Background
Porcini Inc. has started as a family owned restaurant in the year 1969 in Boston’s North End and after a few years, it expanded its business into the Hyannis, Massachusetts, Providence, Newport, Rhode Island, Harford and Connecticut (Dickie &Delizia, 2008). In addition to this, in the year 1989 the Porcini was acquired by a group of private investors. The revenues and earnings have increased every year except during the recessionary period of 2008-2009. Porcini Inc has differentiated itself from the other players in the market by providing the high quality food and services at each location that are also the main cause behind the success of the company.
Furthermore, the company has formed the environment of a unique family owned restaurant that is different from many of its competitors as well as it is considered as a regional powerful brand by the customers (Capatti, &Massim, 2003). Also, due to the differentiation of the product and service from the competitors, Porcini Inc. has won the “Best Chain Service” award for four consecutive years in 2010.
Problem Statement
The company wants to expand its restaurant business because of the fact that the current market for the Porcini Inc. was near to its saturation point. The company cannot expand into the global market due to the limited resources and brand power, so it requires domestic opportunities for growth. In addition to this, Porcini's Inc. had three options available in order to expand their restaurant business, but there are also some risks associated with every option.
The company has to decide which option is best in order to expand the business as it also has to meet or exceed the hurdle rate of 6% in order to make the further growth in the restaurant industry.
Analysis
Company own- and -operate approach
The first option for business expansion is to adopt the approach of company own -and- operate. If the company selects this option then it would provide the Porcini's Inc. with the opportunity to get the total control of the operation as well as customer experience. In addition to this, it also allows the company to expand the operations at its own pace and the property would be maintained by Porcini's Inc. This option initially requires $2.1 million per unit and the revenue that would be expected to generate is $2.4million.
The main disadvantage of the third option is that if the company borrows money to conduct its business operations, then it has to pay interest charges. Furthermore, another disadvantage of this option would be the huge transnational cost that is required in order to build a new facility at the expense of the company. To evaluate the worth of this option, the Net Present Value that is calculated is $3.53. Although the NPV of this option is positive, but it’s value is far less than the other two alternative options. Therefore, it is not beneficial for the company to adopt this approach in order to expand its business.
Franchising
The second option for the company in order to expand the restaurant business is franchising. The franchising is the business strategy that is used by the companies in order to enhance the market growth and share (Issie Lapowsky, 2010). In addition to this, it is the method to attract the largest audience and retain them. Porcini's Inc. initially requires the $1 million in order to develop the agreement for the franchise. The company has to pay 2% pre-tax margin on the revenue from its franchisees.
The foremost benefit of this option is that the company would be able to emphasis more on the marketing and branding of its products and services instead of focusing largely on operations. Furthermore, it provides the opportunity to speed up the operations of the new outlets as the cost of the construction and site acquisition would be shifted to the franchisees.
Despite all these advantages, there are also few risks associated with this option. It is uncertain that Porcini's Inc. would get handsome loyalties and fees as the company is not known as a strong brand. Secondly........................
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