This report examines strategic alternatives that would help owners of Livoria Sandwiches Inc. gain competitive advantage in a growing market, achieve its profitability target and maintain its strong reputation of having a high quality and unique product in the industry. This report provides an analysis of the company’s current situation, identify strategic issues and analyze strategic alternatives. These also provide recommendations as to courses of actions the brothers should adopt to reach their goal, and proposed implementation plan. CURRENT SITUATION
* Go franchising (Paul)
* Enhance vegetarian menu (Sam)
* Preserve quality and control (Sam)
* Realize $1.1M net income by 2015 (both Paul and Sam)
*Avoid using line of credit (both Paul and Sam)
* One supplier of all store requirements/ingredients
* Bank requires $20,000 minimum cash balance at any given time * Number of hours work
* Working space
Environmental Scan : SWOT Analysis Exhibit 1
Current Financial Assessment
– Lowest profit of .29% compared to industry wide due to $500,000 contingent liability booked in 2012. Removing this extraordinary item would result to 24% operating income which is higher than Dawkins industry benchmark – 52.93% highest Contribution margin than industry average – High growth % versus set by the industry
– Available line of credit
-Impressive performance among competitors whether franchising or non-franchising -Debt free
Key Success Factors:
* High-quality traditional custom-made sandwiches developed through generations *Loyal client base and recognition
* Effective obsolescence plan
* Zero Debt
Losing market share and competitive advantage
Limited experience how to compete and to grow the business
Just one supplier to sustain store operation/production
1. Increase profitability
2. Growing market
1. Expanding without franchising
2. Open Franchise Agreement
ANALYSIS OF STRATEGIC ALTERNATIVES
I. EXPANDING WITHOUT FRANCHISING
Develop product lines by introducing vegetable sandwiches (Appendix 4) shows an increase in cash inflow from 155% in 2013 to 319% in 2015 May cannibalized existing/old product lines which the company is being known for Attracts customers with other preferences and may compete broadly in the industry by branching out in new locations
Requires additional training cost, space, business strategy and building customers recognition, hire professional help which may cause additional fund or used available line of credit Established and maintained more suppliers that would provide more options and huge discounts in large orders May affect existing quality standard of the custom-made sandwiches Discover more hidden opportunities from existing operations, by adding value to the product, and improve training the staff
Financial Assessment if expansion without franchising:
a.Total CM% increase from 2012 52.93% to 60.50% in 2015 (Appendix 3) b. Total profit show a positive increase from 18% in 2013 to 31% in 2015, far reaching the brothers’ preference of $1.1 M in 2015, Appendix 3 showed $1.4 M net profit c.Return on investment assuming initial cash balance net of the minimal requirement ($20,000) was use to introduce new line of menus showed a remarkable result of 21% ROI in 2013 to 249% return in 2015, Appendix 3 d.Cash budget projections with new line of products showed increase cash inflows from $556K (2013),$869K (2014) and tremendous increase of $2.3 M by the end of 2015 – Appendix 2 e. Appendix 4 showing Statement of Cash Flow present a positive economic growth, from $423K cash inflow generated in 2013 155% increase in cash to $1.9M in 2015.
Calculating IRR for the next 3 years showed 478% return. II. OPEN FOR FRANCHISE AGREEMENT
1. opportunity to grow faster than would be the case of training employees create internal marketing strategy, sales and distribution 1. significant disadvantage is loss of control, though substantial restrictions may apply because of franchise agreement, franchise is still considered a 3 rd party who would seek to maximize return of investment at your expense 2. use of franchising fee/capital will expedite growth/network of the company than finding one for the business 2. part of your profit is use to utilized to promote your franchise/s 3. franchising motivates franchisee to excel and go beyond to succeed due to incentive scheme and growth is dependent upon the success of your business
3. substantial product knowledge and expertise has to be shared concerning your business although restrictions may apply but control over it is difficult to enforce and monitor 4. will increase purchasing power as franchising network grows and that eventually reduced cost to operate, gain profitability from small units 4. skills required to monitor, manage and support franchise/s are far different than handling your own employees 5. may thrive from downturn like recession compared to non-franchise business 5. standard sets in doing franchise may alter your consumer taste.
Both alternatives if done in a well thought out plan may manage company’s growth strategically. Since it can be done drastically and uncontrolled way major casualties of which could be customer dissatisfaction and will adversely affect cash flow. IMPLEMENTATION PLAN
So it is necessary therefore to manage the growth process so we can obtain benefits in a medium and long term. The following may be executed: 1.Plan your expansion, not just by reacting to the circumstances but creating a solid plan, Ansoff Matrix (Exh 2) can be a helpful tool in creating this roadmap. 2.Don’t over expand, which is one of the biggest danger in growth phase. A 3 to 5 year projections plan capacity is doable and allow additional 10% capacity over and above that for challenging times.
3.Get professional financial advice because expansion entails monetary implications, with expert help we can reduce the risk and address issues right away. 4.Shop around, look for the target-location where marketing the product may established the same acceptance by the customers. 5.Develop a project management for the expansion in a formal way to uncover other possibilities 6. Keep customers informed about expansion plan and what to expect, when disruption may take up and how will the company will deal with it. 7.Announce the completion of the expansion.
Inform target customers about the increase capacity, new menu and additional services to be offered. A good marketing device will help the company introduce this expansion in a high note.