KFC in China and India: An Analysis of Global Strategy

Background

The current term paper makes analysis of a lead company in one of the core industries that have long been around as a key contributor of value added and a GDP driver. Whereas a ‘hot’ or emerging sector such as the IT or software development has built on the countries’ comparative advantage, e.g. low-cost yet relevant as well as flexible human capital and enviable math attainment scores, that would largely qualify as an outsourcing or net exports item having less to do with domestic consumption or local market penetration per se. We have therefore opted for Kentucky Fried Chicken, which is a part and parcel of the YUM Group and is representative of the alternate industry as well as company profile drawing upon both the host countries’ historical strengths and cross-cultural bridges.

Part One: Cross-Country Attractiveness

To get started on a PESTLE analysis, both China and India could be thought of as prone to sustainable development in just how aptly they have been striking a balance in between a traditional institutional setup versus a fast-learning economy. They have been able to catch up despite adverse initial conditions, and could further converge to the world’s top wellbeing positions as long as their structural parameters prove sustainable. By that we meant a stable ratio of active labor force and labor productivity growing in line with infrastructural development and wage rate. Another dimension of crucial importance in its own right pertains to the environmental impact of intense pollution or natural resource intake.

In fact, these interrelated areas or dual issues are easier to study as tradeoffs facing both economies. Whereas India’s low energy efficiency could be offset by infrastructure and technology-boosted labor productivity; the latter has already ushered in a high social cost in China. For that matter, although the distribution of value added is more pronounced in India (considering the Gini coefficient values as in Appendix A), markets tend to be more fragmented and sectors show greater disparity on GDP contribution in China (“CIA Factbook”, 2013).

For instance, based on the GDP and labor shares in the agriculture versus manufacturing, we were able to infer the relative sectoral labor productivity for China and India totaling 5.74 and 2.46, respectively (“World Bank”, 2014). Now, insofar as these correlate with the marginal productivity of capital and with the interest rates, the comparative inflation rates of 2.5% versus 8.8% could be explained away based on the Fisher parity (Mishkin, 2012, p. 116). Alternatively, these could be rationalized by the labor productivity values that we have computed as GDP over the labor force, as opposed to GDP per capital.

In fact, these turned out to be above the GDP levels in terms of effective purchasing power (or PPP as in Appendix A) per capita, which have in turn exceeded the nominal GDP per capita. For that matter, the relative labor force ratios of nearly .6 versus .4 have shown to be related as the PPP ranks of 2nd versus 3rd. Not least, these ranks exhibit a similar correlation against the EDB scores of .55 versus .33, as imputed in the relative ranks of 91 versus 134, pertaining to the Ease of Doing Business. Whereas this point to a considerable level of protectionism, institutional inefficiency, or otherwise transaction costs, that could alternatively be the flipside of traditional societies embarking on immunity. In fact, this might act to curb the leverage or magnifier of whatever risks and crises the more open societies and markets are exposed to.

Mention was made of China’s and India’s economies having grown at a faster-than-average pace relative to the world at large, and possibly to the BRIC aggregate they have been the key drivers of. Although this club, additionally featuring Brazil and Russia, has only accounted for some 14% to 25% of the global GDP, while contributing to as much as 40% in population (“PBR”), that should not mislead us into inferring that the rest of the world will keep accounting for some 86% of GDP on the strength of 60% of the population. To begin with, even if the G7 boasts a higher GDP per capita ratio than the 4 to 1 implied, the BRIC countries can converge or catch up over a finite horizon. In Appendix B, we provide some algebraic solutions showing that based on the current starting conditions (a ratio possibly referring to technology-induced productivity gap) and the ongoing growth gap of some 5% in GDP per capita between the BRIC[S] and the G7, it would take about 20 years for it to fully converge. With reference to the world average, and based on a 4 to 1 ratio, that would take even shorter time span of about 15 years. In other words, BRICs would rank on par with the G7 and the world average by year 2034 and 2029, respectively.

In fact, for China and India that could be even sooner, based on faster GDP growth and a slower population growth as expected. Overall, however, the demographics point to a more favorable outlook when it comes to value creation back East than out West. Whereas the traditional Oriental societies have long fared on a normally distributed population pyramid, the Western counterpart has been hourglass-looking with singularity, pertaining to the thin interim waist of the middle-aged labor force. The labor to retiree ratio or the share of active labor force has been thin in the Western economies, which should soon adversely affect the supply and demand side alike. That could be one standalone reason why the Western companies would want to tap the emerging markets, if only to extend their product lifecycles (PLC).

In absolute GDP level terms, China alone could beat the US as a leader next year, according to some estimates. On the other hand, in terms of the real GDP growth, India nets out with a negative 4% slowing. Still, the regular Philips curve applies (Mishkin, 2012, p. 267), in that India has exhibited a far lesser unemployment rate, which partially offsets the labor ratio gap. Its economy is more balanced structurally vis-?-vis the core sectors, with services alone accounting for another two-thirds. In China, services contribute to about a half to the GDP and two-thirds to employment. In other words, the labor productivity levels are inversely related for China versus India in the services which could count as one other qualifying domain contributing to our fast food profile or sector identity.

The rationale behind all these inferences as well as their straightforward layout pertains to the very sustainability assumption saying that, whatever initial conditions on hand will likely carry through. In fact, labor productivity will likely keep growing for China and even more so for India, with the advent of superior infrastructure and technologies to complement human capital. On the social capital end, the traditional societies prove more cooperative and could, therefore, tap some superior development equilibria otherwise denied to the more advanced markets building more heavily upon formal institutions and financial markets.

When it comes to governance models and governmental legacy, China is likely to keep on maintaining its dual economy of exports-oriented market sector, co-existing with the state-owned segment, putting on wheels the long-term infrastructural projects that myopic or selfish private business may be reluctant to invest in. Part of the reason has to do with the so-called externalities or the fact that only some of the positive impact is fully appropriable (Varian, 2010, p. 650). On second thought, businesses tend to shirk or free-ride in just how aptly they fail to recoup the negative externalities or social costs they generate. All of that has to be made an integral facet of sustainable agency (with COx emission per capita already mimicking the labor productivity gap), and the foreign players entering the market must realize that they will increasingly face the need of being a good corporate citizen acting in the host nations best long-term interests rather than just catering to their customers induced whims. Although both countries have liberalized their markets ever since the early 1990s, it is unlikely they will ever push the pro-Western extreme.

Part Two: Industry Competitiveness

Whereas the previous section focused on the external or global environment, the present analysis focuses on industry-specific parameters as affected by the host environment. To begin with, the western politicians and policy makers may or may not like Modi’s perceived cultural and Jinping’s economic nationalism, but in any event any newcomer such as KFC seeking market entry has had to show exactly how its rather unsophisticated product concept (with the company name referring to a self-explanatory core) can blend into China’s rich and versatile cuisine, poultry based not least, or whether it fits into the largely vegetarian Hindu legacy. On the Muslim end in both instances, chicken should not have confronted major resistance, save for the recent sourcing quality issues that have put an end to cooperation with a long-standing supplier of poultry for both markets (McDonald, 2014).

In fact, the host governments’ active and proactive stance on health and quality applies beyond formal or technical trade or FDI barriers or ‘strategic protectionism’ as such. For one, love of variety or growing openness to new experiences and solutions on the Asian consumers’ part may have been offset by a home bias to the genuinely rich traditional cuisine or to religious bans the recipient environments have espoused. Along these lines of implied protectionism, Modi and Jinping should be able to continue striking the right tradeoff of sound traditionalism and flexibility lending themselves with sustainable development and steady-state growth. In fact, these civilizations have somehow been around for hundreds and thousands of years, contributing in major ways to knowledge and technology, and the relatively short-lived success of the extreme market model might not suffice to urge a downright institutional transformation around the globe. In any event, no single player, no matter how big in terms of and hungry for more market share, could end up setting the standards and shifting the trends.

For that matter, as the basic needs grow satisfied up the Maslow hierarchy, the Chinese and Indian societies will increasingly get to target safer environment, healthier diets, and more full-fledged lifestyles. It has yet to be signaled just how consistent could that be with a menu high on cholesterol, unless the price is so low that the less affluent consumers can afford it for no better reason, but to pay their way to a better living.

In fact, the big institutional picture could be taken with a grain of salt. For instance, apart from the Hindu law that is not so easy to separate from the natural regularities as well as spiritual dharma, one can think of considerable interceptions with the European lifestyles and the English law based on the mounting body of common law precedence. The southern Maharashtra market could alone absorb the bulk of the demand on the strength of ex-pat and pro-European stratum. Likewise in China, the Marxist agenda may be seen as fitting naturally with the Tao dialectics and the Confucian treatment of the big part social institutions and interaction play. Although the Buddhist varieties common to both terrains might not exactly be fostering an aggressive attitude to growth, that facet could co-exist on non-economic levels of societal development.

For that matter, if we were to distinguish between classic Shari’a versus practical Islamic law that could reconcile the gap between the usury ban and the need for investment and banking with an eye on growth and money multipliers or channels (“CIA Factbook”, 2013). One other pillar of convergence could refer us to the fact the world’s audiences are ever more global these days, as they are exposed to similar digital technologies and social networks as well as commercials and viral advertisements that shape a consumption culture in its own right, whether it is based on standardized or adapted marketing.

However, KFC’s core products do not need toembark on special channels, and there is no material asset specificity or technology lock-in. If we are to invoke on Porter’s Five Forces, the industry may or may not call for a large efficiency scale to break even, and the operational leverage may pertain to the basic processing line and fast-food property premises. Now, although these may not easily be leased subject to the local conditions in the vegetarian Hindu regions, some of the richer Muslim provinces in Punjab and Gujarat might stand lease options as an alternate of direct banking. In China and Hong Kong particularly, those financing channels could be even easier to tap in the major urban areas, but that would be far too distant from the less developed rural regions supplying the poultry. In other words, the distribution channel and value chain may have been somewhat disjoint spatially as well as in the way of vertical integration, which would deny some of the agglomeration economies China is renowned for.

It is worth mentioning that the Chinese markets having been largely fragmented historically. KFC may have wanted to locate in the urban areas where more diversified and affluent economy only competes with greater cultural acceptance. Certainly, that should be discounted against the more intensely competitive environment offering enormous variety. Whereas in the fast-food segment only McDonald’s posits immediate substitution threat when it comes to Western peer concepts, the broader notion of substitution suggests considerable market commonality and resource similarity involved. In this low-cycle industry of a traditional or high-context socioeconomic milieu, KFC would do wise to see sustainability in its commitment to proven success record of a core product concept without major kowtowing dilution.

On the other hand, this industry is considerably pro-cyclical, in that the demand for dining out tends to warp in recession (dynamically) or in terms of static comparison (e.g. against India’s average disposable income per capita). One might suggest some qualifying points, though. For one thing, food is a major staple, more so in lower-income destinations as a share of household budget, so that the demand for basic foods should not be very inelastic, as the lower-than-one CAPM beta of .71 suggests (“Yahoo Finance”, 2014). For that matter, fast food could be viewed as an inferior substitute, with relative demand responding so inversely the market share could actually increase on the downside or in the lower-income markets such as Kashmiri or rural mainland China.

KFC’s bargaining power could be decomposed in regards to input price and quality. It would appear that the forage and surrogate soya or silage mixes should be so cheap locally they impact the poultry price. However, the occasional instances of bird flu and substitute beef salmonella exert double pressure on the average prices. Now, KFC could enjoy company-specific bargaining leverage in each particular case as a key buyer following the quality incidents. However, these scandals tend to sterilize its own reputation for quality, whereas the particular high-quality suppliers tend to enjoy an extra gain rather than suffering a mark-down, so long as the quality is not too costly to screen for.

Part Three: Global Strategy

The company must have attempted a sprinkle type market entry strategy, with an eye towards penetrating as many markets, or indeed the segments and regional submarkets of the larger and faster-growing ones, as there gets to be with possibly mixed success. The somewhat controversial yet natural and well-established product concept would face mixed odds or, in game-theoretic lingo, mixed states in between temporary acceptance and plausible rejection at some point (Varian, 2010, p. 525).

The resultant en-masse effect was supposed to secure a large scale of unstable or probabilistically volatile sales, which alone amounts to a facet of operating leverage. On the other hand, in light of the perishable input profile, the pressure on working capital requirements was even higher, so that a scale or spatial diversification was crucially important as a global entry as well as sustainable presence. The flipside of it would be the extent to which all these risk factors could signal an entry barrier to the rest. In fact, brand recognition and goodwill as well as financial cushion with an eye on making part of a large and well-diversified structure like YUM Group would all serve that end.

When it comes to global segmentation, it can be depicted on a macro and micro-level. The former is aimed at relevance and financial outcomes as per specific segments of the target audience based on demographics, geography, culture, and income, as well as educational levels to name a few. The bulk of that was covered in the previous sections. For instance, whereas China’s most productive segment of population or labor force has not grown over the past year or two, its total population did. For India, the inverse holds, with the labor force increased another 1.5% amid the stagnant or decreasing total population. Among others, the low-end submarket has been targeted as per the core product concept of fried and grilled chicken in rural China, whereas in highland Northern India, the up-market preferences have centered around grilled chicken.

This intra-market detail relates to micro-segmentation of the new markets with an old product concept, allowing for a tossup in between development and penetration. The marketing strategy would pertain to 4P with place, product, and price being closely interrelated along the lines specified and promotion, targeting either the price shopping (low end in rural China), value (quality to price in urban China and non-Hindu India), or social responsive signaling to the governments and communities. Indulging in informal and unethical schemes would be subject to Foreign Corrupt Practices Act.

Finally, the global product strategy can be seen as sensitive vis-?-vis the region-specific cultural constraints yet bypassing and culturally neutral otherwise. In Taoist settings in China, it has materialized as both standardization and adaptation to local tastes. In the Buddhist-like or otherwise non-Hindu legacies in India, it has been neither. In 360 outlets in India, KFC stands paneer burger on its “so veg so good” promotion. In China the large-scale retail leadership via 4,500 something outlets on hand has been countered by 40% YoY decline in sales in 2013 alone (SEC/EDGAR, 2013). The social standing has been shaky on taste intensifiers and non-sustainable packaging.

We suggest an integrated perspective that could align a segmentation-positioning matrix a la Hassan and Craft (2005) against the product-market matrix as above mentioned. Insofar as positioning embarks on the actual methods and ways of mapping specific segments onto 4P, we believe a dual strategy of an “optimization” corner (different positioning for similar segments) versus “geocentric” option (similar branding for different segments) should best fit into cross-market versus intra-market strategy. Localizing adhockery (different, different) must be deployed as entry or anywhere near saturation, whereas a focused one (same, same) fits with interior growth.

Conclusion

On the one hand, this fast food segment could be viewed as an overlapping domain of the foods industry and the manufacturing sector with an eye on the processing technologies deployed. On the other hand, the product concept is so naturally straightforward that it does not need to be at odds with either host culture (or their representative subcultures such as Hindu and Muslim or Taoist and Buddhist versus Confucian and Marxist) over the diet habits or the core cuisine. The KFC/ YUM beta as applied to the fast growing setup could serve as a rough estimate of the growth rate the company could target as part of its SWOT-based balanced scorecard. For now, franchising has been a relatively safe penetrating and PLC extending strategy not venturing major reputation loss.