Content

II. Environment Analysis & Internal resources to seek the PCS’s strategy

I.Case Overview•Coffee culture emerged in China•Coffee consumption growth in China >10%•Potential

↑¥15,000by 2%

↓¥46,010by 142%

Year 2008

Shanghai Pudong —— China’s financial and commercial hub

Li Wang —— has limited business experience

Beverages and Food

•Low sales growth Rate•At a loss in prior year

•Many competitors: Starbucks Coffee, U.B.C. Coffee

II-1. External environment

AMacro Environment (PES

T） Economical factors Social factors

BIndustry Environment Five forces model

CBusiness environmentSWOT

Economical factors

Social factors

Rapid economic growth

Shanghai Pudong —China’s financial and commercial hub

Huge population

Changes in the concept of drinking

Coffee culture has emerged in China

More foreigners and culture blending

☆ As we can see the economic and social environment is favorable

A. Macro environment (PEST）

B. Five forces model

· similar products · Similar prices

Not mentioned in the case

☆Competition situation is serious

· Low switching costs · Low capital investment· Lack of marketingchannel controlBarriers to entry the market -Comparatively high customer loyalty -The technology needed

· Many competitors · High growth rate of industry· Low conversion cost· Barrier to exit is not so high

· Low switching costs· Alternative suppliers· High demands in the

market

C.SWOT AnalysisStrength Superior geographical position Steady source of customers

WeaknessLimited business experienceSimilar productsUnskilled staffTake-away salesOnline salesHigh cost of sales

OpportunityCoffee consumption in China is growing fast market share is potentialnew market segmentationPotential customers

Threat Newcomersprice war

II-2. Internal resources Tangible resourcesTangible resources

Intangible assetsIntangible assets

•Fixed assets： Furniture and fittings

•A very good reputation •The manager has a deep understanding of the European culture

Financial status —Year 2009

Summary: Through the above analysis we suggest that the shop take the following strategy

In the next page we use Balanced Scorecard to expatiate it

Intensive growth strategy

Overall strategy

Competitive strategy

focused-differentiation strategy

III. Balanced Scorecard A strategic planning and management system

Learning and Growth

-Can we continue to improve and create value?

Vision and strategy

i. Learning and Growth Perspective

• Hold training programs regularly and set the least training hours per year

Most of the coffee sh

ops have staff trainin

g programs such as S

tarbucks etc

It’s glad that

Li Wang has

already take this action.

• Manager/executive attend to executive education course irregularly

• Hold group activities regularly

• Decision made by one person should be replaced with Brain Storm

Suggestions

ii.Internal Business Processes Perspective

• Replace some PTE with FTE

Less than the Average by 6%

About 35% of other coffee shops provide wider product range to improve their business.

• Refurbish the outlets to create a more comfortable environment

• Introduce new products with Chinese Feature

Suggestions

iii. Customer Perspective

• Develop membership programs - discounts. Vouchers.little gifts for special days…

• Set a suggestion box for customers’ complaints and encourage the adviser by coupon

• Attract the office workers nearby by developing “take-away” & network business, which fulfill their needs

• Carry through questionnaire survey

• Attract new customers by advertising and promotion such as distributing booklet and providing coupon

Suggestions

Besides, about 30% of other coffee shops

increase advertising to improve their business.

Nearly half of the customers are between

21-30 years old, which is consistent with the age

of office workers

While, the customer base of the PCS —— local professionals andexpats

iv. Financial Perspective

• Categorize the cost of sales by kind

The revenue structure of the Pudong Coffee Shop is quite different from others. To verify the specific reason for low GM, suggest to categorize the cost of sales by kind.

• Enhance the bargain capacity with suppliers

• Make investment in facilities and innovations etc. which can create future value

• Consider the rationality of the assets depreciation policy

Suggestions

Strategy map— A tool for BSCA logical, step-by-step connection between strategic objectives

IV-1. Financial statements &Value evaluation

Price ↑3%Volume ↑5%

Volume ↑5%General inflation ↑4%

General inflation ↑4%

Fixed

Fixed

Under the assumptions, the PCS will have a

profit.

IV-1. Financial statements - continued

Assumptions:Inventory turnover rate Trade credit terms Same as Year 2009

IV-1. Financial statements - continued

Assumptions:No investing or additional financing activities

Loss ↓

Cash flow???

As the depreciation cost is prepaid when fixed assets were purchased.

IV-2. Break-even point AnalysisCost of sales Depreciation of tangible assets Wages and remuneration Rental

Utilities (lighting and heating etc.)

Garbage collection

Advertising and promotions

Cost

Analysis

Variable cost

Mixed cost

Assumptions：（ 1） Average spend per person is 50.

（ 2） consider the mixed cost as fixed cost

Fixed cost

2009 BEP=(420,000+500,000+23,710)/50=18,875

2010 BEP=(458,640+508,720+20,066)/50=17,715

IV-3. The overall valuation of the coffee shop

Assumptions:• As the consumption market in China was expanding at a rate excess of 10 percent per annum, we assume that the sales growth rate is 10%.• Because the growth rate is 10% which is really high for a business, we divide the life span of the coffee shop into two related periods, within which, one is of high growth rate and the other is called the follow-up.• In the follow-up period, according to the competitive equilibrium theory, the growth rate of sales roughly equal to the nominal growth rate of macroeconomic, which is between 2%~6%. As China is highly developing, we assume that rate is 6%. •We assume that Li be able to borrow the loan with the same interest rate .• We assume that the growth of sales is smooth.• Then we use the EVA method to value the shop.• Let the cost of equity equals the rate of net profit to equity.

equityr =net operation profit after tax/ Equity =38,435 /438,656=8.76%

V

Er

V

Drr equitydebtwacc

=7%×180,779 /( 180,779 +438,656)+ 8.76% ×438,656/( 180,779 +438,656 ）=8.25%

EVA (Economic Value Added )=net operation profit after tax-total capital cost =38,435-438,656×8.25%=2,245.88

The value of the coffee shop

=Investment Capital +The Present Value of EVA=681,000+ 2,245.88 /(1+8.25%)+ 2,245.88 ×1.1/(1+8.25%) ^2+ 2,245.88 ×1.1^2/(1+8.25%)^3+ 2,245.88 ×1.1 ^3/(1+8.25%)^4+ 2,245.88 ×1.1^4/(1+8.25%)^5+ 2,245.88 × 1.1^5/[(8.25%-6%) ×(1+8.25%)^5] = 799,864.8

IV-3. The overall valuation of the coffee shop

V. Overall Summary

Urgent Task

Survival

Action NOW!

Take the suggestions to obtain a profit & look forward to the future!