Strategic Forces of McDonald's - Research Proposal Example

 Strategic Forces of McDonald's 1. Company evaluation of the strategic forces 1.1 Background McDonald's Corp, the world’s leading fast food giant, headquartered in Oak Brook Illinois, has a leading market share in the quick-service fast-food segment globally. Having taken advantage of the economic growth, the organization has expanded phenomenally and has presence in virtually every country in the world (Orji, 2005). Their business model too is unique as their restaurants are owned and operated by local people in the country of presence. In mature and developed markets, however, they have company-owned restaurants. The key to McDonald's success is the use of franchising. McDonald's however, has reached the saturation point in their home market – the US – and hence started looking for overseas opportunities. The growth in the US has been slow but in the other markets it is leading. There still exists high potential in the developing countries but they need to realign their strategies. McDonald's wanted to create a multi brand corporation and hence invested in other brands such as Piles Café, Boston Market, Prêt a Manager (Orji, 2005). They also had a majority stake in had a majority stake in Chiptole Mexican Grill and owned Donatos Pizza for several years. Their idea was to offer healthier options and compete with the fast casual sector. McDonald's has been reeling under difficult times as the global economy worsens. Consumer lifestyles, preferences and tastes have changed along with the changed business environment. It experienced declining sales as consumers and investors moved away from the brand. Globalization appears to have impacted the standards and operations at McDonald's (Cuneen, 2008). These require a change in the marketing strategy of McDonald's in the UK. An environmental analysis would help evaluate the right marketing strategy under the circumstances that should be applied in the UK. 1.2 Environmental analysis 1.2.1 PESTLE analysis This helps scan the external environment and is the acronym for Political/Economic/ Social/Technological/Legal/Environmental – all of which are external to the organization. Political Currently the UK is facing a period of instability as there is no significant popular support (Social Equality Party, 2010). The country is more divided than ever before. Economic According to Keynote the fast food sector was valued at £9.3bn in 2007 which shows the market has increased during recession (Riley, 2010). Economic factors such as prices and income have an impact on consumer behavior. As the food prices rise the purchasing power declines and the price changes affect the composition of the food basket in the UK (Knowledge Scotland, 2009). Socio-cultural factors More than half the adults are heavier than recommended and this is particularly rising among the young adults (EMIS & PIP 2005). Tasty food in the UK can be found at any location at any time of the day or night. Most foods are high in calories and dense in energy. Food portion sizes have increased and there is a tendency to eat more. Physical activity levels have gone down and are considered as the major cause of obesity in the recent years. However, there have been growing concerns of obesity in the UK and consumers have become health conscious. The UK has a high number of immigrants and good habits differ across cultures. Each culture and society has its own set patterns of behavior and food preferences and cultures are not pervasive. Globalization has been unable to penetrate these set patterns and converge the food habits. Technological factors Fast food brands are using technology to target kids via games, videos and cartoons on their websites. They thus exploit the legal loophole in the rules. This is against the advertising code which prevents online and offline advertising for fast food to children (BBC News, 2007). Legal factors McDonald's enters in developing countries through franchising which means that their financial resources commitment is low. This in turn means that the risks too are low. They enter through franchising because many developing countries have a protectionist attitude and only permit entry through local partnerships. Environmental factors Major food chains have come under attack from environmental groups in both developed and developing countries because of their environmental impact (Shah, 2010). Breeding of livestock and poultry to cater to the requirements of these fast food chains leads to deforestation, land degradation, and contamination of water and other resources. Every pound of red meat, eggs or milk produced leads to a loss of about five pounds of irreplaceable top soil. Overgrazing by the cattle leads to land degradation. Cattle raising leads to destruction of tropical forests and hence has come under criticism. Production of beef leads to devastation of rainforests (Botterill & Kline, 2007). In addition, the waste and packaging in the fast food industry also adds to environmental pollution. 1.2.2 Porter’s Five Forces Five forces shape the strategy, according to Porter. These are the macro-environmental forces and they differ across industry. If the forces are intense, the return on investment is low; if the forces are weak, the profit margins are high. An analysis of the five forces in the UK fast food industry is presented below. Rivalry The fast-food sector includes sandwiches, burgers, fish and chips, pizza, chicken, other fast food/takeaway and now even coffee shops (Reportlinker, 2006). This sector was valued at £8.69bn in 2005, registering an increase of 3.7% over the previous year. With the coffee shops included, the value of the market reaches £10.78bn, which demonstrates sales growth of 4% recorded in 2005. The fast food brands have been winners during the recession as the chain restaurants lost their consumers to the fast food outlets (Riley, 2010). The most successful brands in the UK were Domino’s, Eat and Prêt A Manger, while Burger King was least successful. The main competitors in the industry are Berger King, Dominos, KFC, Subway and Starbucks, and the largest operators control the market. The larger firms have the resources to support extensive marketing activities. Each unit tries to offer some point of differentiation and McDonald's benefits through its location and cost advantages. Threat of new entrants Start-up costs in the sector being low, threat from new entrants exists in the sector. However, only small firms would be able to enter. Large firms would require extensive capital to compete with large players such as McDonald's. Moreover, it would take a long time to compete with established brands. Consumers look for brand name and reputation which would be difficult to achieve in a short span. The larger brands would be able to spend on research and development which would be difficult for the smaller players to emulate. However, there are no entry barriers imposed by the government and hence competitors can enter the market easily. Bargaining power of suppliers As the raw material and main ingredients are readily available, the bargaining power of suppliers is low. Bargaining power of buyers The bargaining power of buyers is high as the consumers have plenty of choices before them. The older consumers prefer traditional outlets while the younger generation prefers the fast food outlets. Threat of substitutes The fast food sector offers a variety of substitutes to the consumers. New coffee and sandwich chains have hit McDonald's sales (Hickman, 2006). Coffee shops have been able to pull in new segment of customers – the older and more affluent consumers than the traditional, younger and less affluent consumers seeking fast food (Report Linker, 2006). 1.2.3 SWOT analysis SWOT analysis helps to scan both the external and the internal environment. The analysis helps to match the firm’s resources and capabilities to the competitive environment in which it operates. Strengths Large market share Established brand name, image and reputation – world’s number one fast food chain Affordable prices Strong global presence - they have presence in over 188 nations with over 31,000 restaurants (Orji, 2005). Because of global presence, it can achieve economies of scale. It has one of the most recognized logos. They offer both counter service and drive through service. Emphasis on delivering superior customer experience. Because of its enormous size it can absorb the risks and pitfalls. Positive corporate image Added new items to the menu McDonald's works in partnership with environmentally responsible suppliers to minimize resources use (McDonald's, 2009). Entering through franchising agreements required minimum investments. Weakness Since it is closely identified with the lifestyle and culture of America, its global expansion has also been known as McDonaldization or Americanization Poor pay and working conditions as the McDonald’s is low-paid, hard and often unrelenting. (Royle, 2005). They have been the target of anti-globalization protestors. High labor turnover Accused of processed convenience food contributing to obesity, including childhood obesity, leading to litigation proceedings (Schröder & McEachern, 2006). Accused of deceptive advertisements to lire children and also lure people to eat with substantial frequency. These are considered unethical as the food is detrimental to the well being of the children. Saturated food market with high level of competition prevents ignorant from increasing the prices. McDonald's two most popular foods, the double cheeseburger and fries, are high in fat and sodium (Business Week, 2007). Wendy’s has stopped using trans fat in its fries but McDonald's appears to be out of sync with health concerns. Lack of innovation in product (menu) change which is essential as they have been around for a long time. Weakened consumer confidence and stiff competition have reduced sales (Hickman, 2006). Standardized menu at all locations Focus on the child segment Unplanned expansion of about 2000 units annually on a global basis for ten years (Cunneen, 2008). This demonstrates lack of clear vision. Opportunity Since population globally has become health conscious, they can introduce low-calories diet. They can introduce fruits and salad menu. Introduce organic food Green energy and packaging Drive-through deliveries are slow and if this speed is increased they could compete with Burger King. Compete with Wendy’s and Burger King in altering the menus in response to customer preferences. Joint ventures with retailers to set up outlets at their premises Threats Various law suits and litigations Low wages Since they use standard pricing foreign currency exchange fluctuation impacts performance Competition in the sector has forced McDonald's to reduce the prices thereby adversely impacting the profit margins. Burger King and Starbucks pose stiff competition High investments in advertising reduces the profit margins New competitors – both small and large – in the industry along with changing consumer preferences. People are looking for quick service and are willing to pay a price for better dining experience and hence unless McDonald's improves in this regard, they could lose out to competitors. 1.3 Evaluation of the environment The PESTLE analysis suggests that the nation is politically unstable which in turn implies that laws and regulations on the fast food sector would be difficult to impose. The fast food companies are in any case violating the advertising standards by using technology to lure the kids. The fast food chains have also come under attack from the environmentalist groups because of the deforestation and land degradation caused by their huge requirement of poultry and eggs. The choice of food is directly dependent on the income and prices. However, as far as fast food is concerned, recession has been a boon for the fast food sector as the full service restaurants lost out their customers to the fast food sector. This suggests potential for growth of the sector. As far as the forces in the industry are concerned, an analysis of the sector using Porter’s Five Forces suggests that competitive rivalry is high in the sector. New entrants have low barriers and hence competition can be intensified. Since to become established requires time and capital, McDonald's has no immediate threat from the new entrants. However, it does have threat from the large players. Besides, plenty of substitutes are available for the consumer as a number of coffee sandwich chains are now available. The bargaining power of suppliers is low although the bargaining power of buyers is high. Overall, the forces are intense which has reduced the profit margins in the sector. McDonald's too is trying to keep its price low and also entered into price war. A SWOT analysis indicates that McDonald's is a powerful and established brand but to sustain competitive advantage it needs to innovate continuously. This is where McDonald's has not been able to keep up. While its competitors have been able to introduce innovative menus, McDonald's has not kept pace. Their foods are high in fat and sodium and besides weakened consumer confidence has led to a decline in sales. McDonald's also has several law suits and litigations against them. They have been particularly accused of luring children through deceptive advertisements. However, their business model and the strategy to enter different countries on franchising agreements is unique as it did not require capital investments. The risks too were minimum. Globalization was expected to lead to convergence of taste and needs of consumers which prompted McDonald's to standardize their menu as well as their marketing and advertising (Mooij, 2000). McDonald's overlooked the fact that immigrants make up for a sizeable number of their consumers and standardization would not be the solution. They could not respond to the diversity of demands. Globally the purchasing power of consumers has gone up and they are willing to pay a higher price. They even opt for costlier menus. McDonald's however, has been sticking to the same target customers and following the same strategy. The fast food sector is losing the pull factor (Richardson & Aguiar, 2004). The sector is undergoing transition from selling of burgers to the arrival of fast food casual industry. The fast food culture is threatening the ways of life and has been the subject of controversies. McDonald's too has been the subject of criticism on various grounds and has been taking decisions without considering the external environment in which it operates. An effective brand must be able to respond to the changing technological and global environment where McDonald's has failed. McDonald's has been adding new items to the menu and they tried to be innovative but innovation that drives growth must be new and relevant (Cuneen, 2008). They did add new items but these items were not relevant as they did not cater to any new segment. Innovation is essential for growth but innovation need not be complex. Culture is the collective programming of the mind according to Hofstede (Hope & Mühlemann, 2001), and to penetrate this, multinationals have to adapt to the local culture. McDonald's failed to recognize the diversity of consumer demands. Their strategy does not demonstrate a sound understanding of consumer perception and preferences for fast food outlet, which is an essential prerequisite for the fast food companies (Kara, Kaynak & Kucukemiroglu, 1997). Thus, McDonald's has been trying to be innovative but is fast losing to competitors and even to substitutes such as coffee and sandwich chains. They need to adopt a strategy to differentiate themselves from their competitors. 2. Strategic recommendations for senior managers of the organization Consumers today prefer ethical companies and hence one of the first strategies for McDonald's would be to bring in healthy and nutritionally high food. Even if the law does not demand, they should advertise the nutritional content on their packaging, at the food outlets and even on their website. Transparency from their end will enhance their brand image which in turn retains loyal consumers. Consumers have become health conscious and look for convenience to save on time. Fast food offers a ready solution but it should be healthy as growing concerns about health and well-being have become dominant factors in food choice selection. People have altered their eating habits by opting for health meals, or have reduced the frequency of visiting fast food outlets or opt for smaller portion sizes (Report Linker, 2006). The health concerns have altered the demand for fast food and sectors such as pizza and sandwiches are likely to be the fastest growing sectors. Burgers and fish and chips have been experiencing declining sales. Consumers are health conscious and not as much price conscious. Hence, McDonald's can charge a little higher but focus on providing high nutrition products which would not add to obesity. Moreover, keeping the prices too low also signals an adverse image as it is connected to low quality. The menu should be added, altered or amended while maintaining focus on their growth strategy. The growth strategy that they adopted in investing in multi brands was not a focused approach. They soon had to divest their interests. Growth can be achieved through a focused approach and this means offering variations within the same brand. McDonald's does not have any menu especially to attract the older generation due to which it is losing out to coffee and sandwich chains. They should be in a position to respond to requirements of different segments. They should be able to recognize the changing needs and demands. Organic food item is one such growing demand among the consumers. Since markets and consumer behavior is not homogenous standardization of the marketing strategy would not be applicable. Standardization is not always acceptable and a certain level of adaptation is essential (Gilani & Razeghi, 2010). Standardization denotes a product-oriented approach but in the fast food sector it has become essential to have a customer-centered approach. Focusing on the product can blind the organization to the changing consumer needs and tastes. McDonald's had been focusing on the child segment and ignored the adult segment, which is why the older consumers prefer fast food retailers such as Starbucks. Thus, McDonald's should focus on innovation and new product development for all segments of the market. McDonald's should have an internationalization approach instead of a globalization approach. Internationalization involves customizing the marketing strategy for different regions of the world according to cultural, regional and national differences (Vignali, 2001). This would enable servicing specific markets as per individual requirements. It is difficult to view the entire world as s single borderless market. This requires adjusting the entire marketing strategy including what they sell and how they sell and distribute. McDonald's should employ technology and introduce video imaging and digital video display at all their outlets. This would play a very vital role in attracting the consumers. As Cunneen contends, innovation need not be complex but it has to be relevant. McDonald's needs to keep pace with the ever-changing consumer tastes and preferences. They should introduce innovation through the use of technology. Consumers are attracted by what they see externally and the first impression as they walk in, determines the decision whether to sit down or walk out. Marketing communications are hence an essential requirement. Another area of use of technology would be the internet. Online food service has gained importance and McDonald's can tap the potential in this area as people have become technology savvy. They now prefer to order for food from the comfort of their homes. Many fast food retailers such as Starbucks are joining hands with grocery retail chains and setting up coffee counters. This is an excellent way to expand with minimum investment. They can set up counters in partnership with the grocery and apparel retailers as shoppers seek convenience while shopping. Thus McDonald's needs to revise its growth strategy, have a focused approach to meet the challenges that face the fast food casual sector. This is important because recession has only enhanced the market size as more people opt for cheaper food options. 3. Conclusion McDonald's had started off with catering to the youth and experienced phenomenal growth. Competition soon stepped in and the market in the US became saturated. They started looking beyond the boundary and today they have a presence in virtually every country. However, the fast food casual sector has grown exponentially and competition is intense. Even though it is difficult for new entrants to compete and get established, the old players in the sector offer stiff competition. Moreover, McDonald's has several law suits and litigation against them which has adversely affected their image. They have also been accused of offering food leading to childhood obesity and using deceptive advertising. All these demonstrate desperate attempts to retain their market share. They could instead adopt a different approach in international marketing. They should have an internationalization approach and adapt to local conditions and requirements. A focused approach towards growth should steer them towards adding menus for the older generation who are now avid visitors to fast food joints such as Starbucks. They could also enter into partnerships and joint ventures with grocery and apparel retailers to set McDonald's extension counters to attract the shoppers. Another important benefit that McDonald's could derive is through the use of technology. They can offer online booking of orders and use technology to display digital videos at their outlets. They need to be innovative and innovation need not be complex. It needs to be relevant to needs and demands of the consumers. 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