McDonald’s and Its Blue Ocean Business Strategy Report

Executive summary

This paper centers on business strategy known as the Blue Ocean. It is going to look at how the blue ocean operates in business environment. The case study for this paper is going to be McDonald’s Corporation. In addition, the way in how the strategy operates is going to be discussed. The paper also focuses on the way McDonald’s has applied the “strategy” canvas and the “four action framework” to suit its business environment. Moreover the McCafe concept and how it was started by McDonald’s is going to be discussed.

Introduction

Blue Ocean is a metaphor that was developed by W. Chan Kim and Renee Mauborqne. According to Kim and Mauborgne 2007 the concept of the Blue Ocean strategy operates on nine key principles. First the book by the two authors is as a result of study of more than 150 strategic moves spanning more than 30 industries over a period of 100 years. Blue ocean will bring a change for in the past competition has always been base on red ocean strategy ( Robert Morris 2005).

How does the strategy Operate?

Blue Ocean Strategy (BOS) first principle is the concurrent chase of differentiation and low cost. BOS does not seek a company to do better than its rivals in a competitive market but rather its aim is to craft new market space otherwise known as a blue ocean hence rendering competition immaterial.(amazon.com 2009).BOS usually creates and offers a set of methodologies and tools that are used in generating new market space. In some instances it has been pointed out that the innovation is merely an experimental process; BOS on the other hand offers logical, efficient and reproducible methodologies and processes in search of innovation through the existing and also new firms. In principle the BOS frameworks and tools consist of; strategy canvas, value curve, four actions framework, six paths, buyer experience cycle, buyer utility map and blue ocean idea index. Frameworks and tools are generally deliberately crafted to visual so as to not only build the collective wisdom of the company but also to successfully implement through easy communication. BOS encompasses both strategy formulation and strategy execution. In summary, BOS has three major conceptual building blocks; value innovation, tipping point, fair process and leadership. The normal competitive market is referred to as the red oceans; this is where industries are crowded in one space and they compete with their rivals for the market share. In contrast to the blue ocean, in the red ocean there is so much input but the profits keep on reducing because of the bloody competition. Blue Ocean operates under the notion that all other firms are not in existence. Under this strategy the market environment created is unique for there is no competition. In Blue Ocean there is no scrambling for competition rather competition is created. In this strategy there is room for growth both in terms of profitability and rapidity..(ECO MAX Training and Learning Centre,2008).

In formulating the blue ocean strategy the companies use what is known as “value innovation” which is mainly the cornerstone of this strategy. Moreover, Blue Ocean can only be created when a company actually achieves value innovation that creates value simultaneously for both the buyer and the company. To formulate a blue ocean strategy a company has to be very innovative in its marketing ventures. In order to be innovative a firm needs a vibrant and innovative marketing that can come up with workable ideas and implement them successfully. Company should exhibit innovativeness in their products; such that there should always be creation and introduction of new products into the market and at the same time improving the existing ones. Innovativeness should also be experienced in the products and delivery of services that result in the creation of value for the market. In delivery of services the company should strive to improve and at the same time do away with services that do not add value to the company. Value innovation is tapping the new market and spaces for growth. Through this value innovation rivals are rendered obsolete for quite sometime.

Creating a Blue Ocean

There are two ways of creating a blue ocean; by starting a totally new industry or by creating a blue ocean from the red ocean.

To illustrate how companies are using the blue oceans approach we are going to take recent examples of companies that have made use of this strategy. An HCL technology limited of India has created its own blue ocean through a combination of collaborative outsourcing management. HCL has widened its blue ocean through the acquisition of a British company known as Axon Group plc. Through this merger there is potential for new capabilities in the market. It is important to note that through this integration HCL has formulated its own blue ocean strategy. A second company known as Nintendo Wii has succeeded in creating its own marketing space. For three years the Wii product has continued to control the entertainment market. Nintendo has been able to create its own market space through its mold-breaking wii console. To further demonstrate its innovativeness Nintendo has continued to create more market space around the Wii; this has mainly been through a partnership with another company, ad agency Dentsu, Inc. Nintendo therefore has made a step ahead of its rival companies, for it is known to be able to dispense HD content by means of its Wii gaming consoles. Nintendo is aiming to win the non-customers through its Wii product. (Creating Blue Oceans.com 2008). Cirque du Soleil improved in its profits by reinventing the circus. (Harvard Business Review, 2004).

“Strategy Canvas”

The authors of the book Blue Oceans have provided a framework that they refer to as “strategy canvas.” This framework is actually meant to set out the current state of the competition in terms of what a firm is offering in value, as seen by the customer. (SpringerLink, 2009). Mc Donald’s as a company is a blue ocean as it has employed the use of “strategy canvas”. To show their customers that what they are offering is of value the firm emphasized the importance of healthier foods and that is why they revamped a line of fancier salads. In 2003 the company came up with what was to be known as McGriddles breakfast that proved to be a very successful venture. McGriddles was an addition to the normal breakfast that was being offered by McDonald’s; a couple of syrup-drenched pancakes, stamped with golden arches acted as the top and bottom of the sandwich to hold eggs, cheese, sausage and bacon in three different combinations. This addition to its normal breakfast attracted 1milion customers on a daily basis. To appeal and attract the adult customer base Mc Donald’s introduced the low-fat Mc Lean Deluxe and Arch Deluxe burgers. It was a good move as the firm was bringing into the market a healthier product with low fat content. In the late 1990s the firm made and upgraded restaurants so as to speed up orders and to also accommodate new menu items. This was actually meant to improve service delivery. In 1997, in order for the firm to attract more customer base it cut on the prices of its products. This was being done with the aim of driving up sales. On its menu Mac Donald was sticking on the $ 1 pricing that it had lowered in the year 2002. By doing so the company was creating its own market space and at the same time it was squeezing the prices of its rival market players. In the year 2003 with a new person in charge of the company; a new, young and vibrant management team was set up. This team provided fresh point of view. In fact, one of the team members started 17000, square-foot showcase unit in New York’s Times Square, with video monitoring showing movie trailers, brick walls and theatrical lighting. With this kind of idea the firm was estimated to make a profit of over $5 million. By having a fresh team in management the firm was in fact adding value to its products and services. Addition of new products to its menu was one of the strategies that the company was using so as to add value to its own products. The company put a person in charge to work out new items to be added on the menu. The firm made rigorous campaigns to popularize its new menus. To help them market their brands they created their own slogan “I am loving it,” In addition the firm came up with appealing TV commercials that were meant to woo non customers. Pop idols and celebrities were used to popularize the firm’s new products through the slogan “I am loving it.” The firm also opened new outlets outside the United States. These new stores were modeled to be different from the normal ones. The firm experimented the new stores by decorating them with fancier fashionable décor. The seats that were put in these outlets were made of cushions while table tops were made of wood. The walls were made more colorful by decorating them with attractive art. All this was meant to popularize the firm’s brand even further. All these experimentations that turned out to be successful were meant to continue keeping the firm relevant to its consumers. This new luxurious furniture was accompanied by an all improved menu for the Mac Donald customers. The “canvas strategy” has also been expanded and used to tap into the kids market. The company towards its efforts to appeal to the kids opened a Mckids line and. Mckids line was expanded beyond the kids clothing and toys into interactive videos and books. The firm exploited its brand name to expand its market to clothing lines videos and books; Mac Donald’s has created its own blue ocean by simply launching the McKids line. In addition Mac Donald partnered with Mattel, Hasbro and creative designs to get some royalties off the items that were being sold to kids. This added value to the company’s product as the brand remained to be prominent in the minds of the kids. MacDonald is not aimed at selling fast food alone but to also becoming a lifestyle brand.

McDonald’s Success

Through the “canvas strategy” Mc Donald’s has demonstrated that success is not reliant on fierce competition, expensive marketing or heavy budgets; what is needed is simple, smart and strategic move to take a company to another level. The brand is not only focused on the selling of fast food; it has through its canvas strategy become successful in selling of alternative products and provision of alternative services. For instance, as discussed earlier the firm has launched the Mc Kids line; sells videos and books in partnership with other firms; the brand is always improving its menu and it has been busy building comfortable outlets for its consumers; providing healthy fast food has always been aim of the firm. To a large extent Mac Donald’s “canvas strategy” has been a success. Strategy canvas is therefore a framework that locates out the current state of play of the competition in terms of what the firm is presenting in value to the market as seen by the consumers. The firm is simply using a method called “value map” which is done in recognizing the connection between particular benefits on offer and, and how these benefits are configured by the competition. (Computer Sciences Corporation 2005). From this analysis it is clear that Mc Donald’s has made use of value map to create its own blue oceans.

The Four Actions Framework

The four Actions framework is one of the basic tools of the blue ocean strategy. The blue ocean advocates for four actions framework that include: Reduction of some factors well below the industry’s standard, creating new factors which the firm never had, raising the standards that can be raised well above the industry’s standard and to eliminate the factors that the industry takes for granted. To create a value curve the Mac Donald has used the four actions frame.

The above graph represents a picture of what is Mac Donald’s value curve that is as a result of the application of the four actions framework of the blue oceans strategy. From the curve it is evident that Mac Donald’s has a fundamental different value proposition from that of other restaurants. The space in the curve represents the blue ocean that Mac Donald’s has created for itself.

Mac Donald’s has reduced some of the factors that are well below the industry’s standard. First Mac Donald cut down on its expansion plans to concentrate on improving the firm’s rapport with the existing franchisees. Moreover the firm made it a priority to get rid of the other under performing subsidiaries by centrally focusing on its hamburger business. With the introduction of the Mc Cafe concept ; in Europe Mac Donald’s abandoned its cookie-cutter orange and yellow stores for individualized ones that did offer local fare like the ham and the cheese croquet, Mac Donald also reinstituted a tough “up or out” grading system that would kick out under performing franchisees. The second of the four actions framework is; creating new factors which the firm has never had. For instance, Mc Donald has been known to have created some new factors; like the opening up of a 17000 square foot showcase unit in the New York’s Times square with video monitors showing movie trailers, brick walls and theatrical lighting; there was the creation of a new menu by introducing some items that were never there before; Mac Donald’s also introduced the all new Mc kids line that was expanded into kids clothing, toys, interactive videos and books. The third of the four action frameworks; is the raising of the standards that can be raised well above the industry’s standard. Mac Donald’s for instance, has partnered with other firms like the Mattel, Hasbro, and Creative Designs; this was a move that was meant to raise the industry’s standard. This move was meant to get some royalties off the newly introduced Mc Kid’s line. The fourth of the four actions framework; is the elimination of the factors that the industry takes for granted. One of the major moves taken by McDonald’s was cutting back on its expansion plans. The firm had taken for granted its expansion operation. McDonald’s at a certain point has had to cut down on its training of employees.

The concept of “McCafe”

The McCafe initiative is a coffee house concept that was introduced by chief operating officer of McDonald’s, Charles Bell. McCafe was first launched in Australia and is a chain that mirrors a consumer trend towards traditional European coffee. McCafe is a coffee house approach of food and drinks chain that is possessed by and located in Mc Donald’s restaurants. The McCafe initiative has been very successful since its introduction; there has been vigorous growth that has been experienced across Asia, middle East, Latin America and Europe. (Progress Media Group 2009). After its introduction it was reported that McCafe outlets had actually produced 15 % revenue more than the regular Mc Donald’s. The concept has been very successful because it was reported that by the year 2002 there were already 300 McCafe outlets worldwide. From its rapid growth it can be concluded that the McCafe has been able to create an uncontested market space. In addition McCafe presents a wide selection of great tasting, exclusive expresso coffee, gourmet cakes and muffins and delicious snacks. According to HighBeam Research, Inc 2009 the real market of McCafe is in the overseas, in 33 countries. In the year 2007 McCafe expanded into Japan where they boosted their sales by introducing a healthier soup and sandwich offerings. They were also able to reach out to various audiences that preferred traditional coffee shops. Just to demonstrate how the McCafe concept has been able to create an uncontested market space; in South Africa the McDonald’s franchise is already a household name and is one of the largest fast food chains in the country at present.

Why McDonald’s is a Blue Ocean

The best strategic approach to explain Mc Donald’s strategy is the blue Oceans strategy. Despite some shortcomings in the McDonald’s attempt to create its own uncontested market space, the industry still remains to be Blue Ocean. First, McDonald’s has been able to introduce an innovative strategy; McCafe initiative that has been successful in the United States and more so abroad. The graph that has been presented in this paper best illustrates how McDonald’s has been able to create an uncontested space. From the curve, McDonald’s has a different value proposition from its competitors; the spaces in the curve show the uncontested space that has been created by the company. Mc Donald’s has been able to introduce so many items on the menu list; therefore Mc Donald is not a restaurant like the others for it competes with meals at home, and it has created a new way of getting the kids fed. In a nutshell Mc Donald’s is a blue ocean because it is highly innovative.

The other reasons as to why McDonald’s should continue using Blue Ocean Strategy is because, as it invests heavily in innovation, it has set itself apart from the rest of the other players in the industry thus making it a leader in its field. This is good for Mcdonald’s as it helps to drive its popularity and preference for more customers in the market.

As McDonald’s innovates to creates its own markets, it develops a culture of constant creativity, it reduces costs incurred by the company and the new demand it creates it not contested for and therefore it is able to maximize the profits. The table below gives a comparison of blue ocean and the red ocean strategies and highlights its main strong points.

Canvas strategy in the coffee industry

Strategy Canvas in the coffee industry has been used by a number of companies by employing different techniques i.e. introducing various services. This has been done by creating new markets in areas where the residents had not yet been exposed to the espresso! by Starbucks. These were basically the small towns particularly in the Mid West. (Fisenko, 2008). Initially there were no coffee shops that had the drive through stands, but with the increasing competition, some shops for the Espresso started opening shops with the drive through coffee stands. This seemed to offer a lot of convenience to customers it attracted new customers to the stands.

The first area of concentration for most of the companies in the coffee industry was offering diversity in their menus. Starbucks offered among many others, snacks, drip brewed coffee, ice cream, espresso drinks and other non-food items in the entertainment branch like music, movies and books. Starbucks on its side, at a time when it was facing difficulties in its coffee business as the competition got stiffer and its sales went on a constant decline, decided to make a change with the strategy canvas. Instead of concentrating on just making more sales of its coffee to the general public without making any distinctions, Starbucks differentiated its clientele from the rest of the other coffee consumers. This it achieved by venturing into a different kind of environment, integrating the entertainment and socializing scenes like the cinemas and the operas within their outlets. The new environment proved attractive to the corporate customers and mainly adults, a group that was initially neglected. (Trombetta, 2006).

In as much as coffee has been projected in many markets as a luxury drink, Starbucks has used this perception to its advantage by presenting it as a luxury drink yes, but at a lower cost for the moneyed customers. This has blended in well with its objective of attracting the corporate customers. In an effort to create more value for their customers, Starbucks decided to install fast wireless internet access for its customers in its stores in order to transform their experience of the services. This was aimed at accommodating the technology savvy young customers and those who continued to work even during the coffee breaks.(Anders, 2008).

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