Yum! Brands Harvard Business School Case Interpretation

1. How well have they performed financially during the 1985-1990 and 2000-2004 periods? Show your financial analyses (ROA, ROE, and etc.). A table can be useful here.

In order to make this a relevant financial comparison, I have decided to compare the banner year in the case, 1991, with 2004 for the majority of my calculations. On a basic level, we can see that YUM has grown from 20,987 system units in 1991 to over 33,000 today, more than doubling its presence on the planet (only slightly thanks to the addition of Long Johns Silvers and A&W). During this time, worldwide profits have jumped from $575 million in 1991 to $4.36 billion in 2004; demonstrating an average per unit annual profit move from $27,398 to $132,121.
While these numbers are impressive, financial ratio analysis makes it more difficult to ascertain the true strength of YUM. The return on assets seems to have declined by a fraction, from 13.5% to 12.2%. However, this can probably be explained by a maturation process that requires more assets to reach increasingly distant locations. Also, the current quarterly revenue growth percentage for YUM (4.3%) lags far behind that of its main competitor, McDonald’s (9.2%), and the industry as a whole (15.3%).

Nevertheless, YUM must be doing something right recently, since it’s share price has risen steadily from 25.12 on 1/2/03 to 51.29 on 5/31/05, amid strong analyst outperform recommendations.

2. What kind of business is a fast food restaurant? Show your industry analysis.

Between the times that George H.W. Bush began his tenure as Vice-President in 1980 and ended his term as President in 1992, fast food restaurants underwent a complete revolution. Before 1980, the industry was comprised of a few regional chains whose primary concerns were dining area service and large kitchen space. This all changed in the 1980s, when new locations were built to emphasize speed, simplicity, convenience, value, and variety. Such a radical transformation begs an industry analysis.

In hindsight, the decade-long shift to the Fast Food Nation we live in today had nothing to do with the inherent strength of the quick service restaurants (QSR) industry. Rather, it had everything to do with the industry’s ability to meet consumers’ needs. Using Porter’s Five Forces model as a guide, the industry is highly unattractive in four of the five force areas, with supplier power being the only real area of strength for QSR companies. On this level, QSRs purchase only the most basic of food items (lettuce, chicken, et cetera), and have a number of suppliers to choose from when making these decisions. Furthermore, as the case demonstrates, QSRs have added supplier resources, in the form of the co-ops and integrated distributors that have been formed over the years, which make the process even easier and more cost-effective.
Degree of rivalry, threat of entry, and threat of substitutes are all highly related (and highly dangerous) when speaking of the fast food industry. Beginning with the competition that already exists, it is fairly obvious when you drive anywhere in (and beyond) that the QSR market is saturated. And since the Yum Restaurants, Burger King’s, McDonald’s, and Wendy’s of the world are all somewhat equally strong, it makes the competition that much more intense. Everyone mimics everyone else to some degree, menu items are copied, and margins are reduced.

Most likely, this comes as the result of the QSR industry lacking complexity. Essentially, anyone can do this with a minimal amount of startup capital and some very basic food distribution knowledge. Consequently, entry barriers are slim when it comes to fast food. While economies of scale do exist that allow the largest companies to operate on lower cost levels due to their buying power and cross country presence, individual concept QSRs and smaller chains can still thrive under the right business model.

Along the same lines, it has become increasingly hard to identify where a QSR stops and all other restaurants begin these days. More and more establishments open that blur the line between fast food and a family/casual dining experience. A great example of this phenomenon can be found in the case, namely California Pizza Kitchen. While not a direct competitor to the other PepsiCo restaurants at the time, it still pulled customers and their dollars away from the QSR industry.
Finally, we come to buyer power. Unfortunately for QSRs, their customers are extremely price sensitive AND can easily switch to a competitor at the drop of a hat. On the positive side, there are so many potential customers (since everyone has to eat) that the loss of one person can easily be made up by adding another. However, now that QSRs can be found on virtually every corner of every town on the planet, it is next to impossible to build the type of true brad loyalty that guarantees repeat business.
Yet despite all of the red flags that appear in the fast food industry, it continues to thrive thanks to the simple notion that, as a whole, it meets customer needs. As a result, QSR growth continues at a strong pace even though individual companies within the industry face difficult problems every day.

3. What are Yum’s resources and capabilities? Are they general or specific? Are they sustainable as strategic weapons? Explain the sources of sustainability of each key resources and capabilities.

When analyzing Yum Brands restaurants, there are not a whole lot of specific resources that the company has at its disposal. Naturally, this is a result of the industry in which it deals, which is very fragmented in its own right. Nonetheless, the Yum restaurants have one powerful weapon that is sustainable for many years to come: national brand awareness.
As the pioneers and market leaders in the chicken, Mexican, and pizza segments of the QSR world, Yum Brands is able to trade on its name alone. Consumers are aware of their products (along with the A&W and Long John Silvers chains to a lesser extent) and trust that they will get a similar experience no matter where they are on the planet. Suppliers who want to land or keep the big account, have to give the Yum Brands what they want – at the price they want – or risk losing a major chunk of business. These two elements of brand image will allow the company to maintain its dominance for many years to come. In fact, the only way brands as strong as Taco Bell, KFC, or Pizza Hut could falter is through a health scare (like the finger found in the Wendy’s shake), merger, extremely poor management, or an instantaneous massive shift in consumer tastes.
Looking at the more general resources Yum Brands has at its disposal, one must start with an extension of the brand image concept discussed above. To be clear, the marketing clout Pepsi wields is matched by only a few other consumer product companies. While this is a very general resource, it has worked its way into the culture of Pepsi, and more importantly its budget, thereby creating an economy of scale by its sheer size. This path dependency limits what other QSR can do to counteract a move by the Yum Brands.

Another general capability that was instilled at Pepsi around the same time as the commitment to marketing was the aggressive mentality perpetuated by Donald Kendall. By constantly keeping Coke in their sights, Pepsi earned a reputation as a battler not content with second place. This aggressiveness worked its way into the Yum divisions in the form of decision independence for key managers of each division. However, this aggressive capability will continue to have diminished sustainability as the six divisions of Yum become more integrated.

There are two final general capabilities brought up in the HBS case that have become less important over time. The first, ability to shift food preparation up the supply line, will continue to be a sustainable part of the business. By using more and more prepackaged ingredients, the Yum locations will keep onsite costs near the lowest possible. However, this once impressive ability has become more commonplace in the last decade that its relative weight has seriously decreased despite being sustainable. The other capability, being a “generalist in fast food” (by offering delivery, carryout, and dine-in), suffers from this same reduced weight situation. Moreover, it is not sustainable, now that numerous competitors offer similar options.
4. Are these resources and capabilities related or unrelated? You may use a value chain analysis here.

On the surface, pizza, fish sandwiches, and chicken dinners are vastly different types of cuisine. However, in the QSR world, these items are delivered using almost duplicate core primary activity models. Whether we are talking about Pizza Hut, Taco Bell, or any of the other Yum restaurants, the operations, outbound logistics, marketing, and service are virtually the same:
�· Advertising drives customers to want to eat food from a particular location.

�· Food is assembled from mostly precooked ingredients in a small kitchen area upon a phone/in-store customer order.
�· These food items are given to the customer in slick packaging by a low-wage employee.

Ã?· Customer service after the order is a hallmark – food can be returned without question even hours later.
In fact, since many of the ingredients used are identical (shredded cheese finds its way from a Taco Bell quesadilla to a Pizza Hut personal pie), the primary activity process is really interchangeable across the divisions. Sure there are minor exceptions (like the Pizza Hut emphasis on dine-in and delivery over carryout), but on the whole, the value chain holds across all of these resources and capabilities. Thus, marketing, aggressiveness, and food prep are all related to one another in the process and between divisions.

Of course, the major hurdle, from a value chain analysis standpoint, is the lack of coordination between restaurant divisions when it comes to the support activities. Nothing is set in stone, other than maybe the firm infrastructure. Human resource management, technology development, and procurement have become functions that headquarters hopes all the divisions will share, but does not mandate that they do. As such, the Yum divisions will continue to swing back and forth from being a cohesive collection to distinct divisions, every time a new program is added that one or more division chooses not to participate in.

In summary, the primary activities across the different divisions are similar enough to conclude many possibilities for scale and scope economies. However, many of these opportunities are likely to be lost given the freedom each division has to determine its own fate. Without stronger support activity sharing, Yum Brands might not ever reach its full potential. On the flipside, this freedom might be the very reason the brands continue to make nimble changes that keep them on top.

5. How have its structure and systems changed? From what to what?
Yum Brands, back in the days when it was called PepsiCo Restaurants, was originally a conglomeration of restaurant chain accounts put together as much for the sake of adding Pepsi fountain accounts as for pure profit from food sales. Chains were acquired and managed virtually independently, essentially foregoing the usual corporate practice of bringing them in line with the rest of the business units.

At the time, the restaurants (especially KFC and Pizza Hut) were considered, first and foremost, dinner operations. Even still, they each were on the cutting edge of QSR for customers of the early 1980s. Order to eat conversion time was much faster than any other option out there. But management at each division could tell that lifestyles were drastically shifting toward the need for even quicker dining alternatives. The HBS case highlights how “an extensive analysis of customers’ needs had shown that fast service was very important and that Taco Bell’s standard of about 100 seconds was not sufficient.” Consequently, all of the divisions shrank lead time down to a bare minimum, using various methods including advanced food preparation and smaller dining/kitchen space. Taco Bell , as an example, was able to reduce customer waiting time to an average of 30 seconds.

These early changes can be credited for speeding up the QSRs into full-fledged fast food restaurants. Yet, the complete overhaul of the restaurant industry is really a result of companies like Yum Brands thinking beyond the four walls of their chain locations. They wanted to be ubiquitous, for lack of a better term. An early example of this came when Pizza Hut began to offer delivery service in order to compete with Domino’s. According to the case, this was the first step in the “repositioning of Pizza Hut into pizza distribution, rather than just the pizza restaurant business.” John Martin, CEO of Taco Bell, took it one step further by saying “We are in the business of feeding people, and we don’t need buildings to do that.”

With each Yum Brand division now hungry for more market penetration, the company structure shifted ever so slightly. Pepsi Partners was formed in 1991 to give the collective group one voice when approaching the largest contracts. By creating this task force, Yum had a much better chance at “reach(ing) airports, stadiums, retail stores, colleges and other nontraditional settings with carts, kiosks, and other downsized modular units.” And it is this careful balancing act of decentralized management aided by strong headquarters programs, which keeps Yum profitable today.

6. Are there strategic fits between resources, businesses, and structure/systems? Explain the strategic fits or misfits.
With the traditional brick-and-mortar market as saturated as it is today, QSR companies like Yum Brands are going to need to be more strategically sound if they want to survive. Surely, with the constant ebb-and-flow of real estate revitalization, there will always be a new development project on which Yum can push its restaurant concepts. But, as we started to see in the 1990s, the true gains are to be made by taking established name brands like Taco Bell and A&W into smaller and more unique spaces. Luckily for Yum, they seem well-equipped to handle this brave new world.

When you boil it down, the key reason why Yum is prepped for survival is that its primary resource, brand marketing, can be leveraged across every business unit in a similar fashion since all six divisions share a common value chain. While some units are stronger (Taco Bell, KFC) than others (Long Johns Silvers, A&W), senior managers in each division are facing nearly identical operational tasks on a daily basis. As such, the managers at A&W and Long Johns Silvers can focus on building the image of their brands without having to worry about the cost of lettuce (since they reap the benefits of scope generated by PepsiCo Food Systems).

In my opinion, Yum Brands is especially successful at maximizing the success of their brands (given the highly competitive nature of the QSR industry) thanks to the structure of the business. The causal ambiguity created by the loose affiliation between brands seems so obvious yet would likely be impossible to duplicate. If I was building a company that consisted of six restaurant concepts, the last thing I would do is allow division managers to shun companywide initiatives. Yet, it is this relative freedom that the senior managers at Yum possess in accepting or declining programs that makes each brand so successful. For example, would KFC have hurt its own bottom line if it abided by the new distribution system being implemented by Yum? If the answer has even a 1% chance of being ‘yes’, then the company is better off letting its senior managers decide what works best for them.

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