1. Choice Hotels update 1995: Landry refocuses Choice’s strategy: 1995: Landry refocuses Choice’s strategy: –New mission "to be the market leader serving those who serve travelers“: new relationships with travel agents and other travel industry businesses –Restaurant chains into Choice hotels –Friendship phased out; focus on brands and differentiation Innovations (among many others) Innovations (among many others) –1995: first major chain to go on www; –1996: first to introduce geo-coding (find hotels close to points of interest) Acquisitions/brands: 1996 Mainstay (extended-stay), 2005 Cambia Suites (upscale, all-suites), 2005 acquires Suburban Extended- Stay Hotel chain Acquisitions/brands: 1996 Mainstay (extended-stay), 2005 Cambia Suites (upscale, all-suites), 2005 acquires Suburban Extended- Stay Hotel chain

2. Choice Hotels takeaways: Economies of scope What determines firms’ choice of horizontal (products) and vertical (value chain) scope? What determines firms’ choice of horizontal (products) and vertical (value chain) scope? There are many bad reasons to diversify, acquire other firms etc. There are many bad reasons to diversify, acquire other firms etc. –Next week! Main good reason to look for: economies of scope (“synergies”) Main good reason to look for: economies of scope (“synergies”)

3. Sources of economies of scope On cost side: doing A and B together is less costly than doing them separately On cost side: doing A and B together is less costly than doing them separately –Use of common resources, e.g. reservation system –Umbrella branding On benefit side: doing A and B together creates greater benefit for customers (=more business) than doing them separately On benefit side: doing A and B together creates greater benefit for customers (=more business) than doing them separately –Convenient of choice and cross-selling –Lower search/transaction costs for buyers by bringing in partners

4. Most economies of scope can be quantified! In this case, enough detailed info to put a number on almost every source of economies of scope In this case, enough detailed info to put a number on almost every source of economies of scope Numbers are important because changes in strategy (e.g. marketing) often affect ability to benefit from economies of scope Numbers are important because changes in strategy (e.g. marketing) often affect ability to benefit from economies of scope

5. Scope and brand management/competitive environment Here, tension between product differentiation (segmentation) and ability to benefit from cross-selling economies Here, tension between product differentiation (segmentation) and ability to benefit from cross-selling economies Tension compounded by conflict of interest between Choice Hotels and franchisees (agency problem) Tension compounded by conflict of interest between Choice Hotels and franchisees (agency problem)

6. Economies of scope and integration The deeper question: when do synergies really require integration? The deeper question: when do synergies really require integration? If synergies can be realized by contract, that’s usually easier If synergies can be realized by contract, that’s usually easier Integration becomes necessary when contracts are difficult to write/enforce Integration becomes necessary when contracts are difficult to write/enforce –More next week!