In this case the authors tell the story of a small business startup and the difficulties faced when environment is not considered. This case would be most suitable for undergraduate courses in Entrepreneurship and Strategic Management. The case is designed to be taught in one fifty to seventy-five minute class period, with about thirty minutes of reading and preparation time on the students part, prior to class.
This case is based upon an actual experience. The names of the participants and the company have been changed to maintain confidentiality. This case demonstrates problems that can arise from poor investigation of a location prior to going into business. NTA has discovered that they face significant external environmental risks of which they had previously been unaware.
1. Why did David Lee open NTA Executive Retreats?
The NTA Martial Art Academy had grown into a successful business, but its profit potential was limited. When Lee first opened the martial art studio, he faced limited competition in the immediate area. Currently, competitors are expanding directly into his territory and competition is becoming fierce. The increase in competition is making his product more commoditized and threatens his margins.
Students in part select a martial art studio based upon the quality of the instruction. David Lee is the source of advantage for this business, but he has limited time to devote to the business given his other interests. Further, having classes in a fixed facility limits class size and therefore limits profit potential. David Lee needed to find a business that was seen as offering a unique product where he could increase the amount he could charge for his services.
The executive retreat business was a natural extension of his current business. His existing students were an initial customer source for the new venture as well as a source of employees. The established reputation of the NTA Martial Art Academy could be used to provide immediate legitimacy and trust for the new product. David Lee's contacts in the business community, as a result of the other businesses he owned and operated, were a source of referrals for his new venture. Further, the high capital requirements for owning and operating a retreat facility were a significant barrier to entry for other martial art academies. Consequently, the limited competition would allow Lee to charge higher prices and thereby achieve higher margins.
2. Why did David Lee select a location two hours from Silicon Valley for his new venture?
The remote location was necessary for several reasons. First, it would not have been economically feasible to purchase such a large tract of land so close to Silicon Valley. Second, the concept of a retreat is to remove the client from their normal surroundings. Third, a location two hours from Silicon Valley reinforced the concept of separation from the normal routine of the customer yet was close enough that the trip would not seem difficult. Finally, a primitive setting would not have felt genuine inside the boundaries of a major metropolitan area.
3. Describe the nature of NTA's industry using a Porter's Five Forces framework.
NTA's buyers had considerable power due to low switching costs. It was an industry practice to raise switching costs by requiring Academy members to enroll for twelve months at a time. However, this policy used by both martial art academies and health clubs frequently resulted in conflicts with customers.
Suppliers to the business had limited power. While national chains could negotiate better prices due to larger purchase commitments, the cost of supplies was not material to NTA's operations and multiple suppliers were available to the company. …