Strategic Position of McDonalds in the Fast Food Industry - Essay Example

A Report on the Strategic Position of McDonald’s in the Fast Food Industry Introduction This present paper is a report prepared from the standpoint of a management consultant contracted by McDonald’s Board of Directors. The report seeks to present an assessment of the strategic position of McDonald’s within the fast food industry. The report will begin with a brief background preview of McDonald’s and then a critical analysis of the business environment as well as the analysis of the competencies and resources of the company. Thirdly, the report will state the sources of the company’s competitive advantages that have been previously identified. In the fourth section, the report will present strategic recommendations that will enable the company to take advantage of the opportunities identified and shield it from the threats that have also been identified. Table of Contents 1.0 McDonald’s Background information 3 2.0 Business environment analysis 3 2.1 The Porter’s Five Forces 3 2.2 PEST analysis 6 3.0 Internal environment 8 4.0 Sources of the firms competitive advantage 9 5.0 Strategic recommendations 10 6.0 Conclusion 12 References 14 Daniels, S. (2012). Superfood Recipes: Healthy Eats. U.S Internet Niche Publishers 14 Harris, P. (2009). None of Us is As Good As All of Us: How McDonalds Prospers by Embracing Inclusion and Diversity. U.S: Wiley Publishers 15 Light, L. and Kiddon, J. (2009). Six Rules for Brand Revitalization: Learn How Companies Like McDonald Can Re-Energize Their Brands. U.S: Pearson Prentice Hall 15 Mattern, J. (2011). Ray Kroc: McDonalds Restaurants Builder (Food Dudes). U.S: Checkerboard Library 15 1.0 McDonald’s Background information According to Derdak and Pederson (2004), McDonald’s Corporation is the leading hamburger fast food restaurant chain in the world. Maurice McDonald and Richard McDonald initially started the company in 1940 as a barbecue restaurant but Ray Kroc later brought it in 1995; Kroc was initially a franchise agent of the restaurant and he is the one who initiated the global expansion of the restaurant chain. Presently the McDonald’s Corporations has its own restaurants that it manages and there are licensed franchisees and affiliates that operate under the corporation’s portfolio. Therefore, the net income of the company is attributed to sales from its own restaurants, licensing fees from franchisees, and royalties. The present headquarters of the corporation are in Oak Brook, Illinois in the United States, and it has presence in over thirty four thousand locations across the world. Among the popular dishes served at the McDonald’s restaurants include French fries, hamburger, Chicken, coffee, milk shakes, soft drinks, salads and desserts. 2.0 Business environment analysis Under this section, the report will analyse the business environment under which McDonald’s operates. The analysis will apply the use of two critical analytical tools that includes that Porter’s Five Forces and the PEST analysis. 2.1 The Porter’s Five Forces Porter (1980) in his studies stated that there are five critical forces that exist in every industry or business environment, which affect a business organisation. Threat of new entrants According to Brown et al. (2011), if an industry is open and has less hindrance for new businesses that are venturing into the industry, then the survival of existing businesses is threatened by these new businesses. According to Aydrose (2012), the threat of new entrance into the fast food industry is high because of low capital requirement and less legal hindrances. For example, other fast food restaurants chains such as Subway, Burger King, and Wimpy are continually expanding to markets initially dominated by McDonald’s while at the same time the number of other small fast food restaurants is increasing drastically (Aydrose, 2012). McDonald’s is dealing with this threat by continually opening up new branches in other regions across the world as well as offering franchises to retailers in different parts of the World. Threat of competition According to Aydrose (2012), the threat of competition in the fast food industry is high because of the presence of other restaurants chains that have equally wide branch network and strong financial capabilities, which can enable them to conduct effective marketing promotions. According to Harris (2009), McDonald’s major competitors are Burger King and YumBrand Inc; however, McDonald’s tames the competition by continually re-inventing their menu and dishes to suit local taste in order to have a competitive advantage. Threat of substitutes Aydrose (2012) stated that the threat of substitutes is considerable low this is because the fast food industry deals in similar products. Moreover, McDonald’s is able to shield off any threat of substitute since it offers a wide variety of dishes that can be themed either for entertainment or easting. Secondly, McDonald’s develops dishes that fit with the local taste in every market that it operates (Aydrose, 2012). Power of suppliers According to De Toni and Tonchia (2003), large retail chains usually have a strong bargaining power over their suppliers and this is mainly because of their bulk purchases. However, in certain circumstances some suppliers owe their business existence to the business provided by such larger retail chains. This therefore, means that McDonald’s is able to obtain their supplies at low prices from their suppliers and then sell their products at highly competitive prices. Power of buyers Equally, De Toni and Tonchia (2003) stated that when a buyer only makes small purchases then he or she is not able to yield any significant power over the retailers. Therefore, the buyers/ customers of McDonald’s have a low bargaining power because of their usual small purchases, and because McDonald’s offer fewer chances for their customers to switch since they have a superior brand image (Aydrose, 2012),. 2.2 PEST analysis In the writings by Krajewski et al. (2009), it is stated that the PEST analysis aids in the identification of factors that influence supply, demand, cost, and even the performance of businesses within an industry. Political Walters and Rainbird (2007) noted that the political tone/ climate within a country are part of the political factors that also include the legislations enacted by the country’s lawmakers. Additionally, Yip (2004) noted that political factors have the potential of creating threats and opportunities for a business. Among the political factors affecting McDonald’s is minimum wage regulations applied in different countries, fast food and more so fast food advertising regulations in the European region, and tax regulations that exists in the different countries where it operates (Mattern, 2011). Economical Trent (2007) stated that economical factors mainly determine the availability of capital for operational use by a business and even the demand for products within the market. However, Mattern (2011) noted that since the end of the past economic recession in the early part of 2010, the global economic factors have been positive and hence the reason why in the past financial year McDonald’s was able to post a net income of more than GBP 5 billion. However, it is vital to note that in other countries such as Pakistan where McDonald’s operates the economic factors have not been positive as such thereby contributing to low sales in such areas (Mattern, 2011). Social The key social factor that is affecting the business of McDonald’s is the social change on the consumption of fast foods. Many people and in particular, Daniels (2012) advocate against the consumption of fast food because of health reasons, and this social change has lead to decrease in the consumption of fast food and in particular, junk foods globally thereby affecting the industry significantly. However, as a counter-attack measure against this social change McDonald’s has introduced into their menu diet drinks and health foods that include vegetarian dishes, thereby catering for those people against junk foods, which have high fat content (Mattern, 2011). Technology Krajewski et al. (2009) noted that implementation of technology determines the extent of competitiveness of a business and even the operational cost of running the business. McDonald’s has adopted the use of technology in its food production process and this has contributed to fast service delivery within the restaurants. Secondly, the cash desks in the restaurants are automated in order to avoid loss of cash and to improve efficiency (Mattern, 2011). 3.0 Internal environment According to Acur and Bititci (2004), in order to analyze the competencies and resources of a business organisation, it is of essence to analyze its internal environment using a tool such as the Resources Based View. Kaplan and Norton (2008) described the resource-based view as a strategic management tool that is used to identify a business organisation’s strategic resources that gives it competitive advantage against other rivals in the market. These strategic resources are mainly selected because of their ability to give the business organisation sustainable growth when they are applied effectively. Kaplan and Norton (2008) further stated that among the characteristics of strategic resources include the fact that they are valuable to the business organisation. Secondly, they are rare and hence had to find in other organisations. Thirdly, they are difficult to imitate meaning that other firms cannot acquire or control them and fourthly, they are difficult to substitute. According to Mattern (2011), McDonald’s strategic resources in relation to resources-based view include its’ huge market share or wide branch network that stands at 19% and it is unrivalled by other restaurant chains. This strategic resource of a wide branch network enables it to have a stronger bargaining power over their suppliers and through this resource the business organisation is able to generate a lot of revenue. The second strategic resource is the strong reputation and brand image that has given the restaurant chain international fame and it is easily identifiable by majority of citizens in the World (The New York Times, 2012). It is important to note that this strategic resource is supported by the company’s effective marketing campaigns. Thirdly, the New York Times (2012) McDonald’s owns the Hamburger University, which is among the most reputable training institutions in the United States. This strategic resource enable the restaurant chain to provide its employees with additional training thus making them more valuable and competitive. Besides identifying the competencies and resources of McDonald’s it is also critical to state the weakness or problems facing McDonald that can affect its profitability and performance. According to Mattern (2011), one of the weaknesses of McDonald’s is that it is usually linked with the image of unhealthy foods this is because its main speciality is junk foods that have been termed as unhealthy. Mattern (2011) stated that the second weakness of the company is that it is continually losing customers due to fierce competition from other fast foods chains such as Burger King, Wimpy, and Subway. Thirdly, the company usually faces high employee turnover mainly because it offers low wage rates. Fourthly, franchisees are increasingly being unpleased with the continual increase of fees and they are opting to sell their businesses because of increased expenses (Mattern, 2011). 4.0 Sources of the firms competitive advantage This report has conducted the business and internal environment analysis of McDonald’s and it was noted that presently McDonald’s is the leading fast food restaurant chain in the world with the largest market share, and this means that it has certain sources of competitive advantages which has enabled it to acquire and retain its current position within the market. According to Smith (2007), one of the sources of competitive advantages is cost leadership, which is described as a strategy used by businesses in order to lower their cost of operations. According to Porter (1980), this strategy mainly enables a business organisation to operate at a lower cost unlike its competitors and hence it is able to compete favourably in the market by offering low quality products at a cheaper price. It is important to note that McDonald’s also utilises the differentiation leadership strategy as a source of competitive advantage because it is able to prepare its dishes with different spices and ingredients that makes them unique and different from those offered by other restaurants. However, it is evident that the restaurant chain largely focuses on the cost leadership strategy. One of the strategies used by McDonald’s to gain cost leadership arises from the fact that it has a stronger barging power over it suppliers, meaning that it is able to get its supplies at a cheaper rate compared to other rival restaurant chains, this is according to Porter (1980). This strategically places McDonald’s at an advantageous position or a step forward in the competition since it is able to sell quality dishes at lower prices (Porter, 1980). Secondly, in the PEST analysis it was noted that McDonald’s applies the use of technology in its food production process and this further lowers the cost of operations thereby giving McDonald’s leadership in the industry competition in regards to cost. Despite lowering cost at the restaurants, the use of technology also increases efficiency within the restaurants (Porter, 1980). 5.0 Strategic recommendations Pertaining to the weaknesses that were established in the internal analysis, and the possible threats established under the environmental analysis the report will apply strategic recommendations or options that are presented in the Ansoff matrix, which is illustrated in the image below. Figure 1: The Ansoff Matrix Source: /www.tutor2u.net/business/images/Ansoff Matrix Ansoff (1975) in his studies stated that the business organisations usually have four key strategic options when seeking to utilise their opportunities and eradicate their threats and these options include, market penetration, market development, product development, and diversification. Out of the four strategic options, this report will recommend the implementation of only two options that include market penetration and product development. In respect to market penetration, it is recommended that McDonald’s should set up restaurants and/ or issue franchises to potential businesses in areas where the company has not ventured into especially in developing and under developed nations. This strategy is recommended in order to deal with the threat of competition and new entrants into the market. This strategy will further increase the overall market share of the company as well as its profitability and it could potentially acquire monopoly in the fast food industry. It is of essence to note that this strategy will exploit the opportunity of increased market for fast food products and it will eradicate threats from continual increase in the number of competitors within the industry. As for product development, it is recommended that McDonald’s should widen its product menu and include foods that are appealing to the ever increasing number of consumers who prefer foods that have low fat content and tasty foods that do not contain red meat. This recommended strategy will shield off the threat created by increased demand of substitutes and to eliminate its weakness of its brand image being linked with unhealthy foods. This strategic option will tap into the growing market of consumers who are health conscious and it will eradicate the threat of unhealthy brand image and decreasing number of consumers who prefer junk foods. 6.0 Conclusion From the findings in the report, it has been noted that McDonald’s is a leading restaurant chain in the global fast food industry and its brand image is among the top most recognized or known in the world. The restaurants has been able to stay on top of the industry mainly because of its wide branch network, unique menu that suits local taste, and the fact that the restaurant chains undertake leading technological innovations in the industry that helps to improve efficiency within its restaurants, and the service quality whilst lowering the operational cost. These factors have also been the source of the restaurant chain’s competitive advantage. The report noted that McDonald’s has an opportunity to tap into other unsaturated markets that are mostly in developing and under developed countries across the world and in this regard, it has been recommended that the restaurant chain should undertake an aggressive market penetration programme by establishing branches and licensing numerous franchisees across various region in the world. The report also noted that the ever-increasing number of health-conscious consumers poses a threat to the existence of the restaurant chain and therefore, to shield off this threat it is crucial for the restaurant chain to implement the strategic option of product development. This strategic option will foresee that McDonald’s include additional tasty dishes that are appealing to this set of consumers (Smith, 2007). References Acur N. and Bititci U. (2004). A balanced approach to strategy process, International Journal of Operations & Production Management, Vol. 24 issue 4, pp.388-408; Aydrose, A. 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