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April 8, 2013

Sunderland Facult of Business & Law Under raduate Pro ramm

STRATEGIC MANAGEMEN

SIM 336

INDIVIDUAL ASSIGNMENT REPORT


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EXECUTIVE SUMMARY

This report emphasizes Kentucky Fried Chicken Corporation, which is one of the largest

organization in the fast-food industry, a number of issues facing with in 2013. From being the

dominant firm in this industry, KFC must find the solution to turn back while it is kept among

other big existing competitors as well as potential rivalry. Besides, this report also demonstrates

and evaluates opportunities and threats faced with in 2013 summarized from succeeds and

failures as well as the internal and external factors from environments which put effects onto

KFC. Another purpose of this paper evaluates and gives a comprehensive list of pressure for

global integration and local responsiveness in global fast-food industry. Understanding and

applying Schools of Thought into defining strategies for KFC are important, therefore, the report

analyze, evaluate their meaning and the way of implication into real reactions to help KFC

Corporation seek its objectives. Last but not least, the paper explain how international strategic

managers of KFC can apply Hofstedes (1993) theory of cultural dimensions to build productive

relationship with international markets.

KFC Corporation having brand value change of 8% with nearly $8,9 million in total is just

ranked at 4th, while Starbuck is strongly speeding up in the perspective with a positive 47%

changing and McDonalds is always the dominant. KFC faces with threats from other big

competitor like McDonalds, Starbuck, and Subway as well as from the health-oriented behavior

of customers. It also could be from the new entrants in a long-term period of time like the way

Subway speeding up and beat KFC in the industry. The gross income of KFC has trend of

decreasing at the end of 2012 compared with 2011, which is the lowest in recent 5 years. The

paper reveals that Systemic School of Thought is the fittest for KFC Corporation with its main

characteristics and should refuse Evolutionary approach. The different cultural dimensions such

as Power Distance, Masculinity, Long-term orientation, Individualism, Uncertainty Avoidance

should be carefully considered in implication in different countries with such different cultures.

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INTRODUCTION

Kentucky Fried Chicken Corporation founded by Harland Sanders is one of the biggest fast-food

restaurant chain all over the world. It was also known as the first mover in franchising, until now,

KFC has had 800 restaurants across the UK and 17,000 outlets in 115 countries and territories at

the end of 2011 operating under franchising and company-based. KFCs menu specializes in

fried chicken with a long range of choices for customers. After a long period of time, Heublein,

Inc. acquired KFC and then Pepsi Co, Inc. took over KFC in 1986 to diversify its business into

restaurant industry, and now, KFC is one of brand of Yum!Brands which was formerly named

Tricon Global Restaurants (http://en.wikipedia.org/wiki/KFC). From belonging to PepsiCo, Inc.,

the management as well as cultures of KFC had been strongly changed with the rotation of five

divisions for its best manager to create put big pressure for them. Even until now, KFC cannot

keep its position of being on the top in fast-food industry, it still has the first place in the chicken

segment in the world According to Quick Service Restaurant magazine (www.qsrmagazine.com).

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CONTENTS

1. Question 1

1.1. SWOT and Porters value Chain techniques and explain their practical

relevant to strategic planners at Kentucky Fried Chicken (KFC) Corporation

In the process of setting up a strategy for company, it is important to identify the effects of

external and internal environments onto the way in which company runs its business. Therefore,

there are a number of tools that firms use to develop strategies which are SWOT and Porters

Value Chain models.

SWOT analysis (Figure 1, see Appendices) is an analytical tool for business to identify and

assess Strengths, Weaknesses, Opportunities Threats which are the internal and external

factors put effects on the company, then find the best strategies for a long term plan. In strategic

planning, SWOT model helps strategic planners identify internal strengths and weaknesses

which discover the current situation inside of company, external opportunities and threats which

discover effects can put impact on from outside of company, and then companies try to match

Strengths with Opportunities to find companys competitive advantages and convert Weaknesses

and Threats into Opportunities, then match Opportunities with identified Strengths.

In the case of Kentucky Fried Chicken (KFC) Corporation, KFC has been considered as a well-

known, recognized brand name which is one of the best strengths of KFC. Besides, the

opportunity of KFC at that period of time was the population of Mexico which was 93 million in

1994 and had a trend of increasing afterwards. In other words, this is a large market for KFC to

take the leadership position and McDonalds could not seize the position of KFC, hence must go

international in Brazil. Because of, however, the close substitutes in the market, slowing in

introducing new products while McDonalds test-marketed its new product-McChicken

sandwich in the Louisville market, and finally, KFCs sandwich was eliminated which wascaused by the strong consumer awareness of McDonalds sandwich. Another weakness of KFC is

unstable quality services in a number of stores, this point was driven by the conflict between

KFC and Pepsi Co. in the days of Colonel Sander, he built the cultures and relationship among

employees, but Pepsi Co tried to drive strong performance rather than what Mr. Sander did.

Consequently, the culture was inconsistent and got stuck in the middle of two cultural dimension

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(Pepsi Co and KFC). KFC had to face with was the trend of consumer health food which means

consumer cared more about their health, decreased the frequency of eating fried items.

Therefore, KFC had to convert its weaknesses, threats into strengths and opportunities, and

minimized them by finding new markets such as Mexico, the Caribbean; introducing new

products with bonus packs to balance consumers taste.

Value Chain technique initially published by Michael Porter assesses how effectiveness of a

company is in a chain of activities and then deliver its products, services to the market. The

Value Chain model described by Porter (Figure 2, see Appendices) divided chain of activities

into two parts which are primary activities and support activities. It means that how firm

infrastructure, human resource management, technology development and procurement

support primary activities, from inbound logistics to after sales service. In the strategic

planning, Value Chain plays an important roles in identifying and evaluating internal activities

while SWOT covers both internal and external factors. In other words, SWOT and Value Chain

techniques can combine and fit together to present a better overview of company in determining

the best strategies based on the analytical characteristics from them. Besides, managing supply

chain is a necessary step in strategic management because it determines both whether inputs and

outputs work out effectively. By means of using changing inputs flexibly or optimizing the

transportation of raw materials, goods, services, and company can minimize costs as well as

effectively increase the competition among existing rivalry. In this case, raw materials are

controlled with the supporting from IT database, and based on the local location, KFC saved

travelling cost because the suppliers were located locally. KFC also tended to approach

economics of scales, IT equipment are used in freezing chicken to ensure its quality, staff and

employees were trained to serve customers well which supports for marketing and sales as well

as services. KFC is having a good customer service thanks to free delivery and in time.

Generally, infrastructure, HR management and IT development are well supporting KFC

business activities creating the competitive advantages such as customer satisfaction, cleanness,qualified employees and staff, modern technology.

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1.2. Evaluation of the opportunities and threats that faced KFC Corporation in

2013

The Porters Five Forces framework(1993) created by Michael Porter are used to analyze and

understand deeply where powers of a company are, and then gain the strengths and weaknesses aspecific situation in order to prevent from carrying out wrong activities. Michael Porter (1993)

described five factors affecting company; namely, the bargaining power of suppliers, the

bargaining power of customers, the rivalry among existing firms, the threat of substitutes and the

threat of new entrants (Figure 3, see appendices).

a. The bargaining power of supply

There are many suppliers of KFC in terms of chicken, beef, drinks, bread and bun such as Pepsi

Co, Henny Penny, and CPF & Westbridge Foods, and KFC has qualified standards to choose

suppliers for each material. However, it is also a reason why suppliers like Henny Penny or

CPF& Westbridge Foods can increase the prices. Building relationship with a supplier is not a

short-term issue, hence if KFC tends to change other suppliers, as a results it will cost KFC in

starting building the relationship. The switching cost would be high and more difficult in this

crisis period. For example, drink of KFC is product of Pepsi Co which is a big company and

even if KFC stops its business with Pepsi, it also does not create any effect Pepsi while Coke is

serving McDonalds big competitor of KFC.

b. The bargaining power of customers

Customer directly impacted the whole business activities is a competitive pressure. As a coin has

two sides, so does in fast food industry, there are numbers of reasons why the bargaining power

of customer is wide and heavy pressure.

Customer base in fast food industry is large which is a greatly profitable change for KFC to gain

market; however, customers are tend to purchasing products and services which are good for

their health. Customer awareness in terms of value, satisfaction, price and service has been the

highest than ever. While McDonalds has been evaluated as the best service and value according

to a recent survey on the QSR magazine (www.qsrmagazine.com ) responding to the customers

needs. According to Reuters, one of setbacks of KFC is high level of antibotics detected in

Mexico chicken leads to the choices of customers. Besides, the product prices of other brands

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such as McDonalds or Subway is similar to that of KFC, therefore, the switching costs of

suppliers will not affect significantly to customers. Overall, the bargaining power of customers

will be based on the price sensitivity, expectation in relation with health, taste, and switching

costs.

c. The threats from substitute products

KFC has been faced with the issue that the switching cost in fast food industry is low, so instead

of purchasing a fried chicken, customer can buy a Big Mac of McDonalds. Customer is healthy-

oriented meals, and KFC having a diversified range of products with a suitable prices, high

nutrition contents which lead to various choices for customers. Moreover, customer loyalty is

one of the most important factors that KFC carefully concerned to attract awareness of new

customers as well as existing ones, quality-price combination in the long range of products isalso qualified standard in the buying behaviors of customers.

d. New entrants

In fast food industry, big players are as a barrier to prevent new entrants entering. Financial

budgets for penetration such as Research & Development, marketing costs, human resources are

high to differentiate from other players. This point leads to the difficulty that new entrants have

to face with. The acquisition has been considered as a solution after a period of time if new

comers still attempt at entering and could be a potential threat for KFC. KFC builds distribution

channels itself to deliver products to consumers, but distribution channels cost will be low if new

comers afford financial budgets to find distributors themselves.

e. The rivalry among current competitors

Competitive competitors of KFC in fast food industry such as McDonalds, Subway, Wendy

those put impact on the businesses and share market as well as a number of segments. In the

industry, KFC placed 9th while many big fast food companies had created a long distance in

terms of sales according to a report on QSR Magazine in 2010. McDonalds ranked at 1st with

more than $32 billion in total sales (Figure 4, see Appendices). The next positions belong to

Subway and Wendys. The product differentiation is not high and switching cost is low, so it is

not a big problem if customers refuse KFC and buy a product of McDonalds or Wendys. The

competition is high for fast food companies and the changing of buying behaviors of customers

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also remain high to forget a company and purchase others. It is clearly to see that KFC is a

setback based on the effectiveness of business in the whole industry, even in chicken segment,

KFC still remains 1st but feels the pressure from the closest competitors- Chick-fil-A which is

also a fast-food company in the same segment.

f. The pressure for global integration activities and the pressure for local

responsiveness

In the context of current development in the global industry with pressures for global integration

activities, company has considered a perspective which is the cooperation and the way how to

control its business activities internationally. Such pressures are reflected as multinational

customers, competitors, investment and technology intensity, cost reduction, universal consumer

needs, and assessing raw materials. While pressure for local responsiveness could be differencesin needs of customers, distribution channels, the substitutes, structure of market and host

government demands (Tony .P and Philip .K, 2001, p.105). Two types of pressure are taken into

account for planning strategy.

In the case study, KFC is one of the biggest company in the fast food industry and after running

business domestically, KFC expanded business internationally with global integration of

activities as well as considering the local responsiveness in which countries KFC ran its business

through franchising and restaurant-based. In the given information, franchising system accountsfor 69%, while 31% includes both company-owned and licensed restaurants or by joint ventures.

In the pressures for global integration of activities, in the current countries which KFC operates,

the process of recruitment, training, quality standards are in attempt to make them similarly with

outlets in US. It also had a standardization in recipe to keep the original chicken taste to

demonstrate that the Original Recipe Meal customers eat in Mexico is the same taste with that in

US and everywhere in the globe. The global serving is also standardized including the uniform,

customer care and information technology media.

Pressures for local responsiveness in the case could be local cultures, legislation, custom, and

language through KFCs operation. For instance, employees working in outlets of KFC Mexico

are natives speaking Spanish and English. Menu list of KFC Mexico outlets also includes rice,

beef which are current Mexican foods. Such pressures are also presented through regulation and

local requirements as well as the differences in purchase behaviors.

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2. Question 2

a. Understanding of Evolutionary and Systemic Schools of Thought

Whittington (2000) presented other approach to strategy formulation with the key differentiating

dimensions. He divided his consideration into two parts with a grid four approach to strategy

with vertical axis which was profit-maximizing outcomes or pluralistic outcomes, and horizontal

axis which describe the process of planning strategy deliberately or whether it emerge by

accident, muddle, inertia.

Evolutionary perspective depicts the business environment, which put effects onto company is

unpredictable, hence company has to struggle to survive. Strategists consider this approach under

four concepts which are population ecology, entrepreneurship, wider environmental forces, and

symbiosis and co-operation (Strategic management text book, unit 4).

Forpopulation ecology, strategists need to identify clearly successful recipe, in other words,

they are critical success factors which ensure organization is driven to succeed. The company

following this school tries to create themselves competitive advantages, unique cultures to be the

strongest organization compared with the populations of similar ones which pursuit same

purposes (resources, customer awareness).

By combining a number of factors and accepting the risks in order to create a new organization,

although firm-organizing entrepreneurs theoretically own new company, the products or

services are not new ideas. Therefore, organization needs to add differentiated values to products,

services which is evaluated as better than original one to attract consumers. The innovative

entrepreneurs as evolutional strategists are the innovators bringing something together to create

a new products, services and serve the whole society. It is undeniable how powerful they are,

however, this power can be destroyed if other organization can issue new and better version of

products, services.

Evolutionary strategists should concern wider environmental factors changing which put

impacts on business. The way organization responses to the impacts of macro environmental

factors will be the differentiation from other competitors in the sectors.

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Organizations coming from different sectors in the business world can work together to create

symbiosis relationship for reciprocal benefits. While co-operation relationship depicts the

interaction among similar organizations. The cooperation between organizations makes more

powerful in competing with individual organization.

Strategists following systemic approach consider organization as a purposeful system with its

complexity and drive business to prosperity. Organization approaching this school is affected by

a number of factors from environments. It is necessary to consider and evaluate economic and

social factors to ensure the productive relationships. The advocates of systemic school are

reflected through characteristics such as pluralist, dynamic process, changing characteristics,

purposeful system, viability, multiple communication channels, and environment of equal

importance. In comparison with Evolutionary school, Systemic school stands out more flexible

in organization when being affected from factors of environments. The sub-systems (HR,

marketing, finance, etc.) interact and influence the others. (Strategic Management course book,

unit 7)

b. Critically evaluate how you might apply these two Schools of thought to KFC in

2013. Explain and explore which school of thought you prefer, and why?

I assume KFC would apply Systemic School of Thought in business, KFC should pay more

attention on the social and economic factors as given above. Because of the differences of socialand economic systems among countries KFC operates, KFC must be acceptable rather than try to

avoid unwanted markets, and just choose the best ones, and create the productive relationship to

economy as well as community. In order to have productive relationships, business ethics should

also be concerned which means that think globally, act locally is in relation to the ecologic and

economic contexts. For ecologic context, KFC would train staff and employees the thought of

behaviors for protecting environment and acting smartly and tolerantly in foreign countries, it

would outsource the package of products from biodegradable materials if take-away. Such things

would make a new point in KFC cultures. For economic context, KFC, through its business

activities, would support local companies and create chances for agriculture by purchasing raw

materials such as chickens, beef, vegetables from local provider, especially, in Asian and Middle

East countries where agriculture is one of the main economies, rice and vegetables could be

ordered with low prices and good quality, those activities could support well community.

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On the other hand, if I were to apply Evolutionary School of Thought in KFC Corporation, it

would be better to build a short-term plan rather than long-term one, try to adapt and fit

environment before planning deliberately in current market such as politics, economic, social and

technological factor (PEST) in order to survive. Moreover, KFC will refuse entering the markets

in which it does not feel safe.

From my point of view, I highly recommend the Systemic School of Thought in practical.

Evolutionary would be better if applying in small and medium business to compete other

competitors with dynamic and new creative idea for products, services in emerging industry,

while KFC is a big player in fast food industry. Another reason is although evolutionary

perspective could help KFC use cost efficiently, strategy will be limited and must be the fittest

within a market because of being sure of the best adaption in population. And the other is

systemic perspective can create KFC chance to exchange benefits with society and

communication through business ethics. In other words, KFC could benefit ecology and

economy in current countries it is operating (productive relationships).

3. Question 3.

Using your understanding of Whittingtons (2000) Systemic School of Thought, critically

evaluate the implications of those cultural dimensions for internal strategic manager at

KFC in building productive relationships with the outside world.

KFC Corporation following Systemic School of Thought need to well define strategy which is

suitable with economy in different markets as well as considering carefully social environments

in order to create productive relationship with the outside world. Hofstede (1997) stood out 5

cultural dimensions in which they are different in various markets.

From Power Distance cultural dimension, in order to pursuit pluralistic outcomes of Systemic

School of Thought, KFC would consider whether current country KFC operates is high or low

power distance. For example, the power Distance Index of Mexico (81) is high, so KFC would

built tall hierarchy of organizational structural and leader has the strongest power in assigning

the tasks for sub-systems which are low interaction between them.

(http://www.clearlycultural.com/geert-hofstede-cultural-dimensions/power-distance-index/)

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Besides, KFC should also consider individualism cultural dimension and its opposite side is

collectivism. For individualism, people gathered into groups, highly recommend the private

respect, and expect the rewards for what they are well done. While with the advocates of

collectivism, people express their something skillful, appreciate intrinsic rewards rather than

extrinsic ones. Mexico has a strong collectivism with a quite low index (30) which illustrates a

strong respect for age and wisdom, and show a slow changes and always maintain the traditions

in society. KFC would define culture for staff and employees and train them for their suppressing

behaviors and respects.

Another implication is Femininity Index in KFCs international strategic management. Mexico

has a masculinity with a high score (69) which means that sex role between male and female is

distinct. KFC also may interfere peoples private life and create rewards based on the

competition, aggression. In such market, KFC builds its organization based on the prior to

masculine culture which is more assertive than femininity because the mens value is assessed

more assertive and competitive than womens value.

The Systemic School of Thought would require KFC evaluate the uncertainty avoidance

dimension of markets. The uncertainty avoidance of Mexico is relatively high with a score of 82.

KFC would concern and define a long-term strategy and accept the changes and risks from outer

as well as build organization with informal attitude, staff and employees would control and

express responses calmly and smartly in every situation.

The last cultural dimension is long-term orientation. KFC tend to applying Systemic School of

Thought with sociologically efficient. For example, KFC interacts with such cultural dimension

in international strategic management in Mexico. Indeed, the traditions and culture in this

country are strongly respected and the basis of society is family, sex role and ages are distinctive

because male and older people are highly appreciated than the others.

In general, KFC corporation must evaluate different cultural dimension for various markets inmany countries in order to suitable strategies for pursuing the productive relationship and

sociologically efficient.

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CONCLUSION

The findings indicates that KFC uses analytical tools to identify opportunities and threats faced

with in 2013 and define which strategy is suitable with capability of company. Besides, the paper

critically evaluates two Schools of Thought based on the theory of Whittington in order to reveal

the best perspective which is, from my point of view, System School of Thought.

Word count: 3530

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APPENDICES

Figure 1. SWOT analysis model

Figure 2. Value Chain technique

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Figure 3. Porters Five Forces

Figure 4. The top quick-serve and fast-casual brands in the nation

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