CASE STUDY:

PHILIPPINE WOMENS UNIVERSITYTaft Avenue, ManilaA Case Analysis ofKENTUCKY FRIED CHICKEN AND THE GLOBAL FAST FOOD INDUSTRY.Presented toDR. TERESITA FORTUNAFacultyIn Partial Fulfillment of the Requirements for the Subject:DBHR 603 - ADVANCED STRATEGIC MANAGEMENTByPROF. MARIA AMIHAN T. PANESNovember 12, 2007KFC CASE ANALYSIS

Background of the ProblemHistory

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 KFCs 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 non-traditional 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 KFCs 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 KFCs 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 DataTime 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, KFCHe is responsible for making strategic decisions for the companys 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 AreasStrengthsWeaknesses

A. HUMAN RESOURCES MANAGEMENT

1. PEPSI Cos 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

KFCs culture was built largely on Col. Sanders laid back approach to management. X

3. Conflicting cultures of KFC and PepsiCo. KFCs laid-back culture and PepsiCo fast track attitude caused conflict and confusion among employees after the entrance of PepsiCo.X

OPERATIONS MANAGEMENT1. 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.X

2. Utilizes dual branding This operational strategy helps to improve economies of scale within restaurant operations..X

3. Confusing corporate direction Between 1971 and 1986, KFC was sold 3 times with companies that practice different styles.X

4. Turn-over in top management PepsiCo managers who replaced KFC people in 1986 until 1989 also left KFC by 1995.X

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. McDonalds had already introduced its McChicken while KFC was just testing its chicken sandwich. This delay increased the cost of developing consumer awareness for KFC.X

Price

1. Pricing of KFC products are competitive. Pricing for every chicken and related products are very competitive in the fast food industry.hX

Place

1. Market accessibility The stores of KFC are located in high traffic areas. This is a sales advantage in terms of client accessibility.X

2. Utilization of non-traditional areas

of distribution KFCs use of shopping malls, universities, hospitals, airports, stadiums, amusement parks, office buildings and mobile units is a very aggressive marketing tool for product distribution X

Promotion1.PepsiCo's success with the management of fast food chains. PepsiCo acquired Pizza Hut in 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 X

2. KFCs secret recipe.

The secret recipe has been a source of advertising and has set KFC apart. X

3. Strong brand name.

KFCs 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

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.X

5. Maximum usage of promotional strategies.

KFCs promotional activities are extensive: above the line advertising and print media. X

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%X

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

B. External Environment

External Factors

Opportunities Threats

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.

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. 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.

3. Increasing Start-up Costs Increasing costs of construction, operations, training costs to open up new stores is a risk for businesses.4. Peso devaluation US companies are able to invest less in buying assets in Mexico due to the favorable exchange rate. Socio-Cultural Forces1. Mexican Labor problems High incidence of absenteeism. Tardiness and high labor-turn-over affects operations.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.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. 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.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 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 managers 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.

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.

XXXXXXXXX

XXX

XXXX

STRENGTH - S

1. PepsiCo mgmt

2. Employee loyalty

3. Consistent SOP

4. Dual Branding5. Competitive Pricing

6. Accessible

7. Non-traditional distribution

8. KFC Secret Recipe

9. Strong brand name

WEAKNESSES W

1. Conflicting mgmt styles2.Confusing corporate

direction3. Fast mgmt turn-over4. No defined target market

OPPORTUNITY O

1. New Franchise Law in Mexico2. Peso devaluation3.Large base Mexican Market4.Joining of Mexico in the GATT5. Advancements in technology

SO STRATEGIES

1. Open Franchises in

Mexico. 2. Use value for money pricing strategy to capture large market base.

WO STRATEGIES

1. Get locals to manage units through franchising. 2. Implement market segmentation to define target markets.

THREATS - T

1. Increasing competition2. Rising sales of substitutes3. Unstable economic

conditions4. Increasing start-up costs5. Labor problems6. Changing customer

preferences7. Unstable political conditions

ST STRATEGIES

1.Capitalize on KFC secret recipe in ads2. 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.

WT STRATEGIES

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 KFCs 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 KFCs 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.

CRITERIAACA#1ACA#2

Market Growth43

Competitive Advantage43

Profitability34

Corporate Image34

Capitalization Requirement41

Total1815

Average43

Legend : 5 Most Likely

4 More Likely

3 Likely

2 Less Likely

1 - Unlikely

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.