Diversification Strategies: a Comparison of Wal-Mart and McDonalds - Research Paper Example

?Diversification Strategies: Wal-Mart vs McDonald’s Wal-Mart and McDonald’s have been two of the most successful corporate leaders in their own respective fields, yet the former is far more diverse today as compared to the latter. Although both tried to diverse their respective businesses at certain points in time and in certain ways, yet Wal-Mart’s diversification strategies were met with unusual success while those of McDonald’s did not prove quite successful. This paper draws a comparison between the businesses and diversification strategies of Wal-Mart and McDonald’s. Wal-Mart today is the world’s largest retailer. It is even larger than the ExxonMobil or the General Electric. Wal-Mart offers a wide array of products ranging from grocery to fabrics and all kinds of accessories. The general merchandize offered by Wal-Mart includes but is not limited to the toys, jewelry, cosmetics, crafts and electronics. The company also provides the consumers with the facility to shop online. The business started in 1960 when the first store was opened in Rogers. In the following years, the company established outlets and distribution centers in various states. In 1972, Wal-Mart’s name appeared on the New York Stock Exchange. Today, the number of Wal-Mart’s retail stores across the world is 1636, with 502 Sam’s Clubs, 1093 Super centers and 1183 international outlets (Hayden et al, 2002). On the other hand, McDonald’s Corporation is a very big name in the fast food industry. Today, there are roughly 33000 restaurants of McDonald’s in 119 countries across the world that feed above 64 million customers every day (About McDonald’s, n.d.). In the year 2010, the global comparable sales grew by 5 per cent while the earning per growth of the share increased by 11 per cent (McDonald’s Corporation Annual Report, 2010). McDonald’s stock declined by a total of $16 in value per share from $48 in November, 1999 to $32 in February, 2000. The financial analysts considered market saturation to be the prime reason of McDonald’s failed expansion. The fundamental reason for the decline in the value of McDonald’s share between 1999 and 2000 was that every new restaurant that opened affected the customer base of those that were already functional. Having realized this, McDonald’s decided to diversify its business by including a whole range of cuisines in its menu. To achieve this, McDonald’s Switzerland resolved to develop in the hotel business. The CEO Hammer was hopeful that the hotels would do good business and based his optimism on the wide customer base. He said, “Our restaurants serve 74 million customers in a country with a population of 7 million. If only one in 1,000 of those guests choose the Golden Arch Hotel, the project will be a success” (Michel, 2008). Diversification seemed a smart option for the McDonald’s Corporation given its restaurant business had competed well in numerous saturated markets in the past. The first four-star Golden Arch Hotel was opened in March 2001 in Rumlang, a Swiss town. The five-storey 211-bed hotel cost the McDonald’s Corporation a total of $26 million. It was located in the vicinity of a McDonald’s restaurant that was drive-through. This 170-seat restaurant served the customers 24/7. In order to make sure that the hotel building was accessed only by the hotel guests, the hotel was separated from the restaurant. The second hotel was opened after a few weeks in Lully. The hotels had all a guest could ask for. Facilities offered included but were not limited to the custom-based trolley for handling the luggage, two kinds of rooms, assignment of employees to different tasks through the synergy effect, availability of the hotel room-vacancy status at the airport terminal and meeting rooms that were transformable into conference room. McDonald’s Corporation’s hotels failed to do the expected business because of three prime reasons, namely wrong choice of location, high rates and wrong time of construction. The nearest three-star hotel offered rooms at significantly lower rent rates than McDonald’s did. McDonald’s charged $120 and $160 for the two kinds of rooms while the nearest hotel charged between $96 and $137. Another hotel located very near to the Golden Arch Hotel with more than 50 hotels all over the world offered attractive guest-rewards programs. Kloten was another great competitor that was located nearer to the airport and had more rooms and whose meeting rooms were also larger in area. Occupancy in any of the McDonald’s hotels hardly ever reached the industry average. McDonald’s needed to offer a price range of a three-star hotel in order to recover the debt service that was acquired upon the cost of construction. The management also saw a very high employee turnover rate in the first year of operation because of the difficulty of finding well-trained and qualified chefs. The qualified staff preferred the nearby hotels because of higher wages. Last but not the least, global political crises also played an important role in the downfall of McDonald’s hotel business. Numerous unfavorable events occurred at that time that included but were not limited to the US Twin Tower terrorist attacks of 2001, the outbreak of SARS and the grounding of Swissair. All of these events caused the tourism to decline. On the other hand, the fundamental reasons why Wal-Mart’s diversification strategy met with success were its exceptionally low rates, outsourcing and aggressive hospitality encapsulating such rules as the Ten Foot Rule and the Sundown Rule. Wal-Mart has always been able to offer products of the same high quality as its competitors in the market but at significantly lower rates. This ability is linked with the Wal-Mart’s practice of getting the products made by cheap vendors. Outsourcing is the most fundamental secret of Wal-Mart’s exemplary success. “From the beginning, like other discounters, Walton had bought goods wherever he could get them cheapest, with any other considerations secondary” (Ortega, 1999, p. 205). Finally, exceptionally nice customer-service has always been expanding Wal-Mart’s customer base in all its diversification attempts. According to the Sundown Rule, all employees of Wal-Mart are obliged to address a customer’s concern reasonably in no more than 24 hrs. Also, all employees are obliged to wish the customers with a hearty smile and attend them when they are at a distance of less than 10 feet from them. These are just two of the numerous hospitality rules that Wal-Mart has established to enhance its customer-base. As Wal-Mart continues to grow into new areas and new mediums, our success will always be attributed to our culture. Whether you walk into a Wal-Mart store in your hometown or one across the country while you're on vacation, you can always be assured you're getting low prices and that genuine customer service you've come to expect from us. You'll feel at home in any department of any store...that's our culture. (Hayden et al, 2002). Two actions that McDonald’s Corporation could have taken to make the diversification venture successful are offering the hotel rooms and services at lower rates than the hotels in the surroundings, and more prudent selection of the hotels’ location. McDonald’s hotel business was in nascent stage and the competitors had been into this business for decades. McDonald’s should have kept its prices lower in order to attract the consumers. McDonald’s should have selected a location closer to the airport, preferably where it did not have its restaurant nearby because one reason why the hotels didn’t work out was that the customers couldn’t understand how a four-star hotel connected with the restaurant. Political crises also significantly impacted McDonald’s’ chances of success yet many of the unfortunate events were unpredictable. References: About McDonald’s. (n.d.). Getting to Know Us... Retrieved from http://www.aboutmcdonalds.com/mcd/our_company.html. Hayden, P., Lee, S., McMahon, K., and Perelra, M. (2002, April). Wal-Mart: Staying on Top of the Fortune 500: A Case Study on Wal-Mart Stores Inc. Retrieved from http://allman.rhon.itam.mx/~oromero/Wal_Mart_CaseStudy.pdf. McDonald’s Corporation Annual Report. (2010). 2010 Annual Report. Retrieved from http://www.aboutmcdonalds.com/etc/medialib/aboutMcDonalds/investor_relations3.Par.56096.File.dat/2010%20Annual%20Report%20(print).pdf. Michel, S. (2008). Knowledge Network: Faculty & Research. Thunderbird School of Global Management. Retrieved from http://knowledgenetwork.thunderbird.edu/research/2008/07/11/anatomy-of-mcdonald%E2%80%99s-failed-venture-in-hotels/. Ortega, B. (1999). In Sam we trust: the untold story of Sam Walton and how Wal-Mart is devouring the world. UK: Kogan Page. Read More