Table of Contents
This report will give the reader an overview of McDonald’s position in the fierce quick service restaurant industry. QSR or quick service restaurant, is an establishment that is not meant to be a sit-in diner and instead serves fast food cuisine. The food served in fast food restaurants is typically, limited, cooked in bulk prior to order, finished and packaged when ordered, and usually served to go. Fast food restaurants are generally associated with a restaurant chain or franchise that provides standardized ingredients or partially prepared foods and supplies to each restaurant through controlled supply channels. The QSR industry generates 198.8 billion dollars in revenue in the U.S.alone (Jaaskelainen, 2018). We evaluate the company through the Porter’s Five Forces; in which we concluded that they have a low bargaining power of suppliers, moderate bargaining supply of buyers, a low threat of new entrants, and a moderate threat of substitutes. Next we look at the VRIO analysis, in which we concluded that McDonald’s brings value with supply chain, and sheer size, they are rare due to their brand recognition, it is a concept that is not so easily imitable with the systems in process, as well as a well structured multidivisional organization. Within the scenario “86ing Beef” we assume the government has banned the raising and sale of cattle due to the increase in greenhouse gasses and global warming. This legislation will have many diverse effects both on McDonald’s itself, as well as its contenders within the QSR industry. We will be discussing the methods of recouping to these legislations as well as other scopes of alternatives to beef; which is ultimately one of McDonald’s main product offerings. The paper comes to conclude that McDonald’s has overall more market share than YUM Brands, and Restaurants Inc. Consequently, Mcdonald’s is one of the top tier contenders within the QSR industry as a whole.
The main contenders in the industry are three well established companies; which are McDonald’s, Yum Brands, and Restaurant Brands International. The QSR industry has been around since the 1920’s or earlier, and these kinds of restaurants have spread across the globe. Only the firms with the best logistics,supply chain management,marketing,and serving time will be able to compete in this saturated market.
In 1937,Patrick McDonald opened The Airdrome, a food stand in Los Angeles County. His sons,Richard and Maurice McDonald, moved this business forty miles east and renamed the business to McDonald’s Bar-B-Que which featured twenty five items on their menu. The brothers soon realized that hamburgers were by far the best profit producing item. Consequently, they removed many items except for hamburgers and few other items. In 1948, the brothers introduced the Speedee Service System which allowed them to streamline production and sell hamburgers at 15 cents and soon after they franchised the business as McDonald’s System, Inc. The brothers treated their kitchen like an assembly line to gain efficiency. Richard and Maurice were innovators in the design of the building and products served in order to decrease the time customers ate in the restaurant. For example, the restaurant turned off the heating so customers would not stay as long, angled the seats so customers had to hunch over food, pulled tables apart to decrease socializing, and served cone shaped cups so that drinks must be held while eating.
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In 1954, Ray Kroc met the brothers and was inspired to become apart of the McDonald’s team. He became their franchise agent and created a diner in Illinois in April, 1955. In the year 1959 Kroc was able to open sixty-eight new restaurants. In 1961, McDonald’s Corp. purchased the rights of the McDonald’s System Inc. for $2.7 million. Ray Kroc dreamed of opening a thousand restaurants in the U.S.alone. In 1967,McDonald’s restaurants started to appear internationally,in places such as Canada and Puerto Rico. Currently, McDonald’s has over 36,000 restaurants over the globe in over 100 different countries.
Porter’s 5 Forces
Bargaining Power of Supplier
The primary suppliers in a fast food restaurant are food, packaging, napkins, and restrooms supplies. Suppliers often contract to many different restaurants in the locality. This allows the supplier to have high bargaining power. The suppliers influence the profit margins of the fast food restaurant industry, especially if the supplier attains brand recognition. Suppliers focus on setting the industry standard in the locality. They do this by cutting costs, delivering on time, financing options and credits, and higher product quality.
There are many suppliers working with McDonald’s and besides the larger farms there are several smaller farmers that supply to McDonald’s. The breakdown of spending in operations at QSRs are 23% to occupancy and operations, 26% to employment, and 34% going to food. The remaining 18% goes to miscellaneous expenses such as new equipment and advertising (Szalay, 2016). The largest and most important supplier is the food suppliers who make up the largest percentage of QSR spending. The quick service restaurant brands carefully selects their suppliers and resources to maximize quality and consistency. Almost all the companies in the quick service restaurants industry buy their products from multiple suppliers all of which they hold to high standards. Suppliers who are major suppliers to McDonald’s can be in dominate negotiation positions. This allows them to raise price which can decrease the margins McDonald’s can earn. However, McDonald’s uses many smaller farms which hold no bargaining power over the price of goods. While some large suppliers may hold some bargaining power there are many farms who don’t supply enough to affect price. The bargaining power of suppliers in this case remains low. Because of the diverse sources of raw materials and sheer size McDonald’s enjoys a dominate bargaining position and low bargaining power of suppliers.
Bargaining Power of Buyer
The bargaining power of the buyers increase as the amount of fast food restaurants increases. If the lines are long at one outlet they could easily order at a location nearby. Power is also gained if the outlet provides an undifferentiated product such as a hamburger. This puts the QSR industry. The food supplied is inexpensive which eases buyer’s anxiety.
Recently,the bargaining power of the customers has increased. The worlds views of the QSR industry has changed as people become more health conscious. With limited customers and consumers buying less each customer has become far more valuable. On top of the image issue that QSR face the switching costs are next to nothing for the customers giving them a great deal of bargaining power. This is why QSR are heavily focused on maintaining a positive brand image and engage their customers. Companies invest in customer relations as well as food quality. Customers are well informed in the modern era and have all the industry news at their fingertips so the image of the brand matters. McDonald’s focuses on many aspects of image promotion including marketing, product quality, customer service and convenience, to manage its reputation. The bargaining power of customers is high but Mcdonald’s does anything in its power to mitigate this by maintaining a quality image.
Threat of Substitution
Substitutions come from products and services that perform similar functions in a different industry. For example,grocery stores and fast casual dining. The greater number of substitutes cuts into the industry’s profitability. In order to reduce the threat of substitution a firm can differentiate with low costs, brand recognition, healthier options, and dollar menus. The QSR industry was valued, in 2016,$516 billion. The industry is estimated to increase by more than 4.2% from 2017 to 2022 and will be valued at $691 billion according to Zion analysis (Jaaskelainen,2018). Much of the expansion will be in Asia as the population integrates more people into the city coupled with the major growth rate of the population.
In the case of McDonald’s, a company with an established and well rooted place within the fast food industry it often dominates its competition. No one can compare to their low cost model, innovative products, effective control system all backed with their impeccable customer service. There has always been such substitutes within the industry both globally and locally, but while there exists a moderate threat of substitute no one beats Mcdonald’s at their own game.
The fast casual experience is rapidly expanding and other fast food restaurants continues to compete but Mcdonald’s continued focus on quality and customer experience keeps them ahead of the game.
Threat of New Entrants
The threat of new entrants to the QSR industry is high due to the low switching cost for customers and the low barriers to entry. Meaning,customers could easily be persuaded to eat at different restaurants. Reasons for switching could be caused by taste, convenience, cost, quality, or many other factors. McDonald’s holds a firm grip on communities across the globe. It has a vertical supply chain, which cuts down on costs and pushes McDonald’s ahead of other QSRs. The barriers to enter this business is low. However, a new business would need to have an almost unlimited amount of capital in order to take away any significant market share. The costs for a new QSR would heavily come from supply chains, operations, marketing and Human Resources. McDonald’s has all of these aspects perfected with science, planning, and execution. The largest threat would come from individual local communities holding close to their local restaurants; however, these would be isolated situations. In conclusion, it is important for McDonald’s to stay reputable with their symbol, quality and affordability of food, and efficient staff to prevent any new businesses from stealing customers. In addition, funds should continue to be allocated to dominate the many facets of media, which McDonald’s has done well in the past. It is much easier to eliminate opponents at the gate rather than having a price or advertisement war later on to squeeze them out.
Intensity of Rivalry Among Established Companies
Rivalry becomes intense when many firms in the industry have similar footing. In addition, a saturated market like the QSR industry adds to the intensity. The QSR has a high capital investment which means firms need to sell large amounts of food in order to stay in business. Also, standardized items like hamburgers can lead to hectic competition between established companies. Overall, this leads to a disadvantage in profits for the industry as a whole.
The fast food industry is a very holistic environment with a lot of competition from the numerous amount of companies within the industry. There is a lot of intensity that comes along with the well established companies that have had first mover advantages and an extremely well recognized brand images. There is two types or channels of intensity within this industry; there is intensity contributed through the well established big brands,than another channel which adds even more intensity which is the smaller brands which are upcoming through rising trends. The overall goal for all these companies is similar; Market Share.Through market share they can start to have more control of their industry as well as an upper hand; although to obtain this they need to focus on competitive marketing.
The top 4 rankings in the QSR industry according to industry structure data are in the following order: McDonald’s, Subway, Burger King, and Wendy’s. In U.S.alone the following sales were generated according to the order above: $32,395, $10,600, $8,600,and $8,340 (Oches, 2011). There is a large gap between the first and second ranking.
Strategy
Since McDonald’s has an extremely large business globally, it sets the prices at a low level to compete with those competitors in the QSR industry; which is known as the generic strategy of cost leadership. For example, by providing the dollar menu daily or other holiday special discounts while using their mobile app to order. Furthermore, as it becomes a global brand, McDonald’s is also depending on a strategy of broad differentiation to offer special menus in different countries due to local preferences. McDonald’s menu is different internationally in order to be attractive to local customers all over the world. The reason why McDonald’s is so successful globally is because of the effective operating systems, as well as it is able to control the cost of producing the food at a lower price level, and its large size of franchisees can generate a huge portion of revenue for the firm to continue expanding and innovating. Despite the fact that the corporation is holding the first place in the ranks of global fast food chains, it has a large number of strong competitors. Many fast food corporations using the cost leadership as the main strategy to offer customers a cheap and affordable food and service. By using another supporting strategy which is broad differentiation to make their brand become unique as compared to its competitors in local market, these corporations will have the ability to expand more and earn more revenues by better satisfy their customers’ tastes.
In corporate strategy Mcdonald’s employs a few different strategies. The strategy McDonald’s is most famous for is their vertical integration. Mcdonald’s raises their own cattle, grows their own potatoes, transports their ingredients through their own trucking company, and owns the property their franchises reside on. This complete vertical integration allows McDonald’s to cut their costs to increase margins while still being considered a cost leader. Another strategy that McDonald’s is known to employ is strategic alliance. This allows McDonald’s to both focus on their main product line and cross market in other brands. McDonald’s biggest partnership is with Coca-Cola which is a leader in the soda industry. This means those who are seeking out a Coke on the road will probably think about going to Mcdonald’s. Another key way McDonald’s uses partnerships is through their toys to attract children. McDonald’s often partners with popular TV shows or Nintendo to cross promote their products and get children excited about the happy meal.
Mcdonald’s corporation is structured in a multidivisional organizational design. They are a massive corporation that has a variety of strategies that vary by region. For this reason they must have a functional strategy in place for each region they exist in. They also employ a functional strategy in India to cater to the local tastes and manage the local supply chain. They must do the same in Japan, China, Mexico, United States, Canada, and potentially even in sub regions within these countries. By breaking down into multiple divisions; McDonald’s can maximize their impact and profits in every region instead of trying to manage the whole globe under one umbrella.
