Strategic Risks Analysis of Global Restaurant Industry

Executive Summary

The purpose of the current report is to conduct a strategic risks analysis and evaluation that may impact a global business. Moreover, the report aims to identify and evaluate any mitigating measures or responses that companies can use to manage these strategic risks. The four kinds of strategic risks for international business are cross-cultural, commercial risk, currency risk or financial risk, and country risk, which is also known as legal or political risk. The restaurant industry has been used to explain all four of these risks by specific evidence and examples. Moreover, three different risk responses have been explained, namely, Yip’s total global strategy, active management, and defensive management. The report concludes with a summarising overview of all the specifics and the examples.

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Introduction

Monetary transactions and the exchange of commodities, information, services across international borderlines are collectively known as international business (Daniels et al., 2014). Globalisation and the associated challenges have been the subject of numerous debates and studies in recent years. Since the past three decades as globalisation has become mainstream, more and more countries have allowed transnational trade across their borders, which have also served to enhance the relations between nations (Daniels et al., 2014). Globalisation and international business have hence enhanced economic integration around the world by encouraging imports and exports and the transnational expansion of companies.

Although globalisation has immensely increased the opportunities for both corporations and entrepreneurs to venture out of their home country and hence expand their horizons, it also poses serious threats to businesses such as political risks, environmental risk, legal risk, economic risk, risk of natural disasters, and cutthroat competition (Rugman et al., 2011). The current report aims to discuss and critically analyse the significant strategic risks that have the potential to impact global businesses. Moreover, it attempts to assess viable and appropriate risk responses for the identified risks. The report mainly focuses on the widespread food and beverage industry and uses specific examples and evidence from the chosen industry for the analysis.

Major Strategic Risks for International Businesses

Businesses all over the world face threats and risks from their external environments; however, the severity of the risks that the external environment poses on businesses is heightened considerably in internationally operating companies (Daniels et al., 2014). The increased significance of risks for businesses in international markets is partly due to them being far costlier than failures by domestically operating. The cost of failures in global markets is also enhanced further as such failures have the potential to damage the firm’s reputation and profitability in foreign markets (Daniels et al., 2014). The four kinds of strategic risks for international business are cross-cultural, commercial risk, currency risk or financial risk, and country risk, which is also known as legal or political risk. All four of the identified risks remain in the environment permanently; any internationally operating business may face one or more of these risks at any particular moment. The four kinds of threats have been analysed as below.

Cross-Cultural Risk

Cross-cultural risk refers to the particular risk faced by businesses due to cultural differences between the employees and the managers, or between the brand and the locals (Daniels et al., 2014). In cases where the employees and their managers belong to distinct cultures, their differences often result in miscommunication between the two, which in turn affects the business adversely. Moreover, the cross-cultural risk may affect sales pitches, marketing efforts, and day to day internal and external activities. Although a language barrier is significant, non-verbal cues can also be misinterpreted by people due to differences in their cultural and ethnic backgrounds (López-Duarte & Vidal-Suárez, 2010). For instance, the Chinese and Asian cultures promote teamwork and encourage employees to be part of a cohesive group. Moreover, employees who stand out from the collective ideal and express their opinion are considered to be too bold and disrespectful. The collectivism does not resonate with people from the United States, as they are encouraged to be individualistic. Hence an American waiter would find it substantially challenging to work for a Chinese manager in a restaurant located in Asia. (Please remove if you think this is not necessary)

The popular fast-food chain KFC introduced its restaurant in China in the late 1980s. However, the slogan “Finger Lickin” was accidentally translated to a phrase that meant that it was good to eat your fingers off, which was not well received by the Chinese (Biggs, 2019). Nevertheless, the company overcame the catastrophe and eventually successfully opened 4,400 branches in the country (Biggs, 2019).

Moreover, Dyke Shipp, the global CDO for KFC reported that KFC takes different forms in different parts of the world, according to how its people prefer to interact with the brand (Lalley, 2019). The matter under discussion is cross-cultural as people of distinct cultures have contrasting perceptions of KFC, which require attention and due diligence from the brand’s marketers. KFC hence adapted to the local’s perceptions of itself; in South Africa, the restaurant was created in six recycled shipping containers combined (Lalley, 2019).

Commercial Risk

The risks for international businesses that stem from a lack of sound knowledge and experience about any particular country or stakeholders form a foreign country are categorised as commercial risk (Daniels et al., 2014). Commercial risks, although mostly inevitable, can result in considerable damage in terms of brand name, brand identity, trustworthiness, and reputation of a business in the eyes of the stakeholders such as customers, business partners, and even the government and the legal system. Hence, risks such as miscalculations about logistics, missing essential features in products, incorrect translation of phrases, ineffective pricing methods, and airing faulty, inappropriate, or offensive marketing messages all fall into the category of commercial risks for international businesses (Cavusgil et al., 2014).

Commercial risks can be extremely damaging to the brand image of internationally operating businesses. The marketing campaign of the restaurant chain Hardees in Pakistan is an example of commercial risks. Pakistan is a predominantly Muslim country with religious and conservative morals and customs (Zaman, 2018). In such an environment, Hardees launched its campaign with heavy sexual innuendos that were difficult to miss. The restaurant chain’s latest advertisement read “Big enough?” and featured a scale alongside a woman’s mouth wide open, measuring it to be 10 inches (Entertainment Desk, 2016. The restaurant chain faced severe backlash due to their attempts at objectifying and sexualising women, especially in a conservative country (Entertainment Desk, 2016).

Country Risk

Country risk, also known as political risk or legal risk refers to any threats that an internationally operating business faces due to the political or economic situation of a country (Daniels et al., 2014). The country risk for an international business is highest during conditions of political or economic turmoil (Giambona et al., 2017). The country risk may include issues such as terrorism, barriers to trade, barriers to investment, intervention by the government, and protectionism. Although the country risk is directly dependent on political and legal factors, the underlying reasons behind the risk may be economic, technological, or even social.

For instance, according to Rumney (2017), the restaurants, bars, and hotels in England are struggling to find employees to fill the positions that have become vacant due to the British exit from the European Union. Brexit has caused thousands of members of the workforce in England to return to their home countries, leaving a significant shortage in the workforce. Pret a Manger, the international restaurant chain, and Franco Manca have specifically warned the British Hospitality Association (BHA) about their losses due to insufficient employees (Rumney, 2017).

Currency Risk

Currency risk is categorised as the specific risk that international businesses are exposed to when the exchange rate of local currency and foreign currency presents challenges for them (Daniels et al., 2014). The dynamic currency values are among the most troublesome strategic issues that international firms may face on a day to day basis (Lee and Jang, 2010). As multinational businesses regularly deal with foreign as well a local currency, they are at a high possibility for facing currency risk (Lee and Jang, 2010). The currency risk, in turn, causes issues for the investors of international firms as they might be paid out in foreign currencies. The fluctuating exchange rate, a macroeconomic factor, is one of the primary strategic risks that remain unaffected by any efforts that a restaurant might undertake.

For instance, Azhari (2020) reported that Kudeta Bistro, a French eatery in Lebanon, has faced significant losses due to the Lebanese exchange rate with the US dollar (USD). As 1 USD equals 4,000 Lebanese pounds, customers are unable to afford the eatery’s offerings. Moreover, the Lebanese government has imposed restrictions on restaurant management in terms of price ceilings, due to which the cost of cooked dishes even exceeds their price (Azhari, 2020).

Risks Responses

Although all types of primary strategic risks cannot be entirely avoided, international businesses can attempt to mitigate or manage the risks to lessen their adverse effects on their business. The current section of the report hence attempts to develop appropriate risk responses that internationally operating companies can use to reduce the primary strategic risks.

Yip’s Total Global Strategy

The total global strategy developed by Yip (2001) is a popular framework that allows internationally operating firms to manage their operations in a global environment. Yip, however, takes a different view of the term “global strategy” than do other authors of the time such as Inkpen and Ramaswamy (2005), who state that firms must devise and develop distinct global strategies for each country that they operate in. The total global strategy by Yip (2001) instead maintains that a single global strategy must be developed and established that can be applied to all the countries that the business operates in. Yip (2001) theorises that the industry operations of a company in each country are interdependent; hence, an international organisation must be able to subsidy the functions and resources between countries.

There are three stages that any internationally operating company must follow to implement a total global strategy. They are to develop a core strategy, internationalise the core strategy, and globalise the international strategy (Yip, 2001). Any business requires the establishment of a core or basic strategy to direct its operations in a particular country. To convert a core strategy into a global strategy, firstly, the corporation must take into account all the micro-environmental and macro-environmental factors that would influence it in an international setting. Secondly, the same step must be repeated for a global stage.

In effect, the domestic or core strategy for a restaurant brand such as McDonald’s have internationalised their restaurant initially by standardising its offerings and enhancing its unique selling proposition. Once the brand was established across international borders, it globalised its strategy by adapting to the strategic environment inside each country that it wished to expand into. Accordingly, it introduced vegetable burgers, porridge, wraps, spaghetti, wine, and even shrimps in its menu (Cross et al., 2018).

Yip’s strategy allows businesses to actively and effectively manage primary strategic risks or even successfully avoid them altogether (Yip, 2001). Inference suggests that cross-cultural risks and commercial risks can be governed by the framework under discussion almost entirely. Furthermore, it can also help mitigate currency risks and country risks to a fair extent.

Active Management

Internationally operating restaurants could also take measures to manage any cross-cultural or commercial risks actively. As these risks are caused by factors internal to the business, there are simple measures that a company can undergo to mitigate or manage them. International businesses must make it compulsory for their managers, especially the managers that overlook communications, to undergo language courses so that the language barrier is dissolved. Secondly, social interactions between the local managers and the foreign public must be made necessary so that the managers can learn about the cultural norms and mores of the foreign country. Thirdly, qualified local translators must be taken on board to help the managers by cross-checking all kinds of communication and their activities to avoid any issues with the foreign stakeholders. Fourthly, geocentric and polycentric staffing would be an effective way to manage cross-cultural and commercial risks.

Defensive Management

The current subsection pertains to the collective measures that can be taken to manage financial risk and country risk. As external macro-economic factors bring on both financial risk and country risk, organisations can only defend itself against them. In doing so, managers of international organisations must either hire in-house financial and international environment analysts or use a third-party analyses provider to forecast both financial and country risks that could occur in the near future. Once the company has understood the nature of future risks, it can then either choose to move out from the foreign country completely or defend itself against the predicted risk. Precisely, analysts can forecast risks about upcoming issues such as currency fluctuations and political instability. Organisations can then accordingly take measures to protect themselves.

Conclusion

The report identified and analysed the four primary strategic risks that international businesses may face; namely, cross-cultural risk, commercial risk, country risk, and currency risk. The report uses examples of the risks presented to present-day companies to effectively explain the various impacts of the four kinds of risks. The report has specifically used the restaurant industry to provide examples and evidence to illustrate the types of risks as well as the suggested methods of mitigation against them. In doing so, KFC in China, Hardees in Pakistan, Pret a Manger and Franco Manca in England, and Kudeta Bistro in Lebanon have been used.

The report additionally presents two basic methods for the management of primary strategic risks for international businesses: Yip’s total global strategy and defence management. The three-step process of Yip’s strategy and the use of analysts is recommended to mitigate all four kinds of risks. Moreover, measures such as the use of translators, polycentric staffing, and an understanding of local culture are advised to avoid and manage cross-cultural and commercial risks specifically actively.

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