Analysis of McDonald's strategy - Assignment Example

 Analysis of McDonald's Strategy 1. Introduction Globalization has enabled multinationals to operate overseas but such opportunities come with their own challenges. Today businesses face an even more complex interplay of social, technical, cultural, economical and political factors. This report would examine how globalization has impacted international operations in the fast food sector. 2. Purpose of report The purpose of this report is to gain insight into the influence of the external and internal environment in international operations. It would highlight the challenges posed by globalization. This would help identify why and how companies make mistakes and what should be considered before venturing overseas. 3. Background of McDonald's McDonald's Corp., the world’s number one fast-food chain, has a leading share in the globally branded quick service restaurant segment in virtually every country in the world. Taking advantage of the economic growth, McDonald's expansion overseas is phenomenal. They now have presence in over 188 nations with over 31,000 restaurants. They capitalized on the prediction that fast food sector would account for half of all food service growth during the first decade of the 21st century (Orji, 2005). Most restaurants are owned and operated by local people in their respective countries. Their international operations are significant to them as it brings in sizeable revenues through franchisees. However, in 2003, the company registered loss of $348 million after consistently declining sales for the past two years (Cuneen, 2008). Consumers and investors moved away from the brand. Globalization appeared to have impacted the standards and operations at McDonald's. 4. Globalization and its challenges 4.1 Concept of globalization Globalization has been described as the movement of business, industrial and professional activities into a global market place (Harris, 2002). It is the concept of moving towards single-world society. In the 20th century multinational started moving beyond national borders and into international arena and established special divisions for this purpose. Globalization has been defined and interpreted in different ways. The interaction of technology and consumerism resulted in globalization. It also promoted worldwide operations while freeing up of labor and capital flows. Globalization universalizes markets but relies on the greater interdependence of economics, of political systems, of culture and of societies. To achieve competitive advantage many companies have gone global. They have a global presence but this requires transformation in their strategies, operations, management, and marketing as well as their human and material resources and services. Globalization is the process in which a firm becomes global in its vision and corporate objectives in order to achieve competitive advantage (Gilani & Razeghi, 2010). Many firms are still in the process of globalizing. Globalization consists of the action that the firm takes in order to become globalized. 4.2 Globalization and culture Culture, according to Hofstede, is the collective programming of the mind which distinguishes the members of one group or category of people from another (Hope & Mühlemann, 2001). Each society has its own set of beliefs and has developed a set pattern of behavior which allows them to live harmoniously. These beliefs and patterns are handed down from one generation to another. Globalization has been unable to penetrate these set patterns and globalization cannot lead to a global culture. Multinationals can penetrate and succeed only when they adapt to local culture. This is because culture in which an individual is immersed since birth is likely to have much stronger impact than the organizational culture, according to Hofstede. Culture has a pervasive influence because culture is the lens through which individuals perceive and interpret phenomena. Craig and Douglas (2006) contend that culture is becoming deterritorialized and membership in a culture is becoming transitional. Due to this elements of one culture are being transported to another and the unique elements are less clearly demarcated. Hybrid cultures may be originating but as far as food is concerned, national cultures still play a vital role. 4.3 Market entry modes The most critical issue in overseas expansion is the choice of entry mode because wrong choices can lead to loss market potential as well as loss of important committed resources such as management time and money (Rajan & Pangarkar, 2000). The market entry mode impacts international operations, it affects performance in future and hence there is no single market entry strategy that can be applied in all circumstances (Zhao & Decker, 2004). Factors that need to be considered before the entry mode is decided upon, include the firm size, the product or service, the cultural environment, technology transfer, international experience, country risk and uncertainty, host country barriers, foreign exchange rate and host country currency. In short, the external and internal environment has to be assessed. There are four most commonly used forms of entering international markets – exports, licensing, joint ventures (JV) and wholly-owned subsidiaries (WOS). The decision is based on the different theoretical perspectives, the level of control required and on the basis of resources that can be committed (Brouthers & Hennart, 2007). Firms that require maximum control and are prepared for maximum risks and commitment, opt for WOS as the market entry mode. When local assistance and knowledge is essential, especially when firms enter an unknown market, joint ventures are preferred. Licensing offers no control at all. Control is the ability to influence operational and strategic decision of the foreign operations (Rajan & Pangarkar, 2000). Market potential as well as the firm’s international experience also influences the choice of entry mode. Knowledge about the host country and the legal framework is more important than the internal capabilities of the firm (Zhang, Zhang & Liu, 2007). Thus, the choice of entry should be based on tradeoffs between risks and returns. In services marketing service is the essence and firms try to maximize this through agents or a network of people. Traditional marketing has been replaced by other innovative methods and franchising is one such mode of entering an overseas market. Franchising is a contractual vertical marketing relationship between a franchisor and one or more franchisees at one or more locations. In this arrangement or mode of entry, the franchisor provides a proven and tested method of operations, support and advice, in exchange for a fee (Inma, 2005). Continued guidance and support is assured. Franchising has several benefits and is based on the resource scarcity theory. Franchising helps the company to raise capital, gain knowledge of local markets, reduce managerial constraints and transfer part of the risk to the franchisee. It also helps to reduce high monitoring costs substantially. This is an indirect mode of entry that helps to establish a local operation that is wholly or partly-owned by itself (Grönroos, 1999). Expertise is gained for a small fee and both the franchisor and the franchisee benefit from the economies of scale. McDonald's went in for aggressive and massive expansion within the US which promoted it to expand overseas. Many firms in the restaurant industry in the US grew so fast that they started facing competition and saturation in the US markets (Hua & Upneja, 2007). Advancement in technology and global distribution systems resulted in chain restaurants going abroad. Companies such as McDonald's may have found global markets but this has not simultaneously homogenized the western culture. 4.4 Standardization and adaptation It has been argued that there is no need to adapt to the elements of the marketing mix to suit local tastes due to the “globalization of markets” (Gilani & Razeghi, 2010). However, product standardization does not always work. The assumptions on which the standardization process is built, is not always accurate (Gilani & Razeghi, 2010). A certain level of adaptation is necessary when companies want to market their products overseas. Standardization implies identical product lines at identical prices through identical distribution systems and with identical promotional programmes (Zou, Andrus, Norvell, 1997). Standardization means a product-centred approach and this can blind a person to changing customer preferences. 5. Analysis of McDonald's strategy Globalization and the free trade have helped the US companies such as McDonald's to venture overseas. McDonald's undertook aggressive and massive expansion but they failed on certain counts. While competitors like Wendy’s and Jack in the Box registered profits, McDonald's continued to decline. 5.1 Globalization and cultural issues Globalization has resulted in consumers seeking different tastes in food but adaptation to foreign taste has yet to develop. When the process of globalization started in the 1960s, tastes and needs of consumers were expected to converge, which would lead to standardized marketing and advertising of products (Mooij, 2000). McDonald's developed a standard menu for its global outlets overlooking the fact that immigrants make up for a sizeable population everywhere. They could not anticipate that because of this, markets were becoming fragmented. They did not have a sound understanding of consumer perception and preferences for fast food outlet, which according to Kara, Kaynak and Kucukemiroglu (1997), is an essential prerequisite. McDonald's introduces new products for a limited period as they realize that consumer seeks variety. However, they have not been able to add healthy food items in response to growing concerns about obesity (Andidas, 2003). McDonald's focused on children’s preferences and ignored all other segments. The world may have become more homogeneous with technology but standardization of all elements of the marketing mix does not work. Differences in terms of culture, stages of marketing and economic development, political and legal systems and customer values and life styles, imply that adaptation is the appropriate approach (Gilani & Razeghi, 2010). Cultural realities have to be responded to, and adaptation approach enables to respond to customer demand in individual cultural setting. McDonald's has been accused of undermining cultural diversity and destroying the viabilities of local communities, says Rifkin (2001). In India they violated the Hindu dietary laws when they served beef. Consumers do not respond uniformly to products or services in the fast food sector. Culture influences how fast food is accepted in different societies (Lee & Ulgado, 1997). In Korea, the expectations differed from the customer expectations from the US. McDonald's had not conduct a market study of the Korean market before launching its products there. They expected it to be uniformed like other developed nations and hence did not achieve success. Korea is a collectivist society and eating out is a special social occasion. In Korean markets McDonald's could not provide the desired service and quality. The fast food sector is losing the pull factor (Richardson & Aguiar, 2004). Consumers have started scrutinizing the fast food companies. The fast food companies hence need to be knowledgeable about the external environment, which McDonald's did not pay heed to. They planned their own menu without taking into account the external environment. 5.2 Mode of entry In the mature and developed market they have company owned restaurants but in other markets they serve as franchisors as the restaurant business is capital-intensive. McDonald's has experienced growth because of their influence in establishing organizational systems of complete control at every stage – from raw material to production, from worker to consumer (Kulkarni & Lassar, 2009). Most international franchisors are market-seekers and very few have entered using the equity mode. McDonald's has been a market-seeker as it has enabled them to exploit their firm-specific capabilities overseas (Pak, 2002). This merely involved standardized replication of packaged services from one location to another. McDonald's has benefited from its international operations. International franchisors have preferences for certain types of entry modes which are based on their strategic motives. They took advantage of their business model in the US and with negligible investments they could enter foreign markets easily. They also gained from the local knowledge of the franchisor on the choice of location within the country or region. Based on the resource scarcity theory, this was a strategic move on the part of McDonald's. Moreover, initiative on the part of the independent business owner in other countries also encouraged it to follow this route to enter international markets. Pak confirms that the more a franchisor recognizes the significant role of foreign applicants, the more it is likely to enter foreign markets through contractual modes. The more success that franchisors obtain through contractual mode of entry, the more likely they are enter through this mode. The success that McDonald's achieved motivated them to make further entries through franchising. 5.3 External environment analysis Franchising requires monitoring and control but in emerging economies this is a challenge because of the cultural and geographical distance (Welsh, Alon & Falbe, 2006). Political and economic risks in the emerging markets are high but McDonald's evaluated these before entering. Besides, since their financial investment was minimum, the risks too were low. Moreover, having a local franchisee promotes political and cultural acceptability. Currency risk impacts franchising activity, but this is offset to some extent because the franchisors receive the fee as a percentage of the revenues, and not as a flat fee (Fladmoe-Lindquist & Jacque, 1995). The franchisor is unaware of the host country business laws and the behavior of the foreign agent and this risk persist in franchising. It becomes difficult to gather information about the operations in foreign countries but technological advancement has reduced this risk to a large extent. Due to reduction of communication barriers as a result of globalization, franchising has been encouraged even by the government bodies in many countries including Singapore and Malaysia (Hoffman & Preble, 2004). Through franchising in emerging economies, McDonald's has helped many small businesses to grow and the overall national economies to grow as well. Even Middle-East governments have encouraged investments and consumers globally are able to have easy access to products and services. Moreover, the middle-class consumers globally have become upward mobile thereby potential consumers for services such as fast food. Franchising has allowed major business sectors such as restaurants and fast food sectors to grow and reach the masses in most countries. Globalization also attempts to homogenize the markets and this is an adverse impact of franchising (Welsh, Alon & Falbe, 2006). McDonald's too faced such accusations of westernizing the preferences because there is a tendency to shift from local and cultural elements. The consumers stand to gain in the process as they receive goods and services at better prices due to enhanced distribution system. Another impact of globalization has been that smaller establishments could enhance their service offerings by becoming franchisees of McDonald's. McDonald's did not have clear vision of where they were heading. They never anticipated problems related to product diversification. Nearly 2000 units were built annually on a global basis in the ten years ending 2002 (Cuneen, 2008). This period of aggressive expansion saw the number of units rise up from 13,000 to 31,000. The legendary McDonald's mantra of Quality, Service, Cleanliness & Value – was no more found at old or new restaurants. Customer satisfaction was no more the focus of the company. They tried to cater to mass market which does not work in the food sector specially as customers are educated and demanding due to globalization. There had been no change in the menu since the introduction of Chicken McNuggets in 1983. This was a multibrand corporation as they invested in several brands such as Boston Market, Chiptole Mexican Grill, Donatos Pizza. These diluted the brand image and it was a barrier to offering healthy menu choices. Because of reduced trade barriers and opening up of FDI in several countries, they merely invested in such brands without focusing on consumer choices. Since competition in the fast food sector is high, the distribution and retail outlets are of relevance to ensure consumers have easy access to the product. They open as many outlets as possible in any new country before competition sets in. Towards this strategy, McDonald's had added 415 restaurants in Japan in 1998 alone (Orji, 2005). In emerging markets their strategy differs as in the case of India, China and Mexico. In such locations they gradually add restaurants every year as its popularity increases. They look for best locations in any country and maintain similar store front. McDonald's should be just a few minutes away for any consumer and hence they have the ‘free standing restaurants’ while at schools they have the ‘tucking restaurants’ (Need, 2007). However, in its attempt to locate their restaurants at strategic points, they hurt the public sentiments in Israel. The Golani Bridge in Israel figures prominently in the Israeli military history. This intersection is at the Lower Galilee and is named the Golani Junction as a mark of respect (Azaryahu, 1999). Locating the restaurant next to the Memorial became a controversial issue as it seemed to overpower the memorial. McDonald's was accused of disregarding long-standing traditions and conventions; this was also considered as “Americanization’. Again a standardized approach in selection of distribution points cannot work. Local sentiments, conventions, traditions and culture have to be taken into account. 6. Recommendation McDonald's mode of entry was strategic as it required minimum investment and with opening up of economies, they could expand exponentially. However, they have been expanding without focus which has seen a decline in their franchisee relations, customer relation, sales and growth. After decline in their service and quality several outlets in many countries are facing closure. They have been trying to diversify without and focus and strategic direction. Mass marketing has become impractical due to diverse customer needs and sophisticated marketing techniques. Franchisers agree that cultural differences do affect the customer demands (Risner, 2001). McDonald's should undertake market segmentation as it does allow catering to diverse customer needs is a resource-efficient manner (Lindridge & Dibb, 2003). Based on market segmentation theory it is possible to group customers using variables that help to discriminate between product needs and buying behavior. McDonald's focused on adding items without taking into account customer needs. They can consider taking into account ethnic customers because of their increasing size, purchasing power, and geographic concentration. This segment could provide McDonald's with an opportunity to modify their marketing techniques. After segmentation they should consider product positioning and promotion. Underperforming franchisees suffer when their contract is terminated. This is an adverse impact of globalization. McDonald's should not open too many outlets within the same region/location. Other existing franchisees suffer in the process as too many outlets dilute the brand. A thorough market study should be undertaken before a franchisee is approved. When underperforming franchisees jump to another brand, it has a negative impact on the brand image of McDonald's. Mass marketing strategy has to be eliminated. They must show concerns for the franchisees as their investments are heavy and so are McDonald's has undergone expansion based on a product-oriented approach while completely ignoring the ever-changing customer needs and preferences. They need to recognize that the fast food sector has undergone change and nutritional value has gained importance. Online food service has been gaining importance and McDonald's should tap this segment. This is a separate segment and requires massive investments. This should not be done through the regular franchisees but separate franchisees or business owners should be appointed to cater to the online segment. In nutshell, standardization may reduce the overall costs in promotion and advertising for the franchisor, but it benefits neither the franchisee nor the consumer. A company exists for the society in the society but if global expansion has negative outcome, low level of expansion should be preferred. 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