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Business report on the ‘Kentucky Fried Chicken Corporation (KFC) Essay

In evaluating how well a company’s present strategy is working, a proper understanding of the company’s resource capabilities and deficiencies, its market opportunities, and the external threats to its future is essential. The really valuable part of SWOT analysis is understanding and evaluating the strengths, weaknesses, opportunities, and threats and drawing conclusions whether a firm’s business position is fundamentally healthy or unhealthy. In a nutshell, SWOT analysis is a basis for action.

KFC, being one of the world’s most recognizable brands, has its own internal strengths and weaknesses and external opportunities and threats, which are identified and analyzed below.

‘Kentucky Fried Chicken Corporation (KFC) was the world’s largest chicken restaurant chain and the third largest fast-food chain in 2000’ (Krug 2001, cited in Thompson and Strickland 2003, p. C-203). The statement suggests that the brand-name image or the company reputation of KFC is very strong. Such buyer goodwill can be classified into valuable intangible assets, which is an internal strength itself giving KFC enhanced competitiveness. Also, KFC was one of the first fast-food chains to go international in the late 1950’s and was one of the world’s most recognizable brands.

This means that KFC had a high degree of organizational agility in gaining wide geographic coverage and had a strong global distribution capability. Such competitive capability can be identified as KFC’s internal strength. KFC’s international strategy was to grow its company and franchise restaurant base through several high-growth markets. This suggests that the company was able to evaluate the right market opportunities available of serving additional customer groups or expanding into new geographic markets and market openings to extend the company’s brand name or reputation to new geographic areas.

‘According to the National Restaurant Association, food-service sales increased by 5.4 percent, to $358 billion, in 1999’ (Krug 2001, cited in Thompson and Strickland 2003, p. C-207). This was a result of a number of demographic and social trends, which influenced the demand for food eaten outside of the home. The full-service and fast-food segments were expected to make up about 65 percent of total food-service industry sales in 2000. This could be identified as KFC’s external market opportunity since it could use its ability, internal strengths and resource capabilities to grow rapidly because of sharply rising demand in the fast-food industry. However, such a boom in the fast-food industry could also be identified as a potential external threat to KFC’s well-being since increasing intensity of competition among industry rivals may cause squeeze on profit margins.

According to the National Restaurant Association, other food items that were growing in popularity since 1990s through 2000 included chicken, which offered and external market opportunity for KFC to expand. ‘During 1999, KFC continued to dominate the chicken segment, with sales of $4.4 billion’ (Krug 2001, cited in Thompson and Strickland 2003, p. C-210). This is because KFC’s customer base remained loyal to the KFC brand because of its unique taste. This could be identified as KFC’s distinctive competence, since KFC did the fried-chicken well in comparison to its competitors. Such uniqueness provided KFC with a competitively valuable capability, which proved to be a corner stone of every strategy.

Despite its dominance, KFC was losing market share as other chicken chains such as Chick-fil-A and Boston Market increased sales at a faster rate. Such mounting competition from potent new competitors could be identified as a potential external threat to KFC’s market position. However, KFC’s leadership in the U.S. market was so extensive that it had fewer opportunities to expand its U.S. restaurant base, which again was an external threat to KFC’s future profitability and competitive well-being.

The greatest concern for fast-food operators was the shortage of employees in the 16-to-24 age category since many high school and college graduates enjoyed a healthy job market. This was a result of low unemployment, since U.S. economy began to expand during early 1980s through 2000. Such environment is again an external threat for KFC’s profitability. Also, the labor costs made up about 30 percent of a fast-food chain’s total costs. Mounting competition made it difficult to increase prices, since consumers made decisions about where to eat primarily based on price. Such labor costs and increasing intensity of competition among industry rivals which squeezed profit margins posed external threat to KFC’s profitability.

However, the demographic trends offered KFC with a potential opportunity by which costs could be lowered and operations made more efficient by increasing the use of technology. ‘According to the National Restaurant Association, most restaurant operators viewed computers as their number one tool for improving efficiency’ (Krug 2001, cited in Thompson and Strickland 2003, p. C-213). Hence, computers which could improve labor scheduling, accounting and payroll can be identified as KFC’s external market opportunity which is a big factor in shaping the company’s strategy. However, higher costs and poor availability of prime real estate was one of the adverse demographic change that negatively affected profitability of such fast-food chains and hence posed an external threat.

International operations carried by fast-food chains like KFC carried risks not present in domestic-only operations. Long distances posed several problems such as quality, transportation, servicing and support problems. Moreover time, culture and language differences increased operational problems. Such problems could be identified as potential threats to KFC’s international strategy, which was focused on several high growth international markets. However, rising per capita incomes worldwide and the development of the Internet, which was quickly breaking down communication and language barriers were wildly attractive market opportunities for food-chains such as KFC seeking to quickly develop global brands and a worldwide consumer base.

KFC had trouble breaking into the German market during the 1970s and 1980s, however McDonald’s had a greater success penetrating the German market, because it made a number of changes to its menu and operating procedures to appeal to German tastes. This could be identified as KFC’s internal weakness since there was a lack of competitively important skills or expertise to attract new customers as rapidly as McDonald’s did. Moreover, many of KFC’s problems during the 1980s and 1990s surrounded its limited menu and inability to quickly bring new products to market, which could be identified as KFC’s potential weakness, since it was behind its rivals such as McDonald’s in putting capabilities and strategies in place. An example of this is when KFC suffered one of its more serious setbacks on experimenting with the chicken sandwich concept when McDonald’s test-marketed its McChicken sandwich in the Louisville market.

As per the circumstances, Latin America could be identified as KFC’s wildly attractive market opportunity because of the size of its markets, its common language and culture, and its geographical proximity to the United States. KFC could well evaluate the market opportunities available from Latin America and identified its own resource capabilities required to capture it, the result of which was KFC’s Latin America Strategy, which represented a classic internationalization strategy. KFC’s early entry into Latin America gave it a leadership position over McDonald’s in Mexico and the Caribbean with 438 restaurants in 2000. Mexico, in Latin America could be identified as highly attractive market opportunity for KFC because of the North American Free Trade Agreement (NAFTA), which went into effect in 1994 and created a free-trade zone between Canada, the United States, and Mexico.

Other fast-food chains such as McDonald’s, Burger King, and Wendy’s were rapidly expanding into other countries in Latin America such as Venezuela, Brazil, Argentina, and Chile. Such mounting competition from potent new competitors was an external threat for KFC’s competitive well-being. Another threat came from Habib’s, Brazil’s second largest fast-food chain, which opened its first restaurant in Mexico in 2000. Another potential external threat to KFC’s well-being was the long-term value of the peso, which has depreciated at an average annual rate of 23 percent against the U.S. dollar since NAFTA went into effect. This translation risk lowered Tricon Global’s reported profits and damaged its stock price, subsequently affecting KFC’s profitability and market position.

Industry and Competition Analysis

An industry’s competitive conditions and overall attractiveness are big strategy determining factors. In other words, good industry and competitive analysis is a prerequisite to good strategy making. Hence, it is very essential for a firm to evaluate whether the industry environment it is in is either attractive or unattractive to protect its future profitability.

Porter’s Five Forces – A MODEL FOR INDUSTRY ANALYSIS

The industry and competitive analysis used to evaluate an industry’s environment involves a process to discover what the main sources of competitive pressure are and how strong each competitive force is. Porter’s five-forces model is a powerful tool for identifying the principal competitive pressures in a market and assessing how strong and important each one is. Michael Porter provided a framework that models an industry as being influenced by five forces, which are discussed below in context to the FAST-FOOD INDUSTRY and KENTUCKY FRIED CHICKEN CORPORATION.

?a Rivalry: – If rivalry among firms in an industry is low, the industry is considered to be “attractive”, however the competitive structure of an industry is clearly “unattractive” from a profit-making standpoint if rivalry among the firms is very strong. Looking at the fast-food industry there was increasing intensity of competition among rivals. In the chicken segment, KFC was losing market share as other chicken chains such as Chick-fil-A and Boston Market increased sales at a faster rate. Many industry analysts predicted that Boston Market would challenge KFC for market leadership. Popeyes and Church’s were potent new competitors, trying to compete head-on with fried-chicken chains.

McDonald’s, Burger King, and Wendy’s were rapidly expanding into other countries, which subsequently posed a threat. However, even when the rivalry among firms in the fast-food industry is very strong, the industry can be competitively attractive for KFC whose market position provides a good enough defense against competitive pressures. Moreover, to formulate a better strategy and pursue an advantage over its rivals, KFC could lower prices to gain a temporary advantage, improve product differentiation, creatively use channels of distribution, and exploit relationships with suppliers.

?a Barriers to Entry / Threat of Entry: – The competitive structure of any industry would be identified as “unattractive” from a profit-making standpoint if low entry barriers are allowing new rivals to gain a market foothold. ‘According to the National Restaurant Association, food-service sales increased by 5.4 percent, to $358 billion, in 1999. More than 800,000 restaurants and food outlets made up the U.S. restaurant industry, which employed 11 million people’ (Krug 2001, cited in Thompson and Strickland 2003, p. C-207). Also as the U.S. market matured, many restaurants expanded into international markets as a strategy for growing sales. After McDonald’s, KFC, Burger King, and Pizza Hut, at least 35 chains had expanded into foreign countries by 2000.

This suggests that the fast-food industry had relatively low entry barriers, allowing new rivals to gain a market foothold. Such low entry barriers could possibly result from common technology, easy access to distribution channels, little brand franchise, and low scale threshold. Hence, as per the above discussion, fast-food industry is clearly “unattractive”. However, it depends on the incumbent firms such as KFC to offer only passive resistance against a new entrant or aggressively defend their market positions using price cuts, increased advertising, and product improvements to give them a hard time.

?a Threat of Substitutes: – The competitive structure of an industry remains “unattractive” if competition from substitutes is strong. As a rule, ‘the lower the price of substitutes, the higher their quality and performance, and the lower the user’s switching costs, more intense is the competitive pressures posed by substitute products’ (Thompson and Strickland 2003, p. 88). There are no such substitutes in any other industry to stand in competition with the firms in fast-food industry, which is very unique. However, there are various segments in the fast-food sector of the restaurant industry, which may be identified as substitutes for each other. These segments are sandwich chains, pizza chains, family restaurants, grill buffet chains, dinner houses, chicken chains, nondinner concepts, and other chains.

Usually, such chains have price cuts and improved quality and performance as a part of their strategy and since the buyers can switch to any segment of the fast-food industry easily, there are comparatively high competitive pressures among such segments. Hence, for KFC (chicken chain), the fast-food industry is not an attractive one to be in, since sandwich chains made up the largest segment of the fast-food market and dinner houses made up the second largest and fastest-growing fast-food segment in 1999.

?a Buyer Power: – The power of buyers is the impact that customers have on a producing industry. Looking at the fast-food industry, it is more likely that the buyers (customers) can exercise considerable bargaining leverage, which again makes the competitive structure of the industry “unattractive”. This is because buyers’ costs of switching to competing brands or substitutes are relatively low in the fast-food industry. Moreover, the mushrooming availability of information on the Internet is giving added bargaining power to individuals.

It is relatively easy for buyers to use the Internet to compare the different prices offered by various fast-food outlets in the industry. In a nutshell, the more information buyers have, the better bargaining position they are in. Also, the prospect of losing a brand loyal customer not easily replaced often makes a seller more willing to grant concessions of one kind or another.

?a Supplier Power: – A producing industry requires raw materials – labor, components, and other supplies, which are received from suppliers. Suppliers, if powerful, can exert an influence on the producing industry, such as selling raw materials at a high price to capture some of the industry’s profits. However, in the fast-food industry, the suppliers possibly have little or no bargaining power or leverage over rivals since the items they provide are commodities available on the open market from numerous suppliers. In fast-food industry it is relatively simple for rivals to obtain whatever is needed from any of several capable suppliers. Hence, the suppliers being able to exercise little or no bargaining power or leverage over rivals’ makes the competitive structure of the fast-food industry clearly “attractive”.

As a conclusion, the collective impact of competitive forces in the fast-food industry is relatively stronger, which subsequently lowers the combined profitability of participant firms. However, even when the five competitive forces are strong, an industry can be competitively “attractive” or “favorable” to firms such as KFC whose market position and strategy provides a good enough defense against the competitive pressures to earn above-average profits.

Key Industry Success Factors

Key industry success factors (KISFs) by their very nature are so important that all firms in the industry must pay close attention to them. In other words, KISFs are the prerequisites for industry success and are the rules that shape whether a company will be financially and competitively successful.

Looking at the fast-food industry, there are various KISFs necessary to gain sustainable competitive advantage. Manufacturing-related KISFs for the fast-food industry would be low-cost production efficiency (to permit attractive retail pricing and ample profit margins), quality of manufacture (to provide customers with better taste in comparison to the rivals), high-labor productivity (to reduce cost since labor costs are about 30 percent of a fast-food chain’s total costs). Distribution-related KISFs would be short delivery times and having company-owned retail outlets. From the marketing point of view, clever advertising (to induce customers to buy a particular brand repeatedly), courteous customer service and attractive styling of packaging would be identified as important KISFs for fast-food industry.

Skills-related KISFs would be quality control know-how and an ability to develop innovative recipes. In apparel organizing, the KISFs would be an ability to respond quickly to shifting market conditions, superior ability to use Internet and other latest technology to conduct business and managerial experience. Some other important KISFs are favorable image or reputation with buyers, convenient locations of the stores (important for food-outlets), and access to financial capital (important in newly emerging industries).

Hence, the above stated key industrial success factors for the fast-food industry are cornerstones for a firm’s strategy formulation and trying to gain sustainable competitive advantage over its rivals.

Company Analysis

Kentucky Fried Chicken Corporation (KFC) is one of the successful fast-food chains, which was the world’s largest chicken restaurant chain and the third largest fast-food chain in 2000. KFC dominated the chicken segment, with sales of $4.4 billion in 1999 through 2000. KFC was in the lead position in the U.S. market, however had fewer opportunities to expand its U.S. restaurant base due to the entry of new rivals such as Chick-fil-A and Boston Market. Despite gains by Boston Market and Chick-fil-A, KFC’s customer base remained loyal to the KFC brand because of its unique taste, which could be identified as one of the most important resource strengths of KFC.

However, KFC faced several internal problems under its various owners, which adversely affected its financial performance and competitive strength. Heublein, Inc., which was in business of producing alcoholic beverages and had a little experience in the restaurant business, acquired KFC in late 1970s. Conflicts quickly erupted between Colonel Sanders and Heublein management since the quality-control and restaurant cleanliness badly deteriorated under Heublein, Inc. By 1977, the restaurant openings had slowed down, since service quality declined under Heublein management. However, KFC did fairly well under the management of R.J. Reynolds Industries, Inc., which had little more experience in the restaurant business than Heublein. PepsiCo introduced several changes after the acquisition of KFC.

Staff at KFC was reduced in order to cut costs and many KFC managers were replaced with PepsiCo managers. ‘KFC’s culture was built largely on Colonel Sander’s laid-back approach to management’ (Krug 2001, cited in Thompson and Strickland 2003, p. C-206). Employees enjoyed good job security and stability. However, PepsiCo’s culture was characterized by a much stronger emphasis on performance, which reinforced the feelings of KFC managers that they had few opportunities for promotion. As a result, a strong loyalty created among KFC employees over the years was lost.

The Original Recipe Chicken allowed KFC to expand through the 1980s without significant competition from other chicken chains and thus new product introductions was not a part of KFC’s marketing and overall business strategy. Such limited menu and inability to quickly bring new products to market made KFC face several problems during the 1980s and 1990s. However, KFC’s current strategy has been refocused. The cornerstone of its new strategy was to increase sales in individual KFC restaurants by introducing a variety of new products and menu items that appealed to a greater number of customers.

Also, from the marketing point of view, KFC introduced a three-pronged distribution strategy that increased sales to a considerable level. The strategy firstly focused on building smaller restaurants in non-traditional outlets such as airports, chopping malls, universities, and hospitals. Secondly, it continued to experiment with home delivery. Third, KFC established “2-in-1” units that sold both KFC and Taco Bell (KFC/Taco Bell Express) or KFC and Pizza hut (KFC/Pizza Hut Express) products.

KFC’s early entry into Latin America gave it a leadership position over several other food-chains in Mexico and the Caribbean. KFC’s Latin America Strategy was an example of a classic internationalization strategy. KFC firstly expanded into Mexico and Puerto Rico because of several external opportunities such as geographical proximity and other political and economic relations with United States. As KFC’s experience in Latin America grew, it expanded its franchise system throughout the Caribbean. Only after sustaining a leadership position in Mexico and the Caribbean did it venture into South America. However, KFC faced difficult decisions in regards to the formulation of an effective Latin American Strategy over the next 20 years, since limited resources and cash flow limited KFC’s ability to aggressively expand in all countries at the same time.

Statement of alternative options

Looking at the fast-food industry and the highly intensive competition prevailing, a better possible option for KFC would be to merge with other growing chicken chains such as Popeyes, Chick-fil-A, Boston Market, Church’s, and El Pollo Loco. Such merger would possibly create one of the largest chicken chains in the fast-food industry. Merging with another company would dramatically strengthen KFC’s market position and open new opportunities for competitive advantage. In the fast-food industry, such mergers enable the companies to have much stronger technological skills, more or better competitive capabilities, a more attractive lineup of services, wider geographic coverage and greater financial resources to expand into new areas. However, it would still be essential for KFC to tailor a strategy that fits its particular strengths and weaknesses so as to hold a lead position in Latin America by operating several company-owned restaurants in the targeted countries.

Recommendations

Kentucky Fried Chicken Corporation, the world’s largest chicken restaurant chain and the third largest fast-food chain, has several internal weaknesses and resource deficiencies which needs to be identified and improve to gain a competitive advantage over its rivals. Moreover, today’s fast-food industry offers several external opportunities and poses potential threats to the rivals’ well-being and market position. It would be essential for the managers of KFC to identify firm’s resource strengths and weaknesses and its external opportunities and threats, which would provide a good overview of whether a firm’s business position is fundamentally healthy or unhealthy. This would further complement in formulating strategies so as to expand firm’s business activities over a wider geographic coverage.

Latin America is an attractive location for investment because of the size of its markets, its common language and culture, and its geographical proximity to the United States. However, it would be difficult for KFC to penetrate the market successfully as a result of mounting competition from several competitors. It would be a wise recommendation for KFC to merge with other growing chicken chains, which would possibly fill the resource gaps and allow the new companies to do things, which KFC could not do alone.

Such a merger would allow KFC to operate several franchised and company owned restaurants in the targeted countries of Latin America, which is more effective in building a significant market share in individual countries. This is because market leadership often requires a country subsidiary that actively manages both franchised and company owned restaurants. Such strategy would also enable KFC to better control quality, service and restaurant cleanliness.

REFERENCES

Aaker, DA 1992, Developing business strategies, 3rd edn, Wiley, New York.

Faculty of Business and Law 2003, Guide for students, 4th edn.

 Perry, C 1992, Strategic management processes, Longman Cheshire, Melbourne.

 Thompson, AA & Strickland, AJ 2003, Strategic management, 13th edn, McGraw-Hill, New York, NY.


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