Analysis Of McDonalds Corporations

Analysis Of McDonalds Corporations In this report, thorough analysis of McDonalds Corporations position strategies has been design on the basis of the given contexts. Two different topics have been given to discuss in this case. The first topic focuses on the environmental factors that may affect McDonalds business. This topic has been addressed by six different factors which may broadly affect the business of McDonalds. Specific focus has been given to each factor and minute issued have been addressed in our discussion. It has been tried to give a comprehensive analysis of all the relevant ideas regarding this topic to make a reasonable discussion. The second topic given has been focused on the recent strategic stands taken by McDonalds. It has been asked to identify the pros and cons related to these strategies. The discussion has been done to create a comprehensive commentary about the pros and cons of each strategy. Every strategy has been evaluated on the basis of their individual merits. The subjects are quite sensitive and have specific implications to the business of McDonalds. in order to identify advantages and disadvantages each strategy has been clearly scrutinized. It has been tried to provide valid and reasonable remarks about these strategies. At the end, some relevant ideas have been presented to provide a more understandings of these issues. The entire report has been done with a reasonable understanding about the issues in question and all other factors relevant to the study. Introduction This study has been done to provide a reasonable understanding about business policy and strategic management development. McDonalds Corporation (NYSE: MCD) is known as the worlds largest chain of fast-food restaurants, serving approximately 47 million customers daily. Once it was the largest global restaurant chain, but it has since been exceeded by multi-brand operator Yum! Brands (KFC, Taco Bell and others) and sandwich chain Subway. Every McDonalds restaurant is run by a franchisee, an affiliate, or the corporation itself. Its revenues come from the rent, royalties and fees paid by the franchisees. It also earns form sales in company-operated restaurants. From the accounting records we can see that McDonalds revenues grew 27% over the three years ending in 2007 to $22.8 billion, and 9% growth in operating income to $3.9 billion. Generally McDonalds sells hamburgers, cheeseburgers, chicken products, French Fries, breakfast items, soft drinks, milkshakes, and desserts. Now-a-days, in order to respond to the obesity trends in western nations and in the face of criticism over the healthiness of its products, the company has modified its menu to include such healthier alternatives as salads, wraps and fruit. McDonalds began its business in 1940, with a restaurant opened by brothers Dick and Mac McDonald in San Bernardino, California. They have introduced the Speedee Service System in 1948, which established the principles of the modern fast-food restaurant. A man with a chefs hat on top of a hamburger shaped head was the original mascot of McDonalds. The name mascot was Speedee. Ronald McDonald replaced Speedee in 1967 when the company first filed a U.S. trademark on a clown shaped man having a puffed out costume legs. McDonalds opened its first restaurant in the United States, Canada, Costa Rica, Japan, the Netherlands, Germany, Australia, France, El Salvador and Sweden in order of openings. Objective of the report: This report is prepared to gain a broad idea about business strategy formulation and evaluation of these strategies. It is also done to understand the different influences the environmental factors have on the operations of a Multination Corporation. Major objectives of the report are to: Provide a conclusive idea about business environment of McDonalds Understand the impacts and implications of changing environmental factors Gain reasonable perception about strategy formulation Achieve realistic insights about strategy evaluation Attain a thorough knowledge about pointing out the pros and cons of different strategies Methodology of the Report The research methodology is the complete techniques that we will follow to conduct the research. So, we can describe the methodology in the following steps: Data Collection Present information was collected from two sources: Primary Source: Primary data of this report was collected by means of questioning of McDonalds employees and operational managers. Secondary Source As secondary source I adopt some text book on Marketing, Management and also some websites. Data Collection Method Observation: Since the report was descriptive in nature data being analyzed conceptually. Limitations: The field level survey was missing in some areas of our study due to some practical constrains. Question 1: Environmental factors impacting upon McDonalds: As a leading fast food restaurant in the world, environmental factors in different countries are crucial considerations for McDonalds. Following discussion focuses on the environmental issues of relevant to the business of the firm. General environmental factors impacting on a corporations business: If generalization is used, for a multinational corporation, following factors can be identified as major issues: Demographic Geographic Economic Socio-cultural Technological Political-legal These factors have serious implications for any Multinational company. Detailed discussions of these factors are given below: 1. Demographic environment: Demographic environment, which can be defined as the environment consisting of factors related to age, sex, gender, education level, marital status, occupation, religion, birth and death rate, average size of the family, average age of marriage etc. of a specific populace of a specific region, is the most important feature that may impact the business of the firm. As it is a Multinational corporation, the impact of demographic environment on McDonalds can be examined on regional basis. United States of America: United States is the birth place of McDonalds. Basically it is the birth pace of Fast Food culture. The people of United States of America love to enjoy their meal and the idea of fast food have been a turning point of their life style. From the demographic aspect of the region, we can point out the following issues: United States has one of the highest population growth rates among the industrialized nations. So it generally indicates the development of a large market for the corporations. 45% of the children under 5 years old belong to the minority groups of the populace. Hispanic population increased by 14%. McDonalds has been developing its menu to target this population. According to U.S. census Bureau News 2006 studies, the average income of Americans is around $46000. One of the main reasons of increase in McDonalds sales in US is the introduction of Asian Chicken Salad, which indicates importance of Minority groups in US market. Different minority groups are emerging as the economically significant groups. For example, Asians as a minority group has an average income of around $57500 which is well above the average income of Americans. So focusing business on the basis of these kinds of developments may prove fruitful in the future. Around 81% of the populace lives in urban areas where drive-through system is one of the most popular systems of getting easy meals. Europe Europeans are getting more and more interested in having quick meals from fast food shops, as their hectic lifestyles suit this mechanism. Though the sales of McDonalds dropped 14 percent, the expansionary plans of McDonalds reflects the significance of this Market. Following ideas emerged from our analysis: Demographic behavior has changed drastically in Europe. General fertility rate is below the replacement rate in many countries of the region. But a new pattern, described as a `second demographic transition have emerged, as age of first marriage and first child has changed. These changes in behaviors culminated to an increase in population growth. On average, population growth increased somewhat in the region. In European Market, McDonalds stores enjoy more customer visits and highest company-operated margin since 2001. This may be attributed to increased population and changing trends of food habits towards fast foods. Gender differences have been reduced dramatically. Economically solvent mothers are spending much to provide best quality products for their children. For this reason, McDonalds introduced R Gym to enhance children customer base. Asia pacific and Middle East: This is the region where McDonalds has the highest possibility of exponential growth due to demographic as well as socio-cultural and economic changes. Demographic factors can be specified in following manner: Countries like China and India, with high population growth rates, are considered as emerging markets for fast food industries. In order to capture the expanding markets in China and India, McDonalds has increased its outlets in both of these markets. Income of the people of this region has been increasing gradually over time, which indicates people having more spending power. Middle Eastern regions are considered as one of the wealthiest regions of the planet. Population growth is also relatively high in this region compared to the industrialized countries. Migration trend towards urban areas is a major factor to consider for Corporations like McDonalds. Latin America Although regarded as one of the poorest regions of the world, this market has been changing its economic and socio-cultural patterns to become one of the lucrative markets. According to 2005 statistics the population of South and Central America is 588 million. The population growth is about 0.6%. This is quite significant information as it indicates a big market for fast food industry. Due to the low income and economic inequality, Latin American market is still not a big revenue source for McDonalds. Different ethnic groups with diverse cultures are prominent features of this region. Economic inequality is dominant in this region. According to World Bank reports, approximately 25% people live less than $2 a day. Huge amount of people live in rural areas, or under developed areas in the cities. Migration rate to the cities is increasing day by day. The following diagram depicts the importance of each regional segment for McDonalds based on sales revenues. Source: http://internationaltrade.suite101.com/article.cfm/mcdonalds_global_sales [Visited on 23/12/2009] Figure 1: McDonalds regional sales revenue. 2. Geographic Environment: Geographic factors that may affect the business of McDonalds can be pointed out in the following discussion: The distribution points of McDonalds are vital considerations as it is involved in a business which requires easy accessibility for the customers. So locations of the distribution centers should be close to populated areas. Some of the McDonalds stores are connected to gas station or convenient stores to target the shoppers. McExpress are shops having limited seating arrangements, located in shopping malls. In its mission statement, McDonalds vowed to provide services in the best possible means. This requires quick and correct service. So, warehouses for the raw materials should be located in the strategic places for easy transfer. Geographic segmentation is very important for McDonalds. As fast food culture is mainly the trend in cities and urban areas, the strategic establishment of distribution points are needed. McDonalds have locations in Disney Theme parks and Ocean Park. This strategy helps to increase sales promotion and expand customer base among the visitors of the theme parks. Competition is anther driving issue for McDonalds to choose the locations of its business carefully. McDonalds may choose a location where it will get a strategic advantage. To have a competitive advantage it introduced locations in Wal-Mart stores. To target trackers and travelers, McDonalds has developed McShop, which may have services found at truck stops. 3. Economic Factors: Many economic factors may affect the operations of McDonalds. These economic factors are identified in the following discussion: The economic cycle of different countries may affect the revenue generation of McDonalds. But as the business seems well diversified, the effects may be nullified to a negligible extent. In 2006, McDonalds global sales rose 5.8% from the previous year. Sales margin improved in all geographic locations. McDonalds has a large amount of long term debt of about $8 billion. So, changes in interest rates or tax policies of the government may affect favorably or adversely. The exchange value of dollar against other currencies may affect the profitability of McDonalds. As it is operating in different regions, so it may consider the exchange rates differentiations of different currencies. There may be some possibilities that inflation rate may adversely affect the business of McDonalds. Increase in inflation rate may cause the price of raw materials to rise. This may also drive the customers away from the restaurants. Income level of the general people varies with the economic condition of the nation. So, in the times of recession, economic conditions may adversely affect the purchasing power of people, thus affecting the business of McDonalds. McDonalds operating earnings, earnings per share and overall revenue increased 15%, 17% and 10% respectively. It also announced dividend at the rate of $1 in year 2002 per share. This indicates 276% increase of dividend payout from the period of 2002. These numbers reflect economically a strong position for McDonalds. 4. Socio-cultural Factors: Every corporation should analyze the important socio-cultural factors relevant to their business. Such relevant factor regarding socio-cultural environment of McDonalds are discussed below. The healthy lifestyle trend has become a global phenomenon in recent days. McDonalds must consider this to maintain a competitive position in the market. McDonalds Healthy Lifestyle programs attracted health conscious people. It has become worlds first fast food service restaurant to provide nutritional information on majority of its food packaging. As women are becoming more independent and families are becoming smaller and smaller, fast foods are growing in their popularity. Eating home cooked meals are becoming a luxury in the fast paced unban lifestyles. So, restaurants are gaining momentum in their businesses. McDonalds operated in different regions of the world. In order to maintain its profitability it must keep track of regional cultural and sociological changes. For example, increased migratory trends towards cities in developing nations can be an advantageous sign for McDonalds. McDonalds needs to be aware of local trends in different regions. For instance, by presenting French Fries as vegetarian food, McDonalds had to pay a hefty price as fines in 2002. McDonalds has introduced R Gyms, a form of interactive game zones, designed for children aged 4 to 11. To emphasize on physical activity, they are equipped with stationary bicycles attached to video games, dance pads, basketball hoops, monkey bars, an obstacle course, and other games. It has introduced a new slogan to its recruitment posters: Not bad for a McJob, to encourage employees to be related with McDonalds. McDonalds jobs have been regarded as of low pay, just above the legal provision, required little skill and little job security. It has been trying to improve the conditions 5. Technological Factors: To maintain a competitive edge against the rival companies, McDonalds must be aware of the recent technologies and innovations. New and improved technologies can reduce the man power needed in processing the food thus reducing the labor related costs. New innovations can help McDonalds to create more environment friendly operating systems which will help them to reduce their carbon footprint in the world. To tackle environmental issues, McDonalds has incorporated technology into its business. McDonalds has started using corn-based bio-plastic to produce containers for some of their products. Innovative technologies can also help to reduce the levels of processing and contamination due to human interactions with the food processing functions. It may also help to reduce energy consumption thus reducing the actual cost of serving the customers. In Europe, it has started recycling vegetable grease to use it as fuel for its trucks. In 2000, it has opened a restaurant in Sweden which was the first to intentionally incorporate green ideas. 6. Political- Legal Factors: Political structure of a nation and the ideology of political parties need to be carefully assessed to run business on that states. Confiscation, domestication, tax control, exchange control, interfere of government on business operations are common in global business. Following factors may be taken into considerations about the political and legal factors: Stable political situations are always important incase of operating businesses in different regions of the world. Government policies, tax policies, regional cooperation policies etc. may affect the operations of McDonalds. Law regarding the business operations, legal suits and other legal obligations may influence the business of McDonalds. McDonalds has been involved with number of legal cases, mostly concerning with trademark. Some social cases like, The McDonalds Coffee Case in 1994, hampered the public image of McDonalds. Question2: Evaluation of current strategies in use: McDonalds has been taken some specific steps to enhance the profitability of the corporation. From the perspective of its performance and future potentiality evaluation, these strategies can be critically examined. The strategies chosen by McDonalds are assessed in the following discussion: SWOT strategies: McDonalds has chosen these strategies based on their SWOT analysis. These strategies may have some advantages and disadvantages. SO strategies: These strategies are taken in line with the strength of McDonalds and on the basis of the opportunities the firm has within its arena of operations. The firm has chosen the following strategies: 1. Expanding into Chinese market: McDonalds is thinking of expanding its Chinese market via increased advertising and numbers of outlets. This strategy can have some merits for McDonalds operations. Advantages: Chinese market is a growing market for McDonalds. The population of China is increasing rapidly and the demand for fast food is also growing at a good pace. By developing a good market in China may prove valuable for McDonalds as it has a potential for good return in future. Drive-through system is gaining popularity in china as number of car owners are increasing. This is a very good indication for McDonalds to provide this kind of services in increased number of locations. McDonalds has a brand name which is globally recognized. McDonalds can use this position of its brand name for its advantage. In China, it would be much easier for McDonalds to advertise as it has an easily recognizable brand name. In order to increase the market share, McDonalds must increase its advertising in China. It has to compete against already established quick service providers like Yum Brands. Increased advertising will enable it to capture new markets in China as well as enhance brand exposure. Increased numbers of the restaurant locations in China will provide easy accessibility to the customers. As the number of consumers is increasing the number of locations must be increased in order to meet the current demand. This strategy may pose some disadvantages for McDonalds. Disadvantages: Increased number of advertisements means increased costs. This means less revenue will be off settled by increased operating cost. As McDonalds operates its business on the basis of franchising, increased number of locations may mean lesser amount of control over its operations. In its mission statement it states to be the best quick service provider. Increased number of locations may cause McDonalds to hire employees who are not competent enough to provide good services. It may also force McDonalds to increase training costs. Quality control may not easily be done if numbers of restaurant locations are increased. Although this strategy may have some potential demerits, this strategy is a very good step for McDonalds. Chinese market is becoming the fastest growing market and McDonalds need to enhance its market share in China in order to ensure its sustainability as one of the leading quick service provider in the world. 2. Acquiring Krispy Kreme Corporation McDonalds has taken a strategic choice to integrate horizontally by taking over Krispy Kreme Corporation, which is at the verge of going bankrupt. This strategic decision may have some good implications for McDonalds. Advantages: By expanding horizontally it will be able to outreach more customers with more ease. As Krispy Kreme Corporation is at the verge of bankruptcy, it will be easier of McDonalds to acquire this company without substantial financial implications. Krispy Kreme Corporation may willing be merged with McDonalds without showing any hostility towards the acquiring company. McDonalds should be able to use the existing infrastructure of the Krispy Kreme Corporation in order to conduct its business. Loyal customers of the Krispy Kreme Corporation may still be with this company after the acquisition. This way McDonalds may be able to acquire a new customer base. Acquiring Krispy Kreme Corporation will put McDonalds in a competitively advantageous position. This will mean less competition for McDonalds and infrastructure and customer base development. This strategy may have some potential disadvantages as follows: Disadvantages: There is a chance that Krispy Kreme Corporation may not be willing to merge with McDonalds. This may force it to take strategies against the acquisition. If acquisition happens in this situation, then McDonalds will be in a disadvantageous position. The customer base of the Krispy Kreme Corporation may not support this acquisition. This may drive them away and reduce the benefits of this acquisition. There is a potential of dilution of control and profit of the shareholder in case of this acquisition. For this reason McDonalds may change the top management of Krispy Kreme Corporation. This may affect the whole operations of Krispy Kreme as new management may have a different style of running the business. By comparing the disadvantage with the advantages, we can easily say that the disadvantageous situations may occur in highly probabilistic circumstances, which make those less potent. So this strategy may prove profitable for McDonalds. WO Strategies: These strategies are taken on the basis of the analysis of the weaknesses and existing opportunities of McDonalds. The firm has chosen the following strategy: 1. Menu development: McDonalds has chosen to develop its menu based on healthy lifestyle trends. It is also thinking of introducing Hispanic food lines. This strategy may have following advantages: Advantages: Providing healthy foods may increase the customer base of McDonalds as there is a global trend of shifting to this kinds of foods now-a-days. Increased Hispanic population forced McDonalds to focus on this group. By creating Hispanic food line, McDonalds may be able to capture a more diverse and wide customer base. There is a bad name of fast food of being unhealthy. By providing more healthy food, McDonalds may be able to change this perception which may be a competitive advantage for McDonalds. There may have some disadvantages of this strategy. Disadvantages: This strategy may cost McDonalds more as it requires more investment from McDonalds part. The new product lines for Hispanic population may not be successful or needs more time to be successful. Focusing on Hispanic population may be frowned upon as being a racially motivated strategy. In order to capture the market and be in line with the global trend, McDonalds need this strategy to be implemented. ST Strategies: McDonalds Corporation also has some strategies based on its strength and potential threat analysis. These strategies are discussed below. 1. Increase number of restaurants located in theme parks: McDonalds is thinking of forward integrating by increasing the number of locations in the theme parks of Disney and Ocean Park. This strategy may have some pros and cons which have been identified in the following discussion: Advantages: By increasing the number of locations in the theme parks McDonalds can capture more of the customer base by providing more services. Mutual understanding between theme parks managements and MacDonalds may increase the brand exposure of McDonalds. By expanding the operations to the theme parks it can appeal to the children which may eventually lead to brand loyalty. Disadvantages: This strategy may increase the operational cost of McDonalds. Quality control may not be an easy proposition. More advertising may be needed in order to make all the locations popular. This strategy may be profitable for McDonalds in the long run and it may be recommended to be pursued by McDonalds. 2. Increase advertising of coffee line: McDonalds is trying to increase advertising of the coffee line in key markets like China and North America. This strategy may have some advantages for McDonalds. Advantages: By developing a market penetration strategy, McDonalds can increase coffee sales, which is one of the weak links of its operations. By increasing the advertising, it can acquire more customers in the morning time when the demand of coffee is highest. McDonalds can create an image of best quick service coffee provider by increasing the frequency of advertisements and providing customers with quality services. Disadvantages: It will increase the sales cost of McDonalds and reduce the profit. Increased advertising may prove fruitful if it can provide good services. But id it fails to live up to the mark then rival companies can take advantage of the situation. Increased advertisement for coffee line may prove fruitful for McDonalds as it has beaten its traditional rivals in coffee taste test according to consumer report. So this strategy is quite a good stand for McDonalds. WT Strategies: McDonalds has been thinking of taking some strategies based on its weaknesses and threats analysis in order to enhance its operational efficiency. Following discussion has been done to point out those strategies and some relevant issues about those strategies. 1. Develop the menu to keep up with the competition: McDonalds one of the main concern is lack of menu development. In order to appeal to the Asian and Latin American markets, it is thinking about menu development. Advantages: Creative menu development will appeal to growing markets like Asian and Latin American markets, which will increase its customer base. It may reduce the operational inefficiency and create more customer satisfaction Customer retention may increase as more options of food items are included in the menu. It will increase its profitability in the long run and create stronger customer base. It will help to capture the potentially profitable markets of Asia and Latina America. The underserved niche of the industry may be capture if creative menu developments occur. Disadvantages: Cost of product development and market survey may increase, which will reduce the profit of the company. New products may fail to appeal to the targeted customer segment, which will result in operational loss. New product development may need new kinds of technologies or raw materials, which will increase capital expenditures of McDonalds. This strategy may increase the profitability of McDonalds as new customers are induced to buy its products. It will also increase the customer base and customer retention rate. 2. Redesign the website to make it more users friendly: Making the website more users friendly is another ploy of McDonalds to increase its efficiency. The advantages and disadvantages of this strategy is discussed below. Advantages: Redesigning the website will increase the knowledge of the customers about McDonalds and its products. Internet is one of the best possible ways to advertise the products of any corporation. Revamping the website may increase its potential customer base by providing them with best possible information. Creating a user friendly website may increase the customer satisfaction. Disadvantages: This strategy may reduce the profit of the organization for the time being, but this may increase capital expenditure of the company. Creating a user friendly website requires expert handling of information. If it is not done efficiently, then it will prove worthless for the Company. The strategy of improving its website can be a fruitful ploy for McDonalds if it is done efficiently. 3. Increasing sales promotion and advertising: Increasing the amount of sales promotion and advertising in key markets to increase consumer awareness of the products is an important strategy for McDonalds. The pros and cons of this strategy are discussed below. Advantages: This will increase the consumer awareness of the products and services of McDonalds. This may also increase the number of customers of the company. This may help McDonalds to capture customers from its rivals if it is done efficiently and effectively. This will also help to gain a competitive advantage in key markets. Disadvantages: Increased cost for McDonalds will offset the profits. Increasing advertising and sales promotion is the best possible way for McDonalds to increase its customer base. Recommendation Following recommendations can be