The current international issues that KFC faces are mainly the result of the policy adopted more than 30 years by J.Y. Brown. The idea was to conquer “randomly” some countries by sending highly capable managers working on their own.
This approach made KFC international a much diversified chain restaurant, an approach that at least enables the managers to stick perfectly to the demand on the market. Needless to say that without the independence Loy Weston enjoyed, he wouldn’t had been able to penetrate the Japanese market.
The main advantage of such a strategy is relying on the capacity of the manager working at the front to open the market: it is cheap. As the firm grows and markets are increasingly penetrated, the need of consistency becomes prevalent. Consistency in the meal, in the management of the stores etc. is necessary to monitor correctly the costs, to rationalise the supply chain.
Then the firm must find the balance between monitoring which maximises the production expenditures and independency which brings competitiveness on a given market. The intervention of Miles was necessary, the firm definitely needed to rationalise its international business process. However, the opened conflict with the management in Tokyo is the consequence of a too radical strategy and a lack of communication due to a top-to-bottom approach. The upheaval experienced by the local teams was far more important, not managed by the US Office and thus barely understood.
Facing with the difficulties, KFC overreacted regarding its international management. Considering that it was loosing money, the headquarters imposed a highly restrictive monitoring on the cost with its strategy planning. The strategy planning was necessary but it was implemented as a set of rules to follow, asking a lot of work from the local headquarters.
From a total independency the foreign branches had to report everything as if the fiscal year ended every month! Worst than curving the productivity of the local branches down, the fact that the new strategy was implemented without paying attention to the local management issues created tensions among the firm. How should react a growing business like the Japanese one if it is asked to change everything in its way of working? Monitoring shouldn’t mean preventing the local branches from initiatives: that was the main error of Miles who didn’t get the idea of necessary adaptation to the different markets.
On further examination we must however recognise that the implementation of a strategy planning, whatever bad this one was, was helpful to KFC. The return to basis was probably the most important and clever business line adopted; it fixed the main issues created by the “mud-on-the-map” strategy of Brown which allocated far more independency to the subsidiaries, dilapidating the value of KFC and creating as much different type of KFC as there were branches.
As KFC was acquired, the new management raised interesting issues in the foreign policy of the restaurant chain. The success of the rationalisation must not overlook the poor growth in the Asian market. Knowing perfectly the Japanese market, Loy didn’t make the most of the possible opportunities in the Asian market. Loy built his own Empire on what he knew the best: Japan. KFC may need an entrepreneur like Loy on the other markets, on the other hand countries such as Japan better need manager that are more oriented on a sustainable growth than discovering new markets.
We can summarise our assessment of the market as follows:
– Difficulties to balance between monitoring and giving independency to the local branches;
– Penetrating the Asian Market is not as easy as penetrating a unique market. It means that the objectives of Meyer are maybe too high. Is that not better to focus on some markets, make them mature and then conquering a new market?
– Lucid strategy: Meyer knows that his main difficulty is to convince Loy to follow orders. The international policy must encourage such types of entrepreneurs but at the same time must remove them for other still-to-conquer markets when the firm is becoming mature.
– Good framework settled by the strategy planning but it must be re-design to be more flexible and efficient. The current operation system can be a real disadvantage: for example by asking too high return margin regardless the situation in some countries can be the best way to encourage competition.
NB:
See Table in Exhibit 1 for the Balance between Monitored Structure and Independent one.
2- What changes (if any) should Dick Mayer make? Specifically, what should he do about Loy Weston? And what changes (if any) would you propose at the headquarters?
Some changes should be made by Mayer in his division in order to manage to deal with the need for growth in overseas units. First, he should do something about Loy Weston. This one undoubtedly was “the man of the situation” for breaking into the Japanese market (thanks to his background): he was a real go-getter. But he had no organizational skills and at this stage of the evolution Mayer needed someone who could compromise with headquarters demands. Moreover Weston’s position in the company didn’t seem to be relevant. He’s currently VP for North Pacific which is a position that implies more managerial skills than operational ones. He is an entrepreneur.
We can see that the progress in other countries of this area is slow. Maybe Weston is just not interested in other countries and his appointment to that position was a mistake. Mayer should authorize headquarters’ involvement to understand what is wrong with him. He could then either give him incentives to focus on new markets or get rid of him. If so, he should find new go-getters specialized in these four new countries. Moreover, he has to take into account the fact that Weston might not be able to compromise with other people from the headquarters considering his tamper. Mayer should really think about whether Weston is still useful in the new company’s perspective.
Mayer should also change things in the whole division if he wants to deal with his four main issues. The main answer is the need for a more consistent point of view among all the stakeholders, from the headquarters as from overseas units. We can see that within few years the strategy KFC-I went from “laissez-faire” to very strict strategic planning; that means from an extreme to another. It is understandable that overseas managers get confused and oppose some resistance to this turn.
KFC-I can learn from the US experience (e.g. with QSC control) but Mayer can’t keep an “ethnocentric” point of view and must take into account each area’s characteristics. The headquarters should set up process in order to have a more pervasive feedback than just financial reporting schedules. Those can’t help what’s really wrong if an overseas unit has troubles. That means that KFC-I should keep autonomy within the company and not to be too much tied to the rest with strict report package: this one should be lighten in order to give more space for qualitative data.
It’s the same with the planning cycle of calendar. In order to be more flexible this calendar should be lighten. It should concern only regional areas and KFC-I headquarters. The latest could then have another reporting calendar with KFC Corp.
To strengthen the relationship between overseas units and KFC-I Mayer should increase the communication in a concrete manner. For example he might institute meetings with VPs from KFC-I (finance, planning, marketing …) and regional VPs on a regular basis (every two months). These meetings should have two purposes: to educate regional VPs to the economic reality of a global company (to explain why reporting and consistency is needed) and to exchange points of view to find a golden mean on what level of freedom is needed.
These meetings could also be a way for Mayer to see if regional managers can adapt the new situation. If they can’t, he should be ready to train them or to hire new VPs for the expansion stage.
The success factor is to find the right flexibility.
3- Prepare a specific action program for Mayer to help him deal with the need for continued growth in Japan.
Prepare a specific action plan means first of all set the goals that must be pursued. Mike Miles asked Loy Weston to follow specific headquarters’ standards and procedures, even for a totally different country like Japan: he was trying to establish a totally centralized system. Moreover, he said that, given the high potential of the Japanese market, the Company expansion in that market had to grow a lot. Although the company had more than 400 stores in Japan, on a per capita base this represented less than one quarter the level of penetration in United States. The overseas market was not a mature one, so an aggressive growth was feasible.
But: is it possible to profitably open 1200 new stores to achieve an expansion on a per capita base that equals the US one? Of course we know that the market in which we are operating has got good potential, but how good is it? It isn’t the home market, so the situation is much more different from the US one. Considering this element, can we say that the goal of 1600 stores all over Japan is an appropriate one, or it is one-sided?
Japanese market is very important for KFC, especially if we consider that its operations count for almost 30% of all KFC-I1. If we look at the KFC trends in the Japanese market2, we see that total assets, per store average sales, revenues and earnings are still increasing, but their growth is considerably slowing down compared to the previous years. To solve this problem Miles centralized all the functions, but in this way the company went from an extreme to another. What is needed is a balanced mix of centralized and decentralized power.
First of all, what it is needed is a marketing research among the Japanese consumers regarding taste and price of the products to decide whether change or not the menu, standardizing it with the American one, predict future trends and understand how big can the market be. The goal of 1200 new stores was maybe too big: people must have challenging and complicate objectives, but not impossible ones, and we must be sure of what tasks we are assigning to them.
Then Mayer must arrange a meeting with Weston and Shin Ohkawara, the new chief executive in Japan, and discuss with them the future plans. They will have proposals coming directly from the field and Mayer has to listen to them. The marketing research done and the on-field experience acquired from the two managers in the previous years are really important for the decision-making process. Knowing which products the Japanese customers like will enable the Company to prepare a special menu for them, with its own quality standards, so that the expansion can be based on products that are already tested. This is complicate, but can lead to greater profits3.
Another issue that must be raised during the meeting is the price of the meals. If selling at lower prices attracts more people, it is good to set a cheap price, especially during the expansion phase, even if they have to agree on its level and find a fair one for both parties. Maybe 20% above supermarket fresh chicken prices is too much, but the US pricing can also reduce the market expansion, that at the moment is the primary goal. The company must increase a little actual costs to be able to focus on the quality, service and cleanliness (QSC) standard.
The respect of the QSC, anyway, must be strictly under the KFC supervision. This implies that the company builds a function with the specific task of monitoring and controlling all the stores. This function must be strictly centralized and has to ensure that all the standards are met from the different stores.
The expansion strategy, of course, will take a lot of the company’s energies and resources; for this reason maybe the best solution can be to rely on franchising4; in this way the company will just have the role of supervisor and will be able to put much more efforts on the overall growth in the country. Moreover, considered the fact that, except for a few countries, the company has just a small percentage of owned subsidiaries abroad, the argument is even more valid.
After all these points are set, they have to move to another branch of the decision-making process: how to expand? The company must try to open new stores first of all in Tokyo, the most populated and highest density city, then start to expand in the other big cities like Yokoama, Osaka, Nagoro, Sapporo, Kobe, Kyoto, Fukuoka and Kawasaki5.
During the expansion the company must advertise the product putting a lot of emphasis on the American brand name, pushing on marketing and showing that it is a fashion product6; KFC, moreover, has to launch an hiring campaign for local managers, asking for specific skills and abilities for the new facilities and all the different areas.
The right balance of centralization and decentralization, expansion objective and prices, will enable the company to achieve short and long-term goals and to satisfy both KFC and Mitsubishi requests. This is a crucial element: the company can’t forget it has a partner, so it has to be privy to its needs and requests and try to set fair goals also in respect of its partner’s objectives.
KFC has to enforce the relationship with Mitsubishi, showing them to be sensible to their needs, get informed about Mitsubishi requests (mostly long-term goals) and try to not contrast with them, enabling the Japanese subsidiary to satisfy both of them.
We want to highlight that, following this action program, the company will go through the three stages in country management evolution; they first relied on Weston, the go-getter, as they call him, then they will look for local baronies, to give a better feeling of the company and to exploit their experience, and finally they will have periodic meetings with the managers that operate in Japan that will give them constant feedback about the business there and will propose new planning, measurement and business development ideas; in this way they will strictly cooperate with the headquarters, and the company will have a successful strategy thanks to the right balance between centralization and decentralization.
