International Business
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Question 1. Outline reasons for the fast global growth of McDonald‘s. - Page 2 Question 2. McDonald‘s needs to adapt to different cultures and conditions when it sets up business in different parts of the world. - Page 3 Question 3.1. Critically discuss McDonald‘s globalisation strategy. - Page 7 Question 3.2. Explain how and why the entry strategy of McDonald‘s was different in China in comparison with the rest of the world. – Page 9 Question 4. Explain some of McDonald‘s efforts to localise its offerings in China and describe how successful these efforts were. – Page 10 Question 5. Discuss the challenges that McDonald‘s faced when entering the Chinese market and to expand its operations. – Page 11
Question 6. Where do you think the best opportunities for future growth lie for McDonald‘s? – Page 14 Bibliography – Page 16
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Question1. Outline reasons for the fast global growth of McDonald’s.
There are two major drivers of globalisation: declining trade and investment barriers and technological change. The rapid growth of McDonald‘s is due to the skill and competence of them and also the appeal of their product. The combination of local knowledge and entrepreneurial spirit of the franchisee is one of the reasons for McDonald‘s fast growth. 80% of McDonald‘s is Franchise owned. McDonald‘s Big Mac hamburger is or is supposed to be the same everywhere in the world; this means the consumer is familiar with the brand and will buy it. McDonald‘s used standardised promotion methods. McDonald‘s turned away from an unchanged menu to a menu that is trendy and innovative. McDonald‘s change its menu to keep up with the new trend of eating healthy. McDonald‘s expanded its menu and extended its store hours. They benefit from the trade down of consumers from more expensive eating places. McDonald‘s growth is due to finding good real estate locations, management of distribution and it‘s skill in making products of consistent quality. McDonald‘s invest in their staff by providing on the job training because they realise that the staff is the face of the business and must sell the product to the consumer. They provide employment to local people within the various countries. McDonald‘s trained local people for management positions. According to an article ―Macdonald‘s success Strategy and global expansion through customer and brand loyalty‖ socially responsible actions and efforts have given McDonald‘s a longstanding and distinguished record for diversity-as an employer, franchiser, and purchaser of goods and services. Before McDonald‘s enter a country they do proper market research. They ensure that they are familiar with the country‘s social, cultural, economic and technological situations. According to an article ―Macdonald‘s success Strategy and global expansion through customer and brand loyalty‖ McDonald‘s success is due to them thinking global but acting local. McDonald‘s ensure that they are familiar with the different countries preferences when it comes to food. McDonald‘s core values are quality, service, cleanliness and value. These values combined with localisation have positioned them as one of the market leaders. They also give financial donations to local organisations within the various countries to boost their image within the various countries.
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Question 2. McDonald’s needs to adapt to different cultures and conditions when it sets up business in different parts of the world.
Gaining cultural awareness has been a centuries-old need for anyone involved in international business. It is important to understand the language of a country as well as the ability to speak it. There are two kinds of knowledge about cultures. One is factual knowledge about the culture and interpretive knowledge. The dynamic character of culture is significant in assessing new markets even though changes face resistance. Cultural misunderstandings can raise havoc to the best business plans. Cultural differences can cause four kinds of problems in international business negotiations, at the levels of language, nonverbal behaviours, values and thinking and decisionmaking processes.
2.1 Countries in Eastern Europe When McDonald‘s opened their restaurants in Ukraine they started off with the basic items on their menu and introduced new products later to keep them interested. The pricing of McDonald‘s were set to cater for the lower income group. While McDonald‘s restaurants in the United States and many other countries are typically operated as franchises owned by private investors, the fast-food world leader has invested its own money to conquer Ukraine according to the article ―McDonald‘s continues expanding Ukraine Chain‖ dated February 07, 2007. According to an article in the Bloomweek Businessweek ―McDonald‘s tastes victory in Europe‖ Hennequin's recipe for success focuses on upgrading the customer experience. "The brand position is different in different parts of the world," he says. In the U.S., customers tend to eat on the go, and therefore around 70 percent U.S. sales come from drive-throughs. Europeans on the other hand prefer to linger. "In Europe it's more about the experience," he says. "It's convenient and a destination place at the same time." The rapid roll out of McCafés is another Continental-style offering helping to drive growth. In France, McDonald's began using kiosks where customers can order and pay for their food, because a majority of transactions there are made using debit cards. Now the kiosks, which also have been introduced in Germany, are being tested in other European markets. According to an article ―Employee involvement and market orientation in a transition economy: Importance, problems and a solution‖ suggest that cultural differences between most Eastern European countries and the U.S. create barriers to the effective implementation of employee involvement and, hence, a firm's market orientation. If managers are to effectively implement employee involvement it will have to be within the cultural dimensions. Ukraine displays collectivistic tendencies unlike the US high individualism. In Ukraine the cultural values are family, care of children, aged parents and maintaining strong long friendship bonds. In Ukraine you must display respect for older people and those of higher status which is an outcome of high power 3
distance. Ukraine people are very emotional and this is a sign of feminine tendency. In US personal freedom is highly valued and social distance positively evaluated whereas in Ukraine the interpersonal bonds are very close and a lot of things can go unsaid. Ukraine society display high uncertainty avoidance. McDonald‘s Russia success is due to them adapting their business model to accommodate the needs of the Russians. Russia place high values on giving priority to locally produced goods and McDonald‘s use this in their favour to advertise that the ingredients used by them are coming from Russian soil. Russia placed strong values on community in their city and in order to impress them McDonald‘s sponsored a lot of community events. In US the customers will only sit for as long as it takes to eat their meal where in Russia it is the complete opposite therefore Russia McDonald‘s display a friendly and homely environment unlike the US where the atmosphere is very cold. Americans generally regard compromise as desirable and inevitable, a logical way of doing business. Russians regard compromise as a sign of weakness, a retreat from a correct and morally justified position. They will often out-wait impatient Americans to produce more concessions from them.
2.2 Countries in West Asia Asian culture is high power distance, which means that subordinates maintain a distance from their superiors and have a sense of respect. On the other hand American culture is low power distance, which means that subordinates see their superiors as approachable and their superiors‘ decisions as negotiable. The attitude a person acquired growing up transfers to the manager-subordinate relationship in the workplace therefore an Asian employee might not disagree with his or her manager because they do not want to disrespect him or her. They feel obligated to just accept whatever their superior says. This makes Western management techniques such as ―Management by Objectives‖ ineffective because they presuppose that an employee would negotiate their objectives. However if the employee is uncomfortable saying ―no,‖ they would simply agree to the projects and be stuck with an unreasonable workload. Overall, management in high PDI cultures is more paternalistic whereas management in low PDI cultures is more consultative. McDonald‘s has partnered with the Indian Oil Corporation (IOC) to expand its footprint in gas stations in the western and southern parts of the country and according to The Economic Times this agreement will potentially double sales by 2014 in these markets. McDonald‘s has taken advantage of India's market potential, initially announcing an aggressive expansion plan in the country in 2006. With this plan, the Golden Arches anticipates a 10-fold growth by 2025. Cultural factors for McDonald‘s to take into account in Saudi Arabia are the need to understand the religious norms, their personalities, their language, understand the formal and informal regulations, 4
their ethic and work culture and the level of flexibility when work offered in their country. McDonald‘s Saudi Arabia closes five times a day. In Saudi Arabia McDonald‘s has two separate dining rooms, one for men and one for women and children. In Saudi Arabia women are not allowed to drive and most restaurants will have home delivery services. When McDonald‘s opened in Saudi Arabia, they made the mistake of printing the Saudi Flag on the take-out bags and this created a massive scandal as a short extract of the Qur‘an is written on the Saudi flag. Most of the people were furious to see an extract of their holy book printed on an American burger bag. With greater cultural sensitivity, McDonald‘s could have avoided costing millions of dollars to their company. Saudi management culture is heavily influenced by traditional Islamic values and strong tribal and family orientations. Saudi managers demand loyalty, obedience, and seek a social distance from those they manage, which may be partially attributed to authoritarian beliefs in Islamic social system. Saudi Arabia has a high power distance. Saudi Arabia has a low level of tolerance for uncertainty. According to the article ―Uncertainty avoidance‖ in International Business Wiki the government in Saudi enforced strict rules, laws, policies, and regulations on safety to guarantee the reduction of uncertainty and everyone are expected to follow this, even anyone visiting the country. The government wants to control everything the people do in order to prevent the unexpected. The people of Saudi Arabia do not willingly accept change and is extremely opposed to taking risks. Saudi Arabia is a Collectivist society. Saudi Arabia is a more masculine culture, here gender roles are more strictly adhered to and men are expected to be dominant. In Israel McDonald‘s redesign its standard logo from the yellow and red to blue and white. They added the word ―kosher‖ alongside in order to avoid confusion over which branches were kosher. Israel is a low power distance country. Therefore they put more decision making power in the hands of the people unlike Saudi Arabia. Uncertainty avoidance in Israel is high and they have feminine values.
2.3 Countries in Africa McDonald‘s came to South Africa in 1995. According an article ―Underneath the Golden Arches‖ dated 05/10/2010 the managing director of McDonald‘s SA said that when they look for new locations in SA they took into account different factors like demographics, passing traffic, retail components and convenience for the consumer. In SA there are a big part of the population that make use of public transport therefore the location must be convenient otherwise they will lose out on a big part of the population. According to him McDonald‘s is a brand that caters for all the diverse community in SA and this is largely on the strength of the variety in their menu offering and convenience platform. In SA McDonald‘s did market research by asking the consumers certain 5 questions as to how the brand can become more relevant to them. McDonald‘s is building brand
loyalty through a local partner channel and this promotion seeks to reach the South African consumer in a way that integrates with their daily lives. According to the article ―About McDonald‘s South Africa‖ South Africa is one of the most successful markets in McDonald's international history. Currently more than 97% of all food served in McDonald's restaurants is produced by local South African suppliers to McDonald's highest quality standards. All of McDonald's SA restaurants are Halaal certified by the Islamic Council of South Africa (ICSA) because Moslems form a big part of the society. South Africa has a high level of individualism. South African business tended towards the accumulation of power and decisionmaking in the hands of a few senior managers (usually white), with middle managers waiting in line to move up the corporate ladder over time. McDonald‘s took time to develop good relationships with the people because it is important within all sections of South African society as relationships have always formed the basis of good business. In SA McDonald‘s had to battle against the country‘s trademark laws, which stated that a registered trademark had to be used within a certain period. A local company wanted to launch its own fast food chain using the name McDonald‘s. The SA High court ruled in McDonald‘s favour. When McDonald‘s opened its first store in SA they found that there was no existing distributor that could handle their distribution. Managers from US had to come to SA to help organise and set up a distribution centre. McDonald‘s also faced the challenge that unemployment and uncertain social change fed a high crime rate in SA. Based on Hofstede‘s model, South Africa is characterized by weak uncertainty avoidance and a large power distance. South African society is also characterized by an individual approach. This is the reason that South Africa has a high tendency towards masculinity. In SA subordinates tend to be afraid of their bosses whereas in US subordinates are more likely to challenge their bosses and bosses tend to use a consultative management style. In SA and US people are expected to look out for themselves where their typical values will be time, freedom and challenge. In US people tend to value having a high opportunity for earnings, getting the recognition they deserve when doing a good job, having an opportunity for advancement to a higher-level job, and having challenging work to do to derive a sense of accomplishment. South Africa has a much higher tolerance for unequal power distribution. Males in South African society are seen of higher standard than women are in the business world. This has a huge impact on the business behaviour, management styles, and leadership styles. Business in South Africa is usually more conservative and will follow a hierarchy. Although South Africans tend to be in favour of an individual approach, they can be seen as more collective than other nations, even with the lean to masculinity. Society in general in South African heavily favors the males, which defiantly translates to the business world. Masculinity vs. femininity in South African society demonstrates a strong inequality amongst the genders, where race also plays a factor. In SA the culture tends to perceive unknown situations as threatening so they tend to avoid 6
them whereas in US people feel less threatened by unknown situations and they tend to be more open to innovations and risk.
Question 3.1. Critically discuss McDonald’s globalisation strategy.
The planning process must start with a clear definition of the business. This phase requires the input from different divisions, especially, production, finance, distribution, and procurement. The strategy is made up of a number of actions. Globalisation refers to the growth in the International trade on the one side and profound concerns about the social consequences on the other side. McDonald‘s has a very clear business model where it takes relatively low-quality food ingredients, unskilled labour, retail locations, and buildings through a thorough, standardised process and transform them into a particular kind of food service experience for mass market consumers. McDonald‘s business model seeks to impose the company‘s logic on the marketplace and has changed consumer behaviour. This type of model finds international success easy because it minimise the need to adapt to local conditions and customers. McDonald‘s are choosing to build up a network of local suppliers and to train local people for local jobs. The Economist magazine uses a ―McDonald‘s Big Mac Price Index‖ to compare the cost of living in major countries because the pricing of a Big Mac hamburger are supposed to be the same anywhere in the world. McDonald‘s has pursued two strategies since 2003 which are to keep up with the ever changing consumer preferences, demographics and spending patterns. They have also focused on increasing sales at existing restaurants rather than opening new ones. In order to achieve this they keep stores open for longer and have increased menu options. McDonald‘s public image of fast food has a negative effect as consumers see it as unhealthy therefore they introduce salads and public nutrition campaigns to adapt its business model to the changing trends in the market. McDonald‘s build its branding strategy through the use of unique products marketed by them like the Big Mac hamburger. They use their globalisation to their advantage. They keep their restaurants similar to ensure that consumers will know the product in different countries. They introduced new items on their menu to ensure that they keep up with changing customer preferences, demographics and spending patterns. People get bored of the same brands that they had been using over the years, so when they do not see the new products they migrate to new brands. It is a struggle by brands to manage localisation to overcome this, McDonald‘s do this thru franchising which allow the licensee‘s input into local matters like consumer trends and preferences. The Indonesian McDonald‘s chain placed green flags of Islam along with religious music and Islamic security guards in their restaurant. This ploy seems to help protect McDonald‘s against terrorism and other attacks by fostering a community orientation. 7
McDonald‘s marketing strategy included alignment of their brand, positioning themselves in the market and what the correct marketing mix would be for them. They ensured that the quality of their brand is the same everywhere and that customers are satisfied. The fact that McDonald‘s is everywhere might be over exposure. It is important for McDonald‘s to maintain the standards of their chain because a lack of quality service in one store can affect the whole brand. McDonald‘s challenges are pricing, food innovation, store remodeling, operational excellence, extended hours and brand trust. They need to understand these key drivers and how to achieve them. Assessment and adjustment of core strategy consist of the market and competitive Analysis and Internal analysis: It is important for McDonald‘s to understand that the underlying forces that determine business success are common to the different countries that they compete in. Planning processes that focus across a broad range of markets at the same time provided McDonald‘s with tools to help balance risks, resource requirements, competitive economies of scale and profitability to gain stronger long-term positions. On the demand side this requires an understanding of the common features of customer requirements and choice factors. The key is to understand the structure of the global market to identify the forces that will drive competition and determine profitability. McDonald‘s makes money by operating its own restaurants and franchising to third parties. 80% of their business is franchises therefore they need less organisational resources that must be used for any strategic choice. Formulating global marketing strategy which consists of choice of competitive strategy and choice of target countries and segments: When dealing with global markets there are three general choices of strategies; cost leadership, differentiation and focus. McDonald‘s mix and match strategies in different countries. It is important that McDonald‘s consider potential competition and their impact on the markets should they enter. When choosing a country market McDonald‘s should make decisions beyond those relating to market attractiveness and company position. Expansion strategy is determined by McDonald‘s market-, mix-, and companyrelated factors. Global marketing program development McDonald‘s need to make marketing related decisions in four areas – the degree of standardisation in the product offering, the marketing program beyond the product variable, location and extent of value-adding activities and competitive moves to be made. 8
McDonald‘s must adapt their menu regularly to adapt to the constant changes in consumer preferences to insure profitability. Implementation global marketing consists of organisational structure and control
Question 3.2. Explain how and why the entry strategy of McDonald’s was different in China in comparison with the rest of the world.
In China, multinational companies are required to take local partners. According to Rick Yan he states that success is more a matter of managerial capacity, critical mass scale, and product portfolio than the length of stay in China. According to him having a local partner is not enough because marketing and management are also very important. The China market can be difficult to tap and may not be profitable for years. China has a complex and rapidly changing business climate, where personal connections matter more than business plans and rules and regulations are often a matter of interpretation which McDonald‘s had to adapt too. Patience is required to do business in China because negotiations can drag out beyond deadlines to gain an advantage. In China McDonald‘s restaurants are either wholly-owned by the company or jointly-owned because when they entered this country franchised laws did not exist. This is different because elsewhere they set up franchising stores. Chinese consumers are more likely to buy a product if it is promoted by family or friends. China‘s cost advantage is achieved via three areas of saving namely labour and raw materials, lower set up cost and low cost product design and R&D activities. This is the key driver for international companies targeting the country. McDonald‘s researched the China market for 5 years before opening the first restaurant. McDonald‘s China has a business model that replicates the efficient, proven and standardised practices that characterise McDonald‘s worldwide according to the CEO Jim Cantalupo. They entered the market small and then executed a rapid roll out. McDonald‘s engaged in strategic partnering. JV partner in Beijing is the department of agriculture which assured them access to raw materials. They were willing to wait for break- even point which came only after 6 years. They executed the entrenchment of the internationally tested business model and operational practices with discipline. McDonald‘s made use of localisation. McDonald‘s could differentiate their product despite cheaper alternatives. In China the food culture, lifestyles and legal structure were changing as a result of surging economic growth and massive urbanisation. McDonald‘s standardised its operations to ensure quality consistency of cuisine at all its restaurants across China. McDonald's growth in China has been expanding steadily by providing outstanding quality, service, and value to its customers. McDonald's strategic plan in China was to focus on core menu extensions, convenience and value. According to the article ―McDonald‘s in China‖ McDonald's became a symbol of modern lifestyle. 9
Though it remained American in terms of menu, services, and management, the company brought in variations in its products and ingredients to suit the Chinese palate and culture. McDonald's standardized operations to ensure the quality and consistency of cuisine at all its restaurants across China. In China, it launched a version of its 'Dollar Menu' known as the 'Value menu' that offered sandwiches and other items at a lower price. It also introduced a smaller version of the 'Value Meal' that offered small fries and a small drink for just twenty cents. According to an article ―McDonald‘s discussion China development strategy, Sinopec deal‖ James A. Skinner said that in China, their development strategy is focused on opening more restaurants with drive-thru‘s to capitalize on the increasingly mobile population whereas in US McDonald‘s focus on increasing sales in existing restaurants rather than opening new stores. This strategy received a significant boost in June with the signing of a strategic partnership with Sinopec, China's largest petroleum retailer. The agreement gives McDonald's first right of refusal of co-developed drive-thru restaurants at existing and new Sinopec outlets, which number more than 30,000. James said that it is great having a choice and their initial plan is to identify and prioritize the best locations across China. In China they focused on brand preference for Chinese consumers. China's rapid economic development offered the environmental conditions corresponding to fast food culture.
Question 4. Explain some of McDonald’s efforts to localise its offerings in China and describe how successful these efforts were.
Localisation strategy focuses on increasing profits by customising the company‘s goods or services so that they can provide a good match to tastes and preferences in different national markets. By customising their products McDonald‘s increases the value of their products in China. McDonald‘s ensured that their strategy was efficient and captured the economies of scale from their global reach. In China the traditional culture of food and drink is the features color, fragrance, flavor and variety and therefore fast food simply does not compare. Under this circumstances, the only way out was to combine the two different cultures. McDonald‘s made use of localisation by adapting their menu according to local tastes but kept the core values in place. The inter-cultural management mode supplemented by Chinese traditional culture enhanced local market flexibility for McDonald‘s. McDonald‘s established a network with local farmers and suppliers to supply them with raw material. They purchased 95% of the raw material locally and local staff was trained and developed for management positions to gain a local understanding and cost base. McDonald‘s reduce its distribution costs significantly by getting the raw material locally. They also invested in the country‘s economic market because they created jobs for farmers. McDonald‘s efforts to localise its offerings in China was successful because they enriched the country. In China McDonald‘s changed their strategy from franchise to either wholly-owned by the company 10
or jointly-owned. McDonald's on Beijing's Wangfujing Street attracted many people with its traditional Chinese look, decorating their interiors with paper-cuts of the Chinese character Fu (Happiness), magpies and twin fishes, all auspicious symbols. McDonald's have absorbed the Chinese cultural elements of showing respect, recognition, understanding, assimilation and amalgamation, while maintaining the substance of the Western culture of efficiency, freedom, democracy, equality and humanity. They also helped local industries to develop specialised infrastructures. In China new restaurants have Internet connections, play areas for children and special seating for their mothers, all of which are designed to reinforce their role as gathering places. McDonald‘s localization includes high local participation in production, purchasing, personnel, marketing, research and development in China. In China, teenagers and the elderly spend hours in McDonald's which is a part of their culture and that would likely not happen in US. McDonald's standardized operations ensured the quality and consistency of cuisine at all its restaurants across China. In February 2009 McDonald‘s launched their first online shop on Alibaba‘s Taobao, China‘s top auction site. With this strategy they wanted to target the right audience which was urban adults in their 20‘s. In China the consumers react on word of mouth so it is important for McDonald‘s to deliver quality food. According to the "hamburger culture" cold case the Chinese market for McDonald's confirms the absence of McDonald's localization strategy paid a heavy price. Strategic management, Michael Porter, believes that a company only in the differentiation and cost leadership strategy can create a competitive advantage. It is McDonald's competitive advantage due to its creative business model which adapt to the times, and through the development of a unified and standardised standards, that it can replicate rapidly expanding, which achieved great success, achievement of the fast food industry dominance. However, in the face of changing market, McDonald's once proud business profit model has encountered challenges. In particular, in the Chinese market, McDonald's not only significantly lags behind its competitors, but also by the impact of local Chinese fast food industry. McDonald‘s marketing model in China ensured consistency of brand and service delivery but their expansion speed cannot satisfy market demand.
Question 5. Discuss the challenges that McDonald’s faced when entering the Chinese market and to expand its operations.
Successful international managers need cross-cultural literacy. The Hofstede cultural dimensions identify five dimensions. Power distance focus on how a society deals with the fact that people are not the same in physical and intellectual capabilities. The higher the power distance index, the more people at the bottom accept and expect that power is distributed unevenly. Cultures that are higher in power distance attach more importance to brand names. According to the ‗Handbook of brand 11
relationships‖ research conducted by Lam (2007) suggests that individuals who score higher in power distance are less brand loyal and are more likely to switch brands whereas individuals who score lower in power distance are not so influenced by higher power groups and develop greater brand loyalty. In China McDonald‘s branding efforts have attempted to connect the Chinese belief in the strengthinducing properties of beef to its Quarter Pounder burger. The success of McDonald‘s in the United States is due to its American corporate culture, whereby the low power-distance between employers and employees enabled free exchange of ideas and creativity, the McDonald‘s corporate structure in Asian countries would naturally adopt the American corporate culture. Instead of adhering to the characteristically high power-distance of the Asian corporate culture, which may suppress creativity and the free exchange of ideas, the American corporate culture helps to instill creativity among the junior level employees. In China the degree of power distance is high. In China, McDonald‘s emphasized the social and sensory needs as this benefits are very effective in developing brands. Individualism versus collectivism deals with the relationship between an individual and his or her fellows. The higher the individualism index, the more people focus on the individual rather than on the group. Uncertainty avoidance deals with the extent to which different cultures socialise their members into accepting ambiguous situations and accepting ambiguity. The higher the uncertainty avoidance index, the more uncomfortable the people are in situations of uncertainty. Cultures with higher uncertainty avoidance feel more threatened by unknown situations than those with lower uncertainty avoidance. Masculinity versus femininity deals with the relationship between gender and work roles. Cultures that are feminine based prefer to make decisions based on feelings. They also prefer social goals and rewards of appreciation. Cultures that are masculine based prefer decision making based on facts. They prefer profit goals and monetary rewards. Confucian deals with attitudes towards time, persistence, ordering by status, protection of face, respect for tradition and reciprocation of gifts and favors. Confucian ethics lowered the cost of doing business in China. In China three values central to the Confucian system of ethics are of particular interest namely loyalty, reciprocal obligations and honesty in dealings with others. Loyalty to superiors is regarded as a sacred duty. In China they don‘t work according to policies and procedures but negotiations are based on honesty and loyalty. In China loyalty binds the management and staff which reduce the conflict between them. Cooperation between staff and management are achieved at a lower cost. With Confucian ethics superiors are obligated to reward staff for their loyalty. McDonald‘s reward their staff by providing training to better themselves. Confucian ethic is central to Chinese culture. Reciprocal obligations are the glue that holds networks in China together. The implicit threat of social sanctions is often sufficient to ensure that favors are being returned, obligations are met and gentleman agreements honoured. According to an article ―KFC and McDonald‘s – a model of 12
blended culture‖ in the China today dated 01 June 2006 McDonald's has absorbed the Chinese cultural elements of showing respect, recognition, understanding, assimilation and amalgamation, while maintaining the substance of the Western culture of efficiency, freedom, democracy, equality and humanity. The inter-cultural management mode, with American business culture at the core, supplemented by Chinese traditional culture, provides reference for international enterprises which need to adjust, enrich and reconstruct their corporate culture to enhance local market flexibility. China‘s economy is a fast growing one which goes hand in hand with the fast tempo of fast food. When McDonald‘s entered China they had to make changes to the flavour of their products. In China people will use McDonald‘s as a meeting place for various reasons whereas in US people will make use mostly of the drive thru‘s therefore in China the restaurants are brightly decorated. There are similarities between US and China. They have the same logo, are popular in both countries, hire local students for services and are family friendly. U.S. advertising tends to emphasize directly why someone would benefit from buying the product where as in China word of mouth is a better method. In US McDonald‘s focused on increasing sales at existing stores rather than opening new stores whereas in China they are opening new stores to increase sales. In China McDonald‘s target the middle and upper class because of their pricing structure where this is not the case in US. Although both of the markets and its potential for growth is considerably dominant the ways of managing its business are very distinct; both societal and institutional differences and values differences. American workers are more individualize. American workers focus on their individuals and lives in the world of distrust, where their only source of trust is the contract. The business culture of American is very effective when doing business as they tend to be frank about their position and persuasive which promotes their ability to make immediate response to decision making. The interpersonal problem rarely occurs in the working arena because American holds the business objective as top priorities. In a traditional Chinese meal, dishes were served on communal plates, which were placed at the centre of a table for everyone to share. Diners would use their chopsticks to pick food out of the communal plates on a bite-by-bite basis. This was quite different from a typical Western meal, in which individual servings were doled out at the beginning of the meal and diners would have their own sets of food to themselves. In China Managers are not too concerned with following rules whereas in US managers live by the book. Chinese managers are better educated at first degree level and benefit from significantly more in-house training than their Western peers. There are three explanations of culture: a) the integrated pattern of human knowledge, belief, and behaviour that depends upon man‘s capacity for learning and transmitting knowledge to succeeding generations; b) the customary beliefs, social forms, and material traits of a racial, religious, or social group; c) the set of shared attitudes, values, goals, and practices that 13
characterizes a company or corporation (Greet Hofstede, 1997:13) China has a high power distance, low individualism, a high uncertainty avoidance, and low masculinity. The US on the other hand has a low power distance, high individualism, low uncertainty avoidance and high masculinity. US places higher value on material possessions, power and assertiveness. According to an article Resolving Ethical Dilemmas in cross-cultural commerce researchers have suggested that Chinese are more relativistic in their decision making than westerners (Jackson, et al., 2000) (Ralston, Gustafson, Terpstra, & Holt, 1994) (Redfern & Crawford, 2004). These researchers indicate that Chinese utilise relativistic ethical principles more than absolute ones. McDonald and Park
(McDonald & Park, 1996) and Lin (Lin, 1999) both demonstrate that Chinese rely more on economic or self interest concerns and less on idealistic concerns when making ethical decisions. Recent research (Redfern & Crawford, 2004) (Whitcomb, Erdener, & Li, 1998) indicates that managers in China are now using a mix of traditional Confucian values and what they call a market ethic when making ethical decisions.
Question 6. Where do you think the best opportunities for future growth lie for McDonald’s?
McDonald‘s should open restaurants in Cambodia. In order for a franchise to open a McDonald‘s it must have high integrity, business experience, knowledge of culture and customs, willingness to devote themselves full-time to the venture, willingness to train for nine months in a foreign country, knowledge of real estate management and ability to work well with the franchise organisation. The Cambodian culture is a collectivism society whereas the US is an individualism society. Cambodian society is a high power distance and feminine. Cambodian culture demands obedience, respect and allegiance to superiors or those in power is considered highly desirable. They place higher value on people, quality of life and nurturing. Cambodia has an investment law which offers one of the best business incentive packages. This makes the country a very attractive place to invest. McDonald‘s will get a 9% corporate tax, tax holidays of up to 8 years, five year loss carried forward, full import duty exemption, no withholding tax on dividends, free repatriation of profits, no nationalisation and price controls, no discrimination between foreign and local investors and land leases for up to 70 years. The Council for the development of Cambodia allows the investors to deal with only one government body and provide speedy approval response. This will be a bonus for US people because they prefer speedy transactions than lengthy negotiations. According to an article ―Cambodia open for business‖ since the new government came into power in 1993 the country has attracted over $200 million in the private sector investment. According to an article ―Establishing a business in Cambodia‖ dated 14 September 2007 strong economic growth, low start-up costs, and a wealth of untapped markets make Cambodia an attractive environment for 14
starting up a business. Many foreigners arriving with no intention of becoming an entrepreneur find themselves opening their first business in this exciting marketplace. Cambodia is taking strategic steps to diversify its economic base, invest more in human capital, and promote an inclusive growth to narrow urban-rural income gap which means McDonald‘s more people will be able to afford McDonald‘s. McDonald‘s normally employ local people and train them as well which will be in line with the economic growth potential the Cambodian government predict. According to an article ―The 2011 Cambodia Outlook Conference‖ the Cambodian premier said that ―the future outlook for Cambodia is positive – the economy is projected to grow between 6 percent and 7 percent annually over the medium term. It is expected that Cambodia will benefit from future global investment and credit flows which will favour Asia due to the weakening of demand in the other parts of the world. With the growing regional cooperation and integration and faster growth of the Asian economies, Asian markets could offer more prospects of export and income growth to Cambodia. Thus, they have to diversify Cambodia‘s economic structure to focus not only on serving the U.S. and EU markets, but also Asian market‖. Cambodia is in a good geographic neighbourhood. China is nearby and rapidly increasing imports of commodities that Cambodia produces. The relative stability in prices and exchange rates has helped to create a good macro-economic environment.
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Question 1. Outline reasons for the fast global growth of McDonald‘s. - Page 2 Question 2. McDonald‘s needs to adapt to different cultures and conditions when it sets up business in different parts of the world. - Page 3 Question 3.1. Critically discuss McDonald‘s globalisation strategy. - Page 7 Question 3.2. Explain how and why the entry strategy of McDonald‘s was different in China in comparison with the rest of the world. – Page 9 Question 4. Explain some of McDonald‘s efforts to localise its offerings in China and describe how successful these efforts were. – Page 10 Question 5. Discuss the challenges that McDonald‘s faced when entering the Chinese market and to expand its operations. – Page 11
Question 6. Where do you think the best opportunities for future growth lie for McDonald‘s? – Page 14 Bibliography – Page 16
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Question1. Outline reasons for the fast global growth of McDonald’s.
There are two major drivers of globalisation: declining trade and investment barriers and technological change. The rapid growth of McDonald‘s is due to the skill and competence of them and also the appeal of their product. The combination of local knowledge and entrepreneurial spirit of the franchisee is one of the reasons for McDonald‘s fast growth. 80% of McDonald‘s is Franchise owned. McDonald‘s Big Mac hamburger is or is supposed to be the same everywhere in the world; this means the consumer is familiar with the brand and will buy it. McDonald‘s used standardised promotion methods. McDonald‘s turned away from an unchanged menu to a menu that is trendy and innovative. McDonald‘s change its menu to keep up with the new trend of eating healthy. McDonald‘s expanded its menu and extended its store hours. They benefit from the trade down of consumers from more expensive eating places. McDonald‘s growth is due to finding good real estate locations, management of distribution and it‘s skill in making products of consistent quality. McDonald‘s invest in their staff by providing on the job training because they realise that the staff is the face of the business and must sell the product to the consumer. They provide employment to local people within the various countries. McDonald‘s trained local people for management positions. According to an article ―Macdonald‘s success Strategy and global expansion through customer and brand loyalty‖ socially responsible actions and efforts have given McDonald‘s a longstanding and distinguished record for diversity-as an employer, franchiser, and purchaser of goods and services. Before McDonald‘s enter a country they do proper market research. They ensure that they are familiar with the country‘s social, cultural, economic and technological situations. According to an article ―Macdonald‘s success Strategy and global expansion through customer and brand loyalty‖ McDonald‘s success is due to them thinking global but acting local. McDonald‘s ensure that they are familiar with the different countries preferences when it comes to food. McDonald‘s core values are quality, service, cleanliness and value. These values combined with localisation have positioned them as one of the market leaders. They also give financial donations to local organisations within the various countries to boost their image within the various countries.
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Question 2. McDonald’s needs to adapt to different cultures and conditions when it sets up business in different parts of the world.
Gaining cultural awareness has been a centuries-old need for anyone involved in international business. It is important to understand the language of a country as well as the ability to speak it. There are two kinds of knowledge about cultures. One is factual knowledge about the culture and interpretive knowledge. The dynamic character of culture is significant in assessing new markets even though changes face resistance. Cultural misunderstandings can raise havoc to the best business plans. Cultural differences can cause four kinds of problems in international business negotiations, at the levels of language, nonverbal behaviours, values and thinking and decisionmaking processes.
2.1 Countries in Eastern Europe When McDonald‘s opened their restaurants in Ukraine they started off with the basic items on their menu and introduced new products later to keep them interested. The pricing of McDonald‘s were set to cater for the lower income group. While McDonald‘s restaurants in the United States and many other countries are typically operated as franchises owned by private investors, the fast-food world leader has invested its own money to conquer Ukraine according to the article ―McDonald‘s continues expanding Ukraine Chain‖ dated February 07, 2007. According to an article in the Bloomweek Businessweek ―McDonald‘s tastes victory in Europe‖ Hennequin's recipe for success focuses on upgrading the customer experience. "The brand position is different in different parts of the world," he says. In the U.S., customers tend to eat on the go, and therefore around 70 percent U.S. sales come from drive-throughs. Europeans on the other hand prefer to linger. "In Europe it's more about the experience," he says. "It's convenient and a destination place at the same time." The rapid roll out of McCafés is another Continental-style offering helping to drive growth. In France, McDonald's began using kiosks where customers can order and pay for their food, because a majority of transactions there are made using debit cards. Now the kiosks, which also have been introduced in Germany, are being tested in other European markets. According to an article ―Employee involvement and market orientation in a transition economy: Importance, problems and a solution‖ suggest that cultural differences between most Eastern European countries and the U.S. create barriers to the effective implementation of employee involvement and, hence, a firm's market orientation. If managers are to effectively implement employee involvement it will have to be within the cultural dimensions. Ukraine displays collectivistic tendencies unlike the US high individualism. In Ukraine the cultural values are family, care of children, aged parents and maintaining strong long friendship bonds. In Ukraine you must display respect for older people and those of higher status which is an outcome of high power 3
distance. Ukraine people are very emotional and this is a sign of feminine tendency. In US personal freedom is highly valued and social distance positively evaluated whereas in Ukraine the interpersonal bonds are very close and a lot of things can go unsaid. Ukraine society display high uncertainty avoidance. McDonald‘s Russia success is due to them adapting their business model to accommodate the needs of the Russians. Russia place high values on giving priority to locally produced goods and McDonald‘s use this in their favour to advertise that the ingredients used by them are coming from Russian soil. Russia placed strong values on community in their city and in order to impress them McDonald‘s sponsored a lot of community events. In US the customers will only sit for as long as it takes to eat their meal where in Russia it is the complete opposite therefore Russia McDonald‘s display a friendly and homely environment unlike the US where the atmosphere is very cold. Americans generally regard compromise as desirable and inevitable, a logical way of doing business. Russians regard compromise as a sign of weakness, a retreat from a correct and morally justified position. They will often out-wait impatient Americans to produce more concessions from them.
2.2 Countries in West Asia Asian culture is high power distance, which means that subordinates maintain a distance from their superiors and have a sense of respect. On the other hand American culture is low power distance, which means that subordinates see their superiors as approachable and their superiors‘ decisions as negotiable. The attitude a person acquired growing up transfers to the manager-subordinate relationship in the workplace therefore an Asian employee might not disagree with his or her manager because they do not want to disrespect him or her. They feel obligated to just accept whatever their superior says. This makes Western management techniques such as ―Management by Objectives‖ ineffective because they presuppose that an employee would negotiate their objectives. However if the employee is uncomfortable saying ―no,‖ they would simply agree to the projects and be stuck with an unreasonable workload. Overall, management in high PDI cultures is more paternalistic whereas management in low PDI cultures is more consultative. McDonald‘s has partnered with the Indian Oil Corporation (IOC) to expand its footprint in gas stations in the western and southern parts of the country and according to The Economic Times this agreement will potentially double sales by 2014 in these markets. McDonald‘s has taken advantage of India's market potential, initially announcing an aggressive expansion plan in the country in 2006. With this plan, the Golden Arches anticipates a 10-fold growth by 2025. Cultural factors for McDonald‘s to take into account in Saudi Arabia are the need to understand the religious norms, their personalities, their language, understand the formal and informal regulations, 4
their ethic and work culture and the level of flexibility when work offered in their country. McDonald‘s Saudi Arabia closes five times a day. In Saudi Arabia McDonald‘s has two separate dining rooms, one for men and one for women and children. In Saudi Arabia women are not allowed to drive and most restaurants will have home delivery services. When McDonald‘s opened in Saudi Arabia, they made the mistake of printing the Saudi Flag on the take-out bags and this created a massive scandal as a short extract of the Qur‘an is written on the Saudi flag. Most of the people were furious to see an extract of their holy book printed on an American burger bag. With greater cultural sensitivity, McDonald‘s could have avoided costing millions of dollars to their company. Saudi management culture is heavily influenced by traditional Islamic values and strong tribal and family orientations. Saudi managers demand loyalty, obedience, and seek a social distance from those they manage, which may be partially attributed to authoritarian beliefs in Islamic social system. Saudi Arabia has a high power distance. Saudi Arabia has a low level of tolerance for uncertainty. According to the article ―Uncertainty avoidance‖ in International Business Wiki the government in Saudi enforced strict rules, laws, policies, and regulations on safety to guarantee the reduction of uncertainty and everyone are expected to follow this, even anyone visiting the country. The government wants to control everything the people do in order to prevent the unexpected. The people of Saudi Arabia do not willingly accept change and is extremely opposed to taking risks. Saudi Arabia is a Collectivist society. Saudi Arabia is a more masculine culture, here gender roles are more strictly adhered to and men are expected to be dominant. In Israel McDonald‘s redesign its standard logo from the yellow and red to blue and white. They added the word ―kosher‖ alongside in order to avoid confusion over which branches were kosher. Israel is a low power distance country. Therefore they put more decision making power in the hands of the people unlike Saudi Arabia. Uncertainty avoidance in Israel is high and they have feminine values.
2.3 Countries in Africa McDonald‘s came to South Africa in 1995. According an article ―Underneath the Golden Arches‖ dated 05/10/2010 the managing director of McDonald‘s SA said that when they look for new locations in SA they took into account different factors like demographics, passing traffic, retail components and convenience for the consumer. In SA there are a big part of the population that make use of public transport therefore the location must be convenient otherwise they will lose out on a big part of the population. According to him McDonald‘s is a brand that caters for all the diverse community in SA and this is largely on the strength of the variety in their menu offering and convenience platform. In SA McDonald‘s did market research by asking the consumers certain 5 questions as to how the brand can become more relevant to them. McDonald‘s is building brand
loyalty through a local partner channel and this promotion seeks to reach the South African consumer in a way that integrates with their daily lives. According to the article ―About McDonald‘s South Africa‖ South Africa is one of the most successful markets in McDonald's international history. Currently more than 97% of all food served in McDonald's restaurants is produced by local South African suppliers to McDonald's highest quality standards. All of McDonald's SA restaurants are Halaal certified by the Islamic Council of South Africa (ICSA) because Moslems form a big part of the society. South Africa has a high level of individualism. South African business tended towards the accumulation of power and decisionmaking in the hands of a few senior managers (usually white), with middle managers waiting in line to move up the corporate ladder over time. McDonald‘s took time to develop good relationships with the people because it is important within all sections of South African society as relationships have always formed the basis of good business. In SA McDonald‘s had to battle against the country‘s trademark laws, which stated that a registered trademark had to be used within a certain period. A local company wanted to launch its own fast food chain using the name McDonald‘s. The SA High court ruled in McDonald‘s favour. When McDonald‘s opened its first store in SA they found that there was no existing distributor that could handle their distribution. Managers from US had to come to SA to help organise and set up a distribution centre. McDonald‘s also faced the challenge that unemployment and uncertain social change fed a high crime rate in SA. Based on Hofstede‘s model, South Africa is characterized by weak uncertainty avoidance and a large power distance. South African society is also characterized by an individual approach. This is the reason that South Africa has a high tendency towards masculinity. In SA subordinates tend to be afraid of their bosses whereas in US subordinates are more likely to challenge their bosses and bosses tend to use a consultative management style. In SA and US people are expected to look out for themselves where their typical values will be time, freedom and challenge. In US people tend to value having a high opportunity for earnings, getting the recognition they deserve when doing a good job, having an opportunity for advancement to a higher-level job, and having challenging work to do to derive a sense of accomplishment. South Africa has a much higher tolerance for unequal power distribution. Males in South African society are seen of higher standard than women are in the business world. This has a huge impact on the business behaviour, management styles, and leadership styles. Business in South Africa is usually more conservative and will follow a hierarchy. Although South Africans tend to be in favour of an individual approach, they can be seen as more collective than other nations, even with the lean to masculinity. Society in general in South African heavily favors the males, which defiantly translates to the business world. Masculinity vs. femininity in South African society demonstrates a strong inequality amongst the genders, where race also plays a factor. In SA the culture tends to perceive unknown situations as threatening so they tend to avoid 6
them whereas in US people feel less threatened by unknown situations and they tend to be more open to innovations and risk.
Question 3.1. Critically discuss McDonald’s globalisation strategy.
The planning process must start with a clear definition of the business. This phase requires the input from different divisions, especially, production, finance, distribution, and procurement. The strategy is made up of a number of actions. Globalisation refers to the growth in the International trade on the one side and profound concerns about the social consequences on the other side. McDonald‘s has a very clear business model where it takes relatively low-quality food ingredients, unskilled labour, retail locations, and buildings through a thorough, standardised process and transform them into a particular kind of food service experience for mass market consumers. McDonald‘s business model seeks to impose the company‘s logic on the marketplace and has changed consumer behaviour. This type of model finds international success easy because it minimise the need to adapt to local conditions and customers. McDonald‘s are choosing to build up a network of local suppliers and to train local people for local jobs. The Economist magazine uses a ―McDonald‘s Big Mac Price Index‖ to compare the cost of living in major countries because the pricing of a Big Mac hamburger are supposed to be the same anywhere in the world. McDonald‘s has pursued two strategies since 2003 which are to keep up with the ever changing consumer preferences, demographics and spending patterns. They have also focused on increasing sales at existing restaurants rather than opening new ones. In order to achieve this they keep stores open for longer and have increased menu options. McDonald‘s public image of fast food has a negative effect as consumers see it as unhealthy therefore they introduce salads and public nutrition campaigns to adapt its business model to the changing trends in the market. McDonald‘s build its branding strategy through the use of unique products marketed by them like the Big Mac hamburger. They use their globalisation to their advantage. They keep their restaurants similar to ensure that consumers will know the product in different countries. They introduced new items on their menu to ensure that they keep up with changing customer preferences, demographics and spending patterns. People get bored of the same brands that they had been using over the years, so when they do not see the new products they migrate to new brands. It is a struggle by brands to manage localisation to overcome this, McDonald‘s do this thru franchising which allow the licensee‘s input into local matters like consumer trends and preferences. The Indonesian McDonald‘s chain placed green flags of Islam along with religious music and Islamic security guards in their restaurant. This ploy seems to help protect McDonald‘s against terrorism and other attacks by fostering a community orientation. 7
McDonald‘s marketing strategy included alignment of their brand, positioning themselves in the market and what the correct marketing mix would be for them. They ensured that the quality of their brand is the same everywhere and that customers are satisfied. The fact that McDonald‘s is everywhere might be over exposure. It is important for McDonald‘s to maintain the standards of their chain because a lack of quality service in one store can affect the whole brand. McDonald‘s challenges are pricing, food innovation, store remodeling, operational excellence, extended hours and brand trust. They need to understand these key drivers and how to achieve them. Assessment and adjustment of core strategy consist of the market and competitive Analysis and Internal analysis: It is important for McDonald‘s to understand that the underlying forces that determine business success are common to the different countries that they compete in. Planning processes that focus across a broad range of markets at the same time provided McDonald‘s with tools to help balance risks, resource requirements, competitive economies of scale and profitability to gain stronger long-term positions. On the demand side this requires an understanding of the common features of customer requirements and choice factors. The key is to understand the structure of the global market to identify the forces that will drive competition and determine profitability. McDonald‘s makes money by operating its own restaurants and franchising to third parties. 80% of their business is franchises therefore they need less organisational resources that must be used for any strategic choice. Formulating global marketing strategy which consists of choice of competitive strategy and choice of target countries and segments: When dealing with global markets there are three general choices of strategies; cost leadership, differentiation and focus. McDonald‘s mix and match strategies in different countries. It is important that McDonald‘s consider potential competition and their impact on the markets should they enter. When choosing a country market McDonald‘s should make decisions beyond those relating to market attractiveness and company position. Expansion strategy is determined by McDonald‘s market-, mix-, and companyrelated factors. Global marketing program development McDonald‘s need to make marketing related decisions in four areas – the degree of standardisation in the product offering, the marketing program beyond the product variable, location and extent of value-adding activities and competitive moves to be made. 8
McDonald‘s must adapt their menu regularly to adapt to the constant changes in consumer preferences to insure profitability. Implementation global marketing consists of organisational structure and control
Question 3.2. Explain how and why the entry strategy of McDonald’s was different in China in comparison with the rest of the world.
In China, multinational companies are required to take local partners. According to Rick Yan he states that success is more a matter of managerial capacity, critical mass scale, and product portfolio than the length of stay in China. According to him having a local partner is not enough because marketing and management are also very important. The China market can be difficult to tap and may not be profitable for years. China has a complex and rapidly changing business climate, where personal connections matter more than business plans and rules and regulations are often a matter of interpretation which McDonald‘s had to adapt too. Patience is required to do business in China because negotiations can drag out beyond deadlines to gain an advantage. In China McDonald‘s restaurants are either wholly-owned by the company or jointly-owned because when they entered this country franchised laws did not exist. This is different because elsewhere they set up franchising stores. Chinese consumers are more likely to buy a product if it is promoted by family or friends. China‘s cost advantage is achieved via three areas of saving namely labour and raw materials, lower set up cost and low cost product design and R&D activities. This is the key driver for international companies targeting the country. McDonald‘s researched the China market for 5 years before opening the first restaurant. McDonald‘s China has a business model that replicates the efficient, proven and standardised practices that characterise McDonald‘s worldwide according to the CEO Jim Cantalupo. They entered the market small and then executed a rapid roll out. McDonald‘s engaged in strategic partnering. JV partner in Beijing is the department of agriculture which assured them access to raw materials. They were willing to wait for break- even point which came only after 6 years. They executed the entrenchment of the internationally tested business model and operational practices with discipline. McDonald‘s made use of localisation. McDonald‘s could differentiate their product despite cheaper alternatives. In China the food culture, lifestyles and legal structure were changing as a result of surging economic growth and massive urbanisation. McDonald‘s standardised its operations to ensure quality consistency of cuisine at all its restaurants across China. McDonald's growth in China has been expanding steadily by providing outstanding quality, service, and value to its customers. McDonald's strategic plan in China was to focus on core menu extensions, convenience and value. According to the article ―McDonald‘s in China‖ McDonald's became a symbol of modern lifestyle. 9
Though it remained American in terms of menu, services, and management, the company brought in variations in its products and ingredients to suit the Chinese palate and culture. McDonald's standardized operations to ensure the quality and consistency of cuisine at all its restaurants across China. In China, it launched a version of its 'Dollar Menu' known as the 'Value menu' that offered sandwiches and other items at a lower price. It also introduced a smaller version of the 'Value Meal' that offered small fries and a small drink for just twenty cents. According to an article ―McDonald‘s discussion China development strategy, Sinopec deal‖ James A. Skinner said that in China, their development strategy is focused on opening more restaurants with drive-thru‘s to capitalize on the increasingly mobile population whereas in US McDonald‘s focus on increasing sales in existing restaurants rather than opening new stores. This strategy received a significant boost in June with the signing of a strategic partnership with Sinopec, China's largest petroleum retailer. The agreement gives McDonald's first right of refusal of co-developed drive-thru restaurants at existing and new Sinopec outlets, which number more than 30,000. James said that it is great having a choice and their initial plan is to identify and prioritize the best locations across China. In China they focused on brand preference for Chinese consumers. China's rapid economic development offered the environmental conditions corresponding to fast food culture.
Question 4. Explain some of McDonald’s efforts to localise its offerings in China and describe how successful these efforts were.
Localisation strategy focuses on increasing profits by customising the company‘s goods or services so that they can provide a good match to tastes and preferences in different national markets. By customising their products McDonald‘s increases the value of their products in China. McDonald‘s ensured that their strategy was efficient and captured the economies of scale from their global reach. In China the traditional culture of food and drink is the features color, fragrance, flavor and variety and therefore fast food simply does not compare. Under this circumstances, the only way out was to combine the two different cultures. McDonald‘s made use of localisation by adapting their menu according to local tastes but kept the core values in place. The inter-cultural management mode supplemented by Chinese traditional culture enhanced local market flexibility for McDonald‘s. McDonald‘s established a network with local farmers and suppliers to supply them with raw material. They purchased 95% of the raw material locally and local staff was trained and developed for management positions to gain a local understanding and cost base. McDonald‘s reduce its distribution costs significantly by getting the raw material locally. They also invested in the country‘s economic market because they created jobs for farmers. McDonald‘s efforts to localise its offerings in China was successful because they enriched the country. In China McDonald‘s changed their strategy from franchise to either wholly-owned by the company 10
or jointly-owned. McDonald's on Beijing's Wangfujing Street attracted many people with its traditional Chinese look, decorating their interiors with paper-cuts of the Chinese character Fu (Happiness), magpies and twin fishes, all auspicious symbols. McDonald's have absorbed the Chinese cultural elements of showing respect, recognition, understanding, assimilation and amalgamation, while maintaining the substance of the Western culture of efficiency, freedom, democracy, equality and humanity. They also helped local industries to develop specialised infrastructures. In China new restaurants have Internet connections, play areas for children and special seating for their mothers, all of which are designed to reinforce their role as gathering places. McDonald‘s localization includes high local participation in production, purchasing, personnel, marketing, research and development in China. In China, teenagers and the elderly spend hours in McDonald's which is a part of their culture and that would likely not happen in US. McDonald's standardized operations ensured the quality and consistency of cuisine at all its restaurants across China. In February 2009 McDonald‘s launched their first online shop on Alibaba‘s Taobao, China‘s top auction site. With this strategy they wanted to target the right audience which was urban adults in their 20‘s. In China the consumers react on word of mouth so it is important for McDonald‘s to deliver quality food. According to the "hamburger culture" cold case the Chinese market for McDonald's confirms the absence of McDonald's localization strategy paid a heavy price. Strategic management, Michael Porter, believes that a company only in the differentiation and cost leadership strategy can create a competitive advantage. It is McDonald's competitive advantage due to its creative business model which adapt to the times, and through the development of a unified and standardised standards, that it can replicate rapidly expanding, which achieved great success, achievement of the fast food industry dominance. However, in the face of changing market, McDonald's once proud business profit model has encountered challenges. In particular, in the Chinese market, McDonald's not only significantly lags behind its competitors, but also by the impact of local Chinese fast food industry. McDonald‘s marketing model in China ensured consistency of brand and service delivery but their expansion speed cannot satisfy market demand.
Question 5. Discuss the challenges that McDonald’s faced when entering the Chinese market and to expand its operations.
Successful international managers need cross-cultural literacy. The Hofstede cultural dimensions identify five dimensions. Power distance focus on how a society deals with the fact that people are not the same in physical and intellectual capabilities. The higher the power distance index, the more people at the bottom accept and expect that power is distributed unevenly. Cultures that are higher in power distance attach more importance to brand names. According to the ‗Handbook of brand 11
relationships‖ research conducted by Lam (2007) suggests that individuals who score higher in power distance are less brand loyal and are more likely to switch brands whereas individuals who score lower in power distance are not so influenced by higher power groups and develop greater brand loyalty. In China McDonald‘s branding efforts have attempted to connect the Chinese belief in the strengthinducing properties of beef to its Quarter Pounder burger. The success of McDonald‘s in the United States is due to its American corporate culture, whereby the low power-distance between employers and employees enabled free exchange of ideas and creativity, the McDonald‘s corporate structure in Asian countries would naturally adopt the American corporate culture. Instead of adhering to the characteristically high power-distance of the Asian corporate culture, which may suppress creativity and the free exchange of ideas, the American corporate culture helps to instill creativity among the junior level employees. In China the degree of power distance is high. In China, McDonald‘s emphasized the social and sensory needs as this benefits are very effective in developing brands. Individualism versus collectivism deals with the relationship between an individual and his or her fellows. The higher the individualism index, the more people focus on the individual rather than on the group. Uncertainty avoidance deals with the extent to which different cultures socialise their members into accepting ambiguous situations and accepting ambiguity. The higher the uncertainty avoidance index, the more uncomfortable the people are in situations of uncertainty. Cultures with higher uncertainty avoidance feel more threatened by unknown situations than those with lower uncertainty avoidance. Masculinity versus femininity deals with the relationship between gender and work roles. Cultures that are feminine based prefer to make decisions based on feelings. They also prefer social goals and rewards of appreciation. Cultures that are masculine based prefer decision making based on facts. They prefer profit goals and monetary rewards. Confucian deals with attitudes towards time, persistence, ordering by status, protection of face, respect for tradition and reciprocation of gifts and favors. Confucian ethics lowered the cost of doing business in China. In China three values central to the Confucian system of ethics are of particular interest namely loyalty, reciprocal obligations and honesty in dealings with others. Loyalty to superiors is regarded as a sacred duty. In China they don‘t work according to policies and procedures but negotiations are based on honesty and loyalty. In China loyalty binds the management and staff which reduce the conflict between them. Cooperation between staff and management are achieved at a lower cost. With Confucian ethics superiors are obligated to reward staff for their loyalty. McDonald‘s reward their staff by providing training to better themselves. Confucian ethic is central to Chinese culture. Reciprocal obligations are the glue that holds networks in China together. The implicit threat of social sanctions is often sufficient to ensure that favors are being returned, obligations are met and gentleman agreements honoured. According to an article ―KFC and McDonald‘s – a model of 12
blended culture‖ in the China today dated 01 June 2006 McDonald's has absorbed the Chinese cultural elements of showing respect, recognition, understanding, assimilation and amalgamation, while maintaining the substance of the Western culture of efficiency, freedom, democracy, equality and humanity. The inter-cultural management mode, with American business culture at the core, supplemented by Chinese traditional culture, provides reference for international enterprises which need to adjust, enrich and reconstruct their corporate culture to enhance local market flexibility. China‘s economy is a fast growing one which goes hand in hand with the fast tempo of fast food. When McDonald‘s entered China they had to make changes to the flavour of their products. In China people will use McDonald‘s as a meeting place for various reasons whereas in US people will make use mostly of the drive thru‘s therefore in China the restaurants are brightly decorated. There are similarities between US and China. They have the same logo, are popular in both countries, hire local students for services and are family friendly. U.S. advertising tends to emphasize directly why someone would benefit from buying the product where as in China word of mouth is a better method. In US McDonald‘s focused on increasing sales at existing stores rather than opening new stores whereas in China they are opening new stores to increase sales. In China McDonald‘s target the middle and upper class because of their pricing structure where this is not the case in US. Although both of the markets and its potential for growth is considerably dominant the ways of managing its business are very distinct; both societal and institutional differences and values differences. American workers are more individualize. American workers focus on their individuals and lives in the world of distrust, where their only source of trust is the contract. The business culture of American is very effective when doing business as they tend to be frank about their position and persuasive which promotes their ability to make immediate response to decision making. The interpersonal problem rarely occurs in the working arena because American holds the business objective as top priorities. In a traditional Chinese meal, dishes were served on communal plates, which were placed at the centre of a table for everyone to share. Diners would use their chopsticks to pick food out of the communal plates on a bite-by-bite basis. This was quite different from a typical Western meal, in which individual servings were doled out at the beginning of the meal and diners would have their own sets of food to themselves. In China Managers are not too concerned with following rules whereas in US managers live by the book. Chinese managers are better educated at first degree level and benefit from significantly more in-house training than their Western peers. There are three explanations of culture: a) the integrated pattern of human knowledge, belief, and behaviour that depends upon man‘s capacity for learning and transmitting knowledge to succeeding generations; b) the customary beliefs, social forms, and material traits of a racial, religious, or social group; c) the set of shared attitudes, values, goals, and practices that 13
characterizes a company or corporation (Greet Hofstede, 1997:13) China has a high power distance, low individualism, a high uncertainty avoidance, and low masculinity. The US on the other hand has a low power distance, high individualism, low uncertainty avoidance and high masculinity. US places higher value on material possessions, power and assertiveness. According to an article Resolving Ethical Dilemmas in cross-cultural commerce researchers have suggested that Chinese are more relativistic in their decision making than westerners (Jackson, et al., 2000) (Ralston, Gustafson, Terpstra, & Holt, 1994) (Redfern & Crawford, 2004). These researchers indicate that Chinese utilise relativistic ethical principles more than absolute ones. McDonald and Park
(McDonald & Park, 1996) and Lin (Lin, 1999) both demonstrate that Chinese rely more on economic or self interest concerns and less on idealistic concerns when making ethical decisions. Recent research (Redfern & Crawford, 2004) (Whitcomb, Erdener, & Li, 1998) indicates that managers in China are now using a mix of traditional Confucian values and what they call a market ethic when making ethical decisions.
Question 6. Where do you think the best opportunities for future growth lie for McDonald’s?
McDonald‘s should open restaurants in Cambodia. In order for a franchise to open a McDonald‘s it must have high integrity, business experience, knowledge of culture and customs, willingness to devote themselves full-time to the venture, willingness to train for nine months in a foreign country, knowledge of real estate management and ability to work well with the franchise organisation. The Cambodian culture is a collectivism society whereas the US is an individualism society. Cambodian society is a high power distance and feminine. Cambodian culture demands obedience, respect and allegiance to superiors or those in power is considered highly desirable. They place higher value on people, quality of life and nurturing. Cambodia has an investment law which offers one of the best business incentive packages. This makes the country a very attractive place to invest. McDonald‘s will get a 9% corporate tax, tax holidays of up to 8 years, five year loss carried forward, full import duty exemption, no withholding tax on dividends, free repatriation of profits, no nationalisation and price controls, no discrimination between foreign and local investors and land leases for up to 70 years. The Council for the development of Cambodia allows the investors to deal with only one government body and provide speedy approval response. This will be a bonus for US people because they prefer speedy transactions than lengthy negotiations. According to an article ―Cambodia open for business‖ since the new government came into power in 1993 the country has attracted over $200 million in the private sector investment. According to an article ―Establishing a business in Cambodia‖ dated 14 September 2007 strong economic growth, low start-up costs, and a wealth of untapped markets make Cambodia an attractive environment for 14
starting up a business. Many foreigners arriving with no intention of becoming an entrepreneur find themselves opening their first business in this exciting marketplace. Cambodia is taking strategic steps to diversify its economic base, invest more in human capital, and promote an inclusive growth to narrow urban-rural income gap which means McDonald‘s more people will be able to afford McDonald‘s. McDonald‘s normally employ local people and train them as well which will be in line with the economic growth potential the Cambodian government predict. According to an article ―The 2011 Cambodia Outlook Conference‖ the Cambodian premier said that ―the future outlook for Cambodia is positive – the economy is projected to grow between 6 percent and 7 percent annually over the medium term. It is expected that Cambodia will benefit from future global investment and credit flows which will favour Asia due to the weakening of demand in the other parts of the world. With the growing regional cooperation and integration and faster growth of the Asian economies, Asian markets could offer more prospects of export and income growth to Cambodia. Thus, they have to diversify Cambodia‘s economic structure to focus not only on serving the U.S. and EU markets, but also Asian market‖. Cambodia is in a good geographic neighbourhood. China is nearby and rapidly increasing imports of commodities that Cambodia produces. The relative stability in prices and exchange rates has helped to create a good macro-economic environment.
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