YUM!

Travis Book

YUM! By Travis Book March 19, 2013

I.
I. II. A. B. C. D. III. IV. A. B. C. V. A. B. C. D. E. F. G. VI. A. B. C. D. VII. A. B. C. D. E.

Contents
Core Problem / Issue .............................................................................................................................. 3 SWOT Analysis .................................................................................................................................... 3 Strengths ........................................................................................................................................... 3 Weaknesses ....................................................................................................................................... 4 Opportunities..................................................................................................................................... 4 Threats .............................................................................................................................................. 4 Alternatives.......................................................................................................................................... 5 Recommended Strategy ....................................................................................................................... 6 Phase 1 : Now ................................................................................................................................... 6 Phase 2 : 1 3 years.......................................................................................................................... 7 Phase 3 : 3+ years ............................................................................................................................. 7 Appendix A : McKinsey 7-S Framework ............................................................................................. 8 Strategy ............................................................................................................................................. 8 Structure ............................................................................................................................................ 8 Systems ............................................................................................................................................. 9 Shared Values ................................................................................................................................... 9 Style................................................................................................................................................. 10 Skills ................................................................................................................................................ 11 Staff ................................................................................................................................................ 11 Appendix B : Financial Ratios .......................................................................................................... 11 Liquidity ......................................................................................................................................... 11 Asset Management .......................................................................................................................... 12 Capital Structure ............................................................................................................................. 12 Profitability ..................................................................................................................................... 13 Appendix C : Macro Forces ............................................................................................................. 14 Economic ........................................................................................................................................ 14 Political / Legal / Regulatory .......................................................................................................... 14 Social / Demographic ...................................................................................................................... 15 Technological ................................................................................................................................. 15 Ecological........................................................................................................................................ 15

Page 1

YUM! By Travis Book March 19, 2013 VIII. A. B. C. D. E. Appendix D: Porters 5 Forces ....................................................................................................... 16 Rivalry ............................................................................................................................................ 16 Barriers to Entry.............................................................................................................................. 16 Substitutes ....................................................................................................................................... 16 Supplier Power................................................................................................................................ 16 Buyer Power .................................................................................................................................... 17

Bibliography ............................................................................................................................................... 18

Page 2

YUM! By Travis Book March 19, 2013 I. Core Problem / Issue

Since Pepsi divested YUM! Brands from their operational strategy the company has had to manage the 4.6-billon dollars of debt and reinvent itself to assure that its brand identity is strong and growing. They are a company that is trying to define how to operate and provide products to feed the world in a competitive global landscape. At the point of divestiture the company was generating a significant amount of their revenue from their international markets. In 1997 approximately 20% of the companys profits came from international operations. (Siegel & Poliquin, 2012, page 1). The core problems facing Yum! Brands consist of the following: 1) How should the company continue to grow and gain new market share in other countries, 2) Properly evaluating the next market that will emulate their success in China and allow them to leverage their standardized business process and capitalize on the first mover advantage in new markets, 3) Continue to develop a strategy that enables the company to implement new product offerings, such as Taco Bell, in the Middle East, and 4) The continued execution and development of their existing international markets, which is driven mostly by their strong position in China and implement a strategy that will capture new market share domestically.

II. A.

SWOT Analysis Strengths

YUM! Brands has done an excellent job in building shareholder wealth after the divesture form Pepsi. They have been very successful at establishing a strong, identifiable brand and position worldwide. In addition, the emerging countries continue to increase their appetite for fast service restaurants and industry consumption continues as new markets and products are launched. A successful company in a growth driven industry along with vibrant culture will make YUM! Brands a great employer. Other strengths include the following: YUM! Brands has articulated a clear, defined root strategy and operational strategy. They have successfully executed their root strategies through operational and organizational strategies using standardization to generate efficiency. They have strong product development allowing for continued growth in existing and new markets. A system of strength is their standardized operational message CHAMPs (Cleanliness, Hospitality, Accuracy, Maintenance, Product Quality and Speed) (Siegel and Poliquin, page 5). Strong leadership program throughout the company has provided consistency. Financially, the company has strong earnings and continues to maintain a strong profit margin. They do an excellent job utilizing their assets and generating revenues

Page 3

YUM! By Travis Book March 19, 2013 B. Weaknesses

The company competes with very strong competitors in highly competitive markets both domestically and internationally. Though the company has a great deal of strengths, the company also has areas of improvement in an industry that is constantly evolving based upon consumer taste, price and health impact. Other weaknesses include the following: C. Strong leadership is important to a companys success but it can result in an autocratic style. The company declining market share domestically and lack of innovation to address the issue. Continuing to develop and manage the required human capital to encourage product innovation to adjust to changing consumer tastes in their international markets. Though the company is strong financially, they could do better in collections of accounts receivable and increase inventory turnover. Though low leverage of debt is good, it can also been seen as an opportunity to expand operations and increase revenues. Overleveraged could hinder strategic flexibility and limit future growth opportunities Underperforming Brazil markets. Opportunities

The biggest opportunity for the restaurant industry is that there is emerging economies and growing middle classes all across the world. This allows for a company that can capitalize on the first mover advantage to consistently grow their revenues. The key in taking advantage of this opportunity is understanding consumer taste and preferences, and translating this knowledge into product offerings that satisfy the evolving consumer need. Other opportunities include the following:

D.

Finding the next China. Consumer demand for other product offering in their established markets (i.e. China). Consumer demand for products in other emerging economies and additional offerings generated from market specific innovation (Middle East, Brazil and Africa). Continued operational efficiency, innovation from their large workforce, leveraging new countries presented issues related to their business model. Continued implementation of CHAMPS system to differentiate its customer service to build stronger global brand. Continued development of promotional programs that build Brand Loyalty. The restaurant market has high barriers to entry and leveraging this to continue its global expansion. Strong power of supplier of raw materials. Threats

There is currently a lot more pressure on industries that contribute negatively to public health care costs to be more transparent and conscientious with regards to the ingredients and the products they are offering domestically. There should be a concern and understanding that this could become a worldwide trend that could drastically affect revenues in the future. This idea has been supported by recent research and

Page 4

YUM! By Travis Book March 19, 2013 government reports on the increasing epidemic of obesity and diabetes in America. This has resulted in many governmental agencies considering steps to prevent and reduce consumption to prevent rising health care costs. Other threats include the following: Local, State, and Federal regulations and taxes to reduce consumption in the U.S. Changes in the Local regulatory environment that could enact regulations that limit the type of food consumers eat. Potential Federal and State fat tax to provide for increased state health care costs. Continue negative press on obesity and diabetes. Negative press regarding the health and ingredient quality of the products offered. Restaurant industry has a lot of substitutes, at which there are low switching cost. Not being able to control input costs and commodity prices could have operational impacts and affect their contribution and profit margin. Alternatives

III. Growth

In an industry that is very competitive and is going to continue to be due to emerging economies and economic stability, YUM! Brands must consider growth as a primary strategy. Growth may not be in existing markets but mostly in international. The company could look at an inorganic growth model and acquire more restaurants in the targeted countries to assure first mover advantage. The company could also purchase a domestic competitor to grow and eliminate the declining revenue in the united state. Another long-term growth strategy would be to develop popular product offerings that could be offered at grocery stores. This would be a product where the consumer could purchase and eat products in the comfort of the their home, and the product would be opened to a less capital intensive retail channel that is currently in existence. Status Quo Status Quo would consist of only continuing to expand internationally, looking at ways to continue to cut costs both variable and fixed. The company would continue to offer the same products in the United States and not implement any innovation or inorganic growth to acquire additional market share. Also YUM! Brands would not address the recent changes in the political and regulatory landscape and or they would not concern themselves with a strategy that addressed the risk of regulatory agencies limiting consumption of unhealthy products. They would effectively stay true to their original root and operational strategy and continue to build their brand with the existing unhealthy products. This could present concerns with their public relations campaign since these foods have been linked by research to obesity

Page 5

YUM! By Travis Book March 19, 2013 and diabetes. Although this would be considered Status Quo, I am not sure that it would be a very successful option. A deviation of this option would be for YUM! Brands to remain in status quo centered around their root and operational strategies but continue producing their unhealthy products and also provide small selection of alternative healthy products. This will place the onus on the consumer and the market to decide if the they want to pay for the healthy alternative. This will prevent the company in having to revamp their menus and product offering. Also continue to evaluate their current position in the United States and reduce risk buy transitioning into the Franchise business model. Combination A combination approach to strategy would include adopting a status quo around their current brand growth strategies in China in the short-term while reviewing the opportunities to grow into grocery products that can increase exposure and brand recognition. After achieving short-term status quo and implementing mid-term growth strategies, they could then develop and launch healthy product offerings in all their locations domestically to appease the political pressures.

IV. A.

Recommended Strategy Phase 1 : Now

The first phase of implementing a recommended strategy should focus on improving areas of weakness and taking immediate advantage of areas of opportunities. A better strategy of improving the collection of their accounts receivable plus a plan to turnover inventory to improve their overall financial strength will allow for more operational flexibility. They should also focus on generating more revenue to pay down their debt obligations. This will help with future growth and will not become a limiting factor for future growth and flexibility. Responding quickly to consumer demand and capitalizing on the first mover advantage should be an immediate strategy that they should adopt. Exploiting and expanding new emerging markets such as India, Middle East, Africa, Brazil and Russian should be a main focus to help emulate the success in China and to continue to grow revenue. This is very vital to the company since their root strategy is to build a leading brand in China in every category and establish global dominance. This will protect the company as China begins to transition from growth mode to mature, just as the United States did. Another immediate opportunity would be to retool and evaluate the offering in the declining market domestically and craft a more aggressive strategy to deal with declining revenue by recapturing market share. They can continue to develop and manage their human capital to encourage product and marketing

Page 6

YUM! By Travis Book March 19, 2013 innovation especially in the United States to help drive revenue growth. This evaluation should include understanding the US brands position, consistency and the required rate of return. This could improve as the economy improves but the company needs to be in a position to regain market share from their competitors. This will require innovation, which will be pivotal in the success of gaining the domestic market share. B. Phase 2 : 1 3 years

After implementing immediate internal strategies to strengthen financial and stockholder returns, the company should focus on organic and inorganic growth. Given that the trend is towards more sensitive consumers eating habits the company needs to continue implementing and are looking for ways to incorporate more nutritional and healthy alternatives to evolve with change regulatory environment and consumer preferences. In addition, they should continue to review possibilities to partner or acquire companies that already have established restaurants in the selected growth markets and implement their standardized process to achieve value and quicker brand recognition and loyalty. C. Phase 3 : 3+ years

Based upon the success of the growth strategy, the company needs to continue to address and monitor sales in the domestic markets to assure that it does not continue to decline to a point that it cannot be rebirthed. If the company cannot successfully increase market share then they should consider acquiring some of their competition since they will have the financial flexibility to grow inorganically. They need to consistently evaluate all of the markets and attempt to drive innovation for new products and marketing strategies. This could include trying to leverage new promotion ideas and technologies.

Page 7

YUM! By Travis Book March 19, 2013 V. A. Appendix A : McKinsey 7-S Framework Strategy

The YUMs root strategy that has been communicated by their mission and vision is to be the defining global company that feeds the world (Siegel and Poliquin, p 1, 2012). Based on their historical performance and success, the company would like to replicate the success in other markets that they are pursing (i.e. the Middle East, Brazil Africa and Russia). Yum! Brands is committed to continuing the success of the company since the divestiture from Pepsi. Our success has only just begun as we look forward to the future, one which promises a long runway for growth, especially on an international level.( Siegel and Poliquin, p 1, 2012). This strategy successfully articulates the companys competitive direction that provides clear objectives, and business scope but lacks the clear understanding of what their competitive advantage or value proposition to their customers. Their strategy is focused on not just competing in todays market place but how to continue their success and competing for future success in a global market. The companys operational strategy has continued to evolve over the last ten years. The company focuses on operational excellence as their foundation and strives for standardization but still finds a way to foster innovation in each of their markets. The company is trying to build their brands to be Dynamic and Vibrant everywhere which is articulated at every store by their operational approach of CHAMPs (Cleanliness, Hospitality, Accuracy, Maintenance, Product Quality and Speed). This is an expectation of everyone within the organization and at their franchises. There might be a slight difference in execution depending on each market but the expectations are consistent. B. Structure

Given that the company has been spun off from Pepsi about 15 years ago, the business life cycle for the company is more complicated than just stating growth or mature. The business life cycle should be determined and understood based on each market they operate as well as their business units. Their existing domestic business would be classified as transitioning from mature to decline. The Chineses market would transition from startup to growth and the other business units would still be considered startup. As they continue to develop and launch new restaurants to consumers in various consumer markets around the world, the companys life-cycle stage will continue to evolve. The company has continued to position themselves in strong growing markets, which would be considered their core business units for growth and divesting stores that are not in the core area and capitalizing on the franchise arrangement. This helps reduce risk and maintains strong revenue. Based on

Page 8

YUM! By Travis Book March 19, 2013 this structure and the relationship with their franchises to produce and deliver their food products to consumers, the structure could be defined as intensive tech in that they purchase all of their inputs from multiple local suppliers and then they process the product and then price and sell the product to their customers. Although this is an intensive process the company has streamlined and provided continuity to the process to make sure that there is consistency and that it is as simple as possible. C. Systems

The company possesses its own systems and process that support their mission as a global company that feeds the world (Siegel and Poliquin, page 1, 2012). Yum! Brands most notable system is that for each product offering (KFC, Pizza Hut and Taco Bell) the company is able to standardize the entire process and equipment to make sure that there is continuity and that they are able to leverage their experiences. For example, they use only two suppliers for their fryers for all of their KFC stores to assure quality control, safety and consistency. This also enables them to capitalize on the economies of scale by allowing the company to have strong purchasing power with their suppliers. Another system that is instrumental in the standardized process is that every store is a training store. This fosters the concept that every store is standardized and that there will be consistent training no matter what location. Every store is taught to champion the operational message CHAMPs (Cleanliness, Hospitality, Accuracy, Maintenance, Product Quality and Speed) (Siegel and Poliquin, page 5). This concept is integrated into every store to assure that there is a systematic process for the customer experience. Employees are encouraged to show innovation with respect to Marketing and product development, but insists on having consistency on the companys leadership program and customer service expectations. Local suppliers and local labor are another important component of the system for YUM!. So important that it could determine the overall success and the product variety that is offered in each market. They implement strategies to connect with local suppliers and to attract talent from the local labor force. This helps the company be competitive in the market and to have a better understanding of each markets needs by recruiting experienced consumers to work for the company. The company also capitalizes and reduces it operating cost by standardizing their franchise contracts. This creates consistency to their business model that is central to their success (Siegel and Poliquin, page 4, 2012). D. Shared Values

The company has communicated their commitment to their internal and external constituents as well as the community. The company possesses superordinate goals that help guide the companys execution of

Page 9

YUM! By Travis Book March 19, 2013 their mission, vision and business strategy. This is communicated in their Corporate Social Responsibility framework and their iconic expressions Future Back Vision and Dynasty Growth Model. YUM! Brands CSR

People Food Community Environment

(YUMCSR Website, 2013)

This creates the framework in how the company will operate internally, externally and how their business model serves and impacts the community. The CSR is a defined concept that will allow them to continue to be successful in the global market by communicating the importance of acting as a good corporate citizen.

YUM! Brands Future Back Vision

Famous Recognition Culture where everyone counts Dynamic, vibrant brands everywhere with one system operational excellence as our foundation A Company with a huge heart

(YUMCSR Website, 2013) This sets the tone and communicates the culture internally and externally. It is apparent that their commitment extends to the communities. E. Style

The companys management style suggests that David Novak is a strong leader that is continuing the success of the company through the different business cycles that each business unit faces. His actions and leadership model implies that he portrays an autocratic style. This is demonstrated based on the companys initiative to standardize their business model and create a standard leadership model that is utilized in every location. Leaders throughout the company are able to develop award systems that are shaped by their personality, but there is still the requirement to implement the corporate leadership program that has been established. More importantly there is a sense of commitment to their employees that includes not just financial rewards but creating opportunity for professional development. The leadership model and the training

Page 10

YUM! By Travis Book March 19, 2013 program is in place to assure that every employee is successful in their employment. Not only is this their their commitment to their employees but also the local community that they operate in. F. Skills

The managerial and technical skills demonstrated by the company are evident based on their execution of their strategy since their spin off. YUM! executive team has been proficient in executing their root and operational strategy and adapting to the innovations in the international markets. Unfortunately they have not been able to implement substantial innovation to become more competitive in the domestic market. They have been able to leverage their brand around the world to become an icon of China and other emerging countries. They have been able to successfully implement a very successful sustainable growth strategy and are consistently evaluating their international markets for additional product offerings. Time will tell if the executive management can fend off their domestic competition and either rebrand or innovate to gain market share domestically. G. Staff

As indicated in each companys skills and style, executive leadership has played a vital role in the development and execution of root, operational, and organizational strategies. The company has figured out that by utilizing local labor markets to staff their restaurants, it has enabled the company to leverage cultural experiences and innovations to their product offerings. They allow their employees to innovate with regards to marketing and product development to enhance and add value to the business. This allows specific markets to customize the food on the menu to achieve a stratifying taste to meet the needs of the local market. As mentioned above, leadership has been centralized to assure that there is a consistent message being communicated. Even though leadership is centralized the company fosters innovation in marketing and product development. This business model aligns with the companys overall strategy of exploiting the emerging countries and establishing the companys brand globally. This certainly creates the opportunity to take advantage of the concept of being a first mover into a market place because of the systematic process that is created.

VI. A.

Appendix B : Financial Ratios Liquidity Current Ratio YUM!s has improved their liquidity to better cover their liabilities but their current liabilities exceeds their currents assets. This is concerning since the company might be having issues paying their current liabilities. Lower than 1 doesnt always indicate a critical

Page 11

YUM! By Travis Book March 19, 2013 problem, but rather, something management should be aware of. In the fast food industry this might not be as big of a problem since the inventory turns over faster than the payment of the associated liability. Quick YUM! had been demonstrating an upward trend in improving liquidity but during 2012 had taken a step back. They could be having issues converting existing inventory into sales. Average Collection Period (days) YUM! has been pretty constant in maintaining their collection of accounts receivables maybe if they could figure out how to reduce this number their liquidity would improve. Inventory Turnover YUM! should consider increasing its inventory turnover to improve their liquidity position.
Liquidity 2012 % 2011 % 2010 % 22 % 49 % -1% 15 % 2009 % 25 % 29 % -7% 2008 % 31 % 96 % 6% 13 % 2007 % 28 % 35 % 10 % 13 % 2006

Current Ratio

0.87

Quick Ratio Avg Collection Period

0.49 46.58

-9% 22 % 2% 18 %

0.95

0.6 45.84

1% 13 % 0% 32 %

0.94

0.73

0.55

0.72

0.52

0.68 45.96

0.35 46.43

0.25 49.82

0.49 46.94

0.32 42.05

Inventory Turnover

33.62

39.57

52.22

59.88

-4%

62.47

70.34

79.71

B.

Asset Management Total Asset Utilization They have demonstrated consistency that they are utilizing their total assets sufficiently to generate sales. Fixed Asset Utilization Similarly, they utilize their fixed assets to generate over three times the amount in sales.
2012 Asset Management Asset Turnover Fixed Assets Turnover 1.53 3.3 % 5% 4% 1.45 3.16 2011 % -1% 7% 1.47 2.94 2010 % -8% 3% 1.59 2.86 2009 % 3% 5% 2008 % 6% 7% 2007 % 3% 2% 2006

1.64 2.99

1.54 2.79

1.59 2.74

C.

Capital Structure Debt-to-Assets The firm is maintaining a moderate to higher level of long-term debt. This leverage can limit company future strategic flexibility and decisions. Debt-to-Equity Similarly, they have a high ratio of debt to shareholder equity which means the company is well capitalized.

Page 12

YUM! By Travis Book March 19, 2013 Times Interest Earned Given that the company has a higher level of debt, it would be expected that the amount of interest expense compared to operating income would be high.
2012 2011 2010 2009 2008 2007 2006

Capital Structure

% 17 %

Debt to Assets

1.35

5%

1.28

Debt to Equity

1.37

-33%

1.82

2% 25 % 13 %

1.25

2.28

5% 40 % 26 %

1.18

0.98 Equity< 0

% 21 %

1.19

-9% 44 %

1.29

3.19 19 %

2.82 28 %

1.58

Times Interest Earned

14.06

16%

11.79

10.23

7.53

6.07

7.77

1%

7.69

D.

Profitability Contribution Margin Yum! has maintained a good contribution margin over the past 5 years. This would indicate that they are doing a good job controlling their variable costs. Profit Margin on Sales They also have a consistent profit margin over the last five years and it is trending upwards. Return on Total Assets The strength of the company is evident in their return on total assets, which have been consistently in the teens for the past 5 years. Return on Shareholder's Equity They have a good return on equity, which would make all shareholders very happy with content with the performance of the firm. Primary Earnings Per Share They are consistently increasing their earnings per share which could be a factor of either generating more earnings per share of stock or they could be reducing the total amount of outstanding shares to bolster their earnings. The company did repurchase some shares in 2011 and 2012 but not enough to account for the increase in earnings. Price/Earnings Where stock price is the investor value on future earnings, price to earnings ratio is comparing current earnings to stock price. The company has produced consistent earnings for the last three years that are consistent with earnings in relation to investors expectations. As for 2012 the PE ratio was 1915, the interpretation is investors are willing to pay $19.15 for 1 dollar of current earnings.
2012 Profitability
Contribution Margin Profit Margin on Sales % Break Even in Dollars Return on Assets %

2011 % % 27.60 14.40 -3% -8%

2010 % 28.40 15.60 10% 6%

2009 % 25.70 14.70 5% 9% 11 %

2008 % 24.30 13.40 -3% 3%

2007

2006

27.70 16.80

0% 14 % 16 %

25.00 13.00

-3% -2%

25.80 13.20

17.95

15.13

1%

15.02

-5%

15.71

14.04

4%

13.41

-2%

13.71

Page 13

YUM! By Travis Book March 19, 2013

17 % 13 % 16 % 162 % 7% 20 % 12 % 14 % 62 % 14 % 27 % 48 %

Return on Equity % Earnings Per Share

80.53 3.38

5% 19 %

76.36 2.74

89.29 2.38

234.23 2.22

187.52 1.96

70.77 1.68

19% 13% 53% 76%

57.26 1.46

Price Per Share

64.72

PE Ratio

19.15

9% 12 %

59.01

49.66

29%

35.38

30.28

38.54

58.80

21.54

3%

20.87

24%

15.94

3%

15.45

22.94

40.27

VII. A.

Appendix C : Macro Forces Economic

During the last recession, in general this really didnt have a negative impact to YUM! Brands, they are not as price sensitive as other higher end restaurants. Also this could have been offset by their growth. Based on the general concept of increase GDP, lower unemployment rate and an increase in discretionary income it will only help benefit the restaurant industry. The consumers that did eat at home more frequently will probably start spending more in this industry based on a larger trend. But this presents another issue for the restaurant industry at least domestically, since the largest operating expense for restaurants is their employees wages. Lower unemployment put upward pressure on wages reducing their profit margin and resulting in issues with talent management and retention of A players. There is a concern regarding commodity prices, since the restaurant industry has exposure to commodity fluctuations. This is an issue since the company has to typically absorb the commodity increase and maintain stability in their menu prices. I would suspect based on the recent drought nation wide that the company will see an increase in crop prices since farmers productivity dropped due to the lack of irrigation water and natural precipitation. B. Political / Legal / Regulatory

The restaurant industry is susceptible to political, legal, and regulatory changes both domestically and internationally. As the company continues to operate and expand their operations internationally the political risk and uncertainty increases. The company needs to continue to research the local regulatory framework in order to adapt its business model accordingly. This will ensure success in these new markets. One issue that the company needs to be aware of domestically is regulations related to nutrition labeling of products offered in fast service restaurants. This can be problematic since the majority of the product offerings consist of high calories and fat content. This could educate and change purchasing behavior of consumers in a way that negatively impacts revenue. This is in response to the growing rate of American

Page 14

YUM! By Travis Book March 19, 2013 obesity epidemic in the United States. Additionally, there is the concern that states could respond by limiting caloric intake and product offerings or create fat taxes to disincentivizes consumers from purchasing these products. C. Social / Demographic

As is it correlates with the changing political and regulatory landscape there is a push by consumers tastes and social habitats to eat healthy meals. Consumers are paying more attention to their overall health. This is a strategic concern and disadvantage for fast service restaurants since the majority of their products are considered unhealthy as touched on above. In order to responded to this YUM! Brands need to innovate their product offerings domestically to help rebrand the company in order to reposition. The company should also be evaluating this internationally as well since this trend will continue especially as emerging countries start dealing with rising health care costs. D. Technological

The industry could start to implement new technology to enhance their advertising and their connection between advertising and revenue generation. This could be using social media, a medium to communicate promotional pricing to generate revenue. They could also be implementing the use of data analytics to better understand their consumers purchasing habits and generate better insight on what the market is demanding. This could help enhance the companys ability to react to new markets and triangulate the data to determine and execute success in those markets. E. Ecological

With more emphasis on reducing the carbon footprints and environmental sensitivity companies are being forced to consider how this is impacting their business. The restaurant industry is being forced to deal with these issues. This extends from the type of ingredients they purchase to their facilities total carbon footprint. Companies are implementing processes and strategy to appeal to the more education and environmentally sensitive consumer. YUM! has implemented environmental goals and best practices to address these topics of sustainability and reducing their carbon footprint. The company has implemented policies that encourage them to move towards sustainable sourcing. Not only are they implementing policies but they have implemented projects that Reduce, Reuse and Recycle our food and packaging waste.

Page 15

YUM! By Travis Book March 19, 2013 VIII. A. Appendix D: Porters 5 Forces Rivalry

Industry rivalry is defined by many factors. The first is the definition of the industry followed by the number of competitors and their respective strength. The fast food industry has a number of competitors as this competition forces firms to try to differentiate their brand and offerings to meet their customers needs. First movers, typically have an easier time with establishing their business and continuing to grow. This is driven by the ability to develop a brand and establish brand loyalty. Since the competition is fierce, and that there are an abundant of fast food restaurants locations, it is an industry norm to engage customers with promotions, games, toys and constantly introducing new menu items to lure or incentivize customers into the restaurant. There is also lots of advertising that is used to communicate these promotional strategies. These factors create intense competition between the competitors. B. Barriers to Entry

The fast food industry has high barriers to entry. Any new entrant would have to overcome the firstmover advantage. There are a lot of restaurants that have established strong brand identity and good customer loyalty. Some of these restaurants have become American icons. The major players spend a great deal of capital on advertising in support of their brands. This hurdle makes it tough to gain market share as a restaurant. There is also a capital limitation that would require restaurants to develop an accumulated advantage that the strong brands have already developed. C. Substitutes

The restaurant industry has very strong competition and that is resulting from many restaurants with similar menus. Very few have differentiated their product offerings. The majority of the menus are very similar providing to the consumer many options. The food industry has numerous other substitutes including grocery stores (frozen foods), full service restaurants, delis, hot dog stands, etc. D. Supplier Power

All the ingredients needed for restaurants to provide products come from a variety of suppliers and vendors. All of these products or ingredients are considered a commodity, which creates power to the suppliers or farmers that provide the ingredients. YUM!s business model focuses on using local sourcing of ingredients which directly determines the products offered on their menus. The hope is to create relationships that they are able to leverage but the commodity prices and demand ultimately drive the price of the raw materials.

Page 16

YUM! By Travis Book March 19, 2013 E. Buyer Power

Buyers are their customers. Customers have buyer power due to the low switching costs associated and the amount of substitutes. Price is a key factor to the majority of consumers so this will affect their final choice. If the product is irrationally price compared to their competition regardless of the brand the restaurant will lose the revenue. There is also concern about placement and promotion and lastly the actual product taste and quality. These are all considerations and resulting in high buyer power.

Page 17

YUM! By Travis Book March 19, 2013 Bibliography Siegel, J. and Poliquin, C. (rev: October 5, 2012). Yum! Brands. Harvard Business School. Harvard Business School Publishing, Boston, MA Yum! Brands website: www.yum.com/annualreport/ Yum! Brands CSR: www.YUMCSR.com YUM! 2007 Annual Report (2007). Mergent Online. YUM! 2008 Annual Report (2008). Mergent Online. YUM! 2009 Annual Report (2009). Mergent Online. YUM! 2010 Annual Report (2010). Mergent Online. YUM! 2011 Annual Report (2011). Mergent Online. YUM! 2012 Annual Report (2012). Mergent Online.

Page 18