McDonalds International Strategy - Case Study Example

Question 4: Discuss and evaluate the international strategy of a multinational company of your choice. Assignment Title: McDonald’s International Strategy Name: XXXXXXXXX Group Number: XXXXXXXXX Tutor: XXXXXXXXX Academic Year: XXXXXXXXX Word Count: 2517 McDonald’s International Strategy Introduction Emerging global markets are increasingly becoming important grounds for multinational companies to carryout their international business activities. In order for multinational companies to efficiently carryout their business activities at the global level, increase their market base, and profitability there is need for effective international strategies. In business terms, an international strategy can be defined a plan developed by a company or an organization with the aim of promoting sustainable growth and profitability on a global level through the sales of products or services. In addition to this, another aim of an international strategy is to build the global presence of a company and meet the specific needs of different customers and clients around the globe (Jansson 2008; Pehrsson 2008). This paper seeks to critically examine and evaluate the international strategies of the McDonalds Company. Foremost, it will provide a brief background of the company and how the company has grown over the years. Secondly, it will examine the international strategies used by the company. Subsequently, it will evaluate the strategies with regards to whether or not these strategies have helped the company to increase its profitability and maintain its competitive edge in the market. Background The history of McDonald’s can be traced back to 1940 when Peter McDonald’s two sons Dick and Maurice McDonald relocated and re-opened a restaurant he had opened in 1937 to San Bernandino and named it “McDonalds”. However, McDonalds was officially founded in 1948 when the McDonald’s brothers Richard (Dick) and Maurice re-opened McDonalds in 1948 in San Bernandino California as a self-service drive in restaurant. The McDonald’s brothers sought competitive advantage by offering quality hamburgers, which was the staple of a reduced menu, at a cheaper rate than their competitors. To be able to deliver cheaper burgers, they introduced the specialised and fast food approach to their restaurant where burgers were made in assembly-line style with staff specialising in or committed to one task at a time such as slicing buns or packaging the completed burger (Vignali 2001). Ray Kroc, a milkshake mixer salesman from Chicago whose mixers the McDonald’s used in their restaurants, took interest in the McDonald’s venture in 1954. Realising the potential of the McDonald’s concept and business model, he subsequently negotiated for a franchise deal for exclusive rights to franchise McDonald’s in the USA. Kroc opened the first McDonald’s franchise in Des Plaines, Illinois in 1955 with the brand’s famous golden arches. Kroc played an instrumental role to the early growth and expansion of McDonalds, offering franchises at $950 as compared to up to $50,000 from other fast food competitors. In 1961, Kroc bought out the McDonald’s brothers for $2.7 million dollars and embark on an aggressive growth strategy for the company aimed at making it America’s number one fast food chain (Grant 2010; Viswananthan 2007). McDonald’s went international in 1967 with restaurants opened in Canada and Puerto Rico. The company expand globally through franchising and as a result it experienced rapid growth in the 1960s, 70s and 80s with McDonald’s restaurants located in 32 countries by 1983 and even opening a restaurant in Moscow in 1990. Although McDonald’s domestic growth could be attributed to its standardised and innovative product offerings, its global strategy of franchising accelerated its growth. By franchising to local operators, the delivery and implementation of what might have been perceived as American brand culture was automatically translated by locals in terms of both product and service. McDonald’s has for a long time been the world’s largest restaurant and fast food chain with restaurants in over 100 countries including China and Australia more than 80% of which are franchises. According to the Wall Street Journal, McDonalds was the largest restaurant and fast food chain for almost a decade up to 2010 with 32,737 units before being surpassed by rival sandwich maker Subway with 33,749 restaurants worldwide (Vignali 2001; Paul 2008). International strategy used by the McDonald’s Company Structural strategy Over time, McDonald’s has managed to expand into the international market and boost its profits through franchising. According to Barkoff et al (2008), franchising is a business model whereby an established parent company allows entrepreneurs to employ the company’s brand, trademark and business strategy. In exchange, these entrepreneurs or franchisee, pay to the parent company royalties based on their monthly or annual revenues. This procedure is usually facilitated through a franchising agreement. In most cases, the franchising agreement requires that the franchisee adhere to a set standard of operation provided by the parent company or the franchiser, in return the parent company gives the franchisee support particularly with regards to training and advertisements. Franchising enables fast and cost-effective expansion of a business (Barkoff et al 2008). The McDonald’s Corporation, earns its revenue in the international market both as an operator of restaurants and as a franchiser of restaurants. Approximately 15% of the company’s restaurants around the world are directly operated and owned by the McDonald’s corporation. The remaining restaurants are operated through different joint investments and franchise agreements. The company’s model is different from other fast-food restaurant chains since it operates and builds its presence in the international market through franchising. As a condition to many of its franchise agreements in different countries around the world, the terms of franchising agreements are largely dependent on the laws and policies of the local area where the franchise is based. Nevertheless, in general the Corporation requires that franchisees operate based on certain set standards particularly with regards to work ethics, location and the type of service and products provided (Sidhpuria 2009; Royle 2000). The company’s business model in the United Kingdom is different than that used in the United States. For instance 30% of restaurants in the UK are franchised whereas a majority are directly under the ownership and operation of the Corporation. In some countries, McDonald’s restaurants are operated through joint ventures with the government or local non-governmental entities. The company does not make direct sales of materials or food to franchisees rather it organises the supply of materials and food by using third party logistics operators who are approved. It monitors its franchisees through their field consultants and managers (Royle 2000). The company has been committed to franchising as a predominant model of doing business and much of its success can be attributed to its franchisees. The company’s franchising system is based on the premise that the company’s success is dependent on the success of its franchisees. The company strongly believes in partnering relationships with suppliers, owners, operators and employees (Sidhpuria 2009). Product and service strategy In the face of increasing competition, saturation in the domestic market and regulations, the McDonald’s company expanded its operations into the international market. The company initially expanded its business operations into the international markets by leveraging standard products, American brand equity and providing clean and bright environments. However, with time the company started to adapt to the local regions that it operates in by changing its products so as to appeal to the tastes of local people and remodelling it retail space. In the short term, this strategy has paid off and as a result the company discovered that in order to efficiently capitalise on its market base in the international market, they need to adapt to the needs and tastes of the countries their operate in. Thus their strategy of catering to local tastes and needs prompted the company to change their restaurants and appeals and as a result, the company’s brand equity was diluted (Paul 2008; Mead 1994). For example, since the company’s operations entered in India in 1996, it has continually adapted to the values systems, lifestyle, tastes and language of consumers in India. The religion of most consumers in India dictates that they should not eat beef or pork. In order to survive in the Indian market, the company went beyond its pork and beef burgers menu and had to be responsive to the tastes and sensitivities of consumer’s in this market. The company came up with fish, lamb and chicken burgers so as to meet the needs of the Indian Palate. Furthermore, a huge population in India comprises of consumers who are vegetarians. The company caters to this segment of consumers by providing a new line of vegetarian products such as McAloo Tikki and Mc Veggie burger. The company separates its vegetarian and non-vegetarian sections so as to cater to the sensitivities of this population. Moreover, in China, the company has taken a different approach in running its operations. The company has met the demands of consumers by adding Chinese delicacies on its menu. For instance, in China-based McDonald’s restaurants the teriyaki burger, a common Chinese delicacy is incorporated in the main menu (Hodgetts & Luthans 2000). In France where a good number of consumers are resentful about the incursion of fast-food, restaurant chains, McDonald’s has managed to build its presence and boost its sales by remodelling the structure and design of its restaurant by using wood-beam ceilings, hardwood floors and comfortable armchairs. Furthermore, the company has also included new menu items like upscale sandwiches, brioche and espresso so as to respond to the tastes and preferences of the local area. Similarly in other countries the company has put into account the preferences and tastes of the local population by incorporating menu items and using structural designs that suite the preferences and meet the needs of consumers in different countries and local areas (Han 2008). For instance in Canada, the company has introduced breakfast servings that have Canadian features. In Belgium the company included the McCicken in its menu. By doing this, the company has managed to show to consumers that it values and appreciates their cultures. Although the company is proudly an American company, it does not disregard the markets of other nations. It respects their beliefs, likings and cultures by catering to its consumers in a wholesome manner (Daft 2005; Han 2008). In addition to this, McDonald’s has given a considerable amount of attention to the needs of children in every country that it operates in. Given the fact that children make-up the biggest consumer group of McDonald’s products, the company has introduced different strategies in order to meet the needs of children. For instance, in most of its restaurant chains the company has introduced “happy land” for children, giving them fantastic “happy meals” with novelty toys to them. In some of its restaurant chains, the company has incorporated computers with games that are designed to inspire the imagination of children and shape their personal characteristics. The company believes that by focusing on children, they can build stable and sustainable business since children can encourage the entire family to eat at McDonald’s. By providing food and fun to children, the company not only ends up with an increased sales volumes but it also retains its customers. While children may chose going to McDonald’s for fun, parents find McDonald’s as a suitable ground for entertaining thier children (Boatwright & Cagan 2010). A critical evaluation of McDonalds’ International strategy Franchising has enabled McDonald’s to build its global presence and expand it business operations. Currently, McDonalds franchise network has been ranked as the world’s leading service retailer. This international network has more than 30,000 franchise restaurants which serve over 52 million in over 100 countries around the world. Among these restaurant chains 70% are owned by independent franchise operators. The Corporation collects royalties from these franchisees based on their monthly or annual revenues. Through this structural strategy, the company has overtime experienced tremendous growth and success (Royle 2000; Sidhpuria 2009). However, through franchising the McDonalds Corporation has limited control over the standards of operations used in its various franchisees around the world and products and services offered by its franchisees. Consequently, the company’s brand value and standards have been compromised. For instance, some of McDonald’s franchisees have been involved in court battles and negative media coverage due to employee exploitation and their provision of unhealthy foods stuff that cause obesity. As a result, the company‘s public image has been compromised. Furthermore, McDonalds continues to experience a high labour turnover each year. Consequently, this has given McDonald’s key competitors such as KFC and Subway a upper hand (Asuka 2007; Love 2008). McDonald’s strategy of adapting to local regions by changing its product line and remodelling its retail space so as to appeal to local tastes has paid off in the short term. By so doing, the company has managed to show consumers that it values and appreciates their cultures, this has in turn drawn more consumers. Nevertheless, in the long-term this strategy may be detrimental to the company in that it may dilute the company’s brand equity. This could also result to the company loosing its appeal. Some critics argue that when McDonalds adapts to the local tastes of the countries it operates in, it risks loosing its connection to the American culture and it in turn strays from its fast-food roots. They also argue that consumers in the international market have options for local foods therefore, instead of the company adapting to local tastes it should maintain its status as the ultimate place that provides traditional American fast-food (Ganapathy 2009). McDonald’s strategy of targeting children through the introduction of happy meal and playing facilities in some of its restaurants chains has enabled the company to generate the demand of its products. Children get to eat, play and have fun at McDonald’s and as result the company not only increase its sales volume but it also develops customer loyalty (Boatwright & Cagan 2010). On the other hand, the use of this strategy to target children caused the company to come under strong criticism. McDonald’s fast-food products have been attributed to the increasing trends of childhood obesity. As a result, since 2002 the Corporation has witnessed a series of embarrassments with law suits and negative media coverage due to its provision of unhealthy foods products that cause obesity. Consequently, the Corporation experienced 15 % reduction in its market stocks hence making it to become the third biggest loser in the “Dow Jones Industrial average in 2002” (Asuka 2007). Conclusion In business terms, an international strategy is a plan developed by a company with the aim of promoting sustainable growth and profitability on a global level through the sales of products or services. This paper has critically examined and evaluated the international strategies of the McDonalds Company. It has focused on two areas of the company’s international strategy namely; structural strategy and product and service strategy. The findings of this paper show that McDonald’s uses franchising in order to expand to the international market. Franchising has enabled the company to build its global presence and expand it business operations. In addition to this, the company strategically adapts to local regions by changing its product line and remodelling its retail space so as to appeal to local tastes. Despite the fact that these strategies have helped the company to build it presence in the global market, the use of these strategies, have to some extent compromised the company’s brand equity and public image (Ganapathy 2009). Bibliography Asuka, J., 2007, McDonald's Corporation Human Resources Issues. Retrieved on January 19,2012 from Read More