American Franchisers in China based on KFC - Case Study Example

KFC in China: Problems, Successes and Challenges for American Franchisers I. INTRODUTION The Kentucky Fried Chicken (KFC) has become one of the most successful franchises in the world since its birth in 19521. It started as a small restaurant under Colonel Sanders in Kentucky2, USA. KFC became well-known, expanded to other countries and now, still continues to operate thousands of its branches around the globe. With fried chicken as its main, famous and prized course, the Kentucky Fried Chicken won the hearts of lots of people around the world for its "finger lickin"3 recipes. With its success in North America, KFC tried to gain success in other parts of the world. Foreign franchisers invested in Europe, Asia, South America and some parts of Africa. In Asia, China has the biggest market and starting businesses in this country is very strategic. However, the political, social, and cultural conditions in China are not the same with the United States. This paper tries to analyze the different strategies that the KFC franchisers took to make KFC one of the most successful franchises in China today. This paper also mentions the problems the managements encountered and the measure they took to remedy those. It also analyzes how successful KFC franchises are in China that they reached a total of 2,200 KFC branches4 in China alone. II. JOINT VENTURE WITH CHINA Johan Olsson cites several reasons why an international business strategy such as joint venture is recommended for China: (1) solves many logistic problems such as access to good quality chicken and other supplies, (2) eases the access to the Chinese market, (3) shares risk with local entity, and (4) serves a sign of commitment to the host government increasing goodwill.5 Pei Liang and Sun Zhixian examine which of the three (3) business strategies: (1) direct franchising, (2) master franchising, and (3) joint ventures is effective in the Chinese market. For direct franchising, the success of this strategy relies on establishing a good relationship between foreign investors like the Americans and local partners in China. Local partners know and understand much about the political, economic, and social conditions of the country. They are also in "much better position(s) to negotiate with government agencies as well as required suppliers."6 The authors also add that direct franchising for American franchisers will be difficult without local partners in a culturally-different state like China.7 Olsson adds that franchising is not suitable for China because of the strict foreign investment laws. For master franchising, the main problem that exists why this strategy has lower success rate compared to joint venture is the availability of a qualified master franchisee. Liang and Zhixian describe a master franchisee to have not only an abundant capital but also "a favorable social relationship as well as the entrepreneurial skills and the ability to communicate easily with a franchisor." If the master franchisee fails to maintain "franchise quality or reverse engineer and duplicates the franchisor system, he franchisor could, as a practical matter, face considerable difficulties in enforcing the terms of the master franchising agreement or terminating the relationship."8 For the master franchising to work in China, the master franchisee must possess the qualities of leadership and a lot of public relation skills. For Liang and Zhixian, they recommend the joint venture as the best choice for starting a business in China. They also mention that choosing a good and qualified local partner is the critical point for the success of any foreign business in China. Working with unqualified local partners may incur more management costs than management benefits because it weakens the performance of the business.9 Olsson supports these arguments by saying that "a potential partner with sufficient contacts [and] networks with government agency officials may smoothen the process of setting-up operations in the nation."10 Olsson also adds that joint ventures produce goodwill and commitment between the foreign investor and the government since it will reflect the sincere intentions of the investor of sharing rather than taking advantage. III. MANAGEMENT PROBLEMS AND SUCCESS IN CHINA After opening the first KFC restaurant in Beijing, China in 1987, KFC earned initial success from the Chinese people who were curious about the taste of foreign cuisine that time. Being a fast food restaurant, KFC adopted "convenience, efficient service, comfortable environment, pleasing music and jovial atmosphere" as its goals and principles.11 This style of management excelled in China in its initial years. Since these kinds of foreign restaurant were exotic on that time, managers took the advantage of charging higher prices of hamburger (10 Yuan) and Coke (5 Yuan) compared to their local counterparts in the United States. In the 1990's the number of fast food restaurants like KFC in China increased by 100.12 The initial success was followed by minor setbacks the following years. The local people of China started to get used with the food that was being served in KFC and other fast food restaurants like McDonalds. This was proved by several managers who noticed that some customers who usually stop by and eat at their restaurants were now going to local Chinese restaurants where their favorite Chinese cuisines are served. During special occasions like Spring Festival and Mid-autumn Festival, KFC and other fast food restaurants were empty. Customers also complained the lack of variety of the food that was served and was not as good as their food.13 The managements of KFC as well as other fast food restaurants started making adjustments in their menus and cuisines as way of absorbing the Chinese culture. In the summer 2001, KFC introduced many Chinese meals on their menus. Examples of Chinese foods that were introduced are "Preserved Sichuan Pickle and Shredded Pork Soup".14 The introduction of Chinese cuisines was a success as Chinese felt the respect of foreign restaurants on their cuisines. More varieties with blends of Chinese style were added like Mushroom Rice, Tomato and Egg Soup, Traditional Peking Chicken Roll, and Happy French Fry Shakes (comprises beef, orange and Uygur barbecue spices). 15 IV. CONCLUSION: The success of KFC as well as McDonalds and other fast food restaurants in China is rooted on their willingness to adapt to their culture which was well appreciated and acknowledge by the big Chinese community. As quoted by China Today: "KFC and McDonald's have absorbed the Chinese cultural elements of showing respect, recognition, understanding, assimilation and amalgamation, while maintaining the substance of the Western culture of efficiency, freedom, democracy, equality and humanity. This inter-cultural management mode, with American business culture at the core, supplemented by Chinese traditional culture, provides reference for international enterprises which need to adjust, enrich and reconstruct their corporate culture to enhance local market flexibility." (China Today) Analyzing the success of KFC in China as well as in United States, the concept of originality (like KFC's original chicken recipe) proves to be the determining factor. In a different environment politically and socially like China, foreign businesses can encounter difficulties which can result to withdrawals of investments. KFC management although faced with the same challenges, learned to adapt to the Chinese culture while maintaining its principles and standards as a western fast food restaurant. The joint venture strategy also proved to be effective for foreign franchising. The success of KFC in a different atmosphere serves as a challenge for other businesses to improve their strategic plans for them to become successful abroad. Works Cited China Today, "KFC and McDonald's - a model of blended culture", 2 August 2008 Liang Pei, and Sun Zhiang, "What entry vehicle will you select in China Three approaches to succeeding in the burgeoning Chinese market place (International Development)", 2 August 2008 Olsson, Johan, "KFC in China - a case study", 2 August 2008 "Yum! China", 2 August 2008 Read More