Why Did Pizza Hut in China Quit Franchise

Topics: Pizza Hut, Brand, Yum! Brands Pages: 13 (4778 words) Published: March 23, 2013
Why did Pizza Hut Quit Franchise
Team 9
1. Introduction:
In 1993, Pizza Hut made a 10-year agency contract with Hong Kong’s famous agent, Jardine Matheson. It gave power of agency and its market expansion business in southern part of China to Jardine, which became the only agent of Pizza Hut in China. And from then on, Pizza Hut went on a hard way of expansion. However, in late May, 2004, Yum Brands declared that they had taken back the management and administrative powers of all 130 branch canteens of Pizza Hut in China, and from then on, Pizza Hut would be managed and operated by Yum Brands directly instead of taking the pattern of franchise . 1.1 Research question:

Why did Pizza Hut quit franchising in China?
1.2 Sub-questions:
(1) What is the explanation given by Yum Brands and what are other guesses of why Pizza Hut quit franchise? (2) What are the changes of Pizza Hut after it quit franchise? (3) Why did Pizza Hut quit franchise in China but still continues franchise abroad? (4) Are there similarities between Pizza Hut and other firms quitting franchise? 1.3 Motivate:

Since the franchisor can use franchise to expand the scale of his firm with lower cost than using directly management, franchise becomes the most popular business model among catering services. And thus, it’s such a strange and rare adverse action that Pizza Hut quit franchise. What caused it to do so? Is it problem of franchisee, Jardine Matheson or the problem of the franchise pattern itself? And what does it want to do? We want to find out the answer.

2. Theoretical framework:
2.1 Explanation of Porter’s 5 Force Model.
Porter’s five-force framework is an important tool for ensuring systematically using these principles to assess the current status and likely evolution of an industry. The five-force model contains internal rivalry, entry, substitutes, supplier power and buyer power, which is presented as following:

Also, the model has some shortcomings. It doesn’t take the environment into consideration, which means that it lacks the role of demand and government. And the emphasis of the model is on the competition between firms while recent trend is towards cooperation between firms. What’s more, the model is primarily an analysis of industry rather than analysis for a particular firm. 2.2 The Forces will be used in our Case

Analysis of the model must begin with market definition.
When defining the market, we must be sure to include all firms that constrain each other’s strategic decision marking and pay attention to both the product market and geographic market definitions. Some of the five forces we use include:

(1) Internal rivalry
For most industries, the intensity of internal rivalry is the major determinant of the competitiveness of the industry. Internal rivalry refers to the jockeying for share by firms within a market. (2) Entry

Entry is the beginning of production and sales by a new firm in a market. Entry erodes incumbents’ profits in two ways. First, entrants divide marker demand among more sellers. Second, entrants decrease market concentration and heat up internal rivalry. (3)Supplier Power

Supplier power takes the point of view of a downstream industry and examines the ability of that industry’s upstream input suppliers to command prices that extract industry profits. Also, we will analyze our case by explaining the influence of the government, which is a shortcoming of the model. 2.3 Application of the Model to our research question:

We will choose to apply the principles of internal rival, entry, and supplier power to our answers of the research question. We think that after Pizza Hut quit franchise, it can choose price competition and benefit leadership, which will affect its rivals and entrants. Also, it has more power when purchasing inputs, which links with supplier power. And the government plays a significant role in our case, too. We will analyze them in...
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