(KFC's African Expansion and Zhejiang Geely Automotive's Purchase of Volvo)

ATALE OFTHREE COMPANIES: THESURVIVAL STRATEGIES OFSONY, HITACHI ANOCANON 313-134-1 glorious histories, arenow simply outdated. Indeed,arecent studyconducted by an electronic appliances analystconcluded thatJapanese firmsmake morethan half ofthe components usedinthe iPhone 5.Sony, Toshiba, andSharp provide goods suchascamera imagesensors, memorydevices, anddisplay panelsto the world leader intechnology, Apple.

Japanese CrisisManagement Nevertheless, wecannot denythattheJapanese electronics industryasawhole is on adownward slope.Mostfirms inJapan sharethefeatures mentioned above, andsohave beenexposed tothe same problems inrecent years.

However, theyhave notallreacted inthe same way.Theworld economic crisis has made Japanese businessleadersthinkabout newways toadapt inaworld where thecompetition isincreasingly global.Japanese firmsallprefer Japanese management styles,butmany ofthem haverealized thatthey need tochange and adapt fastertothe rapidly evolving international businessenvironment.

And they have notallchosen thesame strategies. Thenext sections will describe thecases ofthree major players inthe Japanese electronics industry, as well astheir survival strategies: theseareSony, Hitachi, andCanon. Despite similar roots,theyareallattempting toadjust theirbusinesses indifferent waysin a global market fullofchallenges andopportunities.

Sony History On 7May 1946, Masaru Ibuka(anengineer) andAkio Morita (aphysicist) invested theequivalent of¥190,000 tostart acompany withjusttwenty employees. Itwas called "Tokyo Tsushin Kogyo"andwas established in Nihonbashi inTokyo. Thecompany initiallyspecialized inresearch and manufacturing ot telecommunications andmeasuring equipment. Thename "SONY" camelaterandwas created bycombining sonus, whichisLatin for "sonic," with"sonny," meaning ayouthful boywith afree andinnovativespirit. It as chosen foritssimple pronunciation thatcould beeasily articulated Inany :nguage. Thenew name perfectly suitedthecompany, whichwanted toproject the image ofagroup ofyoung people withenergy andpassion forunlimited creation.

Sony developed stronglyafter1954, when thecompany obtained a license to d t.t sabasic electronic component whichhadbeen Invented In pro uce ransts or, .' ., beforeThefollowing yearitbegan seiling thefirst radio America SIXyears . .

d t·Iywith transistors In1960 SonyAmenca wascreated, and receptor maeen Ire ., .Id th panyopened subsidiaries inHong KongandSWitzer an.

shortly after, ecom .. .h . mbolofpower theSony bUilding wasopened Inte SIX years later,asasy , 5 271 """'f' 274 International BusinessStrategy the interconnectivity betweenthec imaging, games,andmobile techno I!

the upcoming years.Theyareproje operating incomein2015. Asforth abandon themorcreate partnershi On 27October 2011,Sonytookfull producing mobilephones, createdt companies, SonyandEricsson. Th to Tokyo inorder tospeed upthe d take amajor roleinthe smartphone start. Toachieve this,Sony willrely name isderived fromtheword "exp released in2008. Thestart ofthe X is now developing theconnection b media toincrease theattractivenes Entertainment Networktoits Xperia music, andgames tothe users ofth Concerning itsTV division, Sonyen Samsung inDecember 2011.This the costs ofthe TVbranch. Theco 1'1' developnewtechnology quickeran announced apartnership withPana I display OLEO.' Thisuses lesspow I On2July 2012, Sonyannounced t leader incloud-gaming. Accordingt Entertainment, thisacquisition was of Gaikai withSony's gaming platfo consumers. Thispartnership mayb the Playstation, PlaystationPortabl In September 2012,Sonybought s in the digital imaging sector.Theob of its medical equipment division,a I tenyears. Hiraiwants tocontinue t opportunities inthe medical sphere.

imaging technologies inorder toga sector.

Sony's smallest business unitshav example, Sony'schemical products J OlED:Organic light-emitting diode I I 313-134-1 onsumer goodsofthe company. Digital logy willbethe spearheads ofthe group in cted togenerate 85%ofthe company's e other sectors, thefirm pians toeither ps with other companies.

control ofSony Ericsson, ajoint venture en years earlier bythe then-separate ey pian tomove thesubsidiary fromSweden ecision-making process.Thegroup wants to market, ledbyApple, ofwhich itmissed the heavily onitssmartphone line,"Xperia." The erience," andthefirst phone inthis linewas peria linewas rather disappointing, butSony etween itssmartphones andother forms of s of the phone. Bytransferring Sony line, Sony willbeable topromote itsmovies, e phones.

ded thejoint venture inLCD technology with operation ispart ofaplan todrastically reduce mpany isalso making strategic alliances to d more efficiently. On25June 2012, Sony sonic tojointly develop thenext-generation er while providing abetter quality image.

hat ithad acquired GaikaiInc.,theworld o Andrew House,CEOofSony Computer made tocombine thetechnological strength rm toprovide newexperiences for e profitable formany Sonyproducts suchas e, and thesmartphones.

hares of11.46% inOlympus, amajor player jective wastogain access tothe technology market expected toreach €75billion within o pursue merger andacquisitions Sony canbenefit fromitsstrengths indigital in asignificant competitive advantageinthis e also been inciuded inthe restructuring. For business wasrecently soldoff,and simiiarly, 8 -----. --------------.:A TALEOFTHREE COMPANIES; THESURVIVAL STRATEGIES OfSONY. HITACHI ANDCANON ____ -!'_Il&.I&......

275 313-134-1 in the field ofautomotive batteryandenergy storage, Hiraisaidthatthegroup needed tochange thecurrent situation because ithad several shortcomings.

The group isalso increasing itspresence inemerging countries. Forexample, in Brazil, SonyISan official partner ofthe 2014 World Cup.Theobjective isto Improve brandawareness inacountry whereconsumer electronics salesare expected toincrease sharply.InIndia, SonyPictures Television isalready the provider ofsome ofthe top-rated television channelsinthe market. Hiraialso wants touse theBRIC economies asabase tostrengthen Sony'ssupplychain.' Hitachi History Hitachi wasfounded in1910 byNamihei Odaira,anelectrical engineering graduate ofTokyoImperialUniversity. Thecompany wasinitially ashop that repaired electrical equipment. Theorigin ofthe name isacombination ofthe two kanjis, hi(meaning sun)andtachi (meaning rise).

It took inspiration fromthe Rising SunFlag, themilitary flagofJapan. Hitachi's firstproduct wasafive- horsepower inductionmotorthatwas mainly usedincopper mining. In1924, the company manufactured Japan'sfirstlarge-scale electriclocomotive. In1932, Hitachi startedtoproduce elevators andcompleted itsfirst electric refrigerator. In the 1940s, thecompany developed waterturbines andpower excavators. The Second WorldWarslowed theactivities ofthe group, butitrecovered quicklyand in 1958 thecompany wasawarded thegrand prizeforitselectron microscopes at the Brussels WorldFair.Ayear later, Hitachi America wasestablished. During the 1960s, HitachiwasJapan's industrial andtechnological backbone.The company developed anexperimental nuclearreactorandconstructed thefirst cars ofthe famous Japanese high-speed train:theshinkansen. Italso launched consumer productssuchasair conditioners andwashing machines. In1971, the company developed the19o storage unitand, soon after, builtoneofthe most powerful nuclearpowerstations inJapan. Atthe end ofthe 1970s, Hitachi succeeded intrialing theworld's firstoptical transmission system.

Due toits success, thecompany waslisted onthe New York Stock Exchange in 1982. Twoyears later,itstarted mass-producing thefamous 256-kbit DRAM.In order tomaintain itstechnological dominance,in1989 thecompany openedfour large R&Dcenters, twointhe USand twoinEurope. Inthe 1990s, itlaunched a subsidiary inChina andestablished anew record withacomputer thathadthe world's fastestprocessing speed.Another recordwasbroken dUringthesame decade withtheshinkansen, whichcouldreach speeds ofup to270 km/h. In 2002, itwas thefirst company todevelop asilent laptop withacooling system, and in2007, Hitachi developed EMIEW2,asmall robotcapable ofmteractmg BRIC: Brazil Russia IndiaChina 9 276 International BusinessStrategy ---------- 313·134·1 with itsenvironment. Inaddition, inorder toreduce Japan's dependence onrare metals thecompany developed amethod ofrecycling them.Thecompany I ' .tely 323 000people around theworld anditsheadquarters emp oysapproxrma , are located inthe Chiyoda districtofTokyo.

Like many Japanese corporations Hitachihasalways beeneager todive~sify into different business fields.Hereisthe weight ofeach Hitachi business unitIn2012 (source: AnnualReport2012).

• W1IDrmIllio>ft& -- Yl,7&lJ'1lUDoI .Porotel~_ va» .•~ &OIlIIl1rinI~_' ~"'1_ ~lAOl.9~ .boc~sv.-.~ ",101,71llfg1, .eo.- ....

Ird......, r'1QI.l~ ..... rlllllr\larlll MlLerWaf, - i1.H7,1 Wlrl .~""l_ 'dll.6t61t1 '~,o..lc.

i7.,O~ 1a.,...lMdoIac_ ~ d .... _ .- .......

"",- '-' *l,$~ ( ......... 1IId e:..-_,*,,- 'f{1,21~l:6lII 1& TSystems:

Software,servers,ATMs,system integration Power Systems:

NuclearlThermaliHydroelectric powerplant,windpower generation systems Social 1&1Systems:

Railway,escalators, elevators,industrialmachines Electronic S&E:

Semiconductors, medicalelectronics equipment, LCOs Construction Machinery:

Hydraulicexcavators, wheelloaders, mechanical cranes High Functional M&C:

Wires, cables, magnetic components AS:

Carinformation systems,enginemanagement systems C&D:

Batteries, information storagemedia Digital M&CProducts:

Refrigerators, washingmachines, airconditioning Financial Services:

Leasing,loanguarantees Others:

Logistics, propertymanagement 10 _------------A~TA~l::.E :::OF~T~H:RE:::E~CO'::M:P~A:'.NI~ES~:T:.t:H::E~SURVIVAlSTRATEGIESOFSONY, HITACHI ANOCANON -- -- 313-134-1 Hffachim RecenfYeam According tothe Fortune Global500,in2012 Hitachi wasthelargest Japanese electronics companyinterms ofrevenue. However, thecorporation hasrecently seen turbulent yearsandhashad tomodify itsbusiness activitiestoget ahead in a cornpennve envronment Theevolution ofHitachi's stockpriceshows that after anet decrease inthe value ofshares, beginning from2008, thestock is now onan upward trend(seeappendix). Thecompany sawfourconsecutive years oflosses butreturned toprofit in2011 despite adecrease intotal revenue (see appendix). Theconsequences ofthe 2007 financial crisiswereserious for Hitachi, because therewasasharp decline indemand formost ofthe company's products.

At the beginning of2010, Hitachi wasexperiencing theworst period ofits 102- year legacy. InApril 2010 Hiraoki Nakanishi becameHitachi's president andhe implemented arestructuring ofthe company thatresulted intwo years ofrecord profit. Nakanishi declaredthattobecome aglobal player, thekey factor isnot revenue, butprofitability. Thisstatement servesasaguide tothe group's transformation. Indeed,Nakanishi istrying todiminish theimportance of consumer-related goodssuchascomputer partsandflat-panel TVstofocus on global infrastructure projectssuchaspower plants, raillines, andwater treatment facilities. Consumer businesswasforecast toaccount forless than 10%of Hitachi's revenuein2012, halfofits share theprevious year.Inparallel, its infrastructure businesswillaccount for80% ofits profit thisyear.

Departing fromJapanese Management Traditions One ofHitachi's mainconcerns wasitshard discbusiness. Problemsbeganto arise in2002, whenHitachi boughtIBM'sHODbusiness tomerge itwith itsown HOD division. However, thenew unitdidnotmake anyprofit. Thisiswhy in2004 Nakanishi, atalented manager, waschosen toidentify themain reasons whythe group waslosing money onthis division. Aftertwomonths, hedeclared thatit was badly managed andthat theonly solution wastomanage ithimself.

He realized thatthere wereproblems withquality andsaid that60% ofthe hard disk drives produced byHitachi werenotsuitable foruse. Hehired experts from a competitor toreorganize theproduction andmanufacturing lines.Thebusiness unit became profitable againin2008.

B t i 2010 onbecoming presidentofHitachi, Nakanishi decidedthatHOD should noI~nger beone ofthe company's coreproducts, despitethefact that it t· 10" profit margins InMarch 2011,hesold theunit toWestern was genera Ing 10 '.. ., Digital for$4.8 billion. Bydoing so,Nakanishi showedthatallthe business Units 'ncluded inthe restructuring. Hearranged thesale byarguing of the group wereI .

that theHOD industry wasvery fastmoving andnotwell suited toalarge 11 277 I I 278 InternationaJBUSjnes5Strategl~Y _ 313-134-1 conglomerate. AmongtheJapanese pUblicthisdeal wasnotperceived ,:,ell..

According totraditional Japaneseideas,members ofacompany group(Including units andtheir employees) shouldbesupported foraslong aspossible. TheIdea of selling aprofitable businesswasviewed verynegatively inthe Japanese press and leftmany observers stunned.

But Nakanishi thentookeven bolder steps.Inorder toreinforce itsstrength in the energy sector, Hitachibought Horizon Nuclear Power(HNP), theBritish builder ofnuclear powerplants, inNovember 2012.SincetheFukushima disaster, thenuclear marketinJapan hasbeen idling. Thetakeover of HNP is intended tomake itpossible forthe group toexpand thisactivity abroad. Hitachi judges theinternational potentialofnuclear energytobe promising, andBritain is one ofthe main markets inEurope. Hitachiplanstobuild twoorthree 1,300- megawatt plantsinEngland bythe mid-2020s.

On 29November 2012,Hitachi created apartnership withMitsubishi Heavyto combine theirthermal powersystem businesses. Nakanishisaidthatthis cooperation wouldhelpboth firms tobecome globalleaders inatough business climate. Moreover, theywant tobecome bigenough tocompete against overseas rivalssuchasSiemens andGeneral Electric.Hitachiwilltake 35% of the newly created company. Itwill develop, manufacture, andsellturbines, boilers andother equipment forpower andgeothermal plants.Thedeal is supposed tobe completed in2014.

Nakanishi alsowants toreduce thecosts ofthe conglomerate. 20%of employees havebeen letgo inunder threeyears, andinApril 2012 Hitachi delisted fromtheNew York Stock Exchange becausethelow volume didnot justify thecost.

Hitachi isalso looking outside Japantostimulate growth.Activities abroadnow account for57% ofthe revenue and65% ofthe total employees. Thecompany plans todevelop procurement inother countries wherepricesareabout 40% lower thanJapan. Ahigh priority forHitachi isIndia. Thegroup wants totriple its activity therebefore 2016.Indianeeds infrastructure andHitachi isstrong inthis respect. Hitachialsowants touse India asanexport centerforAfrica andthe Middle East,twoother places wherethedemand forinfrastructure issupposed to increase greatlyinthe near future.

12 ---... ~ -.,--A=-T:.:A~LE':.'O::F-,-T";HR~E~E C~O~M~P~AN~IE~S~:T~H:':ES~U~RVIVAL STRATEGIES OFSONY, HITACHI ANDCANON 7 313-134-1 Canon History Canon wasfounded in1933 byagroup ofyoung people inasmall apartment in Ropponql, adistrict ofTokyo. Theywanted toproduce high-quality camerasto compete againsttheGerman firmswhowere leading atthat time. They quickly developed acamera prototype called"Kwanon" andayear latertheHansa Canon, Japan's first-ever 35mmtocal-plane shuttercamera, wasborn. The company continued itsgrowth overthenext fewyears bycontinuously developing technologies inthe optical sector. Inthe 1950s, Takeshi Mitarai,the president ofCanon, builtacorporate culturewhichtookasitskey principle human respect andcompassion, indealings bothwithemployees and customers. In1955, Canon entered theAmerican market,opening anoffice in New York. Twoyears later,thecompany setupitssole European distributor, Canon Europe, inSwitzerland. Atthe end ofthe 1960s, exports already represented 50%ofthe total sales ofthe company. Duringthesame decade, the Japanese firmwas looking todiversify inorder toreduce risks.In1964, the company enteredtheoffice equipment marketwiththeworld's first10-key electronic calculator. In1967, thefirm introduced anew sloqan toillustrate its activities: "Cameras inthe right hand, business machines inthe left." Three years later, Canon developed thefirst Japanese plain-paper copyingmachine.

Up until 1970, Canon wasachieving incredible growth.However, in1974 the company struggledwithfinancial problems duetothe oilshocks andadefective calculator displaycomponent. Theyear after, forthe first time inits history, the company didnot pay anydividends. Tocompensate, Canonunveiled an ambitious projectbasedoninnovation thataimed totransform itinto an "excellent globalcompany." Underthisplan, thecompany launchednew products thathadnever beenseenbefore, suchasalaser printer witha semiconductor andaBubble Jetinkjet printer. Afterits51" anniversary in1988, Canon startedtopromote environmental activities,suchastoner cartridge recycling, inaddition toglobalizing itsdevelopment sites.Inthe mid-1990s, Canon wasstilldeveloping outstanding technologies butitsdebts became too large. FujioMitarai became thesixth president ofCanon in1995, andayear later he launched anew plan tooptimize thefinancial structure ofthe company. The focus nowwas notonsales butonprofit. Inthe 2000s, Canonmaintained its world dominance inthe digital camera marketandhasstayed profitable every year since. Thecompany currentlyemploys200,000peoplearound the.world, .

the vast majority ofthem inAsia. Here IS the weight ofeach Canon business Unit in 2012 (source: AnnualReport2012).

13 280 InternationalBusinessStrategy 313-134-1 IS: Digital cinema cameras, digital camcorders, digital compact cameras anddigital single lensreflex cameras.

• Imaging System • Office • Industry andOthers Office:

Officenetwork multifunction devices,laser printers, solutions software, toner, photosensitive drums, toner cartridges.

I&Others: semiconductor lithography, LCD Canon dominates themarket inmost ofits activities andhasstrong brand awareness. AccordingtoForbes, in2012 Canon wasthe35 1h most powerful brand inthe world. Itis ranked firstamong Japanese companies inthe field of technoloqy." Canonisalso aworld leader inR&D; thecompany heldthemost patents inthe USafter IBMandSamsung in2011.

Innovation Leader As mentioned above,Canonisaglobal leader, making aprofit every year.Due to its cutting-edge products,fewcompetitors-besides itscompatriot Nikon-can seriously compete. Thesegoodresults wereachieved thankstoamanagement style based onaculture ofexcellence. Canonisactive injust three different areas, andassuch ismore reactive tomarket change. Themanagement of Canon wantstostay strongly focusedonitscore business. SinceCanon only focuses onasmall number ofindustries, thecompany hasnochoice buttostrive to be number oneinall ofits endeavors.

In the past fewyears, Canon hasfaced decreased revenuesduetothe financial crisis buthas stayed profitable (seeappendix). Thiscontrasts withmost ofthe other Japanese firmsactive inthe electronics sector.

Despite suchhighaspirations, thegroup isconscious thatitcannot relysolely on its own labsandthat itwill have toacquire foreigntechnology. Thatiswhy, in April 2012, Canon bought Gee, theDutch printer maker. Thistake-over wasan ambitious planforCanon. Thecompany paid$1billion, itslargest everpurchase.

In acquiring Gee, Canon hadtwomain goals. Itwanted tostrengthen itscore activities andtodiversify therisk ofcurrency fluctuation. Bykeeping the manufacturing baseinthe Netherlands, Canonwouldspread thecurrency risk between theyen and theeuro. Withthesame logic,inSeptember 2012,Canon Only Toyota andHonda haveabetter ranking.

14 __----------~A~TA:L~E O::'F:..:T:.':'H~RE=E.':'CO~M~P'!.A~NI::ES~:T~H~E:.tSU~R~VI'!!.VA~L~ST~R~ATE~GIES OFSONY, HITACHI ANDCANON ----. .----- --+...............

313-134-1 bought Iris,aBelgian company specializing insoftware solutions andinformation scanmng.

Canon isalso looking tooptimize itssupply chainbyproducing outsideJapan.In June 2012: thecompany established asubsidiary inBrazil tomanufacture compact digitalcameras. Brazilisconsidered alucrative placetoinvest, asitis forecast togrow rapidly duetohosting majorsporting events,suchasthe FIFA World CupandOlympic Games.Moreover, Brazilhasthefourth-largest digital camera marketaftertheUS, China, andJapan. Increasing brandawareness in emerging countriesisone ofCanon's mainconcerns. InIndia, which isan important targetforthe Japanese firm,Canon rolledoutachain ofbranded retail stores called"Canon ImageSquare." Theconcept isvery similar tothe famous "Apple Store."Customers areable tohandle Canondigitalcameras andprinters to experience thembefore deciding topurchase them.Thegroup wants to increase thenumber ofthese stores inIndia from50atthe end of2011 to300 in 2014.

Currently, everything seemstobe going wellforCanon; itis making aprofit and is leading inmany fields. However, thefirm knows thatbeing successful today does notnecessarily meanbeingsuccessful tomorrow.Sothe management is constantly tryingtoadjust itsbusiness activitiestofitcurrent trends. Itis also preparing thecompany inanticipation offuture troubles. EvenifCanon isnot directly threatened byany foreign conglomerates suchasSamsung, another threat isalready makingCanon's strategychange.

Canon's BiggestFear:Smartphones The main advantage ofsmartphones isthat they remove theneed tocarry other pocket devices. Unfortunately forCanon, oneofthe devices smartphones are beginning toreplace isthe digital camera. Byproposing integrated cameraswith an increasing numberofmegapixels, thenext generation ofsmartphones may put fear intoCanon's shareholders. TheJapanese companyhasalready reduced its forecast inrevenue andprofit forthe coming years,mainly duetocompetition with smartphones. ForCanon, beingfocused onfewer areasofbusiness has been astrength untilnow, because ithas been abletomaintain andperpetuate its leadership. However,ifone ofthese businesses isdoomed, Canonmayface huge difficulties inthe near future.

Finding NewBusiness Opportunities However, Canon'smanagement issharp andhasalready startedtoanticipate how thegroup willadapt tothis new threatThls ISwhy thecompany ha~ . t if d fforts toenter intotwonew bUSiness domains. medicalImaging and In ensl Iee ld. .t .

. II' tbt In2011 Mitarai thepresident ofCanon, sal In an Inerview tnte Igen ro 0 s. " ...

J -r:

sthat thecompany planstoexpend ¥1 trillion In mergers and for the apan "me 15 282 InternationalBusiness Strateg~y~ _ 313-134-1 acquisitions withinfiveyears toimprove itspresence inthese twosectors. He explained thathewanted tobenefit fromthestrength ofthe yen toacquire companies abroad.Foritsmedical division, thecompany wantstofocus on diagnostic devices.TheUS-specifically Maryland,whereoneofthe top "biotechnology clusters"issituated-will bewhere theR&D willbeconducted.

Canon hasalso launched acollaboration withtheUniversity ofMaryland to develop anautomated systemproviding infectious diseasediagnostics. Itwill simplify theduties ofthe clinical staffandsignificantly improvethespeed and efficiency ofsuch activities. Thegoal ofthis partnership isto harness the strength ofboth institutions, toinnovate, andtoincrease Canon'scommercial portfolio.

With regards tointelligent robots,themain goalpursued byCanon isthe automation ofproduction. Japanisaworld leader inrobotics andCanon wantsto be amajor player inthis sector. Instead ofrelocating allactivities tocountries where laborischeap, Canonalsowants topursue therobot manufacturing of several products inJapan. Themain goalisto cut costs. Thecompany wantsto move towards machine-only productioninthe next fewyears. However, the chairman hassaid thatjobs willnotbecut, and thatworkers willbetransferred to do new kinds ofwork.

However, evenifthe fear ofsmartphones haspushed Canontofind new business opportunities forthe future, thecompany stillbelieves thatthedigital camera marketremains promising. Thebelief isthat byconstantly innovating it can compete aqainstsrnartphones. DuringtheConsumer Electronics Showin 2013, Canon presented anew version ofthe digital camera: thePowerShot N 6 The goal pursued withthelaunch ofthis device isto create anew infatuation for consumers whothreaten toabandon digitalcameras forsmartphones. In addition tounique designandergonomics, thedevice provides theability totake high-quality photographs, personalizethem,andthen publish themdirectly to social networks viaWi-Fi connectivity. Thedevice alsooffers iOSandAndroid support. WiththePowerShot N,Canon hopestoreinvigorate thedigital camera market, whereitspopularity isslowly declining.

Japanese Management TakingDifferent Routes As we have seen, Sony, Hitachi, andCanon havesimilar cultural backgrounds; they aretraditional Japanesecorporations andareconfronted withaworld thatis becoming increasingly competitive.Despitethisthey have adopted different business strategies inorder togrow.

See appendix formore details 16 __-----------A-T .;A.=LE:.:O .;F THREE COMPANIES: THESURVIVAL STRATEGIES OFSONY, HITACHI ANDCANON - ---- 313-134-1 In conclusion, thesethreecases refiect theseismic changes thattheelectronics industry inJapan isundergoing. Panasonic,Sharp,Toshiba andmany others are also trying tochange theircorebusiness strategies becauseofsimilar problems.

Thus, thegeneral conclusions thatcanbedrawn forthe three companies are also valid formuch ofthe sector overall. Beingprofitable inthis new global environment isthe main concern ofJapanese firms,afactor withwhich they were notconfronted duringprevious decades. Thedecline canthus bean opportunity forthem toentirely rethinktheirbusiness modelandmanagement style. Ifthey succeed, thesecompanies couldemerge stronger andregain their glorious pasts;ifthey fail,Japan couldloseitsimage asaworld hubofhigh-tech eiectronics.

17 I:

l~ I I I I. 284 InternationalBusiness Strate~g':.y _ 313-134-1 Questions > What arethemain reasons forthe decline ofthe Japanese electronics industry?

> Why dosomany Japanese companies finditdifficult tosucceed inthe globalized businessworld?

> Which business strategydideach ofthe companies apply?

> Are these strategies JapaneseorWestern?

> Do you think theywillbesuccessful?

> What management advicecanyou give tothe three companies?

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Questions growonJapanese manufacturing quality.

WallStreet Journal, 29January 2010.

Canon officialwebsite. http://www.canan.com Google finance. http://www.gaogle.comlfinance Hitachi officialwebsite. http://www.hitachi.com Morningstar. http://www.mornlngstar.com Sony Mobile officialwebsite. http://www.sonymobile.com Sony official website. http://www.sony.net 20 ATALE OFTHREE COMPANIES: THESURVIVAL STRATEGIES OFSONY, HITACHI ANDCANON 287 313-134-1 Appendix Sony stock 60 ., " 20 2007 aooe 200; 2010 acr i 2012 (Source: GoogleFinance) Hitachi stock "" 60' 2007 200B 2009 2010 2011 2012 (Source: GoogleFinance) 21 288 InternationalBusinessStrategy 313-134-1 Canon stock 60 2007 2008 2010 2011 2012 (Source: GoogleFinance) Sony results (In JPY Million) 2008-03 2009-03 Revenue 8,845,7477,729,993 Net income 368,332-98,93820 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 2008-032009-032010-032011-03 2012-03 Revenue 10,248,483]1,194,237 10,000,369 8,968,5469,315,807 9,387,587 Net income -32,754-57,932-787,337-106,961 238,869103,958 (Source: Morningstar) Canon results (In JPV Million) 2007-03 2008-032009-0320I0-03 2011-03 2012-03 Revenue 4,496,3684,090,0843,209,20I3,706,901 3,557,433 3,493,151 Net income 489,997308,845131,647246,603 248,63224,834 (Source: Morningstar) 22 _-------------.:A:..'T'.':A':.'LE:-':o':.F~TH:'."R~EE:.'C::O~M:f'IPA~N~IE~S.~ ----. .THE SURVIVAL STRATEGIES OFSONY, HITACHI ANDCANON Sony Xperia Z Design:

Characteristics: 313·134·1 5" 1080 x1920p fullHD Reality Display withMobile BRAVIA® Engine2 13MP FastCapture camerawithExmor RSformobile, theworld's first image sensor withHDR video forsmartphones Dust andwater resistant (IP55 & IPS?) withadurable glassdisplay 1.5 GHz asynchronous quad-coreSnapdragon S4processor with2GB RAM Battery STAMINA modeimproves yourstandby timebyatleast 4times One-touch functionsenableconsumers toeasily sharemusic, photos and videos fromtheirsmartphone toan array ofNFC-enabled Sonydevices L TE, 4Gforsuperfast entertainment A unique OmniBalance designwithsubtly rounded edgesandsmooth reflective surfacesonallsides (Source: SonyMobile) 23 L.j2U9~O!L-lL~'~nt,:er:l1n~.t~io~n~"~B:"US:ilin~e=SS~S~tr:,.t::,eg~ y~ _ 313-134-1 Canon Powershot N Design:

~- Features: • Built-in IM-Fi® allowsyoutowirelessly transferyourimages tosocial networking sites through CANON iMAGEGATEWAY#; toaPC orupload virtually anywhere on your iOS® orAndroidTM device"withthefree download ofthe Canon CameraWindow app".

• The convenient MobileDevice Connect Buttonallowsyoutoconnect toyour AndroidTM oriOS® device" forquick andeasy sharing.

• New Creative Shotmode usescomposition, colorandlighting fromyouroriginal image tocreate fiveunique images withanartistic fiair.

• Newly designed 2.8-inchcapacitive, tilt,touch panelLCD;lensshutter; andzoom ring offer users aunique andcreative waytocapture photos.

• 8xOptical Zoomand28mm IMde-Angle lenswithOptical ImageStabilizer reduces camerashakesoyou achieve brilliantimages.

• 12.1 Megapixel High-Sensitivity CMOSsensor combined withaDIGIC 5Image Processor createstheCanon HSSYSTEM forimproved low-lightperformance up toISO 6400 andenhanced imagequality.

• Capture stunning 1080pFullHDvideo withadedicated moviebutton, pluszoom while shooting.

• Intelligent ISautomatically choosesfromsixdifferent modestooptimize image stabilization forthe shooting condition.

(Source: Canonofficialwebsite) 24 ____ ______------------------------~KFC'S AFRICANEXPANSION: AIDEDBYVALUE CHAINS'?

314-138-1 KFC's African Expansion Aided by 'Value Chains'?

Case Study This case waswritten by RaJan Shah,Amity Research CentersHeadquarters, Bangalcre.Itis Intended to be used asthe basis forclass discussion ratherthantoillustrate eithereffective orIneffective handling ofamanagement situation.Thecase wascompiled frompublished sources.

© 2014, Amity Research CentersHeadquarters, Bangalore.

No part ofthis publication maybecopied, stored,transmitted, reproducedordistributed inany form or medium whatsoever withoutthepermission ofthe copyright owner.

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BANGALORE Author: Mr.Rajan Shah KFC's African Expansion: Aided by 'Value Chains'?

Abstract: Yum!Brands (Yuml), basedinLouisville, Kentucky, USA,wasworld's leadingrestaurant company, operatedthroughKFC,Pizza Hutand Taco Bellbrands. Thesebrands werespecialised in chicken, pizzaandMexican-style foodrespectively. Amongall,KFC was anearly mover inthe African market byopening itsfirst restaurant inSouth Africa in1971. Withtheencouraging successinSouth Africa, KFC entered Namibia, Botswana andSwaziland. In2009, KFCentered Nigeriaviafranchise route. Meanwhile, in2011, totalrestaurants countinSouth Africatouched 660.Inthe same year, moving aheadwithitspan African growthplan,KFCentered Kenya,Ghana andZambia. Byend of 20l2, KFChad63outlets inthe New African Markets and900outlets inSouth Africa, Egypt,Morocco and Mauritius. Inaddition, KFCplanned toenter Zimbabwe, TanzaniaandUganda, theDemocratic Republic ofCongo, Ethiopia andSenegal. Insuch anunbridled expansion, apartfromthegovern ment protectionism andregulations, KFCfaced difficulties inmanaging supplychainassmall farmers in Africa wereunable tosupply quality andquantity ofchickens asper KFC's standards. Insuch a scenario, according toexperts, the'Value Chains' approach forsmall farmers mootedbyThe US Agency forInternational Development (USAIDjandBill&Melinda Foundation (GatesFoundation) would indirectly benefitKFCmore thanthesmall farmers, inthe long run.Given suchscenario, how KFC would chartitsfuture expansion inAfrica, remained tobe seen.

Pedagogical Objectives The case study helpstounderstand andanalyse:

o Growth ofKFC inAfrica o Expansion aidedby'Value Chains' o Future Challenges.

Case Study "Africa isundoubtedly oneofthe fastest growing regionsglobally andKFCisfully committed to harnessing thisopportunity andbUilding asustainable businessmodelonthe continent.

1/1 - Bruce layzell, General Manager ofNew African Markets, KFC "A~ 0 mar~~t leaderinthe Quick Service Restaurant industry,weare excited totake thisleap forward.

It IS ou~ VISion tos~1I ourgreat original recipechicken rightacross thecontinent _ tnars abil/ion people In 54 countries. Fortunately it'sabillion people wholove chicken andwe'lf n w be able togive them thebest tasting chicken."2 0 - Keith Warren, Managing Director,KFCAfrica 1 "KFC toEJCpand Steadilv IntoAfrIca", ~ttP://WWW.kfc.co.za/zone/post/kfc-to.eKpand.steadilV-lnto-afrlca/. January is"2013 "KFC EJCpanslon tnAfrica tobe So Good", http://WWW.kfc.co.za/zone/post/kfc-eJCpansIOn-ln_africa.to_be-so-gOOd/. January 23'd2012 tIC 2014, AmIty Research Centers HQ, Banga1ore. Allrights reserved," Page -1 --------------- -- --.. -------------------------.:KFC'S AFRICANEXPANSION: AIDEDBYVALUE CHAINS'?

314-138-1 KFC's African Expansion: Aidedby'Value Chains?

H aving more than18,000 restaurants inl1S countries, KFC,based inlouisville KentuckyUSA was world's t Ihl '" . . maspopuar C icken restaurant chain.' As apart ofIts future expansion KFChad an ambitious i1antoconquer Africa, thesecond-largest continentin terms of size and pcpulatlon.

4 By 2014, Yum.

Brands (Yum!), parentcompany ofKFC, decided todouble number ofKFC restaurants to 1,200 .inAfrica, Inaddition, by2014, Yum!alsoforecasted togarner annual profitsof$120 million from Afnca.' Growing urbanisation, increasingnumberoffamilies withmore disposable income,and affluent customers werethelucrative factorsforKFC's expansion invarious Africancountnes." According toDavid C.

Novak, Chairman andChief Executive OfficerYum!"Africa hastremendous opportunit~. It'sagreat emerging continent, andwehave achance toreally leadInthat business." But, managing supplychainremained thebiggest challenge forKFC inAfrica assmall farmers were unable tosupply chickens asper KFC's standards. Insuch scenario, Initiatives pursuedbyThe US Agency forInternational Development (USAID)andBill & Melinda Foundation (GatesFoundation) were aimed toaid small farmers inAfrica. Suchinitiative wasaimed todevelop 'ValueChains' In order toindulge smallfarmers intobusiness relationship. But,critics opined thatinsuch efforts, KFC poised tobenefit morerather thansmall termers.' Amidst thisbackdrop, itremained tobe seen howKFCmoves aheadwithitspan African expansion plans.

KFC inAfrica: AnOverview Yuml Brands Inc.(Yuml), basedinLouisville, Kentucky,USA,hadnearly 40,000 restaurants in125 countries. In2012, Yum!wasranked at201 position inFORTUNE 500listwith revenues of$13 billion.

Being world's leadingRestaurant Company,keybrands ofYuml included KFC,Pizza Hutand Taco Bell. These brands werespecialised inchicken, pizzaandMexican-style foodcategories respecnvetv." Among itskey brands, KFCwas reputed asworld's mostpopular chickenrestaurant chatn." KFC was founded byColonel Harland sanders (Colonel), afounder andvisionary, whocreated world famous recipebyusing herbs and splces." Byproviding anexcellent qualityoffried chicken, in1955, Colonel decided toforay intochicken franchisee business,Withhisbusiness acumen, Colonelhad more than600KFCfranchises Inthe USand canada. Butin1964, Colonel soldItsUS operations to group ofinvestors includingJohnY.Brown Jr.for $2million. Withsuchmanagement overhaul,KFC went public in1966, bylisting itselfonthe New YorkStock Exchange. Inamajor development, in 1969, PepsiCo (PepsiCo) Inc.acquired thecompany andlater, in1997, PepsiCo decided tospin-off its quick service restaurants business.Thisspin-off resulted intotheformation ofan Independent restaurants companynamedTrieonGlobal Restaurants Inc.known asYuml.

u KFCwas known forits Original Recipe", ExtraCrlspv'", Kentucky GrilledChicken", ExtraCrispyr" StripsandExtra Crispy"· Boneless, withhome-style sides,HotWings"', andfreshly madechicken 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. August122010 B Moorad Zeenat"KFCEager tospread itsWings InAfrica, h http://www.bdll~e.co.ZlI/buSlness/retall/2013/01/14/kf.-eager-to-spread-lts-wlngs-lo-afrlca, January14'2013 7 "KfC toDouble SizeInAfrica", op.clt.

8 p kAI "HowBillGates isHelping KFCTake over", III "II ex, h j om/."",onment/2014/01/kf,_afritil

l1'bid H ~coione' Sanders", http://colonelsanders.com/hlstor y _,oloneISanders.asp U "KfC", http://www.yum.com/brands/kfc.asp Page -2 .....2;;;;,;;9;..4.;.._f-_I_nt_ernatlonal BusinessS;~tr~at~e~g~y _ 314-138-1 KFC's African Expansion: Aidedby'Value ChaIns'?

The worldwide systemunitsofYum! weredivided intotheUSand theinternational market.,Further, such system unitswere categorised intocompany-owned, unconsolidatedaffiliates,fra~chlsed and licensed. Bythe end of1999, inthe US,KFC had 1,439 company-owned, 3,743 franchised a,nd49 licensed systemunits.Atthe same time,KFChad1,185 company-owned, 514unconsollda~ed affiliates 3841franchised and55licensed systemunitsinternationally. Inthe same year,operating profit an'd~etincome ofYum! touched $1,240millionand$6,27 million r~spectively.14 Acco~dingto analysts, overaperiod oftime, performance ofYuml soared withoperating profitandnetIncome touching $2,294millionand$1,597 millionrespectively in2012. (Annexure I) In the same year,vuml decided topursue itsInternational expansionmoreaggressively, inorder tobuild strong brandin various countries suchasChina, India,Russia, France, Germany, MiddleEastand Latin America, and Africa. Onsuch growth strategy, David C.

Novak (Novak), Chairman andChief Executive Officer(CEO), Yuml, said,"Wesetanew record forinternational development byopening nearly2,000new restaurants in2012. Asamatter offact, webelieve thebest isyet tocome aswe pursue our objective tobe the defining globalcompany thatfeeds theworld.?" In its international expansion,amongvarious regions, Yum!decided toestablish asteady platform for KFC brands acrossAfrica. Moreover, KFC'sAfrican voyagewasinteresting. AccordingtoD Smart, KFC'sAfrica Managing Director(MOl,"KFChasbeen inSouth Africa since1971andsoalmost all ofour consumers grewupwith itand they know it,it's ahousehold name,inmany partsofAfrica that isnot thecase they maynothave everheard ofitever.// 16 KFC's African Voyage Observers notedthatwhen aCEO ofKFC's holding company visitedSouthAfrica withhisfamily for safari tourin19605, hewas lured bythe development ofthe country. Aftergoing back,suchincident resulted intoKFC's debut intoSouth Africain1971. Withthesignificant successinthe South African market, KFCdecided toforay neighbouring countriessuchasNamibia, Botswana andSwaziland. With the beginning ofnew millennium, KFCdecided toexpand itsfootprint inNorth Africa. According to Keith Warren (Warren), thethen MO,African Operations, KFC,"South Africawasjust toomuch ofa prospect interms ofthe further development of[the] market thatwedidn't reallywanttodistract ourselves takingthefocus further north.v" In 2007, inaddition toNorth Africa, KFCidentified businessopportunities acrossAfrican continent, and asaresult, inDecember 2009,KFCopened itsfirst restaurant inLagos, Nigeria.

1I KFCentered Nigerian marketviaDevvani International NigeriaLimited (Oevyani), afranchise holderforKFC in Nigeria. According toVis hal Kapur (Kapur), CEO,Devyani, "SinceKFCjoined theNigerian market,it had continually uppedthestakes inthe provision offreshly madefoodthatmetinternational quality standards." Sinceitsentry intoNigerian market,KFChadopened sevenoutlets. In2011, KFCdecided to open another 19new service centres, withaninvestment ofNGN19 1.5billion. Tofuel such expansion, Devyanihadlaunched 'MoreFood,MoreGifts'promotional activityinNigeria.

Commenting onsuch promotional activity,Kapursaid,"Wearelnvlting allour customers tocome u "1999 Annual Report-Yuml", www.yum.com/lnvestors/annualreport/99annualreport/Pdf/1999AnnualReport.pdf :: "2012 Annual Re~rt2012-Yuml", http://www.yum.com/annualreport/pdf/2012yumAnnReportPdf. 2012 Moorad zeen~t, FamousBrandsAlmstoCash Inon 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 3 rd 2013 , 17 Marin race,"KFC's African venture", ~.~:~/www.howwemadeitinafrlca.com/kfc%E2%80%99s-afrlcan-adventure/1S151/, February2i'd2012 If Itdenotes Nlger1an currency Naira.

Page-3 - __------------ -!KFC'SAFRICANEXPANSION: AIDEDBY'VALUE CHAINS'7 --...

---- 314-138-1 KFC's Afrlcon Expansion: Aidedby'Value Chains'?

and enjoy the'sogood' experience ofKFC. Nigerians willalways enjoythesame quality ofdelicious meals fromKFCasobtained anywhere inthe world. ThisIsour promtse.?" On the, s,uccess ofKFC's Nigerian operation, Warren quoted, "KFCwasvery well received InNigeria.

D,ur on,glnal d,evelopment plansforNigeria werequite conservative, andwithin slxweeks, Iwas [In discussion] with thefranchisees, andthey were saying, 'Forgetthat,weare now going tobuild as many stores aswe possibly can'.Wearefinding thattheonly limiting factorwe've gotInNigeria right now isactually chickensupply,andfinding suppliers whoareable tomeet ourglobal quality standards insufficient quantity.,,21 KFCalso planned tooffer seafood inNigeria. Givingoutthe rationale behindsuchoffering, BruceLayzell (Lavzell], GeneralManager ofNew African Markets, KFC, said, "KFCcustomers aroundtheworld enjoyavaried menuobviously coupledwithsome keybrand defining elements likeourOriginal Recipe' chicken. Ouroutstanding FishZinger" burgersandZinger Shrtmps'" areaway ofbringing diversity toour menu butwith afamiliar meatblock thatweknow Nigerians love.Nigerians arevery much partofthe global village andthey demand worldclass products, worldclassservice andworld classexperiences. AtKFC westrive todeliver onthis need and weare uncompromising toensure, through ourproducts, customers' andrestaurants demands are met. Ourglobal reachallows usto tap into thevery frontline ofproduct development and consumer trendsandweknow thatsuccess herewillhinge onusensuring thatNigerians getto experience thesethings sooner ratherthanIater.t" Moreover, KFCpaid dueattention towardsbrandbuilding andoperational efficiencyInits Nigerian operations. Highlightingimportanceoflocal production, Layzellstated, "100 percent ofour chicken in Nigeria isNigerian farmedandprocessed. Wehave worked withsome outstanding partnersto upgrade facilitiesandstandards tomeet theexact requirements thatourbrand demands. Wewant to be seen asaNigerian company thatcontributes tothe Nigerian economy andpeople onanumber of levels. Assuch, wewill always trytolocalise production wherewecan source theright quality at the right price. Theultimate goalwould betoget Nigerian suppliers tothe level ofcapacity that would allowthemtoexport toother countrles.?" Meanwhile, in 2011, KFC's\~staurants countinSouth Africa touched morethan660.According to experts, thesenumbers wFrefourtimes ahead ofMcDonald: andNando's, KFC'snearest competitors inSouth Africa. Onsuch development, Warrenopined, Ifwe can unlock Africatheway we've unlocked SouthAfrid, thebiggest division InYuml byacountry milewillhopefully bethe African division inabout 100 years."24 Moving aheadwithitspan Africa growth plan,In 2011, KFCentered Kenya,GhanaandZambia.

is For entering intoKenyan market, KukuFoods became franchisee partnerforKFC. Kuku FoodhadKFC franchisee acrossEastAfrica. OnKFC's Kenyan foray,Gavin Bell(Bell), aveteran ~estaurateur and General Manager, KukuFoods, said,"Wehadbeen looking atKenya asapotential locationfora number ofglobal franchises andKFCseemed tobe the obvious choiceinterms ofthe prov~sion of the quality products thatitoffers, predominantly fromthechicken perspective, giventhatchicken is 20 "KFC toInvest N1.sbn on19New outlets", III /201l/04/15/kfc.to-Invest-n1-Sbn-on-19-new-outlets/, April152011 http://buslnessnews.com .ng 21"KFC'S Africanventure", op.dt.

la 22 Armitage lan,"KFC NigeriaN, http://www.afrlcaoutiookmag.com/content/kfc-nlger 2S Ibid 2" "KFCClonelleads theCharge IntoAfrica", III Nicolson GreB, 0/.I/2012_03-1g.kfc-colonel-ieads.the-charge-lntcHlfrlca/I.UllakTYXb82x. March18 http://www,dallymaverlck.co.za arnee 2012 25 "KFC's African Venture", op.clt.

Page-4 295 Ii I !

I I , 296 International BusinessStrategy 314-138-1 KFC's African Expansion: Aidedby'Value Chains'?

--------..;...- a popular luxuryhereInKenya. Wehave three branches inKenya andweare inthe process of building inTanzania andUganda, withatleast onestore inboth ccuntrfes.":" But, atthe same time,pointing outthechallenges inKenyan operations, Bellmentioned, "Wehave faced challenges predominantly inthe supply chain,especially gettinglocalsuppliers tothe level where theycanpass theYum! Brands (owner ofKFC) Supplier Tracking andRecognltlcn (STAR)audit system, whichmonitors suppliersforfood safety andsecurity. Alot ofbusiness:s herehave various certifications, butarenotatthe level where theycanbeable tosupply KFC.InInstances -when we cannot findaKFC approved supplierlocally-we have topurchase outsidethecountry from a KFC approved supplier.Forinstance, webuy ourprocessed, pre-blanched, blast-frozen potatochipsfrom Egypt because Ithas total traceability backtosource. Weareworking withKenyan companies to ensure thatinthe future wewill have localchips suppliers, ItIs In our interest interms ofcost, logistics andstorage. Itisahuge expense forusto import fromEgypt,"n By end of2012, therewere63KFC restaurants inNew African MarketexceptSouthAfrica, Egypt, Morocco andMauritius. Thetotal KFCrestaurants countInAfrica including SouthAfrica, Egypt, Morocco andMauritius touched900byend of2012. Inaddition, byend of2012, KFCrestaurants were operational inAngola, Namibia, Botswana, Mozambique, lesotho,Malawi,Swaziland, Ghana, Kenya andZambia. By2013, KFCalso pJanned toenter Zimbabwe, TanzaniaandUganda andlater on in the Democratic RepublicofCongo, Ethiopia andSenegal.28 In Yuml's Annual Reportof2012, focusing onAfrica, Novakmentioned, "[Yumlwas]making major progress inAfrica, acontinent withendless possibilities whereweclearly havefirst-mover advantage. We are driving majorgrowth bulldtng offour dominant baseofabout 700KFCs inSouth Africa, whereweexpect toadd another 45restaurants thisyear, Bythe end of2012, weexpanded to 14 African countries, includingthebiggest ones,Nigeria, KenyaandZambia. In2013, weintend to expand toTanzania, Uganda'and21mbabwe."29 SupportingNovak,Warren alsoadded that,"We agreed thatthebest thing todo would betodevelop thebusiness acrossanumber ofgeographies.

So ifwe hitspeed wobbles, orcame across obstacles, wewouldn't bedependent onJust that one market, andwouJd therefore beunder pressure.':" In2013, KFC'stotalrestaurants countinAfrica touched 1,000.HBy 2014,Yumlaimed tooperate 850KFCrestaur.ants InSouth Africaand350across African countries togarner operating profitof$120 Tillion12 (ExhibitI).

According toobservers, foritsAfrican voyage, KFChad decided nottoadopt 'Blanket' approach.

Giving rationale behindfornot adopting 'toe-in-the-water' approach,layzell,opined, "KFChas established adedicated department tofocus onallaspects ofoptimising businessinAfrica, from marketing andsupply chain,toinfrastructure andhuman resources." Layzell,admitting theview of Aliko Dangote, aNigerian businessman, whoonce opined thatbysitting inUS and Europe, African business cannotbeoperated, asserted, 'This isafundamental truth-you need tobe on the ground to understand thecomplexities ofeach country inAfrica, OurKFCrestaurants ineach market differ_ our aim isto make ourbrand relevant inalocal context. Wewon't cutand paste aSouth African KFC as Mulupi Dinfln,"KFCExpects MoreGlobal Fast-Food ChainstoEnter thexenvan Market" http://panafrleanvlslons.eom/2012/kfe-expects-more-gIObat.fast_food-ehalns-to-enter_th'ke _k II J I 2." 2012 e- oven mare,uV 17 Ibid, z, "KFC Spreads ItsWings", http://www.bl2mag.eo.za/kfe-to-expand_steadIfV.lnto_afrlca/ Janua14th2013 Zg Hedley NIck,"Yum toPush KFCInto Africa 'asfast aspossIble"', ,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 toPush KFCInto Africa 'asfast aspossible"', op.cit.

U Schreiner Bruce,"KFCtoDouble 512e InAfrica", http://www.hUff!ngtonpostcom/2010/12/OS/kfc-ln-afrlca_plans_to_do_n_793976.html. August Ith 2010 Page -5 --. -----------------------~KFC'S AFRICANEXPANSION: AIDEDBYVALUE CHAINS'?

314·138·1 KFC's Afrlcon EKpanslon: Aided b)l 'Value Chains'?

into Nigeria orzerrora.':" Hefurther addd' _ the first ishow wedb' e I 'There aretwo factors whenlooking atmarket potential environment _olitical 0 ~~lness, call ~t our Internal ambitofcontrol. Thesecond Isthe external play positively iogeth Stt~btlitYI economic gr~wth,infrastructure Investment etc.

If these twofactors er enwe are very bullish aboutourgrowth potentlal."" Exhibit I KFC -Spreading WingsInAfrica After rapidCI(Pil(lSIOrl oflts KfC stores In(hmi) •VUM brimM ISturnmy Its,IUenuon toAfr)ri'l 1,2'00 slOfn l~OOO •south Alr"co!

_ Rest ofArt!ea 800 10,000 Rtstol'WQrld 5,000 -- 0 20'" '" 'rr!

'Ill '09 • flr:l!tl(IIDn 600 "0 ,ao o '005 2010 '001 Source: JulieJargon, "KFC Savors Potential InAfrica", http://onllne,wsj,com/news/articles/SB100014240527487042 5070457600557124 7805178,December i h 2010 But, atthe same time,heemphasised thatinsuch approach, KFC'sworld-class foodsafety standards remained intact.Inorder toachieve this,Layzell stated, "Wepartner withsuppliers whoarewllllng to invest inAfrica orensure localsuppliers areuptospeed andscale inorder tomeet our requirements, Wecanspend uptotwo years inadvance ofopening astore ensuring thatsuppliers meet ourexacting standards." Inaddition, KFCfocused onproviding employee trainingtofoster its growth inAfrica. Lavzetlemphasised, "Wehave done justthat inour Africa markets andtoday we have trained about2100customer facingKFCemployees and100above storeandrestaurant support employees."lS With suchbusiness approach, by2014, KFCaimed todouble itsAfrican outletto1,200 andrevenues to $2 billion inthe same period. Onsuch ambitions, Novaksaid,"Africa wasn't evenonour radar screen 10years ago,butnow wesee itexploding withopportunity." Accordingtoexperts, improved political stabilityinvarious Africangovernments, vastpopulation sizeandgrowing middleclass,who preferred chickenasnutritional food,fascinated KFCtoconquer Africanmarket.

J6 Recognising potential ofAfrica, Abdoulie Janneh,Executive Secretary, EconomicCommission forAfrica, United Nations, said,"Nine outofthe top 10fastest growing economies areinAfrica. Thereisagrowing consensus thatAfrica ison the verge ofan economic take-offandcould become apole ofglobal growth. Thisislargely basedonsome factors: Africa'suntapped naturalresource endowment which provides significant investment potential;thecontinent's steadypopulation growth,which,If properly managed, couldyieldpositive returns; therise ofthe middle classandtheuntapped regional market;higheconomic growthrates;improvements inthe general macroeconomic n "KFC spreads ItsWings", op.clt, ~4 "KFC Nigeria", op.clt '5 "KFC Spreads its Wings", op,clt, J6 Jargon Julie"KFCSavors Potential InAfrica", lh http://onllne.:.vS!.com/news/artldes/S810001424052748704250704576005571247805178, December72010 Page -6 i II I 298 International BusinessStrategy 314-138-1 KFC's African Expansion: Aidedby'Value Chains'?

------- environment; strategicandtimely institutional reforms,as wei,' asjmpro~ed gov~rnance inma~y African countries' improvedbusinessenvironment inmany African countries andIncreased FDI In recent years.Themiddle class needs togrow forthose numbers totranslate intoaprofit, butthere are already positive signs.While thecontinent's collectiveGDPstl,'1o~IY ,amounts roughlyto that,~~ Brazil orRussia, it grew twice asfast inthe last decade than It did In the 19805 and19905 (Annexure II).

However, inspite ofthe promising growth,KFCfaced withnumerous challenges. inAfrica, Apartfrom government protectionism andregulation, accordingtoexperts, oneforthe biggest challenges for KFC inAfrica wastomanage itssupply chain.According toWarren, "Wehave countries inwhich we operate wherethechicken isthe most expensive chickeninthe world. Itis the most inefficiently produced chickeninthe world. Itisthe lowest standard chickeninthe world. Anditis all because the government isprotecting thelocal industry '"The reality Is,and Ithas been proven theworld over, whenever youhave trade barriers andprotection, youend upwith an[unfavourable] economic result.v" 'Value Chains' -Thrust forFuture Growth In order tofuel itsAfrican expansion, KFCrequired steadysupplyofchickens withpre-defined standards. But,small chicken farmers inAfrica wereunable tomeet quality andquantity, asrequired by KFC.39 Ashok Mohinani (Mohinani), arestaurateur, whotook afranchise ofKFC inGhana, was forced toimport chicken, asfarmers werefailed tosupply chicken asper KFC's standards. Withsuch development, importcostincreased andthat resulted intoproduct pricehike.According to Mohinani, "Withfastfood, youcan't keepraising prices.It'schicken." Notonly inGhana butalso in Nigeria andKenya tooKFCfaced similar problems. KFChadstarted offering fishinNigeria, asimport of chicken wasillegal. Kenyatoohad aban onimport ofpoultry. Onsuch situation, PaulBrenton, Lead Economist atWorld Bank,expressed, "Growingdemandforfood inAfrica isincreasingly being met byimports. Clearlysomething hasto change.v" In such scenario, TheUSAgency forInternational Development (USAID)andBill&Melinda Foundation (GatesFoundation) sawopportunities forsmall farmers inAfrica byconvincing themto adopt newcrop. According toexperts, "Todothis, USAID andGates arefunding companies to build what development expertscall'value chains' -business relationships thatlinksmall farmers to sellers ofagricultural inputslikefertilizer onone side, andbigbuyers ofcorn andsayan theother.

Those buyers turnthese commodities intofeed, andthen sellitto large chicken wholesalers whoare staking theirfuture growth onsupplying KFC'sAfrican expansion. Theidea isto give small farmers living onthe edge newtechnology togrow more, allowing themtofirst feed themselves andthen 'diversify intocommercial crops.'Allover Africa, companies backedbyUSAID andtheGates Foundation aredeveloping thesesupply chainsandencouraging smallfarmers tojoin them'?" (Annexure Ill).

In 2010, Gates Foundation gaveagrant of$8 million forafour-year projecttoTecnncserve" tofocus on businesses thatgenerate incomeofsmall farmers inSouthern Africaviadeveloping localsoy industry. "Grantwillbeused toboost farmer incomes inMozambique andZambia, where H "KFC Colonel LeadstheCharge IntoAfrica", op.clt.

u "KFC'sAfrican Venture",op.clt.

n "How BillGates IsHelping KFCTake Over", op.clt.

40 Hinshaw Drew,"AsKFC Goes toAfrlca ItLacks onlyOneThing: Ollcken", http;//onllne,ws J .can/news/artlcles/sBlOOOI4241278873Z4442304578235602613061228 F br Ih 41 "How BillGates IsHelpll'18 KFCTake Over", op.c1t ' e uary 82013 42 The USA based NGO.

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314-138-1 KFC'$ African Expansion: Aidedby'Value Chains'?

TechnoServe is.workin g toexpand soyproduction by smallholder farmersandconnect themto buyer~ f?r thel~ crops. TechnoServe, inpartnership withpublic andprivate agencies and organ"zatlons, willhelp farmers purchase premium seedsandother supplies teachthemnew te,chnlques fo~growing so~, andwork withthem toform farmer cooperatives.

The organization also will promote Investments In soy storage andprocessing andwillwork toboost thelocal feedand livestock industries toensure thefarmers haveastable market fortheir crops. Within fouryears, TechnoServe expectstheeffort toboost theincome of 37,000 farming households byan average of $200 ayear,"43 highlighted theGates Foundation. Inaddition toTechnoServe GatesFoundation partnered withCargill, reputed asagricultural commoditytradinggiant." ' TechnoServe hadalready listedseven largest chicken wholesalers inZambia asend market forsoy.

Experts notedthat,"Forlarge poultry wholesalers, thevalue chainsystem makesperfect sense:It'sa way toturn small farmers ontoasingle, htgh-proteln croplikesoy, then turnthatcrop Intochicken feed, and,eventually, intochicken." Onsuch development, RichardHurelbrink, Directorof $24 million U5AID-backed soyproject, mentioned, "SoybeansareImportant. Theendmarkets driving that market arethe livestock sectorforthe manufacture ofanimal feeds.They're demanding alot of materiaf.?" Moreover, KFCoffered burgers without lettuceinfew places inAfrica, aslocal producers were unable tosupply quantity andquality oflettuce asper KFC's requirement. AccordingtoWarren, "In one ortwo ofour geographies ...we haven't gotsuitable lettuceproduction, andasaresult, our burgers don'tactually havelettuce onthem. Thatisa short-term problem,anditis not something we want toentertain atall because burgersdon'ttasteasgood without lettuce...We areworking very hard andclosely withthelocal farmers toget them toproduce lettuceatthe quality andthe standard thatweneed toput onour burgers." However,expertsfeltthat KFC's growth inAfrica was also affected byinadequate farmingcapacity tosupply bothchickens andvegetables. But,atthe same time,Warren opinedthatsupplying chickensandother products couldturnouttobe a lucrative businessforfarmers inAfrica. Highlighting theinitial supply chaindifficulties facedinthe Nigerian marketforKFC, Warren said,"When wefirst went intoNigeria, ittook alot ofconvincing to get one ofthe chicken farmers topartner, because ofthe amount ofinvestment [he}needed to make toachieve ourquality standards. Theother chicken producers weren'tparticularly interested.

But once theysawthesuccess wewere achieving withthatonefarmer, theythen went andsaid, 'We better getonboard'. Andnow wehave fourchicken producers inNigeria, allcertified andaccredited, and achieving ourstandards ..."46 With suchinitiatives, KFC'sambition wastoensure localsupply Inall African countries Inwhich It operated. Explaining importance oflocal supply ineach country, Warrenpointed, "Whywould you want tobe paying thecost of."shipping products, whenyoucanactually sourceitlocally? Mostof Africa isblessed withenormous agricultural wealth,sotherefore ItIs a matter ofunlocking thatand I d d 1147 developing thetechnology tomeet oursupp yeman 5.

4~ "Gates Foundation Awards$8million forSoy project InSub-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's African Expansion anopportunity forFarmers • ,6 , dill'Iea ,om/kfcsoafrlcan-expanslon-an-opportunlty-for-tarmers/14799/, February 3 2012 http://www.howwema ena .

47 Ibid.

Page-8 I-...;3""O:.;O;"_I-_lnternational Business strategy' ~ 314-138-1 KFC's African Expansion: AidedbyValue ChaIns?

Challenges Ahead According toexperts, high-protein foodsuchassoy was crucial forthe healthy growthand development ofchicken. WIthsuchinitiatives fromUSAID andGates FoundatIon, concernswere raised thatKFCpoised tobenefit morecompared tosmall farmers. Explaining suchscenario, experts mentioned thatinorder tosupply toKFC, farmers mustutilised theirlimited resources tomeet quality measures of KFC. tn addition toKFC, there wereother commercial buyer~forsoy inAfrica.

Due tothis concern wasraised thatKFCmight setthe prices andcontrol thebuying market. Atthe same tlme.even thoughfarmers witnessincrease intheir income, theycan't afford fried~hicken. In sub-Saharan Africa,visiting KFCrestaurants wasconsidered asastatus symbol. Commenting onthe role ofaid organisations, expertsnoted,"Aidorganizations canbring market players fromacross the supply chain-farm torestaurant -into thesame room, Theycanprovide aplatform wherefarmers' interests andvoices arerecognized androadblocks inthe market areresolved bythe players themselves. Thisisessential tobuilding astrong market thatwillbenefit alllong after theaid organization leavestheconversanon."!

In addition, smallfarmers inAfrica mightnotbecapable ofworking onboth thefronts namely, supplying toindustry andfeeding theirownfamilies. According toJames McCann, Historian of African agriculture atBoston University, "Smallfarmers mayfindithard tosell toanyone but commercial feedproducers. Marketexpectations canchange whatfarmers produce. Butarethey producing forthe local market, orfor the value chain?" Atthe same time,Andrew Eder, Spokesperson, TechnoServe,whenasked whether soyproject wasultimately aidingfast-food industry, hedenied suchmotive andsaid, "Hiscompany's roleisto connect farmerstothe best markets -Jocafregional orglobal- fortheir croporproduct. Ourfocus ison improving thesoy value chain Inorder toincrease theincomes ofthe smallholder farmerswithwhom wework." Inamajor announcement, ananonymous spokesperson fromYuml said,"Weprimarily sourceourchicken in Africa locally andregularly workwithlocalsuppliers toincrease production tomeet ourgrowing business andhigh quality standards." But,observers mentioned thatsince 2011, YumJhadlobbied USAID forproviding foreigndevelopment assistancetoAfrica,4' Meanwhile, emphasising importanceofthe supply chainforKFC inAfrica, layzell said,"Oursuppliers are growing withus.We doalot ofwork withthem, bringing themuptostandard. It'snot always easy andyoucanimagine theinteresting conversations wehave withsuppliers _'you need to improve yourquality andspend money onyour plant butwecan't offeryouguarantees forwork, or we only have three orfour outlets inthat country.' It'sachallenge butwhat it'sreally about is painting ourvision ofwhere wewant togo asabrand andthen finding suppliers whoarewilling to partner withuson that journey, Itis upfront investment thatmight notbepaid offinthe short term but thepoint isto get inearly, laydown theright standards andbuild therelationship. Asan example we have some South African companies thathave supplied usfor much ofthe 40 years wehave been in that country, Weallow themtogrow theirbusiness withus.We also know ourglobal standards are exceptional andwillhelp them ingetting otherbusiness. Indeed,whenotherbusinesses enter Africa· otherfoodservice businesses -Our suppliers haveafoundation ofthe right quality theycan supply tothe Industry, tohotels, tosupermarkets, Itisabout painting thepicture, findingthe suppliers whobelieve inwhat wehave tooffer andcreating thevision tobecome worldclass,And 41 Hafften vonMarie, "Growing I

Page-9 __----------- .".KF~CSAFRICANEXPANSION:AIDEDBY'VALUE CHAINS'?

---..

--' 314-138-1 KFC's African Expansion: Aidedby'value Chains'?

we have found somefantastic partners, peoplewillingtoinvest intheir business anddothe training."so At the same time,highlighting otherchallenges Inaddition tothe supply chain,Layzell stated, "Africa is full ofchallenges, rangingfromthepolitical andeconomic, tothe societal andpractical. Some challenges areharder toaddress thanothers -consider thepower problem: notsomething that'llbe solved overnight ornecessarily somethingwecan control. Wecan putinlocal generation anduse equipment thatuseslesspower, butwecan't domuch more. SomeofAfrica's challenges youcan control butothers youcan't. Ithink wehave beensuccessful insolving thechallenges withinour control andfinding waysofmitigating thefactors wecan't, eventhepower issues,"Sl But, inorder toexpand andensure success inAfrica, experts noted,"Yum's success inAfrica depends on guaranteeing thesame sandwich orbucket ofchicken everywhere itgoes, whether it'slusaka, Zambia, orlouisville, xentuckv.?" Therefore inbackdrop ofthe above scenario, howKFCmoves aheadwithItsAfrican expansion, remained tobe seen.

AnnexureI Yum! Brands Restaurants Counts & Revenues - Worldwide SystemRestaurants Year-end 2012 2011 2010 20092008 Company 7,578 7,437 7,2717,6667,568 Unconsolidated Affiliates 660587 525469 645 Franchisees 28,608 26,928 26,219 25,OBS24,225 licensees 2,168 2,169 2,1862,1992,167 Total 39,014 37,121 36,201 35,41934,605 Revenues (InMillions) Revenues 2012 20112010 Company Sales $11,833 $10,893 $9,783 Franchisee andlicense feesandIncome 1,800 1,7331,560 Total Revenues 13,633 12,62611,343 Source:

. lOt Restaurants Count"http://www.yum.com/lnvestors/restcounts.asp 11 "Yuml Flnancla aa-, " 2} "vuml Financial Data-Consolidated StatementsofIncome, http://www.yum.com/lnvestors/income_statement.as p 50 Armitage ran, "unlocking Africa:

Inlsld~KFtC"l~nIOCklnB-afrlca.lnslde.kfc, January 7 111 2013 http://www.afrlcaoutlookma g .com conen 51 Ibid.

r" dt 5Z "How Bill Gates Is Helping KFCTake eve ,op. , Page -10 301 InternationalBusinessStrategy 302 - 314·138·1 KFC's African Expansion: AIdedby'Value ChaIns'?

Africa Today Annexure II Africa -Luring Factors AfricaTomorrow • $1.6 trillion Africa's collective GOPin2008, roughly equaltoBrazil's andRussia's $860 billion: Africa's combined consumer spending in2008 316 million: thenumber ofnew mobile phone subscribers signedupinAfrica since 2000 60%: Africa's shareofthe world's total amount ofuncultivated, arableland 52: the number ofAfrican citieswithmore than 1million peopleeach 20: the number ofAfrican companies with revenues ofatleast $3billion. • $2.6 trillion Africa's collective GOPby2020 $1.4 trHJlon Africa's consumer spendingin 2020 1.1 billion: thenumber ofAfricans ofworking age In2040 128 million: thenumber ofAfrican households withdiscretionary incomein 2020 50%: theportion ofAfricans Jivingincities by 2030 An African 'GreenRevolution' couldraise agriculture production to$880 billion per annum by2030.

Discretionary SpendingPowerby2020 Share ofhou811holda ineach Income bracket %, millions ofl1our,ahOlds Page-11 100%= 163 Discretionary Income --- ..

_--._--- 21 29 32 aeete needs -, 34 2' 2000 2006 Households with .. ..

income >$5,000 Million Household Incomebrackets S ppp, 2005 244 ._-_ ...

_- ...

_.-._--- ..

_-- ..

_--- ..

_--------- Globnls (>20,000) COnsuming mick:llecrass .. ~~_~l~~.~::29.,~~) ._... __..

Emerging consumers (5,000-10,000) ...

_------._---._--._- .-.- ..

_--- ...

_----- ...

29 Basicconsumer needs (2.000-5,000) 2020F 1 Purchasll'l9 powerpantyadjusts tor pnce dltrerences Inklentlcal gOOds.1Cfoss countriestorenee d1"-,,, ,__••,., power In each country. ".,,"', ~IPU,....~1t1 Africa -Segmenting COuntries _______ .---- __--------------- ~K::FC~'SAFRICAN EXPANSION: AIDEDBY'VALUE CHAINS'?

314·138·1 KFC's African Expansion: Aidedby'Value Chains'?

GOP caple..

......

• 1600--1,000 ExportJ~r~p1la,20G8,$ •$1,001)...2,000 "'00' ~""""'=-----------.:::..:.:==:.---~ EQlJ

--.

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 6010 8090 100 liconomlc dlv.r.ifI~llon MiIl1Ul'aetl.IrJOg IlOll~

""" 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

!L.._-~::==~------;::===- Midstream oownstr ...m Source: Roxburgh Charles,et at, "The Uons onthe Move: TheProgress andPotentIal ofAfrIcan tccnomles", http://www.mcklnSey.com/lnSights/MGI/ResearCh/productlvltY-Competltlveness_and_Growth/Uons_on_t he_move,June2010 Page -12 303 304 International BusinessStrategy 314-138-1 KFC's African Expansion: Aidedby'Value Chains'?

Annexure III USAID andBill&Melinda GatesFoundation -African Focus USAJO GlobalDevelopment programme, works onthe following areas:

• Agriculture development • Emergence response • Family planning • Financial servicesforthe poor • Global libraries • Maternal, Neonatal&Child health • Nutrition • Polio • Vaccine delivery and • Water, sanitation &hygiene In Sub-Saharan Africa,Gates Foundation hadawarded grantto various partners undervarious programmes asmentioned below:

USAID issupporting itsAfrican partners asthey confront these challenges andembrace theirpotential. USAIDis focused on:

1. Boosting agricultural productivity throughtheFeed the Future Initiative, byaddressing theroot causes ofchronic hunger andpoverty andspurring economic growthina region withincredible resourcesandarable land 2. Strengthening healthsystems throughtheGlobal Health Initiative, sothat countries canhelp their children survive, overcome theancient threatofmalaria, give mothers thesupport theyneed togive birth safely and turn thetide against theHIV/AIDS epidemiconthe continent 3. Supporting democracy, humanrights,andgood governance, tohelp governments fightcorruption, expand spaceforcivil society, helpcitizens choosetheir leadership andstrengthen thetrend toward democratization inAfrica 4. Increasing resiliencetoclimate shocks,byhelping communities adapttoerratic rainfall andlonger, harsher droughts~weather effectsweknow willhitAfrica hardest and S. Leading quickresponses tohumanitarian crises,tosave lives andhelp prevent instability andloss, critical ina region pronetodestabilizing droughtsandfood emergencies. · 2009 andEarlier -510 • 2010 -SS · 2011-79 • 2012 -108 • 2013 -141 • 2014 -08 Bill &Melinda GatesFoundation Source.

1) "Africa -SupportIng aContinent onthe Rise", http://www.usald,gov/where~we~work/africa ~J. "Bill and.Melinda GatesFoundation -What WeDo", http://www.gatesfoundation,orgJ B.II and Mehnda GatesFoundation -Awarded Grants",http://www.gatesfoundation.orgJHow'We~ Work/QUlck-Links/Grants~Oatabase#q/region=sub~Saharan%20Afrlca Page -13 FromGATT tothe WTO Stalemate atthe WID:

TRIPS, Agricultural Subsidies,andtheDoha Round HARVARD I BUSINESS I SCHOOL 9·711·043 REV: APRIL 3,2012 ARTHUR A.DAEMMRICH Stalemate atthe WTO: TRIPS, Agricultural Subsidies, andtheDoha Round A rare sense ofcalm prevailed astrade ministers andWorld TradeOrganization (WTO)officials wrapped upaDecember 2011ministerial meeting,theninth negotiating sessionofthe Doha round.

Despite amajor global economic crisisthatcontinued towreak havocongovernment financesand employment, globaltradewasrebounding from its 2008 nadir. Therecession ledtotensions among countries andaccusations ofcurrency debasement. Butfew new trade barriers wereinstituted in the downturn, andtariff ratescontinued toconverge internationally. WTOmeetings inthe 19905 and early 20005 hadfeatured violentstreetprotests anddisagreements betweendeveloped and developing countries.Recentmeetings inGeneva, bycontrast, werewidely characterized as "normal." Writingina blog, WTO director-general PascalLamycelebrated thecalm: "There wereno surprises.

It was notabig jamboree, withthousands ofjournalists, hugelycostlyarrangements and sleepless nights.Butafeeling ofnormality, afeeling thattheWTO isasolid institution,"!

H was anopen question whetherthenormality enjoyedbyLamy andtrade ministers reflected success, TheDoha round ofWTO talkshadmade littleprogress in a decade ofnegotiations. Adding to the complexity, positionsofdeveloped anddeveloping countrieshadreversed, Whereas developing countrieswerereluctant tolaunch theDoha round in2001, by2011 most hadfollowed through withcommitments toenact intellectual property (lP) regimes andhadgrown impatient for the United StatesandEuropean Uniontoreform agricultural policies.Developed countries,however, were slowtoeliminate agricultural subsidiesandsought tariffreductions andtheremoval ofother trade barriers bydeveloping economies,especiaUyforchemicals, machinery, andelectronics.I Business leadersneeded tounderstand theWTO inorder todesign strategy inrelation totariff and non-tariff barriersandtoplan forglobal competition inlight oftensions between developed and developing nations.IFhad gained in strategic in~po~tance tomany industries. butitals~ attracted the critical attention ofnon-governmental organizations(NGOs)andwasastumbling blockto multilateral negotiations, Thisnoteupdates the HBS case, "TheWorld TradeOrganization," and offers perspective formanagers whentheyanalyze howWTO agreements willshape future competitive dynamicsintheir industries,3 T1 WTO tr d its roots toaJuly 1944 meeting of 44 allied nations inBretton Woods, New te ace '1I'.. U Id H hiP ti" tsagreed toestablish severalnewmulti atera instituncns tat wou govern amps tre.arcipan Professor ArthurA.Dilemmrich preparedthisnote as the basis forclass discussion.

, dF II ofHarvard College. Toorder copies orrequest permission 10reproduce materials,calll- Copyright e 2010, 2011,2012rn:slden~:OI ;u~~:hinBoslon,MA02163, orgo towww.hbsp.hiIrvard.edu/educators.This publlcoltionmay 800-545-7685, writeHarvard Busmess. add~S!ed ortrallSmitted withoutthepermission orHarvard BusinessSchool.

not bedigitized, photocopied, orotherwIse repruce, r- , ' 322 Case 28Zhejiang GeelyAutomotive's PurchaseofVolvo' In 2011 Geely Automotive wasstillarelatively unknown Chinese carmaker, but it had putinplace aplan designed to catapult it to international standards.Geelyhadstarted off manufacturing homeappliances in1986, and it had only been manufacturing automobilessince1997.But Geely's founder andchairman ofthe board, Shufu Li, had ambitious plansforGeely. Inarelatively shortperiod of time, hehad steered Geelyintobecoming thelargest privately ownedcarmaker inChina. Buthewould not stop there-he hopedtobring Geely upto world-class standards. Hewanted Geelytobe able tocompete with Daimler, Ford,andToyota, Mr.Libelieved thatonly by becoming asgood asthe best foreign brandscould Geely compete bothinChina aswell asinternationally.

He knew thiswould bedifficult, asindependent Chinese automakers areknown tohave problems inoperations, design, safety,quality, andbrand-building. Aspart ofthis plan, Geely's parentcompany, ZhejiangGeelyHoldings, acquired theiconic Swedish automaker VolvofromFord Motor Company in20 IO. This casepresents thesituation and challenges facedbyGeely asitattempts thisepic transformation fromrefrigerator manufacturing toworld- class automaker.

Geely's History Geely Motors wasbased inthe historically important city ofHangzhou, thecapital cityofZhejiang province.

Geely, whosenamedenotes fortuneandluck (en:U) in Chinese, wasfounded byMr. Shufu Li in1986. Geely's motto is"passion inprofessional dedication,innovation, communication andhard work.") Thecompany initially began bymanufacturing refrigeratorsandrelated acces- sories andbegan to manufacture motorcyclesin1993. In 1997 thecompany enteredtheautomotive industryasthe first private Chinese company approved bythe central government toproduce automobiles. In2005 Geely Auto- mobile Holdings Limitedlistedonthe Hong KongStock Exchange. By20II Geely wasamong thetop 10automakers in China interms ofmarket share.Thecompany oper- ated sixpower-train andcarassembly plants.Theywere located inLanzhou (Gansuprovince), Linhai(Zheji- ang province), Luqiao(Zhejiang province), Ningbo (Zhejiang province), Xiangtan(Hunanprovince), and Shanghai (seeExhibit I).This gave thecompany a production capacityofapproximately 300,000carsper • This casewaswritten by Yuan YiChen, Michael N.Young, andAllan K.K.

Chan fromHong KongBaptist University Thedevelopment of(his case was partially supported by the Chinese Business Cast!Re.veurch Centro atHong Kong Baptist University. Thepurpose ofthe case isto serve asabasis for classroom discussion ratherthantoillustrate eithereffective orineffective han- dling ofan administrative shuarion.Copyright C2011 Michael N.Young.

year.

Thefirm employed 12,000workers, including more than1,600 engineers andtechnical personnel. In addition, Geelyhadgotten thegovernmental approval to establish anew base inJinan ofShan dong Province in eastern China.Geelywasplanning toset upacom- plete vehicle production baseinHarbin, capitalofHei- longjiang Province,innortheastern China.

It was nearing the conclusion oftalks withtheHeilongjiang govern- ment. Thefirst phase ofthe project wouldhavecapac- ity ofaround 100,000 to150,000 vehicles annually. This would bethe automaker's eighthmanufacturing facility in China. Additionally, Oeelyhadsigned anagreement with Cixtcitygovernment ofZhejiang Provincetobuild a RMBI8.8 billion(US$2.81 billion)autoindustrial city with annual production capacityofone million unitsin the Cixi economic development zone." Geely produced automobiles underfivekeybrand groups: Oeely,Maple, Gleagte, Emgrand, andEnglon.

The firm wastheonly Chinese carmanufacturer tohave developed itsown range ofengines, whichhadcapaci- ties ranging fromIliter to1.8 liters, supporting auto- matic andmanual transmissions. By20I0 Geely was ranked asone ofthe country's top500 firms. Itwas a fully integrated independent autofirm withacomplete auto ecosystem fromdesign andR&D toproduction, dis- tribution, andservice. Geelybegan toattract attention as the company experienced rapidgrowth. Through abroad distribution networkconsisting of500 4S(sale, spare- parts, service, andsurvey) shopsandnearly 600service stations alloverChina,Geelysoldover 330,000 vehicles in 2009.

The Global Automobile Industry 2009 wastheworst yearforU.S. auto sales innearly 30 years. TheU.S. auto industry underwent aradical trans- formation in2009, oneofthe most turmoil-filled yearsin its more than1OO~year history. In2009 autosales inthe United Statesamounted to10,431,509 vehicles,whichwas a 21 percent decrease compared to2008 sales, 35percent compared to2007. TheBigThree leading American auto- makers werefacing historic challenges bothoperation- ally and financially. OMandChrysler tookthebiggest hits after bothwent through bankruptcy courtandstayed alive withgovernment aid.Fortheyear, OMsales were off 33percent from2008. Chrysler showedsomesignsof progress atshowrooms andwas helped byless-profitable sales tofleets, sucharental companies andmunicipalities, but still sold only 931,000 vehicles fortheyear, itsworst performance since1962.

Although Fordreported asales decline of15percent in 2009, ithad itsfirst gain inU.S. market sharesince 1995 thanks tostrong demand formidsize carslikethe Ford Fusion andcrossovers liketheFord Escape. Inthe