Introduction
KFC is a subsidiary of YUM Brands, Inc, with about 3% own managed restaurants and 97% franchises in 131 countries worldwide, making it one of the largest restaurant chains (Uddin, 2020, p. 172). However, despite being part of one of the world’s largest companies, KFC is still vulnerable to substantial risks. Starting from the corporate model of expansion and up to the choice of meals on the menu, KFC faces numerous dilemmas, threatening its financial stability. Although the company is a corporate giant with significant marketing experience and many competitive advantages, there are still financial, strategic, and public threats that may undermine its success (Jeynes, 2009, p. 92). Understanding what constitutes the main risks to KFC’s stability is essential in ascertaining an appropriate risk response plan. Nevertheless, assessing the risk management processes of the entire corporation is quite problematic since franchises may differ in governing and the threats they face. For this reason, as a former employee of KFC Philippines, I will present a case study of the risk management processes of this franchise based on my work experience, internal information about the company’s activities, and external sources.
Overview
Risk management is an essential part of the activity of any company, regardless of its size, profit, and field of activity. In general, there are two main approaches to risk assessment, depending on the structure of the company. First, an organization may have a separate department that collects information about the activities of the entire company and is responsible for identifying risks and planning responses to them. Second, another structure assumes that each department identifies risks and prepares a response to them, but a general manager prioritizes them, draws up a final risk management plan, and allocates funds.
The information published on the official websites of KFC and their central offices, as well as other reliable sources, is limited. Consequently, one can only guess how the risk assessment process takes place in a leading company. Jeynes (2002, p. 8) noted that the larger the organization, the more it needs risk management strategies that spread from top to bottom. Thus, it is likely that KFC has a separate department for risk assessment, which determines strategies based on feedback and information provided by other departments. This structure is also confirmed by the risk management processes in the KFC franchise located in the Philippines.
As a former employee of KFC Philippines, I am familiar with the structure of the company and know how the organization approaches risk management processes. KFC Philippines is a franchise owned by the family that also has the Ramcar business group, which includes a large car battery business, Mr. Donuts, Japanese fast food Tokyo Tokyo, and Poultry Max. Since it is common in Asia to involve families in doing business, the company’s board of directors consists of family members headed by the Chairman, and the executive committee is also represented by the Chairman and his sons. While this approach may seem out of place in Western business culture, it also has its benefits since, for the owners, the reputation of the business is the honor of the family.
Risk management at KFC Philippines is somewhat complex, with Ramcar’s Poultry Max being the main chicken supplier at KFC, on which a large part of the restaurant business depends. Since the companies belong to the same group, one can define that risk management begins with the work of Poultry Max but not KFC itself. Poultry Max’s general manager reports to the executive committee twice a month on major issues to identify and prevent significant risks. These risks include the quality and cost of chicken feed, as well as animal disease, sanitation, and meat processing that affects product quality. However, the primary responsibility for risk management rests with the department called “The Office of the Chairman,” headed by the Chairman of the company. The duties of the department include monitoring all the different divisions, assessing possible risks, and creating solutions. In addition, the department must communicate and cooperate with a general manager of each division to discuss solutions and find the most effective ones.
The risk management process at KFC Philippines goes through stages that are typical and necessary for any company. These stages include defining the objectives and scope of risk management, identifying the main risks and their significance, planning a response, and managing these responses (Hillson, 1999). Each of these stages is important for the company, but the most significant is the determination of the importance and criticality of the risks since the scale of the network and the parties involved in it make it almost impossible to interfere with all threats at the same time. In addition, planning an adequate response is also a critical step because choosing the wrong strategy can be resource-intensive but not effective. For example, trying to overcome the risk of an earthquake is not possible, and the company must focus on planning a response to its consequences. For this reason, the following part will briefly describe most of the risks of KFC Philippines to identify the main ones and strategies of their management in the next section.
Risk Assessment
The first major risk the company faces is supply chain disruption. As with most fast-food restaurant chains, KFC does not normally produce the raw materials on its own but rather uses outside suppliers to prepare the ingredients for its unique meals. Subsequently, the company relies on other business entities to function. Specifically, not only do the actual food producers have to sell the processed ingredients, but these items have to be shipped from factories to restaurants. The entirety of these operations comprises a system known as a supply chain. The more third parties there are in the network, the higher the possibility of disruption and subsequent delays there will be.
Moreover, KFC faces a number of risks related to the quality of the product and its taste. Firstly, since chicken is a highly perishable food, any delays in the supply chain can lead to a decrease in quality. Consequently, if these products are used in restaurants, customers can get food poisoning. Secondly, an important aspect is the production of uniform poultry since the taste of the final product that customers expect to receive depends on the quality and taste of the meat. If changes in feed or animal care technology occur and affect the taste of the chicken, customers may be unhappy with such modifications as they visit KFC because of the unique chicken recipe.
Thirdly, the risk is also the disease of animals, which can affect both the volume and timing of deliveries, as well as the quality of the final product, if the condition is not detected in time. As a consequence, this risk can lead to a shortage of products for the operation of all restaurants in the chain or even food poisoning or illness of visitors. Fourth, one of the greatest financial risks is the provision of animal feed due to the limited local agricultural supply associated with the geography of the Philippines. Although the company uses local feed and also buys it from other countries such as Australia and Argentina, negative natural factors, even in one country, can affect yields and increase feed prices. Since the company cannot buy less feed to provide for the animals, this situation entails financial costs. Finally, there is also the risk of an allergic reaction in customers due to incorrect product labeling or accidental exposure to allergens in products that should not contain them. While it is likely that these mistakes will affect individual customers, they will damage the reputation of the company as a whole.
The second risk is the possibility of the franchise system backfiring. The primary strategy of KFC’s expansion is franchising, which means issuing licenses to local sellers to conduct commercial activities using the general brand name. It is a fast and effective way of infiltrating new markets. However, the abundance of stores that are individually managed can create issues for the franchisor, especially in foreign countries. The less control the company has over its outlets, the higher the chance of ineffective management will be. Since KFC Philippines consists of a network of sub-franchisees, this risk is also relevant for a local franchise, although it belongs to one family.
Another risk for KFC globally and the Philippines franchise is associated with personnel management. KFC has franchises and company-owned restaurants in dozens of countries around the world, employing thousands of employees. For this reason, the company constantly faces the risk of ineffective management or neglect of the rights of employees, which can harm their reputation. This problem was most clearly reflected in the work of one of the company’s main competitors when McDonald’s workers in dozens of cities organized strikes demanding an increase in wages to $ 15 per hour (Vakil, 2021). Although this issue has generally been resolved in the company-owned restaurants, there is still a problem of control of working conditions in franchises and damage to McDonald’s reputation.
At the same time, since KFC has many franchisees and sub-franchisees, the company has limited influence on its management. Consequently, even the foreseen risk of staff dissatisfaction with working conditions and taking action can lead to the destruction of the company’s image due to non-compliance with the same standards by franchises. In addition, these factors can also lead to higher employee turnover, which will affect the costs of finding and training personnel, as well as the quality of service due to their inexperience.
The third risk is the public perception of KFC and the fast-food industry in general. As the culture of healthy eating becomes more widespread, many people start to view fast-food restaurants as primary sources of unhealthy food. Nowadays, Internet users are constantly reminded of well-known products from famous brands, such as McDonald’s, Chic-fil-A, Burger King, KFC, and others, high in fats, sugar, and salt. Most of these companies, including KFC, do not deny the fact of their foods’ potential harm. As a result, the advancement of health consciousness has the capability of damaging the company’s reputation and reducing customers.
Analysis of the Risks
In all cases, there is the problem of weakening brand attractiveness, brand loyalty, and reduction of revenues. Baryannis et al. (2019, p. 2181) argue that KFC had already encountered complications on such a scale in 2018 when a large number of the company’s stores in the United Kingdom were closed due to the deficit of chicken. Not only did the company permanently or temporarily close half of its assets in the UK, but it also lost thousands of employees and managers. The company had to restructure its logistics to resume its services quickly. Therefore, one of the main goals of the company and its franchisees was to assess and prioritize risks to develop a timely and effective response. The results of this analysis are reflected in the measures of their management.
The company uses various tools and methods for risk analysis to evaluate issues proficiently. However, one of the most often applied tools of KFC Philippines and Poultry Max as its main suppliers is CARVER. CARVER is a tool to evaluate and prioritize risks that stand for Criticality, Accessibility, Recoverability, Vulnerability, Effect, and Recognisability (Bencie & Araboghli, 2018, p.3). In addition, this tool provides directions to develop an adequate response. All the described risks were assessed by this tool during different periods of the company’s development.
Firstly, one of the major risks is supply disruption, which also has several sub-risks or reasons for failure. The supply chain is the most critical due to the short shelf life of meat and significant sales volumes; hence, even minor disruptions will lead to temporary or permanent restaurant closures. This risk also has the highest accessibility because supply problems can arise from a number of different factors. Recoverability and vulnerability are moderate but depend on the speed of KFC’s response because short-term interruptions will reduce the number of customers but, at the same time, retain regular visitors and staff. At the same time, this problem will have a significant financial and reputational effect on local restaurants and the brand as a whole since it is the brand that receives the most attention (Madanoglu, Castrogiovanni, and Kizildag, 2019, p. 240). In addition, this risk is easy to recognize and influenced by external forces.
Moreover, KFC Philippines and its main supplier, Poultry Max, are owned by the same family; thus, The Office of the Chairman also assesses the risks associated with the supply. The most serious are the risks of delivery delays and animal diseases affecting the quality of the product. According to CARVER, they receive a higher priority since, with high criticality and accessibility, they also have a severe effect on the company’s reputation and influence recoverability and vulnerability of the company. If hundreds or thousands of customers get food poisoning, brand recovery will be very difficult or even impossible. At the same time, the risk associated with the supply of feed is low. Despite the sufficiently high criticality, it has an effect only on the financial aspect and is easily recoverable, less likely, and vulnerable.
Analysis of the risks associated with the KFC Philippines franchise and its sub-franchisees using CARVER showed that these problems are of lower priority, although they are also crucial for companies. This conclusion was also reflected in the measures taken by KFC Philippines. The criticality of the risks associated with franchises is high for KFC since the shortcomings and high-profile failures of one or several restaurants harm the image of the entire brand. This aspect is also associated with KFC Philippines, which has sub-franchisees throughout the country. In addition, the accessibility of this risk is relatively high due to the scale of KFC’s activity, and the recoverability and vulnerability are average with the adequate response and work with the media. At the same time, the problems of franchises and sub-franchisees can have significant reputational and financial effects for KFC if they are of public importance. All these parameters also characterize the problem of personnel management and the working conditions and demonstrate that the risk of franchising and sub-franchising requires the development of an adequate response.
The risk associated with the virtues of healthy eating is the lowest priority in this analysis for several reasons. First, while the criticality of a massive population transition to a healthy lifestyle is high for a chain of restaurants offering high-calorie food, the accessibility or likelihood of such a change is low. Likewise, although most people are aware of the dangers of smoking or alcohol, a significant proportion of the population consumes these products. Consequently, the vulnerability of KFC to this risk will also be low in the near future. However, if this risk is realized, it will significantly affect the reputation and profit of the company and also has a low probability of recovery. Consequently, the company needs to develop a response to mitigate the impact of an unlikely but real risk.
Measurement
The CARVER tool has its advantages in assessing risks since the combination of points allows the management to accurately evaluate the priority of risks. This tool uses a five-point rating scale, in which “1” describes the least dangerous situation for each of the categories and “5” is the most dangerous. Consequently, The Office of the Chairman uses measurement data to help accurately track risks and understand their specific characteristics. In addition, although the results obtained demonstrate the priority of risks, individual categories can show directions for their management, for example, increasing chances of recovery.
However, assessing each of the categories also requires specific measurements to understand their magnitude. Risk measurement should be determined by the nature of the problem, which threatens the company’s stability. In terms of the supply chain and healthy eating tendencies, the risk is measured in quantities. Each store’s effectiveness is judged by the amount of money it has generated through sales. However, both these threats can negate these revenues partially or entirely. When the restaurants no longer receive ingredients, they cannot sell the food. When the customers stop viewing the brand as suitable for their needs, they will not buy from this retailer. Subsequently, The Office of the Chairman estimates how much losses the company will sustain if the food ingredients are not supplied.
Similarly, it is possible to calculate the approximate number of customers who will not visit the store. In both cases, the managers use the average purchase value, which will not be generated when the customers do not arrive, or the food is not sold. The resulting value constitutes KFC’s quantified financial risk. These indicators allow management to assess the criticality, recovery, and vulnerability of most risks. The same algorithm can be applied to the estimation of franchising risks, where the average purchase value is compromised by the franchisee’s incompetence. At the same time, the effectiveness of risk management will be measured by the costs of avoiding or mitigating problems and by financial losses if the risks are faced.
Control
Having assessed the main risks, KFC Philippines has taken a number of measures to avoid described problems and their consequences. I, as a general manager, received this information while working in the company and am displaying this experience in a case study. The chosen strategies are currently demonstrating their effectiveness. One of the reasons for the choice and the possibility of implementing these strategies is also the specificity of the KFC Philippines franchise, as it is a member of the Ramsar business group run by one family.
The supply chain risks are met and controlled by management because KFC Philippines and its main chicken supplier, Poultry MAX, are owned by the same family. Consequently, risk management begins at the supplier level, which partially saves KFC from unexpected problems related to product quality. Firstly, the company overcame the risk of supplying low-quality products by introducing standards for working with live animals, farming, and product processing. All processes are uniform, and each employee is responsible for the work done, which provides consistent quality chicken to the stores at a known cost. This uniformity was achieved by building ultramodern poultry houses to control all aspects of chicken rearing, no matter the external environmental conditions. Products that do not meet the standards cannot be sold.
Secondly, the company met the second risk associated with the quality of meat due to animal diseases by building a laboratory to test animals to treat them and meat to avoid its selling in case of infection. Meat samples are constantly tested in the laboratory, as well as live animals, to prevent the spread of disease and the supply of contaminated meat. In addition, the company avoids the risk of damage to reputation due to allergic reactions of customers to restaurants’ products, noting that their products can contain allergens and disclaiming responsibility on the KFC website (“Special diets,” n.d.). Thus, while the threat of delayed delivery is only diminished, the risk of food poisoning for KFC visitors is overcome.
The risks associated with the supply of feed for animals have been overcome by using multiple sources. First, a local Feedmill was built, which ensures a constant supply of quality feed and saves on transportation costs. Secondly, the company supplies raw materials from overseas, especially wheat from Australia and soybeans from Argentina. Thus, this approach reduces the risk of feed shortages or significant cost increases because multiple sources form a safety net.
The company also eliminated the risk associated with sub-franchising by offering a unique restaurant management system. KFC Philippines invites all investors to open their own sub-franchise; however, a significant portion of the governance is vested in KFC Philippines (The Philippine Star, 2021; “Franchising,” n.d.). Thus, even inexperienced managers can open their own KFC restaurant and ensure its high income and full potential since KFC Philippines will be involved in most daily operations. This approach allows for attracting investors and developing restaurants, but at the same time, ensures that all standards of work and service of KFC are maintained. This aspect also concerns the management of personnel and the provision of decent working conditions. Consequently, KFC Philippines reduces the risk of the negative impact of the sub-franchise on the image of KFC as a brand. Moreover, the global company uses official policies that oblige its partners or third parties to provide their employees with decent work conditions and discourage the exploitation of child labor and slavery (“Modern slavery act,” 2019). However, the company is still unable to influence the activities of other franchises around the world, making it nearly impossible to manage these risks.
Finally, in terms of increasing health consciousness, KFC Philippines did not make any changes yet, since the probability of this risk is low. However, the company can change its marketing policy to mitigate the risk in the long-term perspective. Instead of emphasizing the taste and flavor, the company can accentuate nourishment. There is no such product that would be entirely harmful to health. The human body needs fats and carbohydrates as long as they are not consumed uncontrollably. Therefore, KFC can highlight the nutritional value of their products, thus making them appealing to conscious eaters. Such a change in marketing strategy will allow the company to retain its image as a crowd favorite while publicly acknowledging the problem of excess. As a result, the risk of negative public perception is controlled and minimized.
Thus, these risk management measures and the extent of their application demonstrate the priority identified in the analysis. Moreover, these examples demonstrate the different risk management strategies that are most appropriate for each situation. The choice of strategy is consistent with theoretical findings on risk management and the matrix developed for their classification (Panthi, Azhar, and Ahmed, 2007, p. 15). Risks associated with high probability and effects, such as food poisoning due to the low quality of the meat, were met with an avoidance strategy. This category of risks was overcome by building laboratories and quality standards verification centers. The risks associated with the timeliness and sufficiency of supplies and sub-franchisees management were met by a mitigation strategy. This strategy was selected because only the probability or effect of the risks is relatively high, and KFC cannot have complete control over these processes. At the same time, a strategy of transferring was applied to avoid the consequences of a customer’s allergic reaction because there is always a low probability of incidence, which can have a significant effect on the company’s reputation (Panthi, Azhar, and Ahmed, 2007, p. 15). However, KFC accepted the risk of a negative perception of the brand due to a healthy lifestyle trend since it currently has no significant effect on its activities. These facts demonstrate a qualitative assessment and prioritization of risks, as well as adequate strategies for developing a response.
Conclusion
Therefore, the case of KFC Philippines demonstrates an example of effective risk management that protects a company from economic losses and damage to its reputation. The main feature of KFC Philippines is that it is part of a group of businesses owned by one family. This group also includes the company that produces and supplies meat for KFC restaurants. This feature allows management, The Office of the Chairman, to assess and mitigate risks across the supply chain. The example of KFC Philippines demonstrates that risk management requires detailed and systematic assessment at each stage of identifying risks and developing a response to them. This process follows an established and critically developed plan. In the first step, The Office of the Chairman receives reports from a general manager of each department and identifies the main potential risks. In the second step, management evaluates and analyzes each risk using the CARVER tool and other supporting methods and measurements to prioritize risks and identify the aspects that require the most intervention. In the third stage, measures are developed and taken to control these risks, depending on the strategies that can benefit.
The example of KFC Philippines demonstrates that the company chooses approaches to control all parties involved in the activities if such a scenario is possible. For this reason, the main supplier of meat and one of the suppliers of animal feed is controlled by the family that owns KFC. This approach lets the company take action to mitigate the risks associated with quality and on-time delivery. At the same time, the control of KFC Philippines’s sub-franchisees helps the company mitigate the risks associated with the failure of individual restaurants, which could damage the brand’s reputation. However, assessing the risk of a negative perception of KFC due to healthy eating trends as unlikely allowed the company to avoid unnecessary costs to overcome it. Thus, this case demonstrates that the correct identification and assessment of risks is necessary for the company’s activities to prevent possible threats and effectively allocate funds for planning a response for them.
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