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The idea of bringing a business to a regional level can be a daunting task. It is a challenging aspect that can reap multiple rewards, as well as pose threats to the security and longevity of the business. Plagued by internal organizational problems, and external environmental factors; some beyond their control, the founders of Chainaya Lozhka are seeking to regionalize their fast food chain to other parts of Russia.
Within Russia itself, the competition in the fast food industry is intense. This is because of the entrant of big players such as McDonalds and Kentucky Fried Chicken (KFC), who have many years of experience and brand influence. As founding members of Chainaya Lozhka, Boris Krupkin and Mikhail Avgustin have settled on an age-old product that their Russian counterparts have found popular - pancakes. The use of pancakes in many of their dishes proved to be a success and did not directly compete with the big players of the industry. However, it might prove to be a limiting success factor as it did not give Chainaya Lozhka a significant competitive edge among the many other local fast food chains who were selling essentially the same product.
Therefore, throughout the report there will be several issues pertaining to the growth and development of Chainaya Lozhka being discussed, as well as recommended strategies and tools that can prove to be useful in the path of regionalizing this brand.
Key Issues Facing the Firm
The company must first identify the problems and issues that affect the firm which will impact on the type of change it has to take. They consist of crucial issues that affect the firm in the long-term and provide the senior management an insight on what strategies might be used to counter these problems.
The consumer are key to the fast food industry as they bring in the revenue, provide word of mouth advertising, and their feedback is key to an organization's success. It is worth studying the consumer spending habits and their pattern of spending as Chainaya Lozhka is able to create strategies that can divert customers into its restaurants.As mentioned in the case, Russian consumers are still adapting to the idea of eating out. The Russian consumer could not afford to move completely from home-prepared meals to fast food meals. This is due to the general poverty line that exists within Russia, and the currency value of the currency that makes it generally expensive to eat out. This group of people is considered an "untapped" market and therefore it is important for Chainaya Lozhka to consider them potential consumers depending on the type of strategy used.
Chainaya Lozhka can tackle this issue by firstly lowering their prices. This will come at the expense of profit margins. Furthermore it cannot be done in the long run as the business will not generate healthy margins. At the same time, loyal customers of Chainaya Lozhka might perceive the food to be of inferior quality once the prices are lowered. The image of the items sold by the company is somewhat frozen and a long term price expectation is established, which can reduce the flexibility of the decision-making system (Dolgui and Proth, 2008).
In light of that, the organization may want to segment their market into different categories and make use of promotional tools to target lower income consumers specifically. The advantage of this is that Chainaya Lozhka need not slash prices across the board but only in the particular segment. However, even though the expected economic earnings may be great, this may be meaningless if the chance of earning them is low (Soo et. al 2002, 368). Hence Chainaya Lozhka must decide if this segment will contribute at all to the overall profit margin of the company.
Another crucial issue is the increasing cost of doing business in Russia. Citing examples from the case; there are considerably high rental rates for restaurant space coupled with lack of demand eventually driving many restaurants from the city centre to the suburbs.
Chainaya Lozhka must maintain their operating cost because it will affect their profit margin. It is important for the company to achieve these two objectives -
Keeping Cost low
These two objectives are important in sustaining the business for the future, and also provide a competitive edge among rivals such as KFC and McDonalds. The company will be making huge losses eventually because the sales revenue may not cover the increasing cost, should they remain status quo.
Chainaya Lozhka is able to increase their sales through market penetration through aggressive advertising. As part of financial measures in the Balance Scorecard, they can set targets every quarter of the year to monitor how much sales they have made and how hard they have to work to achieve the next quarter sales targets.
Furthermore they can look towards industry Best Practices being developed outside a business unit or company and then brought into adopting organizations in an attempt to get them on a level playing field with their competitive set (Gratton and Ghoshal, 2005). This is a way to identify the industry standards and learn how to be "lean" in terms of processes; as part of keeping cost low.
Challenges faced by the firm
The challenges that are facing Chainaya Lozhka are vital in determining how and what type of strategy to employ when initiating the change.
Leadership issues in Chainaya Lozhka stems from a variety of sources. Firstly, there is lack of empowerment as seen in the case where the top managers are the ones making the decisions. This leads to lack of trust amongst the employees as they feel that there is no delegation of work. Apart from that, the employees are having low morale; including those on higher level positions because they are often stressed due to long working hours and unresolved problems in their minds.
The change perspective to be adopted falls under the Cultural perspective which involves changing the values and beliefs shared by organizational members. As founders and role models of Chainaya Lozhka, Boris Krupkin and Mikhail Avgustin have to set the foundation for a new form of corporate culture within the organization. Strong leadership can garner support of the majority. Effective leadership requires the clear, concise and positive articulation of the change process. Individuals earn the respect of many while having good social standing can help in the process of changing the organizational culture.
One of the strategies to utilize this process involves selecting employees who can help adopt the necessary soft sell initiatives to generate the broad support that is required to bring about company-wide organizational change.
Other challenges include the organizational structure - which highlights a lack of empowerment for certain individuals whereby two different heads are in charge of two different structures (the operating structure and the development structure). The problem with such a structure is that there is no streamlined process of decision making. The separate organizational structure means that there is two separate centralized decision-making.
If Chainaya Lozhka decides to remain with its current organizational structure, it will affect the company in the long run. This is because there is no defined way of running the organization; processes are carried out differently within one structure compared to the other. This results in duplication of work, waste generation, lack of common objective and others.
Therefore the driver of change is the inefficient process within each division. The strategy is to re-work the organizational structure involving the use of Six Sigma - the statistical control of variance and process improvement. Shroeder et.al (2008) suggested that Six Sigma presents "an organized, parallel-meso structure to reduce variation in organizational processes by using improvement specialists, a structured method, and performance metrics with the aim of achieving strategic objectives. However, adapting to Six Sigma demands company-wide process improvements and close scrutiny of those processes from one division to another.
There are a variety of strategies that Chainaya Lozhka can make use of in its growth and expansion to other parts of Russia. The following details the advantages and limitations of each strategy.
A Joint venture involves Chainaya Lozhka partnering with another company to form a legal entity to run Chainaya Lozhka in other regions of Russia. Firstly, there needs to be screening of prospective partners. Following that, a joint development of a detailed business plan and short listing a set of prospective partners based on their contribution to developing a business plan. Lastly, Chainaya Lozhka needs to conduct due diligence through verifying the credentials of the other prospecting party.
Limitations of Joint Venture
A joint venture may not guarantee success because it does have its limitations. Firstly there are a couple of areas that can fail during a joint venture -
Although Chainaya Lozhka intends to expand to other regions within Russia, the problem of cultural differences will still pose a problem as Russia is a very big country with many states. Most of the time cultural differences between two parties result in lack of understanding for the method of doing business, evaluation of the organization culture, and integration analysis.
The lack of sufficient planning may result in a failure between the two companies. Chainaya Lozhka must agree on a detailed written contract before any negotiations can begin; instead of just listing down a statement of each party's intended contributions to the joint venture.
Poor leadership is also a reason for failures in joint venture because the leaders of each company cannot agree from the start regarding the operational control and the degree of autonomy between each company.
Although the idea of providing pancakes in the menu is a popular one, Chainaya Lozhka should consider product diversification. As part of the Ansoff Matrix, product diversification refers to creating a new product in a new market, with either changing the brand name or remain with its current one. For a start, the company can conduct further market research into what its current consumers would like to see on the menu, or what type of improvements they can make into the menu.
Diversification has its benefits namely ability to tap into new markets, and increasing market share. Furthermore, Chainaya Lozhka is able to enhance its synergy from diversifying into related industries facilitating the exploitation of economies of scope where common indivisible inputs are used.
Limitations of Diversification
The main dangers facing a company following a product diversification strategy for a brand are that it could fail to adequately understand the new customer base and that any new brand name may result in loss of meaning for the original brand and/or cannibalization of the original brand, particularly if it is a brand extension.
The risk of not understanding the new customer base is present as it is with market development. And the risks of loss of meaning and/or cannibalization are just as significant as with product development. As firms diversify, their existing structures, systems, and internal resource schemes may at some point fail to fit the new competitive environment (Ruigrok and Wagner, 2003).