Contents
Abstract 3
McDonald’s – The Company. 4
Internal Environment Analysis. 5
Corporate Branding: 5
Supply Chain – Inbound Logistics: 5
Operations: 5
Outbound Logistics: 6
Sales and Marketing: 6
Service Standards: 6
Industry Analysis – The Five Forces Model: 7
Potential Entrants – Threat of New Entrants – High. 7
Substitutes – Threat of substitute products – Medium.. 7
Bargaining power of Suppliers – Low to medium.. 8
Bargaining power of Buyers – Moderate. 8
Industry rivalry – High. 9
Business Level Strategy. 9
Strengths. 9
Weaknesses. 10
Opportunities. 10
Threats. 10
Stakeholders. 11
Ethics and Social Responsibility. 12
Conclusion. 13
References. 14
Abstract
This paper analyses the different aspects of competitive and marketing strategies taken up by McDonald’s, one of the leading food chains in the world. The paper starts off with a brief overview of the company, its presence and operations, and moves on to analyse the internal and external environments that the company operates in. With a Value Chain Analysis and engaging the Five Forces model of competitor analysis, the paper tries to find out the relative strengths and weaknesses in different aspects of business operations of McDonald’s, arriving at the relative strengths, weaknesses, opportunities and threats associated with the business strategy. The paper then looks at stakeholder relationships, business ethics and social responsibility issues of business, throwing light on the initiatives taken by McDonald’s in this regard. The study finally concludes that the business strategy adopted by McDonald’s is a mass market, cost leadership approach as against one of differentiation, and suggests ways in which the business strategy could be adapted to bank on the strengths and eliminate weaknesses in business operations.
Keywords: McDonald’s Business Strategy, McDonald’s Competitive Strategy, Business Analysis, McDonald’s Business Analysis
McDonald’s – The Company
The company chosen for the purpose of analysing Strategy in Action is McDonald’s, one of the largest food chains in the world with global operations. The company, which had its origins in the United States of America in 1940, has expanded its operations to become a global chain of over 23,000 restaurants, spanning over 117 countries and employing as many as 400,000 people around the world. The company’s phenomenal growth could be attributed to many factors, apart from the franchise model of expansion that it popularised, a model of expansion that was promptly followed by many competitors and followers. The company’s emphasis on franchises could be recognised by its model of running 6399 of its outlets under its own management, while employing the franchise model for 26,338 restaurants, as has been reported by 2010.
McDonald’s restaurants have stressed a lot on standardisation of operations, products and services, while also providing customised food products based on the regions that the branches are in. The company has its global operations running across four regions, which are the US, Europe, APMEA (Asia Pacific, Middle East and Africa) and Canada as well as Latin America put together.
McDonald’s has its mission to be the “customers’ favourite place and way to eat” (McDonald’s), as publicised in its website, emphasising on “inspired people who delight each customer”.
Internal Environment Analysis
McDonald’s internal environment could be analysed using Value Chain Analysis, where the different aspects of the business ranging from the corporate brand, human resource management, technology adaptation, procurement of raw materials, inbound logistics, operations, outbound logistics marketing and sales, and service standards could be seen through the glasses of pluses and minuses.
Corporate Branding:
In terms of the corporate brand, the main strengths of the business could be seen as its leadership, world-wide reach, band value, intellectual property and its having mastered the game of franchising. However, the major weaknesses involve the large number of lawsuits (BBC, 2002) that the company faces in terms of customers complaining against obesity and the coffee lawsuits (Chicago tribune, 2012) and the kind of damage that they have had on the corporate image.
Supply Chain – Inbound Logistics:
The company’s recognition as having one of the best supply chains in the world speaks for itself in terms of the strengths of the company in the area. The company has its unrelenting focus on speed, with Just-in-Time Delivery (Small Business) and the economies of scale that it reaps on account of its global presence exerting considerable influence on suppliers, serving as its strength.
Operations:
In terms of operations, the company has invested heavily in information technology, as seen in the state-of-the-art order processing systems and the high end communication equipment that the staffs are armed with, to provide services that are at par with the best in the industry. Further, the standardisation achieved by McDonald’s throughout the distribution system, enforcing its codes of conduct among the extensive network of franchisees would count as its strength. However, the high turnover rates found in fast food industry (Chicago Tribune, 2007) means that the company should keep struggling against the trend and try to keep staff stick to the company and invest heavily in investment in people and in training.
Outbound Logistics:
The franchise agreements that the company has been able to successfully form among the entire gamut of distribution network, the quality control measures involved in ensuring that the product and the package reach their destinations in proper shape and at the right time, and ensuring freshness of food throughout the distribution process are challenges that McDonald’s has been able to live up to.
Sales and Marketing:
Most aspects of the marketing mix seem to be perfectly in place, which would prove to be one of the key strengths of the company. The price leadership, the distribution network and the reach that the company has worldwide, and the range of promotions that the company is able to come up with vouch for the effectiveness of the sales and marketing apparatus. However, there have been frequent cases of product failures (Business Insider, 2011) in the company, which is a reason for worry. Further, driving standardisation across the globe, when dealing with varied eating habits associated with different cultures, is a task at hand.
Service Standards:
With all the investments made in customer service in terms of technology, accuracy of order processing and speed of delivery, there are also gaps in the process, since the company focuses on volume and turnover for business success. Naturally, with so much emphasis on speed, there would be little to focus on in terms of customer service and satisfaction, with many customers feeling left out and neglected, caught in the crowd.
Industry Analysis – The Five Forces Model:
A brief industry analysis is done using The Five Forces Model (Porter, 1980, P. 4) to reveal the state of affairs in the fast food industry as follows:
Potential Entrants – Threat of New Entrants – High
The threat of new entrants in the fast food industry is thought to be high, considering the aspects such as ease of product distribution, product differentiation and standardisation, the difference made by economies of scale, entry barriers and switching costs. Since the majority of fast foods outlets tend to work on the franchise model, expansion into new markets is easy, considering that the fixed costs required for expansion tend to be low. With high levels of standardisation and with nothing significantly much added in terms of value, price is a major factor of consideration rather than product differentiation. Switching costs for buyers is negligible, though there is some room for brand value and brand recognition, and the scope for price wars in terms of retaliation from existing players to ward off new entrants. In general, with low entry barriers into the industry, threat of potential entrants is considered quite high.
Substitutes – Threat of substitute products – Medium
The fast food market may have built its brand value over time with price, some differentiation and vigorous marketing activity, but there is no denying the fact that there are a lot more products out there in the market, focussing on the same selling point of convenience and speed as the fast food market does. Right from the whole range of frozen products along the supermarket aisles that offer the convenience of simple reheating for consumption to the increasing research and development that goes into the food industry to provide products that are easier to cook and healthier to eat, there is a growing threat of substitute products that is out there in the market. However, the range of products that are coming up as substitutes may not match the prowess of brand value of global fast food chains, nor could they match up to the combination of price leadership and ease of consumption, where people would just have to walk in and not even heat stuff up. Hence, the threat of substitute products could be considered to be medium.
Bargaining power of Suppliers – Low to medium
The scale offered by global presence in the large food chains might give some leverage for the organisations to wield considerable influence over suppliers. However, in fast food, it is not just the products but also, most definitely, the price that drives business. And there may be limited scope for organisations to keep squeezing their suppliers, forcing lower prices out of them, in an era of inflation and volatile prices of the raw materials involved in the industry. Further, suppliers for the food industry also have alternative avenues of sales available to them in the form of competitors who are growing in numbers in the industry. Hence, the bargaining power of suppliers of raw materials for the food industry could be seen as being low to medium.
Bargaining power of Buyers – Moderate
In this case, buyers have the advantage of having virtually no switching costs – when they are not satisfied with brand A, all that they need to do is to walk through the doors and enter the doors of brand B. High levels of competition in the industry and low switching costs augur well for buyers. Further, the price elasticity of demand is also considered to be high, since consumers are not really dependent on fast food as they may be for, say, bread and butter. Given that fast food tends to be optional rather than compulsive, bargaining power of buyers is high. However, this is an industry that deals in volumes, where there may not be much lost just because one customer walked out of the door. The demand for fast food is not going to go down anytime soon, despite all the signs and talk of recession and economic turmoil. Hence, bargaining power of buyers could be considered moderate.
Industry rivalry – High
In terms of industry rivalry, existing rivalry is high. With the leaders in the industry being McDonald’s and Burger King, there is no dearth of smaller competitors, given the low entry costs as well as the ease of expansion available through the franchise model. The competition is indeed high when it comes to fast moving products that are at the low end of the price chain, even as the established chains want to have their products and presence expanded. The franchise model provides scope for such expansion and contraction, given that the labour intensive industry could go in for additional staff or cut down on shifts, considering the industry operates in terms of variable capacity to suit business needs. Thus, industry in the fast food industry is high.
Business Level Strategy
A brief overview of Strengths, Weaknesses, Opportunities and Threats facing the company is as follows (Baker, M.J, 2006, P 140):
Strengths
The company’s strengths include the brand value and brand recognition that it has built over the years. The company’s employees and human resource policies are some of the most recognised and renowned in the world, a fact that has been made evident by the efforts that the company has taken in providing “unique opportunities we provide employees”, as proclaimed by Richard Floersch, Executive Vice President and Chief Human Resource Officer, on two of its programmes that would celebrate top-performing restaurant employees and its world class training and people development” (Marketwatch, 2012) on the occasion of London Olympics, 2012. Apart from brand and people, its world-wide distribution system and its price leadership and market share are the strengths. Corporate branding, inbound and outbound logistics, operations, sales and marketing are all strengths that the company has been thriving on.
Weaknesses
Weaknesses involve lapses in services and flaws in terms of customer satisfaction, since this is an industry that emphasises on volume and speed. Another contrast is the difference between standardisation and customisation – to focus on a world market and to strive for standardisation is a perplexing mix that should be enough of a trouble to manage. The abundant lawsuits that have dented the brand image, and the trend that goes towards healthier eating habits to get fit and get in shape are factors that would not go well with the product ideology of the company. Further, the high staff turnover rates that are trademark aspects of the fast food industry are things that should give sufficient botheration for the human resource management department.
Opportunities
Opportunities for McDonald’s lie in the form of moderate to low bargaining power of suppliers and the low bargaining power of buyers. This is a mass market industry that focuses on price and product turnover than on differentiation in terms of product and service delivery. An emphasis on operations and supply chain management go well with the brand image and the product and delivery mechanisms. The key advantage is the franchise model and the extensive reach that the model has given the brand through global distribution.
Threats
This is a market that has low entry barriers and low exit barriers, hence, the threat of new entrants has always, and will always be, high. Further, there is also a moderate threat of substitute products. One significant threat is that the company cannot afford to have any lapses in its human resource management practices, which could risk the company’s employability levels. The range of lawsuits that are pending and are still coming up against the company are other aspects that need to be managed not just by the legal team but also by the product as well as research and Development departments.
The strategy adapted by the company is certainly one of cost-based leadership rather than one of differentiation. In a mass market industry, the company that manages its supply chain and its operations, stresses on sales and marketing to increase turnover, and keeps its cost down, would be able to lead the industry, as has been amply demonstrated by McDonalds. Differentiation and value addition in product and service standards would only add to costs and reflect on drop of profit margins and hit the bottom line.
Stakeholders
Monks and Minow (2001, P. 37), when discussing stakeholder laws, consider the way organisations and their management would have to consider the impact of their actions and activities, not just on shareholders, but on all ‘stakeholders’, such as employees, customers, suppliers, and the community as a whole. It is no longer a matter of being focussed on just shareholder value maximisation, but it takes a stakeholder point of view to sustain organisational performance in the long run.
McDonald’s takes its stakeholders’ interests seriously, as it tries to find a way of satisfying and motivating everyone involved through positive action. The official restaurant of the Olympics 2012 has come up with its announcement of McDonald’s Olympic Champion Crew (Equity Bulls, 2012), where the best of the best managers in the company have been selected to serve world class athletes and sportsperson during the London Olympics 2012. The idea is to provide opportunities and hope for employees to have things their way on a global scale, reinforcing the global nature of the brand that they are a part of.
The commitment that McDonald’s shows towards is suppliers can be seen from the efforts and investments that have gone into supply chain management of the company, where processes have simplified and investments made to increase efficiencies. This is evident from the report by Gartner, as published by Daily Finance (2012), the market research firm, which has put McDonald’s on the third spot of the organisations with the best supply chains in the world. A feat such as this could not be achieved without paying attention and focus on suppliers.
In terms of customer satisfaction, one of the key components of the stakeholders of the company, the success, turnover, profitability and recognition of the brand would vouch for the effectiveness and efficiency that the company displays in promoting stakeholder welfare. There is further evidence of the success of the brand, given that Millward Brown, the leading brand consultant, has come up with its report on the value of global brands, and has ranked the value of brand McDonald at the fourth spot, among leading IT brands such as Apple, IBM and Google, as reported by MSN (2012). And the efforts that McDonald’s takes to give it back to the community could be found in the following section on ethics and social responsibility.
Ethics and Social Responsibility
Social responsibility is a delicate surface to step into, considering the organisational objectives of profit maximisation and share holder value maximisation. As Monks and Minow (2001, P. 42) ask of social responsibility, “Is it socially responsible to move jobs out of depressed areas? Is it socially responsible to stay in these areas if it means going bankrupt?”
Some of the values portrayed by McDonald’s read like a book of virtues – to enhance customer experience, showing relentless commitment to people, operating ethically in business with values of fairness, honesty and integrity and giving it back to communities that support the company are some of the facets of McDonald’s values and principles that they claim to embrace.
And it is not just in their sustainability report or corporate responsibility statement that the company shows its commitment towards giving it back to the community that it belongs to. The Foundation for Corporate Social Responsibility (2004) vouches for McDonald’s commitment towards social responsibility, when it affirms that the company’s “principle of giving back to the communities . . . still holds at McDonald’s today”. The report goes on to state that the company and its franchise operations support local schools, the young and the old in the form of athletic teams to communities of senior citizens, promote safety awareness, conduct literacy programmes and environmental projects and take up initiatives towards fund raising in the local communities for noble causes.
The sustainability programme of McDonald’s is seen to have their firm focus on nutrition and wellbeing, taking up environmental responsibility, enhancing employee experiences, promoting a sustainable supply chain and supporting the community in normal as well as in trying times through charities, sponsorships, direct involvement and in providing disaster relief, as claimed in their sustainability report.
Conclusion
It is clear from the discussion that McDonald’s has been focussing on a cost-leadership strategy to win market share in a highly competitive industry, and has reached its dominating position in the market using the strengths of the franchise model of distribution. McDonald’s has exploited its strengths in standardisation of operations, sales and marketing, supply chain management and brand building initiatives. The community initiatives and display of corporate social responsibility go on to strengthen the brand image, involving local communities into the corporate brand and reaching out to a wider market. However, there is room for improvement when it comes to service standards, customisation to suit local cultural values, addressing health issues associated with its diet and focussing more on customer satisfaction, than having a pure and unrelenting focus on business turnover and cost leadership alone. This would help in sustaining the market leadership in a volatile market scenario with high levels of rivalry within the industry players, where customers have no switching costs in terms of choosing alternative brands or substitute products, and in an industry that has minimal entry and exit barriers and hence has high threat of substitutes and new entrants.
References
Baker, M.J (2006). Marketing: An Introductory Text
BBC (2002, November 22). McDonald’s targeted in Obesity lawsuit. Retrieved from http://news.bbc.co.uk/2/hi/americas/2502431.stm
Business Insider (2011, April 30). 12 McDonald’s Menu Items that Failed Spectacularly. Retrieved from http://articles.businessinsider.com/2011-08-30/strategy/30376915_1_big-mac-product-mcdonald
Chicago Tribune (2007, May 15). McDonald’s tries to keep workers from flipping jobs. Retrieved from http://articles.chicagotribune.com/2007-05-15/business/0705140540_1_restaurants-turnover-rate-karen-king
Chicago Tribune (2012, March 23). McDonald’s faces hot coffee litigation again. Retrieved from http://articles.chicagotribune.com/2012-03-23/business/chi-mcdonalds-faces-hot-coffee-litigation-again-20120323_1_hot-coffee-mcdonald-s-usa-lawsuit
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Daily Finance (2012, March 27). Retrieved from http://www.dailyfinance.com/2012/05/27/further-proof-that-apple-has-the-best-supply-chain/
Equity Bulls (2012, May 28). Retrieved from http://www.equitybulls.com/admin/news2006/news_det.asp?id=106235
Foundation for Corporate Social Responsibility (November 2004). Retrieved from http://www.fcsr.pl/members/mcdonald/
Marketwatch (2012, May 23). McDonald’s commitment to its People and World-Class Training Play Key Roles for London 2012 Games. Retrieved from http://www.marketwatch.com/story/mcdonalds-commitment-to-its-people-and-world-class-training-play-key-roles-for-london-2012-games-2012-05-23
McDonald’s Sustainability Report. (n. d). Retrieved from http://www.mcdonalds.com/us/en/our_story/values_in_action/the_road_to_sustainability.html
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Monks., R and Minow, N. (2001), Corporate Governance, Blackwell Business
MSN (2012, 27 May). Apple Tops This List. Again. Retrieved from http://www.msnbc.msn.com/id/47581641/ns/business-motley_fool/#.T8S02rCo-4k
Porter, M. E (1980), Competitive Strategy: Techniques for Analyzing Industries and Competitors, Free P
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