Question
La Bonita (LB)
La Bonita $(L B)$ is a beach hotel owned by Felix and Rose Sanchez. Its current target market is families seeking beach holidays. $L B$ offers high-quality service. Customers do not pay in advance and pay in full on departure. $L B$ is located near a capital city.
As there are no hotel training schools locally, Felix provides on the job training to all new recruits. A recent survey by $L B$ to assess brand loyalty found that existing customers remain loyal because:
- they appreciate not having to pay in advance, as required at other local hotels
- employees are polite and helpful and particularly good with children
- the services provided are perceived as very good value for money.
However, many customers have commented that the hotel needs to upgrade its facilities.
In winter, $L B$ has a very low capacity utilization and monthly cash flows are negative. $L B$ gets through these months using bank overdrafts while continuing to pay its suppliers in cash to get generous discounts. Felix is concerned that the cash-flow situation is unsustainable and could get worse because the hotel facilities need upgrading. He proposes that $L B$ raises additional finance and finds ways of reducing cash outflows in the winter (proposal 1).
Rose believes that the cash-flow problem is mainly due to low capacity utilization in the winter months. She wants to diversify and attract a new segment for the winter: business customers. However, this would involve significant expenditure, including upgrading and adding new facilities to the hotel (proposal 2).
a. Define the term brand loyalty.
b. Explain two advantages for $L B$ of using on the job training.$[4]$
c. Explain the importance to $\angle B$ of two elements of the extended marketing mix.$[4]$
d. Discuss whether $L B$ should implement proposal 1 or proposal 2.$[10]$
▶️Answer/Explanation
Ans:
a.Consumers’ faithfulness to a particular brand, which will allow a business to see repeat purchasing by consumers and/or over the longer term, much more acceptability in raising the price of its products/services.
Accept any other relevant definition.
N.B.: no application required. Do not credit examples.
Award [1] for a basic definition that conveys partial knowledge and understanding.
Award [2] for a full definition that conveys knowledge and understanding similar to the answer above.
b.
On the job training is cheaper than sending recruits on external training. This is particularly advantageous for LB, as there are no hotel training schools nearby. External training will mean travelling and hosting costs that LB is unlikely to face due to cash-flow problems. Adding on external training costs could worsen LB’s cash-flow postilion.
On the job training will enable new recruits to familiarize themselves with the hotel’s culture and Felix´s way of doing things. A recent survey has revealed that guests are pleased with LB due to employees’ polite and helpful attitude, which means that Felix’s on the job training has been effective. It is unlikely that new recruits will acquire this specific know-how with external training.
With on the job training, trainees will actually serve guests while they receive training. This could help LB with its cash-flow problems, as labour costs could be saved.
Felix will be able to watch the new recruits closely to follow their training. He will be able to screen closely their potentialities and weaknesses and transmit the hotel’s culture to them.
Accept any other relevant advantage
Do not credit an explanation of general training
Mark as 2 + 2.
Award [1] for each correct advantage identified or described and [1] for a relevant explanation with application to LB. Award up to a maximum of [2].
[2] cannot be awarded per advantage if the response lacks either explanation and/or application.
For example: For an identification or description of an advantage with or without application [1]. For explanation of an advantage with no application [1]. For explanation of an advantage and application [2].
c.
Physical evidence is referred to as the environment in which the goods or services are delivered. It is a crucial element for hotels like LB, as hotel customers make their choices based on the appearance and state of hotel facilities to a great extent. Guests’ judgements will be based on LB’s physical evidence, including its location at the beach, to decide whether or not to book a room. There is, however, evidence from the stimulus that LB’s facilities need upgrading.
People makes reference to the way employees relate to and communicate with customers. This is another crucial element for a hotel. LB’s employees are polite and helpful and particularly good with children. This has proved to be very important for LB’s brand loyalty and customers’ perceptions of it, and also provides a service that is perceived as very good value for money.
Process could be related to the way LB provides a unique way of making payment for guests. LB provides a mechanism that allows customers the opportunity to pay on departure and avoid paying in advance.
Accept any other relevant explanation.
Mark as 2 + 2.
Award [1] for each correct element of the extended marketing mix identified and described and [1] for a relevant explanation of the importance with application to LB. Award up to a maximum of [2].
[2] cannot be awarded per element of the extended marketing mix that has been identified if the response lacks either explanation and/or application.
For example: For an identification or a description of an element of the extended marketing mix with or without application [1].
For an explanation of an element of the extended marketing mix with no application [1].
For an explanation of an element of the extended marketing mix and application [2].
d.
Refer to Paper 2 markbands for May 2016 forward, available under the “Your tests” tab > supplemental materials.
Proposal 1
LB could follow Felix’s proposal to solve its cash-flow problems by reducing cash outflows and raising additional finance. It is probably a lower-risk strategy than Rose’s.
Negative cash outflows could be reduced by delaying payment to suppliers in winter, instead of paying cash. However, LB could lose the generous discounts they get, which in turn could lead to increasing direct costs. Eventually, some suppliers may not accept delayed payments and may demand cash on delivery.
LB could also delay hotel maintenance and refurbishments. However, LB already needs some upgrades. Deteriorated facilities couldn’t negatively affect customer perception and brand loyalty. Sales may eventually fall.
LB can cut other overhead spending such as advertising or promotion costs. These costs will reduce payments without affecting the quality of the service provided. However, future demand may fall if LB is not promoted effectively.
Felix could lay-off some hotel staff or ask them to switch to part-time working. He may even close the hotel completely for the winter season. However this risks losing the services and know-how of key staff, who may not return in the high-season.
Felix has also proposed to raise additional finance. LB could ask for a short-term loan or look for a new business partner. Probably, interest rates will be lower than overdraft rates and LB could save on some costs by substituting the overdraft for a less expensive source of finance. A new business partner will probably require some form of managerial control but fresh/innovative thinking can be introduced into LB.
Alternative short-term sources of finance, such as the sale of assets and debts factoring, seem unlikely to work for LB. It seems that LB does not have assets to sell and there is no evidence that LB has many debtors.
Proposal 2
On the other hand, Rose believes that LB’s cash flow problems are due to low capacity utilization in winter. She has proposed to attract a new segment of customers.
If new business customers come in winter, cash inflows will increase. However, to attract these customers, LB will need to build new facilities, such as a convention centre or a gymnasium, to cater for the needs of this particular market segment. This would involve a significant amount of finance that LB does not have.
LB could try to find external finance, such as a long-term loan, equity finance or a venture capitalist. However, these alternatives seem unlikely for LB in the short term. All of them take time to be found. Bank loans are expensive and LB may not have enough assets to present as collateral. Floating the company could be quite expensive for a family-owned business.
Venture capitalists are not easy to find, particularly if the business is not a promise of extraordinary profits.
LB will need to conduct extensive market research around the new market segment and currently this will increase outflows at a time when monthly cash flows are negative.
It can be concluded that Rose’s alternative seems to be more risky and expensive than Felix’s. What if business customers are not attracted? LB will be indebted with facilities that would remain obsolete for its current market segment. Felix’s proposal, on the other hand, seems more plausible and conservative. Some of the alternatives, such as delaying payments, could work without much risk involved. However, LB should also find a way to increase inflows by tackling its capacity utilization problem. Diversifying into another market segment (such as elderly tourism?) that may not involve a great investment could help to increase inflows in winter.
Marks should be allocated according to the paper 2 markbands for May 2016 forward with further guidance below.
A balanced response is one that covers at least one argument for and one against each proposal.
For one relevant argument that is one-sided, award up to [3]. For more than one relevant argument that is one-sided, award up to a maximum of [4].
If a candidate evaluates/addresses only one proposal, award a maximum of [5]. Award a maximum of [6] if the answer is of a standard that shows balanced analysis and understanding throughout the response with reference to the stimulus material but there is no judgment/conclusion.
Candidates cannot reach the [7–8] markband if they give judgment/conclusions that are not based on analysis/explanation already given in their answer.