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Yum! Brands Inc, Pizza Hut, and KFC
The fast food industry has exploded over the preceding century in both the United States and foreign markets. Rising income, greater affluence among a larger percentage of American households, higher divorce rates, and the marriage of people later in life contributed to the rising number of single households and the demand for fast food (Krug (2004) pg. 632). In 2004, Yum! Brands, Inc. was the world’s largest fast food company. It operated more that 33,000 KFC, Taco Bell, Pizza Hut, Long John Silvers, and A&W restaurants worldwide. Yum! Brands also operated more that 12,000 restaurants outside the United States (Krug (2004) pg. 627). In 2004, the company was focusing on international strategy and portfolio management to develop a strong market share with little high growth markets.
The companies main focus in 2004 was to focus its international strategy on developing strong market share positions in a small number of high-growth markets such as Japan, Canada, the United Kingdom, China, Australia, Korea, and Mexico (Krug (2004) pg. 627). International strategy is based on diffusion and adaptation of the parent company’s knowledge and expertise to foreign markets. The primary goal of the strategy is worldwide exploitation of the parent firm’s knowledge and capabilities (Dess, Lumkin, & Eisner 2007 pg. 256).
The analysis begins by looking at the strengths of the firm. Yum! Brands, Inc. has numerous strengths throughout its internal environment. The company was the market leader in the chicken, pizza, Mexican, and seafood segments of the U.S. fast food industry. It operates more than 33,000 unit’s worldwide (Krug (2004) pg. 627). The focus of the company went from individual to multibranded units. Multibranded units attracted a larger consumer base by offering a broader menu selection in one location. The company operates more than 2400 multibrand restaurants in the U.S (Krug (2004) pg. 628). An additional strength within its internal environment comes from franchising. Franchising allowed firms to expand more quickly, minimize capital expenditures, and maximize return on invested capital (Krug (2004) pg. 633). Franchising has the advantage of limiting the risk exposure that a firm has in overseas markets while expanding the revenue base of the parent company (Dess, Lumkin, & Eisner 2007 pg. 265).
As we have come to realize, companies are never perfect and can have numerous weaknesses within its internal environment. Long distances between headquarters and foreign franchises made it more difficult to control the quality of individual restaurants. Large distances also caused servicing and support problems, and transportation and other resource costs were higher. In addition, time, cultural, and language differences increased communication problems and made it more difficult to get timely and accurate information (Krug (2004) pg. 635).
A company’s opportunities are the most influential to building an effective strategy. As the U.S. market matured, more restaurants turned to international markets to expand sales. Foreign markets were attractive because of their large customer bases and comparatively low competition. A great opportunity for Yum! Brands Inc. is to move its investment locations to Mexico. From a regional point of view, Latin America is appealing because of its close proximity to the United States, language and cultural similarities, and the potential for a future World Free Trade Area of the Americas, which would eliminate tariffs on trade within North and South America (Krug (2004) pg. 627).
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The external environment creates numerous threats for Yum! Brands Inc. One of the prime threats Yum! Brands, Inc. faces from the external environment is the increasing age in the population. Restaurants rely heavily on teenagers and college-aged workers. As the population ages, fewer young workers are available to fill food service jobs. Many restaurants were forced to hire less reliable workers, which affected both service and restaurant cleanliness. An additional weakness was that turnover rates were notoriously high. The National Restaurant Association estimated that 96% of all fast food workers quit within a year (Krug (2004) pg. 633).
Another giant threat the company faces is the proliferation of new diets. Many Americans were eating pizza less often as they pursued the Atkins Diet (low carbohydrates), “The Zone” (balanced meals containing equal parts of carbohydrates, protein, and unsaturated fat), or a traditional low fat diet (Krug (2004) pg. 632). Chicken costs were also a threat to the company. A boneless chicken breast, which cost $1.20 per pound in early 2001, cost $2.50 per pound in 2004, an increase of more than 100 percent. Profit margins were being squeezed from both the revenue and cost sides (Krug (2004) pg. 632).
In 2004, Yum! Brands Inc. started to pay more attention to portfolio management. The key purpose of creating portfolio models is to assist a firm in achieving a balanced portfolio of businesses. Businesses whose profitability, growth, and cash flow characteristics would complement each other and add up to a satisfactory overall corporate performance. Imbalance, for example, could be caused either by excessive cash generation with too few growth opportunities or by insufficient cash generation to fund the growth requirements in the portfolio (Dess, Lumkin, & Eisner 2007 pg. 214).
When using portfolio strategy approaches, a corporation tries to create synergies and shareholder value in a number of ways. One of the best portfolio strategy approaches is the Boston Consulting Group’s (BCG) growth/share matrix. When using the (BCG) each business unit is broken down into four different quadrants, stars, cash cows, question marks, and dogs. Stars are the business units competing in high-growth industries with relatively high market shares. Question marks compete in high growth industries with weak market shares. Cash cows are business units with high market shares in low growth industries. Finally, dogs have weak market shares in low growth industries (Dess, Lumkin, & Eisner 2007 pg. 214).
Yum! Brands Inc. has several business units that are considered cash cows. The first business unit that is a cash cow is Pizza Hut. In 2003, Pizza Hut’s sales were 5 billion dollars. It has almost 50 percent of the industries market share. Although its market share is fairly high, its growth rate is only 1.3 percent. The average sales per unit are $605,700 throughout its 7,523 units (Krug (2004) pg. 631.
Another cash cow is Kentucky Fried Chicken (KFC). As well as Pizza Hut, KFC is also the market leader in the chicken chain. In 2003, KFC’s total sales were almost 5 billion dollars, more than 50 percent of the market share in the chicken chain segment. KFC had a growth rate of 2.8 percent. The average sales per unit are $897,800 throughout its 5,524 units. Despite its dominance, KFC is slowly losing market share as other chicken chains increases sales at a faster rate. Sales indicated that KFC’s share of the chicken segment fell from a high of 64 percent in 1993, a 10 year drop of 14 percent (Krug (2004) pg. 631).
The last cash cow of Yum! Brands Inc. is Taco Bell. Taco Bell is Yum Brand Inc. most profitable among the business units. In 2003, its sales were 5.3 billion dollars, averaging $879,700 per unit. Although it has a high market rate, it only has a growth rate of 2.8 percent (Krug, (2004) pg. 631). Taco Bell was able to generate greater overall profits because of its lower operating cost (Krug (2004) pg. 627). Its profits also were greater because the cooking machinery was simple, less costly, and required less space then a pizza oven or chicken broiler (Krug (2004) pg. 631).
Despite the fact that the company has many cash cows throughout its business units, it also has two dogs in A&W restaurants and Long John Silver’s. In 2003, A&W had sales of only 200 million dollars. That is over 5 billion dollars less than the sales that Taco Bell exceeded. Additionally, Long John Silver’s had sales of 777 million dollars, averaging $640,000 throughout its units. Its growth rate was a low 2.8 percent six percent less than the industry leader McDonald’s (Krug, (2004) pg. 631).
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Even though there are numerous benefits of portfolio models, there are also some downsides. First, the approach views each Strategic Business Unit (SBU) as a stand-alone entity, ignoring common core business practices and value-creating activities that may hold promise for synergies across business units. Second, unless care is exercised, the process becomes largely mechanical, substituting an oversimplified graphical model for the important contributions for the CEO’s experience and judgment. Third, the reliance on “strict rules” regarding resource allocation across SBU’s can be detrimental to a firm’s long term viability. Finally, while colorful and easy to comprehend the imagery of the BCG matrix can lead to some troublesome and overly simplistic prescriptions (Dess, Lumkin, & Eisner 2007 pg. 216).
Since 2004, Yum! Brands Inc. has been narrowing its focus on an international strategy. An international strategy is achieved by developing a strong market share position in a small number of high growth markets. There are a few advantages of international expansion. First, is it increases the size of potential markets for a firm’s products and services (Dess, Lumkin, & Eisner 2007 pg. 243). Second, is reducing the costs of research and development as well as operating costs. Finally, it can enable a firm to optimize the physical location for every activity in its value chain (Dess, Lumkin, & Eisner 2007 pg. 247).
There are four risks when dealing with international strategy, political risk, economic risk, currency risk, and management risk. Political and economic risk can be any where from social unrest, military turmoil, elections, and even violent conflict or terrorist attacks. Any country that has this high risk is less attractive for most types of business. Currency risk can pose as a substantial risk for companies. When business units are in different countries they must pay very close attention to the exchange rates.
Even a small change in the exchange rate can result in a significant difference in the cost of production or net profit when doing business overseas. Management risk is the risk manager face when they must respond to the inevitable differences that they encounter in foreign markets. Managers must also pay very close attention to the culture of the country they are looking to put there business units in (Dess, Lumkin, & Eisner 2007 pg. 248-249).
In conclusion, the SWOT analysis has given us a good view of the internal and external environments for Yum! Brands Inc. It has shown what the company can use for the building blocks for the strategic plan. To be successful, the firm must come across all the factors in the analysis. The Boston Consulting Group has shown which of the business units throughout Yum Brands Inc. are the most successful, and the units that need vast improvement. For Yum Brands Inc. to succeed with its international strategy, managers must pay close attention to the different risks that a country has. The international strategy must be success to develop a strong market share positions throughout the world. If the strategy fails the company’s market share could drop significantly.
Krug, A. Jeffery (2004). Yum! Brands, Pizza Hut, and KFC. Appalachian State University, 627- 638.
Dess, G. Gregory, Lumpkin, G.T, & Eisner, B. Eisner (2007). Strategic Management 3e. McGraw-Hill.
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