The Interrelationship Between Business and the External Environment

The Business Environment: The Interrelationship Between Business and the External Environment A study of the Fast Food Industry 1. Adapt or Die 1.1 The consumer is king! An old adage I know, but it is truer today than it ever has been. Consumers are demanding more and businesses are having to respond or get left behind. The winds of change are certainly blowing through the empire of fast food. People are no longer prepared to sacrifice other considerations at the alter of price and convenience. Adaptation is key if this industry is to continue to thrive in a changing market. 1.2 This report looks at the political, economic, social, and technological trends and their impact on the fast food retail sector. I have created a PEST analysis and considered the implications. Each one affects the industry as a macro-environment. I have identified three significant trends that will sum up every factor, formulate the implications they will have and how the industry has responded to them. I have also considered future aspects of these trends in order to provide my own advice as to how the sector could handle ramifications to come. 2. P.E.S.T 2.1 POLITICAL Health and Safety Guidelines Animal rights campaigns Bovine Spongiform Encephalopathy (BSE) The ‘Cheeseburger Bill’ 2.2 ECONOMIC Low set up costs Support from major supplier Perceived value for money Franchising facilitates set ups Growing market Increasing disposable income 2.3 SOCIAL Increased Vegetarianism Social Activities Busy Lifestyles Heathy Eating and Lifestyle 2.4 TECHNOLOGICAL Receiving and recording customer feedback Computer ordering: placing orders online, till system Investment in technological innovations Analysis 3.1 I have identified and selected three significant trends for consideration within this report: Increasing health consciousness. A demand for higher quality food. A demand for better consumer experience. 3.2 Health More and more of the world’s population are becoming health conscious. This is particularly true in the developed countries. There is a movement towards healthier lifestyles which is being reflected in an increasing demand for healthier foods. This is evidenced by the rise in organic farming, produce and organic food outlets. Obesity has become a significant issue in the developed world. According to the World Health Organisation a global shift in diet towards the intake of fatty foods was the cause of at least 400 million adults being obese in 2005. They project that by 2015 approximately 2.3 billion adults will be overweight and more than 700 million will be obese. (World Health Organisation article) [online]. Against this backdrop, people are becoming increasingly health conscious around both their diet and lifestyle. Increasing health costs are also forcing governments to become involved and have resulted in programs such as the UK’s Change4Life. Unless the fast food industry responds to these important issues of obesity and serious associated health problems, there is likely to be a backlash against these types of foods, and their market will shrink. Indeed as the cost to the health service spirals the sector could be exposed to potential political pressures similar to those experienced by the tobacco industry. These included a ban on advertising, messages being printed on tobacco products warning of the health implications of their use, and eventually the banning of smoking in public places. In the US in 2002 several American teenagers took legal action against McDonald’s blaming the company for their obesity and associated health problems. However, the judge assigned to this case overruled their allegations in early 2003 stating that 'it is not the place of the law to protect them against their own excesses ' (BBC News - McDonald’s Obesity Lawsuit Article) [online]. Just over a year later the US approved what was known as the 'Cheeseburger Bill ', which prevents frivolous lawsuits against the producers and retailers of fast food and non-alcoholic beverages arising from obesity claims. Despite no longer having the threat of lawsuits, the UK government created laws reducing the size of portions and restricting the amount of salt and fat within each food. Due to these new laws, but also as a response to the recent healthy eating trend, fast food chains have introduced healthier options to their menus and discontinued the option of 'super-sizing ' their portions. Notable examples of this are McDonald’s incorporating a range of salads into their menus, and Pizza Hut introducing pasta to their menus. Pizza Hut have also temporarily changed their name to Pasta Hut in the UK in a move to attract new customers looking for a more healthy alternative. These initiatives are also an attempt to entice the increasing number of vegetarians who are looking for healthy, vegetarian fast food. Some companies have also introduced fruit and vegetable snack pouches. Fast food chains who are not embracing these changes are likely to experience a negative impact economically. Socially, this has had a positive effect, meaning that parents with busy lifestyles are still able to take their children to fast food restaurants but provide them with a healthy alternative to the high fat, high salt foods which were exclusively on offer previously. Despite healthy eating initially being a threat to the fast food sector, many of the main players saw this as an opportunity to promote exercise and a healthy lifestyle through distributing pedometers and other health related gadgets with meals bought at their establishment. 3.3 Quality As I research further into this subject one of the things I become aware of is that consumers are also becoming increasingly concerned about the quality of their food. We as a generation are now not so prepared to sacrifice quality and convenience in order to save costs. The social and cultural changes in the general food industry and people’s lifestyles have massively affected fast food of today. In recent years more and more of the population in the UK have turned towards organically produced foods which have not been treated or altered chemically. As the general public strive for quality food there will only be so far a fast food company can take their products in terms of quality. Higher standards of raw materials are needed in order to produce the food that is demanded. This means higher costs for the companies, but the expectation from the public is that they provide them at the same, if not lower prices. Once again if the corporations cannot provide for this market then they will lose a large number of consumers and it will also leave them open to legal allegations in regards to the types of meat consumed by the customer. As a result, the fast food industry has kept up with these changes by altering the meat used within their products. For example, McDonald’s used to produce chicken nuggets utlising the undesirable parts of the chicken. However, they now claim that their nuggets are made up entirely of breast meat. How the animals were treated is also a factor in an individual’s decision on fast food. A few years ago, people would not be bothered as to how the animals were kept prior to the slaughtering. However, this is increasingly not the case. The public demand that animals are treated fairly. A prime example of this would be the investigation carried out by People for the Ethical Treatment of Animals (PETA) with video evidence showing ‘chickens horribly mistreated before they 're slaughtered for a fast-food chain’ (Undercover Investigations article) [online] by workers within a KFC-supplying slaughterhouse. It is difficult for fast food chains to buy free range meats whilst keeping their costs low. In spite of this, most of the main players express that they obtain meats which are negotiated by PETA in order to prevent cruelty to the animals. 3.4 Consumer Experience Low prices and convenience were originally the two trends in which fast food chains had to major in. At present, individuals are not just demanding high quality foods at low prices at a fast rate, but are now also demanding an experience from the companies whilst eating their food. This means having somewhere pleasant to sit down, somewhere they will be entertained during their meal. However, ‘entertainment is only one aspect of an experience. Rather, companies stage an experience whenever they engage customers, connecting with them in a personal, memorable way.’ (Pine & Gilmore:1999:3) Experience is a trend that can catch out the smaller name brands as they pride themselves on quick affordable foods, rather than quality and experience. With the increase of public seeking out experience during dining, these companies will lose out on their custom. It will also create implications for the bigger names as they will have to invent new ways of providing an enjoyable dining experience in order to stay in the competition. A prime example of a fast food restaurant that provides experience is Wagamamas. This chain produces exotic, fast foods within a restaurant style establishment. The use of benches creates an authentic atmosphere along with the view into the kitchen allowing the customer to see their food being cooked. Providing an experience allows any company to raise their prices. This is demonstrated through the progression of economic value graph. (see figure 1.1)

figure 1.1 Information provided by Pine and Gilmore (1999) suggests that ‘the best things in life are not things.’ This graph shows how companies can charge premium prices as they provide more with the goods. Perhaps the best example is coffee being sold by Starbucks. The actual commodities i.e. the coffee bean, cost a very small amount of money, but once those beans are ground, packed and sold by a manufacturer to a supermarket, therefore turning them into a good, the price can increase further. Once the ground beans are brewed within a small name coffee shop, a third higher level of pricing can be introduced. This process is known as customisation. However, there is a fourth level of value which is where the very same coffee beans are served within highly regarded restaurants or big brand name cafes such as Starbucks. The coffee can now be sold at a price of anywhere between £2 to £5. This is because the company are providing an atmosphere on top of the coffee. The customer is no longer paying for just the product but also the heightened ambience that envelops the purchase of the coffee. 4. Conclusion Upon reviewing this report, I believe that the three significant trends commented on could in fact have a positive impact on the fast food retail sector instead of the threat that they are made out to be. The healthier foods, the higher quality and the overall consumer experience demanded causes the industry to respond and provide for these needs, thus improving the standards and bringing in a new era of fast food. The industry has had a significant growth rate since it was established and I feel that the consumer will always value price and convenience. Therefore, I believe that if competitors continue to invest in these responses, but still retain these two elements, then the market will continue to grow. As I stated earlier, the consumer is king, and therefore whatever trends come forth in years to come, the fast food industry must respond in order to meet their demands. Adapt or die is a phrase used that describes the process of the interrelationship between business and the external environment perfectly. There will always be masses of externalities affecting industries which businesses will have to adapt to. Business is about making profits, therefore companies need to be increasingly aware of the market trends in order to maintain and improve on their position.

Bibliography http://www.who.int/mediacentre/factsheets/fs311/en/index.html http://news.bbc.co.uk/1/hi/world/americas/2685707.stm http://www.kentuckyfriedcruelty.com/u-pilgrimspride.asp
Pine II, B.J. and Gilmore, J.H. 1999. The Experience Economy, Work Is Theatre & Every Business A Stage. HBS Press.

Bibliography: http://www.who.int/mediacentre/factsheets/fs311/en/index.html http://news.bbc.co.uk/1/hi/world/americas/2685707.stm http://www.kentuckyfriedcruelty.com/u-pilgrimspride.asp Pine II, B.J. and Gilmore, J.H. 1999. The Experience Economy, Work Is Theatre & Every Business A Stage. HBS Press.