Critical Analysis of McDonald’s Internationalisation Process. Competitors, Challenges, International Markets


Term Paper, 2018
15 Pages, Grade: 1,3

Excerpt

Table of content

1 Internationalisation of McDonald’s
1.1 Company Profile
1.2 News-related influences and major competitors

2 Cultural challenges
2.1 Key external drivers in the I/R Framework
2.2 Classification into a corporate culture typology

3 Critical Evaluation and strategic obstacles
3.1 Market selection and entry mode
3.2 Timing and allocation
3.3 IMGT classification

4 Conclusion

Bibliography

1 Internationalisation of McDonald’s

1.1 Company Profile

In terms of both revenue and brand value, McDonald’s founded in California in 1940 with its headquarters in Oak Brook, Illinois is arguably the most well-known fast food chain in the world. The company serves a locally relevant-menu of various food items, soft drinks and other beverages. The corporation is so globalized that the Big Mac Index is a standard indicator for measuring the purchasing power parity between countries.[1]

To obtain operational growth, McDonald’s works aggressively on becoming a 95% franchise entity by 2018. Approximately 235.000 people were employed as of year-end 2017 in the 36.000 stores in 120 different countries. With its franchise model, the corporation is similar to a large real estate company which is structured into four segments: the largest market is the United States; international lead markets including France, UK, Canada, Australia and Germany; the high growth markets including China, Italy, Poland, Russia, South Korea, Spain, Switzerland, Netherlands and the foundational markets, including 100+ countries are also relevant.[2]

Although the annual revenues are decreasing from year to year, the company’s profitability shows a positive development. In the restaurant industry, McDonald’s generates a significant part of the company’s operating income outside the United States. With a regard for volatility risks in connection with foreign currency changes, the effective income tax rate for 2018 is expected to be in the 25-27%. Nevertheless, there are no significant capital investments required through the gains in franchisee royalties[3] to attempt benefits for McDonald’s shareholders for the long term.[4]

1.2 News-related influences and major competitors

As news-related factors can influence the consumer’s perception in purchasing food in McDonald’s outlets, culture-dependent sensitivities to the market can cause damages in the reputation value.

With a specific regard in the most important markets, China can be taken as an example which emphasizes possible difficulties in the fast food sector. As the third-biggest country as measured in number of restaurants, McDonald’s reported a meat scandal of 4500 cases of beef, pork, chicken and other products in 2012. Food safety scare are common in China. Since the Shanghai Husi Food supplying various chains as Papa John’s and Burger King in several cities in China with expired meat products, the brand suffered.[5]

Nevertheless, the McDonald’s localization strategy accelerated through the presence in key Asian markets. As per estimation of the Chinese population’s development, nearly 19% constitutes of the total world population. Among these, more than 55% of the population is urban.[6] By 2022, middle class population is expected to account for more than 75% of the total Chinese population. These demographic factors led McDonald’s to enter into a partnership with Evergrande Group.[7] 52% per cent controlling stake in its mainland and Hong Kong operations were sold to Citic Capital, while the US private equity firm Carlyle Group holds 28% and McDonald’s remains with 20% own-operated restaurants.[8]

Besides this, McDonald’s is involved in several lawsuits that have been filled with various jurisdictions. Especially in India, the company approached the high court with a broad variety of allegations spanning the company’s entire business. The franchising system in India is running through a 50:50 joint venture.[9] After many vendors have stopped supplying ingredients and packaging materials to Connaught Plaza Restaurants Ltd. (CPRL), the effects of the inconsistencies in the supply chain led McDonald’s to shut down restaurants in north and east India.

Although McDonald’s ended the franchise agreement with CPRL, the suppliers continued to sell to the Indian joint venture, as the contracts are rather done with them than with the US fast-food group. Where contractual wrangles and legal processes are common, India might be a sign of the difficulties many international companies have to face abroad. During the key franchisee hampered McDonald’s to expand, the major competitors like Domino’s and Subway gained market share. To get a better impression of McDonald’s market value, the illustration emphasizes global fast food players in an international context.

McDonald’s faces stiff competition in the informal eating out (“IEO”) segment which includes quick-service eating establishment, casual dining full-service restaurants, cafés or 100% home delivery/takeaway providers.[10] The major competitors include Starbucks, Yum! Brands and different local restaurants depending on the region which could erode the company’s market share and affect its profitability if unpredictable changes like shifting consumer demands, new innovations of competitors being faster in using new technologies will happen. For instance, McDonald’s was accused to have also diverted its profits earned in European major markets like in France, Spain, Italy and the U.K. to Switzerland as well as using an intra-group-based subsidiary to mitigate taxes in Luxembourg.[11] As tax avoidance systems for every large enterprise are common, the exploitation of workers, bad working conditions can be assumed by the society more intensively than marketing initiatives which should influence the new Velocity plan 2018.

2 Cultural challenges

2.1 Key external drivers in the I/R Framework

In order to sell products that suit to local consumer trends and preferences in the different countries, the global fast food giant is urged to deal with social, cultural, political and economic challenges and obstacles that are related to the aspect of glocalisation.[12]

McDonald’s could not only satisfy the local consumer’s needs in different geographical areas; the company pursues also local development. To stay successfully competitive, the geographically decentralized strategic business units are located in countries with different cultural backgrounds. Part of McDonald’s global success is its ability to localize and adapt to changing consumer demands.

To understand the diversity of businesses for transnational companies in connection with national differing markets, the challenge McDonald’s is facing is to rebuild traditional values with decisive action plans.[13]

2.2 Classification into a corporate culture typology

Identifying strategy typologies aims at obtaining a clear understanding of how many ways a company can choose to achieve its objectives successfully. An often-used framework that helps to distinguish multiple forms of internationally operating business is the EPRG scheme.[14] In the beginning of McDonald’s internationalization process, the company only focused on reducing costs as much as possible by creating economies of scale[15] through a standardized product distribution, for example the Big Mac.

In general, firms realize their growth by developing value-creating competitive advantages and create differences between competitors and themselves.[16] For McDonald’s the polycentric staffing policy is the most appropriated one in which host-country nationals are recruited to manage subsidiaries in their own country, while the parent-country nationals occupy key positions at corporate headquarters. In connection with the corporate culture including differentiated networks, the exchange between headquarters and the franchised subsidiaries should guarantee an innovation capability in connection with customer proximity, efficiency and learning ability.

According to international marketing, culture can be defined as “the sum total of learned beliefs, values, and customs that serve to direct consumer behaviour in a particular country’s market”.[17] India and China that will be researched in this study show big cultural differences in most of the dimensions of Hofstede.[18]

According to the classification of McDonald’s Handy’s typology approach, the association between company structures in combination with different culture types, reinforce the fact that these two aspects are interrelated and influence the decisions of buying a product. An applicable category for McDonald’s is the task culture. The franchised restaurants are achievement-oriented by working in a team to produce results for the completion of a particular job.[19] The task culture is the most appropriated one when flexibility and sensitivity to the market or the environment are important. In the fast food industry where the life of a product is short, the speed of reaction to the society’s needs are essential for a long-term success. The trends of change and simultaneously adaption, individual freedom and low status differentials characterize the task culture.

McDonald’s continually adapted to the customer’s tastes, value systems, lifestyle, language and perception. As most Indians are barred by religion not to consume beef or pork, the company had to be responsive to the Indian sensitivities. Due to market segmentation strategies, targeting and positioning, McDonald’s main target segment are young urban families and young children.[20] In India, McDonald’s offers the Maharajah Mac, which is a chicken Big Mac.

In comparison to the U.S. market, McDonald’s in China also shows its ability to localize and adapt to changing consumer demands. The products are standardized but locally adapted to the consumer’s taste and preferences. Building personal relationships between its employees and customers, the Chinese restaurants have several public relations staff in each outlet to answer consumer’s questions. Furthermore, a certain number of female receptionists in some areas take care of children and talk with their parents. This kind of personal customer service isn’t necessary in other markets where expectations of a fast food company changes with a different culture. In addition, McDonald’s Hong Kong recently added wedding packages to the menu. This may seem a strange niche and very unusual for McDonald’s restaurants.[21] Offering this possibility can help to extend the desire to visit a McDonald’s for multiple reasons.

3 Critical Evaluation and strategic obstacles

3.1 Market selection and entry mode

In a hypercompetitive environment, every firm is vulnerable to be attacked by competitors.[22] In the following, the motivation of the market selection and the entry and operation mode is illustrated. A comparison between the Indian and Chinese market is shown.

The ability to deploy intangible assets across national borders, especially for US firm strategy, McDonald’s expands its worldwide location with company-owned and franchised restaurants, with a goal to be approximately 95% franchised over the long term.[23]

Noteworthily is that this goal is likely to be reached in the near future. Although the revenues declined from USD 28 billion in 2012 to USD 22,8 billion in 2017, the operative results increased from USD 8,6 billion to USD 9,5 billion. This effect can be explained by massively higher margins in the franchise business and is a reason for the successful corporate strategy. McDonald’s, as an owner of the restaurants properties, lease income plays a major role.[24]

Licensing agreements involves a contractual arrangement, whereby a licensee acquires the rights from a licenser to use its industrial property rights or non-protected knowledge, technological know-how and experience. In Asia, McDonald’s aggressively expands its presence, particularly in China. As per the industry estimates, Chinese population constitutes nearly 19% of the world population. 55% of the population is urban. The market and cultivation strategy which should be chosen is to be active in markets like China where a growing demand for food products and beverages offered by McDonald’s exists. In order to tap this growing market, the McDonald’s Corporation has already embarked aggressive expansion plans. In August 2017, McDonald’s announced its growth initiatives. By 2022, the opening of 2000 new restaurants, bringing the total of 4500 restaurants in China is targeted.[25]

In addition, McDonald’s announced its plans to identify strategic partners in Taiwan and Japan.[26] Unlike the U.S. market, the market selection and form in the competitive Chinese fast food industry, digital marketing, electronic payment methods and delivery systems are a significant growth driver for the company’s strategic next steps. McDonald’s localization strategy has been accelerated in mainland China through these payment methods.

[...]


[1] cf. The Economist 2018.

[2] cf. Annual Report 2017, p. 19.

[3] cf. Deresky, H. 2012, p. 228.

[4] cf. Team Trafis 2017.

[5] cf. Reuters 2016.

[6] cf. Albrecht, A. 2016, p. 22.

[7] cf. Zhen 2017.

[8] cf. DPA 2017.

[9] cf. Bhushan, R. 2018.

[10] cf. McDonald’s Annual Report 2017, p. 4.

[11] cf. Centellas, P. 2015.

[12] cf. Ritzer, G. 2010, p. 417.

[13] cf. Nicolaou, A. 2017.

[14] cf. Meckl, R. 2014, p. 105.

[15] cf. Oesterle, M.-J. 2005, p. 57.

[16] cf. Hitt, M. A. et al. 2005, p. 245.

[17] cf. Doole 2008, p. 73.

[18] cf. Emrich, C. 2014 p. 2.

[19] cf. Prof. Dr. Abel, J. 2018, p. 32.

[20] cf. McDonald’s Annual Report 2017.

[21] cf. Krüger, S. 2017.

[22] cf. Porter, M. 1985, p. 482.

[23] cf. McDonald’s Annual Report 2017.

[24] cf. Spinnler, T. 2018.

[25] cf. Macfarlane, A. 2017.

[26] cf. Newseditor 2017.

Excerpt out of 15 pages

Details

Title
Critical Analysis of McDonald’s Internationalisation Process. Competitors, Challenges, International Markets
College
University of Applied Sciences Köln RFH
Grade
1,3
Author
Year
2018
Pages
15
Catalog Number
V444526
ISBN (eBook)
9783668855984
ISBN (Book)
9783668855991
Language
English
Tags
McDonald's Internationalisation, company profile, fast food, McDonalds, international management, english, market China and India, product adaption or differentiation
Quote paper
Daniel Germar (Author), 2018, Critical Analysis of McDonald’s Internationalisation Process. Competitors, Challenges, International Markets, Munich, GRIN Verlag, https://www.grin.com/document/444526

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