Sony, Hitachi and Canon survival strategies

A TALE OF THREE COMPANIES: THE SURVIVAL
STRATEGIES OF SONY, HITACHI ANO CANON
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glorious histories, are now simply outdated. Indeed, a recent
study conducted by
an electronic appliances analyst concluded that Japanese firms
make more than
half of the components used in the iPhone 5. Sony, Toshiba, and
Sharp provide
goods such as camera image sensors, memory devices, and
display panels to
the world leader in technology, Apple.
Japanese Crisis Management
Nevertheless, we cannot deny that the Japanese electronics
industry as a whole
is on a downward slope. Most firms in Japan share the features
mentioned
above, and so have been exposed to the same problems in recent
years.
However, they have not all reacted in the same way. The world
economic crisis
has made Japanese business leaders think about new ways to
adapt in a world
where the competition is increasingly global. Japanese firms all
prefer Japanese
management styles, but many of them have realized that they
need to change
and adapt faster to the rapidly evolving international business

environment.
And they have not all chosen the same strategies. The next
sections will
describe the cases of three major players in the Japanese
electronics industry,
as well as their survival strategies: these are Sony, Hitachi, and
Canon. Despite
similar roots, they are all attempting to adjust their businesses
in different ways in
a global market full of challenges and opportunities.
Sony
History
On 7 May 1946, Masaru Ibuka (an engineer) and Akio Morita (a
physicist)
invested the equivalent of ¥190,000 to start a company with just
twenty
employees. It was called "Tokyo Tsushin Kogyo" and was
established in
Nihonbashi in Tokyo. The company initially specialized in
research and
manufacturing ot telecommunications and measuring equipment.
The name
"SONY" came later and was created by combining sonus, which
is Latin for
"sonic," with "sonny," meaning a youthful boy with a free and
innovativespirit. It
as chosen for its simple pronunciation that could be easily
articulated In any
:nguage. The new name perfectly suited the company, which
wanted to project
the image of a group of young people with energy and passion

for unlimited
creation.
Sony developed strongly after 1954, when the company
obtained a license to
d t . t s a basic electronic component which had been Invented
Inpro uce ransts or , .'
., before The following year it began seiling the first
radioAmerica SIXyears . .
d t· Iy with transistors In 1960 Sony Amenca was created,
andreceptor ma e en Ire ., . I d
th pany opened subsidiaries in Hong Kong and SWitzer an
.shortly after, e com . . . h
. mbol of power the Sony bUilding was opened In t e
SIX years later, as a sy ,
5
271
"""'f'
274 International Business Strategy
the interconnectivity between the c
imaging, games, and mobile techno
I! the upcoming years. They are proje
operating income in 2015. As for th
abandon them or create partnershi

On 27 October 2011, Sony took full
producing mobile phones, created t
companies, Sony and Ericsson. Th
to Tokyo in order to speed up the d
take a major role in the smartphone
start. To achieve this, Sony will rely
name is derived from the word "exp
released in 2008. The start of the X
is now developing the connection b
media to increase the attractivenes
Entertainment Network to its Xperia
music, and games to the users of th
Concerning its TV division, Sony en
Samsung in December 2011. This
the costs of the TV branch. The co
1'1'
develop new technology quicker an
announced a partnership with Pana
I display OLEO.' This uses less pow
I
On 2 July 2012, Sony announced t
leader in cloud-gaming. According t
Entertainment, this acquisition was
of Gaikai with Sony's gaming platfo
consumers. This partnership may b
the Playstation, Playstation Portabl
In September 2012, Sony bought s
in the digital imaging sector. The ob
of its medical equipment division, a
I ten years. Hirai wants to continue t

opportunities in the medical sphere.
imaging technologies in order to ga
sector.
Sony's smallest business units hav
example, Sony's chemical products
J
OlED: Organic light-emitting diode
II
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onsumer goods of the company. Digital
logy will be the spearheads of the group in
cted to generate 85% of the company's
e other sectors, the firm pians to either
ps with other companies.
control of Sony Ericsson, a joint venture
en years earlier by the then-separate
ey pian to move the subsidiary from Sweden
ecision-making process. The group wants to
market, led by Apple, of which it missed the
heavily on its smartphone line, "Xperia." The
erience," and the first phone in this line was
peria line was rather disappointing, but Sony
etween its smartphones and other forms of
s of the phone. By transferring Sony
line, Sony will be able to promote its movies,
e phones.
ded the joint venture in LCD technology with

operation is part of a plan to drastically reduce
mpany is also making strategic alliances to
d more efficiently. On 25 June 2012, Sony
sonic to jointly develop the next-generation
er while providing a better quality image.
hat it had acquired Gaikai Inc., the world
o Andrew House, CEO of Sony Computer
made to combine the technological strength
rm to provide new experiences for
e profitable for many Sony products such as
e, and the smartphones.
hares of 11.46% in Olympus, a major player
jective was to gain access to the technology
market expected to reach €75 billion within
o pursue merger and acquisitions
Sony can benefit from its strengths in digital
in a significant competitive advantage in this
e also been inciuded in the restructuring. For
business was recently sold off, and simiiarly,
8
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TALEOFTHREECOMPANIES;THESURVIVALSTRATEGIESO
f SONY.HITACHIAND CANON____ -!'_Il&.I& ......275
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in the field of automotive battery and energy storage, Hirai said
that the group
needed to change the current situation because it had several
shortcomings.
The group is also increasing its presence in emerging countries.
For example, in
Brazil, Sony IS an official partner of the 2014 World Cup. The
objective is to
Improve brand awareness in a country where consumer
electronics sales are
expected to increase sharply. In India, Sony Pictures Television
is already the
provider of some of the top-rated television channels in the
market. Hirai also
wants to use the BRIC economies as a base to strengthen Sony's
supply chain.'
Hitachi
History
Hitachi was founded in 1910 by Namihei Odaira, an electrical
engineering
graduate ofTokyo Imperial University. The company was
initially a shop that
repaired electrical equipment. The origin of the name is a
combination of the two
kanjis, hi (meaning sun) and tachi (meaning rise). It took
inspiration from the
Rising Sun Flag, the military flag of Japan. Hitachi's first
product was a five-
horsepower induction motor that was mainly used in copper
mining. In 1924, the
company manufactured Japan's first large-scale electric
locomotive. In 1932,

Hitachi started to produce elevators and completed its first
electric refrigerator. In
the 1940s, the company developed water turbines and power
excavators. The
Second World War slowed the activities of the group, but it
recovered quickly and
in 1958 the company was awarded the grand prize for its
electron microscopes
at the Brussels World Fair. A year later, Hitachi America was
established. During
the 1960s, Hitachi was Japan's industrial and technological
backbone. The
company developed an experimental nuclear reactor and
constructed the first
cars of the famous Japanese high-speed train: the shinkansen. It
also launched
consumer products such as air conditioners and washing
machines. In 1971, the
company developed the 19o storage unit and, soon after, built
one of the most
powerful nuclear power stations in Japan. At the end of the
1970s, Hitachi
succeeded in trialing the world's first optical transmission
system.
Due to its success, the company was listed on the New York
Stock Exchange in
1982. Two years later, it started mass-producing the famous
256-kbit DRAM. In
order to maintain its technological dominance, in 1989 the
company opened four
large R&D centers, two in the US and two in Europe. In the
1990s, it launched a
subsidiary in China and established a new record with a
computer that had the
world's fastest processing speed. Another record was broken

dUring the same
decade with the shinkansen, which could reach speeds of up to
270 km/h. In
2002, it was the first company to develop a silent laptop with a
cooling system,
and in 2007, Hitachi developed EMIEW2, a small robot capable
of mteractmg
BRIC: Brazil Russia India China
9
276 International Business Strategy ----------
313·134·1
with its environment. In addition, in order to reduce Japan's
dependence on rare
metals the company developed a method of recycling them. The
company
I ' . tely 323 000 people around the world and its
headquartersemp oys approxrma ,
are located in the Chiyoda district of Tokyo.
Like many Japanese corporations Hitachi has always been eager
to dive~sify into
different business fields. Here is the weight of each Hitachi
business unit In 2012
(source: Annual Report 2012) .
• W1IDrmIllio>ft&--Yl,7&lJ'1lUDoI.Porotel~_
va» .• ~

&OIlIIl1rinI~_'~"'1_
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.boc~sv.-.~
",101,71llfg1,
.eo.- ....Ird......,
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'dll.6t61t1
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1a.,...lMdoIac_ ~d...._.-......."",-
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'f{1,21~l:6lII
1&T Systems: Software, servers, ATMs, system integration
Power Systems: NuclearlThermaliHydroelectric power plant,
wind power
generation systems
Social 1&1Systems: Railway, escalators, elevators, industrial
machines
Electronic S&E: Semiconductors, medical electronics
equipment, LCOs
Construction Machinery: Hydraulic excavators, wheel loaders,
mechanical
cranes
High Functional M&C: Wires, cables, magnetic components
AS: Car information systems, engine management systems
C&D: Batteries, information storage media

Digital M&C Products: Refrigerators, washing machines, air
conditioning
Financial Services: Leasing, loan guarantees
Others: Logistics, property management
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STRATEGIESOFSONY,HITACHIANO CANON
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Hffachim Recenf Yeam
According to the Fortune Global 500, in 2012 Hitachi was the
largest Japanese
electronics company in terms of revenue. However, the
corporation has recently
seen turbulent years and has had to modify its business
activities to get ahead in
a cornpennve envronment The evolution of Hitachi's stock price
shows that
after a net decrease in the value of shares, beginning from 2008,
the stock is
now on an upward trend (see appendix). The company saw four
consecutive
years of losses but returned to profit in 2011 despite a decrease
in total revenue
(see appendix). The consequences of the 2007 financial crisis
were serious for
Hitachi, because there was a sharp decline in demand for most
of the company's

products.
At the beginning of 2010, Hitachi was experiencing the worst
period of its 102-
year legacy. In April 2010 Hiraoki Nakanishi became Hitachi's
president and he
implemented a restructuring of the company that resulted in two
years of record
profit. Nakanishi declared that to become a global player, the
key factor is not
revenue, but profitability. This statement serves as a guide to
the group's
transformation. Indeed, Nakanishi is trying to diminish the
importance of
consumer-related goods such as computer parts and flat-panel
TVs to focus on
global infrastructure projects such as power plants, rail lines,
and water treatment
facilities. Consumer business was forecast to account for less
than 10% of
Hitachi's revenue in 2012, half of its share the previous year. In
parallel, its
infrastructure business will account for 80% of its profit this
year.
Departing from Japanese Management Traditions
One of Hitachi's main concerns was its hard disc business.
Problems began to
arise in 2002, when Hitachi bought IBM's HOD business to
merge it with its own
HOD division. However, the new unit did not make any profit.
This is why in 2004
Nakanishi, a talented manager, was chosen to identify the main
reasons why the
group was losing money on this division. After two months, he

declared that it
was badly managed and that the only solution was to manage it
himself.
He realized that there were problems with quality and said that
60% of the hard
disk drives produced by Hitachi were not suitable for use. He
hired experts from
a competitor to reorganize the production and manufacturing
lines. The business
unit became profitable again in 2008.
B t i 2010 on becoming president of Hitachi, Nakanishi decided
that HOD
should no I~nger be one of the company's core products, despite
the fact that it
t· 10" profit margins In March 2011, he sold the unit to
Westernwas genera Ing 10 '. . .,
Digital for $4.8 billion. By doing so, Nakanishi showed that all
the business Units
'ncluded in the restructuring. He arranged the sale by arguing
of the group were I .
that the HOD industry was very fast moving and not well suited
to a large
11
277
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278 InternationaJBUSjnes5Strategl~Y _
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conglomerate. Among the Japanese pUblic this deal was not
perceived ,:,ell. .
According to traditional Japanese ideas, members of a company
group (Including
units and their employees) should be supported for as long as
possible. The Idea
of selling a profitable business was viewed very negatively in
the Japanese press
and left many observers stunned.
But Nakanishi then took even bolder steps. In order to reinforce
its strength in
the energy sector, Hitachi bought Horizon Nuclear Power
(HNP), the British
builder of nuclear power plants, in November 2012. Since the
Fukushima
disaster, the nuclear market in Japan has been idling. The
takeover of HNP is
intended to make it possible for the group to expand this
activity abroad. Hitachi
judges the international potential of nuclear energy to be
promising, and Britain is
one of the main markets in Europe. Hitachi plans to build two or
three 1,300-
megawatt plants in England by the mid-2020s.
On 29 November 2012, Hitachi created a partnership with
Mitsubishi Heavy to
combine their thermal power system businesses. Nakanishi said
that this

cooperation would help both firms to become global leaders in a
tough business
climate. Moreover, they want to become big enough to compete
against
overseas rivals such as Siemens and General Electric. Hitachi
will take 35% of
the newly created company. It will develop, manufacture, and
sell turbines,
boilers and other equipment for power and geothermal plants.
The deal is
supposed to be completed in 2014.
Nakanishi also wants to reduce the costs of the conglomerate.
20% of
employees have been let go in under three years, and in April
2012 Hitachi
delisted from the New York Stock Exchange because the low
volume did not
justify the cost.
Hitachi is also looking outside Japan to stimulate growth.
Activities abroad now
account for 57% of the revenue and 65% of the total employees.
The company
plans to develop procurement in other countries where prices
are about 40%
lower than Japan. A high priority for Hitachi is India. The group
wants to triple its
activity there before 2016. India needs infrastructure and
Hitachi is strong in this
respect. Hitachi also wants to use India as an export center for
Africa and the
Middle East, two other places where the demand for
infrastructure is supposed to
increase greatly in the near future.

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Canon
History
Canon was founded in 1933 by a group of young people in a
small apartment in
Ropponql, a district ofTokyo. They wanted to produce high-
quality cameras to
compete against the German firms who were leading at that
time. They quickly
developed a camera prototype called "Kwanon" and a year later
the Hansa
Canon, Japan's first-ever 35mm tocal-plane shutter camera, was
born. The
company continued its growth over the next few years by
continuously
developing technologies in the optical sector. In the 1950s,
Takeshi Mitarai, the
president of Canon, built a corporate culture which took as its
key principle
human respect and compassion, in dealings both with employees
and
customers. In 1955, Canon entered the American market,
opening an office in
New York. Two years later, the company set up its sole
European distributor,

Canon Europe, in Switzerland. At the end of the 1960s, exports
already
represented 50% of the total sales of the company. During the
same decade, the
Japanese firm was looking to diversify in order to reduce risks.
In 1964, the
company entered the office equipment market with the world's
first 10-key
electronic calculator. In 1967, the firm introduced a new sloqan
to illustrate its
activities: "Cameras in the right hand, business machines in the
left." Three years
later, Canon developed the first Japanese plain-paper copying
machine.
Up until 1970, Canon was achieving incredible growth.
However, in 1974 the
company struggled with financial problems due to the oil shocks
and a defective
calculator display component. The year after, for the first time
in its history, the
company did not pay any dividends. To compensate, Canon
unveiled an
ambitious project based on innovation that aimed to transform it
into an
"excellent global company." Under this plan, the company
launched new
products that had never been seen before, such as a laser printer
with a
semiconductor and a Bubble Jet inkjet printer. After its 51"
anniversary in 1988,
Canon started to promote environmental activities, such as toner
cartridge
recycling, in addition to globalizing its development sites. In
the mid-1990s,
Canon was still developing outstanding technologies but its

debts became too
large. Fujio Mitarai became the sixth president of Canon in
1995, and a year later
he launched a new plan to optimize the financial structure of the
company. The
focus now was not on sales but on profit. In the 2000s, Canon
maintained its
world dominance in the digital camera market and has stayed
profitable every
year since. The company currently employs 200,000 people
around the. world, .
the vast majority of them in Asia. Here IS the weight of each
Canon business Unit
in 2012 (source: Annual Report 2012).
13
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IS: Digital cinema cameras,
digital camcorders, digital
compact cameras and digital
single lens reflex cameras.
• Imaging System
• Office
• Industry and Others
Office: Office network

multifunction devices, laser
printers, solutions software,
toner, photosensitive drums,
toner cartridges.
I&Others: semiconductor
lithography, LCD
Canon dominates the market in most of its activities and has
strong brand
awareness. According to Forbes, in 2012 Canon was the 351h
most powerful
brand in the world. It is ranked first among Japanese companies
in the field of
technoloqy." Canon is also a world leader in R&D; the company
held the most
patents in the US after IBM and Samsung in 2011.
Innovation Leader
As mentioned above, Canon is a global leader, making a profit
every year. Due
to its cutting-edge products, few competitors-besides its
compatriot Nikon-can
seriously compete. These good results were achieved thanks to a
management
style based on a culture of excellence. Canon is active in just
three different
areas, and as such is more reactive to market change. The
management of
Canon wants to stay strongly focused on its core business. Since
Canon only
focuses on a small number of industries, the company has no
choice but to strive
to be number one in all of its endeavors.

In the past few years, Canon has faced decreased revenues due
to the financial
crisis but has stayed profitable (see appendix). This contrasts
with most of the
other Japanese firms active in the electronics sector.
Despite such high aspirations, the group is conscious that it
cannot rely solely on
its own labs and that it will have to acquire foreign technology.
That is why, in
April 2012, Canon bought Gee, the Dutch printer maker. This
take-over was an
ambitious plan for Canon. The company paid $1 billion, its
largest ever purchase.
In acquiring Gee, Canon had two main goals. It wanted to
strengthen its core
activities and to diversify the risk of currency fluctuation. By
keeping the
manufacturing base in the Netherlands, Canon would spread the
currency risk
between the yen and the euro. With the same logic, in
September 2012, Canon
Only Toyota and Honda have a better ranking.
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bought Iris, a Belgian company specializing in software
solutions and information
scanmng.
Canon is also looking to optimize its supply chain by producing
outside Japan. In
June 2012: the company established a subsidiary in Brazil to
manufacture
compact digital cameras. Brazil is considered a lucrative place
to invest, as it is
forecast to grow rapidly due to hosting major sporting events,
such as the FIFA
World Cup and Olympic Games. Moreover, Brazil has the
fourth-largest digital
camera market after the US, China, and Japan. Increasing brand
awareness in
emerging countries is one of Canon's main concerns. In India,
which is an
important target for the Japanese firm, Canon rolled out a chain
of branded retail
stores called "Canon Image Square." The concept is very similar
to the famous
"Apple Store." Customers are able to handle Canon digital
cameras and printers
to experience them before deciding to purchase them. The group
wants to
increase the number of these stores in India from 50 at the end
of 2011 to 300 in
2014.
Currently, everything seems to be going well for Canon; it is
making a profit and
is leading in many fields. However, the firm knows that being
successful today
does not necessarily mean being successful tomorrow. So the
management is

constantly trying to adjust its business activities to fit current
trends. It is also
preparing the company in anticipation of future troubles. Even
if Canon is not
directly threatened by any foreign conglomerates such as
Samsung, another
threat is already making Canon's strategy change.
Canon's Biggest Fear: Smartphones
The main advantage of smartphones is that they remove the
need to carry other
pocket devices. Unfortunately for Canon, one of the devices
smartphones are
beginning to replace is the digital camera. By proposing
integrated cameras with
an increasing number of megapixels, the next generation of
smartphones may
put fear into Canon's shareholders. The Japanese company has
already reduced
its forecast in revenue and profit for the coming years, mainly
due to competition
with smartphones. For Canon, being focused on fewer areas of
business has
been a strength until now, because it has been able to maintain
and perpetuate
its leadership. However, if one of these businesses is doomed,
Canon may face
huge difficulties in the near future.
Finding New Business Opportunities
However, Canon's management is sharp and has already started
to anticipate
how the group will adapt to this new threatThls ISwhy the

company ha~
. t if d fforts to enter into two new bUSiness domains. medical
Imaging and
In ensl Ie e ld . . t .
. II' t b t In 2011 Mitarai the president of Canon, sal In an In
erview
tnte Igen ro 0 s. " .. .
J
-r: s that the company plans to expend ¥1 trillion In mergers and
for the apan "me
15
282 International Business Strateg~y~ _
313-134-1
acquisitions within five years to improve its presence in these
two sectors. He
explained that he wanted to benefit from the strength of the yen
to acquire
companies abroad. For its medical division, the company wants
to focus on
diagnostic devices. The US-specifically Maryland, where one of
the top
"biotechnology clusters" is situated-will be where the R&D will
be conducted.
Canon has also launched a collaboration with the University of
Maryland to
develop an automated system providing infectious disease
diagnostics. It will
simplify the duties of the clinical staff and significantly

improve the speed and
efficiency of such activities. The goal of this partnership is to
harness the
strength of both institutions, to innovate, and to increase
Canon's commercial
portfolio.
With regards to intelligent robots, the main goal pursued by
Canon is the
automation of production. Japan is a world leader in robotics
and Canon wants to
be a major player in this sector. Instead of relocating all
activities to countries
where labor is cheap, Canon also wants to pursue the robot
manufacturing of
several products in Japan. The main goal is to cut costs. The
company wants to
move towards machine-only production in the next few years.
However, the
chairman has said that jobs will not be cut, and that workers
will be transferred to
do new kinds of work.
However, even if the fear of smartphones has pushed Canon to
find new
business opportunities for the future, the company still believes
that the digital
camera market remains promising. The belief is that by
constantly innovating it
can compete aqainstsrnartphones. During the Consumer
Electronics Show in
2013, Canon presented a new version of the digital camera: the
PowerShot N6
The goal pursued with the launch of this device is to create a
new infatuation for
consumers who threaten to abandon digital cameras for

smartphones. In
addition to unique design and ergonomics, the device provides
the ability to take
high-quality photographs, personalize them, and then publish
them directly to
social networks via Wi-Fi connectivity. The device also offers
iOS and Android
support. With the PowerShot N, Canon hopes to reinvigorate the
digital camera
market, where its popularity is slowly declining.
Japanese Management Taking Different Routes
As we have seen, Sony, Hitachi, and Canon have similar
cultural backgrounds;
they are traditional Japanese corporations and are confronted
with a world that is
becoming increasingly competitive. Despite this they have
adopted different
business strategies in order to grow.
See appendix for more details
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In conclusion, these three cases refiect the seismic changes that
the electronics
industry in Japan is undergoing. Panasonic, Sharp, Toshiba and
many others are

also trying to change their core business strategies because of
similar problems.
Thus, the general conclusions that can be drawn for the three
companies are
also valid for much of the sector overall. Being profitable in
this new global
environment is the main concern of Japanese firms, a factor
with which they
were not confronted during previous decades. The decline can
thus be an
opportunity for them to entirely rethink their business model
and management
style. If they succeed, these companies could emerge stronger
and regain their
glorious pasts; if they fail, Japan could lose its image as a world
hub of high-tech
eiectronics.
17
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284 International Business Strate~g':.y _
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Questions
> What are the main reasons for the decline of the Japanese
electronics
industry?
> Why do so many Japanese companies find it difficult to
succeed in the
globalized business world?
> Which business strategy did each of the companies apply?
> Are these strategies Japanese or Western?
> Do you think they will be successful?
> What management advice can you give to the three
companies?
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HOWARD, S. et al (2002). Global strategy lessons from
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19
313-134-1
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Gaikai Inc., a
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022803615?aeeountid=12156
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http://www.reuters.comlarticleI2012/10/30/us-
horizon-h itach i-idUSBR E89TOBB20 121030
SIMMS, J. (2009). South Korea's Rising Sun. Wall Street

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Canon official website. http://www.canan.com
Google finance. http://www.gaogle.comlfinance
Hitachi official website. http://www.hitachi.com
Morningstar. http://www.mornlngstar.com
Sony Mobile official website. http://www.sonymobile.com
Sony official website. http://www.sony.net
20
A TALE OF THREE COMPANIES: THE SURVIVAL
STRATEGIES OF SONY, HITACHI AND CANON 287

313-134-1
Appendix
Sony stock
60
.,
"
20
2007 aooe 200; 2010 acr i 2012
(Source: Google Finance)
Hitachi stock
""
60'
2007 200B 2009
2010 2011 2012
21
313-134-1

Canon stock
60
2007 2008 2010 2011 2012
Sony results
(In JPY Million)2008-03 2009-03
Revenue 8,845,747 7,729,993
Net income 368,332 -98,938
20 I0-03 2011-03 2012-03
7,2]3,9987,18],2736,493,212
-40,802 -259,585 -456,660
(Source: Morningstar)
Hitachi results
(In JPY Million)2007-03 2008-03 2009-03 2010-03 2011-03
2012-03
Revenue 10,248,483 ] 1,194,237 10,000,369 8,968,546
9,315,807 9,387,587
Net income -32,754 -57,932 -787,337 -106,961 238,869 103,958
Canon results
(In JPV Million) 2007-03 2008-03 2009-03 20 I0-03 2011-03
2012-03
Revenue 4,496,368 4,090,084 3,209,20 I 3,706,901 3,557,433
3,493,151

Net income 489,997 308,845 131,647 246,603 248,63 224,834
22
_-------------.:A:..'T'.':A':.'LE:-
':o':.F~TH:'."R~EE:.'C::O~M:f'IPA~N~IE~S.~----.
.THESURVIVALSTRATEGIESOFSONY,HITACHIAND
CANON
Sony Xperia Z
Design:
Characteristics:
313·134·1
5" 1080 x 1920p full HD Reality Display with Mobile
BRAVIA® Engine 2
13MP Fast Capture camera with Exmor RS for mobile, the
world's first
image sensor with HDR video for smartphones
Dust and water resistant (IP55 & IPS?) with a durable glass
display
1.5 GHz asynchronous quad-core Snapdragon S4 processor with
2GB
RAM
Battery STAMINA mode improves your standby time by at least

4 times
One-touch functions enable consumers to easily share music,
photos and
videos from their smartphone to an array of NFC-enabled Sony
devices
LTE, 4G for superfast entertainment
A unique OmniBalance design with subtly rounded edges and
smooth
reflective surfaces on all sides
(Source: Sony Mobile)
23
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® allows you to wirelessly transfer your images
to social networking
sites through CANON iMAGE GATEWAY#; to a PC or upload

virtually anywhere
on your iOS® or AndroidTM device" with the free download of
the Canon
CameraWindow app".
• The convenient Mobile Device Connect Button allows you to
connect to your
AndroidTM or iOS® device" for quick and easy sharing.
• New Creative Shot mode uses composition, color and lighting
from your original
image to create five unique images with an artistic fiair.
• Newly designed 2.8-inch capacitive, tilt, touch panel LCD;
lens shutter; and zoom
ring offer users a unique and creative way to capture photos.
• 8x Optical Zoom and 28mm IMde-Angle lens with Optical
Image Stabilizer
reduces camera shake so you achieve brilliant images.
• 12.1 Megapixel High-Sensitivity CMOS sensor combined with
a DIGIC 5 Image
Processor creates the Canon HS SYSTEM for improved low-
light performance
up to ISO 6400 and enhanced image quality.
• Capture stunning 1080p Full HD video with a dedicated movie
button, plus zoom
while shooting.
• Intelligent IS automatically chooses from six different modes
to optimize image
stabilization for the shooting condition.
(Source: Canon official website)

24
__________------------------------~KFC'S
AFRICANEXPANSION:AIDEDBYVALUECHAINS'?
314-138-1
KFC's African Expansion
Aided by 'Value Chains'?
Case Study
This case was written by RaJan Shah, Amity Research Centers
Headquarters, Bangalcre. It is Intended
to be used as the basis for class discussion rather than to
illustrate either effective or Ineffective
handling of a management situation. The case was compiled
from published sources.
© 2014, Amity Research Centers Headquarters, Bangalore.
No part of this publication may be copied, stored, transmitted,
reproduced or distributed in any form
or medium whatsoever without the permission of the copyright
owner.
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-292 International Business Strategy
314-138-1
KFC'sAfrican Expansion: Aided by Value Chains'?
~~r21r~~i~~(,!,RTTR.
BANGALORE
Author: Mr. Rajan Shah
KFC's African Expansion: Aided by 'Value Chains'?
Abstract: Yum! Brands (Yuml), based in Louisville, Kentucky,
USA, was world's leading restaurant
company, operated through KFC, Pizza Hut and Taco Bell
brands. These brands were specialised in
chicken, pizza and Mexican-style food respectively. Among all,
KFC was an early mover in the African
market by opening its first restaurant in South Africa in 1971.
With the encouraging success in South
Africa, KFC entered Namibia, Botswana and Swaziland. In

2009, KFC entered Nigeria via franchise
route. Meanwhile, in 2011, total restaurants count in South
Africa touched 660. In the same year,
moving ahead with its pan African growth plan, KFC entered
Kenya, Ghana and Zambia. By end of
20l2, KFC had 63 outlets in the New African Markets and 900
outlets in South Africa, Egypt, Morocco
and Mauritius. In addition, KFC planned to enter Zimbabwe,
Tanzania and Uganda, the Democratic
Republic of Congo, Ethiopia and Senegal. In such an unbridled
expansion, apart from the govern ment
protectionism and regulations, KFC faced difficulties in
managing supply chain as small farmers in
Africa were unable to supply quality and quantity of chickens as
per KFC's standards. In such a
scenario, according to experts, the 'Value Chains' approach for
small farmers mooted by The US
Agency for International Development (USAIDj and Bill &
Melinda Foundation (Gates Foundation)
would indirectly benefit KFCmore than the small farmers, in the
long run. Given such scenario, how
KFCwould chart its future expansion in Africa, remained to be
seen.
Pedagogical Objectives
The case study helps to understand and analyse:
o Growth of KFCin Africa
o Expansion aided by 'Value Chains'
o Future Challenges.
Case Study
"Africa is undoubtedly one of the fastest growing regions
globally and KFCis fully committed to
harnessing this opportunity and bUildinga sustainable business

model on the continent. 1/1
- Bruce layzell, General Manager of New African Markets, KFC
"A~0 mar~~t leader in the QuickService Restaurant industry, we
are excited to take this leap forward.
It IS ou~ VISionto s~1Iour great original recipe chicken right
across the continent _ tnars a bil/ion
people In 54 countries. Fortunately it's a billionpeople who love
chicken and we'lf n w be able to give
them the best tasting chicken."2 0
- Keith Warren, Managing Director, KFCAfrica
1 "KFCto EJCpandSteadilv Into AfrIca",
~ttP://WWW.kfc.co.za/zone/post/kfc-to.eKpand.steadilV-lnto-
afrlca/. January is" 2013
"KFCEJCpanslon tn Africa to be So Good",
http://WWW.kfc.co.za/zone/post/kfc-eJCpansIOn-
ln_africa.to_be-so-gOOd/. January 23'd 2012
tIC 2014, AmIty Research Centers HQ, Banga1ore. All rights
reserved,"
Page-1
--------------- --
--.. -------------------------.:KFC'S
314-138-1

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

KFC in Africa: An Overview
Yuml Brands Inc. (Yuml), based in Louisville, Kentucky, USA,
had nearly 40,000 restaurants in 125
countries. In 2012, Yum! was ranked at 201 position in
FORTUNE 500 list with revenues of $13 billion.
Being world's leading Restaurant Company, key brands of Yuml
included KFC, Pizza Hut and Taco
Bell. These brands were specialised in chicken, pizza and
Mexican-style food categories respecnvetv."
Among its key brands, KFCwas reputed as world's most popular
chicken restaurant chatn."
KFC was founded by Colonel Harland sanders (Colonel), a
founder and visionary, who created world
famous recipe by using herbs and splces." By providing an
excellent quality of fried chicken, in 1955,
Colonel decided to foray into chicken franchisee business, With
his business acumen, Colonel had
more than 600 KFC franchises In the US and canada. But in
1964, Colonel sold Its US operations to
group of investors including John Y. Brown Jr. for $2 million.
With such management overhaul, KFC
went public in 1966, by listing itself on the New York Stock
Exchange. In a major development, in
1969, PepsiCo (PepsiCo) Inc. acquired the company and later,
in 1997, PepsiCo decided to spin-off its
quick service restaurants business. This spin-off resulted into
the formation of an Independent
restaurants company named Trieon Global Restaurants Inc.
known as Yuml.
u
KFC was known for its
Original Recipe", Extra Crlspv'", Kentucky Grilled Chicken",

Extra Crispyr" Strips and Extra Crispy"·
Boneless, with home-style sides, Hot Wings"', and freshly made
chicken sandwiches."
3 "About KFC',http://www.kfc.com/about/ .
4 "Asia Population 2014",
http://worldPopulatlonreVlew.com/contlnenu/asia-populatlon/
5 Schreiner Bruce "KFCtoDoubleSizelnAfrlca", th
http://www.hufflngtonpost.com/2010/12/08/kfc-ln-afrlc~-plans-
to-dO_nJ93976.html. August 12 2010
B Moorad Zeenat "KFCEager to spread its Wings In Africa, h
http://www.bdll~e.co.ZlI/buSlness/retall/2013/01/14/kf.-eager-
to-spread-lts-wlngs-lo-afrlca, January 14' 2013
7 "KfC to Double SizeInAfrica", op.clt.
8 p kAI "How BillGates is HelpingKFCTake over", III"II ex, h j
om/."",onment/2014/01/kf,_afritil<hlckeo-usald-gates-
foondatlOn, January 10 2014
http: www.mot er cnes.c "
'''About Yumt Brands", http://www.yum.com/company/
til "About KfC",op.cit.
l1'bid
H ~coione' Sanders",
http://colonelsanders.com/hlstory_,oloneISanders.asp
U "KfC", http://www.yum.com/brands/kfc.asp
Page -2
..... 2;;;;,;;9;..4.;.._f-_I_nt_ernatlonal Business S;~tr~at~e~g~y
_
314-138-1

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

in South Africa since 1971 and so almost
all of our consumers grew up with it and they know it, it's a
household name, in many parts of Africa
that is not the case they may not have ever heard of it ever.//16
KFC's African Voyage
Observers noted that when a CEO of KFC's holding company
visited South Africa with his family for
safari tour in 19605, he was lured by the development of the
country. After going back, such incident
resulted into KFC's debut into South Africa in 1971. With the
significant success in the South African
market, KFCdecided to foray neighbouring countries such as
Namibia, Botswana and Swaziland. With
the beginning of new millennium, KFCdecided to expand its
footprint in North Africa. According to
Keith Warren (Warren), the then MO, African Operations, KFC,
"South Africa was just too much of a
prospect in terms of the further development of [the] market
that we didn't really want to distract
ourselves taking the focus further north.v"
In 2007, in addition to North Africa, KFC identified business
opportunities across African continent,
and as a result, in December 2009, KFC opened its first
restaurant in Lagos, Nigeria.1I KFC entered
Nigerian market via Devvani International Nigeria Limited
(Oevyani), a franchise holder for KFC in
Nigeria. According to Vishal Kapur (Kapur), CEO, Devyani,
"Since KFCjoined the Nigerian market, it
had continually upped the stakes in the provision of freshly
made food that met international quality
standards." Since its entry into Nigerian market, KFChad
opened seven outlets. In 2011, KFCdecided
to open another 19 new service centres, with an investment of

NGN19 1.5 billion. To fuel such
expansion, Devyani had launched 'More Food, More Gifts'
promotional activity in Nigeria.
Commenting on such promotional activity, Kapur said, "We are
lnvlting all our customers to come
u "1999 Annual Report - Yuml",
www.yum.com/lnvestors/annualreport/99annualreport/Pdf/1999
AnnualReport.pdf
:: "2012 Annual Re~rt 2012- Yuml",
http://www.yum.com/annualreport/pdf/2012yumAnnReportPdf.
2012
Moorad zeen~t, Famous Brands Alms to Cash In on Africa
Splurge",
http://www.bdllve.to.za{africa/africanbusl
ness/2013/D7/02/famous_brands_a lms-tc-ca sh-i n-cn-efrtce-
splu rge July 3rd2013 ,
17 Marin race, "KFC'sAfrican venture",
~.~:~/www.howwemadeitinafrlca.com/kfc%E2%80%99s-
afrlcan-adventure/1S151/, February 2i'd 2012
If It denotes Nlger1an currency Naira.
Page- 3
-
__ ------------ -!KFC'S AFRICAN EXPANSION: AIDED BY
'VALUE CHAINS'7
--... ----

314-138-1
KFC's Afrlcon Expansion: Aided by 'Value Chains'?
and enjoy the 'so good' experience of KFC. Nigerians will
always enjoy the same quality of delicious
meals from KFC as obtained anywhere in the world. This Is our
promtse.?"
On the, s,uccess of KFC's Nigerian operation, Warren quoted,
"KFC was very well received In Nigeria.
D,ur on,glnal d,evelopment plans for Nigeria were quite
conservative, and within slx weeks, I was [In
discussion] with the franchisees, and they were saying, 'Forget
that, we are now going to build as
many stores as we possibly can'. We are finding that the only
limiting factor we've got In Nigeria right
now is actually chicken supply, and finding suppliers who are
able to meet our global quality
standards in sufficient quantity.,,21 KFC also planned to offer
seafood in Nigeria. Giving out the
rationale behind such offering, Bruce Layzell (Lavzell], General
Manager of New African Markets, KFC,
said, "KFC customers around the world enjoy a varied menu
obviously coupled with some key brand
defining elements like our Original Recipe' chicken. Our
outstanding Fish Zinger" burgers and Zinger
Shrtmps'" are a way of bringing diversity to our menu but with a
familiar meat block that we know
Nigerians love. Nigerians are very much part of the global
village and they demand world class
products, world class service and world class experiences. At
KFC we strive to deliver on this need
and we are uncompromising to ensure, through our products,
customers' and restaurants demands
are met. Our global reach allows us to tap into the very frontline

of product development and
consumer trends and we know that success here will hinge on us
ensuring that Nigerians get to
experience these things sooner rather than Iater.t"
Moreover, KFC paid due attention towards brand building and
operational efficiency In its Nigerian
operations. Highlighting importance of local production,
Layzell stated, "100 percent of our chicken
in Nigeria is Nigerian farmed and processed. We have worked
with some outstanding partners to
upgrade facilities and standards to meet the exact requirements
that our brand demands. We want
to be seen as a Nigerian company that contributes to the
Nigerian economy and people on a number
of levels. As such, we will always try to localise production
where we can source the right quality at
the right price. The ultimate goal would be to get Nigerian
suppliers to the level of capacity that
would allow them to export to other countrles.?"
Meanwhile, in 2011, KFC's~staurants count in South Africa
touched more than 660. According to
experts, these numbers wFre four times ahead of McDonald: and
Nando's, KFC's nearest
competitors in South Africa. On such development, Warren
opined, If we can unlock Africa the way
we've unlocked South Afrid, the biggest division In Yuml by a
country mile will hopefully be the
African division in about 100 years."24
Moving ahead with its pan Africa growth plan, In 2011,
KFCentered Kenya, Ghana and Zambia. is For
entering into Kenyan market, Kuku Foods became franchisee

partner for KFC. Kuku Food had KFC
franchisee across East Africa. On KFC's Kenyan foray, Gavin
Bell (Bell), a veteran ~estaurateur and
General Manager, Kuku Foods, said, "We had been looking at
Kenya as a potential location for a
number of global franchises and KFC seemed to be the obvious
choice in terms of the prov~sion of
the quality products that it offers, predominantly from the
chicken perspective, given that chicken is
20 "KFCto Invest N1.sbn on 19 New outlets", III
/201l/04/15/kfc.to-Invest-n1-Sbn-on-19-new-outlets/, April 15
2011http://buslnessnews.com.ng
21"KFC'SAfrican venture", op.dt. la
22 Armitage lan, "KFCNigeriaN,
http://www.afrlcaoutiookmag.com/content/kfc-nlger
2S Ibid
2" "KFCC lonelleads the Charge Into Africa", III
Nicolson GreB, 0 /. I /2012_03-1g.kfc-colonel-ieads.the-charge-
lntcHlfrlca/I.UllakTYXb82x. March 18
http://www,dallymaverlck.co.za arne e
2012
25 "KFC's African Venture", op.clt.
Page -4
295
Ii
I

!
I
I
,
314-138-1
KFC'sAfrican Expansion: Aided by 'Value Chains'?--------..;...-
a popular luxury here In Kenya. We have three branches in
Kenya and we are in the process of
building in Tanzania and Uganda, with at least one store in both
ccuntrfes.":"
But, at the same time, pointing out the challenges in Kenyan
operations, Bell mentioned, "We have
faced challenges predominantly in the supply chain, especially
getting local suppliers to the level
where they can pass the Yum! Brands (owner of KFC)Supplier
Tracking and Recognltlcn (STAR) audit
system, which monitors suppliers for food safety and security.
A lot of business:s here have various
certifications, but are not at the level where they can be able to
supply KFC. In Instances - when we
cannot find a KFCapproved supplier locally - we have to
purchase outside the country from a KFC
approved supplier. For instance, we buy our processed, pre-
blanched, blast-frozen potato chips from
Egypt because It has total traceability back to source. We are
working with Kenyan companies to
ensure that in the future we will have local chips suppliers, It Is

In our interest in terms of cost,
logistics and storage. It is a huge expense for us to import from
Egypt,"n
By end of 2012, there were 63 KFC restaurants in New African
Market except South Africa, Egypt,
Morocco and Mauritius. The total KFC restaurants count In
Africa including South Africa, Egypt,
Morocco and Mauritius touched 900 by end of 2012. In
addition, by end of 2012, KFC restaurants
were operational in Angola, Namibia, Botswana, Mozambique,
lesotho, Malawi, Swaziland, Ghana,
Kenya and Zambia. By 2013, KFCalso pJanned to enter
Zimbabwe, Tanzania and Uganda and later on
in the Democratic Republic of Congo, Ethiopia and Senegal.28
In Yuml's Annual Report of 2012, focusing on Africa, Novak
mentioned, "[Yuml was] making major
progress in Africa, a continent with endless possibilities where
we clearly have first-mover
advantage. We are driving major growth bulldtng off our
dominant base of about 700 KFCs in South
Africa, where we expect to add another 45 restaurants this year,
By the end of 2012, we expanded to
14 African countries, including the biggest ones, Nigeria, Kenya
and Zambia. In 2013, we intend to
expand to Tanzania, Uganda' and 21mbabwe."29 Supporting
Novak, Warren also added that, "We
agreed that the best thing to do would be to develop the
business across a number of geographies.
So if we hit speed wobbles, or came across obstacles, we
wouldn't be dependent on Just that one
market, and wouJd therefore be under pressure.':" In 2013,
KFC's total restaurants count in Africa
touched 1,000.HBy 2014, Yuml aimed to operate 850
KFCrestaur.ants In South Africa and 350 across

African countries to garner operating profit of $120 Tillion12
(Exhibit I).
According to observers, for its African voyage, KFC had
decided not to adopt 'Blanket' approach.
Giving rationale behind for not adopting 'toe-in-the-water'
approach, layzell, opined, "KFC has
established a dedicated department to focus on all aspects of
optimising business in Africa, from
marketing and supply chain, to infrastructure and human
resources." Layzell, admitting the view of
Aliko Dangote, a Nigerian businessman, who once opined that
by sitting in US and Europe, African
business can not be operated, asserted, 'This is a fundamental
truth - you need to be on the ground
to understand the complexities of each country in Africa, Our
KFCrestaurants in each market differ _
our aim is to make our brand relevant in a local context. We
won't cut and paste a South African KFC
as Mulupi Dinfln, "KFCExpects More Global Fast-Food Chains
to Enter the xenvan Market"
http://panafrleanvlslons.eom/2012/kfe-expects-more-
gIObat.fast_food-ehalns-to-enter_th'ke _ k II J I 2."
2012 e- oven mar e , u V
17 Ibid,
z, "KFCSpreads Its Wings", http://www.bl2mag.eo.za/kfe-to-
expand_steadIfV.lnto_afrlca/ Janua 14th 2013
Zg Hedley NIck, "Yum to Push KFCInto Africa 'as fast as
possIble"', , ry
~ttP://www.bdllve.co.za/buslness/retall/2013/06/01/vum-to-
push_lde_into--afrlea.aS-fast-as~Possible June tt' 2013
a "KFC's African Venture", op.clt. ,
Jl "Yum to Push KFCInto Africa 'as fast as possible"', op.cit.

U Schreiner Bruce, "KFCto Double 512e In Africa",
http://www.hUff!ngtonpostcom/2010/12/OS/kfc-ln-
afrlca_plans_to_do_n_793976.html. August Ith 2010
Page - 5
--. -----------------------~KFC'S
314·138·1
KFC's Afrlcon EKpanslon: Aided b)l 'Value Chains'?
into Nigeria or zerrora.':" He further add d '
_ the first is how we db' e I 'There are two factors when looking
at market potential
environment _ olitical 0 ~~lness, call ~tour Internal ambit of
control. The second Is the external
play positively iogeth Stt~btlitYIeconomic gr~wth,
infrastructure Investment etc. If these two factors
er en we are very bullish about our growth potentlal.""
Exhibit I
KFC - Spreading Wings In Africa
After rapid CI(Pil(lSIOrl of lts KfC stores In (hmi) • VUM
brimM IS turnmy Its ,IUenuon to Afr)ri'l
1,2'00 slOfn
l~OOO • south Alr"co!
_ Rest of Art!ea

80010,000
Rtst ol'WQrld
5,000 --0
20'" '" 'rr! 'Ill '09
• flr:l!tl(IIDn
600
"0
,ao
o
'005 2010'001
Source: Julie Jargon, "KFC Savors Potential In Africa",
http://onllne,wsj,com/news/articles/SB100014240527487042
5070457600557124 7805178, December ih
2010
But, at the same time, he emphasised that in such approach,
KFC'sworld-class food safety standards
remained intact. In order to achieve this, Layzell stated, "We
partner with suppliers who are wllllng
to invest in Africa or ensure local suppliers are up to speed and
scale in order to meet our
requirements, We can spend up to two years in advance of
opening a store ensuring that suppliers
meet our exacting standards." In addition, KFCfocused on
providing employee training to foster its
growth in Africa. Lavzetl emphasised, "We have done just that
in our Africa markets and today we

have trained about 2100 customer facing KFC employees and
100 above store and restaurant
support employees."lS
With such business approach, by 2014, KFCaimed to double its
African outlet to 1,200 and revenues
to $2 billion in the same period. On such ambitions, Novak said,
"Africa wasn't even on our radar
screen 10 years ago, but now we see it exploding with
opportunity." According to experts, improved
political stability in various African governments, vast
population size and growing middle class, who
preferred chicken as nutritional food, fascinated KFC to
conquer African market. J6 Recognising
potential of Africa, Abdoulie Janneh, Executive Secretary,
Economic Commission for Africa, United
Nations, said, "Nine out of the top 10 fastest growing
economies are in Africa. There is a growing
consensus that Africa is on the verge of an economic take-off
and could become a pole of global
growth. This is largely based on some factors: Africa's untapped
natural resource endowment which
provides significant investment potential; the continent's steady
population growth, which, If
properly managed, could yield positive returns; the rise of the
middle class and the untapped
regional market; high economic growth rates; improvements in
the general macroeconomic
n "KFCspreads Its Wings", op.clt,
~4"KFCNigeria", op.clt
'5 "KFCSpreads its Wings", op,clt,
J6 Jargon Julie "KFCSavors Potential InAfrica", lh
http://onllne.:.vS!.com/news/artldes/S810001424052748704250
704576005571247805178, December 7 2010

Page -6
i
II
I
314-138-1
KFC'sAfrican Expansion: Aided by 'Value Chains'?-------
environment; strategic and timely institutional reforms, as wei,'
as jmpro~ed gov~rnance in ma~y
African countries' improved business environment in many
African countries and Increased FDI In
recent years. Themiddle class needs to grow for those numbers
to translate into a profit, but there
are already positive signs. While the continent's collective GDP
stl,'1o~IY ,amounts roughly to that,~~
Brazil or Russia, it grew twice as fast in the last decade than It
did In the 19805 and 19905
(Annexure II).
However, in spite ofthe promising growth, KFC faced with
numerous challenges. in Africa, Apart from
government protectionism and regulation, according to experts,
one for the biggest challenges for
KFCin Africa was to manage its supply chain. According to
Warren, "We have countries in which we
operate where the chicken is the most expensive chicken in the
world. It is the most inefficiently

produced chicken in the world. It is the lowest standard chicken
in the world. And it is all because the
government is protecting the local industry '" The reality Is, and
It has been proven the world over,
whenever you have trade barriers and protection, you end up
with an [unfavourable] economic
result.v"
'Value Chains' - Thrust for Future Growth
In order to fuel its African expansion, KFC required steady
supply of chickens with pre-defined
standards. But, small chicken farmers in Africa were unable to
meet quality and quantity, as required
by KFC.
39
Ashok Mohinani (Mohinani), a restaurateur, who took a
franchise of KFC in Ghana, was
forced to import chicken, as farmers were failed to supply
chicken as per KFC's standards. With such
development, import cost increased and that resulted into
product price hike. According to
Mohinani, "With fast food, you can't keep raising prices. It's
chicken." Not only in Ghana but also in
Nigeria and Kenya too KFCfaced similar problems. KFChad
started offering fish in Nigeria, as import
of chicken was illegal. Kenya too had a ban on import of
poultry. On such situation, Paul Brenton,
Lead Economist at World Bank, expressed, "Growing demand
for food in Africa is increasingly being
met by imports. Clearly something has to change.v"
In such scenario, The US Agency for International Development
(USAID) and Bill & Melinda

Foundation (Gates Foundation) saw opportunities for small
farmers in Africa by convincing them to
adopt new crop. According to experts, "To do this, USAID and
Gates are funding companies to
build what development experts call 'value chains' - business
relationships that link small farmers to
sellers of agricultural inputs like fertilizer on one side, and big
buyers of corn and sayan the other.
Those buyers turn these commodities into feed, and then sell it
to large chicken wholesalers who are
staking their future growth on supplying KFC'sAfrican
expansion. The idea is to give small farmers
living on the edge new technology to grow more, allowing them
to first feed themselves and then
'diversify into commercial crops.' All over Africa, companies
backed by USAID and the Gates
Foundation are developing these supply chains and encouraging
small farmers to join them'?"
(Annexure Ill).
In 2010, Gates Foundation gave a grant of $8 million for a four-
year project to Tecnncserve" to focus
on businesses that generate income of small farmers in Southern
Africa via developing local soy
industry. "Grant will be used to boost farmer incomes in
Mozambique and Zambia, where
H "KFCColonel Leads the Charge Into Africa", op.clt.
u "KFC'sAfrican Venture", op.clt.
n "How BillGates Is Helping KFCTake Over", op.clt.
40 Hinshaw Drew, "As KFCGoes to Afrlca It Lacksonly One
Thing: Ollcken",
http;//onllne,wsJ.can/news/artlcles/sBlOOOI4241278873Z44423
04578235602613061228 F br Ih
41 "How BillGates Is Helpll'18KFCTake Over", op.c1t ' e uary
8 2013

42 The USA based NGO.
Page -7
________----------------------
~K~FC~'S~A~F~RI~CA~N~E~X::PANSION:
AIDEDBY'VALUECHAINS'?
314-138-1
KFC'$African Expansion: Aided by 'Value Chains'?
TechnoServe is .working to expand soy production by
smallholder farmers and connect them to
buyer~ f?r thel~ crops. TechnoServe, in partnership with public
and private agencies and
organ"zatlons, will help farmers purchase premium seeds and
other supplies teach them new
te,chnlques fo~ growing so~, and work with them to form
farmer cooperatives. The organization also
will promote Investments In soy storage and processing and will
work to boost the local feed and
livestock industries to ensure the farmers have a stable market
for their crops. Within four years,
TechnoServe expects the effort to boost the income of 37,000
farming households by an average of
$200 a year,"43 highlighted the Gates Foundation. In addition
to TechnoServe Gates Foundation
partnered with Cargill, reputed as agricultural commodity
trading giant." '
TechnoServe had already listed seven largest chicken
wholesalers in Zambia as end market for soy.
Experts noted that, "For large poultry wholesalers, the value

chain system makes perfect sense: It's a
way to turn small farmers onto a single, htgh-proteln crop like
soy, then turn that crop Into chicken
feed, and, eventually, into chicken." On such development,
Richard Hurelbrink, Director of $24
million U5AID-backed soy project, mentioned, "Soybeans are
Important. The end markets driving
that market are the livestock sector for the manufacture of
animal feeds. They're demanding a lot of
materiaf.?"
Moreover, KFC offered burgers without lettuce in few places in
Africa, as local producers were
unable to supply quantity and quality of lettuce as per
KFC'srequirement. According to Warren, "In
one or two of our geographies... we haven't got suitable lettuce
production, and as a result, our
burgers don't actually have lettuce on them. That is a short-term
problem, and it is not something we
want to entertain at all because burgers don't taste as good
without lettuce ... We are working very
hard and closely with the local farmers to get them to produce
lettuce at the quality and the
standard that we need to put on our burgers." However, experts
felt that KFC'sgrowth in Africa was
also affected by inadequate farming capacity to supply both
chickens and vegetables. But, at the
same time, Warren opined that supplying chickens and other
products could turn out to be a
lucrative business for farmers in Africa. Highlighting the initial
supply chain difficulties faced in the
Nigerian market for KFC,Warren said, "When we first went into
Nigeria, it took a lot of convincing to
get one of the chicken farmers to partner, because of the amount
of investment [he} needed to

make to achieve our quality standards. The other chicken
producers weren't particularly interested.
But once they saw the successwe were achieving with that one
farmer, they then went and said, 'We
better get on board'. And now we have four chicken producers
in Nigeria, all certified and accredited,
and achieving our standards ..."46
With such initiatives, KFC'sambition was to ensure local supply
In all African countries In which It
operated. Explaining importance of local supply in each
country, Warren pointed, "Why would you
want to be paying the cost of." shipping products, when you can
actually source it locally? Most of
Africa is blessed with enormous agricultural wealth, so
therefore It Is a matter of unlocking that and
I d d
1147
developing the technology to meet our supp y eman 5.
4~ "Gates Foundation Awards $8 million for Soy project In
Sub-SaharanAfrka",
http://www.philanthrOpvnewsdigest.org/news/gates-foundatiOn-
awards-8-mll1lon-for·soy-project·ln-su~saharan-
africa, August so" 2010
44 "Gates Foundation and cargill Paper",
http://gmwateh.org/latest_listlng/l-news-ltems/12451-gateS-
foundatlon-a nd-carsill-paper
45 "HoW BillGates Is Helping KfCTake Over", cp.clt, "
45 Maritz race "KFC'sAfrican Expansion an opportunity for
Farmers • ,6

, dill 'Iea ,om/kfcsoafrlcan-expanslon-an-opportunlty-for-
tarmers/14799/, February 3 2012
http://www.howwema e na .
47 Ibid.
Page- 8
I-...;3""O:.;O;"_I-_lnternational Business strategy' ~
314-138-1
KFC'sAfrican Expansion: Aided by Value ChaIns?
Challenges Ahead
According to experts, high-protein food such as soy was crucial
for the healthy growth and
development of chicken. WIth such initiatives from USAID and
Gates FoundatIon, concerns were
raised that KFCpoised to benefit more compared to small
farmers. Explaining such scenario, experts
mentioned that in order to supply to KFC,farmers must utilised
their limited resources to meet
quality measures of KFC. tn addition to KFC,there were other
commercial buyer~ for soy in Africa.
Due to this concern was raised that KFCmight set the prices and
control the buying market. At the
same tlme.even though farmers witness increase in their income,
they can't afford fried ~hicken. In
sub-Saharan Africa, visiting KFCrestaurants was considered as
a status symbol. Commenting on the
role of aid organisations, experts noted, "Aid organizations can
bring market players from across the

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

KFCin Africa, layzell said, "Our suppliers
are growing with us. We do a lot of work with them, bringing
them up to standard. It's not always
easy and you can imagine the interesting conversations we have
with suppliers _ 'you need to
improve your quality and spend money on your plant but we
can't offer you guarantees for work, or
we only have three or four outlets in that country.' It's a
challenge but what it's really about is
painting our vision of where we want to go as a brand and then
finding suppliers who are willing to
partner with us on that journey, It is upfront investment that
might not be paid off in the short term
but the point is to get in early, lay down the right standards and
build the relationship. As an example
we have some South African companies that have supplied us
for much of the 40 years we have been
in that country, We allow them to grow their business with us.
We also know our global standards
are exceptional and will help them in getting other business.
Indeed, when other businesses enter
Africa· other food service businesses - Our suppliers have a
foundation of the right quality they can
supply to the Industry, to hotels, to supermarkets, It is about
painting the picture, finding the
suppliers who believe in what we have to offer and creating the
vision to become world class, And
41 Hafften von Marie, "Growing I<FC:When ExploIting
Markets May ExploIt Farmers"
http://WWW.gIObalenvlsion.org/2014/02/03/grOwlng_kfCoWhe
n-eXPloltIng-markets-~aY-eXPIOJt_farmers Februa 3
rd2014 , ry
49 "How Bill Gates Is Helping I<FCTake Over", cp.ctt.

Page - 9
__ ----------- .".KF~CSAFRICAN EXPANSION: AIDED BY
'VALUE CHAINS'?
---.. --'
314-138-1
KFC's African Expansion: Aided by 'value Chains'?
we have found some fantastic partners, people willing to invest
in their business and do the
training."so
At the same time, highlighting other challenges In addition to
the supply chain, Layzell stated, "Africa
is full of challenges, ranging from the political and economic,
to the societal and practical. Some
challenges are harder to address than others - consider the
power problem: not something that'll be
solved overnight or necessarily something we can control. We
can put in local generation and use
equipment that uses less power, but we can't do much more.
Some of Africa's challenges you can
control but others you can't. I think we have been successful in
solving the challenges within our
control and finding ways of mitigating the factors we can't,
even the power issues,"Sl
But, in order to expand and ensure success in Africa, experts
noted, "Yum's success in Africa depends
on guaranteeing the same sandwich or bucket of chicken
everywhere it goes, whether it's lusaka,

Zambia, or louisville, xentuckv.?"
Therefore in backdrop of the above scenario, how KFC moves
ahead with Its African expansion,
remained to be seen.
Annexure I
Yum! Brands Restaurants Counts & Revenues-
Worldwide System Restaurants
Year-end 2012 2011 2010 2009 2008
Company 7,578 7,437 7,271 7,666 7,568
Unconsolidated Affiliates 660 587 525 469 645
Franchisees 28,608 26,928 26,219 25,OBS 24,225
licensees 2,168 2,169 2,186 2,199
2,167
Total 39,014 37,121 36,201
35,419 34,605
Revenues (In Millions)
Revenues 2012 2011 2010
Company Sales $11,833
$10,893 $9,783
Franchisee and license fees and Income 1,800 1,733
1,560
Total Revenues

13,633 12,626 11,343
Source:
. lOt Restaurants Count"
http://www.yum.com/lnvestors/restcounts.asp11"Yuml Flnancla
a a -, "
2}"vuml Financial Data - Consolidated Statements of Income,
http://www.yum.com/lnvestors/income_statement.asp
50 Armitage ran, "unlocking Africa: Inlsld~KFtC"l~nIOCklnB-
afrlca.lnslde.kfc,January 7111 2013
http://www.afrlcaoutlookmag.com con en
51 Ibid. r" dt
5Z "How Bill Gates Is HelpingKFCTakeeve ,op. ,
Page -10
301
International Business Strategy302 -
314·138·1
KFC's African Expansion: AIded by 'Value ChaIns'?
Africa Today
Annexure II
Africa - Luring Factors
Africa Tomorrow
•

$1.6 trillion Africa's collective GOP in 2008,
roughly equal to Brazil's and Russia's
$860 billion: Africa's combined consumer
spending in 2008
316 million: the number of new mobile
phone subscribers signed up in Africa since
2000
60%: Africa's share of the world's total
amount of uncultivated, arable land
52: the number of African cities with more
than 1 million people each
20: the number of African companies with
revenues of at least $3 billion.
• $2.6 trillion Africa's collective GOP by 2020
$1.4 trHJlon Africa's consumer spending in
2020
1.1 billion: the number of Africans of working
age In2040
128 million: the number of African
households with discretionary income in
2020
50%: the portion of Africans Jiving in cities by
2030
An African 'Green Revolution' could raise
agriculture production to $880 billion per
annum by 2030.
Discretionary Spending Power by 2020
Share of hou811holda in each Income bracket
%, millions of l1our,ahOlds
Page -11
100%= 163

Discretionary
Income
---.._--._--- 21
29
32
aeete needs -,
34
2'
2000 2006
Households with .. ..income >$5,000
Million
Household Income brackets
Sppp, 2005244
._-_ ..._- ..._.-._--- .._-- .._--- .._---------
Globnls (>20,000)
COnsuming mick:lle crass
..~~_~l~~.~::29.,~~)._...__..
Emerging consumers
(5,000-10,000)
..._------._---._--._- .-.-.._--- ..._----- ...
29 Basic consumer needs
(2.000-5,000)
2020F

1 Purchasll'l9 power panty adjusts tor pnce dltrerences In
klentlcal gOOds.1Cfoss countries to renee d1"-,,, ,_ _ •• ,.,
power In each country. ".,,"', ~IPU, ....~1t1
Africa - Segmenting COuntries
_______.---- __ --------------- ~K::FC~'S AFRICAN
EXPANSION: AIDED BY 'VALUE CHAINS'?
314·138·1
GOP caple ........
• 1600--1,000
ExportJ~r~p1la,20G8,$ • $1,001)...2,000
"'00' ~""""'=-----------.:::..:.:==:.---~
EQlJ<ItortaiW'"G,,~- 011t'xpOr!ers
GutnelJ _~ ii'
. --.1000 CQOgO,~.
cnee ' •
""""
'00
--
•
T""""
C61elflollll,e ~ e

• zambia Moroc:c;.Q SOoJtt1 Al'I1cD--''''''
MaOagilsQIr- Tll/1Z~ ~~ Tr.l'I.lII«1
""ORe
camerooo.
""""
" '-i,~__ ~ ~ ~ __ ~ ~ __ __.J
20 00 40 eo 60 10 80 90 100
liconomlc dlv.r.ifI~llon
MiIl1Ul'aetl.IrJOg IlOll ~ <i«lot tornJn' or JOt" ;tWd 1Ilo
NOTE. We inClude eounlrllls wtlOS& 2008 GOP wa$
appro;dm'llelY S10 b!lIkln 01 grelilef, or wl~ re;tl GOP
grQWIII rille
exceeded 7% ovef 2OllO-O6 we elIcklCIe 22 CQIJnI1eS lhiII
aJ:QIU!11ed!l)f ~%Clf AfI'C«I GOP In 2008
Africa's Agriculture Revenue Potential by 2030 (In USD
Billion)
!ESnMATEO OI"ERAnN'.~ MARGIN........"""
S-1!> percent
• 15-20 pWaK'M
• 20· per<*ll
35 868 239
vegetable/ftult_'00
Fertlllzer 14 66
Pestlclde 7

UveSt~112
Horticulture 490 """n
processIng..
UYes<ocJ<
proces$lnQ 33
_+liffl,eW~e3l5138seee r
Equipment? !L.._-~::==~------;::===-
Midstream oownstr ... m
Source: Roxburgh Charles, et at, "The Uons on the Move: The
Progress and PotentIal of AfrIcan tccnomles",
http://www.mcklnSey.com/lnSights/MGI/ResearCh/productlvltY
-Competltlveness_and_Growth/Uons_on_t
he_move, June 2010
Page -12
303
314-138-1
Annexure III
USAID and Bill & Melinda Gates Foundation - African Focus
USAJO

Global Development programme,
works on the following areas:
• Agriculture development
• Emergence response
• Family planning
• Financial services for the
poor
• Global libraries
• Maternal, Neonatal & Child
health
• Nutrition
• Polio
• Vaccine delivery and
• Water, sanitation & hygiene
In Sub-Saharan Africa, Gates
Foundation had awarded grant to
various partners under various
programmes as mentioned below:
USAID is supporting its African partners as they confront
these challenges and embrace their potential. USAID is
focused on:
1. Boosting agricultural productivity through the Feed the
Future Initiative, by addressing the root causes of chronic
hunger and poverty and spurring economic growth in a
region with incredible resources and arable land
2. Strengthening health systems through the Global Health

Initiative, so that countries can help their children
survive, overcome the ancient threat of malaria, give
mothers the support they need to give birth safely and
turn the tide against the HIV/AIDS epidemic on the
continent
3. Supporting democracy, human rights, and good
governance, to help governments fight corruption,
expand space for civil society, help citizens choose their
leadership and strengthen the trend toward
democratization in Africa
4. Increasing resilience to climate shocks, by helping
communities adapt to erratic rainfall and longer, harsher
droughts~weather effects we know will hit Africa hardest and
S. Leading quick responses to humanitarian crises, to save
lives and help prevent instability and loss, critical in a
region prone to destabilizing droughts and food
emergencies.
· 2009 and Earlier - 510• 2010 - SS
· 2011-79• 2012 -108
• 2013 -141
• 2014 - 08
Bill & Melinda Gates Foundation
Source.
1) "Africa - SupportIng a Continent on the Rise",
http://www.usald,gov/where~we~work/africa
~J. "Bill and .Melinda Gates Foundation - What We Do",
http://www.gatesfoundation,orgJ
B.II and Mehnda Gates Foundation - Awarded Grants",
http://www.gatesfoundation.orgJHow'We~

Work/QUlck-
Links/Grants~Oatabase#q/region=sub~Saharan%20Afrlca
Page -13
From GATT to the WTO
Stalemate at the WID: TRIPS,Agricultural Subsidies, and the
Doha Round
HARVARD I BUSINESS I SCHOOL
9·711·043
REV: APRIL 3, 2012
ARTHUR A. DAEMMRICH
Stalemate at the WTO: TRIPS, Agricultural
Subsidies, and the Doha Round
A rare sense of calm prevailed as trade ministers and World
Trade Organization (WTO) officials
wrapped up a December 2011 ministerial meeting, the ninth
negotiating session of the Doha round.
Despite a major global economic crisis that continued to wreak
havoc on government finances and
employment, global trade was rebounding from its 2008 nadir.
The recession led to tensions among
countries and accusations of currency debasement. But few new
trade barriers were instituted in the
downturn, and tariff rates continued to converge internationally.
WTO meetings in the 19905 and
early 20005 had featured violent street protests and
disagreements between developed and

developing countries. Recent meetings in Geneva, by contrast,
were widely characterized as
"normal." Writing in a blog, WTO director-general Pascal Lamy
celebrated the calm: "There were no
surprises. It was not a big jamboree, with thousands of
journalists, hugely costly arrangements and
sleepless nights. But a feeling of normality, a feeling that the
WTO is a solid institution,"!
H was an open question whether the normality enjoyed by Lamy
and trade ministers reflected
success, The Doha round of WTO talks had made little progress
in a decade of negotiations. Adding
to the complexity, positions of developed and developing
countries had reversed, Whereas
developing countries were reluctant to launch the Doha round in
2001, by 2011 most had followed
through with commitments to enact intellectual property (lP)
regimes and had grown impatient for
the United States and European Union to reform agricultural
policies. Developed countries, however,
were slow to eliminate agricultural subsidies and sought tariff
reductions and the removal of other
trade barriers by developing economies, especiaUy for
chemicals, machinery, and electronics.I
Business leaders needed to understand the WTO in order to
design strategy in relation to tariff
and non-tariff barriers and to plan for global competition in
light of tensions between developed and
developing nations. IF had gained in strategic in~po~tance to
many industries. but it als~ attracted the
critical attention of non-governmental organizations (NGOs)
and was a stumbling block to
multilateral negotiations, This note updates the HBS case, "The
World Trade Organization," and

offers perspective for managers when they analyze how WTO
agreements will shape future
competitive dynamics in their industries,3
T1 WTO tr
d its roots to a July 1944 meeting of 44 allied nations in Bretton
Woods, New
te ace '1 I' . . U Id
H
hi P ti" ts agreed to establish several new multi atera instituncns
tat wou govern
amps tre. ar cipan
Professor Arthur A. Dilemmrich prepared this note as the basis
for class discussion.
, d F II of Harvard College. To order copies or request
permission 10 reproduce materials, call l-
Copyright e 2010, 2011, 2012 rn:slden~:OI ;u~~:hin Boslon,
MA 02163, or go to www.hbsp.hiIrvard.edu/educators.This
publlcoltion may
800-545-7685, write Harvard Busmess. ad d ~S!ed or
trallSmitted without the permission or Harvard Business School.
not be digitized, photocopied, or otherwIse repr uce, r- , '
322
Case 28 Zhejiang Geely Automotive's Purchase of Volvo'
In 2011 Geely Automotive was still a relatively unknown
Chinese carmaker, but it had put in place a plan designed
to catapult it to international standards. Geely had started

off manufacturing home appliances in 1986, and it had
only been manufacturing automobiles since 1997. But
Geely's founder and chairman of the board, Shufu Li,
had ambitious plans for Geely. In a relatively short period
of time, he had steered Geely into becoming the largest
privately owned carmaker in China. But he would not
stop there-he hoped to bring Geely up to world-class
standards. He wanted Geely to be able to compete with
Daimler, Ford, and Toyota, Mr. Li believed that only
by becoming as good as the best foreign brands could
Geely compete both in China as well as internationally.
He knew this would be difficult, as independent Chinese
automakers are known to have problems in operations,
design, safety, quality, and brand-building. As part of this
plan, Geely's parent company, Zhejiang Geely Holdings,
acquired the iconic Swedish automaker Volvo from Ford
Motor Company in 20 IO.This case presents the situation
and challenges faced by Geely as it attempts this epic
transformation from refrigerator manufacturing to world-
class automaker.
Geely's History
Geely Motors was based in the historically important
city of Hangzhou, the capital city of Zhejiang province.
Geely, whose name denotes fortune and luck (en:U) in
Chinese, was founded by Mr. Shufu Li in 1986. Geely's
motto is "passion in professional dedication, innovation,
communication and hard work.") The company initially
began by manufacturing refrigerators and related acces-
sories and began to manufacture motorcycles in 1993. In
1997 the company entered the automotive industry as the
first private Chinese company approved by the central
government to produce automobiles. In 2005 Geely Auto-
mobile Holdings Limited listed on the Hong Kong Stock
Exchange.

By 20 II Geely was among the top 10 automakers
in China in terms of market share. The company oper-
ated six power-train and car assembly plants. They were
located in Lanzhou (Gansu province), Linhai (Zheji-
ang province), Luqiao (Zhejiang province), Ningbo
(Zhejiang province), Xiangtan (Hunan province), and
Shanghai (see Exhibit I). This gave the company a
production capacity of approximately 300,000 cars per
• This case was written by Yuan Yi Chen, Michael N. Young,
and Allan K. K.
Chan from Hong Kong Baptist University The development of
(his case was
partially supported by the Chinese Business Cast! Re.veurch
Centro at Hong
Kong Baptist University. The purpose of the case is to serve as
a basis for
classroom discussion rather than to illustrate either effective or
ineffective han-
dling of an administrative shuarion. Copyright C 2011 Michael
N. Young.
year. The firm employed 12,000 workers, including
more than 1,600 engineers and technical personnel. In
addition, Geely had gotten the governmental approval
to establish a new base in Jinan of Shan dong Province
in eastern China. Geely was planning to set up a com-
plete vehicle production base in Harbin, capital of Hei-
longjiang Province, in northeastern China. It was nearing
the conclusion of talks with the Heilongjiang govern-
ment. The first phase of the project would have capac-
ity of around 100,000 to 150,000 vehicles annually. This
would be the automaker's eighth manufacturing facility
in China. Additionally, Oeely had signed an agreement
with Cixt city government ofZhejiang Province to build
a RMBI8.8 billion (US$2.81 billion) auto industrial city

with annual production capacity of one million units in
the Cixi economic development zone."
Geely produced automobiles under five key brand
groups: Oeely, Maple, Gleagte, Emgrand, and Englon.
The firm was the only Chinese car manufacturer to have
developed its own range of engines, which had capaci-
ties ranging from I liter to 1.8 liters, supporting auto-
matic and manual transmissions. By 20 I 0 Geely was
ranked as one of the country's top 500 firms. It was a
fully integrated independent auto firm with a complete
auto ecosystem from design and R&D to production, dis-
tribution, and service. Geely began to attract attention as
the company experienced rapid growth. Through a broad
distribution network consisting of 500 4S (sale, spare-
parts, service, and survey) shops and nearly 600 service
stations allover China, Geely sold over 330,000 vehicles
in 2009.
The Global Automobile Industry
2009 was the worst year for U.S. auto sales in nearly 30
years. The U.S. auto industry underwent a radical trans-
formation in 2009, one of the most turmoil-filled years in
its more than 1OO~yearhistory. In 2009 auto sales in the
United States amounted to 10,431,509 vehicles, which was
a 21 percent decrease compared to 2008 sales, 35 percent
compared to 2007. The Big Three leading American auto-
makers were facing historic challenges both operation-
ally and financially. OM and Chrysler took the biggest
hits after both went through bankruptcy court and stayed
alive with government aid. For the year, OM sales were
off 33 percent from 2008. Chrysler showed some signs of
progress at showrooms and was helped by less-profitable
sales to fleets, such a rental companies and municipalities,
but still sold only 931,000 vehicles for the year, its worst
performance since 1962.

Although Ford reported a sales decline of 15 percent
in 2009, it had its first gain in U.S. market share since
1995 thanks to strong demand for midsize cars like the
Ford Fusion and crossovers like the Ford Escape. In the
I--_--------------------- ---.:ST:.:ARBUCKS' FORAY INTO TEA-
ORIN KING INDIA
313-186-1
that it would not hold any equity. The application was rejected
again in June 2007 by the
Department of Industrial Policy & Promotion (DIPP), which
suggested that Starbucks take the
51% FDI route rather than the franchisee route.
With its application being rejected for the second time and amid
speculations that the Indian
government would further tighten franchisee regulations,
Starbucks withdrew its application from
the FIPB in July 2007, without giving any date for its Indian
debut. A Starbuck, spokesperson
said, "Starbucks Coffee International, a wholly-owned
subsidiary of Starbucks Coffee Company,
notified the ministry of commerce & industry and FIPS that we
decided to postpone our entry into
India and officially withdraw the application to operate single-
brand retail stores in this country.
Starbucks is reviewing all options and evaluating how we can
proceed related to our entry into one
of the fastest growing economies in the world. It is premature
for us to announce any new dates.':"

The company was also unsure about the involvement of Sharma
and Biyani in its future plans.
N WITH THE TATAS
In January 2011, Starbucks took a significant step and signed a
non-binding memorandum of
understanding (MoU) with Tata Coffee (a subsidiary of Tata
Global Beverages Limited) (Tata),
one among of India's leading providers of premium Arabica
coffee beans. Tata Global Beverages
was a part of the global Tata Group and the world's second
largest tea company. Its brands
included Tata Tea, Tetley, Himalayan natural mineral water,
and Eight 0' Clock Coffee. Tata
Coffee, a subsidiary of Tata Global Beverages, was Asia's
largest coffee plantation company and
the third largest exporter of instant coffee in the country, which
produced more than 10,000 Metric
Tonnes (MT) of shade grown Arabica and Robusta coffees at its
19 estates in South India. Its two
Instant Coffee manufacturing facilities had a combined installed
capacity of 6000 MT. It exported
green coffee to countries in Europe, Asia, the Middle East, and
North America.
The MoV was signed for sourcing and roasting high-quality
green coffee beans in Tara Coffee's
facility in Coorg in south India. Both the parties also explored
the development of Starbucks retail
stores in India. Starbucks' Schultz said, "India is one of the
most dynamic markets in the world
with a diverse culture and tremendous potential. This MoV is
the first step in our entry to India.
We are focused on exploring local sourcing and roasting
opportunities with the thousands of coffee
farmers within the Tata ecosystem. We believe India can be an

important source for coffee in the
domestic market. as well as across the many regions globally
where Starbucks has operanons.v'"
After a year of signing the MoU, Starbucks set up a joint
venture with Tata Global Beverages Ltd.
in January 2012. The agreement paved the way for Starbucks to
set up cafes in India and for Tata
to sell Indian coffee globally. The 50/50 JV was named Tata
Starbucks Limited and would own
and operate Starbucks cafes branded as 'Starbucks Coffee - A
Tata Alliance'. The company
planned to open coffee retail stores across the country by the
end of the year, starting with stores
in Delhi and Mumbai. In a separate agreement, Tata Coffee
Limited agreed to roast coffee and
supply it to Tata Starbucks Limited. and to export to Starbucks
Coffee Company.
The agreement paved the way for Starbucks to reach consumers
in India. The companies agreed to
have an expanded range of beverage offerings for Indian
consumers and jointly leverage assets and
innovation to offer premium products. John Culver, president,
Starbucks China and Asia Pacific,
stated, "We're very pleased to have found the best partner for
Starbucks in Tara - a company that
shares so many of the same values for conducting business in a
way that earns the trust and respect
of our customers and partners (employees). We look forward to
bringing the Starbucks
Experience to customers in India by off~rin~,~igh ~uality
ara?ica coffee, handcrafted beverag~s,
locally relevant food, and legendary service. ~ Stating the
business advantages of the partnership,
Howard Schultz said, "What Tata brings is a unique perspective
in terms of real estate acquisition

capabilities. the opportunity to integrate Starbucks into Taj
Hotels, the ability to brin? fo?d from
the Taj into Starbucks stores and the capability that we Just
could not do on our own Just tn terms
of the infrastructure and distribution."n
7
217
218 International Business Strategl~Y'- _
313-186-1
The companies opined that they shared common values of
responsible business ethics and a
commitment to community. Tata had been working to improve
the li~es of c~ffee growing
communities in the state of Kamataka. Starbucks, through an
initial financial commitment, would
support Tate's 'Swastha' _ a school for children with special
needs (in partnership. wi~h the Coorg
Foundation) and aim to increase its capacity and outreach into
the rural communltle~ I.n.th,e cof~ee
growing region of Karnataka, Starbucks and Tate also planned
to work together on Intt,I8,tJves like
promotion of responsible agronomy practices and training for
local farmers, .technl~lans, and
agronomists 10 improve their coffee-growing and milling skills
and other cornmuruty projects,
The two companies started their venture with an investment of
$80 million and proposed to start
their stores in August or September of 2012, In September, the

company announced that the
opening of the Starbucks stores had been pushed back and their
opening would coincide with the
festive season, which started in October. While the company did
not give any reasons for the
delay, Saloni Nangia, president at Technopak, said, "The store
rollouts of international chains
usually take time because they involve a lot of groundwork in
terms of sourcing ingredients, menu
design, and choosing the furniture for the stores. A lot of effort
goes into ensuring that stores are at
par with international stendards.?" Analysts also opined that the
delay might actually work in
favor of Star bucks as consumer spending would be at its peak
during the festive season.
Finally on October 19, 2012, Starbucks opened its first store in
India, in Elphinstone
Building, Horniman Circle, Mumbai. On January 24, 2013, it
expanded its presence to Delhi by
opening 2 outlets, one at Indira Gandhi International Airport
and the other at Connaught Place. In
January 2012, Culver along with Tata Global Beverages vice
chairman, R.K. Krishnakumar, had
announced their plans to open 50 cafes by the end of 20 12 with
an investment of Rs. 4 billion, but
had missed the target. Culver said: "From the Starbucks
perspective, we are a publicly traded
company. We do not release those figures publicly. We did not
do those numbers specifically from
a Starbucks perspecrive.?" As of March 2013, Starbucks
operated five stores in Mumbai and four
in New Delhi.
INITIAL RESULTS

When the speculations of Starbucks entering India were on,
Shoba Narayan, an Indian columnist,
wrote.
" 'D~cent.' co.!!eelor a com.m.itted south Indian coffee
connoisseur such as me involves a long, very
specific list: It has to be piping hot; the loam must be on top; it
has to be bubbly and the bubbles
have to be breaking down; it should be served in a stainless-
steel tumbler and 'davara', which is
the Indian version 01a saucer,' the color of the drink should not
be as dark as cocoa but not too
milky either; and the amount 01sugar should bejust enough to
take out the bitternes; but without
adding any sweetness to the taste. That's what I would call
decent coffee. My dad drinks four cups
01coffee a day and pays 10 rupees per cup at his neighborhood,
no~name cafe. I pay 35 rupees for
a cup of espresso at Cafe Coffee Day. It still costs under a
dollar for the I . -r.... . mos expensive cup OJ
coffee In India. How IS Starbucks Somg to get price-conscious
Indian consumers who think they
are coffee experts to pay US$4/or a talt .Iatte? Lastly, it needs
to figure Ollt what the Indian
consumer means when they say, All! want IS a simple cup
01decent coffee '. ,,26
However, when Starbucks opened its first store in October 2012
India I. " ,gave a warm we come to
the brand. DUring the early days of Its openmg customers lined
up to tak . f h b d d h. ' e a Sip 0 t e ran e ot
beverage. The lines stretched so .Iong that a 'one-in one-out'
policy . I
h h I· ,was Imp ernented After twomont S, t e mes were gone,
but not the enthusiasm of the custome C '. rs. ustomers took
hour long

treks to reach the stores from different parts of the city Apart f
ff
b h S b k . rom co lee and snacks customersalso aug t tar lIC s
tumblers; others took pictures of the cups SI b k' I '.,
F b k Th . • ar uc s ogo and the mtenorsto post on ace 00. ey
were also smitten by the taste of th d. '
b 'h e d I h e pro ucr, For many Starbucksecame t e prererre p
ace to ave coffee and hang out with fro ds: d hev di '. .len s, an t
ey did not mind paying
8
STARBUCK5' FORAY INTO TEA-DRINKING INDIA___+-
..£.l~..1
313-186-1
extra for the Starbucks experience. However, there were some
who were disappointed. They felt
that Starbucks had not priced its products competitively and that
the products were very expensive.
Nemat Kaur~ a student, said, "It feels like a reasonable amount,
but if you're going to pay that
every week, It would take a toll on you as a studem.''"
Analysts opined that the response to Starbucks' arrival in India
marked the rising consumer wave
that was infatuated with brands and the transformation of India
from a frugal population to an
economic world power that could afford branded products and
shell out the extra bucks. India had
thousands of coffee shops and small tea vendors known as ella;

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