Centralized or decentralized?
11 April 2023
A long time ago, the general manager managed the hotel with little interference from a far-away headquarters. As the industry and the mega-brands started to expand, top management felt they needed to save on costs and started to centralize more and more functions to the corporate headquarters. Today, no one questions this model. Even management in independent hotel groups is tempted to go for a more centralized business management model than preserving a decentralized one.
Both organizational models have pros and cons, so a combination is best for independent hotel groups. Let's examine the pluses and minuses of each model from how a few different perspectives impact the growth of total top-line revenue for a company operating twenty independent hotels.
Management and decision-making
Centralized and decentralized organizations have different structures and approaches to decision-making and management.
Decision-making
Centralized: In a centralized organization, decision-making is concentrated at the top management or headquarters. The senior executives make significant decisions, create policies, and develop strategies for the entire company. This allows for consistency and uniformity across all hotels but may limit the adaptability of individual hotels to specific local conditions.
Decentralized: In a decentralized organization, decision-making authority is delegated to local managers or individual hotel units. This empowers hotel managers to decide based on their unique circumstances, needs, and market conditions. This can lead to greater flexibility, adaptability, and responsiveness to customer needs but may also result in inconsistencies across all hotels.
Communication
Centralized: In a centralized organization, communication flows primarily from the top down, with directives and information from headquarters to individual hotels. This ensures that all hotels adhere to the company’s overall goals and strategies but may slow communication and limit the flow of ideas from local hotels to the top management.
Decentralized: In a decentralized organization, communication flows more freely between individual hotels and central management, allowing for more collaboration, innovation, and idea sharing. This can lead to more dynamic decision-making but may also create challenges in coordinating efforts across the organization.
Autonomy and innovation
Centralized: A centralized organization generally has less autonomy for individual hotels, as decisions are made at the top level. This can limit innovation and the ability to adapt to local market conditions but ensures that all hotels follow the company’s overall strategic direction.
Decentralized: Decentralized organizations foster greater autonomy and innovation at the individual hotel level. Hotels can adapt more quickly to local market conditions and customer needs, which may result in divergent strategies and practices across the company.
Ultimately, the choice between a centralized and decentralized organization depends on the company’s objectives, the importance of standardization and consistency across hotels, and the need for local adaptation and flexibility. Both organizational structures have advantages and drawbacks, and the optimal choice will depend on the specific context and goals of the company.
Positive and negative impacts
Both centralized and decentralized organizational structures positively and negatively impact top-line management. Let’s explore some of these impacts:
Centralized Organization - positive impacts
Consistency: A centralized organization enforces standardized practices across all hotels, which can lead to a consistent brand image and customer experience. This can enhance customer loyalty and attract new customers, ultimately boosting revenue.
Economies of scale: Centralized decision-making and resource allocation can lead to cost savings through economies of scale. This can include shared roles in marketing, sales, and revenue management, standardized marketing campaigns, and better negotiating power with suppliers, improving the company’s financial performance.
Strategic alignment: A centralized organization ensures that all hotels follow the company’s overarching strategy and goals, which can help optimize revenue generation and resource allocation.
Centralized Organization - negative impacts
Limited adaptability: Centralized decision-making can limit the ability of individual hotels to adapt to local market conditions and customer preferences, potentially affecting revenue generation in specific locations. It is very difficult for marketing, sales, and revenue management in a headquarter far from the local market to fully understand the local context.
Slower decision-making: The top-down decision-making process can be slow and less responsive to market changes, hindering the company’s ability to seize opportunities and drive revenue growth.
Reduced innovation: Centralized control may stifle creativity and innovation at the local level, as individual hotels have less autonomy to experiment with new ideas and strategies that could boost revenue.
Decentralized Organization - positive impacts
Adaptability: A decentralized organization allows individual hotels to adapt more quickly to local market conditions and customer preferences, potentially leading to higher revenue generation in diverse locations.
Faster decision-making: Decentralized decision-making can be more responsive to market changes and customer needs, enabling the company to seize opportunities and drive revenue growth more effectively.
Increased innovation: A decentralized structure encourages local innovation and experimentation, which can lead to new revenue-generating ideas, products, or services that cater to specific market segments or locations.
Decentralized Organization - negative impacts
Inconsistency: Decentralized decision-making can lead to inconsistencies in brand image, customer experience, and service quality across different hotels, potentially affecting customer loyalty and revenue generation.
Potential inefficiencies: Decentralized decision-making can lead to inefficiencies and increased costs, as individual hotels may not benefit from the economies of scale and bargaining power that centralized organizations enjoy.
Coordination challenges: Decentralized organizations can face challenges coordinating efforts across multiple hotels, which may result in missed opportunities or suboptimal strategies for driving top-line growth.
Both structures have their advantages and drawbacks, and it’s crucial for the company to carefully assess which approach best supports its revenue growth objectives.
Central or local revenue managers
Let’s dig deeper and explore the perspectives of a centralized revenue manager managing three hotels in different destinations versus a local (decentralized) revenue manager managing one hotel.
Positive aspects of a centralized revenue manager
Broader perspective: A centralized revenue manager can take a holistic view of the company’s overall revenue strategy and performance across the three hotels. This enables them to identify trends and make informed decisions that benefit the portfolio.
Standardization: The centralized revenue manager can enforce consistent pricing, promotional, and distribution strategies across all three hotels, ensuring a coherent brand image and customer experience.
Resource sharing: By managing multiple properties, the centralized revenue manager can allocate resources more efficiently and achieve economies of scale in technology and distribution.
Challenges when the revenue manager sits centrally
Limited local knowledge: The centralized revenue manager might lack a detailed understanding of the specific market conditions, customer preferences, and competition in each destination, which could impact their ability to optimize revenue for each hotel.
Balancing priorities: The centralized revenue manager must balance each hotel's revenue goals and strategies, which may sometimes require making trade-offs or prioritizing one property over another.
Coordination: Ensuring effective communication and coordination between the three hotels and the central management team can be challenging, particularly when implementing revenue strategies or addressing issues that affect multiple properties.
Positive aspects of a local revenue manager
Local expertise: The regional revenue manager possesses a deep understanding of the specific market conditions, customer preferences, and competition in their destination, which allows them to develop tailored revenue strategies and make more informed decisions.
Agility: The local revenue manager can respond more quickly to changes in market conditions, such as adjusting prices or launching promotions, which can help optimize revenue in real-time.
Autonomy: The decentralized revenue manager can experiment with new ideas and strategies that cater to their specific market, potentially discovering innovative ways to drive revenue growth.
Challenges when the revenue manager is on-site
Limited resources: The local revenue manager may have fewer resources at their disposal compared to a centralized revenue manager overseeing multiple hotels, which could impact their ability to invest in marketing, technology, or other revenue-generating initiatives.
Inconsistency: The local revenue manager’s strategies might not align with those of other hotels in the company, potentially leading to inconsistencies in brand image, customer experience, and overall company performance.
Lack of economies of scale: The local revenue manager may not benefit from the economies of scale and bargaining power available to centralized revenue managers, which could result in higher costs or less effective strategies.
A centralized revenue manager can achieve standardization and economies of scale across multiple properties but may need help addressing local market nuances. In contrast, a local revenue manager can leverage their in-depth market knowledge and agility to optimize revenue but may require more resources and potential inconsistencies with the broader company strategy.
The best of both worlds
To minimize the negative impacts and maximize the potential benefits of centralized and decentralized organizations, companies can take a hybrid approach, blending the advantages of both structures. This involves identifying the tasks and jobs better suited for centralization or decentralization and finding the right balance between the two. Here are some measures that can be taken.
- Establish clear goals and objectives: Define the company’s overall goals and objectives, and align centralized and decentralized functions to support these goals. This will help ensure that all levels of the organization work together towards the same targets and maintain a cohesive strategy.
- Leverage core competencies: Identify core competencies and areas of expertise within the organization. Centralize functions that benefit from economies of scale, standardization, and strategic alignments, such as technology, distribution, loyalty programs, travel trade sales, and marketing. Decentralize functions that require local knowledge, adaptability, and customization, such as analyzing demand from destination events, local sales and marketing, and operations of restaurants and other facilities attracting a local audience.
- Foster communication and collaboration: Encourage open communication and cooperation between centralized and decentralized teams. This can be achieved through regular meetings, progress updates, and knowledge-sharing platforms. This will help bridge gaps between the two structures, facilitate coordination, and promote sharing of best practices and innovative ideas.
- Implement a clear decision-making framework: Establish a clear decision-making framework defining centralized and decentralized teams' roles, responsibilities, and authority levels. This will help avoid confusion and duplication of efforts and ensure that decisions are made by the most suitable people within the organization.
- Monitor and evaluate performance: Regularly monitor and assess the performance of centralized and decentralized functions. Use key performance indicators (KPIs) to measure their effectiveness in achieving the organization’s goals. This can help identify areas for improvement and optimize the balance between centralization and decentralization.
- Adapt and adjust as needed: Continuously assess the effectiveness of the hybrid organizational structure and be prepared to adapt and adjust as needed. For example, market conditions, customer preferences, and internal factors may change over time, requiring adjustments to the balance between centralized and decentralized functions.
- Invest in training and development: Provide training and development opportunities for employees at all levels of the organization. This will help enhance their skills and enable them to perform effectively in centralized and decentralized roles.
- Empower local teams: While maintaining strategic alignment, give local teams some autonomy to make decisions and implement strategies that cater to their specific market conditions and customer needs. This can help harness the benefits of decentralization while maintaining the overall coherence of the organization.
By taking these measures, companies can create a balanced, hybrid organizational structure that minimizes the negative impacts of centralized and decentralized organizations and maximizes the potential benefits. In addition, this approach enables companies to be more adaptable, efficient, and responsive to market dynamics while maintaining a consistent brand image and strategic alignment.
Build a solid framework
Finding the right balance between centralization and decentralization is essential to maximize an organization’s profitability and long-term success. This balance depends on the specific company, its goals, and the industry in which it operates. In this example, the company operates unique hotels in many different destinations. Therefore, a decentralized organization would be the best fit being more agile, adaptable, and responsive to local market conditions and customer preferences. This flexibility can lead to higher profitability since customization, innovation, and rapid decision-making are critical to success. However, combining the advantages of centralized and decentralized structures, a hybrid approach can often be the most effective way to achieve optimal outcomes. Start by developing a framework for a decentralized organization with the ambition of growing revenue from all revenue sources and maximizing profits for each hotel. Here are a few aspects to consider for the framework.
- Define the overall objectives and goals: Establish the company’s overall goals and objectives, focusing on revenue growth and profitability for each hotel. Make sure these objectives are communicated to all hotel managers and staff.
- Empower local management: Give each hotel manager the autonomy and authority to make decisions related to pricing, marketing, promotions, and guest experience. Encourage local managers to develop strategies tailored to their specific market conditions, customer preferences, and competition.
- Implement local revenue management systems: Provide each hotel access to a revenue management system that allows them to track demand, monitor performance, and optimize pricing and inventory based on local market dynamics.
- Establish a robust reporting and analytics system: Implement a reporting and analytics system that collects and consolidates data from each hotel to enable performance tracking, benchmarking, and the identification of best practices.
- Foster collaboration and knowledge sharing: Encourage hotel managers and staff to share best practices, experiences, and successful strategies with one another. This can be done through regular meetings, workshops, online platforms, or company-wide communication channels.
- Maintain strong brand identity and centralized marketing support: Ensure each hotel adheres to the company’s overall brand identity, positioning, and marketing strategy. In addition, provide centralized marketing support to help hotels create effective marketing campaigns tailored to their local markets.
- Develop a centralized loyalty program: Implement a company-wide loyalty program that incentivizes guests to stay at any of the company’s hotels, fostering customer loyalty and driving repeat business.
- Offer training and development opportunities: Invest in the professional development of hotel managers and staff, equipping them with the skills and knowledge necessary to manage revenue effectively and make informed decisions that support the company’s objectives.
- Monitor performance and adjust strategies as needed: Regularly evaluate the performance of each hotel against the company’s overall objectives and goals. Use this information to adapt local strategy, identify opportunities for improvement, and optimize resource allocation.
- Encourage innovation and experimentation: Foster a culture that empowers hotel managers and staff to explore new ideas and strategies that may drive revenue growth and enhance guest satisfaction.
By implementing a solid framework, the hotel company can create a decentralized organizational structure that enables each hotel to make better decisions tailored to its local market while still benefiting from the support and resources of the larger organization. This can lead to higher revenue and profitability for each hotel, ultimately contributing to the company’s overall success.
Clarify central and local roles
In a hybrid organizational structure, a centralized organization can provide strategic direction and support, while local hotels can focus on implementing tailored strategies to grow revenue and maximize profitability. Here’s a list of responsibilities and tasks for both centralized and local teams:
Centralized organization responsibilities and tasks
- Strategic direction: Define the company’s overall goals, objectives, and strategic direction, focusing on revenue growth and profitability.
- Branding: Establish and maintain a strong brand identity and ensure that all hotels adhere to brand standards.
- Centralized marketing support: Develop and manage centralized marketing campaigns and provide marketing support to local hotels, helping them create tailored marketing initiatives for their specific markets.
- Centralized procurement and resource allocation: Coordinate procurement, contracts, and resource allocation across all hotels to achieve economies of scale and cost savings.
- Technology and systems: Implement and maintain centralized technology systems, such as reservation systems, revenue management systems, customer relationship management (CRM) systems, and reporting systems.
- Centralized loyalty program: Develop and manage a company-wide loyalty program that incentivizes guests to stay at any hotel.
- Training and development: Provide hotel managers and staff with opportunities to enhance their skills and knowledge.
- Performance monitoring and benchmarking: Monitor and evaluate the performance of each hotel and identify opportunities for improvement and resource optimization.
- Compliance and risk management: Ensure compliance with legal, financial, and regulatory requirements and manage potential risks.
Local hotel responsibilities and tasks
- Local revenue management: Develop and implement pricing, promotion, and inventory management strategies tailored to local market conditions, customer preferences, and competition.
- Local marketing initiatives: Develop and execute localized marketing campaigns, leveraging the support and resources provided by the centralized marketing team.
- Guest experience management: Enhance guest satisfaction and loyalty by offering personalized services and unique experiences and addressing guest feedback.
- Operational efficiency: Optimize operational processes, such as housekeeping, food and beverage, and maintenance, to maximize profitability.
- Local partnerships and alliances: Establish partnerships with local businesses, attractions, and event organizers to create additional revenue opportunities and enhance the guest experience.
- Local market intelligence: Monitor local market trends, competition, and customer preferences to identify new opportunities and adjust strategies accordingly.
- Staff management: Recruit, train, and manage hotel staff to ensure the delivery of high-quality service and guest satisfaction.
- Financial management: Manage hotel budgets, costs, and financial performance to maximize profitability.
Ideal support from a centralized team
Local hotels need the following support from a centralized team to maximize their revenue and profitability.
- Access to centralized marketing resources and expertise to help them develop and execute effective marketing campaigns.
- Access to centralized technology systems, such as reservation, revenue management, and CRM systems, enables them to efficiently manage their operations and make data-driven decisions.
- Consistent brand guidelines and support to ensure that their offerings and customer experiences align with the company’s overall brand identity.
- Training and development resources to enhance their staff’s skills and knowledge in revenue management, customer service, and other critical areas.
- Regular performance monitoring and benchmarking help them identify improvement areas and optimize their strategies and resource allocation.
- Support with compliance and risk management to ensure that they meet legal, financial, and regulatory requirements and minimize potential risks.
A centralized team can help local hotels implement tailored strategies to grow revenue and maximize profitability while maintaining a consistent brand identity and customer experience by providing this ideal support.
Conclusions and final thoughts
There are many aspects to consider when setting up the ideal organization for a hotel company. All of the items to consider listed above are relatively straightforward. However, there are hidden challenges in some of the things. One assumption is that the hotel company can find people with the proper knowledge and skills to fill the different centralized and local roles. Another hypothesis is that the hotel company can find the optimal technology that will be the oil in the machinery to make the hybrid solution work.
With over 30 years of experience in different types of hotel companies, I have concluded that hotel companies need flexible technology that can accommodate the needs of a centralized, decentralized, or hybrid organization. Therefore, when we built the foundation for Demand Calendar, we specifically added flexibility in how hotel companies can use the system regardless of which organizational model they have adopted. In Demand Calendar, all team members, central and local, have access to the same information to enable deep collaboration to grow revenue and maximize profits.