Evolution of Dynamic Capabilities and Alliance: Case of Hilton

TALLINN UNIVERSITY OF TECHNOLOGY
Department of Business Administration
Chair of Organization and Management

Viktor Reppo, Aivo Vahemets, Jelena Onistsenko

EVOLUTION OF DYNAMIC CAPABILITIES
AND ALLIANCE: CASE OF HILTON

Supervisor: Alar Kolk

Tallinn 2011

Acknowledgements

We would like to express our special thanks to people who have helped us during this research,
especially those who have acted practically as our partners rather than interviewees:

− Tim Bridwell, Vice president of Hilton Worldwide, who has given us hours of his time
and several long and fascinating discussions

− Anton Jolkin, sales director of Telegraaf Hotel in Tallinn, who has not only shared with
us his profound knowledge of the industry, but also helped us by introducing us to his
colleagues

− Vitali Makejev, sales and marketing director of Radisson Blu Olympia Hotel, who has
shared with us both his experience and professional contacts

− Leanne Pawlowski, sales manager at Naples Beach Hotel in Florida, who has given us a
deep insight on the US hotel market and helped with her network of contacts

− Robert Presley, who has provided invaluable critique to the structure and language

− To all the experts who have agreed to share their knowledge and experience with us

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Contents
1 INTRODUCTION........................................................................................................................4
2 LITERATURE OVERVEIW: DYNAMIC CAPABILITIES......................................................5
2.1 MICROFOUNDATIONS (Selecting product architectures and business models).............10
2.2 SELECTING ENTERPRISE BOUNDARIES....................................................................11
2.3 MANAGING COMPLEMENTS AND ‘PLATFORMS’....................................................11
2.4 AVOIDING BIAS, DELUSION, DECEPTION, AND HUBRIS.......................................12
2.5 MANAGING THREATS AND RECONFIGURATION....................................................13
2.5.1 Nature............................................................................................................................13
2.5.2 Microfoundations (Achieving decentralization and near decomposability).................14
2.5.3 Managing co-specialization..........................................................................................15
2.5.4 Learning, knowledge management, and corporate governance....................................16
2.6 DYNAMIC CAPABILITIES, ‘ORCHESTRATION’ SKILLS, AND COMPETITIVE
ADVANTAGE..........................................................................................................................18
2.7 CONCLUSION....................................................................................................................19
3 METHODOLOGY.....................................................................................................................21
4 HILTON HISTORY...................................................................................................................23
5 HILTON BRAND PORTFOLIO................................................................................................28
6 EVOLUTION OF HILTON BUSINESS MODEL....................................................................29
6.1 Phase I (1919 – 1940) – Model based on owning and efficiently managing the hotels .....33
6.2 Phase II (1940 – 1960) – Competitive advantage through additional value........................35
6.3 Phase III (1960 –1980) – Development of franchising model.............................................36
6.4 Phase IV (1980 – 2000) – Marketing, branding and product development.........................38
6.5 Phase IV (2000 – …) – Digital age marketing, branding and product development..........39
7 DEVELOPMENT OF HILTON ALLIANCE AND PARTNERSHIP PORTFOLIO...............41
7.1 CURRENT STAGE OF THE EVOLUTION......................................................................43
7.2 Brand standards consistency ..........................................................................................44
7.3 Branding and marketing.......................................................................................................44
7.4 Product developement and innovation.................................................................................45
7.5 SMALL PLAYERS VIEW..................................................................................................46
8 LIKELY NEXT STEPS OF DEVELOPMENT.........................................................................47
9 BIBLIOGRAPHY.......................................................................................................................48
10 APPENDIX 1 – Interview plan................................................................................................52

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1 INTRODUCTION
Today in many parts of the world, especially in North and South Americas, Hilton is a
common synonym for word hotel. Hilton is recognized without doubt as among the 3 largest and
fastest growing hospitality providers around the world. The Hilton business model and culture is
a common book example and benchmark for companies from various fields of activity. For
instance a leading technology park developer and operator - Finnish company Technopolis Plc -
is commonly referring to the Hilton model when envisioning and planning its international
development. (Seppälä 2010) Many ideas that were introduced by Hilton during the last hundred
years have nowadays become absolute industry standards. (Jolkin 2010)
In this study authors aim to capture and attempt to understand Hiltons success in terms of
the evolution of the dynamic capabilities and alliance portfolio.

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2 LITERATURE OVERVEIW: DYNAMIC CAPABILITIES
The ambition of the dynamic capabilities framework is nothing less than to explain the sources
of enterprise-level competitive advantage over time, and provide guidance to managers for
avoiding the zero profit condition that results when homogeneous firms compete in perfectly
competitive markets. (Teece 2007)
The possession of dynamic capabilities is especially relevant to multinational enterprise
performance in business environments that display certain characteristics:
1. the environment is open to international commerce and fully exposed to the opportunities
and threats associated with rapid technological change.
2. technical change itself is systemic in that multiple inventions must be combined to create
products and/or services that address customer needs.
3. there are well-developed global markets for the exchange of (component) goods and
services;
4. the business environment is characterized by poorly developed markets in which to
exchange technological and managerial know-how (Teece 2007)
These characteristics can be found in large sectors of the global economy and especially in high-
technology sectors. In such sectors, the foundations of enterprise success today depend very little
on the enterprise’s ability to engage in optimization against known constraints, or capturing scale
economies in production. Rather, enterprise success depends upon the discovery and
development of opportunities; the effective combination of internally generated and externally
generated inventions; efficient and effective technology transfer inside the enterprise and
between and amongst enterprises; the protection of intellectual property; the upgrading of ‘best
practice’ business processes; the invention of new business models; making unbiased decisions;
and achieving protection against imitation and other forms of replication by rivals. It also
involves shaping new ‘rules of the game’ in the global marketplace. (Teece 2007)
The traditional elements of business success—maintaining incentive alignment, owning
tangible assets, controlling costs, maintaining quality, ‘optimizing’ inventories—are necessary
but they are unlikely to be sufficient for sustained superior enterprise performance. (Teece 2007)

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Two yardsticks can be proposed for calibrating capabilities: ‘technical’ fitness and
‘evolutionary’ fitness (Helfat et al., 2007). Technical fitness is defined by how effectively a
capability performs its function, regardless of how well the capability enables a firm to make a
living. Evolutionary or external fitness refers to how well the capability enables a firm to make a
living. Evolutionary fitness references the selection environment. Helfat et al. (2007) further note
that both technical and evolutionary fitness range from zero to some positive value.
Arguably, entrepreneurial fitness ought to have equal standing with evolutionary fitness.
In order to identify and shape opportunities, enterprises must constantly scan, search, and
explore across technologies and markets, both ‘local’ and ‘distant’ (March and Simon, 1958;
Nelson and Winter,1982).
When opportunities are first glimpsed, entrepreneurs and managers must figure out how to
interpret new events and developments, which technologies to pursue, and which market
segments to target. The enterprise will be vulnerable if the sensing, creative, and learning
functions are left to the cognitive traits of a few individuals. (Teece 2007)
Organizational processes can be put in place inside the enterprise to garner new technical
information, tap developments in exogenous science, monitor customer needs and competitor
activity, and shape new products and processes opportunities. Information must be filtered, and
must flow to those capable of making sense of it. (Teece 2007)
Customers are sometimes amongst the first to perceive the potential for applying new
technology. Visionary members of customer organizations are often able to anticipate the
potential for new technology and possibly even begin rudimentary development activities.
(Teece 2007) One of the most consistent findings from empirical research is that the probability
that an innovation will be successful commercially is highly correlated with the developers’
understanding of user/customer needs (Freeman, 1974).
The concept and practice of open innovation underscore the importance of broad-based
external search and subsequent integration involving customers, suppliers, and complementors.
Establishing linkages between corporations and universities assists broad-based search, as
university programs are usually unshackled from the near at hand. (Teece 2007)
In Porter’s (1980) Five Forces framework, a good strategy involves somehow picking an
attractive industry and positioning oneself to be shielded from competition. Porter’s approach

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mandates ‘industry’ analysis and the calibration of five distinct industry-level forces: the role of
potential entrants, suppliers, buyers, substitutes, and rivalry amongst competitors. (Teece 2007)
The Five Forces framework has inherent weaknesses in dynamic environments.
Fundamental is that it implicitly views market structure as exogenous, when in fact market
structure is the (endogenous) result of innovation and learning. (Teece 2007)
The dynamic capabilities framework represents a strong break with Five Forces. Within
the dynamic capabilities framework, the ‘environmental’ context recognized for analytical
purposes is not that of the industry, but that of the business ‘ecosystem’—the community of
organizations, institutions, and individuals that impact the enterprise and the enterprise’s
customers and supplies. The relevant community therefore includes complementors, suppliers,
regulatory authorities, standard-setting bodies, the judiciary, and educational and research
institutions. It is a framework that recognizes that innovation and its supporting infrastructure
have major impacts on competition. (Teece 2007)
The dynamic capabilities framework is grounded in Kirznerian, Schumpeterian, and
evolutionary theories of economic change, whereas Five Forces is grounded in the Mason–Bain
paradigm of industrial economics. Also, whereas according to Porter the essence of strategy
formulation is ‘coping with competition’ (Porter, 1991: 11), in the dynamic capabilities tradition
the essence of strategy involves selecting and developing technologies and business models that
build competitive advantage through assembling and orchestrating difficult-to-replicate assets,
thereby shaping competition itself. (Teece 2007)

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Figure 1 - Elements of an ecosystem framework for ‘sensing’ market and technological opportunities. Figure
summarizes individual and enterprise traits that undergird sensing capabilities. (Teece 2007)

Once a new (technological or market) opportunity is sensed, it must be addressed through
new products, processes, or services. This almost always requires investments in development
and commercialization activity. (Teece 2007)
EXAMPLE: The quintessential example is the automobile industry, where in the early
days different engine technologies — steam, electric, and gasoline — each had their champions.
Once a dominant design begins to emerge, strategic choices become much more limited. (Teece
2007)
This paradigm, which was first offered by Abernathy and Utterback (1978) and then built upon
by Teece (1986, 2007), now has considerable evidence supporting it over a wide range of
technologies (Klepper and Graddy, 1990; Utterback and Suarez, 1993; Malerba and Orsenigo,
1996). It implicitly recognizes inflexion points in technological and market evolution.
Implications for investment decisions have been noted elsewhere (Teece, 1986) and include
staying flexible until the dominant design emerges and then investing heavily once a design
looks like it can become the winner. In theory, one could imagine transactions between entities
that scout out and/or develop opportunities, and those that endeavor to execute upon them.
(Teece 2007)
Innovation is often ill served by such structures, as the new and the radical will almost
always appear threatening to some constituents. Strong leaders can frequently overcome such
tendencies, but such leaders are not always present. (Teece 2007)

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In regimes of rapid technological innovation, it is clear that making investment choices
requires special skills not ubiquitously distributed amongst management teams. Nor are they
ubiquitously distributed amongst investors. (Teece 2007)
EXAMPLE: Consider the development of civilian jet transport aircraft in the United
States in the 1950s. As Phillips (1971: 126) noted: ‘Any one of Boeing, Douglas, Lockheed, or
Corvair might have been first. . . . The technology was there to adapt to—not risklessly or
costlessly to be sure, but it was there. (Teece 2007) Perhaps the biggest risk in 1953 was not
technological in character. Instead, it was risk with respect to what sort of jet to build and when
to build it. (Teece 2007)
The returns to particular co-specialized assets cannot generally be neatly apportioned or
partitioned. As a result, the utility of traditional investment criteria is impaired. Thus while
project financing criteria (e.g., discounted cash flow, payback periods and etc) and techniques for
decision making under uncertainty are well known, there is little recognition of how to value
intangibles and take into account features such as co-specialization, irreversibility, and
opportunity costs. (Teece 2007)
Nor is the concept of a ‘strategic investment’ recognized in the finance literature. Finance
theory provides almost no guidance with respect to how to estimate future cash flows, although
making such estimates is as much, if not more, the essence of good decision making as are the
methodologies and procedures for analyzing cash flow. (Teece 2007)
Alfred Chandler’s (1990a, 1990b) analysis of successful enterprises from the 1870s
through the 1960s makes apparent, that no matter how much analytical work is done, tacit
investment skills are of great importance. Chandler further argues that success in the late-
nineteenth and much of the twentieth century came to those enterprises that pursued his ‘three-
pronged’ strategy:
1. early and large-scale investments behind new technologies
2. investment in product-specific marketing, distribution, and purchasing networks
3. recruiting and organizing the managers needed to supervise and coordinate
functional activities
The first and second elements require commitment to investments where irreversibilities
and cospecialization are identified. While the nature of required investments may have changed

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in recent decades (less decomposable/more interrelated), investment decision skills remain
important. (Teece 2007)

2.1 MICROFOUNDATIONS (Selecting product architectures and business
models)
The design and performance specification of products, and the business model employed,
all help define the manner by which the enterprise delivers value to customers, entices customers
to pay for value, and converts those payments to profit. They reflect management’s hypothesis
about what customers want and how an enterprise can best meet those needs, and get paid for
doing so. They embrace:
1. which technologies and features are to be embedded in the product and service
2. how the revenue and cost structure of a business is to be ‘designed’ and if necessary
‘redesigned’ to meet customer needs
3. the way in which technologies are to be assembled
4. the identity of market segments to be targeted
5. the mechanisms and manner by which value is to be captured (Teece 2007)

The function of a business model is to ‘articulate’ the value proposition, select the
appropriate technologies and features, identify targeted market segments, define the structure of
the value chain, and estimate the cost structure and profit potential (Chesbrough and
Rosenbloom, 2002: 533–534)
Important (business model) choices include technological choices, market segments to be
targeted, financial terms (e.g., sales vs. leasing), choices with respect to bundled vs. unbundled
sales strategies, joint ventures vs. licensing vs. go-it-alone approaches, etc. (Teece 2007) For
example, in the early days of the copier industry, Xerox focused on leasing rather than selling
copiers. This stemmed from a belief that customer trial would lead to further use. Designing
good business models is in part ‘art.’ However, according to (Teece 2007) the chances of success
are greater if enterprises:
1. analyze multiple alternatives
2. have a deep understanding of user needs

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3. analyze the value chain thoroughly so as to understand just how to deliver what the
customer wants in a cost-effective and timely fashion
4. adopt a neutrality or relative efficiency perspective to outsourcing decisions

2.2 SELECTING ENTERPRISE BOUNDARIES
Normative rules are advanced indicators of how enterprise boundaries ought to be set to
ensure that innovation is more likely to benefit the sponsor of the innovation rather than imitators
and emulators. The framework is prescriptive not only as to strategy but also as to outcomes.
Key elements of this framework are:
1. the appropriability regime (i.e., the amount of natural and legal protection afforded
the innovation by the circumstances prevailing in the market)
2. the nature of the complementary assets (cospecialized or otherwise) that an
innovating enterprise possessed
3. the relative positioning of innovator and potential imitators with respect to
complementary assets
4. the phase of industry development (pre or post the emergence of a dominate
design). The framework is prescriptive not only as to strategy but also as to
outcomes (Teece 2007)

2.3 MANAGING COMPLEMENTS AND ‘PLATFORMS’
EXAMPLE
For instance, electronic game consoles are not much use without games; computer
operating systems are not much use without a suite of application programs; credit cards are not
much use to cardholders without merchants that will accept them, and vice versa; and hydrogen
cars are not much use without hydrogen filling stations, and vice versa. This important class of
situations has highlighted the importance of co-specialization, and strategic decision making
must now take this into account. The phenomenon is not new—the automobile industry
depended first on the general store and then specialized retail outlets to make gasoline
ubiquitously available to motorists. (Teece 2007)

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2.4 AVOIDING BIAS, DELUSION, DECEPTION, AND HUBRIS
Considerable progress in combating biases has been made. Advisors call upon managers to
adopt radical, nonformulaic strategies in order to overcome the inertias that inhibit breakthrough
innovation (Davidow and Malone, 1992; Handy, 1990).
Specifically, corrective strategies encourage change through two basic mechanisms:
1. designing organizational structures, incentives and routines, to catalyze and reward
creative action
2. developing routines to enable the continual shedding of established assets and routines
that no longer yield value (Teece 2007)

Strategies that provide structures, incentives, and processes to catalyze and reward creative
action serve to attenuate problems of excessive risk aversion. (Teece 2007) For example,
strategies that call on the enterprise to ‘cut overhead’ and ‘increase divisional authority’ can be
interpreted as efforts to reduce the number of management layers of the enterprise and to push
decision making down to lower levels to minimize the inherent isolation errors associated with
multilevel, hierarchical decision-making processes. These recommendations can be viewed as
organizational processes and strategic mechanisms to mitigate decision-making biases. (Teece
2007)

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Figure 2 - Strategic decision skills/execution. Figure 2 summarizes the micro foundations identified in this
section. (Teece 2007)

2.5 MANAGING THREATS AND RECONFIGURATION
2.5.1 Nature
A key to sustained profitable growth is the ability to recombine and to reconfigure assets
and organizational structures as the enterprise grows, and as markets and technologies change, as
they surely will. (Teece 2007) Reconfiguration is needed to maintain evolutionary fitness and, if
necessary, to try and escape from unfavorable path dependencies. In short, success will breed
some level of routine, as this is necessary for operational efficiency. Routines help sustain
continuity until there is a shift in the environment. Changing routines is costly, so change will
not be (and should not be) embraced instantaneously. (Teece 2007) Incumbent enterprises
possessing fixed assets may further tend to limit their new investments to innovations that are
‘close-in’ to the existing asset base. They tend to narrowly focus search activities to exploit
established technological and organizational assets. (Teece 2007) This effect makes it difficult
for these enterprises to see potential radical innovations.
The systems and rules needed to manage many layers of organization tend to create structural
rigidities and perversities that in turn handicap customer and technological responsiveness. To

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sustain dynamic capabilities, decentralization must be favored because it brings top management
closer to new technologies, the customer, and the market. (Teece 2007)

2.5.2 Microfoundations (Achieving decentralization and near
decomposability)
With functional internal structures, day-to-day problems tend to distract management from
long-run strategic issues. Studies showed that decentralization along product or market lines with
independent profit centers led to performance improvements in many industries, at least during
the period in which these organizational innovations were diffusing (Armour and Teece, 1978;
Teece, 1980, 1981). More recent scholarship has suggested that even further decentralization and
decomposition in large organizations may be beneficial (Bartlett and Ghoshal, 1993). There is
also some evidence that ‘modern’ human resource management techniques—involving
delayering, decentralization of decision rights, teamwork, flexible task responsibilities and
performance-based rewards—also improve performance (Jantunen, 2005). Of course, achieving
decentralization can compromise the organization’s ability to achieve integration.
There is little harm and much benefit from decentralization when the customer does not
benefit from an integrated product offering, or when sourcing and other inputs do not benefit
from integration and/or aggregation. (Teece 2007) If customer and supply considerations allow
decomposability (because the required integration between units is less than within units) then
management’s ability to identify and implement decomposable subunits should enhance
performance. (Teece 2007) However, if firm-specific economies of scale and scope are available,
they must be captured—otherwise the enterprise is tantamount to a conglomerate. This tension
can be managed through a collaborative nonhierarchical management style assisted by
establishing councils and other integration forums. (Teece 2007)
The open innovation model of Chesbrough (2003) also recognizes the benefits of relying
on a distributed model of innovation where the enterprise reaches out beyond its own boundaries
to access and integrate technology developed by others.

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2.5.3 Managing co-specialization
The field of strategic management and the dynamic capabilities framework recognizes that
‘strategic fit’ needs to be continuously achieved. (Teece 2007) Strategic fit among many
activities is fundamental not only to competitive advantage but also to sustainability of that
advantage. It is harder for a rival to match an array of interlocked activities than it is merely to
imitate a particular sales force approach, match a process technology, or replicate a set of
product features. (Porter, 1996: 73)
Cospecialized assets are a particular class of complementary assets where the value of an
asset is a function of its use in conjunction with other particular assets. With cospecialization,
joint use is value enhancing. Cospecialization results in ‘thin’ markets; i.e., the assets in question
are idiosyncratic and cannot be readily bought and sold in a market. Capturing cospecialization
benefits may require integrated operations (Teece, 1980). Cospecialization allows differentiated
product offerings or unique cost savings. The inherent ‘thin’ market environment surrounding
specific assets means that competitors are not able to rapidly assemble the same assets by
acquisition, and hence cannot offer the same products/services at competing price points.
Management’s ability to identify, develop, and utilize in combination specialized and
cospecialized assets built or bought is an important dynamic capability, but it is not always
present in enterprise settings. (Teece, 2007) Special value can be created (and potentially
appropriated by another party) through asset combinations, particularly when an asset owner is
not cognizant of the value of its assets to another party that owns assets whose value will be
enhanced through combination. (Teece, 2007)
EXAMPLE
Langlois (1992) highlights the case of the diesel-electric locomotive where, in the 1920s,
Charles Kettering had developed advanced lightweight diesel technology at the GM labs. The
earliest use was in submarines. Alfred P. Sloan, GM’s chairman, saw the possibility of applying
the technology to make diesel-electric locomotives—steam power was, at the time, completely
dominant. To accomplish this, GM needed capabilities resident in the locomotive manufacturers
and at Westinghouse Electric. Langlois (1992: 115) notes that the three sets of capabilities might
have been combined by some kind of contract or joint venture, but the steam manufacturers—
Alco, Baldwin, and Lima—failed to cooperate. This was not because the companies feared

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holdup in the face of highly specific assets. Rather, it was because they actively denied the
desirability of the diesel and fought its introduction at every step. GM was forced to create its
own capabilities in locomotive manufacturing.
In short, both innovation and reconfiguration may necessitate cospecialized assets being
combined by management in order for (systemic) innovation to proceed. Managers do not
always succeed in doing so, sometimes because they do not sense the need or the opportunity,
and sometimes because they do but they are unable to effectuate the integration. If the assets
cannot be procured externally, they will need to be built internally.

The ability of management to identify needs and opportunities to ‘invest’ in cospecialized
assets (through its own development or astute purchase) is fundamental to dynamic capabilities.
In particular, it will depend on management’s entrepreneurial capacities with respect to matching
up and integrating relevant co-specialized assets. (Teece 2007)
To summarize, entrepreneurs and managers can create special value by combining co-
specialized assets inside the enterprise (Teece, 2007). This may require investments to create the
necessary co-specialized technologies—as illustrated by Thomas Edison and the creation of
electric power as a system. It is not uncommon in technology based industries to find that certain
technologies are worth more to some market participants than to others, based on the technology
they already have, and their technology and product strategy. (Teece 2007)

2.5.4 Learning, knowledge management, and corporate governance
Integrating know-how from outside as well as within the enterprise is especially important
to success when ‘systems’ and ‘networks’ are present. Good incentive design and the creation of
learning, knowledge-sharing, and knowledge integrating procedures are likely to be critical to
business performance, and a key (micro)foundation of dynamic capabilities (Nonaka and
Takeuchi, 1995; Chesbrough, 2003). Of equal importance are monitoring and managing the
‘leakage,’ misappropriation, and misuse of know-how, trade secrets, and other intellectual
property. (Teece 2007) Of course, tacit know-how is difficult to imitate and has a certain amount
of ‘natural’ protection. However, much know-how does leak out. Innovating business enterprises
with limited experience have been known to inadvertently compromise or lose their intellectual

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property rights. Failure to proactively monitor and protect know-how and intellectual property is
common. (Teece 2007)
The outsourcing of production and the proliferation of joint development activities
likewise create requirements that enterprises develop governance procedures to monitor the
transfer of technology and intellectual property. (Teece 2007) Technology transfer activities,
which hitherto took place inside the enterprise, increasingly take place across enterprise
boundaries. The development of governance mechanisms to assist the flow of technology while
protecting intellectual property rights from misappropriation and misuse are foundational to
dynamic capabilities in many sectors today. (Teece 2007)

Figure 3 - Combination, reconfiguration, and asset protection skills. Figure summarizes the microfoundations
of third class of dynamic capability. (Teece 2007)

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2.6 DYNAMIC CAPABILITIES, ‘ORCHESTRATION’ SKILLS, AND
COMPETITIVE ADVANTAGE
The general framework advanced here sees dynamic capabilities as the foundation of
enterprise-level competitive advantage in regimes of rapid (technological) change. (Teece 2007)
The framework indicates that the extent to which an enterprise develops and employs superior
(non-imitable) dynamic capabilities will determine the nature and amount of intangible assets it
will create and/or assemble and the level of economic profits it can earn (see Figure 4).
Furthermore, the framework emphasizes that the past will impact current and future
performance. However, there is much that management can do to simultaneously design
processes and structures to support innovation while unshackling the enterprise from
dysfunctional processes and structures designed for an earlier period. (Teece 2007)

Figure 4- Foundations of dynamic capabilities and business performance (Teece 2007)

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2.7 CONCLUSION
For open economies exposed to rapid technological change, the dynamic capabilities
framework highlights organizational and (strategic) managerial competences that can enable an
enterprise to achieve competitive advantage, and then semicontinuously morph so as to maintain
it. The framework integrates and synthesizes concepts and research findings from the field of
strategic management, from business history, industrial economics, law and economics, the
organizational sciences, innovation studies, and elsewhere.
Maintaining dynamic capabilities thus requires entrepreneurial management. The
entrepreneurial management in question is different but related to other managerial activity.
Entrepreneurship is about sensing and understanding opportunities, getting things started, and
finding new and better ways of putting things together. It is about creatively coordinating the
assembly of disparate and usually co-specialized elements, getting ‘approvals’ for non-routine
activities, and sensing business opportunities. Entrepreneurial management has little to do with
analyzing and optimizing. It is more about sensing and seizing—figuring out the next big
opportunity and how to address it.
As discussed, there are obvious tensions and interrelationships between and amongst the
three classes of capabilities identified. The managerial skills needed to sense are quite different
from those needed to seize and those needed to reconfigure. All functions have a significant
‘entrepreneurial’ and ‘right brain’ component. Successful enterprises must build and utilize all
three classes of capabilities and employ them, often simultaneously.
Since all three classes are unlikely to be found in individual managers, they must be
somewhere represented in top management, and the principal executive officer must succeed in
getting top management to operate as a team. Of course, if the principal executive officer has
depth in all three classes of capabilities, the organization has a better chance of success.
The dynamic capabilities framework goes beyond traditional approaches to understanding
competitive advantage in that it not only emphasizes the traits and processes needed to achieve
good positioning in a favorable ecosystem, but it also endeavors to explicate new strategic
considerations and the decision-making disciplines needed to ensure that opportunities, once
sensed, can be seized; and how the business can be reconfigured when the market and/or the
technology inevitably is transformed once again. In this sense, dynamic capabilities aspire to be

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a relatively parsimonious framework for explaining an extremely seminal and complicated issue:
how a business enterprise and its management can first spot the opportunity to earn economic
profits, make the decisions and institute the disciplines to execute on that opportunity, and then
stay agile so as to continuously refresh the foundations of its early success, thereby generating
economic surpluses over time.
If the framework has succeeded in some small measure, then we have the beginnings of a
general theory of strategic management in an open economy with innovation, outsourcing, and
offshoring. (Teece 2007)

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3 METHODOLOGY
Authors of this paper have set the objective to deliver a well rounded discussion of past and
ongoing evolution of the dynamic capabilities on example of Hilton. For the structure of the
paper we have broken down the research and discussion onto the following parts:
• Hilton history overview
• Analysis of the business model development
• Correlation of business model transformation and strategic partnerships portfolio
• Discussion of the evolved advantages and disadvantages of chain brands compared to
independent hotels and how independent properties compete against the chains
• Discussion of what is the likely development of hotel industry and what effect it may
have on future evolution of business models

In order to deliver a well rounded, objective and practical analysis we have built our research on
4 columns:
1. desktop research of history and statistics
2. news search
3. interviews with Hilton top management
4. interviews with industry experts

While selecting the industry experts for interviews we aimed to include expert with different
backgrounds:
• Top or middle managements of chain hotels
• Top or middle management of independent hotels
• Academia experts such as university professors in fields of hospitality management and
strategic management
• Travel agents
Interviews with the described mix of experts have proven to give a broader understanding of
various aspects of the industry.

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 Hilton financial reports
Extensive interview with Tim Bridwell - Vice
 Company and general industry
President of Hilton Worldwide responsible
statistics
for Operations and New Projects
 Industry reports and forecasts
Development in North and South Americas
Interview
with Hilton
management

Extensive interviews with:
 Anton Jolkin – Sales and marketing
director, Telegraaf Hotel (Tallinn)
Interviews Subject Statistics
 Vitali Makejev – Sales and marketing with industry and industry
director, Radisson Blu Olympia experts research reports
(Tallinn)
 Leanne Pawlowski – Sales
Manager, Naples Beach Hotel
(Florida)/previously sales manager at
Radisson and Mariott  Business and industry press
 Martin Seppälä – economics Ph.D, searches
expert in strategic alliances, partner at News search  Hilton and industry news search
management consulting firm
Excedea, Technopolis-Ülemiste board
member, frequent Hilton client
 Darja Zuseva – Travel agent, Aves
Travel
 Catherine Gorman – professot at
Dublin School of Hospitality
Management
 Kristin Marshall – regional sales
manager at SunStream Inc. (Florida)
 Clive Ellul Hawthorn – marketing
director, Swiss Hotel (Tallinn)
 Kersti Vaino – Sales and marketing
director, Nordic Hotel Forum (Tallinn)

Figure 5 - Information was collected from 4 main types of sources

Thus we will start with an overview of Hilton Worldwide company history and continue with a
discussion of the business model evolution. We will review how the evolution of the business
model correlates with the partnership portfolio. Finally we will discuss what strategic assets has
Hilton created over time and possesses today and how these assets are used to create sustainable
competitive advantage. We will also reflect on how small chains and independent hotels compete
against the giants like Hilton. We will conclude with a brief speculation on where the industry
might develop in the next years.

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4 HILTON HISTORY
Today Hilton Hotels Corporation is one of the leading hotel and leisure companies in the
world. (Семина А. [www]) It is primarily involved in the management and development of
hotels across the globe. Hilton has been continuously increasing the number of hotels it owns
(including owned as well as franchised hotels). The company owned 2,800 hotels across the
globe at the end of 2005 and became the world’s largest lodging company with the successful
acquisition of U.K-based ‘Hilton International’ (Hilton worldwide official site). Hilton has
hotels spread across various geographies, including major commercial markets in Europe, Asia,
the Middle East, South America, and the Nordic countries. But let's get back to the beginning
and learn how Hilton has become a huge empire of hotels known throughout the world.
31-year-old Hilton Conrad stopped at the flea hotel Mobley. Young entrepreneur
immediately noticed how many people lined up hoping to get a room. However there were not
enough vacant rooms to accommodate all guests and the owner was so tired from work that had
not even considering enlarging his property, instead he sent clients off to look for another place
to stay. (Семина А. [www]) The owner was seeking to retire. Conrad Hilton purchased the
Mobley and began improving the hotel. For the start he equipped it with a large number of
sleeping rooms, thereby eliminating the queue. Then Conrad Hilton had an idea that hotel can
raise extra revenue by offering additional services, products and entertainment (most of the
hotels of those times were simple and boring inns). Soon Hilton’s hotel had a small shop in the
lobby offering various items like newspapers, magazines, razors, toothbrushes and toothpaste.
Conrad later said that a convoy brought him 8,000 dollars a month. (Семина А. [www])
One year after buying the Mobley Conrad purchases his second hotel in Fort North. In
1924, after several acquisitions, Conrad Hilton has already 350 rooms across all hotels and the
business brought enough profits to finance development of a new hotel. On August 2, 1925
Hilton opens a stunning for the time hotel Dallas Hilton (300 rooms, which was approximately
the same as all other hotels owned by Conrad Hilton). (Янковский С. [www]) Dallas Hilton was
the first hotel carrying the name of the founder and became the center of company Hilton Hotels.
In 1929 USA went into an economy crisis, which drastically affected the hotel business.
People simply started travelling less and as a result 80% U.S. hotel companies were ruined.

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Conrad Hilton was also forced to sell his business. Hilton’s business was saved by a partnership
Moody family of Galveston. At that depression time hotels naturally were not among the high
profitability businesses. Moody National Hotel Company had eight unprofitable hotels and was
interested in Hilton’s talent for efficient hotel management. Moody bought out Hilton Hotels and
placed Conrad Hilton as manager of the company with an annual salary of $ 18 thousand.
Soon Conrad began to buy back hotels in his own name. Since that time Hilton will
continue to build a worldwide company through development and large acquisitions.
For fifteen years Conrad Hilton bought competitors and built new hotels.
During this time major changes have occurred within the Hilton hotels. Conrad made it
somewhat like McDonald's - all the hotels carried a standardized set of services. Uniformed was
even the advertising, signs in taxis displayed a short message: ‘To the Hilton’. In order to
‘equalize’ hotels even more Conrad introduced the stars differentiation – idea inspired by stars
on cognacs. Another know-how of Hilton Hotels reflected in its philosophy - all purchases
should be made in advance, based on the analysis and forecast of demand and with view of
upcoming events, no requirement of a customer should come as a surprise. (Гладченко А.
[www])
In 1949 Hilton had already purchased one of the most luxurious hotels in New York -
Waldorf-Astoria, and opened the first Hilton hotel outside the U.S in Puerto Rico. By 1955
Conrad Hilton owned already two companies - Hilton Hotels, which operated business in the
United States, and Hilton International, dedicated to the promotion of international business.
Hilton hotels were attracting more and more people. His success with the company is simply
explainable – rich people, whether businessmen, royalty or the stars of the show business and
also simple middle-class needed unobtrusive comfort from hotels. This is the main luxury. It is
this fact which has attracted different people from millionaires and movie stars as well as the
usual middle class to the Hilton hotels. They all liked the same – style of Hilton.
Besides all this noting it is more worth, than one moment in the history of the Hilton –
merging hotels and casinos. The first hotel-casino has been around since the late 60's, under the
hands of the Conrad Hilton in Las Vegas. It was one of the most controversial steps in the
company's history. But he showed his consistency in 1987, when Hilton International merged
with the Ladbroke Group, whose main business was gambling.

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It is one thing to talk about unobtrusive comfort, and quite another to provide it. What has
been done for this? Firstly, it was in Hilton chain, which first used small booths in the lobby. No
one before Hilton didn’t equipped its rooms with air conditioning, entrance doors with automatic
control, alarm clocks and telephones, which include a function like direct dialing (no need to call
the hotel and ask to be connected with certain phone number). In addition, the Hilton built its
hotels near airports and seaports offering special packages to tourists (hotel overnight stay).
Finally, hotel chain was first among competitors to launch special guests’ remuneration system
called Hilton Honors.
In 1973 the company started remote help system called Hiltron. The client only had to dial
the telephone hot line and he got all the interesting information from the robot, including the
availability of vacant rooms in the hotel. In 1999 the system was replaced with a more powerful
Hilstar, which included possibilities offered by Internet network. In general, if we talk about
information technologies, the hotel chain Hilton introduced them much faster than all its
competitors. For example Hilton was one of the first to provide wireless internet for clients with
laptop computers.
Management understood that to successfully promote Hilton it requires large-scale
marketing campaigns around the world and their own American unit will not cope. Therefore, in
January 1997 a marketing agreement with UK Hilton Group was signed. For the first time from
1933 the two companies, once constituted a single entity, agreed to jointly promote Hilton brand
and advertising campaigns.
Studies and surveys have helped define the brand perception and expectations of guests,
business partners and employees themselves. New concept of Hilton was developed based on
these results - the uniqueness of each hotel with uniform standards and first class service.
Unified logo was developed for both companies and soon the letter H graced all Hilton hotels.
Particular attention was paid to the develop sub-brands. To attract customers, who are traveling
on business purposes Hilton Hotels launched a development program for middle-class hotels,
which was engaged in sub-brand Hilton Garden Inn. Hotels for business turned into a kind of
comfortable offices with computers, fax machines, Internet access points around the clock and
supplemented by the sale of food.

25

UK Hilton Group began to develop a network of international resorts of Hilton Worldwide
Resorts, where clients are offered an expanded set of services and entertainment, the emphasis
was on encouraging repeat visits. Corporate channel in hotels rooms promoted other Hilton
resorts around the clock. Brochures and information about special promotions were sent out by
e-mail to customers. A year after launching the program income units rose by 8%. However, the
success of sub-brands again pushed the core brand to the sidelines and entering the XXI century
Hilton looked like a huge fractured polity, not a single empire.
Beginning of the third millennium was overshadowed by the tragedy, which shook the
whole world - attacks on New York’s World Trade Center buildings in September 2001. The
ensuing crisis severely hit the hotel business. Era of relative calm gave way to a period of
decline, but for someone collapse. Only shrewd and visionary approach by company
management was able to keep Hilton from ruin. Losses of the hotel sector could be covered by
another unit - gambling and sports betting. That same innovation, which in the 60's seemed
controversial and damaging to the hotel business, in the end turned out to be Hilton’s savior.
When the income of company is gradually improved, with a reputation there’s a significant
problem. The main brand is now shadowed by sub-brands, and there is also the scandalous great-
granddaughter of Conrad - Paris Hilton, the heiress of future business. Her shocking lifestyle
does not add Hilton brand attraction in the eyes of the general public.
To restore the reputation several large-scale advertising campaign were launched in 2004 under
the slogan “Drive me to Hilton”. In addition, the approved three-year program to upgrade hotels
and to change interior offices more warm and welcoming.
Determining the fate of the corporation was a decision taken in 2006. US-based Hilton
Hotels Corporation announced the acquisition of Britain's Hilton Group for $ 5.7 billion and
finally the two parts of Hilton after the 42-year hiatus were reunited again. This landmark event
was the last stage to complete the revival of international brand.
A year after the merger, Hilton absorbed investment by Blackstone Group fund. Deal for a
record amount for the hotel business was signed - $ 26 billion over the next two years. More
hotels than ever were opened during this period: in 2009 alone 302 new hotels appeared.
In August 2010 Executive Travel Magazine readers recognized Hilton hotels as the best in
the area of business services. Month later the company topped the best rating hotel brands in

26

Asia for the second consecutive year. Hilton is planning a broad expansion into Central and
Eastern Europe and start the conquest for Russia. Fourth Hilton Hotel in Russia will be opened in
Omsk in 2012. The corporation intends to build 25 hotels in Russia. Will they be able to compete
with the Holiday Inn, Marriott, Radisson and other world-class brands - time will tell.
Many times in its history nothing but ruins and collapse was predicted for Hilton,
nevertheless hotel chain recovered from all the adversity and firmly stood on its feet. The
corporation still grows, develops, and surely holds its place among the five world leaders in hotel
ratings. It is difficult to believe that at the beginning there was only one man, who once risked
buying dilapidated hotel in Texas and now has created, no doubt, a great hotel empire called
Hilton.

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5 HILTON BRAND PORTFOLIO

Hilton Worldwide presents guests with ten leading hotel brands and more than 3,600 hotels in 81
countries. In all hotels, across the brands, Hilton offer guests an unsurpassed commitment to
hospitality. For 90 years, Hilton brands have provided business and leisure travelers the finest in
accommodations, service, amenities and value. (Hilton worldwide official site)

Hilton global brands span the lodging sector with luxurious (Waldorf Astoria Hotels & Resorts,
Conrad Hotels & Resorts), full-service (Hilton Hotels & Resorts, Doubletree, Embassy Suites
Hotels) to comfortable extended stay suites, quality mid price hotels (Hilton Garden Inn,
Hampton Inn & Suites, Homewood Suites by Hilton, Home2 Suites by Hilton) and relaxing
vacation ownership properties (Hilton Grand Vacations). All the brands participate in the
frequent-guest program Hilton HHonors. (Hilton worldwide oficial site)

Figure 6 - Brands that belong to Hilton Worldwide (Source: www.hiltonworldwide.com)

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6 EVOLUTION OF HILTON BUSINESS MODEL

In today’s rapidly evolving world, companies need to constantly adjust their business
models to changes in their environment. A good approach to evolving business models strikes a
balance between capitalizing on new opportunities, and preserving investments in existing
business processes. (Teece 2007) Comparing Hilton model during various historical periods it
becomes clear that the core value proposition and capabilities have gone through a significant
transformation. It would be possible to brake the historical development on 10-12 significant
stages, but for the purpose of this analysis authors would like to live some stages of
transformation out and divide the development of Hilton onto five main periods that, even
though are tightly connected, can be seen as somewhat independent business models. These
periods roughly are:

1. (1919 - 1940) - Real estate ownership and efficient management based model
2. (1940 - 1960) - Competitive advantage through additional value (Luxury, Alliances
with casinos, night clubs)
3. (1960 - 1980) - Franchising
4. (1980 - 2000) Marketing, branding and product development
5. (2000 - …) Digital age marketing, branding and product development

It must be said that proposed division by years should be seen is an approximation adapted
for simplicity of analysis. Many of the signs of each model are naturally seen in the other periods
and many of the model transforming alliances and development took many years and it is
virtually impossible to pinpoint the exact date or year when Hilton has moved from one model to
another. In fact interviewed vice president of Hilton Worldwide saw the historical and ongoing
changes more as additions to the business model than transformation (Bridwell 2010). In other
words most of the transformations have been a result of gradual evolution rather than effect of a
single or small number of management decisions. For instance, naturally Hilton management
argues (absolutely correctly) that efficient management is as important today as 100 years ago

29

and remains one of the core capabilities (Bridwell 2010). For instance consolidated purchasing
system is a good example of Hiltons cost efficient model (Bridwell 2010). Thus cost efficient
management remained a very important part of the model throughout the years, though lost its
unique element. For the purposes of this analysis authors find it reasonable to make the described
approximations.

30

1919 1940 1960 1980 2000 ...

- Hilton increase the - Active cooperation - Technology - Development of - Wireless Internet
number of hotels in with international development and marketing and brand available for all
America partners innovation - Operation of notebook users
-Hilton Hotel - Opening of the first - Remote help system marketing system - Revival of the
Corporation was formed Hilton hotel outside Hiltron Answer *Net international brand
-Main tactic was aimed to the U.S - Go to a franchising - Start your own - A broad expansion
buy the competitor’s - Hilton International model internet portal into Central and
hotels Corporation was hilton.com and a Eastern Europe and the
-Individual approach to formed system of Hilton conquest of Russia
each client - Merge the hotel chain Optima credit card
Hilton with partners - Alliance between
from the gambling and HHC and HIC
betting business and
airports
- Introduction of
innovations to all
customers

Figure 7 - Illustration of diffent development perios of Hilton Corporation
I II III IV

31

In order to compare the periods we will use a simple a business model illustration proposed
by Osterwalder & Pigneur 2009 and illustrated on Figure 8 - Business model illustration
(Osterwalder & Pigneur 2009).

CLIENT CUSTOMER
CLIENT
CAPABILITIES
CLIENT CLIENT
SEGMENTS RELATIONSHIPS
SEGMENTS
SEGMENTS SEGMENTS

PRODUCT,
PARTNER
CLIENT CLIENT CUSTOMER
CLIENT
CLIENT SERVICE: VALUE CUSTOMER
HOW?
NETWORK
SEGMENTS
SEGMENTS
WHAT?
CLIENT
SEGMENTS
PROPOSITION
SEGMENTS
WHO?
CLIENT
SEGMENTS
SEGMENTS
SEGMENTS

DISTRIBUTION
CLIENT
CLIENT
KEY RESOURCES
CLIENT CLIENT
CHANNELS
SEGMENTS SEGMENTS
SEGMENTS
SEGMENTS

COST REVENUE
STRUCTURE MODEL

Figure 8 - Business model illustration (Osterwalder & Pigneur 2009)

Central side of the model illustration shows the main value proposition; right side is related
to the customer and left side to the resources and capabilities. The bottom field shows the cost
structure and revenue model.

6.1 Phase I (1919 – 1940) – Model based on owning and efficiently managing
the hotels

At the very beginning of the company, when Conrad Hilton has purchased his first hotels,
the main value proposition of Hilton appears to have been in convenient accommodation and
hospitality. The most important capability of Hilton at this stage was the cost efficient
management of the properties (Baird 2004). Hiltons approach to cost management, forecasting
and efficiency was rather innovative for the time being. This approach made it possible for

33

Hilton to purchase unprofitable properties and turn them around to start making profit. High
demand for rooms in appropriate locations put relatively small pressure on client relationship and
marketing issues. However growth with the ownership based model obviously requires
significant financial resources or access to such resources through partners. Analyzing exact
financing mechanism used by Hilton lies outside of the scope of this study. The best known and
crucial financial partner in the early history of Hilton was Moody family of Galveston, whose
involvement allowed Hilton to keep going after the depression era (Baird 2004).

Period 1 – Ownership and cost effeciency

Partnership Capabilities Value Client Customer
Network  Hotel Proposition Relationships Segment
Financial management Accommodation Front desk Oilfield
partners  Costs and Convenience workers
efficiency Hospitality Business
management travelers
Leisure
travelers
Key Resources Distribution
 Properties Channels
 Human Hotels at
resources travelling
destinations

Cost Structure Revenue Model
Hotel payrolls and supplies  Rooms rent
Cost of capital  Lobby shops

Figure 9 - Hilton business model in the period 1920 - 1940

First product innovations of Hilton, which he implemented in his first hotel seem very
simple today, but were innovative and successful 100 years ago. For instance Conrad decided
that every area in the hotel should bring profit and placed counters with magazines and personal
care products in the hotel lobby. Each such kiosk could bring additional 8,000 dollars, which was
a significant addition at the time (Baird 2004). Later these principles were introduced in all the
hotels of Hilton (Baird 2004).

34

6.2 Phase II (1940 – 1960) – Competitive advantage through additional value
In year 1942 Hilton bought his first luxury hotel property, the Town House in Beverly
Hills, which put the beginning to a new period in Hilton’s history, period when Hilton has
created the value proposition based on luxury and landmark locations of properties. According to
most interviewees one of the differentiation points of Hilton today is still high quality and
luxurious service (Seppälä 2010, Vaino 2010) In 1943 Hilton purchased Plaza and Roosvelt
hotels in New York and in 1945 the Palmer House and the Stevens, the latter was the largest
hotel in the world at the time. While efficient management still remained a key capability, value
of luxury demands marketing investment and brand building. At the same time Hilton creates
extra value by linking hotels to casinos, night clubs and airports creating ‘full package service’
(Baird 2004). While efficient management still remained a key capability, value of luxury
demands marketing investment and brand building. Thus value proposition, capabilities and
partnership network have gone through significant transformation, which consequently affects
the revenue and cost structure.

35

Period 2 – Luxury, entertainment, full package product
Network  Hotel Proposition Relationships Segment
 Financial management  Accomodation  Front desk  Business
partners  Costs at landmark travelers
 Casinos management locations  Leisure
 Night clubs  Marketing  Luxury travelers
 Airport  Product develop  Hospitality
 Safe hotels
 Innovative
Key Resources Distribution
products
 Properties Channels
 Human  Hotels at
Resources travelling
destinations

 Hotel payrolls and supplies  Rooms rent
 Marketing  Lobby shops, casino revenue share, night clubs
 Cost of capital revenue share


Another clear capability and value proposition developed by Hilton is product innovation.
From the beginning and still today Hilton strives to be at the forefront of technology and product
development. Many features that have with time become industry standards were first introduced
by Hilton. For instance in 1951 Hilton was the first hotel chain to place TVs in all rooms, in
1959 Hilton was the first company to open hotels at the airports (Baird 2004), more recently
Hilton was the first company to launch an iPhone booking application (Jolkin 2010).

6.3 Phase III (1960 –1980) – Development of franchising model
This period was very rich in different events, which eventually led Hilton to reform its
business model. In the 60's Hilton empire was recognized as the most technologically advanced
hotel chain in the world (Baird 2004). However, such an impressive status has also had its
downsides. New projects required huge investments and company's debts began to rise gradually
until completely went out of control. In 1964 Hilton spun-off its international operations. New
company Hilton International was sold to foreign investors, although headed by the son of the

36

founder - Conrad Hilton Jr., and in 1967 became a wholly owned subsidiary of Trans World
Airlines.
In 1966, Conrad, Sr. decided to retire and handed over the reins at Hilton Hotels to his
second son - William Barron Hilton. The latter, remembering the difficulties that were created by
the rapid expansion under the ownership model, bets on franchising. The company sets the
franchisee the following conditions: the interior rooms must conform to established standards;
guests must provide high service levels and provide a specific set of services. At this time to
support the model development Hilton would invested own money (backed by appropriate
financing) to build new hotels and either sold or leased them to franchisees (Baird 2004).

Period 3 – Franchising
Network  Opeartional Proposition Relationships Segment
 Financial standards  Service quality  Front desk  Business
partners introduction consistency  Hiltron travelers
 Franchising and worldwide  Leisure
partners management  High quality travelers
 Product develop accommodationn
 Hospitality
Key Resources  Service quality Distribution
consistency
 Operational Channels
worldwide
know-how  Worldwide
 Innovative
chain of hotels
products

 Branding and marketing  Rooms rent
 Standards assurance and product developement  Franchising fees
 Cost of capital


Thus both a new value proposition and a new capability evolved. The value proposition is
now additionally to high quality/luxurious service and hospitality is based on the promise of
worldwide consistency of the brand values (Seppälä 2010). Of course this has been an important
part of value proposition already earlier, but after divesting the real estate and going over to the

37

franchising model ensuring quality and brand consistency have become the key capability of
Hilton (Seppälä 2010).
At the same time in accordance with the established tradition Hilton has continued to put
special focus on product innovation. In 1973 a unique information system Hiltron was launched;
through which customers could remotely receive current information on rooms’ availability,
book hotel rooms and travelling tickets. This computer system became the first of a kind in the
history of the global hospitality industry and was in operation until year 1999 when it was
replaced by more modern Hilstar (Biard 2004).

6.4 Phase IV (1980 – 2000) – Marketing, branding and product development
Next step of Hilton business model evolution can be described as shifting focus onto
marketing, branding and product development. In 1985 Hiltron put in operation a marketing
system AnswerNet, which linked all hotels and regional offices in the U.S. in a single network
(Biard 2010). Ten years later the corporation first launched its own Internet portal and a system
of hilton.com Hilton Optima credit card with the support of American Express (Biard 2010).
During this period contemporary core capabilities become stronger – standards management
across the network, marketing, branding and product development. Focusing on this area allows
to create value both for the hotel clients and franchising partners, who would not independently
be able to fix multinational alliances e.g. with airlines, run large scale marketing campaigns and
invest into research and development.

38

Period 4 – Marketing, branding, product development
partners introduction consistency  Hilstar travelers
 Franchising and worldwide  Hhonors  Leisure
partners management  High quality travelers
 Airlines  Product develop accommodationn
 Car rentals  Hospitality
 Entertainment Key Resources  Innovative Distribution
providers products
chain of hotels

 Cost of capital

Figure 12 – Hilton business model in the period 1980 - 2000

6.5 Phase IV (2000 – …) – Digital age marketing, branding and product
development
Phase 5 can be seen either as continuation of phase 4 or as a formation of somewhat new
business model through the development of new capabilities. Today we see that development of
Hilton is very much connected to the digital media, social media, web 2.0 and technological
product innovation from computerized rooms to mobile booking applications. We have yet to see
whether this development will be sustainable. However most interviewees have agreed that hotel
industry is drastically affected by the technology development, which creates new opportunities
to those who are able to manage it the best (Bridwell 2010, Jolkin 2010, Makejev 2010)

39

Period 5 – Digital era
partners introduction consistency  Hilstar travelers
 Franchising and worldwide  Hhonors  Leisure
partners management  High quality  Social media travelers
 Airlines  Product develop accommodationn
 Car rentals  Hospitality
 Entertainment Key Resources  Innovative Distribution
providers products
 Digital and
social media  Development chain of hotels
 Technology know how
providers  Partner
networks

 Cost of capital

Figure 13 – Hilton business model after year 2000

40

7 DEVELOPMENT OF HILTON ALLIANCE AND
PARTNERSHIP PORTFOLIO
We have seen how Hiltons business model transformed oever years. In every of the
described historical development phases Hilton was able to add value and create competitive
differentiation through parnterships and alliances. Figure 14 - Development of Hilton's
partnership portfolio. Not all partners are displayed. illustrates how the partnership portfolio of
Hilton grew over years (illustration does not display all the partnerships, but is presented for the
purpose to demonstrate the dynamics and trends in each period). Companies and groups
displayed for different time periods are additions to the portfolio.

Franchising partners

Airports Casinos

1919 1940 1960 1980 2000

Figure 14 - Development of Hilton's partnership portfolio. Not all partners are displayed.

41

In the beginning of Hilton Corporation history, when the model was based mainly on
ownership and management capabilities Hilton the most scarce large scale resource for growth
must have been the financing. Thus in order to leverage its capabilities Hilton needed a financial
partner. Naturally Hilton raised financing from various sources, but the famous financial partner
for Hilton of those times was the Moody family of Galveston (Biard 2004). Thus the partnership
was based on possession of different assets:
− Hilton – hotel management know-how
− Moody – financial resources
In the next phase (1940-1960) Hilton formed extremely successful partnerships with
airports and entertainment providers – casinos and night clubs. This partnerships created new
value for the clients and significantly leveraged value for all partners (Biard 2004) These
partnerships were mainly based on similar goals (attracting more clients) and similar target
segment.
The most important model transformation of the 3rd phase was the shift to franchising
model of operation. Introducing franchising model can be seen as focusing on the core
competence (hotel management) and outsourcing the auxiliary operations (real estate investment
and management) to partners who can do this part better. Additionally franchising model frees
the financial resource and accelerates growth thus leveraging the values of brand name,
consistent brand quality, cross selling and etc. Thus the main addition to the partnership portfolio
of the 3rd period is the franchising partners.
In the 4th phase, having an established franchising model, Hilton begins to leverage its
brand value by focusing on branding, marketing and product development. During this period
Hilton significantly expands its partnership portfolio. Hilton develops its loyalty program
HHonors and partners with numerous companies to offer additional bonuses to the clients and
offer full package services. Today Hilton is partnering with ca 50 airlines worldwide, most of the
major car rentals, Disney World and Universal studios, cruise ship operators, major credit card
companies and etc (Hilton Worldwide official web site). The basic idea of this collaboration is in
cross-selling within the partnership and offering a complete service to the clients.
And finally today, through the partnership portfolio we can see Hilton is focusing even
closer on branding, marketing and product development and innovation. Today Hilton has

42

alliance agreements with such companies as Facebook, YouTube, Twitter. According to Hilton
Vice-president Tim Bridwell Hilton is very seriously taking the e-marketing opportunities
(Bridwell 2010). Other recently formed partnerships are with Accenture and Tata Consulting
aimed at product innovation and development (Bridwell 2010). Other product innovation related
partners of Hilton are Apple (Hilton was the first company to lunch a booking application for
iPhone), AT&T, BlackBerry, IBM, HP, Sony.

7.1 CURRENT STAGE OF THE EVOLUTION
Throughout the history Hiltons business model and capabilities have evolved and
transformed, but every historical period has reflected onto the culture of the company and
today’s value proposition of the company. Thus today the business model involves a complex set
of values. Lets first address common misconception about the Hilton operations. Due to the
complex historical development today Hilton has a mixed model of ownership, franchising and
operating of the properties. For the sake of simplicity let’s say that Hilton has a franchising
model for the most properties in South and North Americas (in reality Hilton does own several
flagman properties) and owns most of its properties in Europe (Bridwell 2010). Such difference
in operation is not a product of strategic intent, but rather a result of historical background – for
years European division was a completely separate company. Now after European operations
have returned under Hilton Worldwide the company is still going through the consolidation
(Bridwell 2010). Also Hilton management is reluctant at this point to say whether it is planning
to divest European properties in future and adapt a more contemporary for large chains practice
of franshising and operation (Bridwell 2010). However it is likely that European operations will
be slowly divested than the time is right and freed resources used either to deleverage or propell
growth, depending on how these properties had been originally financed (Gorman 2010; Seppälä
2010).
It is essential to understand, even though somewhat counterintuitive, that from a company
point of view real estate in itself does not have practically any value. The value is not at all in
walls, floors or beautiful facade, but only in cashflows that it produces (Gorman 2010, Seppälä
2010). More to it, real estate is in fact an additional risk and thus liability, not even mentioning
tha capital costs involved. Thus in theory it makes perfect sense to oursource the real estate

43

investment and management to franchising partners and focus both managerial and financial
resources on the main value adding competence (Gorman 2010, Seppälä 2010).

7.2 Brand standards consistency
Most interviewees agree that primary capability of Hilton is in its ability to ensure brand
standard conformity in every property around the world with uncompromised consistency
(Gorman 2010, Seppälä 2010, Jolkin 2010, Makejev 2010). It has been an ongoing trend in the
hotel industry that the star denominations of hotels are loosing value in the eyes of the customers
due to the inconsistency of standards (Jolkin 2010, Makejev 2010). Today it is common practice
to specify the according to what country standards hotel has a 2,3,4,5 stars rating – eg. Turkish
stars or Western European stars. Under these trend the chains brand standards are becoming
more valued, thanks to their higher consistency (Jolkin 2010, Makejev 2010, Seppälä 2010).
Managing the brand standards consistency on the worldwide scale is not an easy task.
Hilton has a huge number of properties run by people coming from very different cultures and
cultural attitude towards hospitality. Additionally to consolidated purchasing systems every
property has to use many local suppliers and still the overall consistency of products and services
must remain very high. (Bridwell 2010, Seppälä 2010) In order to ensure this consistency Hilton
develops very clear and detailed description or standards for all procedures and products and
constantly makes inspections and provides feedback and guidance to the properties’ management
(Bridweell 2010)

7.3 Branding and marketing
Hiltons marketing capabilities create value both for the franchising partners and the clients.
Franchising partners benefit from the chain scale marketing budgets and centrally based (more
efficient) marketing resources (Bridwell 2010). It is obvious that no independent hotel or small
chain can afford marketing campaign on the same scale with the chains. Clients benefit from the
loyalty benefits that can be very rewarding for frequent travellers (Jolkin 2010, Makejev 2010,
Pawlowski 2010, Marshal 2010). All interviewed experts agreed that loyalty programs are very

44

often the decisive factor for the choice of the hotel, especially for the business travellers (Jolkin
2010, Makejev 2010, Pawlowski 2010).
Additionally the international presence in itself is an important marketing leverage
(Makejev 2010). For instance Rezidor Hotel Group (owner of such brands as Radisson Blu, Park
Inn, Regent and others) are making it a part of their strategy to be present in as many countries as
possible believing, that the presence in the country region helps to attract international business
originating from the location (Makejev 2010).

7.4 Product developement and innovation
Hilton has always been known for being on the edge of innovation both in product and
management philosophy (Baird 2004). This capability to constantly identify relevant
opportunities and develop them into successful products is another crucial value (Bridwell 2010).
So far Hilton and other few large chains were constantly able to be at the forefront of
development and set new industry standards that other companies just have to follow with a
constant lag (Jolkin 2010). Consider the case of introduction of wireless and charge free WiFi in
all hotels. Today it has become a standard for most respectable hotels, but for several years after
Hilton has made it an absolute worldwide standard for its properties clients could not expect the
same from other hotels. Thus many clients would choose Hilton because they new that they will
have the service available. Even today this simple service remains a competitive advantage in
countries like Turke and Egypt (Jolkin 2010). Similar cases could be described with ontroduction
of television sets and telephones in every room. Currently the booking applications for
smartphones is a modern feature offered by the big chains and the industry still has to catch up
(Jolkin 2010).

45

7.5 SMALL PLAYERS VIEW
Having discussed the competitive advantages created by Hilton and knowing that other
worldwide chains adapt the best practices, it is interesting to discuss at least in brief how small
chains and independent hotels compete against the large players. First of all let’s discuss what
are the competitive advantages and disadvantages of smaller chains and independent hotels.
Even though companies like Hilton claim to have the highest level of service and hospitality,
independent high class hotels argue that in most cases their level of service is higher (Jolkin
2010, Pawlowski 2010). Independent hotels are able to resolve any issues on the spot. Any guest
can go directly to the top management or the owner of the hotel. Additionally, usually at the
smaller hotels the staff has much more decision making authority than at a chain branded
property (Jolkin 2010, Pawlowski 2010). However representatives of independent hotels identify
that while they have the capability to offer better service than the larger competitors, they have
very limited capability to market or advertise it (Jolkin 2010, Pawlowski 2010). In order to
overcome this limitation independent hotels form networks based on similar qualities of the
properties (Jolkin 2010). Some of the most know in Europe networks are:
• Leading hotels of the world
• Design hotels
• Small luxury hotels
These networks are strategic alliances of many independent hotels or small chains established in
order to pull resources and achieve economies of scale in marketing and product development
(Jolkin 2010). Thus these networks aim to create essentially similar value for the members and
clients as the large operators like Hilton, Radisson, Mariott. However, so far no chains have
managed to create a loyalty program on a scale competitive to those of the chain brands (Jolkin
2010, Pawlowski 2010).

46

8 LIKELY NEXT STEPS OF DEVELOPMENT
Having reviewed a century of industry development it is fascinating to realize how much
has changed in this relatively short time period and try to forecast how the industry will evolve in
future.
All interviewed expert recognize that technological development is reshaping the industry.
With sites likes expedia.com and booking.com client can easily compare offers and manage his
own booking. This development slowly makes travel agents obsolete in for business travelling
accommodation (Makejev 2010, Bridwell 2010). Recently developed sites like kayak.com take
online booking even further. Kayak.com automatically pulls all the relevant offers from various
web-sites and displays them on a comparable format. Clients can now have perfect visibility of
all rates in the area where he or she travels. Thus price competition becomes much fiercer. This
is especially important with development of applications for smart-phones. If not already today
then very soon clients will be able to have a full review of possibilities and make booking at
anytime from anywhere and this affects the industry drastically (Jolkin 2010).
Another important technological development affecting the hotel industry is Web 2.0. With
sites like Tripadvisor.com, that collect customer reviews, people do not need to rely on brand
promises. Now they can easily get opinions and description from people they trust (Jolkin 2010,
Makejev 2010).
Another clear move identified by the interviewed experts is more specific targeting of
particular segment based on their lifestyle preferences. The best example if Starwood’s W
Hotels, the concept of which is widely called ‘the lifestyle hotel’ or boutique hotels. Currently all
major chains are working on developing of their own alternative to the W hotel (Bridwell 2010).

47

9 BIBLIOGRAPHY

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10 APPENDIX 1 – Interview plan

The area of research is wide and at this point we try to have an open discussion rather than limit
our research to a set of ready question. The following questions are more of discussion plan than
a questionnaire.

The core questions of our analysis could be defined as:

1. What strategic choices allowed Hilton to grow into the world largest hospitality company
(and continue growing)?
2. What are the unique growth strategies of Hilton in terms of alliances and capabilities
development?

For deeper understanding and better structure of the discussion make sure that all of the
following topics are covered:

1. What is the core competitive advantage of Hilton? How is Hilton different from
competitors?
2. What is the value that Hilton offers to its clients and partners?
3. Is it important for a hospitality enterprise to be able to quickly adapt to market and
environment changes?
4. How fast does the hospitality market change? What are the main changes in the last 10
years? Which companies were able to adapt to the changes faster than others and how?
What companies have gained competitive advantage or/and market share through the
ability to adapt faster than others?
5. What is Hiltons core market and management strategy?
6. How has Hiltons strategy changed over time and what are the reasons for these changes?
7. What is the likely furhter development of the strategy?
8. Does Hilton bring new products to the market regularly? What products (can you bring
some examples)?
9. How does Hilton manage the product development and product introduction in such a
massive chain of hotels and resorts?
10. How important are partner relations and alliances in Hiltons growth strategy?
11. What strategic alliances are playing crucial role in value creation, company development
and product development?

I would also appreciate any guidance on where we should direct our attention and suggestions on
who we could interview to improve our understanding of the subject.

52

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