- Email: [email protected]
How restaurant owners manage strategic risk
How Restaurant Owners Manage Strategic Risk by Ivor Morgan
and Like beauty,
jay Rao
risk is in the eye of the beholder.
proaches taken by independent restaurant owners to avoid or reduce risk when faced with major changes in their operations. Though restaurant owners are generally familiar with bank requirements for obtaining a loan, we felt that they would go well beyond this formal assessment. To ensure that we looked at major-and therefore risky-situations, we asked Boston-area restaurant journalists for a list of restaurants that they perceived as having made a recent major strategic change. In the case of one restaurant, we were fortunate to follow a series of changes from their planning through to their implementation. Our goal was to highlight a set of actions that could be useful to others facing such change. In all, we looked at five restaurants, and we categorized change actions into three critical functions: marketing, operations, and financial.
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In turn we asked each owner to describe the change as routine, a stretch, or a leap. We then compared the level of risk assessed by the outside observers with that perceived by the owners and found that the owners saw much less risk than did the observers. This difference appears to be in part the result of various risk-reduction ideas that the restaurateurs followed as they implemented the changes.
Why Change at All? Restaurant concepts often suffer a decline over time. Maintaining them in a fresh condition requires foresight, flair, and careful change management. A decline in a restaurant’s business may stem from changes in Ivor Morgan, D.B.A., is an associate professor at Babson College ccmotgan@ babson.eduu, where Jay Rao, Ph.D., is an assistant professor [email protected]>. 0 2000, Cornell University
basic market tastes or in a market’s demographics, from worn-out facilities or increased competition, or simply from drift--which usually means a loss of focus on the original concept or a gradual deterioration in (or lack of attention to) operations over time. In almost every restaurant’s life there comes a time when the changes needed to reverse or arrest a decline are large and risky, and not subtle and relatively safe. Our study examines the moment of greatest risk, when a restaurateur is making large, obvious changes to the concept and altering operations. We hoped to discover the ways the five restaurateurs whom we studied dealt with this risk. We separated actions into functional categoriesmarketing, operations, and financialfor a general comparison. Our focus on risk and actions led us to examine the restaurateurs’ perception of risk because that is what provides the incentive for action rather than some sort of objective measure. We assumed that risk perception is a function of personal character, experience, and circumstances. While an expert mountaineer might see a certain climb as a relatively low-risk proposition, an inexperienced person might consider it risky indeed. We call the total perceived risk the “strategic change risk.” The reasons for change were not a principal focus of this study Rather we were interested in the magnitude of the changes. We sought the advice of the restaurant reporters for the Boston Globe and The Tab in identifying suitable restaurants in or near Boston. Based on their suggestions we chose the five cases reported here. Our goal was to assess the various risk-reduction measures adopted by these restaurateurs and to generalize from them. Because the food writers helped us to select the restaurants, the restaurants are those that have been
Exhibit 1 Three-dimensional risk-mapping model Operations L
S
I?
Marketing
Financial
In this matrix, risk resulting from changes in of three dimensions: financial, marketing, or sions, a particular change could be seen as depending on how great the change is. The
“noticed” not only because they have undergone major changes but also because they are generally perceived as successful. It was not our intention to monitor only success, however, and we discovered that “failure” was an important part of success. We conclude our report by summarizing the risk-reduction approaches that were adopted by our sample of independent restaurateurs because these may be helpful to others implementing strategic changes.
Conceptual
Framework
During our past experience with service enterprises we developed a three-dimensional risk-mapping model with three business functions, as previously noted: marketing, operations, and financial (see Exhibit 1).
a restaurant can be along one or more operations. Along each of those dimenroutine (R), a stretch (S), or a leap (L) origin (0) represents no change at all.
The map can be used to illustrate the relative amounts of change. Marketing activities were seen as those traditionally focused on demand management-for example, advertising, promotions, and menu pricing. More strategic issues involving the management of expectations and perceptions included target-market segmentation, positioning, signaling, and image management. Operations activities were seen as being most behind-thescenes maneuvers. Those included facility location, layout, capacity, kitchen operations, material procurement, and distribution logistics. However, we recognized the considerable overlap between the marketing and operations activities in restaurant management. We included human-resources matters such as
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recruiting, training, and retaining employees as operations activities. Our third dimension, financial, included matters dealing with capital investments-such as buildings and equipment-and working capital. The axes of Exhibit l’s model are in terms of the owner’s perceptions; as with our mountaineer, what is a challenge for one owner may be no challenge for another. The terms “routine,” “ stretch,” and “leap” are clearly subjective in nature, and we were curious to see whether experience or other circumstances would color what was seen to be “risky.” For example, a restaurant owner who had changed a restaurant’s name would likely perceive the associated risks differently if faced with this prospect again compared to an owner who had never done so. We made no assumptions as to what would constitute a “leap,” a “stretch,” or, indeed, “routine.” Our presumption was that owners would act to minimize their risks-or in the terms of Exhibit l-avoid leaping in several directions simultaneously and that they would be able to explain what risk-reduction actions they had taken.
Booming
Boston
We should note that Boston, Massachusetts, enjoyed a particularly robust economy during the time of our study, that being 1996,1997, and the first half of 1998. We suspect that the good economic conditions probably influenced the attitudes of the restaurateurs toward risk. Overlaid on the economic boom was a change in the city itself; many neighborhoods were experiencing radical demographic changes that could have affected the prospects for given restaurant concepts. The South End neighborhood, the site of more than one of the restaurants studied, provides an example of rapid change, as it transmogrified from a relatively low-income area
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with few out-of-area visitors to one with much higher income levels that became a destination for nonresidents. We developed short case studies of the selected restaurants and asked specifically about the major risks perceived prior to major changes and the steps that had been followed to minimize those risks. We were fortunate to follow the fortunes of one restaurant, Bob The Chef’s, and its owner through some major changes and to write a detailed case study of the situation. Bob The Chef’s, therefore, serves as our base case for this study.
Case I: Bob The Chef’s Bob and Dottie Morgan established Bob The Chef’s restaurant when they moved their counter-service operation from Mud Kelly’s Big “M” nightclub in 1968. They sold Bob’s in the mid-‘80s to a second owner who tried hard to maintain its southern-cooking tradition. The second owner ran into financial difficulties, though, and sold the restaurant in 1990 to Darryl Settles, then a Digital Equipment Corporation engineer. Settles was driven to become an entrepreneur and saw potential in the s&seat “soul-food diner” in spite of its financial losses. The restaurant was located on Columbus Avenue in Boston’s South End, an area rich in cultural and ethnic diversity that had once been a prime entertainment district. Nevertheless, this area was undergoing rapid change, with many of its jazz associations having been lost as a general refurbishment of the area, was moving into a state of ‘ ‘yuppyfication.” A stretch for Bob The Chefs. Under Settles’s ownership, the restaurant continued to prepare “southern soul food” using the Morgans’ recipes. But by 1995 Settles had made a number of changes: vegetable oil replaced
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animal fat for cooking; the restaurant became one of the first in the area to be smoke free; closing time was extended from 8:00 PM to 9:00 PM generally and to 11:OO PM on Fridays and Saturdays; and the restaurant offered a Sunday brunch. Settles also opened a businesscatering service, as a way to extend the use of the kitchen. The catering operation grew dramatically, to the point that its 1995 revenues exceeded those from sit-down operations. It also had a successful takeout operation. Settles perceived only a small risk in all of those changes. Although the catering service was a considerable stretch for the operation, it was far from a leap because the catering operation came directly out of the restaurant’s core business. Catering required few investments in physical assets, but did require careful people management. Settles perceived chiefly a market risk from his changes because the catering business served a different market segment than that traditionally found in the restaurant itself (see Exhibit 2a for a risk map of these actions). Bob leaps. His catering success inspired Settles to make even more use of his kitchen. In 1995 he opened Bob The Chef’s Express as a kiosk-size quick-service restaurant in Dudley Square-one of Boston’s oldest business districtsabout 1.5 miles through city streets from the main restaurant. Despite the unit’s physical distance from the original restaurant, its market demographics were remarkably similar to those of the main operation on Columbus Avenue. Dudley Square was also undergoing resurgence with several buildings undergoing full renovation. The kiosk’s food was prepared in the original restaurant and retained much of the flavor of the original menu. The risks in this new venture involved logistics, the suitability of the menu for an off-
Exhibits
2a-2d
Perceived risks of changes at Bob The Chef’s Operations
Operations Sp
2a
I
Catering
L ‘\
\
2c Renovation
\ \
S
\
i’
Financial Operations
Financial
2b
Operations
Express (off-site kiosk)
2d
Composite
Financial
L = Leap S = Stretch R = Routine 0 = No change
Financial
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Though the pace of change may appear to be great in some cases, the change may actually come about through a series of small stretches and leaps.
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site express service, and the investment of capital and managerial time. However, after the catering-service experience, Settles perceived the logistical problems to be routine, though the Express did pose a considerable new financial risk. (See Exhibit 2b, on the previous page, for a map summary.) At this point the Columbus Street restaurant retained its original, faded, diner-like character. The restaurant space was divided by a central stairway with access to the restaurant on both sides. The stairway served the upstairs apartments and was not connected to the restaurant. The restaurant layout featured cramped booths and tables with a worn decor featuring much plastic and vinyl. Settles had aspirations to update the decor and to add live jazz entertainment on the weekends. This plan presented a large financial risk as well as a large marketing risk, because those changes would necessitate price increases. (See Exhibit 2c, on the previous page.) In a related matter, Settles knew that his expanded venture was leaving him less and less personal time, and so he hired a manager who had considerable experience in the night-club business and had firm ideas about the direction Bob The Chef’s should take. Central to the manager’s ideas was an overhaul of the restaurant, which included changing the decor, upgrading the kitchen, new operating hours, minor changes to the menu, and a new pricing strategy. Leaping backward. Bob The Chef’s Express ran into difficulties from the start and closed in 1996 after just 18 months of operation. That closure, however, allowed Settles to renovate the main restaurant unit. He chose to revamp his restaurant to serve the market segment he had developed through the catering venture, making sure his new customers would not be disap-
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pointed when they visited Columbus Avenue. This decision was a major shift in strategy because it meant that his traditional market would no longer be served. The redesigned unit faced considerable market risk because it was not clear that there would be sufficient volume from the new market segments to sustain operations. The operation, however, would be made more efficient by investment in the kitchen-and the catering operation would be enhanced. The new manager did not fit well and did not stay long. A major point of contention was the future character of the menu, which the new manager wanted to completely redesign.
Stepwise
Risk Management
From an outsider’s view, Darryl Settles seems to have been increasingly willing to take leaps as he moved from small adjustments to a shift in the basic concept of the business. To begin with, the move into catering created little financial or marketing risk, since failure would have no impact on the restaurant’s traditional market. The increased volume clearly stretched the firm’s personnel and its kitchen operations, but handling that side effect was not particularly risky. The Express focused on a traditional market-routine in terms of demographics-but tested the flexibility of the menu and operation for quick-service delivery on a new site. Operating risks were kept as low as possible by using the main restaurant for food preparation. Though this was a financial leap, the marketing risks were again minimal because the Express’ failure wouldn’t hurt the restaurant itself. Biggest risk. The change to the main restaurant concept involved considerable financial risk and a new market focus. But the financial drain of the Express was gone, and
Settles had essentially tested his new target market through the catering service. Despite the financial leap created by a pricier menu and a new market, Settles saw the market change as a manageable risk and one that would reduce his operational complexity rather than increase it. Thus, we judge that Settles not only faced risk in making his changes to Bob The Chef’s, but he indeed created risky situations. Though the pace of change was great, however, by accident or design his leaps were kept to a limited number of dimensions at any one time. That is, he took an operations risk, but not a market risk-or a financial risk, but not an operations risk. If his decisions were aggregated-and this may approximate an outsider’s view-it would appear that Settles had made several gigantic leaps in changing the direction of his restaurant (see Exhibit 2d, on the previous page, for an aggregate risk map). But close inspection shows that change came about through a series of small stretches and leaps-each of a different nature, and spread logically over time. Unwanted risk. The short stay by the new manager was in part due to Settles’s unwillingness to risk major changes to his menu, which he saw as his core business identity. He was willing to change markets after the experience with the successful catering venture, and changes to the physical structure of the unit were necessary in some form or another. The risk of tampering with the menu, however, was far too great in his mind. Overall, Darryl Settles’s approach to risk had a sequential rather than a parallel form. The changes were largely incremental rather than a single “big bang,” and resulted in both successes and failures. Most of the risks associated with the major restaurant redesign had been tested prior to the change. Most impor-
tant, Settles cut his losses quickly (e.g., releasing the newly hired manager and closing the off-site Express operation).
Case 2: Portobello Bistro The case of the Portobello Bistro is another example of “creeping complexity.” Michael Scala is a thirdgeneration restaurateur whose family still runs Scala’s Sandwich Shop, which was opened by Michael’s grandfather in Boston’s North End. Motivated by Boston’s seafrontredevelopment publicity, Michael Scala opened Portobello in July 1994 as a breakfast-and-lunch sandwich shop that would morph into a pasta restaurant for the evening. The conversion plan was to change crews completely between 3:00 PM and 5:00 PM, move the deli counters, and rearrange the tables for dinner. The morphing concept lasted about two days, although the daytime sandwich shop thrived with the support of the primarily blue-collar industrial area nearby (see Exhibit 3a, on the next page, for a risk map). The pasta concept returned two years later, when Scala bought and moved the sandwich shop into the adjacent property. He converted the original location into a traditional North End-style Italian restaurant with a fare of pasta, meatballs, and lasagna. The two sites displayed the same decor and were connected internally by a large glass door. The restaurants worked from a single kitchen, but a fancy curtain concealed the deli counters after 3:00, and the glass door was opened to increase the seating area of the Italian restaurant for the evening. The seaport area was slow to develop, however. Although the sandwich shop continued to thrive, the restaurant struggled. (See Exhibit 3b for this risk map.) In late 1996 Boston’s World Trade Center and a couple of 200plus-room hotels opened in the
Change should be incremental rather than a single “big bang”-and
in the case of
failure, cut your losses quickly.
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Exhibits 3a-3d Perceived risks of changes at Portobello Operations L
Operations
3a Sandwich shop and pasta restaurant
S
I
\
L Pasta restaurant \
3c Went upscale
S
R
)/_A /’
Marketing
I
“/
R
Marketing
L
S
/ Financial Operations L
L
/
Financial
Operations
3b Purchased the property next door
Financial
L = Leap S = Stretch R = Routine 0 = No change
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Marketing
Financial
seaport area, and a number of professional service firms moved into the neighborhood. Michael Scala saw those professional workers as a market opportunity for a trendy Italian bistro. In fall 1997 he closed both the sandwich shop and the Italian restaurant for a major upgrade. The old cooks were replaced by a New York chef who came with his own MediterraneanTuscan menu with a touch of New England that Scala felt confident would appeal to his growing, educated market. The chef was hired with the change underway as he was also to be the kitchen manager. Except for a new larger grill, nothing was changed in the back room. Scala hired a new front-room manager and hired servers who knew their wines and could handle sophisticated guests (see Exhibit 3c for this risk map). Scala changed the name of the restaurant from “Portobello” to “Portobello Bistro.” He increased menu prices so that average checks for lunch went from $9 to $12, and dinner checks averaged $30. Though the restaurant’s menu and back room were completely under the chefs control, Scala remained the manager of the sandwich shop, as he professed little knowledge about running a trendy restaurant. Cautious stretching. Scala had extensive experience in his family’s sandwich business, and he was careful to avoid venturing far from that familiar base. He was also cautious about taking too great a financial risk. He minimized his investments and attempted to leverage them in all phases. Indeed, he kept his investment risk so low in the initial move to open an Italian restaurant that the deli-to-diner idea did not work out. That first full-scale restaurant tested the market, though, and he quickly discovered that the available market was not yet large enough to support his ideas.
He made the decision to upgrade the venture again only when market changes were evident. At this point, Scala decided to acquire the expertise for developing a menu and for managing its implementation by hiring a chef and manager. He reduced the risk inherent in his lack of operations knowledge, but by hiring the chef and manager he faced a new risk-that of depending on their knowledge and actions. He also changed his restaurant personnel to meet the needs of his new target market. Simultaneously, Scala sent a signal to the outside world that major changes had been made by using a new restaurant name. However, in all of this he was careful to constrain his investment by maintaining a common kitchen and by not increasing his investment in real estate. Outsiders might see the opening of the trendy Italian bistro as a leap in many directions simultaneously (see Exhibit 3d for a consolidated view). But that view overlooks Scala’s careful experimentation in developing his concept. By the time he made the major financial investment to enlarge and upgrade the restaurant, he had learned a considerable amount about the marketits volume and its requirementsand he had identified the changes that were necessary for success. Scala kept his risks at a low level throughout his development phase. He used his core knowledge of the sandwich shop as the foundation for careful expansion. His major upgrade consequently came with relatively limited marketing and operational risks, though hiring new key personnel always embodies risks.
Three Other Views of Risk Although we do not map the following three cases, we present them to demonstrate other restaurateurs’ efforts to minimize risk-or, in one case, the consequences of failing
to do so. The other point to be made from the following three cases is that risk perceptions can be deceptive. CafZ Brazil. Walter Vittorino, a restaurateur for 25 years, started Cafe Brazil in 1993 with a friend. After four years of operation, Vittorino felt that the original restaurant needed some improvements and bought out his partner, who was content with the status quo. Cafe Brazil had been a success from the start with a large, expatriate Brazilian crowd. This group frequented the bar on weekends, watched the TV, and talked about things Brazilian. Good weather in summer sent the sun-loving Brazilians to the beaches, resulting in a severe business decline, but the crowd was otherwise loyal to the restaurant. The name-Cafe Brazil-provided a rallying point for this important market segment. Consequently, it was unthinkable that the name would be changed. After buying out his partner, Vittorino made major changes in the restaurant’s appearance to freshen up the atmosphere and adjusted prices. Vittorino was careful, however, to keep his principal market in mind through the changes. He deemed the greatest risk to the restaurant to be one that would adversely affect his main market segment and their perception of the restaurant. In his eyes, the changes made were routine while maintaining the essential nature of the restaurant. Indeed, the biggest risk that Vittorino saw in this case was in failing to make updates. Laurel. Russell Berger was a third-generation restaurateur operating Baja, a Mexican concept, and Hazels, a full-menu deli. Early in the 1990s he opened Blue Wave, a New York-style formal restaurant and bar. The concept never became established in the Boston market, and in the mid-1990s Berger closed Blue
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Avoiding
simultaneous
moves seems to be a major risk-reduction
strategy.
The idea is to make changes in only a single dimension
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at a time.
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Wave, renovated the restaurant, and reopened it as Laurel, a country-inn concept offering a creative seasonal American cuisine. Though Berger is himself a chef, he hired a new chef and gave that person the freedom to set the menu. With the new chef came some changes in the kitchen design, a new kitchen crew, and a new restaurant manager. Some of the table servers returned when Laurel opened after the renovations. The front-of-the-house changes were largely cosmetic and the layout was principally unchanged. Despite a new concept, new kitchen staff, and market repositioning, Berger saw most of the changes he made as routine, perhaps due to his extensive restaurant experience. Certainly, that assessment is at variance to that of outside observers. His major move to constrain risk prior to the renovations was to get the restaurant’s lease extended to ten years. Berger considered his multiple restaurant ownership to be an implicit portfolio approach to risk reduction. The delegation of menu management to the newly hired chef was also seen as a risk-reducing mechanism, since Berger expected that the chef would bring marketing and operations knowledge to the revamped operation. Cafh Saigon. The owners of Cafe Saigon, a Vietnamese restaurant, decided to go ahead with a major cosmetic change to their restaurant without securing a bank loan. Their approach to reducing risk was to cut the renovation costs and speed the construction work by employing a customer who was an architect. The concept was to create a moreauthentic Vietnamese environment using bamboo and Asian artifacts. To recoup that investment, the owners would raise menu prices somewhat. Unfortunately, the owners gradually discovered that their architect had seriously underestimated the project, both in terms of time and
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money. Moreover, the architect had a poor understanding of the authentic Vietnamese look. The owners subsequently released the architect and hired a former Vietnamese national who was a building contractor, and he undertook the design. The owners thought that their upgrade was a relatively routine project, and so their subsequent problems were completely unforeseen. Had they been forced to prepare thorough plans ahead of timesuch as those that a bank might require-it is possible that they would have avoided many pitfalls. Their increased risk-not perceived at the time-stemmed from what they did not do rather than from what they did. Their perception was that they had moved to reduce risk rather than increase it, but their use of an American architect to design a Vietnamese restaurant created a risk the owners did not foresee.
Strategies for Risk Reduction Although this study comprises only five cases, we see a great contrast between the risks perceived by outsiders and the risks as judged by the restaurants’ owners, essentially the difference between the composite map and the individual maps of Exhibits 2 and 3. Furthermore, some risks were taken that were only evident to the owners after the fact. From the lessons of these cases, we offer some general risk-reduction strategies. Avoid simultaneous leaps. Avoiding simultaneous moves seems to be a major risk-reduction strategy. By this we mean that managers try to limit the total risk at any point in time by reducing the number of concurrent actions in different dimensions. The idea is to stretch or leap in only a single dimension at a time, if possible. The risks in a change in menu, decor, or personnel may be substantially reduced if taken one at a time. On the other hand,
simultaneous stretches in more than one dimension may constitute a leap that the operator did not mean to take. The alterations at both Bob The Chef’s and at Portobello Bistro showed how changes that appeared to be large on the surface were actually incremental. Test before a stretch or a leap. Testing before stretching or leaping may seem obvious to those in large corporations, where a major strategy change may be routinely tested using market research or by some other means before implementation. However, the scale and nature of the local restaurant market may make it difficult and perhaps too costly to collect relevant information. Consequently, the owners in our sample used other approaches for testingsometimes without realizing that they were testing the market. In the case of Bob The Chef’s, for example, the catering operation provided substantial evidence that the core menu was acceptable to a different market. Similarly, the successive moves by Michael Scala into a different market provided evidence that he needed new skills and approaches to be successful. So he reduced his risk by acquiring those skills in the form of a new restaurant manager. Stretch or leap by buying experience. Restaurateurs who realize that they need additional knowledge can usually acquire it. In the cases of Laurel and Portobello Bistro, the owners hired chefs who then developed menus they believed in. On the other hand, the persons hired must be a strategic fit, which was not true in the case of the Bob The Chef’s manager who wasn’t in tune with the tried-and-true menu. The new design for Cafe Saigon required specific design knowledge, and the owners assumed that formal architect’s credentials were a guarantee of this. The owners’ familiarity with their project may have led to a belief that the appropriate cultural
knowledge was common. Consequently, they did not see the redesign aspect of their project as being risky. Comfort and familiarity proved a double-edged sword in this case: they reduced the perception of risk, but they also reduced attention to detail. Certainly, the change at Cafe Saigon would have been easier had the owners put themselves in their architect’s shoes. The failure of Bob The Chef’s Express demonstrates the wisdom of buying knowledge and advice to help in assessing a project ahead of time. Perhaps Darryl Settles would not have tried the brand extension represented by Express had he sought such advice. Against this is the risk that an experienced person may carry a bias or fail to understand a winning new idea. Moreover, in the example of Bob The Chef’s Express, despite the operation’s failure, it nevertheless proved that a broad market existed for the menu. The support analysis required for a bank loan or for an outside investor may help to highlight the risks ahead. Such an analysis would seem to be a sound cornerstone of any risk-reduction strategy, even if a loan were not necessary. The use of licensing boards, national and state restaurant associations, or the Small Business Administration would be useful, too, as well as inexpensive. Operate from a strong base. Making sure the base operation is strong constitutes a type of portfolio approach, in which the strong portion of the operation supports the weak (new) venture until it stabilizes or folds. Managers generally don’t want to create weak enterprises, but the risk of failure is reduced if the base is solid. In three cases we see an application of a portfolio approach, albeit in different ways. Russell Berger presents the most obvious example through his use of two strong outlets to support the opening of the Blue Wave, a.k.a. Laurel.
The analysis required for a bank loan or for an outside investor may help to highlight the risks ahead (including
in
those cases where financing is not required).
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Bob The Chef’s approach was also in essence a portfolio, though of dissimilar components: the restaurant, the catering, and the Express. The catering and the restaurant had strong market bonds, but it was relatively easy to cut the weak Express operation without adverse effects on the rest of the venture. The Portobello sandwich business served as the foundation on which the riskier pasta concept was developed. The restaurant went through several iterations before a successful form was found. But the original sandwich shop provided the fuel for the development.
Reality Checks Many risks are reduced when firms justify their plans to outside entities, such as banks. A normal bank-loan application for expansion or change requires detailed business plans, the development of cash-flow projections, assessment of current performance, three years of the restaurant’s financial statements, and a personal financial statement. Banks like to assess their risks as objectively as possible, and the case of Cafe Saigon is a clear example of how actual risks are increased if this standard planning phase is omitted. Ironically, in none of the cases we discuss here did bank-loan applications have an effect. Computer applications make it easy to produce projections and statements that appear convincing, even when their underlying assumptions may have been only lightly examined. The bank loan for Bob The Chef’s Express, for instance, was supported by a wad of documentation, but there was no reality check from anyone experienced in the restaurant industry. To that end, one might find some risk reduction in consultation with local licensing boards. Licensing boards can clarify legal requirements and sometimes offer helpful advice.
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No matter what objective assessments are made, many risks cannot be formally assessed since they are often embodied in the skills of the people and in the way changes are implemented. In the terms of this discussion, experienced managers seem to try to reduce the number of leaps by making incremental stretches if possible, and to make true leaps a rarity. Even when a strategic move was outside the manager’s experience-as in the cases of Bob The Chef’s and Portobello Bistrothe managers appear to have tested many of the changes prior to committing to a major action. Such testing may not be at all obvious to the outside observer. In the terms of our original model, it seems that our sample of managers generally tried to make their risk exposure relatively routine. When the managers were required to leap along a particular risk dimension, they appeared to take steps, consciously or otherwise, to avoid leaping in another. In this study our managers were careful to test conditions before acting, keeping other changes at a routine level. Our examples suggest that-if our sample is even remotely representative-managers will find ways to reduce the total risk exposure using a number of mechanisms. Certainly, this study shows that there are a number of risk-reduction mechanisms available. The range of experience in our sample was great-from new restaurateurs to the seasoned members of families with generations of experience. The experience base clearly influenced perceived risk. What was seen by Russell Berger as a normal risk of the restaurant business-that is, repositioning his operation-was not always seen as such by the newer restaurateurs. Consequently, the actual risk level of what outsiders perceive to be a major strategic change is likely to differ according to the operator’s experience.
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To review, though the restaurants examined here were perceived by restaurant journalists to have undergone major changes, the risks perceived by their owners only rarely fell into the “stretch” category. At no time did the restaurateurs take simultaneous multiple leaps. Most of the restaurateurs whom we studied attempted to reduce risk by hiring expert assistants, although the hiring decision sometimes entailed unexpected risk. An experienced restaurateur hiring an experienced chef appears to be in a better position than an inexperienced restaurateur hiring experienced chefs or managers. Since hiring was one of the ways used to systematically reduce risk, this aspect of hiring demands that particular attention be paid by those inexperienced in hiring. We examined decisions and risks in this article without a specific assessment of success or failure. However, we noted earlier that there was likely to be a success bias to the restaurant sample based on our criteria for selecting the case studies. Moreover, there were many examples of failure along the way. Indeed, the failures were an important part of the learning process, and allowed the owners to move forward with reduced risk. This was particularly evident in the cases of Bob The Chef’s and Portobello. Structuring a major change into sequential actions and decisions seems to be a fundamental way to reduce risk and provide organizational learning. For failure to be acceptable, our sample of organizations demonstrated the importance of a sound foundation. This foundation brought a reduction in stress levels and perceived risk since the firm itself was not at risk, Overall, our study demonstrated that having a clear goal for a strategic change might be insufficient. Although what you do counts, the way that you do it counts even more. CQ
and Like beauty,
jay Rao
risk is in the eye of the beholder.
proaches taken by independent restaurant owners to avoid or reduce risk when faced with major changes in their operations. Though restaurant owners are generally familiar with bank requirements for obtaining a loan, we felt that they would go well beyond this formal assessment. To ensure that we looked at major-and therefore risky-situations, we asked Boston-area restaurant journalists for a list of restaurants that they perceived as having made a recent major strategic change. In the case of one restaurant, we were fortunate to follow a series of changes from their planning through to their implementation. Our goal was to highlight a set of actions that could be useful to others facing such change. In all, we looked at five restaurants, and we categorized change actions into three critical functions: marketing, operations, and financial.
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In turn we asked each owner to describe the change as routine, a stretch, or a leap. We then compared the level of risk assessed by the outside observers with that perceived by the owners and found that the owners saw much less risk than did the observers. This difference appears to be in part the result of various risk-reduction ideas that the restaurateurs followed as they implemented the changes.
Why Change at All? Restaurant concepts often suffer a decline over time. Maintaining them in a fresh condition requires foresight, flair, and careful change management. A decline in a restaurant’s business may stem from changes in Ivor Morgan, D.B.A., is an associate professor at Babson College ccmotgan@ babson.eduu, where Jay Rao, Ph.D., is an assistant professor [email protected]>. 0 2000, Cornell University
basic market tastes or in a market’s demographics, from worn-out facilities or increased competition, or simply from drift--which usually means a loss of focus on the original concept or a gradual deterioration in (or lack of attention to) operations over time. In almost every restaurant’s life there comes a time when the changes needed to reverse or arrest a decline are large and risky, and not subtle and relatively safe. Our study examines the moment of greatest risk, when a restaurateur is making large, obvious changes to the concept and altering operations. We hoped to discover the ways the five restaurateurs whom we studied dealt with this risk. We separated actions into functional categoriesmarketing, operations, and financialfor a general comparison. Our focus on risk and actions led us to examine the restaurateurs’ perception of risk because that is what provides the incentive for action rather than some sort of objective measure. We assumed that risk perception is a function of personal character, experience, and circumstances. While an expert mountaineer might see a certain climb as a relatively low-risk proposition, an inexperienced person might consider it risky indeed. We call the total perceived risk the “strategic change risk.” The reasons for change were not a principal focus of this study Rather we were interested in the magnitude of the changes. We sought the advice of the restaurant reporters for the Boston Globe and The Tab in identifying suitable restaurants in or near Boston. Based on their suggestions we chose the five cases reported here. Our goal was to assess the various risk-reduction measures adopted by these restaurateurs and to generalize from them. Because the food writers helped us to select the restaurants, the restaurants are those that have been
Exhibit 1 Three-dimensional risk-mapping model Operations L
S
I?
Marketing
Financial
In this matrix, risk resulting from changes in of three dimensions: financial, marketing, or sions, a particular change could be seen as depending on how great the change is. The
“noticed” not only because they have undergone major changes but also because they are generally perceived as successful. It was not our intention to monitor only success, however, and we discovered that “failure” was an important part of success. We conclude our report by summarizing the risk-reduction approaches that were adopted by our sample of independent restaurateurs because these may be helpful to others implementing strategic changes.
Conceptual
Framework
During our past experience with service enterprises we developed a three-dimensional risk-mapping model with three business functions, as previously noted: marketing, operations, and financial (see Exhibit 1).
a restaurant can be along one or more operations. Along each of those dimenroutine (R), a stretch (S), or a leap (L) origin (0) represents no change at all.
The map can be used to illustrate the relative amounts of change. Marketing activities were seen as those traditionally focused on demand management-for example, advertising, promotions, and menu pricing. More strategic issues involving the management of expectations and perceptions included target-market segmentation, positioning, signaling, and image management. Operations activities were seen as being most behind-thescenes maneuvers. Those included facility location, layout, capacity, kitchen operations, material procurement, and distribution logistics. However, we recognized the considerable overlap between the marketing and operations activities in restaurant management. We included human-resources matters such as
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recruiting, training, and retaining employees as operations activities. Our third dimension, financial, included matters dealing with capital investments-such as buildings and equipment-and working capital. The axes of Exhibit l’s model are in terms of the owner’s perceptions; as with our mountaineer, what is a challenge for one owner may be no challenge for another. The terms “routine,” “ stretch,” and “leap” are clearly subjective in nature, and we were curious to see whether experience or other circumstances would color what was seen to be “risky.” For example, a restaurant owner who had changed a restaurant’s name would likely perceive the associated risks differently if faced with this prospect again compared to an owner who had never done so. We made no assumptions as to what would constitute a “leap,” a “stretch,” or, indeed, “routine.” Our presumption was that owners would act to minimize their risks-or in the terms of Exhibit l-avoid leaping in several directions simultaneously and that they would be able to explain what risk-reduction actions they had taken.
Booming
Boston
We should note that Boston, Massachusetts, enjoyed a particularly robust economy during the time of our study, that being 1996,1997, and the first half of 1998. We suspect that the good economic conditions probably influenced the attitudes of the restaurateurs toward risk. Overlaid on the economic boom was a change in the city itself; many neighborhoods were experiencing radical demographic changes that could have affected the prospects for given restaurant concepts. The South End neighborhood, the site of more than one of the restaurants studied, provides an example of rapid change, as it transmogrified from a relatively low-income area
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with few out-of-area visitors to one with much higher income levels that became a destination for nonresidents. We developed short case studies of the selected restaurants and asked specifically about the major risks perceived prior to major changes and the steps that had been followed to minimize those risks. We were fortunate to follow the fortunes of one restaurant, Bob The Chef’s, and its owner through some major changes and to write a detailed case study of the situation. Bob The Chef’s, therefore, serves as our base case for this study.
Case I: Bob The Chef’s Bob and Dottie Morgan established Bob The Chef’s restaurant when they moved their counter-service operation from Mud Kelly’s Big “M” nightclub in 1968. They sold Bob’s in the mid-‘80s to a second owner who tried hard to maintain its southern-cooking tradition. The second owner ran into financial difficulties, though, and sold the restaurant in 1990 to Darryl Settles, then a Digital Equipment Corporation engineer. Settles was driven to become an entrepreneur and saw potential in the s&seat “soul-food diner” in spite of its financial losses. The restaurant was located on Columbus Avenue in Boston’s South End, an area rich in cultural and ethnic diversity that had once been a prime entertainment district. Nevertheless, this area was undergoing rapid change, with many of its jazz associations having been lost as a general refurbishment of the area, was moving into a state of ‘ ‘yuppyfication.” A stretch for Bob The Chefs. Under Settles’s ownership, the restaurant continued to prepare “southern soul food” using the Morgans’ recipes. But by 1995 Settles had made a number of changes: vegetable oil replaced
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animal fat for cooking; the restaurant became one of the first in the area to be smoke free; closing time was extended from 8:00 PM to 9:00 PM generally and to 11:OO PM on Fridays and Saturdays; and the restaurant offered a Sunday brunch. Settles also opened a businesscatering service, as a way to extend the use of the kitchen. The catering operation grew dramatically, to the point that its 1995 revenues exceeded those from sit-down operations. It also had a successful takeout operation. Settles perceived only a small risk in all of those changes. Although the catering service was a considerable stretch for the operation, it was far from a leap because the catering operation came directly out of the restaurant’s core business. Catering required few investments in physical assets, but did require careful people management. Settles perceived chiefly a market risk from his changes because the catering business served a different market segment than that traditionally found in the restaurant itself (see Exhibit 2a for a risk map of these actions). Bob leaps. His catering success inspired Settles to make even more use of his kitchen. In 1995 he opened Bob The Chef’s Express as a kiosk-size quick-service restaurant in Dudley Square-one of Boston’s oldest business districtsabout 1.5 miles through city streets from the main restaurant. Despite the unit’s physical distance from the original restaurant, its market demographics were remarkably similar to those of the main operation on Columbus Avenue. Dudley Square was also undergoing resurgence with several buildings undergoing full renovation. The kiosk’s food was prepared in the original restaurant and retained much of the flavor of the original menu. The risks in this new venture involved logistics, the suitability of the menu for an off-
Exhibits
2a-2d
Perceived risks of changes at Bob The Chef’s Operations
Operations Sp
2a
I
Catering
L ‘\
\
2c Renovation
\ \
S
\
i’
Financial Operations
Financial
2b
Operations
Express (off-site kiosk)
2d
Composite
Financial
L = Leap S = Stretch R = Routine 0 = No change
Financial
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Though the pace of change may appear to be great in some cases, the change may actually come about through a series of small stretches and leaps.
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site express service, and the investment of capital and managerial time. However, after the catering-service experience, Settles perceived the logistical problems to be routine, though the Express did pose a considerable new financial risk. (See Exhibit 2b, on the previous page, for a map summary.) At this point the Columbus Street restaurant retained its original, faded, diner-like character. The restaurant space was divided by a central stairway with access to the restaurant on both sides. The stairway served the upstairs apartments and was not connected to the restaurant. The restaurant layout featured cramped booths and tables with a worn decor featuring much plastic and vinyl. Settles had aspirations to update the decor and to add live jazz entertainment on the weekends. This plan presented a large financial risk as well as a large marketing risk, because those changes would necessitate price increases. (See Exhibit 2c, on the previous page.) In a related matter, Settles knew that his expanded venture was leaving him less and less personal time, and so he hired a manager who had considerable experience in the night-club business and had firm ideas about the direction Bob The Chef’s should take. Central to the manager’s ideas was an overhaul of the restaurant, which included changing the decor, upgrading the kitchen, new operating hours, minor changes to the menu, and a new pricing strategy. Leaping backward. Bob The Chef’s Express ran into difficulties from the start and closed in 1996 after just 18 months of operation. That closure, however, allowed Settles to renovate the main restaurant unit. He chose to revamp his restaurant to serve the market segment he had developed through the catering venture, making sure his new customers would not be disap-
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pointed when they visited Columbus Avenue. This decision was a major shift in strategy because it meant that his traditional market would no longer be served. The redesigned unit faced considerable market risk because it was not clear that there would be sufficient volume from the new market segments to sustain operations. The operation, however, would be made more efficient by investment in the kitchen-and the catering operation would be enhanced. The new manager did not fit well and did not stay long. A major point of contention was the future character of the menu, which the new manager wanted to completely redesign.
Stepwise
Risk Management
From an outsider’s view, Darryl Settles seems to have been increasingly willing to take leaps as he moved from small adjustments to a shift in the basic concept of the business. To begin with, the move into catering created little financial or marketing risk, since failure would have no impact on the restaurant’s traditional market. The increased volume clearly stretched the firm’s personnel and its kitchen operations, but handling that side effect was not particularly risky. The Express focused on a traditional market-routine in terms of demographics-but tested the flexibility of the menu and operation for quick-service delivery on a new site. Operating risks were kept as low as possible by using the main restaurant for food preparation. Though this was a financial leap, the marketing risks were again minimal because the Express’ failure wouldn’t hurt the restaurant itself. Biggest risk. The change to the main restaurant concept involved considerable financial risk and a new market focus. But the financial drain of the Express was gone, and
Settles had essentially tested his new target market through the catering service. Despite the financial leap created by a pricier menu and a new market, Settles saw the market change as a manageable risk and one that would reduce his operational complexity rather than increase it. Thus, we judge that Settles not only faced risk in making his changes to Bob The Chef’s, but he indeed created risky situations. Though the pace of change was great, however, by accident or design his leaps were kept to a limited number of dimensions at any one time. That is, he took an operations risk, but not a market risk-or a financial risk, but not an operations risk. If his decisions were aggregated-and this may approximate an outsider’s view-it would appear that Settles had made several gigantic leaps in changing the direction of his restaurant (see Exhibit 2d, on the previous page, for an aggregate risk map). But close inspection shows that change came about through a series of small stretches and leaps-each of a different nature, and spread logically over time. Unwanted risk. The short stay by the new manager was in part due to Settles’s unwillingness to risk major changes to his menu, which he saw as his core business identity. He was willing to change markets after the experience with the successful catering venture, and changes to the physical structure of the unit were necessary in some form or another. The risk of tampering with the menu, however, was far too great in his mind. Overall, Darryl Settles’s approach to risk had a sequential rather than a parallel form. The changes were largely incremental rather than a single “big bang,” and resulted in both successes and failures. Most of the risks associated with the major restaurant redesign had been tested prior to the change. Most impor-
tant, Settles cut his losses quickly (e.g., releasing the newly hired manager and closing the off-site Express operation).
Case 2: Portobello Bistro The case of the Portobello Bistro is another example of “creeping complexity.” Michael Scala is a thirdgeneration restaurateur whose family still runs Scala’s Sandwich Shop, which was opened by Michael’s grandfather in Boston’s North End. Motivated by Boston’s seafrontredevelopment publicity, Michael Scala opened Portobello in July 1994 as a breakfast-and-lunch sandwich shop that would morph into a pasta restaurant for the evening. The conversion plan was to change crews completely between 3:00 PM and 5:00 PM, move the deli counters, and rearrange the tables for dinner. The morphing concept lasted about two days, although the daytime sandwich shop thrived with the support of the primarily blue-collar industrial area nearby (see Exhibit 3a, on the next page, for a risk map). The pasta concept returned two years later, when Scala bought and moved the sandwich shop into the adjacent property. He converted the original location into a traditional North End-style Italian restaurant with a fare of pasta, meatballs, and lasagna. The two sites displayed the same decor and were connected internally by a large glass door. The restaurants worked from a single kitchen, but a fancy curtain concealed the deli counters after 3:00, and the glass door was opened to increase the seating area of the Italian restaurant for the evening. The seaport area was slow to develop, however. Although the sandwich shop continued to thrive, the restaurant struggled. (See Exhibit 3b for this risk map.) In late 1996 Boston’s World Trade Center and a couple of 200plus-room hotels opened in the
Change should be incremental rather than a single “big bang”-and
in the case of
failure, cut your losses quickly.
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Exhibits 3a-3d Perceived risks of changes at Portobello Operations L
Operations
3a Sandwich shop and pasta restaurant
S
I
\
L Pasta restaurant \
3c Went upscale
S
R
)/_A /’
Marketing
I
“/
R
Marketing
L
S
/ Financial Operations L
L
/
Financial
Operations
3b Purchased the property next door
Financial
L = Leap S = Stretch R = Routine 0 = No change
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CORNEL
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Marketing
Financial
seaport area, and a number of professional service firms moved into the neighborhood. Michael Scala saw those professional workers as a market opportunity for a trendy Italian bistro. In fall 1997 he closed both the sandwich shop and the Italian restaurant for a major upgrade. The old cooks were replaced by a New York chef who came with his own MediterraneanTuscan menu with a touch of New England that Scala felt confident would appeal to his growing, educated market. The chef was hired with the change underway as he was also to be the kitchen manager. Except for a new larger grill, nothing was changed in the back room. Scala hired a new front-room manager and hired servers who knew their wines and could handle sophisticated guests (see Exhibit 3c for this risk map). Scala changed the name of the restaurant from “Portobello” to “Portobello Bistro.” He increased menu prices so that average checks for lunch went from $9 to $12, and dinner checks averaged $30. Though the restaurant’s menu and back room were completely under the chefs control, Scala remained the manager of the sandwich shop, as he professed little knowledge about running a trendy restaurant. Cautious stretching. Scala had extensive experience in his family’s sandwich business, and he was careful to avoid venturing far from that familiar base. He was also cautious about taking too great a financial risk. He minimized his investments and attempted to leverage them in all phases. Indeed, he kept his investment risk so low in the initial move to open an Italian restaurant that the deli-to-diner idea did not work out. That first full-scale restaurant tested the market, though, and he quickly discovered that the available market was not yet large enough to support his ideas.
He made the decision to upgrade the venture again only when market changes were evident. At this point, Scala decided to acquire the expertise for developing a menu and for managing its implementation by hiring a chef and manager. He reduced the risk inherent in his lack of operations knowledge, but by hiring the chef and manager he faced a new risk-that of depending on their knowledge and actions. He also changed his restaurant personnel to meet the needs of his new target market. Simultaneously, Scala sent a signal to the outside world that major changes had been made by using a new restaurant name. However, in all of this he was careful to constrain his investment by maintaining a common kitchen and by not increasing his investment in real estate. Outsiders might see the opening of the trendy Italian bistro as a leap in many directions simultaneously (see Exhibit 3d for a consolidated view). But that view overlooks Scala’s careful experimentation in developing his concept. By the time he made the major financial investment to enlarge and upgrade the restaurant, he had learned a considerable amount about the marketits volume and its requirementsand he had identified the changes that were necessary for success. Scala kept his risks at a low level throughout his development phase. He used his core knowledge of the sandwich shop as the foundation for careful expansion. His major upgrade consequently came with relatively limited marketing and operational risks, though hiring new key personnel always embodies risks.
Three Other Views of Risk Although we do not map the following three cases, we present them to demonstrate other restaurateurs’ efforts to minimize risk-or, in one case, the consequences of failing
to do so. The other point to be made from the following three cases is that risk perceptions can be deceptive. CafZ Brazil. Walter Vittorino, a restaurateur for 25 years, started Cafe Brazil in 1993 with a friend. After four years of operation, Vittorino felt that the original restaurant needed some improvements and bought out his partner, who was content with the status quo. Cafe Brazil had been a success from the start with a large, expatriate Brazilian crowd. This group frequented the bar on weekends, watched the TV, and talked about things Brazilian. Good weather in summer sent the sun-loving Brazilians to the beaches, resulting in a severe business decline, but the crowd was otherwise loyal to the restaurant. The name-Cafe Brazil-provided a rallying point for this important market segment. Consequently, it was unthinkable that the name would be changed. After buying out his partner, Vittorino made major changes in the restaurant’s appearance to freshen up the atmosphere and adjusted prices. Vittorino was careful, however, to keep his principal market in mind through the changes. He deemed the greatest risk to the restaurant to be one that would adversely affect his main market segment and their perception of the restaurant. In his eyes, the changes made were routine while maintaining the essential nature of the restaurant. Indeed, the biggest risk that Vittorino saw in this case was in failing to make updates. Laurel. Russell Berger was a third-generation restaurateur operating Baja, a Mexican concept, and Hazels, a full-menu deli. Early in the 1990s he opened Blue Wave, a New York-style formal restaurant and bar. The concept never became established in the Boston market, and in the mid-1990s Berger closed Blue
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Avoiding
simultaneous
moves seems to be a major risk-reduction
strategy.
The idea is to make changes in only a single dimension
72
at a time.
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Wave, renovated the restaurant, and reopened it as Laurel, a country-inn concept offering a creative seasonal American cuisine. Though Berger is himself a chef, he hired a new chef and gave that person the freedom to set the menu. With the new chef came some changes in the kitchen design, a new kitchen crew, and a new restaurant manager. Some of the table servers returned when Laurel opened after the renovations. The front-of-the-house changes were largely cosmetic and the layout was principally unchanged. Despite a new concept, new kitchen staff, and market repositioning, Berger saw most of the changes he made as routine, perhaps due to his extensive restaurant experience. Certainly, that assessment is at variance to that of outside observers. His major move to constrain risk prior to the renovations was to get the restaurant’s lease extended to ten years. Berger considered his multiple restaurant ownership to be an implicit portfolio approach to risk reduction. The delegation of menu management to the newly hired chef was also seen as a risk-reducing mechanism, since Berger expected that the chef would bring marketing and operations knowledge to the revamped operation. Cafh Saigon. The owners of Cafe Saigon, a Vietnamese restaurant, decided to go ahead with a major cosmetic change to their restaurant without securing a bank loan. Their approach to reducing risk was to cut the renovation costs and speed the construction work by employing a customer who was an architect. The concept was to create a moreauthentic Vietnamese environment using bamboo and Asian artifacts. To recoup that investment, the owners would raise menu prices somewhat. Unfortunately, the owners gradually discovered that their architect had seriously underestimated the project, both in terms of time and
HOTELANDRESTAURANTADMINISTRATIONQUARTERLY
money. Moreover, the architect had a poor understanding of the authentic Vietnamese look. The owners subsequently released the architect and hired a former Vietnamese national who was a building contractor, and he undertook the design. The owners thought that their upgrade was a relatively routine project, and so their subsequent problems were completely unforeseen. Had they been forced to prepare thorough plans ahead of timesuch as those that a bank might require-it is possible that they would have avoided many pitfalls. Their increased risk-not perceived at the time-stemmed from what they did not do rather than from what they did. Their perception was that they had moved to reduce risk rather than increase it, but their use of an American architect to design a Vietnamese restaurant created a risk the owners did not foresee.
Strategies for Risk Reduction Although this study comprises only five cases, we see a great contrast between the risks perceived by outsiders and the risks as judged by the restaurants’ owners, essentially the difference between the composite map and the individual maps of Exhibits 2 and 3. Furthermore, some risks were taken that were only evident to the owners after the fact. From the lessons of these cases, we offer some general risk-reduction strategies. Avoid simultaneous leaps. Avoiding simultaneous moves seems to be a major risk-reduction strategy. By this we mean that managers try to limit the total risk at any point in time by reducing the number of concurrent actions in different dimensions. The idea is to stretch or leap in only a single dimension at a time, if possible. The risks in a change in menu, decor, or personnel may be substantially reduced if taken one at a time. On the other hand,
simultaneous stretches in more than one dimension may constitute a leap that the operator did not mean to take. The alterations at both Bob The Chef’s and at Portobello Bistro showed how changes that appeared to be large on the surface were actually incremental. Test before a stretch or a leap. Testing before stretching or leaping may seem obvious to those in large corporations, where a major strategy change may be routinely tested using market research or by some other means before implementation. However, the scale and nature of the local restaurant market may make it difficult and perhaps too costly to collect relevant information. Consequently, the owners in our sample used other approaches for testingsometimes without realizing that they were testing the market. In the case of Bob The Chef’s, for example, the catering operation provided substantial evidence that the core menu was acceptable to a different market. Similarly, the successive moves by Michael Scala into a different market provided evidence that he needed new skills and approaches to be successful. So he reduced his risk by acquiring those skills in the form of a new restaurant manager. Stretch or leap by buying experience. Restaurateurs who realize that they need additional knowledge can usually acquire it. In the cases of Laurel and Portobello Bistro, the owners hired chefs who then developed menus they believed in. On the other hand, the persons hired must be a strategic fit, which was not true in the case of the Bob The Chef’s manager who wasn’t in tune with the tried-and-true menu. The new design for Cafe Saigon required specific design knowledge, and the owners assumed that formal architect’s credentials were a guarantee of this. The owners’ familiarity with their project may have led to a belief that the appropriate cultural
knowledge was common. Consequently, they did not see the redesign aspect of their project as being risky. Comfort and familiarity proved a double-edged sword in this case: they reduced the perception of risk, but they also reduced attention to detail. Certainly, the change at Cafe Saigon would have been easier had the owners put themselves in their architect’s shoes. The failure of Bob The Chef’s Express demonstrates the wisdom of buying knowledge and advice to help in assessing a project ahead of time. Perhaps Darryl Settles would not have tried the brand extension represented by Express had he sought such advice. Against this is the risk that an experienced person may carry a bias or fail to understand a winning new idea. Moreover, in the example of Bob The Chef’s Express, despite the operation’s failure, it nevertheless proved that a broad market existed for the menu. The support analysis required for a bank loan or for an outside investor may help to highlight the risks ahead. Such an analysis would seem to be a sound cornerstone of any risk-reduction strategy, even if a loan were not necessary. The use of licensing boards, national and state restaurant associations, or the Small Business Administration would be useful, too, as well as inexpensive. Operate from a strong base. Making sure the base operation is strong constitutes a type of portfolio approach, in which the strong portion of the operation supports the weak (new) venture until it stabilizes or folds. Managers generally don’t want to create weak enterprises, but the risk of failure is reduced if the base is solid. In three cases we see an application of a portfolio approach, albeit in different ways. Russell Berger presents the most obvious example through his use of two strong outlets to support the opening of the Blue Wave, a.k.a. Laurel.
The analysis required for a bank loan or for an outside investor may help to highlight the risks ahead (including
in
those cases where financing is not required).
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Bob The Chef’s approach was also in essence a portfolio, though of dissimilar components: the restaurant, the catering, and the Express. The catering and the restaurant had strong market bonds, but it was relatively easy to cut the weak Express operation without adverse effects on the rest of the venture. The Portobello sandwich business served as the foundation on which the riskier pasta concept was developed. The restaurant went through several iterations before a successful form was found. But the original sandwich shop provided the fuel for the development.
Reality Checks Many risks are reduced when firms justify their plans to outside entities, such as banks. A normal bank-loan application for expansion or change requires detailed business plans, the development of cash-flow projections, assessment of current performance, three years of the restaurant’s financial statements, and a personal financial statement. Banks like to assess their risks as objectively as possible, and the case of Cafe Saigon is a clear example of how actual risks are increased if this standard planning phase is omitted. Ironically, in none of the cases we discuss here did bank-loan applications have an effect. Computer applications make it easy to produce projections and statements that appear convincing, even when their underlying assumptions may have been only lightly examined. The bank loan for Bob The Chef’s Express, for instance, was supported by a wad of documentation, but there was no reality check from anyone experienced in the restaurant industry. To that end, one might find some risk reduction in consultation with local licensing boards. Licensing boards can clarify legal requirements and sometimes offer helpful advice.
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No matter what objective assessments are made, many risks cannot be formally assessed since they are often embodied in the skills of the people and in the way changes are implemented. In the terms of this discussion, experienced managers seem to try to reduce the number of leaps by making incremental stretches if possible, and to make true leaps a rarity. Even when a strategic move was outside the manager’s experience-as in the cases of Bob The Chef’s and Portobello Bistrothe managers appear to have tested many of the changes prior to committing to a major action. Such testing may not be at all obvious to the outside observer. In the terms of our original model, it seems that our sample of managers generally tried to make their risk exposure relatively routine. When the managers were required to leap along a particular risk dimension, they appeared to take steps, consciously or otherwise, to avoid leaping in another. In this study our managers were careful to test conditions before acting, keeping other changes at a routine level. Our examples suggest that-if our sample is even remotely representative-managers will find ways to reduce the total risk exposure using a number of mechanisms. Certainly, this study shows that there are a number of risk-reduction mechanisms available. The range of experience in our sample was great-from new restaurateurs to the seasoned members of families with generations of experience. The experience base clearly influenced perceived risk. What was seen by Russell Berger as a normal risk of the restaurant business-that is, repositioning his operation-was not always seen as such by the newer restaurateurs. Consequently, the actual risk level of what outsiders perceive to be a major strategic change is likely to differ according to the operator’s experience.
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To review, though the restaurants examined here were perceived by restaurant journalists to have undergone major changes, the risks perceived by their owners only rarely fell into the “stretch” category. At no time did the restaurateurs take simultaneous multiple leaps. Most of the restaurateurs whom we studied attempted to reduce risk by hiring expert assistants, although the hiring decision sometimes entailed unexpected risk. An experienced restaurateur hiring an experienced chef appears to be in a better position than an inexperienced restaurateur hiring experienced chefs or managers. Since hiring was one of the ways used to systematically reduce risk, this aspect of hiring demands that particular attention be paid by those inexperienced in hiring. We examined decisions and risks in this article without a specific assessment of success or failure. However, we noted earlier that there was likely to be a success bias to the restaurant sample based on our criteria for selecting the case studies. Moreover, there were many examples of failure along the way. Indeed, the failures were an important part of the learning process, and allowed the owners to move forward with reduced risk. This was particularly evident in the cases of Bob The Chef’s and Portobello. Structuring a major change into sequential actions and decisions seems to be a fundamental way to reduce risk and provide organizational learning. For failure to be acceptable, our sample of organizations demonstrated the importance of a sound foundation. This foundation brought a reduction in stress levels and perceived risk since the firm itself was not at risk, Overall, our study demonstrated that having a clear goal for a strategic change might be insufficient. Although what you do counts, the way that you do it counts even more. CQ