Academic Strategic management essay Mcdonalds Singapore ''Done by the Blogger''

Introduction With the recent economic downturn following on an extended period of merger activity and diversification, the topic of divestment or exit from a business is receiving attention. Some authors argued it becomes an expected and regular strategic decision made in response to unfavorable market circumstances (Porter 1976). This essay first analyzes how the general environment, Political/Legal, Economic, Socio-cultural, Technological with the selected contemporary issues of fiscal and monetary policy, global financial crisis, recession, economic stimulus, aging population and declining birth rate impact on fast food industry. Then, it covers the industry environment analysis with Porter’s five forces in relation of its strategic group to determine whether this industry is attractive or unattractive. Finally, it discusses whether Singapore McDonald’s has sustainable advantages by analyzing internal environment with resources, capabilities, core competences and value chain. The general environment analysis The political/legal segment There are three main points that has a huge impact on fast food industry due to the government. Firstly, in the Singapore fiscal policy, corporate tax will be 17% in 2010 (Ministry of Finance 2009). This change may attract foreign investors to invest in fast food industry in Singapore. In addition, Singaporean may set up a new fast food restaurants due to the low cooperate tax rate. Secondly, the government increased the Goods and Services Tax (GST) from 5% to 7% in 2007 (MTI 2007). This definitely affects the fast food industry as most fast food restaurants bear the GST themselves. Finally, The Singapore Government has been increasing more programs and activities to promote support healthy living and eating campaigns (The National Bureau of Asian Research 2008). This may make people to consume less fast food because fast food is concerned as junk food. The economic segment Singapore is now in a simultaneous recession due to the Global Financial crisis. Ministry of Trade and Industry (2009) stated that Singapore’s GDP growth is likely to be -5.0 to -2.0 per cent in 2009. The forecast for inflation is also revised downwards to -1.0 to 0 per cent. As monetary policy, government controls its currency rate and ensure low inflation rate for sustained economic growth. Because of recession, people are spending less and less during economic downturn and most companies are tightening their budgets. There is a high possibility that existing companies are not expanding because they are more concerned on their cash flow (MTI 2009). However, there is a decrease of shop properties and rentals. The Prices of shop properties and rentals of shop properties decreased by 4.8% and 0.6% respectively in the fourth Quarter 2008 (URA 2009). The decrease of price of shop properties and rentals affects the fast food industry of whether they are able to cover their fixed costs. Furthermore, government will provide a 15% rental rebate and Stimulate bank lending to enhance business cashflow and competitiveness (Ministry of Finance 2009). The socio-cultural segment Singapore is facing aging population and the average annual growth rates are very high, 1.58% in 2006, and 1.73% in 2007 (Cheang 2007). In addition, the number of persons aged below 15 years decreased to 671,300 in 2008, from 712,000 in 1998 which reflects the declining trend of birth rate in past fertility (Singapore department of statistics 2008). It will probably harder for fast food employers to hire young workers as the fast food industry is to employ young people at service points (Emberton 2006). The social trends is also changing, there is an increase trend towards consumption of more processed food and the use of Western style fast food restaurants (Agriculture and Agri-food Canada 2008). The technological segment Since drive-thru service represents a huge portion of corporate sales for many chains, the focus is primarily on the use of technology to assemble orders, collect payment, and deliver food to drivers (CACM staff 2006). Because of technology advance, some fast food restaurants have shift to use E-commerce to deliver food. Industry environment analysis The nature and degree of competition in an industry hinge on five forces: the threat of new entrants, bargaining power of suppliers, bargaining power of customers, the threat of substitute products or services, and the jockeying among current contestants. The collective strength of these forces determines the ultimate profit potential of a firm (Porter 1979). A strategic group is not simply a more narrow definition of an industry. The industry remains while firms are allowed to be heterogeneous in their behavior by offering a different product line or vertically integrating to a different degree (Tremblay 1985). McDonald's, MOS Burger and Burger King are in the same strategic group because they emphasis similar strategic dimensions such as product quality, pricing policies, distribution channels and customer service. Threat of new entrants The economy of scale deters entry by forcing the aspirant either to come in on a large scale or to accept a cost disadvantage (Porter 1979). New small-scale entrants face cost disadvantage and there is a high difficulty for them to compete the strategic group because the existing firms have developed economic of scale through producing, purchasing and marketing. In addition, the existing fast food restaurants have spent on a great deal of money on effective advertising campaigns to differentiate themselves and create high fences around their businesses. As a result, new entrants must allocate resources to overcome exist customer loyalty. However, new entrants do not need a lot of capital for fixed facilities and inventories for start-up costs. Furthermore, the rental and design for new fast food restaurants are inexpensive. Switching costs are fixed costs buyers face in changing suppliers (Porter 1979). There is a very low switching cost if a customer buys from substitute food. In addition, the cost or retrain employees and psychic cost of ending a relationship are very low. Power of suppliers Suppliers can exert bargaining power on participants in an industry by raising prices or reducing the quality of purchased goods and services (Porter 1979). There are three points indicate that the suppliers do not have much bargaining power over fast food restaurants. Firstly, the supplier group is big where there are many companies who provide raw materials for fast food restaurants. Hence, customers can force down prices, demand higher quality or more service. Secondly, products are not unique, differentiated and very important to fast food outlet’s marketplace success. This is because the raw materials of making burgers, drinks and fries are almost the same. Finally, suppliers do not create high switching costs. One of the reasons is that consumers can buy the raw materials from any supermarket or wet market. Power of buyers Buyers want to buy products at the lowest possible price (Hanson et al. 2008). The fast food industry characterized by many consumers who do not purchase large volumes and they are unable to bargain prices as fast food restaurants use fixed prices. Furthermore, Fast food products are standard, undifferentiated and buyers can always find alternative suppliers. In addition, buyers pose a credible threat that buyers can make food themselves. As a result, buyers tend to be more price sensitive. Threat of product substitutes By placing a ceiling on prices it can charge, substitute products or services limit the potential of an industry. Substitutes can limit profits of existing firms (Porter 1979). The substitute products present a strong treat to fast food industry because consumers face low switching costs and substitute products’ prices are lower. In addition, quality and performance capabilities are equal or greater than the fast food products such as burgers, hot dogs and drinks provided by supermarkets. Intensity of rivalry among competitors Rivalry among existing competitors takes the familiar form of jockeying for position (Porter 1979). There are 3 factors shows that the fast food industry has high intense rivalry among competitors. Firstly, competitors are numerous and roughly equal in size and power. As a result, fast food restaurants use tactics such as price competition and promotion in Singapore. Secondly, products and service are lacks of differentiation and switching costs. Fast food products and capabilities are homogeneous and there are many substitute products threaten their profits. Finally, exit barriers are high for large firms and franchisees. As a fast food franchise, the fast food restaurants needs to continue operate thought the return of invested capital is low. The reason is that the company has singed a contract with a franchiser. Industry attractiveness The profitability of all the firms competing in the industry will be a product of the influences of the five forces (Gartner 1985). An attractive industry with a high average return on investment will be difficult to enter because entry barriers are high, suppliers and buyers have only modest bargaining power, substitute products or services are few, and the rivalry among competitors is stable (Porter 1998). An unattractive industry like fast food industry has low barriers to entry, suppliers and buyers have low bargaining power, threat of substitute products are high and excessive rivalry caused by a large group of competitors, low differentiation and switching costs. Hence, there is low profit potential for fast food industry. Competitor analysis Selznick (1957) first introduced distinctive competence that a firm is capable of performing better than its competitors (Amis and Slack 1999). In the competitor analysis, as the fast food industry is competitive and unattractive, existing restaurants must hold advantages over their competitors to perform well in order to gain more market share. The Internal Environment Resources, Capabilities and Core competence McDonald’s resources are its service and distribution to develop its competitive advantage. McDonald’s physical resources are its ability to look for the best locations within the marketplace to provide our customers with convenience (McDonald’s 2009). McDonald’s equipments are very efficient and they are seeking the most efficient equipment to process fast food. They use of Point of Sale (POS) system and Kitchen to Video System (KVS) effectively to make food at same time and maintain quality. McDonald’s franchisees have the reputational resources as McDonald’s Cooperation is the ninth most valuable brand in the world (Businessweek 2008). Another intangible resource is human resources, the average McDonald's restaurant manager spends more than four years in training (McDonald’s 2009). McDonald’s has the capability for delivering consistent products and service effectively by its distribution channel. Furthermore, Singapore McDonald’s franchisees are benefits from McDonald’s Corporation as the company has excelled in implementing classical marketing techniques, the successful advertising and point-of-sale campaigns (Walters and Rainbird 2004). Core competencies are the collective learning in the organization, communication, involvement, and a deep commitment to working across organization boundaries (Prahalad and Hamel 1990). Resource combine capability is a firm’s core competence. The core competencies of McDonald’s are fast service, consistence and quality food. Although McDonald’s have the core competencies, the capabilities must meet the four criteria of valuable capabilities, rare capabilities, costly-to-imitate capabilities and non-substitutable capabilities in order to be sustainable competitive (Hanson et al. 2008). McDonald’s valuable capabilities to deliver consistent products and service effectively and the use of marketing champions helps them to exploit more opportunities. However, it has possessed by many competitors. In addition, the two capabilities are not costly-to-imitate capabilities, in fact, competitors are using the same tactics such POS and KVS to produce food effectively. Competitors also have effective marketing campaigns to gain market share. The capabilities are substitutable, competitors are easy to find substitute and try to imitate the McDonald’s strategy. Value Chain A company builds up value in its product by incurring costs for a series of functional requirements: the primary activities of inbound logistics, operations, outbound logistics, marketing, and service; and a series of support activities (Porter 1985). For the franchisee, McDonald’s Corporation program offers support for most of the major business functions, including planning, human resources, operations, and marketing (ICIC 2007). Franchisees have the effective inbound logistic, operations and outbound logistic system, this can be seen form the assembly line, each person has specific task and the use of POS and KVS which develop the capability to have real-time transition of orders. In marketing, sales and services, profitable franchisees have the strong network of selling and marketing McDonald’s products to enhance their competitive advantage. Firm infrastructure and human resource management, continuous two-way communications between McDonald’s and franchisees is a top priority. In addition, the McDonald’s Corporation provides Strong network of owner-operators who share information on best-practices, extensive training program for owner-operators and assistance with financing (ICIC 2007). Franchisees are able to create values through the activities of inbound logistics, operations, outbound logistics and service. The advertising and promotional campaigns are created and outsourced by McDonald’s Corporation which is more capable to create values for franchisees. Conclusion Although the Singapore is facing recession with the threats of aging population, decline of birth rate and increase of GST, fast food restaurants are probably able to survive due to decrease of rental, corporate taxes, Economic stimulus and increase trends toward fast food products. However, existing firms need to distinctive their core competences in order to survive though people may not enter due to unattractiveness of this industry. McDonald’s need to adjust itself to the changing of environment though, McDonald’s has its core competencies and the support activities and primary activities are able to create values and increase profits currently. 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