STRATEGIC MANAGEMENT (MGM5200)

CASE ON DILEMMA OF FRANCHISE HOLDERS

(1) The Dilemma: "One dinner plate coming Sir", confirmed Fatul as he finished a
customer's order at counter B;

"That will be RM 6.95 Sir”, he continued and he took the ten dollar note given and return
RM 3.05 to the customer. "Thank you Sir and enjoy the dinner."

Fatul, the Assistant Manager then had a long sigh. In his mind he wondered. "It is only
8.15 p.m. and that was the fourteenth customer the outlet served for the evening. Only 5
tables are occupied and the other 20 are vacant. There is no more client in the queue".

He then went to the counter and met Asmah, another worker. "What is happening? Only
fourteen customers for the dinner rush? What is happening to our outlet? We are in the
middle of Kuching and only fourteeeeeen? In Sea Park where I worked before this, I will
be short of hand at 8.15 p.m.!"

"Abang," uttered Asmah (as Abang Fatul was referred to in the outlet), "this is our
problem. Look at that outlet" as she indicated to a neighboring chicken fast food outlet
called Hartz Chicken. "All the thirty tables are occupied and new customers are lining
up to wait for their turn”.

"'Asmah, what is wrong with us. I got an e-mail from the retail manager at the head
office in Kuala Lumpur and she had the cheek to say that we are not providing enough
personal touch. She should pay a visit and see what is wrong. I am supposed to write a
brief report by tomorrow on the reasons for the poor sale since April, 2008. When we
close at 10 o'clock afterwards, I want to have a discussion with all the employees.
Something need to be done quickly or else the revenue is not enough, even to cover the
operating cost".

The case is not meant to show a right or wrong decision but is to be used for training
discussion. All names are disguised. Written by Zainal Abidin Mohamed.
(2) Background

Kentucky Fried Chicken was a well-known fast food chain and was brought into
Malaysia in the early 70's. By 1996 it was taken over by Pepsico Trading and the
franchise in Malaysia was held by Antah group. There were almost 250 branches in
Malaysia and seven in Kuching. The Sarawak Plaza branch was not performing well and
Abang FatuI being successful in several other outlets before (Ipoh, Penang and Sea Park)
was sent to Kuching in June, 2008. For the last two months, he claimed that he had tried
all the resources available to him to turnaround the declining sales but to no avail.

The Sarawak Plaza branch was opened in early 1990s and was an average performing
branch. "It was," according to the Retail Manager in Kuala Lumpur "able to make on
average a 10% net profit, and this was acceptable. We sent Abang to Kuching because
sales suddenly drop and we thought a Sarawakian might be able to understand the
situation better and come up with alternatives. We did not agree with the previous
manager who suggested that the branch be closed because of competition. We have
never run away from competition. We have faced McDonalds, A & W; White Castle,
Dave Deli and other International Franchises and now she said that we are losing to a
new franchise! That is quite unbelievable. We were worried about Nando Chicken from
South Africa and Texas Chicken, but they have yet to gain a significant foothold".

(3) Taking Stock

During the meeting which ended at 11.00 pm, Abang took stock of the various important
issues brought forward by his staff: "Today's taking is just over RM3,000 and this is
much lower than the average. Although it is a week day and middle of the month it is not
enough to cover even our daily operating expenses". He recalled the opening remarks he
made at the meeting.

Anyway he had a significant number of suggestions as an outcome of the meeting that he

now had to go through before he replied to Ms Kwan's inquiry .What he wondered was
how Hartz Chicken was able to capitalize on KFC's handicap. What he had utilized was

"all my twelve years of experience, I am stuck with not being able to do anything more,
as I am restricted by the franchising rules of KFC. All that is allowed has been

2
implemented and I just cannot alter the menu freely," he grumbled silently.

(4) Hartz Chicken:

This was a new and only Hartz franchise in Sarawak. "In addition to Sugar Bun (a local
franchise), it is another franchise with a lot of potential' said En. Golokin, the Manager
of Hartz outlet as he started to explain to a local newspaper reporter who wanted to write
a feature article on the outlet.

"The head office is in Houston and Hartz planned to spread its wings throughout the
country as well (coincidentally, there was already an outlet in Sungai Way and
Malacca)". Encik Golokin continued, "we are doing better than KFC next door. I was a
KFC employee before, but in a different branch and two of my staff have worked there
too. So, service wise and culturally I am confident that we are almost the same although
some said that we are better in terms of spirit. "

He stopped and showed the menu card to the reporter (Appendix 1), "Our success is
based on providing as good a service but with individual preferences. For a start our
menu on chicken is “double”. In addition, we have grilled chicken similar to that of
Kenny Rogers and therefore our selection is different We also serve fried liver, gizzards,
onion rings, sweet potato and fish fingers, in addition to the KFC list", while running his
hand on the menu card pointing to the various selections to the reporter.

Gabriel Uking, (Golokin's assistant) who was sitting beside him interjected, "But what I
like most about Hartz is the concept of free selection of what you want to eat. You make
the choice. All wings or drumsticks-. Mixture of spicy and crispy. All gizzards. The
customer only pays RM 13.80 per head for the buffet meal, and the “eat all you can”
concept is unique. That was the revolutionary move. The head office decided on the
concept and we determine the price." (Appendix II).

Golokin continued, "We believe a normal healthy adult can eat only one whole chicken
at a sitting. That will cost about RM 13.50. But for a family outing he will bring along
his wife (usually smaller physically), his parents and children and they will never

3
consume food as much as the family head (father) and thus will consume less than the
RM 13.50 that we charge per head. We also provide unlimited refill drinks and a range
of salads, soup and even ice-cream, so as to make an enjoyable family outing. A
vegetarian can also satisfy his meal requirements as we have a range of salads and
vegetable dishes. "

Uking again interjected, "But each customer must consume all that they selected, as we
will bill them for food taken but not consumed. This is to prevent unnecessary wastage
as well as encouraging them to go for multiple helpings as we ensure that there is
always enough supply. We also have a policy that one cannot stay for more than two
hours and must be here in only one seating. This arrangement has been satisfactory so
far except for a few rare incidents when some stayed beyond the time limit. "

(5) Golokin's Dilemma:

"We 'are quite proud of Hartz. I am grateful to them for the training I went through, but
they need to be aware of the competitors. We are now thinking of having noodles to
cater for the family needs and also doughnuts for the light eaters. These have been put
on hold until the economy recovers but I am confident other menus will creep in on trial
basis. Anybody can implement the buffet and eat-all-you-can concept. We have to keep
thinking of new noble ideas and menus. How can I ascertain this ? "

(6) Abang's Dilemma:

Abang believed he knew what made Hartz successful, as he can observe and conclude
why it had more customers. The other KFC branches in Kuching were doing better (the
nearest being only 200 meters across the road) because Hartz, the direct competitor did
not operate near them. On the same floor nearby was Singapore Chicken Rice another
competitor but that was not a real threat as its clients were from a different market
segment. McDonald Restaurant which was across the road was also of no direct threat
because of its non-chicken focus. But their overall daily turnover were still less than
Hartz's. “With all the data that I have, what strategic analysis model should I employ to
come up with some good strategic decision and to recommend to top management next
week”.

4
All the tricks of the trade that Abang learnt like courtesy, service, cleanliness, speed and
promotion that were in the operating manual had been put to use. "What do I need to do
more? Should I recommend to follow Hartz's menu or just introduce grilled chicken?
Buffet for KFC? Can KFC change the menu because of Hartz? What is not right with
this international franchise? Why is Hartz doing better and it is also from America?". He
left his thoughts at that and close the file before calling it a day.

5
APPENDIX I: Hartz Chicken Buffet

Please allow a few moments to familiarize yourself

with our restaurant policy

No food is allowed to be taken out of the restaurant.

We reserved the right to charge excess food, whether it is left behind on the table
or taken outside, according to our menu price.

All table ware (spoons, forks, etc.) shall not be removed out of the restaurant for
any reason.

Broken tableware will be charged accordingly.

Each paying guest will be allowed a maximum dinning time of two hours per visit.

Guests must have their hand stamped, before leaving the restaurant (e.g. washroom)
for a maximum of 10 minutes in order to reenter .

For safety reasons, we ask that children age below 6 be accompanied by adult
to buffet areas because of hot food and hot wells.

Please keep this reservation slip face up to reserve the table during your meal and
turn it over when you have finished.

No Food or Drinks from outside are allowed into this Premise.

Enjoy your meal This Table is Reserve For

Thank you!
Please ,Come Again

6
APPENDIX 2:
We Give You
The Best Buffet Value In The City

Slimming with traditional American South-western, our buffet means uncompromising quality,
unusual variety and unparalleled value. Bring your guests, check our menu, join us for lunch, dinner
or anytime of the day ~ 10 a.m to 10 p.m. Bring your family and friends. There is variety, and
practically something for everyone at Hartz!

Hartz is the place for a get together.

Chicken Buffet
Tempt your palate with Texas Roasted Chicken, Regular, Spicy, Fried chicken, Texas Hot or
Regular, Spicy Chicken Texas.

Hot Vegetable/Casserole Buffet

Features home made casseroles and vegetables preserve flavour and colour.

Cold Salad/fresh fruit/Hot Soup Buffet

Large variety of fresh prepared cold slaw, fresh fruits, and delicious home-made soups.

Fresh Bakery Bar

Freshly Cooked choice of whole meal bread, yeast bread,
and fries.
Dessert Bar:
All-in-one made fruit juice 1XJar, bread with fillings, wings, cakes and do-it-yourself ice cream with a
variety of toppings.

7
APPENDIX 3:

Brief notes on HARTZ.

Original name was Hartz Crispy Chicken, founded in 1972 and operated in Houston Metroplex
area in Texas, USA. Was the first chicken restaurant to offer drive-through service. In June
1991, it had a major ownership restructure and a few professionals join the top management
team with a new major shareholder Ms Levan Wu. She was a graduate from Saigon Law
School in 1965 and was a war refugee when she migrated to USA. She started as an
entrepreneur and was successful in restaurants and fast food industry before getting involved
directly with Hartz in 1991. In September 1993, she herself run a Hartz Chicken Franchisee and
since then has been the largest shareholder of Hartz Restaurants International Incorporated.

In 1995, Hartz Chicken Buffet Inc started expanding overseas and its first outlet was in
Kuching Malaysia. Branches and franchise outlets began to grew in Indonesia, China, Hong
Kong, India and Europe. By 2007 there were already 20 such overseas outlets (with 250 seats
capacity) and is expanding. In Malaysia alone, ther are branches in Miri, Satok, Malacca,
Sunway, Berjaya Times Square.

Brief notes on Kentucky Fried Chicken:

KFC began with Colonel Harland Sanders who had the love for cooking when he was even 9
years old. He reached celebrity status in 1952 when he shared the original 11 types of spices
blended in 1 to the people of America. That blend reached Malaysia in the erarly 70s and the
“It’s finger lickin’ good” began in Jalan Tuanku Abdul Rahman in 1973. Today there are more
than 390 KFC restaurants in Malaysia the latest branch being in Cambodia..

Malaysian KFC is fully managed by Malaysians, and has created its own identity. Kentucky
nuggets was conceived in Malaysia and then found its way worldwide. Today, KFC’s nuggets
is one of KFC’s success. “Meals on Wheels” is another Malaysia’s development and enable
KFC to be enjoyed where the restaurants could not deliver. KFC has embarked on several
corporate social responsibilty programmes the most active being ‘Caring Project Fund’ for
charity, employing the speech and hearing impaired personnel, all are halal in Malaysia, Brunei
and Singapore, 100% cholesterol free and has a complete supply chain network from the
breeding, hatchery, grower, R&D and feed manufacturer.