Creating Customer Value: A Comparison of Customer Relations Programs

of McDonalds and KFC

A research paper presented to ______________

in partial fulfillment of _____________________

________________________Academic Year 2006-2000

Approval Sheet

In partial fulfillment of the ___ requirements to graduate from ___, a research

paper entitled Creating Customer Value: A Comparison of Customer Relations Programs of McDonalds and KFC has been prepared and submitted

by ______________ who is hereby certified for oral defense.

____________________________

Board of Panelists

________________________ ________________________Panelist PanelistMember Member

_________________________Panelist

Chairman

_______________________ ______________________

_________________________ ________________________

i

Acknowledgement

I would like to thank the following people who helped me in finishing my research

project.

Mr. ____ my Adviser, who assigned me this very challenging topic.

My new friends, ___, ___ who guided me on the technical details of the testing

procedure when no help was available.

My parents who gave their encouragements while I toiled with this paper.

And to my old friends who were very helpful in times of stress and competing

deadlines.

ii

Table of Contents

PageCover pageApproval Sheet iAcknowledgement iiAbstract 1

A. Introduction 2

B. The Evolution of Marketing 2 Production Era 2 Sales Era 2

C. The Marketing Concept 3

D. Customer Value 4

E. McDonald's 7 Strategies for increasing revenue 7

F. KFC 9 Strategies for increasing revenue 10 Effectiveness of these strategies 11

G. Conclusion 11

Bibliography 13

iii

Abstract

This study discusses the importance of designing customer relations programs to

focus more on meeting the wants and needs of customers rather than creating

awareness of products and services in order to improve sales.

This study showed how customer relations management evolved from that of

production, to that of selling, and finally to a customer-focused customer relations

strategy. It showed that this approach works, as shown by a comparison of the

successful marketing programs of both McDonald's and KFC, two global

companies involved in fast food operations. While these two companies are

involved in the same industry, they faced different concerns. These concerns,

however, were alleviated when they focused on creating customer value in the

design of their respective customer relations programs.

The study concluded that both McDonald's and KFC achieved their success by

shifting their focus on its customers rather than on its products. it is also likely

that marketing would remain focused on customers because customer loyalty

which translates to a satisfied customer, is cheaper to maintain than that of a

customer that comes only once.

1

Creating Customer Value: A Comparison ofCustomer Relations Programs

of McDonalds and KFC

A. Introduction

The marketing of goods and services has evolved over time. It started with the

production era, when production of goods is paramount to satisfy a huge

unsatisfied demand. Then a shift to the sales era when there was a need to push

a glut of products. The present era, called marketing era, found a need to fine-

tune sales and marketing strategies to maintain profitability.

This study analyzes shifts in marketing to address changing needs of the

marketplace. It also compares the marketing strategies adopted by two global

fast food chains and finds out how successful they were in achieving their

marketing goals.

B. The Evolution of Marketing

Marketing has evolved on the basis of the way products or services were done,

as follows:

Production Era. During the production era, most firms concentrated their talents

and energies on producing as many goods as possible, both quickly and

efficiently. The Industrial Revolution was the major impetus for changes in

marketing and commerce. In this era, the emphasis was on producing products,

not satisfying customers’ needs.

Sales Era. When demand for goods increased, companies quickly recognized

that advertising and more aggressive personal selling were the tools to move

products, and the sales manager’s position within many firms was upgraded to

the level of the production manager and finance manager. Under this era, sales

was key. Market share was measured in terms of sales volumes.

2

C. The Marketing Concept

Again, companies were successful in achieving higher sales volumes. As

demand continued to grow however, the effect of competition started to affect

sales. This decline in sales prompted many companies to study the causes of

the decline. They found out that the cost of selling to an individual is much higher

than that of selling to a repeat customer. With a loyal customer, it does not take a

lot of advertising or promotions to make him buy.

Thus, efforts were then focused on customers. The marketing strategies and

plans were made on the basis of the following three basic propositions:

1. Customer focus: Managers shifted their focus from an internal company

perspective to the customer’s viewpoint. Successful marketing requires a

complete understanding of buyers and their needs. Leading management

authority Peter Drucker suggests that “the aim of marketing is to know and

understand the customer so well that the product or service fits him and sells

itself.”

2. Coordination: All elements of the marketing program—known as the

marketing mix—constitute an interrelated system, and therefore the program

must be viewed and planned as a whole. Also, marketing itself must be

closely interrelated with other business activities.

3. Profit orientation: Profit, not just increased sales, is the goal of a firm.

Because customer satisfaction is the path to profitability, customer focus is

the logical focal point for profit planning. 

The 1990s extended the marketing concept even further. Marketing has adopted

a concept known as Customer Relation Marketing (CRM). This concept assumes

that an organization wants to form long-term relationships with its customers if it

aims to achieve success. Therefore, the focus of an organization’s efforts is not

3

on creating sales, but rather on satisfying and retaining customers, based on

developing a relationship with the customer over time.

Lancaster describes relationship marketing as all of the activities that an

organization uses to build, maintain and develop customer relation (Lancaster et

al, 2001). It is believed to be one of the major value creation methods. The main

objective of relationship marketing is to build customer loyalty, which leads to

customer retention (Lancaster et al, 2001).

Studies show that a company can increase future profit by as much as 30-90

percent (Belch & Belch, 1998) by sustaining relationship with its customers and

reducing their defection by 5 percent.

Most of the traditional marketing approaches are used to build awareness about

offerings and attract more customers. However, the true purpose of marketing is

to build and maintain strong relationships between the company and its

customers (Kandampully). Developing and maintaining exceptional customer

relationships can help to reduce perceived risk, reduce transaction costs,

increase customer loyalty and customer retention and thus enhance

performance.

To maintain a smooth buyer-seller relationship, it is an accepted norm to have

customer orientation rather than sales orientation (Gronroos, 1995). There are a

number of studies that demonstrated that seller relationship with customers can

help to create loyalty and retention (see Hunt, 1997; Mattesson, 1997; Morgan &

Hunt, 1994; Reichheld & Sasser, 1990; Rust & Zahorik, 1993).

D. Customer Value

Woodruff (1997) defined customer value as a customer's perceived preference

for, and evaluation of product attributes, attributes performance and

consequences in term of the customer goals and purposes. Monroe (1991)

4

defines it another way by saying perceived value as "the ratio between perceived

benefits and perceived sacrifice". Day (1990) proposes similar definition and

stated that the perceived customer value represents the difference between

"customer’s perceived benefits" and "customers perceived costs".

Ravald and Gronroos (1996) studied the value concept in relationship marketing

and argue that the benefits that enhance customer perceived value are not the

major components in long-term relationship. Rather, safety, credibility, and

security, are important and lead to reduction of customer sacrifice and are

essential to customers. These variables of `reduction of customer sacrifices are

important in building trust that leads to increased customer loyalty.

In financial terms studies show that the retention of old customers costs much

less than acquisition of new ones. The retained customer base is thus a huge

intangible asset. To make it tangible averages like the cost per transaction and

the profit margin can be used to compute value of the retained customer base.

That value demonstrates the return that is achieved by efforts to satisfy the

customers so greatly that they stay with you.

How to retain customers and keep them coming back

There are three possible ways of making a customer loyal. These are:

Find ways to thank your customers consistently for their business

Know what customers buy and keep in touch with them about what interests

them.

Let them know about other changes in your business.

Customers are only willing to pay for value that they recognize. They do not

value what they do not experience in their relationship with your company.

5

To better understand how customer relation management works, we will now

compare the strategies used by two global companies to achieve profitability.

These two companies are: McDonald's and KFC.

6

E. McDonald's

McDonald's is the leading global food service retailer with more than 30,000 local

restaurants serving nearly 50 million people in more than 119 countries each

day. It is

one of the world's most well-known brands and holds a leading share in the

globally branded quick service restaurant segment of the informal eating-out

market.

Its product brands are the favorite: World Famous French Fries, Big Mac,

Quarter Pounder, Chicken McNuggets and Egg McMuffin.

McDonalds was founded by Raymond Albert Kroc, a salesman by vocation. He

mortgaged his home and invested his entire life savings to become the exclusive

distributor of a milk shake maker called the Multimixer. Hearing about the

McDonald's hamburger stand in California running eight Multimixers at a time, he

packed up his car and headed West. It was 1954. He was 52 years old.

At the Mac Mcdonald's Restaurant in San Bernardino, California, Kroc was

amazed at the speed by which customers were served so quickly. He mentioned

the idea of opening several restaurants with the hope that he can sell his

Mutimixers to each of these restaurants. The problem of who can open these

restaurants was solved with Kroc offering to do the job.

In 1955, Ray Kroc opened the Des Plaines restaurant.

From that time on, McDonald's have continuously  innovated their products to

satisfy the demands of their customers. Big Mac was the idea of Jim Delligatti,

one of McDonald's early franchisees. It was introduced in 1968. The Egg

McMuffin, introduced in 1973, the Egg McMuffin was developed by owner

operator Herb Peterson.

7

Since 1979 the Happy Meal has been making kids visit to collect Happy Meals

toys and boxes. (About McDonald's).

Strategies for increasing revenue

McDonald's has not been able to solve its food quality and menu problem. They

have not been able to adapt their food products to the changing tastes of its

customers. So, they turned to toy promotions and excelled in improving profits.

After decades of targeting children, McDonald's gradually evolved into a

successful toy and entertainment center, which may be taking more business

away from Toys R Us than from Burger King.

When a McDonald's customer buys a Happy Meal he or she has more to look

forward to than the cuisine. For a $1.59 cent Happy Meal, the customer gets a

free Teenie Beanie Baby. Eighty million of these toys have been gobbled up.

This promotion is immensely successful, increasing sales at some stores by 30%

from previous years.

A more important strategy for the success of McDonald's have been their focus

on the customer. They have adopted the following:

1. Service with a Smile

2. Suggestive Sell

3. The Customer is Always Right

4. QSC. (Quality, Service, and Cleanliness)

5. Brand Awareness/Corporate Identity

6. What is your USP (Unique Selling Point)?

7. Customer Appreciation

8. Consistent service

8

Focusing on creating customer value when developing their marketing program,

McDonald's was able to negate the effects of their inability to solve their food

quality and menu problem.

F. KFC

Kentucky Fried Chicken Corporation (KFC) is one of the world’s largest chains of

chicken restaurants and covers a large percentage of the U.S market in terms of

sales. It is a chain of restaurants having its branches all over the world. As it is

the world’s most recognizable brand, its international strategy was to grow more

and more branches in the world through its greater quality product, customer

service and cleanliness of the restaurants.

Therefore, to maintain the objective and to compete with the challenges of the

upcoming and existing new fast food franchise in the world, the corporation has

always focused to give a strong training to their employees specifically to those

related to the customer relation department.

KFC started as a restaurant in Corbin, Kentucky during the Depression. The

introduction of the pressure cooker greatly increased the efficiency of cooking

chicken. In 1952, Colonel Sanders, started actively franchising his business by

going from town to town cooking batches of chicken for restaurant owners.

In 1964, KFC has more than 190 franchisees and 400 franchise units in the US

and Canada.

In 1979 KFC has cooked up to 2.7 billion pieces of chicken in 6,000 KFC

restaurants worldwide with sales of more than US$2 billion. (KFC History).

In 1982, KFC becomes a subsidiary of R.J. Reynolds Industries, Inc. A series of

acquisitions ended in Tricon Global Restaurants, Inc. owning KFC, together with

Taco Bell and Pizza Hut

9

As of 2006 sales figures showed more than a billion of the Colonel's "finger lickin'

good" chicken dinners served annually in more than 80 countries around the

world. (KFC Annual Report, 2001).

Strategies for increasing revenue

In the beginning the strategies were not very effective as the corporation could

not make much market but having some bitter experiences of the past the

corporation made some changes in its management for a successive program

and remodel the existing restaurants during the 70”s and now the emphasis was

to eliminate the marginal products and focused more on cleanliness of the

restaurant .

Since then the development strategy is more focused and gives more career

opportunities for people related to business schools, management and other

professional areas of study.

The principal strategies are as following:

1. Urge the employees to get closer to the customer by adopting a very friendly

behavior to them to make decisions from market back. So the first principle is

to create the customer focus goal.

2. The firm also keeps in touch with the latest trends and changing technological

innovations for its market and to keep a continuous change as a way of life.

Adding new ideas and taste in its meals, making more deals for attracting the

customers and many other small policies are adopted for this purpose.

3. Market orientation was another area of priority by the management team to

generate extra effectiveness in the global market. A friendly atmosphere with

the customers is very important to give them confidence for putting their

10

suggestions in the suggestion box for getting an idea of the likes and dislikes

of their valuable customers.

4. The management team communicates very effectively and learns how to

create an innovative atmosphere and a better understanding with the various

cultures of the globe, as people belonging in different areas and cultures have

different taste. So the main principle here is not to create a strong uniform

brand image but also to serve the best interest of different customers in

different locations.

Effectiveness of these strategies

The business environment in each country is almost same. However the

adaptation of new products is a challenge and risky deal. The strategy adapted

by KFC on focusing on building friendly customer relations is a very effective tool

to make its customers feel comfortable.

By offering varied products that suit its customers' taste and their focus on

improving its customer focus, KFC had been successful in achieving a large

segment in the fast food and eat-out service.

G. Conclusion

On the basis of the above arguments, both McDonald's and KFC achieved their

success by shifting their focus on its customers rather than on its products. It is

likely that marketing would remain focused on customers because it has been

shown that customer loyalty which translates to a satisfied customer, is cheaper

to maintain than that of a customer that comes only once. It is therefore important

for companies to design their customer relations programs, marketing efforts and

strategies so that they would be able to know who their customers are, what they

need, and what they are looking for. It is only by doing this that they achieve

customer value.ooo

11

Bibliography

1. About McDonald's...,

http://www.mcdonalds.com/corp/about/mcd_history_pg1.html

2. Day, G. (1990), Market-Driven Strategy: Processes for Creating Value, The

Free Press, New York

3. Gronroos, C. (1995), "The Rebirth of Modern Marketing - Six Propositions

about Relationship Marketing", Working Paper 307, Swedish School of

Economics and Business Administration, Helsinki.

4. Hunt, S. D. (1997), "Competing through relationships: Grounding

Relationship Marketing in Resource-Advantage Theory", Journal of

Marketing Management, Vol. 13, pp. 431-445

5. KFC History, http://www.kfc.com/about/history.asp

6. KFC Annual Report (2001).

www.yum.com/investors/annualreport/01annualreport/pdf/TGR_p16_24.pdf

7. Mattesson, Lars-Gunnar (1997), "Relationship Marketing" and the "Markets-

as-Networks Approach" - A competitive analysis of two evolving streams of

research, Journal of Marketing Management, Vol. 13, pp. 447-461

8. Monroe, K.B. (1991), Pricing-Making profitable Decisions, McGraw-Hill, New

York.

9. Morgan, R.M. and Hunt, S.D. (1994), "The Commitment-Trust Theory of

Relationship marketing", Journal of Marketing, Vol. 58, July, pp. 20-38

12

10. Ravald, A. and Gronroos, C. (1996), "The value concept and relationship

marketing", European Journal of Marketing, Vol.30, No. 2, pp. 19-30

11. Reichheld, F.F and Sasser, W.E.(1990), "Zero defections: Quality comes to

services", Harvard Business Review, September-October, pp.105-11

12. Rust, R.T. and Zahorik, A.J. (1993), "Customer satisfaction, Customer

Retention and market Share", Journal of Retailing, 69, pp.193-215

13. Woodruff, R. B. (1997), "Customer value: the next source for competitive

advantage", Journal of the Academy of marketing Science``, Vol. 25, No. 2,

pp. 139-153

13