Nancys Coffee Issues - Case Study Example

Case Study Analysis: Nancy’s Coffee Introduction This report is an analysis of the case study about Nancy’s Coffee Café (Arthur M. Blank Centre for Entrepreneurship, 2004). In the analysis, the case method is used to evaluate the situation that Nancy’s Coffee is facing and what the organisation’s strategic options are. The case method usually entails a systematic evaluation of the situation facing an organisation, a description of the problem and a development of several alternatives that are open for use. This is usually followed by a detailed evaluation of the alternatives to determine how well they solve the identified problem as well as the extent to which they are in line with the external and internal environment issues at play. First, a detailed analysis of the factors of the external and internal environment that affect the company is presented. Secondly, the problem facing the company is described. This is followed by a description of the various alternatives that are open for the business. Next, recommendations on a specific alternative that the business should take are presented in the analysis. Lastly, details about how the company should implement and monitor the recommendations are provided. Situation Analysis A situation analysis provides a means of understanding how the prevailing condition of an organisation is shaped by factors of the external as well as the internal environment (Lamb, Hair & McDaniel, 2011). By considering the impact of the factors of the macro and the micro environment, a situation analysis process helps to place a case within the context of these factors. Vrontis and Thrassou (2006) note that the situation analysis process looks at the existing factors of the internal and external environment and evaluates how these factors shape the business. Table 1 below is a summary of the “strengths, weaknesses opportunities and threats” for Nancy’s Coffee. Table 1: SWOT analysis for Nancy’s Coffee Strengths Weaknesses A well-established brand in the niche market High employee turnover A competitive advantage in strategic targeting positioning and segmentation Lack of enough capital for expansion Good managerial capabilities of the CEO Low levels of profitability for some stores Opportunities Threats Possible takeover by well-established companies Changes in weather, causing fluctuations in demand Expansion by opening new stores Increased competition from well-established players One of the main strengths of Nancy’s Coffee is a well-established brand name in the niche coffee market. Since its establishment, the company has been branded as a leading seller of specialty coffee to the largely suburban clientele. As well, the company has successfully managed to develop a competitive advantage from several factors. In theory, a competitive advantage helps a business to perform better than its peers in the market because it helps the organisation to reduce its costs or increase its profitability (Hill & Jones, 2009). Notably, Nancy’s Coffee has successfully used its business model to target a particular market, position itself within malls, and segment the market into two classes of clients – mall workers and visitors. It should be noted that the factors that give Nancy’s Coffee a competitive advantage are hard to imitate. In general, it is when certain factors cannot be easily imitated by the competition that they are regarded as sources of competitive advantage for a firm (Blackwell & Eppler, 2014). In this case, many specialty coffee companies cannot easily adopt the mall-based approach because of the costs and marketing processes involved. In contrast, Nancy’s Coffee faces weaknesses in the form of a high rate of employee turnover, low profitability and lack of capital for expansion. The small size of the business means that the organisation cannot access credit from financiers to expand fast. Additionally, low margins mean that Nancy’s Coffee cannot achieve organic growth. The company faces several factors that, if seen within the context of the situation of the organisation, are opportunities. The main opportunity is a possible takeover by one of the well-established chains. On the other hand, increasing competition from other companies that use the suburban model and changes in the demand for coffee are some of the threats that the company faces. It is important to note that these threats are as a result factors of the external environment over which the company does not have control. Problem Statement The revenue and profitability of Nancy’s Coffee are not enough to help the company achieve and maintain a sustainable rate of growth. Development of Strategic Alternatives There two strategic alternatives that are open for Nancy’s Coffee. The first one is to scale back its operations and remain a small company that is focused on the niche market. The second alternative is to sell equity so that it acquires the capital it needs to grow faster by opening more stores in new locations. In other words, the company can either resize so that it cuts down its costs and streamlines its operations and makes efficient use of its little resources or it can sell equity to acquire capital for expansion. Under the downsizing alternative, the company will have to do several things. First, it will have to cut down the number of its stores in operation. From the case study, it was pointed out the company is growing at a current rate of about three new stores per year. However, given the business model of the company that dictates that it spends a lot of money on leases when setting up new outlets in malls, it does not realise break-even sales in some of its stores. The company will not only have to halt the process of opening new stores, but also revise the performance of every individual store and determine whether it should close the store or not. Martin and Davis (2013) note that downsizing means that the managers of the organisation involved have to scale back operations and focus on their key strengths to cover for the opportunities that they would have created for their competitors. Therefore, it would be necessary for Nancy’s Coffee to resize and cut down its operational expenses. This approach would help the organisation to focus on specific aspects of its business that would help it gain and maintain a competitive advantage over the course of time. The second alternative for the company is related to growth and expansion. Currently, the excess revenue of about $300,000 per year is not enough to help the company achieve and maintain a sustainable rate of growth. Therefore, for the company to pursue the growth strategy, it needs an injection of capital. There are two main ways in which a business can grow: by selling equity or acquiring credit. In this case, it may be necessary for Nancy’s Coffee to sell equity to an external investor to open new stores and streamline operations in the current ones. Evaluation of Strategic Alternatives The two alternatives mentioned above can be evaluated regarding the extent to which they address the problem of the organisation, how they address the situational factors of the organisation and the extent to which they fit with the mission and objectives of the firm. The company can either seek additional capital to finance its growth or downsize to focus on its core market. These two alternatives and their respective implications are presented in a pro forma assessment table (Table 2) as follows. Table 2: Expansion versus resizing for Nancy’s Coffee Expansion Resizing Sales ($) (see notes below) 583,000 500,000 Less Cost of goods sold (COGS) ($) (see notes below) 174,900 83,000 Earnings before taxes ($) 408,100 417,000 Notes 1. It is assumed that for the alternative of expansion, the company will increase 5 new outlets to its current number of 30 stores in one year. Under the resizing alternative, it is assumed that the company will retain its current number of stores for one year. 2. The figures for sales are based on exhibits indicated in the case study. It is stated that the company, with its current number of stores, generates $500,000 in sales per year. 3. Currently, the rate of COGS for the company is indicated as 30% the maximum that the CEO requires that her store managers do not exceed (Arthur M. Blank Centre for Entrepreneurship, 2004). Under the resizing program, this can be reduced further to 20%. The first alternative for the company is to raise capital and expand its operations. The company can finance its expansion strategies by selling equity to an investor. It can then use the additional capital to open more stores in malls as well as in the streets that fit its brand. It can also use the additional funds to address the challenge of high rates of employee turnover by paying its employees competitively. There are several advantages that the organisation can benefit from if it adopts the aforementioned alternative. In the first place, the organisation will reap all the benefits associated with the economies of scale that large organisations develop. Large organisations can easily leverage on their size to reduce their operational expenses and even negotiate for favourable deals with financiers and suppliers (Craig & Campbell, 2012). However, it is important to point out that given the situation of Nancy’s Coffee, it would be inappropriate for the company to adopt a growth-oriented strategy. In general, the company is performing poorly in the market. Hubbard, Rice and Galvin (2014) observe that companies that are performing poorly in terms of sales and profitability should not consider expanding. As such, if Nancy’s Coffee attempts to expand, it would not have addressed its internal weaknesses. Also, the company would not have exploited its internal strengths to take advantage of the opportunities that exist in the market. One of the challenges of adopting the expansion alternative is that it will not solve the complex question of low profitability. As things stand, the company will still have to take very expensive leases for space in malls. Opening more outlets in malls will not necessarily translate into increased sales revenue for the company. In addition, if the company attempts to expand its operations by opening more stores, it will, by necessity, have to compete with the other major players in the industry. This will mean that the company may have to abandon its initial suburban and speciality coffee model, and this may compromise its value offering. Since its establishment, Nancy’s Coffee has focused on the niche market. So far, the company has been built on the premise that it can provide specialty coffee to a small but loyal client base. To implement this mission, the company has focused on a highly focused marketing approach. In theory, companies that use a focused strategy to gain a competitive advantage over their competition need to concentrate all their efforts on meeting the expectations of their selected market (Tanwar, 2013). Also, for a company to effectively serve its market and achieve its objectives, it has to model its product, promotion, prices and place on the needs of its market (Zeithaml, Bitner & Gremler, 2010). Nancy’s Coffee serves a small market that is composed of employees who work in malls as well as individuals who visit malls for fun. The company has developed its service offering to meet the needs of this small segment of the market. Therefore, if the company opts for the expansion alternative, this will be inconsistent with the mission and objectives of the company. Hence, the company should opt for the alternative to downsize its operations, which will be consistent with its mission and will also help the business address its current problem. Recommendations From the preceding analysis, the following recommendations are made for Nancy’s Coffee. The recommendations are based on the need to address the specific problem that the small company is facing. Also, they are based on the best approach that the company can use to address its internal weaknesses and threats in the external environment on the one hand and the internal advantages and opportunities that exist in its external environment on the other. 1. Evaluate the performance of every store to determine whether its revenue meets the break-even point. 2. Close down stores which do not fulfil break-even sales, regardless of the need to pay the termination fee for lease agreements. 3. Reduce the number of employees to the required number, based on the needs of each outlet. 4. Pay attention to serving the core segment of the market by focusing on the existing stores and avoiding opening of new ones for the time being. 5. Streamline operations to continue cutting down operational costs for every store. Implementation Table 3 shows how the recommendations for Nancy’s Coffee should be implemented. Table 3: Implementation of the recommendations for Nancy’s Coffee Weeks 1 2 3 4 5 6 7 8 Evaluate the current 30 stores to determine whether their revenues reach break-even point Close stores that do not make the cut Streamline the number of employees for the downsized company Review service offering of the downsized company Evaluation and Control The company should take two months to downsize its operations. Within the two months, the company should close down all stores that are underperforming. Given that the company currently has about $300,000 that it can invest, it should use this money to pay off lease termination fees for underperforming stores. Moreover, additional finances can be generated from selling excess assets used in underperforming stores. The most critical part of the downsizing process will be reorganising the human resource function of the department. Given that the process will lead to job losses and that this will attract payment of termination fees, the company should announce the process to its staff early. Conclusion In conclusion, Nancy’s Coffee faces the question of whether it should access capital to finance its rapid expansion or scale back its operations and make efficient use of its available resources to achieve its objectives. The option for growth means that the company will have to sell equity to an outside investor since its financial resources are not enough to finance its growth prospects. However, this will go against the effects of the external as well as internal factors of the business’s environment. Besides, it will be against Nancy’s Coffee’s core mission and objectives. The best alternative for the company, therefore, is to downsize by reducing the number of outlets and focusing on serving its small market segment. The downsizing approach will help the company to make efficient use of its resources while remaining true to its mission and objectives. References Arthur M. Blank Centre for Entrepreneurship. (2004). Nancy’s Coffee. Author: Babson Park, MA. Blackwell, R., & Eppler, D. (2014). An approach to strategic situational analysis: Using models as analytical tools. The Journal of Global Business Management, 10(1), 80-86. Craig, T., & Campbell, D. (2012). Organisations and the business environment. London: Routledge. Hill, C. W. L., & Jones, G. R. (2009). Strategic management: An integrated approach. Mason: Cengage. Hubbard, G., Rice, J., & Galvin, P. (2014). Strategic management. Melbourne: Pearson. Lamb, C. W. L., Hair, J. F., & McDaniel, C. (2011). Essentials of marketing. Mason: Cengage. Martin, W. M., & Davis, A. C. (2013). Alternatives to downsizing: An organisational innovation approach. International Journal of Business and Social Research (IJBSR), 3(7), 19-27. Tanwar, R. (2013). Porter’s generic competitive strategies. IOSR Journal of Business and Management, 15(1), 11-17. Vrontis, D., & Thrassou, A. (2006), Situation analysis and strategic planning: An empirical case study in the UK beverage industry. Innovative Marketing, 2(2), 134-151. Zeithaml, V. A., Bitner, M. O., & Gremler, D. D. (2010). Services marketing strategy. Wiley International Encyclopaedia of Marketing. Retrieved from, http://onlinelibrary.wiley.com/doi/10.1002/9781444316568.wiem01055/pdf Read More