McDonalds 08 JIBED Vol 3 No. 4 With Pavlou P -Libre

The external environment and its effect on strategicmarketing planning: a case study for McDonald’s

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: [email protected]

* 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: [email protected]

Abstract: This case study has been compiled in order to illustrate the effect ofthe external environment on the international marketing strategy ofMcDonald’s, the fast food chain. An external environmental analysis isnecessary, as effective marketing strategies cannot be developed without firstlyanalysing the environment in which the company operates. The paper analysesa number of the theoretical approaches to strategic planning to be considered ininternational marketing.

Keywords: adaptation; international; marketing; McDonald’s; 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 McDonald’s’, Journal for International Business andEntrepreneurship Development, Vol. 3, Nos 3/4, pp.289–307.

Biographical notes: Demetris Vrontis is the Founder and Editor of theEuroMed Journal of Business and the Editor for the World Journal of BusinessManagement. He is a Professor in Marketing and the Dean of the School ofBusiness at the University of Nicosia, Cyprus. His prime research interests areinternational marketing, marketing planning, branding and marketingcommunications. He has published over 45 refereed journal articles, contributedchapters and cases in books/edited books and presented papers to conferenceson a global basis. He is also the author of eight books, mainly in the areas ofinternational 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 UK’s NHS and in consultancy organisations(PricewaterhouseCoopers and KPMG) in the UK and Cyprus. In 2005 he joinedthe 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 MBAlevel. He is a member of the Editorial Review Board of the EuroMed Journal ofBusiness. His research interests include strategic performance management,international business and corporate governance systems.

1 Introduction

1.1 McDonald’ s operations in international markets

McDonald’s 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

world’s 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

company’s 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 company’s own resources and supplies suggestions as

to the company’s 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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290 D. Vrontis and P. Pavlou

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 organisation’s 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

McDonald’s.

2 McDonald’s 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 McDonald’s 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 McDonald’s 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 McDonald’s 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

company’s 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 advertiser’s 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 consumer’s 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 McDonald’s 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,

McDonald’s 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).

McDonald’s 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 McDonald’s entered the Russian market,

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the company took into account that technology transfer could provide important long-term

benefits to the Soviet citizenry. Also, since the Soviet machinery lagged 15–20 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 children’s 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 McDonald’s, 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. McDonald’s

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 McDonald’s in determining a consumer’s 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 society’s 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 McDonald’s 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 McDonald’s without

beef. A so-called ‘Maharaja Mac’ was also created, using a patty made from lamb. In some

countries, McDonald’s 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 McDonald’s 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, McDonald’s 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, McDonald’s 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, McDonald’s 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

McDonald’s 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 McDonald’s 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 McDonald’s to reduce its use of plastic and styrofoam packing. While

McDonald’s 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 McDonald’s.

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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.

McDonald’s 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 McDonald’s (Vignali, 2001). Below are some key

examples of the Internationalisation marketing strategy pursued by McDonald’s.

2.8 Product

One of the aims of McDonald’s 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 McDonald’s 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. McDonald’s 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,

McDonald’s 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

McDonald’s adapted the original menu to meet customer needs/wants in different

countries.

In tropical markets, guava juice was added to the McDonald’s product line and

Bananafruit pies became popular in Latin America. In Thailand, McDonald’s 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, McDonald’s introduced the Samurai Pork Burger with sweet sauce. Moreover,

in France, McDonald’s 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 McDonald’s 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 firm’s 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 McDonald’s, Burger King and KFC. However, in certain markets,

McDonald’s 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 McDonald’s 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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2.9.3 Threat of substitutes

A substitute product is one that can be used as an alternative to a company’s own. It could

be argued that the threat of substitutes to McDonald’s 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 McDonald’s 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 McDonald’s 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

McDonald’s 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 McDonald’s

operations, suppliers are keen to retain their contracts with the firm. McDonald’s

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

McDonald’s 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 McDonald’s pricing policy is highlighted in the company’s 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 McDonald’s pricing and differentiation mix is to increase

market share. The strategies of cost leadership and differentiation are used

interchangeably within the internationalisation approach of McDonald’s.

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Figure 2 Strategy tactics grid (for colours see online version)

Figure 3 Porter’s generic strategy grid (for colours see online version)

The McDonald’s 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 McDonald’s. 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 McDonald’s 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 McDonald’s company has perhaps, contrary to Porter’s 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 McDonald’s 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 McDonald’s 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, McDonald’s 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 McDonald’s company’s position in the Mckinsey matrix (for colours see onlineversion)

More specifically, growth strategies are designed to expand an organisation’s

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 firm’s 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 corporation’s

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 McDonald’s 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 McDonald’s 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 McDonald’s 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 (Porter’s (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 company’s strategic decision making. The level of understanding

that exists in these relationships will determine the success of a company.

McDonald’s 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 McDonald’s to consider standardisation, while

customer orientation sways it towards adaptation. It is evident through the analysis that

McDonald’s 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 McDonald’s internationalisation strategy, the company’s 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

company’s 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).

McDonald’s portfolio of products is well managed and ensures the best fit between the

company’s 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 McDonald’s 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 McDonald’s 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.

McDonald’s 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 McDonald’s 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.

References

Daniels, J. and Radebaugh, L. (1998) International Business: Environments and Operations, 8th edn, Reading, MA: Addison-Wesley.

Day, G.S. (1986) Analysis for Strategic Marketing Decisions, St Paul, MN: West PublishingCompany.

Doyle, P. (1983) ‘Marketing management’, unpublished paper, Bradford University Management – Centre, in R. Brooksbank (1994) ‘The anatomy of marketing positioningstrategy’, Marketing Intelligence and Planning.

Markides, C. (1999) ‘Six principles of breakthrough strategy’, Business Strategy Review, Vol. 10,No. 2.

McDonald, M. and Leppard, J.W. (1993) Marketing By Matrix, USA: NTC Business Books.

Mintzberg, H. (1994) The Rise and Fall of Strategic Planning, New York, NY: Free Press.

Muhlbacher, H., Dahringer, L. and Leihs, H. (1999) International Marketing: A Global Perspective,2nd edn, London: International Thomson Business Press.

Porter, M.E. (1980) Competitive Strategy, Techniques for Analysing Industries and Competitors,New York: Free Press.

Porter, M.E. (1985) Competitive Advantage, New York: The Free Press

Rumelt, R. (1980) ‘The evaluation of business strategy’, in W.F. Glueck (Ed.) Business Policy andStrategic Management, New York: McGraw-Hill.

Vignali, C. (2001) ‘McDonald’s: “think global, act local” – the marketing mix’, British FoodJournal, Vol. 103, No. 2, pp.97–111.

Vignali, C., Vrontis, D. and Vranecevic, T. (2003) Marketing Planning. Analysis, Strategy andTactics, London: Foxwell and Davies.

Viswanathan, N.K. and Dickson, P.R. (2006) ‘The fundamentals of standardizing global marketingstrategy’, International Marketing Review, Vol. 24, No. 1, pp.46–63.

Vrontis, D. and Vronti, P. (2004) “Levi Strauss. An international marketing investigation’, Journalof Fashion Marketing and Management, Vol. 8, No. 4, pp.389–398.

Whalen, J. (1995) ‘McDonald’s cooks worldwide growth’, Advertising Age International,July/August, p.5.

Notes

1 http://www.mcdonalds.com/corp/about.html

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Documents

McDonalds 08 JIBED Vol 3 No. 4 With Pavlou P -Libre