Business Strategy in Chinese Restaurant - Term Paper Example

Business strategy in Chinese restaurant Contents Contents 2 Introduction 3 External Analysis 3 Internal Analysis 5 SWOT Analysis 6 Strategic Options 7 Recommended Strategies 9 Conclusion 9 Reference List 11 Introduction Hai Di Lao hot pot is an innovative chain of hotspot restaurants in Sichuan province of China. The company was founded in 1994 and since then it has opened 72 restaurants in leading Chinese cities like Beijing, Nanjing and Shanghai (Hai Di Lao hot pot, 2014). Hai Di Lao hot pot has emerged as one of the most successful Chinese brand of hotspot restaurants by integrating the traditional cuisine of Sichuan style with the contemporary taste and preference of the customers. The restaurant chain have become widely popular in the last 18 years and successfully spread the pot culture in China and beyond. The purpose of this report is to explore the marketing strategies of Hai Di Lao hot pot by applying the PESTEL and SWOT framework. The strategic options for expansion of the restaurant are discussed in this report and finally the recommendations are suggested. External Analysis Political: The Chinese government has been following liberalization policies and this includes a drive of opening foreign based fast food chains in the country. Since 2007, the government have banned all the unlicensed food suppliers. This implies that the restaurant owners have to be highly careful in terms of procurement of food from suppliers. The Chinese government’s policy on food safety is paramount. Economic: China is one of the fastest growing markets among the emerging market economies with an average rate of growth of 9.10 % from 1990 to 2014 (Trading Economics, 2014). The growth of the Chinese economy has been coupled with the growth of disposable income of middle class (Wang, 2012). The average rate of per capita GDP of China is estimated to be about $ 2611 dollars (World Bank, 2014). According to statistics, the fast food restaurant in China is expected to grow by 6% in terms of value sales (Euromonitor International, 2014). Social: Based on social taste and preferences, Chinese fast food market can be differentiated on the basis of domestic fast food industry and foreign fast food industry (Deloitte, 2012). Though, the consumers are acquiring a taste of foreign fast foods yet the domestic Chinese fast food is very popular representing 70% of market share (Research and Markets, 2011). Technological: Technological elements like using Electronic Funds Transfer at Point of Sale (EFTPOS) and advanced equipments in the kitchen reduce cost of production of the company. Using social media marketing and using internet technology to manage inventory can also help companies reduce their costs. Legal: Legislations for restaurant industry in China is influenced by food safety law which governs the health and safety regulations of consumers. Legislations are also passed regarding food additives and nutrition enrichment to take care of consumer safety (CRS, 2014). The Ministry of health in the country regulates the standards of safety. Environmental: The restaurant industry in China is accused of creating formidable food wastage which in turn, has an adverse impact on the environment. Out of 1,427 companies examined, 710 were restaurants, as they did not have proper equipments to deal with exhaust fumes (Jinran, 2014). Porter’s Five Forces Threat of New entrants: Threat of new entrants is considerably high as Chinese government have been promoting domestic demand by encouraging investment in food and restaurants. Furthermore, the legal and cost barriers of setting up fast food restaurants are also low. Threat of Substitutes: Threat of substitutes for domestic fast food restaurants in China is high because proportion of white-collar workers is increasing and they have acquired a taste for foreign fast food. Additionally, younger population in China also prefer foreign fast foods. Threat of suppliers: Majority of the successful fast food chains have their own suppliers and logistic networks. Scale of operation of the restaurants has an influence on the suppliers (Porter, 2008). Supplier bargaining power is low on average. Threat of buyers: Buyer power can be measured in three dimensions namely switching cost, nature of buyers and concentration of buyers (Armstrong and Cunningham, 2012). Switching cost is low as there are many competitors, nature of buyers makes the power of bargaining a medium threat and concentration of buyers is very high as China is a densely populated country. Overall the buyer power is high. Threat of competitive rivalry: Researchers like Sadler and Craig (2003 cited in Grundy, 2006) have established that competitive rivalry depends on concentration of sellers, diversity of competitors and their products and cost conditions. Competitive rivalry is medium considering the product offering of Hai Di Lao hot pot is unique compared to its competitors. Internal Analysis The VRIN framework created by Barney (1991) predicts that there are certain resources which belong to the firm that provides it with sustainable competitive advantage. If the resources are heterogeneous and immobile then it provides competitive advantage to firms. Valuable Rare Inimitable Non-Substitutable Competitive advantage Procurement Yes Yes Yes Yes Sustainable competitive advantage Food Quality Yes Yes No No Competitive Parity Customer service Yes Yes No Yes Temporary Competitive Parity Logistics Yes Yes Yes Yes Sustainable Competitive Parity The above table shows the VRIN analysis of Hai Di Lao hot pot. It can be seen that the source of sustained competitive advantage for the firm lies in the style of procurement and management of logistics. The remaining factors namely, Food Quality and customer service can only act as sources of competitive advantage. Procurement style of Hai Di Lao hot pot is one of its major strengths. The compound and large scale purchasing of the firm allows it to purchase raw materials at a lower cost allowing it to maintain competitive advantage over buyers (Hai Di Lao hot pot, 2014). Another source of sustained competitive advantage of the firm lies in the management of logistics. Mechanized producing, distributing and warehousing of the company are modernized which have greatly reduced the costs of production. There are four centres of distribution which helps in smooth transportation of products (Hai Di Lao hot pot, 2014). SWOT Analysis Researchers have identified that SWOT analysis is one of the most comprehensive ways to capture the internal and external forces that affects the business strategies of the firm. The internal forces embrace the strengths and weakness of firms and the external forces embrace the opportunities and strengths. Strength Weakness The brand name of the company. The wide range of customers and customer loyalty. Large scale of production and economies of scale. Excellent service provider which had made it winner of numerous prestigious awards. Limited food range which makes the target market niche. Poor capital endowment of the company. Less promotional activities on internet based platforms. Opportunities Threats The fast economic growth of the country is expected to fuel growth of restaurant industry in China. The government initiative in favour of stimulating domestic demands provides huge opportunities for the fast food chains. The ever increasing population of the country provides a big market for companies like Hai Di Lao hot pot. Hai Di Lao hot pot faces stiff competition from brands like Yum, KFC and Pizza Hut. Changing consumer taste and preference in favour of foreign based products. Presence of large number of options in the market has increased the pressure from the buyers as they have become highly demanding and choosy. Strategic Options The present situation of Hai Di Lao hot pot can be characterized as one where the company has established itself as one of the leading players in the Chinese market as an authentic hot spot brand by merging Sichuan culture with the Sichuan tastes. One of the major threats for future growth of the company lies in the fact that foreign fast food restaurants are fast gaining market share. If this trend continues then it will be difficult for Hai Di Lao hot pot to maintain its share in the market. Strategy 1 One of the possible strategies to combat the situation is to diversify the existing menu by considering the present taste and preference of the Chinese consumers. The existing literature that points out changes in lifestyle of consumers have a major influence on the fast food markets. Diversifying the menu and including convenience items along with primary products of the restaurant will provide consumers with wide range of choices and has the potential to improve the market share. It has been observed that one of the certified strategies of increasing sales in the market is to supply new products which are closely associated with existing products (Orcullo, 2008). Improvement of existing products can be coupled with the development of new products by infusing foreign food products. The analysis of the restaurant has shown that it predominantly promotes the Sichuan culture. It does not have a diversified food menu which restricts the choice of the consumers. It will also be easier for the restaurant to use its current brand name to promote the new products. The presence of existing loyal customer base also makes it easier to sale the new products. According to the research conducted by Sneed and Holdt (1991 cited Driskell, Meckna & Scales (2006), there a variety of reasons for which consumers prefer fast food and they are, variable menu, convenience and low costs. It has been observed that in the past two decades there has been an immense change in the taste and preference of consumers. Strategy 2 Second option is to take up extensive market penetration strategy maintain the same products. This strategy will involve expansion of the number of outlets to maximize the presence in the Chinese market. This can primarily be achieved by using promotional and advertising techniques. Researchers have pointed out that market penetration is one of the easiest strategies of increasing the market share because it involves less risk and uncertainty than venturing into new markets (Gan, 2002). Others have argued that effectively following the market penetration strategy is one of the best ways to drive the products of competitors out of the market. There are certain disadvantages of using market penetration strategy for raising market share. One of the biggest disadvantages of market penetration is that it is not suitable for products which have a smaller life cycle (Ireland, Hoskisson and Hitt, 2008). Additionally, offering lower costs during initial offering and maintaining the level of lower price is also a difficult strategy as prices will eventually rise. Competitors can also reduce their existing prices and an eventual price war will follow which will be harmful for both the companies. Recommended Strategies Based on the above analysis, there are two alternative strategies that can be adopted by Hai Di Lao hot pot in order to improve its market share. The first one is to diversify the menu of the hotel by taking into consideration about the changing customer taste and preferences and the second one is to expand the existing network of restaurants and driving the products of competitors out of the market. It is recommended that the Hai Di Lao hot pot uses the first strategy for expansion. The research conducted by A. Veeck and G. Veeck (2000) had confirmed that Chinese consumers have a preference of eating western-style convenience foods that are processed and pre-packaged. Other researchers have pointed out that, eating western style convenience food is a sign of status symbol (Bhandari and Smith, 2000). Consumer preferences have undergone huge changes in the urban areas like Beijing and Shanghai (Bhandari and Smith, 2000). These evidences bear testimony that it is imperative for Hai Di Lao hot pot to change its exclusive Sichuan taste by diversifying the menu to some extent. Including convenience food in the menu can help the company to obtain competitive advantage. Furthermore, the research conducted by Hu and Duval (2003) had confirmed that the Chinese have a preference to eat western base convenience food in comparison to traditional food because they are time saving. Therefore, diversifying the menu and including few convenience items can help the company to improve market share. Conclusion The case of Hai Di Lao hot pot is essentially an interesting one as the restaurant have positioned itself as one of the most successful players in the domestic restaurant industry. It has been found from the analysis that the Chinese restaurant industry is facing rapid development as number of foreign market retailers is opening franchises in China. The rapidly growing affluent middle class of the country have fuelled the growth of both foreign and domestic fast food restaurant chains. This report has found out that in order to remain competitive in future Hai Di Lao hot pot must diversify its existing menu options to include convenience items in the menu. This has been suggested in line with the changing social preferences of the Chinese consumers. It is recommended that instead of market penetration with existing products it is better to launch new products in the existing market to improve the market share. Reference List Armstrong, G. and Cunningham, M. H., 2012. Principles of marketing. New York: Pearson. Barney, J., 1991. Firm resources and sustained competitive advantage. Journal of management, 17(1), pp. 99-120. Bhandari, R. and Smith, F. J., 2000. Education and food consumption patterns in China: Household analysis and policy implications. Journal of Nutrition Education, 32, pp. 214−224. CRS, 2014. Food additive laws and food safety standards in China. [online] Available at: [Accessed 26 September 2014]. Deloitte, 2012. China’s consumer markets: What’s next? [pdf] Deloitte. Available at: < http://www.deloitte.com/assets/Dcom-MiddleEast/Local%20Assets/Documents/Industries/Consumer%20Business/me_consumer_business_china_consumer_report_09.pdf> [Accessed 26 September 2014]. Driskell, J. A., Meckna, B. R. and Scales, N. E., 2006. Differences exist in the eating habits of university men and women at fast-food restaurants. Nutrition Research, 26(10), pp. 524-530. Euromonitor International, 2014. Fast food in China. [online] Available at: [Accessed 26 September 2014]. Gan, H., 2002. Business strategy. Beijing: Beijing international press. Grundy, T., 2006. Rethinking and reinventing Michael Porters five forces model. Strategic Change, 15(5), pp. 213-229. Hai Di Lao hot pot, 2014. About us. [online] Available at: [Accessed 26 September]. Hu, J. and Duval, Y. L., 2003. An analysis of household food consumption of Chinese expatriates in the US: Implications for future food consumption in China. 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