Business and the Economic Environment: McDonalds - Coursework Example

Unit.38: Business and the Economic Environment Selected Business: P1. Explain the effects, of changes in the economic environment on a selected business. The economic atmosphere surrounding any business always plays an essential role in defining the success or failure of a business. Generally economic factors can be divided into two parts namely Macroeconomic and Microeconomic factors. Macroeconomic factors used to have a significant role in controlling the performance of any business Unit. If the interest rates are on the higher side, the borrowing money in order to expand the business may not be possible for smaller business units. For bigger companies like McDonalds it is also a problem as they have to rely on their own profit to expand their business and set up new units. On the other hand, higher rate of unemployment helps the business unit to hire more workers in comparatively lesser salary; therefore the operating profit will increase considerably. But with this positive effect or so called positive impact of higher unemployment rates, there are also some negatives points also that the company needs to consider. If the unemployment level is on the much higher side, then this can forced the people of any particular state or nations to get more conservative in terms of their day to day expenses. This kind of less expenditure policy resulting in inadequate sales to keeps the business moving forward. Apart from that another key aspect of economy that controls the performance of business unit is the exchange rate. Among various microeconomic factors, market size acts as a key regulator for the growth of business. Before expansion, McDonalds need to do a proper market survey so that they can get clear idea about whether the target market is feasible for expansion or not. If the market size is very small, there may be a possibility of insufficient demand and low profit potential. The set up cost for the company is comparatively on the higher side so to book profit they must consider all these economic aspects. The concept of market size is directly associated with most common concept of demand and supply. If the demand of any particular merchandise is very high and supply volume is less, the profit margin will be low, likewise, if the supply is far more than the actual demand, then company might incur a loss. The quality and quantity of the competition in the existing market as well as in the new market often determine the success or failure for any business unit. Generally Consumer’s buying powers, growth rate of the country, GDP, inflation or are key economic factors that generally affects the growth of any business. Overall economic condition of the nation is also a key factor. If the overall economic condition of any country is very good and the country in going through a phase of relative prosperity, consumers then used to have higher purchasing power. This kind of economic situation always motivates the customer to spend more money. During this phase, the concept of high price-low price or price difference does not used to have a great impact and customers are stick to their choice of brand com. On the other hand, if a country is going through a recession period, the trend of spending money in various fields is very less as people always look to save money. This deterioration in the spending power always makes price the key component for the success of the company. Here cheaper the product or services is, more it can attract the consumer. So for McDonald it is necessary to understand the economic scenario of the country where it is operating and based on that they must set their pricing and business strategies. Differences in income levels always suggest the attractiveness of methodical price variations. It is significant for McDonald’s to understand that, in countries with a comparative low level of economic development, it is necessary to set a lower price. In those countries their $ 1 products will be more popular in comparison to US or UK. The inadequate buying power or existence of buying power difference among various groups of people in a single society often combined with low levels of literacy, poses special problems for marketers on promotion. Although theoretically a company has a wide choice of promotional tools, in practice the choice of effective tools is somewhat limited. For example, in foreign markets (in various third world countries in South America, Asia and other parts of the globe) with low economic development, McDonald’s should try to use cost effective methods of promotion, must reduce their variety of offering’s and focus on low price food staffs so that they can keep the final price within the reach of the customer and at the same time can also book their own profit. In recent time, the status of the global economy has direct impact on the business of McDonald. With the growing popularity and to expand their business all over the globe, most of the profit earned by the company is now being used in setting up new outlets. So the level of operating profit is coming down for the company. In modern world, like every other company to be at the top it is winning at any cost for McDonalds. This win at any cost is refers to increasing the stock price of the company. Now to do that it is compulsory to expand the business. P2. Identify how government policies impact on a selected business. Political factors include laws, agencies and groups that influence and limit organizations and individuals in a given society. The dimensions being evaluated include the government attitude to foreign markets, the stability and financial policies of a country and government bureaucracy. Political and legal forces are highly important as they cover many aspects of company policy. In UK, fiscal policy plays an important role in business expansion of any organization. In UK, government spending is mainly dedicated towards pension for the older age groups and with other social duties such as education, health and public protection. It indirectly helps companies like McDonalds who are in the public service business. With more government spending on education and health along with pension, the possibility of more job creation increases so as the amount of disposable income also started to go up. With increasing government expenditure towards supply of various goods and service for betterment of lifestyle, introducing extra spending in the macro-economy to increase demand, reducing the external effect on the economy as well as domestic companies, and also to redistribute income among all segment of the society all these helps companies in a great way. Basically the earning of the UK government is based on professional tax, VAT and corporate tax. With development of the industrialization, UK government is frequently changing the tax slab. In some way it affects companies like McDonalds who are targeting mass population with low cot product. Apart from that, government is also taking charges from the organizations that are using various resources controlled by them like parking charges etc. Taxation is another part associated with government fiscal policies. The basic tax rate is 20% in UK and the same is under review every year. Social policies also play an important role for the development of business in the UK. In the 19th century, UK administration implemented various policies like health, social assistance and education and also formed various committees to control the same. In the UK, the role of controlling these policies was given to poor Law guardians, and subsequently this became the core of a reformed local government system. In the UK, the power of taking various administrative decisions is with the central authority as the power of local government is very restrictive. It is helpful for companies like McDonalds as they can concentrate one single set of law while expanding business in various parts of the country. P3. Identify the impact of government spending on a selected business. Like many other factors, government spending is also another key factor that affects the business both directly and indirectly. Generally, the idea of government spending associated with the growth of the business. Most of the economist suggests that the amount spent by the government is directly related with the growth of the economy of any nation. Also dropping administration expenses in various fields (such as public sector salaries, medications, consultancy advice and other forms referred as "government consumption") lean towards faster growth for the economy. Some economist also suggested that decrease in government expenditure often obstructs the growth of the economy. Generally low productivity of the government is directly associated with the other companies in all over the country. Government used to give more money to help the poor people across the society to make sure that they can easily access essential goods and services. Likewise, the government also make sure that the level of expenditure of the businesses are within control so that companies can earn more profit and ensure more job creation for the people of the country. But the welfare subsidies given to low paid employees are indirectly subsidies for those firm only are the key point that every organization needs to follow. So if the government spending started to get reduced then it will pull down the profit margin for the company. M1. Analyze the implications of government policies for a selected business. There are number of government policies across different countries have a great impact on the overall business strategies adopted by the company itself. For example, a legal issue occurred in Russia for McDonald’s during 1993 when a law was implemented in Moscow which suggested the fact that all the stores in the country must have Russian names, or at least names translated into the Cyrillic alphabet. This is a clear indication that the company had to translate its brand name. McDonald dis the same but keeping in mind an important thing which is retaining sound of its name. The same thing also took place in Japan where the pronunciation of its name was changed to MaKudonaldo. Moreover, the law in Russia clearly mentioned that fact that minimum three-quarters majority vote is required to take some critical decision associated with any company. Therefore, it is very important that representatives of McDonald’s must agree on all major decisions with the members of City Council. This rule often hampers the independent nature of McDonald in terms of taking some critical marketing and promotional activities. In terms of developing marketing mix one has to consider the fact that the McDonald must follow their own business policies. The legal environment is a key factor which helps McDonald to determine how it will affect the launch of any particular product in a new country. As a matter of fact in many nations, the rules of government have a direct influence on product designing. Various kinds of government regulations and restrictions often regulate the content of promotion used by the company. The law set by the government often restricts the advertiser’s freedom, particularly in case of advertising message and visual presentation. Likewise, various kinds of promotional activities also may have to be changed, depending on the nature of the country where McDonald is operating and the legal system of the nation. For example, in France and China, door-to-door service is not allowed as it is restricted as per the government policies. So to reach more customers McDonald needs to have more number of branches by which they can reach out to maximum people of the country. In some countries governments may control the price that is set for products. For example, Ghana controls the manufacturers’ profit margins, which indirectly controls the price paid by customers. D1. Evaluate the impact of changes in the economic environment on a selected business. Various economic factors like GDP, inflations, purchasing power of the consumer, demand of the products, and change in choice –all played an important role in the business performance of the company. If one analyses the 5 force model then one can get a clear idea of how these various economic factors have influenced the business performance of McDonalds. Generally all the 5 forces are more or less directly associated with the economy of any country/business sector. There are five competitive forces that will govern the rules of competition and these rules will succeed in any industry both in domestic and international markets. The five forces are: the entry of new competition to the market; the threat of substitutes or replacement products; the bargaining power of buyers; the bargaining power of suppliers and the rivalry between firms of the same sector. Following is the 5 force analysis to McDonald’s. Threat of rivalry/competitors: The attentiveness of firms within the fast food industry is low as there are number of competitor present in almost every nation. For McDonald’s, the major competitors are Burger King and KFC. The above two are the well-established MNCs which can force the company to modify not only its branding and promotional strategy but at the same time forced McDonald to diversify its offerings. On the other hand, in certain markets, McDonald’s will face competition from established domestic fast-food outlets. Threat of new/potential entrants: The obstructions to entry are quite high for new players, as McDonald as a company has achieved economies of scale and have special access to raw materials and distribution channels. So, for any new organization, to start their business from scratch is very hard. Threat of substitutes: A standby product is one that can be used as an alternate to a company’s own. There is a concept continuously growing across the market that the threat of replacements to McDonald’s comes from pizzas and other domestic kebab and fast food houses. But one of the key points for McDonald is neither of the above mentioned substitutes does not have same level of convenience that McDonald’s offers, in terms of having enough number of outlets in big cities and also through the use of multiple drive-through outlets, providing various kinds of food staff as per the choice of the customer, and most importantly providing value for money. Bargaining power of buyers: This is comparatively low risk part for McDonald’s as consumers have very little say on 3 Ps that is Product variety, Place and Price, generally McDonald used to have variety of products for all segment of the customer. As the prices are fixed so they do not need to bargain with the consumer about the price. But, they have to consider the economic crisis of the modern times and also growing low price product from their competitor’s. The company should keep customers satisfied, as switching cost is low and the possibility of switching to another brand in case of dissatisfaction is relatively low. Bargaining power of suppliers: This ranges from the threat of forward integration to the threat of cutting off supplies. As McDonald’s has a great deal of influence over their suppliers, due to the fact that it aids them and trains them, the threats from suppliers are low. Due to the scale of McDonald’s operations, suppliers are keen to retain their contracts with the firm. McDonald’s internationalization could also mean greater sales potential for suppliers. In order to increase profitability, the company has to take some key decisions in various countries which more or less different from their normal business practices. The company has forced to make alterations like replacing burgers and fries and soft drinks from their Dollar Menu and replaced those by with cookies and ice cream cones. They have also introduced an extra value menu with a combination of chicken Nuggets, double cheeseburgers, chicken and Angus snack wraps, medium iced coffees and snack-sized McFlurries, the price was within the range of $1.20 to $3.50 or more. In MacArthur’s opinion, the shift was a risky move as though it helps the company to earn more but “move to wean customers off the DOLLAR Menu and move up to the Extra Value Menu as a way to manage the customer check and company margins” in long term can only increase competition. Micro economic factors and their impact can be understand more in detail if one analyse the 5 force model in relation to the particular company. The issue of the competition among the rival company in the fast food is the major point of concern for the organization. It is necessary for them to get regular update about what are the possible strategies of their competitors, what are their strengths and weaknesses to get a clear idea about their own position in the market and at the same time getting a clear idea about what the others are doing. It is important for any company to determine own position in relative terms (compared to its closest competitors) and be ready for any kind of challenges. These challenges may be economical, social political or from the other players in the market. A business will seek to serve and the choice of differential advantage which defines how it will compete with rivals in the segment. P4. Explain how both fiscal and monetary policy decisions have affected a selected business: Like all government policies, fiscal policy is one of the key parts associated with the business performance. In every country, there are different kinds of fiscal policies and there is a constant review of the same. Generally, fiscal policy is associated with two major government activities: one is taxation and other is spending. Taxation is the way by which government earn money which they used to spent in various developmental activities for the common men. There are 4 key points associated with the fiscal policy and these are: allocation of fund based on requirement of various industries based on how much tax government able to earn from both corporates as well as from the common men. Second point is Distribution of the same fund as par the requirement of various businesses in the country; Stabilization is another key part associated with the fiscal policy. The main objective of this is to provide stable economic growth for all sectors in any particular economy. The final part is development. Monetary policy in the UK is more or less a stable one and with the help of that McDonald able to develop their future strategies effectively for different parts in UK. As government of UK is spending more to develop economy of the nation as well as education system and job opportunity-so as a company McDonald is able to use all these growth factors for their own betterment. It is important for them to pay necessary tax and Vat which may affect the pricing strategy of their own but at the same time UK as a country is now able to recover from the financial crisis of 2010-2012 so people have more money to spent which is again beneficial for the organization P 5: Describe the impact of international factors on a selected business: Over the year every organization has changed their business policies based on the changing world business policies. There are several business policies and trading policies control the business across the nations. Here in case of McDonalds also there is no difference. WTO or World trade organization’s policies are very much helpful for companies like McDonalds to do better business all over the globe. There are various trading blocs present in the world which helps organizations like McDonald to do business properly all over the globe. Business policies or trading policies are different in various countries. The business policies in UK or USA are not same as China or India. Or likewise there are differences in the trading policies of SADC Southern African Development Cooperation, Gulf States, middles East, MINT, BRICS counties, and Commonwealth countries as well. For McDonald it is very important to maintain the trade policies where they are operating. In Asian countries, the trade policies needs to be different and at the same time in countries which are belongs to SADC Southern African Development Cooperation, Gulf States- companies needs to change policies as per the country’s rules and business policies and also based on the culture and test of the people so that they can successfully operate in those areas. M2. Analyze the effects of fiscal and monetary policies for a selected business in terms of the market it operates in: In changing economic condition and also after the financial crisis of 2010-2012, various organizations in UK market was facing the heat. To revive the economy, UK government has taken various measures such as spending more to develop social security, increasing corporate tax and VAT to earn more for the development of lower middle class, spending more for education and job creation etc. The corporate tax, Vat –all these increased during this phase which affect the business of companies like McDonald who are looking to provide fast food for all age group in cheapest possible price. To ensure that pricing advantage remain with them McDonald forced to cut down employee strength, reduce wages and salary and also needed to restrict their expansion plan to some extent. Basically, the USP f the company is the variety of fast foods in cheaper price and under the critical monetary and fiscal condition they did not like to go away from that policy. D2. Suggest and justify elements of fiscal and monetary policies that would help a selected business achieve its objectives. In case of McDonald, like every other company fiscal policy is playing an important role in development of business of McDonald across the globe. The fiscal policy is different in various countries, so as a company they have to review their strategies very frequently so that they can adapt to the changing business environment. When government imposed corporate tax on various product and services, then the prices of every commodity have to go up. Freudenberg in his review has mentioned that “despite the slumping economy, tightening credit market, rising food prices and growing concern about obesity, 2008 was a very good year for the McDonald’s Corporation, the world’s largest fast food company. By the end of the year, Mickey D’s had posted 55 consecutive months of increases in global same–store sales; operated a record 32,000 restaurants in 100 countries and increased the value of shares by 6% and revenues by 7%. Its return on equity, a measure of a firm’s efficiency in generating profits, was 29%, nearly triple the industry average of 10% and the company increased its dividend by 33% in the year of 2009”. From the above facts, it is very clear that the economic crisis and fiscal policy both did not affected the performance of the company in 2009. To fight against economic crisis as well as constantly changing fiscal policies, the company has started to rely on more than one country for their business success. For example, in the year of 2006-2007, the business performance of the company in Europe is comparatively on the higher side in comparison to other parts of the globe. So whatever loss the company incurred, they are able to overcome the same from the profit of other nations. Freudenberg has mentioned that “McDonald’s succeeded in increasing market share in Europe by going upscale. In 2007, the company spent more than $828 million to renovate its European outlets, adding healthier items, catering to regional tastes and adding features such as Internet access and rental I Pods. Sales rose 15%. By the end of that year, the chain was serving 10 million customers a day in Europe, contributing 36% to the companies operating income.” He has also mentioned that this strategy to depend on other countries to balance out the business loss is a nice way to combat whatever difficulties that a company is facing due to change in fiscal policies. Freudenberg has also mentioned that “In 2007, revenues in Europe topped those in the United States. Growth was also strong in Asia, the Middle East and Africa. In November 2008, for example, just as the economic crisis was spreading, McDonald’s global sales increased 171% more than its US sales. As Mickey D’s brought its signature products to Europe, Asia and the Middle East, it also sought to accommodate local tastes, a process some have labelled globalization.” For example, in number of countries where the service taxis on the higher side, people have to pay more to enjoy the variety of McDonald’s food variety. In countries like India and other developing nation, where service tax is on the higher side the business of the company is now started to face tough challenges. In recent years, economic crisis along with various fiscal policies is affecting the business performance of the company. The fast food country’s second quarter result of 2013 has shown a 4% growth which is very slow compare to other years. http://corporationsandhealth.org/2009/01/01/is-mcdonalds-lovin-the-economic-crisis-hard-times-fast-food-and-health/> Read More