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1. Product development
Increase variety on menu
Introduce desert menu
Introduce buffet to restaurants
2. Introduction on the Neighborhood Program with following:
Menu items target African Americans in major cities with the following items: Greens
Macaroni and cheese
Red beans & rice
Menu items targeting Hipics in major cities with the following items:
3. Implementation on non-traditional units including the following: Shopping mall food courts
4. Increase profitability of KFC through the following:
Reduced overhead costs
Improved customer service
Faster and friendlier service
Continued high quality products
5. Resolve franchise problems in the United States.
1. Expansion of international operations to provide the following: Increased percentage of overall sales growth
Increased percentage of profit growth
2. Increased expansion of franchises into Mexico
3. Expansion of franchise operation beyond Central America
4. Continued promotion of healthier image through removal of the word "fried" from the name 5. Improve menu selection of rotisserie
KFC History and Overview
Kentucky Fried Chicken was founded by Harland Sanders in Corbin, Kentucky. In 1952 the fast food franchising was still a new venture Harland Sanders travelled across the United States in an effort to influence potential franchisees to buy into his Colonel Saunders Recipe Kentucky Fried Chicken.
By 1960 “Colonel “Saunders had granted KFC franchises to over 200 retail outlets and restaurants. By 1963 there were over 300 KFC franchises and revenue totaled over $500 million. In 1964 at the age of 74 Colonel Saunders decided to focus his energies on the public relations issues of KFC and move away from the day to day management. He subsequently sold the business for $2 million to Jack Massey and John Young Brown Jr. For the next five years the new owners concentrated on growing KFC’s franchises across the United States. In 1966 the company went public and was listed on the New York Stock Exchange. By this time the company was deeply rooted in the US markets and the owners decided to concentrate on international markets. In 1969 thee company had acquired rights to operate 14 existing franchises in England. Subsidiaries were also established in Hong Kong, South Africa, Australia, New Zealand and Mexico.
Also read about KFC human resources
By 1971 KFC operated in 48 countries, had 2,450 franchises and 600 company owned restaurants. In 1971 KFC merged with Heublein Inc primarily because John Young Brown Jr. was interested in politics. Heublein Inc. produced vodka, mixed cocktails, dry gin, cordials, beer and other alcoholic beverages but they had little experience in the restaurant business. Because of this conflict erupted between Colonel Saunders and Heublein’s management over quality control issues and restaurant cleanliness. By 1977 the business operations became slow where only about 20 new restaurants per year were being opened, service quality had decline and existing restaurants were not being maintained. As a result of these operating problems, a new management team was sent in to address these issues.
They implemented a back to the basic strategy which focused on cleanliness and service, cut out marginal products, and reestablished product consistency. By 1982 KFC was expanding again by building new units due to a successful implementation of the strategy. As a part of R.J Reynolds Industries Inc. overall corporate strategy of diversifying into unrelated business, the company merged with Heublein to form a wholly owned subsidiary in 1982. RJR had wanted to reduce its dependence on the tobacco industry which was currently on a decline due to the health risks associated with the product. RJR took a hand off approach to managing KFC despite the fact that they had more experience in the restaurant business than did Heublein. This strategy proved successful because KFC continued it s aggressive expansions and profitability. RJR subsequently sold KFC to PepsiCo Inc. In 1986 PepsiCo bought KFC from RJR-Nabisco for $841 million. This acquisition gave PepsiCo the leading market share in chicken (KFC), pizza (Pizza Hut), and Mexican food (Taco Bell), three of the four largest and fastest-growing segments within the US. Fast food industry. PepsiCo implemented a new strategy which gave them more control over the business. PepsiCo took direct control over the franchises, reduced staff to cut cost and also brought in their own management teams to run the businesses. This was also compounded by a conflict between the KFC culture and PepsiCo culture. The KFC culture was built largely on the Colonel Saunders laid-back approach to management where job security and stability was paramount. The PepsiCo culture was a highly driven one characterized by strong emphasis on high-performance, and high-accountability. This resulted in little or no employee loyalty and a higher turnover ratio. Additionally, this breed a poor relationship between PepsiCo and KFC franchises. PepsiCo’s diversification into three distinct but related markets- soft drinks, snack foods, and fast foods restaurants created one of the world’s larges t consumer products companies and portfolios for some of the world’s most recognizable brands. Between 1990 and 1996 PepsiCo experience an annual growth rate of 10% exceeding $31 billion in sales.
This growth however negatively affected PepsiCo’s fast-food businesses. Throughout this same period profit margins at KFC, Pizza Hut, and Taco Bell fell from an average of 8% to a little more than 4%. This decline in performance was a direct result of increasing maturity in the U.S. fast-food industry, more intense competition and the aging of KFC and Pizza Hut’s restaurant base. As a result PepsiCo’s fast-food businesses absorbed nearly one half of the company’s capital spending during the 1990’s while generating less than one-third of the cash flows. In 1997 PepsiCo spin off its restaurant division, creating an independent publicly traded company called Tricon Global Restaurants Inc for $4.7 billion. KFC had benefited from the hands-on management style of David Novak, who became head of Tricon. He changed back the culture to one that was more friendly, encouraging and inclusive. In an effort to address the growth issue plaguing the company, Tricon began to open multi-brand stores which combined two or three of the Tricon chains. By 2002, Tricon had developed 1,375 multi-brand stores.
Tricon changed its name in 2002 to Yum! Brands, and it acquired two more restaurant chains, the seafood restaurants Long John Silver's, and the hamburger and root-beer chain A;W. Despite the fact that the domestic market was not doing well, KFC continued to do well internationally especially in Asia. By 2001, Kentucky Fried Chicken was the most recognized foreign brand in China, where the company had 500 restaurants. KFC also had about 300 outlets in Thailand, and more than 150 in Indonesia. The company adapted its recipes to suit local tastes and was able to maneuver itself in the political and regulatory conditions in which it operated internationally. As a result Tricon’s profits increased by almost 50% from its combined China operations. By 2006 KFC had over 1,700 restaurants in China and saw profits increases of over 25% in some quarters whilst in the domestic markets increases were only 1 and 2 percents. In China KFC significantly outsold McDonald’s and KFC were opening up a new Chinese outlet every 22 hours. KFC pursued the overseas market vigorously despite its challenges in the domestic markets.
1. Growth Strategy
KFC had a strong emphasis on building company owned restaurants in larger markets such as Japan, China and Mexico. This strategy allowed KFC to coordinate purchasing, recruiting and training, financing and advertising. Therefore, KFC could spread fixed cost over a larger number of restaurants and negotiate lower prices and was better able to control product and service quality.
2. Refranchising Strategy
PepsiCo decided to reduce the number of company-owned restaurants by selling them off to franchises. This lower company sales but reduces the amount of cash tied up in fixed assets and increases cash flow through initial fees charged to franchisees and franchise royalties. Expansion through franchising was an important strategy for penetrating international markets.
3. Marketing Strategy
One of KFC’s most aggressive strategies was the Neighborhood Program. By Mid 1993 KFC’s had almost 500 company-owned restaurants throughout the major cities in the US. These restaurants were fitted with special menu to appeal to the black community. The introduction of this program increases sales from 5 to 30 percent in those restaurants appealing directly to the black community.
4. Distribution Strategy
KFC introduce a three-pronged distribution strategy. First it focused on building smaller restaurants in nontraditional outlets such as airports, shopping malls, universities and hospitals. Secondly KFC experimented with home delivery. Home delivery was offered by some 365 KFC’s restaurants. Other nontraditional outlets such as drive-thru and carry-out service were also tested. Finally the third segment was restaurant co-branding. Co-branding with its sister chain Taco Bell allowed KFC to expand its business. SWOT Analysis – KFC
Potential internal strengths
KFC’s brand name and reputation
KFC’s secret recipe
KFC”s traditional employee loyalty
KFC’s managerial experience in international markets
KFC’s franchising strategy to penetrate international markets KFC’s aggressive marketing strategy – Neighborhood Program KFC’s three-pronged distribution strategy to opening in nontraditional outlets (airports shopping malls, etc.), home delivery and co-branding with Taco Bell. KFC’s ability to benefit from economies of scale in distribution.
Potential internal weaknesses
KFC’s inability to quickly bring new product to the market KFC’s difficulty to control quality, solve servicing and support problems to franchises Turnover in top management Corporate strategy was unclear due to the many KFC expansions KFC and PepsiCo’s had conflicting cultures
Potential environmental opportunities
The Mexican market, which offers a large customer base, lesser competition, and close proximity to the US. Franchise laws in Mexico give fast food chains the opportunity to expand their restaurant bases. New distribution channels offer a significant growth opportunity KFC’s opportunity to exploit new market niche and expand its market share. KFC’s opportunity to diversify into the other fast-food segment. (Sandwich chains, Dinner houses, Family restaurants)
Potential environmental threats
Saturation of the US market
Strong competition from firms in the fast food industry
Changing preferences of consumers due to demographic and societal changes. Obstacles associated with expansion in Mexico
The financial crisis facing the world.
Evaluating the SWOT analysis
Based upon the SWOT analysis, balancing off the strengths and weaknesses against the opportunities and threats KFC is still in an overall strong competitive position. The analysis disclosed that KFC’s main strengths are its brand name and good reputation coupled with franchising and distribution strategies. These allowed KFC to gain a strong competitive advantage over other fast food chains. In terms of its weaknesses, KFC can introduce new product more quickly to the market through its distribution strategies. In order to control quality and service issues KFC can continue to buy back unprofitable franchised restaurants and convert them into company owned restaurants. In relations to its potential threats, KFC can continue to pursue its strategies due to its strong brand name and reputation.
KFC also had experience in the international market to continue its franchising strategy and the ability to penetrate nontraditional markets through its distribution strategy. KFC can add to its marketing strategy a continual market research to explore customers’ taste and preference due to the demographic and societal changes. Finally KFC needs to develop an overall corporate strategy to match its business level strategies. KFC needs to decide whether to pursue product differentiation or lower cost through distribution to gain an overall competitive advantage in the fast-food industry.
Porter’s Six Force Model
Porter’s six forces model helps to identify the forces of competition for any company within an industry. The recognition of the strength of these forces helps to see where Kentucky Fried Chicken stands in the fast food restaurant industry.
Bargaining Power of Suppliers: Generally Low
Most of the raw materials required in the fast food industry are non-specialized commodity products such as meats, vegetables, dairy products, non alcoholic beverages, labor and machines. This indicates that suppliers are non specialized allowing companies such as KFC in the industry to switch between suppliers without losing any significant cost advantages. Chains such as KFC and others under the YUM Brand produce a large portion of their inputs; this reduces the dependence on out side suppliers and reduces supplier power as they are internal to the organization. Also Yum states, “We will also increase transparency of our labor code of conduct guidelines to our suppliers, and stimulate them to proactively implement and monitor the code”. This therefore illustrates that the company has some control over its suppliers. Workers in the industry are non unionized, part time employees majority of which are under the age of 25. There are minimal costs associated with training these employees and thus the industry tends to have a high turn over rate. Taking these factors into consideration it can be seen that workers who supply labor have almost no power in the industry.
Bargaining Power of Buyers: Generally High-Low
Buyers in the fast food industry include individuals and families with the volume of purchases being dependent on each. The switching cost to competing brands and substitutes are relatively low giving buyer’s strong room to negotiate with sellers on the price and quality of products being offered by
the seller. Whereas on the other hand, KFC customers, especially individual buyers, have almost no bargaining power because if only one customer threatens to no longer eat, the company will not reduce price because the cost of loosing that customer is not very great.
Threat of Potential Entrants: Generally Low
Looking from the perspective of a single restaurant into the fast food industry the barriers to entry are relatively low as anyone can decide to open a restaurant as long as they find a suitable location and have the ability to handle upfront cost to fund their own company owned restaurant or the cost to be a franchisee. Whereas when it comes to the large fast food chains such as KFC barriers to entry are substantial. The first being that the US fast food market is very saturated which discourages other firms from entering. Secondly going up against a huge market leader such as KFC may pose as potential barrier to entry, as it would require large capital requirements and advertising cost which would be needed to increase brand awareness for the new restaurant. New entrants may also find it difficult to find a location with sufficient traffic of people and few competing restaurants to allow them to be profitability and ensure their continued existence with in the industry.
Complements to KFC and other restaurants in the fast food industry include business that pair well, such as shopping malls, gas stations, sports stadiums, amusement parks, airports and retail outlets, etc. These complements are considered favorable to the industry and its participants as they gain from utilizing the convenient location, Kentucky Fried Chicken is one such chain which gains from these complements as they have locations within malls, airports and retail outlets to sell their products to their customers. It is also favorable or complementary to other sectors as in the case of Yum Brands which utilizes co-branding with its restaurants and soft drinks. Some KFC unit’s customers can select pizza and taco bell menu items and soft drinks which complement each other’s sales and boost profits for the parent company.
Rivalry – Generally High
Rivalry within the fast food industry is relatively high as the number of competitors is significantly high. In the case of KFC in the chicken segment their direct competitor include Chick Fil-A, Popeye’s, Church’s and Boston Market who provide similar products such as fried chicken, with competition within the general scope of the industry coming also from produces of burgers, pizza, sandwiches, seafood and Mexican meals. Due to the large amount of competitors with in the industry firms often engage in price wars through promotion such as value meals and family packages. Brand loyalty is also hard to retain within the industry, however because of KFC long standing campaign by its founder, they have very strong brand image within the industry making it difficult for smaller companies to compete with their products. Firms such as KFC increases market share through several areas such as improving customer satisfaction by increasing the quality of products produced by introducing new healthy options on their menu as well as the reduction in the use of trans fats to produce there products. They also engage in franchising which allows them to tap into different geographical locations and niches thereby increasing their earnings potential. Consequently competition is still fierce within the industry for example in Latin America McDonald’s is a big competitor and threat to KFC.
Threat of Substitutes: Generally High-Medium
Substitutes includes burgers, sandwiches, pizza, other courses such as Italian, Chinese etc, pre-package and prepared meals, snacks etc, that a customer would choose to consumer over fast food. There are four main areas that offer these substitutes to the fast food industry they include: Convenience stores (7-11, gas stations, etc) who offer the closes threat to the industry as they offer sandwiches, burgers, hotdogs, drinks etc. At relatively low prices and are convenient as they often operated 24 hours and are at locations such as gas stations which provide economies of sale as the customer can fill their gas tank while at the same time grabbing a bit to eat. This is the main factor for all customers to the fast food industry who want something that is relatively cheap and convenient. Coffee ; Snack Shops (Starbucks,etc) are also considered as substitutes as they provide snacks and treats at relatively low price and are very convenient. Casual and sit
down restaurants (Applebee’s, Chili’s, etc) are considered substitutes to the fast food industry and they allow individuals different food options. They may not be considered a major threat as they are not as convenient and their products are slightly offered at a higher price. Home Cooking and eating at home may also be considered as a substitute to the fast food industry as customers may forgo eating at KFC and rather fry their own chicken and make their own mash potatoes etc. However, this is heavily dependent on the individuals’ time as they may not find it convenient to cook and eat at home. Also the way the fast food industry is currently operating in terms of the family meals packages being offered individuals tend to order the food from these restaurants and take it home to consume.
It can be seen that the competitive structure of the fast food industry is favorable, where market position and strategy provide good defense against competitive forces allowing firms to earn above average profits. The strongest competitive force within the industry as can be seen from above is the Rivalry among competing firms, with a relatively weak threat from potential entrants. There is little pressure from suppliers, and significant pressure from buyers within the industry. However, when it comes to individual firms within the industry such as KFC and others, the effect of an individual buyer not purchasing a product does not have significant power over the firm’s decisions. Although there is high to medium pressure from substitutes as individual have a large selection of other options to choose from convenience and price plays a role in their decision making. In KFC’s case this pressure is reduced as they posses a secret recipe which there customers enjoy and substitutes and competitors can not replicate. Kentucky Fried Chicken is an industry leader in terms of market share and strong foreign position. This will help the company to be successful in the industry and further expand.
Management issue at KFC played an important role for staff and it’s franchises involved. The new acquisition of KFC by Pepsico brought tension within the environment as the company’s past culture was changed from a
laidback to performance culture which then leads to increase in lay-offs. Pepsico must try to integrate the past culture and take into consideration the working environment and keep its staff motivated, human resource is very important for a company’s success. KFC must keep the strategy implemented by Colonel Saunders of allowing franchises to be owned by local entrepreneurs since they are aware of their local market and would know how best to push the product locally As the company grew into the 1990’s era they were faced with the challenge of consumers being more health conscious, and therefore requesting more health conscious dishes. It is recommended that KFC try to diversify it’s menu in line with consumers needs and as they change over time, they must add more variety to their menu, it is important for them to keep with the latest trends in the market It is necessary for KFC to study their market and identify the non-profitable markets and to concentrate on the profitable ones in order to have constant flow of cash to invest in other potential markets. The US market has been saturated with a diversity of fast food industries therefore it is important for KFC to concentrate on other external markets. KFC needs to develop a strategy of carefully selecting the markets it wants to penetrate; they should continue penetrating the smaller markets and strengthen their market there in order to make it difficult for other food chains to enter. They must select attractive countries that can provide above-average returns. Long Term
It is important for KFC to keep an eye open for opportunities; they must pay keen attention to possible mergers or acquisitions that will allow then to gain competitive advantage. Another strategy would be to acquire possible threats like in the case of the Boston market which would allow them to gain market share from that niche market and at the same time provide a healthier food selection acquired from Boston Market KFC should keep their low cost differentiation strategy in order to gain economies of scale, bargaining power, image/brand worldwide recognition. To study the customer base and new trends in the market in order to keeps up-to date with customers changing need. They must keep a positive image by treating employees fairly and good communication with it’s franchises. Develop long term goals and always keep it’s staff motivated into achieving them. KFC should focus on it’s strategy of seeking attractive countries to invest in, countries like Asia
and Latin have chicken as a traditional dish and therefore an attractive market for KFC. They should keep in mind to focus locally in order to overcome certain barriers such as language, law and a good understanding of needs. Targeting new countries usually work better if you adapt to the local market.
KFC needs to stick to their mission which is “To sell food in a fast, friendly environment that appeals to pride conscious, health minded consumers” with emphasis on quality food, excellent service and clean restaurant; Keep control over franchises; Come up with new items regularly; and finally be aware of new technology to stay efficient and competitive.
Thompson ; Strickland (1999). Strategic Management. (11th Ed). Orwin/McGraw-Hill Publisher.
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