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By unouwantdznutz Nov 03, 2008 695 Words
AACSB Case Report
Kentucky Fried Chicken Corporation is player in a leveled-off fast-food industry. With the maturation of this industry in the United States, the restaurants involved face increased intense competition for customers. I find interesting how difficult it is for KFC and other restaurants in other segments of the industry to maintain market share control price because of the amount of competition and rivalry. The restaurants face competition within their segment and with the other segments in the industry. This, along with the NAFTA agreement, has given opportunity for industry leaders, including KFC, to expand more aggressively in Latin America. Threat of New Entrants

This force is weak. KFC has economies of scale holding the largest percentage of market share in the chicken segment of the fast food industry (50.7% in 2002). This allows KFC to spread their costs over the thousands of company-owned and franchised restaurants. Additionally, KFC was bought by PepsiCo, one of the largest consumer products companies in the United States, in which further supports its cost advantage of large production volume and input discounts not accessible to new entrants. It is likely that new entrants would not have the capabilities to withstand the fixed costs or be able to receive funds because of a higher risk of new entrants. KFC’s existence since the 1960s has developed brand loyalty among customers. Even when challenged by rival chicken restaurants, KFC still maintained market share because of consumers’ loyalty to their “unique taste.” Bargaining Power of Suppliers

This force is neutral. This is because KFC is managed by Yum! Brands, Inc who also manages franchises Taco Bell, Pizza Hut, A&W Restaurants, and Long John Silver’s. KFC doesn’t rely on external suppliers for operation, instead it benefits from its management. Market research found that consumers increasingly prefer restaurants that offer a varied menu. KFC had a setback because its concentration of fried chicken and limited menu options. KFC failed to expand sales by diversifying its menu and therefore Yum! began to open “2-1” restaurants where customers have more choices. Yum! provides this important opportunity to KFC which made it more profitable because of its ability to combine it with another large restaurant chain. It increased per unit sales and opened the possibility of opening stores in more locations. Bargaining Power of Buyers

This force is strong because buyers are in a powerful bargaining position. The maturation of the restaurant industry increases competition making it difficult of a company to control cost. Therefore, customers are not sensitive to price because of the amount of substitutes available to them. It would be difficult for KFC (or any other restaurant) to justify higher price. There are virtually no switching costs for the customers. This hurts profitability because of customer demands can increase a company’s cost. Restaurants would not be able to pass the cost to the customer, again because of intense competition and substitutes. For instance, KFC was forced to develop awareness for its chicken sandwich when McDonald’s introduction of the sandwich. This was added cost to the KFC, and as a late arrival had to withdraw their sandwich because of low sales and profit. Threat of Substitute Products

This force is strong. Industry maturity forced intense competition. KFC not only competes with similar companies in the chicken segment but other chains in the fast food industry. There are many strong close substitutes that doesn’t allow for price control. The limited menu of KFC can be substituted with other chicken products that were developed in other restaurants like Burger King and McDonald’s. There is increasing trend of customers going out to eat with less time to prepare meals in the home. However, with high competition, overpopulation of fast food chains, and stronger buyer bargaining position, there is an increase in consumer alternatives, which lowers profitability. Rivalry

This force is neutral. The long existing KFC has been able to develop and maintain brand loyalty and market share within its segment of the industry. Similar chains such as Boston Market and Chick-fil-A fall behind with combined half of KFC’s share in 2002.

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