Group Assignment

Module: Strategic Management

Module code: MGT620

TABLE OF CONTENT

Executive Summary 2

History 4

Krispy Kreme Business Model 7

Porter’s Five Forces 10

SWOT Analysis 15

Krispy Kreme’s Business Level-Strategy 19

Krispy Kreme’s Corporate Level Strategy 24

Krispy Kreme’s Value Chain 30

Recommendation 31

Conclusion 32
 1

Reference 33

Executive Summary
 2

Krispy Kreme entered the quick-service industry (QSI) offering hot glazed doughnut

right off the factory line. Roy Blount Jr. of the New York Times reported that “When Krispy

Kreme are hot, they are to other doughnuts what angels are to people.” Krispy Kreme offers

instant gratification to its customers through its sweet and delicious menu, which is tempting

even to the most ardent health conscious persons who view moderation as common sense.

The rapid expansion and growth strategy pursued by Krispy Kreme’s leaders, who

aggressively tried to increase revenue led to numerous problems. This strategy was too heavy-

handed to the competitive conditions which existed and was not flexible enough to respond to

changes in the industrial environmental conditions and led to overexpansion and market

saturation. The excessive number of stores operating within a relatively small area posed

substantial challenges to the management of Krispy Kreme efforts of achieving long term

profitability after considerable short-term success.

Krispy Kreme was named “America’s Hottest Brand” by Fortune Magazine in 2003,

because of its rapid expansion in the Southeast of the United States in the late 1990” s. In the

early 2000s, Krispy Kreme share price increased substantially from $4 per split-adjusted share in

its Initial Public Offering (IPO) to approximately $49. Just under a year, Krispy Kreme stock

price began to flounder as a result of market saturation from over expansion, accounting errors

combined with changing market trends and poor governance structures. This almost left the

company bankrupt.

A change in strategies, closing unprofitable stores, diversifying the company’s product

and strong leadership improved Krispy Kreme’s effectiveness and efficiencies, resulting in

positive results thus reducing its debt and laid the foundation for continuous improvement. From
 3

2011 to 2012 Krispy Kreme showed growth and became profitable since the mid-2000s. The

new direction was led by the Chairman of Board, James Morgan.

History
 4

In 1933, Ishmael Armstrong, a farmer in Paducah, Kentucky purchased a recipe for yeast-

raised doughnuts from a French pastry chef named Joe LeBeau. The recipe was made of yeast-

raised potato flour and vanilla. Armstrong had hired his nephew, Vernal Rudolph to work as a

door to door salesman to sell hot doughnuts. On the 13th day of July 1937, Vernal Rudolph

ventured on his own where he resettled in Winston-Salem in North Carolina opening a factory

selling doughnuts wholesale to local grocery stores. The demand for hot doughnuts grew

exponentially which encouraged Rudolph to implement a market strategy of cutting a hole in the

factory wall to sell hot doughnuts onto the streets to passing customers. This created the “birth”

of Krispy Kreme.

In the late 1940s, Krispy Kreme expanded with a central plant in Winston-Salem

producing the doughnut mix and distributing it to stores to be cooked. This ensured a consistent

supply of quality products whilst safeguarding the organization’s secret recipe. The company’s

strategy was a combination of company-owned and franchise stores, growing to 95 companies

and 25 franchises. Unfortunately, Krispy Kreme didn’t have a succession plan and after

Rudolph’s death, the company was sold to a diversified conglomerate named Beatrice Foods in

1976. The company was located in Chicago, Illinois, USA. According to Scott Livengood a

former CEO “Beatrice didn’t care so much if the stores made money, as long as we sold

doughnuts to supermarkets. They didn’t want to invest in stores or grow the company, they just

wanted cash.” Beatrice Foods had changed the logo to a tacky 70s look and altered Krispy

Kreme’s secret recipe. Six years after (1982) the acquisition, Krispy Kreme was repurchased by

a group of twenty-two (22) franchisees in a leveraged buyout (LVB).

The group of twenty-two franchisees brought in a new leadership team that restored some

of the strategies that had made the company successful prior to Beatrice’s ownership. The new
 5

owners introduced innovative marketing strategies and relaunched the brand. First, the doughnut

theatre. This was where the manufacturing process was exposed to customers who would watch

the process after which the hot doughnuts were handed to customers right off the production line.

The second strategy was the brightly coloured “Hot Doughnut Now” sign which would

light up whenever fresh doughnuts were coming off the production line. This sign would prompt

customers to walk into the store and receive a free doughnut depending upon the franchise

holder’s policy. The implementation of these two marketing strategies started the turnaround for

Krispy Kreme's future success.

In 1995 Krispy Kreme changed its strategies and planned its growth through franchising

instead of company-owned stores resulting in a steady stream of income from royalties,

doughnut mixes and equipment sales. In 1999 the company’s portfolio grew to 144 stores and

have expanded into 27 states with revenue reaching $220 million up 40% from 1997. Krispy

Kreme offered a split-adjusted price of $9 in its Initial Public Offering (IPO), in April 2000 and

rose to just about $49 per share in 2003. Fortune Magazine ran a cover story calling Krispy

Kreme the “Hottest Brand in America”. By 2003 financial year-end the organization grew to 433

stores reaching $700 million and earned $88million in operating profit. The hole in Krispy

Kreme’s strategy began to emerge, as the expansion of previous years were not strategically

planned, franchise saturated the market and its market niche began to fade. Clearly, this strategy

was not sustainable as there was market saturation by franchises and once profitable locations

began to lose their profitability. In May 2004 Krispy Kreme became unprofitable and

management began to blame its inverse income on the new low carbohydrate diets. The Security

Exchange Commission (SEC) launched investigations into management practices and several

franchise holders filed lawsuits alleging unethical practices by leadership, who were more
 6

concerned with profit-maximizing and not the wellbeing of individual franchises. The CEO Scott

Livengood stepped down and Stephen Cooper was appointed as CEO in 2004 to turn around the

fortunes of the company. Cooper's new strategies included cutting costs by closing some 240

stores costing the organization some $300 million, securing additional funding and installing

capable financial managers. Daryl Brewster a former executive at Kraft was hired as CEO to

continue Scott Cooper’s strategies to return Krispy Kreme to profitability.

The health-conscious consumers forced Krispy Kreme to alter its marketing strategies to

offer whole grain products, doughnuts of a smaller size and the elimination of trans fat in

responding to changes in the market.

Krispy Kreme Business Model

Krispy Kreme core competency is centralized in the manufacturing of doughnuts. The

company sought to produce its doughnuts at its factory and then sell same at the stores. This was
 7

done through the Hub and Spoke distribution model. According to the authors, this system

allows for two types of stores, factory stores and satellite shops. The factory stores would be

responsible for the mixing and distribution of the doughnut mix for both the retail and wholesale

markets. Whilst, the satellite shops which were located within the same vicinity of the factory

store, which would be responsible for delivering fully cooked unglazed doughnuts to several

satellite locations. The glazing of doughnuts was done at the Doughnut Threatre, which would

be glazed in what appears to be glaze waterfall. This model allowed Krispy Kreme to operate

smaller shops in more convenient locations which would facilitate drive-thru windows.

Krispy Kreme also delved in retail and wholesale distribution as early as 1973. The

owner, Vernon Rudolph, opened the wholesale business to sell doughnuts to local grocery stores.

However, Rudolph added this to his business strategy by introducing retailing by cutting a hole

in the factory wall to sell to doughnuts to passerby customers. As the business developed over

the years the management utilized the strategy of franchising. This allowed for persons to

purchase a franchise and open a store instead of Krispy Kreme continuing with its business

strategy of company owned stores. This strategy led to an accumulated opening of 433 stores

across geographical locations in the USA, Canada, Mexico, etc.

As the company experienced exponential growth in the international and local markets,

its customer base grew in tangent. To reach its customer base, Krispy Kreme developed the

smart app “Hot Light”. Once downloaded on smartphones, the app would alert customers of

freshly baked doughnuts and coordinate the customer’s location to the nearest Krispy Kreme

store. This marketing strategy along with “word of mouth” advertising has aided Krispy Kreme

to gain and enjoy 65 per cent brand recognition. Additionally, Krispy Kreme did not invest in

any form of print or media advertisement, instead, the company would send free doughnuts to
 8

those stakeholders who would use their experience of enjoying free hot doughnuts in return for

free publicity. These stakeholders were local television stations, radio stations and newspaper

companies.

To add to the “spirit of free”, Krispy Kreme had a strong commitment to philanthropic

work in communities which franchise stores were located. Krispy Kreme would invest in a wide

range of fundraising initiatives and require of their franchisees to sponsor local charitable events.

These initiatives would build relationships with customers and community members. In 2012,

Krispy Kreme donated $30 million to local charities.

Krispy Kreme’s Corporate Level Strategy consisted of international franchising and their

supply chain. The international franchise consisted of over 400 franchisees in twenty countries

from 2004 through 2009. In 2012, 66 per cent of retails stores were located outside of the USA.

Krispy Kreme franchise had also extended into Mexico which had contributed $6.2 million in

sales in 2012.

The leadership of Krispy Kreme was dynamic, as the management had decided that

franchisees should buy doughnut-making equipment and proprietary doughnut mix from the

headquarters at a marked-up price. This was innovative but, in my observation, created an

atmosphere for cannibalization of profits. Further to the aforementioned strategy, Krispy Kreme

controlled the mixing of the doughnut mix, the production of the doughnuts mix and the

distribution of the baked doughnuts prior to the glazing. This supply chain had helped Krispy

Kreme in protecting its secret recipe.

With the influence of customer change and the demand for healthier products, Krispy

Kreme had diversified its product line in response to changes in the market. The firm introduced
 9

three premium blended coffee and complementary foods at select franchises. All these additions

were responses to the new market trend for healthier foods. Below is a pictorial view of Krispy

Kreme’s Business Model.

 10

Corporate Level
Strategies:
International
Franchising
KK Supply Chain
Franchising

Business Level
Strategies: Product
Differentiation
Franchising/instea
d of company 3 Premium blend
owned DOUGHNUTS coffees
Wholesaling Complimentary
Retailing Secret blend
doughnuts
Hub & Spoke

Marketing :
Word of
Mouth
Philanthropy
Smartphone
App
 11

The external environment is made up of several dynamic factors and actors. Michael

Porter outlined that there are five forces that organizations must consider when operating or

intends to operate a business. Brock and Barry, 2003 posited that managers and operators in

organizations require varying amount and kinds of information for the discernment of industry

activities. This discernment can be achieved through the scanning, monitoring, forecasting and

assessment of the business environment for new entrants in the industry, the bargaining power of

buyers and suppliers, rivalry from competitors and the threat of substitute. Concerning the threat

of new entrants, this threat was low but still eminent. Large capital was required if another firm

had intentions to join the quick services restaurant (QSR) industry. To establish a new business

on the national level would require an extremely large amount of capital which would be

required to setup several network stores and achieve economies of scale for the manufacturing

and distribution of doughnuts. New businesses would have to contend with an expensive
 12

marketing budget for advertisement and time to build brand equity and goodwill. New entrants

would have to carefully consider the dynamics of the industry if they were interested in

competing on the national scale. However, if the new entrants considered entering the industry

on a small scale such as a “mom and pop” strategy, this would be feasible. Krispy Kreme

franchisees and company owned stores were conscious of emerging small businesses and these

were their immediate competitors. The capital requirements for establishing small business were

not capital intensive as a large-scale business. A disadvantage of “mom and pop” shops close to

Krispy Kreme franchise stores would possibly lead to a reduction in their customer base and

create sentimental loyalty.

In addition to the low threat of new entrants, the threat of bargaining power of the

supplier was also low. Krispy Kreme had engaged in vertical integration in their business model.

This was the manufacturing and mixing of the doughnut mix and distribution of same to their

franchise and company owned stores. This strategy to aided Krispy Kreme to successfully

expand in the market and control operating expenses. Within twenty years of operating from

inception, the firm had established thirty Krispy Kreme shops which were located in the

Southeast of the United States.

The switching cost for customers was low and almost non-existence. This along with the

vertical integration and readily available resources created the atmosphere which controlled the

bargaining power of the supplier. In contrast, the bargaining power of buyers was high as the

market was fragmented. Krispy Kreme’s customer base was diverse and consisted of customers

from several ethnic backgrounds such as Hispanics, blacks and whites. The cultural diversity

increased the power of the buyer, according to managing editor of Fortune, Andy Serwer, Krispy

Kreme’s customer base started as low as five years old to 75 years old from various geographical
 13

locations in the US and the international market. Coupled with these dynamics were low to zero

switching cost for competitors’ substitute products. Krispy Kreme had also to handle the threat

of buyers from the wholesale sales channel. The wholesalers such as grocery shops had the

power to switch their supplier at zero cost to them. However, Kreme had managed this process

through good relationships with several grocery stores, convenience stores and the positioning of

large accounts such as Walmart, Kroger and Sheetz. The withdrawal of any one large buyer was

protected through the contractual arrangements with several other large accounts.

The threat of substitute was extremely high. Krispy Kreme had competitors from small

scale business which are referred to as “mom and pop” stores and large scales companies such as

Dunkin’s Doughnut, Tim Hortons, Atkins Diet, Little Debbie, Hostess and Sara Lee which

provided alternative baked goods. The baked goods industry offered similar substitutes of several

freshly baked goods options from a myriad of local and international companies. Other

substitutes included pre-packaged goods which had much longer shelf lives than Krispy Kreme

doughnuts and breakfast offerings such as sandwiches. Furthermore, the craze for healthier

products was on the rise. Costumers wanted lower-calorie products which were available through

the Aitkens diet. Krispy Kreme had slowly responded to the market by introducing wheat

doughnuts which had a low sales turnover. The threat of substitute was real and imminent;

however, Krispy Kreme had great influence over their customers which resulted in 49.60% on

the return on assets and 66.70% on return on equity when compared to companies such as
 14

Dunkin’ Donuts and Tim Horton’s who offered substitute products.

The fifth element of Porter’s 5 forces is the threat of rivalry. Krispy Kreme had several

rivals, but their strongest rivals were Dunkin’ Donuts, Tim Hortons and McDonalds. The most

potent of the rivalry was Dunkin’ Donuts, which had fourteen times more stores than Krispy

Krispy Kremes and made sales of $628.2 million compared to Krispy Kreme $103.22 million.

Despite the outnumbered stores from Dunkin’ Donuts Krispy Kreme debt to equity ratio was

10.20% when compared to Dunkin’s. this means that Krispy Kreme was able to meet its

financial obligation to shareholders and its stakeholders in the event of liquidity requirement.

The returns on asset and likewise equity were most favourable for Krispy Kreme as their

ratios were 49.60% and 66.70% when compared to Dunkin’s of 1.10% and 4.60% respectively.

What this meant was that Krispy Kreme was managing their resources more effectively than

their rival, Dunkin’ Donuts. Other areas for consideration for this category were the rivalry from

“mom and pop” stores which were encountered by small franchised stores and baked products

which had a longer shelf life. McDonalds and Starbucks were also rivals, as Krispy Kreme

started to sell three different premium coffee. Starbucks core product was coffee. Below is a
 15

diagram showing the market share of the main rivals.

In spite of the five forces that existed and impact of the quick service restaurant (QSR)

industry, Krispy Kreme has managed to create its footprint and brand, which resonates with over

4.2 million Facebook fans and the unnumbered walk-in customers. Krispy Kreme has

successfully maneuvered its way in the baked goods industry from 1973 to 2012 (according to

the case) to be recognized as a strong and resilient brand. Krispy Kreme continues to thrive in an

industry which was purported in the case to be attractive based on the assessment made from

Porter’s five forces.

 16

Krispy Kreme Internal Strengths and Weaknesses 

 17

The analysis of the strengths and weaknesses of a company is critical for the success and
sustenance of its future development. The company strengths and weaknesses address the
internal affairs of the company. According to Coulter M. (2013) Strengths are resources that the
organization possesses and capabilities that the organization has developed, both can be
exploited and developed into a sustainable competitive advantage. In analyzing Krispy Kreme
Doughnuts their strengths lie in their legacy; a well-known or household brand name in the
Quick Service Restaurant (QSR) or fast food industry. In other words, Krispy Kreme has an
international reputation for selling and producing the best tasting doughnuts and has maintained
customer loyalty and trust over the years.

The company’s recipe for their yeast-raised doughnuts is assumed to contain vanilla and
potato flour has formed the core differentiated product. This means the product is valuable, rare,
not readily imitated and it is a one- of -a- kind. The company has also innovated two specific
marketing strategies to their product, one of them being the “Doughnut theatre.” This allows
customers to view the process of making the doughnut from the combined raw materials through
to the end product. The marketing strategy sat the precedence for other companies in the QSR
industry. The other Krispy Kreme innovation is the installation of a neon sign with the slogan
“Hot Doughnut Now”. This innovative strategy serves as an indicator to the customers of the
time in which they could enter the store to purchase their hot fresh delicious top of the line
doughnut with the view of getting free glazing on their doughnuts.

Krispy Kreme applies a backward vertical integration as it mixes the ingredients at its
central office or factory and then it is distributed to the company and franchises. This type of
strategy allows for control in the sense that the premium quality of their product recipe is not
compromised or at risk.
 18

Krispy Kreme’s strong leadership redirected and restructured the company to maintain a
competitive advantage over its competitors. The leaders venture into a variety of related products
and this benefited the company in that the knowledge about the company grew while they
maintained their core product. The leaders cared about their stakeholders therefore when there
was a new wave of health- consciousness Krispy Kreme made the accommodation for them by
infusing fruits as well as producing wheat doughnuts. They even went further to provide seasonal
products, for example, forming their doughnuts in the shape of a Christmas tree. They also
ventured into coffee, beverages and even the ice cream market. The Krispy Kreme doughnuts
appeal to all demographics in terms of age group, sex and culture.

Weaknesses

The weakness in the swot analysis of a company speaks to the area of concerns for a
business in its internal functioning of resources, capabilities and core competencies which places
it at a disadvantage to its competitors. The weaknesses identified in the case study of Krispy
Kreme: The health consciousness of the American consumers influenced the market. Therefore,
in order to stay relevant in the market Krispy Kreme began producing whole-wheat doughnut
and this, in turn, distorted the uniqueness of the brand.

The rapid expansion of the company over a short period of time with poor management
planning resulted in over-saturation of the market with franchises and the novelty value of the
product faded. This occurs due to the limited amount and the stretching of the resources to
facilitate the various franchises and companies. The success of the company was not sustainable

Unethical financial management in the past by corporate leadership resulted in lawsuits.

Franchise owners felt used and cheated. The Security and Exchange Commission (SEC)
launched an investigation in the alleged buying of sweetheart deals by corporate leaders to
repurchase failing franchises
 19

In addition to the strengths and weaknesses identified in the case, there were several
opportunities and threats which would have existed within the market. According to Mousa
Rezvani, Shahran Gilaninia, et al, opportunities are a major desirable situation in the
organization’s environment whilst, threats are a major undesirable situation in the organization’s
environment. Opportunities affect the capability of increasing product lines and feasibility to
enter new markets. Krispy Kreme had capitalized on these elements as in response to the
changing demand in customer demands, the company had increased their product line to include
coffee, mini doughnuts, wheat doughnuts and complementary products such as yoghurt, oatmeal
and soymilk at select stores. Other opportunities which can be derived for Krispy Kreme is to
stick to their core products and develop more diversified products that would widen their product
line and by extension their customer base. They could also take advantage of the children’s
market and increase their advertisement to this niche market through television ads.

Threats faced by Krispy Kreme is the large dominance of the market by Dunkin’ Donuts
with 67.5% worldwide market share when compared to the 4.8% enjoyed by Krispy Kreme. In
addition to Dunkin’s oversized market share, people are becoming more health-conscious and
less desirous for high-calorie foods. Another threat is Krispy Kreme’s unpredictive profitability.
To remain a viable competitor and business, the company needs to secure at least three years of
consistent profitability to able to respond to their large competitors such as Dunkin’ Donuts and
Starbucks which are dominating the coffee and complementary products. Below is a diagram
which outlines the Krispy Kreme’s SWOT analysis.
Table 1.0 S.W.O.T Analysis

Strengths Opportunities
 Strong and diversified board of  A shift in the health consciousness of
management and governance policy that consumers
also focus on succession planning that is  International demand and growth
integrated into its annual review. potential
 Strong brand recognition and large social  Lucrative coffee market
media following
 Philanthropic prowess with marketing
benefits
 20

 Aggressive debt reduction strategy

 Franchising proprietary
Weakness Threats
 Failure to genuinely respond to  Static industry
consumer trend and demand for all-  Highly competitive industry
natural, organic and gluten-free products.  The threat of potential new entrance
 Relatively limited success in diversifying
revenues outside of doughnut sales.
 Strained franchiser/franchisee
relationship
 Low margin from wholesaling of
products
 21

Business-Level Strategy

One of the first and most important elements of business strategy analysis is assessing the

external environment. One of the most popular tools for industry analysis is Porter’s Five Forces

Model. Below are the core sights gathered from the external environment of Krispy Kreme:

Threat of Entrance Threat of Substitute

Mom-and Pop Shops can be a threat
Many alternatives to doughnuts
Krispy Kreme however has strong brand
presence and market dominace
Industry
Competitivenss
Intense rivalry
Power of Suppliers
Low becasue there are many suppliers of
Power of Buyers equipment and raw maerials
Low becasue of the franchise Krispy Kreme also buys in large volume
arragement which also weakness supplier power

S.W.O.T Analysis of Krispy Kreme

 22

Krispy Kreme is faced with several threats despite being stronger financially than its

competitors. The nature of the industry and the competitive landscape can seriously impact the

business. Despite those threats that are clear opportunities that can be harnessed for the company

through its international reach and the shift in social factors. It also faced with many weaknesses

that should be addressed internally. With a strong management team now in place driving the

company strategy, there is a great scope that those internal matters can eventually be addressed

to give the company a more solid footing in its industry. Please see table 1:0 below for more

insights on the S.W.O.T. Analysis:

Table 2.0 S.W.O.T Analysis

Strengths Opportunities
 Strong and diversified board of  A shift in the health consciousness of
management and governance policy consumers
that also focus on succession planning  International demand and growth
that is integrated into its annual potential
review.  Lucrative coffee market
 Strong brand recognition and large
social media following
 Philanthropic prowess with marketing
benefits
 Aggressive debt reduction strategy
 Franchising proprietary
Weakness Threats
 Failure to genuinely respond to  Static industry
consumer trend and demand for all-  Highly competitive industry
natural, organic and gluten-free  The threat of potential new entrance
products.
 Relatively limited success in
 23

diversifying revenues outside of

doughnut sales.
 Strained franchiser/franchisee
relationship
 Low margin from wholesaling of
products

Krispy Kreme Business-Level Strategy

While corporate strategy articulates the industry, a company is to compete, business

strategy is focused on market positioning to gain a competitive advantage in one or multiple

industries. Both corporate and business strategies are similar since the company does not have a

portfolio of business units in the same or different industries. Given the nature Krispy Kreme

business, it competes in the Quick-Service Restaurant segment of the restaurant industry as well

as the Baked Goods Production Industry. Krispy Kreme has been credited to have a large but

fragment segment in its core retail segment.

It the business strategy level, Krispy Kreme does not seem to define its business-level

strategy in a clear and concise manner. Whether it will seek to be a cost leader and having

product differentiation was not very clear. However, it has been argued that

“the current study argues that the two paths to achieving competitive advantages (i.e., efficiency

and differentiation) in Porter’s [generic] model can be the main components of possible

franchising outcomes. Firms that pursue an efficiency-oriented strategy should be able to

increase their market share based on a low-cost position relative to their competitors” (Suna and

Leeb, n.d., pg2)

 24

Hence, if the above perspective is entertained, Krispy Kreme would benefit from both a

differentiated strategy that targets franchisees but would also benefit from the scale of production

that should impact its cost. Additionally, the consumers of Krispy Kreme doughnuts also comes

from generally a different segment than the competitors. Krispy Kreme consumers tend to buy

not for the individual but instead group consumption or sharing. Hence, the business level

strategy appears to be a mix of general differentiated and low-cost strategies.

Krispy Kreme also developed the Hub and Spoke strategy. The Hub was where the

doughnuts were manufactured in the factory. After the doughnuts were produced in the factory

they were sent to the satellite location which was located on the same premise as the factory. The

satellite shops would then distribute the unglazed doughnuts to other franchise stores and

satellite shops. The satellite shops were classified as the spoke. This strategy was effective as it

reduced the distribution and operating expenses of the company.

 25

Below are several other business-level strategies and the effectiveness of the strategies which is

outlined in a table format.

26
 27

Corporate-level strategy pursued by Krispy Kreme

Companies use corporate-level strategies to grow revenues and profits for the business

while developing a unique selling advantage and capturing maximum market share. A corporate

level strategy identifies the actions that a firm will take to gain a competitive advantage by

selecting and managing a group of different businesses competing in different product markets.

A corporate level strategy is concerned with two key issues. These are, which products, markets

and businesses the firm should compete in and how corporate headquarters should manage these

businesses. Product diversification, a primary form of corporate level strategy used by many

firms, concerns the scope of the markets, and industries in which the firm compete as well as

how managers buy, create and sell different businesses to match skills and strengths with

opportunities presented to the firm. Other corporate level strategies include, business growth and

business stability. Business growth looks at methods to get more revenues from the sale of

products. Methods of growth usually refers to vertical and horizontal integration strategies.

Vertical integration seeks growth by taking over various components of the operations path to

maintain control over quality and efficiency. Horizontal integration, on the other hand, refers to a

business extending its reach of existing products to new geographical areas or new target markets

and can include acquisition of a competitor. Business stability strategy involves reducing costs

by making processes more cost efficient through automation or negotiating better costs on

materials or distribution margins. Corporate level strategies sometimes change with the lifecycle

of the company.

Krispy Kreme’s vision statement, “is to be the worldwide leader in sharing delicious

tastes and creating joyful.” The mission statement adopted by the company to accomplish

this vision is, “to touch and enhance lives through the joy that is Krispy Kreme.”
 28

Krispy Kreme successfully produces, markets and sells a premium doughnut that devoted and

loyal customers are willing to seek out and buy. While there is not a great deal of differentiation

throughout the baked-goods industry, Krispy Kreme is the exception. Unlike the cake-style

doughnuts sold by most competitors, Krispy Kreme produces fluffy, yeast-based doughnuts that

stand apart from the competition. The company then employs a number of corporate level and

business level strategies to fulfil the vision and mission of the business while satisfying the

expectations of its customers. The company operates in two extremely competitive industries.

These are, the Quick-Service Restaurant segment of the restaurant industry and at the wholesale

level, in Baked Goods Production Industry. These industries are characterized by high fixed

costs, low switching costs for customers and low product differentiation.

Originally, the corporate level strategy pursued by Krispy Kreme was a single business

category of diversification which denotes low levels of diversification. A single business strategy

of diversification can engage one of two strategies or both. These are, a cohesive set of

operational procedures and goals that applies across the entirety of a company or a singular

product focus. A single-business diversification strategy is also one wherein the firm generates

95 % or more of its sales revenue from its core business area. This type of strategy allows a

company to integrate its various departments and workforce population and function as a more

cohesive entity and achieve a higher level of productivity as all efforts are focused on producing,

marketing and selling one elite product, in this case, doughnuts. This strategy allows a company

to concentrate on an area in which they are strong. Krispy Kreme adhered to this policy in the

earlier days of the business, when the main focus was to bring their doughnuts to the people, to

bring them “joy”. The drawback to a single business diversification strategy is that it is highly
 29

sensitive to the economic conditions in the external environment. If sales happen to fall

dramatically, the business has no other product to fall back on for support.

While pursuing a policy of single business diversification, the owners of Krispy Kreme

also added another corporate level strategy of business growth through expansion, through

franchising. The management of Krispy Kreme chose this option instead of opening company-

owned stores as a means of creating value for its customers, grow the business and further fulfil

the company’s vision and mission. Franchising would allow the company to receive a steady

income flow from royalty fees, expand its customer base for doughnut mix and equipment from

its franchisees and increase its brand recognition in the market. Krispy Kreme, at the time,

enjoyed over 65% brand recognition. Franchising also introduced related diversification to

Krispy Kreme. Related diversification brings value to the firm either through sharing of

resources – related constrained strategy, or the transferring of core competencies across the

firm’s different businesses – related linked strategy. Krispy Kreme enjoyed both benefits through

franchising.

However, the aggressive appetite for growth by seeking to increase sales revenues should

have been carried out through actions oriented to achieving moderate and more manageable

levels of growth over a period of time. Rapid growth that was too aggressive in relation to

competitive conditions as well as changes in the external environment resulted in a serious

amount of overexpansion of the number of Krispy Kreme units. Krispy Kreme was growing

rapidly following its decision in the late 90s to expand from its regional footprint in the

Southeast United States. By late 2003, shares were trading at nearly $50, a substantial increase

from their IPO value of $9 just three years prior.

 30

The trouble began with a gap in the corporate governance structure of the company, that

saw a series of accounting missteps due to improper buyback of certain franchises. Other

franchises were filing lawsuits alleging “channel stuffing” and double shipping of the usual

amount of product at the end of quarters so that the company could achieve its revenue estimates.

Still, other franchises, alleged that the corporate leadership was only interested in maximizing

profit overall rather than be concerned about the success of individual stores. When these

troubles were combined with market saturation from overexpansion, changing trends in

American diets, and misaligned incentives between franchisees and corporate headquarters, the

company found itself on the brink of bankruptcy in 2005. To save itself, the firm had to close

unprofitable stores to avoid filing for bankruptcy. Huge losses were suffered between 2005 to

2008.

In 2008, under the stable leadership of James Morgan, the company adopted a corporate

level strategy of business stability. This plan was implemented by the firm determinedly

pursuing a debt retirement campaign that involved a pattern of debt repayment. Krispy Kreme

reduced its debt from $145million in 2005, to $27million in 2011. Morgan also added more

diversification to the firm’s product line This strategic plan saw the implementation of a smaller

factory store model, a hub and spoke distribution system, increased coffee offerings and healthier

menus. Other product lines, such as ice cream, was also introduced. The company also began

looking at products with longer shelf life to reduce spoilage and decrease delivery costs. This is

especially relevant to the wholesale sector, which accounted for over half of the revenues from

domestic store locations in the 2012 fiscal year. The company also hopes to gain a better

foothold in the competitive coffee market by first promoting Krispy Kreme’s coffee to existing

customers. This new focus achieved profitability for years 2011 and 2012, for the first time since
 31

2005. In this way, the company has always acknowledged the line between exploitation of its

core product and a willingness to explore other products and areas of growth.

Pursuing a corporate level strategy of expansion through growth, at both home and

abroad worked in the firm’s favour, when the company ran into financial difficulties. As the

domestic business plummeted, the international business shouldered the load, adding over 400

franchises in twenty countries from 2004 to 2009, geographically diversifying the firm processes.

In 2012, 66%, of all Krispy Kreme’s retail stores were located outside the United States, with

management stating it would like to establish an international presence of 900 stores by the end

of 2017.

In 2013, the company reported that they intended to add a Vice President of Franchise

Development, a new role designed to lead its US expansion efforts. The company recognizes that

its relationships with its franchisees are crucial to its growth and sustainable success. The

company also made a commitment to devote resources to support its franchisees even more.

These resources included management tools, training manuals and increased staffing. This

represents an investment in the human capital of the company.

Other Corporate Level Strategies and its effectiveness are outlined below.
 32

Krispy Kreme’s Value Chain

A company’s value chain consists of a set of activities which a firm uses in its operation in a
specific industry to deliver value added product or services for the market. Krispy Kreme’s
value chain is detailed in the production of its doughnuts, this is denoted in the diagram below.
 33

It must be noted that Krispy Kreme’s value chain has contained the exposure of the company’s
secret recipe through its centralized manufacturing and mixing process.

Recommendation

The Krispy Kreme Doughnut Case Study did not give an explicit vision or mission statement that

would have guided the reader of their goals and objectives for the company. It was also evident
 34

that their Research and Development (R & D) was not mentioned, hence we will assume that the

department was not efficient in conducting their research before the thrust for rapid and

aggressive expansion which the company ensued. Therefore, it is strongly recommended that all

major investments before implementation be allocated for the R & D unit.

Krispy Kreme should also develop better stakeholder relationships to curtail internal conflicts

amongst company and franchise owners. To maintain a positive relationship contractual

arrangement must be frequently reviewed and evaluated by the parties involved.

Krispy Kreme should continue with its leadership and lean management portfolio. This has

resulted in the company resurgence in the market, increased profits and controlled establishment

of a new franchise. Innovation is the lifeblood of the 21st century. Krispy Kreme should continue

to innovate and offer a wide selection of product offerings that satisfies the changes in the

market. The company should continue to invest in philanthropist activities to build better

communities and increase their market shares and customer base. The investment in the

advertisement is also encouraged as this will also increase the awareness of the general public of

Krispy Kreme’s product offering and store locations.

Conclusion

Krispy Kreme should continue to develop their core products and brand under the leadership of

James Morgan who has positioned the company to become profitable after 6 consecutive years of
 35

non-profitability. The company should continue to strategize its position in becoming the largest

in the market.

Reference

Coulter, M. (2013). Strategic Management in Action. (6th ed.), New Jersey: Pearson/Prentice
Hall
 36

Hitt, M. A., Hoskisson, R. E., & Ireland, R. D. (2007). Strategic management: competitiveness
and globalization. Mason, OH: South-Western/Cengage Learning.

Krispy Kreme Neon Sign-Hot-Doughnut-Now. Retrieved from https://giphy.com/search/krispy-

kreme-neon-sign-hot-doughnut-now November 8,2019

Krispy Kreme Factory. Retrieved from on November 8, 2019 https://www.google.com/search?

rlz=1C1CHBF_enJM861JM861&sxsrf=ACYBGNSN3frjlsHFcZuy5kMu8S06LjRyeg:15732428
21615&q=picture+of+krispy+kreme+factory&tbm=isch&source=univ&sa=X&ved=2ahUKEwjk
kJycstvlAhXkYt8KHSZDDmIQ4216BAgFECM&biw=1366&bih=657

Kyung-A Suna. and Seoki Leeb. (n.d) Competitive advantages of franchising firms and the
moderating role of organizational characteristics: Evidence from the restaurant industry.
International Journal of Hospitality Management. Retrieved, November 9, 2019 http://e-
motarjem.ir/storage/btn_uploaded/2018-09-02/1535888993_e-motarjem-EN34.pdf

Leonard, Kimberlee. "Types of Corporate Level Strategy." Small Business - Chron.com,

http://smallbusiness.chron.com/types-corporate-level-strategy-60147.html. 25 January 2019.

Rezvani, M., Gilaninia, S., et al (2011). Strategic Planning: A Tool for Managing Organizations
in Competitive Environments. Australian Journal of Basic and Applied Sciences, 5(9): 1537-
1546.