Companies are always looking for opportunities that allow their business to create a sustainable competitive advantage so that the business is sustained. To do this they have to evaluate what their customers view in their value chain activities as distinguishing factors compared to their competitors. PepsiCo's traditional core business was in beverages where it faced strong competition from Coca Cola. To create value in its business PepsiCo had to:
Differentiate the business from competitors: finding ways to differentiate the company's product offerings and gain market penetration. And/or differentiate itself through product development.
Review its business cost structure
Evaluate the industry growth rate
Evaluate its firms position in the market
The evaluation of PepsiCo strategy led to PepsiCo organizing itself into three divisions: soft drinks, snack foods and restaurants. The value created by the acquisition of KFC was:
1. Synergies were created within the value chain
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According to the case study, the marketing of fast food followed the same patterns as the marketing of cold drinks and snack foods. This allowed for the marketing of soft drinks and fast food products in the same television and radio segments thereby providing higher returns for each advertising dollar (This improves business cost structure and ensures that its internal processes are efficiently configured to support its value creation efforts). As a result a competitive advantage was created through taking advantage economies of scope.
2. Improved Efficiency
KFC restaurant chains also provided an additional outlet for the sale of Pepsi drinks. This provided an efficient distribution network which can highly reduce cost.
3. Scale of Economies
Through PepsiCo management, KFC was able to gain access to large capital resources which enhanced its strategy of expansion which is key to the success of KFC.
4. Learning Opportunities
By being under the PepsiCo umbrella, KFC was able to learn form PepsiCo performance driven culture. The two organisations benefited from the shared learning in differences in Organisational and managerial processes and systems.
5. Reduction of risks by reducing uncertainty about material inputs or access to customers
The use of KFC brand allowed PepsiCo against committing huge resources in markets that the company does not understand well and have no experience in, thus not gaining the required customers. KFC had a well established international presence; utilizing this experience, PepsiCo will easily gain access to distribute their product and gain market share. Another advantage is due to the huge cost and risk of entering a foreign market e.g. the restaurant market. The acquisition allowed PepsiCo to basically leverage costs and risks.
Strategic Issues Facing KFC
To determine the strategic issues faced by KFC, we will begin this section by using Porters Diamond as a tool to evaluate KFC comparative advantage:
According to the case study, due to the maturity of the US Market many restaurants including KFC expanded international as a strategy for growing sales. KFC was one of the first companies to enter the international market as a result it was able to learn and grow faster. Due to cultural and eating habits KFC only had success in penetrating the Asia and Latin American markets because of chicken being a traditional dish there.
Related and supporting structures
The US market has a national cluster of restaurants. This overcapacity in the US market made it difficult for KFC to justify construction of new free standing restaurants in the US due to the sites increased cost which as a result drove profit margins down. In Latin America however, geographic proximity to the US made communication and travel easier and quicker. Latin America also seemed attractive after the implementation of the NAFTA. In other international markets long distances between the head quarters made it more difficult to control the quality of individual restaurants.
Firm strategy, structure and rivalry
Latin America proved to have high levels of rivalry competitors due to the fact that KFC entered the market later. In Latin America, KFC had difficulty deciding on the appropriate strategy (franchising or company-owned restaurants) due to the political and economic policies brought about by frequent changes in the government ad economic stability which increase uncertainty. In other international markets KFC decided on franchising as a strategy as it allowed locals that better know the culture, language and differences to manage the restaurants.
Always on Time
Marked to Standard
According to the case study, worldwide demand for fast foods was expected to grow rapidly during the next two decades, because rising per capita world wide made eating out more affordable for greater numbers of consumers. The internet also increased the ability for company to more quickly develop brands and a world wide consumer base. There was also a large population in Latin America and especially Mexico.
Above I have explained both the competitive advantage gained by KFC and the issues that it is facing by operating international. The above discussion has also revealed some of the driving factors to globalization which are; cultural homogenization (growth in eating out trend), technological developments (internet and improved communication channels), deregulation and lowering of trade barriers (The implementation of the NAFTA) etc.
KFC Approach to expansion in foreign market
We will now look at the approach that KFC has adopted in its international market out of the four approaches to being international; Multinational, Global, International and transitional.
KFC appears to be adopting the international Strategy. This is because it has adopted to convert most of its international business into franchises. However its core abilities like marketing remain centralized.
This section of the report will seek to dispute the statement that "Management tools and models have taken the place of strategy" and seek to show that they are merely used as guide to the formulation of strategy.
Knott (2008) defines "strategy tools or management tools encompass the full range of concepts, ideas, and techniques and approaches that structure or influence strategy activity." Gunn and Williams (2007) agrees and emphasizes that "specifically strategy tools are those concepts and techniques used by managers in the decision making process. Now that we have defines what management tools are it is equally important that we define strategy. There is no one definition of strategy. It is however viewed as a means to making decision and actions that helps to navigate the organization into achieving a competitive advantage. This leads us to the view of strategy as a process. Pearce and Robinson (2000, pg17), says that the strategic process centers on the belief that a firm's mission can be best achieved through a systematic and comprehensive assessment of both its internal and its external environment. The management tools are a guide to achieving this comprehensive assessment. Gunn and Williams (2007) agrees to this by saying that "strategy or management tools were developed to help managers handle the complexity of their environments."
There are currently many different management tools and models available organisations to support decisions by strategic managers. Below I will discuss four strategic management process tools: Balanced Score Card, SWOT Analysis, Financial Ratio Analysis and Value Chain Analysis and show how they contribute to strategic management and strategic thinking in a company.
The Balanced Score Card - The Balanced Scorecard was developed by Kaplan and Norton to move the business away from the reactive view of traditional financial measures. The Scorecard breaks down the organisations vision and mission into strategic objectives that can be categorized into four different perspectives; financial, customer, internal business processes and learning and growth. The scorecard's approach is aimed at promoting and maintaining a completely holistic viewpoint, where one affects the other and each should only be considered in view of the other perspectives
A SWOT Analysis - is generally used in making decisions about what direction a company should take. The major focus of SWOT analysis is to 'Identify opportunities and identify threats, and also to identify organizations strengths and weaknesses'. It has also been explained that it 'achieves correct interaction of business management with its internal and external environment' (Mayer, 2008, p36) whilst emphasizing the monitoring and evaluation of strengths, weaknesses, opportunities and threats in both these environments.
Financial Ratio Analysis - Financial ratio Analysis is done to analyze the success or failure and progress of business. The manager can use financial ratios to spot trends, and to compare the performance of a business with other similar businesses. The financial ratios are not concerned with 'soft' issues such as the culture of business that might have contributing factors to the success of failure in the business. The financial ratio analysis is only concerned with the finances of the company.
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Value Chain Analysis - This tool was first discovered by Michael Porter. A value chain analysis is an analysis of a company's chain of activities. As the product passes through the activities value is generated along the chain. The Analysis is concerned with which activities generate more value and how can the value be improved.
By discussion a few management tools above, we have managed to reveal that management tools on their own can not be used to develop strategy decisions. This means that they are used as guides through the strategy process to help managers to structure the process of strategy formulation. This is verified by Jarzabkowski and Kaplan (2008) purported that "strategy tool use is a means of sense making about uncertainties by helping to structure and interpret information; it serves to justify or legitimatize particular positions; and it instigates and facilitates interaction among various actors." Hussey (1997) adds to this by saying "Therefore there is a need to fully analyze a given situation before strategic decisions are made, pursue and implement strategic decision, implement adequate planning processes and finally when using new business concepts develop an understanding of them before apply them to a practical situation."
Another point of importance is that it is important to choose the relevant management tool for the task. Hussey (1998) says "Consequently, strategists should be familiar with the various concepts available to them, but not biased toward any of them. They should narrow their focus to a specific sub-model only after they determined which one is most appropriate to their situation". In conclusion management tools can not give the holistically analysis that the strategy process entails and as a result could not be used to make decisions about the long term objectives of the organization but can merely serve as a guidance to the holistic evaluation and analysis at each stage of the strategy process.
"Here at head office, we don't go very deep into much of anything, but we have a smell of everything. Our job is capital allocation-intellectual and financial. Smell, feel, touch, listen, then allocate" (Jack Welch former CEO of General Electric)
The above statement by Jack Welch is addressing the role of corporate strategy. Corporate strategy is concerned with what type of business the organization is in. It is about addressing strategic issues such as what the line of business should be and how resources are to be allocated between different business units in other to gain competitive advantage and achieve its long term objectives. This is the process that Jack Welch terms as the "Smell, feel, touch, listen then allocate".
Below I discuss what I consider to be the main priorities for the corporate management of a diversified company like General Electric by using Ghoshal's Organisational framework. Ghoshal's classifies the goals of a multinational company into three categories namely; Achieving efficiency in current operations, managing of risks that it assumes in carrying out those operations and lastly innovation, learning and adaptation.
According to Segal-Horn (2004, pg 379), competitive advantage is developed by taking strategic actions that optimize the firms' achievement of these different and, at times conflicting goals. The three goals can be achieved via three tools; economies of scale, economies of scope and the ability to utilize national differences as sources of comparative advantage.
Efficiency can be defined as the ratio of the value of its outputs to the cost of all its inputs (Segal-Horn, 2003, pg 380). By optimizing this ratio the organization can obtain surplus resources. For a company like General Electric, it is very important that it devise a strategy of managing the interaction of actions of one business unit to another as this can affect performance. For example, GE corporate can analyze the value chain and could decide to have centralized production so as to exploit the advantages of integration or it can choose to have production in subsidiaries based local markets. The decision will be taken based on which will be able to create value. The next priority for a diversified global company is to manage the risk of its chosen process of operation.
A diversified global company like General Electric faces many risks. Segal-Horn (2004, pg 382) categorizes these risks into four:
Micro Risks - These include wars, interest rates, exchange rates, different wage rate etc. GE will have to access these rates and determine what effects they are to have in their operations and manage them.
Policy Risks - These are commonly known as political risks arising from different policy actions of national governments. General Electric need s to analyze and access all national policies to which it conducts business and manage risks emanating from these policies.
Competitive Risks - These are the risks that arise due to the response of other competitors in the market. This may be extended to new technologies. Competitors might gain access to new technologies which may in future result in competitive advantage. It is the priority of GE to monitor and manage these risks.
Resource Risks - Segal-horn (2003, pg 382) defines this as the risk that the adopted strategy will require resources that the company does not have, cannot acquire, or can not spare. This is of particular importance to a technological company like GE, which will require for example human resources with technological skills.
The main point about risks is that they change over time and so the company must continually evaluate the risks from time to time to determine the strategic fit.
Innovation, learning and adaptation
A presence in the international market creates opportunities of learning from the new market, the competition and from the risks. This learning must be accompanied by the flexibility to adapt so that the new learning can be incorporated to enable the company to adapt. For a company like GE this could mean the sharing of best practices and learning across business units. For continued improvement the company must also be on a continued drive of innovation.
As mentioned earlier, the above discussed priorities can be achieved through collaborative use with the three fundamental tools for building global competitive advantage: Scale of economies, Scope of economies and National differences. Although the statement by Jack Welch may sound very simplified, this process of strategy is aimed at achieving the above three priorities which are common for most diversified global organizations.