Executive Summary
The study explores international business although it specifically deals with expansion. In fact, the research report focuses on the entry strategies and the success of franchising in spite of the stiff global competition particularly in the fast-food industry. The report examines McDonald’s international expansion and the concept of franchising.
However, the mode of entry into the international market and growth by the company examined in this study disagree with the idea that the company’s expansion was due to saturation in the existing markets. The study reveals that the expansion of the company was largely due to the desire to increase profitability as well as the emergence of opportunities to expand its market.
The study examines the hurdles faced by the company when trying to internationalize its operations and the strategies used to overcome such hurdles. The study concludes with recommendations for the company to increase its market presence and profitability internationally.
Introduction
Different bodies of literature explore the international businesses in the context of company expansion beyond the domestic borders. The subject of timing and style of entry have also been at the center of these discussions. Theories suggest that companies ought to follow constructive and worthy projects wherever and whenever they arise (Lafontaine & Leibsohn 2004, p.1).
For most organizations, this involves the development and adoption of new technologies or diversification of the product collections. With reference to diversification, geography presents companies with one of the most essential basis for expansion and diversification.
Economic theory asserts that by assuming that risk is impartial, a company with foreign opportunities ought to follow all of them assertively and quickly (Geringer & Hebert 1989, p.237).
In case the company faces limitations such as capital inaccessibility to warrant the management ability, economic theory suggests that such a company will capitalize on profits by initially following the first and the highest prospective profit opportunity.
International theory proposes that companies diminish the uncertainty related to going global by going slowly into such markets. At first, a company begins with entry styles that involve minimal commitment and increase the dedication in markets where success has been achieved (Johanson & Vahlne 1990, p.12). This theory perfectly suits organizations such as the manufacturing companies.
For retail companies, the theory does not explicitly hold. For instance, in companies such as McDonald’s, there is no option but to go foreign at once to reach the consumer if the corporation has to make any sales. The companies ought to increase the foreign units to attain a substantial customer base.
McDonald’s was founded in 1954 in California. Over the years, it has become one of the most renowned and esteemed brands globally. The initial international business undertaking by the company was when it opened a franchise in Canada. Now, the company has opened more than 34,000 outlets globally.
It employs more than 1.8 million workers in more than 120 countries. In pursuing its expansion and globalization agenda, 80 percent of the company global outlets are franchised (McDonald 2013, p.1).
Approach to internationalization
Market entry strategies
McDonald’s is popular for introducing the model of franchising when focusing on expansion. Through the model, the company has gradually but steadily expanded to most global food markets.
By reflecting on the model used by the company to expand its business, one is able to discover what attracts companies to the meticulous market opportunities as opposed to the other markets they will follow later (Buckley & Casson 1998, p.540).
Inherently, the company first entered markets that were culturally and closely similar to those of the founding country, the U.S. McDonald began with Canada that has a consumer base with close proximity in terms of culture to the US consumer tastes and preferences. The company expected the consumers to behave more or less the same to the U.S consumers.
However, geographical proximity was also a factor in deciding to venture into the Canadian market. In other scenarios, companies are driven by new considerations including essential drivers of the market potential (Shane 1996, p.74).
These affect the projected profitability of a market and consequently the company’s resolution with respect to where to enlarge. Institutional considerations also play a role in a company’s evaluation on the worth for internationalization.
The nature of McDonald’s business requires the company to enter the international market in one phase as opposed to manufacturing companies that can enter the international market by first exporting the products. McDonald’s has to be physical within the reach of the consumers considering that it is a retail company. In fact, it must be within the vicinity of the prospective buyer for it to make sales (Davidson 1980, p.13).
The company has to open foreign subsidiaries to amplify the number of customers. This actuality opens the avenue for examining the strategies used by the company to enter into the international market.
The nature of McDonald’s products makes them impossible to export since they are perishable. The company hence has to decide on other operational approaches. These approaches differ from market to market. Some of these markets may require advanced level of dedication and allocation of resources than others. This leaves the company with limited options including opening subsidiaries that franchise directly.
The company may set up a master franchising deal where the main franchisee owns and manages all other outlets in the region. The company may also sign a partnership deal with local partners. Alternatively, the company may pursue acquisition of similar companies in the target markets.
The company in the past attempted all these entry modes with each presenting different results. However, all the ventures have been successful. The degree of success has been attributed to the level of commitment the company gives to the ventures.
The level of venture dedication McDonald’s commits to the markets varies across diverse governance models. However, in all cases, the company exercises substantial control over the number of units and the increase in the numbers of the units in every market (Lafontaine & Leibsohn 2004, p.5).
Subsequently, the company largely internalizes the price of expansion, although to varying scale while relying on the management within every market. The corporation also takes upon itself to set the growth path inside the domestic, regional, and global markets.
Even when the company does not fully internalize the expansion costs, a contract entered into with the franchisee specifies an enlargement plan that indicates the number of units to be added at diverse points in time. The company directs the growth course in such a market.
Moreover, considering that strict growth schedules entail advanced expenditure on the master franchisee, the franchisee may not be able to meet the costs of rapid expansion. Hence, the franchisee will not be willing to pay whatever the company would require for such contracts.
On the contrary, such franchisees would be willing to pay as much for a slow expansion contracts. The company absorbs the expenditure on the fast expansion in master franchise situations. This also applies when the company engages in direct franchise or joint ventures.
Internalization theory indicates that acquaintance would be a driving consideration in deciding the locations that McDonald’s will expand to internationally. However, other considerations that the economic theory suggests may be essential for the company to expand internationally given that they seem attainable.
The economic theory on the company entry overtly focuses on the significance of sunk costs when deciding on the number of companies that can operate in a single market (Lambson & Jensen 1995, p.537). Assuming that McDonald’s puts this into consideration, it has to incur expenditure associated with learning the consumers and the systems that direct that market. The expenditure would also involve advertising costs.
In this view, the company has intentionally retained low supply to create queues in the outlets consequently increasing the consumer curiosity and superiority discernment. The cost of such a move is the loss of income the company would have made if it ran extra units very fast in the same market.
Trade limitations/barriers that apply to McDonalds
Various obstacles face companies longing to venture into the international market. The most evidenced are the cultural, political, societal, and trade restrictions. Culture entails national ideas, values, and tangible items like food (Mead 1994, p.10). However, societal forces involve the traditions, beliefs, and education.
Selling products manufactured in one country to another state is at times difficult if the cultures are different (Fatehi 1996, p.20). McDonalds was met with protests when it established its first outlet in Rome. The people were objecting the smell of frying hamburgers. The social forces that influence international business are another set of limitations.
Religion in some countries significantly sways the purchasing habits of items including the basic merchandizes such as clothes and food. In most countries, individuals do not possess similar preferences in terms of clothing, food, or healthcare (Gielens & Dekimpe 2001, p.237). For example, it will be difficult for McDonald to make beef burger sales in India.
Political limitations affect all companies that go abroad (Henisz 2000, p.343. The laws and legislations governing how business should be conducted are inherently different worldwide. The mind-set of investors in countries experiencing political unrests is negatively affected. The instabilities generate unfavorable climate for international business.
The political instability culminating from riots in Indonesia led to the closure of more than 20 of the McDonald’s 101 outlets. Some of the outlets had been destructed by the rioting mobs. This was necessitated by the moribund buying capacity of the domestic consumers. Additionally, the Rupee sharply depreciated leading to the tripling effect on the cost of imported but unprocessed materials.
Trade restrictions are hindrances to international business (Keneth, 2010). These are often enforced through importation tariffs, exchange controls, quotas, and embargoes. India and Australia are infamous for these behaviors. The restrictions are aimed at discouraging what they refer to as ‘trade intrusion’.
How McDonalds deals with limitations
In order to overcome cultural and social limitations in Rome, the company exchanged the exhaust systems of the outlet. However, to overcome social limitations, the company normally ensures that it studies the target market first as well as learns the customs and beliefs of the target customer before entering such markets. This ensures that the company offers products required by the consumers in that market.
Such was the case in China where the company carried out a five-year research before opening the first outlet (Han 2008, p.73) When political climate is unfavorable, the company reduces the number of outlets while retaining units in stable regions.
In some cases, the company completely ignores such markets such as Somalia in Africa. In order to overcome trade limitations, the company only invests in countries where the terms of trade favor them or negotiate with the authorities to be offered better terms for investment (Shaver, 1998).
Performance in internationalization, market entry and trade
McDonald has been an excellent example of the internalization of business. The company has managed to successfully franchise in more than 120 countries with more than 34,000 outlets.
How to improve internationalization
Since the company usually utilizes local human resources, it may consider exporting its existing competencies to give it an advantage in the international markets (Edstrom & Galbraith 1977, p.249). McDonald should also reduce its costs by accessing cheaper labor, materials, or advanced technology by off-shoring production to countries such as India and China while maintaining quality.
The internalization approach adopted by McDonald’s is in line with the company’s franchising approach to expansion. It has successfully overcome all the barriers through effective strategies. The effectiveness of the strategies makes the company a viable option for an investor to invest in the corporation (Shaver, 1998). There are strong indications that the strategies will continue endowing the company with profitability.
Conclusion and Recommendations
This study has explored the international business with regard to the growth of McDonald’s, a leader in the fast-food industry and a pioneer of franchising. The company did not enter the international market due to domestic saturation. In fact, the company takes advantage of the arising opportunities.
The company still has markets that have not been explored. The company largely expands internationally through franchising. For instance, franchising represents the company’s 80 percent global business.
The company should venture into the emerging markets where labor is cheap and raw materials are inexpensive and readily available. The company should ensure the addition of special domestic treats to the main products to suit the tastes and preferences of the consumers.
It should strive to obtain raw materials locally whenever possible and buy them using the domestic currency to ease exposure to the unenthusiastic impacts. In markets where competition is stiff, the company should pursue acquisition instead of making a completely new entry.
The company has had significant effect on China. Going by the trend it received regarding its opening, the company should consider amplifying its Asian presence. Considering the trend in which families are becoming conscious of their health, the company should offer the consumer very healthy product choices. There should be menus that are acceptable by the consumers.
References
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