Value chain analysis helps the managers to see the parts of their operations that generates money and those that do not. The company can have a strategic competitiveness when the company has a strategic improved value chain among its competitors. Effective value chains creates greater values than the costs incurred to create that value, and helps the firms to earn above average returns. When the company starts to earn above average returns it improves its sustainability and strategic competitiveness in the industry.
It is important for firms to use effectively the value chain process in order to understand the cost position of the company. Value chain is easy to understand and easy to use after it has developed, because it shows the each parts and departments separated. The value chain shows the product movement from the raw material stage to the final customer. The value chain process is segmented and there are primary and supportive activities. Primary activities are the inbound logistic, operations, marketing, outbound logistics and service delivery.
By, segmenting those primary activities on Luby’s Cafeterias, we would be able to see and understand the each market easily and clearly, so that we can come up with effective strategies that can improve the efficiency of the company. Segmenting the activities of the company will give not only efficiency, but also it will enable the company to see the opportunities much easier. The inbound logistic of Luby’s Cafeterias could be the centralized purchasing and delivery. Centralized purchasing is needed in order to cut the costs that have been resulted from the managers of the individual restaurants.
Secondly, on the operations segment there will be the food preparation and the menu coordination in order to eliminate the negative effect of costs on food preparation. Third, sales and marketing area will provide the customers in all places the same specials. Fourth, outbound logistic will help the company to expand its operations to other places. As a result of Primary activities Luby’s Cafeterias prepares all of the food in side the restaurants. Managers from operating activities could perform food preparation, coordinate menu.
The supportive activities are the activities that consist of the firms’ infrastructure, human resource management, technology systems, and procurement. Those activities help the company to better coordinate with in the company. (Some information taken from P. 92 of Strategic Management) After the year 1996 the food costs increased dramatically, and caused the company to loose its revenues. Most of the expenses occurred from the increase in the food costs in the years 1997 and 1998.
Parker should develop a strategy and act as soon as possible to reduce the food costs of the company. Parker should also centralize the purchasing function of the managers in order to reduce the potential food costs resulting from purchasing foods and ingredients for the company. At first the company let the managers to purchase their own materials on their own will and this false strategy lead the company with increased expenses on foods. By doing so, Luby’s Cafeterias could not be able to leverage their money and resources to earn better conditions.
As a result, Parker should immediately leverage its resources and money by centralizing the purchasing power of the managers. Also using the centralized buying, suppliers will not have the same power over Luby’s Cafeterias. Also to work with the suppliers effectively suing the centralized purchasing the company must update its information system database in order the supply the recent demand on time. Also Parker should change the way the company earns its profitability from restaurants. As it says in the case, the profitability of a restaurant is based on the profitability of the location.
Luby’s Cafeterias looks the profits and losses of the restaurants by location which gives them the disadvantage of implementing their operating strategies to their restaurant chains. The provision for store closings totaled 36. 9 million dollars in 1998 and caused the stock price of the company to decline. Parker should consider the store profitability rather than the locations profitability. If the store is performing well and generating money compared to the corporate financial data over the long term Parker should have not closed those restaurants.
Some modifications and redecorating could me necessary, but there will be no need to close the restaurant. It will be wrong to expect the restaurants to perform well based on their locations and could result the stock price of the company decrease, because no one would ever wanted to invest money on companies, which close their restaurant chains. Another important action that Parker should consider immediately is the drive through windows that enables the customers to take out their meals.
By doing so, the customers would not be dependent on eating in the restaurants and will give them more freedom to eat their meals. On the other hand company should consider experimenting with smaller sized facilities in the small areas of the country in order to drive the customers to their locations. Parker should be careful because, the store size of the Luby’s Cafeterias are designed to meet the needs of metropolitan areas, and should be considered in first place.
The demand estimate for the cafeterias must be implemented, in order to open a restaurant. This strategy will give Parker more effective way to understand the demand for their products and provide cost savings. Also in the metropolitan areas, increasing the store size and providing the customers with additional order lines will give customers more convenience in the store. Having drive – throughs will provide additional convenience to customers and improve the sales of Luby’s Cafeterias. Parker needs to focus on the food preparation activities.
The mayonnaise is prepared by Luby’s employees in order to get more cost savings. 10 percent of the Luby’s work force works for the developing mayonnaise, which gives Luby’s a disadvantage of performing other activities. Giving those food preparations to a supplier which will provide the same quality will help Luby’s to use the 10 percent work force to create and perform other activities. The supplier would use the same recipe and provide the company with the mayonnaise that they needed.
Moving the workforce to other related areas will help Parker to perform more activities and generate more money. As a result all of those activities must be developed and implemented from Parker in order to cut the costs and increase the profitability of Luby’s Cafeterias, which will in return increase the stock price of the company. The biggest problem occurs from not centralizing the activities of the restaurants and the managers and Parker should be careful, while estimating the demand for the smaller areas before store openings.