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APPENDIX A: ASSIGNMENT COVER SHEET
ASSIGNMENT COVER SHEET
Surname LASEINDE
First Name/s ABISOLA ABODUNDE
Student Number 113681
Subject INTERNATIONAL BUSINESS ASSIGNMENT. (YEAR 2)
Assignment Number 1
Tutor’s Name
Examination Venue MANCOSA CAMPUS, ALIWAL STREET, DURBAN, SOUTH AFRICA.
Date Submitted
Submission (√) First Submission YES Re-submission
Postal Address P.O.BOX 50477, MUSGRAVE, DURBAN. 4062.
E-Mail [email protected]
Contact Numbers
(Work)
(Home) 0312017322
(Cell) 0780273718
Course/Intake Year 1 –MBA – January 2010.
Declaration: I hereby declare that the assignment submitted is an original piece of work produced by myself.
1
TABLE OF CONTENTS.
Question Title of Section Page
Question 1 McDonald’s Global Expansion 2-3
Question 2 Culture 3-11
Question 3 Globalization Strategy at McDonald’s 11-15
Question 3.2 Entry Strategy at McDonald’s 15-19
Question 4 Localization Strategy 19-21
Question 5 Cultural Strategies using Geert Hofstede model. 21-25
Question 6 Future growth oppournities for McDonald’s 25-28
Bibliography 29
2
Question 1
Outline the reasons for the fast global growth of Mc Donald’s.
Mc Donald’s is the world’s largest food restaurant chain. The major reason for Mc
Donald’s fast global growth is Globalization (Globalization)
What is Globalization? It refers to the shift towards a more integrated and interdependent
world economy (Charles Hill 2009:6). That being said, globalization has many facets
including the globalization of markets and globalization of production.
Drivers of Globalization.
There are essentially two major drivers of globalization:
1. Declining trade and investment barriers.
2. Technological change.
1. Declining trade and investment barriers.
For many years, Nations of the world erected formidable barriers to international trade
between different nations. Many of such barriers took the form of high tariffs on the
imports of goods and services. (Hill 2009:11). However, after world-war II, many nations
haven taken necessary steps to remove or lessen these barriers. This goals and promotion
of trade among nations were enshrined in the General agreement on tariffs and trade.
(GATT) (Hill 2009:11). With the decline in trade and investment barriers globally,
McDonalds has been able to achieve growth quickly internationally especially by tapping
into emerging markets like China, India and the Middle East. These countries also have
the advantage of being heavily populated.
2. Technological Changes: With improvement in technology, has come major break
through in the world. The world is now a global village where a person in the U.S knows
what happening in another continent like Asia. With the advent of the internet and World
Wide Web, information can be easily accessed. McDonalds owns its fast global growth to
improvements in technology. This is because as a brand it is already known even before it
decides to enter into new markets due to western influences; it would be able to break
into new grounds faster than most previously unknown brand. Hence, the reason for its
fast global growth.
3. Business Expansion: By identifying new oppournities for growth and entering into
new international markets with strong potential, rather than remaining in its home
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country, this was achieved via franchising on the international scene. Franchise provide
the initial capital required to build the restaurant and maintain it through re-investment,
whereas direct restaurant operation is more capital intensive relative to franchising and
results in lower restaurant margins as a percent of revenues. While on the domestic scene,
growth was achieved by
a.) Renovating its stores, expanding menu options and extending store hours to 24hours
in Major cities around the world.
b.) By expanding menu options so as to inculcate other countries tastes and preferences.
4. Demographics: McDonald’s restaurants are opening around the world at very rapid
rate. Global expansion remains the core strategy of McDonald’s fast growth with the
market directed at the middle class and the employed, whom do not have the time to
make their meals and are always on the move. Also with the collapse of communism in
Eastern Europe, there is a host of export and investment oppournities for western
businesses. (Hill 2009:16).
In conclusion, Globalization is the key reason for the fast global growth of McDonald’s.
McDonald’s can attribute it fast global growth to expansion strategies both locally and
internationally. It must also choose the appropriate mode for entering a particular foreign
market and how to enter it in its attempt at expanding globally. McDonald’s must also
bear in mind Government restrictions in trading and investment policies in foreign
countries in its attempt at globalization.
Question 2
Mc Donald’s needs to adapt to different cultures and conditions when it sets up business
in different parts of the world.
What problems might Mc Donald’s encounter when it opens outlets in:
2.1 Countries in Eastern Europe?
Culture according to (Charles.w.Hill 2009: 89) is that complex whole which includes
knowledge, beliefs, art, morals, law, custom and other capabilities acquired by man as a
member of the society.
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“The collective programming of the mind which distinguishes the members of one human
group from another… culture in this sense includes systems of values; and values are
among the building blocks of culture”. (Hofstede cited in Hill, 2009: 89).
Culture is made up of three essential components.
1. Beliefs: A large number of mental and verbal processes which reflect our
knowledge and assessment of products and services.
2. Values: - The indicators consumer use to serve as guide for what is appropriate
behavior. They tend to be relatively enduring and stable over time and widely
accepted by members of a particular market.
3. Customs: - Overt modes of behavior that constitute culturally approved or
acceptable ways of behaving in specific situations. Customs are evident at major
events in one’s life. E.g. birth, marriage, death and at key events in the year e.g.
Christmas, Easter, Ramadan e.t.c. (Doole and Iowe 2008:73).
Such components as values, beliefs and customs are often ingrained in a society.
Culture has several important characteristics. Thus Culture sets the standards shared by
significant portions of that society, which in turn sets the rules for operating in that
market.
1. Culture is comprehensive
2. Culture is learned rather than something we are born with.
3. Culture is manifested within the boundaries of acceptable behaviors.
4. Culture falls somewhere on a continuum between static and dynamic depending
on how quickly they accept change. (Lars Perner 2010: 330).
5
Figure 1: The Determinants of Culture. (Hill 2009:91)
Eastern Europe is a region placed in the Eastern part of Europe. It is the region lying
between central Europe and western Asia. Some of the countries lying in this region
include Hungary, Russia, Bosnia, Czech Republic, Poland, Ukraine, Serbia and Belarus.
Some of the problems Mc Donald’s can encounter in Eastern European countries using
Russia as an example are;
1. Political Systems:
The political system of a country shapes its economic and legal systems. By political
system we mean the system of government in a nation. (2009:43)
McDonald’s may face political problems especially in Eastern European countries-
Russia and Bosnia Herzegovina are two countries in Eastern Europe. Communist
Countries such as Russia and Bosnia have relatively unstable Governments compared
with the United States who have stable leadership and may therefore face changes in
policy; especially if new leaders come to power by democratic or other means. Even
though Russia is supposed to be a democratic country, the history of dictatorship by the
communists and the czars has left the country in corruption and strong influence of
Culture
Norms and
Value
Systems
Religion
Political Philosophy
Economic Philosophy
Social Structure
Language
Education
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criminal elements. (Perner Lars 2010:333). Mc Donald’s biggest problem will be how to
adapt to changing political influences which could affect the conduct of their business
from time to time.
2. Legal Issues:
The legal system of a country refers to the rules, or laws that regulate behavior along with
the processes by which the laws are enforced and through which redress for grievances is
obtained. (2009:48)
A well functioning economy requires laws protecting private property rights and
providing mechanism for contract enforcement. Without a legal system in place to
enforce these laws, the incentive to do business may be reduced by private and public
entities. When communism collapsed, many of these countries lacked the legal structure
required to protect property rights, all property having been held by the state. (Hill
2009:74). E.g. In most socialist countries like Russia, Bosnia, the title to urban and
agricultural property is often uncertain leading to wrong records, and disputes which take
time for the court to settle and which they are sometimes unable to settle.
Mc Donald’s might have to contend with these laws including that “the government is
always right and typically has not developed a sophisticated frame work of contracts.
(You do what the government tells you to do) or intellectual property protection
(royalties are unwarranted since the government ultimately owns everything. (Perner Lars
2010:336). Mc Donald’s might find it difficult to adjust to this socialist laws because of
the good judicial system in America where there are laid down principles for setting up
business and procedures to use for breach in contracts.
3. Language issues.
Language is one of the defining characteristics of culture.
Mc Donald’s may face problem of language differences because most Eastern European
country do not use English as there official language. For e.g In Russia the official
language is Russian with several other local dialect while in Bosnia there are about three
official languages that are spoken these are Serbia, Bosnian and Croatian. So
communication may be subject to misinterpretation, especially with differences in values,
assumptions and language structure. This represents a huge contrast to the United States
where English language is the official language. If McDonalds must do business with
7
these countries, it must learn to speak their language so that it is seen as part of the
community. It is not possible to meaningfully translate “word- for- word” from one
language to another. It would be better for Mc Donald’s to rely on translation from two
different translators. Mc Donald’s must realize that language is an important element of
culture, though regional differences are subtle, it should be kept in mind that much
information is carried also in non- verbal communication. (Perner lars 2010:338).
2.2 Countries in West Asia?
West Asia is the region located directly south of Eastern Europe. It is primarily an arid
and semi- arid region and can be subject to drought. The region consists of grasslands,
rangelands, Deserts and Mountains. Further more, each host country has its own society
and culture which are different in many important ways from almost every other society
and culture although there are some commonalities. Although Society and Culture do not
appear to be part of business situations, they are actually key elements in shaping how
business is conducted from what goods are produced to how and through what means
they are sold to the establishment of industrial and management patterns and the
determination of the success or failure of a local subsidiary or affiliate. (Riad .A. Ajami,
Karel Cool, G. Jason Goodrard, Dara Khambala 2006:202).
Table 1: Shows Statistics of some countries in the region.
Country Area (KM)2 Population
(2009)
Nominal
GDP ( 2009)
Per
Capita
(2009)
Official
Language
Turkey 783,562 77,804,122 $615.33
billion
$ 8,723 Turkish
Kuwait 17,820 3,566,437 $156.31
billion
$57,482 Arabic
Saudi Arabia 1, 960,582 28, 686,633 $438.01
billion
$16,778 Arabic
Armenia 29 800 3,245,900 $8.71 billion $2,667 Armenian
8
Iraq 438,317 31,234,400 $70.1 billion $2,200 Arabic
Kurdish
Iran 1,648,195 74,196,000 $ 330.46
billion
$4,459 Persian
Cyprus 9,250 801, 622 $ 23.2
billion
$29,619 Greek
Turkish
Source:- The world fact book, United states Central Intelligence Agency. (CIA).
Some of problems McDonalds may face in West Asia are as follows
1. Religion:
(Hill 2009:96) defines Religion as the system of shared beliefs and rituals that are
concerned with the realm of the sacred. In West Asia, there are different religions
with Islam predominating others are Christianity, Hinduism and Buddhism. Using
Saudi Arabia and Turkey as an example. In Saudi Arabia and Turkey the dominant
religion is Islam. Islam traditionally recognizes no distinction between religion and
state. It is not just a religion; Islam is also a source of law, a guide to state craft and an
arbiter of social behavior. (Hill 2009:100). In countries where Islamic fundamentalists
are strong, Women have resumed wearing floor- length, long sleeved dresses and
covering their hair this is in comparism to the United States where Christianity is the
major religion and more conservative. McDonald’s has to adapt to these differences
in Religion and conditions in West Asia. Furthermore, (Doole and Lowe 2008:73)
stresses that differences in religion and Material Culture affects consumers’
perception and patterns of buying behavior. In the predominantly Muslim countries of
West Asia, where there is an aversion to pork and a hostility to frozen meat, Mc
Donald’s will have to respect culture of the people and create the right burgers to
meet the needs of its customers. McDonald’s may also contend with fundamentalist
actions directed against western businesses, Businesses such as McDonalds believed
to be making unjust profits through exploitation are likely to face Muslims action,
the only way McDonalds can escape is also by giving or ploughing back part of its
profits into community.
9
2. Language differences: In the predominately oil- rich nations of West Asia,
English is not the first official language as seen in the chart. However, if English is
spoken, it might be spoken as a second language or something. This could affect both
verbal and spoken communications and there will be issues of misinterpretation and
mistrust happening now and them which could be bad for international business. This
could be bad for business.
3. Trading with the Enemy : Many Arab countries maintain a boycott of Israel and
US companies like Mc Donald that want to do business with them may be asked to
join in the boycott by stopping any deals they do with Israel and certify that they do
not trade with the country. It is illegal, however for US firm like McDonalds to make
this certification even if they have not dropped any actual deals with Israel to get a
deal with the boycotters. (Perner Lars 2010:335).
4. Economic Implications : This is an extremely important issue to be considered by
McDonalds before establishing its company in West Asia. International business is
affected by religious beliefs in many ways because religion can provide the spiritual
foundation of a culture. Businesses such as McDonalds can bring about
modernization that disrupts religious traditions and international business can conflict
with holy days and religious holidays. Mc Donald’s may face the problem of water
shortage. Water Shortages are a frequent problem in many parts of West Asia, with
rapidly growing populations increasing demand for water and where there is water;
Salinization and pollution threaten water supplies.
2.3 Countries in Africa?
Africa is the World’s 2nd largest and second most populous continent after Asia. With
About 30.2 million km2 (11.7million sq mi). It covers about 6% of the earth total surface
area and 20.4% of the total land area. Africa remains the world’s poorest and most
underdeveloped continent with corrupt government that often commit serious human
right violations, failed central planning, high levels of illiteracy, Malnutrition, inadequate
water supply, sanitation, as well as poor health which affects a large proportion of people
who resides in Africa continent. A large number of the population live under one dollar a
day. (Source www. Africaguide.com)
10
Some of the problems Mc Donald’s may face are in Africa e.g. Nigeria
1. Gift giving and Bribery
Gift giving is a custom that has great value within a business environment. It is important
not only to remember to bring a gift but also to make certain that the gift you have chosen
is appropriate. Gift giving is viewed as a different and separate activity from bribery, at
least in the U S. (Ajami et al 2006:211). Mc Donald’s may face the problems of bribery
in poor countries of Africa e.g Nigeria, where corruption and bribery is predominant and
seen as a normal phenomenon. In 1970s, the United States passed the foreign corrupt
practices Acts following revelations that U.S. companies had bribed government officials
in an attempt to win lucrative contracts. This law makes it illegal to bribe a foreign
government official to obtain or maintain business over which that foreign official has
authority, and it requires all publicly traded companies (whether or not they are involved
in international trade) to keep detailed records that would reveal whether a violation of
act has occurred. (Hill 2009:52)
2. Language: Africa is the most multilingual continent in the world; it is not rare for
individuals to fluently speak not only multiple African languages, but one or more
Europeans language as well. ( www.Africa guide.com) Mc Donald’s may face the
problems of language difference, although English could be official in some countries in
Africa, People prefer to speak their native dialects. I
3. Laws and Politics: The legal and political environments in a foreign market such as
Africa are usually regarded as consequences of the cultural tradition of that market. Legal
systems such as that of the US are relatively transparent. A major problem that Mc
Donald’s will face will be limited access to legal system as a means to redress grievances
against other parties. This is one reason why personal relationships in some cultures are
considered more significant than in the US. (Perner Lars 2010:335).
4. Religion: This is a major cultural variable; Mc Donald’s will face in Africa. Africa
Religions are numerous but the three major Religions predominantly recognized are the
Christians, Muslims, and the traditionalists. Religion affects the type of food eaten and
the way it is eaten. For example, Muslims believe that pork is an “unclean meat” and
should therefore not be eaten as food. The food and drinks of Africans reflects local
influence as also glimpses of colonial food tradition. The African cuisine is a
11
combination of traditional fruits, vegetables, milk and meat products. Traditional African
cuisine is characterized by use of starch as a focus accompanied by stew containing Meat
or Vegetables or both. East Africa is distinctive in the sense that meat products are
generally absent. Cattle, sheep and goats are regarded as a form of currency.
Mc Donald’s will face challenges in trying to inculcate the western diet into the local
cuisine of Africa diet.
In Muslim predominated countries like Libya, Comparative advertisements are banned
as according to the laws of Islam, pegging one product against another diminishes the
sense of unity and social community. ( Doole and Iowe 2008:77).
CONCLUSION:
Countries differ in their cultural, legal, political and economic system. McDonald’s needs
to bear this in mind when it sets up its business in different nations of the world to avoid
conflicts of interest and prevent losses that might accrue if this is not taken into
cognizance. McDonald’s can also achieve good competitive advantage when it’s aware of
the value and norms that are prevalent in a society and adapt its business operation to suit
the values of such nation.
Question 3.
3.1 Critically discuss Mc Donald’s Globalization Strategy.
Introduction
McDonald’s is the world’s largest fast food restaurant chain with over 32000 locations in
over 110 countries. McDonald’s operates its own restaurant and franchises its brand to
local business people.
From the Case study, Mc Donald’s made use of two key strategies in its Globalization
approach.
1. Local Expansion: In the U.S., McDonald’s focused on increasing sales at existing
locations by renovating stores, expanding menu options and extending store hours.
2. Franchising: On the international scene, McDonald’s expanded aggressively by
franchising.
Both strategies have paid off well with McDonald’s experiencing huge profits both
locally and internationally. Globalization however has several facets, which are:
12
Hill (2009:6) reported that Globalization has several facets including the globalization
of markets and globalization of production.
Globalization of production
The globalization of production refers to the sourcing of goods and services from location
around the globe to take advantage of national differences in cost and quality of factors of
production (such as labor, energy, land and capital). By this, company hope to lower their
overall cost structure or improve the quality or functionality of their product offering,
thereby allowing them to compete more effectively.(Hill 2011:7).
Globalization of Markets.
This is the merging of a historically distinct and separate national market into one huge
global market place. Consumer tastes and preference in different nations are beginning to
converge on some global norm, thereby helping to create a global market. (Hill 2009:7).
Mc Donald’s strategy for expansion is based on franchising especially on the
International Scene with focus on emerging economies like China, India and Latin
America. According to Hill (2009:488), a firm contemplating foreign expansion must
take three basic decisions.
1. Which foreign markets?
There are several nation states in the world, which do not hold the same profit potential
for a firm contemplating foreign expansion. (Hill 2009:488) further emphasized that the
attractiveness of a country as a potential market for an international business depends on
balancing the benefits, costs and risks associated with doing business in that country.
Using china as an example, Mc Donald’s decided to enter the Chinese market because it
had huge potential as an emerging market some of the features that are responsible are
rapid growth in urban population, a change in spending habits of consumers and
influence of western brand. It also entered china late, i.e. in the 1990, after fast food
industries were already on ground. For e.g. Yum brands entered the market before
McDonald’s.
McDonald’s entry into china further proved that it had to adapt to an unfamiliar and
rapidly changing environment were the lifestyle, food culture and legal structure were
altering as a result of surging economic growth and massive urbanization.
13
McDonald decided to choose China because it is an emerging and growing market with
strong potential for growth.
2. Timing of Entry:-
Once the firm has identified attractive markets, it must consider the timing of entry.
We say entry is early when an international business enters a foreign market before other
foreign firms and late when it enters after other international businesses have already
established themselves.(Hill 2009:489).
Advantages associated with entering a market early are commonly known as first-mover
advantages which include the ability to preempt rivals and capture demand by
establishing a strong brand name. A second advantage is the ability of early entrants to
create switching costs that tie customers into their products or services, this make it
difficult for late entrants to win business. (Hill 2009:489). The major disadvantage
associated with this is that an early entry may entail pioneering costs, costs that the firm
has to bear that a later entrant can avoid. This arises when the business system in a
foreign country is so different from that in a firm home market that the enterprise has to
devote considerable effort, time and expense to learning the rules of the game. A late
entry may be beneficial when one observes and learns from the mistakes made by early
entrants. (Hill 2009:489) such as the case of McDonald’s in china it entered into the
industry in 1990 after some fast food industry had entered like yum brands and
capitalized on the market thereby making sustainable profits.
3. Scale of entering and strategic commitment.
Another issue that an international business needs to consider when contemplating
market entry is the scale of entry. (Hill 2009:490). Not all firms have the resources
necessary to enter on a large scale and some even prefer to enter on a small scale and then
build slowly as they become familiar with the market. The second approach of entering
on a small scale and building rigorously was the approach that McDonalds took. When it
first opened its outlet in Shenzhen China, which was successful and allowed it to expand
its operations in china. It opened a bigger restaurant in 1992. Small Scale entry allows a
firm to learn about a foreign market while limiting the firm’s exposure to that market.
Small- scale entry is a way to gather information about a foreign market before deciding
14
whether to enter on a significant scale and how best to enter, however, the lack of
commitment associated with small-scale entrant may make it more difficult for small-
scale entrants to build market share and to capture first mover or early mover advantages.
(Hill 2009:492). However this cannot be said for McDonalds as it was able to open its 1st
1000 Mc Donald’s restaurant faster than in any country outside of the U.S.
Franchising.
What is franchising?
Franchising is basically a specialized form of licensing in which the franchiser not only
sells intangible property (normally a trademark) to the franchisee but also insists that the
franchisee agree to abide by strict rules as to how it does business. (Hill 2009:498). With
Franchising, the firm licenses its brand name to a foreign firm in return for a percentage
of the franchisee’s profit. The Franchiser will also often assist the franchisee to run the
business on an on going basis. (Hill 2009:498). So far the revenues from conventional
franchised restaurant include rent and royalties based on a percent of sales with minimum
rent payments and initial fees. This Strategy makes sense for Mc Donald’s because
a.) Like many services, fast food cannot be exported.
b.) Unlike technological know-how, brand names are relatively easy to protect using a
contract.
c.) There is no compelling reason for Mc Donald’s to have tight control over franchisees,
and
d.) Mc Donald’s know-how, in terms of how to run a fast food restaurant, is amenable to
being specified in a written contract.
Mc Donald’s main strategy for growth has been franchising. Franchises provide the
initial capital required to build restaurant and maintain it, through re-investment. As of
late 2009, 25,975 (80%) of 32, 278 McDonald’s restaurant are Franchise. whereas
operating its own restaurant itself is more capital intensive relative to franchising and
results in lower restaurant margin as a percent of revenues.
Advantages of franchising
1. Increased revenues and expansion of its brand identification and market reach.
(Ajami et al 2006:26).
15
2. The firm is relieved of many of the costs and risks of opening a foreign market on
its own. Instead, the franchise typically assumes the costs and risks. This creates a
good incentive for the franchisee to build a profitable operation as quickly as
possible. (Hill 2009:498).
Disadvantages
1. Problems of assuring quality control and operating standards in the case of Mc
Donald’s with a large number of franchisees. Quality control can be difficult, one
way around this problem is to set up a subsidiary in each country in which the firm
expands. The subsidiary might be wholly owned by the company or a joint venture
with foreign company. This subsidiary assumes the right and obligation to establish
franchises through out the particular country or region. ( Hill 2009:498)
2. Difficulty with franchises comes with their need to make slight adjustments or
adaptation in the standardized product or service. ( Ajami et al 2006:26) E. g Mc
Donald’s must change some ingredients in its menu option to suit the taste of local
clientele, which may differ from those of its original customers. (Ajami et al
2006:26).
3.2 Explain how and why the entry strategy of McDonald’s was different in china in
comparism with the rest of the world.
With saturation of domestic markets and intense competition, it is imperative for
companies to internationalize their operations. In order to survive and grow, the
companies are forced to seek and exploit opportunities in newer markets. But the process
of penetrating and then developing an international market for the product is a laborious
activity. With no sales and marketing infrastructure in place, and little or no knowledge
of the market, the efforts required to enter a new market is similar to that of establishing a
start-up venture.
The potential financial and marketing risk also plays a decisive role in the choice of
Market-entry mode. Financial risk is usually the major consideration at the point of
market entry, and it is minimized by low-intensity modes of market participation. But in
16
such cases the marketing risk is maximized, with a local partner making all the important
marketing decisions. (Souvik Dhar 2006:59).
ENTRY STRATEGY.
Once a firm decides to enter a foreign market, the question arises as to the best mode of
entry, there are several modes of entering a foreign market .These include exporting,
turnkey projects, licensing, franchising, establishing joint ventures with host country
firm.
From the case study, Mc Donald’s entered Chinese market through Joint ventures and
wholly owned subsidiaries because at the time of entry into china, because Franchise law
did not exist. This is why its entry strategy was different in China compared with the rest
of the world. Another reason is that more than 80% of McDonald’s restaurants were
franchised in other part of the world because it was easier and faster to set up franchise
for local business people. However, McDonald’s couldn’t do same in setting up business
in China as Franchise law were non-existence, so it had to go into joint partnership and
ownership of its restaurant.
Wholly-owned Subsidiaries:
In a wholly-owned subsidiary, the firm owns 100 percent of the stock. In a foreign
market this can be done in two ways. The firm can set up a new operation in that country,
often referred to as Greenfield venture, or it can acquire an established firm in the host
nation and use that firm to promote its products. McDonald’s could have used any of the
two options. If a firm is seeking to enter a market in which there are already well-
established incumbent enterprises, and in which global competitors are also interested in
establishing a presence, acquisition may be a better mode of entry. As at the time of
McDonald’s entry into china, there were already established competitors both locally and
internationally. However, both methods have there own advantages and disadvantages
which will be considered below: (Hill 2009:506)
ADVANTAGES.
Wholly owned subsidiaries have several clear advantages
1. It gives tight control over operations in different countries of operation
2. Ability to engage in global strategic coordination
3. Ability to realize location and experience curve economics.
17
4. It gives a firm 100 percent share in the profit generated in a foreign market.
DISADVANTAGE.
1. It could be very costly, because firms doing this must bear the full capital costs
and risks of setting up overseas operations. (Hill 2009:501)
ACQUISITIONS.
Acquisitions occur when a large firm merges its operations with an indigenous or
local firm. Some of the benefits of acquisitions are,
1. They are quick to execute, for example, McDonald’s can build it presence faster
in china by acquiring an established enterprise.
2. Provides a means of pre-empting competitors.
3. Managers may believe acquisitions are less risky than Greenfield ventures, when
a firm makes an acquisition; it buys a set of assets that are producing a known
revenue and profit stream. In contrast, the revenue and profit stream that a
Greenfield venture might generate is uncertain because it does not exist yet. (Hill
2009:503).
DISADVANTAGES.
1. The acquiring firms often overpay for the assets of the acquired firm.
2. Inadequate pre-acquisition screening.
3. Clash of cultures between the acquiring firm and the acquired firm. For e.g
McDonald’s had to adapt to an unfamiliar and rapidly changing environment in
china as the food culture in china was vastly different from that in the West. The
environment also posed challenges to the survival of fast-food operators in the
country. ( Hill 2009:505)
4. Most acquisition fail because attempts to realize synergies by integrating the
operations of the acquired and acquiring entities often run into roadblocks and
take much longer than forecast.
ADVANTAGE OF GREENFIELD VENTURES.
1. It gives a firm much greater ability to build the kind of firm that it wants, for e.g,
it is much easier to build an organization culture from scratch than it is to change
the culture of an acquired unit.
DISADVANTAGES.
18
1. It is slow to establish.
2. Risky; degree of uncertainty around future revenue and profitability.
3. A possibility of being pre-empted by more aggressive global competitors that
enter via acquisitions and build a big market presence that limits the market
potential for Greenfield venture. (Hill 2009:506).
JOINT VENTURES.
A joint venture entails establishing a firm that is jointly owned by two or more
otherwise independent firms.
ADVANTAGES.
1. A firm can benefit from a local partner’s knowledge of the host country’s
competitive conditions, culture, language, political systems, and business systems.
2. A firm might gain by sharing these costs and or risks with a local partner when
the development costs or risk of opening a foreign market is high.
3. In some countries, political considerations may make joint ventures the only
feasible entry mode e.g is McDonald’s entry into china where only joint venture
and wholly owned subsidiaries was allowed as against franchise agreement it had
with other countries.
4. Research suggests joint ventures with local partners face a low risk of being
subject to nationalization or other forms of adverse government interferences.(Hill
2009:499).
DISADVANTAGES.
1. There is danger of giving control of its technology to its partner; however joint
venture agreement can be constructed to minimize this risk.
2. A joint venture does not give a firm the tight control over subsidiaries that it
might need to realize experience curve or location economies.
3. There could be conflicts and battles for control between the investing firms if
their goals and objectives change or if they take different views as to what the
strategy should be, this can be limited by entering into joint ventures in which one
partner has a controlling interest. (2009:500).
CONCLUSION.
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So far, we have discussed why the entry strategy of China was different as compared
to other nations where McDonald’s operates franchise- based agreement. The choice
of entry however depends on the firm’s policies and rules governing the host
countries it would like to expand to internationally. The strategy used in china which
involved joint venture and wholly-owned company are good when a firm’s core
competence is management and technological know-how respectively.
Question 4
1. Explain some of McDonald’s efforts to localize its offerings in China and describe
how successful these efforts were.
Countries differ along a range of dimensions, including the economic, political, legal
and Cultural, and these differences can either raise or lower the cost of doing business
in a country. For a firm that is trying to survive in a competitive global market, this
implies that trade barriers and transportation costs permitting, the firm will benefit by
basing each value creation activity it performs at that location where economic,
political and cultural conditions, including relative factor costs, are most conducive to
its performance.
Firms that pursue such a strategy can realize what we refer to as location economies,
which are the economies that arise from performing a value creation activity in the
optimal location for that activity, wherever in the world that might be (Hill
2009:428).
STANDARDIZATION STRATEGY.
Standardization of production by firms who engage in global business entails
producing the same products for national as well as international markets with only
minor changes in attributes (PIasecki, R. and Wolnicki,M. 2004:300). (Hill
2009:436) further stresses that, firms that pursue a global standardization strategy
focus on increasing profitability and profit growth by reaping the cost reductions that
come from economies of scale, learning effect and location economies; that is, their
strategic goal is to pursue a low-cost strategy on a global scale. These firms also try
not to customize their product offerings and marketing strategy because
customization involves shorter production runs and duplication of functions, which
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tend to raise costs. Instead, they prefer to market a standardized product world-wide
so they can reap the maximum benefits from economies of scales. (Hill 2009:437).
Localization is another strategy that can be employed when consumer tastes and
preferences differ substantially across nations and cost pressures are also intense. By
customizing the product offering to local demands, the firm increases the value of that
product in the local market. However, because it involves some duplication of
functions and smaller production runs, customization limits the ability of the firm to
capture the cost reductions associated with mass producing a standardized product for
global consumption. (Hill 2009:437). McDonald’s embarked on standardization
strategy in China, although, the Chinese food culture was different from the Western
food culture. However, research done revealed that the reason consumers go to
McDonald’s is to eat McDonald’s specialty not to eat local-like food which they can
get from local Chinese restaurant. From the case study, we can see some of the efforts
used by McDonald to localize it offering to meet the Chinese food tradition;
McDonald’s had to standardize its operation to ensure the quality and consistency of
cuisine at all its restaurant across China.
ADVANTAGE.
1. It benefits in the economies of scale accruing to the company with it being able to
produce in large quantities using more or less the same techniques of production.
DISADVANTAGE
1. This strategy is in appropriate when demands for local responsiveness are high.
(Hill 2009:437).
CHANGING THE MENU.
McDonald’s launched a version of its ‘Dollar Menu’ known as the ‘Value menu’ that
offered sandwiches and other items at a lower price. It also introduced a smaller version
of the ‘value menu’ that offered small fries and a small drink for just twenty cents. This
was also in an attempt to localize it’s offering in china and also embark on a low-cost
strategy to suit the growing middle class in china.
By building a big McDonald’s outlet in one of the city busiest shopping areas in Beijing,
China. McDonald’s can attract consumers from all works of life; this is a good strategy at
21
branding its product and targeting consumers of all ages and sexes. Also McDonald’s
attempt to further localize its offering in china, can be seen when it made sure that all its
major restaurant where open 24hours which serves as a means to increase market supply
and boost profits.
So far efforts to localize its offering in china have been successful because McDonald’s
opened its first 1,000 restaurant in China faster than in any other country outside of the
U.S. and is the main focus for investment in the region. Furthermore, McDonalds still
plans to open new outlets which indicate its brand is accepted and the taste of the Chinese
is changing to adapt to western tradition. However, we can’t say all is rosy as
McDonald’s is facing great competition from other international and local brands the
greatest being Yum brands which runs Kentucky fried chicken, taco bells among others
and are currently dominating the Chinese market.
CONCLUSION:
McDonald’s has been able to localize its offerings in china by adopting a standardization
strategy which has the benefits of offering cost reduction that comes with location
economies and experience curve effects. So far this strategy has proven beneficial for its
operations in China because it has helped in driving up sales because most of its
inventory is sourced locally therefore allowing it to attain location economics.
Question 5:
Discuss the challenges that McDonald’s faced when entering the Chinese market and to
expand its operations. (You need to use the Geert Hofstede’s Model to compare China
and the U.S. and then highlight cultural challenges that U.S. managers must be aware of
in managing McDonald’s operations in China).
American Expert G. Hofstede choose “four dimensions” to discuss the cultural influence
to organization namely Power distance, Individualism, uncertainty avoidance,
Masculinity. Hofstede collected data on employee attitudes and values from more than
100,000 individuals from 1967 to 1973. Using the same people working for the same
organization in over 40 countries of the world, Hofstede collected cultural data and
analyzed his finding that served to distinguish one culture from another. Later he added a
fifth dimension and that is how the model stands today.(Geert Hofstede 2000:98)
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1. Power Distance Index (PDI) focuses on the degree of equality, or inequality,
between people in the country's society. A High Power Distance ranking indicates that
inequalities of power and wealth have been allowed to grow within the society. These
societies are more likely to follow a caste system that does not allow significant upward
mobility of its citizens. A Low Power Distance ranking indicates the society de-
emphasizes the differences between citizen's power and wealth. In these societies equality
and opportunity for everyone is stressed. (Geert Hofstede 2000:98) For example China
has 80 on the cultural scale of Hofstede analysis compared to the U.S. which has 40. This
means that the U.S does not have a large gap between wealthy and the poor, and so
between employers and employee but have strong belief in equality for each citizens.
McDonald’s challenge in china will be that of inequality as there is a huge gap between
the rich and poor, from Hofstede model therefore it has to adapt its menu to suit both the
upper class and lower class by having meals that can be affordable for the low income
earners. Also due to high power distance there might be huge gap between the educated
(rich) and the educated (poor) which McDonald’s must consider will influence
recruitment as opposed to the U.S where individuals are given the oppournities to be
educated. If McDonalds sets up in China, it must know that there will be lengthy closed
door meetings to actualize its plan and these meeting will involve a select few in
attendance. Also workers must always respect their superiors.
2. Individualism (IDV) focuses on the degree the society reinforces individual or
collective, achievement and interpersonal relationships. A High Individualism ranking
indicates that individuality and individual rights are paramount within the society.
Individuals in these societies may tend to form a larger number of looser relationships. A
Low Individualism ranking typifies societies of a more collectivist nature with close ties
between individuals. These cultures reinforce extended families and collectives where
everyone takes responsibility for fellow members of their group. E.g U.S can be
considered to highly individualistic with a relatively high score of 91 on the scale of
Hofstede compared to China which is collectivism and has a score of 20. The reason
could be attributed to the communist rule and it emphasis on a collectivist culture. This
could be applicable when McDonald’s sets a goal it must remember that the Chinese will
be driven if motivated in groups as against individualizing incentives.(G.Hofstede
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2000:98). Also McDonald’s has to remember to respect the Chinese tradition and
introduce change slowly because change will only happen if its collective as in group
than if it is individualist.
3. Masculinity (MAS) focuses on the degree the society reinforces, or does not reinforce,
the traditional masculine work role model of male achievement, control, and power. A
High Masculinity ranking indicates the country experiences a high degree of gender
differentiation. In these cultures, males dominate a significant portion of the society and
power structure, with females being controlled by male domination. A Low Masculinity
ranking indicates the country has a low level of differentiation and discrimination
between genders. In these cultures, females are treated equally to males in all aspects of
the society. E.g. U.S and China can be considered highly masculine cultures with the U.S
scoring slightly lower i.e. 62 on Hofstede scale and China scoring 66. (G. Hofstede
2000:102). This means both countries are masculine. If McDonald’s is to open its office
in China, you might have greater success if a male employee is allowed to lead the team
with strong male contingency on the team. Also McDonald’s must lay emphasis on
distinguishing between what a man and woman job schedules are. However, there won’t
be so much difference in the way business is run in U.S and China because of the close
ranking.
4. Uncertainty Avoidance Index (UAI) focuses on the level of tolerance for uncertainty
and ambiguity within the society - i.e. unstructured situations. A High Uncertainty
Avoidance ranking indicates the country has a low tolerance for uncertainty and
ambiguity. This creates a rule-oriented society that institutes laws, rules, regulations, and
controls in order to reduce the amount of uncertainty. A Low Uncertainty Avoidance
ranking indicates the country has less concern about ambiguity and uncertainty and has
more tolerance for a variety of opinions. This is reflected in a society that is less rule-
oriented, more readily accepts change, and takes more and greater risks. (G. Hofstede
2000;103).For example the U.S scored 46 on Hofstede scale which is relatively low while
China scored 32 which is lower. This means that the Chinese are more accepting of risk
and change compared to the U.S. which is better for McDonald’s operation because it can
open up its market and expand by trying out different menu options because the Chinese
24
are more tolerant of change and look up to benefits on the long term.
Geert Hofstede added the following fifth (5th) dimension after conducting an additional
international study using a survey instrument developed with Chinese employees and
managers. That survey resulted in addition of the Confucian dynamism. Subsequently,
Hofstede described that dimension as a culture's long-term Orientation.
5. Long-Term Orientation (LTO) vs. short term orientation. Long term orientation
focuses on the degree the society embraces, or does not embrace long-term devotion to
traditional, forward thinking values. Values associated with long term orientation are
thrift and perseverance. Values associated with short term orientation are respect,
tradition, fulfilling social obligation and protecting one’s face. High Long-Term
Orientation ranking indicates the country prescribes to the values of long-term
commitments and respect for tradition. This is thought to support a strong work ethic
where long-term rewards are expected as a result of today's hard work. However,
business may take longer to develop in this society, particularly for an "outsider". A Low
Long-Term Orientation ranking indicates the country does not reinforce the concept of
long-term, traditional orientation. In this culture, change can occur more rapidly as long-
term traditions and commitments do not become impediments to change. (G.Hofstede
2009:102). E.g. the U.S.scored 29 on Hofstede scale and China had 118 which is high.
The reasons being that most Chinese have adopted Confuciasm as their way of life.
McDonald’s challenge will be to place emphasis on education and training of its
employees and avoid anything that will cause him to loose face.
CONCLUSION:
However, one must be careful about reading too much into Hofstede’s research. This is
because Hofstede assumes there is a one-to-one correspondence between culture and
nation state, but as we saw earlier, many countries have more than one culture. Hofstede
results do not capture this distinction. Secondly, Hofstede informants worked not only
within a single industry, the computer industry, but also within one company, IBM. At
one time, IBM was renowned for its own strong corporate culture and employee selection
procedures making it possible that employees’ values were different in important respects
from the values of the cultures from which those employees came. Finally, in group-
25
oriented cultures, individuals might tend to answer questions as if they were addressed to
the group he/she belongs to. While on the other hand in the U.S which is individualistic
culture, the answer will most likely be answered and perceived through the eyes of that
individual. (Hill2009:110).
Table 1: China and US Hofstede Cultural Dimensions. (G.hofstede 2000;98)
PDI UAI IDV MAS LTO
China 80 32 20 66 118
US 40 46 91 62 29
High 104 112 91 110 118
Mean 60 68 45 49 42
Low 11 8 6 5 -10
STDEV 21 24 24 19 25
Notes:
1. PDI= Power Distance, UAI= Uncertainty Avoidance, IDV= Individualism vs.
Collectivism, MAS= Masculinity vs. Femininity, LTO= Long-Term vs. Short-
Term Orientation.
2. M =mean, L =Lower, H =higher.
Question 6
Where do you think the best oppournities for future growth lie for McDonald’s? Why?
McDonald’s is the undisputed king of burgers with over 32000 locations in over
110countries. Over the past 40yrs, McDonald’s has taken full advantage of their strength.
But because of maturity in the fast food industry, more focus will have to put on
oppournities, weakness and strength. McDonald’s brand mission is to be customer’s
favorite place and way to eat. “Our worldwide operations have been aligned around a
global strategy called the plan to win centering on the 5 basics of an exceptional customer
experience- people, products, place, price and promotion. The five people principles are
1. Respect and Recognition. 2. Values and leadership behavior. 3. Competitive pay and
benefits. 4. Learning, development and personal growth. 5. Resources to get the job done
are upheld throughout its worldwide operations. (www.mcdonald’s.com,2005)
26
McDonald’s manages its business as five distinct geographic segments: The US,
Europe, Asia/Pacific, Middle East and Africa (APMEA), Latin America and Canada.
From the Case Study, according to the company 2010 sales statistics, Europe posted the
greatest profits. The US, Canada, France, Germany, UK, Australia, China, Japan and
Brazil are McDonald’s seven Major Markets and represent 70% of the company’s total
revenue. According to (McDonald’s Annual report 2009). Approximately 64% of
McDonald’s sales are derived from its global operation. More than half (35%) of these
sales are from the company European segment of which France, Germany and the United
Kingdom account for approximately 65% of the revenue.
The two greatest oppournities for McDonald’s future growth lie in expansion into other
brand and international markets. McDonald’s should expand into developed countries as
against developing countries that have a better ability and need to buy their product. This
will help them against fighting weak currencies, political and ethnicity problems in
developing countries. Since McDonald’s has posted strong sales record in Europe,
McDonald’s future growth strategy should focus more on Europe (France) because
France is the only country in which McDonald’s has consistently done well since it
opened its outlet in 1979. (The Economist intelligence unit Limited, 2005.) McDonald’s
has about 1,040 restaurants in over 750 cities in France. Among the reasons that
McDonald’s has done so well in France is the company’s “upgrading and transparency”
strategies. McDonald’s team has improved its Menu and introduced a host of innovative
concepts.
Also McDonald’s can benefit from France skilled labour force and strong social
infrastructure. Education is free, beginning at age 2 and mandatory between the ages of 6
and 16. These factors support France’s ability to build up its human capital to be as
attractive as it is to foreign investors. As France continues to hold its position as the most
profitable segment in the European market with a record new McDonald’s opening every
6 days in 2003, we are confident that these practices will continue to provide the
oppournities for expansion in the French Markets.
However, McDonald’s must be aware of some restrictions in its operation in France
which include restrictions on hormone-fed beef and poultry, enriched flour and
genetically engineered foods and crops. This invariably means that McDonald’s will have
27
to source locally and this will add to the costs of the price of the product because lower
priced and better quality products that are available outside of those made by the French
companies cannot be used. (Hill 2009:26).
ENTRY AND REASONS FOR ENTRY.
1. FRANCHISING
In France, franchises do quite well and McDonald’s is obviously not an exception. In
Franchising the franchiser sells intangible property to the franchisee usually a trademark
and expects the franchisee to agree to abide by strict rules as to how it does business (Hill
2009:498)
The advantage of using this mode is that McDonald’s is relieved of many of the costs and
risks of opening a foreign market on its own. Also, McDonald’s can build a global
presence quickly and at a relatively low risk and cost. The major disadvantage of
Franchising will be quality control; one way around this could be the establishment of a
subsidiary in each country e.g. McDonald’s for example established a master franchise in
many countries to control quality. (Hill 2009:498).
2. LICENSING
This has the potential to offer the company (McDonald’s) an excellent opportunity to
gain further market shares against other competitors in the food industry. This makes it a
highly recommended strategy for McDonald’s in the France. In this arrangement, a
licensor grants the right to intangible property to another entity (the licensee) for a
specified period, and in return the licensor receives a royalty fee from the licensee. (Hill
2009:496)
The advantage is that since the licensee puts up most of the capital necessary to get the
overseas operation going. The firm does not have to bear the development costs and risks
associated with opening a foreign market. Also McDonald’s can benefit especially with
the strong French barriers on investment. The disadvantage is that it does not give a firm
tight control over its affair. There is also a risk of licensing technological know-how
products to foreign companies whish constitutes the basis of many multinational firms’
competitive advantage. McDonald’s can reduce this by entering into cross licensing
agreement with a foreign firm which involves a firm licensing some valuable intangible
property to a foreign partner, but in addition to a royalty payment, the firm might also
28
request that the foreign partner license some of its valuable know-how to the firm. (Hill
2009:497).
CONCLUSION:
France is one of the most profitable markets for McDonald’s. It has over 750 restaurants
and continues to do well. McDonalds can benefit from this market by expanding its
operation in this market so that it can reap more benefits. Also its government is also
liberal with setting up of investment in this region as this can provide jobs for the
unemployed in the region and because the French love to eat out, McDonald’s will
continue to have customers and meet this need by sourcing locally. This will make
France a great place to do business.
.
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