Assignment
Report of case study on Management Strategies of
McDonalds Corporation
Jun 2006
Table of Content
INTRODUCTION 1
ORGANIZATIONAL BACKGROUND 1
LOW THREAT OF ENTRY 2
Economies of scale, Learning Curve and Experience Curve 2
Brand differentiation 3
Cost and technology advantage 3
Access to distribution channels 4
HIGH THREATS FROM SUBSTITUTES 4
Price and quality 4
Better performance/service 5
Different industry(Similar product) 5
HIGH THREATS FROM THE BARGAINING POWER OF BUYERS/CUSTOMERS 6
Forcing down prices 6
Customers wants and needs 7
Healthy life style 7
Fast-and-Convenient Service 7
LOW THREATS FROM THE BARGAINING POWER OF SUPPLIERS 8
Forward integration 8
LOW RIVALRY AND COMPETITION AMONG COMPETITORS 8
Competitors 8
Industry growth 9
Product/Service 9
HIGH THREATS FROM STAKEHOLDERS 9
Local Communities 10
Social Welfare 10
Interest Groups and Suppliers: Environmental protection 10
RECOMMENDATION 11
CONCLUSION 12
REFERENCES 13
APPENDIX 14
Introduction
This report is to study McDonalds Corporation using Michael Porters Analysis on
strategies used to deal with the competitive environment.
Organizational Background
McDonalds restaurant established in Illinois in 1955, more than 30,000 restaurants in 119
countries worldwide, serving 47 million customers per day. In December 2005 reached a
record high of more than US$20 billion revenue and 398,000 employees. McDonalds is the
largest quick service restaurant organization in the world1.
This report uses the Five Forces Model from Michael Porter to analyze McDonalds
Corporation Ltd.
Source: Michael Porter Five Forces Model, www.brs-inc.com/porter.asp
This model studies the relationship between competitors within the same industry, such as
potential competitors, suppliers, and buyers. Give alternative solutions to enable the
management to develop an appropriate strategy.
Five forces analysis looks at five key areas namely The threat of entry, The threat of
substitutes, The power of buyers, The power of suppliers, and Competitive rivalry.
McDonalds is a multi-national corporation; they are big in size with broad target markets.
McDonalds belongs to stuck in the middle case, with no competitive. McDonalds mainly
uses analyzer type of strategy, combination of competitive strategies used, such as: cost
leadership, differentiation, diversification, and backward integration. They also use growth
strategies in corporate level like, concentration, backward integration and diversification
strategies used. Those strategies used to against competitive environment will be
illustrated in following sections.
Low Threat of Entry
Economies of scale, Learning Curve and Experience Curve
As new entrants may bring new capacity to the industry, a desire to gain market share and
substantial resources, these may bring threat to an existed company. New entrants need to
spend huge costs in purchasing and setting up machinery for running production, huge
costs in advertising and R&D. With McDonalds 52 years of well-found learning curve,
new entrants have less advantage in handling costs spent. For the hamburger fast-food
industry, a new comers experience curve is low which would refers to high systematic unit
cost.
McDonalds is using Cost Leadership strategy to against new entrants, high volume of
sales, and fixed costs over a large volume of output, which reduces unit costs of products,
that makes the new entrants a hard barrier from entry. McDonalds has the advantages in
handling costs spent; to new entrant is a cost disadvantage. McDonalds has minimized the
unit costs by dividing the production process into small parts, which can decrease
assembly time, increase product volume and increase productivities of employee.
Brand differentiation
New entrant can enter the industry by differentiating a wider product line as McDonalds
focused on the major product line on hamburger. McDonalds Corporation has developed
strong, confidence and high customer loyalty branding for their product of hamburgers.
McDonalds uses Differentiation strategy to create the image of hamburger. McDonalds has
shown great effort in advertising and marketing on their existing products. In which, the
new entrants may form fallback decision even if they could sell similar product but might
suffer from high cost in penetrating in the industry.
Cost and technology advantage
Low price of the product serve as a barrier to new entrant as new entrants may not be able
to match the cost advantages of McDonalds. New entrants may suffer from capital
insufficiency and disadvantages in experience, technology and unknown factors in the
market.
McDonalds has advantages whatever in the size in terms of the cost level, such as in
proprietary product technology, experience and know-how, favorable locations, accesses of
sources of raw materials and government subsidies. McDonalds simply uses Cost
Leadership strategy in this case.
Access to distribution channels
McDonalds restaurants usually locate in populated areas, convenient locations, in which
these locations could be in high cost. They also enhancing restaurant in modern, fresh and
clean, warm and welcoming environment for customers to stay in for eating. This may
avert new entrants from entering the industry.
High Threats from Substitutes
Price and quality
The better the price alternative offered by substitutes, the easier the customer will switch.
The competitors, Yum! Brand Inc 2. Yum! sells variety of food with wide range of prices
for selection. Yum! sells sandwiches, chicken nuggets, spaghettis, pizzas, burgers which to
McDonald is the potential threat of the substitutes.
McDonalds in response to this, they apply Cost Leadership and Differentiation strategy,
they set low price with high quality and varieties of food strategy with differentiated
product, such as the Dollar Menu in United States, 100-Yen Menu in Japan and Pound
Saver Menu in United Kingdom. According to this, they also provide reasonable price in
value meals, this creates satisfied and loyal customers, which create pressure to the
substitutes. The differentiated product of hamburger is successful to be the well-known
exclusive product in the industry.
Better performance/service
The norm of providing friendly customer service is essential and is popular in the industry.
Management is encouraged to train the staff with friendly courtesy.
Every staff of McDonalds is always wearing a bright and genuine smile. McDonalds uses
Diversification strategy to enhance the diversity of the employees and create good
