Strategic Analysis of Kentucky Fried Chicken - Essay Example

Strategic analysis: Kentucky Fried Chicken BY YOU YOUR SCHOOL INFO HERE HERE EXECUTIVE SUMMARY KFC has had its fair share of proverbial ups and downs in its long history. This fast food business model has experienced much success in the United States, which provided the firm with the capital and knowledge resources necessary to expand into other nations as growth strategy. Over time, however, it became clear that KFC would have to adjust operations strategies to cater to unique markets in order to avoid decline of its long-standing brand in a very saturated competitive marketplace domestically and internationally. KFC requires utilisation of trusted and respected models of strategic analysis, including SWOT, Porter’s Five Forces, and even cultural characteristics modelling provided by Geert Hofstede in order to adjust in an evolutionary or systemic philosophy. To build a solid brand reputation and gain market share among competition, KFC must understand its strengths and weaknesses, as well as externally-driven market threats to build a sustainable and marketable strategic position. Without this knowledge, the business will not be able to create productive and long-standing relationships with the very diverse markets in which the business operates. Strategic analysis: Kentucky Fried Chicken 1.0 SWOT and Porter’s Value Chain The SWOT analysis is an acronym for strengths, weaknesses, opportunities and threats. Performing a SWOT analysis is a measure by which a business entity examines both its internal competencies and capabilities aligned with the external market to determine its current strategic position in its market. The basic assumption of the relevancy of the SWOT analysis is that the company can be properly fit within the context of external opportunities and threats by understanding internal resources available (Pearce and Robinson 2011). The SWOT analysis is a framework by which strategic planners are able to make adjustments to the internal organisational structure or reallocate resources to better respond to external market conditions. Porter’s Value Chain is a model that looks at the organisation as a chain of activities that transforms inputs into effective outputs. It is a customer-centric model that views that organisation as being an entity with a set of inter-dependent systems and divisions able to create outputs that customers will perceive as having sustainable value (Pearce and Robinson 2011). There are three ways in which customers perceive the aforementioned value: through activities that provide differentiation of product or services, through activities that lower their costs, and the ability of a company to respond to customer needs rapidly (Thompson, Gamble and Strickland 2005). The Value Chain framework identifies inbound and outbound logistics, marketing, sales/service and operations as primary activities (Porter 1985). Support activities under this model include human resources, procurement, technology and facility management (Porter 1985). When considering the practical application to Kentucky Fried Chicken (KFC), it is necessary that the business understands its current capabilities and capacities in order to develop an appropriate strategic plan. KFC operates in a very saturated market both domestically (United States) and abroad where there are many competitors. KFC can perform a SWOT to identify potentially untapped markets (opportunities) and the competitive threats that occur through rival advertising, pricing structures, or any other measure by which competition attempts to gain competitive advantage by providing superior value to customers. The SWOT findings then give a framework by which KFC can adjust logistical strategy (perhaps by building strategic alliances along the supply chain to lower costs that can be passed back to customers). KFC might also identify that there are threats stemming from better service delivery by customers. By aligning these findings from the SWOT, KFC can utilise the Value Chain Analysis to recognise opportunities to improve the human resources function to build a more motivated and dedicated organisational culture. Both frameworks actually work in conjunction with one another by which KFC can better position itself internally and externally to emerge victorious in providing customers with much better total value. 1.1 Porter’s Five Forces “Over-abundance of products in the late maturity or decline stage will eventually result in obsolete products” (Dooley 2005, p.48). As identified, KFC operates in a highly saturated and mature fast food industry. As such, the business must attempt to extend the life cycle of its products in order to prevent an eventual decline of its products, services or established brand. Porter (2011) identifies five forces stemming from the external marketplace that impact the company’s ability to maintain a long and sustainable product/service life cycle. These include threats of new entrants to the market, availability of substitutes on the market, buyer and supplier power, and competitive rivalry. KFC faces many threats related to new market entrants. There are very few barriers established in domestic and international markets that prevent new or established quick service businesses from trying to gain a foothold with a variety of target markets. Many countries provide incentives (such as taxation) for foreign direct investment and markets that are going to accept these fast food business models are usually politically stable. KFC has many, many competitors including Wendy’s, Subway, McDonald’s, Burger King and Arby’s (to name only a few). Many of these competitors have the financial capital and credit capabilities to establish their presence in the U.S. and in a variety of international countries and are not limited by the high start-up costs required for facility development and distribution needs along the supply chain. Unfortunately, KFC does not have the ability to establish barriers to new entrants as the firm is not in a position to create patents or other proprietary protections or build dominance to restrict distribution channels in a very wide and open international trade environment with many suppliers. Threats of substitutes are also relevant for KFC. The vending market, as one example, offers a variety of quick service food products in an industry that continues to experience growth internationally. In 2009, food products from vending machines made up an estimated 1.9 percent of all consumer household food spending (Research and Markets 2010). In fact, in the Japanese market, there is one vending machine operating for every 23 citizens (AVA 2012). Vending machines are becoming more sophisticated, offering touch screen interfaces and even the ability to chat with operator service members which provides value to consumers (Hickman 2011). Though vending products represent only one substitute, growth in this industry should make KFC more aware of what is driving desired target markets to other, substitute and rapid food opportunities at an affordable price. Buyers have considerable power in the market for KFC. This is because the switching costs for defection to another food brand is very low, which is created by high availability of competition, diverse quick service food options, and constant price competition (such as McDonald’s value menu). High buyer power is also aligned with the threat of competitive rivalry, as oftentimes discounting is utilised as a means of attracting price-sensitive fast food consumers. There is an opportunity in this concentrated price competition for KFC, however. KFC’s competitors have been using value menu pricing for years, especially since the 2008 economic crisis occurring internationally. This was intended to be only a short-term strategy to increase foot traffic into competing fast food restaurants. However, consumers have come to perceive that this pricing is sustainable and it is no longer a method of differentiation (QSR Web 2013). KFC can reposition the business in certain operating territories to give consumers a new perception of high quality (as one example) that would reduce some of the switching costs for consumers if the business was effective in a new marketing strategy framework. The case study also illustrated that suppliers have considerable power in the market, as Tyson, KFC’s main supplier, also services many other fast food companies (Krug 2004). However, KFC can reduce these competitive threats by building alliances with alternative suppliers, which according to Copacino (1996) is crucial to establishing competitive advantage. KFC can reduce supplier power by moving away from those vendors that cater to other fast food companies, or even by creating their own production (wholly-owned) production facilities. Long-run benefits of this is being able to maintain much more control over the supply chain and experience cost advantages that can also create some barriers to new market entry. Toyota has been able to create a lean production system by creating their own production and supply networks which significantly reduced price negotiations in the supply chain by product suppliers. KFC has many opportunities to select other producers than Tyson which would give them more clout along their own, unique distribution methodology. 1.2 Local and global integration pressures for KFC KFC in China, as one example, is now one of the company’s most profitable and expansive markets. However, KFC cannot simply transfer its product and service model into this country without making significant adjustments in the supply chain, logistics strategy, competitive marketing and human resources (as four relevant examples). KFC attempted, in 2012, to alter its supply strategy in order to reduce costs by procuring local products. However, these products were found to be grown with illegal hormone levels and use of poultry antibiotics (China Daily 2012; Yan 2012). This led to a major consumer boycott of KFC products. Global integration pressures have forced KFC to seek alternative supply methodologies to improve cost position and improve product availability for consumers. However, the business’ effort to be more responsive have given the firm more negative publicity and reduced some of the trust that consumers have in the KFC brand. Pressure stemming from the high buying power of consumers, despite attempts to be more locally responsive, continues to exert threats on the business model. In other countries outside of China, demands for products that are relevant to their lifestyles or cultures, such as rice bowls or beef products, places demands throughout the value chain, especially logistics and supply, which can incur many costs to be adaptable. However, without being flexible to cater to foreign consumer needs, KFC will face defection to other fast food brands and build a negative reputation for being rigid in product variety offerings. 2.0 Understanding Whittington’s Evolutionary and Systemic Schools of Thought Whittington’s Evolutionary school of thought is essentially a sell or perish philosophy. It is about building short-run opportunities for improving revenue growth, viewing the organisation as an organic entity capable of responding to external market conditions in order to survive (Rowe 2008). This school of thought views the external market as the final gatekeeper that drives strategy development, forcing an organisation to consider marketing to gain consumer favour or brand-building to build a better and more positive brand identity with markets. The Systemic school of thought considers more of the organisation and its structure as the means to achieve a better market position. It is about changing internal organisational culture, transforming operational strategies, or improving the supply chain to gain long-run competitive advantages or improved market position. This school of thought sees the organisation, internally, as a holistic entity that must make changes to provide better localised service using internal human capital or more efficient resource allocation along a systemic framework. 2.1 Applying the schools of thought to KFC The evolutionary approach applied to KFC might involve the business running discounting promotions over a limited time in order to provide more cost value to customers. Using marketing flyers with incentives coupons or other concentrated discounting promoted through a variety of channels simply to gain revenue growth would be appropriate under this philosophy. Similarly, KFC might devote more to its product research and development in order to create localised, customised menu offerings (such as rice bowls or hamburgers) in order to gain instant brand preference with customers. The evolution of the business to be more adaptable to local needs, even if they differ from the home country operational strategies, is necessary to avoid long-term decline in brand or product sales. Systemically, KFC might change its international organisational culture to provide more culturally-sensitive service dimensions to consumers. With assistance from human resources (training), KFC can build local service cultures that understand, for instance, collectivist versus individualist values with certain target markets. This would provide the internal competencies and structure to provide service angles that applaud group and family membership. As a holistic system view, the business transforms for long-term growth opportunities to ensure sustainable adaptability for consumer needs. The evolutionary school of thought is preferable as it allows a business to gain instant growth or profitability by being adaptable to external market needs. For KFC, the external market is driven by considerable consumer buying power that is related to their price-sensitivity, perceptions of brand value when compared to competition, and even social/lifestyle characteristics. Maintaining the idea, internally, that the business could be in decline in the short-term without evolution keeps strategists constantly viewing the external market to identify opportunities for short-run gain. Not all business models can adapt systemically without severely imposing costs or staffing burdens on the business. By focusing primarily on satisfying consumers by adapting to changing external market conditions, a business is more prepared with contingency plans to ensure the business model (or brand) does not essentially die off against competitors. 3.0 Building productive relationships under the Systemic school of thought KFC is a multi-national organisation that must service very diverse and unique markets. In Japan, consumers are driven by long-standing patriarchical values that emphasise demands for familial respect for elders and also respect for tradition. In China, on the other hand, there is a very strong collectivist mentality which values group opinion as a means of building a sense of personal identity (Cheung et al. 2008). In the United States, consumers are very individualistic and there are many sub-cultures that favour KFC for a variety of different reasons, either cost-related as a value decision or to sustain a strong family structure. The Systemic school of thought demands that KFC maintain capabilities for a pluralist business model, which is defined essentially as believing that a business can be enriched by embracing diversity of thought, political objectives, or in the case of KFC, diversity of service delivery. KFC wants to remain a strong competitive presence in its many different markets, however this cannot be accomplished without changing internal dynamics and strategy developments to reflect this level of market diversity. For instance, KFC must build an adaptable, sustainable business model that provides collectivist values in its integrated communications with Chinese consumers. Therefore, the business, as a holistic system, must consider the role of human resources, sales and marketing, and even in-store support staff training in order to be effectively adaptable to build a solid, sustainable brand with this market. Even logistical strategies must be redefined for specific, international markets with varying cultural characteristics in order to be considered a long-term success. As one example, a market in which KFC operates might have a very strong set of consumer values associated with service excellence and respect. KFC might have to rely on its international expatriate human resources leaders to develop a service training program that consists of in-store greeters to maximise immediate respect perceived by these buyers. Systemic adjustments in the operational model in a country where respect is demanded could impose cost burdens (related to staffing, training and retention), however it is necessary for these consumers to find value. In another country, on the other hand, price might be the only real perception of value that they find with KFC, which means altering profit expectations in order to gain long-run market interest. Whatever the adjustments required, KFC must consider how to adapt for long-term growth and sustainability, with an emphasis on building a differentiated brand aligned with lifestyle and cultural values with unique markets, in order to have any meaningful competitive presence. There is a marketing function referred to as psychographics, which is segmenting markets based on their lifestyle needs, motivations, unique attitudes and values, and cultural systems (Kotler and Keller 2007). A business usually conducts considerable market research, both qualitative and quantitative, to determine how best to position or differentiate the business according to these values. Most oftentimes, this manifests itself in the advertising promotions utilised by the company that reflect these market values. Systemically, a company like KFC that would utilise psychographics would have to adjust sales and marketing, operations and production, research and development and even procurement in order to build a long-term brand in order to gain sustainable consumer loyalty. Many companies have to adjust their service philosophy to meet these needs as well, which requires human capital investment and financial capital investment to achieve. In the case of Kentucky Fried Chicken, the business is going to get lost amongst competitors that have knowledge of what drives cultural characteristics in their operating markets unless they build sustainable internal competencies (and oftentimes externally-centric strategy developments) to create a respected and trusted brand that will be adopted by consumers generationally. It was previously identified that Chinese consumers boycotted KFC on the heels of a scandal involving procurement of poultry that had been injected with illegal chemicals. KFC was forced to adjust its supply strategies and distribution methodologies to be responsive to the negative publicity the firm was receiving for these efforts to localise product offerings and also save costs. Hormone injections, in other countries, would not be considered a major concern, such as in the United States where injecting beef with steroids is commonplace in many supermarket industries. KFC must understand what drives social norms and values in order to align the entire holistic business system to be responsive and avoid offending or otherwise angering markets with very unique cultural characteristics. The business model must recognise and embrace the pluralism of unique cultural attitudes and motivations and position the business accordingly to provide perceptions of complete brand value over the long-run with these markets. Failure to take a systemic view will only make small scale adjustments that do not contribute to the long-term brand equity necessary for a business to experience growth. References AVA. (2012). Industry overview, Automatic Vending Association. [online] Available at: http://www.ava-vending.co.uk/pages/press/industry-overview.php (accessed 17 March 2013). Cheung, F.M., Cheung, S.F., Zhang, J., Leung, K., Leong, F. and Yeh, K.H. (2008). 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