Jollibee's Hong Kong Expansion: Strategic Control Challenges

1. Introduction

Anil K. Gupta and Vijay Govindarajan argue in their article, “Knowledge flows and the structure of control within multinational corporations”, that mainly all previous research on strategic control within multinational companies (MNCs) has paid attention to why these choose to go abroad. They instead argue that for successful offshore business, one must understand how communication flows within the different sub-units of the organization. As Jollibee Foods Corporation considers whether they should establish a fourth store in Hong Kong, it faces several challenges.

One of the main challenges regards knowledge transfer between its Filipino facilities and the newly established ones abroad. It is therefore relevant to look at the following research question:

What consequences does the current “strategic control over its subsidiaries” have on the knowledge transfer between the Jollibee headquarters on the Philippines and the offshore Jollibee Food plants in Hong Kong?

In answering the research question, we will start by explaining the framework of Gupta & Govindarajan’s (1991) on different kinds of subsidiaries, with attention paid to knowledge transfer and their related control instruments.

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Further we will examine what kind of challenges Jollibee Foods Corporation is facing with its expansion to Hong Kong. Finally, the above analysis will provide us with information about the existing opportunities on the Chinese market and will enable us to suggest a reconstruction of the offshore business in Hong Kong to make it more successful. Jollibee meets several tasks in their offshoring project, but due to space limitation there will in this paper only be focus on two selected challenges, the challenges of adjusting to Chinese taste and their management structure.

2. Jollibee Foods Construction and its strategic control over its subsidiary in Hong-Kong

Gupta and Govindarajan (1991) proposed that there exists a certain association between different types of subsidiary units and the strategic corporate control of that subsidiary. They defined four ideal types as; Implementor, Global innovator, Integrated Player and Local Innovator, based on the amount of knowledge that flows and the direction of this knowledge, between the subsidiary and the rest of the MNC.

Upon Tingzon´s arrival the main strategy of the offshore business has been “flag planting”. Flag planting aims at establishing a presence in each market before competitors, and so, emphasizing at implementing customer expectation, influencing taste and building brand (case p. 11). The initial plan in Hong Kong has been to become one of the major players in the market fast. The previous international strategy meant that the subsidiaries in Hong Kong functioned as implementors. An implementor is characterized by a high degree of knowledge inflow from the headquarters but with a low degree of knowledge outflow; hence mainly applying the strategy used in the parent company without any local adaption (Gupta and Govindarajan 1991).

Functioning as an implementor has meant that the established Hong Kong stores have not been engaged in any knowledge creation, but simply followed instructions from the Filipino headquarters. Furthermore one can argue that Jollibee’s approach to Hong Kong has been to primarily implement the already existing practices from the Philippines. For example, the menu offered in Hong Kong is almost the same as the Filipino one, knowledge of what to sell has simply been brought in from headquarter (case page. 12)

Further evidence arguing for that the Hong Kong subsidiary has been operating like an implementor can be seen in the management transfer of the CEO’s brother-in-law, from the parent company to the Hong Kong subsidiary (case page 12). In addition, the store-level managers were all Filipino while little crew were Chinese and staffing problems consequently grew. To solve the problem the Manila based Franchise Service Manager worked continuously with Hong Kong for more than six months, without success. In 1997 a dispute over discipline between the four Chinese Managers, and the five Filipino Managers, resulted in the Chinese Managers leaving Jollibee with only Filipino crew left (page 12). This points towards the subsidiaries in Hong Kong adapting the characteristic of an implementor, e.g. pure inflow of knowledge from the parent company and little outflow of knowledge from the Hong Kong subsidiary. Furthermore is the overall “flag planting” strategy of Jollibee very indicative of the skewed power balance between Jollibee and its subsidiaries.

3. Organizational Challenges

Jollibee experienced the internal challenges of organizational culture clash between its implemented Filipino workers and the Chinese staff. Furthermore the implementation of the international menu was not as successful as expected (case p. 13). The strategy of focusing on Filipino expatriates in new markets, might has helped Jollibee’s entry to the Hong-Kong market, since they already had a distinguished costumer group of Filipinos. But as Tingzon asks in the case “might we risk boxing ourselves into a Filipino niche that prevents us from growing enough to support operations in each country?” (case p. 11).

We found that the expatriate-led strategy have prevented further expansion of the company on the Hong Kong market. This is due to the local knowledge that resides in Chinese workers and managers are not exploited when only employing Filipino managers. As stated above, in the early entry into the Hong Kong market, Jollibee did also employ Chinese managers but due to their sole implementation of inflows from headquarters, clashes arose between the Chinese and the Filipino managers. Furthermore one major challenge to successfully establish a fourth store and gain more market share is to adapt the prevailing menu to the Chinese taste. The main challenge for Jollibee now is how to realize, and best use, the knowledge that resides in Chinese workers.

4. Altering the Strategy for the Hong Kong Subsidiary

From the above section we can conclude that there exists several challenges of how the subsidiary in Hong Kong has previously been structured, for example has one of the sub-franchisees tried to suggest changes to the menu. To be able to attract more local costumers he proposed low fat chicken and Chinese tea, as he sensed a demand for these products among the Chinese people (case p. 12). He has tried to implement these changes for several of months but has not yet received a go-ahead from the headquarters. This indicates that Jollibee mainly sees its subsidiaries as implementors, without any outflow of local knowledge to the other subsidiaries. But for Jollibee to succeed in opening a fourth store and increase its market share on the Hong Kong market, reconstruction and adaption to the local market is crucial. The top management saw a high profit potential in Hong Kong, and therefore urged Tingzon to open the fourth store.

But as the profit potential is high, the competition in Hong Kong for similar food companies, such as McDonalds, is also very intense. Jollibee Food Construction does not have the competitive advantage of a first mover and is not alone on the market. For example has their main competitor, McDonald’s, both stronger brand recognition in the Hong Kong market and they are stronger financially. Hence Jollibee has to take on a different subsidiary strategy than the “implementor”, in order to success (Hymer p. 61).

With this in mind the strategy of the Hong Kong sub-division can become a successful sub-division if it adapts the characteristics of a local innovator instead of trying to be an implementor, with both low inflow and outflow of knowledge. One main challenge for Jollibee is to attract more local employees and as Gupta and Govindarajan’s proposition 3 states; under norms and administrative rationality will the composition of the top-management for the specific subsidiary consist of mainly locals if the division acts as a local innovator (Gupta and Govindarajan 1991). As an implementor has the possibility for autonomous initiative been low while it as a local innovator exists space to adapt to the local environment, e.g. for Jollibee to take on a more Chinese menu.

5. Conclusion

In conclusion, as Jollibee decide whether or not to establish one more store in Hong Kong, they have to look over their strategic control over its subsidiaries. As examined above, the company has mainly viewed their subsidiaries as implementors. We found this international strategy insufficient, and that it hindered them to fully exploit the market potential in Hong Kong. The prevailing challenges for Jollibee now is how to realize and best use the knowledge that resides in Chinese workers. Due to limitations of the paper, it is only a fraction of possible explanations that have been highlighted and these revolve primarily around the importance of increasing the local engagement in the Hong Kong subsidiary, and increase the local innovation towards more local taste. Hence we argue for Jollibee’s subsidiaries in Hong Kong to adapt towards a local innovator role.

6. Bibliography

Case: Bartlett, C. A. (2001). Jollibee Foods Corporation (A): International Expansion. Harvard Business School

Gupta, A.K.,Govindarajan, V. (1991). Knowledge flows and the structure of control within multinational corporations. Academy of Management, Review 16(4) 768-792

Gupta, A.K., Govindarajan, V. (2000). Knowledge flows within multinational corporations. Strategic Management Journal 21, pp. 473-496.

letto-Gilles, G. (2005). “Hymer´s seminal work”, in Part III Modern Theories in Transnational Corporations and International Production. Academic Books, Copenhagen Business School. Published by Edward Elgar Publishing, Inc.

Schlegelmilch, B., Ambos, B., Chini, T. (2003/4). Are you ready to learn from your offshore affiliates? European Business Forum, 16