Evaluate the strategy of Mcdonalds. (A company analysis) Marketing strategy - Essay Example

Introduction Since the opening of its first store in 1955, the McDonald’s corporation has become extremely sophisticated in most aspect of its business strategy. During the companys’ expansion years which has resulted in the placement of more than 30,000 stores worldwide was the care they employed in choosing their locations. Whether one is a retailer, restaurant owner, financial institution or site dependant business, making intelligent and informed location decisions is critical to a companies’ success. The process of informed and intelligent site selection from a business location is neither happen-stance nor rule of thumb; it now includes such things as, measuring market potential for entry and expansion, setting revenue and market share goals, determination of optimal site development strategy in new markets, understanding critical drivers of site performance and success, identification of what products and services to be offered at a particular location, and determining the most appropriate concept and prototype for a given location. Todd Spangler, in his piece, Keeping the Data Ahead of the Curve, he mentions the methods being used by companies making their location decisions, he points out that; “Mc Donalds uses geospatial data to scope out locations for new stores, weighing demographic data like population density and income”. (Spangler) In spite of their many successes and long standing position as an industry leader, the golden arches are beginning to show evidence of tarnish. In this paper I will examine those variables which are impacting McDonald’s market position, growth and expansion. 2 Evaluate the Strategy of McDonalds By virtue of the fact that McDonalds has 30,000 locations world wide, the McDonalds customer can best be described as multi-generation and very diverse. The character of choice inherent of this grouping is the individual who desires to have a reasonably tasty and filling meal, which they can access in a short period of time; within this category we find individuals with two, sometimes three criteria in achieving their objective. The location of the fast food establishment must be conveniently situated.. This means it is either on the way or not very far from where they are currently juxtaposed. It must always be delectable and filling. And it must always be reasonably priced. The first example works against brand loyalty, because it is often said and reasonably observed, that McDonalds puts a lot of effort and money into selecting its locations, while Burger King merely waits until McDonalds locates and then they will erect a store adjacent or near by. Moreover, in some cities fast food restaurants are discouraged from locating in certain sections of the central business district. Consequently you find clusters of fast food establishments adjacent to each other. Such clusters may be found near hospitals, colleges, or sports complexes. With so many choices and given the high competitive nature of the industry participants (featuring price reductions, and two for the price of one), the potential customer has no other choice but to make the common sense decision. More often than not, he will buy where the deal is. The fast food market place is very competitive and with the entrance of additional players neither market share or brand loyalty is assured any one franchise. This reality pushes the corporation to cater to other novel or lifestyle needs which the prospective customer might have. Of course, when a company comes up with a new product or 3 service, they have no sure fire guarantees that their customer base will accept it. A recent Bain & Company survey reveals just how commonly companies misread the market place. A survey of 362 firms revealed that 80 percent believed they delivered a “superior experience” to their customers. But when the customers were asked about their perceptions, it was revealed that they rated only about 8 percent of companies as truly delivering a superior experience. Clearly, its easy for leading companies to assume they’re keeping their customers happy; it is quite another thing to achieve that kind of customer devotion.”(Bain) McDonalds has been plagued by changes in the market which have come forth from a number of varying venues. Competition from rival companies, cultural diversity, environmental adherence, and social demands have made it necessary to either adjust their menu or offer some alternatives, i.e., vegeterian menu and salads, which was the response to address that segment of its customer base, who chose to eat healthier meals, while attempting to placate the advocates who espoused that they were purveyors of fatty, Non-nutritional foods. Additionally, it was a trade off gesture to the animal advocates who were concerned about the slaughter of cows. The problem was further exacerbated with the advent of mad cow disease. Additionally, McDonalds has attempted to expand its standard menu by introducing more than 40 items over the last ten years, “none of which caught on big”. (Business week 2003). On the other hand, McDonalds has made some additions in all of its international menus, which were country specific and they have all worked well. So well in fact that in India, where more than 80% of the customer base does not eat 4 beef or pork, McDonalds has introduced the Maharaja burger (which is a mush made from a lamb base), and it has been very positively received. Below is an illustration of other countries where McDonalds has offered country specific preferences: McDonalds Country Specific Items Country New Item Customer Acceptance Puilippines Spaghetti High India Maharajah burger High Japan Teriyaki burger High France Croquet McDo High Malaysia Maharani burger High Singapore Green Pepper burger High Thailand Thai burger High Indonesia Spicy Chicken/Rice High China Spicy Seafood Noodle High While the Maharajah burger (mutton) works extremely well on the McDonalds Indian menu, it would in all probability have a low acceptance level on the Japanese menu. Further while the Halal menu options may very well experience high levels of acceptance in certain stores (areas) in the UK (borne out by demographic data), it is understandable that the presence of diversity in some neighborhoods/locations, has resulted in negative revenue generation in some locations. In our menu matrix, the high levels of success in country specific acceptance of the menu adjustments, reflect an acceptance based on local choice, taste and familiarity. It is not always that the customer has changed; than it is the needs of the typical customer has changed, in most locations today, it is more that the demographics of the residents has changed. It is the McDonalds prototypical (cookie cutter) strategy which has not (at least in 5 Europe and the US), kept pace with the evolving demographics of today’s customer. One must be careful not to lose sight of the primary activites of the McDonalds corporation. While there end objective is to sell burgers, they were also in the real estate and new Facility construction business. If a store was constructed in a neighborhood location 30 years age, then it is reasonable to say that the pioneering population have for a myriad of reasons, either can not or do not eat out anymore. Further, it is reasonable to assume that there has been a change in the demographics. In an analysis of the fast food industry Hayden Stuart et al, make the projection on per capita decrease due to age: “the aging of the population will decrease spending on fast food by about 2 per cent per capita”. (Stewart et el) So, one must address the question of whether the standard menu and the services provided at the location is suited to capture the maximum customer base. The international menus which are offered by McDonalds in most of its international locations are designed to capture the indigenous clientele. In an article by Robert E. Kelly, a professor at Carnegie Mellon University, on what it takes to be a star at work, he speaks on what contributes to creating brand loyalty; “customers really love you when you go out of your way to solve their problems.”(Kelly) The company is making some strides in some of its markets to cater to the external (in this context, external service means service beyond or service with the selling of a burger), needs of the customer. In India, the company has established lounges in some locations where senior citizens can relax for conversation while enjoying their meal. Also in the same market, the company has come up with two additional innovations; for those customers who like 6 special attention, one or two of the locations crewmembers serve as host and escort diners to tables. And for those who either cannot or wish to dine at home, the company provides a home delivery service; at this location the home delivery service is credited with a 15% increase in its overall revenue. McDonalds has ventured outside of its normal strategy in an attempt to attract more young professionals and kids. The company has tapped into WI-FI hot spots in McDonalds restaurants across the US, and now the WI FI has made its appearance into more than 500 locations in the UK. People will be able to log on to the internet using wireless broadband on the WI FI enabled by their lap top or PDA, as they consume their big macs. McDonalds is very keen towards a vertical distribution strategy, which also demonstrates its part in community economic development. This paradigm represents what has always been present. The founder of McDonald’s put it thusly: “It is important to have an involvement in the life an spirit of a community and the people around you”. (Kroc) But until recently this stratagem has been ignored. As a consequence, invaluable human resources and revenue generating potential lay untapped. Which caused a greater strain on government resources and a larger burden on the society-at-large, because those who were capable of assisting in a win-win situation, did not focus because it did not represent the conventional scenario, which they had become accustomed. Albeit runs counter to conventional wisdom, the new marketing strategy is now focused on continuing service to its target market, only now in this instance the company will identify target groups rather than income. Though expansion has slowed, the last group of openings took the company into more communities, and McDonalds recognizes 7 the part it has to play in each of the neighborhoods. The latest strategy of McDonalds is the opening of stores in under represented areas like Thamesmead and Harperhey. The key ingredients are profile and commitment. It is imperative for a corporation to have a transparent social policy, along with its profit making drive. Quite often, they discover that possessing the former will eventually fuel the latter. The millennium poll, sponsored by the Conference Board and the Prince of Wales Business Leaders Forum, found that the social responsibility displayed by a firm is key to a company’s reputation. COMMUNITY DEVELOPMENT MATRIX Business Area Business Function Sample Practices Governance What it values. How resources Allocate Resources _Board & Top Execs. are allocated for corporate role in community Siting Where it locates Siting facilities (distribution, back _Real Estate What it locates office,headquarters, manufacturing) Government affairs in underserved community Human resources Who it hires Employing, underlized workers, How it develops them increasing work force diversity Product & service Who it sells to target under served markets Development What it sells designing product & services R & D business units for low income communities Supply Chain How it buys or contracts Buying from local suppliers Procurement services. Who its vendors are buying from/partnering with Out sourced services who it buys from ethnic minority-and women owned firms Product & Service How it delivers Sitting retail stores in underserved Distribution Where stores are located communities. Employing local or Franchise/license How it provides access diverse distributors. Partnering with Marketing sales to products and services under served community organizations Business units Investments & Where it borrows money, where Investing in financial vehicles and Profits it invests institutions that are diverse or invest Finance department in under served community organizations Community Relations Who it gives money to Supporting community development Public Affairs Who it helps through monetary, time and product Foundation Who and what it influences donations. Lobbying for policies that What resources it offers support community economic development. Source: Business for Social Responsibility In the UK, there are at least 17 corporate fast food companies which compete with McDonalds’s for market share. Those listed below are not listed in any particular order of classification or importance. (1) Burger King (2) Compass Group (3) Covenant Garden (4) Diageo (5) Dominos’ Pizza Group (6) Greggs PLC (7) Harry Ramsden’s (8) Kentucky fried Chicken (9) Perfect Pizza Ltd. (10) Pizza Hut (UK) Ltd. (11) Pizza Express (12) Pret-a-Manager (Europe) Ltd (13) Soup Opera (14) Subway (15) Tricon Global restaurants (16) Whitbread (17) Wimpys Restaurants Group Ltd. In the UK, bakeries are also classified as fast food establishments, however for the point of this piece they serve no point, albeit they contributed 36.6 per cent of the 7.5 billion pounds of the turnover in the industry in 2004. Competitive rivalry is high amongst the major fast food suppliers. The industry is highly concentrated amongst the major food suppliers including McDonalds, Burger 9 King, Pret-a-Manager, Kentucky Fried Chicken, and Dominos despite the large numbers of much smaller independent fast food outlets. McDonalds and Burger King have a 91 percent share of the Burger sector between them, and Kentucky Fried Chicken has 78 percent of chicken sales. The sandwich sector, with companies such as Pret-a-Manager, in 2004 has seen the largest individual company growth in the fast food market. (Mindbranch) Competition rivals, in particular, McDonalds and Burger King, to achieve broad supremacy remains extremely high and has a significant impact on corporate stakes. Jigh fixed costs increase rivalries, as competitors need to achieve high volumes of production to achieve the necessary economies of scale that ensure low cost of production. Hence, the cost of a market share has a significant impact on corporate stakes. The industry is experiencing a relatively slow growth causing existing firms to fight more aggressively for market share. Though there are extremely high barriers to entry into the UK fast food market, consumers requiring healthier foods increase, switching costs from burger outlets to chicken and ultimately sandwich suppliers will increase. Therefore, this trend would suggest an increase in market share amongst Kentucky Fried Chicken (if the avian flu scare dissipates, if it does not, then the sandwich market (Pret-a-manager) will assume that share of the fast food market, who are desirous of healthier foods, along with those who previously patronized KFC.Of course McDonalds, Burger King and other hamburger companies will not be spared if the situation with mad cow disease gets worse. If this worst-case scenario plays itself out, then it will be easier for new entrants to enter the fast food market in the UK. 10 The Euromonitor International presented the following figures on the fast food industry for the year ending 2004’.”The fast food market in the UK has frown 2.1 percent since 2003 to reach a turnover value of 7.5 billion pounds or $13.9 billion dollars in 2004”, (Euromonitor 2005). Correspondingly, McDonald’s profits in 2004 increased by 11.2 percent or $2.3 billion dollars, While the profits of Yums increased by 7.5 percent or $9 billion dollars. And Burger King has a dismal showing in 2004, showing an increase of 0.4 percent, with profits of $1.1 billion dollars. Technology is extremely important to the fast food industry because the relationship between low cost leadership, economies of scale and market position. The industry relies on low costs of production and high volume to remain competitive. However improvements in technology have also lead to decreasing cost of production and therefore lower prices for the consumer, benefiting the poorer members of society, albeit having the knock on week effect of increasing the volume of fast food consumed and thereby increasing obesity rates. (Seager 2004) Swot Analyses After more than 50 years in business the company faces a new focus. Expansion and new construction have all but ceased (at least for the time being). However, the cultivation of new market areas within the UK is a promising prospect. A substantial amount of market share has been lost, due to a number of factors beyond the control of the corporation, and its not clear weather they will be able to recover from the anti- dietary campaign with the greatest of ease within a short order. Additionally, a great 11 number of locations must be retrofitted to provide better or more appropriate service to their demographic fit. Weaknesses McDonalds is hampered by its successful name recognition. Whenever someone or a group seeks to lambaste the fast food industry, McDonalds is the first whipping boy out of their mouth. The company’s’ disadvantageous presence on the world stage has availed it to microscopic scrutiny. Unfortunately, those who scrutinize are not of a positive nature, but one of defaming. The company’s’ reactions to the attacks of its advertising technique and content is viewed a reactionary defensive. The company has dedicated almost fifty years on purchasing real estate and constructing new buildings. Expansion for a business is not necessarily a bad thing. However, it appears that the free thinkers are all in the field. They need to be harvested by the planners back at headquarters. Opportunities If McDonalds will exert a concerted effort to restudy all locations and embark upon a program of retrofitting both menu and service types. The sandwich market is a viable option for the company at this juncture. It will surely change their image. It is a feasible option given all the negative press it receives about the quality of its menu. Remember, the outlets in India are profitable, albeit close to 90 per cent of the customer base does not consume beef or pork. Threats If the company does not focus on a feasible option plan, their overall quality of existence will continue to erode. Even though the company has experienced a couple of quarters where they have not met the previous profit margins, they are by no means dead in the water, yet. They can recover from all of the bad publicity (fatty foods, low on nutrition, the obesity 12 controversy and even the prevailing scare of mad cow disease), now is the time for the company to make the needed change to a healthy menu. Of course, there will always be a demand for the big greasy burger, so they need not salvage the grills. The supply and distribution chain which the company has established over the years will not have to be scrapped (except there will be a reduction in the purchase of beef), the same individuals who presently supply them with lettuce, tomatoes, onions, fries, oil, bread etc., can be maintained in the supply chain. The company cost for a change over will be nebulous, compared to the cost of attempting to pick up and dust off, after so much dust has flown in their face. Of course, one must not overlook the fact that in spite of all their short comings and troubles they are still the premier fast food burger producer. On the other hand, the smart money is being placed on sandwiches. The projected growth rate over the next four years is forecasted to average approximately 36 per cent. On this note, one should not forget that when it comes to business (after you have secured the ideal location), the timing for new market entry in crucial to your success. Since the next four years is being forecasted as growth years, now is the ideal time to enter the market. If McDonald decides to remain exclusively in the burger business, they will not be truly satisfied with the relative new return on investments. Moreover, if they remain exclusively in the burger business they will eventually lose much of their market share to the cross over crowd. Works Cited Arndt, M., Pallavi, G., 2003 Hamburger Hell; McDonalds Aims to Save itself by going back to basics, Business week, 3 March 2004 Blisard, N,. Hayden, S., Bhuyan, S., Analysis of the fast food industry, The Demand For Food Away From Home, Agricultural Economic report no.829 Brakman, S., et al. 2001, An Introduction to geographical economics: Trade Location and Growth Business Source Responsibility, The Gap, [on line] Available from: mj.info.com Euromonitor Internationnal 2005, [on line] Available from: environment.com/fast_food_in_uk_mmp Harvard Business School, Working Knowledge Kelly, R. What it Takes To Be A Star At Work [on line] Available from: kellyr.uk.info.library Kroc, Jack, McDonalds.com Mindbranch 2002, Catering to History, Maeket Review Rault-Wach and Bricas [on line] Available from: www.rawb.sentro/tre Seager, A., 2004,Don’t Blane Fast Food, Television or Cars, The Guardian The British Library, Fast Food and Snacks Industry, 22 June 2005 WikiPedia.com ZST NET News (The Value Of Location) July 14,2005 Chakravarti, S., Chowdhury, N., and David, S., Americana: Like, This Is It! India Today February 9, 1998, pp 17-19 Read More