Analysis of Kentucky Fried Chicken Corporation - Essay Example

Table of contents Executive summary..................................................................................................2 PepsiCo’s acquisition of KFC in 1986.....................................................................3 Potential synergies....................................................................................................3 Nature of competition in the industry......................................................................4 Driving forces..........................................................................................................4 Fast food industry attractiveness in US...................................................................4 Fast food industry’s key success factors.................................................................5 KFC’s position to success factors...........................................................................6 KFC’s competitive advantage.................................................................................7 International markets...............................................................................................7 Bibliography.............................................................................................................9 Appendices..............................................................................................................10 Executive summary Kentucky Fried Chicken Corporation (KFC) is one of the first fast food industries to go international in the 1950s. Through Harland Sanders’ franchising strategy, KFC rapidly grew in the international market to become one of the most recognizable brands in the world. However, though it managed to grow steadily in its operations as a result of the uniqueness of its chicken products, it has certainly encountered some challenges particularly competition in its operations. Though attractive, the fast food industry is mature especially in America. With its limited products, though unique, KFC has been impacted by fierce competition from competitors like McDonald’s, Wendy’s and Burger King among others. A close analysis of the case study draws to the conclusion that there is need for KFC to diversify its products while attempting to retain its uniqueness in order to remain viable in the long run. PepsiCo’s acquisition of KFC in 1986 In the early 1950s, Harland Sanders embarked on a franchising strategy which saw KFC rapidly growing in America to become one of the most recognizable brands. Having been taken public and listed on the New York Stock Exchange, KFC grew a strong foothold in the United States which prompted it to venture into international markets. Thus, the major motive behind PepsiCo’s acquisition followed a strong belief that the restaurant industry complemented their business of soft drinks and snacks. It was believed that restaurants increased the number of outlets to sell soft drinks and this would also increase the organisation’s popularity. Given that KFC was an already established business entity in the market, PepsiCo sought to capitalise on this through an acquisition which would sort of transfer all the loyal customers from KFC to them. Potential synergies PepsiCo believed that it could take advantage of the numerous synergies available for operating different businesses under one umbrella name. Management skills could be transferred among three businesses. The company had earlier own acquired Pizza Hut and Taco Bell which were leaders in pizza and Mexican categories which could create a synergy with the chicken brand. These synergies were hoped to create competitive advantage for PepsiCo since it would be operating different lucrative businesses which will help it gain more market shares. Nature of competition in the industry It can be seen from the case study that the fast food industry is characterised by stiff competition from other rival competitors. Reynolds and Lancaster (1999) suggest that Porter’s Five Forces Model is an ideal business strategy that is used to analyse five competitive factors that are likely to affect business. Indeed, no one organisation exists in a vacuum where there are no other players and this has a bearing on the performance of the company with regards to market share and viability. In this case, it can be noted that the restaurant industry is almost saturated with players who offer different products. Appendix A illustrates the competitive nature of the restaurant industry. Driving forces The driving force behind PepsciCo’s acquisition of KFC was mainly its product uniqueness which was guaranteed through market development and creation of loyal customers who could identify with the brand. Of concern was the fact that businesses operate in a dynamic environment hence the need to create a strong portfolio of unique and favourable brands. KFC for instance was considered as a leader in the chicken fast food industry. The major aim was to create an identity with popular products in the restaurant industry so as to attract more customers. Fast food industry attractiveness in US The fast food industry is now mature as shown diagrammatically below. It can be seen that competition intensifies when the industry reaches its maturity. Source: http://tynerblain.com/blog/2007/02/27/agile-development-roi-1/ In this particular case, it can be noted that competition is intense among McDonald, Wendy’s as well as Burger King which are fighting for the same competitors in the market. Another characteristic noted is that prices of products tend to be dropping due to excessive products being offered. However, the attractiveness of the industry in maturity stage is mainly caused by the fact that already established organisations have a large number of loyal customers which make them viable. The existence of many segments in this industry shows that it is attractive. The BCG matrix (Appendix B) shows that the fast food industry is an attractive industry with a lucrative market where many competitors compete for the customers. Fast food industry’s key success factors The National Restaurant Association (NRA) reported that there was a surge in food service business and it estimated that there was an increase of 4.3 % to $408 billion in 2002. There were about 858 000 restaurants in the US and about 12 million people were employed in this industry. It can also be seen that the major segments that make up the fast food segment of the restaurant industry include: sandwich chains, pizza chains, family restaurants, grill buffet chains, dinner houses, chicken chains, non dinner concepts and other chains. Though McDonalds dominates in other segments such as sandwich, KFC is a leader in the chicken segment. There is variety in the fast food industry which makes it a major success factor of the industry. Due to an increase in business, the restaurant industry in the US has been growing with dining facilities being introduced. Different restaurants have been established to cater for different tastes as well as age groups. KFC’s position to success factors To a certain extent, KFC is better positioned to harness the key success factors in the restaurant industry by virtue of being an established entity with loyal customers already. It can still enjoy its market share since return purchases will remain reasonably high. It also managed to expand its products through product diversification as it sought to introduce more products on the market that were meant to attract new customers. For instance, apart from offering fried chicken, it introduced other diversified products that were popular with the loyal customers. However, one major challenge it faces is that the restaurant industry has reached maturation and this entails that in one way or the other, business will begin to decline as a result of competition which can force the prices down hence need to keep on developing the products and the markets. It seems that KFC at the moment may find it a bit challenging to match the competition that is offered by McDonald’s, Wendy’s as well Burger King. Appendix C, Ansoff’s matrix suggests that diversification is a viable option especially in a competitive environment like the fast food industry where KFC is operating. KFC’s competitive advantage There are many successful business organizations in the market that are strategically so viable to such an extent that rival competitors can hardly exceed their performance. Such stable status can be achieved only when they apply certain strategies that can hardly be imitated by the competitors for long-term survival and stability, which is known as competitive advantages. Porter (1980) suggested a framework for competitive advantage through his generic strategies. In order to survive in the long term, Porter (1985) has argued that a firm needs to have sustainable competitive advantages. There are two sources of competitive advantage; cost advantage and differentiation. Through his generic strategies, ‘differentiation’ is when a firm seeks to be unique in its industry through features of its products that are highly valued by its customers. A close analysis of the case study shows that KFC has got its own competitive advantage through differentiation. In the chicken segment, KFC is a leader because its brand is unique and is popular with its loyal customer base. By virtue of being unique in the market, the organisation is better positioned to stand the competition that may exist as is the case. International markets issue Though noble to go international, there are some risks KFC has to consider in order for it to remain viable. The fast food industry is now mature and has caused intense competition in the restaurant industry. It becomes difficult to increase prices for their products given that consumers can easily switch to the other substitutes available in the market since the customers have the option to choose where they want to get their food. Another aspect of concern for KFC when it decides to venture into international market is the aspect of culture which greatly determines the taste of consumers. It can be noted that in some Latin American countries, chicken is not their staple food hence it may be a bit challenging to penetrate this particular market. In some religions they do not eat particular food stuffs hence the need for KFC to do market research before embarking on establishing business in an international market. It is a noble idea to expand internationally but this is likely to be affected by different social and economic factors. The other likely problem is that restaurants established in far off markets may not be easily accessible to the head offices which may affect the operations of the organisation. Bibliography Armstrong, G. & Kotler P.(1996) Principles of Marketing, 7th Edition, Englewood Cliffs: Prentice Hall. Lancaster G. & Reynolds P. (1999), Introduction to Marketing: A step by step Guide to all the tools of Marketing, Kogan Page Kotler P., 1999. Kotler on marketing: How to create, win and dominate markets. McCarthy J.E & Perreault W. D. (1996), Basic Marketing: A Global Managerial Approach, 12th Edition, Irwin McGraw-Hill, USA. Porter M.E. (1985), Competitive Advantage; Creating and Sustaining Superior Performance. New York: The Free Press. Porters Generic Competitive Strategies (ways of competing) Accessed on 06 October 2010, from: http://www.ifm.eng.cam.ac.uk/dstools/paradigm/genstrat.html Product life cycle and the ROI of agile development (27 February 2007). Accessed on 06 October 2010 from:http://tynerblain.com/blog/2007/02/27/agile-development-roi-1/ Appendix A Porter’s Five Forces Model This model is used to analyse the nature of competition that exists in the industry in which KFC is operating. Entry of competitors In this case, there wide room for entrance of other actors in the restaurant industry as seen by the stiff competition that exist. The fast food industry is now mature hence competition is high. Threat of substitute It can be noted in the given case that other competitors like McDonalds, Wendy’s as well as Burger King have a variety of substitutes which is a major threat to KFC though it has a unique chicken brand. Bargaining Powers Of Buyers This depends on the interests and capacities of consumers on certain products. As noted, there are about eight segments in the restaurant industry and the customers have a variety of choices to make. Bargaining powers of suppliers There are many suppliers of fast food products. There are several restaurants which offer a variety of different foodstuffs. Rivalry among the existing players There are competitors in the fast food industry as witnessed in the case study. Source http://www.12manage.com/methods_porter_five_forces.html Appendix B BCG Matrix Relative market share Low High (Cash generation ) High Market growth rate (Cash usage) Low a) The stars can be costly in terms of promotion particularly when the fast food industry is getting mature but this has the advantage of good sales once the product has been accepted. In its drive to expand its business, these stars can be converted to cash cows which provide a steady revenue flow. b) The cash cows provide a steady revenue flow as they simply make money having a high market share though there will be low growth given that the company has reached maturity stage. In well managed companies, customers will be loyal and there will be much repeat business as seen in the case of KFC. c) Where there is a question mark, there will be a small market share and the market will be highly growing. The international market in the restaurant industry especially in Latin America is growing but KFC has little market share which can be considered as question mark. d) Dogs: According to the case study, KFC does not have any dogs which are a small market share in a mature market as evidenced by a steady performance of its products in the market. Appendix C Ansoff’s Matrix Present Products New Markets New Source: www.learnmarkerting.net 1) Market penetration is concerned with increasing the sales of the present product through reduction of price or embarking on a high promotional drive. 2) Product development is aimed at developing new products in the market which can go hand in hand with the existing product to increase the market share. 3) Market development is concerned with selling the existing product to new market segments. 4) Diversification entails innovation of something new so as to appeal to a wider segment of the market. Read More