McDonalds and Hospitality Industry - Case Study Example

McDonald’s and Hospitality Industry Name Course Name and Code Date Introduction The aim of the report is to discuss McDonald’s and the hospitality industry. The focus when it comes to McDonald’s that are discussed includes the fast food industry, the different strategies that McDonald’s employ in advancing the business operations. It includes pricing, costing structure, competition, opportunities and challenges that McDonald’s face, and other productivity factors. The second part discusses the fast food industry in terms of economic factors and some of the factors discussed include cost structure, competition, productivity, price elasticity among others. McDonald’s McDonald’s is American fast food and hamburger restaurant that was established in 1940. The business was reorganised in 1948 through the introduction of production line principles. The first franchise was open in 1953 and was the first time the arches logo was used. More partners joined the business in 1955, and the business continued to expand. As of 2015, McDonald’s employ more than 420,000 employees, serves more than 68 million customers daily, it has a franchise in more than 119 countries, and the approximate number of outlets are estimated at more than 36,615 outlets (McDonald’s, 2016). The primary products that McDonald’s deals with include desserts, milkshakes, soft drinks, breakfast items, wraps, French fries, chicken products, cheeseburgers and hamburger. The company operates different types of restaurants including McDonald’s Next, playgrounds, special diet, create your taste restaurant, McCafe and McDrive. The company continues to expand and continuous to innovate to address the growing challenges associated with the fast food industry. The Fast Food Market The fast food industry focuses on eating away from home and becoming a major enterprise across the world. Numerous factors have been associated with the growth of the fast food industry include inexpensive, convenient, tasty and fast nature of operations (Andreyeva, Kelly & Harris, 2011). In addition, the lack of preparation of food before preparation and the minimal amounts of utensils to wash after the service. However, the convenience of fast food, the low cost and the taste is associated with numerous diseases such as hypertension, diabetes, cancer and heart disease. Due to these health problems, the consumer behaviour continues to change and prefer healthy offerings (Roberto et al. 2010). The government and other stakeholders have advocated for reviewing the fast food industry especially when it comes to health, safety and labour regulations. Negative perceptions and discrimination are evident in the fast food industry, which continuously affects the offerings and the manner of completing business transactions. Role of Government Regulations The government influences the fast food industry through numerous processes. The processes include licensing and regulations specifications before opening the business and continuously upholding the requirements of the licenses. Some of the documentations compliances with health standards, food standard testing and health checks. Issues McDonald’s Faces McDonald’s faces numerous issues: Unhealthy menus perceptions - the fast food industry has a negative reputation for unhealthy food. The customers continue to appreciate the importance of health food and tend to move towards healthy offerings (Pearson et al. 2011). Low wages and poor working conditions – the workers are required to work in poor conditions and at low wages. The work these employees do are demanding, but the salary they receive is not consummate with the roles and responsibilities. The public perception about the working conditions and low wages may affect the consumer behaviour in acquiring the services and products of McDonald’s. Opportunities for McDonald’s The following are some of the opportunities for McDonald’s: Healthier options – the restaurant has to continue adding meal choices and healthier ingredients. The focus continues to change towards local ingredients rather than importing the ingredients (Nestle, 2013). It means McDonald’s should offer food with free range chicken, fresher ingredients with less addictive while other companies offer vegetables as a primary side or a main course (Grunert & Traill, 2012). These are some of the opportunities that the company can benefit in addressing the health requirements. Improving efficiency – McDonald’s should continue to use technology to reduce reliance on human resource. The aim is to reduce the costs of production, and these benefits can be transferred to other areas of the company (Allegretto et al. 2013). Labour improvement and salary increase – McDonald’s should improve the working conditions of the employees through increasing salaries and provide other employee benefits with a focus on health and safety objectives. McDonald’s has to uphold the labour regulations and continuously purpose to achieve labour objectives and regulations. Impact of Entry of New Companies The barriers to entry in the fast food industry are low. It means that it is easier for a new competitor to enter the market. Consumers bases their purchase decisions and consumer behaviour on convenience and price, meaning that the customer usually has a bargaining power. Pricing The strategic directive of McDonald’s is cost leadership approach in the determination of the prices of the products and services. McDonald’s approaches different strategies in arriving the prices such as the wage determination approach and the number of employees. For example, few managers are employed meaning savings are transferred to other sectors such as bargain prices. The prices of the products and services are obtained through addition process (Andreyeva, Kelly & Harris, 2011). For instance, the cost of raw materials (purchases), the utility costs, human resource costs and warehousing costs are added together to arrive at the right price of products. In addition, other expenses are added to arrive at the prices; moreover, the prices are dependent on the marketing and sales objectives of McDonald’s. For instance, when the company introduces a new product, the price may change to reflect the marketing objectives. Productivity To understand the effectiveness of productivity at McDonald’s, comparative analysis with the immediate competitor is done: Starbucks. Starbucks was inexperienced in the market but was growing at faster and in 2008, McDonald’s used its superior to lower prices, which affected Starbucks. MacDonald’s was able to use technology, reducing the prices of coffee while improving the overall quality (Lang & Heasman, 2015). Convenience is an important component in the fast food industry and any time lost creates a negative perception from the eyes of the customers (O'Kane, 2012). For example, there are more McDonald’s outlets and drive through compared with the competitors. In addition, the McDonald’s coffee is produced faster compared to Starbuck meaning the customers may prefer the McDonald’s coffee rather than the Starbuck. The method of production and supply to the customer focuses on just in time approach in which the goods are sold after the customer has ordered. The aim is to improve the overall quality while reducing wastages. These processes improved the productivity of McDonald’s. Cost structure McDonald’s cost structure relies on numerous things and also defines the costs to other processes. For example, the market data determines the estimate salaries and the salaries of different employees (Sharma, Teret & Brownell, 2010). Regarding the products and services, the costs are based on overall expenses and profit is added (Qin, Prybutok & Zhao, 2010). Some of the expenses include the purchases of raw materials, wages, depreciation government taxes, packaging costs, and other costs attributed to fulfilling the requirements of the customers. Competitors Competition is fierce in the fast food industry. Some of the major competitors include Starbucks, Pizza Hut, and KFC, which have numerous franchises across the world. Apart from these major competitors, minor competitors also exist in the market that influences the operations. It is an easy market that any competitor can enter, but the problem is attracting and maintaining the customers (Bougoure & Neu, 2010). Factors such as customer loyalty and associated variables influence the customers and dictate the influence of the competitors. Other factors such as convenience, cost/price, quality of care, and customer service influence the approach the competitors can enter the market. The initial cost of entry and the cost of capital also creates additional challenges for the customers and marinating the customers. Moreover, the low margins also mean franchising is one way of generating more revues, which also affects the single entry establishment (Schrempf, 2014). The location of the establishment and rental obligations also defines the competitors, and influence the strength of the competitors in the direction the establishment takes. Supply and Demand The supply side is dictated by the suppliers of the raw materials and other products and services while the demand is associated with customer requirements and expectations. The entire cost structure is influenced by the availability and supply of raw materials (Sharma, Teret & Brownell, 2010). The strategy of the company is to absorb some of the changing costs such as the energy costs, costs of raw materials and other costs directly associated with the production requirements (Boone-Heinonen et al. 2011). The customer demand influences the number of products purchased, and the demand fluctuates especially when the customer behaviour keeps changing. For example, the healthy option makes the demand to decrease while the prices of the products influence the customers. In addition, the fundamentals associated with consumer behaviour influences demand such as the cultural directives, societal expectations, family perceptions and peer assumptions. Thus, the supply and demand influence the pricing and cost structure of the company. Economic Forecast Market Structure An oligopoly is defined as a market structure that few companies dominate the market. A highly concentrated market is said to be a market shared by few companies. Even though some view companies can dominate, the possibility of entrance of small firms is possible (Belasco, 2014). The fast food industry takes the oligopoly form of the market because there are the major competitors and the small firm. Some of the main associated with fast food include KFC, Subway, and Burger King. In addition, there are minor companies and employs a franchise form of business such as the Wimpy’s, and Upper Crust. In addition, there are other independent small, fast food firms of establishments. However, the concentration ratio of the fast food industry can be estimated at 12:71 since 12 companies’ controls more than 71% market share. It means the market structure will be maintained because of the investment required to change the market dynamics and perception. System Load Factor The fast food industry is a tricky sector because each company aims to provide better services and products compared with the competing entity. For example, the introduction of technology continues to influence the strategic operations and outcome of these companies (Naina & Mohd, 2012). The companies tend to reduce reliance on employees and warehousing and sources products when they are required. The aim is to reduce wastage while high-quality products and services are offered. McDonald’s, Starbucks, Pizza Hut among other companies continue to innovate and integrate creativity to improve the business operations (Hawkes & Harris, 2011). Continuously studying of competing products and services means that organisational learning and change are important. Prices The fast food industry yields low margins meaning it is a challenge to compete with firms that employ a cost leadership marketing strategy. McDonald’s is an example of an organisation that has benefited from cost leadership marketing strategy because the company is able to offer basic fast food meals at low prices. The strategy is achieved through the use of untrained and inexperienced employees, and the company trains the employees rather than employing experienced and trained cooks. The company with the highest market share usually sets the prices and influences the pricing in the market (Schlosser, 2012). For example, McDonald’s engaged in a price war with Starbucks in 2008. The ideology will continue for the long term since these major competitors have the advantage of economies of scale. In addition, an increase in the cost of raw materials e.g. energy costs and costs of other raw materials means that the competitors will be forced to absorb most costs to maintain customers. Thus, the competitors and McDonald’s are forced to continue innovating and been creative to address the pricing problems and expectations. Productivity According to BLS (2016) indicates the changes in productivity. For example, the labour productivity index improved from 98.547 to 98.917 for the periods between 2012 and 2015. The total hours worked during the same period increased from 103.754 to 114.099. The improvement in productivity was also reflected in the output index in which it improved from 102.247 to 11.863. The data also indicates the unit labour costs increase from 115.331 to 124.916. The following table summarises the data: Analysing the data means that employees will continue requiring additional compensation, but also the employees have to improve their competency and service provision. It also means adjustments will be required in the type of leadership to incorporate the dynamism of the industry (Hebden et al. 2011). Factors such as suppliers and contractual agreements have to be upheld to reflect the legal and obligation requirements (Ryan, Ghazali & Mohsin, 2011). Therefore, changes are important in the industry to improve the productivity through reviewing working hours, labour relations, suppliers’ obligations and overall requirements of the market. Cost Structure Some of the important factor influencing the cost structure are different types of expenses. Nielson (2013) carried out a study to understand average costs associated with costs structure. The highest cost at 31% are purchases, which includes the raw materials, papers, and other accessories need to accomplish the production process. The second highest cost at 24.6% is wages, indicating that fast food companies have to improve in the use of technologies to reduce the costs on human resource. These two expenses account for more than 50% of overall cost structure. Others are rent, utility, marketing and depreciation, which are sometimes difficult to adjust. Thus, the focus of the companies is on purchases, wages and marketing structures, which can reduce the overall cost structure. The following table summarises the market cost structure for fast food industry: Source: (Nielson, 2013) Price Elasticity of Demand Andreyeva, Long & Brownell (2010) reviewed 160 studies dealing with price elasticity of demand of numerous food categories. The authors found out that price elasticity for foods ranged between 0.27 and 0.81 with meats, juice, soft drinks, and food away from home being responsive to price changes (0.7-08). The data indicates that when the price of juice increases by 10%, it reduces the average consumption by between 8% and 10%. Therefore, McDonald’s and other fast-food companies have to understand the threats of price elasticity of demand. For example, an increase in the cost of products translates to decrease in purchases. It means that the company has to continuously develop and champion processes that reduce the overall production costs and expenses. Competitors Competition is a major component in the fast food industry. Some of the factors to be considered include customer loyalty, saturation of the market, and expensive entry costs because of rental of strategic locations and other capital costs (Kraak et al. 2011). Understanding these variables allows the fast food companies to strategize and create solutions that can improve their positions relative to competitors. In addition, learning the customer behaviour and market dynamics ensure the fast food companies can introduce propositions that can sway the customers, and increase the market share and revenues. Recommendations The fast food industry is facing numerous challenges especially when it comes to health conscious requirements. The following are some of the recommendations to the fast food industry: Include or introduce health foods in the menus Engaging with the employees in reviewing salary and employee benefits Utilisation of technology and innovation in production and processing Reviewing the contracts with suppliers/other stakeholders to improve the supplies standards and qualities References Allegretto, S., Doussard, M., Graham-Squire, D., Jacobs, K., Thompson, D., & Thompson, J. (2013). Fast Food, Poverty Wages: The Public cost of low-wage Jobs in the fast-food industry. UC Berkeley Labor Center. Available at: http://laborcenter.berkeley.edu/publiccosts/fastfoodpovertywages.shtml Andreyeva, T., Kelly, I. R., & Harris, J. L. (2011). Exposure to food advertising on television: associations with children's fast food and soft drink consumption and obesity. Economics & Human Biology, 9(3), 221-233. Andreyeva, T., Kelly, I. R., & Harris, J. L. (2011). 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