Contemporary developments in business management Assignment (SIM 337) january 2015

This report is to assess the impact of the external business environmental factors on organization and evaluate the organization’s responses. In this report, three factors in PESTLE framework and Porter’s Five Forces are used to analyze the strategies and activities that McDonalds Corporation carry out to adapt to the influences of these factors. Furthermore, because of an international corporation, McDonalds face the different issues in the different countries.

ASSIGNMENT COVER SHEET UNIVERSITY OF SUNDERLAND

BA (HONS) BANKING AND FINANCE

Student ID: 149080615/1

Student Name: Tran Quyet Thang

Module Code: SIM 337

Module Name / Title: Contemporary Developments in Business Management

Due Date: 16 Jan 2015

Centre / College: Banking Academy of Viet Nam

Hand in Date: 16 Jan 2015 Assignment Title: Individual assignment

Students Signature: (you must sign this declaring that it is all your own work and all sources

of information have been referenced)

Title page

Contemporary Developments in Business

Management SIM 337

Banking Academy, Vietnam Submitted on January 16, 2015 Prepared by: Quyet Thang Tran Student ID: 149080615/1

Executive summary This report is to assess the impact of the external business environmental factors on organization and evaluate the organization’s responses In this report, three factors in PESTLE framework and Porter’s Five Forces are used to analyze the strategies and activities that McDonalds Corporation carry out to adapt to the influences of these factors Furthermore, because of an international corporation, McDonalds face the different issues in the different countries

The report concludes that McDonalds are under high pressure with the impact of social environment, legal environment, ecological environment, power of buyers, threat of substitutes and rivalry among its competitors Additionally, this report also shows the activities and strategies that McDonalds carry out to take advantages from its strength and reduce the negative impact from its weakness

There are some suggestions for McDonalds such as:

 Innovate its meals with low calories

 Modify its products with local tastes

 Improve the quality of suppliers

This report also has some limitations including: some factors in PESTLE framework – political environment, economic environment and technological environment are not analyzed

Table of Contents

Title page 1

Executive summary ii

1.0 Introduction 2

2.0 Task 1 – PESTLE framework 2

2.1 Social and culture environment 2

2.2 Legal environment 3

2.3 Ecological environment 4

3.0 Task 2 – The changing competitive environment (Porter’s Five Forces) 5

3.1 Analysis 5

3.2 Critical evaluation 5

3.2.1 Threat of new entrants 5

3.2.2 The power of suppliers 8

3.2.3 Power of buyers 9

3.2.4 The threat of substitutes 9

3.2.5 Rivalry among existing competitors 10

3.3 Areas for improvement 12

4.0 Conclusion 12

References 13

Appendix 1 – McDonald’s profile 18

Tables Table 1: Suppliers of McDonalds 8

Table 2: Brief information about some fast food brands 10

Figures Figure 1: Minimum Wages around the World 3

1.0 Introduction

The purpose of this report is to find out the impact of external business environmental factors on McDonalds which provide food and beverage service activities and show the reaction of this organization The report is divided into two parts In the first part, some

of macroeconomic factors will be considered such as society, ecology…while in the second part, the industrial factors will be analyzed through Porter’s Five Forces framework in order to evaluate McDonalds activities Furthermore, be a global fast food chain, McDonalds have to face to the different problems in the different markets Therefore, in each country where the company operate, McDonalds also carry out specific strategies to take the advantages and reduce the negative impacts from these factors

2.0 Task 1 – PESTLE framework

To evaluate the external factors such as economy, society, technology…which influence to the operation of the fast food restaurant chains, the PESTLE framework is carried out However, in the case of McDonalds, only three factors including social and culture environment, legal environment and ecological environment which could bring significant impacts to business are analyzed

Analyzing the social-cultural environment of business is important to recognize that society and culture are not homogeneous or fixed and changes in this environment is a hallmark of modern societies and, again, business can be seen as both driving these changes and having to respond to them (Wetherly & Otter, 2014) Currently, McDonalds operates in more than 100 countries with more than 30,000 local restaurants

so it applies transactional strategy with the trademarked golden archers in all markets Beside the same types of burger and fries, McDonalds also offer the different tastes for different local market For example, according to Business Insider, there are 21 awesome McDonald's dishes that customers cannot get in US such as McDonald's Crock Brie - these deep-fried triangles of oozing brie cheese are only available in Italy (Peterson, 2014) Furthermore, McDonalds also develop McRice Burger in parts of South-East Asia Another important factor is that customers now care more about healthy however eating fast food can bring a lot of negative influence for health In

order to react with this problem, McDonalds provide low-calories menu - a Favorites Under 400 Calories menu for customers In addition, McDonalds also advertise water, milk and juice for its kids’ Happy Meals in 20 markets globally including the U.S., Australia, Germany, France, the U.K and China (Patton, 2013) to reduce the negative impacts of fast food for healthy of kids This large fast food chain tries to attract more customers with these healthier items, but there was a 0.2% same store sales growth at the end of 2013 (Jones, 2014) This action can be considered as an effort of McDonalds

in providing customers better services

Because of operating worldwide, McDonalds have to obey the different obligations such as taxes, labor laws…in the different countries and each country require specific rules One aspect of law is about minimum wage for workers This figure below will show minimum wages around the world:

Source: Business Insider, 2014

Figure 1: Minimum Wages around the World

The salary expenses of McDonalds are different in different countries In the developed countries, employees get higher salary than others Currently, there is a problem which involve to the minimum wages of McDonalds workers in US franchises There are many complaints of workers such as in New York, workers were forced to spend their own time and money cleaning their uniforms, sometimes three times a week, in violation of New York state laws requiring firms to pay employees for uniform maintenance (Swaine, 2014) The actions of hiring or firing employees are done directly

by McDonald’s franchise-owners and there is a 30-year-old case say that says companies cannot be held liable for unfair employment practices toward workers that the company is not directly in charge of hiring and firing (Taube, 2014) However, Paul Millus, an attorney at the law firm Meyer, Suozzi, English & Klein said that: “The franchises get everything from supplies to uniforms to the design of their restaurant, and also information pertaining to wages and hours, hiring, and firing.” (Taube, 2014) This means that all the decisions of franchises are following the guidance of McDonalds Therefore, National Labor Relations Board want to revolve the old case to make companies like McDonalds take responsibility for workers alongside the franchisee If this rule is effective, this will impact the operation of McDonalds not only

in US but also in all market that McDonalds franchise Furthermore, this also shows that McDonalds treats workers unfairly, so their reputation might be destroyed and lead customers choose other brands

The ecological dimension includes a range of factors such as climate change, energy conservation, water quality and shortages, biodiversity and land use, contamination and health issues from chemicals, waste management and disposal, depletion of fisheries, deforestation and pollution (Fee, 2013) One of key problem which involve to fast food chains is about meat production such as beef, pork, and chicken The activities of feeding livestock can bring huge negative impacts to environment Meat production produces more greenhouse gas emissions than transportation with direct emissions from meat production accounting for some 18% of world’s total while transport accounts for 13% of total global greenhouse gas emissions (Shah, 2010) This is a big number and

it can be considered as a factor that cause climate change Furthermore, according to the Institution of Mechanical Engineers (IME), to produce 1kg of meat requires between 5,000 and 20,000 liters (Sedghi, 2013) while in the world, there are still a lot

of people who cannot assess safe drink water In facts that cattle raising is an important root for the destruction of tropical forests Greenpeace - a non-governmental environmental organization said McDonald's was fueling Amazon rainforest destruction by using soybeans grown in the region as feed for chickens that end up served in the fast-food chain's European restaurants (Astor, 2006) Greenpeace act like

a pressure group to require the companies having activities that damage the Earth Now McDonalds have to consider this problem carefully McDonalds plans to begin purchasing verified sustainable beef by 2016, with the goal of eventually buying all of its beef from sustainable sources and develop an app called “Track My Macca's” which allows consumers to trace the supply chain of their Big Mac or Chicken McNuggets down to a particular farmer or rancher (Vittorio, 2014) Although McDonalds have not announced the specific details about sustainable beef, this still shows the ambitions of McDonalds about developing sustainable business In fact, McDonalds take many actions in order to improve the efficiency and reduce the negative impacts to environment by installing LED lighting, low oil volume (LOV) fryer or designing new restaurant model, etc

3.0 Task 2 – The changing competitive environment (Porter’s Five Forces)

3.1 Analysis

By applying Porter’s Five Forces to analyzing the changing competitive environment

in fast food industry, McDonalds can understand and deal with its competitors This finding will show both strength and weakness of McDonalds in fast food markets It means that the company have to carry out the strategies to take advantages of the strength and reduce the impacts of weakness so that the competitive capability of McDonalds might be higher compare to its competitors

3.2 Critical evaluation

3.2.1 Threat of new entrants

3.2.1.1.Supply-side economies of scale

“These economies arise when firms that produce at larger volumes enjoy lower costs per unit because they can spread fixed cost more over units, employ more efficient technology, or command better terms from suppliers” (Porter, 2008) According to Side

dish, McDonald’s sell “more than 75 hamburgers per second, of every minute, of every hour, of every day of the year” (2010) With the giant numbers of hamburger like this, the fixed costs such as labors, fryers, cooking oils are spread more Furthermore, McDonald’s also take advantages of scales economies in purchasing raw material in bulk According to John Hayes, McDonald's senior director of U.S food and packaging, Americans alone consume one billion pounds of beef at McDonald's in a year – five and a half million head of cattle (Feridun, 2010) With a huge quantities of material, McDonalds can contact directly to suppliers to avoid the intermediate costs or take the discounts Furthermore, McDonalds also take advantages of economies of scale based

on the enormous advertising budget The company’s annual advertising budget estimated to exceed $2 billion — making it “unmatched in the industry” - allows McDonald’s to reach an audience far larger than the one that saw “Super-Size Me” (O'Brien, 2012) Therefore, McDonald’s can protect its market by economies of scales 3.2.1.2 Demand-side benefits of scale

“These benefits, also known as network effects, arise in industries where buyers’ willingness to pay for a company’s product increase with the number of other buyers who also patronize the company” (Porter, 2008) According to Bloomberg Businessweek, McDonald’s is the world’s second-biggest fast-food chain by numbers

of restaurant (2013) so it can retain more customers’ loyalty and truth In US market alone, daily customer traffic of McDonald’s is about 70 million people (McDonalds, 2014) In other markets such as UK, it served 325m customers in Britain during the second quarter, the equivalent of everyone in the country visiting nearly twice a month (Wallop, 2012) Especially, when entering Vietnam market, McDonalds served 400,000 customers in its first month of business and about 22,500 customers were served during the first 24 hours of operation (Bloomberg News, 2014) The record shows the attractions of McDonalds to Vietnam customers because of giant fast food brand in the world This can make new entrants have to worry about the willingness of customers in terms of products and price compare to McDonald’s

3.2.1.3 Capital requirements

“The need to invest large financial resources in order to compete can deter new entrants” (Porter, 2008) In fast food industry, new entrants need to find a location for the restaurant and some machines for cooking However, according to Global Fast Food

Restaurants Market Research Report, a fast food operator can establish a new restaurant with a relatively low capital outlay and reduce their initial capital costs, outlays and borrowings by leasing premises and equipment (IBISWorld, 2014) This means that new entrants can easily entry the market In fact, a restaurant named Tau Poco was opened in 2013, cost under $13,000 including $5,000 for designing (branding, wall murals, menus, and signage), leasing refrigerator cases…by chef Chris Dupont (Tice, 2013) In Hanoi, Vietnam, two students with 15 million VND (about $750) and an addition 10m VND (approximately $500) loan opened a snack bar which serving bread, fried eggs, pâté with some drinks (News.zing, 2014) This type of sack bar is very popular in Vietnam and it is indirect substitutes for fast food

3.2.1.4 Incumbency advantages independent of size

“No matter what their size, incumbents may have cost or quality advantages not available to potential rivals” (Porter, 2008) For example, when McDonald’s enter Vietnam market; because of a well-known brand in the world, Vietnam customers can easily to recognize Furthermore, with their experience in other markets, McDonalds

“located at the busy roundabout at intersection of Dien Bien Phu and Nguyen Binh Khiem Streets in District 1, the two-story standalone restaurant is easily accessible for commuters to purchase a McDonalds meal on the go using the Drive-Thru service” (McDonalds, 2014) Furthermore, the store places on strategic road which leads to northern provinces and links to the other southern localities – the important economic and tourism centers – such as Dong Nai, Binh Duong and Ba Ria – Vung Tau (VietnamNet, 2014) This means that the numbers of car passing this location are large,

so Drive-Thru service can take attention of customers about a new type of ordering food while still stay in cars Furthermore, this is the first Drive-Thru service in Vietnam although there are many fast food brands like FKC, Lotteria, Pizza Hurt…entering this market before Therefore, McDonalds will have big competitive advantages to attract middle class Vietnam customers especially who own cars While other fast food brands have to struggle hard to scramble for the clients driving motorbikes in the inner city, McDonald’s target the clients who possess cars (VietnamNet, 2014)