McDonald’s Case

Alisa Zhazhieva, Anh N. Vu, My T. Duong, Anh N. Cao,

Thuy T. Nguyen, Hang K. Nguyen, Chau M. Nguyen

International School

BUS 444

Strategic Management

José A. Torres

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Introduction

The fast food industry changed a lot since it was introduced to people. It happened because of the

external and internal factors, which influenced the fast food restaurants. Some of those factors

helped companies gain profit, while others lead to bankruptcy. In this report, we will focus on

the McDonald’s external and internal environments, its strategies, and results of those strategies.

I. The External Environment

A. A Porter’s Five-Forces Model

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INDUSTRYCOMPETITORS

McDonald’s, Burger

King, Taco Bell, Wendy’s, and KFC

SUPPLIERS

Companies that supply meat, potatoes, etc.

BUYERS

Fast food restaurants’ customers and

franchisees

SUBSTITUTES

Home cooking burgers, French

fries, etc.

Bargaining power of suppliers

Bargaining power of buyers

Threats of new entrants

Threats of substitute

products or services

POTENTIALENTRANTS

Entrepreneurs that plan to run their fast

food restaurants

The Threat of New Entrants The threat of new entrants is quite high. In order to run a fast food

restaurant potential entrants must spend a huge amount of capital. Furthermore, because of the

high industry rivalry, new entrants need to spend money on marketing campaigns and

differentiation in order to stand out from an industry companies that had good brand names as

McDonald’s and KFC. The existing companies have been operating for a long time, so they have

reliable suppliers and well-coordinated distribution systems. These benefits bring big companies

to a superior position in compare with the new ones. The reason is economies of scale which

help famous fast food restaurants reduce their costs and get a higher profit.

The Bargaining Power of Buyers Nevertheless, the switching cost of buyers is approximate to

zero; the bargaining power of buyers is low. Fast food are very popular in the USA, therefore,

the purchases made by one buyer are tiny in compare with the total sales. Fast food restaurants

usually try to differentiate themselves. This fact also underlines the low bargaining power of

buyers. On the other hand, if we will include franchisees to the buyers we will found that they

have a medium level power because can negatively affect the reputation and brand name of the

big fast food corporations.

The Bargaining Power of Suppliers Before Skinner become CEO, the whole fast food industry

was famous for its unhealthy food. They did not use much of vegetables. At this time bargaining

power of suppliers was very low because fast food restaurants could easily switch from one beef

or potatoes supplier to another. However, when people’s taste changed and they became to think

more about healthy food, fast food restaurant paid more attention to the quality of supplied

materials. For that reasons companies usually sign contracts with big foodservice distributors

like Sysco, Heinz, Nestle, Danone, Coca Cola etc. In this situation, the power of suppliers

increases. It happens because fast food restaurant want to differentiate themselves by high

quality of their production. Thus, they use food suppliers with the famous brand names and good

reputations.

The Threat of Substitute Products and Services In our case, it was not said anything about

substitutes, but it can be supposed that substitutes for fast food may be home cooking burgers or

French fries. Generally, such a kind of food can be cook easily. They are healthier and cheaper.

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Moreover, people usually do not need to spend a lot of time to cook something that would be

similar to fast food. From the reasons listed above, we can conclude that the threat of substitute

is high.

The Intensity and Rivalry among Competitors in an Industry There are a lot of fast food

restaurants in the industry, which compete with each other. They use different tools to

differentiate themselves. For example, one fast food restaurant can offer to its customers only

Coca-Cola, while the other will offer only Pepsi. The most famous fast food restaurants in this

industry are Burger King, McDonald’s, Taco Bell, Wendy’s, and KFC. Every one of them has its

own menu, which is advertised to be healthier and cheaper than one another.

B. General Environment

Demographic According to the study of Hiemstra and Kim (1995) demographic characteristics

of population, such as household’s income, age, education level, race and ethnicity may

influence the industry. It was investigated that people with high income usually spend more

money on both fast-food and full-service restaurants. It was also found that the purchase

behavior change in terms of number of people in a family. For example, if individual live alone;

he/she will need to spend more time and money per person than if there are four people in a

family. Thus, this person will likely eat at fast-food restaurants, while crowded families prefer to

eat at home. The age of the costumers is also important because young people usually eat fast

foods, while older ones prefer to eat at full-service restaurants.

Cromartie (2002) statistics showed that American population age average gets higher, people

become more educated, and there are fewer members in families.

Sociocultural In 1970s the number of working women increased. Hence, they could not spend

much time as before for cooking, especially in the mornings when everyone hurries to go to

work. Fast food understood this benefit quickly, so at this time different kind of breakfasts were

introduced. In 1990s people became to think more about the health. At first, it negatively

influenced the fast food industry, which has a reputation of unhealthy food that causes obesity.

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Despite some falls, most of the fast food restaurants succeeded in promoting vegetarian salads,

providing nutrition information on the packaging and removing the artery-clogging trans fatty

acids from the oil that is used for cooking french fries. Customers’ opinions about them changed.

It needs to be said that even today most of the fast food restaurants compete with each other and

differentiate themselves by focusing on the population changes, healthy food.

Economic The demand for fast food is inversely proportional to the economy situation. At a

good economic situation, people usually have higher income; so can afford full-time restaurants.

On the other hand, at a time of recession, people eat at home or only at fast food restaurants.

However, recession may negatively affect the company’s operations. When costs go up,

managers usually prefer to save money on employees, by cutting training and hiring young low-

wage people. As a result, the quality of services gets worse. In the long-run, profit decreases.

Global Issues Because of the globalization the trade between countries and expansion of

corporations to overseas become easier. This fact helped big companies go to other countries and

become very new and popular again.

II. Internal Environment

Tangible resources:

Financial In 2002, McDonald’s posted its quarterly loss of $343.8 million. However after that,

in 2006, company can manage its operations and get the profit of $3.6 billion.

Physical McDonald’s in years of turnaround strategy reconstructed and redesigned all his fast

food restaurants. The walls were painted in bright colors, while interior were featured by new

sofas and armchairs. The modern lightning made McDonald’s looks more up-to-date.

Technological McDonald added touch-activated screen in corners to prevent queues. It also

added large television screens and wireless Internet access.

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Intangible resources:

Organizational Before McDonald’s quality reduced because it did not audited its franchises for

cleanliness, speed and service. However, strategies for improvement lead to the achievement that

Mc Donald’s came in third in average service.

Human Employees play a vital role in the organization. Before when the company had

problems, it saved money on his workers. It was a big mistake. Today, nevertheless it spend a lot

of money on training, it still save money on recruiting.

Innovation McDonald’s try to use different kind of innovation in operating activities; it works

very hard to be modern. For example, Irwin Kruger, McDonald’s franchisee, opened a 17,000-

square-foot showcase unit with video monitors showing movie trailers, brick walls, and theatrical

lightening.

Reputation/Brand In previous decades, McDonald’s has an unhealthy food reputation. After the

strategies for adding salads, vegetables and fruits, it perceived healthier. It also known by

customers as a fast food restaurant this offers low cost products and high-quality services.

Besides, it become not only a place for eating, but also a place for spending a times very well by

listening to music and using the free Internet access.

Organizational Capabilities:

McDonald’s always adapt to the customer buying habits. Furthermore, it understands that

employees play a vital role in the company success. In order to increase the productivity, it

develops relationship through communication. Moreover, it recognizes the hard-work and

achievement of the workforce. The other important key is that McDonald’s very often spend

time for communication with staff to talk them about what is going on.

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III. Low Cost Strategy. In previous decades McDonald’s tried to cut costs in every

aspect of its activity, including training of workers and recognition of them in a face

of bonuses, so it fell because the quality of their production and services got worse.

Differentiation When McDonald’s just move to differentiation strategy it had several

problems. It failed again and again when introduced different kind of low-calories

food. The main was that they tried so many thinks that could not manage and audit

them.

A Combination of Low Cost/ Differentiation Nowadays, McDonald’s try to

combine together both low cost and differentiation. The financial statements illustrate

the good results of the company strategies. It is the most efficient and effective way

strategy for McDonald’s.

Conclusion

Based on the Porter’s five forces analysis we can conclude that McDonald’s biggest danger

comes from its competitors within an industry. At the same time key factors of the general

environment positively affect the fast food industry. At the same time McDonald’s continuously

need to work on its improvement because of the high rivalry and scare of falling to the previous

situation when get a loss. Today, McDonald’s strategies lead to high profit and company’s

prosperity.

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