The ritz carlton hotel company the quest for service excellence

ID# CU09

PUBLISHED ON AUGUST 13, 2010

The Ritz-Carlton Hotel Company The Quest for Service Excellence BY NELSON M. FRAIMAN*, LINDA V. GREEN†, ALIZA HECHING‡, AND GARRETT J. VAN RYZIN* *

As Pat Mene, Corporate Vice President of Quality, reviewed a summary file containing the most recent data reported in the Dynamic Quality Information System (DQIS) from the Buckhead Ritz-Carlton, he wondered what it was going to take to lead the Ritz-Carlton Hotel Company to the next level in service excellence. The Ritz-Carlton was the first hotel company to become a winner of the nation's premier prize for performance excellence and quality achievement, the Malcolm Baldrige National Quality Award.1 The 1992 award represented the culmination of the Ritz-Carlton’s efforts since its restructuring in 1983 to provide the highest level of service in the hospitality industry.

The Atlanta-based company was preparing for its second Baldrige application. Closing the summary file, Mene considered the difficulty of continuing the legacy of the founder, Cesar Ritz, to provide discriminating patrons with the highest standards of quality service in a setting of luxury and elegance.

History of the Ritz-Carlton Hotel Company Cesar Ritz, founder of the Ritz-Carlton Management Corporation (the predecessor of the Ritz-Carlton Hotel Company), opened the first Ritz Hotel in Paris in 1898. The hotel was designed to pamper its guests through meticulous service and luxurious elegance. As news of the success of the new upscale hotel spread in France and throughout the rest of Europe, the Ritz name became synonymous with quality service and high style. In an effort to capitalize on the growing value of the Ritz name, in the early 1900s, Cesar Ritz organized a group of hoteliers and financiers and formed the Ritz-Carlton Management Corporation for the purpose of franchising the Ritz-Carlton name to individual hotel owners who were

Author affiliation *Professor of Professional Practice and Director, W. Edwards Deming Center, Columbia Business School †Armand G. Erpf Professor of Business ‡ PhD ‘98 **Paul M. Montrone Professor of Private Enterprise in the Faculty of Business

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For the exclusive use of W. Gu, 2017.

This document is authorized for use only by Wenlong Gu in MGT545-141 taught by Ivana Zilic, DePaul University from September 2017 to November 2017.

prepared to abide by the strict service and culinary standards set forth by Cesar Ritz. As early as 1927, Ritz-Carlton hotels were opened in locations including New York, Philadelphia, Boston, and Atlantic City, as well as London and Montreal. Each hotel committed to abide by the strict mandates of service and fashion demanded by the Ritz- Carlton Management Corporation. Although austere economic conditions in the United States in the early 1920s and 1930s eroded the profitability of the Ritz-Carlton hotels, forcing the closure of all but one U.S. Ritz-Carlton hotel by 1940, Ritz-Carlton continued to be equated with quality and elegance.

In 1983, the Ritz-Carlton name and trademark were purchased by real estate developer William B. Johnson, and W.B. Johnson Properties Inc. became the parent company of the Ritz-Carlton Hotel Company. William Johnson’s vision was to create a luxury hotel group with the highest standards of the hospitality industry, designed to appeal to the discriminating leisure and corporate traveler. After acquiring the Ritz-Carlton Hotel Company, W.B. Johnson initiated a corporate wide effort to ensure that the same high standards were maintained at all hotels bearing the Ritz-Carlton crest. In April 1995, Marriott International Inc. acquired 49% of the Ritz-Carlton Hotel Company, and in 1998, Marriott exercised its option of acquiring the remaining 51% of the Ritz-Carlton.

By early 1997, the Ritz-Carlton Hotel Company managed and operated 34 Ritz-Carlton hotels, including 25 city hotels and nine resorts. Twenty-five of the hotels were located in the United States; the remaining were distributed throughout the world, with hotels in Australia, Hong Kong, Indonesia, Japan, Korea, Mexico, Singapore, Spain, and the U.S. Virgin Islands. Additional hotels were planned in Shanghai, Dubai, Las Vegas, New Orleans, Coconut Groves, and the Philippines. With the exception of the owned and managed Buckhead Ritz- Carlton hotel located in Atlanta, Georgia, the site of Ritz-Carlton’s corporate headquarters, the Ritz-Carlton Hotel Company operated its hotels under management contracts between the Ritz-Carlton and the owners of those hotels. Through its management contracts, the Ritz- Carlton Hotel Company was able to enforce and maintain its strict quality standards at all of its affiliated hotels. Independent surveys indicated that 97% of Ritz-Carlton customers not only were satisfied with their experience, but felt that a stay at a Ritz-Carlton hotel provided them with a “memorable” experience.

The Hotel Industry The hotel industry has seen significant transformation since its inception in the early twentieth century. The majority of the earliest hotels were independent, privately owned ventures, located in population or trade centers, and had few conveniences. There was no standardization of services. Beginning in the 1960s and 1970s, however, to meet the demands of the growing number of travelers, hotel chains such as Howard Johnson's, Travelodge, and Holiday Inn were developed. As business travel continued to expand in the 1980s and 1990s, the hotel industry responded with the introduction of convention hotels, executive floors, business services, fitness amenities, and most recently, all-suite hotels.

The Ritz-Carlton Hotel Company: The Quest for Service Excellence | Page 2 BY NELSON M. FRAIMAN*, LINDA V. GREEN†, ALIZA HECHING‡, AND GARRETT J. VAN RYZIN**

For the exclusive use of W. Gu, 2017.

This document is authorized for use only by Wenlong Gu in MGT545-141 taught by Ivana Zilic, DePaul University from September 2017 to November 2017.

The expansion, however, was not immediately accompanied by increased profitability. In 1981, in an attempt to stimulate capital investment in the United States, the government passed the 1981 Economic Recovery Act. The lure of investment tax credits was the catalyst of a major building boom in the hospitality industry, and a resulting glut of hotel construction—largely by developers with limited understanding of the hospitality industry. Approximately 7,000 hotels (over 900,000 rooms) were built during the early part of the decade. Properties were built often without regard for market demand or the need to establish a customer base. Although the construction boom ended with the Tax Reform Act of 1986, when federal legislation reduced the level of tax-related incentives, it was years before the hotel industry was able to recover. As recently as 1990, the hotel industry suffered a $5.7 billion loss. Since 1990, however, industry profits have improved dramatically, due to strong consumer demand and the absence of significant capacity expansion. In 1995, pretax profits exceeded $6 billion due in part to a modest rise in occupancy level (0.8% increase to 65.5%) and a 4.8% increase in room rates.

Hotels are typically categorized into five segments: (i) luxury hotels, such as Ritz-Carlton; (ii) upscale hotels, such as Hyatt; (iii) mid-price hotels, such as Holiday Inn; (iv) economy hotels, such as La Quinta; and (v) budget hotels, such as Motel 6. Each segment experiences its own occupancy rate and room rates.

Hotels can also be classified based on their form of ownership and management. Some hotel properties are owned and managed by the same individual or group. Other hotels, such as the Ramada chain, are franchisees where, in exchange for royalty and marketing fees, the property owner receives such services as a national reservation system, national advertising, and volume purchasing discounts. Finally, some hotel properties, such as Ritz-Carlton hotels, are owned by individual property owners, but are managed by a management company in exchange for management fees.

As of December 1996, the U.S. lodging industry had approximately 3.6 million rooms at approximately 47,000 properties. In 1996, hotel occupancy and room prices were on the rise; the average occupancy rate was 65.2%, and the average room rate had increased by 11% since the beginning of 1995. According to a survey by Zagat, the average room rate at a Ritz- Carlton hotel increased by 19% from 1995 to 1997.

Commitment to Excellence THE GOLD STANDARDS After W.B. Johnson acquired the Ritz-Carlton trademark, the company focused its efforts on developing a chain of prestigious and highly personalized hotels, with the objective of achieving product and profit dominance. To achieve these objectives, Ritz-Carlton formulated a philosophy predicated upon management’s commitment to providing uncompromisingly high quality service to its guests. This philosophy was formally stated in the company's Gold Standards, which became the guiding principles of the Ritz-Carlton philosophy. The Gold Standards included the Credo, the Motto, the Three Steps of Service, and the 20 Ritz-Carlton Basics. (See Exhibit 1.)

Page 3 | The Ritz-Carlton Hotel Company: The Quest for Service Excellence BY NELSON M. FRAIMAN*, LINDA V. GREEN†, ALIZA HECHING‡, AND GARRETT J. VAN RYZIN**

For the exclusive use of W. Gu, 2017.

This document is authorized for use only by Wenlong Gu in MGT545-141 taught by Ivana Zilic, DePaul University from September 2017 to November 2017.

THE CREDO The Ritz-Carlton Hotel is a place where the genuine care and comfort of our guests is our highest mission. We pledge to provide the finest personal service and facilities for our guests who will always enjoy a warm, relaxed, yet refined ambiance. The Ritz- Carlton experience enlivens the senses, instills well being, and fulfills even the unexpressed wishes and needs of our guests.

The first of the Gold Standards, the Credo, embodies the essential characteristics of the products and services provided by Ritz-Carlton. The Credo is more than the company's mission; it influences the development and management of each Ritz-Carlton hotel and pervades the attitude and manner of each member of the Ritz-Carlton organization, from senior management to housekeeping. Each Ritz-Carlton hotel is designed and operated using the Credo as a guideline. For example, hotel lobbies are small, designed for intimate gatherings rather than large group meetings. Lobby music varies by time of day and surrounding environment. Conference rooms are located out of direct view from the lobby, to obscure the business function of the hotel. Each Ritz-Carlton hotel offers a full panoply of on-site facilities ranging from on-site fitness centers to 24-hour room service. Each hotel is associated with a number of fine restaurants with international acclaim.

THE MOTTO We are Ladies and Gentlemen Serving Ladies and Gentlemen.

The second, and most well-known, of the Gold Standards is the Motto. The Motto captures the essence of the Ritz-Carlton philosophy and represents the Ritz-Carlton commitment to quality and excellence. “Our employees are treated with as much respect as guests,” explained John Dravinski, general manager at the Marina del Rey Ritz-Carlton hotel. 2 Employees are taught that they are professional service providers, not servants. The Motto is each employee’s touchstone when servicing hotel guests. Each employee is trained to act as if he/she is a lady/gentleman, and to treat guests similarly, that is, in a highly professional and courteous manner.