AN ANALYSIS OF DIFFERENTIATION STRATEGIES
IN TAIWAN CHAIN RESTAURANT INDUSTRY
Tain-Fung Wu
Graduate Institute of Business Administration, Asia University, Taiwan
Ming-Hui Yu
City University of New York, USA
You-Jan Tsai, Shiou-FangLu, Mei-Hui Tseng
Graduate Institute of Business Administration, Asia University, Taiwan
ABSTRACT
This paper analyzes the value activities of the chain restaurant industry, using the drivers of uniqueness to identify the sources of differentiation, in order to find out the sustainability of differentiation strategies for chain restaurant.Chain restaurant industry is a food service trade of chain business, characterized by chain business and restaurant concurrently. Chain restaurants benefit from economy of scale through integrated procurement, warehousing etc.They provide each branch operation strategy and knowledge aid which make the chain restaurant more efficient than traditional restaurant. The operation type of chain restaurants are classified into banquet, western style, Chinese style, compound style, and specialties in this paper.
Differentiation can be based on the product itself, the delivery system, the marketing approach and a broad range of other factors. There are many different value activities in the value chain, and each one that involves different buyer needs. There can be more than one successful differentiation strategy in industry if there are a number of attributes that are widely valued by customers.This paper defines the common value chain of chain restaurant industry from literature review at first, and then interprets how a restaurant achieves differentiation in each value activity through personal interviewing. Finally, research team invited leaders in chain restaurant industry to focus group interview and discussed concrete differentiation strategies. The result will upgrade the research of competitive advantage; provide the chain restaurant manager with concrete differentiation strategies for future planning.
Keywords: chain restaurant industry, differentiationstrategy, value chain
INTRODUCTION
Research background and motives
The lifestyle of modern people has been changed with the industrial revolution. ”Eat out” is becoming dominant for the masses. Therefore, food service industry is growing prosperously. Business idea, manufacturing process, marketing strategy…etc. are also renovated with the vitality of this industry. Managers of restaurants focused on innovation in order to position themselves in customer’s mind. In the past, papers of restaurant industry mostly drew on the exploring of critical success factors. There are few studies draw on the concrete strategies for competitive advantages. This paper focuses on the concrete strategies to achieve differentiation.
Research objectives
The essential of this paper is to develop concrete strategies from each value activity. The research objectives are:
- Defining chain restaurant’s value chain based on the results of literature review,personal interviewing and focus group interview.
- Aiming at constructing concrete differentiation strategies from the matrix of value chain.
- Make the research results as useful reference for chain restaurant manager.
Research steps and methodology
In order to achieve research objectives, this paper has adopted literature review, personal interviewing, and focus group interview. Research carefully followed the steps described below:
- Differentiation is an important strategy for a chain restaurant to achieve competitive status in its industry. The first step is to probe into the differentiation related literature review for the follow-up research.
- Choose representative case from each market segment for personal interviewing.
- Construct chain restaurant’s common value chain based on the results of literature review and personal interviewing.
- Invited leaders in CRI to focus group interview.
- Discussed concrete differentiation strategies based on the results of focus group interview.
LITERATURE REVIEW
Literature review began with the definition of chain restaurant industry. The operating type and problem of chain restaurant could be explored after the definition had been understood. Then the theories of value chain and differentiation are described below.
Definition of CRI
Chain (franchising) is a method of distributing products or services. At least two levels of people are involved in a chain system: (1) the franchisor, who lends his trademark or trade name and a business system; and (2) the franchisee, who pays a royalty and often an initial fee for the right to do business under the franchisor's name and system. Technically, the contract binding the two parties is the Franchise, but that term is often used to mean the actual business that the franchisee operates. (International Franchise Association, IFA, 2005)
According the Standard of business operating items legislated by Ministry of Economics Affairs, ROC (2006), restaurants are categorized into beverage industry, alcoholic drink industry, restaurant and others. Quality, Service, Cleanliness & Value (QSC&V)is a benchmark used throughout the world by the McDonald's Corporation to assess the standard of its own restaurants (operated by McOpCo) and the restaurants run by franchisees. Since 1957 it has been a cornerstone in the operation of McDonald’s restaurants and is a big part of the daily life of McDonalds’ employees. (McDonald’s Holdings, 2006) QSC&V have been transmitted into Taiwan restaurant industry with McDonald’s and caused a revolution among management concept. It has becomea health maintainess indicator of restaurant operation as time goes on. (Taiwan Chain Stores and Franchise Association, 1996)
Chain restaurants are categorized into 4 categories based on their operating type. There are banquet restaurant, Chinese food restaurant, fast food restaurant, and theme restaurant (Lin, 1996). Chain restaurants are featured by chain stores and restaurant. Their competitive advantages of chain restaurant are described below (Lin, 1996; Chen, 2003): 1. Low cost; 2. Unique product line; 3. Highly standardized product; 4. High quality service; 5. Economies of scale; 6.Faultless logistics; 7. Competitive advantages obtained from vertical integration; 8. Complete operating concept and management strategy; 9. Differentiated operating method; 10. High customer satisfaction; 11. Focus on specific market segment; 12. High brand recognition; 13. Computerized operating process; 14. Perfect personnel system & sufficient human resources; 15. Low initial capital investment, low risk.
The value chain
The value chain is a basic tool for diagnosing competitive advantage and finding ways to create and sustain it. The value chain disaggregates a firm into its strategically relevant activities in order to understand the behavior of costs and the existing and potential sources of differentiation. Linkages are numerous within the value chain. To diagnose competitive advantage, a specific value chain must be defined in accordance with industry structure. (Porter, 1998)
Differentiation
Many products sell quality, status, services, and style rather than rock-bottom prices.(Treacy& Wiersema,1997) A strategy of differentiation tries to make products different, and usually better, than those sold by competitors. Differentiators earn more by fitting the specific needs of customers. There are several ways to find out the unique value of customers: 1. find out the source of differentiate; 2. strengthen existing differentiator; 3.master market demand;4.find out unknown customer needs; 5. create customer’s wants; 6.aware of the market trend before customer did (Lin, 2003).
Uniqueness does not lead to differentiation unless it is valuable to the buyer(Porter, 1998). A business creates value for a buyer that justifies a premium price through two mechanisms: 1.by lowering buyer cost; 2. by raising buyer performance. Valuable uniqueness can create opportunities for a business. Some typical policy choices that lead to uniqueness includes: 1. product features and services provided; 2. Linkage; 3. timing; 4.location; 5. integration (vertical or horizontal); 6.economy of scale.
RESEARCH METHODOLOGY
This paper defined the common value chain of CRI from literature review at first, and then interpreted how a restaurant achieves differentiation in each value activity through personal interviewing. Finally, research team invited leaders in CRI to focus group interview and discussed concrete differentiation strategies.
The value chain construction for CRI
The value chain matrix of chain restaurant was constructed from literature review. The intersection of value activity and six strategy dimension is a strategy point. An action plan can be established from reviewing the linkage between different strategy points.
Differentiationstrategy / Product line length and trait / Target market segmentation
& selection / Degree of vertical integration / Relativescale and
economies
of scale / Geography
coverage / Competitive
advantage
Raw Material / A01 / B01 / C01 / D01 / E01 / F01
Equipment / A02 / B02 / C02 / D02 / E02 / F02
Manufacture / A03 / B03 / C03 / D03 / E03 / F03
Warehousing
& Logistic / A04 / B04 / C04 / D04 / E04 / F04
Service / A05 / B05 / C05 / D05 / E05 / F05
Brand / A06 / B06 / C06 / D06 / E06 / F06
Information
Technology / A07 / B07 / C07 / D07 / E07 / F07
R & D / A08 / B08 / C08 / D08 / E08 / F08
HR / A09 / B09 / C09 / D09 / E09 / F09
Marketing / A10 / B10 / C10 / D10 / E10 / F10
Products I / A12 / B12 / C12 / D12 / E12 / F12
Products II / A13 / B13 / C13 / D13 / E13 / F13
Products III / A14 / B14 / C14 / D14 / E14 / F14
Table1.Value Chain Matrixof chain restaurant
Every strategy point is concerning with different value activity and different strategy dimension. Take”product line range and trait” dimension for example:
A01:Are there various substitutes? Is our restaurant able to extend product line?
A02:Is the equipment fully replacing labor? Is the equipment capable of manufacturing special product?
A03:Is there standard operating system for all products? Are the semi-finished products made by central kitchen?
A04:Are the warehousing & logistic system centralized in headquarteror separately managed by the branches?
A05:Is service provided by the waiters or self-service by customer?
A06:Is the brand developed by our self or franchised by others?
A07:Is the information technology system able to integrate information from different value activity?
A08:Are new products developed by headquarter or branches?
A09:Is the restaurant hiring full time employees or part time employees? How to make use of on-the-job training?
A10:Which marketing strategy is best in increasing sales?
Representative cases
According to literature review and transition of social dining culture, 5 representative cases were selected from various chain restaurants. There are Chinese food chain restaurant, western food chain restaurant, fast food chain restaurant, composite food chain restaurant, beverage chain restaurant.
1. Chinese food chain restaurant
Arestaurant chain started an enterprise with fresh and delicious seafood. The mission statement of this chain is providing customer with best quality seafood. There are 3 banquet restaurants and several fashionable theme restaurants. There are 360 employees in this business.
2. Western food chain restaurant
B restaurant chain has 42 regular chains in Taiwan and 4 regular chains in China, 250 regular chains are anticipated in 2010. Only regular chains are carried on in this chain to control service and quality. The market segmentation of this chain is located in middle-high price. There are 2,800 employees in this business.
3. Fast food chain restaurant
C restaurant chain has more than 30,000 local restaurants in more than 119 countries. There are 358 restaurants in Taiwan; all of them are regular chains except 20 franchise chains. There are 15,000 employees in this business.
4. Composite food chain restaurant
D restaurant chain originated from the middle of Taiwan. There are 9 regular chains and 11 franchise chains in Taiwan and 2 restaurants in Shanghai, China. The market segmentation of this chain is located in middle price and white collar. The average regular employees are 50 in each restaurant, and part time employees are employed in peak hours.
5. Beverage chain restaurant
E restaurant chain’s ability to accomplish what they set out to do is primarily based on the people they hired. Develop enthusiastically satisfied customers all of the time is their mission statement. There are 6,000 local restaurants all over the world and 150 inTaiwan. All employees are local people except top management team.
Personal interviewing
A personal interview is a two-way conversation initiated by an interviewer to obtain information from a participant. (Cooper & Schindler, 2003) In order to control the topics and patterns of discussion, research team outlined investigative questions based on value chain. The participants were well informed his or her role in the interview as the provider of accurate information. Research team observed and took down every detail of the discussions. The interview results were induced after interviewing.
Focus group interview
A focus group is a panel of people, led by a trained moderator. The moderator uses group dynamics principles to focus or guide the group in an exchange of ideas, feelings, and experiences on a specific topic (Cooper & Schindler, 2003). Following a topical guide, the moderator will steer the discussion to ensure that all the relevant information desired by the research team is considered by the group. In this paper, the panel of people was invited from representative cases; research team observed and took down every detail of the discussions. This panel of people was homogeneous.
RESULTS ANALYSIS AND DISCUSSIONS
According to the results of personal interviewing and focus group interviews, differentiation strategies were developed on the basis of each value activities.
Achieving differentiation from all value activities
1. Raw materials
(1)Receiving report is double signed by chef and stock keeper. They are both responsible for quantity and quality inspection.
(2)Commission is strictly forbidden. Stick to “no commission” policy can ensure the lowest cost of procurement.
(3)Centralized purchasing and unified price negotiation are adopted for raw material procurement.
(4)Cooperate with multiple suppliers to stabilize raw material price.
(5)Persist in quality of raw material is essential for a chain restaurant, the image of the brand established on the quality of the foods.
2. Equipment
(1)Parking space and fire fighting equipments are basic requirements. Both convenience and safe are valued by customer nowadays.
(2)The interior of restaurant is featured by brand personality. Not only physiological needs but also psychological comfort should be fulfilled in a restaurant.
3. Manufacture (Food processing)
(1)Recommended specialties of the restaurant are often altered with seasons.The texture of foodhas to hold still as time goes on.
(2)Every dish has its own standard operation process (SOP). The SOP ensures the consistency of in-mouth impressions of each batch.
(3)Develop new process to prepare the foods. Chefs are encouraged to propose new dishes every season.
4. Warehousing & Logistic
(1)Just-in-time is applied inventory management. A huge amount of cash appearedas in-process inventory was cooked and sold.
(2)Raw materials are preserved in suitable temperature while transporting and storage.
(3)All raw materials are cooked by central kitchen into toy food. The premeasured and premixed of food can ensure the consistency of quality and flavor.
5. Service
(1)“The customer is always right.” is internalized as the service philosophy. Applying this philosophy as a premise of every service action.
(2)Formulating everydetail in the service process as service SOP. Employee’s on-the-spot response is strengthened based on the SOP. Every premise and every practice must be examined for possible revision.
(3)A surprising specialty is offered according to the purpose of dining. For instance, a birthday gift or free dish.
(4)Take over customer complaints with anunimpeded channel of communication is necessary. Immediate amendment can help in keeping the old customer.
6. Brand
(1)Regularization and institutionalization are bonus point to brand equity.
(2)Goodwill is valuable to the business. The power of word of mouth should not be ignored.
(3)Help employeesto identify themselves with the restaurant. A hearty employee captivates customers.
(4)Continuously innovation is helpful to build up a fresh and bright brand image.
(5)Public relationship is helpful in gaining positive brand image.
(6)Establish Corporate Identification System (CIS) to capture customer’s attention. CIS helps customers to know about the restaurant.
7. Information technology (IT)
(1)The linkage between value activities can be managed by IT. IT can improve the process linkage efficiently.
(2)Establish an automatic inventory-monitor system;buy only enough to fit into the plan of production.
(3)File the customer data, keep intimate contact with regular customer and give incentives to irregular customers.
(4)Suppliers, purchasing, stock control, customer relationship management (CRM) are all managed by data mining program.
(5)IT is able to estimate dining person-time. The estimated data is helpful to control purchasing amount and stock amount.
8. Research & Development (R&D)
(1)New dishes are released every season to match up with interesting finding customers.
(2)Expedition is send to different market (e.g. Japan) to investigate market transforming.
(3)Various exotic foods are provided to expand product line variety.
(4)Allied with schools to stimulate R&D innovationsthrough industrial-academic cooperation.
(5)Establish R&D reward system to encourage and formalize R&D.
(6)Franchised chainsare encouraged to propose creativity to top-level R&D department.
9. Human resource
(1)Employees are divided into regular and part-time. Employ part-time to perform low-skilled work can save great amount of cost.
(2)New employees who are well trained in standard operating procedure (SOP) perform good service quality.
(3)Emphasis complete career training curriculum to help employee with their future planning.
(4)Good employee welfare can lower employee turnover rate. Proficient job skill can be trained and sufficient to differentiate from rivalry.
10. Marketing
(1)Enter different market with local economy cycle. Marketing mix is designed in accordance market segment.
(2)Cause marketing is applied to improve chain restaurants’ image.
(3)Develop availability of fixed facilities. Perform public service, charity event via fixed assets.
(4)Besides product information, business’s ideal also can be communicated through website.
(5)Make use of holidays, charity group event and celebrities to reinforce brand’s impression in customer’s mind.
(6)Allied with related business to improve expose rate to customers.
(7)Heighten entrance barrier with invulnerable marketing power to maintain market leadership.
11. Linkage between value activities
(1)A chain restaurant is responsible to provide various value for customers through understand customer’s needs and innovation.
(2)Unique linkage between value activities makes a chain restaurant to differentiate from others. A unique linkage isn’t imitable to rivalry.