Failure of McDonalds Company in Entering China Market - Essay Example

International marketing Introduction Institutions face several challenges in entering new markets which determine their success or failure. The process of market entry involves various procedures and research to ensure that the incorporation into the new market is a success. Many multinational corporations have expanded their operations to different countries and withstood the difficulties. However, others have collapsed and had to pull out of their potential markets for lack of preparedness to the factors influencing their survival in these new markets (Richter, 2002). A market is defined as group of potential customers with similar needs who are willing to purchase goods and services towards the satisfaction of these needs. Potential entrants need to focus on the customers and come up with proper marketing mixes to particular target market. This paper critically evaluates the primary cause of failure of McDonald, a Fast food restaurant company in entering china market based on the market entry mode, market segmentation; mix strategies, competitive advantage among other attributes. The paper then highlights recommendations that are available for proper entry and successful implementation of the company in the new market (Bickhoff & Svend 2014, pg. 95). McDonalds Corporation is a chain of fast food restaurants whose client base is 68 million customers across 119 states and over 35,000uotlets. The multi-national headed by Steve Easterbrook predominantly sells hamburgers, chicken, sandwiches, soft drinks, desserts breakfast items, salads, wraps, vegetarian items and other localized fare. Despite their seasonal deviations in certain states, the chain is subject to regional food taboos such as religious prohibition and is employed to avail products with which the regional market is more familiar such as beer in Germany, prawn in Ebi or burger in Singapore (Palmer, 2009). The Corporation operates in 118 countries and serves around 168 million customers with an employment rate of 2million people. Among the states relates to Mexico, Germany, Europe, China and predominantly ijn the US where the company is the largest fast foods restaurant with a 96.5% market share. McDonalds has a 15% market share, and an approximate of 1750 stores in China as well as a command of 40 million worth of profits (Kapferer, 2012). It successful entry in other states such as Europe has led to operations in brands other than restaurants such as Piles Café. The company has expanded over the last 25 years to cover various states and currently holds 300 million worth of revenue and 30% of the US GDP. Market choice PEST Analysis It is a key requirement for any company preparing to enter the international market to consider the political aspect of the involved market targets. In China, just like most nations, the political factors have in a way been limiting international companies. The many regulations imposed on new companies when venturing the international markets are among the limiting factors. However, the new changes have made china to discover the importance of international business relations. The country has stood out as politically stable over the last decade, reducing the many regulations that were initially imposed on international trade as a way of accommodating foreign companies. Its cooperation in international politics will ensure political stability and hence more investors from all over the world, just like Mc Donald are expected to invest in the country in the near future. The company’s idea to venture in to china was a wise one since in the coming years, McDonalds will be among the foreign companies enjoying the policies of China that seem to favor the foreign investors. Economically, China is among the several nations that are experiencing reoid economic growth. In a way, China can be viewed as a nation whose economic stability is soon to be achieved. In international strategy, organizations look for markets that have an economic potential and one that provides an opportunity for organizational development. One of the international markets that McDonalds targeted was China, because in a way, its economy is promising and matching the current phase, it will soon be stable.As the economy stabilizes, the purchasing power of the consumers will increase and hence the demand will escalate. Social factor may influence the potential within the China market. In China, culture is a major influence of the customer purchasing patterns. In the Chinese home market, there is evidence that cultural attitudes that in a special way will favor McDonalds products. (Lee-Young, 2014). However, the aspect and culture of the people in China where they prefer to use their local languages may affect McDonalds company since they will visit Hotels that can understand their language. In order to overcome this, McDonalds need to strategize on employing from the local society to create a culturally sensitive experience. Another key factor that McDonalds needs to embrace is employee training. Operating in a socially unattractive environment was bound to pose challenges for the company in the long run. China is among the developing nations in the world, as just like any other nation they have endorsed the modern technology. The country is well known as one of the source of computing and mobile devices across the world. Therefore, the country is technologically developed due to the low price of computing devices in the country .This is an opportunity that McDonalds can utilize to win the largest market share through internet marketing strategy. Through the website and social sites, it is possible for the company to reach out for its customers easily. The completion from rival in China for delivery of fast foods is stiff and this forms less room for expansion. The company faces low competitive advantage from chicken giants Dicos, Country Style Cooking and Kung Fu Catering. Despite huge investments McDonald's market share in China still stagnates at 2.3 % since 2007 while KFC parent YUM holds 6.5% market share. Dicos whose store count rates to 3700 is the third largest fast food producer and provides heavy competition for the Western counterpart vows to eliminate McDonald. The competitive edge is driven by the kind of food produce by these companies (Melewar, 2012). The pushes for a mix of traditionally prepared Chinese Chicken with health focused specialties by Dicos have had large impacts on the market for McDonald which specializes mainly on burgers and beef. Competitive prices have also influenced the market share for McDonald. It costs 17 Yuan at Dicos, 25yuan at KFC and approximately 30 at McDonalds to have a plate of lunch. This reduces the number of customers for the chain store and has adversely affected the survival of the company. Based on Porter force of demand, several Chinese consume chicken as opposed to beef and the supply is readily available. McDonalds survival in this market is low based on the pricing factors, threats of new firm by cultural implications and high competition availed by local and international companies as well as preference for traditional foods as opposed to western foods. KFC currently holds 39% market share in fast foods and 4,400 food chain stores in China as opposed to McDonalds which holds 1,750 stores and 15% worth of market share. The market entry mode Marketing operations are effected with timely and accurate information on customer behaviors, level of prices and market shares. The tradeoff between the various market entry modes lies in form of risk and control. Low intensity modes of market entry minimize risks of international companies and control while at the same time cutting-off market information (Richter, 2002). Among the common methods of market entry are franchising and licensing. Franchising is commonly used as an expansion method by large companies win developed nations. It is suitable for replicating business format relating to fast food outlets because the operation guidelines and procedures are often limited. McDonalds mainly employs this entry mode in international markets because it ensures an increased ability to demonstrate and adapt their offering to suit local tastes. For instance, the company not only offer American style burgers, but also provides different menus in different states and in various regions of countries. In this case, the format is internationally consistent but the certain elements such as service delivery personnel and individual menus are tailored to suit the local tastes and preferences. Besides this, franchising offers a tool for provision of universal operations across product markets whose customers have similar tastes. Sourcing and operations are key success elements in McDonalds which is not culture bound and in which the knowledge of market and product is essential (Lambin & Isabelle 2012, pg 86). This is an advantage to the company for being able to use similar format in entry of market as it reduces the cost of entry and the risks involved. However the employment of franchising mode of market entry by McDonald in China for the supply of food has led to several drawbacks. The mode provides difficulties in aligning the brand or food product to suit the tastes of the local people. The company which specializes in burgers had a big challenge in this state where most people preferred chicken. It has taken several decades and several false starts to advance for the company with most of the time having stagnated prices (Melewar, 2012). The new entrants ensure that proper information concerning menus is availed to the consumers and that it meets legal provisions of the potential market. This is a disadvantage to the potential company based on increases in costs of operations. It can also promote the company through creation awareness of its presence, goods offered and promotions available. Market entry is subject to challenges. McDonald is subjected to stiff competition from other multinationals and local competitors who lead to low profits. Chinese cultural orientation is essential and also affects the company due to tastes and preferences of the people who prefer traditional foods. Upon entry, the firm faced challenges of having to diverse to include chicken and other forms of traditional rice which is a staple food for Chinese people. Besides these, the firm had to offer strategic menu with lots of traditional Chinese dishes relating to congee rice pudding and spicy tofu as well as American style fried chicken and fries. The cost of these strategic changes to boost incomes and attract customers was enormous and had huge impacts on profitability (Baker 2010). Segmentation, targeting and brand positioning Marketing strategic planning entails the process of market segmentation, targeting specific customers and effective positioning of an offering by the potential entrant among the competition. The four available market opportunities relates to market penetration, market development, product development and diversification. When penetrating a market such as the China market which has several competitors, McDonald can employ strategies such as aggressive marketing (Mosley, 2014). The firm employed market development by selling foods into potential new markets. Development of market may also entail wide advertisement in potential region. Product development entails offering new or improved products to available market while diversification entails opening up of new lines of business. In diversifying its products to China McDonalds hopes to mitigate the risks of recession and other economic variables such as low profits. Penetration in China which is fast growing state would improve the success of the company as was viewed. Market segmentation involves two processes of naming product markets as well as segmenting these markets to select target markets. It is essential for developing customer profiles, market sizing analysis. Various entrants fail in segmentation efforts because they try to classify a mass market using one or two demographic characteristics. Important to practice in segmentation is defining generic and product markets and then understanding the dimensions of similar market segments. One segmentation criteria focuses on behavioral, psychographic, demographic and environmental attributes of the products markets. For instance, Chinese people have a unique lifestyle and consume sea food and less of beef. However, they buy based on trends with a major focus on traditions products as opposed to lifestyle good. The population density is high and most are farmers with 50% being well educated. They are environmental friendly and conservative in nature perhaps leading to their inability to switch to new improved products spontaneously. The people have a constant and an average purchasing history with those living in the Northern region consuming more of sea food as opposed to the others (Crane 2010, pg. 45). Their main character is that they are conservative which influences their food from foreign companies. As a result, the ability to retain customers by McDonald is low and competition is fierce because this aspect is not different from the competition. The country has a stable economic and political environment leading to establishment of good business in the region, not only by the local, but also through Multinational Corporation. This has led to fast growth of China as a preferential trade area. The major currency is Yuan whose exchange rate is medium and which promotes proper profits for new entrants due to foreign exchange rates. Strong market segments can have four forms of customers relating to homogenous, heterogeneous, economic upside and operational. China market is operational. This means that it is possible to understand, evaluate and identify customers as well as form decisions on the available and proper marketing mix applicable (Mosley 2014, pg. 95). In order to determine whether a viable target market is selected, various factors are put into consideration. Among these relate to size of the market, expected growth, competitive position, cost to reach or access and compatibility to the goal of the institution. Approaches to target marketing relate to single target market approach, multiple target market approach and combined target market approach. A multiple target market was employed by McDonald which enabled the firm to adjust its marketing mix so as to ensure customer satisfaction with its foods. Product positioning identifies with the place an offering occupies in the mind of the consumer on vital attributes of the brand. It is important to note the position of competitors and attributes relevant for making a purchase by a customer. Current market positions are identified through surveys and research to determine the most relevant product-class, proper brands and product improvement necessities. Upon entry McDonalds is faced with stiff competition because the product which is mainly offered is not well positioned in the product market (Mosley, 2014). The customers have of a poor view of the hamburgers and prefer chicken meals as opposed to beef. In this case, McDonald offers an inferior good as opposed to KFC. The selection criteria of where to stage the business is not functional but emotional in nature. The ability to position the product and ensure that the market structures are fit for proper functionality is missing. This creates an emotional environment which does not translate to proper market positioning. The pricing is high, the quality is low and the atmosphere is conservative leading to low reception in the product market. Marketing strategies Marketing is a continuously developing discipline and is the one which mainly challenges organization in terms of completion from other organization. Mainly these challenges are brought by major changes in the marketing mix. Not long ago when marketing mix was explained in 4Ps but nowadays it is explained in 7Ps. Marketing mix is a means which is used by marketers and businesses to assist in determination of brands or product been offered by the organization (Kotler & Keller, 2011). Multinational organization needs to customize market strategies in regards to the different regions in the worlds in accordance to national, cultural and regional differences so that they may supply specified target market. In order, for the company to standardize the marketing mix, the approach applied should classify the countries in groups with the same political, social, economic, technological and cultural needs. Any multinational company should look for a marketing strategy that will enable in marketing of its product in the current market. Adjusting and altering of marketing mix elements are vital and essential in helping the organization to match local tastes and meet the target market needs. Mc Donald failed to observe and apply the marketing mix when they began to operate in china leading to their failure. Once an organization has developed its marketing strategy, there is always a 7P formula which they should apply to evaluate, monitor or reevaluate their daily activities. These 7ps are namely; promotion, price, packaging, product, place, people and positioning. Due to changes in the customer’s tastes and needs the organization is supposed to revisit the 7Ps regularly to ensure that they keep track of the market place. McDonald did not put into consideration all the 7Ps before establishing its business in china thus leading to failure in the market and also low profits to the organization (Jobber & John 2006, Pg. 78). Product is one of the 7Ps that accompany should strategize on. McDonald could have better come up with a unique product whose quality could meet the customer needs. The quality of a product is determined by the production method, where the aspect of production covers the second P. The product packaging is in lineage with the production. The packaging of a brand will determine its impression to the customers. Packaging refers to the external appearance of a product. In relation to the packaging of the organization and the product is what is visible to the customer after the first contact he makes to the end of purchasing protocol. McDonald company can invest in the aspect of packaging, which brings out an attractive image of their products, and in a way attract the customers, hence winning the largest market share in china. McDonald was supposed to carry a survey of the product they where to sell to people of china in order to promote their products. Promotion campaigns ensure customer knowledge on what is being offered by a company. In 2003, the company carried out a promotional tour on the outskirts of Shanghai consuming more that 10 million which improved the reception. 25 % worth of sales increases were noted that year and this lowered the pressure by the competition. Though, the major concern of McDonalds is to make a standardized set of products thus failing to consider customers tastes. The pricing that was applied by McDonald is ambiguous. The pricing strategy is to set their prices far above the other companies and differentiate the product to target specific customers. The prices should be set equal or slightly above the markets price depending on the market forces of demand and supply. However, being a perfectly competitive market, the price of a chicken burger which is at 30Yuan for McDonald should not be higher than that of KFC which currently stands at 25 Yuan. This means that setting prices higher that other companies and producing less quality goods, makes the customers opposed to the products. Another P is promotion; it is the way to introduce your products to the customers. In the aspect of promotion, McDonald should invest much in marketing and advertisement of their product as a way of creating awareness of the existence of their product in the market. A small change in marketing strategies may bring a huge difference in terms of sales results (Kotler & Keller, 2011). Place is the fourth marketing mix, this is the location where the organizations products is sold; the salesperson meets the customer here. An organization should make the right choice of the location, which is suitable for the customer in making decisions. In China, the physical location of McDonald is in major towns, and close to fuelling stations so as to give a better outlook and to be easily noticeable. Their structure is relative based on the town but mainly with a well endorse inscription of the name of the company on the walls. The spacing is enough and big as opposed to the competition. The design and architecture entails the use of maroon and brings out an emotional environment to appeal the clients (Melewar 2012, pg. 50). The next P is positioning. An organization should be thinking on how they are positioned in the minds and hearts of their customers, by doing so it will be easy to win the favor of many customers because you will be supplying what they prefer. The final P is people as a marketing mix, an organization should think of people in terms of whether they are inside or outside the business (Media, 2012). The customer base for McDonald currently stands at 5 million customers in china which is quite low as compared to the completion. Companies such as KFC have close to 10 million while Dicos which offers cheap products has a customer base of 15million. Conclusion In conclusion, for McDonald to excel in China market they need to carry out a research to establish what could be the issue, why are they not making profits in China and in other states they are? They should also put into consideration the 7Ps and they will see dramatic changes in terms of results. They need to analyze the market well and understand the type of product which is applicable in Chinese market. McDonald though it’s a well established multinational business they need to learn the culture of country they want to invest in. Summary The main purpose of the study is to establish the primary cause of failure in exploring the China market by McDonald, a fast food outlet. It was established that, the main reason for such a failure was lack of proper and prior research on the market, entry modes, marketing mix strategies and probabilities on the survival of McDonald in China. It was recommended that a well founded research be conducted as to establish ways of mitigating this failure as especially with regard to marketing strategies, product segmentation, targeting and positioning, markets entry modes and the application of the 7Ps in marketing. This would enable the company to excel and succeed in not only this market, but also in other potential target markets across the world. Bibliography Baker Michael 2010. Marketing Theory: A Student Text, 2nd ed. London: SAGE. 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