Mcdonalds Paper for Economic
Transcript of Mcdonalds Paper for Economic
McDonald’s 1
Running Head: McDonald’s
Advantages and Disadvantages of McDonald’s Global Strategy
Jessica Haynes
Kunyuan Yang
Md. Rashedul Rabin
Andrew Story
Southern Arkansas University
Global Fast Food Market Value: $ Billion (Source: Datamonitor)
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2005 2006 2007 2008 2009
% Growth
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Company Overview
According to Datamonitor, a leading business information company specializing in
industry analysis, the global fast food market as of 2008 was valued at $154.7 billion with a
growth rate of 6.6%. (Datamonitor, 2009).
Global Fast Food Market Value: $ billion, 2005-2009 Source: Datamonitor
Year $ billion % Growth
2005 166.6 5.2
2006 175.3 6.0
2007 185.9 4.9
2008 194.9 3.1
2009 201.1 4.8
Global Fast Food Market Value: $ Billion (Source: Datamonitor)
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2005 2006 2007 2008 2009
$ billion
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McDonald’s is one of the largest fast food service retailing chain in the world. Their global
business is segmented into four geographical categories: Europe, the U.S., APMEA (Asia,
Pacific, Middle East, and Africa) and other countries. The “other countries” category comprises
Canada and Latin America. As of 2010, McDonald’s operated over 32,000 restaurants in over
100 countries, 17,000 of which were located outside the United States (Nation’s Restaurant
News [NRS], 2005). McDonald’s revenue includes sales from company operated restaurants and
franchise fees (Datamonitor, 2009). Of the company’s restaurants, 6,500 are operated by the
company and over 25,400 are operated by franchisees. McDonald’s revenue for the 2009
financial year was $22,745 million. McDonald’s net income totaled $4,551 million
(Datamonitor, 2010).
McDonald’s Corporation: Key Financials ($) Source: Datamonitor
$ Million 2005 2006 2007 2008 2009
Revenues 19,117.3 20,895.2 22,786.6 23,522.0 22,744.7
Net Income 2,602.2 3,544.2 2,395.1 4,313.0 4,551.0
Total Assets 29,988.8 28,974.5 29,391.7 28,462.0 30,224.9
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Total
Liabilities
14,842.7 13,516.2 14,111.9 15,079.0 16,191.0
Employees 447,000 465,000 390,000 400,000 400,000
McDonald’s largest geographical market is Europe. This segment accounted for 41% of the total
revenues for the year 2009, or $9,273.8 million. The United States accounted for 35% of the total
revenues for the year 2009, or $7,944 million. APMEA accounted for 19% of the total revenues
for the year 2009, $4,337 million. Canada and Latin America (“other countries” accounted for
5% of the revenues for 2009, or $1,190 million.
International Analysis
There are many advantages and disadvantages to conducting business in international
markets. Since 1955, the fast food pioneer, McDonald’s, has experienced both the positive and
negative attributes from adopting a global strategy.
Advantages of Global Strategy
The main advantage of a global strategy is a company’s ability to expand beyond its
borders into growing countries. This approach is the primary source for McDonald’s growth and
profitability, as indicated by the majority of their restaurants being located internationally.
According to Fortune Magazine, “McDonald’s worldwide operations are now far bigger than its
U.S. domestic business, and they are growing substantially faster” (Gumbel, 2008). McDonald’s
Corporation depends on their international markets to be their “principal revenue engine”
(Gumbel, 2008). In fact, “Europe overtook the U.S. as McDonald’s biggest source of revenue in
2004” and accounted for 40% of the company’s total revenue of $22 billion (Gumbel, 2008).
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While revenues in the U.S. grew only a slim 6%, revenue figures in Europe and Asia Pacific
grew more than double. Of the European segment, Russia holds much opportunity for expansion.
In fact, the company has opened over 100 stores in the past few years (NRS, 2005). According to
Glen Steeves, a European Executive for McDonald’s Corporation, “Russia is a market that has
been doing extremely well. It has a strong currency, and it’s among the fastest growing nations in
the region” (NRS, 2005, pg. 55). McDonald’s APMEA segment plans to target China and
Malaysia for expansion. As of 2005, McDonald’s operated in more than 100 cities in China and
had plans to open 500 more stores by 2010. Growth in the Middle East has also continued
despite conflicts, due to local ownership of restaurants and employment of local workers.
McDonald’s has also expanded in Latin America through the installation of over 100 McCafe
stores, a coffee and dessert café that was originated in Australia.
Another advantage of conducting business in international markets is the benefits derived
from having a diversified portfolio. This allows McDonald’s to avoid dependency on the U.S.
economy and weather economy fluctuations in any country. A diversified portfolio also allows
the company to spread risk across many countries. By investing in only one country or region,
the slightest currency fluctuation or conflicts of war and politics could cause the company to go
out of business.
Brand recognition is also a positive aspect gained from conducting business in the
international marketplace. According to CoreBrand, a consulting firm that measures brand
equity, “Starbuck’s, McDonald’s and Wendy’s are food service leaders not only by virtue of
their size and their sales, but because consumers recognize their corporate identities as readily as
their products” (Cebrzynski, 2006). According to a survey conducted by CoreBrand,
McDonald’s brand equity as percentage of overall market capitalization was 18.7 percent out of
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a possible 20 percent. In the restaurant category, “brand equity as a percentage of market
capitalization was an average 12.82 percent” (Cebrzynski, 2006). This shows the McDonald’s
overall market capitalization is much higher than the industry average. The survey then
determined McDonald’s brand strength by measuring familiarly and favorability. McDonald’s
ranked 95 on a scale of 100 for familiarity and 72 for favorability. These numbers are then
converted to a dollar value to determine the monetary worth attached to the company’s brand.
CoreBrand estimated McDonald’s brand value at 7.44 billion. McDonald’s successful brand
recognition and value is attributed to their international strategy. The McDonald’s golden arches
are one of the most recognizable icons in the United States and even the world. According to
studies, Ronald McDonald is the second most recognizable figure in the world, second to Santa
Claus. McDonald’s global strategy has enhanced their brand recognition at an international level.
As more restaurants are opened and more markets are penetrated, the McDonald’s brand will be
exposed to thousands of more consumers on a daily basis. This will continue to increase the
brand’s familiarity and allow the McDonald’s brand to remain the company’s most valuable
asset.
Another advantage of employing a global strategy is economies of scale. R.J. Hottovy, an
analyst at Morningstar, believes that an economy of scale has allowed McDonald’s to be the low
cost leader, ultimately outperforming the competition (Spain, 2009). Because McDonald’s output
is so large, economies of scale grants large companies like McDonald’s the ability to purchase
inputs at a discounted price. Because McDonald’s has a relatively uniform menu, they can use
bargaining power to reduce the price they purchase food from at suppliers. McDonald’s strategy
to maintain a relatively homogenous product, yet tailored to specific regions, allows them to
standardize their food production and in the end sell their products for a lower price.
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Another advantage to McDonald’s international strategy is the ability of restaurants in
different countries and regions to share product ideas. An example of this is the Big Tasty
(Gumbel, 2008). The Big Tasty sandwich was not invented at corporate headquarters; however,
once outlets saw the success of the item, they too included it in their menu offerings. Now the
Big Tasty is offered in Saudi Arabia, Croatia, Germany, Norway, Poland, and Brazil. Peter Bush,
president of McDonald’s Australia, “says the process at McDonald’s is the opposite of the ‘not
invented here’ syndrome, which rejects ideas from outside” (Gumbel, 2008). He said, “There’s a
willingness of managers to steal the best ideas unashamedly” (Gumbel, 2008). This undoubtedly
provides McDonald’s with a competitive advantage over regional and domestic fast food chains.
McDonald’s is known for their management development programs. They believe that
having the best people allows them to have the best possible business results. For the past eight
years the company increased their focus and investment into talent management. Hamburger
University and the McDonald’s Leadership Institute are their main avenues for management
development. These programs are instituted not only in the United States but globally. Classes
taken at Hamburger University earn college credit that may be applied towards a degree. They
are the only restaurant with a program of this magnitude (McDonalds, 2010). The company also
uses the transfer of current staff to further career development. Dennis Hennequin is the
president of McDonald’s Europe. He moved to the president position after being in charge of
operation in France for eight years. Many of their CEO’s have been promoted from within the
company and not imported from outside. Jim Skinner, current CEO, had international experience
in Europe before placement as CEO (Gumbel, 2008). Taking from the talent within the company
allows for positions to be filled in a timely manner. It is easier for them to transfer a competent
employee from one area to another. This takes away time that would be required to train a new
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employee. International assignments give employees experience and allow current management
the ability to develop (Mujtaba and Patel, 2007).
The competition in the global market is limited. Other companies that compete directly
against McDonald’s in the United States do not have that strong of a presence in foreign markets.
During the recent recession, McDonald’s was able to outperform their competition. Restaurants
like Arby’s, Burger King, and Wendy’s saw losses in their stock price. McDonald’s draws power
from having over 57% of their operations outside the United States. Arby’s and Wendy’s are
almost exclusive to the United States while Burger King maintains 40% of its operations outside
the United States (Steverman, 2010).
International companies are able to benefit from cultural diversity. The current
management of McDonald’s is heavier on the American side. However, the company has more
diversity in management than ever. The company believes that with this diversity they have
become more successful. This allows them to be open to ideas from other countries that could
benefit operations in another (Gumbel, 2008).
McDonald’s is one of the most successful companies, not only in the United States, but
also in the global market. Their success can be based in their extensive research. The company
researches market strategies before entering a new country. This research is based on their
mantra of “think global, act local” or “glocal”. The company researches the society, culture,
technology available, political climate, and economy. This advanced research allows them to
achieve success in opening new restaurants. Through extensive research McDonald’s was able to
open in India. This country is very hard for international companies to enter as their government
seeks to protect the domestic businesses. The establishment of local management is another
success strategy. When the immediate management is made of locals, governments and residents
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are more accepting of the new establishment. The company remains sensitive to the political
climate where a restaurant will be placed. Not only should the management have a local sense
but the employees must be local. Many international companies may be reluctant to immediately
hire locals, but McDonald’s has found that it works for the best. Also, for example in India, they
outsource to other companies. With this outsourcing of production they help maintain a larger
workforce. To achieve and maintain a positive reputation, McDonald’s attempts to establish
services that are environmentally friendly. An example is how they give back to the local
community. The company will sponsor events and give donations. The donations to local
organizations within the community also build corporate citizenship. This also brings a positive
return as it encourages people to eat at their local McDonald’s. Also, they try to keep their
pricing in accordance with the local market. The price of a Big Mac varies by country. For
example the price of a Big Mac is the highest in Switzerland at $4.93 and the lowest in China at
$1.30. A restaurant is located where they think the most people that can afford McDonald’s will
come. Their strategy is to attract the middle and upper class citizens. However, in the United
States their popularity is among the lower, middle and upper middle class (Mujtaba and Patel,
2007).
McDonald’s is able to tailor marketing strategies to benefit different regions based on the
culture and national variations. The company began global expansion in 1967 with the opening
of the first Canadian McDonald’s. Within a few years they reached into the United Kingdom and
Japan. The United States features the “Dollar Menu”, but many other countries have a specially
priced menu. New ideas are always in development. For example, a Mediterranean inspired
Pitamac. The Pitamac, a piece of pita bread filled with spiced beef, grilled vegetables, or
chicken, is something that would go onto European menus. Their design studios create models
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for stores in other countries as well as ways to remodel existing restaurants. By breaking the
globe into regions, regional presidents are able to ensure that their region is properly served.
APMEA is their acronym for the regions of Asia, Pacific, Middle East, and Africa. A popular
choice in the Middle East is the McArabia, a folded tortilla sandwich filled with spicy beef. Due
to the popularity of fried chicken wings in Asia, many McDonald’s sell them. Fried Yucca sticks
in place of French fries are available in Venezuela. In Mexico, a popular breakfast platter
includes an egg, rice, beans, and chorizo. In Canada deli sandwiches are available. Also, the
McLobster is offered during the summer months. In the province of Quebec, Potine is sold on the
menu. This is an item that is only offered in Quebec due to their French heritage. Potine is an
order of French fries covered in gravy and cheese curds (Nation’s Restaurant News, 2005).
The picture on the left contains several regional specialties. The picture on the right is of the
McLobster available in Canada.
Disadvantages
There are many disadvantages that McDonald’s Corporation faces by employing a global
strategy. It is not at all an easy task to do business outside the national boundary. McDonald’s
faces many obstacles while expands its business beyond the U.S. borders. It had to implement
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several changes in its business strategies. These changes range from adjustment in food menu to
change in hiring practice.
McDonald’s opened its first restaurant in Norway in the capital city Oslo on November
18, 1983. In Norway, McDonald had to struggle while building a Ronald McDonald House. The
resistance was mostly by the political parties, doctors, and academics. The reason behind this
might be the priority of the health sector. In Norway, the health sector gets the utmost priority.
Again local activist group also contested against McDonald because they thought it served
unhealthy food. To some extent, local people used to think the food served by McDonald’s was
contributing to an overweight youth population. The image of McDonald’s was associated with
overweight children, and poor exercise habits. There is also another issue regarding advertising
which McDonald has to bear. Protecting young children from the pressures of commercial
messages is a role of the Norwegian government and a special part of Norwegian identity.
McDonald was advertising its happy meal product with an appeal to children and the Ronald
McDonald’s character is directly linked to children. The firm is not permitted to advertise
directly to children in the media, including their webpage. (Bronn, 2006)
In some of the countries like India, McDonald’s had to adjust their food menu. On one
side there exists a huge Hindu population who does not eat beef and on the other hand Muslim
people do not eat pork. This was a huge dilemma for McDonald’s because many of their meals
are made of beef and pork. Therefore, instead of supplying the normal Big Mac, which consists
of beef, the company developed the Maharaja Mac that is made of two lamb patties. Other foods
were also added to the non-standardized menu including McAloo Tiki Burger, and other
common Indian dishes. (Mujtaba, 2007)
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McDonald’s also faced issues regarding environmental aspects. In 2006, an
environmental group named Greenpeace protested against the company. It claimed that the
company is using soybeans from illegally deforested areas of the Amazon rain forest.
One of the critical problems of conducting business outside the country is human
resource problems. Labor laws vary from country to country. Therefore, it is difficult to have
standard global rules and procedures. The most significant difference between domestic and
international human resource management (HRM) seems to be that there far more variables to
consider when conducting human resource audits and training on an international scale, making
it more complex than domestic execution. With domestic HRM there is a common standard
practice that most companies are familiar with, whereas with international HRM, there are a
variety of different laws and business practices that international companies have to consider.
Factors such as language translation services, international taxation, international relocation and
orientation as well as host-government relations to name a few, are an integral part of successful
international HRM. Steps must be taken to ensure international employees satisfy their tax
requirements for their host country in addition to their home country, which differs according to
each country’s specific tax laws. Employers also need to address host-government relations and
relocation/orientation issues to ensure that international employees comply with immigration
requirements, obtaining work permits as well as housing, expatriate training and medical
provisions. (Mujtaba, 2007)
In India, McDonalds had to face challenges regarding hiring. India is one of the toughest
markets to enter for foreign businesses, due to the governmental hardships imposed upon by the
Indian government. Indian Governments want to protect domestic businesses and that is why it
put excess regulations. One of the regulations was that only locals could be hired for employees
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and management. McDonald’s was forced to comply with this law, and was not allowed to
transfer a manager from another countries flagship. This caused much difficulty trying to train
and develop talent that had never experienced the “McDonald’s Way” before.
Furthermore, McDonald’s has faced much opposition from country leaders as well. In
October 2002, a five day meeting was held in Netherland and Belgium. It was against the labor
practices of McDonald’s. In that meeting 11 countries participated to show protest against
McDonald’s labor practice. Throughout Europe, McDonald’s was symbolized as a Global threat
to the union rights. (Ghigliani, 2005)
McDonald’s is the world’s largest restaurant chain. However, KFC is almost the most
popular fast food chains in China, operating more than 2,100 locations in 450 cities,
(http://zhidao.baidu.com/question/57155103.html). KFC in China also produces hamburgers and
sandwiches that are a bit different from the United States. Surprisingly, McDonald’s is not nearly
as successful, with only about half the number of restaurants. However, in the United States this
is reversed, where McDonald’s is often considered to be number one while KFC trails behind.
There are three reasons why the Chinese prefer KFC over McDonald’s. One reason is that KFC
caters better to Chinese flavor than McDonald’s does. For example, KFC’s menu includes
Traditional Peking Chicken Rolls, Happy French Fry Shakes (with beef, orange and Uygur
barbecue spices), Preserved Sichuan Pickle and Shredded Pork Soup. For breakfast, KFC’s menu
includes different kinds of Chinese-style congee, and even rice. McDonald’s caters its menu to
international tastes, but not to the same scale in China. Second, KFC made a marketing campaign
which made some Chinese believe that KFC offers healthy food. It’s called “new fast food”.
Third, KFC has better coupons than McDonald’s. The coupons are considered so great that
Chinese holding KFC coupons are often mobbed.
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(http://www.dmjck.cn/plyz/1053511/)
Another disadvantage of a global strategy is the differing labor laws between countries.
McDonald’s hires a great deal of part-time employees. This causes violations in China’s labor
laws. McDonald’s also violated the law of China by paying less than minimum wage, making
workers work more hours than allowed and not offering insurance .In Guangzhou, McDonald's
provides their part-time employees a salary of 4 yuan/hour,. This obviously violates the part-time
minimum wage standard which is 7.5 yuan/hour.
Province/City Salary (yuan/hour)
Guangzhou 4
Shenzhen 5.6
Beijing 6.5
Shanghai 6
In McDonald’s labor contract, “the labor’s first 30 days are a probation period” (McDonald’s
part-time labor contract of China). According to the Part- Time Labor Security Ministry, labor
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can not be stipulated for a probation period. So, in this contract, a required probationary period is
against the law. Also, McDonald’s labor contract does not explicitly stipulate that the enterprise
will pay the injury insurance for part-time employees. According to relevant regulations,
“enterprise doesn’t need to pay the basic endowment insurance and insurance premium, but
injury insurance should unconditionally be paid by the enterprise who employed the worker”
(Chinese Labor Law). Therefore, this policy also violates China’s labor laws.
Conclusion
McDonald’s has relished in the advantages and struggled with the disadvantages
associated with doing business across domestic borders. Despite the many obstacles that
McDonald’s has faced over the years by doing business internationally, their continuous
expansion is all the proof one needs to confirm that McDonald’s global strategy is a success.
With revenues reaching over 22 million dollars per year, McDonald’s is envied by fast food
chains everywhere. As they continue to expand into more countries and penetrate deeper into
current regions, McDonald’s will continue to reap the benefits and experience the drawbacks of
their “glocal” strategy.
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