Part King Inc.

Ishan Sharma
999877085
MGT428H5

Introduction
Part King Inc. was an extension of Hawthorne Corporation. In its operations, Hawthorne
contained many retail divisions such as clothing, financial services, petroleum and general
merchandise. Included in general merchandise was automotive products, including but not
limited to replacement parts. In the 1990s, Hawthorne came to the realization that the needs of
two key market segments were not being met by the automotive section of the general
merchandise stores. These two key market segments were automotive hobbyists and commercial
consumers. To meet their needs, Hawthorne came to a decision to pursue the model of having
independent automotive stores in Canada. These stores would operate under the Part King name.
The first Part King store was opened in Guelph, Ontario in 1996, and Part King flourished and
expanded rapidly. By 2005, there were over 50 franchise stores, with 10 to 12 new stores
opening each year. The target market for Part King was automotive hobbyists and commercial
consumers. Automotive hobbyists consisted of serious do-it-yourself enthusiasts, whereas
commercial consumers consisted of local garages and dealerships. As business was expanding
rapidly, profits were also high and the stores were generally successful. Most stores were making
sales for at least $2 million and generating profits by the third year of operations. However, the
ratio of Part Kings sales to the general merchandise sales were still below 10 percent.
Even though the current Part King business model was incredibly successful, Hawthorne had
always envisioned a corporate store model for Part Kings stores. Hawthorne negotiated the
contract with their general merchandise stores in 2005, allowing them the opportunity to pursue a
corporate store model for Part King. The freshly appointed Ontario operations manager, Kevin
Bachand, was appointed to demonstrate his expertise with regards to the new business model.
Operations
Corporate team performance evaluation
The 25 person corporate team was evaluated based on PKs return on investment and same-store
sales growth. This performance evaluation system encompasses the most common criteria,
however it may pose a problem. This is due to the fact that same-store sales growth is influenced

very little by the corporate team. In the franchisee business model, franchisees have quite a wide
margin of leeway to alter the price or the type of products offered, thus, same-store sales growth
is influenced very heavily by the franchisees relative to the corporate team. Thus, that criteria
might not reflect the performance of the corporate team. For example, if the franchise owners
were very motivated in their pursuit of growth, which they ideally should be, they would do the
best they can to grow their stores. Consequently, even if the corporate team did nothing to help
the growth of Part Kings stores, they would still be evaluated positively in the criteria of samestore sales growth.
Generals right to buy PK stores
The general merchandise stores had a pre-emptive right to buy PK stores in their geographical
area. Technically, the general merchandise stores and Part King stores were in competition with
each other. Although this right is useful for the general merchandise stores, it hurts the overall
position of Hawthorne. The reasoning for this is simple. Firstly, it is evident in the case that the
general merchandise stores could not successfully run Part King stores. Thus, they lost out on
business that came to Part King. Also, it is widely known that competition fuels business and
forces businesses to perform better. Thus, if Hawthorne had not included this pre-emptive right,
it would fuel both Part King and the general merchandise stores to perform better to gain an
advantage over their competition. This effort to one-up their competition, would, in turn, benefit
Hawthorne in the form of better sales and more efficient business.
Parts inventory
The parts inventory was purchased by senior management and then distributed to each franchise
store. This approach is common among franchise stores, and is good because it provides a level
of uniformity to the business. Further, individual stores made their own inventory selection based
on recommendations from the head office. This is also beneficial to the business as stores in
different geographical areas may have different markets, and it would be beneficial to stock
certain inventory which would cater to their particular markets needs.
Franchise Store Business Model
Recruitment

The rigorous process of buying a franchise store is very beneficial to the efficient and effective
running of the business. For example, ensuring that the candidate had $60,000 in un-borrowed
funds would prove to be useful in the case of an emergency or need for an immediate capital
investment. The one drawback of this rigorous screening would be that some highly motivated
and skilled applicants would not be offered a franchise store due to not meeting the criteria, even
though they wouldve otherwise been very successful business owners. However, the advantages
of rigorous screening heavily outweigh the disadvantages.
Corporate support
There were a myriad of ways in which corporate offered support to Part King in exchange for a
portion of the gross margin. Advertising support seemed to be adequate if not more than
adequate. Also, the store and everything inside was offered to the franchisee for a relatively small
investment. Investing only $60,000 in equity, the franchisee obtained a large amount of assets he
could use to realize a successful business. This would provide the franchisee with a sense of
motivation to do everything in his power to make use of what he is given. Thus, in the long run,
this financial support would be beneficial for Hawthorne by way of extremely motivated
franchisees.
Budgeting
The budgeting was a joint process between corporate and the franchisee. The budget, drafted by
the franchisee, would go to corporate, where it would be revised in conjunction with the
franchisee. Following the revision, the budget would be given back to the franchisee to review
the budget with their own accountant. It seems there were adequate controls in place with regards
to the budget formation, and that both corporate and the franchisee knew of each others
expectations. However, there is a potential problem that could arise from the last step in the
budget making process. During the review of the budget with their own accountant, the
franchisee could alter some figures to reflect a more lax budget in order to satisfy their own
needs. For example, the sales budget could be reduced by the franchisee to show more sales
growth and better performance than would be shown had the sales budget remained at the
original level. Thus, the final step in the budgeting process should be given to corporate and not
the franchisee.

Evaluation
The evaluation is a valuable support that corporate offers to the franchise owners. Corporate
requests monthly reports in order to monitor the franchises, and offers advice if the franchises are
not doing as well as targeted numbers. Also, relative scores of franchisees success is shared with
other franchisees, creating a sort of competition between franchises. This competition is
beneficial to fuel better performance on part of the franchises.
Incentives
The guaranteed salary for the franchisee can have both negative and positive impacts on the
performance of the store. The negative impact may be that the franchisee becomes satisfied with
the lower bound $50,000 salary and does not strive especially hard to grow the business. As for
the positive impact, the guaranteed salary provides a safety net for the franchisee, in the situation
that for the first couple years of the business, the store does not generate substantial profits.
Further, it is advantageous that the franchisee can draw as large of a salary as he wants, subject to
the condition of a .35 equity/assets ratio. This incentivizes the franchisee to make efforts to grow
his business to the maximum. The store managers flexibility to design and deliver an incentive
system may have positive and negative ramifications. On the plus side, the store manager can ask
his employees what kinds of incentives they would prefer, and consider these suggestions in the
incentive system. However, the store manager may also skimp on the incentive system to
decrease costs for his store. This would also be hard to discover by corporate in lieu of
complaints from employees. Therefore, there should be a mandatory base incentive system
passed down from corporate, with alternative incentive systems which can be substituted into the
base incentive system. This would ensure that the store manager treats employees fairly.
Transfer pricing
The price at which franchise stores purchased the merchandise was higher than the direct
acquisition cost. This is to ensure that the franchisees did not unjustly discount prices. While this
is beneficial for the company as a whole, it may incentivize franchises to engage in undesirable

business practices. In reference to the example for the tire, if franchisees found tires from a third
party for a cheaper amount than $77, in the absence of any clause in the franchise contract, they
would buy the tires from the third party and Hawthorne would have unsold inventory. Thus, in
this way, the individual franchise store would earn more profit, however Hawthorne would forgo
profits. Thus, the transfer price should be set at the acquisition cost price and there should be a
limit set on the amount of discount the store can offer. With regards to the profits, Hawthorne
would still earn 40% of the profits of the inventory margin because the total gross margin of Part
King would be proportionately higher.
Corporate Store Business Model
Recruitment
It was expected that managers treat the stores as if they were their own. In the absence of
effective performance incentive systems, this would be hard to do. The reasoning for this is that,
in the absence of any invested capital, it would be hard to instill the feeling of ownership into
managers. However, in the presence of adequate performance incentives, such as bonuses for the
stores performance, stock options and grants, etc., it would be possible to encourage managers
to treat the store as if it were their own.
Budgeting
The budgeting process was designed to keep the managers working hard. The budget contained
important elements that were necessary in any budget, such as sales, profitability and accounts
receivables. However, a major element, cost, was not included in the budgeting process. Costs
would need to be included in the budgeting process to make it more effective. Also, there
shouldve been separate budgets for both segments of the market to allow a more clear view of
the budget and future performance. In addition, the budget should focus more on cost control and
sales, as accounts receivable is an asset and does not require much attention in the budget.
Performance and Incentives
The similar salary of corporate store managers and franchisees is a good base line. In addition to
$50,000, benefits of 10% of salary would also be beneficial to keep manager motivation higher.
However, there should most definitely be a bonus system. The reason for this is that, without a

bonus system based on the performance of the store, managers would get incredibly complacent
and satisfied with only their salary and benefits. However, with the bonus system present,
managers would be continuously motivated to work harder and increase their stores
performance. Even taking it one step further, they should also have access to the performance of
other stores. This would imbibe a competitive spirit in the corporate stores, further boosting
performance and manager efforts. Mystery shoppers would be beneficial to the business by
indicating which areas and employees need improvement and providing feedback on the
operations of the business.
For the incentives of the non-manager employees of corporate stores, the wages plus profitsharing and stock options would be sufficient. This is because the wage provides an adequate
base line, and the profit-sharing and stock options encourage employees to put more effort into
their work than the bare minimum.
Transfer pricing
The transfer pricing would be better if it was set at cost than at cost plus percentage of gross
margin. Even for the franchise stores, this would be recommended course of action for the sake
of simplicity, less incentive to partake in undesirable inventory purchases from third parties, and
more reflectiveness of actual performance of the store.
Conclusion
It is recommended that Bachand stay with the franchise store model. This is due to the premise
that when managers are financially invested in their own stores, they will do everything in their
power to advance their business and improve their performance. This follows naturally from the
notion of capitalism. Additionally, Hawthorne, being a naturally decentralized organization,
would pair better with the franchise model than the store model. It only helps that they already
have an abundance of experience with franchise stores, considering that their other store models
are franchise-based. However, even with the franchise model, the aforementioned
recommendations should be taken into consideration and implemented.