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There is an alternative to the relatively expensive process of socializing a new manager from the host or some third country to the value system of the organization; the MNC can simply transfer a pre-socialized member from the parent organization to the subsidiary–the expatriate manager (Boyacigiller, 1990). This practice is held to assure that the subsidiary operates within the overall strategic direction set by the parent, and not in accordance with the behavior patterns dictated by the host cultural context. While there may be many other reasons favoring the assignment of an expatriate over a host country national (HCN) manager, this increased control stemming from the values shared by the expatriate and the parent organization is among the most often cited in both research and textbook publications (Boyacigiller, 1990; Dowling, Schuler, & Welch, 1994; Phatak, 1997).
KFC Latin-America Strategy
Case Study
October 2000
INTRODUCTION
KFC operates in 74 countries and territories throughout the world. It was founded in Corbin, Kentucky by Colonel Harland D. Sanders. By 1964, the Colonel decided to sell the business to two Louisville businessmen. In 1966 they took KFC public and the company was listed on the New York Stock Exchange. In 1971, Heublein, Inc. acquired KFC, soon after, conflicts erupted between the Colonel (which was working as a public relations and goodwill ambassador) and Heublein management over quality control issues and restaurant cleanliness. In 1977 a “back-to-the-basics” strategy was successfully implemented. By the time KFC was acquired by PepsiCo in 1986, it had grown to approximately 6,600 units in 55 countries and territories. Due to strategic reasons, in 1997 PepsiCo spun off its restaurant businesses (Pizza Hut, Taco Bell and KFC) into a new company called Tricon Global Restaurants, Inc.
By the 1990s the fast-food market in the United States was highly competitive, mainly due to the aggressive pace of new restaurant construction during the 1970s and 1980s. Declining margins in the fast-food chains reflected the increasing maturity in the US fast-food industry. As an alternative to domestic expansion, many restaurants began to expand into international markets, KFC was one of the three that originally opted for that strategy (the other two were McDonalds and Pizza Hut), operating the greatest percentage of its restaurants, 50 percent, outside the United States. The early entry into international markets placed KFC in a strong position to benefit from international expansion. Most of KFCs international expansion was through franchises, due to the fact that they were owned and operated by local entrepreneurs with a deep understanding of local language, culture, customs, law, and marketing characteristics. In larger markets there was a tendency to build company-owned restaurants. The rationale was that fixed costs could be spread over a large number of restaurants and lower prices on products could be negotiated.
Latin America was one of the international markets KFC focused on. After 1990 it took a very aggressive strategy by opening company-owned restaurants and by expanding its franchise operations. Mexico is the strongest presence of KFC in Latin America, where most of them are company-owned, mainly because of the lack of a law protecting patents, information, and technology before 1990. Another market of great importance is Brazil – Latin Americas largest economy and mainly unexplored by KFC.
ANALYSIS
Ill focus the analysis by exploring, through different perspectives, the pros and cons of KFC investing in Latin America.
I inevitably associate the words Latin America, when related to social and political factors, with instability, coup dйtat, inflation, drug cartels, and military governments. What can make this region attractive to so many companies? First, the size of the market – it has a population of more than 360 million. Second, most countries are becoming fully functional democracies. Third, most countries are successfully stabilizing their economies. These factors make investment in this market less risky, although it still carries a risk degree above the average.
In a competitive market, companies are not only dependent on their strategy but also on the strategy of their competitors. If the competition is exploring the Latin American market and you arent, cant that be risky? For example, if McDonalds invest in the risky market X and KFC doesnt, two situations may happen. First the investment succeeds, in which case McDonalds gains the advantage. Second the investment fails, in which case KFC gains the advantage from McDonalds misfortune. This situation is one of win or lose all. If KFC wants to play it safe, it can follow the competition into the new markets. That way the chance of all loosing or all winning is quite the same.
The new trade theory mentions the importance of first-mover advantages, especially in locations where the market size only supports one company. For example, KFCs early entry in Mexico gave it a leadership position. McDonalds, one of KFCs biggest competitors, decided to focus their Latin American investments on Brazil. As of December 1997, McDonalds had a total of 480 restaurants in Brazil while KFC had only 8. The economies of scale that are allowed in a big market such as Brazil, can be an enormous competitive advantage to power