CASES OF DOING BUSINESS IN CHINA Editor: Professor Zhu Mingxia University international Business and Economics 2010 CONTENTS Introduction to China In context of “Doing Business in China – A Global Perspective” CASE 1: Starbucks management strategies in China CASE 2: The expansion of McDonald’s in China CASE 3: A Case Study of KFC and other Fast food Chains CASE 4: Successful story of IKEAN in China CASE 5: General Motors in China CASE 6: L’Oreal Group CASE 7: Market entry for David Lloyd in China CASE 8: The water treatment market in China CASE 9: Danone Group CASE 10: A Success Story in Retailing: Carrefour CASE 11: The Expansion of Snow Beer in China Introduction to China In context of “Doing Business in China – A Global Perspective” Introduction China is set to emerge as the world’s greatest economy and superpower in the near future. As global organisations rush to expand operations in the largest consumer base in the world, the global economy as a whole is accelerating as rapid, substantial changes in technology unfold. China is said to be the manufacturing capital of the world, and although true, organisations are increasingly looking to China for more than purely cost competitiveness. Globalisation & ‘The Flat World’ “A set of processes leading to the integration of economic, cultural, political, and social systems across geographical boundaries” Globalisation is the single, most influential driver of change in the 21st century. Management out of necessity are forced to align their business operations with the emerging global economy in order to merely survive in today’s environment. The global market place is intrinsically linked to technology as a means to close the gap of time, culture and geography. A few major recent historic converging events are regarded as core drivers of globalisation as we know today and are investigated below. Although the internet was around for some time, Netscape Navigator, released in 1994 is regarded as bringing the web to life by allowing ordinary users to interact with content easily. Netscape triggered massive attention during the mid 1990s, the so called ‘dot com boom’ as investors scrambled to cash in on the newly established, ‘information revolution’. Huge investments during this time were placed on network providers such as Lucent, Cisco and Nortel. With such a rapid increase in capital, an estimated $1trillion was spent during this time laying thousands of miles of fibre optic cable, establishing high speed infrastructure links between the United States, Asia and Europe. Over-investment at this time lead to the ‘dot com bubble’ and the as a consequence, the ‘dot com burst’. While the ‘dot com burst’ paved way for a more conservative approach to IT investment as the public perceived the information revolution extinguished, this was merely the end of the beginning as the investments in fibre optics effectively made Asia and the United States next door neighbours overnight, allowing more people than ever before communicate virtually for free. Another major contributing factor occurred in the 1990s which saw extraordinary development in a plethora of software applications which when combined with high speed data exchange, had the effect of creating a multiplicity of forms of collaboration. This instance during the 1990s is regarded as the genesis of globalisation and the flattening of the world. Outsourcing has also contributed to the flattening world as managers realised the potential for coordinating business operations online to radically cut costs, leveraging foreign location economic conditions. Similarly, the rise of ‘offshoring’ practices has also emerged. We see a wide range of open-source software development collaborations as a result of globalisation, a powerful form of collaboration. The Firefox web browser created by a 24 year old from New Zealand and a 19 year old from Stanford University was downloaded over ten millions times during the first month of release, acquiring some 5% of Microsoft’s market share. The Linux Apache community have also demonstrated the power of open-source which holds some 15% of the web server market share today. Supply chain management is also regarded as a major contributing factor and in itself, an entirely new form of collaboration. The largest organisation in the United States, Wal-Mart, manufactures nothing, but focuses exclusively on managing their supply chain down to the last atom of efficiency. ‘Your World Synchronized’, the UPS logo, strives to do just that and the company is regarded as another major supply chain player which is gaining business on areas which seem counter intuitive. Insourcing’ (the process of undertaking business operations from third party organisations) Toshiba’s entire laptop repair service and charging Toshiba once laptops have been delivered back to customers demonstrates the ability of organisations to undertake radically different forms of business operations as a result of the ‘flat world’. The convergence of all of the above technologies and forms of collaboration are being rapidly accelerated by more recent developments in technology such as VOIP, file-sharing, ubiquitous computing and wireless communications. Such technologies are now allowing people to collaborative anytime, anywhere and with any device on the move. Much like the electricity revolution, the information revolution truly emerges once a variety of factors reach a pivotal tipping point, resulting in exponential and sudden gains in productivity. Infrastructure fuelled the development of software, which in turn fuelled outsourcing, offshoring, open-sourcing, ‘insourcing’, and ‘supply-chaining’. All of these factors have very recently contributed largely to the flattening of the world as we know it today by creating a global, web-enabled platform for sharing multiple forms of sharing knowledge and work across time, distance, geography and language. Furthermore, government deregulation, free markets, cheap air travel, global warming regulations/legislation and other factors are regarded as other contributing factors. The convergence of all forms of technology and collaboration can be used as a framework for sense-making for a large proportion of things which we see today. Today, value is created in interactions which cut across departments and organisations in a horizontal fashion rather than the traditional vertical silo structure. The ability for organisations and IT project managers to restructure their organisation and integrate with third parties in this fashion will ultimately result in the necessity of survival. Russia, China and India, some 3billion people are not becoming, but are major players in the global business environment. Broadband penetration in total in these areas, some 10%, equates to roughly 300million new entrants (greater than the total broadband enabled population of the U. S) over the traditional powers of the west, which have access to the same tools, resources and education are poised to shape the brief history of the 21st century. When the ‘dot com bubble’ burst, it was said that globalisation was over, yet this statement could not be further from the truth as it was conversely the catalyst of the globally integrated environment which we have created and know today. Large organisations are sensitive to this change and have radically restructured and reinvented operations as a result of a change of mindset. IBM last year stated that they expect that 50% of their new product innovations will come from outside their organisation and as a result have rolled out a highly modern open platform for innovation and learning which constitutes loose forms of collaboration and rapid prototyping by leveraging ‘Web 2. 0’ technologies (blogs, wikis, test beds, social networks & others) to develop and test ideas across all distributed geographic regions of the organisation. Xerox has similarly undergone an extensive change as a result of the flattening world. Organisations are pulling customers more and more into the supply chain as a means to reduce costs and enhance focus on core competency. Design, distribution and advertising we see are increasingly being undertaken by consumers. It can be said in this way that if you buy an electronic flight ticket with Ryanair for example, that, if you value your time, you are paying Ryanair to work for them. There are cases of organisations adopting an extreme approach – where every business operation is outsourced, allowing total flexibility and speed for change. Such organisations may be regarded as branding shells which emphasise brand strength and awareness through the utilization of highly specialized competencies of third part providers. The flat world dictates greater consolidation as a necessity for large organisations to acquire high technology SMEs which have accumulated a large number of users or high technology (intellectual property) goods/services. As a consequence, managers must develop new and align existing IT projects to cope with this potentially large contrast in culture, organisation structure, existing IT infrastructure and customer preferences. It is estimated that in the future almost every product and service will become a commodity as vendors flood into the global market and compete exclusively on price performance. Furthermore, markets we expect will become more complex, will have more opportunity and will comprise a large number of product/market niches. As a result, how can organisations gain sustained long term sustained competitive advantage? Managers must acquire a portfolio of projects, strategically focused, almost exclusively on innovation and idea generation, something which is seen to be impossible to commoditise. Organisations must adopt a proactive approach to embrace the emerging flattening world and encourage open communication and collaboration, share knowledge and receive insight by reciprocated knowledge with all. Managers must encourage open collaboration both internally and increasingly externally, as a core component of an organisation’s overarching business strategy. China & ‘The Flat World’ China’s role in the global economy appears to be set. The country is regarded as the most important nation today for both developing and developed countries. China can do not only high-quality, low-cost manufacturing but increasingly, high-quality, high-cost manufacturing. Organisations such as Google and Microsoft have relocated research and development operations close to Tsinghua University in Beijing as a means to acquire fresh talent from the country’s greatest science and technology institution. Despite substantial losses, Microsoft has taken the seemingly counter intuitive stance of sustained funding in China, implicitly signifying their intensions of the future of the Chinese economy. In 2005, both the Microsoft and Google labs accumulated 12 out of a total 110 computer science and technology PHD studies which have been developed into prototype ventures. In this way, we see that China is increasingly being utilized for more than purely cost based economies of scale. The Chinese government is also supportive of such objectives and is keen to maximise China’s full potential given their shifts in policy from the so called ‘open door’ policy, to ‘made in China’ and to today’s slogan of ‘created in China’. China to this end has adopted a proactive stance to the flattening of the world by allowing itself to connect to more people than ever before through the adoption of cheap broadband and mobile services and the correct physical roads, airports and other transportation systems. Educating the population as a whole to be thinking in more creative and innovation ways and furthermore, to adopt reliable rules of law and fiscal policies to allow people to connect to the global information platform in the most productive way possible is vitally important for the continued growth of the Chinese economy. Between China, India and Russia, roughly 12% of their combined populations have broadband access, equating to some 340million people. These people have access to the same resources, education and tools as people in western countries and are therefore considered to be new and equal entrants into the global playing field. Although broadband penetration in these regions is low, this 340million is greater than the entire population of the U. S, some 300million, of which there is roughly 75% broadband penetration. The implications of this trend are outstanding and will pave the way for the changes which we will see in the coming years as China grows from a manufacturing base to an intellectual hub. In order to facilitate the economic, social and political transition to accommodate the flattening of the world, she must overcome a few major barriers which are particular to China; protecting intellectual property, working with government bureaucracy and developing effective business relationships. Protecting Intellectual Property Intellectual Property (IP) is regarded as a major deterrent for foreign and domestic companies wishing to establish themselves in the Chinese market. It is estimated that as much as 90% of business software used in China is derived from pirated copies. Furthermore, it is estimated that the American entertainment industry lost some US$1billion to piracy in China in 1997. Heinz also discovered that 36 of their products we copied along with SC Johnson estimating that two thirds of their products were available on the black market. While this problem today remains rampant despite recent hanges in IP policy, it is unclear if this problem will subside in the future. Many of the roots causes for counterfeit goods arise from the corruption of local government officials. Organisations today may protect their IP by not excessively building their brand name in China. By doing so, products will gain substantial sales revenues yet will not experience the popularity to warrant unwanted pirate attention. Organisations may furthermore allow customers to send pirated goods to the official manufacturer by which organisations may track down pirates to prosecute them. Joint Ventures are also regarded as a potential for IP theft. Organisations often sign a confidentiality clause with their counterparts but such a contract usually takes years to resolve if exercised given the inefficiency and bureaucracy of the Chinese legal system. Furthermore companies may study the reasons pertaining to technology and IP leaks which occur within the Chinese market as a means to discover mitigation strategies. Organisations can also determine the ways in which they may effectively build relationships with customers and entities as a means to gain loyalty among the local market. Working with Government Bureaucracy China is one of the world’s most corrupt regions of the world to do business. Today’s problem stems from Deng Xiaoping’s declaration of ‘to get rich is glorious’ – which lead many people to pursue personal monetary gain, a significant move away from socialist society. Secondly the government also controls access to resources and approvals that managers need to run their business which puts the power of an organisation firmly in the hands of the government. Corruption usually takes one of the following forms; demands for payments of unauthorized fees, payment for services that should be provided as part of a bureaucrat’s job, or a payment or kickback for awarding a business contract. The future looks bright however for the Chinese corruption situation. The Economic Co-operation and Development (OECD) and five other countries have recently signed the OECD Convention on Combating Bribery. All countries strive to ensure that corruption be governed and eradicated by establishing legislation in all contributing nations home countries in a way which is best suited to their individual legal system. In addition, research suggests that managers may improve communications between stakeholders thereby increasing cooperation. Communication also increases the sense of group effectiveness, cohesion, mutual obligation and interdependence all of which may deter corruption. Conclusion Given the vast amount of complex challenges which managers and organisations face in China today, it is no surprise that the majority of corporations fail or have limited and varied success. In 1998 it was estimated that as much as one half on companies experienced losses due to ‘black hat’ activity. While Deng Xiaoping’s efforts have allowed China to radically transform its economy, political and legal reform has unequally developed and has resulted in an imbalance. This imbalance has ramifications for foreign and domestic investors alike whom wish to develop and expand business operations within the Chinese market. Undoubtedly Chinese ascension toward a global superpower will depend on such reforms to be realised. Foreign investment and open door policy have throughout history allowed such barriers to be broken down in the past in similar situations in different nations. The author speculates that over time, the willingness of China to be open and free to trade will gradually erode such barriers in the future and allow business to further flourish. CASE 1: Starbucks management strategies in China 1. Introduction: history of Starbucks Starbucks calls itself the leading retailer Coffee Company in the world. It has more than 6,000 retail locations in North America, Latin America, The Middle East and the Pacific Rim, wherever there is demand for coffee. They are committed to offer their consumers the world’s best coffee while conducting their business in ways that produce social environmental and economic benefits for the countries where the shops are located. The first Starbucks shop opened in the 1970’s in Seattle’s historic Pike Place Market by three partners: English teacher Jerry Baldwin, history teacher Zev Siegel, and writer Gordon Bowker. Due to the demand for coffee, Starbucks was able to expand beyond Seattle during the nineties. Starbucks became a publicly traded company and offered stock options to its part-time employees. During the last decade, Starbucks continued its worldwide expansion. As the largest coffee house company in the world, Starbucks has total stores 16,706 as of Dec. 27, 2009 which include 8,850 company-operated stores and 7,856 licensed stores. Next to coffee and espresso Starbucks started to offer tea and other drinks to their consumers. The providing of a great work environment and the embracement of diversity is clearly pointed out in its mission statement. Starbucks tries to apply the highest standards of excellence for the ingredients of the products and to satisfy their consumers without losing eye for profitability (Starbucks: 2007). In this paper we first outline how Starbucks conquered the Chinese market. An overview is given about the main marketing strategies concerning the product, place, price, promotion and people. Furthermore we try to compare Starbucks to its main competitors. In the last chapter of the paper we end with a conclusion. 2. Starbucks conquers the Chinese market In 1999 Starbucks opened its first shop in China, in Beijing’s China world trade center. One year later the first shop in Shangai was opened. At this moment Starbucks has over 436 retail shops mostly situated in mainland China, Taiwan and Hong Kong. In mainland China the majority of the stores are located in Shanghai and in Beijing, respectively 95 and 57. In less than 10 years China became the most important market for Starbucks outside the United States. The majority of the shops can be found in cities where the Western culture has already penetrated the Chinese culture significantly. In the beginning Starbucks needed to find local partners to expand the market. As a result, expansion was very slow. Government regulations forced Starbucks and other international retailers to open stores through partnerships with local firms. Starbucks and other multinationals left many operational activities to be completed by their local partners. This resulted in inconsistencies like in case of Starbucks, big disparities in their products from shop to shop. (Reuters: 2006) Since 2004 it became much easier to conquer the market because the government adapted the law and no more local partners were needed to open a retail shop (Adamy: 2006). In figure 1 the numbers of Starbucks stores in mainland China, Taiwan and Hong Kong are presented over a time period from 1999 until 2006. The number of new shops each year has been increased significantly because of the less strict regulations since 2004. This result is in line with Starbucks worldwide expansion plans. In the year 2007 the company’s goal is to open 2,400 stores among the United States and other worldwide markets. This expansion is mainly driven by the growth of the company in China. [pic] Figure 1: Expansion of Starbucks in China, Taiwan and Hong Kong. Information available on https://english. cri. cn/2946/2006/11/29/199@168770. htm 3. Market Strategy The probing question Starbucks and other multinationals have to answer is: should we change our products to have more appeal in China or should we try to change the Chinese taste? Eventually Starbucks decided to go for the second option and tried to promote their coffee specialties in a tea drinking country. Promotion and information was very important in the approach of Chinese consumers. By distributing brochures titled “Coffee Brewing Wisdom” with frequently asked questions such as “What is Cappuccino? they tried to educate the people. Other multinationals like Kentucky Fried Chicken chose the first option and adapted their product to the Chinese taste. As Chinese people like fried food and chicken, KFC is doing very well in the mainland of China and its market share is even bigger then Mac Donald’s who sticks more to their traditional products. Another successful example is General Motors Corp, which has adapted its Cadillac for the Chinese consumer market. This proves that both options, adapting the product or change the Chinese preferences, can be successful. The company does need an effective and efficient market strategy concerning the place, price, product and promotion discussed in the following paragraphs. . 3. 1 Product Starbucks had to close the huge gap between Chinese citizens and their Coffee. In the beginning Coffee was really unknown and unpopular in the country with a tea drinking culture. Starbucks overcame this overwhelming obstacle by a successful marketing strategy. In fact, it turned out that the tea drinking culture was not the biggest obstacle. Coffee can easily be adapted by adding more sugar and milk so that one can make it as sweet as he or she wants. Starbucks main goal was to let people get use to visit a Starbucks shop a couple of times a week like after class or after work. They want to make their clients addicted to visiting Starbucks, maybe not for the food and drinks, but for the cozy environment, to meet friends and to show other people their status. Like one client in Starbucks said: “I don’t really like the coffee but I come here because there are so many girls. I prefer the environment above the products they offer, you just feel so comfortable here”. (CBS: 2006) The drinks menu today focuses on the same coffee-based beverages as in the U. S. with tea playing only a minor role. Next to the hot coffee and tea, Starbucks also offers cold drinks. Furthermore it added sweet food, fruits, vegetable cups and sandwiches to its product mix. Starbucks stores started to sell green-tea cheesecake and Chinese moon cakes. The latter is a special pastry served during the Mid-Autumn Festival. 3. 2 Price Thanks to the enormous economic growth in China during the last ten years, the average income of the Chinese population has increased a lot. The middle class became bigger and the overall purchasing power grew. The Chinese population is more and more able to spend money on luxurious products. Although statistics show us that the purchase of luxurious products has increased during the last decade, the Chinese population still remains very price sensitive. When those new trends are considered and related to the market position of Starbucks, two basic rules become clear. Firstly, because of the overall increase in purchasing power, coffee shops like Starbucks have a potential clientele in the Chinese market. Secondly, because of the fact that the most consumers remains very sensitive to the price and because the overall purchase power remains low compared to Europe and the US, there has to be diversity in the price of the products. For this reason, Starbucks has added cheaper products in their retail shops like small pastries for people who can not afford the more expensive drinks. (Reuters: 2006) 3. 3 People Starbucks is targeting the young Chinese generation which prefer high-status brands. China’s one-child rule created a generation who has been spoiled a little bit by their parents. This generation has more many to spend compared to older generations and like to show off their better social status. Whereas the older generation is very careful to spend money, the new generations has a different view of the world and spend more money on leisure, personal healthcare and food. In recent years there is a tendency towards more individualism among this young generation. Starbucks embraces this tendency by offering customized products and service. For instance the Macchiatto (coffee with a lot of milk), the White Chocolate Mocha and the Frappuchino (ice coffee). The client decides himself how many coffee shots he would like to get. (Chinese Business Monitor: 2003) 3. 4 Place In the beginning Mr. Wang, the CEO of Starbucks in China, overhauled the company’s growth strategy to focus more on adding stores in China’s metropolises instead of entering lots of new cities. First Beijing and Shanghai were targeted as the cities in mainland China, later also Hong Kong. As the expansion was successful, Starbucks moved to smaller cities in mainland China and tried to expand over the whole country (Adamy: 2006) 3. 5 Promotion Promotion is one of the key points of Starbucks business. Because of the tough competition it becomes more and more important and reaches the almost the same level of importance then the product itself. Starbucks has to make the consumer aware of its product and establish a good image. In order to do this the company sponsors a lot of events (sports, charity, ect. ). Last year it donated $ 1. 5 million to train schoolteachers in China from the poor west and to provide books, computers and school equipment (Mcdonald: 2006). To familiarize Chinese people with Starbucks coffee, the company pours customers a one-ounce sample and invites them to join the shop for a tasting. Sometimes the promotion includes a free drip coffee and a brownie. In this way the Chinese population starts to become aware with the products and the tastes. 3. Competitors Starbucks shops try to create a relaxing environment by putting big lounge sofas in the shop. This formula attracts especially young people but it has been copied by a lot of competitors like Subway and Chinese retailers of food services. Recently, Starbucks has competition from a new generation of Chinese teahouses — some of which offer both traditional beverages and a social, laid-back coffeehouse culture. Chinese competitors of Starbucks like the typical Chinese teahouses or the Taiwan-based Barista Coffee consider the coffee focus a weakness given traditional Chinese tastes like explained in the introduction. They will enjoy tea more than coffee,” says Garvin Lau, a general manager for Real Brewed Tea. Launched in Hong Kong, the chain of teahouses considers itself to be “the Starbucks of tea,” It has carefully studied the Seattle chain. Real Brewed Tea’s locations have high ceilings, bright green chairs in style of the interior of the stylish Starbucks shop. (Chinese Business Monitor: 2003) Real Brewed Tea stores sell basic tea drinks for a price slightly less than what Starbucks charges (Adamy: 2006). The consumption price is a very influencing factor in the Chinese market. For an average Chinese citizen, 12 RMB is too much for a cup of coffee especially when we bear in mind that consumers get green tea for free in many Chinese restaurants. The consumption price is definitely one of the main marketing strategies were competitors can compete to each other in order to gain market share. As the price sensitivity is high among Chinese consumer, Beverage Company may prefer to lower their prices instead of spending a lot of money on promotion and advertising budgets. A new trend in coffee shops is the offer of free and wireless Internet to their customers. With this strategy the shops try to keep their clients as long as possible in the hope they will consume a lot of drinks. Moreover the coffee and tea shops also want to create a meeting point for students and business people. Starbucks had to deal with copycat as well during the last years. In Shanghai they won a trial against the company ‘Xingbake’ which means star and bake pronounced ‘bah kuh’ so it sounds like ‘bucks’. Copycat is a common problem in China but the president of Starbucks says that he is confident that there will be less and less problems with copycat in the future. (Mcdonald: 2006). 4. Conclusion Starbucks worldwide growth is driven by the expansion of the company in China. China offers a lot of opportunities but in order to be successful one need to take a lot of facts into consideration. The Chinese market differs from the European and American market in many ways. First there is a huge diversity in preference between Chinese and Western markets. Furthermore the Chinese market itself is not homogeneous at all. The geographical differences are significant like the cultural diversity between Shanghai and Beijing. Moreover within one city or region, there is a considerably high income gap between employees. As a result Starbucks should not only offer different products dependent on the region but also offer a wide price range of products in their shops. The company should adapt their products to the Chinese preference or should try to change the Chinese preferences in their benefit by active ways of advertising. There is not much profit details published about the success of Starbucks in China. The company cites its expansion in Japan as proof it can carve out a market in a tea-drinking country — even though the chain has struggled to raise sales there. Starbucks says China stores have lower sales than U. S. stores. That’s offset by cheaper labor and other lower operating costs. One of the main hurdles of doing business in China is definitely the tightly and stricter regulations, the lack of unity in the government’s policy and the currency-conversion. Furthermore the company has to deal with a different culture, different thinking and a different way of doing business. Cross cultural management training and expertise is needed and the right ‘Guanxi’ in order to succeed in China. Exhibit I The logo revolution pic] The original logo [pic] In the second version [pic] In the current version Exhibit II Starbucks’ expansion in Japan and China 1995 Starbucks enters to Japan – SAZABY Inc – The third largest coffee consuming country in the world, behind the U. S. and Germany. 1998 Starbucks enters to China with its first store in Taipei, Taiwan -President Enterprise Corp. 1999 Starbucks opens its first store in Beijing (1st Starbucks store in mainland China) -Mei Da Coffee Co. Ltd. 2000 Starbucks enter to Shanghai market -President (Coffee) Cayman Holdings, Ltd Questions What marketing strategies the company adopted in China? Please underline the pro & cons of the company marketing strategies. What suggestions and comments would you give to the relative company? What do you learn from this case? CASE 2: The expansion of McDonald’s in China Introduction The Chinese market is a great opportunity for foreign companies. With a population of 1. 3 billion people, the Chinese market is world’s largest consumer market. But foreign companies need to be careful, for example the governmental procedures for foreign investors to make investments in China, is extremely complicated. Therefore, it is important to be familiar of the investment procedures before carrying out business in China. The Chinese fast food market has been booming the last decade because of fast changing lifestyles and eating habits. The reason for this evolution is that Chinese consumers have accepted the Western-style fast food restaurants as a way of life in China. As a result, the popular American food has become a huge success story, creating a growing market for U. S. frozen potatoes. This report makes a comprehensive analysis of one of the key players in the Chinese fast food market, namely McDonald’s. : History of McDonald’s China McDonald’s is the leading global foodservice retailer with more than 31,000 local restaurants serving more than 52 million people in more than 119 countries and regions each day. McDonald’s opened its first Chinese restaurant in Shenzhen in 1990. In the following decade McDonald’s China achieved a steady growth, opening over 400 restaurants in China and serving more than 1. 5 million customers every day. With such a fast expansion of business, McDonald’s China had to take care with a rapidly increasing volume of transactions every day. Over the years, the main priorities of McDonald’s China were providing outstanding quality, service, cleanliness and value. Today there are more than 1,000 McDonald’s restaurants in China, 200 more in Hong Kong, and more than 50,000 McDonald’s staff. (Beijing 2008, 2007) To manage a business across such a large country, McDonald’s China has gradually set up offices in Shenzhen, Guangzhou, Shanghai, Beijing, Tianjin, Fuzhou, Nanjing and Dalian. During Olympic 2009, McDonald’s opened four stores in Beijing Olympic area. Also it launched a new advertisement with logo “I really like it, China wins. ” which involving restaurant employees and customers throughout China. In 2010 McDonald’s is planning to open 175 franchise, 500 stores in the next three year. An important remark is that McDonald’s is the world’s leading fast food restaurant, but as the figure shows, the main fast food giant in China is Yum! Brands Inc. This is the parent of fast food chains Kentucky Fried Chicken, Pizza Hut and Taco Bell. [pic] Source: National Bureau of statistics 2: McDonald’s expansion strategy: The success of franchising McDonald’s is stepping up its China expansion efforts through franchising. The expansion strategy has played a major role in the company’s growth in many other markets. It became applicable in China after the change in franchise regulations by the Ministry of Commerce as part of commitments to the World Trade Organization. Since it opened its first outlet in China in 1990, McDonald’s has been expanding in the country, mainly through joint ventures with various local partners. In contrast, about 70 per cent of its outlets worldwide were franchised. (Yiang Yan, 2005) In 2005 McDonald’s launched its franchise strategy in China, because the legal environment for franchising has been greatly improved in China. For opening a franchise restaurant in China the following necessities are required. First you need to have 300,000$ to invest, secondly you need three years of operating experience in the catering sector and last but not least a specific training is required. McDonald’s has established staff training centers in Beijing, Guangzhou and Shanghai. (Liu Jie, 2004) Such a model reduces the business expansion costs of McDonald’s but also creates more jobs for local people. Other advantages of franchising is that McDonald’s can reach more customers by opening more outlets and can gain more market share from its competitors like Kentucky Fried Chicken. In the past this strategy wouldn’t be very effective because they were not a lot of educated people in China. Now China has a bigger range of people with business experience who can manage the restaurants. One of the problems is that this strategy can have a higher rate of defaults in China than in more affluent markets, because McDonald’s lends money to franchisees to help them set up restaurants. Le-Min Lim, Bernard Lo, 2004) 3: Marketing Strategies To position a product in a country, a good marketing strategy is needed. McDonald’s success in China is based on a five-point strategy focused on product, price, people, promotion and place. A new trend is the introduction of the sixth P, namely profit. McDonalds also tries to improve the profitability in China. (Edward B. Colby, 2006) 3. 1 Product McDonald’s product strategy consists of three categories. First they try to reflect the tastes and customs of the local markets by offering different kind of menus. Examples: Happy Meal options in China now include a cheese and egg sandwich on a steamed bun, yoghurt, and milk. (McDonald’s Corporation a, 2007) The Chicken McNuggets in China come with the traditional BBQ, Sweet & Sour, and Honey Mustard sauces, but there’s also a Chili Garlic Sauce, which is very popular in China. (Answers. com a, 2007) In 2001 McDonald’s Vegetable and Seafood Soup and Corn Soup were introduced. In 2006 McDonald’s introduced the Mega Mac: a Big Mac with four beef patties, and a Quarter Pounder. The McPepper currently being promoted is a black-pepper-sauce-seasoned double-patty burger. (Cheryl V. Jackson, 2006) Secondly McDonalds tries to provide information about their products. In cooperation with their global nutrition team, their local business units develop and implement nutrition information, which can be found on the packaging of the products. The packaging provides information on key nutritional values in a simple and clear format, so that customers around the world can use the information to make menu choices that suit their preferences. Also other communication tools are used, such as advertising both on television as on the World Wide Web to give information about the quality of their food products. McDonald’s Corporation b, 2007) Thirdly McDonald’s promotes physical activity, for example their sponsorship of the Olympic Games. McDonald’s history with the Olympic Movement dates back to 1968. As the Worldwide Olympic Partner and the Official Restaurant of the Olympic Games, McDonalds has served millions of athletes. With the sponsoring of the Beijing Olympic Games in 2008 McDonald’s wants to continue to promote an Active Balanced Lifestyle and Olympic Spirit among Kids, Families and Adults of all ages. (Beijing 2008, 2007) 3. 2 Price The conventional wisdom about China is that most consumers are highly sensitive to price. As a result, a decrease in burger prices is likely to be more effective than a big marketing campaign. To convince Chinese consumers coming to McDonald’s, McDonald’s lowered prices for its basic menu consisting of a hamburger, fries and drink from 12. 50 Yuan to 10 Yuan. (Scott Hume, 2007) Across China there are a lot of differences in purchasing power. Therefore McDonald’s China is also exploring menu pricing by taking into account both market and restaurant. (James A. Skinner, 2006) 3. 3 People McDonald’s provides employment and growth opportunities for a lot of people, more than 1. 5 million worldwide. Entering the Chinese market they can give many people the opportunity to operate in their restaurants. They focus also on training and development, which is necessary to learn the required skills, to do their jobs well. McDonald’s has its own learning academy, namely the Hamburger University (HU), where a leadership development program is established based on Western management practices. (McDonald’s Corporation c, 2007) 3. 4 Promotion Promotion is very important to make the consumer aware of your product. The most important part of promotion is branding. Building a good image in a country is one of the most key points a company has to do. McDonalds is trying to establish a good image by sponsoring sports, educational or charity events. An important thing to keep in mind is that sponsorship requires cost and reputation and is therefore not suitable for every company, but McDonalds has this possibility. Building a good image consists not only of sponsorship. A major part of the promotion budget goes to advertising. Nowadays the value of an advertisement depends not only from its creative element. A good ad promotes sales and builds the brand image. In China, creativity is way down on the list of ad-making priorities. The ad industry fluctuates according to the state of the economy. Through the dynamic economic development, it has caused chaos. China’s advertising industry has developed and redeveloped in line with reforms to a noncompetitive planned economy. The great diversity of consumers tastes causes trouble for advertising firms who must work out, how to hold the attention of a wide scope of consumers with different standards of living long enough to communicate new brand ideas. In the following some campaigns of McDonalds will be made clear. (China Today 2007) International fast food giant McDonald’s has launched a new “Bag Breakfast” for Chinese consumers. McDonald’s organized a survey, which founded that through the growth of China’s urbanization a lot of people eat only a very simple breakfast. Some of them even don’t eat breakfast, which is harmful to their health. With this campaign McDonalds is trying to promote the concept of eating a healthy breakfast. (China Retail News, 2007) Another promotional campaign consists of trying to introduce beef on the Chinese market. With messages, such as beef is luxurious, healthy and sexy, McDonalds is trying to convince the Chinese consumers to eat more beef hamburgers, like the Quarter Pounder. One billboard ad features a close-up of women’s lips. The campaign, which supports the introduction of the Quarter Pounder in China, is part of a change in strategy. The company recently started focusing less on selling menu. They want to convince the consumer to eat more beef hamburgers to higher the profit margins. (Gordon Fairclough, 2007) The “I’m Lovin’ It” campaign of McDonald’s is an important milestone in the history of McDonalds. The new ads of this campaign have all vital elements of Chinese spirit, music and taste. This global campaign has increased sales of McDonald’s all over the world, especially in China. Another evolution in advertising is the broadening of the focus group. Not only teenagers are taken into account but also mothers. In May McDonalds launched a Mom’s Club program, where more than 10,000 women have signed up for in order to access in-restaurant activities such as story-telling, arts and crafts, exercise instruction and games. (Cheryl V. Jackson, 2006) Another campaign, which proves McDonalds is adapting his business to the Chinese culture, is the following. During the 2004 Spring Festival, McDonald’s on Beijing’s Wangfujing Street attracted many people with a traditional Chinese look, decorating their interiors with paper-cuts of the Chinese character Fu (Happiness), magpies and twin fishes, all typical symbols. To encourage Chinese consumers to visit McDonald’s and understand what it is all about, the chain offered an Open Door event last year. Consumers had the possibility to see the kitchen and ask questions about menu, quality, preparation etc. hich has been extended to an every-day policy. 3. 5 Place There are two important evolutions concerning this subject. First evolution is to open McDonald’s China 24 hours a day. Presently, more than 400 restaurants of the 800 restaurants in China have provided services for 24 hours a day. In Beijing 40% of the company’s stores open their business for 24 hours. In Shanghai 50% and in Guangzhou 60% have a 24-hour service. The major reason for opening 24-hour restaurants is to meet the demand by the customers, because more and more customers need the services at night because of their changing living habits. In Beijing customers actually weren’t eager for the night service due to the relatively cold weather there at night. This is different from the customers in the warmer southern China. (Answers. com b) A second important evolution is the establishment of drive-throughs in China, because car ownership continues to grow. In 2006 McDonald’s signed a deal with the Chinese largest gas retailer, namely Sinopec. The strategic alliance with Sinopec gives McDonald’s the opportunity to further expand their business. 3. 6 Profit Jeffrey Schwartz, CEO for McDonald’s China, says he has added a sixth “P,” for profit, to the China Plan to Win. We’re instituting the idea that we’re also about making money,” he says. China’s middle class is rapidly growing, but consumers remain very price sensitive. The goal is to pull Chinese consumers up to higher-price, higher-margin Smart Choice menu combos such as a Big Mac, fries and drink for 16 Yuan and ultimately to items such as the recently introduced Quarter Pounder which costs 18. 50 Yuan. (Scott Hume, 2006) As a conclusion of the marketing strategies, it is obvious that McDonalds is doing a lot of efforts to improve his position in China and to improve his image under the Chinese people. : Evolutions of Unions One of the latest labor developments in China consists of forming unions in multinational corporations. Unions exist already a long time in China but they have been traditionally weak. For instance, it wasn’t possible to challenge management or to bargain for higher pay. Unions have been used especially for coordinating employee activities. Recently Union leaders are fighting for the rights of workers. The All China Federation of Trade Unions wants to have unions active in 70 percent of the foreign-invested companies operating in China by the end of this year. This evolution is also affecting McDonald’s. McDonald’s has already unionized some of its outlets in China. Since November of last year McDonald’s is making progress in setting up a union branch by productive discussions with the Guangzhou city union officials. The effort of McDonald’s to establish a union branch is also a consequence of a recent report of the company, which highlighted some violations of the law. The main topics were that they pay employees less than the minimum wage and that they deny their employees some benefits. David Barboza, 2007) The All-China Federation of Trade Unions said that McDonald’s paid part-time workers less than the legal wages in southern Guangdong province. China’s New Express newspaper reported that McDonald’s was paying its part-timers, mostly college students, 4 Yuan an hour in Guangzhou. This is only half of the city’s minimum hourly wage of 7. 5 Yuan. (Josh Fineman and Samuel Shen, 2007 ). Conclusion China has great opportunity for a lot of companies to do business, but you have to take into account several things. The most important is “Guanxi”. Regardless of business experiences in a company’s home country, in China the right “Guanxi” makes all the difference in ensuring that business will be successful. In the case of McDonald’s the strategic alliance with Sinopec made a great difference. Also a lot of other things need to be taken into account for example building a good image, adapting product to the tastes of consumers and obeying the laws of the country. McDonald’s had some problems with the last example but they are on their way to solve it. So a good advice for foreign companies to come to China is: “To succeed in China requires local knowledge and local players, but the key is local representation. ” Questions What marketing strategies the company adopted in China? Please underline the pro & cons of the company marketing strategies. What suggestions and comments would you give to the relative company? What do you learn from this case? CASE 3: A Case Study of KFC and other Fast food Chains Introduction: China has been undergoing a lot of changes in recent years. The opening of the market has led to a lot of influences from abroad. The lifestyle of the Chinese is also changing; Chinese people are starting to lead more western style lives, especially in the big cities. The introduction of fast-food restaurants in China was a risky venture, and not all firms were successful. In this case study an analysis will be done of the most successful fast-food chain in China: KFC. This paper will start with theoretical aspects of market entry, and market strategies, followed by an application to the KFC case and then an analysis of other market players and new entrants. Also an analysis will be provided of the Chinese market and its opportunities and threats and finally a conclusion will be given what should be done for a successful market entry into the Chinese fast-food market. Strategy Theory: Modes of Entry There are various forms of market entry, all with varying degrees of commitment and different drawbacks and benefits. The different modes will be listed from least amount of resources committed to the most expansive mode of market entry. Of course some modes are not applicable for fast food chains such as exporting, licensing and contract manufacturing. The ones described are the only ones that are applicable for fast-food restaurants. Franchising Strictly speaking franchising is a specific form of licensing in which the franchiser grants the franchisee the right to do business in a prescribed manner. In this vertical cooperation the franchiser makes a whole marketing program available to the franchisee. This program includes brand name, products, symbols, merchandise, method of operation and overall expertise. The franchisee runs his own business but has close links to the franchiser spreading the risk for both. The franchise system combines the advantages of economies of scale offered by the franchiser and the local knowledge, entrepreneurial talents and the motivation to run an independent business of the franchisee providing growth for both (Hollensen 2001). As in a licensing agreement the franchiser receives fees, running royalties, and other compensation from the franchisee for letting the franchisee use his concepts. However franchising is somewhat an umbrella term that can mean anything from the right to use a name to the total business concept. In the case of fast-food restaurants it is of course a total business concept. Joint ventures A joint venture is a form of strategic alliance in which two or more companies form a partnership and found or buy a third company together. In this new co-owned enterprise the owners share ownership, control, losses and profit. The partners can come from different countries and can even be operating in different businesses. Reasons for such joint ventures are various and include the following (Hollensen 2001): Complementary skills, know-how and technologies of the partners lead to new opportunities in existing sectors improving the situation for both companies. One partner is located in the host country and the other is hoping to increase the speed of market entry through cooperating. Foreign ownership is restricted in some less developed countries and makes local co-owners a necessity. Global operations are expensive but necessary in some businesses to achieve competitive advantage. To diversify the portfolio of investments, the joint venture asks for substantial financial and managerial commitment in the foreign market. It is a form of direct investment in which the risk is shared with a partner. The difference to a licensing agreement is that the international company owns equity shares in the joint venture company and therefore has a voice in the firm. (Hollensen 2001) Joint ventures are also seen as the extension of the idea of licensing Joint ventures can be formed in nearly all stages of the product value chain. The important thing about forming a joint venture is examining the future partner and setting goals for the joint venture. Of course before partners can be selected a cost and benefit analysis has to be made to find out whether the strategy of a joint venture is the best solution for market entry. After partners have agreed on forming a joint venture business plans have to be made for the new enterprise. Then when everything is put into a contract the new company can start to operate but will be closely watched by its parent companies (Hollensen 2001) The real difficulty about a joint venture is managing it when it is already set up. Most difficulties arise due to different bargaining power and goals of the parent companies. This power generally shifts between the partners and it requires understanding and good relations between the parent companies to have a long lasting joint venture. Most conflicts come up due to the following motives according to Hollensen (2001): Diverging goals and interests of the involved parties. Managerial independence of the joint venture cannot be achieved and one partner always has more influence on decisions concerning the joint venture than the other one. One partner has the feeling that he gives more input than the other one and does not receive the deserved reward. Trust in the joint venture has not developed and it is regarded better to pull out before the fear is proven true. In case such a motive becomes too strong and the joint venture is actually terminated it is of course important to fix an exit strategy before the joint venture is set up in first place. This prevents legal struggles in the worst case. Acquisition or Greenfield investment A company wanting to choose either of the hierarchical entry modes presented in this chapter has the possibility to acquire an existing company or to set up new operations. The acquisition strategy enables the company to enter a market faster since it enters the market with existing products and market segments using in most cases established brand names and corporate reputations Through acquisition a company also gains access to existing distribution channels and can take advantage of the trained workforce and the management’s knowledge of the market environment The acquisition strategy does not only have advantages as described in the previous paragraph. The difference in management styles and corporate culture may lead to problems that can only be solved through hard work and coordination between the parent company and its new subsidiary (Hollensen 2001). Therefore selection has to be made carefully and acquisition candidates have to be monitored for some time in order to successfully enter a market through take over. A company has to be aware of the problems that might occur and come to an objective evaluation of the candidate An investment in a completely new facility offers the company the possibility to build verything according to its expectations, image and requirements. This is not only meant with regard to technology but especially concerning management practices and corporate culture. Also newest technologies guarantee up to date production. (Hollensen 2001) Motives for market entry In the case of KFC for China this is very clear, China is the largest new opening market of the world. With a population of over one billion it has a huge sales potential. However in the past China was a closed country and Chinese people had no disposable income. However through the economic growth and the economic reforms and trade liberalization China is becoming westernized and people have more disposable income. The lifestyles are changing into a new lifestyle where KFC and other fastfood chains fit in. Finally China is a chicken eating country. Chinese have always used a lot of chicken in their cuisine and love chicken based meals. (Hollensen 2001) Market entry barriers Basically bureaucracy was and is one of the main issues for market entry into China. Getting licenses and government cooperation are painstakingly slow processes till the right approvals are given out. Operations in China started in 1987 and even though bureaucracy is not as bad as it used to be it is still very high compared to western standards. The next market problem is the amount of people that have enough disposable income to visit fast-food chains. Food cooked at home or in Chinese restaurants can be a lot cheaper compared to a fast-food meal. People need to have the income levels high enough and be willing to spend it at KFC for the price premium. The final big issue is the fact that intellectual property rights are not enforceable. For a fast food chain one would expect this not to be a problem. However in China copied fast-food chains have appeared such as QQ (McDonald’s clone) and KFG Market entry timing KFC was the first fast-food chain to enter into China in 1987 and this brought them some strong first mover. Being seen as the first western symbol in China there were long lines of at the first KFC who all wanted to try western food. It took them 9 years to open the first 100 stores, because of the start-up problems such as the right quanxi connections, the right contracts and agreements and licenses. The pace has been speeding up and it took KFC just 11 months to go from 400 to 500 KFC stores in China. There are more than 14,000 KFC restaurants in more than 80 countries in the world. Everyday about 12 million customers visited KFC. As of the 4th quarter of 2006 there are now 1600 KFC restaurants in mainland China (Yum! Brands. com). At the end of 2007, there are more than 146,000 employees worked for KFC in China. Market segmentation The big question is of course who will eat at KFC or any other fast-food chain since fast-food clashes with traditional Chinese dining culture. Well the first thing to recognize is a change in culture and lifestyle towards westernization. In major cities many Chinese people lead very western lifestyles. After some demographic research it was concluded that in the top 20 cities of China 63% of the Chinese people visit fast-food restaurants, 28% visits KFC frequently, and 18% goes to McDonald’s frequently. The majority of this public naturally consists of young people so they should be targeted for marketing. (Woods, 2005) Market Development of fast food industry China’s nearly two-decade high economic growth, its open-up and the improvement of the people’s lifestyles and the changing of rhythm of daily life have driven the rapidly rising demand for consumption of fast food and it has become one of the most important parts of the food and beverage industry in China. Since 1991, the country’s consumption of fast food has grown 23. 2% annually. By the end of 1996, there are about 800 professional fast food enterprises all over the country, with more than 4000 chain operation enterprises, and nearly 400 thousand fast food restaurants. The revenues of fast food reached 135,200. 0 million Yuan (16,368. 0 million US dollars) in 2001. Along with the improvement in overall living standards, not only in more developed regions, but also in less developed and low-income areas the total revenues of fast food is expected to increase 26. 1% annually to 431,597. 4 million Yuan (52,251. 5 million US dollars) by the year 2006 and it will advance to 1,322,487. 3 million Yuan (160,107. 4 million US dollars) by the end of 2011, increasing by 25. 1% per annum. Wood, 2005) Development of fast food industry in China is not the same between the more sophisticated regions as such Beijing, Shanghai and coast line cities and relatively less-developed regions in the central and the west. The more sophisticated regions, with an enhanced economy, catch much more attention from fast food investors than the less-developed regions. Especially Shanghai, the economic and financial centre of China, is regarded as the most important city for fast food industry. Shanghai history has provided it with ample opportunity to adapt itself to the western world. Wu, 2002). Fast food is highly demanded by Chinese consumers because of their busy city life style and particularly white-collars working in offices enjoy KFC chicken, hamburger, pizza or other fast food. Along with fast economic growth in china, the popular American fast food such as KFC and McDonald’s has become a huge success story. Two major competitors, KFC and McDonald’s Fast-food restaurants with strong brand name images, such as McDonalds and Kentucky Fried Chicken, are more popular than Chinese-style fast-foods because they are known for quality control and good store management. KFC and McDonald’s are also known as the most active and prominent fast food companies in China. In spite of the competition between the two companies, they have been occupying the largest market share and enjoying great profits in China (Kentucky reached US$241 million in sales in 2000, ranking on top of the China fast food list). Kentucky Fried Chicken (KFC) Kentucky, a member of Yum! Brands inc. , was the first foreign fast food company to open up shop in China. It opened their first outlet in Beijing on November 12 1987 as a joint venture – a full 5 full years ahead of McDonald’s entry into China. Subsequently it opened a wholly-owned outlet in Shanghai in 1989. Since opening its first mainland outlet in Beijing, the fried-chicken chain has gone on to become the most recognized global brand among urban consumers in China. Kentucky Fried Chicken had more than 510 outlets in China as of October 2001 compared to less than 400 outlets for McDonalds. (Wattanavitukul, 2002) What’s more important is that market surveys by AC Nielson consistently confirm Chinese consumers’ general preference for KFC outlets and products over McDonalds’. One of the main reasons behind this is that chicken is already familiar in China and much cheaper and more widely available than beef. Furthermore Chicken has long been regarded as a kind of nutritious food which is especially good for the patients, the elders and children. Therefore more health conscious consumers prefer the consumption of chicken over beef. It took Kentucky 9 years ( till 1996 ) to set up 100 KFC chain restaurants in China, while it only took 11 months for KFC to increase the number from 400 to 500 restaurants in the country in 1997. Now, KFC has presence in almost all major cities in China, and in some smaller cities too. Wu, 2002) In November, 2007, KFC opened a restaurant in Chengdu until then it had 2000 stores in China. In 2009, KFC has around 2728 restaurants in China. It is said that ‘KFC would continue to aggressively to open new restaurants in China with a goal of opening about 600 restaurants over the next three years. ’(Annual Report, 2009) The entry strategies of KFC The China expansion of KFC plans first came-up in the early 1980’s after several successful expansions in the South East Asian region including Japan. International fast food companies have different market entry strategy options when they decide to expand overseas. They are strategies such as franchising/licensing, wholly owned subsidiary and joint venture. However franchising strategy, which emphasizes standardization and reduces financial risk, on the expense of cultural sensitivity and control was not feasible in case of China due to the country’s strict foreign investment laws. Furthermore wholly owned subsidiary which relies upon total control over competitive advantages and ensures complete operational and strategic control is not compulsory either with high levels of resource commitment and little country-level flexibility and responsiveness. In case of KFC’s market entry in China a joint venture strategy is used, as a joint venture can solve many logistic problems such as access to good quality chicken and other supplies, ease the access to the Chinese market, where the local knowledge of culture, language and geography is beneficial for any foreign entrant into a relatively unknown market. In addition, due to the complexity of many barriers to entry into China, a potential joint venture partner with sufficient contacts (guanxi) with government agency officials make the process of setting-up operations in the nation more easily. Typically a new entrant would find it very difficulty to form local and personal networks between businesses and government agencies, which are crucial to success and
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