The company overview
El Pollo Loco is an American chain of restaurant company specializing in the production of fast foods. The chain of restaurant entered the American market by only one product, the grilled chicken. In fact, the company has been known for its grilled marinated chicken. Over time the company has expanded its products to include burritos and salads. Though the company is majorly operating within the American market, it plans to establish its subsidiaries in the foreign market particularly the fast-growing economy. With established Headquarter in Costa Mesa, California, the company plans to expand its operations in China and later other fast-growing economies of Asia
With its expansion and establishing itself within the Chinese market, the company worldwide market share will increase by over 12%. The company expects to take advantage of the growing Chinese fast food market. The Growing Chinese middle class is particularly targeted due to its increased spending on fast foods. Besides, the growing entertainment and luxurious hotels in China will provide many opportunities for the consumption of the company products. By being part of the industry, the company expects its products to gain a reasonable market share.
Reasons for international expansion
The company is expanding into the Chinese market due to China’s rapid economic growth and enhanced market opportunities. In addition, the international operations offer an opportunity for the company to produce commodities at low cost (Gilpin 102). Establishing a Chinese subsidiary will enable the firm to operate at low wages compared to that of the US. Moreover, the operations in China will enable the firm to reduce the distribution cost thus offering its products at competitive prices (Gilpin 102). Establishing the Chinese subsidiary will enable the firm strategically located in order to serve and meet the demands of the market.
In essence, the company will be taking advantage of the benefits the foreign country offers towards its operations while retaining its technological aspects (Johnson and Colin 56). Expanding and operating in China will enable the firm to make the most of several advantages including low cost of factors of production such as labor cost. In addition, the company will be taking advantage of factor endowment as well as the reduced distribution costs. However, as the company continues to expand internationally, it must retain its technological aspects including research and development along with the defining managerial procedures (Johnson and Colin 56).
International expansion strategies
The firm uses various expansion strategies to establish and position within the international market. Entering into the international market comes with increased costs and risks. Therefore, firms must be critical while deciding on international market entry modes. Firms, while expanding into international markets can apply several strategies. However, for a service firm such as El Pollo Loco, franchising, joint ventures, and utterly held auxiliaries will be the most appropriate.
El Pollo Loco can utilize the business knowledge of other restaurant chains acting as a franchise in host countries to expand the company’s business activities. In this strategy, El Pollo Loco is supposed to provide capital, technical skills, and business expertise. The firm can use this mode in countries where there is uncertainty in political and economic conditions as in the case of China (Johnson and Colin 61).
The uncertainty in the foreign markets makes this mode of entry more suitable for restaurant chains. The major advantage of this mode is that the company does not need to bear the costs and risks related to development and entry into the new market (Johnson and Colin 61). The cutback in overheads and threats allied to charters enlarges the corporation’s efficacy in searching for the fresh marketplace. However, the corporation will hardly have any power over the trade dealings mostly where the by-laws call for the businesses to observe the eminence ideals. Moreover, in the circumstances that the franchise does not strictly obey the agreed rules and regulations, the firm can easily fail in this strategy.
This is the most commonly used entry mode by firms including restaurants, hotels and resorts all over the world (Johnson and Colin 78). The entry mode requires that the El Pollo Loco form an alliance with a similar firm in the foreign country in order to attain a greater position in the market. In most cases, the joint venture involves an equal share of costs and benefits (Johnson and Colin 79. Nevertheless, the businesses functions, as well as operations, are regularly detached from the company control.
Moreover, the supervisory tasks are analogous and mutual by each corporation. In order to achieve stringent direction and have superior allocation entitlements, El Pollo Loco will have to devote additional finance to the mutual schemes.
The advantage of this entry mode is that risks and costs are shared (Johnson and Colin 82). In addition, El Pollo Loco would gain market knowledge from the joint venture firm as well as explore the foreign market with the help of the other firm with political and economic issues put into consideration. With little regard to the conflicts that might arise from the joint venture, El Pollo Loco take advantage of the local firm’s capability of influencing the local government to allow the company to enter, establish, and dominate the markets.
Utterly held auxiliaries
This is the best entry mode for the El Pollo Loco. Utterly held subsidiary means that the company will have total control of all its operations. In other words, El Pollo Loco will have to cuddle a hundred percent allotment of the far-off units. For the firm to own a subsidiary, El Pollo Loco must establish a new entity with full operations into this market or fully acquire an existing firm (Johnson and Colin 91). The acquired firm must be well built within the industry. El Pollo Loco stand to gain a lot from this mode as the company can easily promote the products and services. However, there are increased costs associated with this mode of entry (Johnson and Colin 91).
Reasons for the utterly held auxiliaries
As indicated El Pollo Loco stand to achieve greater benefits through the application of this entry strategy as the company can easily promote the products and services. The reason is that the firm has tight control over business operations because of full ownership. In addition, compared with other modes, the firm will make and easily implement their own strategic plans and does not risk losing the competitive advantage as well as technical skills to other firms. Apart from full control and reduced risks, the firm will also enjoy the full benefits of internationalization. However, there are increased costs associated with this mode of entry (Johnson and Colin 92).
Compared with all other modes, a fully owned subsidiary is the best entry mode for El Pollo Loco into the Chinese market. As indicated, the fully owned subsidiaries in the international markets will make the firm have control of enshrined competencies and initiatives that forms the core of the business strategies. In addition, the strategy increases El Pollo Loco geographical diversity while reducing both political and economic risks associated with this expansion (Gilpin 102).
China as the target country
In the last four decades, China has experienced an economic boom. In the last two years, China has experienced rapid economic growth with increased consumer spending. Currently, China is contributing a third of the total worldwide production. As a result, many multinational corporations are establishing subsidiaries or expanding into the Chinese market. In addition, the Chinese government has encouraged its nationals to buy products and services that have been produced and marketed locally.
The policy has encouraged consumer spending and has opened up many opportunities for firms producing consumer products (Rawski 256). The Chinese economic situation has presented the greatest opportunity for the corporations to sell their products especially El Pollo Loco that is specializing in fast food products.
Demographically, China is the most populous country in the world having almost half of the world population. A third of this population consists of the young middle-class. The rise in the middle-class presents a formidable market for most of the consumer products (Rawski 256). Legally, the Chinese government has encouraged foreign investments by reducing the preferential policies to all foreign companies operating in the country. In addition, the Chinese population consists majorly of the working middle-class as well as the younger generation who are the target market for the company products.
Rawski, Thomas. “The rise of china’s economy.” Journal of Foreign Policy, 16.6 (2011): 732-746. Print.
Gilpin, Robert. Global Political Economy: Understanding the International Economic Order. Princeton, NJ: Princeton University Press, 2011. Print.
Johnson, Debra and Colin Turner. International Business: Themes and Issues in the Modern Global Economy. London, UK: Routledge, 2010. Print.