Porter’s Five Forces Analysis of McDonalds

McDonald’s is an American fast food restaurant chain with its global headquarters in Oak Brook, Illinois. It has over 36,000 restaurants found in 120 countries all over the world, serving 68 million customers each day. It was founded as a barbeque restaurant in 1940 by Richard and Maurice McDonald. In the year 1955, a businessman Ray Kroc joined the company as a franchise agent and bought the company from the McDonald brothers. McDonald’s Corporation, incorporated in the year 1964, operates and franchises McDonald’s restaurants.

Porter’s Five Forces Analysis of McDonalds

A McDonalds restaurant is operated by a franchisee, an affiliate, or the McDonalds corporation itself. McDonalds primary products include burgers, french-fries, soft drinks, milkshakes, wrap and desserts. The company has also introduced different menus like salads, fish, smoothies and fruits in response to changing customer tastes in order to lock-in customers. McDonald’s is operating under a new organizational structure starting from July 2015, categorized into four markets based on similar characteristics, challenges, and opportunities for growth. The company segments include U.S. market, International Lead Markets, High Growth Markets and Foundational Market. The U.S. market being the largest in terms of number of restaurants, revenues and operating income; International Leads Market operating in Australia, Canada, France, Germany, and the United Kingdom which includes the most established markets with strong economies; the High Growth Market holding potential of higher restaurant expansion and franchising operates in China, Italy, Korea, Poland, Russia, Spain, Switzerland, and the Netherlands; while Foundational Market being the market which spans over the most diverse geographical area with potential to operate under a largely franchised model.

Porter’s Five Forces Analysis

The influence of the five force to McDonalds overall as follow below:

  • Bargaining power of buyers is high.
  • Bargaining power of suppliers is low.
  • Threat of new entrants is low.
  • Rivalry among existing competitors is moderate.
  • Threat of substitute products or services is moderate.
Competitive RivalryCurrently, the fast food industry is saturated and McDonalds faces tough competition from big names in the industry like Starbucks and Burger King. In case of McDonalds a few factors determine its force of competitive Rivalry. There exist a high number of fast food restaurants of various sizes like Subway, KFC, Nando’s that aggressively market their product and pose a threat to McDonald’s. In addition, customers of McDonald’s can easily switch to other restaurants. Thus, posing a threat to the firm. This shows that McDonald’s faces a strong force of competitive rivalry. However, McDonald’s has utilized technology effectively to lower cost of production by teaming up with Echelon corporation and using Echelon’s Internet server to improve their kitchen equipment to lower energy consumption and increase data efficiency. Hence, allowing McDonald’s to be cost leaders in the market. In Addition, McDonald’s has interactive kiosks that allow customers to order customized food according to their preferences. This has helped improve the firm’s relationship with customers and increasing the customer’s loyalty.
Buyer PowerFrom the Buyer’s power analysis on McDonald’s, it can be deduced that their customers possess a significant amount of power over the company. Customers can easily impose their demand on McDonalds because they can easily switch to other fast-food restaurants. Furthermore, customers have a variety of other fast food restaurants like subway and Wendy’s. In addition, there are other various substitutes to McDonald’s fast food, for instance, bakeries, food outlets, food cooked at home. McDonalds realizes that it has been behind its competitors like Starbucks and Dunkin Donuts in digital initiatives and customer reward programs. McDonald’s is working on a reward program that would improve their customer experience and customer loyalty and in return improve sales.
Supplier PowerThis element of porter’s five forces shows that supplier power is a minor issue to McDonalds. The weak bargaining power of suppliers is due to several factors. McDonalds has many suppliers to get their raw material and food supplies from. Hence, it weakens the effect of individual suppliers on the firm. In addition, most of its suppliers do not control the distribution network, therefore, they are not a threat to McDonald’s. Similarly, the abundance of materials like potatoes, flour and chicken weakens the power of suppliers over the firm. Therefore, McDonald’s does not need to concentrate more on the suppliers because they already have control over them.
Threat of New EntryPorter’s five forces also analyses new entries in the market as they can impact McDonalds’s market share. An analysis shows that McDonald’s faces a moderate force of new entry due to the following factors. Low switching cost to other fast-food providers means that customers can easily shift to the new entries. Also, the relative moderate cost to start a food outlet means that small and medium sized enterprises can easily establish a new restaurant. Nevertheless, McDonalds has invested a substantial amount of capital, time and resources to build its brand name, something which will be quite difficult for new entries to achieve. Thus, this element of the Five Forces analysis shows that the threat of new entrants is a considerable issue for McDonald’s. I recommend that McDonalds should continue applying technology within their company to set their firm apart from the rest and have that competitive advantage over companies that try to enter the fast-food industry.
Threat of Substitution

This element of Porter’s five forces concentrates on the potential effects of substitutes to the firm. It indicates that substitutes are a major concern to McDonald’s due to the following factors. There exist a high number of substitutes, including home food, local cafeterias and bakeries. In relation, the low switching cost means customers can easily switch to other food producers or fast-food restaurants. Furthermore, high performance-to-cost ratio means that customers can be offered more with less funds by the substitutes. For example, cooking home food is relatively cheaper as compared to ordering McDonald’s meal for five. However, with the help of Information technology, McDonald’s has provided services like wireless charging, introduction of table service after ordering from the kiosk and ordering kiosks at their restaurants in order to give more flexibility and convenience to their customers and increase the firm’s value. Moreover, McDonald’s is introducing remote drive-through ordering where the customer can order remotely when they are in their car. These unique services will help to increase the firm’s value to the customer and also their fast-serving food services and good hospitality will persuade customers to stick with McDonald’s.

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