Operations Strategy - Coursework Example

0. Introduction This paper will discuss the operations strategy process for three companies that operate in the UK’s Quick Service Restaurant (QSR) industry, namely: McDonald’s, Subway and KFC. The paper shall focus on the market-led operations strategy process placing emphasis on the use of Hill’s methodology. The paper begins with business description and SWOT analysis of each of these three fast-food chains. From the SWOT analysis and business background information the paper shall identify the key operations performance objectives for each company and relate them to their competitive factors. The paper shall then conclude by identifying which internal performance objectives that McDonald’s, Subway and KFC need to focus on in their operations strategy if they are to remain competitive in future. 2.0. Business description and SWOT Analysis 2.1. McDonald’s McDonald’s Corporation franchised and operated a total of 32,737 restaurants in 117 countries as at end of 2010. This essentially makes it the biggest fast-food retailer in the world. McDonald’s revenues come from sales by its own restaurants and fees – in form of royalties and rent – from its franchised restaurants. Fees levied to these franchises vary depending on a myriad of factors stipulated in the franchise agreement that typically runs for 20 years. McDonald’s realised sales slightly in excess of US$ 24 billion in 2010 which was a 6 per cent increase over the 2009 revenue figures (McDonald’s, 2011). The business is managed as distinct geographic segments, namely: the US, Latin America and Canada, Asia/Pacific, Middle East and Africa (APMEA), and Europe. The bulk of its revenues originates from Europe, US and APMEA in that descending order. Within Europe, more than half of the company’s revenue comes from three countries: France, Germany and the UK. The UK therefore is a major market for McDonalds. Also according to the 2010 Annual Report, restaurants in the U.K., France and Russia are entirely company-operated (McDonald’s, 2011, p.14). 2.1.1. SWOT Analysis Strengths McDonald’s is the global market leader in the retail fast-food industry. Its huge international presence enables it to benefit from economies of scale that bring down its costs which supports its low-cost pricing strategy. Additionally, this huge international presence, allows the company to spread risk thus so as to reduce negative effects that may emanate from poor economic performance of certain countries. The McDonald’s brand, which is among the world’s best known is another source of strength as the company benefits from all the advantages that accrue due to brand recognition and loyalty such as increased sales. An additional strength for McDonald’s comes from its large real estate portfolio. McDonald’s real estate operations bring in large revenues and allow it to open more stores. Moreover, the strategic location of McDonald’s outlets – in areas of high visibility, traffic volume and ease of access – further strengthen its brand recognition. The company has also continued to innovate in terms of its menu variety – for example introducing limited offers, introduction of healthy salads and shakes – and restaurant re-imaging. McDonald’s “Plan to Win” strategy that focuses on people, products, place, price and promotion that has been in operation since 2003 is also another source of strength as it shows alignment with the company’s corporate strategy. Weaknesses According to Zagat’s 2011 fast food survey, despite being the global leader in market share, McDonald’s was ranked third in the overall ratings of retail mega chains. This implies that the company’s average for food quality, facilities and customer service is lower than expected from its strong brand. Threats Rivalry among competitors in retail fast food industry is intense and it is slowly gravitating towards price competition largely because products and services offered by McDonald’s and its rivals are almost identical and there are virtually nil switching costs. According to Porter (2008) this form of rivalry that McDonald’s is experiencing would translate to overall low industry profitability. The increasing trend of obesity in the Western world and documentaries’ such as “Super Size Me” have directly attributed McDonald’s as a major cause of this lifestyle disease. This increased concern led the Department of Health in the UK to review the advertising of ’junk’ foods such as McDonalds to children (Cavendish, n.d.). Other than the government initiatives, health-conscious consumer’s themselves are demanding for better quality and healthier menu items. This is a threat because it implies that McDonald’s will need to deviate from its core menu. Finally, Europe’s overall weak economy will have an impact on t4he revenues of McDonald’s as their consumers’ disposable incomes have shrunk. Opportunities First of all, the changing trends in eating habits toward healthier eating could also be viewed as an opportunity. McDonald’s could leverage its economies of scale, global presence, distribution and marketing power to realise success in launching new menu items geared towards this new market. McDonald’s has been focused on localizing as much of its menu as possible to attract local palates but we believe there is still more room to exploit this. One quick way of doing this is through the acquisition of local quick-service restaurants that already have expertise in satisfying the needs of local palates. 2.2. Subway Subway is a restaurant franchise owned and operated by Doctor’s Associate, Inc. Doctor’s Associate is a private company and closely keeps Subway information which makes finding investor data on the company such as profitability difficult. As at the end of 2010, Subway had surpassed McDonald’s as the largest restaurant chain in terms of stores. However, McDonald’s still remains superior in terms of total revenues and global presence. Subway’s had 33,749 restaurants in 98 countries in comparison to McDonald’s 32,737 in 117 countries (Jargon, 2011). Subway’s core products are salads and its submarine sandwiches that are tailored to customer’s requirements. This sandwich customization, low franchise fee and opening of Subways in non-traditional locations such as at airports, zoos, ferry terminal, automobile showroom, church and so on have largely been attributed as factors that have led to the company’s phenomenal growth under the radar (Jargon, 2011; Simms, 2011). 2.2.1. SWOT Analysis Strengths Like McDonald’s, Subway’s more obvious strength emanates from its current size, number of stores and channels. This gives the company economies of scale and bargaining power over suppliers. With 33,749 restaurants, Subway’s has also established its brand and made it more recognizable and trusted among the fast food retailers. Nevertheless, the distinguishable strength of Subway’s is its emphasis on small, low-cost outlets (Jargon, 2011) and low franchisee start-up costs in comparison to its competitors. These two attributes makes Subway a natural and more affordable choice for small business owners who want to venture into the fast food retail industry. In addition to this, Subway’s allows franchisee’s to open retail outlets in non-traditional locations such as airports, churches, military bases and amusement parks and so on. An additional strength of Subway’s is its customizable menu offerings. Customers can literally order sandwiches of any nature so long as they come from a “range of reliably uniform ingredients” (Simms, 2011). This gives Subway customer’s a larger degree of freedom to the choice of what they eat more than what they would get at say McDonald’s. Weaknesses Subway’s greatest weakness is its relationship with its franchisees. Subway’s model shield it from sharing franchisee’s risk such that if the franchise fails, Subway just moves on (Simms, 2011). The weak relationship could also be blamed for the organisation’s other weakness, inconsistent service delivery. Within the Subway retail chain, service delivery from one store to another varies immensely because Subway has no direct influence on the service customers are entitled to at each restaurant. Finally, Subway relies largely on franchisee contacting it to open new restaurants rather than on its own internal market research. The company could discover new markets if it was actively seeking for such especially considering that potential franchisees may not have noted that. Opportunities Subway predominantly serves salads and sandwiches which leaves out room for expansion into a broad range of product/service lines available to fast food retail chains such as coffee and healthy snacks and drinks. It may even consider venturing into its rivals specialties such as burgers, French fries and fried chicken. The second opportunity lies in the company actively engaging to improve franchisee relations to provide it with better market information sources. This will also enable it to enforce standardisation of service at its franchises. The third opportunity is, of course, to seek to meet the new consumer demand for increased healthy items on its menu. Threats The current economic squeeze especially in Europe has negatively impacts the entire industry because consumers have less money to spend. This coupled with the low switching costs and intense competition amongst all players, small and big, local versus international, implies that customers will be price sensitive. In such an environment, consumers will aim to play the markets against each other to further lower the prices, which will lower overall industry profitability (Porter, 2008). 2.3. KFC As at the end of 2010, with 5,055 units in the US and 11,798 units in 110 countries and territories internationally, the KFC Corporation is the third largest fast food retail chain globally. It is also is the leader in the U.S. chicken Quick Service Retail (QSR) segment among companies featuring chicken-on-the-bone as their primary product offering, with a 40 per cent market share, which is nearly three times that of its closest national competitor (Yum! Brands, 2011). KFC offers consumers option to dine in or carry out food or drive-through or delivery service. It is part of Yum! Brands, Inc., that owns two other globally known big brands, Taco Bell and Pizza Hut. The entire Yum! Brands stable makes up the world’s largest restaurant company at more than 36,000 locations globally (KFC, 2012). However, cumulatively Yum! Brands made revenues in excess of US$ 11 billion in 2010 which is less than McDonald’s US$ 24 billion and Subway’s US$ 15 billion (Jargon, 2011). Similar to McDonald’s and Subways, KFC builds, runs, and franchises its system of restaurants around the world to make, package and sell its menu of competitively priced food items. KFC makes its revenues through company-owned restaurant product sales, and franchisee fees and licences. 2.3.1. SWOT Analysis Strengths KFC has strong brand equity, stronger than Subway’s but lower than McDonald’s. Nevertheless, KFC is the premier brand with regards to fried chicken offerings. It has a proprietary secret blend of 11 herbs and spices that give its chicken products their unique taste and that can easily be compared to Coca-Colas secret formula X. The company’s presence in over 110 countries with greater than 16,000 restaurants provides it with economies of scale that increase its bargaining power over its suppliers and other advantages. Furthermore, being part of the Yum! Brand implies that it could additionally leverage on the advantages that accrue on its mother company. Weaknesses KFC generally has a limited menu especially in its international units that is mostly focused on chicken sandwiches and Colonel’s Crispy Strips, and a few side items that are suited to local preferences and tastes. Secondly, KFC also suffers from periodic quality issues at some of its franchises that negatively affect its brand image for example poor hygiene issues were raised in London (Daily Mail Reporter, 2010) and Sydney (Lohse, 2010). The hygiene issues could be a sign that the company does not properly monitor its franchisees. Threats The major threats for KFC are similar to McDonald’s and Subway’s namely: (1) intense competition and high threat of substitutes and their impact on buyer power and price; (2) increasing legislation towards healthy eating and changing consumer eating habits; and (3) effect of slow economy on consumer disposable income. Opportunities Opportunities for KFC are similar to Subway’s given that both companies need to broaden their product lines, develop new products to meet the fast rising health conscious market. Most of all, KFC needs to maximise on the bad press that is targeted towards red meat to market its chicken meat as the readily available and delicious non-red-meat substitute. 3.0. Operations Strategy The retail food industry in which all the three players compete is intensely competitive because it encompasses various types and a vast number of competitors that can offer substitute offerings. McDonald’s, Subway and KFC strictly speaking belong to fast-food or Quick Service Restaurant (QSR) segment however, there competitors includes but is not limited to supermarkets, supercentres, delicatessens, snack bars, convenience stores, warehouse stores and coffee shops. The major competitive factors in this industry are food quality, price, service, convenience, location and concept (Yum! Brands, 2011). In such an environment, the relationship between the organisation’s strategy and its operations could be the key determinant in attaining and sustaining market leadership (Barnes, 2008). It is therefore important for these organisations to develop appropriate operations strategy. There are four processes that organisations could use to develop their operations strategy, namely: top-down, bottom-up, market-led or operations-led. In this paper we shall not delve on which is the better approach among these four processes. Instead we shall focus on the market-led approach given the strong buyer power in the retail food industry that behoves strong market-led approaches. The market-led process postulates that an operations strategy should be developed in response to the market environment within which an organisation operates (Barnes, 2008). Here too, operations strategy literature, suggests a number of approaches on how this might be done. The most popular approach is the hill methodology proposed by Terry Hill in 1985. Hill’s methodology is a five-stepped iterative framework that links together corporate objectives, marketing strategy and operations strategy (Greasley, 2008). The framework is based on the idea that within any market it is possible to identify two types of competitive criteria: market qualifying criteria and order winning criteria. In this paper we have utilized the SWOT analysis of McDonald’s, Subway and KFC to come up with a summary analysis on the operations of these three organisations in Appendix A. From Appendix A it is clear that though all three companies compete in the QSR industry, they use different factors for their competitive advantage. Using Appendix A – which we derived from the SWOT analysis – we delineate the competitive factors for each of the three QSR chains. Qualifying factors are factors that have to be satisfied before customers consider the company for business whereas order-winning factors are the key reason why customers ultimately decide to purchase from the business (Greasley, 2008; Barnes, 2008). Competitive factors emanate from the trade-offs that any of these organisations make with regards to the operations performance objectives that they will give priority to. Making trade-offs is the purpose of strategy (Porter, 1996). There are five operations performance objectives from which McDonald’s, Subway and KFC will need to make their trade-offs to distinguish their competitiveness in the market. These are cost, quality, speed, dependability and flexibility (Slack et al., 2009). As an industry, as the name itself suggests, speed is a market qualifying criteria in fast-food / Quick Service Restaurant (QSR) business. Other than this, customers also demand to get their food items exactly as promised from the menus. The act of consistently delivering this promise is essential in this industry and Slack et al. (2009) referred to it as dependability. Finally, the QSR industry heavily relies on the franchising model of business. One of the major attributes of franchising is standardisation of store layouts, operating procedures and largely also of menus. A little customisation of menus is allowed to accommodate for local palates but broadly most QSRs have their identity products such as the McDonald’s burgers and fries, KFC’s chicken and Subway’s footlongs. All franchises need to be able to consistently produce these signature products as well as other products in accordance with specification and without error. Slack et al. (2009) referred to this attribute as quality. One might be tempted to add price as a market qualifying factor though we beg to differ especially given that KFC has been successful in spite of its relatively higher pricing in comparison to its rivals (Anon, 2011). When it comes to order winning factors we find that McDonald’s broad menu, low prices and constant innovation of new items – even though at times only as limited offers – endears it to customers. On the other hand, Subway’s rapid rise to fame has largely been due to its low price, and its sandwiches-order flexibility. At Subway’s the sandwiches are made to customer-specifications so long as ingredients fall within company allowed range. In mathematical-speak, the possible sandwich permutations are in thousands. KFC is offers a unique case where an organisation has used industry qualifying factors as its order-winning factors. KFC has used points of difference to create a unique positioning for its products in the mind of its customers. KFC has emphasised and successfully established the notion that its ingredients and therefore its chicken as being different from its competitors. For this reason quality and dependability are very important order-winning factors for this company. Appendix B gives a summary of the competitive factors for these three companies. Having established the qualifying and order-winning factors for McDonald’s, Subway and KFC it becomes clear as to what the organisations need to excel at in order to remain competitive within their market segments. Appendix C shows the internal performance objectives that each of these companies’ operations strategy needs to achieve for them to satisfy their order winning factors. 4.0. Conclusion Operations strategy assists organisations realise their long-term strategic goals by making their operations consistent with their strategic intent. In developing their operations strategy companies need to first understand their operations. This can be accomplished through the use of SWOT analysis as has been done in this paper. From the SWOT analysis the company can then be better placed in identifying which among its operations performance objectives it needs to place greater emphasis on than others. The trade-offs made in choosing to excel at one or more of the five operations performance objectives – cost, quality, speed, dependability and flexibility – allow organisations within QSR to pursue different business strategies based on corresponding competitive factors. Also, from this paper we have seen that some organisations can rely on the same market qualifying factors to be their order-winning factors. KFC has achieved this by using points of difference to create a unique positioning for its products in the mind of its customers. References Anon (2011). KFC raises prices again. [Online]. 31 October 2011. People’s Daily Online. Available from: http://english.peopledaily.com.cn/90778/7631179.html. [Accessed: 19 January 2012]. Barnes, D. (2008). Operations Management: An International Perspective. London: Cengage Learning. Cavendish, W. (n.d.). Impact of new food marketing restrictions to children in England. [Online]. Available from: http://tacd.org/events/meeting9/will_cavendish_impact.pdf. Daily Mail Reporter (2010). KFC fined after cockroach, mouse and dried blood found in Leicester Sq branch. [Online]. 11 May 2010. Mail Online. Available from: http://www.dailymail.co.uk/news/article-1276459/KFC-fined-cockroach-mouse-dried-blood-Leicester-Sq-branch.html. [Accessed: 18 January 2012]. Greasley, A. (2008). Operations Management. London: Sage Publications. Jargon, J. (2011). Subway Runs Past McDonald’s Chain. [Online]. 8 March 2011. WSJ.com. Available from: http://online.wsj.com/article/SB10001424052748703386704576186432177464052.html?mod=rss_whats_news_us&utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+wsj%2Fxml%2Frss%2F3_7011+%28WSJ.com%3A+What%27s+News+US%29. [Accessed: 17 January 2012]. KFC (2012). About Us - KFC.com. [Online]. 18 January 2012. KFC.com. Available from: http://www.kfc.com/about/. [Accessed: 18 January 2012]. Lohse, R. (2010). Hygiene hell. [Online]. 30 August 2010. The West Australian. Available from: http://au.news.yahoo.com/thewest/a/-/newshome/7850272/hygiene-hell/. [Accessed: 18 January 2012]. McDonald’s (2011). 2010 Annual Report. Oak Brook, Illinois: McDonald’s Corporation. Porter, M.E. (2008). The Five competitive forces that shape strategy. Harvard Business Review Online. R0801E. p.pp. 1-18. Porter, M.E. (1996). What is Strategy? Harvard Business Review. p.pp. 61-78. Simms, A. (2011). How Subway tops the fast-food chain. [Online]. 11 March 2011. The Guardian. Available from: http://www.guardian.co.uk/commentisfree/2011/mar/11/subway-fast-food-chain-mcdonalds. [Accessed: 17 January 2012]. Slack, N., Chambers, S. & Johnston, R. (2009). Operations Management. 6th Ed. London: FT Prentice Hall. Yum! Brands (2011). Yum! Brands 2010 Annual Report. Louisville, Kentucky: Yum! Brands, Inc.  Appendix A: Analysis of McDonald’s, Subway and KFC operations Table 1: Analysis of McDonald’s, Subway and KFC operations McDonald’s Subway KFC Products Largely standardised across franchises Customer-driven within a range of ingredients Standardised across franchises Product range Very wide Narrow but with customisation Narrow – especially in the international markets Product changes / development Frequent limited offers Customisation within range of uniform ingredients Not frequent Customers Traditional Traditional and non-traditional Traditional Delivery Fast Fast Fast Demand Predictable unless for limited offers Predictable Predictable Quality Ability to produce in accordance with specification and without error Ability to produce in accordance with specification and without error Ability to produce in accordance with specification and without error Profit margins Low to medium Low to medium Low to medium Appendix B: Competitive Factors Table 2: Competitive factors McDonald’s Subway KFC Qualifying factors Delivery speed, quality, dependability Delivery speed, quality, dependability Delivery speed, quality, dependability Order winning factors Price, Product range, flexibility to innovate new products Price, Flexibility to change mix of products Consistent high quality, dependability Less important Price Appendix C: Internal Performance Objectives Table 3: Internal performance objectives McDonald’s Subway KFC Cost, Innovation flexibility, Product range Mix flexibility, Dependability, Cost Quality, dependability Read More