PHILIPPINE WOMEN’S UNIVERSITY Taft Avenue, Manila
A Case Analysis of KENTUCKY FRIED CHICKEN AND THE GLOBAL FAST FOOD INDUSTRY.
Presented to
DR. TERESITA FORTUNA Faculty
In Partial Fulfillment of the Requirements for the Subject: DBHR 603 - ADVANCED STRATEGIC MANAGEMENT
By
PROF. MARIA AMIHAN T. PANES November 12, 2007
KFC CASE ANALYSIS
Background of the Problem
History Since its inception, KFC has evolved through several different organizational changes. These changes were brought about due to the changes of ownership that followed since Colonel Sanders first sold KFC in 1964. In 1964, KFC was sold to a small group of investors that eventually took it public. Heublein, Inc, purchased KFC in 1971 and was highly involved in the day to day operations. R.J. Reynolds then acquired Heublein in 1982. R.J. took a more laid back approach and allowed business as usual at KFC. Finally, in 1986, KFC was acquired by PepsiCo, which was trying to grow its quick serve restaurant segment. PepsiCo presently runs Taco Bell, Pizza Hut, and KFC. The PepsiCo management style and corporate culture was significantly different from that of KFC. PepsiCo has a consumer product orientation. PepsiCo found that the marketing of fast food was very similar to the marketing of its soft drinks and snack foods. PepsiCo reorganized itself in 1985. It divested non-compatible units and organized along three lines: soft drinks,
snack foods and restaurants. PepsiCo Worldwide Restaurants was created to create synergism between its restaurant companies. During the 1980s, consumers began to demand healthier foods and KFC was faced with a limited menu consisting mainly of fried foods. In order to reduce KFC’s image as a fried chicken chain, it changed its logo from Kentucky Fried Chicken to KFC in 1991. KFC had made a variety of changes on its menu offerings. KFC introduced Oriental Wings, Popcorn Chicken, and Honey BBQ Chicken and a desert menu. It also introduced the most aggressive strategy which is the “Neighborhood Program” with special menu offerings to appeal exclusively to the Black Community. KFC had relied to the nontraditional distribution channels to spur its future growth. Shopping malls, universities, hospitals, kiosks in airports, stadiums, amusement parks
and
other
high-0traffic
areas
offer
significant
growth
opportunities for fast-food restaurants. In order for more KFC units to quickly expand, PepsiCo acquired shares in Carts of Colorado, Inc. to manufacture mobile merchandise carts for their marketing schemes. By the end of 1994, KFC was operating 4,258 restaurants in 68 foreign countries. KFC is the largest chicken restaurant and the third largest quick service chain in the world. Due to market saturation in
the United States, international expansion will be critical to increased profitability and growth. KFC was one of the first restaurant chains to recognize the importance of international markets. In Latin America, KFC was operating 205 company-owned restaurants in Mexico , Puerto Rico , Venezuela , and Trinidad and Tobago as of November 1995. However, KFC had established 29 new franchises in Mexico by the end of 1995, following the enactment of Mexico ’s new franchise law in 1990. KFC anticipated that much of its future growth in Mexico would be through franchises rather than company-owned restaurants. Although there is an economic and political instability in Mexico , the Mexican market is viewed as KFC’s most important growth market outside of the US and second largest international market behind Australia . The danger in taking a conservative approach in Mexico was the potential loss of market share in a large market where KFC enjoys enormous popularity.
Present Situation The organization is currently structured with two divisions under PepsiCo. David Novak is president of KFC. John Hill is Chief Financial Officer and Colin Moore is the head of Marketing. Peter Waller is head
of franchising while Olden Lee is head of Human Resources. KFC is part of the two PepsiCo divisions, which are PepsiCo Worldwide Restaurants and PepsiCo Restaurants International. Both of these divisions of PepsiCo are based in Dallas. Structuring Another strategy of KFC is currently working with is to improve operating efficiencies. This in turn can directly impact the operating profit of the firm. In 1989, KFC centered on elimination of overhead costs and increased efficiency. This reorganization was in the U.S. operations and included a revision of KFC’s crew training programs and operating standards. They emphasized customer service, cleaner restaurants, faster and friendlier service, and continued high-quality products. In 1992, KFC continued with another reorganization in its middle management ranks. They eliminated 250 of the 1500 management positions at corporate and gave the responsibilities to restaurant franchises and marketing managers.
PRESENTATION, ANALYSIS AND INTERPRETATION OF DATA
Time Context:
1995
It delineates the take off point of the analysis, the period when KFC is faced with the problem of making strategic decisions on what to do with the Mexican market after the peso crisis in Mexico and the resulting recession.
Viewpoint:
Mr. David Novak President, KFC
He
is
responsible
for
making
strategic
decisions
for
the
company’s growth and development.
Statement of the Problem:
What strategic decision will KFC adopt in order to minimize risks and maximize profitability in its operations in Mexico? Due to the current devaluation, profits are greatly reduced. This reduction in earning power has brought much political unrest. Mexico has a large unskilled labor pool that provides little stability.
Cultural attitudes towards punctuality, absenteeism and job retention tend
to
make
managing
employees
difficult
under
present
circumstances. High turn-over rates lead to high training costs and can threaten the brand integrity. In the past, the Mexican economy has triggered violence toward American firms by frustrated nationalists. The culmination of these problems led to low profitability due to a low profit product margin. KFC has to decide what strategy to use in its Mexican operations. The danger in taking a conservative approach in Mexico was the potential loss of market share in a large market where KFC enjoys enormous popularity.
Objectives:
1. To maximize profitability in Mexico; 2. To identify a marketing strategy to enhance market growth and development of the Mexican market.
Areas of Consideration: (SWOT ANALYSIS) I. Internal Environment: Functional Areas Strengths Weaknesses A. HUMAN RESOURCES MANAGEMENT 1. PEPSI Co’s success with management of fast food chains When PepsiCo acquired KFC in 1986, the company already dominated two of the four largest and fastest growing segments of the fast food industry. (Pizza Hut and Taco Bell) X 2. Traditional employee loyalty KFC’s culture was built largely on Col. Sander’s laid back approach to management. X 3. Conflicting cultures of KFC and PepsiCo. KFC’s laid-back culture and PepsiCo fast track attitude caused conflict and confusion among employees after the entrance of PepsiCo.
X
OPERATIONS MANAGEMENT 1. Utilizes a consistent standard operating procedure in all aspects of its operations. The company maintains established operational standards for the different stages of its operations. 2. Utilizes dual branding This operational strategy helps to improve “economies of scale” within restaurant operations.. 3. Confusing corporate direction Between 1971 and 1986, KFC was sold 3 times with companies that practice different styles. 4. Turn-over in top management PepsiCo managers who replaced
X
X
X X
KFC people in 1986 until 1989 also left KFC by 1995. MARKETING MANAGEMENT Products/Services 1. Standardized product. KFC has standardized its chicken recipe all over the world and this has earned it a stable reputation as a foodservice company.
X
2. KFC is focused on fried chicken as its core product and takes a long time to introduce new products. Innovation was not a primary strategy for KFC. McDonald’s had already introduced its McChicken while KFC was just testing its chicken sandwich. This delay increased the cost of developing consumer awareness for KFC. Price 1. Pricing of KFC products are competitive. Pricing for every chicken and related products are very competitive in the fast food industry.h Place 1. Market accessibility The stores of KFC are located in high traffic areas. This is a sales advantage in terms of client accessibility. 2. Utilization of non-traditional areas of distribution KFC’s use of shopping malls, universities, hospitals, airports, stadiums, amusement parks, office buildings and mobile units is a very aggressive marketing tool for product distribution Promotion 1.PepsiCo's success with the management of fast food chains. PepsiCo acquired Pizza Hut in
X
X
X
X X
1977, and Taco Bell in 1978. PepsiCo used many of the same promotional strategies that it has used to market soft drinks and snack food. By the time PepsiCo bought KFC in 1986, the company already dominated two of the four largest and fastest-growing segments of the fast food industry 2. KFC’s secret recipe. The secret recipe has been a source of advertising and has set KFC apart. 3. Strong brand name. KFC’s early entrance into the fast-food industry in 1954 allowed it to develop a strong brand name recognition and strong foothold in the industry.
X
X 4. No defined target market. The advertising campaign of KFC does not specifically appeal to any market segment. It does not have a consistent long-term approach. 5. Maximum usage of promotional strategies. KFC’s promotional activities are extensive: above the line advertising and print media. FINANCIAL MANAGEMENT 1. KFC generally practices sound financial decisions. This is reflected by an increasing trend in its net revenue and increasing market share. Over the past seven years from 1987 to 1994, KFC worldwide sales have grown at an average rate of 8.2% 2. Downward trend of its Profitability ratios. The return on assets ratio of PepsiCo is alarming because it has been lagging the industry by 4-5% and does not show an upward trend. 1994 to 1995 net profit margin also dropped by 1 %.
X
X
X
X
B. External Environment External Factors Threats
Opportunities
COMPETITIVE FORCES 1. Increasing competition with other chicken fastfood companies. There are other fast food companies offering chicken operating in Mexico that compete for the patronage of the locals.
X
2. Rising sales of substitute products. Other fast food companies offering substitute products hamburgers, pancakes, and the existence of old time favorites of Mexicans, the nachos, tacos, Doritos, etc. GOVERNMENT PROGRAMS 1. New franchise law in Mexico. The 1990 Franchise Law in Mexico favored franchise expansion and presents an opportunity to fast food chains to expand operations.
X
X
ECONOMIC FORCES 1. Unstable economic condition of the Mexico. Increased political turmoil resulting to the peso crisis and economic recession in Mexico pose a big risk to investors in the country.
X
3. Increasing Start-up Costs Increasing costs of construction, operations, training costs to open up new stores is a risk for businesses.
X
4. Peso devaluation US companies are able to invest less in buying assets in Mexico due to the favorable exchange rate. SOCIO-CULTURAL FORCES 1. Mexican Labor problems High incidence of absenteeism. Tardiness and high labor-turn-over affects
X
operations.
X
2. Large base Mexican market The large population of Mexico and its close proximity to the US mainland presents a big market with less operational costs for a US firm.
X
3. Changing preferences of customers. Customers demand for healthier foods and increase variety in their menus. 4. Increasing trend of eating out. Increasing household income and more opportunities for women to work have increased demand for foodservice outside the home.
X
X
POLITICO-LEGAL FORCES 1. Unstable political situation in the Mexico. Any political disturbance in the country affects the general business scenario, thus affecting activities of the company. 2. Enactment of 1990 Franchise Law The Franchise Law is an attractive investment incentive for companies in Mexico.
X
X
3. The joining of Mexico in the GATT. This has eliminated trade barriers in Mexico and will facilitate trade entry in the country. TECHNOLOGICAL FORCES 1. Emergence of modern technology in the foodservice industry. With the development of new
X
hardware and software for food service management, the workload of the restaurant manager is less time consuming. He also has now more time for conceptualization and creativity, thus, increasing efficiency and productivity. 2. Advancements in use of the Information Technology The world is at the tip of the event manager’s fingers through the Web. Prices, competitions, new venues, new products, new themes, statistics etc. can all be retrieved from the internet. This facilitates the once very time-consuming work of the store managers.
X
X 3. Advancements in Ads and Promotions technology More vivid and colorful ads utilizing new technological tools aid in more attraction and more interest among viewers, thus, inciting them to try the advertised products.
STRENGTH - S
1. PepsiCo mgmt 2. Employee loyalty 3. Consistent SOP
X
WEAKNESSES – W
1. Conflicting mgmt styles 2.Confusing corporate direction 3. Fast mgmt turn-over
4. 5. 6. 7.
Dual Branding Competitive Pricing Accessible Non-traditional distribution 8. KFC Secret Recipe 9. Strong brand name OPPORTUNITY – O 1. New Franchise Law in Mexico 2. Peso devaluation 3.Large base Mexican Market 4.Joining of Mexico in the GATT 5. Advancements in technology THREATS -
T
1. Increasing competition 2. Rising sales of substitutes 3. Unstable economic conditions 4. Increasing start-up costs 5. Labor problems 6. Changing customer preferences 7. Unstable political conditions
SO STRATEGIES
4. No defined target market
WO STRATEGIES
1. Open Franchises in Mexico. 2. Use value for money pricing strategy to capture large market base.
1. Get locals to manage units through franchising. 2. Implement market segmentation to define target markets.
ST STRATEGIES
WT STRATEGIES
1.Capitalize on KFC secret recipe in ads 2. Introduce variety on menu to capture more market segments with varied preferences. 3. Capitalize on strong brand name to develop franchises to lessen operational costs.
1. Direct ads towards defined target markets. 2. Leave Mexico and open more units in other foreign markets.
ALTERNATIVE COURSES OF ACTION: From the presented SWOT analysis, the researcher came up with two possible solutions to the problem of KFC, the Alternative Course
of Action I (ACA 1) and Alternative Course of Action 2 (ACA 2). These alternatives are aimed at meeting the objectives set for this case and solving the problem of KFC. ACA - 1 Convert all company-owned Mexican units into franchises and open the area for more franchises. Advantages: 1. Converting all company-owned units in Mexico will reduce risks both political and economic. The locals will be the operating the stores and will not expose KFC’s own managers to the political instability in Mexico. 2. This strategy is easy to implement due to the new legislation promoting franchises and protecting patents and technology in Mexico. 3. This strategy will generate increased cash flow from the sale of existing units. 4. This strategy will require less involvement of KFC in the day to day operations of the stores, thus, less administrative costs for KFC. 5. Steady royalties from the sale of existing stores even after the sale, thus, assuring income for KFC. 6. The strategy will expand the network of KFC through more franchised units in Mexico. 7. This strategy is an effective rebuttal strategy to be used by KFC to address the current market positioning of its competitors like McDonalds that will saturate the area with more stores. Disadvantages: 1. Implementing this strategy will forego KFC’s potential greater profitability in Mexico. Company-owned stores have greater capabilities of profit than the standard royalties from franchisees. 2. The strategy will mean losing control of the daily operations of the units by KFC management. 3. Expansion through franchise endangers brand equity.
ACA - 2 Maintain status quo in Mexico and continue market expansion in other foreign markets.
Advantages: 1. This strategy will expand the market possibilities of KFC to other international markets where profitability will be greater. 2. Expansion in other foreign markets poses less political and financial risks for KFC. 3. The existing units in Mexico will maintain a minimal presence for further growth when stability is established. Disadvantages: 1. The strategy will not eliminate the risk in Mexico for the existing units in Mexico. 2. The risk of brand exposure is still present. 3. KFC will forego the potential for more profitability and growth in Mexico. 4. The existing units in Mexico will still need management service and with no increased economy of scale. 5. Competitors and other product substitutes will continue expansion in the area and will gain control of the Mexican market with a very large population that is capable of yielding more profits. Decision Matrix The Five Point Likert Scale is used as a tool in the decision making process of choosing the best alternative course of action to take in order to solve the problem of the case. CRITERIA Market Growth Competitive Advantage Profitability Corporate Image Capitalization Requirement Total Average Legend :
5 4 3 2 1
ACA#1 4 4 3 3 4 18 4
– Most Likely – More Likely – Likely – Less Likely - Unlikely
ACA#2 3 3 4 4 1 15 3
RATIONALE: Market Growth Converting all existing units into franchised stores and opening Mexico for more franchises will have an edge over ACA#2 because this strategy will expand the market potentials of KFC in Mexico which has a very big market potential with its very big population. Competitiveness ACA#1 will have an edge over ACA#2 in terms of gaining competitive advantage because franchising will extend the market base potentials of KFC in Mexico and will enhance its market share in the area. Profitability ACA#1 will have an edge over ACA#2 because with more units to serve the market, KFC will get more sales, thereby increasing profitability. ACA#2 gets a lower rating because foreign market expansion will initially require big start-up expenditures thus, affecting over-all profitability of the company. Corporate Image ACA#2 will give KFC better corporate image as franchising carries the risk of exposing the brand to uncertainties in the hands of franchisees who are not in direct control of the company.
Capitalization Requirement ACA#2 will require more capitalization requirement in its initial start-up operations following its overseas expansion compared to ACA#1. It will also entail the hiring of more personnel to handle the new units to be opened, thus, will mean additional operating expenses for the company in terms of salaries and wages.
RECOMMENDATION (ANALYSIS) The researcher strongly recommends that ACA No. 1. Convert all company-owned Mexican units into franchises and open the
area for more franchisees be adopted by KFC in order to achieve more profitability and maintain its market leadership in Mexico under the prevailing economic and political conditions in the country. This most effectively mitigates the risk of doing business in Mexico by making a franchisee responsible for the profit and loss of each unit. KFC will still receive royalties based on the sales of each unit. However, franchises will protect the company from currency devaluation. KFC is able to reduce this risk while still maintaining a presence in one of the largest growing markets.
