The Internationalization of KFC

Agenda

List of Abbreviations

List of Figures

List of Tables

1. Introduction

2. International Strategic Approach
2.1 Managing the Multinational Enterprise
2.1.1 The EPG Model
2.1.2 Thinking Globally, Acting Locally?
2.1.3 Standardization vs. Adaptation
2.2 KFC’s Internationalization Process
2.2.1 Stages of Internationalization
2.2.2 Entry Modes - Franchising vs. Internal Growth

3. Outlook

Bibliography

List of Abbreviations

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List of Figures

Fig. 1: KFC Improvement Areas

Fig. 2: Organizational Characteristics of MNC

Fig. 3: Stages of Internationalization

List of Tables

Tab. 1: Advantages and Disadvantages of Licensing Agreements

Tab. 2: Advantages and Disadvantages of Greenfield Investments

1. Introduction

In the Great Depression era of 1930, Colonel Harland Sanders opened the first Kentucky Fried Chicken (KFC) restaurant in a small gasoline station in North Corbin, Kentucky, where he was “feeding weary travelers a unique fried chicken” (Herman 2012) until the construction of a new interstate road system made him impecunious. Convincing restaurants in Kentucky, Ohio and Indiana to pay him a five cent royalty for using its unique recipe, KFC started to aggressively drive forth this relatively new franchise concept from the mid-1950s on. By the end of the decade, it was not only listed on the New York Stock Exchange Market, but had also established a strong franchise network across the United States (US) (cf. Krug 2004). Nowadays, with more than 17,000 restaurants over 105 countries, a turnover of 9.2 billion US dollar in 2011 and approximately 455.000 employees it is the world’s largest chicken chain and the second largest fast-food restaurant after McDonald’s1 (cf. Yum! Annual Report 2011).

KFC’s parent company Yum Brands! Inc, also managing Pizza Hut and Taco Bell since Pepsi Co’s divestiture of the three brands in 1997, is the world's leading restaurant company regarding system units with almost 38,000 outlets in over 120 countries.

After the fast-food industry was thriving in Asia and especially in China in recent years, Latin America is considered the future growth market for American restaurant franchises (cf. Bloomberg 2012). In China, KFC already encountered a stunning demand, dominating the market by far before McDonalds (cf. Mellor 2011). However, in 2012 KFC was represented by only 577 restaurants in 36 countries of the Caribbean and Latin American area (cf. CARIBLA 2012). As a consequence one can see that there is still a lot of internationalization potential for the Company in the future.

In order to be able to discuss KFC’s operations in the global market place, this paper will first give an overview of common strategic marketing concepts and management theories, before critically analyzing KFC’s international strategic approach to the global market place. Moreover, it will take a look at how -and if - KFC is able to manage the tension between globalization and localization, giving recommendations for the future development of the firm. In doing so, a critical evaluation of the Company’s pursued internationalization strategy in the past as well as the illustration of possible market entry strategies for KFC is required.

2. International Strategic Approach

2.1 Managing the Multinational Enterprise

2.1.1 The EPG Model

In the year 1969, Dr. Howard V. Perlmutter, an internationally recognized authority and pioneer on the globalization of firms, introduced a new business model about the general strategic profile of multinational companies (MNC) (cf. Perlmutter 1969). In his article “The Tortuous Evolution of Multinational Enterprises” he describes three kinds of management orientations: ethnocentric, polycentric and geocentric.

The term ethnocentrism derives from the Greek word for “nation”. Organizations with an ethnocentric focus are characterized by a high degree of centralization and a very parochial attitude. They feel that their home-country organization is superior to the foreign counterpart and think what works at home, would also work in other countries.

Polycentrism, on the other hand, implies an orientation towards the host-country and thus a highly decentralized organizational structure. The different business units, usually wholly owned subsidiaries, have a high degree of independence in decision-making. Finally, the geocentric approach assumes a world-oriented alignment of the firm, where reference is neither made to the home-country, nor to the subsidiaries, but to an integration of both activities. It aims at serving the world market from a single source, hence looking for similarities in each country.

In the case of KFC, the question is which category fits best the international strategic approach of the Company. Having a look at KFC’s main activity, the franchising business, a clear ethnocentric tendency can be deduced, as the franchising concept is ethnocentric by definition. In this way, the International Franchise Association2 defines a franchise as “a contractual relationship between the franchisor and the franchisee in which […] the franchisee operates under a common trade name, format or procedure owned by or controlled by the franchisor […]”. Another definition states “Franchising is the practice of using another firm’s successful business model” (cf. BizShifts-Trends 2011), which can easily be translated into the management approach stated in the above paragraph “what works at home, is going to work in your country as well”.

Franchising is used in order to spread a brand or corporate image around the world, so the franchisee must follow certain rules and guidelines established by the franchisor, which are usually formalized in a so called Franchise Disclosure Document (cf. BizShifts-Trends 2011). That is why many customers perceive that even the smell of a KFC or McDonald’s restaurant is the same worldwide, as historically franchises make up roughly 80% of most fast-food company’s international restaurant bases (cf. Krug 2004; cf. McDonald’s Homepage) and are probably the reason why the global fast-food industry has a “distinctly American flavour” (Krug 2004: 925).

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Fig. 1: KFC Improvement Areas (Source: Own illustration following Ansoff 1957)

However, not only KFC’s business model, but also its global marketing approach and product portfolio points out the ethnocentric tendency of the MNC. KFC has a strong weakness within its product management, as it relies heavily on its secret chicken recipe and was not really able to adapt to its customers’ demand for greater product variety beyond chicken (cf. Krug 2004). In this way, KFC already faced heavy problems in the 1980s and 1990s due to its limited menu and inability to quickly bring new products to the market. In terms of Ansoff (1957), KFC has a clear weakness on the product side, as depicted by figure 1. In addition to that, when KFC started its international expansion, the Company assumed that its products and operating model would be accepted in any country. As a consequence, it had “more success in Asia and Latin America, where chicken was a traditional dish” but “trouble breaking into the German market”, because there the fast-food concept was not as popular as in the US (Krug 2004: 925). In contrast, its competitor McDonald’s had greater success because of “a number of changes to its menu and operating procedures to appeal to German tastes”.

2.1.2 Thinking Globally, Acting Locally?

In the next chapter, we are going to discuss in detail the marketing concepts of standardization and adaptation. However, what can already be seen is that KFC does not treat each country as being unique (polycentric approach), nor is looking for the best-fitting solution to the world-markets (geocentric approach) but tries to apply its home-country concept whenever possible. It is marketing a standardized product portfolio and is only making adaptations when it is forced to do so. In general, consumers perceive KFC to be a truly American Company. In terms of Bartlett & Goshal, the Company is currently positioned as depicts figure 2. Through the high number of franchises, which imply low operating costs and economies of scale, the Company maintains a level of efficiency, but is not able to completely adapt to local markets.

Fig. 2: Organizational Characteristics of MNC (Source: Own illustration following Bartlett & Goshal 1998: 67 ff.)

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However, as nowadays the tension between globalization and localization is one of the main issues of each MNC, KFC is trying to move towards a higher local adaptiveness, thus a transnational approach, in order to being able to compete in the global market place, as competitors are steadily coming closer. Yet, the Company has still a long way to go. When taking a look at the Groups organizational set-up, only four operating business segments can be distinguished (cf. Yum! Company Profile): US, International, China and India. “International”, therefore, includes the whole rest of the world. If the Company would thrive for real local adaptiveness, they would have an own business segment, and hence an own marketing department3, for at least each economic area (e.g. EU, Africa, Latin America etc.). On the other hand, as the parent company stated in last year’s annual report, they are currently concentrating on emerging markets, especially China; so it is good to see that those plans are also reflected in the organizational set-up. As for a further internationalization in Latin America, the Company should definitely re-organize its business segments prior to an expansion.

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