Possible problems faced by McDonalds when opening a new business

McDonald’s success can be attributed to their ability to adapt their business to the diverse culture and fast pace of city life by providing quality fast food in a short period of time. Their restaurants are generally comfortable, clean and provide a variety of choices on their fast food menu. The quality of food is generally consistent and prices are low worldwide. This keeps production costs down enabling them to generate higher turnover every year.

Furthermore, “McDonalds expanded aggressively, opting to franchise rather than operate its new locations, providing new income and little overheads.” They managed to provide a product and service to the global middle class, “particularly in emerging markets like China, India, and Latin America.” This gave McDonald’s a massive advantage and great opportunity.

By inducing the idea of going global, Kroc managed to attract the fast food market, using Franchised Restaurants, Company Operated Restaurants, and Affiliated Restaurants. To attract the local market Ray introduced a concept of localising the products, so that they will cater to all verities of the local craving. This approach increased the revenue as well as the stability of the company.

Kroc’s strategy of making partnerships with other businesses created huge success to the company. Going in the same successful path, current management has made partnerships with companies such as Wall-mart, Sinopec, and Wall Disney to reach more customers.

McDonald’s needs to adapt to different cultures and conditions when it sets up business in different parts of the world.

What problems might McDonald’s encounter when it opens outlets in:

2.1 Countries in Eastern Europe?

Eastern Europe constitutes an emerging market for most businesses. The collapse of socialism in the region in 1989 facilitated the move of countries to prepare for the participation in the capitalist market. In 1999, most Eastern European countries were working to meet the requirements for the European Community. In 2004, Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Slovenia and Slovakia became members of the European Union.

Membership of a number of European countries in the EU prompted the flow of foreign investments into the country, increasing household income, increasing investment into the region primarily due to cheap labour compared to wages in Western Europe.

There was a general trend towards the improvement of the standard of living of citizens of Eastern European countries. However, in the last two years, most Eastern European countries experienced slowed growth due to the increase in the wages of workers that discouraged investments. Nonetheless, wages are still more competitive in Eastern Europe compared to other regions in Europe. Most Eastern European countries are still in the process of completing their transformation from a controlled to a capitalist Economy. Full transition and the stability of the political and economic institutions are expected to boost economic development in these countries. Assessing the potential of a new market for expansion requires the consideration of several factors providing a comprehensive background of the environment that the expanding business firm expect to enter into.

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In the past unrest created an environment of uncertainty for investors. Products would have to be sourced from nearby countries creating an increase in transportation and labour costs. EU currencies did not have strong buying power, so profit earned would not be enough to sustain the operating costs of the businesses in that region. Consumption volatility could also have an effect on sales on the eastern region due to the rapid increase in income resulting in a change in consumer behaviour.

Employment and wage volatility are important factors in deciding to enter a new market because minimal employment and wage volatility translates to regular income for households influencing the stability of consumption resulting to sales and revenue for business firms. The economic condition of the state affects the financial condition of consumers and their ability to purchase the goods and services offered by entering business firms.

Although there is a general trend for consumption, employment and wage volatility among European countries, introducing McDonalds into the region is viable for the following reasons: First, McDonalds will develop a market by providing technological, management and marketing expertise to local entrepreneurs enabling them to establish a known restaurant in different areas that creates jobs translating into income to households due to the hiring of local employees and the purchasing of raw materials from the local farmers and businesses.

2.2 Countries in West Asia?

If McDonald’s was to open a new outlet in one of the West Asian countries, it would have to take a few things into consideration. McDonald’s would experience resistance from the Islamic countries for selling American food and culture. Also, Muslims do not eat pork so McDonald’s would have to source Halal suppliers and adjust their menu variety to accommodate them. McDonald’s has modified its products to cater for local tastes, not least in countries that have special dietary laws. In Muslim countries like Malaysia, bacon is not served in McDonald’s burgers or in its breakfast menu, as pork is haraam, or not permissible under Islamic dietary law. In Israel, the nature of kosher dietary laws, forbidding the mixture of meat and dairy products, means that cheeseburgers are not popular among Jewish customers; furthermore, all meat not prepared in a certain manner is considered unkosher by strict observers of the dietary laws. (Spiritus-temporis.com, 2005)

2.3 Countries in Africa?

In Africa McDonald’s may face various problems when trying to open up new ventures in countries like Ethiopia, Sudan and Zimbabwe. Ethiopia borders Sudan and Kenya and it is one of the largest and poorest countries in Africa. Its population consists of about 74 million people. Two major religious groups occupy Ethiopia, Muslim and Ethiopian Orthodox, with Muslim being the majority. Unfortunately Ethiopia suffers some the world’s worst droughts in history, which in turn destroys their economy. Agriculture produces 60% of exports, and 80% of total employment for the country.

In order to develop a McDonalds in Ethiopia, many major factors such as location analysis, market, competition, facilities style, and menu must be considered. McDonalds already has great marketing programs and strategies in place in other foreign markets so the corporation can help with those variables.

Most cultures in Ethiopia will allow consumption of red meat such as hamburgers but not of pork. The bacon used for breakfast and on certain sandwiches can be available but also substitutable with turkey bacon. The Ethiopian culture also doesn’t use utensils so they will also be available but optional.

Zimbabwe is another country that is filled with Political and financial turmoil over the past few years. McDonald’s had indicated its interest in Zimbabwe in 1997 and wanted to open a franchise in the country in 1999 but a political storm that year, which later precipitated an unprecedented crisis that saw inflation levels soaring to record highs, forced the fast foods giant to retreat. (bizcommunity.com, 2011)

Globalisation is the integration of markets and technology to a degree never witnessed before in a way that it enables individuals, corporations and nation states to reach around the world farther, faster, deeper and cheaper than ever before. Globalisation affects the whole world in ways that may benefit some while disregarding others. Global corporations, such as McDonalds manipulate their advertising to persuade a target audience to purchase and support what I believe to be an unhealthy scheme. Not only has McDonalds changed the way people view the world, but through negative impacts such as health issues, it has also manipulated the everyday life of individuals living in a global community. The façade of healthy eating posed by McDonalds is epitomised through a short TV advertisement displaying the disturbing outcomes due to reliance on quick, easy and convenient food that people pay for, not only with their wallet, but also their health.

Globalisation is the outcome of mixing the concepts of localisation and globalisation-as a portmanteau, it is the coming together of the two terms in a manner which suggests that there should be a way for businesses and people to “think globally, act locally” (Egan, 2007). In practice, this generates business strategies and manners of communication which seek to find innovative ways to blend together the use of a global communication network and scale with the desire to maintain individual areas and cultures, by means of modifying large scale organisations to suit smaller populations (Schumacher, 1967). Consider, for example, McDonalds: as an organisation, it is an incredibly large company which has put branches in many areas and across several different countries. But as they have continued to grow, there has been an increase in resistance against such large scale corporate food chains, as they are seen to ruin the character of a neighbourhood and drain it of culture, as well as providing food which is perceived to be substandard and unhealthy. They have therefore had to modify their business practices so as to instil practices which are more welcoming to the local populations, for example by focusing on foodstuffs which are popular amongst the local neighbourhoods and providing healthier, more “upscale” types of foods on their menu (Towers, 2004).

Standardized and adapted approaches to communication are two dichotomous approaches to an advertising or marketing campaign which rely upon two very different methods and achieve differing results. A standardized approach to communication is based upon using the same marketing strategies and techniques regardless of where the campaign is being publicised. This would mean, for example, that the slogans and marketing materials are the same whether the global organisation is approaching a target audience in the United Kingdom or in India (DePalma 2004). A good example of this would be a company like McDonalds, whose campaign slogan “I’m lovin’ it” remains the same no matter what country it is in-the slogan may be translated out of English and into the local language, but the concept and execution remain the same. The campaign was first launched in Germany in September 2003 as “ich liebe es” and followed in the United Kingdom and the United States soon after with “I’m lovin’ it”. The benefits of a standardised marketing plan is that it is cost effective-as it does not require multiple marketing strategies to be drawn up and implemented-and that it helps to create a cohesive global branding concept (DePalma 2004). McDonalds, to continue the example, is easily recognisable the world over for the same branding concepts as any other country.

McDonalds has grown from an organisation which had a few branches in the United States to an international phenomenon that has stores in nearly every country in the world. Known for reasonably priced meals with fast food and service, they have pushed even harder to become both a recognisable brand that draws customers in on the strength of their name and brand, but also to adapt to local mores and traditions in such a way to incorporate themselves into neighbourhoods in a strong fashion (Azarya, 2004).

McDonalds has had a greater impetus to modify their business practices on a local scale as they are serving food products which are not always locally acceptable. In India, for example, where the Hindu religion prohibits the eating of beef, McDonalds has changed their menu to be primarily chicken and vegetable based, with several items being seasoned in similar ways to the local tradition (McDonalds India, 2010).

3.2 Explain why and how the entry stage of McDonald’s was different in China in comparison with the rest of the world.

McDonald’s made a foray into China in 1990. In China of the 90’s ancient belief systems rooted in Confucianism and Taoism were intermingling with Western ideologies, through the narrow window opened up by the Communist government at the helm. This was especially true with regards to thoughts on consumption, consumerism and brands. Although, the hurdles faced by McDonald’s in China, like lack of quality supplies and distribution difficulties, were very similar to the Russian experience, it found a more accommodating and efficient bureaucracy and government in the Chinese. The Chinese government wanted to develop its fast food market and wanted McDonald’s to take the risk in paving the way. Thus there was mutual interest involved and consequently, on the cultural acceptability front, McDonald did not have to labour as much as it had to in the Soviet Union where it had to stave off an ideological backlash before finding its feet.

The interactions between the McDonald brand (and all that it stood for), and the Chinese cultural value system, combined to provide a synergy that resulted in some interesting developments. While in some cases McDonald’s became an upholder of traditional values, while in other situations, McDonald’s became an appropriate medium for consumers to explore new beliefs and ways of acting. This apparent paradox epitomized the fact that Chinese society was making a transition and elements of McDonald’s value orientation were slowly being imbued by the Chinese masses. Two instances are cited to highlight this: –

McDonald’s made a departure from the hierarchical set up of the dining experience in traditional Chinese restaurants, based on considerations of age. In McDonald’s the seating arrangements were open, and everyone having equal access as to where to sit and what to order. In this case McDonald’s encouraged the Chinese to make a departure from tradition.

The lack of alcohol served in McDonald’s led some consumers, primarily Chinese women, to embrace being able to be on a more equal footing with men while eating. In this case McDonald’s upheld a traditional Chinese custom.

In retrospect, in Russia, McDonald’s has come a long way from the days of communism inspired anti-globalization backlash. Today, the McDonald’s brand is a sign of quality for Russians, so being seen to work for it or supply to it is a highly regarded stamp of cultural approval. By investing in a strong local supply chain and teaching local producers, McDonald’s has earned itself an almost unassailable position in the minds of the Soviet people who now view McDonald’s as an international brand, run by local people and supplied by local people. It is little wonder that there are as many as 137 McDonald’s restaurants in 37 cities with 500,000 customers a day. In a cultural milieu qualitatively different from that of the Americans, McDonald’s has done remarkably well in China over the last 15 years. Analyzed from the cultural perspective, today McDonald’s does not always denote Westernization in the minds of the Chinese consumers and the interactions are more subtle than that with the result that McDonald’s has absorbed elements of the traditional value system and the Chinese people have imbued elements of Western culture from McDonald’s producing a powerful synergy in the process. (answers.com, 2011)

QUESTION FOUR

Explain some of McDonald’s efforts to localize its offerings in China and describe how successful these efforts were. (operational issues) sourced local suppliers, employed local

The Chinese fast food market has been booming in the last decade because of fast changing lifestyles and eating habits. The reason for this evolution is that Chinese consumers have accepted the Western-style fast food restaurants as a way of life in China. As a result, the popular American food has become a huge success story, creating a growing market for U.S. frozen potatoes.

To position a product in a country, a good marketing strategy is needed. McDonald’s success in China is based on a five-point strategy focused on product, price, people, promotion and place. A new trend is the introduction of the sixth P, namely profit. McDonalds also tries to improve the profitability in China. (Edward B. Colby, 2006)

PRODUCT

McDonald’s product strategy consists of three categories. First they try to reflect the tastes and customs of the local markets by offering different kind of menus.

The Chicken McNuggets in China come with the traditional BBQ, Sweet & Sour, and Honey Mustard sauces, but there’s also a Chilli Garlic Sauce, which is very popular in China. (Answers.com, 2007) In 2001 McDonald’s Vegetable and Seafood Soup and Corn Soup were introduced. I think that these menu items were introduced because it was in line with their culture and love for foods with exotic taste. Clearly this proved to be a successful marketing strategy as it targeted the palatial needs of the Chinese people because of their ancient history and experimentation with different varieties of food.

Furthermore McDonald’s went on to introduce a local; version of its “Dollar Menu” calling it the “Value Menu.” This also proved a successful concept as most Chinese people are short, tiny in physique and very health conscious. The regular sized meals in the US and other parts of the world suited the BMI (Body Mass Index) height and weight of the average customer. Remember, Chinese people in general are not big eaters thus the reason for McDonald’s offering a smaller and cheaper variation of the original product.

Due to the urbanization and overpopulated cities, China has many problems with vehicles and parking. McDonald’s opened restaurants and dessert kiosks targeting pedestrians and the general working class.

Secondly, McDonalds also tries to provide information about their products. In cooperation with their global nutrition team, their local business units develop and implement nutrition information, which can be found on the packaging of the products. The packaging provides information on key nutritional values in a simple and clear format, so that customers around the world can use the information to make menu choices that suit their preferences. Also other communication tools are used, such as advertising both on television as on the World Wide Web to give information about the quality of their food products. (McDonald’s Corporation, 2007)

Thirdly McDonald’s promotes physical activity, for example their sponsorship of the Olympic Games. McDonald’s history with the Olympic Movement dates back to 1968. As the Worldwide Olympic Partner and the Official Restaurant of the Olympic Games, McDonalds has served millions of athletes. With the sponsoring of the Beijing Olympic Games in 2008 McDonald’s wants to continue to promote an Active Balanced Lifestyle and Olympic Spirit among Kids, Families and Adults of all ages. (Beijing 2008, 2007)

This strategy gained McDonald’s a lot of support and trust from the Chinese people as their campaign supported good health and physical activity.

PRICE

The conventional wisdom about China is that most consumers are highly sensitive to price. As a result, a decrease in burger prices is likely to be more effective than a big marketing campaign. To convince Chinese consumers coming to McDonald’s, McDonald’s lowered prices for its basic menu consisting of a hamburger, fries and drink from 12.50 Yuan to 10 Yuan. (Scott Hume, 2007)

Across China there are a lot of differences in purchasing power. Therefore McDonald’s China is also exploring menu pricing by taking into account both market and restaurant. (James A. Skinner, 2006)

PEOPLE

McDonald’s provides employment and growth opportunities for a lot of people, more than 1.5 million worldwide. Entering the Chinese market they can give many people the opportunity to operate in their restaurants.

They focus also on training and development, which is necessary to learn the required skills, to do their jobs well. McDonald’s has its own learning academy, namely the Hamburger University (HU), where a leadership development program is established based on Western management practices. (McDonald’s Corporation c, 2007)

PLACE

There are two important evolutions concerning this subject. First evolution is to open McDonald’s China 24 hours a day. Presently, more than 400 restaurants of the 800 restaurants in China have provided services for 24 hours a day. In Beijing 40% of the company’s stores open their business for 24 hours. In Shanghai 50% and in Guangzhou 60% have a 24-hour service.

The major reason for opening 24-hour restaurants is to meet the demand by the customers, because more and more customers need the services at night because of their changing living habits.

In Beijing customers actually weren’t eager for the night service due to the relatively cold weather there at night. This is different from the customers in the warmer southern China. (Answers.com)

The McDonald’s success story in China is quite evident as they opened their first “1000th McDonald’s restaurant faster than any other country outside the US and is the main focus for investment in the region…” They go one further to mention that they plan to have “…2000 outlets in China by 2013.” Clearly this is quite an achievement in country that is diverse and rich on different culture.

QUESTION FIVE

Discuss the challenges that McDonald’s faced when entering the Chinese market and to expand its operations. You need to use the Geert Hofstede’s model to compare China and the U.S. and then highlight cultural challenges that the U.S. managers must be aware of in managing McDonald’s operations in China)

McDonald’s difficulties and challenges in China

McDonald’s is considered as the most successful and largest restaurant chain in the world. In 1990 McDonald’s opened its first store in Shenzhen China. In 1992, McDonald’s Beijing outlet was opened. There are more than 800 McDonald’s outlets in China today. (answers.com, 2011)

In so far as the legal aspect was concerned, there were no franchise laws that existed in China. This posed a problem about how franchises should exist or operate.

Chinese people were “loyal to Chinese cuisine and felt that the fast food chains did not offer much variety to suit their palate. The Chinese preferred the traditional culture of food and drink complete with colour, fragrance, flavour, and variety.”

To make matters worse, they also “faced intense competition by its biggest rival Yum Brands i.e. KFC.” Not only did McDonald’s have the difficult task of adapting their business to the Chinese culture and way of life; they also had to fend off their competitors. This meant finding other ways to compete against them and attract customers by changing their product range, style and advertising.

Hofstede’s Cultural Dimensions: China and The United States:

One of the most popular works in the study of culture is that of Geert Hofstede’s (1984). Through his research and surveys he theorized that cultural and sociological differences between nations can be categorized and quantified, thereby allowing comparison of national cultures to take place. Hofstede’s identified four cultural dimensions. These are:

1. Power Distance

The dimension of power distance is about the extent to which power structures are hierarchical and reflect significant inequalities in power. Countries with large power distances exhibit wide inequalities in power, power that is often concentrated in relatively few hands in heavily centralized and hierarchical organizations. Individuals within such cultures view themselves as inherently unequal: subordinates are dependent on those higher up the hierarchy and accept the power of their superiors by virtue of their position in the hierarchy. All participants in the hierarchy expect their position within it to be clearly demarcated. China is considered as a large power distance country.

In small power distance countries, individuals are more inclined to regard themselves as equals: rather than expecting to be told what to do, subordinates expect to be consulted and will argue a case with those higher up the organization. Respect for individuals within the organization comes from their proven capacity to perform a role rather than from the possession of a particular job title or their place in an organization. Shorter small power distances coincide with flatter organization structures. The United States is considered a country with small power distance.

2. Uncertainty Avoidance

Uncertainty avoidance measures the lack of tolerance for uncertainty and ambiguity. This manifests itself in high levels of anxiety and emotion. This in turn translates into a preference for highly structured formal rules and limited tolerance for groups and individuals demonstrating deviant ideas or behaviours.

3. Individualism vs. Collectivism

The individualist-collectivist dimension measures the degree to which the interests of individuals or of the group take priority. The social framework in an individualistic society is looser than that of a more collectivist society and individuals take responsibility for themselves and their immediate as opposed to extended families. Individualist societies demonstrate a greater regard for individual rights and freedoms and tend to be characterized by assertiveness and competitiveness rather than by teamwork and cooperation.

China is considered a country that is collectivist. In China, it is the group (which could be the extended family, the employer or the society as a whole) that looks after the interest of individuals and gives them their sense of identity. In return from this protection, individuals offer the group loyalty and work towards the attainment of goals determined by and for the good of the group, organization or society. The United States on the other hand is a highly individualistic society.

4. Masculinity – Femininity

Societies that place a high premium on assertiveness, achievement and the acquisition of material possessions are exhibiting aggressive or masculine goal behaviour. Masculine environments also favour conflict and competition in the workplace. Cultures that place a high value on social relationships, quality of life and sensitivity demonstrate passive or feminine goal behaviour. Cultures and workplaces scoring high on the femininity dimension exhibit high degrees of cooperation, negotiation and compromise. The United States can be considered as a masculine culture while China is leaning toward femininity.

QUESTION SIX

Where do you think the best opportunities for future growth lie for McDonald’s? Why?

Relations between the U.S. and China could be entering the realm of “interesting times,” but McDonald’s seems undaunted. The fast-food giant recently announced plans to nearly double the number of Golden Arches locations in that highly coveted market.

It comes as no surprise that American companies yearn for heated expansion in this populous nation. China has more than 1.3 billion people; one in five people on the planet live in China. That’s a lot of people who might want fries with that.

Meanwhile, informal dining out in China is currently a $300 billion opportunity, and it’s expected to increase by 10% this year as the middle class in that country grows.

An aggressive growth target for Chinese restaurants certainly looks like a good idea, given McDonald’s 2010 plans to grow global revenue by 3% to 5%, and profit by 7% to 9%. In fact, China is the company’s fastest-growing market in sales and income.

As it stands now, China has 1,100 Mickey D’s. By the end of 2013, McDonald’s plans to have planted 2,000 in the nation. China already represents 23% of revenue from the fast food giant’s Asia Pacific/Middle East/Africa segment.

Let’s look at McDonald’s comparable-store sales by geographic region for the last several years (in constant currencies):

MCD annual comparable-store sales

2009

2008

2007

Asia Pacific/Middle East/Africa

3.4%

9%

10.6%

U.S.

2.6%

4%

4.5%

Europe

5.2%

8.5%

7.6%

*From company press releases and SEC filings.

As you can see, in 2009 comps slowed down across the board, although admittedly, McDonald’s faced tough comparisons in years past.

Investors understandably get excited about U.S. companies that eye Chinese growth; one of the significant factors for the investment thesis for Yum Brands have been its presence in China, and its continued aggressive expansion. Last year alone, it opened more than 500 new restaurants there. Yum has more than 2,870 KFC outlets in China, and more than 450 Pizza Huts. You can see why McDonald’s would be salivating to compete for some of that action.

Of course, expanding into China is not without pitfalls. Although Starbucks is still waxing enthusiastic about its Chinese locations, it’s faced plenty of frustrating moments, including its 2007 retreat from the Forbidden City. Many U.S. companies have also had to navigate difficulties with the Chinese government and its policies, including Yahoo! and more recently Google. (www.fool.com, 2011)

India may overtake China as the world’s fastest growing major economy by 2015, as the South Asian nation doubles infrastructure investment and adds six-fold more workers than its northern neighbour, Morgan Stanley said.

India’s growth may accelerate to 9.5 percent between 2011 and 2015, Morgan Stanley economist Chetan Ahya said in an interview from Singapore today. India’s gross domestic product has expanded at an average 7.1 percent over the decade through the third quarter of 2009, compared with 9.1 percent in China, which surpassed Japan as the second-largest economy last quarter. (Bloomberg.com, 2011)

India will surpass China, Japan and many other European countries in the current economic climate with their economic growth rate. It has one of the largest populations in the world. According to a survey by Bloomberg, the govt will invest millions of dollars to develop the country’s poor infrastructure. The creation of jobs in the manufacturing industry means that there will be an increase in consumer expenditure in the long term. McDonalds has great potential in reaching many more consumers in India because an injection of capital into the economy.