Doing Business in China

The attractiveness and success of China depended on Sam overcoming numerous challenges and balancing the benefits, costs and risks associated with doing business in China. The long-run economic benefits considered factors to minimize these challenges such as the size of the market, the purchasing power of the consumers in the market and the likely future wealth of consumers, which was dependent upon China’s economic growth rates.

The big advantage of establishing a Greenfield venture in China is that it gave Yum! a much greater ability to overcome numerous challenges and build the kind of subsidiary company that it wanted. It also provided Sam the ability to build an organization culture from scratch and establish a set of new operating routines instead of converting an existing business. This gave Yum! an competitive advantage based on the transfer of their organizationally embedded competencies, skills, routines and culture.

Timing of entry was very important for Yum! and Sam’s strategy. Their first-mover advantage allowed them to preempt rivals and capture demand by establishing a strong brand name. This drove their rapid expansion of KFC restaurants in China. Since the first KFC opened in 1987, Sam has built the largest restaurant company in mainland China with 3,033 KFC’s in 650 cities and 477 Pizza Huts in 120 cities (Exhibit 6B). This compares to McDonald’s 126 locations. In just the past three years, Sam has opened 1,513 locations (Exhibit 6A)

Another advantage this provided Sam was the ability to build sales volume in China and ride down the experience curve ahead of rivals, giving Yum! a cost advantage over later entrants. This strategy generated revenues of approximately $3 billion in each of the past four years and operating profits averaging around $500 million (Exhibit 4). The next advantage Sam benefited from was the ability to create switching costs that tied their KFC customers into their product thus making it difficult for later entrants to win business by positioning the Yum! restaurants as a ‘destination experience’ instead of as a place for ‘fast food’.

However, Sam faced pioneering costs that later entrants could avoid since China was different than Yum!’s home market in the U.S. As a result of the Chinese government not allowing foreign companies to operate without a joint venture, the first KFC and Pizza Huts in Beijing were owned through a joint venture. Yum! also tested franchises in some interior territories. Some of these pioneering costs included the cost of promoting and establishing their product offering including the