McDonald’s Corporation expands internationally through strategies that account for the external factors in the industry environment, as identifiable through a Five Forces analysis of the business. Michael E. Porter’s Five Forces Analysis model provides valuable information to support strategic management, especially in addressing relevant issues in the external environment of the business. These issues are based on external factors that represent the degree of competitive rivalry in the industry, the bargaining power of customers or buyers, the bargaining power of suppliers, the threat of substitution, and the threat of new entrants. In this Five Forces analysis of McDonald’s, the forces are mainly within the fast food restaurant industry. As the leading restaurant chain business in the world, the company is an example of effective strategic management, especially in dealing with competition in different markets worldwide. This status shows that McDonald’s strategic direction is appropriate to the external factors, such as the ones identified in this Five Forces analysis.
In addressing the external factors determined in this Five Forces analysis, McDonald’s Corporation ensures that its strategies are appropriate to combat external forces. The company faces pressure from various competitors, including large multinational firms and small local businesses. McDonald’s Corporation’s generic strategy and intensive growth strategies satisfy business needs in competing against such firms as Burger King, Wendy’s, Subway, and Dunkin’ Donuts, as well as food and beverage businesses like Starbucks Coffee Company.
Summary & Recommendations: Porter’s Five Forces Analysis of McDonald’s Corporation
Summary. In this Five Forces analysis, McDonald’s experiences the effects of external factors at varying intensities, based on the variations among markets around the world. For example, the U.S. market presents a competitive landscape different from that of the European market. The company must implement strategies to meet these external factors and minimize their negative impacts. Considering the combination of market conditions, this Porter’s Five Forces analysis of McDonald’s establishes the following intensities of the five forces:
- Competitive rivalry or competition – Strong Force
- Bargaining power of buyers or customers – Strong Force
- Bargaining power of suppliers – Weak Force
- Threat of substitutes or substitution – Strong Force
- Threat of new entrants or new entry – Moderate Force
Recommendations. The results of this Five Forces analysis show that McDonald’s Corporation needs to prioritize the strategic issues related to competition, consumers, and substitutes, all of which exert a strong force on the company and its external environment. The other forces (the bargaining power of suppliers and the threat of new entrants) are also significant to the business, although to a lower extent. In this regard, a recommendation is to strengthen the business by building on the strengths enumerated in the SWOT analysis of McDonald’s Corporation. The company’s managers must focus on reducing the effects of competitors and substitutes on revenues and market share. McDonald’s marketing mix or 4Ps partly supports such effort. Also, it is recommended that McDonald’s make its product innovation process more aggressive. While the food service industry is saturated with aggressive firms, new products can attract new customers and retain more customers. In relation, based on this Porter’s Five Forces analysis, McDonald’s can implement higher quality standards to address the forces of competition and substitution.
Competitive Rivalry or Competition with McDonald’s (Strong Force)
McDonald’s faces tough competition because the fast food restaurant market is saturated. This element of the Porter’s Five Forces analysis model tackles the effects of competing firms in the industry environment. In McDonald’s case, the strong force of competitive rivalry is based on the following external factors:
- High number of firms – Strong Force
- High aggressiveness of firms – Strong Force
- Low switching costs – Strong Force
The fast food restaurant industry has many firms of various sizes, such as global chains like McDonald’s and local mom-and-pop fast food restaurants. This external factor strengthens the force of rivalry in the industry. Also, the Five Forces analysis model considers firm aggressiveness a factor that influences competition. In this business case, most medium and large firms aggressively market their products. This factor increases the intensity of competitive rivalry that McDonald’s Corporation experiences. In addition, low switching costs make it easy for consumers to transfer to other restaurants, such as Wendy’s and Burger King. This external factor adds to the force of competition. Thus, this element of the Five Forces analysis of McDonald’s shows that competition is among the most significant external forces for consideration in the strategic management of the business.
Bargaining Power of McDonald’s Customers/Buyers (Strong Force)
McDonald’s must address the power of customers on business performance. This element of the Five Forces analysis deals with the influence and demands of consumers, and how their decisions impact businesses. In McDonald’s case, the following are the external factors that contribute to the strong bargaining power of buyers:
- Low switching costs – Strong Force
- Large number of providers – Strong Force
- High availability of substitutes – Strong Force
The ease of changing from one restaurant to another (low switching costs) enables consumers to easily impose their demands on McDonald’s. In the Five Forces analysis model, this external factor strengthens the bargaining power of customers. In relation, because of market saturation, consumers can choose from many fast food restaurants other than McDonald’s. This condition makes the bargaining power of buyers a strong force in affecting the company’s external environment. Moreover, the availability of substitutes is relevant in this external analysis. In this case, the availability of many substitutes adds to the bargaining power of customers. For example, substitutes include food kiosks and outlets, and artisanal bakeries, as well as microwave meals and foods that one could cook at home. Based on this element of Porter’s Five Forces analysis, it is crucial to develop strategies to increase customer loyalty, especially in the face of the sociocultural trends outlined in the PESTEL/PESTLE analysis of McDonald’s Corporation.
Bargaining Power of McDonald’s Suppliers (Weak Force)
Suppliers influence McDonald’s in terms of the company’s production capacity based on the availability of raw materials. This element of the Five Forces analysis model shows the impact of suppliers on firms and the fast food restaurant industry environment. In McDonald’s case, the weak bargaining power of suppliers is based on the following external factors:
- Large number of suppliers – Weak Force
- Low forward vertical integration of suppliers – Weak Force
- High overall supply – Weak Force
The large population of suppliers weakens the effect of individual suppliers on McDonald’s Corporation. This weakness is partly based on the lack of strong regional and global alliances among suppliers. In relation, most of McDonald’s suppliers are not vertically integrated. This means that they do not control the distribution network that transports their products to firms like McDonald’s. In Porter’s Five Forces analysis model, such low vertical integration weakens the bargaining power of suppliers. Also, the relative abundance of materials like flour and meat reduces individual suppliers’ influence on the company. Thus, this element of the Five Forces analysis shows that external factors combine to create the weak supplier power, which is a minimal issue in strategic management. McDonald’s corporate social responsibility strategy and stakeholder management approaches help in addressing this force from suppliers.
Threat of Substitutes or Substitution (Strong Force)
Substitutes are a significant concern for McDonald’s Corporation. This element of Porter’s Five Forces analysis model deals with the potential effects of substitutes on firm growth. In McDonald’s case, the following external factors make the threat of substitution a strong force:
- High substitute availability – Strong Force
- Low switching costs – Strong Force
- High performance-to-cost ratio of substitutes – Strong Force
There are many substitutes to McDonald’s products, such as products from artisanal food producers and local bakeries. Also, consumers can cook their food at home. In the Five Forces analysis model, this external factor contributes to the strength of the threat of substitution in the fast food service industry. In addition, it is easy to shift from McDonald’s to substitutes because of the low switching costs. For example, shifting from the company to substitutes typically involves insignificant or minimal disadvantages, such as slightly higher costs per meal in some cases, or additional time consumption for food preparation. Moreover, substitutes are competitive in terms of quality and customer satisfaction (high performance-to-cost ratio). In this element of the Five Forces analysis of McDonald’s Corporation, external factors make substitutes a major strategic issue that requires approaches like product quality improvement. In relation, the company’s efforts include encouraging people to eat in fast food restaurants instead of resorting to substitutes. Such efforts are evident in McDonald’s corporate mission and vision statements.
Threat of New Entrants or New Entry (Moderate Force)
New entrants can impact McDonald’s market share and financial performance. This element of the Five Forces analysis refers to the effects of new players on existing firms. In McDonald’s case, the moderate threat of new entry is based on the following external factors:
- Low switching costs – Strong Force
- Highly variable capital cost – Moderate Force
- High cost of brand development – Weak Force
The low switching costs allow consumers to easily move from McDonald’s toward new fast food restaurant companies. In Porter’s Five Forces analysis model, this external factor strengthens the threat of new entrants. Also, variable capital costs of establishing a new restaurant empowers new businesses to enter the global fast food restaurant industry. For example, small restaurant businesses involve low capital costs compared to major corporations in the market. This external factor leads to the moderate threat of new entry against McDonald’s. On the other hand, it is expensive to build a strong brand in the industry. Many small and medium businesses lack the resources to create a strong brand to match the McDonald’s brand. Thus, the external factors in this element of the Five Forces analysis shows that the threat of new entrants is a considerable but not the most important strategic issue.
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