livoria strategic opportunity analysis

INTRODUCTION
The report evaluates the Livoria Sandwiches Inc. strategic alternatives, makes recommendations and proposes implementation plan in order to achieve its net income target of 1.1M by 2015, resolve short-term cash shortage and gain market share.

CURRENT SITUATION
Vision
“Livoria will be the first choice of Dawkins residents who are seeking a variety of high-quality fresh sandwiches at reasonable prices.” Mission & Core Values
“We are the highest-quality sandwich shop in Dawkins because of our legendary sandwich-making processes and our commitment to using the highest-quality ingredients.”
Stakeholders Preferences:
Paul:
•Need to grow
•Franchise
Sam:
•Expanding menu – vegetarian line
•Maintaining control
Both:
•1.1M net income by 2015
•No additional borrowing

Constraints/Targets:
•Labour (no further staff hiring)
•Bank requires a minimum cash balance of $20,000 on hand at any given time •Existing Space
•Available cash
•1.1 million in net income by 2015

Financial Assessment:
Livoria 2012 financial performance is higher than average industry benchmarks: •Contribution margin of 53% versus 43%
•Operating profit of 24% (if excluding onetime extraordinary item 500,000 contingent liability) versus 19% •Growth rate 5.4% versus 1.2%
Company has no debt and has an available line of credit.

SWOT
Based on SWOT (see Appendix 1) analysis next key elements have been identified: Key Success Factors:
•Established brand in high quality traditionally custom-made sandwiches •Restaurant’s location and decor
Key Risks:
•Ingredients supply disruptions
•High competition growth
STRATEGIC ISSUES AND ALTERNATIVES
To achieve company’s goal of 1.1 million in net income by 2015, without borrowing from existing line of credit and meeting cash flow demands, Livoria is considering two options: •Expand menu by adding vegetarian line

•Start franchising Livoria brand

ALTERNATIVES ANALYSIS
Alternative 1 – Adding Vegetarian Line
Quantitative analysis (see Appendix 5a):
•$1,156,564 in Net Income by 2015; achieves strategic goal of $1.1M •2015 Operating Income is 44% and Cost Margins is 65%, way above industry average

Qualitative analysis:
Taking advantage of the customer market shift to vegetarian type of food by adjusting menu to include these items pays off in less than 3 years and meets strategic objective of 1.1 million in net income by 2015. Some adjustments were made to make this option work within the total available labor hours. After performing unit contribution margins (Appendix 2) and unit production (Appendix 3) analysis, sandwiches with lowest CM per unit of ‘labor time’ were reduced or eliminated. For example meatball sandwiches have been removed from all three years of production, veal cutlets will be reduced in 2014 and removed in 2015, and chicken cutlets production will be reduced in 2015. This will maximize the profitability, within existing space and without hiring new staff (founder’s preference)., Cash flow though the three years is positive and meets all liabilities obligations and bank’s requirements (Appendix 6a). The only drawback is the increased risk to vegetables ingredients supply disruption. Especially in light of extended unavailability of Food Terminal vegetables section. The temporary work around by owners is acceptable but still leaves company exposed to potential disruption until alternatives are found. On the other hand, increasing vegetables purchasing volumes will help strengthen relationship with alternative supplier due to stable bulk purchases.

Alternative 2 – Start Franchise
Quantitative analysis (see Appendix 7&5a): •$1,154,044 in Net Income by 2015; achieves strategic goal of $1.1M •2015 Operating Income is 36% and Cost Margins is 60%, slightly above industry averages Qualitative analysis: The pros of franchising are that it will help meet Livoria’s Net income of 1.1M by 2015 and contribute to the positive cash flow (without borrowing additional funds from credit line). Additionally, it meets bank’s minimum 20K in cash balance and allows business to extend to other locations and expend brand recognition. On the other hand, there are some cons. Franchising Livoria’s name, owner’s risk losing control over quality and safety of operations, as a result exposing company to risk of failing meeting city safety requirements and personal injures litigations. All these can potentially lead to brand deterioration and gradual loss of strategic advantage on the market. Moreover, there is a series of franchise brands that are already well established on the market that could delay franchise adoption.

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