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Background of The Business:
McDonalds started out with the two McDonalds brothers; Maurice and Richard. They came up with the idea to design an assembly line that maximized space and minimized wastage. Their idea would soon be recognized by Ray Kroc. A man who saw the genius in the two brothers incredibly efficient production line and became determined to open the stores throughout America. He opened its first franchise store on April 15th 1955 in Chicago, Illinois. The unique selling point of this store was its production line which if it ran properly could produce more food items than any other restaurant and at a fraction of the time. Leading to the birth of what we call the “Fast Food” industry. It would soon after its opening become the most successful fast food franchise ever, no other would be able to compete on the same level as McDonalds. Now it is not only the biggest food franchise in the world, but it now has over 35,000 outlets world wide in places such as Italy, China, Vietnam and South Africa. McDonalds is the most common fast food franchise in history.
1. McDonalds is the largest fast food network, operating in over 120 countries.
2. Economy of Scale, means McDonalds can share fixed costs over thousands of locations, making McDonalds one of the cheapest places to eat everywhere in the world.
3. Strong global brand: McDonalds and its “Golden Arches” is instantly recognizable to almost every individual in the world.
4. It provides consistency in its food, meaning you get the same taste whether you are eating a Big Mac in Los Angeles or in Croatia.
5. McDonalds also accommodates cultural diversities by adjusting its menus based on the ethnicity and cultural background of the country its in.
6. The franchise also benefits from Diversified Income. Because it has locations in over 120 countries, if domestic sales are slumping, it can make up for this loss of income through Europe or South Africa. Therefore the company does not rely on a sole source of income unlike most of its rivals who rely on almost 90% of domestic profits. This allows McDonalds to maintain a constant cash flow and sustained profitability.
1. Negative publicity – McDonalds is criticized constantly over its unhealthy menu. It has been a major impact on the company’s market reachability and has caused a massive number of people to not even consider eating a meal at McDonalds due to its fatty, salty, high carbohydrate ingredients. Movies and documentaries have been made which prove its health problems, furthering the destruction of its customer market.
2. High Employee Turnover – because jobs at McDonalds are low skilled and low paying, many of its employees do not take the job seriously or only take up work for a very short period of time. The high turnover means training costs are through the roof affecting the company’s bottom line and overall profitability.
1. Upgrading Menu: McDonalds is attempting to add premium products to its outlets. Things like artisan chicken breasts and sirloin burgers are already being added to some restaurants in America. It is also trying to enter competitive markets, such as caffeinated beverages from competitors like StarBucks. By keeping the McCafe prices competitive it has had some impact on the market.
2. McDonalds has also started producing fruit smoothies which are now available at most stores, furthering their market reach, by appealing to more health conscious consumers. This will help repair some of the damage it has incurred as a result of its unhealthy menu.
1. Competition: Competition from other national, international, regional and local food retailers is the biggest area of concern to the McDonalds Franchise. It competes on the basis of price, service, product quality, convenience and menu variety. As time passes, consumers preference for natural and quality products is increasing and McDonalds must be able to address these demands. Its primary competition is Burger King and Wendy’s.
2. Health Conscious Customers: Consumers all around the world are trying to eat a healthier diet. The rising demand for organic products, fresh fruit and vegetables and all natural ingredients is a topic of major concern for McDonalds. While McDonalds has very strict quality requirements, they are facing concerns that the younger, more health conscious consumers will hurt the productivity in the long run unless a strategy shift is made.
The fact is that even though McDonalds boasts high profits and is currently the worlds leading global food retailer, it still has many growing threats such as growing health consciousness and competition from similar foodservice outlets. McDonalds is dominating the fast food industry now, however, it needs to start changing and adapting its strategies if it is going to maintain its success well into the future.
Porter’s Six Forces
Competition – the market in which McDonalds operates has already been saturated easily making competitors the biggest threat on their business.
The main competition between competitors is price. Because other fast food businesses such as Burger King are largely based on the same business model as McDonalds, they also provide food at the same quality and low prices making it extremely easy for consumers to switch preference from one store to another. Non price related competition also exists, such as product features, customer support, delivery time and brand image. However these are not the most major threats posed by competitors. Pricing is the big concern.
The high number of firms is a threat.
High Aggressiveness of firms.
Low switching costs – meaning because competitors often charge the same low prices as McDonalds it is much easier for customers to move to a new restaurant.
Opponents Advertising Capabilities – the availability of advertising means that competitors can gain an audience through shear capital power.
Threat of New Entrants – New entrants are putting pressure on existing organisations within an industry through their inclination to gain market share. New entrants put strain on existing industries due to prices, costs and the rate of investment needed to sustain the business.
According to Michael Porter there are various “barriers” that can block the threat of new entrants. These Barriers in terms of McDonalds are:
McDonalds economies of scale : McDonalds spreads the fixed costs of a huge volume of units, reducing the total cost per unit, making their prices almost unmatchable. Which in turn prevents smaller businesses with less capital from penetrating the market.
Brand preference plays a major role in the combating of new market entrants. A well established brand like McDonalds already has a massive customer base and people will usually be influenced by the people around them, so if a new business tries to enter the market they will have to somehow compete with the solid standing brand preference of McDonalds Customers.
Capital Requirements also make the possibility of new entrants minimal. Because in order for a new business to be able to even come close to competing with the likes of McDonalds, they would need a major capital injection. The real threat is when the new entrant is diversifying from an already existing market as they can use existing expertise, cash flow and already established brand identity to their advantage. This can then lead to lower profitability from existing industries such as McDonalds.
Power of Buyers – the power of customers is strong and can lead to pitting two companies against one another in order to drive down price or a change in quality of service.
Choices allow customers to seek out competitors.
Low switching cost.
Large number of providers.
Availability of substitute products.
A business is only as strong as its customers, so in order for any business to survive customer satisfaction is of the utmost importance. McDonalds relies on consumer satisfaction in order to earn its profits. If a customer is unhappy with the food they received or with the service of the employees, this can lead to negative publicity which can spread until it eventually leads to a loss of profits. In order to keep customers happy and the business running well, it is imperative that McDonalds continues to provide quality products at reasonable prices, delivered with care and respect to all of its consumers.
Power of Suppliers – Suppliers provide the basic raw materials needed in order for McDonalds to function. Suppliers have an incredible ability to influence profitability of an business though the prices they charge, their control over service quality or by shifting costs to the industry participants.
What makes a supplier powerful?
If they produce a product for which there is no substitute, McDonalds will have to pay whatever they ask.
If switching suppliers is costly, the business may be stuck with suppliers.
If it does not rely on the industry to gain revenue.
They can increase material costs, causing McDonalds to increase their prices, which will lead to customer dissatisfaction and may cause money loss to the business.
Suppliers that provide unique goods cannot be replaced easily, so if anything happens to the supplier and they cannot deliver goods on time, it can cause McDonalds restaurants to have to close and also will lead to income loss as well as a possible loss of valued customers.
For these reasons it is extremely important that McDonalds maintains solid relationships with their suppliers by paying on time and behaving accordingly.
Availability of Substitute Products – a substitute product is an item that fulfills the same need or performs the same function as an already existing industry product. In terms of McDonalds a substitute product would be the burgers provided by Burger King which fulfils the purpose of ending the consumers hunger. Availability of substitutes will effect the overall competitiveness of the company.
Threats posed by Substitutes:
If McDonalds is closed or is out of a certain menu item, a customer may resolve to take their business else where, where they can buy the same sort of item. This can cause a decline in consumers brand preference.
If the costs of switching to the substitute products are low and the consumer losses nothing by switching to the substitute, the threat placed on McDonalds by substitution is immense.
Complementary Products – refer to the products or services that are compatible with what a particular industry sells. Complementary goods affect the industries profitability depending on how reliant the product is on the compatible one. According to Porters 6 Forces, complementary goods offer more value to the consumer together than apart. Because the Complementor is a separate industry to that of the primary business McDonalds. If the Complementary industry is booming it can positively effect the business of the firms like McDonalds. However, even if the Complementor is doing badly in its industry it does not mean that the other business will suffer in terms of profitability. The main point to be made about Complementary products is that they do not necessarily increase or decrease the competitiveness of an industry, all they do is add another layer to the complex structure of the competitive environment.
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