The Rationale for McDonalds to be in Japan before and after Tohoku - Essay Example

The rationale for McDonald’s to be in Japan All business exists to meet s’ and consumers’ needs profitably. The primary goals being to, maximise revenue and minimise costs, and this results to increased profit margins. Many of the multinational businesses we have today started very small and through continuous focus and implementation of the right production and growth strategies, they have grown to be the multinationals they are today. British American Tobacco, Unilever, McDonald’s restaurants are just but some few examples of such companies. Zeroing in to McDonald’s, it was started by two brothers, Dick and Mac McDonald in San Bernardino, California, in 1940. They had taken over the business, “The Airdome” from their father McDonalds who was selling Hamburger and ready juice and renamed it “McDonalds Famous Barbeque”. Initially there were a number of items in the menu but after realising that the bulk of their profits were in burgers, they decided to stick to burgers only. Later through franchising, the business started spreading into other states of America for example Arizona. This was a suggestion by a business partner, Rey Kroc, milk-shake-mixer machine vendor who realised they were using some of his machines. The chain started growing and the first in United Kingdom was opened in 1974 and later in Japan in 1978(Yuece, 2006). The 5000th restaurant was opened in Kanagawa (Greater Tokyo area), Japan, in 1978. This was in collaboration with an export Giant known as Fujita. He took McDonalds through a cultural adaptation that saw the Company getting accepted in Japan. The name McDonalds was even changed to suit Japanese pronunciation, the menu was changed to incorporate Japanese menu. Thereafter, McDonalds has expanded its operation in so many other countries with the decision to expand being driven by so many factors. The main reason McDonalds going to Japan was to explore and discover new markets to increase sales and profit. During this time, other businesses like Wendy’s, Hardees, and many others, using model similar to McDonalds’ had come up and were directly competing with McDonalds, thus the US market was becoming more and more saturated. There emerged a “Burger-War” that was characterised by intensified and heavily funded market campaigns. Some like Wendy’s reported losses while others like Hardees struggled to stay in business. McDononalds had to rethink its strategies and Go into foreign countries like Japan to remain profitable. Japan was recovering from effects of Second World War. The support from its Central government and United Nation to re-build it highly fuelled the economy. This was so attractive to McDonald since the management was looking for growth opportunities. Japan, among other markets, has come in handy to help McDonalds insulate seasonal domestic sales, by selling excess production. Through its robust supply chain, McDonald is able to dispose off the excess in America, especially the products that are common, and reduce over-dependence on US market (Yuece, 2005). Government policies in Post-war Japan, in an endeavour to re-Construct its economy were also attractive to McDonalds. In 1952 in San Francisco, Japan signed a treaty of peace that ended war with allied countries. According to Yuece (2006), this was aimed at helping Japan re-gain economic footing. Following this, foreign policies were geared towards cooperating with US economically and Security wise, promoting beneficial free trade and cooperating with other countries through United Nations. This provided very attractive grounds for McDonald’s presence in Japan. Growth, expansion and desire to create more jobs, and give back to the society have been McDonald’s belief. It is one of the largest employers, directly and indirectly (Yuece, 2006). Through its franchises and Supply chain, McDonalds have employed so many people both in operational and Management level. This is what an-upcoming economy like Japan needed in 1950s through to 1970s. Japan boasts one the lowest unemployment rate averaging 2.7% in hitting an all high rate of 5.6% in 2009 (Trading Economics, 2012). McDonald’s provision for employment has been global and is present in Japan as well. It has also been vibrant in its social responsibility activities in Japan among them being anti-pollution campaigns, playgrounds construction and healthy eating campaigns. Through employment of highly sophisticated and some automated technologies in Japan, McDonald has been able to cut operational costs and enjoy. In addition, its huge workforce and presence in many countries, Japan being one of them, McDonalds have been able to enjoy Economies of Scale through global outsourcing. Enlarging the investor’s base is another reason why Multinationals goes global. McDonalds with its Franchise system wanted to enlarge its investor’s base. The company wanted to take advantage of the high investments that Japanese were doing. Post second world war period was characterised by an investment wave due to the conducive environment that was created by the central government in an endeavour to revive Japan’s economy. This strengthened the company further (Yuece, 2006). Effects of Tohoku Earthquake on McDonalds and Other Multinationals. Tohoku earthquake, also known as the Great East Japan Earthquake, or Higashi nihon daishin-sai, is the most powerful earthquake in history to have hit Japan. The undersea thrust had a magnitude of 9.03 richer-scales, and the thrust gave rise to a Tsunami that went to heights of 40.5 meters, causing destruction in an area of up to 10 kilometers inward. This caused destruction of communication lines, power lines, roads and other structures in eastern Japan. Several nuclear reactors were damaged, some exploded, dams collapsed, households were destroyed and thousands of people were reported dead. This was the worst crisis to have hit Japan after the Second World War. Economically, the estimated damage by the Japanese government was 16.9 trillion yen which is close to 3.5% of Japan GDP. The affected regions contribute 4% of the country’s GDP. Production fell by estimated 15.5% and this was as a result of supply chains being the hardest hit. This was a major humanitarian disaster. With the damages done, deaths, industries destroyed, infrastructure messed up; multinationals were not spared. McDonald’s supply chain that highly depends on transport infrastructure and power to produce and preserve its products was also hit. Vegetables and seafood were contaminated by the radiation from Fukushima Nuclear reactor. Within this area, transportation of milk and vegetables were restricted which highly affected agriculture, fishing and hospitality industry. By March 2011, McDonalds had 3302 operating restaurants 300 of which were closed due to damage caused and staffing issue. Thus, 90.9% of the restaurants were still operational. To continue doing business in Japan, several factors had to be considered. There was need to continue earning revenue, competition was still there, there were investors to be considered and the McDonalds belief in Corporate Social responsibility (Yuece, 2006). Being the second country to have many McDonalds restaurants in the world, (Japan has 3598 and US 12,804 restaurants), the business has to be vibrant in Japan. Other big Brands owned by Competitors of McDonalds have been introduced in Japan. To stay ahead of this competition, McDonalds have to find a way of staying relevant in Japan by re-inventing itself, adding more locally acceptable items in the menu and continually improving on service delivery. McDonalds have since introduced Mc-Delivery, a service aimed at delivering burgers door to door. Competition has also made Research and Development in Japan very strong. Research shows that Japan has an aging population who are willing to pay extra money for better services and who are becoming more health conscious. Competition has also realized this and it has now become a battle of products, each trying to look more appealing to this niche of people. McDonalds have also been out to give value for the investor’s money. Through its franchise system, McDonald management has always endeavored to improve its services and products to make them attractive thus increasing sales and consequently franchisee return which is given as a percentage of total sales made ( Yuece, 2006). This explains why, despite the challenges faced in Japan, and future possibilities of the same happening, since Japan is seismically active, McDonalds continue its operation in Japan. In 2011, according to McDonald’s annual report, closure of some operations cost the company $25millions, which impacted on investors’ money. Thus it makes a lot of sense for McDonalds as a company to continue operating as long as it is breaking even, or making profits since closures attracts some costs that impacts negatively on investor’s returns. The company, under its franchise system owns land and building or secures long term leases which attract annual rates. This is an automatic fixed cost and unless the company is doing business with the land, building and the lease, this goes towards reducing operating margins further. Some of these buildings were damaged which means McDonalds have to re-build and incur some costs. Japan however has an insurance system that covers such corporate against earthquake losses excluding the time factor. Repayment of the losses is an assurance of business continuity in the affected regions and Japan at large, and a confidence builder to the investors. In addition, the risk hedging aspect of McDonalds being operational in many countries, some stable and others unstable due to different reasons, offsets losses in other unstable states. Corporate social responsibility is another factor that has made McDonald stick in Japan. Employees in the affected regions restaurants were affected by the tsunami as well as consumers of McDonald’s products and investors. To be in line with the company belief to give back to the society where it operated in, McDonalds pledged to donate $2 million channeled through Red Cross. Other restaurants, some operating in US also offered the aid to help re-build Japan. These includes, Papa John’s Unit, Hawaii based restaurant, Panda express, Sushi Samba, Metropolitan Restaurant group and several others. McDonald has to stay in course to support its employees, consumers, suppliers, and other stake holders who were adversely affected by the Tsunami and the earthquake. Growth opportunity is yet another factor that McDonald and any other Multinational considered in evaluating its Post March 2011 Japan Tohoku. After the quake, there was call for all well wishers including United Nations to help Rebuild Japan. The quake, though it was a catastrophe, presented an opportunity of re-building the buildings that were not compliant to the 1981 building codes. With the aid inform of money, which was injected into the economy by the Bank of Japan, presented a big opportunity cake to be shared by Multinationals and other parties. The bank also considered introducing tax incentives to speed the recovery process. The area is known to be an agriculture and fishing hub, volunteers, entrepreneurs and Japanese government are now committed to re-building the Disaster-hit Tohoku and revitalize it economically. This presents an opportunity for growth for businesses, Multinationals included. In conclusion, business exist to make profit and maximize investors return by meeting customers’ needs in a sustainable way, while taking care of the environment they are operating in. With this being the focus, companies that execute the goal so well always finds themselves ever growing and expanding territories, a reason why companies go international. This is driven by need to increase customers’ base and increase revenue while still avoiding market saturation. This needs to be sustainable and contingency plans including disaster mitigation needs to be well spelt out. If well done, companies survives severe mishaps and its going concern aspect is maintained. Multinational have robust disaster management and mitigation plans and that’s why most including McDonalds continued operations in Post March 2011 tsunami in Japan References. Yuece, Illan, (2006) SWOT Analysis of McDonald’s and Derivation of Appropriate Strategies, St. Louis, MO: Mosby Read More