International Business Strategy: McDonalds in India - Essay Example

?Running head: MCDONALDS COMPANY International Business Strategy: McDonalds India Insert Insert Grade Insert 7 February International Business Strategy: McDonalds India 1. External and Internal Environment 1.1. The purpose of environmental analysis A business organization definitely operates in some environment that is often not static but exhibits some dynamism. An important theory of management then focuses on how a firm is able to adjust its operational strategies and organizational structures in order to cope up with the environmental changes (WordPress.com, 2012). The environment also varies with different market locations across the globe. Strategic business planning then involves collecting the information about an organization and examining how the internal abilities of the firm can be married to the prevailing external environment in order to gain a competitive advantage (WordPress.com, 2012). Environmental analysis involves industry analysis and PEST analysis. The industry analysis entails an examination of the business environment in which the business is to operate focusing on the competitors, the clients, and the suppliers of the organization (WordPress.com, 2012).Porter’s Five Forces is appropriate for use here. Similarly, the political, economic, social and technological factors in a given business environment also affect the success strategy development and operations of an organization. Different countries have difference level of economy and technological advances as well as socio-political developments. PEST analysis is appropriate for this analysis. The internal and external factors can also be examined through a SWOT analysis of the company. McDonald’s is one of the world leading food service retailers with its headquarters at the United States. The company has more than 33000 restaurants and serves about 68 million people daily in over 119 countries across the globe (McDonalds.com, 2012a). The mission of the organization is to provide the customers with the most favorite place and way to it (McDonalds.com, 2012a). The company’s global operation strategy is mainly focused on the customer experience applying the 5Ps model: People, Products, Place, Price, and Promotion. 1.2. Industry Analysis- Porter’s Five Forces Several factors affect the operations of an organization in the food service industry in the US and across the globe. Porter’s Five Forces assess the nature of competition in a given industry and describe the attractiveness and profitability of the industry. The five forces include threat for new entrants, threat of substitutes, bargaining power of buyers, bargaining power if suppliers, and degree of rivalry among the existing competitors (tutor2u, 2012). The threats of new entrants into the restaurant industry in the US are high due to low barriers to entry and large numbers of entry candidates (Espire Marketing LLC, 2011). New restaurants are opened daily since the customers often opt for new and different places to eat. The little government regulations in the industry, lack of patent/legal protection, and relatively similar technological efficiencies contribute to the low barriers to new entrants (Espire Marketing LLC, 2011). These conditions also apply in most of other foreign markets. There are little or no threats of substitutes in this industry. Food is a basic commodity for which the clients have no alternative (Espire Marketing LLC, 2011). The threat of substitutes only comes in during the selection of food items in the menu. The buyers’ bargaining power is relatively high in the restaurant industry, and thus, for McDonalds (Espire Marketing LLC, 2011). The customers can easily shift to other restaurants and so the company must be sensitive and quick to respond to the customers’ changing needs and preferences in order to maintain this relationship. The buyers are particularly powerful because they have low switching costs of choosing another restaurant for similar services (Espire Marketing LLC, 2011). McDonalds has arrangements with certified and selected suppliers of farm products like chicken, eggs, and beef. As such, there are control mechanisms that make the supplier’s bargaining power relatively low. The restaurant industry is among the most competitive industries in the US market and even across the globe (Espire Marketing LLC, 2011). There are several players in the industry struggling to make profits as well new entrants who lead to high rates of competition. The company faces competition on the local, regional, national, and global level. Some of its competitors include Starbucks, Subway, Wendy’s, Taco Bell Yum, Burger King, Jack in the Box, Five Guys, and White Castle among many other restaurants (Marketing Teacher Ltd, 2012a). 1.3. PEST Analysis Various political factors affect the company’s regional and global operations. The company has been operating across several countries for several decades. Each of the states has varied policies that affect the company’s international operations. Some of the states have regulations on health implications of the fast foods whereas others have religious laws pertaining to some foods, as is the case in India (Management Paradise, 2010). Economic factors also contribute largely to the success of companies in the fast food industry. Organizations like McDonalds with branches across the globe have to experience the effect of an economic downturn that hits a given state in which they have their operations (Management Paradise, 2010). Fluctuations in the foreign exchange rate will particularly influence the customer’s choice to use foreign or local restaurants. Operating in a multicultural environment requires the company to be responsive to the cultural differences. McDonalds Corporation has been sensitive the diversity through providing the clients in different markets with a variety of options in relation to their dining needs (Management Paradise, 2010). The company adjusts its products to meet the quality that is reliable in a given market. The company applies adequate modern technology to facilitate its operations. Much of its extensive advertisements are carried out through television and other animation techniques using famous characters (Management Paradise, 2010). It also applies technology in the inventory management and management of the supply chain (Management Paradise, 2010). 2. The company’s motive to go international The company’s motive to internationalize its operations and the subsequent entry mode stem from certain economic theories and principles. In the perspective of economic theory, an organization needs to pursue the projects with net positive present values whenever and wherever projects arise. This can be achieved through geographical diversification, diversification of product portfolio, and through technology development. Internationalization theory further holds that firms should minimize the risks and uncertainties of internationalization by entering a market gradually, learning more about the market and committing more resources to the market when its is promising (Vahlne & Nordstrom, 1993, p.530). The company has been operating in several countries for several years. The rationale behind Internationalization and international collaboration include gaining access to local resources in a region, overcoming some legal barriers, minimizing risks, and diversifying geographically to overcome problems caused by fluctuating business cycles (Paul, 1966, p.160). The firm went global to reduce competitive risks. Due to intense competition in the US food industry, the company opted to go international to utilize the opportunities in the emerging markets like India. The global operations of the organization are governed by the fundamentals values and principles that apply across their subsidiaries in the world. Firstly, customer experience is the center of focus for the organization. It has value for the customers that is shown through the high quality foods and services provided in a clean environment. The company’s major goal is settled on quality, service, cleanliness, and values (McDonalds.com, 2012a). It also shows respect for the customs and culture of a given community in which it operates. The company is committed to the employees and teamwork. The management believes that ‘a team of well-trained individuals with diverse backgrounds and experiences, working together in an environment that fosters respect and drives high levels of engagement is essential to continued success’ (McDonalds.com, 2012a). The company ensures a balanced interest between the company owners, suppliers, and employees. The company has corporate social responsibility. It has programs to give back to the community in order to improve its reputation among the members of the society (McDonalds India, 2008b). This provides a competitive advantage to the organization. The company is also a learning organization that emphasizes the need for evolution and innovation to meet the changing customer needs. This can be enhanced through internationalization that involves exchange of skills and technology Besides, the company has shown sustainable development since its inception. With this growth in inventory and with the current wave of globalization, it was inevitable to expand its operations across several countries. 3. The country for the company’s next move in international expansion 3.1. SWOT Analysis The successful management of the organization depends in its ability to identify the internal factors (strengths and weaknesses) as well as the external factors (opportunities and threats) affecting its operations. It then examines how to apply the strengths to exploit the available opportunities and overcome the threats while improving on it weaknesses. Strengths McDonalds, as a player in the food service industry, has a number of strengths that earn it some competitive advantage over the other world renowned players. Effective leadership and human resource management: the company provides a good working environment for its employees with annual training of staff (Marketing Teacher Ltd, 2012a). It observes employee appraisal and ensures that the staffs are promoted to higher positions depending on their performance abilities Corporate social responsibility: Through the Ronald McDonald house facilities, the business provides subsidized food and accommodation services to vulnerable families in several communities across the globe (Marketing Teacher Ltd, 2012a). Its Ronald McDonald Care Mobile programs also provide cheap medical, dental, and educational services to children from poor families The company operates across the globe and is thus able to absorb an economic fluctuation that is experienced in a given country Ability to adapt their global operations to the diverse cultures: This is evident in India where they provide lamb burgers instead of cow burger. It is also evident in the Middle East where they have separate entrance for single women and families (Marketing Teacher Ltd, 2012a). The company has shown serious concern about food safety. The company uses no fillers or additives to its products. It serves foods purchased from certified and inspected suppliers that are 100% fresh from the farms (Marketing Teacher Ltd, 2012a). The company gives nutritional information of its products to the consumers. Weaknesses Inability to compete in the fast food pizza chains after their test marketing in this line of operation failed (Marketing Teacher Ltd, 2012a). The company has also been unable to take advantage of the current trends in the food industry towards organic foods The company has also recorded fluctuating operating and net profits over the last decade. It had an operating profit of $3,984 million in 2005, $4,433 million in 2006 and $3,879 in 2007 as well as a net profit of $2,602 million in 2005, $3,544 million in 2006 and $2,395 million in 2007 (Marketing Teacher Ltd, 2012a). This has had negative impacts on the company’s relation with its stockholders. Opportunities Increased health concern in the food service industry- there is need for the provision of healthy hamburger with low fat contents Expansion to include breakfast foods and beverages in the company Emerging markets. Threats McDonald’s experiences competition from other players like Burger King, Starbucks, Wendy’s, and KFC among many other players in the United States and across the globe (Marketing Teacher Ltd, 2012a). There are chances of food contamination by disease-causing organisms- this can affect the company’s reputation. 3.2. Entry into India The entry of McDonalds Corporation into India came at the right time following the market trends that began to emerge in India. The region was showing a promising market in the food service industry despite the differences that were likely to be encountered. Firstly, India was experiencing a strong economic growth with promising buyer ability. The customers also had passion for new products and the use of new services in the Indian market (Kulkarni et al, 2009). The Indians also did not exhibit serious negative perception of the foreign products except for those who considered it a form of westernization. The customers generally perceived foreign brands to be superior and high-valued (Kulkarni et al, 2009). Besides, the Indians were positive about globalization and its impacts on various markets. The customers wanted markets in which they had a number of alternatives from which to choose (Kulkarni et al, 2009). These factors provided a market opportunity for the company in India. On the hand, there were certain risks factors including differences in cultures, policies, economic levels. While the US had developed economies, India was an emerging market. Some of the regular food items were also forbidden here. In order to manage the risks and exploit the opportunities, the company applied a variety of strategies. These include providing alternative foods to the forbidden; seeking government approval; providing cost-effective foods and food services. The company began its operation by launching its brand. This involved changing the perception of the Indian consumers that it was foreign and American with the intention of bringing in the western culture (Chaturvedi, 2009). It portrayed itself as an Indian company promoting family values and culture. The company also focused on quality service, cleanliness, and value for money. 4. Market entry mode applied by the company The mode of entry refers to the channel employed by an organization in gaining entry into new international market and includes internet, licensing, joint ventures, wholly owned subsidiaries, international agents, international distributors, exporting, and strategic alliances among others (Marketing Teacher Ltd, 2012b). Several factors may influence the choice of market entry mode. These include factors specific to the firm such as its asset specificity, international experience, as well as its size (Santamaria & Ni, 2008). The factors are largely concerned with risks of foreign establishment. The other category include factors specific to the home country as well as the country of foreign establishment (Santamaria & Ni, 2008). The political, economic, legal, institutional, and cultural factors are also considered to reduce country risks through modes that are not involving (Santamaria & Ni, 2008). Other factors related to the market like market potential, demand uncertainty, and competition need to be considered as well (Santamaria & Ni, 2008). The speed with which an organization wishes to have foreign establishment is essential consideration. The organization opted to use collaborative internationalization and in particular joint ventures in entering Indian market. It would later employ franchising. A joint venture involves two or more independent companies working together in managing the new firm and haring the revenues and costs (Masum & Fernandez, 2008). Negotiations to have the company established in India began in the early 1990s with the proposal of joint venture between the company’s subsidiary and local partner being approved in 1993 (The New York Times, 1993). The company was first opened in 1996 and it received serious challenges due to the religious culture of the Hindus. In order to be established in the country, McDonald’s Corporation (USA) entered a 50-50 joint venture with some two Indian businesspersons (Kulkarni et al, 2009). Amit Jatia of Hardcastle Restaurants Pvt. Ltd managed the company’s operations in Western India whereas Vikram Bakshi of Connaught Plaza Restaurants Pvt. Ltd managed the operations in North India (Kulkarni et al, 2009). Amit Jatia would later serve as the Managing Director for McDonalds India. The companies signed a joint-venture agreement in 1995 that would stipulate the objectives of the collaboration as well as the role of every partner in meeting these common objectives. Before opening the first restaurants in India, the management of the two companies and the Indian management team went for Industrial training in the established company institutions in Indonesia and USA (Kulkarni et al, 2009). This was necessary to have the partners align their business objectives and operational strategies towards a common achievement. One outstanding advantage of joint ventures over other strategic alliances is that it is equity-based with the individual parties owning a proportion of the newly established company (Marketing Teacher Ltd, 2012b). In this case, joint ventures enable one partner organization to access the management skills and technology that is applied by the other partners for a common objective. The partner organizations are able to combine their efforts on research and development to produce products and services that meet the changing needs of the clients. Joint ventures provide a proper avenue for entry into a foreign market (Marketing Teacher Ltd, 2012b). Nonetheless, the company later moved own to apply franchising and 80% of McDonald’s restaurants across the globe are currently franchised (Phillips, 2012). The company’s establishment in India in 1996 and its subsequent operations has been faced with a number of challenges, on one hand, and coupled with significant developments on the other hand. One of the challenges was that slaughtering of cows is a religious violation in India and a good proportion of the population is purely vegetarian. In most states, many restaurants serving water buffalo meat (The New York Times, 1993). The company responded to this by proving alternatives like lamb burgers in the restaurants. There was also competition from the domestic companies with some notion that McDonalds was foreign and American. The company’s management appealed to the locals that it had the interest of the native Indians. Nonetheless, the deal has had net positive impacts on the company’s performance. These are largely due to the growth that has been recorded in the Indian quick service restaurant market. The first restaurants were established in Mumbai and Delhi in 1996. At this time, the Indians in these urban centers ate out about three to five times in a month (Chaturvedi, 2009). By 2008, the frequency of eating out had doubled and it was projected that the Indian quick restaurant market would be worth $6.5 billion by 2011 (Chaturvedi, 2009). The company has seen growth in its establishment in the area. The first outlet was established in Mumbai in 1996 after which the company has expanded to open outlets in other large and small towns and cities in the country. By 2008, the company had established its premises in the cities and towns like Delhi, Mumbai, Bangalore, Baroda, Indore, Pune, Nasik, Surat, and many others (Chaturvedi, 2009). The company and its management have received various performance awards in India as key performers in the food service industry. For two consecutive years, 2003 and 2004, the company was named No.1 Food Service Company in India in the Business World’s “Most Respected Company” awards (McDonalds India, 2008a). The serving managing director was also awarded as ‘Entrepreneur of the Year’ in 2004 and 2005. 5. Conclusion/recommendation McDonalds Corporation has opted to go global owing to the potential benefits of internationalization and the current wave of globalization. The company’s internationalization has been successful in several cases even though it has met certain challenges. Several factors within and outside the company influence its operations in a given region. The company has strengths that can enable it to utilize the emerging opportunities. It also has certain weakness in which the management needs to make adjustment. To continue its global operations, the company needs to take further steps. The entry modes like joint ventures are less risky and appropriate when entering a foreign market. The company then moved on to franchising, which is still largely managed and owned by other organizations. In the subsequent expansion of operations in a given market, the company should make use of other mechanisms that reserve more ownership now that risks have been lowered. There is also a need to respond to current wave of organic foods in the market. The company should show increasing concern in providing foods with low fat contents. Reference List Chaturvedi, P., 2009. How McDonald's evolved its marketing in India. (Online). Available at: [Accessed February 7, 2012] http://ipm.ge/article/How%20McDonald%27s%20evolved%20its%20marketing%20in%20India_ENG.pdf Espire Marketing LLC. 2011. Panera Bread Company – Case Study: Five Forces Analysis. (Online). Available at: http://www.espiremarketing.org/panera-bread-company-case-study/ [Accessed February 7, 2012] Kulkarni, S. et al. 2009. McDonald’s Ongoing Marketing Challenge: Social Perception in India, OJICA-Online Journal of International Case Analysis, 1(2); (Online) Available at http://ojica.fiu.edu/index.php/ojica_journal/article/viewFile/19/18 [Accessed February 7, 2012]. Management Paradise. 2010. Pest Analysis on McDonalds. (Online). Available at: http://www.managementparadise.com/forums/principles-management-p-o-m/208679-pest-analysis-mcdonalds.html [Accessed February 7, 2012]. Marketing Teacher Ltd. 2012a. SWOT Analysis McDonald's. (Online). Available at: http://marketingteacher.com/swot/mcdonalds-swot.html [Accessed February 7, 2012] Marketing Teacher Ltd. 2012b. Modes of Entry into International Markets (Place): How does an organization enter an overseas market? (Online). Available at: http://marketingteacher.com/lesson-store/lesson-international-modes-of-entry.html [Accessed February 7, 2012]. Masum & Fernandez. 2008. Internationalization Process of SMEs: Strategies and Methods. Master Thesis EFO705. (Online). Available at: http://www.google.com/url?sa=t&rct=j&q=McDonalds-+motives+on+internationalization&source=web&cd=3&ved=0CDwQFjAC&url=http%3A%2F%2Fmdh.diva-portal.org%2Fsmash%2Fget%2Fdiva2%3A121500%2FFULLTEXT01&ei=DQUxT-OUHs334QTL2MTtBA&usg=AFQjCNElVyoh4l6VAIrQ73CuBEg3Myzm5Q&cad=rja [Accessed February 7, 2012] McDonalds India. 2008a. Amit Jatia- Joint Venture Partner & Managing Director, McDonald’s India [West & South Region]. (Online). Available at http://www.mcdonaldsindia.com/ManagementProfile.pdf [Accessed February 7, 2012] McDonalds India. 2008b. McDonald’s India. (Online). Available at: http://www.mcdonaldsindia.com/McDonaldsinIndia.pdf [Accessed February 7, 2012] McDonalds.com. 2012a. Mission and Values. (Online). Available at: http://www.aboutmcdonalds.com/mcd/our_company/mission_and_values.html [Accessed February 7, 2012] Paul, J., 1966. International Marketing: Text and Cases. New Delhi: Tata McGraw-Hill Phillips, S. 2012. 10 Secrets of McDonald’s success, The Motley Fool Australia. (Online). Available at: http://www.fool.com.au/2012/01/investing/10-secrets-of-mcdonalds-success/ [Accessed February 7, 2012] The New York Times. 1993. Company News; McDonald's Joint Venture Approved By India. (Online). Available at: http://www.nytimes.com/1993/02/10/business/company-news-mcdonald-s-joint-venture-approved-by-india.html [Accessed February 7, 2012] Tutor2u. 2012. Strategy: Porter's Five Forces Model: analyzing industry structure. (Online) Available at: http://tutor2u.net/business/strategy/porter_five_forces.htm [Accessed February 7, 2012] Santamaria, B., & Ni, S., 2008. “Entry Modes of Starbucks” Master Thesis Course - International Business and Entrepreneurship. (Online) Available at: http://www.google.co.ke/url?sa=t&rct=j&q=Modes+of+market+entry-+Joint+venture%2C+franchising%2C+subsidiaries+etc&source=web&cd=3&ved=0CDgQFjAC&url=http%3A%2F%2Fmdh.diva-portal.org%2Fsmash%2Fget%2Fdiva2%3A121498%2FFULLTEXT01&ei=bOswT4TCGomL4gTqha2OBQ&usg=AFQjCNHt5fHSpeQLoZbkz4Kxr6d6J8rFvg&cad=rja [Accessed February 7, 2012] Vahlne, J., & Nordstrom, K., 1993. The Internationalization Process: Impact of Competition And Experience The International Trade Journal.7(5); (Online) Available at http://www.iei.liu.se/fek/frist/723g17/pwom_2008_filarkiv/1.104715/VahlneNordstrm.pdf [Accessed February 7, 2012] WordPress.com, 2012. Drawing strategic value from scanning and business environmental analysis. (Online) Available at: http://dilipnaidu.wordpress.com/2009/10/28/drawing-strategic-value-from-scanning-and-business-environmental-analysis/ Appendix: Recent Global Sales Patterns at McDonalds McDonalds Corporation has witnessed significant increase in global sales with constant currency growth targets. Average annual sales growth of 3% to 5% Average annual operating income growth of 6% to 7%, and Return on incremental invested capital in the high teens Systemwide sales increased 9.5% for the month as depicted below: Percent Increase Comparable Systemwide Sales Sales As Constant Month ended November 30, 2011 2010 Reported Currency McDonald's Corporation 7.4 4.8 9.5 9.5 Major Segments: U.S. 6.5 4.9 7.2 7.2 Europe 6.5 4.9 8.3 9.2 APMEA* 8.1 2.4 15.2 12.4 Year-To-Date November 30, McDonald's Corporation 5.2 5.2 11.0 7.0 Major Segments: U.S. 4.3 3.9 5.0 5.0 Europe 5.5 4.9 14.3 8.2 APMEA* 4.5 5.7 15.7 7.0 * Asia/Pacific, Middle East and Africa Source: http://phx.corporate-ir.net/phoenix.zhtml?c=97876&p=irol-newsArticle&ID=1629145&highlight= Read More