Reference no: EM132090628

You are the chief operations officer in charge of a multinational fast food business, called Top-Town, serving generally American style sandwiches, such as hamburgers, hot dogs, chicken, and fish, along with standard side dishes of french fries and hash brown potatoes. Each outlet also has some local content, and TT makes certain accommodations and alterations to the menu items to reflect local sensitivities. Your firm sells franchise licenses (its major and more successful operations) to approximately 90% of its chain and it operates the remainder of the outlets with company employees. (These operations are less profitable.) It desires over time to divest all owner-operated outlets to sell them to franchisees over the next 5 years. Franchisees pay a one-time entrance fee or advance to receive an operating license from Top-Town. Monthly, franchises also remit a royalty payment plus a percentage of profits back to TT. Owner-operated outlets remit profits to the corporate or regional headquarters. All outlets are required to purchase 100% of their paper goods, signage, and cooking and preparation equipment (called Infrastructure Service) from a Top-Town wholly-owned subsidiary, which has operations in the US and Canada, Germany, and Indonesia. A breakdown of operations is shown in Table 1. Infrastructure Services are charged at about 10% margin for TT, but many franchisees complain that the costs are too high and management is starting to recognize that these costs could be reduced through a variety of mechanisms. Table 1 TT Locations Franchise Owner-Operated North America 950 90 Europe 250 45 Asia 75 10 Australia 80 5 The TT board of directors has just approved the acquisition of another chain of fast food restaurants, Magic Marx, and the acquisition is set to close by the end of the year. MM serves customized plates, wraps and sandwiches around a Tex-Mex theme. MM is a good complement to TT, because (1) there is very little overlap in locations and (2) TT and MM appeal to different types of customers, with MM appealing to an older and slightly more upscale customer and TT to a younger, more budget-conscious consumer. The firm operates all MM outlets. Their distribution is shown in Table 2. A breakdown of MM operations is as follows: Table 2 MM Locations Outlets North America 900 Europe 80 Asia 400 Australia 300 The organizational structures of TT and MM, however, are not aligned. TT management is organized around regions and MM is very centralized with non-perishable items coming from numerous suppliers in the US and then exported to locations worldwide and perishable items provided locally. TT franchises have long been unsatisfied with the fees and costs charged by TT; the MM outlets operating costs are high for the industry, operating margins are thin, and the MM company has seen declining profits each of the last five years. The Board of Directors of the merged company now wants to convert everything to franchises and to make franchise sales and service and cornerstone of the new business model. It wants to sell franchises for all remaining TT units and for all MM units, using the incoming one-time franchise fees as a way to pay for the acquisition and to streamline the business model, making it more uniform and finding economies of scale and scope in all its worldwide operations. Maintaining the brands as separate is an important consideration. You recognize that the organizational structure needs to change, and you are open minded enough to see that perhaps now may be a good time to make changes to both TT and MM structure, too. You question the sources of the company’s success: is it operational efficiencies at each outlet or is it low cost supply? How do you set up a good back office structure that can service all the franchises and outlets? In such a restaurant organization, what is quality and how should a quality program be built and maintained? But, what do you do? The board wants to keep the brands separate, but believes that the back office and supply chains can be better integrated and some economies can be achieved. The board also wants both brands to expand within their existing markets. Finally, TT has used debt financing to make the acquisition, so now, with increased debt to service, it needs to redefine the business model that helps support the company. How do you start thinking about this new opportunity? Please note: you can't possibly address every potential issue, so use these guidelines: Break down your recommendations into corporate, functional, and business strategies. Try to organize your thoughts along those lines first. You should identify the things you think are most important.