Product development and brand management

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This thread aspires to address some of the issues relative
to a product that is constantly evolving within a physical
property not designed to accommodate major change.
Further, the value of the product rests in its financial performance,
derived from its service, property standards,
location and profile. We define ‘profile’ as an established
international brand or brand name.
• Context
• Market demand and capital constraints
• Branding
• Market segmentation
• Planned growth
• Product development
• Refresh or reposition
• New product
• Mixed use developments
• Conclusion

For many centuries hospitality properties have been developed and
built for the purpose of providing accommodation and ancillary
facilities in every part of the world. As with the materials and
methods in construction, the nature and systems in hospitality have
evolved over time. Consequently there are examples of buildings
constructed over four hundred years ago as coaching inns that
are still in use today as hotels. Such properties have been altered,
adapted or extended at different times to suit, so far as possible, the
prevalent requirements or standards of the industry. The great railway
hotels built around the world, some hundred years ago, are
today generally either large premier or luxury hotels having been
subject to much change over the years. Similarly, many of today’s
classic luxury or premier city centre hotels were built in the early
part of the last century. Examples abound, including the Ritz hotels
in many of Europe’s capital cities, and the Plaza and St Regis in New
York; often these buildings will have been classified as monuments
or listed buildings, ensuring that their original features are preserved
to varying degrees for future generations. For an industry
that continues to evolve and is subject to changing consumer tastes
and aspirations, the financial fundamentals of preservation and
change can be challenging. Equally when the building is an integral
part of the product and the value of the property is based on its
financial performance these issues are critical. The life cycle of a
building and the life of a particular product may be very different.
For example, the old classic hotels had their accommodation
designed to suit customers travelling with their servants. The rooms
built on the building frontage would generally be large in size,
whereas the rear or attic rooms would be much smaller to provide
accommodation for the servants. Standardizing such anomalies in
room sizes within the constraints of structural grids on an economically
viable basis is not easily accomplished. Multiply this example
by a factor of ten to fifty and it is possible to conceive how difficult
it can be to adapt existing buildings. This is especially the case considering
the introduction of modern building services, including air
conditioning. Each building constructed over the last hundred years
(with the exception of some of the hotels built by the chains such as
Sheraton and Hilton in the 1970s and the more recent budget hotels,
which were developed on a standardized basis) was of individual
design, layout and construction. It has been shown in previous
threads that fire and other building regulations in different countries,
while sharing a certain commonality, will have meaningful
differences which impact on a building’s design and construction.

Market demand and capital constraints
In previous threads demonstrates the latent and growing
demand globally for hospitality accommodation. Similarly it
argues for the major hospitality companies to address the raising
of capital funds on a grander scale, if they are to grow sufficiently
fast enough internationally, and be in a position to satisfy the projected
global demand with adequate supply. The solution to the
supply and demand equation therefore appears to be vested in
the large internationally-based branded groups whom he considers
are the only entities that credibly have any opportunity of
delivering and managing such volume of product. This argument
does, however, rely on two criteria, namely that the product,
branded or otherwise, is suitable for such rapid expansion and
equally can be operated and managed on such a global scale.

Branding
Branding is an established format of product identity and recognition,
utilized to facilitate growth of sales volume, with the benefit
of clear management systems and controls, economies of
scale or volume and enhanced marketing and distribution systems.
Brands require consistency in the delivery of product, providing
consumers with the reassurance at the point of purchase
that price is relative to the quality irrespective of its point of delivery.
For hospitality products, which are rarely purchased at the
point of delivery, an established brand therefore can have enormous
value, and is a powerful tool to deliver volume and manage
price. Market expansion is simplified as established brands attain
greater market penetration by virtue of their ability to attract
home market customers into their different international locations.
American brands therefore have proved particularly
successful in international expansion, as they can draw from a
large and high volume home market. Brands having attained a
certain critical mass and, if managed correctly to convert new
markets into an enlarged ‘home’ market, become self-perpetuating,
giving rise to the concept of globalization or establishment of
a global brand. Currently, global brands exist in a number of
industries such as, Coca-Cola in soft drinks, Nestlé in chocolate,
HSBC in banking and CNN in TV media. In the service sector,
McDonald’s are probably the most readily recognized global
brand. Interestingly, brands that are globally successful are low
cost, high volume products which are relatively simple to manage
and can readily be produced and delivered to a consistent
standard utilizing clear management systems and controls, particularly
in the cost of production and delivery. Not surprisingly
in terms of hospitality brand development the branded budget or
limited ser-vice hotel products have attained the greater growth
within the sector, whereas the full service products’ growth rates
have only benefited in a more marginal way. This is marginal in
the sense that full service brands such as Marriott, Hilton,
Holiday Inn have added meaningful volume in terms of
improvement in profit, profit and performance, but not necessarily
growth.
The reason for this anomaly is readily apparent in the difference
in the complexity of the product content. Whereas a limited
service product focuses solely on the delivery of the physical
content of the hospitality product, a comparatively simple element
to manage, a full service product is required to deliver a
consistent standard in both physical and service standards, the
latter refers to the historical recognition of hospitality being a
‘people’ industry. People are more complex to manage, especially
where the quality of service delivery is judged on the interaction
between individuals, the service provider and customer.
The earlier example of McDonald’s is useful. The McDonald’s
product, like a full service hotel, combines both the physical
and service elements of a product, the significant difference is that
in a McDonald’s unit there is only one interaction between
server and customer. In a full service hotel, the interaction is
multiple and often of a more complex or subjective nature. The
impact of this on managing consistent quality is therefore dramatic,
as the more complex and emotive the interaction, the more
empowered the server inherently has to be. Empowerment entails
high skill levels in process and people management across a
wide range of tasks, involving cultural diversity of staff and
customer alike. Historically, these issues have been addressed by
way of fragmenting tasks and standardizing processes. This manifests
itself in strict limitations imposed on staff, trained to function
in a similar manner to those working on a motor manufacturing
production line. Staff are trained to perform a specific and limited
task in a specified manner or format, ‘a fragmentation’. Fragmenting
interactive tasks in this manner therefore replicates the
McDonald’s principle by limiting the skill level and automating the
individual’s task. The effect of this system of human automation on
staff has been externally recognized as possibly de-motivating.
While in the car production line the limited task and skill was
applied to an inert entity, when applied to another person it can
be not only de-motivating, but also degrading and, in an ever
more classless society, counter productive from the customer’s
point of view.
The challenge for the full service sector in its expansion of
branded products is in its ability to recruit, train, retain and
develop its staff on an international basis, while increasingly
acknowledging the resurgence of regional cultures. Similarly,
its product must be suitable to provide for adaptation to suit
local variations, both in character and physical property
terms. For management, this involves establishing structures
that facilitate more regional governance, invest more in staff
development and retention, and focus on the development of
products that enable regional variance, while retaining core
brand values and communicating the essence of the brand.

Market segmentation
Market segmentation goes some way to rationalizing such issues,
because the variance in mid-market full service physical product is
not great, but is more visible through service standards. Generally,
the lower the perceived quality standard and price, the lower the
customer’s aspirations. In an industry where volume or higher
occupancy is noted in repeat business, matching or exceeding customer’s
aspirations is essential. Establishing a clear definition of
product segmentation is therefore a central issue, as is maintaining
this during highs or lows in inevitable market cycles. Consistency
across a brand’s portfolio in service standard is, arguably,
more important than that of the physical product. Not surprisingly,
when the unit delivers better quality standards rather than
the defined standard, this can be as harmful to a brand’s reputation.
The reason is that this raises customers’ aspirations above
the medium standard deliverable across the brand portfolio.
Establishing and monitoring clear and defined service standards,
where the differentiation is evident to the consumer, is as essential
in the mid-market sector as in the luxury sector.
Historically, the star rating system lacked clarity due to its
subjective criteria and, while understood by the industry, it was
never clearly understood by the consumer. The advent of branding
as a more powerful marketing, sales and distribution system
equally lacked clarity in differentiation. The industry’s lack of
ability to resolve these issues at a time when information technology
was rapidly expanding and becoming more accessible to the
consumer, has resulted in consumer purchase decisions being
based more on an individual unit’s profile and price rather than
any form of brand loyalty. Similarly, corporate purchases are,
arguably, influenced by location, facilities, price and incentive
rather than brand loyalty. Currently, brand value in monetary
terms has not attained the benefits comparable to those of other
industries. Effective product development and brand management
in the hospitality industry should be rooted in communication
between consumer and supplier. The core product or brand
value should be clearly defined in the mind of both, in order to
enable the brand to grow in terms of recognition, market and value.

Planned growth
Where the product’s constituent parts consist of a physical property
and service delivery, it is essential that the standard for both
are compatible, definable and recognizable. Strategically they
should be suited to facilitate growth at a defined level of capital
expenditure and operational cost in targeted locations of established
or anticipated demand. For the product to develop into a
brand, it needs to achieve a geographical coverage or critical mass,
maintain consistency in service and property standards, have
effective distribution channels, develop a requisite public profile,
and articulate an appropriate pricing policy.
In order to achieve rapid expansion, the requirements of both
the physical and service standards must be deliverable in a wide
geographical area in which there are diverse attributes of cost,
labour and other resources on a consistent basis. The rate of expansion
needs to be realistically targeted at the outset, as this will define
the required resources, both financial and human, but also the characteristics
of the physical and service elements of the product. For
example, if the brand to be developed requires the physical property
to be consistent, then it will generally be new built. This means
that its rate of expansion will be limited to the time taken for land
acquisition, period for design, obtaining relevant permissions
and permits, the procurement and construction stages, as well as
operational commissioning period. For the average mid-market
hotel product, this is likely to be a 2–3-year development programme
per unit, consequently, a company developing 10 units
per year would only complete 50 units in seven to eight years.
For this reason, rapid and numerically meaningful expansion of
a new limited service hotel brand (such as Express by Holiday Inn
who have developed over 300 units in the space of eight years,
after two years’ development of the product for the European market)
has only attained such a rapid rate of development in Europe,
by way of franchising the branded product. Even then, such
growth was only viable because the product was fully standardized,
the construction industrialized and systemized and service
standards of a minimal level. This allowed the company to franchise
the development, management and operation of the product
by third party owners, knowing that they, as franchisers, could
monitor, control and enforce adherence to the brand standards.
Beneficially, the development of such units was focused in secondary
locations that benefited from low land costs and construction
on greenfield sites. These factors, together with planned
volume, ensured that reliable and realistic cost parameters were
sustainable and, with latent demand evident for a low-cost highvolume
product in the market place, capital returns were of sufficient
quality to attract the required investment finance. Using the
UK as an example in Europe, Table 14.1 illustrates the rapid
growth attained by a limited number of companies that have concentrated
on this market.
Table 14.1
Limited service hotel growth in the UK

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7-12-2009 05:24

While the limited service product has been the consistent success
story in the sector for the last decade, a period that has conversely
witnessed spells of high returns and extreme lows in the
full service sector, it is notable that development of the limited
service sector is now slowing down in the UK. The slowdown in
growth is not relative to any change in demand but more related
to the fact that the appropriate sites are no longer available and
that expansion into the city centre locations is prohibited by
virtue of the higher land values in such locations. Equally relevant
is the fact that the franchise system imposes restrictions on

the development of the same branded unit within a specific geographical
area to protect the dilution of the initial investment of
the first unit developed in a specific location. As the number of
established brands in the UK is limited, especially those operating
a franchise system, the delivery of further product into the
market will have to await further competitors or new product
that facilitates entry into the city centre locations on a financially
viable basis.
Examples of fully serviced branded products have been shown
in previous threads. Their expansion is much more limited
because the product is more complex in terms of service standards,
facilities and size, and not suitable except in a new build
format for standardization. For companies managing full service
products, expansion has, therefore, focused on a mix of acquisition
and new build. The problem with acquisition has proved to
be brand integrity. Marriott Hotels, for example, (who place great
reliance on the standardization of the physical property aspects of
their brand product) have found that acquisition has generally
not proved financially viable when the costs of compliance works
have been added to the purchase costs. In turn, the Hilton Group
based in the UK (who have been prepared to accept a wide diversity
in the physical product) have grown their portfolio in the UK
and Scandinavia through acquisition, but at the expense of accepting
a wide range of quality and service standards within their
product portfolio.

Product development
Product development in the industry has historically been concerned
with copying, or producing a similar product to the
competition. Individual entrepreneurs who, having established
themselves in the marketplace, have then been bought out by the
large chains who have the resources to expand the product quickly,
have generally introduced new innovations to the marketplace.
Examples of this are extensive in the bar and restaurant market,
for example, Café Rouge and All Bar One, as well as new hotel
concepts such as Malmaison.
Illustration 14.1

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7-12-2009 05:35

Malmaison Hotels: one of the first lifestyle hotel brands

At the time of writing, there is evidence that the major branded
limited service hotel groups in Europe are venturing into planning
and implementing research and development programmes
to refresh their existing brands. The latter are driven by a desire to
maintain brand share and acceptability to the customer, whose
aspirations have risen as competitive supply has grown. However,
new product development originated by the major companies
is still not part of the industry’s agenda. Unlike many other
industries, they are still in reactive mode rather then proactive.
The advent of asset management has given rise to individual
properties’ performance being constantly reviewed, which has
accelerated the process of existing products being ‘refreshed’ or
capacity increased. Similarly, other properties are being refurbished
to reposition them into a new market sector. The latter
is increasingly undertaken as part of the current industry
consolidation.
While the steps in undertaking a refresh, reposition or new
product development are not very different, it is surprising to note
that companies still resist developing their own new concepts or
products. The usual defensive argument utilized is the large
investment and financial risk. However, if an analysis were made
of the value of entrepreneurial ventures bought over the last ten
years and their subsequent failure rate after the new management
systems had been applied, this would make interesting reading.

Refresh or reposition?
The implications of not adapting the hospitality product can be in
decline. Good operators know instinctively that the process is an
iterative one and that it will be costly, inconvenient and often
plain messy. Nevertheless, the implications of delay can be incremental,
as shown in Figure 14.1.
Figure 14.1
The vicious circle of hospitality property decline

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7-12-2009 05:35

Figure 14.1 shows that, when the property, or some of its profit
centres (such as bar, restaurant or spa) becomes overdue for refreshment,
some of the less loyal customers will look at alternatives.
Similarly, staff will be sensitive to customer opinion and perhaps
will wish for better working conditions themselves. The result is
that morale, turnover and profits will decline, so that there is less
residual profit or financial and market credibility to ensure that
the refurbishment occurs. The best operators are aware that the
time to think about improving the product is when business is
good and profits are high. At such times, it is easier to source
funds for capital investment and to attract good quality staff and
management to ensure that standards remain high.
Figure 14.2
The virtuous circle of hospitality property development

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7-12-2009 05:35

As demonstrated in Figure 14.2, the virtuous circle requires
timely development of the property or some of its features. This
leads to satisfied customers and motivated staff, who provide a
service that is appropriate to the target market. Consequently, the
hospitality property makes profits which can be re-invested as
capital projects to ensure its future prosperity. This type of iterative
change is the essence of hospitality development.
The prime objective of a renovation to refresh or to reposition
an existing product is to maintain market share or improve the
property’s financial performance. The process usually consists of
growth followed by a stabilized period of income and then gradual
decline as the product ages. If demand in the locality is still
strong, then a refreshment renovation programme can be implemented.
This can consist of a soft refurbishment or a hard refurbishment
or any level between the two:
• Soft refurbishment: usually consists of replacement of soft
furnishings, furniture elements and minor redecoration but
excludes any major building works.
• Hard refurbishment: normally includes all aspects of a soft
refurbishment but also entails major building works such as
replacement of bathrooms and public area fit-out.

However, the capital costs for refurbishment are usually lower
than those associated with a repositioning exercise. Soft refurbishments
are usually planned as part of the normal trading
requirement of a hotel and, as such, a capital reserve account is
established as a normal part of the hotel’s trading accounts.
Annual contributions normally consist of 3–4% of the property’s
earnings, although recent research indicates that the requirement
over an 8/9-year cycle more realistically requires 8–10%. A repositioning
programme is usually triggered by a change in local
market demand or an opportunity to leverage the property into a
higher or, in some areas, lower market segment. This provides the
opportunity to enhance returns and increase capital values. Repositioning
normally involves major remodelling of the property
and normally incorporates opportunities to expand the property
or increase the number of lettable units.
Figure 14.3

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7-12-2009 05:40

Capital cost differentiation in refurbishment projects

As the diagram in Figure 14.3 shows, the capital investment
required for repositioning a property is greater and the property
will also need to be launched into a new market segment, increasing
cost and risk. This means that staffing, operational systems and
the sales and marketing of the product will be new and reformatted
to suit. The increasing lack of sites or property available in
high demand locations (such as capital or gateway cities) means
that this type of activity has become commonplace in the developed
countries. Similarly, market consolidation has resulted in the
large groups, operating a stable of brands, being regularly involved
in this process after completing a major group transaction that
requires them to rationalize and integrate the new product supply
purchased.
The hospitality industry may be said to be obsessed with valuations
being quoted on a cost per room, value calculated on earnings
per available room less costs multiplied by the relevant
multiple. It is often overlooked that a 230-bedroom hotel may not
always be more valuable than a 200-bedroom hotel. If the mix of
the first is, say, 80 single rooms and 150-double/twin rooms, and
the second has 200 double/twin rooms, the latter may generate a
higher revenue and profit. More detailed analysis, such as that
used in the retail sector, demonstrates that yield per available
m2/sq ft, linked for instance, to GOPPAR (gross operating profit
per available room), can demonstrate that reliance on REVPAR
(revenue per available room) less costs, alone is not necessarily
the best way of calculating a building’s value.

New product
New product development is concerned with identifying products,
goods or services that will appeal to the consumer and
satisfy changes in their lifestyle, or respond to changing demographics
or other trends. Classic examples are, an ageing population,
Internet shopping, health foods and lifestyle products. It is a
common dictum change is the only constant in modern life, and
that the great opportunity for companies that seek to succeed.
Declining industries are characterized by companies that do not
innovate or constantly undertake some form of creative modelling.
The argument that product development requires large
investments at high risk was sustainable 30–40 years ago, but the
advent of computer modelling and other methods have drastically
reduced the cost and time. For example, to develop a new car
model with the aid of computer modelling now takes far less time
and costs much less than 20–30 years ago; similarly, computermodelling
programs can model virtual tours through buildings.
This can be undertaken in the design stage and the resultant
imagery could be used in market testing programmes to access
consumer response to the physical aspects of a new concept.
Financial modelling daily becomes more sophisticated, providing
new tools to reduce the cost and risk of new product development.
With the marketplace continuing to become increasingly more
vibrant, product information and direct purchasing methods
more accessible, consumers will become even more discerning,
powerful and transcend from price to value as the prime purchase
motivator. Value will be determined in many different ways
reflecting the diversity of the individual. Inevitably this will create
a more segmented marketplace, one where the aspiration of a
global brand will be realized by those companies that develop a
brand profile in hospitality similar to that of Unilever in food and
household wares. A hypothetical global hospitality company
would manage an extensive range of individual branded hotel
products. Such individual branded hotels establish themselves
by focusing on identifying consumer trends and developing suitable
products. This does not require ‘reinvention of the wheel’,
because the basic mechanics of a motorcar have changed little in
the last decade but, nevertheless, the range of models available
has exploded. Similarly, the basics of hospitality facilities are not
likely to change in a meaningful way. However, the experience
and packaging will become much more diverse to reflect consumers’
regional, cultural, economical and aspirational preferences.
This hypothetical globally branded company would be
recognized for its ability to manage a diverse range of branded
products, suited to different regions and markets, but all delivering
recognized and appropriate standards of service and facilities
to suit the guest’s aspirational experience. In order to reach global
presence objectives, the challenge for the industry will be to
grasp the mantle of developing the skills of product development
and managing a diverse stable of different branded products that
can deliver the sort of trading results that attract the long-term
investors in property and stocks. In simple terms, the industry
needs to accept that it is no different to any other industry,
developing and selling products into a consumers’ market, and
that its management skills have to be the same. Acceptance of that
simple fact will create an understanding that, as its product is
property based and it cannot afford to be in property ownership
and expand as it needs to, hotel operators need to be equally
skilled in property development management.
This view of product development illustrates that the steps in
managing the process are progressive. The difference between
the existing practice of refreshment, repositioning and new is primarily
the introduction of modelling and market testing. Computerized
systems allow for 3D-modelling of the exterior and
interiors of buildings, providing a virtual tour of the product.
Modelling of such quality can facilitate market testing without a
brick being laid.
Given that the ownership of property and management continues
to be controlled by separate entities, the building owner will
have to be encouraged to deliver a more flexible shell. With the
advent of more systemized construction systems, this is currently
viable. The operator, in turn, will be able to churn his product
life cycle given that capital costs will be greatly reduced.
Unquestionably, the building owner will incur a higher capital
cost to deliver flexibility, but such buildings would attract a higher
rental value and need not necessarily be a single use property.
This is a current limitation of a hotel construction.
Figure 14.4
The product development matrix

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7-12-2009 05:46

The first stage of product development, as illustrated in Figure
14.4, can essentially be a desktop exercise. In such an exercise, the
market appraisal identifies the profile of the product which, translated
into a brief with a schedule of areas, allows preliminary
costings to be established, but utilizing benchmark costs for construction.
The latter provides a capital cost which, combined with
projected revenues and costs sourced from the market research
and operational benchmark costs, provide the required information
to run a financial feasibility programme to forecast planned
returns on investment.
Figure 14.5 The product development matrix II

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7-12-2009 05:46

The processes illustrated in Figure 14.5, if based in an appropriate
building shell, would provide for the continuous recycling
of hospitality-based products located in an area of established
demand. The skills to manage each of the different formats will
be the same and, if the requirement to respond to changing consumer
demand was incorporated as a value objective in the initial
development, it would provide for a long-term utilization of the
property.

Mixed use developments
Illustration 14.3

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7-12-2009 05:59

Stuttgart International Centre: comprising theatre, offices,
apartments, bars, restaurants, cinema, health spa and two hotels

Mixed use developments incorporating retail, entertainment,
bars and restaurants, residential and hotel accommodation are
increasing in number and scale. In many, the property owners are
utilizing facilities management companies to manage such properties.
Each tenant operates their business independently and
contributes to the overall common maintenance requirements of
the complex managed by the facilities company on behalf of the
owner. The hotel will inevitably manage its facility, including
restaurant and bars, in competition with the other outlets in the
complex, as it will duplicate some of the management of the facilities
company in maintaining its own product.
Mixed-use developments therefore offer another opportunity
for hospitality companies to expand their services product range.
All the skills to manage and provide facility services for a mixeduse
development are the very skills that a hospitality operator
exercises each day. Hospitality operations entail the provision of
services such as security, cleaning, maintenance, marketing and
letting of space. By extending the range of facilities for which
such skills are utilized both investor, owner and operator can
benefit. This mixed use development is shown in Figure 14.6.
Further, such multi-use developments provide an opportunity
for the hotel operator to address the provision and operation of
food and beverage in a different manner. The hotel operator
would manage food and beverages but have access to a larger
catchments group, or have the food and beverages provided by
an independent bar or restaurant owner in the complex, or a mix
of the two. Considering the increased separation of ownership
and management in the hotel industry and the increase in ownership
by investment funds whose property folios cover all types
of property like retail, office, leisure and hotels, such an extension
in utilization of the hotelier’s skills would seem natural.
Figure 14.6
Mixed use developments

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7-12-2009 05:59

Conclusion
This thread attempts to challenge owners and operators to look
beyond the traditional methods of development. The first few
years of the 21st century have seen a dynamic change in the relationship
of ownership and operations, driven by a desire to establish
global brands. While branding is arguably a powerful tool in
attaining growth and enhancing profits, it is to be questioned if the
hospitality industry really understands the essence of a brand and
brand management. Separately, this thread reviews the process
of product development and challenges the industry’s ability to
ignore innovations and new product development in the future.
To develop, after all can mean to expand, realize potentialities or
bring gradually to a fuller, greater or better state. In our view the
industry is entering a challenging period and it will have to
develop in the fullest sense of the word. Hopefully, this thread
will encourage innovation or at the very least a little inspiration.

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