Design of goods and services is an important aspect of an organization as it determines productivity and organizational competitiveness. This is the reason why product launches are important part of an organization’s objective to progressively innovate within itself. Design of goods and services usually takes careful planning because each new product introduced by the company reflects a substantial quantity in capital development. Product design is just one of the significant basics in new product development in an organization.
Apart from product design, a new product has to progress through several stages in its development which include decision making processes, market research and internal communications processes. This paper is going to focus on how product design is applied in decision making in McDonald’s corporation and a description of product life cycle in the same corporation.
Preceding an internal organizational decision making process, a broad market research is conducted by the organization in order to make sure that the ideas introduced in the new product actually concur with clients needs, preferences and desires (Cross, 2011). McDonald’s corporation owns chains of fast foods restaurants around the world.
This business requires frequent changes in product design since customer’s preference and desires change on a day to day basis. McDonald’s restaurants usually conduct both quantitative and qualitative studies that are aimed at testing new product ideas with its customers.
The food industry has many competitors and therefore evaluation of products from different companies is also important. In most large companies as McDonald’s, senior management is normally tasked with establishing whether the company’s resources are to be committed in development of new products. For this reason, product development teams have to convince the senior management by selling the new products concepts to them (Cross, 2011).
The senior management evaluates the product concepts and tries to take into account if the existing operational resources are adequate to cater for the product’s production and manufacturing necessities. The product ideas should also adhere to the organizational goals and objectives and hence the concepts should be assessed to show consistency with this factor.
A company such as McDonald’s has several departments inside and therefore interdepartmental communication is important to ensure products development and marketing is successful. Internal communications should be started at the opening stages of product design and testing so as to gain insights from different organizational departments and this further ensures high levels of commitment to the development of the new product (Cross, 2011).
The sales and marketing department gets involved in decision making at the final stages of new product development. Development of marketing and sales strategies targeting the market is done.
Product life cycle generally referrers to the period that begins with initial product design that incorporates research and development to the period when a product is withdrawn from the market (Rodrigue, 2011). The McDonald’s restaurants products undergo the same process as seen in the previous paragraphs.
New products go through specific stages that begin with market research and development, introduction stage where the new product is introduced to the market, maturity stage, decline stage and finally obsolescence stage (Product Design and process selection, 2007.p.67).
Introduction stage involves the development of a product from the point it was first conceptualized to the time the new product is introduced to the market. The growth stage is experienced if the product introduced to the market is successful and hence sells start to grow.
The company experiences high level of profits in this stage and it improves its distributions to its other restaurants as competition sets in from other companies who may have developed a similar product or improved on the already existing one. Maturity stage is characterized by a situation where the new product is well distributed in the market and the product is now standardized.
As competition increases over cost, production of the product is moved to lower cost sites and this marks the beginning of a decline phase (Rodrigue, 2011).
In conclusion, product design is applied in several ways in the decision making of McDonald’s restaurants. Several departments are involved in development of a new product in this company.
To a large extent, existing literature analyzing the expansion of international firms beyond their primary borders tends to incline towards entry strategies. More specifically, many international strategies have been focused on issues to do with timing and mode of entry, with some of the most commonly referred to entry strategies being joint ventures, franchises, licensing and Foreign Direct Investments (FDI) (Lafontaine, 2004, p. 3).
While this kind of literature is important in understanding the international strategies of international firms, it develops a problem of analyzing the entry of firms into international markets, before comprehending a firm’s foreign market involvement.
As most of the world’s manufacturing companies are moving from the conventional product development industry to a more service oriented industry, international companies are engaged in a tact of entering foreign markets, first, through one location, and then into other geographical areas, as they seek to expand their client base. In this regard, the expansion of international companies into new geographical locations becomes more a matter of when and how they do so as opposed to choosing the timing and mode of entry.
These factors withstanding, this study seeks to develop a deeper understanding of firms’ international strategies by analyzing a fast food industry because of the service oriented nature of the fast food market and the quest for more customers as is synonymous with such companies the world over. In this context we specifically analyze McDonald which has been credited in many literature excerpts as having introduced and fully utilized the concept of franchising to the many markets it has expanded to (McDonald, 2010, p. 2).
Currently, the company is estimated to serve slightly less than 1% of the world’s population daily; meaning that the company has successfully expanded into international markets without necessarily bumping into the risks of international market operations, since current statistics estimate that the company opens up to 1,000 to 1,500 new outlets each year, and approximately expands into five to ten new countries each year as well (McDonald, 2010, p. 5).
Within the last decade, the company has also been able to expand its employee base from a million employees to two million (McDonald, 2010, p. 5).
In addition, the company is a good example in the analysis of international company strategies because it has been able to improve its sales over the decades and now has a market presence in 6 continents across the globe (Lafontaine, 2004, p. 3). Analyzing the pattern of expansion of the fast food company since 1967, when it first expanded into Canada, we will come up with an understanding of the international strategy the company employs and why it is attracted to certain markets in the first place.
In this regard, this study will provide a summary of the international strategy for McDonald, by first regarding what the company considers before entering new markets and what the company does to sell its products in these markets. This will be done through the utilization of data related to the company’s expansion and how it has tailored its products and services to suit new market demands.
Conceptual Framework
According to the economic theory, companies should pursue positive net present value projects when they are faced with the option of expanding into new markets; however, for most firms, this concept entails developing new technologies to increase their operations and expanding their product portfolios (Blaug, 1997, p. 2).
Nonetheless, the geographical makeup of different markets often provides a good platform for firms to grow and surpass their current market dominance (Blaug, 1997, p. 2). For instance, Mc Donald and Burger King have expanded across the United Kingdom (UK), starting with London, and then later into other Geographical regions bordering London (Lafontaine, 2004, p. 5). Such an expansion strategy can be further analyzed through the economic theory, which according to Lafontaine (2004, p. 13) states that:
“……..assuming risk neutrality, a firm with opportunities abroad should pursue all of them. In fact absent any form of constraint on capital or managerial time, and ignoring issues of learning, theory would imply that firms with opportunities abroad would pursue all of them aggressively and rapidly”.
This theory if analyzed in another context means that when firms or companies are faced with minimal capital or managerial expertise to expand, the companies would still go a head to maximize the best possible opportunities across the globe, through proper allocation of resources to spur growth and increase profits (Lafontaine, 2004, p. 9).
With this concept in mind, such firms are often observed to first expand into markets which have probably the same, political, cultural, economic and social make up as the markets they originated from; for example, McDonald would prefer to sell its products to markets which have similar demographical patterns as the United States (US). This true because such companies assume that similar markets are likely to have the same consumer behavior as their domestic market (Lafontaine, 2004, p. 10).
In theoretical understanding, this makes sense, but in practical application, there are other factors to consider before a company chooses a specific international strategy. Such factors may include drivers affecting market potential, market sustainability, cost of doing business and the likes; these factors will then be utilized to come up with the final international market strategy for the company (Blaug, 1997, p. 17).
The internationalization theory is also another important theory that best explains the international strategies adopted by many countries across the globe since it advances the fact that that: firms will often reduce the uncertainties associated with expanding into new territories through gradual expansion (Barkema,1996, p. 151).
Such strategies may include exporting to foreign markets, managerial takeovers and the likes (Lafontaine, 2004, p. 10). The internationalization theory also stipulates that before firms can expand into foreign markets, they must first exhaust their local markets, and just like the economic theory, the theory outlines that firms will always first expand into familiar markets before they move to unfamiliar territories (Gielens, 2001).
McDonald’s Expansion Strategy
Analyzing the data relating to McDonald’s expansion over the years, a trend is deduced whereby the fast food company experiences a lot of growth in markets which it has been operating for a long time; this happens regardless of the time the company entered these foreign markets or the point of growth the company was in.
Upon further analysis of McDonald’s expansion trend into the Asian and European markets, the company does not seem to concur with the international theory which stipulates that firms often exhaust their primary markets first, before moving into foreign markets, because the company clearly expanded into the European and Asian markets while it was still engaged in efforts to expand locally (Lafontaine, 2004, p. 15).
Also, from the analysis of data relating to expansion into foreign markets, McDonald was seen to open more outlets in markets which it had operated for long periods of time.
This means that the markets which the company currently operates in, are probably more profitable than when the company first entered, and in this regard, the company tried to take advantage of the market potential of these locations by opening more outlets in the European and Asian markets, twenty or twenty five years after operating in these markets (Lafontaine, 2004, p. 17).
This trend affirms the notion that McDonald often opens more outlets in markets that it’s already operating in, but more importantly, it is crucial to note that the company also enters into markets which have a higher Gross Domestic Product (GDP) and a higher per capita GDP (McDonald, 2010, p. 3).
We can therefore come up with the fact that McDonald not only considers the market growth of a given country but also the levels at which the market is growing. This is true because even in high GDP countries where the company operates in, it entered into these markets when the GDP wasn’t as high. This means that the company emphasizes, to some degree, the market potential of a given location.
This when analyzed according to the economic theory, we observe that McDonald increase its outlets by first sampling the market characteristics of the area, and also at a given point in its growth phase, it considers the all important expansion attribute of factoring in the incremental costs associated with expansion (Lafontaine, 2004, p. 17).
This fact exposes another characteristic of McDonald with regard to its international strategy because it is clearly evident that the company is very slow in diffusing its operations to international markets, thereby prompting it to plays some sort of catch up game to its competitors, since its primary driver for growth is the overall desirability of the market (according to its history of operation in the market), as opposed to the growth of the market in the long run.
Indeed, McDonald is extensively attracted by higher market potentials in certain markets (and the apparent increase in population) because according to the company, a higher GDP would imply a similar culture to the America market, but interestingly, higher tax rates seems to increase the likelihood of entry for the company as well (McDonald, 2010, p. 8).
This fact could probably be explained by the fact that higher taxes are characteristic of economically developed economies and in this regard, McDonald seems to be more attracted to such market characteristics because they define highly performing markets.
It is also very interesting to note that McDonald rarely considers certain risks to international trade such as currency fluctuation, political instability or Henesz, but in the same context it is not moved by competitive pressures in new markets (Lafontaine, 2004, p. 17). In this regard, McDonald is seen as probably among the first companies to enter unexplored markets while other competitors such as Burger king or Wendy’s operate in markets which seem generally fair for trade (Lafontaine, 2004, p. 17).
However, with regards to the comparison of distance of new markets to the company’s headquarters, McDonald is seen as more inclined to enter into markets it perceives much closer to its headquarters (Chicago) (Lafontaine, 2004, p. 17). This could probably explain why the first international expansion the company undertook was in Canada
There is also another interesting fact about the competitor activity in target markets dominated by McDonald because it is observed that the higher the number of competitor activity in certain markets the higher the probability of McDonald expanding into such markets. The expansion of McDonald into such markets has been partially viewed to mean that the market has a higher potential of doing business. In other words, McDonald views a surge in competitors as a sign of increased potential of a given market.
However, with regards to the variables relating to expansion, there is a direct correlation of the distance from McDonald’s headquarters to the attractiveness of a given market because the far a target market is from Chicago, the lower the number of outlets the company is likely to open and also the lower the company is likely to maintain complete ownership of such outlets.
Nonetheless, the market experience the company has on a given market, coupled with the openness to trade, seems to increase the level of expansion and attractiveness of opening new outlets in the same market.
Sales Strategies
In some quarters, McDonald’s expansion into foreign markets has been seen by some observers as a move to dilute its equity portfolio as a respectable American fast food company (Ganapathy, 2009, p. 3).
These criticisms come about because McDonald is struggling to outdo its competitors by changing its fast food identity to fit the profile of an up market restaurant, especially in its European outlets, as it tries to match up to the competition that some of Europe’s heavy weights in the restaurant Industry such as StarBucks pose (Ganapathy, 2009, p. 3).
Some observers have also identified that McDonald’s move to outdo its competitors by matching up to their game is a wrong one because it is losing the leverage it once had when it was entering Europe’s market in the first place.
It is important to note that most of McDonald’s international consumers have a wide variety of food choices and McDonald is probably the only company that has a specialty in preparing American food. However, analysts observe that the company can still be able to maintain its leverage in international markets by sticking to its core competency which is fast food (Hendrikse, 2008, p. 212).
However, in Europe, McDonald has quickly changed its core competency of fast food business into other types of business portfolios. As mentioned earlier, the company is grappling with the challenge of expanding its customer base by trying to offer much healthier and palatable foods, in addition to changing its restaurant environment to seem more upscale and comfortable than its competitors’.
Another notable feature of McDonald’s operations in its international markets is that, it offers Wi-Fi systems and iPod rental services; a strategy that has not only been identified to dilute the company’s brand equity, but also alienates the company from its core business competency. For example, when the company installs the Wi-Fi music systems, it implies that it doesn’t need fast food customers because fast food customers don’t need to listen to music.
From these developments, McDonald’s European customers no longer expect to find American foods at McDonald’s and neither do they look forward to finding a fast food environment in the restaurants. Even though the company seeks to maintain its profit level in the short run, such a strategy is bound to be disastrous for the company in future.
This is true because as the company seeks to modify its new outlets to suit local preferences, it is alienating itself from being perceived as a truly global brand because it is moving further away from the identity that made it rise into a global brand in the first place (Aswathappa, 2008, p. 319).
As time goes by, the company will have a difficult time trying to maintain its global image because if the European trend is to be replicated in all its new outlets, customers would have a different dining experience from the same company, country to country, and this will dilute its profile as a global entity.
Even though Mc Donald has shifted from the fast food specialization in most of its European outlets, the company has still maintained the same business model in some of its other international markets such as Latin America and Asia (Grant, 2009, p. 392). This means that the company has been able to maintain the same type of food quality even though international markets have forced it to change the type of food it serves.
For instance, in Argentina, the company serves McNiffica instead of the Big Mac which is popular in its American outlets; in Japan, the company serves an equivalent of McTeryavki; but in India, the company never serves beef in its burgers (because of the cultural makeup of the Indian society); however, in countries where chicken is too expensive, the company serves Veggie McNuggets which can be equated to the popular C in America (McDonald, 2010, p. 20).
Conclusion
In this study, we have analyzed the international strategy for one of America’s biggest fast food companies, with a huge market presence, globally. From these insights, we can conclude that from the consistent pattern of entry into new markets, McDonald goes contrary to theoretical expectations of domestic market saturation, preceding international expansion because the fast food company is seen to expand into new markets before it saturates its own domestic market.
However, the company’s international strategy fits into the profile of profit maximization through the identification of the most desirable markets, since the company allocates resources to the most profitable market portfolios it encounters in its quest to conquer new markets. However, most importantly, the company enters these markets by first considering the similarity of the demographical make up of the region, since the company expects the new customer base to have the same kind of consumer patterns its local market has.
McDonald’s strategy can therefore be summed up as encompassing three attributes: increasing its outlets in desirable markets, maximizing the level of profitability in current markets and increasing the company’s profitability, by first analyzing the socio-cultural makeup of the market.
This means that McDonald not only changes its menus when expanding into foreign markets, it adapts its local operating manual for the convenience of the local franchise. These sentiments are further affirmed by the company’s yearly reports (cited in McDonald, 2010, p. 16) which states that: “Maximizing sales and profits at existing restaurants will be accomplished through better operations, reinvestment, product development and refinement, effective marketing and lower development and operating costs”.
This means that the company is set to enjoy economies of high scale if it completely takes advantage of the global infrastructure which is normally based on international franchise agreements that gives external parties the right to operate under McDonald’s brand name for approximately 20 years.
References
Aswathappa (2008) International Business Tata. London: McGraw-Hill.
Barkema, H. (1996) Foreign Entry, Barriers, and Learning. Strategic Management Journal, 17, 151-166.
Blaug, M. (1997) Economic Theory in Retrospect. Cambridge: Cambridge University Press.
Ganapathy, S. (2009) McDonald’s International Strategy: Squander Brand Equity. Web.
Gielens, K. (2001) Do International Entry Decisions of Retail Chains Matter in the Long Run? International Journal of Research in Marketing, Vol: 18, 235-259.
Grant, R. M. (2009) Contemporary Strategy Analysis: Text Only. London: John Wiley and Sons.
Hendrikse, G. (2008) Strategy and Governance of Networks: Cooperatives, Franchising, And Strategic Alliances. Hong Kong: Chang Publishing
Lafontaine, F. (2004) Beyond Entry: Examining McDonald’s Expansion in International Markets. Michigan: University of Michigan.
McDonald. (2010) Mc Donald’s Corporation: the Past Present and the Future. Web.
Following the advent of globalization, many companies that previously operated in the local markets have sought to establish businesses in foreign markets. Globalization refers to the process of integrating people with governments and organizations across the globe. One of the major limitations the companies that seek to exploit foreign markets may face is the challenge of linking franchises established in foreign nations to the organizational culture and polices.
However, globalization has eased communication partly due to the recent immense development in telephone and internet technologies. This implies that the challenges of expanding markets that were experienced by organizations seeking to take their businesses globally have been incredibly eased. Consequently, the term international firm has become a common terminology in the international business debates.
Kottler (2000) described an international organization as the one, which conducts businesses in more than one nation (p.34). However, when making a market entry into new nations, an international organization has to choose appropriate market entry methods because each nation acts as a market segment whose consumption is determined by a variety of factors such as culture, economic, social, and political affiliations among others.
These factors are different in every nation. In this context, this paper finds it indispensable to analyze the factors that affect a firm’s decision-making process on the choice of entry modes to the foreign markets coupled with the impacts of the entry modes on business practices and success. The focus is on western nations’ organizations entry into the Asian markets. The paper presents this by considering the case of MacDonald’s entry into the Chinese markets.
The paper specifically considers Asia as the one that that has undergone tremendous growth within the last three decades. Consequently, emanating from the economic advantages, western organizations such as MacDonald have considered extending their operations into the Asian regions in a variety of ways. As such, the paper further presents these ways with the aid of a review of the relevant theories on foreign entry modes followed by identification of the mode(s) of entry that MacDonald adopted in China.
The case study report also investigates and analyzes the factors contributing to MacDonald’s decision on the choice of the entry mode(s) coupled with evaluation of the advantages gained, as well as the difficulties experienced by MacDonald because of implementing such a mode or modes. Finally, the paper discusses the lessons learned from the firm’s experience on the choice of the entry mode(s).
Literature Review
Factors influencing a firm’s decision to enter into new markets
Many western firms are currently becoming internationalized. The initial choice of the crucial market entry mode in the foreign market may produce imperative implications on successful entry of a company along with its survival in the international market. Arguably, therefore, the decision on survival mechanisms in the foreign nations is a mega step that a firm has to make before channeling its resources to establish its presence in the foreign nations.
Another crucial decision encompasses the entry mode in the international business (Hague & Jackson, 2006, p.47). Firms can accomplish entry modes in foreign markets through several ways. Typical examples include licensing, joint ventures, exporting, and franchising among others. However, essential to note is that each of the entry modes possesses some merits and demerits. Hough and Neuland (2000) conduct an analysis of these market entry modes (p.13).
According to the authors, exporting is the easiest mode of selling a firm’s products in foreign markets. It permits an organization to indirectly or directly export. Indirect exporting involves the sale of a firm’s products in the foreign markets through an agent based in the home markets while direct exporting involves a firm that sells its products directly to an importer or a buyer in a foreign market.
On the other hand, licensing involves an agreement in which “a licensor grants the rights to intangible property to another licensee for a specified period” (Hough & Neuland, 2000, p.21). In return, the licensor receives a royalty fee from the licensee. Franchising involves entering long relationships in comparison to licensing. In the relationship between the franchisor and franchisee, the franchisor sells critical property, for instance, a trademark to the franchisee.
The franchisor also acquires the franchisee’s contractual responsibility to abide by all the rules on its business regulations. Joint ventures constitute business collaboration between two companies based in two or more countries, which share ownership of an enterprise established jointly for the production, and/or distribution of goods and services.
Various factors define the relativity of the appropriateness of the chosen entry mode. They are economic and political risks, trade barriers, social risks, and transportation costs among others. Consequently, firms seeking to establish themselves globally need to consider economics and other dynamics of the target nations (Beamish, Morrison & Rosenzweig, 2005, p.99).
Essentially, it is desirable for globalizing companies to have plausible information about size coupled with rates of growth of the foreign nation’s markets, financial positions, population characteristics, and more importantly, the labour costs. This implies that leaders of firms need to know that the attractiveness of foreign market opportunities is different among different business industries, as well as individual companies (Hibbert, 2005, p.17).
Organizations seeking to establish operations in the international business need to do a number of things. According to Hibbert (2005), some of these things include evaluation of international markets business opportunities, conducting analysis to an extent to which a firm may be able to establish potential opportunities for growth in foreign nations making a decision on the appropriate market strategy, innovating marketing strategies, and then conducting standardization of various global operations (p.33).
Financial crisis and strategic decision to capitalize on Asian market
Following the global financial crisis, many firms embarked on seeking to enhance their competiveness for them to survive through the financial crunch. One of the strategies to realize this goal was to look for new markets particularly where an organization may perceive to experience milder effects of economic down time.
When the western nations encountered challenges of reduced businesses, the global financial crisis did not even spare the possible alternative place -Asia- where such firms could establish new markets. Indeed, Asian nations encountered the global financial crisis in the late 2008 originating from Europe and the U.S. Consequently, the Asian gross domestic product growth rates immensely fell down.
The aftermath was a substantive drop in exports. Additionally, foreign direct investment to Asian countries reduced significantly. However, by August 2009 China and India coupled with other emerging economies in the Asian regions had started to depict some signs of recovery from the global economic crunch. In fact, with regard to a survey conducted by the Economist magazine, Singapore, China, Korea, and Japan, showed quarter-on-quarter annualized GDP growth of 21%, 15%, 10%, and 0.9% respectively (Ross, 2003, p.9).
Even though the accuracy of this data may be debatable, the trend shows that Asian countries were able to recover from the economic crunch much faster as compared to other countries especially those in the west. Deductively, this incredible growth of Asian economies creates mega opportunities for global businesses. This is in sharp contrast to the economies of western countries whose growth remains uncertain. This may explain why global economic activity is shifting to Asia.
Globalization theory and capitalization on Asian markets
The quest of MacDonald to establish franchises in China closely relates with advantage accruing from globalization because globalization has intensively altered the manner in which firms conduct businesses at the international fronts.
In this context, Cooper and Schindler (2008) argue that stemming from technological sophistication and communication coupled with general infrastructural developments, businesses are capacitated to supply and/or distribute goods and services virtually in every geographical location across the globe (p.41).
Nevertheless, venturing into international markets is a risky endeavor. This argument arises because firms ought to be prepared and organized strategically to overcome cultural impediments, differences in currency and language barriers coupled with regulatory, and existing legal environments that may be inconsistent with the organizational policies.
However, firms that have substantial capital bases among other resources can easily sail through these impediments without having to rely on other external aid. However, those companies that do not have substantial resources to aid them in overcoming the impediments to operations in the international markets, more often than not, have to consider altering their polices to suit particular market.
This means that although such companies may be using the same brand name, they are predominantly characterized by non-homogeneity in organizational polices. This makes it possible for them to penetrate international markets.
A myriad of reasons explains why organizations may consider diversifying their markets to include global markets. Many researchers contend, “The emergence of demand potentials in the foreign markets is one of the common reasons” (Hough & Neuland, 2000, p.23).
Directly congruent with this argument, Hough and Neuland (2000) maintain that sales expansion, acquisition of new resources need to minimize risks, depreciation of currencies, and local market saturation account for the internationalization of business (p.39). Arguably, therefore, internationalization of business may incredibly aid in facilitating a business to achieve immense economies of scale.
Consumption theory and capitalization on Asian markets
The consumption theory holds that when the consumption patterns of the consumer increases on the positive side, many firms would tend to move in and meet the demand created. Such a situation is experienced in China since the nation has a big consumption economy akin to its large population. A strategic decision for western firms to enter this market can make the firms attain large economies of scale.
For instance, by the year 2009, McDonald had about 800 outlets already in operation in China. This was an immense success of the company since its entry into the Chinese market from ealry1990’s. The success in the Chinese market recorded by McDonald had forced other western companies to consider establishing themselves in Asian nations.
In particular, the Chinese economy has been growing tremendously within the last two decades of MacDonald’s presence. In this end, Ross (2003) argues that Chinese and Indian economies stand probabilities of accounting for 50 percent of the global domestic product by the year 2030 (p.15).
The attractiveness of the Chinese market to western organisation such as MacDonald rests on the shifting demographics, hiking incomes, growing of consumer spending, and the ever-increasing free and fair business environment. In addition to the increase in consumer spending, some other factors such as increased cost of production and dwindled sales in the local home markets among other factors have made American and European firms consider establishing themselves in Asian nations such as China and India (Hill, Cronk & Wickramasekera, 2011, p.113).
Increased consumption on Asian markets is exemplified by the case of China where there is an increase in consumer credit. The repercussion is that young people are more likely to buy on credit in comparison with old people. In fact, young people are stronger when it comes to consumer expenditure and credit. Consequently, China is currently hosting several global leading brands among them Adidas, Wal-Mart, Sanofi, Tesco, and others.
Methodology
This case study report paper deploys secondary data acquired from the existing literature on the international business. An analysis of the data garnered is conducted to develop theories that can explain the entry methods used by international firms to penetrate new markets in foreign nations. These theories can then be linked closely with MacDonald’s strategies for penetration of Chinese market.
Consequently, a case study of MacDonald’s strategies of colonization of new international markets is scrutinized in relation to existing theories on international business. The secondary data utilized in this paper come from sources including scholarly journals, internet, magazines, newspapers, and books.
Results
The results of the case study indicate that McDonald is a world leading US-based fast food retailer. In the modern day, the company has over 33,000 stores in about 119 countries. The key to this immense expansion of the company rests on the company’s capacity to understand its customers’ need coupled with refinement of its business polices to suit the target market.
The foreign market entry mode used by MacDonald is franchising. In the new franchises, the company sells high quality yet affordable products. In the franchise agreement, “MacDonald grants the right to sell McDonald’s branded products to a prospective franchisee” (Hough & Neuland, 2000, p.25). The agreement gives the company the power to decide on the operating methods, marketing, and the quality of their products.
McDonald’s owns or leases the establishment. The franchisee purchases “the equipment, fittings, and the right to operate the franchise for 20 years” (Hough & Neuland, 2000, p.27). To achieve worldwide homogeneity, all franchisees must use standardized McDonald’s branding. These include their menus, their design layouts, and the administration systems.
Analysis and discussions
MacDonald was established in Illinois in 1955. According to Cooper and Schindler (2008), McDonald had opened its first outlet outside the US by 1967 (in Canada), and had expanded to Australia, Japan, and Europe by the year 1971 (p.32). Since then the company has experienced tremendous growth, and has extended its operations to many nations including China.
One of the success factors of the company is that it has been able to satisfy the Chinese needs for food safety. The strategies for penetration into the Chinese market adopted by MacDonald are valid depending on population characteristics and other market traits. In this end, markets chosen for expansion by McDonald’s are positively associated with high gross domestic product per capita, population size and distribution, and urbanization (Clode, 2011, p.22).
Nevertheless, the company faces competition in China. Consequently, the company’s operation in China makes it is apparent that it conducts studies of changes in markets in an attempt to develop products that meet the needs of consumers. The implication of this strategic decision is that the company takes it within its mandate to develop products that are cost competitive besides looking at the long-term growth possibilities once it has made a new market entry.
From the results of the study, it is also evident that the highest percent of McDonald’s restaurants are franchises, this being the market entry mode adopted by the company to get into foreign markets. Therefore, a cute selection of a franchisee is a central concern for the success of McDonald in China. In this end, the company accords various conditions for its potential franchisees.
The concerned parties have to agree and settle upon these conditions on a legal contract. The conditions include the following promises: a franchisee would be honest, have business experience in the industry, have successful accomplishments, commitment to the franchisor, and a significant capital base.
The results have also indicated that McDonald develops products consistent with the local food tastes of a particular market. This measure helps the company internalize the inferred local knowledge of franchisees into its wider operations (Hill, Cronk, & Wickramasekera, 2011, p.62).
Akin to the needs to survive in the foreign market having competition, a major survival tactic adopted by MacDonald in China is rebranding its products to meet the anticipations of the target market. For this reason, McDonald launched the Chickileaks campaign in China. The central concern of the campaign was to educate and make sure that Chinese people rest assured that the products offered by the company are fresh and safe.
The campaign also enabled McDonald to establish a competitive edge in the market amid the rooming competitions from KFC and Yum. McDonald encountered consumers in China who had different eating preferences compared to the U.S. consumers. For instance, the Chinese people prefer chicken to beef. This posed a challenge to the company since it entered the Chinese market with the intention of distributing beef products. On the other hand, competitors such as KFC were distributing chicken products.
McDonald’s Chickileaks campaign is a key indicator that an organization seeking to establish business internationally needs to ensure that it merges its products and policies with culture, values, beliefs, and traditions of the people inhabiting the new target market. McDonald identified that, in its new market, there was a problem. Strategically, it moved to create a solution to the problem in the new market by designing a campaign to address the challenge.
Essentially, therefore, MacDonald exemplifies the practical application of the thing that an organization seeking to establish itself in the foreign markets must do. Among these things are evaluation of international markets and innovation of marketing strategies among others. A major concern is on how MacDonald would maintain its success in China. According to Gilroy (2011), this is achievable through maintaining a steadfast focus on consistency, quality, and cautiously trying out other new options (Para.5).
Conclusion and Implications
Even though while making the strategic decision to establish MacDonald franchise in China may be taken as one of the ample decisions that has resulted to making the company more competitive, various challenges have been encountered. Firstly, China’s market is non-uniform and non-homogeneous. This is attributable to irregularities of economic growth in differing regions of the nation.
Consequently, aggravation of various social, political, and economic differences across different Chinese provinces has been experienced. This truncates into wide variation of consumer spending behavior in different provinces. The argument here is that China is ideally not a single market but a collection of a myriad of submarkets. These submarkets have distinct cultural, political, social, demographic, and economic characteristics.
Any company seeking entry into the Chinese markets must take into consideration all these factors and orient their policies to suit the dynamics of the Chinese markets. The implication of this concern is that organizations need to choose an entry mode that exposes them to a minimal risk. This is necessary for internationalizing companies to maximize profits coupled with long-term growth.
Internationalizing companies need to take advantage of various available opportunities through integration of a myriad of market strategies. The implication of this recommendation is that decisions made by companies in matters of entering any market need to factor in the characteristics of nations in which they seek to establish business. This is critical to enable a company to determine the scale of investment in the new market.
Therefore, new markets entry modes decisions need to be made from the basis of well-researched markets conducted within the countries of interest. This implies that the political and economic instabilities of the past and the possibility of more problems in the same nation or surrounding nations need to be taken into consideration.
Additionally, market forces have an effect on the growth of the company’s markets and economy, and hence disposable income of potential customers. The implication is that by internationalizing firms one needs to make subtle market entry decision during their first entry into the foreign nations’ markets.
Reference List
Beamish, W., Morrison, A., & Rosenzweig, M. (2005). International Management: Text and Cases (3rd ed.). Chicago: Irwin.
Clode, J. (2011). McDonald’s Exposes ‘Chickileaks’ in China. Global News, 1(1), 22.
Cooper, R., & Schindler, S. (2008). Business Research Methods (6th ed.) Singapore: Irwin/Mcgraw.
To any business, funding remains an issue of critical importance that needs to be addressed with utmost care. Sources of funds to any business remain a critical issue that demands that an organization’s strategic managers guard the sources of funding to guarantee business growth. Traditionally, funds for business come from the sales proceeds.
However, the fluctuating nature of the market makes it necessary for organizations to devise stable sources of funds to avoid unnecessary losses should the sales volumes drop significantly. Therefore, this means that although the main purpose of all business is to get revenue form the sales that they make, it is also important to invest some of the proceeds to some other forms of incomes to protect the company for some eventuality.
Sources of funds for McDonald in either starting a new or expanding the existing restaurants can be classified into three broad categories, which are:
Internal sources of finance
External sources of finances
Long-term sources of finance
Internal Sources of Finance
One of the main sources of funds for McDonalds is sales proceeds. From the sales made by McDonald restaurants, the revenue earned minus all the expenditures incurred, gives it a surplus. This amount is retained by the business and used to finance its expansion into new market areas through establishment of new restaurants or purchase of new assets.
Owner’s savings is also another source of financing for the McDonald Inc in Kuwait. Owner’s savings ensure that the business owners have money at their disposal to use or furtherance of business. In most cases, when businesses are being started, much of the finance is usually from the individual savings.
Another source of finance for McDonalds Inc. is royalty from franchises. According to Keown, (2006), Franchises are businesses that use an already established brand name and in return pay the main firm some funds in form of royalties. The franchisee retains all the profits from the venture, but pays the Franchisor royalties and a minimal rental payment as agreed.
In this case, McDonalds continues to be recognized as one of the great franchising companies in the world in which over 75% of the McDonald restaurants are owned and operated by franchisees. This means that McDonald greatly gains from these franchises when they remit their payments to the franchiser. Franchising is, therefore, one of McDonald’s major sources of finance.
Retained earnings and retained profits are often used as a source of finance. Over the years that the chain has operated in Kuwait, their retained earnings have been used for their expansionary missions. Retained earnings also have been used for asset financing among other major ventures of the organization. Sale of assets is another way that McDonald can get finances for their business ventures.
This involves the selling off the excess assets that are held by the company so as to generate money that could be used to start a new business or expanding an existing one.
However, great caution should be taken into account when doing this and this is because, some of the assets could still be used in smooth running of the current business. The accumulated retained earnings have boosted the return on equity on McDonalds Kuwait as attested by the graph below.
McDonalds’ reatined earnings trends over a 10 years trend.
External Sources of Finance
McDonald also gets finances from partnership ventures. The partners contribute capital for the business and McDonald benefits from this business relationship in that through these capital contributions, it is able to finance its business.
McDonald can obtain finances from bank loans. This form of finances allows McDonalds Inc. to finance its initial costs. The loans come in either long-term nature or in short-term nature. Among the main financiers of McDonald’s Kuwait is the National Bank of Kuwait (NBK) which allows provides a varied form of loans to McDonalds.
Debenture loans are also forms of loans that are used by McDonalds in Kuwait just like in any other worldwide branches. Debenture loans are loans that are secured against with the assets of the business that is being invested in. Secured debentures attract fixed or variable interest rates depending on the assets they are attached to whereby the interest’s rates of these debentures can be predetermined.
McDonald could use this source of finance to fund its existing business or start new ones. However, the business cannot sell the assets without the lenders’ consent and in case the business fails, the lender always take the first priority in being compensated over the owners and the shareholders and also this applies in case of winding up of the business.
Bank overdrafts as sources of funds are also used to fund McDonald’s operations. This is a good source of short-term finance as it helps solve the immediate problems that are being faced by the organization quicker than looking at the long-term ways. The overdraft has more advantage than a loan on the short-term.
Venture capital is another source of finance that McDonald can use to its existing business or start a new one. Venture capital is used by business in the initial stages of their development. For venture capital arrangement to be successful, an investor known as a venture capitalist must be willing to invest a huge sum of money into the business.
This means of soliciting funds has the advantage that the business in most cases end up being successful, but also runs the risk of the venture capitalist demanding to hold part of the business ownership or they may request very high returns at the expense of the business (Braun & Larrain, 2005).
Despite this shortcoming, McDonalds in Kuwait has utilized this from of financing where the venture capitalist is allowed to have some stake in some franchised outlets.
McDonald can also use credit from suppliers as a source of funding. Once goods are supplied, it takes about thirty days for the payments to be made and it gives McDonalds time to sell and then pay at the end of this period. The advantage about this is that the money that could have been paid to the suppliers once they had delivered the goods can be used to pay for other commitments.
However, caution should be taken so that there are no delays in paying the suppliers on time according to the business agreement. Related to this form of financing is the hire purchase. Hire purchase is an arrangement that can ensure the acquisition of an asset is easy in that the buyer does not have to pay for the asset in full amount.
A deposit is paid and the buyer can use the asset, but continue with paying installments at the end of every agreed period. For McDonalds, hire purchase has been a useful method for financing major forms of restaurant infrastructure as the initial installations are usually expensive. Since the arrangement allows the chain to use an asset before it fully pays for them, this form is seen as a source for funding.
Long Term Sources of Finance
Leasing
In leasing a firm hires or obtains fixed assets and pays contractual payments agreed upon. To ease its operating costs, McDonalds inc. forms contractual agreement with stakeholders and other parties and uses their assets for an agreed period of time. Among the main leased items are the premises that that chain uses to house its restaurants as well as other assets that are used by the chain of restaurants for day to day business operations.
Feasibility of McDonald Inc financing there operations internationally or locally
The possibility of McDonald financing its activities locally is more viable. This is because availability of capital locally is high. The reasoning is, the company is able to internally fund itself from the retained earnings, working capital, and with other internal sources of fund available.
This form of financing is economical as the chain is not required to pay interest on this amount. On the other hand, it is possible to get funds from local external sources such as bank loans, bank overdrafts, and credit from suppliers. These sources attract interest charges, but usually at rates that are rationally low.
However, this does not mean that it is impossible for McDonald Inc. to access funds from the international sources. External funding is achievable in the following way. McDonald is the biggest fast food retailer in the world. It has more than 29000 restaurants and operates branches in over 120 countries with the first Asian franchise being opened in 1967 in China.
This franchising has resulted to over 65% of the total revenue earned by the company being from its franchises. From the above explanations it is evident the cost of obtaining these external financing in relatively low. External financing is appropriate if the chain is in the process of expansion.
From the above analysis, it is evident that McDonalds uses internal sources of finance to fund its operations. The preference given to internal sources as opposed to external sources may be justified by the nature o business operation adopted by McDonalds Inc.
The franchising approach has allowed the branches of McDonalds in Kuwait to be self sufficient as they have attracted local investors who come with their initial capitals. This way, the chain has been able to maintain a good book of account that is devoid of foreign debt.
Use of internal sources of funding has also ensured that the chain does not suffer form the effects of a fluctuating international currency hence translating to predictable business trends. This proves that it is feasible for the company to finance its operations locally as opposed to using foreign funding to finance the operations.
References
Braun, M. & Larrain, B. (2005). Finance and the Business Cycle: International, Inter- Industry Evidence. The Journal of Finance. 60(3) pp 1097-1128.
Keown, A., J. (2006). Foundations of finance: the logic and practice of financial management. New York: Prentice Hall.
McDonald’s brand mission is ‘to be our customers’ favorite place and way to eat’ (AboutMcDonalds.com). McDonald’s statement of purpose states that the company aims to be the best in the world at offering its customers quick service restaurant experience. In order to do so, McDonald’s strives to deliver excellent service, cleanliness, quality and value. The ultimate goal is to make every customer leave the restaurant smiling.
Industry area
McDonald’s is in the fast food industry. It is the world’s largest chain of hamburger fast food restaurants.
Major products or services
McDonald’s main product is fast food. Their main categories of food are chicken, salads, breakfast, beverages, burgers & sandwiches and snacks, sides & deserts.
Head office and the geographic area served by the company
McDonald’s was founded in 1955 in Des Plaines, Illinois. Its current headquarters address is 2111 McDonald’s Dr., Oak Brook, IL 60523. The company has franchises in over 120 countries across the globe, with over a thousand franchises each in countries like the United States, Canada, Japan, Germany, France and the United Kingdom.
2009 Revenue
In the three months that ended 30th March 2009, the company’s net income was $979.5 million, down from $985 million over the same period in 2008.
Press Release and Article Summary
Press Release
On 19th October, 2011, McDonald’s announced that it had become a member of the Roundtable on Sustainable Palm Oil (RSPO). This was in line with its intention to use only RSPO-certified Palm Oil in all its restaurants and franchises by 2015. McDonald’s is committed to using only sustainable ingredients such as palm oil.
Already, palm oil is used in McDonald’s restaurants as frying oil within the Asia-Pacific, Middle East and Africa, and Latin America. This move is in line with its Sustainable Land Management Commitment (SLMC) announced in early 2011. According to its SLMC, McDonald’s will source its raw materials for its food and packaging materials from sustainably-managed lands (McComb).
Article Summary
An article by Lacey McCraney for NBC Chicago tells of how McDonald’s is making a change to its happy meals, choosing to give a slice of apple and a smaller helping of Fries and either fat-free chocolate milk or 1% white milk in place of the usual soft drink. This change, however, is only optional.
Customers can still choose their full portion of fries instead of fruit, and a soft drink. This move is part of the company’s commitment to offer improved nutrition choices. Fruit has been part of McDonald’s optional foods for more than five years, but only 10% of their customers choose this option (McCraney).
Justification
The choice to study McDonald’s was made for two reasons. First, the company is one of the world’s most recognizable brands in the world and has been in existence for over half a century. Secondly, its prominence all over the globe makes McDonald’s extremely easy to identify with.
Analysis
McDonald’s operates in nearly 120 countries across the globe, and is known to serve nearly 60 million customers every day. The company’s expansion is attributed largely to its business method of franchising and using joint ventures. Most McDonald’s restaurants offer either drive-through or over-the-counter service.
Some franchises also offer outdoor sitting, although this is not common considering they are found in busy and crowded cities with limited space. Most McDonald’s in highways offer only drive-through service, while those in busy and crowded cities use the counter method or, to a limited extent, walk-throughs.
McDonald’s may have started as a fries and hamburgers-selling joint, but it continues to diversify to other foods. It has placed emphasis on the growth of its provision of healthy and diverse foods. Their growth, however, faces certain challenges. According to CNN’s writer Nin-Hai Tseng, McDonald’s faces a number of potential challenges in the coming years. First, the rising cost of food could negatively affect the company’s growth.
The price of food continues to rise, and it could lead to a food inflation of between 2% and 3% in the next couple of years, according to the US Department of Agriculture (Tseng). So far, the leading food chains have not been affected. However, that could change. Secondly, there might be a reduction in McDonald’s growth because of limitation of beverages over burgers. Since most McDonald’s restaurants are a preferred choice for customers looking for fast food, the company has created a number of creative drinks for their customers.
However, the time taken to serve customers with these beverages has lunch hour sales to slow down over the years. According to the Wall Street Journal, McDonald’s business at lunch-hour has flattened over the last five years (Tseng). Finally, there is a growing concern that McDonalds may no longer provide a satisfactory return-on-investment. This is particularly applicable with the McCafe machines, which cost over $100,000 to install. This is a cause for concern for small investors.
Investing in McDonald’s stock presents a measure of risk, as most stocks do, but it is considered one of the safest stocks to buy. Even during the economic downturn that America has been experiencing since late 2008, the company’s stock remains stable. This can be attributed to two aspects.
First, as the recession hit, America turned to McDonald’s restaurants as a source of affordable food. This kept the business afloat as other companies felt the pinch of the credit crisis. Secondly, McDonald’s continues to appeal to a more upscale market, particularly with its specialty coffee. All these aspects pushed the stock of the company from $55 a share in 2008 to $87.09 in July 2011, a 58% rise (Krantz).
McDonald’s has been involved in a number of lawsuits over the years, most of which involve defamation, workers’ rights and trademark disputes. A hugely famous case was a defamation case they filed against Helen Steel and Dave Morris, a gardener and a former postman. This case was famously known as the McLibel case.
The two were sued after they distributed booklets with damning information regarding McDonald’s record on health, the environment and the exploitation of workers. The trial went on for two-and-a-half years, becoming the longest running English trial ever. Mr. Justice Bell finally delivered his verdict in 1997, condemning McDonald’s for advertisements that ‘exploit children’ and ‘misleading’.
The judge also said the company was cruel to animals and apathetic to workers’ rights (McSpotlight). Nevertheless, McDonald’s was awarded a settlement amount by the courts in the United Kingdom. The company stated later that it had no intention of collecting the 40,000 pounds it was awarded. This case was considered a major embarrassment to McDonald’s.
Conclusion
From the three sections above, three things about McDonald’s are clear. First, the company is one of the best managed organizations in the world and has been for the last several years. It is highly profitable, has a remarkably healthy stock and operates in many countries.
Its business model is easy to follow, and it is easy to see why competitors, who provide highly similar products, have been unable to muscle the company off the top spot. There is a constant pursuit of excellence in the company, bno matter where a franchise is located. A company does not gain the reputation McDonald’s has by being mediocre and running its business poorly.
Secondly, despite the challenges it faces in the market and the odd lawsuit here and there, McDonald’s future appears to be bright. It seems as though this company, which has been at the heart of the fast-food business for over half a century, could last forever. Whether this remains to be true or not, McDonald’s is an excellent example of a company well run, well managed and worthy of emulation.
Finally, McDonald’s will always face a hard time from competitors, environmentalists and people concerned with the ethics of the business. McDonald’s has been criticized in the past for its business methods, its aggressive style and its distasteful marketing techniques. Using the McLibel case as a good example, the company got into trouble first because of its reportedly poor business practices.
The defendants in the case distributed leaflets that the company considered defamatory, so it sued successfully and actually got a settlement. However, the judge still took a swipe at the company, condemning it as a company that practices bad business and operates dishonestly, to the great embarrassment of McDonald’s.
McDonalds is a leading company in food service retail. It boasts of more than 33, 000 restaurants, which serve almost 68 million, people daily. These local restaurants are found in 119 countries around the world. McDonalds is a publicly traded hospitality company, and it sells registered securities like stock and bonds to the public, through the stock exchange.
McDonalds has more than 1.7 million employees all over the world, and they occupy the restraint and corporate positions. Jim skinner is the company’s vice chairman and CEO. Most of McDonald’s restaurants are individually owned and, they are locally operated by women and men. In fact, a percentage of more than eighty is owned by individuals. The company’s goal is to become the customer’s favourite in terms of place and service delivery as well as quality (McDonalds, 2012).
McDonalds’ CEO’s report
Jim Skinner, McDonalds CEO, credits McDonalds as having been in business for 55 years, and it has achieved the status of being the most recognised and favourable brands across the globe. Skinner looks at this success as not only a privilege, but also a responsibility (Bartiromo, 2010).
Jim Skinner attributes McDonald’s success to social responsibility, and social responsibility is a piece of McDonald’s heritage. Jim skinner has a record of implementing positive change by partnering, action and record. Skinner affirms that McDonalds will go on using scope, size and influence in order to form a positive change and difference for children, families and societies across the globe.
This step will in turn create value for the company’s stakeholders as well as the company itself. Jim Skinner asserts that McDonalds aims at making a difference by acting in the following five key areas; well- being and nutrition, environmental responsibility, a sustainable supply chain, the community and the employees’ experience (McDonalds, 2012).
According to McDonald’s CEO’s report, the company works to reduce the energy use and to support the community at the restaurant level. At the market and industry level, the company works at evolving the menus, addressing the balance and the use of sustainable sourcing promotion.
Mission statement
McDonald’s mission statement is to be its customer’s favourite place and the way to eat. The mission aligns with the company’s deeds, as the company’s restaurants have managed to become the most preferred, fast food joints. McDonald’s operations are focused across a global strategy referred to as the Plan to Win.
The global strategy centres around customers experience, focusing on people, place, products, price and promotion. This strategy aids the McDonalds Company and restaurants in achieving commitment to continuously enhance customers’ experience by improving their operations (Bartiromo, 2010).
McDonalds Company understands that people want high tasting quality and quality food, and speeds when offering the services since people are always on the move. In line with the company’s mission, McDonalds has managed to provide affordable choices for their customers every day. This has helped the company to gain the customer’s trust and favour, becoming the most preferred restaurants and serving 68 million customers daily.
Financial health and performance predictability
Basing on the 2007- 2010 annual financial reports for the McDonalds, the company’s health is stable. From the balance sheet, it is apparent that the financial health of the McDonalds Company is steady and does not face any risk of collapsing.
Basing on the five year trend from 2007- 2010, the total current assets rose from 3.58B US$ in 2007, to 4.37b US$ in 2010. The total liabilities in 2010 were 17.34B US$, while, the total assets in the same year were 31.98B US$. The cash flow statement shows that the net income before extraordinaire, rose to 4.95B US$ in 2010, from 2.34B US$ in 2007 (Market Watch, 2011).
The income statement shows that the net income of the McDonalds Company has been on the increase from 2007 to 2010. In 2007, it was at 2.34B US$ rising to 5.5B US$ in 2010. The net income growth has also been on the rise from 5.51% in 2009, to 11.26% in 2011 (Market watch, 2011). It is apparent, therefore, that the financial health of the McDonalds Company is not going to suffer a relapse in the near future (Bragg, 2007).
From the annual report, the McDonalds company performance can be predicted in the next five years. Accruing to the fact that the net income growth has been on the rise in the last five successive years, from 5.51% in 2009, to 11.26% in 2011, it is clear that McDonalds will register the same growth in the next five years.
Despite depreciation, the McDonalds has managed to steer itself forward. The total Assets has been on the rise from 29.39B US$ in 2007 to 31.98B US$ in 2010. This has registered a 5.79% total growth of assets in 2010 from -3.16% in 2008. This pace gives room to predict the performance of the Company as promising, when all other factors are constant like inflation.
Conclusion
McDonalds being the leading fast food retailer has proved its power and worth across the globe by having the most joints and commanding the highest clientele. The success is accrued to social responsibility, good leadership and putting the customer’s needs first. Offering a variety of choices for the customers is also another succeeding factor for the McDonalds as well as giving the ownership and management at the local restaurant level.
McDonald is a food company that has established outlets in the global markets. The company has been in operation since 1940 and has diversified in the number of food products it offers to the global markets. The company was established by Richard and Maurice McDonald, and the main goal was to produce hamburgers.
The headquarters of the company are based in the United States, and various subsidiaries have been established in over 120 countries. The company has applied the strategy of franchising, affiliation or corporate operations. These strategies have enabled the company to expand in many countries (Hill & Gareth, 2011). In the UAE, McDonalds has established more than 90 outlets.
The restaurants are distributed all over the country to serve all customers in the country. The company maintains high quality in offering its products. In addition, the company has maintained a high level of corporate social responsibility. The company has adhered to the legal provisions of the country. It has also improved the welfare of the communities in UAE by supporting orphans and other needy people in the country (McDonalds Arabia, 2012).
Definition of CSR
Corporate Social Responsibility (CSR) is the process whereby organizations regulate their activities so that they can adhere to the ethical standards, legal provisions and global standards. Through CSR, organizations indulge in legal, business activities, improve the environment, provide healthy products and take care of their employees.
In addition, such companies aim at improving the welfare of the communities and all other stakeholders involved in the business. By adopting CSR policies, companies improve their image, and this creates a compelling perception from all the stakeholders. Therefore, CSR is an essential aspect for all organizations (Urip, 2010).
McDonalds’ policy on CSR
McDonalds UAE has practiced CSR in all its activities to ensure it safeguards the welfare of its employees, consumers and all other stakeholders. The company has established various programs to give back to the communities in the regions it operates in by involving in philanthropic activities. The company has also sponsored youth sports and other events which inspire people in the country.
What McDonalds does to carry out their policy
One of the programs which McDonalds UAE has established is to create a partnership with Beit Al Khair Society. This organization takes care of orphans in the country. Beit Al Khair Society was established in 1989 to conduct humanitarian activities in the United Arabs Emirates.
The organization aims at helping the poor and the vulnerable. For example, the organization supports widows, the sick, disabled people, low income families, and people with special needs. The organizations have established partnerships with several; philanthropic organizations in the UAE (McDonalds Arabia, 2012).
McDonalds targeted the orphaned children in UAE by creating a partnership with the Beit Al Khair Society. This program has improved the welfare of many orphans in the country. McDonalds has financed the activities of the organization, and this has been of significant help to the orphans.
For example, McDonalds assisted Beit Al Khair Society to sell children’s books in all restaurants all over the country. There were four published books that were sold by the company across the country through the restaurants of the company. The proceeds gained from the sale of the four books were used in financing the activities of Beit Al Khair Society. The books were written in Arabic and English, and they appealed to children because they had colorful illustrations.
They also had simple stories for children to understand. In addition, the books covered themes in education. Some of the themes included are helping the needy people in the society, balancing life, helping the communities and the significance of education. This campaign was successful, and AED 200,000 was generated. This money was used in improving the standards of the orphaned children in the Beit Al Khair Society (McDonalds Arabia, 2012).
McDonalds established the theme “educate a Child, Support Another”. Through this program, McDonalds donated AED 100,000 to support the children at Beit Al Khair Society. Therefore, the donations were used in educating children at the organization. The main topics of educating children were the importance of sports, eating balanced diets, respect to the elders and environmental preservation (McDonalds Arabia, 2012).
Apart from supporting the orphans, McDonalds has applied other strategies to support the communities in UAE. One of the programs is encouraging people to improve the environment. The company has supported campaigns of green environment. Through these campaigns, the company helps communities protect the environment. The company supports programs alleviate environmental pollution in the country (McDonalds Arabia, 2012).
Agreement with the policies of McDonalds concerning CSR
I agree with the policies established by the McDonalds UAE. Through the CSR policies, the company has helped the orphaned children in the country. The policy was established to help orphaned children get a good education; learn moral value and ethical behavior. This program has improved the welfare of the orphaned children, and it is an excellent move by the company to support the communities in UAE.
However, I tend to disagree with the CSR policies of McDonalds. The company has been accused of selling products which have high cholesterol content. The hamburgers sold by the company are said to fatten people, and this may cause a health risk.
Therefore, the company should aim at improving the quality of its products to reduce the health risk for the consumers. This will help the company improve the welfare of the people i9n the country. The act of helping the orphans is a pleasurable one, but the company should improve on its activities so that it can achieve success in enhancing the lives of the people in the country.
Reflection
I have learnt that CSR is a fundamental activity that should be embraced by all organizations. I have learned that CSR improves the image of a company because it is a form of thanks giving to the community. Corporate social responsibility is a collective responsibility of the company. However, it is determined by the community in which the company is located. Country policies also determine the success of corporate activities of any given firm.
There are a number of theories which helps in explaining corporate social responsibility policies of companies. These include relational or universality, utilitarian and managerial theories. Utilitarian theories focus on how social activities can be used in achieving economic gains for a corporation. Universality theories explain how social investment can be made in the competitive business environments. Social investment is a major part of CSR activities (Ismail, 2009).
Conclusion
Corporate social responsibility is the process through which companies improve the lives of the communities around their areas of operation. Through CSR, companies help the needy people, improve the environment and create better structure for the welfare of the people in the community.
As such, McDonalds has established strategies to help the communities in UAE by financing orphans. This has been achieved by establishing partnerships with NGOs and other organization in the country. McDonalds has developed strategies to improve the welfare of the orphans by donating finances to educate orphaned children. However, the company should improve its CSR because there are many ethical questions being asked to concern the quality of products sold by the company.
References
Hill, C. & Gareth, J. (2011). Essentials of Strategic Management. South-Western Pub.
It would be impossible to describe the previous century without mentioning McDonald’s. Its golden arches sign is as ubiquitous as other symbols of modernity. Since its early beginnings many decades ago this company has now become a conglomerate that spans the globe. In fact, in 1992 McDonald’s sold its 90 billionth burger and the company did not bother to count ever since (Shamsie, 2009, p.25). But in 2002 the corporate leaders of this company came to realize that things can change so quickly.
In that same year, McDonald’s posted its first quarterly loss amounting to $343.8 million and that is not a small amount (Shamsie, 2009, p.25). One of the top managers explained the decline in just a few short words when he remarked “We were hip 15 years ago, but I think we lost that” (Shamsie, 2009, p.27).
In other words there was a time when McDonald’s was a dominant force in the fast-food industry but now a slowdown in the economy and a host of other problems worked in unison to help weaken its position. It is now time for the company to bounce back from defeat and be in the forefront of the fast-food industry once again.
This paper will attempt to outline an analysis of the various forces at work within and without. In order to develop a battle plan that will transform the organization from one that is behaving in a mediocre manner into a company that is on top of the world once again. It has to be pointed out that in recent years corporate leaders at this company tried their best to turn things around.
This study is just a small contribution to that endeavor. In this study, strategic management principles will be utilized and hopefully the final product can be added into the other strategic papers being compiled to solve McDonald’s woes.
The Problem
It was discovered by researchers that the company began to lower its standards when it decided to expand globally in the 1990s (Shamsie, 2009, p.24). As a result the head office stopped evaluating its franchises in terms of cleanliness, speed, and service (Shamsie, 2009, p.24).
Aside from negligence ,the company’s strategy to diversify and provide different types of products such as those that are not related to their main burger business was seen to have a negative effect on the company. This is made more problematic by the fact that McDonald’s decided to acquire non-burger fast-food chains that did not make money for the organization.
Diagnosis
As mentioned earlier the problems lie in the lack of focus, spreading itself too thin and acquiring non-burger chains that are losing money. In order to take a better grasp of the challenges that the company faces it would be best to use Porter’s Five Forces. In Porter’s 5 forces there is a concept called entry barriers (Hax, 2001, p.43).
If one will use this theoretical framework to understand the nature of competition in the fast-food industry then it will be discovered that there is a high barrier for entry when it comes to the development of a fast-food chain.
A huge capital expenditure is needed to compete at the level of McDonald’s. The company is relatively safe in this area, meaning it is not realistic for a competitor to suddenly challenge a company as established as McDonald’s and create a fast-food chain that will ultimately lead to the demise of McDonald’s.
Going back to Porter’s Five Forces, one will come to understand that the more urgent issue to resolve is not the entry of giant-sized competition but the threat of substitutes.
It is a significantly fragmented market and the company faces competition from restaurants that offer better tasting and more nutritious foods as well as from other fast-food outlets such as quick meals that can be found in supermarkets, convenience stores, and even vending machines (Shamsie, 2009, p.23).
The company does not face any significant problem when it comes to their suppliers. Aside from the fact that the prices of goods are increasing, McDonald’s can get better terms from their suppliers because of its size (Kincheloe, 2002, p.73).
It can demand competitive pricing for the raw materials needed such as meat, fruits and vegetables and it can be assured of a good deal from them. The suppliers do not have the capability to pressure McDonald’s to abide by their terms. The size of the company allows it to have leverage against suppliers.
However, even suppliers cannot control external forces. For example the rising prices of fuel will automatically increase the prices of the goods that they will deliver to McDonald’s and as a result the company will have to absorb these price increases.
While it is true that McDonald’s does not have to contend with major issues when it comes to their suppliers, it is the buyers that that they have to worry about because they have a wide range of competing products to choose from. There also quick meals being offered in supermarkets such as those that are made available through vending machines. The uniqueness of McDonald’s service is not that attractive anymore.
The fast, clean, and efficient service offered by the company can be easily matched by others. It does not even require a competitor to build a system similar to McDonald’s in order to succeed. Even small competitors can easily take a slice of their market share. If the buyers decide to patronize a medium-sized enterprise offering fast-food service then this can really hurt the company’s bottom-line.
Finally, McDonald’s has to worry about the competition. For instance, if rival firms will adopt the cost leadership strategy of McDonald’s then both firms will suffer significant losses. If a competitor is willing to go down this path then McDonald’s will have to find the competitive edge to stay profitable.
One way to do this is to improve their main product which is the hamburger. Therefore, the company does not have to continuously lower the price to match that of the competition. The company has to market their burgers as the best in terms of price and value.
Another way to analyze the company’s strengths, weaknesses and overall performance is to utilize internal analysis techniques such as the 7-S framework which stands for:
Shared Values – In the 7-S framework “shared values” is positioned in the centre, it is also known as core values or the central beliefs of the company;
Strategy – this is the plan that will guide the allocation of scarce resources to reach a particular goal;
Structure – this is how an organization is structured whether it is centralized, top-down, decentralized, a matrix, a network etc;
Systems – this talks about the procedures, processes and routines that must be observed in order to keep communications flowing and also to finish tasks that are of significance;
Staff – this is of course the number and type of personnel within the company;
Style – this is more about the culture of the organization and has a lot to do with management styles; and
Skills – the capabilities of the personnel and what it can achieve if taken together as a whole unit (McKinsey, 2009, p.1).
The use of the 7-S framework will reveal what the company stands for and why it was so successful for many decades. By utilizing this tool researchers will be able to know the history of the company and what was done in the past that was proven to be effective. In times of crisis it would be of great help to remember the old adage that if something is not broken then there is no need to fix it.
Data Collection
There is a need to collate data from thee fiscal years, from 2008 to 2010. This will include total revenue for the past three fiscal years. There is also the need to determine the gross profit, operating income or loss, net profit, total assets, total liabilities, and finally net tangible assets.
Aside from the financial side, researchers must also look into the type of products being offered and how did the customers responded to new and old products that were offered in the past three years. This information will provide an overview concerning the economic health of the company and what can be done in terms of developing a turnaround strategy.
After sending out researchers and coordinating with corporate leaders handling the company’s management information systems it was discovered that the company is in trouble if one will compare its performance in the 1990s. Yet, there is hope for this company. Nevertheless, the encouraging news about positive development in recent months is not enough to assuage the fears of the investors and shareholders.
It is true that the company is not yet near bankruptcy. Based on net income between fiscal year 2008 and 2010 it is not a surprise to find that the company is profitable by at least 4.3 billion but since 2008 the growth is minimal.
In fact in fiscal year 2008 the company reported that its earning was significantly lower compared to what it earned a year earlier. However, this is not the most disturbing sign for McDonald’s. The real source of concern can be found if one examines the assets of the company. In 2008 the net tangible assets was valued at an estimated $13.25 billion but in 2010 the value is only $11.15 billion.
Aside from that the company added more long-term debts. Thus, in 2010 total liabilities amounted to at least $15 billion. It is clear that the value of the company is declining. This is reflected by the price of the stock which in 2008 dropped very significantly.
Intervention and Change Management
The turnaround strategy that the company must use can be understood if one will study the generic strategies formulated by Porter. The first strategy that McDonald’s should utilize is the cost leadership strategy (Porter, p.35). For example, the company should focus more on their Dollar Menu, selling food products that are affordable and yet great tasting and promotes customer loyalty.
Going back to Porter’s generic strategies, the company it was discovered that the company attempted to use a differentiation strategy by creating diverse types of products. It must be made clear that this is not one of the best solutions to the company’s woes.
It seems that the company is not keen in applying a focus strategy because of the diversified product offerings as born out of previous decisions to push the company to different directions in response to the idea that mass marketing no longer works.
But is clear that a differentiation strategy is weakening the position of the company and that there is a need to refocus on what McDonald’s does best and it is none other than selling burgers.
Using principles gleaned from Porter’s Five Forces, Porter’s generic strategies and McKinsey’s 7-S Framework, researchers were able to have a big picture view of the company.
Its problems were traced to a misguided differentiation strategy, the lack of focus, negligence when it comes to customer service and overexpansion without the necessary corporate structure and team development needed to support such tremendous growth. When McDonald’s decided to expand globally in the 1990s the company headquarters found it difficult to monitor every single franchisee.
There is no way to grade these outlets in terms of service, speed and cleanliness. This explains the decline. The best way to solve this problem is to re-emphasize the fact that McDonald’s is not just offering food it is also offering a type of service. It is a fast-food chain and therefore there is a need to teach the value of cleanliness, speed and efficient service.
With regards to diversification, it may seem to be a good idea at first because it provides more choices for the customers. However, the quality of these products is suspect.
This simply means that McDonald’s is an expert in serving burgers and therefore find it difficult to immediately improve the quality of their new product offerings. It takes time to increase the company’s proficiency when it comes to dealing with the requirements necessary to serve non-burger products.
Aside from increasing the variety of their product offerings, McDonald’s also did something that forced the leaders to deal with so many things at the same time.
The company decided to acquire companies that are not related to the core expertise of the company. For example Chipotle Mexican Grill is very different from a McDonald’s store. It is time for the company to stop all these acquisitions and instead focus on improving the system and quality of service for each franchise registered under the golden arches brand.
Furthermore, McDonald’s cannot afford to launch any new product without going through a thorough and effective development process. Everything must be studied not only in the quality of the food but also on the packaging. The company must renew its commitment in terms of product development.
McDonald’s has to provide resources so that the company can focus on improving the way new products are studied and tested before releasing it to the market. The company cannot afford to offer anything that is half-baked. This lack of attention to detail will backfire on McDonald’s. The customers must not have any excuse to look for substitutes.
Organizational Implementation Plan
There is a need to implement a focus strategy. There is a need for the company to focus on its strength and that is their capability to sell burgers that are still in hot demand. It is time to sell the companies that they have acquired and focus only on the efficiency and quality of service provided by its restaurants all over the world.
There will be resistance to change. It must be expected to come from those who proposed that it is best for McDonald’s to buy non-burger fast-food chains. Resistance can also come from those who believed in diversification to the point of losing the company’s true identity and forgetting its vision to serve good tasting burgers at an affordable price.
Resistance can also come from franchise holders that are no longer interested in giving the best customer service possible and find it counterproductive to raise the standards of service and cleanliness to a very high level. The CEO as well as top corporate leaders of McDonald’s must invest in developing a monitoring system and a continuous training program especially when it comes to country managers responsible for maintaining strict quality standards for franchisees outside the United States.
Country managers must be targeted if the company is intending to change the image of the company on a global scale. This means that the company must invest in programs that will help understand the importance of culture.
The members of the board must lead the way when it comes to understanding differences in culture and the need to effectively managed multicultural teams. There must be a program that teaches top managers on how to deal with diversity within the organization.
The struggle in coping with the challenges of diversity is especially true for the expatriates that McDonald’s sent to handle their Asian and European business operations. The said training program should be instilled into the hearts and minds of the top-level managers who will be sent as expatriates to foreign countries. They must learn to respect, appreciate and manage diversity.
The company must emphasize the fact that marketing and other technical expertise is just part of the learning process; they must also learn the significance of understanding cultural differences. A brilliant leader will not go far if he or she does not have the necessary training to handle the shock that comes from dealing with a different culture.
The training program must teach top-level managers, middle-management and key leaders in the company to understand the meaning and importance of culture by being able to reflect on their own cultural bias and then use that to observe the cultural differences that exist around them. By doing so, they have achieved a level of awareness that will enable them to communicate effectively to team members in a multicultural team. As a result they are able to resolve conflict and enhance teamwork.
Evaluation
The success of the organizational implementation plan can only be seen if the company begins to increase revenue. This also means that the company’s assets are growing and not shrinking. This can be done if the company learns how to sell more burgers as opposed to other non-burger products.
This means that the company has understood the value of focusing on its strengths and not spread itself too thin. The keys to success would be an organization that prides itself on speed, cleanliness, efficiency and quality.
Progress can be monitored by constantly monitoring the value of the company not only by looking at the price of the company’s stock but also by having continuous access to financial information such as revenue, liabilities, and assets. The evaluation can only be completed if researchers are employed to determine the perspective of the buying public. There is a need to gauge customer loyalty and find out if they are happy with the company’s recent performance.
Finally, the planned change project can only be judged successful if the company has made an investment when it comes to developing multi-cultural teams that will help deal with cultural differences when it comes to franchisees located outside the United States.
The ability to manage cultural diversity will create an organization that is flexible to adapt to changes. More importantly it will allow the company to respond to customer needs.
It would be best for the current CEO to take a closer look at the proposed changes for the company. The gradual decline in company value for the past years is indicative of a deep-rooted problem that has to be dealt with as soon as possible. It has been revealed that the company spent a great deal of money acquiring non-performing assets.
It was also discovered that McDonald’s attempted to veer from its core business without great success. There is a need to revisit what it has done successfully in the past and try to learn from the time-tested strategies that made McDonald’s so successful that it continues to sell tens of millions of burgers on an annual basis.
References
Hax, A. (2001). The Delta Project: Discovering New Sources of Profitability in a Networked Economy. New York: Palgrave.
Kincheloe, J. (2002). The Sign of the Burger: McDonald’s and the Culture of Power. PA: Temple University Press.
McKinsey. (2011). 7-S Framework. 12Manage the Executive Fast Track. Web.
Porter, M. (1980). Competitive Strategy. New York: The Free Press.
Shamsie, J. (2009). Competitive Strategy. MI: Michigan State University Press.
McDonalds is the world’s biggest and well known fast feeder by sales. Its universal sales increased by over 5% last year as compared to 2010. It has also been rated as the sixth best brand in the world when matched to its yearly revenue. In terms of advertisement, it is touted as the 26th biggest advertiser in the United States of America.
It has numerous locations in over 119 nations that serve over 60 million people in a single day. However, over the years there has been a negative trend that has developed in the company. This essay points out that the brand image of the company, a vital element in consumer behavior, has continued to wane over the years. Obviously, there are some important elements that the company seems to be ignoring.
It is important for companies to match their revenues to the quality of services that they offer their clients. Consumer behavior is an important element to be considered and clients have to be respected and treated as number one stakeholders. Basing on this background, in as far as the revenue that this company gets is too good, its reputation is slowly dwindling.
Evidently, its brand image does not rhyme with its levels of sales. According to those people who relate closely to the company, the internal tracking procedures point that the company continues to perform poorly in terms of quality when compared to its competitors. This points out at the failure of the company to maintain its quality services with the increasing sales.
Consumer behavior is important in marketing especially towards the formulation of strategies needed to manage a company’s operations (Schiffman, 2009). It describes the well known attributes that customers hold towards certain offerings of a company, their orientation to the products and services, offered patterns of purchase as well as many other elements that determine purchasing and seen as essential towards the success of any company.
There are factors that have elevated McDonalds brand image to the level it is today. These are: The perception of consumers on the quality of food offered, sustainability practices, condition of stores, Value prices which are affordable to all, expansion of working hours to cater for the late night shoppers, creation of lounge areas, and the Creation of drive throughs. This seems to meet the varying needs of millions of clients.
The above factors are vital when studied under consumer behavior. Perhaps what practitioners and academicians in the field are to concern themselves with is whether revenue is important than brand image or not.
This arises out of the fact that while McDonald’s boasts of its high revenues; its brand image has continued to dwindle over the years. Basically, what is obvious is the fact that no company should pride itself over the high sales it makes while ignoring the feelings and needs of its customers. McDonald has to strive to do everything possible to ensure that its sales match its image.
Previously conducted programs of research suggest that many well performing organizations tend to lose their footing when they start to experience high sales than before. This is the case of McDonalds. Their strategies appear to change and in the end lose their image. What follows later is increase in client turnover rate leading to the failure of such organizations.
Works Cited
Schiffman, L. Consumer Behavior. London: Prentice Hall, 2009. Print.
Business crises are not issues that are new, rare or strange in the business world. However, business crises have been there over the years and the occurrences of such business crises incidents have been on increase for the last two decades. It is evident from the business world that the crises are witnessed across all business sectors and industries around the globe. In this connection, crises have been reported in business organizations involved in the provision of different services such as food, healthcare, transportation among others.
Similar trends of crises report is also common in those manufacturing companies that deal with production of goods such as vehicles and other consumer products. Undoubtedly, the rise of a crisis within an organization definitely implies that there would be some sort of negative impacts in the operation and performance of the organization.
The effects of crises are marked and displayed to the organization through losing the organization performance in its productivity, stock, profitability and incurring of costs through lawsuits. Crisis management, therefore, becomes a crucial factor of checking and controlling the performance of the organization by acting in a proactive and active way to prevent an event which has a potential likelihood of leading the company to financial crisis (Gareth and George, 45)
The McDonald’s, an organization involved in the delivery of a range of food services is not an exception in the list of organizations that have experienced or fallen in the traps of crises.
When the organization experienced a serious crisis, both from the internal environments as well as external ones, the corporation devised a number of ways of combating such crises through which the organization was able to survive and thrive in its competitive business operations.
In handling the organization’s crises that arise, the McDonald’s has employed the strategy of denial and/or avoidance to dealing with some of its complex issues that have plagued it. Focusing on this particular approach, there are certain incidents in which the McDonald’s executives declined to appear before some committees’ appointments.
In a polite manner, they have always issued apologies of their commitments, which were further accompanied by statements that give guidelines of the way forward. Instead of meeting with the members of public media in a face-to face environment, many a time they have directed them to visit their website for more information as it is depicted in many comments of non-McDonalds’.
The practice of denial is further augmented through refusing to accept their meeting negotiations and consensus in which there is a lot of criticism from the public. The company has relentless denied acceptance of a withdrawal decision of its product as result of its connection with a film produced almost at the end of the past century (Gareth and George, 346).
While avoiding the 2006 media comments and coverage, the organization had its restaurants across the globe labeled, but when well aware of the lack of enough information on the Super Size Me, they often claimed that they did not restrict any information to the clients, however, all that what was necessary for the clients to know had been made available. The use of executives’ convincing messages to encounter the media messages is a clear way that has been employed in this Corporation.
The message of Chief executive officer has severally showed the need for better communication method on the issues of nutrition and health. By doing so, the organization clears away if any false information is released by the media groups and thereby convinces the public, its consumers and shareholders of their direction or goal on the particular matter (Gareth and George, 243).
Apart from the above approach of denial and avoidance, the organization has also employed the method of information sharing and gathering. Here, the organization initiated a blogging system. The blogging system offered means for open talk and dialogues. It is through this program that the organization has been able to deal with most of the issues concerning the Corporation’s accountability and responsibilities to the society.
It is by this means that the organization has released numerous messages and information of criticism against the health providers who appear to attack the organization on claims of providing unhealthy foods to the consumers. The organization has further worked toward crisis management through the use of false promising of actions which will never be implemented.
When the organization is faced with the problem of using sub-standards product in their food preparations, the Corporation promises to change some of these with quality ones. However, when the company promised to use quality oils, it helped the organization to circumvent the issues of crisis with the FDA, but the actual use of quality oils never got implemented, which means that it continued to prepare its foods with trans oils that are of poor quality.
Works Cited
Gareth Jones, Jennifer George: Contemporary Management. New York: McGraw-Hill. Print.