International Business - McDonalds Restaurant - Case Study Example

International Business Report: McDonald’s Restaurant Student’s Name: Course: Tutor’s Name: Date: McDonald’s Restaurant – Introduction and background McDonald’s restaurant was founded in 1937 in Pasadena California by brothers Maurice and Richard McDonald. The McDonald brothers later in 1961 sold the restaurant to Ray Kroc, whose first internationalisation attempt was in Canada in 1967 (Vignali 2001). One year later, Kroc sold the licence to operate in eastern Canada to George Cohon, who went ahead to expand the McDonald’s restaurant in that region to 640 restaurant outlets. From the Canadian expansion, McDonald learnt early that the key to international expansion was through franchising. Through the franchise business, Vignali (2001) notes that McDonald’s had expanded to more than 100 countries establishing more than 20,000 restaurants by 2001. Twelve years later, the expansion of McDonald’s is no doubt characterised by its presence in more countries and more restaurants. One of McDonald’s aims has been identified by Vignali (2001, p. 99) as the creation of “standardised set of items that taste the same whether in Singapore, Spain or South Africa”. Having to attend to different tastes and preferences across geographical and cultural preferences has made standardisation a challenging aim to accomplish. In response to the aforementioned challenge therefore, Vignali (2001, p.99) observes that McDonald’s has adopted a concept dubbed “think global, act local”. In other words, the restaurant has realised the importance of adaptation and by so doing, it has been able to satisfy to match the laws, customs, tastes and preference of diverse consumers across the world. Notably however, most of the adaptations to local environments are just variations to the original McDonald’s menu, which include a burger or a sandwich; fries, and a soft drink (Vignali 2001). In China for example, and in respect to the emphasis that the Chinese place on family values, McDonald’s introduced family friendly offers (e.g. The Aunt and Uncle McDonald’s) (Heer & Penfold 2003) Issues confronting McDonald’s Restaurant Anti-globalization sentiments Anti-globalization sentiments are perhaps some of the biggest challenge that McDonald’s has to contend with. While the firm is always particularly happy to announce its international expansion, anti-globalization sentiments often underscore the negatives that the restaurant takes with it to its new market. In some places, McDonald’s has been the target of anti-globalisation protests and continues to be perceived as a symbol of the negative side of globalisation (Spano 2003, p.7). The anti-globalisation crusaders target McDonald’s because to them, the “proliferation of franchise restaurants symbolizes everything that’s wrong with globalization” Spano (2003, p.7). In response however, McDonald’s has adopted a practice that seeks to appease locals and hence solidify their presence in markets. When faced with resistance from residents of Oaxaca in Mexico, who besides resisting the franchise’ infiltration also did not like its location in central plaza, McDonald’s moved to a different location as an expression of its respect to the culture and expectations of the residents (Greenberg 2009) Some of the reasons why globalisation is perceived as such a negative thing to societies is because it brings about rationalization in processes and culture, thus destroying unique traits and aspects contained in each culture. In a 1983 article, Reitzer (1983) for example observes that the rationalization of processes at McDonald’s dehumanizes several aspects of an otherwise rational society. Regularly eating out at a fast-food restaurant for example sets a routine, not only in what to expect, but also being less exciting or mysterious. Societies that would indulge more in home cooked meals are now adopting the fast-food dinners, which was not initially part of their cultural norms. In response, McDonald’s has indicated that its business ventures are simply mean to add to the choices that people have. Those who wish to engage in home cooked meals can still do, while those who prefer eating out are free to consider McDonald’s restaurants as one of the places that they can do so (Greenberg 2009). Criticism against rationalization McDonald’s has also been accused of imposing its control over its employees and customers (Ritzer 1983). By rationalizing food preparation and service, McDonald’s has reduced any control that its employees would have. As a result, the robot-like operations which started in McDonald’s US’s restaurant is slowly permeating to other societies and cultures. While rational systems of working as practiced in McDonald’s have many benefits to the firm, especially in relation to cost reduction, Ritzer(1983, p. 378) observes that “rational systems are not reasonable systems”, specifically because it dehumanizes people, and has also been blamed for bringing about disenchantment among people. In response, McDonald’s states that efficiency in production is a strategy it embraces just like other profit-making firms (Greenberg 2009). The firm however insists that it recognise the human side of its workers and that underlies its insistence of creating a supposedly friendly working environment (ibid.). Criticism for alleged low wages and anti-union stance Closely related to the foregoing is what Emerald Publishing Group Limited (EPGL) (2007a) identifies as low wages for employees in both the US and international markets, McDonald’s anti-union stance, refusal to drop the use of trans-fats, and their world-wide targeting of children with advertisements. In response, McDonald’s has argued that its wages meet the minimal wage standards set in different international markets where it operates, and that its employees are mainly young thus making it hard for them to appreciate labour unions (Greenberg 2009). Besides, it is argued that most employees do not intend to make careers at McDonald’s; rather, most perceive the chance of working therein as a good place to gain experience, earn some money, before moving on into ‘better careers’. In its defence therefore, McDonald’s does not accept responsibility for its non-unionisation stance; rather, it argues that the employee’s perceive careers at the firm and its franchises abroad as transitory and hence do not perceive labour union membership as being necessary. The company does not however dissuade employees from making life-long careers. In some places like Russia, Ball and Herman (2003) observe that graduates saw McDonald’s as an opportunity to work for an international company. Interestingly, and unlike in the US and Canada, staff turnover is very low thus meaning that the perception of McDonald’s careers being transitory is not applicable everywhere. Legal/regulatory hurdles McDonald’s has also had encounters with legal and regulatory bodies in different international jurisdictions. In response to public pressure, the Food and Drug Administration for example imposed a 2006 deadline for the removal of trans-fats in McDonald’s food production processes. As noted by Greenberg (2009) the pressure to campaign to force McDonald’s to stop using trans-fats had started in the 1990s. However, the firm had insisted that its priorities were geared towards meeting the quality and taste preferences of its customers. Faced with a deadline from the FDA, McDonald’s had to yield ground and handle the trans-fat problem. According to Greenberg (2009), the firm engaged Cargill Incorporated to blend and test oils in order to meet the FDA requirements. Cargill Inc. ultimately came up with blended oil, which include canola and soybean oil extracts. According to Greenberg (2009)) one of McDonald’ main worries was that the new oil would have a different taste thus the possibility that customers who expected similar taste as the products cooked with trans-fats would be disillusioned. Luckily, the new blend of oil did not register any taste differentials and as such, Greenberg (2009) observes that McDonald’s has embraced the non trans oils for cooking in the US, Canada, UK and a majority of other franchises abroad. McDonald’s compliance with the trans-fats ban in the US, and the subsequent use of non-saturated canola-soya bean oil blend in Canada and the UK, has instigated another problem that McDonald’s has to contend with. Other countries are clamouring for similar ban of trans-fats in their jurisdictions, and this is raising the demand for the Canola- Soya Bean oil blend. As noted by Greenberg (2009) however, the supply of the oil blend is limited. The producers of Canola and Soya Beans are also demanding for higher prices, thus meaning that the production cost has gone up for McDonald’s. Catering for diversity in the global market Another challenge that McDonald’s faces in internationalisation related to diversity. EPGL (2007a) for example notes that although the restaurant alters its traditional menu to cater for cultural-related tastes and preferences in its international markets, its food throughout the world still contain high fats, salts and sugar. As EPGL (2007a, p. 6) notes, the combination of the three aforementioned ingredients in meals is responsible to the “modern menaces of obesity, heart disease, hypertension, high cholesterol and diabetes”. To handle the criticism leverage towards the unhealthy nature of its fast food, McDonald’s is on record for airing an advertisement in France, which suggested that the food should be consumed one-a-week. Such an approach was not however favourable to franchisers who understandably would have a hard time trying to maximise profits while cautioning consumers about the unhealthy nature of the fast food. An indication of some of the problems McDonald’s encounters due to its perceived link with obesity is the criticism levelled at it in Japan, with health analysts blaming its presence in the country with increasing cases of obesity. In the United Kingdom, EPGL (2007) notes that McDonald’s have adopted a different approach to handling the criticism levelled against its fast food for allegedly being unhealthy. EPGL (2007) observes that McDonald’s UK insists that like every other food, the fast food in its restaurants should be eaten in moderation. Further, McDonald’s UK insists that consumers should balance food consumption with energy-consuming activities. While the foregoing is a good and perhaps effective public relations exercise by McDonald’s, EPGL (2007) observes that it still does not address some critical issues such as the fact that exercise alone is not sufficient to prevent heart disease especially if unhealthy eating habits persist. Fortunately for McDonalds (and perhaps unfortunately for the consumers), many people who take up regular McDonald’s eating habits find it hard to give it up. Even those fighting obesity in both US and the restaurant’s international markets disassociate their health problems from their eating habits. Resistance to the fast food culture But perhaps one of the greatest challenges that McDonald’s has had to face is resistance to the fast food culture. When it ventured into Russia for example, Greenberg (2009) notes that McDonald’s encountered a culture which did not know what fast food was, nor understand how friendly restaurant service was offered. In response, the firm hired residents, trained them, run targeted marketing campaigns and eventually, Russians began to accept fast foods as an alternative to the home-cooked meals that they were used to. Additionally, EPGL (2007b) indicates that most Russians felt that McDonald’s was exploitative for “charging a weekly wage for a burger”. In other words, the pricing strategy that McDonald’s was used to in its traditional markets did not perform well in an international context. Fighting back, EPGL (2007b) notes that McDonald launched a campaign that targeted telling Russians about the choices and efficiencies it had brought to them. Much as the Russian internationalisation (or perhaps globalisation) story for McDonald’s was a success; however, it is perhaps the firm’s ability to thrive in a challenging business environment that is most admirable. The foregoing will be the focus of the following essay section. Business environment International monetary system and the Russian ruble Eight Years after entering Russia, Moon and Herman (2003) observes that McDonald’s faced one of its biggest challenges in its internationalization and globalisation history. In 1998, the Russian Ruble was on a fast depreciation trend. According to Moon and Herman (2003), the Ruble was succumbing to pressures from the government’s austerity measures, events happening in the Asian market, and the overwhelming debt that Russia was increasingly finding difficult to service. As would be expected, and given the financial situation in Russia at the time, McDonalds was finding it hard to remain profitable, because the consumers did not have the spending power. Even those who had money to spend, most of it was in rubles – the Russian currency, which was non convertible at the time. Unlike other foreign investors in Russia, McDonald’s resisted the urge to accept hard currency (e.g. the US or Canadian dollar, or the British Pound), which were basically preferred because businesses could convert them and use them outside the country. Rather, it adopted a ‘rubles only’ policy (Moon &Herman 2003). For doing what no other international investor was willing to do (i.e. accept the ruble despite its depreciated state and non-conversion to other currencies), McDonald’s was able to garner significant publicity, and even won the affection of Russian and thus market itself better (Molch 2007). The vital lesson that McDonald learnt from the entire currency story is that the global market is different from what one is used in their home market, and if a firm is intent on succeeding, it needs to take risks in order to access the market. Collaborative ventures- with the Russian government Prior to entering Russia, McDonald also had to indulge in another ‘first’ in its operations history. Instead of just franchising, Russian laws required it to give up 51 percent stake in the country to the Russian Government. In other words, McDonald’s retained the minority stake, while the government had the majority stake (Moon & Herman 2003). While it was not in McDonald’s norms to partner with governments, the requirement to do so was mandatory in order to access the Russian market. As Cohon (cited by Moon & Herman 2003) later revealed, giving up the majority stake to the Russian government was initially a hard thing to accept, but one that could not be bargained since Russia had such an immense market potential for the company. From this encounter, it is obvious that diversity (not only in foods and taste preferences but also in laws and regulations) was something that McDonalds had to encounter and learn to live with, in its internationalisation and globalisation encounters. Strategically, giving 51 percent stake to the Russian government worked in McDonald’s favour because the firm was assured of government support. In relation to exporting and countertrade, McDonald’s only exportable resource would have been the profits earned in Russia. Having discussed the non-convertible nature of the ruble in the 90s, McDonald’s drew a plan where it could reinvest much of the profits earned in Russia in the same country, something that was based on its long-term strategy to stay in the country. As noted by Moon and Herman (2003) however, Cohon would negotiate to barter the excess ruble with exportable commodities. The lesson from such arrangements was that the global or international market is not always similar; as such, businesses would need to be innovative and learn fast how to operate in order to remain viable in different when faced with different challenges. Global sourcing for McDonald’s in Russia, just like other things, was a completely new experience for the firm. The company had to source experts (not products) from other countries, to come into Russia and show Russians how to grow the specific products (potatoes, lettuce, beef and tomatoes among other things) that McDonald needed in order to retain the quality and taste of its products (Moon & Herman 2003). Cohon (Cited by Moon & Herman) observes that McDonald’s had to train all its suppliers on how to produce supplies that specifically were to be delivered to the restaurant. Internationalization theory/ economic theory In conclusion, it is worth observing that international theory, which suggests that a firm minimizes uncertainty of going abroad gradually by starting with processes that does not involve much commitment (as suggested by Johansen and Vahne 1990) is not entirely true in McDonald’s context especially in Russia. If the narration by Cohon as indicated by Moon and Herman (2003) is anything to go by, it is arguable that McDonald’s entry into Russia despite the problems faced was anything but gradual and hence cannot be explained by internationalization theory. The foregoing theory also suggests that firms expand into familiar markets (e.g. culturally familiar or geographically close markets) and only seek further opportunities when they have already exhausted opportunities in their familiar markets. Again, these explanations do not explain McDonald’s expansion into unfamiliar markets such as Russia, Mexico and China. Such entry can only be explained through risk taking theories economic theory, which states that firms should pursue all opportunities abroad assuming a risk-neutral environment. The economic theory further suggests that firms continuously pursue the most promising opportunities across diverse markets. The economic theory therefore appears well suitable for explaining McDonald’s expansion into some challenging markets such as Russia. Finally, the internalization of McDonald’s, not just in Russia but in other markets (especially in developing countries) has been fraught by numerous risks, which Smith et al. (2003) identifies as government regulations, cultural differences, political risks, currency risks, interest rate risks, inflation among other fluctuations in the political, social and economic environments. While expansion into the international markets is hence theorised as the solution to higher profitability, enhanced growth and as a way of accessing the diverse opportunities available in the international arena, the McDonald’s case as discussed herein offers substantial evidence that it takes more than entering a market to be profitable. Specifically, the McDonald’s case shows that firms should be ready to overcome problems and challenges if they want to realise profits in the international markets. Seemingly, understanding the cultural, political and economic environments of a targeted market is an essential undertaking that each firm should do before starting the internationalisation process. Conclusion McDonald’s has had to embrace cultures, regulations and practices that were beyond its norms and practices in the US and Canada in order to enhance its profit making potential in diverse international markets. In Mexico, it had to relocate from a strategic business location as a sign of respect for the residents’ culture and preferences; in Russia, it had to retain a 49 percent minority stake in order to abide by the rules and regulations set up by the Russian government. Voluntarily, the company had to adopt a ‘rubles only’ policy at a time when the Russian currency was non-convertible. In numerous other places, it has had to make alterations to its traditional ‘fries, burger and soft drink’ menu to accommodate the diverse tastes and preferences presented by different international markets. In its home market, McDonald’s had had to give up the trans-fat and adopt healthier oils for frying its food products, something that is increasing its operating costs. The anti-globalisation protests and the anti-obesity campaigns do not seem to make McDonald’s any less focused on expanding internationally and making profits as it does so. As indicated above, economic theory is better placed to explain the resilience that McDonald’s has shown across markets all over the world. References Emerald Publishing Company Limited (EPCL) 2007a, ‘It’s all McChange at McDonalds’, Strategic Direction, vol. 23, no. 11, pp. 5-8. EPCL 2007b, ‘McMishaps and McVictories- the PR history of McDonald’s’, Strategic Direction, Vol. 23, No. 8, pp. 12-14. 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