You are the chief operations officer in charge of a multinational fast food busi

Question

You are the chief operations officer in charge of a multinational fast food business, called Top-Town, serving generally American style sandwiches, such as hamburgers, hot dogs, chicken, and fish, along with standard side dishes of french fries and hash brown potatoes. Each outlet also has some local content, and TT makes certain accommodations and alterations to the menu items to reflect local sensitivities.

Your firm sells franchise licenses (its major and more successful operations) to approximately 90% of its chain and it operates the remainder of the outlets with company employees. (These operations are less profitable.) It desires over time to divest all owner-operated outlets to sell them to franchisees over the next 5 years.

Franchisees pay a one-time entrance fee or advance to receive an operating license from Top-Town. Monthly, franchises also remit a royalty payment plus a percentage of profits back to TT. Owner-operated outlets remit profits to the corporate or regional headquarters. All outlets are required to purchase 100% of their paper goods, signage, and cooking and preparation equipment (called Infrastructure Service) from a Top-Town wholly-owned subsidiary, which has operations in the US and Canada, Germany, and Indonesia. A breakdown of operations is shown in Table 1. Infrastructure Services are charged at about 10% margin for TT, but many franchisees complain that the costs are too high and management is starting to recognize that these costs could be reduced through a variety of mechanisms.

Table 1

TT Locations

Franchise

Owner-Operated

North America

950

90

Europe

250

45

Asia

75

10

Australia

80

5

The TT board of directors has just approved the acquisition of another chain of fast food restaurants, Magic Marx, and the acquisition is set to close by the end of the year. MM serves customized plates, wraps and sandwiches around a Tex-Mex theme. MM is a good complement to TT, because (1) there is very little overlap in locations and (2) TT and MM appeal to different types of customers, with MM appealing to an older and slightly more upscale customer and TT to a younger, more budget-conscious consumer. The firm operates all MM outlets. Their distribution is shown in Table 2.

A breakdown of MM operations is as follows:

Table 2

MM Locations

Outlets

North America

900

Europe

80

Asia

400

Australia

300

The organizational structures of TT and MM, however, are not aligned. TT management is organized around regions and MM is very centralized with non-perishable items coming from numerous suppliers in the US and then exported to locations worldwide and perishable items provided locally. TT franchises have long been unsatisfied with the fees and costs charged by TT; the MM outlets operating costs are high for the industry, operating margins are thin, and the MM company has seen declining profits each of the last five years.

The Board of Directors of the merged company now wants to convert everything to franchises and to make franchise sales and service and cornerstone of the new business model. It wants to sell franchises for all remaining TT units and for all MM units, using the incoming one-time franchise fees as a way to pay for the acquisition and to streamline the business model, making it more uniform and finding economies of scale and scope in all its worldwide operations. Maintaining the brands as separate is an important consideration.

You recognize that the organizational structure needs to change, and you are open minded enough to see that perhaps now may be a good time to make changes to both TT and MM structure, too. You question the sources of the company’s success: is it operational efficiencies at each outlet or is it low cost supply? How do you set up a good back office structure that can service all the franchises and outlets? In such a restaurant organization, what is quality and how should a quality program be built and maintained?

But, what do you do? The board wants to keep the brands separate, but believes that the back office and supply chains can be better integrated and some economies can be achieved. The board also wants both brands to expand within their existing markets. Finally, TT has used debt financing to make the acquisition, so now, with increased debt to service, it needs to redefine the business model that helps support the company.

How do you start thinking about this new opportunity?

Please note: you can't possibly address every potential issue, so use these guidelines:

Break down your recommendations into corporate, functional, and business strategies. Try to organize your thoughts along those lines first.

You should identify the things you think are most important.

Table 1

TT Locations

Franchise

Owner-Operated

North America

950

90

Europe

250

45

Asia

75

10

Australia

80

5

Explanation / Answer

Business strategies

1. Identify the causes which make the franchise based model more profitable than the owner based one. Do a thorough research on why the franchise model was doing better, and take inputs from the franchise owners to bring in operational efficiencies.

2. Identify, WHAT NEEDS TO BE SOLD AT THE LOCATIONS OF THE ACQUIRED MM BUSINESS. Analyse the REVENUES OF THE DIFFERENT stores of MM. For the stores who were performing well with the menu or the items they were selling, keep the menu same. For the stores whose revenues were not that great, the menu of TT can replace the old MM menu, and new items can be sold.

3. Do a Porter's 5 forces analysis for your business at all the locations, and analyse what changes at each outlet can be brought in. Porter's 5 forces analysis checks- threat of new entrants, bargaining power of supplier, bargaining power of buyer, industry rivalry, and available substitute products in the market. The menu deciding task can be done with the help of Porter's 5 force analysis.

4. Perform a MARKET RESEARCH survey to analyse the customer behavior, specially in the new acquired business locations. This will help TT understand its new customer in a much better way.

  Functional Strategies

1. Operations

1. Analyse the operational efficiencies and inefficiencies of the franchises

2. Use PROCESS MAPPING to define the current operational procedure of all the franchise outlets

3. Use SIX SIGMA OPERATIONAL TECHNIQUES to remove the operational inefficiencies

4. Define QUALITY - Quality can be defined in terms of CUSTOMER SATISFACTION, FOOD WASTED, STAFF PERFORMANCE, INFRASTRUCTURE, ENVIRONMENT IMPACT etc. Define the definition of quality for all franchise outlets

5. Use TOTAL QUALITY MANAGEMENT to imbibe this Quality into the business, and see that it becomes a day in day out routine work

Supply Chain Function

1. Use local procurement strategy because of-

a. Lesser lead times

b. Fresher raw materials all the time

c. Vendors (who sell raw material) relationship can be done easily, they can be taught about how to improve food quality etc.

d. Demand Forecasting and procurement planning becomes much easier

e. Always easy to keep an eye on the suppliers

2. See the possibilty of creating HUB N SPOKE models- A hub and spoke model is where there is a centralised store or a warehouse, and the raw material or goods can be distributed to the other points

How is a Hub and spoke model beneficial-

a. Storing costs are saved

b. Better management of stored goods is done

c. Inventory management becomes much easier

Make a trade off between Hub N Spoke and local supplier model, and see which one is more profitable. Select the alternative

3. Keep a check on Demand for each location, lead times for each location, and inventory position for each store. Make an improved Demand Forecasting and Re-ordering model using better IT technologies

Sales and Marketing

Market Research and PORTER's 5 forces analysis would help in following ways-

1. Know what price needs to be set for the products

2. Know the buying behaviour of the customer

3. Select and design appropriate marketing campaigns

4. Stay ahead of the competitors

5. Help align the business strategies time to time

Finance-

Keep a check on the debt-equity ratio, it should not go way above 1, keep the debt in check.

Maintain a different investment strategy for different locations, and use your investment wisety.

USE STAKE-HOLDER THEORY instead of Share-holder theory to better maintain the interests of the company.

Corporate Strategies

Use ERP- Enterprise Resource Planning for the business. Benefits of using ERP-

1. It combines all the resources used- both by TT and MM outlets

2. Combined resource view helps in better planning, better strategy formation, and resource allocation

3. Integrated Supply Chains give - better procurement strategies, better demand planning and forecasting, better customer service levels, and lower lead times

4. Operational efficiencies can be achieved easily

5. Common Quality programs for both outlets will be easier to manage

6. Common employee engagement programs, customer engagement programs will bring in reduced costs, better achievement of economies of scale, and better results as the businesses operate in similar industry.

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