Yum Brands - Opportunity for Business Innovation

Post Summary

This blog post is relevant as it highlights a stark example of Yum Brands, a leading food chain company which runs KFC, Taco Bell, and Pizza Hut—announced disappointing U.S. results in early February.

To restart growth, the company plans to aggressively introduce new products and attempt to refresh existing brands. Its best chance of success will come if it stages experiments, considers introducing new brands, and also considers business model innovations.

This article below has been written by Scott Anthony, Innosight Partner and Innosight is known for their Harvard case study roots as their founder Clayton Christensen is a world renowned professor there. In the work we do at Helix on helping our clients develop effective innovation business strategies leveraging Web 2.0 - we view Innosight as one of the best practice research firms on Innovation.

Introduction

Although this case is geared to the food industry – it also is applicable to many organizations that are in crisis – need growth but have not developed the corporate culture that enables them to evolve. This is one area where we have expertise at in Helix to have robust transformation change methodologies to support our clients innovate. The number one enemy is corporate culture in executing effective innovation and change practices – many solution providers do not understand cultural diffusion and complexity science techniques that can help “unglue” an organization to respond to new attractor mechanisms.

Enjoy reading this case below and at the end of it – we pose some questions that any organization can reflect upon as well?

When a company CEO states, “In all candor, the best thing I can say about our weak U.S. performance in 2007 is that it sets us up for growth in 2008,” it is a pretty clear sign that a company needs a shot of innovation. Yum Brands Inc. CEO David Novak will have to act carefully if he hopes to achieve the growth he seeks.Yum has three of the most recognized fast food brands in the world: KFC, Pizza Hut, and Taco Bell. Its international sales are surging. However, while McDonald’s hit its stride with new products like its chicken snack wrap and its high-quality coffee, Yum’s U.S. operations seem to have stagnated. Same-store sales, a critical metric in retailing, were flat in 2007. Operating income dropped 3 percent from 2006 to 2007.To address these issues, Novak told investors that the company was considering a range of changes.

For example, KFC will be re-branded to be “more youthful and contemporary.” The chicken chain could be restructured around a “nonfried chicken platform.” Yum plans to roll out a series of new products across the chains, and will seek to make its restaurants “destinations” throughout the day.Innovating out of stagnation is a very difficult task. A wholesale change in a company’s core formula can fail to land new consumers. Worse, it can drive away core consumers that are critical for long-term success.

A past Innovators’ Insight detailing jewelry retailer Zale Corp’s efforts to master this problem raises a cautionary note. The company felt stuck in the middle tier of its market. Zale’s flagship Zales Jewelers division couldn’t command the price premiums enjoyed by competitors like Tiffany. Neither could the division effectively compete against low-cost attackers like Wal-Mart. So the company sought to move up-market to reach more upscale consumers.On February 18, 2005, then-Zale CEO Mary Forte told investors, “We’re in the process of really kind of tearing everything apart now.” The stock jumped close to 10 percent on the news. But the effort bombed. Zale failed to attract new customers and drove away a significant portion of its core budget-conscious consumer. Since Forte’s announcement Zale’s stock has declined more than 40 percent, and it has changed CEOs twice.One lesson from Zale’s struggles is that a lack of growth is not always synonymous with a lack of loyal customers. On the contrary, a company with stagnant sales could very well have built a solid group of customers that absolutely love the company’s core offering. Companies seeking to innovate out of stagnation need to avoid the double whammy of failing to attract new customers while killing core customer loyalty.We have three pieces of unsolicited advice that we think would help Yum Brands successfully escape its U.S. stagnation.

1. Stage investments carefully

Yum is sure to do substantial market research before it implements any changes to its existing stores. Market research is a useful tool to help companies create and execute a winning strategy. But what customers say they will do and what they actually do can be two different things. Also, execution-related challenges sometimes only appear after implementation exposes unpredictable interdependencies between processes.Moving full speed down a transformative path oftentimes is a strategic mistake. If the consumer research turns out to be faulty or execution turns out to be trickier than anticipated, companies can end up “stuck” with a flawed model that is difficult to adjust.McDonald’s has thoughtfully approached its innovation efforts. It starts with experiments in a central test kitchen. Then it trials products in select geographies. The in-market experience allows McDonald’s to figure out if stated purchase intent from consumers translates into actual purchases. If the experiments succeed, McDonald’s can then scale the offering.Yum might be tempted to make a “bold move” to show how serious it is about change. It has a far greater chance of creating long-term impact if it precedes a big splash with a round of careful in-market testing.

2. Consider introducing new brands

Companies always feel tempted to “leverage” existing brands as a cost-effective way to enter new market segments or reach new customers. After all, those brands have legitimate strengths, and it seems cheaper to build on what you have than to create something new. But those brands can bring baggage that outweighs projected benefits.It is difficult and expensive to change the meaning of an established brand so it appeals to more upscale—or for that matter more downscale—customers. Companies seeking to branch into different market tiers need to consider establishing new brands.For example, think about how Toyota managed its move from a bare bones low-cost competitor in the 1950s and 1960s to the automotive titan it is today. It didn’t seek to bring its Corona brand that appealed to budget-conscious consumers to new market segments. Rather, it introduced a series of new brands, like Avalon, Camry, Lexus, and Prius.Perhaps Yum can transform the KFC brand into a more hip, healthy, chicken provider. But in the long run Yum might have more strategic impact creating a new brand (or buying an emerging company).3. Explore new business modelsThe basic fast food business model hasn’t changed a tremendous amount since McDonald’s broke through in the 1950s. Offer a straightforward, reliable selection of food at reasonable prices. Seek to attract a steady flow of customers, especially repeat ones. Franchise the concept to local owners. Profit.There have been new food concepts (Mexican, sandwiches, frozen yogurt), attempts to introduce higher-quality food (Panera Bread), and providers that have experimented with selling branded food in other retail channels (Boston Market), but the basic model has remained relatively static for 50 years.If Yum really wants to drive change, it could consider both incremental and radical business model innovations.Incremental business model innovations could include increasing self-service options in stores, developing branded vending machines, bringing new food products to non-meal day parts to increase utilization, dramatically lowering the space requirements for stores (opening up new locations that have smaller square footage), or further developing delivery offerings.More radical moves could include finding ways to create entirely new revenue streams in existing stores—imagine revenue sharing arrangements where other vendors could use pieces of Yum’s store front during quiet parts of the day—or rethinking the entire retail model. Food trucks are derisively called “roach coaches” or “gut chucks.” What if Yum figured out a way to offer good, reliable food via a convenient, mobile delivery mechanism?Yum has a lot of things going for it. Despite signs of stagnation, its stock price has tripled over the past five years. It has highly recognized brand names and a strong group of loyal customers. By testing and iterating, considering new brands, and exploring new business models, Yum will maximize the chances that it successfully soars through its current stagnation.

Summary

Although all these ideas posed by Scott are excellent one in balancing incremental and radical business innovation models, additional approaches could be to:·

• Assess the organizations’ culture in terms of innovation capacity and resilience using proven methods to assess cultural risk and adoption·
• Apply complexity science techniques identifying the ecosystem dynamics for growth requirements and putting out attractor change interventions to evaluate the speed and diffusion for innovation capacity·
• Developing a focused change leadership program that motivates and recognizes innovation and growth results·
• Putting in place new infrastructure for increasing collaboration and knowledge sharing using Web 2.0 technologiesIn conclusion, what is important for any organization that has disappointing results is to understand the basic operational facts of when went wrong and where and if a pattern for solving the problem exists then execute flawlessly.

Summary

However, often results that are declining are due to much deeper problems that require surgical precision to test multiple approaches and learn from them. In some respects, one needs to look at an organization as a perpetual beta product, constantly iterating and learning. In today’s complex world – organization’s need to be adaptive, agile and resilient and at their core value root be developed a strong foundation of collaboration where knowledge sharing and risk taking are balanced with a learning outlook.

People today and increasingly in the future will move with the law of gravity of their two feet – and in the food industry this is extremely true as turn over ratios are continually high (25-30% turn over rates – and sometimes higher). Winning organizations have to compete for scarce talent and ensure their talent management practices (attract, retain, develop) are balanced with the strategies for innovation and growth. If the people are not motivated or prepared to innovate – setting higher performance targets or reducing operating costs – will not turn around a business.

What will Yum’s do?

For more information on Helix’s business innovation or change transformation offerings, you can reach us at info@helixcommerce.com or (647)477-6254.

Bibliography:

“KFC Tries to Teach an Old Chicken New Tricks,” by Richard Gibson. The Wall Street Journal. 6 February 2008. (http://online.wsj.com/article/SB120227503488747205.html)10 Rules for Strategic Innovators by Vijay Govindarajan and Chris Trimble. Harvard Business School Press, 2005.