Tao Heung Case Study Analysis

Tao Heung Case Study outlineABSTRACTTao Heung is a listed high society focusing on Chinese eating ho physical exercise furrow in Hong Kong and Guangdong. By utilizing Porters five forces model, Chinese eating house industry is place to be intensively militant. Nevertheless, Tao Heung salve recorded slight growth by 2009 through victoryful cost control measures and operational skill. The company has strengths of strong financial determine, cost efficiency, and good trade and management capabilities, and weaknesses of imbalanced market presence, telephone circuit portfolio, and outstanding social organization. The business environment submits it raw(a) opportunities for developing parvenue markets and businesses because of improving living standard and purchasing power. major(ip) threats overwhelm severe inflation leading to soaring cost related to grok, rent, and sustenance ingredients. TOWS matrix is a technique to formulate potential strategical alternatives c oordinated internal factors to outer opportunities and threats. In corporate level, Tao Heung is adumbrateed 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 CONTENTS1. INTRODUCTIONTao Heung is a catering company, focusing on operating Chinese eaterys and chiefly operating in Hong Kong and chinaw be 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 behaviors of eaterys, 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 nearly known for its superior solid nutrients and quality services at relatively low costs, and innovative trade campaign, such as One horse Chicken, at the minds of Hong Kong consumers. One Do llar 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 eating houses of Tao Heung. The campaign effectively enacted the companys Value for silver 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 refreshingfangled management techniques in running this traditional business. The objectives of Tao Heung are to become one of the to the highest degree esteemed and premier Chinese restaurant meetings 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 finish its strategic o bjectives with the balance of all s hold inholders interest. Mr. Chung Wai Ping, who is one of the founders of Tao Heung, owns 36.7% of grants in Tao Heung and must be the key stakeholder. However, share owners of a firm are non 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 extend toment 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 METHODOLOGYStrategy is defined as a firms theory about(predicate) 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).MissionObjectiveExternal AnalysisInternal AnalysisStrategic ChoiceStrategy ImplementationFigure 1 Strategic Management ProcessThis article aims to critically evaluate the strategic position and heraldic bearing of Tao Heung. Johnson and Scholes (2007 16) point out that understanding the strategic position is concerned with impact on strategy of remote environment, internal resources and competencies, and the expectations and influences of stakeholders. Therefore, this article willing present external environmental compen dium 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 policy-making, sparing, 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 a dvantage 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 peculiar(prenominal) 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 put forward be generated. A TOWS Matrix is produced to army how the external opportunities and threats facing a item 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 general purpose and s contest 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 peculiar(a) 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 one-year reports, Internet, government statistics, academic journals, CEO interviews, magazines and newspapers will be collected for conducting analysis.3. ANALYSESFour analyses will be presented here Industry analysis, Macro-environment analysis, Internal analysis, and SWOT analysis.3.1 INDUSTRY digestAccording 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 entrantsNew 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 introduction barrier to the industry is high, the threat of new entrants is lower. The relatively high capital requirements and change posture 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 caf was HK$1,275,500. The scale of a Chinese restaurant is 10 to 20 times greater than a caf, 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 sc ale also attend to establish barriers to entry. Therefore, the major rivals of Tao Heung are big Chinese restaurant groups such as Maxims and Star Seafood. Companies with bound capital have been not easy to start up a new Chinese restaurant in Hong Kong recently.Rivalry among existing firmsHong 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 slim 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 trillion, 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 cos ts. mixture of rivals and differentiation are low. These factors contribute to fierce competition within this industry.Threat of substituteThere are many substitute wares that can satisfy the like 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 buyersThe 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 o rder to erode the bargaining power of buyers.Bargaining power of suppliersThe 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 ANALYSISPESTEL framework is employed for analyzing macro-environmentPolitical factorsThe 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 primarily 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 factorsFinancial tsunami in 2008 created a actually 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 approach 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 factorsLiving 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 bring down 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 factorAdvanced information body engineering 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 factorChinese 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 factorThe 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 ANALYSISInternal 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 HeungStrong financial positionTao Heung has very low debt ratio (about 1%). T he 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 stand-in Tao Heung to grow naturally or grow by merger and acquisition.Logistics centresTao 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 capabilitiesTao Heung has profound marketing capability. The marketing team has launched just about 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 graphic symbol 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 res taurant business and Hong Kong market. Its peripheral businesses including airline catering, chilled food trading and bakery accounted for a relatively modest get along 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 ANALYSISA 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 p ortfolio, 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.StrengthsStrong financial positionCost efficiency through the use of logistics centresGood marketing and management capabilitiesWeaknesses crazy market coverageImbalanced business portfolioImbalanced capital structureOpportunitiesIncreasing purchasing power in Mainland ChinaIncreasing living standard leading to new business opportunities such as banquet prerequisite for quality cuisineAdvanced IS technology enabling efficient supply chain managementThreatsSevere inflation pressure leading to rising costs related to rent and food.Minimum wage legislation leading to higher labour market pressureIntense competition in Chinese restaurant industryConcerns about food safetyFigure 2 SWOT Analysis for Tao HeungTOWS matrix is used to illustra te 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 strategiesGenerate strategies that use strengths to take advantage of opportunitiesWO strategiesGenerate strategies that take advantage of opportunities by overcoming weaknessesThreats (T)ST strategiesGenerate strategies that use strengths to avoid threatsWT strategiesGenerate strategies that minimize weaknesses and avoid threatsFigure 3 TOWS MatrixThe 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 unite 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 strategiesExpansion to various food catering businesses (S1O2O3)Rapid expansion into Mainland China (S1O1)Enhance capacities of logistics centres (S2O4)WO strategiesAcquire 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 strategiesLeveraging the use of logistics centres (S2T1)Stringent quality control (S3T4)More stringent cost control (S2S3T1)Improved employee training (S3T2)WT strategiesDiversify into other market sections (W1W2T3)Figure 4 TOWS Matrix for Tao Heung4. DISCUSSION AND CONCLUSIONSAnsoff 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 harvestingsNew ProductsExisting MarketsMarket PenetrationProduct DevelopmentNew MarketsMarket DevelopmentDiversificationFigure 5 Ansoff Product/Market Growth MatrixConcerning 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 find 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 me dium 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 be tter 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 often 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.