Playa Dorada Tennis Club: Expansion Strategy - Case Study Example

?The Executive Summary Dear Board, After detailed evaluation and analysis of current situation with PD tennis courts and growing opportunities in this part of business, it had been decided not to recommend expansion strategy through adding of the new tennis courts. This approach would not be commercially feasible, it would only incur high fixed costs and new challenges for the organization. This option is not strategically viable and is not possible to use for developing a methodology that could be applied to the capacity planning decisions facing all PD operating managers. Before considering expansion strategy it is necessary to make sure that the PD business is utilizing the assets capacity it currently owns. It is recommended to focus on the maximization of capacity utilization rates of the current tennis court facilities by undertaking of several major steps to make existing 23 tennis courts fully used during the whole year. These steps include: increase of the total hours available to play by setting up a tent over the court to cover it from bad weather and to install conditioning systems inside; by adding high power lights to a number of courts; by rearranging the maintenance service on the 18 clay courts either late at night, or at 6 am; by upgrading and transforming 4 hard-surface old courts for children into 8. In order to popularize tennis courts for children, marketing and sales department would need to focus their marketing strategy on promotion of family packages including options for both parents and children. This approach might help to strengthen the overall image of the PD resorts and attract new customers. This overall approach requires low investment base and is easy to manage, as it has been requested by the Resort operation division. Maximization of tennis court capacity utilization will enable PD to make resort operations profitable, and generate more cash flow & increase ROI. Expansion strategy of the PD tennis courts might be reviewed again after the capacity of existing 23 courts will be utilized at least for 85%. For now, the strategy should be focused on the improvement of operational activities of the tennis courts. A SWOT Analysis Below is provided a summary of the firm’s major strengths and weaknesses and the most important external opportunities and threats. Strengths Attractiveness of the PD Resorts among many tourists due to its favorable location and hot climate conditions in winter season; High capacity (340 3-bedroom, 180 3-bedroom, and 72 4-bedroom villas – fully occupied – 3000 guests); Real Estate revenue source from the sale and resale of villas; Value added service of housekeeping and maintenance for homes; Recreational and entertainment assets: a 127-unit oceanfront hotel; an Olympic-size swimming pool; an 18-hole golf course; a marina with 112 boat slips; 23 tennis courts; and several food and beverage facilities; Diversified mix of activities – the key driver for attracting primary and secondary visits to the PD Resorts; Positive tennis image of the PD Resorts due to its effective marketing promotion through the national media Weaknesses Inadequate tennis facilities; Limited space for building additional courts at the existing south-side location; Increased/Additional costs due to the necessity of building a new site within resort and duplicating facilities and service staff Interconnection and dependence of different revenue sources (tennis, hotel and villa rentals and buyers); Unprofitable PD Tennis operations as a result of low capacity levels Opportunities The highest popularity of Florida resorts comparing to any region in the US Growing popularity and demand for resorts and tennis courts Growing capacity utilization of the courts (from 18,4% to 34,8%) Tendency of increasing number of court hours per guest night A growing concern among guest about the unavailability of the tennis courts during the prime playing hours of 9 to 11 a.m. and 4 to 6 p.m; Shift the demand from peak to off-peak periods through special pricing schemes, promotions, and complementary services. Threats Oppressive heat combined high humidity in summer; Seasonality of demand for resorts and for tennis courts Analysis and Overview of Strategic Altenratives Overview of the SWOT analysis of the PD Resorts, particularly PD Tennis courts, highlights critical necessity of the organization to introduce some strategic changes and adjustments in order to transform its current weaknesses into strengths, and to gain more from potential opportunities and mitigate potential risks. There can be reviewed two main strategic options related to the PD Tennis courts expansion: 1. To expand PD Tennis courts by building new additional courts and thus to incur high fixed cost of building the courts + rent of the land 2. To develop a strategy focused on the maximization of capacity utilization rates of the current tennis court facilities. The first option to build new additional courts doesn’t seem to be feasible based on the set of various criteria: Building of new additional courts is accompanied with high fixed costs and time required for building and equipping the courts There is no room for the additional courts, and therefore the land should be taken for rent, which also implies additional costs; Operating of these additional courts will increase tremendously supervisory, clerical, labor, utilities, repair and maintenance costs; Seasonality of the demand for tennis courts will be reflected in the new courts as well, keeping high utilization capacity rates only during peak season and making the other months unprofitable. In order to achieve profitability of the tennis courts the prices during the high peak season should be increased tremendously in order to cover forfeit during low season periods. This pricing strategy would not be commercially viable. This option is not strategically viable and is not possible to use for developing a methodology that could be applied to the capacity planning decisions facing all PD operating managers. The second strategic option of focusing on the maximization of capacity utilization rates of the current tennis court facilities is considered to be the most healthy and feasible strategy. However, it requires undertaking of several major steps to make existing 23 tennis courts fully used during the whole year. Before providing any recommendations it is necessary to review the forecast of tennis courts capacity for the period of 2007 – 2008. The table below provides a calculation of forecast of total court hours used derived from the forecast of guest nights and conversion ratio of court hours used per guest nights. Also, here is calculated the forecast of capacity utilization rate based on the forecast for 2007. (1) 2007 (2) Guest Nights (3) Court Hours Used/Guest Nights (4) Forecast of Total Court Hours Used (5) Total Court Hours available (6) Maximum Capacity of all 23 tennis courts (7) Utilization rate (all courts and forecast of tennis courts for 2007) Feb 59 950 0,04 2398 225 5175 46% Mar 83 887 0,056 4697,672 290 6670 70% Apr 86 475 0,056 4842,6 319 7337 66% May 34 514 0,057 1967,298 255 5865 34% Jun 36 221 0,064 2318,144 255 5865 40% Jul 27 180 0,063 1712,34 255 5865 29% Aug 18 509 0,088 1628,792 255 5865 28% Sep 16 293 0,046 749,478 224 5152 15% Oct 30 330 0,039 1182,87 290 6670 18% Nov 57 741 0,068 3926,388 243 5589 70% Dec 66 462 0,082 5449,884 252 5796 94% Jan’8 53 992 0,084 4535,328 252 5796 78% Calculation details: Column 1: Monthly breakdown of 2007 year Column 2: Projected Guest nights at the PD Beach & Resort 2007-2008 (derived from the Exhibit 5 of the Case study); Column 3: Court Hours Used/Guest nights for 15 month ending January 2007 (Used as a historical conversion rate: proportion of how many guests of the resort do use tennis courts); Column 4: Forecast of the Total Court Hours used (Column 2 * Column 3). Forecast for 2007 of the total number of guest visits multiplied by conversion rate of those who will use tennis courts gives an insight of the future forecast of tennis courts usage for the period Feb 2007- Jan 2008; Column 5: Total Court Hours available for play per courts (Exhibit 2); Column 6: Maximum Capacity of all 23 courts (Column 5 * 23); Column 7: Forecast of the Total Court Hours used (Column 4) divided by Maximum Capacity of all 23 courts (Column 6) It is possible to note that even with a consideration of significant increase of tourists willing to play tennis at PD Beach & Resort, it is possible to note that the utilization rate is comparatively low during the year, except the peak seasons from November to April. It means, that the business fails to use its assets effectively and it results in low capacity rate and therefore, in low revenues and high fixed costs. Note: Maximum capacity of all 23 tennis courts is based on the current operating hours of the tennis club. This fact illustrates that building new additional courts would even more negatively impact the business at least from the financial side. While this calculation is very mechanical, it provides an insight that the management should focus on developing a strategy which would enable to maximize utilization capacity rates during the low seasons and to avoid bottle necks during the peak seasons by introducing some changes in operational, positioning and marketing strategies. The recommendations for adopting these changes are differentiated by categories and summarized below. Increase of the total hours available to play First of all it is necessary to maximize the total number of days available for tennis play. At the moment, the total number of days missed because of the bad weather during a year is 29 days, which is practically 1 month. Thus, high midday temperature and humidity automatically reduces desired daily capacity on average by 20%. In financial terms this month could bring significant revenue if the problem with bad weather could be solved. In order to overcome this challenge it is necessary to upgrade several of the tennis courts (start with those 8 upgraded in 1999) by setting up a tent over the court to cover it from bad weather and to install conditioning systems inside. Tent will be a fixed cost which will serve as a long-term investment, while the conditioning system will be variable cost depending on the weather and demand. In addition to upgrading several of the courts and making it appropriate for tennis play during a hot weather, it is necessary to increase number of daily hours by adding high power lights to a number of courts. Due to this investment, it will be possible to extend dramatically the utilized space available. Adding 2 additional hours per day during January, February, November and October will increase maximum utilization capacity and allow to service greater amount of clients. Opening hours for tennis play could also be reduced if the maintenance service on the 18 clay courts was made not every morning at 7-8 am, but either late at night, or at 6 am. Thus, this would add 1 additional hour every morning for “early bird” clients. Besides the efforts of increasing the working hours, it is necessary also to analyze in more details target audience of the PD tennis club. If the statistics says that in average visitors are 2,1 adults and 1,7 children of age 5-10 years old, it is logical to assume that children are also target audience for our tennis club. The category of children aged between 5-10 years old do not need the same large tennis courts as the adults do. One adult tennis court can be transformed into two tennis courts for children. Taking into consideration preference of adults to use clay courts, 4 hard-surface old courts could be upgraded and transformed into 8.While the capacity would be increased hugely, the fixed costs of operating the courts will stay practically the same. In order to popularize tennis courts for children, marketing and sales department would need to focus their marketing strategy on promotion of family packages including options for both parents and children. This approach might help to strengthen the overall image of the PD resorts and attract new customers. This approach requires low investment base and is easy to manage, as it has been requested by the Resort operation division. Maximization of tennis court capacity utilization will enable PD to make resort operations profitable, and generate more cash flow & increase ROI. Works Cited: David, Fred R. Strategic Management Concepts and Cases : A Competitive Advantage Approach. 14th ed. Harlow: Pearson, 2013. Print. Read More