Tao Heung Case Study Analysis

Tao Heung Case Study Analysis ABSTRACT Tao Heung is a listed company focusing on Chinese restaurant business in Hong Kong and Guangdong. By utilizing Porters five forces model, Chinese restaurant industry is identified to be intensively competitive. Nevertheless, Tao Heung still recorded slight growth by 2009 through successful cost control measures and operational efficiency. The company has strengths of strong financial position, cost efficiency, and good marketing and management capabilities, and weaknesses of imbalanced market presence, business portfolio, and capital structure. The business environment provides it new opportunities for developing new markets and businesses because of improving living standard and purchasing power. Major threats include severe inflation leading to soaring costs related to labour, rent, and food ingredients. TOWS matrix is a technique to formulate possible strategic alternatives matching internal factors to external opportunities and threats. In corporate level, Tao Heung is suggested to adopt market development strategy by using merger and acquisition and leveraging of debt. In business level, enhancing currently adopted cost leadership strategy is recommended. TABLE OF CONTENTS 1. INTRODUCTION Tao Heung is a catering company, focusing on operating Chinese restaurants and mainly operating in Hong Kong and China market. The company was founded in 1991 and was listed on the main board of The Stock Exchange of Hong Kong Limited in 2007 (Stock code. 0573.HK). It is now operating 66 outlets, including various styles of restaurants, in Hong Kong and more than 10 outlets in Mainland China. The business philosophy of Tao Heung is Delicious and Value for Money. It is well known for its quality foods and quality services at relatively low prices, and innovative marketing campaign, such as One Dollar Chicken, at the minds of Hong Kong consumers. One Dollar Chicken campaign was a marketing promotion during the period of financial tsunami in 2008. Consumers could enjoy a dish of chicken for only One Hong Kong Dollars at the restaurants of Tao Heung. The campaign effectively enacted the companys Value for money philosophy. Chinese restaurant is a traditional industry in which there are many inherent shortcomings and flaws. However, Tao Heung is renowned for the use of innovative marketing strategies and modern management techniques in running this traditional business. The objectives of Tao Heung are to become one of the most esteemed and premier Chinese restaurant groups in Hong Kong and China, recognized for innovations and its capabilities to provide high quality food and restaurant service that promise customers exceptional dining experiences (http://www.taoheung.com.hk/eng/corporate/overview.jsp). The goal of strategic management is to leverage a firms capabilities to accomplish its strategic objectives with the balance of all stakeholders interest. Mr. Chung Wai Ping, who is one of the founders of Tao Heung, owns 36.7% of shares in Tao Heung and must be the key stakeholder. However, share owners of a firm are not the only group of stakeholders of the firm in the sense of strategic management. Stakeholders refer to the groups of people who have interests in a firms activities and affect or are affected by the achievement of the firms objectives (Wheelen Hunger, 2010). Therefore, creditors, suppliers, customers, competitors, employees, governments, and public in the communities are the stakeholders of Tao Heung. Tao Heung tries to maximize profit through providing quality foods and exceptional dining experiences to its customers. As a result, it has the capability to repay loans to its creditors, pay taxes to governments, share profits with employees, satisfy the business need of suppliers, and contribute to communities. Meanwhile, its status as one of the most esteemed and premier Chinese restaurant groups in Hong Kong and China inevitably has impact on its competitors. 2. LITERATURE REVIEW AND METHODOLOGY Strategy is defined as a firms theory about how to gain competitive advantages (Barney Hesterly, 2010). Therefore, strategic management is a set of managerial decisions and actions that generates the firms competitive advantage, and, hence, gains above average return (Wheelen Hunger, 2010) (see Figure 1). Mission Objective External Analysis Internal Analysis Strategic Choice Strategy Implementation Figure 1 Strategic Management Process This article aims to critically evaluate the strategic position and direction of Tao Heung. Johnson and Scholes (2007: 16) point out that understanding the strategic position is concerned with impact on strategy of external environment, internal resources and competencies, and the expectations and influences of stakeholders. Therefore, this article will present external environmental analysis and internal analysis of resources and competencies for Tao Heung and evaluate its strategic options accordingly. By conducting external analysis, the critical opportunities and threats in external environment of Tao Heung will be identified, including macro-environment and industry environment in which the firm operates. Porter (1980) contends that a firms profitability is determined by the intensity of competition within the industry it competes. As a result, he developed Five Forces Model for examining the intensity of competition of an industry. In addition, generally adopt PESTEL framework for analyzing a firms macro-environment. The following factors are included in the analysis: Political, Economic, Social, Technological, Environmental, and Legal factors (Harvard University Press, 2007). By conducting internal analysis, the organizational strengths and weaknesses of Tao Heung will also be identified. The resources and capabilities which are the source of competitive advantage will be identified by internal analysis (Barney Hesterly, 2010). Porter (1985) proposed that Value Chain Analysis is a technique for analyzing source of competitive advantage of a firm. However, according to the Resource-based View, competitive capabilities must be rare, durable, valuable, robust, and not easily be imitated (Grant, 2002). Then, external analysis and internal analysis are synthesized into a SWOT analysis. SWOT is an acronym used to describe the particular Strengths, Weaknesses, Opportunities, and Threats that are strategic factors for a specific company (Wheelen Hunger, 2010). Utilizing the result of SWOT analysis, a number of strategic options can be generated. A TOWS Matrix is produced to show how the external opportunities and threats facing a particular firm can be matched with the firms internal strengths and weaknesses (Wheelen Hunger, 2010). Finally, this article will critically justify the strategy that Tao Heung is using and suggest corporate and business level strategy that Tao Heung should use to improve its performance. Corporate level strategy refers to the strategy that creates value to the firm in line with the overall purpose and scope of the firm. Diversification, merger and acquisition, are examples of corporate level strategy. Business level strategy refers to the strategy about how to compete successfully in particular market and achieve competitive advantage (Johnson Scholes, 2007). Porter (1980) suggested three generic competitive strategies: cost-leadership, differentiation, and focus. They are examples of business level strategy. Secondary data from company annual reports, Internet, government statistics, academic journals, CEO interviews, magazines and newspapers will be collected for conducting analysis. 3. ANALYSES Four analyses will be presented here: Industry analysis, Macro-environment analysis, Internal analysis, and SWOT analysis. 3.1 INDUSTRY ANALYSIS According to Five Forces Model, the intensity of competition within Chinese restaurant industry in Hong Kong is determined by five competitive forces (Porter, 1980): Threat of new entrants New entrants are threats to the existing firms within an industry because they bring new capacity to the industry, and a new desire to gain market share and resources. If the entry barrier to the industry is high, the threat of new entrants is lower. The relatively high capital requirements and sunk costs create certain degree of entry barriers for Chinese restaurant industry. According to the information provided by Trade and Industry Department (2006), the capital requirements for opening a Chinese style cafà © was HK$1,275,500. The scale of a Chinese restaurant is 10 to 20 times greater than a cafà ©, the capital requirements are estimated to more than HK$15,000,000. Most of the investment is spent for decoration, facilities, and marketing activities. They are all sunk costs that cannot be recovered. Economies of scale also help establish barriers to entry. Therefore, the major rivals of Tao Heung are big Chinese restaurant groups such as Maxims and Star Seafood. Companies with limited capital have been not easy to start up a new Chinese restaurant in Hong Kong recently. Rivalry among existing firms Hong Kongs Chinese restaurant industry is dominated by several large restaurant groups now. They are Maxims restaurants, Federal Restaurants, Hsin Kuang Restaurants, East Ocean Victoria City Restaurants, Star Seafood Restaurants, and Tao Heung Restaurants. The relatively small number of competitors and roughly equal in size create intensively competitive environment. In addition, the growth rate of this industry is slow. The value of Chinese restaurant receipts and purchases for the first half of 2010 was HK$19,600 million, accounting for 6% increase compared with last year (Census and Statistics Department, 2010). Moreover, the exit barriers of this industry are high because of high sunk costs. Diversity of rivals and differentiation are low. These factors contribute to fierce competition within this industry. Threat of substitute There are many substitute products that can satisfy the same needs of dinning in Chinese restaurant. Consumers would like to gather to mingle and socialize in Chinese restaurants, besides of the dinning needs. But they could satisfy the same needs by going to Western restaurants, fast food restaurants, or even at home. According to Porter (1980), substitute limits the potential returns of an industry by placing a price ceiling. Chinese restaurants cannot charge profitably beyond the perceived values of dinning experiences. Bargaining power of buyers The bargaining power of buyers in this industry is high. The major reason is that consumers can choose their favorite restaurants free of switch costs. The restaurants can create greater product and service differentiation by introducing innovative recipe, and leveraging quality foods and services, in order to erode the bargaining power of buyers. Bargaining power of suppliers The major suppliers of Chinese restaurants are the food suppliers. They are numerous in the market. The products are not unique and restaurants have almost no switch costs to change suppliers. Substitutes are always readily available. Therefore, the bargaining power of suppliers is low. Overall, collective strengths of five competitive forces determine high level of competitive intensity in Chinese restaurant industry. The profit potential of this industry is limited. 3.2 MACRO-ENVIRONMENT ANALYSIS PESTEL framework is employed for analyzing macro-environment: Political factors The economic transition policy of the government of Guangdong province intended to change the manufacturing-based economy into high-value-added economy. The results lead to severe factory closure in Southern China. It is a drawback for the market development strategy of Tao Heung since its physical presence in China is mainly in the cities in Guangdong province. On the other hand, after the 2008 financial tsunami, Chinese government introduced measures which aimed at promoting domestic demand and increasing welfare benefits. The purchasing power of Chinese consumers has been increased. Tao Heung is definitely benefited from these measures. Overall, the market potential for Chinese restaurants business seems to be optimistic in the long run. After all, factory closure in Guangdong province is a temporary phenomenon. It will recover when the transition is successful achieved. Economic factors Financial tsunami in 2008 created a very volatile economy for catering industry. Tao Heung recorded a relatively low revenue growth of 5.5% only in 2009 (Tao Heung, 2010). Fortunately, economic conditions both in Hong Kong and China are gradually recovering. However, another economic force has been negatively affecting Chinese restaurant industry since economic recovery. Inflation has been very serious for the recent two years. As a result, the costs of raw materials have been soaring. The profitability of Tao Heung is inevitably eroded. In addition, Tao Heung also faced rental and labour market pressure because of severe inflation. Indeed, rent, food and labour are three major inputs to Chinese restaurant industry. Increased Costs associated with rent, food and labour cause significant negative impact on the Chinese restaurant industry. Social factors Living standard is high in Hong Kong. Besides, as economic growth in China is substantially, living standard is improving accordingly. Thus, there is increasing demand for quality cuisine. Restaurant goers both in Hong Kong and China are not only seeking for food, but also for specialty recipe, quality service, and excellent atmosphere. In addition, there are rising concerns for food safety also. It may be because of recent food safety problems in China and the emerging environmental conservation sentiment. Increasing demand for quality and safety will impose challenges to that industry. On the other hand, it may be opportunities for Tao Heung. Tao Heung is a pioneer in adopting modern management and marketing skills to operate traditional Chinese restaurants. If Tao Heung can cope with the challenges, they can outperform its rivals. Besides, improving living standard in China means more market opportunities, for example, banquets market. Technological factor Advanced information system technology is an enabler of modern supply chain management. Tao Heung has utilized bulk purchase and direct food supply from its logistics centres to enhance cost efficiency. The advancement in food processing technology also creates new opportunities for food catering industry, chilled food trading business. Environmental factor Chinese restaurant operations pollute water when washing foods and dishes. According to the Polluters Pay Principle, restaurants need to pay additional sewage charges. Because of the increased environmental concern in our society, the sewage charges are expected to rise. Besides, consumers are more concern about food safety now because of severe pollution problems. Legal factor The minimum wage legislation process is about to complete in Hong Kong. The initial minimum wage rate will be HK$28 per hour. It is expected to come into force on May 1, 2011 (Labour Department). Tao Heung will face increasing labour costs and human resources pressure. 3.3 INTERNAL ANALYSIS Internal analysis is concerned with identifying a firms internal strategic factors which is the firms critical resources and competencies for success (Wheelen Hunger, 2010). With reference to resource-based view of strategic management, Grant (2004) suggested that an organizations sustainable competitive advantage is primarily determined by its strategic resources and competencies. The following internal strengths are identified to be critical for the success of Tao Heung: Strong financial position Tao Heung has very low debt ratio (about 1%). The value of cash and cash equivalents asset is 428 million at the end of 2009 (Tao Heung, 2010). In addition, Tao Heung is listed company so that it has capability to raise funds from shareholders or public when needed. The strong financial position can support Tao Heung to grow naturally or grow by merger and acquisition. Logistics centres Tao Heung owns a logistics centre in Tai Po (Hong Kong) and Dongguan (China). The logistics centre in China enables it to achieve bulk purchase of food ingredients from their sources. Logistics centres have another role of supplying food products to restaurants of Tao Heung. Foods have been processed before delivering to restaurants. The semi-processed food ingredients can help (1) save the cooking time in restaurants, (2) use less skillful chef, and (3) save kitchen space. Besides, the excess capacities of logistics centres are utilized to manufacture pre-packing chilled food supplied to its own outlets, supermarkets and food centres, providing another source of revenue. Marketing and management capabilities Tao Heung has profound marketing capability. The marketing team has launched some excellent promotion campaigns such as One Dollar Chicken. They have also developed brand awareness in China and have won some awards such as Top 500 Quality Brands in China 2009 and Top 500 Overseas Chinese Merchants in Chinas Market (Tao Heung, 2010). Tao Heung has a lot of innovations in Chinese restaurant management, for example, achieving cost efficiency by using operation of logistics centres. Moreover, Tao Heung will establish a training institute providing professional training to restaurant workers with the cooperation of VTC. The program can ease labour pressure of the industry. Although the economic situation was bad in 2009, Tao Heung could still achieve growth through stringent cost control measures and streamlining of operations. On the other hand, Tao Heung has some weaknesses. It has been too focus on Chinese restaurant business and Hong Kong market. Its peripheral businesses including airline catering, chilled food trading and bakery accounted for a relatively modest amount of total turnover (HK$52 million) in 2009. Besides, Mainland China business accounted for only 17.3% of total turnover in 2009. In addition, its use of debt has been too little. Better use of debt can enhance returns of shareholders, although high level leverage of debt will increase business risk. 3.4 SWOT ANALYSIS A SWOT analysis summaries the key issues from the external environment and the strategic capabilities of an organization that are most likely to impact on strategy development (Johnson Scholes, 2007). Figure 2 shows the internal strengths and weaknesses of Tao Heung, as well as the opportunities and threats from the external business environment. The strengths are strong financial position, cost efficiency, and marketing and management capabilities. The weaknesses are imbalanced market coverage, business portfolio, and capital structure. Opportunities include increasing purchase power, living standard, demand for quality cuisine, and advanced IS technology. The threats include inflation pressure, minimum wage, intense competition, and food safety concern. Strengths Strong financial position Cost efficiency through the use of logistics centres Good marketing and management capabilities Weaknesses Imbalanced market coverage Imbalanced business portfolio Imbalanced capital structure Opportunities Increasing purchasing power in Mainland China Increasing living standard leading to new business opportunities such as banquet Demand for quality cuisine Advanced IS technology enabling efficient supply chain management Threats Severe inflation pressure leading to rising costs related to rent and food. Minimum wage legislation leading to higher labour market pressure Intense competition in Chinese restaurant industry Concerns about food safety Figure 2 SWOT Analysis for Tao Heung TOWS matrix is used to illustrate how the external opportunities and threats facing a particular organization can be matched with that organizations internal strengths and weaknesses to result in four sets of possible strategic alternatives: SO strategies, WO strategies, ST strategies and WT strategies (Wheelen Hunger, 2010) (see Figure 3). Strengths (S) Weaknesses (W) Opportunities (O) SO strategies Generate strategies that use strengths to take advantage of opportunities WO strategies Generate strategies that take advantage of opportunities by overcoming weaknesses Threats (T) ST strategies Generate strategies that use strengths to avoid threats WT strategies Generate strategies that minimize weaknesses and avoid threats Figure 3 TOWS Matrix The possible strategies are listed in the Figure 4. In summary, Tao Heung is suggested to develop new markets, enhance its operation efficiency, rapid expansion into Mainland China, and better use of debt. The strategies can be consolidated into two levels of strategies: corporate and business level. Strengths (S) Strong financial position (S1) Cost efficiency (S2) Good marketing and management capabilities (S3) Weaknesses (W) Imbalanced market coverage (W1) Imbalanced business portfolio (W2) Imbalanced capital structure (W3) Opportunities (O) Increasing purchasing power (O1) Increasing living standard (O2) Demand for quality cuisine (O3) Advanced IS technology (O4) SO strategies Expansion to various food catering businesses (S1O2O3) Rapid expansion into Mainland China (S1O1) Enhance capacities of logistics centres (S2O4) WO strategies Acquire other catering businesses (W2O2) Merger and acquisition in Mainland China (W1O1) Threats (T) Severe inflation pressure (T1) Minimum wage legislation (T2) Intense competition (T3) Food safety concerns (T4) ST strategies Leveraging the use of logistics centres (S2T1) Stringent quality control (S3T4) More stringent cost control (S2S3T1) Improved employee training (S3T2) WT strategies Diversify into other market segments (W1W2T3) Figure 4 TOWS Matrix for Tao Heung 4. DISCUSSION AND CONCLUSIONS Ansoff product/market growth matrix (Figure 5) suggests that a business attempts to grow depend on whether it should market new or existing products in new or existing markets (Johnson Scholes, 2007). Existing Products New Products Existing Markets Market Penetration Product Development New Markets Market Development Diversification Figure 5 Ansoff Product/Market Growth Matrix Concerning with Tao Heungs corporate level strategy, market development is a more suitable strategy. Both new geographical markets and new segment markets should be explored. Although Tao Heung has established its presence in Chinese market, it has only less than 15 restaurants in China by the end of 2010. All of these restaurants are located in Guangzhou and Shenzhen. Tao Heung should expand more rapidly in China market and open more new restaurants in other cities within Guangdong province. Regarding to segment markets, most of restaurants in Hong Kong are seafood restaurants targeting to medium income level families. Tao Heung has adopted multi-branding strategy. The different brands are targeting similar segments using different products. For example, Hak Ka Hut, Chao Inn, and Shanghai Inn provide different style of dishes but target the same segmented customers. Chao Inn and Shanghai Inn even located at the same place. HIPOT is a new brand of Tao Heung. This new brand target young customers. It is a good direction. Tao Heung is encouraged to explore more new segment markets by building more new brands. Tao Heung has mainly used internal development for growth. The only acquisition in the past few years is the acquisition of Tai Chong Bakery. Using companys own resources to develop new businesses is actually a play safe game. However, Tao Heung is suggested to use more merger and acquisition to expand into China market in a more rapid pace. Since Mainland China is a massive market, growth by acquisition could be better than by organic growth. Besides, Tao Heung can better use of debt to balance its capital structure. Porter (1980) suggests three generic strategies to compete with rivals in a market. They are cost leadership, differentiation, and focus strategies. Cost leadership is the strategy that Tao Heung is currently adopting. Tao Heung put much effort on achieving cost efficiency by utilizing logistics centres and stringent cost control measures. . It is a correct direction since Chinese restaurant is a very intensively competitive industry. However, Tao Heung is suggested to focus on maintaining quality cuisine while achieving cost efficiency. To complement cost leadership strategy, diversifying into other food catering business such as bakery and school catering to balance its business portfolio.