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Common Causes- Compare the causes and look for commonality

Primary Problem- Based on commonality identify the primary problem

Levendary Caf was spun out from private equity ownership in January 2011, and the following month, Mia Foster was named as its new CEO. The departing CEO, Howard Leventhal, was the beloved founder of the popular chain of 3,500 cafs. He had grown a small Denver soup, salad, and sandwich restaurant into a $10 billion business, but after 32 years was moving on to new interests. This was Foster's first job as CEO. Previously, the 47-year-old had been president of the U.S. business of a large American fast food company for seven years. She had started her career at a major global accounting firm, leaving to earn an MBA from Wharton. Upon graduation, she had become a consultant at McKinsey before taking a job in product management at P&G, where she worked her way up the ranks. Foster was known for her frank communication style and strong execution. In spite of the promise held by the Levendary brand and Foster's strong track record, Wall Street was cautious about the stock. While the company's fundamentals were strong and its performance generally in line with management forecasts, its shares traded at a discount to comparable restaurant stocks. There were two reasons for this. First, analysts were concerned that Levendary's domestic business was nearly tapped out. Second, given Foster's lack of previous international management experience, they were skeptical of her ability to build a multi-national brand. Foster felt challenged by Wall Street's skepticism and wanted to address it head-on. In particular, she knew that Levendary's recent entry into the fast-growing China market would be closely watched. So she was concerned by reports that recently opened China locations incorporated some dramatic departures from Levendary's U.S. concept, particularly in store design and menu selection. She was also frustrated by the apparent unwillingness of Louis Chen, Leventhal's hand-picked president of Levendary China, to conform to the company's planning and reporting processes. To address these concerns, Foster decided she needed to visit the Chinese operations. On May 25, 2011, Foster stepped out of the limo that Chen had arranged to pick her up at the Shanghai Pudong airport. Heading in to her first in-person meeting with Chen, she knew there were big decisions to be made. Indeed, they would determine the future of Levendary China. The Multi-Unit Restaurant Business In 2010, the U.S. restaurant and contract foodservice industry was a $600 billion industry with 960,000 locations. Multi-unit restaurant concepts represented approximately 30% of the industry by units, with independent operators as the balance. The restaurant and foodservice industry was highly fragmented, and even industry giant McDonald's generated just 2% of total revenues. Multi-unit concepts were generally categorized into three industry segments: Specialty Establishments like Starbucks, Dunkin' Donuts, and Baskin-Robbins primarily served snacks and beverages under $5. Quick Service Restaurants, or so-called "fast food" concepts like McDonald's, Taco Bell, and Wendy's, provided counter or drive-through service with average tickets between $4 and $10. Casual Dining included brands like Olive Garden, Applebee's, and Outback, and offered table service for dinner entrees priced between $8 and $20. Within this group, fine dining concepts like Ruth's Chris and Capital Grille featured entres into the $40 range. While some concepts had bridged these categories for years (e.g., Friendly's offered casual dining coupled with a strong takeaway ice cream business), more recently several concepts had clustered around an emerging category often called "Quick Casual." For example, Panda Express was a quick service format of Chinese casual dining, while Chipotle offered a quick casual Mexican-American dining experience. Like other quick casual restaurants, Levendary promised more wholesome choices than its quick service cousins and a more informal self-serve dining experience than its casual dining relatives. Quick casual restaurants typically had average checks in the $8 to $12 range. Restaurant Cost Structure Restaurants had relatively simple cost structures which one industry expert defined as follows: Occupancy: These costs included real estate rental, common area maintenance, and energy and waste disposal. In the United States, they hovered around 10% of revenues. Labor: Even at minimum wage, labor was typically the largest cost element. High turnover in the industry required restaurant companies to continually source and train new employees and to manage employee attrition. Labor typically represented 25% to 35% of total revenues. Food: Food costs accounted for 28% to 32%. This expense was influenced by not only the cost of the ingredients purchased, but also the amount of waste. Supply: About 1% to 4% of revenues typically went to paper products at quick service restaurants or to linen and uniform cleaning at higher-end casual dining restaurants. In a best case scenario, a restaurant might make up to 35% gross margin, but 20% to 25% was more typical. Franchised restaurants also paid a royalty, adding a 3% to 6% cost line, and a marketing fee which added a further 2% to 10% in costs. Depending on the size of the franchise organization, overhead might account for another 5% to 15% of cost. Restaurants typically operated on razor-thin margins, with profitability a direct function of their ability to generate high traffic, execute consistently, and control costs. Traffic, in turn, was a function of the brand's appeal, marketing effectiveness, real estate location, and store experience. Levendary Caf: The Foundations In the quick casual restaurant segment, Levendary Caf was distinguished by two elements: wholesome soups, salads, and sandwiches using high-quality ingredients, and a commitment to service in a comfortable, friendly environment. Its corporate chefs were highly trained artisans from the Culinary Institute of America and other top cooking schools who took pride in creating everyday versions of gourmet fare. Customers raved, "Eating at Levendary makes me feel rich." Levendary was also distinguished by its willingness to take risks, especially those that helped evolve its concept over time. It was an entrepreneurial characteristic traced to founder Howard Leventhal. The most recent risky change occurred five years before Foster became CEO, when the company decided to use only organic grains in its breads and hormone-free naturally raised meats in its sandwiches. To management's delight, customers willingly paid the premium price, resulting in increased revenues and margins and a simultaneous boost in customer trust in the brand. The Organizational Foundation: Blending Concepts and Operations A complex organization supported Levendary's primarily U.S. business. The Denver headquarters housed the following activities (see Exhibit 1 for a basic organizational chart): Concept: For 23 years, Howard Leventhal had relied on Chief Concept Officer (CCO) Lucian Leclerc to keep Levendary a top U.S. restaurant concept. Leclerc managed both the food development group and the marketing team that together determined what Levendary represented to the customer. With Leclerc's uncanny ability to sense nascent food trends and Leventhal's willingness to take calculated risks, the pair had kept the company at the forefront of changing tastes. Their shared commitment to healthful, wholesome eating was embedded in the company's culture and reflected in its well-known advertising slogan "Tasty Fresh Goodness" or TFG as insiders referred to it. Marketing: The Marketing group reported to the CCO. Its creative team worked with outside advertising agencies to convey the TFG concept through advertising copy and images. The logo, store decor, and media images used a palette of earth tones to communicate natural, wholesome goodness. The distribution team ensured that banners, table tents, window decals, and menu boards were properly placed in all 3,500 company and franchised stores, appropriately modified for differences in store size and layout. Preparing menus and menu boards was complicated by variations in menu items to respond to local market preferences and by pricing differences to meet local competition. But the comfortable, welcoming, and homey "look and feel" of stores always remained consistent. Food: A fully scaled test kitchen and food science laboratory also reported to the CCO, taking the items developed by the CCO's executive chefs and making the adaptations necessary to supply their components with quality and consistency to each of Levendary' 3,500 cafs. The food team was also responsible for conducting quality checks in the field. Operations: Led by Chief Operating Officer (COO) Nick White, who had 30 years of operating experience in U.S. franchised restaurant companies, this group managed the day-to- day restaurant business. Store managers at the 1,200 company-owned cafs reported to district managers, who in turn reported in to area directors, then market vice presidents. This structure allowed tight control of store level expenses and close monitoring of operations against the company's detailed and strict operating standards, policies, and practices. It also relayed any recommendations for modifications to the menu or variations in the store "look and feel to the Concept group for consideration and approval. Operations was also responsible for Operating Tools and Learning (OTL). As retail employees were often high school-aged or minimally educated, OTL set operating standards and provided materials to enhance employees' learning. Acting as a bridge between the concept team and the stores, OTL also developed the training materials and processes to break down food preparation into steps that ensured quality local delivery of the chefs' gourmet creations. In general, OTL functioned as both an internal school and a standards enforcer. Franchise: About two-thirds of Levendary's 3,500 stores were franchised. Headed by Chief Franchise Officer Peter Steele, the franchise team recruited new franchisees, supported existing franchisees, and enforced brand and operating standards in franchised stores. Business Development: Staffed by former strategy consultants, this department sourced new revenue opportunities such as Levendary branded grocery items like coffee, cold cuts, and soups. This group also led research for the company's nascent international expansion and was responsible for an experimental licensing deal in Dubai. Launched in 2009, this opportunistic venture was run by a Saudi Arabian restaurant company owned by an old friend of Leventhal's. Aside from China, Dubai was Levendary's only international operation. Administrative Staff Groups: Real estate, finance and accounting, legal, purchasing, and information systems all reported to an Executive Vice President (EVP) of Administration. Headquarters staff totaled approximately 300 in all. There was no separate international division. The Strategic Base: Serving the U.S. Market Levendary was built on a culture that emphasized "delighting the customer." As founder, Howard Leventhal was fond of telling store staff, "Forget today's profit. Have a positive impact on customers' lives. Make them want to come back. That's how we'll win in the long run." Day-to-day, this philosophy translated into a personalized approach that would accommodate customer requests such as removing sprouts from a sandwich or serving a soup extra hot. Such service appealed to Levendary's customer base of white collar professionals and upper-middle-class women. "Heavy user" customers in these groups visited Levendary five or six times a week. But this approach taxed Levendary's store-level operations. The two key store operating metrics of speed of service and order accuracy were driven by standardization, and personalization threatened both. In response to store operators who questioned his relentless drive to provide personal service, Leventhal would simply point to the company's impressive results. (See Exhibit 2.) Expansion in China: Key Decisions During her interview process, Foster heard much about the great hopes for Levendary China. However, she had not had the opportunity to meet Chen or to closely examine the China business. When she became CEO in February 2011, the new CEO was surprised to find that the Chinese subsidiary submitted all management and financial reports to Denver in its own format. The finance group then "massaged" them to apply U.S. Generally Accepted Accounting Principles (GAAP) and adapt them to Levendary's internal monthly reporting format. Foster felt strongly that this would not be a sustainable practice as the China operations grew into a larger portion of total revenue. The First Meeting: Raising the Questions In considering her options for bringing the China reporting in line with the U.S., Foster favored hiring an international financial analyst for the Denver finance team, and thought Levendary's auditor should also manage the China audit. Both steps were expensive but seemed necessary for a publicly traded company that intended to stake its future on growth in the China market. During a video conference that Foster set up to meet Chen in her first week at Levendary, she shared these thoughts with him. He bristled at her suggestions, claiming that both changes would not only incur unnecessary costs but would also greatly inconvenience his local operations. Chen's resistance struck Foster as either nave or antagonistic, and she responded firmly: "You're going to have to make a change, Louis. We have to protect the integrity of our reporting structure." "Fine," Chen shot back. "But to operate here, we have to be compliant with local tax laws or we'll get shut down. If you need those changes, you're going to have to spend the money to set it up right." Levendary Caf was spun out from private equity ownership in January 2011, and the following month, Mia Foster was named as its new CEO. The departing CEO, Howard Leventhal, was the beloved founder of the popular chain of 3,500 cafs. He had grown a small Denver soup, salad, and sandwich restaurant into a $10 billion business, but after 32 years was moving on to new interests. This was Foster's first job as CEO. Previously, the 47-year-old had been president of the U.S. business of a large American fast food company for seven years. She had started her career at a major global accounting firm, leaving to earn an MBA from Wharton. Upon graduation, she had become a consultant at McKinsey before taking a job in product management at P&G, where she worked her way up the ranks. Foster was known for her frank communication style and strong execution. In spite of the promise held by the Levendary brand and Foster's strong track record, Wall Street was cautious about the stock. While the company's fundamentals were strong and its performance generally in line with management forecasts, its shares traded at a discount to comparable restaurant stocks. There were two reasons for this. First, analysts were concerned that Levendary's domestic business was nearly tapped out. Second, given Foster's lack of previous international management experience, they were skeptical of her ability to build a multi-national brand. Foster felt challenged by Wall Street's skepticism and wanted to address it head-on. In particular, she knew that Levendary's recent entry into the fast-growing China market would be closely watched. So she was concerned by reports that recently opened China locations incorporated some dramatic departures from Levendary's U.S. concept, particularly in store design and menu selection. She was also frustrated by the apparent unwillingness of Louis Chen, Leventhal's hand-picked president of Levendary China, to conform to the company's planning and reporting processes. To address these concerns, Foster decided she needed to visit the Chinese operations. On May 25, 2011, Foster stepped out of the limo that Chen had arranged to pick her up at the Shanghai Pudong airport. Heading in to her first in-person meeting with Chen, she knew there were big decisions to be made. Indeed, they would determine the future of Levendary China. The Multi-Unit Restaurant Business In 2010, the U.S. restaurant and contract foodservice industry was a $600 billion industry with 960,000 locations. Multi-unit restaurant concepts represented approximately 30% of the industry by units, with independent operators as the balance. The restaurant and foodservice industry was highly fragmented, and even industry giant McDonald's generated just 2% of total revenues. Multi-unit concepts were generally categorized into three industry segments: Specialty Establishments like Starbucks, Dunkin' Donuts, and Baskin-Robbins primarily served snacks and beverages under $5. Quick Service Restaurants, or so-called "fast food" concepts like McDonald's, Taco Bell, and Wendy's, provided counter or drive-through service with average tickets between $4 and $10. Casual Dining included brands like Olive Garden, Applebee's, and Outback, and offered table service for dinner entrees priced between $8 and $20. Within this group, fine dining concepts like Ruth's Chris and Capital Grille featured entres into the $40 range. While some concepts had bridged these categories for years (e.g., Friendly's offered casual dining coupled with a strong takeaway ice cream business), more recently several concepts had clustered around an emerging category often called "Quick Casual." For example, Panda Express was a quick service format of Chinese casual dining, while Chipotle offered a quick casual Mexican-American dining experience. Like other quick casual restaurants, Levendary promised more wholesome choices than its quick service cousins and a more informal self-serve dining experience than its casual dining relatives. Quick casual restaurants typically had average checks in the $8 to $12 range. Restaurant Cost Structure Restaurants had relatively simple cost structures which one industry expert defined as follows: Occupancy: These costs included real estate rental, common area maintenance, and energy and waste disposal. In the United States, they hovered around 10% of revenues. Labor: Even at minimum wage, labor was typically the largest cost element. High turnover in the industry required restaurant companies to continually source and train new employees and to manage employee attrition. Labor typically represented 25% to 35% of total revenues. Food: Food costs accounted for 28% to 32%. This expense was influenced by not only the cost of the ingredients purchased, but also the amount of waste. Supply: About 1% to 4% of revenues typically went to paper products at quick service restaurants or to linen and uniform cleaning at higher-end casual dining restaurants. In a best case scenario, a restaurant might make up to 35% gross margin, but 20% to 25% was more typical. Franchised restaurants also paid a royalty, adding a 3% to 6% cost line, and a marketing fee which added a further 2% to 10% in costs. Depending on the size of the franchise organization, overhead might account for another 5% to 15% of cost. Restaurants typically operated on razor-thin margins, with profitability a direct function of their ability to generate high traffic, execute consistently, and control costs. Traffic, in turn, was a function of the brand's appeal, marketing effectiveness, real estate location, and store experience. Levendary Caf: The Foundations In the quick casual restaurant segment, Levendary Caf was distinguished by two elements: wholesome soups, salads, and sandwiches using high-quality ingredients, and a commitment to service in a comfortable, friendly environment. Its corporate chefs were highly trained artisans from the Culinary Institute of America and other top cooking schools who took pride in creating everyday versions of gourmet fare. Customers raved, "Eating at Levendary makes me feel rich." Levendary was also distinguished by its willingness to take risks, especially those that helped evolve its concept over time. It was an entrepreneurial characteristic traced to founder Howard Leventhal. The most recent risky change occurred five years before Foster became CEO, when the company decided to use only organic grains in its breads and hormone-free naturally raised meats in its sandwiches. To management's delight, customers willingly paid the premium price, resulting in increased revenues and margins and a simultaneous boost in customer trust in the brand. The Organizational Foundation: Blending Concepts and Operations A complex organization supported Levendary's primarily U.S. business. The Denver headquarters housed the following activities (see Exhibit 1 for a basic organizational chart): Concept: For 23 years, Howard Leventhal had relied on Chief Concept Officer (CCO) Lucian Leclerc to keep Levendary a top U.S. restaurant concept. Leclerc managed both the food development group and the marketing team that together determined what Levendary represented to the customer. With Leclerc's uncanny ability to sense nascent food trends and Leventhal's willingness to take calculated risks, the pair had kept the company at the forefront of changing tastes. Their shared commitment to healthful, wholesome eating was embedded in the company's culture and reflected in its well-known advertising slogan "Tasty Fresh Goodness" or TFG as insiders referred to it. Marketing: The Marketing group reported to the CCO. Its creative team worked with outside advertising agencies to convey the TFG concept through advertising copy and images. The logo, store decor, and media images used a palette of earth tones to communicate natural, wholesome goodness. The distribution team ensured that banners, table tents, window decals, and menu boards were properly placed in all 3,500 company and franchised stores, appropriately modified for differences in store size and layout. Preparing menus and menu boards was complicated by variations in menu items to respond to local market preferences and by pricing differences to meet local competition. But the comfortable, welcoming, and homey "look and feel" of stores always remained consistent. Food: A fully scaled test kitchen and food science laboratory also reported to the CCO, taking the items developed by the CCO's executive chefs and making the adaptations necessary to supply their components with quality and consistency to each of Levendary' 3,500 cafs. The food team was also responsible for conducting quality checks in the field. Operations: Led by Chief Operating Officer (COO) Nick White, who had 30 years of operating experience in U.S. franchised restaurant companies, this group managed the day-to- day restaurant business. Store managers at the 1,200 company-owned cafs reported to district managers, who in turn reported in to area directors, then market vice presidents. This structure allowed tight control of store level expenses and close monitoring of operations against the company's detailed and strict operating standards, policies, and practices. It also relayed any recommendations for modifications to the menu or variations in the store "look and feel to the Concept group for consideration and approval. Operations was also responsible for Operating Tools and Learning (OTL). As retail employees were often high school-aged or minimally educated, OTL set operating standards and provided materials to enhance employees' learning. Acting as a bridge between the concept team and the stores, OTL also developed the training materials and processes to break down food preparation into steps that ensured quality local delivery of the chefs' gourmet creations. In general, OTL functioned as both an internal school and a standards enforcer. Franchise: About two-thirds of Levendary's 3,500 stores were franchised. Headed by Chief Franchise Officer Peter Steele, the franchise team recruited new franchisees, supported existing franchisees, and enforced brand and operating standards in franchised stores. Business Development: Staffed by former strategy consultants, this department sourced new revenue opportunities such as Levendary branded grocery items like coffee, cold cuts, and soups. This group also led research for the company's nascent international expansion and was responsible for an experimental licensing deal in Dubai. Launched in 2009, this opportunistic venture was run by a Saudi Arabian restaurant company owned by an old friend of Leventhal's. Aside from China, Dubai was Levendary's only international operation. Administrative Staff Groups: Real estate, finance and accounting, legal, purchasing, and information systems all reported to an Executive Vice President (EVP) of Administration. Headquarters staff totaled approximately 300 in all. There was no separate international division. The Strategic Base: Serving the U.S. Market Levendary was built on a culture that emphasized "delighting the customer." As founder, Howard Leventhal was fond of telling store staff, "Forget today's profit. Have a positive impact on customers' lives. Make them want to come back. That's how we'll win in the long run." Day-to-day, this philosophy translated into a personalized approach that would accommodate customer requests such as removing sprouts from a sandwich or serving a soup extra hot. Such service appealed to Levendary's customer base of white collar professionals and upper-middle-class women. "Heavy user" customers in these groups visited Levendary five or six times a week. But this approach taxed Levendary's store-level operations. The two key store operating metrics of speed of service and order accuracy were driven by standardization, and personalization threatened both. In response to store operators who questioned his relentless drive to provide personal service, Leventhal would simply point to the company's impressive results. (See Exhibit 2.) Expansion in China: Key Decisions During her interview process, Foster heard much about the great hopes for Levendary China. However, she had not had the opportunity to meet Chen or to closely examine the China business. When she became CEO in February 2011, the new CEO was surprised to find that the Chinese subsidiary submitted all management and financial reports to Denver in its own format. The finance group then "massaged" them to apply U.S. Generally Accepted Accounting Principles (GAAP) and adapt them to Levendary's internal monthly reporting format. Foster felt strongly that this would not be a sustainable practice as the China operations grew into a larger portion of total revenue. The First Meeting: Raising the Questions In considering her options for bringing the China reporting in line with the U.S., Foster favored hiring an international financial analyst for the Denver finance team, and thought Levendary's auditor should also manage the China audit. Both steps were expensive but seemed necessary for a publicly traded company that intended to stake its future on growth in the China market. During a video conference that Foster set up to meet Chen in her first week at Levendary, she shared these thoughts with him. He bristled at her suggestions, claiming that both changes would not only incur unnecessary costs but would also greatly inconvenience his local operations. Chen's resistance struck Foster as either nave or antagonistic, and she responded firmly: "You're going to have to make a change, Louis. We have to protect the integrity of our reporting structure." "Fine," Chen shot back. "But to operate here, we have to be compliant with local tax laws or we'll get shut down. If you need those changes, you're going to have to spend the money to set it up right