International Management Case Write Up
An inquiry into the advantages of franchising over company- owned businesses has revealed advantages for the former and has proved franchising to be an excellent industry into which business may base their strategies especially in the area of expansion. Companies like Pizza Hut, KFC, McDonald’s and Burger King have capitalized on franchising as among their major business strategies.
Franchising refers to the granting of exclusive permission of a business to another, business to operate under its already established brand, selling the same products or services in exactly the same way. This is usually in return for an initial franchising fee and a share in future profits. Large fast food restaurants like Mc Donald’s, KFC, Pizza Hut and Burger have all delved into the franchising business and benefit from the advantages this industry offers.
One of the greatest advantages of franchising for companies like McDonald’s is the opportunity it presents to leverage other assets (Canak 12). These companies use other people’s time and financial resources as well as their skills and expertise to expand their own brand. These companies also gain the advantage of having their business expanded within their countries and many times internationally, without having to spend money or incur any debt while doing so. Furthermore, the initial franchising fee received, as well as continued royalties greatly improves the liquidity of the company and provides capital for even further expansion of the business and its brand. More available capital also provides increased opportunities for future financing to expand the company. The companies also benefit from the fact that they do not have to worry about the recruitment of personnel or worry about management problems that result from the increased scope of businesses. The company’s brand also benefits from better visibility.
Investment strategy in Latin America for KFC and Pizza Hut
Kentucky Fried Chicken is the world’s most global fast-food chain in terms of national vs. international proportion of its restaurants (Property Invest).The company enters a foreign market by use of company-owned branches or performs joint ventures with other companies. Gradually as the brand strengthens in these foreign markets, they then shift their strategy to franchising. This has been the approach they have used In Latin America. The two fast food chains, leverage both tangible and intangible resources for the benefit of the company (Canak 12-15). The franchises are run together with company -owned subsidiaries although more focus is put on the franchised branches, where the company benefits in terms of initial franchise fees as well as quarterly royalties (Property Invest). It is noteworthy that ‘the country differences in KFC’s distribution channels have effect on the way the company is able to reap cross-border synergies between its Latin American country units and its local responsiveness in each country’ (Property Invest).
Owned by the same company, Pizza Hut’s strategy in Latin America. This is done with respect to each brand. For both fast –food companies, there is a concentrated focus on Mexico and Brazil in particular. This is because the two countries have large populations and a market that is fairly new to the fast food business. The market is less mature as compared to that of the United States. This presents a big opportunity for the Yum!-owned brands, in terms of business (Canak 15). KFC’s early entry into the Latin America market, mainly Mexico, gave it leadership in this area and forced its largest competition, McDonalds, to focus its franchises in Brazil (Canak 16).
Mexico vs. Brazil as Investment Locations
As a result of their positioning in Latin America, Mexico and Brazil as investment locations, are largely affected by the same issues in regard to economic and political development. Brazil however, as an investment destination, with specific reference to fast food chain restaurants is a much larger market. This is because it is generally higher populated as compared to Mexico. Brazil’s economy is also the largest in the region, and with major world events being held in the country in the coming years, it is set to grow even larger (Property Invest).There is also a growing middle class in Brazil that Mexico cannot challenge. This is the demographic that supports businesses such as KFC and Pizza Hut. (Canak 12-14). Mexico on the other hand has been undergoing financial difficulties and the economy is generally weaker than that of Brazil.
Risks Associated with Investment in Mexico and Brazil
Like in many Latin American nations, crime is a constant threat to businesses. The illegal trafficking of drugs and the numerous violent gangs in the area have for along time been a threat to businesses. There is also the uncertainty of unstable economies, especially in Mexico. The political environment may sometimes cause the region to be vulnerable to upheavals which have adverse effects on businesses. Purchasing Power Parity in the two countries may not be as strong as that in the U.S.A. This may directly affect sales and slow down expansion. The lack of, or inefficient implementation of laws patent-protection laws is also always a risk that any new business in the region has to bear. However with subsequent and increasingly democratic political regimes, this situation is gradually improving.
Strategies for Minimising the Risks
Companies seeking to expand their businesses into either of the two countries would do well to perform their due diligence in terms of research about the region and all that pertains to the business they would like to set up. Mitigation plans should be considered for the risks available. For instance, a new business owner may want to consider investing in security measures for the business. Compliance with all the government laws and protection of patents should be observed.
Works Cited
Canak, Nihat. YUM! Business Case Study. Munich: GRIN Verlag,
2006. Print.
“Kentucky Fried Chicken and the Global Fast Food Industry.” Property Invest,
14 June 2008. Web. 19 April 2012.
