Entering New Markets: McDonald’s International Strategy

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Table of Contents

Introduction
Conceptual Framework
McDonald’s Expansion Strategy
Sales Strategies
Conclusion
References

Introduction

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.

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