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Framework - should build hotel or not?

MECE Structure
New answer on Jan 21, 2020
4 Answers
1.4 k Views
Anonymous A asked on Jan 21, 2020

Hello, I have a question regarding a simple case question: should client build a hotel or

not? (Payback period < 5 years)

My initial structure was:

1. Analysis on the hotel (business model; synergy & cannibalization / contraints)

2. Financial assessment (profit - reve & cost / payback period)

3. Risk & next step

My case partner thinks the structure is not MECE. How could the structure be more

"MECE" in this case? My confusion part is, I will need to estimate profit and calculate

the payback period. It's very hard to be MECE and include these calculations in the

structure in a MECE way. Is it possible to state my structure as "steps" instead of

topics to analyze instead?

Lastly, should I keep the risk & next step part in my structure?

Thanks in advance!

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Best answer
Sidi
Expert
replied on Jan 21, 2020
McKinsey Senior EM & BCG Consultant | Interviewer at McK & BCG for 7 years | Coached 350+ candidates secure MBB offers

Hi,

this type of case question has been asked many times on the Q&A, and again - this is a typical strategic decision - you can easily translate it to a number of different contexts, but the principles upon which you base your approach should always remain the same!

1. Core Question: "Should the client invest into building the hotel?"

2. Identify criterion to make this decision: If income ("value") is the objective (to be verified in clarifying questions), then the additional value we can create over the client's investment horizon has to be significantly higher than the investment cost. Moreover, the risks need to be manageable.

3. Compile base information: costs of building the hotel / yearly operating cost of the hotel if built / yearly income (revenue) from the hotel / potential adjacent income streams / investment horizon of client

4. Deep dive into the value bucket by means of a profitability tree: what are the levers of value here? Compare Scenario A (building the hotel) to Scenario B (not building the hotel and investing into best alternative) in terms of profit

5. Calculate annual value (delta between Scenario A and B). If building the hotel indeed gives you higher expected income, then divide the initial investment cost by this additional yearly income. This gives you the break even point (point in time after which the investment becomes profitable). If this point comes earlier than the investment horizon, then this is a beneficial investment and the client should proceed with the purchase (purely based on financials).

6. Don't forget to compile potential risks and mention them in your summary

Cheers, Sidi

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Luca
Expert
Content Creator
replied on Jan 21, 2020
BCG |NASA | SDA Bocconi & Cattolica partner | GMAT expert 780/800 score | 200+ students coached

Hello,

FIrst of all I would ask the following questions:

  • here is the hotel?
  • What kind of hotel are we building? What it the targeted customer base?
  • What is the investment required? Are we gonna borrow some money?
  • How much time is required to build the hotel?

Then I would write down a structure like this:

  1. Quick market overview (just to estimate your average occupancy)
  2. Revenues estimation = # rooms * average bill. Ask for any other additional source of revenues (e.g. Beauty center, restaurant, bar ecc.)
  3. Cost estimation (both fixed and variable)
  4. Risks

Once that you have done with point 3 you can calculate the NPV of your investment and compare it with the overall cost. The risks part is not fundamental but it could be useful to have some good hints for the "next steps" part of your final recommendation

Feel free to write me if you want to discuss it more in detail,

Luca

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Anonymous replied on Jan 21, 2020

Hi,

I would typically have the following structure:

1. Market overview and dynamics

- What is the size of the hotel market? Is the hotel market growing? Who are the competitors?

2. Client's hotel offering (Product) - What is their proposition? How will they win customers? How will they compete?

3 Financials - What revenue can the client make? What will it cost them? What are the typical margins?

4. Risks - Operational, financial, competitive, market etc.

Hope it helps

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1
Clara
Expert
Content Creator
replied on Jan 21, 2020
McKinsey | Awarded professor at Master in Management @ IE | MBA at MIT |+180 students coached | Integrated FIT Guide aut

Hello!

The initial approach should be simpler:

  1. Market review
  2. Profitability analysis (revenues and costs)
  3. Risks & other opportunities

Inside each branch you must further develop with 2-3 move depth levels.

However, I believe it´s better to keep it simple at the beggining.

Hope it helps!

Cheers,

Clara

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