Travis Book

YUM!

By Travis Book

March 19, 2013

I. ContentsI. Core Problem / Issue.............................................................................................................................3

II. SWOT Analysis...................................................................................................................................3

A. Strengths..........................................................................................................................................3

B. Weaknesses.....................................................................................................................................4

C. Opportunities...................................................................................................................................4

D. Threats.............................................................................................................................................4

III. Alternatives........................................................................................................................................5

IV. Recommended Strategy.....................................................................................................................6

A. Phase 1 : Now..................................................................................................................................6

B. Phase 2 : 1 – 3 years........................................................................................................................7

C. Phase 3 : 3+ years............................................................................................................................7

V. Appendix A : McKinsey 7-S Framework............................................................................................8

A. Strategy...........................................................................................................................................8

B. Structure..........................................................................................................................................8

C. Systems............................................................................................................................................9

D. Shared Values..................................................................................................................................9

E. Style...............................................................................................................................................10

F. Skills..............................................................................................................................................11

G. Staff...............................................................................................................................................11

VI. Appendix B : Financial Ratios.........................................................................................................11

A. Liquidity........................................................................................................................................11

B. Asset Management........................................................................................................................12

C. Capital Structure............................................................................................................................12

D. Profitability...................................................................................................................................13

VII. Appendix C : Macro Forces............................................................................................................14

A. Economic.......................................................................................................................................14

B. Political / Legal / Regulatory.........................................................................................................14

C. Social / Demographic....................................................................................................................15

D. Technological................................................................................................................................15

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E. Ecological......................................................................................................................................15

VIII. Appendix D: Porter’s 5 Forces......................................................................................................16

A. Rivalry...........................................................................................................................................16

B. Barriers to Entry............................................................................................................................16

C. Substitutes.....................................................................................................................................16

D. Supplier Power..............................................................................................................................16

E. Buyer Power..................................................................................................................................17

Bibliography..............................................................................................................................................18

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I. Core Problem / Issue

Since Pepsi divested YUM! Brands from their operational strategy the company has had to manage the

4.6-billon dollars of debt and reinvent itself to assure that its brand identity is strong and growing. They

are a company that is trying to define how to operate and provide products to feed the world in a

competitive global landscape. At the point of divestiture the company was generating a significant

amount of their revenue from their international markets. In 1997 approximately 20% of the company’s

profits came from international operations. (Siegel & Poliquin, 2012, page 1).

The core problems facing Yum! Brands consist of the following: 1) How should the company continue to

grow and gain new market share in other countries, 2) Properly evaluating the next market that will

emulate their success in China and allow them to leverage their standardized business process and

capitalize on the first mover advantage in new markets, 3) Continue to develop a strategy that enables the

company to implement new product offerings, such as Taco Bell, in the Middle East, and 4) The

continued execution and development of their existing international markets, which is driven mostly by

their strong position in China and implement a strategy that will capture new market share domestically.

II. SWOT Analysis

A. Strengths

YUM! Brands has done an excellent job in building shareholder wealth after the divesture form Pepsi.

They have been very successful at establishing a strong, identifiable brand and position worldwide. In

addition, the emerging countries continue to increase their appetite for fast service restaurants and

industry consumption continues as new markets and products are launched. A successful company in a

growth driven industry along with vibrant culture will make YUM! Brands a great employer. Other

strengths include the following:

YUM! Brands has articulated a clear, defined root strategy and operational strategy. They have successfully executed their root strategies through operational and organizational

strategies using standardization to generate efficiency. They have strong product development allowing for continued growth in existing and new

markets. A system of strength is their standardized operational message CHAMP’s (Cleanliness,

Hospitality, Accuracy, Maintenance, Product Quality and Speed) (Siegel and Poliquin, page 5). Strong leadership program throughout the company has provided consistency. Financially, the company has strong earnings and continues to maintain a strong profit margin. They do an excellent job utilizing their assets and generating revenues

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B. Weaknesses

The company competes with very strong competitors in highly competitive markets both domestically

and internationally. Though the company has a great deal of strengths, the company also has areas of

improvement in an industry that is constantly evolving based upon consumer taste, price and health

impact. Other weaknesses include the following:

Strong leadership is important to a company’s success but it can result in an autocratic style. The company declining market share domestically and lack of innovation to address the issue. Continuing to develop and manage the required human capital to encourage product innovation to

adjust to changing consumer tastes in their international markets. Though the company is strong financially, they could do better in collections of accounts

receivable and increase inventory turnover. Though low leverage of debt is good, it can also been seen as an opportunity to expand operations

and increase revenues. Overleveraged could hinder strategic flexibility and limit future growth opportunities Underperforming Brazil markets.

C. Opportunities

The biggest opportunity for the restaurant industry is that there is emerging economies and growing

middle classes all across the world. This allows for a company that can capitalize on the first mover

advantage to consistently grow their revenues. The key in taking advantage of this opportunity is

understanding consumer taste and preferences, and translating this knowledge into product offerings that

satisfy the evolving consumer need. Other opportunities include the following:

Finding the next China. Consumer demand for other product offering in their established markets (i.e. China). Consumer demand for products in other emerging economies and additional offerings generated

from market specific innovation (Middle East, Brazil and Africa). Continued operational efficiency, innovation from their large workforce, leveraging new

countries presented issues related to their business model. Continued implementation of CHAMPS system to differentiate its customer service to build

stronger global brand. Continued development of promotional programs that build Brand Loyalty. The restaurant market has high barriers to entry and leveraging this to continue its global

expansion. Strong power of supplier of raw materials.

D. Threats

There is currently a lot more pressure on industries that contribute negatively to public health care costs to

be more transparent and conscientious with regards to the ingredients and the products they are offering

domestically. There should be a concern and understanding that this could become a worldwide trend that

could drastically affect revenues in the future. This idea has been supported by recent research and

government reports on the increasing epidemic of obesity and diabetes in America. This has resulted in

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many governmental agencies considering steps to prevent and reduce consumption to prevent rising

health care costs. Other threats include the following:

Local, State, and Federal regulations and taxes to reduce consumption in the U.S. Changes in the Local regulatory environment that could enact regulations that limit the type of

food consumers eat. Potential Federal and State fat tax to provide for increased state health care costs. Continue negative press on obesity and diabetes. Negative press regarding the health and ingredient quality of the products offered. Restaurant industry has a lot of substitutes, at which there are low switching cost. Not being able to control input costs and commodity prices could have operational impacts and

affect their contribution and profit margin.

III. Alternatives

Growth

In an industry that is very competitive and is going to continue to be due to emerging economies and

economic stability, YUM! Brands must consider growth as a primary strategy. Growth may not be in

existing markets but mostly in international. The company could look at an inorganic growth model and

acquire more restaurants in the targeted countries to assure first mover advantage. The company could

also purchase a domestic competitor to grow and eliminate the declining revenue in the united state.

Another long-term growth strategy would be to develop popular product offerings that could be offered at

grocery stores. This would be a product where the consumer could purchase and eat products in the

comfort of the their home, and the product would be opened to a less capital intensive retail channel that

is currently in existence.

Status Quo

Status Quo would consist of only continuing to expand internationally, looking at ways to continue to cut

costs both variable and fixed. The company would continue to offer the same products in the United

States and not implement any innovation or inorganic growth to acquire additional market share. Also

YUM! Brands would not address the recent changes in the political and regulatory landscape and or they

would not concern themselves with a strategy that addressed the risk of regulatory agencies limiting

consumption of unhealthy products. They would effectively stay true to their original root and operational

strategy and continue to build their brand with the existing unhealthy products. This could present

concerns with their public relations campaign since these foods have been linked by research to obesity

and diabetes. Although this would be considered Status Quo, I am not sure that it would be a very

successful option. A deviation of this option would be for YUM! Brands to remain in status quo centered

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around their root and operational strategies but continue producing their unhealthy products and also

provide small selection of alternative healthy products. This will place the onus on the consumer and the

market to decide if the they want to pay for the healthy alternative. This will prevent the company in

having to revamp their menus and product offering. Also continue to evaluate their current position in the

United States and reduce risk buy transitioning into the Franchise business model.

Combination

A combination approach to strategy would include adopting a status quo around their current brand

growth strategies in China in the short-term while reviewing the opportunities to grow into grocery

products that can increase exposure and brand recognition. After achieving short-term status quo and

implementing mid-term growth strategies, they could then develop and launch healthy product offerings

in all their locations domestically to appease the political pressures.

IV. Recommended Strategy

A. Phase 1 : Now

The first phase of implementing a recommended strategy should focus on improving areas of weakness

and taking immediate advantage of areas of opportunities. A better strategy of improving the collection

of their accounts receivable plus a plan to turnover inventory to improve their overall financial strength

will allow for more operational flexibility. They should also focus on generating more revenue to pay

down their debt obligations. This will help with future growth and will not become a limiting factor for

future growth and flexibility.

Responding quickly to consumer demand and capitalizing on the first mover advantage should be an

immediate strategy that they should adopt. Exploiting and expanding new emerging markets such as

India, Middle East, Africa, Brazil and Russian should be a main focus to help emulate the success in

China and to continue to grow revenue. This is very vital to the company since their root strategy is to

build a leading brand in China in every category and establish global dominance. This will protect the

company as China begins to transition from growth mode to mature, just as the United States did.

Another immediate opportunity would be to retool and evaluate the offering in the declining market

domestically and craft a more aggressive strategy to deal with declining revenue by recapturing market

share. They can continue to develop and manage their human capital to encourage product and marketing

innovation especially in the United States to help drive revenue growth. This evaluation should include

understanding the US brands position, consistency and the required rate of return. This could improve as

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the economy improves but the company needs to be in a position to regain market share from their

competitors. This will require innovation, which will be pivotal in the success of gaining the domestic

market share.

B. Phase 2 : 1 – 3 years

After implementing immediate internal strategies to strengthen financial and stockholder returns, the

company should focus on organic and inorganic growth. Given that the trend is towards more sensitive

consumers’ eating habits the company needs to continue implementing and are looking for ways to

incorporate more nutritional and healthy alternatives to evolve with change regulatory environment and

consumer preferences. In addition, they should continue to review possibilities to partner or acquire

companies that already have established restaurants in the selected growth markets and implement their

standardized process to achieve value and quicker brand recognition and loyalty.

C. Phase 3 : 3+ years

Based upon the success of the growth strategy, the company needs to continue to address and monitor

sales in the domestic markets to assure that it does not continue to decline to a point that it cannot be

rebirthed. If the company cannot successfully increase market share then they should consider acquiring

some of their competition since they will have the financial flexibility to grow inorganically. They need to

consistently evaluate all of the markets and attempt to drive innovation for new products and marketing

strategies. This could include trying to leverage new promotion ideas and technologies.

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V. Appendix A : McKinsey 7-S Framework

A. Strategy

The YUM’s root strategy that has been communicated by their mission and vision is to be “the defining

global company that feeds the world” (Siegel and Poliquin, p 1, 2012). Based on their historical

performance and success, the company would like to replicate the success in other markets that they are

pursing (i.e. the Middle East, Brazil Africa and Russia). “Yum! Brands is committed to continuing the

success of the company since the divestiture from Pepsi. Our success has only just begun as we look

forward to the future, one which promises a long runway for growth, especially on an international

level.”( Siegel and Poliquin, p 1, 2012). This strategy successfully articulates the company’s competitive

direction that provides clear objectives, and business scope but lacks the clear understanding of what their

competitive advantage or value proposition to their customers. Their strategy is focused on not just

competing in today’s market place but how to continue their success and competing for future success in

a global market.

The company’s operational strategy has continued to evolve over the last ten years. The company focuses

on operational excellence as their foundation and strives for standardization but still finds a way to foster

innovation in each of their markets. The company is trying to build their brands to be “Dynamic and

Vibrant everywhere” which is articulated at every store by their operational approach of CHAMP’s

(Cleanliness, Hospitality, Accuracy, Maintenance, Product Quality and Speed). This is an expectation of

everyone within the organization and at their franchises. There might be a slight difference in execution

depending on each market but the expectations are consistent.

B. Structure

Given that the company has been spun off from Pepsi about 15 years ago, the business life cycle for the

company is more complicated than just stating growth or mature. The business life cycle should be

determined and understood based on each market they operate as well as their business units. Their

existing domestic business would be classified as transitioning from mature to decline. The Chinese’s

market would transition from startup to growth and the other business units would still be considered

startup. As they continue to develop and launch new restaurants to consumers in various consumer

markets around the world, the company’s life-cycle stage will continue to evolve.

The company has continued to position themselves in strong growing markets, which would be

considered their core business units for growth and divesting stores that are not in the core area and

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capitalizing on the franchise arrangement. This helps reduce risk and maintains strong revenue. Based on

this structure and the relationship with their franchises to produce and deliver their food products to

consumers, the structure could be defined as intensive tech in that they purchase all of their inputs from

multiple local suppliers and then they process the product and then price and sell the product to their

customers. Although this is an intensive process the company has streamlined and provided continuity to

the process to make sure that there is consistency and that it is as simple as possible.

C. Systems

The company possesses its own systems and process that support their mission as a “global company that

feeds the world” (Siegel and Poliquin, page 1, 2012). Yum! Brands’ most notable system is that for each

product offering (KFC, Pizza Hut and Taco Bell) the company is able to standardize the entire process

and equipment to make sure that there is continuity and that they are able to leverage their experiences.

For example, they use only two suppliers for their fryers for all of their KFC stores to assure quality

control, safety and consistency. This also enables them to capitalize on the economies of scale by

allowing the company to have strong purchasing power with their suppliers.

Another system that is instrumental in the standardized process is that every store is a training store. This

fosters the concept that every store is standardized and that there will be consistent training no matter

what location. Every store is taught to champion the operational message CHAMP’s (Cleanliness,

Hospitality, Accuracy, Maintenance, Product Quality and Speed) (Siegel and Poliquin, page 5). This

concept is integrated into every store to assure that there is a systematic process for the customer

experience. Employee’s are encouraged to show innovation with respect to Marketing and product

development, but insists on having consistency on the company’s leadership program and customer

service expectations.

Local suppliers and local labor are another important component of the system for YUM!. So important

that it could determine the overall success and the product variety that is offered in each market. They

implement strategies to connect with local suppliers and to attract talent from the local labor force. This

helps the company be competitive in the market and to have a better understanding of each market’s

needs by recruiting experienced consumers to work for the company. The company also capitalizes and

reduces it operating cost by standardizing their franchise contracts. This creates consistency to their

“business model that is central to their success” (Siegel and Poliquin, page 4, 2012).

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D. Shared Values

The company has communicated their commitment to their internal and external constituents as well as

the community. The company possesses superordinate goals that help guide the company’s execution of

their mission, vision and business strategy. This is communicated in their Corporate Social Responsibility

framework and their iconic expressions Future Back Vision and Dynasty Growth Model.

YUM! Brands CSR

People

Food

Community

Environment

(YUMCSR Website, 2013)

This creates the framework in how the company will operate internally, externally and how their business

model serves and impacts the community. The CSR is a defined concept that will allow them to continue

to be successful in the global market by communicating the importance of acting as a good corporate

citizen.

YUM! Brands Future Back Vision

Famous Recognition Culture where everyone counts

Dynamic, vibrant brands everywhere with one system operational excellence as our foundation

A Company with a huge heart

(YUMCSR Website, 2013)

This sets the tone and communicates the culture internally and externally. It is apparent that their

commitment extends to the communities.

E. Style

The company’s management style suggests that David Novak is a strong leader that is continuing the

success of the company through the different business cycles that each business unit faces. His actions

and leadership model implies that he portrays an autocratic style. This is demonstrated based on the

company’s initiative to standardize their business model and create a standard leadership model that is

utilized in every location. Leaders throughout the company are able to develop award systems that are

shaped by their personality, but there is still the requirement to implement the corporate leadership

program that has been established.

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More importantly there is a sense of commitment to their employees that includes not just financial

rewards but creating opportunity for professional development. The leadership model and the training

program is in place to assure that every employee is successful in their employment. Not only is this their

their commitment to their employees but also the local community that they operate in.

F. Skills

The managerial and technical skills demonstrated by the company are evident based on their execution of

their strategy since their spin off. YUM! executive team has been proficient in executing their root and

operational strategy and adapting to the innovations in the international markets. Unfortunately they have

not been able to implement substantial innovation to become more competitive in the domestic market.

They have been able to leverage their brand around the world to become an icon of China and other

emerging countries. They have been able to successfully implement a very successful sustainable growth

strategy and are consistently evaluating their international markets for additional product offerings. Time

will tell if the executive management can fend off their domestic competition and either rebrand or

innovate to gain market share domestically.

G. Staff

As indicated in each company’s skills and style, executive leadership has played a vital role in the

development and execution of root, operational, and organizational strategies. The company has figured

out that by utilizing local labor markets to staff their restaurants, it has enabled the company to leverage

cultural experiences and innovations to their product offerings. They allow their employees to innovate

with regards to marketing and product development to enhance and add value to the business. This allows

specific markets to customize the food on the menu to achieve a stratifying taste to meet the needs of the

local market. As mentioned above, leadership has been centralized to assure that there is a consistent

message being communicated. Even though leadership is centralized the company fosters innovation in

marketing and product development. This business model aligns with the company’s overall strategy of

exploiting the emerging countries and establishing the company’s brand globally. This certainly creates

the opportunity to take advantage of the concept of being a first mover into a market place because of the

systematic process that is created.

VI. Appendix B : Financial Ratios

A. Liquidity

Current Ratio – YUM!’s has improved their liquidity to better cover their liabilities but

their current liabilities exceeds their currents assets. This is concerning since the company

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might be having issues paying their current liabilities. Lower than 1 doesn’t always

indicate a critical problem, but rather, something management should be aware of. In the

fast food industry this might not be as big of a problem since the inventory turns over

faster than the payment of the associated liability.

Quick – YUM! had been demonstrating an upward trend in improving liquidity but during

2012 had taken a step back. They could be having issues converting existing inventory

into sales.

Average Collection Period (days) – YUM! has been pretty constant in maintaining their

collection of accounts receivables maybe if they could figure out how to reduce this

number their liquidity would improve.

Inventory Turnover – YUM! should consider increasing its inventory turnover to improve

their liquidity position.

Liquidity2012

% Δ2011 %

Δ2010 %

Δ2009 %

Δ2008 %

Δ2007 %

Δ2006

Current Ratio 0.87 -9% 0.95 1% 0.9422% 0.73

25% 0.55

-31% 0.72

28% 0.52

Quick Ratio 0.49

-22% 0.6

-13% 0.68

49% 0.35

29% 0.25

-96% 0.49

35% 0.32

Avg Collection Period 46.58 2% 45.84 0% 45.96 -1% 46.43 -7% 49.82 6% 46.94

10% 42.05

Inventory Turnover 33.62

-18% 39.57

-32% 52.22

-15% 59.88 -4% 62.47

-13% 70.34

-13% 79.71

B. Asset Management

Total Asset Utilization – They have demonstrated consistency that they are utilizing their

total assets sufficiently to generate sales.

Fixed Asset Utilization – Similarly, they utilize their fixed assets to generate over three

times the amount in sales.

Asset Management2012

% Δ2011

% Δ2010

% Δ2009 %

Δ2008 %

Δ2007 %

Δ2006

Asset Turnover 1.53 5% 1.45 -1% 1.47 -8% 1.59-

3% 1.64 6% 1.54-

3% 1.59

Fixed Assets Turnover 3.3 4% 3.16 7% 2.94 3% 2.86-

5% 2.99 7% 2.79 2% 2.74

C. Capital Structure

Debt-to-Assets – The firm is maintaining a moderate to higher level of long-term debt.

This leverage can limit company future strategic flexibility and decisions.

Debt-to-Equity – Similarly, they have a high ratio of debt to shareholder equity which

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means the company is well capitalized.

Times Interest Earned – Given that the company has a higher level of debt, it would be

expected that the amount of interest expense compared to operating income would be

high.

Capital Structure2012

% Δ2011

% Δ2010

% Δ2009

% Δ2008

% Δ2007

% Δ

Debt to Assets 1.35 5% 1.28 2% 1.25 5% 1.1817% 0.98

-21% 1.19 -9%

Debt to Equity 1.37 -33% 1.82

-25% 2.28

-40% 3.19

Equity<0 2.82

44%

Times Interest Earned 14.06 16% 11.7913% 10.23

26% 7.53

19% 6.07

-28% 7.77 1%

D. Profitability

Contribution Margin – Yum! has maintained a good contribution margin over the past 5 years.

This would indicate that they are doing a good job controlling their variable costs.

Profit Margin on Sales – They also have a consistent profit margin over the last five years and it

is trending upwards.

Return on Total Assets – The strength of the company is evident in their return on total assets,

which have been consistently in the teens for the past 5 years.

Return on Shareholder's Equity – They have a good return on equity, which would make all

shareholders very happy with content with the performance of the firm.

Primary Earnings Per Share – They are consistently increasing their earnings per share which

could be a factor of either generating more earnings per share of stock or they could be reducing

the total amount of outstanding shares to bolster their earnings. The company did repurchase

some shares in 2011 and 2012 but not enough to account for the increase in earnings.

Price/Earnings – Where stock price is the investor value on future earnings, price to earnings

ratio is comparing current earnings to stock price. The company has produced consistent

earnings for the last three years that are consistent with earnings in relation to investor’s

expectations. As for 2012 the PE ratio was 1915, the interpretation is investors are willing to pay

$19.15 for 1 dollar of current earnings.

Profitability

2012

% Δ

2011

% Δ

2010

% Δ

2009

% Δ

2008

% Δ

2007 % Δ

2006

Contribution Margin27.7

0 0% 27.60 -3% 28.40 10% 25.70 5% 24.30 -3% 25.00 -3% 25.80

Profit Margin on Sales % 16.8 14 14.40 -8% 15.60 6% 14.70 9% 13.40 3% 13.00 -2% 13.20

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0 %

Break Even in Dollars

Return on Assets %17.9

516% 15.13 1% 15.02 -5% 15.71

11% 14.04 4% 13.41 -2% 13.71

Return on Equity %80.5

3 5% 76.36

-17% 89.29

-162

% 234.2320% 187.52

62% 70.77 19% 57.26

Earnings Per Share 3.3819% 2.74

13% 2.38 7% 2.22

12% 1.96

14% 1.68 13% 1.46

Price Per Share64.7

2 9% 59.0116% 49.66 29% 35.38

14% 30.28

-27% 38.54

-53% 58.80

PE Ratio19.1

5

-12% 21.54 3% 20.87 24% 15.94 3% 15.45

-48% 22.94

-76% 40.27

VII. Appendix C : Macro Forces

A. Economic

During the last recession, in general this really didn’t have a negative impact to YUM! Brands, they are

not as price sensitive as other higher end restaurants. Also this could have been offset by their growth.

Based on the general concept of increase GDP, lower unemployment rate and an increase in discretionary

income it will only help benefit the restaurant industry. The consumers that did eat at home more

frequently will probably start spending more in this industry based on a larger trend. But this presents

another issue for the restaurant industry at least domestically, since the largest operating expense for

restaurants is their employees’ wages. Lower unemployment put upward pressure on wages reducing their

profit margin and resulting in issues with talent management and retention of “A” players. There is a

concern regarding commodity prices, since the restaurant industry has exposure to commodity

fluctuations. This is an issue since the company has to typically absorb the commodity increase and

maintain stability in their menu prices. I would suspect based on the recent drought nation wide that the

company will see an increase in crop prices since farmer’s productivity dropped due to the lack of

irrigation water and natural precipitation.

B. Political / Legal / Regulatory

The restaurant industry is susceptible to political, legal, and regulatory changes both domestically and

internationally. As the company continues to operate and expand their operations internationally the

political risk and uncertainty increases. The company needs to continue to research the local regulatory

framework in order to adapt its business model accordingly. This will ensure success in these new

markets.

One issue that the company needs to be aware of domestically is regulations related to nutrition labeling

of products offered in fast service restaurants. This can be problematic since the majority of the product

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offerings consist of high calories and fat content. This could educate and change purchasing behavior of

consumers in a way that negatively impacts revenue. This is in response to the growing rate of American

obesity epidemic in the United States. Additionally, there is the concern that states could respond by

limiting caloric intake and product offerings or create fat taxes to disincentivizes consumers from

purchasing these products.

C. Social / Demographic

As is it correlates with the changing political and regulatory landscape there is a push by consumer’s

tastes and social habitats to eat healthy meals. Consumers are paying more attention to their overall

health. This is a strategic concern and disadvantage for fast service restaurants since the majority of their

products are considered unhealthy as touched on above. In order to responded to this YUM! Brands need

to innovate their product offerings domestically to help rebrand the company in order to reposition. The

company should also be evaluating this internationally as well since this trend will continue especially as

emerging countries start dealing with rising health care costs.

D. Technological

The industry could start to implement new technology to enhance their advertising and their connection

between advertising and revenue generation. This could be using social media, a medium to

communicate promotional pricing to generate revenue. They could also be implementing the use of data

analytics to better understand their consumers purchasing habits and generate better insight on what the

market is demanding. This could help enhance the company’s ability to react to new markets and

triangulate the data to determine and execute success in those markets.

E. Ecological

With more emphasis on reducing the carbon footprints and environmental sensitivity companies are being

forced to consider how this is impacting their business. The restaurant industry is being forced to deal

with these issues. This extends from the type of ingredients they purchase to their facilities total carbon

footprint. Companies are implementing processes and strategy to appeal to the more education and

environmentally sensitive consumer. YUM! has implemented environmental goals and best practices to

address these topics of sustainability and reducing their carbon footprint. The company has implemented

policies that encourage them to move towards sustainable sourcing. Not only are they implementing

policies but they have implemented projects that Reduce, Reuse and Recycle our food and packaging

waste.

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VIII. Appendix D: Porter’s 5 Forces

A. Rivalry

Industry rivalry is defined by many factors. The first is the definition of the industry followed by the

number of competitors and their respective strength. The fast food industry has a number of competitors

as this competition forces firms to try to differentiate their brand and offerings to meet their customers’

needs. First movers, typically have an easier time with establishing their business and continuing to grow.

This is driven by the ability to develop a brand and establish brand loyalty. Since the competition is

fierce, and that there are an abundant of fast food restaurants locations, it is an industry norm to engage

customers with promotions, games, toys and constantly introducing new menu items to lure or incentivize

customers into the restaurant. There is also lots of advertising that is used to communicate these

promotional strategies. These factors create intense competition between the competitors.

B. Barriers to Entry

The fast food industry has high barriers to entry. Any new entrant would have to overcome the first-

mover advantage. There are a lot of restaurants that have established strong brand identity and good

customer loyalty. Some of these restaurants have become American icons. The major players spend a

great deal of capital on advertising in support of their brands. This hurdle makes it tough to gain market

share as a restaurant. There is also a capital limitation that would require restaurants to develop an

accumulated advantage that the strong brands have already developed.

C. Substitutes

The restaurant industry has very strong competition and that is resulting from many restaurants with

similar menus. Very few have differentiated their product offerings. The majority of the menus are very

similar providing to the consumer many options. The food industry has numerous other substitutes

including grocery stores (frozen foods), full service restaurants, delis, hot dog stands, etc.

D. Supplier Power

All the ingredients needed for restaurants to provide products come from a variety of suppliers and

vendors. All of these products or ingredients are considered a commodity, which creates power to the

suppliers or farmers that provide the ingredients. YUM!’s business model focuses on using local sourcing

of ingredients which directly determines the products offered on their menus. The hope is to create

relationships that they are able to leverage but the commodity prices and demand ultimately drive the

price of the raw materials.

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E. Buyer Power

Buyers are their customers. Customers have buyer power due to the low switching costs associated and

the amount of substitutes. Price is a key factor to the majority of consumers so this will affect their final

choice. If the product is irrationally price compared to their competition regardless of the brand the

restaurant will lose the revenue. There is also concern about placement and promotion and lastly the

actual product taste and quality. These are all considerations and resulting in high buyer power.

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March 19, 2013

Bibliography

Siegel, J. and Poliquin, C. (rev: October 5, 2012). Yum! Brands. Harvard Business School. Harvard

Business School Publishing, Boston, MA

Yum! Brands’ website: www.yum.com/annualreport/

Yum! Brands’ CSR:

www.YUMCSR.com

YUM! 2007 Annual Report (2007). Mergent Online.

YUM! 2008 Annual Report (2008). Mergent Online.

YUM! 2009 Annual Report (2009). Mergent Online.

YUM! 2010 Annual Report (2010). Mergent Online.

YUM! 2011 Annual Report (2011). Mergent Online.

YUM! 2012 Annual Report (2012). Mergent Online.

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