Lorna Valdez on cooking up a business: Lorwill's BBQ Stand.

Santos, Annette Taijeron ; Dacanay, Jennifer

CASE DESCRIPTION

The search for opportunity is the entrepreneur's roller coaster. According to the SBA Office of Advocacy's annual report (Source: http://www.sba.gov/advo/), there are approximately 25.85 million small businesses in America. The economy and financial markets generally support the growth of small business. Many scholars estimate that 75% of the businesses formed will last less than five years. Approximately 19.86 million of these small businesses were sole proprietorships, which continue to rise according to an analysis of the Census Bureau data found in the SCORE website (Source: http://www.score.org/small_biz_stats.html). Between 1997 and 2002, women-owned businesses increased 19.8 percent or 6.5 million businesses. More than 14 percent of women-owned firms employed 7.1 million workers accounting for $173.7 billion in annual payroll in 2002.

CASE SYNOPSIS

This is the first record of the business history and entrepreneurship of Lorna Valdez placed in context. Also included is the history on the family and how it all started, a business she built from scratch and that continues to grow today--Lorwill's BBQ Stand. Also included is the economic analysis of each of her business ventures throughout her entrepreneurial venture until today. The current business is one that is in the growth stage, having opened for only three years and is continuing to expand.

As a small firm in a price-taking market, her managerial decisions are what created the competitive edge. In Guam, where there is high competition as well as demand for food and especially barbeque (a local favorite andpast time) she is able to offer the market something unique. This and other factors that lead to relatively higher market power for her business than other vendors in the Dededo area explain how its success has grown.

BEGINNINGS

In 1993, Lorna Valdez was working as a waitress at Chopsteak, a restaurant located in Tumon, Guam. After working there for just over a year, she was promoted to the position of manager with an $8 hour pay. In 1994, the restaurant was forced to close down for the construction of what is now Planet Hollywood. Her boyfriend, at the time, gave her the idea that they should open up a hamburger stand. The idea of opening up her own business and being her own boss strongly appealed to her. She also wanted to find a way to make more money. This was a defining experience for Lorna Valdez. She learned that she had a talent--she was good at cooking and enjoyed it.

HISTORY

The first business she attempted was a hamburger stand located in Tumon, where the Slingshot is now located. The food sold at the stand was mainly a variety of American-style hamburgers. The opportunity cost of opening up the food stand is the lost cost ranging between $1,200 to $1,500 working as a manager. The cost to rent out the space was $500 a month and Lorna Valdez soon recognized that daily revenue was not enough to cover personal bills and expenses. Several months after opening, she realized that the business was not making enough.

Although her first attempt was not as successful as she had hoped, she continued to follow her newfound talent in cooking. Thereafter, she endeavored on another method of selling food, which was delivering homemade food. She would prepare food at home, package it, and then deliver to various locations to sell. The food would be prepared three times a day, six times a week. Her market was limited to stores such as Napa Auto, Diamond Auto, National Office Supply, and various taxi companies located in Tumon.

She delivered food this way beginning October 1995 and continued for about a year. Her daily menu included mainly Filipino dishes such as fried lumpia, okoy, pancit, spaghetti, and food plates that included rice with choices such as calderetta, sinigang, and/or adobo. She also sold two soups that changed daily; varying from arroz caldo con goto, corn soup, arroz caldo, and other ethnic varieties. Along with the food, she sold a variety of drinks. She delivered all of this personally to each site in her car.

This was a difficult job for her because she ran all aspects of the business from purchasing ingredients, to cooking, to preparation and packaging, and finally delivery. She would end up with daily revenue ranging from $100 to $250 a day, depending on the sales. However, the profits were only sufficient enough to cover the bills. This type of business had also resulted in additional losses due to the waste of food that accumulated daily, which was costing a lot. This convinced her that she should look for yet another way to make a living.

BUSINESS DEVELOPMENT

So in February of 1996, she bought a mobile hot dog stand, called it the Big Fat Weiner Stand and opened up for business in the parking of GTA (Guam Telephone Authority) in Tamuning. It was open weekdays from 8 a.m. to 5 p.m. The menu was expanded and included the variety of hamburgers, hotdogs, as well as different lunch plate choices. Soup and hot coffee was served along with drinks and snacks.

In addition, she would also sell at the Dededo Flea Market on the weekends. Interestingly, the revenue that was made at the Flea Market on those two days alone was more than what was made during the five days at GTA. The profit that was made in this business venture were higher compared to the days of delivery; but costs also went up. The loss of money from the waste of unsold food that had to be thrown away was still an issue. This venture lasted for about two years until 1998, when Lorna Valdez lost her vendor space at the flea market.

The year she went to renew her vendor license, she was told that a new law was passed that prohibited vendors to sell food outside of the premises of the main flea market area. This was a barrier created by the government that posed a significant negative impact on her business. This barrier was a big disappointment considering the growing success she achieved from selling at the Flea Market. The Flea Market sales contributed to revenue growth she had not experienced in her other previous business ventures. Her food sales at the Flea Market proved to be the most successful thus far and considering that those revenues generated was made within just two days.

TEMPORARY LAPSE

After that drawback, in 1998 she returned to work in a restaurant called Binh Minh as a waitress. She was getting paid $5.50 an hour and received daily tips that ranged from $10-$15 a day. She also worked a second job as a waitress and a bartender at Mariposa, a karaoke lounge, where she earned $7 an hour. After a year, she was promoted to manager and started earning $8 an hour. She later started to work at a linen cleaning company called, Marianas Linen for about six months for $5.75 an hour. Her monthly salary was not sufficient enough for the single working mother to provide for her family so she sought once again to continue working in her chosen passion.

BACK TO BUSINESS

In 2000, she began to deliver food again despite her experience from the initial attempt. Her decision was driven by the anticipated profit that was to be made which would exceed her current salary and further driven by her passion for cooking. She adopted the same routine as she had done previously for the next two years. She would deliver food daily to different locations and occasionally filled catering orders for parties. Again, the revenue accrued was only sufficient to cover the costs of her bills. This prompted her to try something new, yet again. In hindsight, the thought of going back to the food delivery venture should have raised red flags, given her previous experience.

Following that, in February 2002, she opened up a small stand called Lorwill BBQ. Her decision to go back into the business of barbeque was a good one after her former success selling at the Dededo Flea Market. The demand was there and she already proved that she could sell good-tasting barbeque. The stand was situated right in front of Napa Auto Parts' parking lot on Route 1 Marne Corps Drive.

At the Napa Auto Parts location, the owner of the land agreed not to charge rent for the space to be used by Lorna Valdez for her barbeque stand as long as the lawn was maintained. On the first day of business, she made $18 through BBQ sells. Although revenue was not as much compared to the food delivery service, she did notice that losses accumulated from food waste were much lower. This was a result of food being prepared after being ordered instead of beforehand, thus already providing savings in costs.

The business was slow for the first year until her customers learned of the new location. As a result, the menu began to expand as more and more customers learned of her new stand. Initially, barbeque was the main product, then the menu expanded to include lunch plate choices, drinks, and other exclusive Filipino dishes. She was averaging profits that ranged from $4,000-$5,000 a month. However, business was still somewhat slow and she blamed it on the location.

Revenue began to rise the following year and so did the demand for food. This prompted her to hire a few workers to help with the growing demand. At that time, there were no overhead costs; however, labor costs seemed to cut into profits. This eventually led to smaller profit margins over time. Then another relocation move was prompted after the space was bought out by Shell and a gas station was to be built on the spot.

GROWTH STAGE

Therefore, in September 2004, Lorna Valdez's business relocated about two blocks down the road. It is now her present location, along Route 1, Marine Drive beside the Dededo Retail Store. This has been her most successful business to date. This may be attributed to the ease of access and visibility, now located along a main road with high traffic flow. Another positive factor is the anticipated opening of the Benson Home Center located right behind the stand. Located along the main road also has the advantage of easy advertisement by just having passersby catch a whiff of the enticing barbeque aroma.

Lorna Valdez's business currently brings in double the revenue than what she was making in front of the Napa Auto Parts location. The barbeque is priced at $1.25-$1.50 a stick. This was determined by the market demand and market supply on Guam, the price range represents the range of the equilibrium price, representing how much the customer is willing to spend and how much the producer is willing to sell. Lorna Valdez further mentions that her profits and take home money has decreased due to additional costs such as capital expansion, which is about triple the size of the previous location. This is a result of adding storage, an office, built-in restrooms, and air conditioning to her business. All of which was non-existent at her previous location. Furthermore, unlike the last location, she was not paying for rental space (a fixed cost), which is $800 a month.

Table 1 above shows an estimate of the average total cost per pork barbeque stick she sells. At around 3,500 sticks, she begins to make a profit. This shows that in order to cover her costs for that one item on her menu, she must sell that many in a month. However, this may not be as accurate because there are other factors to take into account such as the variable costs that apply only to the barbeque. Also note that this reflects short-run production costs.

Her opportunity costs have also increased because her job seems to require her to work "24 hours a day" resulting in a lack of sleep. She states that it would be too costly to hire more people than she already has. So, instead, she compensates or tries to lower costs by working longer hours. She mentions that although her profits have increased, her operating and labor costs are consuming about seventy to eighty percent of total revenue.

Taking into account the amount of economic profit to run the business, we consider whether her total revenue minus total economic costs results in a profit or loss. She now takes home roughly $8,000. That includes total revenue minus explicit costs. Adding in the opportunity costs, which would be the opportunity cost she is giving up running her own business rather than working as a restaurant manager. On Guam, a restaurant manager averages around $7,000 month. That would mean her total economic profit is $1,000.

Considering the cost of labor, she took into account the production function even without definite and precise data. There was a point where she had too many workers assisting her, so she had to let them go or reduce the units of labor. At that point, her marginal product of labor for the additional employee was resulting in a loss rather than a benefit to production.

As the business continues to grow, it has been noticed by the local community. It has been featured twice in the Pacific Daily News, in the Northern Weekly insert with reviews such as, "best place to buy barbeque on island." It was also mentioned in the Guam Manila Time's Lifestyle magazine stating, "Along Marine Drive, heading north, past the Mobil gas station and just a smidgen past the Ysengsong Road & Marine Drive intersection, you will see the Lorwill's Barbeque stand. Open daily from 4--9 pm, Lorwill's is often packed with lines of customers waiting to buy from their food. They also have a large menu ranging from the barbeque to pancit to sisig to lumpia, and many more. You can even preorder for parties and celebrations" (Magazine).

BUSINESS STRATEGY

Market Structure

In Dededo, there are many other small businesses to compete against. Each has its own unique taste and various complimentary foods. Also, there are hardly any barriers to entry for the food industry on Guam. That type of business is a "price-taker, a firm that cannot set the price of the product it sells, since price is determined strictly by the market forces of demand and supply" (Thomas & Maurice, 2005, p.22). This makes the products that they provide elastic such that an increase in prices will result in a decrease in demand.

As for the market definition, it shows that in the Dededo area there are many other small barbeque stands competing with each other. As a manager, Lorna Valdez must identify what other products her competition offers so as to estimate product substitutes. However, with the distinct barbeque taste that she offers, there seems to be no perfect substitute available in the Dededo market. This means her market power there is relatively higher than the rest of the vendors.

Management decision for demand in price-taking firms looks at the perfectly elastic demand curve. For example, the current price in the market for barbeque chicken is $1.50, as shown below. So for each additional unit she sells, the marginal revenue would equal $1.50, thus producing more and selling more would lead to higher profits. Another thing that must be considered is being careful not to set the price of the barbeque higher or lower than the equilibrium price. Setting the price too high may lead to the loss of customers. Also, setting the price too low could result in a loss of revenue even though there would be more buyers.

A good business strategy would help distinguish Lorwill's from the many barbeque stands in Guam, especially in the Dededo area. Luckily, having worked in the food and beverage industry, Lorna Valdez knew early on that having a unique and delicious taste in her barbeque is what will giver her a competitive edge. When it comes to Lorwill's BBQ stand, she strives to provide her customers with good service and great tasting food. Her very own unique marinating process and the vinegar-garlic sauce that goes along with it is her distinct creation. In addition, Lorna Valdez's natural ability to get along and converse with everyone she meets wins her a lot of loyal friends and customers.

Another feature of Valdez's business is the variety she provides her customers. On top of her main feature, barbeque, her menu consists of a variety of American, Filipino, and Chamorro dishes as well. The menu also includes some Filipino desserts that are not often sold at other restaurants or barbeque stands. Because of this, she is able to accommodate the variety of ethnic groups that reside on island. The combination of good tasting food and friendly service keeps customers coming back.

CONTINUED GROWTH AND EFFICIENCY

As her business continues to grow, she seeks to cover costs that she accumulated during the start-up years due to expansion. Highly concerned about operation efficiency, Valdez plans to implement strategies to lower costs and remove items from the menu that are not sellable or that require storage space that costs more to hold than it does to benefit the business. Other areas of improvement include inventory management and marketing.

CONCLUSION

Lorna Valdez's entrepreneurship is one that has experienced several downfalls as well as successes. After finding her passion for cooking, she continued to pursue her dream of "being her own boss" regardless of the obstacles she faced. This drive and passion combined with hard-work and determination has lead to the growth and success of her business today, Lorwill's BBQ Stand. A small vendor located along Marine Drive on Route 1 beside the Dededo Retail Store and in front of the Guam Home Center that is opened daily from 10 a.m. to 10 p.m. The business is at its growth stage, along with short-run costs, but it has shown economic profit. Overall, it is a place to try a unique tasting marinated barbeque right off the grill along with other appetizing items that are offered in her menu of diverse ethnic foods.

CASE DISCUSSION AND QUESTIONS

For the entrepreneurship course:

1. Develop a matrix to measure opportunities available to Lorna Valdez that she ought to be thinking about or that offer the best return on investment. The dimensions of the matrix may include ones that are specific to a particular situation or circumstance. Along one dimension, you might include: attractiveness of opportunity/idea (level of priority given to the idea) and along the other dimension: viability (profit potential) or strategic alignment. Other criteria relevant to the circumstances or situation may be used.

2. This case is a great opportunity for discussing some of the excitement and fears which entrepreneurs face. Assess the personal and career opportunities and risks, which Lorna Valdez faced and continues to face. Discussion should include personality traits such as: internal locus of control vs. external locus of control, high energy level, need to achieve, self-confidence, awareness of passing time, and tolerance for ambiguity (Daft, 2008). Be sure to anticipate other potential issues that might surface in the future, both in the short- and long-term.

For higher-level courses, such as the business capstone course, the following teaching options are suggested: Case Analysis Assignment and/or Assignment Questions.

CASE ANALYSIS ASSIGNMENT

1. Lorwill's BBQ Stand has sought your consulting expertise and asked you to assess the company's strategy, competitive market position, and overall situation, and recommend a set of actions to improve the company's future prospects. Please prepare a report to Ms. Lorna Valdez, owner of Lorwill's BBQ Stand. Be sure your report includes:

* An identification of the key elements of the company's strategy,

* A discussion of which of Porter's five generic competitive strategies most closely match the competitive strategy that Lorwill's BBQ Stand is employing,

* The pros and cons of the company's strategy,

* An assessment of Lorwill's BBQ Stand's strengths, weaknesses, opportunities, and threats,

* An evaluation of Lorwill's BBQ Stand's financial performance,

* An evaluation of the key success factors that Lorwill's BBQ Stand and its rivals compete against,

* The strategic issues and problems that Lorwill's BBQ Stand's owner needs to address, and

* A set of action recommendations to deal with these issues and problems.

The report should be 5-6 pages; plus it should include an assortment of charts, tables, and exhibits to support the analysis and recommendations.

2. What are the pros and cons of Lorwill's BBQ Stand's strategy? What evidence indicates that the strategy is working well or not so well?

3. What does a SWOT analysis reveal about Lorwill's BBQ Stand's overall situation?

ASSIGNMENT QUESTIONS

1. What is Lorwill's BBQ Stand's strategy? Which of Porter's five generic competitive strategies most closely fit the competitive approach that Lorwill's BBQ Stand is taking? What type of competitive advantage is Lorwill's BBQ Stand trying to achieve?

2. What does a SWOT analysis of Lorwill's BBQ Stand reveal about the overall attractiveness of its situation? Does the company have any core competencies or distinctive competencies?

3. What is your appraisal of Lorwill's BBQ Stand's financial performance based on the data in the case? How well is the company doing financially?

4. Identify the key success factors that Lorwill's BBQ Stand and its rivals compete on.

5. What strategic issues and problems does Lorwill's BBQ Stand's owner need to address?

6. What does Lorwill's BBQ Stand need to do to strengthen its competitive position and business prospects vis-a-vis other small barbeque stand rivals?

REFERENCES

Dacanay, Jennifer (2007). Lorna Valdez on cooking up a business: LorWill's BBQ stand. Unpublished manuscript.

Daft, Richard. (2008). Management (8th ed.). Ohio: Thomson South-Western.

Quinatas, D. (2006). The roadside barbeque. The Guam Manila Times: Lifestyle (1st Issue).

Thomas, C.R. and Maurice, S.C. (2005). Managerial Economics (8th ed.). New York: McGraw-Hill

Valdez, Lorna. (December, 2007). Personal Interview.

Annette Taijeron Santos, University of Guam

Jennifer Dacanay, University of Guam Table 1: Output Quantity and Costs Total Total Total Average Output (Q) Fixed Cost Variable Cost Cost Total Cost 0 100 0 100 150 200 100 100 400 2 500 100 250 850 1.7 1000 100 500 1600 1.6 1500 100 750 2350 1.56667 2000 100 1000 3100 1.55 2500 100 1250 3850 1.54 3000 100 1500 4600 1.53333 3500 100 400 4000 1.14286