INTRODUCTION McDonalds, being an American based fast food company was also very successful in other western countries. The cultural and consumer behavioral similarities among those nations might have caused a positive impact in this success. However it’s not only in western countries that McDonalds was successful but also in eastern countries as well. Among those Asian countries, McDonalds has become one of the most preferred fast food destinations.
After xxx years of its operations, with vast experience in several cultures, McDonalds eyed the mainland Chinese market which they saw a huge potential of growth and expansion despite the fact that the Chinese government system and the law system was a bit tougher than other countries they were operating. At first they were not allowed to franchise in China, but in 2004 they were allowed. But unlike in other countries which McDonalds are operating, they are a bit reluctant to franchise in mainland China. On the other hand there is a tight competition among various food suppliers, both western foods and traditional Chinese foods.
The aim of this paper is to 1. Critically analyse the environmental forces affect on McDonalds development in China 2. Critically evaluate the opportunities and threats for McDonalds operations in China 3. Find out the strategic groups in the fast food industry in China and with what group does McDonalds compete most This paper included three major parts which each part discuss about each objective mentioned above followed by a simple conclusion. ENVIRONMENTAL FORCES AFFECTED ON MCDONALDS DEVELOPMENT IN CHINA Basically when it comes to an environmental analysis, its either PESTEL or SWOT frameworks are used.
In this paper the PESTEL framework is used to analyse the external environmental forces. PESTEL stands for Political Economical Social Technological Environmental Legal factors of the external environment in which the organization is operating. PESTEL provides a tool for managers or business analysts to take measurements on how the external environment is behaving and potential impacts on the organization. Political Forces China used to be a Communist country for several decades. The economic system was a closed one. But now China is becoming more and more capitalist and opens its door to foreign investors.
This transformation was an immense driving force for McDonalds development in china because they have their own standards in the industry, in fact, globally recognized standards as McDonaldisation (Tom Larney) and this transformation allowed them to operate without much of disturbances. Even though, Chinese government’s decision to peg the Chinese Yuan against American Dollar has made a drawback. But they were able to adjust to this situation by using local ingredients. By 2006 almost everything at McDonalds in china were sourced from china itself.
Even at a time when Chinese government was not having a good faith on foreign investors McDonalds was able to make good relationship with the government. Making joint venture with the state owned general corporation of Beijing agriculture enabled McDonalds to enhance their image at the Chinese government while making it profitable for the company too. Economical Forces China being transformed to a more liberal and open economy, having enough faith on foreign companies make China a big playground for large western companies like McDonalds.
The increasing consumer income in both rural and urban China encourages individuals to expend on products like McDonalds. Per capita annual disposable income in both urban and rural areas have increased dramatically in last four decades from 50. 14 US Dollars in 1978 to 1,716. 89 US Dollars in 2006 in Urban areas while 19. 51 US Dollars in 1978 to 523. 7 US Dollars in 2006. (National Bureau of Statistics of China, 2006) This had a great affect on McDonalds as the consumer disposable income has a direct effect in any sales organization.
But in the other hand, Engle Coefficient has significantly dropped over the specified years from 57. 5% to 35. 8% in urban areas while from 67. 7% to 43% in rural areas. (National Bureau of Statistics of China, 2006) Social forces The curiosity to experiment new western food by the Chinese consumers was a very positive and effective factor which established McDonalds easily and in a short time in the Chinese market. However when they entered to the Chinese market, KFC, their main competitor was already in operating in China.
So to gain market share McDonalds had to use its brand name as a symbolic representation of the US culture. Unlike their operations in other countries which involve a significant amount of Beef in their products, had to minimize the Beef involvement in products in the Chinese market because Chinese consumers prefer Chicken far more than Beef. Urbanization and increasing number of middle class people played a huge role in establishment and development of McDonalds in china because targeting at those individuals made easy to be attracted.
Middle class people thought of McDonalds as a luxurious food destination and were naturally attracted to McDonalds for its spacious, clean and friendly atmosphere. China is showing a large potential market for breakfast. 80% of Chinese people eat breakfast while 68% of them are taking breakfast away from home. By introducing American style breakfast to the Chinese market, the profits of the McDonalds boosted rapidly as the margin of the breakfast items were higher than the other food items sold at McDonalds outlets.
Even though per capita annual disposable income has increased in both rural and urban house holds, the proportion of expenditure spend on food is showing a slight decline over the year. This may be due to consumer’s interest in buying other consumer goods like electronics, fashion cloths, etc. And also may be due to growing health consciousness. Technological forces It’s very hard to find direct technological forces affected in establishing and developing McDonalds operations in China and only very few indirect technological forces could be found.
Increasing skills of Chinese labor in technological aspects made China the main attractive place for foreign electronic item producers and that made a significant increment in the income of the Chinese house holds. This made a rise in the consumer disposable income which has a positive impact on McDonalds sales. The increasing interest to use the information and communication technology by the young and teen generation has a bit of impact on McDonalds but because McDonalds has not launched their own web site in the Chinese makes, it less effective for McDonalds. Legal forces
When McDonalds started their operations in china there was virtually no protection to cover foreign investors in China. But with the time, with the Chinese government’s need to open up the economy and attract foreign investors, a reliable and an acceptable legal system was developed. But still those businesses see some week points in the legal system which makes them to be cautious when operating in China. The franchise law which was first introduced in 1997 was only for local franchises. After seven years the franchise law which applies to foreign businesses was enacted.
But still companies like McDonalds are reluctant to franchise in China as much as they do franchising in other countries. EVALUATING OPPORTUNITIES AND THREATS FOR MCDONALDS IN CHINA Opportunities and threats are two elements of SWOT analysis which stands for Strengths Weaknesses Opportunities Threats In this paper its intended only to study and critically evaluate Opportunities and Threats. Opportunities Market position McDonalds being the second largest fast food provider in China by popularity and number of outlets, is a huge opportunity to expand further in the Chinese market.
The popularity of the brand and it symbolic representation of US culture and life style makes it easier to establish the image of the company in the minds of Chinese customers. Products being offered at the outlets Unlike other traditional Chinese fast food providers, McDonalds provides a vast range of western fast food including chicken, Beef, and French fries. The immense curiosity of the Chinese consumers to taste western food is a good asset for the company. But Beef was not much preferred by Chinese consumers.
The competition is very much between KFC and McDonalds which offers chicken as their main serving. But the McDonalds has an advantage over KFC because they were the symbol of the American life style which most of the Chinese customers are attracted to. Branding philosophy Being a globally recognized fast food company, McDonalds does not have to put much effort to establish the brand image. It is a good opportunity for them as they are entering in to a market which they are already known and recognized as a global establishment.
This is very advantageous for McDonalds when comparing the effort put in by other western fast food chains when entering to establish a positive image in the minds of Chinese customers. Government Transformation The Chinese government transforming itself from communism extreme to much more flexible capitalism system makes the Chinese market more and more free and open for foreign companies. Being a player in the free market system gives a huge opportunity for McDonalds to play freely under their own rules and expand itself. Promotional efforts As always McDonalds uses a unique promotional strategy.
When they had the Olympics in China McDonalds promoted itself with the slogan” I’m lovin it when China wins”. Even though this led to a contradiction in the US market they still were able to secure an unmatchable place in the hearts of Chinese customers. And McDonalds were smart enough to grab the customer attraction by using Chinese traditional decorations in special festival seasons to change the merchandising display. This gave the customers a feeling of their own when they get inside the out let. Enacting of franchising law In most of the countries out of USA McDonalds were operating in a franchise base.
But when they entered the Chinese market there were no law to do franchise business in China. Only in 2004 Chinese government enacted the franchise law which enables foreign businesses to do franchise in the mainland China. Even though McDonald is still a bit reluctant to franchise the business in China, there is a big opportunity to expand the business easily and in a fast phase if they do the franchising. Increasing per capita annual disposable income With the fast growing technology and foreign investments on China, individual income has dramatically rises in china.
This is a good opportunity for McDonalds serve them with western food for their liking and attract more and more individuals to McDonalds. Size of the population China has the largest population in the world. Out of this large population most of the people are living in rural areas. At the moment McDonalds is serving to a lesser extend of this population whom are the urban population. If they expand themselves to rural areas as well there is a huge opportunity to make more profits. Changing Chinese life style China’s younger generation is showing a great interest in internet shopping.
McDonalds partnership with taobao. com in 2007 gave a higher online presence to McDonalds witch is a good opportunity to go through to the younger generation as well. Demand for food on the go With the rapidly expanding Chinese middle class and the increased car ownership, the demand for food on the go increased giving a big opportunity to McDonalds to establish their famous “drive – thru” facility in China too. Threats Political affairs between USA and China China and USA being economical rivals, the emerging political tension between two countries has a negative impact on the US based McDonalds.
A tiny misunderstanding would cause huge damage for companies like McDonalds. Unfortunately China becoming the emerging giant makes US to keep a close eye on china makes a big potential to blow up in the economic contest. Competitors McDonalds has to compete with both western and Asian competitors who has entered China before McDonalds and also with entrants in the recent times. With the transformation of the Chinese government policies, more and more foreign businesses entered China seeking for market share. KFC being a pioneer player in china is the biggest rivals for McDonalds.
But as a whole all the other foreign and local fast food providers in china is a threat and this threat is ever growing. Inconsistent social and economical development Even though China is showing a rapid growth in national economy, the distribution of the benefits of this growth is not consistent. Tire 1 cities benefits the most of the rapid development while Tire 2 and Tire3 cities benefit lesser amounts respectively. The infrastructure in Tire 2 and Tire3 cities are far behind from that of Tire 1 cities. This has made McDonalds to operate only in Tire 1 Cities and in a very few parts of Tire 2 Cities.
This is a major threat for the growth of McDonalds. If the benefits of national development in China are being distributed at least in a fare manner, companies like McDonalds could invest more and more to expand their businesses. Increase in fuel and food materials With the growth of Chinese economy and because of the inflation rate, prices of food materials are rising and with the increased fuel price in the world market which is unavoidable, McDonalds has to bare both these costs on its production. This makes the unit cost to be increased and is a major disadvantage in attracting new customers.
Increasing health consciousness of the customers The whole world is in a trend to be aware about their health more than ever at the present. Consumers are expecting food providers to be more and more standardized on their products. Even though McDonalds have a world recognized standards in preparing their foods, they still have to do researches to develop new food ideas which appeals to health conscious customers. Legal system in China Though China is transferring itself in to a capitalist economy, the Chinese law system does not provide the hundred percent security to foreign investors yet.
May be that’s why McDonalds is still reluctant to do the franchising in China. Most of the operations of the McDonalds in china are either sole owned by the company or joint ventures with other western companies. If the Chinese government has enacted strong and sufficient laws to protect foreign companies invested in China, McDonalds could expand itself in a more rapid and productive way. THE STRATEGIC GROUPS FOUND IN FAST FOOD INDUSTRY IN CHINA There were mainly four strategic groups found in fast food industry in China. 1. Western Burger fast food chains
KFC which was the pioneer entrant to the main land china along with Burger king which is a very late entrant makes the western burger fast food chain including McDonalds as well. 2. Western non Burger fast food chain Western non Burger fast food chain consists of Pizza Hut, Rainforest Cafe, Subway, and Starbucks as main players. Even though this fast food chain entered the Chinese market very late they also have gained a significant market share over the years. 3. Asian Burger fast food chains Mainly Japans Mos Burgers is found in this chain.
Mos burgers were the number one burger chain in Japan which had a significant success also in Chinese market 4. Asian non Burger fast food chains Daniang Dumpling, Malan Noodles, Lihua fast food are found among the Asian non Burger fast food chain. Although Malan Noodles had positioned themselves in a higher rank in the chain in the past, the tough competition made the company to close its operations. McDonalds being a western Burger fast food chain and its main competitor KFC was also in the same chain makes McDonalds to compete mostly against its own strategic group to secure the market share.
CONCLUSION By analyzing the case study on McDonalds; is China Lovin’ it? It is basically found some interesting Political, Economical, Social and Legal forces that had some significant effect on McDonalds establishment and development in main land China. Only few indirect Technological forces found. It was very hard to find environmental forces which affected McDonalds in their operating procedure. When Analyzing the Opportunities and threats, ten opportunities could be identified. And also there were six major threats were found in the text.
Four main Strategic groups could be identified in the case study where it is found that the strategic group which McDonalds belongs to is the most intensified competitive group. REFFERENCES National Berueau of Statistics of China (2006), China Statistical year book 2006 , [online : http:// www. stats. gov. cn/ english/ statisticaldata/ yearlydata/ YB1996e/ I9-4e. htm] Date accessed: 2nd January 2011 Larney T. The McDonaldization of information [online: Http:// web. simmons. edu/ ~chen/ nit/ nit’96/ 96-171- larney. html] Date accessed: 30th December 2010