Competitive Advantage


Summary:

This post analyses whether Subway has a sustained competitive advantage within the fast food industry. The Resource-Based-Analysis (RBA) framework drives this analysis and explores Subway through: Value, Rareness, Imitability and Organizational-Embeddedness (VRIO).

Results from this analysis show that Subway holds sustainable competitive advantage due to passing all areas within VRIO’s framework.

To leverage growth amid Subway’s public relations disaster, customers’ shifting demands, slowed growth and 900 store closures, this post recommends Subway: (1) Innovate its food menu and increase fresh delivery schedules (2) Remodel stores and (3) Integrate charitable giving into marketing and public relations.

Resource-Based-View

Valuable? Yes. An organization’s resource or capability that is valuable increases customers’ willingness to pay, decreases net delivered costs, or both, and allows a firm to exploit an external opportunity or neutralize an external threat.

Subway passes VIRO’s valuable test because: (1) Customers believe that Subway offers healthy menu options (2) Consumers will pay more for healthier food and (3) Subway’s brand perception helps neutralize competitors’ threats.

Subway’s brand and mission cause healthy-conscious consumers to perceive Subway as the market’s leader for offering healthy fast food options compared to fast food options that are fried, oily and unhealthy.

In a recent study, consumers who preferred healthy fast food options ranked Subway ranked No. 1 on YouGov BrandIndex’s list of casual dining chains.

In addition, ranked Subway No. 3 among all fast food brands, on Statista’s 2018 Brand Value for the 10 Most Valuable Fast Food Brands Worldwide.

Business Insider’s notion that Subway is “forgettable to health-conscious Americans” is not supported by consumers’ stated preferences.

This post finds that Subway’s brand is highly favorable with consumers, who frequently choose Subway for their casual dining desires, as demonstrated in its brand value ranking within the fast food industry.

Furthermore, Subway’s brand helps neutralize external threats from competitors. Yet, Business Insider mentions how Arby’s, one of Subway’s competitorsmanaged impressive growth through innovation by adding gyros to its menu.

This post concedes that Arby’s sales grew between 2013-2017 whereas Subway’s sales declined during that same period.

But Business Insider failed to mention how Subway’s capabilities mitigated Arby’s threat as Subway more than tripled Arby’s U.S. sales revenue, each year, during the following five consecutive years: 2013, 2014, 2015, 2016 and 2017, according to QSR Magazine's reporting on the industry’s sandwich category (see table below).

Subway’s health conscious advantage mitigated McDonald’s attempts to pivot from an unhealthy perception by adding healthier menu options. According to McDonald’s spokesman Stephen Mazeika, the company has attempted to offer “more balanced choices in “fruits and vegetables.”

Despite the attempted pivot "people just don't think of McDonald's as having that premium quality,"said Sara Senatore, a restaurant analyst with Bernstein Research. Also, a study by RBC Capital Markets found that consumers rated McDonald’s as having the lowest quality food-- placing the market’s revenue leader 12 out of 12 in quality.

Business Insider and many experts draw equivalence between Subway and McDonald’s because they both sell fast food.

This post recognizes that while consumers will, from time to time, cross shop burgers to sandwiches, a sandwich to sandwich categorical comparison is more appropriate.

Given Subway’s dominance within the sandwich category and respectable market position within all fast food chains, this post finds justification for value passage.

Rare? Yes. An organization benefits from a rare resource or capability when its resources and/or capabilities are shared by relatively few firms in its industry.

Subway passes the rare portion because the market has few competitors matching Subway on (1) entrepreneurial franchise relationships and (2) Supply chains and negotiating power.

Entrepreneurial Franchise Relationships

Doctor Associates owns Subway and collects a percentage of profits from approximately 40,000 Subway locations worldwide. This advantage leaves Subway with little, if any, operational cost, which also serves as a financial buffer when operations at a location fails. In addition, this advantage offsets Subway’s low standing as No.47 in sales per unit out of 50 ranked chains.

Subway’s franchise relationships enable it to focus heavily on marketing the brand’s: (a) price promotions (b) healthy food options (c) quality and (d) nutrition in ways that most other fast food chains cannot penetrate.

Supply Chains & Negotiating Power

As a large international brand, Subway learned lessons on anticipating commodities’ often volatile pricing. Due to Subway’s vast network, few chains have the capability to turn those lessons into revenue increases or cost decreases.

Subway entered into an agreement to shop for and negotiate prices on behalf of its approximately 40,000 restaurants across the globe-- capitalizing on both quality and cost reductions.

Suppliers along this chain compete for access to Subway’s annual purchases of: 70 million pounds of chicken, 60 million pounds of turkey, 30 million pounds of pepperoni and more.

This leverage gives Subway significant bargaining power at the negotiating table-- a competitive advantage that few firms experience.

Given Subway’s relationships within its franchise entrepreneurs, its vast supply chain and the positive leverage its purchasing provides during its negotiations, this post finds justification for rare passage.

Imitability? Yes. An organization’s resources or capabilities are imitible if they’re difficult to imitate and competitors face significant costs during duplication, development or acquisition.

Subway passes VRIO’s imitibile portion because the fast food market has few competitors matching Subway on the complex logistics in: (1) growing times for animals and crops to supply customers with meat and vegetables (2) establishing and building a competing health centered brand.

Organizational Embeddedness? Yes. An organization’s resources or capabilities are organizationally embedded if the firm is able to exploit opportunities to capture value.

Subway passes VIRO's organizational embeddedness portion because Subway owners control their own destiny through their store placement, operations and customer service, yet benefit from Subway’s brand, collective negotiating and supply chain.

Subway’s reporting structure, specifically its entrepreneurial relationship with its chain owners enable it to provide the proper financial incentives to leverage profitable growth. Consequently, this post finds justification for organizational embeddedness passage.

Subway's complete VIRO passage indicates that it benefits from a sustained competitive advantage.

Recommendations: To leverage sustained profitable growth, this post recommends that Subway pursue the following strategies and tactics:

(1) Innovate its menu offerings and remodel stores in order to keep up with emerging trends and bring freshness to its operations

(2) Integrate online CSR storytelling into its business model by synthesizing and leveraging two emerging trends within society:

(a) Millennials’ increased demands that corporations act as better community steward (Deloitte's Millennial Study)

(b) Customers demand healthier & fresher food (Nielsen's Health & Wellness Report)

To capitalize on these two facets, Subway should use "Business as a Force for Good" by publicizing a weekly “contribution” where a strategic revenues benefit social good. Results from this strategy will increase Subway’s engagement and leverage its brand.

The Trifecta

This post finds that, after successfully implementing the above strategies and tactics, the following results will arise:

(1) The public will perceive the social impact campaign as a sincere and

valuable effort by Subway.

(2) Shareholders will perceive the social impact campaign as an innovative

and valuable executive maneuver by Subway.

(3) Subway will engage more with existing customers, compel new customers

and thereby leverage profitable growth.

This win series represents the trifecta.

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