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Case Sonic

Cover Letter

_____________

_____________

_____________

Dear Sir/Madam:

Greetings!

At the request of __________________ to conduct a study on your organization, I would like to present the results of the said study.  Our research covers an in depth analysis of the administrative and strategic situation of Sonic Corp.

I would like to  thank ________ for providing us the information about Sonic Corp.  The information allowed us to get a comprehensive situation of the subject. 

I hope that the result will have a significant input to your organization’s development.

Thank you.

Respectfully yours,

Shannon Cook

I.                   Executive Summary

The case describes the administrative and strategic situation  of Sonic Drive-In, the largest drive-in chain in the United States.  The company is considered a significant competitor on the core markets of the fastfood industry.  Despite heavy competition, the management of Sonic is able to turnaround its poor financial performance into a $400 million revenue earner last 2002 .  It also leads the industry in terms of real sales growth since 1987.

The restaurant industry in the U.S. is also described.  The fast food industry is classified into two segments: the full service and the quick service restaurants.   Restaurant operations of the leaders in the industry is also presented.  Despite the growth of the restaurant industry, there are several

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indications that the U.S. market is saturated.  Competition is very stiff leading fastfood chains to expand out of the country. Demographic and societal trends also resulted to change in demands for fast-food chains.

Sonic as a company has evolved also in many ways.  From a prototype drive-in in 1953 it has already 2, 432 chains all over the world, although most of its operations is still based in the U.S. Under the management of Cliff Hudson, several initiatives has been implemented.  Franchise and employee relations has been improved, product innovations were offered, and marketing campaigns has been introduced.  Marketing strategies were also changing directions.  Marketing expenditures and brand management became an important component for their aggressive marketing campaigns.

Sonic has enjoyed success despite economic difficulties and Hudson believes that it is positioned to deliver up to 20 percent growth in revenues per share based n the 1-3 percent store sales growth.  However the financial position is not tailored to fund growth given that there will be decrease in sales.  One issue faced by Sonic is how to sustain financing with its planned growth.  Another challenge faced by Sonic is how to gain cost advantage since competitors continue to improve its technology and systems to gain such. The investment approach of Sonic to sustain its  growth and profitability is considered as the problem in the case.

Alternative recommendations were made and strategic implementations were formulated to support realism on the analysis of this case.

Situation Analysis

The Environment

US per capita spending on fastfood in 1998 as $376.23.  Three out of 10 consumers agree that meals prepared in a restaurant or fastfood are essential in their lifestyle. Americans have less energy to prepare their own meals which gives a promising implication for fastfood.  However as the population is aging, comes also the preferences of mature diners to a more upscale

The Industry

The restaurant industry is considered mature, composed of approximately eight million restaurants worldwide and 300,000 restaurant companies.  It is classified into two categories: the full service and the quick service ( fastfood).  Sonic competes in the quick service category along with fastfood chains such as McDonald’s, Burger King,  and Wendy’s.  Table 1 shows the number of stores operated by leading fastfood chains.

Total # of Chains
US
Int’l
Corporate Stores
Franchise

McDonald’s
30,093
13, 099
16, 944
12, 698
17, 395

Burger King
11,455
8, 146
3, 309
1, 014
10, 441

Wendy’s International
6,043
5, 315
728
1, 228
4, 815

Sonic
2,432
2, 431
2
511
1, 921

The economic impact of the industry is estimated to be at $ 1 trillion in 2002.  It is considered as the largest employer employing almost 11.6 million people.  Despite the industry’s growth, it is still beset with problems.  One common challenge the industry is facing is its high employee turn-over.

The Firm

Sonic drive-in was founded by Troy Smith in 1953 in Shawnee, Oklahoma.  First known as Top Hat Drive-in, it changes its name after 4 Top Hats were opened.  In 1973, Sonic is owned by franchisees and was publicly traded.  In 1984, it is already operating in 19 states with 1,000 franchises. In 1996, Cliff Hudson successfully buy-out the franchisees for $10 million and  initiated a public stock offering to pay its debts. The organization was restructured and operations efficiency is increased. Standardization among all franchisees and reduced its operating cost.  Brand awareness for Sonic also increased significantly.  By 2002, Sonic has 2,432 stores in 30 states and 2 stores in Mexico.

Although considered small compared with competition, Sonic enjoyed the largest real sales growth  in the industry.  Its net income reached up to $48 million and return to equity reached 21 percent.  It also enjoys high level of customer satisfaction and achieved the highest customer loyalty in the quick-service segment.

The success of its operation was attributed to five factors: multi layered growth strategy, a differentiated concept, strong sales trends, fast expansion program, and a good financial performance. The parent company developed a good relationship between their franchisees and their employees. Menu innovations were also introduced, and information systems were developed to better franchisee and employee support.  Marketing efforts were also improved.

III. Statement of the Problem

1.) Primary Problem

  What management approach should Sonic take to sustain growth and profitability?

“ Sonic’s financial position is not designed to fund growth during a possible downturn in revenues” therefore one challenge management faces is how to financed the planned growth.  Sustainability of  its success is also another challenge since competition is stiff in the industry.

III. Description of Alternatives

ALTERNATIVE 1: Use contingency approach1 to management in sustaining growth and profitability.

Basically, the contingency approach will assert that Hudson should take into consideration all the aspects that is faced by Sonic at hand.  The financial situation of Sonic is not so susceptible for expansion. Other areas also needs to be address like employee retention and product differentiation to be more competitive.

Advantages:

·         It will address immediate issues Sonic faces at hand;

·         Its a more flexible management approach since decisions are relative and based on situations at hand

Disadvantages:

·         Solutions might only be short-term as competition in the industry is so stiff;

·         There is a tendency that decisions will be more reactive.

ALTERNATIVE 2: Use strategic approach to management in sustaining growth and profitability will let Hudson take an integrative view of the whole organization in facing challenges and will make him assess the how all the functional areas and activities fit together to achieve Sonic’s goal and objectives2.

Advantages:

·         Decisions will be more proactive and long term;

·         Sustainability issues on facing competition in the industry will be given emphasis on the process;

·         Inclusion of stakeholders on the decision making.

Disadvantages:

·         It requires more time to go with the strategic process;

·         The management might not be able to solicit cooperation in the implementation of its strategies.

IV.             SELECTION OF STRATEGIC ALTERNATIVES/RECOMMENDATIONS

ALTERNATIVE 2: Take a strategic approach to management in sustaining growth and profitability.

It is recommended that Sonic should take a strategic approach to management in sustaining its growth and profitability. Sonic being the largest drive-in chain in the U.S. is in itself a recognition that it is one of the key players in the fast service segment of the restaurant industry.  Being this, Sonic is now in the position to be strategic in its plan on how to be be head on with large competitors.  The strategic management process consists of four major steps: (1) formulation of grand strategy, (2) formulation of strategic plans, (3) implementation of strategic plans, and (4) strategic control. Corrective action that is based on the evaluation of progress and feedback helps keep the strategic management process on track. Strategists formulate the organizations grand strategy after conducting a SWOT analysis. The organizations key capabilities and appropriate niche in the marketplace become apparent when the organizations strengths (S) and weaknesses (W) are cross-referenced with environmental opportunities (O) and threats (T)3.

In conducting the SWOT analysis of the firm , this involves a thorough scanning of the internal and external environments of Sonic. Environmental forecasting is necessary.  That the population in the U.S specifically the labor workforce4 will have an implication to the future demand for quick foods and employment for Sonic.

Also, industry conditions are being identified in strategic analysis.  In formulating strategies on the industry level, Porters  five forces model of industry competition will be considered relevant.  According to Porters generic competitive strategies model, four strategies are (1) cost leadership, (2) differentiation, (3) cost focus, and (4) focused differentiation.5  As for Sonic, the strategy to work on is more cost leadership and cost focus since they already have differentiate their products.  Even so, product differentiation should be their competitive advantage in the industry.

In analyzing the internal environments of the firm, it should be noted that one challenge faced by Sonic or the whole industry for that matter is employee turn-over.  Employee turn-over is caused by many factors like benefits, the job market, etc.  However Sonic should try to position themselves in employment terms.  Creating a fun working environment is a good start.  Managers need to recruit for diversity to increase their companies appeal to job applicants and customers alike. The hurdle-like selection process can be summed up in the seven-step PROCEED model: (1) prepare (job analysis, job descriptions, and interview questions), (2) review (legality and fairness of questions), (3) organize (assign questions to interview team), (4) conduct (collect information from the candidate), (5) evaluate (judge candidates qualifications), (6) exchange (meet and discuss information about candidate), and (7) decide (extend job offer or not).6  Strategic management allows considers employees as major stockholders therefore it empowers employees in decision making and goal setting.  Participative management programs foster direct employee involvement in one or more of the following areas: goal setting, decision making, problem solving, and change implementation. The S.T.E.P. model of open-book management encourages employee participation when managers (1) share key financial data with all employees, (2) teach employees how to interpret financial statements and control costs, (3) empower employees to make improvements and decisions, and (4) pay a fair share of profits to employees. Employees assigned to self-managed teams participate by taking on tasks traditionally performed by management. Profit sharing or gain sharing, job security, cohesiveness, and protection of employee rights are keys to building crucial employee support for participation programs.7 Sonic should also be able to promote a culture of creativeness and innovation among its employees, stakeholders, and customers.  A healthy innovation process which includes conceptualization, product technology, and production technology is vital to technological development.8

Given that Sonic has able to build a its brand and leads the customer satisfaction and customer loyalty in the industry, the company has now a good intangible resource lead vis-a-vis competitors.  Intangible resources are difficult for competitors to imitate or account for.  A good brand reputation will increase customer recognition therefore minimizing cost on advertising.

The financial aspect of Sonic is also a challenge that should be given attention to.  A debt to equity ratio of  over 50 percent and a current ratio of 69 percent is quite alarming for any investors or creditors on that matter.  More so that there is no significant liquid assets, Sonic absolutely will have difficulties in finding finances for expansion.  The partnership with Sodexho is a good move to start with.  This will increase equity of the company.  Another option would be to sell convertible bonds.  However, the best option would still be to find more investors. A good customer satisfaction plus an increase in the return of equity will be a good indicator that the company is experiencing growth.

Technology leadership and product focus or product innovation are also important factors to attain competitive advantage in the industry.  As for Sonic, it must be able to think of another market segments aside from the existing menu.  Innovation should never stop. Technology should also be assessed every now and then so it can be competitive and updated.

The restaurant industry , like most of the industries, is facing uncertainty.  In this case sonic is responding as defender when it comes to customer satisfaction and product differentiation, it responds as reactor in terms of technology and finance.9.

As for expansion, Sonic is relying heavily on getting new franchisees. This may mean that Sonic should consider expanding globally not just in Mexico but to other areas as well.  Make the franchise package so attractive and affordable.  Potential location would be Asia and more countries in South America due to hot climate.

Markets for non traditional Sonic areas should also be considered.  Partnership with other entities such as Sodexho should also be promoted.  Whatever expansion program is decided, the most important thing is for the parent company to control franchise quality and standards. A Total Quality Management 10 approach can be implemented across chains.

Work Cited:

1.)    Kreitner, Robert. Student Achievement Series: Foundations of Management Basics and Best Practices, Arizona State University,  2008.

2.)    (Please Note Source of Case if not from Kreitner)

3.)    Ibid.

4.)    Ibid.

5.)    Ibid.

6.)    Ibid.

7.)    Ibid.

8.)    Ibid.

9.)    Ibid.

10.)                       Ibid.

11.)                       Ibid.

 

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