Using BCG to Analysis of McDonalds - Case Study Example

McDonald’s BCG Analysis The BCG matrix is a model that is based on making an assessment on organisations and their products through the observation of the organisations’ business units. In the BCG matrix, organisations are categorised into cash cows, stars, dogs and question marks. Any business organisation operates through different stages of development in different industries and markets. Each corporation will go through different phases where it earns varying quantities of profit. Organisations also go through different stages where there are contrasting amounts of investment that will be required. The BCG matrix makes it easier for organisations to define the different life stages or organisations thus helping them to plan ahead for resources so as to remain in operation. The BCG matrix accomplishes this by assisting corporate analysts to determine the units that require investment, the amount of investment to be allocated, and the departments or business units that ought to be divested. Business workers as well as high level managers can use the BCG matrix to gain perspective that makes it possible for them to plan ahead on how to use the proceeds that are generated by business to keep it in operation through the different stages. Introduction The BCG matrix is a model that was formed by the Boston Consulting Group to assess a business brand portfolio’s strategic position as well as its potential. It also categorises business portfolio in four different categories which are founded on the attractiveness of the industry as well as its competitive position. These two strategic dimensions have the capacity to portray the expected productivity of a business portfolio in regards to the capital required to support that business unit and the proceeds it generates. The BCG matrix contributes towards an organisation’s comprehension of the brands it should invest in and those which ought to be divested. Rationale for Using the BCG Matrix The BCG Matrix is important because it can be employed to prepare a company’s growth market share policy. Assessments on different cooperate operations that have to do with realising increased profits while improving organisational functional processes can be made through the use of the BCG matrix’s graphic representation of corporate activities to evaluate its relative growth rate against the industrial average. The BCG matrix can also be used to appraise the company portfolio in matters regarding the balance of monetary contributions and the general corporate performance. The BCG matrix is straightforward and can quickly be comprehended. It allows for the carrying out of planned planning discussions by converging all the important factors under the auspices of corporate market share as well as development. Organisational Profile of McDonald’s The McDonalds Corporation is, at present, the worlds biggest fast food outlet with approximately 47 million clients served on a daily basis across 31,000 restaurants in approximately 119 nations spread all over the world (Watson 2006). McDonald’s main foods include different fast food products such as ice-cream, chicken, burgers, fries, and salads. The franchise also deals in soft drinks as well as healthy food options. The majority of McDonald’s outlets are autonomous units which provide consumers with drive through services as well as dine-in options. The McDonalds corporation has numerous eateries which are situated in retail areas, and airports, among other localities that have regular human traffic. Approximately 80% of McDonald’s restaurants are operated by business affiliates as well as franchisees. BCG Matrix The Boston Consulting Group Matrix (BCG) assists organisations to be able to evaluate their product lines as well as business units. It also allows organisations to be able to classify products according to their present and future value. Organisations can also use the Boston Matrix when determining how to apportion resources for every manufactured goods or service according to their current position in the marketplace. The individuals who are most likely to use the BCG matrix include those involved in product management, brand marketing, portfolio analysis and strategic management. The four quadrants that form the BCG matrix are represented by the star, cows, the dog, and the question mark. Manufactured goods that have slow growth as well as high market share are viewed as being cash cows. Normally, they produce large amounts of capital which surpasses the amount of capital needed to sustain shares. This surplus does not have to be re-invested in the same products. Manufactured goods that have slow growth as well as low market share are classed in the dogs’ quadrant. They may demonstrate a financial profit, but the proceeds must be invested again so as to sustain the shares, thus leaving no residual capital. All manufactured goods are usually either categorised in the dogs or cash cows quadrants. A product’s value is based on its capacity to achieve a leading share of its targeted market before the development slows down (Barney and Hesterly 2010). Products that do not have a high market share or growth rate are categorised in the quadrant of question marks. These products almost always need more capital than they are able to generate. If the capital is not availed, the products will inevitably begin to fall behind. Even when the capital is availed and the product is able to hold onto its share, it will still be classed in the dogs quadrant when the growth ceases (Elango 2007). Products in the quadrant of the ‘question mark’ require large capital investment to inspire the procurement of market share. The high growth product which has low market share is a problem in any other quadrant than that of the star. The ‘question mark’ quadrant calls for a large capital input that an organisation may be unable to generate itself. The star quadrant is characterised by a high growth as well as high shared product (Chakravarthy and Henderson 2007). Organisations considered to be in this quadrant are almost always considered to be able to generate their own capital (Graham 2004). Organisations in the ‘star’ quadrant are able to become big cash generators even when their development is slowed down and there are hardly any re-investments required (Mintzberg, Lampel, Quinn, and Ghoshal 2003). In time, the organisation in the ‘star’ quadrant is transformed to be the cash cow, thus supplying high margin, high volume, security, and high stability for reinvestment elsewhere. The Boston Consulting Group (BCG) matrix is important because it assists organisations to be able to create strategic business entities based on two factors: the strategic business unit’s market development and the strategic business unit’s relative market share. As the BCG matrix presumes that market share and productivity are two factors that are highly related, it is a practical approach for the creation of investment as well as business investment decisions. The BCG matrix assists managers to be able to make decisions on how to allocate resources when different products are categorised. Depending on the manufactured item in question, an organisation might make the decision to include on any number of strategies. One strategy, for instance, could be to create market share for an organisation or manufactured item that could enter the ‘star’ quadrant. Many organisations readily invest in the ‘question mark’ organisation as market share is then accessible for them to take advantage of (Hitt, Ireland, and Hoskisson 2009). The sequence of success is usually used to assist organisations in the ‘question mark’ quadrant to be a part of the ‘star’ quadrant. In regards to the success sequence, capital from cash cows is acquired and then invested in the ‘question mark’ quadrant with the aim of transforming the organisations to become a part of the ‘star’ quadrant (Wheelen and Hunger 2008). Within the BCG Matrix, the McDonald’s corporation is categorised as being a star. This is because this international organisation has continuously registered high market growth over many years while also benefiting from a high market share. The main objective is to try to spawn short-term profits from the organisation’s product in spite of the potential long-term effect on its survival (Lynch 2009). If an organisation makes the decision to divest a manufactured item, the business essentially sells or drops it. In the dog quadrant, many organisations or products are divested. When organisations divest items it could be because they need to concentrate on different brands in the company portfolio. As other business competitors go into the market, and there are more technological advances, the arrangement of an organisation’s products within the BCG matrix is also liable to change (McGee, Thomas, and Wilson 2005). An organisation has to constantly assess the situation and change its product promotion as well as investment strategies. After the conduction of a BCG matrix analysis, organisations have the option of embarking on some four strategies for any business unit. These include Build: By increasing the amount of investment, an organisation’s product is allowed an impetus that permits the product to add to its market share. For instance, an organisation in the quadrant of a question mark can be promoted to being one in the ‘star’ quadrant through the success sequence (Grant 2008). Hold: An organisation cannot invest a product or has additional investment commitments that stop it from making more investments; meaning that the product is held in the same quadrant (Kotler, Keller, Mairead, Goodman, and Hansen 2009). For instance, holding a product in the ‘star’ quadrant might be the only solution when it is not practical to transform the ‘star’ product into a cash cow. Harvest: This is something that is most obvious in the ‘cow’ quadrant, where the organisations reduces the quantity of financial investment and attempts to take out the highest amount of cash flow from the product in question-which adds to the general profitability (Doole and Lowe 2008). Divest: This is best observed in products in organisations considered to be in the ‘dog’ quadrant. In the dog quadrant, organisations divest their products in order to let go of the amount of capital already invested in the business. The McDonald’s Corporation The McDonald’s has its headquarters in America and was launched in 1940, by Richard and Maurice McDonald, as a barbecue restaurant (Vrontis 2003). In 1948, the two entrepreneurs reorganised their firm as a hamburger stand created along the principles of production line standards. Ray Kroc, a business man, would join the corporation in 1955 and then buy the modest restaurant from the McDonald brothers and propel it into the international arena. By 2007, McDonald’s proceeds had grown to $22.8 billion (Bahaudin and Bina 2007). McDonald’s is one of the few corporations that have been successful in achieving balance between its customers’ demands and operational strategies. McDonald’s business strategies as well as emphasis on the customer are things that have propelled it to the top (Gilbert 2008). McDonald’s greatly emphasises on ensuring that it provides the best quality of food for its clients. To ensure that its employees adopt the corporation’s work ethic as well as attention to detail in the preparation of foods, the organisation even created the ‘Hamburger University’. The restaurant chain even teaches its franchisers on how to maintain its standards in the preparation of all their foods (Kotler 2007). This shows that McDonald’s operational processes are supported by its strategic objectives. The BCG matrix presumes that development rates, as well as different stages of a product’s life cycle can affect an organisation’s finances (Hatch and Schultz 2003). Strategic corporate units are categorised into different quadrants as cash cows, stars, dogs, and question marks. McDonald’s has for a long time been categorised in the ‘star’ quadrant. This is because of the corporation’s high market share as well as high growth rate. McDonald’s has a high rate of development along with its high market share, but is in the process of being transformed into being a cash cow (Johnson, Whittington, and Scholes 2011). The McDonald’s corporation is an established business unit that now does not require as much investment to ensure the continued loyalty of its market share as do other emerging restaurant franchises. McDonald’s continues to enjoy the freedom of creating more innovative food options that benefit from the attention of its established market’s proven high rate of development. Stars in the BCG Matrix Organisations such as McDonald’s, which are regarded as being a part of the ‘star’ quadrant, can be considered to be cash-flow neutral. This means that even though they produce a lot of profits, there is still a need for capital to be spent on business aspects such as promotion. Organisations in the ‘star’ quadrant such as McDonald’s will end up being a part of the ‘cow’ quadrant. Organisations that excel in being part of the ‘question mark’ quadrant, on the other hand, will end up being a part of the ‘star’ quadrant, and become market leaders in industries that experience high growth (Pride and Ferrell 2008). Moreover, investment is usually still needed to sustain corporate development and to protect the leadership position of the organisation. ‘Star’ organisations are often just marginally profitable; however, as they achieve a more established status within their life cycle and development is slowed down, the returns grow to be viewed as being more attractive. The ‘star’ organisations supply the basis for profitability as well as long term growth. Some strategic options that can be successfully used by star organisations include backward, forward, and horizontal integration and market development. Other strategic options are joint ventures, market penetration and product development. ‘Star’ organisations are perceived as being leaders in their markets; however, they have to concentrate on issues such as market share and building sales. In ‘star’ organisations, resources ought to be invested to preserve the organisation’s leadership position in the market even as competitive challenges are repelled. If the market share plummets, a ‘star’ organisation can be altered into being a ‘question mark/problem child’. Ultimately the rate of development of the market will turn down and the ‘star’ organisation will be altered to being one of the ‘cash cows’. This means that ‘star’ organisations should be safe-guarded as they are potential cash cows. The ‘star’ organisation has to ensure that it remains to be twice the market share of its nearest business competitor. If a ‘star’ organisation’s financial rate of development surpasses its return on the net assets utilised, then the organisation is not self-financing. Development especially requires assets as they equal cash investments. In the course of time, all ‘star’ organisations will be transformed (Thompson, Strickland, and Gamble 2007). It is not possible for above average growth rates to be perpetually sustained. It is inevitable for cash input necessities to drop along with growth rates. Moreover, the ability for cash generation is not altered if the cost disparity from business competitors stays unchanged. The leader organisation that is a part of the ‘star’ quadrant can lose market share even when absolute market share is preserved. The definitive value of any manufactured good or service has to be the worth of the stream of cash it creates out of its own re-investment. For the organisation in the ‘star’ quadrant, that capital is likely to remain available in future. Moreover, it is the future payoff of the ‘star’ organisation that is important, not its reported profit. Conclusion McDonald’s unbroken record of realising product innovation as well as customer satisfaction can be continued in future to the profit of the organisation. Its position as a market leader will likely contribute towards its sustainability in the long run. However, McDonald’s is not likely to remain under the ‘star’ category in the BCG matrix. It is already well in the process of being transformed into a cash cow. As a cash cow, McDonald’s will not need the same level of financial support as it did in the past. This is because there will be less competitive pressures experienced within the low growth market even though the company could compare to hold a dominant position that has been created with the help of economies of scale. Cash cows such as McDonald’s is becoming are well able to produce a considerable amount of income; but they no longer cost their organisations a lot of capital to maintain. References Bahaudin, G. & Bina, P. (2007) ‘McDonald’s success strategy and global expansion through customer and brand loyalty’, Nova Southeastern University, vol. 3, no.3. Barney, J.B. & Hesterly, W.S. 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