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business strategic management-case study on McDonald’s in India

By Zongying-Zhang Apr 27, 2014 3403 Words
1.1 McDonald Corporation worldwide
McDonald‟s Corporation, headquartered in Oak, Brook, US, is a fast food chain established by Maurice and Richard McDonalds. Since its establishment in 1940 when the company operates as a barbecue with customers queuing up for a limited service, the company has grown to become the world‟s largest hamburger food chain serving 68 million customers daily in over 119 countries. The company attains its international recognition following the purchase of a franchise right by Ray Kroc in 1955 who establish the presence of the company in other regions (Gilbert, 2009; Business Education, 2011).

1.2 McDonald’s India
McDonalds entered India in 1996 through a joint venture with local firms such as Hardcastle Restaurants Private Limited and Connaught Plaza Restaurants Private Limited. However, contrary to the company‟s expectation, McDonalds faced some tough time been accepted by the consumers due to perhaps cultural mismatch between the locals culture and what McDonalds represent – the American culture (Habib, et al., 2011). Through its localization strategy (Times Magazines, 2011; The Start Newspaper 2011), McDonalds changed its product menu from beef burger to lamb and vegetable burger given the large vegetable consuming population, altered its store design, reduce the product price by 10-15% so as to suit the customer‟s taste and preference. This localization strategy has paid off because McDonalds has over 300 restaurants in various parts of India serving over 500,000 customers on daily basis.

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2. Macro environment analysis in India
After years of economic dwindling, the Indian economy is fast growing in recent years, thus impacting positively on the fast food industry. For example, Subramanian, (2013) notes that Indian economy grows at 6.4% annual rate from 2002 to 2011 with an average rate of 7.7%. This has enhanced the rise of the middle class group after years of wide gap between the rich and poor. This rising middle social class opens more investment potential for companies especially fast food companies because the more income people earn, the more likely they would spend such on food. Also, another prevalent concept in India is the tendency to eat outside which has increased from 2-4 times a week to 4-8 times. Goyal and Singh, (2007) assert that food diversity in India is characterized by India‟s diversified culture comprising diverse states. Although Indians like to have homecooked meals – a concept supported religiously as well as individually, recent years has witnessed a slight shift in food consumption patterns among urban Indian families toward eating outside owing to increasing awareness and influence of western culture. The rising middle class group and consumer‟s tendency to eat outside has affected the fast food industry positively in that Nayak, (2013) notes that the India fast-food industry grows at 40% rate and the market value is expected to reach 70 billion rupees ($1.1 billion) by 2016.

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3. Micro business environment in India using PESTLE
The political, economic, sociocultural, technological, legal and the environment factors influencing the India fast food market is discussed here.
3.1 Political factor
McDonald‟s and other fast food chain are expected to obey labeling and packaging regulations and health and safety guidelines as stipulated by the Indian government and its food regulatory bodies. This is because of the growing concerns of the health effect of consuming fast food (Ali, et al. 2011). For example, the fast food consumption has been shown to increase calorie intake, weight gain which exposes consumers to the risk of facing diabetes. Given this, fast food is been criticized by health practitioners and consumers activists for high calorie content and Trans fat.

3.2 Economic factor
India‟s increasing income level per month which was Rs5130 in 2011 and Rs5,729 in 2012-2013 (The Economic Times, 2013) gives McDonalds and other fast food chains a good economic prospect for profitability and better market performance. However, the low setup cost of fast food outlets and franchising create rapid expansion in that operators keep prices low so as to attract customers (Gilbert, 2009). For example, McDonalds offers financing and training assistance for new franchisees so as to help better manage their cash flow and keep business profitable.

3.3 Social factor
Consumers changing lifestyle offers both opportunities and challenges to the fast food operators. While outlets who provide healthier and more natural food menu would benefit from consumers‟ changing eating habit to organic food, operators who do not provide healthier food options would loss customers. For example, when McDonalds entered India, it did not realize the desired results because while over 70% Indians are vegetarians, the company‟s burgers were made with beef as other markets. Thus, the company localized its products and outlets so as to suit the consumer‟s tastes and preferences by offering vegetarian burger and revamping the outlets‟ design (Srikant, 2013).

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3.4. Technological factor
Technological advancement helps fast food companies to streamline value creation process so as to enhance efficiency (Srikant, 2013). For example, through advanced food processing technology, Help Desk Service, network and application consolidation, the operations of McDonalds in India is greatly improved. Also, just-in-time order and delivery is done over the internet and TV, social media and radio are used to advertise the products and maintain customer relationship management.

3.5 Environmental factor
There is a growing concern about environmental issues associated with fast food consumption in India (Times Magazines, 2011). For example, fast food is said to be one of the largest consumers of paper products leading to millions of pounds of food packaging waste littering roadways, clogging landfills and spoiling quality of human life.

3.6 Legal factor
Given the increasing environmental concerns of fast food consumption, the operators are required by law to use environmentally friendly materials such as recyclable materials in packaging products so as to avoid wastes littering roadways and landfills (Times Magazines, 2011). Also, McDonald‟s in India and other firms are required to maintain fair advertisement programs so as not to make false advertising promises.

4. Industry analysis
India‟s fast food industry is a fast growing market characterized with many players and challenges. Michael Porter‟s five forces model is used to analyze the competition level and profitability (see Figure 1).

Figure 1: Porter‟s five forces model

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Entry
barrier

Supplier
s power

Existing
rivalry

Buyers
power

Substitut
es
products
Source: Gilbert, (2009)
4.1 Entry barrier
India‟s fast food industry is a fast growing market due to increasing middle class population, changing lifestyle towards eating outside and low setup costs although major existing players such as McDonalds enjoys economics of scale and strong brand recognition. This increasing market potential encourages many potential firms to enter the market. Business Wire, (2011) reports that the India fast food market grows at an annual rate of 30-35% because of increasing social class grow and consumers‟ changing lifestyle.

4.2 Existing rivalry
Since the entry rate of India fast food market is high, there are quite a number of current fast food firms competing for the same customers. Given this, McDonalds, Kentucky Fried Chicken (KFC) and other competitors compete over customers through price reduction, product localization to suit tastes and preferences and revamping the outlets to be more convenient and smart. While the price war attracts more customers, it tends to reduce the profitability rate of the companies since the reduced product prices would increase production costs. Rapoza, (2012) reports that McDonald‟s India cuts 6-15% products prices in order to increase its customer base.

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4.3 Substitutes products
Although the threat of substitute products in the fast food market is moderate, food available in foodservice, retail outlets and homemade serve as substitute products (Haberberg and Rieple, 2008). However, the convenience and family dining experience associated with eating outside on fast food outlets reduce the threat of substitute. For example, while consumers can cook at home cheaply, the lack of convenience element in homemade food increases consumers‟ chances of eating on fast food outlets.

4.4 Suppliers power
The suppliers‟ bargaining power is moderate in the India fast food market. This is because with the growing competitive supply chain alliances, supplier bargaining power appear to be limited (Srikant, 2013). However, the firm to enjoy higher bargaining power depends on who has a more technology control and strategy.

4.5 Buyers power
The buyer‟s bargaining power seems moderate to high in the India fast food market. For example, the industry‟s competitiveness enhances consumer‟s bargaining power and consumers are highly price-sensitive (Muhlbacker et al., 1999) with little/no switching cost among fast food chains. But, major companies like McDonald reduce buyer‟s power through providing product range that cater for the whole demographic, rather than focusing on a single segment. For instance, McDonalds targets children with its „Happy Meals‟ products offerings while professionals with breakfast options and take - away coffee.

5. Success factors
McDonald‟s in India targets children, youth and the young urban family who are either vegetarians or non-vegetarians. To survive and succeed in the India market, McDonalds understand consumer‟s needs and satisfy such needs profitability. Table 1 shows consumers‟ needs and the determinants of the industry survival and success.

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Table 1: Industry‟s success factors
CONSUMERS’ NEEDS
Affordable

SURVIVAL FACTORS

product Economies of scale

SUCCESS FACTORS
Localization of products to

offerings

Financial strength

Vast variety of products

Highly

Healthier options

dedicated staff

Product

Convenient environment

Good corporate marketing

diversification

Good ambient

Strong corporate reputation

better control of the market

Responsive services

Strong corporate identity

Providing healthier menu

Consistent quality

Strong corporate branding

Low production costs

Clean environment

Price cutting

Strong profit margin

Good parking space

Offering superior customer Providing unique benefits

Accessible location

value

skilled

suit

local

taste

and

and preference
and

market
to

have

Table 1 indicates that consumer‟s needs are changing from benefits such as tastes and quantity to a more healthy food menu deliver in a clean and conducive environment at an affordable precise. The survival spectrum of the table is the survival factors. According to the table, fast food firms can survival the intense market competition through price cutting since consumers are price sensitive and efficiency. However, the other end of the spectrum is the determinants of the industry‟s success story. According to the table, firms can succeed if they differentiate base on product uniqueness and costs and designing products to satisfy local tastes and preference.

6. McDonalds India and value chain
McDonald‟s India internal environment is characterized by purchasing raw materials from suppliers, preparing food and serving customers. Table 2 shows the value creation process of McDonalds in India. It shows the various stages and activities involved in the value creation processes. For example, McDonalds purchases raw materials from its fixed, pre-defined suppliers which are subsequently prepared and served to customers in a clean and comfortable environment.

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Table 2: McDonald’s India value chain analysis
Firm
infrastructur

Food processing plant, warehouse, accounting, legal, finance, planning,

e

quality assurance and government relation

Human

Service

Quality

Resource

crew

safety training

Management

Custome

Market

r service

research

and

Product

Customer

development

service staff

staff

Just-in-

Advanced

Refrigerate

time

Technology

food

d

order and manufacturin
delivery.

Advertisemen

Customer

delivery t through TV, Relationshi

truck

radio,

g machine

social p

tracking

media, digital system

Inventor

display,

y

payment

checking

e-

system

computer
system
Procurement

Product

Preparation

Distribution

order and and

of

delivery

through

packaging

goods

wholesalers
, retailers

Inbound

Operations

Outbound
logistics

logistics
Source: Gilbert, (2009)

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Marketing & Services
sales

Although India‟s supply chain network was underdeveloped during the early stage when McDonalds penetrated the country, McDonald‟s has taken steps to improve the situation. The company works with local suppliers and farmers to source all its requirements. This indicates that McDonalds has over the years streamlined its business through its strategic and threshold resources to become a key player in the India market.

7. Business-level strategy
In the company‟s level strategy, the issues considered are resources and capabilities, positioning approach, differentiation and costs strategies.

7.1 Resources and capabilities
While McDonald‟s resources are the useful assets which help the company create a cost or differentiation advantage which rivals cannot acquire easily, capabilities entail McDonald‟s ability to use its resources effectively and efficiently (Gilbert, 2009; Business Education, 2011). Examples of McDonald‟s resources include: corporate brand identity such as brand image, brand reputation and brand equity. Other resources include strong technical know-how, installed customer base and patents and trademarks. An example of McDonald‟s capability is its skill in bringing a product to the Indian market faster than rivals who help the firm enjoys first-mover benefit. McDonald‟s resources and capabilities form distinctive competencies which facilitates innovation, efficiency, quality and customer responsiveness.

A resource-based view is used to explain McDonald‟s resources and capabilities (see Figure 2). According to the resource-based view theory, McDonald‟s uses its resources and capabilities to produce a competitive advantage which subsequently yields an excellent value creation.

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Figure 2: A model of competitive advantage

Resources

Distinctive
Competencies

Cost Advantage or
Differentiation Advantage

Value Creation

Capabilities

Source: Porter, (2008)
The model indicates that McDonald‟s must develop a competitive advantage through resources and capabilities which are superior to competing products.

7.2 Positioning approach
McDonald‟s India positions the brand through utilizing its resources and capabilities which ultimately develops into costs and differentiation strategies. This is aimed at delivering product benefits exceeding competing brands at lower costs. This indicates that McDonald‟s India positions itself in the fast food industry through its low-cost and differentiation strategies.

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7.3 Differentiation and costs strategies
While differentiation strategy entails delivering superior product benefits that exceed competing products, costs strategy entails delivering product that benefits at lower costs. This is directed at achieving a competitive advantage that would help McDonald‟s deliver superior value for customers and superior return for the firm. 8. McDonald’s India analysis

The company‟s strengths and weaknesses as well as opportunities and threats are discussed here. Table 3 balances the internal and external environment of McDonald‟s in India
Table 3: McDonald‟s in India‟s SWOT analysis
STRENGTHS

WEAKNESSES

Strong market presence

Low differentiation

Heavy investment in R&D

High rate lawsuits

Strong brand recognition

exorbitant promotion expenses

Cost leadership

Negative publicity

Good financial position

High talent turnover rate

Good marketing skills

Opportunities
Preference for healthy food menu

Threats
Changing consumer lifestyle toward healthy

option
Growing middle class population

Increasing number of lawsuits

Expand core business

Intense market competition
Low consumer switching costs between

operators

Source: (Gilbert, 2009; Srikant, 2013)

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While there seems to be a fair balance of the strengths and weaknesses, the former outweighs the latter. This indicates that the firm stands a chance of utilizing its market position to become a strong force to recognize if it will convert its weaknesses into strengths. For example, McDonald‟s could invest in public relations to change the negative perception consumers have towards fast food so as to increase consumers brand association and preference. On the external environment, while the growing middle class population indicates more disposable income on fast food, the intense competition may not allow McDonald‟s to capture on the trend but through aggressive campaign.

9. Corporate-level strategy
McDonalds India‟s mission is to become consumer‟s most favorite place to eat. The mission is designed to be achieved through its global strategy of „plan to win‟ approach by offering superior consumer experience.

The company is guided by its operational strategic goals of lower costs, quality products delivered at quick speed in a flexible environment (Business Wire, 2011; Rapoza, 2012). For example, it serves as the costs leader in the fast food market through its economies of scale and cost control mechanisms. On the quality, it provides tasty and healthy options without compromising the standard.

McDonalds entered India through a joint venture with Hardcastle Restaurants Pvt. Ltd and Connaught Plaza Restaurants Private Limited who spearhead the promotion of McDonald's operations in West, South and North regions (Srikant, 2013). The relationship between foreign partner and the locals is a mutual one in that human capability, marketing expertise and operational know-how are shared among the associating firms so as to achieve a mutual benefit. For example, while McDonalds uses its strong global market expertise and presence in promoting the brand in India, the two partners use their knowledge on the local complete latter efforts.

McDonalds involves both in forward and background so as to have a better control over the supply chain and logistic function of the fast. For example, McDonalds India 12

diversifies into related products on the area of healthier product offering, franchising, upstream and local product sourcing. This indicates that the firm expands tap into growth potentials in the market by introducing more products-line and increase market share. This fulfills consumers‟ unmet needs because it becomes more attractive and better competitor. Diversification gives the firm more control over market by capturing profitable opportunities and gaining access to crucial resources. However, diversification has the risk of not selling the new products or generating enough revenue to cover the investment costs.

10. McDonald’s India structure and control pattern
McDonald‟s India adopts decentralized management structure in its task allocation, coordination and supervision towards goal achievement. This indicates that each of McDonald‟s outlets in India has a restaurant manager who allocates, coordinates and supervises the operations so as to ensure that the sales quotas and performance is achieved (Business Education, 2011). However, middle-line managers and training managers assist the restaurant manager to achieve the organizational goals. While the manager and assistant managers oversea the daily running of the outlet, the delivery crew members perform basic operations such as procuring materials and preparing and packaging food menu and ensuring customers satisfaction.

While the decentralized structure helps each restaurant to implement policies and strategies according to their peculiar needs and tastes, it could cause inconsistent service quality and standards among the restaurants in different regions.

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11. Recommendation
McDonalds in India should take note of the needs and expectations of the local consumers. Thus, the following points must be considered in order to attract and increase the customer base in India.



McDonald‟s India should offer superior value through unique product benefits at affordable price and ensure consistent service quality.



The company should offer food menus comprising many options so as to suit consumers‟ varying tastes and preference



McDonalds India should offer healthier menu options and enhance its brand image through investing in public relations



The company should provide convenient and quick services to meet consumers changing lifestyles

12. Conclusion
McDonalds penetrated the India market in the 1996 due to growing middle class population, changing lifestyles, and the tendency for dual partners to hold full time job. However, the company did perform well at the initial years due to cultural mismatch between McDonalds who represents the American culture and the locals who epitomizes the India culture. To achieve greater results, McDonalds revamped its store outlets, reduced price by 6-15% and product location. If the company wishes to maintain its market position in the emerging market, it must streamline its product benefits to include health concerns of the consumers.

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References
Ali, I. et al. (2011). “An exploratory study on the web-based customer relationship management in the fast-food industry in Malaysia”. 2011 2nd International Conference on

Economics,

Business

and

Management

[online]

Vol.

22(14).

Available:

www.ipedr.com [Accessed: 13 October, 2013]

Business Education, (2011) McDonald's Company Facts Home Page [online]. Available: http://www.bized.co.uk. [Accessed: 13 October, 2013]

Business Wire, (2011) Research and Markets: The fast food market in India: Indian fast food market is growing at the rate of 30-35% Per Annum, 04 August [online]. Available: http://www.businesswire.com [Accessed: 7 October, 2013]

Gilbert, S. (2009) The Story of McDonald 1st ed. Minnesota: Creative Education Grant, R.M. and Jordan, J. (2012) Foundations of strategy, 1st edn. West Sussex: John Wiley & Sons Ltd
Goyal, A. and Singh, N.P. (2007) “Consumer perception about fast food in India: an exploratory study”, British Food Journal [online], Vol. 109(2), pp. 182-195. Available: www.emeraldinsight.com [Accessed: 22 October 2013]

Haberberg, A. and Rieple, A. (2008) Strategic Management: Theory and Application, Oxford University Press
Habib, F.Q. et al., (2011) “Consumers‟ preference and consumption towards fast food: evidences from Malaysia”. Business Management Quarterly Review [online], Vol.2 (1), pp. 2180-2777. Available: www. eprints.uitm.edu.my [Accessed: 13 September, 2013]

Porter, M.E. (2008) Competitive strategy: techniques for analyzing industries and competitors US: Simon and Schuster

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Rapoza, K. (2012) Some McDonald‟s struggling in India”, Forbes Magazine, 22 July [online]. Available: www.forbes.com [Accessed: 13 October, 2013] Srikant, P. (2013) McDonald‟s goes vegetarian in India”, Amity Research Centers [online]. Available: www.ecch.com [Accessed: 13 October, 2013] Subramanian, A. (2013) “Why India‟s economy is stumbling”, The New York Times, August 30 [online]. Available: http://www.nytimes.com [Accessed: 20 October, 2013] The Start Newspaper (2011) McDonald’s: “Think Global, Act Local the Marketing Mix [Online] Available from: http://biz.thestar.com.my [Accessed: 13 October, 2013] Times Magazines, (2011) McDonald’s: “Think Global, Act Local, and the Marketing Mix [Online] Available: http://www.time.com/time [Retrieved: 13 October, 2013]

The Economic Times, (2013) India's per capita income rises to Rs 5,729 per month, 7 February,

[online].

Available:

http://www.articles.economictimes.indiatimes.com

[Accessed: 13 October, 2013]

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