Integrative Case_01 INTEGRATIVE CASE STUDY 1 3i GROUP’S PRIVATE EQUITY INVESTMENT IN CHINA’S LITTLE SHEEP

OVERVIEW In 1999, an entrepreneur called Zhang Gang founded Little Sheep Catering Chain Co. in Inner Mongolia, one of the most remote and underdeveloped corners of the world. Zhang managed to open two additional restaurants within two months, with a very enthusiastic customer response. Notwithstanding this success, To prepare for an initial public offering (IPO), he believed that the company needed to attract not only additional capital, but also a partner with the capability to provide much-needed industry knowledge and expertise. Little Sheep’s extraordinary growth and brand name recognition attracted many willing investors, including such prestigious investment banks as Morgan Stanley and Goldman Sachs. Privateequity firm 3i noted Little Sheep’s success and approached the company. 3i demonstrated its industry expertise and the benefits it could offer Little Sheep, subsequently beating rivals Morgan Stanley and Goldman Sachs. CASE DISCUSSION QUESTIONS 1. From an industry-based view, identify some of the competitive forces affecting the Chinese restaurant industry. Analyzing the competitive forces in the Chinese restaurant industry using Porter’s five forces will involve considering (1) the intensity of rivalry among competitors, (2) the threat of potential entry, (3) the bargaining power of suppliers, (4) the bargaining power of buyers, and (5) the threat of substitutes. Based on the information in the case, the intensity of rivalry among competitors seems to be high, as it was the threat of competition that caused Zhang to expand rapidly and seek trademark protection for the brand name. The threat of potential entry, too, would seem to be high, as the restaurant industry does not require as much investment or specialized knowledge as other industries do, and trademark protection seems to be low. The bargaining power of suppliers in the industry is difficult to determine from the case, but it is not likely that this is high, considering that the ingredients that go into restaurant food are widely available from numerous suppliers. The bargaining power of buyers, too, is not likely to be high, as there are probably a number of competitors in the restaurant industry, offering food at various prices. The threat of substitutes is likely to be extremely high, especially considering the slow processes for obtaining trademark protection in China. 2. What are the key factors that explain the success of Little Sheep? What are the main obstacles associated with its continued grow