only for the_ideas "

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glorious histories, are now simply outdated. Indeed, a recent study conducted by an electronic appliances analyst concluded that Japanese firms make more than half of the components used in the iPhone 5. Sony, Toshiba, and Sharp provide goods such as camera image sensors, memory devices, and display panels to the world leader in technology, Apple.

Japanese Crisis Management

Nevertheless, we cannot deny that the Japanese electronics industry as a whole is on a downward slope. Most firms in Japan share the features mentioned above, and so have been exposed to the same problems in recent years. However, they have not all reacted in the same way. The world economic crisis has made Japanese business leaders think about new ways to adapt in a world where the competition is increasingly global. Japanese firms all prefer Japanese management styles, but many of them have realized that they need to change and adapt faster to the rapidly evolving international business environment.

And they have not all chosen the same strategies. The next sections will describe the cases of three major players in the Japanese electronics industry, as well as their survival strategies: these are Sony, Hitachi, and Canon. Despite similar roots, they are all attempting to adjust their businesses in different ways in a global market full of challenges and opportunities.

Sony

History

On 7 May 1946, Masaru Ibuka (an engineer) and Akio Morita (a physicist) invested the equivalent of ¥190,000 to start a company with just twenty employees. It was called "Tokyo Tsushin Kogyo" and was established in Nihonbashi in Tokyo. The company initially specialized in research and manufacturing ot telecommunications and measuring equipment. The name "SONY" came later and was created by combining sonus, which is Latin for "sonic," with "sonny," meaning a youthful boy with a free and innovativespirit. It as chosen for its simple pronunciation that could be easily articulated In any

:nguage. The new name perfectly suited the company, which wanted to project the image of a group of young people with energy and passion for unlimited

creation.

Sony developed strongly after 1954, when the company obtained a license to d t . t s a basic electronic component which had been Invented Inpro uce ransts or , .' ., before The following year it began seiling the first radioAmerica SIXyears . .

d t· Iy with transistors In 1960 Sony Amenca was created, andreceptor ma e en Ire ., . I d th pany opened subsidiaries in Hong Kong and SWitzer an .shortly after, e com . . . h

. mbol of power the Sony bUilding was opened In t e SIX years later, as a sy ,

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the interconnectivity between the c imaging, games, and mobile techno

I! the upcoming years. They are proje operating income in 2015. As for th abandon them or create partnershi

On 27 October 2011, Sony took full producing mobile phones, created t companies, Sony and Ericsson. Th to Tokyo in order to speed up the d take a major role in the smartphone start. To achieve this, Sony will rely name is derived from the word "exp released in 2008. The start of the X is now developing the connection b media to increase the attractivenes Entertainment Network to its Xperia music, and games to the users of th

Concerning its TV division, Sony en Samsung in December 2011. This the costs of the TV branch. The co

1'1' develop new technology quicker an announced a partnership with Pana

I display OLEO.' This uses less pow I

On 2 July 2012, Sony announced t leader in cloud-gaming. According t Entertainment, this acquisition was of Gaikai with Sony's gaming platfo consumers. This partnership may b the Playstation, Playstation Portabl

In September 2012, Sony bought s in the digital imaging sector. The ob of its medical equipment division, a

I ten years. Hirai wants to continue t opportunities in the medical sphere. imaging technologies in order to ga sector.

Sony's smallest business units hav example, Sony's chemical products

J OlED: Organic light-emitting diode

II

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onsumer goods of the company. Digital logy will be the spearheads of the group in cted to generate 85% of the company's

e other sectors, the firm pians to either ps with other companies.

control of Sony Ericsson, a joint venture en years earlier by the then-separate ey pian to move the subsidiary from Sweden ecision-making process. The group wants to market, led by Apple, of which it missed the heavily on its smartphone line, "Xperia." The

erience," and the first phone in this line was peria line was rather disappointing, but Sony etween its smartphones and other forms of s of the phone. By transferring Sony line, Sony will be able to promote its movies, e phones.

ded the joint venture in LCD technology with operation is part of a plan to drastically reduce mpany is also making strategic alliances to d more efficiently. On 25 June 2012, Sony sonic to jointly develop the next-generation

er while providing a better quality image.

hat it had acquired Gaikai Inc., the world o Andrew House, CEO of Sony Computer made to combine the technological strength rm to provide new experiences for e profitable for many Sony products such as e, and the smartphones.

hares of 11.46% in Olympus, a major player jective was to gain access to the technology market expected to reach €75 billion within

o pursue merger and acquisitions Sony can benefit from its strengths in digital

in a significant competitive advantage in this

e also been inciuded in the restructuring. For business was recently sold off, and simiiarly,

8

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in the field of automotive battery and energy storage, Hirai said that the group needed to change the current situation because it had several shortcomings.

The group is also increasing its presence in emerging countries. For example, in Brazil, Sony IS an official partner of the 2014 World Cup. The objective is to Improve brand awareness in a country where consumer electronics sales are expected to increase sharply. In India, Sony Pictures Television is already the provider of some of the top-rated television channels in the market. Hirai also wants to use the BRIC economies as a base to strengthen Sony's supply chain.'

Hitachi

History

Hitachi was founded in 1910 by Namihei Odaira, an electrical engineering graduate ofTokyo Imperial University. The company was initially a shop that repaired electrical equipment. The origin of the name is a combination of the two kanjis, hi (meaning sun) and tachi (meaning rise). It took inspiration from the Rising Sun Flag, the military flag of Japan. Hitachi's first product was a five- horsepower induction motor that was mainly used in copper mining. In 1924, the company manufactured Japan's first large-scale electric locomotive. In 1932, Hitachi started to produce elevators and completed its first electric refrigerator. In the 1940s, the company developed water turbines and power excavators. The Second World War slowed the activities of the group, but it recovered quickly and in 1958 the company was awarded the grand prize for its electron microscopes at the Brussels World Fair. A year later, Hitachi America was established. During the 1960s, Hitachi was Japan's industrial and technological backbone. The company developed an experimental nuclear reactor and constructed the first cars of the famous Japanese high-speed train: the shinkansen. It also launched consumer products such as air conditioners and washing machines. In 1971, the company developed the 19o storage unit and, soon after, built one of the most powerful nuclear power stations in Japan. At the end of the 1970s, Hitachi succeeded in trialing the world's first optical transmission system.

Due to its success, the company was listed on the New York Stock Exchange in 1982. Two years later, it started mass-producing the famous 256-kbit DRAM. In order to maintain its technological dominance, in 1989 the company opened four large R&D centers, two in the US and two in Europe. In the 1990s, it launched a subsidiary in China and established a new record with a computer that had the world's fastest processing speed. Another record was broken dUring the same decade with the shinkansen, which could reach speeds of up to 270 km/h. In 2002, it was the first company to develop a silent laptop with a cooling system, and in 2007, Hitachi developed EMIEW2, a small robot capable of mteractmg

BRIC: Brazil Russia India China

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276 International Business Strategy ----------

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with its environment. In addition, in order to reduce Japan's dependence on rare metals the company developed a method of recycling them. The company

I ' . tely 323 000 people around the world and its headquartersemp oys approxrma , are located in the Chiyoda district of Tokyo.

Like many Japanese corporations Hitachi has always been eager to dive~sify into different business fields. Here is the weight of each Hitachi business unit In 2012

(source: Annual Report 2012) .

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1&T Systems: Software, servers, ATMs, system integration Power Systems: NuclearlThermaliHydroelectric power plant, wind power generation systems Social 1&1Systems: Railway, escalators, elevators, industrial machines Electronic S&E: Semiconductors, medical electronics equipment, LCOs Construction Machinery: Hydraulic excavators, wheel loaders, mechanical cranes High Functional M&C: Wires, cables, magnetic components AS: Car information systems, engine management systems C&D: Batteries, information storage media Digital M&C Products: Refrigerators, washing machines, air conditioning Financial Services: Leasing, loan guarantees Others: Logistics, property management

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Hffachim Recenf Yeam

According to the Fortune Global 500, in 2012 Hitachi was the largest Japanese electronics company in terms of revenue. However, the corporation has recently seen turbulent years and has had to modify its business activities to get ahead in a cornpennve envronment The evolution of Hitachi's stock price shows that after a net decrease in the value of shares, beginning from 2008, the stock is now on an upward trend (see appendix). The company saw four consecutive years of losses but returned to profit in 2011 despite a decrease in total revenue (see appendix). The consequences of the 2007 financial crisis were serious for Hitachi, because there was a sharp decline in demand for most of the company's products.

At the beginning of 2010, Hitachi was experiencing the worst period of its 102- year legacy. In April 2010 Hiraoki Nakanishi became Hitachi's president and he implemented a restructuring of the company that resulted in two years of record profit. Nakanishi declared that to become a global player, the key factor is not revenue, but profitability. This statement serves as a guide to the group's transformation. Indeed, Nakanishi is trying to diminish the importance of consumer-related goods such as computer parts and flat-panel TVs to focus on global infrastructure projects such as power plants, rail lines, and water treatment facilities. Consumer business was forecast to account for less than 10% of Hitachi's revenue in 2012, half of its share the previous year. In parallel, its infrastructure business will account for 80% of its profit this year.

Departing from Japanese Management Traditions

One of Hitachi's main concerns was its hard disc business. Problems began to arise in 2002, when Hitachi bought IBM's HOD business to merge it with its own HOD division. However, the new unit did not make any profit. This is why in 2004 Nakanishi, a talented manager, was chosen to identify the main reasons why the group was losing money on this division. After two months, he declared that it was badly managed and that the only solution was to manage it himself.

He realized that there were problems with quality and said that 60% of the hard disk drives produced by Hitachi were not suitable for use. He hired experts from a competitor to reorganize the production and manufacturing lines. The business

unit became profitable again in 2008.

B t i 2010 on becoming president of Hitachi, Nakanishi decided that HOD should no I~nger be one of the company's core products, despite the fact that it

t· 10" profit margins In March 2011, he sold the unit to Westernwas genera Ing 10 '. . ., Digital for $4.8 billion. By doing so, Nakanishi showed that all the business Units

'ncluded in the restructuring. He arranged the sale by arguing of the group were I . that the HOD industry was very fast moving and not well suited to a large

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conglomerate. Among the Japanese pUblic this deal was not perceived ,:,ell. . According to traditional Japanese ideas, members of a company group (Including units and their employees) should be supported for as long as possible. The Idea of selling a profitable business was viewed very negatively in the Japanese press and left many observers stunned.

But Nakanishi then took even bolder steps. In order to reinforce its strength in the energy sector, Hitachi bought Horizon Nuclear Power (HNP), the British builder of nuclear power plants, in November 2012. Since the Fukushima disaster, the nuclear market in Japan has been idling. The takeover of HNP is intended to make it possible for the group to expand this activity abroad. Hitachi judges the international potential of nuclear energy to be promising, and Britain is one of the main markets in Europe. Hitachi plans to build two or three 1,300- megawatt plants in England by the mid-2020s.

On 29 November 2012, Hitachi created a partnership with Mitsubishi Heavy to combine their thermal power system businesses. Nakanishi said that this cooperation would help both firms to become global leaders in a tough business climate. Moreover, they want to become big enough to compete against overseas rivals such as Siemens and General Electric. Hitachi will take 35% of the newly created company. It will develop, manufacture, and sell turbines, boilers and other equipment for power and geothermal plants. The deal is supposed to be completed in 2014.

Nakanishi also wants to reduce the costs of the conglomerate. 20% of employees have been let go in under three years, and in April 2012 Hitachi delisted from the New York Stock Exchange because the low volume did not justify the cost.

Hitachi is also looking outside Japan to stimulate growth. Activities abroad now account for 57% of the revenue and 65% of the total employees. The company plans to develop procurement in other countries where prices are about 40% lower than Japan. A high priority for Hitachi is India. The group wants to triple its activity there before 2016. India needs infrastructure and Hitachi is strong in this respect. Hitachi also wants to use India as an export center for Africa and the Middle East, two other places where the demand for infrastructure is supposed to increase greatly in the near future.

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Canon

History

Canon was founded in 1933 by a group of young people in a small apartment in Ropponql, a district ofTokyo. They wanted to produce high-quality cameras to compete against the German firms who were leading at that time. They quickly developed a camera prototype called "Kwanon" and a year later the Hansa Canon, Japan's first-ever 35mm tocal-plane shutter camera, was born. The company continued its growth over the next few years by continuously developing technologies in the optical sector. In the 1950s, Takeshi Mitarai, the president of Canon, built a corporate culture which took as its key principle human respect and compassion, in dealings both with employees and customers. In 1955, Canon entered the American market, opening an office in New York. Two years later, the company set up its sole European distributor, Canon Europe, in Switzerland. At the end of the 1960s, exports already represented 50% of the total sales of the company. During the same decade, the Japanese firm was looking to diversify in order to reduce risks. In 1964, the company entered the office equipment market with the world's first 10-key electronic calculator. In 1967, the firm introduced a new sloqan to illustrate its activities: "Cameras in the right hand, business machines in the left." Three years later, Canon developed the first Japanese plain-paper copying machine.

Up until 1970, Canon was achieving incredible growth. However, in 1974 the company struggled with financial problems due to the oil shocks and a defective calculator display component. The year after, for the first time in its history, the company did not pay any dividends. To compensate, Canon unveiled an ambitious project based on innovation that aimed to transform it into an "excellent global company." Under this plan, the company launched new products that had never been seen before, such as a laser printer with a semiconductor and a Bubble Jet inkjet printer. After its 51" anniversary in 1988, Canon started to promote environmental activities, such as toner cartridge recycling, in addition to globalizing its development sites. In the mid-1990s, Canon was still developing outstanding technologies but its debts became too large. Fujio Mitarai became the sixth president of Canon in 1995, and a year later he launched a new plan to optimize the financial structure of the company. The focus now was not on sales but on profit. In the 2000s, Canon maintained its world dominance in the digital camera market and has stayed profitable every year since. The company currently employs 200,000 people around the. world, . the vast majority of them in Asia. Here IS the weight of each Canon business Unit

in 2012 (source: Annual Report 2012).

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IS: Digital cinema cameras, digital camcorders, digital compact cameras and digital single lens reflex cameras.

• Imaging System

• Office

• Industry and Others

Office: Office network multifunction devices, laser printers, solutions software, toner, photosensitive drums, toner cartridges.

I&Others: semiconductor lithography, LCD

Canon dominates the market in most of its activities and has strong brand awareness. According to Forbes, in 2012 Canon was the 351h most powerful brand in the world. It is ranked first among Japanese companies in the field of technoloqy." Canon is also a world leader in R&D; the company held the most patents in the US after IBM and Samsung in 2011.

Innovation Leader

As mentioned above, Canon is a global leader, making a profit every year. Due to its cutting-edge products, few competitors-besides its compatriot Nikon-can seriously compete. These good results were achieved thanks to a management style based on a culture of excellence. Canon is active in just three different areas, and as such is more reactive to market change. The management of Canon wants to stay strongly focused on its core business. Since Canon only focuses on a small number of industries, the company has no choice but to strive to be number one in all of its endeavors.

In the past few years, Canon has faced decreased revenues due to the financial crisis but has stayed profitable (see appendix). This contrasts with most of the other Japanese firms active in the electronics sector.

Despite such high aspirations, the group is conscious that it cannot rely solely on its own labs and that it will have to acquire foreign technology. That is why, in April 2012, Canon bought Gee, the Dutch printer maker. This take-over was an ambitious plan for Canon. The company paid $1 billion, its largest ever purchase. In acquiring Gee, Canon had two main goals. It wanted to strengthen its core activities and to diversify the risk of currency fluctuation. By keeping the manufacturing base in the Netherlands, Canon would spread the currency risk between the yen and the euro. With the same logic, in September 2012, Canon

Only Toyota and Honda have a better ranking.

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bought Iris, a Belgian company specializing in software solutions and information scanmng.

Canon is also looking to optimize its supply chain by producing outside Japan. In June 2012: the company established a subsidiary in Brazil to manufacture compact digital cameras. Brazil is considered a lucrative place to invest, as it is forecast to grow rapidly due to hosting major sporting events, such as the FIFA World Cup and Olympic Games. Moreover, Brazil has the fourth-largest digital camera market after the US, China, and Japan. Increasing brand awareness in emerging countries is one of Canon's main concerns. In India, which is an important target for the Japanese firm, Canon rolled out a chain of branded retail stores called "Canon Image Square." The concept is very similar to the famous "Apple Store." Customers are able to handle Canon digital cameras and printers to experience them before deciding to purchase them. The group wants to increase the number of these stores in India from 50 at the end of 2011 to 300 in 2014.

Currently, everything seems to be going well for Canon; it is making a profit and is leading in many fields. However, the firm knows that being successful today does not necessarily mean being successful tomorrow. So the management is constantly trying to adjust its business activities to fit current trends. It is also preparing the company in anticipation of future troubles. Even if Canon is not directly threatened by any foreign conglomerates such as Samsung, another threat is already making Canon's strategy change.

Canon's Biggest Fear: Smartphones

The main advantage of smartphones is that they remove the need to carry other pocket devices. Unfortunately for Canon, one of the devices smartphones are beginning to replace is the digital camera. By proposing integrated cameras with an increasing number of megapixels, the next generation of smartphones may put fear into Canon's shareholders. The Japanese company has already reduced its forecast in revenue and profit for the coming years, mainly due to competition with smartphones. For Canon, being focused on fewer areas of business has been a strength until now, because it has been able to maintain and perpetuate its leadership. However, if one of these businesses is doomed, Canon may face

huge difficulties in the near future.

Finding New Business Opportunities

However, Canon's management is sharp and has already started to anticipate how the group will adapt to this new threatThls ISwhy the company ha~ . t if d fforts to enter into two new bUSiness domains. medical Imaging and In ensl Ie e ld . . t . . II' t b t In 2011 Mitarai the president of Canon, sal In an In erview tnte Igen ro 0 s. " .. .

J -r: s that the company plans to expend ¥1 trillion In mergers and

for the apan "me

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acquisitions within five years to improve its presence in these two sectors. He explained that he wanted to benefit from the strength of the yen to acquire companies abroad. For its medical division, the company wants to focus on diagnostic devices. The US-specifically Maryland, where one of the top "biotechnology clusters" is situated-will be where the R&D will be conducted. Canon has also launched a collaboration with the University of Maryland to develop an automated system providing infectious disease diagnostics. It will simplify the duties of the clinical staff and significantly improve the speed and efficiency of such activities. The goal of this partnership is to harness the strength of both institutions, to innovate, and to increase Canon's commercial portfolio.

With regards to intelligent robots, the main goal pursued by Canon is the automation of production. Japan is a world leader in robotics and Canon wants to be a major player in this sector. Instead of relocating all activities to countries where labor is cheap, Canon also wants to pursue the robot manufacturing of several products in Japan. The main goal is to cut costs. The company wants to move towards machine-only production in the next few years. However, the chairman has said that jobs will not be cut, and that workers will be transferred to do new kinds of work.

However, even if the fear of smartphones has pushed Canon to find new business opportunities for the future, the company still believes that the digital camera market remains promising. The belief is that by constantly innovating it can compete aqainstsrnartphones. During the Consumer Electronics Show in 2013, Canon presented a new version of the digital camera: the PowerShot N6 The goal pursued with the launch of this device is to create a new infatuation for consumers who threaten to abandon digital cameras for smartphones. In addition to unique design and ergonomics, the device provides the ability to take high-quality photographs, personalize them, and then publish them directly to social networks via Wi-Fi connectivity. The device also offers iOS and Android support. With the PowerShot N, Canon hopes to reinvigorate the digital camera market, where its popularity is slowly declining.

Japanese Management Taking Different Routes

As we have seen, Sony, Hitachi, and Canon have similar cultural backgrounds; they are traditional Japanese corporations and are confronted with a world that is becoming increasingly competitive. Despite this they have adopted different business strategies in order to grow.

See appendix for more details

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In conclusion, these three cases refiect the seismic changes that the electronics industry in Japan is undergoing. Panasonic, Sharp, Toshiba and many others are also trying to change their core business strategies because of similar problems. Thus, the general conclusions that can be drawn for the three companies are also valid for much of the sector overall. Being profitable in this new global environment is the main concern of Japanese firms, a factor with which they were not confronted during previous decades. The decline can thus be an opportunity for them to entirely rethink their business model and management style. If they succeed, these companies could emerge stronger and regain their glorious pasts; if they fail, Japan could lose its image as a world hub of high-tech eiectronics.

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Questions

> What are the main reasons for the decline of the Japanese electronics industry?

> Why do so many Japanese companies find it difficult to succeed in the globalized business world?

> Which business strategy did each of the companies apply?

> Are these strategies Japanese or Western?

> Do you think they will be successful?

> What management advice can you give to the three companies?

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Appendix

Sony stock

60

.,

" 20

2007 aooe 200; 2010 acr i 2012

(Source: Google Finance)

Hitachi stock

""

60'

2007 200B 2009 2010 2011 2012

(Source: Google Finance)

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Canon stock

60

2007 2008 2010 2011 2012

(Source: Google Finance)

Sony results

(In JPY Million)2008-03 2009-03 Revenue 8,845,747 7,729,993 Net income 368,332 -98,938

20 I0-03 2011-03 2012-03 7,2]3,9987,18],2736,493,212 -40,802 -259,585 -456,660

(Source: Morningstar)

Hitachi results

(In JPY Million)2007-03 2008-03 2009-03 2010-03 2011-03 2012-03 Revenue 10,248,483 ] 1,194,237 10,000,369 8,968,546 9,315,807 9,387,587 Net income -32,754 -57,932 -787,337 -106,961 238,869 103,958 (Source: Morningstar)

Canon results

(In JPV Million) 2007-03 2008-03 2009-03 20 I0-03 2011-03 2012-03 Revenue 4,496,368 4,090,084 3,209,20 I 3,706,901 3,557,433 3,493,151 Net income 489,997 308,845 131,647 246,603 248,63 224,834 (Source: Morningstar)

22

_-------------.:A:..'T'.':A':.'LE:-':o':.F~TH:'."R~EE:.'C::O~M:f'IPA~N~IE~S.~----. .THESURVIVALSTRATEGIESOFSONY,HITACHIAND CANON

Sony Xperia Z

Design:

Characteristics:

313·134·1

5" 1080 x 1920p full HD Reality Display with Mobile BRAVIA® Engine 2

13MP Fast Capture camera with Exmor RS for mobile, the world's first image sensor with HDR video for smartphones

Dust and water resistant (IP55 & IPS?) with a durable glass display

1.5 GHz asynchronous quad-core Snapdragon S4 processor with 2GB

RAM

Battery STAMINA mode improves your standby time by at least 4 times

One-touch functions enable consumers to easily share music, photos and videos from their smartphone to an array of NFC-enabled Sony devices

LTE, 4G for superfast entertainment

A unique OmniBalance design with subtly rounded edges and smooth

reflective surfaces on all sides

(Source: Sony Mobile)

23

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313-134-1

Canon Powershot N

Design:

~-

Features:

• Built-in IM-Fi® allows you to wirelessly transfer your images to social networking sites through CANON iMAGE GATEWAY#; to a PC or upload virtually anywhere on your iOS® or AndroidTM device" with the free download of the Canon CameraWindow app".

• The convenient Mobile Device Connect Button allows you to connect to your AndroidTM or iOS® device" for quick and easy sharing.

• New Creative Shot mode uses composition, color and lighting from your original image to create five unique images with an artistic fiair.

• Newly designed 2.8-inch capacitive, tilt, touch panel LCD; lens shutter; and zoom ring offer users a unique and creative way to capture photos.

• 8x Optical Zoom and 28mm IMde-Angle lens with Optical Image Stabilizer reduces camera shake so you achieve brilliant images.

• 12.1 Megapixel High-Sensitivity CMOS sensor combined with a DIGIC 5 Image Processor creates the Canon HS SYSTEM for improved low-light performance up to ISO 6400 and enhanced image quality.

• Capture stunning 1080p Full HD video with a dedicated movie button, plus zoom while shooting.

• Intelligent IS automatically chooses from six different modes to optimize image stabilization for the shooting condition.

(Source: Canon official website)

24

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KFC's African Expansion Aided by 'Value Chains'?

Case Study

This case was written by RaJan Shah, Amity Research Centers Headquarters, Bangalcre. It is Intended to be used as the basis for class discussion rather than to illustrate either effective or Ineffective

handling of a management situation. The case was compiled from published sources.

© 2014, Amity Research Centers Headquarters, Bangalore. No part of this publication may be copied, stored, transmitted, reproduced or distributed in any form

or medium whatsoever without the permission of the copyright owner.

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KFC'sAfrican Expansion: Aided by Value Chains'?

~~r21r~~i~~(,!,RTTR. BANGALORE

Author: Mr. Rajan Shah

KFC's African Expansion: Aided by 'Value Chains'?

Abstract: Yum! Brands (Yuml), based in Louisville, Kentucky, USA, was world's leading restaurant company, operated through KFC, Pizza Hut and Taco Bell brands. These brands were specialised in chicken, pizza and Mexican-style food respectively. Among all, KFC was an early mover in the African market by opening its first restaurant in South Africa in 1971. With the encouraging success in South Africa, KFC entered Namibia, Botswana and Swaziland. In 2009, KFC entered Nigeria via franchise route. Meanwhile, in 2011, total restaurants count in South Africa touched 660. In the same year, moving ahead with its pan African growth plan, KFC entered Kenya, Ghana and Zambia. By end of 20l2, KFC had 63 outlets in the New African Markets and 900 outlets in South Africa, Egypt, Morocco and Mauritius. In addition, KFC planned to enter Zimbabwe, Tanzania and Uganda, the Democratic Republic of Congo, Ethiopia and Senegal. In such an unbridled expansion, apart from the govern ment protectionism and regulations, KFC faced difficulties in managing supply chain as small farmers in Africa were unable to supply quality and quantity of chickens as per KFC's standards. In such a scenario, according to experts, the 'Value Chains' approach for small farmers mooted by The US Agency for International Development (USAIDj and Bill & Melinda Foundation (Gates Foundation) would indirectly benefit KFCmore than the small farmers, in the long run. Given such scenario, how KFCwould chart its future expansion in Africa, remained to be seen.

Pedagogical Objectives

The case study helps to understand and analyse: o Growth of KFCin Africa o Expansion aided by 'Value Chains' o Future Challenges.

Case Study

"Africa is undoubtedly one of the fastest growing regions globally and KFCis fully committed to harnessing this opportunity and bUildinga sustainable business model on the continent. 1/1

- Bruce layzell, General Manager of New African Markets, KFC

"A~0 mar~~t leader in the QuickService Restaurant industry, we are excited to take this leap forward. It IS ou~ VISionto s~1Iour great original recipe chicken right across the continent _ tnars a bil/ion people In 54 countries. Fortunately it's a billionpeople who love chicken and we'lf n w be able to give them the best tasting chicken."2 0

- Keith Warren, Managing Director, KFCAfrica

1 "KFCto EJCpandSteadilv Into AfrIca", ~ttP://WWW.kfc.co.za/zone/post/kfc-to.eKpand.steadilV-lnto-afrlca/. January is" 2013 "KFCEJCpanslon tn Africa to be So Good",

http://WWW.kfc.co.za/zone/post/kfc-eJCpansIOn-ln_africa.to_be-so-gOOd/. January 23'd 2012

tIC 2014, AmIty Research Centers HQ, Banga1ore. All rights reserved,"

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KFC's African Expansion: Aided by 'Value Chains?

Having more than 18,000restaurantsin l1S countries,KFC,basedin louisville KentuckyUSAwas world's t I hl ' ". . mas popu ar C icken restaurant chain.' As a part of Its future expansion KFC had an ambitious i1an to conquer Africa, the second-largest continent in terms of size and pcpulatlon. 4 By 2014, Yum. Brands (Yum!), parent company of KFC, decided to double number of KFC restaurants to 1,200 .in Africa, In addition, by 2014, Yum! also forecasted to garner annual profits of $120 million from Afnca.' Growing urbanisation, increasing number of families with more disposable income, and affluent customers were the lucrative factors for KFC's expansion in various African countnes." According to David C. Novak, Chairman and Chief Executive Officer Yum! "Africa has tremendous opportunit~. It's a great emerging continent, and we have a chance to really lead In that business." But, managing supply chain remained the biggest challenge for KFC in Africa as small farmers were unable to supply chickens as per KFC's standards. In such scenario, Initiatives pursued by The US Agency for International Development (USAID) and Bill & Melinda Foundation (Gates Foundation) were aimed to aid small farmers in Africa. Such initiative was aimed to develop 'Value Chains' In order to indulge small farmers into business relationship. But, critics opined that in such efforts, KFC poised to benefit more rather than small termers.'

Amidst this backdrop, it remained to be seen how KFC moves ahead with its pan African expansion plans.

KFC in Africa: An Overview

Yuml Brands Inc. (Yuml), based in Louisville, Kentucky, USA, had nearly 40,000 restaurants in 125 countries. In 2012, Yum! was ranked at 201 position in FORTUNE 500 list with revenues of $13 billion. Being world's leading Restaurant Company, key brands of Yuml included KFC, Pizza Hut and Taco Bell. These brands were specialised in chicken, pizza and Mexican-style food categories respecnvetv." Among its key brands, KFCwas reputed as world's most popular chicken restaurant chatn."

KFC was founded by Colonel Harland sanders (Colonel), a founder and visionary, who created world famous recipe by using herbs and splces." By providing an excellent quality of fried chicken, in 1955, Colonel decided to foray into chicken franchisee business, With his business acumen, Colonel had more than 600 KFC franchises In the US and canada. But in 1964, Colonel sold Its US operations to group of investors including John Y. Brown Jr. for $2 million. With such management overhaul, KFC went public in 1966, by listing itself on the New York Stock Exchange. In a major development, in 1969, PepsiCo (PepsiCo) Inc. acquired the company and later, in 1997, PepsiCo decided to spin-off its quick service restaurants business. This spin-off resulted into the formation of an Independent restaurants company named Trieon Global Restaurants Inc. known as Yuml.

u KFC was known for its

Original Recipe", Extra Crlspv'", Kentucky Grilled Chicken", Extra Crispyr" Strips and Extra Crispy"· Boneless, with home-style sides, Hot Wings"', and freshly made chicken sandwiches."

3 "About KFC',http://www.kfc.com/about/ . 4 "Asia Population 2014", http://worldPopulatlonreVlew.com/contlnenu/asia-populatlon/ 5 Schreiner Bruce "KFCtoDoubleSizelnAfrlca", th http://www.hufflngtonpost.com/2010/12/08/kfc-ln-afrlc~-plans-to-dO_nJ93976.html. August 12 2010 B Moorad Zeenat "KFCEager to spread its Wings In Africa, h http://www.bdll~e.co.ZlI/buSlness/retall/2013/01/14/kf.-eager-to-spread-lts-wlngs-lo-afrlca, January 14' 2013

7 "KfC to Double SizeInAfrica", op.clt. 8 p kAI "How BillGates is HelpingKFCTake over", III"II ex, h j om/."",onment/2014/01/kf,_afritil<hlckeo-usald-gates-foondatlOn, January 10 2014 http: www.mot er cnes.c " '''About Yumt Brands", http://www.yum.com/company/ til "About KfC",op.cit. l1'bid H ~coione' Sanders", http://colonelsanders.com/hlstory_,oloneISanders.asp

U "KfC", http://www.yum.com/brands/kfc.asp

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KFC'sAfrican Expansion: Aided by 'Value ChaIns'?

The worldwide system units ofYum! were divided into the US and the international market.,Further, such system units were categorised into company-owned, unconsolidated affiliates, fra~chlsed and licensed. By the end of 1999, in the US, KFChad 1,439 company-owned, 3,743 franchised a,nd 49 licensed system units. At the same time, KFC had 1,185 company-owned, 514 unconsollda~ed affiliates 3841 franchised and 55 licensed system units internationally. In the same year, operating profit an'd ~et income of Yum! touched $1,240 million and $6,27 million r~spectively.14 Acco~ding to analysts, over a period of time, performance of Yuml soared with operating profit and net Income touching $2,294 million and $1,597 million respectively in 2012. (Annexure I) In the same year, vuml decided to pursue its International expansion more aggressively, in order to build strong brand in various countries such as China, India, Russia, France, Germany, Middle East and Latin America, and Africa. On such growth strategy, David C. Novak (Novak), Chairman and Chief Executive Officer (CEO), Yuml, said, "We set a new record for international development by opening nearly 2,000 new restaurants in 2012. As a matter of fact, we believe the best is yet to come as we pursue our objective to be the defining global company that feeds the world.?"

In its international expansion, among various regions, Yum! decided to establish a steady platform for KFC brands across Africa. Moreover, KFC's African voyage was interesting. According to Doug Smart, KFC's Africa Managing Director (MOl, "KFC has been in South Africa since 1971 and so almost all of our consumers grew up with it and they know it, it's a household name, in many parts of Africa that is not the case they may not have ever heard of it ever.//16

KFC's African Voyage

Observers noted that when a CEO of KFC's holding company visited South Africa with his family for safari tour in 19605, he was lured by the development of the country. After going back, such incident resulted into KFC's debut into South Africa in 1971. With the significant success in the South African market, KFCdecided to foray neighbouring countries such as Namibia, Botswana and Swaziland. With the beginning of new millennium, KFCdecided to expand its footprint in North Africa. According to Keith Warren (Warren), the then MO, African Operations, KFC, "South Africa was just too much of a prospect in terms of the further development of [the] market that we didn't really want to distract ourselves taking the focus further north.v"

In 2007, in addition to North Africa, KFC identified business opportunities across African continent, and as a result, in December 2009, KFC opened its first restaurant in Lagos, Nigeria.1I KFC entered Nigerian market via Devvani International Nigeria Limited (Oevyani), a franchise holder for KFC in Nigeria. According to Vishal Kapur (Kapur), CEO, Devyani, "Since KFCjoined the Nigerian market, it had continually upped the stakes in the provision of freshly made food that met international quality standards." Since its entry into Nigerian market, KFChad opened seven outlets. In 2011, KFCdecided to open another 19 new service centres, with an investment of NGN19 1.5 billion. To fuel such expansion, Devyani had launched 'More Food, More Gifts' promotional activity in Nigeria. Commenting on such promotional activity, Kapur said, "We are lnvlting all our customers to come

u "1999 Annual Report - Yuml", www.yum.com/lnvestors/annualreport/99annualreport/Pdf/1999AnnualReport.pdf :: "2012 Annual Re~rt 2012- Yuml", http://www.yum.com/annualreport/pdf/2012yumAnnReportPdf. 2012 Moorad zeen~t, Famous Brands Alms to Cash In on Africa Splurge",

http://www.bdllve.to.za{africa/africanbusl ness/2013/D7/02/famous_brands_a lms-tc-ca sh-i n-cn-efrtce-splu rge July 3rd2013 , 17 Marin race, "KFC'sAfrican venture",

~.~:~/www.howwemadeitinafrlca.com/kfc%E2%80%99s-afrlcan-adventure/1S151/, February 2i'd 2012

If It denotes Nlger1an currency Naira.

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KFC's Afrlcon Expansion: Aided by 'Value Chains'?

and enjoy the 'so good' experience of KFC. Nigerians will always enjoy the same quality of delicious meals from KFC as obtained anywhere in the world. This Is our promtse.?"

On the, s,uccess of KFC's Nigerian operation, Warren quoted, "KFC was very well received In Nigeria. D,ur on,glnal d,evelopment plans for Nigeria were quite conservative, and within slx weeks, I was [In discussion] with the franchisees, and they were saying, 'Forget that, we are now going to build as many stores as we possibly can'. We are finding that the only limiting factor we've got In Nigeria right now is actually chicken supply, and finding suppliers who are able to meet our global quality standards in sufficient quantity.,,21 KFC also planned to offer seafood in Nigeria. Giving out the rationale behind such offering, Bruce Layzell (Lavzell], General Manager of New African Markets, KFC, said, "KFC customers around the world enjoy a varied menu obviously coupled with some key brand defining elements like our Original Recipe' chicken. Our outstanding Fish Zinger" burgers and Zinger Shrtmps'" are a way of bringing diversity to our menu but with a familiar meat block that we know Nigerians love. Nigerians are very much part of the global village and they demand world class products, world class service and world class experiences. At KFC we strive to deliver on this need and we are uncompromising to ensure, through our products, customers' and restaurants demands are met. Our global reach allows us to tap into the very frontline of product development and consumer trends and we know that success here will hinge on us ensuring that Nigerians get to experience these things sooner rather than Iater.t"

Moreover, KFC paid due attention towards brand building and operational efficiency In its Nigerian operations. Highlighting importance of local production, Layzell stated, "100 percent of our chicken in Nigeria is Nigerian farmed and processed. We have worked with some outstanding partners to upgrade facilities and standards to meet the exact requirements that our brand demands. We want to be seen as a Nigerian company that contributes to the Nigerian economy and people on a number of levels. As such, we will always try to localise production where we can source the right quality at the right price. The ultimate goal would be to get Nigerian suppliers to the level of capacity that

would allow them to export to other countrles.?"

Meanwhile, in 2011, KFC's\~staurants count in South Africa touched more than 660. According to experts, these numbers wFre four times ahead of McDonald: and Nando's, KFC's nearest competitors in South Africa. On such development, Warren opined, If we can unlock Africa the way we've unlocked South Afrid, the biggest division In Yuml by a country mile will hopefully be the

African division in about 100 years."24

Moving ahead with its pan Africa growth plan, In 2011, KFCentered Kenya, Ghana and Zambia. is For entering into Kenyan market, Kuku Foods became franchisee partner for KFC. Kuku Food had KFC franchisee across East Africa. On KFC's Kenyan foray, Gavin Bell (Bell), a veteran ~estaurateur and General Manager, Kuku Foods, said, "We had been looking at Kenya as a potential location for a number of global franchises and KFC seemed to be the obvious choice in terms of the prov~sion of the quality products that it offers, predominantly from the chicken perspective, given that chicken is

20 "KFCto Invest N1.sbn on 19 New outlets", III /201l/04/15/kfc.to-Invest-n1-Sbn-on-19-new-outlets/, April 15 2011http://buslnessnews.com.ng

21"KFC'SAfrican venture", op.dt. la 22 Armitage lan, "KFCNigeriaN, http://www.afrlcaoutiookmag.com/content/kfc-nlger

2S Ibid 2" "KFCC lonelleads the Charge Into Africa", III

Nicolson GreB, 0 /. I /2012_03-1g.kfc-colonel-ieads.the-charge-lntcHlfrlca/I.UllakTYXb82x. March 18 http://www,dallymaverlck.co.za arne e 2012 25 "KFC's African Venture", op.clt.

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KFC'sAfrican Expansion: Aided by 'Value Chains'?--------..;...- a popular luxury here In Kenya. We have three branches in Kenya and we are in the process of building in Tanzania and Uganda, with at least one store in both ccuntrfes.":"

But, at the same time, pointing out the challenges in Kenyan operations, Bell mentioned, "We have faced challenges predominantly in the supply chain, especially getting local suppliers to the level where they can pass the Yum! Brands (owner of KFC)Supplier Tracking and Recognltlcn (STAR) audit system, which monitors suppliers for food safety and security. A lot of business:s here have various certifications, but are not at the level where they can be able to supply KFC. In Instances - when we cannot find a KFCapproved supplier locally - we have to purchase outside the country from a KFC approved supplier. For instance, we buy our processed, pre-blanched, blast-frozen potato chips from Egypt because It has total traceability back to source. We are working with Kenyan companies to ensure that in the future we will have local chips suppliers, It Is In our interest in terms of cost, logistics and storage. It is a huge expense for us to import from Egypt,"n

By end of 2012, there were 63 KFC restaurants in New African Market except South Africa, Egypt, Morocco and Mauritius. The total KFC restaurants count In Africa including South Africa, Egypt, Morocco and Mauritius touched 900 by end of 2012. In addition, by end of 2012, KFC restaurants were operational in Angola, Namibia, Botswana, Mozambique, lesotho, Malawi, Swaziland, Ghana, Kenya and Zambia. By 2013, KFCalso pJanned to enter Zimbabwe, Tanzania and Uganda and later on in the Democratic Republic of Congo, Ethiopia and Senegal.28

In Yuml's Annual Report of 2012, focusing on Africa, Novak mentioned, "[Yuml was] making major progress in Africa, a continent with endless possibilities where we clearly have first-mover advantage. We are driving major growth bulldtng off our dominant base of about 700 KFCs in South Africa, where we expect to add another 45 restaurants this year, By the end of 2012, we expanded to 14 African countries, including the biggest ones, Nigeria, Kenya and Zambia. In 2013, we intend to expand to Tanzania, Uganda' and 21mbabwe."29 Supporting Novak, Warren also added that, "We agreed that the best thing to do would be to develop the business across a number of geographies. So if we hit speed wobbles, or came across obstacles, we wouldn't be dependent on Just that one market, and wouJd therefore be under pressure.':" In 2013, KFC's total restaurants count in Africa touched 1,000.HBy 2014, Yuml aimed to operate 850 KFCrestaur.ants In South Africa and 350 across African countries to garner operating profit of $120 Tillion12 (Exhibit I).

According to observers, for its African voyage, KFC had decided not to adopt 'Blanket' approach. Giving rationale behind for not adopting 'toe-in-the-water' approach, layzell, opined, "KFC has established a dedicated department to focus on all aspects of optimising business in Africa, from marketing and supply chain, to infrastructure and human resources." Layzell, admitting the view of Aliko Dangote, a Nigerian businessman, who once opined that by sitting in US and Europe, African business can not be operated, asserted, 'This is a fundamental truth - you need to be on the ground to understand the complexities of each country in Africa, Our KFCrestaurants in each market differ _ our aim is to make our brand relevant in a local context. We won't cut and paste a South African KFC

as Mulupi Dinfln, "KFCExpects More Global Fast-Food Chains to Enter the xenvan Market" http://panafrleanvlslons.eom/2012/kfe-expects-more-gIObat.fast_food-ehalns-to-enter_th'ke _ k II J I 2." 2012 e- oven mar e , u V 17 Ibid,

z, "KFCSpreads Its Wings", http://www.bl2mag.eo.za/kfe-to-expand_steadIfV.lnto_afrlca/ Janua 14th 2013 Zg Hedley NIck, "Yum to Push KFCInto Africa 'as fast as possIble"', , ry ~ttP://www.bdllve.co.za/buslness/retall/2013/06/01/vum-to-push_lde_into--afrlea.aS-fast-as~Possible June tt' 2013 a "KFC's African Venture", op.clt. ,

Jl "Yum to Push KFCInto Africa 'as fast as possible"', op.cit. U Schreiner Bruce, "KFCto Double 512e In Africa",

http://www.hUff!ngtonpostcom/2010/12/OS/kfc-ln-afrlca_plans_to_do_n_793976.html. August Ith 2010

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into Nigeria or zerrora.':" He further add d ' _ the first is how we db' e I 'There are two factors when looking at market potential environment _ olitical 0 ~~lness, call ~tour Internal ambit of control. The second Is the external play positively iogeth Stt~btlitYIeconomic gr~wth, infrastructure Investment etc. If these two factors

er en we are very bullish about our growth potentlal.""

Exhibit I KFC - Spreading Wings In Africa

After rapid CI(Pil(lSIOrl of lts KfC stores In (hmi) • VUM brimM IS turnmy Its ,IUenuon to Afr)ri'l

1,2'00 slOfn

l~OOO • south Alr"co! _ Rest of Art!ea

80010,000

Rtst ol'WQrld

5,000 --0 20'" '" 'rr! 'Ill '09

• flr:l!tl(IIDn

600

"0 ,ao o

'005 2010'001

Source: Julie Jargon, "KFC Savors Potential In Africa", http://onllne,wsj,com/news/articles/SB100014240527487042 5070457600557124 7805178, December ih

2010

But, at the same time, he emphasised that in such approach, KFC'sworld-class food safety standards remained intact. In order to achieve this, Layzell stated, "We partner with suppliers who are wllllng to invest in Africa or ensure local suppliers are up to speed and scale in order to meet our requirements, We can spend up to two years in advance of opening a store ensuring that suppliers meet our exacting standards." In addition, KFCfocused on providing employee training to foster its growth in Africa. Lavzetl emphasised, "We have done just that in our Africa markets and today we have trained about 2100 customer facing KFC employees and 100 above store and restaurant

support employees."lS

With such business approach, by 2014, KFCaimed to double its African outlet to 1,200 and revenues to $2 billion in the same period. On such ambitions, Novak said, "Africa wasn't even on our radar screen 10 years ago, but now we see it exploding with opportunity." According to experts, improved political stability in various African governments, vast population size and growing middle class, who preferred chicken as nutritional food, fascinated KFC to conquer African market. J6 Recognising potential of Africa, Abdoulie Janneh, Executive Secretary, Economic Commission for Africa, United Nations, said, "Nine out of the top 10 fastest growing economies are in Africa. There is a growing consensus that Africa is on the verge of an economic take-off and could become a pole of global growth. This is largely based on some factors: Africa's untapped natural resource endowment which provides significant investment potential; the continent's steady population growth, which, If properly managed, could yield positive returns; the rise of the middle class and the untapped regional market; high economic growth rates; improvements in the general macroeconomic

n "KFCspreads Its Wings", op.clt, ~4"KFCNigeria", op.clt '5 "KFCSpreads its Wings", op,clt, J6 Jargon Julie "KFCSavors Potential InAfrica", lh http://onllne.:.vS!.com/news/artldes/S810001424052748704250704576005571247805178, December 7 2010

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KFC'sAfrican Expansion: Aided by 'Value Chains'?------- environment; strategic and timely institutional reforms, as wei,' as jmpro~ed gov~rnance in ma~y African countries' improved business environment in many African countries and Increased FDI In recent years. Themiddle class needs to grow for those numbers to translate into a profit, but there are already positive signs. While the continent's collective GDP stl,'1o~IY ,amounts roughly to that,~~ Brazil or Russia, it grew twice as fast in the last decade than It did In the 19805 and 19905 (Annexure II).

However, in spite ofthe promising growth, KFC faced with numerous challenges. in Africa, Apart from government protectionism and regulation, according to experts, one for the biggest challenges for KFCin Africa was to manage its supply chain. According to Warren, "We have countries in which we operate where the chicken is the most expensive chicken in the world. It is the most inefficiently produced chicken in the world. It is the lowest standard chicken in the world. And it is all because the government is protecting the local industry '" The reality Is, and It has been proven the world over, whenever you have trade barriers and protection, you end up with an [unfavourable] economic result.v"

'Value Chains' - Thrust for Future Growth

In order to fuel its African expansion, KFC required steady supply of chickens with pre-defined standards. But, small chicken farmers in Africa were unable to meet quality and quantity, as required by KFC.

39 Ashok Mohinani (Mohinani), a restaurateur, who took a franchise of KFC in Ghana, was

forced to import chicken, as farmers were failed to supply chicken as per KFC's standards. With such development, import cost increased and that resulted into product price hike. According to Mohinani, "With fast food, you can't keep raising prices. It's chicken." Not only in Ghana but also in Nigeria and Kenya too KFCfaced similar problems. KFChad started offering fish in Nigeria, as import of chicken was illegal. Kenya too had a ban on import of poultry. On such situation, Paul Brenton, Lead Economist at World Bank, expressed, "Growing demand for food in Africa is increasingly being met by imports. Clearly something has to change.v"

In such scenario, The US Agency for International Development (USAID) and Bill & Melinda Foundation (Gates Foundation) saw opportunities for small farmers in Africa by convincing them to adopt new crop. According to experts, "To do this, USAID and Gates are funding companies to build what development experts call 'value chains' - business relationships that link small farmers to sellers of agricultural inputs like fertilizer on one side, and big buyers of corn and sayan the other. Those buyers turn these commodities into feed, and then sell it to large chicken wholesalers who are staking their future growth on supplying KFC'sAfrican expansion. The idea is to give small farmers living on the edge new technology to grow more, allowing them to first feed themselves and then 'diversify into commercial crops.' All over Africa, companies backed by USAID and the Gates Foundation are developing these supply chains and encouraging small farmers to join them'?" (Annexure Ill).

In 2010, Gates Foundation gave a grant of $8 million for a four-year project to Tecnncserve" to focus on businesses that generate income of small farmers in Southern Africa via developing local soy industry. "Grant will be used to boost farmer incomes in Mozambique and Zambia, where

H "KFCColonel Leads the Charge Into Africa", op.clt. u "KFC'sAfrican Venture", op.clt. n "How BillGates Is Helping KFCTake Over", op.clt. 40 Hinshaw Drew, "As KFCGoes to Afrlca It Lacksonly One Thing: Ollcken", http;//onllne,wsJ.can/news/artlcles/sBlOOOI4241278873Z4442304578235602613061228 F br Ih 41 "How BillGates Is Helpll'18KFCTake Over", op.c1t ' e uary 8 2013 42 The USA based NGO.

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KFC'$African Expansion: Aided by 'Value Chains'?

TechnoServe is .working to expand soy production by smallholder farmers and connect them to buyer~ f?r thel~ crops. TechnoServe, in partnership with public and private agencies and organ"zatlons, will help farmers purchase premium seeds and other supplies teach them new te,chnlques fo~ growing so~, and work with them to form farmer cooperatives. The organization also will promote Investments In soy storage and processing and will work to boost the local feed and livestock industries to ensure the farmers have a stable market for their crops. Within four years, TechnoServe expects the effort to boost the income of 37,000 farming households by an average of $200 a year,"43 highlighted the Gates Foundation. In addition to TechnoServe Gates Foundation partnered with Cargill, reputed as agricultural commodity trading giant." '

TechnoServe had already listed seven largest chicken wholesalers in Zambia as end market for soy. Experts noted that, "For large poultry wholesalers, the value chain system makes perfect sense: It's a way to turn small farmers onto a single, htgh-proteln crop like soy, then turn that crop Into chicken feed, and, eventually, into chicken." On such development, Richard Hurelbrink, Director of $24 million U5AID-backed soy project, mentioned, "Soybeans are Important. The end markets driving that market are the livestock sector for the manufacture of animal feeds. They're demanding a lot of

materiaf.?"

Moreover, KFC offered burgers without lettuce in few places in Africa, as local producers were unable to supply quantity and quality of lettuce as per KFC'srequirement. According to Warren, "In one or two of our geographies... we haven't got suitable lettuce production, and as a result, our burgers don't actually have lettuce on them. That is a short-term problem, and it is not something we want to entertain at all because burgers don't taste as good without lettuce ... We are working very hard and closely with the local farmers to get them to produce lettuce at the quality and the standard that we need to put on our burgers." However, experts felt that KFC'sgrowth in Africa was also affected by inadequate farming capacity to supply both chickens and vegetables. But, at the same time, Warren opined that supplying chickens and other products could turn out to be a lucrative business for farmers in Africa. Highlighting the initial supply chain difficulties faced in the Nigerian market for KFC,Warren said, "When we first went into Nigeria, it took a lot of convincing to get one of the chicken farmers to partner, because of the amount of investment [he} needed to make to achieve our quality standards. The other chicken producers weren't particularly interested. But once they saw the successwe were achieving with that one farmer, they then went and said, 'We better get on board'. And now we have four chicken producers in Nigeria, all certified and accredited,

and achieving our standards ..."46

With such initiatives, KFC'sambition was to ensure local supply In all African countries In which It operated. Explaining importance of local supply in each country, Warren pointed, "Why would you want to be paying the cost of." shipping products, when you can actually source it locally? Most of Africa is blessed with enormous agricultural wealth, so therefore It Is a matter of unlocking that and

I d d 1147

developing the technology to meet our supp y eman 5.

4~ "Gates Foundation Awards $8 million for Soy project In Sub-SaharanAfrka", http://www.philanthrOpvnewsdigest.org/news/gates-foundatiOn-awards-8-mll1lon-for·soy-project·ln-su~saharan-

africa, August so" 2010 44 "Gates Foundation and cargill Paper", http://gmwateh.org/latest_listlng/l-news-ltems/12451-gateS-foundatlon-a nd-carsill-paper

45 "HoW BillGates Is Helping KfCTake Over", cp.clt, " 45 Maritz race "KFC'sAfrican Expansion an opportunity for Farmers • ,6

, dill 'Iea ,om/kfcsoafrlcan-expanslon-an-opportunlty-for-tarmers/14799/, February 3 2012 http://www.howwema e na . 47 Ibid.

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KFC'sAfrican Expansion: Aided by Value ChaIns?

Challenges Ahead

According to experts, high-protein food such as soy was crucial for the healthy growth and development of chicken. WIth such initiatives from USAID and Gates FoundatIon, concerns were raised that KFCpoised to benefit more compared to small farmers. Explaining such scenario, experts mentioned that in order to supply to KFC,farmers must utilised their limited resources to meet quality measures of KFC. tn addition to KFC,there were other commercial buyer~ for soy in Africa. Due to this concern was raised that KFCmight set the prices and control the buying market. At the same tlme.even though farmers witness increase in their income, they can't afford fried ~hicken. In sub-Saharan Africa, visiting KFCrestaurants was considered as a status symbol. Commenting on the role of aid organisations, experts noted, "Aid organizations can bring market players from across the supply chain - farm to restaurant - into the same room, They can provide a platform where farmers' interests and voices are recognized and roadblocks in the market are resolved by the players themselves. This is essential to building a strong market that will benefit all long after the aid organization leaves the conversanon."!

In addition, small farmers in Africa might not be capable of working on both the fronts namely, supplying to industry and feeding their own families. According to James McCann, Historian of African agriculture at Boston University, "Small farmers may find it hard to sell to anyone but commercial feed producers. Market expectations can change what farmers produce. But are they producing for the local market, or for the value chain?" At the same time, Andrew Eder, Spokesperson, TechnoServe, when asked whether soy project was ultimately aiding fast-food industry, he denied such motive and said, "His company's role is to connect farmers to the best markets -Jocaf regional or global- for their crop or product. Our focus is on improving the soy value chain In order to increase the incomes of the smallholder farmers with whom we work." In a major announcement, an anonymous spokesperson from Yuml said, "We primarily source our chicken in Africa locally and regularly work with local suppliers to increase production to meet our growing business and high quality standards." But, observers mentioned that since 2011, YumJ had lobbied USAID for providing foreign development assistance to Africa,4'

Meanwhile, emphasising importance of the supply chain for KFCin Africa, layzell said, "Our suppliers are growing with us. We do a lot of work with them, bringing them up to standard. It's not always easy and you can imagine the interesting conversations we have with suppliers _ 'you need to improve your quality and spend money on your plant but we can't offer you guarantees for work, or we only have three or four outlets in that country.' It's a challenge but what it's really about is painting our vision of where we want to go as a brand and then finding suppliers who are willing to partner with us on that journey, It is upfront investment that might not be paid off in the short term but the point is to get in early, lay down the right standards and build the relationship. As an example we have some South African companies that have supplied us for much of the 40 years we have been in that country, We allow them to grow their business with us. We also know our global standards are exceptional and will help them in getting other business. Indeed, when other businesses enter Africa· other food service businesses - Our suppliers have a foundation of the right quality they can supply to the Industry, to hotels, to supermarkets, It is about painting the picture, finding the suppliers who believe in what we have to offer and creating the vision to become world class, And

41 Hafften von Marie, "Growing I<FC:When ExploIting Markets May ExploIt Farmers"

http://WWW.gIObalenvlsion.org/2014/02/03/grOwlng_kfCoWhen-eXPloltIng-markets-~aY-eXPIOJt_farmers Februa 3 rd2014 , ry

49 "How Bill Gates Is Helping I<FCTake Over", cp.ctt.

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__ ----------- .".KF~CSAFRICAN EXPANSION: AIDED BY 'VALUE CHAINS'?

---.. --' 314-138-1

KFC's African Expansion: Aided by 'value Chains'?

we have found some fantastic partners, people willing to invest in their business and do the training."so

At the same time, highlighting other challenges In addition to the supply chain, Layzell stated, "Africa is full of challenges, ranging from the political and economic, to the societal and practical. Some challenges are harder to address than others - consider the power problem: not something that'll be solved overnight or necessarily something we can control. We can put in local generation and use equipment that uses less power, but we can't do much more. Some of Africa's challenges you can control but others you can't. I think we have been successful in solving the challenges within our control and finding ways of mitigating the factors we can't, even the power issues,"Sl

But, in order to expand and ensure success in Africa, experts noted, "Yum's success in Africa depends on guaranteeing the same sandwich or bucket of chicken everywhere it goes, whether it's lusaka, Zambia, or louisville, xentuckv.?"

Therefore in backdrop of the above scenario, how KFC moves ahead with Its African expansion, remained to be seen.

Annexure I Yum! Brands Restaurants Counts & Revenues-

Worldwide System Restaurants

Year-end 2012 2011 2010 2009 2008

Company 7,578 7,437 7,271 7,666 7,568

Unconsolidated Affiliates 660 587 525 469 645

Franchisees 28,608 26,928 26,219 25,OBS 24,225

licensees 2,168 2,169 2,186 2,199 2,167

Total 39,014 37,121 36,201 35,419 34,605

Revenues (In Millions)

Revenues 2012 2011 2010

Company Sales $11,833 $10,893 $9,783

Franchisee and license fees and Income 1,800 1,733 1,560

Total Revenues 13,633 12,626 11,343

Source: . lOt Restaurants Count" http://www.yum.com/lnvestors/restcounts.asp11"Yuml Flnancla a a -, " 2}"vuml Financial Data - Consolidated Statements of Income,

http://www.yum.com/lnvestors/income_statement.asp

50 Armitage ran, "unlocking Africa: Inlsld~KFtC"l~nIOCklnB-afrlca.lnslde.kfc,January 7111 2013 http://www.afrlcaoutlookmag.com con en 51 Ibid. r" dt 5Z "How Bill Gates Is HelpingKFCTakeeve ,op. ,

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301

International Business Strategy302 -

314·138·1

KFC's African Expansion: AIded by 'Value ChaIns'?

Africa Today

Annexure II Africa - Luring Factors

Africa Tomorrow

•

$1.6 trillion Africa's collective GOP in 2008, roughly equal to Brazil's and Russia's $860 billion: Africa's combined consumer spending in 2008 316 million: the number of new mobile phone subscribers signed up in Africa since 2000 60%: Africa's share of the world's total amount of uncultivated, arable land 52: the number of African cities with more than 1 million people each 20: the number of African companies with revenues of at least $3 billion.

• $2.6 trillion Africa's collective GOP by 2020 $1.4 trHJlon Africa's consumer spending in 2020 1.1 billion: the number of Africans of working age In2040 128 million: the number of African households with discretionary income in 2020 50%: the portion of Africans Jiving in cities by 2030 An African 'Green Revolution' could raise agriculture production to $880 billion per annum by 2030.

Discretionary Spending Power by 2020 Share of hou811holda in each Income bracket %, millions of l1our,ahOlds

Page -11

100%= 163

Discretionary Income

---.._--._--- 21

29 32

aeete needs -, 34

2'

2000 2006 Households with .. ..income >$5,000 Million

Household Income brackets Sppp, 2005244

._-_ ..._- ..._.-._--- .._-- .._--- .._--------- Globnls (>20,000)

COnsuming mick:lle crass ..~~_~l~~.~::29.,~~)._...__..

Emerging consumers (5,000-10,000)

..._------._---._--._- .-.-.._--- ..._----- ... 29 Basic consumer needs

(2.000-5,000)

2020F

1 Purchasll'l9 power panty adjusts tor pnce dltrerences In klentlcal gOOds.1Cfoss countries to renee d1"-,,, ,_ _ •• ,., power In each country. ".,,"', ~IPU, ....~1t1

Africa - Segmenting COuntries

_______.---- __ --------------- ~K::FC~'S AFRICAN EXPANSION: AIDED BY 'VALUE CHAINS'?

314·138·1

KFC's African Expansion: Aided by 'Value Chains'?

GOP caple ........ • 1600--1,000

ExportJ~r~p1la,20G8,$ • $1,001)...2,000

"'00' ~""""'=-----------.:::..:.:==:.---~ EQlJ<ItortaiW'"G,,~- 011t'xpOr!ers GutnelJ _~ ii'

. --.1000 CQOgO,~. cnee ' •

"""" '00

-- •

T"""" C61elfl\ollll,e ~ e

• zambia Moroc:c;.Q SOoJtt1 Al'I1cD--'''''' MaOagilsQIr- Tll/1Z~ ~~ Tr.l'I.lII«1

""ORe camerooo.

""""

" '-i,~__ ~ ~ ~ __ ~ ~ __ __.J 20 00 40 eo 60 10 80 90 100

liconomlc dlv.r.ifI~llon MiIl1Ul'aetl.IrJOg IlOll ~ <i«lot tornJn' or JOt" ;tWd 1Ilo

NOTE. We inClude eounlrllls wtlOS& 2008 GOP wa$ appro;dm'llelY S10 b!lIkln 01 grelilef, or wl~ re;tl GOP grQWIII rille exceeded 7% ovef 2OllO-O6 we elIcklCIe 22 CQIJn\I1eS lhiII aJ:QIU!11ed!l)f ~%Clf AfI'\C«I GOP In 2008

Africa's Agriculture Revenue Potential by 2030 (In USD Billion) !ESnMATEO OI"ERAnN'.~ MARGIN........"""

S-1!> percent • 15-20 pWaK'M • 20· per<*ll

35 868 239

vegetable/ftult_'00 Fertlllzer 14 66

Pestlclde 7

UveSt~112

Horticulture 490 """n processIng.. UYes<ocJ<

proces$lnQ 33

_+liffl,eW~e3l5138seee r Equipment? !L.._-~::==~------;::===-

Midstream oownstr ... m

Source: Roxburgh Charles, et at, "The Uons on the Move: The Progress and PotentIal of AfrIcan tccnomles", http://www.mcklnSey.com/lnSights/MGI/ResearCh/productlvltY-Competltlveness_and_Growth/Uons_on_t

he_move, June 2010

Page -12

303

304 International Business Strategy

314-138-1

KFC's African Expansion: Aided by 'Value Chains'?

Annexure III USAID and Bill & Melinda Gates Foundation - African Focus

USAJO

Global Development programme,

works on the following areas: • Agriculture development • Emergence response • Family planning • Financial services for the

poor • Global libraries • Maternal, Neonatal & Child

health • Nutrition • Polio • Vaccine delivery and • Water, sanitation & hygiene

In Sub-Saharan Africa, Gates Foundation had awarded grant to various partners under various

programmes as mentioned below:

USAID is supporting its African partners as they confront

these challenges and embrace their potential. USAID is focused on:

1. Boosting agricultural productivity through the Feed the Future Initiative, by addressing the root causes of chronic hunger and poverty and spurring economic growth in a region with incredible resources and arable land

2. Strengthening health systems through the Global Health Initiative, so that countries can help their children survive, overcome the ancient threat of malaria, give mothers the support they need to give birth safely and turn the tide against the HIV/AIDS epidemic on the continent

3. Supporting democracy, human rights, and good governance, to help governments fight corruption, expand space for civil society, help citizens choose their leadership and strengthen the trend toward democratization in Africa

4. Increasing resilience to climate shocks, by helping communities adapt to erratic rainfall and longer, harsher droughts~weather effects we know will hit Africa hardest and

S. Leading quick responses to humanitarian crises, to save lives and help prevent instability and loss, critical in a region prone to destabilizing droughts and food emergencies.

· 2009 and Earlier - 510• 2010 - SS · 2011-79• 2012 -108 • 2013 -141 • 2014 - 08

Bill & Melinda Gates Foundation

Source. 1) "Africa - SupportIng a Continent on the Rise", http://www.usald,gov/where~we~work/africa ~J. "Bill and .Melinda Gates Foundation - What We Do", http://www.gatesfoundation,orgJ

B.II and Mehnda Gates Foundation - Awarded Grants", http://www.gatesfoundation.orgJHow'We~ Work/QUlck-Links/Grants~Oatabase#q/region=sub~Saharan%20Afrlca

Page -13

From GATT to the WTO

Stalemate at the WID: TRIPS,Agricultural Subsidies, and the Doha Round

HARVARD I BUSINESS I SCHOOL 9·711·043

REV: APRIL 3, 2012

ARTHUR A. DAEMMRICH

Stalemate at the WTO: TRIPS, Agricultural Subsidies, and the Doha Round

A rare sense of calm prevailed as trade ministers and World Trade Organization (WTO) officials wrapped up a December 2011 ministerial meeting, the ninth negotiating session of the Doha round. Despite a major global economic crisis that continued to wreak havoc on government finances and employment, global trade was rebounding from its 2008 nadir. The recession led to tensions among countries and accusations of currency debasement. But few new trade barriers were instituted in the downturn, and tariff rates continued to converge internationally. WTO meetings in the 19905 and early 20005 had featured violent street protests and disagreements between developed and developing countries. Recent meetings in Geneva, by contrast, were widely characterized as "normal." Writing in a blog, WTO director-general Pascal Lamy celebrated the calm: "There were no surprises. It was not a big jamboree, with thousands of journalists, hugely costly arrangements and sleepless nights. But a feeling of normality, a feeling that the WTO is a solid institution,"!

H was an open question whether the normality enjoyed by Lamy and trade ministers reflected success, The Doha round of WTO talks had made little progress in a decade of negotiations. Adding to the complexity, positions of developed and developing countries had reversed, Whereas developing countries were reluctant to launch the Doha round in 2001, by 2011 most had followed through with commitments to enact intellectual property (lP) regimes and had grown impatient for the United States and European Union to reform agricultural policies. Developed countries, however, were slow to eliminate agricultural subsidies and sought tariff reductions and the removal of other trade barriers by developing economies, especiaUy for chemicals, machinery, and electronics.I

Business leaders needed to understand the WTO in order to design strategy in relation to tariff and non-tariff barriers and to plan for global competition in light of tensions between developed and developing nations. IF had gained in strategic in~po~tance to many industries. but it als~ attracted the critical attention of non-governmental organizations (NGOs) and was a stumbling block to multilateral negotiations, This note updates the HBS case, "The World Trade Organization," and offers perspective for managers when they analyze how WTO agreements will shape future

competitive dynamics in their industries,3

T1 WTO tr d its roots to a July 1944 meeting of 44 allied nations in Bretton Woods, New

te ace '1 I' . . U Id H

hi P ti" ts agreed to establish several new multi atera instituncns tat wou govern amps tre. ar cipan

Professor Arthur A. Dilemmrich prepared this note as the basis for class discussion. , d F II of Harvard College. To order copies or request permission 10 reproduce materials, call l-

Copyright e 2010, 2011, 2012 rn:slden~:OI ;u~~:hin Boslon, MA 02163, or go to www.hbsp.hiIrvard.edu/educators.This publlcoltion may 800-545-7685, write Harvard Busmess. ad d ~S!ed or trallSmitted without the permission or Harvard Business School. not be digitized, photocopied, or otherwIse repr uce, r- , '

322

Case 28 Zhejiang Geely Automotive's Purchase of Volvo' In 2011 Geely Automotive was still a relatively unknown Chinese carmaker, but it had put in place a plan designed to catapult it to international standards. Geely had started off manufacturing home appliances in 1986, and it had only been manufacturing automobiles since 1997. But Geely's founder and chairman of the board, Shufu Li, had ambitious plans for Geely. In a relatively short period of time, he had steered Geely into becoming the largest privately owned carmaker in China. But he would not stop there-he hoped to bring Geely up to world-class standards. He wanted Geely to be able to compete with Daimler, Ford, and Toyota, Mr. Li believed that only by becoming as good as the best foreign brands could Geely compete both in China as well as internationally. He knew this would be difficult, as independent Chinese automakers are known to have problems in operations, design, safety, quality, and brand-building. As part of this plan, Geely's parent company, Zhejiang Geely Holdings, acquired the iconic Swedish automaker Volvo from Ford Motor Company in 20 IO.This case presents the situation and challenges faced by Geely as it attempts this epic transformation from refrigerator manufacturing to world- class automaker.

Geely's History Geely Motors was based in the historically important city of Hangzhou, the capital city of Zhejiang province. Geely, whose name denotes fortune and luck (en:U) in Chinese, was founded by Mr. Shufu Li in 1986. Geely's motto is "passion in professional dedication, innovation, communication and hard work.") The company initially began by manufacturing refrigerators and related acces- sories and began to manufacture motorcycles in 1993. In 1997 the company entered the automotive industry as the first private Chinese company approved by the central government to produce automobiles. In 2005 Geely Auto- mobile Holdings Limited listed on the Hong Kong Stock Exchange.

By 20 II Geely was among the top 10 automakers in China in terms of market share. The company oper- ated six power-train and car assembly plants. They were located in Lanzhou (Gansu province), Linhai (Zheji- ang province), Luqiao (Zhejiang province), Ningbo (Zhejiang province), Xiangtan (Hunan province), and Shanghai (see Exhibit I). This gave the company a production capacity of approximately 300,000 cars per

• This case was written by Yuan Yi Chen, Michael N. Young, and Allan K. K. Chan from Hong Kong Baptist University The development of (his case was partially supported by the Chinese Business Cast! Re.veurch Centro at Hong Kong Baptist University. The purpose of the case is to serve as a basis for classroom discussion rather than to illustrate either effective or ineffective han- dling of an administrative shuarion. Copyright C 2011 Michael N. Young.

year. The firm employed 12,000 workers, including more than 1,600 engineers and technical personnel. In addition, Geely had gotten the governmental approval to establish a new base in Jinan of Shan dong Province in eastern China. Geely was planning to set up a com- plete vehicle production base in Harbin, capital of Hei- longjiang Province, in northeastern China. It was nearing the conclusion of talks with the Heilongjiang govern- ment. The first phase of the project would have capac- ity of around 100,000 to 150,000 vehicles annually. This would be the automaker's eighth manufacturing facility in China. Additionally, Oeely had signed an agreement with Cixt city government ofZhejiang Province to build a RMBI8.8 billion (US$2.81 billion) auto industrial city with annual production capacity of one million units in the Cixi economic development zone."

Geely produced automobiles under five key brand groups: Oeely, Maple, Gleagte, Emgrand, and Englon. The firm was the only Chinese car manufacturer to have developed its own range of engines, which had capaci- ties ranging from I liter to 1.8 liters, supporting auto- matic and manual transmissions. By 20 I 0 Geely was ranked as one of the country's top 500 firms. It was a fully integrated independent auto firm with a complete auto ecosystem from design and R&D to production, dis- tribution, and service. Geely began to attract attention as the company experienced rapid growth. Through a broad distribution network consisting of 500 4S (sale, spare- parts, service, and survey) shops and nearly 600 service stations allover China, Geely sold over 330,000 vehicles in 2009.

The Global Automobile Industry 2009 was the worst year for U.S. auto sales in nearly 30 years. The U.S. auto industry underwent a radical trans- formation in 2009, one of the most turmoil-filled years in its more than 1OO~yearhistory. In 2009 auto sales in the United States amounted to 10,431,509 vehicles, which was a 21 percent decrease compared to 2008 sales, 35 percent compared to 2007. The Big Three leading American auto- makers were facing historic challenges both operation- ally and financially. OM and Chrysler took the biggest hits after both went through bankruptcy court and stayed alive with government aid. For the year, OM sales were off 33 percent from 2008. Chrysler showed some signs of progress at showrooms and was helped by less-profitable sales to fleets, such a rental companies and municipalities, but still sold only 931,000 vehicles for the year, its worst performance since 1962.

Although Ford reported a sales decline of 15 percent in 2009, it had its first gain in U.S. market share since 1995 thanks to strong demand for midsize cars like the Ford Fusion and crossovers like the Ford Escape. In the