Fast Food Industry 3

Introduction

KFC bought large corporations operating in the fast food industry. At present, hundreds of branches are scattered all over Europe and Asia. As a fast food stores, consumers who want to have meals in an instant at lower prices, in order to attract a wider scope of market, KFC offers a diversified menu selection. However, since the fast food industry is very competitive KFC should improve its current business strategy. The objective of this study is to: provide a brief description of the fast food industry, analyze the business strategy of KFC using Porter’s Generic Strategies, analyze the internal and external environment using SWOT analysis and finally, evaluate the effectiveness of KFC current strategy.

Characteristic of the Food Industry

Market Size and Growth Rates

The food industry is earning a trillion-dollar per year. In the United States, it is sharing 10% of the gross domestic product. In Canada, it is contributing about 13% of the GDP, while 13% in Mexico, 11% in the European Union, 12% in Latin America and 14% in Asia (Allen, 2006). The trend in the market size and growth rates in the fast food industry over the past year slowed down in the yearly rate of the quarterly growth between 1998 and 2003 followed by subsequent acceleration (KFC Corporation, 2004). With interest rates increasing in 2004, the rate of growth over 2004 and 2005 is slow. On this basis, the longer-run trend in annual growth since 1998 appears downward. The consumer expenditure is still anticipated to grow in the near future, but its rate of growth will be slower than that seen between 1998 and 2004.

Scope of Rivalry

The scope of rivalry in the fast food industry is from local to international depending on whether if the competitor or regional, national or international chain. The two competing fast food giants are KFC and McDonald’s has dominated the fast food industry, however smaller companies like Subway, Wendy’s and Hardee are beginning to make a large dent in fast food sales (Courch, 2004).

Stage in Industry Life Cycle

The domestic market is in a mature stage, while the international market is in the rapid-growth stage. The fast food industry’s curve is flatter, showing slow in growth and can be considered to be in the stage of expansion (Datamonitor, 2004). The fast food industry’s sales is expanding and continuously gaining profit from their cash cow products. In this life cycle of the fast food industry, there are some late entrants and are trying to put all efforts to have a share in the market. The leading company in the industry like KFC and McDonald’s are separating their product from other lower-cost offering in order to increase volume of sales and gain profits.

The Number and Size of Competitors

The number and size of the competitors in the fast food industry is heavily fragmented, Markets with large numbers of firms (KFC and McDonald’s) competitive than markets with small numbers of firms (Wendy’s and Hardee). These small companies behave more competitively than those large firms in the industry (Fifield, 1998). In the fast food industry, the size of firms differs on the other hand inclines to be smaller than other industries (KFC, 2005). Even with a heavy distribution of size in the fast food industry, competitors still have the tendency to have smaller forms than other industries.

Product Differentiation

The companies in the fast food industry have cooperated with the call of the present environment by its efforts to differentiate themselves from competitors, and at the same time creating an attraction to existing and new customers (Hume, 1991). To give a good example, KFC have distinguished itself by introducing new variety of products in the market. They centered their attention to their store quality and the new “finger licking good” slogan. KFC also exerted efforts to the health of their consumers through their adult customers (Lim, 1997). This meal includes salad bottled water, a pedometer and some medical tips encouraging them to walk and exercise more. KFC does also have their low-fat dressing, more salads and more nutritional information about their products so that the customers can choose what to eat depending on their dietary needs (Hume, 1991). This differentiation helps KFC to be superior to their competitors. While McDonalsd’s introduced 30 new products, McDonald’s Big Mac is recognizable compare to KFC Original Recipe Chicken (Moore, 1993).

Economies of Scale

Economies of scale are important because they allow competitors to preserve margins in the presence of intense price competition. In the fast food industry gives economies of scale for the supplier (Lipset, 1991). All the major fast food chain end of the market, suppliers are weaker in bargaining position, especially with KFC because they have the ability to collaborate with the major wholesalers and food manufacturers.

Entry Barriers

The entry barriers in the fast food industry are high (Roye and Towers, 1980). Therefore, the fast food industry can be considered as oligopolistic because of some small rivals inside the industry that are interdependent among organizations with substantial economies of scale significant to the barriers of entry when products may be identical or differentiated. KFC is considered to be oligopolistic.

Industry Profitability

Food industry companies profits approximately $18 billion in pre-tax earnings from marketing U.S. farm foods in 1997, a 4.2-percent decrease from 1996. About 3.5 cents of every food dollar went to pre-tax corporate profits in 1997. By 2003, retail foodstore increased 6.5%, even though there is some marginal sales increase, despite marginal sales increases, by attracting customers to cheaper generic brands and nonfood services such as in-store pharmacies, greeting cards, health and beauty care, and video rentals (Thompson et al, 2005).

Porter’s Five Forces Model

Competitive Rivalry: Very Strong

Rivalry is considered to be the strongest and most important force in Porter’s model (Porter 1980). It represents the presence and number of firms competing for each other’s economic profits. The level of rivalry within the fast food industry can be described as high. This is mainly due to the presence of several competing companies of similar sizes. Moreover, rivalry level increases because of product and service differentiation inadequacy. As fast food stores offer similar products (e.g. burgers, fries, tacos, pizza, pasta, sandwiches), the level of competition is naturally increased. The companies operating within the industry are also very aggressive in making fresh moves so as to increase sales and market share because of the following factors:

• Domestic demand is growing slowly
• Competitors often rely on price cuts to boost volume
• Low switching costs for consumers.

Threat of Entry: Relatively Weak

The threat on entrants is highly dependent on the presence of factors known as barriers of entry (Bejou and Palmer, 1998). Basically, barriers to entry could increase or decrease the chances of new businesses offering products that could rival those produced by existing companies. Naturally, the threat on entrants will be low due to risks of decreased market share potential. There are several examples of barriers to entry. For the fast food industry, the entrant factor can be considered as low due to a number of reasons.

• Economies of scale allow preservation of margins during price cuts
• Relatively unattractive market with slowing growth
• Competitors are working to build brand loyalty through new menus, increased efficiency, and improved service
• Existing competitors have accumulated expertise in marketing and efficiency

Competition from Substitutes: Very Strong

As mentioned, the fast food industry is very competitive; fast food restaurants are operating in a business environment where several major companies are producing and offering similar products or services (Gifford, 1991). In addition, the target markets of these companies are similar as well. The consumers then have several product options to choose from, making the level of substitutes high for this industry:

• Alternatives to fast food are readily available
• Alternatives are attractively priced
• Buyers view the substitutes as satisfactory in terms of quality
• Bargaining Power of Suppliers: Weak

Similar to buyer power, the power of the suppliers with the company is high as well (Gross, 1996). This is because supplier concentration for menu ingredients is low. HP can deal with other suppliers for its production. If the fast food establishment is a multinational type, other suppliers will be very willing to supply goods to such company (Hitt et al, 2003). However, major fast food stores should also note that healthy relation with suppliers is as important as those with its customers. So as not to affect the quality of its products, it is imperative that the company refrain from changing one supplier to the next (Howard, 1999):

• No evidence of supplier-seller collaboration in the fast-food industry
• Fast food supplies are mostly commodities
• Industry leaders are major customers to suppliers
• Bargaining Power of Buyers: Moderate to strong

According to the September report, the bargaining power of customers establishes how much customers can compel demands on margins and volumes (Horowitz, 2004). Customers normally have comparatively moderate to strong bargaining power in the fast food market. This stems from some important characteristics of the market: in particular:

• The fast food industry comprises a large number of small operators
• The industry operates with high fixed costs,
• The fast food product (within defined market segments) is largely undifferentiated and can be replaced by substitutes
• Switching to an alternative product type of fast food or an alternative outlet is relatively simple and is not related to high costs,
• Consumer tend to be price-sensitive,
• Consumer can produce the product themselves if they wanted
• Fast food is not of strategic importance for the customer,
• Buyer’s switching costs are relatively low
• Customers purchase in small volumes
• Consumers are well-informed about sellers’ products, prices, and costs

Conclusion

KFC have pioneered and excelled itself in a whole range of modern management methods, particularly in areas of strategic marketing, consumer research, product innovation and development, personnel management, staff training and management development, quality assurance and testing and lastly technology-oriented purchasing although it was successful it had to sell off most of its overseas operations so that it can maintain its food chains. In management of a firm strategy is needed, to make sure that everything goes well in the company, through the use of strategic management everything done in the company is well organized and no detail is being left out.

Strategic decisions are made whenever companies experience problems, Strategic decisions are made when a company’s current strategy is not working or is being questioned. Capital structure represents the major privilege and due to a corporation’s assets and resources. It includes publicly issued securities, private placements, bank debt, trade debt, leasing contracts, tax liabilities, pension liabilities, deferred compensation to management and employees, performance guarantees, product warrantees, and other contingent liabilities.

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