#116 China, not so Yum-my anymore
American fast food holding company Yum Brands announced that it would restructure its China business. Normally, there’s nothing wrong with finding a better approach to deal with the local market environment (quite to the contrary, actually), but this case seems to be different. Yum’s major brands KFC and Pizza Hut have been struggling in the Chinese market in recent years (see other posts on this blog). First, in 2012, antibiotics and growth hormones were found in KFC chicken, then Pizza Hut made some bad calls with regards to their menu and pricing, and most recently competition from Chinese fast food chains got rather intense. Yum brands had lost their appeal and started to loose money. This led to Yum headquarters making a bold move by cutting the Chinese market loose from global operations. Had it only been in order to give local operations more control over decisions on their China strategy, this might have been a good move, but it’s been reported that it is largely an attempt to shield US operations from risk. That could mean even tighter controls and a narrower look on the financials, and it could also result in a complete lack of support. Potentially, even damage to the global brands could emanate from the Chinese market.
November 25, 2015 @ 10:41 pm
Yum’s decision on cutting loose the Chinese market from its global operation seems to be a pretty interesting move. Having a look at Hofstede’s Cultural Dimensions to compare the American and Chinese culture, we can find some major differences, especially in terms of Individualism and Long Term Orientation.
At a score of 20 China can be seen as a highly collectivist culture. People tend to act in the interests of their group in exchange for loyalty.
The Americans, on the other hand, have a highly individualistic culture at a score of 91. In individualistic countries people tend to look after themselves and their direct family and “I” plays a more important role than “We”.
American Managers and employees expect to be consulted and both of them share information. Their communication is rather informal.
Another clear difference between the US and China is the Long Term Orientation. Americans have a pretty low score (26), whereas Chinese have a very high score of 87. Chinese people need time to build trust and long-term relationships and focus on long term results. I think that the problems in 2012, when antibiotics and growth hormones were found in meat, might have damaged the image of the company regarding their trustworthiness.
These cultural differences might have a strong influence on the management style and communications in both countries and could lead to internal disagreements and misunderstandings. From this point of view, it seems to be a good decision to separate the Chinese market from global operations. It could help Yum to focus on business and competition and prevent them from investing too much time and energy to balance out the differences.
However, this separation might also represent a risk to the whole company. If the strategies and organisational structures strongly deviate from each other, the global brands could be damaged. It could lead to a “dilution” of the brands.
It requires a great effort to position a brand internationally. Therefore, I think its essential that both Americans and Chinese keep on working together on fundamental decision. The future will show, if the separation leads to success.
November 29, 2015 @ 12:13 pm
The decision to divide the company into a Chinese part and one for the rest of the world seems to be an interesting one. It indicates clearly how difficult this market can be for foreign companies. To put things in perspective I took a closer look on how China and the United States compare in Hofstedes dimensions:
Power Distance: US (40) – China (80)
Individualism: US (91) – China (20)
Masculinity: US (62) – China (66)
Uncertainty Avoidance: US (46) – China (30)
Long Term Orientation: US (26) – China (87)
Indulgence: US (68) – China (24)
Apart from Masculinity where they have a more similar score, the difference between those two countries is a huge one. This makes it harder for both sides to build a profitable and long-lasting business relationship. But how are the dimensions connected to the given case?
In my opinion the dimensions of Uncertainty Avoidance and Long Term Orientation had a major influence on how Yum Brands behaved. Maybe due to the low scores of these dimensions the market entry was sort of spontaneous and not properly planned. If it had been a success, such a strategy would certainly pay off. But as reality shows it was not and they had to react. They had to cut the Chinese market loose to prevent the US market from damage. Now the new Chinese division has more influence on their strategy and the future development. What would be interesting is if the management of the new China division is made up from Chinese or American managers. With a profound knowledge of the market and the much higher long term orientation a Chinese management team might be a good choice to ensure future success. If they are American it would be much harder for them to leave their old thought patterns and adapt a new strategy. In theory, a mix of American and Chinese managers would be advisable. The problem is that the difference which divided the company in the first place can also divide it again.
From my point of view the situation is kind of paradoxical. If you again look at it through Hofstedes dimensions you see that the Chinese have a high Power distance score, which means they do not care if they are dictated by superiors. In addition, they have a very low Individualism score, which means they are highly collectivistic and want to belong to a group. As it is the case, they are given power, or in other words superiority over the Chinese market and are separated from the company group. I do not know if a company behaves the same like an individual in regard to Hofstede, but the development of this situation will be worth to follow.
December 1, 2015 @ 8:30 pm
In my opinion, the objective fact, that Yum separated it is Chinese market from it is global operation is worth to take a closer look at it. It is one example which shows the differences of global acting companies. When taking a closer look at the two countries China and US, you can include the dimensions of Hofstede. I concentrated on two, which I think are the most apparently ones in the case of Yum.
I think the dimension of Long term Orientation is one of the dimensions, which had influenced Yum mainly. America is a very practical country, with a “hands-on” , chaotic mentality. They are people which act fast and maybe this was a reason of the decision of YUM. From my point of view it could have been happened that the Americans haven’t done a really research or thought about a realizable future concept for China. They had do react to the struggling in the Chinese market. China as a long time oriented country is now next to manage the company in their country. The pragmatic country believes that truth depends very much on the situation, context and time, so it would be interesting if a change in the future leading of the company can be lead to success by a Chinese management team.
Long Term Orientation: US: 46, China 87
Another point which had major influence in this case, was in my opinion the combination of the two dimension Power Distance and Individualism. You can see a high difference in these two points of the two countries. This shows America as a country, which expects from managers to share information frequently and directly. The managers act iniative, which can be seen in the decision loosing China from the rest of the company. China as high collectivist culture, where people act in the interest of the group it could be an advantage to be managed separately and can fully concentrate on their special market needs.
Power Distance: US: 40, China 80
Individualism: US 91, China 20
Another interesting question for me is, if the management teams in both countries could be mixed with Chinese and American managers. I think this case will be worth to watch in the future to learn from possible mistakes or find ideas for the own business.
December 4, 2015 @ 4:46 pm
From my point of view, this case has to be closer looked at. Comparing the Americans and the Chinese there are quite big differences regarding the Hofstede’s dimensions. First of all the power distance shows quite a big gap between these two countries. In connection to this dimension the Americans have more or less a flat hierarchy compared to the Chinese. On the one hand the Americans are more individualistic, although they pay more attention to their employees’ needs and care about them a lot. On the other hand Chinese are not used to be asked about their opinion when they are working for example in a Pizza Hut’s restaurant, the decisions are made through the top management.
Regarding Hofstede’s dimension “Indulgence” the US has nearly a three times higher score than China. The Chinese are used to work nearly 24/7 and their leisure time is not really important to them. So at this point I want to look at the Yum! case. It would be interesting, if lots of American managers were represented in the management board in China, which would change the view of this case a lot. Let’s assume that this was the case and take a look behind the scene. First of all, the Americans could have tried to be spontaneous as they are (regarding Hofstede’s dimension “Long Term Orientations vs. Short Term Normative Orientation”). Maybe they did not do a lot of market research or discuss their market strategy with the Chinese managers, which was maybe followed by a bad relationship between these two parties (Chinese are group oriented and decide together and Americans decide more individualistic and spontaneous). Furthermore, they could have underestimated the complexity of the market and the attitude of the Chinese people. Chinese would rather pay less and get a “copy” than to pay more for a brand (in this case Pizza Hut raised their prices so the Chinese eventually just went to a “fake” restaurant which was cheaper). Regarding the people, who are working in these restaurants, the American would have tried to give them more free time for their family and fun related activities, but this could have looked like an offence to them, because this would show their society that they were lazy and less working people. Finally let’s look at the most obvious issue. As there were antibiotics and growth hormones found in KFC chicken, Yum! has lost the trust of the Chinese (regarding Hofstede’s dimension “Uncertainty Avoidance”).
From my point of view, it was a good idea that the Chinese market was cut from global operations, because now it would be possible to concentrate completely on rebuilding the brand in China and winning the trust of the people there again. But this will only be possible if the management carries out the decisions in Chinese style. Let’s see what will happen in the future!
March 14, 2016 @ 6:08 pm
I can’t bring myself to see this as a brilliant move, in order to enhance local operation’s control over decision making at the Chinese market, but rather as a desperate attempt to shield the “home market” (the US market) from bad influences. It seems that Yum has overestimated its own brand name power and therefore came into a very unpleasant situation in China. Taking into account that there are large cultural differences between the Chinese and the US market they seem to have done a quite good job when entering the Chinese market at first. But whenever a big player starts to smooth the path there will be others that try to profit from the work done. It is no surprise that Chinese fast food companies try to participate and compete within the fast food market. The real problem however doesn’t seem to be a loss of market shares, but loss of image and reputation. This loss is partly coming from unprofitable expenditures, as a company which fails is viewed as weak and unpromising, but to a good part also from the issues yum had with antibiotics in their food, etc. Under such circumstances a clean cut may have still been the best choice, but in any case this example shows once more that even the big and mighty aren’t immune to the inherent risks of globalization.
March 16, 2016 @ 10:59 pm
Yum! Brands, Inc. is one of the largest restaurant operators in the world with more than 43,000 restaurants in more than 130 countries. Yum stock’s restaurant brands, including Kentucky Fried Chicken, Pizza Hut, and Taco Bell, are some of the most recognized brands in the world. Just a few days ago Yum announced plans to open its first store in China by the end of this year. In 2015, Yum stock wavered up and down, but it ended the year essentially flat. But even though last year was a bit disappointing for Yum stock, 2016 should fare better, as CEO Greg Creed sees the year 2016 being a transformational one for Yum! Brands, Inc.
Tallying with this recently Yum announced that the company is planning to spin off its China division into Yum China by the end of the year. The not unexpected spin-off will separate the Chinese division into a new company.
According to the CEO, the China spin-off “will have a more stable earnings stream typical of a franchise company powered by industry-leading brands, while also benefiting from the development of the China business as a unique growth engine.”
From Yum’s point of view the move should allow the local management to focus exclusively on the Chinese market without interference from its U.S. parent. Through this spin-off, Yum wants to take better advantage of China’s growing middle class, while also reducing risk for the company. In 2014, the company suffered from a food scandal when it was discovered that tainted meat was being sold at KFC locations in China. Sales took a hit and still have not fully recovered.
But the Yum Management should also consider that Yum China will be entirely dependent upon the volatile Chinese economy for its growth and survival. China’s economic woes, relating to its real estate bubble, manufacturing supply outstripping demand and massive government debt, were seen as portending trouble over a year ago. The stock market drama that has played out since then over the Chinese economy has confirmed the pessimists’ fears. The still-inadequate food-safety regime and the slowing, disruptive Chinese economy leads me to think, that the Spin-Off will not be the last management intervention needed to bring Yum China on the road to success.
July 2, 2016 @ 9:25 pm
This blog is trying to make Yum company to think about the effect of cutting Chinese market. In this blog, the author introduces the current decision which Yum company made, the reasons why Yum company has this thought, and the events happened since 2012.
As Professor Apfelthaler said that the world is flat, because there are so many countries are doing global merchandise trade, especially China. Chinese market share is so important because it is the second leading economies in merchandise trade. Yum company cannot just cut Chinese market to restructure China business.
In my opinion, there are two reasons why Yum is losing money in China. The first reason is the quality of Yum’s food. The public is losing their confidence to KFC because the existence of antibiotics and hormones in KFC food. In the systematic entry, Yum is facing the problem of its products. If Yum can improve the quality of its food, it still has the chance to success. Second, Yum company does not want to face Chinese intense fast food competition environment. There is competition in every market, not only China. In the systematic entry, Yum is facing the problem of target market selection. China market has the ability to be Yum’s big target market. If Yum cut China business, it may reduce its operation risk, but it will tighten its controls and it will have a narrower look. In addition, it will be short of revenues, because its China market is smaller.
In conclusion, the correct decision should be improving Yum food quality and manage the Chinese fast food challenge. It should do some market research to find out Chinese appetite and enhance its competitive ability.
November 7, 2016 @ 8:04 pm
In my point of view, Yum made the mistake of thinking the Chinese market is similar to the USA. There are some differences, especially when you compare the Hofstede’s dimensions. Comparing power distance, long-term orientation and individualism, you can see a strong deviation.
The USA for example is known for its antibiotics and growth hormones in food, but this was a big mistake of Yum in the Chinese market. China has a very high score in the dimension “long-term orientation”. Chinese people need time to build trust, but this trust was broken after finding out about the antibiotics and growth hormones. When entering a market it is not just enough to adapt the lettering and package of a product. Another important point is also to think about allowable and accepted ingredients in the foreign target country.
Furthermore, the individualism in the United States is about 91 percent, which means an extremely high value. The Chinese market is a collectivistic country and does not dream the American dream, where everything is possible. I think a society like the Chinese is not familiar with trying out new things like Americans. Due to that fact, the scandal of unexpected ingredients was inexcusable and no longer acceptable in China, which meant consequential an extremely turnover reduction.
The last dimension I would like to highlight is the power distance. The power distance in China is about 80 percent, which means twice as much as in the United States. In my point of view, it would not be enough to put in a good word for Yum by some people. As a result, you can see big decisions are made at the top management in the Chinese culture and Yum was “exiled” from the Chinese market.
Finally, I think it is very important to think about cultural differences before entering a new market, especially for extremely contrary countries like this example.
July 8, 2017 @ 1:08 pm
In my opinion, Yum’s decision to cut off the Chinese market from all other global operations was an act of cowardice and apathy.
Regarding the issue with the KFC brand: of course customers get upset if you modify your chickens with antibiotics and growth hormones. Therefore, it wasn’t a big surprise that the company had lost appeal and some of their revenue.
With China having a value of 87 “Long Term Orientation” according to the Hofstede dimensions, Yum should have known that the Chinese consumer would not accept such modification of food.
Instead of cutting loose the ties to the Chinese market, endangering the local-
and global businesses, Yum should have openly dealt with the problem and coorperate with their franchise partners.