KFC in Japan Case Report

Management of International Firms Case Report #2 – Kentucky Fried Chicken (Japan) Limited

June 28, 2013

Name: Yvonne Pan

Case Report #2: Kentucky Fried Chicken (Japan) Limited

I. Identifying the Problems One specific problem appears to be why the KFC in Japan is not as successful as some of the other international attempts to make KFC take hold in other nations, such as Great Britain, where there are already what can be considered four failures in foreign nations (Korea, Taiwan, Thailand, and Hong Kong). This is an important issue because Dick Mayer and the other executives of KFC-I risk losing money, a limited international presence and ultimately lost opportunities for expansion that other franchises, like McDonald's and Churches have enjoyed throughout the years. Another marketing issue is that KFC in Japan is experiencing the limited menu and inability to bring new products to markets. Initially, KFC-Japan's overall strategy was simply to bring its American product to Japan intact, with the same store design, menu and management style as existed in the United States. In addition, the Japan country manager has little experience in international operations and hired a Japanese manager from a printing company after six months. The unwillingness of KFC-Japan to begin its strategy by examining the market and determining what would or would not be acceptable in terms of product at the outset, and the KFC-Japan never takes full advantage of its Japanese partner's, who had a huge representation in the poultry market, which can help them gain a better understanding of the Japanese culture, along with a bigger presence and investment opportunities in the local market by association with Mitsubishi. This failure to use its joint venture partners in any type of serious senior management capacity, contributed to the poor operating results which the company has seen. In the greater story of the KFC-I international case study, the major focus is what Dick Mayer and other executives for KFC can do for the company in terms of strengthening

Case Report #2: Kentucky Fried Chicken (Japan) Limited

international efforts. On the surface there is the initial problem of what to do about KFC-I's supposed decline overseas is underscored by a deeper problem. This underlying problem can be expressed as one of the opinions being given to Mayer indicate, corporate headquarters interfering with local national operations to the point that the “spirit of entrepreneurship that had built the overseas business” has been lost. This conflict finally caused uncooperative among subsidiary managers and unsatisfactory performance expectations. Or, as Gary Burhow argues the issue of the appropriate management skills required to manage the company’s overseas operations, the fault lie with the lack of strategic planning and control system in the early years of KFC-I, which supposedly “led to suboptimal financial performance, inconsistent strategies, and stalled expansion into new markets.” Overall, a centralized management style due to the international strategy that adopted by KFC has resulted the company’s high turnover rate and also lowered down the employees’ morale. Furthermore, lack of local knowledge prevents KFC-I from its expansion of operations, specifically when it comes to foreign cultural goods. In the case of market expansion, tastes and consumer buying habits, as well as the willingness of host-country citizens to accept foreign brands and culture withholds significant implications for a company such as KFC. Japan is considered as a high power distance country where employees will only perform their duty if clear guidelines were given by the top management as a form of respecting the status. Cultural barriers to effective communication between the corporate headquarters and subsidiaries may lead to problems for the operation team as they may be confused about the overall strategic plan and hence might be result in inconsistency of responsibilities and ineffective of operations.

Case Report #2: Kentucky Fried Chicken (Japan) Limited

II. Situation Analysis - External Industry Analysis In terms of opportunities, there are a few specific practices of the fast food industry that lend themselves well to the idea of KFC-I broadening its horizons with foreign stores. One of these, as outlined by the case, is scale economics, which for the fast food industry depends on the volume of customers rather than the price at which the food is sold in order to make a high profit. “This made location a key success factor, and decisions on which region, town, neighborhood or even side of the street could mean the difference between success and failure” (Bartlett & Rangan). Other opportunities for growth and success for the industry in general include proper store management that limits waste and maximizes efficiency and market imaging, upon which, at least, Americans base their eating patterns, but that are not perhaps established enough in other countries for KFC-I to be an instant success. There are threats to the industry of international cuisine as well, including the lack of recognition for fast food franchises in foreign countries. One line from the case is especially effective here: “Although the distinctive architecture was a big plus in the United States, nobody in Japan recognized what we were selling, and sales were very poor” (Bartlett & Rangan). Another threat is the competition that is already established in these foreign countries, including McDonald's and Churches, either of which have a much stronger foothold in the foreign fast food market than other franchises that are holding their own, for instance, in the US. Alternatively, according to the Porter's Five Forces framework, though there is little threat of substitute products, competitive rivalry within the industry is high, while the bargaining power of suppliers is low. Fundamentally, there is little that can be done to prevent customers from shopping elsewhere in terms of fast food, while suppliers in Japan are linked to KFC in a way

Case Report #2: Kentucky Fried Chicken (Japan) Limited

they are not linked to other fast food places, giving suppliers little bargaining power if they want to sell their supplies. The customers of KFC, especially as individual buyers, have almost no bargaining power because if only one customer threatens to no longer eat at KFC, the store is not going to lower its price because the cost of losing one customer is not very great. Considering the current Japanese market for fast food, it is not difficult for KFC to enter the market if the firm adopts an appropriate entry mode. However, there are already some emerging franchise western-style restaurants in Japan, such as McDonald’s and Churches, and any new fast-food entrants would just be presenting something very similar to what’s already there. The outcome of this external analysis has lead to the establishment of Key Success Factors, which here for KFC-I in the international market include its foreign entry modes such as franchising. The franchise entry mode allows companies to capture operating economies with a better understanding and control of operations, as well as quickly expand to other locations. KFC-I is able to reap the benefits of increasing its market share. Secondly, the importance of realizing scale economies and location also contributes to the success in store growth and development. Other than that, the effective store management also is a main driver of firm’s profitability within the industry in this case. Lastly, in terms of operation, the importance of maintaining consistency of products and facilities in order to increase the chain’s overall market image can be another key factor to industry development. Overall, a combination of hyper-competitiveness, high market imaging and high volume of customers through any one particular location come to be a main determinant of KFC-I’s profitability in this case.

Case Report #2: Kentucky Fried Chicken (Japan) Limited

II. Situation Analysis - Internal Company Analysis In terms of strengths, KFC was one of the first franchised fast food companies in America, spreading quickly through the 50 states to make Kentucky Fried Chicken a household name for ordering take out or going out for fast food. This strength of franchise is as such because it indicates a stable foundation from which KFC can build in foreign nations. It also indicates that the financial strength of KFC is high, which will only be helpful in an international level. Other strengths for KFC include a joint venture in Japan with Mitsubishi, which owned poultry farming throughout the country, and the ability to focus Japan's endeavors on a highly talked-about area. Weaknesses of the company, however, are also numerous. One of these is a lack of imaging in the foreign nations in which KFC-I have attempted to establish themselves. Other weaknesses include attempt at changing management over the KFC-I, a lack of qualified executives to handle such a massive undertaking, and weakening domestic profits due to the 2008 recession in the US that affected much of the world. Lastly, KFC headquarters experience a high turnover rate during the rapid growth as most of senior executives leaving to become franchisees. This situation leads to the weakness within the firm since a loss of talents is the lack of core competencies due to its centralization strategy. Porter's generic competitive strategies are also very helpful in evaluating KFC from the standpoint of international business. The cost leadership strategy does not look favorably on KFC because KFC is by far not the most inexpensive fast food restaurant in these other nations, particularly when compared to franchises like McDonald's, which is much more cost effective than KFC's food. However, Porter's differentiation strategy is highly indicative of success because KFC's food and method of deliver (buckets, buffet, etc) are highly different from the

Case Report #2: Kentucky Fried Chicken (Japan) Limited

nearest fast food competitors, making their different choice of menu and delivery system attractive to customers who are tired of the typical burger-and-fries fast food options. Firm-specific advantages of the company, as the result of these evaluations, include that KFC is a well-established company with a strong economic and financial support for international endeavors, and that it has a differentiated service to offer that is attractive to customers. Over time, the KFC-I overall strategy shifts to one which recognized the unique characteristics of the Japanese culture and local market knowledge in terms of tastes and consumer buying habits. Preferences and tastes are major contributors to its popularity and acceptance. In considering this matter, the traditional American store layout is abandoned in favor of smaller locations which can be located in areas of heavy traffic, and they add local favorites to the menus which have more traditional Japanese appeal. At the same time, KFC-Japan shifts its focus from merely fast food to a "fashion" focus and positions its food as an exotic product. In order to be more locally responsive, KFC-Japan markets the American aspect of the product to young Japanese whom KFC-Japan determines to be particularly taken with American goods and appearances. In a strategic GAP analysis, it has been determined that the root problem KFC-I is facing is because of its traditional international strategic approach is no longer adaptive to the foreign market expansions. Other than that, lack of a strategic planning and control system, as well as an effective franchise market imaging result in an absence of on-site leadership in foreign nations. Furthermore, there are cultural barriers that hinder the growth of the KFC in Japan which could result in conflicts between the headquarters and subsidiaries management teams. Cultural barriers such as lack of local market knowledge also have an influence on corporate strategic decisions.

Case Report #2: Kentucky Fried Chicken (Japan) Limited

Besides, the failure to use its joint venture partner’s resources when it first entered to Japan, indicates a loss of opportunity to use Mitsubishi’s financial backing and investment opportunities. As a result, KFC-I is not able to initially reap the benefit from expansion through franchising entry mode. III. Generating Alternatives Criteria: In order for the alternatives to be considered reliable and possible, the criteria would be: (1) Amount of expenditure of implementing the alternative, (2) Ease or feasibility of implementing the alternative – is this being doable, (3) How effective when implementing the alternative – profitability and influence, (4) Would it be a reliable alternative. Alternative #1: Continue existing efforts to launch KFC-I locations in other countries along with changing its current international strategic approach to a transnational strategy. Advantages: What profits are coming in from existing KFC stores continues to do so, while management is being revamped in order to continue growth rather than losses. And that KFC-I can actively competing with other fast food restaurants for capable and dynamic leadership of that nation's KFC stores. By adopting a transnational strategy, KFC-I is not only able to develop innovations through centralization, but also allow its innovations to be adapted worldwide through decentralization. Therefore, KFC- I has potential to achieve worldwide competitive advantage by managing costs and revenues simultaneously, as well as by exploiting efficiency and innovation in many different parts of the organization. With a decentralized delegation system, it would increase the flexibility of KFC-I’s managers so that they can become easier to cope with the diversity of the local situations and will be able to response to the market changes. Managers of all levels will be able to perform their duties knowing clearly what is the objective and able to perform decision-making in a faster and more efficient ways. Cultural barrier can also be mitigated since local national operations can get more independence to act and

Case Report #2: Kentucky Fried Chicken (Japan) Limited

make important decision while minimizing the consumption of time waiting for top management for approval or decisions. Disadvantages: It would be a long-term effort for KFC to convert its strategy from international approach to transnational due to the complex configuration of assets, resources, and capabilities at home-country. KFC-I has to bear all the costs and risks. Alternative #2: Continue existing efforts to launch KFC-I locations in other countries but stick to its traditional international strategic approach. Advantages: KFC-I can still benefit from scale economies of cost reduction from the industry perspective. Its successful franchise entry mode can help KFC-I to exploit reputation worldwide and stay competitive presence in other foreign markets. Disadvantages: KFC-I pays for its loss of time and budget because traditional marketing approach relied heavily on transferring new products and processes developed from the home parent company to subsidiaries, especially those in less-advanced overseas markets. Although KFC-I built considerable strengths out of their ability, both efficiency and flexibility problem would suffer because they do not make any changes to the relationship between headquarters and subsidiaries. In addition, this strategy limits the exploitation of innovations from home-country to develop competitive positions abroad, which depends on a low local responsiveness to some extent. Therefore, many root problems would be amended in the end. Alternative #3: Suspend efforts in other countries, but initiate market imaging building in those countries in anticipation of resumed efforts. Advantages: Suspended efforts in countries will reduce losses while market imaging is being built upon, which will in turn revive the interest in KFC in other nations that has not yet been established there due to the very American architecture and advertising that has been done

Case Report #2: Kentucky Fried Chicken (Japan) Limited

thus far. Disadvantages: Suspending efforts will reduce losses, but it also will reduce any profits as well. In addition, building market imaging to attract more customers, a volume-dependent issue for KFC, will take several months if not one or more years, and this will result in lost time and profits. Successful new product innovations are difficult, and management is always conscious of the risk of confusing the chain’s image if it deviated too far from its basic menu and core theme. IV. Recommendations The recommendation of this evaluation is to go with alternative number one: Continue existing efforts to launch KFC-I locations in other countries along with changing its current international strategic approach to a transnational strategy. Within the greater strategic benefits of the organization, this option allows for maximum profits until the root problem of the company's international endeavors can be corrected through intensive management shifts and building up layers of competitive advantages by exploiting efficiency, flexibility, and learning simultaneously among each franchise store to regain an effective franchise image. The challenges involved with this recommendation include establishing the chain’s overall market image in a foreign nation, which will require leadership within that nation and considerable investment of money, time and effort by KFC-I's executive branch. It is important above all else to choose an option that allows for maximum profits while still correcting the underlying issue with the lack of international success for KFC. This option is the one most readily available for establishing an effective planning and control system management while maintaining what small presence there is already in these nations.

Case Report #2: Kentucky Fried Chicken (Japan) Limited

Reference Bartlett, C. A., & Rangan, U. A. (1986). Kentucky Fried Chicken (Japan) Limited. Ivey Management Service, 1-20.