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For: United Airline Prepared by: Ran Huo, Senior Consultant from RH Consulting LLC Date: 6/5/2016 Final Exam: Fly with United & TED

MKT-534 Fly With United & TED

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Page 1: MKT-534 Fly With United & TED

For: United Airline Prepared by: Ran Huo, Senior Consultant from RH Consulting LLC Date: 6/5/2016

Final Exam: Fly with United & TED

Page 2: MKT-534 Fly With United & TED

Table of Content I. Introduction.............................................................................................................................................................................................................................................................................1II. Overview................................................................................................................................................................................................................................................................................1III. The Competition Between United & Southwest (Static & Dynamic Positioning)......................................................................................................................................1

A. Static Industry Positioning: The Price-Performance Curve.............................................................................................................................................................................1B. Dynamic Positioning: Disruptive & Sustaining Business Model...................................................................................................................................................................2

IV. Perceptual Mapping: The Individual Airlines’ Positions.....................................................................................................................................................................................2V. Conjoint Analysis: The Recommended Features for TED....................................................................................................................................................................................3VI. Value Curve: Additional Feature Set Recommendation......................................................................................................................................................................................4VII. Overall Recommendation..............................................................................................................................................................................................................................................5

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I. Introduction Through a bid process, RH Consulting LLP won a contract by the well-known Airline, United to conduct a comprehensive research study. Based on the findings, our consulting firm decided to apply the four analytical tools including: Perceptual Mapping, Conjoint Analysis, Value Curve, and Dynamic Positioning. The primary objectives for the consultation are including: • Understand United Airline’s competition with Southwest Airline through Static and Dynamic positioning model. • Understand United Airline’s current position in terms of customer perception through Perceptual Mapping. • Understand the consumer insight on available options for United Airline, if to launch TED, through Conjoint Analysis. • Understand how to create new market space, if to launch TED, which leads to the increase of economies of scale for sustainable growth. • Make clear recommendations on whether United Airline should launch TED, and how exactly does TED look like. II. Overview United Continental Holdings, Inc. is the holding company for United Airlines, one of the largest air carriers in the world. The company primarily operates in North America. It is headquartered in Chicago, Illinois and employed 84,000 as of December 31, 2014.1 According to Professor Iqbal, “Recently emerged from Chapter 11 (U.S. Bankruptcy Code), United has been facing a steady erosion of its profitability and market share to a once upstart – Southwest Airlines.”

In addition to its debt problem, according to the SWOT analysis, United is facing the external threats from “Intense competition”. The airline industry is highly competitive in recent year. “Competition can be direct, in the form of another carrier flying the exact non-stop route, or indirect, where a carrier serves the same two cities non-stop from an alternative airport in that city or via an itinerary requiring a connection at another airport.” Due to airline industry’s high cost structure, by blindly matching competitors’ discount fares, United is trapped in its debt issue and losing market share.

In order for United to get out of the debt trap and sustainably grow, “United is contemplating by the option of moving the parent United brand more up-market to compete for business end of the market and to create a new offering TED for the consumer segment to compete against low-end airlines such as Southwest.

For the purpose of regaining market share and revamping its profitability, United Airlines are desperate to make the decision on whether to launch TED to compete with Southwest. III. The Competition Between United & Southwest (Static & Dynamic Positioning)

For every large scaled corporation, there are different strategic business units. These strategic business units are belonging to the same corporation, but operating independently in terms of the respective strategies they apply. From the perspective of Airline industry, individual Airline is like independent strategic unit, which applies its unique strategy. In order to make sound recommendations, we need to first examine what exact strategies United and Southwest are applying right now. Then we also need to understand why and how different “strategic business units” compete with each other in the long run. A. Static Industry Positioning: The Price-Performance Curve

Price-Performance Curve clearly demonstrates the static position of each individual company within industry “by classifying recurring customer outcomes and benefits.”2 Companies are pursuing one of the three strategies including: Operation Excellence, Customer Intimacy, and Product Leadership. Figure 1 shows us the Price-Performance Curve. As we could see from the figure, the dependent variable “Price” is positively correlated to the independent variable “Performance”. In another word, with the increase of performance, the price will go up as well.

Southwest Airlines: Operational Excellence According to Figure 1, Southwest Airlines is a typical Operation Excellence company with lower cost, lower level of service, and lowest level of customization. By getting rid of the class seating, Southwest Airlines achieves “one size for all”, which enables customers to enjoy the low price. Its point-to-point service strategy enables Southwest Airlines to have more non-stop flight, which directly result in increasing of convenience. Instead of applying the common “hub-and-spoke” strategy, which the majority of Airlines are currently applying including United, Southwest Airlines effectively improve its on-time performance by reducing the number of the connecting flights and accelerating the turnaround speed.

United Airlines: Product Leadership Figure 1 also shows us the static position of United Airlines, which is in the

1 United Continental Holdings, Inc’ n.d., MarketLine/Medtrack Company Profiles, EBSCOhost, retrieved 5 June 2016. 2 Cited from Professor Iqbal’s course slide, “The Need for Dynamic Positioning: Disruptions Framework.”

Figure 1: UA & SW’s Static Position

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upper right hand side. United Airlines is applying the Product Leadership strategy, which delivers higher performance accompany with higher price and portrayed of sophistication. During the time I wrote this report, United unveiled its luxury Business class cabinet “Polaris”, which emphasis on providing customers an exclusive experience.3 United Airlines access to high performance by providing more features: class seating options (Economy, Economy Plus, Business, and First Class), meal options (hot meal, cold meal, snacks, and dessert), and entertainment system (personal device, seatback on-demand, and main screen). However, higher performance comes with higher price. Furthermore, they don’t provide higher level of customization to customers, because they believe their cutting edge service is the best for their customers. B. Dynamic Positioning: Disruptive & Sustaining Business Model With the impact of time, the natural evolution within an industry is Northeast Migration. With increasingly intensive competition, companies choose to pursue “more sources of available differentiation”, “more price insensitive customers”, and “much higher gross margins” by migrating northeast. By migrating northeast, company’s strategy is transformed from “lower price with fewer features” to “higher price with more features”. Figure 2 shows us how Airline companies shoot for higher end of the markets, specifically for more demanding customers. Before the emergence of Southwest Airlines, Airlines companies were competing by providing more features and functionalities. There is a time when the features that United Airlines supply are equal to the customers’ demand. This ideal point is the equilibrium point allows, “Supply equals demand”. Mostly, the speed that companies adding features is higher than the increase of customers’ demand. According to Appendix 2, there will be a gap between what companies offers and what customers really demand. The gap will become larger with companies continue adding features over time. With the increasing number of features, the price goes up accordingly. Nobody likes to pay what he/she doesn’t really need. As a result, there is a time when customers don’t want to pay the extra to the continuously increasing number of features. At this time, an Airline service with lower cost and better on-time arrivals could sufficiently satisfy customers’ demand. As a result, Southwest Airlines becomes more preferable than United Airlines. Southwest Airlines is a southwest low-end disruptor to United Airlines. Customers become over-served by United’s constantly added features as well as the price. When customers are no longer willing to pay the extra, they are actively seeking other opportunities. Southwest Airlines fulfills the demand of the majority of customers. According to Figure 2, we could see that the red lines indicate the different levels of customers’ demand from high to low. Southwest’s line reaches equilibrium on most of lines, which represent lower demanding customers, while United’s line is even higher than the lines, which represent more demanding customers. As a low-end disruptor, Southwest captures and satisfices the majority of customers’ demand with lower price, higher on-time arrival rate, and fewer number of layovers. This is the reason why United Airlines has had difficulty responding to this threat, and also why United was constantly losing market share to Southwest. In order to be more profitable and competitive in the market, United Airlines choose to follow the path of natural evolution to migrate northeast by adding more features. However, by capturing higher level of customers’ demands accompany with higher price, the majority of customers can’t afford and mostly don’t want to pay the extra. Simply put, the majority customers are no longer thinking United Airlines is an affordable and cost-effective Airline. All of sudden, Southwest Airlines become a viable alternative for customers. In order for United Airlines to survive the disruption from Southwest Airlines, while sustainably grow following the natural evolution path, we recommend United Airlines to make up the mind to split into two strategic business unites by:

• Launching “TED” to capture the majority of customers’ demand and to compete against Southwest Airlines. • Moving parent “United” Airlines more up-market to compete for the business end of the market.

IV. Perceptual Mapping: The Individual Airlines’ Positions In order to understand how United and Southwest are positioned, we conducted a Perceptual Mapping study. As we could see from Figure 3, preference vector is close to the x-axis and most of the vectors are clustered

3 Retrieved from United Newsroom: http://newsroom.united.com/2016-06-02-United-Airlines-Unveils-Reimagined-International-Travel-Experience-United-Polaris-Business-Class

Figure 2: Dynamic Positioning

Figure 3: Perceptual Mapping

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around x-axis. In our case, we have 11 primary vectors besides preference and 3 secondary vectors. From the map, we could see that United Airlines is positioned in the northeast quadrant of the map, where the preference vector is located. In terms of customer preference, United Airlines ranks the top in terms of customer preference.4 Based on the findings, we recommend United to maintain the current position on the map. There is no need to change the perception at this time. TED + United: Figure 4 shows us that there are plenty of available spaces for United to introduce TED. It also shows our recommended space for TED to enter. Keep the dynamic positioning model in mind, the reason why Southwest could gain market share from United is because they capture the demands for the majority of customers. Hence, in order for TED to compete with Southwest, TED needs to have a good perception on “competitive price”. In order to achieving that without hurting the profit margin, TED needs to get rid of all those added features that United provides. There is no need for TED to provide extra features such as “sufficient on flight storages”, “High level of leg rooms”, “Variety of class seating options”, and etc. By eliminating these extra features, TED could dramatically save cost, while investing them into offering customers a more competitive price to compete against Southwest Airlines. Only low price is not enough, because discount Airlines such as Frontier and ATA, they also provide competitive price. However their perception on most of the primary and secondary vectors rank at the bottom, which directly result in their low rank on customer preference. This is the other reason why we recommend this position, because it enables TED to rank higher than Southwest and other discounted Airlines in terms of customer preference. Figure 4 also shows us TED’s achieved position on customer preference. By entering the new space, it also allows TED to have good perception on “competitive price”, “on-time arrival”, and “friendliness of crew”. Most importantly, by having positive perceptions on “competitive price” and “on-time arrivals” are good enough for TED to compete against Southwest. By entering this new space, TED has to sacrifice those good perceptions on features that United provides and ranks high on. Otherwise, there will be internal cannibalism between TED and United, and TED is not capable of competing against Southwest. The result of perceptual mapping confirms our recommendation that United should go with TED and United. By introducing TED to the recommended position, it allows United to keep pursuing Product Leadership strategy by effectively and exceptionally serving the high-end market, while TED to pursue Operation Excellence strategy by providing low-cost service with higher on-time arrival and friendly crew to effectively satisfy the majority of the market, so that to regain market share from Southwest. Here comes the question: How exactly could TED achieve the recommended position? V. Conjoint Analysis: The Recommended Features for TED In order for TED to achieve the recommended position on the Perceptual Map, we need to know what features are relatively important to customers, and how we could create TED with the optimal combination of features. Conjoint Analysis provides us great insights on overall feature importance (features that are important to customers) and utilities of each level for each feature (the level of happiness to customers). According to figure 5, the top three most important features for customers are: Price, Number of Layovers, and Percent of On-time Arrivals. The total of three features occupy more than 85% in terms of feature importance. In order to capture more market share, TED should take priority in considering investing and leveraging these three features. Utility Bar Graph provides us another reason to go with TED and United. Let’s take a look at the intercept. Intercept is the market maturity indicator and also illustrates the entry barrier for companies that attempt to enter the market space. According to Figure 6, the intercept is 0.58 (less than 1). It indicates that the Airline market is not highly matured. It also tells us that in order for United to successfully launch TED, the TPU (Total Product Utility) should go beyond the entry barrier of 0.58. This information strengthens our belief that United should go with United and TED, because it is easy for TED to go beyond the entry barrier.

4 Please see appendix

Figure 5: Overall Feature Importance

Preference

Space for TED to Enter

Starwood Hotels

Days Inn

Disney Resort

Super 8 Motel

Figure 4: Recommended Position for TED

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According to Figure 6, we recommend TED to have: an average price level of $300, zero layovers, and 80% of on-time arrivals. Low-cost is the competitive advantage for Operation Excellence companies. Based on the result, a $300 average price will provide customers the highest Utility (happiness). The $300 price level is perfectly aligned with our previous recommendations. Moreover, it is achievable by sacrificing those extra features. As we mentioned before, low-price is not enough. TED also needs some delighters to differentiate with discount Airlines. We recommend TED to have zero layover, which carry the highest Utility. Most of Southwest’s flights have average of 1 layover, which is less than United Airlines 2 layovers. You might have the question, why on perceptual map, United is perceived to have more “direct flight availability than Southwest”? The reason is because direct flight doesn’t mean there is no layover. The flight, which doesn’t have any layover, is what we called the “non-stop” flight. Its price is normally higher than direct flight with layover. In order to provide non-stop flight while also keep the price down, we recommend TED to further cut add-on features. For feature at the third place, we recommend TED to have an 80% on-time arrival. Southwest’s success as a disruptor to United is not only because of its low price, but also the delighter of on-time arrival. In order for TED to compete with Southwest, we highly recommend TED to match this feature. Point-to-point strategy is the key. In addition, by offering exclusive non-stop flight, TED could further guarantee the 80% on-time arrival. Appendix 6 shows us TED’s recommended feature set and the TPU. Since the three features we recommend takes almost 85% of feature importance, we don’t recommend TED to spend on the other four features and leave them there. By implementing our recommendation, TED could effectively achieve the position shown on Figure 4 with competitive price and high on-time arrivals. Simulated market share also supports our recommendation to go with TED and United. Based on our market research, we made an assumption that the seven features from our conjoint analysis drive the market share. According to Appendix 7, we could see that before launching TED, Southwest has 25.9% market share, whereas United only has 8.8% market share. If United launch TED, Southwest’s market share will go down to 19.6%, whereas TED will gain 24.2% market share. United will continue down to 6.6%, which makes sense because of its northeast migration, more and more customers don’t want to pay premium price. When we Combine the United’s 6.6% with TED’s, totally by launching TED, United could gain 30.8% market share as a whole. It made us more confident to recommend United to go with United and TED. VI. Value Curve: Additional Feature Set Recommendation Figure 7 shows us how TED could achieve its desired sales volume and market share by discovering new market insights, which lead to value creation. Figure 7 also confirms our recommendation for United to go with United and TED, because by implement our recommendation, TED is able to create new market space between United and Southwest. Whenever discussing the topic of Airline Industry, there are 10 common factors. The red line and blue line on Figure 7 demonstrate the status quo of these two types of competition within the Airline industry. Based on the Kano survey result, we categorize these 10 factors into 4 groups. Besides above-recommended feature set for TED through Conjoint Analysis and Perceptual Mapping, Value Curve provides us additional features for TED to include in order to compete against Southwest. Raise Linear Satisfiers According to the dynamic positioning model, as a low-end disruptor, Southwest came into the market with lower cost and 1 delighter that is higher on-time arrival rate. According to the Kano Survey result, our customers rate “Attractive Price” and “On-time Arrivals” as Linear Satisfier. We recommend TED to raise “Attractive Price” and “On-time Arrival” above both United and Southwest. As we mention above, based on the Conjoint Analysis, we recommended TED to have “Average ticket price” as $300 and “Percent of On-time arrival” as 80%, which are identical to Southwest. TED’s zero layover is the key. For example, for a one-way trip from Chicago to Los Angeles, Southwest and TED have the same price ticket that is $300, which seems equally attractive. However, TED is a non-stop flight, whereas Southwest will stop at Denver. Due to the Conjoint Analysis, 0 layover provides the highest Utility to customers. All of a sudden, TED’s ticket price is more attractive than Southwest’s. It is the same as “On-time arrival”. Although both Airlines provides 80% on-time Arrival rate, because of non-stop flight, customers will perceive TED to have much higher on-time arrival rate. You might have the question that it is contradict to the result of perceptual mapping. On the map, Southwest is perceived to be better than TED on the attribute of “on-time arrivals”. It is the impact of time. The change of customers’ perception requires time. Changing the actual feature will not instantly result in change of perception. As a result, it doesn’t contradict to our result of perceptual mapping. Enhance Delighters According to our Kano survey, our customers rate “One price for all”, “First come first serve”, and “self-service” as delighters. According to Figure 7, both United and Southwest don’t provide these factors. As a result, we recommend TED to enhance them as much as possible. Although Southwest provides only one class seating, they has three price levels differentiated by boarding priority and flexibility of choosing the time of flight. The additional features come with price and sometimes confuse customers. In order for TED to compete against Southwest on price without hurting the margin, we recommend TED to have “one price for all” to cut cost and eliminate confusion. By getting rid of price level, like taking a public transportation, it is “first come first serve”. Customers have the same possibility to select wherever he/she want to seat without paying extra. To further cut cost to

Figure 6: Utility Bar Graph

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provide more competitive price, we also recommend TED to have “self-service”. There are bottled water and snacks distributed at the gate and also available to pick up on board. Like taking a public transportation, nobody expects any services. Flight attendant will provide service only if customers ask for it. Reduce “Must Be” According to our Kano survey, our customers rate “Easiness to check-in” and “Service Quality of Flight Attendants” as “Must Be” features. For “Service Quality of Attendants”, as mentioned above, attendants will provide service only if customers ask for it. It totally makes sense because customers don’t care about the “Service Quality of Attendants”. They think Airline should have it but no matter how much you improve, customers simply don’t care, especially it requires them to pay more. As a result, “Self Service” becomes a delighter for them. As long as the price is competitive and flight is on time, customers don’t care about the serving themselves. It also applies for “Easiness of Check-in”. Customers think check-in process should be easy. However, it is not necessary for them to become much happier when check-in becomes easier and easier. As a result, we recommend TED to simply have the two features in place, but reduce the investment on them to minimum. By saving the cost, it allows TED to provide more competitive price, which is the most important feature to customers. Eliminate “So What” According to our Kano survey, our customers rate “Free Checked Bags”, “Available Entertainment”, and “Number of layovers” as “so what” features. As we mentioned above, we have already recommended eliminating layover by providing non-stop flight. For the other two features, according to the dynamic positioning model, they are both perks /added features provided to customers. By completely eliminating these two features, TED could further maximize its cost saving, in turn, it allows TED to provide more attractive price to compete against Southwest. We recommend TED to get rid of “free check bags”. It will become “Pay as you need” and totally discretionary to customers. For customers, much cheaper ticket price bring higher Utility than any other features. As a result, by getting rid of “free check bags” and providing more competitive price, it creates more values to our customers. It is the same as “available entertainment”. All customers’ need is a lower price Airline with on-time arrival and no layover. This is exactly what TED could provide. Economy of Scale By implementing our recommendations, TED is pursuing “Less is better”. By capturing the majority of customers’ demand, TED is targeting the mass market, which allows TED to drive up its volume. The result from simulated market share also approves our opinion. VII. Overall Recommendation In conclusion, by looking across the results from the four tools, we are confident to recommend United to go with United and TED. Static and Dynamic positioning demonstrates us that as a product leadership company, United should follow the natural evolution path and continue capture the high-end demands. It is irrational for United to go back to apply Operation Excellence strategy to compete with Southwest. In order to compete against Southwest in the Operation Excellence space, United should launch TED, a low-end Airline with low cost, higher on-time arrival, and zero layover to capture the majority customers’ demands. Perceptual Mapping confirms our recommendation. For United, it has already been at the top position in terms of customer preference. There is no need for United to change its customer perception. For TED, we can find plenty of spaces, which are available for TED to enter, and at the same time, allows TED to compete with Southwest. Our recommended position on map also allows TED to stay ahead of Southwest in terms of customer preference. Conjoint Analysis tells us the market is not highly saturated and the entry barrier for TED is extremely low. As a result, United should take advantage of this low entry barrier to launch TED. Conjoint Analysis also tells us the feature set for TED to compete against Southwest. The simulated market share further confirms our recommendation. If we go only with United, United is not capable of competing against Southwest. In the long run, it will keep losing market share to Southwest. If we go only with TED, although it could compete against Southwest, United will sacrifice the top position in terms of customer preference and all related primary vectors that drive the preference. In addition to that, United will also give up all its achieved brand equity and brand value. As a result, by going with TED and United, United could effectively compete with Southwest while keep its top position in terms of preference. Value Curve demonstrates us what additional features TED should include or eliminate. It also shows us that it is possible for TED to create new market space between the competition of United and Southwest. By targeting mass market, TED will increase the economy of scale. At the same time, United could continue its steps on northeast migration to offer more cutting edge features to capture the more demanding customers.

Figure 7: Value Curve

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Appendix 1: Static Position of United and Southwest

Performance

Price

OE CI PL

Static Positioning: Price-Performance Curve

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Appendix 2: Dynamic positioning: Southwest Attacker

Time

Perf

orm

ance

Southwest Attacker: Low-End Disruptor

Market Needs

Equilibrium

Equilibrium

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Appendix 3: Dynamic Positioning

Time

Perf

orm

ance

Airline Industry Disruptive & Sustaining Business Model

More Demanding Consumers

Less Demanding Consumers

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Appendix 4: Overall Feature Importance

47.43%

24.60%

14.15%

7.72%

2.41% 2.09% 1.61%

Conjoint Analysis: Overall Feature Importance

Price

Number of Layovers

Percent of On-Time Arrivals

Frequency of Desired Flight

Class Seating

Percent of Time Desired Destination Offered

Food Service

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Appendix 5: Utility Bar Graph

0.58

1.00

0.55

0.05

0.54

0.27

0.05

0.33

0.17

0.05

0.20

0.19

0.05

0.05

0.01

0.00

0.09

0.06

0.05

0.05

0.03

0.02

Intercept

Price $300

Price $600

Price $900

Number of Layovers Zero

Number of Layovers One

Number of Layovers Two

Percent of On-Time Arrivals 80%

Percent of On-Time Arrivals 70%

Percent of On-Time Arrivals 60%

Frequency of Desired Flight Hourly

Frequency of Desired Flight Every Three Hours

Frequency of Desired Flight Every Six Hours

Class Seating Having 1 Class

Class Seating Having 2 Classes

Class Seating Having 3 Classes

Percent of Time Desired Destination Offered 90%

Percent of Time Desired Destination Offered 80%

Percent of Time Desired Destination Offered 70%

Food Service Snack

Food Service Cold Meal

Food Service Hot Meal

Conjoint Analysis: Utility Bar Graph

1. Price

2. Number of Layovers

3. On-Time Arrivals

4. Frequency of Desired Flight

5. Class Seating

6. Percent of Time Desired Destination Offered

7. Food Service

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Appendix 6: Recommended Feature Set with TPU

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Appendix 7: Simulated Market Share If Launch TED

Appendix 8: TPU & Market Share without TED

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Appendix 9: TPU & Market Share with TED

Appendix 10: Brand Clusters

Brand Clusters

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Appendix 11: Perceptual Mapping

Competitive Price

Frien

dlin

ess o

f Cre

w

Terr

ible

On-

Tim

e Arr

ival

s

Terrible Desired Destination Availability

High level of safety

Preference

Inconvenient Gate Location

High level of leg room

Terrible Direct Flight Availability Variety of class seating options

Good Standby options

Perceptual Map for Airline Industry

Disney Resort

Super 8 Motel

Starwood Hotels

Days Inn

Preference

Relative Preference for Airline Industry

Starwood Hotels

Disney Resort

Super 8 Motel

Days Inn

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Appendix 12: Relative Preference

Preference

1 2 3

4 5 6

Relative Preference for Airline Industry

Days Inn

Starwood Hotels

Super 8 Motel

Disney Resort

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Preference

Available Gaps for TED to Enter

Disney Resort

Days Inn

Starwood Hotels

Super 8 Motel

Appendix 13: Gaps

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Preference

Available Spaces for TED to Enter

Super 8 Motel

Days Inn

Starwood Hotels

Disney Resort

Appendix 14: Spaces

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Preference

Space for TED to Enter

Starwood Hotels

Days Inn

Disney Resort

Super 8 Motel

Appendix 15: Recommended Space for TED

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Appendix 16: Value Curve

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Appendix 17: Re-scaled Utility

Appendix 18: Linear Regression Result Appendix 19: Linear Regression Result 2

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Appendix 20: Factor Analysis Result

Appendix 22: Attribute Coordinates

Appendix 21: Brand Coordinates