Case analysis McDonalds in India
Submitted to: Pavel Hoq Lecturer BRAC Business School
Submitted by:
Nazifa Afroze Moinul Haque Sharmin Sultana Amit Sarkar Md. Imtiaz Hassan
ID – 10104087 ID – 11304045 ID – 11304045 ID – 10104073 ID – 10104136
Date of submission: th 6 December, 2013
Table of contents Scope …………………………………………..……………………………………………………3 Rationale…………………………….………………………………………………………………3 Methodology………………………………………………………………………………………...3 A global MNCs business growth strategy in an emerging market (India)……………………...3
Growth Strategies of McDonald’s…………………………………………………………..3 Entering at a small scale…………………………………………………………………….4 Indianizing the products…………………………………………………………………….4 Pricing………………………………………………………………………………………4 Supply Chain………………………………………………………………………………..4 Location……………………………………………………………………………………..4 Cultural sensitivity………………………………………………………………………….5 Family and child centric strategy…………………………………………………………...5 Fate believers……………………………………………………………………………….5 Country Context Analysis………………………………………………………………………….6
Political…………………………………………………………………………….………..6 Economic……………………………………………………………………………………7 Social………………………………………………………………………………………..7 Technological……………………………………………………………………………….8 Analyze Country Context and A Global MNCs Business Growth Strategy Fit…...…………...8 Relating Porter’s Five Forces Model ……………………………………………………………...9
Threat of new entry………………………………………………………………………..10 Buyer Power ……………………………………………………………………………….10 Threat of Substitution……………………………………………………………………...10 Supplier Power ………………………………………………………………………...…..11 Competitive Rivalries……………………………………………………………………...11 Corporate Social Responsibilities………………………………………………………………...11 Reference………………………………………………………………………………………...12 2
Scope McDonalds is a large corporation and its business strategy in India is the core focus of this case analysis.
Rationale This analysis may help their company for the betterment for future strategy derivation.
Methodology Mainly the case study and some relevant website information are used.
A global MNCs business growth strategy in an emerging market (India) “Globalization
was a deep trend pushed by technology and right ideas, as much as anything else. ”
- Jeffrey Sachs. Floes of capital, the age of mobility and sharing in the world’s prosperity are the stages of globalization that has enabled the world to act as a single market place. Creating a borderless market enables the multinational companies (MNCs) to enter into foreign continents and operate. Foreign Direct Investment (FDI) being a major factor which helps an economy to its privatization. Initially, from a very harsh historical background India tent to be a planed or command economy. They did not want foreign companies to run their business in their territory. With heavy governmental control, up until 1980s India tends to be self-sufficient trying to improve its economic condition gradually. Unfortunately, by the late 1980s India had to borrow heavily from commercial sources, World Bank and Asian Development Bank to finance its growing deficits. Causing a major macroeconomic pitfall Prime Minister Narasimha Rao helped to create a market friendly environment to attract for MNC’s and FDIs (Dash, 2005). From there, pace of globalization influenced India’s population which led many MNC’s to enter in the food industry, thus McDonald was one of them. Growth Strategies of McDonald ’s Growth of urbanization changed the traditional trend of food habit. High income urban citizens seek more verity in their food preference. Thus, foreign MNCs emerged to fulfill the desires, Kentucky Fried Chicken (KFC), TGI Friday’s, Domino’s Pizza, Pizza Hut, McDonal d’s (Dash, 2005). In a survey by Synovate, 20% young Indian aged between 8 to 24 preferred McDonald, 11% Pizza Hut and 2 % KFC. There are six different modes to enter foreign markets such as exporting, turnkey projects, licensing, franchising, joint venture, wholly owned or Greenfield (Study Mode, 2011). KFC uses mix of international entry strategies, Greenfield, company owned foreign subsidiary and by joint venture,
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collaborating with the countries host company. Thus McDonald ’s used joined venture strategy. McDonald joined with Amit Jatias, Hardcastle Restaurants Private Ltd, in the west and Vikram Bakshi, Connaught Plaza Restaurants Private Ltd, in the north. The growth strategy of McDonald ’s was to maintain a good local supply chain, and offer extra benefits at a reasonable price optimizing and operating from best possible location. Thus some of the strategies are being highlighted as follows. Entering at a small scale: One of the formidable strategies was to enter the market in a small scale so that they can cut the possible risk and study the market. There is a lot of risks initiated attempting to run a business where an economy has very vibrant political condition, completely new market consisting of verity of consumers of religious back grounds. With no beef and pork in the menu to offer McDonald’s had to come up with a whole new concept of vegetarian foods in their offering. Indianizing the products: Due to political factor and highly religious sensitiveness 75% of the cuisines had been modified and specially designed to serve Indian Customers, the process is what they call “Indianized” (Dash, 2005). Such as Maharaja mac, McAloo Tikki burger, chicken Kabab Burger etc. Pricing: In McDonald’s they follow the Purchasing Power Parity (PPP) strategy. They are concerned about the consumer’s ability to pay. They try to cut the price at a minimum level. 40% more than expected sells was made by offering a Veggie burger (Shudh Shakahrai) for Rs17 (Dash, 2005). They also follow the strategy to offer the customer’s value meals in a price range from 29 to 89 so that they can distinguish the difference of price and product and quality. Supply Chain: McDonald’s can enjoy the pricing flexibility because they have well established supply chain. They collect 95% of their raw materials from 38 local suppliers and thus obtained Americans Institute of Bakers and HACCP certification for quality standards (Dash, 2005). They emphasize on three major factors:
To offer quality, service, cleanliness, and value to the customers.
Enjoying pricing flexibility.
Lunching new product when wanted.
Location: Location is a very major factor for McDonald for its quick serving restaurant business. They do not prefer to open outlets beyond the range of 500 miles Radios from its main distribution channels. Shift in 4
government attitude gave McDonalds access to be in a partnership with largest state owned oil company. Moreover, McDonald’s opens its outlets in Rail way stations, bus stations, and in highways for drivers and travelers so that they can get a taste of happy meal on the go. Cultural sensitivity: In India the cultural trends were very irresponsive towards the fast food. But there has been a cultural shift of new cultural acceptance of the urban based rich and middle class. People are becoming more modernized and are more reluctant to consume fresh, healthy fast foods. Introducing Maharaja mac was a very well cultural fit for those who do not eat beef. Moreover, about 20% of the population is pure vegetarians (Dash, 2005); therefore, providing pure vegetarian foods such as McAloo tikki, Veggie burger and other vegetable based food was a very good strategy to blend in with the culture. People tends to spend more during festivals, offering special new products can also be a good strategic fit to lure more customers. Family and child centric strategy: McDonald’s is a family centric restaurant. Most of the young parents come to have a good time with their family and friends to have healthy fresh foods, accurate service in a clean and friendly environment. They concentrate on children for they can influence their parents to come by the place again and again. And they also believe that they are future customers and creating a good brad image can help to ensure a loyal customer. Different types of toy figures are most favorite and exciting part for the children. They can also act as reference group influence such as friends like to at McDonald ’s like to encourage other friends to do so as well. They also arrange birthday parties and young lover can come to treat each other on a date as well. So it is an overall good strategy. Fate believers: Indian people have a heavy tendency to believe in fate. Therefore, McDonald’s has decided to test the consumers luck. The consumers can win very lucrative prices by scratch cards. TV’s, Mobiles, Road trip tickets, travel tickets many more exciting special gifts are there for the customer. It adds more excitement in their purchases and the system of instant gifts makes it more desirable.
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Country Context Analysis
Figure 1: India
India is a country of South Asia and an emerging power of the world. To analyze the context of India, a PEST analysis can reveal the overall situation. PEST analysis is a part of external environment analysis and the components of PEST analysis are – P – Political,
S – Social,
E – Economic,
T – Technological (Cambridge, 2013).
Every company should consider these factors while running business because external environment is beyond control of any organization. Political Political decisions and environment can influence the overall business strategy. The government intervention in the field of business operation can ultimately lessen the profitability of a business. India has federal republic government. There are separate personal law codes for Hindu, Muslim, and Christians. 6
The political environment of India is more or less stable. Sometimes there is some political unrest and for corruption, running business in India can be hampered. Although there are many rules and regulations but government of India also has done some deregulation for supporting business. Regulation changed to allow 100% FDI for single brand retailers (Ikea, 2013). In case of international trade, India has become more flexible than before. After the independence of India in 1947, the politicians followed their rules of becoming economically sovereign country, and to do so, they did not want to enter foreign companies in their country but now the scenario has changed (Dash, 2005). Several taxation policies are there in India for business. Major taxation policies and duties are sales tax, service tax, customs duty etc. Economic Economy is an important ground for a country to prosper in future. India experienced wide range of economic reforms in 1990. Until late 1980, India pursued the policy of economic nationalism – state control over economic matters and self sufficient development strategy. Mainly public sector continued to drive the economic growth. The companies are forced to trade in a government fixed exchange rate and inefficient policies made the economic growth downward in India. After 1980, India started borrowing loan to meet up budget deficit from World Bank, Asian development bank and commercial banks as well. By 1990-91, India faced severe inflation, Balance of Payment deficit and budget deficit (Dash, 2005). After this period, the newly reformed government brought huge changes in policy reformation – abolition of industrial licensing, removal of control over capacity expansion, participation of foreign firms in new projects, price liberalization, liberalization of foreign investment, access to global capital markets, privatization, reduction of income tax, abolition of wealth tax, reduction of tariff structure etc (Dash, 2005). Now for buying raw materials and capital goods no governmental fixed exchange rate has to be maintained. There is a continuous growth of per capita income, which has brought higher buying power to Indian consumers. Foreign investors are now more eager to invest in India because here the labor is cheap so investment is cheaper and thus the profitability of investment is higher ( Jaltek, 2013). Social It is important to notice the direction in which the society is moving to understand the expectation of consumers. Total population of India is more than 1 billion. The growth trend of India is upward. During 1972 to 1982 GDP growth rate averaged 3.5% a year and by 2002 it reached to 6%. In recent years it has been increased more. The income distribution is not equal, some of the people posses high income and some live below the poverty line. 20% of rich people enjoy more than 40% of national income. The number of households with an annual income over Indian Rupees 1 crore has grown to 20000 in 2001- 02
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and in recent year it goes higher. The number of low income group has been lessening both in urban and rural area. Almost half of the low income group declined in 2002 in urban areas compared to 1990 ( Dash, 2005). The population growth in India is high and it is likely to increase 36% in 2025. Dual income households are also increasing slowly and most of the high income people live in almost ten
Source:( Dash, 2005)
cosmopolitan cities in India. The unemployment rate is almost 9.8% in recent years (Indexmundi, 2013). There are various ethnic and religion based people live in India but most of them are Hindus. For the religious concept, Hindus do not eat cow and Muslims do not eat pork. Technological Technology reduces costs, improve products and lead to innovation. India is doing well in technological field. There are some skilled IT experts in the world who live in India. For this, outsourcing and off shoring works rapidly comes to India. As the cost of labor is relatively low in India, foreign companies are willing to get skilled work with low cost. Bangalore established itself as the most important IT centre of India. There is large increase in R&D investment. So Indian IT people are getting more work, so they are having high income, thus their expenditure tends to be more. Government is developing the IT sector for betterment of the country.
Analyze Country Context and A Global MNCs Business Growth Strategy Fit Country context is very essential factor for MNSs. It is imperative to know about the political, economical, societal and technological trends of a country so that MNCs can design, organize and plan ahead before entering a foreign market. Most importantly, deciding what are the major growth strategies that are required to survive in the market. As from the country context information drawn above we can denote that India has a lot of potential for MNCs to operate. Moreover, the government is very conscious about MNCs and FDIs; they made the economy more market friendly. MNCs and FDI is allowed to do business but at the same time parameters are drawn as well. The presence of mix market economy is there with a very well controlled government intervention. By which both MNCs and economy can perform efficiently. Although, government intervention sometimes can be proved harmful but it is a kind of 8
systematic risk of which MNCs have to deal with. Every economy has its individual criteria and casualties to follow and the idea is to blend in. McDonald’s has done its best to analysis the country context and thus the taken growth strategies were quite appropriate. Starting from, “Indianizing” the food specially to attract the local customers. Choosing to enter the market in small scale and join venturing with local restaurants. Analyzing the local responsiveness and serving accordingly and continuously developing new products for customers. Being conscious about cultural sensitiveness, creating a well established supply chain, gaining price flexibility, locating the subsidiaries everything was well planned. In addition, emphasizing on c hildren’s as their more effective target customers both for influencing the parents and for as future consumers. Finally, by doing many eco friendly and social developing CSR activities to gain governments favor. It not only helps to create a good impression in the minds of the customers it also helps the economy to its growth specially the lower class. Therefore, we can say that the growth strategies compared to the country context are very much compatible. McDonald’s also looked through some other strate gies as well such as believing in fate notion to introduce the consumers with scratch cards to win lucrative gifts.
Relating Porter’s Five Forces Model Porter five forces analysis is a framework for industry analysis and business strategy development. It draws upon Industrial Organization (IO) economics to derive five forces that determine the competitive intensity and therefore attractiveness of a market. These five factors include threat of new entry, buyer power, and threat of substitution, supplier power and competitive rivalry. Now, we will be using this strategy in terms of our case “MC DONALD’S IN India” by Kishore Dash.
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Threat of new entry: According to the author of this case, Mc Donald’s opened their first outlet in India in October 1996. Though, they established 58 restaurants within 8years, it was not so easy for them because Indian culture is full of diversity and different culture has distinct food habits. Not only this, they had less faith on fastfoods. According to them, these are not hygienic as well as not cost effective. They preferred more their home made food or local food as they had approximately 22000- registered restaurants,100,000dhabas,1568-registered hotel what provided them local foods with different tastes and innovations. However, Mc Donald’s were well known about these factors. Therefore, they carefully planned entry and expansion strategy in accordance with political, cultural and economic landscape. They set up their operations through a joint venture partnership with two local companies, such as; hard castle Restaurants Private Limited in the west and south region and Connaught Plaza Restaurants Private Limited in the north. In this case it’s given that due to many intermediaries, 20% of Indian foods production was wasted. However, Mc Donald’s were successful enough to maintain a good supply-chain process. Then due to the Indian government economic liberalization, Mc Donald’s could not enter into their market until 1996. And they spent six years in consumers taste, product development and maintaining good supply chain. Buyer Power: Kishore Dash mentions in his article that, “on an average, each household spends 5 0% of income on food and beverage. India added 181 million people between 1990 and 2001 and the population will continue to grow up”. Not only that, increasing high rate of income and purchasing power moved their choice on spending more on international cuisine, including fast food. In addition, they were getting more influenced by western culture so their food culture affects a lot in their regular food habit. As They are very much price sensitive in terms of foods, Mc Donald’s first targeted the upper c lass and upper middle class people. Then they cut the price of some of the products for targeting the middle class people that made them able to sell the veggie burger 40% more than before. In addition, it also increased their consumers at 25%. They also introduced value ladder strategy to ensure affordability of customers as well as to attract them. Threat of Substitution: Mc Donald’s another important strategy was setting up a well -established supply chain in order to achieve three objectives. They are To implement it’s globally practiced QSCV (quality, service. Cleanliness and value) To enjoy flexibility in pricing To launch a new product when necessary.
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To achieve these three objectives, they introduced different models whenever it was important. They actively imported from other countries. Normally, they collected raw materials from the local suppliers of different places. They collected 98% of raw materials from 38 local suppliers. They only import the process control equipment that made their work easy. Supplier Power: Mc Donald’s main suppliers were the local farmers that were about 38 in number. And they collected 98% of raw materials from the local supplier. Though the quality of the products was not good enough, they worked hard with the local suppliers to improve product quality. They shared advanced agricultural technology and expertise like to drip irrigation systems that reduce overall water consumption. Competitive Rivalries: The first competitor for McDonald’s was Nirula’s that were offering variety of products at reasonable price. And Indian people most likely preferred to taste different foods. T hat is why Mc Donald’s needed to increase their product range though this strategy conflicted with their core strategy. Developing new product increases complexity and raises cost as well as risk but Mc Donald’s had to follow this to fulfill the demand of their consumers. Its competitors were Pizza Hut and KFC. However, it is clearly mentioned in the case that 20% of young India n preferred Mc Donald’s when Pizza Hut was 11% and KFC was 2%. Now, after analyzing Porters generic strategy, we can say that Mc Donald’s was a well established business. It created a good position for doing business in India. From their entry level to compete rivalries, they strictly maintained all of the levels. They created a new environment for the food business. They were always concerned about the cultural and political environment of India as well as they maintained the quality of foods. That is the reason, they became more profitable and favorable within very few time.
Corporate Social Responsibilities CSR is a process with the aim to embrace responsibility for the company's actions and encourage a positive
impact
through
its
activities
on
the
environment,
consumers,
employees,
communities, stakeholders and all other members of the public sphere who may also be considered as stakeholders. According to the case, the executive of Mc Donald’s understood it well that giving back to the society is not just helping the society. It is also an important element for bringing fame and reputation. It spreads company’s positive outlook to the society. Therefore, Mc Donald’s had been involved in many community related projects. Such as:
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Mc Donald’s Spotlight: It is an annual art competition among the interschool performing art competition where secondary school’s students participated. World Children’s Day on November 20: In this day, Mc Donald’s restaurants all over the world collect money for a charity. Blue Dot: it took initiatives for the girl’s education because they were deprived a lot. And this initiative’s on Mc Donald’s was appreciated a lot to the society. Pulse Poloi Program: Their main purpose was to make India Polio free. Besides these, Mc Donald’s also sponsored some popular children programs, like; the millennium Pune Festival, Millennium Dreamers Global Recognition Program, Interschool Science Quiz Contest etc. Before 2000, the people of India were dissatisfied with the corporation's presence in the country. The corporation lacks understanding about cultural and religious beliefs in India but in later stage they developed their strategy. Now McDonald's can build up consumer trust in the Indian market.
McDonald's is a popular fast food chain found all over the world. Entering into the Indian market was a brave move and it set new challenges for the corporation due to cultural, religious and ethical differences in the country. McDonald's are still facing problems, but for the most part they have managed to attract a part of the Indian population, fascinated by this western culture. Between India and America, cultural factors still affect Indian customer's buying habits and McDonald's need to focus on gaining the trust of their local customers, or they will be unsuccessful like their fellow-American competitors, KFC. Reference:
1. Study Mode (2011). KFC Strategies. Retrieved from:
http://www.studymode.com/essays/Kfc-Strategies-652353.html . 2. Ikea (2013). PEST analysis. Retrieved from: http://shoutbrand.com/wp-content/uploads/2013/03/UCLAGMPEST4IKEA1.pdf 3. Cambridge (2013). PEST analysis. Retrieved from: http://dictionary.cambridge.org/dictionary/business-english/pest-analysis?q=PEST+analysis 4. Jaltek (2013). Doing business in India. Retrieved from: http://www.cambridgewireless.co.uk/docs/5.%20Anmol%20Sood%20India%20Event%20Pres.p df 5. Dash, K. (2005). McDonalds in India. India: The Garvin School of International Management. 6. Indexmundi (2013). India – country profile. Retrieved from: http://www.indexmundi.com/india/
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