2. Content II. Environment Analysis & Internal resources to seek the PCS ’ s strategy

3. I.Case Overview Coffee culture emerged in China Coffee consumption growth in China >10% Potential ↑¥15,000 by 2% ↓¥46,010 by 142% When Where Who Products Problems Year 2008 Shanghai Pudong —— China’s financial and commercial hub Li Wang —— has limited business experience Beverages and Food Low sales growth Rate At a loss in prior year Many competitors: Starbucks Coffee, U.B.C. Coffee

4. II-1. External environment A Macro Environment (PEST ） EEconomical factors SSocial factors B Industry Environment  Five forces model C Business environment SSWOT

5. Economical factors Social factors Rapid economic growth Shanghai Pudong —China’s financial and commercial hub Huge population Changes in the concept of drinking Coffee culture has emerged in China More foreigners and culture blending ☆ As we can see the economic and social environment is favorable A. Macro environment (PEST ）

6. B. Five forces model · similar products · Similar prices Not mentioned in the case ☆ Competition situation is serious · Low switching costs · Low capital investment · Lack of marketing channel control Barriers to entry the market -Comparatively high customer loyalty -The technology needed · Many competitors · High growth rate of industry · Low conversion cost · Barrier to exit is not so high · Low switching costs · Alternative suppliers · High demands in the market

7. C.SWOT Analysis Strength  Superior geographical position  Steady source of customers Weakness  Limited business experience  Similar products  Unskilled staff  Take-away sales  Online sales  High cost of sales Opportunity  Coffee consumption in China is growing fast  market share is potential  new market segmentation  Potential customers Threat  Newcomers  price war

8. II-2. Internal resources Tangible resources Intangible assets Fixed assets ： Furniture and fittings A very good reputation The manager has a deep understanding of the European culture Financial status —Year 2009

9. Summary: Through the above analysis we suggest that the shop take the following strategy In the next page we use Balanced Scorecard to expatiate it Intensive growth strategy Overall strategy Competitive strategy focused-differentiation strategy

10. III. Balanced Scorecard A strategic planning and management system Customer -How do customer see us? Learning and Growth -Can we continue to improve and create value? Financial -How do we look to our shareholders? Vision and strategy Internal Business Processes -What must we excel at?

11. i. Learning and Growth Perspective Hold training programs regularly and set the least training hours per year Most of the coffee shops have staff training programs such as Starbucks etc It’s glad that Li Wang has already take this action. Manager/executive attend to executive education course irregularly Hold group activities regularly Decision made by one person should be replaced with Brain Storm Suggestions

12. ii.Internal Business Processes Perspective Replace some PTE with FTE Less than the Average by 6% About 35% of other coffee shops provide wider product range to improve their business. Refurbish the outlets to create a more comfortable environment Introduce new products with Chinese Feature Suggestions

13. iii. Customer Perspective Develop membership programs - discounts. Vouchers.little gifts for special days… Set a suggestion box for customers’ complaints and encourage the adviser by coupon Attract the office workers nearby by developing “take-away” & network business, which fulfill their needs Carry through questionnaire survey Attract new customers by advertising and promotion such as distributing booklet and providing coupon Suggestions Besides, about 30% of other coffee shops increase advertising to improve their business. Nearly half of the customers are between 21-30 years old, which is consistent with the age of office workers While, the customer base of the PCS —— local professionals and expats

14. iv. Financial Perspective Categorize the cost of sales by kind The revenue structure of the Pudong Coffee Shop is quite different from others. To verify the specific reason for low GM, suggest to categorize the cost of sales by kind. Enhance the bargain capacity with suppliers Make investment in facilities and innovations etc. which can create future value Consider the rationality of the assets depreciation policy Suggestions

15. Strategy map— A tool for BSC A logical, step-by-step connection between strategic objectives

16. IV-1. Financial statements &Value evaluation Price ↑3% Volume ↑5% General inflation ↑4% Fixed Under the assumptions, the PCS will have a profit.

17. IV-1. Financial statements - continued Assumptions: Inventory turnover rate Trade credit terms Same as Year 2009

18. IV-1. Financial statements - continued Assumptions: No investing or additional financing activities Loss ↓ Cash flow ??? As the depreciation cost is prepaid when fixed assets were purchased.

19. IV-2. Break-even point Analysis Cost of sales Depreciation of tangible assets Wages and remuneration Rental Utilities (lighting and heating etc.) Garbage collection Advertising and promotions Cost Analysis Variable cost Mixed cost Assumptions ： （ 1 ） Average spend per person is 50. （ 2 ） consider the mixed cost as fixed cost Fixed cost 2009 BEP=(420,000+500,000+23,710)/50=18,875 2010 BEP=(458,640+508,720+20,066)/50=17,715

20. IV-3. The overall valuation of the coffee shop Assumptions: As the consumption market in China was expanding at a rate excess of 10 percent per annum, we assume that the sales growth rate is 10%. Because the growth rate is 10% which is really high for a business, we divide the life span of the coffee shop into two related periods, within which, one is of high growth rate and the other is called the follow-up. In the follow-up period, according to the competitive equilibrium theory, the growth rate of sales roughly equal to the nominal growth rate of macroeconomic, which is between 2%~6%. As China is highly developing, we assume that rate is 6%. We assume that Li be able to borrow the loan with the same interest rate. We assume that the growth of sales is smooth. Then we use the EVA method to value the shop. Let the cost of equity equals the rate of net profit to equity.

21. =net operation profit after tax/ Equity =38,435 /438,656=8.76% =7%×180,779 /( 180,779 +438,656)+ 8.76% ×438,656/( 180,779 +438,656 ） =8.25% EVA (Economic Value Added )=net operation profit after tax-total capital cost =38,435-438,656×8.25%=2,245.88 The value of the coffee shop =Investment Capital +The Present Value of EVA =681,000+ 2,245.88 /(1+8.25%)+ 2,245.88 ×1.1/(1+8.25%) ^2+ 2,245.88 ×1.1^2/(1+8.25%)^3+ 2,245.88 ×1.1 ^3/(1+8.25%)^4+ 2,245.88 ×1.1^4/(1+8.25%)^5+ 2,245.88 × 1.1^5/[(8.25%-6%) ×(1+8.25%)^5] = 799,864.8 IV-3. The overall valuation of the coffee shop

22. V. Overall Summary Urgent Task Survival Action NOW! Take the suggestions to obtain a profit & look forward to the future!