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America is not what it once was. Gone are the times of spending hours sitting on the front porch while grandma snapped a pound of green beans for dinner. Instead, those times have been replaced with speeding through a drive-thru window to grab a quick bite to eat. Foods that were once referred to as slow-cooked, wholesome, and hearty, are now being described by words such as, fast, convenient, and fatty. We now live in an evolving world, where a single moment of free time is branded as wasted time for progress. The fast-food industry has emerged almost immediately.
“Yum! Brands, Inc., was reported as the largest fast-food company in 2004” (Krug (2004) pg. 627). This company is made up of many household brands such as KFC, Pizza Hut, Taco Bell, Long John Silver's, and A&W restaurants. In the fast-food industry, they are the market leader in the chicken, pizza, mexican, and seafood segments (Krug, 2004). Yum! Brands' goal is to be the market leader in the United States, and also increase market share in high growth areas around the world. One strategy that Yum! Brands implemented to increase market share in the United States was to combine two of the company's franchises into one location to attract a broader customer base. This has brought tremendous success to the company. Yum! Brands has since shifted its focus to an international strategy to expand on their current market share.
The rise of the fast-food industry is not confined to the United States alone. The world as we know it has evolved into a fast-paced no wait zone. Although based on a country's culture, the dining practices of the world's countries are quite different. Some countries remain steadfast to their culture and have been reluctant to embrace the fast-food concept. This presents the strategic issue. How can Yum! Brands continue to expand on their international strategy while sustaining their leadership and competitive advantage in the United States and other countries? We will now address this issue by applying an analysis that will help Yum! Brands decide which countries need to be evaluated and when to expand their company into new markets.
In order for Yum! Brands to venture outside of the United States, they must first evaluate the markets in which they are planning to enter. This type of analysis requires a model that evaluates the economic conditions, political stability, cultural differences, resources, society conditions, and supporting industries associated within a given market. Michael Porter of Harvard University concluded that “there are four broad attributes of nations that individually, and as a system, constitute what is termed ‘the diamond of national advantage'” (Dess, Lumpkin, & Eisner 2007 pg. 240). We will find this analysis to be the most beneficial to Yum! Brands. In this analysis, we will be analyzing what issues Yum! Brands should address before entering a market. These issues are factor conditions, demand conditions, related and supporting industries, and firm strategy, structure, and rivalry.
We begin the analysis with factor conditions. These conditions reflect each nation's factors of production and should be industry and firm specific. Yum! Brands should be looking at what each country possesses, as far as firm-specific knowledge and skills created within the country that are rare, valuable, difficult to imitate, and rapidly and efficiently deployed. If these factors do not exist in a country, then Yum! Brands will need to consider whether the firm can create these factors using their own intellectual assets. One factor advantage for expanding into the Latin American markets, for instance, is that the costs associated with labor and salaries will be significantly less than in the United States. This is due to inflation rates, economies of scale, and unemployment rates. Yum! Brands has been successful in other markets because almost all of their franchises outside of the United States are locally owned and operated. This reduces the language barriers and allows a cultural perspective that might otherwise be a major concern. By allowing local business people to own the franchise, Yum! Brands gains intellectual knowledge on the country's culture and consumer demands in a given market.
Analyzing demand conditions is important because without knowing what the customers' wants and needs are, we cannot efficiently serve the market. In the United States, we know that the demand for fast-food is high, based on our lifestyle and growing population trends. Although in Latin America, this may not be the case, due to consumer awareness and cultural differences. Yum! Brands will need to rely on economic and trend analysts to predict the cultural and societal trends of that market. Among the things analyzed should be the ethnic and immigration trends of that country. In the United States, we have seen a growth in ethnic food, due to the recent growth in immigration. Another thing to consider when analyzing demand conditions is the level of income individuals are receiving. A rise in income stimulates growth in the dine-in restaurant segment as consumers receive higher disposable incomes (Krug, 2004). Yum! Brands may need to expand and improve on existing products in order to sustain competitive advantage.
Related and Supporting Industries deal with countries managing inputs more efficiently. Close working relationships with suppliers is a key factor in gaining competitive advantage. In the United States, we have seen that distribution of products is highly correlated with production. Distribution between states within the country is non problematic, based on the free trade barriers that exist between them. This is also true of distribution to Canada and Mexico, due to the North American Free Trade Agreement that enabled free trade and tariffs between North American countries. Also, the geographic proximity of Latin America to the United States gives the firm an advantage towards supplier power. Yum! Brands will need to assess the supplier power, as well as other related relationships relevant to success, in each market before entering. Also, it is important for Yum! Brands to research trade laws and regulations between their home market and potential foreign markets.
Firm strategy, structure, and rivalry is perhaps the most important segment in analyzing a foreign market. “Rivalry is particularly intense in nations with conditions of strong consumer demand, strong supplier bases, and high new entrant potential from related industries” (Dess, Lumpkin, & Eisner 2007 pg. 243). In the fast-food segment, we have seen that domestic rivalry is very high within the United States. Although, based on cultural differences in Latin America, the demand is low, because most Latin Americans have not yet acquired a taste for American food. Instead, Latin Americans continue to embrace dining at home. Economics are another factor reflecting domestic rivalry. As we have already discussed, the pay rate in Latin American countries is significantly lower than in the United States. This results in lower consumer demand which reduces the competitive environment in Latin America. How a country is run can also influence domestic rivalry and strategy. With populations on the rise around the world, as well as in Latin America, a trend may soon be emerging that will shift all dining practices to a more American style of eating.
As long as Yum! Brands continues to innovate and make changes in its internal framework, they should be able to achieve their international strategic goals. It is imperative that Yum! Brands does not venture into foreign markets without first analyzing the market in which they are entering. Also, if they try to expand too rapidly, they may experience limited resources and cash flow. Yum! Brands will want to expand into areas with high economic growth potential, as well as, regions with rising population and political stability. “Firms that succeed in global markets had first succeeded in intense competition in their home markets. We can conclude that competitive advantage for global firms typically grows out of relentless, continuing improvement, innovation, and change” (Dess, Lumpkin, & Eisner 2007 pg. 243). Based on the history of Yum! Brands' success in the United States, we can assume that the company is a prime candidate to venture into international markets.
Krug, Jeffrey A. (2004). Yum! Brands, Pizza Hut, and KFC. Appalachian State
Dess, G. Gregory, Lumpkin, G.T, & Eisner, B. Eisner (2007). Strategic Management 3e.
Diamond of National Advantage
- high in the U.S.
- based on cultural trends
- low in Latin America
- fast-food versus dining at home
Factor Conditions Demand Conditions
- requires high population - low in Latin America
- modern technology - high in U.S.
- communication systems - dining practices
- language barriers - immigration trends
- tariffs and trade regulations - consumer awareness
- legal system - growth in suburban areas
- banking system - unemployment rates
- labor costs
Related and Supporting Industries
- close proximity to the supplier
- supplier bases must be prevalent in an industry
- can a supplier base be created
- trade barriers
- can similar suppliers be substituted