Macro and Micro Environment Analysis of McDonalds

2. Literature Review

This section provides a broad picture of the dissertation that includes setting up the parameters and limits to the field of inquiry going into the research. Its aim is to identify key ideas, marketing theories applicable and marketing case studies that impinge upon the area of this investigation. It makes an effective starting point leading into the introduction and the background of the dissertation.

2.1 Macro Environment Analysis of McDonald’s

The analysis is done using a top down approach where first the Macro Environment and then the Micro environment has been examined, in which McDonald’s operates.

2.1.2 Internal Anlaysis

Internal Analysis is done using Value Chain analysis. The term ‘value chain’ was used by Michael Porter (1985) in his book “competitive advantage; creating and sustaining superior performance”. Brown (1997),“described value chain as a tool to disaggregate a business in to strategically relevant activities”.

In McDonald’s case, the key value adding activities are inbound logistics, operation, outbound logistics, marketing & sales and service. McDonald’s logistics function is to buy food on behalf of its operator (franchisee) and arrange delivery in to their restaurants. McDonald’s logistics includes; the procurement and shipment of raw materials in to suppliers, the procurement and shipment of finished goods between the suppliers and the distribution centres, together with the warehousing at each distribution centre, the ordering and the delivery to restaurants of all food, packaging and operating supplies. To improve its logistics operation, McDonald’s combines a number of food-processing plants dedicated to its operation only. The establishment of “food towns” consisting of a distribution centre and a bakery, a meat plant, a sauce plant and a chicken plant, gives McDonald’s competitive advantage.

The supporting activities that can be identified are procurement, human resources development and technology. McDonald’s uses electronic procurement system. It had set logistics trends for restaurants with its online ordering system. It was noted that more than 12% of McDonald’s franchisees ordered food supplier electronically. Revamping its supply chain with software and technology made it easy to respond quickly and efficiently to customers’ needs. With the online ordering system, McDonald’s had a return on investment of 23.2% in 2008. However, the human resource development at McDonald’s is excellent. McDonald’s uses a high-engagement approach to improving both their operations, leadership pipeline and employee satisfaction with their career growth. Every management staff at McDonald’s receives training at one of the regional training centres and at the national centre, Hamburger University in East Finchley. Training all employees to work in one best way (quick-service culture) made McDonald’s to gain customer’s loyalty continuously leading to a competitive advantage.

2.1.3 External Anlaysis

PEST analysis is applied for an in depth understanding of macro environment in fast food industry where McDonald’s operated. Kotler (1998) claims that PEST analysis is a useful strategic tool for understanding market growth or decline, business position, potential and direction for operations.

POLITICAL

The operations of McDonalds are affected by the government policies on the regulations of fast food operation. Currently government are controlling the marketing of fast food restaurant because of health concern such as cardiovascular and cholesterol issue and obesity among the young and children in the country. Governments also control the license given for open the fast food restaurant and other business regulation need to follow such as for a franchise business. Good relationship with government in giving mutual benefits such as employment and tax is a must for the company to succeed in any foreign market. McDonalds should also protect its workers by ensuring all the hiring, compensation, training or repatriation is according to UK and European Labour Law and the Middle Eastern Labour Laws as stipulated.

ECONOMICS

As a business entity, McDonalds need to face a lot of economic variables outside its company or its macro environment. Dealing with international sourcing for its material McDonalds should be aware on the global supply and currencies exchange. Remember, McDonalds import most of its raw material such as beef and potatoes due to local market cannot supply in abundant to meet the demand of its product. Any upside of currencies especially dollar will be impacting its cost of purchase.

Working on the local country, McDonalds must face government regulations on tax of profit where it gains from the operation and other tax such as entertainment and restaurant service tax. Each country may have different scale or types of tax available and McDonalds should follow the regulation if it wants to continue the operation. As a franchise, McDonalds should also pay certain percentage of the revenue to the parent company in United States. The economic condition and growth of the country also is an important indicator to the demand of products that McDonalds offered. As the food priced slightly above normal foods, not many people will have the income range to consume the products. Moreover if the economy is bad and income percapita is affected, the demand of McDonalds product will certainly going down. On the other hand the good economy also means disposable income is more and people can spend more on more expensive food at fast food restaurant.

SOCIAL/CULTURAL

The changing lifestyles of Malaysia due to development of Malaysian economy should be also taking into consideration. While more people are able financially to eat at more expensive outlet such as fast food restaurant, they have higher expectation. They want to have quality in services and more conveniences that can differentiate one restaurant from another. Young urban consumers want technology in their life and facilities such as credit card payment, wireless internet, cozy and relaxing ambient place, and other attraction for their hangout and eating. All these needs should also be taken into consideration. There is not much difference between cultural and the purchase of products in a single country but for different countries cultural sensitivity should be upheld. For example in India people (Hindu) do not take beef, Muslim countries do not take pork, German like beers, Finnish like fish type of food menu, Chinese like to associate food with something good (for example prosperity), Asian like rice and Americans eat in big-sized menu. So far McDonalds has shown good efforts in localization of its menu to suit local taste but it should constantly survey and learn about local culture to better understand and design the best product for them.

TECHNOLOGY

For a fast food restaurant, technology does not give a very high impact on the company and it is not a significant macro environment variables. However McDonalds should be looking to competitors innovation and improve itself in term of integrating technology in managing its operation. For example in inventory system, supply chain management system to manage its supply, easy payment and ordering systems for its customers and wireless internet technology. Implementation of technology can make the management more effective and cost saving in the long term. This will also make customer happy if cost savings results in price reduction or promotional campaign discount which will benefits them from time to time.

LEGAL

As a certified fast food operator, there are many regulations and procedures that McDonalds should follow. For example is the Halal certification that becomes a concern to Muslim consumers. McDonalds should protect its integrity and consumer confidence by ensuring all materials and process are as claimed or must followed. Other legal requirement that the business owner should follow as stipulated in laws are such as operating hours, business registration, tax requirement, labor and employment laws and quality & environment certification (such as ISO) in which the outlet has been certified. The legal requirement is important because the offenders will be fined or have their business prohibited from operating which can be disastrous.

ENVIRONMENT

As one of world largest consumer of beef, potatoes and chicken, McDonalds always had been critics for world environmentalist. This is because high consumption of beef causing the green house effect by methane gasses coming from the cow’s ranch. Large scale plantation has effect the environment and lost of green forest opening for plantation activities. Vegetarian environmentalist criticizes the fast-food giant for cruelty to animals and slaughtering. In Japan, once McDonalds want to introduce whale burger causing uproar because whales are endangered species. Before using paper packaging, once McDonalds also had been criticized for being insensitive to pollution because using polystyrene based packaging for its foods. Imagine millions of people purchase from fast food operator and how is the impact to world environment by throwing away those hard to recycle packaging. Our world is getting concern on environment issue and business operating here should not just care for profit, but careful usage of world resources for sustainable development and care for environment safety and health for our future generation. Critics and concern from all public or activist should be review and support if necessary to ensure we play our social responsibility better.

2.2 Market Position

McDonald’s is operating in a very competitive market. In order to maintain on the top position of the competition, it is important to understand the company’s industry environment to be prepared for actions. Porter’s 5 Forces is a useful model for analysing the industry environment, it identifies five competitive forces that shape every single industry and market.

Supplier Power

If suppliers have strong bargaining power, competitive pressure will be greater (Pearce and Robinson, 2004). McDonald’s works in partnership with most of their suppliers to protect the quality of their foods and minimise the bargaining power of suppliers.

Buyer Power

Consumer’s buying power in the food market is high. With the continuously changes in tastes and the increased concern in healthy eating, companies in the food market has to make changes and improvements to satisfy its customers. Otherwise there is a high possibility in getting bad publicity and lost in profit.

Threat of Substitute

The threat of substitute is high in the fast food market due to the strong competition and the increasing amount of ready to eat foods. Customers have many choices other than McDonald’s, and ready to eat meals are cheaper and convenient.

Competition

The competition in the fast food market is very high. McDonald’s has to compete with strong competitors like Burger King, Pizza Hut, Wendy and KFC.

Threat of Entry

The threat of new entrant is low in the fast food industry because of the amount of competition with the big players in the market. New entrants will not likely to win due to lack ok economic of scale. The fast food industry is highly competitive. Taking one step further from the internal analysis, in this chapter, external analysis was done so as to determine where McDonald’s I positioned in the market, given the intensive rivalry. PESTLE is used to gather data for completion of this analysis. From the data using PESTLE, swot analysis is done to determine how McDonald’s strong market position as the largest foodservice and fast-food retailing chain in the world is bolstered by robust all-round growth witnessed by the company. By analyzing PEST and SWOT an understanding of overall of the company’s power and how it can grow, is established. This was done keeping the focus on Western European Market and the Middle east. Hence the impact of European Regulations and turbulence caused by terrorism and Iraq war is also taken as a significant point as part of analysis.

Porter’s five forces model is used as the tool to analyse the market competition in the European and the middle east market. The existing rivalry in the industry is already strong although McDonalds is in a dominant market position.

The above analysis helps to conclude MCDonald’s competitive advantage and its uniqueness to gain broad target in the aforementioned markets.

2.3 Marketing Strategy and Mix

Every organisations need to identify their strategic aims to be able to have a direct focus of what and when to achieve it within a given time. This is usually based on the organisation’s limited resources and capabilities. As (Barney 1991), “stated an organisation could extend their limited resources and capabilities through organisational learning, sharing, generation of knowledge, redeployment of existing resources in an effective and efficient ways”.

In this section, the strategic aim of McDonald’s is discussed. This is used for evaluating the way it has implemented its objectives and the effectiveness of the global and local marketing strategies. This was important to fully understand its market and environment in order to evaluate its right marketing plans and the adopted strategies.

After analysing the market and environment of McDonald’s, this chapter focuses on the plans and strategies adopted by the company to overcome its weaknesses and avoid the threats. It uses various survey results to determine the effectiveness of its marketing mix. In the year 2003, when, McDonald’s had been having problems on losing market share, reducing profit and bad publicity, the company started aligning their global system around a common mission with a common set of customer focused goal oriented actions. It was called “McDonald’s Plan to Win” which was to put the company’s concentration on the five drivers of exceptional customer experiences – Product, People, Place, Promotion and Price. This plan was aimed to increase profits by improving its services to increase customers. These 5 variables are also known as the Retail Marketing Mix or the 5 P’s. They are the variables that marketing managers can control in order to best satisfy customers in the target market. This chapter discusses and evaluates the way McDonalds has established its revitalisation plan in the European and the Middle East markets.

While doing the research on the five Ps, McDonald’s relationship marketing is also examined, that is viewed as an asset and the company’s marketing goal is to attract, maintain, and enhance customer relationships. Then there is an argument on whether the combination of five P’s with the relationship marketing is enough to stay on the competition or is there any other areas to be focussed as well.

In the aspect of marketing & sales McDonald’s adopted the concept of 7ps of marketing mix formulated by McCarthy (1975) and Gilligan & Fifield (1996). These 7ps includes; product, place, price, promotion, people, process, physical. With these 7ps McDonald’s was able to create a uniformity of items that taste the same in different countries. McDonald’s realises that although there is cost savings in standardisation but success can be achieved by being able to adapt to a specific environment. It has a pricing strategy that enables it to cope with a particular market. In setting price, McDonald’s looks at the elasticity of demand for its product in response to price. Considering the diverse range of culture, custom in different countries, McDonald’s has localised its marketing communication strategy using different promotion and advertisement. For instance McDonald’s uses the England footballer Alan Shearer as a logo to advertise its hamburgers in the UK and in France its uses Fabien Barthez, the French international goalkeeper. Obviously, McDonald’s uses a number of styles to attract customers.

After analysing the market and environment of McDonald’s, this chapter will be focusing on the plans and strategies adopted by the company to overcome its weaknesses and avoid the threats. In the past few years, McDonald’s has been having problems on losing market share, reducing profit and bad publicity. In the year 2003, the company have aligned their global system around a common mission with a common set of customer focused goal oriented actions. It is called “McDonald’s Plan to Win” which was to put the company’s concentration on the five drivers of exceptional customer experiences – Product, People, Place, Promotion and Price. This plan was aimed to increase profits by improving its services to increase customers. These 5 variables are also known as the Retail Marketing Mix or the 5 P’s. They are the variables that marketing managers can control in order to best satisfy customers in the target market. (Please refer to appendix 2 for further information on the 5 P’s)

Product

The following are the strategies applied by McDonald’s on their Products:

• To satisfy customers’ desire for premium products at affordable prices.
• More choices on the Happy Meal such as fruit options and milk for the kids.
• To address the desire for foods that fit into today’s lifestyle. McDonald’s has added new choices like meal-size salads, fruit options and sandwiches in order to fit the increased concern on health eating.

McDonald’s is controlling the quality of the foods by working in partnership with its suppliers and to work closely with food experts to ensure the quality is in the highest standard.

People

The following are the marketing strategies adopted by McDonald’s on its People:

• Speeding up service by simplifying the restaurant environment for their staff and customers.
• Ensuring the restaurant staffs are focused on being friendly, as well as fast with hospitality training.
• Providing cost-efficient, relevant training for their world-wide workforce. There are more than 1.6 million people worldwide working for McDonald’s. McDonald’s has placed emphasis on the training and development of its employees, aiming to provide career opportunities for people to achieve their potential.

McDonald’s has five commitments to their employees, which are:

• Respect and Recognition
• Values and Leadership Behaviours
• Competitive Pay and Benefits
• Learning, Development and Personal Growth
• Resources to Get the Job Done

Place

McDonald’s has over 30,000 restaurants in 119 countries. It opens in places where has high consumer flows such as high street, shopping malls, train station, airports, retail parks, gas stations, and even schools. Freestanding restaurants are positioned so that customers are never more than a few minutes away by foot in the city or by car. The following are McDonalds’ strategies on Place:

• To make the environment the gold standard for cleanliness. They have recalibrated their standards and are consistently enforcing them.
• McDonald’s has added additional service to customers by providing Wi-Fi accessibility in some of the restaurants so customers can stay connected to the internet while enjoying their foods.
• Giving customers more reasons to visit McDonald’s by adding more products offering such as coffee and to locate in the right place.
• Relocating, renovating and rebuilding some of the restaurants to give McDonald’s a fresh edge.

Promotion

Every year McDonald’s spent huge amount of money on promotion. The company has been trying to maximise the impact of the advertising spending and broaden their reach through public relations and by placing adverts in media well beyond the traditional prime-time network television format. The objective of spending so much money on promotion is to build brand loyalty and bonds of trust. The following are the strategies:

• The new creative brand direction “I’m Lovin’ It!” is designed to connect with customers around the world, especially young adults, moms and kids. It has became McDonald’s signature brand voice in 119 countries, generating awareness figures as high as 96% in some parts of the world.
• Appealing to young adults with relevant advertising. McDonald’s is bringing top creative teams from around the world to gather ideas, study trends and find inspiration to create world-class advertising.

Price

McDonald’s has a rigorous pricing process that is used to determine the price for that particular market in each country. The reason is to be able to offer affordable prices to customers and also to be profitable for the company. The following are the process which sets out the basic framework that allows the company to set localised pricing:

• Selecting the price objective
• Determining demand
• Estimating costs
• Analysing competitors’ costs, prices and offers
• Selecting a pricing method
• Selecting a final price (www.mcdonalds.com)

2.4 Performance Measurement

Quality is an important issue in services due to the features of inseparability, intangibility and perishability. That which can not be stored and is intangible cannot be checked for defects before ‘delivery’ to customers. In addition each individual involved in the exchange process brings with them varying levels of expectations and levels of satisfaction in addition to the unpredictable nature of human beings. It is this dominant role of human interaction in services that shape customers expectations and create difficulties in understanding and implementing quality initiatives (Behara & Gundersen (2001)).

Officially McDonalds names three elements in their strategy to be the world’s best quick service restaurant: People (being the best employer), Customers (providing them excellence) and System Growth (for owners/operators, suppliers and company).

‘McDonalds has always been a franchising Company and has relied on its franchisees to play a major role in its success. McDonalds remains committed to franchising as a predominant way of doing business. Approximately 70% of McDonalds worldwide restaurant businesses are owned and operated by independent businessmen and women, our franchisees’. Usually, McDonalds offers franchises to poor performing restaurants in order to sustain profitability.

Advertising is used to differentiate McDonalds’ products from competitors and as a means of branding: Advertising Spend in 2001 amounted to £39m (KFC: £14m, Burger King: £8.6m, Pizza Hut: £7.4m).

Furthermore, McDonalds is involved in various high profile sponsorship schemes (e.g. major Sponsor of FIFA World Cup, ‘gold’ sponsor and official restaurant of the Olympic Games) that secures them favourable PR.

Recently McDonalds acquired Boston Market Chicken restaurants, the Donatos pizza chain and Chipotle Mexican Grill. In the UK, it purchased the Aroma coffee chain and 33% of Pret A Manger. This demonstrates that McDonalds has diversified into other segments of the fast food/ convenience /take away market.

McDonalds is the world’s largest food service organisation. It has the greatest market share of the breakfast, lunch and dinner market and holds 67% of the UK Burger Market.

McDonalds’ golden arches are the world’s biggest brand with higher awareness than Coca-Cola.

McDonalds is constantly introducing new products, usually for a limited period of time. This is because management recognise that consumers like variety as well as a continuation of good products such as Big Macs and Cheeseburgers. Also, they are well aware that if McDonalds has too many products running at the same time then the speed of customer service will deteriorate.

However, McDonalds has not introduced healthier products in response to growing concerns about obesity.

It is difficult to evaluate the extent to which McDonalds fulfils customers’ demands. In the 2001 consumer survey conducted by Sandelman & Associates, McDonald’s was ranked as last out of 60 chains for taste. Statistics that describe McDonalds cleanliness are not available and therefore the achievement of this objective is difficult to examine, but anecdotal evidence suggests that suitable policies are in place to meet that objective. Customer service quality is difficult to assess but it is renowned for being quick.

2.5 Ethical Criticism

Ethical behaviour has come up as one of the most important aspect of any organisation. By ‘Doing the right thing’ internally and externally, businesses created a good working atmosphere, while also benefiting society and the environment. However many ethical issues are subjective and based on one’s values and beliefs. As a result, they are often difficult to enforce and easy to neglect. The result of this is that ‘when the costs are added up, the social balance sheet contains enormous debts to society’ (McEwan, 2001).

This chapter discusses the ethical issues that McDonalds have been facing over a period of time and how effectively it addressing its corporate social responsibility. The 2008 corporate social responsibility report has been critically evaluated and based on that it is determined, whether much of its efforts are just descriptive or has been realistic. It uses various results from the data set based on the primary and secondary research to determine the effectives.

It is the notion of an organization’s ‘debts to society’, which led to the branch of ethics known as ‘corporate social responsibility’. This refers to ‘the economic, legal, ethical, and philanthropic expectations placed on organizations by society at a given point in time’ (Carroll and Buchholtz, 2000). This theory of responsibility to society is based around two headings, stated by Wells (1998). Social Responsibility deals with ‘the purposes for which companies should act’ (Wells, 1998), and Corporate Responsibility is the ‘liability attached to a company for actions done in its name’ (Wells, 1998).

On 2002, McDonald’s published its first Corporate Responsibility Report and this was followed up with an updated version in 2004. Neverthless many critics of McDonald’s still believe that this, like many Corporate Responsibility Reports, is simply a medley of generalities and assumptions, that do not provide hard metrics of the company, its activities or its impacts on society and the environment’ (Hawken, 2002), and is ‘peripheral to the core interests of an organization’ (Strategic Direction, 2002). Consequentially, there is a need to analyse the claims made towards McDonalds, and whether they have been resolved within the two Corporate Responsibility Report. The incident which has done the most damage to McDonald’s ethical reputation was the ‘McLibel’ trial, where the company expected a quick conclusion to its action against activists who had distributed a pamphlet, What’s Wrong with McDonald’s?’. Instead it ran for two and a half years and became the longest ever English trial, upon its completion in June 1997 (McSpotlight.org: The McLibel Trial, 2005).

One of the main ethical criticisms consistently faced by McDonald’s over the last 30 years relates to the food offered in its stores. Critics claim that McDonald’s is a major contributing factor to the ver-increasing levels of obesity in the UK and European countries. Medical studies show that ‘waistlines are expanding faster in the UK than in any other European country…with 1 in 5 adults dangerously overweight’ (Walsh, 2003), while in 2001 it was reported that 300,000 deaths a year in the U.S. are related to obesity compared to 400,000 through cigarette smoking’ (McMans Depression and Bipolar Weekly, 2004). McDonald’s contribution is a result of the unhealthy nature of fast food. For example, a meal of a Big Mac and medium fries would provide you with ‘910 calories, as well as 46g of fat, 13g of which are saturated’ (McDonald’s.com, 2005). Considering the fact that this is half the Recommended Daily Allowance for a female adult, it is clear that McDonald’s does not meet U.S. dietary requirements. Apart from obesity, ‘diabetes, high blood pressure, heart disease and some forms of cancer are related to a diet high in fat, saturated fat, salt and sugar’ (Inside the McLibel trial, 1995). The impacts of a McDonald’s diet were clearly shown in Morgan Spurlock’s controversial film ‘Super Size Me’, where he ate nothing but McDonald’s for one month. Although this was an extreme example, the impacts on Spurlock were dramatic. ‘Spurlock gained 25 pounds, raised his cholesterol by 60 points, dropped his libido and turned his liver into pate’ (McMans Depression and Bipolar Weekly, 2004). He also experienced headaches and depression, and actually became addicted to the products. The impact of a McDonald’s diet on children is also a major ethical concern, as an increasing number of children are faced with obesity problems. ‘Every month, 90 percent of the children between 3 and 9 in America visit a McDonald’s’ (Schlosser, 2001). McDonald’s has been criticised for exploiting children with advertising. They have traditionally aimed themselves towards children with collectable toys in ‘Happy Meals’, as well as colorful advertising campaigns and promotions in schools. Most criticized is the use of the Ronald McDonald clown character, which has been seen as a ‘cynical exploitation of children to use a clown to drum up business’ (Inside the McLibel trial, 1995). These marketing tactics contribute to the increasing unhealthy diet of many children. Stakeholders in a corporation may not only be human because animals are also seen as an important part of society and deserve the same treatment as humans. McDonald’s has been criticized for the way it treats animals before they are killed and turned into fast food. ‘The corporation is the world’s largest promoter of meat-based products, the largest user of beef and the second largest user of chicken’ (McSpotlight.org: McDonald’s and Animals, 2005), and thus is faced with the usual claims aimed at slaughterhouses. It is claimed that ‘chickens were crammed into sheds with less than one square foot of space per bird and no daylight’ (Inside the McLibel trial, 1995). As a result, ‘44% had leg abnormalities and other health problems’ (Inside the McLibel trial, 1995). This treatment was not just reserved for chicken but also other animals involved in McDonald’s fast food products. 40% of piglets were held in indoor breeding units, and half had tails docked for no apparent reason’ (Inside the McLibel trial, 1995). Ethical criticism is also aimed at the methods for killing the animals. ‘14% of chickens received pre-stun shocks, which caused undue stress, while 1% (1,350 per day) were decapitated before being stunned’ (Inside the McLibel trial, 1995).

As well as social ethical issues, corporations must also consider environmental ethics, which means treating natural resources not just as commodities, but as part of the ecological whole. It is important because it affects the image of the company and consumer’s perceptions. For example, ‘a Wall Street Journal poll in 1991 claimed that 53% of people avoided purchasing a product because of environmental concerns about a product or manufacturer’ (Hawken, 2002). The most famous environmental issue is the suggestion that McDonald’s has destroyed hundreds of acres of Brazilian rainforest to make way for large-scale cattle ranching. This not only removes a valuable natural resource, but also has an impact on global warming, as the rainforest is an essential mechanism for the absorption of Carbon Dioxide in the atmosphere.