Date: August 23, 2010 To: Professor Kopka From: Veronica Salas Subject: Strategic Analysis for McDonalds EXTERNAL AND INTERNAL ENVIRONMENTAL ANALYSIS External Analysis There are two conditions that are most significant in McDonald’s external environment that are: 1. The new trend in which customers are changing fast –food restaurants to healthier ones. 2. The arising competition to achieve growth in this industry. The fast-food industry is very complex and saturated.
The key success factors in APPENDIX 1 show that in order to be able to compete there is a need for research and development, achieve differentiation with your competition, create quality with your products, and be price competitive. Large capital is needed to be able to develop new products in order to differentiate among competitors. The creation of quality is very important because the switching costs majorly in this industry are very low. This explanation is supported in APPENDIX 2: Five forces of competition.
Although the environment is very competitive it is very difficult to enter because of the need of capital, the regulation faced by the government, and especially because of the customers loyalty towards other restaurants. The new trend that has being evolving during the years has also created areas of distress among competition. Nowadays customers want to change fast-food restaurants to a healthier one. That increases costs, because companies will have to change their operation and ingredients in order to satisfy their customers; nevertheless there is a good side, McDonalds will reach another market that wasn’t reached before.
Internal Analysis Once of the major problems faced by McDonalds and can clearly be seen in APPENDIX 3: Internal Analysis McDonalds Value Chain, is the lack of recruiters and led to a dramatic falloff in the skills of it employees. As we can see on APPENDIX 4: Competitive Advantage Building Blocks, McDonalds is very efficient. They have a systemization and duplication of all their food prep processes in every restaurant. This means that they successfully and easily adapt their global restaurants to appeal to the cultural differences.
That effective system and easiness to adapt is a strong competitive advantage. Although McDonald has a strong brand recognition and a huge customer base their return on investment on 2008 decrease in comparison with 2007. (See APPENDIX 5: Internal Analysis Selected McDonalds Financial Results). Regarding the stakeholder satisfaction (APPENDIX 6: Stakeholder Satisfaction), the customers satisfaction is increasing because McDonalds made changes on their menus and customers are embracing them in a positive way.
Strategic Issues for McDonalds One of the strategic issues that I identified for McDonalds is the lack of market focus. The market is rapidly changing and they need to develop or arrange their products and processes accordingly. If they don’t create a healthier product they will stay behind in the market. The second issue, which is linked with the first one, is the cost of implementing the changes on their production. The creation of new products need research which needs capital. Strategic Alternative Evaluation
The strategic alternatives with their pros and cons are shown in APPENDIX 7: Pro-Con Alternative Analysis for Issue 1: McDonald’s threats regarding the change in the market towards healthier food, and APPENDIX 8: Pro-Con Alternative Analysis for Issue 2: The rise in the cost of operations. Each of these two issues has their own alternatives. The different alternative for attacking the changing market are; keep the same menu but change to healthier ingredients, develop new products, and remain the same and increase their marketing.
Create a long-term contract with a supplier to reduce costs, sell the healthier food as a premium product, but continue to produce the regular meal, and increase prices are the alternative for issue 2. Strategic Recommendations for McDonalds For the fast-food industry the most critical factor is issue 1. The best alternative that suits the issue is to keep the same menu but change to healthier ingredients. They have already established certain steps all the franchises need to implement to create the final product; it is easier to change ingredients rather than changing all the operations in order to introduce new products.
McDonalds will save money from the development of new product and use it to pay for the new healthier ingredients. This alternative also lets McDonalds reach new markets, without losing their image and brand recognition. While addressing to issue 2, the preeminent alternative is to create a long-term contract with a supplier t reduce costs. In order to produce new healthier products McDonalds needs to spend in buying the new products that will have a premium price. With this contract, McDonald will have a close relationship with the supplier and they will be both beneficiating from it.
McDonalds will have the same products they need at a lower price. Their revenues would increase because they are satisfying their customers unmet needs. Last, the supplier would benefit from having a long-term buyer. APPENDIX 1: Selected External Analyses Key Success Factors for Industry Competition * Research and Development for new products * Quality of customer service * Trained employees * Competitive prices * Have strong relationships with supplier, in order to receive low cost raw materials. * Building trust and loyalty towards brand. * Good marketing * Quality of products * Differentiation within competitors. Know the market trends and make arrangements to follow them Stage of Industry * Mature stage in U. S * The competition in this industry is so high that it affects every fast food restaurant. * People have gone from fast food to a healthier choice; for example, sushi. * There is not only competition within the fast food restaurants, but there is also fast food in local supermarkets and vending machines. * Growing in Europe General Environment * People are more self conscious about what they are eating. People prefer healthier food. APPENDIX 2: Five Forces of Competition External Analysis Threat of New Entrants: Low It is very difficult and costly to build a global brand name. * In order to compete, large capital is needed to invest on the construction of physical locations. * The market is over-saturated, so the new competitor might find it difficult to establish a customer base. * Government regulations * The need of economies of scale * The need for a reliable distribution sector. Supplier Power: Low to none. * Fast-food restaurants tend to purchase their raw materials from various suppliers. * Fast-food restaurants can switch to different suppliers if they see that other supplier have lower costs.
Threat of Substitutes: High * There are a lot of substitutes for fast food industry; for example regular healthier restaurants, grocery store, another fast food restaurant like pizza. * The threat of substitutes is particular high in this case because the trend has gone more towards healthy food. * Low switching costs * Similar products Competitive Rivalry: High * There are many large fast-food chains that compete with McDonald’s. * The growth in this industry is limited and everyone if fighting for that chance. Buyer Power: Low * Fast-food restaurants possess their loyal customers. They have being present for a lot of years so they have already created value that portrays their prices. APPENDIX 3: Internal Analysis McDonalds Value Chain Value ChainSecondary Activities| Strengths| Weakness| Firm Infrastructure| * Regained profitability * Strong brand recognition. * Refurbishment of outlets. * Improving existing menu. * Affordable products (dollar menu) * The implementation of the plan to win. * Customer base increased over the years. * Value added product. * Broad company with many outlets. | * Failure to recognize and understand the rapidly fragmenting market. And the change in the taste of consumers. Their 1990s expansion leads to loss in quality of service. * New CEO created more problems instead of helping the company. * Constant change of leader. | Human Resources Management| * New CEO Cantalupo created a new plan to upgrade the service on the stores. “Up or out”. | * Tighter labor market * Difficulty in retaining employees. * They cut back on training. * They couldn’t find recruits and led to a dramatic falloff in the skills of it employees. | Technology (Product) Development| * McDonalds achieved success with the introduction of McGriddles. * McDonalds switched to healthier raw materials. New McCafe’s with a variety of soft-drinks. | * McDonalds failed with the introduction of new products. * There were problems on the development process. | Procurement| * McDonald’s sold their locations to franchises who are revamping the locations for a new fresh look. | * Their acquisitions of non-burger chains had little growth for the company. | APPENDIX 3: Internal Analysis McDonalds Value Chain (cont. ) Value ChainPrimary Activities| Strengths| Weakness| Inbound Logistics | * They are closely related with their suppliers. | | Operations| * Their products are very standard so they can change them to satisfy customers. For example, the use of healthiest components on burgers). * They divest acquisitions in order to reduce costs of operations. | * High costs of operations due to the change to healthier components. | Outbound Logistics| * Many of their locations are franchises and are easy to train. | * In the 1990’s they stopped testing and grading the quality and service of the different franchises. | Marketing and sales| * They have being improving their physical locations to be more attractive. * They have new product they can advertise; such as salads and other healthy food. Easy to market because of the strong brand recognition. | * McDonalds was affected by their reputation of un-healthy food. * The documentary “Super Size Me” destroyed their image. | Service| * The new CEO created a plan in order to engage more with the customer. * The quality of the service is high. | * Employees needed to be motivated. | APPENDIX 4: Competitive Advantage Building Blocks Innovation| * They started using healthier ingredients. * They created new products, which didn’t succeed for example; the pizza. * They decided to remodel the locals in order to increase attention. They created new products such as salads and a new coffee place. * They introduce a new breakfast meal. | Efficiency| * They successfully and easily adapt their global restaurants to appeal to the cultural differences. * They have a systemization and duplication of all their food prep processes in every restaurant. | Customer Responsiveness| * Customers would remain loyal customers because of the new implementation of the healthier menu. * The franchises have being remodel with new exotic and refreshing style. * Some customers won’t buy McDonalds and they will switch to another healthier restaurant. Quality| * One of the world’s most recognizable logos (the Golden Arches) and spokes character (Ronald McDonald the clown). | APPENDIX 5: Internal Analysis Selected McDonalds Financial Results | 2008| 2007| 2006| Return on Investment| 0,5805| 1,3207| 0,4783| Total Asset turnover| 0,7913| 0,7753| 0,7422| Net Profit Margin| 0,1834| 0,1051| 0,1642| Gross Profit Margin| 0,3673| 0,5691| 0,3236| Selling, General, Administrative as percent of sales| 0,1001| 0,3260| 0,11141274| APPENDIX 6: Stakeholder Satisfaction Investors| Low: The return on investment lowered because the costs were higher than in 2007. Employees| Low: It’s hard to retain employees. The training programs aren’t effective because there are not many recruiters. | Customers| Increasing: McDonalds made changes on their menus and customers are embracing them in a positive way. They continue being loyal and satisfied customers. | Suppliers| Increasing-high: McDonalds is opening new outlets which means more supplies needed. The suppliers are happy to serve McDonalds; and also the new change for healthier ingredients represents a premium price that McDonalds have to pay and that is revenue for the suppliers. Competitors| The competitors are facing the same problems; nevertheless McDonalds is ranked #1 and they will always fear them. | APPENDIX 7: Pro-Con Alternative Analysis for Issue 1: McDonalds threats regarding the change in the market towards healthier food. Alternative 1: Keep the same menu but change to healthier ingredients| Pros| Cons| * McDonalds won’t have to develop new products. * They won’t have to spend more money. * Their operation will remain the same, only that they will replace the ingredients with a healthier choice. | * The new ingredients can change the flavor of the food. The new ingredients can turn to be worse than the first used ingredients. * Customer may doubt about the use of the new healthier ingredients. * The cost of producing the same burger will increase. * The need for new suppliers. | Alternative 2: Develop new products| Pros| Cons| * New products can be appealing to a new market that wasn’t reached before. * McDonalds won’t be perceived as a junk food any more. * It will increase customer satisfaction and quality. * There will be a value added because McDonalds is caring about the health of their customers. | * The need for new suppliers. The new products can fail. * The failure of the products may lead to a loss of capital. * McDonalds will spend a lot of time and money developing new products. * Their reputation and change with the new products. | Alternative 3: Remain the same and increase their marketing. | Pros| Cons| * McDonalds won’t have to spend money on research and development. * They can preserve their line of production and prep instructions. * They can increase their sales by doing what they do best. | * Certain customers will switch to a healthier restaurant. * They have a bad reputation. |
APPENDIX 8: Pro-Con Alternative Analysis for Issue 2: The rise in the cost of operations. Alternative 1: Create a long-term contract with a supplier to reduce costs. | Pros| Cons| * McDonalds will have the same products they need at a lower price. * They can count with the supplier they bonded with. * They will satisfy the customer they wanted. * Their revenues would increase. | * The supplier may breach the contract. * The supplier can run out of raw material. * The costs could be still high. | Alternative 2: Sell the healthier food as a premium product, but continue to produce the regular meal. Pros| Cons| * McDonalds would be able to reach different markets. * The meal can still be affordable. * With this option they could have two suppliers; one with their regular ingredients and another with the healthier. This way they won’t be dependent on just one supplier. | * The customers that want to be healthier need to pay more. * Their image could be damaged. * Customers may not want to pay a premium price. | Alternative 3: Increase the prices. | Pros| Cons| * The costs would be lower. * The customer will be satisfied with the new healthier products. | * It could be expensive for some people. |