Food and Beverage Management: McDonalds and Burger King - Assignment Example

Strategy, Business Information and Analysis The fast food industry has undergone a series of changes in response to the changing environment. The changing customer preferences have forced existing fast food companies to cater more appropriate food offerings. Sinatra, Punker and Sears (2006, p. 213) describe the changing expectations of the fast food consumer. ‘Customers are not going to quit McDonald’s or Burger King or Wendy’s. But they are beginning to request more healthful options… Americans spend upward of $32 billion annually on all types of natural and organic products… organic food is now a billion dollar a year business.’ The authors describe the fast food industry as being valued at $110 billion and an accepted part of western cultures. The nature of competition in the fast food industry has been changing. The fast food industry is typified by speedy delivery and consistent output at reasonable prices. The industry works on market segmentation and product differentiation strategies. For instance, McDonald’s originally targeted lunch and late-snack customers and changed to breakfast offerings in some outlets to target a wider market segment. Pizza Hut offers the Vegetarian Pizza in an attempt to cater to a specific market segment and also differentiate the product from other fast food offerings (Michman & Mazze, 1998, p. 48). Grant (2002, p. 263) points out the fact that franchising and standardized operations, pioneered by McDonald’s, have resulted in the sector becoming dominated by a few major corporations. Industry trend In the 70’s, General Foods and Levers owned restaurant chains and Burger King was part of the Pilsbury empire. The suppliers of fast food industry raw material were also competition for the industry. The industry saw a move for smaller players to become part of larger conglomerates to gain competitive advantage and internationalization to counter the limited growth of the local markets. Mergers and acquisitions changed the geographic scope of the industry. Pepsico took over Pizza Hut, Kentucky Fried Chicken and Taco Bell to become the world’s largest conglomerate. This has given a boost to the multinational presence of previously local names and changed the type of products on offer. The move to become international brands was followed by an attempt to cater to local tastes with products that are ‘hybrid forms that are neither completely local, national or global’ (Wilk, 2006, p. 20). Gordon-Davis (2004, p. 217) points out the changing taste preferences of the fast-food customer. The customer is now more conscious about healthy food choices and wants to be informed about the contents of the food being consumed. Many fast food outlets use icons to signify fat and meat content. There is a conscious move towards natural foods and recipes that include better cooking styles. The trend is towards expecting and preferring outlets that offer the premise of healthy eating with smaller serving possibilities and speedy service rather than that of only good taste. The major strategic groups in this industry are the customer whose preferences define the products and service; multinational conglomerates with wide fast food offering; alternate food options that offer fresh and healthy food with the desired ambience; local fast food competitors who cater to local tastes; supplier groups that determine stock availability at the right price. The strategic group a company is a part of is a factor that affects profitability. The industry may be considered to be at the mature stage of its life cycle. Weitz and Wensley (2002, p. 470) note that In the maturity stage, the soft- and hardware ingredients in the service have been fully developed, and the standardization of key components and features takes place… it is this standardization… which is the basis for global expansion of the service. Organizations like McDonald’s have set outlet management procedures while Pizza Hut offers service within a specified time frame. Processes and products are standardized. The changes in customer tastes and commentary by medical practitioners are directing changes in products offered by fast food companies. Innovations in response to market demand are allowing the fast food industry to stave off the decline stage. A SWOT analysis (Jones, 2006, p. 97) of the industry reveals Strengths: Well-developed business model with international and local presence, market segmentation accurately drawn up, strong global brand image, predictably good output from all outlets, efficient and effective process orientation and management, availability of capital to invest in new product development, speed and efficiency, responsiveness to customer, association with major global brands, local acceptance, location of outlets. Weaknesses: Reported as being ‘bad for health’, fast food is labeled ‘junk food’, brand association with obesity, heart disease, inability to capture local flavor, one more choice among many, shift to health ‘niche’ with long standing multiple brands with high market share, international expansion without sufficient knowledge of local cultures and tastes. Opportunities: Customer demands health-oriented offerings with basic processes that allow for speed, efficiency and predictability of taste, market segmentation to include health-conscious patron with low-fat, vegan and similar items, introduction of health drinks, incorporate healthier cooking and storing processes, possibility of acquiring global brands to increase ‘health’ brand presence, international expansion on the strength of global brand. Threats: Existence of brands in ‘healthful’ niche, rejection of ‘healthy’ image, local fast foods better able to cater to taste and health requirements, high market share brands in ‘health’ niche deter entry of new brands in the market, rival fast food companies planning similar strategic moves, insufficient in-house skills to design and cater to health market, younger generation more aware of good food, product can be easily replicated by competition, international expansion thwarted by local competition that is better able to cater to customer preferences and tastes. Porter (2008) describes a model of five factors that determine the capability to compete and the profitability of industries. Competition for profits goes beyond established industry rivals to include four other competitive forces as well: customers, suppliers, potential entrants, and substitute products. The extended rivalry that results from all five forces defines an industry’s structure and shapes the nature of competitive interaction within an industry. Industry Rivals The industry rivals in the international arena consist of a variety of players within the industry with differentiated product offerings and business scope. Organizations like McDonalds have differentiated their offering and ‘embedded the idea of time savings and ease of use into every particle of their products and processes’ (Roberts, 2008, p. 50). The fast food outlets change the menu on offer to attract the local consumer. McDonald’s has a tie-up with Fisher-Price Toys to cater to young customers. (Reiter, 1996, p. 56). Service and product differentiation act as effective means to attract customers to the outlets. A fast food company may choose the strategy of ‘product proliferation’ by catering to all types of customer niches. This is an effective means to counter the possible entry of a new competitor (Hill & Jones, 2009, p. 206). McDonald’s, Wendy’s and Pizza Hut offer different product choices for the same market niche. Customer The customers are the driving force for the fast-food industry’s products, location, pricing and quality. Davis (2008, p. 243) highlights the presence of location and interior ambience as factors that make customers prefer an outlet. Customers are cost-conscious and the pricing is determined by competitive effort. The service delivery process has a direct impact on food quality, speed and overall image and the courtesy extended by the staff is important though secondary to the promise of efficiency of the outlet. Klopper (2006, p. 34) states that high bargaining power in the hands of the buyer forces the suppliers to be cautious about prices and willing to expand the product or services on offer. This is because of the presence of large number of competing suppliers with similar products to satisfy customer needs. Supplier Saloner, Shepard and Padolney (2008, p. 250) highlight the factors that influence the power of the supplying agency. Individual players in the business have low negotiating power among local and international food suppliers as opposed to multinational chains that can direct prices and delivery schedules. Location, product quality and the absence of viable substitutes are factors that affect the buyer’s willingness to consider competitive supplier offers. Fragmentation of suppliers and the relative cost advantage dyad impacts shifting to different suppliers and determine the bargaining capacity of the agency. The relative lack of difference in cost and quality deter movement of business to new suppliers. (Golis, Mooney & Richardson, 2009, p. 19-20). Threat of potential entrants Potential entrants in the fast food industry are those players who can attract a customer to healthier or better food options within or without a fast food framework. Salad bars and neighborhood delis are other alternatives. Healthy fast food products can compete in the market by catering to the need for speed and health (Walker 2006, p. 95). These new entrants are better equipped to adapt the cooking styles and ingredients to be appropriate to the health conscious patron. Klopper (2006, p. 33) maintains that ‘substitutes cause greater competition because they give a choice to consumers.’ As fast food companies set up shop in diverse geographical areas, the threat of local players who can ably provide more suitable local fast-food alternatives. Jacob (2003, p. 146) describes a situation in Spain where the local fast food company made it difficult for McDonald’s to gain customer acceptance. Pans, the local company, ‘introduced Spanish specialities like the long sandwich and other forms of tapas as part of their fast food offering with success.’ Knowledge of customer preferences and tastes allowed the company to grab market share by providing popular local fare alongside fast food items. Threat of substitute products An entrant may bring substitute products by entering with a new technology that allows for nutritious pre-packed ready to eat meals, frozen convenience foods, local fast food products that are more suited to customer palates, full menu offers from traditional food outlets are other viable alternatives to the hungry patron and individual fast food owners. Even the local grocers provide healthy fast foods that can be consumed on the go (Roberts, 2008, p. 50). Future of the fast food industry The fast food industry will find itself maintaining the fast food with good health image while it continues to cater to the traditional client base. Ageing of the customer base will find greater demand for healthy meals. The fast food industry players will soon feel the need to identify customer segments beyond the current set as the fight for market share expands to include dominant players in the health food sector. Market niches that provide specialized services that allow care for toddlers while the parents have a meal, catering to young children’s nutritional needs with efficiency and reliability are examples of possible segments that remain untapped. The existing processes of the fast food industry may be utilized to continue to serve customer expectations as the potential customer base is widened. Customers with specific dietary requirements like low salt or sugar may be provided healthy alternatives. The ageing population has changing tastes and portion requirements that are distinct from those of the younger customers. The menus will need to cater to a more diverse customer set while maintaining the basic qualities of speed and efficiency. Michman and Mazze (1998, p. 37-39) stress upon the need for ‘management vision’ and a ‘proactive rather than a reactive management style’ to take the industry into the future. The authors foresee ‘significant development of foreign markets’ and the diversification of menus to include international fare. Future birth rates are expected to decline and the fast-food business has realized the need to cater to young adults by changing internal décor to allow for greater privacy at outlets. The authors foresee an increased intensity in ‘mobile food wars’ with companies feeling the need to cater to densely populated locations. Harris (2003, p. 106) sees the possibility of fast food companies serving in various portion-sizes to suit an ageing population. Special menu items catering to food restrictions brought about by diabetes and similar diseases will be introduced. Interior designs will cater to failing vision and changing physical needs. Compare and contrast of the 5 forces model with the ‘resource based view’ The five forces model provides a framework to understand the changing external forces in the environment of an industry while the resource based view considers the internal resources that can help a firm to acquire a competitive advantage. The former accepts the presence of similar approaches by the players in an industry while the latter looks for uniqueness. Yet, these are two perspectives that provide a view to understand the factors affecting and aiding the company in a bid to survive and make profits. The two models may be viewed in conjunction to enable a holistic view of the context of the industry and the firm. Comparison of the two models Grant (2002, p. 133-134) explains the resource based view as ‘the idea that the firm is essentially a pool of essential resources and capabilities, and that these resources and capabilities are the primary determinants of its strategy.’ The importance of this model lies in the fact that the ever-changing market place and technological advancement make the external environment too volatile to predict and cater to. The author concurs that a ‘definition of the firm in terms of what it is capable of doing may offer a more durable basis for strategy than a definition based on the needs that the business seeks to satisfy.’ Levitt is cited as explaining that a company that defines itself broadly but lacks the capability to fulfill the definition will find itself performing poorly. A company may choose to consider itself as catering to the needs of all customers in an industry. This can be disastrous since different customer segments call for distinct capabilities. Considering the case of the fast food industry, if the players attempt to define the business as competing in the hospitality industry, there is a wide section of customer tastes to be catered to. The breadth of the menu, flexibility in ordering to suit individual tastes, provision of suitable ambience and the manner of treating customers vary according to the segment being attracted. The fast food industry caters to a narrow segment and will not be in a position to fulfill the demands of the definition. Companies that have strategically exploited their internal capabilities have successfully adapted to changing external needs. Zook (2007) describes the tendency of companies to view a need to strengthen their core business when the core has ceased to add value. The desire to move beyond the core business must consider the ability to ‘mine new value close to home; assets already in hand but peripheral to the core offer up the richest new cores.’ Lowson (2002, p. 48) explains that ‘capabilities reflect an organization’s ability to use its competencies. The resource based view focuses on the ‘individual resources, competencies and capabilities of the organization, rather than on the strategies that are common to all companies in the industry.’ In the context of the fast food industry, a resource based view would focus on the internal process perfection that is achieved and may be utilized in areas that demand similar streamlined processes for business success. The intent to redefine itself would lead to choices that consider the brand strength and image, advantage of location and internal capability among its inherent strengths. Grimm, Lee and Smith (2006, p. 69- 71) opine that the value of a resource lies in its ability to help the company ‘exploit specific opportunities or protect itself against key threats. Value is firm-specific, as a firm’s relationship to its environment is unique.’ The availability of specialized talent or internal processes defined for lasting value may be considered to be the resources that can be utilized. The rarity of the resource determines its strategic importance. In the context of the fast food industry, the internal processes are individualistic in design but work towards a common objective of speed and output. A specific strategy may be considered to be a resource but ceases to lose rarity as it is imitated by competition. The authors quote Barney’s explanation of what makes a resource difficult to imitate. ‘History, causal ambiguity and social complexity.’ The uniqueness of a brand due to its long run in the market provides it a history that cannot be rivaled. Causal ambiguity refers to the uniqueness of organizational processes and their association with success that makes it difficult for competition to understand and replicate in their own context. Social complexity refers to the open presence of a culture that fosters creativity or innovativeness as a part of the overall strategy may be an aspect that competitors find difficult to replicate within their own organizations. The five forces model describes the various external factors that determine the industry or business capability to profitably conduct a venture. The model describes the factors and lays out strategic initiatives that help companies to find their way in the competitive environment. Faulkner (2002, p. 5) explains that the five forces exist in varying strengths and ‘the corporate strategist’s goal is to find a position in the industry where his or her company can best defend itself against these forces.’ Focusing on the five forces ensures that the company continuously looks externally to determine its strategy. Lowson (2002, p. 47) explains the inherent paths a market player may choose to attain competitive advantage, overall cost leadership (traditionally based on economies of scale), differentiation (offering a product or service perceived in the industry as unique) and focus (using the low cost or differentiation in a niche or narrow segment). The five forces go on to ascertain competitive advantage on the basis of the company’s comparison and area of strength. A firm may be strong in relation to the market by view of the monopolistic nature of business but remains vulnerable on the remaining forces of the model. Dinsmore and Cabanis-Brewin (p. 272) underline the capacity of the five forces model in identifying ‘areas in which they (firms) want to compete.’ The model is further strengthened by the development of the concept of value chain analysis. A comparison of the two models reveals certain similarities: Both models search for the value that allows the business to gain competitive advantage The differentiating factor that makes a firm stand apart from the rest is believed to be the underlying cause for profit Both models define the end customer or market as the target of all value creation Both models are inherently demanding of historical data and a high degree of detailed analysis The models come with numerous frameworks that may be applied but lead to confusion in the user (Enders, 2004, p. 2) The resource based view considers only the internal value adding possibilities while the five forces model considers only the external environment. To that extent, each one offers a unilateral view of business. Dinsmore and Cabanis-Brewin (2006, p. 272) believe that the industry view provided by the five forces model ‘provides a good description of market conditions’ but does not provide information on how to go about increasing profitability. The resource based view provides a perspective of the VRIO framework (valuable, rare, inimitable, organization focus) for evaluating the resources available. Reputation, knowledge, technological knowhow are some examples of internal strengths that are unique to a company. There is no practical proof of the veracity of either of these approaches. Contrasting the models Grimm, Lee and Smith (2006, p.69) contrast the five forces model and the resource based view by highlighting the focus of the two. The five forces model provides an industry with an external focus while the resource based view considers the internal resources and capabilities of the firm. Rugman and Verbeke (2005, p. 319) highlight the fact that the five forces model considers the presence of a relationship between industry structure and individual firm behavior. The five forces consider the four components of the SWOT (Strength, Weakness, Opportunities and Threats) analysis. Actions relating to barriers to competition and customer attrition are as much a part of competing firms desirous of holding the market with the industry as they are a part of the behavior of the industry as a whole. The resource based view focuses on the strength and weakness components of the SWOT analysis and does not consider the changing environment. It works on the identification of competencies and practices that cannot be substituted or imitated by competition to gain the same advantage. When applied to an industry, the resource based view considers resources common to industry players without being accessible to outsiders. The authors suggest a combination of the two models to provide a holistic view with the justification The development of a dynamic capability by a firm therefore needs to build incrementally upon existing internal processes. Here, external forces must be taken into account, but these result themselves from paths along which the firm has travelled in the past. Grant (2002, p. 1136) points out that the five forces framework suggests that ‘industry attractiveness derives from the ownership of resources… lack of rivalry… from the dominance of a single firm or a few firms.’ This is a situation arising out of joint ownership of resources like technology or specific facilities. The resource based view, on the other hand, focuses on the uniqueness of each firm in the industry and suggests that ‘profitability is not through doing the same as other firms, but rather through exploiting differences.’ The strategy that derives from this view focuses on what it does differently from other market players and gaining a competitive advantage out of it. The resource view looks at unique internal strengths for providing business advantage while the five forces model accepts the similarity in approach of the players in an industry. The resource based view considers the strategic advantage of the firm while the five forces model applies to industry and may be applied to understand the context of an individual firm. Innovativeness as a key competitive advantage is recognized by the resource based view. Hansen and Birkinshaw (2007) highlight the importance of innovation and sharp implementation practices to make the ideas reach the market as a firm’s strategic resource. Implementation calls for the presence of an innovation value chain in an organization that ‘involves idea generation, idea development and the diffusion of developed concepts.’ This important business differentiator is not considered by the five forces model. An industry may choose to target a wider market segment by becoming something to everybody on the strength of existing capabilities. Though this is not recommended by the five forces model, the resource focus enables this approach. Conclusion The two models may be considered complementary to each other as one focuses on internal factors while the other focuses on the external environment. Faulkner and Campbell (2006, p. 256-257) quote Wernerfelt’s opinion that ‘external forces at a business unit remain important but the resource based view of the firm reminds us that we cannot afford to ignore internal factors.’ The authors put forth the thought that a combination of Porter’s work on the five forces model and the value chain, we get a perspective that the aim of the industry is make an attempt ‘to maximize the added value that it can appropriate by providing benefits at each stage of the value chain that the customer is prepared to pay more for than they cost the firm to provide.’ The application of both these theories to the fast food industry can lead to the thought the each firm can continue to get the advantages of their internal competencies with the process and technological perfection that has been achieved over the years as a part of a resource based strategy. 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