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1.0 INTRODUCTION

The following report has been prepared for KFC’s, for the purpose of providing a

recommendation that will improve its international presence while keeping its product

quality, high customer service and restaurant cleanliness. KFC’s is facing with difficult

strategic decisions surrounding the design and implementation of an effective

international strategy over the next 20 years in order for them to sustain its leadership

position. Their group have analyzed the growth opportunities of the company in both

domestic and international markets, as well as KFC’s core competencies, resources, and

capabilities, what is the most appropriate strategy for the company in order for it to go

forward and to succeed?

2.0 COMPANY BACKGROUND

KFC’s is among the best-established brands in the Western Quick Service

Restaurants market. It is by far the most popular restaurant chain in the Malaysia,

commanding a market share of over 35%. With about 409 KFC restaurants in Malaysia,

72 in Singapore and 8 in Brunei and 1 in Cambodia, KFC sees millions of people

flocking to its various outlets year in, year out.

Recent product innovations, such as O.R. Chicken Chop, Cheezy BBQ Meltz,

Chick N Fingers, H&S X-tra, Zinger Maxx and the Fish Sandwich offer their customers a

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variety of alternatives to chicken-centric meals. At the same time, they have continued to

expand company traditional chicken range by introducing variants like the Colonel

Burger and X-meal for teens and young adults, as well as providing a range of value

promotions and combinations. KFC’s also is the first Western Quick Service Restaurant

in the world to set up restaurants run by hearing-and speech-impaired staff; and the first

to establish a children's club (the KFC Chicky Club) with membership topping 250,000.

KFC invests in a variety of related activities that support company core restaurant

business. This integrated structure is crucial to company operations, providing consistent

support services; a stable source of quality chicken at very competitive prices; better cost

control; and the ability to supply the fast-expanding open poultry market, locally and

abroad. Their plants process poultry for restaurants throughout KFC, and focus on

achieving cost-efficiency while maintaining halal and quality standards.

Now under Yum! Brands, Inc.’s management, KFC primarily operates in two

different markets, which are the domestic and international markets. In 2000 KFC

refocused its international strategy on several high-growth markets, including Canada,

Australia, China, and Mexico where they planned to develop a base growth and to give

more control to restaurant owners. The international markets, which include Europe and

Latin America, have lesser control since they are franchisees. Those international markets

appear to be quite appealing since of the size of its markets but the problem is certainly to

select the proper countries and to develop a strategy to enter the given market to make it

profitable for the company, which we analyzed in detail later in the report.

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2.1 Vision

To be the leading integrated food services group in the ASEAN region

delivering consistent quality products and excellent customer-focused service

2.2 Mission

To maximize profitability, improve shareholder value and deliver

sustainable growth year after year.

2.3 Principle

The KFC principles are adapted from the Yum! Dynasty Model and are

known as the KFC Dynasty Model. KFC believes in the fundamental principles of

disclosure and transparency. This means not only following best practices but also

being open about the way they run their business. In everything do, they seek to

balance their economic and social goals, aligning as nearly as possible the varying

interests of all their stakeholders.

As part of their commitment to good governance, their management and

staff are expected to demonstrate diligence, responsibility and absolute integrity in

all their business dealings. Recent years have witnessed a shift in the Malaysian

economy towards domestic demand, which in the immediate to mid term will be

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driven by the ongoing implementation of development projects under the Nineth

Malaysia Plan.

3.0 COMPANY MOTIVE

KFC motive are to satisfy their customers every time they visit their restaurants

and to do it better than their competitors. Fast-food industry sales rose by 5.4% with more

than 800 000 restaurants in the US in 1999. On the other hand, full-service restaurants

grew by 7% during the same period. The trend has now been reversed since in the mid-

1990s, at that time the fast-food sector was surpassing the full-service sector, however

due to the maturation of the sector, rising family income among many Americans and

many other demographic factors that will be discussed in more detail in the next point.

Dinner houses are becoming more popular and we can see a trend for full-service

restaurants. Sales in the full-service sector increased by more than 13% during 1999,

surpassing by a large margin the 6% fast-food industry growth. This higher growth in that

full-service segment translated to a slower demand in the sandwich, pizza chains.

Domestically, the chicken market seems saturated and is only growing at a rate of 1% in

the US. Companies in that sector have to look at other alternatives if they want to grow.

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4.0 RATIONALE AND WAYS TO ENTERING INTERNATIONAL MARKET

The fast-food industry is expected to grow rapidly in the next two decades

internationally, which makes it really attractive for chains to invest in since the US

market is becoming saturated. KFC has developed a great expertise in opening

restaurants in other countries and could take advantage of that. They have a strong

position abroad and they are ready to take part of the big trend and be the first-mover.

They already had 50% of their restaurants outside of the Malaysia by 2000. They use a

multi-domestic strategy to expand internationally that appears to be working well. By

franchising, restaurants are owned by local entrepreneurs that know their markets really

well, which take away the barriers as language, law, financial, etc. Franchising appears to

be an excellent strategy to open new units in small countries as well, which could only

support a few restaurants. Of the 5 595 units located outside the Malaysia; 69% were

franchised, 21% company-owned and 10% joint ventures.

It is now even more interesting for companies to invest between US-Canada-

Mexico since the NAFTA (North American Free Trade Agreement) came into effect in

1994 and eliminated tariffs and quotas on goods shipped between the three countries. It

made it easier to do business between those countries as a result. Mexico especially

appears to be an attractive market since it has about 103 million in population and its

proximity to the US, which increases control, reduces transportation costs, etc. Though

expanding in Mexico might seem a good idea at first, many factors should be taken into

consideration before investing. For instance, the instability of the Peso should be a big

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concern for most companies. Notice that the Peso has been depreciating at an average

annual rate of 23% since NAFTA went into effect. But for KFC, this is not really a

concern since they get products and sell within Mexico borders and avoid exchange rate

risks. KFC’s largest supplier of chicken is Tyson Foods, which has two operating plants

in Mexico. All already KFC’s franchises established in Mexico have been switched to

company-owned, which provides them with greater control over quality, service, and

restaurant cleanliness. As we know, company-owned requires a lot more capital than

franchises, which slows down the expansion but KFC wanted keep control over its

restaurants.

International fast-food market was a strategy that most big fast-food players have

looked at since the US started to mature and saturate. Many chains expanded into other

countries to take advantage of the potential growth opportunities. There seems that there

is still an untouched market outside of the US. For instance, McDonald’s operate 46

restaurants for every 1 million US residents and only 1 restaurant for 3 million outside

the US. McDonald’s is certainly the biggest competitor abroad operating 14 000 units. As

discussed, since KFC was an early mover in the 1950s, it has developed brand

recognition worldwide. KFC was really successful abroad especially in the Asian and

Latin American markets since chicken was a traditional dish in those countries. Even

though, going international seems appealing, it carries more risks and it also becomes

more difficult to keep a control over your operations. Furthermore, time, culture and

language differences are also not encountered when operating domestically but serious

issues when going international.

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5.0 BUSINESS ENVIRONMENT

5.1 INTERNAL FACTOR

Following its acquisition of KFC, PepsiCo initiated several changes. They

wanted to have greater control over franchisees in order to close unprofitable

restaurants. Drastic changes have occurred; staff reduction, KFC’s manager’s

replacement, and layoffs. Conflicts between KFC and PepsiCo arisen due to

different corporate cultures and soon created a morale problem within KFC.

KFC’s employees no longer had job security and stability. They used to have a

strong loyalty under the Colonel’s management but those days seemed to be over.

The friendly, relaxed atmosphere were now gone. Turnover went up and loyalty

went down under the new management. PepsiCo was certainly intimidating a lot

of KFC employees with their high performance, high accountability and highly

driven culture. This poor relationship with KFC franchisees was certainly not

helping the company to develop its business and actions should be taken since

profitability is affected.

KFC should start by solving their internal issues such as management and

restaurant menu before thinking about expanding. They should work on the

management issues to create a good atmosphere where employees are happy to

work in. Certainly KFC must do not believe that by treating employees poorly, a

company can be successful. They also need to make sure that their restaurants

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offer a diversified menu, provide their customers with quality food, excellent

service and restaurant cleanliness.

KFC should always listen to their customers and try to follow the new

trends on the market in order to fully satisfy their customers. Otherwise,

competitors will satisfy them and will eventually outperform you as Boston did

with its grilled chicken. To ensure that all their products conform to Halal

requirements, apart from obtaining Halal Certificate for its operational premises,

they operate stringent internal controls over raw materials procurement,

manufacturing, packaging, storage, transportation and utensils. KFC are

extremely careful to prevent cross-contamination with filth (najis) or dangerous

contaminants. They also adhere to industry best practices to maintain the highest

standards of quality and hygiene in food production.

5.2 EXTERNAL FACTOR

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There are several demographic factors that companies like KFC have to

take into account while evaluating expanding to other countries since a lot of

them influence the demand of food eaten in restaurants. During the last two

decades, we have noticed a few changes; rising incomes, higher divorce rates, and

greater affluence among American households. More than 50% of women work

outside of the home, which shows an enormous increase that influence, the meals

eaten outside. Since more women work, it brings an extra income to the family

and can then afford to eat outside more often.

Another factor that contributed to the increase demand is that people had

less time to prepare their meals. A lot of fast-food chains noticed the trend, which

created an over-supply and an aggressive competition among players. People from

35 to 50 were the largest consumer group. Biggest concern is that people do not

want fried food anymore, they are more health oriented and KFC’s menu is still

offering a lot of fried items. They understood that by changing their names from

Kentucky Fried Chicken to KFC but they would need to change their menu as

well.

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They also need to keep an eye and be aware of new technology in order to

improve their productivity and be able to compete more efficiently because even

though they may have a competitive advantage now, they can be sure that they

will eventually be challenged by stick to their mission which is quality food-

excellent service-restaurant cleanliness and then keep control over franchises to

make sure franchisee follow the rules. Company also comes up with new items

regularly and keeps an eye on possible mergers and acquisitions to find the new

opportunity. Besides that, they were always aware of new technology to stay

efficient and competitive to compete in worldwide market.

The Department of Islamic Development Malaysia (JAKIM) inspects KFC

factory, restaurants, ingredients and processes before permitting them to use their

logo. All imported products are certified Halal by the source country local Islamic

food and nutrition certification body recognized by JAKIM. To further verify the

Halal status of their imported products, officials from QSR Brands Shariah

Advisory Council, inspect the facilities of all their suppliers abroad

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6.0 STRATEGY MARKETING

6.1 PRICE

KFC are also really price sensitive, they find the value is worth the price.

They know that people more preferred to choose the price that they can able to

buy it. KFC try to suitable the price and all the level community can come to their

restaurant. KFC have been segmented the price followed by place because they

look based on level of income. For example, at Genting Highlands the price for

meals are very expensive compared the price in rural restaurants.

For the new product they put the price more cheaper because wants to

attract the customer to taste and evaluate the new product. It is important because

the price give the big effect to the company to maintain their customer loyalty.

Besides that, the customer will always remember the KFC’s product and existing

the brand image in their memory. KFC are use with a Dumping selling product in

a foreign country below its domestic price or actual cost. KFC also use a Gray

marketing or parallel importing to produce product are sold through unauthorized

channels of distribution.

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6.2 PLACE

KFC have planned to abroad their market at Mexico as well they have

planned before this. Besides that, they have seems that there is still an untouched

market outside of the US and that’s why KFC trying to give more franchisee

rights for the company who has interested. They try to open as many new

restaurants as economically possible and strong expansion of the KFC network,

with 39 new stores being opened during the year in Malaysia and nine in

Singapore.

KFC uses GM chicken. This arouses a great controversy in many places.

In some places, people think that as long as KFC can give delicious fried chicken,

it does not matter what kind of chicken they are using. On the other hand, some

people think that the use of GM chicken will have great influence on the food

chain which is very crucial to the environmental health and nature development.

Take China as an example, the people there do not have very strong and clear idea

on GM food. There are not as many problems that have to be faced as in other

advanced placed in the world.

Distribution channel in KFC start with seller. Then sellers are produce

product to seller international marketing headquarters through channel between

nations. After that are channels within foreign nation distributed are product to

final customer. Non-traditional service, often stemming from successful

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innovations instituted in the company's international operations, was seen as a

way for KFC to enter new markets. Delivery, drive-thru, carry-out, and

supermarket kiosks were up and running. Other outlets in testing were mall and

office-building snack shops, mobile trailer units, satellite units, and self-contained

kiosks designed for universities, stadiums, airports, and amusement parks. To

move toward the twenty-first century, executives believed KFC had to change its

image. "We want to be the chicken store," Cranor stressed in a 1991 Nation's

Restaurant News. Cranor's goal was total concept transformation, moving KFC to

a more contemporary role.

6.3 PRODUCT

The KFC’s market has covered around the world. So that, the product that

they produced must be suitable based on that country. For example, Indian

country did not eat beef, the other alternative they find product based on

vegetarian. KFC also try to expand their product by introduce the variety meal.

For example, in Malaysia recently KFC have produce ‘Nasi Lemak Twister’.

The Malaysian people synonymous breakfast ‘nasi lemak’ and KFC have

seen it as a way to attract people. They also launches new product such as

Colonel Rice combo, Alaskan Fish Burger, BlackPepper Chicken Chop, Chicken

Poppers, Half-Half Meltz, Variety Bucket with Fish Fingers, and new X-meal

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combos. Recently KFC have launch by Ayamas of a variety of new offerings

including Hot & Spicy Chicken Fingers and Premium Popcorn Bites as well as a

range of shelf-stable products.

Despite contract battles and communication troubles, in the fall of 1990

Kentucky Fried Chicken called a one-day truce to celebrate in honor of Colonel

Sanders's 100th birthday. Meanwhile, fast-food competitors with stricter

organization were keeping up with changes in consumer demand and introducing

new products at a dizzying rate. KFC, in contrast, had difficulty in creating new

products linked to the cornerstone fried chicken concept, as well as in getting

them out quickly through franchisee stores. Hot Wings, brought out in 1990, were

KFC's only hit in a number of attempts, including broiled, oven-roasted, skinless,

and sandwich-style chicken.

They need to stay close to their mission (provide customers with quality

food, excellent service and restaurant cleanliness) and make sure to know how to

achieve their long-term objectives. They also have to keep innovating and coming

up with new items regularly. Remember that even though, they come up with

similar products, customers are most likely going to try them. They also have to

follow the trend and go hand in hand with customers to satisfy their changing

needs, as we have previously discussed with the current healthier food trend. They

also want to keep an excellent image by treating employees fairly and keeping a

good control over franchises to make sure they follow the company’s procedures.

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Values they are enduring moral beliefs shared by members of a society and

contributing to its culture and beliefs of what is "good," "right," and appropriate in

behavior. Attitudes for marketers, a crucial value distinction is a culture's attitude

toward change Societies that are resistant to change are usually less willing to

adopt new products or production processes Local attitudes toward foreign culture

will drive product positioning & design decision.

Different values will influence if the product can be consumed by the

market. It will also determine the marketing segment, like if the selling point has

to very verify. Different attitude will determine the ease of entering the market.

According to the above data, the demand and supply of the host country can be

known so what the related product decision can be made to match the demand of

the market.

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6.4 PROMOTION

They offer an excellent growth potential and many markets are still

untouched. Basically, KFC does not need to make the promotion all out because it

being familiar since the last decade. The most important is KFC just need to

maintain their strategy to make sure their product can be stay along. Besides that,

they try to effective brand building and marketing promotions. They also

extension of operating hours at 73 of our restaurants, which now open 24 hours to

make customer easiest. KFC have been introducing of credit card facilities at their

restaurants in the Klang Valley, Johor and Penang.

In 1966, for instance, the Kentucky Fried Chicken Advertising Co-Op was

established, giving franchisees ten votes and the company three when determining

advertising budgets and campaigns. As a result of an antitrust suit with

franchisees, in 1972 the corporation organized a National Franchisee Advisory

Council. To update its down-home image and respond to growing concerns about

the health risks associated with fried foods, in February 1991 Kentucky Fried

Chicken changed its name to KFC.

New packaging still sported the classic red-and-white stripes, but this time

wider and on an angle, implying movement and rapid service. While the Colonel's

image was retained, packaging was in modern graphics and bolder colors. New

menu introductions were postponed, as KFC once again went back to the basics to

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tighten up store operations and modernize units. A new $20 million computer

system not only controlled fryer cooking times, it linked front counters with the

kitchen, drive-thru window, manager's office, and company headquarters.

New product introductions were part of the company's plan to keep up

with competitors. Having allowed international market to grab a significant

portion of the chicken market, KFC tried to catch up with the introduction of

Rotisserie Gold Chicken. The company's new CEO, David Novak, also decided to

test Colonel's Kitchen, a clear imitation of the international market format. To

counter McDonald's and Burger King's "value meals," KFC brought out the

"Mega-Meal dinner": an entire rotisserie chicken, chicken nuggets, mashed

potatoes, macaroni, Cole slaw, biscuits, and a chocolate chip cake for $14.99. In

1995, KFC expanded the idea to "Mega-Meal-For-One," and decided to test

chicken pot pie and chicken salad.

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7.0 SWOT ANALYSIS

7.1 STRENGTH

KFC was an early mover in the 1950s; it has developed brand recognition

worldwide. KFC was really successful abroad especially in the Asian and Latin

American markets. They have a strong position abroad and they are ready to take

part of the big trend and be the first-mover. They use a multi-domestic strategy to

expand internationally that appears to be working well. KFC’s capabilities include

primarily its unique way to deliver chicken. Being able to offer price sensitive

customers the option to choose the type of food they purchase enables them to fell

like they have more control over the money they spend on food.

KFC’s also has a great expertise in opening restaurants abroad and could

take advantage of that while the international market offers growth. KFC also has

an excellent bargaining power, which allows them to get lower prices from their

suppliers. Further, given the size of their already established market, KFC can

realize economies of scale, and strengthen their low-cost advantage that would be

achieved. KFC was the world’s largest chicken restaurant chain and the third

largest fast-food chain in 2000. They had about 55% of the US chicken restaurant

market and they operated more than 10 800 restaurants in 85 countries. They were

one of the first chains to go international in the 1950s, which allowed them, by

being the first-mover, to build one the most recognizable brands around the globe.

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KFC has changed hands a couple of times since it started operating. The major

one was certainly when PepsiCo, Inc. acquired KFC, which, at that time, became

the largest consumer-product company in the US. PepsiCo believed that KFC

would complement its consumer product orientation. By acquiring KFC, PepsiCo

had a clear idea in mind and wanted to take advantage of the synergy that would

be created by having an advantage in both advertising and management.

KFC is well positioned now with a high market share. It is able to offer a

low price due to the economies of scale that it processes, and at the same time

offer the good original taste. We will now look at the competitive advantage that

KFC may have over competitors.

Resource Rare Valuable Hard to Copy Hard to Substitute Sustainable

Advantage
Reputation & Yes Yes Yes Yes Yes
Brand name
Art of operating Yes Yes Yes Yes Yes
Store Yes Yes No Yes No
Management
Chicken Taste Yes Yes Yes Yes Yes
Size & Capital Yes Yes Yes Yes Yes

From the table, we notice that KFC has a few core competencies such as

its reputation that it has built throughout the years, its art of operating, its size and

capital and certainly its chicken taste. At first, someone might think that the taste

of its chicken might be easy to copy for competitors but it is a top-secret recipe

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that even KFC employees and suppliers do not exactly know. For years, Colonel

Harland Sanders carried the secret formula for his Kentucky Fried Chicken in his

head and the spice mixture in his car.

The recipe is now locked away in a safe in Louisville, Ky. Only a handful

of people know that multi-million dollar recipe (and they have signed strict

confidentiality contracts). Security precautions protecting the recipe would make

even James Bond proud. One company blends a formulation that represents only

part of the recipe. Another spice company blends the remainder. A computer

processing system is used to safeguard and standardize the blending of the

products, but neither company has the complete recipe.

7.2 WEAKNESS

Even with a large market share, KFC is losing of its leadership. Market

shares have been declining at a rate of 15% over the past 10 years. To response to

the demand, Boston provides roasted chicken instead of fried. Without a doubt, it

appears that their strategy is working and that Boston is stealing customers away

from KFC.

Conflicts between KFC and PepsiCo arisen due to different corporate

cultures and soon created a morale problem within KFC. KFC’s employees no

longer had job security and stability. This poor relationship with KFC franchisees

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was certainly not helping the company to develop its business and actions should

be taken since profitability is affected. They have a limited menu and have sticked

to their original recipe chicken that made their success since the beginning. We

remember that even though KFC was in the chicken industry, McDonalds came

up with the chicken sandwich months before KFC did. KFC then occurred high

cost in order to try to create awareness for its sandwich. Unfortunately, due to low

sales they had to change its strategy.

7.3 OPPORTUNITIES

Another interesting fact is that the Chicken segment is the fifth in terms of

sales in the fast-food industry and we note that they are fewer competitors

compared to the other segments. During the last two decades, we have noticed a

few changes; rising incomes, higher divorce rates, and greater affluence among

American households.

More than 50% of women work outside of the home, which shows an

enormous increase that influence, the meals eaten outside. Since more women

work, it brings an extra income to the family and can then afford to eat outside

more often. Another factor that contributed to the increase demand is that people

had less time to prepare their meals. They also started operating restaurant with 2

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or even 3 of the company chains with KFC/Taco or KFC/Pizza Hut, which is a

great advantage for them by using the synergy.

Following our external analysis, we can conclude that the American

chicken fast food industry is not attractive due to the maturity and saturation. The

industry is facing a lot of changes and there is an extremely strong competition

among the players. Only below or average return can be obtained. However, as

we have seen international markets offer great opportunities for companies that

are ready to expand. They offer an excellent growth potential and many markets

are still untouched. We will now evaluate if KFC has the resources, capabilities

and competencies internally to take advantage of this opportunity.

7.4 THREATS

PepsiCo has three distinct markets that they do business in, which are soft

drinks, snack foods, and the fast-food restaurants. Between 1990 and 1996, annual

sales grew by more than 10%, operating margins averaged 12% for Pepsi-Cola.

During the same period, margins at KFC fell from 8% to 4%. Rivalry in this

industry is strong because the competition is mainly focused on decreasing prices

and on offering various products; most companies are competing to offer new

products, special offers, and better service

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8.0 CONCLUSION

In Malaysia, domestic consumption-led growth and the diversification of the

economy continued to facilitate development and strengthen resilience. This protected the

country from the uncertainties arising from global imbalances and the recent market

volatility caused by the U.S. sub prime mortgage crisis, and enabled the nation to achieve

a GDP growth of 6.3%. Meanwhile, the private sector was encouraged to assume a

leading role in economic development. In a series of initiatives, the Government

liberalized the Foreign Investment Committee guidelines, reduced corporate tax to 26%

from 2008, and launched five economic corridors across the country Singapore’s

economy also made good progress during the year, growing by 7.7%.

Financial services and tourism performed strongly, driven in part by buoyant

economies throughout the sub-region. Construction activity surged too, supported by a

boom in high-end apartments building as well as new office cum retail projects and two

large entertainment resorts. KFC employs a rigorous set of Key Performance Indicators

(KPIs) to build a performance culture and to help them define and gauge the progress we

are making towards their organizational goals. Their KPIs are used to measure

achievement and also form the basis for recognizing, rewarding and promoting

employees. In this way, they enhance motivation and build momentum. One of their most

powerful tools in building a performance-driven business is the annual exercise known as

Pedoman.

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Pedoman is a Group-wide interactive session that institutionalizes open dialogue

and provides a fully transparent interface for those in leadership positions, including all

their restaurant managers and the Chairman himself. As well as enhancing open

communication and giving everyone the chance to voice their ideas and concerns,

Pedoman reinforces their strong corporate culture and strengthens Group bonding

between all levels. In so doing, it gives a powerful new meaning to their principle of

“People First”.

These include the Iskandar Development Region (a large logistics and tourism

project in southern Peninsular Malaysia), the Northern Corridor Economic Region

(involving Perlis, Kedah, Penang and the north of Perak), the East Coast Economic

Corridor, and the Sabah and Sarawak Development Corridors. In addition, the extension

of Visit Malaysia tourism-related activities to 2008 should continue to boost the local

consumption of goods and services.

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