Issues Pertinent to McDonalds International Business - Assignment Example

You are required to analyze your own organization or one that you are familiar with in terms of issues relating to International Business in one or more than one markets. The assignment should use a variety of models and perspectives / theories within your chosen topic as part of your analysis. Table of Contents Introduction 3 The McDonald’s Corporation 3 Application of Theories 4 Current Strategies 6 Issues Pertinent to McDonald’s International Business 9 The External Environment and McDonald’s 12 Social Challenges 12 Legal Challenges 12 Conclusion 13 Bibliography 14 Introduction The McDonalds Corporation is one of the most successful global restaurants in the world. Its International division was established in the year 1969. International expansion by McDonald’s was accomplished through three different means: McDonalds and its foreign subsidiaries, franchises and affiliates. The following report talks about the McDonald’s corporation, its inceptions, values and international expansion. Then, the theories are applied and McDonald’s strategies are analyzed in light of these theories. Later, the issues McDonald’s faces as a corporation as it expands particularly in the developing countries are discussed, followed by specific examples of the challenges, from the past, the external environment has posed on the fast food chain. The McDonald’s Corporation The McDonald’s corporation, whose international division was established in the year 1969, today is the largest chain of hamburger fast food restaurants in the world, and serves around 70 million customers on a daily basis in 118 countries. In the 1940 when the company began its operations in the United States under Richard and Maurice (Mac) McDonald, it was a barbeque restaurant. It wasn’t untilm1948 that they decided to reorganize the business as a hamburger joint based on the principles of production line. In 1954 when the milk-shake mixer sales man, Ray Kroc, saw an opportunity in this market and joined the business as a franchise agent in 1955. Ray Kroc negotiated the deal with the brothers and ended up making a franchise deal that gave him the exclusive rights to franchise in the USA. Kroc offered a McDonalds franchise at a price of $950, and took home a service fee of 1.9% of sales. The McDonalds brothers eventually sold out for $2.7million in 1961. The corporation’s first international venture was in Canada in 1969. International expansion in McDonald’s was accomplished through three different means 1) McDonald’s and its foreign subsidiaries, 2) franchisees and 3) Affiliates. Franchising played a major role at McDonald’s. A major factor contributing to the rapid and successful international expansion for McDonald’s has been the way its franchise system has operated. Over the years the corporation has given immense importance to the training and development of franchisees that operated the restaurants. Today 80% of its restaurants are franchised. Initially the McDonald’s restaurants had a standard, uniform menu centered on hamburgers and french-fries. Supporting menu items included salads, pies, sundaes, shakes, and other beverages. However as McDonald’s has expanded into diverse markets (for example, India) it had to customize its menu according to the tastes of the local demand (in this case, including non-veg items in the menu). With a number of 440,000 employees globally, a ranking of number 6th in the most valued brands , a market cap of $96.91 billion and a share price of $96.31, McDonald’s shows signs of a great foreseeable future. Notably, McDonalds has also increased shareholder dividends for the last twenty five years. Application of Theories The internationalization theory, a prominent theory in international business talks about a mutidomestic means through which corporations expand internationally. This theory focuses on risk aversion and holds that corporations tend to enter in different markets once they have exhausted all the opportunities in the home market. This is usually done through low risk means of expansion, for example, exporting, at first. Later, as the corporations move upwards on the learning curve, they establish foreign operations that act independently of one another. With an internationalization strategy in place, the country of each operation becomes its domestic market. Managers of such an operation are concerned solely with their domestic market than the entity as a whole. This strategy also involves customization of marketing strategies according to the different external environment factors at work: cultural, regional, economic, social, technological, and political to reach the target market. At the heart of the multi domestic strategy also is the need for building goodwill by working with local government agencies to address problems facing the host countries. In this case, the sources of competitive advantage include High differentiation, and quick response to changes in local demand patterns. The globalization theory, as suggested by Theodore Levitt in his HBR article ‘The Globalization of Markets’ is said to be followed by corporations when their operations are standardized or highly integrated from country to country. This theory holds that corporations operate all the units under a single strategy despite the locations and the corporation views the world as a one, single, unified, borderless market and the units in various countries operate under centralized control from the head quarter of the corporation. Globalized companies tend to employ not only standardized products but also promotional campaigns and prices are same/similar across the globe. In his article, Levitt has also hinted towards how the more informed customers are moving towards a ‘convergence of tastes’ and that the future belongs to the companies that overlook local differences and focus on providing products which are innovative, cheaper and functional which consider the whole world as a single entity (Levitt, 1983). The source of competitive advantage in this case is low cost. The two schools of thought have been in debate ever since the firms started going global, as to which is a more successful strategy of the two. Many researchers have talked about development of a hybrid strategy to achieve the strongest possible competitive advantage. The phrase used by Ira Herbert, Coca-Cola’s Chief Marketing Officer ‘Think globally, but act locally’ forms the basis of this strategy. The units coordinate their activities not only with the headquarters but also with one another and the units are free to adapt to the special circumstances only they face. McDonald’s has moved from the globalization strategy to the hybrid strategy or ‘glocalisation’ that is, combining the components on globalization and localization (Vignalli 1997), today. While certain products, operational practices, quality standards and the restaurants décor is standard across the globe, many product offerings have been tailored according to the country demands, for example, offering chicken slaughtered in a ‘Halal’ manner, according to Islamic rules in Muslim countries. Current Strategies To ‘McDonalize’ a term commonly associated with raising quality standards in businesses, depicts that McDonalds has come a long way from being a mere burger joint in the 50s. However, just being McDonald’s isn’t enough. The corporation has to constantly innovate to differentiate its products to retain its competitive advantage and for this, McDonalds has focused on a few strategies to keep moving forward: Focusing on the Emerging Markets- The corporation is currently looking at the developing countries for expansion. Over the past few years McDonald’s has not just focused on markets like China and India which due to their increasing population rate have attracted a lot of FDI, but also markets like Africa, where McDonald’s was non-existent before. Growth in the number of restaurants, especially in the Middle East, Asia Pacific and Africa provides a significant growth opportunity to McDonald’s. Currently APMEA accounts for 22% of McDonald’s sales revenue and 18% of the operating income (Trefis, 2012). McDonald’s can continue to expand its business in the Sub Saharan Africa, especially because it offers a great opportunity: while the global growth rate will be 3.7% this year that of Africa will be 6.1% (Bloomberg, 2014). The corporation, however, views China as the most productive place to expand internal operations to. It aims to open at least 2000 restaurants in China by the year 2017 (Business Insider, 2014). But, to penetrate in this giant market, McDonald’s needs to reframe itself according to the Chinese cultural aspects. This also means de-Westernizing its restaurants, for McDonald’s. In the case of China where middle class will constitute 50% of the population by 2020 (Business Insider, 2014), to attract this major chunk of population, in its restaurants McDonald’s has incorporated a seating system of large, round tables that can seat ten. This has been done keeping in mind the norms of a collectivist society where extended families usually go out and eat together; the round tables facilitate socialization. In its menu in China, McDonald’s has also offered unusual items like spring rolls and rice and moved away from beef which is not a common part of the Chinese diet to pork and chicken. Offering a Diverse Variety of Food Items on the Menu- This is in addition to the strategy stated above. By including diverse and non-traditional food products in its menu in addition to sticking with its core product offering of burgers and fries has helped McDonald’s reach more consumer segments. Not just in China, in many countries, it has tried to tailor its products according to the host country’s requirements. Here many external factors are at play. For instance, in the case of Muslim countries, McDonald’s offers no pork products as consumption of pork is prohibited in Islam and the chicken and beef are obtained and cooked according to Islamic rules and regulation. Diverse variety of products also includes McDonald’s shift towards healthier food options. These include salads and recent inclusion of oatmeal in the breakfast menu in many countries. Making the Restaurants Attractive to the Customers- At the heart of McDonald’s market leadership is its ability to successfully innovate and standardize not only the products but also the process technologies. In line with this, in 2006, McDonald’s redesigned its brand as ‘Forever young’. This was the first major redesign by McDonald’s after the 70s. Restaurants all over the world were made to conform to this new design and it is still in the process of implementation, where the red is replaced by terra cotta and the yellow is replaced by a golden sunny colour. Restaurants have more wood than plastic with framed photographs and paintings hanging on the wall. The new décor has three main features: the ‘linger’ zone which consists of sofas and free Wi-Fi connections, the ‘grab and go’ zone with tall counters and bar stools for single customers and the ‘flexible’ zone which has booths with colorful patterns and flexible seating and is targeted towards families. Franchising- Franchising, as stated before, played a major role at McDonald’s. Advantages of the franchise business are many and diverse and are discussed briefly below: Franchising has allowed McDonald’s to grow as a company without making capital investments, which in this case are made by the franchise owners. Franchising allows multiple restaurants to be opened simultaneously resulting in rapid expansion. At one point in the 1980s, one new McDonald’s restaurant was opened every 17 hours. Franchisees, with their capital and business ownership at risk, are more motivated to perform to the highest level as compared to employees. Franchising allows the owners to benefit from the brand name and the collective network. Often it happened in the franchisor-franchisee relationship that McDonald’s had to take a hard line against some franchises in an attempt to save its brand image. By performing operational audits, many a times McDonald’s came across issues that the franchises had. These ranged from failure to follow operating procedures to inability to maintain cleanliness. Up until the 90s, McDonald’s approved the suppliers for food, paper and equipment for the franchises. Quality, Service, Cleanliness and Value (QSCV) were four core values that Ray Kroc insisted upon and where a franchise was unable to meet any of the these values, it would either not get a second unit and also had no guarantee of a contract renewal. Issues Pertinent to McDonald’s International Business Finding the ‘right’ franchisees- With 80% of its restaurants franchised globally, it becomes crucial to find franchisees that are at the same wavelength as McDonald’s and have the same approach to the principles of Quality, Service, Cleanliness and Value as the parent corporation itself. Especially, as McDonald’s expands in to the developing countries, the problem of finding the tight franchisees aggravates. The restaurant chain may face many difficulties such as reliability of suppliers, uncertain Macro economic conditions, a weak legal system, corrupt governments which may have to be bribed on a regular basis to let the operations run smoothly or just the fact that the franchisees don’t possess enough scale. This problem was especially true in the case of China where a paucity of good franchises meant that the corporation had to open company-operated restaurants and by the year end of 2011; only 36 out of its 1400 operating restaurants were franchised. Another example is that of Vietnam, where the corporation has yet not been able to penetrate because of lack of the right franchisees (Forbes, 2012) The Dynamics of the Real Estate- Usually the McDonald’s corporation owns the land on which the franchisees operate; however, this is not always true. In cases where this hold true, the corporation collects a collective amount comprising of a onetime initial fees, rent and royalties from the franchisees. Since its inception, McDonald’s has had a desire to place its restaurants on prime, high traffic routes. These areas although provide significant business opportunity, comes with increased land price. In the case of developing countries, where the infrastructure is not much developed, real estate may demand increased investment before a franchise can be set up. Setting and Maintaining the supply chain- One of the advantages of the McDonald’s franchise system also is that usually the franchisee belongs to the host country and may have prior experience of operating a business. Still, to be in coherence with the core values, the corporation has to spend a substantial amount of time to set up its supply chain in the country. In the case of India, for example, McDonald’s spent 6 years to set up a reliable and functional supply chain by working with the local farmers, training them, before the first restaurant opened in the country. The time spent in setting up the supply chain and understanding the market dynamic allowed McDonald’s to have a firm grip in the Indian fast food market and in the next 20 years it was successfully able to establish and run 250 restaurants. Adapting to the Local demands- Today McDonald’s is present in 118 countries. Its international division was formed in 1969, this implies that it roughly has a 45 years’ experience in international business. This long history of expansion has allowed McDonalds to move upwards on the learning curve and to be able to tailor its menu according to the tastes of the local population, by creating new menu products which are non-traditional and in line with the tastes of the local population. As much as McDonald’s has been able to master the provision of food items according to the local demands, it still poses as a challenge, each time it expands in to an unknown territory. New product development for the menu and understanding of the local markets requires investment in time and capital. the markets they operate in. ‘Some of McDonald’s menu items developed exclusively for the local population include: Bubur Ayam McD (Malaysia) fMcAloo Tikki (India) McArabia (Egypt), McMollete (Mexico), McPollo (Chile), McKroket (The Netherlands (Forbes, 2012). The External Environment and McDonald’s Economic Challenges- The 2007, $700 million sale of 1600 restaurants in Latin America and the Caribbean to the licensee, Woods Station, shows clearly the implications economic factors can have on a business as large as McDonald’s. Despite being awarded the ‘Best Company to work for in Latin America’ in 2006 and a resulting decline of $1.5billion in consolidated revenues, McDonald’s continued with the conversion of the 1600 restaurants in Latin America to franchises in order to minimize the volatility caused by the swings in the value of the local currencies. Matt Paull, the corporation’s CFO commented that, ‘We weren’t put on this earth to deal with this kind of volatility. It makes us nervous, and it makes some of our shareholders nervous.’ (Narapareddy, 2007) Social Challenges McDonald’s faced many social challenges when it expanded to the Pakistani market in 1998. At the time McDonald’s started, fast food was not popular with the Pakistani masses. McDonald’s had to bring about a change in the eating pattern of the masses. This was a case of category conversion. Although it continued to provide ‘Halal’ meat products, general anti-American sentiments often affected McDonald’s. Legal Challenges In the June of 2004, McDonald’s had to face controversy when it distributed free goodies, balloons and meal vouchers to the medically ill children in the UK on a day when the local government reported high levels of obesity among the British children because of consumption of fast food. Another legal challenge McDonald’s faced was when in 2002, Hindu vegetarian groups not only started demonstrations but also sued the Indian McDonald’s for misrepresenting its French fries as being vegetarian despite being fried in beef lard. McDonalds lost the case against the vegetarian groups. Conclusion Over the 45 years of international business, McDonalds has made a shift from the globalization strategy to a more hybrid or ‘glocalization’ strategy, which has the components of both, the internationalization and the globalization strategy. It has learned how to adapt to local consumer needs while offering certain standardized products which are in line with the McDonald’s brand. It has employed the use of franchises to expand its business to as many as 118 counties, present day. It has adopted the strategies of differentiation and cost leadership to have a sustainable international competitive advantage. Although it will continue to face certain issues and influences from the external environment as it expands more in to the developing counties and as the US market saturates, there is no denying that it is one of the most successful international businesses in the world. Bibliography James Brumley, 2014, McDonalds is About to Tap into a Huge Growth Opportunity. [Online] Available at: http://www.businessinsider.com/mcdonalds-expanding-international-2014-4 [Accessed 2 December 2014]. Jason Folkmanis, 2014, McDonald’s CEO Thompson Seeks New African Markets for Expansion. [Online] Available at: http://www.businessweek.com/news/2014-02-10/mcdonald-s-ceo-thompson-seeks-new-african-markets-for-expansion [Accessed 2 December 2014]. Forbes, 2014, McDonald’s Financials. [Online] Available at: http://www.forbes.com/companies/mcdonalds/financial/MCD/ [Accessed 2 December 2014]. About McDonald’s, 2014, Our Company. 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