Kfc Case Study

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.

RECOMMENDATIONS.

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)

1. Franchising/Licensing

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.