4.2 Porter’s 5 forces
The Five Competitive Forces shall be used to determine the intensity of competition and hence the profitability and attractiveness of the fast food industry. The Five Competitive Forces are typically described as follows:
4.2.1 Bargaining Power of Suppliers
The suppliers to the fast food industry have very little leverage and bargaining power for numerous reasons:
o The items purchased in bulk are generally commodity items.
o Competitive - The products in demand are standard and offered by many other suppliers and are only differentiated by the services, prices, delivery and other terms and condition.
o The switching costs from one supplier to another are high.
o Customers are important to the supplier.
o World wide market of suppliers
o Bigger organizations can negotiate for a lower pricing
Therefore the supplier bargaining power is likely to be low, mainly caused by the saturated market.
4.2.2 Bargaining Power of Customers
In the current competitive market, customers have a wide selection of food choices, which gives the customers more selection power. Bargaining power of the customers is likely to be low when:
o Fast-food consumers are price sensitive.
o Fast-food consumers want convenience and are location sensitive.
o Fast-food consumers are quality sensitive.
o Fast-food consumer switching costs are low.
o Fast-food consumer prefer varieties
o Fast-food consumer search for ambience in restaurants
o Fast-food consumer prefer healthier food menus
From the standpoint of individuals looking for a meal away from home, there are many substitutes and almost no switching costs between competing restaurant chains. Customers tend to be price sensitive, location sensitive, relatively health conscious, and increasingly more quality conscious. They may be more loyal to some chains/locations than others.
So the positive buyer perceptions of a fast food chain’s product offering are definitely a competitively relevant consideration. Buyers of fast-food products do not have significant bargaining power for there is wide selection of fast food restaurants available to the customers and none offer concessions for return patronage, customers will have little brand loyalty.
4.2.3 Threat of New Entrants
A moderately strong force and growing stronger as existing chains look to new geographic markets for expansion, especially in countries where consumers may be attracted to fast-food products and there is significant growth potential for fast-food enterprises to establish new locations
Newcomers (especially new start-up enterprises) have several formidable entry barriers to overcome:
o Slowing industry growth rate domestically (especially in the U.S. where the market is pretty saturated with fast-food locations)
o High costs of market entry (to build outlets, recruit/train franchisees, and fund advertising/promotional efforts)
o Established competitors with well-known reputations and menu selections
o Existing brand loyalties
o High cost to exit, thereby increasing resistance of existing competitors to new entrants.
However, several major chains pursue growth in foreign markets to escape domestic market maturity. New chains crop up quite frequently, so there is some threat of entry, even in the saturated U.S. market. Perhaps the greatest entry threat from KFC’s perspective would be the likelihood that other fast-food chains would decide to add popular chicken items to their menus—thus entry into the chicken segment is a very real and potentially strong competitive force.
But the real issue here is the threat of existing restaurant chains to enter the markets of foreign countries where they currently have little or no market presence. Here the threat is very real and growing. Existing fast food chains function as “new entrants” when they expand into geographic markets where they have no outlets. Plainly, the global expansion efforts of a number of rival fast-food chains currently pose significant entry threats. Hence, the threat of additional entry is a relatively strong competitive force in those country markets where fast-food opportunities present themselves—certainly there are entry threats in Latin America and Mexico.
4.2.4 Threat of Substitutes
There are numerous substitutes for fast-food and for the fast-food offerings of the chicken chains like KFC:
i) Microwavable products
These products are conveniently available at all supermarkets that can be easily prepared at home
ii) Convenience shops
This neighborhood shops offers microwavable food products with microwave oven available in the shops so that customers can heat up the food upon making the purchase. They have a wide variety of products (including chicken) catered to the masses.
iii) Supermarket delis
These delis provide delicious chicken cooked food at a lower price targeted at shoppers who are shopping in the supermarket.
iv) Full-service, formal restaurants
Some people have the preference of being served and would not mind paying a slightly higher price.
v) Homemade meals
Homemade meals are cheaper and healthier as compared to fast food, which are usually fried and contains lots of calories. It is more suitable for those people who are more health conscious.
vi) Other Ready-to-eat cooked food
Other fast food restaurants / restaurants can also be considered as substitutes since they offer products that are traditionally offered by fast-food chains in other menu segments, the competitive line between the various fast-food segments is getting blurry indeed. Chicken products are offered in most fast food restaurants and the difference may be one is offering chicken burger while the other is offering chicken parts.
Other restaurants do provide other high quality, reasonably priced eating alternatives. Family restaurants, cafeterias, and other quick-serve food establishments with other menu concepts (fish and seafood, dim sum, pasta dishes, sandwiches, sushi and others), to add to the competition, there are numerous restaurants and other eating alternatives located near KFC. Customers can frequent anywhere they like since the switching costs are low.
4.2.5 Competitive Rivalry between Existing Players
Competitive rivalry among the leading fast-food chains is the strongest of the five forces due to market maturity and a slowdown in industry growth rates, the high market visibility of the 50 or so largest fast-food chains, and the fact that, except for industry leader McDonald’s, the major players in the industry are relatively similar in size and resources. Plus, many are choosing to pursue expansion into many of the same foreign markets with relatively similar strategies.
The weapons of competition are price, quality, menu attractiveness and appeal, location, dining atmosphere and cleanliness, advertising and promotion (including celebrity endorsements in some instances), and brand name recognition.
When a rival acts in a way that elicits a counter response by other firms, rivalry intensifies. The intensity of rivalry commonly is referred to as being cutthroat, intense, moderate, or weak, based on the firms' aggressiveness in attempting to gain an advantage.
Rivalry is strong for several reasons:
o Slow market growth causes firms to fight for market share. In a growing market, firms are able to improve revenues simply because of the expanding market.
o There’s intense jockeying for sales and market share among existing chains—fresh competitive moves are made frequently by one or more players in order to gain business at the expense of their rivals.
o High first mover rewards (e.g., McDonald’s created brand awareness for its chicken sandwich by introducing its sandwich before KFC).
o Low customer switching costs increase pressure on chains to attract customers through advertising, new product offerings, and price discounts. Also when a customer can freely switch from one product to another there is a greater struggle to capture customers.
o Low levels of product differentiation is associated with higher levels of rivalry. Brand identification, on the other hand, tends to constrain rivalry.(chicken products are also available in Mac Donald’s)
o High exit barriers place a high cost on abandoning the product. The firm must compete. High exit barriers cause a firm to remain in an industry, even when the venture is not profitable. A common exit barrier is asset specificity. When the plant and equipment required for manufacturing a product is highly specialized, these assets cannot easily be sold to other buyers in another industry.
o Changing prices - raising or lowering prices to gain a temporary advantage.
5.0 Company Analysis
Kentucky Fried Chicken (KFC) was the world’s largest chicken restaurant chain and the third largest fast food chain in 2000.
5.1 Culture
PepsiCo's culture emphasized a lot on the performance and top performers are expected to move up through the ranks quickly. It made used of KFC, Pizza Hut, Taco Bell and Frito-Lay and training grounds for its managers, rotating them every two years. This performance driven practice created immense pressure for the managers to demonstrate their managerial skills and maximize their potential for promotion.
For Colonel Sanders, he adopted a laid-back approach. Employees were entitled to benefits, pension, and other non-income needs. This created strong loyalty among it employees. The above management style contrasted greatly with KFC’s traditional laid back approach, where employees were accustomed to stability and employment security.
5.2 Leadership
Organizational weaknesses include the extreme pressure that was placed on PepsiCo's managers to produce, and the limited flexibility of their restaurant franchisees. These policies create high turnover in management and contract difficulties with franchise owners. The unwanted effects of the performance driven culture also brought about lost of employee loyalty.
5.3 Finance and Management Issue
PepsiCo is financially stable. The net sales for the year for its restaurants in year 1996 rose to $31,645,000. (Refer to Appendix 1 – Consolidated Statement of Income)
6.0 Stakeholder Analysis
The figure below is the identified stakeholders of KFC.
Figure 6.0 Stakeholders of KFC
(Sources: Self-created)
6.1 Primary stakeholders
Primary stakeholders are immediate communities of interest for the organization. They are vital to KFC’s growth. If their involvements are high, then KFC will be able to expand. However, if these groups of stakeholders have negative feelings towards KFC, the impact is likely to be high. For e.g., if the products from KFC is not up to the usual standards, the stakeholders might switch to other alternative since the switching cost is low. Moreover, through the word of mouth, others may be influenced in believing that their standards had drops, may also do a switch.
6.2 Secondary stakeholders
This group belongs to the intermediaries in the process, and may include government agencies and other institutional bodies. The influence from this group of stakeholders is far greater than those from the primary stakeholders. For instance, if the media is to release some negative articles of KFC, it will give a very bad impression. On contrary, if the media is to release an article to the advantage of KFC, then business in KFC will improve.
7.0 Macro-environmental Analysis
7.1 Economic Environment
Fluctuating foreign currency exchange rates in Mexico. An increased inflation rate in Mexico poses an economic threat of lower profits and revenues in KFC's Mexico locations. In addition, the tendency of having strikes is high and this will bring down the economy.
7.2 Social – Cultural Environment
Society's attitudes have changed in the past decade toward eating healthier food selections, eating fewer fried foods, and eating more reduced-fat food selections. The majority of KFC's menu items are fried foods. This is due to the increasing population that is obese and articles that criticized fast food being the main culprit.
KFC could improve the social environment of local communities and society in general by offering innovative, community-involvement programs.
Identifying the cultural differences in other countries is important. For e.g.: some Asia countries have a majority population of Muslims (Malaysia) therefore, the menu must be Halal and no pork can be served.
7.3 Political Environment
The government may implement stricter heath and safety guidelines, which may affect KFC sales. An example will be Bird flu strain that infected 18 people in Hong Kong and killed six of them in 1997. If the bird flu were to hit US, then KFC will be greatly affected.
7.4 Technological Environment
As the technology continues to improve, it creates unlimited opportunities for innovation. Online information seeking by customers is easy due to Internet. In addition, the use of computers to advertise via the Internet, targeting on the yuppies. Computer ordering via Internet can be made possible since they are an increasing population that is Internet savvy. Internet enabled KFC to develop global brands and worldwide consumer base.
Computers can be used to improve labor, scheduling, payroll, accounting, inventory control and communications with other franchisees. This will give KFC a greater control over its employees and even to the franchisees.
Hi – tech equipment that will be able to determine of the cleanliness of oil content be used since majority of the products offered in KFC are deep-fried. Other technological methods can be implemented, like new cooking method whereby there will be a reduction of oil content in the fried food.
In the recent years, the market is growing as single-person households are on the rise. This is due to factors like rising incomes, higher divorce rates and people getting married later. There are also more women in the workforce than ever before. As a result of this, individuals are spending more disposable income on eating out. Moreover, there is a perceived value for money for the fast food products offered. They tend to be cheaper as compared to other cooked food.
7.5 Demographic Environment
Dual income households are on the rise, with higher household purchasing power. These working executives have hurried lifestyles and a desire to avoid food preparation at home has made the fast food business an attractive market. Moreover, there are more women in the work force than ever before, and this continues to increase. Because of this, traditional family income has risen. Due to these demographic changes, opportunities exist for expansion of restaurant chains to compliment and meet the new demands created by these changes. Meals offered in any fast food restaurants will usually consist a main course, side dishes, and a drink, which make it very convenient.
8.0 Alternative Action
1. Expand into Mexico and Puerto Rico
Advantages:
Ø KFC is popular with the Mexicans
Ø Close proximity with US
Ø Free trade agreement with Mexico
Ø Strong competition as competitors are already in Mexico, however; their specialty products are burgers and not chicken
Ø Standards can be maintain easily
Ø Growing economy in Mexico
Ø Cheap labor and chicken parts
Ø Demand for fast food expected to grow
Ø Tax brakes of 5 years when investments are made into Mexico
Ø Growing rate of the Mexican population is high and constant
Disadvantages:
Ø Poor working attitudes of the Mexicans
Ø Majority of the workers are unskilled and requires training
Ø Unstable economy – depreciation of Pesos
Ø Do not like the Americans
Ø Unstable economy (strikes often)
2. Leave Mexico and enter into other foreign market
Advantages:
Ø Focus investment on other stronger growing segments like South America
Ø Less political and financial risks in other foreign market
Ø Maintain a minimal presence in Mexico for future growth when the stability is greater
Disadvantages
Ø Forgoing a potential growth in a profitable market
Ø Servicing of Mexico units without the increase of the of the economy of scale
Ø Still have not mitigated the risk in Mexico
Ø Limited resources and cash flow
Ø Large distance causes difficulty in exercising control, servicing, support and other problems
3. More advertisements with promotional features attached to it
Advantages:
Ø Attract more customers to patronize KFC
Ø Capture competitors market share
Ø Increase brand awareness
Disadvantages
Ø Higher cost incurred for the promo features
Ø Lower perceive value of KFC (brand) when they have frequent promotions
4. Wider varieties available in the menu
Advantages:
Ø Appeal to a greater number of customers
Ø Capture competitors market share
Ø Increase brand awareness
Ø Healthy food like low oiled items may attract new segments (health conscious)
Disadvantages:
1. Higher cost incurred in experimenting, advertising (new product) and recruiting.
9.0 Recommended Option
Our selection is to expand into Mexico and Puerto Rico, which is currently a growing market. The obvious advantages shall be the close proximity to U.S., whereby KFC can maintain its standards, the existing North America Free Trade Agreement (NAFTA), GATT and the availability of cheap workforces and products. Operating efficiency in the restaurants is largely dependent on controlling food and labor cost.
Another pull factor is that there is no competitors from the chicken segment, therefore, can be said as an untapped market. Being the first mover, KFC will be able to establish a strong foothold before other competitors enter the Mexico. First time customers remain usually remain strongly loyal to pioneering firms in making repeat purchases. Making investment into Mexico, the government allows tax brakes of 5 years.
The world is divided in different regional markets (like Europe, Asia, Latin America, and etc.). If a crisis happens in a specific country it tends to affect all countries within the same economic region with which it has close economic relations. KFC should focus not only on ‘Latin America’ but also in other markets. That way it can minimize possible economic crisis in one region with the profits of another region.
10.0 Steps of Implementing the Option
Since KFC is a new company, it will be necessary for the franchisees to register for the business.
10.1 Organizational
The strategy to enter into Mexico and Puerto Rico shall be through franchising as avoid the risk of committing resources into an unfamiliar market. To grant franchises to only the highly motivated, talented entrepreneurs with integrity and business experience and train them to become active and aggressive owners of KFC. A revision of franchise contracts would need to be made to protect KFC from having other KFC franchises in too close a proximity to one another and the prevent franchisees from having sub standards. The traditional Colonel's way of life philosophy would be brought back into KFC's mission and goal statements to improve relationships and to reduce management turnover and internal discontentment. Additionally, it is very important to have well trained marketing staff, with sufficient knowledge of the evolution of the Mexico’s market, Mexicans laws and regulations.
10.2 Product
KFC will increase their product line to include new menu items in various locations to test acceptability and possible sales in relation to demographics. While expansion of their menu is necessary, they need to continue their focus on the "healthy foods" the domestic population is demanding. They can do this by adding additional items such as oriental chicken dishes and grilled chicken sandwiches and dinners.
10.3 Place
In this industry, distribution and new product introduction are the keys to success.
Therefore, KFC shall expand into more nontraditional locations such as hospitals, gas stations, convenience stores, malls, airports, concert halls, amusement parks, and college campuses. They will need to implement new, culturally-specific procedures such as serving beer in German restaurants, more Asian chicken dishes, familiar dress in Asian restaurants, a pub-type atmosphere for European restaurants with a leisurely atmosphere conducive to long conversations and others depending on the Mexican’s culture.
10.4 Pricing
This will be a determining factor for the customer making their first purchase. The price should be set reasonably and competitively with other local restaurant offer chicken in their menu. The price for the initial launch must be low. (Refer to 10.5 Promotion)
10.5 Promotion
Promote all three divisional products combining ads and reducing costs for individual advertisements. Offer special introductory bargains for newly opened locations to get customers' attention. Continue with celebrity promotions of KFC. Promote beneficial societal programs by continuing their neighborhood grant programs and expanding opportunities for more neighborhood youths as they build new restaurants as an outreach and advertisement of PepsiCo's traditional values and "caring" attitude.
10.6 Operational
Hire and train new employees in all areas including customer relations. KFC must deploy a program that will create a more disciplined work force. That can be accomplished by giving a bonus for those that had high punctuality rates, good growth perspectives, etc. Prepare and test menu items in restaurant and maintain high cleanliness standards. Increase efforts to improve work environment for workers and customers such as implementing a smoke-free facilities policy of all restaurants.
10.7 Financial
KFC needs the financial backing of PepsiCo to expand into the nontraditional locations and foreign countries. Due to increased competition domestically, the financial stability of PepsiCo is essential for KFC and the other restaurant divisions to expand into the nontraditional locations. PepsiCo needs to increase the amount of funds budgeted for employee training programs, community betterment programs, and equipment for new franchises. They can still increase funds used to promote beverages in their battle against Coke, but not concentrate all their monies in that direction.
10.8 Sustaining Competitive Advantage
Sustaining competitive advantage means to create unique service and product, which cannot be easily imitated. This would include:
(a) International SO Standards
(b) Cleanliness of restaurant
(c) Restaurant of the year
(d) Unique advertisements
(e) Unique packaging
(f) Introduce new products frequently
(g) Obtain feedback from customers and making modifications to meet their needs
11.0 Conclusion
The global fast-food market is competitive, with rivalry, substitutes, and the threat of entry presenting the strongest sources of competitive pressure. Some country markets are more competitive than others; however the U.S. fast-food market – high saturation so growth opportunities are relatively lesser but still can grow considerably by offering franchisees to open more outlets. Declining margins in the fast food chains reflected that increasing maturity in the fast food industry.
We anticipate that, despite the inherent risks and generally higher general and administrative expenses of operations, we will continue to invest in key international markets with substantial growth potential. As an alternative to domestic expansion, many restaurants began to expand into the international market. Our selection is to expand into Mexico and Puerto Rico as the target market niche is big enough to be profitable and offers good growth potential. Franchising to build a presence in Mexico and Puerto Rico without risking any resources. Being a first mover will help KFC to build up their reputation and image with the buyers.
The world is divided in different regional markets (like Europe, Asia, Latin America, and etc.). If a crisis happens in a specific country, it tends to affect all countries within the same economic region with which it has close economic relations, therefore, our recommendations for the international strategy will begin by focusing into Mexico and Puerto Rico.
12.0 References
1. The Manager, http://www.themanager.org/Models/p5f.htm, Accessed 18th
August 2003
2. PepsiCo, http://www.pepsico.com/investors/annual-reports/1996/financial/page6.shtml , Accessed 5th August 2003
3. George E. Belch & Micheal A. Belch, 2001, “ Advertising and Promotion”, McGraw-Hill
4. Kleindl, Brad Alan, 2001, “Strategic E-Marketing: Managing E-Business” South-Western Publishing
5. Susan Dann and Stephan Dann, 2000, “Strategic Internet Marketing”, John Wiley and Sons
6. Kotler & Armstrong, “ Principles of Marketing”, 9th Edition, Prentice-Hall, Inc, Upper Saddle River, New Jersy
7. Arthur A. Thompson. Jr. & A.J. Strickland III, 2003, “ Strategic Management”, 13th Edition, McGraw-Hill
8. Subhash C. Jain, (2001), “International Marketing”, 6th Edition, South-Western College Publishing
13.0 Glossary
Brand A name, term, sign, symbol, or design, or a combination of these intended to identify the goods or services of one seller or group of sellers and to differentiate them from those competitors.
Culture The complexity of learned meanings, values, norms and customs shared by members of society.
Franchise A contractual association between a manufacturer, wholesaler, or service organization (a franchiser) and independent business people (franchisees) who buy the right to own and operate one or more units of the franchise system
Internet A worldwide means of exchanging information and communicating through a series of interconnected computers.
Porters 5 Forces Tool for analyzing an organizations industry structure in strategic process
SWOT Stand for Strength, Weakness, Opportunity and Threats.
Word-of-mouth Personal communication about a product between target buyers, friends family members and associates
14.0 Appendixes
Appendix 1 - Operating Results
Appendix 2 - Consolidated Statement of Income
Appendix 3 – Consolidated Balance Sheet
