Fast Food Essay
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Market and environmental analysis is an essential part of an organization’s External Analysis. The main objectives of a market analysis are; a)To determine how attractive a market is. b)To understand the dynamics of the market and amend strategies accordingly. Here we apply the dimensions of a Market Analysis to McDonalds corp. 1)Emerging submarkets; McDonalds failed to recognize the changing trend in customer’s preferences to better tasting, fresher food. This trend led to new sub markets emerging for tastier, fresher and fast food perceived as healthier.
A few of the smaller/privately owned competitors (Cosi and Quizno’s) were able to operate in niche markets selling gourmet sandwiches and salads. The emergence of smaller restaurants offering easy access to exotic foods such as sushi and burritos created a more specialized niche market. 2)Size and Growth; With the emergence of these sub-markets and niche markets, McDonalds started losing market share. It now had to share its fast-food mass market with these newly created markets.
Even though these restaurant chains were small in size, their growth opportunities presented a potential threat to McDonalds.
They operated on service that was better than McDonalds at the same time providing better tasting food, which led to an increase in its sales. This sector was in the early stages of growth where as McDonalds was past the maturity stage. 3)Profitability; McDonalds profitability can be gauged by using Porters 5 factor model. a)Intensity of competition among existing customers was relatively high. Direct competitors like Wendy’s and Chik-Fil-A were able to out perform McDonalds based on service quality by providing quicker service. In comparison McDonalds had a large number of franchises, but will falling service time.
b)Threat of new entrants: Other market niches like quizo’s, cosi and small restaurants offering exotic foods also provided a high degree of competition to McDonalds by offering food that appealed to changing customer preferences. The only barrier to entry that McDonalds used was to open a large number of franchises and offer an inexpensive menu; this is however changing as franchisees are leaving McDonalds, lowering the barriers to entry. c)Substitute products would include fast food options available in leading supermarkets, and cafe’s offering exotic foods like sushi. d)Bargaining power of customers.
Customers are the main source of income for McDonalds. Customers were not happy with the menu offered at McDonalds and hence took their custom to other restaurants, leading to a drop in sales. e)Bargaining power of suppliers: McDonalds aimed to keep their menu prices low (source more details about suppliers) 4)Cost structure McDonalds strategic focus was on cost and service. In order to raise service quality new kitchens were installed. However, this installation was done for some franchises that did not need it and where the new additions did not help improve business.
In order to keep the price of its burgers low, it asked the franchises to sell at a loss. Example: Promoting a $1 burger when the cost to make it was $1. 07. This lack in foresight resulted in rising costs to franchise owners who responded by leaving McDonalds and going over to competitors. This snowballed into falling investor confidence resulting in falling equity. Another cost issue was investing in too many takeovers which it couldn’t handle at the same time as improving service quality and revamping the menu. 5)Distribution Systems McDonalds distribution system was the large and growing number of franchises.
However not many of the franchises were posting profits and as per Exhibit 1, more than 500 would have to be closed. One of McDonalds strengths is its distribution system, where in customers come in and have the same experience that they have at any other store. However, this can also be a weakness as providing a consistent experience soon becomes ordinary. 6)Market Trends The fast food casual market was quickly breaking up into fragments. With the rising immigrant population customers now had a choice of items. McDonalds realize this too late and try to counter this effect by introducing new burgers.
However, the testing of the new menu does not gauge strongly enough the changing customer preferences and this poor planning led to its failure. Internally changing trends were also blindsided. Franchisees who were the closest to customers were not included in decision making and were thus disgruntled. Here was the need to change the management style from top-down to bottom-up. This would have solved some of the issues plaguing McDonalds, by providing data on what customers want and what products would have a greater chance of success.
7)Key success Factors McDonalds did have some strengths or key success factors; a)Large number of franchises that led to economies of scale. This however contrasted to the ‘small is beautiful’ concept of the niche markets. b)Complete training for franchisees to begin and run their own McDonalds proved to be a good team building exercise. c)Cost of food was low due to economies of scale and economies of size. Moreover, McDonalds was able to negotiate a reasonable price for high quality food products.
McDonalds failed to realize the changing trends in the casual fast food markets, as a result of which, a large part of the market share was taken over by existing brands like Wendy’s and new players like Panera bread co. The company also failed to acknowledge competition from the niche markets serving gourmet and exotic foods. This lack in analysis led to lowering of entry barriers for new entrants, loss of market share to competitors (Wendy’s, Chick-Fil-A. ), disgruntled franchisees, and a drop in sales leading to a fall in equity value. Environmental Analysis 1)Political:
2)Economic: 3)Socio-Cultural: There are three cultural forces that influence marketers: a) persistence of cultural values, b) subcultures and c) shifts in secondary cultural values. Of the three, secondary cultural values carry the largest influence on the fast-food market. When the market is interested in convenience, they are more likely to buy fast food; if the market’s secondary values shift and become interested in fitness and health, they will be less likely to buy fast food. (Monash university, 2006) The case shows this shift to gourmet and healthier foods.
4)Technological: McDonalds had begun to notice the importance of technology. The organization was looking at new technological solutions like ERP to improve their supply chain (Newman, 2002) 5)Environmental: 6)Legal:
References: Monash university, 2006, Briohny’s Report, Language and Learning Online, Retrieved on 06 May 2008. http://www. monash. edu. au/lls/llonline/writing/business-economics/marketing/3. 3. 2. xml Newman, K, 2002. McDonalds seeks closer electronic relations, iStart. com:Technology in business, www. istart. co. nz, retrieved on 06 May 2008. .