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RichardlveySchoolofBusinessTheUniversityofWesternOntarioKENTUCKYFRIEDCHICKENINCHINA(A)ProfessorAllenJ.MorrisonpreparedthiscasewithassistancefromProfessorPaulBeamishsolelytoprovidemarerialforclassdiscussion.Theauthorsdonotintendtoillusuateeithereffectiveorineffectivehandlingofamanagmalsituation.TheauthorsmayhavedisguisedcertainnamesandotheridentiQinginformationtoprotectconfidentia!ity.tlveyManagementServicesprohibitsanyformofreproduction,storageorvansmittalofthismaterialw.!houtitswrittenpemrission.ThismaterialisnotcoveredunderauthorizationfromCanCopyoranyotherreproductionrighrsorganization.Toordercopiesorrequestpermissiontoreproducematerials,contactlveyPublishing,lveyManagemefitServices,doRchardlveySchoolofBusiness,TheUniversityofWesternOntario,London,Ontario,Canada,N6A3K7;phone(573)667-3208;Tax(579)667-3882;e-mailcases@ivey.uwo.ca.Copyrighta7989,lveyManagementServicesandCanadianInternationalDevelopmentAgencyVersion:7997-77-70InlateSeptember1986,TonyWangleanedbackinhisleatherchairinhisSingaporeofliceandthoughtofthelongroadthatlayaheadifKegtuckyFriedChicken(KFC)wereeverto--establishthefirstcompletelyWestem-stylefastfoodjdintventureinthePeople'sRepublicofChinaWang,anexperiencedentrepreneurandseven-yearveteranofKFChadonlytwomonthspreviouslyacceptedthepositionofcompanyvicepresidentforSoutheastAsiawithanoptionofbringingtheworld'slargestchickenrestaurantcompanyintotheworld'smostpopulouscountry.Yet,ashebeganexploringtheopportunitiesfacingKFCinSoutheastAsia,WangwasbeginningtowonderwhetherthecompanyshouldattempttoentertheChinesemarketatthistime.-0CWithoutanyindustrytrackrecord,WangwonderedhowtoevaluatetheattractivenessoftheChinesemarketwithinthecontextofKFC'sSoutheastAsiaregion.Cornpoundingthe-.challengewastherealizationthatalthoughChinawasahuge,highp-market,itwoulddemandpreciousmanagerialresourcesandcouldoffernoredtermprospectsforsiOdcanthardcurrencyprofitrepatriation-eveninthemediumterm.WangalsorealizedthatadecisiontogointoChinanecessitatedselectingaparticularinvestmentlocationinthefaceofgreatuncertainty.Itwasequallyclearthatwhileopportunitiesandrisksvariedwidelyfromcitytocity,thecriteriaforevaluatingsuitablelocationsremainedunspecified.Withlimitedinformationtogoon,WangrealizedthatapositivedecisiononChinawouldbeinherentlyrisky-bothforthecompanyandforhisownreputation.AndwhileWangwasintriguedbytheenormouspotentialoftheChinesemarket,healsoknewthatmanyothershadfailedinsimilarventures.Paae29A90G001HISTORYTheori,$.nsofKentuckyFriedChickencanbetracedtoHarlandSanders,whowasbornin1890inHenrepdle,Indiana.WhenSanderswasaboy,hedroppedoutofthesixthgradeandbeganastreamofoddjobs,concentratingeventuallyoncooking.Intimeheopenedhisowngasstationwithanadjoiningrestaurant.Inthe1930s,Sandersdevelopedasecretrecipeforcookmgchickenbyfmtapplyingacoatingcontainingamixtureof11herbsandspicesandthenfiymgthechickenunderpressure.Thissouthernhedchlckeneventuallybecamea&atthegasstationandin1956Sandersdecidedtofranchisehisnovelconcept.By1964,khadsoldalmost700franchises.MuchofSanders'successinthlspioneerindustqlayinhlsnearobsessionwithproductqualityandacommitmenttomaintainingafocusedlineofproducts.In1964,attheageof74,HarlandSandersfinallyagreedtosellthebusinessinexchangefor$US2millionandapromiseofaMetimesalary.ThesaleofthebusinesstoJohnBrown,a29-yearoldKentuckylawyer,andhisfinancialbacker,JackMassey,60,wasaccompaniedbytheassurancethatSanderswouldmaintainanactiveroleinbothproductpromotionandqualitycontrolofthenewventure.Withnew,agressivern&agersandarapidlyevolvingAmericanfastfoodindustry,KFC'sgrowthsoared.Overthenextfiveyears,salesgrewbyanaverageof96percentperyear,topping$US200millionby1970.Thissameyearalmost1,000newstoreswerebuilt,thevastmajoritybyfi-anchisees.AkeyelementmthisrapidgrowthwasBrown'sabilitytoselectagroupofhard-workingentrepreneurialmanagers.Brown'sphilosophywasthateverymanagerhadtherighttoexpecttobecomewealthyintherapidlygrowingcompany.Byrelyingheavilyonfranchising,thecompanywasabletoavoidthehighcapitalcostsassociatedwithrapidexpansionwhilemaximizingreturnstoshareholders.Rapidsalesgrowthprovidedpromotionandopportunitiestopurchasestockforcompanymanagersaswellastheopportunityforbchiseestoimprovemarginsbyspreadingadministrativecostsoverabroaderbaseofoperations.Thiswascriticallyimportantgiventhehighfixedcostsassociatedwitheachstore.Volume,bothattheindividualstorelevelandwithinafranchisee'stenitory,wasthusessentialindeterminingprofitability.Profitability,inturn,assuredtheattractivenessofKFCtopotentialfuturekchisees.In1971,BrownandMasseysoldKFCtoHeubleinInc.for$US275million.Heublein,basedmFaxmington,Connecticut,wasapackagedgoodscompanywhichmarketedsuchproductsasSmimoffvodka,BlackVelvetCanadianwhisky,GreyPouponmustard,andA1steaksauce.Page39A90G001ChallenqesatHomeandAbroadPage39A90G001ChallengesatHomeandAbroadTheestablishmentofKFC'sintemationaloperationsbeganjustpriortothecompany'sacquisitionbyHeublein.KFCopeneditsfirststoreintheFarEastinOsaka,Japanin1970aspartofExpo-70.By1973,KFChadestabbhed64storesinJapan,mostlyintheTokyoarea.KFCalsomovedquic