PART 1 Closing Cases KFC in China KFC opened its first western-style restaurant in Beijing in 1987. It has rapidly expanded using a blend of franchising and localization strategies. It has grown from small beginnings to become China's largest foreign fast food chain. It has over 2,200 branches in 450 Chinese cities. It is a far bigger enter- prise than any of the other multinational fast food chains that have tried to trade in the potentially high-risk Chinese market. The first KFC store in China was opened close to Tiananmen Square. It is still the largest KFC outlet worldwide. Such has been the transition in fortunes for KFC and other multinational fast food outlets that initially, when they were opened, the most frequent customers were foreigners living in China. Local con- sumers could not afford to eat there. Yum Brands .owns the KFC and Pizza Hut brands. It quickly discovered that it is not enough to rely on a well- known foreign brand name to ensure growth. Instead, it is important to adapt to local tastes and lifestyles. KFC has, therefore, adapted its menu by adding a variety of dishes that are familiar to the Chinese. Year on year, Yum's sales in China have increased; it was the first foreign fast food company to move into China and including the Pizza Hut stores it has 2,500 branches with annual sales of $2 billion. The nearest multinational competi- tor is McDonald's with just 900 branches. There is still consid- erable room for expansion, as China's fast food market is estimated to be worth $28 billion per year. During 2008, with the Beijing Olympics and the higher profile that China enjoyed, Yum intended to add 425 new branches, while McDonald's aimed to top the 1,000 mark with 125 new stores. In 2007 Yum's China Division's operating profit rose by 30 percent to $375 million. This was a quarter of the entire multinationals' operating profit. The Chief Executive of Yum, David Novak, predicted that by 2017 the Chinese oper- ation would contribute 40 percent of the overall profits. Perceptions of Pizza Hut, in particular, are very different in China than in many other markets. In Europe and the United States, for example, Pizza Huts are regarded as being relatively inexpensive, but in China they are considered to be up-market and, therefore, Yum has targeted the estimated 250 million middle class Chinese consumers. In a unique reverse strategy the success of Yum's Chinese business, particularly by introducing healthier products and breaking away from the notion that KFC produces junk food, Novak explained to shareholders in December 2007: "Let's learn from our most successful business. Let's learn from our China business." The idea will be to adapt the China model across the rest of the world and increase the emphasis on breakfast and evening sales and provide broader menus. Yum China is not content with simply taking China's fast food chicken market by storm. They are now planning the expan- sion of a traditional Chinese fast food chain called East Dawning. This will take on Kung Fu Catering Management and the hotpot chain, Inner Mongolia Little Sheep. Ten East Dawning branches have been operating in Shanghai since 2005. Yum tested the Beijing market prior to the Olympics. The branches offer tradi- tional Chinese dishes. Initially, the novelty of KFC restaurants won over many Chinese customers. Fast food was considered to be exotic and Chinese consumers were curious. At first, KFC took advantage of the situation, charging relatively high prices. By the mid-1990s there were about 100 fast food restaurants around Beijing. It quickly became obvious that the market was not growing fast enough, as many Chinese considered that the fast food was not as good as their own Chinese cuisine. During Chinese festivals tradi- tional Chinese restaurants were full to bursting, while KFC restau- rants and McDonald's were almost empty. There were a number of reasons for this, some economic, some social and others ideo- logical, but culture played the most important role. The Chinese have a traditional culture of food and drink and fast food could not compare with it. Once the curiosity of the new fast food restaurants had waned. Chinese people returned to their own cuisine. In order to first survive and then to prosper, KFC had to combine the elements of the two different cuisine cultures. In other words, it had to absorb clements of Chinese cuisine, In 2001 KFC introduced Chinese food to their menus. They started with preserved Sichuan pickle and shredded pork soup. This was a success and mushroom rice, tomato and egg soup and Peking chicken rolls were also added to the menu. McDonald's tried to follow suit and began to modify the design of the restaurants and add distinctly Chinese style soups to their menu. In effect, both KFC and McDonald's had developed inter- cultural management. They had retained American business culture but supplemented it with Chinese traditional culture. The businesses had used localization strategies to reinterpret American business culture, Why then is KFC far more popular in China than McDonald's? Certainly, KFC has stressed that their own version of fast food is far healthier than other fast food options. China also is an enomous consumer of fried chicken and customers prefer it to hamburgers, KFC also has a far more Chinese-specific menu than McDonald's and, finally, KFC has made great use of deals and coupons and around 50 percent of their customers use coupons to purchase food from their branches. On January 16, 2004, KFC had opened its one thousandth restaurant in China. The success of KFC was certainly linked to both its franchise policy and the scientific nature of its man- agerial operations. This was known as CHAMPS. It measures operational basics of Cleanliness, Hospitality, Accuracy, Maintenance, Product quality and Speed. From the outset KFC took advantage of the political changes in China and the different approach of the Chinese government that began to welcome western investors. KFC certainly had a synergy with China from the very beginning, CHAPTERS. ETHICS AND SOCIAL RESPONSIBILITY IN INTERNATIONAL BUSINESS 165 The ulty industry in China was one of the major priorities of the agricultural modernization plans and KFC, as a predom inantly ultry food chain, mained enormous support from the Chinese government Financially, KC's entry into the Chinese market came at an ideal time PepsiCo had only recently purchased the company and the business now had enormous financial mus cle. The market potential in China was enormous and chicken was not only more popular, but cheaper and more widely available than beel KFC also had the ideal image as far as the Chinese consumer was concerned, the clean branches were considered to be hygienic and KFC stressed the high levels of quality and service throughout all of their outlets There were, however, some weaknesses and potential threats. The Chinese government provides far more support to businesses that are bringing technology into their country and KFC was a service provider. The setting up of each new restau- rant was a high-cost venture and initially KFC had problems in ensuring high quality supplies from local producers. Human resource management was difficult in a culture where family contacts are often used to obtain sought-after jobs. There was also a lack of Chinese-speaking store outlet managers and ini- tially there were problems with the management and local employees. KFC's imposed quality standards were at variance with Chinese partners, who believed that they knew what Chinese customers wanted more than KFC. In order to adapt and to cater for the Chinese market, KFC's strategy was to offer a blend of western style products, which would appeal to younger consumers that were eager to try foreign food, while at the same time developing traditional Chinese-style fast food. The net outcome was a blend of both cast and west, with Chinese seafood and Hong Kong milk tca sitting alongside orange juice, fries and western chicken burg- ers. The U.S. brand image was retained, which was consistent with KFC's globalization strategy, but the incorporation of Chinese side dishes was a key localization strategy One of the major cultural differences between the United States and China is the perceived gulf between American indi- vidualism and Chinese collectivism. Taking this into account, it was obviously a key influence on the advertising and on the strategies used by KFC in China. Individualism emphasizes achievement, freedom, competition, pleasure and independence. On the other hand, collectivism suggests security, hierarchy, cooperation, low competition and interdependence. Harmony and conformity are also a key aspect of collectivism. KFC there- fore had to adapt its advertising, in order to communicate how their products would satisfy these customer needs. The first key aspect was to become family and group orientated, Commercials promoted the KFC bucket, which could be enjoyed by the whole family; this fitted well with the value systems in China. Big families with three generations and relatives were targeted by the advertising. As far as groups were concerned, KFC commercials targeted friends having fun and work colleagues. KFC also used emotional appeals, which would find resonance in the Chinese market. They focused on patriotism, respect for the elderly, In December 2003 KFC made a major mistake when it promoted a new chicken wrap. It featured an empty Cantonese restaurant and a packed KFC outlet and caused enormous reaction, KI was accused of being arrogant and there was considerable backlash KFC has since been extremely careful to avoid offending Chinese culture, As with any foreign product or service, there is always the question of cultural imperialism and the fact that weutem uyle fast food can be seen as an invisible cultural invasion that is trying to overwhelm Iraditional Chinese culture. The Chinese were particularly concerned about the influence of fast food on the young and whether it would, in effect, separate the young from their own cultural heritage. Much of this attitude has changed, as China is no longer isolationist and there is no longer a fascination for fast food just because it is foreign KFC is a prime example of how its convenience fits in with Chinese lifestyle and the fact that it has adapted to the fast pace of modern Chinese life. Understandably, there have also been health concerns and in China there was a belief that too much fast food would cause obesity and other health problems. So far, KFC has tried to mitigate any particular problems in rela- tion to health issues by focusing on the nutritional value KFC's success in China has undoubtedly been a result of understanding the country and its culture. The company has recognized that the host culture is an important consideration and cannot be overwhelmed by standardized global market ing and advertising. Undoubtedly, KFC is the most popular international brand in China. The localization strategy has certainly worked Yum Brands are also trying to replicate their success with KFC across their other brands. Su believes that Pizza Hut will be the next major success story. China has rising incomes and economic growth; both key drivers in helping Pizza Hut to become a major brand, Taco Bell is also being tested in the Chinese market, with a test restaurant in Shanghai. They hope the model will work across China and if it does it will be another big success story. Sources: China Economic Net (www.ence.cn), China Daily (www. chicadaily.com). The China Ex Pat (www.thechinaexpat.com), China Herald (www.chinaherald.net). People's Daily (www.english. peopledaily.com.cn). All Business (www.allbusiness.com), and Eats Online (www.cats.com) The Oil Curse cherishing the young, friendship and romantic love. In Chapter 5's closing case, we noted that development cconomists and poverty specialists often view the discovery of oil as a curse rather than a blessing. Consider the case of Nigeria. 4. When did KFC open its first ever drive through restaurant and how many Pizza Hut home delivery services are operating in mainland China