McDonald’s Analysis

Professor: Chris Miller

Due date: May 20, 2013

Team members Keuka ID

Nguyen Bang Nhat 435390

Pham Phuoc Linh 435394

Doan Thi Thai Hang 435364

Nguyen Tuan Hung 435386

McDonald’s

Table of ContentsI. Summary...................................................................................................................................2

II. External environment analysis..................................................................................................3

1. Porter 5-forces model of the fast food industry....................................................................3

A. The intensity of rivalry among competitors in an industry...............................................3

B. Threat of new entrants.......................................................................................................3

C. Threat of substitutes..........................................................................................................3

D. The bargaining power of buyers........................................................................................4

E. The bargaining power of suppliers....................................................................................4

2. Key factors in the general environment that have a significant impact on the fast food industry.........................................................................................................................................5

A. Demographic segment.......................................................................................................5

B. Socio-cultural segment......................................................................................................5

C. Economic segment............................................................................................................5

D. Global issues segment.......................................................................................................6

III. Internal environment analysis...............................................................................................6

1. Tangible Resources...............................................................................................................6

A. Financial resources............................................................................................................6

B. Physical resources.............................................................................................................7

C. Technological resource......................................................................................................7

2. Intangible resources..............................................................................................................7

A. Organization......................................................................................................................7

B. Human resources...............................................................................................................8

C. Innovation and creativity...................................................................................................8

D. Reputation.........................................................................................................................9

3. Organization capabilities.......................................................................................................9

IV. Differentiation Strategy.........................................................................................................9

V. Conclusion..............................................................................................................................11

Works Cited...................................................................................................................................12

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McDonald’s

I. Summary

McDonalds is known for being a fast food restaurant since it was founded more than

50 years ago. At the beginning, McDonalds had only a single outlet in remote Chicago

suburb. However, the firm had the outstanding development and become a leader in the fast

food industry with more than 30,000 stores worldwide in 119 countries that served for over

50 million people each day. Although McDonald’s had market dominance, but the intensity

of rivalry among competitors is more and more strong in this industry. Therefore,

McDonald should concern about both external and internal environment that affects to fast-

food industry to find the solutions to deal with those problems and all of them are outlined

below.

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II. External environment analysis

1. Porter 5-forces model of the fast food industry.

A. The intensity of rivalry among competitors in an industry

The fast food industry is highly dynamic and competitive, thus, McDonald’s had

numerous companies to compete in price and quality services with including: Burger King,

Wendy’s, In and Out, Taco Bell, and Jack in the Box. In our opinion, to gain and maintain

completive advantages in that industry, McDonald’s should focus on creating new and

unique brand products such as Chicken Selects, Newman’s Own – a well-known higher

end brand as well as products created to suit the taste of each customer in different ages

and locations, which make McDonald’s different from their rivals. To sum up, McDonald’s

should build a menu that has not only distinct product but also affordable price to compete

with other existed companies in that industry.

B. Threat of new entrants

According fast-food facts from Supersize Me website, on average, there is one-fifth

of the population of the USA (45 million people) eat in a fast-food restaurant each day

(Vivavegie). Therefore, fast-food is potential market, there are so many companies want to

participate in this market. However, it is not easy for new fast food restaurants to enter the

industry because they must be faced with high entry barriers from existed big companies as

McDonald’s. McDonald’s controlled this market for a long time and owned 30,000 outlets

around the world. In addition, it is continuously expanding its outlets through franchising

that makes new business which enters that industry may spend a lot of time to create its

own brand recognition to compete with McDonald’s. Therefore, the threat of new industry

entrants for McDonald’s and fast-food industry is negligible.

C. Threat of substitutes

From our points of view, the threat of substitute products or services is very high in

the fast-food industry because of growth of convenience food. Many food stores provide

other options for customers like sushi and burritos. Besides that, there is competition that

has been coming from quick meals of all sorts that can be found in supermarkets,

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convenience stores, and even vending machine. Nevertheless, if McDonald provides not

only diversified but also good for health in its menu, it would have an opportunity to

expand market and increase sales. For example, McDonald’s would get a lot of value from

providing alternative products on its affordable Dollar Menu “When people are seeking

value, these guys have a very powerful component” (Jarmal Shamsie, 2009).

D. The bargaining power of buyers

The buyers have more power over buying McDonald’s products because customer

tastes have great influence on what company sells. Therefore, to keep and gain new

customers, the company must pay attention to the demands of consumers. After the

documentary “Supersize Me”, made by Morgan Spurlock, there is increasingly becoming

concern about the food harmed their health. Therefore, McDonald’s also provided more

offerings that is being healthier as Chicken Selects with white meat, Newman’s Own salad

with premium ingredients and Apple Dippers with apple slices instead of French fries.

Additionally, according to Supersize Me program, McDonald's and its products as well as

one of the causes of obesity in the USA. As the result, to avoid lawsuits from some of its

loyalty customers, McDonald’s started to provide nutrition information on the packaging of

its products and remove the artery-clogging trans-fatty acids from its French fries.

Furthermore, McDonald’s supplied new beverages such as lattes, cappuccinos, ice-blended

frappes, and fruit-based smoothies that are good for health to its customers.

E. The bargaining power of suppliers

The bargaining power of suppliers is one of important aspect that helps McDonald’s

ensure its position in fast-food industry. McDonald’s should keep good relations with key

firms like Coca Cola, Minute Maid, Heinz, Newman’s Own and also develop the

relationships with new suppliers that aimed to diversify its products and customers. For

example, if McDonald’s tried to add fruit and vegetable on its servings, it would increase

the firm’s operating cost because the nature of fruit and vegetable is perishable so it rather

expensive. Hence, it would need vegetable suppliers as from farms or intermediate

suppliers.

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2. Key factors in the general environment that have a significant impact on the

fast food industry

A. Demographic segment

According to the United States’ Census Bureau, the percentage of people are less

than 18 and over 65 years were 27.3 percent and 12.8 percent respectively in 2009 and

more than half of population was people in the age range from 18 to 65. Therefore,

McDonald’s should target young adults, teenagers, children and families and take different

forms in order to satisfy the demand of customer. Moreover, the majority of the U.S.

population was White (72.4 percent in 2010) and accounted for 17.6 percent were Black

and other races (Wikipedia/Demographics of the United States). Thus, McDonald should

target on the majority of population, but also provide options for serving foods and drinks

suitable for the tastes of minority group.

B. Socio-cultural segment

Nowadays, the life is more and more busy and hurried so people concern about

convenient and quickly products; fast-food is best solution for them. However, people also

have greater concern for fitness and health. They aware that have the high fat content of

most of the products offered by fast-food restaurants and want more healthy options from

McDonald's. Hence, they also should introduce more healthy products by adding fruits and

vegetable on its servings and removing the artery-clogging trans-fatty acids from the oil

that is uses to make French fries. In addition, the firm also should provide nutrition

information that included calories, fat, protein, carbohydrates and sodium on the packaging

of its products to tell customers about what is in their food and then, they can choose

suitable products for themselves.

C. Economic segment

In the last half decade, the trend of global economy is slowdown; it creates a

numerous economic crises in many fields. It can lead to high rate of unemployment, thus,

consumers have to cut down their spending. This change which have greatly influenced the

purchasing power of customers and profit creation of fast-food companies. At that time,

McDonald has been setting up plan to increase sales by improving menu, redecorating the

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outlets and extending hours. And Skinner has been controlling both of prices of menu and

the firm’s profit margins. As the result, during 3 years from 2006 to 2008, the revenue of

McDonald increased dramatically from 21 to 23 billion dollar.

D. Global issues segment

Globalization creates both opportunities and challenges for fast-food industry.

Globalization helps fast-food companies reach larger potential markets and source or

supply from which benefit is produced. Thereby, fast-food companies can sell more goods,

make more profit and make more jobs. However, when it enters foreign market, it will face

with competition of local competitors and different regulations, tariffs, and policies from

local government; thus, they must clearly understand the market to ensure that their

products suit the taste and culture of local people. Additionally, globalization causes

unemployment in United States because fast-food firms move their factories to places

where they can get cheaper workers and it is a risk for the growth of economy.

III. Internal environment analysis

1. Tangible Resources

A. Financial resources

According to balance sheet, there is a gradually decrease in the cash and cash

equivalents from 2006 to 2007 and then increased slightly to $ 2,063,400,000 in 2008. In

addition, McDonald’s sales have increased sharply from 21,586,400 to 23,522,400

thousand dollars between 2006 and 2008 (Jarmal Shamsie, 2009). Although the trend of

global economy is slowdown and consumers cut down their spending, but McDonald's

sales still growing because the core of its Plan to Win strategy was increase sales at

existing locations by improving the menu, refurbishing the outlets and extending hours.

On the other hand, although the trend of equity ratio is obviously downward from

0.53 to 0.47 between 2006 and 2008 but it still produce good results for stockholders, as

long as the company earns a rate of return on assets that is greater than the interest rate paid

to creditors. From our points of view, McDonald’s had a healthy financial situation (Money

Zine).

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B. Physical resources

The total number of McDonalds’ outlets increased slightly from 30,496 in 2004 to

31,967 in 2008. Among them, the owned outlets of company experienced a decline sharply

from 8179 in 2004 to 6502 in 2008. And the franchised outlets rose dramatically from

22,317 to 25,465 during 5 years. “More than 75 percent of its outlets are now in the hands

of franchisees and other affiliates” (Jarmal Shamsie, 2009). Thereby, McDonald’s can save

money and reduce the risk of investment when it expands the chain of restaurant in the

world. However, it can build its brand recognition in the world and also raise its profit from

the royalties of selling off the outlets that it owned.

On the other hand, the turnaround strategy of McDonald’s is also focused on the

company owned outlets. McDonald’s tried to refurbish or reimage the decoration of all its

outlets around the world that aimed to attract customer. The interiors can feature armchairs

and sofa, modern lighting, large television screens, and even wireless internet access. The

firm is also developing new features for its drive through customers that include “music

aimed at queuing vehicles and a wall of windows on the drive-through side of the

restaurant” (Jarmal Shamsie, 2009).

C. Technological resource

One of the parts of innovation strategy of McDonald’s is developed a touch-activated

screen that is very convenient and comfortable for customers. It allows customers to punch

in orders without queuing. In addition, McDonald’s also developing new features for its

drive through customers that include music aimed at queuing vehicles and a wall of

windows on the drive-through side of the restaurant that allows customers to have a look at

their meals being prepared right from their cars’ windows. Inside of restaurant,

McDonald’s also provides the wireless Internet access that creates a comfortable space for

customers.

2. Intangible resources

A. Organization

McDonald choose one of common operating structures that is functional structure

which is headed by CEO and the boards of directions and divided into separate units based

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on role, such as accounting, marketing, research and development or distribution networks.

The organization structure of McDonald’s helps enhance coordination and control and

make decisions easily.

McDonald had over 30,000 outlets already operating around the world of which over

25,000 are franchises that serves from 56 million to 58 million a day. Each of franchise is

like a subsidiary that also had a general manager who will manage and guide employees.

Employees are delegated to suitable tasks and responsibilities. The organization structure

of McDonald’s helps company take advantage managerial and technical talent efficiently.

However, it may lead to short-term thinking, managers should enhance atmosphere of

corporation and teamwork to foster employee’s performance.

B. Human resources

McDonald’s has provided thousands of jobs for American population. By the end of

the decade, the chain ran into more problems because of the tighter labor market.

McDonalds began to cut back on training as it struggled hard to find new recruits, a policy

that led to a dramatic falloff in the skills of its employees. Therefore, McDonald’s should

invest more money on training employees to provide necessary skills for employees. For

example, after the consumer surveys at the beginning of 2003, McDonald face with

deteriorating performance, McDonald’s franchisees and employees needed to be inspired

as well as retrained in their role of putting the smile back into the McDonald’s experience.

C. Innovation and creativity

The innovation of products is one of the top concerns of McDonald's. To make profit

and attract customers, McDonald tried to provide many healthier products that don’t have

trans-fatty acids in the oil that is used to make French fries. In addition, McDonald’s

provide McGriddles breakfast sandwich that consisted of a couple of syrup-drenched

pancakes or a sandwich filled with eggs, cheese, sausage, and bacon in three different

combinations. Besides that, McDonald introduces new beverages as lattes, cappuccinos,

iced-blended frappes, and fruit-based smoothies to its customers. On the other hand,

McDonald’s upgrade its technological equipment in its outlets as touch-activated screen

that allows customers to punch in orders without queuing. It will bring a convenient and

comfortable space for customers.

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D. Reputation

McDonalds is known for being a fast food restaurant since it was founded more than

50 years ago. It rose from a single outlet in a nondescript Chicago suburb to one of the

largest chain of outlets spread around the globe.

To improve the reputation with customers, McDonald’s should improve the quality

of food and introduce healthier foods to satisfy the demands of customers. For instance,

McDonald should provide fresh and high-quality ingredient to make products suitable for

the tastes of customers.

Moreover, McDonald’s should focus on fast and friendly service that can build the

good image of company for customer. For example, McDonald’s should train employees

and refurbish outlets to make relevant to customers. When customers want to eat fast-food,

they will enter McDonald’s restaurant.

3. Organization capabilities

Organizational capability of McDonald’s is to combine tangible and intangible

resources to operate business efficiently. With financial stability, human resources and

management skills, McDonald can maintain and develop its values and satisfy the

expectation of customers. McDonald’s focused on quality of leaders, and then it trains

them to improve their skills. Based on that, it can build a good management model that

helps companies exploit managerial and technical talent efficiently. Hence, McDonald will

gain and maintain their core competencies to compete with the intensity of rivalry among

competitions in fast-food industry.

Furthermore, to achieve the goals, company should pay attention to the change of

demographic and technology. If McDonald’s understands the market, it will ensure their

products suit the taste and culture of local people. Based on it, McDonald gain and

maintain its competitive advantages.

IV. Differentiation Strategy

At the beginning, McDonald chose the low-cost strategy to serve customer, so they

can easily gain a competitive advantages. However, when the fast-food industry grows,

there are so many companies participate in this market and they imitated McDonald’s

strategy. McDonald’s owned Dollar Menu with the lowest cost ($1), but other companies

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started to provide low-cost menu as Burger King ($1.39) and Wendy ($0.99)

(Wikipedia.org /Value menu). Therefore, low-cost strategy is not efficient solution in the

future. To maintain the leader position in fast-food industry, McDonald’s should create the

differentiation strategy. McDonald’s decide to base on nutrition food, technology, quality

of outlet and management style to gain their differentiation strategy.

Nowadays, according to National Master Statistic recently, obesity is becoming a

global epidemic and the highest number of people suffered obesity is the United State (30.6

percent) (Nationmaster). After the Supersize Me documentary, McDonald's and its

products as well as one of the causes of obesity in the US, thus, McDonald's has made

changes in accordance with the customer's health. For instance, McDonald tried to add fruit

and vegetable in servings of customers.

Technology is one of the most important factors especially in fast-food industry like

McDonald’s. So McDonald should use modern technology to help customers access to

products and services effectively. For example, McDonald’s developed a touch-activated

screen and focused on drive-through customers that help customers order products

conveniently and quickly.

Moreover, instead of increase the num of outlet, McDonald’s also focused on the

quality of their outlet such as employee’s attitude, decoration. Additionally, location also is

one of the most important factors to improve McDonald’s quality of outlets because

choosing the best location will helps customers save time when moving. On the other hand,

McDonald had McCafe with many new beverage highlighted by new coffee-based drinks

that helps customers conveniently if they want to beverage and delicious meal.

In the fast-food industry, attitude and skill of the staff that helps companies gain and

maintain the loyalty customers. Thus, McDonald’s always focus on training employee to

know how to serve and satisfy their customers fast and friendly.

V. Conclusion

Both of internal and external environment factors play important roles in the

existence and development of company. Although McDonald’s had market dominance, but

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McDonald should learn and understand those factors. Therefore, while maintaining the

suitable price of product, McDonald should focus on other factors, namely product/food,

modern equipment/facility and management style. This can helps McDonald’s expand its

brand recognition and dislodge other competitors from the fast-food industry

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Works CitedJarmal Shamsie, A. b. (2009). McDonald's. Michigan State University.

Viewed on May 16,2013, from

<http://www.vivavegie.org/101book/text/nolink/social/supersizeme.htm>

Viewed on May 16,2013, from

<http://en.wikipedia.org/wiki/Demographics_of_the_United_States>

Viewed on May 16,2013, from

<http://www.money-zine.com/definitions/investing-dictionary/equity-ratio/>

Viewed on May 16,2013, from <http://en.wikipedia.org/wiki/Value_menu>

Viewed on May 16,2013, from <http://www.nationmaster.com/graph/hea_obe-health-obesity>

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