McDonald’s Corporation Case Analysis

McDonald’s Corporation

PROBLEM STATEMENT

McDonald’s, who has a 76-year history and owned a long-lasting reputation is currently struggling with serious identity crisis reflecting in the weak stock market performance, the lowered customer satisfaction and the continuous dropping sales revenue even though the forecasted industry growth rate is 22% in 2017. Apparently, McDonald’s is using cost leadership strategy as its business strategy for a long time and this can be easily imitated by competitors who use their own unique strategic actions. Due to the failure to detect changes in customers’ needs, McDonald’s is losing its market. In order to turn around this difficult situation, Steve Easterbrook, new CEO of McDonald’s is playing a combination of boxing. Menu, food quality and media campaign are the main solutions proposed by Easterbrook so as to improve the brand image and appeal to more millennials who are the main consumers in quick-service restaurant industry. In other word, McDonald’s is in the way to determine its competitive advantage and its strategic positioning.

EXTERNAL ANALYSIS

In terms of global environment, we can easily find out that the global economy is continuous weak. What’s worse is the stronger dollar which makes McDonald’s products even more expensive for international consumers. Although the lower unemployment rate and more disposable income in US will enable the millennials who is the key consumer in fast food restaurant industry, they tend to swift to higher quality and higher priced food options. Other than that, unstable political world and tension relationships among different countries could result in huge business loss. Just like that several McDonald’s shops were shut down due to the revenge for US sanctions against the Russian invasion of Ukraine. Social-culturally, labor costs continue to rise worldwide and stronger labor union is asking for more labor rights. If not take currency inflation into consideration, more labor costs mean less profits. However, these phenomena are applied to every business, this cannot explain why the overall market share was up by fifty percent while McDonald’s shares had dropped significantly below their 2012 price point by 2015. Therefore, we need conduct the industry analysis.

Generally speaking, quick-service restaurant industry is saturated. There are so many competitors who use similar strategies. Obviously, there are more intense competitions within a strategic group. When we look at the threat of new entrants, we understand that the threat is really high due to the incentive by 22% industry growth rate and easy entry requirements. The strength that McDonald’s can beat the new entrants is its economies of scale and higher brand awareness. In terms of the bargaining power of supplier, US animal product prices continue to rise from 2000 to 2014 due to the climate disasters and higher agricultural products costs to feed the animals. Since most quick-service restaurants want to provide healthier burgers, they have a strong dependency on their suppliers. On this point, the bargaining power of supplier is strong as it of buyers. Customers won’t bear the switching costs since they have the motivation to switch to other options because of the increase of disposable income and health concerns choosing healthier food rather than those so-called “junk food”. What is more important, the customers believe these products do not differ significantly, thus the customers have more pricing power. The threat of substitutes is in median level since customers need to pay more in traditional restaurants or need to spend more time if cooking by themselves, though could save money.

Although McDonald’s controls almost half of the US hamburger market, but its main competitors stock outperformed it in 2015. There are so many competitors in this industry. Most of them are in the same strategic group which using the cost leadership strategy while some of them are using Differentiation Strategy. Burger king, as the world’s third-largest quick-service restaurant chain, is the example of cost leadership strategy as McDonald’s. Its success factors lie in the simplicity food choice, the limited time offers and attracted promotions. However, staffing issues and customer dissatisfaction about the unfriendly employees are now influencing its brand. Wendy’s and Subway, on the other hand, are using the differentiation Strategy. They provide products that have higher quality, fresher ingredients and sell at a premium price. Wendy’s targets both cost-sensitive customers and affluent clientele. It did great in branding by redesigning its stores and at the meantime, it decreases its ownership by refranchising company-owned stores in order to cut costs. Product innovation is also Wendy’s strength due to its custom-building sandwiches and short-term menu changes. Taco Bell is known for its breakfast service and home delivery service. It is in a long-term upward trend because of the foresight of targeting millennials by developing a food-ordering app.

New things always urge the world to change. A growing restaurants segments with higher quality food and relatively low enough price wins on taste and image. It attracts more and more millennials with premium burger and once compelled McDonald’s to introduce its premium products but then proved to be a failure at last. With the combination of fast food and coffee supply, the competitions are more and more broad not only between fast food industry but also in coffee shops. This could generate more business opportunities in the future restaurant industry since many counties have coffee culture.

INTERNAL ANALYSIS

McDonald was operated successfully at the beginning 40 year but it is experiencing many troubles in recent decade. Before discussing its weakness, we’d better look at the strengths it has. Large network of store owners is always a big strength which backed up it towards further success in the whole process. Many items such as Big Mac and Egg McMuffin were developed by the franchisees. McDonald’s encourage the product innovation and new products, to some extent, would attract more customers. But every coin has two sides, I will talk about the weakness of too many products later. The second strength is that McDonald’s has a big value-driven loyalty customer base. This is the reason why it can still dominate a big market share which is more than three times larger than the market share held by either Wendy’s or Burger King. Rome wasn’t built in a day. This customer base is established through a long time and efforts of leaderships generation by generation. At the early stage of its development, resource-based model was its way to generate the core competencies. The integrated supply-chain management and technology advances such as microwaves and other equipment helped McDonald’s to gain operational advantages over its competitors. However, only the advantage that meets the four criteria which is valuable, rare, costly to imitate and non-substitutable can be viewed as sustainable advantage. Thus, operational efficiency is not competitive advantage. Industrial organization model becomes an explanation for its current strategy. Forces outside of the organization represent the dominate influences on a McDonald’s strategic actions. Just as mentioned above, health concerns about obesity and antibiotic-resistant bacteria is the root cause and is the biggest force to the changing strategy. High brand awareness is another strength for McDonald’s even though sometimes it could become a convenient target to be negatively reported. No matter good or bad images, high brand awareness can always create many touch points which generate opportunities to guide or correct the perceptions of customers.