KFC however chose a different approach, its products were sourced locally and not in tandem with international divisions. It set up a joint venture from the start with Beijing Animal Production Company and sourced every other raw food material from Chinese sources. KFC also embarked on a large-scale localization strategy when it set up an R & D team and test kitchen to develop new localised meals for the Chinese market.
Both strategies do seem to have their advantages and disadvantages. Kogut and Singh (1988) found a high correlation between franchises that failed, and their high level of local adaptation, as opposed to replication. Szulanksi and Jensen (2008) however states that franchises and international divisions that are better able to combine elements of replication and adaptability in managing their affairs, would have a better competitive advantage against competitors that adopt just one of those approaches. Though both companies have been operating profitably in China well over 20 years, KFC has been much more successful at expanding its outlets to 2,300, while that of McDonalds stands at 1,000. KFC has also been much more profitable as each of its Chinese outlets have an average annual income of $1.2 million, 33% higher than those of similar stores in the US, with a profit margin of nearly 20.1%. Though profit figures for McDonalds could not be easily determined, it is no secret that the company has not been as successful as KFC in China.
MY CONCLUSION
Based on information gathered in this case study and those of several theorists. I believe the adaptation and replication decision is inevitable for organizations seeking international market entry, especially those seeking entry in countries with a totally different consumer behaviour and culture.
I therefore assert that MNCs should do their best to uphold their brand image, product and service standards wherever in the world they are located, just like McDonalds has done. A failure to do so may result in the food dye poisoning that afflicted KFC’s customers. However, these products and services should also be desirable by the local populace. The Chinese may love to have American food, but they consume much more localized food. Therefore for international firms aiming to target and capture this market, a considerably portion of their products should be localised.
Sales of a considerable portion of localized food also enables the organization to expand deeper into the country, especially into lower income cities that may not be well versed in international cultures and may not be so willing to purchase Big Macs on a regular basis.
QUESTION 2
With reference to the Chinese operating environment outlined in the case study, describe and discuss the analytical frameworks that a quick service restaurant chain might employ to explore the potential of a new market. In your discussions, you should identify any limitations of the analysis methods you select.
Based on the information provided in the case study. The following analytical frameworks could be utilised in assessing the potential of a new market. Industry Ansoff Matrix, Life Cycle, Porter’s Five Forces, PESTEL macro environmental analysis.
ANSOFF MATRIX
Source: Ansoff (1957)
This matrix, created by Igor Ansoff (1957) depicts the strategy that a business should adopt for growth, based on whether it is operating in a new or existing market, with new or existing products (SOURCE). For quick service restaurant chains seeking to venture into the Chinese market, such as McDonalds and KFC, they already have existing products in already established markets, and are seeking to enter into the new market. Therefore as the matrix depicts, the firms should adopt a market development strategy.
At the time when KFC entered China in 1987, followed by McDonalds in 1990, they were no international quick service restaurant chains, or international franchises operating in similar capacities. There was no ready market for big hamburgers and friend chicken, except for those sold by local vendors and businesses. Therefore both companies had to recruit and train labour, develop new procurement channels, transfer assets from international labour and convince customers to be attracted to their already established global brand. Richardson and Evans (2007) assert that the matrix represents an array of differing strategic planning initiatives that could help businesses set priority and develop goals for organizational growth. The matrix could help an organization decide what strategy to adopt next with respect to new or existing products. However, SOURCE asserts that the matrix fails to account for vertical integration strategies, wherein companies buy their suppliers or buyers. It also fails to account for culture and the competitive context within these markets (Comaford-Lynch, 2007)
INDUSTRY LIFE CYCLE
Source: Learning Exchange (2009)
The industry life cycle is used to determine the current state of operations within a particular product or service industry (Bordonaba-Juste, 2010). Prior to the entry of KFC into China in 1987, there were no foreign quick service restaurant chains operating within the country. There were no local brands with globally known brands that could pose a serious threat or constitute a competitor to KFC or McDonalds, thereby illustrating that the Chinese quick service restaurant industry was in its introductory phases. Vojislav and Gordon (2008) depicts this stage as being characterised by product innovation. Therefore firms operating within an introductory industry would have no products to which there are no close substitutes (Bordonaba-Juste, 2010). Total production is usually low (Lynch, 2009) evidenced by the number of stores that KFC and McDonalds had in 1994 (16 each). Quick service restaurant chains aiming to enter such markets firms would have had to bear the costs of advertisement, product development, recruitment alone, and customers who have no previous experience about the firm’s products (Dinlersoz and MacDonald, 2009). The most frequent customers would probably be foreign citizens living the country.
However, in recent times, the quick service industry within China has been growing steadily and could now be categorised as a growing market. Chinese spending on eating out has increased due to the economic boom the country has been enjoying. Retail revenues for the industry have increased from 5.2% to 14% from 1991 to 2007. Foreign franchises have been categorised as the main drivers of growth and foreign direct investments in the hotel and restaurant industry increased by 25.8% in 2007, totalling $10.4 billion. Meat consumption in China is also forecasted to grow in coming years, while the share of fast food in the retail industry is poised to reach 9.3% in 2011, from 7.4% in 2007. China’s fast-food industry is also expected to achieve a CAGR of 25% between 2008 and 2011.
All these figures point to the fact that the quick service restaurant industry within China has moved from its introductory stage, into a growing industry, thereby posing a great opportunity to other foreign companies seeking to establish foreign franchises within the country. The Industry Life Cycle framework could therefore be used to assess the market growth capability of an existing market, in order to see the opportunities that are still present which foreign firms could capitalize o (Vojislav and Gordon, 2008). A notable criticism of this model is that it fails to account for innovative measures that could establish new markets in the system (Dinslersoz and MacDonald, 2009)
PESTEL
The PESTEL tool of analysis measures the effect of the political, economical, socio-cultural, technological, environmental and legal factors on a particular industry (Lynch, 2009). Therefore a foreign quick service restaurant chain employing the PESTEL framework based on the case study would realise that the Political climate within China has improved in recent years, since it embarked on a policy to open its borders to international trade in 1978. The economical situation within the country, in terms of its GDP is also highly favourable, as China has had an average GDP increase of over 9% since 1978. However per capital income was very low at $621.01 due to the country’s over 1.3 billion people. However, China has enjoyed favourable economic conditions in recent years that have facilitated a better welfare for its citizens.
Also socio-cultural factors such as the Chinese culture are strong and very different from that of western cultures. Therefore there is a huge emphasis for firms to effectively leverage their core competencies, whilst still adapting to the local culture. Technology and infrastructure development is also low, but is improving due to improving economy. Environmentally, transportation systems are not well developed, especially those that would facilitate an effective logistics operation. The legal system is also not as developed as those in western countries where these companies primarily operate.
Therefore these foreign quick services companies could utilize this framework in ascertaining how the macro environment, and consumer behaviour would affect the industry in the foreseeable future, and their prospects of a successful market entry (Johnson et al, 2008). However, Lynch (2009) criticises against the sole use of the PESTEL framework as it is a measure of past occurrences and it does not necessarily portray what could happen tomorrow. Also it fails to account for the effect of the international political economy and hegemony bodies, and their influence on macro economic factors in a country.
PORTER’S FIVE FORCES
Porter proposed the Five Forces model in order to ascertain how the competitive pressure industries affect firms’ profitability. Organizations aiming to assess a new foreign market, or evaluate their current marketplace would need to examine the competitive pressure within the industry. These five forces, according the Porter (1980), could shape the profitability of the industry in coming years.
Therefore, based on the case study, a foreign fast food brand, aiming to enter in China for instance, would face competitive rivalry from the already established foreign brands (McDonalds, KFC and Burger King) already operating within the country. McDonalds and KFC for instance have been operating in China for over 20 years and already have an established brand presence. It would therefore be very hard to steal customers away if the foreign firm intends to sell the same products. However, due to China’s foreign policy, there is little political barriers to entry, apart form the capital expense needed to build restaurant sites, logistics networks and brand awareness.
The supplier power is relatively low as food and raw materials could be sourced from several local and international merchants. However, most if not all of the power depend on the buyer. There is a vast choice from what the customer can choose from if they intend to go to eat fast food, which therefore increases the buyer power such that there is no monopoly or lack of choice, but not so much that there is a price based competition between existing players. There is no substitute to food, however customers could choose to stay home and cook instead of going out to eat. However the numbers of eat outs in China has increased in recent years, thereby lowering threats of substitute products.
The Porter framework could therefore be utilised in assessing the potential and working environment of any organization. It is essential especially for market entrants who are curious as to how their potential industry operates (Lynch, 2009). However Collis and Montgomery (2008) assert that the five forces fail to account for individual firm strength and how these could be leveraged in negotiating better deals with suppliers and competing more effectively.
QUESTION 3
McDonald’s and Yum! pursue aggressive globalisation strategies. Describe and discuss how they can manage the cultural issues that result from being a global player.
BACKGROUND
Culture, as defined by Usunier (1999, p. 13) is ‘a set of beliefs or standards, shared by a group of people, which helps the individual decide what is, what can be, how to feel, what to do and how to go about it’. Organizations aiming to engage in strategic alliances, multinational operations, local market attraction, need to discover the impact of culture on their businesses and how to turn this into a positive advantage for growth (Hofstede, 1991). Companies like McDonalds and KFC have always pursued aggressive international strategies. McDonalds owns over 31,000 stores in 24 countries. KFC owns over 15,000 stores in 25 countries. Their initial foray into the complex and culturally diverse market of China reflected their drive to grow internationally and break the cultural barriers that many other firms found difficult.
A possible organizational consequence of differing cultural contexts would be for multinational organizations pursuing aggressive global expansion agendas, such as McDonalds and Yum Brands (KFC). These organizations are bound to encounter numerous cultural barriers whenever entering into new regions and territories that are culturally different and therefore share different socio-cultural values than their homeland (Bond, 1987). Therefore firms from low context cultures like the US and UK, seeking to expand and grow in high context cultures like China and Japan (Hofstede, 1991), would encounter serious barriers in the predominant cultures within the region. The following are possible cultural barriers that these global brands can face, and possible methods in which they could manage them.
POSSIBLE CULTURAL ISSUES AND METHODS OF MANAGEMENT
Employment
When KFC and McDonalds first entered into the Chinese market, indigenous managers were unavailable. The major issue there was to transfer competent staff from various other regions that could manage the Chinese businesses up until when these managers were trained. Foreign firms seeking to enter into new markets face the major hurdle of employment. A decision to transfer employees from the home country may seem beneficial as they have the necessary experience, however the cultural barriers in communication and negotiation may render them useless in the foreign market (Bond, 1987).
A more appropriate approach, as described by Soares et al (2007), to limit the barriers encountered in employment within different cultures is to adopt regiocentric and polycentric staffing policies in which a vast majority of staff are recruited from within the country or region, but with relevant experience to run the business effectively. For instance, when KFC first entered into China, it transferred a number of managers from its Taiwanese business to oversee operations within China, while also recruiting a number of educated and competent restaurant staff that were also training to be managers. This approach does seem like one of the most effective method of dealing with cultural differences, and was even beneficial when KFC decided to aggressively expand in the Chinese market. Over 80% of current managers were university graduates who had been recruited and trained to become managers who could lead the company further.
Customers
Geographically, customers have different taste and behaviour. They eat different kinds of food. Consumer taste is one of the major issues affecting multinational organizations. It determines whether their global products would be able to compete effectively in the chosen market place (Donthu and Yoo, 1998). In the fast food market for instance, the market for quick service meals seems to be growing, illustrating that consumers in China are increasingly becoming accustomed. However these customers would still have craving for traditional meals and companies should be able to leverage their global brands in delivering international and localised products to the market. McDonalds is well known for delivering the same products to all customers worldwide. Their menu is virtually the same everywhere around the world, except for a very few localised items. However, KFC in China was able to incorporate local meals into a huge portion (40%) of its menu. Though the direct effects of this strategy cannot be calculated based on information provided in the case study, it could be assumed that it is a contributing factor to why the firm has been much more successful than McDonalds in capturing market share and establishing more outlets.
Though existing menus should constitute a dominating portion of the McDonalds and KFC’s menu, localisation of meals should also be an important agenda. It could be an important driver in growth, as customers would identify better with them.
Business partners
Strategic alliances with business partners such as suppliers and logistics experts are also dependent on the culture of an environment, especially when it comes to different cultures such as that of the US and China (Dorfman and Howell, 1988). Whereas companies in the US may put large embargoes on contract and legal agreements, the legal system and prevailing cultural environment in another country may hinder those arrangements. For instance, KFC or McDonalds may encounter difficulties in sourcing raw materials such as Chicken or Potato from the local market within their target country, because of the lack of guarantee on quality, and legal frameworks to protect contractual obligations. An efficient approach in order to save cost and retain efficient processes in the midst of different cultures would be to establish relationships with a few suppliers who have the reputation of guaranteeing steady supply and quality, that way the risks are limited and accounted for.
Corporate Culture
According to Hofstede (1991), corporate environments within different geographical locations have different cultures. These cultures are characterised by the level of power distance, uncertainty avoidance, masculinity and individualism between employees. According to a study on IBM employees, Hofstede found that employees in different countries had different organizational cultures, which was a better determinant of their actions. Therefore for KFC and McDonalds seeking to invest in new markets, the prevailing organizational culture of the environment must be assessed, and taken into consideration during decision-making (Donthu and Yoo, 1998).
For instance China as a country is known to have a very high power distance between managers and employees; high uncertainty avoidance, low masculinism and a collectivist culture (Bond, 1987). Therefore managers would be looked after as the source of all direction and knowledge, while employees would be seeking to be employed in low risk organizations that can guarantee growth prospects and safety. Individuals would prefer to work in teams and make decisions together, rather than alone. These factors should therefore be taken into consideration so effective managers and management processes could be put into place to ensure that organizational processes are in line with the national culture.
QUESTION 4
Compare and contrast the approaches of McDonalds and Yum! (KFC) to supply chain and logistics management in their Chinese operations. Your answer should include an evaluation of the risks associated with their approaches.
Supply chain and logistics management for both KFC and McDonalds’ Chinese operations was very important due to the infancy of the market and their need to aggressively expand. Both companies had to source raw materials to make their meals with, and had to transport these products from distribution centres to each and every store in efficient manners so as to ensure adequate supplies at all times.
SUPPLY CHAIN
From the on set, KFC had adopted a totally unique procurement and distribution platform. The company set up a joint venture with the Beijing Animal Production Company in order to get access to better product supply. The company has always used local food ingredients in the production of their meals. Chicken, potatoes, cabbage, and carrots were all purchased locally. McDonalds, in contrast, had a different approach; She had about 43 suppliers in China, 70% of which were global partners who supplied thousands of other outlets in several other countries. The company’s chicken, fries and even vegetable partners set up businesses and joint ventures in China just because of McDonalds arrival, just so they could keep supplying the firm within this new market.
Both strategies do have their benefits and risks. KFC has been able to source products cheaper by procuring them locally, however McDonalds has maintained long term relationships with global partners, thereby being able to extend global contracts, and deal with partners that can ensure contractual obligations and product quality.
KFC however would have to engage in lengthy negotiations with new suppliers in order to source quality products. However, I do believe that with respect to sourcing, KFC’s strategy to source products locally is one of several reasons why it is profitable. However, McDonalds has a better advantage in terms of long-term relationships with suppliers that may enable it to get better deals. This assertion has also been supported by Curtis et al (2006) who carried out a study on convenience fast foods in China.
The major risks here are that KFC may be unable to effectively manage contracts and sourcing agreements with local vendors, which may lead to lower quality product sourcing. However McDonalds suffers from its over reliance on foreign partners and its inability to produce localised foods as a vast majority of its raw materials and equipments are imported. Hung et al (2005) asserts that the ineffectiveness of legal frameworks and contractual obligations are one of the major shortfalls of supply chain procurement within China.
LOGISTICS
KFC’s distribution network also was largely localised and depended on well-connected supply chains. Yum Brands in China established its own logistics system ‘by working closely with local partners rather than simply outsourcing the supply of their products through third parties.’ KFC established a ‘STAR’ rating system for its Chinese logistics partners. Subsequent consolidation of the supply chain saved the company up to 100 million RMB and effectively created Asia’s largest logistics and distribution centre. This strategy allowed for another 10% reduction in costs. McDonalds in contrast, chose not to adopt local measures, but had its global logistics partner Havi Food, set up a logistics business in China, even prior to McDonalds market entry into the country.
The need to establish one’s own logistics department compared to outsourcing it to local or global partners is a decision that both companies had to make. However, whilst KFC enjoyed the benefits of using local partners who were well adverse in the logistics market within China, McDonalds decided to have its global partner set up operations in the country prior to its arrival. Thought the benefits of long-term contractual and strategic alliances do seem beneficial to both parties (Dorfman and Howell, 1988), I believe KFC has a better advantage by establishing its own logistics department, which has enabled it to save money.
CONCLUSION
Based on these questions and subsequent answers, it is therefore no surprise how KFC has been able to overtake McDonalds in the Quick service restaurant market within China. They have been able to provide localised food, train educated graduates into future managers, recognise cultural diversity and utilise this in appealing to consumers and employees, and also setting up localised distribution networks that saved costs and increase efficiencies. China is thriving fast food market, with immense opportunity for growth and new market entries that would provide better value to the population.
REFERENCES
Ansoff, I. (1957) Strategies for Diversification, Harvard Business Review, Vol. 35 (5), Sep-Oct, pp.113-124
Bond, M. (1987) Chinese values and the search for culture-free dimensions of culture, J Cross-Cult Psychol 18 (1987), pp. 143–164
Bordonaba-Juste, V., Lucia-Palacios, L., and Polo-Redondo, Y. (2010) Influence of Franchisors' Competitive Strategies on Network Size: The Impact of Entry Timing Decision. Journal of Marketing Channels, 17(1), 33-49
Collis, D. and Montgomery, C. A. (2008) Competing on Resources, Harvard Business Review, Jul-Aug p140-150
Comaford-Lynch, C. (2007). To Get Financed and Stay Financed, Innovate. BusinessWeek Online, 18
Curtis, K. R., McCluskey, J. J., and Wahl, T. I. (2006) Consumer preferences for western-style convenience foods in China, China Economic Review, Vol. 18 (1), pp1-14
Dinlersoz, E., MacDonald, M. (2009) The industry life-cycle of the size distribution of firms, Review of Economic Dynamics, Vol 12 (4), pp648 - 667
Donthu, N., and Yoo, B. (1998) Cultural influences on service quality expectations, J Serv Res 1, pp. 178–185
Dorfman, N. and Howell, J. (1988) Dimensions of national culture and effective leadership patterns: Hofstede revisited. In: Richard N. Farmer and Elton G. McGoun, Editors, Advances in International Comparative Management (1988), pp. 127–150
Hofstede, G. (1991) Cultures and organizations — software of the mind, McGraw Hill, New York, 191pp
Hung, F., Gu, F., and Tse, D.K. (2005) Improving media decisions in China: A targetability and cost–benefit analysis, Journal of Advertising, 34 (3), pp14 – 25
Johnson, G., Scholes, K. and Whittington, R. (2008) Exploring corporate strategy: text & cases. 8th Ed. Pearson Education Limited: Essex, UK. 878pp
Kaufmann, P. J., and Eroglu, S. (1999) Standardization and adaptation in business format franchising, Journal of Business Venturing 14, pp69–85
Kogut, B. and Singh, H. (1988) The effect of national culture on the choice of entry mode, Journal of International Business Studies, Vol. 19, pp411–432
Learning Exchange (2009) Industry Life Cycle, , accessed 22/01/10
Lynch, R. L. (2009) Strategic management, 5th ed, Pearson Education Limited: UK, 826 pp
Porter, M.E. (1980) Competitive Strategy, The Free Press, New York
Richardson, M., and Evans, C. (2007) Strategy in Action: Applying Ansoff’s Matrix, British Journal of Administrative Management, Summer (59), pi-iii
Soares, A. M., Farhangmehr, M., and Shoham, A. (2007) Hofstede's dimensions of culture in international marketing studies, Journal of Business Research, Vol. 60 (3), pp277 – 284
Szulanksi, G., and Jensen R. J. (2008) Growing through copying; The negative consequence of innovation on franchise network growth, Research Policy, Vol 27 (10) pp1732-1741
Usunier, J. (1999) Cultural aspects of international business negotiations. In: Pervez Ghauri and Jean-Claude Usunier, Editors, International business negotiations, Pergamon, Amsterdam , pp.91–118
Vojislav, M., and Gordon, P. (2008) The Industry Life Cycle, Acquisitions and Investments: Does Firm Organization Matter? Journal of Finance, Vol. 63 (2), pp673 – 708
Zaheer, S. (1995) Overcoming the liability of foreignness, Academy of Management Journal 38, pp. 341–363
This student got 75 % marks
