McDonald Expansion in China Term

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Introduction

Immediately after the Second World War, various political stands which
encouraged international trade were undertaken. Particularly, the signing of the
General Agreement on Tariffs and Trade (GATT) in 1947 played the major role in
opening the doors for global business expansion. The agreement provided an
efficient trading platform for member states.

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Additionally, modern transportation, communication, and technology innovations

are increasingly making the world a global village. As more opportunities for
expanding into other market rather home markets becomes present, companies
are quickly learning that new global strategies are needed.

Unlike in the familiar home market, the new foreign market might possess
unfamiliar challenges. Such challenge might include cultural diversity, need for a
specialized knowledge or skill, legal and political implications, just to mention a
few (Morgan, 2008).

Forming a strategic alliance is a common and highly preferred strategy of

expanding globally. Strategic alliance can be defined simply as a form of
collaboration whereby two parties enters into an agreement to pursue certain set
of objectives and/or goals.

Obviously, each party of agreement believes that the relationship will provide
them with an opportunity to accomplish more with a relatively minimum effort as
oppose to when they strive to achieve a certain goals on their own.

An organization seeking to expand its operation in an unfamiliar market should

carefully analyze the potential partners; measure the feasibility of the alliance
taking into account all the factors that can either make the alliance successful or
unsuccessful.

It should establish its main need of entering into an alliance and hence chose a
partner that can fulfill these needs. For instance, if a multinational company
wishes to overcome cultural barrier, it should chose a local firm that is well vast
with the cultural influences that might affect consumer preferences (Morgan,
2008).

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The Case of McDonald

McDonald is the leading US fast food retailer. Its undeniable success was
evident by 1963, whereby through its franchises it was selling approximately a
million hamburgers each day.

Two years later in 1965, the company listed its shares at price of $22.50 a share,
few weeks later the share price more than doubled to trade at $ 49; clearly this
was an indication of its strong financial performance and growth prospects. For
sure, the investors’ confidence on the company was not misplaced since in 1972
the company for the first time reached a billion dollar in sales.

As in the US, the company has strived to replicate this success in other countries
where it has expanded its operation. As result, the organization has become a
reputable multinational brand (Ko & Woo, 2008; Hoskisson & Alon, 2007; Peng,
2005).

McDonald operations in China

McDonald expanded to China in 1990 opening its first store in Shenzhen, which
is a city near Hong Kong. This market was and still is particularly important to
many Multinational companies due to its potential driven by a rapidly growing
economy.

Additional, the high population meant huge number of consumers for McDonald
products. McDonald can not expand into any market unless it is sure the market
has a potential of offering high demand and consequent increased profit.

China possessed precisely this potential. However, even after deciding to

venture into a foreign country a careful scrutiny reveal that McDonald has a
specified strategy of choosing its locations. The strategy involves choosing a
large city and ensuring its presence is fully appreciated there. Only after, this
happen does it diversify to other peripheral regions (Peng, 2005; Ko & Woo,
2008).

However, while venturing in China, McDonald appeared to have ignored this

strategy. For instance, unlike in other cases, Shenzhen is a relatively small city.
Nevertheless, the decision was quite a strategic one. The company would enjoy
various benefits given that in 1979 the city was declared special economic zone.
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As a result, McDonald expected to enjoy increased subsides, low tax rates, and
proper infrastructure. In addition, the fact that the location was the first one to be
open to foreigners meant that government interference would be minimal. Also,
there was a high possibility that the foreigners operating in the region were
familiar with and would prefer McDonald products (Hoskisson & Alon, 2007; Han,
2008).

Probably after having an initial taste of China’s Market, McDonald saw it fit to
return to its location choosing strategy, which aimed at setting restaurant in large
and busy cities. Its experience in Shenzhen must have proven to its strategic
managers that China is a very important market with high potential.

This is because, in 1992, the company opened its world largest restaurant in
Beijing (the capital city of mainland China). At the time, the restaurant was a two
storey building with 29 cash registers, 700 seats and employing approximately
1000 employees (Hoskisson & Alon, 2007).

Quite evidently, its decision to initially venture into China through Shenzhen paid
off as observed during its first day of operation. As result of its brand popularity
among the trendy Chinese consumers, the company sold to a total of 40,000
consumers on its first day (Ko & Woo, 2008; Hoskisson & Alon, 2007).

The decision to open such a large restaurant was motivated by a number of

reasons associated with the country and the specific city. To be precise, Beijing
is a highly populated area that host many traveling foreigners.

Also, the purchasing power of majority of its residents was relatively high and
therefore they would afford its products. This was particularly an important
consideration since, unlike in America and other developed countries, consumer
in China preferred McDonald products for quite different reasons.

One of reasons people prefer McDonald food in America is because it is

relatively cheap. On the contrary, McDonald is not considered cheap in China
given that the disposable income of the consumer in the region is relatively low.
However, Chinese consumers visit such restaurant because they are considered
trendy socialization spot.

This perception attracts them to such restaurants despite them being relative
expansive than local restaurants. With an increasing number of middle class
McDonald opted to open more restaurants in the city and later diversify to
Shanghai and other city where this class of citizen was growing (Han, 2008; Ko &
Woo, 2008).

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McDonald Localization approach

Traditionally, McDonald always opts to apply its American strategy in all the
international markets it has expanded to. It usually aims to apply the
competencies it has acquired from operating in its US home market.

Whether it is venturing into a foreign market through franchising or any other

strategy, it expects the new restaurants to replicate the strategy being applied in
the home market hence enjoy similar success in the new market.

By operating in America, McDonald had gained competency associated with

Input standardization and cost reduction. If these competencies are applied in
foreign markets, managers in McDonald believe the organization will surely
succeed (Hoskisson & Alon, 2007).

The diversity between China’s culture and that of the western countries
particularly America was expected to pose a challenge to McDonald localization
strategy.

Differences ranged from the type of food to the method of enjoying the meal. For
instance, while in Chinese food is served and eaten in a communal manner, the
western style and by default the McDonald one, is less communal. However the
changing perception of Chinese people created conducive environment for the
company to apply its localization strategy.

At the time, Chinese associated the western culture with feeling of progress and
development, feelings that they highly regarded. McDonald was highlighted in the
media as providing clean and attractive dining environment. Moreover, its
products were highly considered fresh, a factor many Chinese consider
equivalent to modernity (Hoskisson & Alon, 2007).

While operating in the Global arena, overcoming issues such as economic and
social-cultural issues is not always an easy task (Morgan, 2008). McDonald and
its main competitors from the western countries quickly discovered this.

For instance, there was a certain important group of consumers who did not pay
close attention to McDonald and its closest rival efforts. During traditional
celebration, the full length of the cultural difference was observed, whereby these
restaurants remained empty.

With the initial hype surrounding American fast food fading, it was time for the
managers to adopt an approach that would prevent it from loosing important
revenue. In order to avoid losing its strategic identity completely, McDonald opted
to blend the American culture with that of the Chinese people.
The process involved, redesigning their facilities to suit the local people there.
Their products included the traditional Chinese cuisine and selling chicken which
was considered a favorite of the Chinese people as oppose to McDonald beef
burger signature (Hoskisson & Alon, 2007; Ko & Woo, 2008).

Global Expansion Strategy

The preferred strategy of expanding either locally or globally by McDonald is

franchising. An approximate 70% percent of its foreign outlets are operated
through franchise; as a result it has gained prominent recognition as the world
leading franchising company (Ko & Woo, 2008).

To maintain its reputation of highly standardized food production procedures and

effective management technique, McDonald usually insists for its franchise to
operate using the corporate strategy designed by the head company.

Similarly, before allowing one to operate as its franchise, it has to ensure the
interested party meets certain conditions. To begin with, the party must be
adequately funded to cater for the, franchising fee, supplier, and other operating
cost.

Secondly, the company adequately trains them to ensure they can easily apply
the recommended business, marketing and operation strategy. The training also
aims to equip the franchisee with skill necessary to ensure the required quality
standards, which are in line with its Quality, Service, Cleanliness, and Value
(QSC &V) philosophy, are maintained.

McDonald is obsessed with maintain its strong brand through its franchises to a
point whereby they chose the location where the franchisee will be located.
Normally they will develop this location, fully designing the exterior to meet their
standard and requirements. The franchisee, through the guidance of the
company will have to complete the interior details (Peng, 2005)
Franchising was not possible in the case of China. The country had no
franchising laws at the time McDonald was venturing into it. Even with the
introduction of the first franchise regulation in 1997, McDonald still faced legal
restriction which prevented it from adopting its preferred strategy.

This was due to the fact that the regulation was designed to cater for only
domestic companies. However, at the end of 2004, China opted to prove that to
the world trade organization that it is sufficiently committed and hence enacted
the first legal structure that applied to foreign franchisors (Peng, 2005; Ko & Woo,
2008).

Developing through Strategic Alliance

Before actually opening its first operation in China, it is alleged that McDonald
conducted a 5 years research. Possibly as result of the research it established
that strategic alliances would be the most appropriate strategy of expanding into
the market. Therefore its first operation can be highly credited to a joint venture
partnership between the organization and General Corporation of Beijing
Agriculture, Industry, and Commerce (Peng, 2005).

A joint venture involves creating a new business entity and therefore the two
partners share ownership. Each firm in the partnership hopes that the other will
bring to the table a complementary strength that will help it achieve its goal
effectively (Dess, Lumpkin & Eisner, 2009)

In this case, McDonald was motivated to enter into a relationship with the entity
for very specific reasons. To be precise, it intended to improve its relationship
with department of agriculture and therefore gain easy access of purchasing
agricultural product in the country.
In China, one must seek an approval from the department of agriculture before
purchasing this produces; at times, the process can be tedious and time
consuming, a barrier McDonald aimed to eliminate through the joint venture.

Its partner was not only well positioned to enable McDonald easily acquire its
produce but also provided efficient distribution channels. For instances, it gained
access to a network of suppliers, food processing manufacturers and Chinese
farmers (Ko & Woo, 2008).

In the US market, McDonald success rate increased after it opened its first drive-
through outlet. Generally, this type of restaurant would allow car owners
purchase their favorite McDonald products while on the go. Considering the
operating environment in China, especially the franchise law, McDonald
concluded that are cooperative strategy would be the most appropriate (Peng,
2005).

A complementary strategic alliance is one form of cooperative strategy; it

involves partnering (cooperating), with another party in order to acquire a certain
advantage that a firm on its own can not acquire. Usually a firm can either adopt
a vertical or horizontal complementary strategy.

In a vertical complementary strategy, the partner in the strategic alliance will

apply their capabilities and resources at two different level of the value chain. On
the other hand, the latter one involves the firm applying their resources and
capabilities at the same level of the value chain (Morgan, 2008; Peng, 2005).

McDonald adopted a vertical complementary strategic alliance in its drive-

through outlet. In China, it entered into such an arrangement with China major
petroleum companies. Such a partnership would allow McDonald to capitalize on
the favorable changing economic environment. The rapid economic growth in
China meant that the middle class was expanding rapidly.
Similarly, the rate of car ownership in the country was consequently increasing;
actually this country vehicle market had grown to be the second largest in the
world. This in turn created an opportunity which McDonald could not afford to
overlook. With its strategic partner, China Petroleum and Chemical Corp, owning
over 30,000 gas stations, the company would be well positioned to establish an
approximate 100 new outlets annually (Peng, 2005).

Similarly, the social-cultural lifestyle of the Chinese, especially the teenagers and
young adult, was progressively changing to appreciate the western nightlife and
foods.

Consequently this created an important consumer segment. With the strategic

alliance in place, selling to this segment was made relatively easy since the drive
through would allow for 24 hours operation. Halfway through 2007, almost 50%
of McDonald restaurant in China were operating for 24 hours. Majority of these
restaurants were from the southern China (Ko & Woo, 2008).

The lifestyle changes also included the adoption of internet shopping by the
younger Chinese generation. Again, McDonald considered strategic alliance as a
suitable response to these developments. Therefore a well established strategic
partner was chosen. Taobao.com was the partner of choice due to its ability to
reach the targeted internet users consumers. This online company was a
subsidiary of alibaba-a Chinese e-commerce company-partly owned by yahoo.

Its popularity in the region enabled McDonald to quickly and effectively promote
its products. Ko & Woo (2008) cites that this partnership increased McDonald
online presence to surpass all of its direct competitors. However, the major
hurdle in the arrangement was the fact that it did not allow for consumer to
directly place buy orders online.

Global Competition
Apart from the political, economical, legal, social-cultural, technology and Legal
(PESTLE) factors that might affect an organization, the managers of the MNC
must seriously consider the type of competition it expects to meet in the foreign
market. Therefore improving its competitive position should be at the top of its
priority list.

This it can achieve by gaining sufficient knowledge of the market it plans to

penetrate, establish beyond reasonable doubt that the sales prospects in the
targeted market are favorable, and also familiarizing itself with the laws,
procedures, and protocol to be followed while operating in the new market
(Morgan, 2008).

Arguably, the five years McDonald spend researching China was meant to
investigate this factors. It is in the process that it discovered franchising as global
strategy was not applicable in this market and therefore the other viable option
was strategic alliance, joint ventures to be specific (Peng, 2005).

Although choosing the right entry level strategy is a step in the right direction,
beating an existing competition and staying relevant in the market over a long-
term period requires extra effort. A competition already operating in the market
might enjoy various advantages over the new entrant.

Such advantage might be knowledge and experience on consumer preference.

Such a case was experienced by McDonald. Although it has been relatively
successful in China, beating its biggest rival, Kentucky Fried Chicken (KFC), to
emerge the industry leader in the market has proven to be an uphill task (Ko &
Woo, 2008).

McDonald versus Kentucky Fried Chicken

KFC is another giant American fast food retailer. Despite it striving to outdo
McDonald, the latter has always emerged the winner in most markets where the
two have fiercely competed.

For instance, in the American market McDonald sales performance in 2003 was
approximately $ 20 billion whereas that of KFC was a mere $ 5 billion dollar
(Hoskisson & Alon, 2007). The situation has been replicated in many other
markets whereby the latter has emerged as the stronger of two, opening the
highest number of branches and enjoying relatively higher sales and consequent
profits.

On the contrary, the situation in China has been quite different. KFC, in this
unique and cultural diverse market, has managed to outclass McDonald. As of
2004, it had opened an approximate 1200 branches and enjoyed sale worth $ 9.3
billion. McDonald on the other hand had only 600 restaurants nationwide while it
enjoyed relatively lower sales volume amounting to only $ 5.3 billion (Hoskisson
& Alon, 2007).

KFC appeared to have a better understanding of the Chinese market than its
rival McDonald, and probably this is why it has been able to outshine it.

While McDonald was not quick to identify the opportunity presenting itself in the
Asian market, as more Chinese preferred the western style, KFC capitalized on
it; venturing into the market in 1987, 3 years earlier than McDonald. This gave it
the first mover advantage. Apart from this advantages evidence point out that
KFC localization strategy has been superior to that of McDonald. The first
indication of this is evident in the product focus of the two organizations.

While McDonald insisted on its standardization approach, selling beef burgers

which had achieving tremendous success in the markets which it had expanded
to, KFC sold chicken. Generally the Chinese people prefer chicken than beef;
however, KFC went an extra-mile to prepare their chicken in a customized way
that was appealing to most Chinese people (Hoskisson & Alon, 2007; Ko & Woo,
2008).

Positioning for Greater Global Competitiveness

A firm cannot formulate and adopt strategies and approaches that will aid it
achieve competitive advantage, unless it first establishes its position in the
market. A firm can either be an industry leader, challenger, or follower. By
establishing its position, it can adopt an approach that will ensure it not only
attain a preferred market position but also maintain it.

Important to note is the fact that each position might probably require a different
strategy. For example a market leader might choose a defense strategy while on
the other hand; frontal attack strategy might be the most suitable one for the
challenger (Morgan, 2008)

The business model of a challenger should be robust and flexible enough to

allow easy alteration of the tactical choices. The ideal situation is when the firm in
question has a favorable cash flow and relatively strong balance sheet. A firm
that does not enjoy such a situation can opt to cut down on cost and/or
restructure its business. Also, it can opt to acquire resources, capabilities and
assets that can help it compete against the industry leader effectively.

Various approaches can be used to achieve this. One way is hiring talented
manpower. Another notable way of achieving the needed competitive strength is
acquiring strategic partner. Also very effective approach is introducing a new
range of product that has the potential of appealing to the target consumer.

A market challenger can borrow a leaf from the market follower approach and
hence produce products which are similar to those of the leader. However, it is
important to note that the challenger while selling the new ‘copied’ products
should equally promote its indigenous one (Morgan, 2008).
McDonald Response to KFC Competition

All indications points out, McDonald is not the industry leader in the China fast
food industry. Due to the mention reasons, among others, this position has been
hold by KFC. Nevertheless, the fact that McDonald has become accustomed to
being an industry leader in almost every market that it has penetrated, has forced
it to fighting relentlessly.

Moreover, the two competitors target a similar consumer segment, therefore

emerging as the industry leader is very vital for either of the competitor.
McDonald at the moment has reluctantly assumed the market challenger
position, while working tirelessly to become the industry leader (Hoskisson &
Alon, 2007; Han, 2008).

As expected of an industry challenger, McDonald has adopted various strategies

that aim at strengthening its stronghold. In some cases, its approaches had led to
the questioning of whether it is actually applying market challenging strategies.
Various elements in its response suggest that it is settling for market following
approaches.

Nevertheless, its first notable response was observed through its marketing
campaign. In 2003, it launched its marketing slogan “I ‘m lovin’ it. This clearly
indicated that McDonald was fully ready to incorporate the needs of its
consumers in this market. The campaign portrayed the high value McDonald held
on its business and consumers.

Considering that its consumers preferred it because they considered it to be

trendy, the campaign captured this element. It aimed to include all the factors its
consumers considered popular. A case in point was hiring the popular Chinese
singer and international artists to promote its brand image (Ko & Woo, 2008;
Peng, 2005).
As mentioned earlier, one factor that has always reduced the competitive edge of
McDonald in China is its overemphasis in selling beef burger while neglecting
chicken, which has always been a favorite of the Chinese people. This has
however changed as McDonald has incorporated chicken products in its menu in
a bid to increase its market share.

It has localized its ingredient to produce product range which are similar to that of
KFC therefore offering are more direct competition. Despite these efforts, reports
show that the Chinese consumer is largely attracted to this restaurant due to their
western style.

Therefore apart incorporating Chinese meal in their ingredients the firms should
establish which western culture their customers find appealing and incorporate
them in their operation. Up to this end, McDonald appears to be in the direction
(Peng, 2005; Hoskisson & Alon, 2007; Ko & Woo, 2008).

Apart from China’s legal requirement, one of the other main reasons McDonald
has entered into a strategic alliance partnership is to acquire the necessary
capabilities, resources and assets, which as mentioned earlier, are very
important in aiding market challenger overtake the market leader. As indicated,
KFC has beaten McDonald in terms of the number of restaurant outlets it owns in
China.

Nevertheless, analysis points out that this is not a major concern for McDonald
since its business model and expansion strategy is quite different. While KFC
targets to expand by 300 restaurants a year, McDonald aim is to expand by only
a 100. However, McDonald is counting on its alliance with largest petroleum
company to provide it with a competitive edge.

The partnership will ensure that the outlets opened are drive-through, a strategy
that has always provided this company with overwhelming success. McDonald
strategic managers felt they had an upper advantage over KFC since the latter
one has limited number drive through outlets (Peng, 2005)

To increase its chances of emerging the top in China, McDonald has to address
directly the health concern issues associated with its products.

This problem is not only rampant in China, but also in other markets where the
organization operates. Reports from health organizations have associated fast
food with various social health problems. For instance, fast foods are credited to
be the number one reason of causing obesity in children; an important segment
of McDonald consumers.

To worsen the situation further, medical evidence points out that regular
consumption of fast food can lead to certain types of cancer. These
developments have made McDonald succumb to competition. In China, health
conscious customers who previously preferred McDonald are quickly switching to
KFC. Various KFC marketing campaign have portrayed it as the alternative
healthy option.

Moreover its range of products, such as mashed potatoes as opposed to fried

ones, is considered healthier. Despite the challenges McDonald is slowing
playing catch up by increasing its range of products to include salads among
others. These efforts are directed towards the health conscious customers (Han,
2008) (Han, 2008).

Conclusion

The reduction of the barriers to international trade opened the doors for many
organizations to compete globally. One such company is McDonald.

In almost every market that this firm has expanded in, it has achieved
tremendous success. These achievements have been credited to its franchising
strategy, which is its preferred method of expanding. However the situation in
china was different. The country did not have proper legal structure that could
allow china utilize its familiar method.

Despite re-strategizing and adopting joint venture as an entry level strategy,

dealing with its rival KFC proved difficult. Nonetheless, it’s the hope McDonald
manager that its alliance with largest petroleum company would result in the
desired goal.

References

Dess, G., Lumpkin, G., & Eisner, A. (2009). Strategic Management: Text and
Case. New York. MC Graw Hill.

Han, J. (2008). Business Strategy of McDonald’s. International journal of

Business Management, 3(11), 72-74.

Hoskisson, M., & Alon, N. (2007). Localisation strategy: The Case of McDonald
and KFC in China. Strategic Management Journal, 6(9), 121-45.

Ko, S., & Woo, H. L. (2008). McDonald’s: Is China Lovin’ It? Harvard Business
Review, 1-14.

Morgan, K. (2008) Globalization, and Strategic Management Issues. London.

Palgrave.

Peng, M. (2005). Evaluating Entry Level Global Strategy. Oxford. Blackwell.