China is the world largest economy and also the world largest developing country, with a population of more than 1 trillion, offers fertile ground for foreign companies wanting to set up business. Sixty-five percent of its population lives in rural areas. China has a personal saving rate of 50% of its earnings, and the economy has been quite stable for quite a long time. A company’s sustainability and success abroad, are affected by the political, legal, technical, economic, and socio-cultural factors of the host country. Both economic and non-economic policies of the host country, influences international business. (Hooper, 2000)
Chinese government has considerable power, and being in good ties with the government, will help create a favorable business environment. KFC entered China, at a time when the Chinese were looking for opportunities to modernize its food and agricultural produces. Chicken is an important agricultural produce in China. Fast food chains like KFC will not only favor modernization and efficiency in this sector, but also create demand for the product. The Chinese government wanted to promote foreign industry that was beneficial to China and its people. Being the first of the kind, to move to China, KFC was fortunate in obtaining government support for its setup and organization in China. During this time, the Chinese government has also been shifting its focus from state capitalism to the private sector market economy. All this favored the successful entry of KFC.
The overall living standards in China, or that of a well off society. Though entering China and setting up business may not have been that difficult, becoming successful is a tough game for a western firm that wants to establish its trade in China. Close to 41% MNC’s in China are successful, while the rest fail to thrive. Establishing a joint venture with local firms, was found to enhance success rates in China. Selecting the right local partner is an important deciding factor in the firm’s ability to make profit.
KFC also called Kentucky Fried Chicken, is one of the world No1. Quick service restaurants for chicken. Its famous product motto is: “Crispy Outside and Juicy Inside”. It is an American company, with business outlets in 80 countries across the world. Many of its foreign outlets are more successful than that seen in parent countries. It is a leading business brand in U.K, Australia, South Africa, China, U.S.A, Malaysia. Companies like KFC, enter foreign markets, to widen profit. China provides a marketplace of 7 million potential buyers and KFC can profit from this huge potential. The first KFC restaurant in China, started in Hong Kong, in 1973. However, all the 11 restaurants that were set up in China, failed to thrive, and was shut down by 1975. One of the main reasons for the failure, was the time it chose to enter, and the prevailing economic conditions in China. Later in 1990, KFC reentered the Chinese market, after correcting its previous strategies and contemplating new strategies, that were based on sound research and understanding. The two important steps that payed way for KFC’s success, was choosing a local partner to enter business and selecting the team members from China. By employing a partner that is well established in China and local teams to lead the company, KFC could use, the local knowledge and secrets to succeed in China. A local team will have a better intuitive understanding of the market and its need, when compared to a foreign team. Further, local team members add flexibility to the firm and help modulate strategies to suit local and global needs.
According to business statistics, companies that do international business, fail less and grow faster. International market offers many advantages to companies who want to go global. Expanding the market in China will help increase sales. Nevertheless, many export markets are not as competitive as U.S market. KFC products in U.S cost more than the products in China. Going global, provides short term security from fluctuations and market downsides in the U.S. It also contributes to long term security. It helps increase the capacity of production, and helps save cost. The company is motivated to innovate its products to suit the host country, and this will help product innovation and development. New products are developed in the process of innovation. Expanding the business internationally, is not always about expanding demand and sales, but also provides opportunities for business to learn from their experiences in other countries.
Companies adopt different strategies to succeed in the evolving international market. Firms that enter a foreign market through exporting its products, face the disadvantage of high transportation cost and trade barriers. Exporting processed products across international borders is disadvantageous from various reasons. In addition, the food is at risk of degradation during transport. To overcome these problems, food chains prefer to enter foreign markets through licensing or franchising to host country firms. However, in this method, the profit is split from the parent and franchise firms. Though KFC prefers such an entry, it was willing to comprise its terms and give complete authority to it Chinese partner. At the same time, KFC still retained its control on the way the restaurant was managed. The majority of KFC’s outlet is owned by Yum foods and it closely monitors operation at these outlets. Even restaurants that have a KFC outlet, allow the parent company to oversee and regulate activity. Centralized purchasing from the company, enables greater share in profit, by the company. KFC has grown into a formidable organization posing considerable threat to its competitors. Though Mc Donald is famous in China, its success is still lower than KFC.
Changes in China’s economic structure, improved the buying potential of its people. The per capita income of its citizen has increased. Similarly, there has been a reduction in poverty rates and absence of financial crises in China. Over the last three years, the Chinese economy has grown by 9.8 percent, the highest growth recorded among Asian countries. Investment in infrastructure has also increased by 19%. In addition, China offers cheap labor and subsidized infrastructure, Recent trade policies in China, favored foreign investments and trade. Currently, China is having a high export and high accumulation market, and is in constant needs of high foreign investments and high shares in the world market. Foreign companies and migrants, have also increased in China. All these factors created demand for western food in China. The free market system, low inflation rates and low private sector debts were favorable to KFC’s entry China.
KFC offered China, with a product that was not normally available in China, and it also met the need of the Chinese palate. At KFC’s in China, one can get fried chicken, along with Chinese cuisine like spicy sauce, egg soup, dragon twister and soya bean milk. Presenting western food with traditional cuisine, helped in gaining local appreciation. KFC in China, was a fusion of Asia and Western Restaurant, with functional standards matching the western standards. American way of running the restaurant provided customers the freedom, individual experience and independence, which are not found in Chinese culture. (Witkowski, Ma & Zheng, 2003)
China has more than 1.3 billion potential buyers and there is a growing demand for U.S food among this population. Though Chinese Ajisen and Mc Donald offered western food and experience, its products were different from that of KFC (Shen & Xiao, 2014). In addition, the firm’s strong brand name, helped it to take over its rivals. KFC also provided a cost advantage for its products over that of its rival. KFC made a correct assessment about the foreign environment, it was to face in China and this helped the company’s preparedness. Chinese like chicken, and KFC offered them with tasty chicken. The Chinese have a strong liking for U.S food. McDonald and KFC’s are two powerful western food brands in China. In addition, the quality of most Chinese food brand was found to be inferior to U.S brands (Shen & Xiao, 2014). KFC has a very good cleanliness culture, that is not commonly found in Chinese fast food outlets. Further the speed of service and hospitality added to the attraction. (Qin, Prybutok & Zhao, 2010)
Unlike U.S customers, customers in China, come as families or as extended family members. These restaurants were adapted to suit Chinese customer. Likewise, Chinese customers prefer takeout and KFC took care of these requirements in its market plan. The company was also correct in judging that Chinese food was at the heart of Chinese culture, and incorporating Chinese flavor and taste into the business is extremely important for winning in China. (Witkowski, Ma & Zheng, 2003)
KFC has taken a relaxed approach in China. It did not insist on strict adherence of protocol and product menus followed in the U.S. This helped Chinese customer see KFC as a local brand, rather than as a U.S brand. A rice porridge of KFC called congee is one of the top selling recipes. In spite of this adjustment to local needs, it still maintains western standard and customer service strategies to attract high paying customers. A Customer on an average spend $2.5 to $3.5 per visit at KFC. Product prices are adjusted to suit the living standard of different regions in China, and the cost was kept at affordable levels in the Chinese middle class. Many young white collar employees in China, prefer to eat at KFC, at least once or twice per week. Unlike KFC’s in U.S, in China, there are many menu choices to select from, and this encourages customers from visiting again. People in China spend lots of time around food, and it is necessary for restaurants to accommodate them for long. The new generation of Chinese, finds the American fast food culture as exciting, and plan, formal and informal get-together at these restaurants. (Hbs.edu, 2011)
The time taken to open a new restaurant in China is lesser and cheaper than the U.S. This helped KFC to expand to all small, medium and large cities. Currently there are close to 4600 outlets in China. The success of food chains like KFC, is highly dependent on its efficient logistics and supply chain management. This will help ensure that the food is handled well, from a production unit, through distribution, processing unit to its sales at the outlet (Chen, Hao, Li & Yiu, 2012). KFC has its own warehouses and truck. It also has a thorough monitoring system, from feed fed to animals in the production sector to how often employees wash their hands at the outlets. It is extremely critical about its functioning and has tight hygienic policies. Most of the raw products used for producing the final recipes in the outlets, are obtained from the local market. Nevertheless, KFC is keen about meeting the freshness and quality of raw materials used. In addition, KFC is the leading choice for mall openers, and Chinese are welcoming to KFC in their neighborhood. Good customer service, a concept that was not very common in communist China, also added to the publicity of KFC. The company takes special attention in staff recruitment and training. They learn from their customers and work towards constant improvisation. (Hbs.edu, 2011)
Being culture savvy, is important for business success in a country like China. Culture has an important influence on managerial decision and learning style. Cultural sensitivity will help predict the complexities that will arise in carrying out business globally. Culture is called the software of the mind. It determines how people think and behave. It also decides the choices they make in life. Food choice, is a part of Chinese culture. Having a working knowledge about the food culture of the place, is required for success in China. Cultural awareness, will help determine appropriate plans and policies that suit the place. The Chinese have a collective culture, and the emphasis on group rights, rather than on individual rights. In a collective culture like that of China, the openness to change is low, and for the country to accommodate a new concept, the concept needs to be integrated into the countries existing culture. Chinese managers have a culture of tight adherence to rules, policies and have a strong desire to avoid uncertainties.
The large scale operation and investment of KFC in China, has also increased its risk for adverse effects that may arise from any backslash of government and social policies. In China, business decisions are not always based on financial gains. The social and political climate, can also influence business. KFC had chosen to enter China in partnership with a local firm. It was correct about choosing its partner firm. Yum is a well-established western food brand in China, which was popular among the public, and had the largest number of outlets, in the whole of China. This firm had long term goals for success, and this benefited KFC. If KFC has chosen partners who were interested in short term benefits, it may not have succeeded. Partnering with Yum Foods, provided the firm with long-term opportunities. In addition, Yum Foods, like its partner was strict in complying with corporate standards. The business culture of Yum, was advantageous to KFC. By entering into a partnership, KFC avoided making huge investments and taking a huge risk. Though the company started as a single partnership venture; Following its rapid growth, it expanded the partnership with other local firms as well. It allowed sufficient freedom to its partners to function autonomously, and at the same time, also took steps to ensure that long term objectives were ensured. Unlike many Chinese food firms, KFC motivated its employee to adopt the company’s policy of “Treating Customers like King.” (Hbs.edu, 2011)
China is not only a cheap manufacturing base for global companies, but also has a strong domestic market. However, to be successful in China, the business has to be enormous. Previous trends suggest that companies which start small, have a hard time surviving the competition. KFC started in partnership with Yum Foods, which was already having enormous business in China. In addition, it also right about estimating local buying potential and trends. KFC provided the Chinese partner with new technologies that enabled quick access to food, while the Chinese partner offered KFC the medium to access a huge market. KFC had the potential to make huge investments for the future. The strategies of both firms ensured short term profit maximization and long term opportunities. (Beamish & Killing, 1997)
Conclusion: KFC’s success in China was brought about by its entry level strategies. Rather than going with its traditional way of entering global market through Franchises, KFC chooses to partner with an established western food brand of China, making it easy for the company to make a strong and safe footing. In addition, the company made the correct assessment about the customer’s purchase ability and the potential of the Chinese market. Chinese liking for western food, and the company’s cultural sensitivity in presenting western food, along with traditional Chinese cuisine, were important in ensuring, customer satisfaction and return rate.
The large population of well off customers, who were in need of a unique product to please their palate, favored KFC. In terms of rivalry and competition, KFC was formidable and outstanding, and had an enormous market share. This prevented other companies with similar product from establishing a hold in the market. KFC was able to gain a competitive advantage over its rivals, by providing customers with the benefit of cost advantage for similar product. It also adopted product differentiation, to sell its unique products at higher prices. By employing product differentiation strategies, the company was able to profit from the different demands of its customer. Prices were also different for different location. In posh regions, that had high purchasing ability, prices were kept slightly higher than region with low purchase ability. In spite of this, prices were high enough to ensure that majority of the customers were from upper middle class. In addition, KFC wanted its product to occupy a clear, distinctive place in the minds of its customers. Exceptional fresh, tasty food, high quality, cleanliness and customer services ensured that the brand was strongly imprinted in the mind of the Chinese customers.
References:
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Hbs.edu, (2011). KFC's Radical Approach to China. Retrieved 25 January 2016, from http://www.hbs.edu/faculty/Pages/item.aspx?num=41443
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