KFC Holdings Malaysia Strategic Management Case Study

Introduction

KFC Holdings (Malaysia) Berhad (KFCH) is an investment holding company located in Malaysia. Its key vision is to be the leading integrated food services group in the ASEAN region, delivering consistent quality products and excellent customer-focused service. Its mission is to maximize profitability, improve shareholder value, and deliver sustainable growth year after year. The company's guiding principles are adapted from the Yum! Brands Dynasty Model and are known internally as the KFCH Dynasty Model.

KFCH operates within Malaysia's recreation industry, specifically in the restaurant and fast-food franchise sub-industry. Through its network of subsidiaries, it has channeled investments into three major segments: restaurants, integrated poultry, and ancillary operations. The integrated poultry operations include feed mills, contract broiler farming and processing, poultry farms, breeder farms, hatcheries, and further processing plants. The ancillary support system includes sauce manufacturing, as well as bakery and commissary operations.

Company statistics show that in 2009, KFCH operated a total of forty-three RasaMas restaurants in Malaysia and Brunei, and thirty-five Kedai Ayamas stores across Malaysia. According to the company's official website, by 1st January of the following year, the company was operating at least four hundred and seventy-five restaurants across Malaysia, seventy-two restaurants in India, nine restaurants in Brunei, and seventy-seven stores in Singapore. Another significant investment milestone was on 15th December 2009, when the company acquired the entire issued and paid-up capital of Rasamas Terminal Larkin Sdn Bhd and Rasamas Melaka Sdn Bhd.

According to industry statistics, KFCH emerged as a very strong player in the Malaysian corporate world following a successful restructuring process that earned it a high reputation for excellent products, efficient and friendly service, and strong financial performance. It also became the largest employer in the Malaysian restaurant industry, employing over twenty-six thousand employees across Brunei, Malaysia, and Singapore. Notably, it is the only company operating restaurants in the world whose Western Quick Service restaurant market share exceeds that of McDonald's. The company's key competitors include Carrols Restaurant Group Inc., McDonald's Corp., and Wendy's/Arby's Group Inc. (Thomsen, 2004).

KFCH has a vision of being the leading integrated food service group in the ASEAN region and currently operates in four countries: India, Malaysia, Singapore, and Brunei. This means the company's financial performance is subject to the legislative and political conditions of those four countries and, in the future, of the entire ASEAN region. Employment, food, and health legislation are the main political factors that significantly affect KFCH. With a commitment to providing high-quality products and employing over 26,000 staff, the company is keen to observe these regulations and is therefore unlikely to be negatively affected by political factors (Thomsen, 2004).

Since KFCH operates in the restaurant and fast-food franchise industry, external economic factors are likely to influence its performance with respect to profits, demand, costs, and prices. The main economic factor likely to affect operations in its current markets is high unemployment in the region, which has a negative impact on demand for many products. Economic factors cannot be controlled by the company, and its performance is therefore largely dependent on the economic conditions of the ASEAN region (Anon, 2004).

Malaysia itself is a highly religious state, as are many of the other markets in which KFCH operates. Demographic change is also a relevant factor, as most people in the region increasingly prefer take-away meals over home-cooked food. For the company to succeed, it must produce products that are sensitive to the religious and socio-cultural context of its consumers, which will ensure its continued relevance in the market.

Over recent years there has been increased pressure on all business organizations to act responsibly toward their surrounding communities and environments. In particular, food retailers in the ASEAN region face growing pressure to adopt eco-friendly practices. Through the company's Dynasty Model, corporate social responsibility is listed as a major objective, with aims to provide sustainable consumption and production, reduce waste and resource consumption, and minimize any negative environmental impact.

Technology is a key enabler for achieving high customer satisfaction, which is central to KFCH's vision. The restaurant and fast-food franchise industry is increasingly integrating technological innovations into its business models, and KFCH can leverage technology to make products more readily available and services more personalized (Acur & Bititci, 2004). As Dickinson (1999) indicates, technology will also benefit KFCH in terms of operational efficiency and reduced costs.

External Analysis: PESTEL and Porter's Five Forces

Threat of New Entrants: The market in which KFCH operates is considered one for large, established players — including competitors such as McDonald's, Carrols, and Wendy's. KFCH's extensive network of restaurants and stores across different regions itself acts as a barrier to new entrants, particularly small traditional restaurants and stores. The threat of new entrants is further mitigated by the large capital requirements necessary to compete and by KFCH's specific barriers to entry, including economies of scale and product differentiation (Porter, 1980).

Bargaining Power of Customers: According to Porter's framework, the more undifferentiated or standardized a company's products become, the lower the cost of switching and the greater the power consumers hold. KFCH's increasing attention to meeting consumer demands, offering competitive prices, customizing services, and providing a wide variety of food options has allowed the company to maintain and strengthen its consumer base (Porter, 1980).

Bargaining Power of Suppliers: This force shows that suppliers can be influenced by large players in the restaurant and fast-food franchise industry, placing suppliers in a vulnerable position. This dynamic gives KFCH an advantageous position for negotiating fairer prices, as suppliers are aware of the company's potential to source raw materials from alternative suppliers at better prices.

Threat of Substitutes: Product substitution can reduce demand, as customers may easily switch to alternative offerings. In the restaurant and fast-food franchise industry, this takes the form of substitution driven by emerging trends, which has contributed to the growth of small traditional markets, particularly in Malaysia. To counter this threat, KFCH has acquired a number of existing small-scale restaurants (Porter, 1980).

Bargaining Power of Competitors: The high level of competition between KFCH and its rivals has made consumers increasingly sophisticated and demanding. This is a key reason why KFCH has focused on gathering consumer information to better engage with its customer base. Competition has also pushed industry players to offer more innovative services in order to build and maintain market share.

Non-food retail diversification: KFCH has experienced robust growth in recent years, opening numerous restaurants and stores across different markets. It can leverage its network and low-cost structure to diversify further into integrated poultry and ancillary segments, where competition remains relatively minimal (Thomsen, 2004).

Further regional growth: KFCH currently operates in at least four countries and has the opportunity to enter new markets across the ASEAN region to maintain and strengthen its leadership position.

Bakery-restaurant integration: Integrating bakery operations with restaurant locations would not only save on space but also allow the company to run two closely related lines of business in tandem, achieving operational synergies.

Structural changes in Malaysia and the broader ASEAN region have the potential to trigger price wars among industry players. Competitors in the recreation industry are increasingly reducing prices as consumers become more price-sensitive and gravitate toward lower-cost options. Returns from overseas markets could fall due to failures in the business model, adverse economic conditions, or competitor action. The McDonald's challenge is particularly significant given that company's wide market reach and industry experience. Additionally, regional growth is a costly undertaking with uncertain returns.

Inbound logistics: Tasks here include the storage of products, receipt of produce from suppliers, and the internal transportation and handling of products. It is the first stage of the value chain and has the potential to create significant value. KFCH maintains a wide variety of menu options for its consumers through its restaurants, while increasing the efficiency of its distribution flow (Yip, 2004).

Operations: This stage enables products and services to be provided to consumers and is a value-creating activity involving tasks such as maintaining stock levels and operating businesses in accordance with set operating hours.

Outbound logistics: This stage is primarily concerned with the delivery of products to clients. KFCH could add value by offering home delivery of meals, bakery products, and feed-mill products. It could further gain competitive advantage by providing parking facilities for restaurant customers.

Sales and marketing: KFCH can use radio, television networks, and local newspapers to reach consumers promptly and effectively. These activities can, however, also become value-destroying if consumers perceive the company's products as insufficiently eco-friendly, which could damage sales (Veliyath & Fitzgerald, 2000).

Technological development: Technology has the potential to provide consumers with innovative products and solutions and is a primary tool through which a company can gain competitive advantage and add value to its offerings. On the other hand, it is also a potentially value-destroying activity, as it requires skilled professional employees who come at a significant cost to the company (Finch, 2004).

KFCH's major strengths include an increased regional market share, driven by recent acquisitions and the opening of new stores and restaurants. According to Malaysian industry statistics, the company shows no signs of diminishing growth potential, and its investors have seen consistent returns, making this one of its core strengths. The company's brand image has also propelled it to further heights, as it is associated with high product quality. A further strength is its reinforced market leadership through the acquisition of the entire issued and paid-up capital of Rasamas Terminal Larkin Sdn Bhd and Rasamas Melaka Sdn Bhd (Ehrbar, 1998).

Although KFCH is expanding, it still relies heavily on its home market of Malaysia for growth. Consequently, poor performance in the Malaysian market would greatly hamper its development and overall financial performance. The level of financial leverage has also increased due to the growing need for external funds to finance expansion plans. Furthermore, the company has engaged in serial acquisitions of various stores and restaurants, which can be a weakness insofar as the process tends to reduce earnings quality and visibility (Drejer, 2000).

For the company to obtain competitive advantage, generic strategies are most applicable, as they are characterized by each individual company's response to industry structure (Clarke, Bennison & Guy, 1994).

Opportunities and Threats

The first strategy depends entirely on the company's ability to control its operational costs, enabling it to offer products and services at the lowest prices in the recreation industry while still achieving high profit ratios. The second strategy involves differentiating products in a manner that incorporates unique features that customers value, thereby creating brand loyalty over the long term. Differentiation can be achieved through special product features, technological innovation, or superior customer care (De Toni & Tonchia, 2003). The third applicable strategy involves developing internal efficiencies that can strategically position KFCH to withstand external competitive pressure (Pfeffer, 2007). This study proposes that KFCH focus on market development through partnerships and diversification, which can be pursued through new product development. Both strategies would guarantee the company increased revenues and a wider consumer base.

The SAF (Suitability, Acceptability, Feasibility) test determines which strategy KFCH should implement. Strategies are graded on a scale of 1–10 across three criteria.

KFCH shareholders would consent to allowing strategic partners to jointly invest alongside the company. Stakeholders are most likely to support this strategy because it provides much-needed capital to fund the expansion program. Diversification of products can also be more readily achieved with increased capital, and internal efficiencies can be attained as new partners can provide both financial support and technical expertise. Partnership as a source of financing can be achieved through public offerings of KFCH company shares or by inviting strategic investors to invest directly in the company (Dickinson, 1999).

The SAF test was applied to determine which among the generic strategies is most suitable for KFCH Company. Strategies were evaluated on the basis of their suitability to company needs, acceptability to all concerned stakeholders, and feasibility on a scale of 1–10. The strategy that attained the highest overall score is therefore recommended for implementation.

The success of this strategy is supported by the three evaluative criteria: feasibility, acceptability, and suitability. The feasibility criterion considers whether KFCH has the competence and resources to deliver on a partnership strategy. The suitability criterion evaluates whether the recommended strategy addresses the circumstances in which KFCH operates, and it is grounded in the rationale of a market-expansion development approach. The acceptability criterion relates to the expected returns from the strategy, the anticipated reaction of stakeholders, and the level of risk involved (Bernard, 1981).