Macro and Task Environmental Analysis of Macdonald's - Case Study Example

 Contents 1.0 Background Information p3-4 2.0 Macro Environmental Analysis p4-7 3.0 Task Environmental Analysis p7-10 4.0 Sources of Competitive Advantage p11-14 5.0 Options and Responses p14-16 McDonalds Report 1.0 Background Information McDonald’s is one of the largest fast food restaurant chains and has a global presence operating 32,000 restaurants on all six continents. Despite the recent economic downturn, the past three years have seen high levels of performance from the financial perspective with the company operating income rising from $6.4bn in 2008 to $7.5bn at t5he end of 2010. Such trends have been rewarded by the market with three year total returns of 12.7% against the Dow Jones Industrial Average (DJIA) which has lost 1.6% in the past three years and the S&P 500 which has done worse giving investors a -2.9% rate of growth in the past three years (McDonald’s, 2010). From a strategic perspective, McDonald’s is currently perusing an aggressive sales based strategy in new and emergent markets such as China, India, Russia and parts of South America. While McDonald’s traditional markets such as the UK and US may be seen as saturated, the company has still managed to increase sales through organic growth with sales in 2010 increasing by 3.9% in the US and 4.4% in Europe compared to 6% figure seen in new and emergent markets for the company (McDonald’s, 2010). In generating continued growth over the past eight years, the annual report (McDonald’s, 2010) highlights the fact that a clear strategy has been set in the adaptation of a globalised marketing mix template to meet the needs of localised customer groups (Brassington and Pettit, 2006, Kottler et al, 2009). As such, for McDonald’s this results in a business model with limited complexity and the associated costs of complexity, yet the ability to benefit from a localised marketing strategy. In addition the business has in recent years developed a clear model of communication in which three key stakeholders are included so as to ensure success of the businesses strategy at the aggregate level. Here the annual report (McDonald’s, 2010) highlights franchisees, suppliers and employees as the key stakeholders of the business in carrying out the overall strategy of the business. 2.0 Macro Environmental Analysis A standard tool for analysing the key factors within the general level or macro environment is to use a PESTLE analysis (Jones and George, 2010, Johnson et al, 2008). The PESTLE analysis considers six key factors within the external macro level environment which may have an impact upon how a business later seeks to create a competitive advantage. Political Political factors in recent decades may be seen as aiding the McDonald’s business model for large international expansion. Key political reforms such as the integration of previously isolated economies such as Russia and China into the international economic system have allowed McDonald’s expand into large new markets which were previously isolated due to political isolation of the nations in question. Economic Given that McDonald’s product presents a discretionary purchase on the behalf of consumers, this may lead analysts to be concerned with the potential growth opportunities for McDonald’s given current fears over continued poor economic performance in the economy as a whole (OECD, 2009, 2010). Despite this, a general trend towards economic development in the developing economies of the world may also see McDonald’s have the opportunity to increase sales by focusing upon new markets. Furthermore, the current low levels of interest rates seen in the UK and US mean that McDonald’s has a key opportunity to borrow for the purpose of investments at record low cost levels. As such, this economic policy may be seen as one which is able to help McDonald’s expand significantly at a reduced cost in future years. Social Social and demographic trends may be one of the most significant issues for McDonald’s in confronting the pressures of the external macro level environment. On the one hand, consumers in established markets such as the UK and US have seen an increasing social move in recent years towards the purchase of healthier foods and green products (Parsons and MacLaran, 2009). As such, this may require McDonald’s to continue to adapt its product portfolio in existing markets so as to cater for the specific needs of a market with different social attitudes that of a decade ago. Other demographic changes include considering the changing population profile of different countries around the world and the relative opportunities and threats this presents. While population levels may be seen as stabilising in the Old World, by contrast large population booms are being seen in developing markets such as Africa and South East Asia. This may see McDonald’s wanting to consider carefully where the company chooses to invest so as to maximise the opportunity for incremental volumes based upon selling into countries with an expanding population. Technological Technological developments may be seen as having a wide impact upon McDonald’s in two key forms. Operational, developments in transport and other supply chain technologies in recent years will allow McDonald’s to increasingly manage its operations with increasing efficiency including lower inventory levels, lower levels of waste and though a greater level of internationalisation of the supply chain (Christopher, 2005). The other key technological development for McDonald’s is that of the internet, while McDonald’s thus far has not made use of the internet significantly for sales purposes, the use of the internet as a potential marketing tool is a significant one for the company. Making use of the internet can be a cost effective way of reaching a global audience with an instantaneous time frame and much reduced costs in comparison to traditional mass media methods of advertising (Jobber, 2007, Yeshin, 2006). Legal Legal challenges for McDonald’s may be seen as one of the key areas for considerations. A significant element of the success of McDonald’s may be attributed towards the success of the company’s international brand. As such, this requires constant legal attention in form of the protection of intellectual property rights. As an operator in the food services sector, McDonald’s is also subject to some of the most stringent regulations enforced by governments, especially in developed markets such as the UK and US. As such, McDonald’s must pay a high degree of attention towards being compliant with the relevant food safety legislation in each of its international markets. Environmental The increasing environmental pressures placed upon organisations in recent years has seen a change in consumer demand with a requirement for organisations such as McDonald’s to act in a more socially responsible way. Key environmental measures adopted by McDonald’s include the retro-fitting of restaurants to include energy saving features, in the incorporation of water saving technology in new restaurants and the use of products such as free range ingredients, which are seen as having lower levels of environmental impact in the first case. 3.0 Task Environmental Analysis Jones and George (2010) indicate that in analysing the task environment there are a number of key considerations to appraise including, competitors, customers, suppliers, and distributors each of which will now be analysed in the context of McDonald’s operations. Competitors On the whole McDonald’s competes within the fast food market segment with a number of other large international fast food chains including Burger King, Pizza Hut and KFC. Many of McDonald’s competitors also have a large international research will well known international brands and a global distribution network. Indirectly, Pepsico may also be seen as a key competitor for McDonald’s given that the company owns the key and competing brands Pizza Hut and KFC, this may be seen as a significant consideration for McDonald’s given that the company is able to create significant synergies though bringing together multiple brands within a single corporate entity and distribution channel. As such, McDonald’s may be seen as operating in a market which is significantly competitive and ensures that the company must focus upon operational efficiencies so as to ensure the competiveness of the company’s offering in relation to price. In addition, the large nature of McDonald’s key competitors and global reach means that the company must seek to consistently expand and develop a truly global supply chain network if the company is not to lose out in new and emergent markets such as China and India. Customers Overall, McDonald’s customers may be seen as having a high level of power over the company. The cost of switching between fast food alternatives is relatively low and a purchase of McDonald’s products represents a purchase which is relatively low in emotional intensity thus giving consumers a lower level of brand loyalty in relation to larger more complex purchases. As McDonald’s have expanded into international markets, the company has also had to adapt to meet the needs of localised customer needs, this includes providing more vegetarian options in India and removing pork from the company’s offering in Islamic countries and Israel. In addition, changing social trends in established markets amongst McDonald’s customers have also seen the need for further product adaptations including the provision of healthier alternatives such as salads replacing burgers and bottled water replacing traditional carbonated drinks. Suppliers On the whole, McDonald’s suppliers may be seen as having a relatively low power based and thus impact upon McDonald’s operation. In most cases the input goods of suppliers represent generic commodity style goods such as packaging, agricultural products and other mass produced items which are available from a wide number of sources. In addition to the commodity style inputs used by McDonald’s an additional consideration is that as a large customer by volume. McDonald’s is able to leverage significant economies of scale with suppliers ensuring low prices and beneficial commercial terms (Johnson et al, 2008, De Witt and Meyer, 2004). Despite the ability of McDonald’s to be able to negotiate favourable terms and conditions with suppliers, the company has in recent years sought to work with its suppliers to ensure higher standards of quality and a product which is in some cases adapted to meet the needs of localised customer groups. An example of this can be seen in the UK market where the company has deliverable sough to work with UK farmers and free range producers so as to be able to leverage a marketing advantage in promoting the social responsibility of the company to British consumers. Distributors As a food service provider the majority of McDonald’s distribution takes place in house with the primary products being distributed solely through McDonald’s outlets at present. However, when the distribution model is considered in more detail, it may be seen that there are two sub-sectors within the model. McDonald’s as a business distributed to two kinds of restaurant, wholly owned restaurants which are run and operated centrally by McDonald’s and franchised operations in which an operator pays a fee in order to run a franchised operation making use of the McDonald’s marketing formula and products. At the micro level, there have been some changes to the distribution model in some localised geographic markets. While the business model in Western European and the United States sees the emphasis being placed upon the customer to visit a McDonald’s restaurant to obtain the product. In the South East Asian markets, a delivery model has been built into the business model allowing the McDonald’s product to be distributed to a wider number of consumers. At present, McDonald’s does not distribute its products through any third part supplier such as in the supermarket sector, this may be a business and distribution model which McDonald’s may consider in future years and has been one that has been experimented with by other in the food retail sector such as Pizza Express which offers its products in the UK supermarket sector. 4.0 Sources of Competitive Advantage While Porter (2004) considers that a company may derive a competitive advantage from three sources of generic strategy, Jones and George (2010) provide a more comprehensive framework which takes into account four key sources of a competitive advantage namely, improving responsiveness to customers, improving innovation, improving quality and improving efficiency. The essay will now consider how McDonald’s makes use of each of these key strategies in attempting to develop a competitive advantage in the context of the global market for fast food. Improving Responsiveness to Customers The key elements in improving responsiveness to customers on the behalf of McDonald’s may be seen as the ability to adapt the product itself to meet local needs and regional variations. As such, McDonald’s while maintaining a standardised menu within each of its regional markets adapts the menu to meet local cultural values such as offering beef alternatives and vegetarian menus in India and excluding culturally sensitive products such as pork in Arab and Israeli markets where such products may cause a cultural or religious offence. Other responses to customer needs include the provision of additional levels of service such as the delivery service seen in the Far Eastern market, this is a key customer service offering in such markets where car ownership is not as high as in the traditional Western markets McDonald’s operates in. Improving Innovation Innovation within McDonald’s has been seen in a number of forms in recent years, however, key initiatives has revolved around the deployment of innovative technological features in restaurants which help to both reduce costs and emphasise the social responsibility of the corporation from the consumer perspective. Such initiatives have seen the incorporation of water saving systems in bathroom facilities provided by restaurants, this has both an environmental and a cash saving benefit for the company. In addition, innovations in building technologies, making use of pre-fabricated designs have allowed the company to build restaurants which are not only energy efficient in nature but also allow for construction in record low levels of time. Again, this may be seen as providing the company with a three way benefit in for form of operational cost savings, an improvement in the perception of the company from the consumers perspective and the ability to expand and grow market share faster than in previous eras of the company’s business model. Improving Quality Quality has been a key area of focus for McDonald’s in recent years. One of the key areas which McDonald’s has focused on in recent years is ensuring the quality the supply of input goods. As consumers have come to take an ever greater interest in the origin of food products and the production methods associated with ingredients, McDonald’s has sought to work with suppliers to meet the demands of customers by including a greater level of usage of local products and free range ingredients. This has been clearly demonstrated in the UK market where the company has adopted a policy of sourcing the bulk of its input ingredients from UK and Irish agricultural producers. As such, by making use of locally sourced ingredients the restaurant chain has been able to improve the perception of quality amongst its consumers. This has been a key considerable source of competitive advantage for McDonald’s, while others such as Burger King have to an extent followed by incorporating certified “Aberdeen Angus” beef into the menu, few of McDonald’s other large competitors such as Pizza Hut or KFC have yet to respond with a suitable retaliation of improvement in the actual product offered. Improvement in Efficiency Overall, the level of efficiency at McDonald’s may be seen as one of the distinguishing features of the company which helps to deliver a low cost price model and thus a sustainable competitive advantage based around what Porter (2004) would have referred to as the cost leadership strategy. One of the key methods made use of by McDonald’s to ensure improvements in efficiency is the though limiting the complexity of the operation itself. Here McDonald’s while adapting menus to meet the needs of local consumers ensures that each region has a limited number products on offer. The result is the ability to offer consumers a high volume of products within a limited range which thus ensures a low cost of production (Slack et al, 2009, 2010). In addition to the cost savings felt though operational efficiency, such a limited range also ensures that McDonald’s is able to leverage a higher level of power over its suppliers through volume based buying. Procurement strategies are also a key part of McDonald’s drive for operational and financial efficiency, here the company has in recent years chosen to consolidate its supplier network thus gaining further advantages though volume based buying and a reduction in administrative based costs associated with multiple account maintenance. 5.0 Options and Responses This section will now consider how McDonald’s as a company has reacted to the relative opportunities and threats within the external environment at both the task and macro level. In the first instance, the company’s annual report (McDonald’s, 2011) highlights the fact that the business recognises the potential seriousness of the current economic downturn within the global economy. Despite this fact, the report goes on to consider that while the economy represents a significant challenge for the company, sales revenues have continued to rise in the period, even in mature markets such as the US. One of the key strategies made use of by McDonald’s in recent years may be seen as an aggressive expansion strategy in relation to new markets such as China, Russia and Brazil. Here the company indicates that a key strategy has been to focus upon the creation of a larger customer base by increasing the number of restaurants in these relatively untapped and lucrative markets. A key strategy here has simply been for McDonald’s to attempt to make use of its considerable access to financial resources which have given the company the ability to expand into new and emergent markets at a faster rate than those of its competitors. On the other hand, the strategy of McDonald’s in existing and mature markets has been quite different due to the fact that many of these markets are now saturated giving limited opportunities for the company to generate incremental volumes through sales growth. As such, McDonald’s in existing markets has sought to pursue a strategy of increased profitability by continuing to pursue efficiencies within operations and the supply chain. Key initiatives include a consolidation of the company’s procurement which sees the company benefit from both economies of scale and a reduction in administrative costs as a larger volume of supplies are consolidated into the hands of a smaller number of vendors (Lynch, 2009, Johnson et al, 2008). Other efficiency drives may be seen as attempting to offset the long term cost rises associated with rising prices of commodities such as energy and water. Here the company has sought to incorporate key technological developments into the real estate which results in both lower costs and a greater perception of social responsibility amongst consumer groups. A key strength of the company may be seen as that of the company’s global brand and almost universal recognition amongst both consumers and potential consumers. However, from a strategic perceptive is McDonald’s is to maintain a competitive advantage then investment in the brand must be continual. When analysing McDonald’s strategic marketing activities it can be seen that the company has made use of a wide range of tools to maintain a strong international brand. These range from standard marketing activities making use of mass media sources such as television advertising through to move creative methods such as sponsorship of key sporting events, such as the Olympic Games and continuing to tie the brand to other popular media events such as the release of new films. Despite the relative strengths of McDonald’s which have helped the company to take advantage of a wide range of opportunities within the external environment, the company still has a number of weaknesses for which solutions must be sought. On the one hand the company’s brand may be seen as one of the most valuable assets of the company. However, much of the growth seen in the fast food market is associated with countries in the Middle East and South East Asia where the association between McDonald’s and its American heritage may be perceived as a key weakness. As such, of the company is to successfully maximise the potential for sales growth in these key regions then the company must find a way to adapt its global marketing mix to be palatable to local consumer perceptions. Other weaknesses of the brand include the association of McDonald’s with a product which is perceived by consumers to be less than healthy. This is a key problem for McDonald’s in an era when changing social trends see an increasing demand on the behalf of consumers for healthier products. In dealing with such changes in consumer demand, the company has sought to alter its core product range in Western markets by introducing healthier options such as salads, and fruit options with children’s meals. 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