This case study discusses the business strategy employed by Boston Chicken, Inc. It also tackles the focus of the business and the ways the company raises revenues.
Paul M. Healy
Harvard Business Review (198032-PDF-ENG)
September 24, 1997
Case questions answered:
- Briefly outline Boston Chicken, Inc.’s business strategy. Who are Boston Chicken’s key competitors? What is Boston Chicken’s competitive advantage? Finally, assess the potential entrants and substitutes.
- What is Boston Chicken’s line(s) of business? What does the Balance Sheet tell you about the company’s business focus? What do the Income Statement and Note 2 (see “Revenue Recognition” section) tell you about the company’s business focus? Briefly describe the different ways in which the company generates revenue.
- Most of the company’s stores are owned by franchisees. What business purpose is served by expansion through franchising rather than just expanding the number of company-owned stores? Go to the website for McDonald’s (http://www.aboutmcdonalds.com/mcd/franchising/FAQs.html) and find the “frequently asked questions” about franchising with McDonald’s. How does McDonald’s franchising practice differ from Boston Chicken’s?
- What are financial analysts saying about the future prospects of the company? What are the “bears” saying? If you were an investor, would you pay more attention to the analysts or the shorts? Why?
- In the company’s 1994 balance sheet (on page 11), one can see that total Notes Receivable (current and long-term) exceeds $200 million. Explain how these Notes Receivable arise. Also, recompute after-tax net income for 1994, assuming that it is estimated that 5% of these Notes Receivable will ultimately be uncollectible. Note: Make sure you first ascertain what bad debt allowance has been included in the 1994 numbers prepared by the company.
- In Note 5 to the financial statements, the company provides a breakdown of its deferred tax assets and liabilities. Why do deferred tax assets need a valuation reserve (or allowance)? By how much and in which direction did the valuation reserve change from 1993 to 1994? Does this change impact net income? What signal from management is implied by this change?
- In Note 6 to the financial statements, the company explains its accounting for the advertising funds created by contributions from company-owned as well as franchised stores. How is the cash in these funds reflected in the company’s financial statements?
- As seen in the table on page 7, the vast majority of the company locations are operated by franchisees. How would the financial statements of Boston Chicken be different if all of the franchise stores were company-owned stores instead? Answer this question generally; don’t try to figure out what the exact numbers would be.
- Compute the company’s return on equity for 1994. Explain any assumptions you make.
- Bonus: Estimate the after-tax net income per year for a franchised store. A good place to start in this calculation is page 5.
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Boston Chicken, Inc. Case Answers
Briefly outline Boston Chicken, Inc.’s business strategy. Who are the company’s key competitors? What is the company’s competitive advantage? Finally, assess the potential entrants and substitutes.
Boston Chicken, Inc.’s business strategy is to be the home meal replacement. It is all about delivering generous quantities of home cooking at affordable prices. The case mentions KFC as its competitor.
The case also mentions pizza as its competitor. Thus, local pizzerias and KFC should be their competitors as per the case.
The threat of potential entrants and substitutes is high. The relative price of competitor’s products can substitute Boston Chicken.
KFC could outperform Boston Chicken in rotisserie chicken sales. The latter has a first-mover advantage and economies of scale advantage. But there is no legal barrier to entering the business, so it is bad for the company.
What is Boston Chicken’s line(s) of business? What does the Balance Sheet tell you about the company’s business focus? What do the Income Statement and Note 2 (see “Revenue Recognition” section) tell you about the company’s business focus?
Briefly describe the different ways in which the company generates revenue.
Boston Chicken operates and franchises food service stores that specialize in complete meals featuring home-style entrees, fresh vegetables, salads, and other side items.
The balance sheet tells us that the company’s focus is to grow through franchises and thus provide huge credit lines to franchise owners in setting up the stores. The note payables of around 200 million USD signifies that.
The income statement shows that the company receives its revenues through royalties, franchise-related fees, interest income, and revenue through company-operated stores. So, the business focus should be to increase revenue through royalties, franchise-related fees, and interest income.
Boston Chicken derives its revenue from revenues from company-operated stores, royalties, and franchise-related fees, and interest income from the credit line offered to the franchisees.
Most of the company’s stores are owned by franchisees. What business purpose is served by expansion through franchising rather than just expanding the number of company-owned stores? Go to the website for McDonald’s (https://corporate.mcdonalds.com/corpmcd/home.html) and find the “frequently asked questions” about franchising with McDonald’s. How does McDonald’s franchising practice differ from the company’s?
Quick expansion is possible through franchising. Quick establishment of national presence, which is inconceivable through company-funded development, is the business purpose served by…
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