PHILIPPINE WOMENS UNIVERSITY

Taft Avenue, Manila

A Case Analysis of
KENTUCKY FRIED CHICKEN AND THE GLOBAL FAST FOOD INDUSTRY.

Presented to

DR. TERESITA FORTUNA

Faculty

In Partial Fulfillment of the Requirements for the Subject:

DBHR 603 - ADVANCED STRATEGIC MANAGEMENT

By

PROF. MARIA AMIHAN T. PANES

November 12, 2007

KFC CASE ANALYSIS

Background of the Problem

History
Since its inception, KFC has evolved through several different
organizational changes. These changes were brought about due to the
changes of ownership that followed since Colonel Sanders first sold
KFC in 1964. In 1964, KFC was sold to a small group of investors that
eventually took it public. Heublein, Inc, purchased KFC in 1971 and
was highly involved in the day to day operations. R.J. Reynolds then
acquired Heublein in 1982. R.J. took a more laid back approach and
allowed business as usual at KFC. Finally, in 1986, KFC was acquired
by PepsiCo, which was trying to grow its quick serve restaurant
segment. PepsiCo presently runs Taco Bell, Pizza Hut, and KFC. The
PepsiCo management style and corporate culture was significantly
different from that of KFC.
PepsiCo has a consumer product orientation. PepsiCo found that
the marketing of fast food was very similar to the marketing of its soft
drinks and snack foods. PepsiCo reorganized itself in 1985. It divested
non-compatible units and organized along three lines: soft drinks,

snack foods and restaurants. PepsiCo Worldwide Restaurants was

created to create synergism between its restaurant companies.
During the 1980s, consumers began to demand healthier foods
and KFC was faced with a limited menu consisting mainly of fried
foods. In order to reduce KFCs image as a fried chicken chain, it
changed its logo from Kentucky Fried Chicken to KFC in 1991. KFC had
made a variety of changes on its menu offerings. KFC introduced
Oriental Wings, Popcorn Chicken, and Honey BBQ Chicken and a desert
menu. It also introduced the most aggressive strategy which is the
Neighborhood Program with special menu offerings to appeal
exclusively to the Black Community. KFC had relied to the nontraditional distribution channels to spur its future growth. Shopping
malls, universities, hospitals, kiosks in airports, stadiums, amusement
parks

and

other

high-0traffic

areas

offer

significant

growth

opportunities for fast-food restaurants. In order for more KFC units to

quickly expand, PepsiCo acquired shares in Carts of Colorado, Inc. to
manufacture mobile merchandise carts for their marketing schemes.
By the end of 1994, KFC was operating 4,258 restaurants in 68
foreign countries. KFC is the largest chicken restaurant and the third
largest quick service chain in the world. Due to market saturation in

the United States, international expansion will be critical to increased

profitability and growth.
KFC was one of the first restaurant chains to recognize the
importance of international markets. In Latin America, KFC was
operating 205 company-owned restaurants in Mexico , Puerto Rico ,
Venezuela , and Trinidad and Tobago as of November 1995. However,
KFC had established 29 new franchises in Mexico by the end of 1995,
following the enactment of Mexico s new franchise law in 1990. KFC
anticipated that much of its future growth in Mexico would be through
franchises rather than company-owned restaurants. Although there is
an economic and political instability in Mexico , the Mexican market is
viewed as KFCs most important growth market outside of the US and
second largest international market behind Australia . The danger in
taking a conservative approach in Mexico was the potential loss of
market share in a large market where KFC enjoys enormous
popularity.

Present Situation
The organization is currently structured with two divisions under
PepsiCo. David Novak is president of KFC. John Hill is Chief Financial
Officer and Colin Moore is the head of Marketing. Peter Waller is head

of franchising while Olden Lee is head of Human Resources. KFC is part

of the two PepsiCo divisions, which are PepsiCo Worldwide Restaurants
and PepsiCo Restaurants International. Both of these divisions of
PepsiCo are based in Dallas.
Structuring
Another strategy of KFC is currently working with is to improve
operating efficiencies. This in turn can directly impact the operating
profit of the firm. In 1989, KFC centered on elimination of overhead
costs and increased efficiency. This reorganization was in the U.S.
operations and included a revision of KFCs crew training programs and
operating standards. They emphasized customer service, cleaner
restaurants, faster and friendlier service, and continued high-quality
products.
In 1992, KFC continued with another reorganization in its middle
management ranks. They eliminated 250 of the 1500 management
positions at corporate and gave the responsibilities to restaurant
franchises and marketing managers.

PRESENTATION, ANALYSIS AND INTERPRETATION OF DATA

Time Context:

1995

It delineates the take off point of the analysis, the period when
KFC is faced with the problem of making strategic decisions on what to
do with the Mexican market after the peso crisis in Mexico and the
resulting recession.

Viewpoint:

Mr. David Novak

President, KFC

He

is

responsible

for

making

strategic

decisions

for

the

companys growth and development.

Statement of the Problem:

What strategic decision will KFC adopt in order to minimize risks

and maximize profitability in its operations in Mexico?
Due to the current devaluation, profits are greatly reduced.
This reduction in earning power has brought much political unrest.
Mexico has a large unskilled labor pool that provides little stability.

Cultural attitudes towards punctuality, absenteeism and job retention

tend

to

make

managing

employees

difficult

under

present

circumstances. High turn-over rates lead to high training costs and can
threaten the brand integrity. In the past, the Mexican economy has
triggered violence toward American firms by frustrated nationalists.
The culmination of these problems led to low profitability due to a low
profit product margin. KFC has to decide what strategy to use in its
Mexican operations. The danger in taking a conservative approach in
Mexico was the potential loss of market share in a large market where
KFC enjoys enormous popularity.

Objectives:

1. To maximize profitability in Mexico;

2. To identify a marketing strategy to enhance market growth
and development of the Mexican market.

Areas of Consideration: (SWOT ANALYSIS)

I. Internal Environment:
Functional Areas
Strengths Weaknesses
A. HUMAN RESOURCES MANAGEMENT
1. PEPSI Cos success with
management of fast food chains
When PepsiCo acquired KFC in
1986, the company already dominated
two of the four largest and fastest
growing segments of the fast food
industry. (Pizza Hut and Taco Bell)
X
2. Traditional employee loyalty
KFCs culture was built largely on
Col. Sanders laid back approach to
management.
X
3. Conflicting cultures of KFC and
PepsiCo.
KFCs laid-back culture and
PepsiCo fast track attitude caused conflict
and confusion among employees after the
entrance of PepsiCo.

OPERATIONS MANAGEMENT
1. Utilizes a consistent standard
operating procedure in all aspects of
its operations.
The company maintains established
operational standards for the different
stages of its operations.
2. Utilizes dual branding
This operational strategy helps to
improve economies of scale within
restaurant operations..
3. Confusing corporate direction
Between 1971 and 1986, KFC was
sold 3 times with companies that practice
different styles.
4. Turn-over in top management
PepsiCo managers who replaced

X
X

KFC people in 1986 until 1989 also left

KFC by 1995.
MARKETING MANAGEMENT
Products/Services
1. Standardized product.
KFC has standardized its chicken
recipe all over the world and this has
earned it a stable reputation as a
foodservice company.

2. KFC is focused on fried chicken as

its core product and takes a long
time to introduce new products.
Innovation was not a primary
strategy for KFC. McDonalds had already
introduced its McChicken while KFC was
just testing its chicken sandwich. This
delay increased the cost of developing
consumer awareness for KFC.
Price
1. Pricing of KFC products are
competitive.
Pricing for every chicken and
related products are very competitive in
the fast food industry.h
Place
1. Market accessibility
The stores of KFC are located in
high traffic areas. This is a sales
advantage in terms of client accessibility.
2. Utilization of non-traditional areas
of distribution
KFCs use of shopping malls,
universities, hospitals, airports, stadiums,
amusement parks, office buildings and
mobile units is a very aggressive
marketing tool for product distribution
Promotion
1.PepsiCo's
success
with
the
management of fast food chains.
PepsiCo acquired Pizza Hut in

X
X

1977, and Taco Bell in 1978. PepsiCo

used many of the same promotional
strategies that it has used to market soft
drinks and snack food. By the time
PepsiCo bought KFC in 1986, the
company already dominated two of the
four
largest
and
fastest-growing
segments of the fast food industry
2. KFCs secret recipe.
The secret recipe has been a
source of advertising and has set KFC
apart.
3. Strong brand name.
KFCs early entrance into the
fast-food industry in 1954 allowed it to
develop a strong brand name recognition
and strong foothold in the industry.

X
4. No defined target market.
The advertising campaign of KFC
does not specifically appeal to any
market segment. It does not have a
consistent long-term approach.
5. Maximum usage of promotional
strategies.
KFCs promotional activities are
extensive: above the line advertising and
print media.
FINANCIAL MANAGEMENT
1. KFC generally practices sound
financial decisions.
This is reflected by an increasing
trend in its net revenue and increasing
market share. Over the past seven years
from 1987 to 1994, KFC worldwide sales
have grown at an average rate of 8.2%
2. Downward trend of its Profitability
ratios.
The return on assets ratio of
PepsiCo is alarming because it has been
lagging the industry by 4-5% and does
not show an upward trend. 1994 to 1995
net profit margin also dropped by 1 %.

B. External Environment
External Factors
Threats

Opportunities

COMPETITIVE FORCES
1. Increasing competition with other
chicken fastfood companies.
There are other fast food companies
offering chicken operating in Mexico that
compete for the patronage of the locals.

2. Rising sales of substitute products.

Other fast food companies offering
substitute products hamburgers, pancakes,
and the existence of old time favorites of
Mexicans, the nachos, tacos, Doritos, etc.
GOVERNMENT PROGRAMS
1. New franchise law in Mexico.
The 1990 Franchise Law in Mexico
favored franchise expansion and presents
an opportunity to fast food chains to
expand operations.

ECONOMIC FORCES
1. Unstable economic condition of the
Mexico.
Increased political turmoil resulting
to the peso crisis and economic recession
in Mexico pose a big risk to investors in the
country.

3. Increasing Start-up Costs

Increasing costs of construction,
operations, training costs to open up new
stores is a risk for businesses.

4. Peso devaluation
US companies are able to invest less in
buying assets in Mexico due to the
favorable exchange rate.
SOCIO-CULTURAL FORCES
1. Mexican Labor problems
High incidence of absenteeism.
Tardiness and high labor-turn-over affects

operations.

2. Large base Mexican market

The large population of Mexico and
its close proximity to the US mainland
presents a big market with less operational
costs for a US firm.

3. Changing preferences of customers.

Customers demand for healthier
foods and increase variety in their menus.
4. Increasing trend of eating out.
Increasing household income and
more opportunities for women to work
have increased demand for foodservice
outside the home.

POLITICO-LEGAL FORCES
1. Unstable political situation in the
Mexico.
Any political disturbance in the
country affects the general business
scenario, thus affecting activities of the
company.
2. Enactment of 1990 Franchise Law
The Franchise Law is an attractive
investment incentive for companies in
Mexico.

3. The joining of Mexico in the GATT.

This has eliminated trade barriers in
Mexico and will facilitate trade entry in the
country.
TECHNOLOGICAL FORCES
1. Emergence of modern technology
in the foodservice industry.
With the development of new

hardware and software for food service

management,
the
workload
of
the
restaurant
manager
is
less
time
consuming. He also has now more time for
conceptualization and creativity, thus,
increasing efficiency and productivity.
2.
Advancements in use of the
Information Technology
The world is at the tip of the event
managers fingers through the Web. Prices,
competitions, new venues, new products,
new themes, statistics etc. can all be
retrieved from the internet. This facilitates
the once very time-consuming work of the
store managers.

X
3.
Advancements
in
Ads
and
Promotions technology
More vivid and colorful ads utilizing
new technological tools aid in more
attraction and more interest among
viewers, thus, inciting them to try the
advertised products.

STRENGTH - S

1. PepsiCo mgmt
2. Employee loyalty
3. Consistent SOP

WEAKNESSES W

1. Conflicting mgmt styles

2.Confusing corporate
direction
3. Fast mgmt turn-over

4.
5.
6.
7.

Dual Branding
Competitive Pricing
Accessible
Non-traditional
distribution
8. KFC Secret Recipe
9. Strong brand name
OPPORTUNITY O
1. New Franchise Law in Mexico
2. Peso devaluation
3.Large base Mexican Market
4.Joining of Mexico in the
GATT
5. Advancements in technology
THREATS -

1. Increasing competition
2. Rising sales of substitutes
3. Unstable economic
conditions
4. Increasing start-up costs
5. Labor problems
6. Changing customer
preferences
7. Unstable political conditions

SO STRATEGIES

4. No defined target
market

WO STRATEGIES

1. Open Franchises in
Mexico.
2. Use value for money
pricing strategy to capture
large market base.

1. Get locals to manage

units through franchising.
2. Implement market
segmentation to define
target markets.

ST STRATEGIES

WT STRATEGIES

1.Capitalize on KFC secret

recipe in ads
2. Introduce variety on
menu to capture more
market segments with
varied preferences.
3. Capitalize on strong
brand name to develop
franchises to lessen
operational costs.

1. Direct ads towards

defined target markets.
2. Leave Mexico and open
more units in other
foreign markets.

ALTERNATIVE COURSES OF ACTION:

From the presented SWOT analysis, the researcher came up with
two possible solutions to the problem of KFC, the Alternative Course

of Action I (ACA 1) and Alternative Course of Action 2 (ACA 2).

These alternatives are aimed at meeting the objectives set for this
case and solving the problem of KFC.
ACA - 1 Convert all company-owned Mexican units into
franchises and open the area for more franchises.
Advantages:
1. Converting all company-owned units in Mexico will reduce risks
both political and economic. The locals will be the operating the
stores and will not expose KFCs own managers to the political
instability in Mexico.
2. This strategy is easy to implement due to the new legislation
promoting franchises and protecting patents and technology in
Mexico.
3. This strategy will generate increased cash flow from the sale of
existing units.
4. This strategy will require less involvement of KFC in the day to
day operations of the stores, thus, less administrative costs for
KFC.
5. Steady royalties from the sale of existing stores even after the
sale, thus, assuring income for KFC.
6. The strategy will expand the network of KFC through more
franchised units in Mexico.
7. This strategy is an effective rebuttal strategy to be used by KFC
to address the current market positioning of its competitors like
McDonalds that will saturate the area with more stores.
Disadvantages:
1. Implementing this strategy will forego KFCs potential greater
profitability in Mexico. Company-owned stores have greater
capabilities of profit than the standard royalties from
franchisees.
2. The strategy will mean losing control of the daily operations of
the units by KFC management.
3. Expansion through franchise endangers brand equity.

ACA - 2 Maintain status quo in Mexico and continue market expansion

in other foreign markets.

Advantages:
1. This strategy will expand the market possibilities of KFC to
other international markets where profitability will be greater.
2. Expansion in other foreign markets poses less political and
financial risks for KFC.
3. The existing units in Mexico will maintain a minimal presence
for further growth when stability is established.
Disadvantages:
1. The strategy will not eliminate the risk in Mexico for the existing
units in Mexico.
2. The risk of brand exposure is still present.
3. KFC will forego the potential for more profitability and growth in
Mexico.
4. The existing units in Mexico will still need management service
and with no increased economy of scale.
5. Competitors and other product substitutes will continue
expansion in the area and will gain control of the Mexican
market with a very large population that is capable of yielding
more profits.
Decision Matrix
The Five Point Likert Scale is used as a tool in the decision
making process of choosing the best alternative course of action to
take in order to solve the problem of the case.
CRITERIA
Market Growth
Competitive Advantage
Profitability
Corporate Image
Capitalization Requirement
Total
Average
Legend :

5
4
3
2
1

ACA#1
4
4
3
3
4
18
4

Most Likely
More Likely
Likely
Less Likely
- Unlikely

ACA#2
3
3
4
4
1
15
3

RATIONALE:
Market Growth
Converting all existing units into franchised stores and opening
Mexico for more franchises will have an edge over ACA#2 because this
strategy will expand the market potentials of KFC in Mexico which has
a very big market potential with its very big population.

Competitiveness
ACA#1 will have an edge over ACA#2 in terms of gaining
competitive advantage because franchising will extend the market
base potentials of KFC in Mexico and will enhance its market share in
the area.

Profitability
ACA#1 will have an edge over ACA#2 because with more units
to serve the market, KFC will get more sales, thereby increasing
profitability. ACA#2 gets a lower rating because foreign market
expansion will initially require big start-up expenditures thus, affecting
over-all profitability of the company.

Corporate Image
ACA#2 will give KFC better corporate image as franchising
carries the risk of exposing the brand to uncertainties in the hands of
franchisees who are not in direct control of the company.

Capitalization Requirement
ACA#2 will require more capitalization requirement in its initial
start-up operations following its overseas expansion compared to
ACA#1. It will also entail the hiring of more personnel to handle the
new units to be opened, thus, will mean additional operating expenses
for the company in terms of salaries and wages.

RECOMMENDATION (ANALYSIS)
The researcher strongly recommends that ACA No. 1. Convert
all company-owned Mexican units into franchises and open the

area for more franchisees be adopted by KFC in order to achieve

more profitability and maintain its market leadership in Mexico under
the prevailing economic and political conditions in the country.
This most effectively mitigates the risk of doing business in
Mexico by making a franchisee responsible for the profit and loss of
each unit. KFC will still receive royalties based on the sales of each
unit. However, franchises will protect the company from currency
devaluation. KFC is able to reduce this risk while still maintaining a
presence in one of the largest growing markets.