Strategic planning processes analysis: Case study of McDonald’s China

By | May 25, 2013

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Table of contents

 

1.     Introduction and review of the findings in the previous study………………………… 2

1.1      Measurable financial and strategic objectives………………………………………. 2

2.     Position paper for enhancing strategic capability by influencing strategy in action 3

2.1      Strategic formulation………………………………………………………………………… 3

2.1.1     Competitive positioning using Porter (1980)’s Generic Strategies….. 3

2.1.2     The strategy of business growth using Ansoff (1957)’s matrix……… 4

2.1.3     Resource based view……………………………………………………………….. 6

2.2      Strategic implementation…………………………………………………………………… 7

2.2.1     New product development………………………………………………………. 7

2.2.2     Redesign of the layout of the restaurants…………………………………… 9

2.2.3     Action plan and the budget……………………………………………………… 9

3.     Evaluate the McDonald’s China’s strategic planning processes………………………. 11

3.1      Evaluations & control policy and techniques on the strategic planning process      11

3.2      Recommendations on improving the organization’s strategic planning processes   11

Appendix 1 The three years action plan…………………………………………………………….. 14

 

MGT8002 strategic Management Assignment 2

Case study of McDonald’s China

 

1.        Introduction and review of the findings in the previous study

 

McDonald’s China is one of the famous western style fast food brands in the mainland of China. In the previous study, we had performed an environmental analysis of the organization in term of both external environments with the assistance of the Michale Porter’s Five Forces of Competitive Position Model and internal analysis regarding the organization’s core resources and competences as well as the current strategic choices adopted by the company in the Chinese market sector. In term of strategic capabilities, we have identified six general strategic capabilities which include production and delivery speed, quality training in franchise business, professional supply chain management, special recipe, brand equity and awareness and the large number of outlets. Considering the company’s business objective in the Chinese market as to expand the business scale and coverage in a fast speed, below we will focus on the strategic formulation and strategic implementation as well as the evaluation of the McDonald’s China’s strategic planning processes and providing some recommendations in improving the effectiveness of the strategic planning processes.

 

1.1    Measurable financial and strategic objectives

 

Guided by the global vision of McDonald’s which is to be the world’s best quick service restaurants experience through the provision to customers with outstanding quality, service, cleanliness and value (King 2004, p. 12), and considering the rapid growth of the Chinese fast food market as mentioned in the previous assignment, here the strategic objectives include two: to become the No.1 fast food brand in the next seven years’ time and double the number of the McDonald’s outlets within the coming three years to reach 2,500. And in term of financial objectives, the company could expect to the revenue to increase by three times in the end of the coming five years.

 

2.        Position paper for enhancing strategic capability by influencing strategy in action

 

2.1    Strategic formulation

 

2.1.1            Competitive positioning using Porter (1980)’s Generic Strategies

Figure 1
 Porter (1980)’s Generic Strategies

Source: Adapted from Porter, M. E. (1985) Competitive advantage: Creating and sustaining superior performance, New York: The free press.

 

One of the most widely known strategy framework and the best established in industry and academic literature is the model of Porter (1980)’s Generic Strategies which include three generic strategies as illustrated in the figure above (cost focus and focus differentiation are under the same category of focus strategy). It is believed that the ultimate goal of competitive strategy is to distinguish between successful and unsuccessful companies on behalf of their strategic choice: cost leadership, differentiation and focus and a company has to make a choice between these three generic strategies or else it would be “stuck in the middle” and suffer from below performance (Eldring 2009, p. 7).

 

In the case of McDonald’s China, the company in the Chinese market sector has long been adhering the McDonald’s global competitive strategy which is a cost leadership strategy though the strategy of focusing on operating efficiency and product and procedure standardization, but in order to get adapted to the rising Chinese market which has distinct customer features and market characteristics, it is recommended that the company change the current cost leadership strategy to a differentiation strategy for the following reasons: in term of competitive scope, as a fast food restaurant chain that targets at the consumer market with broad customer base (McDonald & Wilson 2011), the company would definitely has to compete in a broad market rather than a particular market segment because the fast foods products and services are designed to be served to the majority of people who would like to have a quick meal; and in term of the dimension of the competitive advantage which indicates the source of competitive. Porter identifies two types of competitive advantage: firms compete either on the basis of lower cost than their rivals, or the basis of differentiation where they provide some unique and superior value to the buyer allowing them to charge higher prices (Fellows, Langford, Newcombe & Urry 2002, p. 20). But in China, the pricing of the McDonald’s food is never considered as low cost, and as proposed by Marieke K. de Mooij (2004, p. 161) that in China McDonald’s offers the opposite of fast by as several elements of the company’s play a role in the evaluation of the brand such its provision of social space in term of two persons (usually lovers or friends) can go for a date in the two-person tables and also the food is considered in good taste and unique. And most importantly, people feel proud when they eat in McDonald. Therefore, in the current stage of economy and social development, considering the preference of western fast food, McDonald could switch to a differentiation from a cost leadership strategy in the dimension of competitive advantage.

 

2.1.2            The strategy of business growth using Ansoff (1957)’s matrix

 

Figure 2 The Ansoff (1957) Growth matrix

Source: adapted from Kumar, D. 2010, Enterprise Growth Strategy: Vision, Planning and Execution, Farnham Surrey: Gower Publishing Limited. P. 175

 

The Ansoff (1957) Growth matrix is a popular marketing tool as shown in the figure above to assist the marketing strategy forming. The model identifies four major business growth strategies based on the two dimensions of product and markets that the organization is focusing on. While focusing on the existing market, there are two options for business growth: market penetration and product or service development. Market penetration is about increasing sales in the existing market with current products and services while product or service development functions via expanding the business by upgrading the existing products or services or creating new products or services that offer different functions or meet the different needs of the customers (Stanton & Lemer 2010, p. 83).

 

As suggested in the last assignment, based on the Ansoff (1957) Growth matrix model, we had concluded that the McDonald’s China has been currently using a market penetration by providing the same menu and service (restaurant layout, table design and so on) to the Chinese customers which has been demonstrated as much less effective than a more localized strategy that is being adopted by its global competitor KFC that manages to achieve a bigger success than McDonald in the China market. And here in this position paper for enhancing strategic capability of the company we would recommend a gradual switch from market penetration to a product development in the growth mode for at least three major reasons: Firstly, as analyzed in above discussion regarding the three generic strategies, we have come the conclusion that the company need to pursue a differentiation strategy as a source of core competitiveness; secondly, food culture in China vastly different from that in the western countries which McDonald mainly focus and is more familiar with (Ko 2008), and they would prefer products that integrate the local food culture characteristics; thirdly, customers in China has special demand for the design of the layout of the restaurants even when it comes to fast food restaurants, for instance, the Chinese customers tend to prefer to dine in a restaurants where they can sit down to eat rather than rushing to the door to leave though they also want to save time because lunch and dinner are traditionally excellent time for people to communicate with their families, friends or colleagues (Wang 2011) and thus having meals is not simple thing as understood in the western countries.

 

2.1.3            Resource based view

Figure 3 A resource based view
model

Source: adapted from Storey, J. (2007). Human resource management: a critical text. London: Thomson Learning.

 

The resource based view which focus on the internal side of the company or a brand could help a company to seek “self-knowledge” to achieve an understanding of its resources and capabilities and it also entails the exploitation of these resources over the long term in order to build up a close tie between the strategies and the company capabilities (Storey 2007). In term of material resources the company does not have too much material resource, some include the materials that are supplied to the company globally under strategic cooperation with the suppliers; in term of human resources, as mentioned in the previous assignment, the quality training power over the franchise management is one of its six major capabilities in the China market which the company seems to be use less than what it does in the rest part of the world. Because the company has been less ambitious in expanding its franchise business and invests itself in many outlets, this has partially contributed to the slow growth of the business scale. Therefore, it is recommended that the company could continue to account on the franchise business to grow the market share; and in term of intangible resources, the special recipes, R&D power, corporate brand equity and the corporate culture could be furthered exploited by developing strategies that could better utilize these intangible assets that are hard for copying by the competitors.

 

2.2    Strategic implementation

 

2.2.1            New product development

 

Based on the conclusion that the company would pursue a differentiation competitive strategy and also a product development growth mode, therefore a program of new product development would be necessary and immediately needed for implementation of these strategies formed above. New product development is a multi stage process. Many different models with a varying number of stages have been proposed in the literature (Murthy, Rausand & Osteras 2008). Idea generation is the usual first step within the new product development process, as in this step, it is recommended that a broad marketing survey should be done among the Chinese customers to find out their demand in term of the desired features and taste and quality of the new products in their imagination, such survey would provide a number of new ideas that come from the local customers and should be considered as being more in consistence with the local market; before employing resource to these ideas to make the new products, idea screening is necessary and in this stage of the new product development, local managers as well as oversea managers could both be invited to evaluate these ideas and remove those impractical and inappropriate ones; these ideas could be followed up and furthered developed into practical products through deploying the company’s quality and powerful research and development (R&D) resources and human resources as but before the commercialization the new products should go through market testing and business analysis to ensure that these products are marketable and satisfy the needs and demand of the local Chinese customers.

 

After having the final products, there are three more things that need to be defined: product name, pricing strategy and the decision about which product to be replaced. In term of product name, the company could widely consult the customers and the employees to name the new products in such a way that it could have special meanings in the Chinese culture or at least that it would not attract hatred and misunderstanding among the Chinese sensitive customers because of the cultural differences; and in term of pricing strategy, both of the competitive pricing and psychological pricing which refers to setting prices based on consumer perceptions of value (Reid & Bojanic 2010, p. 568) could be applied. The purpose of competitive pricing is to compete head to head with the competitors to gain a larger share of market while at the same time the psychological pricing which could be achieved by better understand and utilize the meanings of some special numbers in the Chinese culture such as the preferred number of 6, 8 and 9, there for the price of 18.88 could be an excellent price for a new product offered by the company to the market; in term of the decision about which existing products to be replaced by the new products would be of quite some importance. Because though the menu could be expanded to some extent, it is more recommended that there would be some replacement and update of the existing menu by introducing the new products into the menu and replace some old products, if replacement is needed, the company should choose products with similar products with the new products to be replaced.

 

2.2.2            Redesign of the layout of the restaurants

 

As mentioned above, two major features of the Chinese customers decide that the company needs to redesign the layout of the restaurants: social needs and respect for more privacy. To achieve this target and meet such needs, two major strategies would be implemented. Firstly, the company could redesign the table of dinning inside and outside the McDonald to better provide group dinning functions such as providing more four or six persons chair and at the same time expand the size of the dining area to provide more space for sitting because people would like to have meals like in the traditional restaurants; another strategies is to redesign of layout the restaurants to increase the respect for privacy for friends and families as people tend to sit with their friends and less likely to have meals with strangers. All these two programs could be sub-contracted to third party standalone contractors to get in charge rather than carrying out themselves.

 

2.2.3            Action plan and the budget

Actions123456789101112Budget
Advertising×××  ×  ××× 35,000
Promotion activities ×××     ×××20,000
New product development    ×××××   5,000
Marketing research××××        5,000
Employees and franchisees training       ×××××10,000
Distribution channel maintenance×        ×××5,000
Redesign of the layout of the restaurants  ××××××    20,000
In total            100,000

Table 1 The action plan for 2012 (in thousands CNY)

 

Actions123456789101112Budget
Advertising×××  ×  ××× 52500
Promotion activities ×××     ×××30000
New product development    ×××××   7500
Marketing research××××        7500
Employees and franchisees training       ×××××15000
Distribution channel maintenance×        ×××7500
Redesign of the layout of the restaurants  ××××××    30000
In total            150000

Table 2 The action plan for 2013 (in thousands CNY)

 

Actions123456789101112Budget
Advertising×××  ×  ××× 70000
Promotion activities ×××     ×××40000
New product development    ×××××   10000
Marketing research××××        10000
Employees and franchisees training       ×××××20000
Distribution channel maintenance×        ×××10000
Redesign of the layout of the restaurants  ××××××    40000
In total            200000

Table 3 The action plan for 2014 (in thousands CNY)

 

 

 

 

 

3.        Evaluate the McDonald’s China’s strategic planning processes

 

3.1    Evaluations & control policy and techniques on the strategic planning process

 

The evaluation and later control of the implementation of the strategic planning should be done by several key steps. Firstly, the company would need to define the key parameters to be measure such as the number of the new outlets to be open within a certain period of time and the brand ranking in the surveys; secondly, measurement should be done timely and regularly; thirdly, the company need to measure the results to the set targets which could be broken into one year or even one month small targets. For example, as mentioned above, the company is targeting at doubling the number of the McDonald’s outlets within the coming three years to reach 2,500, it can not simply make this target and check the results in the end of the next three years’ time and it has the break up the target to each year target of around 800 new outlets to be established each year; and fourthly, necessary changes in the strategy planning could be needed based on the changed situation in the market. Market does not stay still and there are many uncertainties and changes happening out there in the market every day, here one very important risk that needs to be taken into consideration is the possible economy crisis triggered by the real estate bubble which has already been witnessed in the mainland of China as the government controls the development and purchasing of the real estate products such as the housing to force an early outbreak of the asset bubble and drive away the international and domestic hot money into the investment of the housing industry. Therefore, for McDonald’s in China, it has to keep a closer eye to the changing of the economic development trend, and change the strategic direction if necessary. For instance, if there is an imminent crisis in the economy that may keep the people to be more home stay and cook on their own, as the demand drop, the opening of the new outlet could be very difficult to recover the cost. Therefore, following up control and intervention would be critical to the success of the strategic plan in the long run.

3.2    Recommendations on improving the organization’s strategic planning processes

 

There are two major recommendations given to the company to increase the effectiveness of the company’s strategic planning processes: on one hand, in term of environmental scan, a third party management consulting firm could be hired to identify the key challenge in the Chinese market as well as the key capabilities possessed by the company; secondly, in term of adopting a differentiation and localizing strategy, the company could test the new products in a small number of outlets before they could be introduced to the whole Chinese market to reduce the chance of failure of the new products.

List of reference

 

Ansoff, I. 1957, Strategies for Diversification, Harvard Business Review, September-

October: 113-24

 

Eldring, J. 2009, Porter’s 1980 Generic Strategies, Performance and Risk: An Empirical investigation with German Data, Hamburg: Deplomlca Verlag GmbH. p. 7

Fellows, R., Langford, D., Newcombe, R. & Urry, S. 2002, Construction Management in Practice. London: Blackwell Science Ltd. p. 20

 

King, J. B. 2004, Business plans to game plans: a practical system for turning strategies into action. Revised edition. New Jersey: Wiley & Sons, Inc. p. 12

 

Ko, S. 2008 McDonald’s: Is China loving it?, Hong Kong: The University of Hong Kong Press.

 

Li, D. L. 2010, Computer and Computing Technologies in Agriculture III,  Chennai: Scientific Publishing Services. p.260
McDonald, M. & Wilson, H. 2011. Marketing Plans: How to Prepare Them, How to Use Them. West Sussex: John Wiley & Sons Ltd.
Mooij, M. K. D. 2004, Consumer behavior and culture: consequences for global marketing and advertising. London: Sage Publications, Inc. p. 161

 

Murthy, D. N. P., Rausand, M. & Osteras, T. 2008. Product Reliability: Specification and Performance. Brisbane: Springer.

 

Porter, M. E. 1979, How Competitive Forces Shape Strategy, Harvard business Review, March-April 1979
Porter, M. E. 1980, Competitive strategy: Techniques for analyzing industries and competitors, The Free Press, New York. pp. 108-122

 

Porter, M. E. 1985, Competitive advantage. Creating and sustaining superior performance. The Free Press. New York.

 

Reid, R. D. & Bojanic, D. C. 2010, Hospitality Marketing Management. New Jersey: John Wiley & Sons. p. 568

 

Stanton, E. & Lemer, C. 2010, MBA for Medics. Abingdon: Radcliffe Publishing Ltd. p. 83

 

Wang, V. X. 2011. Making Requests by Chinese Efl Learners. The Netherlands: John Benjamins Publishing Co.

 

 

Appendix 1 The three years action plan

Actions123456789101112Budget
Advertising×××  ×  ××× 35,000
Promotion activities ×××     ×××20,000
New product development    ×××××   5,000
Marketing research××××        5,000
Employees and franchisees training       ×××××10,000
Distribution channel maintenance×        ×××5,000
Redesign of the layout of the restaurants  ××××××    20,000
In total            100,000

The action plan for 2012 (in thousands CNY)

 

Actions123456789101112Budget
Advertising×××  ×  ××× 52500
Promotion activities ×××     ×××30000
New product development    ×××××   7500
Marketing research××××        7500
Employees and franchisees training       ×××××15000
Distribution channel maintenance×        ×××7500
Redesign of the layout of the restaurants  ××××××    30000
In total            150000

The action plan for 2013 (in thousands CNY)

 

Actions123456789101112Budget
Advertising×××  ×  ××× 70000
Promotion activities ×××     ×××40000
New product development    ×××××   10000
Marketing research××××        10000
Employees and franchisees training       ×××××20000
Distribution channel maintenance×        ×××10000
Redesign of the layout of the restaurants  ××××××    40000
In total            200000

The action plan for 2014 (in thousands CNY)

 

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