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South Beauty Group

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BUS488
Strategy

Assignment 2 - Individual Assignment

July 2012 Presentation

By: Tang Jiwei (Z0902316)

Introduction: South Beauty Group

Founded in 2000, the South Beauty Group has come to be a successful player in China’s catering industry. By 2007, the Group had expanded to 20 outlets in commercially valuable locations in China, with three different brands. Winning a contract to become a food service partner of the Beijing Olympic Games in 2008 would bring more revenue than in 2007 to the Group.

Challenges lay ahead for the company as founder Zhang Lan sought to expand the Group’s operations worldwide. An ambitious plan of increasing the number of outlets from 20 locally to 100 worldwide over the next three years raised critical decisions that the Group had to make. These include the issues of standardization in the process of food preparation to increase efficiency and quality, the prioritization of markets to enter, entry into new businesses including airline catering, and the expansion model to follow.

Question 1

A competitive advantage is a strategy implemented by a firm which competitors find are unable to duplicate or too costly to imitate, and strategic competitiveness is achieved when a firm formulates and implements a strategy that creates value successfully (Hitt et al., 2011, pp. 4). Only when a firm is able to continuously develop new competitive advantages will it be able to “achieve strategic competitiveness, earn above-average returns, and stay ahead of the competition” (Hitt et al., 2011, p. 64).

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Source: Adapted from Hitt et al., 2011, p. 66: Components of Internal Analysis Leading to Competitive Advantage and Strategic Competitiveness

Resources by themselves cannot create any competitive advantage, which usually is based on a unique bundling of several resources. Once purposefully integrated to achieve a specific task or set of tasks, these resources then become a firm’s capabilities. If such capabilities can serve as a firm’s competitive advantage over competitors, they can then be core competencies for the firm.

Resources can be classified into tangible and intangible resources. Tangible resources are those that can be observed and quantified, and includes financial, organizational, physical and technological resources. Intangible resources are those that cannot be observed, thus making it difficult for others to imitate. These include human, innovation and reputational resources.

In determining a core competency, there are four criteria that must be satisfied. As resources are transformed into capabilities, such capabilities must be valuable, rare, costly to imitate and non-substitutable to be termed a core competency.

An analysis of South Beauty Group’s resources shows the following:

Tangible resources

|Financial resources |Financial clout – Evident in the chronology of revenue per year in Exhibit 8 (Hitt et al., 2011, Case |
| |Studies, p. 154). In 2007, revenues were estimated at RMB 384 million. Also, the recently opened LAN |
| |Club in Beijing cost RMB 100 million on interior decoration alone. |
|Organizational resources |Effective organization structure – South Beauty Group has two divisions, one for head office functions |
| |and one for restaurant operating functions. |
|Physical resources |Location of outlets – Restaurants were located in top-notch office buildings in key cities to remain |
| |close to the Group’s target customer base. High-end location and high pricing helped to develop the |
| |upper-middle-class image. |
| |Interior decoration – Each restaurant is decorated differently and all were designed by well-known |
| |artists. LAN Club in Beijing cost RMB 100 million to decorate and was designed by Philip Stark. |
|Technological resources |Advanced IT applications – Such as portable order placement were used to enhance the image and |
| |efficiency of the restaurant. |
| |CRM – Customer relationship management system to record customer information to provide personalized |
| |services and promotional communications. |
| |ERP – Established to control financial variables and purchasing processes. |
| |Remote conference system – Increase internal communication, yet another innovative way of operations |
| |while most restaurants remained committed to the traditional methods. |

Intangible resources

|Human resources |People management – Large-scale training program for staff, new people management systems to motivate |
| |its staff, as well as hiring Chinese executives who used to manage the operations of McDonald’s and |
| |Coca-Cola in China. |
|Innovation resources |Independent R&D team – In charge of creating new dishes, and under a strict assessment system, only 2 |
| |percent of new dishes could be launched. |
| |Menu innovations – New dishes, wider variety and catering to the tastes of different people by adding |
| |Cantonese cuisine and other flavors to the menu. |
|Reputational resources |Positioning – Focused on office workers and businesspeople as an upmarket restaurant. |
| |Branding – Three different brands under the South Beauty Group: South Beauty targeting businesspeople |
| |aged 30-45 years, LAN Club targeting successful businesspeople over 45 years and SUBU targeting younger|
| |and more fashionable workers looking for healthy dishes. |
| |Cooperatives – Cooperation with certain international airlines, including Air France and KLM Royal |
| |Dutch Airlines, to provide business travellers flying to and from China with South Beauty-branded |
| |cuisine. |

Capabilities can become core competencies if they are (Hitt et al., 2011, p. 74-75):

Valuable – Allow the firm to exploit opportunities or neutralize threats in the external environment.

Rare – Capabilities that few or no competitors possess. Capabilities that are valuable yet common are only a source of competitive parity.

Costly to imitate – These capabilities are those that other firms cannot easily obtain. These can be due to unique historical conditions or causal ambiguity, where competitors are unable to understand how a firm uses such capabilities as a competitive advantage.

Non-substitutable – Capabilities that do not have strategic equivalents.

Analysis of South Beauty Group’s Resources and Capabilities

|Resource or Capability |
|Human Resource Management |
|New people management system designed to motivate staff |
|3-month training course for waiters at company training center |
|2-year on-the-job training for managers |
|Hiring Chinese executives who previously managed other restaurant chains |
|Technology Development |
|Portable order placement |
|CRM system to record customer information to provide personalized service and promotions |
|Procurement |
|ERP system |
|Central kitchen for standardization and average cost control |
|Inbound Logistics |Operations |Outbound Logistics |Marketing and Sales |After-sales Service |
|Central kitchen will handle | |Central kitchen sends dish |Multi-brand strategy |Unavailable from case study |
|most raw materials |Central kitchen to prepare |packets to restaurants for |Located in prime buildings | |
|Restaurants required to make|dish packets with uncooked |cooking |in key cities | |
|certain purchases |raw materials | |CRM system | |
| |Restaurants cook dishes | | | |

Question 2

The external environment of a firm is made up of three parts: the general environment, the industry environment, and the competitor environment.

The general environment is composed of seven environmental segments: demographic, economic, political/legal, sociocultural, technological, global and physical (Hitt et al., 2011, p. 33). Because these cannot be controlled and influenced directly, a firm must gather information needed to understand these factors and the implications for choosing and implementing strategies to be successful (Hitt et al., 2011, pp. 33).

Analysis of the General Environment of South Beauty Group

|PESTL Analysis |Positive (Opportunity)|Neutral |Negative |
| | | |(Threat) |
|Demographic |As the income of Chinese urban consumers have increased, the| | | |
| |annual expenditure per capita on restaurant meals have | | | |
| |increased, from RMB 534 in 2004 to RMB 800 in 2007. In more |X | | |
| |developed cities such as Shanghai and Beijing, the | | | |
| |expenditure numbers were three to five times higher than the| | | |
| |national average. | | | |
| |Due to a booming economy, business meals in China had more | | | |
| |growth potential than other segments because of the higher | | | |
| |prices that could be absorbed. |X | | |
|Economic |In 2007, the catering market size of RMB 1,200 billion | | | |
| |accounted for 4.87 percent of the gross domestic product in | |X | |
| |China. | | | |
| |China’s catering industry had been growing with a compound | | | |
| |annual growth rate of more than 15 percent since the 1990s. |X | | |
|Political/Legal |To tackle the problem of counterfeit South Beauty | | | |
| |restaurants in cities where it had not penetrated, the Group| | | |
| |tried to use legal means to protect its brand, but due to | | | |
| |local protection enjoyed by the counterfeiters, the process | | |X |
| |was slow and results not encouraging. | | | |
| |The government did not see the catering industry as a | | | |
| |priority area, and hence are unwilling to fund its growth. | | |X |
|Sociocultural |Office workers select fast food as the choice of lunch for | | | |
| |its convenience and quickness. | |X | |
| |Businesspeople required more in terms of ambience, food | | | |
| |taste, and location, and were not satisfied with just eating|X | | |
| |and drinking alone. | | | |
|Technological |The use of advanced IT applications to enhance the | | | |
| |upper-middle-class image of the restaurant and to improve | | | |
| |efficiency. A CRM system to record customer information to | | | |
| |provide personalized services and promotional | | | |
| |communications. An ERP system to control financial variables|X | | |
| |and the purchasing process. | | | |
| |A remote conferencing system to increase internal | | | |
| |communications. | | | |
| | | | | |
| | |X | | |
|Global |Compared to developed markets, such as the United States | | | |
| |which had a per capita expenditure of USD 1,600 on | | | |
| |restaurant meals annually, there is a lot of potential for |X | | |
| |growth. | | | |
| |The 2008 Olympic Games in Beijing were estimated to generate| | | |
| |sales of RMB 18 billion for the catering industry in the | | | |
| |city. South Beauty Group was one of the few companies |X | | |
| |selected as the food suppliers. | | | |
|Physical Environment |The mainstream international media challenged the food | | | |
| |security situation in China, and the Chinese government | | | |
| |tried to ensure food supply safety for the Olympic Games. | | |X |

Compared with the general environment, the industry environment has a more direct effect on the firm’s strategic competitiveness and ability to earn above-average returns (Hitt et al., 2011, p. 46). In determining the profitability of an industry, Michael E. Porter formed the Porter’s five forces analysis in 1979. The competitive intensity and attractiveness of an industry is a function of five forces: the threats posed by new entrants, the power of suppliers, the power of buyers, product substitutes, and the intensity of rivalry among competitors (Hitt et al., 2011, pp. 46).

Porter’s Five Forces Industry Analysis of South Beauty Group

Threat of new entrants – As a function of two factors, namely barriers to entry (economies of scale, product differentiation, capital requirements, switching costs, access to distribution channels, cost disadvantages independent of scale and government policy) and retaliatory response from current firms, this threat is important since new entrants to the industry can threaten the market share of current firms in the industry (Hitt et al., 2011, pp. 48).

|Threat factor / Level |High |Low |
|Economies of scale |The cost of production decreases as the amount of raw| |
| |materials required, thus purchased, increases. | |
|Product differentiation | |It is difficult to differentiate dishes in the |
| | |catering industry, especially since any new dish |
| | |could be easily and quickly imitated. |
|Capital requirements | |Capital requirements to enter the catering industry |
| | |can be as low as less than RMB 500 for a breakfast |
| | |stander. Overall, entry requirements in this aspect |
| | |can be considered to be low. |
|Switching costs | |It does not cost anything for a consumer to switch |
| | |from eating at one restaurant to selecting another to|
| | |dine in. |
|Ease of access to distribution |Specific to the catering industry, distributorship of| |
|channels |food is done by the restaurants themselves. | |
|Cost disadvantages | |There are no specific cost advantages that current |
| | |players in the catering industry enjoy. |
|Government policies creating | |There are few, if any, government-created entry |
|barriers | |barriers to the catering industry. |
| |Threat of new entrants is: High | |

Power of suppliers – If a firm is unable to recover its costs from suppliers through its own pricing structure, its profitability would be reduced (Hitt et al., 2011, p. 51).

|Threat factor / Level |High |Low |
|Supplier-buyer ratio |Raw materials were dependent on local suppliers. | |
|Availability of substitute | |Raw ingredients do not have substitutes for any dish,|
|products | |especially with the strict food quality standards for|
| | |South Beauty Group. |
|Importance of customer to |Without selling its products, a supplier would be | |
|supplier |stuck with its inventory, which in the case of raw | |
| |ingredients for dishes, are perishable and cannot be | |
| |held for a long time. | |
|Differentiation of supplier’s | |Raw ingredients for dishes are expected to be the |
|products | |same. |
|Switching costs |Switching costs from one supplier to another could be| |
| |high since one would expect loyalty or long-term | |
| |discounts given by suppliers to their customers. | |
|Threat of forward integration | |There is no evidence that suppliers’ activities were |
| | |expanded to control its own product distribution |
| | |directly. |
| |Threat of suppliers is: Low | |

Power of buyers – To reduce their costs, buyers or consumers in the industry would seek higher quality, greater service levels and lower prices, all of which would result in higher levels of competition between firms in the industry (Hitt et al., 2011, pp. 52).

|Threat factor/Level |High |Low |
|Buyer-supplier ratio |Obviously, there are more diners than restaurant | |
| |outlets. | |
|Switching costs | |There is little to no switching costs that would be |
| | |incurred for choosing one restaurant over the other. |
|Product differentiation | |It is difficult to differentiate dishes in the |
| | |catering industry, especially since any new dish |
| | |could be easily and quickly imitated. |
|Threat of backward integration | |Consumers in the catering industry are unlikely to |
| | |integrate backwards. |
|Extent of buyers’ profits | |Sales of food dishes in a restaurant are the main, if|
| | |not the only, components of the seller’s annual |
| | |revenues. |
|Importance of supplier’s input to| |Suppliers of products, in this case the restaurants, |
|quality of buyers’ product | |are solely responsible for the quality perceived by |
| | |buyers, in this case the consumers of the restaurant.|
| |Threat of buyers is: High | |

Intensity of rivalry – Because firms are mutually independent, actions taken by one company elicits a response from competing firms. Firms will seek ways to differentiate themselves and their products from the competition in ways that customers value and in which they hold competitive advantages (Hitt et al., 2011, p. 53).

|Threat factor/Level |High |Low |
|Number of competitors | |Of the top 100 restaurants in China in 2007, only 10 |
| | |belonged to the high-end Chinese dinner segment. |
|Industry growth rate | |Growth rate of the Chinese dinner segment was only |
| | |2.25% from 2005 to 2006. |
|Fixed costs |Fixed costs of high-end restaurants are high due to | |
| |prime location rentals and upmarket design and | |
| |decoration of venues. | |
|Storage costs |Raw materials in the catering industry are highly | |
| |perishable and must be used up within a certain time | |
| |period. | |
|Product differentiation |South Beauty Group focused on Sichuan cuisine and thus| |
| |does not directly compete with other players in the | |
| |same segment in terms of cuisine. | |
|Switching costs | |Switching costs for the industry’s consumers are low,|
| | |if any at all. Choosing one restaurant over another |
| | |does not raise any costs for the consumers. |
|Exit barriers |Exit barriers for South Beauty Group are high, one | |
| |regard being the cost of investment in its | |
| |restaurants. | |
|Strategic stakes |Strategic stakes are high for the high-end restaurant | |
| |segment in China, as can be seen from the selection of| |
| |South Beauty Group as a supplier of food for the | |
| |Beijing Olympic Games in 2008, where sales were | |
| |expected to generate RMB 18 billion in revenue. | |
| |Intensity of rivalry is: High | |

Threat of substitute products – Substitute products are those from outside a given industry that perform similar or the same functions as a product that the industry produces (Hitt et al., 2011, p. 52).

|Threat factor/Level |High |Low |
|Differentiation of substitute |Considering the catering industry as a whole, | |
|product |differentiation of substitute products, such as fast | |
| |food, is high, even though South Beauty Group does | |
| |not compete directly with fast food, hot pot and | |
| |ordinary restaurants. | |
|Rate of improvement in |The substitute products’ price is lower, and | |
|price-performance relationship of|depending on consumer preference at time of | |
|substitute product |consumption, quality and performance capabilities can| |
| |be high (e.g. Office workers prefer fast food during | |
| |lunch for its inexpensiveness and speed). | |
| |Threat of substitute products: High | |

Competitor analysis focuses on each company against which the firm directly competes with (Hitt et al., 2011, p. 55). As the intensity of competitive rivalry within an industry increases, so does the need for firms to understand their competitors.

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Source: Adapted from Hitt et al., 2011, p. 123: A Framework of Competitor Analysis

Market commonality is the degree of similarity to which a firm and its competitors are involved in a market, and the importance of each market to each firm. Resource similarity is the degree of similarity of a firm’s tangible and intangible resources with that of its competitors’ (Hitt et al., 2011, pp. 122). Firms with similar resource types and amounts are more likely to share the same strengths and weaknesses, and use similar strategies.

A competitor analysis for South Beauty Group in the high-end Chinese dinner segment would place it in quadrant I. This is because its direct competitors are other top restaurant chains in China, vying for the same target group of consumers. Resources would also be similar in the sense that since each restaurant depends on local suppliers for raw materials, and then competitors in the same city would select raw materials from the same suppliers.

Question 3

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Source: Adapted from Wikipedia, 2012: SWOT Analysis
SWOT analysis is a framework used to evaluate Strengths, Weaknesses, Opportunities and Threats of a project, business venture or company (Wikipedia, accessed 2012). Strengths and weaknesses arise from the internal analysis of the firm, while opportunities and threats arise from the external analysis of the firm.

SWOT Analysis of South Beauty Group
|Strengths |Weaknesses |Opportunities |Threats |
|Adoption of advanced IT systems to |Non-standardization in terms of raw|Annual expenditure per capita on |The ease of copying dishes gave |
|enhance image and efficiency |material purchases, preparation of |restaurant meals were growing, but |rise to counterfeit restaurants |
| |semi-cooked dishes, logistics and |were still low compared to the |that provided poor quality and |
| |customer service |United States and France |service appearing in cities where |
| | | |the Group had not yet penetrated |
|Strengths |Weaknesses |Opportunities |Threats |
|People management and human |Opinion of the people of Chengdu |Selected as one of the food |Rapid development and expansion of |
|resource strategies, including |that the Sichuan cuisine offered is|suppliers of the Beijing Olympic |both hot pot and Western fast food |
|extensive training for employees |not authentic and not as spicy as |Games in 2008, where revenue was |chains |
|and hiring experienced executives |the original |estimated to hit RMB 18 billion | |
|Effective organization structure |Lack of human resources and |The booming economy in China lead |Expansion required large capital |
| |management skills |to business meals having more |expenditure, but it was difficult |
| | |potential for growth than other |to obtain bank loans because of |
| | |segments of the catering industry |perceived risks involved |
|Independent R&D team responsible | | | |
|for menu innovations and food | | | |
|quality | | | |
|Strong branding and reputation in | | | |
|the industry | | | |

Question 4
Business-level strategy is “an integrated and coordinated set of commitments and actions the firm uses to gain a competitive advantage by exploiting core competencies in specific markets” (Hitt et al., 2011, p. 90). The purpose of a business-level strategy is to differentiate a firm’s position with that of its competitors, and in doing so, choose between “performing activities differently or perform different activities” (Hitt et al., 2011, p. 95).
South Beauty Group employs a focused differentiation strategy in that it strives to achieve a uniqueness competitive advantage serving a narrowly targeted segment of customers.
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Source: Adapted from Hitt et al., 2011, p. 97: Five Business-Level Strategies

The focused differentiation strategy relies on producing goods or services for a narrow group of customers at an acceptable cost that customers perceive as being different in ways which are important to them (Hitt et al., 2011, p. 102). All three restaurant brands under the South Beauty Group (South Beauty, LAN Club and SUBU) provide unique dining experiences with innovative dishes, each targeted at a narrow segment of the market, work on this strategy.

Product innovation – South Beauty Restaurant introduced innovations and improvements to traditional Sichuan food in terms of new raw materials, preparation process and customer experience, such as the stone-heated tofu congee. A research and development team was also put in charge of creating new dishes for the menu.

Service innovation – The use of advanced IT applications in the customer service process enhanced image and efficiency of the restaurant. CRM, ERP and remote conferencing systems were also used.

Image differentiation – The Group’s restaurants were located in prime office buildings in key cities, such as Guomao (China World Trade Center) in Beijing. Each restaurant was also decorated in a different way by different well-known artists, and no expenditure was spared. LAN Club in Beijing, designed by Philip Stark, cost RMB 100 million to decorate.

Price differentiation – Meals at South Beauty Group’s restaurants were priced more expensively. This was made possible by the combination of the upper-middle-class image portrayed, location and uniqueness of dishes.

Target market – South Beauty targeted businesspeople aged 30 to 45 years, LAN Club targeted successful businesspeople aged over 45 years, and SUBU targeted the younger and more fashionable office workers, serving innovative and healthy food.

Question 5

South Beauty Group wishes to build an international brand presence in key international cities in the world. The Group had recently communicated its plans to open restaurants in cities such as New York, Paris and Tokyo, and anticipates expanding to 30 restaurants in the short term. In the long term, the Group projected to have 100 restaurants in the next three years, of which 35 would be in China and the rest in the international market. Product expansion such as airline catering and supplying semi-processed food to retail outlets was also part of its plans to expand its product scale.

The current recommendations are to seek standardization, developing a franchising system and financing expansion by means of an initial public offering.

Each South Beauty Group restaurant had 380 items on the main menu. They were dependent on local suppliers for raw materials, and on the chef’s experience for the quality of dishes. Executive director Jacy Yang identified that of two success factors, service and the menu, service was easily standardized through “training, rules, inspections and the right incentive system”. To standardize the preparation and distribution of the main dishes, South Beauty Group is working on building a central kitchen to oversee the process. With the two central kitchens set to be built in Shanghai and Beijing, standardization and average cost control can be achieved.

As another way to expand its reach in China, the Group was trying to develop a franchising system. While two new restaurants were on the verge of signing the franchising contracts, the situation in the international market would be very much different. This is because of the lack of local knowledge and the difficulties of management. Requirements in terms of size, style and cuisine would also differ from city to city. In view of this and to seek cooperation, the Group contacted local partners who had complementary resources in target cities.

It was difficult for a private restaurant to obtain a bank loan, due to the perceived risks, and government non-prioritization of the industry. Hence, the Group, needing external funding for expansion plans and standardization projects, new business development and the Olympic Games contract, attracted cooperative interest from venture capitalists and foreign investment banks. A possible IPO was announced in 2006, either in the international or domestic stock market, to raise additional funds.

Additional recommendations target the lack of human resources and copyright or counterfeiting issues.

Counterfeiting is a constant source of threat to industry players. As innovative as it could be, South Beauty Group has faced its fair share of counterfeiters in cities in China where it had not yet penetrated. There are two possible solutions: one, to continue innovating like what the Group has been doing so far and at a faster pace, and two, to pursue legal action and persevere until results are satisfactory.

The lack of human resources is another industry-wide issue. South Beauty Group should continue hiring experienced executives who can contribute to the company. Training and methods should be intensified and improved on continuously. Another way to improve the human resource situation is employee retention. This can be done by providing better training, keeping employees motivated, job rotation so that employees can learn new skills and feel valued by the company, and offering better incentives to employees and extra incentives to better performers.

References

IRELAND, R. D., HOSKISSON, R. E., & HITT, M. A. (2011). The management of strategy: concepts and cases. Canada, South-Western/Cengage Learning.

En.wikipedia.org (1960) SWOT analysis - Wikipedia, the free encyclopedia. [online] Available at: http://en.wikipedia.org/wiki/SWOT_analysis [Accessed: 7 Sep 2012].

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