Business Overview
McDonald’s Corporation is the world’s largest fast-food chain that serves over 69 million customers in approximately 34,000 outlets that are spread across more than 115 countries. Founded in 1940, the company is highly reputable because of its globally recognized brand.
It operates on a franchise business model where majority of its businesses are operated through franchises that are spread across the world with few of its outlets being company owned. With a revenue of over USD$2.56 billion in the 2011/2012 financial year, the company continues to dominate in the fast-food industry, despite the increasing competition from other players.
The company’s fast food business is characterized by high efficiency of running its operations and serving its customers. This paper provides a strategic analysis of McDonald’s Corporation with the aim of presenting strategic management recommendations that will give the company a competitive advantage to retain its leadership position in the fast-food industry.
External Environment and Competitive Position
Industry Analysis
McDonald’s Corporation operates and competes in the fast food industry. The industry is characterized by a high level of competition, sale of cheap food products, and different regional growth rates. The high competition in the sector is due to the extremely low barriers in the industry’s operations.
For example, while McDonald’s has the largest market share in the USA, this share is only at 26% while the smaller fast-food restaurants hold a combined market share of 55%. The global fast-food industry is a multibillion dollar industry with over USD$ 500 billion of revenue that is recorded annually. In the United States, the fast-food sector accounts for USD$120 billion of USD$ 600 billion restaurant sales.
The industry has been affected by a change in social and economic trends across the world. For instance, in the last five years, the sector has experienced a slow growth of 3.5% due to the global economic meltdown of 2007/2008, which greatly reduced the disposal incomes for customers across the world.
Further, the rising awareness on health risks that are associated with the intake of high fat, salt, and sugary foods has also been a blow to the growth of the industry. However, it is projected that the industry will continue to grow through 2019, with more growth activity in the emerging markets such as China, Asia, and Africa.
Another important industry trend is the increasing cost of doing business because of soaring food and energy prices. For example, after labor, food, and beverages account for the biggest share of costs in the fast-food industry, representing 33% of all costs. An increase in the prices of food and beverage has a significant impact on the bottom-line of fast food companies and that McDonald’s is no exception.
International expansion is increasingly playing an important role in bringing revenues for fast food companies, which are experiencing slow or stagnated growth rates in the mature markets of the US and Europe.
For instance, international business franchises for McDonald’s account for 60% of its revenues and 50% for a McDonald’s competitor, namely ‘Yum Brands’ . Another important trend in the industry is the growing middle class in developing countries. The trend represents an expanding ready market for fast-food industry players (Thompson, Strickland, & Gamble, 2008).
Five Forces Model Analysis for McDonald’s
Porter’s five-force model describes an organization’s strategy as the steps and actions that are geared towards attaining competitive advantage in its industry. Five-force model analysis allows an organization to study competition in five different areas, including providers’ negotiation authority, clientele bargaining command, threats of substitutes, pressure of latest entrants, and opposition.
In the case of McDonald’s, the threat of new entrants and rivalry is very high due to the low barrier of entry. Establishing new restaurants requires a relatively low capital outlay and no existing customer base. Further, with the option of leasing premises and equipment, the cost of establishing new business in the sector becomes even lower.
In addition, the industry’s saturation is high, although it has monopolistic tendencies where few outlets dominate the market, with the rest sharing a minimal percentage of the remaining market share.
However, despite the easy entry into the market, new entrants do not find it easy while competing with the already established companies such as McDonald’s and Yum Brands, which have strong brands, strategic locations, and financial resources to roll out extensive marketing and advertising campaigns.
Further, with well-established relationship with suppliers, established brands have a relatively advantaged position in the access of raw materials.
Secondly, the threat of substitutes is very high in the fast food industry. For instance, many people can opt to prepare and eat food from the comfort of their homes. Secondly, there is minimal differentiation between the products offered in different fast-food restaurants.
Further, since there are no switching costs for consumers to other substitutes, the threat is very high. To curb these threats, McDonald’s must focus on price competition, quality of service, and a reduction in operation costs in order to reduce the threats of substitutes.
Thirdly, the bargaining power of customers exerts moderate to low pressure on the industry. For example, McDonald’s is increasingly promoting differentiated products such as “Big Mac” among others.
However, although there are many substitutes and no switching costs, industry leaders such as McDonald’s position the process of their products in relation to their major rivals and within the prevailing market price elasticity and competition. High brand value and customer loyalty play an important role in reducing the bargaining power of buyers.
Fourthly, the bargaining power of suppliers is moderate due to the presence of a global supply chain. However, some areas of supplies such as the supply of soft drinks that are dominated by few suppliers such as Coca Cola and Pepsi mean that such companies have a considerable bargaining power over the fast-food industry players.
Fifthly, competition rivalry in the industry is moderate to high. For instance, although McDonald’s and Burger King hold a higher share of the ‘burger segment’, the market as a whole is dominated by small fast-food companies spread across the world.
The competition is majorly cost-based where firms are continuously investing in cost effective production and service processes to gain competitive advantage over rivals. With low costs of exit and the capacity to expand through franchising, the competition is cutthroat for industry players.
However, the most popular tact of fighting competition is through branding. For instance, McDonald’s spends approximately USD$650 million each year in its branding activities.
Internal Environment and Competitive Position
SWOT Analysis
Value Chain Analysis
The value chain analysis identifies the mix of activities that allow an organization to remain competitive in its industry. Through the value chain analysis, an organization is able to categorize the generic value-adding activities that it undertakes. The model consists of an analysis of organizations’ activities that are categorized as primary and support activities.
The primary value chain activities include inbound logistics, operations, outbound logistics, marketing and sales, and service. These activities are supported by other activities that include technology, cost advantage, infrastructure, human resource management, procurement, and infrastructure.
At McDonald’s, inbound deliverables represent the goods and products that are coming into the company for the production of its final products. The company purchases its inputs such as raw vegetables and beef from fixed and pre-defined suppliers.
The company is actively involved in the activities of its suppliers to ensure quality and reduced costs, which ensure value addition for the final products for its customers. In terms of operations, McDonald’s has a well-established operations management apparatus that touches on all areas of production, including inventory management, food production operations, and logistics management.
In terms of outbound operations, McDonalds strives to provide the highest quality products and services at the greatest value to customers. Further, the company seeks to provide its services in a clean and welcoming environment. For instance, its close involvement with its suppliers, employees, and franchisees serves its commitment of offering the highest quality products for its customers.
Its focus on energy conservation, sustainable packaging, and waste management further illustrates the company’s dedication and desire of building a sustainable, environmentally friendly, and profitable business.
In terms of marketing and sales, the company’s activities are spread across more than 115 countries worldwide, serving more than 69 million customers daily. The company also employs more than 1.5 million people, thus making it one of the world’s leading employers. McDonald’s has increased its shareholder dividends for 25 consecutive years.
This observation is a clear indication of its success in its core business and desire to offer value to its shareholders (Thompson, Strickland, & Gamble, 2008). Its extensive advertising campaigns cover the mainstream media, billboards and signage, and sponsorships of sports among others.
The support activities for the company are important in helping the successful implementation of the primary activities. For instance, the company strives to have modern and sophisticated infrastructure, which also involves the use of ICT. The company also strives to offer welcoming and environmentally friendly restaurants in all its locations.
It provides services such as free Wi-Fi and other services such as kids play areas to ensure that customers feel well attended. On human resource management, although the company has one of the highest employee turnovers, it remains one of the leading employers in the world.
Looking to the future, technology will play an important role in the company’s growth. Currently, the company has successfully applied technology in some areas of its operations such as the management of procurement through its E-Procurement portal for all its restaurants, a plan that has made it cut costs by 85%.
Competitive Strategy
McDonald’s competitive strategy is built on three key strategies that include cost leadership, differentiation, and focus. In terms of cost leadership, the company strives to offer its products at the best rates in the industry. To achieve this goal, the company has invested heavily on technology and innovation to help cut the cost of production of products without compromising on quality, hence creating value for its customers.
In terms of differentiation, although the company works in an industry that has little differentiation of products, McDonald’s strives to offer differentiated products in terms of quality and cost. For example, its Big Mac is one of the most popular products. Further, by striving to ensure cleanliness and environmental friendliness, the company strives to offer differentiated high quality services for its customers.
Strengthening Competitive Position
It is important for McDonald’s to find ways of strengthening its strategies to remain in its prevailing competition position. One of the strategies that McDonald’s company uses is the cost effectiveness strategy to ensure that the costs of doing its business do not erode its strong financial base. For instance, through close involvement with its suppliers, the company is able to cut the costs of input products by a large margin.
Further, the usage of technology plays an important role in driving cost effectiveness. For example, the company’s E-Procurement system, which has seen a reduction of costs of purchasing by 85% ensures that its franchises are able to remain profitable and hence ensuring that the company’s operations across the world last longer.
The company responds defensively to competition as it is evident through its USD$500 million marketing and advertising programs that are aimed at cementing the company’s leading position. Further, through innovation and response to health concerns by customers, the company has responded effectively by introducing products such as ‘light meals’ that are aimed at attracting and maintaining its health-conscious customers.
The Global Market Place
McDonald’s is a global company with operations that are in line with its international expansion plans of establishing its presence in all corners of the world. Franchising is the main method through which McDonald’s enters new market. So far, the company has been highly successful. For instance, 60% of the company’s revenues are from international markets, a clear indication of its success in international markets.
The company has attained a competitive advantage over its rivals through its global expansion. Firstly, with the mature markets such as the USA and Europe having little space for expansion, venturing into international markets has allowed the company to achieve its much-needed growth to segment its market position.
Further, with revenue source distribution, the company has been able to achieve revenue growth through major crises such as the 2007/2008 financial meltdown. To continue its expansion trajectory, there is a need to visit more regions in its already established international markets, which it has not been able to serve completely.
Corporate Strategy: Business Diversification
In the last 10 years, McDonald’s has focused on expansion and diversification within its core business of fast foods. For instance, in 2003, the company sold Donatos Pizzeria, which it had operated for four and half years, citing increased operational costs of running the company. This situation was in line with its revitalization plan of seeking to increase operational efficiency, product development, and marketing and advertising.
In response to increasing health concerns regarding the company’s products, McDonald’s has sought to diversify its menu by adding new healthy food options for its increasingly healthy customers.
Such approaches have allowed the company to achieve not only high profitability but also retain its customers by responding effectively to their preferences. Looking ahead, the company must strive to introduce new products or redesign its existing products to reflect the health culture that is threatening to affect the fast-food industry.
Ethical, Social Responsibility, and Environmental Sustainability
McDonald’s ethical, social, and environmental sustainability is built on the desire of ‘making a difference’. The organization pledges on ensuring that its business is ethical, truthful, and dependable. This pledge is reflected in the company’s mission and values. The company’s brand mission is to be it clients’ preferred choice and way to get food and drink.
Further, the company’s “Plan to Win” statement indicates its commitment to exceptional customer experience. The company’s values reflect its ethical, social, and environmental responsibility where it is committed to giving back to community, operating its business ethically, and growing its business profitability. The company conforms to its ethical statements by practicing honesty, fairness, and integrity.
On social responsibility, the company is involved in many community projects whenever it operates. For instance, through its Ronald McDonald House Charities, the company has supported over 7 million children and families. On environmental sustainability, the company understands that its activities have the possibility of affecting the environment due to the high quantity of products that are consumed each day.
In this case, the company has an elaborate set of standards that its suppliers must adhere to while producing the company’s inputs. The company also has initiatives that focus on energy conservation, sustainable packaging, and waste management.
To remain competitive, the company must increase the level of community involvement in areas where it operates. Further, through the adoption of technology, the company can reduce its energy consumption and wastage as a way of promoting environmental sustainability of its activities.
Strategy Execution: Building the Capability to Execute Strategy
The execution of a company’s strategy can only be achieved through its people. It is important for McDonald’s company to build its capacity to execute the proposed strategy. Firstly, the company has a large financial base, a well-trained human resource, and a well-established structure to support the execution of the product (Aaker & McLoughlin, 2010).
The company has a clear and streamlined decision-making structure at every operational level. Further, the company’s support and involvement with its franchises makes it easy to execute and implement strategic decisions. One of the key strengths of the company is its hiring and training practices, which allow it to attract highly trained and experienced top-level management personnel.
Further, the elaborate training that new employees undergo ensures consistency, which is effected throughout the organization’s services. However, a different structure will work best for the company. For example, a structure, which focuses on improving the sharing of information and motivation for the employees, will ensure a clear understanding of the requirements of the strategy.
Further, the right motivation will promote employee loyalty whilst reducing the high turnover of employees, which may derail the organization’s ability to implement the strategy successfully.
Strategy Execution: Managing Internal Operations
McDonald’s employs over 1.8 million employees, making it one of the leading employers in the world. The company’s compensation program is aimed at attracting, retaining, and engaging highly talented individuals at all levels. However, the high rate of employee turnover at the low and middle levels is a cause for worry.
There is a need for the company to motivate its employees by providing better compensation and working environment. However, the company provides benefits and compensations, including medial, vacation, incentives, recognition programs, profit sharing, and employee and dependent insurance cover.
Despite the power of an effective information system, the company has been unable to effectively identify and understand its employee needs. Such understanding can help it to best execute its strategy.
The executive packages for the company’s decision-making team are some of the highest in the industry. The top three executives earn more than USD$ 25 million in combined annual monetary benefits. For instance, the CEO earns approximately USD$9.5 million annually.
However, there is a big disparity between the earning of the executive and the lowest employee earnings where the CEO earns approximately 380 times more than what the lowest employees earn. For the company to eliminate this disparity, there is a need to increase the wages of its lowest employees.
Conclusion: Strategy Execution: Leadership
The following is a summary of the recommendations that the company must adopt to improve its strategies that are aimed at maintaining its competitive advantage and leading position in the fast-food industry. The company must put in place a 5-year strategic plan through which it will execute the goals of its strategy.
In putting a calculated plan in place, the company will ensure that it sets its eyes on achieving the goals of its strategy. The fast-food industry is very competitive and dynamic. It is important for the company to strive to retain competitive advantage in the sector.
There is a need to replicate the success of the company’s E-Procurement across other areas of operations in order to cut operational costs and hence gain competitive advantage in the industry. This observation represents the potential of technology in promoting the success of the company’s strategy.
Further, as the company’s customers become health conscious, it is important for it to offer healthy alternatives of its products. The leadership of the company must also recognize that its strategy can only be successful through its people and hence the need to put in place measures that will bring onboard all the company’s personnel.
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