Franchising and Multi-Unit Chain Management - Case Study Example

? Report AAAAAAAAAAAAAA Organisation: XXXXXXXXXXXXXXXXXX Report Addressed BBBBBBBBBBBB Report Prepared by: the Report: DD MMMM 2012 Total Word Count: 2,500 words maximum Executive Summary International ventures by the companies have become a common phenomenon in the recent world of business. Asian food market is a dynamic market where the MNCs are investing and reaping huge benefits. The paper explores the pros and cons of investing in a Chinese market by an organization of UK which specializes in fish and chip and takeaways and is a chain of restaurants with some global presence. Managerial tools like PESTEL and SWOT analysis are implemented initially for exploring the external environment of China along with the internal environment analysis of the firm. After that, the potential risks of entering the Chinese restaurant market are analyzed. Then in the analysis section detailed discussion of the competitors, cultural dimension, competitive advantages of the firm is executed. Recommendations in the short term, medium term as well as long term are also discussed. Contents Executive Summary......................................................................................................................2 Introduction ....................................................................................................................................4 Risk of entering China ....................................................................................................................................9 Analysis ....................................................................................................................................10 Conclusion ...................................................................................................................................15 Recommendations ....................................................................................................................................16 Reference ....................................................................................................................................19 Introduction International trade has intensified to mammoth levels with the advent of globalization and influx of free trade regime in the modern world. Different sectors of production are engaged in the global business with various goods and services and their exchange. The increasing scope of business corporations in the herald of the 21st century is involving much attention and this trend is defined as a stretch of human imagination (Okoro, 2012, p. 130).The companies and organizations involved in diverse fields of production are expanding their business neglecting geographical barriers and expanding internationally for establishing robust reputation in the global business dimension and also operating in a rigorous manner taking advantage and proper use of environmental, economic, political, cultural factors and so on of these international territories. But successful expansion and proper functioning of business on a new international arena incorporates strategy implementation with dynamic foresight and policies that ensures sustainability and ethical functioning as well as hardcore business motives. Food sector is one of the pioneering domains in the global business forefront and many companies have established their business ventures in the international market and are running them in a successful manner with high turnovers and goodwill in the market. To name a few, food companies like Nestle, Monasto, Unilever, Wal-Mart have all expanded their reach and global influence backed by a direct result of trade liberalization policies developed mainly after the 1980s. Now, our company which is a large chain of fish and chip restaurants forms a crucial part of the food industry. Since we are a company headquartered in UK with many branches in the global ring, establishing a global goodwill as well as expanding in a dynamic manner in the international platform is deemed to be one of the most important decisions of our business strategy (Allen & Alba, 2007, p. 200). Our management has been thoroughly discussing of entering the Chinese food market. So on the behalf of the company it is our prime duty to explore the market dynamics of food industry in China in order to judge the decision of investing in this market will be fruitful or not. The food market of China is presently the fourth largest in the world. In between the years 2004 to 2008 the total average sales of food and beverage in the Chinese market have reached a mark of CNY 800 billion which is approximately around EUR 84.2 billion. Empirical research suggests that the European companies possess great opportunities of expanding in sectors like “wine, cheese, dairy and premium ice cream, pasta, spaghetti sauce/tomato products, olive oil, beer, chocolate, high-end confectionery, pre-packaged biscuits and snacks, breakfast cereal, coffee, and baby food/infant formula”. Now, we will develop a PESTEL analysis for the purpose of having a grip on the overall macro structure i.e. the external environment of the Chinese food market business which will give a basic idea regarding investment in this market. P The government of China has become highly concerned with the ecological, social and economic problems like that of deterioration of the environment, food safety dilemma, increasing gap between the rural and urban levels dwellers as fixed up by WTO. Ecological concerns are mitigated through the government by environmental laws as well as state expenditure on the environmental matters (Milbrodt, 2005, p. 111) E The Chinese food market possesses a fragmented infrastructure, local infrastructure as well as a good opportunity for the European companies in selling their products in the market. The economy is driven by increased disposable income, urbanization as well as an increasing taste for the foreign foodstuffs (F&B market in China, 2011, p.1) S The restaurants and fish and chip industry includes the young generation as potential customer base. The Chinese people born after 1979 are more educated, more open minded and they are highly exposed to the western language culture as well as lifestyle of which food habit comprises an integral part (Stanton, Emms & Sia, 2007, p.183) T The technological ground of Chinese food industry is not so developed and it requires a large jolt of advanced technology investment. Especially in case of the prepared food market, the technology of Chinese food market is not so developed (Genzberger, 1994, p. 75) E Within the environmental factors of the restaurant industry in the interaction quality is very useful which is measured through attitude, behaviour, expertise, physical environment quality determined by ambient conditions, design and social factors as well as outcome quality measured through waiting time, tangibles as well as valence (Chow et al, 2007, p.701) L Communist China under Mao Tse Tung couples with economic crunches and ideological checks developed the notion of a mass consumer culture within the urban middle classes of China without so much restraints (Murray, 2011, p.15) but today the government has established rigid rules for the development of the restaurant industry like Law of Food Sanitation and safety directs towards regulating the practice of food production, health protection and also augment food production and consumption. State Administration of Internal Trade, 1997 has implemented measures for regulating the Chinese fast food sector. Food and Beverage Safety and Sanitation Measures, 2000 for safeguarding public food policies (Parsa & Kwansa, 2001, p.158). Now having a brief insight on the external environment for the internal environment analysis we will focus on SWOT analysis on the Chinese food market. This will be represented in a tabular representation as follows: Strength Success in international business arena Full compliance with the corporate social responsibility Focused target group Strong support system to fight back adverse situation or at times when faced with criticism Weaknesses Some problems with obesity issues Predominance of similar competitors Not fully acquainted with the Chinese local food culture, tastes and preferences Opportunities Income distribution is skewed and the local competitors are in a position of faulty competition Innovative technology through thorough R&D acts as an added advantage in the technology scarce Chinese competitive market Threats Fierce competition of the MNCs in the relevant market Dominant players like Mac Donald’s, KFC making the environment more complicated for entry Criticisms have cropped up with respect to obesity and several other health issues Risks of entering China The Chinese restaurant industry is indeed a difficult market to enter into. The risks of entering the market can be explained in the points as follows: Intensified competition with very low prices Process of company registration is very complicated and time consuming Rigid requirement of the foreign companies to seek help from the local partners for establishing joint ventures Wholly foreign owned enterprises possess around 100 percent of the shares and issue invoices and full liabilities fall to the companies Stiffening of the recent regulation have made the situation much tougher in order to make profits from tax reductions and they have to generate revenues mandatorily in Hong Kong or Singapore for the purpose of taking advantage of lower expatriation taxes of the Mainland China profits. Within the eastern first tier cities there is a constant rise in the rents and wages and the levels are much compared to the western countries. Receiving more registered capital may take around two months and many of the companies have been found to be bankrupted before they are allowed into invest more capital (Hopper, 2012). Cultural differences exists between UK and China in the sense that in UK teamwork, professionalism and individualism are highly concentrated but in the Chinese factories teamwork are appreciated but they prefer including their family members within the workforce. Again political and economic factors are highly incorporated within the Chinese factories which are unlike in the British factories (Krishna & Madon, 2003, p. 22). Analysis Competitive strategy includes the positioning of the business in maximizing the value of the capabilities which differentiates the organization from its competitors. Thus competitor analysis is of immense significance and one of the central aspects of the business strategy .The main objective of a competitor analysis is tailored towards developing a profile of the nature and success of the likely chances that each competitor might make as well as include each of the competitor’s probable responses to a range of various feasible strategies that the other firms are able to initiate (Porter, 1998, p.47). The largest competitor in this market in the restaurant chains on the Chinese soil is mainly KFC and Mac Donald’s (Kentucky Fried Chicken). The evidences of market research states that the Chicken products are healthier than the beef products and as Mac Donald’s stresses on beef products, the company is on a disadvantageous position. KFC offers more Chinese specific options in its menu which is not present in Mc Donald’s and it also provides a better prices and bundles for its products . KFC has also managed in receiving good quality local product from the suppliers that have helped them in offering as well as maintaining prices in a low scale dimension while Mc Donald continue its operation in importing some key products like that of fries, ketchups which restricts the companies from price lowering and competing with the KFC in a more straightaway method. They focus on the notion that people forms the most valuable resources as they compete with the national as well as the international fast food giants throughout the world (Mujtaba,2007, p. 55). Among the other top brands in China in the fast food restaurant arena are Dico’s which ranks third in the Chinese fast food market, Yum’s China is also a restaurant chain operating with recent market shares reaching levels around 40%. The representation of the brands can be exhibited in a pie diagram as follows: Fig.1 Market Shares of top competitors in the restaurant chain market in China (Mellor, 2011) From the above diagram, it can is revealed that KFC dominates the Chinese market but then followed by Yum’s China, a local restaurant chain and then Mac Donald’s followed by Dico’s restaurant chain. It can be seen that hardcore competition between KFC and Yum’s. It can be stated that a strong strategy is necessary for us to enter the market with a policy that includes optimal combination of Western and Chinese tastes and preferences in order to penetrate within the market and establish a brand market. Now the Chinese tastes and preferences are mainly indulged with recipes like congee, rice along with pork, pickles, mushroom (Mellor, 2011) and our company specializing in fish and chip market may find an advantage in the Chinese market. Now, coming to the discussion of market growth opportunities the tool of Ansoff Matrix is highly essential. The matrix includes mainly four diverse growth strategies and they are market penetration, market development, product development and diversification. In market penetration, the organization focuses on attaining growth with existing products within the relevant market and targets at increasing its market share. In the arena of market development the firm targets at the growth dimension through the target of its existing products to new market segments. Within the dimension of product development, the firm targets at the growth through diversification within the new businesses through the process of new product development of the new markets (Bachmeier, 2009, p. 2). Existing product New Product Existing markets Noodles, Rice products, fast food , fried chicken, Diverse soups , Bi Pack Dinners, frozen egg rolls, chicken products, sea food mix, crabsticks, beef, Spicy Dragon Twister, Egg Tart and so on (Fundamentals of International Business, 2008, p. 256). Soy products, seafood and Cantonese rice noodles. Apart from food, new products can be also viewed as input or infrastructure. In the existing market continuously the restaurant owners are concentrating on product mix strategies infusing more local Chinese flavours and also investing in developing suitable local Chinese culture and aligned with the cultural integration of immigrants residing in this country with different food preferences (Talwar, 2003, p.18). New Markets Dunkin Donuts (a company) has made successful implementation with existing products along with doughnuts and coffee has become almost average diet of the Chinese people. With the existing products hamburgers are dominating in the new markets where KFC plays a leading role. Our organization with diverse products like that of fish in sweet sour sauce, batter fried shrimp, breakfast congee, crab omelette, and our beef and chicken products that will be blended with seasoned Chinese herbs and flavours can add to the advantage and product diversification in the market along with capturing the existing market. Thus, from the Ansoff matrix constructed above, we get a clear representation about the existing market and the products and also the option of the new market with new products with respect to the products of organization which gives us the policy of diversification within the Chinese Food market. Competitive advantage can be explained through Porter’s generic model. In 1985, Porter developed a model which argued that the competitive advantage depends on the selection of appropriate generic strategy for the purpose of achieving objectives of the business in the context of competitive environment. The generic strategy framework can also be framed in a 2x2 matrix which includes parameters like cost leadership, differentiation, cost focus as well as differentiation focus (Stonehouse et al, 2007, p.175). This framework will provide a brief insight on the integrated cost leadership dimension of our firm. The framework is as follows: Cost leadership Becoming a cost leader in the market will not benefit the market but the organization need to follow an average pricing method so that focus on vital factors are not get compromised. Differentiation Application of differentiation strategies like power advertisement, rampant marketing may initially put some pressure on the cost but it will help in the immediate run as the market is highly infested with innumerable competitors. Unique strategy implementation with innovative ideas may prove to be a boon for the organization. Focus Rather than focusing on a diverse group or a large section of the consumer, if the focus may be shifted to a niche sector as for example the young Chinese population which includes people from Chinese ethnicity as well as nationals of other countries. Focused Differentiation The focused differentiation strategies include combination of cost leadership with proper differentiation strategies. Market data will have to be collected and then statistical analyses must be encountered which will provide important insights on business decisions. (Stonehouse et al, 2007, p.175). In the cultural forefront, we have already discussed that there exists a strong difference within the managerial forefront of the Chinese market and the British market which has been reflected in the studies of Hofstede in 2007 with the evolution of Hofstede’s paradigm (Fang, 2010, p. 157). It has been found that in the Chinese market focus on the family workforce is especially rigorous and political and economic arguments are highly associated within the workforce. In the entry to the market, it can be stated that registering a company in China is highly complicated and it is a rigorously time intensive process. In the “Ease of Doing Business” Index which is published by World Bank China stands at the 151st place out of around 183 economies in the process of starting a business. The problem is that without taking help of a local partner or the scope of a joint venture (JV), the only option present among the foreign entrepreneurs is a Wholly Owned Enterprise which includes full liabilities. The advantage is that the local expertise can be grasped and decision taken will be based on venture management rather than on unilateral decisions adopted by a single party (Yan & Luo, 2001, p. xvii). Conclusion The study provides a considerable idea about the Chinese restaurant market and exhibits a position of investing in the market with respect to a fish and chip restaurant chain of UK. Among the Asian market, the Chinese market shows tremendous potential of business growth in the food sector especially in the restaurant chain industry. The fast food and readymade food are in high demand within the Chinese domain with foreign investment finding mammoth within the country. The Chinese people post Mao Tse Tung era much more educated and they are becoming more prone towards the western food culture. The technological advancement within this industry is not so immense which makes our company in an advantageous position as we are renowned for our advanced technology implementation. The environmental standards are becoming rigid and the obesity problem also needs to be handled in a proper manner. Risks of entering the market have been discussed and the competitors like Mac Donald’s and KFC are already dominating the market. Cultural forefront may also pose a hindrance to the company. The marketing tools used in the analysis section discusses about the competitive positioning of our company and it can be stated that the decision of entering the Chinese market may be a fruitful one subjected to the new product and differentiation strategies. Recommendations Timeline Recommendation Implications of the recommendation: Strengths / Opportunities Implications of the recommendation: Weaknesses / Threats R1 Immediate Targeting the youth market and developing food products aligned with the local tastes and preferences Significant portion of the Chinese population are young people and they are educated and are open welcoming western cultures like that of USA and UK. Variety of fish products with innovative chip items is supposed to draw a significant attention of the young customers. A sizeable portion of the customer base will be lost. Mac Donald’s, KFC are pioneers in the market. Recently the population are raising their concern over obesity which act as a hindrance R2 Immediate Analysis of current brand and imposition of a proper brand awareness Brand awareness is a necessity and even if involves cost must be implemented to generate a market goodwill Involve a lot of cost and risky investment. Revenue flows might not cover up the total costs R3 Short term There must be a proper consultation of the investment catalogue before investing which shows categories like encouraged, restricted or protected Protected investment will boost a confidence within the organization against the fierce completion prevalent in the market But protected investment also imparts dominance of the agency protecting and there is less scope to expand R4 Short term Collaborate with a local company or enter into a joint venture project Lower cost base, enormous facilities in local production, access to the resources of the local market, opportunities to new customer base Less managerial control, finding trustworthy partner is critical. Subjected to long negotiation period, risk of IPR R5 Medium term Compliance with the local and national regulation and update of the same in regular time intervals Helps in maintaining proper industry standards as well as capturing the goodwill of the local and global employees Upward cost revision R6 Medium term Managerial positions will be offered to Chinese nationals Understands the local market properly, existing contracts with the suppliers, customers and the government Possibility of goal conflict R7 Long Term Invest in and around the coastal areas of China Population increasing and the income distribution are high. Places like Zhejiang, Guangdong, Jiangsu are not so developed in restaurant chains as Beijing, Shanghai Investment may be risky and adaptive cycle may linger more than proportionately as expected R8 Long Term Enter into long term regulatory binding developed on a forward contract basis Hedging of economic and political risks. Stabilized revenue flow over a long stream of time Losing out opportunities and market share at times when it will show strong dynamic growth of market References 1. Allen, G, J & Alba, K, (2007), The Business of Food: Encyclopedia of the Food and Drink Industries, ABC-CLIO 2. Bachmeier, K, (2009), Analysis of Marketing Strategies Used by PepsiCo Based on Ansoff's Theory, GRIN Verlag 3. Chow et al, (2007), Service quality in restaurant operations in China: Decision- and experiential-oriented perspectives, Hospitality Management, Vol. 26, pp. 698- 710 4. Fundamentals of International Business, (2008), Wessex Publishing 5. Fang, T, (2010), Asian management research needs more self-confidence: Reflection on Hofstede (2007) and beyond, Business Media, Vol. 27, pp. 155-170 6. Milbrodt, C, (2005), Organic Food Industry in China - Current State and Future Prospects, GRIN Verlag 7. 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