Company Background

McDonalds celebrated its 50th anniversary in April 15, 2005 and remained true to the statement "As far as I can tell, the only place you can't get a Big Mac is in outer space." The company operates as a global business through franchising. In 2004, the company reported to have established 30,000 local restaurants located in 115 countries across five continents. It is the biggest fast food retailer conquering markets worldwide. In almost every country, there is a McDonalds restaurant and in a single state or region, there are several branches. The company has spread so widely that the term mcdonaldization, was coined to describe the organization and culture of the company. The term has evolved to refer to the general business strategy of expansion.

Company Expansion Strategy

McDonalds expands its operations through franchising. Franchising is a hybrid manner of expanding and organizing the business by establishing a relationship of agency with the franchisees. Franchising involves the convergence of a parent company and several small businesses. The parent company sells to the smaller businesses the right to distribute its products or use its trade name and processes. A contract governs the agency relationship established between the parent company and the franchisees. The franchise contract defines the conditions of the agency and the duration of the relationship.

Company Management and Marketing Strategies

Organizational culture is the concept that guides the operations of McDonalds. McDonalds operates according to four values: quality, service, convenience and value. Organizational culture is part of the knowledge and information transmitted by McDonalds to the franchisees in other countries. Part of organizational culture is the delivery of uniform quality of food and service wherever the branch is located. The good reputation of the company and the expectation of an excellent service no matter which branch people eat is a marketing strategy of McDonalds. Despite this basic standard, the company expects the different stores to adapt to the needs of the local market by managing their stores in a manner that makes the employer-employee relations, customer service and the food products served satisfactory to the local community. McDonalds sets a standard applicable to all its branches worldwide. However, the company also gives leeway for innovation by allowing the branches to integrate culture into food and service increasing market share.

McDonalds integrates a combination of scientific management and human relations approaches in its organizational standards and work ethic. Scientific management is the process of achieving efficiency by actualizing the principles that employees are motivated by economic rewards, a clear delineation of interrelated tasks, and a clear structure of recognized authority that facilitates all aspects of the operation. Scientific management requires the managers of the business to analyze the operations of the business and create objective methods of dealing with problems. This became popular because of the prevalence of disputes among workers and between workers and management with the proliferation of new industries.

The human relations perspective recognized the importance of the non-rational element in the organization behavior such as the development of relationships between workers and the role of an effective leader in facilitating the constructive communication and participation of all members of the organization. Human relations management considers the techniques of forming problem-solving teams, improved communication by the company with its employees, the offer of employment security, skills and training support for employees and incentives for efficient work.

McDonalds applies scientific management by recognizing the value to employees of monetary rewards given in recognition of their valuable contribution to the company. Although the salary of employees varies in different countries, the company ensures that its franchises comply with the acceptable wage

rates and working hours in different countries. The company also ensures organized collective work by having a clear delineation of interrelated tasks and rotating employees so that they experience a holistic view of service delivery. The managers of branches are hired locally so they can apply the local practices in hiring employees, determining wage and work hours, and giving the monetary incentives recognized by employees so that employees are motivated to contribute to the companys success. The company appoints managers belonging to the locality to make sure that the manager has a good grasp of the market demand and work culture in the locality so the company does not offend anybody due to offensive policies. In introducing the standard values of the company, these are presented to employees in a language they understand and in the context of the local culture.

McDonalds also apply human relations management by considering the importance of interpersonal relations in the day-to-day operations of the company. Interpersonal communication is the key to achieving cooperation among the employees in performing related tasks. An effective leader is required to facilitate the communication and participation of all employees. The company trains managers to be adept at effective communication. The manager knows how to speak the local dialect and English and proves to command respect from the employees as a leader that can unite the collective efforts of the crew. The result of cooperative employees is teamwork in problem solving. During peak hours, the members of the crew are designated in areas needing assistance. When the kitchen is lagging behind in meeting orders employees on the floor are asked to help until normal operations is achieved. McDonalds employees are versatile. The manager plays a vital role in the achievement of a good employer-employee relationship in the branch.

Eastern European Market Background

Eastern Europe constitutes an emerging market for most businesses. The collapse of socialism in the region in 1989 facilitated the move of countries in the region to prepare for participation in the capitalist market. In 1999, most Eastern European countries were working to meet the requirements for

membership in the European Community. In 2004, Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Slovakia and Slovenia became members of the European Union.

Membership of a number of Eastern European states in the EU prompted the flow of foreign investments into the region, increasing household income, increasing consumption and spending, because of cheaper labor compared to wages in Western Europe. There was a general trend towards the improvement of the standard of living of citizens of Eastern European countries. However, in the last two years, most Eastern European countries experienced slowed growth due to the increase in the wages of workers that discouraged investments. Nonetheless, wages are still more competitive in Eastern Europe compared to other regions in Europe. Most Eastern European countries are still in the process of completing their transformation from a controlled to a capitalist economy. Full transition and the stability of the political and economic institutions are expected to boost economic development in these countries.

Parallel to the economic growth that Eastern Europe is experiencing is the development of the food and beverage market due to the increase in household income and the increasing demand for variety in food and beverages. The increasing number of food and beverage businesses in the region has created competition between these firms to draw a large portion of the market. Entrepreneurs in economies in transition usually look towards foreign partners in developing a market for food and beverages. Foreign partners are viewed as significant in providing financial resources, investments in the development of new technology, sharing technological expertise, training locals as managers, introducing quality management strategies, and providing financial and general advice.

Business expansion into Eastern Europe offers potential profit and minimization of cost on labor and raw materials. Expansion into Eastern Europe offers mutual benefit to the country and to the foreign business by providing investments and technology to the country and cost-effective operations and profit to foreign business firms.

Attractiveness of Eastern Europe as New Market for McDonalds

Assessing the potential of a new market for expansion requires the consideration of several factors providing a comprehensive background of the environment that the expanding business firm expect to enter into.

Gross Domestic Product is the common measure used to determine the economic condition of a country. GDP has several components, which are consumption, investment, government consumption, exports and imports. However, the most significant indicator of the movement of the market is consumption. In terms of consumption, there is a high volatility of consumption relative to emerging countries and industrial states. Although UK holds a high consumption volatility of 1.15 among the G7 countries, the consumption volatility rate in Lithuania and Poland is 1.05, in Russia it is 1.03 and in Slovenia it is 0.71. Consumption volatility is attributed to either the rapid income growth resulting to a changing consumer behavior, or liquidity constraints especially in economies with an underdeveloped financial system, or consumers are not assured of a constant source of income that increases the tendency to save instead of increasing consumption. The stabilization of the political and economic institutions of Eastern European states provides an environment conducive to economic activities and foreign investments. In choosing a country in Eastern Europe to invest in, the state with the stable political and financial institutions should be chosen so that consumption is constantly increasing and the potential for profitability is higher. There is also lesser risk in entering a stable economy.

Apart from GDP, the characteristics of the labor market also influence the viability of entering a new market. The general trend in employment in European countries also indicates high volatility

particularly in Bulgaria with a high absolute volatility relative to Czech Republic and Slovenia with lower volatility. The nature of employment in most Eastern European countries is spread similarly across industries similar to G7 members with the exception of Estonia and Czech Republic with exclusive industrial employment. Consequently, there is also a general trend of wage volatility especially in Russia and Hungary. However, there is an observed persistence in real wages in most countries except Estonia. There is no common trend in productivity. The volatility of productivity is low in Hungary, Czech Republic, Poland and Slovakia and high in Estonia, Bulgaria and Romania.

Employment and wage volatility are important factors in deciding to enter a new market because minimal employment and wage volatility translates to regular income for households influencing the stability of consumption resulting to sales and revenue for business firms. The economic condition of the state affects the financial condition of consumers and their ability to purchase the goods and services offered by entering business firms.

Although there is a general trend for consumption, employment and wage volatility among European countries, introducing McDonalds into the region is viable for several reasons. First, McDonalds will develop a market by providing technological, management and marketing expertise to local entrepreneurs enabling them to establish a known restaurant in different areas that creates jobs translating into income to households due to the hiring of local employees and the purchasing of raw materials from the local farmers and businesses. Second, McDonalds incurs less risk, relative to other industries, because food and drinks is a necessity and if the company can offer an affordable, alternative source of food then it can gain a significant portion of the market. Third, McDonalds expects continues growth in the long run, although fluctuating, in Eastern European countries due to the development and opening of investment opportunities drawing the continuing flow of foreign investments positively affecting employment and income. Fourth, there are relatively less multinational restaurants in Eastern Europe giving the establishment of McDonalds in the region a competitive edge in terms of consumer share and market leadership. Fifth, the consumption culture in Eastern Europe is changing due to its involvement in international trade introducing the Eastern Europeans to the fast food culture. The entry of McDonalds in Eastern Europe is timely.

Estonian Market Background

Estonia exudes political and economic stability relative to other Eastern European countries. In the spring of 2003, the country held its parliamentary elections resulting to the victory of the conservative coalition. Prime Minister Parts direction is towards the continuation of reform policies. Estonia became a member of the European Union in May 2004. The country is experiencing robust economic growth attributed to investments and private consumption. The expected average growth in succeeding years is 5 to 6 percent. The government also applies sound fiscal policy resulting to substantial budget surpluses. The country also has a stable banking sector led by Scandinavian banks. Estonian economy is dominated by the service sector with a 65 percent GDP share, followed by transport and communications with 16 percent and then by the distributive trades with 14 percent.

Estonia has a labor force that reached high levels of education. Wages are low but this is steadily increasing due to increasing economic activities demanding more labor. Workforce is also capable of speaking English, German and Russian apart from the official language of Estonian. Based on 2003 estimates, the national average per hour cost of labor is 3.87 euro in the service and industry sectors. This is lower when compared to EU average per hour rate of 19.65 euro. On the average, the monthly gross income is 441 euro when compared 2,396 euro average monthly wage in EU.

Business Plan for McDonalds Expansion into Estonia

I. Obtaining Franchising Requests from Estonia

McDonalds takes pride in being the largest franchising company in the industry. At present McDonalds has more than 2,400 owners/operators worldwide. The company offers franchising opportunities to entrepreneurs. Complete information on obtaining a franchise is accessible in the company site and the franchise form and contact address and number for the company agent in Estonia.

II. Entry into the Estonian Food & Beverage Industry

Entry into the food and beverage industry in Estonia involves the establishment of links with local networks or partners in the supply chain. McDonalds should assess the ability of owners/operators to find a good location and establish valuable links with local suppliers for the building of the physical structure of the restaurant, food supplies and workforce sources. This is important because McDonalds applies strict standards in these aspects that should be followed if the company is to impart the company culture to the new owner/operator. Communication with the owners/operators is important in the transfer of the design, processes, technological abilities, management expertise and marketing strategies to the McDonalds franchisees. Prior to the opening of the restaurant, the physical structure should have been built, the crew trained, a manager designated and suppliers are contacted and arrangements are made.

III. Market Segmentation and Product Positioning

There is little market segmentation because McDonalds target households in general. Although at the beginning, there may be an initial segmentation with the middle and upper income classes composing majority of its market, the company expects to reach out to lower income brackets as Estonias economy continuous to grow, employment and income increases resulting to higher ability to pay together with the change in food culture as more people are exposed to American food and the fast food culture.

McDonalds will introduce the restaurant as a viable alternative to local restaurants because it offers a different culinary environment targeting the Estonian family culture and to local food since McDonalds offers American food. However, McDonalds will also encourage the operators/owners to design innovative ways of integrating Estonian values and culture into the food, service delivery, marketing and management of the restaurants to attract customers.

IV. Competition

McDonalds does not have a major competitor in Estonia because of the relatively less number of foreign, non-European restaurants in the country. Competition comes from established local restaurants. McDonalds carries the competitive advantage of management and marketing expertise coupled with knowledge of the local market through the owners/operators. However, a possible competitive weakness is the views of the Estonians towards the United States since McDonalds is an American business and towards the company as an international business firm. Negative perceptions should be addressed.

V. Marketing

McDonalds products are standard in all franchises. However, the company adjusts to culinary differences in various cultures. In the case of India, McDonalds offered vegetarian burgers to practicing Buddhists. Asian countries preferring spicy taste saw the introduction of spicy burgers, chicken and seasoning. This provides options for customers to purchase food with either the American taste or the local taste. McDonalds achieves balance by maintaining standardization in products but adjusting to the local taste.

McDonalds prices differ in difference franchises since product price depends upon the expenses and costs in the locality. However, McDonalds determines price by ensuring the profitability of the restaurant while considering affordability to customers. Owners/operators should be trained to be costeffective in their expenditures. Balance between profitability and affordability is achieved through the companys pricing policy based on actual expenses and the receiving value for value given. This means that people are willing to pay a certain price when the company delivers and equivalent quality food and service.

McDonalds distribution channels in exclusive to its franchise restaurants. The way of increasing its channels of distribution is by obtaining several franchise requests in Estonia. Population, income and industrialization trends influence the decision to increase franchises.

McDonalds promotions are made internationally by the mother company and locally by the owners/operators through advertisements espousing company values and promotions such as tastetests, discounting and frequency cards.

VI. Operations

Product and service delivery of McDonalds is customer centered. This means that McDonalds primary concern is the satisfaction of its customers. This is ensured by applying a strict standard of food and service quality. Periodically, representatives from the mother company visit certain branches in order to ensure the maintenance of quality standards, to discover problems and issues, and to provide updates on operation, management and marketing techniques. The quality standard is integrated in the entire supply chain process, starting with the products obtained from suppliers, the process of transforming raw materials into consumable products, packaging the food products, taking the orders of customers, and delivering the food. McDonalds employees play an important role in the delivery of quality product/service delivery. Employees are also responsible for providing customers service by asking the preferences of clients and listening to their requests and needs, and addressing these accordingly.

McDonalds values its employees as much as it values its customers. The company applies the employment policy of providing sufficient training to its workforce. Prior to starting work, newly hired employees are given a rundown of the rules and regulations, company practices and the goals of the company. After this, the employees are introduced to the different components of the menu, process of food preparation, food-packaging techniques, serving of food, handling the cash register, and establishing rapport with customers. New employees are given practical exercises for experience.

VII. Management

Management of an organization operating through a franchise requires a strong leadership and a close relationship between the parent company and the branches. Network firms involve monitored

interpersonal relationship management between the center and its satellite businesses. McDonalds maintains a close relationship with its branches from the time that the application of an aspiring owner/operator is approved until the operational stage of the business. There are several ways employed by McDonalds particularly to gauge the performance of the branches.

The parent company regularly conducts contests and gives awards and recognition to top performing branches. Rewarding performance serves as a strategy for the branches to improve their performance. McDonalds encourage the participation of the customers in voting for their favorite crew and by regularly soliciting comments and suggestions. The company is able to provide the service required by the customer by identifying needs based on the specifications given by the customer.

McDonalds shows appreciation of employee contributions by giving wages that meets minimum wage and benefits in compliance with national labor laws. Apart from respectable wages and benefits, McDonalds also offers career development to its employees by training crewmembers to assume the position of manager in the same or another branch. Employees are motivated to optimize their contribution to the company and acquire experience in the different areas of operation due to the possibility of becoming a McDonalds restaurant manager.