Introduction
Just Falafel’s success can be attributed to its broadly differentiated products and its best-cost strategy. Just Falafel is a fast food firm that specializes in falafel sandwiches. It offers the best-cost to its customers through focused differentiation and offering the best customer service. It supports its franchises to maintain health and professional standards. Falafel is also considered a healthier product compared to other fast food meals because it is made from multiple ingredients. Its value chain is managed properly by the general administration that reduces nonessential costs.
Just Falafel recognizes that there are different segments that cannot be targeted using a single standardized product. The firm targets high concentration areas with a high visibility, which reduces the need for advertizing. The high concentration areas also increase the number of units sold per outlet. It helps to spread general administrative costs over many units. It reduces cost per unit. It is the best-cost provider because it offers a broadly differentiated product at a reasonable price. The UAE macro-environment also favors the expansion of the firm. There is a favorable political environment that led to the establishment of the firm.
The physical environment also supports the expansion of the firm through road networks and real estate. The GCC countries’ demographics indicate that there is a high concentration of young people in urban areas, which supports sales in the fast food industry. Just Falafel will find expansion in GCC countries easier because of their social culture and a high purchasing power. The Porter’s Five Forces indicate that there is intense rivalry among firms. However, the degree of intensity is reduced because major firms offer broadly differentiated products. The difficulty that faces firms to withdraw from the industry intensifies rivalry.
The bargaining power of buyers has been lessened through focused differentiation. One of the problems that the firm may face is varying standards across franchised outlets. There is the threat of a major Western brand targeting the market with similar products. The main firm can act as a regulator to maintain Just Falafel standards in all outlets through collaboration. The firm already offers professional support to franchised outlets. Its focused differentiation strategy may discourage other firms from launching similar products. Just Falafel’s planned expansion into other countries is likely to succeed because it offers a unique fast food, which is considered healthy and nutritious.
Brief Background to the case
Just Falafel is a fast food firm that specializes in falafel sandwiches. Falafel is part of the Arabic food culture. Just Falafel was established in 2007, in the UAE. The firm has expanded rapidly through capturing a large market share in the UAE and other GCC countries. Globally, it has been using franchises to expand. The firm has approximately 700 franchises across six countries. The UAE fast food industry grew by 7% in 2011 (Jabeen & Katsioloudes, 2013).
The fast food industry has been growing at a moderate rate. However, the demand for falafel has been increasing at a higher rate. It is noted that Just Falafel sales almost tripled between 2010 and 2011 from AED 2.6 million to AED 7 million (Jabeen & Katsioloudes, 2013). Within five years, the firm had opened 27 outlets. It had plans to open 15 outlets in 2013 (Jabeen & Katsioloudes, 2013). The success of the firm can be attributed to its broadly differentiated products. It offers the best-cost to its customers through focused differentiation and best customer service.
Environmental Analysis
Value Chain Analysis (The Internal Environment)
Value chain analysis examines the value-creating activities, which are divided into primary and supporting activities. Value chain analysis enables managers to evaluate linkages between activities that utilize costs and nonfinancial factors (Hansen, Mowen, & Guan, 2009). Just Falafel can effectively compete by enhancing the efficient use of centers of value creation found in their value chain.
Primary activities
Supply chain management
Just Falafel should be able to develop collaborative relationship with suppliers that may enable it to lower product prices. The firm should be aware of changes occurring in the supply market, which may allow it to take advantage of inputs that lower costs.
Operations
Operation refers to carrying out of routine activities that produce the end product. Quality and cost control may be integrated into the daily activities. Just Falafel has a quality control system that ensures that standards are maintained in all its outlets (Jabeen & Katsioloudes, 2013). Just Falafel has been able to expand through selling franchises, which bring the challenge of maintaining standards. There should be an appropriate level of the integration of technological advancement in its production processes. The strength of the brand is maintained by high standards in all the franchised outlets. Just Falafel is planning for global operations that bring in the challenge of legal and political environments.
Distribution
There should be an efficient method of managing finished products that minimizes waste and does not affect the taste of food. There are concerns that food refrigerated for a long period may slightly loose its original taste. The firm has an understanding of the market trend, which enables it to provide fresh food. It has quick service personnel that are able to respond effectively to changing demands (Jabeen & Katsioloudes, 2013). The firm provides little information about managing inventory and utilization of space. Better utilization of space will rely on the internal design of its fast food shops, which includes dining space, kitchen, and other facilities.
Sales and marketing
The social network provides an innovative approach to marketing that reduces advertising costs. There is proper selection of distribution channels that increase visibility and sales. The firm targets to set its fast food outlets in areas that are easily accessible. The firm realizes that customers can decide to make purchases within a very short time depending on the visibility of the shops (Jabeen & Katsioloudes, 2013). The firm targets shopping malls and streets, which have a high concentration of customers. It is likely to increase the number of customers per outlet. It results in the spread of general and administrative costs over many units. It may also result in the reduction of advertisement costs.
The firm offers multiple flavors at reasonable prices, which is an effective pricing strategy (Jabeen & Katsioloudes, 2013). The customer segments are identified through cultures. The product differentiation strategy targets customers of different nationalities with different falafel flavors. The main advantage is that people from other cultures may also be attracted to the various Arabic cultural flavors. Its broad differentiation as a healthy fast food brand offers a competitive advantage. The firm needs a highly motivated sales team to continuously revamp products that are considered old in the market.
Service
Service refers to additional processes carried out to enhance the value of the product. One of the processes is soliciting for customer feedback. Just Falafel allows customers to directly contact the firm on issues that affect them. It also allows customers to provide feedback on the different types of products that should form part of the Just Falafel menu.
The firm trains its personnel and those of its franchises to match international standards. Jabeen & Katsioloudes (2013) discusses that its stores “follow the international level standardization program set towards a healthy and professional environment” (p. 6).
There is a quick response to customer needs and tastes. The firm carries out market research to ensure that it stocks the right kind of food. Just Falafel has to show ability to prevent a stock out by timely replenishment of stock.
Support activities
Technology, systems development, and product R&D
Just Falafel case study reports a successful history of developing new products (Jabeen & Katsioloudes, 2013). The different sandwiches are an indication of a proactive product development unit. There should be positive collaboration between the market research unit and other departments to ensure the successful development and introduction of new products or the rejuvenation of an old product.
The firm should use state-of-the-art facilities and equipment because eating out is considered a form of entertainment for some families. It should develop information systems that support online sales and home deliveries. Just Falafel should develop an organizational culture where individual outlets can respond to customer needs quickly and effectively without relying on the central management. Just Falafel already shows a culture of creativity.
Human resources management
The firm trains its personnel to meet international health and professional standards (Jabeen & Katsioloudes, 2013). There is a need to develop a reward and incentive program to ensure customer satisfaction and responsiveness. Retention of employees with specific skills and talent is necessary for the success of the firm. In a highly competitive industry, retention of critical skills can help accumulate competencies that may serve as a competitive advantage.
Market research is essential to the survival of the firm. The learning curve is enhanced when the HR manager uses certain rewards to accumulate knowledge and technical skills. Internal statistical skills are necessary to ensure that information advantages are not shared with competitors. The firm has to attract and retain the best market researchers. However, it can also outsource market research if it reduces the overall cost without reducing information advantages.
General administration
General administration supports and coordinates activities of the entire value chain. It creates linkages between different centers of value creation that promote efficiency and effectiveness.
Just Falafel uses market research to anticipate customer preferences and tastes (Jabeen & Katsioloudes, 2013). It helps the components that provide primary activities to be prepared to meet customer demand without shortages or excesses. Ability of top management to signal other departments when it recognizes trends and changes in the business environment is what creates an effective general administration. Just Falafel general administration has been able to signal changes to its other departments effectively. The selection of the UAE as an entry country was visionary. The UAE has a favorable business environment compared with other GCC countries.
Another characteristic of an effective administration is obtaining low-cost funds. Just Falafel has replaced financial leveraging with franchising. The firm is able to expand at a low cost.
The creation of a reputable brand is one of the elements that Just Falafel has an effective general administration. Brand loyalty is essential in maintaining profitability at all times, including difficult economic times and periods of stiff competition. Its philanthropic sponsorship to promising students in Asia strengthens its brand image. Its philosophy of a healthy fast food can be used as a marketing slogan. The firm has developed a realistic vision and sustainable organizational values. Just Falafel’s ability to capture a market share from other fast food retailers is a significant indication of quality management.
One weakness that Just Falafel’s general administration has been its shorter work experience compared with its major competitors. For example, KFC has operated in the UAE’s fast food market for more than 20 years (Jabeen & Katsioloudes, 2013). The major Western brands have better global positioning than Just Falafel. Their learning curve bears more accumulated knowledge than that of Just Falafel’s on global operations.
External environment
Porter’s five forces (The Industry)
Intensity of rivalry
There are several large firms and many small-sized competitors. The intensity of rivalry is high because of the high number of firms in the fast food industry. The degree of intensity is reduced because the fast food firms offer broadly differentiated products. Just Falafel specializes in falafel sandwiches. It offers different flavors. KFC, as a competitor, focuses on fried chicken with its complements. Intensity of rivalry would be very high if the firms were offering similar products.
Difficulty in leaving the industry intensifies the rivalry because it leads to price wars and duplication of products by firms that offer close substitutes. The planned expansion by major firms may be at a higher rate than the growth of the market. The market grew at a rate of 7% in 2011 compared with McDonald’s sales growth of 8% in the same year (Jabeen & Katsioloudes, 2013). The planned expansion may increase the intensity of rivalry among firms if it occurs at a higher rate than the increase in demand.
The bargaining power of suppliers
The price of raw materials is very high, which may be an indication of strong bargaining power of suppliers. It could also be emerging from factors that suppliers cannot control such as restrictions on the importation of certain products or shipment costs. Most of the inputs may involve shipment and warehousing that increase the cost of raw materials. The firm has weak power over suppliers because it is unable to influence lower prices. The bargaining power of suppliers can be weakened if the firm decides to manage its own supply (Ahlstrom & Bruton, 2010). However, Just Falafel ability to engage the primary production of raw materials has been limited. It may only eliminate middlemen by purchasing from producers directly.
The bargaining power of buyers
Buyers have a higher bargaining power if they are few and large. The buyers are individuals from households, which show that they have weak bargaining power. The bargaining power of buyers is high when switching costs are low (Ahlstrom & Bruton, 2010). Low switching costs in the fast food industry increase the buyers’ bargaining power. Just Falafel and its rivals target the same urban areas and streets. Customers can easily switch from one shop to another without travelling a long distance. Differentiation by firms reduces the bargaining power of buyers.
Presence of substitutes
There are a large number of substitutes, which limits the use of premium pricing. The firm may not be able to use premium prices to make higher profit margins. However, differentiation allows the possibility of using premium prices. Just Falafel has been using moderate prices with differentiation to capture a larger market share. There are small firms charging premium prices for their burgers. It may discourage the firm from targeting a similar market niche.
Threat of new entrants
There is a high threat of new entrants because the only barrier is capital. Service skills can be learned in training institutions within a short period. They can be imitated easily. The labor market also provides ease in acquiring the necessary skills. Customers have a tendency of trying new products, which may encourage new entrants. The learning curve provides an advantage for firms that have operated in the industry for a longer period.
Highly differentiated products may limit the success of new entrants. Just Falafel has a strong following as a brand, which may help it retain its market share despite the threat of new entrants. The threat of new entrants is high when firms make high profit margins or charge premium prices (Ahlstrom & Bruton, 2010). Just Falafel pursues an overall low-cost strategy that may discourage new entrants.
PESTLE (The macro-environment)
Political
The UAE has a favorable political environment that has attracted different nationalities into its community. A stable political environment encourages business activities by reducing business risk (Cheverton, 2005). The UAE is more politically stable than most Arab countries. Just Falafel targets different nationalities through its flavors differentiated by ethnic cultures. Tourists visiting the UAE are significant in supporting the fast food industry. The UAE, as a tourist destination, is supported by the favorable political climate.
Government policies encourage investments, especially by Emiratis. The inspiration given by political leadership was instrumental in the formation of Just Falafel as a firm (Jabeen & Katsioloudes, 2013).
Economic
There is improvement in global economic conditions and particularly, the emerging markets in Asia. Cycles of economic growth and decline affect businesses differently (Cheverton, 2005). The UAE population also has a higher purchasing power derived from the high disposable income (Jabeen & Katsioloudes, 2013). The UAE’s GDP growth rate has slightly declined in the past few years. The real GDP grew by 4.9 percent in 2011, 4.2 percent in 2012, and 3.3 percent in 2013 (Ramady, 2014). The GDP per capita is the sixth in the world (Spraggon & Bodolica, 2014). It provides higher purchasing power that favors the opening of new outlets in the UAE.
Suppliers rely on stable exchange rates. Stabilized exchange rates may favor the stability of prices because the fast food industry is reliant on imported raw materials. The AED has been stable for a long period against major currencies, such as the US dollar, the Euro, and the GBP (Trading Economics, 2014).
Social
There is increased urbanization in GCC countries that may favor businesses. Most people are moving from rural areas to towns. The UN-DESA (2009) survey indicates that 70% of the populations in GCC countries live in urban areas. A big percentage of the urban population is formed of young males attracted by the job opportunities in urban centers (UN-DESA, 2009). Just Falafel success can partly be attributed to the younger generation and increased urbanization (Jabeen & Katsioloudes, 2013).
Urbanization results in high concentration of customers over small geographic areas. The younger age groups have a tendency to eat out more often than the older generation (Jabeen & Katsioloudes, 2013). The population growth rate may signal the growth of markets. The UAE has a high population growth rate. The UAE population growth rate averaged 5.09 percent between 1995 and 2000 compared with 14.21 percent between 2005-2010 (United Nations, World Population Prospects, 2012).
In the GCC countries, people are very social and word of mouth is a fast seller of new products (Jabeen & Katsioloudes, 2013). Social change may involve changes in perception about healthy food habits (Cheverton, 2005). Concerns about obesity may increase in the UAE that may favor Just Falafel over other brands. According to the case study (Jabeen & Katsioloudes, 2013), 50 percent of the expenditures on food and nonalcoholic products is spent on eating out. It is a favorable spending pattern for the fast food industry.
Technological factors
The UAE has a high rate of adopting advanced technology in many sectors (Spraggon & Bodolica, 2014). The high rate of adopting advanced technology may induce a similar trend in the fast food industry. Just Falafel outlets may find it necessary to use the state-of-the-art facilities to provide a sensational feeling for customers. It may also need to adopt advanced technology to manage stock and reduce inefficiencies. Just Falafel already relies on social networks to cut advertisement costs (Jabeen & Katsioloudes, 2013). It also uses information technology for its customer feedback system.
Legal
The fast food industry has a weakness because some of the products can be imitated without legal restraint. The only fully protected intellectual property is the brand name. Just Falafel benefits from selling franchises, which brings additional revenue to the firm.
Environmental
The physical environment depends on the availability of infrastructure to support the industry, which include road networks and availability of rental buildings in urban areas. The UAE has developed most of its road networks. It also has a modern harbor, which increases efficiencies in the handling of shipments. The fast food industry relies on the availability of affordable rental buildings in high visibility and concentration areas.
There are government restrictions on the level of investment in real estate. However, it has not leveled down the rate at which new buildings are built by real estate developers (IMF, 2013). Over-investment in real estate has caused the price of buildings to fall in the UAE and some of the GCC countries. The physical environment does not favor agricultural production, which may have an impact on the prices of raw materials. The unfavorable climatic conditions in the GCC countries lead to the importation of food. There are high production costs if crops are grown locally.
Key Strategies Used
Just Falafel has applied the five generic competitive strategies to its falafel sandwiches.
Overall low-cost provider strategy
Just Falafel strategy is to capture a large market share at a relatively moderate profit margin. The firm does not follow firms that use premium pricing (Jabeen & Katsioloudes, 2013). Its profitability is driven by increasing the number of units sold. It has been able to reduce the size of its workforce by transferring customer feedback from normal employees to a centralized system. The firm relies on social networks to reduce the cost of placing advertisements.
The firm targets high concentration areas with a high visibility. It also reduces the need for advertizing. The high concentration areas also increase the number of units sold per outlet. It helps to spread general administrative costs over many units, which reduces cost per unit. The firm has been able to by-pass nonessential financing of additional outlets by selling franchises.
Broad differentiation strategy
The broad differentiation strategy is that falafel is a new-to-the-market product in the UAE fast food industry (Jabeen & Katsioloudes, 2013). The broad differentiation has enabled the firm to have an easy entry in capturing a market share from major Western brands such as McDonalds and Wendy’s. The firm can set its prices with less concern about competitive pricing because different firms offer different products, which may appear like close substitutes. It reduces pricing wars and allows the firm to target a moderate profit margin.
Focused differentiation
Just Falafel recognizes that there are different segments that cannot be targeted using a single standardized product (Jabeen & Katsioloudes, 2013). The firm uses focused differentiation to target different ethnic groups. Nationality flavors have been the focus of the firm. The main item is falafel, which is served with different flavors to satisfy different consumer tastes. Different ingredients are used to produce different sandwiches. The different flavors enhance buyer satisfaction in noneconomic ways. Customers can also try a different flavor each time they visit Just Falafel. Just Falafel has been able to capture a larger market share through its focused differentiation. It is able to attract different segments, which increases its total sales.
Best-cost provider
The firm does not pursue premium pricing. It offers a broadly differentiated product at a reasonable price (Jabeen & Katsioloudes, 2013). The focused differentiation and the moderate prices make Just Falafel the best-cost provider of falafel products. The firm enhances the performance of its employees through professional training. They offer the best customer service. Falafel, as a product, is healthier than the other fast food products when the amount of fat in food is considered.
Key Problem Areas
- Rivalry may intensify if a major Western brand decides to offer similar products. The Western brands have capital, expertise, and good reputation that may make it difficult for Just Falafel to survive. The firm may be forced to engage in price wars with its competitors, which may result in lower profit margins.
- The firm may over-differentiate such that buyers realize very little difference between products. They may not any justification in paying different prices. Differentiation also requires a lot of marketing to create awareness. Otherwise, some products may not be noticed by customers.
- Franchising denies the firm the ability to benefit from the economies of scale. Different franchise owners will only use the brand to operate their shops. Different owners may end up using different suppliers. They have little chance of finding the overall lowest-cost supplier.
- Franchising may create differences in standards and the level of professionalism because of separate management. It may affect product quality and customer service. Lower quality products and compromised customer service may reduce the strength of the brand. It may affect outlets with good performance.
- Differences in prices between countries and outlets may distract customers. The firm may ignore the sensitivity of customer to varying prices.
Solutions
- Focused differentiation and a focused low-cost strategy should be used to discourage competitors from offering similar products. Competitors may be encouraged to offer similar products if the products provides a higher profit margin. Competitors can also lower prices than Just Falafel if it uses premium prices. If Just Falafel uses the best-cost strategy, competitors may not find any gaps in the product line to launch their product. Just Falafel should continuously reduce the gap between products.
- If the firm over-differentiates, the best solution is to offer similar prices to most of its closely differentiated products. Customers will realize that the firm offers noneconomic benefits through its differentiated products. It may spread sales across all differentiated products. None of the products may need to be eliminated.
- The firm may need to benefit from the economies of scale despite franchising. The firm can organize collaborative purchases from most of its franchised outlets to reduce raw material costs. Joint ordering of supplies may also increase their bargaining power as a single buyer.
- The firm already provides professional support for its franchised outlets that may reduce differences in standards. The firm can make agreements that allow them to carry out regular inspection to ensure that franchised outlets maintain Just Falafel standards. It will be beneficial to all outlets if the reputation of the brand is strengthened.
- Differences in prices between outlets can be reduced through collaborative purchases. Differences in prices between countries cannot be avoided because of the exchange rate and differences in wage rates across countries. The firm should strengthen its position as a best-cost provider, which will make customers appreciate their services despite differences in prices.
Conclusion
Just Falafel’s success can be attributed to its broadly differentiated products and its best-cost strategy. There is a high demand for falafel products than the growth rate of the fast food industry. Just Falafel’s sales almost tripled between 2010 and 2011 despite the market growing by about 7% in 2011. Market research has been one of the pillars that support its expansion and introduction of new products. The firm targets highly populated areas that increase visibility and sales per outlet. It also reduces overall advertisement costs.
The firm has been able to reduce the size of its workforce by redirecting the work that was supposed to be carried out by front desk personnel to a centralized system, which handles customer queries and feedback. The firm is gradually eliminating nonessential expenditures. The Porter’s five forces show that the firm has low bargaining power over suppliers because of inability to produce its own raw materials and a high cost of managing supplies if it eliminates middlemen.
The physical environment does not favor agriculture, which is the main process of producing raw materials. The intensity of rivalry is high because of strong competitor brands. The demographics in the GCC countries also favor the expansion of Just Falafel because the younger generation spends more often on eats outs than the older generation. There is a favorable macro-environment in the GCC countries.
The high per capita income in the UAE and the favorable political environment has helped through the establishment of the firm. Focused differentiation and a low-cost strategy are essential for the sustainability of the firm. The firm discourages new entrants and the launching of similar products by major brands by reducing the gap between differentiated products and offering the best-cost. There is a need for collaborative purchases among franchised outlets and the main firm, which may allow them to benefit from the economies of scale.
References
Ahlstrom, D., & Bruton, G. (2010). International management: strategy and culture in the emerging world. Mason, OH: South-Western Cengage Learning.
Cheverton, P. (2005). Key marketing skills 2: strategies, tools and techniques for marketing success. London, UK: Kogan Page.
Hansen, D., Mowen, M., & Guan, L. (2009). Cost management: accounting and control (6th ed.). Mason, OH: South-Western Cengage Learning.
IMF. (2013). United Arab Emirates: selected issues. Washington, DC: IMF.
Jabeen, F., & Katsioloudes, M. (2013). Just Falafel: A success story of an international expansion. Emerald Emerging Markets Case Studies, 3(2), 1-8.
Ramady, M. (2014). Political, economic and financial country risk analysis of the gulf cooperation council. New York, NY: Springer.
Spraggon, M., & Bodolica, V. (2014). Managing organizations in the United Arab Emirates: dynamic characteristics and key economic developments. New York, NY: Palgrave Macmillan.
Trading Economics. (2014). UAE Dirham. Web.
UN-DESA. (2009). Chapter Four: the state of the GCC countries. Web.
United Nations, World Population Prospects. (2012). The demographic profile of the United Arab Emirates. Web.