Department of Management Strategic Case Analysis

Semester A 2011-12

Case 14 McDonalds

Course: Course Code: Instructor:

Strategy and Policy FB4303 (Section 07) Professor Jason Whan Park

Student Name: Student ID

Li Ka Lun 51818553

Submission Date: 18th November 2011

The threat of substitute products or services The threat that substitute products pose to an industry's profitability depends on the relative price-to-performance ratios of the different types of products or services to which customers can turn to satisfy the same basic need. Referring to the case, McDonalds was facing not too much threat of substitutes before 1998. The hamburger, a typical American food, was the popular food. Due to the high price-to-performance, it steadily maintained a bright performance. On the other hand, McDonalds had to wrestle with the growing concern about food health and obesity. More and more so-called healthy foods with low calories and fat were getting more popular. To cope with the threat, McDonalds revamped its menu by adding more nutrient food such as salad and sandwich, provided nutrition information on the packaging of its products, removed trans-fatty acids from the oil as well as even phased out supersizing option. We can see that an encouraging result for McDonalds on erasing its junk food image. The threat of entry Both potential and existing competitors influence average industry profitability. The threat of new entrants is usually based on the market entry barriers. They can take diverse forms and are used to prevent an influx of firms into an industry whenever profits rise above zero. In contrast, entry barriers exist whenever it is difficult or not economically feasible for an outsider to replicate the incumbents position. For catering industry, there is almost no entry barrier. Before 1998, the main threat of new entries were new establishment of hamburger fast food chain, like Subway, Burger King, Wendys and Carls Jr.. These restaurants served American fast food with similar price range and thus are the direct competitors to McDonalds. The threat was very high at that time. After a long-term steady growth, more and more fast food chains enjoy economies of scale and posses expertise, especially McDonalds,. These formed a natural entry barrier and the threat is lower after 1998. The bargaining power of buyers Buyer power is one of the two horizontal forces that influence the appropriation of the value created by an industry. The most important determinants of buyer power are the size and the concentration of customers. Other factors are the extent to which the buyers are informed and the concentration or differentiation of the competitors. For most catering chains, this force is relatively low. McDonalds faces not too much

buyer power force most of the time since the concentration of customers is not intensive despite the large size of customers. The majority of its customers are every individual party but not some larger buyer. Yet, there is a certain extent of buyer power force. As there are various fast-food restaurants the switching cost between restaurants is low. McDonalds try to minimize the impact via different membership programme and community contribution, which can enhance loyalty and image. The bargaining power of suppliers Supplier power is a mirror image of the buyer power. As a result, the analysis of supplier power typically focuses first on the relative size and concentration of suppliers relative to industry participants and second on the degree of differentiation in the inputs supplied. Owning its own farm and food processing factory, McDonalds protects itself from being threaten by suppliers in terms of raising price and offering poor quality products. More importantly, as a fast-food giant in the world, McDonalds is never overwhelmed by any suppliers. There are always many suppliers willing to supply materials to such a leading corporation in the industry.

The intensity of rivalry The degree of rivalry, which is the most obvious of the five forces in an industry, helps determine the extent to which the value created by an industry will be dissipated through head-to-head competition. As a leading fast food restaurant, McDonalds has been facing an intensive competition other restaurant. Before 1998, the main competitors are those well-performed fast food restaurants, say, Subway. KFC, Burger King. The threat could not be overlooked as all these restaurants offers almost same products which generated direct competition for McDonalds. With distinguished price to performance ratio and reputable fame, McDonalds still outperformed these competitors. After 1998, McDonalds was facing a rapidly fragmenting market, where new competitors of exotic foods became other options for consumer as a result of their change in tastes. Many of its customers switched to the much healthier and better tasting food. The competition from quick meals could even found in supermarkets and conveniences store as well as vending machines. McDonalds worked on turnaround strategy to meet challenges by revamping its menu: add more nutrient food such as salad and sandwich, introduce featured offerings regularly and boldly offer specialty beverage with its McCafe. It also differentiated itself as a lifestyle restaurant by revamp its outlet. All these moves prevent McDonalds profit being vastly eroded by

new competitors. Research on threat and opportunity With great success in China, McDonalds currently has more than 1000 branches in China. The fast expansion may suppress the development of the local fast food chain. As a result, Chinese government may intervene the industry via limiting the expansion of the outlets as the central government always adopt policy support the local corporation at the same time hinder the development of foreign corporations. However, there is an great opportunity in India. In Jalandhar, there is a head-to-head fight between KFC and McDonalds. McDonalds seems to lead a little bit. It is targeting 1,000 restaurants by 2020. It opened 33 new restaurants last year. Lets see whether it can grab it!

Reference: 1. Bennett Coleman (2011 August 29) How KFC & McDonald's plan to target each other in India. The Economic Times 2. Anne Gibson ( 2011, July 20) Fast food giant's expansion faces hurdles. The New Zealand Herald 3. HIDEKI SHINDO (2011 October 31) China warming to foreign eatery chains. Nikkei Weekly 4. Alan Rappeport (2011 August 1) US food groups in health initiative. Financial Times 5. www.themanager.org/models/p5f.htm