The modern business world has been very competitive as firms in the industry seek to outdo each other to become the industry head. McDonald’s Corporation has been a leader in the fast food industry, which is attributable to the strategies at the business and corporate level. In this paper, I will analyze how McDonald’s has maintained the lead through its business-level and corporate strategies, and whether these strategies are the most significant to the long term success. I will also explore the competitive environment in which McDonald’s corporation operates in to determine the most significant competitor, as well as the market cycles.
Business-Level Strategies
Hitt, Ireland, & Hoskisson (2020, p 104) outline business-level approach as the harmonized and unified set of commitments and actions that an organization employs to gain competitive advantage by utilizing fundamental capabilities in explicit product marketplaces. The rationale for strategies at the business-level is to create a difference between an organization’s position in the market and its rivals. McDonalds has to decide whether it intends to perform different activities or perform activities differently or to position itself differently from its competitors. There are five main generic strategies that firms use at the business-level. These are; integrated cost leadership/differentiation, differentiation, cost leadership, focused differentiation, and focused cost leadership.
McDonald’s Corporation uses a combination of cost leadership and broad differentiation at the business-level. Cost leadership strategy entails minimizing costs to provide customers with products at low prices. McDonald’s is huge in size, and thus able to operate with economies of scale whereby products are obtained at low costs, which is translated into cheaply produced products. McDonald’s uses vertical integration as a strategic tool to achieve cost leadership. The corporation has integrated with suppliers to own facilities that produce standardized mixtures of ingredients. McDonald’s is huge in size and exerts a higher bargaining power over its suppliers, and this cost reduction measures are reflected in the final products.
McDonald’s also uses broad differentiation strategy whereby McDonald’s seeks to set itself apart from competitors by selling differentiated products. This strategy entails developing the business and its products to make them distinct from its competitors. For instance, McDonalds makes and sells large sized burgers known as Big Mac that are sold at the same price as smaller burgers from competitors as a means of differentiating itself from its competitors (mcdonald’s.com, 2021). The corporation also sells differentiated coffee products known as McCafé products which is a specialty coffee product.
In the long term, cost leadership for McDonald’s is not the most important for the long term success because McDonald’s may be obsessed with lower product prices and fail to realize the uniqueness and market changes. McDonald’s adopts standardization of products, which is similar to a one-size fits all approach, which might not be in line with changing customer needs. The desire to keep costs low might make the corporation to be too focused on minimizing costs at the expense of quality. McDonald’s should adopt product differentiation on a large scale as opposed to the low level differentiation it currently uses. Some customers require specially made products, and McDonald’s can appeal to such groups of customers.
Corporate-Level Strategies
Hitt, Ireland, & Hoskisson (2020, p 166) delineate corporate-level approaches as unique actions that an organization undertakes to gain competitive merit by choosing and running a collection of diverse businesses competing in various product markets. The purpose of corporate level strategies is to aid an organization to earn above average returns by creating value. McDonald’s Corporation uses low levels of diversification, which is also known as the single level or dominant business model. A single business diversification approach is a strategy at the corporate level where the organization makes 95 percent of its sales income from the main business area. McDonald’s core business is from fast food products like hamburgers, French fries, sandwiches, pancake, desserts, chicken, and wraps among others.
McDonald’s has diversified into the beverage industry whereby the corporation sells McCafé attract customers who are not interested in consumption of fast foods. The company has set aside McCafé as part of predict development which is different from the traditional McDonald’s store (mcdonalds.com, 2021). The McCafé section is a store that has a relaxing environment for customers who are interesting in enjoying coffee in a quiet and relaxing environment and not satisfy hunger. The move to diversify from the core business to specialty coffee is an example of product development to develop new products and new markets.
To exploit the corporate-level strategies, McDonald’s employs three growth strategies in line with the low diversification strategy. These are product development, market penetration, and market development. Market penetration entails the operations of reaching to the current customers in areas where the corporation operates. This strategic objective is aimed at safeguarding the current market share from going over to competitors. McDonald’s uses loyalty point program to generate loyalty and safeguard its market share such as giving free meals to customers who have reached a certain number of points.
McDonald’s also uses market development as a secondary strategy whereby the company seeks to establish new branches in new markets. Specifically, McDonald’s is eyeing the African and the Middle Eastern countries where it has minimal presence. McDonald’s continually uses its cost leadership strategy to develop new markets. Finally, McDonald’s employs the product development strategy as a tertiary strategy for developing new products over time such as the new McCafé products.
Competitive Environment
McDonald’s Corporation operates in the fast food industry that is characterized by intense competition from small, medium and large restaurants. The fast food restaurant has little or no barriers of entry, which makes it easy for entrants to enter into the industry. The threats of substitutes are very high in the industry, which means that customers have so many choices to buy from. Because products from rivals are near or perfect substitutes, there is no switching cost involved, which means that customers who are disappointed by McDonald’s will not hesitate to switch from one seller to another (Mcdonalds.com, 2021). There are many firms that compete with McDonald’s such as 7-Eleven, Jack in the Box, Domino’s Pizza, KFC, Burger King, Wendy’s Subway, Pizza Hut, Starbucks, Chipotle, among others. From the endless list of competitors, Starbucks Corporation is the most significant competitor.
Competition between Starbucks Corporation and McDonald’s is intense and bloody. The restaurant industry operates in a red ocean market where each company seeks to outdo the other to remain the head and grab the each other’s market share. Starbucks operates a differentiation strategy at the business level. Starbucks is known for its specialty coffee and high level of customer service. This kind of differentiation sets Starbucks apart for people who want a quiet and relaxing environment while enjoying a cup of coffee. Starbucks is also known for quality customer service at its branches, which makes customers want to come back. Starbucks was at the verge of collapse following the 2008 recession, but with great dedication by Howard Schultz transformed the company. Schultz used $20 million for retraining staff on customer service, a transformation journey that proved successful. For instance, Starbucks revenues have increased from a low of $7 billion in 2009 to $23.2B in 2020, surpassing McDonald’s whose annual revenue as Starbucks has made a turnaround in its revenues exceeding those of McDonald’s that were $19.21 billion for the same period (Sec.gov, 2020).
At the corporate level, Starbucks employs differentiation strategy whereby Starbucks has acquired different companies in different product markets. For instance, Starbucks acquired the bread bakers Panera bread to ensure that customers are treated to food and pastries for consuming alongside coffee. Starbucks also acquired Teavana Holdings to gets its foot in the tea industry. Acquisition of Teavana helps strengthen Starbucks position in the market, especially in china where there is a burgeoning middle class in China. China is presently the number one country in the world in terms of tea consumption, and tea consumption is 16 times the consumption of coffee. Starbucks has made other acquisitions like acquiring Evolution Fresh, which is a bottled fruit juice company, La Boulange bakery chain, Ethos Water that sells bottled water and Seattle Coffee Company that sells packaged and brewed coffee (Taylor, 2017, para 1-5).
In the long term, Starbucks Corporation is likely to be successful because it has uniquely differentiated itself in a manner that is difficult to imitate. For instance, Starbucks La Boulange differentiation in terms of exceptional customer service is a unique capability that is rare to find, and which is likely to attract more customers. Satisfied customers are the best source of advertisement, and customers who receive quality service are likely to come back and/or refer others (Taylor, 2017, para 1-5). Secondly, Starbucks has differentiated itself in terms of product offering in product markets that are related. For instance, customers who visit Starbucks are most likely to consume tea, coffee, juice, bottled water and freshly baked bread from Panera bakers or La Boulange food offerings. Differentiation in different product markets is synonymous with the old adage that one should not put all eggs in one basket since diversification helps to spread the risk of overlying on a single product market or a dominant core business.
McDonald’s does not have differentiated products, which increases the threat of substitutes. The standardization and the ‘one size fits all’ approach are inherently risky as McDonald’s stands to lose a great deal if customers perceive the products as not matching their tastes anymore. There is a socio-cultural change whereby customers have a negative perception about McDonald’s quality of products and the unhealthiness of the fries and other fast foods as being the leading cause of obesity in America.
Market Cycles
Hoskisson, (2020, p 283) classify market cycles into two main categories, the slow cycle markets, and the fast cycle markets. Fast cycle markets are markets that are characterized by little time for turnaround to adjust to market changes and develop new products and take them to the market ahead of competitors. On the other hand, slow cycle markets are characterized by firms having adequate time to make new products, differentiate them and take them to the marketplace before their competitors. Essentially, slow market cycle markets are ideal for monopolies. In relation to McDonald’s and Starbucks Corporation, the strategies that are successful in the long term would differ depending with the market cycle.
Differentiation strategy by Starbucks would be ideal in slow cycle markets because the firm would have enough time to innovate and develop new products and take them to the market before competitors do. However, differentiation strategy would not be ideal in fast cycle markets because competitors would have taken their time to develop the market and grab the market share through other strategies such as cost leadership. By the time that Starbucks brings its product to the market, competitors will have taken the majority of the market share. Grabbing such market share from competitors is an uphill task.
McDonald’s corporation of cost leadership would be ideal in fast cycle markets because it would help the company to grab a large portion of the market by capturing the market sensitive customers. The majority of the customers in the marketplace are price sensitive customers who would easily purchase the products that are lowly priced from a pool of similar and highly priced substitutes. Thus, McDonald’s would be successful in fast cycle markets, but not in the slow cycle markets. In conclusion, McDonald’s management understands well the kind of business environment it operates in is one that necessitates quick action in a bid to gain a large portion of price sensitive customers. McDonald’s takes pride in being the leader in the fast food industry, thanks to the ‘fast’ kind of service by the company and it franchises to ensure that customers do not go to competitors. However, McDonald’s needs to re-look into its business and corporate level strategies to make a turnaround to its dwindling revenues and market share.
Business-Level Strategies
Hitt, Ireland, & Hoskisson (2020, p 104) outline business-level approach as the harmonized and unified set of commitments and actions that an organization employs to gain competitive advantage by utilizing fundamental capabilities in explicit product marketplaces. The rationale for strategies at the business-level is to create a difference between an organization’s position in the market and its rivals. McDonalds has to decide whether it intends to perform different activities or perform activities differently or to position itself differently from its competitors. There are five main generic strategies that firms use at the business-level. These are; integrated cost leadership/differentiation, differentiation, cost leadership, focused differentiation, and focused cost leadership.
McDonald’s Corporation uses a combination of cost leadership and broad differentiation at the business-level. Cost leadership strategy entails minimizing costs to provide customers with products at low prices. McDonald’s is huge in size, and thus able to operate with economies of scale whereby products are obtained at low costs, which is translated into cheaply produced products. McDonald’s uses vertical integration as a strategic tool to achieve cost leadership. The corporation has integrated with suppliers to own facilities that produce standardized mixtures of ingredients. McDonald’s is huge in size and exerts a higher bargaining power over its suppliers, and this cost reduction measures are reflected in the final products.
McDonald’s also uses broad differentiation strategy whereby McDonald’s seeks to set itself apart from competitors by selling differentiated products. This strategy entails developing the business and its products to make them distinct from its competitors. For instance, McDonalds makes and sells large sized burgers known as Big Mac that are sold at the same price as smaller burgers from competitors as a means of differentiating itself from its competitors (mcdonald’s.com, 2021). The corporation also sells differentiated coffee products known as McCafé products which is a specialty coffee product.
In the long term, cost leadership for McDonald’s is not the most important for the long term success because McDonald’s may be obsessed with lower product prices and fail to realize the uniqueness and market changes. McDonald’s adopts standardization of products, which is similar to a one-size fits all approach, which might not be in line with changing customer needs. The desire to keep costs low might make the corporation to be too focused on minimizing costs at the expense of quality. McDonald’s should adopt product differentiation on a large scale as opposed to the low level differentiation it currently uses. Some customers require specially made products, and McDonald’s can appeal to such groups of customers.
Corporate-Level Strategies
Hitt, Ireland, & Hoskisson (2020, p 166) delineate corporate-level approaches as unique actions that an organization undertakes to gain competitive merit by choosing and running a collection of diverse businesses competing in various product markets. The purpose of corporate level strategies is to aid an organization to earn above average returns by creating value. McDonald’s Corporation uses low levels of diversification, which is also known as the single level or dominant business model. A single business diversification approach is a strategy at the corporate level where the organization makes 95 percent of its sales income from the main business area. McDonald’s core business is from fast food products like hamburgers, French fries, sandwiches, pancake, desserts, chicken, and wraps among others.
McDonald’s has diversified into the beverage industry whereby the corporation sells McCafé attract customers who are not interested in consumption of fast foods. The company has set aside McCafé as part of predict development which is different from the traditional McDonald’s store (mcdonalds.com, 2021). The McCafé section is a store that has a relaxing environment for customers who are interesting in enjoying coffee in a quiet and relaxing environment and not satisfy hunger. The move to diversify from the core business to specialty coffee is an example of product development to develop new products and new markets.
To exploit the corporate-level strategies, McDonald’s employs three growth strategies in line with the low diversification strategy. These are product development, market penetration, and market development. Market penetration entails the operations of reaching to the current customers in areas where the corporation operates. This strategic objective is aimed at safeguarding the current market share from going over to competitors. McDonald’s uses loyalty point program to generate loyalty and safeguard its market share such as giving free meals to customers who have reached a certain number of points.
McDonald’s also uses market development as a secondary strategy whereby the company seeks to establish new branches in new markets. Specifically, McDonald’s is eyeing the African and the Middle Eastern countries where it has minimal presence. McDonald’s continually uses its cost leadership strategy to develop new markets. Finally, McDonald’s employs the product development strategy as a tertiary strategy for developing new products over time such as the new McCafé products.
Competitive Environment
McDonald’s Corporation operates in the fast food industry that is characterized by intense competition from small, medium and large restaurants. The fast food restaurant has little or no barriers of entry, which makes it easy for entrants to enter into the industry. The threats of substitutes are very high in the industry, which means that customers have so many choices to buy from. Because products from rivals are near or perfect substitutes, there is no switching cost involved, which means that customers who are disappointed by McDonald’s will not hesitate to switch from one seller to another (Mcdonalds.com, 2021). There are many firms that compete with McDonald’s such as 7-Eleven, Jack in the Box, Domino’s Pizza, KFC, Burger King, Wendy’s Subway, Pizza Hut, Starbucks, Chipotle, among others. From the endless list of competitors, Starbucks Corporation is the most significant competitor.
Competition between Starbucks Corporation and McDonald’s is intense and bloody. The restaurant industry operates in a red ocean market where each company seeks to outdo the other to remain the head and grab the each other’s market share. Starbucks operates a differentiation strategy at the business level. Starbucks is known for its specialty coffee and high level of customer service. This kind of differentiation sets Starbucks apart for people who want a quiet and relaxing environment while enjoying a cup of coffee. Starbucks is also known for quality customer service at its branches, which makes customers want to come back. Starbucks was at the verge of collapse following the 2008 recession, but with great dedication by Howard Schultz transformed the company. Schultz used $20 million for retraining staff on customer service, a transformation journey that proved successful. For instance, Starbucks revenues have increased from a low of $7 billion in 2009 to $23.2B in 2020, surpassing McDonald’s whose annual revenue as Starbucks has made a turnaround in its revenues exceeding those of McDonald’s that were $19.21 billion for the same period (Sec.gov, 2020).
At the corporate level, Starbucks employs differentiation strategy whereby Starbucks has acquired different companies in different product markets. For instance, Starbucks acquired the bread bakers Panera bread to ensure that customers are treated to food and pastries for consuming alongside coffee. Starbucks also acquired Teavana Holdings to gets its foot in the tea industry. Acquisition of Teavana helps strengthen Starbucks position in the market, especially in china where there is a burgeoning middle class in China. China is presently the number one country in the world in terms of tea consumption, and tea consumption is 16 times the consumption of coffee. Starbucks has made other acquisitions like acquiring Evolution Fresh, which is a bottled fruit juice company, La Boulange bakery chain, Ethos Water that sells bottled water and Seattle Coffee Company that sells packaged and brewed coffee (Taylor, 2017, para 1-5).
In the long term, Starbucks Corporation is likely to be successful because it has uniquely differentiated itself in a manner that is difficult to imitate. For instance, Starbucks La Boulange differentiation in terms of exceptional customer service is a unique capability that is rare to find, and which is likely to attract more customers. Satisfied customers are the best source of advertisement, and customers who receive quality service are likely to come back and/or refer others (Taylor, 2017, para 1-5). Secondly, Starbucks has differentiated itself in terms of product offering in product markets that are related. For instance, customers who visit Starbucks are most likely to consume tea, coffee, juice, bottled water and freshly baked bread from Panera bakers or La Boulange food offerings. Differentiation in different product markets is synonymous with the old adage that one should not put all eggs in one basket since diversification helps to spread the risk of overlying on a single product market or a dominant core business.
McDonald’s does not have differentiated products, which increases the threat of substitutes. The standardization and the ‘one size fits all’ approach are inherently risky as McDonald’s stands to lose a great deal if customers perceive the products as not matching their tastes anymore. There is a socio-cultural change whereby customers have a negative perception about McDonald’s quality of products and the unhealthiness of the fries and other fast foods as being the leading cause of obesity in America.
Market Cycles
Hoskisson, (2020, p 283) classify market cycles into two main categories, the slow cycle markets, and the fast cycle markets. Fast cycle markets are markets that are characterized by little time for turnaround to adjust to market changes and develop new products and take them to the market ahead of competitors. On the other hand, slow cycle markets are characterized by firms having adequate time to make new products, differentiate them and take them to the marketplace before their competitors. Essentially, slow market cycle markets are ideal for monopolies. In relation to McDonald’s and Starbucks Corporation, the strategies that are successful in the long term would differ depending with the market cycle.
Differentiation strategy by Starbucks would be ideal in slow cycle markets because the firm would have enough time to innovate and develop new products and take them to the market before competitors do. However, differentiation strategy would not be ideal in fast cycle markets because competitors would have taken their time to develop the market and grab the market share through other strategies such as cost leadership. By the time that Starbucks brings its product to the market, competitors will have taken the majority of the market share. Grabbing such market share from competitors is an uphill task.
McDonald’s corporation of cost leadership would be ideal in fast cycle markets because it would help the company to grab a large portion of the market by capturing the market sensitive customers. The majority of the customers in the marketplace are price sensitive customers who would easily purchase the products that are lowly priced from a pool of similar and highly priced substitutes. Thus, McDonald’s would be successful in fast cycle markets, but not in the slow cycle markets. In conclusion, McDonald’s management understands well the kind of business environment it operates in is one that necessitates quick action in a bid to gain a large portion of price sensitive customers. McDonald’s takes pride in being the leader in the fast food industry, thanks to the ‘fast’ kind of service by the company and it franchises to ensure that customers do not go to competitors. However, McDonald’s needs to re-look into its business and corporate level strategies to make a turnaround to its dwindling revenues and market share.
