White Label Restaurants Microworld User Guide

Transcription

1 Published by Strategy Dynamics Limited Two Farthings, Aylesbury Road, Princes Risborough, Buckinghamshire. HP27 0JS, UK T: +44 (0)

2 Page 2 Background White Label Restaurants is based on a wholly owned business in the retail services portfolio of Whitbread PLC, which operates a range of restaurant, hotel and other consumer service businesses. Each business in this portfolio has confronted issues raised in this microworld issues shared with a wide range of well-known retail chains, from Starbucks to Walmart to 7- Eleven. The [optional] case series covers the history of the business from its modest beginnings to its dominant position by the early 1990s, as possibly the most successful restaurant business in Europe. The Microworld This Microworld simulation reflects some of the strategic issues faced by the restaurant chain and other businesses in Whitbread s retail portfolio. The challenge is to build a strong business and deliver good financial returns throughout its strategic development, from early testing, through rapid growth, and on to maturity. You can explore these challenges either with or without the additional problems caused by the presence of a competitor. You can also choose the timing and strength of this competitive threat. How would you cope with the pressures of growing such a business over many years? Can you put together robust policies to serve the market, develop the business, and still meet investors needs so they give you the capital you need to grow the business? The Microworld lets you devise your own strategy, set your own objectives and make strategic decisions to try to achieve them. Many management games confront students or managers with competitive pressures, but few address the conflict between serving both customers and investors - in this case Corporate management who decide what limits on capital to set and what profit target to apply. This conflict alone is quite complex, so the Microworld offers you the option to deal with this alone, before having to tackle the additional issues arising from competition. In the first option, all you have to do is take that market, but meet Corporate expectations in the process. With no competitors to worry about, you will feel what it is like to have your strategic destiny entirely in your own hands. In the second option, you compete against a rival with a similar business model to your own. You are in a race with them, to develop a large number of outlets quickly, so as to deliver strong earnings growth. If they take these opportunities first, you are left only with less attractive locations with fewer of the types of customer who like what you offer. You also have the option to try this challenge against a competitor whose rate of development varies, and who enters the market before you, after you, or at the same time. As you take the role of the management team, you can reflect on the dynamics of the complex system in which you are caught up, and consider how the fundamental structure of this system explains its behaviour. You can also consider how your performance improves, as you learn

3 Page 3 about the dynamics of the system through repeated experimentation. To run the simulator, you make quarterly decisions on pricing, staffing, marketing, maintenance, new product development and capital spending. Comprehensive help and information systems are available, with current and historical data on operational and financial performance presented as reports, graphs and tables. Games may be saved for later review, or for exploring alternative strategic options for moving forward from a defined position. Several such games have already been created and installed with the simulation. These offer you a variety of different challenges to try out - both with and without a competitor. Overview The management challenge The Restaurants chain this case is based on grew through the 1980s to dominate its market, eliminating established rivals in the process and becoming the most profitable restaurant brand in Europe. To achieve this, management created a strong reputation with customers and a widespread presence in the market-place. At the same time as serving the demands of the market-place, the management team had to meet the needs of their corporate masters to win the capital required to grow the business. The Microworld presents you with these same conflicting pressures. There are three management levels to consider - Corporate HQ (your bosses), the restaurant business itself (i.e. you!), and the individual restaurants that make up the chain. Serving the market Building a sustainable business in any market requires you to satisfy customer expectations at a price they are prepared to pay. If you succeed in this, you enjoy rising revenues and may be able to invest in growing the business. Here the customer is the ordinary consumer who wants to go out for a meal. The kind of meal involved is roughly mid-market, neither cheap refuelling, such as a take-away, nor a special, formal meal. There is a large but unknown market for this kind of service, so although you start with 10 restaurants, the potential exists for many times that number. If customers enjoy meals in your restaurants, they return and encourage others to try them too. But this only happens if you offer four qualities. Service should be good. You control service levels by setting the fraction of sales on labour. The higher the budget fraction, the more staff each restaurant can employ to serve customers. If customer numbers or meal numbers or prices are higher, then your fraction implies a bigger budget and hence more staff. If you choose to spend a higher fraction of sales on service, the change happens quickly - staff don t take long to find, and are happy to work longer hours so that training time is not a problem. (In reality, of course, training staff to deliver good service is critical and takes time and money) The restaurant environment should be attractive. Your restaurants start in a reasonable condition, but as time passes, they deteriorate - carpets wear out, wall-paper fades, tables and

4 Page 4 table-wear get spoiled. The more customers you serve, the more quickly this happens. You can protect the restaurant quality, or even raise it above its initial level, by spending money on repairs and replacements, controlled by the fraction of sales on maintenance. If you decide to spend more on maintenance, the extra money you spend quickly has an effect on the actual standard of restaurants, though it may take some time for customers generally to become aware of the improvement. The worse the state of the restaurants, the more you will have to spend to fix them, and the longer it will take to get back to a decent standard. Crowding will put customers off. They may have to wait for a seat, or be too closely packed together at tables. Nor, though, should restaurants be too quiet - likely customers will be put off if there are few other people there. There is no decision you can set to determine how crowded your restaurants are - it depends on your success in attracting customers. The menu itself must be appealing. You start with a simple menu that is acceptable, but as time goes by, customers get bored with the products, their expectations rise, and what started out as an acceptable meal becomes uninteresting. You improve the menu by investing in new product development (Menu Spend per annum). This costs money from your business s central budget, but will benefit all restaurants. Improving the menu has a further benefit. A limited product range only satisfies a limited set of consumers (e.g year-old couples) for limited periods of the trading week (mostly Friday/Saturday evenings). A wider menu serves the needs of new groups of consumers (e.g. families and older couples), who are available at different times of the week (e.g. Sundays and mid-week lunch-time). This reduces the average level of restaurant crowding for any given level of weekly meal sales. Extra money spent on product development improves the menu quite slowly, since it takes time for the research kitchens to come up with products that are operationally practical as well as appealing to consumers. Improvements to the menu do not increase the cost of ingredients, since part of the research effort is aimed at achieving better products using ingredients that are no more expensive. Balancing customers needs. Customers weigh up these considerations when deciding whether to visit your restaurants or not. Unfortunately, you don t know how they balance each issue to arrive at an overall perception of quality. You do know, though, that if any one quality issue is poor, it will outweigh other good points. Any change to these individual qualities takes time to be noticed. If consumers are used to poor service and suddenly have a good experience, they won t immediately trust that service standards will always be better. They will only learn this next time they visit, and it may take some while before they and their friends all have a higher opinion of your restaurants, your service or your quality. Meal price. Customers are not driven only by their perception of quality -

5 Page 5 they compare that quality against the price you are charging. If you set a price they think is too high for the mix of meal, service, environment and crowding you offer, they will feel you provide poor value for money. Even if your quality and service does justify a higher price, consumers spend less frequently on more expensive meals, so you will sell fewer meals at higher prices (everything else being equal). You set a target meal price, which will take a time to reach, since you have to reprint menus, change promotional offers, and make other operational changes. Market development and marketing Marketing can always win some more customers. How many customers you win depends on your current reputation for providing value-for-money, which of course also determines whether they return to the restaurants after they respond to a marketing promotion. You decide on the fraction of sales on marketing, which covers all advertising, local promotions and discounts. Since this tends to be a rather local market, this spend is set on a per-restaurant basis, so there are no real benefits from central, chain-wide advertising. Market saturation. As long as you operate only a small number of restaurants, each new one serves a totally new group of consumers. However, as you open more restaurants, you reach a larger fraction of the market. As the chain gets large, new restaurants tend to be built in less attractive trading locations. They also encroach on the trade of existing sites, so customer numbers per restaurant fall. Unfortunately, though these effects are known, they are extremely difficult to quantify. Margins, costs and profitability Restaurant profit (Note - Restaurant managers focus on short-term issues, so receive reports on weekly performance) The target price you set is for a typical standard meal - a simple starter, a mid-range main course, dessert and coffee. You also receive revenue on drink sales, in proportion to food sales. The gross profit margin on drink is 40%. Restaurant costs are subtracted from the gross margin made on food and drink to arrive at profit per restaurant. Your decisions on labour, maintenance and marketing cost fractions are turned into spent per week per restaurant. To these costs are added fixed restaurant costs, such as manager s salary and local taxes. This information reflects the kind of financial information your restaurant managers use to control the business, so your chosen spending levels are implemented by the managers, who try to cope within the limits you set. suppliers. Also, since the major investment is in real-estate, depreciation charges are modest in relation to profits. (These items are clearly not zero in reality, but for present purposes, they can be ignored). Capital employed consists of the total capital currently invested in restaurants. These initially cost 500,000 per site, but the cost rises as the business grows, reflecting the scarcity of good sites. If you have to close sites (as you will if return on capital is poor) you only receive 80% of the cost of acquiring new ones.

6 Page 6 Note: it is possible, in reality as well as in this simulation, to achieve extremely high returns on capital for a few individual restaurants. It is common, for example, that a site costing 0.5m will achieve annual profits of 0.25m or more BUT, there is some luck involved in finding such good site- opportunities, few of them exist, and such high returns are very difficult to sustain. Profit returns and shareholder-value (Note - The management team focuses on longer-term issues, so at any point in time they receive reports on the annual rate of profit for the business) Information is given on various measures of profitability and business value. Restaurant profit divided by revenue gives return on sales at the restaurant level (i.e., for every made, how much is left after food costs, labour and other restaurant costs are deducted). Company profit divided by revenue gives return on sales at the company level, i.e. after central costs. Restaurant profit divided by the total capital employed in the business measures the return on capital employed (ROCE). You also have information on shareholder value - an indication of the total value that the business might attract if it were an independent company with traded shares. This works as follows (though note that without debt or tax effects, this is only a simplified representation). A notional charge is deducted from recent profits for the cost of capital. Current capital spend is subtracted to estimate net cash-flow after capital charge. A trend of this adjusted cash flow is estimated over recent quarters results - if cash flow is growing, shareholders assume it will continue to do so for a while (about three years). From four years ahead, your cash flows are assumed to stabilise at year 3 levels, as illustrated below. These forecast cash-flows are discounted to today s value at a rate reflecting the business risk. The resulting share-holder value responds, as might be imagined, rather sensitively to changes in the earnings growth you achieve.

7 Page 7 The following example illustrates the idea (without going into the detail of discount rates and periods). 000 Capital employed 8,000 Current Company profit 1,700 less - Notional capital charge 800 Profit after capital charge 900 less - Current capital expenditure 500 Net cash flow after capital charge (assume strong growth ) 400 Forecast net cash flow after capital charge year year 2 1,100 year 3 1,450 year 4 onwards 1,450 Discounted sum of these forecast cash flows to today s price = shareholder value 12,800 If profits grow rapidly to, say, 20m p.a., shareholders might view the business as worth 200m (i.e. 10 times earnings) or even more. If the business then stops growing, but still produces 20m p.a., its value might be only 6 times earnings. If earnings then drop to 15m p.a., shareholders with no other information may value the business at perhaps only 4 times these reduced earnings. Targets and capital Corporate headquarters (HQ) expect you to improve profits over time, and give you capital to expand. Their view of the company s underlying profitability responds to your current performance - as profits rise, they expect you to keep up the growth. This means that if your profit grows rapidly, the profit targets they set will rise sharply too. Unfortunately, HQ are not so quick to relax those targets if profits fall. Unlike shareholders, they don t just forecast earnings, but exert pressure for profitability to continue as it was before. Consequently, targets don t decline as fast as they grow. If you exceed corporate profit targets, your team may receive a performance bonus - but if you fall short of target, you may be warned to do better. The more you fall short of target, the more impatient HQ become with your performance, although if you correct the shortfall in later quarters, HQ gradually forgive your past shortcomings. If you can t correct the problem, the

8 Page 8 warnings become more serious until, after considerable shortfalls, your team will be dismissed. You can ask for capital from HQ to spend on more sites, and will be given that capital up to a limit. That limit depends both on the average restaurant s return on capital employed (ROCE) and the size of the business. If ROCE is poor, HQ have better things to do with their money, and only a little capital will be granted. If ROCE is good, the business will appear to offer a good use of capital, and the limit will increase. If you happen to grow profits quickly, corporate goodwill increases and further capital will be granted. Even with excellent ROCE, HQ are not going to commit especially large sums of capital to a small business, so the larger the chain size, the higher the capital limit will be for any level of ROCE. There will always be poor-performing sites in your business, so a fraction of restaurants is closed each period to help fund growth. If ROCE is poor, you are required to sell a larger fraction of your existing restaurants. (This happens without any decision on your part - HQ effectively demand that you release some capital from closures). For these disposals, you only receive 80% of the cost of a new restaurant, which is added to the cash you can spend on new sites. To make life manageable in this exercise, you face stable market conditions - no seasonality, no consumer cycles, no shocks - so your success is entirely in your own hands. Be careful not to make any assumptions about what might be going on - the following is a pretty safe rule: If it isn t mentioned in the Guide, it isn t in the model

9 Page 9 Tutorial This tutorial is designed to introduce you to the main elements of the simulation interface and how to get information about your performance. The Tutorial starts at a point where you have entered the game with no rivals. Having opened the simulation, click continue on the introduction and competitor screens without selecting any different options. Before you start trying to manage the business for yourself, it might be useful to see how well it is running as you take over. The Summary Report is a useful place to start - select Reports, Summary. This is mostly blank until you see it run for a period - click Run and the business moves forward 1 quarter. Year 1 Quarter 1 - basic information At the top of the report, you will see that the restaurants you have are generating revenues at the rate of 7.6m p.a., and contributing profits at the rate of 1.6m p.a. After deducting Company overhead costs, the business is earning profits at the rate of 0.5m p.a. (Note - since we are continually taking a strategic, dynamic view of the business as it develops, these numbers are always reported as annual rates of profit, not actual profits for the quarter. Restaurant managers are expected to give more attention to short-term performance, compared with the strategic view of the Company management, so their restaurant sales, costs and profits performance is always reported as weekly rate). Looking further down the report, you see that your first 10 sites have been a good investment, generating a return on capital of just over 30%. The return on sales is also reasonable - at 7.5 % after company costs. Looking across to the Decisions box, you see that the company is allowing managers to spend 15% of sales revenue on labour, enough to employ 14 staff per restaurant. The other spending numbers in the Summary also correspond to the decisions currently being taken.

10 Page 10 You now have 11 restaurants serving on average 920 meals each week, and market-wide customer surveys indicate that, overall, people are giving you 71% for value for money. This isn t great and has dropped from 73% in the previous quarter. You need to keep an eye on the customer response forms! However you think that the profit figures are Ok and decide to run for one more quarter before making any major changes. Click Run again to advance to year 1 quarter 2 Year 1 Quarter 2 - look into more detail The return on capital per restaurant has fallen slightly although the return on sales after company costs has picked up a bit. Other figures have improved, including perceived value for money. Selecting Reports, Business Size and Trends, you see that you are now operating 11.9 restaurants (the fraction of a restaurant simply implies that one or more have been operating for less than a whole quarter!). You are opening restaurants at the rate of one per quarter, which reflects the 0.5m per quarter that you are requesting from headquarters (HQ) - see the Decisions box. However despite the positive signs, the number of meals being served per restaurant is falling. HQ also expects you to close restaurants that are not performing well - a fraction of them will always be relatively unprofitable, though at present this is a very small problem. You receive 80% of the resale value to re-invest and this is added to the capital you request. You feel that HQ should be pleased with your financial performance, but you anticipate that keeping customers happy will also be important, so select Reports, Quality and service. This tells you what is being spent by the average restaurant on certain items - even marketing expenditure is allocated to restaurants profit calculations, since most of this money goes on local promotions, rather than national advertising. Below the data on restaurant spending appears some detailed information from customer surveys. Customers pay attention to several items, and though they may be happy enough on each item, their reported view of overall quality will tend to be most affected by the items they feel least happy about. If more than one item annoys them, their overall feelings will be severely damaged. Currently, your customers in the restaurants are reasonably happy with service levels (rating = 0.95), and with the environment. The menu is felt to be good and your customers are not unhappy at the crowding levels, both of these rating 1.0. In the wider market, the price of per meal, compared with customers word of mouth about quality, has produced a rating of 74% for perceived value for money. However something is adrift. Having noticed that the number of meals per restaurant is falling: maybe the restaurants are getting a little too quiet and some investment in the menu would be a better idea than reducing meal price. In the Decisions box, change the Menu spend to 500. Increase the maintenance spend to 5% and the Labour budget to 16%. What effects do you expect this to have on your results for the next quarter? Click Run once more to progress to Year 1 Quarter 3.

11 Page 11 Well, since you were spending more the memo from HQ informing you that profit was lower than target should not be too much of a surprise. ( You can either close this message or move it out of the way. Note that if you can turn the memos on and off by going to Windows, switch on/off bonuses or warnings.) What else has happened though? Notice that the value for money indicator has improved - maybe this strategy just takes a bit more time. Click Run again and see what happens. Year 1 Quarter 4 - looking at trends. You receive warnings when your profit targets are not achieved and bonuses when you exceed the profit targets that HQ set for you. In setting your targets, HQ take into account three items - achieving a good absolute profit rate, the historic rate of profit you have actually delivered, and some expected growth. You might like to think about how their expectations are changing through time, so select Graphs, Targets and Capital, Company Profit vs. Target. The reason for the profit warnings is self-evident - your profit performance is well behind that expected but you have narrowed the gap somewhat this quarter. Perhaps you can drive more profit growth with some modest expansion. Change Capital requested from HQ 000 to 1,000 - you are asking HQ to invest 1m this quarter in new restaurants. Click Run. You receive a message telling you that this request is more than the 760,000 that HQ are prepared to invest. This is still a small business, and needs to prove its potential. As you grow, and improve your performance, HQ will give you more capital. Change Capital requested from HQ 000 to 760, and click Run once more. Year 2, quarter 1 - under control? Profits have jumped near to target this quarter, but be careful: HQ expectations will need to be monitored: your improved performance over the last two quarters has also lead to a higher target. Checking the Quality and service report you notice that satisfaction with service is high and overall quality is good but that value for money, whilst improving is still not very high. Perhaps it would be sensible to put more into menu development as well as trying to grow. Check out the Report for Targets and capital and note that the maximum capital allocation for the next quarter now 1,035,000. Is it a good idea to use all of this and increase menu spend to ? Well, unlike real life we can try it out but before you do so take a moment to write down what you think the effect of this will be on your profit, the meals served per restaurant and the various quality indicators. Enter these changed decisions and click run. Were you right? Perhaps you are on the right track and could risk running for a longer period with these decisions. Select Simulation, Timestep, 4 quarters, and click Run, to move forward for a whole year with the same policies. Again, take a moment to think about the effect on your results. Well, the business appears to be generating excellent results. With things going so well, you don t want to lose the details of your glittering managerial career for your CV so Remember to save your game - select File, Save often! (short cut is control + s). Click Run once more to run forward another year. Look at the other reports graphs and tables

12 Page 12 that are available - there is a lot of information available and you will need to decide how to use it. At this stage, having just saved the game why not run an experiment and run through to the end of the 10 year period with your existing decisions. You would like to see the trend for your bonuses, to see what sort of life style you might be able to afford with these rather excellent results. Open the table for Targets capital and performance and double click on the management bonuses column. This produces a time-chart of your bonuses - a trick that works for any table-variable. Well from this graph you can see that running the business blindly would have led for a very uncomfortable time with this company - and opening other graphs you quickly see that its not just your bonuses that suffered - you are lucky to have a job still. On the Capital and targets table find the fifth column - Danger of being fired and check out the graph. This Tutorial has shown you most of the basic facilities of the simulation. Useful additional points to note are: If you make a mistake in entering decisions, select Simulation, Go back. This undoes your last set of decisions for whatever period you selected under Simulation, Timestep - i. e. you go back 4 quarters if this timestep is set at 4 quarters. Trying alternative strategies. Save the simulation at an interesting point, then see what happens if you try one set of policies from that point forward. When you have learned about that strategy, re-open the game that you saved at the point of interest, and try a second or third set of policies. Creating management challenges of your own, perhaps to give to other people. Again, manage the business into an interesting situation, and save it at that point. Add some notes in the comments area of the File Save window to describe the challenge you have created. Introducing competition On starting or restarting the simulation, you can choose to run the business in competition with a serious rival. In the opening screen, you can choose to switch on such a rival. You can choose the competitor to be already in operation as you start, or else to start up at some point in the future. If they are running as you start, you can choose how many restaurants they already operate - e.g. if you set them to start with 100 restaurants, they already have a large and profitable business, and more importantly, there will be fewer good sites remaining for you. If they start in the future, they will begin with 10 restaurants, then start to grow. In either case, you can decide how aggressively they growth. For example, the following screen shot shows us competing against a rival who starts with 50 restaurants, and is fully aggressive at opening new sites.

13 Page 13 White Label Microworld... How To :...make decisions and control the run: Use the decision box to enter your decisions for the game variables. To run the game for a preset time period, interrupt or stop the game: use the tool bar RUN and STOP buttons or items from the Simulation menu. To change the time period over which the game will run after each set of decisions: use Menus - Simulation - Time Step... To go back to the previous decision or re-start the game: use the Restart button or Menu - Simulation......get feedback on your performance: reports, graphs and tables recording your progress are available from Menus - Reports... / Graphs... / Table......save and retrieve your results on disk: saving and opening of games is available from the File Menu. open saved games or challenges : File - Open Game or File - Open Challenge....keep a note of progress:...print results:...get help: use the Game Notepad (View..) to make notes as you progress. These notes are transferred to the end of game summary and also to the Comments that are saved with games. You may edit them at either stage. the table of User Decisions keeps a note of all the decisions you have made through the game. use the Edit menu... to copy the active report, graph or table to clipboard prior to pasting into another application. use Alt + Print screen to get a copy of the whole screen to the clipboard. help on using the simulation is in this helpfile - the topics in this summary are covered in more depth elsewhere in the help. help on game variables can be accessed from the reports etc: where you see a hand icon holding the left mousebutton down will reveal some information on the item....rearrange the desktop: various options to rearrange the desktop are under the Windows menu

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