The Global Economic Impact of Private Equity Report 2008 - World ...

soul” of the business. But there was a pressing need torecruit additional professional managers, install managementinformation systems and revamp the structure andresponsibilities of the board.In this regard, 3i was instrumental in helping Little Sheepgradually put a strong team and a governance system inplace. Once 3i made the investment, Cheung and Wangboth joined the board as non‐executive directors. 3i alsorecruited two additional independent directors with strongindustry experience: Nish Kankiwala, the former presidentof Burger King International who played a part in the dealinitiation process, and Yuka Yeung, CEO of the KFC franchisein Hong Kong. Both individuals had extensive experience inthe food industry and were exactly the type of high-levelindustry people that Little Sheep had been looking for.Instead of viewing these new directors as outsiders, however,Little Sheep’s top management enthusiastically welcomedthem as partners capable of adding considerable value tothe company. When 3i proposed four board meetings peryear, Little Sheep came back and asked for more. “LittleSheep is the only company I have worked with that hasasked for more board meetings… Zhang is an extraordinaryentrepreneur, but he was very humble and eager to learn.This is one of the most impressive things about thecompany,” Cheung commented.The newly constituted board immediately began to focuson adding depth to the management team. Up to this point,Zhang had served as both the board chairman and the CEOand had tended to delegate much of routine management tomembers of his senior management team. One of the first 3irecommendations was to recruit a full‐time CEO dedicatedto overseeing day‐to‐day management of the business. “Wepractically insisted on it,” recalled Wang. In addition, basedon 3i’s recommendation, the board agreed to create newpositions for a COO and a CFO, but emblematic of China’sthin supply of professional managers, it would take morethan a year to recruit the right candidates. (See Exhibit 6Bfor Little Sheep’s organization chart as of October 2007.)Creating a Standards CommitteeUntil these three new senior executives could be recruited,an interim management solution was needed. 3i proposed– and the board agreed – to create a Standards Committeeconsisting of Little Sheep’s existing management team, plusWang. The committee’s purpose was to serve as interimCEO, focusing especially on enhancing the communicationand coordination among the three regional operations untila proper headquarters could be set up. For the first threemonths between June and September 2006, the committeemet bi‐weekly to discuss detailed operational matters andmake decisions to be carried out by the three regional VPs.Gradually, as internal communication improved and keyheadquarter functions were established, the StandardCommittee evolved to become a series of monthly meetingsfocused more on long‐term strategic issues, such asnew‐store developments, marketing and budgeting. Finally,in November 2007, with the establishment of Little Sheep’snew national operation headquarters in Shanghai, thecommittee was formally dissolved.Creating and executing a new franchise strategyAlthough Little Sheep had taken the initiative to halt theawarding of new franchises in 2003, the existing sprawlingnetwork of over 500 franchises was not systematicallyaddressed prior to 3i’s involvement. Symptomatic of theproblem was the fact that management had actually lost countof the exact number of stores in the Little Sheep network.Cleaning up the existing franchise system and designing a newfranchise strategy thus became a top priority for the newlyconstituted board. Based on the insights from the RolandBerger report, the board came to the conclusion that the newstrategy should focus on quality rather than quantity, and thatthe franchise system should become more centrally managed.Not only was this consistent with protecting and strengtheningthe Little Sheep brand, it was also made feasible by thestrengthened management and headquarters capabilities.The following three‐phased overhaul of the franchise systemwas agreed on and carried out:Phase 1: Cleaning up the existing franchise systemFirst, a systematic effort was taken to visit and catalogueevery franchise in the country. These visits generatedstore‐by‐store information that was fed into a databasecreated to track critical performance indicators, and servedas a basis for making decisions about the future status ofeach franchise. More than 200 franchises that had clearlyviolated the Franchise Agreement or did not meet LittleSheep’s quality standards were closed. Others that wereperforming reasonably well had their franchise agreementrenewed, and the best performing stores were bought backby Little Sheep to become directly owned as part of thenew, more centralized strategy. This task was completeby the end of 2006.Phase 2: Enhancing training and support to remainingfranchise storesPhase 2 involved stepping up the training for all franchisepersonnel through an elaborate new programme consistingof various stages of training at headquarters, on-site andduring regular national and regional franchisee meetings.In addition, headquarters staff continued to provide on‐sitetraining during their regular store visits.Phase 3: Developing new franchise storesThe final phase in the new franchise strategy was toproactively develop new stores and grow the franchisefee base. In contrast to the traditional, passive expansionmethod of responding when potential franchisees called,Little Sheep’s new, active approach began with research intothe local business environment, which then led to a choice oflocations. The company then actively sought out restaurantoperators with good reputations to run the franchise stores.The Global Economic Impact of Private Equity Report 2008 Case studies: 3i Group plc and Little Sheep 135