Strategic Management: Case study of McDonald’s China

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1.        Industrial analysis

 

Figure 1 Michale Porter’s Five Forces of Competitive Position Model
Source: Adapted from Porter (1979)

While researchers have long studied the source of profit in the organizations’ external environments (McLoughlin & Aaker 2010, p. 68), Michael Porter of Harvard Business School pioneered the application of industrial organization economics to analyzing the determinants of the firm profitability (Grant 2005, p. 17) and one of the key determinants is the competitiveness of the industry. According to Porter (1980), high level of the competitiveness in an industry would reduce the profitability of the players inside the industry and hence decrease the attractiveness of an industry. Despite that industries may differ greatly in their composition, Porter claimed that all industries share similar five competitive forces which determine the competitiveness of the industries (Flouris & Oswald 2006, p. 56) as shown in the figure above. Similar to other fast food sectors in the major emerging and developed countries, the fast food industry in China is considered as competitive though it is not as extremely competitive as like markets such as UK and the United States. In following, we will perform an industrial analysis using Porter’s Five Forces of Competitive Position Model to evaluate the industrial environment that McDonald’s China competes in.

 

1.1    Intensity of rivalry among established firms – Medium

 

According to Philip Sadler and James C. Craig (2003, p. 97), some of the key factors that influence the rivalry among established firms are: seller concentration, diversity of competitors, product differentiation, excess capacity and exit barriers, cost conditions and market growth rates. The level of the intensity of rivalry among the established players in the Chinese fast food industry is medium because: in term of seller concentration fast food restaurants tend to concentrate in the locations with large flow of people such as airport and train stations (sees appendix 2.0 and 3.0 for the example of the concentrated locations of KFC and McDonald’s in Beijing); in term of market growth rates, according to the CRI report released in 2011, during the past ten years, China’s fast food industry has maintained a high annual growth rate of 10%-20% (cri-report.com 2011) and in term of product differentiation the fast products are to some extent diversified since there are different offerings to the Chinese consumers such as pizza, burger and various international and local fast food products.

 

1.2    Threat of substitutes – Low

 

The threat of substitutes in the fast food market in China is low for two key reasons: firstly, the growing group of fatigued, white-collar workers in China’s major cities increase the demand for convenience provided by the fast food (Cnreviews.com 2010); secondly, young people see western fast food as an interesting and quality cheap alternative to traditional meals (Kan, Lau & Martin 2008, p. 189) and McDonald is obvious one of the most valuable brands among the Chinese consumers.

 

1.3    Bargaining power of buyers – Medium

 

Buyer power is also important in defining the industrial environment and it could be affected by various factors such as the buyer concentration (volume) and switching cost (sees appendix 4.0 for more factors influencing the bargaining power of buyers) (Nicosia & Moore 2006, p. 34). The middle level of the bargaining power of buyers could be rationalized in these three dimensions: in term of nature of buyers, they are large in numbers but are individual consumers which reduces the group bargaining power; in term of buyer concentration, the majority of the consumers of the fast food products would be in the cities and in places near the workplace and residential areas which in accordance with the above mentioned concentration of sellers; in term of switching cost, as switching to a competitor (dinning in another fast food restaurant) would not incur high cost.

 

1.4    Risk of entry by potential competitors – Strong

 

Risk of entry by potential competitors which is a function of the height of barriers to entry will involves factors that make it costly for other firms to enter the industry (Hill & Jones 2008, p. 58). The risk of entry by potential competitors is strong because on one hand as mentioned above the fast food industry is growing fast which will attract new competitors and on the other hand the legal and industrial barriers such as the fixed cost in setting up a fast food chain are low. Hence the risk of entry by potential competitors is strong.

 

1.5    Bargaining power of suppliers – Low

 

A supplier’s power is critical when they provide a special input that the firm cannot get elsewhere (Analoui & Karami 2003, p. 84). Bargaining power of suppliers is low in the fast food industry in China for two major reasons: on one hand, the materials provided by the suppliers to the fast food firms such as flour are mostly standard products with a large number of suppliers concentrating on the production of these products; on the other hand fast food chains such as McDonald are large in purchasing volume which help increase their bargaining power.

 

1.6    Summary and implications of Porter’s Five Forces analysis

ForcesStrength of the forcesDescriptions
Threat of substitutesLowerpreference of western food among the youth; fatigued, white-collar workers need real “fast” food
Bargaining power of buyersMediumindividual consumers; low switching cost; high buyer concentration;
Risk of entry by potential competitorsStronggrowing market attract new competitors; low barriers to entry (low investment requirement);
Bargaining power of suppliersLowlarge in number (suppliers), large purchasing power by fast food firms;
Intensity of rivalry among established firms Mediumannual growth rate of 10%-20%; high seller concentration; medium product differentiation

Table 1Summary and implications of Porter’s Five Forces analysis

 

The medium competition in the fast food sector in the China market has two major implications to McDonald’s China: firstly, price competition in China for most fast food firms is not as necessary as in other well developed markets outside of China like the US because of the fast growing market size; secondly, market share increase should be the focus in the growing stage of the fast food industry in China.

 

 

 

2.        Strategic capability analysis

 

In the 1990s, thinking related to the role of resources and capabilities as the fundamental basis for organization strategy and the major source of profitability coalesced into what has become known as the resource-based view (Barney 1991). The resource-based view holds that sustainable competitive advantage and quality performance of the organization are determined by its distinct resources and competences (Johnson et al, 2008). Below we will list and analyze the general resources and capabilities of McDonald to see how it will maintain competitive in the long term basis.

Resource or capabilityIs it valuable?Rare?InimitableNon-substitutableCompetitive consequence Performance implications
Production and delivery speedYYNY33
Quality training in franchise businessYYNY33
Professional supply chain managementYYYY44
Special recipeYNYN22
Brand equity and awarenessYYYY44
Large number of outletsYYNY33

Table 2 Evaluation of the key strategic resource and capabilities

 

The above listed six resources or capabilities are the source of the sustainable competitive advantage and superior performance of the McDonald because they are valuable, rare, inimitable and non-substitutable. For example, in term of brand equity and awareness, McDonald has been ranked as no.6 in the Top 50 Most Valuable Global Brands 2010 (see appendix 5.0) and it is the only fast food brand in the top 10 most valuable global brands. Also taking into the fact that McDonald is one of the known western brands in China, the brand equity of McDonald is one key source of core competitiveness in the China market. And in term of large number of outlets, though as mentioned in the background information of the company (appendix 1.0) McDonald’s is a late entrant into the foreign fast food industry in China it has already established more than 1,200 McDonald’s restaurants in the country (Bloomberg.com 2010) which enhances the brand equity and awareness in the China market.

 

The above analysis regarding the McDonald’s strategic resources and capabilities together with the industrial analysis that we have had previously has two major implications to its operations in the China market: firstly, in term of the number of outlets and franchise management which are two key resources and capability of the McDonald’s China, the fast food chain could ambitiously expand the number of the franchise stores because the number could bring core competiveness (probably due to the effect of scale of economy) especially when in the China market its major global competitor KFC has already owned more than 3200 outlets (kfc.com.cn 2011) in the mainland of China leaving the McDonald far away behind; secondly, special recipe need to be enhanced frequently due to it is not as rare and bon-substitutable as other core competencies and resources.

 

3.        Strategic choices

 

In following this study will identify the strategic options and direction for strategic development of McDonald’s China by applying Ansoff (1988)’s Product/Market matrix.

 

 

Figure 1 Strategic development directions

Source: adapted from Ansoff (1988)
After knowing the external industrial environment and the internal strategic capability of the McDonald’s China, it is important identify the strategic development directions for the company to guide its development in the Chinese market which witnesses fast growth with the rapid raise of the Chinese economy in the globe. The key message of the chosen model Ansoff (1988)’s Product/Market matrix is that market growth should be achieved in line with own capabilities (Birkholz 2004).

 

Figure 2 Lunch menu of McDonald’s China

Source: Mcdonalds.com.cn 2011

In the case of McDonald’s China, it is using a market penetration strategy which is focusing on the increase of market share of the existing products in existing markets at the expense of competition. This judgment is made based on two kinds of facts: firstly, in term of product decisions, McDonald’s China has been adhering to the global product strategy to provide standardized menu and quality services which is also delivered in standard procedures as prescribed in the well known McDonald’s internal instruction book which aims at include the majority of operating activities into the SOPs (standard operation procedures) to increase the operating efficiency and control the costs; secondly, in term of market segments strategies, McDonald’s China is also act in accordance with the global market segment strategy to targeting the middle to lower income consumers who are busy at work and daily life and would like to save time though having fast food products and services. And McDonald’s China will continue to stick to this market strategy though in China the company seems no able to well cover the lower income market segments due to its still high price as perceived by the consumers (in most traditional restaurants, a set meal could be priced as low as about 5 Yuan compared to the more than 10 Yuan McDonald meal sets).

 

The market penetration strategy adopted by McDonald’s China has obvious advantages and disadvantages considering the future development and strategic expansion in the rising market of China. In term of advantages, by using a market penetration strategy the organization would be able to apply all the standard operation procedures in the Chinese market without making any major changes and adaptations which will not incur high cost and thus will be safe and stable; in term of disadvantage, by focusing on the promotion of the existing products in the Chinese market like what the organization has been doing in other major markets, the McDonald’s has neglected the cuisine cultural differences that exist between the Chinese consumers and the consumers in the western countries. Such disadvantage may probably best explain why KFC manages to beat McDonald’s in the China market while it is the underdog in the global scale because KFC is more willing to change its menu in China such as the introduction of the “Old Beijing Roll” which could not been found outside of China. The market penetration strategy implies that the firm has been pursuing along a less effective strategic direction and there is a better alternative strategy which will be elaborated in the following.

 

4.        Justification of an alternative strategy

 

A better alternative strategy recommended here will be the product development in the same Ansoff (1988)’s Product/Market matrix. The McDonald’s in the China market could focus on the creation of products with new or different characteristics (tastes) that offer new or additional benefits to the consumers in China. It is viable and necessary for the organization to change to the product development strategy for the following reasons:

 

Firstly, the organization has the capability and resources to develop the needed products. As one of the top fast food chains, McDonald’s China could be able to develop new products in new tastes to better satisfy the local market needs. Also taking account of the large market and still growing market, it would be worthy for the organization to invest significantly in the R&D (research and development) activities of the new products with the hope that some of these new products could become a success and their value would be immeasurable.

 

Secondly, KFC in the China market has set up a good example for McDonald to follow. Because of the fact that KFC has so nicely introduced the new products that more localized and attract more consumers, now KFC has been in a more advantageous position in the competition with McDonald to be the largest and best fast food chain in the Chinese market. Hence the fact KFC has adopted the product differentiation to beat McDonald suggests that McDonald could also localized its products to suit the needs of the Chinese consumers.

 

Thirdly, the Chinese food culture is different from the western style food culture and such differences create pressure for the McDonal’s China to make some changes rather than adhering to the product standardizations. With a long history, the Chinese food culture suggests that in the south part of China, rice food is what considered as principle food while it would be noodle and “mantou” in the north part of China and hence product differentiations based on the local market needs would be necessary. While the principle food has been changed to burgers in McDonald’s China, there would be many consumers who resist such replacement because of their long term eating habits. And localized new menu would be able to provide offering to satisfy the needs of the local customers and also provide uniqueness to them to make them perceive that McDonald’s China is different from to other major competitors as well as other McDonald’s outlets outside of China in New York or Kuala Lumpur.

 

To conclude the above analysis on the new strategy, the product development, McDonald’s China has the resources and capabilities to development new products to offer new features to meet the unique needs of the consumers in China.

 

 

List of reference

 

Analoui, F. & Karami, A, 2003, Strategic management in small and medium enterprises. p. 84

 

Ansoff, H. I. 1988. The new corporate strategy. Revised edition, John Wiley & Sons, New York.

 

Barney, J. B. 1991,“Firm Resources and Sustained Competitive Advantage,” Journal of Management, 17 : 99–120

 

Birkholz, A. 2004. Business Analysis of Web.de AG. GRIN, Norderstedt.

 

Bloomberg.com 2010. McDonald’s Raises China Prices on Higher Costs. Last updated: Nov 17, 2010, Retrieved 18 Dec 2011 [online] available: http://www.bloomberg.com/news/2010-11-17/mcdonald-s-increases-china-prices-on-higher-raw-material-costs-from-today.html

 

Cnreviews.com 2010. The Most Stressful Cities For China’s White Collars. Retrieved 18 Dec 2011 [online] available: http://cnreviews.com/life/living-in-china/china-white-collars-stressful-cities_20101105.html

 

Flouris, T. G. & Oswald, S. L. 2006, Designing and executing strategy in aviation management. Ashgate Publishing Company, Burlington. p. 56

Grant, R. M. 2005, Contemporary strategy analysis. Blackwell Publishing, London. p. 17

Haig, M. 2011, Brand Failures: The Truth about the 100 Biggest Branding Mistakes of All Time. Kogan Page Publishers, London, p. 93

 

Hill, C. W. L. & Jones, G. R. 2008, Essentials of Strategic Management. South-Western, Cengage Learning. Natorp Boulevard, Mason, p. 58

 

Johnson, G., Scholes, K. & Whittington, R. 2008. Exploring corporate strategy: text and cases, 8th edition, Prentice Hall, Harlow.

 

Kan, J., Lau, H. & Martin, D. 2008, Live & work in China & Hong Kong. Crimson Publishing, Hong Kong. p. 189

 

Kfc.com.cn 2011. About US. Retrieved 18 Dec 2011 [online] available: http://www.kfc.com.cn/kfccda/About/index.html

 

Luo, Y. D. 2011. How to enter China: Choices and lessons. University of Michigan Press, Michigan

 

McLoughlin, D. & Aaker, D. A. 2010. Strategic Market Management: Global Perspectives. John Wiley & Sons Ltd., West Susses,. p. 68

Nicosia, N. & Moore, N. Y. 2006, Implementing purchasing and supply chain management: best practices in market research. RAND Corporation, Santa Monica, CA, p. 34

 

Oyafemi, C. D. D. 2011, Theological Reflections for Sundays and Solemnities of Liturgical Year B. Author House, Bloomington
Porter, M. E.1979, How Competitive forces shape strategy. Harvard Business Review, March/April

Porter, M. E. 1980, Competitive strategy: Techniques for analyzing industries and competitors, The Free Press, New York. pp. 108-122

Cri-report.com 2011. RESEARCH REPORT ON CHINA FAST FOOD INDUSTRY, 2011-2012.  Retrieved 18 Dec 2011 [online] available: http://www.cri-report.com/240-research-report-on-china-fast-food-industry-2011-2012.html
Sadler, P. & Craig, J. C. 2003, Strategic management. Kogan Page, London, p. 97

 

 

Appendix 1.0 Background of McDonald’s China

 

McDonald’s Corporation is the world’s largest chain of hamburger fast food restaurants, serving around 64 million customers daily in 119 countries. Headquartered in the United States, the company began in 1940 as a barbecue restaurant operated by the eponymous Richard and Maurice McDonald; in 1948 they reorganized their business as a hamburger stand using production line principles. Businessman Ray Kroc joined the company as a franchise agent in 1955. He subsequently purchased the chain from the McDonald brothers and oversaw its worldwide growth (Oyafemi 2011). It is self proclaiming by the company that the chain of fast food restaurants represents the world’s most successful food service organization. In July 2010, McDonald’s reported global sale were up 5 percent and operating profit was up 10 percent and at the same time it was ranked the sixth most valuable brand in the world with worth in excess of $66 billion (Haig 2011, p. 93). McDonald’s is a late entrant into the foreign fast food industry in China. In 1990, McDonald opened its first restaurant in the south city Shenzhen when PepsiCo opened its first Kentucky Fried Chicken in Beijng in 1987. Despite its late entrance, it still has an advantage over its competitors with the world famous brand in the fast food industry (Luo 2011) and enjoys a fast expansion in the recent years.

Appendix 2.0 Concentrated outlets of McDonald’s in Beijing (points marked in red)

 

 

 

Appendix 3.0 Concentrated outlets of KFC in Beijing (points marked in red)

 

 

 

Appendix 4.0 Factors influencing the bargaining power of buyers

 

 

 

Appendix 5.0 Top 50 Most Valuable Global Brands 2010

 

 

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