CASE WRITE-UP

ON

KENTUCKY FRIED CHICKEN AND THE GLOBAL FAST-FOOD INDUSTRY

PREPARED FOR

RIAD MAHMUD
SCHOOL OF BUSINESS
NORTH SOUTH UNIVERSITY

COURSE: EMB690 – STRATEGIC MANAGEMENT

Prepared By

1. Md. Abdus Sabur – 073353090

2. Gazi Saharul Habib - 0910116090
3. Kazi Ahsan-Ul-Hasib - 0910117090

SEMESTER: FALL ’2010

DATE: December 9, 2010

Introduction

To determine the competitive intensity, and therefore attractiveness of a market we modeled Michael E.
Porter’s five forces. These are

1. Rivalry within the industry

2. Threat of Entry from new competitors
3. Pressures from substitute products
4. Pressures from buyer bargaining power
5. Pressures from suppliers bargaining power
Based on the information provided in case 10 we have analyzed the influence of the above five forces on
attractiveness of global fast-food industry:

1. Rivalry within the industry:

The second competitive force is the extent of competition or rivalry among established companies in the
industry. For instance, if the rivalry is weak, companies have an opportunity to increase prices and gain
more profits. While, if there is a strong competition, companies would compete in prices, which might
result in a price war. This would reduce or limit profitability due to the reduction in the sales margins.

As explained in this case rivalry among companies depends on the following factors:

Price is an issue for undifferentiated product:

If the products are very similar the switching cost of customers is low then price competition is common. If
the products are differentiated and switching cost is high then rivalry is less sensitive. In case of global
fast-food industry switching cost is low and products are quite similar among existing players in the
industry. It implies rivalry is quite high in the global fast-food industry. As a result first food industry is
unattractive.

Number of Competitors and size of competitors:

There are more than 800,000 restaurants and food outlets made up the U.S Restaurant industry. Out of
which full-service and fast-food segments were expected to make up about 65 percent of total food-
service industry sales in 2000. The fast-food businesses are competing globally in the fast-food industry
and the size of some company like McDonald’s, Pizza Hut, KFC are quite large and they are operating
globally. McDonald’s operated the largest number of restaurants which is more than 12,000 in USA and
14,000 foreign units all over 119 countries. Tricon global restaurants operated more than 20,000 in USA
and close to 30,000 non-USA. KFC, Pizza Hut, and Taco Bell restaurants in 85 countries. Because of
their early expansion abroad, McDonald’s, KFC, Burger Kind, and Pizza Hut had all developed strong
brand name and managerial expertise in the international market. This made them formidable competitors
for the fast-food chain. It reflects that global fast-food industry is unattractive in terms of number of
competitors and size of competitors.

If Demand is growing slowly:

The changes in demographic trends in the past two decades, rising incomes, greater affluence among a
greater percentage of American house holds, higher divorce rates, and the fact that people married later
in life contributed to the rising number of single households and the demands for fast food. But due to
immense price competition and saturation of the US and other develop country’s market; all global fast-
food industry is unable to raise its prices to cover the increased costs. As a result global giants focused
on developing country as there are huge growths potential like Latin American countries and NAFTA
region countries. Finally it can be concluded that seeing price competition and industry growth, global fast
food industry is unattractive in developed country and attractive in developing country.

If Brand loyalty does not exists:

In fast-food industry, as it is found in the case brand loyalty is the only identity here. As the name implies
KFC, McDonalds, Pizza Hut, burger Kind including all 35 companies (exhibit 5) has their strong customer
base. Another important thing in Fast-food industry is the test of food. It is a matter of habituation. There
is a natural loyalty to the brand for the test.

So, Brand loyalty is high and as a matter of fact industry is unattractive.

Concentration and balance of competitors:

Concentration of the number of firms in the industry shapes the competitive behavior of the firm. In case
of fast-food industry some giant company like McDonald, Pizza Hut, KFC, Burger King are shaping the
industry and dominated all over the world. So in case of concentration we found global fast-food industry
unattractive.

2. Threat of New Entrants

Threat of entry from new competitors depends on existing entry barriers and reaction from existing
players. Existing Entry barriers are Brand loyalty, Economies of scale, Learning curve effect, Absolute
cost advantages, Access to distribution channels, Government regulations etc.

Brand Loyalty

KFC is brand of example. As we find in the case its customer base is unbreakable unless otherwise its
corporate strategy fails. The rapid growth of first food industry encourage lots of potential competitors who
are not currently operating and competing in the industry to enter and establish their businesses. These
potential competitors might be Heublein, Inc and R. J. Reynolds Industries, Inc or other companies, which
have diversification strategy that includes the acquisition of different companies in several industries. For
example, RJR has a diversification strategy into unrelated areas to its major business. It merged with KFC
in 1982, but it sold it to PepsiCo after 3 years. Therefore, such companies could enter the industry if they
have the capability to compete with other fast-food companies. Potential companies or new entrants
would face some difficulties or barriers that eliminate their entrance. For example, brand loyalty to goods
produced by incumbent companies is considered as a barrier to new entrants as they would take a long
time to shift customers’ loyalty to their products.

Economies of Scale:
The threat of new entrants can be reduced because most of the established companies in the industry
have economies of scale advantage. For instance, McDonald’s has cut its building costs and spread this
fixed cost over large outputs. Also, PepsiCo has improved its economies of scale within its business
operation by adopting the dual branding strategy. Therefore, this enables KFC to improve its customer
base by increasing its menu offerings. This would reduce the threat of new entrants because they will not
be able to compete in the market and hold high cost disadvantages compare to the already established
firms.

Government Regulation:
In addition, government regulations and other bureaucratic procedures make it difficult for new
competitors to enter the market.
At the same time we find in the case that the giant are facing competition with local entrepreneurs who
had grassroots understanding of local language, culture, customs, law, financial markets, and marketing
characteristics. Most case they are overcoming this problem by franchising local entrepreneurs.

In conclusion there is moderate threat of new competition. The sales increased 5.4 percent, to $358
billion in 1999 in United States. The reason behind such a threat existing is due to the fact that the
industry is highly profitable. So, global fast-food industry is moderately attractive for existing giant as well
as new players considering the fact of threat of new entrants.

3.The Threat from Substitute products:

Substitute products are alternative products that satisfy customer’s needs in a similar way to those being
served and provided by the industry. At the same time availablity or affordability would shift customers to
substitute products. As a result, the existence of substitute products acts as a strong competitive threat
for companies as it restricts its ability to increase prices and boost revenue. Similarly, if a firm’s products
have fewer substitutes in the market, it would have a good opportunity to reflect its prices and gain more
net income.
Here we find in global fast-food industry there are numbers of substitutes that fast-food industry faces as
competitive forces. Fine dining, hot and spicy foods, smoothies, wraps and pitas, salads, and espresso
and specialty coffees. As in this case Starbucks, the Seattle-based coffee retailer, capitalized on the
popularity of specialty coffee by aggressively expanding its coffee-shop concept into shopping malls,
commercial buildings and bookstores. Mexican-food is aggressively popular. Japanese, Indian, and
Vietnamese restaurants are getting shape as mentioned in the case. Aged consumers are reluctant taking
fast-food and were more likely to visit dinner houses and full service restaurants.

Another point to mention is that products in each segment of the fast food chains is considered as
substitute for the products that are being offered in other segments. As found in the case, the items that
are being offered in the sandwich segment by McDonald’s might be considered as substitute for other
items offered in the chicken segment by KFC. Although KFC sandwich is not popular due to unique test of
McDee, but this is quite a R&D and marketing failure issue.

So, it can be colcluded that the pressure from substitute, there are pressure but not so potential. Fast-
food industry is attractive in case of pressures from substitute products.

4. The bargaining power of buyers:

KFC is a single company including others is small in number and big in size, which gives them the ability
to bargain for price reduction as they purchase in large quantities from suppliers. KFC as a multinational
company it has large internal cash flow that allows it to invest in cheap and less risky countries(NAFTA
Countries including México) to supply their own input needs (vertical integration). As a result, the
suppliers would be threatened and forced to reduce their prices. The buyers would be able to reduce their
costs and increase the competitiveness of their goods in the market.
On the other hand individual customers can have power over the fast food companies and force them to
reduce their prices. For a first food customer it is just a meal of one sitting, and switching cost is negligible
other than test and appetite satisfaction

Considering both side it can be concluded that the bargaining power of buyers in the fast food industry is
very strong. It implies that the industry is very attractive.

5.The bargaining power of suppliers:

The bargaining power of supplier could be very strong, if we assumed that the buying companies are not
important for the supplier as its business profitability doesn’t depend on them. Therefore, he could set his
own terms and offer them to the buying companies and if they refused to approve on the terms, the
suppliers could go to other buying companies in the industry such as McDonalds if KFC refused the
terms. From this it is clear that the buyer could not force the supplier to reduce prices or improve quality.
On the other hand suppliers could have relatively moderate or weak bargaining power in the fast food
industry. This is because the industry’s products have lots of substitutes that customers can use to satisfy
their needs. Also, the buyer’s products are not highly differentiated, which makes it easy for them to
change their suppliers. This means they don’t depend on one supplier and can switch to other suppliers.
Furthermore, the buying companies such as PepsiCo are not heavily depended on this industry to
generate profits, but it diversify their business operations into several unrelated industries to diversify its
source of income. This helps to reduce the bargaining power of suppliers. Another thing is that the buyers
who distribute the products to end users are big companies that are financially strong. This enables them
to invest their money on cheaper countries such as Mexico and supply their own needs. From this we can
see that buyers can match with the threat of vertical integrating backward and reduce the bargaining
power of suppliers.

As whole suppliers bargaining power is weak on KFC. Consequently attractiveness of fast food market
(KFC) is high.
Conclusion:

So far the concern of global fast-food industry it is needed to conclude in two different aspects. From the
view of developed countries attractiveness of the fast food industry is low as the market is already
saturated. There is extreme rivalry inside the industry although the threat from new entry is low; there is
no bargaining power from supplier and buyer and not so much threat from substitute, Exhibit 1. On the
other hand in the context of developing country attractiveness of fast-food industry is high as growth
potentiality is high, no bargaining power from buyer and suppler. There are some threats from substitute
but it can be minimize by adopting creative marketing policy and pricing. Also the threat from new entry is
there but global giants can compete easily by franchising, brand image and through managerial expertise.

Exhibit 1.

Rivalry Threat of new Threat of Bargaining Bargaining

Entrants substitute power of power of
product Buyer Supplier
Cause Extreme Moderate Not too strong Strong Weak
Rivalry Threat
Effect Very Moderately Attractive Attractive Attractive
Unattractive Attractive

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