Corporate Strategies of PepsiCo and Functional Strategies of KFC Business Operations - Case Study Example

Case Analysis Corporate Strategies of PepsiCo and Functional Strategies of KFC Business Operations Prepared and Submitted by Student Name: Course Module: 1. Introduction Fueled by increased free trade, regional economic integrations and overall trends of globalization, business environment is intensely competitive today. Therefore companies need to be tuned to the environmental developments as well competitiveness of the industry within which they operate. This paper provides an analysis of the US Fast Food industry and the current corporate, functional and operational level strategies of KFC. The paper will also provide recommendations aiming to improve growth and profitability of KFC in the face of dynamic US and international market conditions. 1.1 External Analysis - Porters Five Force Analysis. For organizations such as KFC, which operates on a global environment, the industry conditions become diverse from market to market. However, USA provides the largest fast food restaurant market with Americans spending over 55% of their food dollars in restaurants and being well disposed towards quick service fast food concept. Therefore the analysis focuses on US fast food industry. In Porter’s view, the intensity of each force will indicate how restrictive or less attractive the industry is in terms of industry players being able to maintain high prices and thereby earning greater profits. 1.2 Threat of New Entrants The entry barriers can be in the form of legislature requiring licensing or in the form of natural monopolies or oligopolies. The entry to industries can be also in the form of heavy capital intensity naturally restricting new entrants. The existing barriers are more of natural ones such as the high capital intensity of setting up a chain of outlets with outlet setting up cost are as high as US$ 1.7 million per unit. The market is structured similar to an oligopoly where top-ten restaurant chains now control more than 55 percent of all fast-food sales. Competing against well established industry giants such as Mc Donald, KFC, Taco Bells, and Pizza Hut. However there is no legislature, which restrict entry in to the industry, license requirements are not too restrictive. Thus new entrants, especially from foreign markets that possess fast food service experience and presence outside USA may enter the market with sufficient financial strength. Therefore this competitive force is moderate for the industry. 1.3 Rivalry among competitors When rivalry among the competition is high in industries, the pressure on pricing increases and the profitability in the long run erodes. Cost of promotions and differentiation strategies adds on to the operational costs, further affecting the profitability. Boston Market and Kenny Rogers and McDonalds have introduced fried chicken, nuggets and chicken sandwiches in their menus where chicken was traditionally the forte of KFC. Hardees have acquired Roy Roger's outlets which gives them high reach and chances to incorporate chicken in their menus. There is also cross promotions as being done by Taco Bells and KFC given the common ownership. These factors indicate that rivalry among industry players are very high. 1.4 Bargaining Power of Customers When customers are fragmented and mostly individuals, there is no collective bargaining or bargaining from a stronghold position. However, given the majority of options and easy accessibility etc of the alternatives, customers are able to demand value for money and high standards by way of switching brands. In certain industries, customers are few and very large scale, providing them with a very high degree of bargaining power which they use in forcing down prices, demanding better payment terms and shorter lead time etc such as the case of large retail chains such as Tesco or Wal-Mart. Thus, the bargaining power of customer is low in the Fast food industry. 1.5 Bargaining Power of Suppliers When industries are supplied by few suppliers with specialized requirements or with scare resources, then the bargaining power of the suppliers is high. This can lead to increased costs of supplied materials, price increases, supply quotas etc. Bargaining power of oil suppliers is an example where the resource is scarce and access is restricted. In the case of Fast Food Industry there are many local and international suppliers of the required raw-materials and therefore the supplier bargaining power is low. 1.6 Threat of substitutes There are many substitutes for Fast Food industry. While within industry itself there are variety of fast food types ranging from burgers to sandwiches and tacos to fried chicken, and full meal type options offered by diners. Sit down meals taken at restaurants as well as home cooked meals pose other substitutes. Therefore the threat of substitute products in the fast food industry is high. Considering the analysis of the above five industry forces, the Fast food industry holds moderate level of attractiveness. The adversely positioned industry forces include the high rivalry levels and close substitutes. However with expertise in marketing and product development functions, these threats can be countered. Therefore organizations with high internal capabilities will be able to enjoy strong profits within this industry that has a growth potential of approximately 5% per annum. 2. Analysis of Business and Corporate Level Strategies Corporate and Business strategies of an organization gives direction to the organizational activities and guides the overall company towards achieving its mission and long-term objectives. Corporate strategy refers to the overall managerial strategies used by a diversified company aiming to establish business positions in different industries and the approaches used in managing the company’s group of business. Key considerations include: What moves are to be made to establish position in different businesses and achieve diversification through acquisitions Making local vs. international strategy choices for strengthening new business as well as building new business. Moves to build position in new businesses through acquisitions, mergers, internal start ups and alliances Initiating actions to boost the combined performance of the business the firm has diversified in to. Pursuing ways to capture valuable cross-business strategic fits and turn them in to competitive advantage. Establishing investment priorities and steering corporate resources in to the most attractive business units as well as divesting weak businesses. Although the focus of this paper is KFC, for corporate strategy analysis, PepsiCo’s strategies are to be considered as it represents the diversified company whereas KFC is one of the Business Units. Therefore the majority of the Corporate and business strategies initiates directly from PepsiCo while any of the identifiable business level strategies of KFC will also be discussed. 2.1 Developing and Strengthening Existing Business - Franchising KFC is one company that has used franchising as an effective tool to grow its business both locally and internationally. By 1993 KFC has grown its presence to 3,872 outlets outside US. In selected markets such as Mexico, KFC optimized new legislature favoring franchises and development was mainly through franchising route. Although it gave lesser management control, it allowed developing presence in less populated regions and also capitalizing on local knowledge of franchisee. 2.2 Diversification and Expansions through Acquisitions and Alliances PepsiCo’s acquisition initially included unrelated acquisitions like North America Van lines and Wilson Sporting Goods. PepsiCo also realized the importance of investing in developing its presence in consumer foods industry to complement its core business of beverages. A series of acquisitions supported this including acquisition of Frito Lay snacks, Taco Bell restaurant chain, Pizza Hut chain and finally the Kentucky Fried Chicken restaurants. Since the company already had experience in managing Pizza Hut restaurants, there were many managerial and operational synergies to be realized from additional acquisitions such as Taco Bell and KFC. Acquisition of these fast food chains also helped PepsiCo in terms of its fountain business of the beverages which gave them a significant edge over Coke in the food service segment of US market. KFC’s direct acquisitions are limited as most were handled directly under PepsiCo. However, in 1969 a joint venture was signed with Mitsuoishi Shoji Kaisha, Ltd., in Japan, and rights to operate fourteen existing KFC franchises in England were acquired by KFC. Review of these corporate strategies will indicate that they were instrumental in PepsiCo’s success as one of America’s most admired companies. These acquisitions of PepsiCo were very strategic moves which gave PepsiCo the leading market share in three of the four largest and fastest-growing segments within the U.S. quick service industry. At the end of 1994, Pizza Hut held a 28 percent share of the $18.5 billion U.S. pizza segment, Taco Bell held 75 percent of the $5.7 billion Mexican food segment, and KFC held 49 percent of the $7.7 billion U.S. chicken segment. PepsiCo also made some strategic divesting decisions of some of their earlier acquisitions such as Wilson Sports and North America Van Lines which were unrelated to their core business. Their diversification strategy was later streamlined in to a narrow focus with three key lines of business including beverages, snacks and restaurant business. 2.3 Growth through Foreign Expansions KFC’s foreign expansion strategies have been rather aggressive and they have used different strategies including franchising, acquisitions and alliances. KFC ended 1993 with 3,872 restaurants outside of the United States and remains the most internationalized of all fast-food chains, operating 43 percent of its total units outside of the United States. Despite the economic turbulences in Mexico, KFC is also committed in developing this high potential international market. The need for understanding the local cultures and modifying product offerings and marketing concepts to suit them is a consideration which KFC had not taken in to consideration in its initial foreign expansions. Its failure to penetrate in to German market was an example where German customers have different eating and ordering habits where McDonald won out with localizations such as offering beer in restaurants and having suitable ordering arrangements. KFC’s expansion to Asia has been more successful as chicken is a part of the traditional cuisines of many Asian countries. By 1995 KFC was also operating a number of successful subsidiaries in Mexico, Hong Kong, South Africa, Australia, New Zealand, Mexico, Puerto Rico and Venezuela. 2.4 Capturing Cross Business Synergies and Boosting Combined Business Performance For a diversified company, an essential part of corporate culture includes capturing cross business synergies and actions that can boost the combined business performance. This was achieved by PepsiCo's when they realigned and restructured the company along three lines: beverages, snack foods, and restaurants. This allowed the company to capture managerial synergies by easily transferring its managers among these three business units. The company also gained the benefits of selling beverages in all of its restaurants, blocking fountain sales of Coke in its 20,500 KFC, Pizza Hut and Taco Bell restaurants which in combination represented 15% of the US fast food industry. As another step towards capturing business synergies within the group, PepsiCo created two new divisions to oversee its restaurant businesses in late 1994: PepsiCo Worldwide Restaurants and PepsiCo Restaurants International. KFC has been successful in this aspect of corporate strategizing where their international and domestic sales and profits grew again after sluggish years, mainly driven by the strategies developed and implemented by new corporate business units. 3 KFC’s Functional Level Strategies Following functional level strategies and related challenges were identified within the KFC operation: 3.1 Marketing One of the key marketing strategies which the company implemented in the face of growing concern for healthy food and negative connotations associated with fried food was to change its logo from Kentucky Fried Chicken to KFC. This also allowed them to widen their product range on offer. The company’s strategy to implement cross promotional strategies with Taco Bells and KFC benefiting not only Taco Bell but also KFC in terms of expanded menu items. Another successful and aggressive marketing strategy included the "Neighborhood Program” targeting the black communities where over 500 outlets were outfitted with special menu offerings to appeal exclusively to the black community. This helped the outlets to increase sales by 5-30% which has prompted the company to consider similar programs targeting the Hispanic and Latin communities. Challenges faced by KFC in its marketing function relates mainly to the new product development. KFC paid little attention in developing new menus and items departing from its traditional success story of fried chicken leaving competitors such as McDonalds to move in to segments like chicken sandwiches. However, new strategies in new product developments were implemented recently including the introduction of “Colonel's Kitchen” for testing new menu items and introducing a host of new items as Mega Meal, Oriental Wings, Popcorn Chicken, and Honey BBQ Chicken, Rotisserie Chicken, lunch and dinner buffet as well a desert menu. 3.2 Distribution strategies In response to the changing routines and mobile lifestyle of the consumers, KFC has crafted new distribution strategies by locating KFC outlets in non traditional locations such as Shopping malls, grocery stores, restaurants, airports, and outdoor events. KFC is also currently testing a variety of nontraditional outlets, including drive-through and carry-out units; snack shops in cafeterias; kiosks in airports, stadiums, amusement parks, and office buildings; mobile units that can be transported to outdoor concerts and fairs; and scaled-down outlets for supermarkets which will allow KFC to dominate these non traditional locations with lower costs. The company has even purchased a stake of a mobile cart manufacturer to ensure speedy and priority supply of these outlet units to effectively implement this strategy. 3.3 Financial Strategies As pressure continues to build on fast-food chains to limit price increases in the U.S. market, restaurant chains continue to search for ways of reducing overhead and other operating costs in order to improve profit margins. Since improved operating efficiencies are essential for improving operating profits, KFC implemented certain strategies aimed at eliminating overhead costs and to increase efficiency targeting improvements in customer service, cleaner restaurants, faster and friendlier service, and continued high-quality products. 3.4 HRM Strategies When PepsiCo took over KFC from JRJ, they made many management changes unlike the previous companies that acquired KFC. With these changes, the old KFC management was disintegrated. There was also the challenge of retention of the new management. Some of the other HRM strategies to note were the reorganizing of the middle management ranks. Performance aligned reward and remuneration systems were also among the new HRM strategies implemented in the mid 90’s within KFC. 4 Recommendations Having reviewed the business and functional level strategies and the challenges associated with KFC operations, following corporate, business and functional level strategies are proposed for the KFC management to improve future profitability. 4.1 Expansions and Acquisitions Acquisitions in Diner House Category - It is proposed that KFC make acquisitions in the field of Diner industry which have outgrown the other five segments over the last few years is expected to have sales increase of 12.6 percent in 1995. This segment has high potential and although PepsiCo is represented with Fesh-Mex chain of restaurants, they can consolidate this position by acquisitions of established outlet chains. Expansions in Chicken Business – It is also proposed for PepsiCo to consider KFC to start up or acquire a chicken kebab, chain. Kebab shops are increasing in its popularity. These outlets usually serve chicken sandwiches too in pita bread wraps etc which will allow PepsiCo to compete in both chicken and sandwich category at the same time. Usual Kebab shops operate on small operation spaces and PepsiCo can use non traditional outlets as kiosk and cart located at nontraditional distribution points to promote this new business. The highest growth in 1995 occurred in the chicken segment. Sales are estimated to increase by 14.3 percent in 1995 over 1994. 4.2 Reducing Costs in Supply Chain through Strategic Alliances Poultry Integration - PepsiCo has defined its core business as consumer foods so; they can consider mergers or strategic alliances for vertical integration with a well established poultry integrator which has the backward links of the supply chain as feed mills, breeder farms, and processing plants. If PepsiCo enters in to a strategic alliance with such a company, from either USA or from Mexico (Given the trade and costs benefits of NAFTA to deal with Mexican companies) they can achieve low costs. Further items such as frozen crumbed nuggets can be added to not only the restaurant menus but also marketed at retail level. Locating production facilities in Mexico – Given the benefits of NAFTA and the close proximity of US and Mexican markets, it is possible to consider locating new production facilities of a key raw material or enter in to alliance with a Mexican supplier. This can cater to both US market as well as Mexican market which is one of the key target markets of KFC. Given the low production costs and labor in Mexico this will allow KFC to reduce costs in its operations. However the economic turbulence of Mexico is an area which the company has to closely monitor and safeguard against. 4.3 Other Strategies In addition to above mentioned key strategies, following strategies are also proposed for consideration and implementation: Expansions in to Foreign markets – US market is saturating and therefore, new markets, especially those which are emerging markets as India, Mexico and China has vast potential for growth. Rewards and Retention programs – It is also proposed that PepsiCo look in to management retention programs with linked rewards as well as a new attitude towards creating organizational commitment in its management. New Product Development – Proposals for considering new product ranges such as nuggets and new menu items as Chinese chicken rice and cuscus salads etc are proposed for KFC restaurants. 5. Conclusion In conclusion, it can be seen that as a diversified global company, PepsiCo has many challenges which they need to counter with both corporate and functional level strategies. Some of the strategies implemented can be effective while others may need to be replaced by newer more suited strategies to reap benefits of the market opportunities. The proposed business and functional level strategies are aimed towards capturing the existing business synergies as well as capitalizing on the growth potentials of the markets. While its acknowledged that these proposed strategies also will have its fair share of success and failure, all strategies need careful planning and proper implementation, monitoring and feedback loops in place for alterations and modifications in order to ensure their success. Bibliography: Porter, M. (1980). Competitive Strategy: Techniques for Analyzing Industries and Competitors. New York: Free Press. Thomson, A. A. Jr. & Strickland, A. J. (2003). Strategic Management Concepts and Cases. 13th ed. New York: McGraw-Hill Publishing Company Ltd. Read More