Lavender’s first steps and industry analysis Although Lavenders Cafég’s decision of entering Chinese market faced some tough challenges, the organization also took some good steps. First of all, the decision of entering China as the target market was a good decision. According to a report by IBIS World, “this industry revenue grew by 3. 4% to $190. 2 billion in 201 1 and 2. 6% to $195. 2 billion in 2012. Industry revenue growth will level off as growth rates approach historical levels and the industry is forced to contend with the market saturation issues it has grappled with over the last 10 years. (Koala, April 2010). Since the American racket was already saturated, Chinese market offered an attractive alternative of expansion for Lavenders Cafe. China was a market of 1. 4 billion people where economic growth was around 14. 5% and where growing middle-class citizens, who demonstrated a positive acceptance of quick service restaurants, had a larger disposable income. The original idea of looking for foreign ventures proved also the good performance of the Business Research and Development department, which was taking the correct steps to enter this market.
Apart from this, the previous experience of other companies such as KEF or McDonald’s was a good example of US. Corporations able to attract a significant amount of customers and handle the existing competition in the market. The restaurant industry in China as well as in the IS. S. Is segmented, which means that rivalry is high because all competitors offer the same kind of products although the concept of establishment differs in each market. The threat of substitutes is also high since there are many other products to choose from: specialty or casual dining establishments.
However, Lavender’s focus adaptation strategy targeted a segment of consumers that were more health conscious and that allowed industry trends, which gave them an advantage over their competitors of serving a specific niche in the market. Problem statement and main issues concerning Lavenders cafég’s actions. The main problem that agenda Café faced was to enter a market like China relying on a tacit agreement with a Chinese operator without a written agreement. Due to the lack of a strategic plan, Lavenders Café was unable to set up a common goal to be followed by the Chinese Operations department.
In addition to this, the lack of communication between offices cascaded in the adoption of different enhance practices, and as a result, there was a lack of transparency and agreement reflected in the confusing business models adopted. As mentioned above, the experience of other American businesses serves as an example of actions to be avoided by Lavenders Cafe. For instance, Pretzel Time did not study the assimilation by Chinese consumers of their stores’ decoration. KEF or McDonald’s used joint venture as successful ways of entry for the Chinese Market.
These two examples give us an idea of what Lavenders Café did wrong when entering the Chinese market. First of all, the election by Chem. of smaller locations, less full-time staff or even the format of the stores as shown in Exhibit 3 are opposite to the standardized stores established among the U. S. Lavenders should have taken advantage of the difference regarding store costs as well as labor costs between China and U. S and try to replicate the American facilities in China.
Bigger spaces would allow them to include the same number of seats, have a greater number of employees who could provide a more personalized service and increase the average traffic of guest per day. As a consequence, the annulled sales of he Chinese locations would be closer to the U. S. Ones, if they followed a more standardized strategy regarding the features and services offered in those stores. The sales volume of the Chinese stores in Exhibit 3 represent only 8% of the sales volume achieved by the American stores.
Moreover, it would also help to enforce their brand image since customers in America can expect a similar service in China. Therefore, the standardization of these stores should be controlled by the Operations Department leaded by Mr.. Nick White (Exhibit 1) to control and secure their store opening strategies since any local and international competitors are trying to mimic the standardizing efforts. Secondly, Sheen’s objectives were quite different from the ones that the CEO had in mind. Sheen’s goal was to open numerous locations across the country based on price in order to reduce cost as much as possible.
Although his main objective was the minimization of costs, the financial statement shown in Exhibit 4 demonstrate that despite his efforts, the net income remained negative. On the contrary, the American Coo’s goals was to establish a niche stable enough from which to expand in the near torture. She preferred giving more value to customers and going an extra mile to provide personalized customer service in order to build up loyalty while Chem. was focused on attracting a higher number of customers.
He actually included changes in the menus that contradicted the company’s niche strategy of targeting consumers interested in healthier choices. This conflict of interests comes as a result of the lack of duties and responsibilities clarification included in the agreement between Chem. and the CEO. Finally, the understanding of Chinese policies and procedures in order to plan a integration strategy was not effectively carried out. Lavenders Café did not adopted the Gaps for accounting the revenues collected and, as a consequence, the company concurred in higher expenses.
The organization did not consider the different organizational culture of Chinese businesses where the hierarchical structure is bottom-up instead of the top-down structure of American companies. This error explains the lack of communication between the CEO and Chem. as well as the refusal attitude of the last one to implement any change. Therefore, Lavenders Café needs to adapt policies that would reinforce transparency as well as more control over Chinese operations without belittling Sheen’s efforts.
Alternative Strategies Recommendation The following suggestions will help to eliminate or alleviate the conflicts explained above: Dismiss the China operations. The financial statements show that the business is not making any profits and that the situation is not going to turn around in the short-run. Sheen’s poor management as the Chinese operations CEO has not been proved as profitable as expected and the organization should reconsider the option to form a joint venture as a landed strategy to enter the Chinese market. Standardization strategy.
The firm can try to replace the stores that do not follow their standardization strategy and make enough changes to attract the customers targeted by the American Company since the beginning. This strategy would provide consistency to Lavender’s brand and would focus more on quality features rather than quantity. However, the restoration of the 23 stores would increase expenses significantly. Moreover, the adoption of a standardized strategy to attract demand could also force the Chinese operations to incur in ewer net profits because they would be ignoring the advantages of alternative adaptation strategies.
Localization strategy. The organization can try to adapt their business by including local dishes in their menus in order to attract a higher customer base. However, this would make competition even higher due to the already high rivalry established by companies that appeal to local tastes. Mixed strategy. Lavenders Café can provide a standardized image through their stores and, at the same time, include some local dishes in their menus or offer two different kind of menus. Although this last option old satisfy different kind of demands, it would also increase marketing and operation expenses.
Apart from this, the existence of two opposite menus would pose a huge challenge for the Concept department to meet goals in both markets. An alternative to attract both types of demands is the opening of two separate stores that would appeal to different tastes in a different set of locations. According to the average traffic of guests shown in Exhibit 3, those stores that appeal to local tastes would be located in metro-suburb areas while the stores appealing tastes closer to the Americans would be coated in more centered or developed areas.
Optimal solution Lavenders Café needs to turn around their initial pitfall entering the Chinese market and start making profits instead of negative net income. Since the main costs that need to be controlled are labor, marketing, maintenance and rent, there should be an effort by American CEO and Chem. to define coordinate marketing strategies as well as risks analysis, which would make it easier to identify cost drivers. Furthermore, they would need to redefine responsibilities, objectives and expectations in a formal written agreement which would include the features that are important to Lavenders Café when expanding to other locations.
However, departments such as Marketing, Operations and Business Development would have to transfer knowledge such as marketing forecasts to Chem. so that he had the appropriate tools to make decisions based on the same criteria than the American managers. This would alienate managerial styles and reduce expenses in the long-run. The best option to achieve a similar goal is to adopt a mixed strategy in which they keep a standardized strategy to offer a consistent brand image and, at he same time, appeal to local tastes through the modification of the menu.
Once Lavenders Café achieved a satisfactory profit margin in China, the firm could study the possibility of diversifying their portfolio and opening two different stores attending to different demands. Apart from this, they would need to differentiate the drivers of revenue for both markets since in China the volume of sales is the main driver while in America is the gross margin (Dolomite, 2014). A standardized approach such as the Gaps would reconcile the accounting differences and enforce transparency through Lavenders Cafég’s practices.