McDonald Corporations is fast food chain and one of the most successful global restaurants chains operating in different parts of the world. The company has applied international expansion strategies to enter new markets and attain a significant share in the international fast food market. This report explains the international strategies used by the company, the reason why these specific strategies were applied as well as the international business theory that is associated with the international strategies employed by the Company. Overall, the report provides a discussion of the modes of entry used by McDonald Corporation to join foreign fast foods markets, the strategies it uses to be a dominant player in this industry and the applicability of internalization theory in these strategies. The report also focuses on the strategic challenges that McDonald has encountered and the role played by the international strategies have assisted in overcoming these challenges.
The group has selected McDonald Corporation since it has established its operations globally. By the year 2014, the Company operates more than 35,000 restaurants globally in 119 countries and territories all over the world. These restaurants served approximately 68 million customers every day through the more than 1.7 million people employed by the company. In 1940, Richard and Maurice McDonald started the company in the United States as a barbecue restaurant. They reorganized the company as a hamburger stand in 1948 using product line principles. In 1955, Ray Kroc joined McDonald as a franchise agent, and he later purchased the company and pushed its worldwide growth.
The McDonald’s operations are done through franchisees, affiliates or the corporation itself operates a McDonald’s restaurant. The franchised restaurants are about 81 percent while the company-owned restaurants are only 19 percent. At the end of the year 2013, 33 percent of its revenues were earned from franchisees, and 67 percent of the revenues were earned from company-operated restaurants. Its revenues are obtained from royalties, rent and fees paid by franchises and sales made by restaurants operated by the company. In 2012, the annual revenues and profits made by McDonald Corporation amounted to $ 27.5 billion and $ 5.5 billion respectively.
McDonald product line is mainly comprised of cheeseburgers, hamburgers, chicken, breakfast items, French fries, milkshakes, soft drinks and deserts. To meet the changing customers’ preferences for healthy products, the Company had introduced new items in the menu including fish, salads, fruit, wraps and smoothies. Some of the strategic issues faced by McDonald over the years include the negative publicity from poor food quality, unhealthy food menu, high employee turnover, negative public perception as a contributor of obesity problem to the society, product innovation, advertising that targets young children, poor customer service, increased competition and high labor turnover.
McDonald Market Segments
According to Gerhardt, Hazen & Lewis (2014, p.104) “McDonald (MCD) operates in the U.S, Europe, Asia or Pacific, Middle East, and Africa (or APME), and other countries and corporate (or OCC)”. The U.S is the home of McDonald as well its oldest market and had 14,278 locations as at 2013, with its presence being felt in almost every state. Europe provides the largest market for restaurants operated by the company with 7,602 stores and has the second largest market for franchised restaurants. In the APMEA market, one of the market segments that has very diverse tastes, McDonald operates 9,918 stores. The company has 3,631 stores in all the remaining countries such as Canada and Latin America as well as the corporate sales categorized as the OCC. Approximately 65 percent of the McDonald’s sales are obtained internationally. The company concentrates on expanding in developed markets as well as penetrating emerging markets.
Source: ‘McDonald’s A Case Study in Globalization.’
McDonald’s International Strategies
Thinking global and acting local
MCD applies a transnational strategy in terms of global integration and local responsiveness. The company realized that its foreign markets needed a very high degree of local responsiveness because as the fast food chain had experienced huge global expansion it also needed to have effective and efficient management of its business across different regions. The business chain puts into consideration the local culture, economic and legal-political environment of every region in its management processes (Crawford, Humphries & Geddy 2015).
To enhance better responsiveness to the external environment, MCD has emphasized on having local management for its restaurants. What’s more, hiring locally is used to fetch the company more acceptance from the local market and gain easy influence in the local governments. This introduces the culture of accountability, innovation, and better responsiveness to customers needs. Local management also makes it easier to take care of employees issues taking into consideration the diverse cultures presented by each region. The business model of the company reduces the costs of starting a new business in different regions (Crawford, Humphries & Geddy 2015).
Becoming environmental friendly
Environmental friendliness strategy is a new emerging concept adopted. Countries have come up with certain environmental laws that they enforce to make sure that corporations comply with the norms. For instance, there are regulations provided to companies directing how they are required to dispose of waste generated by their operations in business. By being environmentally friendly, McDonald gets goodwill and provides a good opportunity to build its brand. The company also engages in CSR activities aimed at environmental sustainability such as sustainable supply management, promoting the production of healthy and nutritious food products. Recently, MCD introduced products that have low-calorie content and nutritious to the health of the customers (Crawford, Humphries & Geddy 2015).
Standardization of Systems and Processes
As a transnational company, McDonald put in place standardized systems and processes that assisted in effectively and efficiently managing its business activities taking place in different territories. For instance, MCD enforced standard operating procedures such as the make to order, make to stock and just in time processes (Gerhardt et al. 2013). The standardization of McDonald’s business processes was also achieved by implementing and integrating an ERP system across its businesses in various countries and with their different business associates in these locations. The standardized processes and systems helped McDonald in reducing costs, reducing manual work, improving transparency and efficiency in sharing of information as well as improved responsiveness to various stakeholders (Gerhardt et al. 2013).
McDonald had to evaluate their pricing of products when entering into different countries based on factors such as currency exchange rate, local inflation, and distribution of incomes among the citizens. The exchange rate has a major influence on the cost of products implying that it is possible for customers to pay different prices for a similar product in different countries. The companies are opening its stores in major cities having in mind the middle and upper-class citizens as the target customers since they can afford the prices. Afterward MCD begins targeting the lower middle-class citizens (Gerhardt, Hazen & Lewis 2014).
McDonald considers three elements in its growth strategy including adding the number of restaurants, maximizing sales and profits at the existing restaurants, improving profitability globally. To maximize sales and profits at existing restaurants, the company improves its operations, reinvests, develops and refines products, conducts effective marketing and minimizes the operating and development costs. The company believes in ensuring franchisees and suppliers are profitable for the company to gain profitability. The company improves its global profitability through its economies of scale achieved in individual markets and as company gains competitive advantage through its global infrastructure. The share of foreign incomes has grown rapidly with the globalization of the company. MCD incurs costs of expansion while it decides to expand within and into new markets. However, it also assess prospects of different markets and then decides when to move into a new market on this basis. For instance, the company opened its initial stores in countries with higher incomes such as UK, Canada, and Japan and then moved to lower income countries like India (Kowitt 2011).
The entry strategy and business model
McDonald has several modes of operation it can select to operate within foreign markets, some of which are likely to demand a higher degree of resources as compared to others. Particularly, the company has opened sole ventures, subsidiaries that act as a direct franchise; it has entered into a joint venture with a local partner and established a master franchising arrangement. In the lastly mentioned mode of entry, a master franchisee owns and operates all the outlets within his or her territory of gets franchisees to do the same. The amount of investment committed to these markets is not the same across the various modes of entry, but in each of the markets, the company has significant control over the number of stores as well as the growth of the number of outlets. Therefore, McDonald internalizes costs of expansion mainly dependant on the level of superiority presented by the market and follows a similar path of expansion within the same and across other markets (Gerhardt, Hazen & Lewis 2014).
The Franchising model
Most of McDonald restaurants are operated as franchises, which allow rapid expansion without having to commit high capital requirements. This business model enabled the company to acquire local knowledge resulting in the creation of menu differences by country. McDonald combines its brand and model with the local knowledge of the master franchise, which is a successful formula that allows expansion while maintaining significant control. Other benefits associated with the model include faster setting up of the business, becomes profitable faster, cheaper suppliers for the franchise since the company’s supply chain are leveraged. Managerial know-how is offered to the company. Revenues collected from franchisees are of two kinds consisting of service fees and rent. Services fees are a fee paid monthly by the franchisees, and it is determined by the sales made by the restaurant. The rent is calculated as a percentage of monthly sales whereby McDonald owns the property where the franchise is located.
Product and service standardization
To make sure that a standard McDonald experience is offered anywhere in the world, McDonald standardizes its operations across its franchises. The McD’s objective is that a customer in Paris would have a similar experience if he went to an outlet in California. This is made possible by reducing the amount of skill that is needed in the preparation of McDonald product line and it is achieved by separating the process into a series of repeatable actions to obtain the same results. The company makes it possible to have an identical product output across the world by providing same frozen meat products and ensuring each worker follows similar procedure (Puzakova, Kwak & Bell 2015).
McDonald had to customize its business strategy to meet the local needs of its host countries. As the company began expanding into Asian countries, regional strategy became important, as these countries’ culture is very different from the western world. Product adaptation or localization and innovations to offer products based on local needs and tastes were adopted (Schlentrich 2009). Examples of these adaptations include the use of chicken instead of beef in India; the Filet-of-fish introduced for Catholics in the Cincinnati area who could not consume meat on Friday, the Maharaja Mac, McAloo Tikki that is suitable to the local tastes and traditions of India. In 2005, Wi-Fi services were introduced in various locations; home delivery services were offered in some regions like Singapore. This allows customers to place orders by phone and have them delivered to their homes (Global Quick Service Restaurants Market Analysis 2015). Quick services kiosks instead of the standard free-standing units have been installed in busy places like malls and airports. In China, locals run all the restaurants, and the consumers are allowed to change the culture of the company for their purpose. Here, coffee houses are more common in the restaurants since most visit there more instead of fast food joints. Modifications were also made to the menu to include the teriyaki burger, which presently is very popular. In Britain, the company’s name was tarnished by activists who sued it for cruelty to animals, exploitation of children in advertisements, misleading adverts and antipathetic to unionization (Derousseau 2015). The company came up with a strategy to handle these issues in Britain later on by attracting new and different customers, improving McDonald’s tarnished image, offering good value item. Biodiesel oils obtained from cooking oil powered the McDonald’s restaurants; sheets of paper put on the customers’ trays had photographs of the British farmers who supplied the company (Gruley & Patton 2015).
Internalization theory and McDonald’s International Strategies
Internalization theory is applied in international business, and it is concerned with how a company expands to foreign markets. It is a behavioral theory that proposes that a company minimizes the uncertainty associated with entering a foreign market by doing it in a gradual manner. This involves using modes of entry that do not involve a lot of commitment such as exporting their product or service and only becomes more involved in those markets when they find success. The theory perspective on international expansion is not similar to the options value approach, whereby companies also engage in the gradual commitment of resources and occasionally update their evaluation of various opportunities. However, internalization theory focuses on risk aversion and proposes that a company with an objective of expanding abroad should only do so after all opportunities within its home market have been exhausted. The firms then first enter into the markets that are more familiar to them such as those that are closer geographically or have similar cultures and exhaust the opportunities in them before entering into new ones (Rugman 2013)
Following the international strategies of McDonald and the explanations provided for the internalization theory, McDonald is a highly internalized company from, with a lengthy history of internalization. The company has followed a gradual process of internalization since it began with its initial expansion to foreign markets that began with countries that were geographically and culturally closer. Before expanding into these international markets, it had established many outlets in the U.S. Currently the company is in almost every state in the U.S with 14278 stores. The expansion of McDonald started with Western nations before moving into Asian nations. The western nations are more close to McDonald in terms of geographic proximity and culture (Kowitt 2011).
Moreover, the Company first entered into the most developed countries that had higher levels of incomes before moving to the less developed and emerging markets. The mode of entry mainly used by McDonald is Franchise, whereby about 81% of the restaurants are franchised while the company operates only 19 percent. After entering a foreign market, McDonald’s target customers are usually the top and middle-class income earners before moving to the low-income earners. The company begins with establishing one or two franchisees in the foreign market before adding others (McDonald’s Corporation 2015).
The theory also suggests that in the new globalized market, uniform products and services emerges. In this case, large-scale companies no longer emphasize on customizing their offers but offer internationally standardized products that are reliable, functional, advanced and at reduced prices. It argues that well-informed customers move towards tastes convergence, pushing firms to take advantage of the economies of simplicity. The success of a global corporation is greatly influenced by its ability to adopt strategies that allow it to operate as if the whole world or major regions of the world form a single entity. In such an organization, similar things are sold in the same manner everywhere (Crawford, Humphries & Geddy 2015). Customers would prefer a company providing world-standardized products instead of that, which cuts down costs and prices and increases the quality and reliability while at the same time maintaining concerns for suitability (Verbeke & Kano 2015). McDonald offers standardized products and services as one of its international strategies ensuring that customers can get a similar experience at two different locations.
The Uppsala Model is also applicable in explaining the McDonald’s path of internalization. This model explains how firms gradually improve their operations in foreign markets and how their investment behavior is affected by what the firms learn. The model suggests that the expansion of a corporation to the international market is a gradual process that depends on incremental steps and experiential knowledge. The Uppsala model also makes the assumption that while proceeding along the internalization path, a company takes logical steps that are determined by the gradual acquisition and application of information obtained from foreign markets and operations. They then make successive determinations of higher levels of market commitment to more international business operations (Rugman 2013).
Uppsala model has four key concepts including Market knowledge, market commitment, commitment decisions and current activities and based on these four concepts the model can predict the basic pattern of company internationalizing. At every stage of the gradual development, a company obtains different experiences and knowledge about the foreign market. At each of the stages, the firm maintains its previous knowledge and obtains new. Using this model, the international strategies employed by McDonald reflect the different stages of gradually entering the international market. In the first stage, McDonald acquired experience in the United States where the first chains of the restaurant were established. The company then aspired to enter the foreign markets using the franchisees mode of entry. This mode of entry did not require huge commitments in terms of resources implying that McDonald was cautiously and gradually moving to the international market. The countries were also more geographically and culturally closer. In the third stage, McDonald started their foreign activities by introducing traditional exports but with time, products are modified to fit the local markets (Dabija & Postelnicu 2015).
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