Kfc in china case study solution

990G01 KENTUCKY FRIED CHICKEN IN CHINA (A) Professor Allen J. Morrison prepared this 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.

This document is authorized for use only in Sandra Triana's MBA (Roberto de la Vega Vallejo) 2018-1 course at Pontificia Universidad Javeriana, from January 2018 to July 2018.

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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