Identification and Recommendation of Alternative Strategies for McDonalds - Research Paper Example

Marketing Report : Identification and recommendation of alternative strategies Selected Sector: Fast Food Selected Organization: McDonald’s Table of Contents 1. Introduction 2. Overview of the fast food sector – Macro and Micro 3. Company overview, history and structure. 4. SWOT Analysis 5. Identification of alternative strategies 6. Recommendations for strategies – short, medium and long term 7. Bibliography Introduction: This business report analyzes the marketing strategies of a selected organization to find out their current strategic issues and to suggest the possible alternative strategies or improvements in the prevalent strategies. The company chosen for the analysis is the fast food giant McDonald’s. The first aim of this study is to understand the current structure and strategies adopted by McDonalds, to analyze the effectiveness of their marketing operations and find what is lacking and its drawbacks. Having done that the objective of this paper is to suggest to the McDonald’s management, a number alternative strategies to improve their market share and develop the business further in the short, medium and long-term future. Fast food industry: The fast-food culture is fast expanding into the developing nations, as more and more people are attracted towards the taste, quick service, consistency and cheap prices. Out of the total restaurant revenues of the developed nations, the fast food outlets accounts for almost half. “It is no longer enough to just fill someone’s stomach – you have to do it better and faster than others do. Product innovation, customer satisfaction, and differentiated promotions are of utmost importance – now more than ever” (Shekeb Naim, 2008) The industry has nearly matured in the developed countries but in countries like India the fast food industry is growing at the rate of over 40% per annum. The growth of the IT and IT enables services in India were the bulk of urban youth are working with big pay packets and little time to cook are driving the growth. Growing concerns over the fat and salt content of some fast foods has led to a severe criticism of eating fast food and have prompted the industry to offer an increasing range of “healthy” fast foods. A typical fast food outlet carries high overheads in terms of rents, rates, labor costs and bank interest charges. The market is labor intensive and involves considerable start-up and ongoing capital investment. The fast food industry has a lot to thank McDonald’s for. Especially the supply chain management of this company is highly regarded as one of the best in any industry and fast food companies try to emulate the McDonald way of operations. “Flavor is the key to the attractiveness of fast food. It is not just the blend of salt, sugar and fat, but the combination of taste and smell, which is now micro-engineered by the big food corporations’ chemists. Fast food is industrially processed before it is served. It requires color additives to make it look good, and chemical flavor compounds to make it taste right. Technically it is perfectly legal to call these flavors that are manufactured in plants "natural".”( www.bbc.co.uk, 2006) McDonald’s being the pioneer in many path-breaking practices followed by the fast-food industry was also responsible for placing the quick service restaurant industry amongst the big economic driving force industries such as steel and automobiles. The fast-food industry has matured over that last 50 years and is now seen as one of the most competitive for a new company to enter. The US and other developed countries are the biggest markets of the industry. McDonalds gets about 80% of its revenues from eight countries like US, Canada, Germany, France, Japan, UK, Australia and Brazil. The popularity of fast-food in the US is best summed up by ERIC SCHLOSSER in his book Fast Food Nation “Americans now spend more money on fast food than on higher education, personal computers, computer software, or new cars. They spend more on fast food than on movies, books, magazines, newspapers, videos, and recorded music – combined”.( Eric Schlosser, 2004) Allegation of health problems related to high intake of fast food has resulted in many leading companies to revise their menu by introducing products with less-fat and sodium content. McDonald being the leader had to take the bulk of the criticism from the media and the activists. Innumerable publications in the media keep spreading warnings among the public to go easy on fast food. McDonalds has responded by offering “healthier options” to the BigMac, and introducing Salads, white meat McNuggets and fruits. On the part of the companies, the argument is that healthy menus don’t work because few people actually go for them. The concept of fast-food place has also been revamped from “eat-it and beat-it” to a place where friends can chat, families can spend time and others can play games or catch on their work using their notebooks. McDonalds led the change by offering playing area for kids with games & toys, LCD flat TVs running the news, free Wi-fi in the premises. (Mag. My Hue McGowran, 2006) McDonalds’s – Overview, History and Structure McDonald’s operates in the global quick service restaurant industry business. McDonald’s was the pioneer of this business and it was McDonald’s which made the quick service restaurant business a global industry by creating a huge global commercial empire. McDonalds could be credited with pioneering the processing and standardized approach to the commercial production of fast food. The current position of McDonald’s :- The world’s largest food service organization ; Biggest chain of fast food restaurants with more than 31,000 outlets in 121 countries in the world. The second most popular brand after coca-cola. Controls 43% of the US fast food market. McDonald’s ranks 114th in the list of Fortune 500 companies. The $21.6 billion company now serves a record 27 million people every day, the figure rising at the rate of 1 million every year since 2003. History : - The story goes that two brothers, Richard and Maurice McDonald, were busy running a single drive-in restaurant in San Bernardino, California in 1948. It was Ray Kroc, a Milk-Shake machine distributor, who spotted the potential of their business and proposed his idea of taking this business elsewhere to the brothers. In 1955 Ray Kroc became exclusive franchising agent for the company and opened his first McDonald's in Des Plaines, Illinois and just three months later in July, inaugurated his second McDonald’s in Fresno, California. By 1956 Kroc added 12 more outlets spread in all major towns in the US and by 1959 a total of 66 restaurants were in operation. The speed with which McDonald’s spread was a record of the times. In 1965, McDonald’s went public with the company’s initial public offering on stock exchange. By 1991 McDonald's almost single handedly owned $13 billion of fast-food industry, operating 12,400 restaurants in 59 countries. Though there were many obstacles the company continued its growth and recorded revenues of $21,586 million during the fiscal year ended December 2006. Today, this company has more than 30,000 restaurants in over 120 countries operating successfully. McDonald’s has sold more than 100 billion hamburgers since 1955. It prepares more than a 6.8million pounds of French fries daily. From the “Hamburger University” more than 50,000 students have completed their graduation is what’s called humburgerology. Marketing Strategies of McDonald: Even though, when McDonalds started out there were many fast food brands such as A&W, Dairy Queen, Tastee -Freez, and Big Boy, they were not serious competition. What set McDonalds apart was its determination to grow by expansion. While most competitors were content to appoint franchisees as bulk order customers, Ray Kroc saw them as partners in progress. He provided his franchisees tremendous guidance on operation, promotion, sales strategy, financing and food processing. McDonald’s competitive edge was in its assembly line approach to “manufacture” hamburgers. The way the process of product delivery was managed made the quality of hamburgers standardized with fewer mistakes and variance in taste. The company’s Hamburger University ensured that the franchisees had ready source of skilled manpower and did not have a shortage of it. It’s an example of the management’s obsession with good human resource development and the company’s drive in developing efficient food assembly processes. And that meant refining the whole standardized operating procedures into several smaller easily replicable processes. Kroc endowed his beef patties with exacting specifications -- fat content: below 19 percent; weight: 1.6 ounces; diameter: 3.875 inches; onions: 1/4 ounce. To the world of advertising and branding in the fast-food industry, McDonald’s introduced the concepts of a central advertising campaign and brand icons in the shape of Ronald McDonald the McDonald clown. Sponsoring sports events and teams was another first in the industry that McDonalds carried out. When Television advertising took shape, McDonalds launched into it, which gave tremendous marketing help to its franchisees spread across US. When McDonald’s started operations in foreign countries like UK, Germany and Japan they quickly learned to adapt to the local environment by not only improvising and changing its strict product line but also changed its promotion strategies to suit local tastes. McDonald’s global strategy is, strict adherence to quality and consistency standards, innovation and continuous development, central promotional campaign and adaptability to local environments. Over the years McDonald’s has diversified their restaurant interests by operating fast food chains under other brand names such as Aroma Café, Boston Market, Chipotle Maxican Grill, Donatos Pizza and Pret A Manager. Competition: McDonald’s faces stiff competition from global operators of fast food chains such as Burger King, KFC, Subway, Wendy’s and YUM!. The issues facing McDonald’s: The fast food market is nearing saturation in many developed countries. That means further growth will have to happen at the expense of a competitor. The food service of the company has been criticized for not maintaining an acceptable level of standard. The McDonald’s menu is considered less attractive than its rivals. On several consumer satisfaction surveys, McDonald's was consistently ranked far below than its prime rivals- Burger King and Wendy's. Though, the fact that McDonalds controls its own supply chain makes it formidable and strong in the market, this also makes it a giant that has trouble moving quickly. While other companies who out-source most of the processes, can effect a change in the product in their menu within days, McDonalds will have to go through a much more complicated process to implement the change step by step all along its supply chain so as not to unduly disrupt the established setup. Company Structure: McDonald's are structured along the following functional lines. Operations (equipment and franchising) Development (property and construction) Finance (supply chain and new product development) Marketing (sales marketing) Human Resources (customer services, personnel, hygiene and safety) SWOT ANALYSIS: Strengths 1) Reach : Over 30,000 branches in 120 countries. 2) Market share of 42% of US fast-food hamburger business 3) Consistency of food 4) Overseas Market – Present in over 120 countries 5) Strong financials 6) Real Estate Assets – Company own most of the major stores and the buildings. 7) Owner of some of the most popular brands in the fast-food industry, BigMac, McNuggets, McMuffins, McFlurry etc, Weakness: 1) Declining market share 2) Weak product development 3) Unhappy franchisees due to low rate of return and competition. 4) Quality and taste of products: When compared in market for best tasting food & burgers, Wendy’s & Burger Kind preferred by more percentage of consumers than McDonald. 5) Slowed revenue and income growth Opportunities: 1) International presence 2) The developing countries only just a faction of the population is covered. 3) Growing trends of cooking less and eating out 4) Westernization or affinity towards the American way of living in developing countries which comes as a part of growth and increase in per capita income. 5) Brand extension into diversified areas. Threats: 1) Mature/over stored industry in most established countries 2) Strong competition 3) Low Profitability: McDonalds net income is 4.4% whereas its competitors Burger King is 8.7% and Wendy’s is 16.3% 4) More and more health-conscious consumers 5) Changing demographics 6) Fluctuation of foreign exchange rates; Economies. 7) Environmental Issues with packaging, farming and cruelty to animals. Identification of Strategic Alternatives: Differentiate the products: The promotional campaigns should highlight the product’s unique qualities and the McDonald’s legendary hygiene and consistency. In the highly competitive markets this is essential to survive. Cut prices: - According to Mr. Skinner, the former CEO of McDonalds, 37 percent of McDonald's customers make their buying decision exclusively on price. Price cutting is a time-honored method of beating the competition. In pure economists point of view price-cutting results in increased demand. Shift to an up-market image:- In conjunction with more product differentiation, maybe McDonalds should raise its prices, sending the price sensitive customers to other joints, but making more profit from the loyal customers in the process. This would be a gamble and could work very well in the really busy stores who have problems with long lines of customers waiting to be served. Improve store locations:- McDonald’s, is known for great real estate but not great buildings. They are not optimized for the morning crowd, though. The right or left side of a street is an important consideration for inbound morning commuters. In right-hand-drive countries, when there is rush-hour traffic, customers don't like to make left hand turns. Build Customer loyalty: With so many choice of restaurants, customers would like if there is just another reason to come to McDonalds. Buy out the competition: It will save lot of resources if a local fast food restaurant owner is given an offer from McDonalds to buy them, instead of buying a place and building it up from scratch. There are risks involved. But it could be better for all concerned. It will lessen at least one competitor. Continuous menu revision: Some people like familiarity and while some like surprises. Bigmac and McNuggets give the comfort of familiarity but introduction of a new item every now and then will bring the curious customers in for a bite. Coffee is a step in the right direction. Change the image of the stores :- From just a fast food place to an all-family get- together kind of place. New Games for children:- Children are the most effective target segment. Introducing new games for them will make them ask their parents to take them to McDonald’s instead of any competitor. Automation of the food preparation process :- The idea is to free up the store personnel’s time so that more human interaction can be done. Robotics could be given a try as a novelty in the stores. A company with the financial strength of McDonald’s can experiment with the new technologies in selected stores in for at least six months. If the customers like the change, replicate it across. Recommended Stategies : Short Term : Introduce New Games :- Children above 4 to 5 years may not prefer to play with the usual toys. Instead, popular computer games could be introduced in the store. When the children spread the news in their schools this would turn into serious walk-ins and revenue. Medium Term : Change the image of the stores :- It will make good business sense, to turn the store into a family retreat, where children can play in a safe area with toys while parents can eat and talk. These elaborate indoor playgrounds would be a “healthy” way to attract children into the store in big numbers again and again. At the same time let the “old folk” come in and use it as a community center and, may be, play bingo to pass time. The image of a socializing place will encourage more customers. Long Term : Build Customer loyalty : Since the airlines industry introduced the concept of frequent flier programs, air-traveling changed forever because people then have a big incentive to choose one particular airline as much as possible. Likewise, a rewards program for frequenting the local McDonalds store can be devised. It could be linked to a pre-paid card or something similar so that its easy to use too. Bibliography 1. newsfox, Mag. My Hue McGowran, McDonald's goes high-tech for fast-food future http://www.newsfox.com/pte.mc?pte=050615036 2. The McGraw-Hill Companies 2007, McDonald's 24/7 http://www.businessweek.com/magazine/content/07_06/b4020001.htm 3. Paul Feine, McBastards: McDonald's & Globalizatio, www.ccsindia.org/lssreader/10lssreader.pdf 4. Shekeb Naim, U.S. Fast Food Industry – Too Much On The Plate, April 09, 2008, http://www.americanchronicle.com/articles/57967 5. Fast Food Factory, http://www.bbc.co.uk/worldservice/specials/1616_fastfood/index.shtml 6. Eric Schlosser, The fast food nation, http://www.nytimes.com/books/first/s/schlosser-fast.html) 7. The McDonald's History, 1954 to 2008, http://www.mcdonalds.com/corp/about/mcd_history_pg1.html 8. McDonald’s Timeline, 2007 http://www.xtimeline.com/timeline/McDonald-s/First-Soviet-McDonald-s-1 9. Byron Preiss Visual Publications et.al, Ray Kroc, McDonald's, And The Fast-Food Industry, 1996 , http://www.wiley.com/legacy/products/subject/business/forbes/kroc.html Read More