Yum! China

Case Analysis of Yum! Brands Inc. and KFC in the Chinese Market – Health Concerns and Expansion Plans

Natalie SewardBA 494.01

Professor JamesJanuary 28, 2015

Table of Contents

Memorandum 3

Introduction 4

Summary 5

SWOT Analysis 9

Update 11

Analysis 13

Recommendations 17

Work Sited 19

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MEMORANDUM

TO: Mr. Su, Chief Executive OfficeFROM: Natalie Seward, Student at Pepperdine UniversityDATE: January 28, 2015RE: Rising Obesity Rates in China and Expansion Plans

BackgroundEver since the first KFC opened its doors in Beijing in 1987, KFC has been known as the most recognized global brand among Chinese consumers.1 Yum! Brands, the parent owner of many well-known restaurants, includes KFC, Pizza Hut, Taco Bell, and A&W All American Foods. 77% of Yum! Brands new development in 2014 occured in emerging markets, such as China and India.2 Recently, the question of slowing down the expansion rate of KFC has arisen due to not only economic concerns, but also the rise of obesity rates in China.

Critical IssuesThe obesity rate in China became a paramount concern when the rate rose so much as to move China up to the 2nd most obese country in the world following the U.S.3 The global obesity problem is associated with the vast expansion of all Westernized fast food, for example, KFC began to open more than 1 store per day in China. Along with this association, the Yum! Brands 2013 financial report does not show significant improvement. This raises the issue of if more, and greater, expansion at the current rate is beneficial to the company and to the health of China. Yum! Brands and KFC China need to reevaluate their strategy moving forward.

RecommendationsYum! Brands and KFC are in a position to leverage their strong leadership and entrepreneurial skills to better serve the Chinese consumer. Reasoning from this case analysis of KFC China, it is best for the company to continue running the current well-preforming units, and to keep introducing more nutritional teachings and alternatives to consumers. Monetarily, KFC China and Yum! Brands are performing well, which gives the green light to continue building in emerging economies. However, in order to accommodate the rapid expansion as well as balance the ability to continue to operate current store, KFC China should move away from a majority of company owned units, and consider joint venture, local partnership, or franchise in order to incorporate and include the Chinese culture, and to create a more integrated and purposefully growing company. By implementing this trust in the culture and business of China, the KFC brand can obtain a “home base” and move away from a U.S., Western company that may carry a stigma for introducing obesity to China.Action Steps

1 Yum! Brands, Inc., 2013 Annual Report, May 21, 2014, p. 3, from Yum! Brands, Inc. investor relations website, http://www.yum.com/annualreport/, accessed January 21, 2015.2 Yum! Brands, Inc. 2014 3rd Quarter Report, October 7, 2014, p. 1, from Yum! Brands, Inc. investor relations website, http://www.yum.com/investors/media/earnings/14_Q3.pdf, accessed January 28, 2015.3 Pippa Stephens. “Global Population of Obese and Overweight Tops 2.1bn,” BBC News Health, May 28, 2014, http://www.bbc.com/news/health-27586365, accessed January 29, 2015.

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Thank you for considering this proposal. With its implementation, Yum! Brands Inc. and KFC China should be able to strategically continue profitable growth and expansion while delving deeper into nutritional education and awareness. I look forward to discussing this strategy with you at our next meeting.

Introduction

As CEO of Yum! Brands, Inc. for 12 years, David Novak is one of the world’s

top CEO due to his passion for leadership. David Novak’s journey to CEO began with an

advertisement agency job with the Pizza Hut account, which then led to a marketing job

at Pizza Hut.4 Novak, referred to as one of the world’s best team builders, is in charge of

a learning organization and has perfected his formula that produces effective leaders.5

Yum! Brands currently has over 40,000 outlets in 128 different countries, 4,600

of which are KFC restaurants in over 900 cities in China. 6 In 1986, PepsiCo acquired

KFC (founded and headquartered in Louisville, Kentucky, U.S.), and in 1989 Sam Su,

the current Chairman and CEO of Yum! Brands China, and Vice Chairman of Yum!

Brands, Inc., joined KFC China.7 Su proved himself to be an incredible national manager

and leader. In 1997, Pepsi Co. spun off Taco Bell, Pizza Hut, and KFC and became

Tricon Global Restaurants Inc., the same year Su became the first president of the China

division.8 China became a predominant focus for the company. Just 2 years later, over 2

million Chinese consumers ate in KFC everyday.9 In 2002, the three well-known

restaurants became Yum! Brands, Inc., and Su challenged the company to increase

4 Colvin, Geoff. 2013. "GREAT JOB!*." Fortune 168, no. 3: 62. Business Source Premier, EBSCOhost accessed January 29, 2015.5Ibid.6 Yum! Brands, Inc., 2013 Annual Report, May 21, 2014, p. x, 3, from Yum! Brands, Inc. investor relations website, http://www.yum.com/annualreport/, accessed January 21, 2015.7 David E. Bell and Mary Shelman, “Yum! China,” HBS No. 9-511-040, p. 1, (Boston: Harvard Business School Publishing, 2012), https://cb.hbsp.harvard.edu/, accessed January 25, 2015.8 Ibid.,49 Ibid., 5

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expansion to over 400 new restaurants per year.10 From then on, KFC China has been

expanding rapidly, infusing Western brands with Chinese culture, training employees in

customer service, developing efficient supply chain organization, all while continuing to

maintain a strong management team.

David Novak highlighted the importance of Yum! Brands’ China operation and

strategies by saying, “the Yum! growth story is clearly about China and a whole lot

more.”11

Summary

In the 1980s, an opportunity to bring Western brands of fast food to the mainland

of China arose. The first KFC opened in Beijing in 1987, while Chinese were still

wearing blue Mao suits and riding bicycles for transportation.12 The opening of this

restaurant was a huge success with 500 seats, serving over 9,000 customers a day,

recouping investments within 1 year, and hosting birthday events and weddings.13 Issues

appeared regarding the supply chain outsourcing from the U.S., and advertisements that

did not align with the Chinese culture, such as, “Finger lickin’ good,” which the

consumers regarded as unsanitary.14

The 1992 government reform in China allowed KFC to be company owned

instead of franchised and gave Su a “blank canvas” to hire local staff and set new,

10 David E. Bell and Mary Shelman, “Yum! China,” HBS No. 9-511-040, p. 5, (Boston: Harvard Business School Publishing, 2012), https://cb.hbsp.harvard.edu/, accessed January 25, 2015.11 Fontevecchia, Agustino. 2012. "Yum! Brands And The Gift That Keeps On Giving: Chinese Demand." Forbes.Com 44. Business Source Premier, EBSCOhost accessed January 29, 2015.12 David E. Bell and Mary Shelman, “Yum! China,” HBS No. 9-511-040, p. 2, (Boston: Harvard Business School Publishing, 2012), https://cb.hbsp.harvard.edu/, accessed January 25, 2015.13 Ibid., 214 Ibid., 2

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courageous and risky goals.15 By 2010, out of the 3,600 units open in China, 90% of the

stores were company owned (compared to 15% in the U.S.).16 The Chinese leader that

called for this radical economic reform was Deng Xiaoping. His ruling helped open

China to the rest of the world. Su took this opportunity to take the time and hire skilled,

globally knowledgeable workers. He went to McDonalds in Taiwan, where he if from,

and hired professional people, attracting them to KFC by explaining the grand

opportunity available at the time – to recreate the KFC brand into anything. Su hired

Angela Loh, Chief Marketing Officer for Yum! China, and Mark Chu, President and

Chief Operating Officer of Yum! China.17 Su claimed that, “the company they would

build would make China a better place.”18 With this fresh start, Su and his team

developed and opened KFC in China’s small towns instead of the top four tier 1 cities –

Shanghai, Beijing, Guangzhou, and Shenzhen – where McDonalds had already taken

over. This management team was innovative, calculated risk takers, and they continued to

succeed with implementation of new décor, and menu items. One of the main attributes

as to why there was early victory in China was because of the team Su recruited. He hired

smart, Chinese, entrepreneur spirits who knew the culture well and were able to modify

and create products that would sell.

A key asset to this success was to build a supply chain in China, to minimize the

outsourcing of food and recourses. In 1997, Yum! created their own Chinese, local

distribution system. To Su and the management team, it was important to reorganize the

15 David E. Bell and Mary Shelman, “Yum! China,” HBS No. 9-511-040, p. 3, (Boston: Harvard Business School Publishing, 2012), https://cb.hbsp.harvard.edu/, accessed January 25, 2015.16 Ibid., 517 Ibid., 318 David Bell and Mary L. Shelman, “KFC’s Radical Approach to China,” Harvard Business Review, November 11, accessed January 20, 2015.

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infrastructure of the logistics operations. To do this, the company hired Roland Chong,

who was an experienced transportation executive from Yellow Freight China, to take

charge of the reform.19 With this structural improvement came new transport vehicles and

strategies, safety technology, and education. To ensure success, Yum! sent suppliers and

producers overseas to learn correct techniques and safety measures to bring back to the

Chinese workforce. Now, Yum! sources products from 500-600 local locations with

vertically integrated suppliers.20 The Chinese government recognized and awarded this

supply chain as the 2nd best in China after the Army. 21 Yum! Brands’ supply chain in

China has 11 full-service centers and 6 satellite centers.22 The biggest of which were

located in Beijing and Shanghai.23 Trucks would deliver to 6-9 stores per night, and each

restaurant received 3-4 deliveries a week.24 The supply chain has backup plans in

preparation of weather or cyclone conditions where the company will rent a temporary

warehouse in order to store food closer to remote restaurants, or will reserve cargo room

in order to airlift deliveries if needed.25

KFC China revitalized their menu to adapt to Chinese taste preferences. In China,

“food is culture – at the very heart of society. It must be adapted. Sam saw that from the

beginning.” explains Joaquin Pelaez, the Senior Vice President and Chief Support

Officer.26 The company localized the menu, turning away from the traditional recipe that

19 David E. Bell and Mary Shelman, “Yum! China,” HBS No. 9-511-040, p. 10, (Boston: Harvard Business School Publishing, 2012), https://cb.hbsp.harvard.edu/, accessed January 25, 2015.20 Ibid., 921 David E. Bell and Mary Shelman, “Yum! China,” HBS No. 9-511-040, p. 9,10, (Boston: Harvard Business School Publishing, 2012), https://cb.hbsp.harvard.edu/, accessed January 25, 2015.22 Ibid., 1023 Ibid., 1024 Ibid., 1025 Ibid., 1026 David E. Bell and Mary Shelman, “Yum! China,” HBS No. 9-511-040, p. 5, (Boston: Harvard Business School Publishing, 2012), https://cb.hbsp.harvard.edu/, accessed January 25, 2015.

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is served in the U.S. In China the menu introduces 85-100 new products per year,

compared to the U.S., which offers 1-2 new items a year.27 In 2002, KFC presented a

breakfast menu with traditional Chinese dishes, such as congee, that are not easily made

at home. The Chinese KFC focus on the experience more so than in a U.S. KFC. To

implement this strategy operationally, KFC China hires a hostess to greet costumers and

teach children lessons, as well as the mascot, Chicky, and 30,000 new employees a year

in 2010 (having a total of 250,000 Yum! staff in China at the time).28 Families come to

enjoy their lunch, or an event, and the children have activities to partake in. The U.S.

experience at KFC is primarily an individual one. Consumers take advantage of the drive-

thru and take-out aspects and usually eat at home.

In 2012, the poultry suppliers of fast food in China were criticized for pumping

too many antibiotics into the chicken that was being served at KFC and other fast food

restaurants. The negative publicity, along side an outbreak of the Avian Flu, caused KFC

and Yum! Brandsto take a few steps back and reevaluate their position on nutrition,

wellness, and the quality of their suppliers. The Chinese consumers are especially

conscious with what they put into their bodies. After obesity entered the spotlight, Su and

the KFC China team, created “New Fast Food,” in 2005, a movement that tackled the

rising obesity problems and concerns.29 This proactive campaign promoted safe, high

quality and nutritious food for the Chinese consumer.30 KFC eliminated supersize

options, switched fries and soda to fruit and juice for the kids, and provided health

27 David E. Bell and Mary Shelman, “Yum! China,” HBS No. 9-511-040, p. 12, (Boston: Harvard Business School Publishing, 2012), https://cb.hbsp.harvard.edu/, accessed January 25, 2015.28 Ibid., 529 David E. Bell and Mary Shelman, “Yum! China,” HBS No. 9-511-040, p. 13, (Boston: Harvard Business School Publishing, 2012), https://cb.hbsp.harvard.edu/, accessed January 25, 2015.30 Ibid., 13

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lessons from the hostess and Chicky, and on the placemats. Sam Su lobbied for the

government to show more support for promoting nutrition classes and education in

schools.31 Yum! Brands’ marketing committee partnered with the Ministry of Health to

make advancements as well.32 In addition, Yum! Brands gave grants to research studies

on wellness issues in correlation with urban restaurant foods.33

KFC has been sustainable and profitable thus far, but with the economy in China

slowing down and the obesity rates on the rise, is it right for KFC to keep opening more

than 1 store a day? It is unknown if shifting toward a healthier restaurant would help or

hurt the brand of KFC in China.

SWOT Analysis

To understand KFC China it is essential to evaluate Yum! Brands, as well as their

own company. David Novak, Yum! Brands world renowned CEO, is just one example of

the strong leadership that has worked hard to build up great, and well respected, brand

images. Yum! Brands has an opportunity to develop and succeed in emerging markets,

such as China and India. By 2030, India is projected to have the largest consuming class

in the world.34 The threats against Yum! Brands include the financial dependency they

have on China and the poultry suppliers, and how they affect the company’s sales.35

KFC China has been a thriving brand because of their strong understanding of

Chinese culture and their ease and ability of adapting. As the first Western fast food

31 David E. Bell and Mary Shelman, “Yum! China,” HBS No. 9-511-040, p. 14, (Boston: Harvard Business School Publishing, 2012), https://cb.hbsp.harvard.edu/, accessed January 25, 2015.32 Ibid., 1433 Ibid., 1434 Yum! Brands, Inc., 2013 Annual Report, May 21, 2014, p. 7, from Yum! Brands, Inc. investor relations website, http://www.yum.com/annualreport/, accessed January 21, 2015.35 2014. "Yum! Brands, Inc. SWOT Analysis." Yum! Brands, Inc. SWOT Analysis 1-9. Business Source Premier, EBSCOhost (accessed January 29, 2015).

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restaurant (McDonald’s did not open in Shenzhen until 1990), KFC had advantages and

great potential to penetrate the Chinese market. This, and the localized supply chain, has

allowed the company to expand rapidly and train numerous employees at a low cost. Su

and his strong national management team made every KFC location a training facility so

that employees and staff are always being trained. Customer service was a new concept

to China until KFC introduced the importance of it. KFC found it a challenge to hire

young adults for part time work because most children in China are raised as only

children and spend their childhood lacking social interaction, and spending excessive

amounts of time on the computer.36 Once KFC gains parents’ trust, their kids learn social

skills, and how to celebrate group achievements.37

There is an opportunity for KFC to focus more on the young adult consumer as a

target market in order to build broader brand awareness. This can be achieved through a

presence online with a digital customer experience. Furthermore, KFC has the

opportunity to expand health conscious menu options, and to also strengthen relationships

with the government through utilizing local suppliers. As KFC China did with the

restaurant’s menu, the company adapted the advertising as well to adjust campaigns to

Chinese local taste and cultural understandings.

The occurrences and scares of unsafe food have hurt KFC in years past, but the

company has been responded proactively with innovative solutions. Chicky now teaches

health lessons and visits schools to promote students to participate on sports teams, such

36 David E. Bell and Mary Shelman, “Yum! China,” HBS No. 9-511-040, p. 11, (Boston: Harvard Business School Publishing, 2012), https://cb.hbsp.harvard.edu/, accessed January 25, 2015.37 Ibid., 11

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as basketball and gymnastics.38 With these, and other, revival campaigns, Su envisions a

bright future.

KFC now needs to take into consideration the slow down of China’s economy.

Growing at the slowest pace it has in 5 years, at a rate of 7.3%, China’s economy may not

meet its annual growth target for the first time since 1998.39 With this in mind, KFC

needs to reevaluate their expansion and development strategies and costs, while

continuing to uphold the qualities of the Chinese restaurants that the consumers love.

Update

Currently the largest restaurant company in the world, Yum! Brands has been

producing knock out results since the company was spun off from PepsiCo in 1997.

Yum! Brands’ stock has returned 16.5% compounded annually, compared to the S&P

500 stock at 3.9% during the same time frame.40 With more than 4,600 KFCs in over 900

cities, KFC is currently the #1 foreign brand in China.41 Yum! is listed as #216 on

Fortune 500 List with more than $13 billion in revenue, and in 2014 named one of the

100 Best Corporate Citizens and one of the Top Companies for Leaders in North

America.42 Yum! is a global company; 70% of the company’s profits came from outside

of the U.S. in 2013. Yum! Brands is a worldwide leader in emerging economies and

38 David E. Bell and Mary Shelman, “Yum! China,” HBS No. 9-511-040, p. 14, (Boston: Harvard Business School Publishing, 2012), https://cb.hbsp.harvard.edu/, accessed January 25, 2015.39 Mark Magnier, Richard Silk, and Liyan Qi, “China GDP Growth Rate Is Slowest in Five Years,” The Wall Street Journal, October 20, 2014, http://www.wsj.com/articles/china-third-quarter-gdp-slows-to-7-3-growth-1413857081, accessed January 27, 2015.40 Colvin, Geoff. 2013. "GREAT JOB!*." Fortune 168, no. 3: 62. Business Source Premier, EBSCOhost accessed January 29, 2015.41 Yum! Brands, Inc., 2013 Annual Report, May 21, 2014, p. x, 3, from Yum! Brands, Inc. investor relations website, http://www.yum.com/annualreport/, accessed January 21, 2015.42 Yum! Brands, Inc., “About Yum! Brands,” Yum! Brands Inc., website, www.yum.com/company/, accessed January 27, 2015.

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markets with over 14,000 units, which is twice as many as the closest competition.43

There are 58 restaurants per million people in the U.S. and 2 restaurants per million in the

top 10 emerging markets.44 On January 1, 2014 Yum! Restaurants International combined

with the U.S. individual divisions for KFC, Taco Bell, and Pizza Hut. 45 Yum! is

strategically positioned to continue growth in the future. Yum! Brands’ price per share on

the stock market has been increasing from $49.05 in December 2010 to $74.27 today.46

A good indicator of how the company is doing is to compare current financial

reports, 2013, to past performance, 2010. Yum! Brands Inc., delivered outstanding

reports in 2010, one of the peak years for the company. Yum!’s net profit margin

decreased from 10.2% in 2010 to 8.3% in 2013; compared to McDonald’s 20.55% in

2010 and 19.87% in 2013.47 The return on equity and the inventory turnover decreased as

well, from 89.29% to 50.65%, and 52.22 to 31.32, respectively.48 The current ratio

decreased from .94 to .75 in 2013; however, the asset turnover ratio stayed equal moving

from 1.47 to 1.48 over 3 years.49 Price earnings ratio increased from 15.41 in 2010 to

23.23 in 2013.50 Yum! Brands’ market cap almost doubled to a total of $32,422,606,230

43 Ibid.,44 Yum! Brands, Inc., “About Yum! Brands,” Yum! Brands Inc., website, www.yum.com/company/, accessed January 27, 2015.45 Ibid.,46 Yahoo Finance, “Yum! Brands, Inc. Summary,” Yahoo Finance website, www.finance.yahoo/q?s=YUM/, accessed January 29, 2015.47 Mergent Online. “Yum! Brands, Inc.,” Company Financials website, http://www.mergentonline.com.lib.pepperdine.edu/companyfinancials.php?compnumber=92073, accessed January 25, 2015.48 Ibid.,49 Mergent Online. “Yum! Brands, Inc.,” Company Financials website, http://www.mergentonline.com.lib.pepperdine.edu/companyfinancials.php?compnumber=92073, accessed January 25, 2015.50 Ibid.,

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in 2013.51 With these records, KFC and Yum! Brands can calculate the company’s most

strategic business plan for the future.

Analysis

The key to understanding the problems of obesity and further expansion

plans in China is to better know the Chinese consumer habits, preferences, and

dislikes. Culture, defined as “key values, beliefs, understandings, and norms shared

by members of a group.”52 Appropriate behavior differs from different national

cultures; consequently, when people interact from various backgrounds, their

cultural differences can greatly affect their non-verbal and verbal communication,

particularly in an organizational, business setting. To better understand and

compare cultures, Geert Hofstede divided culture into five dimensions: power

distance, uncertainty avoidance, individualism-collectivism, masculinity-femininity,

and confusion dynamism. These sectors help explain observed differences in cultures

and among individuals. Hofstede began his research on IBM employees after arguing

that there are many differences in employee motivation, managerial styles, and

organizational structures across the globe that can be because of culture, and

different social environments.53

Power distance reveals to what degree a culture respects power, or of

individuals in socieities not being equal. Such as rigid or lenient regards to power

51 Ibid.,52 Constance James, “KFC China Case Lecture” (Lecture in International Management Class, Pepperdine University, Malibu, CA, January 28, 2015).53 Herminia Ibarra, “National Cultures and Work-Related Values: The Hofstede Study,” HBS No. 9-496-044. (Boston: Harvard Business School Publishing, 1996), p. 1, http://hbsp.harvard.edu, accessed January 20, 2015.

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and titles within a company organizational structure. China ranks high with power

distance, meaning that titles matter to them.54 The training system at KFC is an

example of this, as it takes 2-4 years to become a restaurant general manager.55 A

general manager needs to have the skills and knowledge of all the positions below

him or her in order to train new employees, but once the managerial level is reached

it is regarded as a higher position on the hierchary of employees. With this

subordinate-superior relationship, it is clear that inequalities amongst people are

more acceptable in China than in other countries and cultures.56 In contrast, the U.S.

ranks low in the power distance dimension, regarding status as not as important as

the Chinese do.

China ranks low in the dimension of uncertainty avoidance. This section

shows to what extent the ambiguity of the future holds in the national culture. The

fact that Sam Su and his team approached the development of KFC in China in small

cities is just one example of the entrepreneurial drive that Chinese have. KFC China

recognized an opportunity with the menu and went above and beyond to intigrate

Chinese culture into the options by offering new items at a new time of day. This

business decision was a huge success and would not have been if noone took the

calculated risk. Sam Su embodies this entrepreunerial spirit and has built a

successful team who share the same visions as he does, to help make KFC China as

great as it is today. The U.S. also ranks low with uncertainty avoidance as there are

54 The Hofstede Centre, “What about China?,” Geert Hofstede Centre website, http://geert-hofstede.com/china.html, accessed January 25, 2015.55 David E. Bell and Mary Shelman, “Yum! China,” HBS No. 9-511-040, p. 11, (Boston: Harvard Business School Publishing, 2012), https://cb.hbsp.harvard.edu/, accessed January 25, 2015.56 David E. Bell and Mary Shelman, “Yum! China,” HBS No. 9-511-040, p. 11, (Boston: Harvard Business School Publishing, 2012), https://cb.hbsp.harvard.edu/, accessed January 25, 2015.

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always emerging innovative ideas and products on trial, as well as the acceptance of

freedom of expression.

There are two ways a culture can be: individually or collectively oriented.

China scores as a high collectivist culture due to the interest of the group rather than

themselves.57 This is exemplified in the way that the Chinese consumer treats KFC as

a destination to go out to lunch, with their families or a big group, instead of just

going out to get chicken.58 The Chinese consumers love to spend time in KFC

enjoying the activities and the nice facilities. The collectivist society is also

represented by the store operations and experience with a hostess to greet at the

door and a mascot to provide social activities during the meal. The U.S. is a highly

individualistic culture. The KFC restaurants in the U.S. are designed for fast, in-and-

out, experiences, such as through the drive-thru. Even the games given to children

are meant to be completed alone.

Another cultural dimension identifies a culture as either masculine or

feminine. The Chinese culture is driven by competition, achievement, and success.59

Su introduced a “future-back” approach and mindset for tackling optimistic goals set

for KFC China, such as expanding from 100 units per year, to 400.60 Achievement

oriented, Su hired Angela Loh, and Mark Chu who share the same competitive and

aggressive mindset. The U.S. is also high in masculinity, as the culture is very future

57 The Hofstede Centre, “What about China?,” Geert Hofstede Centre website, http://geert-hofstede.com/china.html, accessed January 25, 2015.58 David E. Bell and Mary Shelman, “Yum! China,” HBS No. 9-511-040, p. 6, (Boston: Harvard Business School Publishing, 2012), https://cb.hbsp.harvard.edu/, accessed January 25, 2015.59 The Hofstede Centre, “What about China?,” Geert Hofstede Centre website, http://geert-hofstede.com/china.html, accessed January 25, 2015.60 David E. Bell and Mary Shelman, “Yum! China,” HBS No. 9-511-040, p. 4, (Boston: Harvard Business School Publishing, 2012), https://cb.hbsp.harvard.edu/, accessed January 25, 2015.

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oriented and hardworking. Some societies are regarded as feminine, which implies a

strong emphasis on caring nature and the importance of quality of life.61

China is scored highly on the final cultural dimension, confucian dynamism.

Chinese think about the future and the past as expansive and everlasting. Society

focused, Asian companies have long term goals, such as Sony, a Japanese company,

who has a 250 year strategic business plan.62 The rise of obesitiy and health

concerns surrounding the fastfood industry in China does conflicts with this cultural

dimension because of the high value placed on the development of society.

Along with Hoftede’s 5 cultural dimensions, there are other ways to evaluate

culture inorder to know how to best manage a business, such as Edward Hall’s silent

languages of culture.63 The language of time is exemplified in China with how they

approach eating at KFC. The customers linger in the restaurant, which shows how

they value time. All of these aspects are important when evaluating a national

culture. With the language of space in KFC China, the consumers appreciate nice,

airy, and comfortable locations to spend time in. The language of material goods,

frienship, and agreement are also extremely important factors to the understanding

of a national culture.64 Each of which provide insight to how a business may flourish

in a new, emerging market.

Given these tools to analyize China, it is evident how the problem of obsesity

arrising in the country is alarming and unwanted. The Chinese are health consious,

61 The Hofstede Centre, “What about China?,” Geert Hofstede Centre website, http://geert-hofstede.com/china.html, accessed January 25, 2015.62 Constance James, “KFC China Case Lecture” (Lecture in International Management Class, Pepperdine University, Malibu, CA, January 28, 2015). 63 Philip M. Rosenzweig, “National Culture and Management,” HBS No. 9-394-177 (Boston: Harvard Business School Publishing, 1994), http://hbsp.harvard.edu, accessed January 20, 2015.64Ibid.,

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family and society development oriented, success driven, and competitive – framing

a society where health is taken seriously. KFC has been to blame for the rising rates

of unhealthy Chinese citizens. This raises the question of whether continuous rapid

expansion is the best move for Yum! Brands, Inc. and KFC China.

Recommendations

KFC China began its Chinese success story as a joint venture with a local

entrepreneur or government partner because of the regulations of opening a foreign

restaurant at that time. Once the law was lifted in 1992, Sam Su jumpstarted as a

company owned business, which provided room for growth, the ability to train more

workers doubled the staff, and opened the door for more innovation. This was crucial to

KFC China’s success and profitability in the last 2 decades. Now, with the obesity

epidemic on the rise, moving toward a franchise model, such as the one in the U.S., could

improve KFC’s relations in China by becoming a more local brand. Returning to joint

venture will influence the Chinese perception of the brand by creating KFC to be more of

a native brand, rather than regarded as a Western company, which would cause the

consumer to feel more attached and involved in the betterment of the company.

Nutritionally, KFC needs to continue the education of health and nutrition. Financially,

KFC changing management to a joint venture or franchise would be a positive transition,

as it would result in decreased investment and other expense costs. Also, this change

would alter the government’s opinion of the company, which is seen as a threat right now

because it is monopolizing the restaurant industry and serving unhealthy food to the

rising obese Chinese citizens.

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Regarding expansion, it is not a concern as to whether to keep expanding or not,

but at what rate is best for the company taking all aspects of the business into

consideration. The recent slow down of the Chinese economy needs to be taken into

consideration when evaluating the future expansion approach.65 KFC has proven to be a

very successful company in constant and rapid development in China, but the goal of

opening 700 stores a year is ambitious and may not be a smart or strategic move for the

company.

65 Mark Magnier, Richard Silk, and Liyan Qi, “China GDP Growth Rate Is Slowest in Five Years,” The Wall Street Journal, October 20, 2014, http://www.wsj.com/articles/china-third-quarter-gdp-slows-to-7-3-growth-1413857081, accessed January 27, 2015.

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