Subject: Seminars in International Business Management Teacher: Dr Ajmal Waheed Case done by: Sohail Hamayon Khan Class:

Mphil 1st QASMS

sunny 3/1/2013

McDonalds: Is China Lovin' it? Question #1: What is the purpose of conducting an external environmental analysis? What are the general environmental forces that could influence or have influenced McDonalds development in China? Answer: Purpose of conducting an External environmental analysis The purpose of an environmental analysis is to help in strategy development by keeping decision-makers within an organization informed on the external environment. The external environment includes changing of political parties, increasing regulations to reduce pollution, technological developments and shifting demographics. If a new technology is developed and is being used in a different industry, a strategic manager would see how this technology could also be used to improve processes within his business. An environmental analysis allows businesses to gain an overview of their environment to find opportunities or threats. Environmental forces influencing McDonald's in China The external environment that have influenced McDonald's development in china are as under. Political Environment As the issue raised of underpaid employees in Guangzhou the government forced McDonald to make labor unions and balance the wages of employees. this caused McDonald great set back in developing to mainland China. Other political regulation like franchise restriction have also influenced development of McDonald Legal Environment The strict laws of franchising in China forced McDonald to make its own outlets instead of franchise policy it carried out in other countries. McDonalds entered China in 1990, where China not yet have Franchise Law. In 1997 China enacted its Franchise Regulations which applied only to domestic franchiser; just in 2004 China has created legal structure for foreign franchiser as part of China commitments to WTO. Newspaper revealed McDonald and Yum Brands had underpaid their part time employees in Guangzhou. As a foreign fast food companies sprang up quickly during the 1990s, the Chinese government expected the fast-food sector to grow rapidly in the country and contributed significantly to restaurant industry. Social Environment As the Living standards of the middle class is improving in china so they are demanding more facilities and high standards and the issues like health are in prior concern which forced McDonald to provide standard and healthier food. The double standards in meals given in Hong Kong and Kid breakfast in America which include milk and Apple Dippers not given in China caused major issue. Chinese customers are eager to try out burgers and fries, which were vastly different from local Chinese quick service restaurants. Big curiosity of Chinese about foreign brands and their-in-store experience that enable Western fast food and restaurant companies to set relatively high price for their food. Chinese food tradition. Chinese meal, dishes were served on communal plates, which were placed at the center of a table for everyone to share. That different from what McDonalds offers as wester n food, which serve on individual serving. Chinas rapidly growing middle class was also demanding higher standards. Fast food is already known in China, such as noodle and dumpling stalls. In the late 1980s and early 1990s the emerge of Western fast-food chains had change restaurant landscape in China through the different experience they offered to Chinese consumers: efficient self-service. Standardized servings, less reliance on eating utensils, a clean environment and a comfortable atmosphere. Young Chinese customers had a different view about Western restaurant: they dont mind paying more expensive food to enjoy and socialize with friend and relax. Breakfast market in China: 80% of Chinese consumers are eating breakfast, among which 68% ate breakfast away from home. Chinese consumers have a preference tea then coffee. Few other socio-cultural issues are as under

Social critic about health improvement and environmental standard in China: Mc Donalds doesnt do the same campaign about health and environment as they do in US McDonalds in developing nations had been targeted by anti-Americans Activist American News Anchor Brian Sulivan said that McDonald should respect US since McDonald was American Company as a impact of tag Im Lovin it when China win While the booming economy of China offered the environmental conditions corresponding to fast-food culture, the environment also posed challenges to McDonalds. The prevalence of McDonalds restaurants in China seemed suggests the Chinese were lovin it In 1987-1990, the KFC, McDonald, Pizza Hut have a service that comparable to high class Chinese Restaurant. Many Chinese in those early considered dining at KFC, McDonalds or Pizza Hut as Luxury There were cases in china of other franchises signing on as partners just to learn trade secrets and recipes and then open their own stores under different names Economic environment Two issues faced by McDonald in China were high inflation and China coming in the category of Developed nations. the first issue caused the price of the products to rise and McDonald increased the prices 15% without any advertisement that caused the customer to shift to other alternatives. the second economic issue is upcoming and pressing because the McDonald was considered a white color meal but it was considered luxury good but as the economy is developing it is causing major concerns to the McDonald about the future Strategy. Some major economic environmental issues that are impacting McDonald are as under The competitive environment was also intensifying as local a foreign restaurant sought to capitalize on Chinas increasing affluence people There were powerful Chinese partners who willing to have a joint venture relationship with McDonald as a foreign company In April 2007 there was raising inflation in China Companies that originated in Asia and which were familiar with both Chinese tastes and Western management styles also emerged in China during the Economic Reform Many home grown fast-food chains, which offered more Chinese and lower prices than foreign counterpart Technological Environment Many of China Chains failed because they failed to develop system like those of foreign chains Lihua fast food operated without storefronts but owned a well-equipped kitchen with a skilful kitchen crew Lihua used computers to facilitate inefficient food ordering and tracking system and utilized the GPS to aid food delivery Lihua fast food was the 1st fast food company in China to use environmentally friendly packaging and implement the ISO 4001 environmental management system

Natural Environment

China have natural resources that can fulfill 95% of material needs by Mc Donalds (egg. beef , potatoes, milk, and vegetable) Demographic Environment There was massive urbanization in China In China there was significant economic growth, which reflected from per capita annual income growth Affluence people in China was increasing In Chinas there was rapidly growing middle class In China there are many lower income consumers that could not afford at Western fast food chains, which charge $3 for a basic meal Question #2: Based on the external environmental analysis, what are the opportunities and threats presented to McDonalds operations in China? Answer: McDonalds operations in China is presented by the following opportunities and threats Opportunities: Increase in average annual per-capita disposable income, over the last 20 years. Substantial urbanization due to increase in income Development of infra-structure Improvement in supply-chain network Expansion i.e. increase in number of outlets Joint ventures and partnerships e.g., the one with Sinopec petroleum In Chinas there was rapidly growing middle class Big curiosity of Chinese about foreign brands and their-in-store experience that enable Western fast food and restaurant companies to set relatively high price for their food Breakfast market in China: 80% of Chinese consumers are eating breakfast, among which 68% ate breakfast away from home As a foreign fast food companies sprang up quickly during the 1990s, the Chinese government expected the fast-food sector to grow rapidly in the country and contributed significantly to restaurant industry Threats Intense competition with foreign and local fast food sellers Labor unions protected by government laws Increasing health consciousness in Chinese High rate of inflation in China Anti-American activists In China there are many lower income consumers that could not afford at Western fast food chains, which charge $3 for a basic meal In the late 1980s and early 1990s the emerge of Western fast-food chains had change restaurant landscape in China through the different experience they offered to Chinese consumers: efficient self-service Chinese consumers have a preference tea then coffee Lihua used computers to facilitate inefficient food ordering and tracking system and utilized the GPS to aid food delivery There were cases in china of other franchises signing on as partners just to learn trade secrets and recipes and then open their own stores under different names

Question #3: Discuss the five forces of the industry environment of McDonalds China and comment on the competitiveness of the company in relation to each of these forces? Answer: Michel Porter's Five forces Bargaining power of Buyers The Bargaining power of buyers is very strong in China as the Middle class in China constitute the majority of the population and the income level of the middle class was getting higher. the target customers of McDonald was middle class and they had so many alternative to switch like KFC, Burger King, Hong Kong's Cafe de Coral, Malan Noodles etc McDonald's Competitiveness: it has high brand recognition and market share which gives this company competitive edge Bargaining power of suppliers McDonald had backward integrated it had its own farm to produce the raw material and made joint ventures to produce raw materials. The supply chain created by McDonalds has created 95% of the materials needed. It would be costly for McDonalds to switch suppliers because of the joint venture that they entered into with their Chinese partners. McDonald's Competitiveness: it has significant access to, or control of, distribution channels in the market. Threat of Substitutes There is high threat of the substitute products to the McDonald as there are many fast food available like KFC, Burger King, Sub way, Hong Kong's Cafe de Coral, Malan Noodles etc McDonald's Competitiveness: it provides better quality products then its most customers Threat of New Entrants New market entrants into the Chinese fast food industry were U.S.-based Burger King, and Subway and Japans Mos Burger. Themed restaurants and Starbucks also entered the mix of new entrants. These new entrants also pose moderate threat to the market share of McDonald McDonald's Competitiveness: it has high market share and brand reputation which provides competitive edge Threat of Rivalry The biggest rivals of McDonald are KFC, Dicos, Cafe de Coral, Ajisen Ramen and Malan noodles. McDonald is 2nd in the ranking and it is holding its position since last two decades. McDonald's Competitiveness: KFC has largest market share and is catering the local taste better by providing chicken products so McDonald faces huge competitive disadvantage

A lot of number competitor Uniqueness product of

each competitors Low customer loyalty No switching cost

Threat of new enterence

Moderate time and cost

entry Moderate economic of scale Many new local entrance failed to develop system Low barriers to entry

Moderate
Bargaining power of Suppliers State owned General Corporation of Beijing Agriculture, Local Farmer Rivalry among existing competitors

Bargaining power of buyers buyers

High High
Threat of substitute product
Free market Small size order There were difference
offering from its competitor High price sensitivity Low cost of changing

Low

Already have a join venture with

State owned General Corporation of Beijing Agriculture Develop a network with farmer, food processing manufacture and other suppliers

Good substitute
performance Low cost of change

High

Question #4: What are the strategic groups in the fast-food industry in China? In which strategic group does McDonalds China compete most in China? Answer Based on Michael Porter theories, Strategic group is firms directing the same strategy directed to the same target market. Different restaurant landscape Efficient self-service Standardized serving Less reliance on eating utensil A clean environment Comfortable atmosphere Focus on brand quality Focus on management control Ability to adapt quickly to local condition Has well-known and strong name and trademark Vast Capital Expert in technology Adapt its menu to China preference chicken over beef Well develop its internal supply network. Strong partnership through local company, e.g. McDonald with Taobao.com for online shop and Sinopecs for drive through in 30,000 petrol stations. Have home delivery service Open hour to 24 hours per day Price discrimination Promoting western menu in China the bold one is the strategy that McDonalds China most compete A strategic group is defined as a group of corporations that employ the same or similar strategies in a particular industry. The strategic behavior and performance within a strategy group are very similar. The industry may consist of several or only one strategic group. A strategic group may consist of one or more members (Mller& Stevens, 2005). The two basic strategic Dimensions that fast food industry in China operates are Price Quality service: this means providing best quality products in the given price range Geographic Distribution: this means the market captured by the company

Strategic groups:

Malan Noodles High

Geographic Distribution

Cafe De Coral

KFC McDonald

Pizza Hut Dicos Ajesin Ramen

Mos Burger

Moderate Local Chinese noodles and dumpling restaurant Low Low

Burger King

Moderate
Price Quality service

High

McDonald strategic group: McDonald is considered luxury item in China with KFC so they form the first group in the top right most of the Grid. with high Price and Geographic Distribution.