How do firms enter foreign markets? How can we describe their motivations?
You will start by reading a review article on the Dunning / OLI paradigm – a classic model in international business.
Then, read the article (also attached in PDF) and the video there: http://knowledge.insead.edu/leadership-management/strategy/kfc-chinas-recipe-for-success-1706
And read the Harvard Business Review blog post (also attached in PDF): https://hbr.org/2011/11/kfcs-radical-approach-to-china
1. What are the main foreign entry modes for a firm? If you enter a new, culturally different market, what would you start with in terms of entry modes?
This is just an introductory discussion. This might take 5-10 mins
2. Explain the Dunning Paradigm (OLI) and its main elements and how it relates to the variety of entry modes.
They should be familiar with this from the lecture in week 2 and the main reading for this week. It may be worth briefly going over the three main elements of the paradigm
– Ownership specific advantages
Firms considering int’l expansion must be able to compensate for inherent difficulties of operating internationally. The way they do so is through using a source of competitive advantage not open to other firms.
– Location specific advantages
Why not exploit the ownership specific advantage at home? Answer lies in things that are important to the production process that are fixed in location e.g. the market, characteristics of the labour force, raw materials
Why not license or franchise to an independent firm? Sometimes doing so is difficult – there is not a well developed market in many intangible assets. So the firm must use the advantage itself in order to fully exploit it.
3. What are the contextual elements that determined the success of KFC in China? Explain China offered KFC with location specific advantages.
Big market in China – very little cultural differences.
It was opening at that time
Fit with the core offering of KFC.
4. How were those contextual elements exploited by the firm?
a) How did the firm start expanding in China? And how come they could expand so fast?
b) And why did they decide to customize? How come their product was so successful?
KFC entered 1) the right market, 2) at the right moment (it entered first – timing of entry)
It also first franchised (= licensing), which is much less risky
It selected partners that had government connections – an asset that It did not have
They had a good knowledge of cultural differences through their Taiwan gang. What warren calls an intuitive understanding.
KFC has chicken as the main offering which fits the context. But it requires small adaptation. More popular than the beef. It is considered as an American brand (prestigious, appreciated and looked up at) adapted to Chinese customers.
5. How can we explain there is a low threat of new entrant for KFC?
Standardization is fairly new for China.
It is hard to offer authentic Chinese food that is produced massively.
It is a complex market to understand from a cultural point of view – see Starbucks difficulties.
Many chains failed. Localization/customization on product offering.
KFC targeted smaller cities to not face competition from McDonalds at the start.
KFC has full control of the value chain. It switched to fully owned
6. What are the main challenges and threats for KFC in the Chinese market?
Technology might change the fast food sector.
Tastes might evolve faster than KFC can adapt.
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New local actors might emerge.