Kfc in china case study pdf

KFC Case

A written individual case analysis, Kentucky Fried Chicken in China (A)，

The case analysis should address the following questions:

1：What are the risks and opportunities of entering China at the time of the case?

2：Does KFC have the capabilities to expand? What are it’s competencies and deficiencies?

3：Where should KFC establish initial operations – Beijing, Shanghai, or Guangzhou?

case with assistance from Professor Paul W. Beamish solely to provide material for class discussion. The authors do not intend to illustrate either effective or ineffective handling of a managerial situation. The authors may have disguised certain names and other identifying information to protect confidentiality. Ivey Management Services prohibits any form of reproduction, storage or transmittal without its written permission. This material is not covered under authorization from CanCopy or any reproduction rights organization. To order copies or request permission to reproduce materials, contact Ivey Publishing, Ivey Management Services, c/o Richard Ivey School of Business, The University of Western Ontario, London, Ontario, Canada, N6A 3K7; phone (519) 661-3208; fax (519) 661-3882; e-mail cases@ivey.uwo.ca. Copyright © 1989, Ivey Management Services; Canadian International Development Agency Version: (A) 2003-05-29 In late September 1986, Tony Wang leaned back in his leather chair in his Singapore office and thought of the long road that lay ahead if Kentucky Fried Chicken (KFC) were ever to establish the first completely Western-style fast food joint venture in the People’s Republic of China. Wang, an experienced entrepreneur and seven-year veteran of KFC, had only two months previously accepted the position of company vice president for Southeast Asia with an option of bringing the world’s largest chicken restaurant company into the world’s most populous country. Yet, as he began exploring the opportunities facing KFC in Southeast Asia, Wang was beginning to wonder whether the company should attempt to enter the Chinese market at this time. Without any industry track record, Wang wondered how to evaluate the attractiveness of the Chinese market within the context of KFC’s Southeast Asia region. Compounding the challenge was the realization that although China was a huge, high profile market, it would demand precious managerial resources and could offer no real term prospects for significant hard currency profit repatriation — even in the medium term. Wang also realized that a decision to go into China necessitated selecting a particular investment location in the face of great uncertainty. It was equally clear that while opportunities and risks varied widely from city to city, the criteria for evaluating suitable locations remained unspecified. With limited information to go on, Wang realized that a positive decision on China would be inherently risky — both for the company and for his

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own reputation. And while Wang was intrigued by the enormous potential of the Chinese market, he also knew that many others had failed in similar ventures. HISTORY The origins of Kentucky Fried Chicken can be traced to Harland Sanders, who was born in 1890 in Henreyville, Indiana. When Sanders was a boy, he dropped out of the sixth grade and began a stream of odd jobs, concentrating eventually on cooking. In time he opened his own gas station with an adjoining restaurant. In the 1930s, Sanders developed a “secret” recipe for cooking chicken by first applying a coating containing a mixture of 11 herbs and spices and then frying the chicken under pressure. This “southern fried chicken” eventually became a hit at the gas station, and in 1956 Sanders decided to franchise his novel concept. By 1964, he had sold almost 700 franchises. Much of Sanders’ success in this pioneer industry lay in his near obsession with product quality and a commitment to maintaining a focused line of products. In 1964, at the age of 74, Harland Sanders finally agreed to sell the business in exchange for US$2 million and a promise of a lifetime salary. The sale of the business to John Brown, a 29-year old Kentucky lawyer, and his financial backer, Jack Massey, 60, was accompanied by the assurance that Sanders would maintain an active role in both product promotion and quality control of the new venture. With new, aggressive managers and a rapidly evolving American fast food industry, KFC’s growth soared. Over the next five years, sales grew by an average of 96 per cent per year, topping US$200 million by 1970. This same year almost 1,000 new stores were built, the vast majority by franchisees. A key element in this rapid growth was Brown’s ability to select a group of hard- working entrepreneurial managers. Brown’s philosophy was that every manager had the right to expect to become wealthy in the rapidly growing company. By relying heavily on franchising, the company was able to avoid the high capital costs associated with rapid expansion while maximizing returns to shareholders. Rapid sales growth provided promotion and opportunities to purchase stock for company managers as well as the opportunity for franchisees to improve margins by spreading administrative costs over a broader base of operations. This was critically important given the high fixed costs associated with each store. Volume, both at the individual store level and within a franchisee’s territory, was thus essential in determining profitability. Profitability, in turn, assured the attractiveness of KFC to potential future franchisees. In 1971, Brown and Massey sold KFC to Heublein Inc. for US$275 million. Heublein, based in Farmington, Connecticut, was a packaged goods company which marketed such products as Smirnoff vodka, Black Velvet Canadian whisky, Grey Poupon mustard, and A1 steak sauce.

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Challenges at Home and Abroad The establishment of KFC’s international operations began just prior to the company’s acquisition by Heublein. KFC opened its first store in the Far East in Osaka, Japan in 1970 as part of Expo-70. By 1973, KFC had established 64 stores in Japan, mostly in the Tokyo area. KFC also moved quickly into Hong Kong, establishing 15 stores there by 1973. Other areas of expansion included Australia, the United Kingdom, and South Africa. Shortly after the acquisition, KFC’s small international staff was merged with Heublein’s much larger international group in Connecticut. In spite of Heublein’s efforts to impose rigid operational controls, KFC country managers were frustrated by the imposition of U.S. store designs, menus, and marketing methods on culturally divergent host countries. Resistance to corporate control grew and led many stores to develop their own menus: fried fish and smoked chicken in Japan, hamburgers in South Africa, and roast chicken in Australia. In some cases, local managers seemed to know what they were doing; in other cases, they clearly did not. After heavy losses, KFC pulled out of Hong Kong entirely in 1975. In Japan, operations also began on shaky grounds with losses experienced throughout much of the 1970s. In addition to poor relations between country managers and corporate staff, the 1970s presented a much more challenging environment for KFC in the United States. The fast food industry was becoming much more competitive with the national emergence of the Church’s Fried Chicken franchise and the onset of several strong regional competitors. Important market share gains were also being made by McDonald’s hamburgers. With the Heublein acquisition, many top managers who had been hired by Brown and Massey were either fired or quit, resulting in much turmoil among the franchisees. By 1976, sales were off eight per cent and profits were decreasing by 26 per cent per year. To make matters worse, rapid expansion had led to inconsistent quality, poor cleanliness and a burgeoning group of disenchanted franchisees who represented over 80 per cent of total KFC sales. At one point, even white-haired Harland Sanders was publicly quoted admitting that many stores lacked adequate cleanliness while providing shoddy customer service and poor product quality. Turning Operations Around In the fall of 1975, with rapidly deteriorating operations both at home and abroad, Heublein tapped Michael Miles to salvage the chain. Miles was initially brought in to head up Heublein’s international group, which by this point was dominated by KFC. Miles had come to Heublein after managing KFC’s advertising account for

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10 years with the Leo Burnett agency. At Heublein, he had risen to vice-president in charge of the Grocery Products Division. While he had little international experience, he had developed a strong reputation for strategic planning. His challenge in late 1975 was to install consistency in international operations by increasing both corporate support and control. One of his first decisions was to move KFC-International back to Louisville where it could begin to develop a degree of autonomy within the corporation. Within 18 months, Miles was asked to manage KFC’s entire worldwide turnaround, including operations in the United States. The basic thrust of Miles’ strategy was a return to back-to-basics in terms of menu selection and commitment to quality, service, and cleanliness (QSC). The back-to- basics strategy was supported by a new series of staff training programs, random inspections of company-owned and franchisee stores, and a new “we do chicken right” advertising program. The goal was to focus consumer awareness on a sleeker, more customer-oriented KFC which would make one product — chicken — better than any of its competitors. The results of the turnaround strategy were dramatic. By 1982, KFC had become Heublein’s fastest growing division, with real growth of 2.3 per cent. From 1978 to 1982, sales at company-owned stores jumped an average 73 per cent, while franchise unit sales rose by almost 45 per cent. Much of this growth came from KFC’s international operations where company units outnumbered even McDonald’s outside the United States. While chicken is eaten almost everywhere in the world, the same is not true of beef which has been poorly received in many countries. This provided KFC with a considerable advantage in penetrating foreign markets. Nowhere was this more true than in the Pacific Rim, where by 1982, KFC had nearly 400 stores in Japan. In Singapore alone, KFC had 23 franchised stores. Acquisition by R.J. Reynolds Although KFC had made dramatic progress, growth was limited by restricted expansion capital at Heublein. Most of the profits generated by KFC were being used to revive Heublein’s spirits operations, which were themselves facing flat sales and increased competition. By 1982, KFC was receiving only US$50 million per year in expansion funds compared with the US$400 million being spent by hamburger giant McDonald’s. KFC also had one of the lowest ratios of company- owned to franchisee stores in the industry. Many franchise stores were slow to upgrade facilities and it was understood that major investments would be required to assure the integrity of the overall KFC network. In the late summer of 1982, R.J. Reynolds of Winston-Salem N.C. acquired Heublein for US$1.4. billion. The acquisition was supported by Heublein directors fearful that the company might be taken over and sold in pieces. Reynolds had

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been seeking expansion possibilities in the consumer products industry where its marketing skills and huge cash flow could best be put to work. Although hugely profitable, Reynolds’ tobacco operations were being attacked by soaring taxes and consumers’ declining interest in smoking. The acquisition of Heublein was only part of a group of companies Reynolds acquired during the late 1970s and early 1980s, including Del-Monte Corp. in 1979, Canada Dry and Sunkist Soft Drinks in 1984, and Nabisco Brands in 1985. Soon after the acquisition, Mike Miles left the company to become president of Dart and Kraft. He was succeeded as CEO of KFC by Richard Mayer who had worked with Miles on the turnaround. Mayer had put in a 10-year stint at General Foods where he rose to become head of the Jell-O product group. Mayer characterized the acquisition as “marvellous.” International Expansion The heavy financial backing of Reynolds resulted in further growth for KFC. Betting that health-conscious consumers would increasingly shift consumption to chicken, Reynolds designed an ambitious worldwide expansion plan that promised US$1 billion in funds over five years. Much of this expansion would come outside the United States where markets remained largely untapped. As was the case with domestic operations, franchising played a major role in KFC’s international growth. Franchising became the mode of choice in many markets where political risk and cultural unfamiliarity encouraged the use of locals. Another advantage with franchising was that KFC could be assured a flow of revenues with little investment, thus leveraging existing equity. This was a particularly attractive option internationally where potential deviations of franchisees from KFC operating procedures could be more easily isolated. The downside of a reliance on franchisees was that it permitted an erosion of system integrity. Local franchisees typically controlled a portfolio of companies, with KFC sales representing only a portion of revenues. Local franchisees, driven by a desire to maximize profits, often cut corners or “milked” operations. While this type of strategy would generally not compromise short-term profitability, it often led to the deterioration of operations over the longer term. This problem was only exacerbated internationally where control was more difficult to maintain. Southeast Asia Operations By 1983, KFC had established 85 franchise stores in Southeast Asia, including 20 stores in Indonesia, 27 stores in Malaysia, and 23 stores in Singapore. This area was recognized as the Southeast Asia Region, one of five separate geographic

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regions within the corporation. Harry Schwab headed the Area office, where he served as a company vice-president. Schwab had been successful in managing KFC’s South African operations where he eventually built a chain of 48 company- owned stores and 95 franchise stores. After returning to Louisville to assume the position of KFC vice-president for international franchising, he was given the added responsibility of supervising the company’s Southeast Asia area. Exhibit 1 presents a partial map of Asian Pacific nations. THE CHINESE MARKET After a 10-year absence, KFC moved back into Hong Kong in 1985. During KFC’s long absence from Hong Kong, McDonald’s, Burger King, Wendy’s, and Pizza Hut had entered the market, providing the local population with a taste for Western fast food. After preparing a new Cantonese version of the “we do chicken right” advertising campaign, KFC opened the first of its 20 planned stores. During its first week of operation, the store sold more than 41,000 pieces of chicken, the most that any startup ever sold during its first week of operation. With renewed confidence that management had finally learned how to balance the need for corporate control with the demands for local responsiveness, the company began contemplating a much more ambitious move into the Chinese mainland. The initial discussions over the feasibility of entering the huge Chinese market were held in early January 1985 between Richard Mayer and Ta-Tung (Tony) Wang, a former executive of KFC. Tony Wang was born in Sichuan province in the People’s Republic of China in 1944. When Tony was five years old, the family made its way to Taiwan where in 1968 he graduated from Chong-Yuan University with a degree in engineering. He later moved to the United States, and in 1973, completed a masters degree in management science from Stevens Institute of Technology in New Jersey. Wang then attended New York University where in 1975 he earned a post-master’s certificate in international business management. Upon completion of his studies in 1975, Wang accepted a position in Louisville with KFC. A series of promotions culminated with his assuming the position of director of business development for the company. In this position, Wang reported directly to Mayer where the two developed a close personal relationship. Yet by 1982, Wang was feeling increasingly uneasy at KFC. Although KFC had completed a dramatic turnaround, Wang felt strongly that the company had been too conservative in penetrating international markets. Wang’s conviction was that the company was afraid to take real investment risks, particularly in the Far East where American managers were culturally out of touch. In his capacity as director of business development, Wang also saw some of the enormous profits that many of his projects were generating for franchisees. In Wang’s view he was merely a bureaucrat, “enriching a conservative, ethnocentric corporation.” He plotted his departure. This eventually led to the establishment of QSR Management Company

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where Wang served as president. QSR was principally engaged in franchisee operations of Wendy’s restaurants in Northern California. The company also provided management consulting to other franchisees of major fast food companies. The Tianjin Experience In spite of QSR’s highly profitable operations in California, Wang remained convinced of the enormous potential for American-style fast food in the Far East. In the summer of 1984, the mayor of Tianjin (the third largest city in China with a population of seven million) visited San Francisco and spoke to a small group of Chinese-Americans about investment opportunities in his city. Wang attended the meeting and was later invited by the mayor to serve as an advisor on improving the food service industry in Tianjin. Wang’s counter-proposal was to serve not only as an advisor but as an investor in a joint Chinese-American-style fast food restaurant. The mayor welcomed the idea. Primary backing for the project came from a group of Chinese-American investors in the San Francisco bay area; additional backing was provided by Don Stephens, the chairman of the Bank of San Francisco. With this support, Wang reached a 50-50 joint venture agreement with a local Tianjin partner to establish “Orchid Food,” the first ever Chinese/U.S. joint venture in the restaurant industry in China. The combination take-out/80-seat restaurant was hugely successful from its first day of operation with revenues averaging 100 per cent above break even. Buoyed by this success, Wang began reflecting on the tremendous potential that KFC had in China. Wang’s interests were in bringing KFC into China through personally winning the franchise rights for key regions of the country. Barring this, he would try to convince his friend, Richard Mayer, to become a partner in a three- way deal involving Wang, KFC, and a local and as yet undetermined partner. In a letter to Mayer in mid-January 1985, Wang argued that the time was right for KFC to move “aggressively” into China.

I am totally convinced that KFC has a definite competitive edge over any other major fast food chains in the United States in developing the China market at the present time. In spite of the fact that McDonald’s is trying to establish a relationship there, it will be a long while before beef could become feasibly available. On the other hand, the poultry industry is one of the top priority categories in China’s agriculture modernization and it is highly encouraged by the government. It is my opinion that KFC can open the door in China and build an undisputable lead by first establishing a firm poultry-supply foundation.

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Movement into China was also being encouraged by KFC’s parent, R.J. Reynolds, itself interested in penetrating the vast Chinese market for cigarettes. Executives at RJR had long realized that, unlike North American demand, the demand for cigarettes was soaring in Third World and communist countries. American cigarettes, in particular, faced almost unlimited demand. China seemed like the perfect market for the company. Mayer approached Wang’s offer to bring KFC into China with great interest. On the one hand, Wang had a long and productive history with KFC; Mayer could trust him. He was aggressive and had a proven track record of successfully negotiating with the Chinese. He was also Chinese — he spoke perfect Mandarin and felt at ease in either Beijing or Louisville. If anyone could get KFC into China, it seemed that Tony Wang was the person. On the other hand, Mayer had considerable concerns about turning over such a strategically important market to a franchisee. Experiences in other international markets had shown the perils of relying on franchisees. The granting of franchise rights could also jeopardize KFC’s ability to expand later in other regions of the country. According to Mayer, China was “too important to not be developed as a company operation.” Tony Wang himself was beginning to have serious doubts about his ability to move KFC into China by relying on his own resources. His experience in Tianjin had only reemphasized his conviction that major changes in the attitudes of Chinese employees would almost certainly be required for operation under the KFC banner. These changes could only be achieved through time consuming training programs, suggesting heavy pre-start-up costs which Wang could not adequately support. Wang was also concerned about the up-front money needed to find and negotiate a partnership, to sign a lease and to gain operating permits. By late fall of 1985, it was becoming increasingly clear to Wang that “China is too big a market for individuals.” Changes in Management It was in April 1986 that Mayer decided to make his move. He telephoned Tony Wang with several announcements: Steve Fellingham was being promoted to head up all of KFC’s international operations. Fellingham had over 10 years’ experience in KFC-International and was widely respected as someone who would move much more aggressively internationally by relying less on franchisees and more on joint ventures with local partners. This observation was confirmed by Mayer. Mayer also announced that KFC was buying up its Singapore franchisee, which now operated 29 KFC stores. This would result in considerably more administrative responsibilities for KFC’s Southeast Asia regional office. Finally, Mayer was moving Harry Schwab out of Singapore, and restructuring the Southeast Asia region. The job of running the region was Tony’s, if he wanted it. Mayer also expressed his encouragement that Wang pursue the China option according to his best judgment and efforts.

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After some soul-searching, Wang accepted the position and, in the summer of 1986, officially became vice president of KFC Southeast Asia with headquarters in Singapore. According to Wang, he accepted the job because of the “personal challenge to develop KFC in China.” Wang viewed this opportunity of establishing the first Western-style fast food operation in China as an historic opportunity — both personally and for the company as a whole. He also realized that with this very visible challenge came high personal risks should the venture fail. With the assumption of responsibility for all KFC operations in Southeast Asia, Wang began to see the decision to invest in China in a different light. The singular objective of getting into China would now have to be balanced with other investment opportunities in the region. KFC had enormous growth potential throughout Southeast Asia. The national markets of the region, while together smaller than the entire Chinese market, had already been exposed to Western-style fast food; patterns of demand for KFC’s products were well understood. Compared to China, targeting these markets for growth had certain appeal. Control over partners and employees would be rather simple to maintain, leading to rapid growth and higher returns. Hard currency was also readily available. China, in contrast, would demand a huge amount of scarce managerial resources. The primary constraint was the limited number of Chinese-speaking KFC managers — many of whom were already being pushed to the limits in Hong Kong and Singapore. As a consequence, by the late summer of 1986, Wang was beginning to wonder whether committing these resources to China would be in the best interests of the region for which he was now responsible. Exhibit 2 presents selected national economic and population statistics for the Southeast Asia region as well as KFC location and sales figures. The China Option: Investigating Alternatives Wang’s reaction to the ambiguity surrounding the China option was to investigate the Chinese market more thoroughly. Here, the principal question facing Wang was the intended geographic location of the first Chinese store. The location decision would potentially have a dramatic effect on profitability, future expansion elsewhere in China and managerial resource commitments — all vital considerations in a go/no-go decision. In considering where to establish the first store, Wang initially thought of Tianjin. Through his earlier experiences, he had developed excellent contacts within the municipal government of Tianjin and he appreciated that Tianjin was one of three municipal governments in China that were administered directly by the Central Government in Beijing. (The other two were Shanghai and Beijing.) Yet, he also recognized that the city had several shortcomings. First, Tianjin lacked a convenient supply of grain-fed chickens. Experience in Hong Kong — where in 1973 KFC had entered the market using fish meal-fed chickens — suggested that

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Chinese consumers placed a high value on freshness and taste. This would be particularly important with a product prepared in a way which was unfamiliar to the Chinese. Another problem with Tianjin was that the city was not generally frequented by Western tourists. While Wang anticipated that most sales would be from soft currency renminbi (RMB), some hard foreign currency sales would be essential for profit repatriation and/or the purchase of critical supplies such as chicken coating, packaging, promotion materials, and so on.1 Finally, and perhaps most importantly, Tianjin would be unable to provide KFC with the profile necessary to facilitate eventual national market penetration. In fact, Tianjin was generally regarded in China as a gateway to its larger sister, Beijing, only 85 miles to the west. Other cities presenting viable alternative locations for KFC’s entry into China included Shanghai, Guangzhou, and Beijing. The location of each is noted in Exhibit 1. Shanghai As China’s largest city, Shanghai is home to some 11 million people, almost 9,000 factories and the country’s busiest harbour. Metropolitan Shanghai is widely regarded as China’s most prosperous business centre. The city alone accounts for approximately 11 per cent of China’s total industrial output and almost 17 per cent of the country’s exports. It is also one of three self-administered municipalities. Shanghai has a long history of involvement with Westerners. The Treaty of Nanking, thrust upon the Chinese by the British during the middle of the 19th century, set Shanghai aside as one of five Chinese port cities open to foreign trade. Western commerce and cultural influence flourished. Foreign gunboats continued to patrol the river until well into the 20th century. Complete expulsion of foreigners came in 1949 with the communist victory over the Nationalist Chinese army. However, since then the city has maintained an interest in international business and trade. Today, the city is the home of a large variety of Western hotels, business facilities and tourists. Shanghai also had the benefit of providing easy access to a seemingly ample supply of quality chickens. In fact, through joint ventures a Thailand-based company — the Chia Tai Group — had established 10 feed mills and poultry operations in the region and was the largest poultry supplier in Shanghai. KFC’s Southeast Asia office had good relations with Chia Tai and was currently negotiating with one of the company’s divisions as a potential franchisee in Bangkok. 1Like virtually all communist economies, the Chinese economy operates through two separate currencies: renminbi, or the “People’s Currency,” which is used by local Chinese for the purchase of goods and services; and FEC (Foreign Exchange Certificate) which is used by foreigners to represent the value of hard currency while in China. FEC is required at all hotels, taxis, restaurants and shops which cater to foreigners. A black market for FEC existed in most large Chinese cities.

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While Shanghai remains a major centre for business, its noise and pollution have discouraged tourists. For KFC, the sheer population of a host city is important, although less so than the mix of potential customers. While Shanghai could provide KFC with eagerly sought-after media exposure, the operation would also need to promise an adequate return in FEC before an investment could be justified. Here, the concern was whether or not Western business people would be attracted to KFC or would prefer to frequent more fashionable restaurants. Clearly, no one knew. Guangzhou Another alternative was the city of Guangzhou, located in southeast China only a short distance from Hong Kong. Guangzhou, historically know as Canton, is one of 14 special coastal cities set apart in 1984 as preferential treatment centres for foreign investment. As such, Guangzhou was given greater autonomy in approving foreign investment projects, reducing tax rates and encouraging technological development. By the end of 1986, about 80 per cent of the almost US$6 billion foreign investment in China had been located in these open coastal cities. In addition, Guangzhou is the capital of Guangdong Province, which contains three of the country’s four “Special Economic Zones” (SEZs), designed specifically to attract foreign investment. The SEZs were initially set up as part of the broad economic reforms that were launched in China in the late 1970s. Guangzhou was frequented by Western business people as well as by tourists who visited the city on one-day excursions from Hong Kong. Due to its proximity to Hong Kong — less than 75 miles away and easily accessible by road or train — an operation in Guangzhou could easily be serviced out of the company’s Hong Kong office. The Chinese in this region were also more familiar with Western management practices and culture. In fact, the people in Guangzhou speak Cantonese — the same language spoken in Hong Kong. Cantonese Chinese is quite different from the Mandarin Chinese spoken elsewhere in China. Preliminary investigations also indicated that little difficulty would be anticipated in locating an adequate supplier of chickens. Beijing Another location that warranted closer inspection was Beijing, China’s second most populous city (after Shanghai) with nine million citizens. Since its establishment as the Chinese capital by the Mongols in the 13th century, Beijing has remained the political and cultural centre of China. For example, although China spans a breath of 3,000 miles, the entire nation runs according to Beijing time — an indication of the power of the central government. As the nation’s capital, Beijing also sports a subway and freeway system and an international airport complete with air conditioning and moving sidewalk.

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Chinese citizens from all over the country pour into Beijing eager to attend meetings or to represent their factories or districts before the authorities of the central government. The city is also the educational capital in the country with university campuses ringing the city. These factors all contribute to the relatively high levels of affluence and the intellectual enlightenment of the population — critically important in generating RMB sales. Beijing is also a tourist centre for Western visitors anxious to see the Forbidden City, Summer Palace, and nearby Ming Tombs and Great Wall. This would mean a ready supply of FEC currency. Finally, without doubt a start-up in Beijing would grab the people’s attention and would communicate the tacit approval of the central authorities, thus facilitating future expansion outside the city. Beijing could provide considerable advantages to a company eager to expand throughout China. A preliminary investigation indicated that several poultry producers were operating just outside the city. Yet, politically and operationally, Beijing would be more of a gamble than alternative locations. High profile operations heightened the possibility of government interference for political purposes. Weighing the Decision In his heart, Tony Wang knew he was a man who liked taking risks, and clearly, China qualified as the risk of a lifetime. However, it was also clear that the location of the first store could mitigate much of the obvious risk of moving into China. Left undetermined was whether the low risk alternatives were worth pursuing. What was needed was to weigh the possibility of reducing the risks against the potential benefits that could be achieved through the investment. Clearly, Wang had staked out a position as the person who could bring KFC into China. However, he now had different responsibilities which also demanded his attention and for which he would surely be evaluated. He was certain that there would be little second-guessing by Richard Mayer if he recommended that after careful consideration, KFC should hold off for the present from China. He also realized that, because there were no competitors as yet in China, the present time could be the most opportune time for making the move. Indeed, even if a Chinese location were selected, it would likely take years of negotiations before operations could start. To delay any further risked ceding the market to others. The challenge to Wang would be in balancing these possible risks with the possible returns.

The Richard Ivey School of Business gratefully acknowledges the generous support of The Federation of Canadian Municipalities’ Open City Project through a grant from the Canadian International Development Agency and by The University of Western Ontario in the development of these learning materials.

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Exhibit 1

PARTIAL MAP OF PACIFIC ASIAN COUNTRIES

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Exhibit 2

SELECTED COUNTRY STATISTICS — SOUTHEAST ASIA AND CHINA (1986)

Population (millions)

Life Expectancy

GNP per Capita (US$)

Annual Real GNP Growth

Rate

Number of KFC Units

KFC Sales (US$ millions)

Thailand Singapore Malaysia Indonesia Hong Kong PRC

52.6

2.6

16.1

166.6

5.4

1,054.0

64

73

68

55

76

69

790

7,450

1,830

500

7,030

300

5.3%

7.3%

1.8%

1.2%

12.1%

7.9%

4

26

53

25

4

—

1.5

15.0

27.0

6.8

2.7

—

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