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International Expansion of McDonald’s Corporation Case Study

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Updated: Jun 27th, 2019

Introduction

The history of the McDonald’s Corporation dates back to 1954 when a man by the name of Ray Kroc heard about Mac and Dick McDonald, two brothers who were running a burger and shakes joint in San Bernardino, California. Kroc paid the two brothers a visit and this visit culminated in a franchising agreement to use the McDonald’s name limitlessly.

Seven years later and with more than one hundred and thirty McDonald’s restaurants across the United States, Ray Kroc bought the chain from the McDonald’s brothers for 2.7 million dollars. The growth of McDonald’s Corporation continued in the United States and soon Kroc set his eyes on markets away from home (Ko, 2008). Today, the McDonald’s Corporation is the leading fast-food chain globally, and owns the restaurants in different continents: South America, Europe, Asia, Middle East, and even Africa.

This paper examines the internationalization of the McDonald’s Corporation. What factors have led to the success of McDonald’s growth across the globe? What strategy does the company use? What are some of the challenges it is facing in its expansion efforts and how does it overcome them? These are some of the questions that this paper addresses. Although the McDonald’s Corporation has expanded into operations in different countries and regions, the focus of this paper will be on the corporation’s expansion in China.

McDonald’s Entry into the Chinese Market: 1990 – to date

Due to the diverse cultural beliefs and practices between the Americans and the Chinese, examining McDonald’s development in China is an interesting discovery. Indeed, the success of an all-American business in China warrants investigation. Moreover, China is the world’s largest emerging market and is characterized by a high demand potential but at the same time high risk and is therefore the envy of any international corporation that seeks to expand.

The McDonald’s Corporation first set foot in China in 1990 when it opened its first outlet in Shenzhen. At the time of McDonald’s first entry, the concept of Western fast food was not new to the Chinese because of the presence of Kentucky Fried Chicken (KFC) which opened business in China in 1987. For the last two decades, McDonald’s growth in China has been behemoth. By the end of 2007, the fast food chain giant had hit a target of 1000 outlets in China (Ko, 2008).

The success of McDonald’s Corporation is mainly attributed to the strategy it uses to expand internationally. The management of the corporation took into consideration the cultural differences between the United States and China. According to Hofstede (2004), societies can be categorized based on four dimensions, namely: “power distance, collectivism versus individualism, femininity versus masculinity, and uncertainty avoidance” (p. 56).

The Western and Chinese societies differ in all these dimensions. Any Western corporation that wants to succeed in a culturally diverse society like China needs not only understand cultural beliefs and practices of this culture, but also put them into practice. For instance, China is a collectivist society and as such, the Chinese people value friendships, family, and personal relationships.

Trust and mutual respect are also important values in China (Jassawalla, Truglia & Garvey, 2004). McDonald’s has managed to succeed in China because of its respect for and adherence to the Chinese cultural practices. The strategies that follow have been adopted by the fast-food giant in China, and they are completely different from ones used in the United States and other Western countries.

Localization strategy

Unlike in Western cultures, where meals are served on different plates for different individuals, the Chinese value communalism even during the meal times. Meals are usually served on a single plate from which individuals take food using their chopsticks. In order to succeed in the Chinese market, the McDonald’s Corporation decided to adopt the Chinese style of serving food and this is one of the reasons why the Chinese have grown fond of the fast food giant (Ordo, 2001).

In addition to the style of serving food, the McDonald’s restaurants in China uphold the Chinese cultural value of social relations. China is indeed a social-oriented society. Social gatherings are common and extend over a long period of time. Unlike in the United States where the concept of fast food and eating out is mainly for convenience purpose, it is totally different in China.

As a result, McDonald’s corporation has incorporated the social dimension of the Chinese people into the set-up of its restaurants. In China, the McDonald’s restaurants look more like coffee houses where people can comfortably communicate with others. This set-up provides the Chinese people with a good environment for enhancing their social relations (Ordo, 2001).

McDonald’s Corporation blends well into the Chinese culture. All McDonald’s restaurants in China are decorated as to symbolize traditional Chinese culture. The restaurants also change their interior designs to match with different festivals. For instance, during the Chinese Lumar Year, they use art-red paper cut-outs of Chinese characters and pictures of auspicious symbols. They also prepare special meals for such occasions.

The McDonald’s corporation is also flexible when it comes to the menu it offers to its clientele in different countries. It does not stick to the menu offered in the United States. It does this to take into account the fact that different societies have different tastes and food preferences.

In China, there is a general preference for chicken over beef (Ko, 2008). As a result, the company created a menu with a wide variety of chicken-based foods such as chicken burgers and chicken wings. In addition, the Chinese traditional foods such as red bean pies and seafood soup have been added to the menu. The company has also taken into account the high demand for teriyaki burger and has incorporated it into its menu in China (Namita, 2000).

Changing the menu from the standard one to the one that fits the tastes of the local people requires extensive market research, something that McDonald’s invests in heavily. For instance, it was through market research that the corporation got to know that its Chinese customers were not too enthusiastic about the McDonald’s Fantastic Rice Burger, despite the fact that rice is a staple food in mainland China.

The management approach of McDonald’s in China is also different from the one used in the United States. In China, the McDonald’s restaurants are managed by the locals. This is one of the reasons why the company has succeeded in China and yet many large Western-based corporations have failed. Inviting locals to manage the restaurants has enabled McDonald’s corporation to overcome most of the challenges that arise in organizations with cross-cultural employees and managers.

In a typical global economy, managers and employees usually have different cultural values and beliefs which often create conflicts (Feldman, 2000). In the American society, for instance, individuals place great emphasis on individual talent and efforts without taking into consideration their peers’ feelings.

Personal satisfaction is therefore the ultimate goal of every worker. In China, on the other hand, people work as a close-knit family, with consideration of each other’s feelings and progress. Personal satisfaction is therefore frowned upon and may be misconceived as selfishness.

The major challenge that organizations face when operating in a cross-cultural context is how the employees with different cultural backgrounds can work together in harmony and contribute to the bottom line of the organization (House et al., 2004). The situation is even worse if the management, employees and clients are of different cultural backgrounds. The McDonald’s Corporation has avoided this problem by employing Chinese to manage its outlets in China.

As a result, potential conflicts that could arise have been avoided. Moreover, because the managers are Chinese, they are able to provide the clientele with the services that appeal to them better because they understand their culture well. The responsiveness of McDonald’s to the national culture of the Chinese people is one of the forces behind its enormous success (Macduff, I2006).

Use of local ingredients

The success of McDonald’s in China is also attributed to its use of local ingredients. Due to its enormous capital and technological know-how, McDonald’s has been creating its own network of supplies since its entry into the Chinese market in 1990 (Namita, 2000). The corporation has its own farms in China, which enable it to sell its farm products both, in the local and foreign markets.

The corporation also has joint ventures with well-established Chinese firms and organizations, for instance, the state-owned General Corporation of Beijing Agriculture, Industry and Commerce. It also has a network of local farmers, food-processing manufacturers and other suppliers, that helped the company in developing a specialized infrastructure which was once non-existent.

Ko (2008) argues that “by 2006, 95% of materials employed by McDonald’s in its supply chain for the Chinese market (for example, beef, potatoes, milk and vegetables) were sourced from the country” (p. 2).

The use of locally-produced ingredients has enabled the corporation to cut down on transportation costs that could have been incurred if the company was to obtain the products from abroad (Murray, Wildt & Kotabe, 1995). It has also earned the corporation trust among the Chinese because the company does not use American products. Use of local products also creates employment for the Chinese people and opens the market for its produce.

Mode of operation

The nature of a firm determines the mode of operation it chooses in international markets to a great extent. McDonald’s products cannot be exported abroad and as a result, the options available for the corporation to operate abroad include: franchising directly, entering into joint ventures, or entering into a master franchising arrangement whereby the master franchisee owns and operates all the outlets in the territory.

Irrespective of the mode of operation chosen by the corporation, the corporation retains the substantial control over the number and growth of outlets in each market (Lafontaine & Leibsohn, 2004). According to the Uppsala internationalization theory, firms minimize the risk associated with venturing into global markets by doing so very gradually, and only increasing their investments in markets in which they have prior success (Johanson & Vahlne, 1977).

Most firms also choose to go abroad when they have exhausted the home market (Henisz, 2000; Gielens & Dekimpe, 2001). Contrary to this assertion, however, the McDonald’s decision to venture into the international markets was largely influenced by the existence of market opportunities for its products. The growing market of China and the accompanying high demand for consumables drove McDonald’s to China.

In China, McDonald’s mode of operation is mainly joint ventures with local companies or wholly-owned enterprises (Ko, 2008). Even after the Chinese government amended its franchise law, the corporation has been reluctant towards the franchise mode of operation due to fears of franchisees learning its trade secrets and menus, and then opening stores under different brands.

By the year 2007, only one out of more than 800 of its restaurants in China was franchised. The corporation, however, has focused more on improving the quality of its products and management control.

Strategies used by McDonald’s to compete internationally

The Kentucky Fried Chicken (KFC) is McDonald’s number one rival in China. KFC has an upper hand over McDonald’s because it opened its door to China much earlier than McDonald’s (Shen & Xiao, 2011). Moreover, over the years, KFC has focused on increasing the number of its outlets, which far surpasses that of McDonald’s.

Indeed, by 2007, KFC had outlets in all provinces except Tibet (Liu, 2008) whereas McDonald’s still had no presence in six provinces. In order to compete with KFC, McDonald’s used a different approach. Rather than focusing on increasing the number of outlets in all provinces, McDonald’s uses strategies such as drive-through restaurants and twenty-four-hour services.

Drive-through restaurants and round-the-clock services

The increasing rate of car ownership and a rapidly growing middle class in China created an increasing demand for quick meals. Taking this cue, McDonald’s opened the first of a series of drive-through restaurants in 2002 by partnering with Sinopec, China’s largest petrol retailer. In addition, the increasing demand for Western foods among the teenagers and young adults led the corporation to introduce 24-hour services in all its Chinese restaurants. By 2007, almost fifty percent of its restaurants were running round the clock (Ko, 2008).

Use of modern technologies and home delivery services

In 2007, McDonald’s Corporation partnered with Taobao.com, a Chinese online shopping site, to take advantage of the changing Chinese lifestyle, especially among the young population. The partnership involves an agreement in which online shoppers are given coupons for McDonald’s food and other promotional items.

In addition, dinners in McDonald’s restaurants are given cash coupons to purchase items from the site every time they buy the Super Value Meal. This partnership has increased McDonald’s presence among the internet users and gives it an advantage over its greatest rival.

Introduction of home delivery services in 2008 by McDonald’s has also given it a competitive edge over its rivals. This mode of delivery takes into account the fast-paced lifestyle of the Chinese youth.

Tier pricing

Despite its rapid economic growth, the distribution of income and wealth in China is very uneven. In China, foreign-owned restaurants are more expensive than local restaurants thereby restricting the clients to only the middle- and high-income earners. In order to cater for the needs of the low-income earners, McDonald’s introduced a tier pricing system in which the products were sold at different prices according to customers’ purchasing power.

The corporation achieved this by dividing the country into different districts depending on their average levels of income and then adjusting the prices in each of these districts to match the income levels. This pro-poor strategy has also increased McDonald’s popularity in China (Ko, 2008).

Organizational challenges of international expansion

The success of McDonald’s in China has not come without challenges. The corporation has experienced a number of scandals and has faced various legal battles. In 2007, for example, the corporation was accused of exploiting its employees by underpaying them amid rising inflation rates and refusing its workers to unionize.

Following these claims, the corporation was forced by the All-China Federation of Trade Unions to increase its workers’ pay and to allow them to unionize. McDonald’s increased its workers’ pay by between 12% and 56% above the local minimum wages.

In the face of the global economic crisis in 2008, many local restaurants adjusted the prices of their foods upwards because of the rising costs of raw materials. McDonald’s also followed suit and quietly increased the prices of most of its products by between 5% and 10% (Chen, 2008). This action caused uproar among the customers simply because the corporation had not made the changes public.

McDonald’s has also been criticized for not upholding high environmental and health standards in China as it did in its other overseas markets. For instance, in the United States, the corporation provides children healthier alternatives to its meals but this is not the case in China.

The Chinese government has also raised concerns over the link of fat-rich Western foods to diseases such as obesity and is worried that the country will soon be experiencing similar health problems because of the foods they bring to the country (Chen, 2008). All these claims are enough to cause damage to any booming corporation. In the midst of all these, McDonald’s has implemented effective damage control strategies, for instance, assuring its customers of the safety and healthiness of the ingredients it uses to prepare its meals.

Conclusion

McDonald’s Corporation has been in operation for more than half a century and still remains the leader in the global fast food industry. The corporation opened its doors to other markets beyond the United States, and its success in these markets provided it with the impetus to spread its wings to China. Although China differs from McDonald’s other Western markets significantly, the corporation has appealed to the Chinese people in spite of all odds.

The corporation’s success in China is largely attributed to the strategies that uphold the cultural values and practices of the Chinese people. Strategies such as using locals to manage the restaurants, adopting the Chinese food tastes and preferences in its menu, as well as using local ingredients have increased the presence of the corporation among the Chinese locals.

Notwithstanding its success, McDonald’s greatest rival, the Kentucky Fried Chicken, is way ahead of McDonald’s in terms of its presence in the provinces and number of outlets.

Rather than focusing on increasing its physical presence, McDonald’s strategy to compete with its rival is to improve on the quality of its products, introducing home delivery, and using modern technologies such as partnering with online shopping sites. The success of McDonald’s in China provides proof that internationalization of firms can be effective if the right approach is used.

References

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Macduff, I 2006, ‘Your pace or mine? Culture, time and negotiation’, Negotiation Journal, vol. 22 no. 1, pp.31-45.

Murray, J. Wildt, A. & Kotabe, M 1995, ‘Global Sourcing Strategies of U.S. Subsidiaries of Foreign Multinationals’, Management International Review, vol. 35 no. 4, pp.307-324

Namita, J 2000, McDonalds: Success through thinking global, acting local, Delphi Magazine, Delphi.

Ordo, J 2001, ‘McDonald’s to Assess Full-Service Effect on Profit With Launch of Diner Concept’. Wall Street Journal, no. 6, pp.1-3.

Shen, Q. & Xiao, P 2011, McDonald’s and KFC in China: Competitors or companions? National University of Singapore, Singapore.

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