Internal and External Business Environment of Two

¶ … internal and external business environment of two fast food giants, McDonald's and KFC. The major sections of the paper include introduction to the companies; the competitive analysis of the fast food industry using five forces model; the Balanced Scorecard and SWOT analysis of the companies; and a set of recommendations in the light of these analyses.

The purpose of this paper is to present an analysis of the Global fast food industry using Michael Porter's Five Forces Model and then evaluate the past, current, and projected performance of two companies from the industry using Balanced Scorecard approach. The paper also presents SWOT analysis of the companies and recommends strategies which can help them in moving forward in the industry in a more competitive and profitable way. The companies selected for this research paper are McDonald's and KFC which are the top market leaders in the Global fast food industry. McDonald's is the number one brand with respect to customer base and market share whereas KFC enjoys the market leadership in chicken restaurant chains.

The paper starts with an ample introduction to both these companies and proceeds by discussing the competitive environment in the fast food industry using Michael Porter's Five Forces Model. After analyzing the business environment, the paper presents an analysis of the companies' past, present, and future performance using Balanced Scorecard. The four major areas where these companies focus are: customer services, internal business processes, learning and growth, and financial performance. This analysis is followed by SWOT analysis of both these firms which can help them in evaluating the core strengths and major weaknesses in their internal business processes as well the potential threats and opportunities in their external business environment. These companies can use their strengths to avail the potential opportunities, overcome the weaknesses, and encounter the possible threats which can impact its business operations and profitability in a negative way.

The final section of the paper recommends strategies to both these firms which they can use to beat the competition from both direct and indirect competitors and grow in the industry in the most tactful and effective way. The research paper concludes by summarizing the whole discussion and the recommended strategies for these companies.

Introduction

1. McDonald's:

McDonald's is the world's leading fast food chain currently operative with more than 34,000 restaurants and outlets in 119 countries. It is an American multinational corporation headquartered in Oak Brook, United States. Since its inception, McDonald's has spread its business network in all the potential markets of the world. At present, McDonald's enjoys a huge customer base with an average serving of 69 million customers every day (McDonald's, 2013). McDonald's is ranked among the top fast food brands in the world which have established their strong brand image through highest quality products and highly efficient customer services. The major products offered by McDonald's include hamburger (Big Mac), Chicken McNuggets, Quarter Pounder, chicken sandwiches, French fries, soft drinks, soups, desserts, milkshakes, breakfast items, coffee, and salads. McDonald's currently employs more than 1.7 million people in all its outlets, restaurants, production units, and offices around the Globe (About McDonald's, 2011).

McDonald's has grown its business network through self-ownership and franchising agreements. More than 80% of the McDonald's restaurants and outlets are franchised to private businessmen from the local and international markets. It is the world's largest and the fastest growing drive-through and counter service fast food restaurant chain. Since its expansion into the Global market, McDonald's has introduced a large variety of fast food products in order to meet the consumers' expectations and keep itself innovative and competitive in the industry. McDonald's has implemented the latest plants and machineries at its production units and the most advanced enterprise management systems in its offices like inventory management, customer relations management, strategic human resource management, etc. McDonald's is also the winner of various quality and favorite brand awards and recognitions at International levels (McDonald's, 2013).

2. KFC (Kentucky Fried Chicken):

KFC (Kentucky Fried Chicken) is a multinational chicken fast food restaurant chain. It is operative with more than 17,000 restaurants and outlets in 115 countries. KFC is the subsidiary of Yum! Brands -- the leading brand in the Global restaurants industry. It was founded in 1930 by Harland Sanders in North Corbin, Kentucky. The operational headquarters of KFC are situated in Louisville, Kentucky. KFC operates with a total workforce of around 190,000 employees. The successful expansion of KFC in the Global market can be attributed to its continuous growth strategy which enabled it to expand its business operations internationally with a rapid pace through franchising and licensing. The main product offerings by KFC include fried chicken (drumstick, breast, thigh and keel, etc.) and its different variations like chicken burgers, chicken wraps and sandwiches, crispy chicken strips, French fries, as well as other fast food products like salads, coleslaw, soft drinks, juices, and desserts. The most successful product of KFC is pressure fried chicken pieces which are made with original recipe seasoning mix (KFC, 2013).

KFC is ranked number one in the list of chicken restaurant chains in the world whereas number two in the overall fast food restaurant chains after McDonald's. It is also one of the most liked food brands in the world. The takeover of KFC by PepsiCo International gave it a competitive advantage as well as various strategic benefits like extensive supply chain and distribution network, strong brand image, and financial support by a large beverage supplier. Like other top fast food brands in the world, KFC also relies on private investors for its business expansion strategies. Currently, more than three-fourth of KFC outlets and restaurants are run by private businessmen from the home and Global markets (KFC, 2013).

Michael Porter's Five Forces Model for the Global Fast Food Industry

The Five Forces Model of Competition was presented by Michael Porter which helps in analyzing the competitive environment in a particular industry. Companies use this model to analyze the intensity of competition in their industry and design their operational, financial, and marketing strategies accordingly. The five forces analyzed in this model are: rivalry among existing competitors, competition from new entrants, threats of substitute products, the bargaining power of suppliers, and the bargaining power of customers (Kotler, 2010). These forces are now discussed for the Global fast food industry in the following section:

a. Rivalry among existing Competitors:

The Global fast food industry is concentrated with a few large fast food giants and numerous small scale fast food manufacturers. The top market leaders in this industry are McDonald's, KFC, Pizza Hut, Wendy's, Burger King, Starbucks, Dunkin Donuts, and Yum! Brands. The industry is dominated by McDonald's and KFC with the highest market shares and customer base. These top brands are famous for the menu variety, quality, and taste of their products (KFC, 2013). The industry has a perfect competition where a large number of small scale manufacturers have also taken a significant portion of the total market share. The top market leaders like McDonald's, KFC, and Pizza Hut are pursuing growth strategies in order to maintain their market position and remain in the row of top Global fast food brands (Blythe & Megicks, 2010).

b. Competition with New Entrants:

The fast food industry has a perfect competition with very low barriers to entry for new entrants. Therefore, more and more businesses are entering this industry to become famous and develop their brands. These new entrants are direct competitors for the existing industry leaders. They use different marketing tactics to attract potential customers like low price strategy, discounts on special events, free coupons and memberships, etc. (Kurtz, MacKenzie, & Snow, 2010). These new entrants get successful in snatching potential customers from the market leaders by offering their products according to the lifestyles and eating habits of these customers. McDonald's and KFC are able to beat this competition from new entrants on the basis of their product quality and extensive distribution network. However, they are unable to win the price war with these new entrants due to their high manufacturing costs and premium-priced products (Pride & Ferrell, 2012).

c. Threat from the Substitute Products:

Although McDonald's, KFC, and other market leaders offer an extensive range of fast food products; there are various other products which can be used as substitute against these products. Therefore, these market leaders also face an indirect competition from these substitute product manufacturers. For example, McDonald's offers milkshakes and soft drinks which have to compete with Starbucks, Coca-Cola, Pepsi, and other well-recognized brands (McDonald's, 2013). Similarly, KFC's pizza and fried chicken range competes with numerous local and global fast food brands which offer fried beef, beef burgers, vegan pizzas, etc. (KFC, 2013).

d. The Bargaining Power of Suppliers:

Suppliers are one of the most important stakeholders in the fast food industry. They provide the necessary raw material like wheat, chicken or beef meat, oil, vegetables, and other ingredients which are used in the production processes. However, due to the presence of large number of fast food manufacturers, suppliers enjoy stronger bargaining power (Ellwood, 2002). They demand high prices for their supreme quality raw material. The top market leaders like McDonald's and KFC have built strong relationships with some large scale suppliers in order to ensure continuous supply of raw materials at discounted prices (Kotler, 2010).

e. The Bargaining Power of Customers:

The consumers in the fast food industry also have a strong bargaining power as compared to the manufacturers. McDonald's and KFC have been the top industry rivals of all the time. They try to snatch each other's customers through their high quality products and different promotional offers (About McDonald's, 2011). However, the consumers choose only those brands which meet or exceed their expectations. There are various brands in the market which offer similar products at very competitive prices. Therefore, McDonald's and KFC have to use different marketing strategies to attract the most potential customers and earn attractive revenues for their business (Kotler, 2010).

The Balanced Scorecard for McDonald's

Since its inception as a fast food restaurant, McDonald's has always focused on providing the best quality food products and excellent customer services. It aims to achieve an unbeatable industry leadership through internal process efficiency and sustainability efforts. McDonald's vision is to become the most liked fast food brand in the world through high quality and innovative products. It has adopted the Balanced Scorecard approach in a view to become efficient in every aspect of its business operations (McDonald's, 2013). The core areas where the Balanced Scorecard approach applies are internal business processes, financial performance, learning and growth, and customer value and relationships (Kurtz, MacKenzie, & Snow, 2010). By focusing on these core areas, McDonald's is able to achieve the number one position in the Global fast food industry.

a. Customers:

First of all, McDonald's focuses on meeting and exceeding its customers' expectations by offering the best quality food products and excellent customer services. It believes that customers are the lifeblood of a business organization. They are the biggest source of revenues and the most important stakeholders. In all its business and functional level strategies, McDonald's has kept its focus on increasing the customer satisfaction and retention rate. As a result, McDonald's is able to serve the largest consumer segment in the world with the highest number of brand loyal customers in the fast food industry. Since the opening of its first restaurant in USA, McDonald's has continued to grow in the Global fast food and beverages industry with a strong customer appreciation and loyalty. This growth and appreciation is a proof that McDonald's has performed exceptionally on the 'Customer' dimension of the Balanced Scorecard (McDonald's, 2013).

b. Internal Business Processes:

Secondly, McDonald's keeps its internal business processes highly efficient and purely aligned with its corporate business strategy, vision, and mission statement. There is an effective coordination between all the departments in different kind of activities like budget allocation, new product development, marketing communication, etc. McDonald's also uses different types of process automation systems to improve its employees' efficiency and its overall operational performance. McDonald's is the market leader in manufacturing the highest quality of fast foods (McDonald's, 2013). This success can be attributed to its internal process efficiency and alignment (Hitt, Ireland, & Hoskisson, 2011).

c. Financial Performance:

Thirdly, the financial performance of McDonald's has always been remarkable against its industry rivals. It is one of the few multinational corporations that have seen tremendous growth in the international markets through private investments and franchising agreements. McDonald's enjoys strong cash flows and return on investments due to its high acceptability and attractive sales revenues. It publishes its quarterly and annual financial results in order to show its performance to the key stakeholders. The major burden on its profitability is put by high Research and Development costs, raw material prices, advanced production operations, and high marketing and promotional expenses (Pride & Ferrell, 2012). However, its supply chain and distribution costs are comparatively lower than those of its competitor brands due to its extensive business network and strong relationships with the large scale suppliers and distributors in the world markets. Moreover, McDonald's also invests a huge amount on social welfare and environmental protection activities. It has struggled to collect more than $170 million funds for this purpose during the last ten years period (McDonald's, 2013).

d. Learning and Growth:

All these three areas create opportunities for McDonald's workforce to learn and adapt to change. McDonald's is one of the most competitive fast food giants in the world which has always focused on bringing innovative products to the market. Since its incorporation, McDonald's has continued to introduce new flavors and variations in its menu variety according to the changing consumer requirements and cultural trends. These innovations have greatly helped McDonald's in keeping itself in the row of highly successful and profitable fast food companies (Pride & Ferrell, 2012). In addition to learning from the market trends, McDonald's has always created opportunities for its employees to groom themselves and become more efficient in their job tasks. McDonald's not only arranges periodical training for its employees, but also provides them attractive salary and compensation packages in a view to control its employee turnover and rate of absenteeism. The managers at McDonald's use both transactional and transformational leadership styles to keep their subordinates motivated and committed towards their organization's success and prosperity (About McDonald's, 2011).

Balanced Scorecard for KFC

KFC is the largest chicken restaurant chain in the world. It has achieved this position by focusing on all the core areas which the Balanced Scorecard approach considers essential for the success of business organizations. KFC keeps an eye on its financial performance as well as the changing industry trends which can affect this performance in the long run. It designs its business level strategies in such a fashion that all its core areas of operations get an equal focus during the strategy implementation process (KFC, 2013).

a. Customers:

KFC has developed a strong brand image in the fast food industry. It has the highest number of customers that love fried chicken products. In order to keep its customers satisfied, KFC keeps on introducing new products by making different variations in the fried chicken like sandwiches, drumsticks, crispy, spicy, etc. It has made business relationships with some strong food and beverage brands in order to get the advantage of supply chain and distribution efficiency. KFC manufactures fried chicken products for all age groups and income classes of the society. Therefore, it can adjust to competition in all types of consumer markets. Moreover, it gives a special focus on making its customer services more and more efficient (KFC, 2013).

b. Internal Business Processes:

KFC has implemented cutting-edge technology and advanced enterprise resource planning systems to stay competitive and innovative in its industry. Its inventory management system helps it in managing the demand and capacity options in an effective way. The customer relationship management system enables it to store, organize, and manage its consumers' data for different marketing and public relations activities. KFC uses differentiation strategy for its products in different markets of the world. Therefore, the business processes like production operations, marketing efforts, employee training, etc. are aligned with this differentiation strategy. Moreover, the company invests a heavy amount on its Research and Development activities in order to keep an eye on the changing consumer trends and competitors' strategies (KFC, 2013). However, it has failed to achieve remarkable results through R&D activities in the past. If KFC continues to invest in R&D activities and mold its business operations according to the changing market and industry trends, it can gain a stronger and more competition position in the overall fast food industry (Hitt, Ireland, & Hoskisson, 2011).

c. Financial Performance:

The financial performance of KFC has remained incredible in the past. It has become one of the leading one billion dollar brands in the world. With an ever-increasing sales volume and customer base, KFC is able to enjoy strong cash flows and second highest market share after its top industry rival, McDonald's. KFC has also been observing a positive change in its stock prices for the last ten years period. Based on its past financial performance, growing market share and strong customer base, it is anticipated that KFC will continue to generate attractive revenues for its shareholders. However, increasing raw material prices, manufacturing costs, and marketing expenditures are the biggest hurdles in setting high profit margins. KFC can control these costs and expenditures in the future by making its production operations more efficient and building stronger relationships with its supply chain members. According to the Baldrige National Quality Program, these efforts will help it in ensuring maximum output with the least amount of inputs as well as continuous supply of raw materials respectively.

d. Learning and Growth:

KFC has proved to be a learning organization by investing a huge amount on different innovation projects and employee development initiatives. When KFC was took over by PepsiCo International, it faced severe problems due to significant changes in the organizational structure. This changed structure affected the coordination between different departments as well as the whole communication and reporting framework for the organizational members. Keeping in view these structural issues, KFC redesigned its organizational structure from decentralized to centralized form.KFC has also built a strong organizational culture which keeps its culturally diverse employees tied as a single unit. KFC provides equal employment opportunities to all individuals irrespective of their cultural backgrounds, gender, or religious beliefs. These employees find attractive growth opportunities in their organization and stay committed towards its success and competitiveness.

SWOT Analysis for McDonald's

a. Strengths:

The biggest strength of McDonald's is its market leadership in the Global fast food industry. It is one of the most liked fast food brands among consumers of all age groups and income classes. McDonald's has built a strong brand image with the passage of time by providing the highest quality of fast food products. At present, McDonald's is the most successful fast food brand with respect to financial strength, market share, and customer serving ratio (McDonald's, 2013). Another major strength of McDonald's is its strong business relationships with the largest supply chain members in the international markets. These suppliers and distributors help it in manufacturing and delivering its highest quality products to the potential consumers in the target markets (Jobber, 2009).

McDonald's targets all age groups -- from children to the aged people. It has a large variety of food products for every type of occasions and celebrations. McDonald's products are delivered at doorsteps and in-store counters through highly efficient services. McDonald's has succeeded in building a strong customer base through these efficient customer services and highest quality food products. Moreover, consumer focused strategies, differentiation strategies, and strong presence in the Global market are some other strengths of this successful fast food chain (McDonald's, 2013).

b. Weaknesses:

One of the major weaknesses of McDonald's is its less famous product lines which have low level of acceptability among consumers. These product lines include pizza and organic product categories. The reason for this low acceptability is McDonald's diversified focus on its menu variety. It mainly focuses on its burgers and French fries categories while ignoring the beverages and organic product lines. Another weakness of McDonald's is high rate of employee dissatisfaction, absenteeism, and turnover. This weakness has arisen due to poor working environment and inflexible working options for the employees. Moreover, McDonald's has been facing a decreasing market share in some developing and under-developed markets of the world. These markets are dominated by local fast food restaurant chains and other Global brands.

c. Opportunities:

The most potential opportunity for McDonald's is to grow its business in the new markets where its competitors have not yet reached. It can invite private investors to join its expanding business network and ensure a sustainable future in the fast food industry (Hitt, Ireland, & Hoskisson, 2011). It can enter into joint ventures and strategic alliances with financially strong businesses in the related industries in a view to strengthen its market position. Moreover, it can introduce new flavor variations in its fried chicken, beef, and beverage categories to enhance its menu variety and give more options to the consumers to prefer McDonald's over its competitor brands.

d. Threats:

Like other business organizations, McDonald's also faces the biggest threat from its industry rivals. McDonald's deals in all kinds of fast food products which are manufactured with chicken and beef meat. However, it faces an indirect competition from pizza, beverages, and breakfast food manufactures. Being a premium-priced brand, McDonald's cannot make the lower and middle income groups as its regular customers. Therefore, low price brands are able to attract those consumers by offering their products at comparatively lower price than McDonald's. The economic situations, political instability, and environmental pressures in different markets are also posing threats for the company's sustainability and success in the long run. Moreover, changing consumer trends towards healthy and non-spicy foods are forcing fast food companies to re-innovate their product lines (Jobber, 2009).

SWOT Analysis for KFC

a. Strengths:

KFC is the second largest fast food restaurant chain after McDonald's. It has dominated the dinner and take-away segment in the Global market through a large variety of fried chicken products. It is recognized as the best Global brand with respect to convenience and food menu variety. Another big strength of KFC is its extensive business network through franchising and joint ventures with some renowned multinational corporations like Taco Bell and Pizza Hut which are also the sub-brands of its parent company -- Yum! Brands. KFC also enjoys strong cash flows and financial performance due to ever-increasing sales volume and high level of acceptability in the Global market. Therefore, it is easier for KFC to expand its business operations through self-ownership as well as through franchising by attracting potential investors from all over the world. In all its strategic moves, KFC greatly benefits from the reputation and brand image of its parent company, Yum! Brands (KFC, 2013).

KFC is also recognized among the few one billion dollar brands in the world. Its large market share in the Global fast food industry enables it to keep its roots strong and restrict new competitors from snatching its brand loyal customers. Moreover, KFC uses a strong positioning strategy for its products in all its outlets and restaurants. It introduces its products according to the cultural values and consumer preferences in the target markets. In addition to its superior operational and financial performance, KFC is also recognized as an environmentally concerned business corporation. It has taken various initiatives to contribute towards the social and economic welfare in under-developed and developing countries (KFC, 2013).

b. Weaknesses:

Being one of the strongest brands in the fast food industry, KFC expends a huge amount on its Research and Development activities. However, these activities are not generating exceptional results for the Management. These high R&D costs are putting direct negative pressures on the company's marketing budget. KFC is also losing market share in different markets of the world due to low level of acceptability for some product categories and innovation strategies of its competitor brands. The diversification strategies of KFC are also quite unsuccessful as compared to its profitable fast food restaurant chain. This diversified portfolio affects the major product lines and profitability of the company.

Moreover, the take-over of KFC by PepsiCo International has led to various changes in its organizational structure which has negatively affected its employees' efficiency and routine job duties (KFC, 2013). A high employee turnover is also a big weakness of this fast food giant. KFC has observed a significant increase in its employee turnover and absenteeism during the last few years. The marketing and promotional budget of KFC is also lower than its competitor brands which restrict it from running expensive marketing campaigns on regular basis.

c. Opportunities:

The biggest opportunity for KFC is to expand its business operations in the unreached markets of the world. The potential target markets for a fast food restaurant business exist in Latin America, Mexican region, Europe, and Middle East. KFC can also do product innovation to match cultural requirements and demographic trends of these target markets. In order to make its customer brand loyal, it can improve the quality of its products and make the home delivery of these products more efficient. According to the Baldrige National Quality Program, an organization can better serve its customers if its departments perform according to the guidelines given by its R&D section (Jenny & Scammon, 2010).

Another potential opportunity for KFC is to focus on expanding its operations through self-ownerships instead of franchising agreements. It can start this expansion from the most potential areas of the local and international markets and continuing to grow with the passage of time. Although self-ownership brings greater risks for the company, but it eventually leads to stronger and more competitive business presence in the industry. KFC can take advantage from the strong financial position and brand image of its parent company and attract potential investors to become its strategic partners.

d. Threats:

The major threat for KFC is its industry rivals, i.e. The fast food restaurant chain that are operating at the international level and having a strong consumer loyalty. It is harder for KFC to attract the brand loyal customers of its industry rivals as compared to making new customers. The biggest threat for KFC is the world's number one fast food restaurant chain, McDonald's. This competitor is having the biggest market share and the highest customer serving ratio per day. Other competitors include Burgers King, Pizza Hut, Starbucks, Wendy's, and Starbucks.