Executive Summary

This report is an attempt to analyze the case of Jollibee Foods Corporation (A) International Expansion. In this study we have first analyzed the case background so that we understand the scheme of things. In this section we have laid emphasis on the inception of Jollibee Foods Corporation, their expansion in various countries like Singapore, Honk Kong, Brunei, Taiwan, Indonesia, California etc. Further we have discussed the Strengths, Weaknesses, Opportunities and Threats to Jollibee in the fast food industry. We have dealt with different problems like the management issues, the market issues, business expertise, financial resources, inventory management etc. This would help in better understanding of Jollibees present condition and future sustainabilit y in the modern and fast changing business world. After the SWOT analysis we identified certain issues with Jollibee which concerned the Management, business, expansion etc. There were issues like improper utilization of financial resources, lack of promotional campaigns, communication gap between the different wings of Jollibee and between the Management and the employees. Keeping in mind these issues we have come up with a few recommendations. We have discussed them through Human Resource, Marketing, Financial and Operations perspective. Then we have discussed the Strategic decisions with regards to expansion in the future in California, Hong Kong and Papua New Guinea. We have studied various pros and cons of expansion in each of the above mentioned countries and reached the conclusion that California is the most favorable location. The reasons for the location being that there is a huge Philippine population in Dale City of California which will help in the establishment of the store. Also they have successfully catered to the taste buds of the people in Guam which will help them serve the Americans better and thus the expansion could be a success. Later we have conversed about the implementation plan and how to go about it. At the end of the document we have attached appendix for the readers facilitation. It contains certain tables and graphs for better understanding of the financials of Jollibee Food Corporation.

Business Landscape:
Company History; Jollibee Food Corporation began as an Ice- cream parlour in the year 1975 and was run by the Chinese Filipino Tan Family. But later they diversified in to sandwiches when the 1977 oil crisis occurred and the President Tony Tan Caktiong (TTC) expected the ice cream prices to soar. The hamburger recipe developed Tonys Chef father became famous and a year later they opened five store in Manila, where the family incorporated as Jollibee Food Corporation. TTCs vision was to see that the employees enjoy while working and are efficient. Jollibee expanded quickly throughout Philippine financing all growth internally until 1993. Most of the operations of the business were run by the Tan family and for expert opinion they brought in outsider especially in the Marketing and Finance Department. Background: Until 1981it was a smooth sailing for Jollibee, but then came Mc Donalds to Philippines. But the group was fearless and had confidence in the spicy taste of their Hamburger which appealed to the Philippine customers. Slowly Jollibee forayed in to the foreign markets and began with its investment in Singapore in 1985 in 1988 with the help of some family friends. However the relations between Jollibee and the local manager started to deteriorate. Their next venture was in Taiwan again with the help of family acquaintance, but this also did not last long and the transaction came to an end on the basis of distrust between the local manager and Jollibee management in 1988. Brunei was another joint venture that they entered into in 1987 August. Then they forayed in to the Indonesian Market in the year 1989, opening a store in Jakarta but due to conflicts with the local manager again this store also had to be closed down. In 1994 the International Division was created with Tony Kitchner, an Australian native as the Vice President. Kitchner went about differentiating the International Division from the Philippine part of Jollibee and tried to create a more formal culture for the division. Kitchners strategy rested on two themes: 1) Targeting expats 2) Planting the Flag He realized that there are a lot of Filipino expats in Middle East, Hong Kong, Guam and other Asian Territories and this would provide a good market for Jollibee. The other strategy was to have a first mover advantage. They started with planting the companys flag in those countries where there was no or little competition. But these strategies had their own constraints. First of all there was a strain on the resources as they were expanding rapidly and then there was no enough advertising budget.

Kitchner was responsible for the Franchise Service Managers (FSM) and they acted as a point of contact between the company and its franchise. Kitchener asked the FSM to work on the ambience of the store and customize it on the basis of the local consumers taste. to ensure a good local crowd turn up. Kitchner and Visco ( Marketing Director) discovered that Jollibee needed a world presence and the present logo did not serve the purpose. So they changed the background from red to orange so that it is distinguished from Coke and KFC and also added the tag line great burgers, great chicken so that people have a clear identity about the brand. They also customized the menu according to the tastes of the local consumers. But as the international business grew, the relation between the International Division and the Philippine operations started turning sour. There was lack of coordination and cooperation between the two groups. In 1996, TTC realized that he could no longer support Kitchner as the expansion strategy was costing heavily and they were losing a lot of money. In February 1997, Kitchner left Jollibee. After Kitchner, Manolo P (Noli) Tingzon took over. He came with the conclusion that in order for Jollibee to be profitable it should earn an annual sales of US$ 8,00,000/He wanted to analyze the existing strategies to discover the scope for improvement. There were conflicting opinions from the staff on Plant-the-Flag. Some thought it was ill conceived and some though it was a wonderful way of expansion. He also analyzed whether targeting expats is narrowing down their scope or image. Now he is considering the three options for profitable expansion. They are: Papua New Guinea, Honk-Kong and California. Papua New Guinea has no much completion for Jollibee. In Hong Kong there are several management issues and in California things seem to be quiet pleasant.

Firm Analysis Internal Analysis: Strengths: Leadership in local Philippine market. Strong financial resources. Expertise in doing business in international markets. Well developed operations management capability (ability to provide quality products at affordable prices). Diversity in product offering after the acquisition of Greenwich Pizza and joint venture with Deli France.

Weaknesses: The expansion of business in international markets based on the flawed strategy of Planting the Jollibee flag. Absence of proper methods to select franchisees. Too much dependence on Filipino expatriates and inability to cater to the needs of the local residents of other countries. Weak promotional campaigns in international markets to promote Jollibee as a global brand. Based on the graph: 1(Refer Appendix), it can be seen that the operating profit margin is very low over the period from 1992 to 1996. Operating margin is around 11% to 13% over the years which mean Jollibee could not improve its operational efficiency. Based on the graph: 3 (Refer Appendix) it can be seen that the inventory cycle of Jollibee is around 25 to 30 days from 1992 to 1996 which is very high for a fast food business. It means that company is taking longer time to sell its products. Based on the graph: 2 (Refer Appendix) it can been seen that Jollibee could not utilise its assets productively as Return on assets had decreased from 28% in 1992 to 17% in 1996. It means that the new stores abroad did not give the desirable results. As per the Graph: 4 (Refer Appendix) it can be seen that the average payable period had been increased from 74 days in 1992 to 111 days in 1996 which means that they are delaying the payment of suppliers. This can damage the long term relationship with the suppliers. Lack of communication within the organization during the formation of International Division which led to infighting amongst the two divisions. Bias towards friends and relatives while selecting local franchisee partners.

Lack of cross cultural management. Increased diversity in menu items came at the cost of operating efficiency and complicated the task of store level operating control. The involvement of the franchisees in the important decisions during the start up was varying from country to country. Most of the decisions were being made by FSM and project manager.

External Analysis: Opportunities: Untapped locations with fewer or negligible competition from fast food chains. Widen product range to include more local food items. Make new acquisitions of profitable food chains in other countries. Create differentiation by cost advantage, customer experience etc.

Threats: Political Instability. Competition from local well established food chains. Dining habits of local people eg. More preference to dining than fast food. Shift of preferences of people to more health conscious items. Epidemics like Bird flu, Mad cow diseases that make procuring of raw material difficult. High set up cost due to high standard of living. Reduction in entry barriers like favourable policies, tax incentives etc lead to increase in foreign competition. Downturn in economy. Rise in operational cost like cost of power, labour etc.

Recommendations: The weaknesses of Jollibee (as mentioned above) section have been addressed in detail as relevant to different functions. Strategy: Jollibees strategy of Planting the Jollibee Flag for entry in new markets was narrowly focused on absence of competition. They were expanding too fast without giving a thought to alternative strategies to be adopted in case their food items are not accepted by the locals. So, 5

before entering a new market various other factors like demographics, local dining habits, per capita income etc should also be considered. Jollibee should have proper procedures to select franchisees to evaluate their suitability for the company. Various factors like their financial background, previous business ventures etc should be checked even if they are Filipinos, friends or relatives. Marketing: As seen in the market in Middle East, all the Filipino expatriates were not attracted to their offerings. Also, in Hong Kong, the standard menu was not attracting the local Chinese customers. This shows the pressing need for Jollibee to customize their menu to include local food items. Jollibee should identify the right communication channel to promote its brand cost effectively with optimum results to promote itself as a global brand. Finance: Synergy creation is of utmost importance for success of any joint venture. Differences in management style and culture between the firms may pose serious problems that make it difficult to create synergies, which ultimately lead to poor financial performance. There has been a year on year increase in cost of sales from 13% in 1992/93 to 46% in 1995/96, however sales during 1995/96 has only increased by 24%. Suitable ways must be found in order to decrease cost of sales. Year on Year Sales Cost Increase. Year Percentage Increase 1992/93 46% 1993/94 34% 1994/95 28% 1995/96 13%

Cash on hand is continuously increasing which is very positive sign however EPS has decreased 19% from 1994-96 largely on account of a bank loan. Therefore the cash at hand should be put to better use and help ensure early repayment of loan.

Based on the financials, Jollibee has a good cash position so it should use the cash to pay its suppliers regularly which will build a long term relationship with the suppliers. Twenty four stores in foreign countries account for roughly US $9 million in sales. Present cash flows indicate that paying off debts will not be difficult however they must slow down their expansion plans.

Opening new stores requires a lot of financing. Therefore once a store is opened one must give it time to grow and generate sustainable profits before it is used to finance the opening of 6

a new store. Moreover opening multiple stores at the same time will hurt the bottom line and will increase debt and failure of such stores may take several years to recover the investment. This will help Jollibee to improve its asset utilisation. Jollibee has been expanding rapidly in the international market which is a good sign but the companys operations are not well managed as the inventory period is very high which means inventory is kept idle so as to avoid it, company should improve its operating efficiency. HR: The international division was distinct from the Philippine division: The look of the international department was distinct from the Philippine counterpart. They tried to distinguish it so that the international department is not conceived as simple and basic and in order to give it a more international look.This approach of being different created hostility. Here there was a communication gap. The need for the international department should have been communicated properly and portrayed as a part of the Jollibee family. The HR department should have convinced the domestic division to be more accepting about the international department. Mixing of friends and family with business: It is to be noted that the Singapore and Taiwan partners were family friends and yet they could not sustain the relationship. The pros and cons of the relationship were not well evaluated before the venture began. The terms and conditions of any business relationship should be explicitly stated to prevent any mistrust and conflict in the future. Lack of Cross Culture Management: There was a lack of training in cross cultural team management which resulted in clashes between the workers of different cultures. A proper training programme on cross culture behaviour and management should be developed for the employees of the international division. Operations: R&D to focus more on finding methods to customize local food to fast food production techniques. Involve franchisee in all the decisions during the start up to increase trust between the company and the franchisee and also to gain from his knowledge about the local area.

Strategic decisions: PNG, Hong Kong or California a) Papua New Guinea Pros Cons The failure of the previous fast food chain in the country might linger in the minds of the customers. To overcome this, Jollibee might have to do enough branding to convince the customers. The target market is also smaller compared to Philippines. Hence the profit potential is very low. Opening up of many stores, to cover franchises costs, requires huge investments and therefore the loss would be high, if the business fails. Local player has not been developed and it does not have brand equity in PNG. Since no previous experience in this market, uncertainty of the acceptance of Jollibee food items by locals. First mover advantage Jollibee would risk no equity Stores at service stations

b) Hong Kong Pros Earlier presence in the country will help Jollibee in speedier setting up of business in HK. It already had 3 stores in Hong Kong. Cons The other franchisee units had a lot of management issues. 8 It also provides JB an opportunity to learn from the mistakes of other franchisee units. Location advantage (one of the busiest in Hong Kong).

It did not have a global image there, as it employed local Chinese employees with no English speaking skills.

Jollibee failing to change the menu items to cater to the local needs of the customers. Managerial problems (conflicts between Chinese and Filipino staff) led to uneven product quality.

Kowloon district had fewer Filipinos so new store would have to depend on locals but already some issues were going on so Chinese did not use to prefer coming to Jollibee stores and Jollibee strategy was to cater to the expats of the Philippines.

Dominant presence of McDonalds.

c) California Pros Availability of different equipments to compensate for comparatively high labour costs. Presence of Filipino population. (California having more than 1 million Filipino populations provides a huge opportunity for JB.) The diversity of the area allows Jollibee to broaden its niche to include the Asian-Hispanic segment and to do so without having to make major adjustments to its menu. Already success in Guam (only 1 store and revenue is 1771202).Its menu also appealed to Americans as well so they dont have to do many variations.

Cons Country of origin of McDonalds. Though JBs items appealed a few American customers, competing with McDonalds for market share poses a big risk. As a late-mover, it will be difficult for Jollibee to obtain access to the distribution channels, suppliers, and store location. Logistical problems (12 hrs by plane & 8 time zones away) would put constraints in rendering support from the headquarters in Philippines.

Recommended plan of action: Based on the above analysis, Jollibee should go ahead with opening their new store in Daly City, California. Daly Citys large Filipino expatriate population will be helpful in supporting the business initially. Also, Jollibees successful venture in Guam will come in handy to cater to the local U.S. people. The option of adopting cost effective process instead of labour intensive methods as used elsewhere will help in making a cost differentiation against their competitors. In Hong Kong, the company should concentrate on the existing 3 stores first before opening a new fourth store. Jollibee will have to customize its menu in Japan in order to attract the Chinese population. Also, the conflict between local Chinese managers and Filipino managers has to be resolved. Jollibee can give the entire Chinese operation to the local franchisee and FSM being the contact point between the franchisee and the company. In the presence of a dominant player like McDonalds in the market, Jollibee can learn its techniques of catering to the local tastes and try to make the existing stores less dependent on Filipino expatriates. In Papua New Guinea, in spite of negligible competition the market, the small population of 5 million is not attractive enough to put in a substantial investment to set up at least 5 stores which will be needed to recover the set up costs. Jollibee also does not have enough understanding of the tastes of the locales. Though the franchisee is ready to undertake the equity costs, sole dependence on him can be risky as already seen by their ventures in Singapore and Taiwan. Here, the company has to conduct a detailed market study to understand the local food habits, reasons for the failure of the Australian franchisee, the perception of people towards fast food etc. Only after this factors can it take an informed decision.

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Implementation of Strategic Decision With respect to the other available options, Daly City, California, is comparatively the best option. The criteria for choosing the franchisee should also be such that each franchisee should be evaluated based on various criteria, even in case of a potential Filipino franchisee, so that in the end the franchisee who shares the most number of common values with Jollibee is selected. The key to Jollibees success in Daly City will be its ability to find a local partner who should not only be able to work with the International Division but also design a business model that would address issues like personnel management, recruiting of managers, language barriers, customization of menu items and branding which were the key factors that resulted in the success or failure of Jollibee in other countries. In a market which dominated by Mcdonalds, marketing should be given more priority and franchisees sh ould not associate achieving target sales with promotional activities. The strategy of Filipino-Asian-HispanicMainstream will be difficult to implement, mainly if Jollibee continues with its policy of standardization of menus. The variety in menu should not be at the cost of poor operational efficiency. If Jollibee has long term plans with USA it can also set up a R&D department in USA for customizing the menus. The pricing strategy should also be such that it is priced competitively with respect to McDonalds. Overall, the strategic decision that is to be made is not only about choosing from the 3 available options but also learning from their earlier mistakes in other countries, changing their business policies and adapting to the dynamic environment of the business.

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Appendix

1992 Profit Margin Operating profit Net profit Revenue Profit Margin Operating profit margin Asset Utilization Operating profit Total Assets Asset Utilization Inventory Turnover Cost of sales Inventory Inventory Turnover Days in Inventory Account payable Period Cost of Sales Accounts payable Payable turnover Payment period 1469 297 4.946128 73.7951 1469 116 12.66379 28.4275 280 1013 28% 280 201 2296 8.75% 12%

1993 364 292 2702 10.81% 13%

1994 458 403 3606 11.18% 13%

1995 590 538 4851 11.09% 12%

1996 780 602 6904 8.72% 11%

364 1375 26%

458 1926 24%

590 2645 22%

780 4537 17%

1663 135 12.31852 29.22429

2133 183 11.65574 30.88608

2858 201 14.21891 25.3184

4180 323 12.94118 27.81818

1663 323 5.148607 70.89296 Table: 1

2133 497 4.291751 85.04688

2858 715 3.997203 91.31386

4180 1274 3.281005 111.2464

15% 10% 5% 0% 1992 1993 1994 1995 1996 Operating profit margin Profit Margin

Graph: 1

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Asset Utilisation
30% 20% 10% 0% 1992 1993 1994 1995 1996 Asset Utilisation

Graph: 2

Days in Inventory
40 30 20 10 0 1992 1993 1994 1995 1996 Days in Inventory

Graph: 3

Payment period
150 100 50 0 1992 1993 1994 1995 1996 Payment period

Graph: 4

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