Reference no: EM132295173

Please read the following case description of "Pine Tree Natural Foods". After reading this case, you should prepare an analysis following the guidelines posted under "Course Requirements". The purpose of this assignment is for you to demonstrate that you can apply the concepts, principles, and theories presented in the course readings. Your analysis must employ only the facts presented in the case description below. This case description is fictionalized for purposes of this analysis. Pine Tree Natural Foods Headquartered in Cheyenne, Wyoming, Pine Tree Natural Foods is the leading independent food retailer in the Rocky Mountain region. Its stores feature gourmet, natural, and organic products, competitive prices, and high-quality service. In 2011, Pine Tree’s 33 stores in 25 stores in Colorado, Wyoming, and New Mexico achieved total annual revenues of $251 million and a net income of almost $6 million. The company began as a small seasonal produce stand in 1966 run by a young U.S. Marine Corps veteran named James Costa in a small town just outside of Cheyenne. During the decade of the 70s, Costa took over a couple of independent grocery stores in nearby small towns. In each case, Costa was approached by an owner seeking advice on how to improve his business. Instead of offering advice, Costa offered to buy the store and let the former owner continue to manage it. In the decade of the 80s, Costa managed to acquire three more stores in much the same way, thus growing into the region’s first independent grocery chain with multiple locations. Once the decade of the 90s arrived, the pace of acquisitions throughout the grocery industry accelerated dramatically. Although many of the acquisitions proved to be a disappointment to the acquiring company, Pine Tree Natural Foods acquired one store after another after another, successfully increasing both its sales and net income. Austin, Texas-based Whole Foods Market led the charge in organic/natural food market segment, and Costa was approached more than once with an offer to buy his small but growing chain. Pine Tree enjoyed a significant advantage over other companies looking to make acquisitions based on its strategy of partnering with the owners/managers of the stores it acquired. In 2004, Costa decided to retire and the reins of his company to his daughter Erin who had been working in the company since she graduated from college several years earlier. Erin had proven to have a knack for the grocery business in general and the organic/natural food business specifically. Before he retired, Costa managed one last deal, the acquisition of two warehouses that he turned into distribution centers, each with almost 25,000 square feet of space. These new distribution centers enabled the company to develop a very efficient distribution system designed to support the growing number of stores and allow for additional growth down the road. By this point in time, Pine Tree Natural Foods found itself competing against supermarkets, supercenters, and other store positioned in the natural/organic/gourmet market space. The leading companies in this space include Whole Foods Market, Trader Joe’s, Sunflower Farmers Market, Earth Fare, and Sprouts Farmers Market. The company’s target consumer is highly educated, upper income, informed, and very health-conscious. The typical store in the chain is under 18,000 square feet, and many of the stores are found in less-desirable areas, which provides the company with lower lease and occupancy costs. The large supermarket chains typically carry around 60,000 stock-keeping units (SKU), while Pine Tree carried less than 20,000, meaning that it had less inventory to manage and, as a result, could exercise tighter control. The company also did not carry its own private label. General managers of each of the company’s stores, many of whom previously owned the stores they now managed, are provided with significant autonomy for instituting local pricing, hiring personnel and establishing their compensation, and responding to the needs of the communities they served. This kind of autonomy is unusual among those retailers in this market space who own multiple units; in contrast, most of these types of decision at other retailers were the purview of the corporate office. One of Pine Tree’s practices that is not popular among the managers of its acquired stores is the use of slotting allowances (also known as slotting fees) that are typically paid by suppliers to gain shelf space for new products. Many of these managers and others in the industry believed that this practice placed smaller manufacturers and distributors at a significant disadvantage vis-à-vis the larger, more well-established players. As the company added more stores to its portfolio, the corporate office took on much larger responsibilities for activities and processes that were common to all of the stores including payroll, advertising, and promotion, and information technology support, the latter being critical to the company’s supply operations and its tight financial controls. Over the years, the company had achieved a strong reputation for improving the performance of its acquisitions. Typically, within two years of acquisition, the new stores increased their sales per square foot by 20%, and increased margins by a full one percent or more. These improvements were not due to price increases as was sometimes the case with acquisitions; instead, the primary driver was the company’s focus on instilling strong financial and managerial discipline through the use of relevant performance measures and financial controls than the stores had been using prior to being acquired. Financial discipline in particular was a critical component in the company’s accounting control system as the management team placed significant emphasis on managing by the numbers. Store managers were taught to use the yearly business plan and financial forecasts available from the system, and they used them as tools to manage the day-to-day operations of their stores. This control system also assisted the general managers with setting and meeting their performance targets with key metrics focused on inventory turns (how often inventory turns over during a specific period), cash conversion cycle, and return on assets (ROA). The company used its operational and financial measures as criteria for its performance-based compensation plan for store managers. Important components of this plan included the quarterly results of both service quality and employee empowerment surveys because the company wanted its managers to care as much about their employees and the working environment as they did about the experiences of customers who shopped in their stores. Each of the general and department managers had the potential to earn bonuses of up to 25% of their salary based on company, store, and individual performance, and store managers received a bonus pool that they could use to reward individual employee performance. Unfortunately, implementing the stringent financial control system in newly-acquired stores did not always go well as in some cases the conversion was difficult, time consuming, and negatively affected customer service. Another method that Pine Tree uses to integrate its acquisitions is the assignment of a ‘mentor store’ to share information and expertise with the managers of newly-acquired stores in an effort to help them build their competency and expertise in the company’s operating procedures and practices. The typical routine if for the manager and some of the associates from the ‘mentor store’ to spend two or three days each month at the new store and, conversely, the new store would send some of its personnel to the ‘mentor store’ to learn based on observation how things were done. In addition, Pine Tree schedules a quarterly retreat for all of its store managers, during which participants gain experience through working together, exchanging ideas, and learning together. This retreat is a very powerful tool for transmitting the company’s values and operating standards. Today, Pine Tree finds itself faced with the task of integrating its newest acquisition, which is quite unlike its previous acquisitions given that it is outside of its normal operating territory, involves a chain of seven stores rather than a single store, and has revenues equal to nearly half of Pine Tree’s total sales. The acquired company, Organic Grocers, which is based in Las Vegas, Nevada, is a surprising target for Pine Tree because it had lost money during the previous three-year period, in part due to the real estate bust that devastated the local economy, but also in part because the founder of the chain had died and his heirs had shown little interest in managing the chain. The heirs were so eager to unload the burden of the chain that they were willing to sell it at a significantly lower price than Pine Tree had initially been willing to pay. Many managers at Pine Tree are not fully onboard with the acquisition of Organic Grocers, in part because they feared that Pine Tree’s motives for making the acquisitions were really aimed learning how to emulate Organic’s top-down management style of using technology to mandate common processes and policies across stores without regard to local circumstances. Erin Costa has heard these concerns, and she now wonders if Pine Tree’s customary methods of improving store performance will work with this particular acquisition, and also wonders if she should consider taking additional steps or try new ways for Pine Tree’s management to meet the challenges associated with successful integration of Organic Grocers. Assignment: You have been hired by Erin Costa to help her devise an effective strategy for integrating the control systems of Organic Grocers with those of Pine Tree. Your deliverable to Ms. Costa is a detailed report in which you will recommend changes to the existing control system, and propose the addition of new controls, if either or both are considered appropriate. The analysis should begin with a discussion of the advantages Pine Tree gained from its use of tight financial controls and loose operational controls, and the advantages and disadvantages of considering the top-down controls used by Organic Grocers. The report must provide Ms. Costa with at least two alternatives she could consider for integrating the control systems of the two companies, and should rely on the various forms of control discussed in Chapter 16 of Management: Leading and Collaborating in a Competitive World.