Obesity Debate: McDonalds Role - Assignment Example

 Obesity Debate: McDonald’s Role PEST Analysis A PEST (Political, Economic, Society, and Technology) analysis is a critical environmental scrutiny of the various factors that influence the area that a firm or industry operates in. This includes both internal e.g. staff, office equipment, technology, wages and financing among others; and the external factors encompassing the suppliers, agents, rival firms among others. Other factors considered in a PEST analysis are the macro-economic factors that will influence the climate the firm or industry is operating in. This include: political, legal services, economic, social-cultural, and technological issues. Political Analysis The fast food industry enjoys a very conducive political environment for its operations which has been enhanced by the creation of excellent economic policies that foster the growth of the industry. The fast food industry has been adequately supported by government policies in many of the territories it has expanded into. Within the U.S., European Union, Australia and the emerging economies, the general macroeconomic solidity, low interest rates, stable currency environment and the global competitiveness of the fiscal system, form a suitable base critical to the fast food industry growth (IMF, 2009a). There is neither any major political turmoil, civil strive and intrigues nor government regulations touching the industry hence promoting a good environment for trade. The support extended to the fast food industry by the US administration, mainly in wide-ranging macroeconomic solidity, low interest rates, established currency exchange environment and the global competitiveness of the income tax structure; establish the basis crucial to the industry’s growth. Economic Analysis The current global economic recession offers the greatest challenge too the food industry. The prevailing financial squeeze has deterred many consumers who have been largely confined to essential consumption. The ongoing global recession has many indicators pointing to a condensed market for the current year 2009 (Yildiz, 2009). The fast food industry has recently experienced slow growth in its core U.S. markets but has moreover continued to enjoyed sumptuous expansion in foreign markets. Conversely, MacDonald’s was nevertheless compelled to sell many of its Latin-American franchises due to poor results. However the company’s innovative integration of local culture, food habits, and lifestyle that integrate both American and local elements has led to successful launching of new markets in hitherto virgin markets like the Middle East, China, Japan and Eastern Europe (Aguiar, 2004). The fast food industry has however been lucky in not been as critically crippled as the other consumer markets. A report by Zagat 2009, the restaurant-review firm has indicated that the overall results in the sales generated by fast food industry have remained stable with many counters including Wendy’s, MacDonald’s, Red Robin, and Starbucks registering higher growth from the last year (Ritter, 2009). The global market makes up for the variances in sales particularly between the local and international market in view of the resurgent sales abroad. In China, the resurgent economy has created more jobs and affluence hence enhancing consumer spending. Many of the US fast food restaurants have set up shop in China, Brazil and Russia augmenting their domestic revenues. (IBIS-World-Industry-Reports, 2009). Societal/Cultural Factors Analysis The fast food industry operates in the larger international and regional sphere where it is exposed to divergent cultures and societies. Among the core domestic and European markets, the concern of unhealthy food rich in caloric content, trans-fats and portion has been mainly blamed on the fast food restaurants (Croft, 2006). This has generated opposition to the firms’ investments into some markets. The public is more health conscious today as issues of diet and wellbeing are gains more eminence. Subsequently, increasingly individuals are joining fitness clubs while avoiding ‘junk food’ as the campaign for healthy living gets stronger (Schlosser, 2001). The bad publicity generated by the campaigners of health foods has forced many fast food restaurant brands to venture into the production of lower fat and calories’ saturated products to augment their standing. In the newly emerging markets of China, Middle East and Japan, the fast food firms have incorporated local cuisines like sushi in Japan or developed social sitting arrangements that consider gender segregation in the Middle East (RNCOS Report, 2008). In the Middle East, MacDonald’s has launched a local version named McArabia which incorporated the main ingredients of conventional MacDonald’s products while integrating Arabian sauce when launched in the UAE and other Middle East countries. Similarly, not to offend the local cultural norms, MacDonald’s restaurants were uniquely subdivided to separate the gender as required in Islamic customs (Alkhereiji, 2003). Technology Analysis The fast food restaurants consider technological factors when setting up business since their speedy service require advanced machinery or equipment that cannot be accommodated in the relatively less advanced economies. The restaurants also utilise modern technology for communication, marketing, and accounting functions. The fierce rivalry between the firms require them to innovate to have a competitive edge over their rivals hence a more enhanced technological environment is desired to developed new products. In general, the fast food industry has employed technology effectively to consolidate its market share in the food industry as more people troop to the segment and save time and cost in consumer spending. Summary Our PEST (Political, Economic, Society, and Technology) analysis has revealed that the fast food restaurant industry enjoys an excellent political climate which is also contributes to favourable fiscal and economic factors conducive for doing business. Although the current economic climate has affected adversely many economic sectors, the fast food restaurant business has not been negatively impinged. The PEST analysis has also revealed that the competitive nature of the industry require highly developed technology to gain a competitive advantage. However the PEST analysis is not adequate to really garner the challenge faced by those in the industry as well as the threat of new entrants. To analyse the fast food restaurant firms’ competitive advantages, we have used Porters Five Forces matrix or model to determine the competitive factors inherent in the industry. Porters Five Forces (Competitive Environment Analysis) Porter’s five forces analysis were developed by Harvard’s Prof. M. E. Porter in 1979 as a framework for industry analysis. The analysis utilises an industrial economics model to generate five forces that determine whether a market is attractive or profitable enough (Porter, 1998). The five forces consider the micro-economic factors that determine the attractiveness of the market hence determining whether there is a possibility of slow, medium or high threat to the market entrant (See Appendix: Figure 2). The fast food industry can similarly be analysed using the model as outlined below. The five forces as regards the fast food industry are: The Threat of Substitute Products The main threat facing the fast food industry products is the onset of substitute health products that are mainly retailed in the supermarkets. The products constitute a viable threat to the predominance of rapidly prepared food as they offer an alternative to the now increasingly attacked unhealthy ‘junk food’ which have been accused of leading to obesity and other ills. Another supermarket alternative is the frozen or refrigerated food products that are also ready to eat and easily and cheaply retailed in the supermarkets. The threat of substitute products like health products or the frozen foods retailed in the supermarkets is not immediate since the alternatives are not likely to overtake the fast food restaurant industry. These threats are sluggish and therefore not very high. Threat of New Entrants The basic factors that confront new entrants to an industry hence serving as barriers to entry include: brand characteristics, economies of scale and investment prerequisites. The large supermarket chains offer the greatest threat to the predominance of the fast food restaurant in the rapid ready-to-eat food segment. The threat of new entrants is medium since the market entries require considerable investments and an established supply chain. Bargaining Power of Suppliers: The fast food industry is reliant on the supply of raw material and other commodities from their supplies. The existing high commodity prices coupled with incessant price wars among the rival firms mean the fast food industry profits are eroded greatly by the high overheads resulting (See Appendix: Figure 4 & 5). The supply chain for the raw material is therefore largely controlled by the suppliers who also dictate the pricing. The resurgent food commodity prices have negative impact on the food industry as wholesale prices continue to rise on year over year since 2007 reaching a high of 8.5 percent by 2008 (Restaurant.org, 2009). The threat from the suppliers is therefore considerably high since the fast food restaurants have no prevailing control over the suppliers who can raise prices at will. Bargaining Power of Customers: The current global recession has demonstrated the power of consumers as many sectors of the economy suffer from reduced purchases. The purchasing power of the consumers determines the products that can be marketed. Within the fast food industry like other non-essential products, most people purchase food at the drive in windows as snacks hence the curtailed consumer spending has affected the number of sales (IMF, 2009b). The Zagat Fast Food Survey (2009) categorised Subway a health food based restaurant as the most popular within the sector while the larger restaurant chains like MacDonald’s and Burger King were not placed among the top rated (Ritter, 2009). The drive towards healthy food products has also demonstrated the purchasing power of the consumers (Obesity-in-America, 2008). The bargaining power of the customers is apparently elevated as exemplified by the shift towards the health food products and other alternatives in the market thus reducing the demand for the fast food products. The threat of the bargaining power of the customers is therefore quite high. Competitive Rivalry within the Industry Strategic brand management is crucial for firms to develop enduring growth and profitability hence brand awareness and strong associations with the trademark guarantees lasting success (Gladden & McDonald, 1999). The fast food restaurant business is intensively competitive with many price wars continuously enjoined between the major players. This fierce rivalry is unhealthy and erodes the firms’ profits as they drive down pricing in their fight for a competitive edge over their rivals. Many of the major firms, McDonalds, Burger King, Yum! Brands, Wendy’s have evolved rigid network or franchises that compete globally and regionally (Menon, A. et al., 1999); (Pitts and Lei, 2003). The fast food industry is therefore fiercely territorial hence growth is considered slow to both the market entrant and the established players who have to reserve a sizeable chunk of their profits to deal with the threat of their main rivals in the industry. Porters Five Forces ccompetitive environment analysis reveals that the fast food restaurant industry is beset by real challenges unlike the more positive PEST analysis. The threat of substitute products is very real though may not be immediate. However the bargaining power of the suppliers and that of the consumers, and the intense competition between the existing firms constitute a veritable threat t the industry as revenues are eroded when the firms initiate measures to counter the threats. Nonetheless, the industry is not exceptionally challenged as the firms have maintained their competitive edge in the industry as well as their profitability even as other food sectors flounder in the face of the financial meltdown. SWOT ANALYSIS A Swot analysis is mainly used to review an organization’s internal and external factors that are favourable and unfavourable to achieve its goals. SWOT which stands for strengths, weaknesses, opportunities, and threats has been applied to determine the future of an organization. Strengths and weaknesses are internal factors while opportunities and threats are external factors (Hill & Westbrook, 1997). In the fast food industry, the following SWOT analysis is done on one of the major firms in the industry, McDonalds (See Appendix: Table 1). McDonald's Corporation the U.S. based firm is the world’s largest fast-food chain, operating its own restaurants, subsidiaries and franchises in over 31,000 restaurants in more than 120 countries globally (Dividend Growth Investor, 2009). Strengths McDonald’s enjoys a strong brand name internationally with over 31,000 outlets in 120 countries. In third annual BrandZ Top Most Powerful Brands Ranking, Macdonald was ranked the eighth most powerful brand, with a brand value of 49,499, or a 49 percent brand value change in 2008 (Kelley, 2009). McDonalds has many prime properties at various locations regionally and abroad. This assist in establishing new outlets but also rented out generating a lot of revenue to the firm. It has emerged as one of the major global brands which have enabled the firm to lease its brand franchise which generates over 60 percent of the firm’s profits. The company’s strong financial position and technological acumen enable it to introduce new products. McDonalds has a large experienced and capable management team that continue to drive the firm’s enviable growth and revenues. Weakness According to industry analysts, McDonalds has one of the lowest customer services rating among the fast food restaurant companies. Although it is the market leader among the fast food restaurant chains, McDonalds continues to maintain dilapidated stores that gives a bad reputation The main income generator for fast food outlets is a rapid and efficient service. On the contrary, McDonalds has a very slow service and accuracy. McDonalds continues to be beleaguered by numerous lawsuits from former employees due to its perceived poor employee relations that inevitably lead to high turnover of staff. Despite having a strong financial backing, McDonalds always plays second fiddle to its rivals in terms of product innovation. Opportunities McDonald’s diversification and acquisition of several profitable affiliates and franchises in diverse regions continues offers widespread opportunities. McDonalds in response to its rival’s new products can introduce similar low-priced menus cultivated to compete against them. The firm can easily raise additional funds by launching public offers in its numerous affiliate firms through initial public offers (IPOs). McDonalds (NYSE: MCD) is one the main trading corporations at the S&P 500 and Dow Industrials indexes. With a strong dividend policy, it continuously delivers returns to its shareholders generating an average of 6.70 percent (Dividend Growth Investor, 2009). There are numerous opportunities to expand in the emerging markets that are not as adversely affected by the global recession like China, India, and the Middle East. The financial squeeze has brought several additional new clients to the fast food segment hence offers room for growth. Threats The intense and sometimes rivalry between the competing firms is often destructive as price wars drive down profits while cutting on funds for research and development. The advent of health conscious consumers have impacted negatively on many of the firm’s major products that are now shunned for more healthier low fat menus. Numerous lawsuits by former employees continue to constitute a threat to the firm while obese clients have also initiated lawsuits against the firm blaming their condition on the diet offered at McDonalds. These lawsuits now constitute one of the single largest threats to the company’s profits growth (Schlosser, 2001). The emergence of new restaurants called fast casuals now constitutes a new major threat to the fast food outlets. These restaurants (Chipotle, Cosi and Panera) combine the convenience of fast food restaurants with the quality of casual dining. Limitations of the SWOT Analysis A SWOT analysis if done in isolation from other strategies may not be adequate since it overlooks some viable factors including macro-economic issues that have a critical impact on an organisations environment (Hill & Westbrook, 1997). According ManyWorlds.com (2007), ‘people who use SWOT might conclude that they have done an adequate job of planning and ignore such sensible things as defining the firm's objectives or calculating ROI for alternate strategies’ (nd). In our SWOT analysis MacDonald’s has been revealed to have more strengths than weaknesses while the threats against its market dominance are aptly outweighed by the opportunities prevalent in the market. MacDonald’s enjoys a competitive advantage over its rivals by having a more stronger brand image, existing properties offering easy room for expansion atminimal expense, and a strong management team. Similarly, there are numerous opportunity to enhance its financial position by floating shares of its affliate firms, the world recession has provided more customers from the full restaurant sectors, and lastly the new emerging markets of China, India, Brazil, and Middle East offer ample opportunities. The SWOT analysis complements the macro-economic factors as sketched in the PEST analysis matrix and those analyzed by Porters Five forces. Menon et al. (1999) and Hill & Westbrook (1997) allege that SWOT actually harm performance of organizations due to the grossing over of many significant factors. However SWOT is more effective if applied together with Porters Five Forces matrix and the more externalized PEST analysis hence giving a more comprehensive analysis of the prevailing financial and economic environment. References Adams, Catherine (2007) Reframing the Obesity Debate: McDonald’s Role May Surprise You Journal of Law, Medicine, and Ethics 35: pp.154-15. Academic Search Premier University of Nevada, Reno Libraries Aguiar, J. R. (2004). Consumer Change in Fast Food Preference. London: Business in the Contemporary World. Alkhereiji, Mohammed (2003) McDonald’s Launches McArabia Arab News Staff, March 5, 2003. Armstrong, J. Scott. (1982). The Value of Formal Planning for Strategic Decisions, Strategic Management Journal 3: 197–211. Arnold, G., 2002. Corporate Financial Management. 2nd ed. London: Financial Times Pitman Publishing. Bhatnagar, Parija (2004) Sad Day at McDonald’s CNN Money. 19 April 2004 Available at: [Accessed October 17, 2009] Croft, Robin (2006) Folklore, families and fear: understanding consumption decisions through the oral tradition, Journal of Marketing Management 22:9/10, pp1053-1076, DATA-WAREHOUSE. (2003). DATA WAREHOUSE CASE STUDY: FAST FOOD. Blue Bell, PA: Data Warehousing and OLAP For The Fast Food Industry. Dividend Growth Investor. (2009). McDonald’s (MCD) Dividend Stock Analysis. [Accessed on October 17, 2009] from Thediv-net.com: Doll, V. 2005. Industry Overview: Footwear Manufacture/Wholesale/Retail. College Park, MD: First Research, Inc. Eligon, John (2008) Where to Eat? A New Restaurant Genre Offers Manhattan More Choices The New York Times. Available at: [Accessed October 15, 2009] Hoovers. (2009). Hoover's Fast Food and Quickservice Restaurant Report. Retrieved November 9, 2009, from Hoovers.com: http://www.hoovers.com/fast-food-and-quickservice-restaurants/--ID__269--/free-ind-fr-profile-basic.xhtml Hill, T & R Westbrook (1997) SWOT Analysis: It’s Time for a Product Recall Long Range Planning 30 (1): pg.46–52 Hoover Fast Food Report (2008) Available at Hoovers.com [Accessed October 20, 2009] International Monetary Fund, 2009a. Global Financial Stability Report (GFSR) Market Update. [Online] International Monetary Fund. Available at: [Accessed October 17, 2009]. International Monetary Fund, 2009b. World Economic Report (WEO) Crisis and Recovery. [Online] International Monetary fund. Available online at: [Accessed October 17, 2009]. Kelley, J. (2009). The Fast Food Industry Will Continue to Shine. Retrieved October 17, 2009, from Forbes.com: http://www.forbes.com/The-Fast-Food-Industry-Will-Continue-to-Shine-41920.html Levinstein, Harvey (2003). Paradox of Plenty: a Social History of Eating in Modern America University of California Berkeley: P.228-229 ManyWorlds.com (2007) Don’t do SWOT: a Note on MarketingPlanning Online http://www.manyworld.com/exploreco.aspx?coid=CO8504144504/html [Accessed on October 20, 2009] Marino, Lou & Jackson, Katy Beth. “McDonald’s: Polishing the Golden Arches.” Crafting and Executing Strategy, Concepts and Cases. 14/e. Menon, A. et al. (1999) Antecedents and Consequences of Marketing Strategy Making Journal of Marketing 63: pg. 18–40. Obesity in America. (2008). The Obesity Crisis: What's it all about? [Accessed on October 15, 2009] from online Obesity In America, The Endocrine Society; The Hormone Foundation: Poggi, J. (2009). Espresso Perks Up McDonald's Sales. Retrieved October 17, 2009, from Thestreet.com: http://www.thestreet.com/espresso-perks-up-mcdonalds-sales.html Porter, M.E. (1998a). Competitive Advantage: Creating and Sustaining Superior Performance. New York: The Free Press. Pitts, R.A. and Lei, D. (2003). Strategic Management: Building and Sustaining Competitive Advantage. 3rd ed. Ohio: Thomson South-Western. Porter, M.E. (1998b). The Competitive Advantage of Nations. New York: Palgrave. Porter, M.E (2004). Competitive Strategy: Techniques for Analyzing Industries and Competitors. New York: Free Press. Restaurant.org. (2009). How Spiking Food Prices Impact Restaurants. Retrieved November 9, 2009, from restaurant.org: http://www.restaurant.org/pressroom/pressrelease.cfm?ID=1600 RNCOS Report (2008). China Fast Food Analysis. Retrieved November 9, 2009, from the-infoshop.com: http://www.the-infoshop.com/food.shtml Ritter, I. (2009). The State of the Fast Food Industry: Q&A With Zagat. Retrieved November 10, 2009, from Bnet.com: http://resources.bnet.com/topic/survey.html Rubio-Sanchez, A. (2008). Globalization: A Consumer Behaviour Perspective. [Online] Retrieved on 9 November 2009 from Business Source Complete http://web.ebscohost.com/ehost/detail?vid=1&hid=106&sid=a18fc906-61e9-4915-8477-6735efccd317%40sessionmgr107 Strandskov, J. (2006). Sources of Competitive Advantages and Business Performance. Journal of Business Economies and Management. 7(3). Pp.119-129. Schlosser, Eric (2001) Fast Food Nation: The Dark Side of the All-American Meal. Houghton Mifflin Books. U.S. Bureau of Labor Statistics, Occupational Employment Statistics http://www.mcdonalds.com/ White, E. Wall Street Journal 2/17/2005 p.A1  APPENDICES Table 1: SWOT ANALYSIS [McDonalds Corp.] Strengths Enjoys a strong brand name globally Has many prime real estate locations that contribute chiefly to firm’s revenues and provide avenue for expansion. Able to introduce numerous new products Offers focused instruction to its employees (Hamburger University) Has the largest market presence both domestically and internationally among fast-food chains Experienced and capable management team Weaknesses Has one of the lowest customer services rating among the fast-food chains firms. Continues to maintain dilapidated outlets that give a bad image Poor and slow service affecting the firm’s reputation Poor service translates to poor order accuracy as contrasted to major rivals Poor employee relations leading to high turnovers and litigation. Not as highly innovative as its major rivals in new products. Opportunities Continues diversification and acquisition of profitable affiliates and franchises in diverse regions Low-priced menus cultivated to compete against major rivals and attract new clientele Possibilities of launching IPOs in the strong emerging markets to raise revenues Expansion in the emerging new markets like China and Eastern Europe offers fresh opportunities. Economic downturn affecting consumer eating habits to the advantage of fast food chain sector Threats Amplified competition among rival firms including price wars, product improvement, and reduced revenues Health conscious consumers clamoring for improved products with healthier menu items Lawsuits from former employees and obese clients eroding firm profits Global economic recession affecting consumer spending power Global health epidemics threatening social eating habits negatively Emergence of new casual fast restaurants that combine the ease of rapid service and sitting arrangements. Table 2: Quick Service Restaurant (QSR) Quarterly Results SSS, CQ QI 2008 Q2 2008 Q3 2008 Q4 2008 Q1 2009 Q2 2009 McDonald's 2.9 3.4 4.7 5 4.7 3.5 Wendy's -1.6 0.1 -0.2 3.6 0.3 -0.4 Taco Bell 7.4 7 8 9 2 1 Burger King 5.6 5.6 3 1.7 1.6 -4.5 Olive Garden 5.7 5.8 2.4 0.8 -1.4 -0.6 Cheesecake Factory (CAKE) -1.8 -4.1 -4.7 -7 -3.2 -3 Chili's (EAT) 1.6 3.4 -3 -4.2 -5.2 -9.2 Applebees (DIN) 0.5 -1.7 -3.1 -4.6 -3 -4.3 Source: RBC/Larry Miller Operator & Buyside Survey Figure 1: Porters Five Forces Model Source: Adapted from Porter, M.E. (1998a, p.5) Figure 2: Source: USDA Figure 3: US Historical and Forecasted Corn Prices per Bushel Source: USDA Read More