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In 1989, Mr Chan Wing On and Mr. Yuen Chi Ming among others founded their first...

In 1989, Mr Chan Wing On and Mr. Yuen Chi Ming among others founded their first restaurant under the “Tai Hing” brand in Sai Wan Ho, Hong Kong. Through years of development and integrating traditional and innovative business philosophies, Tai Hing Group Holdings (太興集團控股有限公司) gradually expanded from a humble siu mei style restaurant to one of the largest multi-brand casual dining restaurant operators in Hong Kong and established a chain of over 200 restaurants across Hong Kong, Mainland China, Macau and Taiwan. By adopting a multi-brand business model when expanding the market, in addition to the flagship “Tai Hing” brand restaurant, the group has grown their brand portfolio through a mixture of in-house development, acquisitions and licensing including the Taiwanese themed “TeaWood”, “Trusty Congee King”, “Men Wah Bing Teng”, “Phở Lê”, “Tokyo Tsukiji”, “Fish & Farmer”, “ Rice Rule” , “Hot Pot Couple” , “King Fong Bing Teng”and "Asam Chicken Rice". With its core values of “People Oriented”, “Value Every Customer”, “Focus on Quality”, and “Create New Chances” and its implementation of a stringent “5-S” management system aimed to Structuralize, Systemize, Sanitize, Standardize, and Self-discipline, Tai Hing has been the recipient of numerous awards as recognized by professional judges and the general public for its quality products, friendly services, and comfortable dining environment.

        To facilitate and streamline food production across its restaurants in Hong Kong, Tai Hing Group owns its own independent production and logistic center that sets a highly standardized production process and allows employees to provide close control over product development and production process to achieve the highest quality in its food products. In 2008, Tai Hing Group established a large food factory in Fo Tan in 2008 that boasts an area of approximately 158,414 square feet and currently supports all of their restaurants in Hong Kong.

        In 2016, to improve the standardization and effectiveness of the operations in Mainland China, the Group commenced construction of the Mainland China Food Factory, which commenced operation in October 2018 and houses an approximate gross floor area of 253,430 square feet. It mainly produces cured meat, frozen products and canned milk tea. It is estimated that the Mainland China Food Factory is able to support approximately 200 restaurants in Mainland China and the production of certain products for its restaurants in Hong Kong.

        The Group’s Food Factories enables the centralization of the food ingredients and supplies purchasing, food processing, quality control of raw materials, semi-processed or processed food ingredients, as well as packaging, warehousing and distribution functions. Additionally, as food safety and quality are the Group’s highest priorities, the Group applies the food safety and quality management principles embodied in various quality standards issued by the ISO in the Food Factories quality control system, and has quality assurance personnel implementing quality control policies and procedures. For example, the siu mei production unit of Tai Hing Group’s Hong Kong Food Factory has obtained ISO 22000 accreditation for food safety and quality management system in 2013. The Group’s quality control team oversees quality control at each stage of food processing in accordance with the formulated food processing procedures and HACCP (Hazard Analysis Critical Control Point) standard to ensure food safety.

        In local Hong Kong, although customers typically have a high demand for good quality casual dining experiences, Tai Hing’s Hong Kong business has been challenging since late May of 2019 due to political unrest and the subsequent emergence of Covid-19. Weak market sentiment impacted the quick service restaurant business and casual dining brands, particularly the dinner segment and weekend sales, as well as outlets located in shopping and commercial areas. In the year ended December 31 of 2019, although Tai Hing’s revenue increased by approximately 4.0% to HK$ 3,252.3 million (2018: HK$ 3,126.1 million), due to increased staff costs, depreciation and amortization, and other increased costs and expenses, the net profit for the year ended 31 December 2019 was only HK$76.9 million (2018: HK$304.9 million).

        According to figures published by the Census and Statistics Department, the value of total restaurant receipts in July to September decreased HK$3500 million compared to the same quarter in 2018. Although the fast food restaurant sector still recorded incremental growth, the economic hardships inflicted by the coronavirus pandemic predict tough times ahead for the casual dining industry. Given customers’ increasing sensitivity to price, the Tai Hing Group will be very cautious on price adjustment.

        The Tai Hing Group expects market sentiment may take some time to improve, especially in a highly competitive restaurant industry in Hong Kong. Whilst taking a prudent approach in managing cash flow, controlling costs and improving productivity, they will continue to focus on customer service and dining experience, as well as product quality, which will drive same store sales growth. Hong Kong is the Group’s key market, and Tai Hing Group is committed to striving to incorporate innovative methods to support its industry’s development by actively exploring opportunities to adopt automated food processing machines in restaurants, creating a safer and healthier working environment, and increasing operational efficiency to ensure consistency in dish portion and quality.

Question: Given the background and position of Tai Hing Group, use your knowledge of different types of strategies to make 3 strategic recommendations for Tai Hing Group Holdings to achieve strategic competitiveness. Support your recommendations with well-developed arguments and appropriate examples.

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Answer:

The Following are the important strategy are as follows.

1. Multi-brand strategy to drive growth

Operate multi-brand through self-development, acquisition and licensing agreement Tai Hing Group (THG) currently runs 9 brands (self-developed 6 brands, 2 through acquisitions and 1 through licensing agreement) with >190 restaurants network in Hong Kong, Macau, China and Taiwan. In FY16-FY18, THG’s revenue and adjusted net profit (excl. one-off gain on investment property disposal and listing expenses) grew at 11.5%/18.7% CAGR to HK$3,126mn/HK$153mn. The stable growth was driven by store counts grew at 10.3% CAGR together with a low-single digit SSSG in Hong Kong. During the track record period, THG had a stable seat turnover rate of 5.0-5.4x (7.6x-7.8x in Hong Kong, 2.4x-2.5x in China), in which Men Wah Bing Teng and Pho Le’s seat turnover rate achieved >10x on average.

2. Future growth driven by store expansion, launch of new lines in fast growing brands; Recent Hong Kong political unrest would hit near term SSSG

During FY16-FY18, Tai Hing’s total number of store counts grew at ~10.3% CAGR to 185 stores (FY17: +16 ; FY18 :+17), with Tai Hing took up ~60% of total store counts in FY18 while TeaWood, Trusty Congee King, Men Wah Bing Teng and Pho Le each accounted for 17.3%/9.2%%/5.5%/5.4% of total store counts in FY18. Since 45% of the net IPO proceeds would be allocated to opening new restaurants, we expect Men Wah Bing Teng and Pho Le would be the main contributor of net store openings in Hong Kong, while Tai Hing and TeaWood store expansion would be gradual. According to the prospectus, THG plans to open 105 stores (Hong Kong: 63, China: 36) and reach 290 by FY21E, which represents 16.1% CAGR from FY18. Meanwhile, THG recently introduced TeaWood Deluxe, which is the premium version of TeaWood (avg. ticket price HK$100-200 vs. HK$51-100 for TeaWood). It co-operates with the local Tourbillon brand and focuses on delicate Taiwanese and western fusion cuisine with the quality ingredients. Through our channel check, TeaWood Deluxe received good customer feedback in Openrice app. THG is also considering to adopt similar strategy in other brands, e.g. Men Wah Bing Teng. Despite THG continue to grow through store expansions, we also view the launch of premium lines in fast growing brands such as TeaWood (thru TeaWood Deluxe) and Men Wah Bing Teng would be another new growth drivers.

3. Enhance operating efficiency through stable menu, automation in restaurants and food factories

THG strive to maintain both operating efficiency and consistency in food quality through i) stable menu while introducing some seasonal specials each quarter ii) standardised operation processes for different brands, iii) implementation of automated production processes in restaurants and food factories and iv) obtain larger floor space in shopping malls to accommodate different brands so that logistics can be centralized. THG managed to achieve operating breakeven within 2-4 months. THG is among the first to introduce automated food processing machinery including automated woks, programmed barbecued pork sauce mixers, programmed chicken poaching machines and poultry roasting ovens. The introduction of automated cooking machines not only help reduce the reliance on skilled chef, but also lowering the risk of obtaining occupational illness/ injury while maintaining the overall product quality .

4. Two food factories in operation to suuport current operation and future expansion

THG currently has two factories (1 in Hong Kong and 1 in Dongguan, China). The Hong Kong factory has an area ~158k sq. ft, supporting all of THG restaurants in Hong Kong (~120 in FY18). With current capacity, together with i) increasing additional equipment (such as industrial pressure boilers, kettles and oven) and ii) increasing the numbers and employtee working hours, it would be able to further support 50-60 restaurants in Hong Kong, which is in-line with THG ‘s store expansion plan until FY21E. The China food factory, which has an area ~253k sq. ft (floor area 60% larger than that of Hong Kong factory) and commenced operation in October 2018 and still undergoing ramp up. It would be able to further support 200 restaurants in China (vs. THG had 62 stores in FY18) and the production of certain food products for THG’s restaurants in Hong Kong.

5. Trading at FY19E 9.8x PE, ongoing political unrest suppress near term valuation

Having dropped >30% since IPO in end-June, Tai Hing is currently trading at FY18 13.3x PE (excl. one-off sales proceeds from investment properties and listing expenses) and FY19E 9.8x PE (based on our back of the envelope calculation and excl. listing expenses) , which is trading at 14%/45% discount vs. catering peers listed in Hong Kong. The ongoing political unrest in Hong Kong in the past 60 days already raise investors’ concern (local catering peers’ stock price dropped ~4.0% in the last 5 trading days vs. HSI dropped 1.4%) that this may deter consumer spending in 2H19, and we believe this near term overhang would continue to suppress THG’s valuation.

  • Three Strategies for Achieving and Sustaining Growth

Many organizations fail to achieve their desired growth targets in revenue and profitability.

Most businesses fall short of achieving their growth objectives for revenue and profitability. In fact, studies report success rates as low as 20%. Why is growth so elusive?

Based on our research and experience*, there are two major reasons:

  • Inadequate consideration of opportunities within the core business, adjacent to the core business or within new customer sub-segments.
  • An organizational infrastructure that cannot support successful execution.

However, managers can do certain things to improve the chances for success. This article will describe one such thing managers can do, namely build a systematic framework composed of three strategies for growth and three key elements for successful execution. The article will also explain how the three strategies and three key elements increase the probability for success.

Achieving growth: Recommendations for increasing the probability of success

1. Strengthen the execution infrastructure by investing in ‘safe bets’.

Regardless of which growth strategy is selected, a firm’s infrastructure must be up to a standard that supports successful execution. An on-going commitment to creating such an infrastructure is a ‘safe bet’. Achieving this requires (1) eliminating departmental or regional silos, (2) utilizing leading indicators and performance drivers that align with the strategy and (3) growing leaders at all levels – managerial and non-managerial. (See Sections 4, 5 and 6.)

2. Initiate a process to identify strategies with a high probability for success.

Three customer growth strategies are presented below: (1) Growing the core business, (2) Growing by sub-segmenting customers and (3) Growing adjacent opportunities. It is recommended that the senior leaders begin the process by considering the growth potential within the present core business and/or the opportunities and growth potential associated with creating innovative value propositions for underserved customer groups. As the senior leadership group moves through this process, it will become clear if and when adjacent growth options should be considered. (See Sections 1, 2 and 3.)

  • Customer-Focused Growth Strategies

1. The process of identifying profitable growth opportunities most often begins with the Core Business1, that is, the products, services, customers, channels and geographic areas that generate the largest proportion of revenue and profits. In-depth conversations with the senior leaders on the topic, “What is our core business?”, is the preferred starting point.

An evaluation of the overall performance of the core business follows. This involves measuring and benchmarking profitability, rate of revenue growth and the firm’s reputation with its most important customers.

Such an assessment will raise a number of questions. For example:

  • In what direction is each of these key indicators headed and why?
  • Who are and who are not the core customers? Why?
  • What is the firm’s key competitive market differentiator? How can it be strengthened?
  • Is the core business under major threat?
  • Are there attractive growth opportunities within the core?

When considering these questions, input from external stakeholder groups is very helpful, particularly from loyal and even not-so-loyal customers.

The overall process need not take a great deal of time, but can yield significant returns. These include:

  • A renewed commitment to operational excellence within the core business,
  • Insightful conversations on the growth potential of the core business, or conversely,
  • An urgent need to make significant changes to the core or even a plan for abandoning the present core and exploring more profitable growth options.

Processes were created to help refocus on the core business. Key elements included (1) defining three market platforms on which the core business is based – Industrial, Fleet and Safety, (2) eliminating products and markets that did not fit on these platforms, (3) adding new products to augment the core and (4) strengthening market coverage with significant investments in the two major channels – sales depots and the firm’s website.

2. A second customer-focused growth strategy is based on the firm’s existing customers. This strategy involves creating High Impact Value Propositions for new customer sub-segments. Underpinning this strategy is the willingness to view customers through a different set of lenses.

A process can be created to assist both managers and specialists at the customer interface gain fresh insights into customer needs and preferences. This is a necessary first step in discovering underserved customer groups and hidden growth opportunities. (Senior leaders who frequently interact with customers can make a significant contribution to this process.)

Key elements of this process include (1) sub-segmenting existing customer groups based on newly discovered needs, buying patterns and contribution to profits and/or revenue, (2) creating innovative and high-impact value propositions for the most attractive sub-segments, (3) field-testing the new value propositions and (4) scaling-up based on the results of field tests.

In addition, some firms choose to focus on lower end customer sub-segments. These are usually groups of customers for which the cost of supplying and servicing exceeds the revenue the customer generates. In such cases, value propositions can be designed which will move the customer to a profitable position or at least minimize the losses. For example, direct sales calls can be replaced with on-line ordering systems and non-essential product/service features can be eliminated. These actions not only lower the costs of serving customers but often also lower the customer’s cost. After the initial shock, many customers welcome the new lower-value proposition.

3. A third customer-focused strategy is to enter businesses that have strong strategic links to the core – adjacent businesses1. This is a particularly appealing alternative when the core business is approaching its full potential, operates efficiently and generates surplus cash for reinvestment. It is also an important option when it is clear that the core’s future growth potential is weak.

Many leaders prefer to start this process by focusing on current customers. A series of meetings with the most innovative customers can be a valuable source of opportunities. Alternative channels, new products or services or even new joint ventures may be suggested as well as entering new geographic markets, serving different customer segments and redesigning the customer’s value chain.

Another alternative is to consider the non-core businesses of the firm. Is there the potential to leverage present positions into attractive growth opportunities?

When considering adjacent growth alternatives, the relationship to the core business requires special consideration – specifically an assessment of the major strategic differences and similarities with the core. Too many differences can overly tax the organization’s capabilities. To minimize this risk, business leaders may wish to test their organization’s capacity by piloting adjacent growth initiatives in stages, one or two degrees of strategic difference at a time.

Some leaders choose to look at adjacent growth options in an opportunistic manner – as one-offs. This often results in disappointment. Initial successes with one or two close customers can soon fade under the onslaught of strong established competitors. To prevent this, leaders are advised to “organize to suit the new business as much as the core”.

  • Executing growth strategies

The three Customer-Focused Growth Strategies described above require a supporting infrastructure to increase the chances of successful implementation. Lack of an adequate infrastructure is the second reason cited for not achieving growth objectives.

A supportive infrastructure includes (1) organization capabilities that are valued by customers, (2) a management-performance system and scorecard which focuses on leading indicators and the drivers of growth and (3) strong leadership practices at every level of the organization.

1. Organization capabilities are processes that are strategic and deliver a high level of value to customers. For example, a firm may have the capability to:

  • Successfully entering new markets,
  • Create excellent new products or services which appeal to customers, or
  • Provide an outstanding level of customer service.

Note that the three organization capabilities selected are vital to the success of specific Customer-Focused Growth Strategies.

Each of these capabilities is rooted in processes that move across the organization and require the expertise and commitment of various individuals and departments.

It’s widely accepted that an organization’s success is rooted in its competitive-edge, organizational capabilities. Therefore, a major challenge that senior managers face is to clarify, assess and continually strengthen their organization’s strategic capabilities.

Each of these capabilities is rooted in processes that move across the organization and require the expertise and commitment of various individuals and departments.

It’s widely accepted that an organization’s success is rooted in its competitive-edge, organizational capabilities. Therefore, a major challenge that senior managers face is to clarify, assess and continually strengthen their organization’s strategic capabilities.

An important aspect of the clarifying and assessing process requires that senior managers step outside their organization and evaluate both their firm and their competitors’ through the eyes, mind and heart of the customer. The following guidelines will help with such an assessment. The capability should be:

  1. Highly visible to key individuals within the customer organization, and acknowledged as providing exceptional value.
  2. Difficult for present and potential competitors to replicate.

As an example, let’s examine the capability to provide an outstanding level of customer service in a manner that would make it difficult for competitors to replicate. In order to provide such a high level of customer service, employees from different departments (not only the Customer Service Department) must be involved in service delivery. Employees throughout the organization should connect quickly and collaborate willingly. Collectively, relevant information and insights about customers and product or service delivery must be shared.

The high level of cross-departmental collaboration required can prove challenging for some organizations, particularly those with rigid vertical structures. Such structures make it difficult for employees to adapt and respond to special customer service requirements. Note that under these conditions, an employee’s loyalty often shifts from the firm to their department or profession.

Delivering a superior level of customer value requires uninterrupted flow across the organization. Eliminating barriers to flow – breaking down departmental silos- is a necessary first step to building an organization’s strategic capabilities, regardless of the specific capability.

Let’s return to the question of how difficult will it be for a competitor to replicate a key organizational capability. It should be very difficult! A number of senior leaders view organization capabilities as the key element of their business strategy. These leaders focus on continually building and leveraging the organizations’ capabilities to drive new business growth.6

2. A second key element of infrastructure necessary for successful execution is the Performance Management system and scorecard. (Note: Performance Management systems are rooted in the widely held belief that “what gets measured gets done”.)

The process starts by answering the question, what should be measured and why?

The following guidelines help answer this question.

  • Scorecards depict key strategic relationships, particularly between the desired performance outcomes such as revenue and profit growth and the drivers of performance (e.g. new market entry, service quality, customer loyalty, employee engagement).
  • Performance of both individuals and departments (or regions) is directly linked to the growth strategy and successful execution.
  • Company scorecards should provide a balanced perspective based on the needs of key stakeholders groups and/or major organizational processes – internal operations, value provided to customers and employee development.

Let’s assume that the overall strategy of a firm is to grow the core business and that growth will be achieved through increased market penetration of existing products. What are the drivers of growth that must be measured, monitored and managed?

This question is best answered by those directly involved. Precise measurements are not always possible but proxy indicators established in a thoughtful and open manner are. Let’s assume that increased market penetration will be driven by the strength of the company’s brand and customer loyalty. But what drives customer loyalty and brand strength? Is it the quality of service provided, the reputation of the sales staff or the depth of knowledge of the customers’ business and requirements?

When there is a reasonable level of confidence that the above questions have been answered, the process shifts to (1) how and when will performance be measured, (2) how will those directly responsible access the performance measurement and (3) what follow-up action, if any, is necessary?

Performance management systems based on the processes described are becoming more evident in successful organizations. A brief description of the approach RBC Banking uses follows.

Leaders in the Banking Group have utilized performance scorecards to link execution with overall business strategy for a number of years. The scorecard has been aligned with four major stakeholder groups – customers, employees, shareholders and the communities in which the bank resides.

The focus is on measuring and monitoring leading indicators – for example, the drivers of customer loyalty, employee engagement and financial results. Considerable input from many sources is solicited before these measures are set and appropriate action undertaken to continually improve performance.7

3. The third key ingredient of a supportive infrastructure is Leadership.

Who are leaders and what do they do? Leaders are people throughout the organization who influence the attitudes and actions of colleagues. As such, they help colleagues understand the many why’s of organizational life. For example:

  • Why the organization must perform at a high level in the increasingly competitive and global business environment.
  • Why barriers to cross-departmental collaboration are harmful and weaken the organization’s ability to adapt.
  • Why, when a colleague’s performance appears to fall short, it may be preferable to view this as an opportunity for learning and professional development rather than expulsion from the organization.
  • Why the ultimate success of the organization is rooted in its ability to continually be innovative in delivering value to customers.

Leaders are found at all levels in organizations, including, non-titled, non-managerial positions. They are best identified by their behaviours and influence rather than the hierarchical position. Together, such leaders create a network that reflects the very essence of their organization – ‘who we are, where we’re going and how we’ll get there’.

Such a perspective on leadership significantly differs from the more traditional ‘leader as hero’- the person who fires-up the troops, leads the charge and performs ‘heroic’ feats.

Can leadership skills be developed? The answer is clearly “Yes”. Some organizations owe their success to being able to recognize that the organization is a lab for leadership development. The process of leadership development can start with an assessment of an individual’s emotional intelligence, a key predictive attribute of successful leaders at all levels. Hands-on learning experiences with one-on-one coaching and mentoring are also vital elements of the process.

The relationship between senior leaders and other leaders throughout the organization merits special consideration. Senior leaders ultimately set the overall direction and create conditions that encourage others to join in and lead – particularly with respect to executing the strategy. A condition that has proven effective is the continual reinforcement by senior leaders of the expectation that all employees should exhibit leadership behaviours. With persistence, the growing network of leaders will tip the scales as other members of the organization from every level and in every role join in and commit.

Two organizations, Southwest Airlines and KI (formerly Krueger International), a mid- sized furniture manufacturer, have taken different approaches to the challenge of building leadership at all level and in all roles.

Since its founding, Southwest Airlines has focused on the hiring process. The organization created a unique candidate screening process that has been highly effective in selecting individuals whose values and abilities embody unique and imaginative approaches to dealing with challenges. Such individuals are a good fit with the highly disruptive and innovative low-cost strategy of the airline.

When employees share identical values with the values of the company founder and connect at a very basic level with the organization’s core business strategy, it can be expected that each employee will step forward and lead. Over the last 5 years, Southwest’s sales have grown at an average annual rate of 11 percent. The airline has been profitable for the last 34 years.

In contrast, the president of KI (formerly Krueger International) a Green Bay Wisconsin business furniture manufacturer started the process of expanding the organization’s leadership mindset and behaviours more that 40 years after the company was founded. The president’s approach was based on the belief that (1) teaching employees how to think like a business person and (2) providing all employees access to whatever information is required is an absolute necessity. These beliefs have been continuously demonstrated at well-attended regular scheduled monthly meeting organized by the president. Employees at all levels and in every role receive performance-related information from the president and discuss how to solve problems and capitalize on opportunities. (Note: As a result of the diligent efforts of the president, all employees are company owners.)

The company’s growth strategy has drawn on the approaches described in this article – redefining and growing the core (expanding the product line), entering adjacent businesses (European expansion) and focusing on new market segments and sub-segments (universities, leading high tech firms). During the president’s tenure, sales increased from $45 Million to $630 million, an annual growth rate of 14%. The annual growth in ROI exceeded 30%.

In summation, we can say that the probability of achieving profitable growth is heightened whenever an organization has a clear growth strategy and strong execution infrastructure. One without the other impairs the probability of success.


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