Switching Cost Regarding the Restaurant Industry

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 Letter of Transmittal

7th November 2017

Jashim Uddin, PhD
Associate Professor
Coordinator of MBA & EMBA Programs
Department of Business Administration,
East West University, Dhaka-1212.

Subject: Submission of the Assignment.

Dear Sir,
It is our pleasure to submit this assignment as a partial fulfillment of Strategic
Management (MGT 480) course requirements.

We have tried our level best to give feedback of item with the help of the
concept and theory of the topics, which we have learned, from Strategic
Management course. We are glad to submit you the feedbacks of the items.

Thank you for your guidance and constant supervision to fulfill this assignment.
We sincerely hope that the contents of our paper will meet the requirements of
this course and fulfill your expectations.

Sincerely Yours,
Sl No. Names IDs
1 Md. Mahabubul Quddus Pritom 2014-1-10-017
2 Md. Shibli Nomani 2014-1-10-120
3 . Amrina Afrin 2013-2-10-149
4 Tasnia Islam Rimy 2013-2-10-099
5 Mehenaz Hossain 2013-2-13-032

Acknowledgement

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We would like to express our gratitude and indebtedness to our honorable faculty Jashim
Uddin, PhD , Associate Professor, Coordinator of MBA & EMBA Programs, Department of
Business Administration, East West University.

With his inexhaustible guidance, valuable advice, continuous inspiration constructive

criticism and generosity she helped us to carry out this assignment successfully. We would
also like to express our gratitude to the journalists and web developers who creates journals
and websites which helped us to gather all the necessary information. We also like to thank
those people who give their valuable comments and helped us to do a successful analysis on
switching cost on restaurant.

Finally, we would like to thank all group members that directly or indirectly helped us to
provide and accumulate all the necessary information for the accomplishment of this
assignment.

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Restaurent Industry of Bangladesh

Restaurent culture was started in the early nineties. In Bangladesh it has mainly geared
towards the younger end of the market and the employees of the corporate sector. This
culture in Bangladesh has taken the country by storm. The first fast food shop started its
business in the Bailey road of Dhaka. After that, a number of fast food shops started to grow
exponentially in different places of the Dhaka city. Local entrepreneurs are leaders in
pioneering the fast food industry of Bangladesh. New brands i.e. Swiss, Helvetia etc. are to
name of some Bangladeshi fast food shops formed in franchising system.

In early 2000, Bangladesh experienced the entry of the first international brand of fast food
franchise in the country. Pizza Hut and KFC entered into Bangladeshi market having
franchise with Transcom Foods Limited (TFL). Both Pizza Hut and KFC are subsidiaries of
the world’s largest restaurant company Yum! Restaurants International. TFL has opened
three Pizza Huts and three KFC outlets in Bangladesh in a span of five years. Pizza Hut
opened its flagship restaurant in 2003 at Dhaka. Following its grand success in Dhaka, the
Chittagong outlet was opened in 2005. The third Pizza Hut restaurant was launched in Dhaka
in 2008. Meanwhile, Kentucky Fried Chicken (KFC) perceived as high-quality fast food in a
popular array of complete meals to enrich the consumer’s everyday life. TFL successfully
launched the flagship KFC in 2006 and gained attention of the people with its taste, high
standard of hygiene, cleanliness, interior attractiveness, affordable pricing etc. Following its
enormous success in Dhaka, the second and third outlets were opened in 2008. There were
two major shakeups in the fast food industry in Bangladesh. In September 2005, the
government of Bangladesh started a major drive against the companies that were found
adulterating fruits, using pesticides, unauthorized food colors and food items that expired
their date of uses etc. These drives created a serious impact on the public health sector of
Bangladesh. Many renowned restaurants and fast food shops were found guilty and those
were highly publicized in press and media. This lead towards the mistrust of the common
people and resulted in temporary decline of sale of fast food items. Due to this shakeup, many
middle and small fast food shops were closed and only a few restaurants, mostly the
expensive and franchise ones, were left. This caused heavy losses following surprise raids by
mobile courts. The normal buzzing snack shops at Dhaka no longer draw the same attraction
after September 2005. The mobile courts raided and as a result almost 60 percent of business
was declined. A big portion of the customers at these shops were teenagers and students.

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Many of which had stopped going to the snack shops following the news reports of stale
items being sold. (Nazrul, Ullah, and Nasim, 2010) The Top 12 Fast food restaurants in
Bangladesh are: Pizza Hut, Kentucky Fried Chicken (KFC), Best Fried Chicken (BFC),
American Fried Chicken (AFC), Dominous Pizza, Helvetia, Yummy Yummy, Wimpy,
Western Grill, Sausly's, Hot Hut!, and Shwarma House.

Switching Cost

When we talk about restaurents the topic switching does appear. Because in case of
restaurents consumers are very sensitive and all competitors offer alomost similar products.
So, these restaurent tries their best to retain their customers by managing switching cost.

Switching costs are the costs that a consumer incurs as a result of changing brands, suppliers
or products. Although most prevalent switching costs are monetary in nature, there are also
psychological, effort- and time-based switching costs. A switching cost can manifest itself in
the form of significant time and effort necessary to change suppliers, the risk of disrupting
normal operations of a business during a transition period, high cancellation fees, and a
failure to obtain similar replacement of products or services.

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Question 1: How to increase switching cost for the customers?

( From KFC’s prospective)

Ans: KFC ( Kentucky is a fast food restaurant chain with headquarter in Louisville, Kentucky
known for its fried chicken. It operates in 123 countries having more than 20,000 outlets. The
founder of KFC was Colonel Harland Sanders in 1930. KFC started its journey in Bangladesh
on the 6th of September, 2006. Transcom Foods Limited, as the sole franchisee of KFC
opened the doors of the first KFC restaurant in Gulshan 1. Today, KFC has grown as a brand,
winning people’s hearts and has opened 19 restaurants in 3 cities across Bangladesh. The
biggest laurel for KFC Bangladesh is maintaining highest standards of food safety and
hygiene regime by following stringent local and international audits. Employing more than
600 people, KFC Bangladesh committed to secure the best quality fried chicken with the best
of services.

Naturally KFC would like to increase switching cost of its customers. So if we analyze it
from the Porter’s five forces theory what KFC Bangladesh can do is-

I. Rivalry among competing firms (High): the fast food business is one of the most
competing businesses today. KFC Bangladesh is also facing intense competition from
BFC, AFC, Five Star CP, Yummy Yummy also even from Food Panda. Although
there is some product differentiation in some products most products are common
such as fries, soft drinks, salad etc. So, competitors try to attract their customers by
offering these products is different ways. So, KFC Bangladesh can introduce a
discount card for students as most the customers are young people. This will create
brand loyalty among them also company can track the purchases made by those
customers.
II. Threat of new entrant (Medium): The existing brand like KFC has strong brand
image which helped them to create a huge loyal customer base. To start a restaurant
huge amount of investment is required which is a entry barrier for new entrant. So,
What KFC can do to deal with this force is to differentiate the taste of their food and
serve their food as fast as possible. They can also prevent their waiters to force the
customers for tips as it discourage some customers to come regularly thus reduce sale.
Good behavior of the waiters is also a positive thing. Mass customization of products
can also create differentiation.

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III. Bargaining power of suppliers (Low): The main raw materials of KFC Bangladesh
are chicken, soft drinks and potatoes. Due to the very frequent and bulk orders many
suppliers are willing to supply raw materials to them. But as the number of suppliers
is high the bargaining power of suppliers is low. KFC Bangladesh can change their
suppliers anytime. So, KFC can let the suppliers compete with one another as their
raw materials are not critical. It can purchase from that supplier who can deliver the
raw materials at lowest possible price and time.
IV. Bargaining power of buyers (high): The buyers of KFC are its customers to come
inside KFC every day. These customers have an array of choices like BFC, AFC, Five
Star CP and so on. There KFC cannot raise their prices as it will reduce customers.
So, they can offer occasional discount to people also differentiate their product more.
KFC can also provide wifi services inside the restaurant to attract more customers.
V. Threat of substitute products (High): There are a number of substitutes of KFC in
Bangladesh such as BFC, AFC, Five Star CP etc. who offer similar products. KFC
can tackle this problem by introducing new menus for morning, Lunch and dinner etc.
This will differentiate their product more.

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 SWOT Analysis of KFC
Strengths
 Second best global brand in fast food
industry in terms of value ($ 6 billion).
 Original 11 herbs and spices recipe
 KFC is the market leader in the world
among companies featuring chicken as
their primary product offering
Opportunities
 Increasing demand for healthier food
 Home meal delivery
 Introducing new products to its only
chicken range
Question 2: How to decrease switching cost for the customers?
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Weaknesses
 Untrustworthy suppliers
 Negative publicity
 Unhealthy food menu
 High employee turnover
 Lack of strong marketing efforts
Threats
 Saturated fast food markets in the
developed economies
 Trend towards healthy eating
 Local fast food restaurant chains
 Currency fluctuations
 Lawsuits against KFC
(From BFC’s prospective)

Best Fried Chicken, is a new emerging star in the fast food market of Bangladesh. Started in
2002, under the guidance of Anisur Rahman Sinha, a leading Industrialist & Chairman of
Opex & Sinha Group .The birth of BFC is the manifestation of the commitment of its founder
to provide quality, Hygienic food at affordable price to the fast food appetite of a growing
consumer demand. The commitment to provide hygienic food in a decent simple clean
environment is unwavering. The principal ingredient, the juicy fresh Chicken is formed by
the owners at their expanding farm facility in Rangpur, under strict supervision of their own
trained staff. The Signature Blend of Spices with which the Chicken is coated in unique in
taste & aroma, manufactured carefully under the creative supervision of master Blender. The
food chain has gained immense popularity & it has opened 17 outlets so far, its market share
is increasing significantly. Housed in simple, clean & customer friendly environment with an
alerts service staff, Service to customers remains their commitment.

As BFC is one of the largest fast food chain restaurants in Bangladesh, there are other
competitors who are offering almost the same products at similar price. Competitors having a
large market share and BFC would like to increase their market share. In order to do so BFC
will try to reduce the switching cost of the customers of their competitors. So if we analyze it
from the Porter’s five forces model what BFC can do the followings-

I. Rivalry among competing firms (High): Fast food industry is one of the most
attractive industries in Bangladesh, as it is a profitable business. It has been noticed
that there is an intense competition among restaurants. If BFC want to attract their
competitors’ customers, they can offer differentiated products than their competitors
as the products are almost same (chicken fry, French fry, soft drinks, coleslaw etc.)
but the price should be lower. Different offers can be attached to different products,
such as discount, membership benefits etc. The main item for all these restaurants are
crispy chicken fry and a specialized spice is required which is almost same for all of
them. If BFC can develop a new spice better than the others can gain the customers
attention. That’s how the customers can find reduced switching cost and BFC can
gain greater market share.

II. Threat of new entrants (Moderate): BFC is a well-known brand in Bangladesh. If

there is a new competitor in the industry then it is very difficult to cope up with BFC

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 in different aspects like cost, product differentiation, economies of scale benefits and
so on. So these can be considered as barriers to entry, although it is possible but a less
likely situation. If this situation becomes threat of new entrants then BFC can adopt
several measures. BFC can reduce the price of their products than the new entrants as
BFC is having economies of scale benefit. Then the new competitor’s customers’ can
have the opportunity to switch to BFC.

III. Bargaining power of suppliers (Low): The major raw materials of BFC are broiler
chicken, special spice, egg, salt, potato etc. As BFC is one of the largest fast food
shops in Bangladesh, many suppliers are willing to supply materials to them. Besides,
there is large number of suppliers of these raw materials. So, here bargaining power of
the suppliers is low. Although the competitor like KFC is having the same advantage,
BFC can purchase from those suppliers who can provide the materials at the lowest
cost and lowest possible price. If BFC can manage to acquire raw material at the
lowest possible price and time it will be helpful for them to produce more and offer
lower price than the competitors. That’s how they can reduce the switching cost of
their competitors’ customers.

IV. Bargaining power of the buyers (High): As the fast food business is an attractive
and growing industry, there is an intense rivalry among the competitors. Fast food
customers have the option like KFC, FFC, CP etc. So BFC cannot easily increase
their price. They can reduce the switching cost of the customers by providing various
offerings like providing free home delivery service for a certain time period, introduce
special student package where the prices are low, differentiated products at lower cost
(maybe loss leading unit) unique environment and recruit efficient employees. All of
these forces can reduce the switching cost of the customers.

V. Threats of substitute product (High): In the current fast food market, new products
are emerging day by day. Basically the fast food chains are offering crispy chicken
fry, coleslaw, French fry etc. but some other restaurants are now offering products
like chicken ball, chicken lollipop, sausage at lower price. So these can be the
substitute of chicken fry, wings fry but the prices are comparatively very low. In this
case, BFC can do several things; they can start producing the substitute products at
the same price of the competitors or they can introduce new products which are priced

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similar as the substitute products. They have a brand image so the customers of
substitute product can have reduced switching cost.

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