McDonald’s Five Forces Analysis (Porter’s Model)

McDonald’s Five Forces Analysis, Porter’s model, competition, bargaining power buyers, suppliers, and threat substitution, new entrants
A McDonald’s in Muscat, Oman. This Five Forces analysis of McDonald’s (based on Porter’s Model) indicates that external factors in the industry environment emphasize competition, customers, and substitution. (Photo: Public Domain)

McDonald’s position as the global leader in the fast food restaurant market is partly a result of the firm’s effectiveness in responding to the Five Forces in its industry environment. Porter’s Five Forces analysis model identifies the most relevant external factors that influence business organizations. In McDonald’s Five Forces analysis, the focus is on the fast food restaurant industry. The environment of this industry interacts with McDonald’s to affect the firm’s potential and success. Nonetheless, its current global success indicates that McDonald’s remains effective in addressing these five forces and in overcoming related issues.

McDonald’s Five Forces analysis gives insights about the company’s strategic direction. McDonald’s strategies must align to the external factors in the global fast food restaurant industry’s environment.

Overview: McDonald’s Five Forces Analysis

In this Five Forces analysis, McDonald’s experiences the effects of external factors at varying intensities. The company must implement strategies to meet these external factors and minimize negative impact. In summary, McDonald’s Five Forces analysis yields the following intensities of the five forces:

  1. Competitive rivalry or competition (strong force)
  2. Bargaining power of buyers or customers (strong force)
  3. Bargaining power of suppliers (weak force)
  4. Threat of substitutes or substitution (strong force)
  5. Threat of new entrants or new entry (moderate force)

The results of the Five Forces analysis shows that McDonald’s needs to prioritize the issues related to competition, consumers, and substitutes, all of which exert a strong force on the company. A possible course of action for McDonald’s to address these issues is product innovation. New McDonald’s products can attract and keep more customers. Also, this Five Forces analysis shows that McDonald’s can implement higher quality standards to address competition and substitution in this saturated market.

Competitive Rivalry or Competition with McDonald’s (Strong Force)

McDonald’s faces tough competition because the fast food restaurant market is already saturated. This element of the Five Forces analysis tackles the effect 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. Also, most medium and large firms aggressively market their products. In addition, McDonald’s customers experience low switching costs, which means that they can easily transfer to other restaurants, such as Wendy’s. Thus, this element of the Five Forces analysis of McDonald’s shows that competition is among the most significant external forces on the business.

Bargaining Power of McDonald’s Customers/Buyers (Strong Force)

McDonald’s must address the significant power of customers. This element of the Five Forces analysis deals with the influence and demands of consumers. 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)

Because of the ease of changing from one restaurant to another (low switching costs), customers can easily impose their demands on McDonald’s. In relation, because of market saturation, consumers can choose from many fast food restaurants other than McDonald’s. Also, there are many substitutes to firms like McDonald’s. These substitutes include food outlets, artisanal bakeries, as well as foods that one could cook at home. Based on this element of the Five Forces analysis, McDonald’s must develop strategies to increase customer loyalty.

Bargaining Power of McDonald’s Suppliers (Weak Force)

Suppliers also influence McDonald’s. This element of the Five Forces analysis shows the impact of suppliers on firms. 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 (weak force)
  • High overall supply (weak force)

The large population of suppliers weakens the effect of individual suppliers on McDonald’s. This is especially so because of the lack of regional or 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 linked to McDonald’s facilities. Also, the relative abundance of materials like flour and meat reduces suppliers’ influence on McDonald’s. Thus, this element of the Five Forces analysis shows that supplier power is a minimal issue for McDonald’s.

Threat of Substitutes or Substitution (Strong Force)

Substitutes are a significant concern for McDonald’s. This element of the Five Forces analysis 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 (strong force)

There are many substitutes to McDonald’s products, such as products from artisanal food producers and local bakeries. Consumers can also cook their food at home. It is also easy to shift from McDonald’s to these substitutes (low switching costs). In addition, these substitutes are competitive in terms of quality and consumer satisfaction. In this element of the Five Forces analysis of McDonald’s, substitutes are a major issue that the company must address through approaches like product quality improvement.

Threat of New Entrants or New Entry (Moderate Force)

New entrants can impact McDonald’s market share. 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)
  • Moderate capital cost (moderate force)
  • High cost of brand development (weak force)

Because of the low switching costs, consumers can easily move from McDonald’s toward new fast food restaurant companies. Also, the moderate capital costs of establishing a new restaurant makes it moderately easy for small or medium-sized firms to affect McDonald’s. However, it is expensive to build a strong brand that could match the McDonald’s brand. Thus, this element of the Five Forces analysis shows that the threat of new entrants is a considerable issue for McDonald’s.

References
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