AMERICAN PERISCOPE. Let pasta be

There is a fight on to save the soul of Olive Garden.

Rather, it is between a US investor group, Starboard Value LP, and the company that owns the Olive Garden restaurant chain, Darden Restaurants, for control of the company. The company’s performance has been slipping, and the restaurant chain’s same-store sales fell about 1.3 per cent in the last quarter.

Starboard, which owns about 9 per cent of Darden’s stock, wants to replace the entire 12-member board of directors with its own list. In addition, Starboard has released an elaborate document giving its turnaround plan, which includes recommendations that Olive Garden should only give one breadstick per customer plus one for the table, instead of three breadsticks as is being given presently, and that it is overfilling salad bowls and adding too much dressing, resulting in higher costs and food waste.

Cost-cutting games

Now, another local organisation recently went into belt-tightening mode as part of its turnaround plan. Staff travel was restricted and an internal copying centre closed.

The organisation also decided to stop providing coffee powder refills for the coffee maker in the staff pantry. If an employee wanted coffee, she had to get her own. However, at events organised by senior management, lunch continued to be served, and there was coffee powder for the coffee maker near the senior management’s offices!

Employee morale was naturally taking a hit. When it comes to cutting costs, organisations often look at the accounting statements and run a red pencil under all items that seem easy to cut, without thinking about the larger implications of the action.

Research has shown that no amount of controls like cutting travel and switching off the lights early (operating actions) are going to help the company if it is in the wrong business where it does not have unique competencies (strategic reason). Strategic problems require a strategic response and operating problems require an operating response..

Darden responded to Starboard’s recommendations with the comment that their approach has to do with conveying a notion of ‘Italian generosity’ and that internal satisfaction surveys have shown that their salads have high loyalty.

In other words, Darden is arguing that one should not be counting the number of breadsticks on the table but whether it fits with the style and positioning of the restaurant, a strategic issue.

Investor groups like Starboard often take a significant minority position in companies that are not doing well, and leverage their position to bring about changes in the running of the company in order to boost its value and make a small fortune on their investment, as they then exit and scout for another place to go.

It will be better if Starboard sticks to the broad strategy issues. But their reportedly 300 page set of recommendations also go into details like how the pasta was being cooked and how much meat there was on the lasagna.

Do you want to eat in a restaurant where financial investors are deciding the menu and cooking style?

The writer is a professor at Suffolk University, Boston, and Jindal Global Business School, Delhi NCR

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