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McDonald’s Entry into the Chinese Market Report

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Updated: Aug 20th, 2019

Introduction

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.

Gilroy, D. (2011). McDonald’s China: ‘Chickileaks’ & the Truth about McChicken. ChinaSmack. Retrieved from <>.

Hague, P., & Jackson, P. (2006). A guide to planning, methodology and evaluation: Market Research. London: Kogan Page.

Hibbert, P. (2005). International Business. Strategy and Operations. London: Macmillan Press.

Hill, C., Cronk, T., & Wickramasekera, R. (2011). Global Business Today: Asia Pacific. Sydney: McGraw Hill Australia Pty Ltd.

Hough, J., & Neuland, W. (2000). Global Business. Environments and Strategies Managing for Global Competitive Advantage. Cape Town: Oxford.

Kottler, P. (2000). Marketing Management: The Millennium Edition. New Jersey, NJ: Prentice-Hall.

Ross, B. (2003). Market entry methods for western firms in China, Asia Pacific. Journal of Marketing and Logistics, 15(4), 3–18.

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