McDonald’s Corporation’s Porter’s Five Forces Analysis

Introduction

The Company was envisioned in San Bernardino in 1954 and brought some revolution in the fast-food industry and producing hamburgers in a more disciplined way was begun. The Company owns a chain of 20,000 restaurants which are the oldest in the world. In this chain, 50’s style uniforms such as ties and shirts are worn by the employees to distinguish fashion. Original versions of old-fashioned milkshakes, fries, and hamburgers, as well as Happy Meals and Big Macs as the more recent items by the seller, are also supplied. The Company’s values (termed as Q.S.C & V.), according to their statement are to help them in providing good quality service for consumers and provide a clean environment, as the customer enjoys the meal. In addition, they aimed at providing quality products. The Company believes in ethical practice and aims at being of integrity, honest and fair. They maintain good company ethics and are accountable both as individuals and groups. The company has linkages with many social groups, as well as having standards for quality to serve the customer better. Indeed, the products offered, such as food (chicken, salads, meals, and snacks) are reflective of the company’s readiness to promote health for the people (McDonald’s). Reduced jobs and increased unemployment have a devastating effect on consumption and an impact on the industry (The New York Times). The Company also has a good responsibility towards the community and helps them through charity. The Company aims at leveraging on its resources, as well as increasing its scope and size in order to provide services.

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Competition

Fast food industry in the US is competitive, with players such as Taco Bell and Pizza Hut, Starbucks, Yum Brands, Burger King among others, and is characteristic of a market that has a high value perception (Spain, 2010). The company has great potentials as would be indicated in the financial results (partial) for this year, where it had an improvement in revenue amounting to 10% (King). The company operates in a very competitive environment, where all players are aiming at improving on their markets. It has implemented technology that helps them link with suppliers, as well as customers, including distribution and sales channels to reach the customer in various places around the world. Technology has also been utilized in quality packing and production of innovative products for the company. The company has, however, performed excellently, amidst competition; since its establishment in 1940. The Company started with McCafe, which has helped them to staying in the business or keeping it running. The company also at one time aimed at competing with businesses offering breakfast, through the establishment of Breakfast brand. In any market, competition has an overall impact on the commodity price, because providers must sell, especially where there are so many competing products and sellers in the market.

Ease of Entry

Companies that are entering the market in the fast food industry meet with strong brand identities like McDonald’s who make it more difficult for them to enter and excel in the marketplace. These existing chain restaurants create an environment of price competition among all players. On the contrary, McDonald’s has a very well established market brand. It does not encounter many problems as far as entry into the market is concerned.

It has been difficult to enter the market and establish a distinct brand name in the restaurant business. Some of the factors influencing entry of markets are legal implications and requirements, which are different in various countries around the world. The company however, operates with a sustained logo and observes legal stipulations where they operate. The legal implications for fast food industries can be exemplified with presentation of the United State’s case, where there was adoption of the Bioterrorism Act. The adoption was as a result of the United State’s desire to boost preparedness for terrorism as well as fight the same. Such moves may have an impact by adding up operation costs, which may in turn cause a rise in price. However, observance to these rules may help the company in earning good public attitude. The Bioterrorism Act would be expected to not only change the food importation markets but also the domestic market which involve the packing of food. Such act to either discourage some players from entering the market channels, and/or lengthening the time which may be taken for a company to register and begin operations. If they are tied to financial obligations, the new entrants will have to pay, and hence incur more cost. They may in turn seek to recover these costs once they are in the market, but the market strategies which they have been forced to bring about, as well as those tactics they aim at responding to the market trends with, may not work because the older players are already acquainted with the market strategies and survival tactics. The older players can alter these strategies as well. The legal establishments, for instance, requires that foreign operators have an agent based in the United States so as to have contacts with the FDA (Food and Drug Administration) (Riggle & Craven). They include those established in such areas as taxation, business and environment. The industry is characteristic of high development and research costs that companies must incur to excel in the market. Such practices as research & development cannot be eliminated from business and they make business have a high cost of entry.

Every company is prone to legal implications which affect them in one way or the other. Food industry is very sensitive in areas like the U.S where people have health problems such as obesity, and regulation changes are bound to influence the industry on these and other grounds. Legal implications may spark trade wars. For instance, when beef enhanced with hormones coming from America was refused entry in to this market by the European Union and in return, Europe alternatively received tariff imposition on such products as foie grass through the World Trade Organization (BBC).

Substitutes

Again, substitutes may bring problems as far as original products are concerned, because, many times they are designed to compete with original products and they may offer price competition when they come with lower prices for their products than those of the original commodities. Low priced commodities may seem to capture low-priced customers because they cannot afford high priced goods. However, for large companies who are already controlling large markets and with big brand names, some other advantages that make them cushion this kind of waves exist. The McDonald’s products can be substituted with such like the MDC Burgers, dairy products and other commodities.

Strength of Suppliers

Lack of availability of the main ingredients in the product would make the suppliers’ power in the food industry to be relatively small. There is low relative strength of buyers in this industry. In 2007, the company was listed in the 9th position among the top 100 brand names for the whole world. The company has a sense of closeness to its customers, thanks to its long period of operation. Thus, the company has been rated as having high rates of customer retention. It has over 120 affiliated businesses together with franchise businesses.

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The company utilizes foreign suppliers for local manufactures. It also provides quality packing for their products. Environmental concerns are increasing among the governmental and non-governmental organizations around the world, and more laws are being enacted to ensure that companies adhere to regulations regarding disposal and handling of wastes. McDonald Company has been handling issues well and following issues relating to recycling and waste disposal. The industry is characteristic of many substitutes and customers can choose a wide variety of products. In a way, this is advantageous because customers get what they want to enjoy from a variety of commodities.

Strength of Buyers

The strength of the buyer is affected by many factors, among them the price of the commodities. Subsequently, changes in the market may cause prices for consumption of substitutes to go higher and this may influence the sale for McDonald’s in consideration of the fact that the market has too many substitutes. Many forces may come to influence the power of the buyer for their commodities, including political influences (which may affect among other things the employment status and the income as well as the distribution patterns and taxation); economic forces which directly touch on the power of the consumer to purchase as well as social factors which influence consumption. Changes in prices could be affected by the political and the economic forces in the United States, changes in governments, as well as the adoption of the regulations suggested by the global organizations.

Individual state and country policies influence the business for this seller. There are areas with stringent market policies that add costs as far as market entry is concerned. Taxation is an also a substantial barrier to continued business. These policies and their implications vary in various places around the world. In addition, there have been changes experienced with incoming governments (for example the Obama administration), which also have varying impacts on business at various segments. The company indeed should be geared towards more realignment as the world encounters changes in environment legislation driven by politics and government agendas, as well as changes in the business operation regulations, for instance those regarding transportation, logistics, as well as health and food selling among others. These may happen due to a number of reasons including

Politics in the United States has affected prices for energy and food-an increase of 8.5% in 2008 compared to that of 7.6% for 2007 (year on a year basis) (Donohue and Annika, 2008), which has had an impact on the whole fast food industry by reducing the growth rate (Gavin). Politics agendas also involve the contribution of Americans poor health and increased infections such as diabetes and heart attacks, where fast foods are blamed.

The company aims at providing customers with services of quality value. The Company aims to continue providing an environment to nurture talent and developing leaders. In addition, the Company believes in the establishment of an environment fostering engagement of high level as well as characterized by respect so that they can succeed. Fast food industry was also favored in the United States as people turned from restaurants to fast foods during recession (RNCOS).

Customers in the US markets are becoming more health-conscious and this may affect US sale volumes (IBISWorld).

Regarding the issue of health, there has been an upsurge towards concern to eat healthy foods in the United States. It is possible that these social trends will have an impact to company sales in the United States. Many people have been looking forward on joining weight reduction programs and getting information regarding their health and being more interested on how they can stay healthy. These trends influence the companies to a point where they may feel it necessary to adopt changes for their products. Sellers of snacks only may have a negative result as a result of such customer behaviors.

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Nevertheless, some companies can quickly change to modern trends and continue to offer food solutions that are acceptable. For those companies that are well established, and have the capital to afford to quickly make these changes, only minimal and short time effects may be felt. Nevertheless, severe impacts may be experienced where a product belonging to a known company has been blacklisted as having health dangers. MacDonald’s and other well established companies can respond to market trends as quickly compared to smaller and new operators who must first take time to understand the market and then respond. In addition, they may lack the resources to launch hefty campaigns which have amazing impacts. Global presence again makes the likes of MacDonald’s able to absorb short-term market shocks as compared to other firms.

Distinctive Notion

The company excelled well where inflation had an impact of business for the fast foods. It operates a very large market with large sales volume. In food industry, the rate of growth of the economy determines the purchase power and demand, and this has affected McDonald too.

The industry as a whole garnered a total of $178,593.9 million in industry revenues with a growth of 3.3% and a number of enterprises amounting to 212, 952 units. The US fast food industry was targeted to achieve a growth of 5% for the year 2010 (RNCOS). Economic difficulties in the US industries make customers to achieve low spending of customers (Young).

The company has added yet another distinctive product, namely McCafe into its product line. The company is able to provide express services to its customers in the United States markets. In the U.S. market, the company is popular among the youngsters. The company operates with earlier opening times, flavored breakfast as well as premium coffee. The company realized sales growth in 2007, amounting to 6.9% while there was growth of guest counts of 3.1% in the same year. For buildings, the realized rates were 6.8% and 3.8%. There was growth of 9% for system wide sales (for constant cu9rrencies). For the same year aforementioned, the company realized a growth of operated margins (by 17.6%) while there was an improvement in the franchised margins (by 82.3%). The company garnered an increase of net income per share at the rate of $3.76, which amounted to 16% after adjustments for the 2007 Latin America transaction was made.

The company was able to pay a dividend rate of $2.0 per share. In 2009, the company aimed at becoming better and not just bigger, so as to drive more success. The seller aimed at doing so through the consideration of understanding the needs and wants for the customer. In addition, the company had a target to adopt best practices and ideas around the world, enhance greater sharing. The company would implement a strategy that would see bottom-line impact be driven at best.

The company has had an advantage for having a world-wide momentum, despite being faced with worldwide economic tough lines. The company had identified five areas in which it would continue to build upon, including balancing between price and value, to achieve an improved relevance and contemporary feel of their restaurants in an attempt to achieve benefits on the available capital, to leverage the equity and unique taste of such products as French Fries, Quarter Pounder among others, to ensuring that continuation with their financial discipline and evaluation of measures of success impact their restaurant business, and finally; focusing on improved execution through furtherance of operations excellence.

Works Cited

BBC. A corporation under attack. BBC. n.d. 2010.

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Donohue Mike and Annika Stensson. Media statement: How spiking food prices impact restaurants. 2008.

Gavin, Robert. Surging costs of groceries hit home. 2008.

IBISWorld. Fast food restaurants. IBISWorld. 2010.

King, Author. McDonald’s Corporation (MCD) – Financial and Strategic Analysis Review – new company profile and analysis released. 2010.

McDonalds. Food. McDonalds. 2010.

Riggle and Craven. U.S. Food industry radically challenged by Bioterrorism Act. Riggle and Craven. n.d.

RNCOS. US fast food industry set to prosper in 2010. RNCOS. 2010.

Spain, William. Fast-food outlook: Intense competition, margin pressures. 2010.

The New York Times. Unemployment rising. The New York Times. 2008.

Young Laura. Weathering the storm: Food costs, less consumer spending hurting restaurants. The Business Journal of the Greater Triad Area, 2008.

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