Westlake Lanes Case Analysis

Westlake Lanes: Case Analysis

Westlake Lanes: Case Analysis

Key Issues Shelby Givens, general manager of Westlake Bowling Lanes is concerned with whether the company is financially ready to pay back the debt owed to its board members. At this point the board may decide against any alternatives and chose to close down the business and liquidate its assets. External Analysis Porter’s 5 Forces Model: Threat of New Entrants It is relatively easy for new business to enter into this industry in terms of cost to entry. However, from a location point of view, it would be quite hard to enter. Westlake Bowling Lanes is located at a prime location to serve its target market because it is the only one in downtown Raleigh close to lively neighborhoods and restaurants. As well, Westlake Lanes has dominance over potential new entrants due to its existence for over 30 years. Essentially, this business has a rapport amongst the current existent recreational and league customers. Buyer Power Buying power of customers is medium to high. The demand is quite elastic to a change in price as seen when Givens increased the price by 20%. League participation, recreational traffic and food and beverage sales all dropped. However, overall revenues only dropped by 3%. As well, there are many activities other than bowling around the downtown core which increase the power of buyers. The largest demographic segment is ages below 16 and over 55. Both these segments possess significant buying power; the former in due to their parents and the latter due to their stable disposable income. Supplier Power There are various small suppliers of Westlake Lanes (i.e. food and drinks providers and shoes and bowling equipment providers). This ensures that if a supplier was to raise their prices, Westlake Lanes would not have a difficulty moving onto the next supplier. Due to this, Westlake Lanes has a significant advantage over its suppliers. Thus, supplier power is low. Threat of substitutes Threat of substitutes is medium to high because there are many alternatives that customers can choose from ranging from rock-climbing centers, laser tag, and popular sites for birthday parties. These

can be considered as indirect substitutes. The direct substitutes (i.e. another bowling location) are nonexistent in the downtown area. Degree of Rivalry Westlake Lanes does not face direct competition since there are no bowling alleys near its proximity. However, it does face a host of indirect competition. In this sense, the degree of rivalry is low to medium. This degree of rivalry is also reduced by the loyalty to Westlake Lanes by existing customers. Summary of External Analysis Westlake Lanes is definitely in a good position to compete with other businesses present or potential. It can be seen through this analysis that this business is currently in an attractive industry relative to where it is located (Raleigh). Most of the above forces had a low to medium impact on the industry and thus on Westlake Lanes. New entrants will indeed have a very difficult time entering this market. It can be seen through this analysis that capital requirements are simply not enough in regards to the ease of entry into this industry. This business has successfully created high barriers to entry due to its long-time operations and a loyal customer base. Internal Analysis VRINE Analysis: Westlake Lanes has been in business for over 30 years. This is believed to contribute directly to its competitive advantage. Valuable The fact that Westlake Lanes has been in business for over 30 years has contributed directly to the loyalty that its customers posses for it. This loyalty secures a continued flow of revenues and at the same time keeping customers away from Westlake Lanes’ direct/indirect competition. This long-term operation is valuable because it gives a sense to potential customers that anything in operation for this long has to be an effective organization. Rare The case does not touch too much on this but it can be assumed that not many businesses have survived from the 70’s. Even if they have survived, they may no longer be a “family business”. This is one notion which makes this capability rare. Inimitable/Substitutable This capability is neither inimitable nor substitutable because there can be no company which can open at this time and claim to be opened for the last three decades. In this regard, it is impossible to copy this capability.

Exploitable This capability can indeed be exploitable. Westlake Lanes can use this capability to further enhance its image in the eyes of the community in which it is located. Westlake Lanes could advertise this capability to a further extent in order to better exploit it. As well, since the business has been operating for a long period of time, employees and managers can learn from the previous data and use it for greater efficiencies. These efficiencies can come in the form of cost reduction and revenue generation. Summary of Internal Analysis According to this test, the capability of a long-term business operation has proven to contribute directly to the competitive advantage of Westlake Lanes. This capability is valuable, rare, inimitable/unsubstitutable and exploitable.

Financial Analysis (See Appendix 1) Operating Margins for years 2004 to 2009 (Calculated from exhibit 2 of case): 2004

2005

2006

2007

2008

2009

15%

15%

8%

-3%

-4%

-10%

Operating margin is fine in 2004 and 2005, but it started to decrease in 2001. In 2007 it went into a negative percentage as an effect of a net loss. It continued to decrease in 2008 and it dipped sharply in 2009. In 2009 the company was losing 10 cents on every dollar of its sales. This goes to show how extremely ineffective the company was at managing its operations. Shelby Givens was at the right track to reduce general expenses. Gross Margins for years 2004 to 2009 (Calculated from exhibit 2 of case): 2004

2005

2006

2007

2008

2009

78%

78%

78%

77%

75%

82%

Gross margin is fine in 2009. This means that the company is able to return 82 cents from each dollar of revenue generated, and it can put this towards other expenses. Ultimately this means the problem with Westlake Lane’s inability to create a profit was somewhere else. Again, Givens was at the right track to reduce general expenses substantially and further increase revenues.

Debt to Equity Ratios (Calculated from exhibit 3 of case): 2006

2007

2008

2009

0.8

4.574

0.970

3.343

The debt to equity ratio in 2007 was quite high (4.574). This was due to funding of improvements by Sugar through a line of credit. It was high still in 2009 due to a further decrease in equity. Current Ratios (Calculated from exhibit 3 of case): 2006

2007

2008

2009

3.415

2.07

1.3

0.442

This liquidity ratio was greatly reduced in 2008 and 2009. This is significant because if the board does decide to sell the business, they may not be able to get all of their investment returned.

Decision Criteria ·

Long-term orientation for the business

·

Level of entrepreneurial spirit shown by the board

·

Plausibility and practicality

·

Cost

·

Personal Aspirations

Alternatives Alternative 1 Sell business; liquidate all assets to pay liabilities and investors. The Pros for this alternative would be that the business would be able to pay debt owed to investors. Furthermore, when the business closes, Givens and the board can possibly spend their time and energy into another more profitable business model. Givens may even have to work less than 70 hour a week shifts. The Cons to this may be the opportunity cost of making the business profitable and giving the business a chance to make a return on investment. As well, by doing this Givens and the board would be killing the family business, not to mention the job loss of employees. In terms of a financial analysis for this alternative,

the liquidations of assets will ensure repayment of all debt. Current net assets ($191,303) less net liabilities ($154,208) will ensure a $37,095 left over. Alternative 2 Keep business and maintain current state of affairs. Continue to scrutinize cost and increase revenues. Add no major investments. The pros for this alternative would be the relatively low risk since the inertia has already been initiated by Givens. Now, Givens or any other manager simply may need to keep it going the way it is going. By keeping the family business alive, Givens and the board would be protecting their employee’s jobs (which would directly affect their families). As well, Costs of the business will decrease as revenues will eventually increase. Finally, the business can collect profits now and perhaps in a few years be able to make a major investment. On the contrary the cons would be to that simply maintaining the business may not be enough to make good profits in the long-term. Keeping the business open if it has no hope to begin with may be a waste of time and resources. Scrutinizing of cost for this alternative is the following: 8% decrease in costs (fixed expenses), advertise expense cut by 50% and an $11,000 decrease in service costs. Revenue will increase due to increase in price by 20% and the increase of patronage by 26%. As a result, the business is likely to see a $10,208 profit in March 2010. (Please see Appendix B Exhibit 1 for a detailed income statement of March of 2010). Alternative 3 Keep business, look for own replacement and work as a consultant. The pros of this alternative are that Givens can focus on something else and perhaps give consulting a try. As well, the next manager may do a better job than Givens and all the pros of alternative 2. The cons to this are that it takes time for a new manager to understand operations and get to know the employees. This may create a cyclical process of high managerial turn-over. This alternative’s cons include all the cons of alternative 2. Alternative 4 Employ kid-friendly strategy. The pros and cons for this alternative are listed on page 9 of the case. Some of these are the limited upfront costs, free arcade games with revenue share model, no major structural remodel costs and lower damages. Cons include higher advertising expenses. Alternative 5 Employ upscale bowling lounge strategy. The pros and cons for this alternative are listed on page 9 of the case. Some of these are the ability to exploit liquor license and high-margin alcohol sales and the relative inelasticity of demand. Cons include higher costs of rehab, insurances and damages and the concern of longevity.

Recommendation

Taking all the alternatives into account, it is recommended to Westlake Lanes to follow alternative 2. The business should be kept as it should maintain current state of affairs under the leadership of Givens. The attractive market shown by Porter’s 5 force’s model and one of the competitive advantages that Westlake Lanes possesses (seen by the VRINE test) are both justifications for the continuation of the business. A kid-friendly strategy should be used in year 4 of operations (2014) in order to maintain the long-term orientation of Westlake Lanes. The financial situation of the business currently does not support the idea of a major financial investment. The company could further improve their operations by increasing revenue and decreasing costs to collect enough profit for the kidfriendly strategy. As seen in the projected income statement for 2010 March, the company is able to make a profit of $10,208 with only a 20% increase in price, a 26% increase in patronage and an 8% decrease in fixed costs. In a given year, this company will be able to produce a $122,496 profit. This profit will reach to approximately $367, 488 in the year 2014. It would be most opportune at this time to make a major investment. The kid-friendly strategy was used due to the pros already mentioned above. Westlake Lanes can easily exploit the buying power of children (as seen in the external analysis above) by targeting them. It can be seen that parents are willing to pay a premium for their children even if it is up to $20 per child. This strategy also correlates well with the target demographics of the business. As seen in the case, individuals over 55 created the largest segment (33%) while those under 16 created the second largest (15%). Since none of the alternatives catered to the over 55 market segment, the only logical selection would be to target the second largest target – children under sixteen years of age. Bringing in technologically advanced arcade gaming at a limited upfront cost (with a revenue share model) would indeed attract children, and their parents along with them. This would further enhance the company’s profit performance.

Implementation Having discovered the direction of the future business model for Westlake Lanes, it is now strongly recommended that they follow this approximate implementation plan. Keep in mind that this implementation plan should be used as a guiding tool. The plan must be changed in the occurrence of any unforeseen future events. Essentially, the plan outlines 4 years of operations for Westlake Lanes. In the first year (2010), the business will continue to cut down costs and grow its revenues by as much as possible. Westlake Lanes will do this by using effective and efficient promotional techniques. The idea here is to achieve very high returns by using as little capital as possible. The business will rely on a word of mouth promotional technique since funds are least available in this phase (year one). This technique can only be possible by training the team of employees to have the highest regard for customer service in their mentality and in their practice. Optimistic forecasts suggest that by the end of this year the business will have approximately $122,496 in profits.

The second year (2011) should again focus on further cost reductions (non-essential costs). In this phase however, Westlake Lanes will put a greater emphasis on aggressive promotion, mainly in the form of television advertisements. The idea here will be to re-invest the profits gained from the year before to secure as many affordable television slots as possible. Since the current target market for this business is individuals over 55 and under 16, the advertisements will focus in on when and what these individuals are doing on a daily bases. For the under 16, the best place to advertise is on the internet. It is absolutely essential to do some kind of advertising on YouTube and Facebook. As well, it is quite significant to get a good spot online when someone searches for bowling alleys in the region. Therefore the website must be kept up to date. On the other hand, the use of radio advertisements and newspaper advertisement will ensure the capture of the over 55 market. In the third year (2012) of Westlake Lane’s operations, the emphasis should be put on interior decoration and renovation. At this point Westlake Lane’s customer base has increased significantly due to its aggressive promotion campaign in the previous year. The profits should be used from the year before to install glow in the dark lighting along with a new speaker system. At the end of this year, even with the additional cost of glow in the dark lighting and new speakers profits should reach about $367,488. In the fourth year (2013) Westlake Lanes will have enough accumulated profit to initiate the kidfriendly strategy. At this point the business will bring in the free arcade games by the use of a revenue share model. It will also bring some food and beverage changes. A designated private party space will now be added. There will also be a need for an additional eight part-time staff members. Contingency Plan Westlake Lanes can decide to hold off on investment needed to employ kid-friendly strategy if profits are not at the desired level in the year 2013. Lack of profits may come from the expected machine expiry at the end of 2010. It will cost the business $57,000 if this does occur. Practicality of Plan The plan that is recommended to Westlake Lanes is quite sound and practical. It does not go beyond the capacities of this business. The plan is laid out in accordance with the external/internal analysis. It has followed the conclusive analysis of competitive advantage and market attractiveness. This plan has used the demographic data provided in the case. Lastly, it has shown a revenue and cost model in which the long-term orientation of the Westlake Lanes is also considered.

Time line of proposed Phases Appendix A Exhibit 1 Forecasted Income Statement for March 2010 Income Lane Rentals…………………………57, 568 Food Sale ………………………………………….7, 204 Liquor Sale…………………………………………8, 640 Total………………………………………………….73, 412

Variable Cost of Sales Food Purchased………………………………..2, 160 Liquor Purchased………………………………1, 1729 Food and Beverage Supplies……………..1, 586 Total…………………………………………………15, 475

General Overhead Expenses Advertising…………………………………….470 Salaries Full-Time…………………………..7, 634 Salaries Part-Time………………………….3, 080 Coupons…………………………………………722 Legal and Audit………………………………652 License & Permits…………………………..136 Office Supplies……………………………….245 Rent……………………………………………….8, 983 Repair & Maintenance Labor…………4, 271 Repair & Maintenance Supplies……..7, 671 Utilities ………………………………………….2, 200 Travel and Promotion……………………..162 Insurance………………………………………..4, 537 Miscellaneous………………………………..138 Total General………………………………….40, 901

Interest…………………………………………..632 Depreciation & Amortization………….700

Operating Income (Loss)………………..15, 704

Tax…………………………………………………5, 496

Net Income…………………………………….10, 208

Posted by Akaramah Khawaja at 14:51