The Little Red Roaster - Case Study Example

? The Little Red Roaster Strategic direction 639846 MGMT 1P96 Dr. Helen Mackenzie February 24, Executive summary The Little Red Roaster had been in business since 1994. Owned by Kendra Gordon Green, the company offered a menu of coffees, teas, gourmet beverages, breakfasts, light lunches and snacks. The company had been approached by other companies to diversify its operations into wholesaling and catering. There was also the option of selling the company. The LRR operated in a highly competitive market. Therefore the company could not afford to sit still. The company could expand into wholesaling or catering. The management could also sell the company. Given the fierce competition for market share in retail, the company’s core business, the future strategic direction would involve implementing one of these options. Gordon-Green had to make a decision fast about which option to pursue. The communication theory is relevant in this business situation because of the distribution and logistics issues to be considered. The company would require a well-designed communication system in either wholesale or catering. The company’s goal is to maintain net profit at 4.56% of sales. In reaching this goal, the company had three action alternatives. Gordon-Green could sell the company. The LRR could diversify into wholesale. The company could expand the catering capacity. In implementing either option of wholesaling or catering, the company would incur additional costs. In implementing the wholesaling strategy, the LRR should outsource distribution and logistics to D&C. Initially it should focus upon the existing customer base. This would enable the company to gain further expertise in wholesaling. Overview The LRR was a retail coffee shop which had been in operation since 1994 with two London locations. The key players in the present business situation are Kendra Gordon-Green, the student consultant team from the school of business and the potential wholesale and catering customers who wanted LRR to expand operations in that direction. The student consultant team had submitted a proposal to buy the company. LRR had been approached by Global Spectrum to expand in the wholesale industry. In the past year, offices and other businesses in the downtown London area had also approached the LRR about catering for varying activities. So Gordon-Green had to make a decision about which of these future options to pursue. Problems The LRR operated in a highly competitive market. Therefore Gordon-Green had to make a decision fast about the strategic direction of the company. The LRR had been approached by wholesale and catering customers to expand in both industries. However, given the wide spectrum of competitors in the industry, they would not wait long. The LRR had developed strong brand awareness in the retail market. However the company could not afford to sit still given the wide spectrum of competitors, as stated in the case, ranging from multinational corporations to family-run businesses. Given the fierce competition for market share, the LRR had to diversify into other markets. Therefore Gordon-Green had to consider the proposals made by both the student consultant team and the wholesale and catering customers. Given the high level of competitive rivalry in the market, the strategic direction of the company was at stake. However Gordon-Green had three options to consider. She could sell the company or expand in the wholesale business or expand in the catering business. These are the three future options one of which should be selected. Given the fast pace of change in the external environment, the wholesale and catering customers would not wait long before they approached other retail companies. Therefore Gordon-Green was anxious to make a fast decision. If Gordon-Green sold the company, then she would no longer be able to capitalize upon the strong brand awareness that the company had achieved so far. Gordon-Green enjoyed being an entrepreneur and wanted to be in business for herself. However she was also expecting her first child and therefore would not be able to focus upon her management duties to the same extent as before. In that case, selling the company would appear to be the best option. However she could capitalize upon LRR’s brand awareness in the retail market to expand in either the wholesale market or the catering market. But there are additional expenses involved in pursuing either option. Expanding the catering capacity involved additional costs in renovation and advertising. If the company went into the wholesale business, then the company could either expand in-house or outsource to a local distribution company. Causes The Porter’s theoretical framework for strategy formulation lists three possible courses of action: differentiation, cost minimization and focus. The LRR implemented the strategy of differentiation to build a strong customer loyalty in the service industry. From the perspective of Porter’s five forces analysis, the retail coffee industry is not an attractive place in which to continue to operate. Because of the high level of competitive rivalry, the industry was not experiencing significant growth. Therefore the LRR has to implement a diversification strategy in terms of either entering the wholesale industry or the catering industry. The job characteristics model can be applied in evaluating whether selling the company was the best strategic direction. The job characteristics model deals with skill variety, task identity, task significance, autonomy and feedback. The communication theory can be applied in evaluating whether the company can afford to expand its wholesale or catering capacity without loss of profitability. The job characteristics model would also be affected if the company implemented the diversification strategy. The current strategy of the company involved a differentiation strategy in terms of providing quick service and employing friendly and knowledgeable staff. If the company wanted to implement the diversification strategy, then skill variety would have to be expanded. However the diversification strategy could be implemented with outsourcing so that the additional expenses of expanding in-house are avoided. Outsourcing is defined as the process of subcontracting to a third-party those activities which are not the company’s core competencies. Wholesale or catering operations involved distribution and logistics which encompassed the communication system. Therefore, in pursuing the strategic direction of either wholesale or catering, the LRR management would have to consider the communication theory. The communication system involved ordering and delivery which would have to be made more efficient than the company was currently capable of. Goals The company should maintain its net profit at 4.56% of sales. Sales should continue to grow as before thus maintaining the present level of profitability. Strong brand awareness should continue to be the strategic focus. Action alternatives The first alternative is to sell the company. Since Gordon-Green was expecting her first child, she would have to focus more on family interests, therefore compromising the time she spent upon business interests. However this means that Gordon-Green would not be able to capitalize upon the strong brand awareness that the company had achieved so far. The LRR was also a family-run business so that she could delegate decision-making to family members. It is mentioned in the case that her father would be able to spend more time on the business when he retired. Therefore even if Gordon-Green herself could not spend time as before on the business, her family members could fill in for her. The second option is to expand in wholesaling. If this action was chosen, then the company could either expand in-house or outsource distribution and logistics to a third party. Presently the company did not have the capacity for greater wholesale operations. Therefore outsourcing seemed to be the best option. In that case the LRR would have to give up 15 to 25 percent of the selling price. However this enabled the company to capitalize upon D&C’s experience in distribution and logistics and current customers which included restaurants and hotels. Therefore this partnership would enable the LRR to gain additional customers leading to additional sales revenue. The third option is to grow the catering capacity. If this action was implemented, then investments in expanding order capacity would have to be considered. There were also transportation issues in terms of creating a well-designed communication system. However implementing this action would be more costly. First the renovations costs were estimated at $22,350. Then an additional amount of $2,500 is required to be spent in advertising. There were also transportation costs. These investments did not ensure that the company had the core competencies in this area. So far the company’s focus had been on the retail side of the business, therefore catering resources were limited. Recommendation The LRR should expand the wholesale side of the business. This action involved less costs than if the company wanted to expand into catering. Provided that LRR outsourced distribution and logistics, then the costs of additional human resources, transportation and promotion could be avoided. Therefore implementing this action alternative was less costly. Presently the LRR had such growth potential that selling the company was not an option. Implementation In implementing the second action alternative, the company should outsource distribution and logistics to D&C. Once the partnership agreement had been reached, the LRR should continue to focus upon the traditional customer base consisting of restaurants and offices. This should be the strategic focus in the first year. During this time, the LRR would gain further expertise in running the wholesale side of the business. In the second year, the company should diversify into other customer groups. This could be sports and entertainment centers. If the company followed this timeline, then it would be able to capitalize upon its retail expertise in growing the wholesaling operations. When the wholesaling operations started to grow, then the LRR should consider purchasing warehousing space from D&C. This would reduce transportation costs in the long-term as a result of economies of scale as the company gained more wholesale accounts. Implementing this action alternative would incur the costs of giving up fifteen to twenty five percent of selling price. As stated in the case, warehousing space would cost at $6 per square foot. The LRR would not have to make significant changes in human resources in case of outsourcing distribution and logistics. The other alternative of expanding in-house would entail significant changes in terms of additional part-time wholesale staff. This staff would not be required if D&C handled distribution and logistics side of the business. However it is stated in the case that Gordon-Green’s father would be able to invest more time in the business when he retired. This would be valuable addition to the human resources particularly because Gordon-Green was expecting her first child and therefore would have to delegate decision-making to other personnel. Contingency If D&C was not available to provide distribution and logistics resources, then the company should explore other distribution companies. Expanding in-house was not an option since the company was new to wholesaling. Therefore outsourcing should continue to be the strategic focus of a well-designed communication system. Sources Healey, N., & Grasby, E. M. A. (2005). The Lttle Red Roaster. Richard Ivey School of Business, case, 1-14. Read More