Read the following case and answer the question

Q: 1.For whole foods, what strategic choices were most evident in their operations? How did these choices aid them in overcoming possible mobility barriers for the emerging industry?

2.Porter argues that the absence of rules is both a risk and a source of opportunity in emerging industries. Do you agree or disagree? Justify your opinion and this can be done by relating it to the case study.

Use of Local Ingredients

Compared to KFC, which entered China in 1987, McDonalds was a late entrant. However, its name and trademark, which were symbols of America, and its ability to adapt quickly to local conditions were advantages over many competitors.With its vast capital and technological know-how, McDonalds had developed its own internal supply network, including farms in China since the early 1990s, to sell to both the domestic and export markets. By forging joint-venture ties with powerful Chinese partners (eg, the state-owned General Corporation of Beijing Agriculture, Industry and Commerce), McDonalds had established a network of local farmers, food-processing manufacturers and other suppliers. It also helped local industries develop specialised infrastructure where none had existed previously. By 2006, 95% of materials employed by McDonalds in its supply chain for the Chinese market (eg, beef, potatoes, milk and vegetables) were sourced from the country.

Unique Store Design and Innovative Chinese Menu

To blend into the local culture, McDonalds decorated its restaurants with designs symbolising traditional Chinese culture. For example, during major Chinese festivals such as the Chinese Lunar New Year and mid-autumn celebration, it decorated store interiors with traditional Chinese paper artred paper cut-outs of Chinese characters and pictures of auspicious symbolslike many local Chinese restaurants did. It also offered special festive items, such as the Prosperity Burger during the Lunar New Year. Just as KFC had capitalised on Chineses preference for chicken over beef,8 McDonalds adapted its menu in China to focus on chicken burgers and spicy chicken wings. From time to time, other side-dishes inspired by the Chinese diet, such as red bean pie and seafood soup, were added to the menu. However, prior market test results showed that McDonalds Fantastic Rice Burger (a burger in between two patties of rice) launched in Hong Kong in 2006 was not that appealing to mainland Chinese consumers, despite rice being the staple food. Thus, the company only launched the rice burger as a promotional item in mainland China.9

Drive-Through and 24-Hour Services

In 2005, to compete with KFC,10 which had announced the debut of Chinas first drive-through restaurant in late 2002, McDonalds partnered with Sinopec, Chinas largest petrol retailer, to build McDonalds drive-through restaurants at some of Sinopecs 30,000 petrol stations in China.11 With increased car ownership and a rapidly expanding middle class, McDonalds saw a demand for food on the go. Additionally, with teens and young adults growing appetite for Western food and nightlife, McDonalds had begun extending its business hours to 24 hours per day since the beginning of 2006. By mid-2007, nearly half of McDonalds 800 restaurants in China operated 24 hours per day; 60% of its restaurants in southern China were open 24 hours, compared with 45% in the north.

Alliance with Internet Shopping Site and Delivery Service

The changing Chinese lifestyle was evident in the growing popularity of internet shopping among Chinas younger generation. To increase its exposure and attract these internet users, McDonalds China partnered with a popular Chinese online shopping site, Taobao.com,13 in September 2007 to give online shoppers coupons for McDonalds food and other promotional items. Additionally, diners in McDonalds restaurants were given a Rmb 2014 cash coupon for Taobao.com for every Super Value Meal they purchased.¹⁵Although consumers were unable to place food orders online, the partnership gave McDonalds a greater online presence than its direct competitors. To further accommodate the fast-paced lifestyle of young Chinese and to catch up with rival KFC, it launched home delivery service from its 42 outlets in Shanghai in early 2008, covering half the citys population of 14 million.

Tier Pricing

Customers in the US ate at McDonalds because of its speed, convenience and relatively cheap food. Young Chinese customers had a different view; they visited McDonalds and other Western restaurants or caf chains because they were trendy places to socialise with friends and relax, even though the food was more expensive than at local restaurants. To respond to uneven wealth distribution in such a big country and to counter the impact of food price inflation since 2007, McDonalds explored the use of a tier pricing model in China, as it had in the US and European markets and some places in Asia such as Taiwan and Japan, to sell products at a range of prices for consumers with different purchasing power.19 By partitioning the country into a few districts, prices were adjusted according to income levels, the consumer price index and other cost factors for each district.

Appeal to Nationalism in Advertising

In 2008, Beijing hosted the Olympic Games. McDonalds had built most of its global marketing campaign around the theme of advocating Olympics spirit among people from all over the world and promoting an active balanced lifestyle. However, this universal message gave way to a nationalistic appeal in China, where McDonalds used the Chinese slogan wo jiu xihuan zhongguo ying (Im lovin it when China wins) as part of its localisation strategy.

Infusion of Western Tradition

Despite traditionally making beef burgers, McDonalds had, upon entering China, localised its menu for the Chinese market by offering a selection of chicken products besides the traditional beef burger. Furthermore, instead of introducing breakfast items that were more traditionally Chinese in taste, McDonalds China promoted its American-style breakfast (eg, Sausage McMuffins, McEggs, and Hashbrowns) to all its branches in China in late 2006. While staying true to its heritage, Rosen considered the company to be a Chinese company operating in China with a well-established Western brand acting as a window to the West.

Controversial Issues

Amid rising inflation in China, a Chinese state-owned newspaper revealed in April 2007 that McDonalds and Yum Brands Inc (which owned KFC and Pizza Hut) had underpaid their part-time employees in Guangzhou, a first-tier25 city in southern China [see Exhibit 4]. Four months later, the state-backed All-China Federation of Trade Unions called on McDonalds to let its workers unionise and to adjust its pay. Consequently, the company publicly announced an increase in its employees pay to between12% and 56% above local minimum wages.26 In February 2008, when Chinas inflation hit an 11-year high of 8.7%, many restaurants across the country raised prices to make up for the surging costs of various materials.27 Following three separate price increases in 2007, McDonalds China quietly raised prices for almost all its products by 510% on 23 February 2008.28 Therefore, some consumers expressed dismay, as no proper formal announcement had been made. Some also expected that the appetite for McDonalds might decline, particularly among those who had travelled abroad and realised that they were paying a luxurious price at home for food that was valued lower overseas.

Social critics also pointed out that McDonalds had not applied the same health-improvement and environmental standards in China as it did in other places. 29 For example, its Happy Meals targeted at children offered better-for-you substitutes (eg, milk and Apple Dippers) in the US, but not in China. Also, McDonalds in Hong Kong observed two no-straw days every month, but this programme was not implemented in mainland China. Over growing Chinese government concern that a Western fast-food diet might cause China the same health problems (eg, obesity) considered epidemic in the West, McDonalds China claimed to be making considerable efforts to assure consumers the healthiness of its ingredients used (eg, exclusive use of free-range eggs, meat from reliable farms, refusal to use genetically modified ingredients, and no trans-fats french fries30).

INDUSTRY Western Fast-Food Chains

McDonalds rival, KFC, was the first foreign company to bring the concept of fast food to the country in 1987a full five years ahead of McDonalds entry into China. Although the standard KFC meal cost almost one-tenth the monthly income of urban residents of Beijing then, more than 2,000 buckets of fried chicken were sold on the opening day, when the line of customers stretched 50 metres out the door. KFCs success had lured McDonalds to the Chinese market in October 1990. Again, despite the high price it charged, the Ronald McDonald clown, Golden Arches and Big Mac attracted many local consumers to the restaurant. That same year, Pizza Hut also opened its first store in Beijing and introduced another new conceptthat of casual dining . Many Chinese in those early days considered dining at KFC, McDonalds or Pizza Hut a luxury.

Booming Fast-Food Sector

Companies that originated in Asia and which were familiar with both Chinese tastes and Western management styles also emerged in China during the economic reform. For example, Hong Kongs Cafe de Coral,36 the market leader of the fast food sector in Hong Kong, expanded its market to the mainland China in 1992 by offering both Chinese and Western food. Taiwans Ting Hsin International Group entered China in 1994 and introduced its Dicos37-brand fried chicken. Another popular Asian fast-food brand was Japans noodle chain, Ajisen Ramen,38 which entered China in 1995. As foreign fast-food companies sprang up quickly during the 1990s, the Chinese government expected the fast-food sector to grow rapidly in the country and contributed significantly to restaurant industry revenues. Such governmental estimation had stimulated the establishment of many home-grown fast-food chains, which offered more-Chinese menus and lower prices than their foreign counterparts. However, many of them were short-lived because they failed to develop systems like those of foreign chains, which oversaw every detail of the business, including site selection, purchasing of ingredients, food preparation, service delivery, restaurant hygiene, and staff training and management. To assure staff quality, McDonalds trained its staff at its corporate schools, Hamburger University, which had a branch campus in Hong Kong; whereas KFC tailored its education development centre especially for China and required each employee to go through a 200-hour training programme.

Chinese Fast-Food Chains

In 2001, some local Chinese fast-food chains began to update and standardise their systems. Malan Noodles40, established in 1993, was one of the successful Chinese fast-food chains. In 1999, Malan Noodles was Chinas most popular fast -food chain after KFC and McDonalds, and it set up its first overseas outlet in Los Angeles in the same year. Daniang Dumpling was another successful Chinese chain. It began operations in April 1996, selling dumplings of different flavours and cooking methods. It also offered a variety of traditional Chinese dishes and, until 2008, owned more than 300 stores in China. Other popular Chinese chains included Eastern Dumpling King, YongHe King and Kungfu Catering. These local Chinese chains mostly concentrated their business in urban cities in specific regions and offered food-delivery service. Generally, foreign brands competed for national market share, whereas many local brands concentrated on specific regions. Inadequate funding was a big stumbling block for Chinese fast-food chains, some of which resorted to local or international venture capital or capital markets to raise business development funds. In 1990s when the presence of foreign restaurants mushroomed in China, there were still many large, foreign fast-food chains eyeing the growing market in mainland China. Both McDonalds and Burger King had a disadvantage compared to KFC because their core products were based on beef rather than chicken. Another burger restaurant was Japans Mos Burger which targeted mainland China in 2008. Growing disposable income in urban China had pushed customers theme restaurants such as Rainforest Cafe entered the Western fast-food market in China and won the favour of many Chinese adults and children. Other fast-food restaurants such as the USs Subway, which primarily sold sandwiches and salads, also stepped in to fill the healthy-fast-food niche. The success of coffee chains such as Starbucks, which appealed to youngsters and workers on the move, also forced fast-food operators to create more sophisticated eating environments.