Strategic Management - Influence of Business Structure upon Strategy - Case Study Example

Strategic Management - Influence of Business Structure upon Strategy Table of Contents Strategic Management - Influence of Business Structure upon Strategy 1 Influence of Business Structure upon Strategy 2 Financial Performance 4 SWOT Model for McDonald’s 7 Competitive Positioning 10 Value Creation 11 PESTEL Model for Critical Appraise of McDonald’s Strategy 13 Porter’s Model for Critical Appraise of McDonald’s Strategy 17 Conclusion 21 References 22 Bibliography 26 Introduction McDonald’s has been the largest booming fast food chain in the world. It started in the US in California in 1954 and has been successful in establishing it as a brand all over the world. McDonald’s has been successful in expanding its restaurant in more than 119 countries through the franchise model. It has also been successful in establishing more than 30,000 franchise stores that provide service to more than 47 million people everyday. In order to build the brand image stronger, McDonald’s promote the brand through sponsorship of sports events and social activities. This helps in developing the brand image of McDonald’s (Han, 2008). Influence of Business Structure upon Strategy The recent trend in the fast food industry has seen an immense boom especially in the healthy fast food category. The competitors of McDonald’s are Taco Bell, KFC, Pizza Hut, Wendy’s Burger King and many more that are competing globally (Aaker, 2004). The business strategy of McDonald’s is based upon geographic structure. The main area of operations of McDonald’s are divided into five geographic divisions, shown in Figure 1 below. Figure 1 (Han, 2008) The revenue of McDonald’s are largely generated from the US and the European market. McDonald’s uphold the leading position by applying a strategic approach in maintaining the major markets and at the same time expand the business in other potential markets. As different markets have different tastes and demand for products, McDonald’s produce and market diverse products in diverse markets with different pricing strategy. McDonald’s have the strategy to target similar category of consumers’ section that demand fast food services at a reasonable price with high hygiene standards and aims to maintain high quality at all it’s restaurants in the world. The main food item is same all over the world but new items are introduced in the regional level. In this way, the company is growing and making profits. Financial Performance Financial Highlights 2010 Figure 2 (Money Central, 2010). Revenue - Quarterly Results (in Millions) Figure 3 (Money Central, 2010). Earnings per Share (EPS) - Quarterly Results Figure 4 (Money Central, 2010) Year over Year EPS Growth Rate Figure 2 presents that there is 20.65% of net profit margin that is better for the company operations. The Return on Equity is 36.68%. The investors return is high. 36.68% of return providing capacity of the company shows potential growth and this will increase the level of investors’ investment. In Figure 3, the revenue result shows the increase in revenue. There is a positive increase in the revenue structure. This shows the successful strategic capability of generating business for McDonald’s. Figure 4, shows the EPS structure. Overall there has been an increase in EPS from 2008 to 2009 but there has been a decrease in this figure in 2010 from that of 2009. But viewing the quarters of 2010, there has been increase in the EPS. This shows the increase in financial performance. Even during the global financial recession from the period of 2008-2009, McDonald’s has been successful in generating more EPS. McDonald's Corporation, year after year has viewed revenues shrinkage from “$23.5Billion to $22.7Billion, though the company was able to grow net income from $4.3Billion to $4.6Billion. A reduction in the percentage of sales devoted to cost of goods sold from 63.27% to 61.35% was a key component in the bottom line growth in the face of falling revenues” (Bloomberg Business Week, 2010). Year 2006 2007 2008 2009 Net Income 3,544.20 2,395.10 4,313.20 4,551 Figure 5 (Bloomberg Business Week, 2010) There has been an increase in the net income. In the year 2007, the net income level has dropped but with the strategic expansion of the business through the franchise model, it entered in the potential market that has led to the growth in the net income of McDonald’s. McDonald’s has been able to generate $1006.8 billion (4551 – 3544.20) from 2006 to 2009. This shows the strategic approach towards the geographical operations with the franchise model. Year 2006 2007 2008 2009 Gross Profit 6,932.00 7,905.20 8,639.20 8,791.80 Operating Income 4,636.30 5,538.20 6,283.70 6,557.60 Figure 6 (Bloomberg Business Week, 2010) There has been an increasing trend in the gross profit level. Figure 6, shows that the gross profit has seen an increasing growth that makes McDonald’s financial performance stronger and the cash liquidity maintained. McDonald’s has been able to generate $1859.8 billion (8791.80 – 6932.00) from 2006 to 2009. SWOT Model for McDonald’s For the performance of McDonald’s in the competitive environment SWOT analysis will provide an understanding. Strengths The franchise model is the strength of McDonald’s that helps the company to enter the potential market and generate huge revenue. McDonald’s has been able to develop a brand value in the international market. The brand image of McDonald’s has generated revenue for the company. The major market share from where the revenue is generated is the US and the European market. Operations in the two markets have led McDonald’s to achieve huge success and made them to invest in other potential market. The introduction of innovative items in the restaurants, made the success level higher. Every region has its own different products that are present with the main items of McDonald’s. This allowed the consumers not only to consume the items that were made according to the regional level but also the original products that were created in the US market. The increase in new product development has helped to enhance the various segments and offerings. The introduction of healthy food items attracted the young consumers as they are more health conscious and demanded the health products. The introduction of the innovative food items for health has enabled McDonald’s to widen the range of the consumer segment. Along with this the information providing method of food items related to calories that are present in the foods of McDonald’s has enabled the consumers to be more aware and has helped to them to opt for the items that are healthy for them. Weaknesses The sales have shown a decrease of 7% in the year 2009. The company’s focus on expansion and not on sales, led to the reduction on sales. The existing stores of McDonald’s require to be focused upon in order to increase the sales (FAQS, 2010).   2009 2008 2007 Revenues 22745 23522 22787 Company-operated margins 2807 2908 5036 Franchised margins 5985 5731 5036 Figures are in US Dollars (Million). Figure 7 (FAQS, 2010) There has been a decrease in the revenue of $777 billion in the year 2009. The operating margin has also reduced by $101billion in the year 2009. The competition is high in the domestic and international market. Without increase in the sales for generating more revenue, it will become hard for McDonald’s to fight in the global market. Opportunities From the Figure 7, it is rectified that there is an increase in the margin from the franchise model. From 2007 to 2009, the trend has been increasing and has potential for growth. The market can expand and McDonald’s can enter in the new potential market with this model of operation. The increasing demand for the healthy nutrition food has changed the fast food consumption pattern. To tap this segment of consumers, McDonald’s has developed the nutrition food menu that has been able to attract the young consumers and health conscious consumers. The opportunity for this segment is increasing as more people are becoming health conscious and generating more demand (McDonald’s Corporation, 2010). Threats There is huge competition in this industry. Burger King, Wendy and many more potential competitors of this industry are making the domestic market saturated and the opportunity for growth is restrained. This decreases the profit margin and share in the market (Erlichman, 1994). Government has taken initiative to create the culture of healthy cuisine. This has increased the level of threat to McDonald’s and also other competitors. Apart from providing the healthy menu items of McDonald’s, they earn more revenue from the junk food items. Competitive Positioning To stay ahead in the industry McDonald’s applies the training model to certify its distributors for competitive benefit through cost/efficiency. McDonald’s applies its intensive program of training at Hamburger University to guarantee that its franchisees or distributors run as efficiently as possible. The training is also provided for the purpose of maintaining quality in all the stores. Its competitive advantage from the training program of franchises and distributors is attained from a cost/ efficiency thrust. This competitive training program and cost reduction activity led McDonald’s to be a successful leader of the market in food supply chain restaurants (Schuler & MacMillan, n.d.). The focus upon the quality, hygiene environment and healthy food for everyone all around the world has made McDonald’s successful for many years. CEO Jim Cantalupo announced that “he will give himself eighteen months to turn the company’s brand back around” (Cabell, 2010). Within the time frame, Jim Cantalupo re-established brand uniqueness and developed new menu items to satisfy consumers especially for health conscious consumers. To strengthen McDonald’s competitive strategy the company is focusing upon consumers. The trend in demand for particular items and consumer’s wants are being analysed and acted upon accordingly. This strategy helps McDonald’s to be an even stronger player in the international market (Worden, 2004). Value Creation McDonald’s started with one store and developed many stores worldwide. It has been successful in developing its own brand image. The brand has been successful in attracting many consumers. The value that McDonald’s have created is through the innovative product development. Consumers have changed; the demands and consumption habits have changed in this industry, and due to this McDonald’s have been struggling to fight in the competitive environment (Dobni, 2010). To create value towards the consumers, product development was important aspect to satisfy them. Products were developed and menu items were changed. The innovative product development was necessary to meet the changing consumers demand. Value for stakeholders was also generated by increasing the sales volume and by following the expansion strategy. The strategy was developed in creating more sales in the existing stores with the expansion of more stores in potential market (Warmkessel, 2002). Figure 8 (Dobni, 2010) Due to the industries changing demand, McDonald’s has tapped the opportunity by understanding the market demand. The strategy was formulated in developing new innovative products that meet the consumers’ expectation. The menu was re-engineered by McDonald’s and many items were added according to the consumers’ expectation. Especially the health conscious items were created that provided more business. This strategy had generated value for the consumers in delivering the expected products. The shareholders values were generated through the strategy in increasing the sales. The opportunity in the market was due to the changing demand of the consumers. McDonald’s has been successful in finding the opportune space and has been growing through innovative product development. PESTEL Model for Critical Appraise of McDonald’s Strategy Political There were many political issues in the development of McDonald’s especially related to the local supply of food production. The company has started its international operations and required to acquire huge assets and economic power. During this transformation process, there was a lot of political tension related to holding of huge assets and economic power. The strategy was to concentrate upon the political and economic power and divert them towards the company for making the political environment favourable for operations in different markets (Temple University, n.d.). The political environment of different country is varying. McDonald’s had to adjust with the political environment for the growth of the business. For this purpose the franchise model was used and it gained success in different markets. Economical The business strategy of McDonald’s is based upon geographic structure. The economic situation in each area is different in terms of taxation, economic growth, inflation and exchange rate. McDonald’s sells goods and services that are admired and accepted easily, replaceable and reasonable for the majority of consumers and generate a lesser retail trade zone as compared to a speciality restaurant (Duggal, 2007). Through the franchise model McDonald’s was successful in analysing the economic power and situation of different regions and has been in favour of the business. In this process, the economic conditions was benefitted by providing products and services that were easily accepted and appreciated by all consumers Socio-Cultural McDonald’s started business in the US and then entered into other markets. The culture of the US accepted the food that were produced and offered by McDonald’s. But to get accepted in the foreign market was not easy. To run the business smoothly in international market, the strategy to develop regional food items with the original McDonald’s items was developed. Each region has the original McDonald’s food items. Along with these they provide the regional McDonald’s food items. This way the products and services got accepted in the international market and have helped in generating and maintaining the revenue. Technological The technological advancement helps in growing the company. McDonald’s underwent changes from the old traditional format of retailing in this industry to modernised retail format that added benefit to the company. The strategy adopted of involving technology was successful in helping to develop more innovative products that were healthy and helped in providing hygiene environment in all the stores. As consumers are more careful about hygiene and healthy food items, the strategy of involvement of technology of McDonald’s was a right decision. Moreover, other competitors also use the technology in their business to develop and grow in the competitive environment. Environmental The major environmental issues were related to healthy food consumptions. Consumers have become more health conscious as demand for more healthy food items to keep them healthy. In response to this, McDonald’s developed the strategy in creating new product for the health conscious consumers. The company has developed a separate segment for the purpose of health food. The menu contains all items that are beneficial to the consumers. Especially for the kids, McDonald’s have generated separate food items that contain high nutrition and are popular all around the world (McDonald’s Corporation, 2010). Legal In the food chain industry the legal issues were related to health and safety. The government developed many programs that were related to the health issues and these created problems for the food chain supply restaurants. The issues were huge and the industry was fighting the challenges. The issues were taken by the government, but the initiative was first generated by the consumers. To fight against this situation McDonald’s has developed strategy of developing the products that are more health conscious and has provided hygienic environment in all its stores. Porter’s Model for Critical Appraise of McDonald’s Strategy (The College of St. Scholastica, n.d.) Industry Competition There is intense competition in this industry. This has led McDonald’s to loose its market share of various food supply chains. The increasing competition has forced McDonald’s to change the strategy. The previous strategy of McDonald’s was to expand to more new stores in potential market. But this resulted in decrease in sales in the existing stores. McDonald’s had to change the strategy in increasing the sales of the existing stores all over the world. This change in strategy had made McDonald’s gain business from the existing stores. The franchise model led the business to grow. This strategy of applying franchise was successful in every economy and provided a source of revenue to the company. Substitutes The products of McDonald’s are available in most parts of the world. The main substitute threats are the products that competitors provide. The main competitors of McDonald’s are Taco Bell, Subway, Wendy’s; which provides similar category of products and services. McDonald’s have developed the strategy to introduce new product lines that were different from the competitors. The beverage category is the new potential market and few competitors have developed the products in this segment. McDonald’s provide differential offerings in this beverage segment to consumers that help to increase the level of satisfaction. Potential Entrants In the domestic market i.e. in the U.S. there is very little opportunity for further growth. The markets have been constraint for the food supply chain industry. But there is an opportunity in the international market and companies are developing new stores in the international market. To fight against the international competition and to reduce the costs, McDonald’s have franchise strategy that helps them to enter the potential market with cost effective approach. The strategic approach of applying franchise model helped McDonald’s to grow and increase profit in the competitive environment. Bargaining Power of Buyers The bargaining powers of the buyers are low for McDonald’s. In this industry, generally the bargaining power of the buyers is low in nature. The brand value and loyalty towards the brand are the two factors that have made the bargaining power of the buyers low. McDonald’s has been successful in creating a positive brand image value and more loyal consumers through the services and products they provide. Due to the strategic implication of brand image and value through different programs of McDonald’s, they have been successful in controlling the bargaining power of buyers. Bargaining Power of Suppliers The bargaining power of suppliers will always be low until the raw materials are readily available. It depends upon the availability of raw materials that changes the bargaining power of the suppliers. Certain items in this industry specially related to spices are rarely available. In this case, the bargaining powers of the suppliers are high. McDonald’s have contracts with the regional supplier that provides all the raw materials and a well developed supply chain management system that delivers the materials. Conclusion McDonald’s has been operating for many years in the food supply chain industry and has achieved success through the application of different strategy in the changing environment of the business in domestic as well as in the international market. For its growth, McDonald’s have applied different strategy related to product, training of employees, training of franchise or distributors in enhancing the quality of products and services with along with maintaining hygiene aspects of the food products. The approaches of different strategies of McDonald’s in response to the changing competitive environment have made McDonald’s successful in the global industry. 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[Online] Available at: http://pesona.mmu.edu.my/~wruslan/MISP1/Readings/detail/Reading-35.pdf [Accessed November 23, 2010]. Read More