Corporate Strategy McDonalds in Chinese Market

MCDONALD’S IN CHINESE MARKET

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Corporate Strategy: McDonald’s in Chinese Market

Introduction

McDonald’s is the best and largest centralized international company today. The company was started in San Bernardino California, in 1940 by two brothers Mac McDonald and Dick. McDonald’s specializes in supplying fast foods like French fries, hamburgers and many other consumable products. Currently McDonald’s operates in 121 countries worldwide and has 30,000 restaurants. For McDonald’s to invest and market its products in foreign countries, it employs three primary methods: company owned restaurants, franchising and joint ventures (DAVIS, 2000).

In China, McDonald’s is located in Beijing and other major cities and towns. McDonald’s was first opened in Beijing, which is termed as a localization or adaptation of American cities. McDonald’s opened in 1992 with approximately 700 seats and 29 cash registers serving 40,000 customers within the first few days of operation. The opening of McDonald’s restaurant in China became an instant attraction for the domestic tourists who flocked the premises and enjoyed the American culture. After opening the restaurant in Beijing, a series of restaurants spread in city of Beijing and by the end of 1996, 29 outlets were already opened all over the city. In China, Beijing has the largest market for McDonald’s that the company can capitalize on to open more outlets countrywide since the company has plans to open over 600 outlets in China by the end of 19th Century (ALON & WELSH, 2001).

The introduction of McDonald’s in China was at first greeted with a negative attitude, but later the political system accepted the idea of eating in a foreign restaurant. In fact during the National Day in China in 1993, the government organized a dinner at McDonald’s restaurant located at Wangfujing Street. Unfortunately, the largest McDonald’s in Beijing was demolished to paved way for the construction of the Oriental Plaza. The management of McDonald’s has introduced franchising method to help in the introduction of new styles of eating in the unfamiliar markets. This method has helped so many locals in China to eat from McDonald’s, which is a foreign restaurant, without fear.

The residents of Beijing see McDonald’s as a symbol of America and value it as a way of modernizing the country and the Chinese society. The success of McDonald’s products is the high standard procedures used by the staff in food production, its current executive methods and its scientific recipes (REES & POLLACK, 2004). McDonald’s is known as a large company in the American market and many youths prefer working at McDonald’s before moving from their country to go and look for work in other states or countries. McDonald’s gives the youth adequate experience that is crucial when they later seek jobs with other companies.

The introduction and incorporation of McDonald’s restaurant in the Chinese market has boosted the economy of the country because of the high sales of their products to both the domestic tourists and the international tourists visiting the country. The restaurant has high quality foods that attract many repeat customers to eat there hence is gains competitive advantage in the Chinese market (BERGSTROM, 2012).

Market and Customer

The market scope is defined as the target consumers who are interested in the products being offered by an organization. The market is defined by the total populations, which are triggered by factors such as increase in a product price and government policies. To understand the market scope of MacDonald’s, the marketing segment needs to have an understanding of the customers to satisfy their needs by offering a marketing mix that could be satisfactory to the consumers. These could be done by identifying the market segment, the distribution channels to access the target market and the resources needed to reach the market scope as MacDonald’s restaurants needs a large market size in order to have enough customers. The market scope is made of customers of different cultural differences and the customers’ behavior is affected by beliefs, custom and values (Anna, 2006).

Product

McDonald is the second largest fast food chain in China. The company has placed adaptive measures to cater for the Chinese clients’ preferences. The menu has been localized based on chicken and a few products derived from beef (Ritzer, 2009). McDonald’s offers different types of chicken sandwiches, chicken wings, fish sandwich and McNuggets. McDonald’s carry ice cream cones, the McFlurry, pineapple pies and sundaes. Their breakfast menu consists of a ham, an egg, cheese sandwich and pancakes. McDonald’s also offers soft drinks in McExpress stores and ice cream desserts, which could be delivered to the clients at a small fee. The introduction of McDonald’s McCafe in stores offers coffee, special drinks such as lattes, and sweets for the growing number of coffee customers.

Technology

Technology has played a major role in McDonald’s food stores and restaurants in the modernization of their restaurants. This is evident in the strategy to evolve their menus and their customers experience to the new nutrition- based products. McDonald’s Corporation has revolutionized the use of technology in restaurants in a bid to increase sales in terms of the speed in serving customers (Svetlana, 2008). McDonald’s has installed plasma and wireless internet platforms for free thus incorporating modern professionalism to satisfy its customers’ requirements. In addition, McDonald’s provides laptops outlets and video games kiosks to its customers making its stores a hang out place for its demographic market. The use of technological innovation has shortened the time spent on payment, processing and the preparation of McDonald’s products.

Geographic Area

McDonald’s Corporation is based upon a geographic structure that keeps major markets while expanding into emerging markets. The penetration strategy of McDonald’s restaurants in China has been enhanced with the issue of the development license, which has led to the expansion, and the creation of opportunities for the local enterprise in the Chinese market. The first McDonald’s restaurant opened in China was established in the South City of Shenzed in Beijing (Watson, 2006). Despite its late entrance to the Chinese market, it enjoys an advantage being one of the famous brands in the food industry leading to its wide expansion. Presently, McDonald’s has established its stores in over 1,100 locations in Beijing.

McDonald’s Stakeholders

Customers

At McDonald’s, the customers are treated with equality and democracy. Regardless of status or any other criterion, a customer at McDonald’s will be treated with a lot of friendliness and warmth in the restaurant. Customers therefore, patronize McDonald’s to experience moments of equality. In the Chinese restaurants, banquets are very competitive and customers try to outdo one another by ordering for the most expensive food which, in turn, causes the person sitting next to lose face. The competition banquets competition compels customers to rent private room so that they do not experience such embracement (COOMBS, 2013).

At McDonald’s, there are such occurrences since the menu is limited, there are standardized foods and the customers receive items that are of equal quality. Therefore, for people who have less money but need good meals, McDonald’s is the best alternative. The foods offered at McDonald’s offers the customers all the nutritional constituents a needed for a healthy life including water, fat, starch, protein, sugar and vitamins (BERGSTROM, 2012). Therefore, when a customer decides to spend money on a single meal at McDonald’s, he is guaranteed enough nutrition at least for half a day.

Employees

Most of the employees at McDonald’s are the youth. People prefer to work at McDonald’s because it prepares workers to be able to work in any position and from any other company. For example, the Canadian youths look for employment at McDonald’s restaurants before they seek employment elsewhere to broaden their skills. Each employee at McDonald’s plays a major role to ensure the productivity of the company. Employees work as a team and enjoy numerous benefits of being part of the McDonald’s big happy family (RITZIER, 2010). There are picnics offered to the employees that significantly motivate the employees to form lasting friendships.

Employees have the freedom to choose the time they feel is best for them to work. The restaurant ensures that employees work under very safe conditions including catering for their health and security. The employees receive promotions and motivations regularly so that they perform their duties appropriately (RITZIER, 2010). The benefits the employees get at McDonald’s include:

Group insurance plan where the Employees and their families are entitled to health and life insurance plan.

Profit Sharing where the employees get good share of profits of the company and McDonald’s is the greatest profit sharer in the whole world.

Matching Donation Programs where any charitable donation an employee’s gives is compensated by McDonald’s.

The positions at McDonald’s are categorized as follows:

i) The Second Assistant Manager whose roles are to train, motivate and coach the employees.

ii) The First Assistant Manager ensures aspects like: recruitment of new staffs, scheduling the staffs’ activities and managing all the equipment used in the restaurant.

iii) Other functions executed by the managers include performing field operation services, training the employees, developing the employees, human resource management, marketing and supply chain management.

The Suppliers

McDonald’s relies on independent suppliers who can efficiently deliver products by maintaining the company’s standards and specifications. One of the main suppliers of McDonald’s is the Bama Foods which supplies McDonald’s mainly with pineapples, apples and bean curd pies. The other supplier of McDonald’s is the McKey Food Services Ltd which is majorly based at the Shenez city. The Chinese Livestock Company also provides McDonald’s with meat. The suppliers of McDonald’s have outstanding appeal because there are no other suppliers who can meet McDonald’s high quality standard requirements.

Economics Trends of McDonald’s

The numerous branches of the McDonald’s always experience hardships whenever the economies of various countries experience inflation. Exchange rates also have effects on McDonald’s economy. McDonald’s being a business entity usually faces a lot of economic variables in its macro environment. McDonald’s should be well acquainted with the global supply changes and appreciate how the frequent currencies changes because the company sources most its products from the international markets. It is therefore evident that any change in currency and especially the dollar will affect the cost of purchasing McDonald’s products.

McDonald’s faces governmental regulations on taxes in all the nations where it operates branches. The countries have different scales of taxation which makes it rather tricky for the company to allocate funds effectively and this pose a great challenge to the company’s economy. The company also pays a certain percentage of revenue to the mother company in the U.S. The economic conditions of a country also have an impact on the business. Whenever the company tries to price products a bit higher than other foods, people will buy the cheaper foods as the consumers will prefer what they can afford. This is another challenge to McDonald’s as it must strive to capture as many customers as possible. The effect is that the company might end up making great loses. If the economy of a country is good, the consumption of the company’s products would increase regardless of the food pricing.

The Political trend of McDonald’s

The Government policies on the regulations of fast foods have great effects on McDonald’s operations. The main justification why the Chinese government is regulating the fast food markets is to promote the nation’s health by avoiding issues like the cardiovascular diseases, high cholesterol level foods and even obesity. These health issues are basically experienced by the young generations. The government also ensures that only recognized fast food restaurants get the license to carry out the business. McDonald’s needed to create good rapport with the government so as to succeed in the business. When employing the staff, the company must ensure that the employees are hired, compensated and trained according to the stipulated laws of the nation.

The Social Trends of McDonald’s

McDonald’s is taking into consideration the changes in lifestyle of China which is as the result of the development of the economy. The customers are able financially and can eat in very expensive outlets, but despite this fact, customers expect to be served with quality services. McDonald’s is working towards providing the best quality services to the customers and to therefore enjoy the market advantage against other restaurants. The best services given by McDonald’s that makes it different from others restaurants derive from the cutting edge technology. McDonald’s offers several convenient services for the customers including credit card payments, wireless internets, cozy and ambient relaxing points and refreshments.

McDonald’s has also tried to offer menus that favor different cultural beliefs; for example, the Hindu people don’t take meat therefore the company has a menu that favors the Hindus; the Muslims don’t take pork products therefore the company offers an alternative menu for the Muslims. The Chinese also have menus that favor their culture; the Asians like rice while Americans have preference for big sized menus (STOJIC & PFAJFAR 2010). McDonald’s should continue doing more market research and establish what the customers eat as far as culture is concerned.

The Technological Trend of McDonald’s

Technology is not a major macro environment factor in a fast food restaurant. Nevertheless, the company should do a deeper market research to know the new trends that will help in managing its operations. The main technological trends that the company should look into are the supply chain trends so that they supply their products to the customers in the most current technology. The payment systems should also be of modern technology, and the customers should also be able to access the restaurant through the internet (STOJIC & PFAJFAR 2010). The technological methods can be good cost savers both for the customers and the company.

McDonald’s Global Trend

In the first quarter, the leading fast food restaurant in the world had a marginally higher income which was at $ 1.27bn, but the global sales later on fell by 1%. The company says that the drop was due to the harsh winters in the U.S and the Europe. McDonald’s is also facing great pressure from its competitors. The Yum Brands which is the owner of the Pizza Hut, Taco Bell and the Kentucky Fried Chicken is posing a great challenge to McDonald’s as it is rising very fast. The Burger Kings have also redesigned their products in a more appealing way posing another great challenge to McDonald’s (OVERSEAS MISSIONARY FELLOWSHIP, 2008). Following the disappointing third quarter, McDonald’s is trying to make up for the fall so as to get a better response to the continuing financial crisis that is faced globally.

The major focus of McDonald’s for the year 2013 has been to improve its menu and develop innovative products that are very profitable. The company is also working towards producing products that are less time consuming like the chicken bacon and onion sandwich (OVERSEAS MISSIONARY FELLOWSHIP, 2008). Even though McDonald’s is trying to globalize its products, it is vastly experiencing great resistance from different cultures, for example, Japan resisted McDonald’s foods saying that the food caused obesity.

McDonald’s Regulatory Trends

McDonald’s company has taken strong measures to ensure that the business is conducted in a very ethical way and that the business activities comply with the rule of law. The commitment to attain the rules derives from McDonald’s core values. McDonald’s employees have the responsibility to abide by each value including the values of honesty and respect. The commitments are clearly spelt in the company’s Standards of Business Conduct that guide employees to conduct themselves in an ethical fashion (OVERSEAS MISSIONARY FELLOWSHIP, 2008). All the employees of McDonald’s must read McDonald’s Standard of Business conduct and accept to abide by the set rules. McDonald’s organizes a number of workshops and seminars to train the employees on the standards, laws, regulations, and policies that govern the company. All the employees of McDonald’s must obey the Foreign Corrupt Practices Act (FCPA). The (FCPA) act generally strives towards ensuring that politicians or political parties do not use their powers to manipulate or exploit businesses.

The act also ensures that giving bribe to any government official, private businesses, or individuals is prohibited. The employees of McDonald’s must certify yearly that they agree with the FCPA and their local act. The global compliance office of McDonald’s regularly monitors the company’s policies so as to prohibit unethical acts like bribery, money laundering and the chances of conducting business with terrorists (BARNEY & HESTERLY, 2012). This monitoring process is directed by the United States Patriot Act, the FCPA and the Executive order which is 13224. McDonald’s is also required to adhere to the general laws of business operation set by the Chinese government.

Uncertainties of McDonald’s restaurant in China

McDonald’s China faces several challenges despite having a strong brand in the industry. Some of the uncertainties are the pressure derived from the competitors, the government control and political risks, the market cultural differences, an increased labor cost, and the inherent inefficiency in the supply chain.

Competitors

The major competitors to McDonald’s are the Kentucky Fried Chicken and other Yum Brands. This is due to the late entry of McDonald’s in the Chinese market, its strategic decisions, and the localization of the products offered in China by the competitor Kentucky Fried Chicken. McDonald’s faces a major problem from its competitors through its weak copyright issue. Being a globally known brand McDonald’s facing the challenge of the imitation of its product and logo design (Chan, 2009). McDonald’s has the least market share in comparison to its competitors which leads to wrong customer’s perception about the available products and services. This is due to the food quality, diversification and maintenance of lower prices on the products by competitors like Kentucky Fried Chicken in comparison to those of McDonald’s.

Government Policy and Legal Factors

China is faced with the challenge of corruption in the political and legal system that has been catalyzed by lack of transparency in its judicial structure, which does not have binding precedential value. Foreign companies, therefore, do not receive adequate legal and political representation in China. Land ownership is not transparent inevitable, as the government owns the land. The business operation of McDonald’s faces numerous challenges since it entails large amounts of property transaction and privatization of land does not exist (Brown & Ganguly, 2008).

Cultural differences

The diverse Chinese consumption habits are based upon the different cultural beliefs. These consumption habits dictate the taste preferences of the people in towns like Beijing. The cultural food practice determines which foods qualities are accepted by the people. Some cultures in China castigate the consumption of fast foods leading to poor sales of these foods in such regions. McDonald’s Corporation operates a few stores in China as compared to Kentucky Fried Chicken owing to the culture barrier. Kentucky Fried Chicken adapted their products to fit the cultural expectations of the local people before McDonald’s discovered the strategy. McDonald’s has consequently conducted several market researches and initiated strategies to ensure that its fast foods are consistent with the local cultural beliefs. Tailoring the fast foods to fit the local taste and to obey the local cultural beliefs is the only sure strategy for McDonald’s to maintain its undisputed fast food leadership in China (Rein, 2012).

High labor cost and food price inflation

The Chines government’s decision on labor and the one-child policy have caused a decline in the labor pool. The decrease in population in China has increased the labor cost (Scharping, 2000). The cost of living has become expensive hence the wages that McDonald’s pays its employees have also increased. McDonald’s Corporation is faced with the challenge of the rising expectation of customers who want to pay less for products. Such customers perceive the fast foods offered to be of low quality just like their counterparts in America. The price of food has increased affecting the fast food chain in China. The high global commodity prices have broadened the inflation rate and threatened economic growth. Due to this situation, McDonald’s and other food stores have escalated the food prices leading to customers’ frustration. Despite China having the largest population in the world, its food supply chain relies on the small food producers. The big difference between the producers and consumers of fast foods In China calls for mass production that has made McDonald’s to face numerous challenges in managing its supplies (Schütte & Ciarlante, 2010).

Uncertainties Description

Competitors The major competitors of McDonald’s are the Wendy’s, Burger King, Subway, Pizza hut, KFC and the local fast foods. The competition is heightened by strategic decisions, and the localization of the products offered to in China by McDonald’s competitors. McDonald’s has the least market share as compared to its competitors, a situation that creates wrong customer’s perception about its product and services.

Government Policy and Legal Factors

Corruption in the political and legal system has been catalyzed by lack of transparency in China’s judicial structure, which does not have binding precedential values. Foreign companies therefore do not receive legal and political fairness. The operation of McDonald’s business endures numerous challenges as it is involved in large amount of property transaction and privatization of land does not exist.

Cultural difference The Chinese consumption habits differ from the American consumption in various respects. Various Chinese cultures have their unique consumption habits that explain the differences in their taste preference. McDonald’s Corporation operates a few stores in China as compared to Kentucky Fried Chicken. This is factual because the company tailors its products to fit the local taste as dictated by the local cultural beliefs. The reengineered strategy by Kentucky Fried Chicken is a product of several researches that have also motivated McDonald’s to come up with products that fit the local needs of the Chinese market and to appreciate the consumer habits of the Chinese people.

High labor cost and food price inflation

The Chines government’s decisions on the labor and the one-child policy have caused a decline in the labor pool. The increasing labor costs have ultimately raised the cost of living. The price of food has increased and affected the fast food chain in China. The high global commodity prices have broadened the inflation rate and threatened economic growth.

Basic Trends and Uncertainty

These are the factors that McDonald’s considered when examining China as an appropriate location for starting its business. These are also the appropriate approaches for highlighting the general business environment to help in managing the coming opportunities and threats. The potential changes in the environment are determined through analyzing the economic, environmental, political and regulatory, cultural, social conditions as well as technological issues to ensure that the business operates effectively. These trends are analyzed below in detail in relation to the Chinese market.

Economic

The growth of the economy in any environment or country has significant ramifications on the activities of small marketing enterprises (SMEs). The exchange rate, employment levels, banking policies, interest rates, inflation rates, Gross net product (GNP) trends, Gross domestic product (GDP) per head, fiscal and monetary policies, availability of raw materials and energy are some of the factors considered in economy analysis. The growth trend of GDP per capita of China in the 19th century provided a concord GNP indicator and highlighted that the country had sustained a continuous rapid growth in terms of GDP per person. This gives an indication that each person in the country is creating more value to the society leading in the high purchasing power of customers (Mathews & Lü, 2001).

Sometimes businesses are slowed down by economic development trends like higher prices of property and high rates of inflation though the situation of the economy seems to be good. Recent news of businesses in the Chinese market show that consumer price index went up by 6.1 percent from a percentage of 6.5. Food prices rose up by more than 13 percent; this is the most sensitive part in the government’s budget. The overall economy in the Chinese market with respect to McDonald’s restaurant has slowed down for three successive quarters but McDonald’s in Beijing have endeavored to reduce inflation and slow growth.

The interest rates have been increased for last five years by the people’s Bank of China and the Central Bank of China (BERGSTROM, 2012). The reserve requirement for commercial banks has increased nine times hence banks have reduced the lending limits on basic needs like food to control consumer and property prices. Turbulence in the economy is very significant since it can affect the shift of demands of segments in the Chinese market. For example, the world’s economy was recently shaken by forces emerging from citizens having less disposable income, issues with credit crunch, less gross demand of products and wild unemployment in nearly all the major economies.

High interest rates and inflations have also affected the major geographic markets of McDonald’s hence leading to decreased sales and increased costs of running the business. McDonald’s and many other businesses experience the aftershocks caused by a lagging economy. Reasonable prices of McDonald’s menu ad a wide range of foods have been adopted following the appreciation of the fact that economic turbulence are ever enduring (DAVIS, 2000).

Political

Legal issues, formal and informal rules which govern the company and government regulations are part of the political conditions in the Chinese business environment. Research shows that political conditions are the most turbulent forces in any business environment. The Chinese government has attached great significance in the past one decade focusing on the development of e-commerce. These steps that promote e-commerce include the summaries of the Middle/Long term Science and Technology Development Plans of government of China, the growth of the Development of Information Industry Plans in the Eleventh Five-year and Long term Plan in vision 2020 in the ministry of information industry.

The Chinese legal structure for e-commerce is in its promising phase in terms of the legal structure governing the Chinese people (DAVIS, 2000). However, the system has been experiencing some problems in its current stage. There is no sufficient knowledge in the Chinese government for drafting issue pertaining to e-commerce legislation like rights to intellectual property, security in transactions carried out in the country, protection of property and taxation of products in the country. All these laws help the government to earn some income from the transactions taken by the business people internationally and locally.

The Chinese government is drafting some laws supporting the critical areas like the rights of consumers, privacy in business sector and acknowledgment of digital signatures and validation of contracts in the electronic world. The Chinese legal system is developing slowly to meet the demands of the e-commerce sector (REES & POLLACK, 2004). McDonald’s is therefore, compelled to adjust its operations due to the Political shifts in China.

McDonald’s is developing ways to ensure that political changes in China will not directly affects its business in future, but it will remain stable in the midst of any political storm. This has been made effective by having partnership with Sinopec, which is the largest oil operator in China. The rapid growth of the Chinese population has really encouraged McDonald’s to open more restaurants in the country (DAVIS, 2000).

Social

The society needs to be analyzed keenly to understand the cultural and social environment in the world of business. Changes in demographics like movements, age distribution and population growth are significant because they have some effects on the cultural values and changes in social trends such as social behaviors and growth of the family (REES & POLLACK, 2004). Several other social factors that abound include environmental issues, immigration/emigrants, consumer lifestyles, religion, demography and education. As the Chinese economy grows, the growing population will require the use of the internet that McDonald’s has capitalized on to promote its sales.

China’s online shopping had a turnover of $80billion in 2010 and this is growing year in year out. 420 million Internet users in China spend approximately a billion, dollars every day on internet use, and around 15 million did purchase of goods online. Since the purchase of goods online is effective the Boston Consulting Group is predicting an increase of such by the year 2020. This will be easy because the e-commerce has changed the thought of consumers of goods in China about shopping online.

People are being warned about online, shopping since it has cheating and fake goods and this is a draw back to business world although the genuine business men try to ensure that the online products are quality. The Chinese business requires face to face transactions in order to build trust to the consumer, which is related to Hofstede’s notion of individualism-collectivism.

 Technology

Factors influencing technology include new mechanisms of purchasing, development of new products, new working methods, new mechanisms of distribution and new production technology. The largest technological problem affecting the development of the Chinese B2C industry is the lack of secure and stable online payment systems. According to research, the online payment system is affected by the Chinese consumer’s favorite for high Uncertainty Avoidance Index (UAI