STRATEGY

TEACHING NOTE:
SUGGESTIONS FOR USING
THE SKYLINE CHILI CASE

Daewoo Park
Hema A. Krishnan
Xavier University

The Skyline Chili case can be used in a variety of ways in conjunction with different
areas of small business management. It fits particularly well in small business growth
managment and strategy course. The case content spotlights the past and present of Skyline
Chili as well as the role of top management. Because Skyline Chili is competing in a
fragmented industry, the case also fits into a discussion of formulating and implementing
"sustained, profitable growth" strategy in fragmented industries. There is an abundance of
informationabout the restaurant industry and Skyline Chili's competitors. Therefore, Skyline
Chili ia an excellent case for classroom discussion or for individual or group written
assignment.

A video ( I I/2 hour) is available with this case (Mr. Kevin McDonnell's presentation
in small business growth management and strategy course). Also, annual report is available
from CompactDisclosure and CompuStat.

TEACHING OUTLINE AND ANALYSIS

1. What impressesyou about this company? Is it well-managed? Why or why not?

Using Skyline Chili's financial data, analyze internal strengths and weaknesses.

This is a good opening question because you get immediate feel for what students
think about Skyline Chili, Inc. and how it is managed. The following items are strong
candidates for being included:

Skyline Chili operates successfully under a new CEO, Mr. Kevin
McDonnell. The challenge of guiding Skyline into a thriving regional
restaurantchain while increasing shareholder value has only begun for him.
It is essentially the same challenge his predecessors were unable to
overcome aRer Skyline Chili went public to finance an aggressive regional
expansion. Mr. McDonnell describes his task as an "intriguing
opportunity."

v Skyline Chili has managed to grow by utilizing the principles of small-
scale organization.

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Skyline's track record of growth. As of 1995, there are 83 Skyline
restaurants. Though Mr. McDonnell might like to add new stores more

quickly, he is most concerned with improving the prolitabilityof the existing

ones outside Cincinnati.

Skyline Chili has some internal weaknesses. For example, 3 Lambrinides family

members control 74.7% of ownership. Also, compensation for them (as oAicers and directors)
and price-earnings ratio (19 in 1994) are too high (in comparison to ROE). Skyline Chili's
ROE (Return on Equity) was poor in comparison to other competitors: 4.7% in 1992, 5.8%
in 1993,6.7%in 1994 (industry average: 10%). However, in 1995, Skyline Chili under Mr.
Kevin McDonnell's leadership reported 11%.

2. How successful was Skyline Chili in defining the business and crafting a strategy
to achieve performance objectives?

Skyline Chili defined the business narrowly as a company that produces the secret-

recipe chili for its restaurants (company-owned and franchised) and several frozen chili

products for local grocery stores. However, Skyline Chili did not pay much attention to

crattinga strategy. It emerged from a process of trial and error. Today, Mr. McDonnell pays
more attention to craRing and implementing a strategy with a strong growth orientation.

3. Can Skyline Chili executives stand the tests of time and growth?

Skyline Chili's financial management is very conservative. The company has no

regular Wall Street analyst following because its stock is thinly traded. Limited attention is

given to improving shareholder value and sustaining it. Given its projected growth, however,

Skyline Chili must be a company that generates a large amount of cash to pay for the necessary
expansion.

Growingearningsis the foundation forincreasingshareholdervalue. For Skyline, that

means the restaurant chain must expand outside Cincinnati because it has all but saturated this

market. Another critical component to shareholder value is liquidity. With 75 percent of
Skyline Chili's 3 4 million shares tied up in the hands of officers and directors, there's not much
of a public float. With so few shares available, it's difficult to achieve significant price
appreciation. It also limits Wall Street's interest because investors usually don't invest in such

tiny companies. Nevertheless, Skyline Chili has an asset: Mr. Kevin McDonnell, his

leadership and strategy.

4. What issues does Skyline Chili face in the years ahead? What would you
recommend Skyline Chili do to successfully confront these issues?

Students are prone to come up with shallow answers to this question. You may have

to probe and push a little to draw out the rather substantive issues Skyline Chili faces:

v Deciding how fast to grow —how many new restaurants(company-owned
and franchised) to open each year and how rapidly to enter new geographic

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areas. Rapid expansion runs the risk of straining the company's ability to
implement its strategy elTectively in all of its stores. Skyline Chili should
avoid its previous mistakes in the late 1980s. For example, there were only
one or two Skyline Chili restaurants in the new city. The stores lacked a
loyal customer base and with so few locations in a city, promotion was very
difficult. Skyline Chili had to pull out of the troubled markets such as
Atlanta, Pittsburgh, and Washington, D.C. Therefore, Skyline Chili needs
to pursue "managed growth."

~ What management actions to take to ensure that each restaurant delivers
attentive and personalized customer service? It will not be easy to sustain
the current strategy of customer service as the company's size and
geographic scope gets bigger and bigger. Special efforts need to be made to
employee training and development. Skyline Chili's strategy cannot succeed
without a cadre of dedicated, motivated, and knowledgeable store
employees. Therefore, Skyline Chili should focus on: high standards in
employee selection, extensive efforts to recruit service-oriented people to
staff restaurants, intensive training of all employees, and communication
between management and employees.

~ Can Skyline Chili continue to finance growth without incurring financial
strains?

In sum, the core issue is how to sustain the growth strategy and continue to
implement it with excellence. At the end of case discussion, students can try to answer the
following question: Should I consider buying stock in Skyline Chili?

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