Contemporary developments in business management Assignment (SIM 337) january 2015

Banking Academy, Vietnam
ASSIGNMENT COVER SHEET
UNIVERSITY OF SUNDERLAND
BA (HONS) BANKING AND FINANCE

Student ID: 149080615/1
Student Name: Tran Quyet Thang
Module Code: SIM 337
Module Name / Title: Contemporary Developments in Business Management
Centre / College: Banking Academy of Viet Nam
Due Date: 16 Jan 2015

Hand in Date: 16 Jan 2015

Assignment Title: Individual assignment

Students Signature: (you must sign this declaring that it is all your own work and all sources
of information have been referenced)

Contemporary Developments in Business Management (SIM 337) – Jan 2015


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Title page

Contemporary Developments in Business
Management
SIM 337

Banking Academy, Vietnam

Submitted on January 16, 2015
Prepared by: Quyet Thang Tran
Student ID: 149080615/1

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Executive summary
This report is to assess the impact of the external business environmental factors on
organization and evaluate the organization’s responses. In this report, three factors in
PESTLE framework and Porter’s Five Forces are used to analyze the strategies and
activities that McDonalds Corporation carry out to adapt to the influences of these
factors. Furthermore, because of an international corporation, McDonalds face the
different issues in the different countries.
The report concludes that McDonalds are under high pressure with the impact of social
environment, legal environment, ecological environment, power of buyers, threat of
substitutes and rivalry among its competitors. Additionally, this report also shows the
activities and strategies that McDonalds carry out to take advantages from its strength
and reduce the negative impact from its weakness.
There are some suggestions for McDonalds such as:


Innovate its meals with low calories



Modify its products with local tastes



Improve the quality of suppliers

This report also has some limitations including: some factors in PESTLE framework –
political environment, economic environment and technological environment are not
analyzed.

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Table of Contents
Title page ....................................................................................................................... 1
Executive summary........................................................................................................ii
1.0.

Introduction ......................................................................................................... 2

2.0.

Task 1 – PESTLE framework ............................................................................. 2

2.1.

Social and culture environment ....................................................................... 2

2.2.

Legal environment........................................................................................... 3

2.3.

Ecological environment................................................................................... 4
Task 2 – The changing competitive environment (Porter’s Five Forces) ........... 5

3.0.
3.1.

Analysis ........................................................................................................... 5

3.2.

Critical evaluation ........................................................................................... 5

3.2.1.

Threat of new entrants ............................................................................. 5

3.2.2.

The power of suppliers............................................................................. 8

3.2.3.

Power of buyers ....................................................................................... 9

3.2.4.

The threat of substitutes ........................................................................... 9

3.2.5.

Rivalry among existing competitors ...................................................... 10

3.3.
4.0.

Areas for improvement.................................................................................. 12
Conclusion ........................................................................................................ 12

References .................................................................................................................... 13
Appendix 1 – McDonald’s profile ............................................................................... 18

Tables
Table 1: Suppliers of McDonalds .................................................................................. 8
Table 2: Brief information about some fast food brands ............................................. 10
Figures
Figure 1: Minimum Wages around the World ............................................................... 3

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1.0. Introduction
The purpose of this report is to find out the impact of external business environmental
factors on McDonalds which provide food and beverage service activities and show the
reaction of this organization. The report is divided into two parts. In the first part, some
of macroeconomic factors will be considered such as society, ecology…while in the
second part, the industrial factors will be analyzed through Porter’s Five Forces
framework in order to evaluate McDonalds activities. Furthermore, be a global fast food
chain, McDonalds have to face to the different problems in the different markets.
Therefore, in each country where the company operate, McDonalds also carry out
specific strategies to take the advantages and reduce the negative impacts from these
factors.

2.0. Task 1 – PESTLE framework
To evaluate the external factors such as economy, society, technology…which
influence to the operation of the fast food restaurant chains, the PESTLE framework is
carried out. However, in the case of McDonalds, only three factors including social and
culture environment, legal environment and ecological environment which could bring
significant impacts to business are analyzed.

2.1.

Social and culture environment

Analyzing the social-cultural environment of business is important to recognize that
society and culture are not homogeneous or fixed and changes in this environment is a
hallmark of modern societies and, again, business can be seen as both driving these
changes and having to respond to them (Wetherly & Otter, 2014). Currently,
McDonalds operates in more than 100 countries with more than 30,000 local restaurants

so it applies transactional strategy with the trademarked golden archers in all markets.
Beside the same types of burger and fries, McDonalds also offer the different tastes for
different local market. For example, according to Business Insider, there are 21
awesome McDonald's dishes that customers cannot get in US such as McDonald's
Crock Brie - these deep-fried triangles of oozing brie cheese are only available in Italy
(Peterson, 2014). Furthermore, McDonalds also develop McRice Burger in parts of
South-East Asia. Another important factor is that customers now care more about
healthy however eating fast food can bring a lot of negative influence for health. In

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order to react with this problem, McDonalds provide low-calories menu - a Favorites
Under 400 Calories menu for customers. In addition, McDonalds also advertise water,
milk and juice for its kids’ Happy Meals in 20 markets globally including the U.S.,
Australia, Germany, France, the U.K. and China (Patton, 2013) to reduce the negative
impacts of fast food for healthy of kids. This large fast food chain tries to attract more
customers with these healthier items, but there was a 0.2% same store sales growth at
the end of 2013 (Jones, 2014). This action can be considered as an effort of McDonalds
in providing customers better services.

2.2.

Legal environment

Because of operating worldwide, McDonalds have to obey the different obligations
such as taxes, labor laws…in the different countries and each country require specific

rules. One aspect of law is about minimum wage for workers. This figure below will
show minimum wages around the world:

Figure 1: Minimum Wages around the World

Source: Business Insider, 2014

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The salary expenses of McDonalds are different in different countries. In the developed
countries, employees get higher salary than others. Currently, there is a problem which
involve to the minimum wages of McDonalds workers in US franchises. There are
many complaints of workers such as in New York, workers were forced to spend their
own time and money cleaning their uniforms, sometimes three times a week, in
violation of New York state laws requiring firms to pay employees for uniform
maintenance (Swaine, 2014). The actions of hiring or firing employees are done directly
by McDonald’s franchise-owners and there is a 30-year-old case say that says
companies cannot be held liable for unfair employment practices toward workers that
the company is not directly in charge of hiring and firing (Taube, 2014). However, Paul
Millus, an attorney at the law firm Meyer, Suozzi, English & Klein said that: “The
franchises get everything from supplies to uniforms to the design of their restaurant,
and also information pertaining to wages and hours, hiring, and firing.” (Taube, 2014).
This means that all the decisions of franchises are following the guidance of
McDonalds. Therefore, National Labor Relations Board want to revolve the old case to
make companies like McDonalds take responsibility for workers alongside the
franchisee. If this rule is effective, this will impact the operation of McDonalds not only

in US but also in all market that McDonalds franchise. Furthermore, this also shows
that McDonalds treats workers unfairly, so their reputation might be destroyed and lead
customers choose other brands.

2.3.

Ecological environment

The ecological dimension includes a range of factors such as climate change, energy
conservation, water quality and shortages, biodiversity and land use, contamination and
health issues from chemicals, waste management and disposal, depletion of fisheries,
deforestation and pollution (Fee, 2013). One of key problem which involve to fast food
chains is about meat production such as beef, pork, and chicken. The activities of
feeding livestock can bring huge negative impacts to environment. Meat production
produces more greenhouse gas emissions than transportation with direct emissions from
meat production accounting for some 18% of world’s total while transport accounts for
13% of total global greenhouse gas emissions (Shah, 2010). This is a big number and
it can be considered as a factor that cause climate change. Furthermore, according to
the Institution of Mechanical Engineers (IME), to produce 1kg of meat requires
between 5,000 and 20,000 liters (Sedghi, 2013) while in the world, there are still a lot

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of people who cannot assess safe drink water. In facts that cattle raising is an important
root for the destruction of tropical forests. Greenpeace - a non-governmental
environmental organization said McDonald's was fueling Amazon rainforest

destruction by using soybeans grown in the region as feed for chickens that end up
served in the fast-food chain's European restaurants (Astor, 2006). Greenpeace act like
a pressure group to require the companies having activities that damage the Earth. Now
McDonalds have to consider this problem carefully. McDonalds plans to begin
purchasing verified sustainable beef by 2016, with the goal of eventually buying all of
its beef from sustainable sources and develop an app called “Track My Macca's” which
allows consumers to trace the supply chain of their Big Mac or Chicken McNuggets
down to a particular farmer or rancher (Vittorio, 2014). Although McDonalds have not
announced the specific details about sustainable beef, this still shows the ambitions of
McDonalds about developing sustainable business. In fact, McDonalds take many
actions in order to improve the efficiency and reduce the negative impacts to
environment by installing LED lighting, low oil volume (LOV) fryer or designing new
restaurant model, etc.

3.0. Task 2 – The changing competitive environment (Porter’s
Five Forces)
3.1.

Analysis

By applying Porter’s Five Forces to analyzing the changing competitive environment
in fast food industry, McDonalds can understand and deal with its competitors. This
finding will show both strength and weakness of McDonalds in fast food markets. It
means that the company have to carry out the strategies to take advantages of the
strength and reduce the impacts of weakness so that the competitive capability of
McDonalds might be higher compare to its competitors.
3.2.

Critical evaluation

3.2.1. Threat of new entrants
3.2.1.1.Supply-side economies of scale
“These economies arise when firms that produce at larger volumes enjoy lower costs
per unit because they can spread fixed cost more over units, employ more efficient
technology, or command better terms from suppliers” (Porter, 2008). According to Side

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dish, McDonald’s sell “more than 75 hamburgers per second, of every minute, of every
hour, of every day of the year” (2010). With the giant numbers of hamburger like this,
the fixed costs such as labors, fryers, cooking oils are spread more. Furthermore,
McDonald’s also take advantages of scales economies in purchasing raw material in
bulk. According to John Hayes, McDonald's senior director of U.S. food and packaging,
Americans alone consume one billion pounds of beef at McDonald's in a year – five
and a half million head of cattle (Feridun, 2010). With a huge quantities of material,
McDonalds can contact directly to suppliers to avoid the intermediate costs or take the
discounts. Furthermore, McDonalds also take advantages of economies of scale based
on the enormous advertising budget. The company’s annual advertising budget
estimated to exceed $2 billion — making it “unmatched in the industry” - allows
McDonald’s to reach an audience far larger than the one that saw “Super-Size Me”
(O'Brien, 2012). Therefore, McDonald’s can protect its market by economies of scales.
3.2.1.2. Demand-side benefits of scale
“These benefits, also known as network effects, arise in industries where buyers’
willingness to pay for a company’s product increase with the number of other buyers
who also patronize the company” (Porter, 2008). According to Bloomberg
Businessweek, McDonald’s is the world’s second-biggest fast-food chain by numbers

of restaurant (2013) so it can retain more customers’ loyalty and truth. In US market
alone, daily customer traffic of McDonald’s is about 70 million people (McDonalds,
2014). In other markets such as UK, it served 325m customers in Britain during the
second quarter, the equivalent of everyone in the country visiting nearly twice a month
(Wallop, 2012). Especially, when entering Vietnam market, McDonalds served
400,000 customers in its first month of business and about 22,500 customers were
served during the first 24 hours of operation (Bloomberg News, 2014). The record
shows the attractions of McDonalds to Vietnam customers because of giant fast food
brand in the world. This can make new entrants have to worry about the willingness of
customers in terms of products and price compare to McDonald’s.
3.2.1.3. Capital requirements
“The need to invest large financial resources in order to compete can deter new
entrants” (Porter, 2008). In fast food industry, new entrants need to find a location for
the restaurant and some machines for cooking. However, according to Global Fast Food

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Restaurants Market Research Report, a fast food operator can establish a new restaurant
with a relatively low capital outlay and reduce their initial capital costs, outlays and
borrowings by leasing premises and equipment (IBISWorld, 2014). This means that
new entrants can easily entry the market. In fact, a restaurant named Tau Poco was
opened in 2013, cost under $13,000 including $5,000 for designing (branding, wall
murals, menus, and signage), leasing refrigerator cases…by chef Chris Dupont (Tice,
2013). In Hanoi, Vietnam, two students with 15 million VND (about $750) and an
addition 10m VND (approximately $500) loan opened a snack bar which serving bread,
fried eggs, pâté with some drinks (News.zing, 2014). This type of sack bar is very

popular in Vietnam and it is indirect substitutes for fast food.
3.2.1.4. Incumbency advantages independent of size
“No matter what their size, incumbents may have cost or quality advantages not
available to potential rivals” (Porter, 2008). For example, when McDonald’s enter
Vietnam market; because of a well-known brand in the world, Vietnam customers can
easily to recognize. Furthermore, with their experience in other markets, McDonalds
“located at the busy roundabout at intersection of Dien Bien Phu and Nguyen Binh
Khiem Streets in District 1, the two-story standalone restaurant is easily accessible for
commuters to purchase a McDonalds meal on the go using the Drive-Thru service”
(McDonalds, 2014). Furthermore, the store places on strategic road which leads to
northern provinces and links to the other southern localities – the important economic
and tourism centers – such as Dong Nai, Binh Duong and Ba Ria – Vung Tau
(VietnamNet, 2014). This means that the numbers of car passing this location are large,
so Drive-Thru service can take attention of customers about a new type of ordering
food while still stay in cars. Furthermore, this is the first Drive-Thru service in Vietnam
although there are many fast food brands like FKC, Lotteria, Pizza Hurt…entering this
market before. Therefore, McDonalds will have big competitive advantages to attract
middle class Vietnam customers especially who own cars. While other fast food brands
have to struggle hard to scramble for the clients driving motorbikes in the inner city,
McDonald’s target the clients who possess cars (VietnamNet, 2014).

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3.2.1.5. Profitability
According to Bloomberg Industry Market Leaders, restaurants is ranked 8th by the
industries are expected to grow most in the year ahead 2015. It means that the new

entrants can hope that they can get high profitability when get in this industry.
 Pressure: low to medium
3.2.2. The power of suppliers
“Powerful suppliers capture more of the value for themselves by charging higher prices,
limiting quality or services, or shifting costs to industry participants” (Porter, 2008).
The main components in McDonalds’s include beef, chicken, eggs, potatoes. This table
below will show names of some suppliers.
Name of suppliers

Products Supplied

OSI group

Beef

Cargill Meats Europe

Chicken

Noble Foods

Eggs

Keystone

Logistics and distribution supplier

HAVI Global Solutions Packaging
Table 1: Suppliers of McDonalds

According to Best of Sustainable Supply 2014 of McDonald’s, 31 suppliers among
hundreds of supplier submissions are honored. It means that there are a lot of suppliers
McDonald’s worked with. To be a multinational corporation, McDonalds have built its
supply network in the worldwide so if there is any problem with one supplier, the
impacts to McDonalds’s activities are low. In the scandal with expired meat with China
supplier, McDonald's Holdings Co (Japan) would halt all imports of chicken products
from China and shift that business to Thailand, boosting purchases from existing
suppliers McKey Foods Services (Thailand) Ltd, a unit of Keystone Foods, and Cargill
Thailand (Reuters, 2014). Furthermore, McDonald's spokeswoman Heidi Barker said
that a small percentage of McDonald's restaurants in China may have to stop selling a
few items on their menus for a day or two while McDonald's obtains meat from other
companies (BURKITT, et al., 2014). This shows that McDonalds can easily switch the
suppliers and it do not depend on any major supplier. Currently, McDonalds – one of

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the biggest fast food chain -has about 34,492 outlets in 116 countries so the suppliers
do not lose the contracts with it.
 Pressure: low
3.2.3. Power of buyers
“Powerful customers can capture more value by forcing down prices, demanding better
quality or more service, and generally playing industry participants off against one
another, all at the expense of industry profitability” (Porter, 2008). In the case of
McDonalds, there are many brands in fast food industry in the markets today and they
offer various types of products so customers have many choices for the meal. According
to Forbes, competitive pricing is one of the biggest assets of McDonalds, so any

changes in menu prices will inadvertently affect the consumer purchasing decision
(Team, 2014). This means that customers can easily switch from McDonald to other
brands such as KFC, Subway…In addition, another evidence to show the power of
customers is that because of meat scandal, McDonalds’ global sales for the month of
July dropped 2.5%, with 7.3% drop in the Asia/Pacific, Middle East and Africa
(APMEA) segment (Forbes, 2014).
 Pressure: high
3.2.4. The threat of substitutes
“A substitute performs the same or a similar function as an industry’s product by a
different means” (Porter, 2008). There are several substitutes for fast food such as
frozen ready-meal, meals in restaurants…Moreover, a grocery store can be seen as an
indirect substitutes for fast food restaurants because consumers can find something
conveniently to eat such as noodle, bread, etc. However, by providing customers quick
services with cheap price, fast food is the choices of many customers. In UK, a research
showed that consumers spent 5.54 billion to a fast food chains in 2011, out of the 11bn
meals eaten in total out of the home (Wallop, 2012). With the first restaurant in
Vietnam, McDonads will have to face to many different types of substitutes such as
‘pho’ – a type of noodle soup or ‘banh mi’ - a Vietnamese sandwich that typically
includes sliced pork and sprigs of cilantro (IVES, 2014). In addition, Vietnam street
foods are very various with diversified tastes. These foods like sticky rice, roll cake,
papaya salad with pork liver…can be found in everywhere in Vietnam at any time.
Moreover, for launch time or dinner, a com binh dan - an institution that translates as

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“the people’s food” (GROSS, 2013) – with regular ready-cooked meals could be a

choice for many Vietnam customers. This is absolutely an indirect substitute. On the
other hand, fast food also brings negative impacts to health of consumers like obesity,
heart disease, etc. and today consumers consider this problem more carefully. In fact,
there are some books and documentaries talk about this issue notably Fast Food Nation
written by Eric Schlosser or Super-Size Me directed by and starring Morgan Spurlock.
Therefore, healthy diet meals can be developed significantly in the future.
 Pressure: high
3.2.5. Rivalry among existing competitors
“Rivalry among existing competitors takes many familiar forms, including price
discounting, new product introductions, advertising campaigns, and service
improvements” (Porter, 2008). In order to evaluate the intensity in competition in fast
food industry, some factors like market structure, market concentration…can be
measured.
This table below will show brief information about some fast food brands:
Brands

McDonald’s Corporation

$28.106

billion

(2013)

Yum! Brands, Inc. (KFC, Pizza Hut, $13.084
Taco Bell)

billion

(2013)

Burger King Worldwide, Inc.
Starbucks Corporation
The Wendy’s Company

Numbers of

Revenue

$1.146

billion

(2013)

locations
More than 35,000

Nearly 40,000

More than 12,600

$14.9 billion (2013) More than 21,000
$2.478
(2013)

billion

More than 6,300

Table 2: Brief information about some fast food brands

Sources: Modified from 2013 annual reports of McDonald’s Corporation, Yum!
Brands, Inc., Burger King Worldwide, Inc., Starbucks Corporation, The Wendy’s
Company.

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These are big companies in the world so the levels of competition among them are very
high. They have to fight against each other for market shares, sales in order to take a
strong position in the market. Each company has different strategies to attract customers
and defeat its competitors. For instance, McDonalds spends more money for advertising
while Burger King focuses on equipment updates (Wong, 2014).
The competition can be illustrated through market structures. In the case of fast food
markets, there is monopolistic competition. According to Porter 2008, monopolistic
competition describes a structure where slightly differentiated products are offered by
a number of suppliers, with little or no barriers to entry. In fast food industry, there are
a lot of global fast food brands to meet the demands of numerous customers around the
world. For US-based fast food restaurants alone, there are more than 66,000 units
abroad just among the 10 largest chains (QSRMagazine, 2011). Furthermore, each
brand offers different menus for customers with many choices of products or services.
For instance, the key products of McDonalds include hamburgers, chicken nuggets,
French fries, coffee…Additionally, the differentiated products can be illustrated
through design of restaurants, packaging or locations. Advertising is a way for
companies to make their brands different compare to other rivals and also gain the
attention of customers. There is a funny fact about ‘Golden Arches’ – trademark of

McDonalds’ that a survey conducted among 7,000 people in the United States, the
United Kingdom, Germany, Australia, India, and Japan — found that 88% could
identify the golden arches and that 54% could identify the Christian cross (Schlosser,
2001). In Vietnam market, to compete to these brands which have already operated in
Vietnam such as KFC in 1997, Burger King in 2011 and Starbucks in 2013, McDonalds
bring various things in designing first outlet in Ho Chi Minh City. With a first 24h
drive-thru service in Vietnam, McDonalds create a big difference compare to its rivals
by adding the convenience for customers. Moreover, customers will enjoy a multitude
of offerings around the clock including delicious McDonald's food, free Wifi internet
access, family-friendly amenities like a children's playplace and party rooms
(McDonalds, 2014).
Because of high competition in fast food industry, the strategies of each company is
influenced by its competitors. In the burger segment in Japan, for instance, after Burger
King launched ‘Kuro’ (black) burger with its gourmet black buns, black cheese and
black sauce, McDonalds quickly introduced its own version the black burger (Rai,

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2014). This is an example to show the reactions of one company to the strategies of its
competitors. Furthermore, with the advantages of fist mover in black burger version,
Burger King achieves the increase of sales. Therefore, in a high competitive industry,
the fast food brands have to bring out the innovations in changing tastes, materials,
shapes of dish…in order to take the attention of customers.
 Pressure: high

3.3.

Areas for improvement

Based on the analysis above, there are some points that bring high pressure for
McDonalds like power of buyers, threat of substitutes and its competitors. In order to
reduce these pressures, McDonalds should focus on innovating the new meals that
provide low calories and good healthy for customers because this is an important issue
for society. Besides, McDonalds also have to supervise the suppliers carefully to make
sure that its products have the best quality to retain old customers and attract the new
ones. Furthermore, to compete to both direct substitutes and indirect substitutes,
McDonalds need to understand clearly about the benefits that substitute provide, its
price, its weakness…For example, in Vietnam, McDonalds can offer some types of
combo with competitive prices with ‘pho’, snack bar and the people’s food or launch a
new type of burger with eggs, pork… to compete to ‘banh mi’.

4.0. Conclusion
In conclusion, it can be seen that the external business environment factors bring a lot
of impacts to the McDonald’s activities. In order to match the requirements of different
macroeconomic factors, McDonalds adjust its meals in various countries such as
serving McRice burger in some of South-East Asia markets. Additionally, McDonalds
hold a strong position in fast food industry by increasing the barriers for new entrants,
diminishing the influence of suppliers and improving meals and services to gain
customers. In other words, McDonalds have to adapt with diverse business
environments and carry out the suitable strategies for each issue so that McDonalds can
keep the first place in global fast food brands.

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Appendix 1 – McDonald’s profile
McDonald's Corporation (McDonald's or 'the company') is one of the world's largest
foodservice retailing chains. The company is primarily known for its burgers and fries,
which it sells through 35,429 restaurants in 119 countries. McDonald's operates in the
US, Europe, Asia Pacific, and the Middle East and Africa. It is headquartered in Oak
Brook, Illinois and employed about 440,000 people as of December 31, 2013.
The company recorded revenues of $28,106 million in the financial year ended
December 2013 (FY2013), an increase of 2% over FY2012. The operating profit of the
company was $8,764 million in FY2013, an increase of 1.8% over FY2012. The net
profit was $5,586 million in FY2013, an increase of 2.2% over FY2012.
McDonald's franchises and operates McDonald's branded fast food restaurants all over
the world. The company is one of the world's largest food service retailing chains,
preparing and serving a range of food products and beverages. As of December 31,
2013, the company operated 35,429 restaurants in 119 countries, out of which 6,738
were company-operated and 28,691 were franchised or licensed. The franchise
agreements include conventional franchise arrangements as well as developmental
license agreements and foreign affiliates. Of the total franchises, 20,355 restaurants
were franchised to conventional franchisees, 4,747 were licensed to developmental
licensees and 3,589 were licensed to foreign affiliates.
The company reports its revenues based on four geographic segments: Europe, the US,
Asia/Pacific, Middle East and Africa (APMEA), and other countries and corporate.
Other countries and corporate includes Canada and Latin America, as well as corporate
activities and certain investments.
McDonald's markets its products under a wide range of brand names that include Big
Mac, Filet-O-Fish, Chicken McNuggets, McFlurry, McMuffin, McGriddles, and
McCafe among others.
(Source: MarketLine,2014)

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