Managing International Business - Case Study Example

International Business Management Name Professor Institution Course Date International Business Management Executive summary This report is prepared to analyze entry strategy and different challenges such as economic, political and cultural influencing McDonald’s entry into Asian market particularly China and Singapore. McDonald's Corporation is considered the largest hamburger restaurants in the world in terms of revenue with a market share of 16.7% followed by Yum! Brands with 10.9% (appendix1) (McDonald’s 2014). The restaurant chain was started in 1940 in California. The business has since grown and now and now presence worldwide. Today the company has 35,000 outlets and serves 68 million customers in 119 countries (McDonald’s 2014). IBISWorld (2014b) claims that McDonald’s is recognized for hamburgers, chicken, cheeseburgers, French fries and soft drinks. McDonald's model of business is basically concentrated on franchising or joint venture. Because of stiff competition in the US market and potential economic growth in other markets, McDonald's started targeting the Asian market. Table of Contents International Business Management 2 Executive summary 2 Table of Contents 3 1.0 Introduction 4 2.0 Chinese fast food industry 4 3.0 Why McDonald’s made an entry to Chinese fast food industry 5 4.0 Singaporean fast food industry 8 5.0 Why McDonald’s made an entry to the Singaporean fast food industry 8 6.0 Entry strategy used by McDonald's to enter both China and Singapore 11 7.0 The economic, political and cultural issues faced by McDonald’s in China and Singapore 15 9.0 References 16 10.0 Appendix 19 1.0 Introduction With globalization being embraced by most businesses, the business environment has changed tremendously even as companies scramble for new markets. Euromonitor (2010c) argues that the number of companies operating in the American fast food industry has gone up in the recent past, causing a stiff competition and to some extent saturation of the market. Market players are looking for other markets to invest and maximize their profit in future. One of such players is McDonald’s; a fast food restaurant with headquarters in Texas US. The company has realized how risky it is to focus on one market (the US) in the current business environment. The risk is contributed by increased competition from other market players such Dominos, KFC and Subway systems among others (IBISWorld 2014b). The company is targeting a potentially growing markets of China and Singapore. As such, this report analyzes entry strategy and different challenges such as economic, political and cultural influencing McDonald's entry into Asian markets particularly China and Singapore. To put this discussion into perspective, this report will start by analyzing both Chinese and Singaporean fast food industries. 2.0 Chinese fast food industry Contemporary fast food sector in China began fairly late together with the adoption of reforms in China. KFC was the first to establish first fast food outlets in Beijing, China in 1978, marking fast food market in the country (Euromonitor 2010a). In 80’s and 90’s, some other fast food venture of Western Origin started entering this market, and attained favorable success. Fast food of Chinese origin also started streaming into the market. According to features of the fast food market of Chinese origin, fast food is categorized into two main classes as Chinese and Western fast food (Chow et al. 2007, p.699). Characterization of the Western fast foods is is normally fried and roasted with a small quantity of key ingredients, slight condiments and ingredients are embraced. The major varieties of the Western fast food are chicken nuggets, hamburger, French fries, Pizzas, etc. which are usually accompanied with soft drinks (Lv & Brown 2010, p.106). Characterization of the Chinese fast food is hard to recognize because they exist in a bulky variety of key ingredients, minor condiments and ingredients. In the recent past, reduced leisure time and lifestyle changes have led to a customer change from traditional service outlets towards fast-food restaurants. Furthermore, increased the Western influence in Chinese and high incomes have resulted in increased need for fast-foods (Lv & Brown 2010, P.109). With the rapid growth of population, improved disposable income, and new food styles and brands, sector growth have become strong in the recent years. IBISWorld approximates that Fast Food Restaurant sector in China will create profits of $94.4 billion in 2013, an increase 8.0 percent from 2012 (IBISWorld 2014a). It’s estimated that the last five years, the sector profits have been going up at a yearly rate of 13.0 percent. 3.0 Why McDonald’s made an entry to Chinese fast food industry The Chinese fast food industry is growing so fast with the population increase over the years. It is projected that the urban population of China will be 1billion by the year 2030 (Datamonitor, 2007). Even as the population grows, other nationals are also moving in the country for business or leisure purposes. This contributed to the reason why businesses including McDonald’s want to invest in China. The economy has grown tremendously over the last 10 years to become the second largest and growing economy after the US. Beginning 2013, China has a nominal GDP of about US$9.3253 trillion consistent with International Monetary. If the purchasing power parity is considered, since the economic liberalization started in 1978, China is regarded amongst the rapidly-growing economies of the world depending mainly on investment (Qin, Prybutok & Zhao 2010). According to Waldmeir (2011, p.17), the Chinese food service sector has continued to record a double-digit yearly rise from 2003. This mean there is a lot of room for further growth. China is also a WTO member and the biggest trading power in the world with a sum total global value of trade of US$3.88 trillion in 2013 (IBISWorld 2014b). China is business a busy nation with most people involves in business. As such, several people do not have time to cook at home. Exhausting work hours, longer commuting hours in a heavy traffic and house combined give most Chinese citizens few incentives to prepare their individual meals. With the busy schedule they prefer fast food. That situation leads to perfect opportunity for setting up fast food restaurant though. The scramble for China's rising appetite for rapid, expedient meals is simply starting to go up. Embracing other culture because of having diverse cultures has had a massive impact on its success with regards to fast food industry (Hoare & Butcher 2008, p.157). Demand for the fast food also has been encouraged by the growth in disposable income in the previous ten years. Trends in customer age, especially the rising median age of Chinese population, have prompted demand for healthy fast food options which are offered by McDonald’s. Trends in the real family disposable income influence demand for the fast foods. IBISWorld (2014b) contends that the growth in disposable income makes the customers to spend extra money on luxury purchases like the takeaway foods. Disposable income is anticipated to go up in 2013/14, even though at a slow rate compared to the past year (IBISWorld 2014a). IBISWorld (2014a) claims that the middle class population of China had attained over 300 million people by 2012. Hurun Report claims that the number of billionaires in terms US dollars in China rose from 140 to 251 between 2009 and 2012 making China regarded as the second country with the most number of the billionaires (IBISWorld 2014a). Chinese luxury product market has expanded greatly with 27.5 percent of the international shares. The technology infrastructure is the reason which makes Chinese market ideal for investing more so fast food. This industry needs a lot of marketing and information both on the side of the company and customers; a situation which is boosted with advanced technology presence in China (IBISWorld 2014a). McDonald’s capitalized on the technology platform to increase their brand awareness, increase customer base and improve their brand. IBISWorld (2014a) postulates that China today has the leading number of active mobile phones users globally with more than one billion users. This country also leads in broadband and internet users globally with more than 592 million internet consumers representing approximately 44 percent of the total population (Chow et al. 2007, p.704). A report of 2013 established that the nationwide standard internet speed of connection is 3.14 MB/s. In the same year, the report also established that China represent for 24 percent of the global internet-connected gadgets. The political climate of China can be argued to stable. This encourages investment from all corners of the earth. The government also supports business since they understand that it is the same factor of the economy that has made the company (Li 2005, p.42) 4.0 Singaporean fast food industry Singapore is not known for the fast food industry. However, the economy is growing so is the fast food sector. The first restaurant was set up in 1966 and was A & W family-oriented outlet. This paved the way for other restaurant chains (Li 2005, p.42). A & W family was followed by KFC with the establishment of a Somerset restaurant in 1977 while McDonald's opened its outlet at Liat Towers in 1979 (McDonald’s 2014). The number increase of the franchises increased considerably. After these burger outlets, Singapore witnessed entry of more pizza delis and outlets. However, numerous fast-food restaurants emerged and did not survive due to fierce competition. Even A & W family-oriented outlet, a founder of the Singapore fast food market came across the stiff competition and to closed it operations in 2003. Namkung & Jang (2007, p.388) claims that today, there are three leading market players in fast-food business including McDonald's, Burger King and Kentucky Fried Chicken, with the McDonald having the largest share of the market. 5.0 Why McDonald’s made an entry to the Singaporean fast food industry Currently, Singapore has become a greatly grown market economy founded on historical entrepôt trade. Alongside Hong Kong, Taiwan and South Korea, Singapore is considered one of the major blocs forming what is referred to as Four Asian Tigers (Xie 2007, p.114). What encouraged McDonald’s to enter into the Singaporean market is that this country’s economy is recognized for freest nature, most innovative, most competitive, and also as the business-friendly. This has contributed to significant growth of fast food industry over the years. The report by Index of Economic Freedom of 2013 rated Singapore as the second free economy globally after Hong Kong. Even though, many businesses would flock to the country because of its free to entry, it would have help businesses more so McDonald’s in avoiding trade barriers and high cost of operations (Kotler& Armstrong 2010). Over the years, the Corruption Perceptions Index report has consistently ranked Singapore amongst the least corrupt nations globally, alongside New Zealand. This encourages clean business which observes ethical issues in its operations. In the countries where corruption has thrived, the fate of doing lies in corrupt officers who hold positions in the business sector; meaning your business must part with higher amount money to bribe the officials on occasions (Kotler & Armstrong 2010). Singapore corrupt free nature encourages McDonald’s to compete fairly. The country has also paid attention to workers’ right, payment levels and environmental conditions of organizations. Today, Singapore is one of the rapidly developed Asian countries with numerous attractive employees’ policy in the globe. Currently, Singapore is one the friendliest country with open policies for the foreign companies (Tan 2007). The situation forms a good opportunity for an expanding company like McDonald’s, which may be received well in other countries. Singapore is ranked as the 15th major importing nation internationally. Tan (2007) claims that the nation has the uppermost GDP-to-trade ratio globally at 407.8%, suggesting the significance of trade activities to this economy. Singapore draws numerous foreign investments such as McDonald’s due to its location, its nature of corruption-free atmosphere, skilled labor force, advanced infrastructure and lower tax rates (Li 2010). With nearly 5.2 million people, Singapore forms a potential market for the fast food sector (Li 2010). Food purchase is about 56 percent of the total consumer expenses in the country. The Singaporean Fast food sector is developing at a very fast rate. The fast food industry had approximately 6,000 outlets by 2009, representing a rise of 2.4% compared to 2008. The sector employed about 869, 800 staff. Fast food restaurants registered increase of 6.5% in terms of turnover and 5.2% in terms of value added in the past year (Li 2005, p.43). Consumer spending for the Singaporean fast food sector increased from 200 onwards. The rising number of the new outlets like fast food restaurants with strong brands in Singapore demonstrates a momentous growth in the sector. The government research claims that Singaporean buying “eating out” is increasing continuously since the citizens are seeking the expedient product and the best and quality food service restaurants (Lin & Mattila 2006, p.7). Young upper and middle income individuals and families are common customers of the fast food outlets. A recent survey of individuals between the ages of 15-45 indicated that 80 percent of the participants loved hamburgers. 90 percent of participants loved fast foods frequently and 10 percent just “love” hamburger (Lin & Mattila 2006, p.12). Therefore, this makes the fast food sector in Singapore ideal industry for McDonald’s. Singapore is one country among others with the highest number of millionaires in the world, with one in every six families having no less than 1 million US dollars as disposable wealth to buy luxury goods such as hamburger (Tan 2007). The country also has advanced infrastructure in terms of transport and communication. The development has led to the building of good roads enabling efficient access to various locations. The country has developed its technology over the years to get people connected and improve their work (Tan 2007). Today, many businesses compete on the technological platforms from production to marketing. This forms a great opportunity for McDonald’s to procure and markets its business, more so on social media. 6.0 Entry strategy used by McDonald's to enter both China and Singapore McDonald’s is one of best brands recognized globally and global largest restaurant of hamburger serving over 50 million clients on a daily basis (Tan 2007). McDonald uses an international strategy with regards to local receptiveness and global incorporation. They understood that global market needed a greater degree of local sensitivity and because their businesses have grown very much that they also require to manage and control business in China and Singapore efficiently and effectively which could not be realized through other strategies (Doole & Lowe 2008). As such, McDonald’s settled for joint venture and Franchising in these countries as the perfect strategy. McDonald’s company entered into China in 1990 first through franchise, but later spread its outlets through joint ventures (Derdak & Pederson 2004, p.108). McDonald’s value chain needed to be designed with a consideration of legal-political, economic environments and local cultures in mind. The fast food sectors in most cases use franchising as their entry strategy. Franchises representing 80 percent of the 32,000 McDonald’s outlets in 120 nations across the world and generate over 70 percent of the company’s profits. (Derdak & Pederson 2004, p.109) By employing this entry strategy, McDonald’s company is capable of expanding quickly into the entered of markets within China and Singapore with a minimized risk, while maintaining the control of major business operations. The two countries, China and Singapore are business friendly, however; politics is always entrenched in business, particularly global business. To minimize political risk the company uses franchising where citizen of that country who understands the political economy of the state is given rights by the company to run a similar business (Hitt 2009). It should be noted that until recently, the government of China mandated that the franchisors to operate no less than two company-owned restaurants in country beneficially for no less than one year before being allowed to provide franchises to entrepreneurs of Chinese descent (Datamonitor 2007). If a foreign business is run by foreign officials, it is seen outsider business, therefore giving the rights to the citizens make the business being accepted. Franchises give McDonald’s the opportunity to establish a business venture with the proven rate of success at reduced risk. The franchisor offers support, marketing and support programs to franchisee. Derdak & Pederson (2004, p.109) posit that McDonald’s offers training for its business at its Hamburger University in Chicago, and for this reason the business is highly known for its quality and service. Similarly, the company locals understand culture and can convince the parent company to modify their menu to suit the locals. The cost of starting McDonald’s in a foreign country is very high which would have made the company to increase their budgets. Using franchise as mode saves the company the capital. This is because the franchisee normally applies for the right but provide the capital for starting up a new outlet (Hitt 2009). McDonald’s also preferred franchising mode of entry over others because the people who obtain the franchisee rights to bring expertise, market experience, and financial investment, including managerial and technological competence to the company (Li 2005). As the one of the successful and effective franchiser globally, McDonald’s opened 70% of its outlets through franchising. However, in the past has restricted number of companies being opened through franchising. This left McDonald with Singapore which was a free market. Li (2005) affirms that the company has also faced other challenges with franchising including such as less quality control from Franchisee. The manager buying a hamburger at McDonald in China or Singapore can reasonably anticipate a similarly quality of product and service which could have received in Illinois. Poor quality products and service in franchise have ruined the name of the company. The situation has made McDonald’s to adopt joint venture entry strategy in its later market entries in these countries (Li 2005). McDonald’s established one of the joint venture with domestic companies in Beijing and so far McDonald’s has nearly 600 restaurants in China operating through the mode. In this entry mode McDonald’s has been sharing costs and risk leading to some measure of control whilst reducing the risk exposure to political unfairness. Just like franchising, through joint ventures, McDonald’s have gained and access information and knowledge regarding the host nation environment (Hitt 2009) Why McDonald’s overlooked other modes of entry Entering into a foreign market is now part of the majority of business expansion plans. For others, this could be an opportunity to maximize but for it is a tough challenge marred with several risks, including technical, political economic and socio-cultural risks (Hollensen 2008). Irrespective of the intentions, once a business decides to go global and select its target market, what matters is the mode of entry. Every company tries to choose the most perfect mode of entry considering their pros and cons. For that reason, McDonald’s thought that exporting, licensing and acquisition was not the ideal method for their company. McDonald’s ruled out exporting because what they are dealing is food which highly perishable. The distance between the US and China or Singapore is far apart making it difficult to transport fast food which are sometimes served fresh and hot or warm (Rao 2007, p.171). Exporting also comes with a cost which is very expensive for a distance between continents. Eliminating transport is not an advantage to McDonald’s but to other businesses too. Exporting would have success in Singapore which depends on import rather than China which depends on export to grow its economy (Li 2005, p.43). By exporting its hamburger and other products to China, McDonald’s would be viewed as an outsider especially because the US and China as seen as business rivals. This is also applies to a wholly owned subsidiary. Both building a subsidiary could have faced trade barriers such as tax and tariffs particularly in China. IBISWorld (2014b) contends that the McDonald’s annual report of 2012 indicated that franchisees posted a $7.5 billion gross profit compared to $3.4 billion posted by stores opened through direct sales. McDonald’s were also overlooked licensing because of fear that Chinese government could given them limited time. 7.0 The economic, political and cultural issues faced by McDonald’s in China and Singapore McDonald's success of today can be credited to their capability to adjust their businesses to fast pace and diversity of city life by offering quality fast foods (Euromonitor 2010a). However, this has not come out on a silver platter; the company has struggled to be ranked as the largest fast food outlet by revenue. Some of the challenges that McDonald’s has faced particularly in China and Singapore include economic, political, socio-cultural issues (Li 2005, p.43). One of the major economic issues that the company faces is the economic fluctuations as well as weak currencies. Part of this problem is attributed to the global economic crisis which started in the Wall Street. Obviously, the American dollar is superior to Chinese Yuan and Singapore dollar (Rao 2007, p.172). The economic challenges reduced the purchasing power of most Chinese and Singaporean nationals on the luxury products like hamburger and other fast foods offered by McDonald’s (Rao 2007, p.172). The Chinese culture is totally different from that from the west which made it difficult perform well in its earliest years in the Chinese and Singaporean fast food market. It should be noted it is the western companies led by KFC and McDonald’s that introduced the fast food culture in the Asian market. Tan (2007) affirms that Singapore still adheres to family values, however the young generation has begun to embrace to western culture; this forms an opportunity for Mc Donald. 8.0 Conclusion McDonald’s Corporation enjoys market share and dominance globally in fast food segments. The firm takes the lead in diversification platforms such as Hamburger, cheeseburger, French fries and desserts of its strong brands. However, McDonald’s experiences bad perception and competition in its operations. There are several opportunities which can exploit so as uphold its dominance of the market – increasing joint partnerships with other companies both in China and Singapore so as to protect them politically in these markets. However, to attain this, the firm will also have to reduce competition created by Subway Systems, Burger King and other other upcoming fast food joints. 9.0 References Chow et al. 2007, Service quality in restaurant operations in China: decision- and experiential- oriented perspectives, International Journal of Hospitality Management, Vol. 26, No.3, pp.698-710 Datamonitor 2007, Chinese Markets for Fast Food, Global Information, Inc., Asia Market Information & Development Company, Farmington, CT. Derdak, T & Pederson, J.P ed. 2004, McDonald's, International directory of company histories 67 (3rd ed.), St. James Press, pp.108–109. Doole, L & Lowe, R 2008, International Marketing Strategy (5th edition), London, South- Western Cengage Learning. Euromonitor 2010a, Fast-Food in China, Euromonitor Database, London. Euromonitor 2010c, Global Fast-Food: Charting the Course in a Post-recession World, Euromonitor Database, London. Hitt, A 2009, Strategic Management Competitiveness and Globalization, Nelson Education Ltd. Hoare, R.J., Butcher, K 2008, Do Chinese cultural values affect customer satisfaction/loyalty? International Journal of Contemporary Hospitality Management, Vol. 20 No.2, pp.156-171. Hollensen, S 2008, Essentials of global marketing, Harlow, Essex, England: Pearson Education. IBISWorld 2014a, Fast-Food Restaurants in China: Market Research Report, viewed on 30th June 2014 http://www.ibisworld.com/industry/china/fast-food-restaurants.html IBISWorld 2014b, IBISWorld Industry Report G4621-GL: Global Fast Food Restaurants, viewed on 30th June 2014 http://clients1.ibisworld.com.au.ezproxy.lib.uts.edu.au/reports/gl/industry/default.aspx?entid=1480 Kotler, P. & Armstrong, G 2010, Principles of Marketing, 13th (Global) ed. Boston, Pearson Education, Inc. Li, C 2005, A war among the biggest fast food companies, Franchise Magazine, vol.2, pp.42-43. Li, D 2010, Singapore is most open economy: Report, Asiaone (Singapore). Lin, I.Y.H & Mattila, A.S 2006, Understanding restaurant switching behaviour from a cultural perspective, Journal of Hospitality & Tourism Research, Vol. 30 No.1, pp.3-15. Lv, N & Brown, L 2010, Chinese American food systems: Impact of Western influences, Journal of Nutrition Education and Behavior, Vol. 42, No.2, pp.106-114. Namkung, Y & Jang, S 2007, Does food quality really matter in restaurant? Its impact on customer satisfaction and behavioral intentions, Journal of Hospitality & Tourism Research, Vol. 31 No.3, pp.387-410. McDonald’s 2014, McDonald’s Official Website, viewed on 30th June 2014 http://www.mcdonalds.com/us/en/home.html Qin, H., Prybutok, V & Zhao, Q 2010, Perceived service quality in fast-food restaurants: empirical evidence from China, International Journal of Quality & Reliability Management, Vol. 27 No.4, pp.424-437. Rao, G 2007, Western fast food in China: culture analysis, Culture Research, Vol. 5, pp. 171-172. Tan, K. Paul 2007, Renaissance Singapore? Economy, Culture, and Politics, NUS Press. Waldmeir, P 2011, Fast food chains fight for China’s appetite, Financial Times, p. 17. Xie, Q. Y2007, Cultural Difference between the East and the West, Canadian Social Science, Vol.3, No. 5, pp.114-117. 10.0 Appendix Appendix 1: global fast food industry’s market share Read More