HERIOT-WATT UNIVERSITY

STRATEGIC RISK MANAGEMENT – JUNE 2018

Case Study

Note: In developing your answers you can make any assumptions you wish provided these are reasonable,
do not contradict the content of the case study and are clearly written down.

Note: Company and individual names are shown in italics.

Food for thought

Yummy Pizza is a well-known international pizza chain, selling pizza and pasta products.
Its corporate headquarters is in the US, while it maintains a presence in more than 80
countries around the globe. With annual sales revenue of $2.1 billion, it is ranked as the
second-largest franchised pizza chain, after Pizza Shack. The company has built a
reputation of being an innovative company, with a history of ‘out of the box’ thinking in
food menu varieties and customer service, such as the ‘track your pizza online’
sophisticated ordering system, energy-efficient ovens and a quicker ‘make line’ to
produce pizzas in just under 10 minutes, to name a few. In the next quarter, they plan to
launch the ‘Pizza-Air’ delivery by unmanned aerial vehicles (drones) in some countries,
subject to local regulations. The company highly values its reputation and is reluctant to
undertake activities that could affect its image.

Yummy Pizza’s revenues are generated from three segments of operation – the first is the
supply chain centres, accounting for about 55% of revenues. They manufacture fresh
dough and other food items for pizzas and pastas, which are then sold and delivered to
the chain’s stores worldwide. Another segment is the franchised stores, which account
for about 39% of its revenues, by paying a percentage of their revenues as ongoing
royalties and fees to the company. The third is the company-owned stores, where the
company can test its new product and service developments.

Since the beginning of this year, global sales have gone down. Yummy Pizza blames price
cuts by its ‘very aggressive’ rival Pizza Shack and the rising costs of raw materials and
energy for this slowdown. However, financial experts agree that more factors should be
considered, such as the state of the global economy, changes in customer preferences in
the characteristics of the fast-food sector, the lack of growth engines (for example,
diversification through acquisitions), and even unsuccessful advertisement campaigns.

Yummy Pizza’s board is considering major steps to improve the company’s flagging
business performance, as the shareholders urge immediate improvements in financial
results, followed by a sustainable long-term strategic plan. The main initiative being
studied is an expansion into China, where the company initially failed to establish its
business several years ago. The company’s major competitor, Pizza Shack, has been very
aggressive in China, with some presence in major cities and exclusive procurement
agreements with domestic suppliers. The company is aiming at re-establishing a
substantial presence in the Chinese market by altering its business model specifically to
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better target that market. These localisation attempts include pricing, home delivery
methods, local ingredients and customised flavours, to better suit the customers’
preferences. The effort also involves investment of around $200 million to get the
operation up and running in three years’ time. This investment will cover establishing the
stores’ locations, branding, local human resource (HR) infrastructure and other
operational aspects. As part of the grand plan, three supply chain centres will be built in a
joint venture with local companies, in order to comply with the terms of a Chinese
government investment grant. The payback period is estimated at eight years.

The board is concerned at the risk involved in pursuing this expansion project while
possibly neglecting other domains. Nonetheless, Yummy Pizza’s size and operational
experience coupled with its business potential may present a viable opportunity.

As a strategic risk management analyst, you’ve been asked to advise Yummy Pizza’s board.

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Question 1

(a) Identify and discuss four strategic risks and four unforeseen risks that are likely to
be associated with the steps considered by Yummy Pizza. In each case, suggest a
suitable risk response that could be taken by the company.
(40 marks)

(b) Discuss the use of a strategy route map as a management tool and generate a
sample strategy route map based on Yummy Pizza’s potential operational risks in
China.

(60 marks)

(Total 100 marks)

Question 2

(a) Discuss some of the main project or change risks that are likely to be present in
the project risk profile of the re-expansion into China, and suggest suitable
responses.

(40 marks)

(b) Carry out a scenario planning exercise for the case study, exploring the issue of
possible expansion into China, from the point of view of Yummy Pizza.
(60 marks)

(Total 100 marks)

Question 3

(a) Discuss how project management can be used as a tool to manage Yummy Pizza’s
change plan and give examples from the case study.
(40 marks)

(b) Discuss the characteristics of a risk interdependency field (RIF) that could assist
Yummy Pizza’s management with its strategic decision making, giving examples of
node risks based on the case study.
(60 marks)

(Total 100 marks)

END OF PAPER