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Winning Global Taste Buds:

v Levendary Caf v
Hillary Tzeng
v Table of Contents v

Executive Brief 3

Decision Tree 4

Company Overview
Product Mix & Global Presence 5
Current Business Model 6
Value Chain 7
Competitive Advantages 8
Growth Imperative 9

Country Analysis China


Economic Overview 10
CAGE Analysis 11
Target Consumers 12
Institutional Voids 13

Industry Analysis Multi-Unit Restaurants


Porters Five Forces 14
Market Attractiveness 15
Industry Trends 16
Competitor Analysis 17

Recommendations 18
v Executive Brief v

To reap the profits derived from possessing a strong brand image, quality
customer service, and consistent company practices across its global
operations, Levendary Caf must enter China as a wholly owned enterprise,
focus initially on an aggregation-arbitrage strategy, and reroute its Levendary
China operations to a new arm of its managerial hierarchy.

Thus far, Levendary China has suffered from a scattered brand reputation. In a
rush to open as many stores as possible, Levendary Caf in China has relied
upon a pure adaptation strategy, which has fragmented its carefully curated
company image. If the company wants to regain full control of its branding, it
should only consider establishing wholly-owned operations to avoid losing
further control.

By turning to an aggregation-arbitrage strategy, Levendary Caf can turn also


around its profitability by creating economies of scale among its stores and
taking advantage of Chinese consumers willingness to pay premiums for
Western food. An aggregation-arbitrage strategy will transform Chinese store
operations to become more standardized so that Levendary Caf will have an
easier time reporting GAAP-compliant financial performance measures, training
its employees under a general program, and marketing its core line of menu
items rather than spreading out its funds.

Finally, creating a new company division specifically for Levendary Chinas


operations will streamline communication between China and the U.S., as China
can operate with more flexibility to match the Chinese markets needs.
Levendary China currently reports to a U.S. executive, which is irrelevant to its
overseas operations. In order to fully maximize its potential for growth, China
should be given its own place within Levendarys company structure, allowing
China to be at the forefront of the companys priorities for future growth.

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v Decision Tree v
Decision Tree

Strategic Alliance

Joint Venture

Focus first on China

Adapt entirely to local


Yes Acquisition tastes

Focus first on Dubai


Preserve original brand,
Expand outside the Wholly owned foreign allowing room for local
U.S.? enterprise
customization
Wait for more favorable
market conditions

Replicate U.S. model


No exactly

Never enter global


market

As Levendary Caf looks past its U.S. borders, it should consider the
next steps regarding its venture into China. In order to maintain the
most control over its foreign operations, Levendary Caf should
continue pursuing a strategy of wholly owning its enterprise in China.
In turn, this will allow Levendary Caf to preserve the integrity of its
original brand while allowing space for customization to local tastes.

Despite what Louis Chen, VP of Chinas Operations, insists regarding


complete customization to local tastes, CEO Mia Foster must keep in
mind that the only way to create a consistent brand image focused on
offering high-quality food and a comfortable environment is by
retaining full influence over Levendary Caf, especially in its formative
years in China. By establishing consistent guidelines for future store
openings in China, Levendary can better monitor its financial
performance, shape the marketing for its target consumers, and
present a unified front against its competitors within the multi-unit
restaurant industry.
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v Offering Western Fare to Eastern Markets v
Product Mix
Levendary Cafs specialty lies in the popularity of its classic, core
menu items: the Turkey & Avocado Sandwich with Cranberry Dressing,
Award-Winning Cheese Soup, and Chicken Caesar Salad. Many stores
offer slight, local menu adaptations.

Global Presence
Levendary Caf currently has over 3,500 stores in the United
States, 23 stores in China, and a partnership in Dubai. Its most
immediate plans are to expand its store coverage in China to
balance out its slowing U.S. growth.

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v Maximizing Profitability Potential v
Current Business Model

Tight Control of
store expenses
& operations
Speedy service Higher Global
& order margins scale
accuracy
Royalty Volume
Increased need Profits
New fees
for employees
operating tools franchises Negotiation
& learning (OTL) Reinvest power with
Branded
suppliers
grocery
Raised items
consumer Diversified
demand Marketing global
programs portfolio
New menu
boards
International
expansion

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v Coordinating Across All Operations v
Value Chain

Levendary Cafs operations touch upon the entire value chain of


running a multi-unit restaurant. Its driving force for keeping the brand
fresh originates in its R&D Concept group, while it maintains
operating standards at its point-of-sale destination as part of the
training enforced in Sales & Service.

Distribution
Ingredients Menu & Sales &
R&D Sourcing Adaptation Service
Marketing

- Modifies & - Train employees


- Concept group places banners, through
senses - Test kitchen & table tents, Operating Tools
upcoming food - Executive food science
chefs look for decals, menu and Learning
trends laboratory boards in all (OTL)
wholesome
- Maintains adapts quality stores - Franchise team
ingredients
consistency and consistency - Modifies for enforces brand
- Food team differences in and operating
with the slogan to each of
conducts store size & standards
Tasty Fresh Levendarys
quality checks layout - Consultants find
Goodness 3,500 cafes
(TFG) to ensure - Conveys TFG opportunities for
concept through branded grocery
healthy eating ads items

Levendarys value chain allows for operating metrics like speed of


service and order accuracy to be optimized through standardization
while leaving room for personalization. Levendary must constantly
strive to balance its core sales drivers with its founders philosophy of
providing customized service to delight the customer.
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v Capitalizing on Established Strengths v
Competitive Advantages

Uses only high-quality ingredients


Boosted customer Hires corporate chefs who are expert artisans from top cooking
schools
trust in brand Organic grains & hormone-free meats resulted in increased
revenues despite premium pricing, equating to customer loyalty

Reputation for Delivers value by serving customers gourmet fare at a


reasonable price
delivering a Maintains a consistently comfortable, welcoming, and homey
environment
quality experience Built on a culture that emphasized delighting the customer

Stays ahead of Willing to take calculated risks that evolve its concept over time
Features new items that incorporate in-trend healthy
the curve in food ingredients
trends Debuts a suite of new products five times a year

Consistent Company-owned cafes have an efficient reporting structure


that allows tight control of store expenses & monitoring of
operating operations according to strict operating standards
Enhances employee learning through the Operating Tools and
standards learning (OTL) program to ensure quality local delivery

Levendary has been able to maintain profitable U.S. operations


through its four main core competencies. All of these strengths tie
into each other to allow Levendary to retain a strong brand image,
establish impressive customer retention rates, keep its edge over
competing multi-unit restaurant chains, and maintain an organized
reporting structure on which to base its performance evaluations.
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v Identifying the Imperative for Growth v
Slumping U.S. Growth
Sales

Introduction Growth Maturity Decline

Time

In the span of 32 years, Levendary Caf has expanded from one small
restaurant in Denver to a chain of over 3,500 cafes across all 50
states in the U.S., with stores in urban, suburban, and rural areas.
Despite this strong momentum, by 2008, the companys domestic
growth began to slow, because it lacks strong demand in small towns
in the Midwest and South.

As its geographic expansion sputters in the States, it seems that


Levendary may be nearing the apex of its life cycle. As it advances
further into domestic maturity and toward eventual decline, the
company must find alternative markets within which to establish itself
and market itself to a new crowd. Levendary Cafs eye should turn
first toward China.

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v Evaluating Viability of Entry into China v
Chinas Economic Overview
Population: 1.4 billion
Average Annual GDP Growth: 14.5% in past 10 yrs

Emerging Trends in Past Decade

1. Urban population rose by 9.6% of Chinas total


2000 2009
36%
47%
53%
64%

Urban Suburban + Rural

2. Middle class per-capita income skyrocketed by 173.4%


Per Capita Income (RMB)
20000

10000

0
2000 2009

Based on Chinas vast market size and income growth potential,


Levendary Caf may be able to justify its entry into this country.
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v Determining the Risk of Entering China v
CAGE Analysis
Cultural, administrative, geographic, and economic differences
between the U.S. and China show that there is some inherent risk
involved in venturing to China. However, closer evaluation of such
differences shows why Levendary Caf would lean toward supporting
a decision to enter the country.

Cultural Distance: Administrative Distance:


Medium Medium
Official language is Chinese but Government officials may delay
English is spoken widely process of obtaining permits,
Large increase of women in the incorporating, and staffing
workforce stores
Growing lifestyle trend to eat out Bribery is often seen as the
Western food is still perceived as social norm
foreign rather than the norm Increasing openness to foreign
High power distance, collectivist investors
culture Different tax laws & reporting
structure

Geographic Distance: Economic Distance:


Medium Low
Is separated from U.S. by the Increasingly affluent middle
Pacific Ocean class
Has an extensive network of Extremely rich upper class
ports, railways, and roads Most are willing to pay premium
Cities are concentrated near the for Western-style foods & brands
Eastern Coast, allowing for Established banking system
easier distribution Fluctuating currency rate poses
May benefit from supplier risk for inconsistencies in pricing
network in relatively nearby Emerging economy means high
Dubai expected GDP growth

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v Pinpointing the Right Customers v
Target Consumers

Tier 1 Global Consumers

Domestically focused but


Tier 2
upwardly mobile

Locally focused but


Tier 3
with income
Subsistence/
Tier 4 marginal
consumers
Consumers
Tier 5 outside the
formal economy

Tier 1 Consumers
Levendary Caf should target global consumers, because these
consumers are more likely to try out new, foreign brands. Their tastes
are more exploratory, as their earnings are high enough where they
have the discretionary income to spend on typically higher-priced
Western brands. These consumers may include white-collar
professionals, expatriates, and high-seated government staff.

Tier 2 Consumers
The upper echelon of consumers who are domestically focused but
upwardly mobile may include college students and the rising working
class. These consumers are knowledgeable about Western corporate
advances into the Chinese market and may be be willing to shell out a
couple extra RMB to try out Levendary Cafs novel offerings.
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v Adjusting for Chinas Latent Flaws v
Institutional Voids

Business Strategy & Operations

Specialized
Soft Professions, Debt & Equity
Logistics Consultants,
Credentialing Markets, Venture
Infrastructure Intermediaries
Search Firms Capital
Accountants, and
Legal System

Physical and Banks &


Schools, Functioning
Hard Roads, Rail &
Universities,
Property Financial
Independent
Infrastructure Ports Rights Institutions,
Training Legal System
Security Regulators

Country Factor Political & Social


Land Labor Capital Markets
Systems
Endowments

Soft Infrastructure
Specialized Consultants, Accountants, and Legal System - China runs
on different tax laws and accounting standards than the U.S., and
oftentimes, reporting accurate financial data back to a foreign
investors home country becomes muddled up in the process of data
translation.
Hard Infrastructure
Physical and Property Rights Security - Pirating and petty thievery is
not uncommon within and among Chinese businesses, so it may be
difficult to develop a competitive advantage over competitors who
have stolen intellectual property or pilfered inventory.
Functioning Independent Legal System - Chinas legal system is privy
to bribery of police or government officials and may not be conducive
toward the security of foreign investors assets.

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v Scoping Out the Industry v
Porters Five Forces

Rivalry (High)
The multi-unit restaurant industry is dominated by independent full-service
restaurants, existing American chains, and Asian chains
Chinese restaurants take the largest share of the quick service segment
Difficulty in standardizing operations makes it hard for independents to
maintain successful local chains

Power of Suppliers (Low)


Raw ingredients suppliers are fragmented and usually differentiate
themselves by cost rather than quality
Generally homogeneous pricing since ingredients are commodities
Restaurant chains can wield the power of lowering prices by buying in bulk

Power of Buyers (High)


Chinese consumers often seek the lowest-priced option, which are often
street vendors or local mom-and-pop shops
Chinese tastes are not used to Americanized offerings
Western restaurant dcor and/or feng shui may not align with Chinese
preferences

Threat of Substitutes (Medium)


Many Chinese households still cook homemade meals with their families
Young adults often buy from mall food courts and night market stalls instead

Threat of New Entrants (Medium)


Low startup costs allow virtually anyone with funding to start their own
restaurant chain
Low margins may weed out those who are inexperienced in maintaining
standardization of employee training, financial accounting, and resource
allocation within the multi-unit restaurant industry

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v Determining Ease of Market Entrance v
Market Attractiveness
Levendary Caf will have no problem with demand in Chinas market for Western
foods and should expect little interference from government intervention, as long as it
follows established rules on foreign investment and capitalizes upon its network of
contacts. Because China is an emerging economy, more middle-class citizens are
finding that they have extra money to spend on foods outside of their local tastes.
However, there is intense competition among all multi-unit restaurants in China,
making it slower and more difficult for Levendary to recover a positive NPV from its
investments in China.

Economic Drivers:
The middle class
Chinese are becoming
increasingly wealthier at
rapid rates, leading to
greater demand for
global foods as people
have more discretionary
income.


Government Drivers:

The Chinese Market Drivers:
government is starting
to become more open
to outside investment
Market China is seeing a surge
of people dining out,
but often delays the
advancement of
Integration and young adults are
starting to develop a
companies who do not taste for Western foods.
have insider contacts.


Competitive Drivers:
There is intense
competition among
multi-unit restaurant
chainsboth Western
and Asian brands.

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v Catering to Changing Tastes v
Industry Trends

Chinese Food Services


An affluent middle class,
Industry Revenue rising numbers of working
w o m e n , a n d a g ro w i n g
3 lifestyle trend to eat out have
RMB (trillions)

2 suppor ted growth in the


Chinese food ser vices
1 1.996 industrya 80.47% increase
1.106
0 in revenue within the span of
5 years.
2004 2009

Even though this industry is dominated by a count of 2.723 million


independent, full-service restaurants, there is still opportunity to grow.

Chinese Quick Service


Sector Revenue
The highly competitive quick
service sector has been 600
RMB (billions)

growing the fastest within the


Chinese food ser vices 400
industry, showing a 85.43% 471
200
increase in revenue within the 254
span of the same 5 years. 0
2004 2009

Levendary Caf should use this evidence as an impetus to open


stores in China while the quick service sector is still booming.
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v Analyzing Rivals Battle Plans v
Competitor Analysis
Levendary Cafs successful American competitors within the quick service sector
have each approached China with vastly different strategies, yet all of them have
incorporated at least some degree of local adaptation to their menus.

KFC
Most successful foreign fast food chain
>3,000 restaurants in 450 Chinese cities
Learned to adapt through joint venture partners and local
management
Some add-on items and altered recipes

McDonalds
1,100 restaurants in 110 cities
Consistent worldwide look & feel
Same core menu plus localized specials
Charged U.S. prices, knowing that Chinese youth would be willing to
pay premium for Western food

Pizza Hut
560 high-end, casual dining restaurants
Menu extends far beyond pizza
Very different from U.S. original
Appealed to young affluent Chinese for date locations

Learning from its Western fast food cousins, Asian chains have started to focus on
standardization, tight control of raw materials, food preparation, and in-store service.
When determining its competitive advantage in China, Levendary Caf must be wary of
these Asian competitors, who have shown strong performance as of 2009:

Country Style Cooking


$495 million in sales
Sichuan cuisine

Little Sheep
$235 million in sales
Hong Kong-based Mongolian hot pot

Ajisen Ramen
$256 million in sales
Japanese ramen
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v Priming the Entry into China v
Entry Priorities

Preserve the
brands
carefully
nurtured image
Balance
Formalize the
economies of
financial
standardization
reporting
with benefits of
process
localization

Strategic Alliance
A strategic alliance with a pre-existing restaurant chain in China would not serve to advance
the brand of Levendary Caf and would give the company less control over its operations in
China.

Joint Venture
A joint venture would grant Levendary the foot in the door that it needs to join the Chinese
quick service restaurant sector, but it runs the risk of not retaining full control over its
practices or of giving away competitive advantages to its host company.

Acquisition
An acquisition of a popular restaurant chain in China is a great way for Levendary to learn
about its market. However, an acquisition may seem like a hostile move, so Levendary runs
the risk of being boycotted by the acquired companys original customers. The two
companies cultures may not be compatible with each other.

Wholly-owned foreign enterprise


By entering China as a wholly-owned foreign enterprise, Levendary Caf retains the most
control over its financial reporting practices, its brand image, and ability to monitor store
operations. While this method may mean more roadblocks, it is a tradeoff that Levendary
must accept in order to have full say in guiding the direction of Levendary China.

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v Revising Current Priorities v
Revamped Entry Strategy

Currently, Louis Chen, VP of Levendary China, is pursuing a strategy of pure adaptation


according to the local tastes of the consumers at which each store is located. Because he
has customized Levendary Cafs menu offerings so dramatically to each stores surrounding
population, he cannot save money by buying ingredients in bulk to be supplied across all
stores (aggregation) or appeal to the Chinese populations willingness to pay more for
branded Western fare (arbitrage).

Aggregation Adaptation

Before implementation
After implementation

Arbitrage

Chen must shift his focus away from adaptation in order to begin building a consistent brand
image in China. By transitioning his stores menu offerings to offer Levendarys core U.S.
menu items while leaving room for local menu customizations, Chen can reap the benefits of
economies of scale from aggregating his raw material orders and enjoy the increased
publicity that comes with cultural arbitrage. Such a move toward standardization will make it
easier for Levendary China to measure financial performance according to GAAP, promote
customer service consistency, and allow marketing efforts to be more focused.

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v Switching Up the Pecking Order v
Organizational Changes
The current managerial structure of Levendary Caf inhibits the growth of Levendary China.
Chen is currently stuck reporting to the COO of U.S. operations, and this makes Chinas
operations seem like less of a priority to the company. To put more pressure on Chen to
perform according to standardized best practices, Levendary China should be given its own,
separate 6th division directly under CEO Mia Foster.

Mia Foster, CEO

Peter Steele, Chief Franchise Lucien Leclerc, Chief Concept Nick White, Chief Operating
EVP, Admin Officer Officer VP, Business Dev. Officer Louis Chen, VP China

VP Fin/Acctg SVP, Marketing SVP, Food Regional VPs, U.S. Market

VP, Legal Director, Creative Louis Chen, VP China

Director, Ops, Tools &


VP, Real Estate Director, Distribution Learning

VP, IS Director, Online Director, Catering

VP, Purchasing

Giving Levendary China its own line of command grants Chen the freedom to manage Chinas
operations while staying under the watchful eye of the CEO, who will make sure that Chen is
striking the right balance between staying true to Levendary Cafs brand and catering to
local Chinese tastes.

Should Chen defy the imperative to align Levendary China under a consistent brand image,
he should be swiftly replaced by another manager who not only has network contacts but
also understands the importance behind presenting a uniform front to the Chinese market.

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