CATHERINES CONFECTIONARIES CASE WRITE UP

Professor Wilbon June 1

Catherines Confectionaries Case Write Up June 1, 2012

Executive Summary Issue Presented Catherine Horton has a knack for cooking, but not as much for fundamental business analysis. In an attempt to grow her business to meet the demand of her customers, Catherine has found herself overextended with respect to finances and time. Because she attempted to grow her business without a clear business strategy, she is in a situation where she is paying rent that she apparently cannot afford for a space that is so large it is forcing her to hire unskilled labor in an effort to utilize the space by taking walk-in customers (something outside of her core competency and business model: preparing food for events). Because of the high demands on her she recently has hired two more individuals (one to help cook and one to help manage), an infrastructural decision that her finances dont necessarily justify. Thus, Catherine is suffering from ill-advised structural and infrastructural decision-making (Introductions to Supply Chain Management, Bozarth & Handfield, 2008, pp. 23-24). Brief Answer At this juncture, Catherine needs to re-think her business strategy and decide whether she would like to downsize her business, maintain the size of her business, grow her business further or close the business. My recommendation is for Catherine to downsize her business while possibly making the business more profitable by being more selective about her clientele and finding creating ways to cut costs.

Catherines Confectionaries Case Write Up June 1, 2012

Analysis of Alternatives Catherines first order of business is to conduct a better analysis of her business and create and then implement a strategy that will allow her to function in a cash flow positive manner. After such strategy is created, Catherine will have to determine whether she needs to (i) downsize her business to make it more manageable, (ii) maintain the size of her business. (iii) grow the business or (iv) shut down the business. First Step: Creating a Business Strategy Business strategies are important because they are the mechanisms by which businesses coordinate their decisions regarding their structural and infrastructural elements. (Bozarth & Handfield, 2008, p.24). Bozarth & Handflied states that a business strategy must identify the firms targeted customers and determine what functions are needed to provide value to the same. First, Catherine should look at her revenues over the past 7 years and determine which segment of her business has been the most profitable. Catherine has 3 different types of customers: walk in, business to business and individual orders (See Appendix A for a further breakdown of such customer segments). Although her business to business

customers probably generate the most revenue, they also require the most care because of the constant changes to the mix and quantity of items being made. Because of these logistics, it would probably be wise to hire some help cooking and managing the food items provided in the business to business portion of her business. The individual orders were probably not as profitable (because they were not as consistent), but the longer notice time probably makes Catherines life much easier. Also, she was able to run the individual order business pretty
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Catherines Confectionaries Case Write Up June 1, 2012

efficiently from her own kitchen. The walk in business is a by-product of her leasing situation and is more than likely a cost center because of the hired help that is needed to serve such customers. Catherine also needs to consider her costs and how she may be able to lower them. For instance, it could be that in a support process portion of her business (Bozarth & Handfield p. 46) such as purchasing ingredients or equipment that she needs to consider shopping for new vendors or negotiating with her current ones to lower costs. Catherine can also consider reviewing ratios such as productivity (Productivity=outputs/inputs, Bozarth & Handfield p. 56) that can let her know if she needs to consider increasing the output the company gets from a particular input. After taking a close look at revenues and costs, Catherine needs to take a look at her local competition to determine who is competing that might take business from her. This will allow her to perform some type of forward looking financial analysis on where she believes her business might go in the next couple of years. Finally, Catherine has to put a dollar amount on the value of her leisure time in the short term. Her business to business customers are more than likely going to require more strenuous work on her part from client management to management of hired help. However, her individual order business seemed to be a little more manageable. After considering these factors Catherine would be prepared to make a choice as to how her business will need to move forward to reach her personal goals. Downsizing the Business One of Catherines alternatives is to downsize her business by only catering to her individual customers or to customers that offer similar business conditions as her individual
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Catherines Confectionaries Case Write Up June 1, 2012

customers. The pros to this decision are that she can (a) cut costs by terminating her current lease and working from home again, (b) manage the business on her own and possibly cut the cost of an employee to help her cook and (c) have a little more time for leisure and not be completely stressed out about the business constantly. The cons to this solution are that Catherine could be leaving some money on the table by refusing to continue to work with her business to business customers (or at least the ones that require last second changes and tight deadlines), her revenue will not be as consistent (and thus her profitability may be affected) and she may not feel as challenged with this limited amount of work. Maintain Size of Business Another alternative for Catherine is to maintain the size of her business and try to make it more profitable. The only way that she would be able to do this is by increasing the companys revenue and maintaining costs, or finding ways to cut costs. Catherines company can increase revenues by either increasing prices, providing more service to the companys current customers or attracting new customers (or some combination of these). Raising prices could be difficult with respect to business to business customers because of their price sensitivity, and these customers provide the most consistent revenue. However, if Catherines research reveals that she really has no competition in the area then she may have to consider commanding a higher dime for her product. If the company tries to provide more service to its customers, then Catherine will have to rely heavily on Mary to help her prepare quality food in a timely fashion. Finally, attracting new customers is always vital to maintaining and growing

Catherines Confectionaries Case Write Up June 1, 2012

businesses.

This allows the company to diversify its customer base and not be overly

dependent on one client. The pros to maintaining the size of the business are that with the right decision making Catherine can increase her profits, she can have a successful fully operating business, and if profits reach a certain level she can hire enough skilled labor to ensure that her job is to develop business and oversee the company and not necessarily take part in the day to day grind. The cons to maintaining the size of the business are that in the short term Catherine is going to have to expend a high level of energy working hard and also be creative in finding ways to cut costs. Some possible ways to cut costs are as follows: (1) negotiating a reduction in her lease payment with her landlord, (2) discontinuing the walk-in business and thus possibly not needing her MBA hire (although he could be useful to help her run the overarching business), and (3) finding a better solution for compensating Mary such as reducing her salary but providing her a bonus tied to the revenue brought in by the company or giving her an equity stake in the company. Another con is that even if she is able to build a cash flow positive company that is profitable, being the CEO of a firm is still a fair amount of work and pressure, thus she would be removed from what she loves doing (trying new recipes and being innovative). Grow the Business Catherine can also consider growing her business. Many of the requirements of

maintaining the business would come into play here (generating more revenue and cutting costs), but finding additional financing would be of great importance if she decided to grow her
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Catherines Confectionaries Case Write Up June 1, 2012

business. Catherine would have to consider taking out a loan (either from a bank or relatively high net worth friends) or searching for equity investors. If financing were to be raised, Catherine would need a very strong plan on how she was going to generate a return for such investors (such as lowering costs and generating more revenue to increase profitability over the next 18 months). The pro to this plan is that with the correct strategy Catherine could possibly build a profitable empire that could put her in a strong financial position. The cons to this plan are that this type of effort would probably mean that Catherine would have to work even harder over the next 5 years and that she is going to be on the hook with respect to financial returns to investors (which increases the stress on the company and on her personally). Shut Down Business If Catherine determines that the work she must put in to maintain her business is not worth the business itself, she should consider shutting it down. At this juncture she only has a handful of employees so the fall out would be minimal. She could have a fire sale of her equipment and she would have to find a manner in which to terminate the lease (if the lease is in the companys name and the company dissolves this may provide an out on that front). The cons to this idea are that she would lose her source of income and also not realize her dreams of running her business effectively. The pros are that she would be able to have some pressure taken off her and possibly find another job that better suits her skills (such as preparing food for another business that she does not run or going back to her initial employment if possible).

Catherines Confectionaries Case Write Up June 1, 2012

Recommended Solution Based on the information provided, I recommend that Catherine carefully thinks through her business strategy and implement a strategy of downsizing her business slightly. This downsize would have the following attributes: Catherine would cater her business to individual orders and take on business to business customers that were more flexible with respect to timing (e.g., able to give her a lengthy notice period regarding the items they were going to order and had minimal last minute changes). Catherine would terminate her lease and work out of her kitchen or find a less cost prohibitive venue. This structural decision will complement her decision to target specific customers that will allow her to thrive in her business. On the infrastructural front, Catherine should cut Marys compensation by a certain percentage, but offer Mary a bonus based on reaching certain revenue goals. Such

compensation and bonus combined would need to exceed Marys current payment amount. Catherine would discontinue serving walk-in customers. Although there is an argument that this is a type of marketing tool, it is not worth the headache and financial stress that comes from hiring unskilled labor and dealing with unpredictable customers. This task is outside of her core competency and more than likely is costing Catherine money and time. Catherine could cut Toms pay by at least 30% (noting that the walk-in business is being terminated), and pay him as a part time employee (or even an outside CFO) that could help her keep the books and stay on top of her financial situation.

Catherines Confectionaries Case Write Up June 1, 2012

Assumptions, Restrictions and Constraints The above recommendation is based on certain assumptions that have been made. First, we have assumed that Catherine can terminate the lease with her landlord. This item is definitely going to be difficult because the landlord is dependent on the income from Catherine. We are not sure about the terms of the lease including the monthly payment, lease termination policy, parties to the lease or penalties for breach. These are very important items that would need to be reviewed carefully with a lawyer. Further, we have assumed that Catherines home kitchen can handle an increased workload. We are not sure of the dimensions of her personal kitchen, or the equipment that she has in such kitchen. We would need to carefully assess whether the kitchen would be able to handle more consistent cooking, noting that previously was the business to business portion of her business picked up she needed to move to a larger kitchen. We have assumed that Mary and Tom are understanding and logical individuals who dont have better prospects at employment. This may be true for Mary, but Tom may not be willing to take a pay cut and a decline in his duties. MBAs are known to be a prideful lot. Finally, we have assumed that business to business customers might be willing to be more flexible in their timing regarding ordering and their last minute needs. However, businesses that are using Catherines services are trying to meet quantities and deadlines on their own, so they more than likely want to work with a caterer that can deal with the issues that they have to deal with from their own customers. Further, Catherine may face certain constraints. For instance, she may need to make a certain amount of money to maintain her standard of living, noting that she left her full time

Catherines Confectionaries Case Write Up June 1, 2012

job to run this business. Time is also a constraint because if the business does not start moving in the correct direction soon Catherines operations may start to suffer, a fact that would hurt her ability to compete for her customers (assuming she does not have a monopoly, which is a fair assumption because the barriers to entering this business are minimal). Summary and Conclusion Catherine should consider downsizing her business to make it more manageable from both a structural and infrastructural standpoint by targeting certain customers that provide a certain level of flexibility, terminating her lease and working with Mary and Tom to come up with a better compensation structure. Implementing this strategy may generate less revenue for Catherines business, but it may actually increase her margins and make her services more profitable. Most importantly, it could help take some of the stress off Catherine so that she can enjoy her work again and spend more time creating new recipes that could please her clients. Effectively managed, this new strategy could make Catherines business sustainable for the foreseeable future.

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Catherines Confectionaries Case Write Up June 1, 2012

Appendix A

Customer Type Walk-in

Business to business

Individual Orders

Differentiating Factors (of Customer) Piece meal ordering. What you see is what you get. Customer service is consistent face to face interaction. Orders are relatively not predictable. Requires higher volume and flexibility. Possibly more stringent quality compliance and deadlines. Higher likelihood of large volume repeat business. High contact with customer (personal feel). Flexibility in timing.

Order Winners Quality of taste. Reputation.

Quality of taste. Timely fulfillment of orders. Competitive pricing.

Customer service. Options for special ordering. Personal relationship.

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