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Industry Analysis of McDonalds Corporation

McDonald’s is a multinational corporation with its headquarters in Oak Brook, Illinois, and it owns restaurants all over the world. This corporation opened its doors in early 1955 in the United States of America. The current Chief Executive officer is James Skinner. The company has approximately 1.7 million employees both locally and internationally. The annual revenue of McDonalds Corporation is nearly $27.01 billion since it is among the top seven most powerful brands in the whole world (2012 Annual Report 9).  This organization focuses on franchise and operation of McDonald’s restaurants in the world restaurant business.

Dick and Mac McDonald started their first restaurant business in the year 1948 not having the idea that their business would experience extraordinary growth. The corporation emerged from humble beginnings when they found a formula of selling food of high quality at a cheaper price. An individual called Ray Kroc assisted the company to flourish. Once he was involved in the company’s businesses, there was an introduction of multiple franchises in the globe. This study will focus on describing the product(s) the industry produces, the firms in the industry, as well as the level of concentration of the industry. The study will also describe the cost structure of the industry. In addition, I will describe the demand of the industry, the downstream and upstream industries, and analyze the implications of that to the costs and demand of this industry. Lastly, I will describe the kinds of strategic interactions that exist in this industry and how the price is set.

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Description of the Product(s) This Industry Produces

The company has a united system, which persists in maintaining their food quality by adding extra excitement around the food, beginning with the core favourites of the corporation such as French fries, Big Mac, and chicken McNuggets. The company also creates innovations that incorporate some of the local offerings. The company also expands the growth line of its McCafe beverages, which has speciality coffees and various smoothies containing real fruits. The company differentiates its products from other restaurants regardless of the location.

The company’s products include foods and drinks such as Fast food take-outs or served on site, for example, chicken, Soft drinks, dessert, full breakfast, French fries, chicken, coffee and a wide range of milkshakes. The restaurants have numerous products in this study; I will explain a few products offered in the company. The key product is a hamburger that consists of 45 grams ground beef patty with ketchup of about 3.5 grams, onions, pickles and cheese placed in a bun that is often toasted on the grill. This hamburger is also served in double or triple in the same bun with other filling that the client requires.

This flexibility ensures that the clients get what they require. Under the burgers menu, the firm has other products that are basically burgers although they have special fillings and buns, for example, the Big Mac contains groping beef, special sauce made in the firm and a bun that has sesame seeds on top. In addition, this burger has an extra slice of bun placed between the two beef patties, the bun is commonly known as a Club layer. The hamburgers served in this firm are often named depending on how they look and what they have. Additional hamburgers served include the quarter pounder that has extra cheese, the Big Tasty has grilled onions that are neatly diced.  Other burgers include ranger burger, BBQ ranch burger, double cheeseburger, Mc feast, daily double and the common Bacon McDouble.

In the chicken, fish and pork section the firm has McChicken, where chicken is grounded and formed to patties that are similar to the ones in the beef burger and this creates a hamburger for individuals who want to order chicken. In the restaurants the company serves chicken fajita: it is chicken with red and green peppers with diced onions, Chicken McNuggets where chicken is served with sauces. Fillet-O-Fish is a product that is emanated from fish fillets. It is always served together with a special sauce known as Tartar sauce, cheese and a bun that is often steamed. McRib is a product made from pork, it is basically boneless bacon with sauces and onions served as a sandwich.

During breakfast, the available products include McMuffins that have a fried egg, cheese, back bacon or sausage on a toasted muffin. The company has a pastry section that offers biscuits, pancakes, bagels and many more things, although the basic breakfast food offers are in the McMuffin. McDonald also offers a wide range of soft drinks from the Coca Cola Company, Cadbury Schweppes and PepsiCo. It also serves roast coffee, both hot and iced tea, and all McCafe products.  The firm also offers French fries as a side dish for some meals. Lastly, the firm also offers desserts in the form of cookies, ice cream, cinnamon melts, fruits mixed with yogurt parfait, pies and smoothies.

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The Firms in the Industry and the Level of Concentration of the Industry

McDonalds operates in the Fast food industry. Being among the leaders in this industry it has always had a high concentration in all areas of the industry. The corporation concentrates in approximately all areas in the world since it is becoming more and more global, although currently it has numerous restaurants in the United States, Europe, Asia, Middle East and Africa. The company has various departments in the United States of America that carry out research and development for further and future innovations. The corporation allows the franchise to manufacture all its products since it is efficient and cost effective since production cost varies in the different locations.

The key competitors of the company include Wendy’s/Arby’s Group, Burger King Corporation, YUM Foods Subway, and Starbucks. Companies in this industry compete because they have unique products that provide taste and satisfaction to other consumers. A perfect example is Burgers King whose core competency is its method of cooking. This fast food restaurant flame broils its hamburgers instead of using grills and the variety it offers the clients on how they can have their burgers. In the fast food industry, it has become a major competitor to the firm and other corporations.

The market structure the firm operates in is similar to the situation of the monopoly. This is an indication that this form of market has extreme barriers to entry. This form of market has few organizations, which attempt to control the price of products. The demand in this market structure is similar to that of monopoly, although here firms are few, while in monopoly there exists one company. The number of buyers is extremely high in relation to the number of sellers in this firm. This form of market structure allows the firms to attain maximum profits as long as the marginal costs meet marginal profits in the market.

The Cost Structure of the Industry

McDonald’s cost structure includes what the firm takes into account when producing all their products and it encompasses the transaction costs, marginal, fixed, and sunk costs. To evaluate the structure of this firm, I will analyze the fixed costs, and variable cost ratio. The management in McDonalds speculates that there will be an inflation of the products of nearly 2.5%. In relation to this speculation, other USA restaurant margins will also be affected when this period occurs. This will also be experienced in other countries such as China and Japan, since there will be no room for cutting costs further, since all the consumers have also become more price sensitive than in the past. Europe will experience margins of up to 1% over the years although they will experience flexibility in their sales. According to a recent analysis, the food breakdown highlights that McDonald will have a similar cost structure to the industry average where raw materials and labor are the leading components.

It is a fact that McDonald’s labor cost is nearly 24% of the cost of goods sold and indication that it cannot afford to increase the salary of the employees. The firm has now resolved to cut back on employees and some benefits in order to have a comfortable cost structure. The firm has invested intensely on burners, grills, freezers and other equipment in order to ensure it reduces its capital and labor costs.

The firm deals with the impact of raw material prices by having purchase contracts that ensures that their suppliers give them raw materials at fixed costs on a contract for a set period. The firm also minimizes its fixed costs margin by investing in reliable machinery and paying employees well. The variable costs such as transport are handled by an investment of numerous vehicles, Lorries and motorbikes to carry raw materials from the suppliers.

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The Demand of the Industry

McDonald Corporation distributes its products in nearly 120 states, serving over 68 million customers annually. The company has extensive menus and they are diverse in the sense that they are relevant with the current situation in the world. The company utilizes digital ordering in distribution their new reimaged restaurants across the world an indication that it has an extremely fast service. It is evident that the company has restaurants across the United States of America, a location where the company has an unlimited excess of approximately 350 clients in the year 2011. Europe is another key consumer since it has experienced growth generating an overall of 40% revenue for the company. Other key locations include Asia, Middle East and Africa since they increased the income of the company over the years. The company allowed franchises in these countries since expansion and demand for McDonald’s products is rising. The corporation deepens its relations with its clients everywhere since it has provided satisfactory products.

The company has a huge market share both abroad and at home when foreigners come, they will prefer to use McDonald’s restaurant since they have seen it in their country. According to the financial reports in the year 2011 the company experienced a global comparable sales growth which was at 5.6 %, the earnings per share. Growth was 11% and the total shareholder return was 34.7%. Income of the firm rose by 10% in constant currencies while the company continues to obtain a large market share. These analysis highlights that the firm has customers all over the world; it has food for all: children, young adults, adults, and older generation and college students. According to the menu, the company offers food for all ages and races regardless of the background. According to the firm’s annual reports in the year 2012, it served 69 million customers per day with a sales growth of 3.1%. Below is a table indicating the demand versus price of the commodities in the Industry. The table highlights that the lesser the price, the more sales product yields. The firm employs a pricing strategy that allows customers who are price sensitive to continue buying in the company and this has increased the demand of the products of the firm.

The Downstream and Upstream. Analysis of the Implications of That to the Costs and Demand of This Industry

The key objectives of the supply chain in the company are to carry out operations that are globally practised. There has to be international standards in terms of quality, service, value and cleanliness. The company also focuses on obtaining flexible prices in the local market and potential opportunities to launch a new service or product.  The company ensures that all the supply chains are well established and efficient. The corporation utilises an outsourcing model to manage all its markets. It only imports in few cases. It is evident that the franchise in foreign countries might require high import rates and fluctuations in currency so the corporation decided to outsource its raw products from the locally available market to the maximum.  The only product the company imports are the process control equipment, which allows it to dish out burgers and other specific orders with the super fast speed known by all the clients. An analysis of the restaurants across the globe indicates that the corporation buys 95% of its raw materials from the local suppliers available.

The company produces its goods and services in each restaurant since every franchise has the technology required to produce fresh products within the required duration. The company takes advantage of all the required raw materials available when considering setting up a franchise in a certain area since it entirely depends on fresh products. The company intends to open branches in other countries where it has not ventured its business. It is evident that the company also wants to increase its market share through advertisements and other marketing strategies. The company also intends to remove its competitors from the restaurant business through maintaining the quality of the goods.

The purchasing of materials has caused the firm to acquire products at a low cost since outscoring is a cheaper option for the firm. The firm reduces its costs and this is an indication that it is capable of setting favourable prices while attaining a higher profit margin. The demand in the industry will favour McDonald’s since individuals are assured of fresh food at affordable prices. 

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The Kinds of Strategic Interactions That Exist in this Industry

The industry faces the strategic interactions described by the game theory in business. Game theory allows an individual to understand the mode of understanding that exists in the fast food industry. According to Osborne and Rubinstein, it is evident that Game theory is “a bag of analytical tools designed to help us understand the phenomena that we observe when decision-makers interact. The key assumption in this industry is that each company manufactures products based on their self-interest in order to earn a profit on what they have invested and every firm believes that when they choose an action plan it will affect another player in the market and they might react. This is an indication that, in case any corporation makes a decision it has to be reasoned strategically.  It is a fact that these two assumptions outlaw the aspect of pure chance, such as the games in the lotteries where there is no need for strategic interactions with the people playing the game. In this industry, the game or operations of any player always depends on the collective operations of the companies involved. The firms in the industry have the knowledge of all other competing firms, the regulations of the fast food industry and information available to other companies in the industry. In addition, the firm knows how a decision made by a certain company will affect each company and the results of the decision. Each company in this industry strives to maximize its income having the notion that information is available for every company the fast food company’s use external knowledge to gain a huge market share.

McDonalds is an excellent player. It has various groups that work together since they are aligned with the goals of the company while they produce their unique contribution. The company has a collection of members from all spheres to form a diverse board of directors. These directors assist the corporation to make sound regulations that govern the company together with sound corporate governance present in the company.

The company encourages the use of recent technology while handling the businesses across the nations. The company assists with all forms of finance to implement effective distribution channels that will ensure the company’s products are delivered to the required destination. The company has digitalised outlets across the globe and communication is through recent technologies such as internet, video conferencing and mobile phone. The company’s key strengths include the companies huge brand equity, since it has approximately 31,000 restaurants that serve fries and burgers in 120 countries worldwide. It is the number one fast food selling company. The company has a reliable and high-quality innovations and product development that assist them in maintaining their consumers. In addition, the company has a brand that allows consumers to make choices and they are of reasonable value accompanied by great service. Lastly, the company has loyal staff who work under a strong management put in place.

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Analysis of How the Price is Set

The company intends to build a business through capturing the diverse external opportunities in the plan to win. The company focuses its marketing strategy on two factors, which include their ongoing commitment to the plan to win that serves as a roadmap to all its operators for the precedent nine years. This plan centre of concentration is the core drivers of the business, which includes the five Ps signified by the Products, Place, Price, People and Promotion. This five Ps assist the company to build its brand with full concentration enhancing the clients’ experiences across the globe.

In pricing, the company believes that the consumer’s perception towards the goods is essential and it determines the cost of any product in the firm. McDonald’s believes that the client often draws an imaginary picture of what the product is worth, an indication that their pricing method also affects the psychological aspect of the client. The product is not only physical, it also has a psychological association with the consumer. The firm, therefore, prices its product knowing that in case the price is extremely low the clients might believe that the quality of the product is low with low quality materials. The firm sets its prices with regard to their brand and integrity an indication the prices are set in relation to the input in the product. The firm also evaluates the prices of the competitors in order to maintain the demand of the product. When a product is highly priced, it will give a chance for the competitors who have lower prices for the same product. The firm also evaluates its competitors’ prices of specific goods before pricing and adding value to differentiate their products. In general, the firm sets price that will create an acceptable price margin while increasing the sales of every product.