RE: Advice and Analysis on your meetings regarding future of Levendary Café China
Statement of the problem
Levendary Café is a group company name for a chain of cafés. As part of the top management of the company, you are keen to expand its business in other parts of the world. This is because you have realized that Levendary Café’s domestic business in the United States has tapped out. You understand that the business has reached the maturity level of growth and further attempts to improve profitability and growth may not pay off as expected. Therefore, it is increasingly important that you help expand its operations into other developed economies such as China in order to increase its profitability and growth. However, as the newly appointed CEO, you will encounter a critical problem of inexperience in international management. You need to understand that your lack of managerial experience in the international business world poses a great threat to the expansion of the Company into China. Before you can allow any significant investment in China, you will have to address a number of critical issues. Due to the existence of different national cultures, the Chinese food industry is characteristically unique from the United States. The customer-oriented strategy adopted by your company will require an in-depth study and understanding of what customers in the Chinese market need. You will have to ensure coordination and cooperation amongst the Food, Operations and Marketing teams of the Company in order to help choose a strategy that will work in the Chinese market.
Alternatives
Once you have conducted market feasibility studies, the choice of strategy to be used for entering the Chinese market will heavily depend on two factors; level of risk expected and the amount of funds available for investment. As a result, you will have to understand and evaluate evaluate the following three alternative strategies that are available for the Company:
- Setting up of new operations
This is also referred to as a green-field venture. It involves building new restaurants bottom-up. The costs of occupancy, labor, food and supplies will be all met by the Company. This method demands adequate managerial and financial resources from the Company. Generally, it is the most costly mode of serving the foreign market from a capital investment requirement perspective. However, it provides the Company with full control over quality and service.
- Joint venture
It involves establishing a business that two or more otherwise independent companies own jointly. You will have to convince the Company to buy a stake in the joint undertaking. The risk attributed to the joint venture will change depending on the amount of capital committed by the Company. The greater the amount of money invested by the Company, the greater the risk involved and vice versa. A joint venture is politically acceptable, fosters sharing of knowledge by partners and facilitates risk-sharing. However, the Company will lose control over service and quality specifications. This will reduce customer satisfaction. In addition, the Company may be forced to share business secrets thus lose its competitive edge in the industry.
- Franchising
Under this strategy, you will grant to another independent Chinese-based company, the right to conduct business using the Company’s recipes. This strategy is common among service companies such as Levendary Café. The main advantage of this strategy is that the Company will be relieved of the heavy costs incurred in setting operations and the associated high risks involved. However, there is loss of competitive advantage through sharing of trade secrets with the franchisee. In addition, a potential competitor is created in the form of the franchisee.
Decision
Since China has a national culture that is significantly different from that of the United States, you should adopt Alternative 2. A joint venture will allow you to gain access into the Chinese market while each partner explains its competitive advantage. An essential feature of a joint venture is that ownership and management of the business will be shared between the Company and its partners. Thus, foreign-based partners will act as a cultural bridge between the Company and the foreign customers. However, you need to note that one critical concern about this strategy is that control over service and quality may be lost.
Action
Before you commit any investment into the joint venture, you need to;
- Assess the political situation of China. This is because existence of political tension between China and the United States may affect attitudes of target customers towards the business.
- Establish objectives and goals to be achieved in both the short term and long term. This will be guided by the corporate philosophy of the Company.
- Determine the extent of disclosure about trade secrets with potential partners. This is because joint ventures often lead to loss of competitive advantage by the Company.
- Decide how much stake it you will purchase in the new business. For joint ventures, control by each partner over the business is dependent on the amount of stake acquired. This step involves the actual commitment of capital investment.
