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November 2011

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KFC's Radical Approach to China

by David E. Bell and Mary L. Shelman

Global companies face a crucial question when they enter emerging markets: How far should they go to localize their offerings? Typically they try to sell core products or services pretty much as they’ve been sold in Europe or the United States, with headquarters calling all the shots—and usually with disappointing results.

The authors, both of Harvard Business School, examined why KFC China has been able to find fertile ground in a market that is notoriously challenging for Western fast-food chains. KFC’s executives believed that the dominant logic behind the chain’s growth in the U.S.—a limited menu, small stores, and an emphasis on takeout—wouldn’t produce the kind of success they were looking for in China. KFC China offers important lessons for global executives seeking guidance in determining how much of their existing business model to keep in emerging markets—and how much to throw away.

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Global companies face a critical question when they enter emerging markets: How far should they go to localize their offerings? Should they adapt existing products just enough to appeal to consumers in those markets? Or should they rethink the business model from the ground up?

The typical Western approach to foreign expansion is to try to sell core products or services pretty much as they’ve always been sold in Europe or the United States, with headquarters watching closely to make sure the model is exported correctly. This often starts with selling imported goods to the expat community or opening one or two stores for a trial run. Once such an approach is entrenched, companies are reluctant to rethink the model. U.S. retailers and food corporations that have spent years saturating the huge home market tend to cling to what has worked in the past. Domino’s Pizza nearly failed in Australia because it underestimated the need to adapt its offerings to local tastes; only after it turned the country over to a local master franchisee did Domino’s become the largest pizza chain there.

A master of adaptation is the Swiss food giant Nestlé, which has created an array of products that incorporate differing regional flavors—and cater to local tastes—in coffee, chocolate, ice cream, and even water. For a hundred years Nestlé’s country managers have been empowered to say no to the head office if a product or a campaign doesn’t suit their locales. Perhaps the greatest tribute to the strategy is that many consumers around the world believe Nestlé is a local company.

One of the most impressive stories of a U.S. multinational in an emerging market is unfolding right now in China: KFC is opening one new restaurant a day, on average (on a base of some 3,300), with the intention of reaching 15,000 outlets. The company has achieved this success by abandoning the dominant logic behind its growth in the United States: a limited menu, low prices, and an emphasis on takeout.

We recently studied KFC China’s transformation of the business model that had made Kentucky Fried Chicken a global brand, and we learned how, in the process, the company accumulated strengths and competencies that now pose formidable barriers to competitors. KFC China offers important lessons for global executives who seek to determine how much of an existing business model is worth keeping in emerging markets and how much should be thrown away.

Five Competitive Advantages

In 1987, when the first Chinese KFC opened in Tiananmen Square, Western-style fast-food restaurants were unknown in China. Many Chinese still wore the tunic suits of the Mao era, and bicycles were the main means of transportation. KFC was a novelty, a taste of America. It was a place where residents with spending money could go for a special occasion. Although customers didn’t like the food much, KFC made steady progress, according to Sam Su, now the chairman and CEO of Yum! Brands China Division, which owns KFC and a number of other brands in the country.

In 1992, after the Chinese government granted foreign companies greater access to markets, KFC China’s managers gradually developed the blueprint that would transform the chain. Like every other multinational in China, KFC made its way up the learning curve by trial and error. But the strategy that emerged was remarkably clear and embodied five truly radical elements: turning KFC into a brand that would be perceived as part Chinese; expanding rapidly into small and midsize cities; developing a vast logistics and supply chain organization; extensively training employees in customer service; and owning rather than franchising the restaurants.

KFC China’s executives believed that the company’s U.S. model, although good enough to do moderately well in the largest Chinese cities, wouldn’t lead to the level of success the company sought. They understood that in China, as in many other developing countries, food is at the very heart of society, inextricable from national and regional cultures, and that an abundance of flavors and an inviting ambience would be necessary to win over consumers in great numbers.

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David E. Bell is the George M. Moffett Professor of Agriculture and Business and a senior associate dean at Harvard Business School. Mary L. Shelman is the director of the Agribusiness Program at Harvard Business School.

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