Playa Dorada Case Study 1

PLAYA DORADA TENNIS CLUB: EXPANSION STRATEGY

Introduction & Situation Analysis

A major recent trend in the resort industry has been the shift towards the creation

of active and activity-oriented resort destinations which encourage guests to pursue

sports, hobbies and other leisure activities (Costa, Glinia, Goudas & Antoniou, 2004;

Pepper, 2006). This is a departure from the traditional resort format which focused on

providing a comfortable place for vacationers to relax and “do nothing” – at least

“nothing” on the resort premises since resorts are typically located in areas where guests

are free to engage a broad range of activities – and reflects a shift in consumer demand

and the emphasis on healthy, active lifestyles. In the United States, sports-themed resorts

are particularly popular. Variations on the sports-theme resorts include sports-spa

resorts, or those which combine sports like golf courses and tennis courts, and spas

offering massages, facials and fitness programs; and sports “camps” or resorts which

offer guests coaching, lessons and even total immersion in a particular sport (Katz, 2000;

Pepper, 2006).

This paper provides a case analysis and alternative case solution to a Harvard

Business School case study on Boca Raton, Florida-based Playa Dorada Tennis Club,

itself part of a larger Playa Dorada Beach and Resort (Sasser & Kazan, 2010). The time

setting for the case is February 2007. The major decision maker is Douglas Hall, the

newly appointed tennis director at the club. The case focuses on the need to formulate an

expansion strategy in the wake of strong growth in resort guests, growing demand for

tennis facilities, and seasonal problems of full capacity and unavailability of courts for

guests.
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Court usage at Playa Dorada Tennis Club is projected to double for the third year

in a row and 2007 capacity utilization is expected to reach 47% overall, up from 34.8% in

2006 (Sasser & Kazan, 2010, p. 3). Projections indicate that the facilities (23 courts,

including 18 clay courts and five hard-surface courts) will be at full capacity in the peak

vacation months of March and April and reach near-capacity in January and February.

While Hall is under pressure to devise an expansion strategy by his March meeting with

Playa Dorada executives, he must carefully weigh the interests of all stakeholders in

formulating this strategy. The marketing and sales departments are in favor of an

aggressive expansion strategy since home sales are directly linked with guests’

satisfaction with vacation experiences, and surveys indicate that availability of tennis

courts are closely linked with guest satisfaction. While sales and marketing advocate

building more courts without regard to costs or operating efficiencies, other stakeholders

are focused on these concerns. Resort Operations would like to see any expansion

program be consistent with optimally effective land use. Although the courts operate at

full capacity in peak season, it is important to note that utilization rates are low during the

off-season and that utilization rates for the hard courts are much lower than they are for

the clay courts. Meanwhile, the Finance Department expects a satisfactory return on

investment (construction of each clay court costs $48,000) and strong cash flow. This is

itself a problem, since the tennis operations have never been profitable.

Problem Definition

The Playa Dorada Tennis Club suffers from lack of profitability and periodic

capacity problems (both over-capacity in the offseason and under-capacity in the peak

season). Because under-capacity problems threaten new home purchases – the major
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source of revenue for Playa Dorada – there is considerable pressure to expand and build

more tennis courts. At the same time, Hall must craft an expansion strategy which

attends to the needs of stakeholders from finance and resort operations. Overall, Hall’s

objective is to transform Playa Dorada Tennis Club into a profit center for the resort, and

to do this within the context of a viable expansion strategy.

Problem Analysis

A review of the current situation at Playa Dorada Tennis Club reveals that there

are a few key issues related to any potential expansion strategy.

Seasonality

While it is certain that the number of tennis courts must increase if Playa Dorada

Tennis is to meet guest demand during the prime vacation season (January through

April), for much of the year, there appears to be a surfeit of tennis courts available for a

much smaller number of guests. If new courts are added as part of the expansion, there is

likely to be considerable problems of over-capacity during the off-peak summer season,

especially if there are no other changes in operations. The lower demand for tennis

courts in the off-season appears to be a function of the reduction (versus peak season) in

the total number of guests/visitors/residents at the resort. In 2008, it is projected that the

number of guest nights at the resort will vary from a peak of 130,696 in March to a low

of 21,717. Hall appears to be viewing this as an inevitable problem – tourists have little

incentive to flock to steamy Boca Raton in the summer. At the same time, it should be

noted that Playa Dorada’s peak season is really quite short – just four months a year (with

March and April the only times when guests have difficulty booking tennis courts).

Other resort destinations in Florida (e.g., Disney World, Epcot, Kennedy Space Center,
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etc.) manage to attract tourists year-round. There may be strategies which Playa Dorada

Tennis Club could employ to attract visitors during the off-season. It should also be

noted that there is not a direct relationship between the number of guests at the resort and

the number of court hours used at PD Tennis Club. Indeed, as indicated in Exhibit 3, the

guests who visit the resort in the offseason months of June, July, August and December

are actually more likely to demand court hours (overall) than guests during the peak

tourist season months of March and April (Sasser & Kazan, 2010, p. 9).

Space Limitations

There is only enough room for four more tennis courts at the current south resort

location. These courts could be constructed at a cost of $48,000 each, excluding land. If

Hall’s plan is to construct more than four new courts, it will be necessary to identify a

new site within the resort. Since such courts would be constructed at some distance from

the present set of 23 courts, it will be necessary to also duplicate supportive facilities and

service staff, thus adding significantly to the cost.

Limitations of the existing facilities & facilities management

Playa Dorada currently has 18 clay courts and 5 hard courts. Most adult players

prefer the “natural” softer clay courts because they are less likely to cause leg fatigue.

From a facilities management perspective, however, the clay courts are more

difficult/expensive to maintain, more expensive to construct, and have a shorter lifespan.

Not surprisingly, given players’ preference for clay, the utilization rates of the clay courts

are nearly double that of the hard court. In terms of pricing and scheduling, however, the

tennis club does nothing to differentiate the clay and the hard courts.
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The hours that players can use the courts are limited by the hours that

management keeps the courts open and lit. Although the case does not specifically note

the hours of operation, based on the information provided, it appears that the facilities are

open from 7 AM (maintenance is performed early in the morning before players start

using the courts) until 8 PM. There is lighting on a limited number of the courts, which

allows for some night play. All of the courts are open (i.e., uncovered) and unprotected

from the elements. During the summer, the heat and humidity renders the courts

unusable during mid-day and uncomfortable during the rest of the day. There are also a

few days each month when rainy and/or stormy weather forces closure of the courts.

While tennis clubs in cold-weather regions feature indoor, climate controlled courts to

attract visitors during inclement weather, Playa Dorada has apparently to date not

considered the possibility of shielding its guests from the harsh summer weather.

Simplistic & Sometimes Counter-effective Pricing Strategies

The current pricing system at Playa Dorada is rather simplistic. Guests are

charged a flat-fee premium rate for the first two hours ($20/hour for adults, $10/hour for

students 18 years and under) and a half-rate ($10/hour, $5/hour respectively) for

additional hours. Night play (lighted court) is charged at $40 an hour, with no discounts

for additional hours (probably because the facility is not open long enough to allow for

additional play time at night).

There is no clear explanation for why a half-price discount is offered students. It

would make more sense if they were limited to certain off-peak hours or to usage of hard

courts.
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Especially during the peak season, it makes no sense to offer discount pricing on

additional hours (beyond the first two hours) of play. The guests who monopolize the

courts at a discount rate are preventing full-price guests from using the courts. The two

tennis plans (4-day and 7-day) offer discounts and presumably guarantees of a court

space. Although these plans are not available during March and April, Hall might want

to consider reducing their availability during the semi-peak months of January and

February as well. Another option would be to adjust the pricing of the plans to reflect

seasonal demand.

The current pricing plan does not reflect any changes in demand for the courts based on

time of day. The peak times are in the morning (9 am to 11 am) and late afternoon/early

evening (4 pm to 6 pm).

Profitability

PD Tennis Club is not profitable. Any expansion of the facilities would be costly

and would make achieving profitability more difficult. Despite the history of loss-

making, Playa Dorada management has set a goal of 25% contribution for the tennis

operations (Sasser & Kazan, 2010, p. 4). This represents quite a challenge for Hall.

Value Added Services

There appear to be few value added services (beyond ball machine rental and

tennis equipment rental) offered by PD Tennis club. Noticeably absent are tennis pros,

lessons or tournament activities.

S.W.O.T. Analysis

Strengths
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1. Strong demand for tennis court time from guests and residents (year round

demand).

2. Good location in a prime resort area.

3. Good supporting and complementary facilities (e.g., hotel, golf course, etc.).

4. Financial strength of Playa Dorada resort operation.

5. Willingness of PD management to fund expansion.

6. PD management’s commitment to tennis operations.

Weaknesses

1. Unprofitable

2. Lack of available courts during peak season and peak times

3. Simplistic and sometimes counter-productive pricing system

4. Lack of value-added services

5. No indoor and/or climate-controlled courts

6. Few night courts

7. Excess capacity during off-season

Opportunities

1. Increase revenues and contribution by increasing tennis court utilization

2. Increase utilization during off-peak hours and off-peak seasons

3. Increase revenues by charging higher prices during periods of strong demand

4. Create a profit center for the resort

5. Make PD Tennis Club a destination location

Threats

1. Excess costs of expansion lead to losses for resort

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2. Competition from other tennis resorts in the area

3. Competition from other non-tennis resorts

4. Guest dissatisfaction related to unavailability of courts

5. Price resistance

6. PD Management stops supporting tennis

Alternatives

While Hall believes that not expanding the current number of courts is not an

option because of pressing capacity issues, this analysis suggests that it is possible for PD

Tennis to expand without building additional tennis courts – at least for a while. The

following main alternatives have been identified.

1. Expand by increasing the efficiency of capacity utilization. As previously noted,

there is a lack of efficiency in how the existing courts are used. Pricing strategies

could be used to encourage use (discount pricing) during off-peak hours and

discouraging use (premium pricing) during peak hours. Likewise, the operation

could be made more efficient by altering the multi-day plans and eliminating the

half-price discounts for additional playing hours (except during non-peak times).

The primary advantage of this strategy is that it would cost virtually nothing to

implement. Moreover, it could result in significant alterations in the pattern of

use, therefore dramatically increasing the efficiency (and likely profitability) of

operations. It would also have the advantage of perhaps eliminating (or at least

postponing) the need for physical expansion of the courts. Another advantage of

this alternative is that it is likely to receive strong support from Resort Operations.

A major disadvantage with this alternative concerns the uncertain results of a

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premium and/or discount pricing strategy. Since PD has historically used a flat-

rate pricing strategy, it may be difficult to reliably predict customers’ responses to

variable pricing (Steenburgh & Avery, 2010, p. 1). However, it might be possible

to estimate the elasticity of demand by examining pricing and demand levels at

other tennis clubs. In addition to this uncertainty, another disadvantage of this

alternative is that guests may become confused over the new pricing structure.

Another possibility is that guests will be alienated by the new pricing structure.

Yet another possible negative effect is that the sales and marketing department

will oppose this expansion strategy.

2. Expand by increasing the potential utilization capacity of existing courts. Rather

than specifically concentrating on increasing the efficiency of existing capacity

utilization, Hall could expand the potential capacity of the existing 23 courts by

expanding the hours of operation and making modifications to the facilities to

enable operation during inclement weather. For instance, if lights were added to

more of the courts, it would be possible to expand hours of operation both at the

end of the day (into the night) and at the beginning of the day (early morning

before sunrise). Additionally, if covering and climate control were added to some

of the courts, it would be possible to keep earning revenue during hot and humid

days (or mid-days during the summer) as well as during rainy or stormy days.

Although this alternative would require some investment in lighting and (if the

option of adding covering is selected) covering/climate control, the total

investment would likely be considerably less than building new courts. This

option would increase overall revenue from the tennis operations, and thus
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increase tennis’ contribution to the resort. Finance, Resort Operations and even

Marketing would probably endorse this option, at least as a short-term measure.

A disadvantage with this alternative is that it would not, of itself, do anything to

alleviate the problem of high demand for courts and limited availability during

peak hours and the peak season.

3. Build four new clay courts on the south area of the resort. This appears to be

Hall’s default first option for expansion. The four additional courts would

alleviate the demand crunch during the peak season and would provide necessary

room for growth during the rest of the year. This option would clearly be in line

with Marketing’s expectations. It is also a less expensive option than building

more courts in another part of the resort. A key disadvantage to this option is that

it does nothing to address the existing inefficiencies in the operation or to address

the lack of profitability.

4. Plan on continued strong growth in demand, build eight new clay courts in

another part of the resort, along with necessary supporting facilities. If new

courts were added in another part of the resort now, PD could hold in reserve the

option of adding another four courts on the south side in a few years. The

primary advantage to this option is that it would address the peak-season capacity

crunch over the medium-term. There are a number of disadvantages to this

alternative, however. First, it would be a very costly alternative since it will

require providing additional supportive facilities (and the associated labor).

Moreover, as with alternative number three, this does nothing to address existing

inefficiencies or lack of profitability.

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5. Focus on increasing revenues and profits through value-added services. Rather

than simply adding more courts or expanding potential capacity of existing courts,

PD tennis could focus on increasing revenues and profitability by providing

additional related services and utilizing appropriate pricing strategies. Possible

services to add include tennis pros, tennis lessons, tennis clinics, tournaments, and

special events. This alternative has the advantage of directly addressing

profitability and contribution shortcomings. It also provides a basis for

developing a competitive advantage. On the other hand, this alternative could

prove costly, perhaps as costly (in terms of the initial investment) as building four

new courts on the south part of the resort. Another disadvantage is that this

strategy will not necessarily address the looming capacity shortage problems

during the peak season/hours. Yet another potential disadvantage is that a focus

on tennis pros and tennis lessons might diminish the “play” (and amateur focus)

of Playa Dorada.

Recommendations

None of the five alternatives discussed above can fully address the problems

identified at PD Tennis Club or position the Club to meet the objective of turning tennis

into a profit center for the resort (and hitting the target 25% contribution). Realistically,

in order to meet the profit and contribution objectives, and to address the peak-season

under-capacity problem, Hall will need to fashion an expansion strategy which adds

capacity, increases the efficiencies of current operations, and enhances the current service

offerings in a way which attracts more guests and increases demand. Prior to physically

adding capacity by building additional courts, it is strongly recommended that PD Tennis

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Club expand the potential capacity of the existing facilities through mechanisms

suggested in the discussion of alternative #2 as well as increasing efficiencies of existing

operations through pricing and other mechanisms suggested in the discussion of

alternative #1. Moreover, it is strongly recommended that Hall work to enhance the

reputation and value of the PD Tennis Club brand by increasing the range and scope of

value added services like tennis lessons, tournaments and tennis pros. It is only through a

combination of such methods that PD Tennis Club can evolve into a profit center for the

resort.

It is recommended that Hall request an initial investment budget of $192,000

(equivalent to the cost of building four clay courts) to be spend on upgrading and

expanding existing operations. Based on operational outcomes, it is recommended that in

two years Hall request another $500,000 be invested to expand the facilities with new

courts. The following specific measures are recommended:

1. Implement variable pricing, with premium pricing during peak seasons and peak

hours and discount pricing during traditionally “slow” times.

2. Install high-efficiency, solar-powered LED lights on at least another eight courts;

expand hours of operation, keeping the lighted courts open from 5 AM to

midnight.

3. Charge the same hourly court rates at night as during the day; charge a premium

for the second hour during peak early morning and mid-evening times; offer

discounts during periods of low demand later at night.

4. Place a removable covering (that will allow for climate control) on eight of the

courts to allow for operation during hot/humid and/or rainy weather.

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5. Judiciously begin adding services such as tennis clinics, lessons, and tennis pros.

6. Begin planning for the construction of a new four court center which will have a

retractable roof and surrounding seating. The facility should be designed to host

tournaments and special events, including non-tennis events related to the resort.
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References

Costa, G.; Glinia, E.; Goudas, M. & Panagiotis, A. (2004). Recreational services in
resort hotels: customer satisfaction aspects. Journal of Sport Tourism, 9(2), 117-
126.

Katz, I. (2000, May 8). Whip your game into shape – at a tennis camp. Business Week,
pp. 160E2-160E3.

Pepper, T. (2006, March 20). Sports-spa resorts. Newsweek, 147(12), E24.

Sasser, W.E. & Kazan, B. (2010). Playa Dorada Tennis Club: expansion strategy.
Harvard Business School Case Study, 4221(June 24, 2010). Boston: Harvard
Business School Publishing.

Steenburgh, T. & Avery, J. (2010). Marketing analysis toolkit: pricing and profitability
analysis. Harvard Business School Quantitative Toolkit, 9-511-028 (July 16,
2010). Boston: Harvard Business School Publishing.