S w 990G01 KENTUCKY FRIED CHICKEN IN CHIN.docx

S w
990G01
KENTUCKY FRIED CHICKEN IN CHINA (A)
Professor Allen J. Morrison prepared this case with assistance
from Professor Paul W. Beamish solely to
provide material for class discussion. The authors do not intend
to illustrate either effective or ineffective
handling of a managerial situation. The authors may have
disguised certain names and other identifying
information to protect confidentiality.
Ivey Management Services prohibits any form of reproduction,
storage or transmittal without its written
permission. This material is not covered under authorization
from CanCopy or any reproduction rights
organization. To order copies or request permission to
reproduce materials, contact Ivey Publishing, Ivey
Management Services, c/o Richard Ivey School of Business, The
University of Western Ontario, London,
Ontario, Canada, N6A 3K7; phone (519) 661-3208; fax (519)
661-3882; e-mail [email protected]
Copyright © 1989, Ivey Management Services; Canadian

International Development Agency
Version: (A) 2003-05-29
In late September 1986, Tony Wang leaned back in his leather
chair in his
Singapore office and thought of the long road that lay ahead if
Kentucky Fried
Chicken (KFC) were ever to establish the first completely
Western-style fast food
joint venture in the People’s Republic of China. Wang, an
experienced
entrepreneur and seven-year veteran of KFC, had only two
months previously
accepted the position of company vice president for Southeast
Asia with an option
of bringing the world’s largest chicken restaurant company into
the world’s most
populous country. Yet, as he began exploring the opportunities
facing KFC in
Southeast Asia, Wang was beginning to wonder whether the
company should
attempt to enter the Chinese market at this time.
Without any industry track record, Wang wondered how to
evaluate the
attractiveness of the Chinese market within the context of
KFC’s Southeast Asia
region. Compounding the challenge was the realization that
although China was a
huge, high profile market, it would demand precious managerial
resources and
could offer no real term prospects for significant hard currency
profit repatriation
— even in the medium term. Wang also realized that a decision

to go into China
necessitated selecting a particular investment location in the
face of great
uncertainty. It was equally clear that while opportunities and
risks varied widely
from city to city, the criteria for evaluating suitable locations
remained
unspecified. With limited information to go on, Wang realized
that a positive
decision on China would be inherently risky — both for the
company and for his
This document is authorized for use only in Sandra Triana's
MBA (Roberto de la Vega Vallejo) 2018-1 course at Pontificia
Universidad Javeriana, from January 2018 to July 2018.
Page 2 9A90G001
own reputation. And while Wang was intrigued by the enormous
potential of the
Chinese market, he also knew that many others had failed in
similar ventures.
HISTORY
The origins of Kentucky Fried Chicken can be traced to Harland
Sanders, who was
born in 1890 in Henreyville, Indiana. When Sanders was a boy,
he dropped out of
the sixth grade and began a stream of odd jobs, concentrating
eventually on

cooking. In time he opened his own gas station with an
adjoining restaurant. In the
1930s, Sanders developed a “secret” recipe for cooking chicken
by first applying a
coating containing a mixture of 11 herbs and spices and then
frying the chicken
under pressure. This “southern fried chicken” eventually
became a hit at the gas
station, and in 1956 Sanders decided to franchise his novel
concept. By 1964, he
had sold almost 700 franchises. Much of Sanders’ success in
this pioneer industry
lay in his near obsession with product quality and a commitment
to maintaining a
focused line of products.
In 1964, at the age of 74, Harland Sanders finally agreed to sell
the business in
exchange for US$2 million and a promise of a lifetime salary.
The sale of the
business to John Brown, a 29-year old Kentucky lawyer, and his
financial backer,
Jack Massey, 60, was accompanied by the assurance that
Sanders would maintain
an active role in both product promotion and quality control of
the new venture.
With new, aggressive managers and a rapidly evolving
American fast food
industry, KFC’s growth soared. Over the next five years, sales
grew by an average
of 96 per cent per year, topping US$200 million by 1970. This
same year almost
1,000 new stores were built, the vast majority by franchisees.
A key element in this rapid growth was Brown’s ability to select

a group of hard-
working entrepreneurial managers. Brown’s philosophy was that
every manager
had the right to expect to become wealthy in the rapidly
growing company. By
relying heavily on franchising, the company was able to avoid
the high capital
costs associated with rapid expansion while maximizing returns
to shareholders.
Rapid sales growth provided promotion and opportunities to
purchase stock for
company managers as well as the opportunity for franchisees to
improve margins
by spreading administrative costs over a broader base of
operations. This was
critically important given the high fixed costs associated with
each store. Volume,
both at the individual store level and within a franchisee’s
territory, was thus
essential in determining profitability. Profitability, in turn,
assured the
attractiveness of KFC to potential future franchisees.
In 1971, Brown and Massey sold KFC to Heublein Inc. for
US$275 million.
Heublein, based in Farmington, Connecticut, was a packaged
goods company
which marketed such products as Smirnoff vodka, Black Velvet
Canadian whisky,
Grey Poupon mustard, and A1 steak sauce.

9A90G001
Challenges at Home and Abroad
The establishment of KFC’s international operations began just
prior to the
company’s acquisition by Heublein. KFC opened its first store
in the Far East in
Osaka, Japan in 1970 as part of Expo-70. By 1973, KFC had
established 64 stores
in Japan, mostly in the Tokyo area. KFC also moved quickly
into Hong Kong,
establishing 15 stores there by 1973. Other areas of expansion
included Australia,
the United Kingdom, and South Africa.
Shortly after the acquisition, KFC’s small international staff
was merged with
Heublein’s much larger international group in Connecticut. In
spite of Heublein’s
efforts to impose rigid operational controls, KFC country
managers were frustrated
by the imposition of U.S. store designs, menus, and marketing
methods on
culturally divergent host countries. Resistance to corporate
control grew and led
many stores to develop their own menus: fried fish and smoked
chicken in Japan,
hamburgers in South Africa, and roast chicken in Australia. In
some cases, local
managers seemed to know what they were doing; in other cases,
they clearly did
not. After heavy losses, KFC pulled out of Hong Kong entirely

in 1975. In Japan,
operations also began on shaky grounds with losses experienced
throughout much
of the 1970s.
In addition to poor relations between country managers and
corporate staff, the
1970s presented a much more challenging environment for KFC
in the United
States. The fast food industry was becoming much more
competitive with the
national emergence of the Church’s Fried Chicken franchise and
the onset of
several strong regional competitors. Important market share
gains were also being
made by McDonald’s hamburgers.
With the Heublein acquisition, many top managers who had
been hired by Brown
and Massey were either fired or quit, resulting in much turmoil
among the
franchisees. By 1976, sales were off eight per cent and profits
were decreasing by
26 per cent per year. To make matters worse, rapid expansion
had led to
inconsistent quality, poor cleanliness and a burgeoning group of
disenchanted
franchisees who represented over 80 per cent of total KFC sales.
At one point,
even white-haired Harland Sanders was publicly quoted
admitting that many stores
lacked adequate cleanliness while providing shoddy customer
service and poor
product quality.

Turning Operations Around
In the fall of 1975, with rapidly deteriorating operations both at
home and abroad,
Heublein tapped Michael Miles to salvage the chain. Miles was
initially brought in
to head up Heublein’s international group, which by this point
was dominated by
KFC. Miles had come to Heublein after managing KFC’s
advertising account for
Page 4 9A90G001
10 years with the Leo Burnett agency. At Heublein, he had risen
to vice-president
in charge of the Grocery Products Division. While he had little
international
experience, he had developed a strong reputation for strategic
planning. His
challenge in late 1975 was to install consistency in international
operations by
increasing both corporate support and control. One of his first
decisions was to
move KFC-International back to Louisville where it could begin
to develop a
degree of autonomy within the corporation. Within 18 months,
Miles was asked to
manage KFC’s entire worldwide turnaround, including

operations in the United
States.
The basic thrust of Miles’ strategy was a return to back-to-
basics in terms of menu
selection and commitment to quality, service, and cleanliness
(QSC). The back-to-
basics strategy was supported by a new series of staff training
programs, random
inspections of company-owned and franchisee stores, and a new
“we do chicken
right” advertising program. The goal was to focus consumer
awareness on a
sleeker, more customer-oriented KFC which would make one
product — chicken
— better than any of its competitors.
The results of the turnaround strategy were dramatic. By 1982,
KFC had become
Heublein’s fastest growing division, with real growth of 2.3 per
cent. From 1978 to
1982, sales at company-owned stores jumped an average 73 per
cent, while
franchise unit sales rose by almost 45 per cent. Much of this
growth came from
KFC’s international operations where company units
outnumbered even
McDonald’s outside the United States. While chicken is eaten
almost everywhere
in the world, the same is not true of beef which has been poorly
received in many
countries. This provided KFC with a considerable advantage in
penetrating foreign
markets. Nowhere was this more true than in the Pacific Rim,
where by 1982, KFC
had nearly 400 stores in Japan. In Singapore alone, KFC had 23

franchised stores.
Acquisition by R.J. Reynolds
Although KFC had made dramatic progress, growth was limited
by restricted
expansion capital at Heublein. Most of the profits generated by
KFC were being
used to revive Heublein’s spirits operations, which were
themselves facing flat
sales and increased competition. By 1982, KFC was receiving
only US$50 million
per year in expansion funds compared with the US$400 million
being spent by
hamburger giant McDonald’s. KFC also had one of the lowest
ratios of company-
owned to franchisee stores in the industry. Many franchise
stores were slow to
upgrade facilities and it was understood that major investments
would be required
to assure the integrity of the overall KFC network.
In the late summer of 1982, R.J. Reynolds of Winston-Salem
N.C. acquired
Heublein for US$1.4. billion. The acquisition was supported by
Heublein directors
fearful that the company might be taken over and sold in pieces.
Reynolds had

9A90G001
been seeking expansion possibilities in the consumer products
industry where its
marketing skills and huge cash flow could best be put to work.
Although hugely
profitable, Reynolds’ tobacco operations were being attacked by
soaring taxes and
consumers’ declining interest in smoking. The acquisition of
Heublein was only
part of a group of companies Reynolds acquired during the late
1970s and early
1980s, including Del-Monte Corp. in 1979, Canada Dry and
Sunkist Soft Drinks in
1984, and Nabisco Brands in 1985.
Soon after the acquisition, Mike Miles left the company to
become president of
Dart and Kraft. He was succeeded as CEO of KFC by Richard
Mayer who had
worked with Miles on the turnaround. Mayer had put in a 10-
year stint at General
Foods where he rose to become head of the Jell-O product
group. Mayer
characterized the acquisition as “marvellous.”
International Expansion
The heavy financial backing of Reynolds resulted in further
growth for KFC.
Betting that health-conscious consumers would increasingly
shift consumption to
chicken, Reynolds designed an ambitious worldwide expansion

plan that promised
US$1 billion in funds over five years. Much of this expansion
would come outside
the United States where markets remained largely untapped.
As was the case with domestic operations, franchising played a
major role in
KFC’s international growth. Franchising became the mode of
choice in many
markets where political risk and cultural unfamiliarity
encouraged the use of
locals. Another advantage with franchising was that KFC could
be assured a flow
of revenues with little investment, thus leveraging existing
equity. This was a
particularly attractive option internationally where potential
deviations of
franchisees from KFC operating procedures could be more
easily isolated.
The downside of a reliance on franchisees was that it permitted
an erosion of
system integrity. Local franchisees typically controlled a
portfolio of companies,
with KFC sales representing only a portion of revenues. Local
franchisees, driven
by a desire to maximize profits, often cut corners or “milked”
operations. While
this type of strategy would generally not compromise short-term
profitability, it
often led to the deterioration of operations over the longer term.
This problem was
only exacerbated internationally where control was more
difficult to maintain.

Southeast Asia Operations
By 1983, KFC had established 85 franchise stores in Southeast
Asia, including 20
stores in Indonesia, 27 stores in Malaysia, and 23 stores in
Singapore. This area
was recognized as the Southeast Asia Region, one of five
separate geographic
Page 6 9A90G001
regions within the corporation. Harry Schwab headed the Area
office, where he
served as a company vice-president. Schwab had been
successful in managing
KFC’s South African operations where he eventually built a
chain of 48 company-
owned stores and 95 franchise stores. After returning to
Louisville to assume the
position of KFC vice-president for international franchising, he
was given the
added responsibility of supervising the company’s Southeast
Asia area. Exhibit 1
presents a partial map of Asian Pacific nations.
THE CHINESE MARKET

After a 10-year absence, KFC moved back into Hong Kong in
1985. During
KFC’s long absence from Hong Kong, McDonald’s, Burger
King, Wendy’s, and
Pizza Hut had entered the market, providing the local
population with a taste for
Western fast food. After preparing a new Cantonese version of
the “we do chicken
right” advertising campaign, KFC opened the first of its 20
planned stores. During
its first week of operation, the store sold more than 41,000
pieces of chicken, the
most that any startup ever sold during its first week of
operation. With renewed
confidence that management had finally learned how to balance
the need for
corporate control with the demands for local responsiveness, the
company began
contemplating a much more ambitious move into the Chinese
mainland.
The initial discussions over the feasibility of entering the huge
Chinese market
were held in early January 1985 between Richard Mayer and Ta-
Tung (Tony)
Wang, a former executive of KFC. Tony Wang was born in
Sichuan province in
the People’s Republic of China in 1944. When Tony was five
years old, the family
made its way to Taiwan where in 1968 he graduated from
Chong-Yuan University
with a degree in engineering. He later moved to the United
States, and in 1973,
completed a masters degree in management science from
Stevens Institute of
Technology in New Jersey. Wang then attended New York

University where in
1975 he earned a post-master’s certificate in international
business management.
Upon completion of his studies in 1975, Wang accepted a
position in Louisville
with KFC. A series of promotions culminated with his assuming
the position of
director of business development for the company. In this
position, Wang reported
directly to Mayer where the two developed a close personal
relationship. Yet by
1982, Wang was feeling increasingly uneasy at KFC. Although
KFC had
completed a dramatic turnaround, Wang felt strongly that the
company had been
too conservative in penetrating international markets. Wang’s
conviction was that
the company was afraid to take real investment risks,
particularly in the Far East
where American managers were culturally out of touch. In his
capacity as director
of business development, Wang also saw some of the enormous
profits that many
of his projects were generating for franchisees. In Wang’s view
he was merely a
bureaucrat, “enriching a conservative, ethnocentric
corporation.” He plotted his
departure. This eventually led to the establishment of QSR
Management Company

9A90G001
where Wang served as president. QSR was principally engaged
in franchisee
operations of Wendy’s restaurants in Northern California. The
company also
provided management consulting to other franchisees of major
fast food
companies.
The Tianjin Experience
In spite of QSR’s highly profitable operations in California,
Wang remained
convinced of the enormous potential for American-style fast
food in the Far East.
In the summer of 1984, the mayor of Tianjin (the third largest
city in China with a
population of seven million) visited San Francisco and spoke to
a small group of
Chinese-Americans about investment opportunities in his city.
Wang attended the
meeting and was later invited by the mayor to serve as an
advisor on improving the
food service industry in Tianjin. Wang’s counter-proposal was
to serve not only as
an advisor but as an investor in a joint Chinese-American-style
fast food
restaurant. The mayor welcomed the idea. Primary backing for
the project came
from a group of Chinese-American investors in the San
Francisco bay area;

additional backing was provided by Don Stephens, the chairman
of the Bank of
San Francisco. With this support, Wang reached a 50-50 joint
venture agreement
with a local Tianjin partner to establish “Orchid Food,” the first
ever Chinese/U.S.
joint venture in the restaurant industry in China. The
combination take-out/80-seat
restaurant was hugely successful from its first day of operation
with revenues
averaging 100 per cent above break even.
Buoyed by this success, Wang began reflecting on the
tremendous potential that
KFC had in China. Wang’s interests were in bringing KFC into
China through
personally winning the franchise rights for key regions of the
country. Barring this,
he would try to convince his friend, Richard Mayer, to become a
partner in a three-
way deal involving Wang, KFC, and a local and as yet
undetermined partner. In a
letter to Mayer in mid-January 1985, Wang argued that the time
was right for KFC
to move “aggressively” into China.
I am totally convinced that KFC has a definite competitive edge
over any other major fast food chains in the United States in
developing the China market at the present time. In spite of the
fact
that McDonald’s is trying to establish a relationship there, it
will be
a long while before beef could become feasibly available. On
the
other hand, the poultry industry is one of the top priority

categories
in China’s agriculture modernization and it is highly
encouraged by
the government. It is my opinion that KFC can open the door in
China and build an undisputable lead by first establishing a firm
poultry-supply foundation.
Page 8 9A90G001
Movement into China was also being encouraged by KFC’s
parent, R.J. Reynolds,
itself interested in penetrating the vast Chinese market for
cigarettes. Executives at
RJR had long realized that, unlike North American demand, the
demand for
cigarettes was soaring in Third World and communist countries.
American
cigarettes, in particular, faced almost unlimited demand. China
seemed like the
perfect market for the company.
Mayer approached Wang’s offer to bring KFC into China with
great interest. On
the one hand, Wang had a long and productive history with
KFC; Mayer could
trust him. He was aggressive and had a proven track record of
successfully

negotiating with the Chinese. He was also Chinese — he spoke
perfect Mandarin
and felt at ease in either Beijing or Louisville. If anyone could
get KFC into China,
it seemed that Tony Wang was the person. On the other hand,
Mayer had
considerable concerns about turning over such a strategically
important market to a
franchisee. Experiences in other international markets had
shown the perils of
relying on franchisees. The granting of franchise rights could
also jeopardize
KFC’s ability to expand later in other regions of the country.
According to Mayer,
China was “too important to not be developed as a company
operation.”
Tony Wang himself was beginning to have serious doubts about
his ability to
move KFC into China by relying on his own resources. His
experience in Tianjin
had only reemphasized his conviction that major changes in the
attitudes of
Chinese employees would almost certainly be required for
operation under the
KFC banner. These changes could only be achieved through
time consuming
training programs, suggesting heavy pre-start-up costs which
Wang could not
adequately support. Wang was also concerned about the up-
front money needed to
find and negotiate a partnership, to sign a lease and to gain
operating permits. By
late fall of 1985, it was becoming increasingly clear to Wang
that “China is too big
a market for individuals.”

Changes in Management
It was in April 1986 that Mayer decided to make his move. He
telephoned Tony
Wang with several announcements: Steve Fellingham was being
promoted to head
up all of KFC’s international operations. Fellingham had over
10 years’ experience
in KFC-International and was widely respected as someone who
would move
much more aggressively internationally by relying less on
franchisees and more on
joint ventures with local partners. This observation was
confirmed by Mayer.
Mayer also announced that KFC was buying up its Singapore
franchisee, which
now operated 29 KFC stores. This would result in considerably
more
administrative responsibilities for KFC’s Southeast Asia
regional office. Finally,
Mayer was moving Harry Schwab out of Singapore, and
restructuring the
Southeast Asia region. The job of running the region was
Tony’s, if he wanted it.
Mayer also expressed his encouragement that Wang pursue the
China option
according to his best judgment and efforts.

9A90G001
After some soul-searching, Wang accepted the position and, in
the summer of
1986, officially became vice president of KFC Southeast Asia
with headquarters in
Singapore. According to Wang, he accepted the job because of
the “personal
challenge to develop KFC in China.” Wang viewed this
opportunity of establishing
the first Western-style fast food operation in China as an
historic opportunity —
both personally and for the company as a whole. He also
realized that with this
very visible challenge came high personal risks should the
venture fail.
With the assumption of responsibility for all KFC operations in
Southeast Asia,
Wang began to see the decision to invest in China in a different
light. The singular
objective of getting into China would now have to be balanced
with other
investment opportunities in the region. KFC had enormous
growth potential
throughout Southeast Asia. The national markets of the region,
while together
smaller than the entire Chinese market, had already been
exposed to Western-style
fast food; patterns of demand for KFC’s products were well
understood. Compared
to China, targeting these markets for growth had certain appeal.
Control over
partners and employees would be rather simple to maintain,

leading to rapid
growth and higher returns. Hard currency was also readily
available. China, in
contrast, would demand a huge amount of scarce managerial
resources. The
primary constraint was the limited number of Chinese-speaking
KFC managers —
many of whom were already being pushed to the limits in Hong
Kong and
Singapore. As a consequence, by the late summer of 1986,
Wang was beginning to
wonder whether committing these resources to China would be
in the best interests
of the region for which he was now responsible. Exhibit 2
presents selected
national economic and population statistics for the Southeast
Asia region as well as
KFC location and sales figures.
The China Option: Investigating Alternatives
Wang’s reaction to the ambiguity surrounding the China option
was to investigate
the Chinese market more thoroughly. Here, the principal
question facing Wang
was the intended geographic location of the first Chinese store.
The location
decision would potentially have a dramatic effect on
profitability, future expansion
elsewhere in China and managerial resource commitments — all
vital
considerations in a go/no-go decision.
In considering where to establish the first store, Wang initially
thought of Tianjin.

Through his earlier experiences, he had developed excellent
contacts within the
municipal government of Tianjin and he appreciated that Tianjin
was one of three
municipal governments in China that were administered directly
by the Central
Government in Beijing. (The other two were Shanghai and
Beijing.) Yet, he also
recognized that the city had several shortcomings. First, Tianjin
lacked a
convenient supply of grain-fed chickens. Experience in Hong
Kong — where in
1973 KFC had entered the market using fish meal-fed chickens
— suggested that
Page 10 9A90G001
Chinese consumers placed a high value on freshness and taste.
This would be
particularly important with a product prepared in a way which
was unfamiliar to
the Chinese. Another problem with Tianjin was that the city was
not generally
frequented by Western tourists. While Wang anticipated that
most sales would be
from soft currency renminbi (RMB), some hard foreign currency
sales would be
essential for profit repatriation and/or the purchase of critical

supplies such as
chicken coating, packaging, promotion materials, and so on.1
Finally, and perhaps
most importantly, Tianjin would be unable to provide KFC with
the profile
necessary to facilitate eventual national market penetration. In
fact, Tianjin was
generally regarded in China as a gateway to its larger sister,
Beijing, only 85 miles
to the west.
Other cities presenting viable alternative locations for KFC’s
entry into China
included Shanghai, Guangzhou, and Beijing. The location of
each is noted in
Exhibit 1.
Shanghai
As China’s largest city, Shanghai is home to some 11 million
people, almost 9,000
factories and the country’s busiest harbour. Metropolitan
Shanghai is widely
regarded as China’s most prosperous business centre. The city
alone accounts for
approximately 11 per cent of China’s total industrial output and
almost 17 per cent
of the country’s exports. It is also one of three self-
administered municipalities.
Shanghai has a long history of involvement with Westerners.
The Treaty of
Nanking, thrust upon the Chinese by the British during the
middle of the 19th
century, set Shanghai aside as one of five Chinese port cities
open to foreign trade.

Western commerce and cultural influence flourished. Foreign
gunboats continued
to patrol the river until well into the 20th century. Complete
expulsion of
foreigners came in 1949 with the communist victory over the
Nationalist Chinese
army. However, since then the city has maintained an interest in
international
business and trade. Today, the city is the home of a large
variety of Western hotels,
business facilities and tourists.
Shanghai also had the benefit of providing easy access to a
seemingly ample
supply of quality chickens. In fact, through joint ventures a
Thailand-based
company — the Chia Tai Group — had established 10 feed mills
and poultry
operations in the region and was the largest poultry supplier in
Shanghai. KFC’s
Southeast Asia office had good relations with Chia Tai and was
currently
negotiating with one of the company’s divisions as a potential
franchisee in
Bangkok.
1Like virtually all communist economies, the Chinese economy
operates through two separate
currencies: renminbi, or the “People’s Currency,” which is used
by local Chinese for the purchase of
goods and services; and FEC (Foreign Exchange Certificate)
which is used by foreigners to represent the
value of hard currency while in China. FEC is required at all
hotels, taxis, restaurants and shops which
cater to foreigners. A black market for FEC existed in most
large Chinese cities.

Page 11 9A90G001
While Shanghai remains a major centre for business, its noise
and pollution have
discouraged tourists. For KFC, the sheer population of a host
city is important,
although less so than the mix of potential customers. While
Shanghai could
provide KFC with eagerly sought-after media exposure, the
operation would also
need to promise an adequate return in FEC before an investment
could be justified.
Here, the concern was whether or not Western business people
would be attracted
to KFC or would prefer to frequent more fashionable
restaurants. Clearly, no one
knew.
Guangzhou
Another alternative was the city of Guangzhou, located in
southeast China only a
short distance from Hong Kong. Guangzhou, historically know
as Canton, is one
of 14 special coastal cities set apart in 1984 as preferential
treatment centres for
foreign investment. As such, Guangzhou was given greater

autonomy in approving
foreign investment projects, reducing tax rates and encouraging
technological
development. By the end of 1986, about 80 per cent of the
almost US$6 billion
foreign investment in China had been located in these open
coastal cities. In
addition, Guangzhou is the capital of Guangdong Province,
which contains three
of the country’s four “Special Economic Zones” (SEZs),
designed specifically to
attract foreign investment. The SEZs were initially set up as
part of the broad
economic reforms that were launched in China in the late 1970s.
Guangzhou was frequented by Western business people as well
as by tourists who
visited the city on one-day excursions from Hong Kong. Due to
its proximity to
Hong Kong — less than 75 miles away and easily accessible by
road or train — an
operation in Guangzhou could easily be serviced out of the
company’s Hong Kong
office. The Chinese in this region were also more familiar with
Western
management practices and culture. In fact, the people in
Guangzhou speak
Cantonese — the same language spoken in Hong Kong.
Cantonese Chinese is
quite different from the Mandarin Chinese spoken elsewhere in
China. Preliminary
investigations also indicated that little difficulty would be
anticipated in locating
an adequate supplier of chickens.
Beijing

Another location that warranted closer inspection was Beijing,
China’s second
most populous city (after Shanghai) with nine million citizens.
Since its
establishment as the Chinese capital by the Mongols in the 13th
century, Beijing
has remained the political and cultural centre of China. For
example, although
China spans a breath of 3,000 miles, the entire nation runs
according to Beijing
time — an indication of the power of the central government.
As the nation’s
capital, Beijing also sports a subway and freeway system and an
international
airport complete with air conditioning and moving sidewalk.
Page 12 9A90G001
Chinese citizens from all over the country pour into Beijing
eager to attend
meetings or to represent their factories or districts before the
authorities of the
central government. The city is also the educational capital in
the country with
university campuses ringing the city. These factors all
contribute to the relatively

high levels of affluence and the intellectual enlightenment of
the population —
critically important in generating RMB sales. Beijing is also a
tourist centre for
Western visitors anxious to see the Forbidden City, Summer
Palace, and nearby
Ming Tombs and Great Wall. This would mean a ready supply
of FEC currency.
Finally, without doubt a start-up in Beijing would grab the
people’s attention and
would communicate the tacit approval of the central authorities,
thus facilitating
future expansion outside the city.
Beijing could provide considerable advantages to a company
eager to expand
throughout China. A preliminary investigation indicated that
several poultry
producers were operating just outside the city. Yet, politically
and operationally,
Beijing would be more of a gamble than alternative locations.
High profile
operations heightened the possibility of government
interference for political
purposes.
Weighing the Decision
In his heart, Tony Wang knew he was a man who liked taking
risks, and clearly,
China qualified as the risk of a lifetime. However, it was also
clear that the
location of the first store could mitigate much of the obvious
risk of moving into
China. Left undetermined was whether the low risk alternatives

were worth
pursuing. What was needed was to weigh the possibility of
reducing the risks
against the potential benefits that could be achieved through the
investment.
Clearly, Wang had staked out a position as the person who
could bring KFC into
China. However, he now had different responsibilities which
also demanded his
attention and for which he would surely be evaluated. He was
certain that there
would be little second-guessing by Richard Mayer if he
recommended that after
careful consideration, KFC should hold off for the present from
China. He also
realized that, because there were no competitors as yet in China,
the present time
could be the most opportune time for making the move. Indeed,
even if a Chinese
location were selected, it would likely take years of
negotiations before operations
could start. To delay any further risked ceding the market to
others. The challenge
to Wang would be in balancing these possible risks with the
possible returns.
The Richard Ivey School of Business gratefully acknowledges
the generous support of
The Federation of Canadian Municipalities’ Open City Project
through a grant from the
Canadian International Development Agency and by The
University of Western Ontario
in the development of these learning materials.

Page 13 9A90G001
Exhibit 1
PARTIAL MAP OF PACIFIC ASIAN COUNTRIES
Page 14 9A90G001
Exhibit 2
SELECTED COUNTRY STATISTICS — SOUTHEAST ASIA
AND CHINA
(1986)

Population
(millions)
Life
Expectancy
GNP per
Capita
(US$)
Annual Real
GNP Growth
Rate
Number of
KFC Units
KFC Sales
(US$ millions)
Thailand
Singapore
Malaysia
Indonesia
Hong Kong
PRC
52.6

2.6
16.1
166.6
5.4
1,054.0
64
73
68
55
76
69
790

7,450
1,830
500
7,030
300
5.3%
7.3%
1.8%
1.2%
12.1%
7.9%
4
26

53
25
4
—
1.5
15.0
27.0
6.8
2.7
—

S w 990G01 KENTUCKY FRIED CHICKEN IN CHIN.docx

S w 990G01 KENTUCKY FRIED CHICKEN IN CHIN.docx

Recommended

Recommended

More Related Content

Similar to S w 990G01 KENTUCKY FRIED CHICKEN IN CHIN.docx

Similar to S w 990G01 KENTUCKY FRIED CHICKEN IN CHIN.docx (19)

More from jeffsrosalyn

More from jeffsrosalyn (20)

Recently uploaded

Recently uploaded (20)

S w 990G01 KENTUCKY FRIED CHICKEN IN CHIN.docx