GLOBAL ENTERPRISE AND COMPETITION | 66.511.

081 | SPRING 2014

Assignmen 1
L!"en#!$% C!&e'( T)e C)in! C)!**enge
B$ie& C!ses( +!$"!$# B,siness S-)..* / Re" 0e1$,!$% 262 2013
[2]
T!1*e .& C.nens
Table of Contents........................................................................................................................ 2
Question 1................................................................................................................................... 4
a)What is a Multi-unit Restaurant (MuR) Business? ....................................................................4
b) o! bi" is it? .......................................................................................................................... #
$) %s it a $onsoli&ate& or fra"'ente& in&ustr(?.............................................................................#
Question 2................................................................................................................................... )
Question * ....................................................................................................................... 1+
Wh( &i& ,e-en&ar( &e$i&e to enter China Mar.et? o! &i& its /0 foun&ation 'at$h a"ainst
China 'ar.et nee&s? ($o'1are /0 2s China 'ar.et in ter's of $usto'ers an& o1erations). . .1+
b) o! &i& its /0 foun&ation 'at$h a"ainst China 'ar.et nee&s? ($o'1are /0 2s China
'ar.et in ter's of $usto'ers an& o1erations)3 .........................................................................11
Question 4................................................................................................................................. 12
Wor.s Cite&............................................................................................................................... 14
[*]
Introduction
Howard Leventhal, the former CEO ,was the beloved founder of popular Lavendary Cafe'
in Denver, Colorado as a small soup, salad, and sandwich restaurant. he restaurant evolved into
a !"# billion dollar firm comprised of over $,%## caf&s nationwide. In the 'uic( casual restaurant
se)ment, Levendary Caf& was distin)uished by two elements* wholesome soups, salads and
sandwiches usin) hi)h+'uality in)redients and a commitment to service in a comfortable,
friendly environment, as well as its willin)ness to ta(e ris(s, especially those that helped evolve
its concept over time.
,fter $- years the founder was movin) on to pursue new interests and new talent, .ia
/oster, has been selected as his replacement as the CEO. /oster, (nown for her fran(
communication style and stron) e0ecution, was chosen based on her academic merit and
previous e0perience as a president of a lar)e ,merican fast food company. Despite /oster1s
stron) trac( record for e0ecution and the fact that Levendary Caf& has developed a loyal
customer base and stron) brand, 2all 3treet has been cautious about the company1s stoc(.
,nalysts point out that while the company has stron) fundamentals and its performance
)enerally in line with mana)ement forecasts, its shares still trade at a discount to comparable
restaurant stoc(s. hey hypothesi4e two reasons for this. /irst, analysts were concerned that
domestic business has reached its )rowth potential and secondly, re)ardin) the new CEO1s lac(
of international mana)ement e0perience, they were s(eptical of her ability to build a multi+
national company.
/oster felt challen)ed by 2all 3treet's s(epticism and use this as an opportunity to prove
herself, (nowin) that the analysts be payin) close attention to the way in which she approaches
the Chinese mar(et. However, much to her cha)rin, she has recently received reports that Louis
Chen, Leventhal's hand+pic(ed president of Levendary China chan)ed the store desi)n and menu
selections in -$ new stores located in different cities in China. 3he reported her findin)s to the
53 team and now they are all furious at these chan)es 6 they are insistin) thin)s should remain
as is in the 53. Chen tried to e0plain that if you don1t adapt to the environment in where you are
tryin) to conduct business you will fail. He spent one and a half years openin) these -$ locations
in China and is about to turn a profit and now the 53 team wants to chan)e thin)s. he corporate
[4]
mana)ement were afraid if any of the 53 customers travelled to China and saw the chan)es it
would ruin everythin) they wor(ed so hard to build in the 53. hey spent years carefully
nurturin) their concepts and ima)e and (eepin) it consistent throu)hout the 5nited 3tates
nationally was now at 7eopardy.
he new CEO compared companies that also e0panded in other countries ta(in) this
approach by radically chan)in) their entire menu yet (eepin) their stores1 loo( and feel. 8ut she
also compared what .cDonalds has done worldwide 6 (eepin) their stores standardi4ed for the
most part and 7ust alterin) the menu sli)htly. 3he felt neither of these approaches was appropriate
for Levendary Caf& and that they should (eep thin)s consistent across borders. In order to
address these concerns, /oster decided to )o to China in an effort to learn more about the
Chinese operations and be)in to formulate a strate)y for )rowth.
4,esi.n 1
5)! is ! M,*i6,ni Res!,$!n 7M,R8 B,siness9 +.: 1ig is i9 Is i ! -.ns.*i#!e# .$
&$!gmene# in#,s$%9 5)! !$e is e-.n.mi-s 7,se )e P.$e$;s M.#e* . e"!*,!e
<$.&i!1i*i% in !##ii.n . )e #!! gi"en in )e -!se89
!85)! is ! M,*i6,ni Res!,$!n 7M,R8 B,siness9
, multi+unit 9estaurant 8usiness is the concept of ownin) more than one unit of a franchise
and:or bein) the franchise owner ownin) more than one unit or store. In other words, runnin)
more than one unit of the same business is considered a .u9. he mar(et can be cate)ori4ed in
three different se)ments*
3pecialty Establishments* 8usiness primarily serves snac(s and bevera)es with a
typical bill under !%. E0amples include Dun(in1 Donuts and 3tarbuc(s.
;uic( 3ervice 9estaurants* 8usiness primarily provides counter or drive+thru
service with typical bill between !< and !"#. E0amples include .cDonald1s,
2endy1s, and 8ur)er =in).
Casual Dinin)* hese businesses offer table service servin) entrees between !>
and !-#. E0amples include Chili1s and Olive ?arden. /ine dinin) .ulti+unit
[#]
restaurants such as 9uth1s Chris and Capital ?rill are also included in this
cate)ory. Entrees are priced well into the !<# dollar ran)e.
In recent years, a new cate)ory has emer)ed which is often called @'uic( casualA. Levendary
Caf& falls into this cate)ory bein) )enerally healthier than 'uic( service restaurants and more
informal than casual dinin). he avera)e chec(s in this cate)ory typically fall between > and "-
dollars.
18 +.: 1ig is i9
,s of -#"#, the 5.3. restaurant industry reported over !B## billion dollars in sales and the
Cational 9estaurant ,ssociation of ,merica DC9,E reports that this number is pro7ected to total
!BB#.% billion dollars with F>#,### locations in -#"$ representin) appro0imately <G of the 5.3.
)ross domestic product. .ulti+unit restaurants only ma(e up a small percenta)e of the overall
industry. he rest of the industry is mostly made up of independent restaurant owners. his case
shows how Levendary Caf& sou)ht after the multi+unit restaurant. he company had over $,%##
stores in which appro0imately two+thirds were franchised.
-8 Is i ! -.ns.*i#!e# .$ &$!gmene# in#,s$%9
he restaurant and foodservice industry is hi)hly fra)mented and hi)hly competitive with no one
dominatin) firm. Even massive companies such as .cDonald1s and 8ur)er =in) )enerate only a
small percenta)e of total profits.
#8 5)! !$e is e-.n.mi-s 7,se )e P.$e$;s M.#e* . e"!*,!e <$.&i!1i*i% in !##ii.n .
)e #!! gi"en in )e -!se89
9estaurant business owners have many opportunities, but they to fi)ht for mar(et positions in
this industry. Owners need to understand this competitive environment to become profitable in
the industryH and without clear vision and strate)ic plan they will find themselves at a lar)e
disadvanta)e compared to its competitors. 2e will e0amine Iorter1s /ive /orces .odel as a tool
to e0amine and assess the level of competitive forces in an industry and determine the industry
profitability as discussed below*
[4]

0ig,$e 1( P.$e$'s &i"e &.$-es m.#e* .& -.m<eii.n
/or the sa(e of this analysis we will consider the restaurant industry on the whole because
realistically all restaurants are in competition with each other re)ardless of how many units they
operate. /rom /i)ure " above the five forces Iorter's model of competition include threat of new
entrants, threat of substitute products, bar)ainin) power of buyers, bar)ainin) power of
suppliers, and rivalry amon) e0istin) firms.
hreat of new entrants*
he threat of new entrants into the restaurant industry is hi)h. Of course start+up revenue is
re'uired, but it is relatively small and mana)eable for one store. he populari4ation of small
food truc(s in cities functionin) as start+ups and the ability to franchise ma(es it even easier to
open a restaurant. /urthermore, there is typically a minimal learnin) curve for new employees
and access to distribution of raw materials, or food in)redients in this case, is strai)htforward.
hreat of substitute products*
[5]
he threat of substitute products is hi)h. ,s can easily be deduced from enterin) a city name
and searchin) for restaurants on Jelp, there are a myriad of restaurants to choose from in a )iven
area. If you aren1t in the mood for somethin) or don1t li(e the service at one restaurant:ambiance
of another, it is 'uite easy to simply drive down the road for another alternative. here are also
no switchin) costs associated with simply tryin) a new restaurant.
8ar)ainin) power of buyers*
he bar)ainin) power of buyers is medium in the restaurant industry. Due to the low switchin)
cost, there is some sensitivity to pricin) in the industry and it is considered wise to price items
similar to competition based on the level of service. hat said, buyers are fra)mented similar to
the industry and no buyer has a particular influence on the product:price.
8ar)ainin) power of suppliers*
he bar)ainin) power of suppliers in the restaurant industry is medium. /or the restaurant
industry in )eneral bar)ainin) power can be considered low, but for businesses involved in
@specialtyA items such as the Levendary Caf& this may decrease the number of available
suppliers. It is easier to source standard, local fare as compared to another restaurant with a
commitment to no hormone treated meats, e0otic fruits, etc.
9ivalry amon) e0istin) firms*
/rom this analysis it can be deduced that the restaurant industry and hence, multi+unit restaurant
industry is very competitive. he lar)e number of firms intensifies rivalry because more
businesses must compete for the same customers and resources. Low switchin) costs also
increase competition because when a customer can switch freely between products it is more
difficult to capture clients on a lon) term basis.
2e see that Iorter1s model can be used as a tool to better develop strate)ic advanta)e over
competin) firms within an industry and to realistically assess potential levels of profitability,
opportunity and ris( based on the five (ey factors. 8ased on this assessment above, the
restaurant industry is both fra)mented and competitive. On the positive side, the lac( of ma7or
players in a fra)mented industry means the public has not )iven its loyalty to any one business6
there is room for both innovation and e0perimentation and it is not necessary to fi)ht for mar(et
[)]
share a)ainst a ma7or brand. /ra)mentation also allows the opportunity to develop a business
accordin) to mana)ement instincts and mar(et research.

Differentiation is a (ey way for
Levendary Caf& to compete by focusin) on a specific customer other businesses may have
missed. Differentiation and other critical success factors to be discussed further in ;uestion -
below.
4,esi.n 2
I#eni&% M,R -$ii-!* s,--ess &!-.$s in )e =.S. !n# )en #is-,ss <.eni!* insi,i.n!*
".i#s in C)in!.
!8 C$ii-!* s,--ess &!-.$s in )e =.S.(
It is obvious from the financial statements presented in the case e0hibits that in both the 5.3. and
China, restaurants operate on very slim mar)ins with profitability bein) a direct function of the
ability to )enerate hi)h traffic, consistent service, and cost control. he fre'uency of customers
in a restaurant depends on a few factors such as brand appeal, differentiated product, 'uality,
mar(etin) effectiveness, real estate location, and restaurant e0perience. he success of
Levendary Caf& in the 5.3. is due to its local team members meetin) these critical success
factors with various teams wor(in) in unison*
Concept* 3hared commitment to healthy eatin) embedded in company culture and
reflected in company motto, @asty /resh ?oodnessA D?/E.
.ar(etin)* Conveyed /? concept throu)h mar(etin) materials such as store d&cor,
advertisin) materials, menu boards etc. It is the mar(etin) teams Kresponsibility to ensure
consistent store layout. .enu and menu board inconsistencies e0isted due to local
pricin) differences and menu preferences, but the comfortable, warm feel of the stores
always remainin) consistent.
/ood* Levendary Caf& has their own test (itchen and )ood science lab where they can
ta(e the recipes prepared by their chefs and adapt them to mass supply in a way that
maintains 'uality and consistency. his team also performs field 'uality chec(s to ensure
the food is properly prepared amon) the restaurants.
[6]
Operations* he operations team mana)es day to day operations and a strate)ic
or)ani4ational structure allowed for ti)ht control of store e0penses. his team is also
responsible for maintainin) the company1s learnin) and operatin) standards system.
/ranchise* wo+thirds of Levendary Caf&1s stores are franchised. his team1s
responsibility included recruitin) new franchisees, supportin) e0istin) franchisees, and
enforcin) brand:operatin) standards in e0istin) franchised stores.
8usiness Development* his department sources new revenue opportunities such as new
products and led research for the company1s nascent international e0pansion efforts.
,dministrative 3taff* Levendary Caf& employs real estate, finance and accountin), le)al,
purchasin), and I professionals.
It becomes clear relatively 'uic(ly that it ta(es a small army of employees to consistently deliver
and e0ecute the critical success factors that have made Levendary Caf& so successful in the
5nited 3tates.
18 P.eni!* insi,i.n!* ".i#s in C)in!(
here is a list of institutional voids that need to be addressed and they include* Iolitical and
social systems, openness, product mar(ets, labor mar(ets and capital mar(ets.
Institutional voids in China can (eep a company from doin) business in this location if it1s not
willin) to tac(le these institutional voids. It can also offer opportunities if the company is willin)
to adapt to the voids. he company needs to modify its business model for this specific location
and adapt to the voids in order to be successful. his is what Levendary Caf& did in the different
locations in China. /or instance, some locations re'uired some drastic chan)es li(e havin) a
ta(eaway counter with no seatin) or chan)in) the menu by removin) everythin) but one
sandwich item and addin) a variety of local dumplin)s. In another location they chan)ed the
furniture entirely by usin) a local furniture supplier to supply them with plastic framed chairs
which was an alternative to their classic wooden framed upholstered chairs. 3ome of the
locations were able to (eep the same desi)n and menu selection as the 5nited 3tates but not the
ma7ority.
[1+]
Locations were not an issue since Louis Chen, the Iresident of Levendary Caf& in China had a
networ( of connections already in place to help him with speedin) up the processes of
permittin), incorporatin) and staffin) the stores.
4,esi.n 3
5)% #i# Le"en#!$% #e-i#e . ene$ C)in! M!$>e9 +.: #i# is =S &.,n#!i.n m!-)
!g!ins C)in! m!$>e nee#s9 7-.m<!$e =S ?s C)in! m!$>e in e$ms .& -,s.me$s !n#
.<e$!i.ns8
!8 5)% #e-i#e . ene$ C)in! M!$>e(
,s the domestic )rowth was slowin) down, Levendary Caf&1s sou)ht overseas e0pansion.
,ccordin) to consultin) firm ,li0Iartners, of 3outhfield, .ichi)an the mar(et for fast+food and
casual dinin) rose "BG from -##F to -#"# alone and reach !$<# billion. hat compares with "G
)rowth for the 5.3. industry, where sales reached !%L# billion in -#"# as shown in /i)ure -.
0ig,$e 2( C.ns,me$s in C)in!( T.< $e!s.ns &.$ s<en#ing ! $es!,$!ns
Levendary established a clear priority and successfully pursued it by accommodatin) customer
re'uests. In the 5.3. mar(et, customer focus was on the affluent and mother. his caused
declined )rowth due to the .idwest and 3outh not supportin) the demo)raphic that the
restaurant is tar)etin). ,ccordin) to the article with a population of ".< billion people
[11]
and annual ?DI )rowth of "<.%G in the past decade, China is ripe for investment. In
addition, the urban population continued to rise and a stron) middle class was
emer)in). ypically Chinese consumers remain substantially more conservative in
terms of dinin) out than 53 consumers* in the 53 people nearly spend half their food
e0penditure in restaurants as of -#"# while the Chinese only spend --G in
restaurants. he rise of an affluent emer)in) middle class in China however is leadin)
towards a )rowin) lifestyle trend to eatin) out. Ier capita e0penditure on dinin) out
will continue to increase at double di)it )rowth rate in -#"#. Consumers anticipate
spendin) about "#G more in restaurants than they did in -##F. his is in star( contrast
to 53 where people e0pect to spend <G less in -#"#.
18 +.: #i# is =S &.,n#!i.n m!-) !g!ins C)in! m!$>e nee#s9 7-.m<!$e =S ?s C)in!
m!$>e in e$ms .& -,s.me$s !n# .<e$!i.ns8(
Levendary1s foundation was based on the principles that the caf& would only use hi)h 'uality
or)anic in)redients in its products, which were to be served in a comfortable, friendly,
environment. In the 5.3., the tur(ey sandwich and cheese soup were bi))est sellers. 2hile these
items were meetin) the needs of consumers in the 5.3. mar(et, the same could not be said for the
Chinese mar(et.
2hile only a select few of the -$ locations in China were developed to be li(e the 5.3. menus,
service standards and ambience of their 5.3. counterparts, Chen pursued hi)h levels of
customi4ation in others. /or instance, in the -nd established China location in the Ju ?arden
area of 3han)hai, Chen opted for a ta(eaway counter rather than Levendary1s customary
comfortable seatin) areas found in the 5.3. locations. In the <th caf& located near the /orbidden
City in 8ei7in), seatin) was offered to customersH however, Chen fitted the establishment with
plastic framed chairs produced by a local furniture supplier as opposed to the classic wooden
framed upholstered chairs used in the 5.3.
Chen not only customi4ed the environment of the caf&1s but also their menus. In the <th caf&,
Levendary1s si)nature salads were not offered and in the -$rd location in a suburb of 3han)hai,
[12]
only one sandwich was offered in addition to a variety of local dumplin)s. Overall, Levendary
China had ta(en a far different, more tailored approach to servin) the local consumer when
compared to the caf&s in the 5.3. operatin) under the )uidance of corporate head'uarters.
4,esi.n 4
5)! !$e )e >e% iss,es &!-ing Mi! 0.se$ !n# :)! :.,*# %., $e-.mmen# )e$ . !##$ess
)ese iss,es9
!8 5)! !$e )e >e% iss,es &!-ing Mi! 0.se$(
CEO .ia /oster is faced with several critical issues. ,lthou)h .ia has had leadership s(ills as a
former Iresident, she has yet to prove her talents to the analysts and investors of 2all 3treet.
.ai feels that the company head'uarters was established to support common operatin) practices
throu)hout the $,%## )eo)raphically dispersed 5.3. caf&s and ensure that customers were served
in similar ways while presentin) a uniform ima)e. 8efore .ia /oster 7oined the company, the
former CEO mana)ed with a more hands+off approach to the Chinese operations to Louis Chen
and he did not reinforce the need to ali)n with such 5.3. operations. Due to this )iven freedom,
Louis Chen used his own authority to develop the Chinese e0pansion of Levendary Caf& and
ma(e critical decisions without discussin) with 5.3. mana)ement or head'uarters. Chen adapted
the Chinese based caf&1s to conform to the tastes and li(es of the local consumers and not the
@same brand e0perience everywhereA that the business has been (nown for to its customers. his
has made the Chinese operations not have the same uniform ima)e and potentially hurt the
company1s brand ima)e as customers in 5.3. for so lon) have (nown.
Chen was usin) a different reportin) method for financial and business reportin) process to
report bac( to the 53. his posed a potential threat to Lavendary's corporate business practices
the reportin) were not applyin) 53 ?enerally ,ccepted ,ccountin) Irinciples D?,,IE format.
China1s accountin) standards are not as strict as the 5nited 3tates and bein) the Levendary Caf&
is mostly 53 based this is a very important rule to adhere to. hese reportin) needed to be
compliant with the local ta0 laws in China or could face bein) shut down. In order to put the
[1*]
correct systems in place to transfer the financial records to the format of the 53 this would be a
costly e0pense.
18 Re-.mmen#!i.ns . !##$ess )ese iss,es(
,s a CEO .ia /oster should remind Chen of the firms promise to its customers that the
customers will encounter the @same brand e0perience everywhereA. .ia should definitely (eep
Chen as he is an asset to the continuous e0pansion of Lavendary. 3he should also strive to
provide support from the company's corporate as she promised and present a balanced plan in
handlin) the Chinese operations )oin) forward due to the fact that Chen is the only individual
who maintains a close understandin) of the Chinese locals and the Chinese operations. .ia
should focus on efforts to enforce the 5.3. standard operation model and both .ia and Chen
should a)ree to focus on ali)nin) the company1s core values and mission vision with the Chinese
operations so there can be a uniform ima)e for its customers.
.ia should have more fre'uent and periodic reviews of the Chinese operations. his will help
mana)ement to become familiar with the Chinese practices and cultures and help them develop
practices and procedures that can be implemented to establish consistency throu)h China.
.ia should also wor( with Chen to ma(e sure that the financial reportin) is done accordin) the
5.3. compliance format of ?,,I. here is substantial and repetitive costs associated with
convertin) the Chinese accounts based on 5.3. accountin) standards. .ia should consider
different methods li(e trainin) the Chinese based accountants with 5.3. ?,,I.
C.n-*,si.n(
Must li(e any other business, Lavendary Cafe' is also faced with the comple0ity of business
decisions and strate)ies it its e0pansion )lobally. here seemed to be a conflict between the
ori)inal founder and the operatin) standards which are currently in place in China. he current
CEO believes in what the ori)inal founder believed in that is personali4in) orders to ma(e the
customer want to come bac( for more. his personali4ation approach ta0ed their store+level
operations but the founder would simply point out the company1s impressive results yet the
standards never chan)ed accordin) to the e0hibit - in the article. he president of Levendary
[14]
China also operated li(e the ori)inal founder, however, he too( it upon himself to ma(e the
chan)es needed in order to adapt to the country and the culture he was in. he new CEO came on
board in -#"" with no international e0perience and immediately wanted to chan)e thin)s in
China without first researchin) how international business is successful.
2hen .ia as(ed Chen about his strate)ic plan he had no answers as he had no strate)y in place.
If I were to e0pand my business )lobally, especially in a new country and a culture and anew
local mana)er I would have my strate)ic plans in place. /or Levendary Caf& to succeed in China
both .ia and Louis have to find common )round to benefit the company as a whole. /indin) a
balance in (eepin) the brand ima)ine while also findin) a way to incorporate the local mar(et
into its menu and restaurant is critical for it to succeed in China. here are challen)es ahead of
the company but with the current mana)ement the company is bound to succeed in China and
)row throu)hout the re)ion.
5.$>s Cie#
"E 3trate)ies hat /it Emer)in) .ar(ets by arun =hanna, =rishna ?. Ialepu, and Mayant
3inha,
http*::)lobaled)e.msu.edu:
-E 8artlett, C., Han, ,.. D-#""E. Levendary Caf&* he China Challen)e. Harvard Business
Publishing, Feb 2013.
$E Consumers in China* op 9easons for 3pendin) ,t 9estaurants,
https*::www.alliancebernstein.com:abcom:se)mentNhomepa)es:privateNclient:us:pcus.ht
m8loomber),
<E ?abrielsson, I., ?abrielesson, .., 3eppal, ..D-#"-E. .ar(etin) 3trate)ies for /orei)n
E0pansion of Companies Ori)inatin) in 3mall and Open Economies* he
Conse'uences of 3trate)ic /it and Ierformance. Journal of International Marketing,
Jun 2012.
[1#]
%E Local Institutions and ?lobal 3trate)y by arun =hanna,
http*::)lobaled)e.msu.edu: