ROBERT SMITH, HOST:

A while back, KFC - Kentucky Fried Chicken - scored this enormous marketing coup. They were launching this new product, an amazing thing for them, grilled chicken. And they got the best salesperson in the world to show for it - Oprah.

(SOUNDBITE OF TV SHOW, "OPRAH")

OPRAH WINFREY: For every viewer watching today, here's the deal. We called up the fine folks at KFC - Kentucky Fried Chicken. Here's what they're going to do. KFC is offering two pieces of grilled chicken complete with two sides and a biscuit - don't forget the biscuit - for you and your family for free.

(APPLAUSE)

WINFREY: It will not cost you a dime.

SMITH: You get free chicken. You get free chicken. Everyone gets free chicken.

(SOUNDBITE OF TV SHOW, "OPRAH")

WINFREY: Free, free, free - a free family feast. Here's how it works.

SMITH: All you've got to do is print off a coupon on the website. And this sounded great. Who doesn't like free chicken? Well, there was at least one person who was not happy with free chicken - the man behind the counter.

RICK ROZIER: A lot of people came in thinking that, well, Oprah is buying this for us, you know, isn't she? I said, no, Oprah just, you know, gave a pitch. We're paying for this.

SMITH: This is Rick Rozier - owns five KFC stores. The free chicken thing - that was dreamed up by KFC corporate headquarters. But when all those people printed out all those coupons and lined up at his stores, Rick had to give them the chicken. He was paying for it. And it did not work out so well. He says he lost a bunch of money.

So would you do that again if that came up?

ROZIER: That's not an option. I'll just leave it at that. It's not an option.

SMITH: Hello, and welcome to PLANET MONEY. I'm Robert Smith, here with NPR reporter Alexandra Starr. Hey, Alexandra.

ALEXANDRA STARR, HOST:

Hi, Robert.

SMITH: We think of franchises as the corporate behemoths, right? McDonald's, Burger King, KFC - every sport the same, every store identical.

STARR: But in reality, almost every store has a different owner - someone like Rick Rosier. And sometimes, what the corporation wants is very different than what these individual store owners want.

SMITH: Today, the secret war going on inside every fast-food franchise. It all goes back to an old man with a white beard and a black string tie.

(SOUNDBITE OF MUSIC)

SMITH: We should say first that Colonel Harland Sanders was a real person. And I feel embarrassed even having to point this out, but at this point he's become like Ronald McDonald or the Hamburglar - this icon. But no, he was a real person who lived in Kentucky.

STARR: And the real-life Colonel Sanders was something of a failure for most of his life. He only had a sixth-grade education and by the time he reached his 40s, he'd held more than two dozen jobs.

SMITH: I love this list. Lay it on us.

STARR: He was a farmer, a soldier, a lawyer. He worked on the railroads. He was an amateur obstetrician.

SMITH: This was a long time ago during, the Depression. Now, in the 1930s it seemed like Colonel Harland Sanders had finally found his calling. He was running a small gas station in Kentucky. And as he explains in this film footage, he figured out a way to make some money on the side. I need you to prepare yourself now because the colonel was a fast talker.

(SOUNDBITE OF ARCHIVED RECORDING)

HARLAND SANDERS: After I'd been here about 30 days, I moved the old dining room out, don't you see, and the six chairs, and decided we'd try to sell some food to some people who was stopping with us. So we cooked meals for the five and the family. We wouldn't eat it right away ourselves, hoping to sell one, two three or the five meals. So that was my first restaurant.

SMITH: He sounds like Foghorn Leghorn. What was he saying - translation?

STARR: So he was saying that he was selling chicken out of his house, his living room. Eleven herbs and spices - very popular.

SMITH: So has this little restaurant next to the gas station. And he does so well that the governor of Kentucky makes him an honorary colonel for his contributions to the state cuisine, and then the state of Kentucky turns around and kicks him right in the nuggets. The state built a new highway that bypassed Sanders' gas station and chicken joint, and that was the end of the business.

STARR: He's 65 years old, living off of Social Security.

ROBERT DARDEN: And all he had was this recipe and his own kind of salesman-entrepreneur buoyant spirit. And you take what you have.

SMITH: This is Robert Darden. He's a professor at Baylor University who wrote a biography of the colonel. He says starting in the 1950s, the colonel took his recipe and he hit the road. He had no choice. He would drive around and try to get restaurant owners to put Sanders' fried chicken - that secret recipe - on their menus. And if they agreed, it was a handshake deal.

DARDEN: And the understanding was the cook was to keep an idea of how many pieces he sold and how much chicken he sold. And don't worry about tax, just send me the money and I trust you.

STARR: Here's how it worked. For every chicken you sold using Sanders' recipe, you paid him five cents. And in order to prepare the chicken his way, you had to buy bags of that special blend of herbs and spices from him.

SMITH: It was an early form of franchising. He was one of the first people to franchise restaurants. And you can see the genius of it. Restaurants get the secret recipe and the colonel can expand quickly. Everyone makes money.

STARR: But even back then, there was this tension that you see in all franchises over who's in charge. The colonel sometimes acted like he was the one running the restaurants. He was super particular about how you prepared the chicken. He didn't want anyone skipping any steps as they made it.

DARDEN: When he finds out that new cooks are in and they're doing it - they're frying it but they're not adding this next step or whatever, he would simply quit sending the material.

SMITH: It was his way or the highway.

DARDEN: Yeah. When it came to chicken.

SMITH: There was this other tension too that always comes up in franchises. And it was about money. The colonel wanted to expand, and expand quickly - have more and more places sell his chicken - because after all, he got a cut of the sales. For him, the more sales, the better.

STARR: But if you're an individual owner of one of these restaurants, you don't necessarily want that. You don't want another Kentucky Fried Chicken operating across the street from you.

SMITH: To resolve this tension, the colonel would offer geographic exclusivity. He'd say, OK, OK, I will not sell this recipe to anyone within a certain number of miles.

STARR: And for a long time, this worked.

SMITH: Yeah, it worked so well that corporations wanted in on the game. Kentucky Fried Chicken got bought out. But the colonel, he stayed on as its founder and its icon and its pitch man.

(SOUNDBITE OF ARCHIVED RECORDING)

SANDERS: I'm Colonel Harland Sanders, and I'd like to tell you a little bit about my Kentucky fried chicken.

UNIDENTIFIED WOMAN #1: Hey, ain't you coming?

SANDERS: You go ahead, honey. I'm going to talk to these folks a little bit longer. And now I said Kentucky fried chicken. There's only one way to cook Colonel Sanders' Kentucky fried chicken. And that's my way.

STARR: By the late 1960s, KFC is outselling McDonald's. The colonel pushed the chicken, and the corporation pushed the growth. They just kept adding more and more stores.

SMITH: You know, the truth is anyone could run one of these things. That was the beauty of the franchise idea. It was a restaurant in a box.

STARR: We called up Darlene Pfeiffer. She's a former airline stewardess. And in the mid-1960s, she decided she wanted to run a Kentucky Fried Chicken. So she calls headquarters. And the man who picks up the phone was beyond encouraging.

DARLENE PFEIFFER: He said, well, honey, you don't want one restaurant; you want five. I said, I do? He says, yeah, we'll sell you five franchises.

SMITH: Darlene found herself running five restaurants in upstate New York. And after she bought, guess who shows up? Colonel Harland Sanders arrives at her doorstep. He was a roving chicken ambassador at the time - a sort of middleman between corporate headquarters and the individual owners. He was there to help her promote her restaurant.

PFEIFFER: People came in, had their pictures taken with him. And he sat there for hours and hours and hours. Along about 6 o'clock, I said, Colonel, come on, let's go. I was worn out. Here he was; he was still raring to go.

STARR: The colonel stayed at her house that night and then hit the road again.

SMITH: He was 88 years old, traveling from franchise to franchise, barging into their kitchens, telling them what to do. A couple years later, at the age of 90, he died. A moment of silence for the colonel.

STARR: RIP. By the 1980s, there were KFCs everywhere.

SMITH: Literally, they were everywhere - intersections, rest stops, all the obvious places. And this was a problem. The corporate owners - it was PepsiCo at the time - wanted to push the brand further. They wanted to make it even easier for customers to get their hands on the chicken.

STARR: Darlene is pretty sure they wanted to sell KFC in grocery stores and just open new KFCs. And this is where that tension - that tension that is always there in a franchise situation - broke out into the open. Franchise owners like Darlene were like wait, wait, wait. I don't want a new KFC across the street from mine. This is not the deal we made with the colonel.

PFEIFFER: They could put franchisees out of business, literally.

SMITH: How do you compete with a KFC across the street? It is an identical store. They have the same menu, the same chicken. It costs the same. They have the same advertising. That's the whole idea of a franchise.

STARR: At that time, Darlene was president of the KFC Franchisee Association. And she remembers this meeting with the president of PepsiCo. They owned KFC.

PFEIFFER: And he had this new franchise agreement. And he threw it down in front of me. He says, you will accept this agreement or you will deal with me. And looked at him and I said, well, I guess I'm going to deal with you because we're not accepting it.

STARR: The owners who ran the individual KFC outlets sued the KFC corporate owners. It was this big, ugly public fight.

SMITH: This whole relationship the colonel had worked hard to keep together for decades was breaking down. They didn't trust each other. They weren't working together. And that made it even worse when disaster struck - or, as I like to call it, chickengate (ph).

(SOUNDBITE OF TV SHOW, "OPRAH")

WINFREY: Here's how it works. For the next 24 hours, go to oprah.com/kfc and download a coupon for this free KFC grilled chicken meal.

(APPLAUSE)

STARR: When Oprah tells you to do something, you do it. People swarmed KFCs demanding those free chicken dinners - chicken dinners paid for by the already-frustrated storeowners.

SMITH: It got worse.

(SOUNDBITE OF ARCHIVED RECORDING)

UNIDENTIFIED MAN #1: Getting that free chicken may not be as easy as you'd think. Eleven News reporter Melissa Carlson joins us live from northeast Baltimore tonight with more on the story.

MELISSA CARLSON: This location here on Greenmount, they've run out of the grilled chicken. But they were taking those coupons. Other locations weren't doing it.

UNIDENTIFIED MAN #2: I'm disappointed because I can't go in and get lunch. I'm burning my lunch time, I'm burning gas.

UNIDENTIFIED WOMAN #2: I'm kind of disappointed I've got to go to McDonald's now.

CARLSON: That's because she was turned away. This location, and many others, are not accepting the coupon.

STARR: It was a disaster for everyone. There was another lawsuit.

SMITH: The KFC Corporation declined to talk to us for this story.

STARR: But we did find a transcript of a call that the then-president of KFC's parent company had with analysts around this time.

SMITH: The president was David Novak and he is clearly frustrated. He says, the franchisees are basically dragging down the brand. He says, quote, "if they want to vote down every value idea we ever have, then we're not going to have any value."

STARR: This battle at KFC - it's not just a KFC thing. It happens all the time with franchises. There have been battles at Burger King, Quizno's, Domino's, Coldstone Creamery. There's this inherent tension built into the system. It's why a lot of companies these days are not going the franchise route. Take Starbucks. Starbucks stores in the U.S. are owned and run by Starbucks. That's why you see a Starbucks next to a Starbucks across the street from that third Starbucks.

SMITH: Because there are no franchisees, like at Kentucky Friend Chicken, protesting the whole thing.

STARR: KFC needed to find a way to make peace. And there was only one person who could do it.

SMITH: That person was, of course, Colonel Harland Sanders. It's as if he reached his greasy hand up from the icy grave, grabbed the two sides and said, you have got to start to get along.

STARR: The colonel was the one thing everyone could agree on. So the corporate office and franchisees, they got together behind a new campaign. They even have a name for it.

ROZIER: Re-colonelization (ph).

SMITH: The re-colonelization (ph). The return of the colonel.

ROZIER: Exactly. Bring the colonel back. Whenever the business has done well, it's been when the colonel has been very involved.

SMITH: That's Ricky Rozier, the KFC owner you heard at the very beginning who was upset about the Oprah thing.

STARR: He has a new picture of Colonel Harland Sanders on his wall. In fact, the colonel is staring down at us from everywhere in the restaurant.

SMITH: You're into it. You have, like, the colonel here on your shirt. You've got the colonel on your hat.

ROZIER: Absolutely hard core.

STARR: The colonel has been revived. You may have seen the new ads they've been playing on TV.

(SOUNDBITE OF AD)

DARRELL HAMMOND: (As Colonel Sanders) Hi, folks. It's me, Colonel Sanders. I've been gone for a while, and boy howdy have things changed. Nowadays you've got your international space station, you're double-sided tape, your cargo pants. You've seen these pants? That's too many pockets.

SMITH: I should say that that is not the real colonel. KFC corporate hired an actor to play him. And guess what? Since they've started to air these ads, sales are up.

(SOUNDBITE OF SONG, "YOU'LL NEVER FIND ANOTHER")

THE BUCKSTANKLE BOYS: (Singing) I don't care how far you roam and ramble. You'll never find another that'll love you like I do.

SMITH: We should acknowledge that our music today is the bluegrass stylings of The Buckstankle Boysfrom North Carolina. You can email us at p..y@npr.org, or we accept Tweets. We're on Facebook. Our episode today was produced by the great Nick Fountain.

STARR: Special thanks to David Palmer - he's at the Royal Bank of Canada - and Ben Lawrence at Cornell University. He's the one who tipped us off to the story of the colonel.

SMITH: And if you're looking for another podcast to try, may we suggest NPR's Hidden Brain? You can find the Hidden Brain at npr.org/podcasts and on the NPR One App. I'm Robert Smith.

STARR: And I'm Alexander Star. Thanks for listening.

(SOUNDBITE OF SONG, "YOU'LL NEVER FIND ANOTHER")

THE BUCKSTANKLE BOYS: (Singing) I don't care how far you travel. You'll sail around the ocean blue. I don't care how far you roam and ramble. You'll never find another that'll love you like I do.

SMITH: It as if an - almost like a zombie Colonel Sanders in a tattered white suit eaten by worms and oozing viscera reached back his - reached his greasy hand out from the Kentucky dirt from his icy grave, grabbed both sides and said, you two have got to start to get along.

AEM 3230 Managerial Accounting Summer 2016 Ch. 11 Manual Homework Student: ________________________________ For this assignment, please listen to the \"Planet Money Podcast Episode 684: The Return of the Colonel\" from February 17, 2016. The podcast is 15 minutes long and is available at: http://www.npr.org/sections/money/2016/02/17/467108611/episode-684-the-return-of-the-colonel A transcript of the podcast is available at: http://www.npr.org/templates/transcript/transcript.php?storyId=467108611 1. When Harland Sanders began selling his recipe to restaurants in the 1950s did he primarily use a formal control system or informal control system? If a restaurant violated the control system, what type of recourse did Harland Sanders have? 2. What is KFC Corporation's primary asset? Is it the physical restaurants? 3. How did Harland Sanders' KFC protect franchise owners (i.e. franchisees) from intra-firm competition? 4. Is the current KFC or Starbucks more decentralized? What types of decisions might a locationowner/manager make versus what decisions are made by Corporate? 5. Assume that franchisees of KFC restaurants pay KFC Corporation a royalty (fee per piece of chicken sold) and keep the rest of revenues to cover expenses, buy assets and provide financing (e.g. pay off loans). What type of responsibility center is a KFC restaurant? 6. Did KFC recently resort to a formal or informal control system mechanism to get franchisees to \"play nice\"? What was the mechanism? 1 AEM 3230 Managerial Accounting Summer 2016 Ch. 11 Manual Homework Student: ________________________________ For the remaining questions, consider the following hypothetical information: KFC franchises purchase most of their spice packages from the KFC Corporate Spice Division. The Spice Division's incremental cost for manufacturing the packages is $90 per unit and it is currently working at 80% of capacity. The current market price of the packages is $125 per unit (in addition to selling packages to KFC franchises, KFC Corporate Spice Division sells the packages to grocery stores under a different label). 7. Using the general guideline presented in the chapter, what is the minimum price at which the Spice division would sell packages to a KFC franchise? 8. Suppose that KFC Corporation currently requires that whenever divisions with unused capacity sell products internally, they must do so at the incremental cost. Corporate is now considering having the KFC franchise and KFC Spice Division negotiate a transfer price. What is the range of possible transfer prices? What hybrid transfer price would \"split the difference\"? 9. Would a negotiated transfer price improve KFC Corporate's ability to evaluate the Spice Division performance? Explain. 10. Would a negotiated transfer price improve the Spice Division manager's motivation? 2