Problem statement
In 2011, the newly-minted CEO of Levendary Café, Mia Foster, was facing the greatest challenge of her career to date. With no previous experience as a chief executive and little background in international business, she was stepping up to take the reins of the $10 billion business. This move was further complicated by the fact that the company was expanding into China at that time. Despite Foster’s strong track record, the stock market was showing distrust regarding her capabilities to lead the expansion and deal with a presumably exhausted domestic market with no further room for growth. On top of this, shortly after starting her mandate, Foster became aware that the company strategy was not properly implemented in China, and the financial reporting structure was not properly following the corporate policy (Bartlett and Han 2011). Here we will continue by outlining the theoretical framework that will serve to support ananalysis of this situation, and then we will discuss the issue of proper corporate governance in an internal environment.
International Business
A general definition of international business first considers the cross-border transactions (Bartlett and Ghoshal 2002; Dunung 2012) between companies and countries and this concept involves various challenges (Dlabay et al. 2010), such as product adoption (Johnson and Turner 2004). Sometimes the term of globalization is used interchangeably with international business however they are not synonym. The difference is a rather fine one, as globalization refers to an integration and cultural exchange between nations (Al-Rodhan and Stoudmann 2006), often involving the use of information technology as a tool (Castells 1999;Stephens 1999). As opposed to globalization itself, international business is a generalization, in that it does not limit to intangible resources such as knowledge, and it does not necessarily require the use of IT (Sullivan et al.2007). At the same time, international business can be seen as a particularization of globalization, since it is endeavored for profit purposes (Sullivan et al.2007).
The concept originates from the 1960’s, when it was studied as Foreign Direct Investment (Hymer 1960) in the context of multinational companies. Local markets see an influx of foreign capital when the barriers for entry are low (Denisia 2010). According to the Production Cycle Theory (Vernon 1966), the context for international business is provided by over- production and subsequent use for export by companies that already saturated the local market.
Other theories put forward the idea that international business exploits currency rate differences to obtain profits (Cushman 1985). In the current economy, the international attention is attracted by emerging markets, those countries with developing economies and a great appetence for new products and services. A possible explanation is that the economic cycles of these economies are not synchronized with those of the originating countries of the companies that invest in overseas commerce (Aguiar and Gopinath 2004). This in turn helps companies find profits in an otherwise stale economic environment and the idea can be tracked back as far as the cyclic theory of ‘creative destruction’(Schumpeter 1961).
Two theories of business competitiveness describe the intrinsic dynamical state of a company capable of producing profits and dynamics of a company or of a country in an international market. The first theory of competitive rivalry (Porter 2008) discussed the business as a Five Forces Model. The second theory presents the larger context of international affairs (Porter 1990), which is the focus of this section. According to the Diamond Model, there are many factors that influence the success of a company, out of which only the strategy and the structure of the offer are intrinsic to the business. The extrinsic factors are dependencies to the market, the local laws and government, the available resources, competition, and even random chance.
Strategy management
Companies can typically exert influence mostly on the internal factors, which is why we can conclude that the company strategy needs to receive very careful consideration. In total, the capital influx toward the emerging markets of the developing nations exceeded the threshold of 100 billion USD in 1996 (Arnold and Quelch 1998). This was a growth of 15% since 1992. The number work to confirm the tripod strategy view (Peng et al. 2008), where the available resources are one leg of the strategy of a company, another being the industry and the third leg being the international expansion of a company, or becoming successfully competitive in China and India.
Strategic management is the formulation and execution of large scale goals that are decided at the top levels of a company and implemented throughout its activities and structure (Nag et al. 2007). The process that ends with the definition of a company’s strategy is the strategic planning component (Mintzberg 2003). Approaches to strategic planning normally involve tools such as the SWOT analysis (Hill and Westbrook 1997), the Porter Five Forces model (Porter 2008), or scenario based outlooks (Godet 2000). A capability maturity model (CMM) from the 1970’s places strategic management as the most sophisticated step of the strategic planning abilities of a company,which occurs when the strategic framework is very well defined and used throughout the business (Kiechel 2010).
There are three main principles that define the strategy (Porter 1996). The first is to create value by a unique position within the market, which is equivalent to choosing a niche. The second is to trade some arguably beneficial aspects, such as short term profit, for longer term goals. The third is to support the chosen strategy by internal company alignment. Strategy can be defined as a systematic process to find a winning doctrine that can ensure profitability if it is followed to the end (Kvint 2009).
The elements of strategic management are adaptation to the environment, complexity and flexibility, and the existence of a planning and implementation components (Chaffee 1985). Most importantly, strategy acts to steer the direction of the entire organization. By these characteristics, strategy can be divided into three types. Linear strategy is fixed from the beginning and followed throughout the daily life of the organization. Adaptive strategy responds well to the market environment. The model of interpretive strategy focuses on creating a lasting impression on the consumers (Chaffee 1985), and consequently create brands.
This is confirmed by the Theory of Business (Drucker 1994) which regards strategy as relaying on three main assumptions. These were that a) every company has a mission, b) it needs some core competencies to deliver its promise, and c) businesses function in a market environment that needs to be taken into account when formulating the strategy.
Cultural and market fit
With these aspects in mind, we can move forward to the topic of cultural fit from an intrinsic and an extrinsic perspective. Since companies are a balance between the organizational structure, the available resources and the market (Arnold 2003), it is natural to think that the way a product or service is marketed is critical for business development. In this context, the Ansoff matrix (Ansoff 1957) is a product/market tool that guides the way to the proper planning and implementation of the market and product approach.There are attempts to link strategic marketing with the resource-based view of the company in a unified approach (Fahy and Smithee 1999) since it can be argued that a unique choice or resources creates a unique competitive advantage that can be presented to the market as a value generator (Berry and Parasuraman 2004).
However, marketing is not the only force that is building the image of a company and the perceived value of its products. Leadership, the culture of a company, and the organizational behavior (Lok and Crawford 1999) are equally strong forces that shape a company from the inside (Luthans 2005). There exists a feedback loop between the culture of a company, organizational behavior and the leaders or a business (Bal and Quinn 2001). The leaders of a company shape the culture and behavior of an organization (Schein 2006), which are visible from the exterior of the company and leaks into the market consciousness as a branding marker (Jo Hatch and Schultz 1997;French 2011). This has particularly strong consequences in the services industry, where the perceived market value is closely associated with the image of a company (Lovelock 1983).
The element that ties together all the intrinsic elements of a company’s strategy and ensures compliance is corporate governance (Shailer 2004). Corporate governance is based on the principles or ownership and control (Blair 1996), which dictate that the stakeholders can manage their own interests through an appropriate reporting structure. The role of governance is to connect the strategy of the company with the market and the internal organization such that strategy is implemented for the common good.
Analysis and findings
In this section, we will analyze the case of Levendary Café in 2011,when Mia Foster replaced the former CEO in the context of a market expansion of the company into China. We will base our analysis on the theoretical framework presented in the literature review chapter and we will emphasize the differences between the theoretical notions and the observed situation.
In 2011, Levendary Café fit into the category of quick casual dining. The company started as a combination between a fast food restaurant and a casual diner. The strategy was very well developed and chosen based on the advice of the Chief Concept Officer. The stakeholders had chosen to start an expansion in China with two years prior to this date, in 2009. Since then, China had never been visited by any of the members of the headquarter.
The expansion into China was a carefully considered move that fit well in the company strategy. China is an emerging market (Cui and Liu 2001), extremely sought out by investors due to its hungry and still developing cities. China is a unified market, with a common culture and language, capable of rapid growth and efficient expansion (Landry 1998). China has a population approaching one and a half billion people and a GDP that has seen a growth of almost 15% in the past decades (Barlett and Han 2011). This was in line with the risk-taking policy of Levendary Café at the time. The management strategy was a mix between the finest dining choices, a mark of the conservatory people, and progressive thinking aimed rather at anticipating the market than at following it. This was a good strategy, since the competitors at the cutting edge of the market strategy are usually those who shape it (Brown and Eisenhardt 1998), rather than those adopting old strategies. There exist indications (Baum and Wally 2003) that the financial performance of a company is directly related with its ability to make speedy strategic decisions aimed at aligning it with the market trends. Before 2001 and during that year, Levendary Café seems to fit this description, including the decision to expand its operations into an emerging market.
At the time, Levendary Café had notable trend awareness and the mix between this awareness and the forward thinking style managed to keep them ahead of the competition. The description of the marketing group shows a careful management of the company image and consistency. The company ensured marketing materials for its stores, including the franchises. Careful investment was made in the image of the stores, which had a décor in natural tones and materials, meant to coincide with the slogan of the company regarding food. This is a strong sign of consistency between the chosen image and the branding of the company (Bickerton 2000). Brand consistency is one of the key winning strategies for market share. Another sign of the attention awarded to the brand image was the choice of food, ingredients, and the “corporate chefs [who] were highly trained artisans from […] top schools” (Bartlett and Han 2011). The overall customer experience and brand promise were above the average in the quick dining industry, acting as a strong differentiator and one of the main competitive advantages (Porter 2008) of the business.
The domestic corporate governance of the company followed a clear and strong chain of command that was ending at the Chief Operating Officer. This is a great example of proper corporate governance, since a strong reporting structure leaves little room for role ambiguity (Rizzo 1970). Another sign of attention to image and detail was the training provided by the company to its employees. Levendary Café had a Operating Tools and Learning program meant to teach the often undereducated employees how to treat the customers. This is highly beneficial for the job satisfaction of the employees (Lam et al. 2001), commendable from the strategic human resource management (Nankervis et al. 2002), and beneficial for the relation with the customers (Leidner 1993).
The business development was managed by a dedicated department of highly qualified and motivated people, who had experience as strategy consultants. There are indications that the business development department followed the guidelines of the Ansoff development matrix, since they were able to find both opportunities for expanding into new product niches, which can be categorized as product development, and into new markets, a characteristic of market development (Ansoff 1957). There was no separate international business department at the time, which is an indicator that governance should have been managed from headquarter, or not at all. This typically leaves room for the apparition of local self-managed enclaves, or the agency problem (Shleifer and Vishny 1997; Tricker 2015) that may or may not follow the strategic guidelines of the company.
A complement of the Levendary market policy was the owner’s philosophy, centered on customer satisfaction, “delighting the customer” (Bartlett and Han 2011) instead of rapid profits. This philosophy implied that no generalization about consumers can be made, there is no prototypical customer. In consequence, the policy of the stores allowed for both customization of products, and had strategies that allowed the operations to move at a normal pace even in such conditions. Care for the customer and attention to the image were the key ingredients of the Levendary success.
This was not however the case in China. With the ascension of Foster it was discovered that the isolated China agency was not led by the Levendary strategy book. From the case study, it is obvious that the potentially damaging situation was the consequence of multiple aspects that converged to this result. The local Levendary China director, Louis Chen has been chosen by the former CEO himself because of his entrepreneurial spirit, over an established Chinese operator.
It is interesting to note that the report states that only few restaurant chains succeeded in China at the time. This is possibly linked with the fact that China investors appreciate well-governed businesses (Bai et al. 2004). Since well implemented corporate governance mechanisms are such a great incentive in China, it is likely that lax governance is a landmark problem in the country, which would not be strange given the size of the market that needs to be closely managed. Although China is relatively homogeneous, there are actually 7 market areas that can be identified and have to be taken into consideration when planning the strategy (Cui and Liu 2000). Put into perspective, this brings new understanding as to why China is a both prized and dangerous market.
We also know that the former CEO stepped down after many years of service and hired Chen towards the end of his highly successful mandate. During the few years when they worked together, Leventhal only managed Chen tangentially, and their contract was a handshake. It can seem strange to rely the entire business development program of a new market on an agreement however it is a noted tendency for some CEO’s at the end of their service (Conger and Nadler 2012).In some cases, CEO’s prefer to end their mandate on a high note. They are less willing to implement large changes in the company, since these would be equivalent to a criticism of the current state of business (Conger and Nadler 2012). Even so, proper corporate governance requires information to freely flow to the board of directors, and the performance of the company has to be periodically reviewed against goals (Lipton and Lorsch 1992). This is because lack of communication and transparency can generate situations as the present one.
In 2008, Chen was only given 6 weeks to copy the original model and deploy into in China as best as he could. It was only discovered after more than 2 years that, while a few shops followed the strategic guidelines of Levendary Café, most of the restaurants were extremely far from the company goals. Instead of the great atmosphere and fine foods, some shops had plastic chairs, some had no seating arrangement but only a pickup counter, and most of them were not serving food similar to that of the franchise (Bartlett and Han 2011). It is known that brand consistency is critical (Park et al 1991) especially in the context of a global economy where people travel and expect the same experience everywhere in the world (Bengtsson 2010). It is clear that many companies have an issue with establishing a proper and unified presence across borders (Matthiesen and Phau 2005) and that they need to give time and proper attention to establishing a correct image and presence in a new market. The same attention needs to be provided to the revitalization of the company brand in the local market (Keller 1999), since the image of a company is a central component of the overall market strategy, through the promise and mission dimensions. This was precisely the point Chen made during his conversation with Foster, that the lacked support and guidance during the market expansion, which he managed singlehandedly.
Another point was that China is not similar enough to the western world and that a simple transplantation of the brand might not have worked (Tielmann 2010). There are indications that he was right in asserting this fact, but strategies can be invented for emerging markets to serve a proper representation of the company (London and Hart 2004). Moreover, cross-cultural competence seems to be necessary to develop a correct transition model (Johnson et al. 2006). However it is at the same time clear that lack of governance (Peng et al. 2008), transparency, communication, and common strategy cannot achieve long term results. Chen was priding himself on managing short term profitability, yet this was in direct conflict with Leventhal’s core philosophy to focus on sustainability and customer experience. In the same country where Pizza Hut was opening casual dining restaurants, Chen opened small fast-food restaurants (Bartlett and Han 2011).Notably,China was also transmitting the financial reports in a separate format that was not compliant with the headquarter practice, another action against the centralized governance structure (Cohen et al. 2002).
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