International Business Strategy on McDonald – Case Study

International Business Strategy

Outline

1. An Executive Summary
2. An Introduction
3. SIB components
4. A Conclusion
5. Recommendation
6. An analysis of the implications
7. A Reflection

1. An Executive Summary

The identified challenge that McDonald faces while entering the Vietnamese fast food market is setting up an efficient food distribution and refrigeration network that extends into second-tier cities. The proposed strategy to the challenge is to develop its own food distribution and refrigeration network that extends into second-tier cities with the aim of creating a competing space in addition to expansion and increasing its market share. The major challenges and issues faced by managers in the international environment are such as cultural and language barriers, meeting the demand and tastes of the local consumers, and extra costs in hiring experts and skilled employees. It is recommended that McDonald implement its strategy is phases and using the already existing structures. The implications of the strategy are such as increased costs, loses, high level of competition from rivals, and limited resources, and human capital necessary to successfully undertake the task in the set timeframe.

2. An Introduction

The report paper is based on McDonald’s, which is the leading fast food restaurant in the world. Despite its expansion capabilities in emerging markets in Asia such as Vietnam, the company is faced with some challenges ranging from logistics to meeting the preferences and tastes of the local Vietnamese consumers. The first activity entails the identification of a relevant and important business challenge that has the potential for making a difference to the company. This is followed by analysis of McDonald’s external environment and internal basis of competitiveness to derive suitable strategic options. The second part of the report is based on the international business perspective, which identifies some of the challenges and issues faced by managers in the international environment. Recommendations, conclusion, and implication of the recommendations as well as a reflection are also provided at the end of the report.

The challenge and the rationale for selection

Vietnam’s first McDonald’s restaurant was opened in February in downtown Ho Chi Minh City. This is a late entry in the Vietnamese fast food market, although the market is lucrative and has potential for new entrants. Even though the Vietnam’s fast-food market is far from saturation, the core strategic challenge faced by McDonald’s is “establishing an efficient food distribution and refrigeration network that extends into second-tier cities” (Ives 2014). The implication made is that the management of McDonald’s is faced with the challenge of setting an efficient food distribution and refrigeration network that can be used to supply food into second-tier cities, which hinders the expansion of the company. Since the identified challenge faces multinationals planning to expand in Vietnam, it then implies that this is a central problem. Therefore, developing an efficient and reliable distribution and refrigeration network shall create a unique competing space, thus creating opportunities to deliver superior value to its consumers (Mintzberg, 2007; Porter 1985).

Food distribution entails the transport of food to the targeted consumers, and inefficient food distribution and refrigeration network would ensure that McDonald’s does not meet the market demand. Protection of fast foods in terms of refrigeration during transport is vital to McDonald’s. To meet demand and provide quality food, food in transit is kept in temperatures that hinder spoilage through efficient refrigeration freezers and systems. Moreover, the distribution and refrigeration network should be effective and efficient to make sure that its products reach consumers in second tier cities. Therefore, unless there is a well established and efficient food and distribution and refrigeration network, the strategic goal for McDonald’s to expand its operations in other cities in Vietnam shall remain a dream.

The challenge identified is a threat to the expansion of the company to other parts of Vietnam. As such, the company shall lack a competitive advantage over its competitors such as KFC, and Lotteria which have 134 and 50 outlets in Vietnam respectively (Abiri, 2012). Therefore, to gain a market share and compete favorably with its rivals and competitors, McDonald has to deal with the challenge of food distribution and refrigeration network that links Ho Chi Minh City to second-tier cities in Vietnam. The challenge has to be solved for McDonald’s to the new opportunities related to demand for new menus in fast foods by the Vietnamese’s consumers, in addition to supplying its superior products into second tier cities. Thus, setting up an efficient distribution and refrigeration channel has the capability to create a competitive advantage through superior value delivery, enable expansion to second-tier cities, increase McDonald’s market share and presence, and provide quality products to its consumers, hence high profits (Collis & Montgomery 2008).

 VALUE PROPOSITION

The diagram below as adapted from Drucker (1994) is the value proposition framework, depicting the major inputs to the value proposition.

Figure 1: Value proposition framework

McDonald’s External Competitive Context

Opportunities:

The Vietnam’s fast-food market though competitive is not saturated, which is an opportunity that McDonald’s can capitalize on to expand its operations in the lucrative fast food market (Ives 2014). Thus, the Vietnam fast food market is huge. The existence and thrive of other fast food restaurants in Vietnam such as KFC, Pizza Hut, Yum Brands, Dunkin’ Donuts, and Baskin-Robbins among others is advantage for McDonald because it has the opportunity to enjoy from large economies of scale.

The data from the case study show that majority of the 90 million populations especially the young have insatiable curiosity for foreign culture and cuisine such as K-pop and kebabs, and the opening of McDonald’s first outlet is timely (Ives 2014). This is supported by Truong et al. (2012) views that Vietnamese consumers have changed their lifestyles and showed increased interest in Western foods. Vietnam has a big population of 90 million people which is appealing. McDonald’s restaurants in Vietnam shall be filled with parents watching their children enjoy foreign cuisine, which is perceived by the old as modern and positive (Ives 2014). The implication from these findings is that McDonald has a ready market that it can capitalize on. The Vietnam government provides a conducive business environment through efficient franchising regulations for fast food operators. From the numerous opportunities provided, it means that it is profitable for McDonald’s to enter a market that is not saturated, despite the challenge it faces.

Threats

The major threat that McDonald faces while establishing and expanding its operations is competition for existing rivals such as KFC, Pizza Hut, Lotteria , Popeyes, Pizza, Burger King, Domino , Yum Brands, Dunkin’ Donuts, and Baskin-Robbins among others. Other than logistics challenge, lack of efficient food distribution and refrigeration network threatens the goal by McDonald’s to satisfy the special taste and preferences of Vietnamese consumers (Ives 2014). The poor terrain and climate threatens the ability by McDonald to create and offer superior value to its consumers located in second tier cities.

McDonald’s Internal Basis of Competitiveness

The evaluation of the internal basis of competitiveness, the strengths and weaknesses of McDonald are evaluated to determine whether the company can create and deliver a superior value (Porter 1990).

Strengths

Over the years, McDonald has developed a strong brand and brand equity, which makes it the number one fast food company in the world. Moreover, the company has over 30,000 outlets in more than 100 countries. As a market leader, its global brand recognition is more likely to create appeal to the young Vietnamese consumers (Ives 2014).  Other strengths are such as a market share of 20 percent in the fast food industry, and the ability to provide a variety of fast food choices for consumers to select from. As the market leader, it implies that McDonalds has adequate financial capability to set operations and address the challenge it is currently facing thus creating a competitiveness space.

Weaknesses

Based on the case study, McDonald’s foods are tasty but expensive. A competition with already established fast food restaurants in Vietnam is more likely to force consumers look for cheaper brands. McDonald’s replicates the same menu it has in other markets, which affect its operations if duplicated in Vietnam.

PESTLE Analysis

PESTLE analysis is made of (political, economic, societal, technological, legal, and environmental factors.

Political-legal factors: Vietnam other than being a stable and developing nation, the government has made it easy for investors through relaxed legal requirements and regulations. However, Vietnam regulations and laws are vaguely written, which gives local officials the change to assist or delay an investor.  In reference to McDonald’s the company has Mr. Nguyen who can easily negotiate on its behalf.

Economic factors: The case study further shows that a report provided by the Euromonitor International in 2012 predicted a service industry growth from $383 million in 2010 to $670 million in 2015. The prediction is good news to McDonald as it shows that Vietnam is a developing economy with a potential market. Moreover, inflation in Vietnam has stabilized, meaning that food products have reduced coupled by cost of operations. The estimates by the World Bank indicate that Vietnam’s per capita income increased to $1,550 in 2012 from $1,000 in 2008 (Ives 2014). This means that individual income has increased and the economy stabilized, which from an economic perspective means the market is appealing.

Social factors: Vietnam is characterized by a change is eating patterns of young Vietnamese. For example, demand for foreign cuisine is more likely to appeal to young Vietnamese consumers (Ives 2014). Besides, the country has a big population that can be targeted by McDonald’s. However, there is a challenge of meeting the demand of the local people provision of special taste of Vietnamese consumers.

Environmental factors: The major hindrance is poor terrain that makes it hard to establish an efficient food distribution and refrigeration network that connects to second-tier cities.

VRIO (Valuable, Rare, Imitable, Organization) Model

The VRIO (valuable, rare, imitable, organisation) framework presents an alternative means that can be adapted to assess the competitive means of evaluating the competitive impact of a resource or capability (Barney & Hesterley 2006).

Figure 2:  VRIO framework for assessing competitive impact of resources and capabilities

Source: Barney and Hesterley (2006)

This model is applied when entering new markets, because a company evaluates the capabilities and resources that generate advantage in one market but may be hard to replicate in another new market. When the resources and capabilities meet the VRIO requirements, then a competitive advantage is sustainable in new markets (Barney & Hesterly 2010)

Valuable: McDonald has a high value in respect to its brand image and resource exploitation in the last years showed in the establishment of restaurants in more than 100 countries (Ives 2014). Moreover, McDonald has brand reputation for quality, customer service, and innovation.

Rare: McDonald resources are rare and valuable as indicated through its strong brand and presence in over 100 countries.

 Imitable: Raw materials used in fast foods are similar, which makes it to duplicate products. Moreover, there exists close substitutes, which are cheap for normal Vietnamese. Although it is easy to imitate the product aspect of McDonald, it is hard for competitors to achieve its functionality.

Organization: McDonald is well organized to exploit new markets based on the available resources in the Vietnamese market. So far it has showed its organization capabilities by entering into a contract with Henry Nguyen as developmental licensee. The figure below is the VRIO Framework for McDonald.

Based on the evaluation, McDonald has a sustained competitive advantage, because it the company exploit its current resources and capabilities advantage into the Vietnamese market. McDonald is well organized to fully exploit its advantages, whilst the cost of imitation of other firms is greater than the benefit of imitation.

Strategic Solutions

There are three strategic options that McDonald can adapt to solve the challenge it faces. These are (a) collaboration with other stakeholders to establish an efficient food distribution and refrigeration network, (b) establish its own food distribution and refrigeration network that connects to second-tiers cities, and (c) depend on third party provider that provides food distribution and refrigeration network. The most effective option can be determined through the use of AFD (appropriateness, feasibility and desirability) framework provided in figure two below

Figure 3: Appropriateness, Feasibility and Desirability Framework for Strategic Option Evaluation

Adapted from Thompson and Martin, (2010)

As indicated in the AFD framework, each of the elements of the appropriateness, feasibility and desirability, which are considered before the effective strategy, is chosen. The figure below provides a semi-qualitative evaluation scheme with weights of the criteria and each options scoring as advised by Thompson and Martin, (2010).

Based on the evaluation, the most appropriates strategic option is option (b), which advocates for the establishing own food distribution and refrigeration network that connects to second-tiers cities,

3. SIB Components

One of the key economic activities carried in international business is international trade. The major market entry methods used by McDonald’s while entering new markets is franchising (Peng 2013; Pan & Tse 2000). In regard to its entrance in Vietnam, franchising was used where Henry Nguyen shall be the developmental licensee and representative in Vietnam (Ives 2014).

Macroeconomic Analysis

Vietnam has a stable GDP, stable prices, and corruption-free environment, which has made it become a preferred location for FDIs.  Vietnam as a state enjoys economic liberalization, since it has moved towards economic and political ideologies that give emphasis to markets (Narula 2003). For example, Vietnam restructured its economic and political systems since the end of the Vietnam War in 1975. Besides, its laws and regulations are politically and economically friendly, which is an advantage for McDonalds.

Managerial Challenges

There are range of challenges that managers are bound to face during and after establishing business operations in Vietnam. These challenges are namely environmental, culture, and ethics among others. For example, it shall be a challenge for McDonald’s managers to provide local cuisine that meets the preferences, needs, and wants of the local consumers (Ives 2014). Moreover, infrastructure is a major challenge (Arnold & Quelch 1998) since based on the case study logistics and establishing an efficient food distribution and refrigeration network that extends into second-tier cities (Ives 2014). Findings a place which is cheap is hard to find because of the high level of competition in the location sites for business establishments. Vietnamese have different culture, which means that managers are likely to face language and cultural barriers.  As such, extra costs are required to train employees and hire professional to redesign their menu. So as to provide local cuisines, the management may be required to import raw materials and supplies form neigbouring countries, which may be expensive

4. A Conclusion

The report is based on McDonald’s which has recently established a fast food restaurant in Vietnam. The major challenge identified in the case study is setting up an efficient food distribution and refrigeration network that extends into second-tier cities. Based on the analysis, developing an efficient and reliable distribution and refrigeration network shall create a unique competing space, thus creating opportunities to deliver superior value to its consumers. Moreover, it is after the challenge is addressed that McDonald’s strategic goal to expand its operations in other cities in Vietnam will be realized.  Setting up an efficient distribution and refrigeration channel is vital as it creates a competitive advantage through superior value delivery, in addition to enabling expansion to second-tier cities. As a result, McDonald’s market share and presence shall be increased and hence high profits. Internal and external competitive analysis has showed that McDonald strong brand and brand equity supported by adequate financial capability, shall ensure that its operations and the challenge it is currently facing is addressed thus creating a competitiveness space. Based on PESTEL analysis, the major challenge faced is meeting the demand of the local people provision of special taste of Vietnamese consumers. To address the challenge of setting up an efficient food distribution and refrigeration network that extends into second-tier cities, the selected strategy is to establish its own food distribution and refrigeration network that connects to second-tiers cities.

Over the years, Vietnam has created a favorable environment for MNEs to establish operations in the country. As a key member of World Trade Organization, Vietnam has overhauled some of its laws and regulations that did not meet international standards. Because of stable GDP, stable prices, and corruption-free environment, Vietnam has become a preferred location for FDIs. Other macroeconomic policies and measures adopted by the Vietnamese government are such as relaxing its laws and simplifying administrative procedures related to importing and exporting and ensuring easy tax payments. Major managerial challenges faced when operating a business in foreign and international market are such as cultural and language barriers, increased expenses and costs, and inability to provide fast food that meets the demands and needs of the local Vietnamese young consumers.

5. Recommendation

McDonalds should use its resources and capabilities to address the identified challenge. This can assist in developing a unique competing space by offering value that meets customers’ needs in a way that its competitors cannot. Through the establishment of efficient the transportation and refrigeration networks McDonald shall nurture and expand its unique market position (Tovstiga 2013; Tovstiga 2010). It can exploit new opportunities such as presence of unsaturated foods in Vietnam, which is relative to its customers by meeting customer needs such as need for Western fast foods at affordable prices in all second tier cities.

McDonald can also capitalize on Firm Specific Advantages (FSA) such as strong brand and resource capabilities and Country Specific Advantages (CSA) such as cultural factors like demand for foreign fast foods by younger generation, reduced inflation, increased income, high GDP, and relaxed rules and regulations. As such, McDonald shall have a competitive advantage over domestic competitors when it produces fast food that is demanded in Vietnam by local consumers. CSAs that McDonald can capitalize on to create a competitive advantage are Vietnam’s large and growing domestic market, Vietnam’s stable economic and political environment, Vietnam’s and abundant, young population, and government’s commitment to economic reforms, which make it attractive to foreign companies.

Though a cost venture, the fast food giant can first collaborate with existing competitors and other stakeholders to reach second tiers cities. Moreover, the company can take phases while establishing the transportation and refrigeration networks because internationalization depends highly on international and national contexts. While entering a foreign market, McDonald’s can use Peng’s comprehensive model. Some of the considerations are such as rivals, entry barriers, bargaining power of buyers and suppliers, and substitute products (Peng 2009). Others are such as value, rarity, and imitability (Peng 2009).

6. An analysis of the implications

Establishing an efficient food distribution and refrigeration network that extends into second-tier cities shall ensure that McDonald expands its operations, in addition to increasing its presence in the Vietnamese fast food market. Moreover, the company shall provide its products in specified time frame to its targeted consumers, thus improving on profits and revenues. However, some of the obstacles that McDonald’s may face while implementing the strategy is costs, limited resources, and human capital necessary to successfully undertake the task in the set timeframe. The company also faces competition and rivalry from existing companies, in addition to consumer preference of local fast foods. Presence of close substitutes and imitation of food menus by local fast food restaurants has the capability to make McDonald run for its money and experience losses.

7. A Reflection piece

Internationalization is a complex process that requires comprehensive measures and actions to prevent business failure (Peng 2011). Therefore, I have learned that it is always imperative to undertake an internal and external environment analysis to determine factors that have direct or indirect influence on establishment of MNEs. This is achieved through the use of strategic frameworks such as SWOT analysis and PESTEL analysis. It is through SWOT analysis that is used to articulate an effective strategy that matches the weaknesses and strengths of an organization to the threats and the opportunities met in the organization’s environment (Porter 1980). Subsequently, it becomes easy to create and develop a competitive space, which gives a company a competitive edge over its competitors.

References List

Abiri, A. A. (2012) McDonald’s in Vietnam, viewed 28 May 2014, <www.scribd.com/doc/95660907/McDonald-s-in-Vietnam>.

Arnold, D J & Quelch, J A. (1998) Vietnam: Market entry decisions’, Harvard Business School, pp. 1-13.

Barney, J B & Hesterley, W S (2006) Strategic Management and Competitive Advantage. Upper Saddle River, NJ: Pearson Prentice Hall

Barney J.B. & Hesterley W.S, (2010) Strategic Management and Competitive Advantage concepts and cases, 3^rd edition,  Pearson:Prentice Hall.

Collis, D J & Rukstad, M G (2008) ‘Can you say what your strategy is?’,  Harvard Business

Review, vol. 86, no. 4, pp. 82–90

Drucker, P F (1994) The theory of the business. Harvard Business Review, Sep/Oct, 95–104

Ives, M (2014) ‘McDonald’s Opens in Vietnam, Bringing Big Mac to Fans of Banh Mi’, The New York Times, February 7, p. 1.

Mintzberg, H (2007) Tracking Strategies. Oxford: Oxford University Press

Narula, R (2003) Globalization and Technology. Cambridge: Polity Press

Pan, Y, & Tse, D 2000, ‘The hierarchical model of market entry models’, Journal of Business Studies, vol. 31, pp. 535-554.

Peng, M W 2011, Global business ,  South Western Cengage Learning, Mason

Peng, M W 2013,  Global Startegy , Cengage Learning, Mason.

Porter, M 1980, Competitive Strategy, Free‐Press

Porter, M E (1985) Competitive Advantage. New York: Free Press

Porter, M E (1990) The Competitive Advantage of Nations. New York: Free Press

Thompson, J & F Martin (2010) Strategic Management: Awareness and Change, 6th ed. London: Thomson.

Tovstiga, G (2010) Strategy in Practice – A Practitioner’s Guide to Strategic Thinking, Chichester: John Wiley & Sons

Tovstiga, G (2013) Strategy in Practice, 2nd ed. Chichester: John Wiley & Sons.

Truong, M. D & Bennett, L. (2012) Vietnam Food Service– Hotel Restaurant.