AN ANALYSIS OF DIFFERENTIATION STRATEGIES

IN TAIWAN CHAIN RESTAURANT INDUSTRY

Tain-Fung Wu
Graduate Institute of Business Administration, Asia University, Taiwan
[email protected]

Ming-Hui Yu
City University of New York, USA
[email protected]

You-Jan Tsai , Shiou-Fang Lu, 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, differentiation strategy, 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:
1. Defining chain restaurant’s value chain based on the results of literature review,
personal interviewing and focus group interview.
2. Aiming at constructing concrete differentiation strategies from the matrix of value
chain.
3. 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:
1. 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.
2. Choose representative case from each market segment for personal interviewing.
3. Construct chain restaurant’s common value chain based on the results of literature
review and personal interviewing.
4. Invited leaders in CRI to focus group interview.
5. 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
become a 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.
Differentiation Product Target market Degree of Relative Geography Competitive
strategy line segmentation vertical scale and coverage advantage
length & selection integration economies
and trait
of scale
Raw Material A01 B01 C01 D01 E01 F01
Equipment A02 B02 C02 D02 E02 F02
Manufacture A03 B03 C03 D03 E03 F03
Warehousing A04 B04 C04 D04 E04 F04
& Logistic
Service A05 B05 C05 D05 E05 F05
Brand A06 B06 C06 D06 E06 F06
Information A07 B07 C07 D07 E07 F07
Technology
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 Matrix of chain restaurant

Every strategy point is concerning with different value activity and different strategy
dimension. Take ”product line range and trait” dimension for example:
A1: Are there various substitutes? Is our restaurant able to extend product line?
A2: Is the equipment fully replacing labor? Is the equipment capable of
manufacturing special product?
A3: Is there standard opera ting system for all products? Are the semi-finished
products made by central kitchen?
A4: Are the warehousing & logistic system centralized in headquarter or separately
managed by the branches?
A5: Is service provided by the waiters or self-service by customer?
A6: Is the brand developed by our self or franchised by others?
A7: Is the information technology system able to integrate information from
different value activity?
A8: Are new products developed by headquarter or branches?
A9: 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

A restaurant 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
in Taiwan. 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 food has 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 appeared
as 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 every detail 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 an unimpeded 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 employees to 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 innovations through industrial-academic
cooperation.
(5) Establish R&D reward system to encourage and formalize R&D.
(6) Franchised chains are 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.
(3) There are different operating strategies for different segment of chain restaurant.
The uniqueness of value activities should link well to perform good business
practice.

Construction of differentiation strategies

1. Enhance the source of differentiation: The quality of food, flavor consistency and
freshness are sources of differentiation.
2. Make actual product use consistent with intended use: Conduct a survey on
customer’s expectation for reference of food servicing process improving.
3. Employ signals of value to reinforce differentiation: Arrange food process visiting
course for customers and academia. Communicate restaurant’s own advantages
over the rivalry with customers.
4. Employ information bundled with the product to facilitate both use and signaling:
Make it convenient for customers to understand the chain restaurant via internet.
Provide them with useful and positive information about the restaurant.
5. Make the cost of differentiation an advantage: Mold special culture to differentiate
from rivalry. This activity may be made more unique at little extra cost. But the
specific restaurant’s culture can lead employees coordinating better internally.
6. Preemptively respond to changing buyer behavior: Cultivate on dining behavior of
new generation to develop corresponding marketing strategies. Educate customers
to make them identify themselves with the ideal of chain restaurants.
7. Discover unrecognized purchase criteria: Make use of chain restaurant’s spared
rooms in off-peak hours. The multifunctional uses of exiting space can share the
fixed cost of the building.
8. Reconfigure the value chain to be unique: Differentiation potentially arising
anywhere in the value chain. Differentiate in sensitive value activities such as
brand, cause marketing and culinary R&D.
9. In entirely new ways: Unlock innovative operating process to freshen customer’s
expectation of food servicing. Serve the restaurant not only a place for food, but
also a place for meeting or leisure.

CONCLUSION & SUGGESTIONS

Conclusions
Chain restaurants obtain competitive advantage over other restaurant through its
operating characteristic. Successful differentiation usually stems from cumulating
uniqueness in many value activities.
1. The chain restaurant’s value chain are disaggregated in raw material, equipment,
manufacture, warehousing & logistic, service, brand, IT, R & D, HR, Marketing.
 All these activities can be represented of chain restaurant’s approach to
implementing its strategy.
2. Differentiation comes from various sources in a chain restaurant. Improvement
space exists in every value activity. More efficient linkages between two value
activities are also the chances for improvement. For example, more extensive
inspection by suppliers may lower a restaurant’s inspection cost at the same time
that the reliability of the end product is increased. Once business-level
(differentiation) has been chosen, a restaurant focuses its resources to demonstrate
its competitive strategies against rivals.
3. Product line length and trait, target market segmentation & selection, degree pf
vertical integration, relative scale and economies of scale, geography coverage are
sources to be considered in establishing differentiation strategies. Successful use of
chosen strategy results only when the restaurant integrates its primary and support
activities to provide the unique value it intends to deliver.
Suggestions
Suggestions are made in terms of conclusions and differentiation strategies which
have been constructed in previous chapter for managers’ reference.
1. Create customer’s wants: Design restaurant’s image with different business area.
Suitable image can attract impulse shopping and create sales ultimately.
2. Establish superior business culture: Build up enthusiastic value for the company
and encourage team performance. See employees as internal customers, the
performance of internal customers are free-charge advertisement of the restaurant.
Low employee turnover rate is essential for an employee to get proficient job
training. A well-trained employee is helpful in earning customer loyalty.
3. Emphasize R&D: Be sure to provide new value for customer. Investigate market
transforming all the time to keep up with various needs of customers.
4. Invest in hygiene managing system: HACCP is required in strengthen food’s safe
and hygiene. Enforcing HACCP can keep the meal from food poisoning. Low
contingency rate will contribute to good brand image. In the long run, investing in
HACCP is worthwhile.
5. Manage customer relationship with IT: New opportunity has been created by
market shifting. IT should be further embedded into chain restaurant in the future.
In addition to supply chain management, operation system integration, applying IT
to customer relationship management is also necessary.
6. Encourage innovation and creativity: Differentiation mainly comes from
innovation, utilize existing facilities for holding various events to attract
customer’s attention.
7. Reinforce training curriculum: Human resource is essential because they represent
the restaurant’s image to customers. Chain restaurant industry is not only a food
servicing industry, but also an industry for chefs and cooks to perform culinary art.
A suitable innovative-emphasizing training curriculum plan for each level is
important in passing restaurant’s culture to employees.
8. Public relationship establishment: Expose to the public in good image through
cause marketing, strategic alliance with charity…etc. Differentiate with rivalry in
brand image. A highly sophisticated brand image may be perceived as more unique
and valuable by customers.
9. Differentiation does not solely exist, the sustainability differentiation strategy lies
on cost advantage. Further researcher can combined both cost leadership strategy
and differentiation strategy to depict a whole picture of competitive advantages.
10. The research was based on literature review, personal interviewing, and focus
group interview. Further research can be conducted with questionnaire surveys to
testify management consensus of the results.

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