McDonald’s Corporation’s strategies for international expansion account for the external factors in the industry environment, as identified in this 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 food service business. These issues are based on factors external to McDonald’s, representing 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, although the company also sells McCafé coffee products for home use and other consumer goods. 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 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 businesses and small local restaurants. 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’, as well as other food and beverage businesses like Starbucks Coffee Company.
Overview – Porter’s Five Forces Analysis of McDonald’s Corporation
Summary. In this Five Forces analysis, McDonald’s faces the effects of external factors at varying intensities, based on the variations among markets around the world. For example, the U.S. fast-food market presents a competitive landscape different from that of the European fast-food market. The restaurant chain company implements 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:
- Strong competitive rivalry or competition
- Strong bargaining power of buyers or customers
- Weak bargaining power of suppliers
- Strong threat of substitutes or substitution
- Moderate threat of new entrants or new entry
Recommendations. This Five Forces analysis shows 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 (bargaining power of suppliers and threat of new entrants) are also significant to the food service 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 fast-food 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 experiences 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 food service industry environment. In McDonald’s case, the strong force of competitive rivalry is based on the following external factors:
- High number of food service firms – Strong Force
- High aggressiveness of firms – Strong Force
- Low switching costs between restaurants – Strong Force
The 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 fast-food restaurant industry. Also, the Five Forces analysis model considers firm aggressiveness a factor that influences competition against McDonald’s. In this business case, most medium and large firms aggressively market their food and beverage products. This external factor increases the intensity of competitive rivalry with McDonald’s Corporation. In addition, low switching costs are an external factor that makes it easy for consumers to transfer to other restaurants, such as Wendy’s and Burger King, thereby adding 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 market strategies address the power of customers in influencing business performance. This element of the Five Forces analysis deals with the leverage of consumers, and how their decisions impact food service 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 food and beverage 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 influence McDonald’s business performance. In the Five Forces analysis framework, this external factor strengthens the bargaining power of customers relative to the influence of food service firms on the market. 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 that affects the fast-food company’s external environment. Moreover, the availability of food and beverage substitutes is relevant in this external analysis, adding to the bargaining power of customers. For example, substitutes include food kiosks and outlets, artisanal bakeries, microwave meals, and foods that consumers can cook at home. Based on this element of Porter’s Five Forces analysis, business strategies must increase customer loyalty, especially when the identified external factors combine with sociocultural trends like consumers’ increasing preference for healthy lifestyles, as 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 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 for food service businesses – 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 food and beverage 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 fast-food restaurant firms. In Porter’s Five Forces analysis model, low vertical integration weakens the bargaining power of suppliers against McDonald’s Corporation. 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 make supplier power weak and a minor issue in restaurant firms’ strategic management. Still, McDonald’s corporate social responsibility strategy and stakeholder management approaches help in addressing this force coming 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 the growth of the restaurant chain business. The following external factors make the threat of substitution a strong force against McDonald’s:
- High substitute availability – Strong Force
- Low switching costs for consumers – Strong Force
- Low cost-performance ratio of many 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 own 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’s meals to substitute meals typically involves insignificant or minimal disadvantages, such as additional time consumption for food preparation, or slightly higher costs per meal in some cases. Moreover, many substitutes are competitive in terms of quality and customer satisfaction with affordable prices (low cost-performance ratio), such as consumers’ satisfaction in the health benefits of home-cooked meals. 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. Such approaches need to be included in the company’s current efforts to encourage 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 restaurant businesses. In McDonald’s case, the moderate threat of new entry is based on the following external factors:
- Low switching costs – Strong Force
- High variability of capital costs – Moderate Force
- High cost of brand development for food service companies – 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 against existing players in the food service industry. Also, the high variability of capital costs in establishing a new restaurant business only partially limits the entry of new businesses in the market. This external factor leads to the moderate threat of new entry against McDonald’s. However, it is costly to build a strong brand in the fast-food industry. Many small and medium-sized businesses lack the resources to create a strong brand that rivals the McDonald’s brand. Thus, the external factors in this element of the Five Forces analysis show that the threat of new entrants is moderately considerable but not the most important strategic issue for the multinational restaurant chain business.
References
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