Business Strategy and Strategic Management Concepts - Essay Example

Analysis Memorandum – Krispy Kreme Case Study Details Chief elements of Krispy Kremes strategy and effectiveness of the implemented strategy: The chief elements of the Krispy Kreme’s strategy include the shifting of focus from the wholesale market segment to retail consumer segment as the primary target group. This allowed the company to capitalise on the brand name as well as operate in a higher margin sector than wholesale segment. Another key element in the strategy is the increasing of number of outlets through own outlets as well as franchisees. This would allow the company to target the whole national market than concentrating on its current geographical areas. To facilitate this expansion plan the company also took a strategic decision to reassess its standard shop formats and sizes from 7000 sq ft to more economical 2400-4200 sqft range outlets. Evidence indicating that these strategies are effective can be identified in the sales increase of over $ 185 million during the period of 1995 – 2001 since the implementation of new strategy. The profits too had reached a record of $ 14.75 million in 2001 from $4 million in 1995.The number of outlets have increased from a total of 88 in 1995 to 174 by 2001. Franchisee outlets have grown from 40 to 111 during this period. 2. Assessment of Krispy Kremes financial performance: The financial performance of the company has been rather unstable over the past 5 years with losses and profits resulting in alternative years. However the year 2000 and 2001 has indicated steady growth with losses being converted to profits. Own outlet sales account for over 70% while franchisee income represent 3%. 26% of the income is from mixes and equipment sales. The most profitable part of the business is the Franchising operation where the GP margin is 62%. The other two business units generate 15% GP. The company’s financial performance during past two years has been outstanding with earnings per share jumping to $ 0.60 in 2001. The sales revenue has grown by 37% in 2001 while net income has grown by 147% over year 2000. This $ 8.76 million net income growth is also facilitated by the reduced interest costs of about $ 1 million for the year 2001 as a result of IPO funding relieving the company of its costly capital borrowings. The statement “ The numbers just don’t work” has been made pertaining to the company’s targeted 20% sales growth vs. 25% growth in earnings for the year 2002. The statement cannot be supported with the current evidence, as it is most likely that the company will be in a position to achieve such forecasts. The additional 5% growth in earnings are likely to come from reduced costs through increased sales per existing outlets as well as cost reductions expected through streamlined logistics and distribution. Please refer to Appendix I for calculations and financial analysis. 3. A SWOT analysis on Krispy Kremes overall situation: Strengths 181outlets in 28 states Product quality and special formula Brand name and consumer loyalty with word of mouth promotion Standardised production and process Concept of Area Developers where Franchisees handle specific geographic areas with commitment to open a specified number of outlets. Outlet layouts offering the consumer unique opportunity of watching the product being made. Integrated supply chain with premixes and equipment being manufactured. Weaknesses: High operational costs Low advertising other than grass root level activities surrounding openings Low investments in expansions of own outlets Burden of high capital costs (until IPO cash came in) Narrow product line Narrow beverage offers Comparatively less aggressive expansion plans Undifferentiated stores formats Opportunities: Possibilities of overseas expansions facilitated by globalisation and favourable FDI policies (Markets such as China, Japan and South America can offer massive market potential and companies such as Strasbuck coffee, KFC, Mc Donalds have capitalised on these trends) Social trends such as large number of single people and working mothers increasing consumption of fast foods such as doughnuts. Strategic alliances with large-scale department stores such as Wal-Mart which will allow the company to expand rapidly while tapping on to established customer traffic. Such alliances can also pave way to overseas presence within these outlets being operated overseas. Threats: People are being encouraged to become more health conscious and food such as doughnut with high calorie counts and fat are not considered healthy. Single product concepts can become less attractive to customers over time Threat of new entrants is possible with low investments. The existing franchisees too may become well qualified and opt to operate on their own after the 15-year franchisee agreement terms are at end. Large-scale supermarkets may consider own production. 4. Competitive Analysis Analysing the competitiveness of Krispy Kreme compared to its key rivals, there are many areas in which the company needs to improve upon. However, the company’s competitive strength lies in the Brand image and product quality, which can be rated as the best in the industry. In terms of product quality, LaMars too shares the number one spot with Krispy Kreme. When rated with unweighted scoring, the Krispy Kreme is the least competitive in terms of total scores. However, using weighted scoring, the company ranks 3rd in competitiveness in terms of the 9 key success factors assessed. Table 1 below provides the competitive scoring. Table 1 – Competitive Scoring Table for Key Rivals in US Doughnut market Key Success Factors Weight Ratings for Competitors (1-10) KKs ranking Krispy Kreme Dunking Doughnut Winchells Tim Hortons LaMars Wide Geographical Presence in US market 0.200 4 0.80 10 2.00 6 1.20 5 1.00 1 0.20 3rd weak International Operations 0.010 0 - 9 0.09 3 0.03 6 0.06 0 - 4th weak Brand Image 0.200 8 1.60 7 1.40 6 1.20 7 1.40 6 1.20 1st strong Product Quality 0.200 9 1.80 7 1.40 7 1.40 7 1.40 9 1.80 1st strong Financial Stability 0.150 4 0.60 9 1.35 8 1.20 8 1.20 3 0.45 3rd weak Aggressive Expansion Plans 0.150 4 0.60 7 1.05 7 1.05 5 0.75 6 0.90 4th weak Wideness of Product Line 0.050 1 0.05 7 0.35 6 0.30 6 0.30 4 0.20 4th weak Health Aspects of product line 0.015 3 0.05 6 0.09 4 0.06 5 0.08 4 0.06 4th weak Strength of beverage offers 0.025 1 0.03 7 0.18 5 0.13 6 0.15 6 0.15 4th weak Total Weighted Rating 1.00 34 5.52 69 7.905 52 6.565 55 6.34 39 4.96 3rd weak 5. Krispy Kremes growth prospects: The growth prospects for the company is good for the next 5 years although the overall industry growth is minimal. However in order to achieve a high growth, the company needs to address few key issues such as speeding up the expansion process as well as widening the product line. International markets too will offer high growth potential. Considering that the company aims to open at least 36 own outlets in year 2002, the sales revenue is likely to increase at least by $ 70 million, based on conservative estimates of 2.5 million avg. sales per annum and projecting that 50% of new outlets will be opened in 1st half of the year and balance 50% in latter half. With the commitment of 250 outlets to be opened by franchisees over the next 5 years, the next year is likely to see at least another50 franchise outlets added to the chain. These new franchise outlets will bring in extra revenue at high GP margins and also boost the premix and equipment sales. The company has been achieving 22% and 37% growth in revenues in year 2000 and 2001. The number of new outlets added to the chain during these years is 11 and 13 respectively. Thus, with new outlets for 2002 forecasted at 36 own and 50 (estimated based on 250 commitment for 5 years), the sales increase should be much larger than the $ 80 million achieved in 2001. During the next year the company is likely to achieve up to 37% growth in revenue and over the next 5 years to sustain a 20% growth. These revenue growths have to be sustained through aggressive expansions, entering overseas markets and striking strategic alliances for co branding and co marketing advantages. The company is also likely to achieve its 25% growth for earnings which is 5% above its revenue targets. With high GP margins from Franchisee operations, the earnings can get boosted at a higher growth rate than sales revenue. Krispy Kreme has to reduce costs and streamline its operations to back up its expansion plans so that deliveries can be done from economically located centers which covers different geographic areas. The fact that the company is now trading soundly in the stock market may allow for additional capital to be raised to fund the expansions at low interest costs. 6. Major issues needing Krispy Kreme management attention: Krispy Kreme needs to address its low level of expansion investments on an immediate basis as other competitors are implementing expansion plans which involve large number of outlets while KK is planning for only 36 own outlets in year 2002. Even the Franchisee commitments for the next 5 years are for 250 outlets. If other competitors enter the markets and saturate the business potential, the growth opportunities will be stunted. Another key issue is the imbalance in the ratio of company owned outlets to franchisee owned outlets. It is necessary that the company operates at least 50% of the total outlets in the chain in the national market. However the international operations can be purely on franchise basis. The company also needs to address the undifferentiated stores formats, which hinders its targeting secondary markets with fewer than 100,000 households. The company should plan kiosks and small outlets, which will be supplied by centralized commissaries, which can cater to high traffic locations. The company needs to also address the issue of single product concept being currently practiced. While doughnuts remain the key product, it is important to introduce additional baked goods in to the product offering so that customers can choose KK as a location for a variety of meal items than merely doughnuts. 7. Recommendations for improvement of strategy. Expand the operations to all parts of the country and increase the number of own outlets. The 2001 year end ratio of own outlets to franchisee outlets is 63 : 111 which is 1:2. This should be reduced to 1:1 level in the long run during next 5 years. The company should establish strategic alliances with large scale department stores such as Wal-Mart & Target to open Dough Nut Kiosks. This will allow the company to expand its own outlets fast and with lower investment costs. Move away from its single product concept in to bakery products business domain so that business operations are not myopic and restrictive. Companies cannot grow it their business domains are defined too narrowly. Investments have to be made in strategically located distribution and premix manufacturing facilities to cater to different parts of the country. All logistic processes has to be streamlined to lower costs The company should take away any restrictions placed upon franchisee outlets on sales and rather encourage the outlet to increase capacity and manpower to maintain high service standards. ($50,000 per week limit on premise sales for franchisees) Adopt the “4 in 1” packs and “12 a dozen” packs as promotional packs in all outlets and canvass sales for these packs with special institutional customers as sports centers etc. Invest in a Information System linking all outlets including franchisee operations so that company can monitor and plan the marketing strategies based on real time information. Decision support systems should be combined to the IS system. Develop doughnut options for health conscious as well – use of healthier oils such as canola and sunflower oil for frying. Develop its Digital Java coffee business to complement its core business. Appendix I Table 1 – Krispy Kreme’s Sales Make Up by Operations   Outlets Franchisee KKMD Total Sales Revenue - 2001 213.7 9.4 77.6 300.7 Percentage contribution 71% 3% 26% 100% Table 2 – Profitability Analysis by Operations   Outlets Franchisee KKMD Total Operational Income - 2001 32.2 5.8 12 50 Gross Profit Margin - 2001 15% 62% 15% Table 3 – Financial Trend Analysis (Year 1995 to 2001) Year Sales Revenue Revenue Growth Expenditure Expense Growth Net Income Growth In Earnings Net Income % 1995 115   - 109  - 4.6  - 4.0% 1996 118.5 3% 117.3 8% 0.18 -96% 0.2% 1997 132.6 12% 127.4 9% 2.4 1233% 1.8% 1998 158.7 20% 117.3 -8% 2.7 13% 1.7% 1999 180.9 14% 180.3 54% -3.2 -219% -1.8% 2000 220.2 22% 209.3 16% 5.96 286% 2.7% 2001 300.7 37% 277.1 32% 14.72 147% 4.9% Table 4 – Sales Growth Analysis (Year 1995 to 2001) Year Sales Revenue Growth 1995 115 1996 118.5 3.5 1997 132.6 14.1 1998 158.7 26.1 1999 180.9 22.2 2000 220.2 39.3 2001 300.7 80.5 Table 5 – Number of Outlets (Year 1995 to 2001) Year Own Growth Franchisee Growth Total Growth 1995 48 - 40 - 88 - 1996 53 5 42 2 95 7 1997 61 8 55 13 116 21 1998 58 -3 62 7 120 4 1999 61 3 70 8 131 11 2000 58 -3 86 16 144 13 2001 63 5 111 25 174 30 Table 6 – Average Sales Revenue Analysis (Year 1995 to 2001) Year System Wide Sales No of Outlets Avg. Revenue per Outlet % Growth 1995 146,715.00 88 1,667.22   1996 151,693.00 95 1,596.77 -4% 1997 167,592.00 116 1,444.76 -10% 1998 203,439.00 120 1,695.33 17% 1999 240,316.00 131 1,834.47 8% 2000 318,854.00 144 2,214.26 21% 2001 448,129.00 174 2,575.45 16% Reference: Thomson, A. A. Jr. & Strickland, A. J. Strategic Management Concepts and Cases. 13th ed. New York: McGraw-Hill Publishing Company Ltd. 2003. Read More