ES is applied through workshops and different steps for identification of issues, gaps and suggestions.
Step-1
McDonald's mission will be analysed, which is to become worlds best fast food restaurant with service, quality, value and cleanliness to make all customers happy. The goals are set in tune with the mission.
Step-2
Remote environment is scanned, while identifying the external stakeholders and their analysis using PESTE analysis.
PESTE analysis
Political stability and continuity of policies would boost the economy. The tax structure, environmental laws, employee laws, sexual discrimination act, Health and safety laws, Policies of EU like Trade descriptions act, food and drugs act and weights and measures act etc influence the McDonald's performance. The dominance of McDonald's in market attracts Monopolies and Mergers Commission (MMC). The UK government introduced the Real Estate Investment Trust (REIT) during 2007, which brings hotel ownership to the individuals may impact the franchisee relations. Smoking ban introduced in UK is likely to impact McDonald’s.
The overall economic situation including GDP growth rate, inflation and exchange rates would impact McDonald’s operations. UK recorded an impressive economic performance of 1.75-2.25% during 2008-09. The Bank of England raised rates to 5.25% in January 2007 and the inflation soured to 3%. Government proposed additional taxes amounting to a £1.8bn on alcohol, tobacco, petrol and vehicle excise. As a result the McDonald's restaurants in the UK, which are mostly franchises, would suffer. Similarly customers would also have to pay less to spend on luxuries like eating outside home because of additional taxes and high inflation.
McDonald's sponsored several social and charity programmes for the welfare of children and young people by providing scholarships. Ronald McDonald Children's Charities (RMCC) was set up in 1989. McDonald respected the local cultural values and introduced the products suitable to the local needs. The counters in Japan offer Teriyaki sauce Burger, while rice dishes are made available in McDonald Indonesia. In India Mc Donald replaced its Big Mac made of beef with Maharaja Mac made of mutton in respect of the religious believes of Indians. McDonald in partnership with the Environmental Defense Fund took out publications on environmental issues.
Quick adoption of new technological advancements and integration into the industry imparts competitive advantage. Recently McDonald’s launched Electronic Funds Transfer Point of Sale (EPFTPOS) machines in their restaurants (Annual report-2006, McDonald's). Kitchens have been computerized in outlets to facilitate speedy cooking to save servicing time. Sale of products by online has been promoted, mentioning the details of ingredients. McDonald’s has made some interventions towards ecological conservation like converting cooking oil as biodiesel, procuring organically produced milk and coffee only.
Step-3
Stakeholders of Task environment are analysed. The main stakeholders are customers, suppliers and competitors, whose analysis is done through Michael Porter’s five forces model.
Michael Porter’s five forces model.
Threat of new entrants into food retailing sector causes concern, the entry is easy as the investment is low and getting legal permissions is also easier. McDonalds encountered challenges from Burger King, KFC, Taco Bell, “Yum!” and Wendy; however the threat of new entrant of the scale of Mc Donald’s is less and McDonald’s also uses cost leadership strategy against new entrants.
Threat of Substitutes is due to the introduction of cheap substitute products into the market resulting in the decrease of industry’s attractiveness and profitability. McDonald's main competitors offered quality products at affordable rates. McDonald's effectively countered it by introducing ‘pound Saver Menu” in UK. McDonald's vigorous advertising campaign attracted the customers from moving away towards alternatives.
If the suppliers have a high bargaining over the management the industry’s profitability reduces. McDonald's adopted Backward Vertical Integration to the suppliers for reduced price and high quality and also developed a good supplier chain system, while nominating some of the suppliers to the board of directors. McDonald's had trained suppliers in social accountability and also developed partnerships with Coca Cola.
The bargaining power of buyers is greater when there are many outlets in the same area and offering similar competitive packages and industry is not able to satisfy the buyers (customers). The customer’s taste and choice dictate McDonald's products. However branding, low priced high quality food and advertising improve the sales.
The Intensity of Rivalry between existing competitors is strong if similar and several enterprises exist in the same operational area offering similar packages and that also leads to reduced rates and improved quality. The competition between McDonald’s and rivals KFC and Burger King is very strong, however McDonald’s market position is very strong.
Other external stakeholder’s analysis
Other external stakeholders that influence the organisational performance include unions, financial institutions, media, and local communities. Banks are the sources of capital investment. McDonald’s borrowing stood at $9.5 billion. McDonald's spent huge money of $1.6 billion on TV advertisements (Annual report-2007, McDonald's). But in EU, lobbyists started agitation against the projection of children in fast food advertisements and in Sweden and Australia a ban was already imposed. Hence McDonald’s needs to find alternative ways of publicity. With pro-union and employee friendly HR policies like Profit Sharing and Savings Plan McDonald’s employed 1.6 million people.
Step-4
Firm’s Internal Environment including human, financial and physical resources is analysed using financial analysis and SWOT analysis methods.
Human resources analysis should be carried out at all levels. McDonald’s conducts systematic trainings and their evaluation. McDonald’s earmarked approximately $1 billion per year for Training and Development (McDonald’s Annual report, 2007).
Physical resources include all the tangible assets like usually land, buildings, and equipment. McDonald's total assets increased by $417 million or 1% in 2007
Financial Analysis of McDonald’s shows that sales have increased by 6.8% during 2007 over 5.7% of 2006 and system wide sales have gone up by 12%. Company-operated margins touched an eight-year high of 17.3% and Franchised margins recorded 81.5%, highest in the last ten years. The times interest earned (TIE) ratio of 11.29 and return on assets ratio (ROA) of 13.2% recorded by McDonald's are satisfactory. The overall financial condition of McDonald’s is fair.
SWOT analysis
The analysis of factors like Strengths, Weaknesses, Opportunities and Threats refer to SWOT analysis that provides quality feed back on the resources and capabilities of the organisation. The strengths of McDonald’s include strong brand image & product value, delivery speed, customer care and cleanliness and good restaurant environment. The strong Research and Development wing, control over most aspects of its operations, launching of unique packages and innovative products like McKids, McSalads, chicken McNuggets & McLean etc are other strengths. Diversification of business, following appropriate human resource policies and focusing on organisational behaviour and managerial expertise are also the strengths.
The weaknesses of McDonald’s include the high operating cost, delay in services, low employee productivity, over exposure of brand, compromise in quality in a bid to grow fast, not able to focus on products suitable for health conscious customers, weak marketing and the strained relations between McDonald’s and franchises and the advertisements hitting only kids.
Department of Agriculture (UK) says that consuming food outside home is increasing at 46.1% of total expenditures on food; hence McDonald’s has an opportunity to further focus on diversification, expansion and increase in market share. Expansion enables McDonald’s to reduce its investment cost and unit prices of products. Innovations in menu, developing new products of low calories for health conscious customers, new technology options like online sales and semantic web are other opportunities available to McDonald’s.
The general threats to McDonald’s include new trade barriers, new Government legislations, market saturation and new tax structures. The trade specific threats are shift in customer options and taste, availability of cheap imitation products in the market, rising raw material prices, focus towards health consciousness, change in consumer’s opinion on fast food and increasing demand for ethnic foods like sushi and burritos, strained relations between the management and the franchise dealers, the fierce competition of rivals and the overgrowth of the industry (C K Prahalad and G Hamel 1990).
Step-5
Findings of the scan are shared with all stakeholders and also sending it to as many people as possible through email or online web based survey for honest information feedback on scan information.
Step-6
A workshop is organised after receiving the feedback with the participants of scan and other relevant staff of McDonald’s for the evaluation of the feedback. The participants are asked to rank each of the observations of SWOT analysis and top five priorities under each category will be listed for action.
Step-7
Here the participants will be further asked to suggest on how to capitalize the strengths, how to over come the threats, what shall be done to overcome weaknesses and how to take advantage of the opportunities. The suggestions are then aligned into an action plan.
Step-8
Monitoring and Evaluation is a continuous process that includes the identification of the indicators to be monitored, comparison of results and incorporating necessary changes. McDonalds positioned a system for M&E while constantly training their staff.
Advantages & Disadvantages
Environmental scanning enables McDonald’s to identify and understand the events and trends in the external environment. Assessment of their relationships and possible implications leads McDonalds to take appropriate decisions for designing and developing a strategic plan. The ES has certain limitations. The quantification of the results of ES and further assessment of their impact on the firm is difficult. McDonald’s also found that strategies are emergent rather than explicit. The reliability of the scan depends on the wholesomeness and relevance of the data collected and the knowledge, skill, expertise and experience of the participants.
(WORDS: 2005)
References
- Annual Reports of McDonald’s-2005,2006 & 2007 available at www.mcdonalds.com
- Bized.co.uk. (2006). McDonald's Company Facts. Bized.co.uk. Available at: http://www.bized.co.uk/compfact/mcdonalds/mcindex.htm.
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Chun Wei Choo,2001, Environmental scanning as information seeking and organizational learning, University of Toronto, Canada Available at informationr.net/ir/7-1/paper112.htm
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Craig Dobbins, Strategic Planning: External Environmental Scanning, Center for Food and Agricultural Business, Purdue University, Available at http://www.agecon.purdue.edu/extension/sbpcp/resources/exscan.pdf.
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Harrison, Jeffrey S,2003, Strategic analysis for the hospitality industry, Available at:http://www.entrepreneur.com/tradejournals/article/101938461.html
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Hubbard. (2000), Strategic Management: Thinking, Analysis and Action, Prentice Hall.
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James L. Morrison, 1992, Environmental Scanning , Available at http://horizon.unc.edu/courses/papers/enviroscan/
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Information Management for the Intelligent Organization, Available at
http://choo.fis.utoronto.ca/FIS/IMIO/IMIO4.html
- Michael Porter Five Forces Model, Available at: www.brs-inc.com/porter.asp
- Prahalad, C.K and Hamel.G, 1990,Article on McDonald’s. Available at
http://EzineArticles.com/?expert=Vijayarajalakshmi_Muthukrishnan
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www.gov.sk.ca/finance/accountability/2006/keyterms.htm.
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