Mcdonald's in China

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McDonald’s: Is China Lovin' it?

Executive Summary
This case studies McDonald’s’ business model as it develops to achieve success in the Chinese market. Issues addressed included how to retain McDonald’s’ image of cultural Americana, yet adapt to satisfy pallets and appeal to patrons in Chinese culture.

1. What is the purpose of conducting an external environmental analysis? What are the general environmental forces that could influence or have influenced McDonald’s development in China? The purpose of conducting an external environmental analysis is to obtain information on the forces outside of a company that will help to determine how the company will operate. A successful company cannot operate only in its internal environment and must be aware of the external factors that will further shape the business. Company strategies must take these factors into account in order to match their internal strengths and weaknesses with their external threats and opportunities.

With McDonald’s expansion in China, external environmental factors did play a key role. One major environmental force came from American company KFC. KFC entered China in 1987 and it was important for McDonald’s to analyze the factors that had been successful and unsuccessful at KFC. Another environmental force that played a large role in McDonald’s growth in China was local Chinese quick service restaurants where customers could buy local cuisines such as noodles and dumplings.

Other pertinent environmental factors that McDonald’s was forced to address in China were the effects of the growing middle class and a more affluent population. This lead to other types of local and foreign restaurants attempts to capitalize on this growing wealth, generating further competition.

The external environment has also shown force by consumers demanding higher standards in the McDonald’s restaurants as well as resistance to the restaurants’ high prices. Buyers’ desires also affected the external environment, which caused McDonald’s to increase operating hours to 24 hours, implement home delivery service and drive thrus in many location. Suppliers were integral elements of the external environment as well and McDonald’s grew to source 95% of their food from local growers and suppliers.

2. Based on the external environmental analysis, what are the opportunities and threats presented to McDonald’s operations in China? The external environmental analysis reveals several opportunities in China on which McDonald’s can capitalize. Annual per-capita disposable income has increased an average of 22.18% for urban households and 64.62% for rural households per year over the last 20 years. The general trend during this time has been movement from rural to urban population centers where disposable incomes are higher[i]. The increase in disposable incomes has helped contribute to the fast food industry boom. These trends promise to continue as the Chines economy evolves. Tier pricing can be leveraged to help McDonald’s reach customers of different income levels in locations at different levels of development.

Additionally, as the Chinese economy continues to develop, improvements to local infrastructure may create opportunities for an improved supply chain. As of 2006, 95% of materials used by McDonald’s in China were locally sourced. McDonald’s will likely benefit as local suppliers employ more advanced technology and management processes.

There are also untapped opportunities for franchising. China created the legal structure for foreign franchisors in 2004 and, as of February 2007, only one of the 879 McDonald’s restaurants in China was franchised while KFC, their largest competitor, franchised 37 of their 1700 restaurants. Increasing the number of franchisees will allow McDonald’s to expand to new locations while minimizing risk.

In addition to expanding their franchising operations, McDonald’s has opportunities to take advantage of changing Chinese...
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