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Serving The Client Not The Sandwich Case Marketing Essay

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

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.

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.

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.

What are revenues to date in 2002? [Nearly US $790,000, based on RMB Y8.3 - $1 rate]

How strong is the gross margin? [Average of nearly 70% year-to-date (YTD) 2002]

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]

How many units are in the chain? [4 “deli-style” cafés, 1 kiosk and a strong delivery business]

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.]

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.

What life cycle stage is the business in? [Growth and expansion]

Which single goal is most important? [Sustainability of Sammies as an ongoing entity]

What are some key (non-financial) [1. Focusing on service, as much as on

success factors? 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.]

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 IC-1

1. Skills/Attributes Sam Goodman Possesses:

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)

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.

Self-Realization: Sammies’ founder effectively knows his own strengths and weaknesses and is humble.

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 [1] . 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.

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.

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!

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:

Fund Raising: Goodman needs to learn that “whom you raise money from is more important than the funds themselves.” [2] 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.

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.

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.

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.

Doing Business in China (20 minutes): The discussion might then transition to doing business in China.

In addition to the cultural information from the case, I’ve included the following from my personal experience and research:

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.

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. [3] All of the written language is based on Chinese characters. The spoken language is tonal in nature, with pitch causing meanings to vary widely.

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. [4] 

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. [5] 

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.

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. [6] 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

Value Proposition (20 minutes): The discussion should then move to a discussion of Goodman’s value proposition:

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.

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.

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.

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.

Financial Discussion (20 minutes):

1. Financial Results

I interpret the financial results of Beijing Sammies as follows:

Gross Margins: The Kitchen Delivery unit of the business is producing equivalent revenue to the individual cafés (“Income Statement Café Exhibit 5”).

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”).

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). [7] 

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 [8] , it’s gratifying to see that Goodman’s chain accurately reports its financials and, on an (honestly calculated) net basis, is making money.

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 [9] 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:

Space Maximization: The cafés can accommodate that many more patrons by not requiring an in-store kitchen.

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.

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.

Training Consistency: As indicated in the case on page 111, 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. [10] However, this discussion might require far more than the 20 minutes allocated for the overall financial discussion.

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!


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