Case-1-3 Beijing Sammies – International Entrepreneurship: Starting, Developing, and Managing a Global Venture : Book Guide

This Document Contains Cases 1 to 3 Beijing Sammies CASE OVERVIEW When Sam Goodman opened a new Sammies café in Beijing’s Motorola Building, he cut prices by 50 percent for the first three months in order to attract customers. The initial period was very successful, but when prices returned to normal, sales dropped dramatically and fell short of targets. The local store manager, when presenting the figures, suggested that Goodman simply lower the sales targets. Goodman was frustrated; the manager had failed to address any of the issues that prevented customers from returning. Countless orders went out missing utensils, in the wrong bag, or with items simply left out. Delivery orders were being sent hours late or to the wrong location. This typified Goodman’s early experience; the market was showing interest in Beijing Sammies' products but he knew that without exceptional service, good food would not be enough. Goodman questioned whether he could find employees who were thinkers and problem solvers and wondered how to improve upon the business in order to turn Beijing Sammies into a sustainable and profitable enterprise. According to Goodman, face and money were the two most important tenets. With experience as a student and businessman in China, he knew one must observe the cultural beliefs. Throughout the company’s initial years Goodman sought to teach a service-oriented approach to his employees. In doing so, he ironically learned that face was as much of an important issue for Beijing Sammies’ customers as it was for its employees. OBJECTIVES 1. Development: Study the creation of a successful business in a Far Eastern country, particularly one that is often unfriendly to outsiders; view the process of entrepreneurship through an international lens. 2. Culture and Business: Discuss how cultural beliefs and years of history have influenced the Chinese business approach, and how Western management must deal with human resources and training issues. 3. Financial Analysis: Overlay development discussions with financial analysis and decision making. The reader is presented with two-years of actual (full-length) income statements, and must determine what operational changes, if any, he/she would make, in light of the results. QUESTIONS FOR DISCUSSION 1. Why do you think Goodman is having a difficult time finding employees who can perform up to his expectations? How can he teach them to perform better? 2. Do you believe Goodman is being unrealistic in his expectations of bringing quality Western service to China? 3. What are the key success factors for Beijing Sammies? What are its strengths and weaknesses? 4. What can you draw from Beijing Sammies' financial documents with regard to growth between 2001 and 2002? Would you invest in the company? What rate of return would you require given the risk? 5. What should Goodman do to build the business moving forward? How should he approach future fundraising efforts? TEACHING APPROACH Beijing Sammies is best positioned at the beginning of a module on international business, or as one of the opening cases in a course on Entrepreneurship. While the operations of a sandwich business might be straightforward to some students, the complexity of running that same entity internationally is anything but. Further contributing to the mix is the location of the company in Beijing, China. Despite the government’s insistence that it is fully committed to embracing Western-style capitalism, the fact remains that Sam Goodman is still doing business in a Communist nation, and must abide by their myriad of often contradictory laws, rules and regulations. The reader who might instinctively seek relief as he/she observes certain fact patterns is reminded that Western-style values and legal remedies are essentially useless in this part of the world. Despite the party lines about foreign businesses recited in robotic form by local and national bureaucrats, ironically, Goodman’s concept has been extremely well-received by nearly all walks of life in China. Whether as rebellion or due to genuine interest, the average Chinese citizen respects and covets anything representing “the West,” and in particular icons and traditions of the U.S. Thus, the ability to experience the U.S. culture through reasonably priced food (albeit during a short lunch hour) is well embraced by many. Compounding this with the cultural importance that even big-city Chinese place on word-of-mouth communication, it’s no surprise that Sammies is reaching the levels of success it has. Vis-à-vis government regulation, the chain’s small size has actually worked to its advantage, since the revenues and profits aren’t large enough to “officially” attract attention from government personnel (other than as customers!). (This Teaching Note assumes a 90-minute class to teach this case.) Introduction (10 minutes): I usually begin class by establishing the fact that Sammies is doing exceptionally well as a business, regardless of its Chinese origins. a. What are revenues to date in 2002? [Nearly US $790,000, based on RMB Y8.3 - $1 rate] b. How strong is the gross margin? [Average of nearly 70% year-to-date (YTD) 2002] c. Is it making money on the bottom line? [2002 has had some of its first profitable months, and it intends to consistently attain monthly profitability in 2003 and beyond] d. How many units are in the chain? [4 “deli-style” cafés, 1 kiosk and a strong delivery business] e. Is Goodman an experienced manager? [He’s essentially in his 3rd “round” of financing due to the partnership troubles he’s encountered up until now. This represents a huge asset for the operations of Sammies moving forward.] a. Life Cycle of the Company (5 minutes): The second line of questioning should focus on where Sammies is in its life cycle and what success factors are underpinning its business. 1. What life cycle stage is the business in? [Growth and expansion] 2. Which single goal is most important? [Sustainability of Sammies as an ongoing entity] 3. What are some key (non-financial) success factors? 1. Focusing on service, as much as on logistics. 2. Motivating his Chinese employees and teaching them to apply a Western mindset, all while maintaining ‘face’ within the tradition-rich Chinese culture 3. Using them as ambassadors of the company to educate their clients about ordering and consuming Western style food, and how to get the most out of their Sammies experience.] b. Anatomy of an Entrepreneur (10 minutes): What skills/attributes does Sam Goodman possess that has enabled Beijing Sammies to become successful? Are there critical skills he still needs to develop moving forward? Case Exhibit IC-1 summarizes the skills that Goodman possesses and those he needs. Case Exhibit 1C-1 1. Skills/Attributes Sam Goodman Possesses: a. Visionary: Goodman is a true visionary as it relates to his desire to develop a place to “hang out and eat a traditional sandwich which reminded him of home.” (page 108) b. Determination: He’s the epitome of undaunted determination to follow through on a dream. Beginning any business is difficult enough, but compounded with the partnership and cultural hurdles he overcame, Goodman deserves much kudos for a job well done. c. Self-Realization: Sammies’ founder effectively knows his own strengths and weaknesses and is humble. d. Isolation of Decisions: At the different turns in the road, Goodman has effectively learned to isolate Sammies’ core business decisions from issues related to international expansion . The same way entrepreneurs learn to separate operating decisions from financing decisions when running a domestic business, Goodman has done the same with his own firm’s development. e. Diversification: Goodman has effectively built diversification into his business by creating a separate delivery business from his cafés and kiosks. He’s also learned that a business doesn’t have to be all things to all customers in order to be successful, and choosing a unique niche (the deli business in China) has enabled him to continue growing, even in light of the many other restaurant locations he competes with daily. f. Logistics: Goodman has a strong knowledge of his company’s value chain and has used that to his advantage in delivering (literally!) the goods to the customers either in the cafés or via truck to the corporate offices. We all know that ideas are everywhere but that the execution surrounding them is elusive—for Goodman to have learned this in such a short time and focused his training on one or two key attributes (i.e. service and face on page 108) is impressive! g. Altruism: Despite his success, Goodman is cognizant and respectful of his societal and business roots, and gets high points for remembering to give back to the community through donations (page 113). 2. Skills/Attributes Sam Goodman Needs: a. Fund Raising: Goodman needs to learn that “whom you raise money from is more important than the funds themselves.” It’s not just a matter of raising the funds, but doing so from a trustworthy, dependable partner who can add more value to his business beyond just investing equity. b. Planning: The business could benefit from more formal strategic planning activities. It’s great to have a dream, but the plan supporting it is also crucial. c. Metrics: It would be helpful for Goodman to develop some additional strategy and financial metrics to evaluate his business’ results on an ongoing basis. The next step in this process is then to determine how these might change over time as Sammies expands even more. d. Delegation: Not surprisingly, and given the history of the chain’s growth, by default Goodman has centralized a great deal of the decision making. As the company grows, however, it might behoove him to develop a formal management team (beyond the individual store managers he’s grooming) and delegate key decision-making and processes. c. Doing Business in China (20 minutes): The discussion might then transition to doing business in China. 1. In addition to the cultural information from the case, I’ve included the following from my personal experience and research: a. Culture: There is no shared value system to rely on between Westerners and the Chinese. Even though, for example, the West coast of the U.S. fosters its own unique culture, citizens from the Northeast or Deep South can take solace in the fact that everyone is still an American. In theory, this means that everyone subscribes to the same basic set of values and abides by essentially identical laws. There is no such middle-ground either in business or personal situations, as China and the U.S. (and Canada) are literally worlds apart. b. Language: There is no similarity between the English and Chinese languages. In fact, written Chinese doesn’t even contain any verb tenses, and time frame is determined by context. All of the written language is based on Chinese characters. The spoken language is tonal in nature, with pitch causing meanings to vary widely. c. Names: Names are in a different order than those of Westerners, and often people have three names: family name, “generational” name, and given name. For example, in order: Li Teng Hui. d. History: The People’s Republic of China has over 4,000 years of recorded history. Change in different aspects of society and in certain business sectors will come slowly, if at all. e. Seniority: Company personnel are always cognizant of the hierarchy in place during any formal or informal conversation. Junior people are extremely reluctant to express any opinion publicly, even if the senior person they’re speaking or listening to is completely incorrect on an assumption or comment. f. Face: The concept of maintaining “face,” or avoiding embarrassment, humiliation or disgrace at any cost is tantamount to the average Chinese citizen, and in fact for most Asian cultures. Chinese will go to levels that what Westerners perceive as excessive, solely to maintain this harmony in their personal and professional lives. 2. As other information sources, the instructor might also consider referring to: Kiss Bow and Shake Hands (Morrison, Conaway, Borden) ExecutivePlanet.com Coming Home Crazy—An Alphabet of Chinese essays (Bill Holm) Chinatour.com d. Value Proposition (20 minutes): The discussion should then move to a discussion of Goodman’s value proposition: 1. Service: Beijing Sammies is set up to provide outstanding service at any interface point with the customer. The business has bi-lingual menus, a web site, a frequent user points system, ordering tips inside the cafés, and delivery options. While by Western standards these “bells-and-whistles” are expected from even the most basic business models, to the Chinese they are truly outstanding. Beijing is noisy, overcrowded, dirty, and filled with chaos. However, unlike other Asian countries such as Japan, where technology is ubiquitous, the average Chinese citizen has come to expect far less service from private businesses and in government responsiveness. In many cases, many of Sammies’ value-added services, such as delivery, are a mind-boggling novelty. As for the “Ex-pat” community (foreign nationals who are living and working in China as business professionals), Beijing Sammies is a nostalgic, multi-dimensional reminder of life back home. Deli meats and condiments are essentially either unheard of in the Chinese diet or unavailable from any markets, and life in Beijing is anything but consistent or reliable. The concept of being able to access a web site, make choices, and actually receive what you ordered is itself an Ex-pat novelty! Furthermore, from a marketing perspective, the longer Goodman’s list of high-profile corporate users becomes, the more credibility (and confidence) first time users perceive the sandwich chain to have. 2. Value: Goodman’s business offers solid value to its clientele. The food is authentic, reasonably priced and consistently tasty. (During a recent trip to China two companies independently used Sammies’ catering services for our luncheons. Although the food itself was different, the presentation and taste were nearly identical). The fact that Sammies embodies the U.S. and Canada through non-political messaging (food is food!), and is run based on Western standards, is further support for its credibility. Finally, the ability to customize offerings based on web site preferences makes individual customers feel unique and that much more “bought-into” the Beijing Sammies’ experience. 3. Technology: Regardless of whether its target market is Ex-pats or Chinese, Beijing Sammies is technologically and logistically outstanding. Their IT systems allow direct connections to the customer through either a graphical user interface (i.e. the web site) or the frequent user points system. In turn, it provides real-time feedback to management on usage history and dining preferences. The system even automatically emails users (see exhibit 2) with periodic updates. From a logistics standpoint, Goodman has not only effectively controlled costs through the use of his central kitchen, but has also allowed for tighter quality control and efficiency. It should be noted that the drivers can more effectively plan their routing through Beijing since all of the food runs are originating from the same source. In an environment where everyone follows a nearly identical time clock in terms of a 9:00 a.m. start-time for work and a 12 noon lunch break (regimented to a much greater extent than we are accustomed to in the West), this delivery planning is a powerful antidote against rush hour. 4. Caring: It’s obvious from the quotations in the case (and my personal interactions with Sam Goodman over the years) that he genuinely cares about his company and the products he’s selling. By Chinese standards, this alone places him in the minority of unique businesses. Although he’s operating his business for profit, Goodman is more inclined to take a loss (i.e. “comp” the meal) in order to keep a customer, than arrogantly assume that he only needs a small percentage of the more than 1 billion Chinese in order to remain profitable. e. Financial Discussion (20 minutes): 1. Financial Results I interpret the financial results of Beijing Sammies as follows: a. Gross Margins: The Kitchen Delivery unit of the business is producing equivalent revenue to the individual cafés (“Income Statement Café Exhibit 5”). b. Gross Income: However, from a cost perspective, Kitchen Delivery is far more profitable overall. This is attributable to a lack of overhead; the Kitchen Delivery’s rent is only 4% of total revenue, compared with a straight average (i.e. not weighted) of 17% for the cafés. Salary expense is also far less in that same department. In short, the Kitchen Delivery unit of the business operates more efficiently since it isn’t required to pay “retail rent” and its overhead expenses is far less. In short, there’s more contribution to the bottom line (Exhibit 5 “Income Statement Café”). c. Seasonality: Sammies appears to be affected by seasonality during January, February, and March, based on its gross revenue. In addition, profitability is also affected since salaries and other expenses weren’t reduced proportionately during that same period. Beijing Sammies actually posted a cumulative Gross Income loss overall (i.e. on an EBITDA basis, although in China taxes are paid based on revenue and not on net income). d. General Profitability: That the sandwich chain has posted three months of positive net income in the first ten months of 2002 is an excellent indication that it has turned a major corner financially and is headed in the right direction. This achievement is particularly significant since Net Income is truly “net;” the contribution is after all pre-operating, start-up, and renovation costs have been deducted. In an era where some companies, even in the wake of disasters such as Enron and WorldCom, are still clinging to a “pro forma” approach to finance , it’s gratifying to see that Goodman’s chain accurately reports its financials and, on an (honestly calculated) net basis, is making money. e. Financial Statement Format: As positively as the chain is performing, the instructor might still want to remind students that the financial statements are still a long way from being presented properly. There are no MD&A notes accompanying the statements or defining key assumptions, and no balance sheet or statement of cash flows. 2. Central Kitchen Maintaining a self-contained commissary also brings the following financial and operational benefits to Goodman: a. Space Maximization: The cafés can accommodate that many more patrons by not requiring an in-store kitchen. b. Rental Savings: The combination of retail locations with delivery services is an ideal mix for Sammies. The retail locations provide their own free advertising, but the chain doesn’t have to pay for costly retail rental space in every single location. Provided the units are located in high traffic areas, name recognition will increase, and Goodman can service quieter trafficked locations (or corporate accounts) through delivery. c. Overhead Reduction: It’s far more cost effective to centralize food production and increase capacity utilization than it is to staff each unit with its own team of foodservice employees. Workers at the individual locations would clearly be idle at some point during each day when customer counts decline (i.e. after lunch), thereby reducing overall productivity. d. Training Consistency: As indicated in the case, it’s far easier to control production by centralizing cooking and preparation and having the chance to see ALL food before it goes to the customer. 3. Valuation Time permitting, the instructor might choose to bring the students through a valuation of Beijing Sammies, and seek to quantify the reward an investor might demand based on the risk incurred. However, this discussion might require far more than the 20 minutes allocated for the overall financial discussion. a. Assumptions ● US $1 = Y8.3 rmb ● 2001 - 2002 revenue increase = 54% ● 2002 YTD financials are taken from exhibit #5 ● 2001 = year #1 for calculation purposes ● 2005 = year #5 for calculation purposes ● EBITDA will increase from approximately 3% to 10% in year #5 ● All numbers are in US Dollars, unless separately noted ● Disregard repatriation of currency & international accounting issues, etc. b. Valuation ● If $350,000 represents (for example) 90% of the company, post-money valuation today must be worth: $350,000 ÷ 90% = $388,889 If post-money valuation is $388,889, pre-money must be worth: $388,889 - $350,000 = $38,889 ● At a 30% return (since this is a low growth company), investment of $350,000 should be worth approx. $1.3 million in 5 years (2005) $350,000 x (1.3)5 = $1,299,526 ● If $350,000 represents 90% of the company, reverse engineered, the value of the entire company 5 years from now must be: $1,299,526 ÷ 90% = $1,443,918 ● Assume that $1,443,918 is only 5x EBITDA, since this is a low growth company. EBITDA in year 5 (2005) must be: $1,443,918 ÷ 5 = $288,784 ● Assume company will have 10% profit margin 3 years from now (2005). Imputed sales must therefore be: $288,784 ÷ 10% = $2,887,840 ● At a current (2002) sales volume of $788,670 (exhibit #5), an increase to $2.8 million in 2005 (3 years later) is an IRR of 54%: $788,670 x (1 + i)3 = $2,887,840 (solve for i to get IRR) i = ≈54% ● Here’s the breakdown based on required rates-of-return: 10% rate of return = 17% IRR (17% required growth EACH year) 20% rate of return = 35% IRR 30% rate of return = 54% IRR (current case) Case Exhibit 1C-2 f. Key Questions: ● Can Sammies do it every year and would you invest? ● Does the return adequately compensate you for the risk? f. Epilogue and Concluding Questions (10 minutes): As of the publishing of this case, Beijing Sammies continues to be successful. Its individual units continue to perform well and increase in profitability. Proving once again that he is a good corporate citizen, Goodman recently issued a proactive email highlighting his company’s solid sanitation practices, in light of the SARS epidemic in 2003. This final point should underscore yet again that business success, especially on an international level, is all about people and communications. In short, it’s not necessarily what you sell, but rather how you deliver it. As a sidebar, it’s also worth mentioning that internal and external relationship management is more of a marathon rather than a sprint! At this point in the discussion the instructor might query students regarding what they perceive to be next steps for Beijing Sammies as it continues to expand. Of particular interest might be: 1. What specific tactics should he use for building the business? How many additional units should he open; on what time frame; and, based on the included Beijing map, in what areas of the city? As the chain grows, how should his evaluation metrics be changed? 2. How should he approach his fund raising for additional financing rounds? What protections can he put into place to ensure he isn’t burned, yet again, by untrustworthy financial partners? Federal Express Case Questions 1. In April 2008 Delta Airlines announced its intention to merge with and absorb Northwest Airlines, formerly known as Northwest Orient. Delta Airlines had already grown through the acquisition of Northeast in 1972 and Western Airlines in 1986. Northwest was also a large airline, having absorbed Republic Airlines, itself a merger of North Central Airlines, Southern, and later Hughes Air west. Republic had an important hub in Memphis, as did Federal Express. The result would be a global airline with hubs in Asia and Europe as well as across the United States. Will an enlarged Delta Airlines be a threat for FedEx? No, because Delta’s core business is carrying passengers, while FedEx has a different niche. In the United States, as is the case in many other countries across the Americas and Eurasia, firms in the transportation business often focus on carrying freight or passengers but not both to the same degree. Delta carries cargo and will continue to do so, but not to the same degree as FedEx, which has dedicated cargo service. 2. How can FedEx maintain the capacity to keep up with China’s growth? FedEx can raise money and buy aircraft, and also lease aircraft or sub-contract to other service providers. Larger airlines with fleets suitable for longer-haul flights have already been sub-contracting short-haul routes to local carriers. Significant cost reductions are achieved in terms of less restrictive rules, and in some cases more specialized aircraft. 3. What risk does FedEx encounter when subcontracting? An airline may assign its own designator code to a flight operated by an independent firm under contract, but it loses some control over the service. Allegheny Airlines (today’s US Airways), based in Washington, DC, pioneered the concept of subcontracting flights to independent firms to which it assigned its own two-letter designator (AL). The airline developed a hub in Pittsburgh and introduced new routes. In June 1978, Allegheny upgraded its fleet to include the Boeing 727, a jet very suitable for new longer routes to Florida and beyond. Simultaneously, Allegheny phased out its Convair 580, a turbo-prop ideal for short hops between Pittsburgh and New York. When deregulation spread to Canada and Europe so did the principle of creating an alliance of subcontractors. In Canada, Air Canada set up a family of Air Canada Connectors, including Air Alliance, Air BC, Air Nova, and Air Ontario, as well as Austin Airways (Canada’s oldest airline established as a family business in 1934). Subcontracting has proven itself over the past 30 years to be an effective means of providing a specialized niche service in the airline industry. It should be noted, however, that subcontracting also has disadvantages, most importantly, a possible loss of quality control. 4. In 2008 crude oil cost more than US$100 per barrel and this was reflected by the price of jet fuel at the pump. Why might this be of concern to FedEx? Jet fuel in 2008 cleared the once unthinkable landmark of US$3 per gallon. Beyond a certain price of fuel, some goods lose competitiveness when transportation is required. Rather than import from China, Australians might import from Thailand because of lower transportation costs affecting the overall price of a product. This could affect FedEx revenues and routes might be updated to reflect market changes. 5. How might a devalued American dollar hurt FedEx? The American market is a world leader creating a large demand for air transport. If American consumers have a low dollar they can afford to buy less from overseas, therefore, reducing the need for cargo service. Fitz-Ritter Wine Estate Teaching Notes Part I - Overview, Objectives and Teaching Background Case Study Overview / Synopsis This case offers the advantage of covering various topics in entrepreneurship and entrepreneurial management. Set in late 2007, the Fitz-Ritter Company, an entrepreneurial wine estate, just went through the process of family succession. The new head, Johann Fitz, has invented new products and has opened new distribution channels. However, he is facing even more major strategic decisions in a complex and evolving market environment, which is characterized by ongoing globalization and a tendency towards liberalization of multinational trade protection. The following topics in entrepreneurial management are covered in this case: • family succession in an entrepreneurial company • strategic decision making • entrepreneurship and innovation / new product development • product portfolio strategy and management • entrepreneurship and marketing / distribution, • entrepreneurial finance • family business • the entrepreneurial firm and theories of internationalization • family business and theories of entrepreneurship Objectives/Major themes The case provides students material to think through several areas of decision making, including the consequences of short, medium and long-term strategy, and encourages students to present different potential scenarios in group discussion. First of all the present case shows the complexity of decision-making in general. The new head of the company is a young family member full of new ideas and the will to improve performance and quality. The constellation of senior owner and his junior son as successor is a typical characteristic of family businesses. In general, the old owner can provide experience and knowledge to the business, but there are also potential threats, like resistance against new methods etc. Students should to discuss pros and con’s regarding innovation and an entrepreneurial mindset. The case mentions some small tensions between father and son, which they sorted out quickly. The case offers the possibility to discuss best practices in the area of entrepreneurial family business succession. The Fitz-Ritter company points out the necessity of an entrepreneurial mindset in a fast changing market, especially for traditional family businesses reinventing themselves to survive. Being ahead of competitors is part of the story of success. The concentration process in Exhibit 2 shows the threat of hostile takeover attempts, particularly by large foreign companies. Another important aspect is the ambiguity of decisions and its impacts. Students should understand the importance of a well thought-out strategy which fits to the company. The reader has to realize that in regional terms Fitz-Ritter is a large company, well known for its classic white wine. In national terms it is still a medium-large size company and among wine gourmets known for excellence, but in global terms Fitz-Ritter is unknown. The resources available are infinitesimal comparatively, so the company needs to take advantage of networks like the VDP. Relating to the ambiguity of decision-making, the owner has to decide whether or not to meet the rigorous requirements of the VDP and, for example, downsize the output to gain better quality, which could lead to a potential higher failure rate. Decisions about planting and the type of vine growing have to meet the resources available (land, temperature etc.) and the requirements of the VDP. But it is also very important to understand that the rules of supply and demand are guiding vintner decisions as well as all other businesses. Moreover the vintner has to anticipate which kind of wine will be en vogue in the next decades. Planting vine takes time and first cash flows can be generated after three years at the earliest. Amortization of all investments takes a lot of time and “quick” changes (i.e. up to 2-3 years) means zero cash flows. Fast changing lifestyle leads to even more uncertainty. Students will use tools to analyze the situation and circumstances presented in the case. The well-known PESTEL framework, Porter’s Five Forces, Competitor Analysis, BCG Matrix, and Ansoff Matrix are some tools the students should use to construct complex/detailed arguments and discussions in class. Some examples of possible outcomes will be presented later on. It is important that students understand how to use them to support their arguments, while extending their horizon regarding management instruments at the same time. Market forces and their impact on company performance when you “swim against the stream” can be seen in the case. The Fitz-Ritter company did not follow the common strategy among the German vintners in the 60s and 70s trying to compete in mass production without having the resources for it. At that time, Fitz-Ritter was even more in a niche market fighting against market forces and decreasing reputation of German wine. Students are encouraged to discuss pros and cons regarding Fitz-Ritter’s export business. Potential use of scenario analysis could help to provide input for intense class discussions. One group may try to find arguments FOR keeping up export business while another group may think about arguments AGAINST the export business. What advantages and disadvantages has the Fitz-Ritter company from continuing export? How could you improve it? Case Questions The following explanations are guidelines for assignment questions to use with this case. As there is no holistic right or wrong in answering case study questions, these guidelines should be used to encourage students to think about specific areas which the authors think are very important for the protagonist in his situation. 1. Do you agree with the owner that there is a fit regarding the company’s strategy and resources? 2. What is Fitz-Ritter’s competitive advantage? How did the company manage to survive in highly competitive wine business? 3. Regarding the company’s strategy, what do you think is the most important thing the new owner has to do? And why? 4. Concerning Fitz-Ritter’s export business, how should the owner reorganize the export business? Does he need a new strategy for it? If he does, what would be your suggestion to the owner? Why would you continue with the export business? And why not? 5. Why is the Association of German Prädikat Wine Estates so important for the company? How do you think Fitz-Ritter could improve its network? If you do not think it is important, why not? Where do you see arguments for and against the partnership? 6. Johann Fitz wants to strengthen the firm’s position in the market and he is thinking about how to grow—do you see any potential areas for growth? How could he use the new Fitz Ecco? 7. Fitz-Ritter’s product portfolio embraces around 40 different products. Where are the strengths and weaknesses in its product portfolio? 8. Imagine you are the new owner. What are the next steps and why? Where do you see areas to improve? Part II – Teaching Plan / Suggested Teaching Strategy Discussions • After starting the class with a thoughtful opening question, which might be placed by a cold call, we recommend to discuss at least one of the eight assignment questions mentioned above. The course might get divided into groups, each group preparing for one assignment question. • It then takes a second step to include the assignments into an integrated strategic plan for Fitz-Ritter’s further development. Students should note that eight single answers on separate questions may remain fruitless when the overall coordination of strategic decisions and operational actions is missing. To develop a view on the enterprise in total, not just on partial segments is a core requirement in entrepreneurial management. • The strategic planning on which the class agrees can then be analyzed for strengths and weaknesses and possible risks and rewards. Some of our classes agreed on a placement in the high end of the upper market segment, but at the same time pointed at the risks this strategy barriers, e.g. when a financial crisis from the U.S. market would affect especially higher incomes. • On the way towards the integrated strategic plan, details of the business process can be discussed, e.g. the role of mezzanine capital in financing the “historical cross vault cow barn,” the way family succession was managed, the role which entrepreneurship education might have played in Johann Fitz’s life, the detailed marketing strategy, a theoretical explanation of the results of the export management, and several other topics. Instruments The case offers the possibility to make use of several instruments dedicated to the strategic planning process, which may help entrepreneurs making better decisions. We give six examples of instruments we use while teaching this case: 1. PESTEL framework for analyzing the macro environment 2. Porter’s Five Forces 3. Internal Analysis 4. Ansoff Matrix 5. Strategic Types of Change 6. SWOT Analysis 1. Example for PESTEL Framework The PESTEL framework is a useful tool to categorize environmental influences into six main types: political, economic, social, technological, environmental, and legal. These factors cannot be seen as independent, so it is very important that students understand that these six influences are linked together. As Johnson et. al. (2005) mentioned “understanding how PESTEL factors might impact on and drive change in general is only starting point.” This starting point helps to categorize and think about Fitz-Ritter’s environment and what influences drive change in its market. Thinking about each single factor leads to another important job for students to do. According to Johnson et. al., the PESTEL framework as such is only a list of factors and influences to the organization. In a second step the user has to identify the key drivers of change, “which are forces likely to affect the structure of an industry, sector, or market.” A PESTEL framework for the Fitz-Ritter company could look like: Political factors - Taxation policy (domestic and foreign policies) - Foreign trade regulations - ….. Economical factors - Disposable income - Inflation - Dollar, Euro (exchange rate dis-/advantages) - Income distribution - Globalization - ….. Socio-cultural factors - Changing lifestyle - Changing consumer preferences/taste - Population demographics - ….. Technological factors - New technologies in viniculture - Internet as marketing and sales channel in global context - ….. Environmental factors - Energy costs and consumption - Changing climate - ….. Legal factors - Protectionism - Changing laws for viniculture methods - ….. When examining possible external influencing factors, it is important to bear in mind the two key questions as guidance for this framework and the identification of key drivers of change: “What environmental factors are affecting the organization?” AND “Which of these are the most important at the present time? And in the next few years to come?” 2. Example of Porter’s Five Forces Porter’s Five Forces framework is a tool to identify the sources of competition in an industry or sector . Students should bear in mind the following guiding points from Johnson et. al.: • The Five Forces framework must be used at a level of strategic business units and not at the level of the whole organization. In case of Fitz-Ritter this can be disregarded because of size of the company and the fact that it is not operating simultaneously in several different areas. • It is essential to understand the connections and key drivers in the macro-environment. • Very important to understand is the fact that the Five Forces are not independent of each other. As Johnson et. al. point out, pressure from one direction can trigger changes in another area in a dynamic process of shifting sources of competition. For example, higher prices of suppliers of empty bottles would lead to higher prices for wine, which would then lead to higher pressure of buyers who are sensitive to prices. • One major point of critics is that the Five Forces framework is not dynamic and it only pictures a certain point of time, but by comparing different images this lack of dynamics can be resolved. Some arguments in the Five Forces scheme: Bargaining Power of Suppliers (LOW) Almost every task within the value chain will be fulfilled by the family and company members themselves. A current “bottleneck” is the supply of bottles. The shortage yet has not affected prices, but delivery time; the supply of bottles got more inflexible and needs better planning. Bargaining Power of Buyers (HIGH) There are almost zero switching costs for customers to buy other products, which makes it easier for them to put pressure on prices. The high number of other premium producers is enormous. Threat of Entry/ Barriers of Entry (LOW-MEDIUM) For direct competitors of Fitz-Ritter and especially German competitors, it is very difficult to buy additional premium acreage so that the costs of entry are almost prohibitively high. Exhibit 2 from the case shows the declining number of companies. It seems highly unlikely that new competitors will join the premium market. It is rather more likely that competitors will be taken over by existing large domestic or foreign companies. Threat of Substitutes (MEDIUM-HIGH) Direct substitutes of high premium wine are other quality liquors and new trend liquors like mixed drinks or other fashionable and lifestyle drinks. Wine lovers still enjoy only wine, but young customers especially may change their drinking habits more frequently. Competitive rivalry (MEDIUM) Within the German market most premium companies are networking cooperatively. Therefore, it seems that major competitive threats stem from outside of Germany, especially from large overseas companies or Australian competitors. 3. Internal Analysis 4. Example of Ansoff Matrix According to Ansoff’s matrix for strategy development directions, the Fitz-Ritter company can be located as shown above, using new products like the FitzSecco to gain new customers. Another option is strategic market development for its high class, premium wine, especially white wine like riesling or gewuerztaminer, in new markets like the United States. A major argument against more extended diversification and market development is the limited growth potential. The Fitz-Ritter company can grow in terms of size and acreage only with an enormous monetary effort, like Johann Fitz comments in the text. For each of the strategy development directions presented by Ansoff, there are arguments for and against. Students should discuss each option and flesh out their solutions with well thought-out arguments. 5. Types of Strategic Change Thinking about Fitz-Ritter’s strategy and a potential change in strategic direction students can make use of Balogun and Hope Hailey’s four types of strategic change, which was adapted from Johnson and Scholes (cf. the figure above). Four potential types of strategic changes are possible. Balogun and Hope Hailey distinguish between Adaptation, Evolution, Reconstruction, and Revolution. Strategic change in terms of the nature of change is divided into Incremental change and the so called Big Bang. Regarding the scope of change, the authors distinguish between two forms: Realignment and Transformation. In case of Fitz-Ritter, it is more likely that the company will strive for a change in its strategy through adaptation, which “can be accommodated within the current paradigm and occur incrementally.” Due to the fact that the company is still successful and new projects have been started, it is not likely that the company will change its strategy dramatically, but students should think about each type of strategic change. On the one hand, it helps to broaden students’ horizon, and, on the other hand, within fast changing markets and ongoing liberalization in the European Union, Johann Fitz might have to change his strategy more substantially due to increasing pressure exerted by foreign competitors within the next years. Thinking about different routes for strategic change is also very helpful in terms of scenario analysis. The case provides a very good example of a company which has to adjust its strategy in face of ongoing change in its market environment. S.W.O.T POSITIVE NEGATIVE INTERNAL Strengths: • Innovation capability • Strong reputation for premium wine, which can bring a premium price • Traditional knowledge • New products • New projects • …. Weaknesses: • High costs of production, due to handcraft work • Dependent on weather conditions • …. EXTERNAL Opportunities : • New high growth export markets, e.g. Russia, China etc. • …. Threats: • High dollar price • …. 6. Example for SWOT Analysis S.W.O.T POSITIVE NEGATIVE INTERNAL Strengths: • Innovation capability • Strong reputation for premium wine, which can bring a premium price • Traditional knowledge • New products • New projects • …. Weaknesses: • High costs of production, due to handcraft work • Dependent on weather conditions • …. EXTERNAL Opportunities : • New high growth export markets, e.g. Russia, China etc. • …. Threats: • High dollar price • …. A Note on Entrepreneurial Finance / Start-up/SME-Finance in Germany Governmental action has its role in entrepreneurial finance in Germany and most parts of Europe. Since in Germany the market for private seed financing (e.g. early stage venture capital, Angle Investors, and FFF-Finance) remains underdeveloped, the government-owned bank “KfW” (Kreditanstalt fuer Wiederaufbau, www.kfw.de) decided to step in, in order to overcome market failures. One aim is to provide small- and medium-sized businesses, mainly start-ups, with mezzanine capital and bank loans, which entrepreneurs in Germany find difficult to obtain from the private banking sector. The basic procedure is as follows: 1. Entrepreneurs will need to invest at least 15% equity of the total investment costs. 2. KfW then is willing to step in with up to 25% mezzanine capital, the so called “Unternehmerkapital,” i.e. a long term loan running for 20 years with low interest rates (no interest in the first year and a low interest scale from zero to five percent during the first five years), no amortizations in the first seven years, no bank security needed, and a subsequent ranking. The loan is given to the entrepreneur personally, so it can be devoted into the incorporation by the entrepreneur himself, and therefore can be booked as equity in the balance sheet. Thus, equity and mezzanine capital will sum up to 40% of the total investment. 3. The missing 60% of the investment are provided by a special start-up/SME loan, which comes with an interest rate calculated on the basis of individual risk and no amortization during the first two years after investment. Investments can take their time to establish itself in the market and achieve first earnings ahead of debt service. 4. German government is not meant to interfere in free market forces, but only to heal market failures in financing start-ups. Therefore, applications for KfW Start-up/SME finance have to be placed via a private sector bank (the so-called entrepreneur’s “Haus bank”), following the “Hausbankprinzip” (i.e. the principle of having always a private sector bank making the market decision whether to finance a start-up or not). The private sector bank will test the soundness of the business idea according to their principles of analyzing investments. If the bank agrees with the business plan, it will pass on the application to the KfW, who will not finance the start-up/SME directly, but will re-finance the private sector bank. In refinancing, KfW will cover up to 80% of the risk of loan default. The private sector bank must pass the loans on to the entrepreneur according to the conditions promised by the KfW. The KfW refinancing offers some margins for the private sector bank and a share in a 4% disagio. We included this example of entrepreneurial finance for some reasons: 1. It is a very typical way of financing entrepreneurial ventures and SMEs in Germany and Austria. 2. Many European countries have similar procedures, since the money used in those programs often origins from the decades-old “European Recovery Program.” 3. In many cases, KfW’s Start-up/SME financing is open to foreign investors starting up companies in Germany. So it might be of interest to some international users of this textbook. 4. In class, the basic concept of “mezzanine capital” and its role in entrepreneurial finance can be explored by this example. 5. On the example of Hausbankprinzip, the class can discuss how public support can be kept in line with the rules of free market forces (at least to a great extant). 6. KfW provides English information on their web page: www.kfw-mittelstandsbank.de Closing Comments The Case has shown some difficulties the new owner has to face in his early days at the top of a traditional family business. Being relatively large in local terms but small in global terms is the biggest challenge for the company in a fast changing and highly competitive global market. Important strategic problems need to be solved and decisions on the international business have to be made. Students are about to step in the shoes of Johann Fitz and think about the future of the company. All strategic management tools presented above are useful to support strategic thinking. As a special addition to this Case, the entrepreneur Johann Fitz has created a special webpage on the Fitz-Ritter website where students can discuss the case. Students and instructors will also have the chance to get in touch with Johann Fitz himself. To learn more please visit www.case.fitz-ritter.com. Instructors can also contact the authors of this case via email. Send your questions and comments to [email protected]. One Page of Information for a Syllabus (Example given for a Class in Entrepreneurial Marketing) International Marketing & the Entrepreneurial Family Business Case Pre-Preparation: Make yourself familiar with the “Uppsala-School” of internationalization, introduced by J. Johanson & J. E. Vahlne resp. J. Johanson & F. Wiedersheim-Paul. See any good text book on international management, or look for the primarily sources as given: • Johanson, J. / Vahlne, J.-E. (1977): The Internationalization Process of the Firm: A Model of Knowledge Development and Increasing Foreign Market Commitments. In: JIBS (Journal of International Business Studies), Vol. 8, No. 1, pp. 23-32. • Johanson, J. / Vahlne, J.-E. (1990): The Mechanism of Internationalization. In: International Marketing Review, Vol. 7, No. 4, pp 11-24; • Johanson, J. / F. Wiedersheim-Paul, F. (1975): The Internationalization of the Firm: Four Swedish Cases. In: Journal of International Management Studies, Vol. 12, No. 3, pp. 305-322. Case: Fitz-Ritter Wine Estate: 220 Years of Tradition and Entrepreneurship (by L. T. Koch / S. P. Sassmannshausen & M. Biele, in: Robert D. Hisrich (Editor): Explaining Internationalization Strategy in Family Businesses: Text and Cases. New York etc.: McGraw-Hill) The Fitz-Ritter Wine Estate was founded in 1785. In 1837, the estate was supplemented by a champagne production. Today, the young owner Johann Fitz is managing director of both companies in the 9th generation of traditional family business. German wine producers have been facing global challenges for several years. This case shows how an entrepreneurial spirit in generations of successors contributes to the survival of a firm. It also shows how a medium sized business can cope with global challenges if it commits itself to international entrepreneurship. In this complex situation, Johann Fitz has to take decisions concerning strategic positioning, customer relations, distribution channels, new business segments, investments, and the international business. Assignment questions: 1. The theories of “Uppsala School” came into existence more than 30 years ago. Can they still help the owner manager to understand and improve his business? 2. What do you think is Fitz-Ritter’s competitive advantages and disadvantages? How did the company manage to survive in highly competitive wine business? 3. Concerning Fitz-Ritter’s export business, how should the owner reorganize the export business? Does he need a new strategy for it? If he does, what would be your suggestion to the owner? Why would you continue with the export business? And if you would not do so, why not? 4. Why is the “Association of German Prädikat Wine Estates” so important for the company? How do you think Fitz-Ritter could improve its network? If you think it is not important, why not? Where do you see arguments FOR and AGAINST the partnership? 5. Johann Fitz wants to strengthen the firm’s position in the market and he is thinking about how to grow – do you see any potential areas for growth? 6. Fitz-Ritter’s product portfolio embraces around 40 different products, where are the strengths and weaknesses in its product portfolio? 7. Imagine you are the new owner, what would be your next step and why? Solution Manual for International Entrepreneurship: Starting, Developing, and Managing a Global Venture Robert D. (Dale) Hisrich 9781452217390, 9781483344393