SIM337 Contemporary developments in business management

Task 1 - A brief overview of primary external factors 2.1 PEST analysis McDonald’s operate on both domestic and international market.. stable political environment that motivates McDona

Student ID: 149078874/1

Student Name: Nguyen Thi Kieu Anh

Module Code: SIM 337

Module Name / Title: Contemporary Developments in Business Management

Centre / College: Banking Academy of Viet Nam

Hand in Date: 16 Jan 2015 Due Date: 16 Jan 2015

Assignment Title: Individual assignment

Students Signature: (you must sign this declaring that it is all your own work and all sources of information have been referenced)

Contemporary Developments in Business

Management SIM337

Prepared by: Nguyen Thi Kieu AnhStudent ID: 149078874/1

Submission Date: 16th January 2015

Number of Words: 3,970

TABLE OF CONTENTS

CONTENTS 5

1 Introduction 5

2 Task 1 - A brief overview of primary external factors 5

2.1 PEST analysis 5

2.1.1 Political factors 5

2.1.2 Economic factors 6

2.1.3 Socio-cultural factors 7

2.1.4 Technological factors 9

2.2 Competitors analysis 9

3 Task 2 - The changing competitive environment 10

3.1 Analysis of the changing competitive environment in McDonald’s China 10

3.1.1 Rivalry among existing firms 10

3.1.2 Threat of new entrants 11

3.1.3 Threat of substitutes 12

3.1.4 Bargaining power of buyers 12

3.1.5 Bargaining power of suppliers 12

3.2 McDonald’s China response to changing the competitive environment 13

3.2.1 Product 13

3.2.2 Services 13

3.2.3 Distribution 14

3.2.4 Price 14

3.2.5 Promotion 14

3.2.6 People 15

3.2.7 Process 15

3.2.8 Physical evidence 15

3.3 Critical evaluation of the effectiveness of McDonalds’ response 15

3.4 Areas for improvement in the response of McDonald’s 17

4 Conclusion 19

LIST OF REFERENCES 20

APPENDICES 24

EXECUTIVE SUMMARY

Nowadays, external environmental analysis plays an important role in thedevelopment of most companies It facilitates in obtaining informationoutside of the company that help the company determine suitablebusiness strategies Furthermore, the changing competitive environment

is considered as a big challenge for most companies It requires thecompany adjust to constantly adapt to changes in competitiveenvironment As a leading global foodservice company McDonald’s needs

to pay more attention to these aspects

This report is divided into two parts The first part would identify andassess primary external influences that the company is subject to.External environment would be identified within the scope of PESTanalysis and competitor analysis The second part would show how thechanging competitive environment influences policies and decision-making of McDonald’s and evaluate efficiency of the company’s response

It is presented by Porter Five Forces model Finally, some areas forimprovements in the response of competitive environment changes would

be proposed

1 Introduction

McDonald’s is the top fast-food company, serving nearly 70 millioncustomers daily in more than 119 countries with over 35,000 restaurants(Mcdonalds, 2014a) Its business is divided into four main geographicsegments that is United States, Europe, Asia/Pacific, Middle East andAfrica (APMEA) and other countries China, Australia, Japan are threelargest segments in APMEA, which accounted for 54% of revenues thatMcDonald’s collected from APMEA segment (McDonalds, 2013, p.10) Thisreport will focus on McDonald’s China which is the third largest market forMcDonald’s after the US and Japan It entered China in 1990 and currentlyMcDonald’s has expanded and developed with more than with 2,000restaurants and over 80,000 employees [ CITATION Ang14 \l 1033 ]

2 Task 1 - A brief overview of primary external factors

2.1 PEST analysis

McDonald’s operate on both domestic and international market Whether

in domestic or international market, it must face with changes in businessenvironment which can create opportunities but also cause threats for thecompany PEST is a useful tool for understanding better what is going onoutside their organization, identify opportunities and threats, and managerisk based on analyzing political (political stability, trade regulations ),economic (economic growth, exchange rate ), socio-cultural (differencesregarding demographic and cultural aspects) and technological factors(technology advances) (Fee, 2013, p.56)

2.1.1 Political factors

China is a unitary state, where the Chinese Communist Party (CCP) holdsall political power (Stojic, 2010, p.27) A one-party state may provide a

stable political environment that motivates McDonald’s to expandbusiness in China Nevertheless, in order to start a business in the Chinesemarket, entrepreneurs need to pass the long and complicated procedures

to register the new company

Countr y

Procedur es (number)

Time (days)

Table 1: Starting a business data for China compared to Australia and Japan

(Doing Business, 2012a, p.88)From the table above, China is obviously a bureaucracy state withburdensome entry regulations because it needs 14 procedures and 38days to register the business Compared to other two countries in APMEAsegment are Australia and Japan, they need less procedure and time tocomplete the business registration process According to World Bank(2012), China ranks at 151st place out of 183 economies in the terms ofstarting a business This process of China is extremely time-consumingand slow down business expansion of McDonald’s

McDonald’s entered the Chinese market since the early 1990s under theform of a wholly-foreign owned enterprise (WFOE) or joint venture (JV), notfollow franchise model as at that time the Chinese government restrictions

on foreign investment and the lack of Franchise Law Just in 2004, Chinapermitted foreign investment in franchising since its entry into the WorldTrade Organization (WTO) China government also revised the laws onforeign direct investment (FDI) and the intellectual property laws includingthe Trademark Law, the Patent Law and the Copyright Law (Stephens,

2009, p.1) It creates opportunities for McDonald’s to develop andreplicate franchise model for expanding to news locations rapidly while

minimizing risks as well as to run the business more freely and confidently

in the Chinese market

2.1.2 Economic factors

China is the fastest growing economy in the world Chinese economy hasproved its strength in the period of financial crisis 2007-08 At that time,when other powerful economies such as U.S and Europe were struggling,China responded quickly, not only overcome global economic downturnbut also GDP grew 8.7% in 2009, 10.3% in 2010, and 9.2% in 2011 (Doingbusiness, 2012b, p.1) Besides, China have been undergoing massiveurbanization China’s current urbanization rate stands at around 47%, butits national development agenda has mandated 60% urbanization in 2030(Bharne, 2013, p.226) These things have lead to a rise in income ofChinese As Shi (2012, p.1) showed, by the end of 2012, the GDP percapita reached about $5500, making China one of the upper-middleincome countries which in turn rapidly growing in middle class andincreasing in the number of affluence people in China Such thingsincreases demand and purchasing power in fast-food industry which inturn promotes the development of McDonald’s in China However, there isurban-rural income disparity in China In 2009, the gap was 3.33 times,the highest figure so far (Aglietta and Bai, 2013, p.210)

Figure 1: Urban-rural income gap in China, 1978-2012 (Shi, 2012, p.6)

McDonald’s, therefore, have responded to uneven wealth distribution byapplying tiered pricing model

2.1.3 Socio-cultural factors

Chinese food culture is different from that in the West Eating habits andpreferences are typical examples As for eating habits, Chinese peopletends to go to a restaurant in occasions to meet friends, even in fast-foodrestaurant rather than inviting them to their own house whereas towardsmost Americans, fast-food restaurant is chosen for its quick food serviceand convenient access Thus, McDonald’s are located in main streets orhighways in the US but for China, most of restaurants are built indowntown where population is crowded (Zhou and Zhang, 2012, p.15).When McDonald’s penetrated the Chinese market, it promoted American-styled beef hamburger to conquer Chinese However, Chinese peopleprefer chicken meat than beef meat At that time McDonald’s changed itsstrategy by launching chicken burger to suit Chinese people’s tastes (Han,

2008, p.73) Hence McDonald’s need further efforts in localizing its menus

to suit Chinese tastes

Table 2: Cultural differences between the USA and China (The Hofstede Centre, 2014)

As can be seen from the table above, the individualism of Chinese is really

in low position, but it is high in American culture That means Chinesepeople usually have the habit of following other people’s behaviours, theold generation tends to stick to old tradition and not easy to accept newthings (Cui and Ting, 2009, p.43) However the young generation aredifferent, they can easily accept new things imported from westerncountries, even they are fond of experiencing foreign brands’products/services Besides, China had the youngest population with thenumber of people aged below 30 at 497 million people (EuromonitorInternational, 2012) Thus, McDonald’s has targeted at children, youngparents and young people to boost sales

As many other countries, the busy life have made Chinese people choosefast food as best solution to save time However, rapid growth of fast-foodindustry causes numerous diseases for Chinese people such as heartdisease, overweight, obesity, and even cancer A study by the University

of Washington’s Institute for Health Metrics and Evaluation (IHME) foundthat China is now the second most obese country in the world behind the

US, with 46 million Chinese adults are obese with a further 300 millionoverweight [ CITATION Lio11 \l 1033 ] Along with increased disposableincome, Chinese people are aware of health issues and highly concernsabout the healthy eating and safety of the food It has pressuredMcDonald’s to offer healthier options like low-calorie, low-carbohydratesand adding more fruits and vegetables into its servings In addition,McDonald’s also has to ensure that all products providing to customers aretotally fresh and hygienic

2.1.4 Technological factors

The Chinese government has many policies to encourage development ofscience and technology For example, they support funds to research andadopt new technology in numerous fields, including agriculture, medicineand genetics (Stojic, 2010, p.31) Employing advanced technology cancreate opportunities for an improved supply chain which brings benefit inproviding raw materials for McDonald’s According to Jeffrey Schwartz, thechief executive officer of McDonald’s China, 95% of materials used byMcDonald’s in China were locally sourced (China Retail Research Center,2008) Hence, McDonald’s can reduce costs in importing raw materialwhich in turn reduce products prices to attract customers

China not only has the world’s largest internet users but also surpassed

US to become the world’s largest market for smart phones As of June

2014, China has had 632 million internet users, up to 14.42 million from

2013 and 527 million mobile internet users, an increase of 26.99 millioncompared with the end of 2013, according to The China Internet NetworkInformation Center (CNNIC) [ CITATION Ada14 \l 1033 ] Rapidly growingusage of internet and mobile in China has created favourable conditions

for McDonald’s to advertise products in economic and fast way as well aseasily develop e-business like online food ordering service

of competitors as well as its development, it is not easy for McDonald’s to

be leading in China’ market In order to achieve this target, it requiresMcDonald’s put more energy and effort in building business strategy andcreating competitive advantages in Chinese market

3 Task 2 - The changing competitive environment

3.1 Analysis of the changing competitive environment in

McDonald’s China

Figure 2: The Five Forces Driving Competition (Porter, 1980, p.4)

Porter’s Five Forces framework is one of the most popular tools foranalyzing competitive environment Understanding the forces that shapeindustry competition will reveal why industry profitability is what it is andhow that has been changing overtime, thereby setting the starting pointfor strategy formulation to defense against the competitive force as well

as improve the company’s position in industry (Porter, 2008, p.26)

3.1.1 Rivalry among existing firms - High

The intensity of rivalry among competitors in fast-food industry of China isvery fierce Besides, independent consumer foodservice which accountedfor 62.58% of market share, McDonalds faces with a lot of competitors ofchained consumer foodservice from both foreign chains (e.g KFC, PizzaHut, Burger King, Subway, Japan’s Mo’s Burgers and Ajisen Ramen…) andlocal chains (e.g Taiwan’s Dicos, Hua Lai Shi, Malan Noodle, Xiabu Xiabu,KungFu…) They have been competing in not only quality, prices but alsodelivery services, promotion campaigns

Table 3: Top Five Chained Brands in the Chinese Fast-Food Subsector, Historic %

Breakdown Based on Retail Value Sale (Agriculture and Agri-Food Canada, 2014, p.9)Kentucky Fried Chicken (KFC) is primary competitor of McDonald’s inchained fast-food market Specifically, in 2013, KFC accounted for 34.2%sales amongst chained fast-food brands, nearly double that of McDonald’s

as KFC enjoys the first-mover advantages in terms of penetrating theChinese market It is hard for McDonald’s to become a leader in Chinese

chained fast-food brands Besides, the gap in foodservice sale betweenMcDonald’s and Disco’s is too small so it poses a threat to McDonald’ssince it is easily lost its current position.

3.1.2 Threat of new entrants - Medium

According to the data from the National Bureau of Statistics, China’s fastfood has already become the biggest and most attractive profit zone inChina’s commodity market with high profit rate (the annual turnover ofover 200 billion Yuan) by the year 2000 [ CITATION Lav13 \l 1033 ].Furthermore, the start-up costs are relatively low, and there are no secretformula or special cooking methods that would prevent business entry infast-food industry (Stojic, 2010, p.39) Hence it attracts more businessesparticipate Chinese fast-food market such as Burger King, Japan Mo’sBurger in the mid-2000s Nevertheless, it is not easy for these businesses

to compete with existed companies because it holds first-moveradvantages regarding economies of scale, distribution channel Forexample, in 2004 KFC had 1,400 outlets followed by McDonald’s with 600outlets (French and Crabbe, 2010, p.210) In addition, it is continuouslyexpanding outlets through franchise model Such things require newentrants need long time to create a foothold in Chinese fast-food industry

3.1.3 Threat of substitutes - Medium

There are many substitute products in the fast-food industry that creatingmore choices for customers The substitute products for McDonald’s would

be many traditional Chinese food and home-cooked meals However,young people interest in experiencing western fast-food and considered it

as an interesting alternative to traditional meals Besides, the mainalternative is home-cooked meals causes switching cost for customers,that is the opportunity cost of the time spent to prepare the meal.Therefore, convenience of fast food is value-added component thatreduces the pressures from substitute products However, since Chinesepeople considered McDonald’s as unhealthy choice due to high fatcontents, alternatives for McDonald’s is also healthier options such asSubway which provides salads into its servings

3.1.4 Bargaining power of buyers - High

Chinese buyers, especially in urban areas have more power as theirbuying decisions have great influence on McDonald’s success Due tonature of industry, switching cost is relatively low so the buyers havemore leverage to turn to McDonald’s competitors in case of dissatisfactionregarding product quality, price and employees’ attitude and demand fornew tastes, new experience, and healthier options For example, scandalssurrounding McDonald’s China such as expired meat, largest proteinsupplier and violation of employee’s wages influences significantly onpurchasing decisions of customers Therefore, buyers are a strongcompetitive force

3.1.5 Bargaining power of suppliers - Low

Supplier’s power involves in cost of raw material (e.g beef, flour, sugar,milk and a variety of vegetable…) which is one of the important aspectsthat helps McDonald’s create competitive advantages compared to itscompetitors in terms of product’s prices as low raw material cost enableproduct’s price reduction With its abundant capital and technologicalknow-how, McDonald’s had developed its own internal supply network,including farms in China since early 1990s, to sell to both the domesticand export markets By forging joint-venture ties with powerful Chinesepartners (e.g the state-owned General Corporation of Bejing Agricultural,Industry and Commerce…), McDonald’s also had established a network oflocal farmers, food-processing manufactures and other suppliers (Ko andWoo, 2008)

3.2 McDonald’s China response to changing the competitive

environment

The changing competitive environment when McDonald’s entered Chinathat influences on its policies and decision-making in following aspects:

3.2.1 Product

Localization: Initially, McDonald’s kept its menu in China the same as

that in US, with the Big Mac being its characterized dish to conquer

Chinese people (McMichael, 2013, p.7) However, they are not successfulbecause McDonald’s ignored one important issue is that Chinese peopleprefer chicken than beef burgers After identified this problem, McDonald’shas tried to adapt more Chinese tastes by adding chicken burgers andspicy chicken wings into their menu for attracting more customers (Han,

2008, p.73) Besides, since 2001, KFC introduced many Chinese items

onto their menus such as Preserved Sichuan Pickle and Shredded PorkSoup and succeeded afterwards Not to lag behind, McDonald’s also added

a few local tasted items such as Vegetable, Seafood and Corn Soup[ CITATION Chi04 \l 1033 ]

Healthier menu: McDonald’s supplemented the “healthy” and “more

natural” element by offering low-calorie, low-carbohydrates options andadding salads, fruits, and carrot sticks to the menu [ CITATION Wen12 \l

1033 ]

3.2.2 Services

Drive-thru: KFC had announced the debut of China’s first drive-through

restaurant in late 2002 Therefore, to compete with KFC, McDonald’s builddrive-through restaurant in partnership with Sinopec’s 30,000 petrolstations in China in 2005 (Ko and Woo, 2008) Convenience is main driver

of fast-food so McDonald’s also created an assembly line procedure thatallowed customers to make orders quickly and effectively while still in thecar (McMichael, 2013, p.7)

24-Hour Services: McDonald’s extended its business hours to 24 hours

per day since the beginning of 2006 in response to growing appetite forWestern food and nightlife of teens and young adults (Ko and Woo, 2008)

Delivery Service: McDonald’s offered home delivery services in

Shanghai (Appendix 2) According to Reuters (2008), McDonald has built

up a fleet of 300 motorcycles to deliver hamburgers from 42 restaurants

in Shanghai covering half the city’s 14 million population

3.2.3 Distribution

Realizing that size advantage plays an important role in competing with itscompetitors, Kenneth has been implementing an aggressive expansionstrategy to make the business bigger Within 18 years since operating inChina, McDonald’s open first 1000 restaurants in China In the five years(2009-2013) that Kenneth has been at the helm, the company has alreadyopened an additional 1000 restaurants and growing year on year[ CITATION Sph15 \l 1033 ]

3.2.4 Price

In China, McDonald’s food is expensive for the average citizen, soMcDonald’s explored the use of a tire pricing model Accordingly, thefirm’s pricing is tiered by district based on the income of local consumers(Hitt et al., 2008, p.213) Besides, McDonald’s have launched differenttypes of value meals packages - breakfast, lunch and snacks costing from

$1 to $3 According to Kenneth Chain - CEO of McDonald’s China,McDonald’s want to be affordable so Chinese consumers can come hereoften and not just as a treat [ CITATION Wen12 \l 1033 ]

3.2.5 Promotion

Public relations: McDonald’s in Beijing focus more on personal

interactions with customers In everyday operations, one or two publicrelations staff in each outlet is available to answer customers’ questions.Each restaurant assigns five to ten female receptionists to take care of

children and talk with parents (Vignali, 2001, p.106)

Sport sponsorships: McDonald’s enhance its brand by acting as a

sponsor of the Bejing Olympics (2008) - big spenders with RMB549 million.McDonald’s used the Chinese slogan “wo jiu xihuan zhongguo ying”meaning “I’m lovin’ it when China wins” for the purposes of cheering forthe home team Jeff Schawartz, McDonald’s China’s CEO believed that thisnationalist campaign which demonstrates the company’s “deep-seatedcommitment to the people of China, the Chinese government, and the