Analysis of Kfc. The Forces and KFC Essay
The Forces and KFC | | James Watson 12/23/2012 | Executive Summary The seven international environmental forces that impact international business are natural resources and environmental sustainability, economic and socioeconomic forces, political forces, intellectual property and other legal forces, understanding the international monetary system and financial forces, labor forces, and international competitive strategy. While some of the factors mentioned above are completely under the control and maneuverability of a country, others are inherited and have to be dealt with in order for a country to become competitive.
The focus of this report will be on KFC and how they have handled the various forces mentioned earlier and have managed to become an international powerhouse. More specifically this report will detail KFCs success in China. KFC belongs to Yum! brands which used to be named Tricon Global Restaurants, Inc. , the world’s largest food company. Tricon Global Restaurants, Inc. was a spin-off of PepsiCo, Inc. (KFC History). It’s of interest to mention that according to KFC’s history web page in 1964 the first international KFC was actually in Canada and the first oversees KFC was in England (KFC History).
I assume these previous locations don’t fully count as international or it doesn’t seem to count as international in the restaurant world because there is not much about the obstacles or forces KFC faced while achieving the above. The chain has grown to more than 3,200 locations in 650 cities, according to Bloomberg, there is no arguing that KFC is successful. The Forces Natural resources and environmental sustainability are basic factors that a country inherits and either has no control or very limited control over such as topography, climate, and natural resources (Ball, Geringer, Minor, and McNett ).
Terrain and climate can be wildly different in the same country, mountains, deserts, plains and bodies of water all with their corresponding climate can be present or absent in any combination in a country. Natural resources are energy sources like petroleum, coal, natural gas, and nuclear power. Environmental sustainability is an approach by businesses to operate without reducing the capacity of the environment to provide for future generations (Ball, Geringer, Minor, and McNett ).
Another uncontrollable force is the economic and socioeconomic force in a country. Socioeconomic provides information on the overall number of people, the number of people who can buy a business’ product, population density and distribution. While economic information is income distribution, discretionary income, currency conversion, how economically developed a country is, and gross national income. Political forces are a country’s level of government ownership of businesses, government protection, government stability, and trade restrictions.
Intellectual property and other legal forces is perhaps the most complex of the forces. Just the number of laws can make it difficult for any business to successful internationally. An awareness of a country’s legal system is necessary as well as the sources of international law, and litigation. Also, there are U. S. laws that affect international business like the accounting law and the foreign corrupt practices act. Intellectual property are copyrights, patents, trademarks, and trade names.
The international monetary system is based on institutions, agreements, rules, and processes that allow for the payments, currency exchange, and movements of capital required by international transactions (Ball, Geringer, Minor, and McNett ). The labor force consists of the quality, quantity, and composition of the available labor in a nation. Within the labor force things that must be acknowledged are urbanization of the workforce, immigrant labor, child labor, brain drain, sexism, social status and labor unions. Lastly there is the international competitive strategy force.
While all the other forces deal mainly on external forces, a business’s competitive strategy is more of a focus on the internal workings to do all it can to be successful. This consists of strategic planning, skill level, knowledge management, corporate objectives, mission, vision, and value statements. The economic future of China is what so many businesses are really going after. Chinas economy has grown steadily over the past thirty or so years. In the last ten years, disposable income has quadrupled from $760 to about $3000 per person on average (Censky).
This new found middle class and their discretionary income is what KFC and many other businesses are focusing on. With an increasing amount of consumption for western type luxury’s and with an eagerness to adopt an easier and faster way of life, Chinese consumers are the target for KFC. While income distribution is not at all equal, with many rural Chinese having disposable income of about $1000 per year while urban Chinese in large cities like Beijing, Shanghai, and Shenzhen have around $12,000 per year (Censky), the up and coming Chinese are willing to spend their income on fast food.
It must be mentioned that Chinas economic boom and therefore the rise of Chinese disposable income has come with a price when it concerns the country’s environmental climate. With the speed of industrialization, China has compromised much of its forests, rivers, and air quality. While KFC has not had to deal with any environmental forces it has to be conscious of being a good business that doesn’t contribute to any deterioration of the environment. The socioeconomic situation in China has required KFC to adapt to local tastes and lifestyles.
In 2008, KFC’s in China added items to their menu that are similar to what Chinese consumers buy at street stalls or small restaurants. It turns out some Chinese aren’t really interested in fried chicken. In a country where there is increasing worry about obesity and general health, many people want choices, or as a young Shanghai employee put it ” I avoid touching fried stuff because it’s bad for one’s health,” but she does visit KFC three or four times a week to eat fish, porridge and egg tarts (Shen).
When KFC opened its first China restaurant back in 1987, China was open to the idea of western lifestyle but even though it’s attracted to our way of life , fast food brings up other feelings among Chinese as expressed by Sam Su who has “spent the past two decades redefining fast food, which is often associated with unhealthy junk food in the West. “(Shen). Despite the junk food stigma, KFC China has been successful at beating out competitors as expressed by Denis, “While the relative prevalence of chicken over beef in the typical Chinese diet may give the Colonel’s original recipe, … that doesn’t begin to explain the extent of KFC’s success”(McMahon). One way in which KFC has dealt with the International monetary system and financial force has been by repatriating profits, which is easier to do for companies thanks to the U. S. American Jobs Creation Act of 2004 (Ball, Geringer, Minor, and McNett). Under this repatriation provision the firm is allowed a deduction equal to 85 percent of the repatriated cash amount (Ball, Geringer, Minor, and McNett ). This is of course a very attractive incentive for firms to bring their money back to the U. S. and put it to use here where the U. S.
Repatriating profits means the firm brings its profits that are earned in yen into the U. S. and then goes through a process with the government to convert it into U. S. dollars. Currently the yen is not fully convertible meaning that it’s not easily bought and sold without government restrictions. As Yum! brand CEO stated when he was interviewed by Ron Insana “We work it through Treasury. It’s a very complicated process, but we basically have no problem at all repatriating our profits”(Insana). The political, intellectual property and other legal forces can be combined into a giant hurdle that KFC has had to overcome.
China has had a strong authoritarian/ totalitarian oligarchy with figurehead leaders, although it is commonly referred to as a communist government. China is heading down the road to becoming more and more capitalist which is due to the explosion of its economic growth. This doesn’t mean that KFC had an easy time entering the country as an American business. In 1987 KFC could only do business in China by forming joint ventures, which were required by government regulations. KFC China selected local partners with government connections and effectively leveraged their tangible and intangible local resources(Cho).
By joining with local partners KFC was able to “get a foot in the door” as we say, it also allowed KFC to learn how to build a business model that would be appealing to a different culture. Once joint ventures were no longer required KFC opted to separate from their partners to better control production and quality. This of course didn’t mean that KFC was given free rein to conduct business however they please, as Evelyn mentions “Staying in the good graces of the Chinese government was difficult and time-consuming” (Iratani).
The labor force was an advantage for KFC as the population of China is over one trillion, there was no shortage of possible employees. Although special efforts by KFC were needed because in china like many Asian countries, the perception that employment should last until retirement is prevalent. As stated by Evelyn in Gimmicks, “It took KFC several years to get permission to hire part-time workers, a new concept in a country accustomed to the iron rice bowl of lifetime employment”(Iratani).
Evelyn also comments on the abundance of workers and their pay stating “200 hopefuls apply for every job opening. Trainees start at the government-mandated minimum wage of 37 cents an hour but get regular raises and bonuses”(Iratani). As for the International competitive strategy David Novak, CEO of Yum! has said “One thing we are going to do… is grow with a focus on returns. We have the highest return on invested capital of any major fast-food company. We want to continue that”(Isana) .
Not only is KFC the fast food leader in China, it went about it very carefully, after the joint ventures were over KFC hired a team that were native to Taiwan or Asia but where western educated, men that understood intuitively how to best reach the Chinese consumer and had experience in the fast food industry. If that’s not a solid management team, then I don’t know what would be. This team called the “Taiwan Gang” put KFC ahead of the competition. Another aspect of their strategy was localizing their supply. KFC currently sources 95 percent of its supplies locally(Iratani).
Of course KFC China has not been without their share of trouble Evelyn had this to say about one hurdle ” Last year, fearful parents began restricting their daughters’ visits to KFC after a media report that the chicken contained hormones that accelerated puberty. KFC strongly denied that claim” (Iratani). Its biggest legal battle that KFC has had to date is the issue of pay. In 2001, an original chicken meal costs nearly $3, the equivalent of six hours of work for the average person(Iratani). Higher wages have been demanded by a Chinese trade union, there is a huge gap in pay among KFC’s workers and their managers.
The union and KFC came to an agreement “the company with 2,000 employees on its payroll has agreed to set a minimum wage at 900 yuan (131. 7 US dollars) a month instead of the previously offered 700 yuan, and maintain an annual pay raise of 5 per cent”( KFC Agrees to Raise Workers). $131. 7 dollars a month, is this even right, fair or just another aspect of doing business internationally? Overall I would not have changed anything about how KFC conducted its international business strategy. I don’t think that KFC operated with a Christian ethic but it tried to accommodate its strategy to be more inclusive of its target consumers.
As a business, it doesn’t shock me or surprise me that they would take advantage of the labor force by literally paying them cents per hour. Of course there is only one reason that KFC does business in China and that is to make money, to increase profits and to increase shareholders returns. At the end of the day KFC is just another business after peoples discretionary money. Works Cited “KFC Agrees to Raise Workers’ Pay in China’s Liaoning. ” BBC Monitoring Asia PacificJun 08 2010. ABI/INFORM Complete; Los Angeles Times; ProQuest Newsstand. Web. 12 Dec. 2012 . “KFC History. ” KFC. N. p. , n. d. Web. 13 Dec. 2012. <http://www. fc. com/about/history. asp> Ball, Donald A. , J. Michael Geringer, Michael S. Minor, and Jeanne M. Mcnett. International Business : The Challenge of Global Competition. 12. New York: McGraw-Hill College, 2010. Print. Censky, Annalyn. “China’s Middle Class Boom. ” CNN Money 26 Jun 2012, News/Economy. Web. 20 Dec. 2012. Cho, Karen. KFC China’s Recipe for Success. Fountainebleau, France, Fountainebleau: INSEAD, 2009. ABI/INFORM Complete. Web. 11 Dec. 2012. Evelyn Iritani Special to the Tribune Evelyn Iritani is a staff writer for the Los Angeles Times,,a Tribune newspaper. “Gimmicks, Courtesies Help KFC Rule Roost in China. Chicago Tribune: 10. Sep 16 2001. Los Angeles Times; ProQuest Newsstand. Web. 11 Dec. 2012 . Insana, Ron. “Yum Brands Builds Dynasty in China ; KFC, Taco Bell Owner Sets Sights on Growth. ” USA TODAY: 0. Feb 07 2005. Los Angeles Times; ProQuest Newsstand. Web. 13 Dec. 2012 . McMahon, Denis. “Kfc in China: Secret Recipe for Success. ” Far Eastern Economic Review 172. 1 (2009): 67-8. ABI/INFORM Complete. Web. 13 Dec. 2012. Shen, Samuel. “KFC Hangs its China Expansion Hopes on Local Tastes. ” International Herald Tribune: 15. May 06 2008. Los Angeles Times; ProQuest Newsstand. Web. 12 Dec. 2012 .