The KFC Business Model - Essay Example

The KFC Business Model By Simon James Kentucky Fried Chicken Corporation (KFC) was the world’s biggest chicken restaurant in 2004. It held more than 50 percent of the market share in the US. It was operating through franchises in more than 11,000 restaurants in 80 countries and territories worldwide that included high growth markets in Australia and NZ; Asia such China, Korea, Malaysia, Thailand, Indonesia, Philippines, Vietam, Pakistan, India, and Turkey; in Europe (UK, France, Germany, Poland, the Netherlands, and Malta); neighboring countries, Mexico and Puerto; and Canada. KFC History It is important to know the background of how KFC has grown in order to understand its weaknesses and strengths, so as to effectively strategise for its future. On 9 September 1890, Harland Sanders, the founder of KFC was born in Henryville, Indiana. From 1900-1924, Sanders held a variety of jobs. In 1930, in the midst of the depression, Sanders opened his first restaurant in the small front room of a gas station in Corbin, Kentucky. Sanders served as station operator, chief cook and cashier. He named the dining area "Sanders Court & Café." In 1936, Kentucky Governor Ruby Laffoon made Sanders an honorary Kentucky Colonel in recognition of his contributions to the state's cuisine. The pressure cooker was introduced. Colonel Sanders began using it to fry his chickens to give customers fresh chickens faster. 1940 was the birthdate of the original recipe . The Colonel began franchising his chicken business in 1952 by traveling from town to town and cooking batches of chicken for restaurant owners and employees. The Colonel awarded Pete Harman of Salt Lake City with the first KFC franchise. A handshake agreement stipulated a payment of a nickel to Sanders for each chicken sold. Sanders sold his interest in the U.S. company for $2 million to a group of investors headed by John Y. Brown Jr., future governor of Kentucky. The Colonel remained as public spokesman for the company. In 1966, the KFC went public. KFC was listed on the New York Stock Exchange in 1969. More than 3,500 franchised and company-owned restaurants were in worldwide operation when Heublein Inc. acquired KFC Corporation in 1971. On 16 December 1980, Colonel Harland Sanders, who came to symbolize quality in the food industry, died of leukemia. Flags in all Kentucky state buildings fly at half-staff for four days. In 1982, KFC became a subsidiary of R.J. Reynolds Industries, Inc. (now RJR Nabisco, Inc.) when Heublein, Inc. was acquired by Reynolds. In 1986 PepsiCo, Inc. acquired KFC from RJR Nabisco, Inc. In 1997 PepsiCo, Inc. announced the spin-off of its quick service restaurants - KFC, Taco Bell and Pizza Hut - into Tricon Global Restaurants, Inc. In 2002, Tricon Global Restaurants, Inc., the world's largest restaurant company, changed its corporate name to YUM! Brands, Inc. In addition to KFC, the company owns A&W All-American Food Restaurants, Long John Silvers, Pizza Hut, and Taco Bell restaurants. Business Model Evaluation PEST Scan Political and Economic KFC is fortunate to operate within a healthy democratic milieu and politically stable environment. The founding entrepreneur, Colonel Sanders earned his honorary title because Governor Laffoon of Kentucky recognized his unique contribution to the culture (cuisine) and the economy of his community, thus further providing him with the incentive to bring his entrepreneurship to the next higher levels as the food industry world had witnessed to date. The healthy economy enabled small food entrepreneurs to avail of the franchise offered by Colonel Sanders. Up to the present, the inheritors of KFC are careful to operate in a politically stable and economically vibrant countries. Social Colonel Sanders had lived and worked in the old school of thought and honor system. He gave dignity to labor. He was generous in sharing the fruits of his experimentation and hard work to others in a win-win manner, best illustrated by franchising. He used to travel from one restaurant to another selling his secret recipe. And when he found a significant franchise holder in the person of Pete Harman, it was only a handshake agreement that stipulated a payment of a nickel for every chicken sold. The next generation of franchise holders deviated from the work ethics established by the Colonel, specifically PepsiCo, Inc. which placed higher premium on performance and commercial gain rather than the workers’ loyalty. Technology The advent of the pressure cooker enabled Colonel Sanders to quickly cook the chickens and offered them fresh and a lot tastier to customers. Technology had enhanced his genius. Next generation KFC operators are benefiting much from computers that enable more efficient administrative and financial operations. SWOT Analysis Strength and Weakness The “old” KFC strength rested much in the character of its founder, Colonel Sanders. He was innovative, entrepreneurial (taking risks and not afraid of hard work and temporary failures); open to the use of new ideas (franchising) and technologies (the pressure cooker, for instance). The new generation of KFC owners possess this same ability to take risks. Heublein knew more about vodka and other alcoholic beverages when he bought KFC. He suffered temporary problems regarding quality and hygiene but was able to redirect a back-to-basic strategy. Tobacco-based company, RJR acquired KFC from Heublein and allowed the same KFC people to manage, thus ensuring the continuity of smooth operation. RJR sold KFC to PepsiCo, Inc. which had radically changed the KFC corporate culture to the detriment of the workers’ and franchise holders’ well being, until a more humane president and CEO in the person of David Novak took over in 1997. PepsiCo, Inc. eventually sold KFC to Tricon Global Restaurants that changed its name to Yum! Brands Inc., the current owner of KFC. The KFC next generation owners’ weakness resulted from their lack of passion for and knowledge of the food business. They were into alcoholic beverages and tobacco businesses. PepsiCo, Inc. was in the diversified food manufacturing and failed to focus on the restaurant business. More so, PepsiCo, Inc. was obsessed with commercial success, switching managers, slave-driving the staff , and bleeding franchise holders. It was a time of turbulence when the KFC franchise contract, unchanged for thirteen years, was amended to give PepsiCo, Inc.. power to take over weak franchises, relocate restaurants and make changes, and raise royalty fees for renewing contracts. KFC recovered when an expert in the restaurant business, Tricon Global Restaurants, Inc. took over. Threats and Opportunities There are many restaurants that pose threats to KFC. Its major competitor, however, is essentially a fast food chain and not a sit down restaurant, McDonald’s. McDonald’s overtook KFC in offering chicken sandwiches. However, such failure to establish a reputation in chicken sandwiches encouraged KFC to come up with chicken meal variants, sauces or dips, as well as side dishes. A single most exciting opportunity for KFC is to explore further the European market, taking into consideration its culture and eating habits. Unlike typical Americans, most Europeans prefer a sit down meal with friends and families, taking time to savor the food and bask in the company of people whose presence they enjoy. KFC must also continue to expand in Asia and Latin America where chicken is a traditional dish. Also, there is opportunity in the North American Trade Agreement (NAFT A) which eliminated tariffs on goods shipped between Canada, Mexico, and the United States. KFC must deal with threats and opportunities with the same tool that it used it dealing with strengths and weaknesses, which is—knowledge. Indeed, the 21st century is a knowledge-driven economy. KFC must do research surveys on market opportunities and customer preferences; data mining; and knowledge management in all aspects from human resources management to marketing. Porter’s Five Forces Rivalry and Substitutes Threat KFC by this time has known how to handle rivalries in the food industry. It has established its niche and must be careful to maintain its power position in the food sector. KFC continued to dominate the chicken segment with sales of $4.8 billion in 2002. Its nearest competitor, Chick-fil­A. ran a distant second with sales of $1.4 billion. Despite its dominance, KFC was slowly losing market share as other chicken chains increased sales at a faster rate. In the 1990s, it was predicted that Boston Market would challenge KFC for market leadership. Boston Market offered roasted rather than fried chicken Barriers to Entry What can be considered barriers to KFC expansion are the high cost of real estate which hinder construction of more restaurant locations, fast turn over of young, low skilled, low salaried workers, difficulty of quality assurance in foreign franchise branches due to far distances, and economic risks in politically unstable countries in Latin America. Buyer Power and Supplier Power, Value Chain KFC has established a code of business ethics and standard for its suppliers while at the same time engaging in corporate social responsibility program that involves protection of animal welfare. This is a unique feature of KFC’s buying power that in turn, enables KFC to control the value chain. The raw materials (chickens) that are direct inputs to its business, undergo processes (like being cooked using the secret recipes) that add value to the finished products, which are appropriately packaged and offered to customers. Conclusion Quality assurance together with sensitivity to market trends will ensure KFC’s power position in the restaurant industry. Aside from strategic expansion, the corporate leadership must be careful to avoid the mistakes committed when KFC was still under PepsiCo, Inc. It would be wise to be immersed in new ways of thinking that are in essence, a containment in new bottle of Colonel Sander’s management principles, such as Mintzberg’s five perspectives, particularly the emergent leadership style. The emergent managers go out of their offices more, listen more than talk. They foster collaboration and do less controlling, allowing people to be in greater control of their work. KFC in the 1950’s that evolved into KFC of the 21st century continues to grow from out of one man’s original, basic passion for food and service. Read More