Case Study 1 Introduction Since KFC opened the first outlet in Beijing in 1987, the fast-food giant has occupied its dominant position in China(Bell and Shelman 2011). As KFC expands rapidly in China, it formulates specific strategy aiming to Chinese customers and accomplishes unprecedented success. Among all the strategies, the localization strategy and the different operation management contribute significantly. While analyzing such strategies, benefits and weakness both emerge and some questions need to be resolved. What is the best business strategy to ensure long term success for KFC in China?
What are three key challenges to its localization strategy that KFC China might face in the future? I would give analysis to the strategies and illustrate the conceivable challenges. Analysis • Strategies • Company-owned Outlets Strategy KFC employs an operation strategy different from other fast-food chains. As Bell and Shelman (2011)agree, KFC China sticks to the strategy of company-owned outlets, which asks the headquarter to closely monitor all the outlets. Up to ninety per cent of the outlets in China are comprised of company-owned outlets. According to YUM! Restaurants(China) Investment Company Limited(n. . ), the only way to franchise is to purchase an profitable ongoing restaurant and take courses to be qualified to own the restaurant. Such strategy guarantees the reputation of KFC and creates a win-win situation. However, owning most restaurants and strictly selecting franchisees increases the initial cost of opening a new outlet. • Localization Strategy Localization has long been the outstanding merit of KFC compared with other western fast-food chains. It alters the domestic U. S. business mode and adjusts the strategy to cater to Chinese customers(Bell and Shelman 2011).
KFC China emphasize on customer service and Chinese-styled fast food. The fast-food giant has been upgrading the menu with Chinese-styled breakfast like soya milk and fried dough sticks since it started to serve Chinese customers with breakfast in 2002(Wang 2012). However, such degree of localization still has a long way to go. The regional characteristics are not presented in the menu and the service. A southerner may prefer light food, while residents from northern part of China get used to salty dishes. Also, the perception of diet differs between city dwellers and villagers.
The localization on the general level is far from perfect and there is potential market unexplored. • Solutions for a better strategy As indicated above, the current strategies have the disadvantages of high initial cost of expansion and insufficient degree of localization. However, the weakness can be endured when considering the long-term revenue. To resolve another problem, I recommend that KFC carry out further localization. According to the results of KFC SWOT ANALYSIS 2013(2013), the prominent level of localization compared with other competitors from western world acts as a strength.
To fully utilize it, enforcing deeper localization strategy would be the right choice. KFC outlets from different regions can update their menu with regional characteristics. Take breakfast as an example. In southern part of China, the menu may consist of more kinds of porridge while buns can be served in northern part. Yet, the risk is high. The measures are possible to make no difference. Overall, the prospect of successful further localization overweighs the risk. Spanning 9. 6 million square kilometers, China consists of 34 provinces, autonomous regions, directly governed city regions and special administrative regions(China 2010).
The diverse regional differences matter significantly. Although risk still exists, the benefit of exploring the potential market is attractive enough for KFC to take the risk. Therefore, to ensure long term success for KFC in the future, KFC should adhere to the company-owned outlets strategy and enforce further localization. • Three Key Challenges Localization strategy plays an imperative role in the expansion in the future. It is necessary to discuss the key challenges KFC will meet in the future. • The First Challenge
The first challenge comes from the dilemma between additional costs and the benefit generated from the adjustment for regional differences. As mentioned before, further localization is a feasible solution to ensure long-term success. Nevertheless, it demands not only fund but also human resources. New products have to be developed, resulting in the accompanying new advertisement. Employees have to learn the new cooking method and use the localized recipe. Additional costs then arise and managers have to do trade-off between the costs and the benefits. The Second Challenge The second challenge comes from labor force. The exhausted demographic dividend will trigger a shortage of 140 million workers in China in the near future(Evans-Pritchart 2013). As the supply of labor shrinks, the equilibrium condition will alter. Thus, KFC has to increase the real wage to recruit enough employees. As the KFC SWOT ANALYSIS 2013(2013) suggests, high employee turnover also raises the risk of unexpected costs, for the work in KFC is low paid and doesn’t require specific technical skills. • The Third Challenge
The third challenge is the contradiction between healthy diet and fast-food. These years, Chinese are aware of the importance of a balanced diet(Atsmon, Y. , Magni, M. , Li, L. and Liao, W. 2012). The entrenched stereotype that fast-food is deemed as junk food has jeopardized the reputation of KFC. Moreover, scandals over misuse of drugs make things worse. Back in 2005, the misuse of Sudan I in ‘New Orleans roast chicken’ series caused trust crisis(Banned dye Sudan I found in KFC sauce 2005). These days, again KFC is trapped in the ‘scandal over misuse of drugs by its poultry suppliers’(McDonald 2013).
Although KFC has made efforts to add healthy elements to the process of localization, the impact of additives scandals and the stereotype of regarding fast-food as ‘junk food’ make it difficult for KFC to proceed further localization. Conclusion In the case study, I analyzed the strategies and possible challenges. While stick to the current company-owned strategy, it would be better to implement further localization strategy. In the process of localization, KFC will encounter challenges like additional costs brought by further localization, costly and unstable labor force, and prevalent concept of healthy diet.
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