Entry of MacDonalds into the Iranian Market - Case Study Example

Running Head: REPORT MODULE 1 Report Module 1 Student Name: Student Number: Course Code: Instructor: 23rd August, 2016 Executive Summary The world is growing into a small village at a faster pace than ever before. To match this pace, and to take advantage of it to make profits out of it, businesses with a given appeal on some markets are fast expanding globally in an unmatched fashion in what can qualify as globalization. Not only are they maximizing on the businesses across boundaries and jurisdictions, but also creating partnerships with auxiliary service providers in order to capture even bigger markets. MacDonald’s is a fast food outlet originally from the United States of America, and which has of late captured various market other than the traditional American market. Its presence is felt across the globe in over 100 countries with approximately 35000 outlets serving its customers. Be that as it may, expansion into farther territories is part and parcel of MacDonald’s strategy, and Iran is among the many markets that it is bound to capture by making a maiden entry into Iran. This report will assess the macro environment in Iran while focusing on the economic, political, legal and social environments, and how they affect the entry of MacDonald’s into the Iranian market. Theories relating to international management will be focused on while offering recommendations on cross-cultural communication and conflict resolution in the said country. Table of Contents 1.0 Introduction……………………………………………………………………….. 4 2.0 MacDonald’s Background……………………………………………………….. 5 3.0 Iran as a Market…………………………….…………………………………….. 6 4.0 Political and Legal Analysis of Iran……………………………………………… 6 4.1 Political………………………………………………………………………6 4.2 Legal…………………………………………………………………………7 5.0 Economic Analysis………………………………………………………………… 7 6.0 Cultural Analysis…………………………………………………………………..8 7.0 Conclusion and Recommendations………………………………………………..8 8.0 References………………………………………………………………………….11 1.0 Introduction MacDonald’s has stood the test of time as one of the biggest fast food outlets world over. This tradition of high quality products, delivered over to customers in various markets, has catered for markets for over seven decades. Be that as it may, there are markets that have traditionally been difficult to exploit due to various factors that have hindered entry into the said markets. This has always called for a keener look into strategies that are necessary for MacDonald’s to be able to meet its goals for increasing its markets, even if it means using further and well thought-out strategies that have not been exploited before. Naturally, most multinational companies like MacDonald’s have always found it easier to use strategies like franchising or using proxy entities to enter markets. While Porter’s Five Forces points out to franchises as the best strategies for expansion that MacDonald’s succeeded in using across the US and other big countries, markets like Tehran may beg for a newer strategy like maybe joint ventures (Porter, 2008). Truth be told, the geopolitics surrounding Iran and its market has always been as challenging as can be, and time and again, most multinationals face an uphill task when trying a new entry into the market. This, coupled with a big difference in cultures, means that for any such entry, there has to be a strategy that meets requirements set aside by the company and thoroughly thought out for the benefit of the market and to ensure that the political situation present does little to interfere with business. As such, it is prudent to first carry out a thorough analysis of the political, economic, social, legal and cultural or socio-cultural factors that affect business. The conservative nature of the people in Middle East makes for a big challenge since the entry of multinationals is always big way through which foreign nationals may be allowed to work in the region. However, their entry always signifies the onset of a group of people with a different set of cultures, which is really a big challenge for both natives and foreign workers who relocate to the countries in the region (Mellahi et. al., 2011). 2.0 MacDonald’s Background Having been set up as a hamburger selling business by brothers Maurice and Richie MacDonald, the business originally dealt in the line of fast foods. Having an appealing business model, Ray Kroc found it so appealing that he decided to acquire a franchise from it, hence giving it the first franchise outlet. He is the brain behind making MacDonald’s go international. The number of products MacDonald’s offers range with the type of market where it is situated. For instance, it openly sells beef products like hamburgers in the US, but this is avoided in India due to the different cultural implications in the locations. Despite this, the general wide range of products include chicken products, hamburgers, cheeseburgers, milk shakes, smoothies, soft drinks and French fries. It is with this regard that Iran can also only accept a certain range of products due to cultural implications (MacDonald’s, 2016). The Middle East has always been a great market for multinationals despite the various cultural differences that pose challenges that appear insurmountable. In essence, MacDonald’s will be seeking to exploit an untapped market seeing as most fast food outlets have largely kept off this particular market segment. MacDonald’s should consider expansion to the Iranian market since the political situation is easing every waking day after the US and other EU countries are easing on the sanctions they had initially placed on Iran due to geopolitical issues relating with nuclear agreements. These sanctions have always stood in the way of multinationals since political goodwill is not automatic in such an environment, making business an ever difficult endeavor. However, with the thawing tensions, the green light is on, and more multinationals can brace for a market that is ready to receive bigger players (Torbat, 2005). 3.0 Iran as a Market Iran is a largely Islamic country that reveres religious leaders – mostly Ayatollahs. The Ayatollahs have influence over the politics of the day and can summon leaderships to give directions on how the country may need to operate. This means that the cultures which appear retrogressive can receive the red light if they are deemed offensive to the people. More often than not, that which has been perceived as Western or American is shunned since it may influence the populace not to follow the culture that is deemed correct. This does not in any way mean that the country is oppressive, not at all. While it has been a rough ride for multinationals, the citizens have held discussions about the possibility of consuming the products from such companies. If anything, most countries were benefitting initially, leaving out Iran which is a market bursting at the seams with various possibilities due to a constantly growing middle class (Long, 2006). 4.0 Political and Legal Analysis of Iran Generally speaking, Iran has always been viewed as a challenging market for multinationals from the West and America. This is due to the fact that culturally, Western influence is seen as a factor that may water down the cultures in the country. At the leadership level, and as mentioned before, political influence is used to squash attempts to bring in anything that may be seen as more influential than the basic tenets of religion since religion is taken very seriously. Be that as it may, the markets are now opening up as the aforementioned sanctions on the country have been withdrawn and there seems to be endless opportunities in most of the industries (Ross, 2012). 4.1 Political Analysis With the Supreme Leader as the focal point of attention when it comes to leadership issues that require religious direction, Iran still has a high affinity to tax, highly, foreign entries that come in with goods that are not exactly very much connected with religion. Furthermore, the tax is divided into various parts, including corporate tax which was lowered from a high of 60% to 25%. Even more concerning are the small taxes levied on foreign entities that may not exactly have any connection with business. For instance, the Islamic tax levied on employees is wont to raise issues for employees who may not be familiar with the policy (Spivack, 2016). 4.2 Legal Analysis The mere fact that there still exists some sanctions against the Iranian government by the US and the EU means that for a business or company to set up shop in Iran, it has to seek proper legal advice before engaging in any transactions. For instance, there has to be a thorough due diligence done in order to make sure that none of the business activities will go against the sanctions placed on Iran, or the rules that are set by the Iranian government. This will reduce cases of friction for businesses like MacDonald which intends to set up shop in the area. The saving grace is that the Iranian legal system is very independent and contrary to public opinion that is peddled out of the country, the system works very well for everyone (Shambayati, 1994). 5.0 Economic Analysis Iran is a society that is hugely hinged on egalitarian values so that there is a fairly good number of people who live well due to availability of equal opportunities. In addition, the higher class society is also growing due to the opening up of business opportunities, both for locals and foreigners. This means that the purchasing power of most Iranians is fairly rated. Most of them can afford to have food at outlets like MacDonald’s. With an inflation that has stood at approximately 14% for some time, Iran appears fairly stable, much as the asymmetry of oil prices keeps the inflation figures changing. The unemployment rate stands at 11.02%. This is not low, neither is it too high, but still has a fairly good number of people who are employed and can afford to visit outlets like MacDonald’s for their favorite snacks (Nazariyan & Amir, 2013). 6.0 Cultural Analysis As has been mentioned previously, Iran is a country that is led according to the dictates of religion, therefore there is a very conservative culture of sticking to the rules and regulations as stipulated by the dictates of the Quran. Culturally, it would be very inappropriate to inquire about female relations from males. While these are guarded by the conservatism in culture, it is noteworthy that Iranians value close friendships but always keep their private lives from the public life. This means that most people have a circle for friends from whom they can rely for support on various issues concerning their private lives (Autio et. al., 2013). 7.0 Conclusion and Recommendations MacDonald’s may be able to make an entry into the Iranian market after a careful consideration of the variously mentioned factors above. For a start, the sanctions that have always seemed to bog Iran down and set them as a difficult market for foreign companies are slowly being lifted. This means that soon enough, MacDonald’s may be able to expand to this said market. The first method of entry is through franchises. This may not be easy, so the second option is naturally through affiliates. This would be easier since more entities that are already in Iran may work easily at first. Then and only then can MacDonald’s set up shop as a corporation (Povod & Rodulgina, 2016). The political and legal analysis of Iran shows that there are a number of sanctions that were placed on the country due to political perceptions on Iran’s nuclear program. Despite this, the market has remained largely under-exploited due to fears, both real and imagined. However, with the lifting of some of these sanctions, most countries are preparing to increase their investments, meaning even new entrants into the market are challenged to try their luck. MacDonald’s, as is known to most people, is an entity that has the wherewithal to set up shop in Iran. Even so, Iran is proving to be challenging when it comes to the political and legal environment that is common for foreign investors (Bayat, 2013). With such factors in mind, MacDonald’s needs to consider the following recommendations: i. Use affiliates as an entry strategy. This may restrict their reach at first since they will have to play according to the affiliate’s rules, but then with time, they will have the chance to expand as operate as a corporate after gauging the market (Iammarino & McCann, 2013). ii. Adoption of contingency plans needs to be done with every little plan since the world market is not changing fast enough, especially in culturally conservative areas like Iran. Be that as it may, each contingency plans should be tampered with plans to change tactic with every challenge. For instance, if affiliates are not taking up the chances offered by MacDonald’s, then the company ought to have an exit strategy (Figueira-de-Lemos & Hadjikhani, 2014). iii. Iran, like most countries, is still experiencing a shift in needs, and this presents a big market. As such, a big market research on likes and dislikes of the population may become handy since there is an identified section of Iranians that do not mind MacDonald’s services and products. It is therefore imperative that MacDonald’s commissions a research on the market, whereby it may feel free to divide the market into the best segments possible and check which one would be the best to carter for (Norman & Verganti, 2014). 7.0 References Autio, E., Pathak, S., & Wennberg, K. (2013). Consequences of cultural practices for entrepreneurial behaviors. Journal of International Business Studies, 44(4), 334-362. Bayat, A. (2013). Life as politics: How ordinary people change the Middle East. Stanford University Press. Figueira-de-Lemos, F., & Hadjikhani, A. (2014). Internationalization processes in stable and unstable market conditions: Towards a model of commitment decisions in dynamic environments. Journal of World Business, 49(3), 332-349. Iammarino, S., & McCann, P. (2015). Multinationals and Economic Geography: Location, technology and innovation. Transnational Corporations, 22(2), 71-80. Long, H. 2016. Will get MacDonald’s Now? CNN Money. 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ANALYSIS AND OPPORTUNITIES OF INNOVATIONS IN RESTAURANT BUSINESS" MCDONALD'S"(AS AN EXAMPLE). ВЕСТНИК МАГИСТРАТУРЫ, 59. Ross, R. S. (2012). Problem with the Pivot: Obama's New Asia Policy Is Unnecessary and Counterproductive, The. Foreign Aff., 91, 70. Spivack, M. 2016. What to Know About Doing Business in Iran. Harvard Business Review. Retrieved from https://hbr.org/2016/05/what-to-know-about-doing-business-in-iran Torbat, A. E. (2005). Impacts of the US trade and financial sanctions on Iran. The World Economy, 28(3), 407-434. Read More