Little Sheep & 3i

                                Case 2: Little Sheep & 3i

1. In order to identify the competitive forces, Porter's’ five forces must be analyzed: The intensity of rivalry among competitors, the threat of potential entry, the bargaining power of suppliers, the bargaining power of buyers and the threat of substitutes.

Intensity of rivalry among competitors

In 2011, KFC the leading shareholder in the restaurant industry in China maintained over 2,700 active stores (Restaurant Counts). KFC is Little Sheep’s biggest competitor in terms of market share. In 2005, Little Sheep ranked second in China’s with 6.2% market share of the entire restaurant industry and catering market behind KFC. Rivalry among restaurants in China is so intense in fact that Zhang Gang, founder of Little Sheep quoted, “The average life of a restaurant is less than three years in China”. Rivalry among competitors is arguably one of the reasons Zhang initially focused on rapid expansion. In interest of protecting his brand name, Zhang pushed to expand upon more than 500 Little Sheep’s across China.

Threat of potential entry

The threat of potential entry is high since, as Zhang noticed he would need to trademark Little Sheep in order to fend of replicas of his business. In China, trademark protection is low as explained by Zhang. It is also important to note that as Zhang mentioned, just as business close down every three years, others come in.

Bargaining power of suppliers

The bargaining power of suppliers in the food industry is relatively low. Today with such a vast amount of suppliers available, they are all competing with one another. This allows Zhang to purchase his produce and ingredients at a relatively low cost. If his supplier raises the cost, he can simply switch suppliers.

Bargaining power of buyers

On the other hand, the bargaining power of buyers is especially important in the restaurant industry. When Little Sheep rapidly expanded to over 500 restaurants, Zhang experienced negative publicity from customers complaining to the media about inadequate quality and customer service, thus damaging the brand name. Zhang maintained weak oversight of all restaurants due to a small management team and this forced him to refocus his business, which would lead him to his success later on.

Threat of Substitutes

        With 20% of the restaurant industry considered “hot pot” restaurants, it was obvious Zhang’s vision was becoming popular in China (Peng). Zhang himself changed the popular dish “hot pot” by opting out of the sauces and ended up including more than 60 spices and herbs in his recipe. Not only are “hot pot” restaurants direct substitutes, but with so many restaurants, these are also considered substitutes. With this in mind, the threat of substitutes is high.

2. Key factors that explain the success of Little Sheep