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Autor: anton 26 March 2011
Words: 1901 | Pages: 8
CASE STUDY: KFC in China
Kentucky Fried Chicken (KFC)- one of the most known fast food chains in the world started in the early 1930's by Kernel Sanders in the Southern USA as a small franchise operation. Colonel Sanders has become a well known personality throughout thousands of KFC restaurants World wide. Quality, service and cleanliness (QSC)represents the most critical success factors to KFC's global success.
Throughout its 35-year history, the company has gone through several stages and has answered to a legion of corporate parents from Heublein to R.J. Reynolds. The most significant stage was when the enterprise was sold to the American giant, Hubelin International in 1974. Rapid growth throughout the use of franchising together with increased competition from primarily MacDonald's reduced the consistency of the standard of both food and service on the individual franchise level leading to massive decreases in profitability. Together with low Research and Development funding from Hubelin, the division found it difficult to match the expansion plans of its main competitors. KFC responded to these problems by improving staff training, employ a new manager- Michael Miles capable of managing an effective turnaround strategy. The QSC motto was emphasized on a global level together with slogans such as "We do Chicken Right". In 1982, Hubelin International was acquired by R.J. Reynolds and Richard Mayer succeeded Miles.
INTERNATIONALIZATION OF KFC:
Opposite to Hubelin International, R.J. Reynolds was willing to fund KFC's overseas expansion plans. In order to reduce risk, KFC encouraged franchising in complicated markets. This reduced financial risk, but also increased problems of operational control, as local franchisees often were more interested in maximizing profits in the short term rather than to adhere to corporate standards and strategic plans. To find the balance between corporate control and cultural sensitivity has been the main point of concern at KFC.
THE CHINA OPTION.
The China expansion plans first came-up in the early 1980's after several successful expansions in the South East Asian (SEA) region including Japan. Tony Wang who was born in China, educated in Taiwan and in the USA, and now living in Singapore was appointed manager for KFC's SEA region. He was given the autonomous responsibility to further investigate the feasibility to further expanding KFC's operations in Asia to the world's most populous nation and the largest market for consumer goods- China. On the other side of the scale, expanding into China would certainly be KFC's most risky international business strategy so far. Moreover, a "go-ahead" signal would make KFC the first western fast-food chain in China.
An expansion into China is recommended. The potential size and growth of the market in association with improving political stability makes the Chinese market very attractive. As KFC has been able to successfully expand into the Pacific Basin, and its popularity in the region (large portion of the population is Chinese), the people in China will most certainly find KFC's products attractive. In addition, the ready access of quality poultry in the major metropolitan areas and host government emphasis on modernization of this industry can ensure a reliable supply of supplies. Opposite to this, potential competitors such as MacDonald's face major barriers to enter the market due to poor beef supply. Moreover, the Chinese government has opened-up access to its markets.
MARKET ENTRY OPTIONS
There are three market entry strategies that can be employed: (refer appendix 1)
2. Wholly owned subsidiary
3. Joint venture
First, KFC's traditional franchising strategy, which is emphasizing standardization and reducing financial risk, on the expense of cultural sensitivity and control. Due to China's strict foreign investment laws such a strategy is not feasible. In addition, KFC will be pioneering in the fast-food field and thus needs to be highly sensitive to cultural demands. In the past, KFC encountered problems with aligning corporate planning with franchisee's short-term focus on profitability.
A wholly owned subsidiary represents the second option. Such a strategy relies upon total control over competitive advantages and ensures complete operational and strategic control. It also involves high investment expenses with no financial risk sharing. With high levels of resource commitment and little country-level flexibility and responsiveness, this option is not recommended.
RECOMMENDED MARKET ENTRY STRATEGY: JOINT VENTURE
When KFC first went into the Japanese market in the early 1970's, the company chose to form a joint venture with a large scale poultry producer with excess capacity. This 50/50 joint venture served the two partners very well, as KFC was able to ensure a stable supply of quality supplies to its operations, and the local corporation was able increase efficiencies in production by selling its excess supply. Furthermore, KFC was able to utilize existing distribution networks serviced by the partner and at the same time, adhere to exiting rules and regulations imposed by the Japanese government on Foreign direct investment.
Despite of the many differences between the Chinese and the Japanese market, a similar joint venture agreement is highly recommended in China. The essence of a joint venture is the synergy effect of two different entities merging. Such an international business strategy will attempt to; solve many logistic problems such as access to good quality chicken and other supplies, solve many logistic problems such as access to good quality chicken and other supplies, ease the access to the Chinese market, share risk with a local entity, and finally serve as a sign of commitment to the host government increasing goodwill. In addition, due to the complexity of many barriers to entry into China, a potential partner with sufficient contacts/networks with government agency officials may smoothen the process of setting-up operations in the nation.
The potential joint-venture partner should be large, well established, provide excellent distribution channels and have personal network access to government officials. It should also have modern equipment and a good management record. It is recommended that a partner is found by backwards integration. In other words, a good domestic poultry supplier. In order to ensure total commitment and balance of power between the two partners, a 55/45 joint venture, with KFC as the dominant partner should be set-up.
By building on each partner's core competencies, knowledge, and efficiencies, a mutually beneficial synergy effect could be achieved as a result of joint venture activities. For instance, the local partner can learn from KFC how to produce a better product at a lower cost and further expand on its new competitive positioning. KFC, on the other hand, can maintain quality supply which is detrimental to its success.
A joint venture will also significantly ease the entry to the virgin Chinese market. A new entrant would find it very difficulty to form local and personal networks between businesses and government agencies, which are crucial to success and provide access to the local market and domestic suppliers. In addition, local business customs and laws can be quicker understood and established ways to cut bureaucratic red-tape can be further utilized. Also, the local knowledge of culture, language and geography is beneficial for any foreign entrant into a relatively unknown market.
In order to cope with the significant political risk of investing in China, a local joint venture partner will share this risk. There is always a risk of domestication measures imposed by the host government, often leading to major financial losses for the foreign investor. By having a 55/45 joint venture agreement, this risk is potential eliminated, since only 55 percent of operations are domesticated. If such an unfavorable situation would arise, KFC has clearly less to loose in such an agreement. In addition, by being the dominant partner, KFC will be able to ensure cost, quality and strategic control measures.
The Chinese government may very well find KFC beneficial to the nation, as it is the pioneering western fast-food outlet. Training the joint venture partner, personnel and other institutions in the value chain can reduce learning and experience curves. KFC's operations may also inspire local competitors to increase service and quality of food. It can also help to create a competitive fast-food industry in China as new competitors respond to KFC's ideas. Moreover, a joint venture agreement commonly produce goodwill and commitment between the host government and the foreign investor. In such a relationship, the foreign investor is not seen as trying to take advantage of the nation for profit purposes, but rather show willingness to share. Maintaining good relations with the host government is a critical success factor as government policy impacts intensely upon business activities.
Even if KFC had developed "excellent contacts" with the government of Tianjin, further expansion should not be made here. The poor supply of good quality poultry and the geographic location does not attract too many westerners that are able to bring-in foreign currency, which is crucially needed to ensure profitability.
Instead, the Chinese capital city, Beijing is recommend as the preferred location for KFC's entry into the Chinese market. Beijing is the center for most political activity and provides the necessary access to government agencies and business regulatory bodies. Furthermore, it has a large population of nearly 9 million inhabitants. The numerous universities located in the city further educates people that may make them more open to foreign ideas perhaps including western fast-food. More importantly, plenty of western tourists are attracted to Beijing's many tourist attractions, increasing the potential for generating foreign currency sales. Also, suppliers of poultry are available. Beijing can serve as the initial platform of KFC's operations and later expand into other potential areas such as Shanghai and Guangzhou.
One or two initial outlets should be set up in order to get a "taste" of how KFC will be perceived in the Chinese Capital. Both dine-in and take-out facilities, much in line with most of KFC's international operations ought to be offered in large, clean and well serviced company owned outlets to cater for the customers with above average disposable incomes. In order to ensure the right cultural fit of the business, restaurants must be highly functional and effective in order to serve large numbers of customers due to the cheer size of the population. Special menu-substitutions may also have to be facilitated, such as substituting rice for French-fries.
CENTRAL CONTROL VERSUS LOCAL RESPONSIVENESS.
In a foreign market with high political risk and low cultural knowledge, a high degree of cultural sensitivity is crucial. Centralized control cannot be maintained since its is impossible to effectively manage an overseas operation from the headquarters without the information and knowledge needed to make sound strategic decisions.
China operations surely need to be able to quickly respond to political and/or market changes. The joint venture will facilitate some of this responsiveness, but a KFC or a R.J. Reynolds head office in the region with a high level of autonomy is needed. Perhaps, such a regional office could be set-up in Hong Kong to oversee overall corporate objectives of further expanding R.J. Reynolds products and KFC into the Chinese market.
The Chinese market represent a great opportunity for KFC, but also significant risk. KFC should begin operations in Beijing and later expand into other metropolitan areas. By finding an appropriate domestic business partner via backwards integration, it is possible to further build on opportunities and significantly reduce risk throughout financial sharing, cultural sensitivity, and favorably treatment from the host government. Tony Wang should be responsible for finding the right joint venture partner and develop a coherent international strategy linking the China operations with other markets.
OPERATIONAL RISK VERSUS CONTROL OVER STRATEGY IN MARKET ENTRY
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