Among the last two decades of entering, KFC, shorten from Kentucky Fried Chicken, a once lack-luster American fast food brand, outperformed all other competitors and rapidly became the biggest restaurant chain in China. No matter considering the number of restaurants, profit or market shares, KFC dominants the Chinese food market with 2200 branches over China and a speed of 300 new branches annually, unmatched by its arch rival and world market leader McDonald (John, 2008).
The successful expansion of KFC China has been one of the mysteries of modern marketing. The success of a company always results from its choice of strategy with regard to low cost and value creation and its ability to configure the internal operations to strategic emphasis (Hill, 2011). This essay will first focus on the main competitive strategy KFC chooses and why it is chosen, and then analyze the architecture choose of KFC China in four aspects and lastly discuss the key functional strategy implemented in KFC China.
As Hill (2011) pointed, when pursuing its competing strategy, a multinational company would face two types of pressure that affect their ability to maintain profitability and ensure profit growth, the one is cost reductions and the other locally responsiveness. Intensive cost reduction pressure will rise when companies compete in the industry where products are indifferent and the main competitive weapon for the producers is price.
On the other hand, pressure of local responsiveness come from national differences, such as consumer tastes and preferences, which requires companies to provide different products and conduct value adding activities. Among several strategies for multinational companies, KFC China to a large degree rooted in localization strategy, with relative high pressure in local responsiveness and less in cost reduction. Mainly there are two aspects of reasons towards KFC’s relatively low cost reduction pressure. On one hand, it is impossible that KFC compete with its rivals mainly by reducing the price.
Even though major fast food outlets in United State have provided a model of “the cheapest dining option” for the world, KFC has different poisoning in China (David and Mary, 2001). As the first Western-style restaurant entering into China of the Mao era, it provided its customers about an exotic environment and a taste of America (David and Mary, 2011). For the other reason, being the biggest restaurant chain in China, KFC enjoys advantages in scale economy, which minimize its cost in office rent and supply chain (Warren, 2008).
Moreover, as quoted by David and Mary (2011), firms that tend to focus on one process often become more effective. KFC, with its slogan of doing only “chicken right”, is possible to specialize, including considerable bargaining power with suppliers due to the large quantities purchased and so on. Therefore, KFC have less cost reduction pressure when competing with other rivals. On the other hand, KFC China faces with relative high pressure on local responsiveness. “An American Brand with Chinese Characteristics”, KFC China positions itself as a special occasion for residents but not only a cheap dining place (Warren, 2008).
It is because that China, other developing countries as well, treats food as the very heart of their society, inextricable from national and regional cultures (David and Mary, 2011). In these countries, local responsiveness is very important and the key element to win over consumers in a great deal is an abundance of flavors with an inviting ambience (ibid, 2011). Thus instead of a purely Western one, Chinese consumers drawn to this mixed brand position due to the situation in China of 19th century.
That is why KFC China competes on the ability to customize their products or services to meet the needs in the particular Chinese market. Take some example, the packages provided in China are smaller in size than that in U. S. A; some really spicy hamburger are provided in China as well (John, 2011). KFC China, which pursues the Localization strategy, wants to build a system from scratch that would match the local condition (Warren, 2008). While, local adaptation of corporate standard, policy, and management system cannot take place without a supportive organizational architecture.
Organizational architecture includes a broad dimension of structure, process, incentives, control and people, which can be an invaluable tool for shaping the way it gets things done (David, Michael and Mark, 1997). The following part will discuss the organizational architecture of KFC China in four separate aspects, structure, process, incentive and control, and culture. To beginning with, the worldwide area structure and decentralized decision-making responsibility contribute a large parts of KFC’s remarkable success in China.
It is crucial for country subsidiaries which focus on local responsiveness to have decentralized operating decisions (Hill, 2011). KFC is very much decentralized in its operation, their franchises and joint ventures have a good deal of latitude in the way the conduct their business (James and Melissa, 2005). KFC China, based in Shanghai, is a functionally self-contained country subsidiary that the first important move after entering was to selected local partners with government connections and effectively leveraged their tangible and intangible local resources (Karen, 2010).
This structure facilitates local responsiveness, especially important in the consumer goods industry, summed by Liu (2005), a former member of the company’s Greater China executive committee (John, 2011). Secondly, appropriate control system ensures the subsidiaries’ actions are consistent with the firm’s overall strategies and financial objectives by providing the metrics used for measuring performance of the subunits and making judgments (Hill. 2011). As the localization strategy and the decentralization structure it conducts, the Brand’s corporate headquarters delegated lots of authority on control metrics to KFC China.
There are several reasons. At first, the localization strategy implies the lack of interdependence between each subunit. Thus one subunit is responsible for its own performance which will not lead to performance ambiguity. Hence they judge the performance based on the local conditions that differ from other countries. Additionally, as their remotely expansion all over the world and the emergence of franchised or licensed restaurants, it is impossible to directly control the individual restaurants (Maryann, 2001).
Thirdly, since the need for integration and coordination among their subunits is low, there is low need for each self-contained country subsidiaries to have common processes and share same organizational culture. Process is viewed as the manner in which decisions are made and work is performed with the organization (Hill, 2011). KFC pursues the localization strategy, hence each subunit will choose its own manner of allocating resources, handling customer inquiries and complaints and improving product and so on, depending on their local conditions.
For example, declining profit margin in KFC South (Oklahoma and Texas) division results in a major quality improvement project aiming at saving service time for the drive-through window (DTW) operations (Uday and Charles, 1995). It proved successful that the improved service process restaurants cut service time by more than half while improving labor productivity (ibid, 1995). However, differing from America, KFC China added “meals on wheels” service and on-line order service, which as well improve quality management and dramatically outperformed in the sales growth and customer transactions.
On the other hand, for the same reason, KFC has low need for a common organizational culture that is same across the multinational network of subunits. Although the restaurants decorated similar with a dominate tone of red, KFC China was influenced by Chinese culture to a large extent due to the local conditions. Therefore, subsidiaries of KFC conduct their own culture which should to a large extent mix with the local culture, to enhance local responsiveness. Ironically, among all the contributions to the success of KFC China made by its corporate parent, none outweighs the importance of “leaving it alone” (Warren, 2008).
Not only does the support from the corporate parent on decentralization, the success of KFC also results from its key functional strategies for Chinese markets. Among several value creation activities, which aims at gaining competitive advantage, production and logistics of KFC China will be discussed next. Production and logistics strategies are implemented attempting to lower the costs of value creation and add value by better serving customers’ need (Hill, 2011). KFC China saves a lot of costs by conducting the supply localization and source consolidation strategy.
In addition, adapting the local conditions and expansion strategy, the new way of doing business, the competitive bidding, was introduced in China. The supply localization strategy in KFC China means that most products are sourced in China. Not only buying locally in a large scale drops the costs of transportation and transaction, but also it strengthens the parent company’s relationship with Chinese government (David and Mary, 2011). While, the local supply alliances are limited in a few major food items including the KFC Original Recipe mix in order to protect critical trade ecret, plus cobbed corns because the local-grown-and harvested crops hardly met KFC’s product standard (Warren, 2008). Significantly, although it initially expensive to undertake, but necessary if a critical mass of revenue restaurants have been opened (ibid, 2011). In addition to localized supply, KFC also initiated a program to consolidate suppliers. At the very beginning, each KFC market had its own group of chicken suppliers who can supply multiple markets and get different paid for the almost same products without control.
The existing arbitrage opportunity results from a highly decentralized system and in long term caused gross economic inefficiency since different KFC markets then out-bid each other (ibid, 2011). Furthermore, a lack of common supply chain means a loss of common system standards, then the absence of quality control of products (ibid, 2011). In 1997, to meet these challenge, KFC China decided to centralize purchasing and suppliers with a common quality assessment standard by implementing a supplier rating system(David and Mary, 2011, 2011).
This policy allows managers throughout China to concentrate purchasing with the supplier that perform best, and meanwhile building a mutually supportive and beneficial relationship between them (ibid, 2011). At the same year, KFC established the distribution center and a delivery network to support all KFC restaurants within a few hundreds kilometers away (Warren, 2008). KFC China directly own and controlled the distribution and logistics operations by building warehouses and running its own fleet of trucks.
Without a third party and a series of useless automated facilities, KFC China’s distribution and logistics system saved a lot of time and reduce the cost pressure (ibid, 2011). Moreover, a series of stimulate actions have been taken to improve KFC supply chain. During 2000, in case of possible collusion between KFC’s purchasing staff and suppliers and in a drive of cost reduction of production, a new process of supplier bidding was introduced in China (ibid, 2011).
This open, fair and competitive bidding process represented a new way of doing business based on price, cost, and product quality. To sum up, to build the modern marketing mystery KFC Chin, based in Shanghai, not only have an explicit strategic choice of localization, but also be supported by the corporate parent’s decentralized organizational architecture. Furthermore, the logistic strategy in KFC China leads to a mode of cost reduction with high product quality. References David. E. B. and Mary. L. S. “KFC’s Radical Approach to China,” Harvard Business Review, November, 2011 http://hbr. org/2011/11/kfcs-radical-approach-to-china/ar/1 David. N. , Michael. T. and Mark. B. N, “Competing by design: the power of organizational architecture,” Oxford University Press, July 10, 1997, p. 7. Hill, “International Business: competing in the global marketplace,” 8th, McGraw-Hill, 2011. James. L. W. and Melissa. L. C. , “The cultural politics of food and eating”, Blackwell, 2005, p. 169. John S. , “KFC – ‘a foreign brand with Chinese characteristics’,” September 22, 2008. ttp://www. china. org. cn/business/2008-09/22/content_16515747. htm Karen. C, “KFC China’s recipe for success,” INSEAD knowledge, December 23, 2010 http://knowledge. insead. edu/KFCinChina090323. cfm? vid=195 Maryann. H. A. , “International HRM: managing diversity in the workplace” Blackwell, 2001, p. 303-306 Uday. M. A. and Charels. R. “Quality Management at Kentucky Fried Chicken,” Interfaces 25, 1995, P. 6-21. http://interfaces. journal. informs. org/content/25/3/6. abstract Warren, L “KFC in China: Secret Recipe for Success”. Publisher: Wiley. 2008