How Will the Economic Factors Affect McDonald's at the Moment - Research Paper Example

Part A: How Will The Economic Factors Affect Mcdonald’s At The Moment? Brief company information Nature of business McDonald’s is a major player in the fast food business, which is a major segment of the global food market. Being the largest fast food chain around the world, McDonald’s is a global player in the global food market. According to its annual report, the company describes itself as follows: “The Company primarily franchises and operates McDonald’s restaurants. Of the 31,377 restaurants in 118 countries at yearend 2007, 20,505 are operated by franchisees (including 2,781 operated by developmental licensees), 3,966 are operated by affiliates and 6,906 are operated by the Company. Under our conventional franchise arrangement, franchisees provide a portion of the required capital by initially investing in the equipment, signs, seating and décor of their restaurant businesses, and by reinvesting in the business over time. The Company owns the land and building or secures long-term leases for both Company-operated and conventional franchised restaurant sites. This ensures long-term occupancy rights, helps control related costs and improves alignment with franchisees. Under our developmental license arrangement, licensees provide capital for the entire business, including the real estate interest, while the Company generally has no capital invested (McDonald’s 2008, 26).” McDonald’s is known for its burgers, especially its flagship product which is the Big Mac. It offers other varieties of burgers such as double cheese burger, quarter pounder burger, etc. Aside from burgers, there are French fries, chicken meals, breakfast products, etc. These products are mostly standardized in all the franchises across the world, making the products associated with the McDonald’s brand name, although regional variations are allowed in order to cater to local tastes. McDonald’s operates under the legal structure of a corporation. Although it has a lot of subsidiaries in other countries, the company’s headquarter is located in the United States. Objectives McDonald’s corporate objective is reflected in its “Plan to Win” strategy which about making McDonald’s not only bigger but better. The main objective of the company is to maintain its strong position in the global market for food, while growing its different business segments in different markets across the globe. The objective is broken down into different regional markets. In the United States, for example, the company’s objective is to grow its breakfast business and take leadership in that segment. As indicated in its annual report, “In the U.S., our key areas of focus will be breakfast, chicken, beverages and convenience. In 2008, we expect to build on our breakfast momentum and at the same time extend our leadership in the chicken category with the launch of the Southern Style Chicken Biscuit Sandwich for breakfast and the Southern Style Chicken Sandwich for the remainder of the day (McDonald’s 2008, 28).” In Europe, the goal is to improve its market position and strengthen the company image. As reflected in its annual report, “In Europe, we plan to strengthen our local relevance using a tiered menu approach featuring premium selections, classic menu favorites and everyday affordable offerings. […] We will also create stronger bonds of trust by being accessible and maintaining an open dialogue with customers and key stakeholders (McDonald’s 2008, 28).” In Asia-Pacific, Middle East and African region, McDonald’s aims to pursue growth in its different business segments, especially its emphasis on convenience thru its drive-thru business. In its annual report, it indicates: “In APMEA, locally-relevant execution of our strategies surrounding convenience, breakfast, core menu extensions and value is essential to sustaining momentum in this diverse and dynamic part of the world. Convenience initiatives include leveraging the success of 24-hours or extended hours of service, offering delivery service in certain countries and building our drive-thru business, particularly in China. In addition, we will continue to emphasize breakfast to further build this daypart, communicate our everyday value offerings and feature limited-time variations of classic menu favorites (McDonald’s 2008, 28-29).” Analysis Major economic factor: The Global Financial Crisis The world is now faced with a global financial crisis that threatens to lead to recession. While the crisis has started from the subprime mortgage crisis in the United States, the instability of financial institutions and investment banks in the United States and European region has unfolded which leads to a global loss of confidence and crash of financial markets (Torbat, 20008 October 13). Due to these, many large corporations that operate globally are envisioned to be greatly affected as their operations are integrated to the global economy. Therefore, this global crisis is a vital economic factor that could impact the performance of global companies such as McDonald’s Implication of economic factors in fulfillment of McDonald’s objective Foreign exchange rate One of the major implications of the economic factors to a global company such as McDonald’s is the consolidation of its sales across the globe from its different subsidiaries. As the foreign exchange rates fluctuate due to the weakening currencies in different countries where McDonald’s operates in, McDonald’s faces a serious impact on its sales, as measured by the local currencies. The weakening currencies, although being a factor of the demand and the supply of the currencies in the market represent a portion of the weakening purchasing power in a country. Even with the purchasing power parity in order to equalize the purchasing power across countries, the fluctuating foreign exchange rate has a significant effect on the contribution of the operations in that country to the overall growth of McDonalds. If a local currency loses its value, there is a significant impact on the company’s operations, as Keown in his book Financial Management put it, “profits generated in [other countries] and measured by the [local currency] would have bought significantly fewer US dollars after the devaluation (2005, 500).” Decreasing purchasing power due to global recession Recession in the United States and European region has significantly created a chain effect all over the world. This recession in many countries have resulted in a decrease in total purchasing power in many countries, has a significant effect on the spending of the economy. Due to this, McDonald’s objective of growing its markets in many countries such as the Asia Pacific, Middle East and African region can be affected. As economies grow weaker and slowly get into slump, spending decreases, which has a significant effect on sales of the company. Although the company has gained a significant foothold in its home country and has established itself as another icon for the American culture, the crisis must also have effects on spending in the US which could result in lower sales for the company. As regards its objectives for the European region, success is less regarded. McDonald’s aims to establish stronger relevance in the European region by strengthening its position and changing its re-establishing its brand image as indicated in the annual report. However, this can be hampered by the global financial crisis due to recession in most countries in the region. The significant effect of decrease spending can significantly impact the company’s fulfillment of objectives. Fewer access to financing for growth, higher cost of capital As the company aims to promote growth in regions outside the United States especially in the APMEA where many emerging markets such as China and India are located, the growth can be hampered by scarcer financing in international markets (Soros 2008). As the credit crunch continues to affect more countries across the globe, the international financial markets have developed risk-averseness which led to capital flights in major financial markets, funds have become scarcer. While McDonald’s strategy in pursuing growth is through its franchises all over the world, franchises that rely on different sources of financing can have a harder time trying to secure some capital for expansion during the crisis. Lower prices of commodities due to decrease in global demand The decreasing demand for commodities has an impact on the global prices of commodities—that is, prices are lower. As prices get lower, there could be a substantial effect on McDonald’s operations in such a way that the crisis has an effect on the price of McDonald’s inputs or raw materials. Of course, the lower prices come along with the decreasing purchasing power due to recession. But the lower prices can offset the effect of financial crisis on McDonald’s sales due to lower consumer spending. With this, McDonald’s can see it an opportunity to pursue its growth strategies by maintaining a certain amount of profitability with the higher margins provided by the potential decrease in the prices of the company’s inputs. Part B: Two techniques that can be used by management in order to assess the business environment and evaluate their usefulness for planning strategies in light with the external factor that is identified in Part A. Strategies are plans that are crafted in order to fulfill a certain objective. However, in pursuit of objectives, there are forces larger than the firm itself which could influence the result of the objective. While a company cannot influence these forces, it can guard itself from the threats that these forces bring by incorporating some strategies to prepare for it. Also, companies can turn the favors to its side by spotting opportunities that these forces bring and build a competitive advantage out of them. As Bartol in her book “Management: A Pacific Rim Focus” said, “[…] managers need to consider elements in the general environment, or mega-environment that can positively or adversely influence an organization’s ability to reach its strategic goals. […] Managers also need to assess major elements in the organization’s task environment, which includes the more specific outside elements with which the organization interfaces in conducting its business (2001, 224).” In order to assess the macro-environment of the company, PESTLE analysis can be proven beneficial. It identifies the political, economic, social, technological, legal and environmental factors that may influence the company’s strategic direction. These influences present implications for the company in the form of opportunities and threats. As for the microenvironment or the company’s task environment, Michael Porter’s competitive five forces can determine the relative situation in the market and the industry where the company operates in. These two techniques can provide significant insights in order for managers to prepare for the future, and plan ahead as they craft strategies to fulfill their objectives. PESTLE The PESTLE analysis provides a company a comprehensive analysis of factors in macro-environment that may influence any business. These factors include political, economic, social, technological, legal and environmental dimensions of the business environment that have implications on a company’s operations. By spotting changes and trends in these dimensions, the company can spot implications in the form of opportunities and threats. The global financial crisis, although an economic factor has effects that are so vast it does not only contain economic implications for the company, but alongside it goes certain political, social, technological, legal and environmental implications as well. The PESTLE analysis can help McDonald’s in formulating strategies in order to offset the effects of the global financial crisis on the company. As for the political dimension, the global financial crisis has posed some political implications for the company. Governments in different countries have provided stimulus packages in order to encourage spending in the economy, as well as additional investments in infrastructures. In line with other fiscal measures, McDonald’s can expect new policies that may impact businesses such as incentives and tax breaks. These can have both negative and positive implications for McDonald’s, both on the global and local level. As for the economic dimension, the global financial crisis has resulted in major loss of confidence in banks; therefore scarcity of capital has an effect on McDonald’s growth objectives. The crisis has made acquisition of loans harder and more expensive, although McDonald’s is a global giant with a reputation to back up its borrowings. Even so, many governments have lowered the prevailing interest rates which have significant impacts on the company’s cost of capital in a given country. Another economic implication is the decrease in purchasing power of consumers as massive unemployment has been a result of recession in countries that are greatly affected by the global financial crisis. The social dimension can pose significant changes in societal trends for many countries. Due to recession, citizens in other countries may shift their money habits from spending to saving. The shift in spending patterns can significantly impact sales of players in the food industry. Due to recession and shift in spending patterns, price can be a major aspect where competition among players in the food market can compete. The global financial crisis which results in recession has increased poverty in many countries, which could have a significant societal shift in values in many countries. This, of course could impact spending decisions as regards McDonald’s products. Technological dimension of the environment is also affected by the global financial crisis. As the scarcity in capital becomes an issue in many markets, budgets for research and development in many countries have become an issue. Due to this, certain technological implications especially in terms of communication and integration of systems of the company’s operations across the globe can be an issue. In contrast to overall tendency to decrease the spending on research and development, McDonald’s can capitalize on the growing influences of the internet. Even with the global financial crisis, many companies find resort into the Internet a cheaper way to access consumers and deliver value to the market by incorporating direct marketing especially in their marketing tactics. The legal dimension of the business environment can be mostly tied with a country’s political and economic dimensions. Therefore, what McDonald’s could face are provisions and changes in laws that have something to do with political and economic reforms in order to rescue a country from the deeper effects of the global financial crisis. The environmental, or ecological dimension of the business environment, is likely less affected by the global financial crisis, however can still pose some implications on the company. The emphasis on lower-cost alternatives to raw materials and other inputs are becoming more popular, as well as being advocated by many people. In times of such crisis, more ecological and environment-friendly alternatives are advocated as more beneficial in relation to economical reasons in line with cutting down costs. All in all, the PESTLE analysis can help McDonald’s in anticipating the effects of global financial crisis on the company’s global operations, by looking at the different dimensions of the business environment. The PESTLE analysis can provide insights as regards shifts in trends, which can enable the company to include necessary steps in order to address the impacts of these changes through its corporate strategy. The global financial crisis’s effect is hard even for a global company such as McDonald’s to combat, however McDonald’s can use analytical frameworks such as PESTLE in order to tailor strategies in order for it to still achieve objectives, despite the current happenings. Porter’s five forces Porter’s five forces model analyzes the company’s micro-environment, specifically the industry where it operates in. The analysis that the framework provides give a company an idea about the level of competition, as well as idea about how the market is currently served. By knowing the competition as well as the market, McDonald’s can devise a strategy in order to cope with the changes in its more immediate environment. According to Bartol in her book “Management: A Pacific Rim Focus”, Porter’s five forces include “rivalry, bargaining power of customers, bargaining power of suppliers, threat of new entrant, and threat of substitute products and services (2001, 224).” Furthermore, she added, “the collective strength of these forces directly affects the profit potential, or long-term return on investment, available to businesses operating in the particular industry (Bartol 2001, 224).” McDonald’s operates in the fast food industry, which is a segment of the global food market. Assessing the current situation in the industry in line with the global financial crisis can be beneficial for McDonald’s in order to develop insights to gain an advantage. As the global financial crisis continues, the threat of substitute products becomes higher—other emerging products that compete on the basis of price has entered the markets as food is still a necessity that will continue to sell even in the hard times. Because the larger category where McDonald’s competes in is in the food market, getting into the food business is relatively easier. Thus, the global financial crisis, although have a significant effect on new business in terms of acquiring capital does not have much impact on the barriers to entry of the food business. Due to this, the threat of new entrant for the food industry is still high. As there are many substitute products for the consumers, McDonald’s is faced with higher bargaining power which could result in pressures on product quality as well as prices. The global financial crisis could also prompt consumers to use their bargaining powers to push the prices of products in the market. As for the bargaining power of suppliers, due to the falling commodity prices, suppliers have less power to bargain with McDonald’s as many of them could be driven out of business if they tend to increase their prices. McDonald’s will have plenty of suppliers across the globe, and with McDonald’s being one major purchaser, it can demand more from its suppliers which could be more advantageous for the company in the process. The degree of rivalry in the global food market is most apparent in the fast food segment where McDonald’s is a major player in. The great brands in the fast food segment compete and constitute the rivalry. Among McDonald’s rivals are Burger King and Wendy’s. As apparent in many geographical markets or locations, the rivalry between the three is still intact even at the presence of global financial crisis. Porter’s competitive five forces framework is useful in determining the company’s head-to-head strategy with other players in the competition. However, if the global financial crisis is to be considered as a major factor, as apparent in the analysis, this framework does not explore the implications on the company and the competition in contrast to the PESTLE framework. This is because Porter’s framework deals with the organization’s task or immediate environment. When the global financial crisis definitely can impact the company, it is more seen and felt on a larger scale and through the implications that the dimensions of the macro-environment of McDonald’s could provide. Therefore, if the global financial crisis is the major factor to consider in revising and crafting the strategies of the company, the PESTLE framework can provide better insights to address that. Porter’s framework would be beneficial on the more tactical scale for the company’s strategies, such as its strategic marketing function and human resource functions which will carry on the McDonald’s grand strategy. Bibliography: Asian Development Bank (2008). “Navigating the Global Storm: A Policy Brief on the Global Financial Crisis.” ADB.org. Available from http://www.adb.org/Documents/Reports/Navigating-Global-Storm/global-storm.pdf. 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[Accessed 13 January, 2009] Torbat, Akbar E (2008, October 13). “Global Financial Meltdown and the Demise of Neoliberalism.” GlobalResearch.ca: Center for Research on Globalization. Available from http://www.globalresearch.ca/index.php?context=va&aid=10549. [Accessed 13 January, 2009] Read More