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McDonald’s Five Forces Analysis (Porter’s

Model)
UPDATED FEB 5, 2017 | LAWRENCE GREGORY

McDonald’s position as the global leader

in the fast food restaurant market is
partly a result of the rm’s effectiveness
in responding to the Five Forces in its
industry environment. Michael Porter’s
Five Forces analysis model identi es the
most relevant external factors that
in uence business organizations. In
A McDonald’s in Muscat, Oman. This Five Forces analysis of
McDonald’s Five Forces analysis, the
McDonald’s (based on Porter’s Model) indicates that external
factors in the industry environment emphasize competition,
focus is on the fast food restaurant
customers, and substitution. (Photo: Public Domain) industry. The environment of this
industry interacts with McDonald’s to
affect the rm’s potential and success. Nonetheless, its current global success indicates
that McDonald’s remains effective in addressing these ve forces and in overcoming
related issues.

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

Overview: McDonald’s Five Forces Analysis

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

1. Competitive rivalry or competition (strong force)

2. Bargaining power of buyers or customers (strong force)
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3. Bargaining power of suppliers (weak force)

4. Threat of substitutes or substitution (strong force)
5. Threat of new entrants or new entry (moderate force)

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

Competitive Rivalry or Competition with McDonald’s

(Strong Force)
McDonald’s faces tough competition because the fast food restaurant market is already
saturated. This element of the Five Forces analysis tackles the effect of competing rms
in the industry environment. In McDonald’s case, the strong force of competitive rivalry
is based on the following external factors:

High number of rms (strong force)

High aggressiveness of rms (strong force)
Low switching costs (strong force)

The fast food restaurant industry has many rms of various sizes, such as global chains
like McDonald’s and local mom-and-pop fast food restaurants. Also, most medium and
large rms aggressively market their products. In addition, McDonald’s customers
experience low switching costs, which means that they can easily transfer to other
restaurants, such as Wendy’s. Thus, this element of the Five Forces analysis of
McDonald’s shows that competition is among the most signi cant external forces on the
business.

Bargaining Power of McDonald’s Customers/Buyers

(Strong Force)
McDonald’s must address the signi cant power of customers. This element of the Five
Forces analysis deals with the in uence and demands of consumers. In McDonald’s case,
the following are the external factors that contribute to the strong bargaining power of
buyers:

Low switching costs (strong force)

Large number of providers (strong force)
High availability of substitutes (strong force)

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

Bargaining Power of McDonald’s Suppliers (Weak Force)

Suppliers also in uence McDonald’s. This element of the Five Forces analysis shows the
impact of suppliers on rms. In McDonald’s case, the weak bargaining power of suppliers
is based on the following external factors:

Large number of suppliers (weak force)

Low forward vertical integration (weak force)
High overall supply (weak force)

The large population of suppliers weakens the effect of individual suppliers on

McDonald’s. This is especially so because of the lack of regional or global alliances
among suppliers. In relation, most of McDonald’s suppliers are not vertically integrated.
This means that they do not control the distribution network linked to McDonald’s
facilities. Also, the relative abundance of materials like our and meat reduces suppliers’
in uence on McDonald’s. Thus, this element of the Five Forces analysis shows that
supplier power is a minimal issue for McDonald’s.

Threat of Substitutes or Substitution (Strong Force)

Substitutes are a signi cant concern for McDonald’s. This element of the Five Forces
analysis deals with the potential effects of substitutes on rm growth. In McDonald’s
case, the following external factors make the threat of substitution a strong force:

High substitute availability (strong force)

Low switching costs (strong force)
High performance-to-cost ratio (strong force)

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

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Threat of New Entrants or New Entry (Moderate Force)

New entrants can impact McDonald’s market share. This element of the Five Forces
analysis refers to the effects of new players on existing rms. In McDonald’s case, the
moderate threat of new entry is based on the following external factors:

Low switching costs (strong force)

Moderate capital cost (moderate force)
High cost of brand development (weak force)

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

References

Burke, A., van Stel, A., & Thurik, R. (2010). Blue ocean vs. ve forces. Harvard Business
Review, 88(5), 28-29.
Dobbs, M. (2014). Guidelines for applying Porter’s ve forces framework: a set of
industry analysis templates. Competitiveness Review, 24(1), 32-45.
Grundy, T. (2006). Rethinking and reinventing Michael Porter’s ve forces
model. Strategic Change, 15(5), 213-229.
Maybury, M. T., & Belardo, S. (1992, January). Five forces. In System Sciences, 1992.
Proceedings of the Twenty-Fifth Hawaii International Conference on (Vol. 4, pp. 579-588).
IEEE.
McDonald’s Corporation Form 10-K 2014.
Roy, D. (2011). Strategic Foresight and Porter’s Five Forces. GRIN Verlag.
United States Department of Agriculture Economic Research Service (2015). Food
Service Industry Market Segments.

TAGS:
CASE STUDY & CASE ANALYSIS, MCDONALD'S CORPORATION, PORTER'S FIVE FORCES ANALYSIS, 
RESTAURANT INDUSTRY

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