Download Case Study – Kentucky Fried Chicken and the Global Fast Foods

Case Study – Kentucky Fried Chicken and the Global Fast Foods Industry
Submitted in the requirements for Section 1, Question 1 in TMA 4
MBA5921 on 28 September 2009 with a word count of 1976
Masters in Business Administration
at the
University of South Africa
Table of Contents
Page
1 Summary 3
2 Introduction 3
3 Value Creation in KFC 4
4 Strategic Issues Facing KFC 6
5 Conclusion 8
6 References 9
1. Summary
Kentucky Fried Chicken (KFC) being one of the world’s largest chicken restaurant chains has
many challenges. Two of these challenges being value creation through its corporate parent
PepsiCo during the 1980’s and 1990’s as well as strategic issues they face in terms of their
expansion internationally more specific to Latin America.
The role of corporate parenting is used as a basis in commenting on the value creation provided
to KFC under the ownership of PepsiCo. The strategic issues that KFC faces in its expansion
internationally specifically Latin America is also commented on using the frameworks of
international strategy. In conclusion, final comments are passed regarding these challenges.
2. Introduction
Kentucky Fried Chicken (KFC) is one of the world’s largest chicken restaurant chains and is
operational in 85 countries with more than 10, 800 restaurants. KFC had grown its business
within the United States through franchisees in the 1950’s and was sold to two businessmen
named Jack Massey and John Brown
Jr. Massey and Brown during the late 160’s turned towards international markets. After a joint
venture with Mitsuoishi Shoji Kaisha who assisted franchising the business internationally, the
business was later acquired by Heublin Inc in 1977.
In 1982, R. J Reynolds Industries Inc. (RJR) acquired Heublin and merged. After RJR had
acquired Nabisco, RJR had attempted to redefine itself as a world leader in the consumer foods
industry which led to the divestment of non consumer food businesses and therefore sold KFC to
PepsiCo a year later. PepsiCo had attempted in diversifying its business into three related
markets which were soft drinks, snack foods and fast food restaurants. Due to the declining
margins of the fast food chains within PepsiCo, the restaurant chains had absorbed 50% of
PepsiCo’s annual capital spending and generated less than a third of its cash flows. This
eventually influenced the business of PepsiCo and reduced its ability to compete against Coca
Cola. In 1997, KFC and the rest of the restaurant businesses under PepsiCo were spun off to
Tricon Global Restaurants.
Through these movements of KFC through the years, the business faced different challenges.
The one challenge was operating under the umbrella of PepsiCo. In this report, comments will be
made in terms of PepsiCo and its operation as a corporate parent. Added to this, is the value
creation that PepsiCo was able to provide to KFC as the corporate parent. Comments are made
on these based on theory in the role of corporate parenting.
The
other challenge being commented on within this report is the strategic issues that face KFC and
its approach to expansion into foreign markets more specific to Latin America. Comments on
these issues within the report are based on frameworks of international strategy which will lead
to a conclusion.
3. Value Creation in KFC
Pepsi co had the strategy of taking advantage of the synergies that existed between the three
businesses but in terms of value creating strategies of diversification (5-82), where Pepsi co can
be viewed as having low opportunities of sharing assets and high corporate relatedness indicates
that economies of scope were not efficient. Pepsi co had transferred management skills from
themselves to KFC and influenced the culture of the business where the encouragement and
sharing of skills and capabilities did not occur. Pepsi co had a one sided approach where they
had dominated the business. This further influenced the resource and capabilities of KFC which
play a vital role in the strategic goal of the business (Grant-131) and did not add value to the
business. Synergies in multibusiness companies have been overrated and corporate parents
should pay more attention to improving performance in each individual business as a standalone
entity (Horn-327).
“The most successful parents concentrate their attention on a few large areas of opportunity
rather than attempting to intervene more broadly: in this way they can both develop distinctive
skills that are specially suitable for the
opportunities they are targeting” (Horn-328). Pepsi Co had certainly intervened into the
business where franchise contracts were changed and cultures were influenced. This had led to
low morale of staff and franchisees which affected the business negatively. There may have been
a more positive outcome if Pepsi co had performed a functional role in assisting KFC in its
business (5-65) where assistance could have been rendered in providing additional finance for
growth or problem areas. Corporate parents should avoid intervening unless the influence will be
positive.
To comment further on the value creation of KFC, it is important for the parent to have
sufficient understanding and discipline to avoid value destruction (Horn-328). Pepsi co had the
culture of performance and promotional opportunities of its own staff into executive positions.
There were many KFC managers that were replaced with Pepsi co managers and were rotated
between the business to obtain greater experience and grooming for the executive positions.
This results in competition between managers for the promotional opportunities that exists and
may lead to exaggerated business performances in order to be seen more favorably. This
specific situation will lead to value destruction (Horn-326).
Value creation may have resulted had Pepsi co abided by the fundamentals in the role of
corporate parenting and value creation which evidently was not efficient.
4. Strategic Issues Facing KFC
When KFC spun off into Tricon Global Restaurants, KFC had
initiated its refranchising strategy and reduced the amount of company owned restaurants from
40% to 27%. This had assisted KFC in alleviating one of its strategic issues in that it was able to
tailor its marketing concept to that of adaptation (7-85). This allowed KFC to adapt to local
market requirements which was managed by people who understood the dynamics of the business
in its own environment. This had further alleviated the issue of establishing company owned
restaurants in smaller markets where operating costs were high and presence of the business and
brand could be established. The other strategic issue of value creation was improved by the
refranchising strategy which allowed the business to expand internationally especially in smaller
markets where company owned restaurants are not feasible.
One of the marketing issues that KFC is experiencing is the limited menu and inability to bring
new products to markets. In this marketing issue and in the international viewpoint, each
country should have an adapted approach. Countries differ in characteristics and culture and
therefore adaptation is important to enhance success of the business. The example of KFC in
Japan (7-85) proves the point where KFC had to amend the product, change its locations and
negotiate local supply of quality chickens contributed to its success in Japan. The same concept
must apply in terms of adaptation in Latin America to alleviate the marketing strategy issues.
Emphasis is placed on the expansion of KFC in the case study
through Latin America where there is a significant market share in Mexico due to early entry but
is experiencing strategic issues in its expansion further as competition has established
themselves in countries of Latin America where KFC does not exist. It is understood that KFC
has had cash flow issues hence the reason for closing down the eight restaurants in Brazil which
hampered its expansion strategy into Latin America.
KFC is in a leadership position in Mexico through its early entry into the market and should
therefore concentrate on maintaining this leadership together with Ecuador and Peru. In keeping
with its Internationalization strategy, geographically Mexico is in close proximity to the United
States and is able to capitalize on regionalization ((7-38) especially with Mexico being part of the
North American Free Trade Agreement (NAFTA). This will assist in KFC managing its costs in
maintaining the business. Further, factor costs like salaries are lower which will assist in
achieving efficiency in current operations as part of its strategic objects of Goshal’s ‘organizing
framework’ (7-81).
Porter (7-25) mentions the fact that ‘home base’ and domestic industry conditions are critical
to international success. This reiterates my comments that KFC needs to maintain leadership
and comparative advantage in Mexico in order to enhance its success internationally. Mexico’s
factor conditions as briefly discussed are an advantage to KFC with salaries being lower and the
advantages in the implementation
of NAFTA. Apart from the lower trade barriers through NAFTA, the economy in Mexico is an
emerging one through new government legislation of privatization and upgrading infrastructure.
Mexico is a demanding environment especially with a population count of over 100 million
people. Related and rival industry undoubtedly involves MacDonald’s as its largest competitor
and without thorough analysis of the diamond model, it is quite evident already that KFC has
comparative advantage. In terms of the strategic issue of expansion into Latin America, the
possibility does exist especially with the ‘home base’ in order and although early entry in
countries like Brazil is no longer possible, the opportunity for success exists.
It may also franchise business units in Mexico which may assist in its Internationalization
strategy. This may create the ability for KFC to utilize its resources better in the expansion
strategy to the rest of Latin America. Being in close proximity to the United States, the
approach strategy of internationalization can be better managed for example the development
and diffusion of knowledge (7-78) can be more efficient where knowledge is developed at the
Head Quarters in the United States and transferred to units within Mexico. Business units will
also be better monitored and the concept of standardization and adaptation or even glocalization
(7-85) can be more efficiently implemented.
Expansion strategies into Latin America may take shape with franchising of businesses into the
required
countries. KFC has lost early entry into countries like Brazil but through franchising, it may
leverage on better local responses and implementation of the strategy. In franchising the
businesses, it will also assist in creating a faster expansion of the brand through the country
therefore giving the business a fast moving advantage. Franchising businesses through Latin
America and the creation of better utilization of resources may improve cash flow issues
currently experienced. This will improve other strategic issues like expansion in larger markets
around the world example Australia, China and Thailand.
Franchising through Latin America may prove to be more challenging compared to that of
Mexico due to the geographic proximity of these countries from the United States. Countries
like Brazil are far which may result in lack of efficiency and problem solving may be difficult,
however factors like language barriers and cultures in the different countries may not be an issue
through franchising due to local responses of the businesses. Other strategy issues that may be
mitigated through franchising and local response is the market structure, customer needs, buying
behavior and infrastructure.
5. Conclusion
The two challenges commented on within this report was the value creation of KFC under
PepsiCo being the corporate parent and the other were the strategic issues that KFC has faced
in the expansion strategy more specific to Latin America.
PepsiCo should not have intervened into the business of
KFC like they way they did. In an attempt to use the synergy between the businesses as an
advantage, intervening had resulted in value destruction. PepsiCo should have rather performed
a functional role and assisted KFC in its business. Value creation may have resulted had Pepsi
co abided by the fundamentals in the role of corporate parenting.
Strategic issues being faced like cash flow, language barriers, culture and economy of the
countries that KFC is expanding into will be alleviated should KFC take advantage of its
franchising strategy. In having a strong ‘home base’ in Mexico and franchising business into
Latin America may provide additional resources and cash flow to strategize further expansion
into larger markets. Although KFC has lost early entry advantage into countries like Brazil,
through franchising, they can create a fast moving advantage and a faster expansion of the brand
into other countries.
7. References
1. Grant RM. 2008. Contemporary Strategy Analysis. 6th edition. New York: Wiley
2. Open University. 2006. Analyzing the External Environment: study guide for B820. Milton
Keynes: Open University
3. Horn SS. 2004. The Strategy Reader. 2nd edition. Oxford: Blackwell
Section B
Question 2 (Word Count - 977)
Management tools and models refer to the theory and concepts that are used in a business.
These models are research based and proven to be of value should they be implemented in the
area of business that they are required. There are models available for just about every
sector of business that it can be used in order to enhance efficiency within a business. One
specific model that is used as an example is the five forces model of Porter.
The five forces model is used to analyze the external environment of the business specific to
competition and is proven to be valuable in an attempt to obtain competitive advantage in the
industry. The question is whether a model like this has taken the place of strategy?
In the organization I am currently employed at, it is easy to get caught in a scenario where there
exists new competition in the industry and strategy of the organization now seems to be not as
important or forgotten. This may be due to the fact that the new competitor may now obtain
sales volumes which will influence the performance of the business unit in that specific area. The
initial thought would be to compete as aggressively as possible to maintain our own business. In
this case, the five forces model may be implemented as a tool to analyze the competition and
maximize competitive advantage. Management tools and models as in the example above merely
assist the business in its operations management. The five forces model in the example above will
now provide information to the business to enhance its operation on a day to day basis in order
to create a healthier competitive environment. The model has offered the business a short term
solution in which it may feel a little more comfortable.
This very same model however is used in the process of strategy formulation
(2-20). In the analyzing stage of the process of strategy formulation, the external environment is
analyzed by various models and the five forces model is one that is significant. It is clear that a
quick solution is required in some businesses to resolve an issue as soon as possible and may
lack the discipline to follow the process of strategy formulation to gain the ultimate advantage.
This example is fitting to many businesses but contravenes further teachings of Michael Porter,
“operational effectiveness is a necessary, but not a sufficient, condition for superior
performance’ (1-18). He further argues that “For superior performance, strategy is essential in
order to guide and shape the operational activities” (1-18). Operations and strategy can be
easily confused but are very different from each other.
Management tools and models are used in the process of strategy formulation in a manner to
achieve its objective. When analyzing the environment, these models are used coupled with the
models used in choosing the type of strategy to enhance the objective and ensure greater
success. If the entire process of strategy formulation is not adhered to, this may result in these
models adding value to the operation only thereby proving the statement correct that these tools
and models have taken the place of strategy.
In the article ‘The Icarus Paradox’ (Horn, 461), it can be seen as in the example of my own
organization, when things go wrong, operations tend to improve to counter what is going wrong.
This
reduces the opportunity of organizational learning when the organization develops tunnel vision
and loses flexibility. What needs to happen is that the process of strategy formulation needs to
be followed. Strategy formulation assists in critical evaluation and reflective thought to enable
organizational learning and enhance the culture of the organization. In the examples provided,
this did occur due to the process not being followed and hence the tools and models taking the
place of the strategy.
Further examples include the Red Cross (8-8) and Japanese companies rarely have strategies
(Horn, 44). The Red Cross which is an internationally renowned organization for the assistance
that they provide to societies around the world has faced its challenges like many businesses.
The organization, although well known, was undergoing cash flow issues. The organization had
operated its business on a day to day to basis with no strategy in place. Since the appointment
of Mike Whitlam as director, a strategy was put in place over a period of five years and had
attempted in turning the business around. By staying with the process of strategy despite the
demands and pressures on his resources, the Red Cross business had improved.
The process of strategy formulation also becomes more complex depending on the type of
business. In terms of the complexity of the business, the process of strategy formulation can be
lost especially where there are lack of resources which organizations compete for. We now have
a situation
where the organization has to deal with a complex business as well as skills shortage as a lacking
resource. These organizations fall into the same trap again, develop the tunnel vision and lose
the process of strategy.
It is quite evident in the examples provided that the process of strategy formulation is not a
simple process to adhere to. There are far too many factors that can affect efficient
implementation of the process like the type of business, resources, geography, culture, political
and social systems (1-26, 27). It would require discipline from the management structure of the
business to ensure that the process is followed through however, seeing this complexity, it
makes sense that many businesses fail to follow the process of strategy formulation. If the
process of strategy formulation and implementation cannot be efficient, the organization is going
to rely on management tools and models to maintain the business and reinforces the point made
by Porter ‘Management tools and models have taken the place of strategy’.
Question 3 (Word Count - 747)
Corporate management involves the top management of the organization where priorities in the
business are different to that of middle and lower management. Corporate management is
responsible for the corporate strategy rather than business strategy attempting to create
attractiveness in the industry (Grant-20). Corporate management however goes beyond the
thought of corporate strategy (Grant-419). Corporate management includes fostering cohesion in
the business, identity and provides the organization with direction. Corporate management in an
organization must be able to add value. This can be considered as one of key priorities of
corporate management.
There are three main activities through which corporate management can add value. These are
managing the corporate portfolio, exercising guidance and control over individual businesses and
managing linkages among businesses through the management of resource and capabilities. In
managing the corporate portfolio, portfolio planning is vital to ensure that there is adequate
allocation of resources, setting performance targets, monitoring cash flows and growth and very
importantly is the formulation of business unit strategies within the multibusiness organization.
Adequate allocation of resources as seen in General Electric where delayering of the
organizational structure was done which added value to the organization (Grant 4-36). This had
resulted in the business heads reporting directly to the CEO therefore speeding up their
responsiveness. Market penetration, market development and product development can be seen
as part of the corporate portfolio and therefore monitored through corporate management. As
proven in the case of General Electric, efficient management of the corporate portfolio in its
entirety is a priority for the corporate management of a global company.
The second activity which corporate management must see as priority is the management of the
individual businesses. This pertains
to the parenting role of the multibusiness organization. The corporate management team must
not intervene into the business unless it is necessary. In the case of General Electric which is a
diversified global organization, corporate management may occupy head quarters which can be
seen playing the role of a corporate parent. The role of parenting if efficient will add value to the
organization. In the case of KFC where PepsiCo was the corporate parent, inefficient parenting
can result in value destruction and therefore parenting can be seen as a priority. Another
priority being part of the management of the individual businesses is the strategic planning
system. Corporate management must create a strategy making process within the organization so
that the individual business will develop decentralized business strategies that will add value to
the organization.
The third activity of managing linkages between businesses relates more to the resources and
capabilities of the businesses. It is the responsibility of corporate management to ensure that the
most suitable resource is allocated to the right area. This may not seem important at first glance
but in the case of KFC, PepsiCo had allocated resources to the business units that were not
suitable and lacked the experience of the industry. This misallocation of resources can lead to
value destruction of the business units.
Although corporate parenting allows autonomy of the business units, financial control by
corporate management is another priority which
is considered. As in any business financial performance is a priority. Budgets, targets and
financial variables must be monitored of the business at corporate level.
Management processes and level of management (Grant-439) further reiterate some of the
priorities already mentioned. Corporate management must provide leadership and enforce the
corporate purpose. Values of the organization are of importance strategically and therefore are a
priority for corporate management to ensure that the organization is steered in the direction to
live up to the values of the organization.
Corporate management must monitor ethics and corporate governance of the organization. This
poses a risk to the business and may affect shareholder value as with Parmalat and Enron (4-53).
Risk audits are certainly a priority and should be monitored by top management.
From a global perspective in Goshal’s ‘organizing framework’ (7-81), strategic objectives of
achieving efficiency in current operations, managing risks and innovation, learning and adaptation
is the responsibility and priority of corporate management. This must be given priority as these
enhance competitive advantage. Corporate management must also ensure and take priority of
the vertical integration of the organization as this may improve performance of the organization.
To conclude, the priorities of corporate management lie in the three broad activities of corporate
management. These activities must create value for the organization and if proven do so, should
be