry average) and 4% for managers (compared to 15% in a normal Mariotts full-service chain). The highly motivated staff and rewards based on service, leads to a higher quality of services to customers from the cleanliness on the room till the front desk amiability.

Question 2- What are the Pros and Cons of each of the development scenarios outlined in the case? Which one would you propose and why? 1- Company manage scenario: + High capital expenditures - Fairfield Inn could grow to 300 units (compared to 500 with Franchising) 2- Franchising: + Fairfield Inn could grow to 500 units (compared to 300 with company-managed scenario) +Ideal concept candidate for franchising + Less capital expenditures + Fairfield ancillary services would create value for franchisees providing benefits unavailable to an independent operator + Access to good undeveloped locations - Fairfield Inn would lost control over prices

Group members: Claudia Fernandez-Concha/ Carlos Maduro/ Jimena Silva/ Pablo Vidal/ Frederick Warberg

a. The Standard Plan + Overall number of projects would be increased because of sites brought by the franchise. + Control Quality is controlled by Marriot. - Franchisee would need to arrange its own financing - Downside to grow rapidly? b. The McDonalds Plan + Target: experienced hotels operators with demonstrated ability to meet Mariott operating standards +Marriot will remain the title of the land - Real State appreciation opportunity. - Mariott should have to invest a great amount in upfront costs to buy the land and build the motels 3. Syndication + Minimizes internal capital needs + Fairfield Inns internal growth would provide great opportunities for employees to grow inside the company - High Transation Costs (5% of the value of the properties to be syndicated). - Training and set of Standards for each property is difficult to maintain In conclusion, based on less number of cons, we believe that Franchising with the Standard Plan is the best developement scenario for Fairfield Inns expansion.

Question 3- What percentage of Marriotts profits will Fairfield contribute going forward in each development scenario and at what capital cost -- keep in mind that each scenario requires different capital outlays, has a different profitability profile per unit and will result in different numbers of units being developed.

As we choose the Franchising Standard Scenario there is no capital outlays, asides from the assumed $1,000,000 for working capital. The NPV of the development scenario is $85 million (assuming a 12% cost of capital that is what Mariott uses to evaluate investment alternatives), and the IRR of the project in the 20 years is 151%/year. Please check attached Excell spreadsheet.

Group members: Claudia Fernandez-Concha/ Carlos Maduro/ Jimena Silva/ Pablo Vidal/ Frederick Warberg