ENTR 313 - Levendary Cafe Harvard Case

Case Analysis #2

Levendary Café: The China Challenge

Levendary Café the high-end American café has expanded to China. The domestic market minimal expansion has triggered this decision to go abroad. China’s growing economy, strong middle-class, high urban rates, and current lifestyle trends were crucial for the company to make this decision.

The “Tasty, Fresh, Goodness” company’s Senior Executives dealt with different problems along the way in its expansion. Among them, is the dilemma of applying the US strategy and standards in China, or maintaining the new changes established by Louis Chen. Levendary China’s President has conducted rapid expansion in the urban centers of Beijing and Shanghai. However, this rapid growth took some of the distinctive features of its menu and customer experience to adapt to local needs. To decide what would be the strategy to take, a persuasive analysis on

Levendary Café entering the Chinese market must be made.

Levendary's entry into the Chinese market was positive. The fact of creating the knowledge of a brand, establishing itself and being close to the breakeven point is positive considering the little possibility of expansion in the American market. However, this immersion should have been better planned and structured to avoid mistakes like the ones we now encounter. I think that the moment of entry was correct; nonetheless, the poor strategic coordination made the situation difficult. This lack of appropriate coordination was an administrative error brought back from their Denver’s Headquarters. A clear corporate strategy had to be established, with established roles, an action plan accompanied by a market study before opening the first café.

In the long term, with a new corporate structure, the expansion will be very positive for the company. However, to do so, the company has to understand that China's revenue driver is the sales volume associated with high traffic. Therefore, it was the right thing to make specific strategic changes to be more competitive in the market. However, the corporate culture must be maintained but appealing to this new market that seeks options other than American. I believe that the differences between locations, including size, menu options, and sitting service options are correct.

A strategy of differentiating the premises can be a plausible option and decreasing costs associated with occupancy, which are very high. The creation of a "Levendary Express" can result in areas of high traffic and business areas, in which the Yu Garden takeaway counter with no seating is the perfect example. This feature would create a new niche in the market, decreasing menu options and associated operational costs, while maintaining the representative quality of Levendary. On the other hand, a classic high-end Levendary Cafe differentiated by name, meal options, and seated service is supported. Appealing to this differentiation, Levendary seeks to position itself as Pizza Hut in the Chinese market. With products and service for a demanding public, taking advantage of the population segment with high purchasing power. While also appeals to the other market clientele of fast, casual meals that look for workers, entrepreneurs and young people living in a busy urban environment. Creating new opportunities in the market, while not jeopardizing the model designed in the United States.

As for other strategies to be taken, taking into account the expansion to China, Dubai and not limiting its possible growth, there must be changes at the structural level of the organization.

Executive positions that oversee global operations are essential. Therefore a multinational CCO,

COO, and OTL positions must be created. In the same way, three branches: Levendary US, Levendary International (China and the Middle East) must be formed, giving operational independence to each one. Like district managers report to area directors, and then to market vice presidents; US and International branches report to the global executives. This structure will allow tight control of operations and marketing, in addition to creating a stable corporate culture and support between branches.

At the time of the expansion, hiring a local was a wise decision. Louis Chen knew how to carry out this expansion efficiently, but the great freedoms did not allow an organic growth, with Denver consensus. Hand in hand with these structural changes, new positions must be created in each branch. For this company to implement organizational change, a new president must be hired for Levendary Café International, while Chen is reassigned as COO. This change, more than anything strategic, will allow finding a balance of current operations while also having the person who carried out this project. Chen started as someone with many ideas, energetic and able to solve problems. However, due to its ambition, it loses sight of the general corporate good, leading it to take radical decisions and not consensual by the rest of the work team. That is why a new president must be chosen for the organizational good. This, a professional manager should look for the best options for the company and work for hand in hand with the workers. In accordance to thoroughly implement changes, executive management should also establish a clear strategic plan. In the short term, they must set a schedule of meetings to revise and analyze current operations in China. Furthermore, a more specific market analysis to determine Levendary’s acceptance rate and changes that must be done. Investment in the development of new products adapted and determined by region diversification is also needed.

Among which is the creation of Levendary Express, thus creating a niche in the market and segmenting customers.

On the other hand, contracting and external auditor such as KPMG or Deloitte is essential to do report consolidations for this year of operations. Despite the costs associated with this, China’s Levendary must maintain reports with the Chinese principles to meet local tax and accounting structures successfully. Back in Denver, a team that translates and adapt international branches financial reports to GAAP for internal and tax purposes must be established. This structure would create a solid base for international expansion, consistently meeting China’s and United Arab Emirates governments financial needs, while meeting international tax reports back in the

United States.

This series of changes are needed to maintain and keep growing Levendary’s brand abroad. China as an industrial and manufacturing country, with a large population, facilitates access to necessary inputs for operations. However, there is a difficulty associated with the high costs of importing American products. It is crucial to limit the dependence on American products and to obtain Chinese substitutes that lower costs and maintain product quality. Consumers have high power in the success of Café. As has happened with other companies, these have to adapt to local tastes to maintain and expand. This factor cannot be neglected. Competition in the sale of food is high, especially in the price. Small stores offer options at a considerably lower price, in addition to appealing to the intrinsic taste of the locals.

Besides, they have competition from local chains such as Dar Jia Lee and Mongolian Hot Pot. Multinationals like KFC and McDonalds despite not being a direct competition they all represent substitution threats. The companies compete increasingly aggressively to improve the qualityprice of the products. Despite achieving differentiation as a novelty and healthy option, there is a wide range of options at a lower cost.

The risk of not investing and developing new products to adapt would lead that competition to overcome current Levendary’s competitive advantage. Not having flexible responses to the changes and needs in the market, can have a significant impact on the company’s profitability. Financial and strategic considerations must merge to meet organizational sustainability. With this corporate level changes, Levendary’s International expansion with a focus in China will allow a more standardized level of service, maintaining the organizational culture, and by segmenting the market, making the branch more profitable.