In strong market conditions, hotel owners may make some unwise decisions being led by irrational exuberance. Based on the course materials, savvy RMs will most likely advise the owners to:
a. decrease the hotel room rates since the market is strong.
b. take on large bank loans and increase the number of units as much as they can since the repayment of such loans covers a long period of time.
c. be cautious about building more units because market conditions follow cyclical patterns and may change for the worse.
d. invest in building as many hotels as possible while the market is strong.
The correct answer and explanation is:
The correct answer is c. be cautious about building more units because market conditions follow cyclical patterns and may change for the worse.
In strong market conditions, it’s easy for hotel owners to get carried away with optimism and expansion plans. However, savvy Revenue Managers (RMs) recognize that market conditions tend to be cyclical, meaning that periods of high demand are often followed by downturns. When the market is strong, it’s tempting to overestimate future demand and aggressively expand. This can lead to overbuilding, which could cause an oversupply of hotel rooms when demand eventually drops.
RMs will advise hotel owners to be cautious because they understand the risks of overspending during peak times. Market conditions can change rapidly, and demand for hotel rooms can decrease due to various factors such as economic downturns, changes in consumer behavior, or unforeseen events like global pandemics. If hotel owners over-leverage themselves by taking on large loans or committing to significant expansions, they could be left with high debt and underutilized facilities when the market weakens.
Instead of focusing solely on growth, RMs will emphasize the importance of strategic planning, which includes monitoring market trends, adjusting pricing strategies, and diversifying investments. They will likely recommend that hotel owners avoid impulsive decisions driven by short-term success and instead focus on long-term sustainability. By being cautious, hotel owners can avoid financial strain and position themselves to weather downturns more effectively.
In summary, savvy RMs guide hotel owners toward balanced growth, advising them to think beyond the current strong market conditions and consider future risks and market fluctuations. This conservative approach helps protect against the possibility of financial loss when the market eventually slows down.