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Company Analysis and Equity Valuation for Marriott International, Inc Completed by University of Outline 1. Company Introduction and Analysis 2. Industry Overview and Key Financial Issues of Industry Issues 3. Financial Statement/Ratio Analysis 4. Discussion of Corporate Capital Structure 5. Financial Projection (Income Statement, Balance Sheet and Cash Flow Statement) 6. Corporate Valuation and Valuation of Equity 7. Equity Recommendation 1. Company Introduction and Analysis Marriott International, Inc., is one of the leading worldwide hospitality organizations. It was established in Washington DC, in 1927 by J. Willard and Alice S. Marriott. Nowadays, Marriott Corporation has more than 2,700 accommodation properties located in the United States and 65 other countries and territories. Marriott International is a major global hospitality organization with over 2,600 operating units. The Corporation operates under 16 different brands. For many years, Marriott Corporation has been one of the most profitable firms in each of its product lines--hotels, airline food service, business food service, family dining, and contract services. Its historical key to success rests in being the "preferred provider," the provider customers think of first when making lodging or food choices. At a recent management planning meeting, Marriott decided that a second component was necessary for continued success. Along with being the "provider of choice," the firm also had to become the "employer of choice." If Marriott could not continue to attract and manage high quality people, its historically rapid growth would slow. As the provider of choice, competitors include Hilton, Hyatt, Sheraton; as the employer of choice, competitors began to include Sears, McDonalds, and the U.S. Army. For Marriott Corporation, managing employees and becoming the employer of choice is not an option; it is central to business success. Managers at all levels have just as great a commitment to customer service as they do to attracting, retaining, and motivating high quality employees. To become the preferred employer, Marriott executives have worked to broaden their employee supply pool (e.g., hire mature adults and form relationships with schools and community organizations). To retain employees, Marriott executives have worked to clarify career alternatives, form autonomous work teams, and empower employees. To continue to motivate employees, executives have modified reward systems, expanded job responsibilities, and shared power. In brief, Marriott executives leveraged their HR practices to become the employer of choice, provider of choice, and ultimately, to become more competitive. Marriott is an upscale hotel that competes with Hyatt and Stouffer hotels. Although Marriott may have overextended itself in the 1980s, its performance continues to improve more rapidly than that of its direct competition. An important factor in the success of Marriott has been the effective management of its financial assets. Occupancy rates were identified that were needed to cover construction costs and established as goals. A second important factor in Marriott's success is the ability to provide total customer satisfaction. Concierge service, video checkout, frequent-flier points, weekend rates, and the administration of customer surveys to identify customer needs and wants were all elements of a successful service approach. A third reason for success has been effective leadership and the ability to know when to change. Finally, the development of a successful strategy of market segmentation has focused resources and promoted a loyal customer base. Marriott was a fast-growing organization until it was overturn?? by a declining real estate market, an oversupply of hotel rooms, and a lingering recession. Profits tumbled by half between 1989 and 1992, and Marriott was devastated by $3.6 billion in debt. A controversial plan to split the company into two parts--one a profitable hotel and food-service business, and the other a debt-laden owner of depressed real estate--proved successful. Another strategy that proved successful was to accelerate franchising hotels. In 1989, 21 percent of hotels were franchised, and by 1993, 27 percent were franchised and plans were formulated to franchise 50 percent by 1997. Marriott avoided the risk of a loss of quality by selecting franchisees with the same philosophy about quality and by quickly withdrawing a franchise if standards are lowered in any way. Marriott also has a product in every price category: the high-end J.


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W. Marriott, business-class Marriott, moderate Courtyard by Marriott, budget-priced Fairfield Inns, and suite hotels. Moreover, Marriott has invested heavily in the burgeoning retirement accommodation business. Marriott, like Wal-Mart, Mary Kay, and Home Depot, is heavily dependent on a single individual for leadership. Bill Marriott inherited the business from his father and has made many important changes. Bill Marriott, like Sam Walton of Wal-Mart did, closely monitors expenses. One of Marriott's most admired financial strategies is to design, build, and manage its hotels but not to own them. Although each manager has a fair degree of autonomy over operating costs and pricing, there are literally a dozen encyclopedia volumes concerning task performance. For example, maids follow a 66-point guide to making up bedrooms, and guidelines cannot be changed without headquarters’ approval. 2. Industry Overview and Key Financial Issues of Industry Issues The process of globalization appears to be unstoppable with international mergers, acquisitions and strategic alliances becoming the norm rather than the exception. Unfortunately, increased trading will not benefit everyone, particularly low-skilled workers in new and emerging economies. Unless global corporations become more philanthropic, living standards and social structures in certain countries may be undermined. The tourism and hospitality industry already has a global focus. However, due to dynamic trading and technological conditions, there have been changes in product supply in response to shifting consumer preferences. In an increasingly competitive trading environment it is important for destinations to reinvent or differentiate themselves successfully, especially if they become homogenized as predicted by some researchers. In particular, destination organizations will need to seek competitive advantage by providing a quality service product using the philosophy of TQM. Total Quality Management is based on a systems approach, whereby organizations and processes are viewed in a holistic manner. In other words, all activities, processes and procedures are interdependent and issues for service delivery include: • participation of customers in the service encounter • use of blueprints and flow charts to identify key service areas, eliminate potential problems and recovery from service failure • indirect management of customers through layout planning • indirect management of the service encounter • adequate selection and training support systems A defining characteristic of hospitality organizations is the kind of service they deliver. Service quality stands or falls by the outcome of the service encounter. Service excellence can only be achieved by commitment starting at the top of the organization being translated by managers providing leadership by example. Clearly this is only workable with appropriate support systems which focus on service quality. It is vital that managers and employees understand the 'service encounter'. It is the essence of the service experience because customers derive an initial 'total quality' impression of the organization from this interaction. In addition, the ensuing behavior at the service interface has a lasting impression upon the customer and is likely to influence subsequent exchanges. The service encounter is also the point at which managers lose much of their direct control over employee performance. It is therefore essential that managers strive to influence employee conduct wherever possible. There are a number of ways this may be achieved including examination of the service delivery system, use of appropriate selection and training procedures, and an understanding of organizational culture. However, achievement of excellence during the service encounter requires scrutiny of the total service process, managerial commitment and enthusiasm from everyone in the organization. The creation of property-based EMSs to guide site audits and monitoring processes and in which to anchor certification processes is a new phenomenon in the hospitality industry and, to date, one without a defined standard. This is generating a mounting confusion within the industry over what environmental standards, which criteria, and whose certification programme to use. The advent of EMSs into tourism is based on the success of EMS operations in other industries, the perceived market benefits of independent certification of environmental standards for individual tourism enterprises, and a demonstrated growth in demand for environmentally friendly or 'green' tourism destinations in major outbound markets.

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EMSs are desirable because their adoption can reduce operation costs through energy and resource savings, improve internal management methods, reduce liability/risk from environmental deterioration, improve a property's image in the area of environmental performance and compliance with regulatory requirements, and open opportunities for profit in the emerging market for 'green' tourism destinations. The overall benefit of a properly designed and administered EMS, then, is its ability to provide credible and objective assurance to inbound markets that the environmental conditions in a particular property or destination are of a higher quality than those of competing locations (Holtz 1998). The creation of environmental management systems for the tourism industry is a new phenomenon that is looking to build on three important trends: 1 The success of EMS operations in other industries. 2 The perceived potential market benefits of independent certification of environmental standards for individual tourism business. 3 The demonstrated growth in demand for environmentally friendly or 'green' tourism destinations in major outbound markets. A number of organizations are currently certifying tourism providers as 'environmentally friendly', including Green Globe, Green Seal and HVS Ecotel. The primary benefit, to date, of conforming with the various EMS standards developed for the tourism industry is the cost savings achieved through various operational efficiencies. It is anticipated, however, that as awareness of environmental certification within the tourism industry is raised, there will be an increased competitive advantage to being independently certified as environmentally friendly. The largest hotel chains based on number of rooms are Holiday Inn Worldwide, Choice Hotels International, Best Western International, Marriott, Hospitality Franchise Systems, Days Inn of America, Hilton Hotels, ITT Sheraton, Motel 6, and Promus. The largest hotel chains based on number of units are Best Western, Choice Hotels International, Holiday Inn Worldwide, and Days Inns of America. The fastest-growing hotel/motel chains are Motel 6, Howard Johnson Inns, Comfort Inns, and Hampton Inns. Holiday Inn Worldwide and Best Western International dominate market share among hotel and motel franchise companies. Choice Hotels International administers Comfort Inns, Quality Inns, Clarion Hotels, House Inns, Sleep Inns, Rodeway Inns, Econo Lodges, and Friendship Inns. Marriott controls Residence Inn, Fairfield Inn, and Courtyard. Hospitality Franchise Systems consists of Howard Johnson and Ramada. The Promus Group comprises Embassy Suites, Hampton Inn and Suites, Homewood Suites, and Harrah's. Franchising in the hotel/motel industry has been used extensively. Hotels have used franchising to satisfy the retailing of services to meet the challenges of intangibility, perishability, inseparability, and variability. Labor intensity and quality control are other challenges that franchising has successfully addressed. Demand troubles Fluctuating demand caused by seasonal variations is another facet of the market structure of the hotel industry. To meet this challenge, several ski resorts in appropriate locations have opened their facilities to tour groups during the summer months. Moreover, Marriott hotels have offered weekend rates and discounts to special groups during the off-season. In general, hotel and motel organizations tend to be small, with more than half accounting for no more than three units. Nonetheless, like the rest of the retail industry, large organizations are steadily increasing their market share. This concentration of large organizations such as Marriott International has developed partly because of inter-organizational communication systems, franchised networks, and corporate vertical systems. 3. Financial ratios analysis is enclosed in the excel file All of the financial statements can be accessed at: http://ir.shareholder.com/mar/downloads/2004annualreport.pdf Stock Table 4:01 PM EST on Feb 17 Marriott International, Inc. (MAR) Price Last $ 69.28 Price Change $ - 0.22 Previous Day Close $ 69.50 Percentage Change 0.32% Volume (000) 653,700 Qtrly. Dividend $ 0.105 YTD % Change $ N/A Dividend Yield (%) 0.61 % 52-week high $ 70.78 Market Capitalization $14,435,840 52-week low $ 58.

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01 Shares Outstanding (in millions) 208.37 Source: Marriot Inc official website, http://ir.shareholder.com/mar/default.cfm?WT_Ref=mi_left 4. Discussion of Corporate Capital Structure Marriott manages the hotels under the Marriott name but does not own them. Typically, Marriott builds the hotel and sells it to a group of investors. These investors might be an insurance company, a limited partnership, or a real estate investment trust. Marriott manages the property in return for about 5 percent of the hotel's revenues and 20 percent of its operating profits and, in a minority of situations, may franchise some hotel units or may own other units outright. Marriott was one of the most successful hotel operations in the 1990s and continues to outperform the industry in the 21-st Century due to its good locations, upgraded properties, and strong occupancy. A strong and clear hotel image can increase consumer confidence in its lodging and service accommodations. Because the way in which consumers perceive a hotel can influence their reaction to its offerings, management is very concerned with the development of hotel image. Perception of a hotel image is derived not only from functional attributes of price and convenience but also from the influence of architecture, interior design, colors, and advertising. Luxury hotels include Fairmont, Four Seasons, and Westin. Upscale hotels include Hyatt, Lowes Anatle, Marriott, Omni, and Stouffer. In precarious economic times, luxury and upscale hotels can reduce rates to maintain occupancy. Budget hotels cannot readily counter this strategy. Moreover, should a geographic area become overbuilt with hotels, high-price hotels may lower their rates in an effort to limit their losses and keep occupancy from failing below 60 percent. Again, midscale and budget operations would find it difficult to counter this move. Middle upscale hotels include Courtyard by Marriott, Doubletree, Harvey, Hilton, Radisson, Sheraton, and Wyndham. These middle upscale hotels are also able to lower rates in adverse economic environments. Many of these hotels find it profitable to cooperate with such organizations as the American Association of Retired Persons and the Automobile Association of America in offering discounts during off-season periods or during adverse economic periods. All-suite middle upscale hotels include AmeriSuites (Howard Johnson), Embassy, Guest Quarters, Hawthorne, Homewood, Lexington, and Residence Inn by Marriott. Both Howard Johnson and Marriott have diversified by serving different target markets that desire longer stays and more residential facilities and services than ordinary travelers. Full-service midscale hotels include Best Western, Howard Johnson, Holiday Inns, Quality Inns, and Ramada. Limited-service midscale hotels include Drury, Hampton, and LaQuinta Motor Inns. Both Holiday Express and Ramada Limited have been expanding quickly, but this is a market that can become oversaturated rapidly. Limited-service midscale hotels will probably increase total market share since the potential is present, but individual hotel shakeouts may occur along the way. Sections 5 and 6 are included in the excel sheets attached and the Power Point presentation enclosed. VALUATION MEASURES Market Cap (intraday): 14.87B Enterprise Value (8-Apr-06)3: 16.40B Trailing P/E (ttm, intraday): 25.01 Forward P/E (fye 30-Dec-07) 1: 20.22 PEG Ratio (5 yr expected): 1.58 Price/Sales (ttm): 1.29 Price/Book (mrq): 4.58 Enterprise Value/Revenue (ttm)3: 1.42 Enterprise Value/EBITDA (ttm)3: 21.779 FINANCIAL HIGHLIGHTS Fiscal Year Fiscal Year Ends: 30-Dec Most Recent Quarter (mrq): 30-Dec-05 Profitability Profit Margin (ttm): 5.79% Operating Margin (ttm): 4.62% Management Effectiveness Return on Assets (ttm): 4.14% Return on Equity (ttm): 18.22% Income Statement Revenue (ttm): 11.55B Revenue Per Share (ttm): 53.373 Qtrly Revenue Growth (yoy): 15.90% Gross Profit (ttm): 1.31B EBITDA (ttm): 753.00M Net Income Avl to Common (ttm): 668.00M Diluted EPS (ttm): 2.89 Qtrly Earnings Growth (yoy): 25.40% Balance Sheet Total Cash (mrq): 203.00M Total Cash Per Share (mrq): 0.989 Total Debt (mrq): 1.74B Total Debt/Equity (mrq): 0.534 Current Ratio (mrq): 1.009 Book Value Per Share (mrq): 15.794 Cash Flow Statement Operating Cash Flow (ttm): 837.00M Levered Free Cash Flow (ttm): -565.63M Industry Statistics Market Capitalization: 36B Price / Earnings: 16.

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8 Price / Book: 5.7 Net Profit Margin (mrq): 11.4% Price To Free Cash Flow (mrq): -124.6 Return on Equity: 21.0% Total Debt / Equity: 0.8 Dividend Yield: 0.6% 7. Equity Recommendations Ambitious plans like these also spotlight another huge gap between IT and business: accountability for project delivery. "Even with some appearance of governance, typically there's no process for performance review and accountability once a project is officially endorsed," comments Ryan Schmelz, managing partner at Transition Partners, an IT management consulting firm in Reston, Va. When projects are commenced with an executive management team, they often fall off the radar, typically because of changes in the business or executive management turnover, Schmelz adds. This, he reveals, results in structures that are often funded long after their usefulness or that are left incomplete. Therefore, IT projects have to be held to the same level of accountability as any business initiative. We propose an "accountability ladder", which is similar to the existing Marriott’s model. At Marriott, accountability is divided between business and technology project managers. Each project begins with an executive sponsor, who chairs a steering committee headed by a business project manager, connected with an Information Resources project manager. Because of such level of enclosure, the technological aspects of new initiatives are fleshed out alongside with the development of new projects. This brings about a more efficient flow of ideas and business development. With such level responsibility, Marriott will be calculating the benefits of IT projects and preparing a system to measure the performance of those applications throughout their life cycles. Marriott Corporation has done a decent job in the past with cost control and project management. However it has had troubles measuring a project's actual benefits. Under the proposed plan initiative, Marriott will construct the most appropriate automated system to measure life-cycle performance of projects. As benchmarking labors move ahead, so too do forward-looking proposals like customer relationship management projects that stretch Marriott's sales force automation tool into a platform for a number of interesting functions, such as pre-stay sales of golf or spa packages. In the future, visitors will even be able to book extra services like these or squeeze their itineraries online. Most of these proposals will be commenced by business departments, executive teams and even sales representatives who are likely to get excited about the benefits IT can bring to the business. But all this new expansion will stretch Marriott's IT resources. It will boost the number of people working on IT projects by one-third and will increase IT spending from 5% to 15% per year since 1996. However, the immeasurable benefits of these new policies implementation will be that IR will not have to struggle with ill- defined technology projects or dictate the software development and support for business support systems. IT at Marriott is likely to become a main component of the products and services that the corporation offers to its customers and guests at its locations. Therefore, positive results from the proposed event management plan will be huge. Bibliography Brockbank, J.W. and Ulrich, D. "Avoiding SPOTS: Creating Strategic Unity." In H. Glass (ed.), Handbook of Business Strategy 1990. (New York: Gorham Lambert, 1991. Charan, R. "How Networks Reshape Organizations--For Results. Harvard Business Review, September-October, 1991, pp. 104-115. Doyle, John M. “Marriott splits into two firms”. Honolulu Advertiser, July 24, 1993. Dunning, John .H. Explaining international production. London: Unwin, 1988. Hamel, G. and Prahalad, C.K. "Strategic Intent." Harvard Business Review, May-June, 1989, pp. 63-76. Erramilli, M. K. & C. P. Rao. “Service firms' international entry mode choice: A modified transaction-cost analysis approach”. Journal of Marketing 57 1993, pp. 19-38. Fladmoe-Lindquist, K & L. Jacque. “Control modes In international service operations: The propensity to franchise”. Management Science 41, no. 7, 1995, pp. 238-49. Schuler, R.S. "Repositioning the Human Resource Function: Transformation or Demise?" Academy of Management Executive, 4(3), 1990, pp. 49-60. Ulrich, D., Halbrook, R., Meder, D., and Stuchlik, M. Employee and Customer Attachment: Synergies for Competitive Advantage. Human Resource Planning, 14(2), 1991, pp. 89-102. Ulrich, D. and Lake, D. Organizational Capability: Competing from the Inside/Out. (New York: Wiley, 1990.

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