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Strategic Management

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Industry Analysis with Porters Five Force and VRIO Framework


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Company Chosen:

McDonalds
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Group Members:Anuran Chattaraj (B13075) Avisek Bandyopadhyay (B13078) Dhruv Gupta (B13083) Faraz M Khan (B13084) Harshan Agrawal (B13088) Sarvesh Singh (B13112) Shelly Dabas (B13114) Srijan Srivastava (B13116) Subhro Mukherjee (B13118) Suprabhat Tiwari (B13119)

Strategic Management

BM-B, Group-1

Contents
1> Executive Summary 2> Introduction 3> Porters 5 Forces Analysis of the Fast Food Industry 4> VRIO Analysis of McDonalds 5> Analysis of Overall Business Strategy : Positives and Shortcomings 6> Limitations of the Study 7> Conclusion 8> References

Strategic Management

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1> Executive Summary


McDonalds is a Quick Service Restaurant (QSR) that is the Global Leader in the Fast Food business. The developed markets are reaching a saturation point and the way forward in the fast food business is to make inroads in the developing market and grab market share from the unorganised sector. The increasing per capita income in developing nations like India make them attractive targets for the company. Branding, quality orientation, timeliness, cleanliness, and innovation are the key mantras for the success of QSRs. The threat of new entrants is low for this industry as the existing player have achieved brand recognition and economies of scale which will be difficult to replicate. The threat of competition is high as there are multiple fast food chains which provide similar products. So there is great competition in terms of cost, quality and service-time. The threat of substitutes is also high as health awareness has increased among customers and substitutes are readily available. The bargaining power of suppliers is moderate for the raw material food items like vegetables, chicken, bread since the suppliers are local providers and not very powerful. However, the bargaining power of the soft drinks suppliers are high as there are very few alternatives like Coke or Pepsi. The bargaining power of buyers is low due to large number of customers available. Major capabilities and resources of McDonalds are as follows: Current worldwide infrastructure (McDonalds serves around 68 million customers daily in 118 countries through its more than 34000 outlets) Strong brand name and marketing Best quality at low price (Aloo tikki burger at McDonalds costs Rs 25,Veg Zinger at KFC costs Rs 100) Innovation and service time (They have very quick service time of 188.83 seconds for drivethru)

Some of its successful strategies are as follows: Inbound Logistics (High-quality suppliers, backward vertical-integration, E-Procurement) Operational Efficiency (Speedee kitchen, mass production methods, quick service) Cost Efficiency (Bulk-purchases, waste management, energy conservation) Predatory Marketing to Kids (Uses CSR initiatives like Mc-Spell-It Competitions and Ronald-McDonald-RoadShows to target kids) Special Services (Provides complimentary free Wi-Fi, Arch cards and Gift Certificates)

The shortcomings in McDonalds strategies are as follows: Overdependence on suppliers Lack of healthy snacks Limited offerings Lack of social presence

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2> Introduction
McDonalds sees itself as a leading global foodservice retailer committed to the philosophy of QSCV (Quality, Service, Cleanliness and Value) behind its service to its customers. It serves Western fast foods and can be typified as Quick Service Restaurants (QSR). Although developed markets are reaching a saturation point, developing economies offer attractive growth prospects. Fast food industry in India is touted to grow to double its size in the next 3-4 years. QSR is one of the sectors that have managed to grow even in the recessionary market. It is interesting to note that 83% of sales can be attributed to sales of burgers, pizzas and sandwiches. Per capita income of developing nations like India is rising and QSR has an income elasticity of 1.4x. This entails, with increase in per capita income, demand for QSR will grow fast. The young demography of developing nations, which is heavily influenced by Western culture has led to the success of QSRs. This population is more likely to eat processed foods. Reports suggest that Indian consumers are eating out seven times a month on average. [1] [2] The food business in developing nations is still largely catered to by the unorganized sector. Only 1620% of the food business in India is organized. So, branding, quality orientation, timeliness, cleanliness, innovative palates are some of the factors that play a critical role in the success of QSRs. [3] [4] In the ensuing report, we study the global fast food industry and analyse the strategies adopted by McDonalds.

3> Porters 5 Forces Fast food industry


Threat of new entrants Low. With the nature of the industry a sizeable number of well-established names fighting on quality, variety and price it is difficult for a new entity to break into the clutter and succeed. With brand consciousness being of high importance in the fast food segment people prefer names they know and trust. This would mean that a new entrant would have a very tough time establishing itself in the mind of the customer as a fair alternative to the existing options available in the market. The fast food industry by its nature makes profits by employing economies of scale. Their wide scale gives the firms the ability to survive the intense rivalry by selling at low margins. This is clearly a luxury that a new player in the market would not enjoy. All these factors plus a heavy startup cost for a franchise model as well as the substantial advertising and marketing budget that would be required to create the brand, combine to lead us to the conclusion that threat of new entrants is considerably low in this industry. [5]

Threat of competition High Fast food industry is a highly competitive space with competitors backed by solid financial might. This ensures a constant attack from competition in terms of advertisements and measures taken to poach McDonalds customers. The dynamic and competitive nature of the industry means that

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McDonalds has to compete on both price and quality with multiple entities like Burger King, Taco Bell, Yum Foods etc. A well-known brand combined with higher levels of customisation for different age groups and regions sets it apart. Top global fast food chains Fast Food Chain Subway McDonalds Starbucks KFC(Yum Foods) Burger King Pizza Hut(Yum Foods) Dunkin Donuts Dominos Pizza Taco Bell(Yum Foods) Source: Wikipedia. As shown above McDonalds currently holds the second position globally with many other fast food chains that have in excess of 10000 outlets. All these pose a direct threat to the company as they provide both quick service and quality food attributes that customers look for while choosing McDonalds as the place to dine or order food on-the-go. Worldwide Outlets 40850+ 34000+ 21000+ 18000+ 13000+ 11200+ 15000 10000+ 6500

Threat of Substitutes High Fast foods can easily be replaced by meals at restaurants, canteens, home-made food etc. Further, since there is an increasing awareness about the adverse effects of excess fast food on health, customers are shifting to substitute products with better nutritional values. McDonalds and other fast food chains have to concentrate on promoting healthier fast foods and have to spend heavily on marketing to retain their brand image. The fast food chains also have to manage social organizations which spread negative word-of-mouth about fast foods contributing to obesity, especially among children.

Bargaining power of Suppliers- Moderate for food items & High for soft drinks Any QSRs value chain consists of complex network of direct and indirect suppliers. The bargaining power of suppliers is moderate with respect to food items (vegetables, chicken, bread etc.). Both rely on each other for their profitable existence. Due to quality requirements (infrastructure requirements, support systems, Hi-tech refrigeration systems etc.), any QSR chain has a relatively

Strategic Management

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small pool of suppliers. So whenever few suppliers withdraw supply, it can affect the chain in short term though not acutely in medium to long term. E-procurement system aids the industry to invite bids from various suppliers and hence maintain a network of suppliers. There are many suppliers who can replace existing suppliers. Hence overall, the power of suppliers is moderate with respect to any QSRs supply chain of vegetables and chicken. However, soft drinks market is dominated by very few players like coke and Pepsi. Due to unavailability of many substitutes, bargaining power of soft drink provider (coke) is relatively high with respect to QSRs. Therefore, QSRs have launched various drinks in its menu to hedge off the high reliance on soft drink firm. QSRs charge soft drink prices to extensive mark-up to what it pays to soft drink providers. Hence, profit margin of QSRs rests in negotiation with food suppliers as they rely on their respective organisations a lot for their profitable existence. E-procurement system helps in reducing costs by 85% according to QSRs.

Bargaining power of buyers- Low The bargaining power of buyers is low in case of QSRs even though the switching cost for customers is zero in case of the fast food industry. The reason being the large number of customers reliant on fast food for their daily consumption. In US alone, almost 25% population is dependent on fast food. In India, approximately 3.5 lakhs customers are served every day while in UK 3.8 million customers are served. The industry in India is worth Rs. 11 billion and growing at a rate of 20-25 percent annually. Fast food chains do not rely on customer loyalty for their survival. Rather they focus on advertising to lure large masses. Hence, buyers dont exercise much bargaining power over QSRs. Also, QSRs offer various different meals at differential pricing to attract consumers of different income group. This helps in creating large pool of customers. Low bargaining power of buyers enable QSRs to mark-up its price to generate profits. The general rate it charges for coke is $1 in US, gaining whopping profit of ~90% on coke sales. Rates charged by QSRs cover most of its cost on food items and is sustainable for survival owing to large number of customer base around the world. Had the bargaining power of buyers been large then it would have become very difficult for QSRs to sustain its heavy investment in infrastructure and quality control expenditure.

Strategic Management

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4> VRIO analysis of McDonalds


VRIO (Value, Rarity, Inimitability and Organization) framework is used to analyse capabilities and resources of a firm.

Capabilities and Resources of McDonalds


1) Current worldwide infrastructure McDonalds serves around 68 million customers daily in 118 countries through its more than 34000 outlets (From Table 1). Other infrastructure includes local management centres and quality assurance centres worldwide. Worldwide infrastructure of McDonalds definitely provides a value to the company, giving it access to huge populations across geographies. Quality assurance centres provide value by enabling McDonalds to provide best quality food, which is one of the value proposition being provided by McDonalds to its customers. So infrastructure is definitely a valuable resource for McDonald. Not many fast-food chains can match McDonalds in number of outlets and number of countries McDonalds serves (Only Subway has more number of outlets than McDonalds worldwide). So this is a rare resource for McDonalds. Though quality assurance centre is not a rare resource for McDonalds as most fast-food chains have quality assurance centre. Though infrastructure is valuable and rare resource for McDonalds, it is not inimitable as any fast food chain can open as many outlets or more as McDonalds. Many of outlets of McDonalds worldwide are franchisee stores and thus this type of ownership structure is good for large number of outlets. Its organization structure be at store level or macro level supports this large number of outlets.

Value

Rare

Inimitable

Organization

2) Strong brand name and marketing McDonalds is a very strong brand name with huge brand value much higher than any of its competitors (From Table 2). McDonalds through its marketing campaigns always try to strengthen this brand name. Its brand name combined with its marketing capabilities form an important resource for McDonalds. McDonalds is a very strong brand name enough to drive people to avail its services. This intangible resource adds huge value to the company and it is big strength that McDonalds leverage to gain competitive advantages in both existing and new markets. All its major competitors also have strong brand names and aggressive marketing campaigns to maintain brand image. So a big brand name and marketing capabilities are not a rare resources.

Value

Rare

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Inimitable

Brand name and marketing capabilities not being rare are always inimitable resources as each company have a specific brand name and a different marketing campaign to address its target customers and to convey values which cannot be imitated. So McDonalds brand name and marketing capabilities are valuable and inimitable but not rare resources. McDonald as an organization always works towards keeping up the big brand name. It has a very organized structure mainly at macro level to make use of this brand name and maintain this brand name as a valuable resource.

Organization

3) Best quality at low price McDonalds main value proposition to customers is that it provides best quality at a low price. This value proposition has helped McDonalds to grow in different countries over the years. McDonalds is able to fulfil this commitment towards customers because of its strong supply chain which McDonalds has developed over the years. McDonalds provide education to its suppliers of vegetables and other materials so that they can supply best quality raw material. The quality McDonalds provides at low prices (Aloo tikki burger at McDonalds costs Rs 25 and Veg Zinger at KFC costs Rs 100) is a valuable capability of McDonalds which has helped it create a competitive advantage worldwide and which has made it the World-Number-One fast-food joint. This value is sustained because of its highly dedicated supply chain which includes farmers whom McDonalds teach so as to get best quality raw material. Its dedicated supply chain makes this capability a rare capability for McDonalds as not many companies local or global can supply quality given by McDonalds at such low prices. Also supply chain structure of McDonalds is also rare which has provided McDonalds with this rare capability. Though supply chain structure of McDonalds is rare but is imitable and so is the capability being provided by this structure. Therefore providing best quality at low price is a rare and valuable capability but not inimitable. Organization at McDonalds is well equipped to provide best quality at low price. Suppliers are trained as a part of the organization to procure best quality raw materials. Also structure of organization enables it to work effectively to increase its efficiency with minimum wastage which helps in price cutting and thus providing food at low price.

Value

Rare

Inimitable

Organization

4) Innovation and service time McDonalds are known for their quick service and customized menu for different countries. For example: they have McAloo Tikki just for India. They have very quick service time of 188.83 seconds for drive-thru (From Table 3) which is comparable to any other close competitors (Burger King has 201.33 seconds). As McDonalds provide customized menu suitable to a country and when it is coupled with a free quick service time, provides a competitive advantage to McDonalds and is a big strength, which has played its part in making McDonalds leading fast-food chain worldwide.

Value

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Rare

Other competitors also customize their menu as per local needs and try to reduce service time to win over customers so this is not a rare capability for McDonalds. (KFC has introduced rice meal in India to meet local needs). As already many other competitors are doing this and as it is not a rare capability, it makes this an imitable capability which can easily be used by any other chain by introducing a variant similar to what McDonalds provide and using similar delivery system to imitate quick service time of McDonalds. Though customization, innovation and quick service time are not rare and inimitable, it is the ability of organization to able to deliver this value that makes McDonalds a stand-out in this capability. Organization structure of McDonalds is such that it allows McDonalds to provide customized menu in different countries. Also employee structure at local structure is what has helped McDonalds to reduce its service time very efficiently.

Inimitable

Organization

Impact of Capabilities and Resources on profitability Ownership structure of McDonalds has large percentage of outlets as franchisee which had once resulted in stagnant profit for McDonalds. But then McDonalds started spending on infrastructure worldwide (that included decoration, etc.) which resulted in growing profits for McDonalds again. So infrastructure as strength has helped in pushing McDonalds towards profitability. Strong brand name has helped McDonalds in luring customers towards it outlets which is been helped by strong marketing campaigns and this also has overall increased its profitability. Providing best quality food at low price in quick time and customizing menu according to local needs have been corner-stone of strategy of McDonalds for years and this is what have helped McDonalds in becoming such a huge brand and number one fast-food chain in world and thus, have definitely helped the profitability.

5> Analysis of Overall Business Strategy : Positives and Shortcomings


McDonalds is the Industry Leader in the fast food sector and it has reached this position through some really successful and innovative strategies some of which are as follows:1. Inbound Logistics : McDonalds has high-quality suppliers and it has also undergone backward vertical-integration in many places to reduce costs and ensure quality. Its E-Procurement system ensures an extremely efficient Supply Chain Management. 2. Operational Efficiency : It uses the speedee kitchen (automated and regularised processes) and mass production methods for proper inventory management and quick service. 3. Cost Efficiency : McDonalds goes for bulk-purchases, which reduces raw material costs. It also focusses on waste management and energy conservation to boost its profitability. 4. Predatory Marketing to Kids : McDonalds uses its CSR initiatives like Mc-Spell-It Competitions and Ronald-McDonald-RoadShows to target kids and sell more of its fast food to them. [6] [7] 5. Special Services : It provides complimentary free Wi-Fi with meals to enable customers to work from McDonalds premises and may be buy some extra stuff during that time. It also provides Arch cards and McDonalds Gift Certificates that people can give to others. [8]

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Just like any other company, McDonalds too has some shortcomings which are analysed below along with suggestions for overcoming them:Shortcomings Suggestions for improvement 1. Overdependence on suppliers: To reduce dependance on suppliers, McDonalds has a limited no. of suppliers because McDonalds should look at vertical integration of its stringent specifications and quality by means of strategic acquisitions. If done requirements. properly, McDonalds may even be able to reduce costs and increase revenues. 2. Lack of healthy snacks: With the consumer mindset shifting and health being an important consideration in the minds of the consumers, McDonalds has been slow to adapt to this change. McDonalds is not perceived as a healthy place to snack and the health conscious consumers are seen flocking towards Subway. 3. Limited offerings: In its efforts to maintain a lean supply chain, McDonalds has created a very limited menu in its fast food joints. The dessert offerings are also very poor. McDonalds has recently started providing the nutritional information for its various products. It should also develop snacks which are healthy and can stop customers from looking for alternatives.

McDonalds provides a local menu to cater to the local needs. However, since these menus are very limited, they are not able to bring back customers repeatedly. McDonalds can look into expanding its menu and bring in a few items from its international menus which may act as delicacies. McDonalds should try to leverage social media to the fullest. Active accounts on Facebook and Twitter would be a great driver of sales and reduce people from deflecting to rival brands. Engaging the people through contests and promotions would enable to capture a greater mind share of the people.

4. Lack of social presence: With the rise of social media, McDonalds has not been able to leverage it to its fullest. Competitors like Pizza Hut and Dominos have used social media effectively to drive sales.

6> Limitations of the Study


In this study, we have not delved deep into the financial management strategies and corporate finance methods used by McDonalds. Due to limit on the number of words, we have not been able to explain in detail how McDonalds achieves its Cost Leadership and Operational Efficiency. We have also not focussed on the individual country level strategies adopted at different places, but tried to analyse the broad international strategy for the organization.

7> Conclusion
As the markets in the developed nations move towards saturation, McDonalds has to try and make greater inroads into the developing markets and snatch a larger chunk of the business from the unorganised sector. The organisation needs to leverage the social media better and focus on creation of differentiated and healthier menus to attract greater masses to its fast-food centres.

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8> References
[1] http://www.globalthen.com/qsr/pdf/Indian%20Fast%20Food%20Industry.pdf [2] http://www.ibef.org/brand-india/conversations/the-rise-of-qsr-chains-in-india.aspx [3] http://www.mcdonaldsindia.net/PressRelease/McDonalds%20india%20(North%20%20East)%20%20Media%20Fact%20Book_February_2013.pdf [4] http://www.iimahd.ernet.in/assets/snippets/workingpaperpdf/19750668122012-06-07.pdf [5] http://www.sba.gov/community/blogs/community-blogs/small-business-matters/7-tips-startingfast-food-business-its-not-ju [6] http://www.theinternetchef.biz/4121/8-under-handed-ways-mcdonalds-markets-to-your-kids [7] http://corpgov.net/2013/05/for-mothers-day-tell-mcdonalds-mcd-to-stop-predatory-marketingto-kids/ [8] http://www.mcdonalds.com/us/en/services.html