KFC A) When KFC Entered

KFC A) When KFC entered the Chinese market, it had just begun to open its economy. The chicken outlet had originally begun to develop its Chinese market strategy in the early 1980s, half a decade after Deng Xiaoping began his market reforms. At the time KFC opened its first Beijing outlet, Chinese economic development was still nascent, but beginning to progress quickly. The government was still hesitant to eliminate its social controls, but was beginning to trust private enterprise to some degree.

There were few, however, if any foreign brands present in China at the time. The fast food industry, at least the Western conception thereof, did not exist when KFC entered. Indeed, restaurants were relatively uncommon in China up until the mid-1980s. Chinese were given extended lunch hours, sufficient for them to return home for lunch. Regulations changed, making dramatically reducing the incidence of these extended lunch hours, leading to a restaurant boom. KFC came to China in the middle of this boom.

While a lot of food service is efficient in China, the Western concept of a fast food restaurant did not exist. KFC knew that the Chinese people had a fondness for chicken, based on their prior experiences in Singapore, Taiwan and Hong Kong. Thus, KFC had a strong product and entered the market at the right time. The fast food industry in China today has developed substantially. KFC remains a market leader, and one of the most recognizable Western brands in China.

The Chinese economy has developed considerably in the past 22 years, such that the middle class has grown by hundreds of millions of people. The wealth of that middle class has improved as well. KFC faces competition, however from a wide range of chains, especially McDonald's. At this point, though, KFC is buffered somewhat by the presence of fellow Yum! brand Pizza Hut. McDonald's is a leading Western competitor. Independent local restaurants have also proliferated in China, increasing the amount of competition.

Despite the increased competition, the market is growing so rapidly that KFC is continuing to add new stores at a rate of 250 per year and plans to do so for the foreseeable future (Adler, 2003). The market, therefore, is not even close to saturation. B) When KFC entered the Chinese market, its primary strength was in having first-mover advantage. It was creating the market, which gave it a competitive advantage in that its product/service offering was unique. They were well-capitalized and had a strong local partner.

The weaknesses at that time also stemmed from being the first mover. KFC did not have an established business model and did not know how the mainland market would react to their product. Lack of Chinese market knowledge was their biggest weakness. In terms of opportunities, KFC had all the opportunities in the world, as the first mover in a country that was moving towards a more capitalist economic model, increasing wealth, had a historic love of chicken and a fascination about all things new and modern.

The biggest threat to KFC when they entered China was the threat of government intervention. Even as the economy was being slowly opened up, China's government maintained strict controls over most forms of economic activity. This was especially true for foreign enterprises entering the country. Further, the specter of corruption represented another risk to KFC when they entered China. Today, KFC's main strengths are its established brand name and its sophisticated distribution network (Associated Press, 2007).

There are no significant weaknesses at this point in time -- the company's performance is stellar. Its back end operations are the envy of all Western nations trying to enter China. Sales are growing and the brand is among the most recognizable in the nation. Better still, the market still exhibits near limitless growth potential. KFC is opening an outlet a day (Ibid), and the rapidly expansion of the Chinese middle class shows no signs of slowing down. The threats are very different, however.

The government is no longer a major concern, in part due to KFC's status as a major success story. However, increased competition is a threat, as other Western fast food chains and Chinese chains as well have made the restaurant industry competition in China very intense. C) When entering the Chinese market, there are several differences between China and the West, both political and social. The government in China is more heavily involved in politics, and there is substantially more corruption in China than in the West.

The increased regulation combines with the unfamiliar culture to make market entry a challenge for KFC. There are social differences as well. Chinese people were unfamiliar with the concept of fast food and with fried chicken in particular. The company needed to add some Chinese dishes, such as congee, to the menu in order to better appeal to consumers. The Chinese people needed to become accustomed to the fast food concept as well. These social differences also apply to the workforce, resulting in some human resource challenges for KFC.

One such challenge involved a legal case where KFC was obligated under Chinese law to pay for the living expenses of workers not working, but did not (Legal Daily, 2006), a situation entirely foreign in the U.S. labor market. Q2. A) There were several key success factors at the time of KFC's launch in China. One was the choice of Beijing as the initial location.

While they had good discussions with Tianjin, another one of China's main cities, setting up shop in the capital contributed to the success of the venture in a couple of ways. One is that the venture received a high degree of visibility. Prestige and face are important in China so setting up shop in a provincial city, even a large one like Tianjin, would not have portrayed the correct image for KFC.

By taking their business to the most prestigious location right away, they were able to establish a strong image for the brand. The brand needed this strength to appeal to the Chinese consumer, in particular because it positioned the foreign brand as luxury. Thus, despite its mass appeal, the brand was able to become an aspirational brand, which helped drive its success. Another key success factor for KFC's Chinese launch was going to be the relationship that the company had with government. KFC needed several things to work out.

One was cooperation on legal issues -- they needed the government to remove roadblocks in order to help them start and grow. Furthermore, KFC needed to build out its infrastructure if it was going to grow rapidly, and the government's cooperation was going to be needed for that as well. A third key success factor for KFC was going to be to find the right domestic partner. The company knew that they had succeeded in Japan in large part because they chose the right strategic partner.

In China, KFC knew they would need to duplicate this feat. This was particularly important because it would allow KFC access to government officials, which in turn out facilitate better growth opportunities and reduce some of the key risks. B) The first entry strategy is franchising/licensing. This option has several advantages. One is that KFC maintains complete control over the operation, including the profits.

If KFC was going to be as successful in China as they thought they would be, it would be beneficial to be able to keep all of the profits. This option also reduces financial risk and would allow for greater control over product standardization, which is a crucial element of competition in the fast food industry in the United States. There are several drawbacks to franchising, however.

One of the main drawbacks is that it was almost impossible, if not outright illegal, for a foreign company to operate a 100% owned subsidiary in China. Additionally, there are many potential political and social challenges associated with entering the Chinese market. Franchising would allow the local Chinese owners only limited means to deal with these challenges. Indeed, other forms of organization would result in superior performance with respect to dealing with the social and political challenges associated with operating in China.

A wholly-owned subsidiary is akin to a riskier version of franchising, in that the option allows for even greater standardization, but also has the same risks only greater in intensity. For example, a wholly-owned subsidiary would give 100% control both financially and operationally to KFC. With this total control, KFC would be able to leverage its competitive advantages to a greater degree. However, there are many drawbacks to entering the Chinese market with a wholly-owned subsidiary.

One is that this option does not give the firm any local experience, or local connections. The risk would then exist for a major social faux pas much less a significant issue with government officials. A wholly-owned subsidiary is also the most costly option and the one with the most risk, since the risk is not shared among a group of partners. The final option is the joint venture. There are several benefits to entering the market with a JV. Among them is the local experience that KFC would gain.

Their local partner would be able to help them maneuver through the social and political pitfalls that the company may run into. A JV is less risky as well because the risk is shared among the partners. With each partner bringing different expertise to the table, there is less operational risk as well. The drawback to a joint venture is that you must cede some control. This increases the risk of a lack of standardization.

Additionally, with less controlling interest, the firm retains less of the profits, the remainder of which to the JV partner. However, a joint venture partner also helps the firm to gain access to the Chinese market. It encourages the Chinese government to remove barriers to operations and to support the company, since the growth of the company is beneficial to the country as a whole. C) The proposed characteristics of the Chinese partner are good, as evidenced by the success of the Japanese situation.

There are differences between the Chinese market and the Japanese, particularly in terms of government intervention in market activities. In recognition of that, I would recommend that KFC has increased stipulations with regards to government contacts. Poor relations with government would scuttle this venture, so the partner must be extremely well-connected. Another recommendation I would make with respect to the partner is that they have to meet Western ethical standards.

KFC will ultimately be held accountable for hiring and sourcing issues that occur, even if the decision is made by their JV partner. Management at the Chinese partner needs to be sympathetic to KFC's needs that its subsidiaries and partners adhere to Western ethical standards or potentially face damaging scandal at home. Q3) A) In a situation such as this, if all other factors are handled well, KFC will ideally be in a position where each new location is opened to fanfare and pent-up demand.

The rollout therefore should be conducted carefully, to maximize the amount of pent-up demand. We have established that we are going to start in Beijing. We should open a few locations in Beijing, in each high-profile tourist or shopping district. This will make KFC a widely-known brand not only in the capital but in other parts of China as well. KFC will become a destination restaurant. From there, the company should slowly move into other high profile Chinese cities, further enhancing the brand's established prestige.

The best initial candidates in 1987 would be Shanghai and Guangzhou, followed by other major eastern cities like Tianjin, Hangzhou and Qingdao. By this point, saturation of Beijing and Shanghai can commence. The rationale for this location strategy is to build the brand's trendy, luxury image. The demand in the marketplace needs to be built organically for the first couple of years, and this strategy allows for the slow diffusion.

After a year of being in a market, however, saturation of that market should commence, since the brand's novelty will have worn off by that point. In terms of price, KFC should be priced in accordance with its twin objectives of developing a strong middle class brand and saturating the nation. The strong middle class brand demands a price point within reach of that demographic, but slightly out of reach of the mainstream demographic in 1987. Thus, the ability to eat at KFC becomes a status symbol.

It is important to remember that at this point in time, the company's offering is differentiated, as there is little in the way of foreign food in China. The experience should therefore not be cheapened. It is expected that the economic reforms will result in economic growth sufficient to support a growing middle class demographic. Promotion should focus around establishing brand awareness. At this point, China's population has enjoyed little to no access to the outside world.

They do not receive Western media and do not travel within China, much less outside of the country. Therefore, the KFC brand is entirely unknown. For the first several years, KFC will need to focus on introducing the brand to the Chinese audience. As such, promotions should focus on everything from the fast food concept to the concept of southern-style fried chicken. KFC has a strong history and lore, which will be attractive to the Chinese audience. Therefore, this should also be included in the promotion.

The core North American audience has all of this lore ingrained over the course of years, but this is not the case with the Chinese audience, so KFC will need to rapidly establish their name, their offering and their credentials. The product is perhaps the most interesting element. KFC sells chicken, with which the Chinese audience is familiar. However, they are unfamiliar with southern-style fried chicken.

While it is therefore believed that the core product will catch on with Chinese consumers, KFC should offer some local, more familiar products to help entice audiences and make them feel more comfortable. This can include not.