Strategic Management (MGT703)

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Strategic Management (MGT703) MD: Ashiquzzaman ---ID: 1029993

TABLE OF CONTENTSTABLE OF CONTENTSQUESTION 1: Identify the key economic and businesscharacteristics of the fast-food industry1.0Introduction ----------------------------------------------------------------------------- 1

1.1Domestic and International Economic Factors( Factors of Production, Economies of Scale, Import-Export Earnings, Balance of

Payments and Foreign Exchange)--------------------------------------------------------- 2

1.1.2. Home and Host Countries FDIs:

(Market size and Growth rates, Competitiveness and Increasing Competition,Customer tastes and preferences, and Infrastructure availability) ------------------ 2

2.0 Appendix-I (Analysis Remarks conclusion) ------------------------------------------ 14QUESTION 2:

Report on Porter’s ‘Five forces model Competitive

Forces’ in the Fast Food Industry:1.0 Introduction: ----------------------------------------------------------------------------- 3

2.0The Structural Analysis of Industries: ------------------------------------------------ 3

I). Industry Competitors: ------------------------------------------------------------- 4

II). Buyers: -------------------------------------------------------------------- 5

III) Suppliers: -------------------------------------------------------- 5

IV). Potential Entrants: ------------------------------------- 5

V). Substitutes: ------------------------------------- 6

3.0 Concluding Remarks: ------------------------------------------------------------------- 6

4.0 Appendix-II--------------------------------------------------------------------------------- 15

5.0 Appendix-III--------------------------------------------------------------------------------- 16

QUESTION 3:

Conduct a SWOT Analysis and present your conclusionson McDonald’s competitive position based on thisanalysis.1.0 Introduction: ----------------------------------------------------------------------------- 6

2.0Competitive Analysis of McDonald (SWOT) -------------------------------- 7

I. Strengths: -------------------------------------------------------------------------- 8

II. Weaknesses: --------------------------------------------------------------- 8

III. Opportunities: -------------------------------------------------- 9

IV. Threats: ------------------------------------------------- 9

3.0 Concluding Remarks:

---------------------------------------------------------------------------------- 9

QUESTION-4 (a) Identify McDonald’s current strategy in termsof Generic competitive strategy -----------------------------------------------------------------------------------------------------------------

--- 10

QUESTION-4. (b)

Using marketing and financial information, discusswhether McDonald’s current strategy working.





------------------------------------------------------------------------------------------------------- 111.0 Introduction: ----------------------------------------------------------------------------- 11

2.0 Concluding Remarks: ---------------------------------------------------------- 12

3.0 Appendix -IV-------------------------------- 17

4.0Appendix-V--------------------------- 18

Question -1

Identify the key economic and business characteristics of the fast-food industry.

Answer :

Introduction

The fast-food industry is very much a domestic business as it is an international business

because they represent different sides of the same coin. As in the case of McDonald’s, it

started as a domestic business within the borders of the United States of America in (1955),

extending to become a foreign trade in (1967) with branches in Canada and Puerto Rico, and

further expanded into an international or global business over the next few decades. The rest

is history today. Significantly, however, McDonald’s success is illustrative of major or

critical decisions made that consider key economic and business characteristics of the

business potentials of the fast-food industry.

Among the economic characteristics are the factors of production including the conventional

wisdom of sourcing raw materials of production and distributing finished products at

reasonable and competitive

i. Prices.

ii. Economies of scale.

iii. Realities of foreign and international trade such as balance of payments and foreign

exchange earnings.

And among the business characteristics are market size and growth rate including new

markets and investment opportunities, competitiveness and increasing competition, customer

tastes and preferences including lifestyle changes in food consumption, and extent of

infrastructural availability such as physical, natural, social and managerial or entrepreneurial

infrastructures and continuing quality-assured standards of products and services. These two

groups of fast Food industry -characteristics are summarized as

(1) Domestic and international economic factors.

(2) Home and host countries FDIs (foreign and domestic investments) respectively.





1.1 Domestic and International Economic Factors:

(Factors of Production, Economies of Scale, Import-Export Earnings,

Balance of Payments and Foreign Exchange)

.As a fast –Food industry business developed and grew, so too its consideration for the

economics of sourcing raw materials for production becomes increasingly localised to its

geographical areas of operations to save cost and maximize convenience without

compromising on standards and quality assurance.

1.1.2 Home and Host Countries FDIs:

(Market size and Growth rates, Competitiveness and Increasing Competition,

Customer tastes and preferences, and Infrastructure availability)

The business characteristics, following the growth and expansion of McDonald’s beyond

USA and isolated clusters of non-USA especially North and South American countries and

European countries, have taken more aggressive global market-oriented expansions and multi-

million (even billions) of branding and promotional (including advertising) campaigns in all

shapes, sizes, colours and guises since the beginning of the 21st century. And it looks like the

vast markets and consumer potentials in China, the African continent, the Indian continent

and the ASEAN/Southeast Asia groupings will continue to drive the business motivation and

expansion of McDonald’s and other competitors in the fast-food industry.

Analysis Remarks conclusion may refer Appendix I . p.14


Analysis




Question 2:

Report on ‘Five Competitive Forces’ in the Fast Food Industry

To: New CEO

From: Md.Assiquzzaman (ASHIQ)

Subject: Porter’s ‘Five Competitive Forces’

1.0Introduction:

Analyse the fast-food industry using Porter’s Five-Forces Model of Competition and prepare

a report with conclusions concerning the overall strength of competitive pressures.

2.0 The Structural Analysis of Industries:

New CEO first used the weapon as a Porter 5 forces determine industry profitability because

they influence the price ,costs, and required investment of firms in an industry the elements of

return on investment Porter (1985) strongly advocated the ‘Five Competitive Forces’ as a way

forward in formulating immediate strategy. In this manner some level of competitive

advantage could be quickly leveraged against the competitors.

[Porter 1990, p.5]

Porter’s model is a heuristic device for analysing market forces affecting trade transactions

and business operations in a competitive environment, both within and outside the boundaries

of home and host countries worldwide. It identifies and describes the following five

elements: industry competitors, buyers, suppliers, potential entrants, and substitutes and

elaborately describe and analysis by figure 1-2 Element of industry Structure refer may

Appendix-III

[Porter, 1990.p-6]


Analysi

s:



``

Bargaining

Power of suppliers

Threat o


Figure 1-1 The Five competitive forces that Determine Industry Profitability

Source: Porter, 1990, p.5

I). Industry Competitors:

As discussed in details (see chapter 1: “Analysing a Company’s competitive Strategy: The

Core Concept with External Environment, Michael” E., Porter, 1990 pp. 1-10), Porter





suggested that “competitive pressures created by jockeying for better market position,

increased sales and market share, and competitive advantage” constitute the main

considerations in the factor on industry competitors.

II). Buyers:

Competitive pressures are also experienced from buyer bargaining power and buyer-seller

collaboration. . Switching brands is a buyer’s advantage but their disadvantage is low volume

and infrequent consumption as demonstrated by the rivalry between McDonald’s and Burger

King outside homeland USA.

The fact remains that buyers pressures can be both strong and weak bargaining power, given

the violability or sensitivity of a very competitive fast-food industry that responds to changing

consumer lifestyles, preferences and tastes, in which “time-savings” in food consumption

given busy schedules of job commitment can tip the balance for an upward growth projection

for McDonald’s and companies, with innovative products and creative services to boot!

III) Suppliers:

Competitive pressures stemming from supplier bargaining and supplier-seller collaboration is

another serious consideration for the fast-food industry. To maintain market share, and

perhaps to increase market share too, where the top ten players accounted for 62,617 stores in

(2002) for a market size of US $408 billion total consumption in (2003), suppliers must

remain competitive. In this regard, the giant conglomerates continue to challenge and

threaten the suppliers capabilities when their supply of raw materials commodity items.

It is evident that the suppliers’ bargaining power is weak. But established suppliers can have

a competitive advantage if they merge or consider effective forms of partnership that can

safeguard their position in the fast-food industry. Of course, with imminent changes in

lifestyle trends, the market opportunities for new suppliers can be encouraging too.

IV). Potential Entrants:

Unless the character of the fast-food industry changes, such as in alignment with thedevelopmental healthy lifestyle food consumption preferences and tastes with offers new





business opportunists in the supply and distribution chain management systems, new entrants

into the existing fast-food industry can be very trying. Given the stated US $64 billion

volume of business for the top ten restaurants, the playing field is tight. This suggests that

new entrants must be prepared to accept lower profitability and excess capacity, despite

posing serious threats to established players.

V). Substitutes:

The presences of emerging substitutes in the industry, especially in host countries of

operations, apparently are in the form of localising an international-originated product while

retaining the business infrastructures of fast-food chain operations.

The examples of pita bread substitutes in current McDonald’s and KFC “folders” food are

only product substitutes directed at product differentiation or diversification to maintain their

competitive advantage. But, in the hands of substitute players, and given the possibilities

some local –companies penetrant the country people mind, own flavour strategy to enjoy the

fast food industries profitability

Nevertheless, currently, the threat from substitute players in the established fast-food industry

is still weak. But the potential can be rewarding in the long run for future entrepreneurs in

global business transactions and management.


The fast-food industry may continue to be dominated by the top ten in the industry, many of

whom are US-bred and grown. This does not mean that, given the potentials of non-

American and no-European local-bred and local-grown food industries in host countries

where FDIs in fast food shave dominated the market, the character and presentation of new

fast-food offerings may not change the global business transactions in this industry.

May refer to Appendix-II, p.15

3. Question:

Conduct a SWOT Analysis and present your conclusions on McDonald’s competitive

position based on this analysis.

1.0 Introduction:


Analysis




The SWOT Analysis is also a heuristic model to facilitate our understanding and discussions

of the strengths, weaknesses, opportunities and threats which confront the competitive

position of McDonald’s vis-a-vis its rival competitors in the “gold rush” scramble to the

world’s largest China and Africa markets.

2.0 Competitive Analysis of McDonald (SWOT)


Analysis




Internal

Factors

(IFAS)

External

Factors

(EFAS)

I. Strengths:


Analysi

s




McDonald’s is an established business and branded trademark since (1955) when

“simian” for breakfast, “Bolshoi” or “Mac” for lunch became a household name

throughout the Americas and Europe.

• “Golden Arch” is a symbol of quality-assured fast food and its Ronald McDonald a

symbol of fun-friendly greetings from a lovable clown!

• Strengths associated with this ever-green restaurant worldwide include relatively low-

priced,

• Value-for-money product,

• Friendly and fast service with clean and pleasant buildings, an impressive list of

national International franchised holders that continue its proven tradition of

excellence,

• A strong presence in the younger market segment and a loyal following of young

consumers, customer loyalty and premium rewards,

• Increasing merchandise retail sales associated with premiums and gifts to reinforce

product branding and friendly service.

II. Weaknesses:

• Despite its international presence almost everywhere, like some big businesses,

McDonald’s also has its share of failing revenues.

• Weaknesses are seen in slow order processing time that irritate waiting customers,

• Low customer service ranking,

• High employee turnover,

•

Detracting from business focus because of increasing dependency on income fromrent, not from core business,

• Inconsistent quality and service despite quality-assured pronouncements, and

launching and writing off too many failed new initiatives.

Significantly, McDonald’s have failed to respond quickly to changing customer needs and

franchise requirements.

III. Opportunities:





• McDonald’s market opportunities are tremendous and widespread because its market

reaches since (1955) have stretched the breadth and length of conceivable and

penetrable countries in different continents throughout the world.

•

It is not surprising that McDonald’s have seized available opportunities to increase itsinvestment in more company-owned and company-operated restaurants where

profitability is predicted and since domestic industry is mature based on careful

consideration

• Fast food not only people taken for full fill the appetitive but also but also use

entertainment so technology adaptation like warless internet plasma TV with MTV

channel.

• Review and revise its standard menu in host countries and improvement innovation

where consumer preferences and tastes may decide the need to localise its original

product lines to accommodate host-country originated “killer” local products in fast-

fast consumption.

IV. Threats:

The threats, perceived or otherwise, to McDonald’s successful global business investments

ironically stems from its home country where it is projected that the market has saturated,

with only a 2 percent earning potential for the company. The growing trend toward healthy

food consumption and more health-inclined population are among the reasons for the home

decline. However, other external threats to its dominant share seem to come from more

aggressive marketing and promotion by its competitors who are eating into the market share

for fast-food industry quite significantly. The Subway sandwich restaurant is a case in point.


. In this regard, McDonald’s is exploring alternatives in its real estate investments and new

investments targets under its new Chairman and CEO, Jim Cantalupo who has just introduced

his “Plan to Win” strategy to arrest McDonald’s declining fortunes. Nevertheless, this

observation does not devalue the need for SWOT analysis to enable use business operators

and entrepreneurs to make better and more effective decisions on their investments.





QUESTION. 4 (A)

Identify McDonald’s current strategy in terms of generic competitive strategy.

The generic competitive strategy currently adopted by McDonald is “Best Cost Provider

Strategy”.

McDonald CEO analysis Generic Competitive Strategies by according to Mical E. Porter (1990)

Source: Porter, 1990, p.12, Figure 1-3 Three Generic Strategies

It is aligned to the new Chairman and CEO’s “Plan to Win” strategy aimed, among others, to

variegate McDonald’ products at a range of price points that most appeal to the sensitivity of

consumers. This strategy also includes extended fresh efforts to concentrate promotion to

entice and lure customers to McDonald’s restaurants with premium family salads and

improved “Happy Meals”.


Analysi

s




QUESTION 4. (B)

Using marketing and financial information, discuss whether McDonald’s current

strategy is working.

1.0 Introduction:

The discussion on whether the “Best Cost Provider Strategy” is working is based on the

summary of financial information presented as McDonald’s 11-year Summary refers may

(3.0`) Appendix IV. In terms of the company-operated sales and franchised and affiliated

revenues, the earnings in 1995 was US $9.795 million, in 2000 was US $14.243 million, and

in 2005 was US $20.460 million. The revenue has more than doubled since 1995. The net

income for the years stated are US $1.427, US $ 1.977, and US $ 2.602 million respectively,showing an almost 100 percent increase over a ten-year period. On the whole, the percentage

increase is positive.

Viewed from the perspective of Total System wide Restaurants in the same years being

compared, the earnings are US $18.299 million for 1955, US $ 28.707 million in 2002, and

US $31.886 million. There was an increase of US $ 10.408 in span of five years between

1995 and 2000, although the increase in revenue between 2000 and 2005 was only US $3.179.

The Franchised and Affiliated Sales are US $23.051 million in 1955, US $29.714 million in

2000, and US $38.926 million in 2005. There was an increase of US $6.663 million between

1995 and 2000, and US $8.582 million between 2000 and 2005. In both instances, the

increase was positive and the 1st five-year earnings growth at year 2000 was larger than the

2nd five-year earning growth at year 2005.

2005 current ratio of Mc Donald

We know current ratio =Current asset/Current lability

` =$8832/$2920

=3.024

This ratio analysis proved that Mc Donald financial situation is very strong that way (1995)

Prrasuraman, Zenithal & Berry undertaking the risk management

(https://www.castelle.com/corporate/financial/q1_2005.pdf


Sourc

e

Analysis

https://www.castelle.com/corporate/financial/q1_2005.pdf





In perspective, McDonald over the financial ratio, Calculation may refer (4.0) Appendix-V:

2.0 Conclusion:

The overall revenue and income figures look promising, showing a positive trend towards the

year of 2005 – a credit to the Cantaloupe’s “Plan to Win Strategy”. McDonald must

therefore continue to expand its operations overseas where it owns and operate more than half

of its restaurants. And it must continue its franchise businesses as they seem to produce

positive growth figures while controlling costs quite effectively. This “Plan to Win

Strategy” seems to be working in the short run. However, the long-term and continuing

success of McDonald’s in the fast-food and restaurant businesses require more consistency in

management innovations and identification of new strategic development in doing emerging

changes in international business transactions and global market dominance.

LIST OF TEFERANCE MUST BE





. Thompson, A. Jr.,. Strickland III, A., J & E., John, Gamble, 2005, Crafting and Executing

Strategy: The Quest for Competitive Advantage, 14th ed., US: McGraw-Hill.Case13 pp-C-

213-234

Michael, E., Porter 2004, Competitive Advantages creating and sustaining Superior

performance: Free Press New York, London, Toronto, Sydney, Simon & Schuster new York

Prahalad, C.K., 1987, The Free Press New York : The Multinational Mission: Balancing

Local Demands and Global Mission, USA

Besanka, D. , Dranove, D., &. Shanley, M., 1996 , Economics of Strategy, New York: John

Wiley & Sons.

Hamel, G., & Prahalad, C.K., 1994, ‘Competing for the Future, Boston’, Harvard Business

school , Review Press.

Barney, J.B. 1991, ‘Firm Resources and Sustained Competitive Advantage’, Journal of

Management vol.17 pp. 99-120.

Birkinshaw, J. Morrison, A. & Hulland, J. 1995, ‘Structural and Competitive Determinants of

a Global Integration Strategy’, Strategic Management Journal Vol.16 pp. 637 – 55.

.Porter, M.E., 1980, Competitive Strategy, New York: Free Press.

Porter, M.E., 2000, “What is Strategy?” Harvard Business Review, On-point Enhanced

article, February p.1

http://mcd.mobular.net/mcd/90/13/35/ (Viewed 28.Novwmber from 2006-11-29)

Reich, P.J. & Buckley, Hasai, N. 2004, ‘A Global System View of Firm Boundaries’, Journal

of International Business Studies, January, pp. 33-50.

Copeland, T., Koller, T., & J. Murrin, 2000, Valuation: Measuring and Managing the Value

of Companies, New York: John Wiley & Sons.

https://www.castelle.com/corporate/financial/q1_2005.pdf (Viewed Mac- Donald’s main

wave Page 27, November2006-11-29)

Summers, J.,& Smith, B.2002, Communication Skills Hand Book , published by Markono

,Singapore


http://mcd.mobular.net/mcd/90/13/35/








Appendix –I

Analysis Remarks of fast food industry in sense of Mc Donald’s:

According to The Nation’s Restaurant News in Thompson, Jr., Strickland III, and Gamble,

(2005), Crafting and Executing Strategy: The Quest for Competitive Advantage, 14th ed., the

fast-food industry in our case study has an estimated market size for consumer food service of

US S408 billion, of which the total sales of 30 sandwich chains accounted for about US $64

billion. The top of the list includes McDonald’s in 120 countries, Burger King in 58

countries, Wendy’s in 22 countries and Harder’s in 15 countries. Jointly, they accounted for

61% share of the US $64 billion turnover of the said 30 sandwich chain of fast food

restaurants.. The predicted 2 percent growth for the market leaders has pushed them to look

beyond their home country operations, especially when Euro monitor had forecasted a growth

of US $200 billion between the years of 2002 and 2006 for the food service market. And

McDonald’s, in the year 2002, had expanded its presence to account for more than half of the

total international market share of fast-food restaurants, and it is still growing despite the

presence of old and new competitors, and the increasing competitiveness of consumer choices

and changing tastes.

In the final analysis, when the two groups of economic and business characteristics are

combined, inevitably, the future of the fast-food industry is subject to the influences of the

business cycle, business mergers and acquisitions, trade barriers and national and regional

protective FDI policies regulated by the World Trade Congress and prevailing international

laws and regulations by other international bodies.

And, in concert, in achieving economies of scale with increasing demands, supply and

distribution, McDonald’s like other compositing brands in the fast-food industry also

considered the impact of balance of payments and foreign exchange savings, apart from

payments made for import-export transactions at prevailing localised exchange rates. Thus, in

the world of global business today, domestic and international economic factors are still

important considerations even though they may pale against the dominating business factors

of expanding market potentials and changing consumer lifestyle preferences and tastes with

vital contribute of employers in the globally .


Analysi

s




Appendix –II

Analysis another part:. Most importantly, over the years, McDonald’s has become a world-class and the largest

burger chain with more than 30,000 restaurants throughout the world, with an estimate of 46

million customers a day and turnover sales of US $41 billion.

Its strong international growth and overseas expansion, through franchises which negates the

need for huge capital investment and risks, is supported by a large advertising and

promotional budget directed at maintaining competitive edge and enticing new consumers

while retaining customer loyalty. Also, McDonald’s has diversified its business interests into

real estate holdings, retails merchandise sales, and restaurant operations in order to achieve

variety of incomes and improve revenue earnings





``

B a r g a i n i n

P o w e r o f s u l i e r s

T h r e a tn

Entry BarriersEconomic of scale

Proprietary products difference

Brand identity

Switching costCapital requirement

Access to distribution

Absolute cost advantages

Proprietary learning curve

Access to necessary inputProprietary low cost product design

Government policy

Expected retaliation

Figure 1-2 Elements of industry Structure[Source: Porter, 2004, p.7]


Appendix –III




`


3.0Appendix -IV




4.0 Appendix-VFinancial Ratio Calculations For Mc Donald's

Year type Of Ratio

Ratio Formula Calculation Result

Profitability Operating Profit Profitbefore

taxesinterest

Ratios Margin Sales

1998 2761.90 22.24%

12,421.40

1999 3,319.60 25.00%

13,259.30

2000 3330.00 23.38%

14,243.00

2001 2,697.00 18.14%

14,870.00

2002 2113.00 13.72%

15,406.002003 2,464.70 19.58%

(3

quarters)

12,585.10

Net Profit Margin Profit aftertaxes

interestSales

1998 1550.10 12.48%

12,421.401999 1,947.90 14.69%

13,259.30

2000 1977.00 13.88%

14,243.00

2001 1,637.00 11.00%

14,870.00

2002 893.00 5.80%

15,406.00

2003 1,345.70 10.69%

(3quarter

12,585.10


Appendix -IV3.0






LiquidityRatios

Current Ratio Current Assets

Current Liabilities

1998 1309.40 0.52:1

2,497.10

1999 1,572.30 0.48:1

3,274.30

2000 1662.40 0.70:1

2,360.90

2001 1,819.30 0.80:1

2,248.30

2002 1715.40 0.70:1

2,422.30

2003 1,938.50 0.73:1

(3quarters)

2,633.40

Leverage

Ratios

Debt To Total Debt

Asset Ratio Total Assets

1998 6188.60 0.31:1

19,784.40

1999 5,632.40 0.26:1

20,983.20

2000 7843.90 0.36:1

21,683.50

2001 8,555.50 0.38:1

22,534.50

2002 9703.60 0.40:1

23,970.50

2003 9,291.70 0.36:1

(3

quarters)

25,234.10





Debt To Total Debt

Equity Ratio Total Shareholders Equity

1998 6188.60 0.65:

9,464.70

1999 5,632.40 0.58:

9,639.10

2000 7843.90 0.85:

9,204.40

2001 8,555.50 0.90:9,488.40

2002 9703.60 0.94:

10,280.90

2003 9,291.70 0.80:

(3quarters)

11,648.60

Marketing Operating Cost Total Operating Cost

Ratios Ratio Total Revenue

1998 9659.50 77.76

12,421.40

1999 9,939.70 74.96

13,259.30

2000 10913.00 76.60

14,243.00

2001 12,173.00 81.86

14,870.00

2002 13,293.00 85.7315,506.00

2003 10,120.40 80.41

(3

quarters)

12,585.10





Net Income To Net Income

Revenue Total revenue

Ratio

1998 1550.10 12.48

12,421.401999 1,947.90 14.69

13,259.30

2000 1977.00 13.88

14,243.00

2001 1,637.00 11.00

14,870.00

2002 $893.00 5.76%

15,506.00

2003 1,345.70 10.69

(3quarters) 12,585.10

Company Co.Operated Rest.Exp

Operated Rest. Co.Operated Rest.Rev.Expense To

Revenue

Ratio

1998 5261.60 59.15

8,894.901999 7,829.60 82.31

9,512.50

2000 8750.00 83.60

10,467.00

2001 9,454.00 85.63

11,041.00

2002 9907.00 86.15

11,500.00

2003 8,094.00 64.31

(3

quarters)

12,585.10





Franchised Rest. Fran.Rest.Exp.

Expense To Fran.Rest.Rev.Revenue

Ratio

1998 678.00 19.23%

3,526.50

1999 737.70 19.69%

3,746.80

2000 772.00 22.40%

3,776.00

2001 800.00 20.89%

3,829.00

2002 840.00 21.51%

3,906.002003 690.30 21.65%

(3quarters)

3,188.10

Strategic Management (MGT703)

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