What should Frank Martinez do about the salad bar issue?
Objectives
1. To introduce the Inputs ~ Process ~ Outputs model
2. To illustrate the tension between standardisation and innovation
Case Synopsis
Roy Rogers Restaurants is a fast food franchise business owned by Marriott Corporation. Roy Rogers is pursuing a strategy of aggressive growth through the licensing of independent franchisees (ie., independent owners) to operate its restaurant outlets. The case describes the nature of the franchise industry and provides statistics on the major franchise organisations.
The decision in the case focuses on a request by a large and powerful franchisee to eliminate the salad bar in a downtown Roy Rogers location. This decision seems trivial, but, in fact, proves to have important consequences for the strategy of the business, and the relationship between the franchisor (Roy Rogers) and the franchisees.
At the heart of the case is the tension between innovation (ie., allowing the franchisee to tailor his products and services to the local market) and standardisation (ie., consistency in the franchise concept).
This problem is particularly difficult in any franchise business since consistency in product and/or service offering defines value both in the eyes of the customer and the franchisee.
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Case Background and Theory
This case provides an excellent vehicle to illustrate the power and pitfalls inherent in the design of performance measurement and control systems. For any organisational process, managers can choose to monitor either inputs (e.g., material, labor, energy), process (e.g., ongoing work that transforms inputs into outputs), or outputs (products or services that have value to recipients).
Chapter 4 of Simons, Performance Measurement ~ Control Systems for Implementing Strategy lists the conditions that managers use to decide whether to monitor inputs, processes, or outputs.
Prominent among these criteria is the effect of this choice on standardisation and innovation. As described in Chapter 4, managers will choose to standardise inputs and processes when they desire to achieve economies of scale and scope, or when quality and safety is critical to success. In contrast, when they desire to maximise innovation, they will monitor outputs, and leave it up to employees to figure out how to best configure inputs and processes.
In the Roy Rogers case – a typical franchising arrangement – corporate managers have carefully standardised all aspects of the inputs and processes. In this business, standardisation is critical to their strategy. Standardisation ensures consistency of concept – ensuring that customers will get exactly what they expect when they stop at any Roy Rogers restaurant. It also ensures food quality – a critical issue where the negative publicity from any illness could undermine the health of the entire franchise business.
From a franchisees’ perspective, standardisation is also valuable. The franchisee is paying a fee to purchase the standardised business concept, menus, signs, and customer following that is associated with awareness of the concept. What differentiates a Roy Rogers or McDonald’s from a local hamburger stand? Clearly, it is consistency in terms of menu, quality, price, and ambiance. This differentiation and brand awareness is valuable to the franchisee.
However, this same top down consistency and standardisation upon which all franchises are based is also their Achilles heel. These businesses are unable to easily adapt to changing market conditions. They do not allow a bottoms up adjustment of strategy. Thus, it is no accident that many franchise businesses are suffering in the kite l990s as they struggle to adapt to changing consumer tastes and demographics.
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The key for Roy Rogers is to standardise operations to ensure quality control and monitor each franchisee’s execution of each component of the concept (this is especially important for a newer franchise that has not yet established as much customer awareness as McDonald’s).
From a marketing standpoint, Roy Rogers wants to maintain a consistent image before the customer to gain economies of scale in marketing expenditures and enable cross over buying.
Although there is some monitoring of outputs through financial statements, the primary focus is on the standardisation of inputs and processes.
Inputs: Roy Rogers controls carefully who can become a franchisee, and the case provides details of the financial and managerial qualifications that are necessary to be accepted as a franchisee. Roy Rogers also controls tightly the design and construction criteria for new restaurants.
Process: All processes are controlled very tightly through the franchise agreement. Key processes relate to menu, cooking procedures, training, uniforms, signage, etc. The franchise agreement provides information relating to the extent to which Roy Rogers exercises control over key inputs and processes.
The benefits of standardisation, as well as the risks should be understood. A top down standardisation of concept precludes the bottom up learning that is necessary to adapt to dynamic markets. Moreover, it is the franchisees – who are close to customers, markets, and employees – who have the most intimate information about changes in demographics, markets, and customer tastes that are most likely to affect the future direction of the business. Yet, these people are precluded from innovating or customizing the concept to experiment or take account of local and/or changing market conditions.
Long hours, highly standardised work, and low financial returns (Exhibits 5 and 6) do not seem to point to a very attractive opportunity (these exhibits show a pretax return of $100,000 on an investment of, say, $1,200,000).
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For those who want to be their own boss and open a business, a franchise greatly reduces the risk of failure. Many studies have shown that up to 40% of new businesses fail within the first year and 80% do not survive beyond 10 years. By comparison, over 90% of franchises succeed over the long term. Why? Because franchisees are acquiring a proven concept, marketing and sales support, training and corporate support, and a known customer base.
The figures in Exhibits 5 and 6 are misleading: they mix apples and oranges since Exhibit 5 shows the capital investment for an owned facility and Exhibit 6 shows the profitability for a leased facility. Thus, the capital investment in Exhibit 5 includes land and building, but Exhibit 6 includes rent charges. To make a proper comparison for an owned facility, eliminate the rent charge. Also, consider whether owner compensation is also included in the salaries and benefits line item. Finally, consider adding back all noncash accrual charges to get a better picture of the case flow from the business.
Thus, the pretax profit shown in Exhibit 6 can be adjusted as follows:
Pretax profit $ 99,950
Addback :
Rent 97,600
Salary for owner 75,000 (estimate)
Equipment depreciation 24,100
Franchise fee amortisation 1,250
Adjusted pretax profit $297,900
Thus, we can see that on a cash basis, after making some reasonable adjustments, the financial picture improves considerably.
The following issues should be considered. What is best for Roy Rogers? What is best for Jack Towle? What will the other franchisees say if they find out that Roy Rogers has allowed Towle to change the concept to meet his local needs?
The solution – and what the company actually did – hinges on a distinction between a core concept in the franchise value proposition and a periphery service or product offering. In the case of Roy Rogers, the salad bar is part of its core concept and is important in differentiating Roy’s from other fast food restaurants. Therefore, corporate mangers (and other franchisees) would likely resist Towle’s request to eliminate the salad bar altogether. But, because Towle was so important and his request was legitimate, Roy Rogers allowed him to pre-package his salads in this urban location – maintaining a focus on salads, but without the space constraints imposed by a full salad bar.
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Summary
There is always a tension between too little innovation (which can lead to failure to adapt) and too much innovation (which can lead to chaos).
McDonald’s is known for strict standardisation and consistency of its concept. But McDonald’s has had a difficult time adapting to new market conditions in the 1990s. Accordingly, in 1999 McDonald’s announced that it was changing to a more decentralised, regional based organisation that would allow regions to customise their product offering to adapt to local market conditions. By contrast, Dairy Queen has minimal standardisation and consistency, which has lead to uneven quality and the lack a consistent image.
