1. Ⅰ. Problem identification Ⅱ. Analysis and recommendations Ⅲ. Summary of action plan Ⅳ.Other issues Content 西安交通大学 skywalker

2. Ⅰ. Problem Identification– Case overview Li Wang, manager of the shop Shortly after FY2009 Pudong ， Shanghai When Who Problem Loss in 2009 Profitability problem Where China— Prosperous future for coffee shop industry Shanghai— Financial and commercial hub of China Competitors Private business school Office buildings Residential department

3. Ⅰ. Problem Identification– SWOT Analysis strength weakness threats opportunities Good customer experience: non-smoking ample magazines provided free fruit and biscuit in the afternoon Customer loyalty Loss in 2009 Not attractive to new customers negligible take-away business Price limited by nearby competitors Growing coffee-drinking culture Two-digit growth in domestic market Customers requiring high qulity service and product Take-away business Offer growth potential Liquidity problems if not performing well Rent costs expected to grow after 2015 Potential new entry for high growth & Low entry barrier

4. Ⅰ. Problem Identification– Financial Analysis 20082009 ROCE0.0790.017 ROE0.075-0.033 20082009 BMK (Average) Net Profit Margin0.035-0.0150.050 Profits dropped significantly from last year. And this coffee shop’s profits are generally lower than the average. If the coffee shop’s profitability remains constant, it will take tens of years for the owner to recover his investment. Unfortunately, the case is the profitability is actually deteriorating!! 20082009 BMK (empirical value) Ratio of cash to current liabilities 0.7150.7171.00 or higher The cash balances at both year ends are too slim to cover the payables, indicating some liquidity problems. Therefore, it is urgent to generate more cash to mitigate the situation. Liquidity 20082009 BMK (empirical value) Interest cover2.2150.4221.00 or higher Solvency The interest cover drops substantially from the last year. The slim profit renders the company extremely difficult to pay the due interest.

5. Ⅰ. Problem Identification– Financial Analysis The operating leverage rocketed to 29.2 this year, indicating some potentially high operating risks. 3 strategic objectives To reverse this trend, we should … % change in operating income % change in sales % change in operating income % change in sales % change in operating income Due to the high DOL (degree of operating leverage), a minor change in sales can bring a significant one in operating income. Thus we can boost the operating income by way of increasing sales volume. Sales Volume

6. 3 strategic objectives Sales Volume Demand curve and price elasticity analysis P(RMB) Q (Demand) 50 47.6 19215 (Y2008) 18600 (Y2009) Based on data of 2008 and 2009, the price elasticity is calculated to be -0.66, indicating a rigid demand. So, increasing price will lead to a rise in total revenue. Further calculation shows revenue will continue to rise until the increase in price reaches 25.8%. So increasing sales price is acceptable. Price Ⅰ. Problem Identification– Financial Analysis

7. Operating Costs as % of Total Revenue in Coffee Shops 20082009 BMK (average) Food & beverages 424540 Wages & remuneration 121420 Rental22 20 Utilities455 Depreciation995 Advertising & promotions 335 > Therefore, we should promote the efficient, effective and economic use of resources, including fixed assets & intangible ones, by refining the internal process. Value for Money > Sales Volume Price 3 strategic objectives

8. Long-term Short-term Ⅰ.Strategic Goals Maximize value for equity Profitability Revenue increase Value for money Differentiation Market development Price Sales volume EfficiencyEconomy Effectiveness

9. Ⅱ. Analysis and recommendations—CSF&KPI Perspective CSFKPI Financial Sales Profitability Liquidity Sales increase ROE, Net profit margin Gearing Customer Customer loyalty High quality service Market share Customer satisfaction rate Number of new customers Ambience and facilities Internal process Value for money Brand management Waste, expense Inventory turnover Advertisements, surveys Learning& Growth Staff training Staff competence Employee satisfaction Training cost Average order processing time Employee turnover, reward

10. K K ey P P erformance I I ndicator Customer loyalty highsustain Number of new customer smallTo be decided Customer complaint rate lowsustain Customer waiting time unknownTo be decided Seat occupation rate 17/50*Over 35/50 * customer number per day ×sales percentage at lunch time. CurrentExpectation Ⅱ. Analysis and recommendations—Customer We should focus on breakfast supply We should attract campus students under 20 years

11. Ⅱ. Analysis and recommendations—Customer Local proffesionals Expats Make signpost to maitain nonsmoking environment Issue vip card Individual cup Customer satisifaction People-oriented service to maintain existing customers White-collar Students Reduce waiting time Issue discount card Price discrimination at different time period Theme day activity new customer attraction to enlargemarket share

12. Ⅱ. Analysis and recommendations—Internal Process Variance Analysis Material cost: unfavorable Labour cost: favorable Utilities expense: unfavorable Advertising: favorable Need to improve cost control and emphasize promotion And according to surveys online, food profit margin >drinks profit margin. Need to boost food sales

13. Ⅱ. Analysis and recommendations—Internal Process *Assumptions: After implementing the strategies, price of food and drinks will increase by 5% and 7%respectively. Also, the sales volume of food and drinks will rise by 40% and 10% seperately. K K ey P P erformance I I ndicator Percentage of revenue from food47.8%53.4%* Types of food availableabundantsustain Advertising expense (as a % of sales)3.2%5% Utilities expense (as a % of sales)5.2%<5% Ingredient waste rateunknownlow Inventory turnover period38 daysshortened CurrentExpected

14. Ⅱ. Analysis and recommendations—Internal Process Action plan Differentiation Play soft music at certain time Improve food presentation Picturesque menu Design a new decoration style (in the near future) Update reading material Market development Advertise in office buildings Start from7am to increase breakfast supply Open a take-away window Boost food sales Value for money Efficient use of facilities and ingredients Keep a clean and cozy environment Provide high quality food and drinks

15. Set reward and incentive scheme Train employees Leader takes management courses Competence and courtesy contest Enroll university student as part time workers *according to financial expectation figure Action plan K K ey P P erformance I I ndicator Employee turnoverlowsustain Employee satisfactionunknownhigh Training cost (as a % of sales)unknownTo be decided Reward expenseunknownTo be decided Customers processed per full- time employee hour 1.311.52* CurrentExpected Ⅱ. Analysis and recommendations—Leaning & Growth long term objective

16. Customer loyalty Attract new customer Customer satisfaction Customer Create brand image Boost food sales Cost reduction and quality control Internal Process Manager and employee training Employee satisfaction Incentive scheme Learning and Growth Cost of sales Operating expenses Price Sales volume Financial Ⅱ. Analysis and recommendations—Strategy Map

17. Forecasted Financial Statements for the Year ended 2010

18. Income Statement for the Year ended 31 st December 2010 (forecasted) Revenue (beverages/drinks)524,527.50 Revenue (food sales )481,267.50 Total revenue (food and beverages)1,005,795.00 Cost of sales(458,640.00) Gross profit 547,155.00 Less Operating expenses: Depreciation of tangible assets(82,000.00) Wages and remuneration(135,200.00) Rental(200,000.00) Utilities (lighting and heating etc.)(49,920.00) Garbage collection(10,400.00) Advertising and promotions(31,200.00) Total operating expenses(508,720.00) Operating profit for year 38,435.00 Interest payable on loans(18,368.00) Profit (loss) for year 20,067.00 Statement of Financial Position as at 31 st December 2010 (forecasted) Goodwill 400,000 Furniture and fittings (net) 164,000 Inventories 47,586 Cash at bank 232,189 Total assets 843,775 Owner’s equity 438,657 Bank loan payable 180,778 Trade payables 224,340 Total liabilities and owner’s equity 843,775 Statement of Cash Flow for the Year ended 31 st December 2010 (forecasted) Operating cash flow: Operating profit (loss) for year38,435 Add: depreciation 82,000 120,435 Changes in working capital: Less: Increase in inventories(3,586) Add: Increase in trade payables17,340 134,189 Investing activities: Nil Financing activities: Repayment of loan including interest ( 100,000) Overall cash flow (deficit) for year 34,189 Add: Opening bank balance198,000 Equals: Closing bank balance232,189

19. Other issues yearas customer No.as revenuecurrent/forecastsafety margin 200917,963 ¥ 898,151 ¥ 930,0003.5% 201015,936 ¥ 820,713 ¥ 1,005,79522.6% breakeven point analysis *Assume only rental & depreciation are fixed cost. Safety margin is enlarged and business risk is remarkably lower in 2010. So, consider efficient use of net cash flow in near future

20. Wears out in about 5 years So new investment in replacing non-current asset will be needed Furnitures & equipment Need additional fund to redecorate and change the image Decoration style After 2015, rental may increase since generous terms will expire Negotiate again; or look for a new site Rent terms

21. 西安交通大学 skywalker