Case of Roaring Dragon Hotel

Case of Roaring Dragon Hotel

Read the case and answer the following 3 questions as outline format. (Please include the bullet points). Be sure to be comprehensible and detailed; and really ANSWER THE QUESTIONS.

(1) Please identify and BRIEFLY explain the challenges faced by Fortune when he assumed his role. These should include but are not limited to the several specific differences in “organizational culture” between HI and RDH (former) management. Please make sure that you include these cultural differences.
(2) What should Fortune, Erhi T, and the provincial government have done differently?
(3) What lessons did you learn from this case that you would apply to any transaction or situation that covers two or more cultures including mergers, acquisitions, J-Vs, takeovers, etc.?

ROARING DRAGON HOTEL

Stephen  Grainger wrote this  case  solely  to  provide  material  for  class  discussion.    The  author  does not  intend  to  illustrate  either
effective  or  ineffective  handling  of  a  managerial  situation.    The  author  may  have  disguised  certain  names  and  other  identifying
information to protect confidentiality.

Ivey Management Services prohibits any form of reproduction, storage or transmittal without its written permission.  Reproduction of
this material is not covered under authorization by any reproduction rights organization.  To order copies or request permission to
reproduce  materials,  contact  Ivey  Publishing,  Ivey  Management  Services,  c/o  Richard  Ivey  School  of  Business,  The  University  of
Western Ontario, London, Ontario, Canada, N6A 3K7; phone (519) 661-3208; fax (519) 661-3882; e-mail cases@ivey.uwo.ca.

BACKGROUND

The  Roaring  Dragon  Hotel  (RDH),  a state owned enterprise (SOE), was one  of  the  original  three-star
hotels in south-west China. Since the early 1950s it had enjoyed a long, colourful history and reputation as
the region’s premium guesthouse.

To  staff  the hotel,  employees  were  usually  transferred  in  from  other  SOEs and  government  departments
primarily on the strength of their guanxi or connections. Having secured employment, RDH employees felt
excited and very proud. Some recalled “if your relatives or your friends knew that you were working at the
Roaring Dragon, you would be admired.”

In  2000,  the  then-Chinese general manager  (GM) Tian  Wen’s  management  practices  were  from  the
planned  economy  era,  with  minimal  concern  for  the  development  or  expansion  of  the hotel’s  business.
Employees’ jobs  and  salaries  were  secure  and  their  working  conditions  and  benefits  much  better  when
compared to other jobs. The RMB 580 (US$75) per month paid to a barman or the RMB 1,500 (US$185)
per month paid to a manager, combined with the easy work, neat uniforms, complimentary meals, health
cover, accommodation and fringe benefits for employees made the hotel an attractive and respectable place
of  work. The  organizational  culture  was  relaxed  with  many  employees  managing  to  find  time  to  read
newspapers,  drink  tea  and  some  managers  even  conducting  private  business  and  leaving  the  premises
during working hours.

Although  the  market  economy  was  slowly  developing  in  the  region,  RDH  management  did  not  want  to
embrace new work practices nor was it concerned about the hotel’s decline in popularity and income. The
RDH’s  planned  economy  management  processes  were  not  changing  and  there  was  minimal  concern  for
generating profit or delivering quality standards of service.

The provincial government  was  concerned  that  the  potential  of  the hotel  was  not  being  realized  and
decided  in  2001  that  the RDH needed  modernization.  They  commenced  the  search  for  an  international
management  company  to  arrest  the  declining  fortunes  of  the  RDH  and  identified  the Hotel  International
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(HI)  as  an  organization  with  the  right  international  reputation,  credentials  and  brand  name  to  take  over
management of the RDH and help realize the hotel’s potential.

By  late 2001, after  considerable negotiations, it  was agreed in  principle that in  2002  HI  would take over
management  control  of  the RDH.  The  incumbent  GM, Wen, would  take  the  new  position  of  acting  as  a
conduit through which the HI communicated with the hotel’s board.

April 2002

Paul Fortune, the GM appointed by HI, arrived from England in April 2002 to commence the preparations
for the RDH to begin its transition from a Chinese-managed SOE to management by the HI.

Fortune  soon  realized  that  a  takeover  involved  massive  changes  in  the hotel’s  organizational  culture.
Entrenched guanxi practices, an ordinary quality of customer service and the occasional annual loss had to
be  converted  into  accountable,  quality  service  practices  provided  by  dynamic,  motivated  employees.
Fortune’s  team  would  need  to  identify  efficient  and  effective  employees  who  could  produce  the  HI
standard  of  excellence  at  the hotel.  He  also  realized  that  many  of  the  existing  staff,  who  had  been
employed for as long as 30 years, were limited in their work professionalism, efficiency or the ability to
communicate in English. The challenge was to transform a large group of relaxed family-based employees,
working  under  an  ad-hoc  management  style, into  a  professional  group  of  dynamic  employees  operating
within a structured international organizational culture.

With HI’s proposed arrival, the hotel’s Chinese board of management suddenly expanded from four to 20
members — with 11 new representatives from the co-owners of the RDH, local tobacco producers Erhi T.

The final contract signed between HI, Erhi T and the provincial government stipulated that HI would take
over the management of the hotel from August 1, 2002, but the RDH would not be re-named as a HI hotel
until such time as significant progress had been made towards improving the quality of service, as well as
construction  being  completed  on  a  proposed  new five-star  wing  to  replace  the  old  section  of  the hotel.
Once  the  quality  of  service  in  the  modern  extension  was  brought  up  to  HI’s  international  standard,  the
hotel would then be re-branded the Hotel International Roaring Dragon Hotel.

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It  was  proposed  that  by  November  2002,  the  old  section  of  the hotel  would  be  closed  and  stripped  for
demolition. All  that  would  remain open for  guests  was the  modern,  more expensive section of the hotel.
Left with a significantly smaller number of rooms to service, employees’ redundancies were imminent as
the 675 employees HI were inheriting were well in excess of the 350 employees they estimated would be
needed  to  service  the  reduced  number  of  rooms  at  capacity.  Whilst  many  of  the  existing  staff  would  be
made  redundant,  HI  planned  to  bring  in  eight  expatriate  professionals  to  manage  the  takeover  and  later,
when the time was right, expand their international management team to include pastry chefs, an executive
chef, food and beverage managers and a much stronger professional management team.

Fortune  felt  confident  that  within  two  years  his  team  would  be  able  to  bring  the  service  skills  and
professionalism  of  the  local  Chinese  employees  up  to  the  HI’s  world-class  standard.  With  this  goal  in
mind,  he  announced  that,  from  the  beginning  of  August 2002, a  two-month  training  period  for  all
employees  would  begin  in  search  for  employees  with  the  right  attitude  and  ability.  In  the  HI  human
resource  selection  process,  previously  valued guanxi networks  would  become  irrelevant  and  powerless.
Co-owners  Erhi  T  and  the provincial government  would  have  no  control  over  the  selection  process  and
Erhi  T  would  be  financing  employee  redundancies  or  re-employing  them  elsewhere.  Young  employees
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were  excited  by  the  prospect  of  working  in  an  international  hotel;  however, in  sharp  contrast,  older
employees were concerned with their job security.

Fortune  realized  that  the RDH’s  nepotistic  history  was  one  of  HI’s  obstacles  in  choosing  the  best
employees  to  remain  at  the hotel.  There  had  been  as  many  as  32 families  with  more  than  two  family
members  working  at  the hotel,  the  kitchen  had  more  than  70  chefs  and  departmental  workloads  were
unbalanced  with  young  employees  putting  in  long  hours  compared  to  those  working  behind  the  scenes.
Often  older,  more  experienced  employees  found  time  to  chat,  play  cards  and  read  newspapers  during
working hours. HI had to change some deeply entrenched non-productive work behaviours.

July

In late July, HI’s international management team arrived to join Fortune to takeover administration of the
front office, accounts, food and beverage, housekeeping and supply departments. Immediately they began
working with employees to assess their performance under strict, demanding conditions and to determine
who was adapting  well  to  the  new  regime.  Any  employee  who  failed  to  meet  the  new, higher  standards
would be asked to leave by the end of November.

Around  the  same  time,  a  significant  event  occurred  with  Nu  Fu  Travel,  an  agency  that  in  the  past  had
provided  many  accommodation  and  banquet  customers  to  the  RDH.  Nu  Fu’s  manager  rang  to  offer  the
hotel a Japanese tour group that required a small banquet at the hotel as part of their tour package. New HI
food  and beverage manager,  Mike  Thomason,  told  the  manager  that  their  package  deal  offer “was  too
cheap” and refused to accept, stating that he “wanted them to pay the full price.” Upon learning this, the
Chinese head  of food  and beverage, Cui Fang,  advised  him  that “if  he  refused  the  offer  he  would  be
effectively excluding HI from any future bookings from Nu Fu Travel.” Thomason refused to agree on the
cheaper  price  and  in  retaliation  Nu  Fu  cancelled  all  future  tours  booked  at  the hotel.  This  consequently
resulted in the loss of business for RDH at a crucial time of increased competition from rival hotels in the
region.

After  a  short  time  under  HI’s  management,  employees  realized  they  had  to  work  much  harder  and  staff
who had strong guanxi connections and did not like to work hard or who realized they were likely to be
laid off requested transfers out of the RDH.

While voluntarily redundancies were welcome, the down-side was the loss of critical industry contacts and
guanxi connections. One of the oldest members of the Chinese management team, Fang, decided to leave,
taking with her a large percentage of guaranteed income-generating contacts. After witnessing Thomason’s
style of management, she opted for a transfer to another government hotel. Whether HI was aware or not,
their number one guanxi holder was going to work for a rival competitor.

August

On August 1, 2002, each employee was issued a short-term contract guaranteeing their position for three
months,  out  of  which  two  months  would  be  concentrated  on  training  followed  by  a  month’s  probation
focused  on  their  ability,  attitude  and  approach  to  the  job.  All  managers  and  supervisors  now  worked  an
eight-hour  day  and  were  no  longer  able  to  conduct  private  business.  Employees  who  used  to  sit  around
smoking and reading the papers in May, were now busy all the time or, if lucky, might be relaxing out of
sight somewhere.
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September

For contracted employees with less than five years’ service, a voluntary redundancy package was drawn up
offering  them RMB 1,000  (US$125)  for  each  year  of  completed  service.  HI  saw  retrenching  younger
employees as an attractive option as the payout for those with only a few years service was significantly
less than the larger sums needed to pay-out long serving staff, some with more than 30 years service. HI re-confirmed  that  no  new  staff  would  be  hired  for  some  time. Seventeen  young  employees  accepted  the
redundancy package on offer.

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Although  the  RDH  was  now  under  HI  management,  it  remained  Chinese  in  many  aspects.  For  instance,
some old  practices  had  merely  gone underground.  Captains  still  hid in vacant guest rooms to watch TV,
sleep  or  play  cards — however, someone  was  now  on  watch  outside  the  door  at  all  times  as  immediate
dismissal faced those caught.

Several  more  managers  with  important guanxi retired  or  moved  on  as  news  spread  regarding  the hotel’s
forthcoming downsizing.  Members  of  Erhi  T  and  the provincial government  were  still  scrutinizing  HI’s
performance closely as the rumblings of discontent began to grow.

October

Five talented young staff members from the front office and food and beverage departments gave notice in
October that they were going to seek better opportunities elsewhere. Some had secured positions in other
Chinese hotels or at foreign-managed hotels where guanxi connections did not hold any advantage.

The new standard of work demanded by HI at the RDH meant that many older employees could not cope
with the faster and more demanding pace of the job. With no education and simple backgrounds, they had
difficulty relating to the concept of five-star service and working under non-Mandarin speaking managers.

As a result of HI’s new meal roster, employees now ate alone or with someone from another department.
The prevailing atmosphere in the cafeteria was glum and contrasted markedly with that of previous years
when  employees  enjoyed  staff  camaraderie  with  their  fellow  workers  over meal  breaks.  They  had  great
difficulty understanding why they now had to eat alone.

November

With a small number of staying guests and only two restaurants open, business was slow for the food and
beverage department. As expected, no further bookings for banquets or accommodation came from the Nu
Fu agency. With the  restaurant  in the old  section now  closed,  other  agents looked elsewhere  as the local
Chinese business clientele did not like the lack of privacy offered by the restaurants in the modern section
of the hotel. Business was very quiet and over eight days straight the HI  managers were the only people
who dined at the hotel’s Western restaurant.

Following the completion of the three-month training and assessment program, the scheduled redundancy
program began. The objective was to release about 60 workers per week from the beginning of November.
Fortune  said “it  would  be  done  as  quietly  as  possible  with  a  few  from  each  department  being  made
redundant each week.” On the first Monday in November, a group of workers was given their redundancy
payouts late in the afternoon. No prior warning was given to them as HI feared that any advanced notice
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would  result  in  damage  and  equipment  being  stolen  before  their  departure. Employees  made  redundant
were told to proceed directly to the payroll department to collect their pay out, hand in their uniform, leave
the building and not report for work again.

No official reason was offered as to why those employees were no longer required nor were they thanked
for their years of service. In the locker room where they handed in their uniform for the final time, many
voiced  their  complaints.  Several  senior  managers  commented  that “if  the  Chinese  managers  had  been  in
charge  of  the  redundancy  process,  they  would  have  handled  it  differently.” What  had  transpired  was  a
market-driven action by the HI and it contrasted markedly to the traditional Chinese way of dealing with
co-workers and minimizing the loss of face.

Each Monday that November, the redundancies continued. There were tears, sadness, surprise and anger at
the pay-out window. With the onset of the redundancy process and the change in organization culture, the
work atmosphere had become very uncertain. Employees had lost confidence in the hotel and some who
had  served  many  years  of  service  no  longer  feared  redundancy.  Upon  receiving  their  payout,  some
redundant staff commented that the RDH’s “once friendly and supportive atmosphere no longer existed.”
One manager observed that each employee now wore two faces, a fake smile for the HI  managers and a
worried frown in reality.

Occupancy levels continued to decline. On one night, there was only one paying customer staying in the
entire 200-room hotel. By late November, concern was growing that the hotel did not have sufficient funds
remaining to pay operating expenses, let alone wages. All advanced tour group bookings had expired and
no future bookings were confirmed. The tourism industry in the region had now had time to assess the HI’s
management  style  and  from  the  Chinese  perspective,  the  conclusions  drawn  did  not  augur  well  for  the
future.

By the end of November, many of the hotel’s young workers had been made redundant whilst older staff
remained. Fortune admitted that each day was a struggle but progress was being made.

In late November, Fortune expected to take to the board the final list of employees to be made redundant
— they  were  a  group  of 30 well-connected,  older  staff  who  did  not  fit  the  HI  mould  but  who  had  the
connections  with the  Chinese board  to  protect their positions.  Fortune  admitted that  he  was “prepared to
make a few changes to his list but did not want to end up with a bunch of useless staff.”

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The  RDH  continued  to  have  a  very  low  occupancy  rate  and  was  losing  money.  HI  had  an accounting
manager,  a marketing manager,  a house keeping manager,  two food  and beverage managers  and  a
reception manager  working  full  time  at  the hotel  being  paid  at  international  rates  and  making  co-owner
Erhi T unhappy to “pay those foreigners working in our empty hotel.” The original objectives of improving
the quality of service and occupancy at the RDH were fading and the disgruntled voices among the hotel’s
board members were growing louder.

The small cash reserve, which had been accumulated by the RDH over the last decade, was rapidly being
used up and rumours began to circulate that for the next pay period, the hotel would not have the money to
pay employees’ wages.

Although some remaining employees were told their jobs were secure, there was still an air of depression
in the work place. RDH occupancy was now averaging just six per cent whilst other competing hotels in
the vicinity were enjoying 20 per cent occupancy rates.

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December

The hotel’s reserve fund was now exhausted and there was insufficient money left for payroll without extra
funding injections by Erhi T. HI’s front office and food and beverage managers tried to collect their wages
at  the  end  of  the  month  and  were  told  that  there  were  no  funds  left  to  pay  them.  It  was  then  the board
realized  that  to  complete  all  of  the  transition  plans,  Erhi  T  would  be  asked  to  spend  over  one  hundred
million Yuan. This was to finance the construction of a new five-star wing, fund the wages of more than
350 employees, pay the redundancies of more than 200 employees and cover the salaries and expenses of
nine expatriate HI managers at a crucial time when income generation at the hotel was very low. Erhi T did
not like being saddled with those large and unwanted expenses. A flood of unpaid suppliers was also at the
hotel’s door pleading to be paid for its goods and services. On December 16, Erhi T injected half-a-million
Yuan into the RDH account and it was spent within a week to cover operating expenses, accounts payable
and basic four-star hotel requirements such as air conditioning and power. Two of the three passenger lifts
in the hotel were taken out of use and the air conditioning was now turned off in the evenings.

Development projects planned by HI were now stalled as the flow of money from Erhi T had again dried
up.  New  computers  were  installed  but  not  paid  for.  There  was  fear  that  employees  would  not  get  their
December  wages  and  rumours  were  rife  that  employees  may  have  to  take  a  pay  cut.  Workloads  had
increased  with  one  employee  now  doing  the  work  of  three  employed  under  the  former  Chinese
organizational structure.

In late December, Erhi T’s directors and provincial government officials held a critical meeting to discuss
the future. By originally inviting the HI to manage the RDH, the provincial government felt that they had
made the right decision and expected to see improvements in the number of customers coming through the
door  much  sooner.  Some  expected  the hotel  to  be  full  of  guests  and  after  five  months  of  observation  of
HI’s style of management and the developing financial crisis, both Erhi T and the provincial government
wanted to end their association with HI.

Before leaving for Christmas in Europe, Fortune met with the chairman of the Erhi T board to arrange for
more  funds  to  be  released  to  finance  RDH  improvements  planned  for  2003  and  beyond.  In  pursuing  his
original mandate, Fortune had embarked on a costly long term program to develop the RDH into a quality
five-star  hotel.  In  contrast,  Erhi  T  had  expected  the hotel  to  be self-funding  much  sooner.  They  did  not
expect to face the prospect  of  providing such  a  large amount  of extra funds to maintain  basic operations
and had become reluctant to continue injecting more money into the hotel’s operations.

The provincial government and the Erhi T-dominated board waited for Fortune to leave for the Christmas
holidays in Europe before ordering the immediate halt to the planned redundancies for the final 30 long-term employees.

2003

In  mid-January, HI’s board  of directors  in  Europe  received  official  notification  from  the  local  Chinese
provincial government of its intention to terminate the contract. Fortune remained at the RDH to finalize
the  termination  contract  and  to  recover  HI’s  outstanding  debt  as  both  parties  worked  towards  a
“Termination  of  the  Management  Agreement”  to  be  signed  on  the  last  Friday  in  March.  Aside  from
Fortune, all of HI’s expatriate management had left the RDH.

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Following the departure of HI and the reinstatement of the former GM Tian Wen, there was an immediate
improvement  in  the hotel’s  occupancy  levels.  By  the  beginning  of  June, 60  of  the  employees  made
redundant had been re-employed. It seemed as if the RDH had avoided the forces of change but how much
longer could it avoid the growing market forces?
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