The external environment and its effect on strategic

marketing planning: a case study for McDonalds

Demetris Vrontis*
School of Business, University of Nicosia, 46 Makedonitissas Ave.,
P.O. Box 24005, 1700 Nicosia, Cyprus
Fax: 00357 22 353 722 E-mail: vrontis.d@unic.ac.cy
* Corresponding author
Pavlos Pavlou
Department of Management and MIS, School of Business,
University of Nicosia, 46 Makedonitissas Ave., P.O. Box 24005,
1700 Nicosia, Cyprus
Fax: 00357 22 353 722 E-mail: pavlou.p@unic.ac.cy
Abstract: This case study has been compiled in order to illustrate the effect of
the external environment on the international marketing strategy of
McDonalds, the fast food chain. An external environmental analysis is
necessary, as effective marketing strategies cannot be developed without firstly
analysing the environment in which the company operates. The paper analyses
a number of the theoretical approaches to strategic planning to be considered in
international marketing.
Keywords: adaptation; international; marketing; McDonalds; standardisation;
strategy.
Reference to this paper should be made as follows: Vrontis, D. and Pavlou, P.
(2008) The external environment and its effect on strategic marketing planning:
a case study for McDonalds, Journal for International Business and
Entrepreneurship Development, Vol. 3, Nos 3/4, pp.289307.
Biographical notes: Demetris Vrontis is the Founder and Editor of the
EuroMed Journal of Business and the Editor for the World Journal of Business
Management. He is a Professor in Marketing and the Dean of the School of
Business at the University of Nicosia, Cyprus. His prime research interests are
international marketing, marketing planning, branding and marketing
communications. He has published over 45 refereed journal articles, contributed
chapters and cases in books/edited books and presented papers to conferences
on a global basis. He is also the author of eight books, mainly in the areas of
international marketing and marketing planning
Pavlos Pavlou graduated from the University of Leeds in England with a BSc
in Engineering and from Salford University with a PhD in Management.
He spent 13 years in the UKs NHS and in consultancy organisations
(PricewaterhouseCoopers and KPMG) in the UK and Cyprus. In 2005 he joined
the University of Nicosia as an Assistant Professor in the School of Business.
He teaches international business, leadership development and quality
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J. International Business and Entrepreneurship Development, Vol. 3, Nos. 3/4, 2008 289
Copyright 2008 Inderscience Enterprises Ltd.
management at the undergraduate level and strategic management at the MBA
level. He is a member of the Editorial Review Board of the EuroMed Journal of
Business. His research interests include strategic performance management,
international business and corporate governance systems.
1 Introduction
1.1 McDonald s operations in international markets
McDonalds is the leading global foodservice retailer with more than 30,000 local
restaurants serving 52 million people in more than 100 countries each day. It is one of the
worlds most well-known and valuable brands and holds a leading share in the globally
branded quick service restaurant segment of the informal eating-out market in virtually
every country in which it operates.
1
1.2 Situation analysis and marketing planning. A theoretical outlook
The importance of the internal and external environment and their effect on the
development and implementation of marketing planning is crucial and should be highly
considered by any organisation wishing to be profitable in the increasingly competitive
international marketing arena. Multinational companies that desire to prosper, should
develop a coherent international marketing plan (see Figure 1) having, as a starting point,
the analysis of the environment. Based on that, the company objectives, strategies and
tactics are drawn, aiming for organisational success and profitability.
Multinational companies should have in mind that effective marketing strategies could
not be developed without firstly analysing the external and internal environment in which
the company operates.
The external environment for a company covers many aspects. It is suggested that the
environment covers two main areas:
the macro-environment
the micro-environment.
The macro-environment consists of forces such social, cultural, legal, economic, political
and technological. Within this are included factors such as demographics, green issues and
larger societal and environmental forces. The micro-environment includes other
environmental constraints, such as the structure of the market, the suppliers, customers,
trends of the market, the public and competition.
Equally important is the internal environment incorporating the examination of the
companys marketing mix (product, price, place, promotion) and service mix (people,
process management, physical evidence). An analysis of the internal environment also
covers other factors such as sales, profitability, market share and customer loyalty.
The internal audit examines the companys own resources and supplies suggestions as
to the companys strengths and weaknesses. Internal considerations are mainly
controllable by the company and, therefore, companies should mostly avoid any problems
from this area. It is evidently proven that product development and strategic formation is
based upon the internal organisational capabilities.
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Source: adapted from Vignali et al. (2003)
Every company, after considering both its internal strengths and weaknesses and the
external environmental influences that affect it (opportunities and threats) is in a position
to develop an effective marketing plan. Failure to understand the external and internal
capabilities may lead to sub-optimisation of the organisations strategy and resources
invested.
Multinational companies must highly consider environmental auditing and the
development of the SWOT (strengths, weaknesses, opportunities and threats) analysis. This
is vital if they want to capitalise on organisational strengths, minimise any weaknesses,
exploit market opportunities as they arise and avoid, as far as possible, any threats.
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The external environment and its effect on strategic marketing planning 291
Figure 1 The STRATICS PROCESS marketing planning
It should be noted that the external environment is very important as it dictates the
behaviour of any marketing orientated organisation. Consequently, for the purpose of this
case, considerations for the analysis of the external environment are highlighted for
McDonalds.
2 McDonalds and its external environment
2.1 Political/legal factors
Political factors include laws, agencies and groups that influence and limit organisations
and individuals in a given society. The dimensions being evaluated include the
government attitude to foreign markets, the stability and financial policies of a country and
government bureaucracy.
Political and legal forces are highly important as they cover many aspects of company
policy. Government policy affects industry as a whole through regulatory bodies such as
the Department of the Environment and the Department of Trade and Industry. These
bodies develop policies on the trading, restrictions and standards within their particular
field. The policies created can affect businesses in various ways; in how their products are
produced, promoted and sold.
Multinational companies should understand that the political background is different
across the regions of the world. Many former centrally planned economies, for example,
are still heavily protected by the government. In such a climate, it is more likely that
proposals for a joint venture will be accepted.
It is argued that the legal ramifications of marketing a product internationally are very
complicated. Each country has their own legal system and when a company
internationalises then it must keep within these legal systems.
A legal issue occurred in Russia for McDonalds when, in 1993, a law was passed
in Moscow requiring all stores to have Russian names, or at least names translated into
the Cyrillic alphabet. This meant the company had to translate its brand name to
. This enabled McDonalds to at least retain the sound of its name. This
also occurred in Japan where the pronunciation of its name was changed to MaKudonaldo
(Daniels et al., 1998).
Moreover, the law in Russia states that at least a three-quarters majority vote is needed
to approve important decisions. Therefore, the representatives of McDonalds and the City
Council must agree on all major decisions, which could hamper opportunities identified
by the company (Daniels et al., 1998).
When it comes to developing marketing mix elements in foreign markets, the
companys approach may have to be adapted. The legal environment must be assessed to
determine whether it would affect the launch of a product into a new country. In many
countries, government and regulations have a direct influence on product design. Law
often imposes minimum or special product standards, which may necessitate the shape,
kind, components or even the brand name of a product used.
Government regulations and restrictions regulate the content of promotion. The law
restricts the advertisers freedom, particularly with regard to the advertising message and
visual presentation. Promotional activities also may have to be changed, depending on the
country involved and the legal systems that take place. For example, in France and China,
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door-to-door selling cannot be used as it is prohibited (Vrontis and Vronti, 2004).
Moreover, Germany forbids superlatives or comparative claims. The words better and
best are words to be avoided. In the case of product comparisons, the manufacturer with
whose products the advertised products are compared may be able to sue for damages.
Price regulations may be another factor that a company needs to look at when
launching into internationalisation. In some countries governments may control the price
that is set for products. For example, Ghana controls the manufacturers profit margins,
which indirectly controls the price paid by customers (Muhlbacher et al., 1999).
2.2 Economic factors
Economic factors include factors that affect consumer purchasing power and spending
patterns.
Economic trends are again, to a large extent, bound up in government policy and are
a crucial issue to businesses and marketers because of the way they affect consumer
spending power. In periods of relative prosperity, a consumers disposable income will be
relatively high and, therefore, there is a willingness to spend more money. Price becomes
a less sensitive issue and this affects marketing strategy itself. During a recession,
however, spending power decreases making price more relevant.
The differences that exist between countries in different stages of economic and
industrial development have a profound influence on price setting. Differences in income
levels may suggest the desirability of systematic price variations. It is, therefore, important
for McDonalds to understand that, in countries with a lower stage of economic
development, it is necessary to set a lower price.
The limited purchasing power in developing countries, often combined with low levels
of literacy, poses special problems for marketers on promotion. Although theoretically a
company has a wide choice of promotional tools, in practice the choice of effective tools
is somewhat limited. For example, in foreign markets with low economic development,
McDonalds should try to use cost effective methods of promotion, otherwise the final
price would be beyond the reach of most customers.
2.3 Technological factors
Technological developments have made international travel and communication more
accessible to consumers and led to a situation in which social habits and fashions change
much quicker. Moreover, lifestyles and attitude changes cause changes in product demand
and how products can be sold to customers.
Technological factors include forces that create new technologies, creating new
product and market opportunities. It is based on considerations as to whether the local
market has sufficiently developed technologies to take full advantage of the product. It
should be noted that high technologies are required to make full use of the variety of
promotional methods using alternative advertising media such as television or websites
(Vrontis and Vronti, 2004).
McDonalds successful internationalisation can be partly attributed to the way the
company has overcome technological problems. The systematic substitution of equipment
for people and the carefully planned use and positioning of technology have helped each
franchise to be of the same high standard. When McDonalds entered the Russian market,
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The external environment and its effect on strategic marketing planning 293
the company took into account that technology transfer could provide important long-term
benefits to the Soviet citizenry. Also, since the Soviet machinery lagged 1520 years
behind Western technology, new machinery from Holland was used to harvest potatoes
used to make French fries.
2.4 Socio-cultural factors
Shifts in spending power are also affected by sociological demographic trends. Analysis
of population fluctuation suggests to marketers in which age groups there is going to be
the largest demand for particular goods. A baby boom, for example, will increase the need
for baby products initially then, in following years, a greater demand for toys, educational
products and childrens clothes etc. Another emerging trend is the changing family, with
the traditional family unit of mother, father and two children in decline. The increase in
one person households creates different needs in home products as homes require smaller
products and money is spent due to more frequent home movement. Changes in
demographics can, therefore, affect things such as the development, designing, packaging
and promotion of products. It could also shape the organisational setting of strategies and
strategic planning.
In the case of McDonalds, several social forces greatly affected its success in US.
One factor was the prevailing family structure in the US and the trend towards a
youth-orientated culture. In the 1960s and the 1970s the decision-making role had changed
to such an extent that children often made the selection of a place to eat. McDonalds
special emphasis on children and teenagers as advertising targets was successful largely
because the strategy capitalised on these existing social trends.
Another important factor was that the value that US society placed on time favoured
the consumption of meals with minimum time effort. Saving time, in fact, created the
desire for meals purchased outside the home on an unplanned or impulse basis. The result
was a burgeoning demand for low-priced food that was available any time and that could
be purchased with minimum shopping effort.
Economic factors are important for McDonalds in determining a consumers ability
to purchase a product. Whether a purchase actually occurs, however, depends largely on
cultural factors. Therefore, to understand markets abroad, the company must have an
appreciation of buyer behaviour.
Culture could be defined as institutions and other forces that affect a societys basic
values, perceptions, preferences and behaviours. Culture includes the entire heritage of a
society transmitted by word, literature or any other form. It includes traditions, habits,
religion, art, education, language, family and reference groups. While satellite television
and the international media are shrinking the world and homogenising consumer tastes,
culture continues to pull in the opposite direction. Traditions and religious beliefs run deep
and could often conflict with international media messages.
When McDonalds entered India, the chain decided not to launch its Big Mac burger
as a result of deferring to the Hindu prohibition against beef consumption. The company
instead served chicken, fish and vegetable burgers. This was the first McDonalds without
beef. A so-called Maharaja Mac was also created, using a patty made from lamb. In some
countries, McDonalds has been forced to change its food preparation methods as well; in
Singapore and Malaysia, for example, the beef that goes into burgers must be slaughtered
according to Muslim law.
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In terms of language, when McDonalds expanded in Puerto Rico in the early 1980s
the company employed US TV commercials dubbed in Spanish. When prospective
customers objected, the company eventually relented and developed a Spanish language
campaign just for Puerto Rico. Sales showed a considerable increase.
Moreover, in Southern China, McDonalds is careful not to advertise prices with
multiple occurrences of the number four. The reason is simple: in Cantonese, the
pronunciation of the word four is similar to that of the word death (Whalen, 1995).
In Japan, where family ties are strong, McDonalds has enjoyed a surge of popularity
as, in its approach, it invites consumers to associate the restaurant with family members
interacting in various situations. Starting in 1996, McDonalds campaign in Japan depicted
various aspects of fatherhood. One spot showed a father and son bicycling home with
burgers and fries; another showed a father driving a van full of boisterous kids to
McDonalds for milkshakes.
2.5 Environmental factors
The climate and physical terrain of a country are important environmental conditions
which have a significant effect on the demand and the type of product made available.
Prior to entry into a new market, it is very important for McDonalds to consider the
physical terrain and climate in the appraisal. Altitude, relative temperatures and humidity
are some of the climatic conditions that can affect products in foreign markets.
Being environmentally friendly is another important issue to consider. Environmental
groups forced McDonalds to reduce its use of plastic and styrofoam packing. While
McDonalds internal market research shows that environmental issues will have neither a
positive nor negative impact on sales, they have agreed to work with the Environmental
Defence Fund, an environmental pressure group, to reduce unnecessary and harmful
waste.
2.6 Stakeholders
It is important that multinational companies highly consider and value their general public
or stakeholders their staff, suppliers, distributors, shareholders and the consumer itself.
How a consumer and, indeed, the other publics mentioned, view the company and the
products marketed is important, firstly in order to assess what market you are in but,
secondly, to assess whether the corporate image of the company is functioning in a
positive manner. Public perception of your product allows it to be positioned or
repositioned to reach the required target market and, therefore, be successful. If you view
your product as portraying a certain image that is at odds with the public perception of it,
obviously your marketing strategy is not functioning properly. Likewise, if your business
itself is viewed in a negative light by actors both internal and external to the company,
steps need to be taken including the design, quality, marketing and strategy of what is
offered to correct this and therefore create a feel good factor. Having a good relationship
with all publics is highly considered by McDonalds.
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The external environment and its effect on strategic marketing planning 295
2.7 Customer tastes
Customer tastes is another very important issue to consider. Every company should
undertake market research and understand consumers needs and wants. Based on that, it
should design marketing strategies and tactics to meet the needs and requirements of its
target audience. This is crucial as, by undertaking necessary adaptations, the company can
maintain its marketing orientation and go in line with the marketing concept.
McDonalds is not an advocate of global marketing where this involves products and
services being treated as though the world is a single, uniform entity, thus marketing
standardised offerings in the same way everywhere. They follow an internationalisation
marketing strategy which involves customising marketing strategies (this may also include
pricing strategies) for different regions of the world according to cultural, regional and
national differences in line with local needs. Therefore, the concept of think global, act
local has been clearly adopted by McDonalds (Vignali, 2001). Below are some key
examples of the Internationalisation marketing strategy pursued by McDonalds.
2.8 Product
One of the aims of McDonalds is to create, where possible, a standardised set of items
that taste the same whether in Singapore, Spain or South Africa. Vignali (2001) notes that
adaptation is required for many reasons, including consumer tastes/preferences and
laws/customs. There are many situations where McDonalds adapted the product because
of religious laws and customs in a country. For example, in Israel, after initial protests, Big
Macs are served without cheese in several outlets, thereby permitting the separation of
meat and dairy products required of kosher restaurants. McDonalds restaurants in India
serve Vegetable McNuggets and a mutton-based Maharaja Mac (Big Mac). Such
innovations are necessary in a country where Hindus do not eat beef, Muslims do not eat
pork and Jains (among others) do not eat meat of any type. In Malaysia and Singapore,
McDonalds underwent rigorous inspections by Muslim clerics to ensure ritual
cleanliness; the chain was rewarded with a halal (clean, acceptable) certificate,
indicating the total absence of pork products. There are also many examples of how
McDonalds adapted the original menu to meet customer needs/wants in different
countries.
In tropical markets, guava juice was added to the McDonalds product line and
Bananafruit pies became popular in Latin America. In Thailand, McDonalds introduced
the Samurai Pork Burger with sweet sauce. In Germany the chain sells beer and
McCroissants, while wine is served in France. Chilled yogurt drinks are available in
Turkey, espresso and cold pasta in Italy. Teriyaki burgers are sold in Japan and vegetarian
burgers in The Netherlands. Australian outlets used to offer mutton pot pie and, in the
Philippines, where noodle houses are popular, natives go for McSpaghetti.
The varied offerings also include banana fruit pies in Latin America, kiwi burgers
(served with beetroot sauce) in New Zealand, noodle soup served in most Asian markets
and chilli sauce to go with fries in Mexico and Singapore. McLaks (grilled salmon
sandwich) are sold in Norway and McHuevo (poached egg hamburger) in Uruguay. In
Thailand, McDonalds introduced the Samurai Pork Burger with sweet sauce. Moreover,
in France, McDonalds have adapted the McDeluxe to have a delicate old mustard and
pepper sauce, a slice of cheddar cheese, fresh onions and a whole lettuce leaf to appeal to
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their tastes and in Greece and Cyprus the introduction of the Greek Mac has been a huge
success.
These are examples of how McDonalds has adopted its product offer in international
environments.
2.9 Structure of the market/competition
The issue of the competitive environment must be seen as probably one of the most
important issues. By gathering continuous data about competitors, such as their strategic
strengths and weaknesses, their objectives, strategy, tactics and reaction patterns and the
sort of marketing activity/budget, a company can decide its own position in relative terms
and be prepared for what challenges are facing them in terms of competitor attacks. This
information also can be used to interpret sudden moves by competitors and how they will
respond to a move you are considering taking.
Porter (1980) and Doyle (1983) are both proponents of positioning strategy. Porter
considers the external factors which impact upon a firms competitive positioning. Doyle
refers to the choice of target market segment which describes the customers. A business
will seek to serve and the choice of differential advantage which defines how it will
compete with rivals in the segment.
Porter claims that competition is at the core of success or failure of the firm and that a
successful competitive strategy can establish a profitable and sustainable industry
position. He claims that there are two fundamental questions underlying the choice of a
competitive strategy: firstly, how attractive is the industry with regard to profitability and
secondly, what are the determinants of a competitive position within an industry.
According to Porter there are five competitive forces that will govern the rules of
competition and these rules will prevail in any industry both in domestic and international
markets. The five forces are:
the entry of new competition to the market
the threat of substitutes or replacement products
the bargaining power of buyers
the bargaining power of suppliers
the rivalry between firms of the same sector.
2.9.1 Threat of rivalry/competitors
The concentration of firms within the fast food industry is low due to the established
presence of McDonalds, Burger King and KFC. However, in certain markets,
McDonalds will face competition from established domestic fast-food outlets.
2.9.2 Threat of new/potential entrants
The barriers to entry are quite high for new entrants, as the size of McDonalds means they
have achieved economies of scale and have preferential access to raw materials and
distribution channels. New entrants may find that a high cost of investment is required in
securing plant and machinery.
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The external environment and its effect on strategic marketing planning 297
2.9.3 Threat of substitutes
A substitute product is one that can be used as an alternative to a companys own. It could
be argued that the threat of substitutes to McDonalds comes from pizzas and other
domestic kebab and fast food houses. However, most of the above do not have the same
level of convenience that McDonalds offers, in having a number of outlets in big cities
and also through the use of multiple drive-through outlets.
2.9.4 Bargaining power of buyers
This area is perceived to be fairly low risk for McDonalds as consumers have little control
over the variations in the product offerings, price and place of distribution. However,
international market research should take place and any necessary adaptations made. The
company should keep customers satisfied, as switching cost is low and the possibility of
switching to another brand in case of dissatisfaction is relatively low.
2.9.5 Bargaining power of suppliers
This ranges from the threat of forward integration to the threat of cutting off supplies. As
McDonalds has a great deal of influence over their suppliers, due to the fact that it aids
them and trains them, the threats from suppliers are low. Due to the scale of McDonalds
operations, suppliers are keen to retain their contracts with the firm. McDonalds
internationalisation could also mean greater sales potential for suppliers.
2.10 Competitive positioning
So, what is a good strategy? Can a firm position itself in order to gain competitive
advantage over its competitors? Is there a specific position a firm should take in order for
its strategy to be successful?
Rumelt (1980) states that competitive advantages can normally be found in superior
resources, superior skills or a superior position. Resources and skills enable a firm to do
more or do it better than the competition. Different resources and skills will be required
depending on the industry or market segment. Positional advantage is how the
arrangement of these resources and skills are used to out manoeuvre the competition.
Positional advantage can be gained by forward planning, greater skill and resources or
luck! Once a dominant position is gained it is difficult for the competition to dislodge the
incumbent firm provided the position merits continuation and that it is extremely costly
for competitors to take over.
As long as environmental forces remain constant position can remain constant.
Positional advantage can take the form of size or scale, differentiation from competitors
and successful trading names. To be successful, a company needs to get both its strategy
and tactics working in harmony to provide the optimum return bounded by efficiency
(McDonald and Leppard, 1993). Both strategy and tactics should be designed after a
careful consideration of the situational environment.
It is apparent from Figure 2 that businesses finding themselves to the left of this matrix
are destined to die, strategy being the key factor as to how quickly. Considering
McDonalds international performance we can argue that the company is thriving as it is
effective doing things right (having the desired effect, producing the intended result) and
efficient doing the right thing (able to work well and without wasting time or resources).
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Source: McDonald and Leppard, (1993, p.7)
The firm has to consider more than the industry structure, it also has to take an appropriate
position within the industry. This positioning will determine the competitive advantage a
firm can have, namely low cost or differentiation against competitive scope at the broad
or narrow market (see Figure 3).
The official stance on McDonalds pricing policy is highlighted in the companys mission
statement, where it states the most fundamental element of determining price:
Being in touch with the pricing of our competitors allows us to price our
products correctly, balancing quality and value.
Overall the ultimate goal of McDonalds pricing and differentiation mix is to increase
market share. The strategies of cost leadership and differentiation are used
interchangeably within the internationalisation approach of McDonalds.
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Figure 2 Strategy tactics grid (for colours see online version)
Figure 3 Porters generic strategy grid (for colours see online version)
The McDonalds positioning in the cost leadership quadrant is achieved not only
through economies of scale in research, development and promotion but also through
learning, knowledge and experience in production and operational processes as well as the
way it manages its franchises. Vignali (2001) provides an explanation of the pricing
decisions of McDonalds. He notes that this is based on a six step approach, namely:
1 selecting price objectives
2 determining demand
3 estimating costs
4 analysing competitors costs, prices and offers
5 selecting a pricing effort
6 selecting the final price.
The use of a differentiation strategy is where the firm attempts to diversify from its
competitors by adding something to its product that will provide a unique value to its
customers. There are also various ways a firm can differentiate depending on the industry
in which it operates, however the costs of this differentiation policy must be lower than
the additional pricing the firm can obtain. Differentiation for McDonalds is achieved
through a perceived superior quality product which surpasses their nearest rivals and high
brand image and recognition. The company also has used their promotion and packaging
as a means of further differentiation, for example, the golden arches, which have become
an internationally recognised symbol for high quality at low cost. They can, therefore,
adopt a premium pricing policy in many markets where economic conditions allow.
There are several approaches a firm can take to become a low cost producer, which can
be used in isolation or as a combination to differentiation. The most basic way to a low
cost is to remove all the extras from the product and produce a no frills offering. The
danger in this strategy is that the way is paved for a feature war. The design or make up
of the product can create advantages, for example the use of alternative materials. The
standardised production and operational processes a firm employs can also reduce costs.
Another example would be the efficient use of distribution networks, manufacturing
systems or the use of low cost labour and product innovation.
The McDonalds company has perhaps, contrary to Porters warning, managed to
adopt both a differentiation and a cost leadership strategy.
McDonald and Leppard (1993) have developed a strategic focus matrix (see Figure 4)
which emphasises the impact of time on business activities. The elements relating to the
marketing mix have been emboldened to show where they are positioned in relation to
time. It is our view that McDonalds adopts the following recommendations, not only in
the short term but also in the medium and long term.
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Source: McDonald and Leppard (1993)
2.11 Strategic marketing planning
Strategic marketing planning makes use of a number of analytical models that help to
develop a strategic view of the business and, thus, can be used as decision-making aids.
The Boston Consulting Group (BCG) matrix (see Figure 5) is one of these models.
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Figure 4 Strategic focus matrix (for colours see online version)
Figure 5 The Boston Consulting Group matrix (for colours see online version)
Products or services and their respective strategies fall into one of four quadrants of
the BCG matrix. The typical starting point for a new business is as a question mark. If
the product is new it has no market share but the predicted growth rate is good. What
typically happens in an organisation is that management is faced with a number of these
types of products but with too few resources to develop them all. Thus, the strategic
decision-maker must determine which of the products to attempt to develop into
commercially viable products and which ones to drop from consideration. Question marks
are cash users in the organisation. Early in their life, they contribute no revenues and
require expenditures for market research, test marketing and advertising to build consumer
awareness.
If the correct decision is made and the product selected achieves a high market share,
it becomes a BCG matrix star. Stars have high market share in high-growth markets. Stars
generate large cash flows for the business but also require large infusions of money to
sustain their growth. Stars are often the targets of large expenditures for advertising and
research and development to improve the product and to enable it to establish a dominant
position in the industry.
Cash cows are business units that have high market share in a low-growth market.
These are often products in the maturity stage of the product life cycle. They are usually
well-established products with wide consumer acceptance, so sales revenues are usually
high. The strategy for such products is to invest little money into maintaining the product
and divert the large profits generated into products with more long-term earnings
potential, i.e. question marks and stars.
Dogs are businesses with low market share in low-growth markets. These are often
cash cows that have lost their market share or question marks the company has elected not
to develop. The recommended strategy for these businesses is to dispose of them for
whatever revenue they will generate and reinvest the money in more attractive businesses
(question marks or stars).
Having used the Boston Consulting Group matrix above, it should also be noted that
the BCG matrix suffers from limited variables on which to base resource allocation
decisions among the businesses making up the corporate portfolio. Notice that the only
two variables composing the matrix are relative market share and rate of market growth.
Now consider how many other factors contribute to business success or failure.
Management talent, employee commitment, industry forces such as buyer and supplier
power, environmental sensitive practices, corporate governance, corporate social
responsibility and the introduction of strategically-equivalent substitute products or
services, changes in consumer preferences and a host of others determine ultimate
business viability.
The BCG matrix is best used, then, as a beginning point but certainly not as the final
determination for resource allocation decisions as it was perhaps originally intended. In
other words, just analysing the coordinates of a product into the dogs category would not
necessarily mean that it should be singled out for termination. The technological,
production and market synergies (with reference to a perceived total offering) to
customers should also be parts of any elimination of dogs.
Further, if we consider McDonalds position as market leader within the restaurant
based fast food market (this is as opposed to frozen home made fast food items) and the
relative profits derived from this market, then it becomes clear that they are positioned in
the protect position quadrant of the Mckinsey matrix (Figure 6). This means that the
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company should concentrate efforts on maintaining its existing strength by investing to
grow at maximum digestible rate.
Source: Day (1986)
It is also recommended that they can capitalise on first mover advantage and therefore
drive market innovation. This reflects the concepts of the inside-out or competencies
based approach or the capabilities based approach i.e. due to their relative size in the
market, McDonalds can, to some extent, drive the market.
2.12 Strategic options
Markides (1999) further states that behind every successful company there is superior
strategy. The company may have developed this strategy through formal analysis, trial and
error, intuition or even pure luck. No matter how it was developed, it is the strategy that
underpins the success of the company.
Strategists have a tremendous amount of both latitude and responsibility in developing
and balancing the strategic options of an organisation. The countless decisions required of
these managers can be overwhelming considering the potential consequences of incorrect
decisions. One way to deal with this complexity is through categorisation; one
categorisation scheme is to classify corporate-level strategy decisions into three different
types or grand strategies (Porter, 1985). These grand strategies involve efforts to expand
business operations (growth strategies), decrease the scope of business operations
(retrenchment strategies) or maintain the status quo (stability strategies).
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Figure 6 The McDonalds companys position in the Mckinsey matrix (for colours see online
version)
More specifically, growth strategies are designed to expand an organisations
performance, usually as measured by sales, profits, product mix, market coverage, market
share or other accounting and market-based variables. Typical growth strategies involve
one or more of the following:
with a concentration strategy the firm attempts to achieve greater market penetration
by becoming highly efficient at servicing its market with a limited product line
(e.g. McDonalds in fast foods)
by using a vertical integration strategy, the firm attempts to expand the scope of its
current operations by undertaking business activities formerly performed by one of
its suppliers (backward integration) or by undertaking business activities performed
by a business in its channel of distribution (forward integration)
a diversification strategy entails moving into different markets or adding different
products to its mix. If the products or markets are related to existing product or
service offerings, the strategy is called concentric diversification. If expansion is into
products or services unrelated to the firms existing business, the diversification is
called conglomerate diversification.
When firms are satisfied with their current rate of growth and profits, they may decide to
use a stability strategy. This strategy is essentially a continuation of existing strategies.
Such strategies are typically found in industries having relatively stable environments. The
firm is often making a comfortable income operating a business that they know and see no
need to make the psychological and financial investment that would be required to
undertake a growth strategy.
Finally, retrenchment strategies involve a reduction in the scope of a corporations
activities, which also generally necessitates a reduction in number of employees, sale of
assets associated with discontinued product or service lines and, in the most extreme cases,
liquidation of the firm.
Nonetheless, even considering which strategy to pursue and McDonalds is indeed
pursuing a growth strategy through its continuous franchising international and domestic
expansions is not enough in defining strategy correctly. Mintzberg (1994, p.28)
discusses the concepts of strategy as a position and strategy as a perspective. He notes that
as position, strategy looks down . . . to the x that marks the spot where the product
meets the customer . . . and it looks out . . . to the external marketplace. As perspective, in
contrast, strategy looks in . . . inside the organisation, indeed, inside the head of the
collective strategist . . . but it also looks up to the grand vision of the enterprise.
Mintzberg provides an illustration to demonstrate the concept. This has been adapted
and shown in Figure 7.
2.13 Utilisation of value chain
Viswanathan and Dickson (2006) provide a conceptual three-factor model describing the
right conditions for the standardisation of products and services for a global organisation.
Although it has been argued that McDonalds uses a customised approach for setting up
its local strategies in the various countries in which it operates, the Viswanathan and
Dickson model (Figure 8) encompasses elements that, if considered by international
companies, could perhaps be used to enable them to capitalise on their experiences
elsewhere for successfully launching and managing their expansion.
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Source: Mintzberg (1994, p.28)
Source: Viswanathan and Dickson (2006, p.51)
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Figure 7 Position and perspective concept (for colours see online version)
Figure 8 Standardising global marketing strategy
The use of this model serves as an aid to managers for analysing the conditions of the
perspective host country with regard to being favourable for the transferability of tried and
tested practices. If all three conditions are not favourable then management would at least
be in a position to know where to focus attention or where new strategies and tactics would
need to be customised to suit the new environment.
3 Conclusions
It is argued that effective marketing strategies and tactics cannot be developed without
firstly analysing the environment in which the company operates. A number of
uncontrollable elements affect McDonalds international marketing strategy and tactical
implementation. These groups of elements include the PESTLE (political, economic,
social, technological, legal and environmental), structure of the market and competition
being faced (Porters (1980) five forces analysis) as well as analysis of its stakeholders,
customers and product adaptation within its internationalisation strategy. All of these
aspects are crucial to a companys strategic decision making. The level of understanding
that exists in these relationships will determine the success of a company.
McDonalds is not making a one-time standardised global choice but it is striking to
find a balance. This is not a straightforward task, as identifying the balance between
standardisation and adaptation is a challenge and very difficult to achieve. The goals of
reducing costs and complexity lead McDonalds to consider standardisation, while
customer orientation sways it towards adaptation. It is evident through the analysis that
McDonalds is adapting its marketing mix elements in order to go in line with the external
environment. At the same time, it should be noted that the company is also standardising
when and where possible in its desire to achieve economies of scale and global uniformity
and image.
With respect to McDonalds internationalisation strategy, the companys effectiveness
and profitability is obviously well supported by their strong competitive position and
market share in their primary product market. Its international success is achieved by the
companys strategy and tactics, which complement each other and work in harmony,
providing the optimum return bounded by efficiency. The company is thriving as it is both
effective (doing things right) and efficient (doing the right thing).
McDonalds portfolio of products is well managed and ensures the best fit between the
companys strengths and weaknesses and for offsetting the threats found in its competitive
environment. In considering the strong competitive position of the firm in a highly
attractive market, it is suggested that McDonalds should protect its position (Mckinsey
matrix). This can be achieved by concentrating efforts on maintaining its existing strength
by investing to grow at maximum digestible rate.
It is recommended that McDonalds continue this approach, that is: simultaneously
focus its attention on aspects of the business that require global standardisation and aspects
that demand local responsiveness. When appropriate, processes should be standardised,
however, operation in local markets necessitates the maintenance of the appropriate local
flexibility.
McDonalds is adopting differentiation and cost leadership strategies (generic
strategies). In terms of differentiation, the firm attempts to be diverse from its competitors
by adding something to its product that will provide a unique value to its customers. This
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is achieved through well-designed and managed marketing activities resulting in a
perceived superior quality product and high brand image and recognition. Further, cost
leadership is achieved, not only through economies of scale but also through learning,
knowledge and experience in production and operational processes and through
effective/efficient distribution networks and manufacturing systems.
It is recommended that further international expansion may benefit from the use of a
value chain analysis with regards to identifying the degree of homogeneity of a new
country with the ones in which McDonalds already has a presence. Such an analysis will
help to avoid expensive mistakes and false starts, as well as achieve further economies of
scale through the transferability of the experiences and lessons learned in other countries.
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Notes
1
http://www.mcdonalds.com/corp/about.html
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