Case study on The Mountain View

Operations Research Final Report

Submitted By

GROUP 4
PGDM 2019-2021
Torsha Kundu (19PGDM056)
Akhilendra Pratap Panday (19PGDM006)

December 2020
Introduction to the case:
Goa Vela, Goa is known for its beautiful beaches and cheap beers. Unfortunately, there are only two
hotels in this area, “The Grand Pix” and “The ECO” and they almost control the entire market. But a
year ago 3rd hotel “The Mountain View” came in the area to compete with the existing players who
were enjoying monopoly since last few decades.
Vishwa is the owner of the “The Mountain view” and he wants to grab a large share of the market with
the help of exceptional customer service and economic pricing.
It’s been a year of business, Vishwa was looking at the business report to check his progress and insights
in the market situation. He found out that his market share is 10% at present. He was worried that 90%
of market share is still being shared by the Grand pix and Eco hotel of which Eco was able to grab 50%.
Other insights of the market research were the retention rate of each hotel. As per the Research
Mountain View was able to hold 90% of the Customers and remaining 10% switched to others equally.
Similarly, The Grand Pix was able to retain 70% of customer but 25% switches to The Mountain view
and 5% switched to ECO. In the case of ECO, it was able to retain 80% customers and remaining 20 %
switched to other competitors equally.
Vishwa wants to capture a large market share and then he wants to expand his hotel in order to
accommodate the increased guests. As Per his Estimate His present infrastructure is able to sustain the
pressure of 52% market share but after that he needs to expand the hotel. So, his aim is to determine the
time horizon when his hotel will capture at least 50% market share. He will start the construction of
hotel expansion after reaching that minimum 50% market share.
He is also thinking about accumulating some capital by investing Rs.900000 now in some investment
options till the time his hotel captures at least 50% market share. After that he will take the capital out
for financing the expenses.
At present he has a few investment options and found that these are the best option for the investment
but he is still confused which option will give him the highest return till the time his hotel will need
expansion.

Table 1
Industry/Sector Expected annual return
Investment options
rate (%)
Telecommunication Share A – Reliance Digital 15.4%
Telecommunication Share B - Reliance Jio 19.2%
Food Industry Share C - Pizza Hut 18.7%
Food Industry Share D – Dominos 13.5%
NA Mutual fund A 17.8%
NA Mutual fund B 16.3%

The financial advisor have suggested a few points to Viswa to ensure his investments are subject to the
minimum risk. The suggestions are as follows:

1. Amount invested in shares of an industry/sector should not exceed 50% of total available fund
invested.
2. Amount invested in shares with the larger rate of return of an industry/sector must be less or equal
to 80% of sector’s total amount
3. Amount invested in company Β should be less or equal to 10% of the whole share amount
4. Amount invested in mutual funds should be less or equal to 25% of the amount in
telecommunication industry.
Once he is well informed about his total accumulated capital from the investment he wants to determine
which type of constructions should be done first. For this he conducted one internal customer demand
analysis and found that, almost 60% of his revenue comes from standard rooms and almost 15% revenue
comes from deluxe rooms. He also observed that majority of their customers are corporate clients and
are demanding for conference rooms for various corporate purposes. Demand for conference rooms can
fetch him almost 5% of total revenue. Hence, Viswa is thinking about constructing few standard rooms,
deluxe rooms and conference rooms at the very first stage of hotel expansion.
To get an idea of construction Viswa consulted one architecture firm and got to know about the
minimum size and cost for each type of rooms:

Table 2
Room type Size(sqft) Construction cost(INR)
Standard room 500 10000
Delux room 800 12000
Conference room 1200 24000

After knowing Viswas decision to do the construction after some years the architect said that the
constructions cost increases by almost 2% every years. So, based on the cost and available capital they
should start planning the blue print of the expansion. In response to the architects statement Viswa said
that his property has 250000 sqft area readily available for expansion work. And he wants that at least
100 standard rooms, 25 delux rooms and 10 conference rooms should be constructed.
To answer the question about the cost and available capital, Viswa needs to find out after how many
years he wants the architect to start construction and also need to provide him with the budget.

Objective
The objective of our study is as following:
1. Find out the time horizon in years when the market share of The Mountain View hotel will be
at least 50%
2. Determine the combination of investment portfolio for Viswa to invest Rs.900000 today to
maximize his returns at the time when his hotels market share will be at least 50%
3. Determine the number of different rooms that can be constructed given the cost and area
constraints under the business scenario.

Information and collection of data

All the relevant data and information has been mentioned in the case introduction.

Techniques used
For our analysis and reaching out to a definite solution we have used multiple methods in Operations
research.
For, achieving our first objective we have adopted the method of Markov Analysis. Markov
analysis provides probabilistic information about a decision situation that can aid the decision maker in
making a decision. Markov analysis is specifically applicable to systems that exhibit probabilistic
movement from one state (or condition) to another, over time. For example, In this case switching of
customers can be represented in the form of transition matrix –

Transition matrix of market share

The Mountain View The Grand Pix The ECO
90% 5% 5% The Mountain View
25% 70% 5% The Grand Pix
10% 10% 80% The ECO
Transition Matrix-The matrix describing the Markov chain is called the transition matrix. It is
the most important tool for analysing Markov chains.

 This example contains several important assumptions.

 First, the probabilities in each row sum to one because they are mutually exclusive and
collectively exhaustive.
 Second, the probabilities apply to every customer.
 Third, the probabilities will not change over time.
It is these properties that make this example a Markov process. In Markov terminology, each
probability is referred to as a state of the system. The probabilities of the various states in Table
are known as transition probabilities. In other words, they are the probabilities of a customer’s
making the transition from one hotel to another during one time period.
Here we are using Markov Process to get the most obvious information available which is
probability of being in a state at some future time period. In this Case we are looking at the
time period after which the Mountain View will reach 50% market share.
For, achieving our second objective we have adopted the method of linear programing. Linear
programming is a simple technique where we depict complex relationships through linear functions and
then find the optimum points. Linear programming is a simple technique where we depict complex
relationships through linear functions and then find the optimum points. Linear programming is used
for obtaining the most optimal solution for a problem with given constraints. In linear programming,
we formulate our real-life problem into a mathematical model. It involves an objective function, linear
inequalities with subject to constraints.
For achieving our third and final objective we have used weighted linear Goal programing. Here
we consider goal programming, one technique used for multi-criteria decision making. Goal
programming is a branch of multi-objective optimization, which in turn is a branch of multi-criteria
decision analysis (MCDA). It can be thought of as an extension or generalisation of linear programming
to handle multiple, normally conflicting objective measures. Each of these measures is given a goal or
target value to be achieved. Deviations are measured from these goals both above and below the target.
Unwanted deviations from this set of target values are then minimised in an achievement function. This
can be a vector or a weighted sum dependent on the goal programming variant used. As satisfaction of
the target is deemed to satisfy the decision maker(s), an underlying satisficing philosophy is assumed
Formulation of models
1. Finding out the time horizon in years when the market share of “The Mountain
View” hotel will be at least 51%
For this we have followed the Markov analysis method where the current market share of each of
the three hotels were multiplied with the transition matrix. Where the transition matrix contained
the rate of customer shift from one hotel to another in a year. Figure 1 has the transition rate of
customers among each hotel yearly.
Figure 1

The matrix to calculate the market share of each hotels after nth year is:

Matrix containing the Transition matrix of

current market share at × customers among the
the beginning of the nth three hotels
year of each hotels
The above mentioned matrix multiplication is repeated until the desired result is achieves or the
stable state is being achieved.
In our case the matrix looks like,
Present Market share Transition matrix of market share
The Mountain View The Grand Pix The ECO The Mountain View The Grand Pix The ECO
10% 40% 50% 90% 5% 5% The Mountain View
25% 70% 5% The Grand Pix
10% 10% 80% The ECO

And we iterated the matrix calculation until we achieved the year at which the market share for The
Mountain View became at least 50%.

2. Determination of the combination of investment portfolio to invest Rs.900000

today to maximize his returns at the time when his hotels market share will be at
least 50%
For this particular problem we have used simple linear programming method. Where the amount
invested in each investment option is defined as variables.
The objective function is the total capital that Viswa will get after certain number of years (the
result of objective 1).
 Here, the variables are as follows:
X1: Share A – Reliance Digital
X2: Share B - Reliance Jio
X3: Share C - Pizza Hut
X4: Share D – Dominos
X5: Mutual fund A
X6: Mutual fund B
Objective function:
Max (Received capital from investment after n years) = (x1*1.15^n) +(x2*1.192^n) +(x3*1.187^n)
+(x4*1.135^n) +(x5*1.178^n) +(x6*1.163^n)

Subject to:
x1+x2+x3+x4+x5+x6<=900000……………………1
x1+x2<=450000…………………………………….2
x3+x4<=450000…………………………………….3
-0.8x1+0.2x2<=0……………………………………4
0.2x3-0.8x4<=0……………………………………...5
-0.1x1+0.9x2-0.1x3-0.1x4<=0………………………6
-0.25x1-0.25x2+x5+x6<=0………………………….7

3. Determination of the number of different rooms that can be constructed given the
cost and area constraints under the business scenario
Decision variables:
X: number of standard rooms
Y: number of deluxe rooms
Z: number of conference rooms
Goals:
1. The expansion should include approximately 100 standard rooms
2. The expansion should include approximately 25 deluxe rooms
3. The expansion should include approximately 10 conference rooms
4. The expansion should consists of approximately 250000 sqft area
5. The expansion should cost approximately Rs.1987913 [from objective 2]
Deviations

 For number of standard rooms over achievement is allowed

 For number of deluxe and conference room over achievement is not allowed
 For space under achievement is allowed
 For cost over achievement is not allowed
Objective
Min Ʃi (di - + di +)
Goal constraints
X + d1 - - d1 +=100………………….1
Y + d2 - - d2 +=25…………………...2
Z + d3 - - d4 +=10……………………3
500X+800Y+1200Z+ d4 - - d4 +=250000……………………4
(10000X+12000Y+24000Z)*1.02^5+ d5 - - d5 +=1987913……………..5
Outcome and Analysis:
1. Finding out the time horizon in years when the market share of “The Mountain
View” hotel will be at least 51%
“The Mountain View” hotel will be able to capture the 50% market share somewhere between the
year 4 and year 5 from today [table 3].
Table 3

Market share at the end of n th year

After nth year The Mountain View The Grand Pix The ECO
1 24% 34% 43%
2 34% 29% 37%
3 42% 26% 33%
4 47% 23% 29%
5 51% 22% 27%
6 54% 20% 25%
7 56% 20% 24%

Hence, it can be said that Viswa should target his investment for next 5 years and start expansion
work at the end of 5th year.

2. Determination of the combination of investment portfolio to invest Rs.900000

today to maximize his returns at the time when his hotels market share will be at
least 50%
Viswa should invest in three investment options as follows:

 Invest Rs.279000 in Share A – Reliance Digital at an annual compounded return rate of

15.4%
 Invest Rs.81000 in Share B - Reliance Jio at an annual compounded return rate of 19.2%
 Invest Rs.360000 in Share C - Pizza Hut at an annual compounded return rate of 18.7%
 Invest Rs.90000 in Share D – Dominos at an annual compounded return rate of 13.5%
 Invest Rs.90000 in Mutual fund A at an annual compounded return rate of 17.8%
The investment period should be 5 years and the maximum capital that he will achieve is
Rs.1987913.
Hence the budget for the expansion work is Rs.1987913.

3. Determination of the number of different rooms that can be constructed given

the cost and area constraints under the business scenario
Given the more emphasis on constructing standard rooms and cost constrains of Rs.1987913 and
space constraints of 250000sqft. It came out that the architect should plan for constructing 145
standard rooms, 25 deluxe rooms and 10 conference rooms. This will cost Viswa Rs. 1987345.446,
hence he will save almost Rs.568 and this blueprint will save a space of 145500 sqft. This excess
space can be utilized for next phase of expansion.
Conclusion
The Mountain View hotel will capture 50% market share somewhere between the 4 th and the 5th year.
Hence, Viswa should plan to start the hotel expansion work after the 5 th year. And he should also
invest his money on Share A, Share B, Share C, Share D and Mutual fund A for these 5 years to get
maximum return on investment. The budget for expansion work is Rs. 1987913.
The architect should plan to construct 100 standard rooms, 25 deluxe rooms and 10 conference room
that will save up Rs.568 from the budget and will require 104500 sqft. area.

Limitations of this case study

 As a new establishment The Mountain View has only one year data to depend its predictions on.
This put more uncertainty on the final outcomes.
 All the calculation has been done on probabilistic data for future supported through market research
data.
 Other variations that may occur at any point of time in the hotel business has not been considered.
 Markov analysis assumed that the market transition rate of customers will remain same for future
years as well.