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Consulting for the Royal Hotel

Essay by   •  October 10, 2016  •  Creative Writing  •  5,395 Words (22 Pages)  •  1,738 Views

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Chapter 7: Consulting for the Royal Hotel

This mini-case, also patterned after a real case, is not truly a mini-case. It is more precisely an exercise that typically takes between 75 and 120 minutes (depending on your class structure and the degree to which you have students work in teams prior to the discussion). I find this trilogy on the analysis of added value to be invaluable to ensure that students internalize this discussion and concepts. This is because at surface level the material appears to be something that “everyone knows.” Yet, if you ask your students at the beginning of class, What does it mean for a firm to have added value? — you will quickly realize how this concept is much fuzzier in their mind than you think. This is because, as I say in Chapter 7, added value is an over-used (and often misused) concept.

While I have tried to expose all of the hidden questions and issues that arise when you teach the analysis of added value, I am sure your students will come up with interesting new angles.

Ultimately we cannot really discuss strategic information systems and the strategic role of IT until there is clarity on the concepts and vocabulary underlying the analysis of added value. While perhaps not strictly an IT concept, I find that the one or two 75 minute sessions I invest in this topic are extremely valuable (and many students tell me this is the most important concept I taught them…  not sure if this is good or bad… but it reinforces my belief in the value of this discussion). If you and your student enjoy discussions and “light bulb going off” type of experiences, this will also be one of the most fun sessions you will have.

Below I have explained how I use this trilogy of cases. Note that the first installment (i.e., the A case) is in the book as the opening mini-case in chapter 7. The B and C cases you will need to have available to hand out during the discussion. I have provided all three in separate pages, as appendices to this teaching note, so as to make it easy for you to copy.

  1. What does it mean to create value? What is value?

This question is designed to surface students own definitions of value and value creation prior to asking them to read the A case. This discussion works best when students have not yet read chapter 7 as it clarifies that, while we all use these terms extensively, we don’t define them very precisely.

A firm creates value when it takes in input (some resources that had a value of $xx in their next best utilization and produces) as an output (goods for which customers are willing to pay $xx + $vv). Thus the firm has contributed to the creation of value in the amount of $vv. That is value that was not there before this transaction occurred. Thus, value created is defined as the difference between customer willingness to pay (the total amount of money the customer is willing to part with to obtain the firm’s product) and supplier opportunity cost (the minimum amount of money a supplier is willing to accept to provide the firm with the needed resources – including all resources). Thus, the value created in a transaction is given by this difference.

I don’t provide the above definition at this point. I simply listen to students’ own definitions and then introduce the case.

  1. Let’s quickly summarize this scenario

The very first thing I do after students read the A case is to make sure that they all clearly understand the facts of the case. The ROYAL HOTEL is in need of replacing its aging server . That is, the current solution is at the end of its useful life and must be replaced – either with just updated hardware or with the WizTech solution.

The server is an enterprise class machine on which the hotel runs his Property Management System (PMS).  The new cloud solution is a perfect substitute for the current system. We need to assess what is the ROYAL HOTEL to do and whether WizTech, the provider of the new solution, has a competitive advantage over competitors (i.e., those firms that provide a competing solution, a substitute).


I allow the discussion to flow freely and allow the students to answer the questions provided. When I have enough time I let students get into “buzz-groups” of two or three for 10-15 minutes and I walk around to see how they are progressing.  I don’t give answers at this point; rather, I let the class find consensus.

Some of the typical points of confusions are:

  1. Students fail to grasp the notion of perfect substitute. This means that, while a number of differences can be articulated between the providers and their offers, for the purpose of this discussion all these differences have been evaluated and taken into account. For example, the two solutions are the same as it’s the same software. Royal Hotel already has a relationship with the current solution provider but WizTech is an unknown entity, etc. You need to tell students that, while perhaps a bit unrealistic, the perfect substitute hypothesis is necessary to simplify discussion.
  2. Redundancy. Students suggest that cloud solutions require an “always on” internet connection. The legacy system doesn’t, thus it is intrinsically capable of better business continuity. If WizTech fails, the Royal Hotel is stuck. You can challenge the assumption asking how many times their (wired) internet connection actually failed, and add it is for this reason that WizTech offers an offline mode (included in the bundle), that mitigates this concern. Again, the two options are perfect substitutes.  
  3. Some students may note that Internet may not be so easily accessible to properties in isolated locations and this is (albeit rare) situation would make Wiztech solution the wrong choice. This is a legitimate claim. You can take the opportunity to explore such case for large hotel chains with resorts in remote locations, and challenge students asking what they would do in that case. However, that’s not the case for the Royal Hotel.
  4. Security. Students may be worried of cloud solutions’ security and be afraid of the increased system hacks as reported in the press. That’s a good argument that we explored in Chapter 13. You can remind them FBI director James Comey’s words to make them realize that there is no 100% IT security: "There are two kinds of big %companies in the United States. There are those who've been hacked by the Chinese, and those who don't know they've been hacked by the Chinese." Effectively, and considering the sensitive nature of data stored in a PMS—credit card, personal guest data, CRM data —security concerns are a serious matter. To visualize the concept for certain audiences, I draw a simple graph in which I put a firm IT security investment and a relative measure of security. The idea is to show them that 100% IT security requires an asymptotically infinite positive investment. Again, you can remind students to consider the two solutions at least equal to simplify the discussion.
  5. There is no price information! This is a critical point. Students often assume that the information about WizTech’s cost is instead the price they will charge. This is true only if WizTech offers the product at cost! But the key point is that price is a consequence of added value, not a determinant. Thus, you should press students to answer the questions even though they have no price information about WizTech’s product.

Negotiating with the current supplier. We assume that it is impossible to negotiate with it. The new hardware is offered exactly at the same price we historically paid.

Once the students have had a chance to explore the case and you are satisfied with the discussion, you can bring discipline to the analysis using the following questions:

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