Case “Levendary Cafe” The China Challenge

Case&quotLevendary Cafe&quot: The China Challenge

Multinationaljoint ventures are rapidly growing as the globe continues tointegrate. However, the central issue regards how to manageefficiently and enhance the smooth flow of operations in differentcultures. Levendary café, an American fast food restaurant made adecision to enter the Chinese market after expansion in their homemarket reached a plateau. The primary main aim is to implement thequality and delighting concept it uses in America to the Chinesemarket. Unfortunately, the headquarters in America has been facedwith difficulties and need to restructure its strategies in order todeal with the local market. The levendary headquarters lackedknowledge about the Chinese market and permitted Louis Chen toestablish operations single-handedly. This paper will analyze theLevendary case study issues and how the management requires adoptinga strategy that will enhance the integration of the all itssubsidiaries.

Question1 Issues facing Mia Foster and her top management

Theautonomous direction, which the China branch took, seems to haveadopted a different direction contrary to the headquartersexpectations. The main problem that Mia Foster and her top managementface include lack of consistency and standardization of theoperations. Firstly, the headquarters is in a dilemma to what extentthe Levendary café concept can be stretched to adapt to the needs ofthe locals. While the CEO opted for a global strategy and proceduressuch as standardization of reports, Chen customized products as wellas differentiated the subsidiaries procedure. For instance, MiaFoster discovered that the financial statement from the Chinesesubsidiary is reported in its format then manipulated by the financegroup for compliance with U.S Generally Accepted AccountingPrinciples (GAAPs). This is risky according to Mia Foster and her topmanagement and thus, deems it necessary for the reporting process tobe formalized, consistent and compliant. On the other hand, thestores are also designed differently from those in Americaheadquarter to targets different groups of customers (Bartlett,Christopher and Arar, 2011).

Chengained some general knowledge by working as a rotational intern inthe headquarters major departments. While the HQ has the firm’sgeneral knowledge and overall international market, Chen possessesknowledge that is market specific and only obtainable fromexperience. Thus, emphasis is laid down on the need for both thegeneral knowledge as well as market-specific knowledge. For example,as Chen involvement and presence in the Chinese market increases,this continued to widen the gap between the general knowledge andexperiential knowledge thus, creating a communication obstaclebetween him and the headquarters in America.

Theother issue facing the CEO and the top management is communicationbarriers. First, the headquarters in America have unrealisticexpectations where offer little support in the structure of thebusiness in China with Louis exercising a lot of freedom in theestablishment of the Chinese operations. Communication problem is thecause of all these challenges where there exist misalignments ofinterest and market commitment between both foreign and domesticmarkets. According to Barlett et al. (2011), Foster faces a lot ofdifficulties in developing a useful relationship with Chen due to hisattitude. In addition, lack of communication is evident in this caseas Louis Chen was allowed to control China operations fully, andultimately ending up changing the designs and standards of theLevendary company. For this reason, Foster and the top management arefaced with a significant issue on how to sustain the uniform image,as well as the culture of the Levendary brand as Louis had madecritical changes without discussing with the headquarters. Mia Fostermust acknowledge that the American strategy cannot be exercised inChina and thus a market-positioning component is required tocooperate and serve this market (Bartlett et al., 2011).

Culturaldifferences is another issue where the top management does notunderstand the differences between the American culture and Chineseculture and insists on enforcing policies and rules different fromlocal preferences. Social cultural differences are the primarybarrier since what works in America may not necessarily be wellreceived in Chinese. A close look at the two cultures demonstratesnotable differences such as the fact that the Chinese people visitrestaurants to eat and leave quickly whereas, in America, most peoplesocialize in restaurants. It is for this reason that most cafes inChina have been differently structured compared to those in LevendaryAmerica. An example, in this case, is the Levendary location inshanghai’s historic Yu garden area that have no seats since it wasdesigned as takeaway store.

Theother issue is how the management is structured. In America, theorganization is structured a top-down approach and thus hierarchyproblems. This is in contrast to the management in China which isorganized in a way that issues are addressed immediately rather thanwaiting for another person to deal with it. Additionally, Foster hasinadequate international experience regarding the China market, andthis will get in the way on how to deal with Chen and how he willrespond to her demands (Bartlett &amp Ghoshal, 2002).

Question2 Analysis of the situation

Ananalysis of the industry trend helps to identify any opportunitiesand threats that may influence the profitability of the restaurant inChina. A SWOT Analysis of Levendary café shows that the company hasa significant geographical presence in the Unites States with over3,500 stores. The brand is strongly recognized for its excellentquality healthy products, thus customer loyalty. With such as marketposition and recognition of the brand, then Levendary can gain acompetitive advantage by expanding into foreign markets since overthe years, the American operations have been profitable. The otherstrength of Levendary is Louis Chen’s experience and localenvironment knowledge as well as connections that have helped him inobtaining prime locations at reasonable prices.

Onthe other hand, weaknesses posed by Levendary café include a chainof command that is weak and unclear. This is illustrated in Chinawhere no set responsibilities are there for Chen. In fact, no managerhas held meeting with him for the last one year. The other weaknessregards the misaligned strategies between the Levendary headquartersand the Chinese subsidiaries. While the headquarters in America isfocused on the alignment of the original Levendary concept andstandardization, the subsidiaries in China is focused on a strategythat is local responsiveness where products are tailored inaccordance with the locals’ preferences. Lastly, since the companyis new in the Chinese market then the brand recognition in thisregion is weak.

Additionally,Levendary café have opportunities available, and this includes achance to capitalize on the growing Chinese market. With a wealthymiddle class, a growing eating out lifestyle and increase in thenumber of women in the workforce, the company have an opportunity toincrease its profit by increasing the number of locations in China.However, the threat faced by Levendary includes stiff competitionparticularly in its subsidiaries where other dominant players arepresent in the market. In China, the needs of the customers are notresponded due to lack of standardization of products and services.For this reason, the company has failed to set up a strong brand inthe Chinese market. The other threat the company is facing is therisk of losing a Louis Chen who possesses vast knowledge of the localmarket and culture. According to Barlett et al. (2011), Chen’scontract is to expire in a few months and this poses a great riskunless a formal contract is given to him and duties and role assignedto him specified in more detailed manner. Overall, Levendary has morebusiness opportunities and can take advantage of them to succeed inthe Chinese market.

Analysisof the subsidiaries in China

Thefive porter’s force model allows the management to identify theindustry analysis correctly.

Rivalry

Themajor threat is the high competition from established players in theregions such as KFC and Macdonald’s. MacDonald’s approach tostandardizing is a key competitive advantage that has succeededglobally.

Riskof new entry

Thesecond threat is that of new entrants. Although there are alreadyestablished companies operating in the industry, potentialcompetitors may have a capability to enter the market. Thus, in theChinese market, there is a very high threat of new entrants forcompanies operating, as multinationals try to expand. Other companiescan enter the industry and produce products competing directly withothers companies already in existence. As a result, this represents aprofitability threat to the already established companies in theregion. However, the Levendary restaurants are well-positioned inprime locations with the first location Chen opened being in anexpatriate dominated region and ended up becoming an instant hit.

Supplierpower

Thebargaining power of the supplier is a threat that can be defined asthe ability of the supplier to either raise prices or costs of theindustry. In this case, the bargaining power of the supplier is weaksince the inputs of the products come easily. Due to its size, thesubsidiaries can make a huge purchase of organic products.

Buyerpower

Theother threat is the bargaining power of the buyer, which can bedefined as the ability of the customers to bargain the prices chargesor demand for quality services. In this case, the bargaining power ofthe buyer is high due to low switching costs and the customers caneasily choose from other brands. The power that buyers in thisindustry have is a strong threat since people can decide that theenvironment of an individual vendor is no longer enjoyable, or theproduct is no longer consistent with their budget. With other cafesall over the region and on every corner, the consumers have plenty ofother options and this allows them to choose what they want topurchase. For example, this is why Louis Chen had removed allsandwich items from the menu apart from one and replaced with variouslocal dumplings since customers seek for sources of supply that fitwith their preferences. For this reason, vendors are required tochoose a secure and reliable strategy since consumers have the powerto decide whether to accept low cost or high quality.

Threatfrom substitutes

Lastly,the threat of substitute is high because other restaurants existwhere customer can source their supplies. The local market areaanalysis will help to determine the sales potential of the restaurantand evaluate its strength. Louis Chen is most sensitive to what theclosest customers’ needs since home demand play a vital roledriving competitive advantage (Bartlett, Christopher and Arar, 2011).

Overall,the industry is attractive, and the environment is highlycompetitive. However, the industry is growing at a high rate, andthere are no signs of the plateau shrinking in the near future afterthe analysis using the Five Porters Forces. In this case, strongmarketing and innovation may result in marvelous breakthrough. Withdisposable income and other driving forces in the industry, there arenew opportunities. New strategies should be adopted to overcome thestiff competition in the market.

Question3 Main decision alternatives

Afteranalyzing the five forces influencing the competition andprofitability in the hotel industry in China, then Mia Foster and thetop management can position their company relative to the forces.Thus, they are obliged to come up with a global strategy that willenhance standardization and centralization of the control ofactivities. The main advantage of having global strategies includecost reductions through standardized products, which come along witheconomies of scale benefits where production and R&ampD activitiesare pooled. The other benefit is global recognition where customersfrom all over the world will easily distinguish the brand, and thismeans an increase in brand loyalty. Thirdly, compared to having alocal responsiveness strategy, a product developed using a globalstrategy put forward high quality. A strategy that is localresponsiveness helps a company benefit by tailoring products to suitthe locals’ preferences.

Therefore,main decisions required includes proper sharing of knowledge betweenthe America headquarter and its Chinese subsidiaries in order tolimit the present misunderstandings and ensure that both partiesinterest become more aligned. Mia Foster and the top managementshould implement a strategy using organizational design where a moresuitable organizational form should be provided to promoteintegration of efforts between the America headquarter and theChinese subsidiaries. The structure of the subsidiaries should inorder to enhance coordination and integration of employees’ effortsat all levels. Employees in these subsidiaries should be assignedmore specific roles and tasks in a way that increases quality,innovation, efficiency and how to respond to customers. In this case,a finance director must be recruited to ensure that the financialstatements from all the branches are reported in the local format andthen well translated using the appropriate GAAPS. The main advantageof this decision is to ensure consistently in financial reportingwhich encourages comparability of the financial statements fromdifferent enterprises. Consequently, consistency helps to facilitateeconomic decisions that are well informed. Additionally, uniformityis crucial where easier consolidation of the financial statements ismade, and this enhances transparency in the preparation of financialreports. On the other hand, the main disadvantage of having qualityreported financial reports is that the company will have to be taxcompliant which is compulsory (Baltazar, 2015).

Secondly,Mia Foster and the top management should decide on how it will offerstandardized products to achieve consistency with its customers. Theyshould ensure that all customers receive similar services, and thesubsidiaries present a uniform image of the company. This may involvestriking a balance to provide unified operations and meet the localpreferences desired by the subsidiaries. In their book Bartlett, etal. (2011) suggest that improving a firm processes as well asproducts design is key to gaining competitive advantage in asituation of intense rivalry (Bartlett et al., 2011). Thus to achievelong-term success the company should concentrate on what consumerswant rather than worry about what everyone thinks. For this reason,customization is significant in order to come up with the productthat suit the locals taste and meet the market specialties. Thus,they need to decide on the design of the restaurants in China. Thefurniture layout, decorations should be allowed to be localized atmost 10% to ensure consistency in the designs of all Levendaryrestaurants. On the other hand, the food menu should be changed tosuit the needs of the customers by following the approach used byother successful multinational restaurants like MacDonald’s andKFC. However, the menu may differ according to the location of therestaurant. Additionally, when opening a new café, a seniorexecutive should be present in order to monitor the store designs areup to standards.

Fostershould also consider establishing more communication channels whereChen must report to her directly, either weekly of biweekly. MiaFoster should consider managing Louis instead of replacing him withsomeone else since he has the social connections and ability to makethe changes in his work. However, a functional manager to assist Chenis also required. Louis Chen should also be made to understand thatstandardization is significant and can be achieved (Baltazar, 2015).

Thechanging aspect is crucial to the CEO becoming more interested in thecontrol of China operations. She had already made a decision toutilize the time resource as a significant future strategy bytraveling to China and allocating her time to video conferencing.This strategy is appropriate and may ultimately open up communicationchannels between China and the headquarters. As a result, this willlead to alignment of expectations between the parent company and thesubsidiary, as well as enable knowledge sharing. Consequently,increased market knowledge affects decisions and performance ofoperations in an organization.

Questionfour Recommendations and implementation plan

Thecase of Levendary café and its Chinese subsidiaries reflects adisintegrated strategy where the America headquarter have plans tointegrate its concept to the Chinese market while involving minimallocal adaptations. On the other hand, the Chinese subsidiaries preferto exploit the local responsiveness strategy to succeed. Thiscritical situation needs to be resolved by creating right balancesbetween the America headquarter for unified operations and localpreferences by the subsidiaries (Ghemawat, 2007). The firstrecommendation is to tap into the potential growth in the Chinesemarket. The company should remain relevant to the locals thus, themanagement should tailor the format of the stores and introduce alocal product mix that suits the tastes and preferences of the localmarket. Under its international strategy, Levendary should transmitits core competence and abilities into its subsidiaries as itcontinues to expand. Thus, a knowledge sharing frameworks should beimplemented with an aim of resolving these issues and help inaligning the interests of both the America headquarter and itssubsidiaries in China (Gregoriou &amp Ali, 2013).

Implementationplan

Along-term strategy is required to ensure that Levendary survive inthe China market. It is worth noting that the American companyrequires additional investment, including training and recruitingcosts in order to integrate corporate cultures and minimize culturaldifferences by forming unified values for consistency. Animplementation plan agreed by every concerned party should bemaintained to put strategies into actions (Hill &amp Jones, 2007).The first plan is to design the best organization structure that willoffer quality services and compete with the rivals. Improvementprograms such as training employees including Louis Chen should beput into place in order to transform him into a professional manager.Foster should also determine on what extent authority isdecentralized to reduce the challenges associated with tallhierarchies. Decentralization of authority involves delegation offunctions, divisions, and employees. As a result, decentralizationleads to minimization of bureaucratic costs where coordination andcommunication challenges are avoided (Hill &amp Jones, 2012).Specifically, a financial director can be employed to take care ofthe financial reporting and ensure that the accounting procedures arestandardized. In fact, a formal contract should be given to Chenwhere his duties are specified in more detailed manner. Since Chenpointed out that engaging an international financial analyst wouldlead to the company incurring unnecessary costs, then it is wise thatfoster considers training accountants in China on how to use GAAP intheir financial reporting. High-quality cross-cultural personnelshould be trained to enhance integration. Staff training issignificant and helps to achieve professionalism, consistency,improve service quality and to maintain standards (Baltazar, 2015).

Secondly,the products should be designed in a way that enhance standardizationand create a balance in accordance with the local preferences. Then,segmenting the market and offering various products to differentgroups will also be considered. Lastly, a manager should be sent morefrequently in order to review the operations in China. This is tomake sure that customers experience a similar brand culture (Meier,2011).

Conclusion

ASWOT analysis shows that the American company should considerinvesting more in the Chinese market in order to tap the existingopportunities, growing economy as well as a large population. Themiddle class in China is expanding in addition to their increasedpreference for foreign goods. On the other hand, increase of wagesgoes along with becoming more active consumers. Thus, Levendaryshould recognize this that there is likely to be a high demand forluxury items. Mia Foster should analyze what the competitors in theindustry such as Macdonald’s are doing to succeed in the Chinesemarket. The management can decide to use the MacDonald’s approachwhich is more standardized globally. After the analysis of boththreats and opportunities, she should formulate appropriatestrategies that ensure quality services while at the same timemaintaining the defined Levendary standards. Essentially, both theadvantages and distinctiveness of a local culture should bemaintained when a foreign culture is absorbed for business survival.Therefore, contemporary managers require cross-cultural managerialskills to deals with this kind of situations (Thompson, Strickland &ampGamble, 2007).

References

Baltazar,R. (2015).Corporateand International Strategy.Faculty of Management: Dalhouse University.

Baltazar,R. (2015). StrategyFormulation. Facultyof Management: Dalhouse University.

Bartlett,C. A., &amp Ghoshal, S. (2002). Managingacross borders: The transnational solution.Boston: Harvard Business School.

Bartlett,Christopher A., and Arar Han. (2011). &quotLevendary Cafe: The ChinaChallenge.&quot Harvard Business School Brief Case 114-357.

Ghemawat,P. (2007). Redefiningglobal strategy: Crossing borders in a world where differences stillmatter.

Gregoriou,G. N., &amp Ali, P. (2013). Internationalcorporate governance after sarbanes-oxley.Hoboken, N.J: Wiley.

Hill,C. W. L., &amp Jones, G. R. (2007). Strategicmanagement: An integrated approach.Boston, Mass: Houghton Mifflin.

Hill,C. W. L., &amp Jones, G. R. (2012). Essentialsof strategic management.Australia: South-Western/Cengage Learning.

Meier,M. (2011). Knowledge Management in Strategic Alliances: A Review ofEmpirical Evidence. InternationalJournal of Management Reviews.13, pp. 1-23.

Thompson,A. A., Strickland, A. J., &amp Gamble, J. (2007). Crafting andExecuting Strategy: Text and Readings. Boston, MA: McGraw-Hill/Irwin.

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