Competitors Environment Analysis of McDonalds - Case Study Example

Case Analysis Student’s Name Course Date Competitors Environment Analysis of McDonald’s This competitor’s environment analysis will begin with identifying two of McDonald’s competitors, based on two approaches namely the demand-side approach, and the supply-side approach. A demand-side approach will identify firms that satisfy similar customer needs as McDonald’s, while the supply-side approach will identify firms whose technology, operations and resource base are similar to McDonald’s. Existing literature (Kennon, 2014; Magopet, Sanders & Koti, 2013) indicate that Wendy’s and Burger King are the two major competitors to McDonalds. They not only compete for the same customers as McDonalds, but also use a similar way of marketing. Additionally, they use similar technology as what McDonalds use to sell their products. Market share According to Magopet et al. (2013), McDonald’s has a 49.6% market share compared to Wendy’s 12.3 % and Burger King’s 12.2% market share (see diagram below). McDonald’s market share is bolstered by the more than 33,000 restaurants it has, which are impressive compared to Wendy’s approximate 6,500 restaurants and Burger King’s approximated 12,500 restaurants. McDonald’s successful market penetration is aided further by its very attractive brand image, which makes it more known by consumers compared to Wendy’s and Burger King. Figure 1:McDonald’s market share compared to Burger King’s and Wendy’s Profitability According to the Huffington Post (2013), McDonald’s registered sales worth $35.6 billion. Wendy’s on the other hand registered sales worth $8.6 billion in the same period, while Burger King registered sales worth $8.587 billion. Sales worth notwithstanding, it is the return on assets (ROA) on each company that best provide readers with the profits made by each restaurant. According to Investopedia (2014), ROA is an “indicator of how profitable a company is relative to its total assets” (para.1). ROA is attained by dividing the annual earning of a company by its total assets. According to Brown (2013), McDonald’s ROA was 15.44 % for the 2012-2013 financial years. Wendy’s had performed impressively when compared to McDonald’s having attained a 16.46% ROA (see figure 2 below). Burger King on the other hand had dipped its profits having registered 2.11% ROA against an industry average of 11.34%. In the 2012-2013 financial year therefore, Wendy’s exceeded McDonald’s profitability (based on ROA) by 1.02%. Figure 2:McDonald’s profitability compared to Wendy’s and Burger King Growth McDonald’s growth has been slow in the last two years. 2011 was a pretty good year with growth topped at 15%. It however slowed to 3% in 2012 and dropped further to 1% in 2013 (Brown, 2013). This slump in growth occurred even as its competitors identified herein experienced mixed fortunes in their growth trajectory. Wendy’s for example registered -28.83% growth in 2011, 3.04% in 2012, and -0.71% growth in 2013 (CSI Market, 2014). On its part, Burger King registered 10.5%, 5.7%, and 4.2% growth in 2011, 2012 and 2013 respectively (Yahoo Finance, 2014). Arguably, Wendy’s has done a lot worse than McDonald’s in growth. McDonald’s however needs to revise its strategies to recoup growth. (See figure 3 below) Figure 3: Growth trajectory for McDonald's, Wendy's and Burger King Share price Current share prices at the NYSE indicate that McDonald’s shares are selling at $99.87, Burger King’s at $26.04, and Wendy’s at $8.93 (Cardenal, 2014). Of the three, McDonald’s seems to be the valuable stock, whose worth is bolstered by abundant financial resources, economies of scale and brand recognition. Additionally, and as Cardenal (2014) notes, “McDonald’s has placed its restaurant in many of the desirable locations in major world cities, and that’s an invaluable competitive strength in the industry” (para. 2). The dividend yield for McDonald’s stock is 3.4%. On its part, the Burger King stock has risen by more 30% since a year ago, and interestingly, investors seem to be watching (Cardenal, 2014). Among some of Burger King’s strong areas that seem to impress investors include the franchised business model, the re-model stores, and menu innovations that Burger King often introduce in recognition of consumers’ needs for healthier food choices. The foregoing initiatives attract more customers, something that has a positive impact on profitability and growth. The dividend yield for Burger King is 1.2% (Cardenal, 2014). Wendy’s stock is touted as a good investment option for investors considering that the restaurant is in its growth phase (Cardenal, 2014). With 6,500 stores, the company has a lot of growth potential. Recently, the restaurant has revamped its image, franchised its business, and introduced offers that consumers seem to like. Consequently, its stock has risen by an estimated 90% in the past one year. Wendy’s dividend yield is ranked at 2.22%, making it a more attractive stock compared to Burger King’s. Comparing the three stocks reveals that McDonald has the most attractive valuation. Additionally, it has an impressive dividend yield. Burger King is an average stock especially when viewed based on a growth versus value perspective. On its part, Wendy’s has potential superior gains, especially since it is in a vital growth phase. Its fortunes going forward however depend on its future growth strategies. Competitor analysis at business, corporate, cooperative and international levels At the business level, Magopet et al. (2013) note that McDonald’s has cost leadership, and has over the years developed a differentiation strategy especially with an increased number of competitors. Burger King however has integrated cost leadership and differentiation to attain a good fit that is appreciated by a significant number of consumers. On its part, Wendy’s has an integrated cost leadership and differentiation, and also puts more emphasis on food and service quality that in its competitors. At a corporate level, McDonald’s has managed to attain a high level of diversification in its menu, something that Burger King has copied. Wendy’s on the other hand seem to be utilising a different strategy by adopting a low diversification strategy. At the cooperative level, McDonald’s has established joint ventures in Japan. The restaurant further owns 51% of its businesses in Russia, and has adopted a developmental approach in South America. On its part, Burger King has entered into a marketing alliance with DreamWorks – a movie promotions company. The company has also entered into an alliance with Pepsi in China, and brags about selling Seattle’s best coffee. Still at the cooperative level, Wendy’s has partnered with Arby’s to come up with a strategic sourcing group, which saves costs and energy by sourcing better and competitive contracts for their supplies. Arguably, the cooperative level marks significant differences in strategies among the three competitors (Magopet et al., 2013). On the international level, McDonald’s strategy is to adopt a multi-domestic strategy with special emphasis being placed on aligning the products sold to the tastes and preferences of local populations. Both Burger King and Wendy’s also have a multi-domestic strategy, which is used in their international business expansion ( Magopet et al., 2013). McDonald’s Hamburger-focused offerings are what define business at McDonald’s. According to Magopet et al. (2013), the restaurant has a much more focused to business growth through good value, consistency and a standardized managerial approach when compared to its competitors. In addition to having good management that offers a concrete vision for the company, McDonald’s is also indicated to using a SWOT analysis often in order to determine its prevailing strengths and weaknesses, and its opportunities and threats. Its use of SWOT is credited for creating knowledge among its managers about the increasing health consciousness among fast food consumers. Already, Magopet et al. (2013) indicates that McDonald’s has identified developing healthy hamburgers and offerings as one of its growth areas going forward. The restaurant chain has already started exploiting the healthy foods growth area by the development of offers such as fat-free sandwiches, salads, and chicken sandwiches among others. In addition to the above, McDonald has strengths that a fast and efficient service, something that has enhanced its reputation as a reliable service provider among its customers. Its brand recognition is further enhanced by distinctive restaurant architecture and golden arches, which combined, gives it a recognisable presence (Magopet et al. 2013) The value-pricing strategy has also helped McDonald’s retain its market share amid growing competition. Some of the offers that aim to enhance the value that consumers get include a sandwich accompanied by French fries and a drink. Purchased together, the foregoing items cost less compared to if each was bought separately. Combined, all the factors above enable McDonald’s to compete effectively with Burger King and Wendy’s. It is also worth noting that McDonald’s has a comparative advantage in that its market penetration (gauged in the number of restaurants worldwide) is higher that Burger King’s or Wendy’s. Not everything is smooth sailing for McDonald’s though. The rise of new competitors occasioned by high threat of new entrants is a threat that the restaurant remains conscious of. As a result of market saturation brought about by the many market players, McDonald’s can only enjoy limited economies of scale. Additionally, the nature of offers provided by competitors provide little or no product variation hence, switching costs for consumers are also low. Burger King Burger King has been touted as a consistent restaurant (Doppelt, 2010). However, it has been criticised for failing to have a clear vision. Such lack of vision, has according to Horovitz (2010), been occasioned by the constant change of leadership in the restaurant chain. Consequently, it has failed to communicate a motivational and consistent vision to both consumers and franchisees. As a result, Burger King’s brand image suffered, and this eventually could lead to declining profit (Horovitz, 2012). Of the key weaknesses in Burger King is that the restaurant is yet to focus on who they are, and their uniqueness. Compared to McDonald’s and Wendy’s, Gross (2004) argues that “its abundantly clear that Burger King has lacked the sort of managerial, and especially marketing, talent that McDonald’s and Wendy’s have” (para. 8). In a 2010 stidy conducted by Brandy (2010), it was further revealed that Burger King Performed poorly on two metrics namely competence and warmth, while its competitor, McDonald’s fared relatively well on the two pointers. Other weaknesses on Burger King’s books include failure to consult franchisees on advertising strategies (Horovitz, 2007), and a management that is irresponsive to the concerns by franchisees (Brady, 2012). One of the high success points in Burger king was when it partnered with Creative Powerhouse. The latter helped the resuaturant develop an edgy advertising campaign, which included the subservient chickem and the creepy-looking king. The advertising strategy seemed to work as the restaurant registered increased sales shortly after the advertisements were run on television (Brady, 2012). Notably however, the success of the adverstisement was short-lived especially since the 2008 economic recession led to a reduction in consumer spending. Even after the economic fortunes improved, Brady (2012) notes that Burger King failed to devise a strategy that would respond effectively to the clamour for healthy eating as evident in the consumer market. Specifically, it is indicated that Burger King failed to revise its menu at a time when its competitors were replacing items perceived to have high amounts of unhealthy ingredients with healthy substitutes (Horovitz, 2012). The foregoing occurred at a time when young people, were looking for what they perceived as healthier food options. As Snel (2011) observes, overlooking the introduction of healthier food choices was a big misstep for Burger King. Overall, it would appear that Burger King’s brand image is still wanting. Additionally, the lack of a clear vision and astute leadership has resulted in miscommunication between the restaurant and its franchisees. Further, it would appear that the restaurant does not respond to industry trends in good enough time as evident from its delayed introduction of healthy food items on its menu. Wendy’s Wendy’s International Inc is ranked as the third largest restaurant/hamburger chain in the world (Trinity Resources). One of its weak points is that compared to McDonald’s, Wendy ties a great deal of its cash into inventory. Kennon (2014) for example discovered that whereas McDonald had an inventory return rate of 96.15, Wendy’s return rate was 40.07. Additionally, McDonald’s inventory just took 3.79 days to clear, while Wendy stayed with the same inventory for 9.10 days. The effect of the foregoing is that McDonald had less of its cash tied up in inventory hence meaning it had more liquid cash to use in other ventures such as opening up new restaurants; Wendy’s on the other hand, had a significant amount of its cash tied in inventory. Consequently, it lacked the same liquidity as McDonald, meaning that it is not as flexible, or as spontaneous as McDonald would be to new investment opportunities. INTERNAL ENVIRONMENT ANALYSIS Resources Like other firms, McDonald’s has tangible and intangible resources. Its tangible resources include it finances, restaurants, organisational and technological assets, which are quantifiable. Ireland, Hoskisson and Hitt (2008) indicate that tangible resources are the “valuable assets that can be seen or quantified...” (p. 67). The intangible resources on the other hand are “assets that contribution that contribute to creating value for customers but are not physically identifiable” (Ibid). McDonald’s brand name, organisational culture, and reputation are some of the intangible resources in its fold. Tangible resources: Financial resources As of May 2013, McDonald’s market capitalisation was at $99.95 billion. As a result, the restaurant chain earned a position in Forbes list and was ranked at number 61 worldwide in market value, number 637 in the number of assets in possessed, number 106 in profits, and number 344 in sales. It was ranked as the 6th valuable brand in the world. At the time of this ranking, McDonald’s had registered $27.57 billion worth of sales in just one year (Forbes, 2013). As of December 2013, McDonald’s had a free cash flow of 4.3 billion, and total assets of 5.1billion Restaurants According to Forbes (2013), McDonald’s corporation operates and franchises restaurants in 119 countries all over the world. Of the 33, 510 restaurants under the McDonald flag name, 6,435 are operated by the company while 27,075 are franchised. Whether run by a franchisee or by the McDonald itself, the menu in most restaurants include Hamburgers, the Big Mac, cheese burgers, chicken sandwiches, French fries, chicken McNuggets, shakes, oat meal, salads, McCafe beverages, McFlurry desserts, pies, soft serve cones, sundaes, snack warps and quarter pounder with cheese. There is a slight variation of menus in different countries based on the local population’s tastes and preferences. Technological resources Technology resources at McDonald’s help the company offer superior customer services in addition to ensuring its administrative functions are well taken care of. Some of the technology resource includes an ICT stock control system, email and telephone, computerised service tills, and computerised office and administration work. Training and research is also one of the core areas that has benefitted from the technological assets that the company has (McDonalds, 2013a). Intangible resources Value of Brand Name McDonald’s has over the years proved itself as the reliable and fast food shop that has an eye for quality and hygiene (Magopet et al., 2013). Its brand value has been largely driven by factors such as effective marketing campaigns, its logo, ability to offer consistently fair prices for its product offering, ability to penetrate the worldwide marked, and its development of exciting items on its menu. The company has also managed to turn bad publicity (e.g. the unhealthy fat content in its hamburgers) around, by publicising its efforts and developing and testing healthy food alternatives for its consumers. To reinforce its brand name, McDonald’s continuously advertise itself, even though it has an iconic status and has managed to attain market penetration throughout the world. People/employees McDonald’s recognises the importance of people in the attainment of business goals, and has hence formulated what it refers to as the people’s Principles. The principles are “guidelines that validate individual’s importance and the value that McDonald’s places on their growth and development” (Ireland et al., 2008, p. 68). In other words, McDonald’s does not only “use” people to enhance its profit-making potential, but also is interested in the growth and development of the same people it employs. It has been noted that McDonald’s believes that the “firm’s success depends on the ability of its employees, affectionately known as those who work under the arches” (Ireland et al., 2008, p. 68). Capabilities When integrated, resources form capabilities (Ireland et al., 2008). In McDonald’s operating practices and directions are translated into capabilities. By combining their human resource and technologies for example, McDonald’s comes up with a routine which produces products of the same superior quality. Additionally, the ordering system, which combines both people and technology, ensures that consumers get their order in fast and conveniently. The firm further has standard operating procedures, which governs the operations and maintenance of each restaurant. Value chain activities at McDonald’s McDonald’s value chain activities include: inbound logistics, operations, outbound logistics, and marketing and sales. Inbound logistics involve the purchase of all inputs needed to produce the products sold to consumers. Such include raw vegetables, meat and dairy products. It has McDonald’s prides itself in practising backward vertical integration, which has simplified inbound logistics by reducing the number of supplies. Consequently, there are reduced logistical costs, and the quality of products is verified. In operations, McDonald’s has simplified their operations (especially in the kitchen) by installing kitchen equipment which occupy minimal space and are effective in meeting orders placed by customers (e.g. grills that can cook several hamburgers simultaneously). Outbound logistics at McDonald’s mainly concerns the receiving products, storing them and disseminating the final products to consumers. The restaurant indicates that in addition to modernising the menu, it has broadened the accessibility of their products, and optimised the customer experience (McDonald’s, 2014). Marketing and sales at McDonald’s is intended to make the product more appealing to consumers, and making the consumers more willing to purchase product offerings. By reaching out to 119 countries, the restaurant is estimated to reach 58 million people daily. Although sales fluctuate at times, the company maintains that its dividend offering to its shareholders is still reflective of the fact that the firm is still making profits. Financial condition Despite lower profitability in 2012 and 2013, McDonald’s financial position is still secure. In 2012 for example, McDonald’s (2014) indicates that of the $1.2 trillion sales generated in the restaurant segment worldwide, 8% of those sales were from McDonald’s alone. Additionally, McDonald’s does not tie its cash in inventory, and as such, much of its money is usually available for re-investment in the business. Current strategies and objectives at McDonald’s At the business level, Magopet et al. (2013) notes that McDonald’s has adopted a strategy that emphasises integrated costs and leadership differentiation. As a result, the firm stays ahead of competition by giving its customer more options (especially in relation to healthier meals), fast service and cheaper prices. At the corporate level, Magopet et al. (2013) defines McDonald’s rategy as “high levels of diversification with related-constrained”. The goal of the foregoing strategy is to create synergy between stores operating within the same geographical area, and as a result maximise savings (especially on in-bound logistics). The firm has adopted a cooperative/alliance strategy, which enables it to enter into alliances with oil companies, hence allowing it to set up outlets at oil stations. In areas where McDonald’s owns properties, they develop them, use part of them as outlets and rent the remainder to other businesses (Magopet et al., 2013). Finally, McDonald’s has an international strategy which enables the firm to localise its product offerings to cater for prevailing cultural values. For example, beef is not offered in cultures where Hinduism is a predominant religion, while wine is served in markets like France. The objectives for the different strategies adopted by McDonald’s are to serves “quality food” to customers. To McDonald’s, working together with employees, franchisees and suppliers is also an objective they pursue with the realisation that the investments made in the restaurants would not be complete without the contribution of each of the forenamed stakeholders (McDonalds, 2013b). References Brown, A. (2013). McDonald’s : Stale growth means a future you wont love. Forbes. Retrieved April 4, 2014, from http://www.forbes.com/sites/abrambrown/2013/01/23/mcdonalds-stale-growth-means-a-future-that-investors-wont-love/ Cardenal, A. (2014). Best Hamburger stock: McDonald’s, Burger King, or Wendy’s? The Motley Fool. Retrieved April 5, 2014, from http://www.fool.com/investing/general/2014/01/15/best-hamburger-stock-mcdonald-s-burger-king-or-wen.aspx CSI Market. (2014). WEN’s revenue year on year growth by quarter and year. 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BK’s menu overhaul goes far beyond burgers. Retrieved April 5, 2014, from http://nrn.com/article/bks-menu-overhaul-goes-far-beyond-burgers Trinity Resources. (2014). Wendy’s complete case study. Retrieved April 5, 2014, from http://www.trinityresources-us.com/WendysCompleteCaseStudy/tabid/80/Default.aspx Yahoo Finance. (2014). Burger King worldwide reports fourth quarter and full year 2013 results. Retrieved April 5, 2014, from http://finance.yahoo.com/news/burger-king-worldwide-reports-fourth-120301370.html Read More